If the creditor hands the pledged item back to me, is the pledge extinguished even though the debt is unpaid?

Possession is the pledge

Article 2110 provides that 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. The rule follows from how a pledge is created. Article 2093 requires, in addition to the general requisites, that the thing pledged be placed in the possession of the creditor or of a third person by common agreement. Possession is not a formality that proves the pledge; it is the pledge. Give the item back and the security ends, however clearly the parties said it would not.

The debt is untouched

Extinguishing the pledge extinguishes the security, not the obligation it secured. The loan remains payable on its terms and the creditor keeps every ordinary remedy against the debtor; what he has lost is his preferred position over that particular thing and his right to hold it. That is why Article 2105 provides 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, with expenses in a proper case, and why Article 2098 gives the creditor the right to retain it in the meantime.

A presumption that favours the debtor

The article then makes the point easy to prove: 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. The same presumption arises where the thing is held by a third person who received it from the pledgor or owner after the pledge was constituted. So a debtor found in possession does not have to show how the item came back to him. The creditor who says it was taken, borrowed or entrusted for a limited purpose must overcome the presumption.

What a creditor should draw from this

Never let the item go without deciding what happens to the security, because no clause will preserve it. If the debtor needs the thing temporarily, the safe course is a new arrangement rather than a promise that the pledge continues. Remember too that Article 2088 prohibits the creditor from appropriating the things given by way of pledge or mortgage, or disposing of them, and voids any stipulation to the contrary, so holding the item was never a route to owning it. Keep the receipts and the custody records; they are what the presumption will be argued against.

Cases citing this provision

These Supreme Court decisions cite the provision above. We list them so you can read them yourself; the summaries of what each decided are not ours to give.

• Premier Development Bank vs. Central Surety and Insurance Company, Inc, G.R. No. 176246, February 13, 2009 — read the decision on LawPhil →

Related provisions

• Civil Code, Article 2110 — Return Extinguishes the Pledge
• Civil Code, Article 2093 — Delivery Essential to Pledge
• Civil Code, Article 2098 — Pledgee's Right of Retention
• Civil Code, Article 2105 — Return Requires Payment
• Civil Code, Article 2088 — Pactum Commissorium Void