A pledge is a bailment that conveys

title A title is one or more words used before or after a person's name, in certain contexts. It may signify their generation, official position, military rank, professional or academic qualification, or nobility. In some languages, titles may be ins ...

to property owned by a debtor (the ''pledgor'') to a

creditor A creditor or lender is a party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some propert ...

(the ''pledgee'') to secure repayment for some

debt Debt is an obligation that requires one party, the debtor, to pay money Loan, borrowed or otherwise withheld from another party, the creditor. Debt may be owed by a sovereign state or country, local government, company, or an individual. Co ...

or obligation and to the mutual benefit of both parties. The term is also used to denote the

property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depending on the nature of the property, an owner of property may have the right to consume, alter, share, re ...

which constitutes the security. The pledge is a type of

security interest In finance, a security interest is a legal right granted by a debtor to a creditor over the debtor's property (usually referred to as the '' collateral'') which enables the creditor to have recourse to the property if the debtor defaults in m ...

. Pledge is the ''pignus'' of

Roman law Roman law is the law, legal system of ancient Rome, including the legal developments spanning over a thousand years of jurisprudence, from the Twelve Tables (), to the (AD 529) ordered by Eastern Roman emperor Justinian I. Roman law also den ...

, 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. A pledge of

personal property Personal property is property that is movable. In common law systems, personal property may also be called chattels or personalty. In civil law (legal system), civil law systems, personal property is often called movable property or movables—a ...

is known as a pawn.

Features

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.

By legal system

Civil law system

In earlier medieval law, especially in Germanic law, two types of pledge existed, being either possessory (cf.

Old English Old English ( or , or ), or Anglo-Saxon, is the earliest recorded form of the English language, spoken in England and southern and eastern Scotland in the Early Middle Ages. It developed from the languages brought to Great Britain by Anglo-S ...

''wed'',

Old French Old French (, , ; ) was the language spoken in most of the northern half of France approximately between the late 8th -4; we might wonder whether there's a point at which it's appropriate to talk of the beginnings of French, that is, when it wa ...

''gage'', Old High German ''wetti'', Latin ''pignus depositum''), i.e., delivered from the outset, or Nonpossessory interest in land, 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 In English common law, real property, real estate, immovable property or, solely in the US and Canada, realty, refers to parcels of land and any associated structures which are the property of a person. For a structure (also called an Land i ...

which allowed the use and occupation of the pledged property, in lieu of

interest In finance and economics, interest is payment from a debtor or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distinct f ...

on the

loan In finance, a loan is the tender of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay interest for the use of the money. The document evidencing the deb ...

, used to be called an antichresis, but contemporary law of most civil law jurisdictions only allows hypothec as the sole

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 A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...

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 A lien ( or ) 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 pers ...

, 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

or a

mortgage A mortgage loan or simply mortgage (), in civil law (legal system), 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 t ...

. 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. 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.

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 Louisiana ( ; ; ) is a state in the Deep South and South Central regions of the United States. It borders Texas to the west, Arkansas to the north, and Mississippi to the east. Of the 50 U.S. states, it ranks 31st in area and 25 ...

, a pledge can be sold only with judicial authority. In some the US states, the

common law Common law (also known as judicial precedent, judge-made law, or case law) is the body of law primarily developed through judicial decisions rather than statutes. Although common law may incorporate certain statutes, it is largely based on prece ...

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.

References