V.

PLEDGE & MORTGAGE

A. INTRO DUCTIO N Kinds of obligations that may be secured
Valid
Pledge and mortgage are both real guaranties, where property is As to validity Voidable
given in order to secure an obligation. The remedy of a creditor Unenforceable
against a debtor who fails to pay is the foreclosure of the thing As to Pure
and the application of its proceeds to the outstanding conditionality Conditional (suspensive or resolutory)
obligation.
Present obligations
As to time
1. Essential requisites Future obligations, if accurately described
Civil obligations
As to basis
A R T . 2 0 8 5, C C Natural obligations
The following requisites are essential to the contracts
of pledge and mortgage: b. Pledgor/mortgagor absolute owner
(1) That they be constituted to secure the fulfillment
of a principal obligation; Because the remedy of a creditor is a foreclosure sale, the debtor
(2) That the pledger or mortgagor be the absolute who gives the property in pledge or mortgage must have
owner of the thing pledged or mortgaged; capacity to transfer ownership.
(3) That the persons constituting the pledge or
mortgage have the free disposal of their property, What is the consequence if the pledgor or
and in the absence thereof, that they be legally mortgagor is not the absolute owner?
authorized for the purpose. The pledge or mortgage is void, without prejudice to
Third persons who are not parties to the principal the pledgor or mortgagor’s possible liability for estafa,
obligation may secure the latter by pledging or because of his misrepresentation.
mortgaging their own property. (1857) The exception is a mortgagee in good faith, who
relies on a Torrens title given by the mortgagor who is
A R T . 2 0 8 6, C C not the rightful owner, or has no valid title to the
The provisions of Art. 2052 are applicable to a pledge property. In this case, the mortgagee is still entitled to
or mortgage. (n) protection.

A R T . 2 0 8 7, C C c. Free disposal
It is also of the essence of these contracts that when
the principal obligation becomes due, the things in Plege/mortgage being an act of strict ownership, the
which the pledge or mortgage consists may be pledgor/mortgagor must have capacity to make a disposition of
alienated for the payment to the creditor. (1858) the property. Free disposal means that the property must not be
subject to any claim of a third person.
Essential requisites of pledge/mortgage
1. It must be constituted to secure the fulfillment of a 2. Prohibitions against
principal obligation; appropriation
2. The pledgor/mortgagor must be the absolute
owner of the thing pledged/mortgaged; and a. Rationale
3. The pledgor/mortgagor must have free disposal of
the thing or legal authority therefor. The reason for the prohibition is that the amount of the loan is
ordinarily much less than the real value of the thing pledged or
a. Secure a principal obligation mortgaged.

Pledge and mortgage are accessory contracts constituted by b. General rule & exception
either the debtor or a third person, in order to secure the
debtor’s principal obligation. A R T . 2 0 8 8, C C
The creditor cannot appropriate the things given by
A R T . 2 0 5 2, C C way of pledge or mortgage, or dispose of them. Any
A guaranty cannot exist without a valid obligation. stipulation to the contrary is null and void. (1859a)
Nevertheless, a guaranty may be constituted to
guarantee the performance of a voidable or an A R T . 2 1 1 2, C C
unenforceable contract. It may also guarantee a The creditor to whom the credit has not been satisfied
natural obligation. (1824a) in due time, may proceed before a Notary Public to
the sale of the thing pledged. This sale shall be made
Art. 2086, supra at a public auction, and with notification to the debtor
and the owner of the thing pledged in a proper case,
A R T . 2 0 9 1, C C stating the amount for which the public sale is to be
The contract of pledge or mortgage may secure all held. If at the first auction the thing is not sold, a
kinds of obligations, be they pure or subject to a second one with the same formalities shall be held;
suspensive or resolutory condition. (1861) 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

APO ESPAÑOLA & CARLOS MARIN BLOCK A 2016 PROF. HECTOR DE LEON, JR.
 CREDIT TRANSACTIONS 37

entire claim. affected by the fact that the debtors are not solidarily
liable. (n)
Pactum commissorium is when the creditor-pledgee/mortgagee
automatically appropriates the property given, without Rules on indivisibility
foreclosure. A stipulation allowing it is forbidden by law and is Every portion of the property is
void. A single thing is given
answerable for the whole obligation
All of them are liable for the debt
The default of the debtor-pledgor/mortgagor in his obligation Even when only a part of the debt
does not give the creditor-pledgee/mortgagee a right to remains unpaid, all of the things are
automatically appropriate the property given. If he wants to liable for the balance
secure the title to the property, he must buy it in a foreclosure Several things are
given Until the debt has been fully paid, the
sale. debtor cannot ask for the release of
one or some of the things given or the
The only exception is provided by Art. 2112, where if a thing given proportionate extinguishment of the
in pledge is not sold after two foreclosure sales, the creditor pledge or mortgage
may appropriate it. The debtor’s heir who has paid part of
the debt cannot ask for the
c. Requisites Debtor’s heir
proportionate extinction of the pledge
or mortgage
1. There should be a pledge, mortgage, or antichresis The creditor’s heir who has received
of property by way of security for the payment of his share of the debt cannot return the
the principal obligation; and Creditor’s heir
pledge or cancel the mortgage if the
2. There should be a stipulation for an automatic debt is not completely satisfied
appropriation by the creditor of the property in the
event of non-payment of the obligation within the
Exceptions
stipulated period.
1. If several things are given, and each of them
guarantees only a determinate portion of the
d. Permissible stipulations
credit;
2. If only a portion of the loan was released; and
1. Modification of original contract, by subsequent
3. If there was failure of consideration; and
agreement of the parties;
4. If a third party to the debt gives an
2. Voluntary cession of the property by the debtor,
accommodation pledge or mortgage, such that
which amounts to a novation of the original
there was no debtor-creditor relationship.
contract and a voluntary sale; and
3. Promise by the mortgagor to assign or sell the
property. 4. Promise to constitute a pledge
or mortgage
3. Indivisibility of pledge & A R T . 2 0 9 2, C C
mortgage A promise to constitute a pledge or mortgage gives
rise only to a personal action between the contracting
A R T . 2 0 8 9, C C
parties, without prejudice to the criminal responsibility
A pledge or mortgage is indivisible, even though the
incurred by him who defrauds another, by offering in
debt may be divided among the successors in interest
pledge or mortgage as unencumbered, things which
of the debtor or of the creditors.
he knew were subject to some burden, or by
Therefore, the debtor’s heir who has paid a part of
misrepresenting himself to be the owner of the same.
the debt cannot ask for the proportionate
(1862)
extinguishment of the pledge or mortgage as long as
the debt is not completely satisfied.
Neither can the creditor's heir who received his A promise to constitute a pledge or mortgage does not create a
real right over the property. There is only a personal right, or a
share of the debt return the pledge or cancel the
mortgage, to the prejudice of the other heirs who have right of action to compel that the pledge or mortgage be
constituted, but no actual pledge or mortgage is created yet.
not been paid.
From these provisions is expected the case in
The mortgagor may also be held liable for estafa under the
which, there being several things given in mortgage or
pledge, each one of them guarantees only a Revised Penal Code, if he pretends to be the owner of real
property and conveys, sells, encumbers, or mortgages said
determinate portion of the credit.
The debtor, in this case, shall have a right to the property, or dispose of property as unencumbered with
knowledge that it is encumbered.
extinguishment of the pledge or mortgage as the
portion of the debt for which each thing is specially
answerable is satisfied. (1860)

A R T . 2 0 9 0, C C
The indivisibility of a pledge or mortgage is not

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 CREDIT TRANSACTIONS 38

B. PLEDGE c. Formal

1. Concept A pledge requires that it be set forth in a public instrument in

order to be effective against third persons.
Art. 2085, supra
Art. 2087, supra d. Subsidiary

In a contract of pledge, a debtor or third person delivers The obligations of a pledge do not arise until there has been
movable property or an incorporeal right to a creditor or third failure to perform the principal obligation.
person, in order to secure the fulfillment of a principal obligation.
e. Unilateral
A R T . 2 1 2 1, C C
Pledges created by operation of law, such as those The obligations of a pledge are imposed only on the pledgee.
referred to in Articles 546, 1731, and 1994, are The pledgor only incurs obligations under special circumstances.
governed by the foregoing articles on the possession,
care and sale of the thing as well as on the f. Nominate
termination of the pledge. However, after payment of
the debt and expenses, the remainder of the price of The Civil Code gave it a name. Yessir.
the sale shall be delivered to the obligor. (n)
g. Gratuitous or onerous
Some pledges (Arts. 546, 1731, and 1994), are created by
operation of law and are governed by the provisions on pledges. It is gratuitous if given by a third person. It is onerous if given by
the debtor, because the consideration for the creditor’s
2. Characteristics acceptance is the payment of the principal obligation.

Characteristics (Raf sung, “O!”) (Hehe) 3. Essential requisites

1. Real
2. Accessory a. Consent
3. Formal
4. Subsidiary The pledgor must have capacity to give consent to a contract.
5. Unilateral
6. Nominate b. Object
7. Gratuitous or onerous
A R T . 2 0 9 4, C C
a. Real All movables which are within commerce may be
pledged, provided they are susceptible of possession.
A R T . 1 3 1 6, C C (1864)
Real contracts, such as deposit, pledge and
commodatum, are not perfected until the delivery of A R T . 2 0 9 5, C C
the object of the obligation. (n) Incorporeal rights, evidenced by negotiable
instruments, bills of lading, shares of stock, bonds,
Art. 2092, supra warehouse receipts and similar documents may also
be pledged. The instrument proving the right pledged
A R T . 2 0 9 3, C C shall be delivered to the creditor, and if negotiable,
In addition to the requisites prescribed in Article must be indorsed. (n)
2085, it is necessary, in order to constitute the
contract of pledge, that the thing pledged be placed A R T . 4 1 6, C C
in the possession of the creditor, or of a third person The following things are deemed to be personal
by common agreement. (1863) property:
(1) Those movables susceptible of appropriation
Delivery is required for a pledge to be effective. However, a which are not included in the preceding article;
consensual contract to pledge is enforceable between the (2) Real property which by any special provision of law
parties. is considered as personal property;
(3) Forces of nature which are brought under control
b. Accessory by science; and
(4) In general, all things which can be transported
The purpose of a pledge is that it secures a principal obligation. It from place to place without impairment of the real
is an accessory contract whose validity and extinguishment property to which they are fixed. (335a)
depends upon the principal obligation.
A R T . 4 1 7, C C
Please see page 36 for a summary of the obligations that a The following things are also considered as personal
pledge may secure. property:
(1) Obligations and actions which have for their object
movables or demandable sums; and

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(2) Shares of stock of agricultural, commercial and 4. Parties

industrial entities, although they may have real
estate. (336a) A R T . 2 1 0 3, C C
Unless the thing pledged is expropriated, the debtor
A R T . 4 1 8, C C continues to be the owner thereof.
Movable property is either consumable or Nevertheless, the creditor may bring the actions
nonconsumable. To the first class belong those which pertain to the owner of the thing pledged in
movables which cannot be used in a manner order to recover it from, or defend it against a third
appropriate to their nature without their being person. (1869)
consumed; to the second class belong all the others.
(337) A R T . 1 1 1, F A M I L Y C O D E
A spouse of age may mortgage, encumber, alienate or
Things that may be given in pledge otherwise dispose of his or her exclusive property,
Movables susceptible of possession without the consent of the other spouse, and appear
As to Incorporeal rights represented by titles (requires alone in court to litigate with regard to the same. (n)
corporeality delivery of the document evidencing the
incorporeal right) Parties to a contract of pledge
Only existing property Owns the thing given in pledge
As to However, there may be a promise to pledge Pledgor
Either debtor or third person
existence future property, e.g. future dividends, through a Receives the thing in pledge
pledge supplement Pledgee
Either creditor or third person
c. Cause 5. Form
A R T . 1 3 5 0, C C A R T . 2 0 9 6, C C
In onerous contracts the cause is understood to be, for
A pledge shall not take effect against third persons if
each contracting party, the prestation or promise of a
a description of the thing pledged and the date of the
thing or service by the other; in remuneratory ones,
pledge do not appear in a public instrument. (1865a)
the service or benefit which is remunerated; and in
contracts of pure beneficence, the mere liberality of
the benefactor. (1274)
Formal requisites of a pledge
To be effective against third persons:
1. The pledge must be made in a public instrument,
Gratuitous pledge vs. onerous pledge
which sets forth
Gratuitous Onerous
2. A description of the subject of the pledge, and
Third person not party to Debtor in the principal 3. The date of the pledge.
Pledgor
principal obligation obligation
Fulfillment of the 6. Obligations of the pledgor
Cause Liberality
principal obligation
Summary of pledgor’s obligations
d. Delivery
1. Allow alienation of the thing, in case the principal
Art. 1316, supra obligation becomes due
Art. 2096, supra 2. Pay damages for known hidden flaws

Since pledge is a real contract, delivery is an essential requisite to a. Allow alienation of thing, in case
its perfection. The lien created only upon delivery of the thing. principal obligation becomes due

Kinds of delivery Art. 2087, supra

A thing given in pledge may be delivered in two ways:
This is the essence of pledge. It is necessarily implied as an
1. Through actual delivery, or
inherent element of the contract of pledge, since alienation of the
2. Through constructive delivery.
thing through foreclosure and sale and the application of the
The delivery required depends on the nature of the
proceeds thereof are the remedies given to the creditor.
thing given.
b. Pay damages for known hidden flaws
To whom delivery must be made
Delivery must be made to the pledgee, who may be A R T . 2 1 0 1, C C
either: The pledgor has the same responsibility as a bailor in
1. The creditor in the principal obligation; or commodatum in the case under Article 1951. (n)
2. A third person agreed upon by the parties.
A R T . 1 9 5 1, C C
The bailor, who, knowing the flaws of the thing
loaned, does not advise the bailee of the same, shall

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 CREDIT TRANSACTIONS 40

be liable to the latter for the damages which he may

suffer by reason thereof. (1752) A R T . 2 1 1 8, C C
If a credit which has been pledged becomes due
This obligation is merely conditional upon the existence of before it is redeemed, the pledgee may collect and
hidden flaws and the pledgor’s knowledge thereof. It does not receive the amount due. He shall apply the same to
arise at the time the pledge was constituted. the payment of his claim, and deliver the surplus,
should there be any, to the pledgor. (n)
7. Obligations of the pledgee
The pledge retains ownership of the fruits. However, the pledge
generally extends to the fruits and interests. Hence, the pledgee
Summary of pledgee’s obligations can apply the fruits, income, dividends, or interests earned or
1. Take care of the thing pledged produced by the thing pledged to the payment of interest, if
2. Not to deposit the thing pledged with a third party owing, and thereafter to the principal of his credit.
3. Obligation with respect to matured credits, and to
fruits, income dividends, or interests Application of fruits, income, dividends, or interest
4. Not to use the thing pledged 1. To interest first, if it is owing;
5. Return the thing pledged 2. Then, to the principal credit

a. Take care of the thing pledged Unless there is contrary stipulation, the interest and earnings
and, in case of animals, their offspring, are included in the
A R T . 2 0 9 9, C C pledge.
The creditor shall take care of the thing pledged with
the diligence of a good father of a family; he has a d. Not to use the thing pledged
right to the reimbursement of the expenses made for
its preservation, and is liable for its loss or A R T . 2 1 0 4, C C
deterioration, in conformity with the provisions of this The creditor cannot use the thing pledged, without
Code. (1867) the authority of the owner, and if he should do so, or
should misuse the thing in any other way, the owner
The diligence required is that of a good father of a family. may ask that it be judicially or extrajudicially
deposited. When the preservation of the thing
b. Not to deposit thing with third party pledged requires its use, it must be used by the
creditor but only for that purpose. (1870a)
A R T . 2 1 0 0, C C
The pledgee cannot deposit the thing pledged with a General rule: The pledgee has no right to use the thing.
third person, unless there is a stipulation authorizing Exceptions:
him to do so. 1. If there is authority from the owner; or
The pledgee is responsible for the acts of his 2. If the thing pledged requires that it be used in order to
agents or employees with respect to the thing properly care for it. In this case, the duty of the creditor
pledged. (n) is to use the thing, but only for the purpose of
preservation. If fruits are derived from the use, the
General rule: The pledgee cannot deposit the thing with a third pledgee must account these to the pledgor and apply
person. the proceeds of the use to the principal obligation.
Exception: He is allowed to do so by way of stipulation
Pledgor has a right to ask for the deposit of the
This prohibition is necessary for the protection of the pledgor or thing pledged judicially or extrajudicially, when:
the owner of the thing pledged. 1. The creditor uses the thing without authority;
2. The creditor misuses the thing in any way; or
c. With respect to matured credits and 3. If the thing is in danger of being lost or impaired
fruits, income dividends, or interests because of the pledgee’s negligence or willful act.

A R T . 2 1 0 2, C C e. Return the thing pledged

If the pledge earns or produces fruits, income,
dividends, or interests, the creditor shall compensate A R T . 2 1 0 5, C C
what he receives with those which are owing him; but The debtor cannot ask for the return of the thing
if none are owing him, or insofar as the amount may pledged against the will of the creditor, unless and
exceed that which is due, he shall apply it to the until he has paid the debt and its interest, with
principal. Unless there is a stipulation to the contrary, expenses in a proper case. (1871)
the pledge shall extend to the interest and earnings of
the right pledged. General rule: The debtor whose debt and its interest are unpaid
In case of a pledge of animals, their offspring has no right to ask for the return of the thing pledged, against
shall pertain to the pledgor or owner of animals the creditor’s will.
pledged, but shall be subject to the pledge, if there is
no stipulation to the contrary. (1868a)

APO ESPAÑOLA & CARLOS MARIN BLOCK A 2016 PROF. HECTOR DE LEON, JR.
 CREDIT TRANSACTIONS 41

Exception: The pledgor may substitute the thing pledged, which the right of the pledgee under the provisions of the
is in danger of destruction or impairment, with another thing of following article.
the same kind and quality. The pledgee is bound to advise the pledgor,
without delay, of any danger to the thing pledged. (n)
8. Special rules
A R T . 2 1 0 8, C C
a. As to ownership of the thing pledged If, without the fault of the pledgee, there is danger of
destruction, impairment, or diminution in value of the
A R T . 2 0 9 7, C C thing pledged, he may cause the same to be sold at a
With the consent of the pledgee, the thing pledged public sale. The proceeds of the auction shall be a
may be alienated by the pledgor or owner, subject to security for the principal obligation in the same
the pledge. The ownership of the thing pledged is manner as the thing originally pledged. (n)
transmitted to the vendee or transferee as soon as the
pledgee consents to the alienation, but the latter shall Remedies of pledgor in case of danger of destruction
continue in possession. (n) With pledgee’s fault Without pledgee’s fault
Pledgor may demand return of the
Art. 2103, supra Pledgor may ask that the thing, upon offering another thing
thing be deposited with a of the same kind and quality
A R T . 2 1 2 0, C C third person Pledgee may cause the thing to be
If a third party secures an obligation by pledging his sold at a public sale
own movable property under the provisions of Article
2085 he shall have the same rights as a guarantor c. Deception on substance & quality of
under Articles 2066 to 2070, and Articles 2077 to thing pledged
2081. He is not prejudiced by any waiver of defense by
the principal obligor. (n) A R T . 2 1 0 9, C C
If the creditor is deceived on the substance or quality
Summary of rules of the thing pledged, he may either claim another
As to ownership Pledge does not transfer ownership, but the thing in its stead, or demand immediate payment of
of thing pledged creditor has the right to possess the thing. the principal obligation. (n)
The pledgor can sell or alienate the thing,
given that: Remedies of creditor in case of deception
Sale of thing a. The pledgee consents; on substance & quality of thing pledged
pledged b. The pledgee continues in possession; 1. Claim another thing instead; or
and 2. Demand immediate payment of the principal
c. The pledge follows the property. obligation.
The creditor has the right of retention for the
Retention of the principal debt, interest, and expenses of d. Specific rules for third party
thing pledged preservation. The debtor cannot demand pledgors
the thing while these remain unpaid.
General rule: Loss or deterioration is borne A R T . 2 1 1 7, C C
by the pledgor, as the owner (doctrine of res Any third person who has any right in or to the thing
perit domino). pledged may satisfy the principal obligation as soon
Risk of loss & as the latter becomes due and demandable. (n)
Exception: If the loss or deterioration is due
deterioration
to the fraud, negligence, delay, or violation
of the terms of the contract by the creditor, A R T . 2 1 2 0, C C
then he shall be liable. If a third party secures an obligation by pledging his
own movable property under the provisions of Article
b. When thing pledged is in danger of 2085 he shall have the same rights as a guarantor
destruction under Articles 2066 to 2070, and Articles 2077 to
2081. He is not prejudiced by any waiver of defense by
A R T . 2 1 0 6, C C the principal obligor. (n)
If through the negligence or wilful act of the pledgee,
the thing pledged is in danger of being lost or Accommodation pledge
impaired, the pledgor may require that it be deposited An accommodation pledge is one where a third
with a third person. (n) person gives his movable property in order to secure
the principal obligation of another. The third person in
A R T . 2 1 0 7, C C this case, or any third person with a right in/to the
If there are reasonable grounds to fear the destruction thing given in pledge, may fulfill the principal
or impairment of the thing pledged, without the fault obligation as soon as it becomes due and
of the pledgee, the pledgor may demand the return of demandable. He shall have the same rights as that of
the thing, upon offering another thing in pledge, a guarantor, as per Art. 2120. Neither can he be
provided the latter is of the same kind as the former prejudiced if the principal debtor waives any available
and not of inferior quality, and without prejudice to defenses.

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 CREDIT TRANSACTIONS 42

purchase price at once

e. Procedure for foreclosure b. Be made in cash
Failure to bid is when there are no
Art. 2112, supra bids
If several properties are pledged:
A R T . 2 1 1 3, C C a. The creditor may choose which
At the public auction, the pledgor or owner may bid. ones are to be sold
He shall, moreover, have a better right if he should b. But the sale demanded must
offer the same terms as the highest bidder. only be insofar as necessary to
The pledgee may also bid, but his offer shall not pay the debt
be valid if he is the only bidder. (n) Effect of sale: Extinguishment of
principal obligation, regardless of
A R T . 2 1 1 4, C C whether price of sale is more or
All bids at the public auction shall offer to pay the less than the amount due
purchase price at once. If any other bid is accepted, If the creditor accepts a bid other
the pledgee is deemed to have been received the than for cash, the pledgor/owner
purchase price, as far as the pledgor or owner is has the right to consider that the
concerned. (n) creditor has received the purchase
price in cash
A R T . 2 1 1 5, C C 4. Sale to highest bidder
Rules on deficiency & excess:
The sale of the thing pledged shall extinguish the a. Price of sale > amount due =
principal obligation, whether or not the proceeds of debtor not entitled to excess
the sale are equal to the amount of the principal unless there is agreement to the
obligation, interest and expenses in a proper case. If contrary
the price of the sale is more than said amount, the b. Price of sale < amount due =
debtor shall not be entitled to the excess, unless it is creditor not entitled to
otherwise agreed. If the price of the sale is less, recover deficiency and any
neither shall the creditor be entitled to recover the stipulation allowing it is void
deficiency, notwithstanding any stipulation to the Pledgee is obligated to advise the
contrary. (n) pledgor/owner of the result of the
sale, so that the latter may take
A R T . 2 1 1 6, C C 5. Notice to pledgor
necessary steps to protect his
After the public auction, the pledgee shall promptly rights if he believe the sale was not
advise the pledgor or owner of the result thereof. (n) an honest one.
Art. 2117, supra f. Pawnshops
Requisites of a valid foreclosure sale A R T . 2 1 2 3, C C
1. The debt is due and unpaid; With regard to pawnshops and other establishments,
2. The sale must be at a public auction; which are engaged in making loans secured by
3. There must be notice to the pledgor and owner, pledges, the special laws and regulations concerning
stating the amount due; and them shall be observed, and subsidiarily, the
4. The sale must be made with the intervention of a provisions of this Title. (1873a)
notary public.
The laws on pledge, mortgage and antichresis are also
Summary of foreclosure proceedings in pledge applicable to pawnshops that make loans with these securities.
May simply be a letter to the But if you actually want to establish and operate a pawnshop,
1. Notice by creditor to
debtor you should see PD 114. J
debtor
No need for posting
2. Conduct of the auction Court does not direct foreclosure; 9. Extinguishment
by notary public hence, extrajudicial in character
Who may bid: Causes for extinguishment of a pledge
a. Pledgee can submit a bid, but Principal obligation Sale of the thing at public auction
the offer will be invalid if he is is also extinguished Payment of the debt
the only bidder; Return of thing pledged by the pledgee
b. Pledgor may submit a bid, and Only pledge is
Renunciation or abandonment of the
he shall have preference/a extinguished
3. Bidding pledge
better right if he offers the
same terms as the highest a. Of the principal obligation
bidder;
c. Third persons may also bid Art. 2115, supra
All bids shall:
a. Offer to pay the entire

APO ESPAÑOLA & CARLOS MARIN BLOCK A 2016 PROF. HECTOR DE LEON, JR.
 CREDIT TRANSACTIONS 43

The extinguishment of the principal obligation in any way also possession having the option of refunding the amount
extinguishes the pledge, since the latter is an accessory contract of the expenses or of paying the increase in value
whose life is dependent upon that of the principal. which the thing may have acquired by reason thereof.
(453a)

b. Of the pledge A R T . 1 7 3 1, C C
He who has executed work upon a movable has a
A R T . 2 1 1 0, C C right to retain it by way of pledge until he is paid.
If the thing pledged is returned by the pledgee to the (1600)
pledgor or owner, the pledge is extinguished. Any
stipulation to the contrary shall be void. A R T . 1 9 9 4, C C
If subsequent to the perfection of the pledge, the The depositary may retain the thing in pledge until
thing is in the possession of the pledgor or owner, the full payment of what may be due him by reason of
there is a prima facie presumption that the same has the deposit. (1780)
been returned by the pledgee. This same presumption
exists if the thing pledged is in the possession of a MANILA BANKING CORP. v. TEODORO (1989)
third person who has received it from the pledgor or
owner after the constitution of the pledge. (n) Where ambiguity exists as to whether or not a
transaction is a pledge or dation in payment, the
Presumption of extinguishment due to return presumption is in favor of it being a contract of
The presumption of extinguishment due to return by pledge because there is lesser transmission of
the pledgee arises if, subsequent to constituting the rights and interests.
pledge:
1. The pledgor has possession of the thing; and Pledgors cannot insist that a creditor first exhaust
2. The pledgor grants possession of the thing to a all the properties of the debtor.
third person.
Facts: MBC extended a loan to Teodoro for the purpose of
A R T . 2 1 1 1, C C purchasing fishing boats. As security for the loan, he executed a
A statement in writing by the pledgee that he deed of assignment of receivables in favor of MBC. Teodoro
renounces or abandons the pledge is sufficient to defaulted in the loan and the bank sought to collect the
extinguish the pledge. For this purpose, neither the remainder of the debt as well as the security provided therefor.
acceptance by the pledgor or owner, nor the return of
the thing pledged is necessary, the pledgee becoming Issues:
a depositary. (n) WON the assignment of receivables was a dation in payment or
pledge –PLEDGE
The renunciation by the pledgee must be in writing, but it does WON the bank first had to exhaust the property of the debtor
not require acceptance nor the return of the thing to be before seizing the items pledged – NO
effective. However, while the thing is not yet returned, a contract
of deposit arises between the pledgor and pledgee. Held: The benefit of excussion cannot be availed of in the context
of a pledge. Art 2087 provides that when the principal obligation
10. Legal pledges becomes due, the thing pledged may be alienated the moment
the debt becomes due.
Legal pledges are—you guessed it!—created by operation of law.
CITIBANK v. SABENIANO (2006)
Kinds of legal pledges in the Civil Code
1. A possessor in good faith becomes pledgee and Facts: Respondent Sabeniano deposited money and market
may hold the thing, until reimbursement of placements with Citibank, with which it had debts, secured by
necessary expenses for the thing; Deeds of Assignment of Sabeniano’s money market placements
2. One who has executed work upon a movable in FNCB Finance. When Sabeniano failed to pay her debts to
becomes pledgee and may hold the thing, until he Citibank, the latter collected on the Deed of Assignment.
is paid for the price of said work;
3. A depositary becomes pledgee and may hold the Issue: Whether the money market placements can compensate
thing, until he is paid damages or expenses due to for Sabeniano’s indebtedness. YES
him by reason of the deposit.
Held: The court considered these money market placements as
A R T . 5 4 6, C C having been pledged through Deeds of Assignment. Though the
Necessary expenses shall be refunded to every documents conveyed to Citibank were entitled Deeds of
possessor; but only the possessor in good faith may Assignment, the court held that she had actually pledged the
retain the thing until he has been reimbursed money market deposits from FNCB Finance to Citibank.
therefor. Therefore, what occurred was not so much a compensation, but
Useful expenses shall be refunded only to the an action collecting on the security of the obligation in which
possessor in good faith with the same right of Sabeniano had defaulted.
retention, the person who has defeated him in the

APO ESPAÑOLA & CARLOS MARIN BLOCK A 2016 PROF. HECTOR DE LEON, JR.
 CREDIT TRANSACTIONS 44

CALIBO v. CA (2001) acquired is worth less than the amount of the

debt.
Requisites of a contract of pledge
1. The pledge acts as security for the fulfillment of Facts: As security for paying the cost of the cement that she
the principal obligation (accessory contract) purchased on credir, Chu pledged her time deposits in a bank.
2. The pledger is the absolute owner of the thing Upon failure to pay her obligations, the company encashed her
pledged time deposit and applied it to her debt.
3. The pledger has free disposal of the property or is
legally authorized to enter into a contract of Issue: WON the appropriation of the pledged property without a
pledge as regards the thing pledged public auction was void for running against the prohibition
regarding pactum commissorium – NO
Facts: In order to secure payment of amounts owed to Atty.
Calibo under their contract of lease, Mike pledged his father’s Held: Taking into consideration the fact that the monetary
tractor as security. Mike’s father confronted Atty. Calibo and equivalent of the time deposits was less than the amount owed
demanded that possession of the tractor be returned to him. by Chu to the company, then it was not illegal for the former to
When Atty. Calibo refused to return the tractor because the encash the same. Note that Chu consented to such
amounts owed to him had yet to be paid, Mike’s father filed a suit appropriation.
for replevin.

Issue: WON the contract of pledge regarding the tractor between

Atty. Calibo and Mike was valid – NO

Held: Applying the requisites of a contract of pledge [see

doctrine], it was clear that Mike did not own the tractor and, as a
result thereof, the contract of pledge was void. The action for
replevin was proper.

PARAY v. RODRIGUEZ (2006)

The right of redemption applies to real properties

and not personal properties.

The amount paid to the creditor by virtue of the

public auction of the thing pledged extinguishes
the indebtedness of the debtor notwithstanding
the fact that a deficiency (or excess) may exist
between the auction price and the principal
obligation. The foreclosure of pledged property is
always extrajudicial in nature.

Facts: Upon defaulting in their obligation to pay, the petitioners

auctioned off the stocks pledged by the respondents as security
for their loan. The respondents assailed the validity of the auction
because they attempted to redeem the stocks a day before the
auction by tendering payment of their loan—they consigned the
payment with the RTC.

Issue: WON the consignation of payment extinguished the

contract of pledge – NO

Held: The right of redemption is a statutory privilege given to

specific persons within the context of certain transactions—
nothing exists in law or jurisprudence that established the right
of owners of personal property to redeem the same.

CHU v. CA (1989)

The rationale behind prohibiting pactum

commissorium is to protect debtors from losing
property offered as security for loans to creditors
that may be worth more than the debt itself. The
prohibition does not apply when the thing

APO ESPAÑOLA & CARLOS MARIN BLOCK A 2016 PROF. HECTOR DE LEON, JR.