PLEDGE (ARTICLES 20852123)

Obligations And Contracts

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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

BETWEEN 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

PACTUM COMMISSORIUM
> Automatic appropriation by the creditor of the thing pledged or mortgaged upon the failure of
the debtor to pay the principal obligation
> TEST IF THERE IS EXISTS PACTUM COMMISSORIUM is whether or not there is no need for
extra step to be taken by creditor

PROHIBITION AGAINST PACTUM

COMMISSORIUM
1. Stipulation is null and voidit is said to be contrary to good morals and public policy
2. Requisites
a. There should be a pledge, mortgage, antichresis of property by way of security for the payment
of the
principal obligation
b. Stipulation for the automatic appropriation of the property in favor of the creditor upon default
of the debtor/pledgor
3. Effect on the security contractdoesnt affect substantially the principal contract of pledge,
mortgage or antichresis with regard to its validity and efficacy

AGREEMENTS THAT WOULD NOT

CONSTITUTE PACTUM
COMMISSORIUM
1. Attorney in fact
2. Option contract. There would be another contract. There is a risk of the courts to look at it as a
PC.
3. Dacion en pago
4. Assigned shares. Creditor would only have legal title and pledgor would still have beneficial
ownership.

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RISK OF LOSS OF PROPERTY

PLEDGED OR MORTGAGED
> Debtor-owner bears the loss of the property
> The principal obligation is not extinguished upon the loss of the thing pledged or
mortgaged

PLEDGE OR MORTGAGE
INDIVISIBLE, EXCEPTIONS
Art. 2089. A pledge or mortgage is indivisible, even though the debt may be divided among the
successors in interest of the debtor or of the creditor.
Therefore, the debtors heir who has paid a part of the debt cannot ask for the
proportionate extinguishment of the pledge or mortgage as long as the debt is not
completely satisfied.
Neither can the creditors heir who received his share of the debt return the pledge or
cancel the mortgage, to the prejudice of the other heirs who have not been paid.
From these provisions is expected the case in which, there being several things given in mortgage
or pledge, each one of them guarantees only a determinate portion of the credit.
The debtor, in this case, shall have a right to the extinguishment of the pledge or
mortgage as the portion of the debt for which each thing is specially answerable is satisfied.
(1860)
Art. 2090. The indivisibility of a pledge or mortgage is not affected by the fact that the debtors
are not solidarily liable. (n)

PLEDGE OR MORTGAGE
INDIVISIBLE
> Rule applies even if the obligation is joint and not solidary
> The divisibility of the principal obligation doesn't affect the indivisibility of the mortgage or pledge

EXCEPTIONS TO THE RULE OF

INDIVISIBILITY
1.
2.
3.
4.

Where each one of several things guarantees determinate portions of credit

Where only a portion of the loan was released
Where there was failure of consideration
Where there is no debtor-creditor relationship

FORECLOSURE OF MORTGAGE
CONSTITUTED ON SEVERAL
PROPERTIES
> A mortgage even constituted on several properties is one and indivisible, that is, it cannot be
divided among the several properties and the mortgagee has the right to have the properties
either or both, jointly or singly, sold to satisfy his claim
> Further, the sale of the mortgaged properties cannot be set aside in the absence of evidence
to show that a better price could have been obtained if they were sold separately, or the
sale of one or some alone would bring sufficient proceeds to satisfy the mortgage credit

ALL KINDS OF OBLIGATIONS,

WHETHER PURE OR
CONDITIONAL, CAN BE
SECURED BY PLEDGE OR
MORTGAGE
Art. 2091. The contract of pledge or mortgage may secure all kinds of obligations, be
they pure or subject to a suspensive or resolutory condition. (1861)

PROMISE TO CONSTITUTE
PLEDGE OR MORTGAGE
CREATES NO REAL RIGHT
Art. 2092. A promise to constitute a pledge or mortgage gives rise only to a personal action
between the contracting parties, without prejudice to the criminal responsibility incurred by him
who defrauds another, by offering in pledge or mortgage as unencumbered, things which he knew
were subject to some burden, or by misrepresenting himself to be the owner of the same.
(1862)

> A promise to constitute a pledge or mortgage only

gives rise to a personal right
> What exists only is the right of action to compel
the fulfillment of the promise but there is no pledge
or mortgage yet

TRANSFER OF POSSESSION
ESSENTIAL IN PLEDGE
Art. 2093. In addition to the requisites prescribed in 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. (1863)
> An agreement to constitute a pledge only gives rise to a personal action between the
contracting parties
> Unless the movable given as security is delivered and placed in the possession of the
creditor or third person designated by the parties, the creditor acquires no real right to the
property because pledge is merely a lien or encumbrance indispensable to the right of lien
> Without delivery there can be no pledge

TYPE OF DELIVERY DEPENDS

UPON NATURE OF THING
PLEDGED

> Actual deliverythere should be actual possession of the property pledged

> But it was held in an earlier case that the symbolic transfer of the goods is acceptable when the
owner of the property could no longer dispose of the goods, the pledgee being the only one
authorized to do so

SUBJECT MATTER OF PLEDGE

Obligations And Contracts
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Art. 2094. All movables, which are within commerce, may be pledged, provided they
are susceptible of possession. (1864)
Art. 2095. Incorporeal rights, evidenced by negotiable instruments, bills of
lading, shares of stock, bonds, warehouse receipts and similar documents may also
be pledged. The instrument proving the right pledged shall be delivered to the creditor,
and if negotiable, must be indorsed. (n)

SUBJECT MATTER OF PLEDGE

Confined and limited to personal property and it cannot be extended to real property
Incorporeal rights evidenced by documents whether negotiable or not may also be
pledged
Art. 2096. A pledge shall not take effect against third persons if a description of the
thing pledged and the date of the pledge do not appear in a public instrument. (1865a)

PUBLIC INSTRUMENT NECESSARY

TO BIND THIRD PERSONS
1. CONTENTS OF PUBLIC INSTRUMENT
a. The pledge is not binding against third persons unless in addition to delivery of the thing

pledged,
it is embodied in a public instrument
b. Description of the thing pledged; and the date of pledge
2. OBJECT OF THE REQUIREMENTto forestall fraud, because a debtor may attempt to
conceal his property from his creditors when he sees it in danger of execution by simulating
a pledge thereof with an accomplice

THE DATE OF THE PLEDGE IS

RELEVANT TO KNOW IF THERE IS
VALID CONSIDERATION IN THE
FIRST PLACE.
WHAT IS A PUBLIC INSTRUMENT?
The pledge contract should be the one in the public instrument, acknowledged by the notary
public
What if there is litigation ensued and the pledge is not in a public instrument? Is this binding upon
the court? No, it is not. There should be payment of documentary stamp tax.

ALIENATION BY THE PLEDGOR

OF THE THING PLEDGED
Art. 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 latter shall continue in possession. (n)
> Remember that the pledgor retains ownership over the thing pledged
> As soon as the pledgee gives his consent, the ownership of the thing pledged is transferred to
the vendee subject to the rights of the pledgee, namelythat the thing sold may be alienated to
satisfy the obligation; and that the pledgee must continue in possession during the existence of
the pledge

THE PLEDGEE IS CONCERNED

WITH THE TRANSFER OF
ONWERSHIP BECAUSE AS
PLEDGEE, HE WOULD WANT TO
LIMIT THE ENTANGLEMENTS.

RIGHT OF PLEDGEE TO
RETAIN THE THING PLEDGED
Art. 2098. The contract of pledge gives a right to the creditor to retain the thing in his
possession or in that of a third person to whom it has been delivered, until the debt is paid. (1866a)

> This right is limited only to the fulfillment of the principal

obligation for which the pledge was created

OBLIGATION OF PLEDGEE TO
TAKE DUE CARE OF THE
THING PLEDGED
Art. 2099. The creditor 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 or deterioration, in conformity with the provisions
of this Code. (1867)
> Upon fulfillment of the principal obligation, the pledgee must return the thing pledged
> Having possession of the property, he has the obligation to take care of the same with the
diligence of a good father of the family
> In case of loss or deterioration of the thing pledged due to a fortuitous event, the pledgee cannot
be held responsible but he is liable for loss or deterioration by reason of fraud, negligence, or
violation of the terms of the contract

RIGHT OF PLEDGEE TO
COMPENSATE EARNINGS OF
PLEDGE WITH DEBT

> The pledgee has no right to use the thing pledged or to appropriate the fruits thereof
without the authority of the owner
> The pledgee can apply the fruits, income, dividends, or interests earned or produced by
the thing pledged to the payment of interest, if owing, and thereafter to the principal of his
credit
> Unless there is stipulation to the contrary, the interest and earnings of the right pledged and in
case of animals, their offsprings, are included in the pledge