PLEDGE
A. Definition A contract by which a debtor delivers to the creditor or to a third person a movable or document evidencing incorporeal rights for the purpose of securing the fulfillment of obligation with an understanding that when the obligation is fulfilled, the thing delivered shall be returned with all its fruits and accessions. Pledges are typically used in securing loans, pawning property for cash, and guaranteeing that contracted work will be done. B. Kinds 1. Voluntary or conventional - created by agreement of the parties 2. Legal-by operation of law C. Essential requirements 1. Pledge is constituted to secure the fulfillment of principal obligation 2. Pledgor or mortgagor is the absolute owner of the thing pledge or mortgaged 3. Person 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. The thing pledge must be delivered to the creditor to a third person by common agreement. In addition to actual delivery, a public instrument stating thereof description of the thing pledged and date of pledge, otherwise, it is void. D. Obligation of pledgee 1. Pledgee shall exercise due diligence of a good father of a family over the thing pledged. He shall have the right to be reimbursed for whatever expenses incurred for the preservation of the thing. On the other hand, he shall be liable for the loss and deterioration of the thing by reason of fraud. Negligence, delay or violation of the terms of the contract. Except: Fortuitous event Exemption to the Exception: when there is stipulation or when the nature of the thing requires assumption of risk 2. Pledgee cannot deposit the thing to a third person except when there is stipulation to the contrary or when the thing is in danger because of the willful act or negligence of the pledge, pledgor may require its deposit to the third person. 3. Pledgee cannot use or misuse the thing pledged or appropriate the fruits thereof without the consent of the pledgor, otherwise, the latter may ask it to be judicially or extra judicially deposited. Except: preservation of the thing requires its use.
4. Pledgee can apply the fruits, income, dividends or interest, if owing, thereafter to the principal of the credit.
Except: When there is stipulation to the contrary. 5. If without pledgee s fault and there is reasonable ground to fear that the thing may impaired or destructed, pledgee must, without delay, notify the pledgor so that the latter can demand the return of the thing and substitute it for the same kind and quality. On the other hand, pledgee can cause the same to be sold at a public auction afterwhich pledgee must notify the pledgor of its result and the pledge continues on the proceeds E. Rights and duties of pledgor 1. Pledgor may alienate the thing pledged with the consent of the pledgee provided pledge remains in possession, however, creditor/pledgee shall have right of retention until paid is debt. The right to retention by the pledgee though, is limited only to the fulfillment of the principal obligation for which the thing pledge was created. 2. Pledgor must inform the pledgee of the flaws of the thing pledged, otherwise he is liable for damages to the pledgee 3. Pledgor may ask that the thing pledged be deposited judicially or extra judicially when: a. if the pledgee uses the thing without authority b. if he misuses the thing in any other way c. if the thing is in danger of lost or impaired because of the negligence or willful act of the pledgee. 4. Pledgor cannot ask for the return of the thing pledged until the obligation is fully paid including interest due thereon and expenses incurred for its preservation Except: Pledgor is allowed to substitute the thing pledge which is in danger of destruction or impairment with another thing of the same kind and quality. F. PERFECTION 1. Perfection of the pledge occurs when all essential requirements are present atking note of the importance of actual delivery of the thing either to the pledgee/creditor or if there s an stipulation, to a third person. 2. In order to bind third person, the pledge must be made in a public instrument and must stae thereof the thing to be pledged and the date of pledge. G. FORECLOSURE 1. Pledgee, when credit is not satisfied in due time or when pledgee is authorized to sell the thing pledged upon default, he can proceed to a Notary Public for the sale, notify the debtor and owner of the thing pledged, stating the amount for which public sale is to be held and thereafter conduct the public sale. If during the first public sale, the thing was not sold, pledgee can hold
second public sale following the formalities required. If on the second, there was still no sale, he can appropriate the thing for himself. Caveat: pactum commisorium, a stipulation for the automatic appropriation by the creditor or pledgee in payment of the loan at the expiration of the period agreed upon is prohibited. 2. Pledgor can bid at the public auction who shall have a better right if he should offer the same term as the highest bidder. Pledgee can also bid, but his offer shall be void if he is a lone bidder. H. EXTINGUISHMENT 1. The possession of the thing pledged by the debtor or owner subsequent to the perfection of the pledge gives rise to a prima facie evidence presumption that the thing has been returned and therefore that the pledge is extinguished. 2. When the thing pledge is later found in the hands of the pledgor or the owner, only the accessory obligation of pledge is presumed remitted. Not the principal obligation. 3. The sale of the thing pledged extinguishes the principal obligation whether the price of the sale is more or less than the amount. a. if the price of the sale is more than the amount due the creditor, the debtor is not entitled to the excess except the contrary is provided. b. If the price of the sale is less, neither the creditor is entitled to the excess. Stipulation to the contrary is void.
