PLEDGE
DEFINITION AND PURPOSE Form of Pledge:
Pledge is a contract by virtue of 1. Between the parties. The pledge
which the debtor delivers to the may be in any form as in fact the
creditor or to a third person a mere delivery of the object is
movable, or document sufficient to bind the parties.
evidencing incoporeal rights. 2. As regards third persons To take
For the purpose of securing the effect against third persons, the
fulfillment of a principal pledge must be in a public
obligation with the understanding instrument showing a description of
that when the obligation is the thing pledged and the date of
fulfilled, the thing delivered shall the pledge. (Art. 2096)
be delivered shall be returned
with all its fruits and accessions.
Extent of pledge
The pledge shall cover the
KINDS OF PLEDGE following: 1. The thing pledged.
2 The fruits, income, dividends or
1. Voluntary or Conventional interests earned or produced by the
Pledge thing pledged, unless there is a
- that which is constituted by stipulation excluding them. The
the mutual consent of the pledgor creditor shall compensate what he
and the pledgee. receives as fruits, income, dividends
or interests with those which are
Requisites owing him, or insofar as the amount
Secure fulfillment (Art. 2085) may exceed that which is due, he
Pledgor is the absolute owner shall apply it to the principal. (Art.
(Art. 2085) 2102)
Free disposal of the property, or Example: D borrowed from C
legally authorized for the P10,000.00 which bears interest at
purpose. 1% a month. The obligation is
Possession of the creditor, or of secured by a pledge of certain
a third person by common shares of stock owned by D. In
agreement. addition to delivering to C the stock
certificate covering the shares, D
Object of the Pledge: also gave C the authority to collect a
1. All movables within the dividend of P250.00, he shall apply
commerce of men which are P100.00 to the interest due, and the
susceptible of possession (Art. balance of P150.00 to the principal.
2094). If no interest is due to him, he shall
2. Incorporeal rights evidenced by apply the total amount.
negotiable instruments, bills of
lading, shares of stocks, bonds,
3. The offspring, however, shall
warehouse receipts, and similar
pertain to the pledgor, unless there
documents. The instrument proving
is a stipulation excluding them. (Art.
the right pledged shall be delivered
2102)
to the creditor, and if negotiable
must be endorsed (Art. 2095).
Rights of the debtor/pledgor
1. To alienate, with the consent of pledgee of the same. (Arts. 1951,
the pledgee, the thing pledged. The 1201)
ownership of the thing pledged is
transmitted to the vendee or
transferee as soon as the pledgee Rights of the creditor/pledgee
consents to the alienation, but the 1. To retain in his possession the
pledge shall continue in possession. thing pledged until the debt is paid.
(Art. 2097) (Art. 2098)
2. To ask that the thing pledged be 2. To demand reimbursement of the
judicially or extra-judicially deposited expenses made for the preservation
if it is used without authority for a of the thing pledged. (Art. 2099)
purpose other than for its 3. To bring actions which pertain to
preservation. (Art. 2104) the owner of the thing pledged in
3. To continue to be the owner of order to recover it from, or defend it
the thing pledged unless it is against, third persons (Art. 2103)
expropriated. (Art. 2103) 4. To use the thing pledged if he is
4. To require that the thing pledged authorized to do so, or when its use
be deposited with a third person if it is necessary for the preservation of
is in danger of being lost or impaired the thing. (Art. 2104)
through the negligence or willful act 5. If he is deprived of the substance of
of the pledgee. (Art. 2106) the thing pledged, he may either: a.
5. To ask for the return of the thing Claim that another thing be given to him
pledged after he has paid the debt in place of the thing pledged, or b.
Demand immediate payment of the
and its interests, with expenses in a
principal obligation. (Art. 2109)
proper case. (Art. 2105)
6. To cause the sale of the thing
6. To demand the return of the
pledged at a public sale, if there is a
thing pledged, upon offering another
danger of destruction, impairment or
thing in pledge, provided the latter is
diminution in value of the thing
of the same kind and quality, if there
pledged without his fault. The
are reasonable grounds to fear the
proceeds of the auction shall be
destruction or impairment of the
security for the principal obligation in
thing pledged without the fault of the
the same manner as the thing
pledgor. (Art. 2107) This right,
originally pledged. (Art. 2108)
however, is without prejudice to the
7. To collect and receive the amount
right of the pledgee to have the thing
due if the thing pledged is a credit
sold at a public sale. The proceeds
which becomes due before it is
of the auction shall be security for
redeemed, and to apply the same to
the principal obligation in the same
the payment of his claim. He shall
manner as the thing originally
apply what he has collected to the
pledged. (Arts. 2107, 2108)
payment of his claim, and deliver the
surplus, should there be any, to the
Obligations of the debtor/pledgor
pledgor. (Art. 2118)
1. To pay the debt and its interest,
with expenses in a proper case,
Example: D received a promissory
when they are due. (Art. 2105)
note of P10,000.00 from M the same
2. To pay damages that the pledgee
being due on March 1. Thereafter, D
may suffer by reason of the flaws of
pledged the promissory note to
the thing pledged, if he was aware of
secure a loan of P8,000.00 which he
such flaws but did not advise the
obtained from C. The loan is due on
March 5. On March 1, C can collect
the note of P10,000.00 from M. He notified the debtor that
shall apply P8,000.00 for the payment had been demanded
payment of his claim and deliver the of him.
surplus of P2,000.00 to D. d. Damages, if they are due.
7. To sell the thing pledged upon (Arts. 2066, 2120))
default of the debtor. (Arts. 2087, 2. To be subrogated to all the rights
2112) of the creditor against the debtor if
he pays the creditor. (Arts. 2067,
Obligations of the creditor/pledgee 2120)
1. To take care of the thing pledged
with the diligence of a good father of The pledgor is considered a third
a family. (Art. 2099) person interested in the fulfillment of
2. To be liable for the loss or the obligation; hence, he is entitled
deterioration of the thing pledged to be subrogated to the creditor’s
unless it is due to fortuitous event. rights upon payment. (See Arts.
(Art. 2099) 1236 and 1302.)
3. Not to deposit the thing pledged
with a third person, unless Example: D obtained a loan of
authorized. (Art. 2100) P10,000.00 from C. The debt is
4. To be responsible for the acts of secured by the guarantee of G and
his agents or employees with the pledge by T of his ring. If T pays
respect to the thing pledged. (Art. C, T steps into the place of C. Thus,
2100) T can demand the indemnification
5. Not to use the thing pledged, mentioned in No. 1 above from D. If
except when: a. He is authorized by D cannot pay, T can go after G.
the owner, or b. The use of the thing
is necessary for its preservation. 3. To be released from liability in
6. To deliver to the debtor the the following cases:
surplus after paying his claim from a. If the creditor voluntarily
what he has collected on a credit accepts immovable or other
that was pledged and which has property in payment of the
become due before it is redeemed. debt even if the creditor
(Art. 2108) thereafter loses the same by
eviction. (Arts. 2077, 2120)
Rights of a third person who pledges
his own movable property to secure
the debt of another Example: D borrowed
1. To be indemnified by the debtor P50,000.00 from C. The debt
if he pays the creditor. The indemnity is secured by a pledge of T’s
consists of the following: ring. On due date, C accepted
a. The total amount of the a parcel of land from D in
debt. payment of the debt. T can
b. The legal interests demand that he be released
thereon from the time the from the pledge. T shall be
payment was made known to released even if later, C
the debtor, even though it did should lose the lot by eviction
not earn interest for the in case there is a rightful
creditor. owner.
c. The expenses incurred by
the pledgor after having
Note: The acceptance by the creditor 1. Any stipulation that the pledge is
of a property in payment of the debt not extinguished
is in the nature of dacion en pago. b) If the price is less, the creditor
b. If an extension of time is cannot recover the deficiency even if
granted to the debtor by the stipulated. (Art. 2115)
creditor without his (pledgor’s)
consent. (Arts. 2079, 2080) Example: D owes C P10,000.00.
c. If through some act of the The debt is secured by a pledge of
creditor, the pledgor cannot D’s shares of stock which is
be subrogated to the rights, evidenced by a stock certificate
mortgages and preferences of delivered by D to C at the time D
the creditor. (Arts. 2080, received the proceeds. If D defaults
2120) and C sells the shares of stock at
P9,500.00, D’s debt is extinguished.
C cannot recover the deficiency of
Thus, if, in the example in No. P500.00. If the shares of stock are
2, C cancels G’s guarantee, T sold at P11,000.00, D’s debt is
is released from liability likewise extinguished. The excess of
because if T pays C, T can no P1,000.00 belongs to C unless the
longer go after G if D cannot parties had an agreement that any
pay the indemnification due excess shall be turned over to D.
him (T).
2. Legal pledge
Extinguishment of pledge - Legal pledge or pledge by
1. Pledge may be extinguished operation of law refers to the right of
directly or indirectly. a person to retain a thing until he
receives payment of his claim.
Indirect cause - When the principal
obligation secured by the pledge is Examples of legal pledge
extinguished, the pledge, being 1. Possessory lien by a possessor
merely an accessory contract, is in good faith.
likewise extinguished. Any third A possessor in good faith may
person who has any right in or to the retain the movable upon which he
thing pledged may satisfy the has incurred necessary and useful
principal obligation as soon as the expenses until he has been
latter becomes due and reimbursed therefor. (Art. 546)
demandable. (Art. 2117)
Example: B bought a bicycle from S
Example: D owes C P5,000.00. The believing that S was the owner. After
debt is secured by a pledge of D’s obtaining possession of the bicycle,
wristwatch. If D pays C P5,000.00, B incurred P1,000.00 to have it
the debt is extinguished together repaired by causing the removal of
with the pledge. rust from it and replacing some
deteriorating parts. Later, O came
2. Direct causes - Pledge may be forward and proved that he was the
extinguished directly as follows: owner and that S merely deceived B.
a. Return by the pledgee of the thing B is entitled to retain the bicycle (by
pledged to the pledgor or owner way of legal pledge) until O has
reimbursed him the amount of
P1,000.00 for the necessary and
useful expenses that he had In conventional pledge, the
incurred. excess belongs to the creditor,
unless there is a stipulation that the
2. Possessory lien of worker same shall be turned over to the
- He who has executed work debtor. In legal pledge, the
upon a movable has a right to retain remainder of the price of sale shall
it by way of pledge until he is paid. be delivered to the debtor.
(Art. 1731)
3. Depositary’s right of retention 3. On recovery of deficiency
- The depositary may retain In conventional pledge, the
the thing deposited until the full creditor is not entitled to recover the
payment of what may have been due deficiency. Any agreement to the
him by reason of the deposit. (Art. contrary is void. In legal pledge, the
1904) Thus, a warehouseman has creditor is entitled to recover the
the right to retain the goods deficiency from the debtor.
deposited in his warehouse by way
of legal pledge until the depositor Special Laws on pawnshops and
has paid him the storage cost for the similar establishments
goods.
Pawnshops and other
Rules applicable to legal pledge establishments engaged in making
loans secured by pledge shall be
The provisions on conventional governed by primarily the special
pledge on the possession, care and laws and regulations concerning
sale of the thing as well as on the them, and subsidiarily by the
termination of pledge shall be provisions of pledge in the Civil
applicable to legal pledge except Code. (Art. 2123)
with respect to the sale of the thing
as follows:
1. The thing may be sold only after
demand of the amount for which the
thing is retained.
2. The public auction shall take
place within one month after such
demand.
3. 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. 2122)
4. After the payment of debt and
expenses, the remainder of the price
of sale shall be delivered to the
obligor. (Art. 2121)
Conventional pledge and legal
pledge distinguished on excess of
proceeds of sale or deficiency
1. Proceeds of sale exceed amount
of debt
