CREDIT TRANSACTIONS

CHAPTER 11

THE CONTRACT OF PLEDGE

security for the performance of the principal obligation,
upon fulfillment of which, the thing pledged, with all its
accessories and accessions, shall be returned to the
debtor or the third person.
An accessory contract by virtue of which personal
property delivered to the creditor as security for a
principal obligation with the agreement that the
pledged property can be sold at a public auction in case
of non-payment to answer for the unpaid obligation or
the pledged property shall be returned by pledgeecreditor in case the principal obligation is fully paid.
The creditor is given a right to retain his debtors
movable property in his possession or in that of a third
person to whom it has been delivered.
The creditor does not become the owner of the thing
pledged. He is nothing more than a creditor with real
right over the thing in his possession as a pledge, which
he can dispose of through a notary at a public sale.

CONTRACT OF PLEDGE
Article 2093. In addition to the requisites
prescribed by 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.
Article 2094. All movables, which are
within commerce of man, may be pledged,
provided
they
are
susceptible
of
possession.
Article 2095. Incorporeal rights, evidenced
by negotiable instruments, bills of lading,
shares of stocks, bonds, warehouse receipts
and similar documents may also be
pledged. The instrument proving the right
to pledged shall be delivered to the
creditor, and if negotiable, must be
indorsed.
1

1. DEFINITION
An accessory, real and unilateral contract by virtue of
which the debtor or a third person delivers to the
creditor or to a third person movable property as

Article 2085, The following requisites are essential to the contracts of

pledge and mortgage:That they are constituted to secure the fulfillment of a
principal obligation.
2.
That the pledger or mortgagor be the absolute owner of the thing pledged
or mortgaged.
3.
That the persons constituting the pledge or mortgage have the free disposal
of their property and in their absence thereof, that they be legally
authorized to the purpose.
Third persons who are not parties to the principal obligation may secure the latter by
pledging or mortgaging their own property.

o
o

2. REQUISITES (S-A-F-P-E)
a. The pledge must be constituted to secure the
fulfillment of a principal obligation.
b. The pledgor must be the absolute owner of the thing
o By way of exception the real owner may be
estopped even if the person who delivered the
thing by way of pledge was not the real owner
under the circumstance mentioned in Article
1483.2
c. The pledgor must have free disposal of the property.
d. The thing pledged should be placed in the possession
of the creditor or of a third person, by common
agreement

Article 1438. One who has allowed another to assume apparent

ownership of personal property for the purpose of making any
transfer of it, cannot if he received, the sum for which a pledge has
been constituted, set up his own title to defeat the pledge of the
property, made by the other to a pledge who received the same in
good faith and for value.

CREDIT TRANSACTIONS

CHAPTER 11

THE CONTRACT OF PLEDGE

e. To take effecr against third persons, the description of

the thing and the date of the pledge must appear in a
public instrument.

A. DELIVERY
The contract of pledge is one of the 4 real
contracts in the NCC (commodatum, mutuum,
deposituum).
o No pledge is validly constituted if there is no
delivery.
o The delivery implied in Article 2093 is a change
in the actual possession of the property pledged
and that a mere symbolic delivery is not
sufficient
o Until there is delivery, the pledgee acquires no
real right of property in the thing.
Pledge is merely a lien; and possession
is indispensible in the right of a lien.
o In Beita v Ganzon, the animals in question were
in the possession of a third person not specified
in the contract before the alleged pledge was
entered into. The thing pledged remained with
them until execution was levied. The SC ruled
that there is no actual delivery of the alleged
pledgee themselves. There is no reality no
change in possession. Hence, the pledge was
not effective.
o In El Banco Espanol v Peterson the pledgee
took possession of the goods pledged through a
depository and a special agent appointed by it,
each of whom had a duplicate key to the
warehouse where the goods are stored, and
that the pledgee took the proceeds of the goods
sold.
The Court ruled that the fact that the
goods are continued to be in the
warehouse the pledgor reviously rented
does not affect the validity of the
pledged.

The pledgor could no longer dispose if

the thing pledged and the pledgee is the
only one authorized to do so through the
depositary.
The symbolical transfer of the keys to
where the goods were stored were
sufficient to show that the depositary
appointed by the common consent of the
parties were legally placed in the
possession of the goods. This is a deposit
to a third person as contemplated by
Article 2093.
The pledgee assumed control over the
goods because he already controlled the
place where the goods were stored.

3. CHARACTERISTICS (A-R-R-U-S)
1. Accessory Contract
o Being an accessory contract of security, there
is no transfer of ownership.
o In Intergrated Realty Corporation and Raul
Santos v PNB, the SC ruled that a transfer of
property by the debtor to a creditor, even if
sufficient on its face to make an absolute
conveyance, should be treated as pledge if
the debt continues in existence and is not
discharged by the transfer and that
accordingly, the use of the terms ordinarily
importing conveyance, of absolute ownership
will not be given that effect in such a
transaction if they are also commonly used in
pledges or mortgages and therefore do not
unqualifiedly indicate a transfer of absolute
ownership, in the absence of clear and
unambiguous
language
or
other
circumstances excluding an intent to pledge.
2.. Real Right
3. Real security contract
4. Real Contract

CREDIT TRANSACTIONS

CHAPTER 11

THE CONTRACT OF PLEDGE

o Perfected by mere delivery

5. Unilateral
o Upon the perfection of the contract with the
delivery of the thing, it is only the creditor who
has the obligation to return the thing.
6. Subsidiary
o The thing pledged will answer for the principal
obligation only upon the default of the principal
debtor.

Only personal or movables contemplated in

Article 4163 and 4174 of the NCC may be
pledged provided that they are susceptible of
actual delivery and possession.
In the very nature of things, a pledge is
confined and limited to personal property and
it cannot be extended to real property.

A. BANK ASSIGNMENTS
o In Victoria Yau Chu v CA, the SC held that
the assignment of deposit by way of
security is in the nature of pledge. A
public auction is no longer necessary to
satisfy the obligation because the
collateral is money
All that had to be done is to
convert the time deposits into cash
was to present them to the bank
for encashment after due notice to
the debtor.
B. SHARES OF STOCKS
o Shares of stocks and Deed of Assignment
of shares of stocks may be pledged to
secure an obligation.
o The pledgor or mortgagor shall have the
right to attend and vote at the meeting of
the stockholders, unless the mortgagee or
pledgee is expressly given by the pledgor
or mortgagor such right in writing which
is recorded on the appropriate corporate
books.
o The right to vote and attend the
stockholders meeting is the one required
to be recorded in the corporate books.
o The Assignment of Shares of Stocks
cannot be considered as proof of pledge if

Article 1365 of the NCC provides that if 2

parties agree upon the pledge of personal
property, but the instrument states that the
property is sold absolutely or with a right of
repurchase, reformation of the instrument is
proper. In this case, the instrument does not
express the true intention that it is a contract of
pledge.
4. KINDS
1. CONVENTIONAL OR VOLUNTARY PLEDGES
o Those agreed upon by the parties
2. A. LEGAL
o Oftentimes referred to as right of redemption.
B. OPERTAION OF LAW
o Article 456
o Article 612
o Article 1707
o Article 1731
o Article 1914
o Article 1994
o Article 2004
5. SUBJECT MATTER

3
4

CREDIT TRANSACTIONS

CHAPTER 11

THE CONTRACT OF PLEDGE

the
explicit
terms
of
the
deed
denominated
as
Stock
Assignment
Separate from Certificate expressly
states that the owners of the share sold,
assigned and transferred unto another the
stocks involved for and in consideration
of the obligation undertaken by the other
party.
The said Assignment will be
considered a sale since there is a
complete
and
unconditional
divestiture of the incorporeal
property consisting of stocks.
C. NEGOTIABLE INSTRUMENTS
o The pledgee can be a holder for value up
to the extent of his lien.
o Pledgee is entitled to apply the proceeds
up to the extent of the lien and he is
obliged to apply the proceeds up to the
extent of his debt and he is obligated to
account the surplus to the pledgor.
o If the instrument is negotiable, the
instrument must be indorsed and
delivered to the creditor.
D. AFTER INCURRED OBLIGATIONS
o GR: Only current obligations are secured
by the pledge
o XPN: After incurred obligations may be
secured
provided
that
they
are
deliberately described.
o

6. FORMALITIES
For the contract to affect third persons, apart
from being in a public instrument (date and
description of the thing pledged), possession
of the thing pledged must be in addition
delivered to the pledgee.
Article 2096 is a rule of substantive law,
prescribing a condition without which the

execution of a pledge contract cannot affect

third persons adversely.
RATIO: Answers the necessity for
not disturbing the relationship or
the status of the ownership of
things with hidden or simulated
contracts of pledge.
Without this warranty, a debtor in
bad faith from the moment he sees
his movable property in danger of
execution
may
attempt
to
withdraw from the same by way of
criminal
actions,
fraudulent
alterations in his possession by
means of feigned contract of this
nature.
In the absence of an express provision by law, the
contract of pledge may be constituted n whatever
form and will be valid and will produce its natural
and legal consequences with respect to third parties.
However, if the date and the description of the thing
pledged is not indicated, it will be valid as far as 3 rd
persons are concerned.
The pledge is not binding on the vendor if the
required formalities are not complied with.
Without the formalities the third
party will have a right as a
preferred creditor and in levying
judgment against the goods that
were supposed to be pledged.
Consequently, the pledgor in the
absence of the formality, could not
lawfully assert any right as a
pledgee.
The intent to constitute a pledge may appear not
only in the written document but also in a separate
agreement.
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

CREDIT TRANSACTIONS

o
o
o

CHAPTER 11

THE CONTRACT OF PLEDGE

1. ALIENATION OF THE THING

The pledgor remains the owner of the thing.
Hence, the pledgor retains the right to sell or
transfer the property.
The pledge follows the ownership; unless the pledge
is extinguished, the sale of the thing pledge will not
by itself extinguish the pledge.

b.

2. DELIVERY TO TRANSFEREE
o
o

If the thing to be sold is pledged, the seller

cannot make actual delivery of the thing
because the pledgee is in possession thereof.
Thus, there can only be constructive delivery
of he thing which becomes effective upon the
consent of the pledgee to hold possession of
the thing for the transferee.

3. SUBSEQUENT PLEDGE PROHIBITED

o Property held in lawful property
cannot legally be pledged to another
while the first pledge subsists
o The alleged second pledge is wholly
without virtue or effect as to the
property itself.
Article 2098- 2104

1. POSSESSION
o The pledgee is a lawful and rightful
possessor of the personal property
pledged.
a. The pledger cannot alienate the thing
pledged before the obligation becomes due
unless there is consent on the part of the

c.
d.

e.

pledgee- 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.
The creditor-pledgee 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 and
deterioration
The pledgee cannot deposit the thing pledged
with a third person unless there is a
stipulation authorizing him to do so
The creditor-pledgee may bring the actions
which pertain to the owner of the thing
pledged in order to recover it or defend it to
third persons
The pledgor has the same responsibility as a
bailor in commodatum in the case under
Article 19515

A. INCORPOREAL RIGHTS
o Incorporeal
rights,
evidenced
by
negotiable instruments, bills of lading,
shares of stocks, bonds, warehouse
receipts and similar documents may also
be pledged. The instrument proving the
right to pledged shall be delivered to the
creditor, and if negotiable, must be
indorsed.
B. FRUITS
o If the thing pledged shall earn fruits,
income, dividends, or interests, the
creditor shall:
(1) Compensate what he receives with
those which are owing to him

5 Article 1951

CREDIT TRANSACTIONS

CHAPTER 11

THE CONTRACT OF PLEDGE

(2) If none are owing to him, or insofar

as the amount may exceed that
which is due should be applied to
the principal.
(3) Unless otherwise stipulated, the
pledge shall extend to the interest
and earnings of the right pledged.
In case of pledge of animals, their
offspring shall pertain to the pledgor or
owner of animals pledged, but shall be
subject to pledge, if there is no stipulation
to the contrary.
2. HIDDEN DEFECTS
The pledgor who knowing the flaws of the
thing pledged, does not advise the
pledgee of the same, shall be liable for
the latter for the damages which he may
suffer by reason thereof.
REQUISITES
1. There is a hidden defect in the
thing pledged
2. The pledgor is aware of the
hidden defect
3. The pledgee is not aware of the
hidden defect
4. The pledgor did not notify the
pledgee of the hidden defect
5. The pledgee suffered damages
by reason thereof.
o

Article 2105

Article 2115 provides that the sale of

the thing pledged extinguishes the
obligation whether or not the proceeds
of the sale are equal to the amount of
the principal obligation. In that case,
the creditor-pledgee does not have the
right to recover the deficiency.

1
1. RETURN OF THE THING
o The debtor cannot demand for the
return of the thing if the principal
obligation has not been fully paid.
o If the thing is returned before the
payment of the obligation, the same
will be extinguished.
2. PRESCRIPTION
o The right to recover the thing from the
pledgee will rise only upon payment of the
loan secured by the pledge.
o Therefore the prescriptive period within
which to demand the return of the thing
pledged should begin to run only after the
payment of the loan and demand for the
thing has been made, because it is only
then that the debtor acquires a cause of
Article 2106-2109

action for the return of the thing pledged.

CREDIT TRANSACTIONS

CHAPTER 11

THE CONTRACT OF PLEDGE

1. DEPOSIT
o The pledgor has the right to ask that the
thing be deposited in the following cases:
(1) If the pledgee uses the thing pledged
without authority of the owner
(2) If the creditor misuses the thing pledged
(3) (3) If through the negligence or willfull
act of the pledgee, the thing pledged is in
the danger of being lost or impaired.
2. RETURN BEFORE FULL PAYMENT
o REQUISITES:
(1) There are reasonable grounds to fear that
the destruction or impairment of the thing
pledged
(2) The danger of destruction or impairment
was without the fault of the pledgee
(3) The pledgor must offer another thing in
pledge, provided the latter is of the same
kind as the former and not of inferior
quality
(4) The exercise of the right is without
prejudice to the right of the pledgee to
sell the thing at public auction under
Article 2109.
o It is important that the creditor is
aware of the true nature of the
substance and quality of the thing
pledged so that the creditor will have
the correct estimation of the value of
his security
o REMEDIES
If the creditor was deceived as to the
substance and quality of the thing
pledged has has the alternate remedies
of:
(1) The creditor may claim another thing
in pledged

(2) The creditor may demand immediate

payment of the obligation.
Article 2110-2111

1. EXTINGUISHMENT
o GROUNDS FOR EXTINGUISHMENT
(1) Return of the thing pledged
o The return of the thing pledged will not
affect the principal obligation. As an
accessory contract the return will not
affect the principal obligation.
(2) Statement in writing that the creditor
renounces or abandon the pledge.
(3) Full payment or compensation of the
principal obligation
A. NOVATION6
o Novation
is
a
ground
for
the
extinguishment of an obligation. However,
the novation must be established by
sufficient proof.
B. ACQUISITIVE PRESCRIPTION
o Article 1132 provides that the ownership
of
movables
prescribes
through
uninterrupted possession for 4 years in
good faith
o The ownership of personal property
presecribes
through
uninterrupted
possession for 8 years in good faith
o The provision on prescription does not
apply in the things plesged because what

6 NOVATION and REQUISITES

CREDIT TRANSACTIONS

CHAPTER 11

THE CONTRACT OF PLEDGE

is required is the possession of the thing

as an owner., public peaceful and
uninterrupted.
C. CONDONATION7 OR REMMISSION8
o The
condonation
of
the
principal
obligation by the creditor extinguishes the
accessory contract like pledge.
o Remmission or condomation may pertain
to pledge only.
o Article 1274 provides that it is presumed
that the accessory obligation of pledge
has been remitted when the thing
pledged, after its delivery to the creditor,
is found in the possession of the debtor, or
of a third person who owns the thing.
Article 2112-2119

1. NATURE OF EXTRAJUDICIAL SALE

o The pledgee may sell the pledged property if
the obligations it secure is not paid.
o The creditor, in a contract of real security like
pledge
cannot
appropriate
without
foreclosure the things given by way of
pledge.

7 CONDONATION
8REMMISSION

o
o

Any stipulation to the contrary constitutes

pactum commissorium which is void.
The public auction will result in the
extinguishment of the obligation.

2. REQUISITES:
(1) The credit has not been satisfied in due time
(2) The sale must be at a public auction before a
notary
o The procedure in the foreclosure of
pledge before a notary public does not
require the submission of a petition for
extra judicial foreclosure before the
Execution Judge of the appropriate RTC
through the Clerk of Court/Ex-Officio
Sheririff.
A sheriff who does the foreclosure
shall be guilty of gravely abusing his
authority.
The foreclosure of a pledge occurs
extrajudicially
without
the
intervention of the courts.
(3) There must be notification to the debtor and the
owner of the thing in the proper case
o Notice must be sent before every auction
date but notice after the auction sale does
not make the same void.
(4) The notice must state the amount for which the
public sale is to be held
(5) All bids at the public auction shall offer to pay
the purchase price at once
(6) The pledgee must notify the pledgor of the
results of the bidding.
3. NO RIGHT OF REDEMPTION
o There is no right of redemption after the
thing pledged is sold in an extrajudicial
sale.

CREDIT TRANSACTIONS

CHAPTER 11

THE CONTRACT OF PLEDGE

The rights of ownership vested

unto the purchaser are not
entangled
in
any
suspensive
condition that is implicit in
redemption

4. EQUITY OF REDEMPTION
o The payment or consignation of the
amount due will stop the sale.
o Since, the obligation is extinguished,
there is no need to proceed with the sale.
o In order that the consignation could have
the effect of extinguishing the pledge
contracts, such amounts should cover not
only the principal amount but also the
interest due.
5. NO REQUIREMENT OF SALE SEPARATELY
o It is the pledgees right to choose which of
the items should be sold at the auction when
two or more things are pledged.
o The law does not prohibit the things subject
to the pledge be sold at one auction sale or
be it bought in a single occasion.
However this ruled does not apply
in the ff cases:
(1) A bidder expressed the desire
to bid on a determinate number
or portion of the pledged
shares. Not all of the pledge
contracts are not extinguished
if the bidder will choose to buy
only a specific share. There is a
need to determine what shares
will satisfy the obligation
(2) One or some owners of the
thing
pledged
shares
participated in the auction,

bidding only on their respective

pledge shares.
6. PLEDFOR CAN BID
o The pledgor or owner may bid during the
auction sale. The pledgor shall have the better
right if he would offer the same terms as the
highest bidder
The pledgor are in a favorable situation
because:
(1) They may acquire the thing pledged
again in a price lower than what is
originally due.
(2) The creditor would not be able to
recover the deficiency due from them
o The pledgee can only bid in the condition that
he is not the only bidder..
7. PLEDGEES RIGHT TO APPROPRIATE
o The pledgee has the right to appropriate after
second unsuccessful sale. In this case, he shall
be obliged to give an acquittance for his entire
claim
8. NO RECOVERY OF DEFICIENCY
(1) If the price of the sale is less, neither shall the
creditor may be entitled to recover the
deficiency, notwithstanding any stipulation to the
contrary
o RATIO: By choosing foreclosure rather than
suing on the principal obligation, the creditor
has waived any other remedy.
(2) If the price of sale is more than the amount of
the obligation, the debtor shall not be entitled to
the excess, unless it is otherwise agreed. The
pledgee shall be entitled to the excess. The
exception is in legal pledge because after the
payment of the debt and expenses, the

CREDIT TRANSACTIONS

CHAPTER 11

THE CONTRACT OF PLEDGE

remainder of the price of the sale shall be

delivered to the obligor.
o The application of Article 2115 is not affected
by the fact that the pledge is not the principal
agreement
Article 2120

1. RIGHTS OF A THIRD PARTY PLEDGOR

o The pledgor whose property was sold for the
debt of the debtor must be indemnified by the
debtor:
(1) The total amount of the debt
(2) The legal interest thereon from the time the
payment was made known to the debtor
(3) The expenses incurred by the pledgor after
having notified the debtor that payment has
been demanded from him
(4) Damages, if they are due.

2. MECHANICS LIEN
o Article 1731 provides that a mechanic can
legally retain by way of pledge the movable
upon which it executed his work.
o The mechanic has lien until he has been paid
his charges. The lien entitles him to sole
custody of the car.
3. SALE IN LEGAL PLEDGE
o A thing under a pledge by operation of law
may be sold if the ff are complied with:
(1) The creditor must demand the amount for
which the thing is retained
(2) The public auction shall take place one
month after such demand
o If the creditor does not cause the public sale
within one month from demand, the debtor
may require the return of the thing.

Article 2121-22

1.
o
o
o
o
o
o
o

PLEDGE BY OPERATION OF LAW

Article 456
Article 612
Article 1707
Article 1731
Article 1914
Article 1994
Article 2004

LAW ON PAWNSHOP
Article 2123

CREDIT TRANSACTIONS

CHAPTER 11

THE CONTRACT OF PLEDGE

1. LAW ON PAWNSHOPS
o Governed by PD 114 or the Pawnshop
Regulation Act.
o The regulations regarding pawnshops is
primarily the P Regulations of the Manual of
Regulations
for
NonBank
Financial
Institutions.
o A pawnshop enters into a contact of pledge
with the pawner or borrower.

Failure to issue will subject the paynshop

to penalties under Section 189

3. IMPORTANT REGULATIONS

2. DEFINITION OF TERMS
o PAWNSHOP- A person or entity engaged in
the business of lending money on personal
property delivered as a security for loans and
shall be synonymous and may be used
interchangeably
with
pawnbroker
or
pawnbrokerage.
o PAWNER- refers to the borrower from a
pawnshop
o PAWNEE- pawnshop or pawnbroker
o PAWN-the personal property delivered by the
pawner to the pawnee as a security of the
loan
o PAWN TICKET- is the pawnbrokers receipt
for a pawn. It is not a security or evidence of
indebtness
Proof of contract of pledge
At the time of every loan or pledge, the
pawnshop is required to deliver to each
person
pawning
signed
by
the
pawnbroker containing:
i. The amount of the loan
ii. The date the loan was granted
iii. Rate of interest
iv. The name and residence of the
pawnee.