Sales, Agency, and Other Credit Transactions
Pledge is a contract by virtue of which the
debtor delivers to the creditor or to a third
persona 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. (Art. 2085 in rel. to 2093)
Kinds of Pledge
1. Voluntary or conventional Created
by agreement of parties.
2. Legal Created by operation of law.
Central Bank vs. CA: The consideration of
the accessory contract of real estate
mortgage is the same as that of the
principal contract. For the debtor, the
consideration of his obligation to pay is the
existence of a debt. Thus, in the accessory
contract of real estate mortgage, the
consideration of the debtor in furnishing the
mortgage is the existence of a valid,
voidable, or unenforceable debt (Art. 2086,
in relation to Art.2052, of the Civil Code). It
is not necessary that any consideration
should pass at the time of the execution of
the contract of real mortgage. It may either
be a prior or subsequent matter. But when
the consideration is subsequent to the
mortgage, the mortgage can take effect only
when the debt secured by it is created as a
binding contract to pay. And, when there is
partial failure of consideration, the mortgage
becomes unenforceable to the extent of
such failure. Where the indebtedness
actually owing to the holder of the mortgage
is less than the sum named in the
mortgage, the mortgage cannot be enforced
for more than the actual sum due. The rule
of indivisibility of the mortgage as outlined
by Article 2089 above-quoted presupposes
several heirs of the debtor or creditor which
does not obtain in this case. Hence, the rule
of indivisibility of a mortgage cannot apply.
Belo vs. PNB: From Art. 2089 is excepted
the case in w/c, 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 w/c each thing is especially
answerable is satisfied. From the wordings
of the law, indivisibility arises only when
there is a debt, that is, there is a debtor-
creditor relationship.
Characteristics of Pledge
1. Real Perfected by delivery.
2. Accessory Has no independent
existence of its own.
3. Unilateral Creates obligation solely on
the part of the creditor to return the thing
subject upon the fulfillment of the principal
obligation.
4. Subsidiary Obligation incurred does not
arise until the fulfillment of the principal
obligation.
Cause or consideration
1. Principal obligation In so far as the
pledgor is concerned.
2. Compensation stipulated for the pledge
or mere liberality of the pledgor If pledgor
is not the debtor.
Provisions applicable only to pledge
1. Transfer of possession to the
creditor or to third person by
common agreement is essential in
pledge (2093).
a. Actual delivery is important.
b. Constructive or symbolic
delivery of the key to the
warehouse is sufficient to
show that the depositary
appointed by common
consent of the parties was
legally placed in possession.
2. All movables within the commerce of
man may be pledged as long as they
are susceptible of possession
(2094).
3. Incorporeal rights may be pledged.
The instruments representing the
pledged rights shall be delivered to
the creditor; if they be negotiable
instruments, they must be indorsed
(2095)
1
Sales, Agency, and Other Credit Transactions
4. Pledge shall take effect against 3rd
persons only if the following appear
in a public instrument:
a. Description of the thing
pledged.
b. Date of the pledge (2096).
5. The thing pledged may be alienated
by the pledgor or owner only with the
consent of the pledgee. 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 to have possession (2097).
6. Pledge gives the creditor the right 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 (2098).
7. Special Laws apply to pawnshops
and establishments engaged in
making loans secured by pledges.
Provisions of the Civil Code shall
apply subsidiarity to them.
Rights and Duties of Creditor in a Pledge
1. Shall take care of the thing pledged
with the diligence of a good father of
a family (2099).
2. Has right to reimbursement of the
expenses made for preserving the
thing. Shall be liable for loss or
deterioration of the thing by reason
of fraud, negligence, delay or
violation of the terms of the contract,
but not for fortuitous events (2099).
3. May bring actions pertaining to the
owner of the thing in order to recover
it from, or defend it against, a 3rd
person (2103).
4. Cannot use the thing without the
authority of the owner. If he uses the
thing without authority, or if he
misuses the thing when he was
authorized to use it, the owner may
ask that it be judicially or extra
judicially deposited (2104).
5. May use the thing if necessary for its
preservation (2104).
6. May either claim another thing in
pledge or demand immediate
payment of the principal obligation if
he is deceived on the substance or
quality of the thing (2109).
The Pledgee
1. Cannot deposit the thing pledged
with a third person, unless there is a
contrary stipulation (2100).
2. Is responsible for the acts of his
agents or employees with respect to
the thing pledged (2100).
3. Has no right to use the thing or to
appropriate its fruits without authority
from the owner (2104)
4. May cause the public sale of the
thing pledged if, without fault on his
part, there is danger of destruction,
impairment or dimunition in value of
the thing. The proceeds of the
auction shall be a security for the
principal obligation (2108).
Rights and Duties of the Pledgor
1. Takes responsibility for the flaws of
the thing pledged (2101 in relation to
Art. 1951)
2. Cannot ask for the return of the thing
against the will of the creditor,
unless and until he has paid the debt
and its interest, with expenses in
proper cases (2105).
Yuliongsiu vs. PNB: There is authority
supporting the proposition that the pledgee
can temporarily entrust the physical
possession of the chattels pledged to the
pledgor without invalidating the pledge. In
such a case, the pledgor is regarded as
holding the pledged property merely as
trustee for the pledgee. The type of delivery
will depend upon the nature and the
peculiar circumstances of each case.
PNB vs. Atendido: according to law, a
pledgee cannot become the owner of, nor
appropriate to himself, the thing given in
pledge. 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
2
Sales, Agency, and Other Credit Transactions
loss of the property, the loss should be
borne by the pledgor.
3. Subject to the right of the pledge
under Article2108, pledgor is
allowed to substitute the thing which
is in danger of destruction or
impairment without any fault on the
part of the pledgee with another
thing of the same kind and quality
(2107).
4. May require that the thing be
deposited with a 3rd person, if
through the negligence or willful act
of the pledgee the thing is in danger
of being lost or impaired (2106).
Extinguishment of a Pledge
1. Ways to extinguish a pledge:
a. Payment of the debt
b. Sale of the thing pledged at
public auction
c. Thing pledged is returned by
the pledgee to the pledgor or
owner (2110).
d. Written statement by the
pledgee that he renounces or
abandons the pledge. For
this purpose, neither the
acceptance by the pledgor or
owner nor the return of the
thing pledged is necessary,
and the pledgee becomes a
depositary (2111).
2. Presumptions:
a. If, subsequent to the
perfection of the pledge, the
thing is found in the
possession of the pledgor or
owner, there is prima facie
presumption that the thing
has been returned by the
pledge (2110)
b. If the thing is in the
possession of a 3rdperson
who received it from the
pledger or owner after the
constitution of the pledge,
there is prima facie
presumption that the thing
has been returned by the
pledge (2110).
Requirements in sale of the thing
pledged by a creditor, if credit is not paid
on time (Art. 2112)
1. Debt is due and unpaid.
2. Sale must be at a public auction.
3. Notice to the pledgor and owner,
stating the amount due.
4. Sale must be made with the
intervention of a notary public.
5. If at the first auction the thing is not
sold, a second one with the same
formalities shall be held.
6. If at the second auction, there is no
sale either, the creditor may
appropriate the thing pledged but he
shall give an acquittance(release) for
his entire claim.
Effect of the sale of the thing pledged
(Art 2115)
1. Extinguishes the principal obligation,
whether the price of the sale is more
or less than the amount due.
2. If the price is more than amount due,
the debtor is not entitled to the
excess unless the contrary is
provided.
3. If the price of the sale is less, neither
is the creditor entitled to recover the
deficiency. A contrary stipulation is
void.
Manila Banking vs. Teodoro: 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 (as earlier established in Lopez v.
Court of Appeals)
Legal pledges (article 2121)
1. Necessary expenses shall be
refunded to every possessor, but
only a possessor in good faith may
retain the thing until he has been
reimbursed.
Useful expenses shall be refunded
only to the possessor in good faith
3
Sales, Agency, and Other Credit Transactions

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 and by reason thereof (Art.
546)
2. He who has executed work upon a
movable has a right to retain it by
way of pledge until he is paid. This is
called the mechanics lien. (Art.
1731)
3. The agent may retain the things
which are the objects of agency until
the principal effects the
reimbursement and pays the
indemnity. This is called the agents
lien (Art. 1914)
4. The laborers wages shall be a lien
on the goods manufactured or the
work done.
5. (Art. 1707)
NOTE:
1. In legal pledges, the remainder of
the price of the sale shall be
delivered to the obligor.
2. Public auction of legal pledges may
only be executed after demand of
the amount for which the thing is
retained. It shall take place within
one month after the demand,
otherwise the pledgor may demand
the return of the thing pledged,
provided s/he is able to show that
the creditor did not cause the public
sale without justifiable grounds.
(Article 2122)
b. Pawn broker prohibited from
dividing the pawn offered to
collect greater interest
c. Pawn broker prohibited from
requiring additional charge
for safekeeping/insurance
d. Maximum service charge:
Php5 to not more than 1% of
the principal loan
Sec 13: Pawner who fails to pay his
obligation on the date it falls due may
WITHIN 90 DAYS from the date of the
maturity of the obligation, REDEEM the
pawn by payment of the principal debt and
interest
Sec 15: Requisites of public auction of
pawned articles
a. Public auction must be held
at the place of business of
the pawn shop, or within the
municipality or city where it is
located
b. Must be under the control
and direction of a licensed
auctioneer
c. Prior publication one week
before the sale

Pawnshop Regulation Act PD. 114

Sec. 9: Loans granted by pawnshops shall
not be less than 30% of the value of the
security offered, UNLESS the pawner
manifests in writing the desire to borrow a
lesser amount.
Sec. 10:
a. Interests not to exceed usury
law