Pledge (law)

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A pledge is a bailment that conveys title to property owned by a debtor (the pledgor) to a creditor (the pledgee) to secure repayment for some debt or obligation and to the mutual benefit of both parties. [1] [2] The term is also used to denote the property which constitutes the security. [3] The pledge is a type of security interest. [4] [5] Pledge is the pignus of Roman law, from which most of the modern European-based law on the subject is derived, but is generally a feature of even the most basic legal systems. [3] A pledge of personal property is known as a pawn.

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The pledgee has the right of selling the pledge if the pledgor fails to make payment at the stipulated time. No title to a third party purchaser is guaranteed following a wrongful sale except in the case of property passing by delivery, such as money or negotiable securities. In all other cases, persons must show that they are a bona fide purchaser, for (good) value, without notice (BFP). In the case of some types of property as defined on the detailed laws of the jurisdiction, such a new possessor (BFP) must have first consulted (before purchase) revealing no other ownership and then made a public notice or registered their title in a court-recognized register before the pledgor. [3]

Civil law system

In earlier medieval law, especially in Germanic law, two types of pledge existed, being either possessory (cf. Old English wed, Old French gage, Old High German wetti, Latin pignus depositum), i.e., delivered from the outset, or nonpossessory (cf. OE bād, OFr nam, nant, OHG pfant, L pignus oppositum), i.e., distrained on the maturity date, and the latter essentially gave rise to the legal principle of distraint. This distinction still remains in some systems, e.g. French gage vs. nantissement and Dutch vuistpand vs. stil pand. Token (symbolic) reciprocal pledges were commonly incorporated into formal ceremonies as a way of solidifying agreements and other transactions. A pledge of real property which allowed the use and occupation of the pledged property, in lieu of interest on the loan, used to be called an antichresis , but contemporary law of most civil law jurisdictions only allows hypothec as the sole security interest applicable to real estate and (in some cases) marine vessels (ship hypothec), while allowing only pledges (but not hypothec) of other collaterals, including corporeal movables other than marine vessels, as well as securities and intangible assets such as intellectual property rights.

Therefore, a pledge in civil law jurisdictions typically corresponds in common law jurisdictions to any possessory or a nonpossessory lien, excluding mortgage or other lien related to property covered exclusively by a hypothec, namely real estate and (in some jurisdictions) a marine vessel (ship hypothec).

Common law system

In English law, the pledge is in the possession of the pledgee, as opposed to a nonpossessory lien or a mortgage. [3] Another difference between Roman and English law is that certain things (e.g. apparel, furniture and instruments of tillage) could not be pledged in Roman law, while there is no such restriction in English law. In the case of a pledge, a special property passes to the pledgee, sufficient to enable him to maintain an action against a wrongdoer, but the general property, that is the property subject to the pledge, remains in the pledgor. As the pledge is for the benefit of both parties, the pledgee is bound to exercise only ordinary care over the pledge. [3] After a wrongful sale by a pledgee (such as if the pledgor has been keeping to his payment schedule and will have the right to redeem the goods if continuing to do so), the pledgor cannot recover the pledge/the value of the pledge without a tender of (full payment of) the amount due (secured under the pledge). That contrasts with the general law of mortgages, which allows most mortgagors to sustain a cause of action (sue) on a wrongful sale to restore the property into their qualified ownership if they bring any payment arrears up to date plus reasonable debt collection and legal costs of the creditor. [3]

Mixed law systems

The laws of Scotland and of the United States generally agree with that of England as to pledges. The main difference is that in Scotland and in Louisiana, a pledge can be sold only with judicial authority. In some the US states, the common law as it existed apart from the Factors Acts is still followed, but in others, the factor has a more-or-less restricted power to give a title by pledge. [3]

See also

Related Research Articles

A lien is a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation. The owner of the property, who grants the lien, is referred to as the lienee and the person who has the benefit of the lien is referred to as the lienor or lien holder.

A mortgage is a legal instrument of the common law which is used to create a security interest in real property held by a lender as a security for a debt, usually a mortgage loan. Hypothec is the corresponding term in civil law jurisdictions, albeit with a wider sense, as it also covers non-possessory lien.

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A bill of sale is a document that transfers ownership of goods from one person to another. It is used in situations where the former owner transfers possession of the goods to a new owner. Bills of sale may be used in a wide variety of transactions: to sell goods, exchange, give, or mortgage objects. They can be used only to transfer ownership of goods that people already own or to transfer ownership of moveable tangible goods and only by individuals and unincorporated businesses.

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Hypothec, sometimes tacit hypothec, is a term used in civil law systems or to refer to a registered real security of a creditor over real estate, but under some jurisdictions it may additionally cover ships only, as opposed to other collaterals, including corporeal movables other than ships, securities or intangible assets such intellectual property rights, covered by a different type of right (pledge). Common law has two main equivalents to the term: mortgages and non-possessory lien.

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A secured loan is a loan in which the borrower pledges some asset as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan. The debt is thus secured against the collateral, and if the borrower defaults, the creditor takes possession of the asset used as collateral and may sell it to regain some or all of the amount originally loaned to the borrower. An example is the foreclosure of a home. From the creditor's perspective, that is a category of debt in which a lender has been granted a portion of the bundle of rights to specified property. If the sale of the collateral does not raise enough money to pay off the debt, the creditor can often obtain a deficiency judgment against the borrower for the remaining amount.

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A mortgage loan or simply mortgage, in civil law jurisdictions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any purpose while putting a lien on the property being mortgaged. The loan is "secured" on the borrower's property through a process known as mortgage origination. This means that a legal mechanism is put into place which allows the lender to take possession and sell the secured property to pay off the loan in the event the borrower defaults on the loan or otherwise fails to abide by its terms. The word mortgage is derived from a Law French term used in Britain in the Middle Ages meaning "death pledge" and refers to the pledge ending (dying) when either the obligation is fulfilled or the property is taken through foreclosure. A mortgage can also be described as "a borrower giving consideration in the form of a collateral for a benefit (loan)".

A deed of trust refers to a type of legal instrument which is used to create a security interest in real property and real estate. In a deed of trust, a person who wishes to borrow money conveys legal title in real property to a trustee, who holds the property as security for a loan (debt) from the lender to the borrower. The equitable title remains with the borrower. The borrower is referred to as the trustor, while the lender is referred to as the beneficiary.

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References

  1. ↑ Joseph Story, Story on Bailments, 286.
  2. ↑ Black, Henry C. (1990). Black's Law Dictionary . St. Paul, Mn.: West Publishing. pp.  1153. ISBN   978-0314151995.
  3. 1 2 3 4 5 6 7 Wikisource-logo.svg One or more of the preceding sentences incorporates text from a publication now in the public domain :  Chisholm, Hugh, ed. (1911). "Pledge". Encyclopædia Britannica . Vol. 21 (11th ed.). Cambridge University Press. p. 835.
  4. ↑ "Security Interests under Pledge Agreements" (PDF). The Yale Law Journal Editorial Board. 51 (3): 431–447. 1942. doi:10.2307/792194. JSTOR   792194 – via Yale Database.
  5. ↑ "Pledge". LII / Legal Information Institute. Retrieved 2022-03-17.


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