PLEDGE a contract by virtue of which the debtor delivers to the creditor or to a third person a

movable, or instrument evidencing incorporeal rights for the purpose of securing the fulfillment
of a principal obligation.
When the obligation is fulfilled, the thing delivered shall be returned with all its fruits
and accessions.
PLEDGEE is the creditor
PLEDGOR is the debtor
CHARACTERISTICS OF A PLEDGE
 Real contract – perfected by the delivery of the thing pledge
 Accessory contract – it has no independent existence of its own
 Unilateral contract – because it creates an obligation on the part of the creditor to
return the things subject thereof upon the fulfillment of the principal obligation
 Subsidiary contract – obligation incurred does not arise until the fulfillment of the
principal obligation is secured.
Cause/Consideration of Pledge
The cause is the compensation for the pledge or the mere liberality of the pledgor.

KINDS OF PLEDGE
1. Voluntary or Conventional - created by the agreement of the parties
2. Legal - created by the operation of law.

Essential Requisites of Pledge

- Constituted to secure fulfillment of a principal obligation
- Pledgor is the absolute owner of the thing pledged, otherwise void.
- Pledgor has free disposal of the property or has legal authority.
- The thing pledged may be alienated.
- The thing pledged must be delivered to the creditor or a third person. Without delivery
there is no pledge.
Pledge vs. Mortgage

1. Pledge is constituted on MOVABLES; mortgage is on IMMOVABLES.

2. Pledge delivery is necessary; mortgage delivery is not necessary.
3. Pledge must appear on a public instrument; mortgage must be registered to be valid
against third persons.
Art. 2088 – Pactum Commissorium discussed:
Pactum Commissorium - automatic appropriation by the creditor of the thing pledged or
mortgaged upon the failure of the debtor to pay the principal obligation

The property/thing given as pledge stands security for the fulfillment of the principal obligation.
If the debtor fails to comply with the obligation at the time if falls due, the creditor is merely
entitled to sale the thing pledged in order to collect the amount of his claim from the proceeds.

Creditor cannot appropriate to himself the thing held as pledge, nor dispose the thing because
the amount of the loan is ordinarily much less than the real value of the thing pledged.
Any stipulation to the contrary is null and void because it is said to be contrary to good morals
and public policy.
TEST IF THERE IS EXISTS PACTUM COMMISSORIUM is whether or not there is no need for extra
step to be taken by creditor.

Art. 2089-2090 – Divisibility of Pledge

Pledge is indivisible.
1. Single thing – the thing pledge cannot be returned unless the debt is secured and fully
paid
2. Several things – all of them are liable for the entire debt.
3. Debtor’s heir/creditor’s heir – debtor who paid cannot ask for the proportionate
extinction of the pledge.
Example:

All kinds of obligations can be secured by pledge.

Art. 2092 – A promise to constitute a pledge when accepted only gives rise to a personal right
binding upon parties. What only exists is a right to action to compel fulfillment of the promise
but there is no pledge yet.

When a person pledges a property and presents it as unencumbered things, but in reality it is
encumbered and the person is aware of it, with motives to defraud he is criminally responsible.

All movables within the commerce of men and capable of possession may be pledged.
Incorporeal rights evidenced whether negotiable or not may be pledged.

Pledge must appear in public instrument to bind third persons

Art. 2097 – Pledgor retains the ownership of the thing pledged. He may sell the same provided
that the pledgee consents the sale. Upon consent, ownership is transferred to the vendee
subject to the rights of the pledgee, that the thing sold may be alienated to satisfy the
obligation and the pledgee must continue in possession of during the existence of the pledge.

Art. 2099 – Pledgee has the obligation to take of the property with the diligence of a good
father of a family.
He is to be reimbursed of the expenses incurred in order to preserve the property. In case of
loss or deterioration of the property due to fortuitous events, the pledgee cannot be held
responsible but he is liable for loss or deterioration by reason of fraud, negligence, delay or
violation of the terms of the contract.

Art. 2100 – Pledgee is not authorized to transfer possession to a third person unless he is
authorized to do so. Pledgee is responsible for the acts of his employees or agents.

Art. 2101 - Pledgor has the same responsibility as the bailor in commodatum.
Art. 2102 – General rule: The pledgee has no right to use or to appropriate the fruits of the
thing pledged, without the authority of the owner.
Exception: The pledgee can apply the fruits, income, dividends or interest earned by the thing
to the payment of the interest owing, thereafter to the principle of his credit.
Regarding the pledge of animals, unless there’s a stipulation to the contrary, the offsprings are
included in the pledge.

Art 2103 – Unless the thing pledged is expropriated, the debtor continues to be the owner.
The creditor may bring actions which pertain to the owner of thing pledged in order to recover
it from or defend od against third persons.

Art. 2104 – The pledgee who is in possession of the things pledged has no right to make use of
it without the permission from the owner.
Right of pledgor ask that thing be pledged be deposited:
a. Creditor uses the thing without authority
b. He misuses the thing in any other way.
c. The thing is in danger of being lost or impaired because of the negligence or willful act
of the pledgee.

Art. 2105 – General rule: The thing pledged stands as 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.
Exception to the rule: 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.

Art. 2106 – 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.

Art. 2107 – Two remedies granted by Art. 2107:

1 To the pledgor: The right to demand the return of the thing pledged upon offering another
thing in pledge.
2 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 distraction 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 a thing pledged to be sold at public
auction
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.

Art. 2109 – The following are the two remedies to the pledgee in case he is deceived as to the
substance or quality of the thing pledged:
1 to claim another thing in pledge;
2 to demand immediate payment of the principal obligation

Note that the remedies mentioned in Article 2109 are alternative, that is, he is privileged to
choose only one and not both.

Art. 2110 – The pledge is extinguished if the object is returned by the pledgee, and this is true
notwithstanding any stipulation that the pledge would continue although the pledgee is no
longer in possession.

Art. 2111 – Renunciation or abandonment must be in writing 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.

Art. 2112 – The following are the formalities required for the sale under article 2112:
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.

The pledgee may appropriate the thing pledged if after the first and second auctions, the thing
is not sold.

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.

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 received the purchase price, as far as the
pledgor or owner is concerned.

Art. 2115 – Effect of sale of thing pledged:

1 If the price of the sale is more than the amount due, the debtor is not entitled to the excess
unless the contrary is provided.
2 In the same way, if the price of the sale is less, neither is the creditor entitled to recover the
deficiency. A contrary stipulation is void.
General rule: The debtor is not entitled to the excess unless there is an agreement to the
contrary.

 In the case of the creditor, he is not entitled to recover the deficiency in all cases.

Art. 2116 – After the public auction, the pledgee shall promptly advise the pledgor or owner of
the result thereof.

Art. 2117 – 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.

Art. 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 this claim,
and deliver the surplus, should there be any, to the pledgor.

Art. 2119 – The right of choice given to the pledgee as to which of the things pledged he shall
cause to be sold is limited only by stipulation. After sufficient property has been sold to satisfy
the obligation plus interests and expenses, no more shall be sold.

Art. 2120 – A third person who is not a party to the principal obligation may secure the latter by
pledging his own property. The law grants him the same rights as a guarantor and he cannot be
prejudiced by any waiver of defense by the principal debtor.

Art. 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.

Art. 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.

Art. 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.