The pledge: leaving a movable asset as security for a debt

It is Chapter II of Title VII of Book Three of the Civil Code of 2020, Articles 1000 to 1010, in its three sections. It is security over movable property: what people call leaving something pawned, with its own rules.

It falls on movable property, corporeal and incorporeal, in commerce and capable of possession. It does not apply to security interests in movables governed by Chapter 9 of Act 208-1995, the Commercial Transactions Act of Puerto Rico.

• Physical or juridical delivery of the asset to the creditor or to a third person designated by common agreement.Verified against the official source
• For it to have effect against third parties, that the certainty of its date appear from an authentic document.Verified against the official source
• To recover the pledge, paying the debt, its interest, the necessary conservation expenses and the damages caused to the creditor.Verified against the official source
• To sell it absent agreement, doing so before a notary, at public auction and with summons to the debtor and to the pledge’s owner.Verified against the official source
• For the creditor to become owner after two failed auctions, giving a receipt for the whole of their credit.Verified against the official source

• The authentic document giving certainty of the date, without which the pledge has no effect against third parties.
• The receipt for the whole credit, which the creditor is bound to give if they become owner of the pledge after two auctions.

1. 1

   Step 1: What it is, and that the asset can stay with you

   Article 1000 defines it as the real security right constituted over movable property, corporeal and incorporeal, in commerce and capable of possession, by its physical or juridical delivery to the creditor or to a third person designated by common agreement, to secure performance of any kind of obligation. And it clarifies something surprising: the asset is understood juridically delivered when it stays in the debtor’s hands.

2. 2

   Step 2: Before going on: these rules may not apply

   The final paragraph of Article 1000 carves an enormous strip out of this chapter: this Code’s provisions on the pledge do not apply to security interests in movables governed by Chapter 9 of Act 208-1995, as amended, known as the Commercial Transactions Act of Puerto Rico. Much commercial financing lives there and not here. This guide does not read that act.

3. 3

   Step 3: Retention, and the second-debt trap

   Article 1001 empowers the creditor to retain the thing in their hands or in those of the third person it was delivered to, until the credit is paid. And it adds what is worth knowing before taking a second loan from the same creditor: if while retaining the pledge the debtor contracts with them another debt demandable before the first is paid, the creditor may extend the retention until both credits are satisfied, even though the pledge was never stipulated to secure the second debt.

4. 4

   Step 4: Against third parties a certain date is needed

   Article 1002 says it in one line: the pledge has no effect against third parties unless the certainty of its date appears from an authentic document. Between the parties the agreement suffices; against the rest of the world, it does not.

5. 5

   Step 5: What the creditor must do with your asset

   Article 1003 requires them to care for the pledged thing with the diligence of a prudent administrator, entitles them to be paid the conservation expenses, and makes them answer for its loss or deterioration under the Code. Article 1005 forbids them to use it: the creditor may not use the pledged thing without the owner’s authorization and, if they do or otherwise abuse it, the owner may ask that it be placed with a third party and claim compensation for the damages suffered.

6. 6

   Step 6: If the pledge produces fruits

   Article 1004 shares them out: absent agreement otherwise, if the pledge produces fruits the creditor may set off what they receive against the interest owed to them; if no interest is owed, or beyond what is lawfully owed, they may apply them to the principal. The fruits are valued beforehand by the interested parties and, failing agreement, judicial decision may be resorted to.

7. 7

   Step 7: When it must be given back

   Article 1006 sets the full account: the debtor may not demand restitution of the pledge against the creditor’s will while they have not paid the debt and its interest, the necessary expenses the creditor incurred to conserve it and the damages caused to them. And Article 1007 protects a creditor who loses it: they have an action to recover it against anyone holding it, not excepting the person who constituted the pledge; though the debtor may keep it if they pay the whole of the debt it was constituted to secure.

8. 8

   Step 8: How it is sold if payment does not come

   Article 1008 sets the route. A creditor whose credit was not satisfied in time may proceed to sell the pledged asset in the manner agreed when the obligation was constituted. Failing agreement or a legal provision setting another procedure, the sale is made before a notary, at public auction and with summons to the debtor and to the pledge’s owner. If it is not sold at the first auction, a second may be held with the same formalities; and if that also fails, the creditor may become owner of the pledge, being bound to give a receipt for the whole of their credit.

9. 9

   Step 9: Pawnshops go by their own law

   Article 1009 clarifies it: pawnshop businesses and those lending on pledges are governed by the legislation on the matter and, subsidiarily, by this title’s provisions. Their law first; this chapter after. And Article 1010 closes with five causes of extinction: the modes of extinction of real rights so far as compatible with the pledge’s nature; total extinction of the secured credit; consolidation of the pledge right and ownership in one person; the creditor’s renunciation or agreement with the debtor; and total destruction of the encumbered asset.

The sale, absent agreement, is made before a notary, at public auction. Valuation of the fruits, where there is no agreement, and claims for use or abuse go before the Court of First Instance. The Civil Code designates no agency to administer them.

• Believing the pledge requires handing over the asset: it is understood juridically delivered even if it stays with the debtor.
• Taking a second loan from the same creditor without knowing they may extend the retention until both are paid.
• Leaving it in a private document with no certain date: it then has no effect against third parties.
• Letting the creditor use the asset without the owner’s authorization.
• Asking for it back by paying only the principal: interest, conservation expenses and damages must also be paid.
• Selling the pledge on your own without an agreement: failing one, it goes before a notary at public auction with summons to the debtor.
• Keeping the pledge after a single failed auction: two are needed, plus a receipt for the whole credit.

These are the government pages this guide is based on.

• Poder Judicial de Puerto Rico

  Poder Judicial

  bvirtualogp.pr.gov