YULIONGSIU VS. PNB, 22 SCRA 587 (1968)

YULIONGSIU VS. PNB,

22 SCRA 587 (1968)

FACTS

Yulongsiu owned 2 vessels and equity in FS-203, which were purchased by him from the Philippine Shipping Commission, by installment. Plaintiff obtained a loan from defendant and to guarantee payment, plaintiff pledged the 2 vessels and the equity on FS-203, as evidenced by a pledge contract. Plaintiff made a partial payment and the remaining balance was renewed by the execution of 2 promissory notes in the bank’s favor. These two notes were never paid at all by plaintiff on their respective due dates. Defendant bank filed a criminal case against plaintiff charging the latter with estafa through falsification of commercial documents, and the trial court convicted the plaintiff and was sentenced to indemnify the defendant. The corresponding writ of execution issued to implement the order for indemnification was returned unsatisfied as plaintiff was totally insolvent. Meanwhile, together with the institution of the criminal action, defendant took physical possession of the 2 vessels and transferred the equity on FS-203 to the defendant. Later on, the 2 vessels were sold by defendant to third parties. Plaintiff commenced an action for recovery on the pledged items, and alleges, among others, that the contract executed was a chattel mortgage so the creditor defendant could not take possession of the chattel object thereof until after there has been default.

ISSUE

Whether the contract entered into between plaintiff and defendant is a chattel mortgage or a valid contract of pledge.

RULING

It’s a contract of pledge.

The court held that the contract itself provides that it is a contract of pledge and the judicial admission that it is a pledge contract cannot be offset without showing of palpable mistake.

The pledgee defendant was therefore entitled to the actual possession of the vessels. The plaintiff’s continued operation of the vessels after the pledge contract was entered into places his possession subject to the order of the pledge. The pledge can temporarily entrust the physical possession of the chattels pledged to the pledgor without invalidating the pledge. In this case, the pledgor is regarded as holding the pledge merely as a trustee for the pledge.

As to the validity of the pledge contract with regard to delivery, plaintiff alleges that constructive delivery is insufficient to make pledge effective. The Court ruled that type of delivery will depend on the nature and peculiar circumstances of each case. Since the defendant bank was, pursuant to the pledge contract, in full control of the vessels through plaintiff, the former could take actual possession at any time during the life of the pledge to make more effective its security.

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