MODULE: LAW ON SALES, AGENCY AND CREDIT TRANSACTION

PART 3: CREDIT TRANSACTION

CHAPTER 8: PROVISIONS COMMON TO PLEDGE AND MORTGAGE

CREDIT TRANSACTION
Provision common to pledge and mortgage
1. That they be constituted the performance of a principal obligation which maybe a voidable, unenforceable
or a natural obligation.
2. That the pledge or mortgage cannot exist if the principal obligation is void.
3. That the pledgor or mortgagor is the absolute of the thing pledge or mortgaged.
4. That the pledgor or mortgagor have the free disposal of their property, and in the absence thereof that
they legally authorized for the purpose.
5. When the principal obligation becomes due, the thing pledged or mortgaged maybe alienated for the
payment such as obligation.

Indivisibility of pledge and mortgage

A pledge or mortgage is indivisible, except when their being several things given in pledge or mortgage, each
one of them guaranties only determinate portion of the credit.
The indivisibility of pledge or mortgage is not affected by the fact that the debtors are not solidarity liable
The contract of pledge or mortgage may secure all kinds of obligations, be they pure or subjected to a suspensive
or resolutory condition.

Case 1
Asikaso borrowed from Binitay the sum of P50,000 secured by a pledge of Asikso’ diamond ring, Asikaso died
leaving children Pepe and Pilar, Pepe paid P25,000 Binitay. Can Pepe ask a proportionate extinguishment of
the pledge?

No, a pledge is indivisible (even if the people is joint and not solidary) although the principal obligation
is divisible. Hence, the debt is now only P25,000.
A pledge is indivisible even though the debt maybe divided among successors in the interest of debtor
or a creditor.

Reference:

THE LAW ON SALES, AGENCY, AND CREDIT TRANSACTIONS DE LEON 2010

For further discussion please refer to the link provided:

Articles 2085 – 2092: https://youtu.be/XoW5G-yU-5k

Difference Between Mortgage and Pledge: https://youtu.be/RDMfuGJ2YMU

What are Mortgages: https://youtu.be/CBIJwb37O_4

 MODULE: LAW ON SALES, AGENCY AND CREDIT TRANSACTION

PROVISIONS APPLICABLE ONLY TO PLEDGE

CONTRACT OF PLEDGE
A pledge is an accessory, real contract whereby one person delivers to another a movable for the purpose of
securing the principal obligation, with the understanding with the obligation is fulfilled the thing shall be returned
by the creditor to the debtor together with all fruits and accessories.

Characteristics of pledge (ARI USO)

1. Accessory – it has no independent existence on its own; it is created to secure another upon which it is
dependent.
2. Real – it is perfected by the deliver.
3. Indivisible – not susceptible of partial realization
4. Unilateral – it creates an obligation solely on the part of the creditor to return the object pledge upon
fulfillment of the principal obligation which is secured.
5. Subsidiary – in the event of non-fulfillment of the principal obligation, the things in which pledge that
consist may be alienated for payment to the creditor
6. Ownership returned by debtor – unless the thing pledged is expropriate by the debtor continues to the
owner.

PLEDGE VS. ANTICHRESIS

PLEDGE ANTICHRESIS
Classification of contract Real Consensual
Subject matter Personal Property Real Property
Form of contract In public instrument In writing to be
To bind 3rd person valid
Nonpayment Sale is extrajudicial Foreclosure is judicial

PLEDGE ANTICHRESIS
Classification of contract Real Consensual
Property Constituted Movables Immovables
Possession of property Transferred to creditor Retained by creditor
Validity against 3rd person Public Instrument Registration
Sales at public auction Extrajudicial Judicial⁄Extrajudicial
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Parties in contract
Pledgor – the person who gives the thing pledge, he may be debtor in the principal obligation or
a third person but willing to secure the principal obligation by pledging his own property.
Pledgee (creditor) – the person who gives the thing pledged. No special capacity is required but
he must be capacitated to enter into a contract.

Case 2
Asia pledged to Benny the goods found in bodega rented by Asia. By common consent, it was
agreed that Carla, a depositary, would take charge of the goods in the bodega, has the contract
of the pledge been perfected in this case?

Yes, since Carla became the depositary by common agreement.

Case 3
Alipusta borrowed P150,000 from Babaero, Alipusta promised to execute a pledge guarantee this
debt. The promised was accepted. Suppose Alipusta has not yet delivered the property, can we
say that there already exists a pledge here?

None, until the property is delivered there is no real right of Babaero to demand delivery
of the object to promised.

Form required
A pledge shall not take effect against third persons if a description of the thing pledged and the
date of pledged do not appear in a public instrument.

Alienation by the pledgor

With or without consent of the pledgee, the pledge may be alienated by the pledgor or owner,
subject to the pledge. The ownership of the thing pledged is transmitted to a vendee or a
transferee as soon as the pledged consents to the alienation, but the latter shall continue in
possession.
However the contract of the 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 delivered, until debt is paid.

Rights on the fruits

If the pledge earn or produced fruits, income, dividends, or interest, the creditor shall compensate
what he receives with those which are owing him; but if none are owing him, or insofar as the
amount may exceed that which is due, he shall apply it to the principal.
Unless there is a stipulation to the contrary, the pledge shall extend to the interest and earnings f
the right pledged.
In case of a pledge of animals their offspring shall pertain to the pledgor or owner of he animals
pledged, but shall be subject to the pledged, if there is no stipulation to the contrary.

Pactum commisorium (prohibited by law)

An agreement in a contract of pledge, mortgage, or antichresis by virtue of which if the debtor
cannot fulfill his obligation the creditor can appropriate a thing pledged or it shall become the
property of the creditor. This agreement is void. The only exception is in the case of pledge
because the creditor can alienate or sell at public auction the thing given by way of pledge,
mortgage or antichresis.
 MODULE: LAW ON SALES, AGENCY AND CREDIT TRANSACTION

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 acquaintance for his entire claim.

Case 4
Daldal borrowed P10,000 from condesa and pledged a golden bracelet valued at P40,000. The
contract stipulated that if Daldal cannot pay her debt when it matures, the debt of P10,000 shall
be considered as full payment of the golden bracelet without further action. Daldal was unable to
pay. Can Condesa now appropriate the thing?
No this is pactum commissorium which is prohibited by law. However, if the agreement
provided that when the debt matures “the debtor shall sell the ring to the creator” it would
not constitute pactum commissorium. It would be considered as dation in payment.

Case 5
Antonio borrowed from Bertolluci the sum of P20,000 secured by a pledge of a wristwatch for a
debt of P8,000; and another pledge of an earnings for the balance of P12,000. If Antonio pays
P8,000 can he demand the return of the wristwatch?

Yes because in this case, the wristwatch guaranteed P8,000

Case 6
Apuya, Baste, and Candido obliged themselves to pay jointly Domingo P60,000, and as security,
they pledged their car to Domingo. Subsequently, Apuya paid P20,000. Is the pledge on Apuya’s
share of the car extinguisher?

No because the indivisibility of the contract of pledgeis not affected by the fact that the
obligation is solidary.

Subject matter of pledge

The thing given must be:
1. Movable property
2. Within the commerce of man ; and
3. Susceptible of possession.

PLEDGE OF INCOPOREAL RIGHTS

Incorporeal rights, evidenced by negotiable instruments, bills of lading, shares of stocks, bonds,
warehouse receipts and similar documents mal also be pledged. The instrument proving the right
pledged shall be delivered to the creditor, and if negotiable must be endorsed.

Case 7
Arestado is indebted to Bantay, secured by the pledge of the laptop computer. The computer is
delivered to Bantay, But in the public instrument executed, there is no description of the computer,
and the date of the pledge does not appear. If agnes sell the computer to Consuelo, does
Consuelo have to respect the pledge in favor of Bantay?

No because as to her, the pledge is not effective and valid. To be valid, the description of
the watch and the date of the pledge must appear in the public instrument, unless she
already had actual knowledge of the pledge.

Classes of Pledge
1.Voluntary (Conventional)-created by the will of the parties
 MODULE: LAW ON SALES, AGENCY AND CREDIT TRANSACTION

2.Legal- created not by contract but by implication of law (such as the right of an unpaid worker
to retain, by way of pledge, the object- until paid)

Obligation of the pledgee

1. To take care of the thing pledged with the diligence of a good father of a family.
2. To return the thing pledge when the debt is paid.

Case 8
Pedro pledge grapes with Juan. Because the grapes were in danger of being spoiled, Juan sold
them for 1,000. Who owns the 1,000.00?

Pedro owns the 1,000 but Juan shall keep it as security in the same manner as the grapes
originally pledged. The sale, however, must be a public sale.

Case 9
Leopoldo pledged with Virginia a car to secure a loan of P10,000. It was agreed that after a month
Virginia would return the car although the debt would be paid in six months. It was also agreed
that although Leopoldo would once more be in possession of the car, the pledge would continue.

After a month as stipulated, Virginia returned the car .Has the pledge been extinguished?
Yes but not the principal obligation to pay 10,000 to Virginia in six(6) months

Case 10
Angela pledged with Betty a diamond ring. A week later, the diamond ring was found in the
possession of Angela. There is a presumption here that Betty has returned the diamond ring to
Angela that therefore the pledge has been extinguished. May this presumption be opposed?

Yes since the presumption is merely prime facie. It could be that Betty retuned the ring
and asked that it be substituted; or a stranger may have stolen it and gave it to Angela.

When the debtor can ask for return of the thing pledged
The debtor cannot ask for the return of the thing pledged against the will of the creditor, unless
and until he has paid the debt and its interest, with expenses in a proper case.

Right of the creditor-pledgee

1. To retain the thing in his possession or in that of third person to whom it has been delivered
until the debt is paid;
2. To be reimbursed of the expenses for the preservation of the thing pledged.
3. To compensate what is owing him with fruits, Income, dividends, interests that the pledge
earns or produces.
4. To bring actions which may pertain to the owner of the thing pledged to recover or defend
it against a third person.
5. To continue to have lien on the thing pledged even if it is alienated
6. To have the security sold.
7. To demand the substitution or the immediate payment of the obligation, in case he was
deceived on the substance or quality of the thing pledged
8. To collect and received the amount due from the credit pledged
9. To have a preference of credit

Formalities required for the public sale

 MODULE: LAW ON SALES, AGENCY AND CREDIT TRANSACTION

1. The debtor is already due

2. There must be the intervention of a notary public.
3. There must be a public auction (if at the first, it is not sold, a second auction must be held
with the same formalities.
4. Notice to debtor or owner stating the amount due, that is the amount for which the public
sale is to be held.

Case 11
Annie pledge her diamond ring with Betty the debt was not paid on time, and a public auction took
place. Can Annie bid? Can Betty bid?

Yes, Annie can bid. In fact, she shall have a better right if she is the highest bidder because
the diamond ring belong to her.
Betty may also bid but her offer is not valid if she is the only bidder.

Case 12
Anselmo borrowed from Benjamin 1,000. This was secured by a negotiable promissory note made
by Carlos in Favor of Anselmo to the amount of P1,900. The negotiable promissory note was
endorsed by Anselmo in Benjamin’s favor. If the note becomes due before it is redeemed, can
Benjamin collect and received the 1,900?
Benjamin can collect and receive the P1,900 from Carlos. He should get P1,900 and
delivered the 900 to Anselmo.

When two or more things pledged

If two or more things are pledged the pledge may choose which he will cause to be sold, unless
there is a stipulation to the country. He may demand the sale of only as many of the things as are
necessary for the payment of the debt.

Bids at public auction

a. If the price at the sale is MORE- the excess goes to the creditor, unless the contrary is
provided.
b. If the price is LESS- the creditor does not get deficiency. Any stipulation to the contrary is
void.

Case 13
Anita pledged pieces of jewelry to the Barabara on a loan of P10,000. Unable to pay. Barabara
sold the jewelry at a public auction but realized only P6,000. May she recover the deficiency from
Anita?

No, the sale of the jewelry had extinguished the principal obligation, interest and expenses.

Obligation of the pledgor

1. To inform the pledge of the flaws of the things, if known to him
2. To pay the principal obligation including the interest, and expenses in a proper case.
3. To reimburse the pledge for the expenses incurred for the preservation of the thing
pledged.

Right of the pledgor

1. To ask the pledgee that the thing pledged be judicially deposited, in case:
a. The pledgee uses the thing pledged without the authority of the owner, or
 MODULE: LAW ON SALES, AGENCY AND CREDIT TRANSACTION

b. Misuses the thing pledged in any other way not related to the preservation of the thing
pledged, or
c. If through the negligence or willful act of the pledge, the thing pledged is in danger of
being lost or impaired. In case, the pledgor may demand that it be deposited with a
third person.
2. To participate in the bidding of the public auction of the thing pledged and to enjoy a
preference at the sale.
3. To replace the thing in the pledge with another of the same kind as the former and not of
an inferior quality, if there are reasonable grounds to the fear the destruction or impairment
of the thing pledged.
4. To sell the property pledged provided the pledge consents to the sale.
5. To have the return of the thing pledged upon the payment of the principal obligation
interest, if any and expenses.

Manner of the termination of the contract

a. By payment of the principal obligation and other things
b. Thru destruction or loss of the thing pledged.
c. By return of the thing pledged;
d. By renunciation or thru abandonment of the thing pledged.
e. Stratification of the principal obligation by any third person who has a right in or to the
thing pledged.
f. By other causes of terminating ordinary obligations.

Return to the pledgor of the thing pledged

If the thing pledged is returned by the pledge to the pledgor or owner, the pledge is extinguished.
Any stipulation to the contrary shall be void.
If subsequent to the perfection of the pledge, the thing is in the possession of the pledgor or the
owner, there is a prima facie presumption that the same has been returned by the pledge. This
same presumption exists if the thing pledged is in the possession of the third person who has
received it from the pledgor or owner after the constitution of the pledge.

Case 14
Alexander pledged with Bernardo his diamond ring. Benardo took possession of the ring. Later,
although the principal obligation had not been paid, Bernardo wrote on a private document that
he was renouncing the pledge. Alexander did not accept the renunciation and the ring retained in
Bernardo’s possession.
1. Has the pledge beer extinguished?
Yes, Bernardo is not longer a pledge but a depositary. The non-acceptance of the
renunciation is immaterial.

2. Suppose instead of writing a letter, Bernardo returned the ring to Alexander. What is the
status of the pledge?
The pledge is extinguished upon the delivery of the thing pledged. Any stipulation to
the contrary is void.

Examples of the pledge by operation of law

1. The retention of the property by a possessor in good faith, for necessary and useful
expenses.
2. The retention by an agent of the property entrusted to him for the expenses he may have
advanced and for damages cause by him by the agency.
 MODULE: LAW ON SALES, AGENCY AND CREDIT TRANSACTION

3. The retention of a movable by the person who has executed work thereon- till he is paid.
This is known also as the Mechanics Lien.
4. The retention by the depository of the object of the deposit for expenses.

In the above cases, the law of the conventional pledge applies, except that:
a. The debtor is entitled to the excess (in the sale), should there be any (after all, the pledge
was not voluntary)
b. The public auction shall take place within one month after demand for the payment of the
claim,
c. If without just grounds the creditor does not cause the public sale to be held within one
month after demand for the payment of the claim, the debtor mar require the return of the
thing.

Reference:

THE LAW ON SALES, AGENCY, AND CREDIT TRANSACTIONS DE LEON 2010

For further discussion please refer to the link provided:

What is Pledge in Banks: https://youtu.be/QQJ0Zr-X2ZM

Difference Between Pledge, Hypothecation, and Mortgage: https://youtu.be/Pg2uDsfGRaE

Contract of Pledge: https://youtu.be/w-NJbpUNfr4