Constitution of a contract of pledge to secure a loan

Dear PAO,

I lent the amount of P125,000.00 to my friend, with an interest of P800.00 per month until the debt is
fully paid. His loan is secured by a motor vehicle under a contract of pledge and a promissory note. The
debt became due and demandable on October 30, 2017. I found out that the motor vehicle was not
registered on April 30, 2017, the date of its supposed annual registration. I would like to register the
motor vehicle but my friend did not give me the vehicle’s certificate of registration when the loan was
made. Can I appropriate the motor vehicle even if it was not registered by my friend? Please advise on
how I should go about with such appropriation. Do I have to bring this before the small-claims court?

Willy

Dear Willy,

In order to say that there is a valid contract of pledge, the following requisites must be present: (1) That
the pledge be constituted to secure the fulfillment of a principal obligation; (2) That the pledgor be the
absolute owner of the thing pledged; (3) That the persons constituting the pledge have the free disposal
of their property, and in the absence thereof, that they be legally authorized for the purpose; and (4)
That the thing pledged be placed in the possession of the creditor, or of a third person by common
agreement (Articles 2085 and 2093, New Civil Code of the Philippines).

It is apparent from your letter that the contract of pledge was constituted to secure the fulfillment of
the loan, which your friend has obtained from you and that the motor vehicle that is the subject of the
contract of pledge was placed under your possession. To conclude, though, that there is a valid contract
of pledge between the two of you, it must further be established that your friend or the pledgor, if the
pledge was effected by another person for your friend’s benefit, is the absolute owner of the motor
vehicle and has the free disposal of it, and in the absence thereof, that he be legally authorized for the
purpose.

If all the above-mentioned requisites are present in your case, you may pursue the remedy of notarial
foreclosure of the pledged vehicle. Pursuant to Article 2112 of the New Civil Code:

“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.”
We submit that you may proceed with the above-mentioned remedy even if your friend failed to
register the vehicle as the registration is not a requirement for foreclosure. What is explicit under the
law is that (a) the creditor has a credit that has not been satisfied in due time; (b) said foreclosure sale
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; (c) if the thing is not sold at the
first auction, a second auction with the same formalities should be held, and if there is no sale either at
the second auction, the creditor may appropriate the thing pledged, in which case he must give an
acquittance for his entire claim. After the public auction, you must promptly advise the pledgor of the
result of the auction. (Article 2116, Id.) For information as to the transfer of ownership of the motor
vehicle in your favor, you may visit the Land Transportation Office website, particularly
http://www.lto.gov.ph/motor-vehicle-registration/307-transactions-requiring-change-of-certificate-of-
registration.html#trans10, for all the requisites for such transfer of ownership.

If you pursue the remedy of notarial foreclosure of pledge, you will no longer need to file a small-claims
case. We nevertheless would like to emphasize that you are not proscribed from availing the remedy of
filing such suit if you desire to do so. You may pursue, in the alternative, a small-claims case against your
friend if the value of your claim does not exceed Two Hundred Thousand Pesos (P200,000.00), exclusive
of interest and costs (Section 2, A.M. No. 08-8-7-SC, or the 2016 Revised Rules of Procedure for Small-
Claims Cases). If the court decides in your favor, you may move to execute the favorable decision and
attach his available pieces of property, the motor vehicle included if it is owned by him.