PLEDGE
(ARTS. 2093- 2123)
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)
a pledge is a real contract which requires delivery for its
perfection.
To constitute a pledge:
an agreement to constitute a pledge gives rise only to a
personal action between the partiesthat isparties have a
right to compel each other to fulfill the promise but there is
no pledge yet
(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)
without delivery, there is no pledge
possession of the creditor is also necessary to give
effect to pledge as to third persons aside from being
executed in a public instrument (Art. 2096)
Types of Delivery
1. Actual Delivery- is what is referred in this article as
essential to the validity of a pledge and mere
symbolic delivery is not sufficient. However
2. Constructive Delivery- it has been held that
symbolical transfer may also be done by means of
delivery of the keys to the warehouse where the
goods were stored (Banco Espanol Filipino vs
Peterson)
Qualification: whether or not constructive
delivery is sufficient to validate the pledge
would depend on the peculiar nature of the
thing pledged (Yuliongui vs Philippine
National Bank)
Yuliongsiu vs Philippine National Bank
Facts:
1. The Loan secured: plaintiff Yuliongsui was the
owner of 2 vessels and obtained a loan from the
Philippine National Bank Cebu Branch in the amount
of P50,000.
2. The pledge: to guarantee payment, plaintiff pledged
his two vessels M/S Surigao and M/S Don Dino as
expressly provided for in their pledge contract. The
same was duly registered in the Collector of Customs
of Port of Cebu.
3. The plaintiff defaulted on his loan payments, hence,
the Bank took possession of the vessels.
a. The bank also filed criminal charges for estafa
thru falsification of commercial documents
against the plaintiff for which they were
convicted.
b. The two boats were also sold to third persons
on March 1951.
4. The Case: plaintiff Yuliongsui then filed a complaint
before the CFI of Ceby to recover the vessels or their
value, and damages against the Bank.
a. CFI decision: dismissed the complaint
because the PNB was justified in taking
1
 physical possession of the vessels under the pledger without invalidating the pledge. In
pledge contract such a case, the pledger is regarded as holding
b. CA affirmed the decision of the lower the property merely as trustee for the pledgee.
court. Hence, the present recourse with the
Supreme Court.
5. In the Supreme Court, the plaintiff assigns the Art. 2094. All movables which are within commerce
FF as error: may be pledged, provided they are susceptible of
a. That the lower court erred in considering the
possession. (1864)
contract one of pledge and not of chattel
mortgage
Art. 2095. Incorporeal rights, evidenced by negotiable
b. That constructive delivery is not sufficient to
instruments, bills of lading, shares of stock, bonds,
make the pledge effective.
warehouse receipts and similar documents may also
be pledged. The instrument proving the right pledged
Issue 1: What was the nature of the contract?
shall be delivered to the creditor, and if negotiable,
Ruling: Pledge.
must be indorsed. (n)
1. Their contract expressly states that the contract is
one pledge in order to guarantee the P50,000.00 loan
Subject of Pledge: Personal Property and incorporeal
granted by the bank to the plaintiff. Hence, this
Rights evidenced by instruments
admission is binding to the parties.
1. a pledge is confined and limited to personal property
and cannot be made to extend to real property
Issue 2: Was there proper or sufficient delivery made?
because of the very nature of the contract
Ruling: Yes.
a. it must be within the commerce of man and
1. General Rule: there has to be actual delivery of the
susceptible of possession
chattels pledged. 2. Incorporeal rights evidenced by documents whether
2. However, there is a qualification: symbolic
negotiable or not
delivery may suffice depending on the nature or a. Must be delivered to the creditor if not
character of the thing pledged. negotiable
a. the type of delivery will depend upon the b. If negotiable, duly indorsed
nature and the peculiar circumstances of each
case. Philippine National Bank vs Laureano Atendido
b. In this case, The parties here agreed that the
Facts:
vessels be delivered by the "pledgor to the
1. The Loan: Laureano Atendidno obtained from the
pledger who shall hold said property subject
PNB a loan of P3,000.00 with interest.
to the order of the pledgee." Considering the a. the Pledge: the loan was secured by Atendido
circumstances of this case and the nature of by pledging to the Bank the P2,000 cavanes of
the objects pledged, i.e., vessels used in palay which were then deposited in the
maritime business, such delivery is sufficient. warehouse of a certain Cheng Siong in
c. Pledgee can also entrust the physical
Bulacan.
possession of the chattels pledged to the

2
 b. Hence, the quedans/warehouse receipt was
endorsed in favour of the bank.
2. However, before the maturity of the loan, the palay
disappeared from the warehouse for unknown
reasons.
3. When the loan matured, the borrower failed to pay the
same. Hence, the action of the Bank against Atendido.
4. The case: PNB filed a complaint against Atendido to
collect the sum of money.
a. As a defense of Atendido: he claimed that
his obligation is already extinguished because
when he endorsed the warehouse receipt to
the bank, it already became the owner. hence
when the palay was lost, it would be the bank
who should bear the loss and his liability is
already extinguished.
5. The CFI: ruled in favour of the bank and ordered
Atendido to pay for the reason that the surrendering
of the warehouse receipt was not that of a final
transfer of ownership but merely as a guarantee to
the fulfillment of the original obligation.
a. The bank had no right yet to dispose of the
property until maturity of the promissory note
b. And furthermore, the palays were not even in
the physical possession of PNB.
6. The CA affirmed the decision of the CFI.
Issue: what is the effect of surrendering the warehouse
receipt representing the palay as guaranty? Did it pass title or
ownership?
Ruling: the delivery of palay by mere pledge or security,
ownership remains with the pledger subject only to
foreclosure in case of non-fulfillment of the obligation.
1. The obligation is not paid upon maturity the most that
the pledgee can do is to sell the property and apply
the proceeds to the payment of the obligation and to
return the balance, if any, to the pledgor (Article 1872,
Old Civil Code). This is the essence of this contract,
for, according to law, a pledgee cannot become the
owner of, nor appropriate to himself, the thing given in
pledge (Article 1859, Old Civil Code).
2. If by the contract of pledge the pledgor continues to
be the owner of the thing pledged during the
pendency of the obligation, it stands to reason that in
case of loss of the property, the loss should be borne
by the pledgor.
3. Where a warehouse receipt or quedan is transferred or
endorsed to a creditor only to secure the payment of a
loan or debt, the transferee or endorsee does not
automatically become the owner of the goods covered
by the warehouse receipt or quedan but he merely
retains the right to keep and with the consent of the
owner to sell them so as to satisfy the obligation from
the proceeds of the sale, this for the simple reason
that the transaction involved is not a sale but only a
mortgage or pledge.
Manila Banking Corporation vs Anastacio Teodoro
Facts:
1. The Principal Obligation: The Teodoros jointly and
severally executed in favour of the plaintiff Manila
Banking Corporation 3 promissory noted. However,
the Teodoros failed to comply with their obligations of
paying the amounts in their promissory note.
2. The Deed of Assignment: it would appear that the
son Teodoro executed in favour of the plaintiff Bank a
Deed of Assignment of Receivables from the
Emergency Employment Administration in
consideration of certain credits, loans,
overdrafts, and other credit accommodations
extended to the defendants as security for the
payment of the said sums and the interest
thereon.
a. It further stated the phrase that the
defendants do hereby remise, release, and
3
 quitclaim all its rights and titles, and interest in
and to the accounts receivables.
Issue: Did the Deed of Assignment had the effect of payment
of all of the loans of Teodoro to the bank?
Ruling: No.
1. nature of an assignment of credit:
a. Assignment of credit is an agreement by virtue
of which the owner of a credit, known as the
assignor, by a legal cause, such as sale, dation
in payment, exchange or donation, and without
the need of the consent of the debtor, transfers
his credit and its accessory rights to another,
known as the assignee, who acquires the
power to enforce it to the same extent as the
assignor could have enforced it against the
debtor.
b. It may be in the form of a sale,
i. but at times it may constitute a dation
in payment, such as when a debtor, in
order to obtain a release from his debt,
assigns to his creditor a credit he has
against a third person, or
ii. it may constitute a donation as when it
is by gratuitous title;
iii. or it may even be merely by way of
guaranty, as when the creditor
gives as a collateral, to secure his
own debt in favor of the assignee,
without transmitting ownership.
c. The character that it may assume determines
its requisites and effects. its regulation, and the
capacity of the parties to execute it; and in
every case, the obligations between assignor
and assignee will depend upon the judicial
relation which is the basis of the assignment
2. in this case, assignment of receivables executed
by the Teodors did not transfer the ownership of
the receivables to Manila Banking and did not
release appellants from their loans with the
bank incurred under promissory notes.
a. The contract has stated that: it was for and in
consideration of certain credits, loans,
overdrafts, and their credit accommodations in
the sum of P10,000.00 extended to appellants
by appellee bank, and as security for the
payment of said sum and the interest thereon;
3. Neither sale nor dacion en pago. Because at the time
the assignment was executed, not all of the loans
already existed. The Deed of Assignment was
intended as collateral security for the bank loans of
the Teodoros as a continuing guaranty for whatever
sums they would be owing to the Bnk.
4. Moreoever, In case of doubt as to whether a
transaction is a pledge or a dation in payment, the
presumption is in favor of pledge, the latter being the
lesser transmission of rights and interests (Lopez v.
Court of Appeals, supra).
This being so,
The Teodors remain to to be the principal
creditor of the Emergency Employment
Administration. Hence, the Bank need not
go after the said agency first. In anyway,
Exhaustion of guaranty refers to the
principal debtor first, then to the
guaranties.
Victoria Chu vs CA and Family Savings Bank and CAMS
Trading
Facts:
1. Victoria Chu had been purchasing cement from CAMS
Trading on credit.
a. The security: to guarantee the payment of
her cement purchases she executed in favour
of CAMS trading deeds of Assignment of her
time deposits in the Family Saving Bank.
the deeds of assignment stated that the
4
 assignment serves as a collateral or guarantee
for the payment of Chuas obligation with
CAMS trading.
2. CAMS trading notified the Bank that Mrs Chu had
unpaid account with it and asked that CAMS be
allowes to encash the time deposit certificates which
had been assigned by Mrs. Chu.
a. The Bank heeded to the request after informing
Chu of the said request. But not the full
payment of the credit.
3. Chu demanded the Bank and Cams trading to restore
to her account the time deposit. They did not agree.
Hence, the present action.
4. The RTC dismissed the complaint for lack of merit
and the CA affirmed such decision.
Issue: May Cams trading encash the said time deposits
without a public auction?
Ruling: Yes.
1. The deeds of assignment were contracts of pledge,
but, as the collateral was also money or an exchange
of "peso for peso," the provision in Article 2112 of the
Civil Code for the sale of the thing pledged at public
auction to convert it into money to satisfy the
pledgor's obligation, did not have to be followed.
2. All that had to be done to convert the pledgor's time
deposit certificates into cash was to present them to
the bank for encashment after due notice to the
debtor.
3. It is not a pacto commisorio because what is involved
in this pledge is also money deposited in the bank,
and the amount of which is even less than the debt, it
was not illegal for the creditor to encash the time
deposit to pay the debtors overdue obligation.
a. The purpose of prohibiting pacto commissorio
is to prevent the overreach of the creditor to
the property with more value than the debt.
Hence, it is not applicable in this case.
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.
o Even if all of the requisites under Art. 2085 and Art.
2093 are present, if without the execution in a public
instrument, the contract of pledge cannot bind third
persons.
Example: an innocent purchaser of the things
pledged cannot be deprived of ownership of
the thing if the pledge executed by seller and
the pledgee was not in a public instrument
o Purpose of the law is to forestall fraud because the
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
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.
Right of Pledgor to alienate the thing pledged
Since the pledger remains to be the owner of the
property, he may therefore sell the same
provided that the pledgee consents to the
sale.
Once it is alienated with consent, the ownership of
the thing pledged transfers to the vendor however,
the same is subject to the rights of the
pledgeethat is, the satisfaction of the
obligation
o 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
5
 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.
Note that the vendee is a third person same to
what is referred to in Art. 2096. Hence, 2097 will
only apply if the pledge is binding to third persons.
Estate of George Litton vs Mendoza and Court of
Appeals
Facts:
1. Tan brought an action against Mendoza with the CFI
for the collection of sum of money representing the
value of the 2 checks issued by Mendoza by way of
guaranty and commission for the Bernals.
a. the said check were issued by Mendoza in
favour of Tan to guarantee the payment of the
Bernals for the latters purchase of textile from
Tan.
b. the Bernals on the other hand filed an action
for interpleader because they were not certain
with whom they should pay, Tan or Mendoza.
2. The Deed of Assignment: then, Tan executed a
Deed of Assignment in favour of Litton of its interest
and claims against Mendoza, the subject of the said
case.
a. the Deed of Assignment was executed as a
guaranty for a loan that Tan obtained from
Litton.
3. The Trial Court rendered a decision holding Mendoza
liable for the said checks.
4. Mendoza appealed to the Court of Appeals.
a. Compromise Agreement: while the case in
the CA was pending, Tan and Mendoza entered
into a compromise agreement wherein Tan
acknowledged that Mendoza had already been
settled and hence, they mutually waive,
release and quit whatever claim, right or cause
of action they may have against each other
5. The CA then affirmed the decision of the lower court.
a. Hence, Mendoza filed his motion for
reconsideration praying that the decision of the
trial court be set aside in view of the
compromise agreement entered into between
Tan and Mendoza.
b. Tan opposed arguing that the compromise
agreement was null and void because, among
all others, Tan claimed no longer had the right
to alienate his claim or interest in the credit
because he already assigned it to Litton.
6. CA decision: the Ca upheld the validity of the
compromise agreement ratiocinating that when Tan
executed the Deed of Assignment in favour of Litton, it
was only by way of guaranteeing or securing his
obligation to Litton. Hence, Tan retained the
possession and dominion over the credit and can
therefore, enter into the compromise agreement
disposing the credit.
7. Hence, the present action by the estate of
Litton seeking to set aside the compromise
agreement in light of the executed Deed of
Assignment in favour of Litton.
Issue: Did Tan validly enter into the Compromise Agreement?
Ruling: No.
1. Although Tan may validly alienate the litigated credit
as he remains the owner or the possessor of the said
right under the Civil Code, the said right to alienate
the credit already pledged shall not mean as a grant
6
 of an absolute right on the part of the assignor to
dispose of the things or the right given as a security. it
should be read in consonance with Art. 2097.
2. Although the pledgee Litton did not ipso facto become
the creditor of Mendoza, the pledge between Litton
and Tan being valid, the incorporeal right assigned by
Tan in favour of Litton can only be alienated by the
pledger only with the consent of Litton.
3. To allow the assignor to alienate the security without
the notice and the consent of the assignee would
rendered nugatory the purpose of pledge or an
assignment of credit.
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)
Pledgees Right of Retention
It is the possession of the pledgee that constitutes the
security
o Hence, the debtor cannot demand for its return
until the debt secured had already been paid
Obligations of creditor:
1. To take care of the thing
2. Return of the thing pledged after the fulfillment of the
obligation
3. Not to deposit thing pledged to another persons
unless with authority
4. Responsible for the flaws of the thing pledged
5. Not to use 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)
Having possession, he has the obligation to take care
of the thing with the diligence of a good father of a
family
However he is entitled to reimbursement of the
expenses incurred for its preservation
Art. 2100. The pledgee cannot deposit the thing
pledged with a third person, unless there is a
stipulation authorizing him to do so.
The pledgee is responsible for the acts of his agents
or employees with respect to the thing pledged. (n)
Par 1: Obligation of pledgee not to deposit the thing
to another.
GR: While entitled to retain possession of the thing
pledged until debt is paid, he is not authorized to
transfer possession to a third person
o Reason: to protect the pledger or owner of the
thing pledged
Exception is when there is a stipulation
authorizing him to do so.
Par 2: Responsibility of the pledgee for acts of his
employees or agents
Pledgee is responsible for the acts of his agents or
employees with respect to the thing pledged
Art. 2101. The pledgor has the same responsibility as
a bailor in commodatum in the case under Article
1951. (n)
See 1951
Art. 2103. Unless the thing pledged is expropriated,
the debtor continues to be the owner thereof.
Nevertheless, the creditor may bring the actions which
pertain to the owner of the thing pledged in order to
7
recover it from, or defend it against a third person.
(1869)
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)
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)
Right of Pledgee against third persons
To take care of the thing pledged with the diligence of
a good father, the pledgee is authorized to bring such
action as pertaining to the owner in order to recover it
or defend it, against third persons.
o This is also protect the interest and the rights
of the pledgee
It is real right that may be enforced against third
persons, however, it is still necessary that the pledge
is executed to third persons
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)
Right to use the thing pledged:
General rule: Pledgee has no right to use the thing pledged
Exceptions:
(1) with permission of the owner and
(2) the use is necessary for preservation of thing but the
use must be solely for such purpose
Remedies available to the pledger should the pledgee
use it without consent, misuses it, or the thing is in
danger of being impaired or lost because of the
negligence or unlawful acts of the pledgee:
o May ask judicially or extrajudicially to deposit
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.
Pledger cannot ask for the return of the thing without
fulfillment of the obligation
Prescription will not begin to run on the action to
demand the return of the thing pledged while
obligation subsists
Possession of the pledgee will not ripen to ownership
within such period
Art. 2106. If through the negligence or wilful act of the
pledgee, the thing pledged is in danger of being lost
or impaired, the pledgor may require that it be
deposited with a third person.
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.
8
The pledgee is bound to advise the pledgor, without
delay, of any danger to the thing pledged. (n)
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)
Remedies available to the pledger should the thing be in
danger of being lost or impaired without fault of the pledgee:
(1) offer a substitute of the same kind and not of inferior
quality
(2) cause for the thing be sold in a public auction
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)
Remedies of the creditor deceived as to the substance
of the thing
(1) to claim another thing pledged
(2) to demand immediate payment of the principal
obligation
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)
Presumption of Extinguishment
if the thing pledged had already been returned, the
pledge is already extinguished.
o Note that the principal obligation subsists
After the perfection of the contract of pledge, if the
debtor or owner has possession of the things pledged,
it gives rise to a prima facie presumption that the
thing pledged has been returned, and therefore,
already extinguished.
The presumption is only a rebuttable presumption and
may be rebutted by evidence to the contrary
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)
Extinguishment by Renunciation or abandonment
It must be made in writing because the thing pledged
is still with the pledgee.
It is not conditioned upon the acceptance of the
pledger
The pledgee then becomes a depositary for the
pledger
The principal obligation is not affected by the waiver
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
9
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)
Requisites:
(1) The debt is due and unpaid
(2) The sale must be at a public auction
(3) There must be a notice to the pledger and owner,
stating the amount due
(4) The sale must be made with the intervention of the
notary public
It is extrajudicial in character because intervention
of the court is not necessary
Exception to pactum commisorio
Pledgee may appropriate the thing pledged if after
the first and second auctions, the thing is not sold
Bonifacio, Paray & Espeleta vs Rodriguez et al.,
Facts:
1. the petitioners of this case obtained several loans
from the years 1979 and 1980.
a. The Security: the contracts of loan were
secured by way of pledge of some of their
shares of stock
2. Due to the failure of the respondent stockholders to
pay for their loans, Paray attempted to foreclose the
pledges extrajudicially.
3. However, the respondents filed complaints
seeking nullity of the pledge contracts and to
enjoin the petitioners from continuing with the
foreclosure.
a. The RTC, the CA, and the Supreme Court
upheld the validity of the pledge constituted
and the said decisions attained finality.
4. Respondents then received Notices of Sale which
indicated that the pledged shares were to be sold at a
public auction.
a. However, before the scheduled auction,
the respondents caused the consignation of
various amounts to the RTC Clerk of Court.
5. Neverthelesss, the public auction took place as
scheduled and the shares were successfully sold.
6. The case: the respondents filed a complaint with the
RTC of Cebu to nullify the public auction done arguing
that the consignation extinguished the obligation and
discharged the pledges made.
a. The RTC dismissed the complaint.
7. The CA however, reversed the RTC decision rulinf
that the consignation extinguished the loan
obligations. It also stated that liberal interpretation of
the redemption laws so as to give effect to the policy
of the law of allowing redemption.
a. It also stated that the sale is void because
they should be sold separately as different
shareholders owned them.
Issue: was there a valid auction made?
Ruling: Yes.
1. Nature of the Foreclosure in cases of pledge:
a. Preliminarily, it must be clarified that the
subject sale of pledged shares was an
extrajudicial sale, specifically a notarial sale, as
distinguished from a judicial sale as typified by
an execution sale.
b. Under the Civil Code, the foreclosure of a
pledge occurs extrajudicially, without
intervention by the courts. All the creditor
needs to do, if the credit has not been satisfied
in due time, is to proceed before a Notary
Public to the sale of the thing pledged
c. In this case, petitioners attempted as early as
1980 to proceed extrajudicially with the sale of
the pledged shares by public auction.
d. However, extrajudicial sale was stayed with the
filing of Civil Cases No. R-20120 and 20131,
which sought to annul the pledge contracts.
The final and executory judgment in those
10
 cases affirmed the pledge contracts and gave
due course to the foreclosure and sale at public
auction of the various pledges subject of these
two cases may give rise to the impression that
such sale is judicial in character.
e. While the decision did authorize the sale by
public auction, such declaration could not
detract from the fact that the sale so
authorized is actually extrajudicial in character.
Note that the final judgment in said cases
expressly did not direct the sale by public
auction of the pledged shares, but instead
upheld the right of the Parays to conduct such
sale at their own volition.
2. The Sale is still valid although made in bulk sales
notwithstanding the fact that they were owned by
several people.
a. 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.
b. No similar option is given to pledgors under
the Civil Code.
c. Moreover, there is nothing in the Civil Code
provisions governing the extrajudicial sale of
pledged properties that prohibits the pledgee
of several different pledge contracts from
auctioning all of the pledged properties on a
single occasion, or from the buyer at the
auction sale in purchasing all the pledged
properties with a single purchase price.
d. The relative insignificance of ascertaining the
definite apportionments of the sale price to the
individual shares lies in the fact that once a
pledged item is sold at auction, neither the
pledgee nor the pledgor can recover whatever
deficiency or excess there may be between the
purchase price and the amount of 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)
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 purchase price, as far as the pledgor or
owner is concerned. (n)
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)
Effect of the sale of thing pledged
The sale of thing pledged extinguished the principal
obligation whether the price of the sale is more or less than
the amount due.
Price of sale > amount due OR price < amount due
GR: Debtor is not entitled to the excess
Exception: contrary is stipulated or that instead of
foreclosing, enforce payment so as the get full
amount.
However:
11
 (1) Under the Chattel Mortgage Law, the mortgagor is
entitled to recover the excess of the proceeds of the
sale in foreclosure proceedings
(2) The creditor may sue on the principal obligation
instead of electing to sell the thing pledged, and in
such a case, he may recover the deficiency from the
debtor (Manila Surety and Fidelity vs Velayo)
Manila Surety and Fidelity Company vs Velayo
Facts:
1. The Loan: Manila Suretyu executed a bond for
P2800.00 for the dissolution of the writ of attachment
obtained by a certain Granados upon the request of
Velayo.
a. The security: as a collateral security and by
way of pledge, Velayo also delivered 4 pieces
of jewelry to the Surety Company for latters
further protection and with power to sell the
same in case the surety paid or become
obligated to pay any amount of money.
2. Judgment had been rendered against Velayo in a case
and hence, the surety company was compelled to
forfeit the bond.
3. The Surety company sold the jewelry but was not able
to cover the whole obligation.
a. Hence, the Surety company compelled
Velayo to pay the balance through an
action with the MTC.
b. The MTC rendered a decision in favour of the
Surety Company and ordered Velayo to pay the
balance.
4. Hence, the present action by Velayo arguing that the
sale of the pledged jewelry extinguished any further
liability on his part under Article 2115 of the 1950 Civil
Code, which recites:
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.
Argument of the appellee Manila Surety: there is no
stipulation that the surety cannot recover.
Issue: May the Surety Company claim the unpaid balance?
Ruling: No.
1. because Article 2115, in its last portion, clearly
establishes that the extinction of the principal
obligation supervenes by operation of imperative law
that the parties cannot override:
If the price of the sale is less, neither shall the creditor be
entitled to recover the deficiency notwithstanding any
stipulation to the contrary.
2. The provision is clear and unmistakable, and its effect
can not be evaded. By electing to sell the articles
pledged, instead of suing on the principal obligation,
the creditor has waived any other remedy, and must
abide by the results of the sale. No deficiency is
recoverable.
Art. 2116. After the public auction, the pledgee shall
promptly advise the pledgor or owner of the result
thereof.
The purpose is to enable the pledger or owner to
take steps for the protection of his rights where he
has reasonable grounds to believe that the sale
was not an honest one.
12
Art. 2117. Any third person who has any right in or to
the thing pledged may satisfy the principal obligation
as soon as the latter becomes due and demandable.(n)
The general rule in obligations is that the creditor is not
obliged to acceptance or performance by a third person who
has no interest in the fulfillment of the third person.
Exception is provided by this Article:
a person who has any right or interest in the thing
pledged may pay the debt as soon as it becomes
due and demandable and the creditor cannot
refuse to accept payment
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 his claim, and deliver the surplus,
should there be any, to the pledgor. (n)
Obligation/Right of the pledgee to collect and
redeem the amount due when the credit pledged
is already due
CITIBANK N.A. and Investors Finance Corporation vs
Modesta Sabeniano
Facts:
1. Sabeniano filed a complaint against the petitioners
before the RTC of Makati claiming to have substantial
deposits and money market placements with the
Bank.
a. In the answer of the Bank and the FNCB, they
admitted that Sabeniano did have deposits and
money market placements with them.
However, they alleged that Sabeniano also
incurred several loans for which she executed
Promissory Notes and were secured by:
i. Declaration of Pledge of her Dollar
Accounts in Citibank Geneva
ii. Deeds of Assignment of Her money
market placements which has expressly
stated that:
2. In the event the OBLIGATIONS are not paid at maturity or upon
demand, as the case may be, the ASSIGNEE is fully authorized
and empowered to collect and receive the PLACEMENT (or
so much thereof as may be necessary) and apply the same
in payment of the OBLIGATIONS. Furthermore, the ASSIGNOR
agrees that at any time, and from time to time, upon request by the
ASSIGNEE, the ASSIGNOR will promptly execute and deliver any
and all such further instruments and documents as may be
necessary to effectuate this Assignment.
xxxx
5. This Assignment shall be considered as sufficient authority
to FNCB Finance to pay and deliver the PLACEMENT or so
much thereof as may be necessary to liquidate the
OBLIGATIONS, to the ASSIGNEE in accordance with terms and
provisions hereof.
b. That Sabeniano, having failed to pay for the
said loans, exercised its right to set off or
compensate the loan of Sabeniano with her
deposits and money market placements
pursuant to the Deeds of Assignment and
Declaration of Pledge
2. The CA and the RTC rendered a decision declaring
such compensation as null and void for having failed
to establish the indebtedness of Sabeniano
Issue: Was the bank justified in applying the deposits
and the proceeds of the money market placements to
as payment for loan of Sabeniano?
Ruling: Yes in relation to Sabenianos savings account and
her money market placements but not insofar as the dollar
accounts of Sabeniano in Citibank Switzerland.
1. as to the deposits, there was valid compensation
because in relation to the loan, the bank is the
creditor of Sabeniano and Sabeniano is the creditor of
the Bank in relation to the money deposits.
13
 2. However, as to the money market placements, WHAT
WAS EXERCISED was its Right in the by virtue of
the Deeds of Assignment executed by the
respondent.
3. Petitioner Citibank was only acting upon the authority
granted to it under the foregoing Deeds when it finally
used the proceeds of PNs No. 20138 and 20139, paid
by petitioner FNCB Finance, to partly pay for
respondent's outstanding loans.
4. Strictly speaking, it did not effect a legal
compensation or off-set under Article 1278 of the Civil
Code, but rather, it partly extinguished respondent's
obligations through the application of the security
given by the respondent for her loans.
5. Although the pertinent documents were entitled
Deeds of Assignment, they were, in reality, more of a
pledge by respondent to petitioner Citibank of her
credit due from petitioner FNCB Finance by virtue of
her money market placements with the latter.
6. According to Article 2118 of the Civil Code. ART. 2118.
If a credit 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 his claim, and deliver the surplus, should there be
any, to the pledgor.
7. PNs No. 20138 and 20139 matured on 3 September
1979, without them being redeemed by respondent,
so that petitioner Citibank collected from petitioner
FNCB Finance the proceeds thereof, which included
the principal amounts and interests earned by the
money market placements, amounting to
P1,022,916.66, and applied the same against
respondent's outstanding loans, leaving no surplus to
be delivered to respondent.
Art. 2119. If two or more things are pledged, the
pledgee may choose which he will cause to be sold,
unless there is a stipulation to the contrary. He may
demand the sale of only as many of the things as are
necessary for the payment of the debt. (n)
Art. 2120. If a third party secures an obligation by
pledging his own movable property under the
provisions of Article 2085 he shall have the same
rights as a guarantor under Articles 2066 to 2070, and
Articles 2077 to 2081. He is not prejudiced by any
waiver of defense by the principal obligor. (n)
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. (n)
Art. 546. Necessary expenses shall be refunded to
every possessor; but only the possessor in good
faith may retain the thing until he has been
reimbursed therefor.
Useful expenses shall be refunded only to the
possessor in good faith with the same right of
retention, the person who has defeated him in the
possession having the option of refunding the
amount of the expenses or of paying the increase in
value which the thing may have acquired by reason
thereof. (453a)
Art. 1731. He who has executed work upon a
movable has a right to retain it by way of pledge
until he is paid. (1600)
Art. 1914. The agent may retain in pledge the
things which are the object of the agency until the
principal effects the reimbursement and pays the
14
 indemnity set forth in the two preceding articles.
(1730)
Art. 1707. The laborer's wages shall be a lien on the
goods manufactured or the work done.
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. (n)
Since there is no particular period for the payment
of the principal obligation, the pledgee must make
a demand for the payment of the amount due him
The pledgee must proceed with the sale within 1
month after demand, otherwise, the debtor may
require him to return the thing retained
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. (1873a)
15