Definition of pledge.

- Pledge is a contract by virtue of which the debtor delivers to the creditor or to a third
person a movable (Art. 2094.) or document evidencing incorporeal rights (Art. 2095.) 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.

- A pledge is a bailment that conveys possessory title to property owned by a debtor (the
pledgor) to a creditor (the pledgee) to secure repayment for some debt or obligation and to the
mutual benefit of both parties

Characteristics of the contract.

Pledge is:
(1) a real contract because 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) an accessory contract because it has no independent exis-tence of its own. As an

accessory contract, its validity would depend on the validity of the principal obligation secured
by it.;
(3) a unilateral contract because it creates an obligation solely on the part of the creditor to
return the thing subject thereof upon the fulfillment of the principal obligation; and
(4) a subsidiary contract because the obligation incurred does not arise until the fulfillment
of the principal obligation which is secured.

Cause or consideration in pledge.

Pledge is an accessory contract. Its cause insofar as the pledgor is concerned is the principal
obligation. But if he is not the debtor (Art. 2085, par. 2.), the cause is the compensation stipulated
for the pledge or the mere liberality of the pledgor. As an accessory contract, its validity would
depend on the validity of the principal obligation secured by it.

Kinds of pledge.
Pledge may be either:
(1) Voluntary or conventional or one which is created by agreement of the parties; or
(2) Legal or one which is created by operation of law. (see Art. 2121)
-Art. 546. Necessary expenses shall be refunded to every possessor; but only the possessor
in good faith may retain the thing until he has been reimbursed therefor.
-Art. 1731. He who has executed work upon a movable has a right to retain it by way of
pledge until he is paid.
-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.

Transfer of possession essential in pledge.

A pledge is a real contract which requires delivery for its perfection. (Art. 1316.)
-Art. 1316. Real contracts, such as deposit, pledge and Commodatum, are not perfected
until the delivery of the object of the obligation.
(1) To constitute contract. — An agreement to constitute a pledge only gives rise to a
personal action between the contracting parties. (Art. 2092.) Unless the movable given as
security by way of pledge be delivered to and placed in the possession of the creditor or of a third
person designated by common agreement, the creditor acquires no right to the property because
pledge is merely a lien and possession is indispensable to the right of a lien. (U.S. vs. Terrell, 2
Phil. 222 [1903].) Without delivery, therefore, there cannot be a pledge. (McMicking vs.
Martinez, 15 Phil. 204 [1910].)

Type of delivery depends upon nature of thing pledged.

(1) Actual delivery. — The delivery of possession referred to in Article 2093 as essential to
the validity of a pledge means actual possession of the property pledged and a mere symbolic
delivery is not sufficient. Thus, where the animal pledged by A to B were actually in the
possession of C and nothing was stated in the contract that C was by common consent made by
the depositary of B who never took possession of the animal, it was held that no pledge had been
constituted. (Betita vs. Ganzon, 49 Phil. 87 [1926].)

(2) Constructive delivery. — It has been held, however, in an earlier case, that the
symbolical transfer of the goods by means of the delivery of the keys to the warehouse where the
goods were stored was sufficient to show that the depositary appointed by common consent of
the parties was legally placed in possession of the goods, since the owner, as pledgor, could no
longer dispose of the same, the pledgee being the only one authorized to do so through the
depositary and special agent who represented him. (Banco Español-Filipino vs. Peterson, 17 Phil.
409 [1910].)
Whether or not a symbolic or constructive delivery is suf-ficient to validate a pledge would
depend on the peculiar nature of the thing pledged.

Subject of Pledge

1. Only movables can be pledged (including incorporeal rights)

2. Real Property cannot be pledged. A pledge cannot include a lien on real property.
3. Certificate of stock or of stock dividends, under the corporation code, are quasi-negotiable
instruments in the sense that they may be given in pledge to secure an obligation.

ART. 2096. A pledge shall not take effect against third persons if a description of
the thing pledged and the date of the pledge do not appear in a public instrument.
(1865a)

Public instrument necessary

to bind third persons.
(1) Contents of public instrument. — Even if all the essential requisites provided in Articles
2085 and 2093 are present, the contract of pledge is not effective against third persons unless in
addition to delivery of the thing pledged, it is embodied in a public instrument (i.e., one attested
and certified by a public officer authorized by law to administer oath, such as a notary public)
wherein it shall appear the description of the thing pledged; and the date of the pledge. Article
2096 prescribes a requirement without which the contract of pledge cannot adversely affect third
persons, such as, for example, the innocent buyer of the thing pledged notwithstanding that the
pledgee has already taken possession of the same. (Ocejo Perez & Co. vs. International Bank, 37
Phil. 631 [1918]; Bachrach Motor Co. vs. Lacson Ledesma, 64 Phil. 681 [1937].)
 (2) Object of the requirement. — The object is to forestall fraud, because a debtor may
attempt to conceal his property from his creditors when he sees it in danger of execution by
simulating a pledge thereof with an accomplice. (Tec Bi & Co. vs. CharteredBank of India, 41
Phil. 576 [1921].) The requirement is not a mere rule of adjective law prescribing the mode
whereby proof may be made of the date of the pledge contract, but a rule of substantive law
prescribing a condition without which the execution of a contract of pledge cannot affect third
persons adversely. (Caltex [Phils.], Inc. vs. Court of Appeals, 212 SCRA 448 [1992].)

Constituted by the absolute owner.

It is essential that the contract be constituted only by the absolute owner of the thing pledged or
mortgaged (see De Lara vs. Ayroso, 95 Phil. 185 [1954]; Parqui vs. Phil. National Bank, 96 Phil.
157 [1954].), or at least by the pledgor or mortgagor with the authority or consent of the owner of
the property pledged or mortgaged.1 A pledge or mortgage constituted by an impostor is void and
the pledgee or mortgagee in such a case acquires no right whatsoever in the property. 2

Ownership is retained by the pledgor (art. 2103)

Gen. Rule
Pledgor continues to be the owner. But the pledgee may exercise certain rights of the owner.

Exception:
Object is expropriated

Right of third person who pledged his own property.

A third person who is not a party to the principal obligation may secure the latter by pledging
his own property. (Art. 2085, par. 2.) The law grants him the same rights as a guarantor (see Arts.
2066-2070, 2077-2081.) and he cannot be prejudiced by any waiver of defense by the principal
debtor.