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CREDIT TRANSACTIONS

CREDIT TRANSACTIONS

All transactions involving the purchase

or loan of goods, services, or money in

the present with a promise to pay or

deliver in the future

Contracts of security

Types:

1. Secured transactions or contracts of real

security- supported by a collateral or an

encumbrance of property

2. Unsecured transactions or contracts of

personal security - supported only by a

promise or personal commitment of

another such as a guarantor or surety

Security Something given, deposited, or serving

as a means to ensure fulfilment or

enforcement of an obligation or of

protecting some interest in property

Types of Security

a. personal when an individual

becomes surety or guarantor

b. real or property when a

mortgage, pledge, antichresis,

charge or lien or other device used

to have property held, out of which

the person to be made secure canbe compensated for loss

Bailment

The delivery of property of one person to

another in trust for a specific purpose,

with a contract, express or implied, that

the trust shall be faithfully executed and

the property returned or duly accounted

for when the special purpose is

accomplished or kept until the bailor

claims it.

Parties:

1. bailor - the giver; one who delivers

property

2. bailee- the recipient; one who receives

the custody or possession of the thing

thus delivered

LOAN (Articles 19331961)

A contract wherein one of the parties

delivers to another, either something not

consumable so that the latter may use

the same for a certain time and return it

or money or other consumable thing,

upon the condition that the same

amount of the same kind and quality

shall be paid. (Art 1933)

Characteristics:

1. Real Contract delivery of the thing

loaned is necessary for the perfection of

the contract

NOTE: An accepted promise to make a

future loan is a consensual contract, and

therefore binding upon the parties but it

is only after delivery, will the real

contract of loan arise. (Art 1934)

2. Unilateral Contract - once the subjectmatter has been delivered, it creates

obligations on the part of only one of the

parties (i.e. borrower).

Kinds:

1. Commodatumwhen the bailor (lender)

delivers to the bailee (borrower) a non-

consumable thing so that the latter may

use it for a certain time and return the

identical thing.

Kinds of commodatum:

a.

Ordinary Commodatumuse by theborrower of the thing is for a certain

period of time

b. Precarium - one whereby the bailor

may demand the thing loaned at will

and it exists in the following cases:

i. neither the duration nor

purpose of the contract is

stipulated

ii. the use of the thing is merely

tolerated by the owner

2. Simple loan or mutuum where the

lender delivers to the borrower money

or other consumable thing upon the

condition that the latter shall pay the

same amount of the same kind and

quality.

Commodatum Mutuum

Key: COPS-LOTR

1. Object

Non-consumable Consumable

2. Cause

Gratuitous May or may not be


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gratuitous

3. Purpose

Use or temporary

possession

Consumption

4. Subject MatterReal or personal

property

Only personal property

5. Ownership of the thing

Retained by the bailor Passes to the debtor

6. Thing to be returned

Exact thing loaned Equal amount of the

same kind and quality

7. Who bears risk of loss

Bailor Debtor

8. When to return

In case of urgent need,

even before the

expiration of the term

Only after the

expiration of the term

Loan Credit

Delivery by one party

and the receipt of other

party of a given sum of

money or other

consumable thing upon

an agreement, express

or implied, to repay the

same.

Ability of a person to

borrow money or

things by virtue of the

trust or confidence

reposed by the lender

that he will pay what

he promised.

Loan Credit

1. Interest taken at the

expiration of the credit

Interest is taken in

advance

2. Always on a double

name paper (two

signatures appear with

both parties held liable

for payment)

Always on a single

name paper (i.e.

promissory note with

no indorse-ment other

than the maker)

COMMODATUM (Articles 19351952)

Nature:

1. PURPOSE: Bailee in commodatum

acquires the temporary use of the thing

but not its fruits (unless stipulated as an

incidental part of the contract).(Art

1935)

Use must be temporary, otherwise

the contract may be a deposit.

2. CAUSE: Essentially gratuitous; it ceases

to be a commodatum if any

compensation is to be paid by the

borrower who acquires the use, in such

case there arises a lease contract.

Similar to a donation in that it

confers a benefit to the recipient.

The presumption is that the bailorhas loaned the thing for having no

need therefor.

3. SUBJECT MATTER: Generally non-

consumable whether real or personal

but if the consumable goods are not for

consumption as when they are merely

for exhibition, consumable goods may be

the subject of the commodatum. (Art

1936)

4. Bailor need not be the owner of thething owned (Art. 1938) since by the

loan, ownership does not pass to the

borrower.

A mere lessee or usufructuary may

lend but the borrower or bailee

himself may not lend nor lease the

thing loaned to him to a third person

(Art 1932[2])

5. Purely Personal (Art 1939):

Death of either party terminates the

contract unless by stipulation, thecommodatum is transmitted to the

heirs of either or both parties.

Bailee can neither lend nor lease the

object of the contract to a third

person.

NOTE:Use of the thing loaned may

extend to members of the bailees

household except:

a. contrary stipulation;

b. nature of the thing forbids

such use

Obligations of the Bailee: (Arts 19411945)

1. To pay for the ordinary expenses for the

use and preservation of the thing loaned.

(Art 1941)

2. To be liable for the loss of the thing even

if it should be through a fortuitous event

in the following cases: (KLAS D)

a. when he keeps it longer than the

period stipulated, or after the

accomplishment of its use


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b. when he lends or leases it to third

persons who are not members of his

household

c. when the thing loaned has been

delivered with appraisal of its valued. when, being able to save either of

the thing borrowed or his own

things, he chose to save the latter;

or

e. when the bailee devoted the thing

for any purpose different from that

for which it has been loaned (Art

1942)

3. To be liable for the deterioration of thing

loaned (a) if expressly stipulated; (b) if

guilty of fault or negligence; or (c) if he

devotes the thing to any purposedifferent from that for which it has been

loaned

4. To pay for extraordinary expenses arising

from the actual use of the thing by the

bailee, which shall be borne equally by

both the bailor and the bailee, even

though the bailee acted without fault,

unless there is a stipulation to the

contrary (Art 1949 par 2)

5. To return the thing loaned

The bailee has no right to retain the

thing loaned as security for claimshe has against the bailor even for

extraordinary expenses except for a

claim for damages suffered because

of the flaws of the thing loaned.

NOTES:

However, the bailees right

extends no further than

retention of the thing loaned

until he is reimbursed for the

damages suffered by him.

He cannot lawfully sell the thingto satisfy such damages without

courts approval.

In case there are two or more

bailees, their obligation shall be

solidary.

Obligations of the bailor (Art 1946 Art

1952):

1. To respect the duration of the loan

GENERAL RULE: Allow the bailee the

use of the thing loaned for the duration

of the period stipulated or until the

accomplishment of the purpose for

which the commodatum was instituted.

EXCEPTIONS:

a. In case of urgent need in

which case bailee may demand itsreturn or temporary use;

b. The bailor may demand

immediate return of the thing if the

bailee commits any act of

ingratitude specified in Art. 765.

2. To refund to the bailee extraordinary

expenses for the preservation of the

thing loaned, provided the bailee brings

the same to the knowledge of the bailor

before incurring them, except when they

are so urgent that the reply to thenotification cannot be awaited without

danger.

3. To be liable to the bailee for damages for

known hidden flaws.

Requisites:

a. There is flaw or defect in the thing

loaned;

b. The flaw or defect is hidden;

c. The bailor is aware thereof;

d. He does not advise the bailee of the

same; ande. The bailee suffers damages by

reason of said flaw or defect

NOTES:

If the above requisites concur, the

bailee has the right of retention for

damages.

The bailor cannot exempt himself

from the payment of expenses ordamages by abandoning the thing to

the bailee.

SIMPLE LOAN OR MUTUUM (Art 1953

1961)

A contract whereby one party delivers to

another, money or other consumable

thing with the understanding that the

same amount of the same kind and

quality shall be paid. (Art. 1953)

NOTES:


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The mere issuance of the checks does

not result in the perfection of the

contract of loan. The Civil Code provides

that the delivery of bills of exchange and

mercantile documents, such as checks,shall produce the effect of payment only

when they have been encashed (Gerales

vs. CA 218 SCRA 638). It is only after the

checks have produced the effect of

payment that the contract of loan may

be deemed perfected.

The obligation is to pay and not to

return because the consumption of the

thing loaned is the distinguishing

character of the contract of mutuum

from that of commodatum.

No estafa is committed by a person whorefuses to pay his debt or denies its

existence.

Simple Loan/Mutuum Rent

1. Delivery of money or

some consumable thing

with a promise to pay

an equivalent of the

same kind and quality

Delivery of some non-

consumable thing in

order that the other

may use it during a

certain period and

return it to the former.

2. There is a transfer ofownership of the thing

delivered

There is no transfer ofownership of the thing

delivered

3. Relationship

between the parties is

that of obligor-obligee

Relationship is that of

a landlord and tenant

4. Creditor receives

payment for his loan

Owner of the property

rented receives

compensation or price

either in money,

provisions, chattels, orlabor

from the occupant

thereof in return for its

use (Tolentino vs

Gonzales, 50 Phil 558

1927)

Loan Sale

1. Real contract Consensual contract

2.

Generally Bilateral and reciprocal

unilateral because only

borrower has

obligations

NOTE: If the property is sold, but the realintent is only to give the object as securityfor

a debtas when the price is comparatively

smallthere really is a contract of loanwith

an equitable mortgage.

Commodatum/

MutuumBarter

1. Subject matter is

money or fungible

things

Subject matter is non-

fungible, (non

consumable) things

2. In commodatum, thebailee is bound to

return the identical

thing borrowed when

the time has expired or

purpose served

The thing withequivalent value is

given in return for what

has been received

3. Mutuum may be

gratuitous and

commodatum is always

gratuitous

Onerous, actually a

mutual sale

Form of Payment (Art 1955):

1. If the thing loaned is money - payment

must be made in the currency stipulated,

if it is possible; otherwise it is payable in

the currency which is legal tender in the

Philippines and in case of extraordinary

inflation or deflation, the basisi of

payment shall be the value of the

currency at the time of the creation of

the obligation2. If what was loaned is a fungible thing

other than money - the borrower is

under obligation to pay the lender

another thing of the same kind, quality

and quantity. In case it is impossible to

do so, the borrower shall pay its value at

the time of the perfection of the loan.

Interest

The compensation allowed by law or

fixed by the parties for the loan or

forbearance of money, goods or credits


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said that nothing in said circular grants

lenders carta blanche authority to raise

interest rates to level which will either

enslave their borrowers or lead to a

hemorrhaging of their assets (citing Almedavs. CA, 256 SCRS 292). In Medel vs. CA, 299

SCRA 481, it was ruled that while stipulated

interest of 5.5% per month on a loan is

usurious pursuant to CB Circular No. 905, the

same must be equitably reduced for being

iniquitous, unconscionable and exorbitant. It

is contrary to morals, (contra bonos mores). It

was reduced to 12% per annum in consonant

with justice and fair play.

DEPOSIT (Articles 19622009)

A contract constituted from the moment

a person receives a thing belonging to

another, with the obligation of safely

keeping it and of returning the same.

Characteristics:

1. Real Contract - contract is perfected

by the delivery of the subject

matter.

2. Unilateral (gratutitous deposit) -

only the depositary has an

obligation.3. Bilateral (onerous deposit) - gives

rise to obligations on the part of

both the depositary and depositor.

Deposit Mutuum

1. Purpose

Principal purpose is

safekeeping or custody

Principal purpose is

consumption

2. When to Return

Depositor can demand

the return of the

subject matter at will

The lender must wait

until the expiration of

the period granted to

the debtor3. Subject Matter

Subject matter may be

movable or immovable

property

Subject matter is only

money or other

fungible thing

4. Relationship


lender (creditor) and

borrower (debtor).


depositor and

depositary.

5. Compensation

There can be

compensation of

credits.

NO compensation of

things deposited with

each other (except by

mutual agreement).

Deposit Commodatum

1. Purpose isSafekeeping

1. Purpose is thetransfer of the use

2. May be gratuitous 2. Essentially and

always gratuitous

3. Movable/corporeal

things only in case of

extrajudicial deposit

3. Both movable and

immovable may be the

object

Kinds of Deposit:

1. Judicial (Sequestration) takes place

when an attachment or seizure of

property in litigation is ordered.

2. Extra-judicial

a. Voluntary one wherein the

delivery is made by the will of the

depositor or by two or more persons

each of whom believes himself

entitled to the thing deposited. (Arts

19681995)

b. Necessary one made in

compliance with a legal obligation,

or on the occasion of any calamity,

or by travellers in hotels and inns(Arts 1996 - 2004), or by travellers

with common carriers (Art 1734

1735).

NOTE: The chief difference between a

voluntary deposit and a necessary

deposit is that in the former, the

depositor has a complete freedom in

choosing the depositary, whereas in the

latter, there is lack of free choice in the

depositor.

Judicial Extra-judicial1. Creation

Will of the court Will of the parties or

contract

2. Purpose

Security or to insure

the right of a party to

property or to recover

in case of favorable

judgment

Custody and

safekeeping

3. Subject Matter


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Movables or

immovables,

but generally

immovable

Movables only

4. CauseAlways onerous May be compen-sated

or not, but generally

gratuitous

5. When must the thing be returned

Upon order of the

court or when

litigation is ended

Upon demand of

depositor

6. In whose behalf it is held

Person who has a right Depositor or third

person designated

GENERAL RULE: Contract of deposit is

gratuitous (Art 1965)

EXCEPTIONS:

1. when there is contrary stipulation

2. depositary is engaged in business of

storing goods

3. property saved from destruction

without knowledge of the owner

NOTES:

Article 1966 does not embrace

incorporeal property, such as rights and

actions, for it follows the person of the

owner, wherever he goes.

A contract for the rent of safety deposit

boxesis not an ordinary contract of lease

of things but a special kind of deposit;

hence, it is not to be strictly governed by

the provisions on deposit. The relation

between a bank and its customer is that

of a bailor and bailee. (CA Agro vs CA,

219 SCRA 426)

Obligations of the Depositary (Art 1972

1991):

1. To keep the thing safely (Art 1972)

Exercise over the thing deposited

the same diligence as he would

exercise over his property

2. To return the thing (Art 1972)

Person to whom the thing must be

returned:

a. Depositor, to his heirs and successors,

or the person who may have been

designated in the contract

b. If the depositary is capacitated- he is

subject to all the obligations of a

depositary whether or not the

depositor is capacitated. If the

depositor is incapacitated, thedepositary must return the property

to the legal representative of the

incapacitated or to the depositor

himself if he should acquire capacity

(Art 1970).

c. If the depositor is capacitated and

the depositary is incapacitated- the

latter does not incur the obligation

of a depositary but he is liable:

i..to return the thing deposited

while still in his possession;

ii.to pay the depositor the amountwhich he may have benefited

himself with the thing or its

price subject to the right of any

third person who acquired the

thing in good faith (Art 1971)

Time of return:

a. Upon demand even though a

specified period or time for such

return may have been fixed except

when the thing is judicially attached

while in the depositarys possessionor should he have been notified of

the opposition of a third person to

the return or the removal of the

thing deposited. (Art 1998)

b. If deposit gratuitous, the

depositary may return the thing

deposited notwithstanding that a

period has been fixed for the

deposit if justifiable reasons exists

for its return.

c. If the deposit is for a

valuable consideration, the

depositary has no right to return the

thing deposited before the

expiration of the time designated

even if he should suffer

inconvenience as a

consequence.(Art 1989)

What to return: product,

accessories, and accessions of the

thing deposited (Art 1983)


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3. Not to deposit the thing with a third

person unless authorized by express

stipulation (Art 1973)

The depositor is liable for the loss of

the thing deposited under Article1973 if:

a. he transfers the deposit

with a third person without

authority although there is no

negligence on his part and the third

person;

b. he deposits the thing with a

third person who is manifestly

careless or unfit although authorized

even in the absence of negligence;

or

c. the thing is lost through thenegligence of his employees

whether the latter are manifestly

careless or not.

4. If the thing deposited should earn

interest (Art 1975):

a. to collect interest and the capital

itself as it fall due

b. to take steps to preserve its value

and rights corresponding to it

5. Not to commingle things deposited if so

stipulated (Art 1976)

6. Not to make use of the thing depositedunless authorized (Art 1977)

GENERAL RULE: Deposit is for

safekeeping of the subject matter and

not for use. The unauthorized use by the

depositary would make him liable for

damages.

EXCEPTIONS:

1. When the preservation of the thing

deposited requires its use

2. When authorized by the depositor

NOTE: The permission to use is NOT

presumed except when such use is

necessary for the preservation of the

thing deposited.

Effect if permission to use is given (Art

1978):

1. If thing deposited is non-

consumable, the contract loses the

character of a deposit and acquires

that of a commodatum despite the

fact that the parties may have

denominated it as a deposit, unless

safekeeping is still the principal

purpose.

2. If thing deposited consists of

money/consumable things, the

contract is converted into a simpleloan or mutuum unless safekeeping

is still the principal purpose in which

case it is called an irregular deposit.

Example: bank deposits are irregular

deposits in nature but governed by

law on loans.

7. When the thing deposited is delivered

sealed and closed :

a. to return the thing deposited in the

same condition

b. to pay for damages should the seal

or lock be broken through his fault,which is presumed unless proved

otherwise

c. to keep the secret of the deposit

when the seal or lock is broken with

or without his fault (Art 1981)

NOTE: The depositary is authorized

to open the thing deposited which is

closed and sealed when (Art 1982):

i. there is presumed authority (i.e.

when the key has been

delivered to him or the

instructions of the depositorcannot be done without

opening it)

ii. necessity

8. To change the way of the deposit if

under the circumstances, the depositary

may reasonably presume that the

depositor would consent to the change if

he knew of the facts of the situation,

provided, that the former notifies the

depositor thereof and wait for his

decision, unless delay would cause

danger

9. To pay interest on sums converted to

personal use if the deposit consists of

money (Art 1983)

10. To be liable for loss through fortuitous

event (SUDA): (Art 1979):

a. if stipulated

b. if he uses the thing without the

depositor's permission

c. if he delays its return

d. if he allows others to use it, even

though he himself may have been

authorized to use the same


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NOTES:

Fixed, savings, and current deposits of

money in banks and similar institutions

shall be governed by the provisionsconcerning simple loan.(Art 1980)

The general rule is that a bank can

compensate or set off the deposit in its

hands for the payment of any

indebtedness to it on the part of the

depositor. In true deposit,

compensation is not allowed.

Irregular deposit Mutuum

1. The consumablething deposited may be

demanded at will by

the depositor

1. Lender is bound bythe provisions of the

contract and cannot

demand restitution

until the time for

payment, as provided

in the contract, has

arisen

2. The only benefit is

that which accrues to

the depositor

2. Essential cause for

the transaction is the

necessity of the

borrower

3. The irregular

depositor has a

preference over other

creditors with respect

to the thing deposited

3. Common creditors

enjoy no preference in

the distribution of the

debtors property

Rule when there are two or more depositors

(Art 1985):

1. If thing deposited is divisible and

depositors are not solidary: Each

depositor can demand only his

proportionate share thereto.2. If obligation is solidary or if thing is not

divisible: Rules on active solidarity shall

apply, i.e. each one of the solidary

depositors may do whatever may be

useful to the others but not anything

which may be prejudicial to the latter,

(Art. 1212) and the depositary may

return the thing to anyone of the

solidary depositors unless a demand,

judicial or extrajudicial, for its return has

been made by one of them in which

case, delivery should be made to him

(Art. 1214).

3. Return to one of depositors stipulated.

The depositary is bound to return it only

to the person designated although hehas not made any demand for its return.

NOTES:

The depositary may retain the thing in

pledge until full payment of what may be

due him by reason of the deposit (Art

1994).

The depositors heir who in good faith

may have sold the thing which he did not

know was deposited, shall only be bound

to return the price he may have received

or to assign his right of action against thebuyer in case the price has not been paid

him (Art 1991).

Obligations of the Depositor (Art 1992

1995):

1. To pay expenses for preservation

a. If the deposit is gratuitous, the

depositor is obliged to reimburse

the depositary for expenses

incurred for the preservation of the

thing deposited (Art 1992)

b. If the deposit is for valuableconsideration, expenses for

preservation are borne by the

depositary unless there is a contrary

stipulation

2. To pay loses incurred by the depositary

due to the character of the thing

deposited

GENERAL RULE: The depositor shall

reimburse the depositary for any loss arising

from the character of the thing deposited.

EXCEPTIONS:1. at the time of the deposit, the

depositor was not aware of the

dangerous character of the thing

2. when depositor was not expected to

know the dangerous character of the

thing

3. when the depositor notified the

depository of the same

4. the depositary was awareof it without

advicefrom the depositor


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Extinguishment of Voluntary Deposit (Art

1995)

1. Loss or destruction of the thing

deposited

2. In case of gratuitous deposit, upon thedeath of either the depositor or the

depositary

3. Other causes, such as return of the thing,

novation, merger, expiration of the term

fulfilment of the resolutory condition,

etc (Art 1231)

Necessary Deposits

1. Made in compliance with a legal

obligation

2. Made on the occasion of any calamity

such as fire, storm, flood, pillage,shipwreck or other similar events

(deposito miserable)

3. Made by travellers in hotels and inns or

by travellers with common carrier

Deposit by Travellers in hotels and inns:

The keepers of hotels or inns shall be

responsible as depositaries for the

deposit of effects made by travellers

provided:

a. Notice was given to them or to their

employees of the effects brought bythe guest; and

b. The guests take the precautions

which said hotel-keepers or their

substitutes advised relative to the

care and vigilance of their effects.

NOTES:

Liability extends to vehicles, animals and

articles which have been introduced or

placed in the annexes of the hotel.

Liability shall EXCLUDE losses which

proceed from force majeure. The act of a

thief or robber is not deemed forcemajeure unless done with the use of

arms or irresistible force.

The hotel-keeper cannot free himself

from the responsibility by posting

notices to the effect that he is not liable

for the articles brought by the guest. Any

stipulation to such effect shall be void.

Notice is necessary only for suing civil

liability but not in criminal liability.

GUARANTY (Articles 20472084)

A contract whereby a person (guarantor)

binds himself to the creditor to fulfil the

obligation of the principal debtor in case

the latter fail to do so.

Classification of Guaranty:

1. In the Broad sense:

a. Personal - the guaranty is the credit

given by the person who guarantees

the fulfilment of the principal

obligation.

b. Real - the guaranty is the property,

movable or immovable.

2. As to its Origin

a. Conventional - agreed upon by the

parties.

b. Legal - one imposed by virtue of a

provision of a law.

c. Judicial - one which is required by a

court to guarantee the eventual

right of one of the parties in a case.

3. As to Consideration

a. Gratuitous - the guarantor does not

receive any price or remuneration

for acting as such.b. Onerous - the guarantor receives

valuable consideration.

4. As to the Person guaranteed

a. Single - one constituted solely to

guarantee or secure performance

by the debtor of the principal

obligation.

b. Double or sub-guaranty - one

constituted to secure the fulfilment

by the guarantor of a prior

guaranty.

5. As to Scope and Extent

a. Definite - the guaranty is limited to

the principal obligation only, or to a

specific portion thereof.

b. Indefinite or simple - one which not

only includes the principal

obligation but also all its accessories

including judicial costs

SURETYSHIP


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A contract whereby a person (surety)

binds himself solidarilywith the principal

debtor

A relation which exists where one person

(principal) has undertaken an obligationand another person (surety) is also under

a direct and primary obligation or other

duty to the obligee, who is entitled to

but one performance, and as between

the two who are bound, the second

rather than the first should perform

(Agro Conglomerates, Inc. vs. CA, 348

SCRA 450)

NOTES:

The reference in Article 2047 to solidary

obligations does not mean that

suretyship is withdrawn from theapplicable provisions governing

guaranty. A surety is almost the same as

a solidary debtor, except that he himself

is a principal debtor.

In suretyship, there is but one contract,

and the surety is bound by the same

agreement which binds the principal. A

surety is usually bound with the principal

by the same instrument, executed at the

same time and upon the same

consideration (Palmares vs CA, 288 SCRA

422) It is not for the obligee to see to it that

the principal debtor pays the debt or

fulfill the contract, but for the surety to

see to it that the principal debtor pays or

performs (Paramount Insurance Corp vs

CA, 310 SCRA 377)

Nature of Suretys undertaking:

1. Liability is contractual and accessory but

direct

NOTE: He directly, primarily and equally

binds himself with the principal asoriginal promisor, although he possesses

no direct or personal interest over the

latters obligation, nor does he receive

any benefits therefrom. (PNB vs CA, 198

SCRA 767)

2. Liability limited by the terms of the

contract.

NOTE: It cannot be extended by

implication beyond the terms of the

contract (PNB vs CA, 198 SCRA 767)

3. Liability arises only if principal debtor is

held liable.

NOTES:

The creditor may sue separately or

together the principal debtor and

the surety. Where there are several

sureties, the obligee may proceedagainst any one of them.

In the absence of collusion, the

surety is bound by a judgment

against the principal even though he

was not a party to the proceedings.

The nature of its undertaking makes

it privy to all proceedings against its

principal (Finman General Assurance

Corp. vs. Salik, 188 SCRA 740)

4. Surety is not entitled to the benefit of

exhaustionNOTE:He assumes a solidary liability for

the fulfilment of the principal obligation

(Towers Assurance Corp vs. Ororama

Supermart, 80 SCRA 262) as an original

promissory and debtor from the

beginning.

5. Undertaking is to creditor and not to

debtor.

NOTE: The surety makes no covenant or

agreement with the principal that it will

fulfil the obligation guaranteed for the

benefit of the principal. Such a promise isnot implied by law either; and this is true

even where under the contract the

creditor is given the right to sue the

principal, or the latter and the surety at

the same time. (Arranz vs. Manila

Fidelity & Surety Co., Inc., 101 Phil. 272)

6. Surety is not entitled to notice of

principals default

NOTE: The creditor owes no duty of

active diligence to take care of the

interest of the surety and the surety is

bound to take notice of the principalsdefault and to perform the obligation. He

cannot complain that the creditor has

not notified him in the absence of a

special agreement to that effect.

(Palmares vs CA, 288 SCRA 422)

7. Prior demand by the creditor upon

principal is not required

NOTE: As soon as the principal is in

default, the surety likewise is in default.

8. Surety is not exonerated by neglect of

creditor to sue principal


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Characteristics of Guaranty and Suretyship:

1. Accessory - It is indispensable condition

for its existence that there must be a

principal obligation.

NOTES: Guaranty may be constituted to

guarantee the performance of a

voidable or unenforceable contract.

It may also guarantee a natural

obligation. (Art 2052)

The guarantor cannot bind himself

for more than the principal debtor

and even if he does, his liability shall

be reduced to the limits of that of

the debtor.

2. Subsidiary and Conditional - takes effect

only in case the principal debtor fails inhis obligation.

NOTES:

The guarantor cannot bind himself

for more than the principal debtor

and even if he does, his liability shall

be reduced to the limits of that of

the debtor. But a guarantor may

bind himself for less than that of the

principal (Art 2054)

A guaranty may be given as security

for future debts, the amount ofwhich is not yet known; there can be

no claim against the guarantor until

the debt is liquidated. A conditional

obligation may also be secured. (Art

2053)

3. Unilateral - may be entered even w/o

the intervention of the principal debtor,

in which case Art. 1236 and 1237 shall

apply and it gives rise only to a duty on

the part of the guarantor in relation to

the creditor and not vice versa.

4. Nominate5. Consensual

6. It is a contract between the

guarantor/surety and creditor.

NOTES:

Acceptance of guaranty by creditor

and notice thereof to guarantor:

In declaring that guaranty must

be express, the law refers solely

and exclusively to the obligation

of the guarantor because it is he

alone who binds himself by his

acceptance. With respect to the

creditor, no such requirement is

needed because he binds

himself to nothing. However, when there is merely

an offer of a guaranty, or

merely a conditional guaranty,

in the sense that it requires

action by the creditor before

the obligation becomes fixed, it

does not become binding until it

is accepted and until notice of

such acceptance by the creditor

is given to, or acquired by, the

guarantor, or until he has notice

or knowledge that the creditorhas performed the condition

and intends to act upon the

guaranty.

But in any case, the creditor is

not precluded from waiving the

requirement of notice.

The consideration of the guaranty is

the same as the consideration of the


The creditor may proceed against

the guarantor although he has no

right of action against the principaldebtor.

7. Not presumed. It must be expressed and

reduced in writing.

NOTE: A power of attorney to loan

money does not authorize the agent to

make the principal liable as a surety for

the payment of the debt of a third

person. (BPI vs. Coster, 47 Phil. 594)

8. Falls under the Statute of Frauds since it

is a special promise to answer for the

debt, default or miscarriage of another.

9. Strictly interpreted against the creditorand in favor of the guarantor/surety and

is not to be extended beyond its terms or

specified limits. (Magdalena Estates, Inc.

vs Rodriguez, 18 SCRA 967) The rule of

strictissimi juris commonly pertains to an

accommodation surety because the

latter acts without motive of pecuniary

gain and hence, should be protected

against unjust pecuniary

impoverishment by imposing on the

principal, duties akin to those of a

fiduciary.


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NOTES:

The rule will apply only after it has

been definitely ascertained that the

contract is one of suretyship orguaranty. It cannot be used as an aid

in determining whether a partys

undertaking is that of a surety or

guarantor. (Palmares vs CA, 288

SCRA 292)

It does not apply in case of

compensated sureties.

10. It is a contract which requires that the

guarantor must be a person distinct form

the debtor because a person cannot be

thepersonal guarantor of himself.

NOTE: However, in a real guaranty, likepledge and mortgage, a person may

guarantee his own obligation with his

personal or real properties.

Guaranty Suretyship

1. Liability depends

upon an independent

agreement to pay the

obligation if primary

debtor fails to do so

1. Surety assumes

liability as regular party

to the undertaking

2. Collateral under-

taking

2. Surety is an original

promisor

3. Guarantor is

secondarily liable

3. Surety is primarily

liable

4. Guarantor binds

himself to pay if the

principal CANNOT

PAY

4. Surety undertakes to

pay if the principal

DOES NOT PAY

5. Insurer of solvency

of debtor

5. Insurer of the debt

6. Guarantor can avail

of the benefit of

excussion and division

in case creditor

proceeds against him

6. Surety cannot avail

of the benefit of

excussion and division

Indorsement Guaranty

1. Primarily of transfer 1. Contract of security

2. Unless the note is

promptly presented for

2. Failure in either or

both of these

payment at maturity

and due notice of

dishonor given to the

indorser within a

reasonable time he will

be discharged abso-

lutely from all liability

thereon, whether he

has suffered any actual

damage or not

particulars does not

generally work as an

absolute discharge of a

guarantors liability, but

his is discharged only to

the extent of the loss

which he may have

suffered in

consequence thereof

3. Indorser does not

warrant the solvency.

He is answerable on a

strict compliance with

the law by the holder,

whether the promisor is

solvent or not

3. Guarantor warrants

the solvency of the

promisor

4. Indorser can be sued

as promisor

4. Guarantor cannot be

sued as promisor

Guaranty Warranty

A contract by which a

person is bound to

another for the

fulfilment of a promise

or engagement of a

third party

An undertaking that the

title, quality, or

quantity of the subject

matter of the contract

is what it has been

represented to be, and

relates to someagreement made

ordinarily by the party

who makes the

warranty

NOTES:

A guaranty is gratuitous, unless there is a

stipulation to the contrary. The cause of

the contract is the same cause which

supports the obligation as to the

principal debtor.

The peculiar nature of a guaranty orsurety agreement is that is is regarded as

valid despite the absence of any direct

consideration received by the guarantor

or surety either from the principal

debtor or from the creditor; a

consideration moving to the principal

alone will suffice.

It is never necessary that the guarantor

or surety should receive any part or

benefit, if such there be, accruing to the

principal. (Willex Plastic Industries Corp.

vs. CA, 256 SCRA 478)


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Double or sub-guaranty (Art 2051 2nd par) One constituted to guarantee the

obligation of a guarantor

Continuing guaranty (Art 2053)

One which is not limited to a single

transaction but which contemplates a

future course of dealings, covering a

series of transactions generally for an

indefinite time or until revoked.

NOTES:

Prospective in operation (Dio vs CA, 216SCRA 9)

Construed as continuing when by the

terms thereof it is evident that the

object is to give a standing credit to the

principal debtor to be used from time to

time either indefinitely or until a certain

period, especially if the right to recall the

guaranty is expressly reserved (Dio vs

CA, 216 SCRA 9)

Future debts may also refer to debts

existing at the time of the constitution of

the guaranty but the amount thereof isunknown and not to debts not yet

incurred and existing at that time.

Exception to the concept of continuing

guaranty is chattel mortgage. A chattel

mortgage can only cover obligations

existing at the time the mortgage is

constituted and not those contracted

subsequent to the execution thereof

(The Belgian Catholic Missionaries, Inc.

vs. Magallanes Press, Inc., 49 Phil 647).

An exception to this is in case of stocks in

department stores, drug stores, etc.(Torres vs. Limjap, 56 Phil 141).

Extent of Guarantors liability: (Art 2055)

1. Where the guaranty definite: It is limited

in whole or in part to the principal debt,

to the exclusion of accessories.

2. Where guaranty indefinite or simple: It

shall comprise not only the principal

obligation, but also all its accessories,

including the judicial costs, provided with

respect to the latter, that the guarantor

shall only be liable for those costs

incurred after he has been judicially

required to pay.

Qualifications of a guarantor: (Arts 2056-

2057)1. possesses integrity

2. capacity to bind himself

3. has sufficient property to answer for

the obligation which he guarantees

NOTES:

The qualifications need only be present

at the time of the perfection of the

contract.

The subsequent loss of the integrity or

property or supervening incapacity of

the guarantor would not operate toexonerate the guarantor or the eventual

liability he has contracted, and the

contract of guaranty continues.

However, the creditor may demand

another guarantor with the proper

qualifications. But he may waive it if he

chooses and hold the guarantor to his

bargain.

Benefit of Excussion (Art 2058)

The right by which the guarantor cannot

be compelled to pay the creditor unlessthe latter has exhausted all the

properties of the principal debtor, and

has resorted to all of the legal remedies

against such debtor.

NOTE:

Not applicable to a contract of suretyship

(Arts 2047, par. 2; 2059[2])

Cannot even begin to take place before

judgment has been obtained against the

debtor (Baylon vs CA, 312 SCRA 502)

When Guarantor is not entitled to the

benefit of excussion: (PAIRS)

1. If it may be presumed that an execution

on the property of the principal debtor

would not result in the satisfaction of the

obligation

Not necessary that the debtor be

judicially declared insolvent or

bankrupt


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2. When he has absconded, or cannot be

sued within the Philippines unless he has

left a manager or representative

3. In case of insolvency of the debtor

Must be actual4. If the guarantor has expressly renounced

it

5. If he has bound himself solidarily with

the debtor

Other grounds: (BIPS)

6. If he is a judicial bondsman or sub-surety

7. If he fails to interpose it as a defense

before judgment is rendered against him

8. If the guarantor does not set up the

benefit against the creditor upon the

latters demand for payment from him,and point out to the creditor available

property to the debtor within Philippine

territory, sufficient to cover the amount

of the debt (Art 2060)

Demand can be made only after

judgment on the debt

Demand must be actual; joining the

guarantor in the suit against the

principal debtor is not the demand

intended by law

9. Where the pledge or mortgage has been

given by him as special security

Benefit of Division (Art 2065)

Should there be several guarantors of

only one debtor and for the same debt,

the obligation to answer for the same is

divided among all.

Liability: Joint

NOTES:

The creditor can claim from the

guarantors only the shares they are

respectively bound to pay except whensolidarity is stipulated or if any of the

circumstances enumerated in Article

2059 should take place.

The right of contribution of guarantors

who pays requires that the payment

must have been made (a) in virtue of a

judicial demand, or (b) because the

principal debtor is insolvent (Art 2073).

If any of the guarantors should be

insolvent, his share shall be borne by the

others including the paying guarantor in

the same joint proportion following the

rule in solidary obligations.

The above rule shall not be applicable

unless the payment has been made in

virtue of a judicial demand or unless theprincipal debtor is insolvent.

The right to contribution or

reimbursement from his co-guarantors is

acquired ipso jure by virtue of said

payment without the need of obtaining

from the creditor any prior cession of

rights to such guarantor.

The co-guarantors may set up against

the one who paid, the same defenses

which have pertained to the principal

debtor against the creditor and which

are not purely personal to the debtor.(Art 2074)

Procedure when creditor sues: (Art. 2062)

The creditor must sue the principal

alone; the guarantor cannot be sued

with his principal, much less alone

except in Art. 2059.

1. Notice to guarantor of the action

The guarantor must be NOTIFIED so

that he may appear, if he so desires,

and set up defenses he may want tooffer.

If the guarantor appears, he is still

given the benefit of exhaustion even

if judgment should be rendered

against him and principal debtor. His

voluntary appearance does not

constitute a renunciation of his right

to excussion (see Art. 2059(1)).

Guarantor cannot set up the

defenses if he does not appear and

it may no longer be possible for him

to question the validity of thejudgment rendered against the

debtor.

2. A guarantor is entitled to be heard

before and execution can be issued

against him where he is not a party in

the case involving his principal

(procedural due process).

Guarantors Right of Indemnity or

Reimbursement (Art 2066)


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GENERAL RULE: Guaranty is a contract of

indemnity. The guarantor who makes

payment is entitled to be reimbursed by the

principal debtor.

NOTE:The indemnity consists of: (DIED)

1. Total amount of the debt no right

to demand reimbursement until he

has actually paid the debt, unless by

the terms of the contract, he is given

the right before making payment.

He cannot collect more than what

he has paid.

2. Legal interest thereon from the time

the payment was made known

(notice of payment in effect a

demand so that if the debtor doesnot pay immediately, he incurs in

delay) to the debtor, even though it

did not earn interest for the

creditor. Guarantors right to legal

interest is granted by law by virtue

of the payment he has made.

3. Expenses incurred by the guarantor

after having notified the debtor that

payment has been demanded of him

by the creditor; only those expenses

that the guarantor has to satisfy in

accordance with law as aconsequence of the guaranty (Art.

2055) not those which depend upon

his will or own acts or his fault for

these are his exclusive personal

responsibility and it is not just that

they be shouldered by the debtor.

4. Damages if they are due in

accordance

with law. General rules on damages

apply.

EXCEPTIONS:

1. Where the guaranty is constituted

without the knowledge or against

the will of the principal debtor, the

guarantor can recover only insofar

as the payment had been beneficial

to the debtor (Art. 2050).

2. Payment by a third person who does

not intend to be reimbursed by the

debtor is deemed to be a donation,

which, however, requires the

debtors consent. But the payment

is in any case valid as to the creditor

who has accepted it (Art. 1238).

3. Waiver of the right to demand

reimbursement.

Guarantors right to Subrogation (ART.2067) Subrogation transfers to the person

subrogated, the credit with all the rights

thereto appertaining either against the

debtor or against third persons, be they

guarantors or possessors of mortgages,

subject to stipulation in conventional

subrogation.

NOTE: This right of subrogation is necessary

to enable the guarantor to enforce the

indemnity given in Art. 2066.

It arises by operation of law uponpayment by the guarantor. It is not

necessary that the creditor cede to the

guarantor the formers rights against the

debtor.

It is not a contractual right. The right of

guarantor who has paid a debt to

subrogation does not stand upon

contract but upon the principles of

natural justice.

The guarantor is subrogated by virtue of

the payment to the rights of the creditor,

not those of the debtor. Guarantor cannot exercise the right

of redemption of his principal

(Urrutia & Co vs Morena and Reyes,

28 Phil 261)

Effect of Payment by Guarantor

1. Without notice to debtor: (Art 2068)

The debtor may interpose against

the guarantor those defenses which

he could have set up against the

creditor at the time the payment

was made, e.g. the debtor can set upagainst the guarantor the defense of

previous extinguishment of the

obligation by payment.

2.

Before Maturity (Art 2069)

Not entitled to reimbursement

unless the payment was made with

the consent or has been ratified by

the debtor

Effect of Repeat Payment by debtor: (Art


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2070)

GENERAL RULE:Before guarantor pays the

creditor, he must first notify the debtor (Art.

2068). If he fails to give such notice and the

debtor repeats payment, the guarantor canonly collect from the creditor and guarantor

has no cause of action against the debtor for

the return of the amount paid by guarantor

even if the creditor should become insolvent.

EXCEPTION: The guarantor can still claim

reimbursement from the debtor in spite of

lack of notice if the following conditions are

present: (PIG)

a. guarantor was prevented by

fortuitous event to advise the

debtor of the payment; andb. the creditor becomes insolvent;

c. the guaranty is gratuitous.

Right of Guarantor to proceed against

debtor beforepayment

GENERAL RULE: Guarantor has no cause of

action against debtor until after the former

has paid the obligation

EXCEPTION: Article 2071

NOTES:

Article 2071 is applicable and available tothe surety. (Manila Surety & Fidelity Co.,

Inc. vs Batu Construction & Co., 101 Phil

494)

Remedy of guarantor:

(a) obtain release from the guaranty; or

(b) demand a security that shall protect

him from any proceedings by the

creditor, and against the danger of

insolvency of the debtor

Art. 2066 Art. 2071

Provides for theenforcement of the

rights of the

guarantor/surety

against the debtor after

he has paid the debt

Provides for hisprotection beforehe

has paid but after he

has become liable

Gives a right of action

afterpayment

Protective remedy

beforepayment.

Substantive right Preliminary remedy

Extinguishment of guaranty: (RA2CE

2)

1. Release in favor of one of the

guarantors, without the consent of the

others, benefits all to the extent of the

share of the guarantor to whom it has

been granted (Art 2078);

2. If the creditor voluntarily accepts

immovable or other properties in

payment of the debt, even if he shouldafterwards lose the same through

eviction or conveyance of property (Art

2077);

3. Whenever by some act of the creditor,

the guarantors even though they are

solidarily liable cannot be subrogated to

the rights, mortgages and preferences of

the former (Art 2080);

4. For the same causes as all other

obligations (Art 1231);

5. When the principal obligation is

extinguished;6. Extension granted to the debtor by the

creditor without the consent of the

guarantor (Art 2079)

BOND

An undertaking that is sufficiently

secured, and not cash or currency

Bondsman (Art 2082)

A surety offered in virtue of a provision

of law or a judicial order. He must have

the qualifications required of a guarantorand in special laws like the Rules of

Court.

NOTES:

Judicial bonds constitute merely a special

class of contracts of guaranty by the fact

that they are given in virtue of a

judicial order.

If the person required to give a legal or

judicial bond should not be able to do so,

a pledge or mortgage sufficient to cover

the obligation shall admitted in lieuthereof (Art 2083)

A judicial bondsman and the sub-surety

are NOT entitled to the benefit of

excussion because they are not mere

guarantors, but sureties whose liability is

primary and solidary. (Art 2084)

PLEDGE, MORTGAGE AND ANTICHRESIS

I. Common Elements of Pledge, Mortgage,

and Antichresis (Articles 20852092)

A.

Essential Requisites (SOD) (Art 2085)


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1. Secures the fulfillment of a principal

obligation;

2. Pledgor, mortgagor, antichretic debtor

must be the absolute owner of the thing

pledged or mortgaged; and The reason being that in anticipation

of a possible foreclosure sale in case

of default which is still a sale, the

rule is that the seller must be the

owner of the thing sold (Cavite

Development Bank vs. Lim, 324

SCRA 346)

3. Pledgor, mortgagor, antichretic debtor

must have free disposal of their

property, or be legally authorized for

such purpose.

NOTES:

Third persons can pledge or mortgage

their own property to secure the


It is not necessarily void simply because

the accommodation pledgor or

mortgagor did not benefit from the

same. So long as valid consent was given,

the fact that the loan was given solely for

the benefit of the principal debtor would

not invalidate the mortgage (GSIS vs CA,

170 SCRA 533) The accommodation pledgor or

mortgagor, without expressly assuming

personal liability for such debt, is not

liable for the payment of any deficiency,

should the property not be sufficient to

cover the debt (Bank of America vs.

American Realty Corporation, 321 SCRA

659).

The accommodation pledgor or

mortgagor is not solidarily bound with

the principal obligor but his liability

extents only to the property pledged ormortgaged. Should there be any

deficiency, the creditor has recourse on

the principal debtor who remains to be

primarily bound.

The law grants to the accommodation

pledgor or mortgagor the same rights as

a guarantor and he cannot be prejudiced

by any waiver of defense by the principal

debtor.

B. Prohibition against Pactum

Commissorium (Art 2088; 2137)

Pactum Commissorium

Stipulation whereby the thing pledgedor

mortgaged, or under antichresis shall

automatically become the property ofthe creditor in the event of non-payment

of the debt within the term fixed.

Requisites:

1. There should be a pledge, mortgage, or

antichresis of property by way of security

for the payment of the principal

obligation; and

2. There should be a stipulation for an

automatic appropriation by the creditor

of the property in event of nonpayment

of the obligation within the stipulatedperiod.

GENERAL RULE: Pactum Commissorium is

forbidden by law and is declared null and

void.

EXCEPTION: The pledgee may appropriate

the thing pledged if after the first and second

auctions, the thing is not sold. (Art 2112)

NOTE: The security contract remains valid;

only the prohibited stipulation is void.

C.

Capability to secure all kinds ofobligations, i.e. pure or conditional (Art

2091)

D. Indivisibility (Art 2089)

GENERAL RULE: A pledge, mortgage, or

antichresis is indivisible, even though the

debt may be divided among the successors in

interest of the debtor or of the creditor.

Their indivisibility is not affected by the

fact that the debtors are jointly or not

solidarily liable.

Consequences of indivisibility:

1. Single thing Every portion of the

property pledged or mortgaged is

answerable for the whole obligation

2. Several thingsAll of the several things

pledged or mortgaged are liable for the

totality of the debt

3. Debtors heir/creditors heir- Neither the

debtors heir who has paid part of the

debt cannot ask for proportionate

extinguishment, nor creditors heir who

received his share of the debt return the


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pledge or cancel the mortgage as long as

the debt is not completelysatisfied.

CEPTIONS:

1. Where each one of several thingsguarantees a determinate portion of

the credit

2. Where only a portion of the loan

was released

3. Where there was failure of

consideration.

4. Where there is no debtor-creditor

relationship

NOTES:

The mere embodiment of a real estate

mortgage and a chattel mortgage in onedocument does not have the effect of

fusing both securities into an indivisible

whole.

The mortgagee, therefore, may legally

foreclose the real estate mortgage

extrajudicially and waive the chattel

mortgage foreclosure, and maintain

instead a personal action for the

recovery of the unpaid balance of the

credit (Phil. Bank of Commerce vs.

Macadaeg, 109 Phil 981)

E. When the principal obligation becomes

due, the things in which the pledge,

mortgage, or antichresis consists may

be alienated for the payment to the

creditor. (Art. 2087)

NOTES:

If the debtor fails to comply with the

obligation at the time it falls due, the

creditor is merely entitled to move for

the sale of the thing pledged or

mortgaged in order to collect theamount of his claim from the proceeds.

If he wishes to secure a title to the

mortgaged property, he can buy it in the

foreclosure sale (Montevirgin vs. CA, 112

SCRA 641)

F. Pledgor, mortgagor, antichretic debtor

retains ownership of the thing given as

a security

PLEDGE (Arts 20932123)

A contract wherein the debtor delivers

to the creditor or to a third person a

movable or document evidencing

incorporeal rights for the purpose of

securing fulfillment of a principalobligation with the understanding that

when the obligation is fulfilled, the thing

delivered shall be returned with all its

fruits and accessions.

Special Requisites (in addition to the

common essential requisites):

1. Possession of the thing pledged must be

transferred to the creditor or a third

person by agreement (Art 2093);

2. It can only cover movable property and

incorporeal rights evidenced bydocuments of title and the instruments

proving the right pledged shall be

delivered to the creditor, and if

negotiable must be endorsed (Art 2094);

and

3. The descriptionof the thing pledged and

the date must appear in a public

instrument to bind third persons, but not

for the validity of the contract (Art 2096).

Kinds:

1.

Conventional /Voluntary created bycontract

2. Legal created by operation of law

(examples: Art. 546, 1731 and 1914 NCC)

NOTES:

The provisions of possession, care and

sale of the thing as well as on the

termination of the pledge governing

conventional pledges are applicable to

pledges created by operation of law (Art

2121)

Unlike, however, in conventional pledgewhere the debtor is not entitled to the

excess unless it is otherwise agreed, in

legal pledge, the remainder of the price

of the sale after payment of the debt and

expenses, shall be delivered to the

debtor.

In legal pledge, there is no definite

period for the payment of the principal

obligation. The pledgee must make a

demand for the payment of the amount

due him; otherwise he cannot exercise


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the right of sale at public auction (Art

2122)

Characteristics:

1. Real contract it is perfected by thedelivery of the thing pledged by the

debtor who is called the pledgor to the

creditor who is called the pledgee, or to

a third person by common agreement;

2. Accessory contract it has no

independent existence of its own;

3. Unilateral contract it creates an

obligation solely on the part of the

creditor to return the thing subject

thereof upon the fulfilment of the

principal obligation; and

4. Subsidiary contract the obligationincurred does not arise until the

fulfilment of the principal obligation

which is secured.

Consideration in pledge:

Insofar as the pledgor is concerned, the

cause is the principal obligation.

If the pledgor is not the debtor, the

cause is the compensation stipulated for

the pledge or the mere liberality of the

pledgor.

Extent of pledge: Unless stipulated

otherwise, pledge extends to the fruits,

interests or earnings of the thing.

Rights and Obligations of a Pledgor

Rights Obligations

1. To demand return in

case of reasonable grounds

to fear destruction or

impairment of the thing

without the pledgees fault,

subject to the duty of

replacement (Art 2107)2. To bid and be preferred

at the public auction (Art

2113)

3. To alienate the thing

pledged provided the

pledgee consents to the

sale (Art 2097)

4. To ask that the thing

pledged be deposited (Arts

2104 & 2106)

1. To advise the

pledgee of the flaws

of the thing (Art

2101)

2. Not to demand

the return of the

thing until after fullpayment of the

debt, including

interest due

thereon and

expenses incurred

for its preservation

(Art 2105)

Rights of the Pledgee

KEY: D SBC BA2R

2OPS

2

1. Option to demand replacement or

immediate payment of the debt in case of

deception as to substance or quality (Art

2109)2. To sell at public auction in case of

reasonable grounds to fear destruction or

impairment of the thing without his fault (Art

2108)

3. To bring actions pertaining to the owner

(Art 2103)

4. To choose which of several things

pledged shall be sold

5. To bid at the public auction (Art 2113)

6. To appropriate the thing in case of

failure of the 2nd

public auction (Art 2112)

7. To apply said fruits, interests or earningsto the interest, if any, then to the principal of

the credit (Art 2102)

8. To retain excess value received in the

public sale (Art 2115)

9. To retain the thing until after full

payment of the debt (Art 2098)

10. To be reimbursed for the expenses made

for the preservation of the thing pledged (Art

2099)

11. To object to the alienation of the thing

12. To possess the thing (Art 2098)

13.

To sell at public auction in case of non-payment of debt at maturity (Art 2112)

To choose which of the several things

pledged shall be sold (Art 2119)

14. Option to demand replacement or

immediate payment of the debt in case of

deception as to substance or quality (Art

2109)

15. To sell at public auction in case of

reasonable grounds to fear destruction or

impairment of the thing without his fault (Art

2108)

16. To bring actions pertaining to the owner

(Art 2103)

17. To choose which of several things

pledged shall be sold

18. To bid at the public auction (Art 2113)

19. To appropriate the thing in case of

failure of the 2nd


20. To apply said fruits, interests or earnings

to the interest, if any, then to the principal of

the credit (Art 2102)

21. To retain excess value received

in the public sale (Art 2115)


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22. To retain the thing until after full

payment of the debt (Art 2098)

23. To be reimbursed for the expenses made

for the preservation of the thing pledged (Art

2099)24. To object to the alienation of the thing

25. To possess the thing (Art 2098)

26. To sell at public auction in case of non-

payment of debt at maturity (Art 2112)

27. To choose which of the several things

pledged shall be sold (Art 2119)

Obligations of the Pledgee

KEY: CUDA3

1. Take care of the thing with the diligence of

a good father of a family (Art 2099)

2. Not to use thing unless authorized or bythe owner or its preservation requires its use

(Art 2104)

3. Notto deposit the thing with a 3rd

person

unless so stipulated (Art 2100)

4. Responsibility for acts of agents and

employees as regards the thing (Art 2100)

5. To advise pledgor of danger to the thing

(Art 2107)

6. To advise pledgor of the result of the


RIGHT OF PLEDGOR TO SUBSTITUTE THINGPLEDGED (ART.2107)

Requisites:

1. The pledgor has reasonable grounds

to fear the destruction or

impairment of the thin pledged

2. There is no fault on the part of the

pledgee

3. The pledgor is offering in place of

the thing, another thing in pledge

which is of the same kind and

quality as the former

4. The pledge does not choose to

exercise his right to cause the thing

pledged to be sold at public auction

NOTE: The pledgees right to have the thing

pledged sold at public sale granted under the

Article 2108 is superior to that given to the

pledgor to substitute the thing pledged under

Article 2107.

Prohibition against double pledge

Property which has been lawfully

pledged to one creditor cannot be

pledged to another as long as the first

one subsists.

NOTE: Possession of a creditor of the thing

pledged is an essential requisite of pledge.

Extinguishment of Pledge (CRAPS)

1. For the same causes as all other

obligations (Art 1231)

2. Return of the thing pledged by the

pledgee to the pledgor (Art 2110)

3. Statement in writing by the pledgee

that he renounces or abandons the

pledge (Art 2111)

4. Payment of the debt (Art 2105)

5. Sale of thing pledged at public auction

(Art 2115)

NOTE: The possession by the debtor orowner of the thing pledged subsequent to

the perfection of the pledge gives rise to a

prima facie presumption that the thing has

been returned and, therefore, that the

pledge has been extinguished but not the

principal obligation itself. (Art 2110)

Requirements for sale of thing pledged at

public auction: (Art 2112)

1. The debt is due and unpaid

2. Sale must be at a public auction

3.

there must be notice to the pledgor andowner, stating the amount due

4. Sale must be with the intervention of a

notary public

Effect of sale of the thing pledged: (Art

2115)

1. The sale of the thing pledged shall

extinguish the principal obligation,

whether or not the proceeds of the sale

are equal to the amount of the principal

obligation, interest and expenses in a

proper case

2. If the price of the sale is more than the

amount due the creditor, the debtor is

not entitled to the excess unless the

contrary is provided

3. If the price of the sale is less, the creditor

is not entitled to recover the deficiency

even if there is a stipulation to that

effect

REAL ESTATE MORTGAGE (Articles 2124-

2131)


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A contract whereby the debtor secures

to the creditor the fulfilment of a

principal obligation, specially subjecting

to such security immovable property or

real rights over immovable property incase the principal obligation is not

complied with at the time stipulated.

Characteristics of the contract:

1. Real

2. Accessory

3. Subsidiary

4. Unilateral it creates only an

obligation on the part of the creditor

who must free the property from

the encumbrance once the

obligation is fulfilled.

NOTES:

As an accessory contract, its

consideration is that of the principal

contract from which it receives life.

A mortgage does not involve a transfer,

cession or conveyance of property but

only constitutes a lien thereon. Until

discharged, it follows the property

wherever it goes and subsistsnotwithstanding changes of ownership.

A mortgage gives the mortgagee no right

or claim to the possession of the

property, and therefore, a mere

mortgagee has no right to eject an

occupant of the property mortgaged

unless the mortgage should contain

some provision to that effect. The only

right of a mortgagee in case of non-

payment of a debt secured by mortgage

would be to foreclose the mortgage and

have the encumbered property sold tosatisfy the outstanding indebtedness. If

the possession is transferred to the

mortgagee, it must not expressly be for

purpose of applying the fruits to the

interest then to the principal of the

credit, for then it would be an

antichresis.

It is not an essential requisite that the

principal of the mortgage credit bears

interest, or that the interest as

compensation for the use of the principal

and enjoyment of its fruits be in the form

of a certain percent thereof.

Special Requisites (in addition to the

common essential requisites):1. It can cover only immovable property

and alienable real rights imposed upon

immovables (Art 2124);

2. It must appear in a public instrument

(Art. 2125); and

3. Registration in the registry of property is

necessary to bind third persons, but not

for the validity of the contract (Art 2125).

An order for foreclosure cannot be

refused on the ground that the

mortgage had not been registered

provided no innocent third partiesare involved.

NOTE: Where a mortgage is not valid or false,

the principal obligation which it guarantees is

not rendered null and void. What is lost only

is the right to foreclose the mortgage as a

special remedy for satisfying or settling the

indebtedness which is the principal obligation

but the mortgage deed remains as evidence

or proof of a personal obligation of the

debtor and the amount due to the creditor

may be enforced in an ordinary personal

action.

Kinds:

1. Voluntary agreed to by the parties or

constituted by the will of the owner of

the property on which it is created

2. Legal one required by law to be

executed in favour of certain persons

The persons in whose favour the law

establishes a mortgage have no

other right than to demand the

execution and the recording of the

document in which the mortgage is

formalized (Art 2125 par 2)

3. Equitable one which, although lacking

the formalities of a mortgage, shows the

intention of the parties to make the

property a security for a debt

PLEDGE REAL MORTGAGE

1. Constituted on

movables

1. Constituted on

immovables

2. Property is delivered

to pledgee or by

common consent to a

third person

2. Delivery is not

necessary


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3. Not valid against

third persons unless a

description of the thing

pledged and date of

pledge appear in a

public instrument

3. Not valid against

third persons unless

registered

Extent of Mortgage:

Absent express stipulation to the

contrary, the mortgage includes the

accessions, improvements, growing fruits

and income of the property not yet

received when the obligation becomes

due and to the amount of the indemnity

granted or owing to the proprietor from

the insurers of the property mortgaged,

or in virtue of expropriation for public

use (Art 2127)

Object of Mortgage:

Future property cannot be an object of a

contract of mortgage (Art 2085[2])

However, a stipulation subjecting to the

mortgage lien, properties

(improvements) which the mortgagor

may subsequently acquire install, or use

in connection with real property already

mortgaged belonging to the mortgagor is

valid (Peoples Bank and Trust Co. vs.

Dahican Lumber Co., 20 SCRA 84)

Special Rights:

1. Mortgagor - To alienate the mortgaged

property but the mortgage shall remain

attached to the property.

NOTE: A stipulation forbidding the owner

from alienating the immovable mortgage

shall be void (Art 2130) being contrary to

public policy inasmuch as the transmission of

property should not be unduly impeded.

2. Mortgagee - To claim from a 3rd

person

in possession of the mortgaged property

the payment of the part of the credit

secured by the which said third person

possesses (Art 2129)

NOTE: It is necessary that prior demand for

payment must have been made on the

debtor and the latter failed to pay (BPI vs

Concepcion & Hijos, Inc., 53 Phil 906)

Foreclosure

The remedy available to the mortgagee

by which he subjects the mortgaged

property to the satisfaction of the

obligation to secure that for which the

mortgage was given

NOTES:

It denotes the procedure adopted by the

mortgagee to terminate the rights of the

mortgagor on the property and includes

the sale itself (DBP vs Zaragoza, 84 SCRA

668)

Foreclosure is valid where the debtor is

in default in the payment of his

obligation (Gobonseng, Jr. vs CA, 246

SCRA 472)

Kinds:

1. Judicial ordinary action for foreclosure

under Rule 68 of the Rules of Court

2. Extrajudicialwhen mortgagee is given a

special power of attorney to sell the

mortgaged property by public auction,

under Act No. 3135

Judicial foreclosure Extrajudicial

foreclosure

1. There is court

intervention

1. No court

intervention2. Decisions are

appealable

2. Not appealable

because it is

immediately

executory

3. Order of court cuts

off all rights of the

parties impleaded

3. Foreclosure does

not cut off right of all

parties involved

4. There is equity of

redemption except on

banks which provides

for a right of

redemption

4. There is right of

redemption

5. Period of

redemption starts

from the finality of

the judgment until

order of confirmation

5. Period to redeem

start from date of

registration of

certificate of sale

6. No need for a

special power of

attorney in the

contract of mortgage

6. Special power of

attorney in favor of

mortgagee is needed

in the contract

NOTES:

A foreclosure sale retroacts to the date

of registration of the mortgage and that

a person who takes a mortgage in good


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faith and for valuable consideration, the

record showing clear title to the

mortgagor, will be protected against

equitable claims on the title in favor of

third persons, of which he had no actualor constructive notice (St. Dominic

Corporation vs. IAC 151 SCRA 577).

Where there is a right to redeem,

inadequacy of price is not material

because the judgment debtor may

reacquire the property or else sell his

right to redeem and thus recover any

loss he claims to have suffered by reason

of the price obtained at the auction sale

and consequently not sufficient to set

aside the sale. Mere inadequacy of the

price obtained at the sheriffs sale willnot be sufficient to set aside the sale

unless the price is so inadequate as to

shock the conscience of the court taking

into consideration the peculiar

circumstances attendant thereto. (Sulit

vs. CA, 268 SCRA 441)

Should there remain a balance due to

the mortgagee after applying the

proceeds of the sale, the mortgagee is

entitled to recover the deficiency. This

rule applies both to judicial and extra-

judicial foreclosure real mortgage. The action to recover a deficiency after

foreclosure prescribes after 10 years

from the time the right of action accrues

(Arts 1142 & 1144).

Stipulation of upset price or tipo

It is a stipulation in a mortgage of real

property of minimum price at which the

property shall be sold, to become

operative in the event of a foreclosure

sale at public auction. It is null and void

for the property must be sold to thehighest bidder. Parties cannot, by

agreement, contravene the law and

interfere with the lawful procedure of

the courts (BPI vs Yulo, 31 Phil 476)

Extrajudicial foreclosure real property (Act

No. 3135)

The law covers only real estate

mortgages. It is intended merely to

regulate the extrajudicial sale of the

property mortgaged if and when the

mortgagee is given a special power of

express authority to do so in the deed

itself or in a document annexed thereto.

The authority to sell is not extinguished

by the death of the mortgagor (or

mortgagee) as it is an essential andinseparable part of a bilateral agreement

(Perez vs PNB, 17 SCRA 833).

No sale can be legally made outside the

province in which the property sold is

situated; and in case the place within

said province in which the sale is to be

made is the subject of stipulation, such

sale shall be made in the said place in

the municipal building of the

municipality in which the property or

part thereof is situated.

Procedure for extrajudicial foreclosure of

both real estate mortgage under Act No.

3135 and chattel mortgage under Act No.

1508 (A.M. No. 99-10-05-0, January 15, 2000)

1. Filing of application before the Executive

Judge through the Clerk of Court

2. Clerk of Court will examine whether the

requirement of the law have been

complied with, that is, whether the

notice of sale has been posted for not

less than 20 days in at least three (3)

public places of the municipality or citywhere the property is situated, and if the

same is worth more than P400.00, that

such notice has been published once a

week for at least three (3) consecutive

weeks in a newspaper of general

circulation in the city of municipality

3. The certificate of sale must be approved

by the Executive Judge

4. Where the application concerns

extrajudicial foreclosure of real

mortgages in different locations covering

one indebtedness, only one filing fee

corresponding to such debt shall be

collected

5. The Clerk of Court shall issue certificate

of payment indicating the amount of

indebtedness, the filing fees collected,

the mortgages sought to be foreclosed,

the description of the real estates and

their respective locations

6. The notice of sale shall be published in a

newspaper of general circulation

pursuant to Section 1, PD No. 1079


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7. The application of shall be raffled among

all sheriffs

8. After the redemption period has expired,

the Clerk of Court shall archive the

records.9. No auction sale shall be held unless

there are at least two (2) participating

bidders, otherwise the sale shall be

postponed to another date. If on the

new date set forth for the sale there

shall not be at least two bidders, the sale

shall then proceed. The names of the

bidders shall be reported to the Sheriff

of the Notary Public, who conducted the

sale to the Clerk of Court before the

issuance of the certificate of sale.

NOTES:

The Mortgagor and Mortgagee have no

right to waive the posting and

publication requirements under Act. No.

3135. Notices are given to secure bidders

and prevent a sacrifice of the property.

Clearly, the statutory requirements of

posting and publication are mandated,

not for the mortgagors benefit, but for

the public or third persons. Failure to

comply with the statutory requirements

as to publication of notice of auction saleconstitutes a jurisdictional defect which

invalidates the sale.Lack of republication

of notice of foreclosure sale made

subsequently after the original date

renders such sale void (PNB vs.

Nepomuceno Productions Inc., G.R. No.

139479. December 27, 2002).

Sec 3 of Act 3135 does not require

personal or any particular notice on the

Documents

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