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CHAPTER 2: PROVISIONS APPLICABLE ONLY TO PLEDGE 2093. In addition to the requisites prescribed in Art.

2085, it is necessary, in order to constitute the contract of pledge, that the thing pledged be placed in the possession of the creditor, or of a third person by common agreement. Pledgea real contract which requires delivery for its perfection o Without delivery, therefore, there cannot be a pledge An agreement to constitute pledge only gives rise to a personal action between the contracting parties o Creditor acquires no right to the property because pledge is merely a lien and possession is indispensable to the right of a lien For the contract to affect third persons, aside from being in a public document, possession of the thing pledged must be delivered to the pledge Type of delivery depends upon nature of thing pledged: 1. Actual deliveryactual possession of the property pledged and a mere symbolic delivery is not sufficient 2. Constructive deliverywhether or not a symbolic or constructive delivery is sufficient to validate a pledge would depend on the peculiar nature of the thing pledged 2094. All movables which are within commerce may be pledged, provided they are susceptible of possession. 2095. Incorporeal rights, evidenced by negotiable instruments, bills of lading, shares of stock, bonds, warehouse receipts and similar documents may also be pledged. The instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be indorsed. Subject matter of pledge: 1. A pledge is confined and limited to personal property the movable must be within the commerce of men and susceptible of possession 2. Incorporeal rights evidenced by documents whether negotiable or not may also be pledged document must be delivered to the creditor; if negotiable, it must be indorsed in favor of the creditor 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. Public instrument necessary to bind third persons: 1. Contents of public instrumenta contract of pledge is not effective against third persons unless in addition to delivery of the thing pledged, it is
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embodied in a public instrument; one attested and certified by a public officer authorized by law to administer oath, such as a notary public wherein it shall appear the description of the thing pledged and the date of the pledge 2. Object of the requirementthe object is to forestall fraud; a rule of substantive law prescribing a condition without which the execution of a contract of pledge cannot affect third persons adversely 2097. With the consent of the pledgee, the thing pledged may be alienated by the pledgor or owner, subject to the pledge. The ownership of the thing pledged is transmitted to the vendee or transferee as soon as the pledgee consents to the alienation, but the latter shall continue in possession. Pledgor retains his ownership of the thing pledged. He may, therefore, sell the same provided the pledge consents to the sale As soon as consent is given by the pledge, ownership is transferred to the vendee subject to the rights of the pledge, namely, that the thing sold may be alienated to satisfy the obligation and that the pledge must continue in possession during the existence of the pledge Second paragraph: furnishes one of those cases in the Code where ownership is transferred without actual delivery of the thing alienated 2098. The contract of pledge gives a right to the creditor to retain the thing in his possession or in that of a third person to whom it has been delivered, until the debt is paid. Possession of the pledge constitutes his security, hence, debtor cannot demand its return until the debt secured by it is paid Right to retention is limited only to the fulfillment of the principal obligation for which the pledge was created 2099. The creditor shall take care of the thing pledged with the diligence of a good father of a family; he has the right to the reimbursement of the expenses made for its preservation, and is liable for its loss or deterioration, in conformity with the provisions of this Code. Upon fulfillment of the principal obligation, the pledge must return the thing pledged During possession, he has the obligation to take care of the same with the diligence of a good father of a family He is entitled to reimbursement of the expenses incurred for its preservation Loss or deterioration of the thing pledged: a. If due to fortuitous eventpledgee cannot be held responsible
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b. If by reason of fraud, negligence, delay or violation of the terms of the contractpledgee is liable 2100. The pledgee cannot deposit the thing pledged with a third person, unless there is a stipulation to the contrary authorizing him to do so. The pledgee is responsible for the acts of his agents or employees with respect to the thing pledged. While pledge is entitled to retain the possession until debt is paid, he is not authorized to transfer possession to a third person Prohibition is necessary for the protection of the pledgor or the owner of the thing pledged o Exception is when there is stipulation authorizing him to do so Pledgee is responsible for the acts of his agents or employees because their acts are, in legal effect, deemed his 2101. The pledgor has the same responsibility as a bailor in commodatum in the case under Art. 1951. 2102. If the pledge earns or produces fruits, income, dividends, or interests, the creditor shall compensate what he receives with those which are owing him; but if none are owing him, or insofar as the amount may exceed that which is due, he shall apply it to the principal. Unless there is a stipulation to the contrary, the pledge shall extend to the interest and earning s of the right pledged. In case of a pledge of animals, their offspring shall pertain to the pledgor or owner of the animals pledged, but shall be subject to the pledge, if there is no stipulation to the contrary. Pledge has no right to use the ting pledged or to appropriate the fruits thereof without the authority of the owner Pledge can apply the fruits, income, dividends, or interests earned or produced by the thing pledged to the payment of interest, if owing, and thereafter to the principal of his credit Unless there is a stipulation to the contrary, interest and earnings of the right pledged and in case of animals, their offsprings are included in the pledge 2103. Unless the thing pledged is expropriated, the debtor continues to be the owner thereof.

Nevertheless, the creditor may bring the actions which pertain to the owner of the thing pledged in order to recover it from, or defend it against a third person. Right of pledgea real right enforceable against third persons 2104. The creditor cannot use the thing pledged, without the authority of the owner, and if he should do so, or should misuse the thing in any other way, the owner may ask that it be judicially or extrajudicially deposited. When the preservation of the thing pledged requires its use, it must be used by the creditor but only for that purpose. Obligation of pledge not to use the thing pledge without permission from the owner is in consequence of the fact that the pledgor in parting with his property transmits only possession but not ownership But is the thing pledge is of such character that use is necessary, then it becomes his duty to use it so that it will not suffer from its disuse o If from the use, profits are derived, pledgee must account therefore to the pledgor and apply the net proceeds of such use to the payment of his claim Right of pledgor to ask that thing pledged be deposited judicially or extrajudicially: 1. Creditor uses the thing without authority 2. Creditor misuses the thing in any other way 3. If the thing is in danger of being lost or impaired because of the negligence or willful act of the pledgee 2105. The debtor cannot ask for the return of the thing pledged against the will of the creditor, unless and until he has paid the debt and its interest, with expenses in a proper case. Exception: pledgor is allowed to substitute the thing pledged which is in danger of destruction or impairment with another thing of the same kind and quality Prescription will not begin to run on the action to demand the return of the thing pledged while the obligation subsists, neither will the possession of the pledge as such ripen into ownership by prescription because such possession is not in the concept of an owner 2106. If through the negligence or willfull act of the pledgee, the thing pledged is in danger of being lost or impaired, the pledgor may require that it be deposited with a third person.

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2107. If there are reasonable grounds to fear the destruction or impairment of the thing pledged, without the fault of the pledgee, the pledgor may demand the return of the thing, upon offering another thing in pledge, provided the latter is of the same kind as the former and not of inferior quality, and without prejudice to the right of the pledgee under the provisions of the following article. The pledgee is bound to advise the pledgor, without delay, of any danger to the thing pledged. Right of pledgor to substitute thing pledged: [Requisites] 1. Pledgor has reasonable grounds to fear the destruction or impairment of the thing pledged 2. There is no fault on the part of the pledge 3. Pledgor is offering in place of the thing, another thing in pledge which is of the same kind and quality as the former 4. Pledge does not choose to exercise his right to cause the thing pledged to be sold at public auction 2108. If, without the fault of the pledgee, there is danger of destruction, impairment, or diminution in value of the thing pledged, he may cause the same to be sold at a public sale. The proceeds of the auction shall ne a security for the principal obligation in the same manner as the thing originally pledged. The right of the pledge to case sale of the thing pledged at a public auction is superior to that given to the pledgor to substitute the thing pledged Pledge shall keep the proceeds of the sale as security for the fulfillment of the principal obligation 2109. If the creditor is deceived on the substance or quality of the thing pledged, he may either claim another thing in its stead, or demand immediate payment of the principal obligation. Two remedies granted to the pledgee, in case he is deceived as to the substance or quality of the thing pledged: 1. Claim another thing in pledge; and 2. Demand immediate payment of the principal obligation Remedies are alternative, that is, he is privileged to choose only one and not both 2110. If the thing pledged is returned by the pledgee to the pledgor or owner, the pledge is extinguished. Any stipulation to the contrary shall be void.
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If subsequent to the perfection of the pledge, the thing is in possession of the pledgor or owner, there is a prima facie presumption that the same has been returned by the pledgee. This same presumption exists if the thing pledged is in the possession of a third person who has received it from the pledgor or owner after the constitution of the pledge. Extinguishment of Pledge: 1. Object is returned by the pledgethis is true notwithstanding any stipulation that the pledge would continue although the pledgee is no longer in possession 2. Payment of the debt 3. Renunciation or abandonment of the pledge 4. Sale of the thing pledge at public auction Presumption of extinguishment o Prima facie presumption that the thing has been returned and that the pledge has been extinguishedthe possession by the debtor or woner of the thing pledge subsequent to the perfection of pledge o May be rebutted by evidence to the contrary o There is authority supporting the proposition that the pledge can temporarily entrust the physical possession of the chattel pledged to the pledgor without invalidating the pledge Pledgor is regarded as holding the pledged property merely as trustee for the pledgee o Only the accessory obligation of pledge is presumed remitted, not the principal obligation itself 2111. A statement in writing by the pledgee that he renounces or abandons the pledge is sufficient to extinguish the pledge. For this purpose, neither the acceptance by the pledgor or owner, nor the return of the thing pledged is necessary, the pledgee becoming a depositary. Pledge-personal right of the pledgee, hence, may be waived Renunciation or abandonment must be a. In writing to extinguish the pledge b. Not conditioned upon the acceptance by the pledgor or owner nor upon the return of the thing pledged Waivertransforms the pledgee into a depositary with the rights and obligations of one 2112. The creditor to whom the credit has not been satisfied in due time, may proceed before a Notary Public to the sale of the thing pledged. This sale shall be made at a public auction, and with notification to the debtor and the
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owner of the thing pledged in a proper case, stating the amount for which the public sale is to be held. If at the first auction the thing is not sold, a second one with the same formalities shall be held; and if at the second auction there is no sale either, the creditor may appropriate the thing pledged. In this case, he shall be obliged to give an acquittance for his entire claim. Rights of pledgee to cause sale of thing pledged: [Formalities required for such sale] a. Debt is due and unpaid b. Sale must be at a public auction c. There must be notice to the pledgor and owner, stating the amount due d. The sale must be made with the intervention of a notary public Sale is actually extrajudicial in character without intervention by the courts Right of pledgee to appropriate thing pledged: o If after the first and second auctions, the thing is not soldthis is an exception to the prohibition against pacto commissorio o If creditor appropriates the thing, it shall be considered as full payment for his entire claim o Debtor is not entitled to the excess in case the value of the thing pledged is more than the principal obligation 2113. At the public auction, the pledgor or owner may bid. He shall, moreover, have a better right if he should offer the same terms as the highest bidder. The pledgee may also bid, but his offer shall not be valid if he is the only bidder. Right of pledgor and pledgee to bid at public sale: o Pledgor shall be preferred if he offers the same terms as the highest bidder o To avoid fraud, pledgee is not allowed to acquire the thing pledged if he is the only bidder 2114. All bids at the public auction 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. Bid must be for cash If pledgee accepts a bud other than cash, the pledgor or owner has the right to consider that the pledgee has received the purchase price in cash 2115. The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of the sale are equal to the amount of the principal obligation, interest and expenses in a proper case. If the price of the
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sale is more than said amount, the debtor shall not be entitled to the excess, unless it is otherwise agreed. If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency, notwithstanding any stipulation to the contrary. Effect of sale of thing pledgedit extinguishes the principal obligation whether the price of the sale is more or less than the amount due If price of sale is more than the amount due o GR: debtor is not entitled to excess This rule is unfair since the obligation is fully satisfied This amounts to a pacto commissorio which is prohibited Under the Chattel Mortgage Lawmortgagor is entitled to recover the excess of the proceeds of the sale in foreclosure proceedings o Exception: there is a stipulation to the contrary If price of sale is less than the amount duecreditor is not entitled to recover the deficiency o Contrary stipulation is void 2116. After the public auction, the pledgee shall promptly advise the pledgor or owner of the result thereof. Obligation of pledgee to advise pledgor or owner of result of sale is to enable the pledgor or owner to take steps for the protection of his rights where he has reasonable grounds to believe that the sale was not an honest one 2117. 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. Right of third person to satisfy obligation: o GR: creditor is not bound to accept payment or performance by a third person who has no interest in the fulfillment of the obligation o Exception: a third person who has any right in or to the thing pledged may pay the debt as soon as it becomes due and demandable and the creditor cannot refuse to accept the payment 2118. If a credit which has been pledged becomes due before it is redeemed, the pledgee may collect and receive the amount due. He shall apply the same to the payment of his claim, and deliver the surplus, should there be any, to the pledgor.

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2119. If two or more things are pledged, the pledgee may choose which he will cause to be sold, unless there is a stipulation to the contrary. He may demand the sale of only as many of the things as are necessary for the payment of the debt. 2120. If a third person secures an obligation by pledging his own movable property under the provisions of Art. 2085 he shall have the same rights as a guarantor under Arts. 2066 to 2070, and Arts. 2077 to 2081. He is not prejudiced by any waiver of defense by the principal obligor. A third person who is not a party to the principal obligation may secure the latter by pledging his own property 2121. Pledges created by operation of law, such as those referred to in Arts. 546, 1731, and 1994, are governed by the foregoing articles on the possession, care and sale of the thing as well as on the termination of the pledge. However, after payment of the debt and expenses, the remainder of the price of the sale shall be delivered to the obligor. 2122. A thing under a pledge by operation of law may be sold only after demand of the amount for which the thing is retained. The public auction shall take place within 1 month after such demand. 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. Arts. 546, 1731, and 1994 are instances of legal pledges or pledges which are created by operation of law Rules in cases of pledge by operation of law: Conventional pledge Legal pledge Debtor is not entitled to Remainder of the price of the sale after payment of the excess unless it is the debt and expenses shall be delivered to the otherwise agreed debtor There is no definite period for the payment of the principal obligation Pledgee must make a demand for the payment of the amount due him; without such, he cannot exercise the right of sale at public auction Pledgee must proceed with the sale within 1 month after demand; otherwise, the debtor may require him to return the thing retained

2123. With regard to pawnshops and other establishments, which are engaged in making loans secured by pledgee, the special laws and regulations concerning them shall be observed, and subsidiarily, the provisions of this Title. CHAPTER 4 ANTICHRESIS 2132. By the contract of antichresis, the creditor acquires the right to receive the fruits of an immovable of his debtor, with the obligation to apply them to the payment of the interest, if owing, and thereafter to the principal of his credit. Characteristics of Antichresis: a. Accessory contractit secures the performance of a principal obligation b. Formal contractit must be in a specified form to be valid; in writing Antichresis requires delivery by the debtor of the property given as security to the creditor o Delivery is only required so that the creditor may receive the fruits and not for the contract to be binding Antichresis only covers the fruits of the encumbered property but the law gives the parties the freedom to stipulate otherwise Obligation to pay interest is not essential in order that it can be guaranteed with a contract of Antichresis Antichresis v. Pledge Antichresis Pledge Refers to real property Refers to personal property Perfected by mere consent Perfected by delivery of the thing pledged Consensual contract Real contract Debtor loses control of the subject matter of the contract 3 provisions which are indicative of the contract of mortgage: Agreement that full amount of the indebtedness must be returned to the lenders before the borrowers could demand the return of the property b. Use of the term mortgage in various parts of the contract c. Agreement that the lenders are not to pay rentals on the property in consideration of the fact that the borrowers do not pay interest on the sum which they obtained as a loan a.

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Antichresis v. Mortgage Antichresis Property is delivered to the creditor

Mortgage Debtor usually retains possession of the property Creditor acquires only the right to Creditor does not have any right to receive the fruits of the property receive the fruits but only creates real right over the property which is enforceable against the whole world Creditor is obliged to pay the taxes Creditor has no such obligation and charges upon the estate unless there is a stipulation to the contrary Expressly stipulated that creditor There is no such obligation on the given possession of the property shall part of the mortgagee apply the fruits thereof to the payment of interest, if owing, and thereafter to the principal of the credit 2133. The actual market value of the fruits at the time of the application thereof to the interest and principal shall be the measure of such application. 2134. The amount of the principal and of the interest shall be specified in writing; otherwise, the contract of antichresis shall be void. 2135. The creditor, unless there is a stipulation to the contrary, is obliged to pay the taxes and charges upon the estate. He is also bound to bear the expenses necessary for its preservation and repair. The sums spent for the purposes stated in this article shall be deducted from the fruits. The creditor acquires by virtue of the contract of antichresis, the right to enjoy the fruits of the property delivered to him which carries 2 obligations: a. Payment of taxes and charges upon the estate o If he does not pay the taxes, he is by law required to pay indemnity for damages to the debtor o If debtor has paid for the taxes which the creditor should have paid, the amount is to be applied to the payment of the debt, and debtor is entitled to the return of the property free from all encumbrances if he, in effect, by advancing the taxes, has already discharged the debt b. Application of the fruits of the estate
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2136. The debtor cannot reacquire the enjoyment of the immovable without first having totally paid what he owes the creditor. But the latter, in order to exempt himself from the obligations imposed upon him by the preceding article, may always compel the debtor to enter again upon the enjoyment of the property, except when there is a stipulation to the contrary. 2137. The creditor does not acquire the ownership of the real estate for nonpayment of the debt within the period agreed upon. Every stipulation to the contrary shall be void. But the creditor may petition the court for the payment of the debt or the sale of the real property. In this case, the Rules of Court on the foreclosure of mortgages shall apply. Remedies of the creditor: a. Bring an action for specific performance b. Petition for the sale of the real property as in a foreclosure of mortgages under Rule 68 of the Rules of Court Possession of an antichretic creditor is not in the concept of an owner; he is a mere holder who cannot acquire the ownership of the real estate subject of the antichresis through prescription unless he repudiates his status as an antichretic creditor 2138. The contracting parties may stipulate that the interest upon the debt be compensated with the fruits of the property which is the object of the antichresis, provided that if the value of the fruits should exceed the amount of interest allowed by the laws against usury, the excess shall be applied to the principal. Obligation to apply the fruits: a. First, of whatever interest on the debt is due b. Secondly, to the payment of the principal 2139. The last paragraph of Art. 2085, and Arts. 2089 to 2091 are applicable to this contract.

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