OBLIGATION OF PLEDGEE

NOT TO USE THING PLEDGED

Art. 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)

> The pledgee who is in possession of the thing pledged has

no right to make use of it without permission from the owner
> If however, the thing pledged is of such a character that use is necessary in properly
caring for it, then it becomes his duty to use it so that it will not suffer from its disuseif
from the use thereof profits are derived, the pledgee must
account such profits to the pledgor and apply the net proceeds of such use to the
payment of his claim

RIGHT OF THE PLEDGOR TO ASK

THE THING PLEDGED TO BE
DEPOSITED
1. If the creditor uses the thing without authority
2. If he misuses the thing in any other way
3. If the thing is in danger of being lost or impaired because of the negligence or willful act
of the pledgee

RIGHT OF PLEDGOR TO
DEMAND THE RETURN OF
THE THING PLEDGED
Art. 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)
> Pledgor could demand the return if the obligation is fully paid including interest due thereon
and expenses incurred for its preservation
> Prescription will 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 to the rulewhen the thing pledged is in danger
of destruction or impairment with another thing of the same kind or quality

Danger To The Thing Pledged

Art. 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)

REQUISITES FOR THE APPLICATION

OF ARTICLE 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 pledgor
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 doesn't choose to exercise his right to cause the thing pledged to be sold at
public auction

RIGHT OF PLEDGEE TO
CAUSE THE SALE OF
THE THING PLEDGED
Art. 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)
> This right is superior to that of the pledgor to substitute the thing pledged
> The right given to the pledgor is without prejudice to the right of the pledgee
 RIGHT OF PLEDGEE TO
DEMAND SUBSTITUTE OR
IMMEDIATE PAYMENT
Art. 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)
1. To claim another thing in pledge, and
2. To demand immediate payment of the principal obligation
> The abovementioned are alternative remediesto choose only one but not both

EXTINGUISHMENT OF PLEDG
E BY RETURN OF THE THIN
G PLEDGED
Art. 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)

> One of the essential requisites of pledge is that the thing

pledged be placed in the possession of the pledgee or a third person designated by the
parties
> Hence, the pledge is extinguished once the thing pledged
is return in the possession of the pledgor. This
notwithstanding any stipulation that the pledge would continue although the pledgee is no longer
in possession of the thing pledged
> The pledge is also extinguished by payment of the debt, by renunciation or abandonment of the
pledge and by sale of the thing pledged at public auction
PRESUMPTION OF
EXTINGUISHMENT OF PLEDGE
> Possession by the debtor or owner of the thing pledged subsequent to the perfection of the
pledge gives rise to a prima facie presumption that the thing has been returned and therefore, the
pledge has been extinguished
> This presumption may be disputed or rebutted by evidence to the contrary
> Only the accessory obligation is presumed remitted and not the principal obligation

EXTINGUISHMENT OF
PLEDGE BY RENUNCIATION
OR ABANDONMENT
Art. 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)

> The renunciation or abandonment must be in writing to constitute an extinguishment

of pledge

> The renunciation is not conditioned upon the acceptance by the pledgor or owner
nor upon the return of the thing pledged

> Under this article, the thing pledged remains in the

possession of the pledgee. Hence the renunciation must be in writing.

RIGHT OF PLEDGEE TO
CAUSE SALE OF THE THING
PLEDGED
Art. 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)
> The thing pledged may be alienated for the payment to the creditor when the principal obligation
becomes due

THE FORMALITIES REQUIRED FOR

SUCH SALE
1. The debt is due and unpaid
2. The sale must be at a public auction
3. There must be notice to the pledgor and owner, stating the amount due
4. The sale must be made with the intervention of a notary public

RIGHT OF PLEDGEE TO
APPROPRIATE THING PLEDGED
> Serves as an exception to the prohibition on pactum commissorium
> The pledgee may appropriate the thing pledged if after the first and second auctions, the thing is
not sold
> If the creditor appropriates the thing, it shall be considered as full payment of his entire claimhe
is thus obliged to an acquittance for the same. The debtor is not entitled for the excess in
case the value of the thing pledged is more than the principal obligation.
Art. 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 PLEDGOR AND

PLEDGEE TO BID AT PUBLIC
SALE
 To avoid fraud, the pledgee is not allowed to acquire the thing pledged if he is the only
bidder

IN PLEDGE, BID MUST BE FOR

CASH
Art. 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 purcha
se price, as far as the pledgor or owner is concerned. (n)

EFFECT OF SALE OF THING

PLEDGED
Art. 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)
1. If the price of the sale is more than the amount due the creditor, the debtor is not entitled
to the excess unless the contrary is provided
2. If the price of sale is less, neither is the creditor entitled to recover the deficiency
a. The reason is to compel the creditor to hold an honest public sale
b. Creditor should realize the loans only as much as he is likely to realize at a public sale

RIGHT OF DEBTOR TO EXCESS

> GENERAL RULEthe debtor is not entitled to the excess unless there is an agreement to
the contrary
> 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
 PLEDGE
(ARTICLES 2085-2123)

PROVISIONS COMMON TO PLEDGE

AND MORTGAGE
Art. 2085. The following requisites are essential to the contracts of pledge and mortgage:

(1) That they be constituted to secure the fulfillment of a principal obligation;

(2) That the pledgor 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 the absence thereof, that they be
legally authorized for the purpose.

Third persons who are not parties to the principal obligation may secure the latter by pledging or
mortgaging their own property. (1857)

Art. 2086. The provisions of Article 2052 are applicable to a pledge or mortgage. (n)

Art. 2087. It is also of the essence of these contracts that

when the principal obligation becomes due, the things in which the pledge or mortgage consists
may be alienated for the payment to the creditor. (1858)

PLEDGE
> Contract by virtue of which the debtor delivers to the
creditor or to a third person a movable, or 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

KINDS OF PLEDGE
1. Voluntary or conventional
2. Legal
REQUISITES TO A CONTRACT OF
PLEDGE
1. It be constituted to secure the fulfillment of a principal obligation
2. The pledgor be the absolute owner of the thing pledged
3. That the persons constituting the pledge have the free
disposal of the property and in the absence thereof, that they be legally authorized for the
purpose
4. The pledge is perfected by the delivery of the thing pledged
5. When the principal obligation becomes due, the things,
which the pledge consists, may be alienated for the payment of the creditor.

CHARACTERISTICS OF A
CONTRACT OF PLEDGE
1. Real contractperfected by the delivery of the things
pledged by the debtor who is called the pledgor to the creditor who is called by the pledgee, or
to a third person by common agreement
2. Accessory contract
3. Unilateral contract
4. Subsidiary contract

WHAT IS THE CAUSE OR

CONSIDERATION IN PLEDGE?
> Pledge is an accessory contract
> Its cause is the principal obligation

CONSTITUTED TO SECURE THE FULFILLMENT OF THE PRINCIPAL OBLIGATION

CONSTITUTED BY THE ABSOLUTE

OWNER
1. Future property cannot be the subject of a pledge or mortgage
2. 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
3. Share in a co-ownershipshall be limited to the portion
which may be alienated by him in the division upon the termination of the co-ownership
What is the absolute owner? It means
unencumbered property. The absolute owner has legal and beneficial ownership. In the
earlier example, P is the legal owner and S is the beneficial owner. This being the case,
neither of them can pledge the property.

WHAT IS THE DIFFERENCE BETW

EEN FREE DISPOSAL AND
CAPACITY TO DISPOSE?
> FREE DISPOSAL OF THE PROPERTYproperty must not be subject to any claim of a third
person
> CAPACITY TO DISPOSEpledgor or mortgagor has the capacity or authority to make a
disposition of the property

THING PLEDGED OR MORTGAGED

MAY BE ALIENATED
> Necessarily implied as an inherent element of the transaction of the mortgage or
pledge
> The only remedy for the pledgee is to have the security given sold at public auction and
the proceeds of the sale be applied to the payment of the obligation secured by the mortgage
or pledge

PLEDGOR OR MORTGAGOR MAY

BE A THIRD PERSON
1. Accommodation pledge or mortgage
2. Duty of mortgagee to make proper inquiry
3. Where mortgage is gratuitoussame should be strictly construed
4. Liability for deficiencypledgor not liable for any deficiency should the property be not sufficient
to cover the debt

RIGHT OF CREDITOR WHERE

DEBTOR FAILS TO COMPLY
 WITH HIS OBLIGATION IN
PLEDGE
1. If the debtor fails to comply with the obligation at the time it falls due, the creditor is merely entitled
to move for the sale of thing pledged
2. The creditor cannot appropriate himself without foreclosure the thing pledged as pledge or under
mortgage nor can he dispose of the same as owner