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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 contract—perfected 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-ownership—shall 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 PROPERTY—property must not be subject to any claim of a third person > CAPACITY TO DISPOSE—pledgor 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 gratuitous—same should be strictly construed 4. Liability for deficiency—pledgor 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

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 delivery—there 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 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 REQUIREMENT—to 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, namely—that 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 

RIGHT OF PLEDGEE TO CAUSE SALE OF THE THING PLEDGED 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 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) > The thing pledged may be alienated for the payment to the creditor when the principal obligation becomes due

THE FORMALITIES REQUIRED FOR SUCH SALE 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

RIGHT OF PLEDGEE TO APPROPRIATE THING PLEDGED > Serves as an exception to the prohibition on pactum commissorium > The pledgee may appropriate the thing pledged if after the first and second auctions,

the thing is not sold > If the creditor appropriates the thing, it shall be considered as full payment of his entire claim—he is thus obliged to an acquittance for the same. The debtor is not entitled for the excess in case the value of the thing pledged is more than 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)

RIGHT OF PLEDGOR AND PLEDGEE TO BID AT PUBLIC SALE  To avoid fraud, the pledgee is not allowed to acquire the thing pledged if he is the only bidder

IN PLEDGE, BID MUST BE FOR CASH 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) 

EFFECT OF SALE OF THING PLEDGED 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)

1. If the price of the sale is more than the amount due the creditor, the debtor is not entitled to the excess unless the contrary is provided 2. If the price of sale is less, neither is the creditor entitled to recover the deficiency a. The reason is to compel the creditor to hold an honest public sale b. Creditor should realize the loans only as much as he is likely to realize at a public sale

RIGHT OF DEBTOR TO EXCESS > GENERAL RULE—the debtor is not entitled to the excess unless there is an agreement to the contrary > To compensate the creditor for his risk of not being able to recover the deficiency in case the thing pledged is sold below the amount of the principal obligation

RIGHT OF PLEDGEE TO COLLECT AND RECEIVE AMOUNT DUE ON CREDIT PLEDGED 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) > Pledgee is given the right to collect and receive the amount due on the credit pledged > But in reference to the previous article, having the duty to take good care with the diligence of a good father to a family the thing pledged, he has the duty to collect if danger would endanger the recovery of the credit 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)

RIGHT OF PLEDGEE TO CHOOSE WHICH OF SEVERAL THINGS PLEDGED SHALL BE SOLD > After sufficient property has been sold to satisfy the obligation plus interests and expenses, no more shall be sold 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)

RIGHT OF THIRD PERSON WHO PLEDGED HIS OWN PROPERTY > 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 or 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. (n) 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) 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 his Title. (1873a)...