Art.

2107
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.

Right of Pledgor to Substitute thing pledged

There are 2 Remedies granted by Article 2017 to the pledgor when there are
reasonable grounds to fear the destruction or impairment if the thing
pledged w/o the fault of the pledgee:

The right to demand the return of the thing pledged upon offering another
thing pledged;

And To the pledgee, the right to cause the same to be sold at a public sale

The following are the Requisites for the application of Art. 2017 :

The pledgor has REASONABLE grounds to fear the destruction or

impairment of the thing pledged;
There is no fault on the part of the pledgee;
The pledgor is offering in place of the thing, another thing in pledge which
is of the same kind and quality as the former
And The pledgee DOES NOT choose to exercise his right to cause the
thing pledged to be sold at a public auction
The pledgee must advice the pledgor without delay (of any danger to the
thing pledged)

Art. 2108
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.

Right of Pledgee to cause sale of thing pledged

The pledgees right to have the thing pledged sold at public sale is
SUPERIOR to that given to the pledgor to substitute the thing pledged
( Art. 2017)

The law says the pledgor is given the right without prejudice to the right of the
pledgee (Art. 2107)

The sale MUST be a public sale

The pledgee shall keep the proceeds of the sale as SECURITY for the fulfillment
of the principal obligation.
In other words, they shall belong to the pledgor

Art. 2109
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.

Right of Pledgee to Demand Substitute or Immediate Payment

There are 2 Remedies granted to the pledgee in case he is deceived as to the
SUBSTANCE OR QUALITY of the thing pledged:

To claim another thing in pledge; and

To demand immediate payment of the principal obligation

The remedies are ALTERNATIVE; the pledgee is privileged to choose only one
and not both
Article 2109 is of evident fairness to both parties

Art. 2110
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.
This same presumption exists 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.

Extinguishment of pledge by the return of the thing pledged

One of the essential requisites of pledge is that the object be placed

in the possession of the creditor, or of a 3rd person by common
agreement. (Art 2093). Hence:

The pledge is EXTINGUISHED if the object is returned by the pledgee

And this is true regardless ANY STIPULATION that the pledge would continue
although the pledgee is NO LONGER IN POSSESSION
The pledge is also extinguish:

By payment of the debt (2105)

By renunciation or abandonment of the pledge (2111)

And by the sale of the thing pledged at public auction (2115)

Presumption of the extinguishment of the pledge

The possession by the debtor/owner of the thing pledged
SUBSEQUENT to the perfection of the pledge gives rise to a
PRIMA FACIE presumption that the thing has been
RETURNED and therefore, that the pledged has been
extinguished.
Prima facie "at first sight" / on its face "sufficient to establish a fact or raise a
presumption unless disproved or rebutted;" e.g., prima facie evidence

The presumption may be REBUTTED by evidence to the contrary, for ex:

That the return was merely for the substitution of the thing pledged
(2105) or
That the thing was STOLEN and given by the thief to the pledgor /
owner

CASE: Yuliongsui vs PNB

There is authority supporting the proposition that the pledgee can
temporarily entrust the physical possession of the chattel pledged (e.g
vessels) to the pledgor w/o invalidating the pledge
In such a case, the pledgor is regarded as holdng the pledged property
merely as TRUSTEE for the pledgee
Be it noted that when the thing pledged is later found in the hands of the pledgor
or the owner, ONLY the accessory obligation of pledge is presumed remitted,
NOT the principal obligation itself (art 1274)

Art. 2111
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.

Extinguishment of pledge by renunciation or abandonment

Pledge personal right; may be waived

Under Art. 2111, the renunciation or abandonment made by the pledgee:

Must be in WRITING to extinguish the pledge, and such renunciation is

NOT conditioned upon the acceptance by the pledgor or owner nor upon
the return of the thing pledged

The waiver transforms the pledgee into a depositary with the rights and
obligations of one.
The principal debt, however, is NOT AFFECTED by the waiver of the pledge.
But the waiver of the principal obligation carries with it that of the pledge (1273)

Under this article, The thing pledged REMAINS in the possession of the
pledgee

Hence, the waiver MUST be in writing

Under art 2110, the pledge is EXTINGUISHED even in the absence of waiver if
the thing pledged is RETURNED to the pledgor
Other causes of extinguishment of pledge are :
Prescription
Loss of the thing
Merger
Compensation
Novation (1231)

Art. 2112
The creditor to whom the credit has not been satisfied in due time, may
proceed before a Notary Public to the sale of the thing pledged. This sale
shall be made at a public auction, and with notification to the debtor and

the owner of the thing pledged in a proper case, stating the amount for
which the public sale is to be held. If at the first auction the thing is not
sold, a second one with the same formalities shall be held; and if at the
second auction there is no sale either, the creditor may appropriate the
thing pledged. In this case he shall be obliged to give an acquittance for
his entire claim.

Right of the pledgee to cause sale of the thing pledged

(Art 2087) One of the essential requisites of pledge is that the
object pledged may be ALIENATED for the payment to the creditor
when the principal obligation becomes due
Formalities required for such sale under Article 2112:

The debt is due and unpaid;

The sale must be at a public auction

There must be a notice to the pledgor and owner, stating the amount due

The sale must be made with the intervention of a notary public

Art 2112 DOES NOT require POSTING of the notice of sale and
publication
Notification to the pledgor & the owner of the thing pledged is
SUFFICIENT
ONLY a notary public can conduct a public auction AFTER proper notice is
sent to the pledgor and the owner of the thing pledged
The sale extrajudicial in character w/o intervention by the courts
CASE: Paray vs Rodriguez
No provision in the Rules of Court / in any law REQUIRES that pledged
properties sold at public auction be sold separately

Right of the pledgee to appropriate the thing pledged

The pledgee may appropriate the thing pledged if after the first and
second auctions, the thing is not sold (exception against pacto
commisorio)

If the creditor appropriated the thing, it shall be considered as FULL PAYMENT

for his entire claim.
He is thus OBLIGED to give an acquittance for the same

The debtor is NOT ENTITLED to the excess in case the value of the thing
pledged is MORE THAN the principal obligation

Art. 2113
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.

Right of the pledgor and pledgee to bid at public sale

If the Debt is not paid and a

Public sale takes place, BOTH the pledgor and the pledgee may bid

The pledgor shall be preferred if he offers the same terms as the highest bidder
The rule is just considering that ALL THINGS belong to him
To avoid fraud, the:
Pledgee is NOT allowed t acquire if he is the ONLY bidder

Art. 2114
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.

All bids must be for cash

All bids, including that of the pledgor, must be for cash

If the pledgee accepts a bid other than for cash, the pledgor or owner has
the right to consider that the pledgee has received the purchase price in
cash

YULIONGSIVS.PNB(22SCRA585)
Facts:PlaintiffYuliongsiwastheownerof3vessels.In1947,plaintiff
obtainedaloanfromdefendantPNBforP50,000guaranteedbya
pledgeofthe3vesselstoPNB,whichpledgecontractwasduly
registeredwiththeofficeoftheCustomsCollectorofCebu.Plaintiff
effectedpartialpaymentofsaidloananddelivered2promissorynotes
forthebalance.In1948,thedefendantfiledcriminalchargesagainst
plaintiffforestafathrufalsificationofdocuments.Withtheinstitution
ofthecriminalaction,defendanttookphysicalpossessionofthe3
pledgedvessels.Afterthefirstnotefelldue,withouttheplaintiff
effectingpayment,thedefendant,pursuanttothetermsofthecontract,
executedadocumentofsaletransferringthevesselstoitself.2ofthe
vesselswerelatersoldtoa3rdparty.Plaintifffiledanactiontorecover
thevesselsortheirvalueplusdamages.Trialcourtdecidedfor
defendantPNB.
Issue:WONthecontentionofPNBistenable
Held:Thepledgeecantemporarilyentrustthephysicalpossessionof
thechattels(inthiscase,thevessels)tothepledgorwithout
invalidationthepledge.Thepledgorisregardedasholdingtheproperty
pledgedmerelyastrusteeforthepledgee.
Sincethedefendantwas,pursuanttothetermsofthecontract,infull
contractofthevesselsthrutheplaintiff,theformercouldtakeactual
possessionatanytimeduringthelifeofthepledgetomakemore
effectiveitssecurity.Itstakingofthevessels.Therefore,wasnot
unlawful,norwasitunjustifiedconsideringthatplaintiffhadjust
defraudedthedefendant.

PARAYv.RODRIGUEZ,ETAL.,G.R.No.132287(JANUARY24,2006)
Respondents were the owners of shares of stock in Quirino-Leonor-Rodriguez
Realty Inc. In 1979 to 1980, respondents secured by way of pledge of some of
their shares of stock to petitioners Bonifacio and Faustina Paray (Parays) the
payment of certain loan obligations.
When the Parays attempted to foreclose the pledges on account of respondents
failure to pay their loans, respondents filed complaints with RTC of Cebu City.
The actions sought the declaration of nullity of the pledge agreements, among
others. However the RTC dismissed the complaint and gave due course to the
foreclosure and sale at public auction of the various pledges. This decision
attained finality after it was affirmed by the Court of Appeals and the Supreme
Court.
Respondents then received Notices of Sale which indicated that the pledged
shares were to be sold at public auction. However, before the scheduled date of
auction, all of respondents caused the consignation with the RTC Clerk of Court
of various amounts. It was claimed that respondents had attempted to tender
payments to the Parays, but had been rejected.
Notwithstanding the consignations, the public auction took place as scheduled,
with petitioner Vidal Espeleta successfully bidding for all of the pledged shares.
None of respondents participated or appeared at the auction.
Respondents instead filed a complaint with the RTC seeking the declaration of
nullity of the concluded public auction.
Respondentsargument:
Respondents argued that their tender of payment and subsequent consignations
served to extinguish their loan obligations and discharged the pledge contracts.
Petitionersargument:
Petitioners countered that the auction sale was conducted pursuant to a final and
executory judgment and that the tender of payment and consignations were
made long after their obligations had fallen due.
They pointed out that the amounts consigned could not extinguish the principal
loan obligations of respondents since they were not sufficient to cover the
interests due on the debt. They likewise argued that the essential procedural
requisites for the auction sale had been satisfied.
RulingofRTC:

The RTC dismissed the complaint, expressing agreement with the position of the
Parays. It held that respondents had failed to tender or consign payments within
a reasonable period after default and that the proper remedy of respondents was
to have participated in the auction sale.
RulingofCA:
The Court of Appeals however reversed the RTC on appeal, ruling that the
consignations extinguished the loan obligations and the subject pledge contracts;
and the auction sale as null and void. It (CA) chose to uphold the sufficiency of
the consignations owing to an imputed policy of the law that favored redemption
and mandated a liberal construction to redemption laws. The attempts at
payment by respondents were characterized as made in the exercise of the right
of redemption.
CA likewise found fault with the auction sale, holding that there was a need to
individually sell the various shares of stock as they had belonged to different
pledgors.
ISSUES:

1.WON right of redemption exists over personal properties (such as the subject
pledged shares).

2. WON the consignations made by respondents prior 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 payments should be deemed

done in the exercise of their right of redemption owing to an imputed policy
of the law that favored redemption and mandated a liberal construction to
redemption laws.

4. WON a buyer at a public auction ipsofactobecomes the owner of the pledged

shares pending the lapse of the one-year redemptive period

5. WON there is a need to individually sell the various shares of stock as they had
belonged to different pledgors.
HELD:
1.No.
The right of redemption over mortgaged real property sold extrajudicially is
established by Act No. 3135, as amended. The said law does not extend the
same benefit to personal property. In fact, there is no law in our statute books
which vests the right of redemption over personal property. Act No. 1508, or the

Chattel Mortgage Law, ostensibly could have served as the vehicle for any
legislative intent to bestow a right of redemption over personal property, since
that law governs the extrajudicial sale of mortgaged personal property, but the
statute is definitely silent on the point.
The right of redemption as affirmed under Rule 39 of the Rules of Court applies
only to execution sales, more precisely execution sales of real property.
It must be clarified that the subject sale of pledged shares was an extrajudicial
sale, specifically a notarial sale, as distinguished from a judicial sale as typified
by an execution sale. Under the Civil Code, the foreclosure of a pledge occurs
extrajudicially, without intervention by the courts. All the creditor needs to do, if
the credit has not been satisfied in due time, is to proceed before a Notary Public
to the sale of the thing pledged.
In this case, petitioners attempted to proceed extrajudicially with the sale of the
pledged shares by public auction. However, extrajudicial sale was stayed with the
filing of Civil Cases which sought to annul the pledge contracts. The final and
executory judgment in those cases affirmed the pledge contracts and disposed
them. Said judgment did not direct the sale by public auction of the pledged
shares, but instead upheld the right of the Parays to conduct such sale at their
own volition.
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.
In order that the consignation could have the effect of extinguishing the pledge
contracts, such amounts should cover not just the principal loans, but also the
monthly interests thereon.
In the case at bar, while the amounts consigned by respondents could answer for
their respective principal loan obligations, they were not sufficient to cover the
interests due on these loans, which were pegged at the rate of 5% per month or
60% per annum.
3.No.
The pledged shares in this case are not subject to redemption. Thus, the
consigned payments should not be treated with liberality, or somehow construed

as having been made in the exercise of the right of redemption.

4.Yes.
No law or jurisprudence establishes or affirms such right. Indeed, no such right
exists.
Obviously, since there is no right to redeem personal property, the rights of
ownership vested unto the purchaser at the foreclosure sale are not entangled in
any suspensive condition that is implicit in a redemptive period.
5.No.
This concern is obviously rendered a non-issue by the fact that there can be no
right to redemption in the first place. Rule 39 of the Rules of Court does provide
for instances when properties foreclosed at the same time must be sold
separately, such as in the case of lot sales for real property under Section 19.
However, these instances again pertain to execution sales and not extrajudicial
sales. No provision in the Rules of Court or in any law requires that pledged
properties sold at auction be sold separately.
On the other hand, under the Civil Code, it is the pledgee, and not the pledgor,
who is given the right to choose which of the items should be sold if two or more
things are pledged. No similar option is given to pledgors under the Civil Code.
Moreover, there is nothing in the Civil Code provisions governing the extrajudicial
sale of pledged properties that prohibits the pledgee of several different pledge
contracts from auctioning all of the pledged properties on a single occasion, or
from the buyer at the auction sale in purchasing all the pledged properties with a
single purchase price. The relative insignificance of ascertaining the definite
apportionments of the sale price to the individual shares lies in the fact that once
a pledged item is sold at auction, neither the pledgee nor the pledgor can recover
whatever deficiency or excess there may be between the purchase price and the
amount of the principal obligation.
RULING:
Decision of the Court of Appeals is SET ASIDE and the decision of the RTC
Cebu City is REINSTATED.