Credit Transactions

• Pledge

  A contract by virtue of which the debtor delivers to the creditor or to a third person movable or document evidencing incorporeal rights for the purpose of securing the fulfilment of a principal obligation with the understanding that when the obligation is fulfilled, the thing delivered shall be returned with all its fruits and accessions
• Mortgage


  A contract by virtue of which the debtor delivers to the creditor or to a third person movable or document evidencing incorporeal rights for the purpose of securing the fulfilment of a principal obligation with the understanding that when the obligation is fulfilled, the thing delivered shall be returned with all its fruits and accessions
• Requisites of contract of Pledge and Mortgage

  • That they be constituted to secure the fulfilment of a principal obligation
  • That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged
  • That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose
• Third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own property
• Accessory contract

  A pledge or mortgage, being an accessory contract, cannot exist without a valid obligation or a principal contract. Nevertheless, similar to a guaranty, a pledge or a mortgage may be constituted to guarantee the performance of a voidable or an unenforceable contract. It may also guarantee a natural obligation
• The contract of pledge or mortgage may secure all kinds of obligations, be they pure or subject to a suspensive or resolutory condition
• The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void
• Pactum Commissorium

  The stipulation that the creditor can appropriate the things given by way of pledge or mortgage
• A pledge or mortgage is indivisible, even though the debt may be divided among the successors in interest of the debtor or of the creditor
• If there being several things given in mortgage or pledge, each one of them guarantees only a determinate portion of the credit. The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as the portion of the debt for which each thing is specially answerable is satisfied
• Delivery

  In addition to the above-mentioned essential requisites of contracts of pledge or mortgage, it is necessary, in order to constitute the contract of pledge, that the thing pledged be placed in the possession of the creditor, or of a third person by common agreement
• Kinds of Pledge

  • Voluntary or conventional - created by agreement of the parties
  • Legal-created by operation of law
• Pledge

  • Real-perfected by the delivery of the thing pledged
  • Accessory- - no independent existence of its own
  • Unilateral - creates an obligation solely on the part of the creditor to return the thing
  • Subsidiary obligation incurred does not arise until the fulfilment of the principal obligation which is secured
• Cause or consideration for Pledge

  Pledgor/debtor - the principal obligation<|>Pledgor not the debtor - compensation stipulated or mere liberality
• Object of Pledge

  • Movable property
  • Within the commerce of man and capable of possession
  • Incorporeal rights, evidenced by negotiable instruments, bills of lading, shares of stock, bonds, warehouse receipts and similar documents may also be pledged
• If the pledge earns or produces fruits, income, dividends, or interests, the creditor shall compensate what he receives with those which are owing him; but if none are owing him, or insofar as the amount may exceed that which is due, he shall apply it to the principal
• Unless there is a stipulation to the contrary, the pledge shall extend to the interest and earnings of the right pledged
• In case of a pledge of animals, their offspring shall pertain to the pledgor or owner of animals pledged, but shall be subject to the pledge, if there is no stipulation to the contrary
• Unless the thing pledged is expropriated, the debtor continues to be the owner thereof
• The creditor may bring the actions which pertain to the owner of the thing pledged in order to recover it from, or defend it against a third person
• Loss, Deterioration of Pledged Object or the Fear Thereof

  • If through the negligence or willful act of the pledgee, the thing pledged is in danger of being lost or impaired, the pledgor may require that it be deposited with a third person
  • If there are reasonable grounds to fear the destruction or impairment of the thing pledged, without the fault of the pledgee, the pledgor may demand the return of the thing, upon offering another thing in pledge, provided the latter is of the same kind as the former and not of inferior quality, and without prejudice to the right of the pledgee under the provisions of the following article
  • The pledgee is bound to advise the pledgor, without delay, of any danger to the thing pledged
  • If, without the fault of the pledgee, there is danger of destruction, impairment, or diminution in value of the thing pledged, he may cause the same to be sold at a public sale. The proceeds of the auction shall be a security for the principal obligation in the same manner as the thing originally pledged
• Form of Pledge

  There is no form required to constitute a contract of pledge, but in order to affect third persons, there must be a public instrument containing both the description of the thing pledged and the date of the pledge
• Alienation of the thing pledged is allowed with the consent of the pledgee. The ownership of the thing pledged is transmitted to the vendee or transferee as soon the pledgee consents to the alienation, but the latter shall continue in possession
• Creditor-Pledgee


  • The creditor shall take care of the thing pledged with the diligence of a good father of a family; he has a right to the reimbursement of the expenses made for its preservation, and is liable for its loss or deterioration, in conformity with the Civil Code
  • The pledgee cannot deposit the thing pledged with a third person, unless there is a stipulation authorizing him to do so
  • The pledgee is responsible for the acts of his agents or employees with respect to the thing pledged
  • The creditor cannot use the thing pledged, without the authority of the owner, and if he should do so, or should misuse the thing in any other way, the owner may ask that it be judicially or extrajudicially deposited. When the preservation of the thing pledged requires its use, it must be used by the creditor but only for that purpose
  • If the creditor is deceived on the substance or quality of the thing pledged, he may either claim another thing in its stead, or demand immediate payment of the principal obligation
• If the thing pledged is in the possession of a third person who has received it from the pledgor or owner after the constitution of the pledge, the pledgor may demand its return from the third person
• Renunciation or Abandonment of Pledge

  A statement in writing by the pledgee that he renounces or abandons the pledge is sufficient to extinguish the pledge. For this purpose, neither the acceptance by the pledgor or owner, nor the return of the thing pledged is necessary, the pledgee becoming a depositary
• Foreclosure Sale

  • The creditor to whom the credit has not been satisfied in due time, may proceed before a Notary Public to the sale of the thing pledged
  • This sale shall be made at a public auction, and with notification to the debtor and the owner of the thing pledged in a proper case, stating the amount for which the public sale is to be held
  • If at the first auction the thing is not sold, a second one with the same formalities shall be held; and if at the second auction there is no sale either, the creditor may appropriate the thing pledged. In this case, he shall be obliged to give an acquittance for his entire claim
  • At the public auction, the pledgor or owner may bid. He shall, moreover, have a better right if he should offer the same terms as the highest bidder. The pledgee may also bid, but his offer shall not be valid if he is the only bidder
  • All bids at the public auction shall offer to pay the purchase price at once. If any other bid is accepted, the pledgee is deemed to have been received the purchase price, as far as the pledgor or owner is concerned
• Sale of the Thing and Proceeds Thereof

  • The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of the sale are equal to the amount of the principal obligation, interest and expenses in a proper case
  • If the price of the sale is more than said amount, the debtor shall not be entitled to the excess, unless it is otherwise agreed
  • If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency, notwithstanding any stipulation to the contrary
  • The pledgor who, knowing the flaws of the thing pledged, does not advise the pledgee of the same, shall be liable to the latter for the damages which he may suffer by reason thereof
  • The debtor cannot ask for the return of the thing pledged against the will of the creditor, unless and until he has paid the debt and its interest, with expenses in a proper case
• If the thing pledged is returned by the pledgee to the pledgor or owner, the pledge is extinguished. Any stipulation to the contrary shall be void
• If subsequent to the perfection of the pledge, the thing is in the possession of the pledgor or owner, there is a prima facie presumption that the same has been returned by the pledgee
• After the public auction, the pledgee shall promptly advise the pledgor or owner of the result thereof
• Any third person who has any right in or to the thing pledged may satisfy the principal obligation as soon as the latter becomes due and demandable
• If a credit which has been pledged becomes due before it is redeemed, the pledgee may collect and receive the amount due. He shall apply the same to the payment of the principal obligation
• Debtor

  Cannot ask for the return of the thing pledged against the will of the creditor, unless and until he has paid the debt and its interest, with expenses in a proper case
• Thing Pledged is Returned

  1. If the thing pledged is returned by the pledgee to the pledgor or owner, the pledge is extinguished

  2. Any stipulation to the contrary shall be void
• After the public auction

  The pledgee shall promptly advise the pledgor or owner of the result thereof
• If a credit which has been pledged becomes due before it is redeemed

  1. The pledgee may collect and receive the amount due

  2. He shall apply the same to the payment of his claim

  3. And deliver the surplus, should there be any, to the pledgor
• If two or more things are pledged

  1. The pledgee may choose which he will cause to be sold, unless there is a stipulation to the contrary

  2. He may demand the sale of only as many of the things as are necessary for the payment of the debt
• Third party who secures an obligation by pledging his own movable property

  He shall have the same rights as a guarantor to be indemnified for the total amount of the debt, including interest, expenses or damages, if they are due<|>Subrogated to all the rights the creditor had against the debtor<|>He is not prejudiced by any waiver of defense by the principal obligor
• Pledges created by operation of law, such as those referred to in Articles 546, 1731, and 1994, are governed by the foregoing articles on the possession, care and sale of the thing as well as on the termination of the pledge