final handouts

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CREDIT TRANSACTIONS || PLEDGE Lomuntad, Magpantay, Roque, Sarte

PLEDGE AND MORTGAGEGENERAL CONCEPTS

Article 2085. The following requisites are essential to the contracts of pledge and mortgage:

(1)That they be constituted to secure the fulfilment 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.

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.A pledge and mortgage are security transactions constituted to secure the fulfilment of a principal obligation. Unlike a guaranty and surety, a pledge and mortgage are real security transactions; the essence of a pledge or mortgage is that, when the principal obligation becomes due, the property pledged or mortgaged (the collateral) may be alienated for purposes of payment to the creditor of the principal obligation.

It is for this reason that it is essential that the pledgor or mortgagor be the absolute owner of the collateral, and that it have the free disposal of the property, or, in the absence of the right of free disposition, that it be legally authorized to constitute the pledge or mortgage; otherwise the mortgage or pledge is void.

As it is an essential requisite for the validity of a pledge or mortgage that the pledgor or mortgagor be the absolute owner of the collateral, a pledge or mortgage is void and ineffective if it were constituted over future property. The pledgor or mortgagor, not being the owner of the property, could not, for that reason, encumber the same.

Vda. De Bautista vs. Marcos, 3 SCRA 434

Facts: Defendant Marcos obtained a loan in the amount of P2,000 from plaintiff Vda. de Bautista and to secure payment thereof, conveyed to the latter by way of mortgage of an unregistered parcel of land in Tarlac.

Subsequently Marcos filed in behalf of the heirs of her deceased mother Victoriana Cainglet (who are Marcos herself and her three sisters), an application for the issuance of a free patent over the land in question, on the strength of the cultivation and occupation of said land by them and their predecessor since July, 1915 and as a result it was registered in their names. Since Marcos' debt of P2,000 to plaintiff remained unpaid, the latter filed the present action against Marcos and her husband for the payment thereof, or in default of the debtors to pay, for the foreclosure of her mortgage on the land given as security. Defendants moved to dismiss the action, pointing out that the land is covered by a free patent and could not, be taken within five years from the issuance of the patent for the payment of any debts of the patentees contracted prior to the expiration of said five-year period and alleging as well that the real contract between the parties was an antichresis and not a mortgage.

Issue: Whether there was a mortgage and if there was, can the land in question be used as security for that mortgage?

Held: No. It is an essential requisite for the validity of a mortgage that the mortgagor be the absolute owner of the thing mortgaged. The mortgage here in question is void and ineffective because at the time it was constituted, the mortgagor was not yet the owner of the land mortgaged and could not, for that reason, encumber the same to the plaintiff. Nor could the subsequent acquisition by the respondent of title over said land through the issuance of a free patent validate and legalize the deed of mortgage under the doctrine of estoppel since upon the issuance of said patient, the land in question was thereby brought under the operation of the Public Land Law that prohibits the taking of said land for the satisfaction of debts contracted prior to the expiration of five years from the date of the issuance of the patent). This prohibition should include not only debts contracted during the five-year period immediately preceding the issuance of the patent but also those contracted before such issuance, if the purpose and policy of the law, which is "to preserve and keep in the family of the homesteader that portion of public land which the State has gratuitously given to him, is to be upheld.Although the principal debtor may be the pledgor or mortgagor, the law allows third persons, which are not parties to the principal obligation, to secure the by pledging or mortgaging their own property.In either case, in a contract of pledge or mortgage, the pledgor or mortgagor remains to be the owner of the

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collateral. Although a pledge or mortgage is regarded as lien, or legal right or interest that a creditor has in another’s property, it passes no title to creditor. And although the collateral may be delivered to the creditor, the delivery is only to secure the fulfilment of the principal obligation and does not empower the creditor to convey the collateral in favour of another person. The right to dispose is an attribute of ownership, and includes the right to donate, sell, pledge or mortgage. Thus the creditor, not being the owner of the collateral cannot dispose of the whole or part of the collateral.

Heirs of Manlapat vs. Court of Appeals, G.R. No. 125585 June 8, 2005

Facts:“In a contract of mortgage, the mortgagor remains to be the owner of the property although the property is subjected to a lien. A mortgage is regarded as nothing more than a mere lien, encumbrance, or security for a debt, and passes no title or estate to the mortgagee and gives him no right or claim to the possession of the property. In this kind of contract, the property mortgaged is merely delivered to the mortgagee to secure the fulfilment of the principal obligation. Such delivery does not empower the mortgagee to convey any portion thereof in favor of another person as the right to dispose is an attribute of ownership. The right to dispose includes the right to donate, to sell, to pledge or mortgage. Thus, the mortgagee, not being the owner of the property, cannot dispose of the whole or part thereof nor cause the impairment of the security in any manner without violating the foregoing rule. The mortgagee only owns the mortgage credit, not the property itself.”

OBLIGATIONS SECUREDArticle 2086. The provisions of article 2052 are applicable to a pledge or mortgage.

Article 2052. A guaranty cannot exist without a valid obligation.Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or an unenforceable contract. It may also guarantee a natural obligation.

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.

Like a guaranty and suretyship, a pledge and mortgage are accessory obligations. Consequently, their validity is dependent on the existence of a valid principal obligation, whether the latter is voidable, unenforceable, natural , pure or conditional.

As accessory contracts, the consideration of a pledge or mortgage is the very consideration of the principal contract, from which they receive their life, and without which they cannot exist as independent contracts.

China Banking Corp vs. Lichauco, 46 Phil 460“As a mortgage is an accessory contract, its consideration is the very consideration of the principal contract, from which it receives its life, and without which it cannot exist as an independent contract, although, as in the instant case, it may secure an obligation incurred by another (Art. 1857 of the Old Civil Code, Art. 2085 in New Civil Code) “

CONTRACT TO PLEDGE OR TO MORTGAGE

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.

A contract to pledge or to mortgage, or a promise to constitute a pledge or mortgage, is a valid consensual contract

REMEDIES OF PLEDGEE AND MORTGAGEE

A foreclosure is a legal proceeding to terminate a pledgor’s or mortgagor’s interest in the collateral. The creditor institutes the foreclosure, either to gain title, or to force a sale, in order to satisfy the unpaid obligation secured by the collateral. Generally, the terms of the contract and a statute may authorize a power of sale foreclosure, or the sale of the collateral at a non-judicial public sale by a public official, the creditor, or a trustee. If the principal obligation becomes due and the debtor defaults, the pledge or mortgagee may elect to foreclose the pledge or mortgage, in accordance with its terms, or, elect to waive the security and bring, instead, an ordinary action for specific performance to recover the indebtedness. A favourable judgment in an action for specific performance results in the right to execute the judgment on all the properties of the debtor, including the subject matter of the pledge or mortgage. But if the remedy elected fails, the remedy waived can no longer be pursued. A pledgee or mortgagee may pursue either of the two remedies, but not both. By such election, the cause of action is not impaired, for each of the two remedies is

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complete in itself, and any advantages attendant to the pursuit of one or the other remedy are purely accidental and are all under the right of election. The remedies available to a pledge or mortgagee are thus alternative and not cumulative, and the election of one remedy operates as a waiver of the other. Bachrach Motor vs. Icarangal, 68 Phil 287

Facts: Defendant Icarañgal, with Figueroa, received, executed in favor of the plaintiff, Bachrach Motor , a promissory note for P1,614, and in security for its payment, Icarañgal executed a real estate mortgage on a parcel of land in Laguna, which was duly registered on August 5, 1931, in the registry of deeds of the Province of Laguna. Thereafter, promissors defaulted in the payment of the agreed monthly installments; wherefore, plaintiff instituted in the Court of First Instance of Manila an action for the collection of the amount due on the note. Judgment was there rendered for the plaintiff. A writ of execution was issued and, in pursuance thereof, the sheriff of Laguna, at the indication of the plaintiff, levied on the properties of the defendants, including that which has been mortgaged by Icarañgal in favor of the plaintiff. The other defendant herein, Oriental Commercial, interposed a third-party claim, alleging that by virtue of a writ of execution issued in another case by the municipal court of the City of Manila, the property which was the subject of the mortgage and which has been levied upon by the sheriff, had already been acquired by it at the public auction. By reason of this third-party claim, the sheriff desisted from the sale of the property and, in consequence thereof, the judgment rendered in favor of the plaintiff remained unsatisfied. Whereupon, plaintiff instituted an action to foreclose the mortgage but the trial court dismissed the complaint and, from the judgment thus rendered plaintiff took the present appeal.

Issue: Whether plaintiff is barred from foreclosing the real estate mortgage after it has elected to sue and obtain a personal judgment against the defendant?

Held: Yes. A mortgage creditor may institute against the mortgage debtor either a personal action for debt or real action to foreclose the mortgage. In other words, he may pursue either of the two remedies, but not both. By such election, his cause of action can by no means be impaired, for each of the two remedies is complete in itself. Thus, an election to bring personal action will leave open to him all the properties of the debtor for attachment and execution, even including the mortgaged property itself. And, if he waives such personal action and pursues his remedy against the mortgaged property, an unsatisfied judgment thereon would still give him the right to sue for a deficiency judgment, in which case, all the properties of the defendant, other than the mortgaged property, are again open to him for the satisfaction of the deficiency. In

either case, his remedy is complete, his cause of action undiminished, and any advantages attendant to the pursuit of one or the other remedy are purely accidental and are all under his right of election. On the other hand, a rule that would authorize the plaintiff to bring a personal action against the debtor and simultaneously or successively another action against the mortgaged property, would result not only in multiplicity of suits so offensive to justice and obnoxious to law and equity, but also in subjecting the defendant to the vexation of being sued in the place of his residence of the plaintiff, and then again in the place where the property lies. The creditor's cause of action is not only single but indivisible, although the agreements of the parties, evidenced by the note and the deed of mortgage, may give rise to different remedies. The cause of action should not be confused with the remedy created for its enforcement. And considering, as we have shown, that one of the two remedies available to the creditor is as complete as the other, he cannot be allowed to pursue both in violation of those principles of procedure intended to secure simple, speedy and unexpensive administration of justice.

Bank of America, NT & Sa vs. American Realty Corporation and CA, 321 SCRA 659

Facts:Petitioner granted loans to 3 foreign corporations. As security, the latter mortgaged a property located in the Philippines owned by respondent. Respondent is a third party mortgagor who pledged its own property in favor of the 3 debtor-foreign corporations.The debtors failed to pay. Thus, petitioner filed collection suits in foreign courts to enforce the loan. Subsequently, it filed a petition in the Sheriff to extra-judicially foreclose the said mortgage, which was granted.On 12 February 1993, private respondent filed before the Pasig RTC, Branch 159, an action for damages against the petitioner, for the latter’s act of foreclosing extra-judicially the real estate mortgages despite the pendency of civil suits before foreign courts for the collection of the principal loan.

Issue: Whether petitioner’s act of filing a collection suit against the principal debtors for the recovery of the loan before foreign courts constituted a waiver of the remedy of foreclosure?

Held: Yes. In the absence of express statutory provisions, a mortgage creditor may institute against the mortgage debtor either a personal action or debt or a real action to foreclose the mortgage. In other words, he may pursue either of the two remedies, but not both. By such election, his cause of action can by no means be impaired, for each of the two remedies is complete in itself.

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In our jurisdiction, the remedies available to the mortgage creditor are deemed alternative and not cumulative. Notably, an election of one remedy operates as a waiver of the other. For this purpose, a remedy is deemed chosen upon the filing of the suit for collection or upon the filing of the complaint in an action for foreclosure of mortgage. As to extrajudicial foreclosure, such remedy is deemed elected by the mortgage creditor upon filing of the petition not with any court of justice but with the Office of the Sheriff of the province where the sale is to be made.

In the case at bar, petitioner only has one cause of action which is non-payment of the debt. Nevertheless, alternative remedies are available for its enjoyment and exercise. Petitioner then may opt to exercise only one of two remedies so as not to violate the rule against splitting a cause of action.

Accordingly, applying the foregoing rules, we hold that petitioner, by the expediency of filing four civil suits before foreign courts, necessarily abandoned the remedy to foreclose the real estate mortgages constituted over the properties of third-party mortgagor and herein private respondent ARC. Moreover, by filing the four civil actions and by eventually foreclosing extra-judicially the mortgages, petitioner in effect transgressed the rules against splitting a cause of action well-enshrined in jurisprudence and our statute books.

INDIVISIBILITY OF A PLEDGE OR MORTGAGE

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 debtor's heir who has paid a part of the debt cannot ask for the proportionate extinguishment of the pledge or mortgage as long as the debt is not completely satisfied.Neither can the creditor's heir who received his share of the debt return the pledge or cancel the mortgage, to the prejudice of the other heirs who have not 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 the credit.

The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as the portion of the debt for which each thing is specially answerable is satisfied.

Article 2090. The indivisibility of a pledge or mortgage is not affected by the fact that the debtors are not solidarily liable.

Inidivisibility of a pledge or mortgage is understood in the sense that each parcel of the collateral answers for the totality of the debt. It proscribes the foreclosure of only a portion of the collateral or a number of the several properties pledged or mortgaged corresponding to the unpaid portion of the debt where before foreclosure proceedings the debtor partially paid the total outstanding obligation. The debtor cannot ask for the release of any portion of the collateral or of one or some of the several properties pledged or mortgaged unless and until the loan has been fully paid, notwithstanding the fact that there has been a partial fulfilment of the obligation. The debtor who has paid a part of the debt cannot ask for the proportionate extinguishment of the pledge or mortgage as long as the debt is not completely satisfied. The indivisibility of a pledge or mortgage is actually intended for the protection of the pledgee or mortgagee, as it refers to the release of the pledge or mortgage which secures the satisfaction of the indebtedness and naturally presupposes that pledge or mortgage exists. Once the pledge or mortgage is extinguished by a complete foreclosure, the doctrine of indivisibility ceases to apply since, with the full payment of the debt, there is nothing more to secure.

PNB vs. Mallorca, 21 SCRA 694

Facts: Lavilles mortgaged 48,965 square meter-parcel of land to PNB as security for a loan of P1,800. while the mortgage was in full force and effect, and without PNB's knowledge and consent, Lavilles sold to respondent Mallorca 20,000 square meters of the mortgaged land.

Mallorca then asked the court to have the sale duly annotated on the title, and, for the purpose, to require PNB to surrender the owner's copy of the TCT to the Register of Deeds.

The court order then directed PNB to deliver said TCT to the Register of Deeds, and warned that "[t]he mortgage in favor of the Philippine National Bank is duly registered in the Office of the Register of Deeds and to whomsoever the land is sold the vendee will assume the responsibility of complying with the provisions of the mortgage."

The Register of Deeds then cancelled the TCT, and issued a new one making two co-owner's copies of the title — one each for Lavilles and one for Mallorca. PNB's mortgage lien was annotated on both.

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Lavilles failed to pay her mortgage debt. PNB, then foreclosed the mortgage extrajudicially. A certificate of sale was issued to PNB as the highest bidder in the foreclosure sale. This certificate of sale was registered with the Register of Deeds. Mallorca then sued PNB to enforce her right of redemption with damages. Judgment was rendered in the case stated, dismissing the claim for damages but declaring Mallorca "entitled to exercise her right of redemption with respect to the 20,000 square meters sold to her by Lavilles within the period specified by law."

Mallorca's appeal from this judgment wasdenied by the lower court since it was filed out of time. Her move to reconsider was rejected. She then went to the Court of Appeals on mandamus. The appellate court denied the same for lack of merit. Mallorca failed to exercise her right of redemption as decreed by the court.

Thus, the final deed of sale in favor of PNB was presented to the Register of Deeds for registration but the latter refused to register without Mallorca's co-owner's copy of TCT. Thus the Register of Deeds required Mallorca to surrender said copy but she did not comply. Thus, PNB lodged the present petition for consolidation of title in the cadastral court. The bank prayed that Mallorca's co-owner's copy of TCT be declared null and void, and that the Register of Deeds be directed to cancel the same and to issue a new title in the name of PNB, upon payment of the legal fees.

Issue: Whether respondent’s interest in the lot remained unaffected by the foreclosure and subsequent sale to PNB?

Held: No. A mortgage directly and immediately subjects the property upon which it is imposed, whoever the possessor may be, to the fulfilment of the obligation for whose security it was constituted. Sale or transfer cannot affect or release the mortgage. A purchaser is necessarily bound to acknowledge and respect the encumbrance to which is subjected the purchased thing and which is at the disposal of the creditor in order that he, under the terms of the contract, may recover the amount of his credit therefrom. For, a recorded real estate is a right in rem, a lien on the property whoever its owner may be. Because the personality of the owner is disregarded; the mortgage subsists notwithstanding changes of ownership; the last transferee is just as much of a debtor as the first one; and this, independent of whether the transferee knows or not the person of the mortgagee. So it is, that a mortgage lien is inseparable from the property mortgaged. All subsequent purchasers thereof must respect the mortgage, whether the transfer to them is with or without the consent of the mortgagee. For, the mortgage, until discharge, follows the property.

Also against respondent’s cause is one other special feature of a real mortgage, its indivisibility. The Court has understood mortgage indivisibility in the sense that each and every parcel under mortgage answers for the totality of the debt.

It does not really matter that the mortgagee, as in this case, did not oppose the subsequent sale. Naturally, because the sale was without PNB's knowledge. Even if such knowledge is chargeable to PNB, its failure to object to the sale could not have any impairing effect upon its rights as mortgagee. After all, a real mortgage is merely an encumbrance; it does not extinguish the title of the debtor, whose right to dispose — a principal attribute of ownership — is not thereby lost. And, on the assumption that PNB recognized the efficaciousness of the sale by Lavilles of a portion of the mortgaged land to Mallorca, which Lavilles "had the right to make" and which anyway PNB "cannot oppose", PNB cannot be prejudiced thereby, for, at all events, "such sale could not affect the mortgage, as the latter follows the property whoever the possessor may be.

Central Bank of the Philippines vs. CA and Tolentino, 139 SCRA 46

Facts: Island Savings Bank, upon favorable recommendation of its legal department, approved the loan application for P80,000 of Tolentino, who, as a security for the loan, executed on the same day a real estate mortgage over his 100-hectare land. The loan called for a lump sum of P80,000, repayable in semi-annual installments for 3 yrs, with 12% annual interest. After the agreement, a mere P17K partial release of the loan was made by the bank and Tolentino and his wife signed a promissory note for the P17,000 at 12% annual interest payable w/in 3 yrs. An advance interest was deducted from the partial release but this prededucted interest was refunded to Tolentino after being informed that there was no fund yet for the release of the P63K balance.

Monetary Board of Central Bank, after finding that bank was suffering liquidity problems, prohibited the bank from making new loans and investments. And after the bank failed to restore its solvency, the Central Bank prohibited Island Savings Bank from doing business in the Philippines. Island Savings Bank in view of the non-payment of the P17K filed an application for foreclosure of the real estate mortgage. Tolentino filed petition for specific performance or rescission and damages with preliminary injunction, alleging that since the bank failed to deliver P63K, he is entitled to specific performance and if not, to rescind the real estate mortgage.

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Issue: Whether petitioner can foreclose the mortgage?

Held: No. Since Island Savings Bank failed to furnish the P63,000 balance of the P80,000 loan, the real estate mortgage of Sulpicio M. Tolentino became unenforceable to such extent. P63,000 is 78.75% of P80,000, hence the real estate mortgage covering 100 hectares is unenforceable to the extent of 78.75 hectares. The mortgage covering the remainder of 21.25 hectares subsists as a security for the P17,000 debt. 21.25 hectares is more than sufficient to secure a P17,000 debt.

The rule of indivisibility of a real estate mortgage provided for by Article 2089 of the Civil Code is inapplicable to the facts of this case.

The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted presupposes several heirs of the debtor or creditor which does not obtain in this case. Hence, the rule of indivisibility of a mortgage cannot apply.

PACTUM COMMISSORIUMArticle 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.

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.

Elements The essence of a pledge or mortgage is that, when the principal obligation becomes due, the collateral may be alienated for purposes of payment to the creditor. However, the law requires resort to a legal proceeding to terminate a pledgor’s or mortgagor’s ownership to the collateral. A stipulation that allows the creditor to appropriate the collateral, or dispose of it, in contravention of the provisions on foreclosure, is considered a pactum commissorium and is null and void. To determine the existence of a pactum commissorium it is first necessary to determine the existence of a pledge or mortgage. If the essential requisites that define the contract as pledge or mortgage are lacking, then there is no pledge and mortgage and, consequently, there is no pactum commissorium. Thus the elements of a pactum commissorium are: 1. Property pledged or mortgaged by way of security for payment of the principal obligation and

2. Stipulation for automatic appropriation by the creditor of the collateral in case off non-payment of the principal obligation within the stipulated period. The creditor cannot appropriate the collateral, even if it is especially stipulated in the contract. While it is true that contracts are binding, provided they contain the conditions essentials to their validity, and have the force of law between the parties, it is likewise evident that this precept is subordinate to the provision which prohibits agreements contrary to law, morals, or public order. One of these prohibited agreements is a stipulation that the creditor may appropriate the collateral as if it had been sold to him, merely because the period for the payment of the obligation had lapsed. When an obligation secured by a pledge or mortgage becomes due, the creditor is entitled to foreclose, but he is not authorized to appropriate the collateral in order to recover the amount due.Nevertheless, a pledgor or mortgagor may validly sell the collateral to the pledge or mortgagee for the amount of the debt, when the latter becomes due, if the parties stipulate upon the sale, or mere promise to sell, if the collateral to the creditor, should the obligation secured by it not be complied with in time, stipulating the conditions of the alienation; but, if instead of agreeing upon the alienation, the agreement merely states that upon non-fulfilment of the obligation secured by the pledge or mortgage, the pledge or mortgagee may, when the debt falls due, sell the collateral, then the provisions of the law for the foreclosure sale must be observed.

EFFECT ON PLEDGE OR MORTGAGEThe nullity of the pactum commissorium does not substantially affect the validity of the contract of pledge or mortgage. The perfected contract of pledge or mortgage subsists although the parties have not agreed on the manner by which the creditor shall recover its credit. In any case, the law has expressly established the procedure in order that the creditor may not be defrauded or deceived in its right to recover the credit from the proceeds of the collateral, in case the debtor does not comply with the principal obligation. There exists no just or legal reason which prevents the creditor from recovering the credit from the proceeds of a foreclosure sale effected in accordance with the law.

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PLEDGE1. MEANING OF PLEDGE

It 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 fulfilment 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. (De Leon, p. 330)

In a case decided by the Supreme Court, Justice Bersamin defined pledge as:

A pledge may be defined as an accessory, real and unilateral contract by virtue of which the debtor or a third person delivers to the creditor or to a third person movable property as security for the performance of the principal obligation, upon the fulfillment of which the thing pledged, with all its accessions and accessories, shall be returned to the debtor or to the third person. (Tambunting Pawnshops, Inc. v. CIR)

2. CHARACTERISTICS/NATURE AS A CONTRACT

a. Real- perfected by delivery;b. Accessory - has no independent existence of

its own;c. Unilateral – it creates an obligation solely on

the part of the creditor because it creates to return the thing subject thereof upon the fulfillment of the principal obligation; and

d. Subsidiary contract- the obligation incurred does not arise until the fulfillment of the principal obligation that is secured.

3. 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), the cause is the compensation stipulated for the pledge or the mere liberality of the pledgor.

4. KINDS OF PLEDGEa. Voluntary or conventional – one which is

created by agreement of the parties; orb. Legal – one which is created by operation of

law (Art 2121)

5. ESSENTIAL REQUISITES FOR PLEDGE

(COMMON PROVISIONS + SPECIAL REQUISITES)

a. They are constituted to secure fulfillment of the principal obligation.

b. The pledgor or mortgagor is the absolute owner of the thing pledge or mortgage.

c. The person constituting the pledge or mortgage have free disposal of the their property and in the absence thereof, that may be legally authorized for the purpose (Art. 2085); and

d. The when the principal obligation becomes due, the things in which the pledge or mortgage consists may be alienated for the payment of the creditor. (Art. 2087)

e. In addition to the common requisites of pledge and mortgage (Art 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. (Art 2093).

a. Real Contracts, such as deposit, pledge, and commodatum, are not perfected until the delivery of the object of the obligation. (Art. 1316)

b. 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. v. Terrell)

U.S. v Terrell

Facts:Howard Terrell, desiring to borrow from Jacinto Lim Jap P1000 wrote a letter to him asking for a loan of that amount for thirty days, and with the letter inclosed the promissory note of the defendant for that sum and also a bill of sale of his law library, carriage and team of horses, and book accounts, stating in the letter that the bill of sale was sent as security for the loan. The law library remained in the possession of the defendant.

Issue: Was the contract of pledge legally consummated?

Held: No the court has held that while the bill of sale

delivered by the defendant to Lim Jap appear on its face to be an absolute sale of the books, etc. the letter of the defendant accompanying it states in effect that it was a

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transfer of the property as security for the loan, or an offer to pledge the property for the payment of the debt.

It has been frequently held that an instrument in the form of a bill of sale may be construed as a pledge.

On the question of pledges, it has been held that a peldgor is still the general owner of the property. Under the civill code (art. 1863) it is necessary, in order to constitute the contract of pledge that the pledge should be placed in possession of the creditor, or of a third person, by common consent. Until the delivery of the thing, the whole rests in an executory contract, and the pledgee acquires no right of property in the thing. The creditor acquires no rights in or to the property until he takes it into his possession, because a pledge is merely a lien, and possession is indispensable to the right of a lien. Jacinto Lim Jap, through his failure or neglect to take his property into his possession, must be presumed to have waived the right given him by the contract to make good his lien, if saw fit to do so.

It follows that the element of possession failing, there can be no pawn or pledge, and that the possession of the defendant, with the consent of Lim Jap, was absolute and unqualified, and not special or subordinate, and that he committed no crawl in selling the property.

The court stated in US v. Apilo that the contract of pledge was not legally consummated because “the objects of which the pledge was to consist were not placed in possession of the creditor, nor of a third person, but remained in the possession of the debtor, who having the free disposition over those objects as if they were his own, committed no infraction of the penal law by transferring them.”

c. Without delivery, there cannot be a pledge. (McMicking v. Martinez)

McMicking v. Martinez (G.R. No. L-5219)

Facts:Pedi Martinez, in 1908 obtained judgment in the CFI against one Maria Aniversario. The execution was issued upon said judgment and the sheriff McMicking levied upon a pailebot named Tomasa. Defendant Go Juna, intervened and claimed a lien upon said boat by virtue of a pledge of the same to him by Aniversario. The pledge was evidenced by a public. Pedro Martinez contends that the pledge had not been made effective by delivery of the property pledged, as required by Article 1863 (now Art. 2093) and therefore there existed no preference in favor of Go Juna.

Issue: Is the contention of Martinez correct?

Held:Yes, the court has held that the conclusion of the CFI that the property was not delivered in accordance with the provisions of Article 1863 (now Art.2093) of the Civil Code is sustained by the proofs. His conclusion that the pledge was ineffective against Martinez is correct.

Additional Requirementse. Necessity of Delivery (Art. 2093)

1. Types of Delivery a. Actual Delivery

i. Delivery referred to in Art 2093 as essential to the validity of a peldge;

ii. Validity of pledge means actual possession of the property;

iii. Mere Symbolic delivery is NOT sufficient.(Case at point: Betita v. Ganzon)

Betita v. Ganzon (G.R. No. L-24137)

Facts:Alejo de la Flor recovered a judgment against Tiburcia Buhayan for the sum of P140 with costs. In lieu of the said judgment, the sheriff, Ganzon, levied execution on the carabaos which were found in the possession of Simon Jacinto but registered in the name of Buhayan. Petitioner Betita presented a third party claim alleging that the carabaos had been mortgaged to him and as evidence thereof presented a document. The sheriff still proceeded with the sale of the animals at a public auction where they were purchased by the defendant Clemente Perdena for the sum of P200.

Issue: was there an effective pledge between Buhayan and Betita?

Held:No, the court has held that the pledge is ineffective because the plaintiff-pledgee never had actual possession of the property within the meaning of Article 2093 of the New Civil Code. At the time of the levy the animals in question were in the possession of one Simon Jacinto. Under the said article it shall be necessary, in order to constitute the contract of pledge, that the pledge be placed in the possession of the creditor or of a third person appointed by common consent. It appears that the carabaos was neither in the possession of the Betita and that there was no agreement between the parties that

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Jacinto would be considered as depositary. It is of course evident that the delivery of possession referred to in article 2093 implies a change in the actual possession of the property pledged and that a mere symbolic delivery is not sufficient. The carabaos remained in the possession of Jacinto and Buhayan thus in reality there was no change in possession.

b. Constructive Deliveryi. Symbolical transfer of goods

by means of the symbolical delivery are sufficient to show that the object pledged was legally placed in the possession of the pledgee when the pledgor could no longer dispose of the same, the pledgee being the only one authorized to do so. (Banco Espanol-Filipino v. Peterson, [1910])

El Banco Espanol-Filipino v. Peterson (G.R. No. 3088)

Facts:Plaintiff alleges in its complaint that under the contract entered into on the 4th of March, 1905, by and between the Spanish-Filipino Bank and Francisco Reyes, the former, loaned to the latter total sum of P226,117.38, Philippine currency;That to secure the payment of these two sums and the interest thereon, the debtor, Francisco Reyes, by a public instrument executed before a notary on the aforesaid date mortgaged in favor of the plaintiff bank several pieces of property belonging to him, and pledged to the said bank part of his personal property, specifying the proportion on which the said real and personal property thus mortgaged and pledged in favor of the plaintiff corporation would be respectively liable for the payment of the debt;

That the property pledged by the debtor to the bank included a stock or merchandise, consisting of wines, liquors, canned goods, and other similar articles valued at P90,591.75, then stored in the warehouses of the debtor, Reyes, No. 12 Plaza Moraga, in the city of Manila, which said goods and merchandise were liable for the payment of the said sum of P90,591.75, Philippine currency;

that in the aforesaid deed of pledge it was agreed by and between the bank and the debtor, Reyes, that the goods should be delivered to Ramon Garcia y Planas for safe-keeping, the debtor having actually turned over to the said Garcia y Planas the goods in question by delivering to him the keys of the warehouse in which they were kept;

that in a subsequent contract entered into by and between the debtor, Reyes, and the plaintiff bank, was modified so as to provide that the goods then (September 29) in possession the depositary should only be liable for the sum of P40,000, Philippine currency, Luis M.a Sierra having been subsequently appointed by agreement between the bank and the debtor as depositary of the goods thus pledged in substitution for the said Ramon Garcia y Planas.Issue: Was there a valid transfer of the goods or delivery?Held:Yes, the court has held that the contract in question was a perfect contract of pledge, it having been conclusively shown that the pledgee took charge and possession of the goods pledged through a depository and a special agent appointed by it, each of whom had a duplicate key to the warehouse wherein the said goods were stored, and that the pledgee, itself, received and collected the proceeds of the goods as they were sold.The fact that the said goods continued in the warehouse which was formerly rented by the pledgor, Reyes, does not affect the validity and legality of the pledge, it having been demonstrated that after the pledge had been agreed upon, and after the depository appointed with the common consent of the parties had taken possession of the said property, the owner, the 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 it, the symbolical transfer of the goods by means of the delivery of the keys to the warehouse where the goods were stored being sufficient to show that the depositary appointed by the common consent of the parties was legally placed in possession of the goods.

ii. Whether or not a symbolic or constructive delivery is sufficient to validate a pledge would depend on the peculiar nature of the thing pledged.

1. Where the object were hardly capable of actual, manual delivery in the sense that it was impractical as a whole for the particular transaction and would have been an unreasonable requirement constructive delivery is sufficient. (Yuliongsui v. Phil. National Bank)

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Yuliongsiu v. Philippine National Bank (G.R. No. L-19227)

Facts:Yuliongsiu was the owner of two (2) vessels, namely: The M/S Surigao, valued at P109,925.78 and the M/S Don Dino, valued at P63,000.00, and operated the FS-203, valued at P210,672.24, which was purchased by him from the Philippine Shipping Commission, by installment or on account. Plaintiff had paid to the Philippine Shipping Commission only the sum of P76,500 and the balance of the purchase price was payable at P50,000 a year, due on or before the end of the current year. Yuliongsiu obtained a loan of P50,000 from PNB. To guarantee its payment, plaintiff pledged the M/S Surigao, M/S Don Dino and its equity in the FS-203, as evidenced by the pledge contract , duly registered with the office of the Collector of Customs for the Port of Cebu. Yuliongsiu effected partial payment of the loan in the sum of P20,000. The remaining balance was renewed by the execution of 2 promissory notes in the bank's favor. These two notes were never paid at all by Yuliongsiu on their respective due dates. After judgment of the cases filed, a writ of execution issued to implement the order for indemnification was returned unsatisfied as Yuliongsiu was totally insolvent. Meanwhile, PNB took physical possession of three pledged vessels while they were at the Port of Cebu, and after the first note fell due and was not paid, the Manager of PNB, acting as attorney-in-fact of Yuliongsiu pursuant to the terms of the pledge contract, executed a document of sale, transferring the two pledged vessels and Yuliongsiu's equity in FS-203, to PNB for P30,042.72.The FS-203 was subsequently surrendered by PNB to the Philippine Shipping which rescinded the sale to Yuliongsiu, for failure to pay the remaining installments on the purchase price. The other two boats were sold by PNB to third parties. Yuliongsiu commenced action in the CFI to recover the three vessels or their value and damages from PNB. One of his contentions was that constructive delivery is insufficient to make a pledge, citing the case of Betita v. Ganzon.

Issue: Was there sufficient delivery between the parties?

Held:Yes, the court has held that the type of delivery will depend upon the nature and the peculiar circumstances of each case. The parties here agreed that the vessels be delivered by the "pledgor to the pledgor who shall hold said property subject to the order of the pledgee." Considering the circumstances of this case and the nature of the objects pledged, i.e., vessels used in maritime business, such delivery is sufficient. An examination of the peculiar nature of the things pledged in the two cases will readily dispel the apparent contradiction between the two rulings. In Betita v. Ganzon, the objects pledged — carabaos — were easily capable of actual, manual delivery

unto the pledgee. In Banco Español-Filipino v. Peterson, the objects pledged — goods contained in a warehouse — were hardly capable of actual, manual delivery in the sense that it was impractical as a whole for the particular transaction and would have been an unreasonable requirement.

f. Subject Matter – All movables which are within commerce may be pledged, provided they are susceptible of possession (Art. 2094) and Incorporeal rights, evidenced by documents of title (negotiable instruments, bills of lading, shares of stock, bonds, warehouse receipts and similar documents) in which case, the right pledged shall be delivered to the creditor, and if negotiable, must be indorsed.

i. Confined and limited to personal property and it cannot be extended or made to apply to real property. (Pacific Commercial v. National Bank)

Pacific Commercial Co. v. PNBFacts:the Gulf Plantation Company executed to the Philippine National Bank a contract of pledge in which the Plantation Company is named as the pledgor, and the Philippine National Bank as the pledgee, in which it is recited that the Gulf Plantation Company has obtained certain credits, loans, overdrafts, etc., from the pledgee. In consideration thereof the pledgor hypothecated and pledged to the pledgee and hereby delivered the possession, for the purpose of the pledge, of all the property itemized in schedule A.

Schedule A:Lease No. 63 of 534 hectares of public situated in the municipality of Pantucan, Davao Province, P. I., planted to 236,000 hemp and 700 coconut trees, valued at P430,000.Forty-eight buildings of permanent materials valued at P5,500 situated on above lease. Two buildings of strong materials valued at P15,000.One thousand piculs hemp now in the plantation bodega at Pantucan all belonging to the "Gulf Plantation, Incorporated," valued at P45,000.Twenty three carabaos, 38 bullocks, 18 horses, valued at P6,450.One launch "Peril" valued at P18,000; one auxiliary boat "Manuela," P9,000; one launch "Rigel," P800; one launch "New Kirk," P3,500 and cargo boats, P200.

A part of the contract provides, “xxx the pledgee may dispose of the pledged property in the manner herein provided, or in accordance with the Chattel Mortgage Law, at the option of the pledgee."

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The pledgor appoints the pledgee as attorney-in-fact of the pledgor with full power and authority after any condition of the pledge may have been broken to enter the premises where the pledged property is located, and take possession of it by force, if necessary, and seize and take actual possession of it without an order of the court, and to sell, assign and deliver the property pledged, or any part thereof, at the option of the pledgee. Provision is then made for the application of the proceeds of any sale of the property under the pledge.

Subsequently, an insolvency petition was filed to have the Gulf Plantation Company declared insolvent. PNB filed a petition to make their contract of pledge part of proceeding.

Issue: Are the objects under the contract valid?

Held:No, the court has held that a pledge or chattel mortgage is confined and limited to personal property, and it cannot be extended or made to apply to real property. The property described are lease No. 63 of 534 hectares of public land planted to 236,000 hemp and 700 coconut trees valued at P430,000, and forty-eight buildings of permanent materials valued at P5,500, and two buildings of strong materials valued at P15,000. It may well be doubted whether that kind of property could become the subject matter of a pledge or chattel mortgage.

It will be noted that it is a pledge of a lease of public land which is planted to hemp and coconut trees, and of forty-eight buildings of permanent materials and of two buildings of strong materials, clearly indicating that the buildings were attached to the soil and as such would be real estate.

It will also be noted that the pledge was executed in 1918, and it is very probable that the one thousand piculs of hemp have long since been sold. As to the twenty-three carabaos, thirty-eight bullocks and eighteen horses, there is no provision for the increase. Hence, the pledge, if valid for any purpose, should be confined and limited to the particular property described in the pledge, and would not include any increase.

g. In order that pledge shall take effect against third parties:

i. 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;

ii. The description and date of the thing pledged must be in a public instrument (Art. 2096; Ong v. IAC [1991])

Ong v. IAC (G.R. No. 74073)

Facts:Madrigal Shipping Co., Inc. applied for and was granted a loan by the Consolidated Bank and Trust Corporation (Solidbank for short) in the amount of P2,094,000.00. To secure the fulfillment of the obligations of Madrigal Shipping Co., Inc. to the Solidbank, and credit accommodations which the former may from time to time obtain from the latter both parties executed a Pledge Agreement wherein Madrigal Shipping, Co., Inc. gave additional securities or collaterals in the form of a pledge in favor of the bank, its barge and tugboat. Madrigal Shipping Co., Inc. failed to pay its obligation to the Solidbank. The creditor bank had to sell the pledged properties. Nevertheless, when the pledgee bank was to sell the pledged properties, it found out that the tugboat and the barge had surreptitiously been taken from the Tanque Bodega, Pasig River, Manila, without the knowledge and consent of the Solidbank. Petitioner Honesto Ong, a successful bidder in a public auction by virtue of a writ of execution issued by the National Labor Relations Commission (NLRC), bought one barge which was subject of the pledge. Private respondent (Solidbank) filed a complaint against Honesto Ong, et al. for Replevin with Damages.

Issue: whether or not the contract of pledge entered into by and between Solidbank and Madrigal Shipping Co., Inc. is binding on the petitioners Ong

Held:Yes, the court has held that under Article 2096 of the Civil Code that for a pledge to take effect against third persons, it should be in a public instrument which must contain the description of the thing pledged and the date of the pledge. Petitioner’s contention that the contract of pledge by and between Solidbank and Madrigal Shipping Co., Inc. was not recorded under Sections 804 and 809 of the Tariff and Customs Code and argue that it is not binding on third persons like the petitioners is untenable. Art. 2096 has been interpreted in the sense that for the contract to affect third persons, apart from being in a public instrument, possession of the thing pledged must in addition be delivered to the pledgee. All these requirements have been complied with, in the case at bar. The pledge agreement is a public instrument, the same having been notarized. Subject of the pledge (MSC Barge No. 601) was delivered to the Solidbank which had it moored at Tanque Bodega, Pasig River, Manila, where it was guarded by a security guard. Therefore the Solidbank has the light of retention of the barge in question pledged to it until it is paid. The Civil Code expressly provides;

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Art. 2090. The contract of pledge gives 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.

Applying these concepts in the case at bar, the pledgee is obviously a lawful and rightful possessor of the personal property pledged.

6. FORM OF PLEDGE

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 DOCUMENT (i.e., certified by the notary public).

7. SECURED OBLIGATIONS

Any kind of obligation, whether pure or conditional, may be secured by a contract of pledge. (Art. 2091).

Art. 2086 - The provisions of Article 2052 are applicable to a pledge or mortgage.Art. 2056 – A guaranty cannot exist without a valid obligation. Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or an unenforceable contract. It may also guarantee a natural obligation.

The pledge agreement may stipulate that the pledge will also stand as security for any future advancement or renewals thereof that the pledgor may procure from the pledgee.

Case at point (China Banking Corp v. CA)

China Bank v. CA

Facts:On 21 August 1974, Galiciano Calapatia, a stockholder of private respondent Valley Golf and Country Club, inc. pledge his stock certificate to petitioner China Banking Corporation. On 3 August 1983, Calapatia obtained a loan of P20,000 from petitioner, payment of which was secured by the aforestated pledge agreement still existing between calapatia and petitioner.

Issue: is the agreement between Calapatia and China bank for the second pledge valid?

Held:Yes, the court has held that A careful perusal of the pledge agreement will readily reveal that the

contracting parties explicitly stipulated therein that the said pledge will also stand as security for any future advancements (or renewals thereof) that Calapatia (the pledgor) may procure from petitioner. The contract provides “This pledge is given as security for the prompt payment when due of all loans, overdrafts, promissory notes, drafts, bills or exchange, discounts, and all other obligations of every kind which have heretofore been contracted, or which may hereafter be contracted, xxx”

The validity of the pledge agreement between petitioner and Calapatia cannot thus be held suspect by VGCCI. As candidly explained by petitioner, the promissory note of 3 August 1983 in the amount of P20,000.00 was but a renewal of the first promissory note covered by the same pledge agreement.

8. OBJECT / SUBJECT MATTER OF PLEDGE

A pledge is confined and limited to personal property (Art. 416, 417) and it cannot be extended or made to apply to real property. The movable must be within the commerce of men and susceptible of possession. (Art. 2094)

*Case at Point (Pacific Commercial v. National Bank)

Incorporeal rights evidenced by documents whether negotiable or not may also be pledged. The document must be delivered to the creditor; if negotiable, it must be indorsed in favor of the creditor. (Art. 2095)

Movable PropertyArt. 416. The following things are deemed to be personal property:

(1) Those movables susceptible of appropriation which are not included in the preceding article;(2) Real property which by any special provision of law is considered as personal property;(3) Forces of nature which are brought under control by science; and(4) In general, all things which can be transported from place to place without impairment of the real property to which they are fixed. (335a)

Art. 417. The following are also considered as personal property:

(1) Obligations and actions which have for their object movables or demandable sums; and

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(2) Shares of stock of agricultural, commercial and industrial entities, although they may have real estate.

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.

SALIENT FEATURES OF PRESIDENTIAL DECREE NO. 114 otherwise known as

REGULATING THE ESTABLISHMENT AND OPERATION OF PAWNSHOPS

Background: • Pawnshops provide an additional source of credit

especially for small borrowers left unserved by the banking and other financial institutions in the country;

• There is no specific law in the Philippines that governs pawnshop establishments, particularly providing definite and uniform standards for their operation.

Declaration of Policy:– It is hereby declared the policy of the State to regulate the establishment of pawnshops and to place their operation on a sound and stable basis to derive the optimum advantages from them as an additional source of credit;- to prevent and mitigate, as far as

practicable, practices prejudicial to public interest; and to lay down the minimum requirements and standards under which they may be established and do business. ( Sec. 2)

Definition of Terms:• “Pawnshop” shall refer to a person or entity

engaged in the business of lending money on personal property delivered as security for loans and shall be synonymous, and may be used interchangeably with pawnbroker or pawn brokerage.

• “Pawner” shall refer to the borrower from a pawnshop.

• “Pawnee” shall refer to the pawnshop or pawnbroker.

• “Pawn” is the personal property delivered by the pawner to the pawnee as security for a loan.

• “Pawn ticket” is the pawnbrokers’ receipt for a pawn. It is neither a security nor a printed evidence of indebtedness.

• “Property” shall include only such personal property as may actually be delivered to the control and possession of the pawnshop: Provided, however, That certain specified chattels such as guns, knives and similar weapons whose reception in pawn is expressly prohibited by other laws or regulations shall not be included.

A pawnshop may be established as a single proprietorship, partnership or corporation. (SEC. 4)

Any person or entity desiring to engage in the pawnshop business shall (a) register with the Bureau of Commerce ( Department of Trade and Industries) in the case of single proprietorship or the Securities and Exchange Commission in the case of a corporation or any other association ( partnership) and (b) secure a license from the appropriate city or municipality having territorial jurisdiction over the place of establishment and operation (business permit).

SEC. 6. Requirement of registration with the Central Bank. – Any individual, corporation, or association duly registered and licensed to engage in the pawnshop business shall file an information sheet, under oath, with the Central Bank before commencement of actual operations: Provided, however, That pawnshops duly licensed and operating before the approval of this Decree shall, within six months from the date of effectivity of the same, register with the Central Bank. For this purpose, the Central Bank shall furnish pawnshops, upon request, with necessary copies of the prescribed information sheet.

Requirement of registration with the Central Bank – Any individual, corporation, or association duly registered and licensed to engage in the pawnshop business shall file an information sheet, under oath, with the Central Bank before commencement of actual operations. (Sec. 6)

The minimum paid-in capital of any pawnshop which may be established after the effectivity of this Decree shall be one hundred thousand pesos (P100,000.00):Citizenship requirement. Upon the effectivity of this Decree, only Filipino citizens may establish and own a pawnshop organized in the form of a single proprietorship: Provided, however, That in the case of a partnership, at least seventy per cent (70%) of its capital shall be owned by Filipino citizens: Provided, further That in the case of a corporation, at least seventy per cent (70%) of the voting capital stock shall be owned by citizens of the Philippines, or if there be no capital stock,

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at least seventy per cent (70%) of the members entitled to vote, shall be citizens of the Philippines.

SEC. 9. Amount of loan. Pawnshops may grant such amount of loans as may be agreed upon between the parties: Provided, That the amount of loan shall, in no case, be less than thirty per cent (30%) of the appraised value of the security offered for the loan unless the pawner manifests in writing the desire to borrow a lesser amount.

SEC. 10. Rates of interest. – No pawnshop shall directly or indirectly stipulate, charge, demand, take or receive any higher rate or greater sum or value for any loan or forbearance than the rate allowed by the Usury Law for such transactions. It shall be unlawful for a pawnshop to divide the pawn offered by a pawner in order to collect greater interest and/or to require the pawner to pay an additional charge as insurance premium for the safekeeping and conservation of the article pawned. In addition to interest charges, pawnshops may impose a Maximum service charge of five pesos (P5.00), but in no case to exceed one per cent (1%) of the principal loan.

SEC. 13. Redemption. – The pawner who fails to pay his obligation on the date it falls due may, within ninety days from the date of maturity of the obligation, redeem the pawn by payment of the principal of the debt with interest: Provided, however, That for the purpose of computing interest due after maturity of the obligation, the basis shall be the sum of the principal obligation and interest earned at the time the obligation matured.

SEC. 14. Disposition of pawn on default of pawner. – In the event the pawner fails to redeem the pawn within ninety days from the date of the maturity of the obligation in accordance with the preceding section, the pawnbroker may sell or otherwise dispose of any article taken or received by him in pawn: Provided, however, That the pawner shall be duly notified of such sale on or before the termination of the ninety-day period, the notice particularly stating the date, hour, and place of sale.

SEC. 15. Public auction of pawned articles. No pawnbroker shall sell or otherwise dispose of any article or thing taken or received in pawn or pledge except at (1) public auction in his place of business as such pawnbroker or in any other public place within the territorial limits of the municipality or city where the pawnshop has its place of business, (2) under the control and direction of an auctioneer with license duly issued by the corresponding authorities, (3) nor shall any such article or thing to be sold or disposed of unless said pawnbroker has published a notice once in at least two daily newspapers printed in the city or municipality during the week preceding the date of such sale.

In remote areas where newspapers are neither published nor circulated, notice by newspaper publication shall be substituted by posting notices in conspicuous public places within the territorial limits of the city or municipality where the pawnshop has its place of business. Said notice, whether published or posted, shall be in English, and either in Pilipino or in the local dialect, and shall contain the name of the pawnshop, its owner, address of the establishment, hour, and the date of the auctions sale. (SEC.15)

Pawnshop business is under the regulatory power of the Central bank of the Philippines. (Sec. 17)

I. OWNERSHIP OF COLLATERAL (DEBTOR/PLEDGOR IS THE OWNER;

ARTICLE 2103)

Article 2101 - pledgor has the same responsibility as the bailor in 1951;

The pledgor knowing the flaws of the thing loaned, does not advise the pledgee of the same, shall be liable to the latter for damages which the latter may suffer.

If the pledgor has no knowledge of the flaw, he shall not be liable.

The rule in sale is different; vendor can be held liable even he has no knowledge of the flaw, because the contract is for a consideration.

Article 2102 - if the pledge earns or produces fruits, income, dividends or interests, creditor shall compensate what he receives with those which are owing him.

If no interest is owing him, or insofar as the amount may exceed that which is due, he shall apply it to the principal.

Unless there is stipulation to the contrary, the pledge shall extend to the interest and earnings of the right pledged. The ‘right’ pertains to credit.

In case of pledge of animals, the pledge shall extend to the offspring, unless contrary is stipulated. This is in accordance to the rule of accession; the accessory follows the principal.

Article 2103 - Unless the thing pledged is expropriated, the debtor/pledgor continues to be the owner thereof.

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The pledgee/creditor can bring action to recover or defend the thing from claims of third persons. This is an exception to the general rule in Article 428 and 433 where in one of the resulting rights from ownership is the right to recover the thing from third persons.

Requisites of bringing action to recover (Article 2096):1. The pledge must be in a public instrument2. Must describe the thing3. Must be dated

Article 2108 - if without 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.

Proceeds of the auction shall be security for the principal obligation in the same manner as the thing originally pledged. The pledgee/creditor must wait for the default of the debtor/pledgor before he can foreclose the pledge.

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.

Under 2087, when the principal obligation becomes due, the thing pledged may be alienated for the payment to the creditor. This is an essential feature of pledge, meaning without it the contract is null and void.

Article 2097 - With consent of the pledgee, the thing pledged may be alienated by the pledgor or the owner. As the owner he can alienate the thing – jus disponendi.

Ownership of the thing pledged is transmitted to the vendee or transferee as soon as the pledgee consents to the alienation. This is because the consent signifies the delivery of the thing, as actual delivery cannot be effected. Traditio longa manu.

The pledgee shall continue possession.

Estate of Litton vs Mendoza and CAFacts:

Tan brought an action against Mendoza for collection of a sum of money. While the case was pending, Tan assigned his litigated credit to Litton, securing the former's obligation to the latter. The lower court subsequently ruled in favor of Tan in the collection case. Pending appeal by Mendoza in the Court of Appeals, Tan and Mendoza entered into a compromise agreement; Tan acknowledged all his claims against Mendoza has been settled. The Court of Appeals affirmed the lower court's findings. Mendoza filed for a motion for reconsideration

invoking the compromise agreement with Tan releasing him from liability.

Issue:Is the compromise agreement valid?

Ruling:No. The compromise was committed by Mendoza

in connivance with Tan to defraud Litton. Although Tan may validly alienate the litigated credit under Article1634, said provision should not be taken so as to grant an absolute right to the assignor to indiscriminately dispose of the thing or right given as security. The assignment made by Tan to Litton took the form of a valid pledge and its validity has not been questioned. The right under Article 1634 must be read in consonance with Article 2097. Although the pledgee-assignee (Litton) did not ipso facto become the creditor of Mendoza, by virtue of the pledge, the pledgor (Tan) can only alienate his litigated credit with due notice and consent of Litton. More to the point, in Article 1634 the debtor has to reimburse the assignee.

II. RIGHTS OF THIRD PARTY PLEDGOR (ARTICLE 2085 THIRD PERSONS WHO ARE NOT PARTIES TO THE PRINCIPAL

OBLIGATION MAY SECURE THE LATTER BY PLEDGING OR MORTGAGING THEIR

OWN PROPERTY)

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.

This is an exception to Article1236 where creditor cannot be compelled to accept payment from a third person who has no interest in the fulfillment of the obligation. However the law has provided he may satisfy the obligation because he has interest in the thing pledged.

Article2120 - If a third person 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 2066-2070, and Articles 2077-2081.

Rights of a third party pledgor1. Right to be reimbursed by the principal debtor after payment is made by the third party pledgor (2066)2. Right to subrogation (to enforce the said right under 2066 and to include all the rights appertaining thereto; 2067)

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3. Right to be released from obligation in proper instances (2077-80).4. Right to set up defenses which pertain to the principal debtor and are inherent in the debt, against creditor (2081).

III. RIGHT OF POSSESSION- jus possessionis, not possidenti. The possession of the pledgee is not an incident of ownership but by reason of legal title/ contract. Why is this right important? It constitutes the lien or real right in favor of the pledge.

Article 2093 - The thing pledged must be placed in the possession of the creditor, or a third person by common agreement, in order to constitute the contract of pledge. Note “in the possession of… a third person by common agreement”, the creditor need not always have actual possession of the collateral.

Article 2110 - When the thing pledged is returned by the pledgee to the pledgor or the owner, pledge is extinguished. Any stipulation to the contrary is void.

A. RIGHT TO RETENTION - ARTICLE 2098 THE CREDITOR HAS THE RIGHT OF

POSSESSION OR IN THAT OF A THIRD PERSON TO WHOM IT HAS BEEN

DELIVERED, UNTIL THE DEBT IS PAID.

*The right of retention of a thing pledged pertains only to the obligation for which the thing is pledged. Otherwise, it would mean presumption that the debtor consented to a new pledge; such presumption was found to be unjust by the Code Commission.

Article 2099- obligation of the creditor to take care of the thing pledged with the diligence of a good father of a family.

The creditor also has the right to be reimbursed of the expenses for the preservation, and is liable for its loss or deterioration, except in case of fortuitous events (1174, 1170). Article 2100- pledgee cannot deposit the thing pledged with a third person, unless he is authorized by stipulation.

*This prohibition is for the protection of the pledgor or the owner of the thing pledged. The exception is found in Article 2093 - "or of a third person by common agreement" – they can agree on depositing to a third person.

The pledgee is responsible for the act of his agents or employees with respect to the thing pleged. Act

of the agent is imputed to the principal. Respondeat Superior.

Article 2104- obligation of the creditor not to use the thing pledged, except upon the authorization of the owner.

Cases when owner of the thing may ask that it be judicially or extra-judicially deposited:

a. unauthorized usage b. Misuse (in case of authorized use) c. Disuse - when preservation of the thing

pledged requires its use, the creditor did not use.

d. Negligence or willful act of the pledge, the thing is in danger of being lost or impaired (2106).

Article 2109- Alternative (CHOOSE ONLY ONE, NOT BOTH) remedies of the creditor if he is deceived on the substance or quality of the thing pledged:

a.) claim another thing in its steadb.) demand immediate payment of the principal obligation

B. RIGHT TO PAYMENT

Article 2102- the pledgee has the right to 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.

Article 2118- the creditor has the right to collect and receive the amount due from a pledged credit, when the same has become due before it is redeemed.

Manila Banking Corporation vs Teodoro Jr.

FACTS:Plaintiff extended loans to defendants in the sum

of P10,000.00.

On January 24, 1964, the Anastacio Teodoro Jr. (Son) executed in favor of plaintiff a Deed of Assignment of Receivables from the Emergency Employment Administration in the sum of P44,635.00. The Deed of Assignment provided that it was for and in consideration of certain credits, loans, overdrafts and other credit accommodations extended to defendants as security for the payment of said sum and the interest thereon.

April 25, 1966, defendants, together with Anastacio Teodoro, Sr., jointly and severally, executed in favor of plaintiff a Promissory Note (No. 11487) for the sum of P10,420.00 payable in 120 days, or on August 25, 1966, at 12% interest per annum. Defendants failed to pay

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the said amount inspire of repeated demands and the obligation.

On May 3, 1966 and June 20, 1966, defendants Anastacio Teodoro, Sr. (Father) and Anastacio Teodoro, Jr. (Son) executed in favor of plaintiff two Promissory Notes (Nos. 11515 and 11699) for P8,000.00 and P1,000.00 respectively. Father and Son made a partial payment on the May 3, 1966 promissory Note but none on the June 20, 1966 Promissory Note.

For failure of defendants to pay the sums due on the Promissory Note, this action was instituted on November 13, 1969, originally against the Father, Son, and the latter's wife. Because the Father died, however, during the pendency of the suit, the case as against him was dismissed under the provisions of Section 21, Rule 3 of the Rules of Court. The action, then is against defendants Son and his wife for the collection of the amounts of the PNs unpaid.

ISSUE:

Whether or not the assignment of receivables has the effect of payment of all the loans contracted by appellants from appellee bank?

RULING:

The Deed of Assignment provided that it was for and in consideration of certain credits, loans, overdrafts, and their credit accommodations in the sum of P10,000.00 extended to appellants by appellee bank, and as security for the payment of said sum and the interest thereon; that appellants as assignors, remise, release, and quitclaim to assignee bank all their rights, title and interest in and to the accounts receivable assigned (1st paragraph).

“...the title and right of possession to said account receivable is to remain in said assignee and it shall have the right to collect directly from the debtor, and whatever the Assignor does in connection with the collection of said accounts, it agrees to do so as agent and representative of the Assignee and it trust for said Assignee ...”(Ibid. par. 2 of Deed of Assignment).

It was further stipulated that the assignment will also stand as a continuing guaranty for future loans of appellants to appellee bank and correspondingly the assignment shall also extend to all the accounts receivable; appellants shall also obtain in the future, until the consideration on the loans secured by appellants from appellee bank shall have been fully paid by them (No. 9).

The deed of assignment was intended as collateral security for the bank loans of appellants, as a continuing guaranty for whatever sums would be owing

by defendants to plaintiff, as stated in stipulation No. 9 of the deed.

In case of doubt as to whether a transaction is a pledge or a dation in payment, the presumption is in favor of pledge, the latter being the lesser transmission of rights and interests.Citibank N.A. vs SabenianoFACTS:

Respondent Modesta R. Sabeniano was a client of both petitioners Citibank and FNCB Finance.

Petitioner Citibank, N.A. (formerly known as the First National City Bank) is a banking corporation duly authorized and existing under the laws of the United States of America and licensed to do commercial banking activities and perform trust functions in the Philippines.

Petitioner Investor's Finance Corporation, which did business under the name and style of FNCB Finance, was an affiliate company of petitioner Citibank, specifically handling money market placements for its clients.

Respondent obtained several loans from petitioner Citibank, for which she executed Promissory Notes (PNs), and secured by (a) a Declaration of Pledge of her dollar accounts in Citibank-Geneva, and (b) Deeds of Assignment of her money market placements with petitioner FNCB Finance.

Respondent failed to pay her loans despite repeated demands by petitioner Citibank, the latter exercised its right to off-set or compensate respondent's outstanding loans with her deposits and money market placements, pursuant to the Declaration of Pledge and the Deeds of Assignment executed by respondent in its favor.

Petitioner Citibank supposedly informed respondent Sabeniano of the foregoing compensation through letters, dated 28 September 1979 and 31 October 1979. Petitioners were therefore surprised when six years later, in 1985, respondent and her counsel made repeated requests for the withdrawal of respondent's deposits and money market placements with petitioner Citibank, including her dollar accounts with Citibank-Geneva and her money market placements with petitioner FNCB Finance.

Respondent filed a Complaint against petitioners, claiming that petitioners refused to return her deposits and the proceeds of her money market placements despite her repeated demands, thus, compelling respondent to file Civil Case against petitioners for "Accounting, Sum of Money and Damages."

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The lower court rendered its decision declaring as null and void the set-off made by the Petitioners to respondent's deposits and money placements. The appellate court affirmed the lower court decision.

ISSUE:

Was the compensation made by petitioners to respondent's money market placements proper?

RULING:As to her money market placements with FNCB

Finance- in these money market placements, respondent was the creditor and petitioner FNCB Finance the debtor; while, as to the outstanding loans, petitioner Citibank was the creditor and respondent the debtor. Consequently, legal compensation, would not apply.

What petitioner Citibank actually did was to exercise its rights to the proceeds of respondent's money market placements with petitioner FNCB Finance by virtue of the Deeds of Assignment executed by respondent in its favor. Standard clauses in all of the Deeds provide that –

The ASSIGNOR and the ASSIGNEE hereby further agree as follows:x x x x2. In the event the OBLIGATIONS are not paid at maturity or upon demand, as the case may be, the ASSIGNEE is fully authorized and empowered to collect and receive the PLACEMENT (or so much thereof as may be necessary) and apply the same in payment of the OBLIGATIONS.x x x x5. This Assignment shall be considered as sufficient authority to FNCB Finance to pay and deliver the PLACEMENT or so much thereof as may be necessary to liquidate the OBLIGATIONS, to the ASSIGNEE in accordance with terms and provisions hereof.

Petitioner Citibank was only acting upon the authority granted to it under the foregoing Deeds when it finally used the proceeds of PNs, paid by petitioner FNCB Finance, to partly pay for respondent's outstanding loans. Strictly speaking, it did not effect a legal compensation or off-set under Article 1278 of the Civil Code, but rather, it partly extinguished respondent's obligations through the application of the security given by the respondent for her loans.

Although the pertinent documents were entitled Deeds of Assignment, they were, in reality, more of a pledge by respondent to petitioner Citibank of her credit due from petitioner FNCB Finance by virtue of her money market placements with the latter.

ART. 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.

The PNs matured, without them being redeemed by respondent, so that petitioner Citibank collected from petitioner FNCB Finance the proceeds thereof, which included the principal amounts and interests earned by the money market placements, and applied the same against respondent's outstanding loans, leaving no surplus to be delivered to respondent.

*As to the dollar account, compensation was also not applicable, thus absent a declaration of pledge, no remittance from the respondent's dollar account can be made to apply to her outstanding loan.

IV. RETURN OF COLLATERALArticle 2105; The thing pledged is returned only upon payment of the debt and its interest, and expenses (in

proper cases). Article 2107- Remedies in case there are reasonable grounds to fear the destruction or impairment of the thing pledged without fault of the pledgee:

a) Return and substitution of the thing pledged by the pledgor. (exception to Article 2105)b) Public sale caused by the pledgee under Article 2108

The pledgee has the obligation to inform the pledgor, without delay, of any danger to the thing pledged.

Requisites for Substitution:

a) Pledgor has reasonable grounds to fear the destruction or impairment of the thing pledged.b) There is no fault on the part of the pledgeec) Pledgor is offering in place of the thing, another of the same kind and quality d) Pledgee does not choose to exercise his right to have the thing sold in a public salee) Pledgee advised the pledgor without delay

Article 2110- Pledge is extinguished by the return by the pledgee to the pledgor or owner of the collateral. Any stipulation to the contrary shall be void.This is because possession of the creditor or of the third person by common agreement is an essential requisite of pledge.

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There is a presumption of return of the collateral by the pledgee or the third person when subsequent to the perfection of the contract of pledge, the thing is found to be in the possession of the owner or pledgor.

This presumption is prima facie; it can be rebutted as when it is proven that there was merely a substitution (2107), or an incidence of theft, or trust.

The presumption pertains to the pledge being remitted, not the principal obligation. Extinguishment of the accessory obligation does not imply extinguishment of the principal obligation (1273). (See also 1274)

Article 2111- Pledge can be extinguished by waiver expressed in writing. However, such waiver must not be conditioned upon the acceptance by the pledgor or owner, or the return of the thing pledged. The waiver has the effect of transforming the pledgee into a depositary.

The principal debt is not affected by the waiver. (1273)

Pledge being a personal of the pledgee may be waived (Art.6)

Yuliongsui vs PNBFACTS:

Plaintiff-appellant Diosdado Yuliongsiu was the owner of two (2) vessels, namely: The M/S Surigao, valued at P109,925.78 and the M/S Don Dino, valued at P63,000.00, and operated the FS-203, valued at P210,672.24, which was purchased by him from the Philippine Shipping Commission, by installment or on account.

Plaintiff had paid to the Philippine Shipping Commission only the sum of P76,500 and the balance of the purchase price was payable at P50,000 a year, due on or before the end of the current year.

Plaintiff obtained a loan of P50,000 from the defendant Philippine National Bank, Cebu Branch. To guarantee its payment, plaintiff pledged the M/S Surigao, M/S Don Dino and its equity in the FS-203 to the defendant bank, as evidenced by the pledge contract, Exhibit "A" & "1-Bank", executed on the same day and duly registered with the office of the Collector of Customs for the Port of Cebu.

Subsequently, plaintiff effected partial payment of the loan in the sum of P20,000. The remaining balance was renewed by the execution of two (2) promissory notes in the bank's favor. The first note for P20,000, the

second for P10,000. These two notes were never paid at all by plaintiff on their respective due dates.

The bank filed criminal charges against plaintiff and two other accused for estafa thru falsification of commercial documents, because plaintiff had, as last indorsee, deposited with defendant bank, from March 11 to March 31, 1948, seven Bank of the Philippine Islands checks totalling P184,000. The drawer thereof — one of the co-accused — had no funds in the drawee bank. However, in connivance with one employee of defendant bank, plaintiff was able to withdraw the amount credited to him before the discovery of the defraudation. Plaintiff and his co-accused were convicted by the trial court and sentenced to indemnify the defendant bank in the sum of P184,000. The corresponding writ of execution issued to implement the order for indemnification was returned unsatisfied as plaintiff was totally insolvent.

Defendant bank took physical possession of three pledged vessels while they were at the Port of Cebu, and on April 29, 1948, after the first note fell due and was not paid, the Cebu Branch Manager of defendant bank, acting as attorney-in-fact of plaintiff pursuant to the terms of the pledge contract, executed a document of sale, transferring the two pledged vessels and plaintiff's equity in FS-203, to defendant bank for P30,042.72. The FS-203 was subsequently surrendered by the defendant bank to the Philippine Shipping Commission which rescinded the sale to plaintiff on September 8, 1948, for failure to pay the remaining installments on the purchase price thereof. The other two boats, the M/S Surigao and the M/S Don Dino were sold by defendant bank to third parties. On July 19, 1948, plaintiff commenced action in the Court of First Instance of Cebu to recover the three vessels or their value and damages from defendant bank. The court ruled in favor of PNB.

ISSUE:Was the bank's taking possession of the vessels justified? Was there possession in the part of the bank?

RULING:Yes. The bank's possession of the subject vessels are justified by virtue of the pledge constituted upon the same:

"3. That a credit line of P50,000.00 was extended to the plaintiff by the defendant Bank, and the plaintiff obtained and received from the said Bank the sum of P50,000.00, and in order to guarantee the payment of this loan, the pledge contract, Exhibit "A" & Exhibit "1-Bank", was executed and duly registered with the Office of the Collector of Customs for the Port of Cebu on the date appearing therein"

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The defendant bank as pledgee was therefore

entitled to the actual possession of the vessels. While it is true that plaintiff continued operating the vessels after the pledge contract was entered into, his possession was expressly made "subject to the order of the pledgee." The provision of Art. 2110 of the present Civil Code being new — cannot apply to the pledge contract here which was entered into on June 30, 1947.

On the other hand, there is an authority supporting the proposition that the pledgee can temporarily entrust the physical possession of the chattels pledged to the pledgor without invalidating the pledge. In such a case, the pledgor is regarded as holding the pledged property merely as trustee for the pledgee.

FORECLOSUREArt. 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. (1872a)

REQUISITES:(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.

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 pledger and owner of the thing pledged. The sale is actually extrajudicial in character without intervention by the courts.

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. (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 excessin case the value of the thing pledged is more than the principal obligation. (see Art. 2115.)

Sps. Paray vs RodriguezG.R. No. 132287, Jan24, 2006

• Facts: – Respondents were owners, in their respective

capacities, of shares of stock in a corporation– As a security for a loan obtained from the Parays,

they pledge their shares of stock– Upon failure to pay, Parays attempted to

foreclose the pledges– Rodriguez filed complaints which sought the

declaration of nullity of the pledge agreements – Rodriguez consign the payments to RTC as a

matter of redemption– Rodriguez did not participate in the auction sale

• Issues: – Is the contention of Rodriguez as to redemption

valid?– Should the things being pledged be foreclose

separately?– Is the interest usurious?– Is the consignation properly discharge the

principal obligation?• Held:– No. Because redemption does not exist over

personal property. No law or jurisprudence establishes or affirms such right. Indeed, no such right exists. This is extrajudicial sale

– No. No provision in the Rules of Court or in any law requires that pledged properties sold at public auction be sold separately. (Art.2119)

– No. Consent is being given. Usury Laws are legally inexistent. Not enough to cover even the interest

– No. Estopped from invoking it due to laches. They should participated in the auction to have a better right.

ART. 2113. At the public auction, the pledgor or own-er may bid. He shall, moreover, have a better right if heshould offer the same terms as the highest bidder.The pledgee may also bid, but his offer shall not bevalid if he is the only bidder. (n)ART. 2114. All bids at the public auction shall offer topay the purchase price at once. If any other bid is accept-ed, the pledgee is deemed to have received the purchaseprice, as far as the pledgor or owner is concerned. (n)ART. 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

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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. (n)

RIGHT OF DEBTOR TO EXCESSAs 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. The rule is nevertheless unfair since the obligation is fully satisfied. (see Art. 2121.) In effect, the rule would amount to a pacto commisorio which is prohibited.

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.

Manila Surety and Fidelity Co vs Rodolfo VelayoG.R.No. L-21069, Oct. 26, 1967

No Right of Recovery Principle• FACTS:– Manila Surety & Fidelity Co., upon request of

Rodolfo Velayo, executed a bond for P2,800.00 for the dissolution of a writ of attachment obtained by one Jovita Granados in a suit against Rodolfo Velayo in the Court of First Instance of Manila.

– Velayo undertook to pay the surety company an annual premium of P112.00; to indemnify the Company for any damage and loss

– As "collateral security and by way of pledge" Velayo also delivered four pieces of jewelry to the Surety Company "for the latter's further protection", with power to sell and to apply the proceeds

– The surety company was forced to pay having the judgment unfavorable demanding reimbursement from Velayo after foreclosure of the jewelry pledge.

• ISSUE: Upon foreclosure, is there any extinguishment of the principal obligation?

• Held:– Yes. Art. 2115 of the Civil Code provides for the

extinguishment of the Principal Obligation upon foreclosure of the property pledge.

– Regardless if the proceeds exceeds or on a deficiency, both the creditor and debtor are relieved.

– No longer entitled as an exercise of his right to choose the remedy of exact fulfillment or foreclosure.

Article 1484. Civil Code. - In a contract of sale of personal property the price of which is payable in installments, the vendor may exercise any of the following remedies:1) Exact fulfillment of the obligation, should the vendee fail to pay;2) Cancel the sale, should the vendee's failure to pay cover two or more installments;3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee's failure to pay cover two or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void.ART. 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. (n)

LEGAL PLEDGEART. 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. (n)

ART. 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.(n)

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. Useful expenses shall be refunded only to the possessor in

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good faith with the same right of retention, the person who has defeated him in the possession having the option of refunding the amount of the expenses or of paying the increase in value which the thing may have acquired by reason thereof.”

Art. 1731. He who has executed work upon a movable has a right to retain it by way of pledge until he is paid.”

Other examples are:“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 indemnity set forth in the two preceding articles.”

“Art. 1707. The laborer’s wages shall be a lien on thegoods manufactured or the work done.”

Articles 1994 refer to a depositary. Article 2004 is also an instance of a legal pledge and refers to a hotelkeeper.

Note: in legal pledge, the remainder of the price of the sale after payment of the debt and expenses, shall be delivered to the debtor.

RIGHTS OF PLEDGOR: (D-BAA)• To Demand the return in case of reasonable

grounds to fear destruction or impairment of the thing without the pledgee’s fault, subject to the duty of replacement (Art. 2107)

• To Bid and be preferred at the public auction (Art. 2113)

• To Alienate the thing pledged provided the pledgee consents to the sale

• To Ask the thing pledged be deposited in the following cases:

• If the creditor uses the thing without authority or misuses the thing, he may deposit the thing judicially or extrajudicially (Art. 2104)

• If the thing is in danger of being lost or impaired because of negligence or willful act of the pledgee to a third person

OBLIGATIONS OF THE PLEDGOR• To advise the pledgee of the flaws of the thing

(Art. 2101 and 1951)• Not to demand the return of the thing until after

full payment of the ddebt, including interest and expenses incurred for its preservation

RIGHTS OF THE PLEDGEE(D-SBC-BA2-R3-OPS)

• Option to DEMAND replacement or immediate payment of the debt in case of deception as to substance or quality (Art. 2109)

• To SELL at public auction in case of reasonable grounds to fear destruction or impairment without his fault (Art. 2108)

• To BRING actions pertaining to the owner or to defend it against third persons (Art. 2103)

• To CHOOSE which of several things pledged shall be sold (Art. 2119)

• To COLLECT and receive amount due on credit pledged (Art. 2118)

• To Bid at the public auction, unless he is the only bidder (Art. 2113)

• To APPROPRIATE the thing in case of failure of the second public auction (Art. 2112)

• To APPLY fruits, interests or earnings of the pledge to the interest, if any, then to the principal credit (Art. 2102)

• To RETAIN excess value received in the public sale

• To RETAIN the thing until after full payment of the debt

• To be REIMBURSED for the expenses made for the preservation of the thing pledged (Art. 2099)

• To OBJECT to the alienation of the thing• To POSSESS the thing (Art. 2098)• To SELL at public auction in case of non-payment

of debt at maturity (Art. 2112)

OBLIGATIONS OF THE PLEDGEE(CUDA2R)

• Take CARE of the thing with the diligence of a good father of a family and be liable for the loss or deterioration of such (Art. 2099)

• Not to USE the thing unless authorized by the owner or its preservation requires its use (Art. 2104)

• Not to DEPOSIT the thing with a third person unless stipulated

• To ADVISE pledgor of danger to the thing• To Advise pledgor of the result of the public

auction (Art.2116)• To Return the thing upon payment of debt.

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