Académique Documents
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CHAPTER 11
CONTRACT OF PLEDGE
Article 2093. In addition to the requisites
prescribed by 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.
Article 2094. All movables, which are
within commerce of man, may be pledged,
provided
they
are
susceptible
of
possession.
Article 2095. Incorporeal rights, evidenced
by negotiable instruments, bills of lading,
shares of stocks, bonds, warehouse receipts
and similar documents may also be
pledged. The instrument proving the right
to pledged shall be delivered to the
creditor, and if negotiable, must be
indorsed.
1
1. DEFINITION
An accessory, real and unilateral contract by virtue of
which the debtor or a third person delivers to the
creditor or to a third person movable property as
o
o
2. REQUISITES (S-A-F-P-E)
a. The pledge must be constituted to secure the
fulfillment of a principal obligation.
b. The pledgor must be the absolute owner of the thing
o By way of exception the real owner may be
estopped even if the person who delivered the
thing by way of pledge was not the real owner
under the circumstance mentioned in Article
1483.2
c. The pledgor must have free disposal of the property.
d. The thing pledged should be placed in the possession
of the creditor or of a third person, by common
agreement
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A. DELIVERY
The contract of pledge is one of the 4 real
contracts in the NCC (commodatum, mutuum,
deposituum).
o No pledge is validly constituted if there is no
delivery.
o The delivery implied in Article 2093 is a change
in the actual possession of the property pledged
and that a mere symbolic delivery is not
sufficient
o Until there is delivery, the pledgee acquires no
real right of property in the thing.
Pledge is merely a lien; and possession
is indispensible in the right of a lien.
o In Beita v Ganzon, the animals in question were
in the possession of a third person not specified
in the contract before the alleged pledge was
entered into. The thing pledged remained with
them until execution was levied. The SC ruled
that there is no actual delivery of the alleged
pledgee themselves. There is no reality no
change in possession. Hence, the pledge was
not effective.
o In El Banco Espanol v Peterson the pledgee
took possession of the goods pledged through a
depository and a special agent appointed by it,
each of whom had a duplicate key to the
warehouse where the goods are stored, and
that the pledgee took the proceeds of the goods
sold.
The Court ruled that the fact that the
goods are continued to be in the
warehouse the pledgor reviously rented
does not affect the validity of the
pledged.
3. CHARACTERISTICS (A-R-R-U-S)
1. Accessory Contract
o Being an accessory contract of security, there
is no transfer of ownership.
o In Intergrated Realty Corporation and Raul
Santos v PNB, the SC ruled that a transfer of
property by the debtor to a creditor, even if
sufficient on its face to make an absolute
conveyance, should be treated as pledge if
the debt continues in existence and is not
discharged by the transfer and that
accordingly, the use of the terms ordinarily
importing conveyance, of absolute ownership
will not be given that effect in such a
transaction if they are also commonly used in
pledges or mortgages and therefore do not
unqualifiedly indicate a transfer of absolute
ownership, in the absence of clear and
unambiguous
language
or
other
circumstances excluding an intent to pledge.
2.. Real Right
3. Real security contract
4. Real Contract
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A. BANK ASSIGNMENTS
o In Victoria Yau Chu v CA, the SC held that
the assignment of deposit by way of
security is in the nature of pledge. A
public auction is no longer necessary to
satisfy the obligation because the
collateral is money
All that had to be done is to
convert the time deposits into cash
was to present them to the bank
for encashment after due notice to
the debtor.
B. SHARES OF STOCKS
o Shares of stocks and Deed of Assignment
of shares of stocks may be pledged to
secure an obligation.
o The pledgor or mortgagor shall have the
right to attend and vote at the meeting of
the stockholders, unless the mortgagee or
pledgee is expressly given by the pledgor
or mortgagor such right in writing which
is recorded on the appropriate corporate
books.
o The right to vote and attend the
stockholders meeting is the one required
to be recorded in the corporate books.
o The Assignment of Shares of Stocks
cannot be considered as proof of pledge if
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4
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the
explicit
terms
of
the
deed
denominated
as
Stock
Assignment
Separate from Certificate expressly
states that the owners of the share sold,
assigned and transferred unto another the
stocks involved for and in consideration
of the obligation undertaken by the other
party.
The said Assignment will be
considered a sale since there is a
complete
and
unconditional
divestiture of the incorporeal
property consisting of stocks.
C. NEGOTIABLE INSTRUMENTS
o The pledgee can be a holder for value up
to the extent of his lien.
o Pledgee is entitled to apply the proceeds
up to the extent of the lien and he is
obliged to apply the proceeds up to the
extent of his debt and he is obligated to
account the surplus to the pledgor.
o If the instrument is negotiable, the
instrument must be indorsed and
delivered to the creditor.
D. AFTER INCURRED OBLIGATIONS
o GR: Only current obligations are secured
by the pledge
o XPN: After incurred obligations may be
secured
provided
that
they
are
deliberately described.
o
6. FORMALITIES
For the contract to affect third persons, apart
from being in a public instrument (date and
description of the thing pledged), possession
of the thing pledged must be in addition
delivered to the pledgee.
Article 2096 is a rule of substantive law,
prescribing a condition without which the
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o
o
o
CHAPTER 11
b.
2. DELIVERY TO TRANSFEREE
o
o
1. POSSESSION
o The pledgee is a lawful and rightful
possessor of the personal property
pledged.
a. The pledger cannot alienate the thing
pledged before the obligation becomes due
unless there is consent on the part of the
c.
d.
e.
A. INCORPOREAL RIGHTS
o Incorporeal
rights,
evidenced
by
negotiable instruments, bills of lading,
shares of stocks, bonds, warehouse
receipts and similar documents may also
be pledged. The instrument proving the
right to pledged shall be delivered to the
creditor, and if negotiable, must be
indorsed.
B. FRUITS
o If the thing pledged shall earn fruits,
income, dividends, or interests, the
creditor shall:
(1) Compensate what he receives with
those which are owing to him
5 Article 1951
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Article 2105
1
1. RETURN OF THE THING
o The debtor cannot demand for the
return of the thing if the principal
obligation has not been fully paid.
o If the thing is returned before the
payment of the obligation, the same
will be extinguished.
2. PRESCRIPTION
o The right to recover the thing from the
pledgee will rise only upon payment of the
loan secured by the pledge.
o Therefore the prescriptive period within
which to demand the return of the thing
pledged should begin to run only after the
payment of the loan and demand for the
thing has been made, because it is only
then that the debtor acquires a cause of
Article 2106-2109
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1. DEPOSIT
o The pledgor has the right to ask that the
thing be deposited in the following cases:
(1) If the pledgee uses the thing pledged
without authority of the owner
(2) If the creditor misuses the thing pledged
(3) (3) If through the negligence or willfull
act of the pledgee, the thing pledged is in
the danger of being lost or impaired.
2. RETURN BEFORE FULL PAYMENT
o REQUISITES:
(1) There are reasonable grounds to fear that
the destruction or impairment of the thing
pledged
(2) The danger of destruction or impairment
was without the fault of the pledgee
(3) The pledgor must offer another thing in
pledge, provided the latter is of the same
kind as the former and not of inferior
quality
(4) The exercise of the right is without
prejudice to the right of the pledgee to
sell the thing at public auction under
Article 2109.
o It is important that the creditor is
aware of the true nature of the
substance and quality of the thing
pledged so that the creditor will have
the correct estimation of the value of
his security
o REMEDIES
If the creditor was deceived as to the
substance and quality of the thing
pledged has has the alternate remedies
of:
(1) The creditor may claim another thing
in pledged
1. EXTINGUISHMENT
o GROUNDS FOR EXTINGUISHMENT
(1) Return of the thing pledged
o The return of the thing pledged will not
affect the principal obligation. As an
accessory contract the return will not
affect the principal obligation.
(2) Statement in writing that the creditor
renounces or abandon the pledge.
(3) Full payment or compensation of the
principal obligation
A. NOVATION6
o Novation
is
a
ground
for
the
extinguishment of an obligation. However,
the novation must be established by
sufficient proof.
B. ACQUISITIVE PRESCRIPTION
o Article 1132 provides that the ownership
of
movables
prescribes
through
uninterrupted possession for 4 years in
good faith
o The ownership of personal property
presecribes
through
uninterrupted
possession for 8 years in good faith
o The provision on prescription does not
apply in the things plesged because what
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7 CONDONATION
8REMMISSION
o
o
2. REQUISITES:
(1) The credit has not been satisfied in due time
(2) The sale must be at a public auction before a
notary
o The procedure in the foreclosure of
pledge before a notary public does not
require the submission of a petition for
extra judicial foreclosure before the
Execution Judge of the appropriate RTC
through the Clerk of Court/Ex-Officio
Sheririff.
A sheriff who does the foreclosure
shall be guilty of gravely abusing his
authority.
The foreclosure of a pledge occurs
extrajudicially
without
the
intervention of the courts.
(3) There must be notification to the debtor and the
owner of the thing in the proper case
o Notice must be sent before every auction
date but notice after the auction sale does
not make the same void.
(4) The notice must state the amount for which the
public sale is to be held
(5) All bids at the public auction shall offer to pay
the purchase price at once
(6) The pledgee must notify the pledgor of the
results of the bidding.
3. NO RIGHT OF REDEMPTION
o There is no right of redemption after the
thing pledged is sold in an extrajudicial
sale.
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4. EQUITY OF REDEMPTION
o The payment or consignation of the
amount due will stop the sale.
o Since, the obligation is extinguished,
there is no need to proceed with the sale.
o In order that the consignation could have
the effect of extinguishing the pledge
contracts, such amounts should cover not
only the principal amount but also the
interest due.
5. NO REQUIREMENT OF SALE SEPARATELY
o It is the pledgees right to choose which of
the items should be sold at the auction when
two or more things are pledged.
o The law does not prohibit the things subject
to the pledge be sold at one auction sale or
be it bought in a single occasion.
However this ruled does not apply
in the ff cases:
(1) A bidder expressed the desire
to bid on a determinate number
or portion of the pledged
shares. Not all of the pledge
contracts are not extinguished
if the bidder will choose to buy
only a specific share. There is a
need to determine what shares
will satisfy the obligation
(2) One or some owners of the
thing
pledged
shares
participated in the auction,
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2. MECHANICS LIEN
o Article 1731 provides that a mechanic can
legally retain by way of pledge the movable
upon which it executed his work.
o The mechanic has lien until he has been paid
his charges. The lien entitles him to sole
custody of the car.
3. SALE IN LEGAL PLEDGE
o A thing under a pledge by operation of law
may be sold if the ff are complied with:
(1) The creditor must demand the amount for
which the thing is retained
(2) The public auction shall take place one
month after such demand
o If the creditor does not cause the public sale
within one month from demand, the debtor
may require the return of the thing.
Article 2121-22
1.
o
o
o
o
o
o
o
LAW ON PAWNSHOP
Article 2123
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1. LAW ON PAWNSHOPS
o Governed by PD 114 or the Pawnshop
Regulation Act.
o The regulations regarding pawnshops is
primarily the P Regulations of the Manual of
Regulations
for
NonBank
Financial
Institutions.
o A pawnshop enters into a contact of pledge
with the pawner or borrower.
3. IMPORTANT REGULATIONS
2. DEFINITION OF TERMS
o PAWNSHOP- A person or entity engaged in
the business of lending money on personal
property delivered as a security for loans and
shall be synonymous and may be used
interchangeably
with
pawnbroker
or
pawnbrokerage.
o PAWNER- refers to the borrower from a
pawnshop
o PAWNEE- pawnshop or pawnbroker
o PAWN-the personal property delivered by the
pawner to the pawnee as a security of the
loan
o PAWN TICKET- is the pawnbrokers receipt
for a pawn. It is not a security or evidence of
indebtness
Proof of contract of pledge
At the time of every loan or pledge, the
pawnshop is required to deliver to each
person
pawning
signed
by
the
pawnbroker containing:
i. The amount of the loan
ii. The date the loan was granted
iii. Rate of interest
iv. The name and residence of the
pawnee.