I

To secure a loan obtained from a rural bank, Purita assigned her leasehold rights
over a stall in the public market in favor of the bank. The deed of assignment
provides that in case of default in the payment of the loan, the bank shall have
the right to sell Purita’s rights over the market stall as her attorney-in-fact, and to
apply the proceeds to the payment of the loan.

A. Was the assignment of leasehold rights a mortgage or a cession?

B. Assuming the assignment to be a mortgage, does the provision giving the
bank the
power to sell Purita’s rights constitute pactum commissorium or not? Why? (2001)

ANSWERS:
A. The assignment was a mortgage, not a cession, of the leasehold rights. A
cession would have transferred ownership to the bank. However, the grant of
authority to the bank to sell the leasehold rights in case of default is proof that
no such ownership was transferred and that a mere encumbrance was
constituted. There would have been no need for such authority had there been
a cession.
B. No, the clause in question is not a pactum commissorium. It is pactum
commissorium when default in the payment of the loan automatically vests
ownership of the encumbered property in the bank. In the problem given, the
bank does not automatically become the owner of the property upon default
of the mortgagor. The bank has to sell the property and apply the proceeds to
the indebtedness.
II
A. Distinguish a contract of chattel mortgage from a contract of pledge.
B. Are the right of redemption and the equity of redemption given by law to a
mortgagor the same? Explain.
C. X borrowed money from Y and gave a piece of land as security by way of
mortgage. It was expressly agreed between the parties in the mortgage
contract that upon non-payment of the debt on time by X, the mortgaged land
would already belong to Y. If X defaulted in paying, would Y now become the
owner of the mortgaged land? Why?
D. Suppose in the preceding question, the agreement between X and Y was
that if X failed to pay the mortgage debt on time, the debt shall be paid with
the land mortgaged by X to Y. Would your answer be the same as in the
preceding question? Explain. (1999)

ANSWERS:
A. In a contract of chattel mortgage possession belongs to the creditor, while in
a contract of pledge possession belongs to the debtor.
A chattel mortgage is a formal contract while a pledge is a real contract.
A contract of chattel mortgage must be recorded in a public instrument to bind
third persons while a contract of pledge must be in a public instrument
containing description of the thing pledged and the date thereof to bind third
persons.
B. The equity of redemption is different from the right of redemption. Equity of
redemption is the right of the mortgagor after judgment in a judicial foreclosure
to redeem the property by paying to the court the amount of the judgment
debt before the sale or confirmation of the sale.
On the other hand, right of redemption is the right of the mortgagor to redeem
the property sold at an extra-judicial foreclosure by paying to the buyer in the
foreclosure sale the amount paid by the buyer within one year from such sale.
C. No, Y could not become the owner of the land. The stipulation is in the nature
of pactum commissorium which is prohibited by law. The property should be sold
at public auction and the proceeds thereof applied to the indebtedness. Any
excess shall be given to the mortgagor.
D. No, the answer would not be the same. This is a valid stipulation and does not
constitute pactum commissorium. In pactum commissorium, the acquisition is
automatic without need of any further action. In the instant problem another
act is required to be performed, namely, the conveyance of the property as
payment (dacion en pago).

III
In 1982, Steve borrowed P400,000 from Danny, collateralized by a pledge of
shares of stock of Concepcion Corporation worth P800,000. In 1983, because of
the economic crisis, the value of the shares pledged fell to only P100,000. Can
Danny demand that Steve surrender the other shares worth P700,000?

ALTERNATIVE ANSWER:
No. Bilateral contracts cannot be changed unilaterally. A pledge is only a
subsidiary contract, and Steve is still indebted to Danny for the amount of
P400,000 despite the fall in the value of the stocks pledged.
ANOTHER ALTERNATIVE ANSWER:
No. Danny’s right as pledgee is to sell the pledged shares at a public sale and
keep the proceeds as collateral for the loan. There is no showing that the fall in
the value of the pledged property was attributable to the pledger’s fault or
fraud. On the contrary, economic crisis was the culprit. Had the pledgee been
deceived as to the substance or quality of the pledged shares of stock, he
would have had the right to claim another thing in their place or to the
immediate payment of the obligation. This is not the case here.