The Pledge Agreement in Secured Transactions

1. Introduction

In secured transactions law, a pledge agreement is a contractual arrangement in which a debtor (the pledgor) delivers possession of personal property to a creditor (the pledgee) as collateral for an obligation.

It is a type of security interest deeply rooted in common law and now largely codified in U.S. statutes like the Uniform Commercial Code (UCC). Under a pledge, the creditor’s interest is possessory: the creditor holds the collateral until the debt is satisfied, and if the debtor defaults, the creditor can typically sell the property to recover the debt​.

This post explores the legal framework governing pledge agreements, examining statutory provisions, common law principles, rights and duties of pledgors and pledgees, and enforcement mechanisms upon default, with references to relevant statutes and case law.

2. Definition and Legal Nature of a Pledge Agreement

A pledge agreement is fundamentally a security agreement creating a security interest in personal property by way of possession.

In classic terms, a pledge is defined as “a bailment of goods as security for the payment of a debt or performance of an obligation”​.

Unlike a mortgage (which often involves transfer of title or an interest in real property), a pledge involves transfer of possession, not title. The pledgor retains ownership of the collateral, but the pledgee acquires a possessory lien or special interest in the property until the underlying obligation is fulfilled​.

In other words, the mortgagee may gain full title upon default, but a pledgee’s rights are limited to holding and eventually selling the collateral for repayment.

2.1 Common Law Origins of the Pledge

Under common law principles, a pledge was distinguished from other security devices by the requirement of delivery of possession to the creditor.

Early court decisions recognized that a pledge of personal property could be created by an oral or written agreement coupled with transfer of possession, and that such a transaction was outside the scope of the statute of frauds or filing requirements that applied to chattel mortgages​.

The classic common law pledge was a subset of bailment: the pledgor bailed the goods to the pledgee as security. The pledgee obtained a possessory interest (sometimes called a special property) in the chattel, while the pledgor retained general title subject to the lien.

Because the pledgor’s title was never transferred, the pledgor historically did not need to file a bill in equity to redeem; instead, the pledgor could recover the collateral by tendering the amount due at law.​

These common law concepts continue to inform modern secured transactions law, especially since Article 9 of the UCC explicitly preserves principles of law and equity unless displaced (UCC 1-103).

2.2 Modern Statutory Framework of the Pledge

In the United States, pledge agreements involving personal property are generally governed by Article 9 of the UCC, which has been adopted (with minor variations) in all states. The UCC does not use the term “pledge” in a definitional sense, but a pledge agreement is one form of a “security agreement”—defined as an agreement that creates or provides for a security interest in personal property (UCC Article 9-102(a)(74)).

The hallmark of a pledge under the UCC is that the secured party (creditor) takes possession of the collateral as part of the security arrangement. UCC Article 9-203, which governs attachment (creation) of security interests, provides that a security interest is enforceable against the debtor and third parties when three conditions are met:

(1) Value has been given by the secured party.
(2) The debtor has rights in the collateral.
(3) Either the debtor has authenticated (signed) a security agreement describing the collateral or “the collateral is in the possession of the secured party pursuant to the debtor’s security agreement”​

This means that an oral pledge agreement coupled with delivery of the collateral can suffice to create an enforceable security interest – no written agreement is required if the creditor actually possesses the collateral by agreement with the debtor (UCC Article 9-203(b)(3)(B)).

In effect, the act of pledging (delivering) the collateral under agreement serves as the equivalent of a signed security contract.

It is important to note that pledge agreements typically involve tangible movable property or instruments. Common examples include pledges of jewellery, negotiable instruments, stock certificates, or other chattels.

Real estate cannot be the subject of a pledge – interests in real property are secured by mortgages or deeds of trust, governed by mortgage law rather than Article 9.

Likewise, certain types of collateral like deposit accounts or investment securities are subject to special rules under the UCC (e.g. perfection by “control” rather than possession), though one can conceptually pledge a securities account by giving the secured party control rights.

Indeed, UCC Article 8 and Article 9 coordinate on pledges of investment securities: for instance, a stock certificate can be pledged by physical delivery (possession) or an uncertificated security by control via a securities intermediary.

The principle remains that the secured party’s possession or control under a pledge agreement serves to perfect the security interest without the need for filing a financing statement (UCC 9-313(a))​. This makes pledges a favoured method for securing loans with negotiable collateral or other assets where transfer of possession is practical.

3. Common Law Principles Governing Pledge Agreements

Although modern commercial law is largely statutory, common law principles still govern aspects of pledge agreements, especially where the UCC has not altered them. Key common law rules include the following:

3.1 Possession as Essential

At common law, a pledge required actual or constructive delivery of the pledged item to the pledgee. Without delivery, an agreement to give a security interest in personal property was treated as a chattel mortgage or equitable lien rather than a pledge.

Courts have long held that the creditor’s possession serves as public notice of the lien, reducing the risk of secret encumbrances​. This principle remains relevant: if a purported pledgee fails to obtain possession (and no written security agreement exists), the “pledge” may be deemed invalid.

A recent illustration is Berkshire Bank v. Kelly, 2023 VT 2 (Vt. 2023), where a bank loan was supposed to be secured by the debtor’s investment account under a pledge agreement.

The agreement’s collateral description was limited to property “in the possession of, or subject to the control of” the bank, including the specified Merrill Lynch account​. However, the bank never actually gained control of the account (the control agreement sent to the brokerage was never signed).

The Vermont Supreme Court held that because the bank did not obtain possession or control as required by the pledge agreement’s terms, the collateral “never existed” in the sense of attachment, and thus no security interest attached under UCC Article 9-203(b)​.

3.2 Pledge vs. Other Security Devices

Common law drew distinctions between pledges and conditional sales or mortgages. In a pledge, title remains with the pledgor and only a possessory interest passes to the pledgee, whereas in a chattel mortgage historically the title to the chattel might pass conditionally to the mortgagee (subject to re-vesting upon payment).

While Article 9 now generally treats all consensual liens on personal property uniformly as “security interests,” these historical distinctions explain some default rules.

For instance, because the pledgee never had title, the pledgor’s right to redeem the collateral did not require an equitable redemption action – the pledgor could simply pay the debt at law and demand the item back.

By contrast, a mortgagor of personal property (in jurisdictions that treated it as a transfer of title) might need to invoke equity if the mortgagee claimed ownership after default.

Another difference is in remedies: at common law a pledgee could sell the pledged property on default (after notice to the debtor) but had no right to simply keep it as owner without a sale (any attempt to do so was a form of strict foreclosure generally requiring consent or judicial action).

This is mirrored in UCC Article 9, which permits sale or acceptance of collateral after default only under certain conditions, as discussed below.

3.3 Continuing Validity of Common Law Duties

Unless displaced by statute, common law duties such as the pledgee’s duty as a bailee still apply. UCC Article 1-103(b) explicitly preserves principles of law and equity (like the law of bailment, capacity to contract, estoppel, etc.) in secured transactions.

Thus, common law precedents on the standard of care a pledgee owes and the requirement to deal with collateral in good faith continue to be relevant alongside the UCC’s provisions.

4. Rights and Obligations of the Pledgor and Pledgee

A pledge agreement creates a two-way street of rights and duties between the pledgor (debtor) and pledgee (secured party). Many of these are now codified in UCC Article 9 and related law, but they echo traditional common law responsibilities.

4.1 Rights of the Pledgee (Secured Party)

By the terms of the pledge, the creditor gains several key rights in relation to the collateral:

4.1.1 Possession and Retention

The pledgee has the right to take and retain possession of the pledged property until the underlying obligation is satisfied in full​. This right of retention is fundamental; even if the debt’s due date passes or the debtor demands return, the pledgee may hold the collateral until payment or performance occurs.

If the pledge agreement covers future or continuing obligations (e.g. a revolving line of credit or guaranty), it may specify when the pledgee’s possession should end.

For instance, a pledge agreement might state that the collateral secures not only current debt but also future advances, and the pledgee can retain possession until all obligations are extinguished.

4.1.2 Right to Sell or Dispose on Default

Upon the debtor’s default (as defined in the security agreement, typically failure to pay or other specified breaches), the pledgee is entitled to sell the collateral in order to satisfy the debt.

At common law, this power of sale was implied in the pledge relationship – the pledgee could sell after giving reasonable notice to the pledgor (to allow a final chance to redeem)​.

Modern law reinforces this right: UCC 9-610 permits a secured party after default to dispose of collateral by public or private sale, so long as every aspect of the sale (method, manner, time, place, and terms) is commercially reasonable.

The pledgee may bid at a public sale, and in certain cases, may buy at a private sale if the collateral is of a kind customarily sold on a recognised market or subject to standard pricing (UCC 9-610(c)).

The proceeds of a sale are applied to the debt, with any surplus to be returned to the debtor (UCC 9-615(d)(1)-(2)), a rule that aligns with the common law requirement to return surplus proceeds.

​If the sale proceeds are insufficient, the debtor generally remains liable for the deficiency (absent contrary agreement or special consumer protections). We will discuss enforcement and sale procedures in more detail in the next section.

4.1.3 Reimbursement of Expenses

The pledgee has the right to recover reasonable expenses incurred in preserving or caring for the collateral, typically as an additional obligation secured by the collateral. UCC 9-207(b)(1) codifies this: costs of storage, insurance, taxes, or repairs paid by the secured party can be charged to the debtor and are secured.

At common law, courts similarly allowed a pledgee to add expenditures for safekeeping the item (e.g. warehouse fees, maintenance costs) to the debt owed, or to subtract such costs from the sale proceeds.

​This prevents the pledgor from benefiting from the pledgee’s efforts or expenditures necessary to keep the collateral valuable.

4.1.4 Use of Collateral

Generally, a pledgee has no right to use the pledged property for its own benefit while in possession. Doing so without authorization could be a conversion. However, there are limited rights to use the collateral if necessary for its preservation or as agreed by the parties.

UCC 9-207(b)(4) permits the secured party to “use or operate the collateral” for the purpose of preserving its value or pursuant to court order, or (except in the case of consumer goods) as permitted by an agreement with the debtor.

For example, a pledged herd of cattle may need to be fed and exercised; a pledged machine might need periodic running to remain in working order.

Any broader use would require explicit consent of the pledgor (e.g., an agreement that the pledgee can rent out a pledged piece of equipment, with the income applied to the debt).

If the collateral is an instrument or securities, the pledgee may be entitled to collect interest or dividends to apply toward the debt (or to hold them as additional security) — UCC 9-207(c) provides that a secured party in possession may hold non-cash proceeds as additional security and must apply money proceeds to the obligation​.

Traditional law was in accord: a pledgee could receive income from the property (like interest on pledged bonds), but typically had to credit it against the debt or hand it over to the pledgor if the debt was current.

4.1.5 Right to Re-pledge

Interestingly, under both common law and the UCC, a pledgee can in some cases re-pledge or reassign the collateral to secure the pledgee’s own debt. UCC Article 9-207(c)(3) expressly allows a secured party to create a security interest in the collateral​.

For example, a bank holding stock certificates pledged by a borrower might in turn pledge those certificates to a third party (perhaps as collateral for an inter-bank loan). The original pledgor’s rights are not extinguished by such a transaction – the sub-pledgee would take subject to the pledgor’s right to redeem.

Common law allowed re-pledge unless it was specifically prohibited by the contract, treating it as a permissible use of the collateral, provided that the re-pledge did not materially increase the risk to the original pledgor (e.g., the pledgee could be liable if the sub-pledge resulted in loss of the collateral beyond what was owed by the pledgor).¹

4.2 Duties of the Pledgee

Corresponding to these rights, the pledgee owes duties to the pledgor, many of which are designed to protect the pledgor’s residual interest in the collateral:

4.2.1 Duty of Care in Pledge

Foremost, the pledgee must exercise reasonable care in the custody and preservation of the pledged property. UCC Article 9-207(a) imposes this duty: “A secured party shall use reasonable care in the custody and preservation of collateral in the secured party’s possession”.

This includes taking necessary steps to prevent loss, damage, or decline in value of the collateral. For certain types of collateral like chattel paper or instruments, reasonable care explicitly includes actions like preserving rights against prior obligors (e.g., not letting a promissory note lapse or lose its enforceability).

At common law, the pledgee was held to the standard of an ordinary prudent bailee; the pledgee is not an insurer of the property, but if the collateral is lost, stolen, or damaged due to the pledgee’s negligence, the pledgee is liable to the pledgor for the loss.

For instance, if a pawnbroker (pledgee) fails to adequately secure a pledged piece of jewelry and it is stolen, the pawnbroker bears responsibility.

On the other hand, if the pledged item’s value declines due to market forces (e.g. stock prices falling), the pledgee is not liable for that diminution as long as they did not breach any duty​ (common law recognized that mere decline in market value isn’t the pledgee’s fault, whereas failure to sell stock when it precipitously drops might not be a duty unless agreed).²

The duty of care also generally means the pledgee must keep the collateral segregated or identifiable – UCC 9-207(b)(3) requires keeping the collateral identifiable (though fungible collateral can be commingled)​

4.2.2 Obligation to Return Collateral upon Satisfaction

Once the underlying debt is paid or obligation performed, the pledgor is entitled to the return of the collateral. The pledgee has a duty to return the exact property (or its traceable proceeds) in substantially the same condition as received, ordinary wear and tear excepted.

This duty is absolute upon full satisfaction of the secured obligation, subject to any contrary agreement for continuing security.

If the pledgee fails to return the property upon demand after the debt is paid, the pledgee may be liable for conversion. For example, if a person pawns a watch and later repays the loan and interest, the pawnbroker must promptly return the watch.

Any contractual attempt to allow the pledgee to keep the collateral even after the debt is paid (for example, as a penalty or liquidated damages) would be unenforceable as it would amount to a clog on the equity of redemption, a concept disfavored in both common law and under UCC 9-623 (which gives the debtor an inherent right to redeem collateral before disposition).

Thus, the duty to return reinforces the redeemability of pledges. Once the secured debt or obligation is satisfied, the pledgee has a legal duty to return the pledged goods to the pledger in their original condition.

4.2.3 Duty to Inform/Account (in some cases)

While not always expressly stated in older cases, modern law imposes some duties on secured parties to inform the debtor about the collateral. For example, UCC 9-207 requires secured parties to keep records such that they can account for the collateral and any proceeds.

Moreover, if the debtor requests an accounting or information about the collateral, UCC 9-210 requires the secured party to respond.

In judicial contexts, a pledgee may be required to demonstrate that any sale was properly conducted and to account for the proceeds.

Thus, transparency is a part of the pledgee’s obligations, preventing abuse of the collateral.

4.3 Rights of the Pledgor (Debtor)

The pledgor, despite parting with possession, retains significant rights in the transaction:

4.3.1 Right to Redeem

The most vital right of the pledgor is the right to redeem the collateral by fulfilling the obligation. At common law, this right of redemption existed up until the moment the collateral is sold (or otherwise foreclosed) by the pledgee.

The pledgor could pay the debt (and any reasonable expenses or interest due) and demand the collateral’s return.

Even after default, this equity of redemption persists; default alone does not divest the pledgor of ownership, it merely gives the pledgee the power to sell.³

UCC 9-623 similarly provides for a right of redemption: the debtor (or any subordinate lienholder) may redeem the collateral by paying all obligations and reasonable expenses any time before the collateral has been collected, sold, or a strict foreclosure has been completed.

This codified right cannot be waived in advance by the debtor (per UCC 9-602(11)).

In a pledge agreement, practically, the pledgor’s redemption right means that even if they miss a payment deadline, they can still retrieve the collateral by curing the default prior to the pledgee’s sale.

The pledgee must give notice of the intended sale (except in certain perishable or custom-market circumstances) precisely to allow this final chance at redemption.

4.3.2 Pledgor’s Right to Surplus

If the pledgee sells the collateral and the sale yields more than the amount of the debt plus expenses, the pledgor is entitled to the surplus proceeds​.

The pledgee cannot unjustly enrich itself by keeping proceeds above what is owed. This right was firmly established in common law and continues under UCC 9-615(d)(2), which states that any surplus goes to the debtor (or junior lienholders if applicable, with any remainder to the debtor).

Conversely, if the sale proceeds are less, the pledgor is liable for the deficiency unless the parties agreed to limit recourse.

4.3.3 Pledgor’s Right to Possession Upon Satisfaction or Demand if Wrongful Detention

Absent default, the pledgor may have a right to demand return of the collateral under certain conditions (for instance, if the pledgee breaches the agreement or if a third party claims the collateral and the pledgor wants to resolve it).

Generally, however, the pledgor’s right to possess is contracted away until the debt is paid. If the debt is not yet due, the pledgor usually cannot unilaterally reclaim the collateral without providing substitute security or otherwise as agreed.

But if the pledgee violates the agreement (say, misuse or endangers the collateral), the pledgor could seek a court order for the collateral’s return or injunctive relief. Moreover, the pledgor holds the ultimate title and, after paying the debt, can immediate demand the property – this is essentially the mirror of the pledgee’s duty to return.

4.3.4 Pledgor’s Right to Be Notified (in enforcement)

Under UCC Article 9, debtors have the right to receive advance notice before a disposition of collateral (UCC 9-611(b)) in non-consumer transactions, except in certain waived situations or if the collateral is perishable or threatens to decline quickly.

This right ensures the pledgor is informed of the time and place of sale, giving an opportunity to redeem or to attend the sale (or even procure buyers to get a better price).

While at common law the notice requirement was not uniform (some early cases allowed a pledgee to sell without notice if the agreement so provided, others imposed a general reasonableness standard), modern law strongly favours giving notice as part of “commercially reasonable” enforcement.

Failure to give required notice can subject the pledgee to liability or affect the recovery of a deficiency (UCC 9-626).

4.4 Obligations of the Pledgor

Corresponding to rights, the pledgor’s primary obligations are straightforward:

4.4.1 Payment or Performance

The pledgor must pay the debt or perform the obligation that the collateral secures, in accordance with the terms of the underlying contract (loan agreement, promissory note, etc.).

If the pledgor fails to do so (and does not redeem timely), they risk losing the collateral through foreclosure sale. The pledge agreement itself typically does not impose new monetary obligations but references the principal obligation.

For example, if stock is pledged to secure a $50,000 loan, the pledgor’s duty is to repay that $50,000 (and any interest or fees agreed) to get the stock back.

4.4.2 Not to Interfere with Pledgee’s Rights

The pledgor should not take actions that frustrate the pledgee’s security interest. This includes not attempting to sell or further encumber the collateral while it’s pledged (without consent) and not retaking possession wrongfully.

Many pledge agreements include covenants that the pledgor will defend the collateral against claims, will not impair it, and will keep it insured at their expense or otherwise in good condition.

Even when not explicitly stated, courts have found an implied obligation that the pledgor will not intentionally damage the collateral or do anything to diminish its value while the pledgee holds it (for instance, causing a corporate issuer to issue more stock to dilute pledged shares could be a breach of good faith).

4.4.3 Indemnify for Expenses or Loss

If the pledgee incurs costs or is subjected to claims because of the collateral (for example, the collateral is a car that incurs storage charges or is subject to a tax lien), the pledgor is generally obligated to indemnify the pledgee or cover those costs.

This ties back to the pledgee’s right to reimbursement – the pledgor must reimburse those charges to redeem the collateral.

Additionally, if the pledgee is sued by a third party over the collateral (say someone else claims ownership), the pledgor may be obligated to assist or cover the pledgee’s losses, since the pledgor purported to give the security interest.

In sum, a pledge relationship is balanced: the pledgee’s rights over the collateral are strong (including possession and sale), but they are bounded by duties of care and good faith, while the pledgor, though giving up possession, retains key rights like redemption and surplus, conditioned on fulfilling the secured obligation.

5. Enforcement of Pledge and Remedies in Case of Default

Enforcement of a pledge agreement upon the debtor’s default involves a combination of self-help remedies and legal procedures, guided heavily by Part 6 of Article 9 of the UCC.

“Default” itself is typically defined by the security agreement (e.g. failure to pay the secured debt when due, bankruptcy of the debtor, or breach of covenants).

Once default occurs, the pledgee (secured party) has several options:

5.1 Retention of Collateral (Strict Foreclosure)

One option is for the pledgee to retain the collateral in full or partial satisfaction of the debt, commonly known as strict foreclosure.

Under UCC 9-620, a secured party can accept the collateral as discharge of the obligation if certain conditions are met: the debtor must consent to this arrangement after default (either by an authenticated record or by not objecting within 20 days of a proposal), no other creditors with liens object, and if it’s a consumer transaction, additional protections apply (for instance, no partial satisfaction allowed for consumer goods, and special rules if the debtor has paid 60% of the price for consumer goods, etc., under former UCC 9-620(e) and related provisions).

Strict foreclosure essentially means the pledgee keeps the item instead of selling it, and the debt is forgiven to the agreed extent.

In a pledge context, this might occur if, say, the collateral is something the creditor finds useful or the market is depressed – the creditor and debtor may agree the creditor will take the collateral (valued at an agreed amount) and the debt will be satisfied (with perhaps an obligation for the debtor to pay any shortfall unless full satisfaction).

Historically, common law was wary of allowing the pledgee to simply keep the collateral without sale, as it could amount to a windfall if the collateral’s value exceeded the debt.

That wariness is reflected in the UCC’s requirement of consent and notice to other secured parties. In practice, strict foreclosures are not as common as sales, but they remain a possible enforcement mechanism.

5.2 Sale of Collateral

The most typical remedy is for the pledgee to sell the collateral and apply the proceeds to the debt.

UCC UCC 9-610 provides the framework: after default, the secured party may sell, lease, license, or otherwise dispose of the collateral in its present condition or following any commercially reasonable preparation.

All aspects of the disposition must be “commercially reasonable” (UCC 9-610(b)). The sale can be public (an auction open to the public) or private (a negotiated sale to a particular buyer), and it can be as a unit or in parcels.

The pledgee must send prior notice of the sale to the debtor and certain other parties (UCC 9-611), unless waived after default or an exception applies.

The notice (for non-consumer transactions) must be sent within a reasonable time before the sale and contain details of the disposition (UCC 9-612, 9-613).

If these procedures are followed, the sale transfers the debtor’s rights in the collateral to the buyer, free of the security interest and any subordinate liens (UCC 9-617).

The order of applying sale proceeds is set by UCC 9-615: first to reasonable expenses of retaking, holding, and disposing of the collateral (including attorney’s fees if allowed), second to the secured obligation being foreclosed, third to junior secured creditors who have made a demand, and any surplus to the debtor​.

If a deficiency remains (debt exceeds proceeds), the creditor may seek a judgment against the obligor for the deficiency, unless otherwise agreed or barred.

Notably, if the pledgee (secured party) itself purchases the collateral at the sale for a low price, or if the sale is conducted in a commercially unreasonable way, courts may adjust the deficiency or even prevent deficiency collection as a penalty.

UCC 9-626 provides a “rebuttable presumption” rule in many jurisdictions: if the debtor puts the secured party’s compliance in issue, the secured party must prove that the sale was commercially reasonable; if not, the sale proceeds are presumed to equal the amount of the debt (eliminating the deficiency unless the secured party rebuts that presumption)​.

In general, a price obtained that is very low compared to market value does not automatically make a sale unreasonable, but a procedure that depresses the price (such as not advertising a unique item to likely buyers) could be deemed commercially unreasonable​.

The key is that the secured party must treat the collateral and sale as a fiduciary of sorts – obtaining a fair price to protect the debtor’s residual interest. If a sale is set aside or found wrongful, the pledgee may be liable for damages (UCC 9-625).

Under common law, the sale process was governed by similar notions of notice and fairness. A landmark principle was that the pledgee should give reasonable notice to the pledgor of intent to sell, unless notice was waived or impracticable, to allow the debtor a chance to redeem or supervise.⁴ Failure to give notice could render the sale voidable or make the pledgee liable for conversion.

Modern statutes like the UCC have formalized these requirements. Additionally, at common law the pledgee could choose to sue on the underlying debt instead of immediately selling the collateral, obtaining a judgment against the debtor, but unless the pledgee surrendered the collateral, the pledgee would typically then apply the collateral to satisfy the judgment (otherwise the debtor could insist the collateral be accounted for in execution).

UCC 9-601 preserves the secured party’s right to reduce the claim to judgment or pursue other remedies simultaneously with foreclosure, meaning the creditor can both repossess/sell collateral and sue for any remaining debt.

5.3 Collection of Rights (for Intangible Collateral)

If the collateral is of a type that involves rights against third parties (like accounts receivable, negotiable instrument obligations, or investment property), the UCC permits the secured party to step into the debtor’s shoes to collect on those rights directly.

Under UCC 9-607, after default a secured party holding a security interest in, say, an account or a promissory note can notify the account debtor or maker to pay the secured party directly.

In the context of a pledge, an example would be if a debtor pledges a bond or note from a third party – upon default, the pledgee can enforce that note or bond (collect payments or even foreclose on any security for that note) as the debtor could.

This might involve, for instance, the pledgee foreclosing a mortgage that was pledged to it as collateral.​

The secured party must, however, proceed in a commercially reasonable manner in collecting or enforcing such rights (UCC 9-607(c))​, and any surplus after satisfying the debt must be returned to the pledgor, similar to a sale scenario.

5.4 Self-Help Repossession

In many secured transactions, a critical step is the secured party’s right to take possession of the collateral upon default. In a pledge, the secured party already has possession, which is a major practical advantage – there is no need for a potentially contentious repossession process.

If the collateral were not already in the creditor’s hands (as in a non-possessory security interest), UCC 9-609 allows self-help repossession if it can be done without “breach of the peace.”

But by definition, a pledge avoids that uncertainty; the creditor’s control from the outset means enforcement can move straight to disposition or acceptance.

That said, if the pledge covered after-acquired property or if the collateral is an account under the debtor’s control (as in the Berkshire Bank v Kelly, 2023 VT 2 (Vt. 2023) case discussed earlier, where the bank never obtained control of the account), the secured party may need to resort to judicial process (like replevin) or invoke a contractual right to compel the debtor’s cooperation (as the bank did by seeking an injunction to freeze the account​.

In general, however, the pledgee’s possession simplifies default remedies.

5.5 Judicial vs. Extrajudicial Enforcement

Common law allowed the pledgee to sell the collateral without a court order, and this is largely preserved. Foreclosure of personal property collateral under Article 9 is typically a nonjudicial process (unlike many real estate foreclosures).

Nevertheless, the debtor or other interested parties can always challenge the process in court if they believe the creditor is not complying with the law (for example, to stop a sale that is not commercially reasonable or to object to a strict foreclosure proposal).

Some states also provide that a debtor may redeem or reinstate the debt through court proceedings, but Article 9’s provisions generally govern.

If the debtor is in bankruptcy, Article 9 enforcement is subject to the automatic stay in bankruptcy, and the creditor would need bankruptcy court permission to proceed with foreclosure.

5.6 Remedies for Breach by Pledgee

If the pledgee violates its obligations – for instance, fails to exercise due care and the collateral is damaged, or sells the collateral without adhering to the required procedures – the pledgor has remedies.

Under UCC 9-625, a debtor can recover damages for losses caused by the secured party’s failure to comply with Article 9, including potential statutory damages in consumer cases.

The debtor might also be able to defeat or reduce a deficiency claim by the creditor as noted. In egregious cases, a wrongful sale might be set aside by a court, or the pledgee held liable for conversion (especially if the sale was not just procedurally improper but outright wrongful, like selling without any default).

Secured parties who ignore the rules do so at their peril: for example, selling collateral without notice when notice was required can lead to a court refusing to grant a deficiency judgment and ordering the surplus (if any) paid to the debtor as if the debt were satisfied.

Pledgees must also be cautious not to “breach the peace” (though they have possession, a breach can occur if, say, they forcibly remove the pledgor from using the collateral unlawfully).

Courts have long memories of the equitable principle that a secured party is not allowed to use oppressive self-help or surprise to disadvantage the debtor.

6. Conclusion

A pledge agreement remains a vital security device in secured transactions, embodying the core secured lending idea of tying a debt to specific collateral. In the United States, the law of pledges straddles the line between ancient common law principles and the modern Uniform Commercial Code framework.

The common law contributes foundational concepts – delivery of possession, bailment-like duties, the right to sell on default, and the redeemability of the collateral – while the UCC provides a detailed structure for perfection, priority, and enforcement that brings uniformity and clarity to pledge agreements across jurisdictions.

In any common law jurisdiction (within or outside the U.S.), the essence of a pledge remains the same.

English and other Commonwealth courts, for example, still refer to pledges (often using the term pawn in consumer contexts) with the same basic rules: the pawnor and pawnee have a bailor-bailee relationship until default, then the pawnee may sell after notice, etc.⁵

U.S. law, through Article 9, has largely harmonised these rules, but local law and case law interpretations continue to shape outcomes.

For those entering into pledge agreements, this article highlights several practical points: ensure the agreement clearly describes the collateral and, if necessary, effectuate control or possession; understand that the pledgee must take care of the property and follow proper foreclosure procedures; and remember that the pledgor retains rights that cannot be ignored, such as the right to redeem and to any surplus.

A well-structured pledge agreement can provide robust security to a creditor while still protecting the debtor’s equitable interests – it is this balance that the law of pledge agreements, as developed through statutes and case law, seeks to maintain.

1. Kettering, K. C. (1999). Repledge deconstructed. U. Pitt. L. Rev., 61, 45. ↩︎
2. Farnham, W. H. (1936). Effect of Pledgee’s Breach of Duty on Existence of the Debt. Michigan Law Review, 35(2), 253–273. ↩︎
3. Sale of Pledged Collateral at Default. (1941). Columbia Law Review, 41(6), 1087–1096. ↩︎
4. Birmingham, R. G. (1956). Miscellaneous—Pledge—Notice of Sale. Buffalo Law Review, 6(1), 83. ↩︎
5. Oeltjen, J. C. (1991). Pawnbroking: An Historical, Comparative Perspective. Ariz. J. Int’l & Comp. L., 8, 53. ↩︎