PLEDGE (1) Real contract—perfected by the delivery of the

(ARTICLES 2085-2123) things pledged by the debtor who is called the

Provisions Common to Pledge and Mortgage pledgor to the creditor who is called by the
(Common Provisions), Articles 2085- 2092 pledgee, or to a third person by common
agreement
Art. 2085. The following requisites are essential to the
(2) Accessory contract
contracts of pledge and mortgage:
(3) Unilateral contract
(1) That they be constituted to secure the fulfillment of
(4) Subsidiary contract
a principal obligation;
WHAT IS THE CAUSE OR CONSIDERATION IN PLEDGE?
(2) That the pledgor or mortgagor be the absolute
Pledge is an accessory contract
owner of the thing pledged or mortgaged;
Its cause is the principal obligation

(3) That the persons constituting the pledge or

CONSTITUTED TO SECURE THE FULFILLMENT OF THE PRINCIPAL
mortgage have the free disposal of their
OBLIGATION
property, and in the absence thereof, that they be
CONSTITUTED BY THE ABSOLUTE OWNER
legally authorized for the purpose.
(1) Future property cannot be the subject of a
pledge or mortgage
Third persons who are not parties to the principal obligation
(2) A pledge or mortgage executed by one who is
may secure the latter by pledging or mortgaging their own
not the owner of the property pledged or
property. (1857)
mortgaged is without legal existence and
Art. 2086. The provisions of Article 2052 are applicable to a
registration cannot validate it
pledge or mortgage. (n)
(3) Share in a co-ownership—shall be limited to the
Art. 2087. It is also of the essence of these contracts that
portion which may be alienated by him in the
when the principal obligation becomes due, the things
division upon the termination of the co-ownership
in which the pledge or mortgage consists may be alienated
for the payment to the creditor. (1858)
What is the absolute owner? It means
unencumbered property. The absolute owner has legal
PLEDGE
and beneficial ownership. In the earlier example, P is the
Contract by virtue of which the debtor delivers
legal owner and S is the beneficial owner. This being the
to the creditor or to a third person a movable,
case, neither of them can pledge the property.
or document evidencing incorporeal rights, for
WHAT IS THE DIFFERENCE BETWEEN FREE DISPOSAL AND
the purpose of securing the fulfillment of a
CAPACITY TO DISPOSE?
principal obligation with the understanding that
FREE DISPOSAL OF THE PROPERTY—property must not
when the obligation is fulfilled, the thing
be subject to any claim of a third person
delivered shall be returned with all its fruits and
accessions
CAPACITY TO DISPOSE—pledgor or mortgagor
has the capacity or authority to make a disposition
KINDS OF PLEDGE
of the property
(1) Voluntary or conventional - one created by
agreement of the parties.
THING PLEDGED OR MORTGAGED MAY BE ALIENATED
(2) Legal - one created by operation of law.
Necessarily implied as an inherent element of
the transaction of the mortgage or pledge

REQUISITES TO A CONTRACT OF PLEDGE

The only remedy for the pledgee is to have the
(1) It be constituted to secure the fulfillment of
security given sold at public auction and the
a principal obligation
proceeds of the sale be applied to the payment
(2) The pledgor be the absolute owner of the thing
of the obligation secured by the mortgage or
pledged
pledge
(3) That the persons constituting the pledge
have the free disposal of the property and
PLEDGOR OR MORTGAGOR MAY BE A THIRD PERSON
in the absence thereof, that they be legally
Accommodation pledge or mortgage
authorized for the purpose
Duty of mortgagee to make proper inquiry
(4) The pledge is perfected by the delivery of
Where mortgage is gratuitous—same should be
the thing pledged
strictly construed
(5) When the principal obligation becomes due,
Liability for deficiency—pledgor not liable for any
the things, which the pledge consists, may
deficiency should the property be not sufficient to
be alienated for the payment of the creditor.
cover the debt

CHARACTERISTICS OF A CONTRACT OF PLEDGE

Article 2088. The creditor cannot appropriate the things Generally, all kinds of obligations, be they pure or
given by way of pledge or mortgage, or dispose of them. subject to a suspensive or resolutory condition, may
Any stipulation to the contrary is null and void. (1859a) be secured, subject to the rules below, as well as to
principles peculiar to real estate mortgage and
Meaning of PACTUM COMMISSORIUM chattel mortgage.
It is a stipulation authorizing the creditor to
appropriate the things given by way of pledge and Consistent with Art. 2085, Art. 2052 applies to
mortgage or to dispose of them. It is declared null and void contracts of pledge and mortgage, stating that
by law. (Art 2088). these cannot exist without a valid obligation.

Reason : The amount of the loan is ordinarily much less than Nevertheless, voidable, unenforceable and natural
the value of the security. obligations may likewise be secured.

Note: The appropriation must be automatic without need of

further act on the part of the debtor. Hence, the prohibition Article 2092. A promise to constitute a pledge or
does not apply to: mortgage gives rise only to a personal action
a. Subsequent voluntary act of the debtor of making between the contracting parties, without prejudice
cession of the property or; to the criminal responsibility incurred by him who
b. A promise to assign or sell said property in payment defrauds another, by offering in pledge or
of the debt. mortgage as unencumbered, things which he knew
were subject to some burden, or by misrepresenting
himself to be the owner of the same. (1862)

Article 2089. A pledge or mortgage is indivisible, even though Legal effect of a promise to constitute a pledge or mortgage:
the debt may be divided among the successors in interest of It gives rise only to a personal right binding
the debtor or of the creditor. upon the parties but it creates no real right in the
property.

Rules on the indivisibility of Pledge and Mortgage: Promise to Constitute Pledge or Mortgage Not a Real Right
A promise to constitute pledge or mortgage, if
a. A pledge or mortgage is indivisible, even though the accepted, gives rise only to a personal right binding upon
debt may be divided among the successors in interest of the the parties and creates NO real right in the property.
debtor or of the creditor;
b. Therefore, the debtor’s heirs who has paid of the Criminal Responsibility of Pledgor or Mortgagor
debt cannot ask for the proportionate extinguishments of the Under the RPC, estafa is committed by a person who,
pledge or mortgage as long as the debt is not completely pretending to be the owner of any real property, shall
satisfied; convey, sell, encumber, or mortgage the same, or knowing
c. Neither can the creditor’s heirs who received his that the real property is encumbered, shall dispose of the
share of the debt return the pledge or cancel the mortgage, same as unencumbered. It is essential that fraud or deceit
to the prejudice of the other heirs who have not been paid; be practiced upon the vendee at the time of the sale.
d. The above rules, however, do not apply where there
being in several things given in mortgage or pledge, each of
them guarantees only a determinate portion of the credit. In
this case, the debtor shall have a right to the extinguishments Provisions Applicable to PLEDGE
of the pledge or mortgage as the portion of the debt for Articles 2093- 2123
each thing is especially 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. Article 2093. In addition to the requisites prescribed in article
(n) 2085, it is necessary, in order to constitute the contract of
pledge, that the thing pledged be placed in the possession
Is partial release possible, where there are several debtors of the creditor, or of a third person by common agreement.
who are not solidarily bound? (1863)

No. This is not possible. The indivisibility of a pledge or Note:

mortgage is not affected by the fact that the
debtors are not solidarily liable (Art. 2090) Actual transfer of possession essential in pledge
A pledge is a real contract which requires delivery for its
perfection.

1316- Real contracts, such as deposit, pledge and

Article 2091. The contract of pledge or mortgage may commodatum, are not perfected until the delivery of the
secure all kinds of obligations, be they pure or subject to a object of the obligation.
suspensive or resolutory condition. (1861)
An agreement to constitute a pledge only gives rise to a
personal action between the contracting parties. (2092)
What kinds of obligations may be secured by a pledge and
mortgage? 1. Unless the movable given as security by way of pledge be
delivered to and placed in the possession of the creditor or a
third person designated by common agreement, the To forestall fraud – debtor may attempt to conceal his
creditor acquires no right to the property. property from his creditors when he sees it in danger of
execution by simulating a pledge thereof with an
Pledge is merely a lien (legal claim on a piece of property) accomplice
and possession is indispensable (absolutely necessary) to the
right of lien. Article 2097. With the consent of the pledgee, the thing
pledged may be alienated by the pledgor or owner, subject
2. Delivery of possession that is essential to the validity of the to the pledge. The ownership of the thing pledged is
pledge – ACTUAL possession. Mere symbolic delivery may not transmitted to the vendee or transferee as soon as the
be sufficient. pledgee consents to the alienation, but the latter shall
continue in possession. (n)

Article 2094. All movables which are within commerce may Alienation by pledgor of thing pledged
be pledged, provided they are susceptible of possession. The pledgor retains his ownership of the thing pledged.
(1864) He may sell the same provided the pledgee consents to the
sale.
Subject matter of pledge (or chattel mortgage)
-confined and limited to personal property and it cannot be As soon as the pledgee gives his consent, the ownership of
extended or made to apply to real property. the thing pledged is transferred to the vendee subject to the
rights of the pledgee:
The ff things are deemed to be personal property: 1. The thing sold may be alienated to satisfy the
1. Those movables susceptible of appropriation which obligation (2112)
are not included in the preceding article (immovables); 2. The pledgee must continue in possession during the
2. Real property which by any special provision of law existence of the pledge (2093, 2098)
is considered as personalty;
3. Forces of nature which are brought under control by The pledge would not bind or adversely affect third persons
science; and unless 2096 has been followed.
4. In general, all things which can be transported from
place to place without impairment of the real property to Note: The creditor to whom the credit has not been satisfied
which they are fixed. in due time, may proceed before a Notary Public to the sale
of the thing pledged. This sale shall be made at a public
The ff are also considered as personal property: auction, and with notification to the debtor and the owner
1. Obligations and actions which have for their object of the thing pledged in a proper case, stating the amount for
movables or demandable sums; and which the public sale is to be held. If at the first auction the
2. Shares of stock of agricultural, commercial and thing is not sold, a second one with the same formalities shall
industrial entities, although they may have real estate. be held; and if at the second auction there is no sale either,
the creditor may appropriate the thing pledged. In this case
Chattel - an item of personal property which is movable, as he shall be obliged to give an acquittance for his entire
distinguished from real property (land and improvements). claim. (1872a)

A chattel mortgage is a loan arrangement with movable Alienation- the legal transfer of title of ownership to another
personal property as the security for the loan party

Article 2095. Incorporeal rights, evidenced by negotiable

instruments, bills of lading, shares of stock, bonds, warehouse Article 2098. The contract of pledge gives a right to the
receipts and similar documents may also be pledged. The creditor to retain the thing in his possession or in that of a
instrument proving the right pledged shall be delivered to the third person to whom it has been delivered, until the debt is
creditor, and if negotiable, must be indorsed. (n) paid. (1866a)

Incorporeal rights evidenced by documents whether Right of pledgee to retain the thing pledged
negotiable or not may also be pledged. - possession of the pledge constitutes his security
- debtor cannot demand its return until the debt secured by
If negotiable – must be indorsed in favor of the creditor it is paid
- right of retention is LIMITED only to the fulfillment of the
Note: Title to goods may be conveyed by either the transfer principal obligation for which the pledge was created
(1514) or negotiation (1513) of the document of title.
Note: The debtor cannot ask for the return of the thing
Article 2096. A pledge shall not take effect against third pledged against the will of the creditor, unless and until he
persons if a description of the thing pledged and the date of has paid the debt and its interest, with expenses in proper
the pledge do not appear in a public instrument. (1865a) case.

Public instrument necessary to bind third person Article 2099. The creditor shall take care of the thing pledged
- in addition to the delivery of the thing pledged, the with the diligence of a good father of a family; he has a right
contract of pledge shall be embodied in a public instrument to the reimbursement of the expenses made for its
wherein shall appear: preservation, and is liable for its loss or deterioration, in
1. the description of the thing pledged conformity with the provisions of this Code. (1867)
2. the date of the pledge.
Obligation of pledgee to take due care of thing pledged
-the pledgee must return the thing pledged upon the Right of pledgee to compensate earnings of pledge with
fulfillment of the principal obligation debt
-having possession of the property, he has the obligation to The pledge has no right to use the thing pledged or to
take care of it with the diligence of a good father of a family appropriate the fruits thereof without the authority of the
(1163) owner (2104)
-he is, however, entitled to reimbursement of the expenses
incurred for its preservation The depositary cannot make use of the thing deposited
without the express permission of the depositor. Otherwise,
Note: he shall be liable for damages
In case of loss or deterioration of the thing pledged due to
fortuitous event, the pledgee cannot be held responsible. But the pledgee can apply the fruits, income, dividends, or
(1174) interest earned or produced by the thing pledged to the
payment of the interest, if owing, and thereafter to the
He is liable for loss or deterioration by reason of fraud, principal of his credit. (2132-antichresis)
negligence, delay or violation of the terms of the contract.
(1170) Unless there is a stipulation to the contrary, the interest and
earnings of the right pledged and in the case of animals,
Article 2100. The pledgee cannot deposit the thing pledged their offsprings (2127), are included in the pledge.
with a third person, unless there is a stipulation authorizing
him to do so. Article 2103. Unless the thing pledged is expropriated, the
debtor continues to be the owner thereof.
Note: Nevertheless, the creditor may bring the actions which
The pledgee is responsible for the acts of his agents or pertain to the owner of the thing pledged in order to recover
employees with respect to the thing pledged. (n) it from, or defend it against a third person. (1869)

General Rule: Obligation of pledge not to deposit thing Right of pledgee against third persons
pledged with another The creditor to whom the property pledged has been
While the pledge is entitled to retain the possession of thing delivered is obliged to take care of it with the diligence of a
pledged until the debt is paid, he is not authorized to transfer good father of a family(2099). Hence, he is authorized to
possession to a third person. bring such actions as pertain to the owner in order to recover
it or defend it against claims of third persons. Unless given the
EXCEPTION: when there is a stipulation authorizing him to do right, the creditor might be prejudiced by the negligence of
so the owner.

The pledgee is responsible for the acts of his agents or The right of a pledgee is a real right enforceable against third
employees with respect to the thing pledged because their persons but it is necessary that the contract of pledge be
acts are, in legal effect, deemed his. embodied in a public instrument which shall contain the
description of the thing pledged and the date of the pledge
Article 2101. The pledgor has the same responsibility as a (2096)
bailor in commodatum in the case under article 1951. (n)
Article 2104. The creditor cannot use the thing pledged,
Liability to pay damages for known hidden flaws without the authority of the owner, and if he should do so, or
1951. The bailor, who, knowing the flaws of the thing loaded, should misuse the thing in any other way, the owner may ask
does not advise the bailee of the same, shall be liable to the that it be judicially or extrajudicially deposited. When the
latter for damages which he may suffer by reason thereof. preservation of the thing pledged requires its use, it must be
used by the creditor but only for that purpose. (1870a)
Requisites which must concur for the application of 1951:
1. There is a flaw or defect in the thing loaned; Obligation of pledgee not to use thing pledged
2. The flaw or defect is hidden; -no right to make use of it without permission from the owner
3. The bailor is aware thereof; -same rule as in deposit
4. He does not advise the bailee of the same; and -In consequence of the fact that the pledgor, in parting with
5. The bailee suffers damages by reason of said flaw or his property, transmits only the possession but not ownership.
defect.

*commodatum is gratuitous (bailee acquires the use of the Cases when the owner may to ask that thing pledged be
thing loaned but not its fruits) deposited judicially or extrajudicially:
1. If the creditor uses the thing without authority;
Article 2102. If the pledge earns or produces fruits, income, 2. If he misuses the thing in any other way; or
dividends, or interests, the creditor shall compensate what he 3. If the thing is in danger of being lost or impaired
receives with those which are owing him; but if none are because of the negligence or willful act of the pledgee
owing him, or insofar as the amount may exceed that which (2106)
is due, he shall apply it to the principal. Unless there is a
stipulation to the contrary, the pledge shall extend to the Article 2105. The debtor cannot ask for the return of the thing
interest and earnings of the right pledged. pledged against the will of the creditor, unless and until he
In case of a pledge of animals, their offspring shall pertain to has paid the debt and its interest, with expenses in a proper
the pledgor or owner of animals pledged, but shall be case. (1871)
subject to the pledge, if there is no stipulation to the
contrary. (1868a) Right of debtor to demand return of thing pledged
RULE: The thing pledged stands as security for the fulfillment Article 2109. If the creditor is deceived on the substance or
of the pledgor’s obligation. Hence, he cannot ask for its quality of the thing pledged, he may either claim another
return until such obligation is fully paid including interest due thing in its stead, or demand immediate payment of the
thereon and expenses incurred for its preservation (2099) principal obligation. (n)

EXCEPTION: the pledgor is allowed to substitute the thing Right of the pledge to demand substitute or immediate
pledged which is in danger of destruction or impairment with payment
another thing of the same kind and quality (2107) 2 remedies to the pledgee in case he is deceived as to the
substance or quality of the thing pledged:
Article 2106. If through the negligence or wilful act of the 1. To claim another thing in pledge; and
pledgee, the thing pledged is in danger of being lost or 2. To demand immediate payment of the principal
impaired, the pledgor may require that it be deposited with obligation.
a third person. (n) ^Remedies are alternative - only one, not both.

Right of pledgor to ask for deposit of thing pledged Article 2110. If the thing pledged is returned by the pledgee
Pledge – preserve – due diligence to the pledgor or owner, the pledge is extinguished. Any
If the thing should be exposed to loss or impairment through stipulation to the contrary shall be void.
the negligence or willful act of the pledge, the pledgor may
demand that it be deposited with a third person. The If subsequent to the perfection of the pledge, the thing is in
pledgor may also require such deposit should the pledge use the possession of the pledgor or owner, there is a prima facie
the thing without authority or misuse it in any other way presumption that the same has been returned by the
(2104) pledgee. This same presumption exists if the thing pledged is
in the possession of a third person who has received it from
Article 2107. If there are reasonable grounds to fear the the pledgor or owner after the constitution of the pledge. (n)
destruction or impairment of the thing pledged, without the
fault of the pledgee, the pledgor may demand the return of Extinguishment of pledge by return of thing pledged
the thing, upon offering another thing in pledge, provided -object be placed in possession of the creditor, or of a third
the latter is of the same kind as the former and not of inferior person by common agreement – one the essential requisites
quality, and without prejudice to the right of the pledgee of pledge (2093)
under the provisions of the following article. -pledge is extinguished if the object is returned by the
pledgee
The pledgee is bound to advise the pledgor, without delay, -TRUE, notwithstanding any stipulation that the
of any danger to the thing pledged. (n) pledge would continue although the pledgee is no longer in
possession.
Right of pledgor to substitute thing pledged
2 remedies granted by 2107: Presumption where thing pledged in possession of pledgor or
1. To the pledgor, the right to demand the return of owner subsequent to the perfection of pledge
the thing pledged upon offering another thing in pledge -prima facie presumption that the thing has been returned,
2. To the pledgee, the right to cause the same to be and therefore, the pledge has been extinguished
sold at a public sale (2108) -may be REBUTTED by evidence to the contrary (e.g.
the return was merely for the substitution of the thing
Requisites for the application of 2107: pledged (2105) or the thing was stolen and given by the thief
1. The pledgor has reasonable grounds to fear the to the pledgor or owner)
destruction or impairment of the thing pledged;
2. There is no fault on the part of the pledgee; When the thing pledged is later found in the hands of the
3. The pledgor is offering in place of the thing another pledgor or the owner, only the accessory obligation of
thing in pledge which is of the same kind and quality as the pledge is presumed remitted, not the principal obligation
former; and itself (1274)
4. The pledgee does not choose to exercise his right to
cause the thing pledged to be sold at public auction. It is presumed that the accessory obligation of pledge has
been remitted when the thing pledged, after its delivery to
Article 2108. If, without the fault of the pledgee, there is the creditor, is found in the possession of the debtor, or of a
danger of destruction, impairment, or diminution in value of third person who owns the thing.
the thing pledged, he may cause the same to be sold at a
public sale. The proceeds of the auction shall be a security Article 2111. A statement in writing by the pledgee that he
for the principal obligation in the same manner as the thing renounces or abandons the pledge is sufficient to extinguish
originally pledged. (n) the pledge. For this purpose, neither the acceptance by the
pledgor or owner, nor the return of the thing pledged is
Right of pledgee to cause sale of thing pledged necessary, the pledgee becoming a depositary. (n)
The pledgee’s right to have the thing pledged sold at public
sale granted under 2108 is superior to that given to the Extinguishment of pledge by renunciation or abandonment
pledgor to substitute the thing pledged under 2107. The pledge is a personal right of the pledgee which may be
2107 says the pledgor is given the right “without prejudice to waived.
the right of the pledge” Under 2111, renunciation or abandonment must be in writing
**The sale must be a public sale. to extinguish the pledge, and such renunciation is not
*The pledge shall keep the proceeds of the sale as security conditioned upon the acceptance by the pledgor or owner
for the fulfillment of the principal obligation. nor upon the return of the thing pledged.
The waiver transforms the pledge into a depositary with the
rights and obligations of one.
The principal debt, however, is not affected by the waiver of Article 2114. All bids at the public auction shall offer to pay
the pledge. But the waiver of the principal obligation carries the purchase price at once. If any other bid is accepted, the
with it that of the pledge (1273) pledgee is deemed to have been received the purchase
price, as far as the pledgor or owner is concerned. (n)
The renunciation of the principal debt shall extinguish the
accessory obligations; but the waiver of the latter shall leave Right of pledgor and pledgee to bid at public sale
the former in force. If the debt is not paid and a public sale takes place, both
the pledgor and pledgee may bid.
Other causes of extinguishment of pledge: The pledgor shall be preferred if he offers the same terms as
-prescription the highest bidder, for after all, the thing belongs to him.
-loss of the thing To avoid fraud, the pledgee is not allowed to acquire the
-merger thing pledged if he is the only bidder.
-compensation
-novation ALL BIDS, including that of the pledgor, must be for CASH.
If the pledge accepts a bid other than for cash, the pledgor
Obligations are extinguished: or owner has the right to consider that the pledge has
1. By payment or performance received that purchase price in cash.
2. By the loss of the thing due
3. By the condonation or remission of the debt Article 2115. The sale of the thing pledged shall extinguish the
4. By the confusion or merger of the rights of creditor principal obligation, whether or not the proceeds of the sale
and debter are equal to the amount of the principal obligation, interest
5. By compensation and expenses in a proper case. If the price of the sale is
6. By novation more than said amount, the debtor shall not be entitled to
Other causes: the excess, unless it is otherwise agreed. If the price of the
-annulment sale is less, neither shall the creditor be entitled to recover the
-rescission deficiency, notwithstanding any stipulation to the contrary.
-fulfillment of a resolutory condition (n)
-prescription
Effect of sale of thing pledged
-extinguishes the principal obligation whether the price of the
sale is more or less than the amount due
Article 2112. The creditor to whom the credit has not been
satisfied in due time, may proceed before a Notary Public to 1. if the price of the sale is more than the amount due, the
the sale of the thing pledged. This sale shall be made at a debtor is not entitled to the excess, unless the contrary is
public auction, and with notification to the debtor and the provided.
owner of the thing pledged in a proper case, stating the 2. in the same way, if the price of the sale is less, neither is the
amount for which the public sale is to be held. If at the first creditor entitled to recover the deficiency. A contrary
auction the thing is not sold, a second one with the same stipulation is VOID.
formalities shall be held; and if at the second auction there is a. REASON: to compel the creditor to hold an
no sale either, the creditor may appropriate the thing honest public sale
pledged. In this case he shall be obliged to give an b. furthermore, the creditor should see to it, which
acquittance for his entire claim. (1872a) he usually does, that he loans only as much as he is likely to
realize at a public sale.
Right of pledgee to cause sale of thing pledged
The object pledged may be alienated for the payment to Right of debtor to excess
the creditor when the principal obligation becomes due GENERAL RULE: the debtor is not entitled to the excess unless
(2087) – one of the essential requisites of pledge there is an agreement to the contrary
-rather unfair since the obligation is fully satisfied
Formalities required for such sale: -in effect, the rule would amount to a pacto comisorio which
1. The debt is due and unpaid; is prohibited
2. The sale must be at a public auction;
3. There must be notice to the pledgor and owner, Under the Chattel Mortgage Law, the mortgagor is entitled
stating the amount due; and to recover the excess of the proceeds of the sale in
4. The sale must be made with the intervention of a foreclosure proceedings.
notary public
Right of creditor to recover deficiency
Right of pledgee to appropriate the thing pledged -creditor not entitled to recover deficiency in all cases
-can be availed if after the first and second auctions, the -by electing to sell the thing pledged, instead of suing on the
thing is not sold principal obligation, the creditor waives any other remedy,
-if creditor appropriates the thing, it shall be considered as and must abide by the results of the sale.
full payment for his entire claim, and is thus obliged to give
an acquittance for the same (2115) -creditor may sue on the principal obligation instead of
electing to sell the thing pledged, and in such case, he may
Article 2113. At the public auction, the pledgor or owner recover the deficiency from the debtor.
may bid. He shall, moreover, have a better right if he should
offer the same terms as the highest bidder. Article 2116. After the public auction, the pledgee shall
The pledgee may also bid, but his offer shall not be valid if he promptly advise the pledgor or owner of the result thereof.
is the only bidder. (n) (n)
 Article 2121. Pledges created by operation of law, such as
Obligation of pledge to advise pledgor or owner of result of those referred to in articles 546, 1731, and 1994, are
sale governed by the foregoing articles on the possession, care
PURPOSE OF 2116: to enable the pledgor or owner to take and sale of the thing as well as on the termination of the
steps for the protection of his rights where he has reasonable pledge. However, after payment of the debt and expenses,
grounds to believe that the sale was not an honest one. the remainder of the price of the sale shall be delivered to
the obligor. (n)
Article 2117. Any third person who has any right in or to the
thing pledged may satisfy the principal obligation as soon as Article 2122. A thing under a pledge by operation of law
the latter becomes due and demandable. (n) may be sold only after demand of the amount for which the
thing is retained. The public auction shall take place within
Right of third person to satisfy obligation one month after such demand. If, without just grounds, the
GENERAL RULE: creditor is not bound to accept payment or creditor does not cause the public sale to be held within
performance by a third person who has NO interest in the such period, the debtor may require the return of the thing.
fulfillment of the obligation (1236, unless there is a stipulation (n)
to the contrary)
Instances of legal pledges (pledges which are created by
A third person who has any right in or to the thing pledged operation of law)
(as when the pledgor has contracted to sell it to him) may 1. Article 546 –Necessary expenses shall be refunded
pay the debt as soon as it becomes due and demandable to every possessor; but only the possessor in good faith may
and the creditor cannot refuse to accept the payment. retain the thing until he has been reimbursed therefor.
Useful expenses shall be refunded only to the possessor in
Article 2118. If a credit which has been pledged becomes good faith with the same right of retention, the person who
due before it is redeemed, the pledgee may collect and has defeated him in the possession having the option of
receive the amount due. He shall apply the same to the refunding the amount of the expenses or of paying the
payment of his claim, and deliver the surplus, should there be increase in value which the thing may have acquired by
any, to the pledgor. (n) reason thereof.
2. Article 1731 – he who has executed work upon a
Right of pledge to collect and receive amount due on credit movable has a right to retain it by way of pledge until he is
pledged. paid.
It would seem that under this article, it is not obligatory for the 3. Article 1914 – the agent may retain in pledge the
pledgee to collect and receive the amount due on the things which are the object of the agency until the principal
credit pledged but he is merely given the right to do so. effects the reimbursement and pays the indemnity set forth
in the two preceding articles
However, in view of article 2009 which imposes upon him the 4. Article 1707 – the laborer’s wages shall be a lien on
obligation to take care of the thing pledged with the the goods manufactured or the work done
diligence of a good father of a family, he has duty to collect
if delay would endanger the recovery of the credit. Article 1994 – refers to a depositary
Article 2004 – also an instance of a legal pledge and refers to
Article 2119. If two or more things are pledged, the pledgee a hotel-keeper
may choose which he will cause to be sold, unless there is a
stipulation to the contrary. He may demand the sale of only Rules in case of pledge by operation of law
as many of the things as are necessary for the payment of 1. The provisions on the possession (2098), care (2099)
the debt. (n) and sale of the thing pledged (2112) as well as on the
extinguishment of the pledge (2110, 2111) governing
Right of pledgee to choose which one of several things conditional pledges are applicable to pledges created by
pledged shall be sold operation of law. Unlike, however, in conventional pledge,
-limited only by stipulation the debtor is not entitled to the excess unless it is otherwise
-after sufficient property has been sold to satisfy the agreed (2115)
obligation plus interests and expenses (2115), NO MORE shall
be sold In legal pledge, the remainder of the price of the sale after
payment of the debt and expenses, shall be delivered to the
USUALLY, the value of the property pledged EXCEEDS the debtor (2121)
amount of the debt guaranteed. 2. In legal pledge, there is no definite period for the
payment of the principal obligation. The pledge must,
ARTICLE 2120. If a third party secures an obligation by therefore, make a demand for the payment of the amount
pledging his own movable property under the provisions of due him. Without such demand, he cannot exercise his right
article 2085 he shall have the same rights as a guarantor of sale at public auction (2112) The pledge must proceeds
under articles 2066 to 2070, and articles 2077 to 2081. He is with the sale within one month otherwise the debtor may
not prejudiced by any waiver of defense by the principal require him to return the thing returned (2122)
obligor. (n)
Article 2123. With regard to pawnshops and other
Right of third person who pledged his own property establishments, which are engaged in making loans secured
A third person who is not a party to the principal obligation by pledges, the special laws and regulations concerning
may secure the latter by pledgin his own property (2085 par them shall be observed, and subsidiarily, the provisions of this
2) The law grants him the same rights as a guarantor (2066- Title. (1873a)
2070, 2077-2081) and he cannot be prejudiced by any
waiver of defense by the principal debtor. Rules as to pawnships and other establishments
*TITLE- title XVI on pledge, mortgage, and antichresis (articles dividends, or interest earned or produced by the thing
2085 to 2141) pledged to the payment of interest, if owing, and thereafter
to the principal of his credit.

Actual Transfer of Possession Essential in Pledge Right of Pledgee Against Third Persons
A pledge is a real contract which requires delivery for The creditor to whom the property pledged has been
its perfection. An agreement to constitute a pledge only delivered is obliged to take care of it with the diligence of a
gives rise to a personal action between the contracting good father of a family. Hence, he is authorized to bring such
parties. actions as pertains to the owner in order to recover it or
The delivery of possession essential to the validity of a defend it against claims of third persons.
pledge means actual possession of the property pledged,
and a mere symbolic delivery is not sufficient. Obligation of Pledgee Not to Use Thing Pledged
The pledge who is in possession of the thing pledged
Subject Matter of Pledge has no right to make use of it without permission from the
A pledge is confined and limited to personal property. owner. This is the same rule in deposit.
It cannot be extended or made to apply to real property.
Incorporeal rights evidenced by documents whether Right of Debtor to Demand Return of Thing Pledged
negotiable or not may also be pledged. If negotiable, the The thing pledged stands as security for the fulfilment
document must be indorsed in favour of the creditor. of the debtor’s obligation. Hence, he cannot ask for its return
until said obligation is fully paid including interest thereon
Public Instrument Necessary to Bind Third Persons and expenses incurred for its preservation.
The contract of pledge is not effective against third
persons unless in addition to the delivery of the thing Right of Pledgor to Ask for Deposit of Thing Pledged
pledged, it is embodied in a public instrument wherein shall The pledge has the duty to preserve the thing
appear (1) the description of the thing pledged, and (2) the pledged with the diligence of a good father of a family. If
date of the pledge. the thing should be exposed to loss or impairment through
the negligence or wilful act of the pledgee, the pledgor may
Alienation of Thing Pledged demand that it be deposited with a third person.
The pledgor retains his ownership of the thing
pledged. He may sell the same provided the pledgee Right of Pledgor to Substitute Thing Pledged
consents to the sale. Requisites:
1) The pledgor has reasonable grounds to fear the
Right of Pledgee to Retain Thing Pledged destruction or impairment of the thing pledged;
The possession of the pledgee constitutes his security. 2) There is no fault on the part of the pledgee;
Hence, the debtor cannot demand for its return until the 3) The pledgor is offering in place of the thing another
debt secured by it is paid. thing in pledge which is of the same kind and quality as the
former; and
Obligation of Pledgee to Take Due Care of thing Pledged 4) The pledgee does not choose to exercise his right to
Upon fulfilment of the principal obligation, the pledge cause the thing pledged to be sold at public auction.
must return the thing pledged. Having possession of the
property, he has the obligation to take care of the same with Right of Pledgee to Cause Sale of Thing Pledged
the diligence of a good father of a family. The pledgee’s right to have the thing pledged sold at
public sale granted under Art. 2108 is superior to that given to
Obligation of Pledgee Not to Deposit Thing Pledge With the pledgor to substitute the thing pledged under Art. 2107.
Another
The pledge is not authorized to transfer possession of Right of Pledgee to Demand Substitute or Immediate
the thing pledged to a third person, except when there is a Payment
stipulation authorizing him to do so. The two (2) alternative remedies granted to the
pledgee in case he is deceived as to the substance or
Responsibility of Pledgor for Flaws of the Thing Pledged quality of the thing pledged:
Art. 1951 1) To claim another thing in pledge; and
The bailor, who, knowing the flaws of the thing 2) To demand immediate payment of the principal
loaned, does not advise the bailee of the same, shall be obligation.
liable to the latter for the damages which he may suffer by
reason thereof. Extinguishment of Pledge by Return of Thing Pledged
Notwithstanding contrary stipulation, the pledge is
Requisites: extinguished if the object is returned by the pledgee.
1) There is a flaw or defect in the thing loaned/pledged;
2) The flaw or defect is hidden; Presumption Where Thing Pledged in Possession of Pledgor or
3) The bailor/pledgor is aware thereof; Owner
4) He does not advise the bailee/pledge of the same; and The possession of the thing pledged by the debtor or
5) The bailee/pledgee suffers damages by reason of said owner subsequent to the perfection of the pledge gives rise
flaw or defect. to a prima facie presumption that the thing has been
returned and, therefore, the pledge has been extinguished.
Right of Pledgee to Compensate Earnings of Pledge With The presumption may be rebutted by evidence to the
Debt contrary. When the thing pledged is later found in the hands
The pledgee has no right to use the thing pledged or of the pledgor or the owner, only the accessory obligation of
to appropriate the fruits thereof without the authority of the pledge is presumed remitted, not the principal obligation.
owner. But the pledge can apply the fruits, income,
Extinguishment of Pledge by Renunciation or Abandonment Right of Pledgee to Choose Which One of Several Things
Renunciation or abandonment must be in writing to Pledged Shall Be Sold
extinguish the pledge, and such renunciation is not The right of choice given to the pledge as to which of
conditioned upon the acceptance by the pledgor or owner the things pledged he shall cause to be sold is limited only by
nor upon the return of the thing pledged. The waiver stipulation. After sufficient property has been sold to satisfy
transforms rhe pledge into a depositary with the rights and the obligation plus interest and expenses, no more shall be
obligations of one. The principal debt, however, is not sold.
affected by the waiver of the pledge. But the waiver of the
principal obligation carries with it that of the pledge. Right of Third Person Who Pledged His Own Property
A third person who is not a party to the principal
Right of Pledgee to Cause Sale of Thing Pledged obligation may secure the latter by pledging his own
One of the essential requisites of pledge is that the property. The law grants him the same rights as a guarantor
object pledged may be alienated for the payment to the and he cannot be prejudiced by any waiver of defense by
creditor when the principal obligation becomes due. The the principal debtor.
formalities required for such sale are:
1) The debt is due and unpaid;
2) The sale must be at a public auction; Instances of Legal Pledges
3) There must be notice to the pledgor and owner, stating A legal pledges is created by operation of law.
the amount due; and Examples below:
4) The sale must be made with the intervention of a notary
public. Article 546. Necessary expenses shall be refunded to
every possessor, but only the possessor in good faith may
Right of Pledgee to Appropriate Thing Pledged retain the thing until he has been reimbursed therefor.
The pledgee may appropriate the thing pledged if Useful expenses shall be refunded only to the
after the first and second auctions, the thing is not sold. If the possessor in good faith with the same right of retention, the
creditor appropriates the thing, it shall be considered as full person who has defeated him in the possession having the
payment for his entire claim. option of refunding the amount of the expenses or of paying
the increase in value which the thing may have acquired by
Right of Pledgor and Pledgee to Bid at Public Sale reason thereof.
Both the pledgor and the pledgee may bid. The
pledgor shall be preferred if he offers the same terms as the Article 1731. He who has executed work upon a movable
highest bidder, for after all, the thing belongs to him. To avoid has a right to retain it by way of pledge until he is paid.
fraud, the pledgee is not allowed to acquire the thing
pledged if he is the only bidder. Article 1914. The agent may retain in pledge the things which
are the object of the agency until the principal effects the
Effect of Sale of Thing Pledged reimbursement and pays the indemnity set forth in the two
The sale of the thing pledged extinguishes the preceding articles.
principal obligation whether the price of the sale is more or
less than the amount due. If the price of the sale is more than Article 1707. The laborer’s wages shall be a lien on the goods
the amount due, the debtor is NOT entitled to the excess manufactured or the work done.
unless the contrary is provided. If the price of the sale is less,
neither is the creditor entitled to recover the deficiency. A Others:
contrary stipulation is void. Article 1994 – legal pledge involving depository
The reason is to compel the creditor to hold an honest Article 2004 – legal pledge involving hotel-keeper
public sale. Furthermore, the creditor should see to it, which
he usually does, that he loans only as much as he is likely to
realize at a public sale. Rules in Case of Pledges by Operation of Law
The provisions on the possession (Art. 2098), care (Art.
Obligation of Pledgee to Advise Pledgor or Owner of Result of 2099), and sale of the thing pledged (Art/ 2112) as well as
Sale the extinguishment of pledge (Art. 2110) governing
This is to enable the pledgor or owner to take steps for conventional pledges are applicable to pledges created by
the protection of his rights where he has reasonable grounds operation of law. Unlike, however, in conventional pledge,
to believe that the sale was not an honest one. the debtor is not entitled to the excess unless sit is otherwise
agreed. In legal pledge, the remainder of the price of the
Right of Third Person to Satisfy Obligation sale after payment of the debt and expenses shall be
As a general rule, the creditor is not obliged to accept delivered to the debtor.
payment or performance by a third person who has no In legal pledge there is no definite period for the
interest in the fulfilment of the obligation. However, a third payment of the principal obligation. The pledge, therefore,
person who has any right in or to the thing pledged (as when must make a demand for the payment of the amount due
the pledgor has contracted to sell it to him) may pay the him. Without such demand, he cannot exercise the right of
debt as soon as it becomes due and demandable and the sale at public auction. The pledgee must proceed with the
creditor cannot refuse to accept the payment. sale within one (1) month after demand otherwise the debtor
may require him to return the thing retained.
Right of Pledgee to Collect and Receive Amount Due on
Credit Pledged SALIENT FEATURES OF PRESIDENTIAL DECREE NO. 114 otherwise
It is not obligatory for the pledge to collect and known as REGULATING THE ESTABLISHMENT AND OPERATION
receive the amount due on credit pledged but he is given OF PAWNSHOPS
merely the right to do so.
Background:
 • Pawnshops provide an additional source of credit
especially for small borrowers left unserved by the Requirement of registration with the Central Bank – Any
banking and other financial institutions in the individual, corporation, or association duly registered and
country; licensed to engage in the pawnshop business shall file an
• There is no specific law in the Philippines that information sheet, under oath, with the Central Bank before
governs pawnshop establishments, particularly commencement of actual operations. (Sec. 6)
providing definite and uniform standards for their
operation. The minimum paid-in capital of any pawnshop which may
be established after the effectivity of this Decree shall be one
Declaration of Policy: hundred thousand pesos (P100,000.00):
Citizenship requirement. Upon the effectivity of this Decree,
– It is hereby declared the policy of the State to only Filipino citizens may establish and own a pawnshop
regulate the establishment of pawnshops and to organized in the form of a single proprietorship: Provided,
place their operation on a sound and stable basis to however, That in the case of a partnership, at least seventy
derive the optimum advantages from them as an per cent (70%) of its capital shall be owned by Filipino
additional source of credit; citizens: Provided, further That in the case of a corporation, at
- to prevent and mitigate, as far as practicable, least seventy per cent (70%) of the voting capital stock shall
practices prejudicial to public interest; and to be owned by citizens of the Philippines, or if there be no
lay down the minimum requirements and capital stock, at least seventy per cent (70%) of the members
standards under which they may be established entitled to vote, shall be citizens of the Philippines.
and do business. ( Sec. 2)

Definition of Terms: SEC. 9. Amount of loan. Pawnshops may grant such amount
• “Pawnshop” shall refer to a person or entity of loans as may be agreed upon between the parties:
engaged in the business of lending money on Provided, That the amount of loan shall, in no case, be
personal property delivered as security for loans and less than thirty per cent (30%) of the appraised value
shall be synonymous, and may be used of the security offered for the loan unless the pawner
interchangeably with pawnbroker or pawn manifests in writing the desire to borrow a lesser
brokerage. amount.
• “Pawner” shall refer to the borrower from a
pawnshop. SEC. 10. Rates of interest. – No pawnshop shall directly or
• “Pawnee” shall refer to the pawnshop or indirectly stipulate, charge, demand, take or receive any
pawnbroker. higher rate or greater sum or value for any loan or
• “Pawn” is the personal property delivered by the forbearance than the rate allowed by the Usury Law for such
pawner to the pawnee as security for a loan. transactions. It shall be unlawful for a pawnshop to divide the
• “Pawn ticket” is the pawnbrokers’ receipt for a pawn offered by a pawner in order to collect greater interest
pawn. It is neither a security nor a printed evidence and/or to require the pawner to pay an additional charge as
of indebtedness. insurance premium for the safekeeping and conservation of
• “Property” shall include only such personal property the article pawned. In addition to interest charges,
as may actually be delivered to the control and pawnshops may impose a Maximum service charge of five
possession of the pawnshop: Provided, however, pesos (P5.00), but in no case to exceed one per cent (1%) of
That certain specified chattels such as guns, knives the principal loan.
and similar weapons whose reception in pawn is
expressly prohibited by other laws or regulations shall SEC. 13. Redemption. – The pawner who fails to pay his
not be included. obligation on the date it falls due may, within ninety days
from the date of maturity of the obligation, redeem the pawn
A pawnshop may be established as a single proprietorship, by payment of the principal of the debt with interest:
partnership or corporation. (SEC. 4) Provided, however, That for the purpose of computing
interest due after maturity of the obligation, the basis shall be
Any person or entity desiring to engage in the pawnshop the sum of the principal obligation and interest earned at the
business shall (a) register with the Bureau of Commerce ( time the obligation matured.
Department of Trade and Industries) in the case of single
proprietorship or the Securities and Exchange Commission in SEC. 14. Disposition of pawn on default of pawner. – In the
the case of a corporation or any other association ( event the pawner fails to redeem the pawn within ninety
partnership) and (b) secure a license from the appropriate days from the date of the maturity of the obligation in
city or municipality having territorial jurisdiction over the accordance with the preceding section, the pawnbroker
place of establishment and operation (business permit). may sell or otherwise dispose of any article taken or
received by him in pawn: Provided, however, That the
SEC. 6. Requirement of registration with the Central Bank. – pawner shall be duly notified of such sale on or before the
Any individual, corporation, or association duly registered termination of the ninety-day period, the notice particularly
and licensed to engage in the pawnshop business shall file stating the date, hour, and place of sale.
an information sheet, under oath, with the Central Bank
before commencement of actual operations: Provided, SEC. 15. Public auction of pawned articles. No pawnbroker
however, That pawnshops duly licensed and operating shall sell or otherwise dispose of any article or thing taken or
before the approval of this Decree shall, within six months received in pawn or pledge except at (1) public auction in
from the date of effectivity of the same, register with the his place of business as such pawnbroker or in any other
Central Bank. For this purpose, the Central Bank shall furnish public place within the territorial limits of the municipality or
pawnshops, upon request, with necessary copies of the city where the pawnshop has its place of business, (2) under
prescribed information sheet. the control and direction of an auctioneer with license duly
issued by the corresponding authorities, (3) nor shall any such Rosel is given the option to buy at a certain price the
article or thing to be sold or disposed of unless said property given as collateral in the event the borrower fails to
pawnbroker has published a notice once in at least two daily pay. When the loan was about to mature, Rosel proposed to
newspapers printed in the city or municipality during the buy at the pre-set price of 200K the collateral given to
week preceding the date of such sale. guarantee the payment of the loan, but Bustamante refused
to sell. When Bustamante tendered payment of the loan to
In remote areas where newspapers are neither Rosel which it refused to accept, insisting on petitioner’s
published nor circulated, notice by newspaper publication signing a prepared deed of absolute sale of the collateral.
shall be substituted by posting notices in conspicuous public Rosel consigned the amount of 47,500 with the trial court with
places within the territorial limits of the city or municipality which Rosel filed a complaint for specific performance.
where the pawnshop has its place of business. Said notice,
whether published or posted, shall be in English, and either in Issue: WON the stipulation in the loan contract was valid and
Pilipino or in the local dialect, and shall contain the name of enforceable.
the pawnshop, its owner, address of the establishment, hour,
and the date of the auctions sale. (SEC.15) Held:
1. Stipulation embraced in concept of pactum
Pawnshop business is under the regulatory power of the commisorium – Bustamante did not fail to pay the
Central bank of the Philippines. (Sec. 17) loan when Rosel refused to accept payment,
Bustamante consigned the amount with the trial
court. A scrutiny of the stipulation of the parties
reveals a subtle intention of the creditor to acquire
the property given as security for the loan. This is
embraced in the concept of pactum
commissorium.
2. Intent to appropriate property as collateral appears
to be evident – the debtor is obliged to dispose of
CASES: the collateral at the pre-agreed consideration
DBP VS CA (284 SCRA 14) amounting to practically the same amount of the
Facts: CUBA, a guarantee of a Fishpond Lease Agreement loan. In effect, the creditor acquires collateral in
from the Government, obtained from DBP 3 separate loans, event of non-payment of the loan. This is within the
each of which was covered by a promissory note. concept of PC, thus stipulation is void.
Simultaneous with the execution of the notes was the
execution of the “Assignment of Leasehold Rights” by CUBA, ELEMENTS OF PACTUM COMMISSORIUM
as borrower of the mortgaged properties by way of security a. There should be a property mortgaged by way of
in the payment of the loans. Condition no. 12 provides for the security for the payment of the principal obligation;
appointment of DBP as attorney-in-fact with authority, b. There should be a stipulation for automatic
among other things, to sell or otherwise dispose of the said appropriation by the creditor of the thing
real rights in case of default by CUBA and to apply the mortgaged in the case of non-payment of the
proceeds to the payment of the loan. principal obligation within the stipulated period.

Issue: SPOUSES WILFREDO N. ONG AND EDNA SHEILA PAGUIO-ONG

1. WON the condition in question constitute pactum v. ROBAN LENDING CORPORATION 557 SCRA 516 (2008)
commissorium Facts: On various dates, petitioner Spouses Wilfredo N. Ong
2. WON the act of DBP in appropriating to itself CUBA’s and Edna Sheila Paguio-Ong obtained several loans from
leasehold rights with foreclosure proceedings was respondent Roban Lending Corporation in the total amount
contrary to Article 2088 and, therefore, invalid. of P4, 000,000. These loans were secured by real estate
mortgage on Spouses Ong‘s parcel of lands.
Held:
1. The elements of pactum commissorium are not Later Spouses Ong and Roban executed several agreements
present – Condition 12 did not provide that the – an amendment to the amended Real Estate Mortgage
ownership over the leasehold rights would which consolidated their loans amounting to P5, 916,117.50;
automatically pass to DBP upon CUBA’s failure to dacion in payment wherein spouses Ong assigned their
pay the loan on time mortgaged properties to Roban to settle their total obligation
2. DPB exceeded authority vested by condition - DBP
and Memorandum of Agreement (MOA) in which the
cannot take refuge in condition 12 of the deed of
assignment to justify its act of appropriating the dacion in payment agreement will be automatically
leasehold rights. As stated, condition 12 did not enforced in case spouses Ong fail to pay within one year
provided that CUBA’s default would operate to vest from the execution of the agreement.
DBP ownership of the said rights. Besides, an Spouses Ong filed a complaint before Regional Trial Court of
assignment to guarantee an obligation, as in the Tarlac City to declare the mortgage contract, dacion in
present case, is virtually a mortgage and not an payment agreement, and MOA void. Spouses Ong allege
absolute conveyance of title which confers
that the dacion in payment agreement is pactum
ownership on the assignee
commissorium, and therefore void. In its Answer with
BUSTAMANTE VS. ROSEL (319 SCRA 413) counterclaim, Roban alleged that the dacion in payment
Facts: Respondent ROSEL (lender) entered into a loan agreement is valid because it is a special form of payment
agreement with petitioner BUSTAMANTE (borrower) and her recognized under Article 1245 of the Civil Code. RTC ruled in
late husband, under, among others, the condition that the favor of Roban, finding that there was no pactum
commissorium. The Court of Appeals upheld the RTC assignor Tan to indiscriminately dispose of the thing or the
decision. right given as security. The Court rules that the said provision
ISSUE: should be read in consonance with Article 2097 of the same
code. Although the pledgee or the assignee, Litton, Sr. did
Whether or not the dacion in payment agreement entered
not ipso factobecome the creditor of private respondent
into by Spouses Ong and Roban constitutes pactum Mendoza, the pledge being valid, the incorporeal right
commissorium assigned by Tan in favor of the former can only be alienated
by the latter with due notice to and consent of Litton, Sr. or
his duly authorized representative. To allow the assignor to
HELD: dispose of or alienate the security without notice and
consent of the assignee will render nugatory the very
purpose of a pledge or an assignment of credit.
The Court finds that the Memorandum of Agreement and
Dacion in Payment constitute pactum commissorium, which Moreover, under Article 1634, the debtor has a
is prohibited under Article 2088 of the Civil Code which corresponding obligation to reimburse the assignee, Litton, Sr.
provides that the creditor cannot appropriate the things for the price he paid or for the value given as consideration
given by way of pledge or mortgage, or dispose of them. for the deed of assignment. Failing in this, the alienation of
Any stipulation to the contrary is null and void the litigated credit made by Tan in favor of private
The elements of pactum commissorium, which enables the respondent by way of a compromise agreement does not
bind the assignee, petitioner herein.
mortgagee to acquire ownership of the mortgaged property
without the need of any foreclosure proceedings, are: (1)
Manila Banking Corporation v Tedodor Jr. and Teodoro 169
there should be a property mortgaged by way of security for
SCRA 95
the payment of the principal obligation, and (2) there should
Fact: Defendants, together with Anastacio Teodoro, Sr.,
be a stipulation for automatic appropriation by the creditor
jointly and severally, executed in favor of plaintiff a
of the thing mortgaged in case of non-payment of the
promissory note for the sum of P10,420. Defendants failed to
principal obligation within the stipulated period.
pay the said amount inspite of repeated demands and the
Here, Memorandum of Agreement and the Dacion in
obligation as of September 30, 1969 stood at P 15,137.11. The
Payment contain no provisions for foreclosure proceedings
defendants executed in favor of plaintiff two PNS for P8,000
nor redemption. Under the Memorandum of Agreement, the
and P1,000. They made partial payments but none were
failure by the petitioners to pay their debt within the one-
paid, leaving an unpaid balance of P8,934.74 as of
year period gives respondent the right to enforce the Dacion
September 30, 1969 including.
in Payment transferring to it ownership of the properties
It appears that the Son executed in favor of plaintiff a Deed
covered by TCT No. 297840. Respondent, in effect,
of Assignment of Receivables from the Emergency
automatically acquires ownership of the properties upon
Employment Administration in the sum of P44,635.00. The
Spouses Ong’s failure to pay their debt within the stipulated
Deed of Assignment provided that it was for and in
period.
consideration of certain credits, loans, overdrafts and other
In a true dacion en pago, the assignment of the property
credit accommodations extended to defendants as security
extinguishes the monetary debt. Here, the alienation of the
for the payment of said sum and the interest thereon, and
properties was by way of security, and not by way of
that defendants do hereby remise, release and quitclaim all
satisfying the debt. The Dacion in Payment did not extinguish
its rights, title, and interest in and to the accounts
Spouses Ong’s obligation to Roban. On the contrary, under
receivables. Further, title to the AR is to remain in the
the Memorandum of Agreement executed on the same day
assignee.
as the Dacion in Payment, petitioners had to execute a
Plaintiff extended loans to defendants on the basis and by
promissory note for P5, 916, 117.50 which they were to pay
reason of certain contracts entered into by the defunct
within one year.
Emergency Employment Administration (EEA) with
ESTATE OF G. LITTON VS. MENDOZA (163 SCRA 246)
defendants for the fabrication of fishing boats, and that the
Facts: Estate of G. Litton brought an action against Mendoza
for the collection of a sum of money. While the case was Philippine Fisheries Commission succeeded the EEA after its
pending resolution, EGL assigned in favor of abolition; that non-payment of the notes was due to the
(pledgee/assignee) by way of securing or guaranteeing failure of the Commission to pay defendants after the latter
EGL’s obligation to the pledge his litigated credit against had complied with their contractual obligations; and that
Mendoza duly submitted to the court with notice to the the President of the Bank took steps to collect from the
parties. The lower court ruled in favor of EGL. Subsequently, Commission, but no collection was effected.
pending resolution of the appeal of Mendoza to the CA,
The action was instituted against the defendants for
Mendoza entered into a compromise agreement with EGL
wherein EGL acknowledged that all his claims against the collection of sum on the PNs. The trial court rendered
Mendoza had been settled. judgment adverse to the defendants.

Issue: WON the compromise agreement is valid Issue: WON the assignment of receivables has the effect
of payment of all the loans
Held: No. Although it is true that Tan may validly alienate the Held: No. The assignment of receivables executed by
litigatious credit as ruled by the appellate court, citing Article
appellants did not transfer the ownership of the receivables
1634 of the Civil Code, said provision should not be taken to
mean as a grant of an absolute right on the part of the
to appellee bank and release appellants from their loans Held: The liquidation of respondent’s outstanding loans were
with the bank incurred under promissory notes. valid in so far as petitioner Citibank used respondent’s
The Deed of Assignment provided that it was for and in savings account with the bank and her money market
consideration of certain credits, loans, overdrafts, and their placements with petitioner FNCB Finance; but illegal and
credit accommodations extended to appellants by appellee void in so far as petitioner Citibank used respondent’s dollar
bank, and as security for the payment of said sum and the accounts with Citibank-Geneva.
interest thereon; that appellants as assignors, remise, release, Without the Declaration of Pledge, petitioner Citibank had
and quitclaim to assignee bank all their rights, title and no authority to demand the remittance of respondent’s
interest in and to the accounts receivable assigned. It was dollar accounts with Citibank-Geneva and to apply them to
further stipulated that the assignment will also stand as a her outstanding loans. It cannot effect legal compensation
continuing guaranty for future loans of appellants to under Article 1278 of the Civil Code since, petitioner Citibank
appellee bank and correspondingly the assignment shall also itself admitted that Citibank-Geneva is a distinct and
extend to all the accounts receivable; appellants shall also separate entity. As for the dollar accounts, respondent was
obtain in the future, until the consideration on the loans the creditor and Citibank-Geneva is the debtor; and as for
secured by appellants from appellee bank shall have been the outstanding loans, petitioner Citibank was the creditor
fully paid by them. and respondent was the debtor. The parties in these
The character of the transactions between the parties is not, transactions were evidently not the principal creditor of each
however, determined by the language used in the other.
document but by their intention. Definitely, the assignment of Therefore, this Court declares that the remittance of
the receivables did not result from a sale transaction. It respondent’s dollar accounts from Citibank-Geneva and the
cannot be said to have been constituted by virtue of a application thereof to her outstanding loans with petitioner
dation in payment for appellants' loans with the bank Citibank was illegal, and null and void.
evidenced by promissory note which are the subject of the
suit for collection in a Civil Case. At the time the deed of PARAY v. RODRIGUEZ, ET AL., G.R. No. 132287 (JANUARY 24,
assignment was executed, said loans were non-existent yet. 2006)
Obviously, the deed of assignment was intended as FACTS: Respondents were the owners of shares of stock in
collateral security for the bank loans of appellants, as a Quirino-Leonor-Rodriguez Realty Inc. In 1979 to 1980,
continuing guaranty for whatever sums would be owing by respondents secured by way of pledge of some of their
defendants to plaintiff, as stated in stipulation No. 9 of the shares of stock to petitioners Bonifacio and Faustina Paray
deed. (“Parays”) the payment of certain loan obligations.
Assignment of credit is an agreement by virtue of which the When the Parays attempted to foreclose the pledges
owner of a credit, known as the assignor, by a legal cause, on account of respondents’ failure to pay their loans,
such as sale, dation in payment, exchange or donation, and respondents filed complaints with RTC of Cebu City. The
without the need of the consent of the debtor, transfers his actions sought the declaration of nullity of the pledge
credit and its accessory rights to another, known as the agreements, among others. However the RTC dismissed the
assignee, who acquires the power to enforce it to the same complaint and gave due course to the foreclosure and sale
extent as the assignor could have enforced it against the at public auction of the various pledges. This decision
debtor. attained finality after it was affirmed by the Court of Appeals
and the Supreme Court.
CITIBANK vs. SABENIANO G.R.No. 156132, October 16, 2006 Respondents then received Notices of Sale which
FACTS: Petitioner Citibank is a banking corporation duly indicated that the pledged shares were to be sold at public
authorized under the laws of the USA to do commercial auction. However, before the scheduled date of auction, all
banking activities n the Philippines. Sabeniano was a client of of respondents caused the consignation with the RTC Clerk
both Petitioners Citibank and FNCB Finance. Respondent of Court of various amounts. It was claimed that respondents
filed a complaint against petitioners claiming to have had attempted to tender payments to the Parays, but had
substantial deposits, the proceeds of which were supposedly been rejected.
deposited automatically and directly to respondent’s Notwithstanding the consignations, the public auction
account with the petitioner Citibank and that allegedly took place as scheduled, with petitioner Vidal Espeleta
petitioner refused to despite repeated demands. Petitioner successfully bidding for all of the pledged shares. None of
alleged that respondent obtained several loans from the respondents participated or appeared at the auction.
former and in default, Citibank exercised its right to set-off Respondents instead filed a complaint with the RTC
respondent’s outstanding loans with her deposits and seeking the declaration of nullity of the concluded public
money. RTC declared the act illegal, null and void and auction.
ordered the petitioner to refund the amount plus interest, ISSUES:
ordering Sabeniano, on the other hand to pay Citibank her
indebtedness. CA affirmed the decision entirely in favor of 1. WON right of redemption exists over personal
the respondent. properties (such as the subject pledged shares).
Issue: Whether or not there was a valid off 2. WON the consignations made by respondents prior
setting/compensation of loan to the auction sale are sufficient to extinguish the loan
obligations and the subject pledged contracts.
3. WON the act of respondents in consigning the In order that the consignation could have the effect of
payments should be deemed done in the exercise of their extinguishing the pledge contracts, such amounts should
right of redemption owing to an imputed policy of the law cover not just the principal loans, but also the monthly
that favored redemption and mandated a liberal interests thereon.
construction to redemption laws. In the case at bar, while the amounts consigned by
4. WON a buyer at a public auction ipso facto respondents could answer for their respective principal loan
becomes the owner of the pledged shares pending the obligations, they were not sufficient to cover the interests
lapse of the one-year redemptive period due on these loans, which were pegged at the rate of 5%
5. WON there is a need to individually sell the various per month or 60% per annum.
shares of stock as they had belonged to different pledgors. 3. No.
HELD: The pledged shares in this case are not subject to
1. No. redemption. Thus, the consigned payments should not be
treated with liberality, or somehow construed as having been
No law or jurisprudence establishes or affirms such right. made in the exercise of the right of redemption.
Indeed, no such right exists.
The right of redemption over mortgaged real property sold 4. Yes.
extrajudicially is established by Act No. 3135, as amended. Obviously, since there is no right to redeem personal
The said law does not extend the same benefit to personal property, the rights of ownership vested unto the purchaser
property. In fact, there is no law in our statute books which at the foreclosure sale are not entangled in any suspensive
vests the right of redemption over personal property. Act No. condition that is implicit in a redemptive period.
1508, or the Chattel Mortgage Law, ostensibly could have 5. No.
served as the vehicle for any legislative intent to bestow a This concern is obviously rendered a non-issue by the fact
right of redemption over personal property, since that law that there can be no right to redemption in the first place.
governs the extrajudicial sale of mortgaged personal Rule 39 of the Rules of Court does provide for instances when
property, but the statute is definitely silent on the point. properties foreclosed at the same time must be sold
separately, such as in the case of lot sales for real property
The right of redemption as affirmed under Rule 39 of the under Section 19. However, these instances again pertain to
Rules of Court applies only to execution sales, more precisely execution sales and not extrajudicial sales. No provision in
execution sales of real property. the Rules of Court or in any law requires that pledged
It must be clarified that the subject sale of pledged shares properties sold at auction be sold separately.
was an extrajudicial sale, specifically a notarial sale, as On the other hand, under the Civil Code, it is the pledgee,
distinguished from a judicial sale as typified by an execution and not the pledgor, who is given the right to choose which
sale. Under the Civil Code, the foreclosure of a pledge of the items should be sold if two or more things are pledged.
occurs extrajudicially, without intervention by the courts. All No similar option is given to pledgors under the Civil Code.
the creditor needs to do, if the credit has not been satisfied Moreover, there is nothing in the Civil Code provisions
in due time, is to proceed before a Notary Public to the sale governing the extrajudicial sale of pledged properties that
of the thing pledged. prohibits the pledgee of several different pledge contracts
In this case, petitioners attempted to proceed extrajudicially from auctioning all of the pledged properties on a single
with the sale of the pledged shares by public auction. occasion, or from the buyer at the auction sale in purchasing
However, extrajudicial sale was stayed with the filing of Civil all the pledged properties with a single purchase price. The
Cases which sought to annul the pledge contracts. The final relative insignificance of ascertaining the definite
and executory judgment in those cases affirmed the pledge apportionments of the sale price to the individual shares lies
contracts and disposed them. Said judgment did not direct in the fact that once a pledged item is sold at auction,
the sale by public auction of the pledged shares, but instead neither the pledgee nor the pledgor can recover whatever
upheld the right of the Parays to conduct such sale at their deficiency or excess there may be between the purchase
own volition. price and the amount of the principal obligation.
2. No.
There is no doubt that if the principal obligation is satisfied,
the pledges should be terminated as well. Article 2098 of the
Civil Code provides that the right of the creditor to retain
possession of the pledged item exists only until the debt is
paid. Article 2105 of the Civil Code further clarifies that the
debtor cannot ask for the return of the thing pledged against
the will of the creditor, unless and until he has paid the debt
and its interest. At the same time, the right of the pledgee to
foreclose the pledge is also established under the Civil Code.
When the credit has not been satisfied in due time, the
creditor may proceed with the sale by public auction under
the procedure provided under Article 2112 of the Code.