Union college

Santa Cruz, Laguna

Is it a pledge or chattel mortgage?

First Semester Final Requirement

Submitted By:
Rubelyn R. Ocampo
BSA – (016-0137)

Submitted To:
Dr. Rogelio S. Caluza
Dean of School of Arts and Sciences
Professor

S.Y 2019-2020
 Rationale
Lending and financing are a common part of everyday life for most Filipinos.
We use financing to help us purchase larger consumer products, such as real estate
and vehicles, which we otherwise would not be able to afford. Through mortgaging
and pledging, consumers can seek financing for larger-scale purchases without
requiring the lender to take on an equally large risk. The practice of lending against a
pledge allows the lender to protect his interests while permitting consumers to borrow
against the value of the pledge instead of relying on credit worthiness alone.
A mortgage, a type of secured loan, is a security interest in a piece of real
property in exchange for the extension of a loan. When a borrower seeks financing
from a lender in a mortgage arrangement, the borrower transfers his interest in the
property to the lender for the length of the loan. Once the borrower pays back the loan
in full, the lender then transfers interest in the property back to the borrower. In the
event the borrower fails to repay the loan in full, the loan defaults and the lender takes
complete ownership of the property.
A pledge, also called a pawn or a security interest, is a piece of property, or
chattel, used to secure financing. A pledge can be any physical thing with liquid value,
although the type of property that a lender requires typically relates to the reason for
the loan. For example, a lender extending a loan to a borrower for the purchase of a
home will require the home as the pledge; a loan for a new vehicle will often require
that vehicle to serve as the pledge. Pledges can also be used to secure short-term
personal financing, such as a title loan or other “cash advance” loans, where the
borrower puts up the title to her vehicle or a piece of jewelry as a pledge for the loan.
In its most basic form, a mortgage is a security interest secured against the
property, which is the pledge. Therefore, mortgages and pledges are not necessarily
comparable, but rather, co-dependent. A mortgage and pledge work together to
secure financing for the borrower and security for the lender. This allows the borrower
to seek a larger loan amount while simultaneously protecting the lender’s interests if
the borrower should fail to meet her obligations, as the lender can then sell the pledge
to recoup some or all of the loss incurred from the borrower’s failure to pay.
Facts
Diosdado Yuliongsiu was the owner of two (2) vessels, namely The M/S
Surigao (valued at 109K) and the M/S DonDino (63K) and operated the FS-203,
(210K) which he purchased from the Philippine Shipping Commission, by installment
or on account. As of January or February, 1948, he 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. He
obtained a loan of 50K from the PNB Cebu. To guarantee its payment, he pledged the
M/S Surigao, M/S Don Dino and its equity in the FS-203 to PNB, 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, he affected partial payment of the loan in the amount of 20K. The
remaining balance was renewed by the execution of two (2) promissory notes in the
bank’s favor due on April 16 and June 25, 1948 respectively.
These two notes were never paid on their respective due dates. PNB filed
criminal charges against Yuliongsiu and two other accused for Staffa thru falsification
of commercial documents, because Yuliungsiu had, as last indorsee, deposited with
PNB, from March 11 to March 31, 1948, seven BPI checks totalling184K. They were
convicted by the trial court and sentenced to indemnify the PNB in the sum of 184K.
CA affirmed. The corresponding writ of execution issued to implement the order for
indemnification was returned unsatisfied as Yuliongsiu was totally insolvent.
Meanwhile, together with the institution of the criminal action, PNB took physical
possession of the three pledged vessels while they were at the Port of Cebu, and
after the first note fell due and was not paid, the PNB Cebu Branch Manager, acting
as attorney-in-fact of Yuliongsiu pursuant to the terms of the pledge contract,
executed a document of sale, Exhibit "4", transferring the two pledged vessels and
plaintiff’s equity in FS-203, to PNB for 30K. The FS-203 was subsequently
surrendered by the PNB to the Philippine Shipping Commission which rescinded the
sale to Yuliongsiu for failure to pay the remaining installments. The other two boats,
the M/S Surigao and the M/S Don Dino were sold by PNB to third parties. Yuliongsiu
commenced action in the Court of First Instance of Cebu to recover the three vessels
or their value and damages from PNB. The lower court ruled that the bank’s taking of
physical possession of the vessels was justified by the pledge contract, Exhibit "A" &
"1-Bank" and the law; (b) that the private sale of the pledged vessels by defendant
bank to itself without notice to the plaintiff-pledge or as stipulated in the pledge
contract was likewise valid; and (c)that the defendant bank should pay to plaintiff the
sums of 1Kand 8K, as his remaining account balance, or set-off these sums against
the indemnity which he was ordered to pay to it in the criminal cases. Yuliongsiu
contended that the contract was a chattel mortgage and constructive delivery is
insufficient to make the pledge effective.

Issue: Whether or not the contract was pledge

Discussion
Yes. The parties stipulated as a fact that Exhibit "A" &"1-Bank" is a pledge
contract— "3. That a credit line of 50Kwas extended to the him by PNB, and he
obtained and received from the said Bank the sum of 50K, 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;" This judicial admission binds the plaintiff.
Without any showing that this was made thru palpable mistake, no amount of
rationalization can offset it. PNB as a pledgee was therefore entitled to the actual
possession of the vessels.

While it is true that Yuliongsiu continued operating the vessels after the pledge
contract was entered into, his possession was expressly made "subject to the order of
the pledgee." There is 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. Yuliongsiu contended that
constructive delivery is insufficient to make pledge effective. 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. Since PNB was, pursuant to the terms of the pledge
contract, in full control of the vessels thru the plaintiff, the former could take actual
possession at any time during the life of the pledge to make more effective its
security. In a contract of pledge, constructive delivery suffices. Hence, PNB's taking of
the vessels therefore was not unlawful.

Conclusion
By repeatedly refusing to recognize a static conception of possession in the
lender, the courts render the pledge device fully adaptable to the business needs of
the contracting parties. Although frequently an arrangement is held a completed
pledge when it is at least doubtful that the surrounding conditions offer adequate
notice to third persons, the chief need for reform arises when there is admittedly no
warning of the lender's security interest.
Under these circumstances where the claim of the general creditor and the
security interest of the lender are before the court, it appears that at least some - and
perhaps all - creditors might be accorded more positive preference over the equitable
pledgee than they can obtain through a common law race of diligence. The slight
extent to which such a rule would curtail the commercial usefulness of the pledge
seems more than offset by the added security given general credit transactions.
Although a strong sanction in effect means the end of the equitable pledge, it seems
but a reasonable extension of the present policy of lending protection to third parties
who rely upon the apparent ownership of the equitable pledgor.