Pledge and Mortgage

General Concepts
Article 2085. The following requisites are essential to the contracts of pledge and
mortgage:
(1)That they be constituted to secure the fulfilment 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 disposal of
their property and in the absence thereof, that they be legally authorized for the
purpose.
(4)Third persons who are not parties to the principal obligation may secure the
latter by pledging or mortgaging their own property.
Article 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.
A pledge and mortgage are security transactions constituted to secure the
fulfilment of a principal obligation. Unlike a guaranty and surety, a pledge and
mortgage are real security transactions; the essence of a pledge or mortgage is
that, when the principal obligation becomes due, the property pledged or
mortgaged (the collateral) may be alienated for purposes of payment to the creditor
of the principal obligation.
It is for this reason that it is essential that the pledgor or mortgagor be the absolute
owner of the collateral, and that it have the free disposal of the property, or, in the
absence of the right of free disposition, that it be legally authorized to constitute the
pledge or mortgage; otherwise the mortgage or pledge is void.
As it is an essential requisite for the validity of a pledge or mortgage that the
pledgor or mortgagor be the absolute owner of the collateral, a pledge or mortgage
is void and ineffective if it were constituted over future property. The pledgor or
mortgagor, not being the owner of the property, could not, for that reason,
encumber the same.
Vda. De Bautista vs. Marcos, 3 SCRA 434
Facts: Defendant Marcos obtained a loan in the amount of P2,000 from plaintiff
Vda. de Bautista and to secure payment thereof, conveyed to the latter by way of
mortgage of an unregistered parcel of land in Tarlac.

Subsequently Marcos filed in behalf of the heirs of her deceased mother Victoriana
Cainglet (who are Marcos herself and her three sisters), an application for the
issuance of a free patent over the land in question, on the strength of the cultivation
and occupation of said land by them and their predecessor since July, 1915 and as a
result it was registered in their names.
Since Marcos' debt of P2,000 to plaintiff remained unpaid, the latter filed the
present action against Marcos and her husband for the payment thereof, or in
default of the debtors to pay, for the foreclosure of her mortgage on the land given
as security. Defendants moved to dismiss the action, pointing out that the land is
covered by a free patent and could not, be taken within five years from the issuance
of the patent for the payment of any debts of the patentees contracted prior to the
expiration of said five-year period and alleging as well that the real contract
between the parties was an antichresis and not a mortgage.
Issue: Whether there was a mortgage and if there was, can the land in question be
used as security for that mortgage?
Held: No. It is an essential requisite for the validity of a mortgage that the
mortgagor be the absolute owner of the thing mortgaged. The mortgage here in
question is void and ineffective because at the time it was constituted, the
mortgagor was not yet the owner of the land mortgaged and could not, for that
reason, encumber the same to the plaintiff. Nor could the subsequent acquisition by
the respondent of title over said land through the issuance of a free patent validate
and legalize the deed of mortgage under the doctrine of estoppel since upon the
issuance of said patient, the land in question was thereby brought under the
operation of the Public Land Law that prohibits the taking of said land for the
satisfaction of debts contracted prior to the expiration of five years from the date of
the issuance of the patent). This prohibition should include not only debts
contracted during the five-year period immediately preceding the issuance of the
patent but also those contracted before such issuance, if the purpose and policy of
the law, which is "to preserve and keep in the family of the homesteader that
portion of public land which the State has gratuitously given to him, is to be upheld.
Although the principal debtor may be the pledgor or mortgagor, the law allows third
persons, which are not parties to the principal obligation, to secure the by pledging
or mortgaging their own property.
In either case, in a contract of pledge or mortgage, the pledgor or mortgagor
remains to be the owner of the collateral. Although a pledge or mortgage is
regarded as lien, or legal right or interest that a creditor has in anothers property, it
passes no title to creditor. And although the collateral may be delivered to the
creditor, the delivery is only to secure the fulfilment of the principal obligation and
does not empower the creditor to convey the collateral in favour of another person.
The right to dispose is an attribute of ownership, and includes the right to donate,

sell, pledge or mortgage. Thus the creditor, not being the owner of the collateral
cannot dispose of the whole or part of the collateral.
Heirs of Manlapat vs. Court of Appeals, G.R. No. 125585 June 8, 2005
In a contract of mortgage, the mortgagor remains to be the owner of the property
although the property is subjected to a lien. A mortgage is regarded as nothing
more than a mere lien, encumbrance, or security for a debt, and passes no title or
estate to the mortgagee and gives him no right or claim to the possession of the
property. In this kind of contract, the property mortgaged is merely delivered to the
mortgagee to secure the fulfillment of the principal obligation.Such delivery does
not empower the mortgagee to convey any portion thereof in favor of another
person as the right to dispose is an attribute of ownership.The right to dispose
includes the right to donate, to sell, to pledge or mortgage. Thus, the mortgagee,
not being the owner of the property, cannot dispose of the whole or part thereof nor
cause the impairment of the security in any manner without violating the foregoing
rule.The mortgagee only owns the mortgage credit, not the property itself.
Obligations Secured
Article 2086. The provisions of article 2052 are applicable to a pledge or
mortgage.
Article 2052. A guaranty cannot exist without a valid obligation.
Nevertheless, a guaranty may be constituted to guarantee the performance of a
voidable or an unenforceable contract. It may also guarantee a natural obligation.
Article 2091. The contract of pledge or mortgage may secure all kinds of
obligations, be they pure or subject to a suspensive or resolutory condition.
Like a guaranty and suretyship, a pledge and mortgage are accessory obligations.
Consequently, their validity is dependent on the existence of a valid principal
obligation, whether the latter is voidable, unenforceable, natural , pure or
conditional.
As accessory contracts, the consideration of a pledge or mortgage is the very
consideration of the principal contract, from which they receive their life, and
without which they cannot exist as independent contracts.
China Banking Corp vs. Lichauco, 46 Phil 460
As a mortgage is an accessory contract, its consideration is the very consideration
of the principal contract, from which it receives its life, and without which it cannot
exist as an independent contract, although, as in the instant case, it may secure an
obligation incurred by another (Art. 1857 of the Old Civil Code, Art. 2085 in New
Civil Code)

Contract to Pledge or to Mortgage

Article 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.
A contract to pledge or to mortgage, or a promise to constitute a pledge or
mortgage, is a valid consensual contract
Remedies of Pledgee and Mortgagee
A foreclosure is a legal proceeding to terminate a pledgors or mortgagors interest
in the collateral. The creditor institutes the foreclosure, either to gain title, or to
force a sale, in order to satisfy the unpaid obligation secured by the collateral.
Generally, the terms of the contract and a statute may authorize a power of sale
foreclosure, or the sale of the collateral at a non-judicial public sale by a public
official, the creditor, or a trustee.
If the principal obligation becomes due and the debtor defaults, the pledge or
mortgagee may elect to foreclose the pledge or mortgage, in accordance with its
terms, or, elect to waive the security and bring, instead, an ordinary action for
specific performance to recover the indebtedness. A favourable judgment in an
action for specific performance results in the right to execute the judgment on all
the properties of the debtor, including the subject matter of the pledge or
mortgage. But if the remedy elected fails, the remedy waived can no longer be
pursued.
A pledgee or mortgagee may pursue either of the two remedies, but not both. By
such election, the cause of action is not impaired, for each of the two remedies is
complete in itself, and any advantages attendant to the pursuit of one or the other
remedy are purely accidental and are all under the right of election. The remedies
available to a pledge or mortgagee are thus alternative and not cumulative, and the
election of one remedy operates as a waiver of the other.
Bachrach Motor vs. Icarangal, 68 Phil 287
Facts: Defendant Icaragal, with Figueroa, received, executed in favor of the
plaintiff, Bachrach Motor , a promissory note for P1,614, and in security for its
payment, Icaragal executed a real estate mortgage on a parcel of land in Laguna,
which was duly registered on August 5, 1931, in the registry of deeds of the
Province of Laguna. Thereafter, promissors defaulted in the payment of the agreed
monthly installments; wherefore, plaintiff instituted in the Court of First Instance of
Manila an action for the collection of the amount due on the note. Judgment was
there rendered for the plaintiff. A writ of execution was issued and, in pursuance

thereof, the sheriff of Laguna, at the indication of the plaintiff, levied on the
properties of the defendants, including that which has been mortgaged by Icaragal
in favor of the plaintiff. The other defendant herein, Oriental Commercial, interposed
a third-party claim, alleging that by virtue of a writ of execution issued in another
case by the municipal court of the City of Manila, the property which was the
subject of the mortgage and which has been levied upon by the sheriff, had already
been acquired by it at the public auction. By reason of this third-party claim, the
sheriff desisted from the sale of the property and, in consequence thereof, the
judgment rendered in favor of the plaintiff remained unsatisfied. Whereupon,
plaintiff instituted an action to foreclose the mortgage but the trial court dismissed
the complaint and, from the judgment thus rendered plaintiff took the present
appeal.
Issue: Whether plaintiff is barred from foreclosing the real estate mortgage after it
has elected to sue and obtain a personal judgment against the defendant?
Held: Yes. A mortgage creditor may institute against the mortgage debtor either a
personal action for debt or real action to foreclose the mortgage. In other words, he
may pursue either of the two remedies, but not both. By such election, his cause of
action can by no means be impaired, for each of the two remedies is complete in
itself. Thus, an election to bring personal action will leave open to him all the
properties of the debtor for attachment and execution, even including the
mortgaged property itself. And, if he waives such personal action and pursues his
remedy against the mortgaged property, an unsatisfied judgment thereon would
still give him the right to sue for a deficiency judgment, in which case, all the
properties of the defendant, other than the mortgaged property, are again open to
him for the satisfaction of the deficiency. In either case, his remedy is complete, his
cause of action undiminished, and any advantages attendant to the pursuit of one
or the other remedy are purely accidental and are all under his right of election. On
the other hand, a rule that would authorize the plaintiff to bring a personal action
against the debtor and simultaneously or successively another action against the
mortgaged property, would result not only in multiplicity of suits so offensive to
justice and obnoxious to law and equity, but also in subjecting the defendant to the
vexation of being sued in the place of his residence of the plaintiff, and then again
in the place where the property lies.
The creditor's cause of action is not only single but indivisible, although the
agreements of the parties, evidenced by the note and the deed of mortgage, may
give rise to different remedies. The cause of action should not be confused with the
remedy created for its enforcement. And considering, as we have shown, that one of
the two remedies available to the creditor is as complete as the other, he cannot be
allowed to pursue both in violation of those principles of procedure intended to
secure simple, speedy and unexpensive administration of justice.

Bank of America, NT & Sa vs. American Realty Corporation and CA, 321
SCRA 659
Facts:Petitioner granted loans to 3 foreign corporations. As security, the latter
mortgaged a property located in the Philippines owned by respondent. Respondent
is a third party mortgagor who pledged its own property in favor of the 3 debtorforeign corporations.
The debtors failed to pay. Thus, petitioner filed collection suits in foreign courts to
enforce the loan. Subsequently, it filed a petition in the Sheriff to extra-judicially
foreclose the said mortgage, which was granted.
On 12 February 1993, private respondent filed before the Pasig RTC, Branch 159, an
action for damages against the petitioner, for the latters act of foreclosing extrajudicially the real estate mortgages despite the pendency of civil suits before
foreign courts for the collection of the principal loan.
Issue: Whether petitioners act of filing a collection suit against the principal
debtors for the recovery of the loan before foreign courts constituted a waiver of the
remedy of foreclosure?
Held: Yes. In the absence of express statutory provisions, a mortgage creditor may
institute against the mortgage debtor either a personal action or debt or a real
action to foreclose the mortgage. In other words, he may pursue either of the two
remedies, but not both. By such election, his cause of action can by no means be
impaired, for each of the two remedies is complete in itself.
In our jurisdiction, the remedies available to the mortgage creditor are deemed
alternative and not cumulative. Notably, an election of one remedy operates as a
waiver of the other. For this purpose, a remedy is deemed chosen upon the filing of
the suit for collection or upon the filing of the complaint in an action for foreclosure
of mortgage. As to extrajudicial foreclosure, such remedy is deemed elected by the
mortgage creditor upon filing of the petition not with any court of justice but with
the Office of the Sheriff of the province where the sale is to be made.
In the case at bar, petitioner only has one cause of action which is non-payment of
the debt. Nevertheless, alternative remedies are available for its enjoyment and
exercise. Petitioner then may opt to exercise only one of two remedies so as not to
violate the rule against splitting a cause of action.
Accordingly, applying the foregoing rules, we hold that petitioner, by the expediency
of filing four civil suits before foreign courts, necessarily abandoned the remedy to
foreclose the real estate mortgages constituted over the properties of third-party
mortgagor and herein private respondent ARC. Moreover, by filing the four civil
actions and by eventually foreclosing extra-judicially the mortgages, petitioner in

effect transgressed the rules against splitting a cause of action well-enshrined in

jurisprudence and our statute books.
Indivisibility of a Pledge or Mortgage
Article 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 excepted 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.
Article 2090. The indivisibility of a pledge or mortgage is not affected by the fact
that the debtors are not solidarily liable.
Inidivisibility of a pledge or mortgage is understood in the sense that each parcel of
the collateral answers for the totality of the debt. It proscribes the foreclosure of
only a portion of the collateral or a number of the several properties pledged or
mortgaged corresponding to the unpaid portion of the debt where before
foreclosure proceedings the debtor partially paid the total outstanding obligation.
The debtor cannot ask for the release of any portion of the collateral or of one or
some of the several properties pledged or mortgaged unless and until the loan has
been fully paid, notwithstanding the fact that there has been a partial fulfilment of
the obligation. The debtor 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. The indivisibility of a pledge or mortgage is actually intended
for the protection of the pledgee or mortgagee, as it refers to the release of the
pledge or mortgage which secures the satisfaction of the indebtedness and
naturally presupposes that pledge or mortgage exists. Once the pledge or mortgage
is extinguished by a complete foreclosure, the doctrine of indivisibility ceases to
apply since, with the full payment of the debt, there is nothing more to secure.
PNB vs.Mallorca, 21 SCRA 694
Facts: Lavilles mortgaged 48,965 square meter-parcel of land to PNB as security for
a loan of P1,800. while the mortgage was in full force and effect, and without PNB's

knowledge and consent, Lavilles sold to respondent Mallorca 20,000 square meters
of the mortgaged land.
Mallorca then asked the court to have the sale duly annotated on the title, and, for
the purpose, to require PNB to surrender the owner's copy of the TCT to the Register
of Deeds.
The court order then directed PNB to deliver said TCT to the Register of Deeds, and
warned that "[t]he mortgage in favor of the Philippine National Bank is duly
registered in the Office of the Register of Deeds and to whomsoever the land is sold
the vendee will assume the responsibility of complying with the provisions of the
mortgage."
The Register of Deeds then cancelled the TCT, and issued a new one making two coowner's copies of the title one each for Lavilles and one for Mallorca. PNB's
mortgage lien was annotated on both.
Lavilles failed to pay her mortgage debt. PNB, then foreclosed the mortgage
extrajudicially. A certificate of sale was issued to PNB as the highest bidder in the
foreclosure sale. This certificate of sale was registered with the Register of Deeds.
Mallorca then sued PNB to enforce her right of redemption with damages. Judgment
was rendered in the case stated, dismissing the claim for damages but declaring
Mallorca "entitled to exercise her right of redemption with respect to the 20,000
square meters sold to her by Lavilles within the period specified by law."
Mallorca's appeal from this judgment wasdenied by the lower court since it was filed
out of time. Her move to reconsider was rejected. She then went to the Court of
Appeals on mandamus. The appellate court denied the same for lack of merit.
Mallorca failed to exercise her right of redemption as decreed by the court.
Thus, the final deed of sale in favor of PNB was presented to the Register of Deeds
for registration but the latter refused to register without Mallorca's co-owner's copy
of TCT. Thus the Register of Deeds required Mallorca to surrender said copy but she
did not comply. Thus, PNB lodged the present petition for consolidation of title in the
cadastral court. The bank prayed that Mallorca's co-owner's copy of TCT be declared
null and void, and that the Register of Deeds be directed to cancel the same and to
issue a new title in the name of PNB, upon payment of the legal fees.
Issue: Whether respondents interest in the lot remained unaffected by the
foreclosure and subsequent sale to PNB?
Held: No. A 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. Sale or transfer cannot affect or release the
mortgage. A purchaser is necessarily bound to acknowledge and respect the
encumbrance to which is subjected the purchased thing and which is at the disposal

of the creditor in order that he, under the terms of the contract, may recover the
amount of his credit therefrom. For, a recorded real estate is a right in rem, a lien on
the property whoever its owner may be. Because the personality of the owner is
disregarded; the mortgage subsists notwithstanding changes of ownership; the last
transferee is just as much of a debtor as the first one; and this, independent of
whether the transferee knows or not the person of the mortgagee. So it is, that a
mortgage lien is inseparable from the property mortgaged. All subsequent
purchasers thereof must respect the mortgage, whether the transfer to them is with
or without the consent of the mortgagee. For, the mortgage, until discharge, follows
the property.
Also against respondents cause is one other special feature of a real mortgage, its
indivisibility. The Court has understood mortgage indivisibility in the sense that each
and every parcel under mortgage answers for the totality of the debt.
It does not really matter that the mortgagee, as in this case, did not oppose the
subsequent sale. Naturally, because the sale was without PNB's knowledge. Even if
such knowledge is chargeable to PNB, its failure to object to the sale could not have
any impairing effect upon its rights as mortgagee. After all, a real mortgage is
merely an encumbrance; it does not extinguish the title of the debtor, whose right
to dispose a principal attribute of ownership is not thereby lost. And, on the
assumption that PNB recognized the efficaciousness of the sale by Lavilles of a
portion of the mortgaged land to Mallorca, which Lavilles "had the right to make"
and which anyway PNB "cannot oppose", PNB cannot be prejudiced thereby, for, at
all events, "such sale could not affect the mortgage, as the latter follows the
property whoever the possessor may be.
Central Bank of the Philippines vs. CA and Tolentino, 139 SCRA 46
Facts: Island Savings Bank, upon favorable recommendation of its legal
department, approved the loan application for P80,000 of Tolentino, who, as a
security for the loan, executed on the same day a real estate mortgage over his
100-hectare land. The loan called for a lump sum of P80,000, repayable in semiannual installments for 3 yrs, with 12% annual interest. After the agreement, a mere
P17K partial release of the loan was made by the bank and Tolentino and his wife
signed a promissory note for the P17,000 at 12% annual interest payable w/in 3 yrs.
An advance interest was deducted from the partial release but this prededucted
interest was refunded to Tolentino after being informed that there was no fund yet
for the release of the P63K balance.
Monetary Board of Central Bank, after finding that bank was suffering liquidity
problems, prohibited the bank from making new loans and investments. And after
the bank failed to restore its solvency, the Central Bank prohibited Island Savings
Bank from doing business in the Philippines. Island Savings Bank in view of the nonpayment of the P17K filed an application for foreclosure of the real estate mortgage.

Tolentino filed petition for specific performance or rescission and damages with
preliminary injunction, alleging that since the bank failed to deliver P63K, he is
entitled to specific performance and if not, to rescind the real estate mortgage.
Issue: Whether petitioner can foreclose the mortgage?
Held: No. Since Island Savings Bank failed to furnish the P63,000 balance of the
P80,000 loan, the real estate mortgage of Sulpicio M. Tolentino became
unenforceable to such extent. P63,000 is 78.75% of P80,000, hence the real estate
mortgage covering 100 hectares is unenforceable to the extent of 78.75 hectares.
The mortgage covering the remainder of 21.25 hectares subsists as a security for
the P17,000 debt. 21.25 hectares is more than sufficient to secure a P17,000 debt.
The rule of indivisibility of a real estate mortgage provided for by Article 2089 of the
Civil Code is inapplicable to the facts of this case.
The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted
presupposes several heirs of the debtor or creditor which does not obtain in this
case. Hence, the rule of indivisibility of a mortgage cannot apply.
Pactum Commissorium
Article 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.
Article 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.
Elements
The essence of a pledge or mortgage is that, when the principal obligation becomes
due, the collateral may be alienated for purposes of payment to the creditor.
However, the law requires resort to a legal proceeding to terminate a pledgors or
mortgagors ownership to the collateral. A stipulation that allows the creditor to
appropriate the collateral, or dispose of it, in contravention of the provisions on
foreclosure, is considered a pactum commissorium and is null and void. To
determine the existence of a pactum commissorium it is first necessary to
determine the existence of a pledge or mortgage. If the essential requisites that
define the contract as pledge or mortgage are lacking, then there is no pledge and
mortgage and, consequently, there is no pactum commissorium. Thus the elements
of a pactum commissorium are: 1. Property pledged or mortgaged by way of
security for payment of the principal obligation and 2. Stipulation for automatic
appropriation by the creditor of the collateral in case off non-payment of the
principal obligation within the stipulated period.

The creditor cannot appropriate the collateral, even if it is especially stipulated in

the contract. While it is true that contracts are binding, provided they contain the
conditions essentials to their validity, and have the force of law between the parties,
it is likewise evident that this precept is subordinate to the provision which prohibits
agreements contrary to law, morals, or public order. One of these prohibited
agreements is a stipulation that the creditor may appropriate the collateral as if it
had been sold to him, merely because the period for the payment of the obligation
had lapsed. When an obligation secured by a pledge or mortgage becomes due, the
creditor is entitled to foreclose, but he is not authorized to appropriate the collateral
in order to recover the amount due.
Nevertheless, a pledgor or mortgagor may validly sell the collateral to the pledge or
mortgagee for the amount of the debt, when the latter becomes due, if the parties
stipulate upon the sale, or mere promise to sell, if the collateral to the creditor,
should the obligation secured by it not be complied with in time, stipulating the
conditions of the alienation; but, if instead of agreeing upon the alienation, the
agreement merely states that upon non-fulfilment of the obligation secured by the
pledge or mortgage, the pledge or mortgagee may, when the debt falls due, sell the
collateral, then the provisions of the law for the foreclosure sale must be observed.
Effect on Pledge or Mortgage
The nullity of the pactum commissorium does not substantially affect the validity of
the contract of pledge or mortgage. The perfected contract of pledge or mortgage
subsists although the parties have not agreed on the manner by which the creditor
shall recover its credit. In any case, the law has expressly established the procedure
in order that the creditor may not be defrauded or deceived in its right to recover
the credit from the proceeds of the collateral, in case the debtor does not comply
with the principal obligation. There exists no just or legal reason which prevents the
creditor from recovering the credit from the proceeds of a foreclosure sale effected
in accordance with the law.