pledge

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Pledge

A Bailment or delivery of Personal Property to a creditor as security for a debt or for the performance of an act.

Sometimes called bailment, pledges are a form of security to assure that a person will repay a debt or perform an act under contract. In a pledge one person temporarily gives possession of property to another party. Pledges are typically used in securing loans, pawning property for cash, and guaranteeing that contracted work will be done. Every pledge has three parts: two separate parties, a debt or obligation, and a contract of pledge. The law of pledges is quite old, but in contemporary U.S. law it is governed in most states by the provisions for Secured Transactions in article 9 of the Uniform Commercial Code.

Pledges are different from sales. In a sale both possession and ownership of property are permanently transferred to the buyer. In a pledge only possession passes to a second party. The first party retains ownership of the property in question, while the second party takes possession of the property until the terms of the contract are satisfied. The second party must also have a lien—or legal claim—upon the property in question. If the terms are not met, the second party can sell the property to satisfy the debt. Any excess profit from the sale must be paid to the debtor, or first party. But if the sale does not meet the amount of the debt, legal action may be necessary.

A contract of pledge specifies what is owed, the property that shall be used as a pledge, and conditions for satisfying the debt or obligation. In a simple example, John asks to borrow $500 from Mary. Mary decides first that John will have to pledge his stereo as security that he will repay the debt by a specific time. In law John is called the pledgor, and Mary the pledgee. The stereo is referred to as pledged property. As in any common pledge contract, possession of the pledged property is transferred to the pledgee. At the same time, however, ownership (or title) of the pledged property remains with the pledgor. John gives the stereo to Mary, but he still legally owns it. If John repays the debt under the contractual agreement, Mary must return the stereo. But if he fails to pay, she can sell it to satisfy his debt.

Pledged property must be in the possession of a pledgee. This can be accomplished in one of two ways. The property can be in the pledgee's actual possession, meaning physical possession (for example, Mary keeps John's stereo at her house). Otherwise, it can be in the constructive possession of the pledgee, meaning that the pledgee has some control over the property, which typically occurs when actual possession is impossible. For example, a pledgee has constructive possession of the contents of a pledgor's safety deposit box at a bank when the pledgor gives the pledgee the only keys to the box.

In pledges both parties have certain rights and liabilities. The contract of pledge represents only one set of these: the terms under which the debt or obligation will be fulfilled and the pledged property returned. On the one hand, the pledgor's rights extend to the safekeeping and protection of his property while it is in possession of the pledgee. The property cannot be used without permission unless use is necessary for its preservation, such as exercising a live animal. Unauthorized use of the property is called conversion and may make the pledgee liable for damages; thus, Mary should not use John's stereo while in possession of it.

For the pledgee, on the other hand, there is more than the duty to care for the pledgor's property. The pledgee has the right to the possession and control of any income accruing during the period of the pledge, unless an agreement to the contrary exists. This income reduces the amount of the debt, and the pledgor must account for it to the pledgee. Additionally, the pledgee is entitled to be reimbursed for expenses incurred in retaining, caring for, and protecting the property. Finally, the pledgee need not remain a party to the contract of pledge indefinitely. She can sell or assign her interest under the contract of the pledge to a third party. However, the pledgee must notify the pledgor that the contract of pledge has been sold or reassigned; otherwise, she is guilty of conversion.

West's Encyclopedia of American Law, edition 2. Copyright 2008 The Gale Group, Inc. All rights reserved.

pledge

v. to deposit personal property as security for a personal loan of money. If the loan is not repaid when due, the personal property pledged shall be forfeit to the lender. The property is known as collateral. To pledge is the same as to pawn. 2) to promise to do something. (See: pawn)

Copyright © 1981-2005 by Gerald N. Hill and Kathleen T. Hill. All Right reserved.

pledge

a security transaction applicable to chattels under which the borrower (pledgor) gives possession of the chattel to the lender (the pledgee) as security for the payment of a debt or performance of an obligation. The pledgee is entitled to hold the chattel until payment or performance and, upon failure duly to pay or perform at the proper time, to sell it. Until any such sale, however, the pledgor remains entitled to redeem it by payment or performance. The same arrangement applies in Scots law in relation to moveables. It is known to the public through the pawn shop where the public may go to obtain a loan by depositing their personal possessions which may be sold if not redeemed.
Collins Dictionary of Law © W.J. Stewart, 2006

PLEDGE, contracts. He who becomes security for another, and, in this sense, every one who becomes bail for another is a pledge. 4 Inst. 180 Com. Dig. B. See Pledges.

A Law Dictionary, Adapted to the Constitution and Laws of the United States. By John Bouvier. Published 1856.
References in periodicals archive ?
Analysts say that share pledging is one way of promoters funding new greenfield projects but owing to speculation around the same and a lack in transparency, rise in pledged shares and its sale has caused massive volatility in specific stocks.
Companies report their share pledging on a quarterly basis but common investor does not know the minor details of pledging which creates confusion.
"The main reasons for share pledging are need for cash for retiring debt, business operations or investing," says Ravi Shenoy, Vice President, Motilal Oswal Securities.
For instance, of late, Zicom Electronic Security Systems promoters have been pledging more and more shares.
The QCSD Rules of Dealing set out, among other things, the applicable regulations pertaining to the types of accounts which may be operated and the procedures in connection with the pledging of securities.
The Amendment Law appears to make it a requirement for limited liability companies to specifically authorise the pledging of shares by the partners in their Memorandum of Association (similar to provisions commonly included in the articles of free zone companies).
While the Amendment Law specifically mentions that a partner in a limited liability company may pledge its shares, Article 79 of the Amendment Law does not refer to any share certificate that should be presented with the competent authority to complete the pledging of the shares.