 CREDIT TRANSACTIONS

 PLEDGE
(Arts 2093 – 2123)

 Definition

 A contract wherein the debtor delivers to the creditor or to a third person a movable or
document evidencing incorporeal rights for the purpose of securing fulfillment of a principal
obligation with the understanding that when the obligation is fulfilled, the thing delivered shall
be returned with all its fruits and accessions.

 Review of the provisions common to pledge, mortgage, and antichresis

 Special Requisites (in addition to the common essential requisites):

1. Possession of the thing pledged must be transferred to the creditor or a third person by
agreement (Art 2093);

2. It can only cover movable property and incorporeal rights evidenced by documents of title and
the instruments proving the right pledged shall be delivered to the creditor, and if negotiable
must be endorsed (Art 2094); and

3. The description of the thing pledged and the date must appear in a public instrument to bind
third persons, but not for the validity of the contract (Art 2096).

 Kinds:

1. Conventional /Voluntary – created by contract

2. Legal – created by operation of law (examples: Art. 546, 1731 and 1914 NCC)

 Example (Bar 2009)

 XVII. Rosario obtained a loan of P100,000.00 from Jennifer, and pledged her diamond ring. The
contract signed by the parties stipulated that if Rosario is unable to redeem the ring on due date,
she will execute a document in favor of Jennifer providing that the ring shall automatically be
considered full payment of the loan.

 Example (Bar 2009)

 Is the contract valid? Explain. (3%)

 Will your answer to [a] be the same if the contract stipulates that upon failure of Rosario to
redeem the ring on due date, Jennifer may immediately sell the ring and appropriate the entire
proceeds thereof for herself as full payment of the loan? Reasons. (3%)

 Example (Bar 2015)

 XVI. Donna pledged a set of diamond ring and earrings to Jane for P200,000.00 She was made to
sign an agreement that if she cannot pay her debt within six months, Jane could immediately
appropriate the jewelry for herself. After six months, Donna failed to pay. Jane then displayed
the earrings and ring set in her jewelry shop located in a mall. A buyer, Juana, bought the jewelry
set for P300,000.00.

 Example (Bar 2015)

 a) Was the agreement which Donna signed with Jane valid? Explain with legal basis. (2%)

 b) Can Donna redeem the jewelry set from Juana by paying the amount she owed Jane to Juana?
Explain with legal basis. (2%)

 c) Give an example of a pledge created by operation of law. (2%)

 Example (Bar 2004, #VI)

 ABC loaned to MNO P40,000.00 for which the latter pledged 400 shares of stocks in XYZ Inc. It
was agreed that if the pledgor failed to pay the loan with 10% yearly interest within 4 years, the
pledgee is authorized to foreclose on the shares of stocks. As required MNO delivered
possession of the shares to ABC with the understanding that the shares would be returned to
MNO upon the payment of the loan. However, the loan was not paid on time.

 Example (Bar 2004, #VI)

 A month after 4 years, may the shares of stock pledged be deemed owned by ABC or not?
Reason.

 NOTES:

1. The provisions of possession, care and sale of the thing as well as on the termination of the
pledge governing conventional pledges are applicable to pledges created by operation of law
(Art 2121)

2. Unlike, however, in conventional pledge where the debtor is not entitled to the excess unless it is
otherwise agreed, in legal pledge, the remainder of the price of the sale after payment of the
debt and expenses, shall be delivered to the debtor.

3. In legal pledge, there is no definite period for the payment of the principal obligation. The
pledgee must make a demand for the payment of the amount due him; otherwise he cannot
exercise the right of sale at public auction (Art 2122)

 Characteristics:

1. Real contract – it is perfected by the delivery of the thing pledged by the debtor who is called
the pledgor to the creditor who is called the pledgee, or to a third person by common
agreement;
2. Accessory contract – it has no independent existence of its own;

3. Unilateral contract – it creates an obligation solely on the part of the creditor to return the thing
subject thereof upon the fulfilment of the principal obligation; and

4. Subsidiary contract – the obligation incurred does not arise until the fulfillment of the principal
obligation which is secured.

 Consideration in pledge:

1. Insofar as the pledgor is concerned, the cause is the principal obligation.

2. If the pledgor is not the debtor, the cause is the compensation stipulated for the pledge or the
mere liberality of the pledgor.

 Extent of pledge

 Unless stipulated otherwise, pledge extends to the fruits, interests or earnings of the thing

 Can you give an example?

 RIGHTS AND OBLIGATIONS OF

PLEDGOR

 Rights of the Pledgee

1. Option to demand replacement or immediate payment of the debt in case of deception as to

substance or quality (Art 2109)

2. To sell at public auction in case of reasonable grounds to fear destruction or impairment of the
thing without his fault (Art 2108)

3. To choose which of several things pledged shall be sold

4. To bring actions pertaining to the owner (Art 2103)

 Review: basic Civil Pro concepts

1. Actions

2. Cause of action

3. Right of action

4. Dismissal of action due to Failure to state cause of action

 Rights of the Pledgee

5. To bid at the public auction (Art 2113)

 6. To appropriate the thing in case of failure of the 2nd public auction (Art 2112)

7. To apply said fruits, interests or earnings to the interest, if any, then to the principal of the credit
(Art 2102)

8. To retain excess value received in the public sale (Art 2115)

 Rights of the Pledgee

9. To retain the thing until after full payment of the debt (Art 2098)

10. To be reimbursed for the expenses made for the preservation of the thing pledged (Art 2099)

11. To object to the alienation of the thing

12. To possess the thing (Art 2098)

13. To sell at public auction in case of non-payment of debt at maturity (Art 2112) To choose which
of the several things pledged shall be sold (Art 2119)

 Rights of the Pledgee

14. Option to demand replacement or immediate payment of the debt in case of deception as to
substance or quality (Art 2109)

15. To sell at public auction in case of reasonable grounds to fear destruction or impairment of the
thing without his fault (Art 2108)

16. To bring actions pertaining to the owner (Art 2103)

17. To choose which of several things pledged shall be sold

18. To bid at the public auction (Art 2113)

 Rights of the Pledgee

19. To appropriate the thing in case of failure of the 2nd public auction (Art 2112)

20. To apply said fruits, interests or earnings to the interest, if any, then to the principal of the credit (Art
2102)

21. To retain excess value received in the public sale (Art 2115)

22. To retain the thing until after full payment of the debt (Art 2098)

23. To be reimbursed for the expenses made for the preservation of the thing pledged (Art 2099)

 Rights of the Pledgee

24. To object to the alienation of the thing

25. To possess the thing (Art 2098)

26. To sell at public auction in case of non-payment of debt at maturity (Art 2112)

27. To choose which of the several things pledged shall be sold (Art 2119)

 Obligations of the Pledgee

1. Take care of the thing with the diligence of a good father of a family (Art 2099)

2. Not to use thing unless authorized or by the owner or its preservation requires its use (Art 2104)

3. Not to deposit the thing with a 3rd person unless so stipulated (Art 2100)

 Obligations of the Pledgee

4. Responsibility for acts of agents and employees as regards the thing (Art 2100)

5. To advise pledgor of danger to the thing (Art 2107)

6. To advise pledgor of the result of the public auction (Art 2116)

 RIGHT OF PLEDGOR TO SUBSTITUTE THING PLEDGED (ART.2107)

 Requisites:

 1. The pledgor has reasonable grounds to fear the destruction or impairment of the thin
pledged

 2. There is no fault on the part of the pledgee

 3. The pledgor is offering in place of the thing, another thing in pledge which is of the
same kind and quality as the former

 4. The pledge does not choose to exercise his right to cause the thing pledged to be sold
at public auction

 NOTE:

 The pledgee’s right to have the thing pledged sold at public sale granted under the Article 2108
is superior to that given to the pledgor to substitute the thing pledged under Article 2107.

 Give me an example!

 Example (2014 Bar, Civil Law Question #7)

 Prohibition against double pledge

 Property which has been lawfully pledged to one creditor cannot be pledged to another as long
as the first one subsists.

 What is the practical reason for this?

 NOTE: Possession of a creditor of the thing pledged is an essential requisite of pledge.

 Extinguishment of Pledge (CRAPS)

1. For the same causes as all other obligations (Art 1231)

2. Return of the thing pledged by the pledgee to the pledgor (Art 2110)

3. Statement in writing by the pledgee that he renounces or abandons the pledge (Art 2111)

4. Payment of the debt (Art 2105)

5. Sale of thing pledged at public auction (Art 2115)

 NOTE:

 The possession by the debtor or owner of the thing pledged subsequent to the perfection of the
pledge gives rise to a prima facie presumption that the thing has been returned and, therefore,
that the pledge has been extinguished but not the principal obligation itself. (Art 2110)

 Requirements for sale of thing pledged at public auction: (Art 2112)

1. The debt is due and unpaid

2. Sale must be at a public auction

3. There must be notice to the pledgor and owner, stating the amount due

4. Sale must be with the intervention of a notary public

 Effects of sale of the thing pledged: (Art 2115)

1. 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

 Give an illustrative example!

 Effect of sale of the thing pledged: (Art 2115)

2. If the price of the sale is more than the amount due the creditor, the debtor is not entitled to the
excess unless the contrary is provided

 Give an illustrative example!

 Effect of sale of the thing pledged: (Art 2115)

3. If the price of the sale is less, the creditor is not entitled to recover the deficiency even if there is
a stipulation to that effect

 Give an illustrative example!

 END

 Any questions?

 Now…to test your comprehension...