de Jesus, G.A.

CREDIT TRANSACTIONS
Block 2B/SBU-COL, Manila PLEDGE (De Leon & De Leon, 2016)

VI Necessity of delivery
PLEDGE > the thing pledged must be delivered to the creditor or to a
third person by common agreement.
CHAPTER 1 > otherwise, there can be no pledge since it is in delivery
PROVISIONS COMMON TO where the security for the debt lies.
PLEDGE AND MORTGAGE
> in a mortgage, as a a general rule, the mortgagor retains
possession of the property mortgaged.
Article 2085. The following requisites are essential
to the contracts of pledge and mortgage:
Constituted to secure fulfillment of a principal obligation
(1) That they be constituted to secure the fulfillment
> both cannot exist without a valid obligation since both are
of a principal obligation;
accessory contracts. In general, they may guarantee:
(2) That the pledgor or mortgagor be the absolute
a) a valid, voidable, and unenforceable, obligation
owner of the thing pledged or mortgaged;
b) civil or natural obligations
(3) That the persons constituting the pledge or
c) pure and conditional obligations
mortgage have the free disposal of their property, and in the
d) present debts and debts to be incurred in the future
absence thereof, that they be legally authorized for the
(except for a chattel mortgage which guarantees present
purpose.
debts only)
Third persons who are not parties to the principal
e) payment obligations and performance obligations.
obligation may secure the latter by pledging or mortgaging
> while a pledge or mortgage is constituted to secure a
their own property. (1857)
payment obligation, both can also secure a performance
obligation

Article 2086. The provisions of article 2052 are Intention of the parties
applicable to a pledge or mortgage. (n) > character of the transaction is to be determined from their
intention, regardless of the language employed or the form
of transfer.
Article 2087. It is also of the essence of these > any transfer of property by the debtor to a creditor even if
contracts that when the principal obligation becomes due, apparently an absolute conveyance, should be treated as a
the things in which the pledge or mortgage consists may be pledge or mortgage, if the debt continues to exist and is not
alienated for the payment to the creditor. (1858) discharged by such transfer
> an assignment of rights, receivables, title, or interest under
a contract to guarantee an obligation is a pledge or
> Pledge, chattel mortgage, and antichresis are different
mortgage and not an absolute conveyance of title which
species of that kind of contract which are all intended to
confers ownership to the assignee.
secure the performance of a principal obligation by specially
> In case of doubt between pledge and dation in payment,
subjecting the property or the fruits thereof to such security.
doubt resolved in favor of pledge, the latter being
characterized with lesser transmission of rights.
Common requisites
> Arts. 2085 and 2087
Constituted by the absolute owner
> both provisions enumerate the essential characteristics to
> absolute owner or at least by the pledgor or mortgagor
pledge and mortgage
with authority or consent of the owner of the property
> a mortgage executed before the mortgagor became the
pledged or mortgaged
owner of the property, such as before the issuance of a
> hence, a pledge or mortgage constituted by an impostor
patent to the mortgagor is void and ineffective .
and void and the pledgee or mortgagee in such a case
> in all the se contracts, ownership of the thing given as
acquires no right whatsoever in the property.
security is retained by the debtor
> hence, by implication, there being no valid pledge or
> unreasonable delay may amount to ratification, hence a
mortgage, there could be no valid foreclosure or auction
mortgagor or pledgor who wishes to invalidate a mortgage
sale.
should act promptly.
EXCEPTION: mortgagee in good faith (Art. 2125), with
> the invalidity of a pledge or mortgage does not invalidate
respect to a property covered by a Torrens Title
the principal contract of loan since they are only accessory
contracts. In such cases, they may be considered as mere
> a foreclosure sale, is still a sale despite it being a forced
evidence of indebtedness.
sale, pursuant to Art. 1458, under which the mortgagor in
“That in all things, God may be glorified!”
Page 1 of 16
de Jesus, G.A.
Block 2B/SBU-COL, Manila
default, the forced seller, becomes obliged to transfer the
ownership of the thing sold to the highest bidder, who, in
turn is obliged to pay therefor the bid price in money or its
equivalent
**Being a sale, the rule that the seller must be the owner of
the thing sold also applies in a foreclosure sure. Hence, Art.
2085 requires that the mortgagor or pledgor be the absolute
owner of the thing pledged or mortgaged in anticipation of
a possible foreclosure sale should the mortgagor default in
payment of the loan.
Property pledged or mortgaged
Future property
> Future property cannot be pledged or mortgaged.
However, the parties can agree that future properties of the
pledgor or mortgagor will form part of the pledge or
mortgage when the future properties come into existence, or
can be added to the security through the execution of a
pledge supplement or mortgage supplement; in case of
pledge, the property should also be delivered to the
pledgee
Subsequently acquired property
> a pledge or mortgage executed by one who is not the
owner of the property pledged or mortgaged is without
legal existence and registration cannot validate it.
> hence, a mortgage executed before the mortgagor
became the owner of the property is void and ineffective.
NOTA BENE: in case of motor vehicle registration, the same
only constitutes an administrative proceeding and does not
bear any essential relation to the contract entered into
between the parties.
Share in a co-ownership
> See Art. 4931
> hence, for instance, a mortgage of a conjugal property by
one of the spouses is valid only as to 1/2 of the entire
property
Property covered by Torrens Title
> one of the requirements imposed by Art. 2085 is that the
mortgagor must have the free disposal of the property, or at
least have the legal authority to do so, does not apply where
the property is registered under the Torrens system.
> mortgagee in good faith - a mortgagee has a right to rely
upon what appears in the certificate of title and does not
1 Article 493. Each co-owner shall have the full ownership of his part and of the fruits and benefits pertaining thereto, and he may therefore
alienate, assign or mortgage it, and even substitute another person in its enjoyment, except when personal rights are involved. But the effect of
the alienation or the mortgage, with respect to the co-owners, shall be limited to the portion which may be allotted to him in the division upon
the termination of the co-ownership. (399)
Page 2 of 16
CREDIT TRANSACTIONS
PLEDGE (De Leon & De Leon, 2016)
have to inquire further (i.e., innocent purchasers for value are
protected.)
> the public interest in upholding the indefeasibility of a CT
as evidence of lawful ownership or of any encumbrance
thereon, protects a buyer or mortgagee, who, in good faith,
and in the absence of any sign of suspicion, relied upon what
appears on the face of the CT.
> Hence, even if the mortgagor is not the rightful owner
thereof, the mortgagee in good faith is nevertheless entitled
to protection.
> EXCEPTION: this rule on prudence does not apply to
banks which should exercise more diligence in dealing with
such than private individuals. Hence, negligence on its part
renders it liable for its own losses.
> this doctrine likewise applies to GSIS
Duran v IAC: a fraudulent or forged document of sale may
become the root of a valid title if the CT has already been
transferred from the name of the owner to the name of the
forger or the name indicated by the forger. If the rule were
otherwise, the efficacy and conclusiveness of Torrens titles
would be futile and nugatory. The court cannot regard the
rights of such third persons and order the total cancellation
of the CT for the would impair public confidence in the CT.
Pledgor or mortgagor has free disposal of property or
has legal authority
> the act of pledging or mortgaging is an act of strict
ownership involving an alienation or transmission of real
rights in property. Hence, the pledgor or mortgagor must
have the capacity to dispose of the property.
> free disposal - means that the property must not be the
subject to any claim of a third person
> capacity to dispose - pertains to the capacity of the
pledgor or mortgagor to make such disposal.1
Thing pledged or mortgaged may be alienated
> in these contracts, when the principal obligation becomes
due, the things in which the pledge or mortgage consists
may be alienated for payment to the creditor.
> the thing must be capable of being alienated, otherwise
the security would be illusory.
> such is an implied condition which does not necessarily
have to be stated in the contract
> the only remedy given to then mortgagee or pledgee is to
have the security given sold at a public auction and the
proceeds of the sale applied to the payment of the
obligation secured by the mortgage or pledge.
“That in all things, God may be glorified!”
de Jesus, G.A.
Block 2B/SBU-COL, Manila
> there must be a meeting of the minds with respect to the
specific subject of the contract, otherwise, no sale may be
considered as perfected.
Creditor not required to sue to enforce his credit
> to do so would be a nullification of his lien and would
defeat the purpose of the pledge or mortgage which is to
give him preference over the property given as security for
the satisfaction of his credit
Pledgor or mortgagor may be a third person
Concept of accommodation pledge or mortgage
> allowed under Art. 2085 (“Third persons who are not
parties x x x”)
> an accommodation mortgagor is ordinarily a recipient of
the loan, otherwise, that would be contrary to his designation
as such.
> so long as valid consent was given, the fact that the loan
was solely for the benefit of the debtor would not invalidate
the pledge or mortgage.
> he is not entitled to the proceeds of the loan, nor is
required to be furnished with the loan documents or notice
of default, unless stipulated in the deed.
Duty of the mortgagee to make proper inquiry
> the creditor is required to exercise due care and prudence
by making proper inquiry where the debtor borrows money
and mortgages another person’s property to secure the loan
without the consent of the debtor.
> he is guilty of negligence if he merely relies on the
representations made by the debtor, particularly, where the
creditor is engaged in the banking business which is vested
with public interest.
Where mortgage is gratuitous
> the same should be strictly construed.
> pursuant to Art. 1378, the contract should be interpreted
to effect the least transmission of rights or interests.
Liability for deficiency
> the pledgor or mortgagor who pledged or mortgaged his
property to guarantee an indebtedness of another person,
without expressly assuming personal liability for such debt, is
not liable for the payment of any deficiency should the
property not be sufficient to cover the debt.
> he is not solidarily liable with the principal obligator
> although pledge or mortgage may be an accessory
contract, that fact alone does not make a third party pledgor
or mortgagor solidarily bound with the principal debtor in
fulfilling the principal obligation since his liability extends
only to the property pledged or mortgaged.
**should there be any deficiency, the creditor has recourse
to the principal debtor who remains to be primarily bound.
Page 3 of 16
CREDIT TRANSACTIONS
PLEDGE (De Leon & De Leon, 2016)
> an SPA authorizing another to mortgage one’s obligation
does not make the executor thereof as a co-mortgagor of the
debtor.
> hence, an accommodation mortgagor as such is not in any
way liable for the payment of the loan or principal obligation
of the borrower. His liability extends only up to the loan value
of his mortgaged property and not to the entire loan itself
hence he may redeem his mortgaged property by paying
only the winning bid price thereof.
PLEDGE REAL ESTATE MORTGAGE
constituted on movables constituted on immovables
property is delivered to the
pledgee or by common delivery is not necessary
consent to a third person
n ot va l i d a g a i n s t t h i rd
persons unless a
description of the thing and invalid against third persons
the date of the pledge if not registered
appear in a public
instrument
pledgor can sell the thing mortgagor can sell the
pledged with the consent of property even without the
the pledgee consent of the mortgagee
Assignments as a security device
> in financial transactions, the lender may require that the
borrower assign certain properties as security for the
fulfillment of the principal obligation
Characterization of the assignment
Peoples Bank v Odom: if the intention of the parties were that
the assignments are absolute and not by way of guaranty or
mortgage, the stipulation would not have been made
because it would be inconsistent with the will of the
contracting parties
Lopez v CA: notwithstanding the terms of the “Stock
assignment separate from the certificate”, the transaction
should not be regarded as an absolute conveyance in view
of the circumstances obtaining at the time of the execution
thereof
Manila Banking Corp v Teodoro: the deed of assignment was
intended as collateral security for the bank loans of
appellants, as a continuing guaranty for whatever sums
would be owing by defendants to the plaintiff.
Compliance with the requirements of pledge and
mortgage
> since the assignment of property to secure an obligation is
considered a pledge or a mortgage, then such assignment
“That in all things, God may be glorified!”
de Jesus, G.A.
Block 2B/SBU-COL, Manila
must comply with the formal and substantive requirements
of a pledge or mortgage.
> the further requirement that the thing pledged be placed
in possession of the creditor, or of a third person by common
agreement must be complied with.
> moreover, since the assignment is viewed as a pledge or
mortgage, the assignment must comply with the formalities
thereof.
Example:
• a chattel mortgage must be registered with the registry
of deeds and must contain an affidavit of good faith in
order to be biding upon third parties
• in the absence of registration, third parties will not be
precluded from attaching, executing, or garnishing the
property assigned.
Forms of assignment
> when used as a security device, the assignment may be by
way of security or the assignment may be absolute
> absolute - the borrower divests itself of all the rights, title,
and interest in the property and vests the same in the
creditor, subject to the resolutory condition that the
fulfillment of the principal obligation renders such
assignment null and void.
> the transaction is structured as a title instrument where
absolute title to the property is given to the assignee, rather
than as a security or lien instrument
> However, the courts may disregard the express provision
of a deed of assignment upon examination and characterize
the same as an assignment by way of security or mortgage.
Object of the assignment
> in many instances, the assignment would cover receivables
or other contract rights.
> however, there are difficulties in the assignment of
receivables if such assignment will be viewed as a pledge or
mortgage.
Example:
> a pledge requires the delivery of property for the
perfection of the pledge. hence, the pledge will not be
perfected until the collected cash is delivered to the pledgee
in which case the pledge is really over cash and not over
receivables
> since a chattel mortgage cannot be created over future
property, a chattel mortgage cannot extend to the sums
which may be due from accounts receivables as these sums
will not be deemed as existing property of the debtor until
the latter receives them
> the right to governmental permits and approvals generally
accrue in favor of the licensee only, unless the permit
themselves or the relevant governmental entity authorizes
the assignment or transfer of such permits in favor of the
latter
Page 4 of 16
CREDIT TRANSACTIONS
PLEDGE (De Leon & De Leon, 2016)
Presumption of equitable mortgage
> Under Art. 1602, a contract shall be presumed an equitable
mortgage “where it may be fairly inferred that the real
intention of the parties is that the transaction shall secure the
payment of a debt or the performance of any other
obligation
Creation of a trust
> if an absolute conveyance of property is made in order to
secure the performance of an obligation of the grantor
toward the grantee . If the fulfilment of the obligation is
offered by the grantor when it becomes due, he may
demand reconveyance of the property to him (Art. 1454)
Article 2088. The creditor cannot appropriate the
things given by way of pledge or mortgage, or dispose of
them. Any stipulation to the contrary is null and void. (1859a)
Right of the creditor where the debtor fails to comply
with his obligation
> the pledgee and mortgagee may exercise the right to sell
the thing received in pledge or mortgage in the event the
principal obligation is not fulfilled.
Sale of subject properly with formalities required by law
> if the debtor fails to comply with the obligations at the time
if falls due, the creditor is merely entitled to move for the sale
of the thing pledged or mortgaged with the formalities
required by law to collect the amount of his claim from the
proceeds
> upon the mortgagor’s failure to pay his obligation within
the required period, the remedy of the mortgagee is to
foreclosure the mortgage and if he wishes to secure a title to
the mortgaged property, he can buy it in the foreclosure sale.
Prohibition against appropriation of property
> the pledgor/mortgagor’s default does not operate to vest
in the pledgee or mortgagee the ownership of the property
for any such effect is against public policy
> the creditor in a contract of real security cannot
appropriate to himself without foreclosure the thing held as
pledge or under mortgage, nor can he dispose of the same
as owner.
> the act of the mortgagee in registering the mortgaged
property in his own name upon failure of redemption would
amount to the exercise of the privilege of pactum
commissorium (Exception: Art. 2112)
> the prohibition in this provision likewise applies to the
object of an antichresis contract
Prohibition against pactum commissorium
“That in all things, God may be glorified!”
de Jesus, G.A.
Block 2B/SBU-COL, Manila
Pactum commissorium - a stipulation whereby the thing
pledged or mortgaged or under antichresis is to become the
creditor’s property in the event of nonpayment by the debtor
within the fixed term of the loan —> NULL AND VOID since it
dispenses with the requirement of foreclosure which is the
legal means of acquisition of mortgaged property. Moreover,
the amount of the loan is ordinarily less than the real value of
the thing pledged or mortgaged.
Requisites
1) there should be a pledge, mortgage, or antichresis by
way of security for the payment of the principal
obligation
2) there should be a stipulation for an automatic
appropriation by the creditor of the property in the event
of non-payment of the obligation within the stipulated
period
Stipulation presupposes the existence of a security
contract
> presupposes the existence of a mortgage or pledge or
that of an antichresis.
> it essence is that ownership of the security will pass to the
creditor by mere default of the debtor.
> thus, there is no pactum commissorium where in a contract
of sale, the sums already paid by the vendee were forfeited
for his failure to pay the stipulated installments in due time
considering that the person to whom the property was
forfeited was the real and equitable owner of the same
because title would not pass until payment of the last
installment.
> there is likewise no pactum commissorium where the
alienation of the property was by way of security and not by
way of satisfying or extinguishing the debt of the debtor.
Effect on security contract
> The contract remains valid, with only the stipulation
being void.
> the contract, having been perfected, can subsist although
the contracting parties have not agreed as to the manner the
creditor can recover his credit inasmuch as the law has
already expressly established the procedure in order that he
may recover the same, in case the debtor does not comply
with his obligation.
Prohibition refers to stipulation authorizing automatic
appropriation
> what is prohibited is the automatic appropriation by the
creditor of the object of the security contract
> a stipulation provinging that the mortgaged property shall
be considered in full payment without further action in court
in case of nonpayment is null and void
> a stipulation in a purported pacto de retro sale that the
ownership over the property would automatically pass to the
vendee in case no redemption was effected within the
Page 5 of 16
CREDIT TRANSACTIONS
PLEDGE (De Leon & De Leon, 2016)
stipulated period, is contrary to the nature of a true pacto de
retro sale, under which the vendee acquires ownership of the
thing sold immediately upon the execution of the sale —>
VOID
Permissible stipulations
Subsequent modifications of the original contract
> the stipulations that are prohibited by Arts. 2080 and 2137
are those executed or made simultaneously with the original
contract and not those subsequently entered into.
> the prohibition does not include a subsequent voluntary
cession of the property mortgaged in payment of the deb
which amounts in its legal effect to a novation of the original
contract and to a voluntary sale of the said property for the
amount of the debt.
Promise to assign or sell
> the prohibition does not cover a promise to assign or sell
the property if it is not paid upon maturity because the title
thereto remains with the debtor.
> such promise is merely a personal obligation of the
mortgagor and does not in any way bind the property.
> in this case, there is no automatic appropriation of
property.
> the mortgagor can validly sell the property to a third
person and if there should be any action accruing to the
mortgagee, it would be a personal action for damages
against the mortgagor
> if the vendee contributed to the breach of the contract by
the mortgagor, the vendee and mortgagor will be liable for
damages/if the vendee is guilty of fraud which is a ground
for rescission of the sale in his favor, the mortgagor and not
the mortgagee would be the party entitled to bring the
action for annulment.
Authority to take possession of property upon foreclosure
> allowed since such is in consonance with Art. 2132
regarding antichresis and Rule 59 of the Rules of Court
regarding the appointment of a receiver as a convenient and
feasible means of preserving and administering the property
in litigation.
Applicability of pactum commissorium to money held as
security
Yan Chu v CA: where the security for the debt is also money
deposited in a bank, it was not illegal for the creditor to
encash the time deposit certificates to pay the debtor’s
overdue obligation with the latter’s consent
Agreement containing the pactum commissorium
> may be contained in only one or in two or more separate
contracts (interpret together in the latter case)
“That in all things, God may be glorified!”
de Jesus, G.A.
Block 2B/SBU-COL, Manila
> intention of the parties govern over the written provisions
of the contract
RIsk of loss of property pledged or mortgaged
> since there is no transfer of ownership to the pledgee or
mortgagee, the debtor-owner bears the risk of loss
> the principal obligation is not extinguished by the loss of
the pledged or mortgaged property
Article 2089. A pledge or mortgage is indivisible,
even though the debt may be divided among the successors
in interest of the debtor or of the creditor.
Therefore, the debtor's heir who has paid a part of
the debt cannot ask for the proportionate extinguishment of
the pledge or mortgage as long as the debt is not
completely satisfied.
Neither can the creditor's heir who received his
share of the debt return the pledge or cancel the mortgage,
to the prejudice of the other heirs who have not been paid.
From these provisions is excepted the case in which,
there being several things given in mortgage or pledge,
each one of them guarantees only a determinate portion of
the credit.
The debtor, in this case, shall have a right to the
extinguishment of the pledge or mortgage as the portion of
the debt for which each thing is specially answerable is
satisfied. (1860)
Article 2090. The indivisibility of a pledge or
mortgage is not affected by the fact that the debtors are not
solidarily liable. (n)
Indivisibility
> the same is one and indivisible as to the contracting parties
and the rule applies even if the obligation is joint and not
solidary
> generally, the divisibility of the principal obligation is not
affected by the indivisibility of the pledge or mortgage
Consequences of indivisibility
a) Single thing - every portion of the property pledged or
mortgaged is answerable for the whole obligation as
soon as it falls due
b) Several things - all of them are liable for the totality of the
debt and the creditor does not have to divide his action
by distributing the debt, among the various things
pledged or mortgaged
• the debtor cannot ask for the release of one or
some of the several properties pledged or
mortgaged or any portion thereof or the
proportionate extinguishment of the pledge or
Page 6 of 16
CREDIT TRANSACTIONS
PLEDGE (De Leon & De Leon, 2016)
mortgage unless and until the debt secured has
been fully paid.
> the debtor’s heir who has paid a part of the debt cannot
ask for the proportionate extinction of the pledge or
mortgage nor can the creditor’s heir who has received his
share of the debt return the pledge or cancel the mortgage if
the debt is not completely satisfied.
Exceptions to the rule on indivisibility
Where each one of the several things guarantees
determinate portion of credit
> it is submitted that the same is not an exception because in
such cases, there would be as many pledges or mortgages
as there are things given in pledge or mortgage.
EXAMPLE:
• A borrowed P20k from B, and to guarantee payment, A
pledged his diamond ring valued at P15k, and a pair of
earrings worth P5k.
✴ If A pays P15k, he cannot ask for the return of
the ring since both the ring and earrings were
given to secure the debt of P20k.
✴ Such is in consequence of the character of
pledge being indivisible.
✴ In the event of nonpayment, B may cause the
sale of either or both of the jewelries as payment
of his credit or if A dies and his heir only pays
P15k
• If the creditors are B and C, and A pays B P15k, B cannot
return the ring to the prejudice of C who has not
received his share
✴ The same is true if B is the only creditor and he
dies leaving Y and Z as his heirs and A pays Y
P15k
• However, if it was agreed that the ring was given to
secure the payment of only the P15k portion of the
P20k, A can demand the ring’s return
Where only portion of the loan was released
EXAMPLE:
• Loan of P80k
✴ Only P17k was released such that the REM on
the loan became unenforceable to the extent of
the difference (P63k or 78.75%) and subsists as a
security only to the P17k portion (21.25%)
✴ Hence, if the lot consists of 100ha, the
foreclosure can extend only up to 21.25ha
Where there was failure of consideration
> it does not apply when there was failure of consideration
on the part of the mortgagee (e.g., mortgagee bank takes
over the management of the borrowing corporation in
compliance with the conditions for the grant of the loan)
“That in all things, God may be glorified!”
de Jesus, G.A. CREDIT TRANSACTIONS
Block 2B/SBU-COL, Manila PLEDGE (De Leon & De Leon, 2016)

Where there is no debtor-creditor relationship
> a mortgage or pledge is not indivisible with respect to a
third person who did not take part in the constitution of the
security whether personally or through an agent
> as the provision was worded, indivisibility only arises when
there is a debt — when there is a debtor-creditor relationship
> it is not applicable to an accommodation mortgagor and
his assignee with respect to whom this relationship is not
present
> any kind of obligation, whether pure or conditional, may
be secured by a contract of pledge or mortgage.
> the same is also applicable to guaranty which may also
secure a conditional obligation
> the pledge agreement may stipulate that the pledge will
also stand as security for any future advancements or
renewals thereof that the pledgor may procure from the
pledgee

Article 2092. A promise to constitute a pledge or

When there is a waiver
mortgage gives rise only to a personal action between the
> since indivisibility is not an essential characteristic of a
contracting parties, without prejudice to the criminal
mortgage, the parties can agree otherwise.
responsibility incurred by him who defrauds another, by
> the creditor can also waive the benefits of indivisibility.
offering in pledge or mortgage as unencumbered, things
which he knew were subject to some burden, or by
Foreclosure of mortgage constituted on several
misrepresenting himself to be the owner of the same.
properties
> The rule that real property, consisting of several lots,
should be sold separately does not apply to foreclosure of > a promise to constitute a pledge or mortgage, if accepted,
mortgages (it only applies to execution sales)2 gives only a personal right binding upon the parties and
> the mortgagee has the right to have the properties either creates no real right in the property.
or both, jointly or singly, to satisfy his claim. > what exists is only a right of action to compel the fulfillment
> even assuming that the rule cited applies to foreclosure of the promise but there is no contract of pledge or
sales, the sale of the mortgagor’s properties cannot be set mortgage yet.
aside in the absence of evidence to show that a better price
could have been obtained if they were sold separately , or Criminal responsibility of pledgor or mortgagor
that the sale of one or some alone would bring sufficient > liable for estafa.
proceeds to satisfy the mortgage credit > it is essential that fraud or deceit be practiced upon the
vendee at the time of the sale.
NOTA BENE: the doctrine of indivisibility does NOT apply
once the mortgage is extinguished by a complete
foreclosure thereof.

Where both real and chattel mortgage are in one

instrument
> mere embodiment of a REM and a CM in one document
does not have the effect of fusing both securities into an
indivisible whole
> both remain as distinct agreements, differing not only in
the subject matter of the contract, but also in the governing
legal provisions thereof.
> hence, the mortgagee may foreclose the REM
extrajudicially and waive the foreclosure of the CM and
maintain a personal action for the recovery of the balance
instead.

Article 2091. The contract of pledge or mortgage

may secure all kinds of obligations, be they pure or subject
to a suspensive or resolutory condition. (1861)

2 Section 19, Rule 39 of the Rules of Court

“That in all things, God may be glorified!”
Page 7 of 16
de Jesus, G.A.
Block 2B/SBU-COL, Manila
CHAPTER 2
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. (1863)
Concept of Pledge
> it is a contract by virtue of which the debtor delivers to the
creditor or to a third person by virtue of a common
agreement a movable susceptible of appropriation or a
document evidencing incorporeal rights for the purpose of
securing the 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
in appropriate cases)
Classifications of pledge
1) Voluntary or conventional - one created by agreement
2) Legal - one created by operation of law (Art. 2121)
Characteristics
1) Real - perfected by delivery of the thing pledged
2) Unilateral - it creates an obligation solely on the part of
the creditor to return the thing subject thereof upon the
fulfillment of the principal obligation
Nota bene: if a third person receives fees from the creditor
for entering into the pledge agreement, then the contract is
bilateral.
3) Nominate
4) Accessory
5) Formal
6) Onerous or gratuitous
a) if the pledge was given by the debtor —> ONEROUS
b) if a third party receives no compensation for entering
into the contract —> GRATUITOUS
Nota bene: in case of doubt on whether or not a transaction
is one of a pledge or dacion en pago, the presumption is
that it is a pledge by virtue of the least transmission of rights
principle. The same principle applies in case of doubt
between a sale and a loan with pledge or mortgage
(presumption in favor of loan)
Parties
a) Pledgor - may be the debtor or a third person. He must
be the absolute owner of the thing pledged since he
must have free disposal of the property, or at least legally
authorized for such purpose
b) Pledgee - the creditor
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PLEDGE (De Leon & De Leon, 2016)
Essential requisites
> aside from the mandatory requisites for any contract,
Article 2085 provides for additional requisites
1) the pledge must be constituted to secure the fulfillment
of a principal obligation
2) the pledgor must be the absolute owner of the thing
pledged
3) the pledgor must have free disposal of the property
pledged, and in the absence thereof, that the pledgor be
legally authorized for the purpose
4) delivery of the thing is also essential for the perfection of
the contract
Object of the contract
> movable things within the commerce of men which are
susceptible of appropriation.
> certain incorporeal rights may also be pledged (Art. 2095)
Cause or consideration
> being an accessory contract, its cause insofar as the
pledgor is concerned is the principal obligation
> however if he is not the debtor, the cause is the
compensation stipulated for the pledge or the mere liberality
of the pledgor
Rights and obligations of the creditor/pledgee
A. Rights
1) jus retentionis - right of retention over the thing pledged
2) right to bring actions which pertain to the owner of the
thing pledged
3) right to compensate fruits and interest received with
those which are owing to him
4) right to reimbursement of the expenses incurred for the
preservation of the thing
5) right to cause the public sale of the thing pledged if
there is a danger of destruction, impairment, or
diminution of value
6) right to demand substitution of the thing pledged
7) jus distrahendi - right to proceed before a notary public
for the sale of the thing
B. Obligations
1) obligation to take care of the thing pledged with the
diligence of a good father of the family
2) obligation not to deposit the thing pledged with the
third person in the absence of a contrary agreement
3) obligation not to use the thing pledged
4) obligation to return the thing pledged upon payment of
the debt
5) obligation to advise the pledgor of any danger to the
thing pledged
“That in all things, God may be glorified!”
de Jesus, G.A.
Block 2B/SBU-COL, Manila
Rights and obligations of the pledgor
A. Rights
1) right to require the deposit of the thing pledged with the
third person if the thing pledged is in danger of being
lost or impaired
2) subject to the right of the pledgee, the right to demand
substitution of the thing if there are reasonable grounds
to fear the destruction or impairment of the thing
pledged
B. Obligation
1) to indemnify the pledgee for damages in case of known
hidden flaws in the thing pledged
Transfer of possession essential in pledge
> by virtue of it being a real contract
> unless there is no delivery, the creditor acquires no right to
the property because the pledge is merely a lien, and
possession is indispensable to the right of lien
Nota bene: an agreement to constitute a pledge gives rise
only to a personal action between the contracting parties
> to affect third persons, apart from the requirement of a
public instrument, possession of the thing pledge must, in
addition be delivered to the pledgee
Type of delivery
> depends on the nature of the thing pledged
A. Actual delivery
> as a general rule, the delivery of the thing pledged is made
by actual delivery of the thing.
B. Constructive delivery
> the only requirement is that the thing pledged must be
placed under the effective control and possession of the
pledgee or a third person, as the case may be. Hence, actual
delivery is not a necessity at all times
> the pledgor’s dispossession of the thing pledged requires
the pledgor to cease to have effective control and
possession of the thing pledged.
> traditio brevi manu3 is a recognized mode of
delivery
> constitutum possessorium4 is not enough
3Traditio brevi manu or “delivery with the short hand”this exits when a person who possessed property not as an owner [like a lessee], now
possesses it as owner
4 Constitutum possessorium exists when a person who possessed property as an owner, now possesses it in some other capacity, as that of
lessee or depositary (opposite of traditio brevi manu)
5 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. (n)
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PLEDGE (De Leon & De Leon, 2016)
> the symbolical transfer of the goods bymeans of the
delivery of the keys to the warehouse where the goods were
stored was sufficient since the owner, as pledgor, could no
longer dispose of them and the pledgee being the only one
authorized to do so through the depositor and special agent
who represented him
Article 2094. All movables which are within
commerce may be pledged, provided they are susceptible
of possession. (1864)
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.
Subject matter of pledge
> a pledge or chattel mortgage is confined and limited to
personal property and it cannot be extended or made to
apply to real property
> as stated in Art. 2094, the movable must be within the
commerce of men and susceptible of appropriation
> as stated in Art. 2095, incorporeal rights evidenced by
documents whether non/negotiable, may also be pledged.
> such document must be delivered to the creditor, and if
negotiable, indorsement in favor of the creditor is necessary
Nota bene: not all incorporeal rights can be the subject of a
pledge since it is required that the same should be
evidenced by negotiable instruments, bills of lading, shares
of stocks, bonds, warehouse receipts and other similar
documents which transfers ownership of the right or
property represented therein.
> ordinary contract rights cannot be pledged by delivery of
the signed contract to the pledgee as the delivery of the
contract does not transfer ownership of the contracts rights
> cash, pursuant to the tenet of Art. 2108 5, may be the object
of a pledge.
“That in all things, God may be glorified!”
de Jesus, G.A.
Block 2B/SBU-COL, Manila
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.
(1865a)
Public instrument necessary to bind third persons
Contents
> a description of the thing pledge
> date of the pledge
—> this requirement is essential so as not to adversely affect
third persons such as innocent purchasers of the thing
pledged notwithstanding that the pledgee has already taken
possession of the same
Object of the requirement
> to forestall fraud, since a debtor may attempt to conceal his
property from creditors when he sees it in danger of
execution by simulating a pledge thereof with an accomplice
> it is a rule of substantive law prescribing a condition
without which the execution of a contract of pledge cannot
affect third persons adversely
Non-compliance
> the pledge is nevertheless valid and is binding but only
upon the parties only as long as all the essential requisites of
a pledge are present and there was delivery of the thing
pledged
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. (n)
Alienation by the pledgor of the thing pledged
> the pledgor retains his ownership of the thing pledged.
> he may sell the same as long as the pledgee consents and
the ownership of the thing pledged is transferred to the
vendee subject to the pledgee’s right to alienate the thing
sold to satisfy the obligation and that the pledgee must
continue in possession during the pledge’s existence
> however, the pledge would not bind or adversely affect
third persons unless Art. 2096 is complied with
> the second part of this provision illustrates one of those
cases where the ownership is transferred without actual
delivery
> if the pledgor obtained the consent of the pledgee prior to
the actual sale between the pledgor and the buyer, the the
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ownership is generally transferred only when the contract of
sale is executed.
> if the pledgor and the pledgee executes a deed of
conditional sale on the condition of the pledgee’s consent,
then the ownership of the thing pledged is transferred to the
buyer only when the pledgee gives his consent thereto
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. (1866a)
Fundamental Rights of the Pledgee over the thing
pledged
1) The right to retain the thing
2) The right to proceed before a notary public to the sale
of the thing pledged
Right of retention
> the possession of the pledgee constitutes his security
> hence, the debtor cannot demand for its return until the
debt secured by it is paid
> however, the right of retention is limited only to the
fulfillment of the principal obligation for which the pledge
was created
Example:
A borrowed from B P500, for which a ring was pledged.
Later on, A borrowed P200. B can only retain the thing with
respect to the payment of P500 for which the thing was
held in pledge. It does not extend to the amount of P200
since it was not made a part of the pledge contract
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. (1867)
Obligation of the pledgee to take good care of the thing
pledged
> upon fulfillment of the principal obligation, the pledgee
must return the thing pledged
> having possession of the property, he has the obligation to
take care of the same with the diligence of a good father of a
family
> however, he is also entitled to reimbursement for
necessary expenses (for preservation)
> in case of loss or deterioration due to fortuitous events, the
pledgee cannot be made responsible for such
> however, the pledgee is responsible for loss due
to fraud, negligence, delay, or violation of the contract
“That in all things, God may be glorified!”
de Jesus, G.A.
Block 2B/SBU-COL, Manila
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. (n)
Obligation of the pledgee not to deposit the thing
pledged with another
> while the pledgee is entitled to retain possession of the
thing pledged until the debt is paid, he is not authorized to
transfer possession to a third person.
> the prohibition is necessary for the protection of the
pledgor or the owner of the thing pledged
> This is without prejudice to any contrary agreement
authorizing the pledgee to deposit the thing with a third
person
*Comments directly lifted from Art. 19516
Requisites
(1) There exists a flaw or defect in the thing loaned;
(2) Such flaw or defect is hidden;
(3) The bailor was aware of such flaw or defect;
(4) The bailor does not advise the bailee of the same; and
(5) The bailee suffers damages due to such flaw or defect
> The bailor is made liable on account of his bad faith
> Hence, by implication, when the defect is known to the
bailor, he is not liable since commodatum is gratuitous
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. (1868a)
Right of the pledgee to compensate earnings of the
pledge with the debt
6Article 1951. The bailor who, knowing the flaws of the thing loaned, does not advise the bailee of the same, shall be liable to the latter for the
damages which he may suffer by reason thereof. (1752)
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PLEDGE (De Leon & De Leon, 2016)
> The pledgee has no right to use the thing pledged or to
appropriate the fruits thereof without the authority of the
owner
> However, the pledgee can apply the fruits, income,
dividends, or interests earned or produced by the thing
pledged to the payment of interest, if owning, and thereafter,
to the principal of his credit.
> unless there is a stipulation to the contrary, the interest and
earnings of the right pledged and in case of animals, their
offsprings are included in the pledge.
Example:
D borrowed from C P1,000 at 12% interest, with certificates
of stock as security, the interest being payable 6 months after
the contract’s execution.
> if the stocks earn dividends, the the same shall also be
subject to the pledge if there is no contrary stipulation.
> C shall apply such dividends to the interest, if any, owing
him after 6 months.
> If none is owing him insofar as the dividends the interest
due, C shall credit it to the principal of P1,000 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. (1869)
Right of pledgee against third persons
> except for the exercise of the right of possession, the
pledgor remains the owner of the property pledged.
> the creditor to whom the property pledged has been
delivered, is authorized to bring such action as pertaining
to the owner in order to recover it or defend it, against
claims of third persons.
> moreover, unless given the right, the creditor might be
prejudiced by the owner’s negligence
> the right of a pledgee is a real right, but it is necessary
that the contract of pledge be embodied in a public
instrument which shall contain a description of the thing
pledged and the date of the pledge.
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.
(1870a)
“That in all things, God may be glorified!”
de Jesus, G.A.
Block 2B/SBU-COL, Manila
Obligation of the pledgee not to use the thing pledged
> illustrates the same rule to that of deposit
> the pledgee who is in possession of the thing pledged
has no right to make use of it without permission from the
owner
> it is inconsequence of the fact that the pledgor in parting
with his property transmits only possession but not
ownership.
> however, if the thing pledged is of such a character that
the use is necessary in properly caring for it, then it
becomes his duty to use it so that it will not suffer from its
disuse
> if from the use of the property profits are derived, the
pledgee must account therefor to the pledgor, and apply
the net proceeds of such use to the payment of his claim
Right of the pledgor to ask that the thing be deposited
a) if the creditor uses the thing without authority
b) if he misuses the thing in any other way
c) if the thing is in danger of being lost or impaired
because of the negligence or willful act of the pledgee
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. (1871)
Right of the pledgor to demand return of the thing
pledged
> it is a consequence of Article 2098 which gives the
creditor the right to retain the thing in possession until the
debt is paid
> the thing pledged stands as a security for the fulfillment
of the pledgor’s obligation.
> hence, he cannot ask for its return until said obligation is
fully paid including interest due thereon and expenses
incurred for its preservation
> prescription shall not begin to run on the action to
demand the return of the thing pledged while the
obligation subsists, neither will the possession of the
pledgee as such ripen into ownership by prescription
because such possession is not in the concept of an owner
Exception: the 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
Right of owner to demand return of the thing pledged
> the debtor cannot ask for the return of the thing
pledged against the will of the debtor.
> if the pledgor is not the debtor, the pledgor does not
also have the right, as a rule, to demand the return of the
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thing until the debt is paid consistent with the creditor’s
right of retention.
> in the absence of any express provision, the thing
pledged should be returned after payment of the debt to
the owner/pledgor and not the debtor
> if both the debtor and pledgor/owner claim the right to
the thing after payment the debt, the creditor may consign
the thing with the courts.
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. (n)
Right of pledgor to ask for deposit of the thing
pledged
> if the thing should be exposed to loss or impairment
through the negligence or willful act of the pledgee, the
pledgor may demand that it be deposited with a third
person
> the pledgor may also require such deposit should the
pledgee use the thing without authority or misuse it in any
other way
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. (n)
Right of the pledgor to substitution
> There are two remedies contemplated in this article.
a) To the pledgor: The right to demand the return of the
thing pledged upon offering another thing in pledge
b) To the pledgee: the right to cause the same to be sold
at a public sale
Requisites for the application of Art. 2107:
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
4) The pledgee does not choose to exercise his right to
cause the thing pledged to be sold at a public auction
“That in all things, God may be glorified!”
de Jesus, G.A.
Block 2B/SBU-COL, Manila
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. (n)
Right of pledgee to cause the sale of the thing pledged
> the pledgee's right to have the thing sold is superior to
that given the pledgor to substitute the thing pledged.
> “without prejudice to the right of the pledgee”
> the sale must be a public sale and the pledgee shall
keep the proceeds of the sale as security for the fulfillment
of the principal obligation —> they shall belong to the
pledgor, with only the cash as the object of the pledge
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. (n)
Right of the pledgee to demand substitute or
immediate payment
In case the pledgee is deceived as to the substance or
quality of the thing pledged he has the right to:
a) to claim another thing in pledge
b) to demand immediate payment of the principal
obligation
—> these are alternative remedies only
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. (n)
Extinguishment of pledge by return of the thing pledged
> the object should be in possession of the creditor, or of a
third person pursuant to an agreement
> hence, the pledge is extinguished notwithstanding any
stipulation that the pledge would continue although the
pledgee would no longer be in possession
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PLEDGE (De Leon & De Leon, 2016)
> pledge is also extinguished by payment of the debt, by
renunciation, or abandonment of the pledge and by the sale
of the thing pledged at a public auction.
Other causes are:
> prescription
> loss of the thing
> merger
> compensation, among others
Presumption of extinguishment of pledge
> 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 of the thing’s return and
consequently, the extinguishment of the pledge
> however, such presumption is rebuttable by contrary
evidence (e.g., return was only to make way by substitution)
> Nota bene: the pledgee can temporarily entrust
physical possession of the chattel pledged (e.g.,
vessels) to the pledgor without invalidation of the
pledge and in such a case, the pledgor is merely a
trustee
> 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, and not the principal
obligation itself.
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. (n)
E x t i n g u i s h m e n t o f p l e d g e b y re n u n c i at i o n o r
abandonment
> the pledge is a personal right of the pledgee which may
be waived.
> however, renunciation or abandonment must be in writing
in order to extinguish the pledge, and such renunciation is
not conditioned upon the acceptance by the pledgor or
owner nor upon the return of the thing pledged.
> the waiver transforms the pledgee into a depositary with
the rights and obligations of such
> however, the principal debt is not affected by the
waiver of the pledge, but not vice-versa. Hence, the
waiver of the principal obligation also waives the pledge
“That in all things, God may be glorified!”
de Jesus, G.A.
Block 2B/SBU-COL, Manila
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. (1872a)
Right of the pledgee to cause the sale of the 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
Formalities required:
a) That the debt be due and unpaid
b) That the sale be made at a public auction
c) That there be notice to the pledgor and owner stating the
amount due (no publication requirement)
d) That the sale be made with the intervention of a notary
public
Right and not an obligation to cause the sale of the thing
pledged
> the creditor may pursue other legal remedies without
abandoning his rights under the pledge such as foreclosure
of the mortgage and thereafter causing a sale.
Right of the pledgee to appropriate the thing pledged
> if after the first and second auctions the thing is not sold,
and such is an exception to the prohibition against pactum
commisorio
> if the creditor appropriates the thing, it shall be considered
as full payment for his entire claim, and therefore he is
obliged to give an acquittance for the same
> the debtor is not entitled to the excess of the in case the
value of the thing pledged is more than the principal
obligation
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. (n)
Right of the pledgor and pledgee to bid at public sale
> if the debt is not paid and a public sale takes place, both
parties may bid.
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PLEDGE (De Leon & De Leon, 2016)
> the pledgor shall be preferred if he offers the same
terms as the highest bidder since the subject property
belongs to him
> to avoid fraud, the pledgee is not allowed to acquire the
thing pledged 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.
(n)
Bids must be for cash
> all bids, including that of the pledgor, must be for cash.
If the pledgor accepts a bid other than for cash, the
pledgor or owner has the right to consider that the
pledgee has received the purchase price in cash
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, 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)
Effect of the sale of the thing pledged
> extinguishes the principal obligation whether the price
of the sale is more or less than the amount due
a) if the price of the sale > amount due the creditor —>
the debtor is NOT entitled to the excess UNLESS there
is a contrary stipulation
b) if the price of the sale < amount due the creditor —>
the creditor is NOT entitled to recover the deficiency,
and a contrary stipulation is VOID
> this is to compel the creditor to hold an honest public
sale
> moreover, the creditor should see to it that he loans only
as much as he is likely to realize at a public sale
Right of debtor as to excess
> only when there is a contrary stipulation
> this is in order 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
“That in all things, God may be glorified!”
de Jesus, G.A.
Block 2B/SBU-COL, Manila
> under the Chattel Mortgage Law - the mortgagor is
entitled to recover the excess of the proceeds of the sale
in foreclosure proceedings
Right of creditor to recover deficiency
> 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 pledged, and as such, he may
recover the deficiency from the debtor
Right of redemption
Right of redemption over personal property
> there is no existing law which vests the right of
redemption over personal property
Execution sales of real property
> the right of redemption under Rule 29 of the Rules of
Court applies only to execution sales of real property
Extrajudicial foreclosure of real property
> the right of redemption over mortgaged real property
sold extrajudicially is established by Act 3135 and such law
does not extend the same benefit to personal property
Article 2116. After the public auction, the pledgee
shall promptly advise the pledgor or owner of the result
thereof. (n)
Obligation of the pledgee to advise the pledgor or
owner of result of the sale
> to enable the pledgor or owner to take steps for the
protection of his rights where he has reasonable grounds to
believe that the sale was not an honest one
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. (n)
Right of third person to to satisfy obligation
> as a general rule, the creditor is not bound to accept
payment or performance by a third person who has no
interest in the fulfillment of the obligation
> a third person 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 the
payment.
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CREDIT TRANSACTIONS
PLEDGE (De Leon & De Leon, 2016)
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. (n)
Right of pledgee to collect and receive amount due on
credit pledged
> in relation to Art. 2009 which imposes upon the pledgee to
take care of the thing, he has the duty to collect if delay
would endanger the credit’s recovery
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. (n)
Right of the pledgee to choose which of several things
pledged shall be sold
> such right is limited only by stipulation and after sufficient
property has been sold to satisfy the obligation plus interest
and expenses, no more shall be sold
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. (n)
Right of the third person who pledged his own property
> a third person who is not a party to the principal obligation
may secure the latter by pledging his own property and the
law grants him the same rights as a guarantor and he cannot
be prejudiced by any waiver of defense by the principal
debtor
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. (n)
“That in all things, God may be glorified!”
de Jesus, G.A. CREDIT TRANSACTIONS
Block 2B/SBU-COL, Manila PLEDGE (De Leon & De Leon, 2016)

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. (n)

Instances of pledges by operation of law

> Articles 5467 , 17318 , and 19949 mentioned are instances of
legal pledges

Rules in case of pledges by operation of law

> the provisions on the possession (Art. 2098), care (art.
2099), and sale (Art. 2112) of the thing pledged as well as on
the extinguishment of the thing pledged governing
conventional pledges (Arts. 2110, 2111) apply to legal
pledges
> however, in legal pledges, the remainder of the price of
the sale after the payment of the debt and expenses shall be
delivered to the debtor
> in legal pledge, there is no definite period for the payment
of the principal obligation. Hence, the pledgee must make a
demand for the payment of the amount due him. Without
such a demand, he cannot exercise the right of sale at a
public auction.
> the pledgee must proceed with the sale within one month
after such a demand, otherwise, the debtor may require him
to return the thing retained.

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. (1873a)

Rules as to pawnshops and other establishments

> what is referred to is Title XVI on Pledge, Mortgage, and
Antichresis, which covers Arts. 2085 to 2141
> PD 441 regulates the establishment and operation of
pawnshops.

7 Article 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)

8 Article 1731. He who has executed work upon a movable has a right to retain it by way of pledge until he is paid. (1600)

9 Article 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)
“That in all things, God may be glorified!”
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