United States: Legal Concept Of Guarantee

Last Updated: September 26 2005
Article by Maritza Sanabria Mianda

The concept and function of guarantees have evolved in accordance with the times and purposes for which they have been applied.

There is a tendency towards the minimizing of personal responsibility through legal changes that tend to affect only a determined portion of the equity; in this way, the creditors obtain greater security, guarantees, preferences and privileges over the equity of the debtor.

Based on the principles of protection and security, guarantees must be understood as a relationship that is established between the creditor and the equity of the debtor.

According to the classification of guarantees, pledges fall within the category of conventional guarantees.

on movable

civil pledge




commercial pledge


(chattel mortgages)




on immovable



The civil pledge is defined as that which is constituted when, for a specific or conditional obligation, present or future, the debtor delivers to the creditor a movable thing or a credit to secure a debt or principal obligation.

The commercial pledge is that which is constituted to secure and guarantee a commercial transaction and differs from the civil pledge in the practical way in which the guarantee is enforced. In French legislation, a commercial pledge is understood to mean a guarantee constituted by a merchant or by a non-merchant to ensure the realization of a commercial transaction.

With regard to the civil pledge, the right of the mortgagee is by judicial order whereas, with the commercial pledge, the creditor may solely proceed with the extrajudicial sale of the goods pledged.1

The right of the civil and commercial pledge is indivisible and, as long as the debtor does not integrally cancel his obligation, then the goods pledged may not be released.

The term warranty is used as a synonym of order of deposit and as a guarantee of goods; it is a security of guarantee.

The Concept Of Pledges

The pledge, in the traditional, common and classic sense, consists of the delivery of a movable asset to the creditor who, as a form of executing the guarantee, has privilege over that asset.

It is a contract and real right2. by which a movable thing is constituted to guarantee an obligation, through the delivery of the item to the creditor and, in addition, in the event of default, the right to dispose of it and execute the guarantee so as to effect payment of the obligation.

Legal Nature

It is a contract, through which, one seeks to provide as guarantee a real right for fulfilling a principal obligation.

The First Civil Supreme Court, in dictum number 1087 at 8:40h on 24-07-1980; the pledge contract is of the civil court, similar to a mortgage, and is included in the mercantile legislations so as to give versatility to the transactions that are carried out on the basis of it.

The pledge contract will serve to guarantee all types of obligations, except loans from pawnshops, charitable organizations, as well as deposit warehouses as indicated in article 530 of the Commercial Code.

Characteristics Of A Pledge

The pledge is characterized as a contract:

  1. consensual or conventional: it can only come about as a result of a contract, and the actual, not presumed, consent of the parties is sufficient for its establishment.
  2. unilateral: only one of the parties undertakes to make a loan in favour of the other.
  3. real: it is an agreement in which the parts undertake to comply with the loan agreed upon, providing as a performance guarantee, a pledge in which what is relevant is the delivery of the asset in the event of a default on the principal obligation.
  4. special: the asset pledged as well as the guarantee must be precisely determined. The term special refers to the essence off the pledge as recorded in the Register, considering that it must be evidenced in the registration: the amount of the credit, interests, time, place and form of payment.
  5. accessory: it necessarily requires for its existence the presence of a previous deed or contract from which the pledge, as accessory contract, ensures the compliance with the principal contract.
  6. nominated:
  7. gratuity: a cash counter loan does not have to be offered for it to be accepted.
  8. adhesive:
  9. movables: it can only be applied to movables.
  10. indivisible: each of the goods.
  11. solemn: in relation to third parties because in challenge it before them, it should be evidenced in a public instrument and recorded in the respective registry.

Chattel Mortgage

We can refer to the pledge as common, traditional and classic and it is legislated in the Commercial and Civil Codes. It consists of the delivery of a movable asset to the creditor, as a practical means of executing the guarantee which grants him privilege over the necessary expropriation by court order or the extrajudicial sale of the good.

The Chattel Mortgage originated in the ancient Greek and roman institutions; it occurs when the debtor grants the creditor the right to adequately collect payment from the proceeds earned from the auction or sale of the goods.

It is also referred to as: non-traditional pledge and chattel mortgage without displacement of possession, but not all the references are accurate, because in this case, neither the property nor the ownership of the thing is in play, only its possession.

It may be affirmed that it is not a pledge, but rather a mortgage on a movable thing, since the thing does not fall under the control of the creditor, substituting the possession or tradition with the registration of the guarantee.

The chattel mortgage falls within the category of conventional privileges or real guarantees.

Chattel mortgages must not be confused with the constituted contract of a pledge.

An institution such as the chattel mortgage exists by virtue of the socio-economic purpose which it has to fulfil and its condition of substance and form, which should be determined and given power with reference to this purpose. The reason for this is that it possesses all the attributes of a real right of guarantee without the possibility of its exploitation, that is to say, the sale of an item even when it is not the property of the debtor and the right of preference over eventual creditors.

Basically, it differs from the common pledge in:

  1. the possession or displacement of possession of the thing pledged because, whereas in the common pledge, the item falls under the control of the creditor, in the chattel mortgage, the item pledged remains in the care of the debtor.
  2. in the common pledge, the contract is perfected with the physical delivery of a thing, while in the chattel mortgage, the contract produces effects between the parts from the moment it is signed and, in the case of third parties, from the moment it is recorded in the public registry.
  3. in the common pledge, the asset may only be constituted by existing goods, while in chattel mortgage, the object of guarantee extends to future assets.
  4. in the chattel mortgage, the active capacity of the legal holder is restricted; the same does not occur in the common pledge.

Types Of Pledges

The pledge may be constituted on all types of movable assets, with the exception of goods that are susceptible to embargo or judicial proceedings, excluding: household furniture, books, machinery and tools necessary for the business of the debtor and instruments used by the artisan or agriculturalist.3

The objects subject to pledges are listed in article 533 of the Commercial Code.

Agrarian pledge

This type of pledge is constituted as a special guarantee of loans when the assets pledged are destined for agricultural exploitation such as crops, products, machinery, means of transport, animals and their products, cut and sawed wood, movable goods used in the exploitation of mines, quarries, deposits as well as the products derived from them.

To determine the reason for the execution of a pledge document, one has to carry out an analysis of the document, taking into account:4

  • the creditor,
  • the debtor,
  • the thing given in guarantee,
  • the type of interest,
  • the customs or the relation to the activity being carried out by the debtor and the creditor.

The determination of the agrarian pledge is established by the agrarian contract of credit for which it is rendered an accessory contract; it is this contract which establishes whether or not the pledge is agrarian.

Between the debt and the asset, what is fundamental is the origin, purpose and destiny of the debt taking into account that it is required that the deeds and contracts originate from the production, transformation and disposal of agrarian products; in other words, that the debt arises from the carrying out of these activities or the financing of these activities.5

One may differentiate between various types of agrarian pledges, among which are:

1. Future Crops

As a crop, the production of which is expected in the future, one can not identify the place where it will be produced with the place where the debtor undertakes to store it as a depository of the same. Therefore, for it to be acknowledged, the place where the debtor undertakes to store it has to be identified because indicating the place, city or province is not sufficient information for the judge to know where the goods pledged may be found.

If acknowledgement is required, the correct thing to do is to advise the debtor to indicate the location of the crop and the province in which he intends to store it.

In this regard, planted trees on property may not be pledged as the first is an accessory to the land and the land, by its very nature, is immovable; it would be different if the pledge was on cut and sawed wood.6

2. Livestock

Growing livestock is an agrarian activity and, for this reason, the constituted pledge is agrarian in nature, in accordance with dictum # 249 of the Agrarian Supreme Court at 15:10h on April 6, 1990.

Securities given as guarantee

There are various theories that attempt to define this type of pledge, among them are:

  • The theories of the constitutive and common, total or partial, assignment of the credit, explain what it is that the creditor may claim from the guarantor.
  • The theory of the total transfer assignment of credit does not explain how the creditor, as concessionary of the credit, becomes the guarantor and only holder of the same, as well as the reason why he is not authorized to dispose of it.

The theory of pledges on credit instruments and the true right over them, does not justify how it is that an absolute right may be constituted over a relative one and how a real right may be exercised over something that is not corporeal (the credit).

In our opinion, in pledges on credit instruments, there is simply an assignment of them for the purpose of constituting a guarantee because the credits are, in an objective sense, like things in that in that they too are handed over for the constitution of a pledge.

In a pledge on credit instruments, the delivery of the credit documents to the creditor is precise. The creditor will be the depository so that the contract will have full legal value7, as this is how a lien on an existing credit is constituted.

Pledge on Securities

The pledge of securities constitutes an immediate pledge on the document itself, that is to say, it is a pledge on the documented credit.

The pledge of the thing and the pledge of the right represent the profiles of the commercial and civil pledges, taking into consideration that all the elements constitute mercantile instruments. In this way, the documented credit which underpins the pledge is still a civil credit; a guarantee may be constituted (pledge-mortgage) over the security and, for this, it is sufficient that the debtor is duly notified of the constituted contract of pledge before its maturation. What should not occur is that a pledge remains constituted over a credit instrument and not over a documented credit.

To establish a pledge over bearer instruments, it is not necessary that the debtor be notified since the debtor is obligated to pay the person who presents him with the document, without making basic inquiries and verifying the identity of the bearer of the document simply for the legitimization of the payment.

The endorsee has a right before the issuer, but not the same right of the endorser. The endorsee may lay claim to the credit before the endorser.

With the securities, a pledge is constituted over them through an ad hoc contract, the delivery of the documents to the creditor, and the endorsement of the security in guarantee or the security pledged. In this type of endorsement, neither the title nor the ownership of the documented credit is claimed. They serve only to legitimize the collection of payment.

The endorsee may exercise all civil actions specific to the documented credit.

In the bill of exchange, the endorsee is only authorized to endorse the commission of payment and if the bill has been guaranteed with a mortgage, the endorsee may execute the mortgage.

Pledges over Shares or Capital Shares

When capital shares are pledged, these securities must be delivered to the creditor in his capacity of depository and, at the same time, it must be evidenced in the same certificate pledged, bearing in mind that this is a condition sine qua non for it to be fully valid without need for its registration in the public registry.8 The reasons of order and security for third parties demand that the procedure be as such, without ignoring the interest of the State in the fiscal aspect. Furthermore, by not having it recorded in the Registry, there is greater demand for compliance with these formalities in an effort to protect third parties from schemes.

Chattel Mortgages

Chattel mortgages which appeared in Roman law arose out of the economic needs and in the normal course of development. Salvianum y actio serviana o cuasi serviana.

It was used for a long time up until the sixteenth century in France where Roman law was enforced in the southern region and common law in Britain, and Normandy, until it became obsolete and eventually disappeared completely.

In the eighteenth century, due to the need to strengthen credit and to meet the needs of commercial trade, Spain incorporated this type of guarantee into its Civil Code.

In 1851 in Switzerland, a law was passed to foment the livestock industry by creating secured loans for the acquisition of cattle, without the debtor losing possession of his animals.

In France, between 1860 and 1867, Agricultural Credit was created for the same purpose as in Switzerland.

In 1867 in Portugal, agricultural and industrial credit banks were established to strengthen these sectors through the granting of loans, namely, chattel mortgages without displacement of possession.

Chattel mortgages with displacement of possession fall into the category of conventional privileges of the pledge.

Payment Of The Pledge

Payment is the fulfilment of an obligation or a credit against a debt.

There are various types of payment, among which are:

  • payment to account it is the payment made by the debtor the moment of the agreement, as partial fulfilment of the obligation or subject to the liquidation of the parts or third party cash payment is that payment which is made the moment the thing or service is received.
  • advanced payment is the payment of an obligation or the delivery of a certain quantity of money when the debtor makes such a payment before the expiration date agreed upon; it is a renouncement of the period established by virtue of the advanced payment made.
  • payment by subrogation it occurs when a third party to whom all rights of the creditor are transferred, makes payment or cancels the debt.
  • undue payment is the delivery of a quantity or the execution of a deed which reduces the equity, whether in error or by falsely believing that there is a debt owing.
  • payment by alien account it is the payment made by the representative or agent of the debtor. It is made by a third party who was not involved in the original obligation and he effects payment on behalf of and at the cost of the debtor. The freedom to pay as established in the Civil Code allows payment by someone who is not a part of the transaction, whether the debtor consents or ignores it, or even opposes it.
  • payment by delivery of goods it is a form of payment accepted by the creditor in lieu of the debt agreed upon or an adequate sum of money, that the debtor or his agent delivers a movable or immovable asset or various assets. It also occurs when the delivery of the assets replaces the obligation in default.

The following rules must be adhered to when making payments:

  1. The payment must be made to the same creditor or the person who legitimately represents him.
  2. If payment is made to someone who accepts it on behalf of the creditor without his authorization, it is regarded as acceptable if the creditor then ratifies it.
  3. If payment is a determined thing, the creditor must receive it as is, with the stipulation that its deterioration is attributable to the debtor.
  4. When the debt is money, it must be in the national currency or the legal tender.
  5. The creditor is not obliged to receive payment for an obligation in instalments when, by nature or the disposition of the parties, it was not agreed upon.
  6. If when the payment is being made, the debtor does not specify the debt to which it corresponds, he will not be able to claim allocation different from that to which it is assigned in the acquittance.
  7. If during payment, there are unforeseen expenses incurred, they will be the responsibility of the debtor.

On this subject matter, the Commercial Code states that9:

¨The debtor of the pledge may, at any moment, release the lien constituted over the affected goods of the contract by payment to the creditor in the place legally established, in the total amount of the debt, including stipulated interests and any other accessories assigned by the contract¨.

It adds: ¨If the creditor refuses to accept payment or to cancel the security, the debtor may make the corresponding assignment before the judge with jurisdiction where the creditor is domiciled. This assignment does not require a real offer of payment.¨.

Concerning partial payments, it states:

¨When the debtor makes partial payments, provided that the contract so authorizes, he will have the right for it to be recorded in the Registry and in the document itself. If the creditor refuses to accept partial payment despite being obligated to do so, the interested party may assign the corresponding amount by court order.¨

Apart from these provisions, the Code lists a series of norms to be applied in the case of the different types of payments, as set out below:

  • If the obligation of the pledge were to be payable by successive instalments, the default on payment of one of them would result in the entire obligation becoming due and payable, unless otherwise agreed.
  • The debtor is responsible for the allocation of payments when several assets have been pledged and in the contract his responsibility would have been established separately, unless otherwise agreed.
  • Once a pledge of superior rank has been paid for, the subsequent one of an inferior rank will take its place, unless the document expressly indicates that the pledge of inferior rank will maintain that rank, even when the previously contracted pledges have been settled.

The Execution Of The Pledge

The execution is defined as the accomplishment, realization, compliance, action or effect of putting to use some loan or thing promised.

It is the effectiveness or compliance of a sentence or ruling by a competent Judge or Court.

For example, when, through a judicial ruling, the assets are seized from the debtor in default in order to satisfy the creditors.

There exist various forms of execution, the most common of which are the following:

  1. even execution it occurs when the title for which a certain sum of money is demanded, the most typical case is that in which the law authorizes the commencement of an Executory Process to enforce the payment of the indebted amount.
  2. execution by sentencing is the act of executing an order by a Judge or by the Court in a ruling to resolve a matter or lawsuit.

Extinction Of The Pledge

The extinction is the cessation, termination, conclusion or disappearance of a person, thing, situation or relationship and, subsequently, the effects and consequences.

So, for example, extinction occurs in different ambits:

  • extinction of shares they are extinguished by any cause that annuls them or renders them ineffective due to the absence of a deed establishing the right to enforce them.
  • extinction of rights it refers to their cessation or termination as a result of their being satisfied, abandoned, renounced or not legally enforceable.

With regard to the pledge, it is extinguished by the causes listed in article 578 of the Commercial Code, in the order below:

  1. by prescription the term prescribed is four years, commencing from the expiration of the obligation.
  2. by total payment
  3. by the resolution of the constituent right in the cases in which, in accordance with the law, the resolutory reasons prejudice third parties.
  4. by judicial sale in cases in which the purchaser should receive the thing free from liens.
  5. by extinction of the principal obligation in the event that the obligation that led to the formation of the pledge as a guarantee is cancelled or settled.


In the dynamic of mercantile trade, the appearance of new objects of guarantees, demonstrates a clear evolution of the typical figure of the real right of guarantee. The creditor who wishes to secure his credit is interested in having the capacity to execute deeds of economic value that remove the availability of the goods from the owner and affects the compliance with the guaranteed obligation.

Throughout its development, this institution has gone through different phases of evolution so as to overcome its instabilities, eventually transforming itself into a practical instrument that responds to the actual needs of mercantile trade.


Cabanellas de Torres Guillermo, Diccionario Jurídico Elemental, Edt. HELIASTA, Buenos Aires, Argentina, 1997.

Costa Rica, Leyes y Decretos, Código de Comercio, Edt. IJSA, 1997.

Costa Rica, Leyes y Decretos, Código Civil, Edt. IJSA, 1997.

Fernández Raymundo, Tratado Teórico Práctico de Derecho Mercantil, tomo III-C, Edt. DEPALMA, 1992.

Muguillo Roberto, Régimen General de la Prenda con Registro, Edt ASTREA, Buenos Aires Argentina, 1984.

Nieto Carol Ubaldo, Tratado de Garantía en la Contratación Mercantíl, tomo II, volumen Y, Edt. CIVITAS, 199.

Bio: Licda. Maritza Sanabria Mianda a lawyer and notary, she is a senior and founding partner of the LPS&C Law firm. Ms Sanabria is an expert in international asset protection and tax strategies. She specializes in wealth protection and tax minimization, international asset protection trusts and foundations, international business corporations, worldwide investing, yacht registrations, and global banking. Ms. Sanabria is a member of, ABA (American Bar Association), IBA (International Bar Association) and The Colegio de Abogados en Costa Rica. To find out more about any offshore havens or set up a tax plan that is right for you, please call for a FREE Report "Tax Planning Guide", or drop an email to the author.


1. The preceding according to the Argentinian Legislation, artícules 3224 Civil Code and 585 Comm. Code

2. Cabanellas de las Torres, Guillermo; diccionario Jurídico Elemental, Edt. Heliasta, Bs. As. Argentina, 1997.

3. See articles 532 and 533 Comm. Code and 984 Civil Code. Both of Costa Rica.

4. Agrarian Supreme Court, # 494 at 14:00h on July 7, 1989.

5. First Civil Supreme Court, # 202 at 10: 50 h on March 31, 1989, # 518 at 8h on August 6, 1990 and Fist Court # 135 at 15h on November 15, 1989.

6. See, 533 clause Comm. Code

7. Tribunal Superior Primero Civil, #1233 de las 8:15h del 27 de julio de 1984.

8. Civil Supreme Court, # 773 at 10h on July 10, 1980

9. See, articles 561 and 563 of the normative cited.

The content of this article is intended to provide a general guide to the subject matter. Speacialist advice should be sought about your specific circumstances.

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