Short answer. The creditor holding the pledge collects them, but they are not his to keep. He must set what he receives against what you owe him and apply any excess to the principal. Offspring of pledged animals belong to the owner, though they remain covered by the pledge unless you agreed otherwise.
What the law says
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.
Civil Code, Article 2102 — Fruits of the Thing Pledged. Read the full provision →
Collected by the creditor, credited to you
Article 2102 answers the question that arises whenever the pledged thing is productive: 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. He receives the earnings because he is the one holding the thing. He does not keep them as a bonus. They are set against what you owe, and whatever goes beyond that reduces the principal debt.
Your balance should be moving
The order matters. What the creditor collects goes first against the amounts currently owing to him, and any surplus against the principal. A borrower whose pledged shares are paying dividends, or whose pledged right is earning interest, should therefore see the balance falling, and is entitled to ask how the sums were credited. Keep your own record of what the thing produced. Where earnings are being collected and the stated debt never seems to move, that is the moment to ask for a written accounting — not after the loan matures and every figure is disputed.
Earnings and offspring
Two further rules sit in the same article. Unless there is a stipulation to the contrary, the pledge shall extend to the interest and earnings of the right pledged, so the security automatically covers what the pledged right throws off, with no separate agreement needed. And for livestock: 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. Ownership of the offspring stays with you; what changes is that they stand as security too.
Pawnshops, and the paperwork
A caution. Pawnshops are separately regulated, and a pawn transaction is governed by that regulation as well as by these general Civil Code provisions, so the periods, notices and accounting a pawnshop actually follows may differ from the general rule set out here — ask for its written terms and read them. In any pledge, agree at the outset who collects the earnings and how they will be credited, and ask for a statement at fixed intervals. If you believe income was collected and never applied, request an accounting in writing and take advice promptly, since claims are subject to time limits.
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.
- Lim Tay vs. Court of Appeals, et al, G.R. No. 126891, August 5, 1998 — read the decision on LawPhil →