1. Pledge

2. Definition
It is a contract by virtue of which the debtor delivers to the creditor or to a third person a movable, or instrument 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

3. Characteristics Real Contract Accessory Contract Unilateral Contract
May also be a Subsidiary Contract

4. Cause or Consideration
A pledge is an accessory contract. Its cause insofar the pledgor is concerned is the principal obligation. But if he is not the debtor (Art. 2085, par.2), the cause is the compensation stipulated for the pledge or the mere liberality of the pledgor

5. Requisites of a Pledge
May be constituted to secure the fulfillment of a principal obligation
All kinds of obligations, whether pure or subject to a suspensive or resolutory condition (Art. 2091)
Voidable, unenforceable, or natural obligations (Arts. 2052, 2086)
That the pledgor be the absolute owner of the thing pledged
That the persons constituting the pledge have the free disposal of the property, and in absence thereof, that they be legally authorized for the purpose
The thing pledged may be alienated

6. When thing pledged may be sold or alienated to pay debt
General Rule: The thing pledged or mortgaged cannot be sold or alienated since payment of the debt cannot yet be compelled
Exception: If the pledgor fails to fulfill certain conditions, such a violation would make the debt due and entitle the pledgee to have the thing sold (Art. 2087) through the formalities required by law (Art. 2112) in order to collect the amount of his claim from the proceeds

7. Appropriation of the thing pledged
Pactum Commissorium concept
- it is a stipulation whereby the thing pledged shall automatically become the property of the creditor in the event of non-payment of the debt within the term fixed. This stipulation is forbidden by law and declared null and void. However, the stipulation that the pledgee may purchase the thing pledged at their current price if the debt is not paid on time is valid.
Appropriation in pledge
Allowed only if the thing pledged is not sold at two public auctions. The pledgee is required in this case to give an acquittance for his entire claim. (Art. 2112)

8. On Pactum commissorium Taken from Reyes vs. Bebrija 52 Off. Gaz. 1928
D borrowed Php500 from C. As the security for the payment for the debt, D pledged to C a diamond ring valued at Php2,000. It was expressly stipulated in the contract that if D cannot pay his debt when it matures, “the debt of Php500 shall be considered as full payment of the diamond ring without further action”. D was unable to pay when the debt matured.
Can C now appropriate the ring?
C cannot appropriate the ring
The mentioned stipulation constitute what is known as pactum commissorium, that is, a pact or agreement in a contract of pledge, mortgage or antichresis by virtue of which if the debtor cannot fulfill his obligation, the creditor can appropriate or dispose of the thing given by way of pledge, mortgage or antichresis. Such is expressly prohibited by Art of the Civil Code
Any stipulation to the contrary is null and void

9. Indivisibility of Pledge
A pledge or mortgage is indivisible as to the contracting parties and the rule applies even if the obligation is joint and not solidary (Arts. 2090, 1207, 1208)
The exception is when there are several things given in pledge and each one of them guarantees only a determinate portion of the credit

10. Promise to Constitute Pledge
A promise to constitute pledge, if accepted gives rise only to a personal right binding upon the parties and creates no real right in the property

11. Criminal Responsibility of Pledgor
Under the Revised Penal Code, estafa is committed by a person who, pretending to be the owner of any real property, shall convey, sell, encumber or mortgage the same (Art. 316 [1], Revised Penal Code.) or knowing that the real property is encumbered shall dispose of the same as encumbered

12. Kinds of Pledge
Conventional or Voluntary – that which is constituted by the mutual consent of the pledgor and the pledgee.
Legal – that which is created by operation of law. (Arts. 546, 1731, and 1994)

13. Conventional Pledge Requisites
Constituted to secure the fulfillment of a principal obligation. (Art. 2085)
That the pledgor be the absolute owner of the thing pledged (Art. 2085)
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)
That the thing pledged be placed in the possession of the creditor, or of a third person by common agreement

14. Conventional Pledge Object
All movables within the commerce of men, which are susceptible of possession. (Art. 2094)
Incorporeal rights evidenced by negotiable instruments, bills of lading, shares of stocks, bonds, warehouse receipts and similar documents

15. Conventional Pledge Forms Between the parties
As regards to third persons

16. Conventional Pledge Extent The pledge shall cover the following:
The thing pledged.
The fruits, income and interests earned by the thing pledged, except when stipulated.
The offspring, when the thing pledged is an animal, except when stipulated

17. Rights of Debtor / Pledgor
Conventional Pledge
Rights of Debtor / Pledgor
To alienate, with the consent of the pledge the thing pledged.
To ask that the thing pledged, be judicially or extra-judicially deposited if it is used w/o authority or for other purpose than for its preservation.
Unless expropriated, the debtor will continue to be the owner of the thing pledged.
To ask for the return of the thing pledged
To require that the thing pledged be deposited with a third person
To demand the return of the thing pledged

18. Obligations of Debtor / Pledgor
Conventional Pledge
Obligations of Debtor / Pledgor
To pay the debt and its interest, with expenses in a proper case, when they are due (Art. 2105)
To pay for damages the pledgee may suffer, if the pledgor, knowing the flaws of the thing, does not advise the pledgee (Art. 1951, 1201)

19. Rights of the Creditor / Pledgee
Conventional Pledge
Rights of the Creditor / Pledgee
To retain possession of the thing pledged until the debt secured by it is paid. (Art. 2098)
To demand reimbursement of the expenses made for the preservation of the thing pledged. (Art. 2099)
To bring actions which pertain to the owner of the thing pledged in order to recover it from, or defend it against, third persons. (Art.2103)
To use the thing pledged if he is authorized by the owner. Or when its use is necessary for the preservation of the thing (2104)

20. Rights of the Creditor / Pledgee
Conventional Pledge
Rights of the Creditor / Pledgee
If the creditor is deceived on the substance of the thing pledged, he may either claim another thing in its stead or demand immediate payment of the principal obligation. (Art 2109)
To cause the sale of the thing pledged at a public sale, if there is a danger of destruction in value of the thing pledged without his fault. The proceeds shall be the security for the principal obligation. (Art. 2108)
To collect and receive the amount due on the credit pledged which becomes due before it is redeemed, and to apply the same to the payment of his claim, and deliver the surplus, if any, to the pledgor. (2118)
To sell the thing pledged if the debtor default

21. Obligations of Creditor / Pledgee
Conventional Pledge
Obligations of Creditor / Pledgee
To take care of the thing pledged with the diligence of a good father and to be liable for the loss or deterioration of the thing pledged unless it is due to fortuitous event.(Art. 2099)
Not to deposit the thing pledged with a third person, unless authorized (Art. 2100)
To be responsible for the acts of his agents or employees with respect to the thing pledged. (Art. 2100)
Not to use the thing pledged, except:
When he is authorized by the owner
When the use of the thing is necessary for its preservation
To deliver to the debtor the surplus after paying his claim from what he has collected on a credit that was pledged and which has become due before it is redeemed. (Art. 2108)

22. Rights of Third Persons as Pledgors
Conventional Pledge
Rights of Third Persons as Pledgors
Right to bid in a public auction (Article 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”
Right to reimbursement (Article 2066)
Indemnity includes:
Total amount of the debt
Legal interests thereon from the time the payment was made known to the debtor, even though it did not earn interest for the creditor.
Expenses incurred by the guarantor after having notified the debtor the payment had been demanded of him.
Damages if they are due

23. Rights of Third Persons as Pledgors
Conventional Pledge
Rights of Third Persons as Pledgors
Right to subrogation (Article 2067)
To make effective the right of the guarantor to recover indemnity
Reimbursement can’t be more than what the guarantor paid
Guarantor bound to notify debtor before payment (Article 2068)
Guarantor paying debt before maturity (Article 2069)
Double payment by fault of guarantor (Article 2070)
Right to be released from the contract of pledge
The guarantor is released from his obligation upon extinguishment of the pledge in any of these circumstances:
Upon voluntary acceptance by the creditor of immovable or other property in payment of debt, even if afterwards he should lose the same through eviction. (Article 2077)
Release made by creditor to one of the guarantors (Article 2078)
Extension of period without the consent of the guarantor (Article 2079)
Right of subrogation un-exercisable by reason of an act of the creditor (Article 2080)
Right to set up defenses against creditors

24. Conventional Pledge
Faye part

25. Legal Pledge Peculiarities
Prior demand is required before pledge may be sold
Auction sale shall take place within one month after the demand, otherwise debtor may ask for the return of the thing.
In case of excess in the proceeds of the foreclosure sale, the debtor is entitled thereto.

26. Legal Pledge Instances
Possessor of the property in good faith (Article 546)
He who has executed work upon a movable (Article 1731)
Agent who has not been reimbursed by the principal (Article 1914)
Laborer’s wages shall be a lien on the goods manufactured or the work done (Article 1707)
Depositary (Article 1994)
Hotel-keepers (Article 2004)

27. Facts: On possession of pledged thing by the creditor or third person
YULIONGSIU vs. PNB
(22 SCRA 587 2/17/68)
Bengzon, J.
Facts:
Yoliongsiu was the owner of three vessels
He obtained a loan from PNB at the Cebu branch for Php 50,000 guaranteed by a pledge of the three vessels to PNB, which pledged contract was duly registered with the office of the Customs Collector of Cebu. He also effected partial payment of said loan and delivered two promissory notes for the balance
In 1984, PNB filed criminal charges against plaintiff for estafa thru falsification of commercial documents and took physical possession of the three pledged vessels.
After the first note fell due, PNB executed a document of sale transferring the vessels to itself
Yoliongsiu filed an action to recover the vessels or the value plus damages

28. Held: On possession of pledged thing by the creditor or third person
YULIONGSIU vs. PNB
(22 SCRA 587 2/17/68)
Bengzon, J.
Held:
The parties stipulated as a fact that the contract is pledge contract
PNB was therefore entitled to actual possession of the vessels as pledge
While it is true that the Yoliongsiu continued operating the vessels after the pledge contract was entered into, his possession was expressly made “subject to the order of the pledge”.
The type of delivery will depend upon the nature and peculiar circumstances of each case. Considering the circumstances of this case and the nature of the objects pledged— vessels used in the maritime business— such symbolic or constructive delivery is sufficient to make the pledge effective

29. On ownership of thing pledged; On use of incorporeal rights as thing pledged
PNB vs. Atendido
(94 PHIL /26/54)
Bautista Angelo, J.
Fact:
Defendant Atendido obtained a loan from PNB secured by a pledge of 2,000 cavanes of rice deposited in a warehouse in Bulacan
Corresponding warehouse receipt was endorsed in blank in favor of PNB
Before the maturity of the loan, the cavanes of rice disappeared from the warehouse
Atendido failed to pay the loan upon maturity
PNB brought an action to recover the amount of the loan
Atendido’s defense: the quedans covering the rice which was given as security and the palay having been lost, he thereby was relieved of liability

30. On ownership of thing pledged; On use of incorporeal rights as thing pledged
PNB vs. Atendido
(94 PHIL /26/54)
Bautista Angelo, J.
Held:
Ownership of the rice remains with the pledgor subject only to the foreclosure in case of non-fulfillment of the obligation. By this, it stands to reason that in case of loss if the property the loss should be borne by the pledgor
The purpose of endorsing the in blank of the warehouse receipts covering the rice in favor of the bank is the merely transfer the juridical possession of the property to the pledge and to forestall any possible disposition thereof by the pledgor.
If the property covered by the quedans or warehouse receipt is lost without the fault or negligence of the mortgagee or pledge or transferee or endorsee, then the goods are to be regarded as lost on account of the real owner, mortgagor, pledgor or transferor

31. On the need for contract of pledge to appear in a public instrument
BETITA vs. GANZON
(49 PHIL. 87 3/29/26)
Ostrand, J.
Fact:
Alejo de la Flor obtained a judgment against Tiburcia Buhayan. Under this judgment, defendant sheriff Ganzon levied execution on the four carabaos in question which were in possession of Simon Jacinto but registered in the name of Tiburcia Buhayan
Plaintiff Betita presented a third party claim alleging that the carabao had been mortgaged to him evidenced by a document purporting to be the pledge contract
Ganzon proceeded with the sale of the carabao in public auction while Betita brought an action to recover possession of said carabao
Trial Court rendered judgment in favor of Betita declaring that his was a preferred credit

32. On the need for contract of pledge to appear in a public instrument
BETITA vs. GANZON
(49 PHIL. 87 3/29/26)
Ostrand, J.
Held:
The document presented by Betita did not constitute a pledge valid against third parties as expressly discusses in Art of the Civil Code
The document in question is not public. The filing of a private document of pledge with the sheriff after the levy of execution does not create a lien superior to that of the attachment
The alleged pledge is also ineffective because the pledge never had actual possession of the pledged thing
Judgment reversed