Article 2085.

The following requisites are essential to the contracts

of pledge and mortgage:

(1)That they be constituted to secure the fulfillment of a principal

obligation;

(2)That the pledgor or mortgagor be the absolute owner of the thing

pledged or mortgaged;

(3)That the persons constituting the pledge or mortgage have the

free disposal of their property

and in the absence thereof, that they be legally authorized for the
purpose.
(4)Third persons who are not parties to the principal obligation may
secure the latter by pledging or
mortgaging their own property.
Pledge
-An accessory contract
-a debtor delivers to the creditor or to a third person a movable or
personal prop, or docu evidencing incorporeal rights

Only accessory contracts

Absolute owners
Free disposal of their prop or to AUTHORIZED
Sold at public auction when PO becomes due and no
payment
Pledge
Obj is movable is susceptible of possession
Real contract-delivered
Formal-description of the thing must appear in a Public
instru to bind 3rd persons
Not a real right
Prop acquirable in the future be mortgaged?

-when the oblig is satisfied, the thing delivered shall be returned to the
pledger

No. no valid mortgage as to the latter bec. He was

not yet the owner of the prop at the time of the
mortgage

-with all its fruits and accessions

Formalities:

What are the kinds of pledge?

Pledge may be either:
1. Voluntary or conventional (created by agreement of the parties);
2. Legal (by operation of law).
What are the characteristics of pledge? [RAUS]
Pledge is:
1. Real, because it is perfected by delivery of the thing pledged.

a)described w. reasonable certainty ex contract is

land

-to secure the fulfillment of a principal oblig w/condition

2. Acessory, because it has no independent existence.

3. Unilateral, because it creates an obligation solely on the part of

the creditor to return the

thing pledged upon fulfillment of the principal obligation.
4. Subsidiary, because the obligation of the creditor does not arise
until fulfillment of the
principal obligation.
Concept of Real mortgage

Is a right held by a creditor to have the

realty seized and sold for the satisfaction of
the debt in default of payment

Purpose pledge and mortgage:secure the fulfillment

of a PO which ordinarily is a contract of loan
First requisite of the article:They are merely
accessory contracts. Cannot exist w.o existing valid
principal oblig

b)must be delivered to the pledgee

WHAT ARE THE ESSENTIAL REQUISITES OF PLEDGE
AND MORTGAGE? [PRADO]
1.

Purpose - To secure fulfillment of principal

obligation;

The pledgor bears the loss. Remember that there hasnt been transfer
of ownership.
The principal obligation is of course not extinguished, the
pledge/mortgage is only accessory.
However, the debtor must replace the thing or lose the benefit of the
period.
Pledge/mortgage is a direct lien on the property. It is better than
guarantee because the property
pledged can be sold upon default by the debtor, unlike in guaranty
where several requirements have
to be complied with first.

2. Real There must be delivery of the thing.

3. Alienation when the principal obligation becomes
due and the debtor defaults, the thing may be
alienated to satisfy the former.

Effect of invalidity of pledge or mortgage:debt may

still be recovered in an ordinary action as foreclosure
is no longer the proper remedy.

DOES THE CREDITOR HAVE TO GO TO COURT TO ENFORCE THE PLEDGE OR

MORTGAGE?
No, to require litigation would be to nullify the lien and defeat the purpose of the
contract.

Effect of invalidity of PO:being merely an accessory is

also void

4. Disposal Pledgor/mortgagor must have free

disposal of the thing or capacity to dispose.

Consideration of pledge and mortgage:

a)If pledger is the debtor himself the consideration of
pledge is the principal oblig itself.y?PO gives life to
the pledge or mortgage

Free disposal means that the property is not subject to any claim by a
third person.

b)if pledger not the debtor but 3rd person

consideration is the COMPENSATION or the plain
liberality of the pledger or mortgagor
Second requisite:pledger or mortgagor absolute
owner of the thing. Otherwise no legal
effect.Ownership is an essential requirement
Similarities of P and M

5. Ownership Pledgor/mortgagor must be the

absolute owner of the thing;
Mortgage through forged power of atty-principal
will not be bound by the mortgage.mortgage is void
Mortgage executed by an impostor-nullity
3rd person who pledged his prop is not liable
for any deficiency

Mortgage
Immovable
Not necessary
Registered to

Real right and

Xpn:EXPRESSLY agreed to be bound

SOLIDARILY
Right of an owner of personal prop pledged w/o
authority-art 559 owner acquired the possession of
the thing in GF. May recover it.
Article 2086. The provisions of article 2052 are applicable to a
pledge or mortgage.
A pledge like guaranty may be constituted to secure voidable and
unenforceable oblig as well as natural oblig
-not void may be RATIFIED by the parties
Article 2087. It is also of the essence of these contracts that
when the principal obligation becomes
due, the things in which the pledge or mortgage consists may
be alienated for the payment to the
creditor.
Right of mortgage to Foreclose(accion hipotecaria)
-alienate-tranfer or convey prop to another.
-Xpactum commissorium-this stipulation is void. Failure of the debtor
to pay the prop will AUTOMATICALLY belong to the debtor
Nature of foreclosure sale
-forced sale
-mortgagor in default the forced seller obliged to the transfer the
ownership of the thing sold to the highes bider and the rule that the
seller must be the owner of the thing sold
Kinds of Foreclosure of REMa
1)JUDICIAL-court proceeding
2)Extrajudicial-through a sheriff or a notary public
Necessary for the pledgee to sue the pledger to enforce credit?
No. pledgee is not required to file an independent action for the
enforcement of his credit
-otherwise be a nullifaction of his lien and would defeat the purpose of
the pledge is to give him preference over the prop given as security
for the satisfication of his credit
Equity of Redemption
-right of the mortgagor to extinguish the mortgage and retain
ownership of the prop by paying the secured debt q/in 90 period after
the judgement became final
-diff from right of redemption na sa extra-jud siya sa judicial
foreclosure redeem the prop after his default w/in 1 yr

Nature of action to redeem-action in personam

binding only upon the parties properly impleaded
and duly heard or given an opportunity to be heard
CAN THE CREDITOR IMMEDIATELY ACCEPT A PLEDGE
FURNISHED BY A DEBTOR IF THE
PLEDGE BELONGS TO A THIRD PERSON?
No, the creditor cannot require on the word of the pledgor/mortgagor
alone, he must exercise due
care and make sure the pledge/mortgage has given consent. This is
especially true in the banking
industry, which is impressed with public interest.
WHAT IS THE CONSEQUENCE THEN IF THE CREDITOR DOES
NOT VERIFY WITH THE
PLEDGOR/MORTGAGOR?
The pledge/mortgage is null and void. Article 599 gives the owner of a
movable who has been unlawfully deprived thereof the right to recover
the same.
Article 2088. The creditor cannot appropriate the things given
by way of pledge or mortgage, or
dispose of them. Any stipulation to the contrary is null and
void.

WHAT DOES THE CREDITOR WITH THE PLEDGE/MORTGAGE

WHEN THE DEBTOR DEFAULTS?
The creditor can move for the sale of the thing pledged or mortgaged.
WHAT IF THE CREDITOR WANTS TO ACQUIRE THE THING?
He may purchase it at the public auction.
2 prohibited acts
1)creditor cannot appropriate to himself the things given to him by
way of pledge
2)creditor cannot dispose of the things pledged or mortgaged
*y?creditor is merely entitled after the principal oblig has
become due.
WHAT IF THERE IS A STIPULATION THAT THE CREDITOR WILL
ACQUIRE THE THING UPON
DEFAULT?
The stipulation (pactum commissorium) is null and void.
WHAT ARE THE REQUISITES FOR PACTUM COMMISSORIUM TO
EXIST?
1. There should be a pledge/mortgage;
2. There should be a stipulation for AUTOMATIC appropriation or the
thing in case of default by
the debtor.
ARE THERE ANY EXCEPTIONS TO PACTUM COMMISSORIUM?
Yes, Article 2112 provides that if the thing pledged or mortgaged is not
sold in two public auctions,
the creditor may appropriate the same.
WHAT IS THE REASON FOR THE PROHIBITION?
The value of the thing pledged or mortgaged is usually more than the
amount of the obligation. If allowed, the creditor is effortlessly
enriched at the expense of the debtor
-contrary to good morals and public policy.
WHAT HAPPENS TO THE CONTRACT OF PLEDGE/MORTGAGE IF
THERE IS A STIPULATION OF
PACTUM COMMISSORIUM; IS IT VOID?
No, only the stipulation is void; the principal contract will subsist.
HOW CAN YOU OPT OUT OF THE PROHIBITION ON PACTO
COMMISSORIO?
1. You can enter into another contract subsequent to the
pledge/mortgage. The prohibition
applies only to stipulations made in the contract of pledge/mortgage.
2. The debtor can voluntarily cede the property to the creditor. This
would in effect be a novation
of the pledge/mortgage.
3. There can be a stipulation where the debtor merely promises to sell;
non-compliance would
give the creditor, not a right to the property, but an action for
damages.
4. There can be a stipulation granting the creditor authority to take
possession and not
ownership of the property upon foreclosure.
Pledgor or Mortgagor Bears risk of loss
-the owner bears the loss beceause ownership is not transferred to the
pledgee.. The PO is not extinguished by the loss of prop
Article 2089. A pledge or mortgage is indivisible, even though
the debt may be divided among the
successors in interest of the debtor or of the creditor.
Therefore, the debtors heir who has paid a part of the debt
cannot ask for the proportionate share of
extinguishment of the pledge or mortgage as long as the debt
is not completely satisfied.
Neither can the creditors heir who has received his share of
the debt return the pledge or cancel the
mortgage, to the prejudice of the other heirs who have not yet
been paid.
From these provisions is excepted the case in which, there
being several things given in mortgage or
pledge, each one of them guarantees only a determinate
portion of credit.
The debtor, in this case, shall have the right to the
extinguishment of the pledge or mortgage as the
portion of the debt for which each thing is specially answerable
is satisfied.
Indivisibilty of P
-cannot be divided into parts
-even if the oblig of the debtor is JOINT and not solidary
Heirs of Debtor or Creditor-a debtors heir who has paid a part of
the debt cannot demand a proportionate extinction of the pledge

Article 2090. The indivisibility of a pledge or mortgage

is not affected by the fact that the debtors are not
solidarily liable.
Indivisibility of P may be waived-may be
contemporaneous or subsequent to the contract
Indivi applies only to contracting parties
-3rd person whos is not privy not bound to acknowledge the
said pledge
Embodiment of REM and CEM in one docu
-does not fuse both securities into an indivisible whole
Article 2091. The contract of pledge or mortgage may
secure all kinds of obligations, be they pure or subject
to a suspensive or resolutory condition.
As long as not VOID
Conditional oblig may be secured by pledge
Future advancements or renewals may also be
secured by pledge
Article 2092. A promise to constitute a pledge or mortgage
gives rise only to a personal action
between the contracting parties, without prejudice to the
criminal responsibility incurred by him
who defrauds another, by offering in pledge or mortgage as
unencumbered, things which he knew
were subject to some burden, or by misrepresenting himself to
be the owner of the same.

Promise of pledge:merely gives rise to a personal

action bet. Parties
ACCEPTION-creates no real rights; only to
COMPEL the promissor to execute the pledge

Article 2093. In addition to the requisites prescribed in article

2085, it is necessary, in order to constitute the contract of
pledge, that the thing pledged be placed in the possession of
the creditor, or of a third person by common agreement.
Basic req
-

of pledge
Constituted to secure the fulfillment of PO
Pledgor is absolute owner of the thing pledged
Person constituting the pledge(pledger or 3rd person)has
free disposal or legally authorized to make the pledge

Other req
Must be in actual possession-actual
no pledge w.o delivery of thething since its a REAL
CONTRACT
reduced into a public instrument where the thing must be
particularly described
Continuous possession required
pledgee is allowed to temporarily entrust the physical
possession of the thing pledged to the pledger would be in
possession as a mere trustee and his possession is subj. to
the order of the pledge
GR:Constructive or symbolic delivery is not sufficient to
constitute pledge
xpn:delivery to him of the keys to the warehouse is
sufficient delivery of the possession
Pledge/mortgage are real contracts.
If you agree, but dont deliver to the pledgee or a third person/s, there
is no pledge but there is an agreement to enter into a pledge.
Can delivery be made to the pledgor?
Yes, if he is acting as agent of pledgee or where the thing pledged is
so unwieldy as to make delivery impossible, constructive delivery is
allowed.
What may be the objects of pledge?
Movables within the commerce of man.
Delivery may be the actual thing or a title (certificates of deposit,
stocks).
Must be indorsed. Shares of stock not negotiable so no indorsement is
required, however, for safety reasons, the same may be required.
Article 2094. All movables which are within commerce may be
pledged, provided they are susceptible of possession.
Obj of pledge
only personal prop->not all but w/in the commerce of man
and susceptible of possession
cannot be engaged or made a lein on realty
no double pledge:a prop already pledged cannot be
pledged again
Article 2095. Incorporeal rights, evidenced by negotiable
instruments, bills of lading, shares of stock, bonds, warehouse
receipts and similar documents may also be pledged. The
instrument proving the right pledged shall be delivered to the
creditor, and if negotiable, must be indorsed.

Pledged of incorporeal rights evidenced by prop docu may be

pledged
like promissory notes
required that the actual instru be delivered to the pledgee
if nego must be indorsed
Article 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.
Pledge must be emobied in a public instru to affect third
persons
In public instru:description of the thing pledged; and
statement of date when the pledge was executed
Innocent third person who may have transacted w. pledger
involving the thing may validly claim a better right than
the pledgee even if the latter has already taken
possession.
Y may requirement-forestall fraud, bec. A debtor may
attempt to conceal his prop from his creditors when he
sees it in danger of execution.
If undated instru->cannot ripen into a valid pledge
Article 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 pledgee consents to
the alienation, but the latter shall continue in possession.
May a pledger alienate the thing pledged while the pledge is
subsisting
Does not transfer his ownership
Reckoning time as to when ownership is transferred to
vendee->as soon as the pledgee has given his consent
pledgor pledges property to pledgee to secure a loan. Pledge is in a
public instrument. Pledgor sell
property to third person/s without notice to pledgee sale is valid but
transfer of ownership is
suspended until pledgee consents.
Why would the pledgee want to be informed administrative
purposes; who gets property when
obligation is paid.
Article 2098. 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.
Article 2099. 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, in conformity with the
provisions of this Code
Duty of pledgee to take care of the thing pledged
If deteriorated, pledgee is responsible
Gr: Fortuitous events
o
Xpn:delay, contrary agreement, nature of the
oblig requires the assumption of risk and
provided by law
Article 2100. The pledgee cannot deposit the thing pledged
with a third person, unless there is a stipulation authorizing
him to do so. The pledgee is responsible for the acts of his
agents or employees with respect to the thing pledged.
Gr:pledged thing cannot be deposited with a 3rd person
o
Xpn:allowed with the consent of the pledger.
o
Pledgor takes the risk
Responsibility of pledgee for acts of his agents and
employees-pledgee will be liable principle of vicarious
liability
Remedy of pledgor if pledgee deposits it with a third party without
authority?
The pledgor may demand extrajudicial deposit of the thing under 2104
or deposit with a third
person/s in 2106.
If the pledgee deposits the thing with a third person without
authorization, can the pledgor demandresolution of the pledge
agreement?
Yes. Substantial breach under 1191 gives the injured party the right to
resolve the obligation. It can be argued that the principal consideration
was that the custodian be the pledgee; now if the creditor transfers
possession, its a principal breach.
Article 2101. The pledgor has the same responsibility as a bailor in
commodatum in the case under article 1951.
[The pledgor who, knowing the flaws of the thing pledged, does not
advise the pledgee of the same, shall be liable to the latter of the
damages which he may suffer by reason thereof.]
Article 2102. If the pledge earns or produces fruits, income,
dividends, or interests, 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 of the right pledged. In case of a pledge of animals,
their offspring shall pertain to the pledgor or owner of animals
pledged, but shall be subject to the pledge, if there is no
stipulation to the contrary
-

Setting of fruits or interests

o
May be applied to compensate for what the
pledger owes
o
If nothing to offset remainder shall be applied
to the payment of the principal oblig
Rule on extent or scope of pledge
o
Gr:extends to the interests and earnings of the
thing or right

Xpn:contrary stipulation
o
Pledged animanls.GrLbelong to the pledger or
owner bec. Young of animals are considered
natural fruits.xpn: parties may stipulation
Future advancements may be secured by pledge
The creditor who receives the fruits should apply them to whatever
amount is owing (obligations due and payable), if not due, the fruits
just form part of the pledge.
If the period is for the benefit of the pledgee, even if the obligation is
not due, he may compensate against the interest or the principal, as
the case may be.
Article 2103. Unless the thing pledged is expropriated, the
debtor continues to be the owner thereof.
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.
Expropriation-since pledger ceases to be the owner, pledge
is terminated
Legal subrogation-pledgee under oblig to file necessary
actions against certain persons who claim rights on the
prop.
Article 2104. The creditor cannot use the thing pledged,
without the authority of the owner, and if
he should do so, or should misuse the thing in any other way,
the owner may ask that it be judicially or extrajudicially
deposited.
When the preservation of the thing pledged requires its use, it
must be used by the creditor but only
for that purpose
Oblig not to use or misuse the thing
o
Y not allowed the owner may demand the
deposit of the thing judicially or
extrajud.Pledgee liable for the damage or
injury caused
o
Xpns

Pledger given him authority

Use of the thing is necessary for its

preservation
Article 2105. 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
-

Return of the pledge when demandable

Cannot be returned to the pledger against the will of the
pledgee
o
Unless there is full payment of the oblig
o
Corresponding interest
o
Expenses incurred by the pledgee occasional
by the pledge
Pledger allowed to seek the return of the thing if its is in
danger of destruction or impairment provided he offers an
acceptable substitute for it
Article 2106. If through the negligence or willful act of the
pledgee, the thing pledged is in danger of being lost or
impaired, the pledgor may require that it be deposited with a
third person.
Pledged thing is in danger of being lost or impaired
May demand that it be judicially or extrajudicial
o
Use of the thing w/o permission by the pledgee
o
The pledgee is misuing the thing
Deposit of the thing pledged w/ a 3rd person but grounded
on
o
Negligence
o
Willful act of the pledgee which act will
imminently bring about the loss or impairment
of the thing pledged.
Though the pledgor cannot demand return of the thing
unless the obligation is fulfilled, if the thing pledged is in
danger of being lost or impaired through the pledgees

willful act or negligence, he may require its deposit with a

third person
Article 2107. If there are reasonable grounds to fear the
destruction or impairment of the thing pledged, without the
fault of the pledgee, the pledgor may demand the return of the
thing, upon offering another thing in pledge, provided the latter
is of the same kind as the former and not of inferior quality,
and without prejudice to the right of the pledgee under the
provisions of the following article. The pledgee is bound to
advise the pledgor, without delay, of any danger to the thing
pledged.
Right of pledger to demand return of the thing pledged
GR: Cannot demand the return of the thing unless full
satisfaction of debt
o
Reasonable grounds to fear that thing pledged
would be destroyed or impaired(w/o fault on
part of the pledgee)

Provided pledogr offers another

thing as substitute which is of the
same kind and not of inferior
quality
Article 2108. If, without the fault of the pledgee, there is
danger of destruction, impairment, or diminution in value of
the thing pledged, he may cause the same to be sold at a public
sale. The proceeds of the auction shall be a security for the
principal obligation in the same manner as the thing originally
pledged.
Auction Sale where obligation is not due yet
o
If may danger that the thing pledged would be
destroyed, impaired or its value diminished
o
Pledgee, who is not at fault, is grantedthe right
to sell the thing at a public sale
o
If pledger, would like to substitute the thing
pledged w/ another acceptable thing, the thing
pledged w/ another acceptable thing the
pledgee right to sell is given PREFERENCE
Proceeds of Sale, Status
o
Pertain to the pledger y?has not incurred
default on the payment of his oblig
o
Proceeds shall be held by pledgee as security
for the principal oblig
Despite the pledgors right above, in the same situation,
the pledgee may opt to sell the thing and keep the
proceeds; the pledgees right takes precedence over the
pledgors. In this case, the proceeds of the sale shall be
security for the debt.
In 2108, upon due date, if the cash value is less than the
principal obligation, the creditor can still recover the
balance from the debtor, unlike in foreclosure. this looks
important.
The pledgor can question the sale, alleging that he could
have obtained a better price.
Article 2109. If the creditor is deceived on the substance or
quality of the thing pledged, he may either claim another thing
in its stead, or demand immediate payment of the principal
obligation.
Deception or misrepresentation on the substance and
quality of the thing pledged
Pledgee remedies
o
Demand from the pledger an acceptable
substitute of the thing
o
Demand the immediate payment of the
principal oblig
Remedies are alternative not cumulative
This is an instance where the debtor loses the benefit of
the period: If the debtor dupes the creditor as to the
quality of the thing, the creditor may demand immediate
payment or delivery of another security
Article 2110. If the thing pledged is returned by the pledgee 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 owner, there is a prima facie
presumption that the same has been returned by the pledgee.
This same presumption exists if the thing pledged is in the
possession of a third person who has received it from the
pledgor or owner after the constitution of the pledge.
Return of the thing pledged to pledger by pledgee
o
Extinguished-returned and EVEN if the parties
have voluntarily agteed that the pledge shall
continue despite the return of the thing
Presumption(prima facie) when thing is found in the
possession of the pledgor
o
Thing is found in the possession of the pledger
after the pledge had been perfected
o
Third person received it from the pledger after
the perfection of the pledge

Presumed that the accessory oblig of pledge has been

remitted
Note what is presumed remitted is the pledge and not the
principal oblig
If after the perfection of the pledge, the property is in the
possession of the pledgor, as owner, the presumption is
that it was returned and extinction of the pledge, UNLESS
the owner holds it as agent of the pledgee.
Article 2111. A statement in writing by the pledgee that he
renounces or abandons the pledge is sufficient to extinguish
the pledge. For this purpose, neither the acceptance by the
pledgor or owner, nor the return of the thing pledged is
necessary, the pledgee becoming a depositary.
Req of renunciation or abandonment
o
In writing in order to effectuate the extinction
of the pledge
o
Oral waiver or renunciation is not valid
Acceptance by the pledger necessary?
o
No. this is not a case of donation where
acceptance is mandatory to make the donation
valid
If thing NOT RETURNED, there is extinction of the pledge?
o
No.even if the thing was not returned, as long
as there is an effective renunciation,
abandonment or waiver->pledge extinguished
o
Pledgee considered a mere depositary
Other grounds for extinguishment of a pledge-1231
Article 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.
Right of pledgee when debt had not been satisfied in due
time
o
Pledgee right to proceed w/ the sale of the
thing at a public auction to raise the funds for
payment of the oblig
Procedure of public sale
o
Oblig due and unpaid
o
Sale must be at public auction
o
Notice to the pledger and owner stating the
amount for which the sale is to be held
o
Sale conducted by notary public
Pactum Commissorium when allowed
o
If first auction, thing is not sold->second
auction->no sale effected pledgee is now
allowed to appropriate the thing pledged

Ipso jure transfer the ownership of

the thing to the pledgee
Acquittance-pledgee after appropriating the thing shall
execute a deed of acquittance in favor of the pledger
Excess or Surplus-pledgor is not entitled to the said ecvess
unless a contrary agreement in the contract of pledge
o
Deficiency-debtor is not liable for payment.
Even if there is a stipulation to that effect
o
Stip will be void similar as Recto law
o
May recover deficiency-if creditor sude the
pledger in an ordinary action, pledgee may
recover the deficiency from the debtor
How is the public sale conducted?
Default rule: Proceed before a Notary Public and ask him
to conduct a notarial sale. The notarysupervises the sale of
the pledged property, drafts the rules and notifies the
debtor and the owner.
Is there a period required for notification?
No particular period is required by law. Notice can be given
right before close of office the day preceding the sale.
Before that date, debtor already defaulted; he should have
known a notarial sale was forthcoming.
The reason, according to JPSP, is, if there were a period,
the pledgor would be able to litigate and obtain an
injunction.
Can it be a private sale?
Ex: stocks pledged, listed on the PSE and just coursed
through a broker. Yes there is no express
prohibition. But see the de Leon book under Article 2112.
Exception to pactum commissorium if the thing is not
sold after two sales, the creditor may appropriate the thing
and it shall be considered as full payment for the entire
obligation

Article 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.
The pledgee may also bid, but his offer shall not be valid if he is
the only bidder.
Who can bid?public, pledger and pledgee
Pldegee bids w/o any competition->sale is void
Pledgor bids->preferred if he offers the same terms which
he may have some attachment or sentimental value
The pledgor is allowed to bid and all things being equal, his
bid shall be preferred over that of others.
The law wants to conserve the property in the owner.
The pledgee may also bid, but his offer shall not be valid if
he is the only bidder because the law
seeks to prevent fraud. Fraud is possible if the parties had
stipulated that the debtor shall be allowed
to the excess and the creditor, who is bidding alone, bids
low.
Article 2114. All bids at the public auction shall offer to pay the
purchase price at once. If any other
bid is accepted, the pledgee is deemed to have been received
the purchase price, as far as the
pledgor or owner is concerned.
All bid offers must be in cash. Y not checks-> produce
effect of payment only after they have been ENCASHED
Pledgee can waive cash requirement, but that is his
lookout.
Article 2115. The sale of the thing pledged shall extinguish the
principal obligation, whether or not
the proceeds of the sale are equal to the amount of the
principal obligation, interest and expenses
in a proper case.
If the price of the sale is more than said amount, the debtor
shall not be entitled to the excess,
unless it is otherwise agreed. If the price of the sale is less,
neither shall the creditor be entitled to
recover the deficiency, notwithstanding any stipulation to the
contrary.
Effect of sale of thing pledged
Qextinguishes the PO->automatic regardless whether the
proceeds realized from the public auction sale are more or
less than the amounts of the PO and other incidental
expenses
Excess goes to pledgee
o
To compensate him for eventuality where the
purchase price is lesser than the amount of the
debt
o
He cannot receive any deficiency unless there
is a contrary agreement
Pledgee cannot recover deficiency under the article; It
conflicts w/ chattel mortgage law
o
Recto law-not liable sa deficiency any
stipulation will be void
o
Art 2115 does not apply to chattel mortgage>allows to recover the deficiency

XPN:foreclosure of a chattel
mortgage which was constituted to
secure a sale of personalty payable
in installments does not allow
recovery of deficiency
The obligation is extinguished when the pledge is sold
regardless of whether the proceeds are less or
more than the amount of the obligation. Unlike in a
mortgage, there can be recovery of deficiency.
IN PLEDGE, YOU CAN STIPULATE THAT THE DEBTOR WILL
BE ENTITLED TO THE EXCESS
BUT YOU CANT STIPULATE THAT THE CREDITOR WILL BE
ALLOWED TO RECOVER
DEFICIENCY.
PROBLEM: IN THE PLEDGE AGREEMENT, THE PARTIES
STIPULATED THAT, IN CASE OF NOTARIAL
SALE, THE PLEDGOR SHALL BE ENTITLED TO THE EXCESS
AND THE PLEDGEE SHALL BE ENTITLED TO RECOVER THE
DEFICIENCY. ARE THE STIPULATIONS VALID?
The stipulation that the debtor shall be entitled to the
excess is valid. The stipulation giving the
creditor the right to recover the deficiency is void. See
Article 2115.
HOW DO YOU GUARD AGAINST THE SITUATION OF NOT
BEING ABLE TO RECOVER THE DEFICIENCY
IF YOU ARE THE PLEDGEE?
Set a minimum bid (if this is actually allowed; JPSP says
yes, book says no)
OR
Instead of selling the thing, just sue for the entire
obligation.

Article 2116. After the public auction, the pledgee shall

promptly advise the pledgor or owner of the
result thereof.
Duty of pledgee-advise the pledger of the thing pledged
about the result of the auction sale. This is to give him a
last chance to protect himself there is any irregularity
This is to allow the debtor to take reasonable steps if he
suspects that the sale was not honest.
Article 2117. Any third person who has any right in or to the
thing pledged may satisfy the principal
obligation as soon as the latter becomes due and demandable.
May a 3rd person pay the pledgors debt?
o
Yes. Interest in the fulfillment of the PO. Ex 3rd
person become a done of the thing pledged
o
Interest required-creditor not bound to accept
payment of 3rd person WHO HAS NO INTEREST
unless there is a stipulation
o
If paid w/ knowledge to the debtor-may
demand payment
o
w/o or against the will-can only recover the
payment has been beneficial to the debtor
o
Third party can be a buyer of the thing or
someone with a junior lien.
o
Why would a third person with a junior lien
want to pay the obligation? The property may
be more valuable than the obligation and he
may want his lien to become senior.
Article 2118. If a credit which 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.
-

Rule when what has been pldeged is a CREDIT

o
Pledgee Is granted the prerogative to collect
the credit when it becomed DUE, and before it
is redeemed by the pledger
o
Under this article, the thing pledged is a credit
which has become due. The creditor can thus
collect the amount due and compensate,
DELIVERING THE SURPLUS TO THE DEBTOR.
o
The pledgee has the duty to collect any due
credits, in line with the ordinary diligence
required of him.
Article 2119. If two or more things are pledged, the pledgee
may choose which he will cause to be
sold, unless there is a stipulation to the contrary.
He may demand the sale of only as many of the things as are
necessary for the payment of the debt.
When 2 or more things are pledged
o
Value of the thing ppledge are worth more
than the amount of the oblig-pledgee option to
choose which one should bo sold

Unless by agreement
o
Legal pledgee-before he could sell must first
make a demand and comply q/ art 2112
o
Restriction: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
o
Pledgor can restrict only if there are two
pledges securing the obligation.
Article 2120. If a third party secures an obligation by pledging
his own movable property under the
provisions of article 2085 he shall have the same rights as a
guarantor under articles 2066 to
2070, and articles 2077 to 2081. He is not prejudiced by any
waiver of defense by the principal obligor.
3rd party pledger rights- has the right enjoyed by a
guarantor
Waiver of defense by debtor
o
Waived which will bar payment of oblig like
rescission CANNOT prejudice 3rd party pledger.
This is to avoid fraud or injustice to the latter

The third party pledgor is entitled to:

1. Indemnity;
2. Subrogation;
3. Pledgor is released if creditor accepts property in
payment of debt;
4. Release in favor of one pledgor benefits all;
5. Extension granted to debtor extinguishes pledge;
6. Pledgors are released from obligation if by some act of
the creditor, there can be no
subrogation;
7. Pledgor may set up defenses inherent in the debt.
Article 2121. Pledges created by operation of law, such as
those referred to in articles 546, 1731,
and 1994, are governed by the foregoing articles on the
possession, care and sale of the thing as
well as on the termination of the pledge. However, after
payment of the debt and expenses, the
remainder of the price of the sale shall be delivered to the
obligor.
Legal pledge where there is a right of retention
o
Possession
o
Care
o
Sale
o
Termination
XPN:excess or surplus after the payment of the debt and
allowable expenses the same shall be delivered to the
pledger
Voluntary pledge=pledger as a rule is not entitled to the
excess
o
Contrary agreement
Article 2122. A thing under a pledge by operation of law may be
sold only after demand of the
amount for which the thing is retained.
The public auction shall take place within one month after such
demand. If, without just grounds,
the creditor does not cause the public sale to be held within
such period, the debtor may require
the return of the thing.
Demand required first before legal pledge may cause sale
o
Y?kasi in legal pledge has no specific period of
performance or payment.
o
After demand, pledgee must proceed w/ the
sale w/in 30 days.

Otherwise the debtor can require of

him the return of the thing being
retained
o
Ration of article:how the thing pledge should
be disposed
In pledges by operation of law, the remainder of the sale
price shall be delivered to the debtor.
The foregoing articles govern the following pledges by
operation of law; BUT after sale, the excess, if any, is
returned to the pledgor:
Possessor in good faith may retain the thing on which he
spent for necessary expenses until
he is reimbursed.
He who works on a movable may retain the same until
paid for the work.
Depositary may retain thing until paid for the deposit.
Agent may retain objects of agency until reimbursed by
principal.
Laborers wages are considered a lien on goods
manufactured or work done.
How about any deficiency? I think creditor will be
entitled to recover because here, he did not
accept the pledge voluntarily and the reason for prohibiting
recovery is absent (the reason being that
creditors should know not to lend more than what can be
secured
Article 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-pd 114

Civil code applies subsidiariliy