PLEDGE

COVERAGE OF DISCUSSION:
• KINDS OF PLEDGE
• CONVENTIONAL PLEDGE
• LEGAL PLEDGE
Kinds of pledge

1. Conventional or voluntary - That which is constituted by the mutual consent of the

pledgor and the pledgee.
2. Legal - That which is created by operation of law. (Arts,546, 1731 and 1994)
Conventional Pledge

 Requisites
1. That it be constituted to secure the fulfillment of a principal obligation. (Art. 2085)
2. That the pledgor be the absolute owner of the thing pledged. (Art. 2085)
3. That the person constituting the pledge has the free disposal of his property, and in the absence
thereof, that he be legally authorized for the purpose. (Art. 2085)
4. That the thing pledged be placed in the possession of the creditor, or of a third person by
common agreement. (Art.2093)
Necessity of actual or physical delivery

 A pledge, being a real contract, requires for its perfection the delivery of the thing to the
creditor or to a third person by common agreement. Thus, without delivery, the pledge is
void. (El Banco Espanol-Filipino vs. Peterson, 7 Phil 409) The delivery required here is
actual delivery. (Betita vs. Ganzon, 49 Phil 97; Pacific Commercial PNB. 49 Phil 936)
Thus, ne pledge is constituted at the delivery is merely symbolic.
Object of the pledge

1. All movables within the commerce of men which are susceptible of possession. (Art.
2094)
2. Incorporeal rights evidenced by negotiable instruments, bills of lading, shares of stocks
bands, warehouse receipts and similar documents.
 The instrument proving the right pledged shall be delivered to the creditor, and if negotiable
must be endorsed. (Art. 2095)
Form of pledge

1. Between the parties

 The pledge may be in any form as in fact the mere delivery of the object is sufficient to bind the
parties.
2. As regards third persons
 To take effect against third persons, the pledge must be in a public instrument showing a
description of the thing pledged and the date of the pledge. (Art. 2096)
Extent of pledge

 The pledge shall cover the following:

1. The thing pledged
2. The fruits, income, dividends or interests earned or produced by the thing pledged, unless there is a stipulation
excluding them.
 The creditor shall compensate what he receives as fruits, income, dividends or interests with those which are owing him If
none are owing him, or insofar as the amount may exceed that which is due, he shall apply it to the principal. (Art. 2102)
 Example: D borrowed from C P10,000.00 which bears interest at 1% a month. The obligation is secured by a pledge of
certain shares of stock owned by D. In addition to delivering to the stock certificate covering the shares, D also gave the
authority to collect the dividends on the stock. If in a certain month, C collects a dividend of P250.00, he shall apply P100.00
to the interest due, and the balance of P150.00 to the principal. If no interest is due to him, he shall apply the total amount of
P250.00 to the principal

3. The offspring, when the thing pledged is an animal, unless there is a stipulation excluding them. (Art. 2102) The
offspring, however, shall pertain to the pledgor. (Art. 2102)
Rights of the debtor/pledgor

1. To alienate, with the consent of the pledgee, the thing pledged. The ownership of the thing pledged is transmitted to the vendee
or transferee as soon as the pledgee consents to the alienation, but the pledgee shall continue in possession. (Art. 2097)
2. To ask that the thing pledged be judicially or extra- judicially deposited if it is used without authority or for a purpose other
than for its preservation. (Art. 2104)
3. To continue to be the owner of the thing pledged unless it is expropriated. (Art. 2103)
4. To ask for the return of the thing pledged after he has paid the debt and its interests, with expenses in a proper case. (Art. 2105)
5. To require that the thing pledged be deposited with a third person if it is in danger of being lost or impaired through the
negligence or willful act of the pledgee. (Art. 2106)
6. To demand the return of the thing pledged, upon offering another thing in pledge, provided the latter is of the same kind and
quality, if there are reasonable grounds to fear the destruction or impairment of the thing pledged without the fault of the
pledgee. (Art. 2107) This right, however, is without prejudice to the right of the pledgee to have the thing sold at a public sale.
The proceeds of the auction shall be security for the principal obligation in the same manner as the thing originally pledged.
(Arts. 2107, 2108)
Obligations of the debtor/pledgor

1. To pay the debt and its interest, with expenses in a proper case, when they are due. (Art.
2105)
2. To pay damages that the pledgee may suffer by reason of the flaws of the thing pledged, if
he was aware of such flaws but did not advise the pledgee of the same. (Arts. 1951, 1201)
Rights of the creditor/pledgee

1. To retain in his possession the thing pledged until the debt is paid. (Art. 2098)
2. To demand reimbursement of the expenses made for the preservation of the thing pledged. (Art. 2099)
3. To bring actions which pertain to the owner of the thing pledged in order to recover it from, or defend it
against, third persons. (Art. 2103)
4. To use the thing pledged if he is authorized to do so, or when its use is necessary for the preservation of the
thing. (Art. 2104)
5. If he is deceived of the substance of the thing pledged, he may either:
A. Claim that another thing be given to him in place of the thing pledged, or
B. Demand immediate payment of the principal obligation. (Art. 2109)
6. To cause the sale of the thing pledged at a public sale, if there is a danger of destruction, impairment or
diminution in value of the thing pledged without his fault. The proceeds of the auction shall be security for
the principal obligation in the same manner as the thing originally pledged. (Art. 2108)
7. To collect and receive the amount due if the thing pledged is a credit which becomes due before it is
redeemed, and to apply the same to the payment of his claim. He shall apply what he has collected to the
payment of his claim, and deliver the surplus, should there be any, to the pledgor. (Art. 2118)
 Example: D received a promissory note of P10,000.00 from M the same being due on March 1. Thereafter, D
pledged the promissory note to secure a loan of P8,000.00 which he obtained from C. The loan is due on March 5.
On March 1, C can collect the note of P10,000.00 from M. He shall apply P8,000.00 for the payment of his claim
and deliver the surplus of P2,000.00 to D.
8. To sell the thing pledged upon default of the debtor. (Arts. 2087, 2112)
Obligations of the creditor/ pledgee

1. To take care of the thing pledged with the diligence of a good father of a family. (Art. 2099)
2. To be liable for the loss or deterioration of the thing pledged unless it is due to fortuitous event. (Art.
2099)
3. Not to deposit the thing pledged with a third person, unless authorized. (Art. 2100)
4. To be responsible for the acts of his agents or employees with respect to the thing pledged. (Art. 2100)
5. Not to use the thing pledged, except when:
A. He is authorized by the owner, or.
B. The use of the thing is necessary for its preservation.
6. To deliver to the debtor the surplus after paying his claim from what he has collected on a credit that
was pledged and which has become due before it is redeemed. Art. 2108)
Rights of a third person who pledges his own
movable property to secure the debt of another

1.  To be indemnified by the debtor if he pays the creditor The indemnity consists of the
following:
A. The total amount of the debt.
B. The legal interests thereon from the time the payment was made known to the debtor, even
though it did not earn interest for the creditor.
C. The expenses incurred by the pledger after having notified the debtor that payment had been
demanded of him.
D. Damages, if they are due. (Arts. 2066, 212C))
2. To be subrogated to all the rights of the creditor against the debtor if he pays the creditor.
(Arts. 2067, 2120)
 The pledgor is considered a third person interested in the fulfillment of the obligation; hence, he
is entitled to be subrogated to the creditor's rights upon payment. (See Arts. 1236 and 1302.)
 Example: D obtained a loan of P10,000.00 from C. The debt is secured by the guarantee of G
and the pledge by T of his ring. If T pays C, T steps into the place of c. Thus, T can demand the
indemnification mentioned in No. 1 above from D. If D cannot pay, T can go after G.
3. To be released from liability in the following cases:
A. If the creditor voluntarily accepts immovable or other property in payment of the debt even if the creditor thereafter loses
the same by eviction. (Arts. 2077, 2120)
 Example: D borrowed P50,000.00 from C. The debt is secured by a pledge of T's ring. On due date, C accepted a parcel of land from
D in payment of the debt. I can demand that he be released from the pledge. T shall be released even if later, C should lose the lot by
eviction in case there is a rightful owner.
 Note: The acceptance by the creditor of a property in payment of the debt is in the nature of dacion en pago.

B. If an extension of time is granted to the debtor by the creditor without his (pledgor's) consent (Arts, 2079, 2080)
C. If through some act of the creditor, the pledgor cannot be subrogated to the rights, mortgages and preferences of the
creditor. (Arts. 2080, 2120)
 Thus, if, in the example in No. 2, C cancels G’s guarantee, T is released from liability because if T pays C, T can no longer go after
G if D cannot pay the indemnification due him (T).
Extinguishment of pledge

 Pledge may be extinguished directly or indirectly.

1. Indirect cause - When the principal obligation secured by the pledge is extinguished, the pledge, being merely an
accessory contract, is likewise extinguished. Any third person who has any right in or to the thing pledged may
satisfy the principal obligation as soon as the latter becomes due and demandable. (Art. 2117)
 Example: D owes C P5,000.00. The debt is secured by a pledge of D's wristwatch. If D pays C P5,000.00, the debt is
extinguished together with the

2. Direct causes Pledge may be extinguished directly as follows:

A. Return by the pledgee of the thing pledged to the pledgor or owner
1. Any stipulation that the pledge is not extinguished by the return of the thing is void.

2. Prima facie presumption that pledgee returned the thing pledged

A. If the thing pledged is found in the possession of the pledgor or owner.

B. If the thing pledged is in the possession of a third person who has received it from the pledgor or owner. (Art. 2110)
B. Renunciation or abandonment in writing by the pledgee of the pledge.
1. The acceptance by the pledgor or owner of the renunciation, or the return of the thing pledged, is not necessary for such mode
of extinguishing pledge.
2. The pledgee becomes a depositary upon renunciation (Art. 2111) if in the meantime, the thing pledged is not yet returned to
the owner.
C. Sale of the thing pledged
1. Formalities of the sale - The sale shall be:
a) By public auction,
b) Through a notary public, and
c) With notice to the debtor and the owner of the thing pledged, stating the amount for which the public sale is to be held. (Art. 2112)

2. Who may bid at the public auction

a) The pledgor or owner. He shall be preferred if he should offer the same terms as the highest bidder.
b) The pledgee. However, his offer shall not be valid if he is the only bidder. (Art. 2113)
c) Third persons.
3. Required amount of bids
 All bids shall offer to pay the purchase price at once. If any other bid is accepted, the pledgee is deemed
to have received the purchase price, as far as the pledgor or owner is concerned. (Art. 2114)
4. Effects of sale
 The principal obligation shall be extinguished whether or not the proceeds of the sale are equal to the
amount of the principal obligation, interest and expenses in a proper case. (Art. 2115)
a. If the price is more than the amount of the obligation, the debtor shall not be entitled to the excess, unless there
is an agreement to that effect.
b. If the price is less, the creditor cannot recover the deficiency even if stipulated. (Art. 2115)
Illustration:

 D owes C P10,000.00. The debt is secured by a pledge of D's shares of stock which is
evidenced by a stock certificate delivered by D to C at the time D received the proceeds.
If D defaults and C sells the shares of stock at P9,500.00, D's debt is extinguished. cannot
recover the deficiency of P500.00. If the shares of stock are sold at P11,000.00, D's debt is
likewise extinguished. The excess of P1,000.00 belongs to C unless the parties had an
agreement that any excess shall be turned over to D.
 5. Rule when two or more things are pledged
 The pledgee may choose which he will cause to be sold, unless there is a contrary stipulation. He may demand the sale of only
as many of the things as are necessary for the payment of the debt, (Art. 2119)

D. Appropriation of the thing pledged

 If the thing pledged is not sold in the first and second public auctions, the creditor may appropriate the thing pledged.
In this case, he shall be obliged to give an acquittance for his entire claim. (Art. 2112)
 Note: The sale of the thing pledged or its appropriation will result in he extinguishment not only of the
pledge but also of the principal obligation.
Legal Pledge

 Concept
 Legal pledge or pledge by operation of law refers to the right of a person to retain a thing until
he receives payment of his claim.
Examples of legal pledge

1. Possessory lien by a possessor in good faith

 A possessor in good faith may retain the movable upon which he has incurred necessary and
useful expenses until he has been reimbursed therefor. (Art. 546)
 Example: B bought a bicycle from S believing that S was the owner. After obtaining possession of the
bicycle, B incurred P1,000.00 to have it repaired by causing the removal of rust from it and replacing
some deteriorating parts. Later, O came forward and proved that he was the owner and that S merely
deceived B. B is entitled to retain the bicycle (by way of legal pledge) until O has reimbursed him the
amount of P1,000.00 for the necessary and useful expenses that he had incurred.
2. Possessory lien of worker
 He who has executed work upon movable has a right to retain it by way of pledge until he is paid. Art. 1731) The
mechanic’s lien is akin to a contractor's or warehouseman's lien in that by way of pledge, the repairman has the
right to retain possession of the movable until he is paid. However, the right of retention is conditioned upon the
execution of the work upon the movable. The creation of a mechanic's lien does not depend upon the owner’s
non-payment. Rather, the contractor "creates his or her own lien by performing the work or furnishing the
materials, Optimum Motor Center Corp, Vs Tan, GR No. 170292, July 14, 2008).
 Example: O brought his wristwatch to R for repair. R has the right to retain the wristwatch by way of legal pledge
until o has paid him for the repair work he has undertaken
3. Depositary's sight of retention
 The depositary may retain the thing deposited until the full payment of what may have been due him by reason of
the deposit. (Art. 1994) Thus, a warehouseman has the right to retain the goods deposited in his warehouse by
way of legal pledge until the depositor has paid him the storage cost for the goods.
Rules applicable to legal pledge

 The provisions on conventional pledge on the possession, care and sale of the thing as well as on the
termination of pledge shall be applicable to legal pledge except with respect to the sale of the thing
as follows:
1. The thing may be sold only after demand of the amount for which the thing is retained.
2. The public auction shall take place within one month after such demand.
3. If without just grounds, the creditor does not cause the public sale to be held within such period, the debtor
may require the return of the thing. (Art. 2122)
4. After the payment of debt and expenses, the remainder ,of the price of sale shall be delivered to the obligor.
Conventional pledge and legal pledge distinguished
on excess of proceeds of sale or deficiency

Proceeds of sale exceed In conventional pledge, the In legal pledge, the

amount of debt excess belongs to the remainder of the price of
creditor, unless there is an sale shall be delivered to the
stipulation. debtor.
On recovery of deficiency In conventional pledge, the In legal pledge, the creditor is
creditor is not entitled to entitled to recover the
recover the deficiency. Any deficiency from the debtor.
agreement to the contrary is
void.
Special laws on pawnshops and similar
establishments

 Pawnshops and other establishments engaged in making loans secured by pledge shall be
governed by primarily by the special laws and regulations concerning them, and
subsidiarily by the provisions of pledge in the Civil Code. (Art 2123)