Pledge: Coverage of Discussion: Kinds of Pledge Conventional Pledge Legal Pledge
Pledge: Coverage of Discussion: Kinds of Pledge Conventional Pledge Legal Pledge
COVERAGE OF DISCUSSION:
• KINDS OF PLEDGE
• CONVENTIONAL PLEDGE
• LEGAL PLEDGE
Kinds of 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
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
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)
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)
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
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
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)