Learning Activities

Provisions Applicable only to Pledge

The pledgor retains his ownership of the thing pledged. He may, therefore,
sell the same provided the pledgee consents to the sale. As soon as the
pledgee gives his consent, the ownership of the thing pledged is
transferred to the vendee subject to the rights of the pledgee, namely, that
the thing sold may be alienated to satisfy the obligation (Article 2112) and
that the pledgee must continue in possession during the existence of the
pledge. (Article 2093, 2098).
Object of Pledge:
a. All movables within the commerce of man may be pledged as long as
they are susceptible of possession.
b. Incorporeal rights may be pledged. The instruments representing the
pledged rights shall be delivered to the creditor; if they be negotiable
instruments, they must be indorsed.
Cases to read (mortgage):
Vda. De Bautista v. Marcos, 1961 (Links to an external site.)
DBP v. CA, 1996 (Links to an external site.)
Cavite Development Bank v. Sps. Lim, 2000 (Links to an external site.)
Duran v. IAC, 1985 (Links to an external site.)
Additional Requisites for Pledge
Pledge shall take effect against third persons only if the following appear in
a public instrument:
a) Description of the thing pledged.
b) Date of the pledge.
a. Transfer of possession to the creditor or to third person by common
agreement is essential in pledge.
b. Actual delivery is important. o Constructive or symbolic delivery of the
key to the warehouse is sufficient to show that the depositary appointed by
common consent of the parties was legally placed in possession.
Alienation by Owner of Pledge Thing Allowed Subject to Pledge
The thing pledged may be alienated by the pledgor or owner only with the
consent of the pledgee. Ownership of the thing pledged is transmitted to
the vendee or transferee as soon as the pledge consents to the alienation,
but the latter shall continue to have possession.

Case to read:
Northern Motors, Inc. v. Coquia, 1975 (Links to an external site.)
Right of Pledgee to Retain Pledged Thing until Payment of Debt
The possession of the pledgee constitutes his security. Hence, the debtor
cannot demand for its return until the debt secured by it is paid. (See Article
2105; Serrano vs. Court of Appeals, 196 SCRA 107 [1991])
But the right of retention is limited only to the fulfillment of the principal
obligation for which the pledge was created. (Article 2098).
RIGHTS AND DUTIES OF CREDITOR IN A PLEDGE
1) Shall take care of the thing pledged with the diligence of a good father of
a family.
2) Has right to reimbursement of the expenses made for preserving the
thing. Shall be liable for loss or deterioration of the thing by reason of fraud,
negligence, delay or violation of the terms of the contract, but not for
fortuitous events.
3) May bring actions pertaining to the owner of the thing in order to recover
it from, or defend it against, a 3rd person.
4) Cannot use the thing without the authority of the owner. If he uses the
thing without authority, or if he misuses the thing when he was authorized
to use it, the owner may ask that it be judicially or extrajudicially deposited.
5) May use the thing if necessary for its preservation.
6) May either claim another thing in pledge or demand immediate payment
of the principal obligation if he is deceived on the substance or quality of
the thing.
RIGHTS AND DUTIES OF THE PLEDGEE
1) Cannot deposit the thing pledged with a 3rd person, unless there is a
contrary stipulation
 Exception: stipulation authorizing pledgee to transfer possession.
2) Is responsible for the acts of his agents or employees with respect to the
thing pledged.
3) Has no right to use the thing or to appropriate its fruits without authority
from the owner3
4) May cause the public sale of the thing pledged if, without fault on his
part, there is danger of destruction, impairment or dimunition in value of the
thing. The proceeds of the auction shall be a security for the principal
obligation.
PLEDGOR
1) Takes responsibility for the flaws of the thing pledged.
2) Cannot ask for the return of the thing against the will of the creditor,
unless and until he has paid the debt and its interest, with expenses in
proper cases.
3) Is allowed to substitute the thing which is in danger of destruction or
impairment without any fault on the part of the pledgee, with another thing
of the same kind and quality.
4) May require that the thing be deposited with a 3rd person, if through the
negligence or willful act of the pledgee the thing is in danger of being lost or
impaired.
EXTINGUISHMENT OF A PLEDGE
1) Ways to extinguish a pledge:
a) Payment of the debt.
b) Sale of the thing pledged at public auction.
c) Thing pledged is returned by the pledgee to the pledgor or owner.
d) Written statement by the pledgee that he renounces or abandons the
pledge. For this purpose, neither the acceptance by the pledgor or owner
nor the return of the thing pledged is necessary, and the pledgee becomes
a depositary.
2) Presumptions :
a) If, subsequent to the perfection of the pledge, the thing is found in the
possession of the pledgor or owner, there is prima facie presumption that
the thing has been returned by the pledgee.
b) If the thing is in the possession of a 3rd person who received it from the
pledgor or owner after the constitution of the pledge, there is prima facie
presumption that the thing has been returned by the pledgee.
REQUIREMENTS IN SALE OF THE THING PLEDGED BY A CREDITOR,
IF CREDIT IS NOT PAID ON TIME
1) Debt is due and unpaid.
2) Sale must be at a public auction.
3) Notice to the pledgor and owner, stating the amount due.
4) Sale must be made with the intervention of a notary public.
EFFECT OF THE SALE OF THE THING PLEDGED
1) Extinguishes the principal obligation, whether the price of the sale is
more or less than the amount due.
2) if the price is more than amount due, the debtor is not entitled to the
excess unless the contrary is provided.
3) If the price of the sale is less, neither is the creditor entitled to recover
the deficiency. A contrary stipulation is void.
Case: Manila Surety and Fidelity Co., Inc. v. Velayo, 1967  (Links to an
external site.)
Pledgee has the obligation to take care of the thing pledged with the
diligence of a good father of the family. He is entitled to reimbursement of
the expenses incurred for its preservation and he is liable for loss or
deterioration by reason of fraud, negligence, delay or violation of the terms
of the contract. (Articles 1174, 1170).
Pledgee is not authorized to transfer possession of the thing pledged to a
third person.
              o Exception: stipulation authorizing pledgee to transfer
possession. (Article 2100)
The pledgee has no right to use the thing pledged or to appropriate the
fruits thereof without the authority of the owner (Article 2104; see Article
1977). But the pledgee can apply the fruits, income, dividends, or interest, if
owing and thereafter to the principal of his credit. (see Article 2132).
             o Exception: contrary stipulation
The pledgor may ask that the thing pledged be deposited judicially or
extrajudicially.
o if the creditor uses the thing without authority;
o if he misuses the thing in any other way (Article 2104);
o if the thing is in danger of being lost or impaired because of the
negligence or willful act of the pledge.
 

Pledgor cannot ask for the return of the thing pledged until said obligation is
fully paid including interest due thereon and expenses incurred for its
preservation (Article 2099).
              o 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 (Article 2107).
The possession of the thing pledged by the debtor or owner 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.
When the thing pledged is later found in the hands of the pledgor or the
owner, only the accessory obligation of pledge is presumed remitted, not
the principal obligation itself (Article 1274).
The sale of the thing pledged extinguishes the principal obligation whether
the price of the sale is more or less than the amount due.
o 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;
o In the same way, if the price of the sale is less, neither is the creditor
entitled to recover the deficiency. A contrary stipulation is void (Article
2115).
 

Other Important Matters:

Third parties 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 payment.
If credit is due before pledge is redeemed, pledge may collect amount due
on the credit pledged and apply the same to the obligation and return the
excess to pledgor. If two or more things are pledged, pledgee has the right
of choice to which of the things pledged he shall cause to be sold, unless
there is a stipulation to the contrary.
A third person who is not a party to the principal obligation may secure the
latter by pledging his own property. The law grants him the same rights as
a guarantor and he cannot be prejudiced by any waiver of defense by the
principal debtor.
Case: Bank of America v. American Realty Corp., 1999 (Links to an
external site.)
 

LEGAL PLEDGES
1) Necessary expenses shall be refunded to every possessor, but only a
possessor in good faith may retain the thing until he has been reimbursed.
           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 and
by reason thereof (Art. 546)
2) He who has executed work upon a movable has a right to retain it by
way of pledge until he is paid. (Art. 1731)
3) The agent may retain the things which are the objects of agency until the
principal effects the reimbursement and pays the indemnity. (Art. 1914)
4) The laborer’s wages shall be a lien on the goods manufactured or the
work done. (Art. 1707)
NOTES:
Unlike in conventional pledge where the debtor is not entitled to the excess
unless it is agreed otherwise, in legal pledge, the remainder of the price of
the sale after payment of the debt and expenses, shall be delivered to the
debtor.
In legal pledge, the pledge must make a demand of the amount due him
because without such demand, he cannot exercise the right of sale at
public auction.
The pledge must proceed with the sale within one month after demand
otherwise, the debtor may require him to return the thing retained.
Special Laws apply to pawnshops and establishments engaged in making
loans secured by pledges. Provisions of the Civil Code shall apply
subsidiarily to them.