PLEDGE

Josephine Ang| Justin Beltran | Kathleen Beltran |

Rencel Dela Cruz | Patricia Espinoza | Kevin Garcia-
Azcue |Matt Manlapid |Portia Soriano
Nature
1. Real Contract- It requires delivery for its
perfection. An agreement to constitute a pledge
only gives rise to a personal action between the
contracting parties.
• Delivery – may be actual or constructive
• There must be transfer of actual possession.
2. Personal properties only- In the very nature of
things, a pledge is confined and limited to
personal property and it cannot be extended or
made to apply to real property. It must be within
the commerce of men and capable of possession.
(Art. 2094)
 Characteristics
1. Real Contract – It is perfected by the delivery of the thing pledged by the debtor who is
called the pledgor to the creditor who is called the pledgee, or to a third person by
common agreement.
2. Unilateral Contract – It creates an obligation solely on the part of the creditor to return the
thing subject thereof upon the fulfilment of the principal obligation.
3. Bilateral Contract – If a third party pledgor receives fees from the creditor for entering into
the pledge agreement.
4. Nominate Contract – It is given a specific name by the Civil Code.
5. Accessory Contract – It is dependent on another contract.
6. Formal Contract – A particular form is required.
• Description of the thing pledged
• Date of Pledge
• *Object of the requirement is to forestall fraud.
7. Onerous Contract – Pledge was given by the debtor, as the debtor granted the pledge in
consideration of the loan or the principal obligation being secured.
8. Gratuitous Contract – A third party pledgor receives no compensation for entering into the
agreement.
9. Subsidiary Contract – Obligation incurred does not arise until the fulfilment of the principal
obligation which is secured.
Parties:
1. Pledgor – debtor or a third person; must be the
absolute owner of the thing pledged; must have
free disposal of their property, in absence thereof,
pledgor mus be legally authorized thereof.
2. Pledgee- creditor; the one who receives a pledge.
Distinction between Pledge and
Mortgage
PLEDGE MORTGAGE
Object is movable property Object is immovable property
provided it is susceptible of
possession
Property must be delivered. It Delivery is not necessary
is a real contract.
Description of thing and date Must be registered, otherwise,
of pledge must appear in a not valid against third persons
public instrument. Otherwise, although binding between the
it is not valid as to third contracting parties
persons.
Not a real right Real right and real property by
itself
Kinds
1. Conventional or Voluntary – One which is created by
agreement of parties
2. Legal – One which is created by operation of law.
• Art. 546 – necessary and useful expenses: refund and right of
retention
• Art. 612 – termination of usufruct: after delivery of thing to
owner, security or mortgage shall be cancelled
• Art. 1731 – one who has executed work upon a movable has a
right to retain it by way of pledge until he is paid
• Art. 1914 – agent may retain in pledge the things which are object
of agency until principal effects the reimbursement and pays
indemnity
• Art. 2004 – hotel- keeper’s right to remain the things brought into
the hotel as security for credit for lodging and supplies
Requisites:
1. Security – That it be constituted to secure the fulfilment of the
principal obligation.
2. Absolute ownership – That the pledgor be the absolute owner of the
thing pledged.
3. Free disposal of the property – That the person constituting the pledge
or mortgage have free disposal of their property, in absence thereof,
that they be legally authorized for the purpose. For third persons who
are not parties to the principal obligation, they may secure the latter
by pledging their own property.
4. In the possession of the creditor – It must be placed on the possession
of the creditor or of a third person by common agreement.
• There must be continuous possession.
• Constructive delivery – it is not sufficient. Exception: It depends on the
peculiar nature of the thing.
• For pledge of incorporeal rights – Incorporeal rights evidenced by
documents whether negotiable or not may also be pledged. If negotiable,
document must be indorse in favor of the creditor. (Art. 2095)
 Arts. 2085 and 2093
Requisites to bind third persons:
• Pledge must be embodied in a public instrument.
o It would not take effect against third persons if the ff. do
not appear.
a) Description of the thing pledged
b) Date of the pledge

• Effect of undated instrument of pledge:

- As to third persons: It would not take effect.
• Object of requirement:
- To forestall fraud

Art. 2096
Q: A, a bank, alleged that B, acting in behalf of C and D Inc.
executed a promissory note and a chattel mortgage over several
motorized sewing machines and other allied equipment to
secure their obligation arising from export bills transactions to A
amounting to 1, 131,134.35. They also executed a continuing
surety agreement in favor of A as additional security for the
obligation. Subsequently, RTC issued writs of preliminary
attachment and replevin in favor of petitioner and was then
served by the Sheriff upon E, who was then at the possession of
the machines. However, E contended that the Chattel Mortgage
was unnotarized and has no binding effect on E. Is the
contention of E correct?
A: No. The unnotarized Chattel Mortgage executed by B, for
and in behalf of C and D in favor of A does not bind E. The
primary cause of action A is for a sum of money with prayer
for the writs of attachment and replevin. Thus, the Chattel
Mortgage executed which was not notarized does not affect
A’s cause of action since it is required that it should appear in
a public instrument.
Case: Union Bank of the Philippines vs Alain Juniat, et.al
G.R. No. 171569 August 1,2011
 CITIBANK, N.A. (Formerly First
National City Bank) and INVESTORS'
FINANCE CORPORATION, doing
business under the name and style of
FNCB Finance vs. MODESTA R.
SABENIANO
G.R. NO. 156132
October 12, 2006
CHICO-NAZARIO, J.
Article 2118
● If a credit 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.

12
● The Court also noted that the pledge was filled out
irregularly – it was not notarized and Citibank’s copy
bore no date.

13
Pledge must be embodied in a public
instrument to affect third persons
● Where the following entries must appear:
1. A description of the thing pledged; and
2. Statement of date when the pledge was
executed.
● Unless these matters are reflected in the contract of
pledge, innocent third persons who may have
transacted with the pledgor involving the thing may
validly claim a better right than the pledgee even if
the latter has already taken possession thereof.

14
● Rationale behind the requirement—to forestall fraud,
because a debtor may attempt to conceal his property
from his creditors when e sees it in danger of
execution by simulating a pledge thereof with an
accomplice.
● Effect of undated contract of pledge—cannot ripen
into a valid pledge.

15
RIGHTS OF A PLEDGEE
1. To retain the thing until debt is
paid (Art. 2098)
Right of retention
• If the creditor wants the original pledge to apply to
the new debt, he should so demand at the time the
later obligation is entered into. It cannot be fairly
presumed that the debtor consents to the new
pledge.
2. To possess the thing
• RIGHT OF PLEDGEE TO RETAIN THING PLEDGED
• As has been stated, the possession of the pledgee
constitutes his security. Hence, the debtor cannot
demand for its return until the debt secured by it is
paid.
• But the right of retention is limited only to the
fulfilment of the principal obligation for which the
pledge was created.
3. To be reimbursed for the expenses
made for the retention of the thing
(Art. 2099)
• 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. (Art. 1163.) He is, however,
entitled to reimbursement of the expenses incurred
for its preservation.
4. To apply fruits, interests, or earnings to the
interest or expenses owing him, if any, then to
the principal debt (Art. 2102[2])
• Setting off fruits or interests—fruits and interest which the
pledgee receives out of the things pledged, may be applied to
compensate for what the pledgor owes him by reason of the
pledge. If there is nothing to offset or if there is an excess after
the offset, the remainder shall be applied to the payment of the
principal obligation.
• Rule on extent or scope of pledge; exception—the pledge is not
confined to the very thing pledged. It extends to the interests
and earnings of the thing or right pledged, unless there is a
contrary stipulation by the parties.
• As regards pledged animals, their offspring shall belong to the
pledgor or owner because the young of animals are considered
natural fruits. However, they are subject to the pledge, unless
there is a contrary stipulation. The parties may validly agree not
to include them in the pledge.
 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.
• But 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 a stipulation to the contrary, the
interest and earnings of the right pledged and in
case of animals, their offsprings, are included in
the pledge.
5. To bring any action pertaining to
the pledgor in order to recover it
from or defend it against third
persons (legal subrogration) (Art.
2103)
RIGHT OF PLEDGEE AGAINST THIRD PERSONS
• Except as provided in Article 2112, the pledgor remains
the owner of the property pledged. The creditor to
whom the property pledged has been delivered is
obliged to take care of it with the diligence of a good
father of a family. He is authorized to bring such action
as pertaining to the owner in order to recover it or
defend it, against claims of third persons. Furthermore,
unless given the right, the creditor might be prejudiced
by the negligence of the owner.
• The right of a pledgee is a real right enforceable
against third persons but it is necessary that the
contract of pledge be embodied in a public
instrument which shall contain a description of the
thing pledged and the date of the pledge.
• Legal subrogation—the pledgee is under obligation
to protect the thing pledged. The Article subrogates
him to the right of the pledgor to bring such legal
actions in court or to defend it against third
persons.
 6. To sell at public auction in case of
reasonable grounds to fear
destruction or impairment of the
thing without his fault (Art. 2108)
• Auction sale where obligation is not due yet—even if the
obligation has not matured yet, but there is a danger that the thing
would be destroyed, impaired or its value diminished, the pledgee,
who is not at fault, is granted the right to sell the thing at a public
sale. If the pledgor, under the situation would like to substitute the
thing pledged with another acceptable thing, the pledgee’s right to
sell is given preference by Article 2107.
• Proceeds of sale; status—the proceeds of the sale shall pertain to
the pledgor because he has not incurred default on the payment
of its obligation. The proceeds shall be held by the pledgee as
security for the principal obligation in the same manner as the
thing originally pledged was possessed. Here, cash is the object of
the pledge.
 7. Option to demand replacement or
immediate payment of debt in case
of deception as to substance and
quality (Art. 2109)
• Deception or misrepresentation on the substance and
quality of the thing pledged—if the pledgor deceived the
pledgee on the substance or quality of the thing pledged,
the contract is voidable. There is fraud in the execution of
the contract.
• Instead of annulment, the law gives the pledgee the option
to pursue any one of the following remedies:
a) To demand from the pledgor an acceptable substance of the thing; or
b) To demand the immediate payment of the principal obligation.
• The remedies are alternative not cumulative. Only one may
be chosen. The law used the conjunctive “or”. Either one is
more convenient than annulment.
8. To appropriate the thing in case of
failure of second public auction (Art.
2112)
• Right of pledgee when debt had not been satisfied
in due time—when there is no payment of the debt
on time, the object of a pledge may be alienated
for the purpose of satisfying the claims of the
pledge.
The pledgee has the right to proceed
with the sale of the thing at a public
auction to raise the funds for
payment of the obligation.
Procedure—
a) The obligation must be due and unpaid;
b) The sale of the thing pledged must be at a public auction;
c) There must be notice to the pledgor and owner stating the amount for
which the sale is to be held;
d) The sale must be conducted by Notary Public.

• Note that Article 2112 does not require posting of the notice of sale
and publication. Notification to the pledgor and the owner of the thing
pledged is sufficient. Only a notary public can conduct a public auction
after proper notice is sent to the pledgor and owner of the thing
pledged. The sale is actually extrajudicial in character without
intervention by the courts.
• No provision in the Rules of Court or in any law requires that
pledged properties sold at public auction be sold separately.
RIGHT, NOT AN OBLIGATION, TO CAUSE SALE OF THING
PLEDGED
• The creditor may pursue other legal remedies without
abandoning his rights under the pledge.

• RIGHT OF PLEDGEE TO APPROPRIATE THING PLEDGED

• The pledgee may appropriate the thing pledged if after the
first and second auctions, the thing is not sold. This is an
exception to the prohibition against pacto commisorio.
• If the creditor appropriates the thing, it shall be considered as
full payment for his entire claim. He is thus obliged to give an
acquittance for the same. The debtor is not entitled to the
excess in case the value of the thing pledged is more than the
principal obligation.
• Pactum commissorium, when allowed—if at the
first auction, the thing is not sold (such as when
there are no participating bidders), there will be
another setting for the second auction following
the same formalities. If there is still no auction sale
effected, the pledgee is now allowed to
appropriate the thing pledged. The act of
appropriation ipso jure transfers the ownership of
the thing to the pledgee.
• Acquittance—the pledgee after appropriating the
thing shall execute a deed of acquittance in favor
of the pledgor which is a document of his release
or discharge from the entire obligation including
interests and expenses.
 9. To bid at public auction, unless
he is the only bidder (Art. 2113
• Who can bid?—the public, the pledgor and pledgee may
bid. The highest bidder wins. If the pledgee bids, and he
made an offer without any competition, his bid is not valid.
The sale is void. This is to prevent fraud on the part of the
pledgee who may maneuver the bidding in such a way that
no bidder may come so he bids alone. He will surely be the
winner.
• If the pledgor bids, he shall be preferred if h offers the
same terms as the highest bidder in deference to him as
the original owner of the thing over which he may have
some attachment of sentimental value.
• To avoid fraud, the pledgee is not allowed to acquire the
thing pledged if he is the only bidder.
10. To collect and receive amount
due on credit pledged (Art. 2118)
• Rule when what has been pledged is a “credit”—the
pledgee is granted the prerogative to collect the credit
when it becomes due, and before it is redeemed by the
pledgor
• It is not obligatory for the pledgee to collect and receive
the amount due on the credit pledged. He is given merely
the right to do so.

• However, in view of Article 2099 which imposes upon him

the obligation to take care of the thing pledged with the
diligence of a good father of a family, he has the duty to
collect if delay would endanger the recovery of the credit.
 11. To choose which of several things
pledged will be sold (Art. 2119)
• When two or more things are pledged; rule—in case of
foreclosure of the pledge, and the value of the several
things pledged are worth more than the amount of the
obligation which is the usual experience, the pledgee has
the option to choose which one or some should be sold to
satisfy the obligation, unless by agreement, he is deprived
of that right.
• It is understood, however, that if the pledge is legal pledge,
before the pledgee could sell the things, he must first make
a demand and comply with Article 2112.
• Restriction—the pledgee may, however, cause the sale of
only as many of the several things as are necessary to
satisfy the debt. He cannot exercise the right to sell
indiscriminately.
• The right of choice given to the pledgee as to which
of the things pledged he shall cause to be sold is
limited only by stipulation. After sufficient property
has been sold to satisfy the obligation plus interests
and expenses, no more shall be sold.

• Usually the value of the property pledged exceeds

the amount of the debt guaranteed.
12. To retain excess value in the
public sale
• Excess or surplus—if there is any excess out of the
proceeds of the auction sale after deducting the amounts
of the obligation and other liabilities of the pledgor, the
latter is NOT ENTITLED to the said excess or surplus unless
there is a contrary agreement in the contract of pledge.
• Inversely, if there is any deficiency, the debtor is NOT
LIABLE for payment of such deficiency, even if there is a
stipulation to that effect. The stipulation will be void.
• If the creditor, instead of electing to sell the thing pledged,
sued the pledgor in an ordinary action, the pledgee may
recover the deficiency from the debtor.
13. To retain thing until after full
payment of the debt
14. To object the alienation of the
thing

• The second part of Article 2097 furnishes one of those

cases in the Code where ownership is transferred without
actual delivery of the thing alienated.
• If the pledgor obtained the consent of the pledgee prior to
the actual sale between the pledgor and the buyer, then
ownership should generally be transferred only when the
sale contract is executed. On the other hand, if the pledgor
and the pledgee executes a deed of conditional sale, the
ownership of the thing pledged is transferred to the buyer
as soon as the pledgee consents to the alienation.
ESTATE OF GEORGE LITTON
v. CIRIACO B. MEDOZA
GR No.L-49120
JUNE 30, 1988
GANCAYCO, J.
Article 2097
● Although the pledgee or the assignee Litton did not
ipso facto become the creditor of private respondent
Mendoza, the pledge being valid, the incorporeal right
assigned by Tan in favor of Litton can only be alienated
with due notice to and consent of Litton or his duly
authorized representative. To allow the assignor to
dispose of or alienate the security without notice and
consent of the assignee will render nugatory the very
purpose of a pledge or an assignment of credit.

38
● Failing in this, the alienation of the litigated credit
made by Tan in favor Litton by way of a compromise
agreement with Mendoza does not bind the assignee
Litton. Private respondent Mendoza acted in bad faith
with assignor Tan so as to defraud Litton in entering
the compromise agreement

39
OBLIGATIONS OF
PLEDGEE
1. Duty of Pledgee to take care of the thing
pledged with the diligence of a good father
of a family (Art. 2099)
GR: The creditor has a right to the
reimbursement of the expenses made for
its preservation, and is liable for its loss or
deterioration by reason of:
1. Fraud 3. Delay
2. Negligence 4. Violation of the
terms of the contract.
XPN: If the loss or deterioration is due to
fortuitous events, the pledgee is not liable.

XPN2: Pledgee is liable if: (DeCA)

1. There is delay;
2. A contrary agreement; or
3. When the nature of the obligation requires
the assumption of risk and also in cases
expressly provided by law.
2. The pledgee cannot deposit the thing
pledged with a third person (Art. 2100)
Purpose: To protect the pledgor or owner of the
thing from possible loss or deterioration of the thing
pledged while in the hands of the depositary who is
not a privy to the pledge.

XPN: Deposit is allowed with the consent of the

pledgor.
Responsibility of Pledgee for Acts of His
Agents And Employees.
Principle of imputed or vicarious liability –
If the thing is lost, destroyed, or suffered deterioration
by reason of the acts or negligence of the agents or
employees of the pledgee, the latter is responsible.
3. Apply the fruits, income, dividends, or
interests produced or earned by the
property, to interests or expenses first, then
to the principal debt
GR: Apply the fruits and interests which the pledgee
receives out of the things pledged, to compensate for
what the pledgor owes him by reason of the pledge. If
there is excess after the offset, the remainder shall be
applied to the payment of the principal obligation.
XPN: There is contrary stipulation to not extend to
the interest and earnings of the right pledged.

Pledge of Animals
- Their offspring shall belong to the pledgor or owner
because the young of animals are considered natural
fruits.
- It shall be subject to the pledge, if there is no
contrary stipulation. The parties may validly agree
not to include them in the pledge.
4. The creditor cannot use the thing
pledged without authority of the owner.
(Art. 2104)
XPN: 2 exceptions when the pledgee may
use the thing pledged:
1. Pledgor had given him authority or
permission to use it; and
2. The use of the thing is necessary for its
preservation.
5. To advise the pledgor of the result
of the public auction (Art. 2116)
Reason:
This is to give the pledgor a last chance to
protect himself if there is any irregularity in
the sale.
6. To return the thing pledged (Art.
2105)
GR:The thing pledged cannot be returned to
the pledgor against the will of the pledgee,
unless there is full payment of the obligation
as well as the corresponding interest and
expenses incurred by the pledgee occasional
by the pledge.
XPN: If the thing is in danger of destruction or
impairment provided that the pledgor offers
an acceptable substitute for it. (Art. 2107)
 7. To advise pledgor of danger to
the thing (Art. 2107)
Pledgee is bound to advise the pledgor, without
delay, of any danger to the thing pledged.

XPN to Art. 2105

Pledgor may demand the return of the thing:
- If there are reasonable grounds to fear the
destruction or impairment of the thing pledged,
without the fault of the pledgee, and pledgor
offers an acceptable substitute.
RIGHTS OF THE
PLEDGOR
RIGHTS OF THE PLEDGOR
1. Right to dispose the thing pledged, provided there is
consent of the pledgee.

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 pledge consents to the alienation as soon as
the pledgee consents to the alienation, but the latter
shall continue in possession.
RIGHTS OF THE PLEDGOR
2. Right to ask that the thing pledged be deposited in
one of the following instances:
a. If the creditor uses the thing without authority
(NCC, Art. 2104);
b. Misuses the thing, he may deposit the thing
judicially or extrajudicially (NCC, Art. 2104); or
c. If the thing is in danger of being lost or impaired
because of the negligence or willful act of the
pledgee, he may deposit the thing with a third
person (NCC, Art. 2106).
RIGHTS OF THE PLEDGOR
3. Right to demand the return the thing pledged in case of
reasonable grounds to fear the destruction or impairment of
the thing without the pledgee’s fault, subject to the duty of
replacement (NCC, Art. 2107).
Requisites for the application of Art. 2107:
a. The pledger has reasonable grounds to fear the
destruction or impairment of the thing pledged;
b. There is no fault on the part of the pledgee;
c. The pledgee is offering in place of the thing, another thing
in pledge which is of the same kind and quality as the
former; and
d. The pledgee does not choose to exercise his right to cause
the thing pledged to be sold at public auction.
RIGHTS OF THE PLEDGOR
4. To bid and be preferred at the public auction.
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.
• If the pledgor bids, he shall be preferred if he offers
the same terms as the highest bidder in deference
to him as the original owner of the thing over
which he may have some attachment of
sentimental value
OBLIGATIONS OF THE
PLEDGOR
Article 2085
• That the pledge is constituted to secure the
fulfillment of a principal obligation.
 Pledge being an accessory contract cannot exist
independently. Its existence depends on a valid
principal obligation.

• That he is the absolute owner of the thing pledged.

 Manifestations of ownership: control and
enjoyment of the thing owned.
In case of loss of the thing
pledged:
• He bears the loss pursuant to the principle of “res
perit domino.”
 The contract of pledge does not transfer
ownership from the pledgor to the pledgee. It is
merely entered into by parties to secure the
obligation of the principal debtor. Thus, the owner
bears the loss.
In case of joint pledgors:
• They must pay/satisfy the entire obligation first
before one pledgor may demand the return of the
thing pledged. (Article 2089 – Indivisibility of
Pledge).
 When several things are pledged, each thing for a
determinate portion of the debt, the pledges are
considered separate from each other. However,
even when only a part of the debt remains unpaid,
all the things are still liable for such balance.

• Exception: Waiver by parties.

Article 2093:
• The thing pledged must be placed in the possession
(actual & continuous) possession of the creditor or
pledgee, or of a third person by common
agreement.
 Because it is in the delivery of possession where
the security in pledge lies. There is no pledge
without delivery of the thing because pledge is a
real contract which cannot be perfected without
actual delivery.
To bind third persons:
• The pledge must be embodied in a public
instrument. It must contain: (a) the description of
the thing pledged; and the (b) statement of date
when the pledge was executed.
 Otherwise, such pledge may be declared void
insofar as third persons are concerned.
Article 2101
• To inform the pledgee of the flaws and defects of
the thing pledged.
 Otherwise, the pledgor is liable for damages
suffered by the pledgee.

• Exception: if the flaw/defect is apparent.

EXTINGUISHMENT OF
PLEDGE
Extinguishment of Pledge
● ARTICLE 2110
○ Effect of Return of the thing pledged to pledgor by
pledgee
○ If the pledgee has returned it to the pledgor, the
pledge is extinguished
● Presumption when thing is found in the
possession of the pledgor
○ There is a prima facie presumption that the thing
pledged has been returned by the pledgee to the
pledgor or owner.
Extinguishment of Pledge
● If presumption is not rebutted, the
presumption prevails and becomes an
unrebutted evidence.

● Article 1274 - Presumption on the accessory

obligation of pledge.
Extinguishment of Pledge
ARTICLE 2111
Requisite of renunciation of abandonment for
pledge.
- A pledge is a personal right of the pledgee
which may be renounced or waived.
Acceptance by the pledgor or owner is not
necessary.
- It is not a case of donation.
Extinguishment of Pledge
ARTICLE 2111
There is no extinction of pledge suppose the
thing is not returned.
- Effective renunciation extinguishes the pledge.
Other grounds for extinguishment of pledge:
- The causes for extinguishment of ordinary
obligations.
Extinguishment of Pledge
ARTICLE 2112
The right of the pledgee when his debt had not
been satisfied in due time:
- The pledgee has the right to proceed with the
sale of the thing at a public auction.
Procedure of the public sale
Pactum Commissorum, when is it allowed
Extinguishment of Pledge
ARTICLE 2112
Acquittance
- A document of pledgor’s release from the entire
obligation.
Excess or Surplus in the proceeds of the Sale
- Article 2115
Extinguishment of Pledge
ARTICLE 2113
Who can bid at the public auction
- The public, the pledgor, and pledgee may bid
FORECLOSURE OF THE
THING PLEDGED
Foreclosure
Foreclosure of the thing pledged
A pledgee can foreclose the thing pledged when
there is no payment of the debt on time, the object
of the pledge may be alienated for the purpose of
satisfying the claims of the pledge.
Exceptions:
1. Art. 2118
2. Yau v CA
Foreclosure

Right of pledgee to collect and receive amount due

on credit pledged (Art 2118)
The pledgee may collect and receive the amount due
when what was pledged is a “credit”. He shall apply
the same to the payment of his claim and deliver the
surplus if any to the pledger
Foreclosure

Right of the pledge or mortgagor to foreclose

One of the essential requisites of pledge is that the
object pledged may be alienated for the payment to
the creditor when the principal obligation becomes
due.

Options of an unpaid creditor

1. Foreclose the thing
2. Abandon the pledge and file a claim for collection
Foreclosure
Procedure for the public sale of a thing pledged
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; and
(4) The sale must be made with the intervention of a notary public.

Posting and publication

Note that Article 2112 does not require posting of the notice
of sale and publication. Notification to the pledgor and the
owner of the thing pledged is sufficient. Only a notary public
can conduct a public auction after proper notice is sent to the
pledgor and owner of the thing pledged. The sale is actually
extrajudicial in character without intervention by the courts.
 Foreclosure
Who can bid in a public auction
If the debt is not paid and a public sale takes place,
both the pledgor and the pledgee may bid. The pledgor
shall be preferred if he offers the same terms as the
highest bidder, the rule is just considering that all the
things belong to him.
To avoid fraud, the pledgee is not allowed to acquire
the thing pledged if he is the only bidder.
Foreclosure
Nature of the bids at the public auction
All bids, including that of the pledgor, must be for
cash. If the pledgee accepts a bid other than for cash,
the pledgor or owner has the right to consider that
the pledgee has received the purchase price in cash.
Governing Articles of Pledge
Third person paying pledgor’s debt
As a general rule, the creditor is not bound to accept
payment or performance by a third person who has
no interest in the fulfillment of the obligation. (Art.
1236.)
Under this article, a third person who has any right in
or to the thing pledged (as when the pledgor has
contracted to sell it to him) may pay the debt as soon
as it becomes due and demandable and the creditor
cannot refuse to accept the payment.
Foreclosure
Effect of sale of thing pledged.
The sale of the thing pledged extinguishes the principal
obligation whether the price of the sale is more or less
than the amount due.
(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) In the same way, if the price of the sale is less, neither is the
creditor entitled to recover the deficiency. A contrary stipulation
is void.
(a) The reason is to compel the creditor to hold an honest public sale.
(b) Furthermore, the creditor should see to it, which he usually does,
that he loans only as much as he is likely to realize at a public sale.
Foreclosure
Right of debtor to excess.
As a general rule, therefore, the debtor is not entitled to the excess
unless there is an agreement to the contrary. This is obviously 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 creditor to recover deficiency.

In the case of the creditor, he is not entitled to recover the
deficiency in all cases. By electing to sell the thing pledged, instead
of suing on the principal obligation, the creditor waives any other
remedy, and must abide by the results of the sale. The creditor may
sue on the principal obligation instead of electing to sell the thing
pledged, and in such case, he may recover the deficiency from the
debtor.
Foreclosure
Obligation of pledgee to advise pledgor or owner of
result of sale.
The purpose of this article is to enable the pledgor or
owner to take steps for the protection of his rights
where he has reasonable
grounds to believe that the sale was not an honest
one.
Foreclosure
Effect when the thing pledged was not sold at the first
and second public auction
The pledgee may appropriate the thing pledged if after
the first and second auctions, the thing is not sold. This is
an
exception to the prohibition against pacto commisorio.
(Art. 2088.)
If the creditor appropriates the thing, it shall be
considered as full payment for his entire claim. He is thus
obliged to give an acquittance for the same. The debtor is
not entitled to the excess in case the value of the thing
pledged is more than the principal obligation. (see Art.
2115.)
Yau Chu v. CA
Facts: Victoria Yau Chu, had been purchasing cement on
credit from CAMS Trading Enterprises, Inc. To guaranty
payment for her cement withdrawals, she executed in
favor of Cams Trading deeds of assignment of her time
deposits in the Family Savings Bank. Subsequently, Cams
Trading notified the Bank that Mrs. Chu had an unpaid
account with it. It asked that it be allowed to encash the
time deposit certificates which had been assigned to it by
Mrs. Chu. To which the bank complied with. Upon being
informed of the encashment, Mrs. Chu demanded from
the Bank and Cams Trading that her time deposit be
restored.
Issue: Whether the actions of the bank constitute
pactum commissorio
Yau Chu v. CA
Ruling: NO, the deeds of assignment were contracts
of pledge, but, as the collateral was also money or an
exchange of "peso for peso," the provision in Article
2112 of the Civil Code for the sale of the thing
pledged at public auction to convert it into money to
satisfy the pledgor's obligation, did not have to be
followed. All that had to be done to convert the
pledgor's time deposit certificates into cash was to
present them to the bank for encashment after due
notice to the debtor.
Imperial v. Santiago
Question: Can a sheriff conduct foreclosure proceedings with
respect to pledges?

Answer: No, The procedure for foreclosure of a pledge is set forth

under Article 2112 of the Civil Code, to wit:
"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."
Lim Tay v. CA
FACTS: Guiok and Lim pledged their shares of stock
with Go Fay and Co. as a security for the loans they
obtained from Lim Tay. It was agreed upon that if the
two defaulted, Lim Tay can foreclose the pledge and
sell the shares through public or private sale. They
both failed to pay. Instead of selling the shares, Lim
Tay filed a petition for Mandamus before the SEC
praying for an order that the Corporation secretary
of Go Fay be directed to register the transfer and
issue of new shares in his name
Question: Did Go Fay obtained a right to have the
shares registered in his name?
Lim Tay v. CA
RULING: No. Petitioner did not acquire ownership of the
shares by virtue of the contracts of pledge. Article 2112
of the NCC states:
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.
LEGAL PLEDGE
Instances of Legal Pledges
• Art.546- A possessor in good faith has the right to
retain the thing until refunded of the necessary and
useful expenses.
• Art.1707-The laborer’s wages shall be a lien on the
goods manufactured or the work done.
• Article 1731-He who has executed work upon a
movable has a right to retain it by way of pledge
until he is paid.
Instances of Legal Pledges
• Art. 1914- The agent may retain in pledge the
things which are the object of the agency until the
principal effects the reimbursement and pays the
expenses incurred by the agent for the execution of
the agency, including damages which the execution
may have caused.
• Art. 1944- The bailee in commodatum may retain
the thing loaned for damages by reason of defects
thereof.
Instances of Legal Pledges
• Art. 1994- The depositary may retain the thing in
pledge until the full payment of what may be due
him by reason of the deposit.
o Includes the expenses incurred for the preservation of
the thing.
• Art. 2004- The hotel keeper has a right to retain the
thing brought into the hotel by the guest, as a
security for credits on account of lodging, and
supplies usually furnished to hotel guests.
Governing Articles of Pledge
• Art.2098; possession- 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.
• Art.2099; care- 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.
Governing Articles of Pledge
• Extinguishment:
o Art. 2110- If the thing pledged is returned by the
pledgee to the owner, the pledge is extinguished.
Any stipulation to the contrary is void.
o Prima facie presumption of return- there is a prima
facie presumption of return if subsequent to the
perfection of t he pledge, the thing is in the
possession of the pledgor or owner.
The same presumption exists if the thing is in the possession of
a third person who has received it from the pledgor or owner
after the constitution of the pledge.
Governing Articles of Pledge
• Art. 2111- A statement in writing by the pledgee
that he renounces or abandons the pledge is
sufficient to extinguish it.
• Neither the acceptance, by the pledgor or owner,
nor the return of the things pledged is necessary.
o The pledgee becomes a depositary until the return of
the thing.
Governing Articles of Pledge
• Article 2112; sale- If the credit has not been
satisfied in due time, the creditor may proceed
before a Notary Public to effect the sale of the
thing pledged.
• The sale shall be made at a public auction and with
notification to the debtor and the owner of the
thing pledged.
Governing Articles of Pledge
• Effects of the Sale:
o If at the 1st auction the thing is not sold, a second one
shall be held.
o If at the 2nd auction there is still no sale, the creditor
may appropriate the thing.
Sale of the Thing in Legal Pledge
• Article 2122- The thing may be sold only after
demand of the amount for which the thing is
retained.
o Rationale: because there is no definite period for
payment provided in cases of legal pledge.
• The public auction shall take place within one
month after such demand.
o If, without just grounds, the creditor does not cause the
public sale to be held with such period, the debtor may
require the return of the thing.
 OTHER PROHIBITIONS
AND RULES ON PLEDGE
Prohibition on double pledge
• A property already pledged cannot be pledged
again while the first pledge is still subsisting.
(Mission de San Vicente v. Reyes).
Art. 2103
• First par. :Unless the thing pledge is expropriated
the debtor continues to be the owner thereof.
• Effects of Expropriation:
• Pledge is terminated
• Price paid for the expropriated property shall be applied
to the payment of the principal obligation, the interests,
and other expenses due to the pledge.
• If there is any excess, the same shall be applied to the
same shall be delivered to the pledger.
Art. 2103
• Second par. : Nevertheless, 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.
• This paragraph speaks of legal subrogation.
• The paragraph subrogates to the creditor the rights of
the pledger to bring such legal actions in court or to
defend it against third persons.
Art. 2120
• Third party pledger
• Has the rights enjoyed by a guarantor under Articles
2066 to 2070 and Articles 2077 to 2081.
• Not prejudiced by any waiver of defense by the principal
obligor
Art. 2122
• Demand required first before a thing under legal
pledge may be sold
• Reason: unlike a voluntary pledge, a legal pledge has no
specific period of performance or payment
• Pledgee must proceed with the sale of the thing
within 30 days.
• Otherwise, the debtor can require him the return
of the thing being retained.
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 this Title.
• Pawnshops – governed by PD 114
Q: Lulu pawned several pieces of jewelry with
Agencia R. C. Sicam. Two armed men entered the
pawnshop and took away whatever cash and jewelry
were found inside the pawnshop vault. Lulu
requested Roberto, owner of the pawnshop, to
prepare the pawned jewelry for withdrawal.
However, Roberto failed to return the jewelry. As a
result, Lulu filed a complaint against Roberto seeking
indemnification for the loss of pawned jewelry.
Roberto denied his liability on the ground that the
robbery was a fortuitous event. As the absence of
concurrent negligence on the part of the debtor is
one of the elements of fortuitous event, what is the
diligence required of Roberto?
A: Diligence of a good father.
The law which governs pawnshop is silent on the
matter. If the law does not state the diligence which
is to be observed, the provisions on pledge,
mortgage and antichresis apply subsidiarily. The
provision on pledge, particularly Article 2099 of the
Civil Code, provides that the creditor shall take care
of the thing pledged with the diligence of a good
father of a family. This means that Roberto must take
care of the pawns the way a prudent person would
as to his own property.

(Roberto Sicam v. Lulu Jorge)