PROVISIONS COMMON TO PLEDGE OR MORTGAGE

The character of the transaction between the parties is to be determined by their intention, regardless of
what language was used or what the form of the transfer was. If it was intended to secure the payment
of money, it must be construed as a pledge; but if there was some other intention, it is not a pledge.
However, even though a transfer, if regarded by itself, appears to have been absolute, its object and
character might still be qualified and explained by a contemporaneous writing declaring it to have been
a deposit of the property as collateral security. IT HAS BEEN SAID THAT A TRANSFER OF
PROPERTY BY THE DEBTOR TO A CREDITOR, EVEN IF SUFFICIENT ON ITS FACE TO
MAKE AN ABSOLUTE CONVEYANCE, SHOULD BE TREATED AS A PLEDGE IF THE
DEBT CONTINUES IN EXISTENCE AND IS NOT DISCHARGED BY THE TRANSFER, and
that accordingly, the use of the terms ordinarily importing conveyance, of absolute ownership
will not be given that effect in such a transaction if they are also commonly used in pledges and
mortgages and therefore do not unqualifiedly indicate a transfer of absolute ownership, in the
absence of clear and unambiguous language or other circumstances excluding an intent to pledge.
THE TRANSFER OF TITLE TO INCORPOREAL PROPERTY IS GENERALLY AN
ESSENTIAL PART OF THE DELIVERY OF THE SAME IN PLEDGE. IT MERELY
CONSTITUTES EVIDENCE OF THE PLEDGEE'S RIGHT OF PROPERTY IN THE THING
PLEDGED.
By the contract of pledge, the pledgor does not part with his general right of property in the
collateral. The general property therein remains in him, and only a special property vests in the
pledgee. The pledgee does not acquire an interest in the property, except as a security for his
debt. Thus, the pledgee holds possession of the security subject to the rights of the pledgor; he
cannot acquire any interest therein that is adverse to the pledgor's title. Moreover, even where the
legal title to incorporeal property which may be pledged is transferred to a pledgee as collateral
security, he takes only a special property therein Such transfer merely performs the office that the
delivery of possession does in case of a pledge of corporeal property.

In case of doubt as to whether a transaction is a pledge or a dation in payment, the presumption

is in favor of pledge, the latter being the lesser transmission of rights and interests

under Art. 2085 of the Civil Code, it is essential that the mortgagor be the absolute owner of the
property mortgaged, and while as between the daughter and the mother, it was the daughter who
still owned the lots, STILL insofar as innocent third persons are concerned the owner was
already the mother (Fe S. Duran) inasmuch as she had already become the registered owner
(Transfer Certificates of Title Nos. 2418 and 2419).
THE MORTGAGEE HAD THE RIGHT TO RELY UPON WHAT APPEARED IN THE
CERTIFICATE OF TITLE, AND DID NOT HAVE TO INQUIRE FURTHER. If the rule were

otherwise, the efficacy and conclusiveness of Torrens Certificate of Titles would be futile and
nugatory. Thus the rule is simple: THE FRAUDULENT AND FORGED DOCUMENT OF SALE
MAY BECOME THE ROOT OF A VALID TITLE IF THE CERTIFICATE HAS ALREADY
BEEN TRANSFERRED FROM THE NAME OF THE TRUE OWNER TO THE NAME
INDICATED BY THE FORGER (See De la Cruz v. Fable, 35 Phil. 144; Blondeau et al. v. Nano et
al., 61 Phil. 625; Fule et al. v. Legare et al., 7 SCRA 351; see also Sec. 55 of Act No. 496, the Land
Registration Act). The fact that at the time of the foreclosure sale proceedings (1970-72) the
mortgagees may have already known of the plaintiffs' claim is immaterial. WHAT IS
IMPORTANT IS THAT AT THE TIME THE MORTGAGE WAS EXECUTED, THE
MORTGAGEES IN GOOD FAITH ACTUALLY BELIEVED FE S. DURAN TO BE THE
OWNER, AS EVIDENCED BY THE REGISTRATION OF THE PROPERTY IN THE NAME
OF SAID FE S. DURAN (pp. 146-147, Rollo)."
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
true owner to the name of the forger or the name indicated by the forger.

On the contrary, it is demanded of [banks] to exercise the highest order of care and prudence in
its business dealings with the Valencias considering that it is engaged in a banking business a
business affected with public interest.

SO LONG AS VALID CONSENT WAS GIVEN, THE FACT THAT THE LOANS WERE
SOLELY FOR THE BENEFIT OF THE LAGASCA SPOUSES WOULD NOT INVALIDATE
THE MORTGAGE WITH RESPECT TO PRIVATE RESPONDENTS'(Racho Spouses) SHARE
IN THE PROPERTY. (Property is co-owned by the two spouses).

FAILURE OF MORTGAGOR TO REDEEM THE PROPERTY DOES NOT

AUTOMATICALLY VEST OWNERSHIP OF THE PROPERTY TO THE MORTGAGEE,
WHICH WOULD GRANT THE LATTER THE RIGHT TO APPROPRIATE THE THING
MORTGAGED OR DISPOSE OF IT.
This VIOLATES THE PROVISION OF ARTICLE 2088 OF THE NEW CIVIL CODE, which
reads:
The creditor cannot appropriate the things given by way of pledge or mortgage, or
dispose by them. Any stipulation to the contrary is null and void.
THE ACT OF APPLICANT IN REGISTERING THE PROPERTY IN HIS OWN NAME UPON
MORTGAGOR'S FAILURE TO REDEEM THE PROPERTY WOULD AMOUNT TO A
PACTUM COMMISSORIUM WHICH IS AGAINST GOOD MORALS AND PUBLIC POLICY.

The aforequoted provision furnishes the two elements for pactum commissorium to exist:
(1) that there should be a pledge or mortgage wherein a property is pledged or mortgaged by way
of security for the payment of the principal obligation; and
(2) that there should be a stipulation for an automatic appropriation by the creditor of the thing
pledged or mortgaged in the event of non-payment of the principal obligation within the
stipulated period.

THERE IS NO CASE OF AUTOMATIC APPROPRIATION OF THE PROPERTY BY

BAYANIHAN. WHEN THE SPOUSES DEFAULTED IN THEIR PAYMENTS OF THE
SECOND AND THIRD INSTALLMENTS OF THE TRUCKS THEY PURCHASED,
BAYANIHAN FILED AN ACTION IN COURT FOR SPECIFIC PERFORMANCE.
The trial court rendered favorable judgment for BAYANIHAN and ordered the SPOUSES to pay
the balance of their obligation and in case of failure to do so, to execute a deed of assignment over
the property involved in this case. The SPOUSES elected to execute the deed of assignment
pursuant to said judgment.
Clearly, there was NO AUTOMATIC VESTING OF TITLE ON BAYANIHAN BECAUSE IT
TOOK THE INTERVENTION OF THE TRIAL COURT TO EXACT FULFILLMENT 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 THIS WAS EXECUTED PURSUANT TO A VALID
JUDGMENT IN CIVIL CASE NO. 80420 AS CAN BE GLEANED FROM ITS VERY TERMS
AND CONDITIONS.

Respondent bank cites the above-quoted article in its argument that the mortgage contract is
indivisible and that the loan it secures cannot be divided among the different lots. Respondent
Court upheld the validity of the sale en masse.
THE RULE, HOWEVER, IS NOT APPLICABLE TO THE INSTANT CASE AS IT
PRESUPPOSES SEVERAL HEIRS OF THE DEBTOR OR CREDITOR WHICH DOES NOT
OBTAIN IN THIS CASE (Central Bank of the Philippines v. Court of Appeals, supra.).
FURTHERMORE, GRANTING THAT THERE WAS CONSOLIDATION OF THE ENTIRE
LOAN OF PETITIONER CORPORATIONS APPROVED BY RESPONDENT BANK, THE
RULE OF INDIVISIBILITY OF MORTGAGE CANNOT APPLY WHERE THERE WAS
FAILURE OF CONSIDERATION ON THE PART OF RESPONDENT BANK FOR THE
MISMANAGEMENT OF THE AFFAIRS OF PETITIONER CORPORATION AND WHERE
SAID BANK IS IN DEFAULT IN COMPLYING WITH ITS OBLIGATION TO RELEASE TO
PETITIONER CORPORATION THE AMOUNT OF P710,000.00.

PLEDGE
Undoubtedly, petitioners rely heavily on the fact that the contract of pledge by and between
Solidbank and Madrigal Shipping Co., Inc. was not recorded under Sections 804 and 809 of the
Tariff and Customs Code and argue that it is not binding on third persons like the petitioners.
It is, however, stated under Article 2096 of the Civil Code that for a pledge to take effect against
third persons, it should be in a public instrument which must contain the description of the thing
pledged and the date of the pledge.
In the case of Bachrach Motor Co. v. Lacson Ledesma, 64 Phil. 681 (1937), Art. 2096 has been
interpreted in the sense that for the contract to affect third persons, apart from being in a public
instrument, possession of the thing pledged must in addition be delivered to the pledgee.

Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the
Negotiable Instruments Law, an instrument is negotiated when it is transferred from one person
to another in such a manner as to constitute the transferee the holder thereof, and a holder may be
the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof.
In the present case, however, there was no negotiation in the sense of a transfer of the legal title to the
CTDs in favor of petitioner in which situation, for obvious reasons, mere delivery of the bearer CTDs
would have sufficed. Here, the delivery thereof only as security for the purchases of Angel de la Cruz
(and we even disregard the fact that the amount involved was not disclosed) could at the most

constitute petitioner only as a holder for value by reason of his lien. Accordingly, a negotiation for such
purpose cannot be effected by mere delivery of the instrument since, necessarily, the terms thereof and
the subsequent disposition of such security, in the event of non-payment of the principal obligation,
must be contractually provided for.

The pertinent law on this point is that where the holder has a lien on the instrument arising from contract,
he is deemed a holder for value to the extent of his lien. As such holder of collateral security, he would be a
pledgee but the requirements therefor and the effects thereof, not being provided for by the Negotiable
Instruments Law, shall be governed by the Civil Code provisions on pledge of incorporeal rights, which
inceptively provide:

Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be

pledged. The instrument proving the right pledged shall be delivered to the
creditor, and if negotiable, must be indorsed.
Art. 2096. A pledge shall not take effect against third persons if a description of the
thing pledged and the date of the pledge do not appear in a public instrument.
Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of
respondent court quoted at the start of this opinion show that petitioner failed to produce any
document evidencing any contract of pledge or guarantee agreement between it and Angel de la
Cruz.

CHATTEL MORTGAGE
IF A HOUSE OF STRONG MATERIALS, LIKE WHAT WAS INVOLVED IN THE ABOVE
TUMALAD CASE, MAY BE CONSIDERED AS PERSONAL PROPERTY FOR PURPOSES
OF EXECUTING A CHATTEL MORTGAGE THEREON AS LONG AS THE PARTIES TO
THE CONTRACT SO AGREE AND NO INNOCENT THIRD PARTY WILL BE PREJUDICED
THEREBY, THERE IS ABSOLUTELY NO REASON WHY A MACHINERY, WHICH IS
MOVABLE IN ITS NATURE AND BECOMES IMMOBILIZED ONLY BY DESTINATION OR
PURPOSE, MAY NOT BE LIKEWISE TREATED AS SUCH. THIS IS REALLY BECAUSE
ONE WHO HAS SO AGREED IS ESTOPPED FROM DENYING THE EXISTENCE OF THE
CHATTEL MORTGAGE.
In rejecting petitioner's assertion on the applicability of the Tumalad doctrine, the Court of Appeals lays
stress on the fact that the house involved therein was built on a land that did not belong to the owner of
such house. But the law makes no distinction with respect to the ownership of the land on which the
house is built and We should not lay down distinctions not contemplated by law.
It must be pointed out that the characterization of the subject machinery as chattel by the private
respondent is indicative of intention and impresses upon the property the character determined

by the parties. As stated in Standard Oil Co. of New York v. Jaramillo, 44 Phil. 630, it is undeniable
that the parties to a contract may by agreement treat as personal property that which by nature
would be real property, AS LONG AS NO INTEREST OF THIRD PARTIES WOULD BE
PREJUDICED THEREBY.