Provisions common to pledge and mortgage

The following requisites are essential to the contracts of pledge and mortgage:(F-A-F)

  That they be constituted to secure the

fulfillment of a principal obligation;

That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;

The pledgor or mortgagor must be the absolute owner of the thing pledged or mortgaged at the time it is constituted. Hence, pledge or mortgage cannot be constituted on future property.

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.

Free disposal - means that the property being given in pledge or mortgage is free from any claims or encumbrances. It means the owner is able to dispose the property at will, without restraint nor compulsion under the law. In the absence of contrary information, every person who owns a property is deemed to have free disposal thereof.

Guardian, with respect to the property of the ward

Corporation whose assets are under receivership

Trustees

Executors and administrators

Is a promise to constitute a pledge or mortgage valid?

Yes. A promise to constitute a pledge or mortgage is valid; however, it gives rise only to a personal action between the contracting parties. (Art. 2092)

Pledge and mortgage is an accessory contract

Pledge and mortgage cannot exist without a valid obligation. It can secure all kinds of obligations ( simple, with a condition or period, voidable, unenforceable and natural obligations)

Can the thing pledged or mortgaged be alienated to pay the debt?

Before maturity of the obligation – no alienation can be allowed since the payment of the debt cannot be compelled, except in the following instances:

If the pledgor/mortgagor fails to fulfill certain conditions, and such violation would make the debt due and demandable at once

If the debtor has lost the right to make use the period

When the obligation in payable in installments and the debtor failed to pay any of the installment when due, when there is acceleration clause.

At maturity

When the principal obligation becomes due, the things in which the pledge or mortgage consists may be alienated for the payment to the creditor (Art. 2087)

Alienation - refers to the transfer of the property and possession of lands, tenements, or other things, from one person to another

Appropriation of the thing pledged or mortgaged

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 (Art. 2088). This provision speaks of pactum commissorium.

Pacutum comissorium – is a stipulation in pledge or mortgage which provides for automatic forfeiture.

The ownership of the thing pledged or mortgaged automatically transferred to the creditor by mere default of the debtor.

The stipulation is void for being contrary to morals and public policy.

The creditor may only move for the sale of the thing pledged or mortgaged at public auction after the principal obligation becomes due, in order to apply the proceeds from sale to his claim.

Appropriation in pledge – after two (2) public auction sales and the thing pledged is still unsold, the pledgee may appropriate the thing pledge. The pledgee is required to give ac acquittance to his entire claim

Appropriation in mortgage – in no case is appropriation of property mortgaged is allowed

Indivisibility of pledge and mortgage

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 (Art. 2089).

The indivisibility of a pledge or mortgage is not affected by the fact that the debtors are not solidarily liable.

No partial release among heirs of debtor

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.

No partial release among creditor’s heirs

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.

A pledge is a 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 the obligation is fulfilled, the thing delivered shall be returned with all its fruits and accessions.

It may be voluntary or conventional, and legal (or one created by law).

Conventional pledge – constituted by the mutual consent of the pledgor and the pledge

Legal pledge – that which is constituted by operation of law. Include in this legal pledge are the following:

possessor in good faith awaiting reimbursement (Art. 546)

under lease (contract for piece of work), one who has executed a work upon a movable has a right to retain it by way of pledge until he is paid (Art. 1731)

in a deposit, where depositary may retain the thing in pledge until the full payment of what may be due him by reason of the pledge (Art. 1994)

Requisites of a valid pledge

That it is constituted to secure the fulfillment of a principal obligation;

That the pledgor be the absolute owner of the thing pledged;

That the persons constituting the pledge have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose;

That the thing pledged be placed in the possession of the creditor, or of a third person by common agreement

of the principal and of the interest shall be specified in writing; otherwise, the contract of pledge shall be void

Description of the thing pledged and the date of the pledge must appear in a public instrument

The subject of the pledge must be recorded in the appropriate Registry of Property

Pledge may be constituted over:

Movable property within the commerce of man which must be susceptible of  possession.

It may also cover incorporeal rights ( such as those covered by negotiable instruments, bill of lading, warehouse receipt, shares of stocks, bonds and similar credit documents)

Pledge may extend to the fruits, income, dividends, or interests, of the thing pledged, unless there is a stipulation to the contrary

In case of pledge of animals, their offspring shall pertain to the pledgor or owner of the animals pledged, but shall be subject to the pledge, if there is no stipulation to the contrary. (Arts. 2094, 2095)

Note: Future property may not be the subject of pledge (reason: there can be no delivery of future goods)

Between the parties

The pledge may be in any form as in fact the mere delivery of the object is sufficient to bind the parties.

To affect third person

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 (Art. 2096)

The pledge shall cover the following:

The thing pledged

The fruits, income, dividends or interests earned or produced by the thing pledged unless there is a stipulation to the contrary.

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

To pay the debt and its interest, with expenses in a proper case.

To pay damages that the pledgee may suffer by reason of the flaws of the thing pledged, if he was aware of such flaws but did not advise the pledge of the same

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 (Art. 2098)

He has a right to the reimbursement of the expenses made for its preservation, and is liable for its loss or deterioration (Art. 2099)

He 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 (Art. 2103)

When the preservation of the thing pledged requires its use, it must be used by the creditor but only for that purpose (Art. 2104)

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 (Art. 2109)

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 (Art. 2108)

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 (Art. 2118)

The creditor shall take care of the thing pledged with the diligence of a good father of a family

He is liable for loss or deterioration of the thing pledged unless it is due to fortuitous event

Not to deposit the thing pledged to a third person, unless authorized by the pledgor (Art. 2100)

To be responsible to the acts of his agents or employees with respect to the thing pledged (Art. 2100)

Not to use the thing pledged except:

› When authorized by the owner; or› When the use of the thing is necessary for

its preservation

To deliver to the debtor the surplus after paying his claim from what he has collected on a credit that was pledged and which has become due before it is redeemed (Art. 2108)

Rights of a third person who pledges his own movable property to secure debt of another

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 (Art. 2120)

The pledgor who pays for a debtor must be indemnified by the latter. The indemnity comprises:

The total amount of the debt;

The legal interests thereon from the time the payment was made known to the debtor, even though it did not earn interest for the creditor;

The expenses incurred by the pledgor after having notified the debtor that payment had been demanded of him;

Damages, if they are due

The pledgor who pays is subrogated by virtue thereof to all the rights which the creditor had against the debtor.

If the pledgor has compromised with the creditor, he cannot demand of the debtor more than what he has really paid

Subrogation – refers to the substitution of one person in the place of another with reference to a lawful claim, demand, or right, so that he or she who is substituted succeeds to the rights of the other in relation to the debt or claim, and its rights, remedies, or Securities.

If the pledgor should pay without notifying the debtor, the latter may enforce against him all the defenses which he could have set up against the creditor at the time the payment was made.

If the debt was for a period and the pledgor paid it before it became due, he cannot demand reimbursement of the debtor until the expiration of the period unless the payment has been ratified by the debtor

If the pledgor has paid without notifying the debtor, and the latter not being aware of the payment, repeats the payment, the former has no remedy whatever against the debtor, but only against the creditor.

If the creditor voluntarily accepts immovable or other property in payment of the debt, even if he should afterwards lose the same through eviction, the pledgor is released.

A release made by the creditor in favor of one of the pledgor, without the consent of the others, benefits all to the extent of the share of the pledge to whom it has been granted

An extension granted to the debtor by the creditor without the consent of the pledgor extinguishes the pledge.

The pledgor is released from his obligation whenever by some act of the creditor he cannot be subrogated to the rights, mortgages, and preference of the latter.

The pledgor may set up against the creditor all the defenses which pertain to the principal debtor and are inherent in the debt; but not those that are personal to the debtor.

Pledge may be extinguished in any of the following manner:

By payment of the principal obligationWhen principal obligation is

extinguished, the contract of pledge is likewise extinguish. This is in consonance with the legal maxim “Accessory follows the principal”

By the return by the pledgee of the thing pledged to the pledgor

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 (Art. 2110)

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 pledge

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

By renunciation or abandonment in writing by the pledgee of the pledge

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 (Art. 2111)

  By sale of the thing pledged

The debt is due and unpaid The sale must be at a public auction There must be due notice to the

pledgor and owner, stating the amount due

The sale must be made with intervention of Notary Public.

If two or more things are pledged, pledgee may choose which he will cause to be sold, unless there is stipulation to the contrary.

Only as much of the things as are necessary for payment of debt may be sold

The following may bid at the public auction: › Pledgor or owner, he shall be preferred should

he offered the same terms as the highest bidder

› Pledgee, but his offer shall not be valid if he is the only bidder

› Third persons

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.

Pledgee may appropriate thing if after first and second auctions, the thing is not sold. In this case he shall be obliged to give an acquittance for his entire claim.

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 the amount of obligation (there is a gain)

the debtor shall not be entitled to the excess, unless it is otherwise agreed

If the price of the sale is less than the amount of obligation (there is a loss)

the creditor be entitled to recover the deficiency, even if both parties (debtor and creditor) agrees. The agreement is void.

Legal Pledge, defined

Legal pledge is pledge created by operation of law. It refers to the right of a person to retain a thing until he receives payment of the claim.

Examples of legal pledge Possessor in good faith awaiting

reimbursement (Art. 546)

Necessary expenses shall be refunded to every possessor; but only the possessor in good faith may retain the thing until he has been reimbursed therefor.

Useful expenses shall be refunded only to the possessor in good faith with the same right of retention, the person who has defeated him in the possession having the option of refunding the amount of the expenses or of paying the increase in value which the thing may have acquired by reason thereof.

Under lease (contract for piece of work), one who has executed a work upon a movable has a right to retain it by way of pledge until he is paid (Art. 1731)

He who has executed work upon a movable has a right to retain it by way of pledge until he is paid.

In a deposit, where depositary may retain the thing in pledge until the full payment of what may be due him by reason of the pledge (Art. 1994)

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

Pledges created by operation of law are governed by laws similar to conventional pledge with respect to 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

Pawnshops and similar establishments

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 (Art. 2123)

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