Author: María Gracia Moreno Vegas
THE PLEDGE CREDIT OR THE PLEDGING OF A PLEDGE:
To pledge, from the Latin pignus, means to give or assign something in pledge. That is to say: to give, leave or deposit something as security for an obligation or loan with a financial institution.
In comparison to the most traditional credit in the real estate lingo, the mortgage loan, which usually has as collateral the real estate on which the loan is constituted, the pledge or pledge credits usually have as collateral shares, deposits, movable and immovable property, or other financial products.
For example, there are cases in which the pledged asset is an apartment:
What would happen to it? Its owner would not be able to use it, rent it, or even sell it if it is not used to repay the loan. In the event of non-payment of the loan, the apartment could be sold at public auction, and, if no buyer is found, the lender could become the owner of the property.
REQUIREMENTS FOR THE PLEDGE OF LOANS:
The essential requirements according to art. 1857 of the Civil Code of a pledge loan contract are:
1.º That it is constituted to assure the fulfillment of a principal obligation.
2.º That the thing pledged or mortgaged belongs in property to the one who pledges or mortgages it.
3.º That the persons who constitute the pledge or mortgage have the free disposition of their goods or, in case of not having it, they are legally authorized to the effect.
Likewise, third parties not related to the principal obligation may secure the latter by pledging their own assets.
However, the formalization of a pledge is subject to a number of conditions, as set forth in Articles 1,863 to 1,873 of the Civil Code and 320-324 of the Commercial Code for loans secured by listed securities:
- The property provided as collateral must be susceptible of possession and free of encumbrances, as well as the debtor must have free disposal of the property or be (art. 1862 Civil Code).
- This legal figure requires the transfer of possession from the owner to the creditor or to a third party, who will have custody of the property for the duration of the pledged credit.
- During this time, the debtor may not dispose of the property, nor may he transfer or modify the pledge.
- In order to be legally effective, the pledge must be recorded in a public deed.
- The pledge must be indivisible, even if the debt is divided among the successors of the debtor or the creditor.
PLEDGE CREDIT CONTRACT:
The mandatory clauses that must be present in all pledge credit contracts are:
-The contract must clearly bear the identity data of the debtor and the pledgee. In addition, it must indicate which is the property that is pledged and whose use and enjoyment remains with the borrower (Arts. 1857 and 1863–1864 of the Civil Code).
-One of the clauses must define the obligations and rights of the debtor and the borrower. Among one of the obligations will be provided that the pledgee must keep the pledged property in good condition without making any changes to it. The debtor may not dispose of the property until the entire loan and interest have been paid in full (Art. 1866 of the Civil Code).
-In the contract the conditions by which the alienation of the pledge will be carried out are detailed. Such as the loss of the ownership of the property by the debtor and the possibility of its sale at public auction to cancel the debt contracted on the basis of such property (ius distrahendis). (Art. 1858 of the Civil Code)
OBLIGATIONS AND RIGHTS OF THE PLEDGOR OR PLEDGEE:
In addition to those mentioned above, among the most prominent obligations and rights of the debtor shall be:
-If the debtor should contract another debt with the same pledgee, he may have the obligation to settle or satisfy both debts, in due time and form, in order to recover possession of the first pledged property, since the creditor may retain it even if it has not been the object of the constitution of the second debt (ius rententionis).
-The debtor must pay the expenses incurred by the pledgor or creditor to ensure the proper preservation of the pledged property (Art. 1867 of the Civil Code).
The debtor will keep the property of the pledged good without prejudice of not having its possession, except for the case that merits expropriation due to non-payment of the pledge loan subscribed (Art. 1859 and 1872 of the Civil Code).
-The owner must give his express consent for the creditor to use the pledged property. If the latter abuses its use or accesses it without authorization, the debtor or owner may demand that possession of the pledged property be returned to him. (Art. 1870 of the Civil Code).
OBLIGATIONS AND RIGHTS OF THE PLEDGEE:
Apart from the above common considerations, the most prominent obligations and rights of the pledgee shall be:
-Not to appropriate or dispose of the pledged goods during the term of the obligation. Once the obligation has expired, he may proceed to expropriate and sell them at public auction, with the necessary notification and summons of the owner or debtor (Art. 1859 and 1872 of the Civil Code).
-In the event that the property pledged produces interest, the creditor will have the right to compensate with this interest the interest owed to him derived from the original obligation. If this interest exceeds the interest legitimately owed by the debtor, it may be imputed to the capital loaned (anti-crime compensation). (Art. 1868 of the Civil Code).
EXTINCTION OF THE PLEDGE:
- By extinction of the debt that it guarantees, is the case referred to in Article 1871 Civil Code: “The debtor cannot request the restitution of the pledge against the will of the creditor as long as he does not pay the debt and its interest, with the expenses if any.”
- For the loss of the pledged thing: the creditor shall be liable for the loss of the thing if the same occurred due to his fault, not if it was due to an act of God, although it shall be presumed that it occurred due to his fault, unless proven otherwise (article 1867 in relation to articles 1182 and 1183 Civil Code).
- By waiver of the creditor, provided that such waiver is valid for the purposes of article 6.2 of the Civil Code: “The voluntary exclusion of the applicable law and the waiver of the rights recognized therein shall only be valid when they do not contravene the public interest or public order or prejudice third parties”.
- By the general causes of extinction of real rights. Thus by expiration of the term, fulfillment of the suspensive or resolutory condition (article 1861 of the Civil Code), by consolidation when the condition of creditor and owner of the thing given in pledge meet in the same person.
For example, if the creditor was a person who has died, and his pledgee (and owner of the thing given in debt) was his universal heir. Upon the death of the pledgee, the right of the pledgee’s credit falls on his universal heir, who was the debtor of the pledge, so that his debt or credit is extinguished, falling on him the ownership of the thing given in pledge, and the right to collect the credit that was subscribed on the same thing, being at the same time creditor and debtor of the pledge.
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