Pledge is a contract by virtue of which the debtor delivers Mortgaged.
Mortgaged. A pledge or mortgage executed by one who is not the owner
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.
Necessity of delivery. — In addition to the said requisites,
the thing pledged must be delivered to the creditor or to a third
person by common agreement. Without delivery there can be no pledge
because, precisely, in this delivery lies the security of the pledge. In a
contract of mortgage, the mortgagor, as a general rule,retains the
possession of the property mortgaged.
A pledge or mortgage constituted by an impostor
is void and the pledgee or mortgagee in such a case acquires no right
whatsoever in the property.
A foreclosure sale, though essentially a forced sale, is still
a sale in accordance with Article 1458 of the Civil Code, under
which the mortgagor in default, the forced seller, becomes obliged to
transfer the ownership of the thing sold to the highest bidder who, in turn,
is obliged to pay therefor the bid price in money or its equivalent. Being a
sale, the rule that the seller must be the owner of the thing sold also
applies in a foreclosure sale. This is the reason why Article 2085 of the Civil
Code, in providing for the essential requisites of the contract of mortgage
and pledge, requires, among other things, that the mortgagor or pledgor
be the absolute owner of the thing pledged or mortgaged, in anticipation
of a possible foreclosure sale should the mortgagor default in the payment
of the loan.
Future property. — Future property cannot be pledged or
of the property pledged or mortgaged is without legal existence and
registration cannot validate it.
The effect of the alienation or the mortgage, with respect to the co-
owners, shall be limited to the portion which may be allotted to him in the
division upon the termination of the co-ownership.” Hence, a mortgage of
a conjugal property by
one of the spouses is valid only as to one-half (1/2) of the entire property.
Article 2085 which requires that the mortgagor must have the free disposal
of the property or at least have legal authority to do so, does not apply
where the property involved is registered under the torrens system. While
it is true that under Article 2085 it is essential that the mortgagor be the
absolute owner of the property mortgaged, a mortgagee has the right to
rely upon what appears in the certificate of title and does not have to
inquire further.
Example
Facts: A deed of sale of ten lots was made by D (daughter)
in favor of R (mother) who mortgaged the same property to
E in whose favor a certificate of sale was issued by the sheriff
after foreclosure proceedings and sale at public auction of the
property. D claims that the deed of sale in favor of R is a forgery. At the
time the mortgage was executed, E, in good faith, actually believed R to be
the owner, as evidenced by the
registration of the property in her name.
Issue: Is the mortgage made by R in favor of E valid?
Held: Yes. “Even on the supposition that the sale was void,
the general rule that the direct result of a previous illegal contract cannot
be valid (on the theory that the spring cannot rise higher than its source)
cannot apply here for we are confronted with the functionings of the
Torrens System of Registration. The doctrine to follow is simple enough: A
fraudulent or forged document of sale may become the root of a valid title
if the certificate of title has already been transferred from the name of the
owner to the name of the forger or the name indicated by the forger.”
E was a buyer (mortgagee) in good faith and for value at
the time the mortgage was executed. The fact that at the time
of the foreclosure proceedings E may have already known of
D’s claim is immaterial. A mortgagee has the right to rely on
what appears in the certificate of title and, in the absence of
anything to excite suspicion, he is under no obligation to look
beyond the certificate and investigate the title of the mortgagor
appearing on the face of said certificate
“Free disposal of the property” means that the property
must not be subject to any claim of a third person.
The only remedy given to the mortgagee or pledgee is 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 mortgage or
pledge. (Martinez vs. Phil. National Bank, 93 Phil. 765 [1953].) The pledgor
remains the owner during the pendency of the pledge and prior to
foreclosure and sale.
Pledgor or 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.)
Duty of mortgagee to make proper inquiry. — The creditor,
however, is required to exercise due care and prudence by making proper
inquiry where the debtor borrows money and mortgages another person’s
property to secure the loan without the consent of the latter and he is
guilty of negligence if he relied solely on the representations made by the
debtor.
Where mortgage gratuitous. — Where the contract of
mortgage (or pledge) is purely gratuitous, the same should be
strictly construed. In accordance with Article 1378 of the Civil
Code, said contract should be so interpreted as to effect “the
least transmission of rights or interests” as possible. (Buiser vs. Cabrera, 81
Phil. 669 [1948
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. 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.
It has been held that an accommodation mortgagor as such is not in any
way liable for the payment of the loan or principal obligation of the
debtor/borrower. His liability extends only up to the loan value of his
mortgaged property and not to the entire loan itself. Hence, he may
redeem his mortgaged property by paying only the winning bid price
thereof (plus interest and expenses thereon) at the public auction sale.
ILLUSTRATIVE CASE:
Jewelry delivered to agent for sale on commission was pledged by him
without knowledge of owner to pawnshop which acted in good faith.
Facts: P (principal) brought action for replevin of certain
jewelry owned by her which she delivered for sale on
commission to A (agent), and pledged without her knowledge
by A in the pawnshop of B, who refused to deliver the said
jewelry unless first redeemed. B acted in good faith in accepting the
pledge.
Issue: Has B the right to collect the sum loaned to A out of
the value of the said jewelry?
No. The contract of pledge was null and void, since
A was not the owner of the jewelry pledged. “Between the
supposed good faith of B and the undisputed good faith of P,
the owner of the jewelry, neither law nor justice permit that the
latter, after being the victim of embezzlement, should have to
choose one of the two extremes of a dilemma, both of which
without legal ground or reason, are injurious and prejudicial to
his interests and rights, that is, she must either lose her jewelry or pay a
large sum received by the embezzler as a loan from B, when P is not
related to the latter by any legal or contractual bond out of which legal
obligations arise.
The owner of personal property may recover the possession of the same
from a pawnshop where another person had pledged it without authority
to do so.
ART 2088
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.) with the formalities
required by law in order to collect the amount of his claim from
the proceeds.
Upon failure of the mortgagor to pay his obligation within
the required period, the remedy of the mortgagee is to foreclose the
mortgage and if he wishes to secure a title to the mortgaged property, he
can buy it in the foreclosure sale. An action for consolidation of ownership
is an inappropriate remedy on the part of the mortgagee in equity.
(Montevirgen vs. Court of Appeals, 112 SCRA 641 [1982]; Vergara vs.
People, 450 SCRA 482 [2005]
Prohibition against appropriation of property. — The pledgor’s or
mortgagor’s default does not operate to vest in the
pledgee or mortgagee the ownership of the property for any
such effect is against public policy. The creditor in a contract of
real security like pledge and mortgage, cannot appropriate to
himself without foreclosure the thing held as pledge or under
mortgage, nor can he dispose of the same as owner.The prohibition
applies to an immovable which is the object of
the contract of antichresis.
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 nonpayment of the debt within the term fixed is known as pactum
commissorium or pacto commisorio which is forbidden by law and
declared null and void.
Requisites. — There are two requisites or elements for
pactum commissorium to exist, namely:
(a) There should be a pledge, mortgage, or antichresis of
property by way of security for the payment of the principal
obligation; and
(b) 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.
It is immaterial that the questioned stipulation was voluntarily
and freely entered into, pactum commissorium being void
for being prohibited by law.
EXAMPLE
D borrowed money from C under the agreement that
if, at the expiration of the period stipulated, the sum loaned
should not be paid, it would be understood that the house and
lot owned by D, be considered as absolutely sold to C for the
said sum. No payment was made by D within the time fixed.In view of the
refusal of D to deliver the property, C brought
action to recover the property and rents from D.
Issue: Is the contract in question in the nature of a pactum
commissorium?
Held: No. We have in this case a contract of loan and a
promise of sale of property, the price of which should be the
amount loaned, if within a fixed period of time such amount
should not be paid by the debtor-vendor (D) of the property
to the creditor-vendee (C) of the same. The fact that the
parties have agreed at the same time, in such a manner that
the fulfillment of the promise of sale would depend upon the
nonpayment or return of the amount loaned, has not produced
any change in the nature and legal conditions of either contract or any
essential defect which would tend to nullify them. Pactum commissorium
indicates the existence of the contracts of mortgage, or of pledge, or of
antichresis, none of
which has coincided in the loan in question.
The property does not appear mortgaged. (see Art. 2125.) Said property
could not be pledged, not being personal property, and notwithstanding
the said double contract the debtor (D) continued in possession thereof
and the said property had never been occupied by the creditor (C). Neither
was there any contract of antichresis (see Art. 2132.) by reason of said
contract of loan inasmuch as C has never been in possession thereof, nor
has he enjoyed the said property nor for one moment ever received its
rents.
B and S agreed on the sale of trucks by the latter to
the former. When B defaulted in the payment of the second
and third installments, S fi led an action in court for specifi c
performance. The trial court rendered judgment for S and
ordered B to pay the balance of his obligation and in case of
failure to do so, to execute a deed of assignment pursuant to
the judgment.
Issue: Is the deed of assignment in the nature of a pactum
commissorium?
Held: No. There was no contract of pledge or mortgage
entered into by the parties; nor a case of automatic appropriation
of the property by S because it took the intervention of the trial
court to exact fulfi llment of the obligation, which by its very
nature is “. . . anathema to the concept of pacto commissorio.”
And even granting that the original agreement between the
parties had the badges of pactum commissorium, the deed of
assignment does not suffer the same fate as it was executed
pursuant to a valid judgment as can be gleaned from its very
terms and conditions
What is prohibited by Article 2088 in connection with pacto
commissorio is the automatic appropriation by the creditor of the
thing pledged or mortgaged upon failure of the debtor to pay
his debt within the period agreed upon by virtue of authority or
right previously given the creditor

Permissible stipulations
● Subsequent modification of original contract
● Subsequent voluntary cession of property. — The prohibition
does not include a subsequent voluntary act of the debtor making
cession of the property mortgaged in payment of the debt which
amounts in its legal effect to a novation of the original contract
and to a voluntary sale of the said property for the amount of the
debt
● Promise to assign or sell
● Authority to take possession of property upon foreclosure
ART. 2089 to ART. 2090
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. Even when only a part of the debt
remains unpaid, all the things are liable for such balance
The debtor’s heir who has paid a part of the debt cannot ask for the
proportionate extinction of the pledge or mortgage (par. 2.) nor can the
creditor’s heir who has received his share of the debt return the pledge or
cancel the mortgage if the debt is not completely satisfied.
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 determinate portion of the credit. Actually it is not an exception
because in such a case, there would be as many pledges or mortgages as
there are things given in pledge or mortgage.
EXAMPLES:
(1) A borrowed from B P20,000.00 and to guarantee
payment, A pledged his diamond ring worth P15,000.00 and a
pair of earrings worth P5,000.00.
If A pays P15,000.00, he cannot ask for the return of the
ring because both the ring and the earrings are given to secure
payment of the entire obligation of P20,000.00. This is because
the pledge is indivisible. B may cause the sale of either or both
for the payment of his credit. (see Art. 2112
A mortgage, even if constituted on two or more
properties, is one and indivisible (Art. 2089.), that is, it cannot be
divided among the different properties, and the mortgagee has
the right to have the properties either or both, jointly or singly,
sold to satisfy his claim.
Both remain distinct agreements, differing not only in the
subject matter of the contract, but also in the governing legal
provisions. The mortgagee, therefore, may legally foreclose
the real estate mortgage extrajudicially and waive the chattel
mortgage foreclosure, and maintain instead a personal action for
the recovery of the unpaid balance of the credit. (Phil. Bank of
Commerce vs. Macadaeg
ART. 2092
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. In other words, 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
A pledge is a real contract which requires delivery for its
perfection. (Art. 1316.)
Constructive delivery. — It has been held, however, in an
earlier case, 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, since the owner, as pledgor, could no longer dispose
of the same, the pledgee being the only one authorized to do so
through the depositary and special agent who represented him.
“In the very nature of things, a pledge (or chattel mortgage)
is confi ned and limited to personal property (Arts. 416,
417.1) and it cannot be extended or made to apply to real prop-
erty.” (Pacifi c Commercial vs. National Bank, 49 Phil. 236 [1926].)
The movable must be within the commerce of men and susceptible
of possession. (Art. 2094.)
Incorporeal rights evidenced by documents whether
negotiable or not may also be pledged. The document must be
delivered to the creditor; if negotiable, it must be indorsed in
favor of the creditor. (Art. 2095.)
Article 2096
Contents of public instrument. — Even if all the essential
requisites provided in Articles 2085 and 2093 are present, the
contract of pledge is not effective against third persons unless
in addition to delivery of the thing pledged, it is embodied in
a public instrument (i.e., one attested and certified by a public
officer authorized by law to administer oath, such as a notary
public) wherein it shall appear the description of the thing
pledged; and the date of the pledge.
ART. 2097
The pledgor retains his ownership of the thing pledged. He
may, therefore, sell the same provided the pledgee consents to
the sale. As soon as the pledgee gives his consent, the ownership
of the thing pledged is transferred to the vendee subject to the
rights of the pledgee, namely, that the thing sold may be alienated
to satisfy the obligation (Art. 2112.) and that the pledgee must
continue in possession during the existence of the pledge. (Arts.
2093, 2098.) But the pledge would not bind or adversely affect
third persons unless Article 2096 has been followed.
ART. 2098
As has been stated, the possession of the pledgee constitutes
his security. Hence, the debtor cannot demand for its return until
the debt secured by it is paid. (see Art. 2105; see Serrano vs. Court
of Appeals, 196 SCRA 107 [1991].) But the right of retention is
limited only to the fulfillment of the principal obligation for
which the pledge was created.
EXAMPLE:
D owes C P500.00. As security, D pledged his diamond ring. Later, D again
borrowed P200.00. C has a right to retain the thing until the P500.00 is
paid. But C cannot retain the thing until he has been paid the remaining
debt of P200.00. C’s right of retention is limited to the payment of the
P500.00 for which the ring was given in pledge.
ART. 2099 Having possession of the property, he
has the obligation to take care of the same with the diligence of a
good father of the family. (Art. 1163.) He is, however, entitled to
reimbursement of the expenses incurred for its preservation.
In case of the loss or deterioration of the thing pledged due to
fortuitous event, the pledgee cannot be held responsible but he
is liable for loss or deterioration by reason of fraud, negligence,
delay or violation of the terms of the contract.
ART. 2102
The pledgee has no right to use the thing pledged or to
appropriate the fruits thereof without the authority of the owner.
(Art. 2104; see Art. 1977.) But the pledgee can apply the fruits,
income, dividends, or interests earned or produced by the thing
pledged to the payment of interest, if owing, and thereafter to the
principal of his credit. (see Art. 2132.)
Unless there is a stipulation to the contrary, the interest
and earnings of the right pledged and in case of animals, their
offsprings (see Art. 2127.), are included in the pledge.
EXAMPLE:
D borrowed from C P1,000.00 at 12% interest, with
certificates of stocks as security. The interest is payable six
months after the execution of the contract.
If the stocks earn dividends, the same shall also be subject
to the pledge if there is no stipulation to the contrary. C shall
apply such dividends to the interest, if any, owing him after
six months. If none is owing him or insofar as the dividends
may exceed the interest due, C shall credit it to the principal of
P1,000.00 when it matures.
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:
(1) if the creditor uses the thing without authority;
(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 2107 The following are the requisites for the application of Article
2017:
(1) The pledgor has reasonable grounds to fear the destruction
or impairment of the thing pledged;
(2) There is no fault on the part of the pledgee;
(3) 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
(4) The pledgee does not choose to exercise his right to cause
the thing pledged to be sold at public auction.
ART. 2108
The pledgee’s right to have the thing pledged sold at public
sale granted under the above article is superior to that given to
the pledgor to substitute the thing pledged under Article 2107.
The law says the pledgor is given the right “without prejudice to
the right of the pledgee.” (Art. 2107.)
The sale must be a “public sale.” The pledgee shall keep the
proceeds of the sale as security for the fulfillment of the principal
obligation. In other words, they shall belong to the pledgor.
ART 2109
Right of pledgee to demand substitute or immediate payment.
This article grants two remedies to the pledgee, in case he is
deceived as to the substance or quality of the thing pledged:
(1) to claim another thing in pledge; and
(2) to demand immediate payment of the principal obligation.
The remedies are alternative, that is, he is privileged to choose
only one and not both.
ART 2110
The pledge is extinguished if the 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.
The pledge is also extinguished by payment of the debt (see
Art. 2105.), by renunciation or abandonment of the pledge (Art.
2111.), and by the sale of the thing pledged at public auction. (see
Art. 2115.)
ART. 2111
Renunciation or abandonment must be in writing to extinguish the pledge,
and such renunciation is not conditioned upon the acceptance by the
pledgor or owner nor upon the return of the thing pledged. The waiver
transforms the pledgee into a depositary with the rights and
obligations of one.
ART. 2112 Right of pledgee to cause sale of thing pledged
The formalities required for such sale under the above article
are as follows:
(1) The debt is due and unpaid;
(2) The sale must be at a public auction;
(3) There must be notice to the pledgor and owner, stating
the amount due; and
(4) The sale must be made with the intervention of a notary
public.
Notification to the pledgor and the owner of the thing pledged is sufficient.
Only a notary public can conduct a public auction after proper notice is
sent to the pledgor and owner of the thing pledged. The sale is actually
extrajudicial in character without intervention by the courts.
The pledgee may appropriate the thing pledged if after
the first and second auctions, the thing is not sold. This is an
exception to the prohibition against pacto comisorio.
If the creditor appropriates the thing, it shall be considered
as full payment for his entire claim. He is thus obliged to give an
acquittance for the same. The debtor is not entitled to the excess
in case the value of the thing pledged is more than the principal
obligation. (see Art. 2115.)
ART. 2113
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 deficiency. 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 proceedings.

The creditor may sue on the principal obligation instead of

electing to sell the thing pledged, and in such case, he may recover
the deficiency from the debtor.

ART. 2117.
Under this article, a third person who has any right in or to
the thing pledged (as when the pledgor has contracted to sell it to
him) may pay the debt as soon as it becomes due and demandable
and the creditor cannot refuse to accept the payment.