PLEDGE

Pledge- a contract by virtue of which the debtor delivers to the creditor or to a third person a movable, or instrument evidencing
incorporeal rights for the purpose of securing the fulfillment of a principal obligation with the understanding that when the
obligation is fulfilled, the thing delivered shall be returned with all its fruits and accessions.

CHARACTERISTICS:
● Real Contract- perfected by the delivery of the thing pledged, by the debtor who is called pledgor, to the creditor who is
DEFINITION AND CHARACTERISTICS
called the pledgee.
● Accessory Contract- no independent existence of its own.
● Unilateral Contract- it creates an obligation solely on the part of the creditor to return the thing subject thereof upon the
fulfillment of the principal obligation.
● Subsidiary Contract- the obligation incurred does not arise until the fulfillment of the principal obligation which is
secured.

● Conventional or Voluntary- constituted by the mutual consent of the pledgor and the pledgee.
KINDS OF PLEDGE
● Legal- created by operation of law.

● Constituted to secure the fulfillment of a principal obligation. (Art 2085)

● The pledgor be the absolute owner of the thing pledged. (Art. 2085)
● The person constituting the pledge has the free disposal of his property, and in the absence thereof, that he be
legally authorized for the purpose. (Art. 2085)
● The thing pledged be placed in the possession of the creditor, or of a third person by common agreement. (Art.
ESSENTIAL REQUISITES
2093)

A pledge, being a real contract, requires foe its perfection the delivery of the thing to the creditor or to a third person by common
agreement. Thus, without delivery, the pledge is void.

● All moveable within the commerce of men which are susceptible of possession. (Art. 2094)
● Incorporeal rights evidenced by negotiable instruments, bills of lading, shares of stocks, bonds, warehouse receipts
OBJECT OF THE PLEDGE and similar documents. (Art. 2095)

The instrument providing the right pledged shall be delivered to the creditor, and if negotiable must be endorsed.

FORM OF PLEDGE ● Between the parties

The pledge may be in any form as in fact the mere delivery of the object is sufficient to bind the parties.
● As regards to third persons
 To take effect against third persons, the pledge must be in public instrument showing a description of the thing
pledged and the date of the pledge. (Art. 2096)
The pledge shall cover the following:
● The thing pledged.
EXTENT OF PLEDGE ● The fruits, income, dividend or interest earned or produced by the thing pledged, unless there is a stipulation excluding
them. (Art. 2102)
● The offspring, when the thing pledged is an animal, unless there is a stipulation excluding them. (Art. 2102)
PLEDGOR
● Liability to pay the debt and its interest, with expenses
OBLIGATIONS in a proper case, when they are due. (Art. 2105)
● Liability to pay damages for known hidden flaws.
PLEDGOR
RIGHTS
● Right to alienate, with the consent of the pledgee, the
thing pledged.
● Right to ask the thing pledged to be deposited
judicially or extrajudicially. (Art. 2104)
● Right to ask for the return of the thing after he has
paid the debt and its interests.
● Right to ask for deposit of the thing pledged. (Art.
2106)
● Right to substitute the thing pledged. (Art. 2107)
● Right to bid.
PLEDGEE
● Obligation to take care of the thing pledged with the
diligence of a good father of a family. (Art. 2099)
● To not deposit thing pledged with a third person,
unless there is a stipulation authorizing him to do so.
(Art. 2100)
● Obligation not to use the thing pledged without
permission from the owner. Unless authorized or use
of the thing is necessary for its preservation.
● To advise the pledgor of the result after the public
auction (Art. 21116)
● To be liable for the loss or deterioration of the pledged
unless it is due to fortuitous event.
PLEDGEE
● Right to retain the thing pledged in his possession.
(Art. 2098)
● Right to compensate earnings of pledge with debt.
(Art. 2102)
● Right to bring action against third person. (Art. 2103)
● Right to have the thing pledged sold at public sale
(Art. 2108) and to appropriate thing pledged if not
sold. (Art. 2112)
● Right to demand substitute or immediate payment.
(Art. 2109)
● Right to collect and receive amount due on credit
pledged. (Art. 2118)
● Right to choose which he will cause to be sold in case
 of several things are pledged. (Art. 2119)
● Right to bid.

A pledge is a real contract which requires delivery for its perfection.

A. Transfer of actual possession
The delivery of the possession referred to in Article 2093 means actual possession of the property pledge and a mere
symbolic delivery may not be sufficient.

B. Symbolic or constructive delivery

Symbolic or constructive delivery of the thing pledged may be sufficient depending on the peculiar nature of the thing.

PERFECTION OF CONTRACT C. Incorporeal rights

The instrument proving the right pledged shall be delivered to the creditor and if negotiable, must be indorsed. (E.g. In
sales, title of the goods may be conveyed by transfer or negotiation of the document of title.

D. As to third person
The contract of pledge is not effective against third person unless in addition to the thing pledged, it is embodied in
public instrument (Art. 2096) wherein shall appear:
(1) The description of the thing pledged.
(2) The date of the pledged.

CAN A THING THAT HAS BEEN PLEDGED BE SOLD?

Yes, because the object of the pledge may be alienated for the purpose of satisfying the claims of the pledgee.
Provided that:
1. The debt is due and unpaid;
2. The sale must be at a public auction;
FORECLOSURE 3. There must be notice to the pledgor and owner, stating the amount for which the public sale is to be
held;
4. The sale must be made with the intervention of a notary public.

However, if after the first and second auctions, the thing pledged is not sold, the pledgee may appropriate the thing. If
the pledgee did appropriate the thing pledged, it shall be considered as full payment of for his entire claim.

CAUSES FOR THE EXTINGUISHMENT OF PLEDGE ● Return of the thing pledged by the pledgee to the pledgor or owner, any stipulation to the contrary being void.
● Renunciation or abandonment executed in writing by the pledgee even without return of the thing.
● Prescription
● Loss of the thing
● Merger
● Compensation
 ● Novation
● Payment of the debt
● Sale at a public auction
● Other causes of extinguishment of ordinary obligations

DEFINITION
A pledge by operation of law or legal pledge is constituted or created by operation of law.

CAN A THING PLEDGED UNDER OPERATION OF LAW BE SOLD?

It may be sold only AFTER demand of the amount for which the thing is retained. After such demand, the pledgee must
proceed with the sale at a public auction within 1 month. If, without just grounds, the pledgee does not cause the public
sale to be held within the said period, the pledgor may require him to return the thing retained.

INSTANCES OF LEGAL PLEDGES

PLEDGE BY OPERATION OF LAW
A. Possessor in good faith – for necessary and useful expenses incurred over the thing (Art 546);
B. Independent contractor – he who has executed work upon a movable has a right to retain it by way of pledge until he is
paid. (Art 1731)
C. Agent – for expenses advance and damages caused by the agency (Art 1914);
D. Laborer - Lien on the goods manufactured or work done by a laborer until his wages had been paid. (Art 1707);
E. Depositary – for the payment of what may be due him by reason of the deposit (Art 1994); and
F. Hotel Keeper – for credits for lodging and supplies furnished (Art 2004);

RULES IN CASE OF LEGAL PLEDGES

1. The rules on the possession, care, and sale of the thing pledged, and extinguishment of the pledge governing the
conventional pledges also applies to pledges by operation of law. However, in case of sale where there is a remainder
of the price after payment of the debt and expenses, it shall be delivered to the debtor if it is a pledge by operation of
law unlike in conventional pledge, the debtor is not entitled to the excess unless it is otherwise agreed.

2. There is no definite period for the payment of the principal obligation. Therefore, the pledgee must make a demand for
the payment of the amount due him. Without the demand, he CANNOT exercise the right of sale at a public auction.

PLEDGE DISTINGUISHED FROM MORTGAGE PLEDGE MORTGAGE

OBJECT

Movables; and Immovables; and

Incorporeal rights evidenced by documents whether negotiable Inalienable real rights in accordance with laws, imposed upon
or not immovables
 DELIVERY

Property is delivered to the pledgee or by common consent to

Delivery is not necessary
a third person

VALIDITY AGAINST THIRD PERSONS

NOT valid against third persons UNLESS a description of the

thing pledged and date of the pledge appear on PUBLIC NOT valid if NOT registered
INSTRUMENT

SALE OF THING PLEDGED/MORTGAGED

Pledgor can sell the thing pledged WITH consent of the Mortgagor can sell the property mortgaged even WITHOUT
pledgee the consent of the mortgagee

Pawnshops and other establishments engaged in making loans secured by pledges, the special laws and regulations
RULES AS TO PAWNSHOPS AND OTHER
concerning them shall be observed, and subsidiarily, the provisions of this Title, which is referring to Title XVI on Pledge,
ESTABLISHMENTS
Mortgage, and Antichresis.
 REAL MORTGAGE

Real Mortgage- also known as “real estate mortgage” is a contract whereby the debtor secures to the creditor the fulfillment of a
principal obligation, especially subjecting to such security, immovable property or real rights over immovable property in case the
principal obligation is not complied with at the time stipulated. (Art. 2124)

DEFINITION CHARACTERISTICS:

AND  Real – object of a contract of mortgage are immovables and alienable real rights imposed upon immovables. (Art. 415)
 Accessory – its consideration is that of the principal contract from which it receives its life, and without which it cannot
CHARACTERISTICS exist as an independent contract.
 Consensual – perfected by mere consent.
 Unilateral – because it creates an obligation only on the part of the creditor who must free the property from the
encumbrance once the obligation is fulfilled.

● Immovable or Real Property, Interest and Alienable Real Rights

SUBJECT MATTER

● Securing the performance of principal obligation

PURPOSE

 Indivisible – as long as the principal obligation remains unpaid, the real estate mortgage will continue to subsist. It is
indivisible even though the debt may be divided among the successors in interest of the debtor or of the creditor.
ADDITIONAL ESSENTIAL REQUISITES
 Inseparable – the mortgage on real property adheres to the property, regardless of who its owner may subsequently be.

 Voluntary – one which is agreed to between the parties or constituted by the will of the owner of the property on which it
KINDS OF is created.
 Legal – one required by law to be executed in favor of certain persons
MORTGAGE
  Equitable – one which, although it lacks the proper formalities of a mortgage, shows the intention of the parties to make
the property as a security for a debt.

 In conformity with the rule established under the law on “Form of Contracts” which gives to the contracting parties the
RIGHT IN CASE OF right to compel each other to observe the form required by law like the execution of a document or other special forms
provided the contract between them is valid and enforceable.
LEGAL MORTGAGE

● A contract of mortgage should be in public document (Art. 1358) and recorded in the Registry of Property of the province
REGISTRATION or city where the thing is situated. (Art. 2125)

● A mortgagee has a right to rely in good faith on the certificate of title of the mortgagor of the property given as security.
DOCTRINE OF In the absence of any sign that might arouse suspicion, he has no obligation to undertake further investigation.

MORTGAGEE IN ● Hence, even if the mortgagor is not the rightful owner of, or doesn’t have a valid title to, the mortgaged property, the
mortgagee in good faith is nonetheless entitled to protection.
GOOD FAITH

● Creates a Real Right – A real right is enforceable against the whole world. Therefore, if the mortgagor sells the
mortgaged property, the property remains subject to the fulfillment of the obligation secured by it.

EFFECT OF MORTGAGE ● Creates merely an encumbrance – merely an encumbrance upon the property and does not extinguish the title of
the debtor who doesn’t lose his principal attribute as owner, that is, the right to dispose.

● A mortgage constituted on immovable property isn’t limited to the property itself but also extends to all its accessions,
EXTENT OF MORTGAGE improvements, growing fruits and rents or income as well as to the proceeds of insurance should the property be
destroyed or the expropriation value of the property should it be expropriated unless otherwise provided by an express
stipulation.
 ● The right of mortgagee is a real right and directly and immediately subjects the mortgaged property to the fulfillment of
ALIENATION OR the principal obligation.

ASSIGNMENT OF ● The sale or assignment is valid even if not registered because registration is only necessary to affect third persons.

MORTGAGE CREDIT

● The mortgagor does not relieve him from his obligation to pay the debt to the mortgage-creditor if he transferred the
mortgage property to a third person. The mortgage-creditor has the right to demand from any possessor the payment
only to the part of the credit secured by the mortgage property. It is only necessary when the mortgage creditor demand
RIGHT OF CREDITOR AGAINST TRANSFEREE OF
payment from the debtor but fails to do so. The remedy of the third person is to proceed against the debtor.
MORTGAGED PROPERTY

● Any stipulation forbidding the owner from alienating the mortgage property is consider void. However, the transferee is
STIPULATION FORBIDDING THE ALIENATION OF
bound to respect the encumbrance for the mortgage property remains subject to the fulfillment of the obligation.
MORTGAGE PROPERTY

● Foreclosure is the legal right of a mortgage holder or other third-party lien holder to gain ownership of the property and/or
the right to sell the property and use the proceeds to pay off the mortgage if the mortgage or lien is in default.

KINDS OF FORECLOSURE

FORECLOSURE  Judicial foreclosure – It involves the sale of the mortgaged property done under the supervision of a court. Because it is
a legal action, all the proper parties must be notified of the foreclosure, and there will be both pleadings and some sort of
judicial decision, usually after a short trial.
 Extrajudicial foreclosure – It involves the sale of the mortgaged property without the intervention of the court. It can be
inserted in the contract which gives the mortgagee the power to foreclose the mortgage.

● It is a transaction by which the mortgagor-owner of the mortgaged property reacquires or buy back the property within a
REDEMPTION certain period and for a certain amount after his default.

KINDS OF REDEMPTION
 Equity of redemption – The right of mortgagor to redeem the mortgaged property after his default in the performance of
the conditions of the mortgage but before the sale of the mortgaged property.

 Right of redemption – The right of the mortgagor to redeem the mortgage property within a certain period after it was
sold for the satisfaction of the mortgage debt. The mortgagor may redeem the property at any time within the term of one
(1) year from and after the date of the registration of the sale.
 CHATTEL MORTGAGE

Chattel Mortgage- a contract by virtue of which personal property is recorded in the Chattel Mortgage Register as security for
the performance of an obligation.

DEFINITION
CHARACTERISTICS:
AND
· Accessory Contract- it is for securing the performance of principal obligation.
CHARACTERISTICS ● Formal Contract- for the validity, registration is necessary.
● Unilateral Contract- produces only an obligation on the part of creditor to free the thing from encumbrance in fulfillment
of the obligation.

● Always be personal or movable property

SUBJECT MATTER

● Securing the performance of principal obligation

PURPOSE

● To execute a valid chattel mortgage, it should be registered to Chattel Mortgage Register

CREATION Note: If it is not registered, it is not valid and binding as against third person

● The mortgagor may sign the contract alone but practically, the mortgagee must sign also given that they both need to
FORM OF CONTRACT sign the affidavit of good faith.

AS STATED IN THE LAW

 ● Attach a description or schedule of the properties mortgaged.
FORMAL REQUIREMENT ● There is also the requirement of payment of registration fees and documentary stamp taxes.

OF DESCRIPTION OF PROPERTY

OFFENSES INVOLVING ● Knowingly removing personal property mortgaged to any province or city other than the one in which it was located at the
time of the execution of the mortgage without the written consent.
CHATTEL MORTGAGE ● Selling or pledging personal property already mortgaged or any part thereof, under the terms of the Chattel Mortgage
Law without the consent of the mortgage written on the back of the mortgage and duly recorded in the Chattel mortgage
Register.
 ANTICHRESIS

Antichresis - a contract for security between the debtor and his creditor; a transfer of possession of the pledged real property from the debtor to the
creditor, including the the fruits or rent income therefrom, in lieu of payments on the loan, including interest, for any such time period as is provided for in
DEFINITION the contract.

AND CHARACTERISTICS:

CHARACTERISTICS 1. An accessory contract because it secures the performance of a principal obligation.

2. A formal contract because it must be in a specified form to be valid.

● The contract only covers the fruits of the immovable properties, not the immovable property itself. The fruits must be appraised at its actual market
value at the time of application.
SUBJECT MATTER

● The amount of both the principal and interest must be in writing, otherwise lit is void. Even if the antichresis is void, the principal obligation,
FORM OF CONTRACT however, may still be valid.

1. Payment all taxes and charges upon the state.

OBLIGATIONS OF ANTICHRETIC
CREDITOR 2. Apply the fruits to the interest first after receiving them if owing and thereafter to the principal.

● The debtor can reacquire the property only when the debt is totally paid as the property delivered stands as a security for payment of the
obligation of the debtor in antichresis.

RIGHTS OF ANTICHRETIC If the creditor doesn’t want to pay the taxes and incur the expenses necessary, he may compel the debtor to reacquire the enjoyment of the same except
DEBTOR when there is a contrary stipulation.

1. Bring an action for specific performance

REMEDY OF CREDITOR IN CASE
OF NONPAYMENT
 2. Petition for the sale of the real property as in a foreclosure of mortgage. However, parties may agree on an extrajudicial foreclosure.

ANTICHRESIS PLEDGE

OBJECT

Real Property Personal Property

ANTICHRESIS DISTINGUISHED
FROM PLEDGE
CONTRACT

Consensual Contract, perfected by mere consent Real Contract, perfected by delivery of the thing pledged

ANTICHRESIS REAL MORTGAGE

POSSESSION

Property is delivered to the creditor while in mortgage. Debtor usually retains the possession of the property.

RIGHTS TO THE FRUITS

ANTICHRESIS DISTINGUISHED
FROM REAL MORTGAGE
The creditor acquires the right to receive the fruits of the property. Does not acquire the right to receive the fruits.

OBLIGATIONS OF THE CREDITOR

The creditor is obliged to pay the taxes and charges upon the estate
The creditor has no such obligation.
unless there is a stipulation to the contrary.