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Review: distinctions between 2066 and 2071

2071 does not change the principle that a contract of guaranty is a contract of indemnity, because 2071 is not an action for

reimbursement, but for the protection of the interest of the guarantor, in which he seeks to be released from the guaranty or to

demand Under 2072 what is the effect when we have this third person who refuses tofor the debtor: hewould be liable.

Under 2073 effect between co-guarantors. If one of the guarantors is insolvent, his share shall be borne by the othersproportionately. Take note the instances where this Article would not apply:1. if payment had been made in virtue of a judicial demand2. if payment was made because the principal debtor is insolvent

2075 what happens to a subguarantor

Extinguishment of the guaranty

When is the contract of guaranty extinguished?

1. When the principal obligation is extinguished through the following means in general:a. payment of performanceb. loss of the thing duec.

condonation or remission of the debtd. confusion or merger of the rights of the creditor and debtor

e. compensationf. novation

2. When the principal obligation is extinguished through other means:a. annulmentb. rescissionc. fulfillment of resolutory conditiond. prescription

3. Extinguished directly although the principal obligation remains (ex. Art 2078)Maam: Remember that death of the debtor/surety/guarantor will not extinguish the obligation. If the creditor dies, the

obligation is transmissible as a contract of loan is not a personal obligation.

2077: Dacion en pago is also an available remedy for the debtor to extinguish his obligation. In case the creditor is evicted

from a property delivered by the principal debtor, the action against the guarantor will not prosper. His remedy must be

against the principal debtor. If you are a creditor, consider this when you accept a dacion en pago.

2078.

Maam: We have here co-guarantors (CG). Example we have principal debtor A and co-guarantors B, C, and D. The obligation is

120k pesos. As we know by the principle of division, if the creditor goes after the debtor, he cannot compel any of the

guarantors to pay more than their proportionate share. If one of the CG pays for more than their share, they are entitled to

reimbursement from the other CG.

Q: In this example each guarantor is liable for 30k. What is the effect if C will extinguish only the share of B as it appears that B

also has a standing obligation with C (compensation)?

A: If this was made without the consent of the other CG, then 2078 tells us that they will not shoulder the 30k share of B. Sotheir obligation was reduced by 30k.

Q: What if with the consent?

A: The obligation will remain 120k, and the CGs obligations will be increased by 30k, the share of the released CG.

Maam: What you will take note here is WON the consent was made with or without the consent of the CG. If the CG consent,

there shall be no release of the obligation. The obligation remains as is, and the remaining CGs will shoulder the proportionate

share. If without the consent, total release, walang additional burden sa CGs.

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Q: What if in the example, only B and C gave their consent?

A: Only the CGs who gave their consent will shoulder the proportionate share. The CG who did not give his consent will only be

liable for his initial share.

Maam: Why do we have 2078? The act of releasing one of the guarantors without the consent of the others will obviously be

prejudicial to those remaining. If the principal debtor is the one released, then the obligation is extinguished and the accessory

contract of guaranty is also extinguished.

Article 2079. An extension granted to the debtor by the creditor without the consent of theguarantor extinguishes the guaranty. The mere failure on the part of the creditor todemand payment after the debt has become due does not of itself constitute anyextension of time referred to herein.Maam: What is the premise behind this? Its possible na pag nag-extend, the debtor would be subsequently insolvent, asituation that a guarantor may not have contemplated when he agreed to guarantee the obligation. Bale maincrease ang

probability na maging liable si guarantor. If theres an extension withoutthe consent, the guaranty is extinguished. The effect if

the guarantor consents is obvious, he will still be liable if the debtor is not able to pay during the period.

Also in 2079, the mere failurexxx The debtor will not be in default because may kela ngan may demand, diba. So kahit wala

pang demand, hindi yan sya extension as contemplated in this provision. The creditor may demand payment anytime as longas no extension was given to the debtor. Extension here means additional period of time to pay, and not just mere failure to

demand.

Q: What if the obligation is payable in installments? Ex. 10k/month for 1yr. The debtor fails to pay one installment. The

creditor then gives him an extension for the specific installment. What is the effect? Would that necessarily mean that the

guarantor is released?

A: NO. In this case, the extension will only apply to the specific extension. The guarantor will not be released. He will only be

released in an installment scenario if they have an acceleration clause like failure to pay one or two installments will result in

the full obligation being made demandable and thereafter may extension. In that case, the guarantor will be released.

This extension in 2079 is in favor of the guarantor, and so, the guarantor can waive this provision. In cases we have alreadydiscussed, meron dun mga I hereby waive my right to subsequent extensionagree to be held liable in the event of

changes/extension of Xs obligation this is a valid waiver.

In 2079, while the purpose therein is so the guarantor will not be made to answer for the subsequent insolvency of the debtor

during the extension, the guarantor does not have to prove that he will be prejudiced, for 2079 to apply. Its not important tha

the extension will actually prejudice the guarantor/surety. It is enough that the extension was made without his consent

resulting in his release. Extension minus consent equals release.

Article 2080.

Maam: The guarantors can be released from their obligation even if (.diba pwede man yung mga guarantorsamong

themselves solidarily bound) what happens here? They are entitled to subrogation.The situation here presupposes that the

guarantors acted as such with the knowledge and consent of the principal debtor, so therefore he is entitled to subrogation

Recall subrogation is different from beneficial reimbursement. Kasi in subrogation, if there is for example, a pledge/mortgagethen the guarantor if he is subrogated to the all the rights of the creditor, he is entitled to foreclose such mortgage/pledge.

Q: What if the obligation is subject to a mortgage? There are requirements for a mortgage to be valid. What if the mortgage was

not notarized? Anong mangyari with regard to the guarantor?

A: The guarantor cannot foreclose the property because the mortgage failed to comply with the requirements under the law

So in this siuation, if by the fault/negligence of the creditor (failing to notarize the mortgage) the guarantors cannot be

subrogated to his rights, then the guarantors will be released from the obligation. The premise here is that the creditor canno

prejudice the guarantor. This provision also prevents collusion between the debtor and creditor.

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LEGAL AND JUDICIAL BONDS

Q: What is a bond?

A: The bond is an undertaking sufficiently secured, and not cash or currency. We have here a bondsman who acts as a surety

offered in virtue of a provision of law or a judicial order.

Article 2082

2056 (referred in 2082) prescribes the qualifications of guarantors. These general requirements are the same when it come

to bondsmen.

Take note that a bondsman is by provision of law or judicial order. We also have surety bonds Bonds are used for examplewhen you file a case for, say, preliminary detachment and wala pang trial, or if you want to attach property; you also have

surety bonds; meron din under crimpro, pwedeng cash bond (na pwede pang mabalik, yung surety bond hindi mababalik)etc

All bonds, including judicial bonds are contractual in nature. So bale, ikaw you will enter into a contract with a bondsman

Judicial bonds constitute merely a special class of contracts of guaranty, characterized by the fact that they are given in virtue

. . . of a judicial order.Thats why i-approve pa sa court.

Article 2083

effects if the bondsman cannot complyArticle 2084 -

Judicial Bondsman and the sub0surety are not entitled to the benefit of excussion because they are considered sureties and as

such their liabilities are primary and solidary. In a contract of surety, the surety sees that the debtor pays or performs. So itsnot the creditor.

PLEDGE

What is a contract pledge?

Recall guarantees and suretyships are personal securities. The security in these cases is that the guarantor or surety pays if the

debtor cannot pay.

In contrast, a pledge is a real security. Yung property mismo, and not the promise of the owner of the property.

Definition:

A pledge is a contract by virtue of which the debtor delivers to the creditor or a third person a movable or a document

evidencing an incorporeal right 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. In case the obligation is

not fulfilled, the creditor may proceed against the movable property or incorporeal rights.

Remember here, if the obligation is fulfilled, the creditor or the person who is in possession of the property has the obligation

to return the subject matter (with its fruits and accessions) to the debtor/ owner.

2 Kinds of Pledge:

1. Voluntary/conventional pledge that is agreed upon by the parties2. Legal pledge created by operation of law

Parties to pledge:

1. Pledgor person who delivers the property/document2. Pledgee to whom the property/document is delivered

Characteristics of pledge:

1. Real contract perfected by delivery of the thing pledged.2. Accessory contract no independent existence of its own, validity depends upon the principal contract. Invalidity of

the pledge does not affect the validity of the principal.

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3. Unilateral contract only the creditor has an obligation (to return the thing)4. Subsidiary contract obligation incurred does not arise util the fulfillment of the principal obligation

Q: What is the cause/consideration in a contract of pledge?

A: Generally, the cause of the principal obligation as well. But, as we will see that it is possible that the debtor is different from

the pledgor. If the pledgor is not the debtor, what would be the consideration? In that case, compensations or just the

liberality of the pledgor.

Q: What may be the subject matter of pledge?

A: Personal property, movables (cars, jewelry). What about securities? In securities, what is involved is incorporeal rights, so

the documents evidencing such rights may be the subject of pledge. Incorporeal rights are those which cannot be seen nor

grabbed but which exist in law, so when it comes to securities, youre not really referring to the actual securities, but theevidence of that security.

A contract of pledge is a real right, like mortgage and antichresis. What is meant to secure the performance of the obligation is

the property itself,; in antichresis, the use of the property. Take note that these are provisions which are common to pledge

and mortgage. The mortgage in this chapter refers more to real estate mortgage and not chattel mortgage.

Mortgage: similar to pledge but involves real property used as security. If the debtor cannot pay or perform the obligation, the

creditor may proceed against the property, foreclose it, and apply the proceeds to the principal obligation.

Mortgage v pledge

Notwithstanding that we have provisions common to pledge and mortgage, take note of the distinctions between them:

1. as to subject matter pledge involves movables/documents while real estate mortgage: immovable; chattel mortgagemovable

2. Sa pledge, the movable must be delivered to the creditor as it is a real contract; a mortgage, whether or not it is realestate or chattel, does not require delivery for its perfection how would you deliver a parcel of land? Deliverycontemplated in pledge is actual/physical possession. What about chattel mortgage, since it also involves movables?

Sa chattel, not required ang delivered to the creditor although subject to the mortgage yung thing.

3. Pledge does not lie against third persons unless a description of the thing pledged and the date of the pledge appearsin a public instrument. In mortgage, REM is not valid against third persons unless it is registered.

ART. 2085. The following requisites are essential to the contracts of pledge and mortgage:

(1) That they be constituted to secure the fulfillment 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.

Third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their

own property. (1857)

Requisite 1: Again it must be stressed that pledge/mortgage is an accessory contract, they cannot exist independently of the

principal obligation. If principal is void, accessory contracts are likewise void, but not vice-versa.

Requisite 2: Absolute ownership. Only the absolute owner of the thing may be the pledgor/mortgagor. If you are a lessee, you

have possessory rights, but you cannot subject the land to a mortgage. That would be considered a void contract for failure tocomply with the ownership requirement. If you have jewelry that was delivered to you for safekeeping, obviously you cannot

pledge them because you do not own them.

Q: Why is ownership required?

A: Pledge/Mortgage involves acts of disposition. Upon failure to comply, the creditor can foreclose the

mortgage/subject the movable to sale and apply the proceeds to the obligation.

It is important here as regards to ownership, the rules on delivery, because there is only ownership if there is

delivery. Under the law there are different kinds of delivery and other types of constuctive delivery:

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a. traditio longa manu delivery by mere agreementb. tradition brevi manu would be buyer was already in possession of the subject of salec. symbolic delivery ex. Keys to a card. constitutum possessarium at the time of perfection, the seller continues to hold possession as mere

holder

Recall case of CaliboIn that case there was no deposit as the tractor was not delivered for safekeeping. There was also no agency. Likewise there

was also no pledge because who was the onwer of the vehicle in the case? The father. Thats why the SC ruled that the fatherhad the right to possess the property.

Also remember, future property can be the subject of a contract of sale. If subsequently di madeliver, it does not affect the

validity of a contract of sale. Dito, future property cannot be the subject of pledge, remember the requirement of ownership.

Later on we will see a sort of deviation when it comes to mortgages of future property.

A pledge or mortgage executed by one who is not the owner of the property pledged or mortgaged is without legal existence

Even if its registered. Ex, a parcel of land, and the mortgage was annotated in the title, it would validate the said mortga ge if it

was not entered by the owner of the land.

Mortgages/pledges and third personsThe last paragraph of 2085 tells us that it is not necessary that the princpal debtor be the pledgor/mortgagor. As long

as valid consent was given, the fact that the loan was consitutted for the benefit of the debtor (sya nakatanggap nung pera)

then yung property as security is owned by another person, it would not invalidate the pledge/mortgage as long as the owner

of the property gave his consent thereto. If that is the scenario, the creditor should exercise proper diligence in making the

inquiry as to the consent of authority given by the owner to subject the property to pledge/mortgage and not rely solely on the

representations made by the debtor. In this case the third person who is not the principal debtor would not be liable for any

deficiency, if the mortgage is not sufficient to pay for the obligation. Di na sya pwede habulin personally, hanggang dun sa

value ng property nya ang extent ng liability nya.

Requisite 3: free disposal/legal authority.Again, pledges/mortgages involve alienation or transmission of real rights and

property.

Free disposalthe property must not be subject to any claim a third person. The property itself, even if you are theowner of the same, but it is encumbered/subject to a lien, you do not necessarily have the free disposal of your property. But

later on you will see na merong secondary mortgages.

In fact if you can recall in your Penal Code there is liability for persons executing contracts of mortgage stipulating

that the property is free from liens and encumberances and then it turns out meron pala prior mortgage, you will be liable for

estafa or other forms of swindling, because you misrepresented.

Legally authorized for the purpose if there is a lien subject to the decision of the court, or if there is attachment and

there is no authority of the court for you to mortgage it, then you cannot subject the same property to P/M.

Take note: in agency, dun sa special powers of attorney, isa sa inargue dun is SPA is required for mortgages

Although its not stipulated therein, kung kayo creditor, and a debtor shows you a SPA authorizing him to mortgage the

property of a third person, mas maganda pa rin na iconfirm nyo dun sa P-or/M-or kesa sa resolve your doubts later.

Importante din to know what is the extent of that authority kasi minsan nakakaproblema din dyan. There will be aninstance na the owner allows his property to be mortgaged to secure the obligation of the principal debtor. So nakatanggap ng

proceeds ng loan si principal debtor, yung consent ni third person valid sya only in regards to the debt of the principal debtor

Dapat clear yan sa contract of mortgage. If ikaw yung creditor you have to make sure kasi ikaw yung nagtetake ng risk, baka

pala ang nakalagay dun ang intent ng pagsign ng mortgage is that this debtor will sign the mortgage wherein yung owner din

yung principal debtor (principal debtor is the owner and not some other person). Kasi pag nakalagay authorize to mortgage

my property for a loan, kaninong loan? Dapat klaro yan.

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Cases: Development v Prudential

Guide questions:

Couldnt Litex be considered be the owners in this case, considering there was delivery and that was their purpose inopening the letter of credit, to acquire these properties? At thetime of the delivery, title over the said properties have

not yet vested in Litex. The principle of even if there was a transfer, no one can give that which he does not own

How come the SC ruled that Prudential was the owners of the movable properties subject to chattel mortgage despite thefact that physical possession with Litex?Owners still Prudential, this was encapsulated in the trust receipts.

What is a trust reciept? Section 4, PD 115:A trust receipt transaction, within the meaning of this Decree, is any transaction by and between a

person referred to in this Decree as the entruster, and another person referred to in this Decree as

entrustee, whereby the entruster, who owns or holds absolute title or security interests over certain

specified goods, documents or instruments, releases the same to the possession of the entrustee upon the

latter's execution and delivery to the entruster of a signed document called a "trust receipt" wherein the

entrustee binds himself to hold the designated goods, documents or instruments in trust for the

entrusterand to sell or otherwise dispose of the goods, documents or instruments with the obligation

to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster

or as appears in the trust receipt or the goods, documents or instruments themselves if they are

unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the

trust receipt, or for other purposes substantially equivalent to any of the following:

1. In the case of goods or documents, (a) to sell the goods or procure their sale; or (b) to

manufacture or process the goods with the purpose of ultimate sale: Provided, That, in the case of

goods delivered under trust receipt for the purpose of manufacturing or processing before its

ultimate sale, the entruster shall retain its title over the goods whether in its original or processed

form until the entrustee has complied fully with his obligation under the trust receipt; or (c) to load,

unload, ship or tranship or otherwise deal with them in a manner preliminary or necessary to their

sale[.]

How could ownership be transferred to Litex? How can Litex be released from their obligations under the trustreceipt? When Litex pays Prudential.

Considering Litex is not the owner, what is the status of the mortgage executed by Litex? VoidMaam: Recall letters of credit, which are usually resorted to in international transactions wherein for example we have Litexand you have Prudential. Litex wants to buy goods from a supplier in another country. What is the purpose of a letter o

credit? With regard to Litex, wala syang security na pagforward nya ng payment sa supplier, mag deliver ang supplier

Remember theyre from different countries, so mahirap to rely just on agreements. Si supplier, wala ring security na magbayadsi Litex after madeliver yung goods. Kahit pa sabihin mong meron partial payment, mahirap pa rin yan kasi international

transaction and usually it involves large amounts of money. So what will be your resort?

Litex can apply for a letter of credit. Prudential would transact with another bank in another country (say, HSBC)

whereafter HSBC can then coordinate with the supplier. Youre dealing with banks and financial institutions. Syempre, masreliable yung reputation. Here, the goods will be released by virtue of a letter or credit. Prudential would release the money to

the other bank, yung bank ang magbayad sa supplier. The supplier through the bank would then release the goods in favor of

the bank (Prudential, in this case.) Remember the goods here were procured by Litex.

On the part or Prudential, ano ang security nya na magbayad din si Litex? Its not the letter of cr edit, kasi inopen lang

yang letter of credit para mangyari itong transaction, its not really the security for Prudential. Thats why, in transactio ns o

leeter of credit, makikita nyo ineexecute ang trust receipts; wherein the TR stipulates that the owner of the goods is actuallythe bank and that it is being released only to the entrustee (Litex). Kelan marerelease ang Litex? Usually pag nagbayad lang

naman sa obligation. If youre talking about the Trust Receipts Law, merong arrangement dyan,minsan consignment, minsanibalik mo ang hindi nabenta, pero usually payment = release.

Take note of the nature of a trust receipt. Look at definition under Section 4. So the TR evidences the absolute title or

security interest of the entruster over the goods. So while there was delivery here of the goods to Litex, it did not transfer

ownership from Prudential. There are two-fold obligations ng entrustee in a TR:

1. has to hold the designated goods, documents or instruments in trust for the entruster or for the purpose ofselling or otherwise disposing of them

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2. to turn over to the entruster the 1) proceeds thereof to the extent of the amount owing to the entruster or asappaears in the TR or the 2) goods, documents and instruments themselves if they unsold ot not disposed of

Another possible scenario is if you would import cattle from another country. You can also open letters of credit and

the issuances of trust receipts. Yung merchandise is security lang talaga ng bank for the amount na binayad nila sa foreign

bank sa transaction under the letter of credit. [Maam reads par. 2 of Section 4, yung may processed processed]

So here the various agreements between Prudential and Litex were considered valid and it is considered normal withpractice regards to letters of credits and that they are not contrary to law, good morals, etc.

Why am I emphasizing the importance of trust receipts? These are number 1 subjects in the Bar under Commercial

Law (if meron pang Commercial Law due to the proposed revisions).

So ano yung kulang ng Litex dito? Ownership. Litex, although it was in possession of the movables, was not in absolute

ownership thereof and has no free disposal, therefore the Mortgage executed by Litex in favor of DBP was void and of no legal

effect. There being no valid mortgage, there can also be no valid foreclosure sale.

Take note: DBP can also not be considered a mortgagee/puchaser in good faith because here, before the sale where

DBP was the highest bidder it was already aware of the claims of Prudential.

Importance of mortgagee/purchaser in good faith

Case: Cavite v Lim

Guide questions:

1. Was it really option money paid?No, it was considered earnest money by the SC as it formed part of the purchaseprice, so there was a consummated contract of sale in this case.

2. When the mortgage was executed by Guansing, the title was registered in his name. Why then cant CDB beconsidered mortgagee/purchaser in good faith? As a financial institution, it must exhaust all possible means to

ascertain WON the mortgagor is the owner. In this case, CDB did not such thing.

Maam: Take note in this case the mortgagor was Rodolfo Guansing and CDB was the mortgagee. When Rodolfo failed to pay his

obligation, CDB foreclosed the mortgage and emerged the higest bidder. CDB then sold it to Lim. It turned out that Rodolfo had

no right over the said property because the actual owner was Perfecto, his father. In fact there was another proceeding where

Rodolfos title was cancelled.

Whats the liabiliy of CDB? You can apply in cases of mortgages as well as in Sales, the concept of innocent purchaserfor value. Recall in Land Titles: they can rely on face of the Torrens title and be considered innocent. Therefore, protected ang

right nila. Pwede rin to sa mortgagee, they are entitled to rely on what appears on the TCT and does not have to inquire

further.

CDB in this case cannot be considered either a mortgagee in good faith nor a purchaser in good faith in that

foreclosure sale because CDB is expected to exercise higher degree of due diligence required of banking institutions. It is

standard practice for banks before approving a loan to send representatives to the land presented as collateral and must

investigate the real owners thereof. No evidence was presented by CDB that it observed such degree of diligence and even

admitted that they knew the land was being occupied not by Rodolfo, but by heirs of Perfecto. Considering that CDB was

neither a m-gee/puchsaer in good faith, then the sale in favor of CDB was invalid. Remember, the mortgagor was not the

owner. Thus there was no valid mortgage in favor of CDB.

Pwede sana gamitin yung in good faith defense, but in this case we are talking about a banking/financial institution

who are required a higher degree of diligence. In general kasi, despite the fact that the mortgagor was not the owner of the

mortgaged property, the mortgage contract and its succeeding foreclosure can be given effect by reason of public policy iprivate individual yung innocent purchaser for value.

3rdpar of 2085: Third persons who are not parties to the principal obligation may secure the latter by pledging or

mortgaging their own property.

It is therefore not necessary that the owner of the thing pledged to be the principal debtor as another person may

actually own the proeprty; as long as the contract of mortgage is entered into between the owner of the thing, and not the

debtor (unless there is a SPA in favor of the debtor) and the creditor.

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The thing pledged or mortgaged may be alienated. The creditor however does not automatically become the owner i

at the time of the stipulation the obligation is still unpaid. Remember in contracts of mortgage, there is no automatic

appropriation. What will happen is they can sell it and the proceeds will be applied to the principal obligation.

Case: Vda d Jaime v CA

Guide questions:

Who is the principal debtor and creditor? Who is the mortgagor and mortgagee?

What is the subject matter of the mortgage? Did the SC uphold this mortgage? Yes, the mortgage of Asian Cars and Metrobank was valid despite the stipulation. How about good faith on the part of MBTC? MBTC was a purchaser in good faith as it had no knowledge of the

agreement between Asian Cars and the sps Jaime

Maam: Herewe have a case wherein the mortgagor is a separate person from the principal debtor. The law recognizes that

persons who are not parties to a loan agreement may mortgage their own properties to secure the obligation. So the execution

here of that real estate mortgage was upheld due to presumption of regularity, failure by Vda de Jaime to prove that there was

irregularity in the execution thereof.

Here the SC noted that Vda de Jaime is not left without due coursefor the loss of their property as they can go after

George Neri as well as Asian Cars because there was an undertaking

Likewise, with respect to Metrobank being a purchaser in good faith, with regard to the internal agreement. MBTC had

no knowledge, what they were aware of was the leased which was duly annotated in the title. So while MBTC knew of thelease, it was unaware of the specific stipulation that transferred the ownership to the Jaimes upon termination of the lease as

there was no annotation on the title of any other encumberance.

So while the alienation was in violation of the stipulation of the lease contract between Jaimes and Asian Cars, MBTC

cannot be prejudiced by Asian Cars actions. The transfer of the building in favor of MBTC was upheld by the SC.

ART. 2086. The provisions of Article 2052 are applica- ble to a pledge or mortgage.Ano meron sa 2052? A guaranty cannot exist without a valid obligation. Nonetheless a guaranty may be constituted

to guarantee the performance of a voidable or unenforceable contract. It can also guarantee a natural obligation. Again, as

mentioned in 2085 there must be a principal obligation which is valid. Pledge and mortgages are accessory contracts.

Now apply 2052 to principal obligation which may be voidable, unenforceable or to natural obligations. This is

because these obligations are considered valid until annulled by the Courts and therefore if at the time the mortgage wasentered into, wala pa na-annul yung principal obligation, the mortgage is still valid.

Natural obligations on the other hand can also be enforced as long as they are voluntarily performed by the debtor.

ART. 2087. It is also of the essence of these contracts that when the principalobligation becomes due, the things in which the pledge or mortgage consists may bealienated for the payment to the creditor.

If you are the pledgee or mortgagee, you cannot appropriate the thing pledged or mortgaged to you. What is your

remedy? To alienate the things pledged. Sell it as provided under the law and apply the proceeds of the sale to the payment of

the obligation. That is the proper procedure.

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ART. 2088. The creditor cannot appropriate the things given by way of pledge ormortgage, or dispose of them. Any stipulation to the contrary is null and void. (1859a) What is in contemplated in 2088 is calledpactum commissorium (PC), which is null and void under the law.

Q: What is the nature of PC?A: There are two requisites or elements forpactum 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 o

nonpayment of the obligation within the stipulated period.

Q: What it the status of PC? Null and Void.

Q: Why? By such a stipulation, the creditor would be able to acquire ownership of the property given as security without need

of public sale or foreclosure required by law. This is against public policy and order.

Case: Hechanova

Guide questions: Why was there no valid mortgage? The mortgage was not registered. The document that evidenced the document

contained a stipulation that allowed PC.

Assuming that the mortgage had been registered, would there be a transfer of property to Servando as provided in theprivate document?No, because such transfer would amount to PC which is prohibited by law.

Maam: Remember that a stipulation allowing for the automatic appropriation of the thing pledged or mortgaged is considered

PC, as provided in 2088, is a void stipulation. It is null and void because it is against public policy and order.

Why is it considered against public policy and order? Normally if you are the creditor, you would not accept a

property valued less than the obligation. Usually the property is worth more. If there is automatic appropriation, it would be

very unfair for the principal debtor. Consider this: the property has more value than the principal obligation so it would be

unfair and result in unjust enrichment. Thats the basis against PC.So the thing pledged or mortgaged cannot be automatically appropriated. You have to sell it, and it has to be a public

sale. If ikaw lang din yung nakabili/sole bidder, okay lang, as long as there is a foreclosure sale inaccordance with law. We haveto observe the remedies provided for by law because it is still possible for the mortgagor to still pay their obligation. In fact the

mortgagors are given by law a chance to redeem their property.

In Hechanova, it was not considered a valid mortgage because it failed to comply with the requisite of registration

Therefore, no valid mortgage.

For the sake of argument, assuming that the mortgage was registered. The stipulation of PC is null and void and

therefore, there can be no transfer in favor of Servando. They cannot seek annulment of the sale to Hechanova.

Only the PC stipulation is void, not the entire mortgage/pledge contract

Take note what is held void is the stipulation itself and not the mortgage. Void nga yung stipulation for PC, pero valid

pa rin yung mortgage as long as it complies with the requisites provided for by law.

Q: Anong kailangan gawin?

A: Foreclosure sale in mortgage, and in pledge, sale to apply to the proceeds.