CREDIT TRANSACTIONS –TITLE XVI - Pledge, Mortgage and Antichresis CHAPTER 2
Pledge (provisions applicable only to pledge)
Article 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.
Transfer of possession essential in pledge.
A pledge is a real contract which requires delivery for its
perfection. (Art. 1316.) An agreement to constitute a
pledge only gives rise to a personal action between the
contracting parties. (Art. 2092.)
(1) Validity of Pledge
(2) Transfer of Actual Possession
(3) Symbolic or Constructive Delivery
Article 2094. All movables which are within commerce
may be pledged, provided they are susceptible of
possession.
Article 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.
Article 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.
Article 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.
Article 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.
Article 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.
Article 2100. The pledgee cannot deposit the thing
pledged with a third person, unless there is a stipulation
authorizing him to do so.
The pledgee is responsible for the acts of his agents or
employees with respect to the thing pledged.
Article 2101. The pledgor has the same responsibility as
a bailor in commodatum in the case under article 1951.
Article 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.
EXAMPLE:
D borrowed from C P1,000.00 at 12% interest, with
certificates of stocks as security. The interest is payable
six months after the execution of the contract.
If the stocks earn dividends, the same shall also be
subject to the pledge if there is no stipulation to the
contrary. C shall apply such dividends to the interest, if
any, owing him after six months. If none is owing him or
insofar as the dividends may exceed the interest due, C
shall credit it to the principal of P1,000.00 when it
matures.
Article 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.
CREDIT TRANSACTIONS –TITLE XVI - Pledge, Mortgage and Antichresis CHAPTER 2
Article 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 pledgee not to use thing pledged.
The pledgee who is in possession of the thing pledged
has no right to make use of it without permission from
the owner. This is the same rule in deposit. (see Art.
1977.) It is in consequence of the fact that the pledgor
in parting with his property transmits only possession
but not ownership.
Right of pledgor to ask that thing pledged be
deposited.
In the following cases, the owner may ask that the thing
pledged be deposited judicially or extrajudicially:
(1) if the creditor uses the thing without authority;
(2) if he misuses the thing in any other way; or
(3) if the thing is in danger of being lost or impaired
because of the negligence or willful act of the pledgee.
(Art. 2106.)
Article 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.
Article 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.
Article 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.
Two remedies are actually granted by Article 2107, to
wit: to the pledgor, the right to demand the return of
the thing pledged upon offering another thing in pledge;
and to the pledgee, the right to cause the same to be
sold at a public sale. (Art. 2108.)
The following are the requisites for the application of
Article 2017:
(1) The pledgor has reasonable grounds to fear the
destruction or impairment of the thing 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; and
(4) The pledgee does not choose to exercise his right to
cause the thing pledged to be sold at public auction.
(Ibid.)
Article 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.
Article 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.
Right of pledgee to demand substitute or immediate
payment.
This article grants two remedies to the pledgee, in case
he is deceived as to the substance or quality of the thing
pledged:
(1) to claim another thing in pledge; and
(2) to demand immediate payment of the principal
obligation.
CREDIT TRANSACTIONS –TITLE XVI - Pledge, Mortgage and Antichresis CHAPTER 2
The remedies are alternative, that is, he is privileged to (1) The debt is due and unpaid;
choose only one and not both.
(2) The sale must be at a public auction;
“Article 2109 is of evident fairness to both parties.”
(3) There must be notice to the pledgor and owner,
(Report of the Code Commission, p. 157.)
stating the amount due; and
Article 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.
Article 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.
Article 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.
Right of pledgee to cause sale of thing pledged.
One of the essential requisites of pledge is that the
object pledged may be alienated for the payment to the
creditor when the principal obligation becomes due.
(Art. 2087.)
The formalities required for such sale under the above
article are as follows:
(4) The sale must be made with the intervention of a
notary public.
Note that Article 2112 does not require posting of the
notice of sale and publication. Notification to the
pledgor and the owner of the thing pledged is sufficient.
Only a notary public can conduct a public auction after
proper notice is sent to the pledgor and owner of the
thing pledged. The sale is actually extrajudicial in
character without intervention by the courts.
Right of pledgee to appropriate thing pledged.
The pledgee may appropriate the thing pledged if after
the first and second auctions, the thing is not sold. This
is an exception to the prohibition against pacto
commisorio. (Art. 2088.)
If the creditor appropriates the thing, it shall be
considered as full payment for his entire claim. He is
thus obliged to give an acquittance for the same. The
debtor is not entitled to the excess in case the value of
the thing pledged is more than the principal obligation.
(see Art. 2115.)
Article 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.
Article 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.
Article 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,
CREDIT TRANSACTIONS –TITLE XVI - Pledge, Mortgage and Antichresis CHAPTER 2
the debtor shall not be entitled to the excess, unless it is pledged, and in such case, he may recover the
otherwise agreed. If the price of the sale is less, neither deficiency from the debtor.
shall the creditor be entitled to recover the deficiency,
Article 2116. After the public auction, the pledgee shall
notwithstanding any stipulation to the contrary.
promptly advise the pledgor or owner of the result
thereof.

Effect of sale of thing pledged.
The sale of the thing pledged extinguishes the principal
obligation whether the price of the sale is more or less
than the amount due.
(1) 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.
(2) 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.
(a) The reason is to compel the creditor to hold an
honest public sale.
Article 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.
Article 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.
Article 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.

(b) Furthermore, the creditor should see to it, which he
usually does, that he loans only as much as he is likely to
realize at a public sale.
Right of debtor to excess.
Article 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.

As a general rule, therefore, the debtor is not entitled to
the excess unless there is an agreement to the contrary.
This is obviously to compensate the creditor for his risk
of not being able to recover the deficiency in case the
thing pledged is sold below the amount of the principal
obligation. The rule is nevertheless unfair since the
obligation is fully satisfied. (see Art. 2121.) In effect, the
rule would amount to a pacto commisorio which is
prohibited. (Art. 2088.)
Under the Chattel Mortgage Law, the mortgagor is
entitled to recover the excess of the proceeds of the
sale in foreclosure
Right of creditor to recover deficiency.
In the case of the creditor, he is not entitled to recover
the deficiency in all cases. By electing to sell the thing
pledged, instead of suing on the principal obligation, the
creditor waives any other remedy, and must abide by
the results of the sale. The creditor may sue on the
principal obligation instead of electing to sell the thing
Article 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.
Article 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.
Rules in cases of pledge by operation of law.
(1) The provisions on the possession (see Art. 2098.),
care (see Art. 2099.), and sale of the thing pledged (see
Art. 2112.) as well as on the extinguishment of the thing
CREDIT TRANSACTIONS –TITLE XVI - Pledge, Mortgage and Antichresis CHAPTER 2
pledged (see Arts. 2110, 2111.) governing conventional
pledges are applicable to pledges created by operation
of law. Unlike, however, in conventional pledge where
the debtor is not entitled to the excess unless it is
otherwise agreed (Art. 2115.), in legal pledge, the
remainder of the price of the sale after payment of the
debt and expenses, shall be delivered to the debtor.
(Art. 2121.)

(2) In legal pledge, there is no definite period for the

payment of the principal obligation. The pledgee must,
therefore, make a demand for the payment of the
amount due him. Without such demand, he cannot
exercise the right of sale at public auction. (Art. 2112.)
The pledgee must proceed with the sale within one
month after demand; otherwise, the debtor may
require him to return the thing retained. (Art. 2122.)

Article 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.