PD No.

114 January 29, 1973: REGULATING THE ESTABLISHMENT AND OPERATION OF

PAWNSHOPS; "Pawnshop Regulation Act"

Purpose: to regulate the establishment of pawnshops and to place their operation on a sound and stable basis to
derive the optimum advantages from them as an additional source of credit; to prevent and mitigate practices
prejudicial to public interest; and to lay down the minimum requirements and standards under which they may
be established and do business.

Pawnshop- a person or entity engaged in the business of lending money on personal property delivered as
security for loans and shall be synonymous, and may be used interchangeably, with pawnbroker or
pawnbrokerage. ; a single proprietorship, partnership or corporation.

Pawner- borrower from a pawnshop.; Pawnee- pawnshop or pawnbroker.

Pawn- personal property delivered by the pawner to the pawnee as security for a loan. (specified chattels such
as guns, knives and similar weapons whose reception in pawn is expressly prohibited by other laws or
regulations shall not be included.)

Pawn ticket- pawnbrokers' receipt for a pawn. It is neither a security nor a printed evidence of indebtedness.

Requirements to engage in the pawnshop business:

1. register with the Bureau of Commerce in the case of single proprietorship or the Securities and
Exchange Commission in the case of a corporation or any other association and

2. secure a license from the appropriate city or municipality having territorial jurisdiction over the place of
establishment and operation.

Requirement of registration with the Central Bank:

1. File an information sheet, under oath, with the Central Bank before commencement of actual operations:

2. Pawnshops duly licensed and operating before the approval of this Decree shall, within 6 months from
the date of effectivity of the same, register with the Central Bank.

Capital: P100,000.00

Citizenship Requirement:

- only Filipino citizens may establish and own a pawnshop organized in the form of a single
proprietorship:

- In case of a partnership, at least 70% of its capital shall be owned by Filipino citizens.

- In case of a corporation, at least 70% of the voting capital stock shall be owned by citizens of the
Philippines, or if no capital stock, at least 70% of the members entitled to vote, shall be Filipino citizens.

- In the case of corporations owning shares in a pawnshop, the citizenship of the individual owners of
voting stock in such corporations shall be the basis of computing the percentage.

Amount of Loan:

- may be agreed upon between the parties.

- Shall not be less than 30% of the appraised value of the security offered for the loan unless the pawner
manifests in writing the desire to borrow a lesser amount.

Rates of Interest:

- No higher rate or greater sum or value for any loan or forbearance than the rate allowed by the Usury
Law
 - No additional charge as insurance premium for the safekeeping and conservation of the article pawned.

- In addition to interest charges, pawnshops may impose a maximum service charge of P5.00, but in no
case to exceed 1% of the principal loan.

-Every pawnbroker shall keep a memorandum book in which shall be entered at the time of each loan or pledge,
an accurate account and description, the amount of money loaned thereon, the date of pawning or pledging the
same, the rate of interest to be paid on the loan, and the name and residence of each pawner, together with a
particular description of such pawner, including his or her nationality, sex, and general appearance, and no
pawnbroker or other person shall alter or erase any entry made in such book.

-Every person pawning or pledging any article or thing with a pawnbroker shall sign his name and give his
address to said pawnbroker. A person who is unable to write shall imprint his thumbmark, and his name shall be
written by a competent person, who shall sign his own name as witness to said thumbmark.

-Every pawnbroker shall, at the time of every such loan or pledge, deliver to each person pawning or pledging
any article or thing a memorandum or ticket signed by such pawnbroker and containing the substance of the
record required to be kept in such pawnbroker's memorandum book in section eleven hereof, excluding the
description of the person so pawning or pledging such article or thing, and no compensation of any kind
whatsoever shall be received by any pawnbroker for any such memorandum or ticket.

-The pawner who fails to pay his obligation on the date it falls due may, within 90 days from the date of
maturity of the obligation, redeem the pawn by payment of the principal of the debt with interest: for the
purpose of computing interest due after maturity of the obligation, the basis shall be the sum of the principal of
the obligation and interest earned at the time the obligation matured.

-In the event the pawner fails to redeem the pawn within 90 days from the date of maturity of the, the
pawnbroker may sell or otherwise dispose of any article taken or received by him in pawn: the pawner shall be
duly notified of such sale on or before the termination of the 90- day period, the notice particularly stating the
date, hour, and place of sale.

-No pawnbroker shall sell or otherwise dispose of any article or thing taken or received in pawn or pledge
except at public auction in his place of business as such pawnbroker or in any other public place within the
territorial limits of the municipality or city where the pawnshop has its place of business, under the control and
direction of an auctioneer with license duly issued by the corresponding authorities, nor shall any such article or
thing be sold or disposed of unless said pawnbroker has published a notice once in at least 2 daily newspapers
printed in the city or municipality during the week preceding the date of such sale. In remote areas, by posting
notices in conspicuous public places within the territorial limits of the city or municipality where the pawnshop
has its place of business. Said notice, whether published or posted, shall be in English, and either in Filipino or
in the local dialect, and shall contain the name of the pawnshop, its owner, address of the establishment, hour,
and date of the auction sale.

-No pawnbroker shall close or transfer his place of business within 3 months after the expiration of the period
for which any article or thing shall have been taken or received by him at his place of business in pawn or
pledge, or before any such article or thing shall have been sold or otherwise disposed of in accordance with the
provisions of this Decree: Provided, however, That removal or transfer of a pawnbroker's place of business
from one place to another within the territorial limits of the same city or municipality may be authorized on
condition that the pawnbroker shall publish a notice of such removal in 2 local daily papers, one in English,
another in Pilipino or in the local dialect, for a period of not less than three days, the last day of which shall take
place five days before the removal, stating in the notice the date of removal, the address of the premises to be
vacated and of the premises to which the pawnshop will transfer; and that he shall likewise post in a
conspicuous place in both premises one copy of the notice in English and another in either Pilipino or the local
dialect during the period of its publication in the said local papers.

The Central Bank is hereby authorized to:

(a) to issue rules and regulations to implement the provisions contained herein:

(b) to require from pawnshops reports of condition and such other reports necessary to determine
compliance with the provisions of this Decree:

(c) to exercise visitatorial powers whenever deemed necessary; and

 (d) to impose such administrative sanctions including the imposition of fines for violations of this
Decree and regulations issued by the Central Bank in pursuance thereto.

Penalties: A fine of not less than P100.00 and not more than P1,000.00 or imprisonment for not less than 30
days and not more than 1 year, or both, at the discretion of the court, shall be imposed for violations of the
provisions of this Decree and its implementing rules and regulations: Provided, That if the violation is
committed by a corporation, partnership or an association, the penalty provided for in this Decree shall be
imposed upon the directors, officers, employees or persons therein responsible for the offense, without
prejudice to civil liabilities arising from the criminal offense.

BETITA vs. GANZON, March 29, 1926

Facts: This action is brought to recover the possession of 4 carabaos with damages. Defendant Alejo de la Flor
recovered a judgment against Tiburcia Buhayan. Under this judgment the defendant Ganzon, as sheriff levied
execution on the carabaos in question which were found in the possession of one Simon Jacinto but registered in
the name of Tiburcia Buhayan. The plaintiff, Eulogio Betita, a third-party claim alleges that the carabaos had
been mortgaged to him and as evidence thereof presented a document, but the sheriff proceeded with the sale of
the animals at public auction where they were purchased by the defendant Clemente Perdena, and this action
was thereupon brought.

Issue: Whether the mere filing of a private document with the sheriff after the levy of execution can create a lien
of pledge superior to the attachment.

Held:

The alleged pledge is ineffective, because the plaintiff pledgee never had actual possession of the property
within the meaning the Civil Code. But it is argued that at the time of the levy the animals in question were in
the possession of one Simon Jacinto; that Jacinto was the plaintiff's tenant; and that the tenant's possession was
the possession of his landlord. In order to constitute the contract of pledge, that the pledge be placed in the
possession of the creditor or of a 3 rd person appointed by common consent. In his commentary on this article
Manresa says: This requisite is most essential and is characteristic of a pledge without which the contract cannot
be regarded as entered into or completed, because, precisely, in this delivery lies the security of the pledge.

Therefore, in It is, of course, evident that the delivery of possession implies a change in the actual possession of
the property pledged and that a mere symbolic delivery is not sufficient. In the present case the animals in
question were in the possession of Tiburcia Buhayan and Simon Jacinto before the alleged pledge was entered
into and apparently remained with them until the execution was levied, and there was no actual delivery of
possession to the plaintiff himself. There was therefore in reality no change in possession. From what has been
said it follows that the judgment appealed from must be reversed and it is ordered and adjudged that the plaintiff
take nothing by his action.

YULIONGSIU vs. PNB, January 26, 1954

Facts:

Yuliongsiu was the owner of 2 vessels, namely: The M/S Surigao, valued at P109,925.78 and the M/S Don
Dino, valued at P63,000.00, and operated the FS-203, valued at P210,672.24, which was purchased by him from
the Philippine Shipping Commission, by installment or on account. As of January or February, 1943, plaintiff
had paid to the Philippine Shipping Commission only the sum of P76,500 and the balance of the purchase price
was payable at P50,000 a year, due on or before the end of the current year.

Yuliongsiu obtained a loan of P50,000 from PNB. To guarantee its payment, plaintiff pledged the M/S Surigao,
M/S Don Dino and its equity in the FS-203, as evidenced by the pledge contract, duly registered with the office
of the Collector of Customs for the Port of Cebu. Yuliongsiu effected partial payment of the loan in the sum of
P20,000. The remaining balance was renewed by the execution of 2 promissory notes in the bank's favor. These
two notes were never paid at all by Yuliongsiu on their respective due dates.

PNB filed criminal charges against Yuliongsiu and two other accused for estafa thru falsification of commercial
documents, and they were convicted by the trial court and sentenced to indemnify PNB in the sum of P184,000.
CA affirmed conviction. The corresponding writ of execution issued to implement the order for indemnification
was returned unsatisfied as Yuliongsiu was totally insolvent .Meanwhile, together with the institution of the
criminal action, PNB took physical possession of three pledged vessels while they were at the Port of Cebu, and
after the first note fell due and was not paid, the Manager of PNB, acting as attorney-in-fact of Yuliongsiu
pursuant to the terms of the pledge contract, executed a document of sale, transferring the two pledged vessels
and Yuliongsiu's equity in FS-203, to PNB for P30,042.72.The FS-203 was subsequently surrendered by PNB
to the Philippine Shipping which rescinded the sale to Yuliongsiu, for failure to pay the remaining instalments
on the purchase price. The other two boats were sold by PNB to third parties. Yuliongsiu commenced action in
the CFI to recover the three vessels or their value and damages from PNB. The lower court rendered its decision
ruling: (a) that the bank's taking of physical possession of the vessels was justified by the pledge contract and
the law; (b) that the private sale of the pledged vessels by PNB to itself without notice to the plaintiff-pledgor as
stipulated in the pledge contract was likewise valid; and (c) that the PNB should pay the sums of P1,153.99 and
P8,000, as his remaining account balance, or set-off these sums against the indemnity which Yuliongsiu was
ordered to pay to it in the criminal cases.

Issue: W/N the contract was a chattel mortgage so that PNB cannot take possession of the chattels until after
there has been default. NO, PLEDGE

Held:

The parties stipulated as a fact that Exhibit "A" & "1-Bank" is a pledge contract. Necessarily, this judicial
admission binds Yuliongsiu. Without any showing that this was made thru palpable mistake, no amount of
rationalization can offset it. PNB as pledgee was therefore entitled to the actual possession of the vessels. While
it is true that Yuliongsiu continued operating the vessels after the pledge contract was entered into, his
possession was expressly made “subject to the order of the pledgee." The provision of Art. 2110 of the present
Civil Code being new, cannot apply to the pledge contract here which was entered into on June 30, 1947.

On the other hand, there is an authority supporting the proposition that the pledgee can temporarily entrust the
physical possession of the chattels pledged to the pledgor without invalidating the pledge. In such a case, the
pledgor is regarded as holding the pledged property merely as trustee for the pledgee. Yuliongsiu also urge Us
to rule that constructive delivery is insufficient to make pledge effective. The type of delivery will depend upon
the nature and the peculiar circumstances of each case. The parties here agreed that the vessels be delivered by
the "pledgor to the pledgor who shall hold said property subject to the order of the pledgee."

Considering the circumstances of this case and the nature of the objects pledged, i.e., a vessel used in maritime
business, such delivery is sufficient. Since PNB was, pursuant to the terms of pledge contract, in full control of
the vessels thru Yuliongsiu, the former could take actual possession at any time during the life of the pledge to
make more effective its security. Its taking of the vessels therefore was not unlawful. Nor was it unjustified
considering that Yuliongsiu had just defrauded the PNB in the huge sum of P184,000.

LOPEZ vs. CA, June 29, 1982

Facts:

Benito H. Lopez obtained a loan in the amount of P20,000.00 from the Prudential Bank and Trust Company. He
executed a promissory note for the same amount, in favor of the said Bank, binding himself to repay the said
sum one year after the said date, with interest at the rate of 10% per annum. In addition to said promissory note,
he executed Surety Bond No. 14164 in which he, as principal, and Philippine American General Insurance Co.,
Inc. (PHILAMGEN) as surety, bound themselves jointly and severally in favor of Prudential Bank for the
payment of the sum of P20,000.00. Lopez also executed in favor of Philamgen an indemnity agreement
whereby he agreed "to indemnify the Company and keep it indemnified and hold the same harmless from and
against any and all damages, losses, costs, stamps, taxes, penalties, charges and expenses of whatever kind and
nature which the Company shall or may at any time sustain or incur in consequence of having become surety
upon the bond." At the same time, Lopez executed a deed of assignment of 4,000 shares of the Baguio Military
Institution entitled "Stock Assignment Separate from Certificate" With the execution of this deed of assignment,
Lopez endorsed the stock certificate and delivered it to Philamgen. It appears from the evidence on record that
the loan of P20,000.00 was approved conditioned upon the posting of a surety bond of a bonding company
acceptable to the bank. Thus, Lopez persuaded Emilio Abello, Assistant Executive Vice-President of Philamgen
and member of the Bond Under writing Committee to request Atty. Timoteo J. Sumawang, Assistant Vice-
President and Manager of the Bonding Department, to accommodate him in putting up the bond against the
security of his shares of stock with the Baguio Military Institute, Inc. It was their understanding that if he could
not pay the loan, VicePresident Abello and Pio Pedrosa of the Prudential Bank would buy the shares of stocks
and out of the proceeds thereof, the loan would be paid to the Prudential Bank. On June 2, 1960, Lopez'
obligation matured without it being settled.
Issue: a) Where a party "sells, assigns and transfers" and delivers shares of stock to another, duly endorsed in
blank, in consideration of a contingent obligation of the former to the latter, and, the obligations having arisen,
the latter causes the shares of stock to be transferred in its name, what is the juridical nature of the transaction-a
dation in payment or a pledge?

b) Where the debtor assigns the shares of stock to the creditor under an agreement between the latter and
determinate third persons that the latter would buy the shares of stock so that the obligations could be paid out
of the proceeds, was there a novation of the obligation by substitution of debtor?

Held:

a. The stock assignment is in truth and in fact, a pledge. Considering the explicit terms of the deed denominated
"Stock Assignment Separate from Certificate", hereinbefore copied verbatim, Lopez sold, assigned and
transferred unto Philamgen the stocks involved "for and in consideration of the obligations undertaken" by
Philamgen "under the terms and conditions of the surety bond executed by it in favor of the Prudential Bank"
and "for value received". On its face, it is neither pledge nor dation in payment. The document speaks of an
outright sale as there is a complete and unconditional divestiture of the incorporeal property consisting of stocks
from Lopez to Philamgen. The transfer appears to have been an absolute conveyance of the stocks to Philamgen
whether or not Lopez defaults in the payment of P20,000.00 to Prudential Bank. While it is a conveyance in
consideration of a contingent obligation, it is not itself a conditional conveyance. It is true that if Lopez should
"well and truly perform and fulfill all the undertakings, covenants, terms, conditions, and agreements stipulated"
in his promissory note to Prudential Bank, the obligation of Philamgen under the surety bond would become
null and void. Corollarily, the stock assignment, which is predicated on the obligation of Philamgen under the
surety bond, would necessarily become null and void likewise, for want of cause or consideration under Article
1352 of the New Civil Code. But this is not the case here because aside from the obligations undertaken by
Philamgen under the surety bond, the stock assignment had other considerations referred to therein as "value
received". Hence, based on the manifest terms thereof, it is an absolute transfer. Notwithstanding the express
terms of the "Stock Assignment Separate from Certificate", however, We hold and rule that the transaction
should not be regarded as an absolute conveyance in view of the circumstances obtaining at the time of the
execution thereof. It should be remembered that on June 2, 1959, the day Lopez obtained a loan of P20,000.00
from Prudential Bank, Lopez executed a promissory note for 20,000.00, plus interest at the rate of 10% per
annum, in favor of said Bank. He likewise posted a surety bond to secure his full and faithful performance of his
obligation under the promissory note with Philamgen as his surety. In return for the undertaking of Philamgen
under the surety bond, Lopez executed on the same day not only an indemnity agreement but also a stock
assignment. The indemnity agreement and the stock assignment must be considered together as related
transactions because in order to judge the intention of the contracting parties, their contemporaneous and
subsequent acts shall be principally considered. Thus, considering that the indemnity agreement connotes a
continuing obligation of Lopez towards Philamgen while the stock assignment indicates a complete discharge of
the same obligation, the existence of the indemnity agreement whereby Lopez had to pay a premium for a
period of one year and agreed at all times to indemnify Philamgen of any and all kinds of losses which the latter
might sustain by reason of it becoming a surety, is inconsistent with the theory of an absolute sale for and in
consideration of the same undertaking of Philamgen. There would have been no necessity for the execution of
the indemnity agreement if the stock assignment was really intended as an absolute conveyance. Hence, there
are strong and cogent reasons to conclude that the parties intended said stock assignment to complement the
indemnity agreement and thereby sufficiently guarantee the indemnification of Philamgen should it be required
to pay Lopez' loan to Prudential Bank.

The following requirements of a contract of pledge have been satisfied: (1) that it be constituted to secure the
fulfillment of a principal obligation; (2) that the pledgor be the absolute owner of the thing pledged; and (3) that
the person constituting the pledge has the free disposal of the property, and in the absence thereof, that he be
legally authorized for the purpose. Article 2087 of the New Civil Code providing that it is also the essence of
these contracts (pledge, mortgage, and antichresis) that when the principal obligation becomes due, the things in
which the pledge or mortgage consists may be alienated for the payment to the creditor, further supports the
court's ruling. In case of doubt as to whether a transaction is a pledge or a dation in payment, the presumption is
in favor of pledge, the latter being the lesser transmission of rights and interests.

b. No novation took place. Under Article 1291 of the New Civil Code, obligations may be modified by: (1)
changing their object or principal condition; (2) substituting the person of the debtor; (3) subrogating a third
person in the rights of the creditor. And in order that an obligation may be extinguished by another which
substitute the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new
obligations be on every point incompatible with each other. (Article 1292, N.C.C.) Novation which consists in
substituting a new debtor in the place of the original one, may be made even without the knowledge or against
the will of the latter, but not without the consent of the creditor. Payment by the new debtor gives him the rights
mentioned in Articles 1236 and 1237.

In the case at bar, the undertaking of Messrs. Emilio Abello and Pio Pedrosa that they would buy the shares of
stock so that Philamgen could be reimbursed from the proceeds that it paid to Prudential Bank does not
necessarily imply the extinguishment of the liability of petitioner Lopez. Since it was not established nor shown
that Lopez would be released from responsibility, the same does not constitute novation and hence, Philamgen
may still enforce the obligation. As the Court of Appeals correctly held that "(t)he representation of Mr. Abello
to Atty. Sumawang that he and Mr. Pedrosa would buy the stocks was a purely private arrangement between
them, not an agreement between (Philamgen) and (Lopez)" and which the Court affirms.

The promise of Abello and Pedrosa to buy the shares from private respondent not having materialized (which
promise was given to said respondent only and not to petitioner) and no action was taken against the two by said
respondent who chose instead to sue the petitioner on the Indemnity Agreement, it is quite clear that this
respondent has abandoned its right and interest over the pledged properties and must, therefore, release or return
the same to the petitioner-pledgor upon the latter's satisfaction of his obligation under the Indemnity Agreement.
There is no double payment nor unjust enrichment in this case because the shares of stock were merely pledged.

SARMIENTO vs. JAVELLANA, October 2, 1922

Facts:

Defendant loaned the plaintiffs the sum of P1,500 with interest at the rate of 25 per cent per annum for the term
of one year. To guarantee this loan, the plaintiffs pledged a large medal with a diamond in the center and
surrounded with ten diamonds, a pair of diamond earrings, a small comb with twenty-two diamonds, and two
diamond rings, which the contracting parties appraised at P4,000. At the maturity of this loan the plaintiff
Eusebio M. Villaseñor, was unable to pay the loan, but he was able to obtian from the defendant an extension,
with the condition that the loan was to continue. Days past, the plaintiff Eusebio M. Villaseñor, in company
with Carlos M. Dreyfus, went to the house of the defendant and offered to pay the loan and redeem the jewels,
taking with him, for this purpose, the sum of P11,000, but the defendant then informed them that the time for
the redemption had already elapsed. The plaintiffs now bring this action to compel the defendant to return the
jewels pledged, or their value, upon the payment by them of the sum they owe the defendant, with the interest
thereon.

Issue: WON the plaintiffs' action for the recovery of the jewels pledged has prescribed.

Held:

Without deciding whether or not the action to recover the thing pledged may prescribe in any case, it not being
necessary for the purposes of this opinion, but supposing that it may, still the defendant's contention is
untenable. In the document evidencing the loan in question there is stated: "I transfer by way of pledge the
following jewels." That this is a valid contract of pledge there can be no question. As a matter of fact the
defendant does not question it, but take s it for granted. However, it is contended that the obligation of the
defendant to return the jewels pledged must be considered as not stated in writing, for this obligation is not
expressly mentioned in the document. But if this contract of pledge is in writing, it must necessarily be admitted
that the action to enforce the right, which constitutes the essence of this contract, is covered by a written
contract. The duty of the creditor to return the thing pledged in case the principal obligation is fulfilled is
essential in all contracts of pledge. This constitutes, precisely, the consideration of the debtor in this accessory
contract, so that if this obligation of the creditor to return to thing pledged, and the right of the debtor to demand
the return thereof, are eliminated, the contract would not be a contract of pledge. It would be a donation. If the
right of the plaintiffs to recover the thing pledged is covered by a written contract, the time for the prescription
of this action is ten years, according to section 43 of the Code of Civil Procedure. Computing the time from that
date to that of the filing of the complaint in this cause, October 9, 1920, it appears that the ten years fixed by the
law for the prescription of the action have not yet elapsed. On the other hand, the contract of loan with pledge is
in writing and the action of the defendant for the recovery of the loan does not prescribe until after ten years. It
is unjust to hold that the action of the plaintiffs for the recovery of the thing pledged, after the payment of the
loan, has already prescribed while the action of the defendant for the recovery of the loan has not yet prescribed.
The result of this would be that the defendant might have collected the loan and at the same time kept the thing
pledged. The motion for reconsideration is denied.

MANILA SURETY vs. VELAYO, October 26, 1967

Facts:

In 1953, Manila Surety & Fidelity Co., upon request of Rodolfo Velayo, executed a bond for P2,800.00 for the
dissolution of a writ of attachment obtained by one Jovita Granados in a suit against Rodolfo Velayo in the
Court of First Instance of Manila. Velayo undertook to pay the surety company an annual premium of P112.00;
to indemnify the Company for any damage and loss of whatsoever kind and nature that it shall or may suffer, as
well as reimburse the same for all money it should pay or become liable to pay under the bond including costs
and attorneys' fees. As "collateral security and by way of pledge" Velayo also delivered four pieces of jewelry
to the Surety Company "for the latter's further protection", with power to sell the same in case the surety paid or
become obligated to pay any amount of money in connection with said bond, applying the proceeds to the
payment of any amounts it paid or will be liable to pay, and turning the balance, if any, to the persons entitled
thereto, after deducting legal expenses and costs. Judgment having been rendered in favor of Jovita Granados
and against Rodolfo Velayo, and execution having been returned unsatisfied, the surety company was forced to
pay P2,800.00 that it later sought to recoup from Velayo; and upon the latter's failure to do so, the surety caused
the pledged jewelry to be sold, realizing therefrom a net product of P235.00 only. Thereafter and upon Velayo's
failure to pay the balance, the surety company brought suit in Court. Velayo countered with a claim that the sale
of the pledged jewelry extinguished any further liability on his part under Article 2115 of the 1950 Civil Code,
which recites: 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.

Issue: Whether or not the sale of the pledged jewelry extinguished Velayo’s liability

Held:

The core of the appealed decision is the following portion thereof: It is thus crystal clear that the main
agreement between the parties is the Indemnity Agreement and if the pieces of jewelry mentioned by the
defendant were delivered to the plaintiff, it was merely as an added protection to the latter. There was no
understanding that, should the same be sold at public auction and the value thereof should be short of the
undertaking, the defendant would have no further liability to the plaintiff. On the contrary, the last portion of the
said agreement specifies that in case the said collateral should diminish in value, the plaintiff may demand
additional securities. This stipulation is incompatible with the idea of pledge as a principal agreement. In this
case, the status of the pledge is nothing more nor less than that of a mortgage given as a collateral for the
principal obligation in which the creditor is entitled to a deficiency judgment for the balance should the
collateral not command the price equal to the undertaking. It appearing that the collateral given by the defendant
in favor of the plaintiff to secure this obligation has already been sold for only the amount of P235.00, the
liability of the defendant should be limited to the difference between the amounts of P2,800.00 and P235.00 or
P2,565.00. The above quoted reasoning of the appealed decision is unsound. The accessory character is of the
essence of pledge and mortgage. As stated in Article 2085 of the 1950 Civil Code, an essential CRED TRANS
Digest Pool | Atty. Sarona SY 2015-2016 142 requisite of these contracts is that they be constituted to secure
the fulfillment of a principal obligation, which in the present case is Velayo's undertaking to indemnify the
surety company for any disbursements made on account of its attachment counterbond. Hence, the fact that the
pledge is not the principal agreement is of no significance nor is it an obstacle to the application of Article 2115
of the Civil Code. The reviewed decision further assumes that the extinctive effect of the sale of the pledged
chattels must be derived from stipulation. This is incorrect, because Article 2115, in its last portion, clearly
establishes that the extinction of the principal obligation supervenes by operation of imperative law that the
parties cannot override: If the price of the sale is less, neither shall the creditor be entitled to recover the
deficiency notwithstanding any stipulation to the contrary. The provision is clear and unmistakable, and its
effect cannot be evaded. By electing to sell the articles pledged, instead of suing on the principal obligation, the
creditor has waived any other remedy, and must abide by the results of the sale. No deficiency is recoverable.

PARAY vs. RODRIGUEZ, January 24, 2006

Facts:

Respondents were the owners, in their respective personal capacities, of shares of stock in a corporation known
as the Quirino-LeonorRodriguez Realty Inc. Sometime during the years 1979 to 1980, respondents secured by
way of pledge of some of their shares of stock to petitioners Bonifacio and Faustina Paray ("Parays") the
payment of certain loan obligations. When the Parays attempted to foreclose the pledges on account of
respondents’ failure to pay their loans, respondents filed complaints with the Regional Trial Court of Cebu City.
The actions, which were consolidated and tried before RTC Branch 14, Cebu City, sought the declaration of
nullity of the pledge agreements, among others. However the RTC dismissed the complaint and gave "due
course to the foreclosure and sale at public auction of the various pledges subject of these two cases." This
decision attained finality after it was affirmed by the Court of Appeals and the Supreme Court. Respondents
then received Notices of Sale which indicated that the pledged shares were to be sold at public auction.
However, before the scheduled date of auction, all of respondents caused the consignation with the RTC Clerk
of Court of various amounts. It was claimed that respondents had attempted to tender these payments to the
Parays, but had been rebuffed. Notwithstanding the consignations, the public auction took place as scheduled,
with petitioner Vidal Espeleta successfully bidding the amount of P6,200,000.00 for all of the pledged shares.
None of respondents participated or appeared at the auction. Respondents instead filed a complaint seeking the
declaration of nullity of the concluded public auction.

Issue: Whether or not pledged shares of stock auctioned off in a notarial sale could still be redeemed by their
owners.

Held: The subject sale of pledged shares was an extrajudicial sale, specifically a notarial sale, as distinguished
from a judicial sale as typified by an execution sale. Under the Civil Code, the foreclosure of a pledge occurs
extrajudicially, without intervention by the courts. All the creditor needs to do, if the credit has not been
satisfied in due time, is to proceed before a Notary Public to the sale of the thing pledged. The decision to
proceed with the sale by public auction remains in the sole discretion of the Parays, who could very well choose
not to hold the sale without violating the final judgments in the aforementioned civil cases. If the sale were truly
in compliance with a final judgment or order, the Parays would have no choice but to stage the sale for then the
order directing the sale arises from judicial compulsion. But nothing in the dispositive portion directed the sale
at public auction as a mandatory recourse, and properly so since the sale of pledged property in public auction
is, by virtue of the Civil Code, extrajudicial in character. The right to redeem property sold as security for the
satisfaction of an unpaid obligation does not exist preternaturally. Neither is it predicated on proprietary right,
which, after the sale of property on execution, leaves the judgment debtor and vests in the purchaser. Instead, it
is a bare statutory privilege to be exercised only by the persons named in the statute. The right of redemption
over mortgaged real property sold extrajudicially is established by Act No. 3135, as amended. The said law
does not extend the same benefit to personal property. In fact, there is no law in our statute books which vests
the right of redemption over personal property. Act No. 1508, or the Chattel Mortgage Law, ostensibly could
have served as the vehicle for any legislative intent to bestow a right of redemption over personal property,
since that law governs the extrajudicial sale of mortgaged personal property, but the statute is definitely silent
on the point. And Section 39 of the 1997 Rules of Civil Procedure starkly utters that the right of redemption
applies to real properties, not personal properties, sold on execution. Under the Civil Code, it is the pledgee, and
not the pledgor, who is given the right to choose which of the items should be sold if two or more things are
pledged. No similar option is given to pledgors under the Civil Code. Moreover, there is nothing in the Civil
Code provisions governing the extrajudicial sale of pledged properties that prohibits the pledgee of several
different pledge contracts from auctioning all of the pledged properties on a single occasion, or from the buyer
at the auction sale in purchasing all the pledged properties with a single purchase price. The relative
insignificance of ascertaining the definite apportionments of the sale price to the individual shares lies in the
fact that once a pledged item is sold at auction, neither the pledgee nor the pledgor can recover whatever
deficiency or excess there may be between the purchase price and the amount of the principal obligation. There
is no doubt that if the principal obligation is satisfied, the pledges should be terminated as well. Article 2098 of
the Civil Code provides that the right of the creditor to retain possession of the pledged item exists only until the
debt is paid. Article 2105 of the Civil Code further clarifies that 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. At the same time,
the right of the pledgee to foreclose the pledge is also established under the Civil Code. When the credit has not
been satisfied in due time, the creditor may proceed with the sale by public auction under the procedure
provided under Article 2112 of the Code.

SERRANO V. CA, April 22, 1991 

Facts:
Serrano bought some jewelry from Ribaya.  Due to need of finances, she decided to have the jewelry pawned. 
She instructed her secretary to do so for  her,  which  the  secretary  did  but  absconded  after  receiving  the
proceeds. It  is  to  be  noted  that  the  pawnshop  ticket  indicated  that  the jewelry  was  redeemable  “by 
presentation  by  the  bearer.”  Afterwards, there was a lead on where the jewelry was pawned.  An investigation
was done to verify the suspicion.  The jewelry was to be sold in a public auction then.  The petitioner and police
authorities informed the pawnshop owner not  to  sell  the  jewelry  as  she  was  the  rightful  owner  thereof.
Despite of this  however,  the  jewelry  was  redeemed  by  a  Tomasa  de  Leon  who presented the pawnshop
ticket.  
 
HELD:
Having been informed by the petitioner and the police that jewelry pawned to it was either stolen or involved in
an embezzlement of the proceeds of the pledge, pawnbroker became duty bound to hold the things pledged and
to  give  notice  to  the  petitioner  and  authorities  of  any  effort  to  redeem them.  Such a duty was imposed
by Article 21 of the CC.  The circumstance that the pawn ticket stated that the pawn was redeemable by the
bearer, didn’t dissolve this duty.  The pawn ticket wasn’t a negotiable instrument under the NIL, nor was it a
negotiable document of title under Article 1507of the CC.