CHAPTER 11 CONTRACT OF PLEDGE

Art. 2093 - 2095.

Definition
Pledge 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 security for the performance of the
principal obligation, upon the fulfillment of which the
thing pledged, with all its accessions and
accessories, shall be returned to the debtor or to
the third person.

To reflect eventuality of non-payment an

accessory contract by virtue of which personal
property delivered to the creditor as a security
for an obligation with the agreement that the
pledge property can be sold at public auction in
case of non-payment to answer for the unpaid
obligation or the pledge property shall be
returned by the pledgee-creditor to pledgor in
case principal obligation is fully paid.
Creditor is given the right to retain his debtors
movable property in his possession, or in that of
a third person to whom it has been delivered,
until debt is paid.
Thing given in pledge never becomes property
of creditor-pledgee; debtor continues to be the
owner.
Creditor only has real right over the thing, which
he can dispose of through notary at public sale.
Requisites for a valid Contract of Pledge
S constituted to secure fulfillment of principal
obligation
A pledgor is absolute owner of thing pledged
F person constituting pledge has free disposal
of his property or legally authorized to for the
purpose
Exception: Real owner may be estopped even if person who
delivered the thing by way of pledge was not real owner.
ART 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 pledge
has been constituted, set up his own title to defeat the pledge
of property, made by the other to a pledgee who received the
same in good faith and for value.

Real contracts, such as deposit, pledge and

commodatum, are not perfected until delivery of
object

Delivery
No pledge is validly constituted if there is no
delivery.
Delivery of possession implies a change in
actual possession of the property pledged and
that a mere symbolic delivery is not sufficient.
Deposit can be to third person by agreement
Manresa: this requisite is most essential and is
characteristic of pledge without which the
contract cannot be regarded as entered into or
completed because in delivery lies the security
of the pledge.
Until delivery of the thing, the whole rests in an
executory contract, however strong may be the
engagement to deliver it, pledgee acquires no
right of property in thing.
Pledge is merely a lien, and possession is
indispensible to the right of a lien
Abandoment of lien = absolute waiver of lien
Betita v Ganzon
animals were in possession of a third person who were
not specified by both parties before the alleged pledge
was entered into. There was no actual delivery of
possession to pledgee. No change in possession.
Hence, pledge was not effective.
El Blanco Espanol v Peterson
Pledgee took possession of goods pledges through a
depository and special agent appointed by it, each had a
duplicate key to the warehouse wherein goods were
stored, and pledgee received and collected proceeds of
goods as they were sold. The fact that goods continued
in the warehouse formerly rented by pledgor does not
affect validity and legality of pledge.

Characteristics
R creates a real right
A accessory contract
S real security contract
D perfected by delivery
U unilateral upon perfection of contract with
delivery
S subsidiary because thing pledged will answer
for principal obligation
Pledge is an accessory contract of security.
Hence, no transfer of ownership.
Integrated Realty Corp and Raul Santos v PNB
Character of transaction between parties is to be
determined by their intention, regardless of what
language was used or what form of transfer was. If it was
intended to secure the payment of money, it must be
construed as a pledge, but if there was some other
intention, it is not a pledge
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 a pledge if the debt continues in
existence and is not discharged by the transfer and that

accordingly, use of terms ordinarily importing

conveyance, of absolute ownership will not be given
effect.

ART 1365. If two parties agree upon the pledge

of personal property but the instrument states
that property sold absolutely or with a right of
repurchase, reformation of instrument is proper.
KINDS
C conventional or voluntary
- Agreed upon by parties
L legal or by operation of law
- Often referred to as Right of Retention,
provided for by law
SUBJECT MATTER
Personal or movable properties contemplated
under ART 416 and 417 may be pledged
provided that they are susceptible of actual
delivery and possession.
Pledge is confined and limited to personal
property, and cannot be extended or made apply
to real property.
Examples:
- vessel and a tugboat
- shares of stock
- jewelries
ASSIGNMENT OF BANK DEPOSIT
Victoria Yau Chu v CA
Assignment of deposit by way of security is in the nature
of pledge. However, public auction is no longer
necessary to satisfy the obligation because the collateral
is money.
All that has to be done to convert pledgors time deposit
certificates into cash was to present them to bank for
encashment after due notice to debtor.
Encashment of deposit certificates was not a pacto
commissorio which is prohibited under ART 2088.
Pacto commissorio is a provision for the automatic
appropriation of the pledged or mortgaged property by
creditor in payment of the loan upon its maturity.

SHARES OF STOCKS
Shares of stocks may be pledged to secure an
obligation.
A Deed of Assignment of shares of stock may be
considered as a mere pledge in some cases
where substance of the transaction is pledge.
Although title of document is assignment, the
assignment may have been executed for
purpose of securing an obligation.
SEC 55 of Corp Code provides that in case of
pledge or mortgaged shares in stock
corporations, the pledgor shall have the right to
attend and vote at meetings of stockholders,
unless pledgee is expressly given by pledgor

such right in writing which is recorded on

appropriate corporate books.
It is not a requirement for the validity of pledge
that these transactions are recorded in corporate
books.
Assignment of Shares cannot be considered
proof of pledge if explicit terms of deed
expressly states that owner of shares sold,
assigned and transferred unto another the
stocks involved for and in consideration of the
obligations undertaken.
NEGOTIABLE INSTRUMENTS
A pledgee of a negotiable instrument can be a
holder for value up to the extent of his lien.
There is an option to effect that holder of a
collateral like pledge can recover full amount of
the instrument even if the value of lien is less.
Negotiable instrument shall be delivered to the
creditor and if negotiable, must be indorsed.
AFTER-INCURRED OBLIGATIONS
Only current obligations are secured by the
pledge.
However, after-incurred obligations of debtor
may be secured provided that they are
accurately described.
FORMALITIES
ART 2096
- provides that a pledge shall not take effect
against third persons if a description of the
thing pledged and date of pledge do not
appear in a public instrument.
- interpreted in the sense that for contract to
affect third persons, apart from being in a
public instrument, possession of the thing
pledged must in addition be delivered to the
pledgee.
- Rule of substantive law, prescribing a
condition without which the execution of a
pledge contract cannot affect third person
adversely.
Manresa: The article answers the necessity for
not disturbing the relationship or the status of the
ownership of things with hidden or simulated
contract of pledge, in the same way and for
identical reasons that were taken into account by
the mortgage law in order to suppress the
implied and legal mortgages which produced so
much instability in real property.
Pledge can be constituted in whatever
form, as all other contracts, and the one
formalized in the way will be valid and will
produce its natural and legal consequences in

the juridical order with respect to contracting

parties and to their assigns; but will not have
effect with respect to a third party if certainty of
date is not evidenced in a public writing, by
which means the legislator has tried to render
impossible the existence of fraudulent
confabulations.
Third party includes original vendor of goods.
Pledge is not binding on the vendor if the
required formalities are not complied with.
Third party may be acting strictly within his or
her rights in asserting claims as preferred
creditor in levying attachment against goods.
Pledgor, in the absence of formality could not
lawfully assert any right as a pledgee or
preferred creditor that adversely affected rights
of third party.
REAL INTENT
Intent to constitute pledge may appear not only
on the written agreement but in a separate
document.
Example: bill of sale delivered by pledgor
appears on its face to be absolute sale of books,
the letter of alleged pledgor accompanying bill of
sale states in effect that it was a transfer of
property as security for loan, both parties treated
it as security or an offer to pledge.
Art. 2097.
ALIENATION OF THE THING
Pledgor
- remains the owner of the thing
- retains the right to sell or transfer the property
(Jus Dispodendi)
Pledge follows the ownership; unless the pledge
is extinguished, sale of thing pledged will not by
itself extinguish pledge.
DELIVERY TO TRANSFEREE
Generally, real right over the thing is transferred
upon delivery of the thing.
If thing sold is pledged, seller cannot make
actual delivery of the thing because pledgee is in
possession thereof.
Pledgee is not expected to part with the
possession of the thing because he will be then
be waiving the right to the security.
There can only be constructive delivery of the
thing which becomes effective upon consent of
the pledgee to hold property as property of
transferee.
Ownership of thing is transferred to vendee as
soon as pledgee consents to alienation.

If pledgee does not give consent, sale is still

valid and subsisting but subject to the right to
rescind because seller cannot deliver.
SUBSEQUENT PLEDGE PROHIBITED
A property held in lawful pledge by pledgee
cannot legally be pledged to another while the
first pledge subsists.
The fact that there was no delivery by the
pledgor to the (second) pledgee of the property
sought to be pledged.
Art. 2098 - 2104.
POSSESSION
Right of Pledgee
- Retain thing until debt is
paid
- Pledgor cannot alienate
thing pledged before
obligation becomes due
unless pledgee consents
- Right to reimbursement of
expenses made for
preservation
- May bring actions which
pertain to owner of thing in
order to recover it from, or
defend against third
persons

Obligation of Pledgee
- Take care of thing with
diligence of a good father
of a family
- Liable for loss or
deterioration of thing
- Same responsibility as
bailor in commodatum
- Advise pledgor, without
delay, of any danger to
thing

Incoporeal Rights - evidenced by negotiable

instruments, bill of lading, shares of stock,
bonds, warehouse receipts and similar
documents may be pledged.
- if negotiable, should be delivered and must be
indorsed
OBLIGATION TO PRESERVE
Cruz v Lee
Creditor who receives an article in pledge must bear all
the expenses necessary to secure the conservation of
the pledge and that the debtor is bound to reimburse him
for such expenses.
Not only it is the right of the holder of collateral security
to collect the money thereon and apply it to principal
debt, but his duties in this respect are active and he is
bound to ordinary diligence to preserve the legal validity
and pecuniary value of the pledge, and if by negligence,
wrongful act or omission on his part loss is sustained, it
must be borne by him

FRUITS
if thing earns or produces fruits, income,
dividends or interests, creditor shall:
C compensate what he receives with those
owing to him
P if none are owing to him or amount exceeds,
he shall apply it to the principal

 Animals offspring shall pertain to pledgor but

shall be subject to the pledge, if no stipulation to
contrary.
HIDDEN DEFECTS
Applying 1951, pledgor who, knowing the lfaws
of the thing pledge, does not advise the pledgee,
shall be liable to the latter for damages he may
suffer.
Requisites:
H there is a hidden defect in thing pledged
A pledgor is aware of such defect
P pledgee not aware of defect
N pledgor did not notify pledgee of defect
S pledgee suffered damages by reason of
Defect
Art. 2015.
RETURN OF THE THING
Debtor cannot ask for return of thing if obligation
secured has not been fully paid.
Return of thing will, extinguish the pledge if
same is done before payment of secured
obligation
PRESCRIPTION
Pledgor has right to ask for redelivery of thing
pledged upon payment of debt.
Right to recover thing pledged based on written
contract of pledge would arise only upon
payment of loan secured by pledge.
Prescriptive period within which to demand
return of thing should begin to run only after
payment of loan and demand for thing has been
made, because it is only then that debtor
acquires cause of action for return of thing
pledged.
Art. 2016 - 2019.
DEPOSIT
Pledgor is not entitled to return of thing before
full payment of obligatin it secures.
Pledgor provides right to ask thing to be
deposited in ff cases:
M creditor misuses thing in any other way
U creditor uses thing without authority of
owner
D through negligence or willful act of pledgee,
thing is in danger of being lost of impaired

RETURN BEFORE FULL PAYMENT

Pledgor may demand return of thing pledged if ff
requirements are present:
R there are reasonable ground to fear
destruction or impairment of thing
O pledgor must offer another thing of the same
kind and not of inferior quality
W without fault of pledgee
P exercise of right is without prejudice to right
of pledgee to sell thing at public auction.
RATIONALE OF ARTICLE 2019
Important that creditor is aware of true nature of
substance and quality of thing pledged so
creditor will have correct estimation of value of
security
REMEDIES
Two alternative remedies of creditor if he was
deceived as to substance and quality of thing:
C claim another thing in pledge; or
D demand immediate payment of principal
Obligation
Art. 2110 - 2111.
EXTINGUISHMENT
Grounds for extinguishment of pledge:
R return of thing pledged
W statement in writing that creditor renounces
or abandons pledge
F full payment or compensation
N - novation
Necessarily, pledge is also extinguished if
principal obligation extinguished.
RETURN
Pledgee may voluntarily release the pledge by
returning the thing pledged.
Pledge is merely an accessory obligation, and its
release does not vary the terms of principal
obligation.
NOVATION
Novation is also one of the ground of
extinguishment of obligation.
Must be established by sufficient proof.
Example: It cannot be inferred from mere fact
that pledgor has not for a number of years
instituted any action to recover shares.
ACQUISITIVE PRESCRIPTION
ART 1132 provides that the ownership of
movables prescribes through uninterrupted
possession for four years in good faith.

 Ownership of personal property also prescribes

through uninterrupted possession for eight years
without need of any other condition.
Pledgee cannot acquire the thing pledged
through prescription because what is required in
ART 1132 is possession in concept of owner.
Justice Vitug: in order to ripen into ownership,
possession must be in the concept of an owner,
public, peaceful and uninterrupted. Thus, possession
with a juridical title, such as by usufructuary, a
trustee, lessee, agent or a pledgee, not being in the
concept of owner cannot ripen into ownership by
acquisitive prescription unless the juridical relation is
first expressly repudiated and communicated to the
other party.

CONDONATION OR REMISSION
Condonation of principal obligation extinguishes
accessory contract like pledge.
Remission or condonation may pertain to pledge
only.
ART 1274 provides that it is presumed that the
accessory obligation of pledge has been
remitted when the thing pledged, after its
delivery to creditor, is found in the possession of
the debtor, or of a third person who own the
thing.
It is contrary to nature of pledge that thing
pledged is in the possession of debtor or owner,
the logical conclusion is that pledge is already
extinguished.
Art. 2112 - 2119.
NATURE OF EXTRAJUDICIAL SALE
Pledgee may sell the pledged property if
obligation it secures is not paid.
The law requires foreclosure in order to allow a
transfer of title of the goods given by way of
security from its pledgor, and before any such
foreclosure, the pledgor is the owner of goods.
Public auction will result in extinguishment of
obligation.
REQUIREMENTS OF THE SALE
Sale of pledged property shall comply with the ff
requirements:
C credit not satisfied in due time
S sale at public auction before notary public
N there must be notification to debtor and
owner of thing
A notice must state amount for which public
sale is to be held
B all bids at auction shall offer to pay purchase
price at one
N pledgee must notify pledgor of result of
bidding

NOTARY PUBLIC
Petition for foreclosure is not required in ART
2112.
The procedure in foreclosure of pledge before
notary public does not require submission of
petition for extra-judicial foreclosure before
judge.
Only a notary public can conduct public auction
after proper notice is sent to debtor and owner of
thing pledged.
Sale of pledge thing is an extrajudicial sale,
specifically a notarial sale.
NOTICE
Sale shall be made at public auction and with
notification to debtor and owner of thing pledged
in a proper case.
No prohibition contained in law against sending
notice for first and second public auction.
Purpose: to sufficiently apprise the pledgor that
thing pledge will be sold and proceeds will be
applied to satisfy debt.
NO RIGHT OF REDEMPTION
No right of redemption after thing pledged is sold
in an extrajudicial sale.
Rights of ownership vested unto purchaser at
foreclosure sale are not entangled in any
suspensive condition that is implicit in a
redemptive period.
EQUITY OF REDEMPTION
Pledgor has no right to redeem property after
public auction, but pledgor may satisfy obligation
after it becomes due and before the public sale.
Payment or consignation of amount due will stop
the sale.
In order that consignation could have effect of
extinguishing pledge contracts, it amount should
cover principal loans and interests.
NO REQUIREMENTS TO SELL SEPARATELY
No provision in Rules of Court or in any law
requiring that pledge properties sold at auction
be sold separately.
It is the pledgee, and not the pledgor who is
given the right to choose which of the items
should be sold if two or more things are pledged.
Nothing in CC prohibits pledgee of several
different pledge contracts from auctioning all of
the pledged properties on a single occasion,
from the buyer at the auction sale in purchasing
all pledged properties with a single purchase
price.

- once a pledged item is sold at auction, neither

pledgee nor pledgor can recover whatever
deficiency or excess there may be between the
purchase price and amount of principal
obligation.
Bidder may desire to bid on a determinate
number or portion
- there would be a need to ascertain which of the
shares are covered by bid price
If one or some of the owners of pledged shares
participated in the auction, bidding only on their
respective pledged shares.
-must also ascertain which of the shares are
covered by bid price
PLEDGOR CAN BID
Pledgor or owner may bid during auction sale.
Pledgor shall have a better right if he should
offer the same terms as the highest bidder
Pledgee may also bid but his offer shall not be
valid if he is the only bidder.
Advantages if peldgor will participate in bidding:
R - chance to recover thing
L at a lower price than amount that was
actually due from them
PLEDGEES RIGHT TO APPROPRIATE
Pledgee has right to appropriate after second
unsuccessful sale.
If at first auction thing is not sold, a second
auction with the same formalities shall be held
If at second auction there is no sale, creditor
may appropriate thing pledge.
Creditor shall be obliged to give an acquittance
for his entire claim.
NO RECOVERY OF DEFICIENCY
Price is less creditor not entitled to recover
deficiency
Price is more debtor not entitled to excess
unless otherwise agreed.
- exception is in legal pledge because after
payment of debt and expenses, remainder of
price shall be delivered to obligor.
Total obligation is extinguished despite
deficiency in proceeds of sale.
Art. 2120.
RIGHTS OF THIRD PARTY PLEDGOR
Pledgor whose property was sold for the debt of
a debtor must be indemnified by latter.

Indemnity to pledgor comprises of:

T total amount of debt
L legal interests from time payment was
known to debtor
E expenses incurred by pledgor after having
notified debtor
D - damages
Art. 2121 - 2122.
PLEDGE BY OPERATION OF LAW
Legal pledge are those provided for in:

ART 546 necessary expenses shall be refunded to every

possessor but only the possessor in good faith may retain
thing until he has been reimbursed.
Useful expenses shall be refunded only to possessor
in good faith with same right of retention, the person who
has defeated him in possession having option of refunding
amount of expenses or of paying increase in value which
thing may have acquired by reason thereof
ART 612 upon termination of usufruct, thing in usufruct
shall be delivered to owner, without prejudice to right of
retention pertaining to usufructuary or his heirs for taxes
and extraordinary expenses which should be reimbursed.
After delivery has been made, the security or mortgage
shall be cancelled.
ART 1707 the laborers wages shall be a lien on the
goods manufactured or the work done.
ART 1731 he who has executed work upon a movable
has a right to retain by way of pledge until he is paid.
ART 1914 The agent may retain in pledge the things
which are the object of agency until the principal effects the
reimbursement and pays indemnity set forth in two
preceding articles
ART 1994 the depositary may retain the thing in pledge
until full payment of what may be due to him by reason of
deposit
ART 2004 - the hotel-keeper has a right to retain the things
brought into the hotel by the guests as a security for credits
on account of lodging, and supplies usually furnished to
hotel guests.

MECHANICS LIEN
Mechanic can legally retain, by way of pledge,
the movable upon which it executed its work.
Virata v Benjamin Aquino
- the sitation is no different from garnishee being one with
a mechanics lien over a car that he has repaired until he
has been paid his charges, his mechanics lien entitles
him to sole custody of the car.

Possession is essential for existence of such

lien. Such requirement is satisfied if mechanic
initially delivered vehicle but regained
possession when it was returned for further
repars.

SALE IN LEGAL PLEDGE

Thing sold under pledge by operation of law may
be sold only if the ff are complied with:
D creditor must demand amount for which
thing is retained
1 public auction shall take place within 1
month after such demand
If without just grounds, creditor does not cause
public sale within 1 month, debtor may require
return of the thing.
Art. 2123.
LAW ON PAWNSHOPS
Special law that governs pawnshops is PD114,
Pawnshop Regulation Act
Regulations concerning pawnshops is primarily
the Regulations Governing Pawnshops, P
Regulations of the Manual of Regualtions for
Non-Bank Financial Institutions issued by BSP
DEFINITIONS
Pawnshop a person or entity engaged in
business of lending money on
personal property delivered as
security for loans and shall be
synonymous and may be used
interchangeable with pawnbroker
of pawnbrokerage
Pawner borrower from a pawnshop
Pawnee pawnshop or pawnbroker
Pawn personal property delivered by pawner
to pawnee as security for loan
Pawn ticket pawnbrokers receipt for a pawn
Neither a security nor printed
evidence of indebtedness
NATURE OF THE CONTRACT WITH
PAWNSHOP
In essence, a pawnshop enters into a contract of
pledge with the pawner or borrower.
PAWNSHOP TICKETS
At every loan or pledge, pawnbroker or
pawnshop is required to deliver to each person
pawning or pledging a ticket signed by
pawnbroker containing:
D date loan was granted
A amount of loan
R rate of interest
N name and resident of pawnee
Failure to do so shall subject pawnshop
penalties under Sec 18 of law.
Pawn ticket is evidently a proof of a contract of
pledge.