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PLEDGE disposal of their property, and in the
Pledge is a contract by virtue of which
the debtor delivers to the creditor or to
a third person a movable (Art. 2094.) or
document evidencing incorporeal rights
(Art. 2095) for the purpose of securing
the fulfillment of a principal obligation
with the understanding that when the
obligation is fulfilled, the thing delivered
shall be returned with all its fruits and
accessions.
PARTIES:
 Pledgor – the debtor; the one
who delivers the thing
pledged to the creditor
 Pledgee – the creditor, the one
who receives the thing pledged.
KINDS OF PLEDGE:
(1) Voluntary or conventional or one
which is created by agreement of the
parties
(2) Legal or one which is created by
operation of law. (see Art. 2121.)
CHARACTERISTICS OF THE
CONTRACT
1. real contract - it is perfected by
the delivery of the thing pledged by
the pledgor to the creditor who is
called the pledgee, or to a third
person by common agreement;
2. accessory contract- it has no
independent existence of its own;
3. unilateral contract - it creates an
obligation solely on the part of the
creditor to return the thing subject
thereof upon the fulfillment of the
principal obligation; and
4. Subsidiary contract- the
obligation incurred does not arise
until the fulfillment of the
principal obligation which is
secured.
Cause or Consideration
As to pledgor -the principal obligation.
Not a debtor – compensation
stipulated for the pledge or the mere
liberality of the pledgor. (Art.2018)
Requisites are essential to the
contracts of pledge and mortgage
(Art.2085)
(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) That the persons constituting the
pledge or mortgage have the free
absence thereof, that they be legally
authorized for the purpose.
Third persons who are not
parties to the principal obligation may
secure the latter by pledging or
mortgaging their own property.
Common Characteristics of Pledge
and mortgage:
 Both intended to secure the
performance of a principal and
pre-existing obligation by
specially subjecting to such
security, property or the fruits
 A pledge or mortgage, being
merely an accessory agreement,
its invalidity does not affect the
principal contract of loan
 Without delivery there can be
no pledge because, precisely, in
this delivery lies the security of
the pledge
PROPERTY PLEDGED/MORTGAGED:
 Future property cannot be
pledged or mortgaged
 Property acquired
subsequently – one which is
executed by one who is not the
owner of the thing pledged is
without legal existence and
registration cannot validate it.
Property covered by Torrens Title:
 Free disposal and legal authority
to do is not applicable because
the mortgagee has the right to
rely upon what appears in the
certificate of title and does not
have to inquire further.
PLEDGOR OR MORTGAGOR HAS
FREE DISPOSAL OF PROPERTY OR
HAS LEGAL AUTHORITY:
Free Disposal – property must not be
the subject to any claim of third person
Capacity to dispose –
pledgor/mortgagor has the capacity or
authority to make a disposition of
property.
Thing pledge may be alienated:
 To secure the fulfilment of a
principal obligation
 Remedy: to have the security
given sold at public auction and
the proceeds of the sale applied
to the payment of the obligation
secured by the pledge or
mortgage.
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 In the Sale – there must be
“meeting of the minds” with
respect to the specific subject of
the contract.
Pledgor/ Mortgagor may be a third
person:
 It is not necessary that the
principal debtor should always
be the pledgor or mortgagor. (Art.
2085, par. 2.)
 Liability for deficiency. — The
pledgor or mortgagor who
pledged or mortgaged his
property to guarantee an
indebtedness of another person,
without expressly assuming
personal liability for such debt,
is not liable for the payment of
any deficiency, should the
property not be sufficient to
cover the debt.
o His liability extends only
to the property pledged
or mortgaged. Should
there be any deficiency,
the creditor has recourse
on the principal debtor,
the signatory to the
principal contract, who
remains to be primarily
bound
Pledge and real mortgage
distinguished:
1. Pledge is constituted on
movables (Art. 2094.), while
mortgage, on immovables. (Art.
2124.)
2. In pledge, the property is
delivered to the pledgee, or by
common consent to a third
person (Art. 2093.), while in
mortgage, delivery is not
necessary
3. Pledge is not valid against
third persons unless a pledged or mortgaged property
description of the thing pledged
and the date of the pledge
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.
Right of creditor where debtor
fails to comply with his obligation
 The property given in pledge or
mortgage stands as security for
the fulfillment of the principal
obligation. (Art. 2085, par. 1.)
 Sale of subject properly with
formalities required by law.
o 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
or mortgaged (Art. 2087.
 Prohibition against appropriation
of property.
o pactum commissorium
 A stipulation whereby the
thing pledged or
mortgaged or under
antichresis (Art. 2137.)
shall automatically
become the property of
the creditor in the event
of non payment of the
debt within the term fixed
 Forbidden so null and void
contrary to good morals
and public policy.
2 requisites or elements for pactum
commissorium:
1. There should be a pledge,
mortgage, or antichresis of
property by way of security for
the payment of the principal
obligation;
2. There should be a stipulation for
an automatic appropriation by
the creditor of the property in
the event of nonpayment of the
obligation within the stipulated
period
Risk of loss of property pledged or
mortgaged
 Ownership remains with the
debtor, therefore, under the
maxim, res perit domino suo, the
debtor-owner bears the loss of
the property.
 The principal obligation is not
extinguished by the loss of the
Pledge or mortgage indivisible
(Art.2089)
 A pledge or mortgage is one and
indivisible as to the contracting
parties and the rule applies even
if the obligation is joint and not
solidary
 Single thing. — Every portion of
the property pledged or
mortgaged is answerable for
the whole obligation as soon as
it falls due.
 Several things. — 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
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divide his action by distributing
the debt, among the various
things pledged or mortgaged
o Even when only a part of
the debt remains unpaid,
all the things are liable for
such balance
 Debtor’s heir/creditor’s heir.
The debtor’s heir who has paid a
part of the debt cannot ask for
the proportionate extinction of
the pledge or mortgage
Exceptions to rule of indivisibility.
 Where each one of several
things guarantees determinate
portion of credit. — The
exception is where there are
several things given in pledge or
mortgage and each one of
them guarantees only a pledge is merely a lien and
determinate portion of the
credit.
 Where only portion of loan was
released
 Where there was failure of
consideration
 Where there is no debtor-creditor
relationship
o third person who did not
take part in the
constitution thereof either
personally or through an
agent.
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
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 respon-
sibility 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
Promise to constitute pledge or
mortgage creates no real right.
 A promise to constitute a pledge
or mortgage, if accepted, gives
rise only to a personal right
binding upon the parties and
creates no real right in the
property
 what exists is only a right of
action to compel the fulfillment
of the promise but there is no
pledge or mortgage yet
Chapter 2
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
Transfer of possession essential in
pledge
 To constitute contract. — An
agreement to constitute a pledge
only gives rise to a personal
action between the contracting
parties. (Art. 2092.)
o creditor acquires no right
to the property because
possession is
indispensable to the right
of a lien
 To affect third persons - apart
from being in a public
instrument, possession of the
thing pledged must, in addition,
be delivered to the pledgee.
What kind of possession is
required in pledge?
 The mere taking of the property
is not enough. There must be
continuous possession of the
thing. However, the pledge is
allowed to temporarily entrust
the physical possession of the
thing pledged to the pledgor
without invalidating the contract.
Pledgor would in possession as a
mere trustee.
Type of delivery depends upon
nature of thing pledged and peculiar
circumstances of each case:
 Actual delivery. — The delivery
of possession referred to in
Article 2093 as essential to the
validity of a pledge means actual
possession of the property
pledged and a mere symbolic
delivery is not sufficient.
 Constructive delivery. that the
symbolical transfer of the goods
by means of the delivery of the
keys to the warehouse where the
goods were stored was sufficient
to show that the depositary
appointed by common consent of
the parties was legally placed in
possession of the goods.
Note: Constructive or symbolic
delivery does not confer physical
possession of the thing, but by
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construction of law, is equivalent to
acts of real delivery.
ART. 2094. All movables which are
within commerce may be pledged,
provided they are susceptible of
possession.
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.
Art. 417. The following are also
considered as personal property:
(1) Obligations and actions which have
for their object movables or demandable
sums;
(2) Shares of stock of agricultural,
commercial and industrial entities,
although they may have real estate.
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
 one attested and certified by a
public officer authorized by law
to administer oath, such as a
notary public)
o XPN: innocent buyer of
the thing pledged
notwithstanding that the
pledgee has already taken
possession of the same
 Purpose: is to forestall fraud,
because a debtor may attempt to
conceal his property from his
creditors when he sees it in
danger of execution by
simulating a pledge thereof with
an accomplice
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
 To allow the assignor to dispose
of or alienate the security
without notice to and consent of
the assignee will render nugatory
the very purpose of a pledge or
an assignment of credit
What are the rights of a pledge
 Retain the thing until debt is paid.
(Art. 2018, NCC)
 To be reimbursed for the
expenses made for the preservation
of the thing pledged.(Art. 2099, NCC
 Creditor may bring any action
pertaining to the pledgor in
order to recover it from or defend it
against a 3rd person.
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.
 But the right of retention is
limited only to the fulfillment of
the principal obligation for which
the pledge was created.
What are the obligations of a pledge:
 Take care of the thing pledged
with the diligence of a good fat
her of a family. Art. 2099, NCC
Note: Pledgee is liable for the
loss or deterioration of the
thing by reason of fraud,
negligence, delay, or violation
of the terms of the contract.
 GR: Pledgee cannot deposit the
thing pledged to a 3rd person.
o XPN: Unless there is stipu
lation to the contract (Art.
2100, NCC) Note: Pledgee
is liable for the loss or
deterioration of the thing
by reason of fraud,
negligence, delay,or
violation of terms of
contract.
o pledgee is responsible for
the acts of his agents or
employees with respect to
the thing pledged (Art.
2100, par. 2.) because
their acts are, in legal
effect, deemed his.
 Apply the fruits, income, divid
ends, or interests produced or
earned by the property, to inte
rests or expenses first, then to
the principal. (Art. 2102,)
 GR: Cannot use the thing
pledged without authority:
a. XPNs:
i. Authority or
permission from
pledgor
ii. Use of thing is
necessary for
preservation
 Return the thing pledged to
the pledge when the principal
obligation is fulfilled or
satisfied it.
Right of pledgor to ask that thing
pledged be deposited:
In the following cases, the owner may
ask that the thing pledged be deposited
judicially or extrajudicially:
 if the creditor uses the thing
without authority;
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 (2) if he misuses the thing in any
other way; or
 (3) if the thing is in danger of
being lost or impaired because of
the negligence or willful act of
the pledgee. (Art. 2106.)
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.
-XPN: 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.
Right of pledgor to substitute thing
pledged ( Art.2107)
Requisites:
 The pledgor has reasonable
grounds to fear the destruction
or impairment of the thing
pledged;
 There is no fault on the part of
the pledgee;
 The pledgor is offering in place of
the thing, another thing in
pledge which is of the same kind
and quality as the former; and
 The pledgee does not choose to
exercise his right to cause the
thing pledged to be sold at public
auction.
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
 pledgor is given the right
“without prejudice to the right of
the pledge
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
 The remedies are alternative,
that is, he is privileged to choose
only one and not both.
What is the effect of the return of th
e thing pledged to the pledgor by the
pledge:
 The pledge shall be extinguished.
Any stipulation shall be void.(Art.
2110)
Extinguishment of pledge by return
of thing pledged.
 object is returned by the pledgee,
and this is true notwithstanding
any stipulation that the pledge
would continue although the
pledgee is no longer in
possession
 payment of the debt (see Art.
2105.),
 by renunciation or abandonment
of the pledge (Art. 2111.)
 the sale of the thing pledged at
public auction. (see Art. 2115.)
Presumption when the thing is found
in the possession of the pledgor subs
equent to the perfection of the pledg
e:
 gives rise to a prima facie
presumption that the thing has
been returned and, therefore,
that the pledge has been
extinguished in any of the ff.
circumstances:
a. If the thing is found in the
possession of pledgor or
owner after the pledge had
been perfected
b. Thing is found in the
possession of a third
person who received it
from pledgor after the
perfection of the pledge.
presumption may be rebutted by
evidence to the contrary:
 the return was merely for the
substitution of the thing pledged
(Art. 2105.),
 the thing was stolen and given
by the thief to the pledgor or
owner
ART. 2111. A statement in writing by
the pledgee that he renounces or
abandons the pledge is suffi cient 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.
Extinguishment of pledge by
renunciation or abandonment:
 waiver must be in writing
 prescription
 loss of the thing,
 merger,
 compensation,
 novation
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RIGHT OF PLEDGEE TO CAUSE SALE
OF THING PLEDGED:
 The debt is due and unpaid;
 The sale must be at a public
auction;
 There must be notice to the
pledgor and owner, stating the
amount due;
 The sale must be made with the
intervention of a notary public
Note that Article 2112 does not require
posting of the notice of sale and
publication. Notification to the pledgor
and the owner of the thing pledged is
sufficient
Right of pledgee to appropriate thing
pledged.
 The pledgee may appropriate the
thing pledged if after the fi rst
and second auctions, the thing is
not sold. This is an exception to
the prohibition against pacto
commisorio. (Art. 2088.)
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.
- To avoid fraud, the pledgee is not
allowed to acquire the thing
pledged if he is the only bidder.
Bid must be for cash. All bids,
including that of the pledgor, must be
for cash. If the pledgee accepts a bid
other than for cash, the pledgor or
owner has the right to consider that the
pledgee has received the purchase price
in cash (Art.2114)
EFFECT OF SALE OF THING
PLEDGED:
The sale of the thing pledged
extinguishes the principal obligation
whether the price of the sale is more or
less than the amount due.
1. If the price of the sale is more
than the amount due the
creditor, the debtor is not
entitled to the excess unless the
contrary is provided.
2. In the same way, if the price of
the sale is less, neither is the
creditor entitled to recover the
defi ciency. A contrary
stipulation is void.
a. The reason is to compel
the creditor to hold an
honest public sale.
b. Furthermore, the creditor
should see to it, which he
usually does, that he
loans only as much as he
is likely to realize at a
public sale.
Right of third person to satisfy
obligation.
 GR: the creditor is not bound to
accept payment or performance
by a third person who has no
interest in the fulfi llment of the
obligation. (Art.1236)
 XPN: 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
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
 Limited only by stipulation. After
suffi cient property has been sold to
satisfy the obligation plus interests
and expenses (Art. 2115.), no more
shall be sold.
Right of third person who pledged
his own property.
 A third person who is not a party
to the principal obligation may
secure the latter by pledging his
own property. (Art. 2085, par. 2.)
The law grants him the same
rights as a guarantor (see Arts.
2066-2070, 2077-2081.) and he
cannot be prejudiced by any
waiver of defense by the principal
debtor.
REAL MORTGAGE
ART. 2124. Only the following
property may be the object of a
contract of mortgage:
- Immovables;
- Alienable real rights in
accordance with the laws,
imposed upon immovables
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Nevertheless, movables may be the
object of a chattel mortgage.
Mortgage (otherwise known as “real
estate mortgage” or “real mortgage’’) is a
contract whereby the debtor secures to
the creditor the fulfillment 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.
Characteristics of mortgage
 real,
 accessory,
 subsidiary contract.
 unilateral because it creates only an
obligation on the part of the creditor
who must free the property from the
encumbrance once the obligation is
fulfilled.
Essence of a contract of mortgage is
that a property has been identified or
set apart from the mass of the property
of the debtor-mortgagor as security for
the fulfillment of his obligation, in case
of default of payment.
Possession of property mortgaged.
-retains possession of the property
mortgaged as security for the payment
of the sum borrowed from the
mortgagee-creditor, because by the
mortgage, the debtor merely subjects
the property to a lien but ownership
thereof is not parted with
Since it is the mortgagor in a contract
of mortgage who is entitled to the
possession of the subject property, it
follows that one’s status as mortgagee
cannot be the basis of possession.
Payment of interest on mortgage
credit. It is not also an essential
requisite of the contract of mortgage
that the principal of the mortgage credit
bears interest, or that the interest as
compensation for the use of the
principal and enjoyment of its fruits be
in the form of a certain percent thereof.
 The interest may be in the form
of fruits of the mortgaged
property, without the contract’s
losing thereby its character of a
mortgage contract.
Cause or consideration in mortgage.
 As mortgage is an accessory
contract, its consideration is the
same as of the principal contract
from which it receives its life,
and without which it cannot
exist as an independent contract,
although the obligation thereby
secured is incurred by a third
person and, therefore, it will be
valid if the principal obligation is
valid, and cannot be avoided on
the ground of lack of
consideration
 The mortgage must sufficiently
describe the debt sought to be
secured. An obligation is not
secured by a mortgage unless it
comes fairly within its terms.
Kinds of mortgage.
A mortgage may be:
(1) 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 (Art. 138, Spanish
Mortgage Law.);
(2) Legal. — one required by law to be
executed in favor of certain persons (see
Art. 2125, par. 2; Arts. 2082, 2083.); or
Art
(3) Equitable. — one which, although it
lacks the proper formalities or other
requisites of a mortgage required by
law, nevertheless reveals the intention
of the parties to burden real property as
a security for a debt, and contains
nothing impossible or contrary to law.
Subject matter of mortgage.
The objects of contract of mortgage are
immovables (Art. 415.3) and alienable
real rights imposed upon immovables.
Hence, a mortgage on real property is in
itself a real property.
The inclusion of “buildings” under
Article 415 of the Civil Code, separate
and distinct from the land means that a
building is by itself an immovable
property. While a mortgage of land
necessarily includes, in the absence of
stipulation, the improvements thereon,
a building by itself may be mortgaged
apart from the land on which it is built.
Possessory rights over said property
before title is vested on the grantee may
be validly transferred or conveyed as in
a deed of mortgage
8

has a right to rely in good

Future property cannot be object of
mortgage
 Stipulation in a contract of
mortgage whereby the mortgagor
also constituted a mortgage in
favor of the mortgagee and his
assignees “on any other property
he then might have and those he
might acquire in the future” did
not constitute a valid mortgage
on the properties acquired
subsequent to the constitution of
the mortgage.
 mortgagor could not legally
mortgage any property he did not
yet own
ART. 2125. In addition to the
requisites stated in Article 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. (1875a)
faith on the certificate of
title of the mortgagor of the
property given as security
and in the absence of any
sign that might arouse
suspicion, has no obligation
to undertake further
investigation.
The doctrine is based on the rule
that all persons dealing with the
property covered by a Torrens
Certificate of Title as buyers or
mortgagees, are not required to
go beyond what appears on the
face of the title.
Greater care and diligence
required of mortgagee-bank. —
A mortgagee-bank is expected to
exercise greater care and
prudence before entering into a
mortgage contract even those
involving registered lands in its
dealings than private individuals
as their business is impressed
with public interest.

 Where mortgage in a private

document. — No valid mortgage
is constituted where the alleged
deed of mortgage is a mere
private document and, therefore,
is not registered.
 Where mortgage not registered-if
the instrument of mortgage is
not recorded, the mortgage is
nevertheless binding between the
parties.
o In other words,
registration only operates
as a notice of the
mortgage to others but
neither adds to its validity
nor converts an invalid
mortgage into a valid one
between the parties.
 Where mortgage registered under
Act No. 3344-an unregistered
pacto de retro sale over a house
is superior to a recorded
mortgage over the same house of
a later date

Doctrine of mortgagee in good faith.

(1) Reliance in good faith on

certificate of title of
mortgagor. — A mortgagee