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Chapter 2 - PLEDGE

1. Concept of pledge A pledge is a contract whereby personal property is delivered to the creditor or a third person as a security for the performance of an obligation. (Art. 2140) 2. Parties to a contract of pledge a. Pledgor. The party who delivers a movable property to another to secure his debt or that of another person. b. Pledgee. The party who receives a movable property from another to secure the latters debt or that of another. 3. Characteristics of pledge a. Accessory. It cannot exist without a principal obligation. b. Indivisible. It creates a lien on the whole or all of the properties pledged, which lien continues until the obligation it secures has been fully paid. c. Real. The thing pledged is required to be delivered to the creditor or a third person for its perfection. d. Nominate. It has a designated name under the law. e. Unilateral. It creates an obligation solely on the part of the creditor to return the thing pledged upon satisfaction of the principal obligation secured. 4. Kinds of pledge a. Conventional or voluntary. That which is constituted by the mutual consent of the pledgor and the pledgee. b. Legal. That which is created by operation of law. (Arts. 546, 1731 and 1994) 5. Requisites of conventional pledge a. That it be constituted to secure the fulfillment of a principal obligation. (Art. 2085) b. That the pledgor be the absolute owner of the thing pledged. (Art. 2085) c. That the person constituting the pledge has the free disposal of his property, and in the absence thereof, that he be legally authorized for the purpose. (Art. 2085) d. That the thing pledged be placed in the possession of the creditor, or of a third person by common agreement. (Art. 2093) 6. Object of the pledge a. All movables within commerce which are susceptible of possession. (Art. 2094) b. Incorporeal rights evidenced by a negotiable instruments, bills of lading, shares of stocks, bonds, warehouse receipts and similar documents. The instruments proving the right pledged shall be delivered to the creditor and if negotiable must be endorsed. (Art. 2095) 7. Form of pledge a. Between parties. The pledge may be in any form, i.e., oral or in writing whether public or private, as in fact the mere delivery of the object is sufficient to bind the parties. b. As regards third persons. To take effect against third persons, the pledge must be in a public instrument showing a description of the thing pledged and the date of the pledge. (Art. 2096) PROBLEM: D obtained a loan of P5,000 from C. The debt is secured by Ds diamond ring which D delivered to C. No instrument was executed by D and C either for the loan or the pledge. Later, D sold his diamond ring to T. Who has a better right to the diamond ring, T or C? 8. Right of pledgor to alienate the thing pledged The pledgor may alienate the thing pledged even while it is in the possession of the creditor or a third person, with the consent of the pledgee. The ownership of the thing pledged shall be transmitted to the vendee or transferee as soon as the pledgee consents to the alienation, but the latter (or a third person designated) shall continue in possession. This means that the pledge continues to be a security even if there is change in the ownership of the thing pledged. PROBLEM: D delivered his necklace to C to secure his debt of P5,000. The pledge is in public instrument showing the date of the pledge and a description of the thing pledged. Later, D donated the necklace to T with Cs consent. On due date, D defaulted in his payment of the loan. As a result, C notified the debtor and T that he was selling the ring at public auction. T opposed the sale claiming that the pledge was not binding on him since he was not the debtor. Is T correct?
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9. Right of retention by pledgee The very purpose of pledge is to secure the payment of a principal obligation. Until such obligation is paid, the creditor has a right to retain the thing in his possession or in that of a third person to whom it has been delivered. (Art. 2098) If the pledgee returns the thing pledged to the pledgor or the owner, he loses his security, i.e., the pledge is extinguished. (Art. 2110) 10. Obligations of creditor under Art. 2099 a. To take care of the thing pledged with the diligence of a good father of a family. b. To be liable for the loss or deterioration of the thing pledged, except if such loss or deterioration is due to fortuitous event. 11. Right of the creditor The creditor has the right to reimbursement of the expenses he has incurred for the preservation of the thing pledged. 12. Obligations of the pledgee under Art. 2100 a. Not to deposit the thing pledged with a third person, unless there was a stipulation authorizing him to do so. b. To be responsible for the acts of his agents or employees with respect to the thing pledged. 13. Obligations of pledgor for flaws in the thing pledged The pledgor shall be liable for damages which the pledgee may suffer by reason of any flaws of the thing pledged which he had knowledge of but did not advise the pledgee of the same. (Art. 1951) PROBLEM: D borrowed P20,000 from C. The debt is secured by a pledge of Ds 32-inch television set. Although D had knowledge of an exposed wire on the cord of the television set, D did not advise C about it. So when C plugged the cord, he was electrocuted and suffered burns. Can C hold D liable for the damages he sustained? 14. Extent of pledge a. The thing pledged b. The fruits, income, dividends or interest earned or produced by the thing pledged, unless there is a stipulation excluding them. c. The offspring when the thing pledged is an animal, unless there is a stipulation excluding them. (Art 2102) PROBLEM: D borrowed from C P10,000 which bears interest at 1% a month. The obligation is secured by a pledge of SMC shares of stock owned by D. In addition to delivering to C the stock certificate covering the shares, D also gave C the authority to collect the dividends on the stock. What is the extent of the pledge? If C collects a dividend of P250, how shall it be applied? 15. Continued ownership by debtor of thing pledged The debtor continues to be the owner of the thing pledged even while it is in the possession of the creditor or a third person. However, he loses such ownership if the thing is expropriated, i.e., such property is taken by the government for public use upon payment of just compensation. The expropriation proceeds shall be a security for the principal obligation in the same manner as the thing originally pledged. (Art. 2108) PROBLEM: D obtained a loan of P50,000 from C. as a security for the debt, D pledged his gold bar. Who is the owner of the thing pledged? If the State, through its power of eminent domain, expropriated all gold in the hands of its citizens to increase its gold reserves, what is the effect of the expropriation? 16. Right of creditor to bring action regarding thing pledged The creditor may bring the actions which pertain to the owner of the thing pledged in order to recover it from, or defend it against, a third person. (Art. 2103) PROBLEM: D pledged his motorcycle to C to secure his debt of P50,000. Later, the motorcycle was found in the possession of T without knowledge of D and C. What are the remedies available to C? 17. Obligations of the pledgee under Art. 2104 As a general rule, the pledgee cannot use the thing pledged. However, he may use the thing pledged under the following cases: a. When the use of the thing is authorized by the owner. b. When the use of the thing is required for its preservation.
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However, the thing may be used only for such purpose. 18. Right of the owner if the thing is misused If the creditor was not authorized to use the thing pledged and he uses it, or he was authorized to use the thing but he misuses it, the owner may require the thing be deposited either judicially or extra-judicially. PROBLEM: D obtained a loan of P30,000 from C. To secure the debt, D pledged his motorcycle. a. May C use the motorcycle? b. Supposed C was authorized to use the motorcycle, may he use it in racing? c. What right is available to D if C misuses the motorcycle? 19. Obligations of the debtor under Art. 2105 a. Not to ask the return of the thing pledged against the will of the creditor until he has paid the debt and its interest. b. To pay the debt secured and its interest, with expenses in a proper case. 20. Right of pledgor to have thing deposited with a third person The pledgor may require that the thing pledged be deposited with a third person if it is in danger of being lost or impaired through the negligence or willful act of the pledgee. (Art. 2106) PROBLEM: D borrowed P100,000 from C. The debt is secured by a pledge of D priced horse and is payable in 5 equal monthly installments. When D visited Cs residence to pay his first installment, he saw that the horse was being allowed by C to be exposed to the rain and was in danger of getting sick. What may be the remedies available to D? 21. Rights of parties when thing pledged is in danger of destruction or impairment. a. Pledgor. The pledgor may demand the return of the thing pledged, upon offering another thing of the same kind and not of inferior quality, if there are reasonable grounds to fear the destruction or impairment of the thing pledged, without the fault of the pledgee. (Art. 2107) b. Pledgee. The pledgee may cause the sale of the thing pledged in a public sale, if without his fault, the same is in danger of destruction, impairment, or diminution in value. The proceeds of the auction shall be security for the principal obligation in the same manner as the thing originally pledged. (Art. 2108) This right of the pledgee is superior to the right of the pledgor to demand the return of the thing pledged. (Art. 2107) PROBLEM: D delivered to C 30 bags of cement to secure his debt of P20,000. The cement, however, is in danger of hardening without Cs fault. What may be the remedies available to the parties? 22. Pledgees right in case of deception on substance or quality of thing pledged If the creditor is deceived on the substance or quality of the thing pledged, he may either: a. Claim another thing in its stead, or b. Demand immediate payment of the principal obligation. PROBLEM: D obtained an interest-bearing loan of P20,000 from C. The debt is payable after 30 days. To secure the debt, D pledged his ring which he said was embellished with genuine emerald. C agreed to the pledge of the ring believing in Ds statement. Later, C, discovered that the embellishment of the ring was only synthetic emerald. What remedy is available to C? 23. Causes of extinguishment of pledge a. Direct causes. When the pledge is extinguished independently of the principal obligation. 1) Return of the thing pledged by the pledgee to the pledgor or owner. (Art. 2110) 2) Written renunciation or abandonment of the pledge. (Art. 2111) 3) Sale of the thing pledged. (Art. 2115) 4) Appropriation of the thing pledged by the pledgee. (Art. 2112) b. Indirect causes. When the principal obligation secured by the pledge is extinguished, the pledge being merely an accessory contract, is likewise extinguished. Thus, the payment by the debtor of the principal obligation or its Condonation by the creditor will extinguish not only the principal obligation but also any accessory contract including any pledge constituted as security. 24. Return of the thing pledged Pledge being a real contract requires the delivery of the object for its perfection. Thus, the object must remain in the possession of the creditor or a third person by common agreement while the debt it secures remains unpaid. If, while the debt subsists, it is returned by the pledgee to the pledgor or owner, the
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pledge is extinguished for the reason that its possession by the creditor or third person which is an essential element, is already absent. Any stipulation that the pledge shall subsist even if the thing is returned to the pledgor is VOID. 25. Presumption of return of thing pledged There is prima facie presumption that the thing pledged has been returned by the pledgee so as to extinguish the pledge in the following cases: a. If subsequent to the perfection of the pledge, the thing is in the possession of the pledgor or owner. b. If the thing pledged is in the possession of a third person who has received it from pledgor or owner after the constitution of the pledge. The presumption, however, is disputable and thus may be rebutted by evidence. Thus, there is no such presumption if the thing was delivered by the pledgee to the pledgor in order that the latter may have it re-appraised, or the thing pledged has been temporarily borrowed by the pledgor. 26. Renunciation of the pledge In order for renunciation or abandonment to extinguish the pledge, the same must be in writing. The writing may be a private instrument or a public instrument. As a rule, the acceptance by the debtor of the renunciation is required for the extinguishment of his obligation. However, this is not so in the case of renunciation of the pledge. The pledge is extinguished although the renunciation has not been accepted by the pledgor or owner. Neither will the return of the thing pledged be necessary to extinguish the pledge. Until the return of the thing pledged to the pledgor or owner, the pledgee will be liable as a depositary. 27. Ground for sale of the thing pledged If the credit secured by the pledged is not paid on due date, the creditor may cause the sale of the thing pledged. 28. Formalities of the sale. The sale shall be: a. By public auction; b. Through a notary public; and c. With notice to the debtor and the owner of the thing pledged, stating the amount for which the public sale is to be held. (Art. 2112) 29. Appropriation of the thing pledged If the thing pledged is not sold in the first and second public auctions, the creditor may appropriate the thing pledged. In this case, he shall be obliged to give an acquittance for his entire claim. (Art 2112) The sale of the thing pledged or its appropriation will result in the extinguishment not only of the pledge but also of the principal obligation. 30. Who may bid at the public auction a. The pledgor or owner. He shall be preferred if he should offer the same terms as the highest bidder. b. The pledgee. However, his offer shall not be valid if he is the only bidder. (Art. 2113) c. Third persons. 31. Effect if any other bid is accepted. If a bid which does not offer to pay the purchase price at once is accepted, the pledgee is deemed to have received the purchase price, as far as the pledgor or owner is concerned. (Art. 2114) Accordingly, no further recovery can be made from the debtor. 32. Effect of sale The principal obligation shall be extinguished whether or not the proceeds of the sale are equal to the amount of the principal obligation, interest and expenses in a proper case. (Art. 2115) a. If the price is more than the amount of the obligation, the debtor shall not be entitled to the excess, unless there is an agreement to that effect. b. If the price is less, the creditor cannot recover the deficiency even if stipulated. (Art. 2115) Any such stipulation is void. PROBLEM: D owes C P10,000. The debt is secured by a pledge of Ds shares of stock which is evidenced by a stock certificate delivered by D to C at the time D received the proceeds. If D defaults and C sells the shares of stock at P9,500, what is its effect? How about if it was sold for P11,000?

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33. Payment of the principal obligation by third person Any third person who has any right in or to the thing pledged, such as one who pledges his property to secure anothers debt, may satisfy the principal obligation as soon as the latter becomes due and demandable. If he pays the debt, he can demand the reimbursement from the principal debtor what he has paid. Moreover, he shall be subrogated in the creditors right. PROBLEM: On February 1, D borrowed P200,000 from C. The debt which s due on June 1, is secured by a mortgage of Ds lot and the pledge of Ts diamond ring. Who may pay the principal obligation of P200,000? 34. Pledgee right to collect credit pledged a. To collect and receive the amount due on the credit if it has become due before it is redeemed. b. To apply the amount collected to the payment of his claim, and deliver the surplus, if there is any, to the pledgor. PROBLEM: M is the maker of a promissory note amounting to P20,000 which is payable to the order of P. The note is due on March 31. P pledges the note to H to secure his debt of P15,000. On March 31, if P had not yet redeemed the note from him, what may H do? 35. When two or more things are pledged When two or more things have been pledged, the pledgee may choose which he will cause to be sold to satisfy his claim, 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. This is to ensure that the pledgee will not unjustly enrich himself at the pledgors expense because if the proceeds of the sale of the thing pledged exceed the amount of the debt, the pledgee generally gets the excess, unless there was a stipulation that it shall be turned over to the pledgor. (Art. 2115) PROBLEM: D pledged his ring (valued at P15,000), his wristwatch (valued at P6,000) and his necklace (valued at P4,000) to secure his debt to C amounting to P20,000. D defaulted in the payment of his debt. What may be the remedies available to C? 36. Rights of a third person who pledges his own movable property to secure the debt of another a. To be indemnified by the debtor if he pays the creditor. The indemnity consists of the following: 1) The total amount of the debt 2) The legal interests thereon from the time the payment was made known to the debtor, even though it did not earn interest for the creditor. 3) The expenses incurred by the pledgor after having notified the debtor that payment had been demanded of him. 4) Damages, if they are due. (Arts. 2066, 2120) b. To be subrogated to all the rights f the creditor against the debtor if he pays the creditor. (Arts. 2067, 2120) The pledgor is considered a third person interested in the fulfillment of the obligation; hence, he is entitled to be subrogated to the creditors rights upon payment. PROBLEM: D obtained a loan of P10,000 from C. The debt is secured by the guarantee of G and the pledge by T of his ring. If T pays C, what is the effect? c. To be released from liability in the following cases: 1) If the creditor voluntarily accepts immovable or other property in payment of the debt even if the creditor thereafter loses the same by eviction. (Art2. 2077, 2120) PROBLEM: D borrowed P50,000 from C. The debt is secured by a pledge of Ts ring. On due date, C accepted a parcel of land from D in payment of the debt. Is the pledge extinguished? 2) If an extension of time is granted to the debtor by the creditor without his (pledgors) consent. (Arts. 2079, 2080) 3) If through some act of the creditor, the pledgor cannot be subrogated to the rights, mortgages and preferences of the creditor. (Arts. 2080, 2120) PROBLEM: D owes C P20,000. The debt is secured by the guarantee of G and the pledge by T of his ring. If C cancels Gs guarantee, is T also released from liability? 37. Concept of legal pledge Legal pledge or pledge by operation of la refers to the right of a person to retain a thing until he receives payment of his claim. Examples of legal pledge: a. Possessory lien by a possessor in good faith
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PROBLEM: B bought a bicycle from S believing that S was the owner. After obtaining possession of the bicycle, B incurred P1,000 to have it repaired by causing the removal of rust from it and replacing some deteriorating parts. Later O came forward and proved that he was the owner and that S merely deceived B. Decide. b. Possessory lien of worker PROBLEM: Orlando brought his wristwatch to Roberto for repair. If Orlando will not pay his services, what may Roberto do? c. Depositarys right of retention 38. Rules applicable to legal pledge The provision on conventional pledge on the possession, care and sale of the thing as well as on the termination of pledge shall be applicable to legal pledge except with respect to the sale of the thing as follows: a. The thing may be sold only after demand of the amount for which the thing is retained. b. The public auction shall take place within one month after such demand. c. 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) d. After the payment of the debt and expenses, the remainder of the price of sale shall be delivered to the obligor. (Art. 2121) 39. Conventional pledge and legal pledge distinguished on excess of proceeds of sale or deficiency a. Proceeds of sale exceed amount of debt In conventional pledge, the excess belongs to the creditor, unless there is a stipulation that the same shall be turned over to the debtor. In legal pledge, the remainder of the price of sale shall be delivered to the debtor. b. On recovery of deficiency In conventional pledge, the creditor is not entitled to recover deficiency. Any agreement to the contrary is void. In legal pledge, the creditor is entitled to recover the deficiency from the debtor.

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