CREDIT TRANSACTIONSPLEDGE AND CHATTEL MORTGAGE

PLEDGE

CHARACTERISTICS OF PLEDGEAccessoryRealIndivisibleUnilateralSubsidiary- non-fulfilment of principal

obligation, things may be alienated for payment to the creditor

Ownership retained by debtor- unless thing is expropriated

PLEDGEA pledged to B the goods found in a bodega

rented by A. By common consent, it was agreed that C, a depositary, would take charge of the goods in the bodega. Has the contract of pledge been perfected in this case?

Yes, since C became the depositary by common agreement.

KINDS OF PLEDGEConventional – created by the will of the

partiesLegal (Arts. 546, 1731 and 1994)

REQUISITES OF CONVENTIONAL PLEDGEsecure fulfilment (Art. 2085)pledgor is the absolute owner (Art. 2085)free disposal of the property, or legally

authorized for the purpose (Art. 2085)possession of the creditor, or of a third

person by common agreement (Art. 2093)

CONVENTIONAL PLEDGEObjectMovables (Art. 2094)Incorporeal rights (Art. 2095)

FormBetween the parties – any form (as long as there is delivery)As regard to third persons – public instrument (Art. 2096)

ExtentThe thing pledgedFruits, income, dividends or interests earned or producedOffspring (shall pertain to the pledgor) (Art. 2102)

CONVENTIONAL PLEDGEA is indebted to B, secured by the pledge of a

laptop computer. The computer is delivered to B, but in the public instrument executed, there is no description of the computer, and the date of pledge does not appear. If A sells the computer to C, does C have to respect the pledge in favour of B?

No, because as to C, the pledge is ineffective. To be valid, it must appear in a public instrument, unless C already had actual knowledge of the pledge.

CONVENTIONAL PLEDGERights of the debtor/pledgorAlienation (Art. 2097)Judicial or extra-judicial deposit (Art. 2104)Continue ownership (Art. 2103)Ask for its return (Art. 2105)Require it to be deposited with a third person (Art. 2106)Demand its return upon offering of another (Arts. 2107,

2108)

Obligations of the debtor/pledgorPay the debt and its interest (Art. 2105)Pay damages that the pledgee may suffer by reason of the

flaws of the thing pledged (Arts. 1951, 1201)

CONVENTIONAL PLEDGERights of the creditor/pledgeeRetain possession of the thing pledged (Art. 2098)Demand reimbursement for its preservation (Art. 2099)Bring actions which pertain to the owner (Art. 2103)Usage (Art. 2104)If he is deceived of its substance:

Claim anotherDemand immediate payment (Art. 2109) 

Cause its sale at a public sale (Art. 2108)Collect and receive the amount due if it is a credit (Art.

2118)Sell it upon default of the debtor (Arts. 2087, 2112)

CONVENTIONAL PLEDGEA pledged her ring with B. the debt was not

paid on time, and a public auction took place. Can either A or B bid?

A can bid; she has a better right if she is the highest bidder because the ring belongs to her. B may also bid unless he is the only bidder.

CONVENTIONAL PLEDGEA borrowed from B P1,000. This was secured

by a negotiable promissory note made by C in favour of A to the amount of P1,900. The negotiable promissory note was endorsed by A in B’s favour. If the note becomes due before it is redeemed, can B collect and receive the P1,900?

Yes. B should get P1,000 and deliver the P900 to A.

CONVENTIONAL PLEDGEObligations of the creditor/pledgeeTo take care of it (Art. 2099)To be liable for its loss or deterioration (Art.

2099)Not to deposit it with a third person (Art. 2100)To be responsible for the acts of his agents or

employees with respect to it (Art. 2100)Not to use it, unless:

AuthorizedNecessary for its preservation

To deliver the surplus (Art. 2108)

CONVENTIONAL PLEDGEP pledged grapes with J. because the grapes

were in danger of being spoiled, J sold them for P1,000. Who owns the P1,000?

P owns the P1,000 but J shall keep it as security in the same manner as the grapes originally pledged. The sale must be in a public sale.

CONVENTIONAL PLEDGEL pledged with V a car to secure a loan of P10,000. It was agreed that after a month, V would return the car although the debt would be paid in six months. It was also agreed that although L would once more be in possession of the car, the pledge would continue. After a month as stipulated, V returned the car. Has the pledge been extinguished?

Yes, but not the principal obligation.

CONVENTIONAL PLEDGEA pledged with B a ring. A week later, the ring

was found in the possession of A. There is a presumption here that B has returned the ring to A and that therefore the pledge has been extinguished. May the presumption be opposed?

Yes. It could only be that B returned the ring and asked that it be substituted; or a stranger may have stolen it and gave it to A.

CONVENTIONAL PLEDGERights of a third person pledgorTo be indemnified by the debtor if he pays the creditorTo be subrogated to all the rights of the creditor if he

pays the creditor (Arts. 2067, 2120)To be released from liability in the following cases:

If the creditor voluntarily accepts immovable or other property in payment of the (Arts. 2077, 2120)

Creditor grants debtor extension without pledgor’s (third person) consent (Arts. 2079, 2080)

If through some act of the creditor, the pledgor cannot be subrogated to the rights of the creditor. (Arts. 2080, 2120)

CONVENTIONAL PLEDGED obtained a loan of P10 from C. the debt is

secured by the guarantee of G and the pledge by T of his ring. If T pays C, T steps into the place of C. he can demand the debt from D or go after G.

D borrowed P50 from C. the debt is secured by a pledge of T’s ring. On due date, C accepted a parcel of land from D in payment of the debt. T can demand that he be released from the pledge. He shall be released even if later, C should lose the lot by eviction in case there is a rightful owner.

Extinguishmentof a Conventional PledgeIndirect cause – principal obligation

extinguished accessory contract extinguished (Art. 2117)

Direct causes:Return of the thing by the pledgee to the

pledgorRenunciation or abandonment in writing by the

pledgeSale of the thing pledgedAppropriation of the thing pledgedDestruction or loss of thing pledged

Extinguishmentof a Conventional PledgeA pledged with B his ring. B took possession of

it. Later, although the principal obligation had not been paid, B wrote on a private document that he was renouncing the pledge. A did not accept it and the ring remained with B. Has the pledge been extinguished?

YES. B IS A DEPOSITARY. NON-ACCEPTANCE OF RENUNCIATION IS IMMATERIAL.

Suppose that instead of writing a letter, B returned the ring to A. What is the status of the pledge?

EXTINGUISHED

LEGAL PLEDGE- Pledge by operation of law; right of a person to

retain a thing until he receives payment of his claim

Examples:Possessory lien by a possessor in good faith (Art.

546)Possessory lien of worker (Art. 1731)Depositary’s right of retention (Art. 1994)Retention by an agent of the property entrusted

to him for the expenses he may have advanced and for damages caused him by the agency.

RULES APPLICABLETO LEGAL PLEDGE

The thing may be sold only after demand of the amount for which the thing is retained.

Public auction – within one month after demand, otherwise, without just grounds, the debtor may require the return of the thing (Art. 2122)

After the payment of debt and expenses, the remainder of the price of sale shall be delivered to the debtor (Art. 2121)

EXCESS OF PROCEEDS OF SALE OR DEFICIENCY

CONVENTIONAL

LEGAL

EXCESS Creditor, unless contrary is stipulated

Debtor

DEFICIENCY Creditor not entitled to recover. Any agreement to the contrary is void

Creditor can recover

CHATTEL MORTGAGE

REQUISITES OF CHATTEL MORTGAGESecure fulfilmentMortgagor is the absolute ownerFree disposal of the property, or legally

authorized for the purpose (Art. 2085)The document in which the mortgage appears is

recorded in the Chattel Mortgage Register – for its validity (Art. 2140)

OBJECT OF CHATTEL MORTGAGEObject - personal propertyThose movables susceptible of appropriationReal property considered as personalty. (ex. Growing

crops)Forces of nature brought under control by science.Generally all things that may be transported without

impairment of the real property to which they are fixed. (Art. 416)

Obligations and actions which have for their objects movables or demandable sums.

Shares of stock of agricultural, commercial and industrial entities, although they may have real estate. (Art. 417)

CHATTEL MORTGAGEA executed a chattel mortgage on a house built

on a rented land owned by B. Is the contract valid?

YES. BUILT ON ONE’S OWN LAND OR RENTED LAND IS VALID ONLY BETWEEN THE PARTIES.

How about if the object is a machinery placed by a tenant in a plant belonging to another?

IT SHALL BE TREATED AS PERSONALTY SUBJECT TO CHATTEL MORTGAGE.

FORMS OF CHATTEL MORTGAGEBetween the parties

Recorded in the Chattel Mortgage Register of the province: Where the mortgagor resides Where the property is located

Registration is required for its validityAs regard to third persons

Affidavit of good faith (Deed of Chattel Mortgage & Chattel Mortgage Register)

FORECLOSUREOF CHATTEL MORTGAGEGrounds

Principal obligation not paid when dueViolation of any condition, stipulation, or warranty by the

mortgagorKinds

JudicialExtra- judicial

Distribution of proceedsCosts of saleClaim of the person foreclosing the mortgageClaims of persons holding subsequent mortgages in their

orderBalance mortgagor