SECURITY TRANSACTIONS

FINALS REVIEWER
ENDALUZ. GUINIGUNDO. GURREA. MANIEGO. SANTOS. SOBREPENA
I. PLEDGE (Arts. 2085-2123)
CHAPTER I:
MORTGAGE

PROVISIONS COMMON

TO

PLEDGE

AND

Art. 2085. The following requisites are essential to the contracts of

pledge and mortgage:
(1) That they be constituted to secure the fulfillment of a
principal obligation;
(2) That the pledgor or mortgagor be the absolute owner of the
thing pledged or mortgaged;

3. Characteristics of the contract code: RAUS

- REAL contract (perfected by the delivery of the thing pledged by the
debtor(pledgor) to the creditor(pledgee), or to a third person by common
agreement)
- ACCESSORY contract (it has no independent existence of its own)
- UNILATERAL contract (creates an obligation solely on the part of the
creditor to return the thing upon fulfillment of the principal obligation)
- SUBSIDIARY contract (obligation incurred does not arise until the
fulfillment of the principal obligation which is secured)

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

4. Essential Requirements of pledge and mortgage

a. Common Requisites
- (Art. 2085) code: FOD - They be constituted to secure the fulfillment of
the principal obligation.
- That the pledgor or mortgagor be the absolute
owner of the thing pledged or mortgaged.
- That the persons constituting the pledge or
mortgage have the free disposal of their property and in the absence thereof,
that they be legally authorized for the purpose.

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

mortgage. (n)

- (Art. 2086) Provisions of Art. 2052 are applicable (a guaranty cannot exist
without a principal obligation).

Art. 2087. It is also of the essence of these contracts that when the
principal obligation becomes due, the things in which the pledge or
mortgage consists may be alienated for the payment to the creditor.
(1858).

- (Art. 2087) when a principal obligation becomes due, the things in

which the pledge or mortgage consists may be alienated for the payment
to the creditor.

(3) That the persons constituting the pledge or mortgage have

the free disposal of their property, and in the absence thereof,
that they be legally authorized for the purpose.

1. Pledge- contract by virtue of which the debtor delivers to the creditor or

to a third person a movable or document evidencing incorporeal rights
for the purpose of securing the fulfillment of a principal obligation with
the understanding that when this is fulfilled, the thing delivered shall be
returned with its fruits and accessories.
- cause or consideration is the principal obligation; if NOT the
debtor, the cause is the compensation stipulated for the pledge OR the mere
liberality of the pledgor.
2. Kinds of pledgea. voluntary or conventional (one created by agreement of the parties)
b. legal (one which is created by operation of law)

b. The thing pledged must be delivered to the creditor or to a third person by

common agreement (Art. 2093). Without delivery there can be NO pledge
because, precisely, in this delivery lies the security of the pledge.
NOTE!
a. In case of doubt to whether or not transaction is pledge/dation in
payment, presumption is in favor of PLEDGE.
b. Future property CANNOT be pledged or mortgaged.
c. Pledge/ mortgage executed by one without authority is WITHOUT
LEGAL EXISTENCE.
d. Mortgagee in GF doctrine- when the innocent mortgagee can rely on
the title and shall be protected. (exception: BANKS)

5. Pledgor/mortgagor may be a third person

a. Accomodation pledge/mortgage- NOT necessarily void simply because the
accommodation pledgor/mortgagor did not benefit from the same .Ordinarily,
he is not himself a recipient of the loan, otherwise that would be contrary to
his designation.
b. Creditor (mortgagee) is required to exercise due care and prudence by
making proper inquiry where the debtor borrows money and mortgages
another persons property to secure the loan.
c. A gratuitious mortgage must be strictly construed.
d. If pledgor/mortgagor did NOT expressly assume personal liability for such
debt, they shall not be liable for the payment of such deficiency should the
property not be sufficient to cover debt; liability extends only to the property
pledged or mortgaged.

- There should be a stipulation for an automatic appropriation by the

creditor of the property in the event of non-payment within the stipulated
period.
b. A stipulation where the thing becomes the property of the creditor in the
event of non-payment of the debt within the term fixed Is forbidden by the
law and declared NULL AND VOID.
c. The nullity does NOT affect substantiality of the principal contract.

PLEDGE
Constituted on movables
Property is delivered to the pledge or
by common consent to a third
persons
Not valid against third person unless
description of a thing pledged and the
date appear in a public instrument.

REAL MORTGAGE
Constituted on immovables
Delivery is NOT necessary

4. The debtor-owner bears the loss of the property (pledge or mortgagee

does not become the owner of the property); the principal obligation is NOT
extinguished by the loss of the pledged or mortgaged property.

NOT valid against third persons if

NOT registered.

Art. 2089. A pledge or mortgage is indivisible, even though the debt may
be divided among the successors in interest of the debtor or of the
creditor.
Therefore, the debtor's heir who has paid a part of the debt
cannot ask for the proportionate extinguishment of the pledge or
mortgage as long as the debt is not completely satisfied.
Neither can the creditor's heir who received his share of the
debt return the pledge or cancel the mortgage, to the prejudice of the
other heirs who have not been paid.
From these provisions is expected the case in which, there
being several things given in mortgage or pledge, each one of them
guarantees only a determinate portion of the credit.
The debtor, in this case, shall have a right to the
extinguishment of the pledge or mortgage as the portion of the debt for
which each thing is specially answerable is satisfied. (1860)

Art. 2088. The creditor cannot appropriate the things given by way of
pledge or mortgage, or dispose of them. Any stipulation to the contrary
is null and void. (1859a)
1. Right of creditor where debtor fails to comply with his obligation
a. If the debtor FAILS to comply with the obligation at the time it falls due,
the creditor is merely entitled to move for the sale of the thing
pledged/mortgaged.
b. Upon failure of the mortgagor to pay his obligation within required period,
the remedy of the mortgagee is to foreclose the mortgage and if he wishes to
secure a title to the property, he can buy it in a foreclosure sale.
2. Pactum Commissorium
a. Requisites:
- there should be a pledge, mortgage or antichresis of property by way of
security for the payment of the principal obligation.

3. Permissible Stipulations
a. Subsequent modification of original contract (by subsequent aggreement)
b. Subsequent voluntary cession of property (amounts to novation)
c. Promise to assign or sell (personal obligation that does not bind property)
d. Authority to take possession of property upon foreclosure

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

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

1. Pledge or mortgage indivisible

NOTE!
This rule applies even if obligation is joint and not solidary;
Generally, the divisibility of the principal obligation is NOT
Affected by the indivisibility of the pledge or mortgage.

1.

Criminal responsibility of pledgor or mortgagor:: ESTAFA

(committed by a person who, pretending to be the owner of any real
property, shall convey, sell, encumber or mortgage the same or
knowing that the real property is encumbered shall dispose of the
same)

a. Every portion of the property pledged or mortgaged is answerable for the

whole obligation as soon as it falls due.
b. When SEVERAL things are pledged or mortgaged to secure the same debt
in its entirety, all of them are liable for the totality of the debt and the creditor
does NOT have to divide his action by distributing the debt, among the
various things pledged or mortgaged.
c. Debtors/Creditors heir- debtors heir who has paid a part of the debt
cannot ask for the proportionate extinction of the pledge
2. Exceptions to Rule of Indivisibility code: DP-FR
a. Where each one of several things guaranteed determinate portion
b. Where only a portion of the loan was released
c. Where there was failure of consideration
d. Where there was no debtor-creditor relationship
NOTE!
The mere embodiment of a real estate mortgage AND a
chattel mortgage in one document does NOT have the
effect of fusing both securities into an indivisible whole.

Art. 2091. The contract of pledge or mortgage may secure all kinds of
obligations, be they pure or subject to a suspensive or resolutory
condition. (1861)
Art. 2092. A promise to constitute a pledge or mortgage gives rise only
to a personal action between the contracting parties, without prejudice
to the criminal responsibility incurred by him who defrauds another, by
offering in pledge or mortgage as unencumbered, things which he knew
were subject to some burden, or by misrepresenting himself to be the
owner of the same. (1862)

CHAPTER II: PROVISIONS APPLICABLE ONLY TO PLEDGE

Art. 2093. In addition to the requisites prescribed in Article 2085, it is
necessary, in order to constitute the contract of pledge, that the thing
pledged be placed in the possession of the creditor, or of a third person
by common agreement. (1863)
1. Types of delivery upon nature of thing pledged
a. Actual delivery- delivery as mention in Art. 2093 as essential to the validity
of a pledge means actual possession of the property pledged and a mere
symbolic delivery is NOT sufficient.
b. Constructive/ symbolic delivery- i.e. delivering the keys of the warehouse to
represent the goods therein.
NOTE!
Whether or not a symbolic or constructive delivery is
sufficient to validate a pledge would DEPEND on the
peculiar nature of the thing pledged.
Art. 2094. All movables which are within commerce may be pledged,
provided they are susceptible of possession. (1864)
Art. 2095. Incorporeal rights, evidenced by negotiable instruments, bills
of lading, shares of stock, bonds, warehouse receipts and similar
documents may also be pledged. The instrument proving the right
pledged shall be delivered to the creditor, and if negotiable, must be
indorsed. (n)
1. Subject-matter of pledge
a. Confined and limited to personal property and it cannot be extended or
made to apply to real property. 1. Types of delivery upon nature of thing
pledged
b. Incorporeal rights may also be pledged; document must be delivered to
the creditor; if negotiable, it must be indorsed in favor of the creditor.
Art. 2096. A pledge shall not take effect against third persons if a
description of the thing pledged and the date of the pledge do not
appear in a public instrument. (1865a)
1. Public instrument necessary to BIND third persons

a. NOT EFFECTIVE against third persons, i.e. innocent buyer unless in

addition to delivery of the thing pledged, it is embodied in a public instrument
(one attested and certified by a public officer, i.e. notary public) wherein it shall
appear the description of the thing pledged and the date of the pledge.
b. Objective- forestall fraud because the debtor may attempt to conceal his
property from his creditors when he sees it in danger of execution by
simulating a pledge.
Art. 2097. With the consent of the pledgee, the thing pledged may be
alienated by the pledgor or owner, subject to the pledge. The ownership
of the thing pledged is transmitted to the vendee or transferee as soon as
the pledgee consents to the alienation, but the latter shall continue in
possession. (n)
NOTE!
Pledgor retains his ownership of the thing pledged. He may
therefore sell the same provided the pledge consents to the
sale.
Art. 2098. The contract of pledge gives a right to the creditor to retain
the thing in his possession or in that of a third person to whom it has
been delivered, until the debt is paid. (1866a)
NOTE!
Debtor CANNOT demand for its return until the debt
secured by it is paid.
The right of retention is limited ONLY to the fulfillment of
the principal obligation for which the pledge was created.

Art. 2099. The creditor shall take care of the thing pledged with the
diligence of a good father of a family; he has a right to the
reimbursement of the expenses made for its preservation, and is liable
for its loss or deterioration, in conformity with the provisions of this
Code. (1867)
1.Obligation of pledge to take due care of thing pledged
a.. Upon fulfillment of the principal obligation, the pledge (creditor) must
return the thing pledged.
b. Having temporary possession of the property, he must take care of the same
with the diligence of a good father of the family.

c. In case of loss or deterioration due to a fortuitous event, the pledge

CANNOT be held liable.
d. In case of loss or deterioration due to fraud, negligence, delay or
violation of terms, the pledge shall be held liable.
Art. 2100. The pledgee cannot deposit the thing pledged with a third
person, unless there is a stipulation authorizing him to do so. The
pledgee is responsible for the acts of his agents or employees with
respect to the thing pledged. (n)
Art. 2101. The pledgor has the same responsibility as a bailor in
commodatum in the case under Article 1951. (n)
NOTE!
Art. 1951- knowing of the flaws/ defects of thing pledged.

Art. 2102. If the pledge earns or produces fruits, income, dividends, or

interests, the creditor shall compensate what he receives with those
which are owing him; but if none are owing him, or insofar as the
amount may exceed that which is due, he shall apply it to the principal.
Unless there is a stipulation to the contrary, the pledge shall extend to
the interest and earnings of the right pledged. Code. (1867) In case of a
pledge of animals, their offspring shall pertain to the pledgor or owner
of animals pledged, but shall be subject to the pledge, if there is no
stipulation to the contrary. (1868a)
1.Right of Pledgee to compensate earnings of pledge with debt
a. Pledgee has NO right to us eht ething pledged or to appropriate the fruits
thereof without the authority of the owner.
b. Unless stipulation to the contrary, the interest and earnings of the right
pledged, and in case of ANIMALS AND OFFSPRING, are included in the
pledge.
Art. 2103. Unless the thing pledged is expropriated, the debtor continues
to be the owner thereof. Nevertheless, the creditor may bring the actions
which pertain to the owner of the thing pledged in order to recover it
from, or defend it against a third person. (1869)

Art. 2104. The creditor cannot use the thing pledged, without the
authority of the owner, and if he should do so, or should misuse the
thing in any other way, the owner may ask that it be judicially or
extrajudicially deposited. When the preservation of the thing pledged
requires its use, it must be used by the creditor but only for that
purpose. (1870a)
1. Obligation of pledge not to use thing pledged
a. Pledgee who is in possession of the thing pledged has NO RIGHT to make
use of it without permission of the owner, as the pledgor only transmits
possession not ownership.
b. If from the use of the thing, PROFITS are derived, the pledge must
ACCOUNT therefore to the pledgor, and apply the net proceeds to payment
of the claim.
2.. Right of pledgor to ask that thing pledged be deposited code: WMD
a. if the creditor uses the thing without authority
b. if he misuses the thing in any other way
c. if the thing is in danger of being lost or impaired because of the
negligence or willful act of the pledge.
Art. 2105. The debtor cannot ask for the return of the thing pledged
against the will of the creditor, unless and until he has paid the debt and
its interest, with expenses in a proper case. (1871)
NOTE!
Prescription will NOT begin to run on the action to
demand the return of the thing pledged while the obligation
subsists, neither will the possession of the pledge as such
ripen into ownership by prescription because such
possession is NOT in the concept of an owner. (exception:
pledgor is allowed to substitute the thing pledged which is
in danger of destruction or impairment with another thing
of the same kind and quality)
Art. 2106. If through the negligence or wilful act of the pledgee, the
thing pledged is in danger of being lost or impaired, the pledgor may
require that it be deposited with a third person. (n)

Art. 2107. If there are reasonable grounds to fear the destruction or

impairment of the thing pledged, without the fault of the pledgee, the
pledgor may demand the return of the thing, upon offering another
thing in pledge, provided the latter is of the same kind as the former and
not of inferior quality, and without prejudice to the right of the pledgee
under the provisions of the following article. The pledgee is bound to
advise the pledgor, without delay, of any danger to the thing pledged.
(n)

Art. 2110. If the thing pledged is returned by the pledgee to the pledgor
or owner, the pledge is extinguished. Any stipulation to the contrary
shall be void. If subsequent to the perfection of the pledge, the thing is
in the possession of the pledgor or owner, there is a prima facie
presumption that the same has been returned by the pledgee. This same
presumption exists if the thing pledged is in the possession of a third
person who has received it from the pledgor or owner after the
constitution of the pledge. (n)

1. Right of pledgor to substitute thing pledged

a. Remedies:
- pledgor- the right to demand the return of the thing pledged upon offering
another thing in pledge.
- pledge- the right to cause the same to be sold at a public sale.

Art. 2111. A statement in writing by the pledgee that he renounces or

abandons the pledge is sufficient to extinguish the pledge. For this
purpose, neither the acceptance by the pledgor or owner, nor the return
of the thing pledged is necessary, the pledgee becoming a depositary.
(n)

2. Requisites for the application of Article 2017 code: RF-OC

a. Pledgor has reasonable grounds to fear the destruction or impairment of
the thing pledged.
b. There is no fault on the part of the pledgee
c. The pledgor is offering in place of the thing, another thing in pledge
which is of the same kind and quality as the former
d. The pledge does not choose to exercise his right to cause the thing
pledged to be sold at public auction.

1. Extinguishment of pledge code: RPAS

a. If object is returned by the pledgee (Art. 2110)
b. Payment of debt (Art. 2105)
c. Renunciation/abandonment of pledge (Art. 2111)
d. Sale of the thing pledged at public auction (Art. 2115)

Art. 2108. If, without the fault of the pledgee, there is danger of
destruction, impairment, or diminution in value of the thing pledged, he
may cause the same to be sold at a public sale. The proceeds of the
auction shall be a security for the principal obligation in the same
manner as the thing originally pledged. (n)
Art. 2109. If the creditor is deceived on the substance or quality of the
thing pledged, he may either claim another thing in its stead, or demand
immediate payment of the principal obligation. (n)
1. Right of pledge to demand substitute or immediate payment
a. Remedies (alternative; may only choose ONE) to the pledgee, in case he is
deceived as to the substance or quality of the thing pledged:
- to claim another thing in pledge
- to demand immediate payment of the principal obligation

NOTE! Code: PLM-CN

OTHER causes of extinguishment: prescription, loss of the
thing, merger, compensation, novation, etc.
Art. 2112. The creditor to whom the credit has not been satisfied in due
time, may proceed before a Notary Public to the sale of the thing
pledged. This sale shall be made at a public auction, and with
notification to the debtor and the owner of the thing pledged in a proper
case, stating the amount for which the public sale is to be held. If at the
first auction the thing is not sold, a second one with the same
formalities shall be held; and if at the second auction there is no sale
either, the creditor may appropriate the thing pledged. In this case he
shall be obliged to give an acquittance for his entire claim. (1872a)
1. Formalities required for such sale code: DANI
a. The debt is due and unpaid
b. The sale must be at a public auction
c. There must be notice to the pledgor and owner stating the amount due
d. The sale must be made with the intervention of the notary public.

2. Right of pledge to APPROPRIATE thing pledged after TWO auctions and

the thing is not sold.

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

Art. 2113. At the public auction, the pledgor or owner may bid. He shall,
moreover, have a better right if he should offer the same terms as the
highest bidder. The pledgee may also bid, but his offer shall not be valid
if he is the only bidder. (n)

1 Purpose: to enable the pledgor or owner to take steps for the protection of
his rights where. he has reasonable grounds to believe that the sale was not an
honest one.

NOTE! Code: PLM-CN

OTHER causes of extinguishment: prescription, loss of the
thing, merger, compensation, novation, etc.
Art. 2114. All bids at the public auction shall offer to pay the purchase
price at once. If any other bid is accepted, the pledgee is deemed to
have been received the purchase price, as far as the pledgor or owner is
concerned. (n)
Art. 2115. The sale of the thing pledged shall extinguish the principal
obligation, whether or not the proceeds of the sale are equal to the
amount of the principal obligation, interest and expenses in a proper
case. If the price of the sale is more than said amount, the debtor shall
not be entitled to the excess, unless it is otherwise agreed. If the price of
the sale is less, neither shall the creditor be entitled to recover the
deficiency, notwithstanding any stipulation to the contrary. (n)
1. Effect of sale of thing pledged
a. Price of sale > amt. due creditor- debtor NOT entitled to excess.
b. price of sale < amt. due creditor- NEITHER is the creditor entitled to
recover deficiency.
- reason: to compel the creditor to hold an honest public sale.
- the creditor should see to it that he loans only as much as he is likely to
realize at a public sale.
2. Right of debtor to excess
a. GENERAL RULE: the debtor is not entitled to the excess unless there is an
agreement to the contrary to compensate the creditor for his risk of not being
able to recover the deficiency.
3. Right of creditor to recover deficiency
a. Creditor is NOT entitled to recover the deficiency in ALL cases.

Art. 2117. Any third person who has any right in or to the thing pledged
may satisfy the principal obligation as soon as the latter becomes due
and demandable.(n)
1 GENERAL RULE: the creditor is NOT bound to accept payment or
performance by a third person who has NO interest in the fulfillment of the
obligation.
Art. 2118. If a credit which has been pledged becomes due before it is
redeemed, the pledgee may collect and receive the amount due. He
shall apply the same to the payment of his claim, and deliver the
surplus, should there be any, to the pledgor. (n)
Art. 2119. If two or more things are pledged, the pledgee may choose
which he will cause to be sold, unless there is a stipulation to the
contrary. He may demand the sale of only as many of the things as are
necessary for the payment of the debt. (n)
Art. 2120. If a third party secures an obligation by pledging his own
movable property under the provisions of Article 2085 he shall have the
same rights as a guarantor under Articles 2066 to 2070, and Articles 2077
to 2081. He is not prejudiced by any waiver of defense by the principal
obligor. (n)
Art. 2121. Pledges created by operation of law, such as those referred to
in Articles 546, 1731, and 1994, are governed by the foregoing articles on
the possession, care and sale of the thing as well as on the termination
of the pledge. However, after payment of the debt and expenses, the
remainder of the price of the sale shall be delivered to the obligor. (n)
Art. 2122. A thing under a pledge by operation of law may be sold only
after demand of the amount for which the thing is retained. The public

auction shall take place within one month after such demand. If,
without just grounds, the creditor does not cause the public sale to be
held within such period, the debtor may require the return of the thing.
(n)
1 Instances of pledges by operation of law
a. ART. 546- necessary expenses shall e refunded to every possessor, but only
possessors in GF may retain thing until he is reimbursed.
b. ART. 1731- the who executed work upon a movable has a right to retain it
by way of pledge.
c. ART. 1914- the agent may retain in pledge the things which are the object of
the agency.
d. ART. 1707- the laborers wages shall be a lien on the goods manufactured
or the work done.
e. ART. 1994- refers to depositary.
f. ART. 2004- legal pledge and refers to a hotel keeper.
2. Rules in cases of pledge by operation of law
a, provisions on possession, care, sale of the thing pledged as well as
extinguishment shall apply.
b. in legal pledge, there is NO definitie period for the payment of the principal
obligation. The pledge must make a demand for the payment of the amount
due him. Without such, he may not exercise the right of sale at public auction.

Art. 2123. With regard to pawnshops and other establishments, which

are engaged in making loans secured by pledges, the special laws and
regulations concerning them shall be observed, and subsidiarily, the
provisions of this Title. (1873a)

III. REAL MORTGAGE (ARTS. 2124-2131)

CHAPTER III: MORTGAGE:
ART. 2124. Only the ff property may be the object of a contract of
mortgage:
(1) Immovables;
(2) Alienable real rights in accordance with the laws, imposed upon
immovables.
Nevertheless, movables may be the object of chattel mortgage.
Mortgage- contract whereby the debtor secures to the creditor the fulfilment
of a principal obligation, specially subjecting to such security immovable
property or real rights over immovable property which obligation shall be
satisfied with the proceeds of the sale of said property or rights in case the said
obligation is not complied with at the time stipulated.

3)

Equitable- lacking in the proper mortgage formalities but shows the

parties intention to burden the property as security for a debt

Subject-matter:
- Immovables and alienable real rights (real property)
- Future property CANNOT be mortgaged!
- But: stipulation subjecting the mortgage lien, properties
(improvements) which the mortgagor may subsequently acquire,
install, or use in connection with the real property already mortgaged
is valid.
ANTICHRESIS

REAL MORTGAGE

SM
Delivery

Real Property
Property is delivered to
creditor

Real Property
Debtor usually
possession

Characteristics:
1) Real
2) Accessory
3) Subsidiary
4) Unilateral

Right
Acquired

Creditor only has right

to receive fruits, not a
real right
[But may be a real right
if registered]

Creditor has no right to

receive fruits but has real
right over the property

Possession of property mortgaged:

- Gen. Rule: mortgagor retains possession of the property mortgaged
as security for the payment of the sum borrowed from the mortgagee
o Because the debtor merely subjects the property to a LIEN
but the ownership is not parted with
- Ones status as a mortgage cannot be the basis of possession
- But the mortgagor may deliver the property to the mortgagee without
altering the nature of the contract

Tax
Oblign

GR: creditor must pay

for taxes and charges
upon the estate
E: contrary stipulation

Creditor has no obligation

to pay taxes and charges

Payt
Oblign

Expressly stipulated that

creditor shall apply fruits
to payment of interest, if
owing, then to principal

No obligation on part of
mortgagee to apply fruits
to interest then principal

Cause/consideration:
- As an accessory contract, its consideration is the same as of the
principal contract = valid if principal obligation is valid
Kinds:
1) Voluntary- agreed to between the parties or by the will of the owner
of the property on which it is created
2) Legal- required by law to be executed in favor of certain persons

retains

ART. 2125. In addition to the requisites stated in Art. 2085, it is

indispensable, in order that a mortgage may be validly constituted, that

the document in which it appears be recorded in the Registry of

Property. If the instrument is not recorded, the mortgage is nevertheless
binding between the parties.
The persons in whose favor the law establishes a mortgage have
no other right than to demand the execution and the recording of the
document in which the mortgage is formalized.
Essential requisites:
- Art. 2085 + 2125 (F-R-A-P)
1) Secure the fulfilment of a principal obligation (P)
2) Mortgagor the absolute owner of the thing (A)
3) They have free disposal of the property or are legally authorized
to do so (SPA- agent; Board Resolution- corp) (F)
4) Public document and duly recorded in the Registry of Property
(R)
-

If in a private doc: no valid mortgage is constituted and creditor may

recover the loan and has the right to compel the debtor to execute a
contract of mortgage in a public doc
If not registered: still binding between the parties because registration
only operates as a notice to others but neither adds to its validity nor
converts an invalid mortgage into a valid one between the parties
o Unregistered mortgage can be foreclosed IF no innocent 3 rd
parties affected

2nd par: applies to LEGAL MORTGAGES -> contracting parties have the
right to compel each other to observe the form required by law
Registration:
1) Registry of Property (TCT)
2) Registry of Deeds
3) Book of Mortgages
-

Once a mortgage has been signed in due form, the mortgagee is

entitled to tits registration as a matter of right
Not a declaration by the state that the instrument is valid and
subsisting interest in the land: merely a declaration that the record of
the title appears to be burdened with the mortgaged described
Registered mortgage right over property previously sold is
INFERIOR to the buyers unregistered right (no longer free disposal
of the thing)

Registered mortgage is SUPERIOR to a contract to sell

Gen. Rule: when there is nothing on the certificate of title to indicate
any cloud or vice in the ownership of the property, or any
encumbrance thereon, the purchaser is not required to go beyond
than what the Torrens title has upon its face
o Exception: purchaser is a banking or finance institutionmust exercise greater care and prudence

Effect of invalidity of mortgage on principal obligation: (mortgage is

executed by one who is not the owner of the property)
1) Principal obligation still valid- only the right to foreclose is lost
2) Mortgage deed remains as evidence of personal obligation- amount
due to the creditor may be enforced in an ordinary personal action
Art. 2126. The mortgage directly and immediately subjects the property
upon which it is imposed, whoever the possessor may be, to the
fulfilment of the obligation for whose security it was constituted.
Effect of mortgage:
1) Creates a real right- enforceable against the whole world, affording
specific security for the satisfaction of a debt
a) All subsequent purchasers must respect the mortgage whether
the transfer was with or without the consent of the mortgagee
BUT it must be registered OR buyer must know of its existence
b) Right of the mortgagee to rely in good faith on what appears on
the certificate of title of the mortgagors property
o Remedy: damages against the person who caused the fraud
c) If a person is the 1st mortgagee over a property which was sold
in an auction sale by the 2nd mortgagee, the only right left to him
is to collect his mortgage credit from the purchaser thereof
during the sale conducted
d) Nullification of the TCT would adversely affect the mortgagees
rights over the mortgaged property because they would no
longer be known and respected by 3rd parties
2) Creates merely an encumbrance- mortgagee has no right or claim to
the possession of the property = he cannot eject an occupant of the
mortgaged property
o Owner is only divested of his full right to dispose of and sell
the property, not his ownership
a) 1st mortgagee has superior rights over junior mortgagees or
attaching creditors

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b)
c)

Mortgagors default does not operate to vest in the mortgagee

the ownership of the encumbered property (pactum
commissorium)
Mortgagor can constitute another mortgage on the property
during the redemption period

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

improvements, growing fruits, and the rents or income not yet received
when the obligation becomes due, and to the amount of the indemnity
granted or owing to the proprietor from the insurers of the property
mortgaged, or in virtue of expropriation for public use, with the
declarations, amplifications and limitations established by law, whether
the estate remains in the possession of the mortgagor, or it passes into
the hands of a 3rd person.
Deemed included in the mortgage:
1) New plantings
2) Fruits
3) Accrued and unpaid rents
4) Buildings, machinery, accessories
5) All objects permanently attached to a mortgaged land or building
6) More costly building erected in place of a mortgaged building torn
down by the debtor
Art. 2128. The mortgage credit may be alienated or assigned to a 3 rd
person, in whole or in part, with the formalities required by law.
-

Mortgage credit = mortgagees right

Alienation or assignment remains valid even if not registered because
registration is only necessary to affect 3rd persons

Art.2129. The creditor may claim from a 3rd person in possession of the
mortgaged property, the payment of the part of the credit secured by the
property which said 3rd person possesses, in the terms and with the
formalities which the law establishes.
-

Even if the mortgagor has transferred the mortgaged property to a

3rd person does not relieve him from his obligation to pay the debt to
the mortgage creditor in the absence of novation.

As a real right which follows the property, the creditor may demand
the mortgage credit from any possessor the payment only of the part
of the credit secured by said property
o Must be prior demand for payment on the debtor who
failed to pay
Any stipulation forbidding the owner from alienating the mortgaged
property is VOID.
Stipulation granting the mortgagee the right of first refusal over the
mortgaged property us VALID.

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

its constitution, modification and extinguishment, and as to the other
matters not included in this chapter, shall be governed by the provisions
of the Mortgage Law and the Land Registration Law.
-

Foreclosure: remedy available to the mortgagee by which he subjects

the mortgaged property to the satisfaction of the obligation to secure
which the mortgage was given
1st mortgage over 2nd is preferred!
As a rule, the mortgage can only be foreclosed if the debt remains
unpaid at the time it is due

Validity and effect of foreclosure:

1) Valid where the debtor is in default in the payment of his obligation
and must be limited only to the amount mentioned in the mortgage
document.
2) Mortgage contract may contain an acceleration clause.
3) Power to foreclose mortgage or not resides in the mortgagee.
4) Once the proceeds have been applied to the payment of the
obligation, the debtor cannot anymore be required to pay unless there
is a deficiency between the amount of the loan and the foreclosure
sale price.
5) Mortgagor can only legally transfer, cede and convey after the
foreclosure of his property are the right to redeem the same, and the
possession, use and enjoyment of the same during the period of
redemption.
Kinds of foreclosure:
1) Judicially- ordinary action
2) Extra-judicially- foreclosure under power of sale

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Judicial foreclosure:
- Process of judicial foreclosure [AOSCEPS] ayos keps
1. JUDICIAL ACTION
a) Mortgagee files petition for judicial foreclosure in court
where property is situated
b) Court finds if complaint is well-founded. Dismiss if
not.
2. ORDER TO PAY DEBT
a) Court will promulgate judgment & order mortgagor to
pay debt w/in 90-120 days from NOTICE of
Judgment. (EQUITY OF REDEMPTION)
3. SALE TO HIGHEST BIDDER
a) If mortgagor fails to pay within period, property shall
be auctioned
4. CONFIRMATION
a) Upon confirmation of sale to purchaser, the rights of
parties to the action are divested and vested to the
purchaser subject to the right of redemption.
5. EXECUTION OF JUDGMENT
a) Purchaser shall be entitled to possession and all rights
of mortgagor are severed. Mortgagor cannot redeem
anymore. General Rule is that there is no redemption
after confirmation in Judicial Sales. Exception is when it
comes to BANKS
6. PROCEEDS
a) Proceeds of Sale will be Disposed:
i.
Costs/Expenses of Sale
ii.
Principal Obligation and Interests
iii.
Junior Encumbrances
iv.
Excess = mortgagor
v.
Deficiency = MOTION for deficiency
judgment, may be on other properties, no need
for another court action.
7. SHERIFFS CERTIFICATE
a) Foreclosure is not complete until the sheriffs
certificate is executed, acknowledged and recorded.

Extrajudicial foreclosure
- Only when the mortgagee is expressly authorized to sell as stated in
the deed itself or in a document annexed there to.
- Process of Extrajudicial Foreclosure [CNP3R2]
COMPLAINT
a. w/ executive judge in province where property situated
b. clerk of court upon receipt of application shall docket
said application then stamp the corresponding file
number, collect filing fees and examine compliance
with legal requirements
2. NOTICE OF SALE
a. description, date, time, place and principal obligation
b. Posting in at least 3 public places 20 days before sale
c. Publication in Newspaper of general circulation ONCE
a WEEK for ark east 3 CONSECUTIVE WEEKS if
value exceeds P400.
3. PUBLIC AUCTION
a. Executive Judge will raffle applications among all
sheriffs or notary public
b. Time of Sale: 9-4pm
c. Under Sheriff/justice of peaces direction or NP
d. Anyone may bid unless exceptions stipulated
e. Valid even if mortgagee only bidder he may still
redeem
f. Must be at least 2 bidders
g. Highest bidder, but if ceiling price stipulated and
creditor highest bidder, estopped.
4. PROCEEDS
a. Inadequacy of price is immaterial, right to redeem
b. Excess goes to Mortgagor
c. Deficiency must be collected via court action
5. POSSESSION
a. If mortgagor in possession, he will retain possession
during redemption period of 1 year from date of sale.
b. If purchaser wants immediate possession, must file
bond equal to 12 months rent. Exception: in Banks,
purchaser may immediately posses upon confirmation
of sale. In this case, mortgagors remedy is to petition
the sale to be set aside and writ of possession be
cancelled.
1.

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6.

7.

REDEMPTION
a. Mortgagor may redeem within 1YEAR from date of
execution of Certificate of Sale. Exception: Foreclosing
bank and the mortgagor is a juridical person, right to
redeem before registration of the certificate of sale but
not exceeding three (3) months after foreclosure.
b. Debtor, Successor in interest or any judgment creditor
of debtor, or any person having junior encumbrance on
property may redeem. [Sec28 Rule39 ROC]
REDEMPTION PRICE
a. Purchase price plus interest of 1% per month Except: if
foreclosing bank, ORIGINAL OBLI plus INETERST
at ORIGINAL RATE plus COSTS.
b. If mortgagor sells property to 3rd person w/in
redemption period, 3rd person only bought the right to
redeem the property and the right to possess w/in the
redemption period.

Right of redemption may be waived only if there is fair

exchange of value and information between parties. Mortgagor can
exercise right of redemption in same terms even if property is
subsequently sold to a 3rd party.
-

Foreclosure retroacts to date of registration of mortgage

Redemption: transaction by which the mortgagor reacquires or buys
back the property which may have passed under the mortgage or
divests the property of the lien which the mortgage may have created

Individual within 1 year (365 days) from and after date of

registration of the certificate of sale
may be extended by agreement of the parties
Juridical until, not after, registration of the certificate of
foreclosure sale
in no case shall the period be more than 3
months from the date of foreclosure sale
Requisites for valid redemption:
1) Made within 1 year from registration
2) Payment of purchase price
3) Service of written notice
4) Full payment of amount
Persons entitled to exercise right of redemption
1. Mortgagor or one in privity of title with mortgagor; and
2. Successor-in-interest
Successor-in-interest includes: [R-I-L-C-J]
a) Transferee of right of redemption
b) Transferee of interest in the property
c) Successor of debtors interest in the property by operation of
law
d) Co-owners of the property
e) Those with joint interest over the property (e.g. heirs, wife, etc.)
-

Transfer of right of redemption need not be registered!

Kinds of redemption:
1. Equity of Redemption or the right of the mortgagor in case of
judicial foreclosure to redeem the mortgaged property after his
default in the performance of the conditions of the mortgage but
before the confirmation of the sale of the mortgaged property.
Period: within 90 days from the order of foreclosure
this is reckoned from the date of the service of such
order to the mortgagor
2. Right of Redemption or the right of the mortgagor in case of
extrajudicial foreclosure to redeem the mortgaged property within a
certain period after it was sold for the satisfaction of the mortgage
debt.
Period:

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