Chapter 7. Pledge A.

General Concepts

Art. 2085. The following requisites are essential to the contracts of pledge (1) That they be constituted to secure the fulfillment of a principal obligation; (2) That the pledgor be the absolute owner of the thing pledged; (3) That the persons constituting the pledge have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose.

Reliance on presumption may be misplaced since both are generally onerous; hence, more appropriate presumption: greater reciprocity of rights, still favours a pledge.

B. Form of Pledge

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. (1865a) Description of the collateral and the date of the pledge must appear in a public instrument to bind third parties;
C. Obligations Secured

Art. 2087. It is also of the essence of these contracts that when the principal obligation becomes due, the things in which the pledge consists may be alienated for the payment to the creditor. (1858) Art. 2123. With regard to pawnshops and other establishments, which are engaged in making loans secured by pledges, the special laws and regulations concerning them shall be observed, and subsidiarily, the provisions of this Title. (1873a) Pledge ( Conventional Pledge) Roman law: pignus; A real security transaction constituted: o to secure the fulfilment of a principal obligation; o by the absolute owner (the pledger) of movable property who has free disposal of the property, and in the absence thereof, is legally authorized for the purpose; Perfected by delivery of the movable property to the creditor (the pledgee) or to a third person; Subjects the pledged property (or collateral) to the condition that: o When the principal obligation becomes due, the collateral may be alienated for the payment to the creditor; In case of doubt whether a transaction is one of pledge or dation in payment, presumption: pledge; as this involves a lesser transmission of rights and interests1; after all, in a pledge, there yet no transfer of ownership, as the delivery of collateral is by way of security;

After-incurred obligations A pledge may exceptionally secure after-acquired obligations so long as these debts that are yet to be contracted (or future debts) are accurately describe); Dragnet clause May be contained in pledge; Specifically phrased to subsume all debts, whether past or future); Although carefully and strictly construed (dragnet clause), pledge containing such is a valid and legal contract; Amounts stated as consideration do not limit for which the pledge may stand if from the whole of the instrument, the intent to secure future debts can be gathered; Pledge as continuing security Pledge given to secure future debts; Not discharged by repayment of the amount named in the pledge, until the full amount of the principal obligation is paid; D. Object of Pledge

Art. 2094. All movables which are within commerce may be pledged, provided they are susceptible of possession. (1864) Art. 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. (n) Art. 416. The following things are deemed to be personal property:

When doubts refer to incidental circumstances of a gratuitous contract, the least transmission of rights and interests shall prevail; if onerous, doubt in favour of the greatest reciprocity of interests.

1. Those movables susceptible of appropriation which are not included in the preceding article; 2. Real property which by any special provision of law is considered as personal property; 3. Forces of nature which are brought under control by science; and 4. In general, all things which can be transported from place to place without impairment of the real property to which they are fixed. (335a) Art. 417. The following are also considered as personal property: 1. Obligations and actions which have for their object movables or demandable sums; and 2. Shares of stock of agricultural, commercial and industrial entities, although they may have real estate.
E. Ownership of Collateral

Art. 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 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. (1872a)
3. Voluntary sale under 2097;

Art. 2103. Unless the thing pledged is expropriated, the debtor continues to be the owner thereof. Art. 2102. Unless there is a stipulation to the contrary, the pledge shall extend to the interest and earnings of the right pledged. In case of a pledge of animals, their offspring shall pertain to the pledgor or owner of animals pledged, but shall be subject to the pledge, if there is no stipulation to the contrary. (1868a) Art. 2101. The pledgor has the same responsibility as a bailor in commodatum in the case under Article 1951. (n) Art. 1951. The [pledgor] who, knowing the flaws of the thing [pledged], does not advise the [pledgee] of the same, shall be liable to the latter for the damages which he may suffer by reason thereof. (1752)
Essential: pledgor be the absolute owner of the collateral and that it have free disposal of the property, or, in the absence of the right of free disposition, that it be legally authorized to constitute the pledge;

Art. 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. (n) Although the pledgor continues to be the owner of the collateral, its right to alienate is restricted by the requirement imposed by law for the consent of the pledgee to the alienation; Absence of consent of pledgee invalidates the sale;
F. Rights of Third Party Pledgor Although the principal debtor may be the pledgor, the law allows third person which are not parties to the principal obligation to secure the latter by pledging their own property;

Art. 2120. If a third party secures an obligation by pledging his own movable property under the provisions of Article 2085 he shall have the same rights as a guarantor under Articles 2066 to 2070, and Articles 2077 to 2081. He is not prejudiced by any waiver of defense by the principal obligor. (n) Art. 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.(n) Art. 2066. The guarantor who pays for a debtor must be indemnified by the latter. The indemnity comprises: 1. 2. The total amount of the debt; 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; The expenses incurred by the guarantor after having notified the debtor that payment had been demanded of him; Damages, if they are due. (1838a)

Pledgor continues to be the owner of the collateral, unless the following concur: 1. Expropriation of the collateral; 2. Sale by public auction under 2108 and 2112;

3.

Art. 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 be a security for the principal obligation in the same manner as the thing originally pledged. (n)

4.

Art. 2067. The guarantor who pays is subrogated by virtue thereof to all the rights which the creditor had against the debtor.

If the guarantor has compromised with the creditor, he cannot demand of the debtor more than what he has really paid. (1839) Art. 2068. If the guarantor should pay without notifying the debtor, the latter may enforce against him all the defenses which he could have set up against the creditor at the time the payment was made. (1840) Art. 2069. If the debt was for a period and the guarantor paid it before it became due, he cannot demand reimbursement of the debtor until the expiration of the period unless the payment has been ratified by the debtor. (1841a) Art. 2070. If the guarantor has paid without notifying the debtor, and the latter not being aware of the payment, repeats the payment, the former has no remedy whatever against the debtor, but only against the creditor. Nevertheless, in case of a gratuitous guaranty, if the guarantor was prevented by a fortuitous event from advising the debtor of the payment, and the creditor becomes insolvent, the debtor shall reimburse the guarantor for the amount paid. (1842a) Art. 2077. If the creditor voluntarily accepts immovable or other property in payment of the debt, even if he should afterwards lose the same through eviction, the guarantor is released. (1849) Art. 2078. A release made by the creditor in favor of one of the guarantors, without the consent of the others, benefits all to the extent of the share of the guarantor to whom it has been granted. (1850) Art. 2079. An extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty. The mere failure on the part of the creditor to demand payment after the debt has become due does not of itself constitute any extention of time referred to herein. (1851a) Art. 2080. The guarantors, even though they be solidary, are released from their obligation whenever by some act of the creditor they cannot be subrogated to the rights, mortgages, and preference of the latter. (1852) Art. 2081. The guarantor may set up against the creditor all the defenses which pertain to the principal debtor and are inherent in the debt; but not those that are personal to the debtor. (1853)
G. Right to Posession

Art. 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. If subsequent to the perfection of the pledge, the thing is in the 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. (n)
Delivery primary obligation of the pledgor; formal act of transferring, or the giving or yielding of possession or control, of the collateral; reason why pledge is a real contract2; essential for perfection of the real contract of pledge3; if collateral not in possession of creditor, no pledge is constituted; and if having been delivered but returned by the creditor to the pledgor, the pledge is extinguished; Right of Retention

Art. 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. (1866a) grants the pledge a right of retention over the poperty as a means or device by which the pledgee is able to obtain payment of the principal obligation; Art. 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. (n) Art. 2099. The creditor shall take care of the thing pledged with the diligence of a good father of a family; he has a 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. (1867) Art. 2100. The pledgee cannot deposit the thing pledged with a third person, unless there is a stipulation authorizing him to do so. Art. 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
2

Art. 2093. In addition to the requisites prescribed in Article 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. (1863)

A contract in which property passes from one party to another, requiring something more than consent 3 Art. 1316. Real contracts, such as deposit, pledge and Commodatum, are not perfected until the delivery of the object of the obligation. (n)

use, it must be used by the creditor but only for that purpose. (1870a) Art. 2106. If through the negligence or wilful 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. (n)
Right of Payment

Art. 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. (n) Art. 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 be a security for the principal obligation in the same manner as the thing originally pledged. (n) Art. 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. If subsequent to the perfection of the pledge, the thing is in the 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. (n) Art. 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. (n)

Art. 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 earnings of the right pledged. In case of a pledge of animals, their offspring shall pertain to the pledgor or owner of animals pledged, but shall be subject to the pledge, if there is no stipulation to the contrary. (1868a) Art. 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. (n)
above two articles gives pledgee not only right of possession but also the right of payment of the principal obligation without need of a foreclosure sale; Generally, if the collateral earns or produces interests: pledge extends to the interests and earnings BUT law allows creditor to compensate what he receives as fruits, income, dividends or interests with the interest owed under the principal obligation; o If no interest is due or if the amount received exceeds the interest due the creditor is allowed to apply the same to the principal that is due; RESULT: payment of principal obligation; o If the collateral is a credit and the same becomes due before the credit is redeemed the creditor shall apply what he receives from the credit to the payment of his claim; o in both cases, if the principal obligation becomes fully paid, the pledge, as an accessory obligation, is necessarily extinguished;

I.

Foreclosure of a Pledge

Art. 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 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. (1872a) Art. 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. (n) Essential condition of a pledge: if principal obligation is paid, the pledge is automatically extinguished;

H. Return of Collateral

Art. 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. (1871)

However, if the principal obligation becomes due and the debtor defaults, the creditor (as pledgee) may foreclose the collateral, by causing its alienation in accordance with the procedures allowed by law; The CC authorizes the extrajudicial foreclosure of a pledge by notarial sale;

Notice required by 2112: Its purpose is to sufficiently apprise the debtor and the pledgor that the collateral shall be sold in a public auction and the proceeds thereof shall be applied to satisfy the principal obligation; st If notice informs pledgor that 1 public auction is scheduled on a specific date and a second auction will be next day, in the event the collateral is not sold during the first auction, the purpose of the law is achieved; Who may bid: Art. 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. (n) Art. 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 been received the purchase price, as far as the pledgor or owner is concerned. (n) Effect of Notarial Sale 1. Extinction of Principal Obligation Art. 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 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. (n) Art. 2116. After the public auction, the pledgee shall promptly advise the pledgor or owner of the result thereof. (n) Essence of pledge: its accessory character; hence, the fact that a pledge is not the principal obligation is of no significance to the application of 2115; The extinctive effect of the sale of the collateral is not derived from any stipulation; 2115 establishes that extinction of the principal obligation supervenes by operation of imperative law that the parties cannot override; (its effect cannot be evaded); Right of Redemption
Statutory right granted to the owner of collateral (pledgor or mortgagor) to repurchase even after

confirmation of a foreclosure sale but within the periods prescribed by law; Although it is referred to as a prerogative to reacquire collateral after the foreclosure sale, when the owner seasonably exercises the right of redemption, it does not re-acquire the property, since ownership was, in fact, never lost; Accurately, redemption eliminates the lien created on the title to the collateral; it defeats the inchoate right of the purchaser at the foreclosure sale and restores the collateral to the same condition as if not foreclosure sale had been conducted; The redemption merely restores the same title free of the foreclosure lien; But the right of redemption does not exist preternaturally; in this jurisdiction, there is no statute that vests a right of redemption over personal property; Accordingly, the pledgor has no right of redemption over property sold pursuant to 2115; Right to Surplus or Deficiency

3.

Art. 2115. If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency, notwithstanding any stipulation to the contrary. (n) If stipulated, the debtor may recover the excess or surplus of the price of the sale over the amount of the principal obligation; By electing to sell the collateral, instead of suing on the principal obligation, the creditor waives any other remedy, and must abide by the results of the foreclosure sale with no right to recover any deficiency;
J. Legal Pledges Pledges that arise by operation of law, which grant the pledgee a right of retention over the property as a means or device by which the pledge is able to obtain payment of what may be due;

Art. 2121. Pledges created by operation of law, such as those referred to in Articles 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. (n)
Examples:

Art. 1944. The bailee cannot retain the thing loaned on the ground that the bailor owes him something, even though it may be by reason of expenses. However, the bailee has a right of retention for damages mentioned in Article 1951. (1747a) Art. 1951. The bailor who, knowing the flaws of the thing loaned, does not advise the bailee of the same, shall be

2.
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liable to the latter for the damages which he may suffer by reason thereof. (1752) Art. 1994. The depositary may retain the thing in pledge until the full payment of what may be due him by reason of the deposit. (1780) Art. 2004. The hotel-keeper has a right to retain the things brought into the hotel by the guest, as a security for credits on account of lodging, and supplies usually furnished to hotel guests. (n) Art. 546. Necessary expenses shall be refunded to every possessor; but only the possessor in good faith may retain the thing until he has been reimbursed therefor. Useful expenses shall be refunded only to the possessor in good faith with the same right of retention, the person who has defeated him in the possession having the option of refunding the amount of the expenses or of paying the increase in value which the thing may have acquired by reason thereof. (453a) Art. 1731. He who has executed work upon a movable has a right to retain it by way of pledge until he is paid. (1600)
Mechanics lien: 1731 Articulates the concept of a mechanics lien; akin to a warehousemans 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 condition upon the execution of work upon the movable; Its creation does not depend upon the owners non-payment; rather, the contractor creates his own lien by performing the work or furnishing the materials; Foreclosure of Legal Pledge

Proceeds shall be used to pay the debt and expenses, and the surplus shall be delivered to the debtor, unlike foreclosure of a conventional pledge under 2115, where the debtor is not entitled to the excess, unless otherwise agreed upon;

Art. 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 one 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. (n) Art. 2121. However, after payment of the debt and expenses, the remainder of the price of the sale shall be delivered to the obligor. (n)
Demand: Essential prior to the foreclosure of a legal pledge; Public Sale Must be conducted within one month after demand;