Credit Tranctions (UP)

UP COLLEGE OF LAW CREDIT TRANSACTIONS BAR OPERATIONS COMMISSION
PAGE 278
Credit Transactions Upon delivery of the object of the contract of loan (in
this case the money received by the debtor when the
MEANING AND SCOPE OF CREDIT checks were encashed) the debtor acquires
TRANSACTIONS ownership of such money or loan proceeds and is
Credit transactions include all transactions involving bound to pay the creditor an equal amount. [Garcia
the purchase or loan of goods, services, or money in v. Thio, G.R. No. 154878]
the present with a promise to pay or deliver in the
future. COMMODATUM V. MUTUUM
TWO TYPES OF CREDIT Commodatum Mutuum

TRANSACTIONS/CONTRACTS OF SECURITY
Ordinarily involves Involves money or other
(1) Secured transactions or contracts of real security
something not consumable thing
– supported by a collateral or an encumbrance
consumable* (Art.1936)
of property
(2) Unsecured transactions or contracts of personal Ownership of the thing Ownership is transferred to
security – fulfillment by the debtor is supported loaned is retained by the borrower
only by a promise to pay or the personal lender (Art.1933)
commitment of another Essentially gratuitous May be gratuitous or
(Art.1933) onerous, i.e. with stipulated
Examples of credit transactions interest
(1) Bailment contracts Borrower must return Borrower need only pay an
(2) Contracts of guaranty and suretyship the same thing loaned equal amount of the same
(3) Mortgage (Art.1933) kind and quality (Art. 1953)
(4) Antichresis May involve real or Refers only to personal
(5) Concurrence and preference of credits personal property property
(Art.1937)
Loan for use or Loan for consumption
temporary possession
Loan (Art.1935)
Bailor may demand the Lender may not demand its
[A] contract by which one of the parties delivers to return of the thing return before the lapse of
another, either something not consumable so that loaned before the the term agreed upon
the latter may use the same for a certain time and expiration of the term in
return it, in which case the contract is called case of urgent need
commodatum; or money or other consumable thing, (Art.1946)
upon the condition that the same amount of the Bailor suffers the loss of Borrower suffers the loss
same kind and quality shall be paid, in which case the subject matter since even if caused exclusively by
the contract is called a simple loan or mutuum. he is the owner a fortuitous event and he is
[Art.1933] (Art.1942; Art.1174) not, therefore, discharged
from his duty to pay
CHARACTERISTICS OF A LOAN Purely personal in Not purely personal in
(1) Real contract character (Art 1939) character
(a) Delivery is essential for perfection of the
contract of loan. If consumable goods are loaned only for purposes of
(b) An accepted promise to loan, is nevertheless exhibition, or when the intention of the parties is to
binding on the parties, it being a consensual lend consumable goods and to have the very same
contract. goods returned at the end of the period agreed upon,
the loan is a commodatum and not a mutuum.
(2) Unilateral contract [Producers Bank v. CA, Feb. 19, 2003]
(a) creates obligations on only one party, i.e., the
borrower OBLIGATIONS OF BAILOR AND BAILEE
WHO MAY BE A BAILOR IN COMMODATUM?
In a contract of loan, the cause is, as to the borrower, (a) Anyone. The bailor in commodatum need not be
the acquisition of the thing, and as to the lender, the the owner of the thing loaned. [Art.1938]
right to demand its return or its equivalent. [Monte (b) But the bailee himself may not lend nor lease the
de Piedad v. Javier] thing loaned to him to a third person [Art 1939(2)]
PAGE 279
(4) To pay damages to bailee for known hidden flaws

WHAT ARE THE TWO (2) KINDS OF COMMODATUM? in the thing loaned [Art. 1951]
(a) Ordinary commodatum [Art. 1933]
(b) Precarium - bailor may demand the thing loaned (NOTE: Bailor has no right of abandonment; he
at will [Art. 1947] cannot exempt himself from payment of expenses or
damages to the bailee by abandoning the thing to
the latter. [Art. 1952])
OBLIGATIONS OF A BAILOR IN COMMODATUM OBLIGATIONS OF A BAILEE IN COMMODATUM
(1) To allow the bailee the use of the thing loaned for (1) Obligation to pay for the ordinary expenses for
the duration of period stipulated or until the the use and preservation of the thing loaned [Art.
accomplishment of the purpose for which 1941]
commodatum was constituted. (2) Obligation to take good care of the thing with the
diligence of a good father of a family [Art. 1163]
Exceptions: (3) Liability for loss, even if loss through fortuitous
(a) Urgent need of the thing, during which time event, under certain circumstances [Art. 1942]
he may demand its return or temporary use (4) Liability for deterioration of thing loaned, except
(Art.1946) under certain circumstances [Art. 1943]
(b) Precarium (Art.1947) (5) Obligation to return the thing upon expiration of
(i) If duration of the contract has not been term or upon demand in case of urgent need [Art.
stipulated 1946]
(ii) If use or purpose of the thing has not been (6) Solidary obligation where there are 2 or more
stipulated bailees to whom a thing was loaned in the same
(iii) If use of thing is merely tolerated by the contract [Art.1945]
bailor
(c) Bailee commits an act of ingratitude specified General Rule: Bailee is not liable for loss or damage
in Art. 765 [Art. 1948]: due to a fortuitous event [Art. 1174], since the bailor
(1) Commission of offenses against the retains ownership of the thing
person, the honor, or the property of the
bailor, or of his wife or children under his Exception: Bailee is liable for loss even if due to a
parental authority fortuitous event when: [Art. 1942]
(2) Imputing to the bailor any criminal offense, (1) He devotes the thing to any purpose different
or any act involving moral turpitude, even from that for which it was loaned
though he should prove it, unless the crime (2) He keeps it longer than the period stipulated, or
or the act has been committed against the after the accomplishment of the use for which the
bailee himself, his wife, or children under commodatum has been constituted
his authority (3) The thing loaned has been delivered with
(3) Undue refusal to give the bailor support appraisal of its value, unless there is stipulation
when the bailee is legally or morally bound exempting the bailee from responsibility in case
to do so of a fortuitous event
(4) He lends or leases the thing to a third person who
(NOTE: Article 765 is applicable, because like is a not a member of his household
donation, commodatum is essentially gratuitous. (5) Being able to save either the thing borrowed or
[Art.1933, par.2] his own thing, he chose to save the latter.
(2) To refund extraordinary expenses for the General Rule [1]: Bailee is liable for deterioration of
preservation of the thing loaned provided bailor is thing loaned.
notified before the expenses were incurred. [Art.
1949] Exception [1]: The deterioration of the thing is due
(a) Exception: Urgent need such that reply to the only to the use thereof and without his fault [Art.
notification cannot be awaited without 1943]
danger, hence no notice is necessary.
General Rule [2]: Bailee has no right of retention of
(3) To bear 50% of the extraordinary expenses the thing loaned, on the ground that the bailor owes
arising from actual use of bailee of the thing him something. [Art. 1944]
loaned [Art. 1949]
(a) Exception: Contrary stipulation Exception [2]: Bailee has a right of retention for
damages for known hidden flaws mentioned in Art
PAGE 280
1951. [Art. 1944] forbearance of money, the interest due should be

that which may have been stipulated in writing.
INTEREST AND SUSPENSION OF USURY LAW Furthermore, the interest due shall itself earn
Interest – is the compensation allowed by law or fixed legal interest from the time it is judicially
by the parties for the loan or forbearance of money, demanded. In the absence of stipulation, the rate
goods or credits of interest shall be 12% per annum to be
computed from default, i.e., from judicial or
KINDS OF INTEREST extrajudicial demand under and subject to the
(1) Simple interest – Paid for the principal at a certain provisions of Art.1169.
rate fixed or stipulated by the parties.
(2) Compound Interest – that which is imposed upon (2) When an obligation, not constituting a loan or
interest due and unpaid. forbearance of money, is breached, an interest on
(3) Legal Interest – that which the law directs to be the amount of damages awarded may be
charged in the absence of any agreement as to imposed at the discretion of the court at the rate
the rate between the parties. of 6% per annum. No interest, however, shall be
(4) Lawful Interest – that which the laws allow or do adjudged on unliquidated claims or damages
not prohibit except when or until the demand can be
(5) Unlawful or Usurious Interest – paid or stipulated established with reasonable certainty.
to be paid beyond the maximum fixed by law. Accordingly, where the demand is established
However, by virtue of CB Circular 905, usury has with reasonable certainty, the interest shall begin
become “legally inexistent.” to run from the time the claim is made judicially
or extrajudicially (Art. 1169) but when such
WHEN IS COMPOUND INTEREST ALLOWED? certainty cannot be so reasonably established at
(1) When there is an express written stipulation to the time the demand is made, the interest shall
that effect [Art. 1956] begin to run only from the date the judgment of
(2) Upon judicial demand. HOWEVER, debtor is not the court is made (at which time the
liable to pay compound interest even after quantification of damages may be deemed to
judicial demand when there is no stipulation for have been reasonably ascertained). The actual
payment of interest. [Art. 2212] base for the computation of legal interest shall, in
any case, be on the amount finally adjudged.
REQUISITES FOR INTEREST TO BE CHARGEABLE
(1) Must be expressly stipulated [Art 1956] (3) When the judgment of the court awarding a sum
(2) Agreement must be in writing [Art.1956] of money becomes final and executory, the rate of
(3) Must be lawful legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 12%
While it is true that under Article 1956 of the Civil per annum from such finality until its satisfaction,
Code no interest shall be due unless it has been this interim period being deemed to be by then
expressly stipulated in writing, this applies only to an equivalent to a forbearance of credit.
interest for the use of money. It does not
comprehend interest paid as damages. [Integrated Forbearance is defined, within the context of usury
Realty Corporation v. Philippine National Bank, 174 law, as a contractual obligation of lender or creditor
SCRA 295] to refrain, during given period of time, from requiring
borrower or debtor to repay loan or debt then due
EXCEPTIONS TO REQUISITE OF EXPRESS STIPULATION and payable (Bataan Seedling v. Republic, 383 SCRA
(1) The debtor in delay is liable to pay legal interest 590)
(6% or 12% per annum) as indemnity for
damages [Art. 2209] THE USURY LAW (Act No.2566) is an act fixing rates
(2) Interest accruing from unpaid interest – Interest of interests upon loans and declaring the effect of
demanded shall earn interest from the time it is receiving or taking usurious rates and for other
judicially demanded [Art. 2212] or where there is purposes. (Arevalo v. Dimayuga, 49 Phil 894)
an express stipulation [Art. 1959]
CB Circular No. 905 – abolished interest rate ceilings.
RULES FOR AWARD OF INTEREST IN THE CONCEPT OF With the promulgation of such circular, usury has
ACTUAL AND COMPENSATORY DAMAGES (Eastern become “legally inexistent” as the parties can now
Shipping Lines v. CA, 234 SCRA 78) legally agree on any interest that may be charged on
(1) When the obligation breached consists in the the loan.
payment of a sum of money, i.e., a loan or
PAGE 281
ELEMENTS OF USURY OBLIGATIONS OF DEPOSITOR

(1) A loan or forbearance of money (1) Depositor is obliged to reimburse the depositary
(2) An understanding between parties that the loan for expenses incurred for preservation – if deposit
shall and may be returned is gratuitous. [Art. 1992]
(3) An unlawful intent to take more than the legal (2) Depositor is obliged to pay losses incurred due to
rate for the use of money or its equivalent character of thing deposited. [Art. 1993]
(4) The taking or agreeing to take for the use of the
loan of something in excess of what is allowed by General Rule: The depositor shall reimburse the
law. depositary for any loss arising from the character of
the thing deposited [Art. 1993]
A usurious loan transaction is not a complete nullity
but defective only with respect to the agreed interest. Exceptions
(Carpo v. Chua, G.R. Nos. 150773 and 153599) (1) Depositor was not aware of the danger;
(2) Depositor was not expected to know the
dangerous character of the thing;
(3) Depositor notified the depositary of such
Deposit dangerous character;
(4) Depositary was aware of the danger without
Deposit is constituted from the moment a person advice from the depositor.
receives a thing belonging to another, with the
obligation of safely keeping it and of returning the EXTINGUISHMENT OF DEPOSIT
A DEPOSIT IS EXTINGUISHED:
same. If the safekeeping of the thing delivered is not
the principal purpose of the contract, there is no (1) Upon the loss or deterioration of the thing
deposit but some other contract. [Art.1962] deposited;
(2) Upon the death of either the depositor or the
CHARACTERISTICS depositary, ONLY in gratuitous deposits;
(1) Real Contract because it is perfected by the (3) By other modes provided in the Civil Code, e.g.
delivery of the subject matter. novation, merger, etc. [See Art. 1231]
(2) Principal purpose of the contract of deposit is the
safekeeping of the thing delivered. EFFECT OF DEATH OF DEPOSITOR OR
(3) If gratuitous, it is unilateral because only the DEPOSITARY [Art. 1995]
depository has an obligation. If onerous, it is (1) Where deposit gratuitous – death of either of the
bilateral. depositor or depositary extinguishes the deposit
(personal in nature). By the word “extinguished,”
The principal purpose is safekeeping of the thing the law really means that the depositary is not
delivered, so that if it is only an accessory or obliged to continue with the contract of deposit.
secondary obligation, deposit is not constituted but (2) Where deposit for compensation – not
some other contract. extinguished by the death of either party.
CONTRACT OF DEPOSIT IS GENERALLY KINDS OF DEPOSIT

GRATUITOUS [Art. 1965], subject to the following (1) Judicial
exceptions: (2) Extrajudicial
(1) There is a contrary stipulation (a) Voluntary
(2) Depository is in the business of storing goods (b) Necessary
(3) Property saved from destruction during calamity
without owner’s knowledge; just compensation VOLUNTARY DEPOSIT
should be given to the depository. [Art. 1996(2) Voluntary Deposit - delivery is made by the will of the
and Art. 1997, par.2] depositor or by two or more persons each of whom
believes himself entitled to the thing deposited [Art.
ONLY MOVABLE THINGS MAY BE THE OBJECT 1968]
OF A DEPOSIT [Art. 1966] if the deposit is either
voluntary [Art. 1968] or necessary [Art. 1996]. NECESSARY DEPOSIT
HOWEVER, a judicial deposit may cover movable as Necessary Deposit - made in compliance with a legal
well an immovable property, its purpose being to obligation, or on the occasion of any calamity, or by
protect the rights of parties to the suit [Art. 2006]. travelers in hotels and inns [Arts. 1996-2004] or by
travelers with common carriers [Arts. 1734-1735]
PAGE 282
KINDS OF NECESSARY DEPOSITS

(1) It is made in compliance with a legal obligation, (Note: The hotel-keeper cannot free himself from
in which case it is governed by the law responsibility by posting notices to the effect that he
establishing it, and in case of deficiency, the rules is not liable for the articles brought by the guest.
on voluntary deposit e.g. Arts. 538, 586 and 2104 Such kind of stipulation shall be VOID. [Art. 2003])
(2) It takes place on the occasion of any calamity,
such as fire, storm, flood, pillage, shipwreck, or Triple-V Food Services v. Filipino Merchants Insurance
other similar events. There must be a causal Company: Regarding the legal deposit of a vehicle
relation between the calamity and the that was stolen while parked with Saisaki restaurant,
constitution of the deposit. In this case the “the depositary may not exempt itself from
deposit is governed by the rules on voluntary responsibility for loss or damage of the thing
deposit and Art. 2168 deposited with it, by exclusionary stipulation. Such
(3) Made by passengers with common carriers. [Art. stipulations are void for being contrary to law.”
1754]
(4) Made by travelers in hotels or inns. [Art. 1998] HOTEL-KEEPER’S RIGHT TO RETENTION
(1) The hotel-keeper has a right to retain the things
DEPOSITS BY TRAVELERS IN HOTELS AND INNS brought into the hotel by the guest, as a security
Before keepers of hotels or inns may be held for credits on account of
responsible as depositaries with regard to the effects (a) lodging, and
of their guests, the following must concur: (b) supplies usually furnished to hotel guests (Art.
(1) They have been previously informed about the 2004)
effects brought by the guests; and (2) NOTE: The right of retention recognized in this
(2) The latter have taken the precautions prescribed article is in the nature of a pledge created by
regarding their safekeeping. operation of law.
EXTENT OF LIABILITY UNDER ART.1998 JUDICIAL DEPOSIT

(1) Those in hotel rooms which come under the Judicial Deposit – takes place when an attachment or
term “baggage” or articles such as clothing as seizure of property in litigation is ordered [Arts.
are ordinarily used by travelers 2005-2009]
(2) Include those lost or damaged in hotel annexes
such as vehicles in the hotel’s garage. NATURE AND PURPOSE
It is auxiliary to a case pending in court. The purpose
WHEN HOTEL-KEEPER LIABLE is to maintain the status quo during pendency of the
Regardless of the amount of care exercised: litigation or to insure the right of the parties to the
(1) The loss or injury to personal property is caused property in case of a favorable judgment.
by his servants or employees as well as by
strangers [Art. 2000]. DEPOSITARY OF SEQUESTERED PROPERTY
(2) The loss is caused by the act of a thief or robber A person is appointed by the court [Art. 2007] with
done without the use of arms and irresistible the obligations:
force. [Art. 2001] (1) To take care of the property with the diligence of
a good father of the family. [Art. 2008]
WHEN HOTEL-KEEPER NOT LIABLE (2) To continue in his responsibility until the
(1) The loss or injury is caused by force majeure, like controversy which give rise thereto is ended
flood, fire, [Art. 2000] theft or robbery by a unless the court so orders. [Art. 2007]
stranger - not the hotel-keeper’s servant or
employee with the use of firearms or irresistible APPLICABLE LAW
force [Art. 2001] (1) The law on judicial deposit is remedial or
procedural in nature.
Exception: Hotel-keeper is guilty of fault or (2) Rules of Court shall govern matters not provided
negligence in failing to provide against the loss or for in the Civil Code. [Art. 2009]
injury from his cause. [Arts. 1170 and 1174]
(2) The loss is due to the acts of the guests, his

family, servants, visitors [Art.2002] Guaranty and Suretyship
(3) The loss arises from the character of the things Guaranty is a contract whereby a person, called the
brought into the hotel (Ibid.) guarantor, binds himself to the creditor to fulfill the
PAGE 283
obligation of the principal debtor in case the latter

should fail to do so. [Art. 2047] (a) Presence of cause which supports principal
obligation: Cause of the contract is the same
While a surety undertakes to pay if the principal does cause which supports the obligation as to the
not pay, the guarantor only binds himself to pay if principal debtor. The consideration which
the principal cannot pay [See benefit of excussion, Art. supports the obligation as to the principal
2058]. debtor is a sufficient consideration to support
the obligation of a guarantor or surety.
Suretyship is a relation which exists where one (b) Absence of direct consideration or benefit to
person (principal) has undertaken an obligation and guarantor: Guaranty or surety agreement is
another person (surety) is also under a direct and regarded valid despite the absence of any
primary obligation or other duty to a third person direct consideration received by the guarantor
(oblige), who is entitled to but one performance, and or surety, such consideration need not pass
as between the two who are bound, the one rather directly to the guarantor or surety; a
than the other should perform. consideration moving to the principal will
suffice.
If a person binds himself solidarily with the principal
debtor, the contract is called suretyship and the (3) A married woman who is a guarantor binds only
guarantor is called a surety. her separate property, generally [2049]
GUARANTY DISTINGUISHED FROM SURETYSHIP Exceptions

(a) With her husband’s consent, bind the
Guaranty Suretyship community or conjugal partnership property
Guarantor’s liability Surety assumes liability (b) Without husband’s consent, in cases provided
depends upon an as a regular party to the by law, such as when the guaranty has
independent agreement undertaking redounded to the benefit of the family.
to pay the obligation
Guarantor’s engagement Surety is an original (4) A guaranty need not be undertaken with the
is a collateral promissory knowledge of the debtor [2050]
undertaking (a) Guaranty is unilateral – exists for the benefit
of the creditor and not for the benefit of the
Guarantor is subsidiarily Surety is primarily liable
principal debtor
liable i.e. only obliged to i.e. bound to pay if the
(b) Creditor has every right to take all possible
pay if the principal principal does not pay
measures to secure payment of his credit –
cannot pay
guaranty can be constituted even against the
Guarantor not bound to Surety ordinarily held to
will of the principal debtor
take notice of default of know every default of his
his principal principal
However, as regards payment made by a third
Guarantor often Surety not discharged person:
discharged by the mere either by the mere (a) Payment without the knowledge or against
indulgence of the indulgence of the the will of the debtor:
creditor and is usually creditor or by want of (i) Guarantor can recover only insofar as the
not liable unless notified notice of default of the payment has been beneficial to the debtor
of the principal’s default principal [Art. 1236]
(ii) Guarantor cannot compel the creditor to
NATURE AND EXTENT OF GUARANTY subrogate him in his rights [Art. 1237]
NATURE AND EXTENT OF GUARANTY (b) Payment with knowledge or consent of the
(1) A guaranty is generally gratuitous [2048] debtor: Subrogated to all the rights which the
(a) General Rule: Guaranty is gratuitous creditor had against the debtor
(b) Exception: When there is a stipulation to the
contrary (5) The guaranty must be founded on a valid principal
obligation [2052(1)]
(2) On the cause of a guaranty contract
A guarantor or surety is bound by the same Guaranty is an accessory contract: It is an
consideration that makes the contract effective indispensable condition for its existence that
between the principal parties thereto. [Severino v. there must be a principal obligation. Hence, if the
Severino] principal obligation is void, it is also void.
PAGE 284
condition precedent are valid and binding

(6) A guaranty may secure the performance of a before the occurrence of the condition
voidable, unenforceable, and natural obligation precedent.
[2052(2)]
A guaranty may secure the performance of a: A continuing guaranty is one which is not limited to a
(a) Voidable contract – such contract is binding, single transaction, but which contemplates a future
unless it is annulled by a proper court action course of dealing, covering a series of transactions,
(b) Unenforceable contract – because such generally for an indefinite time or until revoked. It is
contract is not void prospective in its operation and is generally intended
(c) Natural obligation – the creditor may proceed to provide security with respect to future transactions
against the guarantor although he has no within certain limits, and contemplates a succession
right of action against the principal debtor for of liabilities, for which, as they accrue, the guarantor
the reason that the latter’s obligation is not becomes liable.
civilly enforceable. When the debtor himself
offers a guaranty for his natural obligation, he A continuing guaranty is one which covers all
impliedly recognizes his liability, thereby transactions, including those arising in the future,
transforming the obligation from a natural which are within the description or contemplation of
into a civil one. the contract of guaranty, until the expiration or
termination thereof. A guaranty shall be construed
(7) A guaranty may secure a future debt [2053] as continuing when by the terms thereof it is evident
Continuing Guaranty or Suretyship: that the object is to give a standing credit to the
(a) Under the Civil Code, a guaranty may be given principal debtor to be used from time to time either
to secure even future debts, the amount of indefinitely or until a certain period, especially if the
which may not be known at the time the right to recall the guaranty is expressly reserved.
guaranty is executed. This is the basis for
contracts denominated as continuing Where the contract of guaranty states that the same
guaranty or suretyship. [Diño v. CA] is to secure advances to be made "from time to time"
(b) Future debts, even if the amount is not yet the guaranty will be construed to be a continuing
known, may be guaranteed but there can be one.”
no claim against the guarantor until the
amount of the debt is ascertained or fixed and (8) A guaranty may secure the performance of a
demandable conditional obligation [2053]
(a) Principal obligation subject to a suspensive
Rationale: A contract of guaranty is subsidiary. condition – the guarantor is liable only after
(a) To secure the payment of a loan at maturity – the fulfillment of the condition.
surety binds himself to guarantee the (b) Principal obligation subject to a resolutory
punctual payment of a loan at maturity and condition – the happening of the condition
all other obligations of indebtedness which extinguishes both the principal obligation and
may become due or owing to the principal by the guaranty
the borrower.
(b) To secure payment of any debt to be (9) A guarantor’s liability cannot exceed the principal
subsequently incurred – a guaranty shall be obligation [2054]
construed as continuing when by the terms
thereof it is evident that the object is to give a General Rule:
standing credit to the principal debtor to be Guaranty is a subsidiary and accessory contract –
used from time to time either indefinitely or guarantor cannot bind himself for more than the
until a certain period, especially if the right to principal debtor and even if he does, his liability
recall the guaranty is expressly reserved. shall be reduced to the limits of that of the
(c) To secure existing unliquidated debts – refers debtor. But the guarantor may bind himself for
to debts existing at the time of the less than that of the principal.
constitution of the guaranty but the amount
thereof is unknown and not to debts not yet Exceptions
incurred and existing at that time. (a) Interest, judicial costs, and attorney’s fees as
(d) The surety agreement itself is valid and part of damages may be recovered – creditors
binding even before the principal obligation suing on a suretyship bond may recover from
intended to be secured thereby is born, just the surety as part of their damages, interest at
like obligations which are subject to a the legal rate, judicial costs, and attorney’s
PAGE 285
fees when appropriate, even without NATURE AND EXTENT OF SURETYSHIP

stipulation and even if the surety would (1) Liability is contractual and accessory but direct
thereby become liable to pay more than the (2) Liability is limited by the terms of the contract
total amount stipulated in the bond. (3) Liability arises only if principal debtor is held liable
(a) In the absence of collusion, the surety is
Interest runs from: bound by a judgment against the principal
(1) Filing of the complaint (upon judicial even though he was not a party to the
demand); or proceedings;
(2) The time demand was made upon the surety (b) The creditor may sue, separately or together,
until the principal obligation is fully paid the principal debtor and the surety;
(upon extra-judicial demand) (c) A demand or notice of default is not required
to fix the surety’s liability
Rationale: Surety is made to pay, not by Exception: Where required by the provisions of
reason of the contract, but by reason of his the contract of suretyship
failure to pay when demanded and for having (d) A surety bond is void where there is no
compelled the creditor to resort to the courts principal debtor because such an undertaking
to obtain payment. presupposes that the obligation is to be
enforceable against someone else besides the
(b) Penalty may be provided – a surety may be surety, and the latter can always claim that it
held liable for the penalty provided for in a was never his intention to be the sole person
bond for violation of the condition therein. obligated thereby.
Principal’s liability may exceed guarantor’s Note: Surety is not entitled to exhaustion
obligations
The amount specified in a surety bond as the (1) The undertaking is to the creditor, not the debtor
surety’s obligation does not limit the extent of the The surety makes no covenant or agreement with
damages that may be recovered from the the principal that it will fulfill the obligation
principal, the latter’s liability being governed by guaranteed for the benefit of the principal. The
the obligations he assumed under his contract surety’s undertaking is that the principal shall
fulfill his obligation and that the surety shall be
(10) The existence of a guaranty is not presumed relieved of liability when the obligation secured is
[2055] performed.
Guaranty requires the expression of consent on
the part of the guarantor to be bound. It cannot Exception: Unless otherwise expressly provided.
be presumed because of the existence of a
contract or principal obligation. (2) Prior demand by the creditor upon principal not
required. Surety is not exonerated by neglect of
Rationale: creditor to sue principal.
(a) There be assurance that the guarantor had
the true intention to bind himself; Strictissimi juris rule applicable only to
(b) To make certain that on making it, the accommodation surety
guarantor proceeded with consciousness of Reason: An accommodation surety acts without
what he was doing. motive of pecuniary gain and hence, should be
protected against unjust pecuniary impoverishment
(11) Contract of guaranty is covered by the Statute of by imposing on the principal, duties akin to those of
Frauds [See Art. 1403(2)(b)] a fiduciary. This rule will apply only after it has been
Guaranty must not only be expressed but must so definitely ascertained that the contract is one of
be reduced into writing. Hence, it shall be suretyship or guaranty.
unenforceable by action, unless the same or
some note or memorandum thereof be in writing, Strictissimi juris rule NOT applicable to compensated
and subscribed by the party charged, or by his sureties
agent; evidence, therefore, of the agreement Reasons:
cannot be received without the writing, or a (1) Compensated corporate sureties are business
secondary evidence of its contents. However, it associations organized for the purpose of
need not appear in a public document assuming classified risks in large numbers, for
profit and on an impersonal basis.
(2) They are secured from all possible loss by
PAGE 286
adequate counter-bonds or indemnity the satisfaction of the obligation –

agreements. If such judicial action including
execution would not satisfy the
Such corporations are in fact insurers and in obligation, the guarantor can no
determining their rights and liabilities, the rules longer require the creditor to resort
peculiar to suretyship do not apply. to all such remedies against the
debtor as the same would be but a
The stipulation in the indemnity agreement allowing useless formality. It is not
the surety to recover even before it paid the creditor necessary that the debtor be
is enforceable. In accordance therewith, the surety judicially declared insolvent.
may demand from the indemnitors even before
paying the creditors. [Mercantile Insurance Company Southern Motors, Inc. v. Barbosa: “The right of
v. Ysmael, 169 SCRA 66] guarantors…to demand exhaustion of the property of
the principal debtor, exists only when a pledge or a
EFFECT OF GUARANTY mortgage has not been given as special security for
EFFECTS OF GUARANTY BETWEEN THE GUARANTOR AND the payment of the principal obligation.”
THE CREDITOR
(1) The guarantor has the right to benefit from Luzon Steel Corp. v. Sia: “The surety in the present
excussion/ exhaustion [2058] case bound itself "jointly and severally" (in solidum)
with the defendant; and excussion (previous
The guarantor cannot be compelled to pay the exhaustion of the property of the debtor) shall not
creditor unless the latter has: take place "if he (the guarantor) has bound himself
(a) Exhausted all of the property of the debtor; solidarily with the debtor".
and
(b) Resorted to all the legal remedies against the (b) In order that the guarantor may make use of
debtor. the benefit of excussion, he must:
(i) Set it up against the creditor upon
Exceptions to the benefit of excussion (2059) the latter’s demand for payment
(a) As provided in Art. 2059: from him;
(i) If the guarantor has expressly (ii) Point out to the creditor:
renounced it. (a) Available property of the debtor – the
(ii) If he has bound himself solidarily guarantor should facilitate the
with the debtor. Here, the liability realization of the excussion since he is
assumed is that of a surety. The the most interested in its benefit.
guarantor becomes primarily liable (b) Within the Philippine territory –
as a solidary co- debtor. In effect, excussion of property located abroad
he renounces in the contract itself would be a lengthy and extremely
the benefit of exhaustion. difficult proceeding and would not
(iii) In case of insolvency of the debtor conform with the purpose of the
– guarantor guarantees the guaranty to provide the creditor with the
solvency of the debtor. If the means of obtaining the fulfillment of the
debtor becomes insolvent, the obligation.
liability of the guarantor arises as (c) Sufficient to cover the amount of the
the debtor cannot fulfill his debt
obligation (c) If he is a judicial bondsman and sub- surety
(iv) When the debtor has absconded, (2084)
or cannot be sued within the (d) Where a pledge or mortgage has been given
Philippines – the creditor is not by him as a special security
required to go after a debtor who is (e) If he fails to interpose it as a defense before
hiding or cannot be sued in our judgment is rendered against him.
courts, and to incur the delays and
expenses incident thereto. (2) The creditor has the right to secure a judgment
Exception: When the debtor has against the guarantor prior to the excussion
left a manager or representative
(v) If it may be presumed that an General Rule: An ordinary personal guarantor
execution on the property of the (NOT a pledgor or mortgagor), may demand
principal debtor would not result in exhaustion of all the property of the debtor
PAGE 287
before he can be compelled to pay. (8) Co-guarantors are entitled to the benefit of division
Exception: The creditor may, prior thereto, secure [2065]
a judgment against the guarantor, who shall be The benefit of division applies only when there
entitled, however, to a deferment of the execution are several guarantors and one debtor for a
of said judgment against him, until after the single debt. Except when solidarity has been
properties of the principal debtor shall have been stipulated, a co-guarantor is liable only to the
exhausted, to satisfy the latter’s obligation. extent of his share in the obligation as divided
among all the co-guarantors.
(3) The creditor has the duty to make prior demand for
payment from the guarantor 2060) EFFECTS OF GUARANTY BETWEEN THE DEBTOR AND THE
(a) The demand is to be made only after GUARANTOR
judgment on the debt (1) The guarantor who pays has the right to be
(b) Joining the guarantor in the suit against the subrogated to the rights of the creditor [2067]
principal debtor is not the demand intended A guarantor who pays the debt is entitled to every
by law. Actual demand has to be made. remedy which the creditor has against the
principal debtor, to enforce every security and all
(4) The guarantor has the duty to set up the benefit of means of payments; to stand in the place of the
excussion [2060] creditor not only through the medium of the
As soon as he is required to pay, guarantor must contract, but even by means of the securities
also point out to the creditor available property entered into w/out the knowledge of the surety;
(not in litigation or encumbered) of the debtor having the right to have those securities
within the Philippines. transferred to him though there was no
stipulation for it, and to avail himself of all
(5) The creditor has the duty to resort to all legal securities against the debtor
remedies [2058, 2061]
After the guarantor has fulfilled the conditions The need to enforce the provisions on indemnity
required for making use of the benefit of in Article 2066 forms the basis for the
excussion, it becomes the duty of the creditor to: subrogation clause of Article 2067. The
(a) Exhaust all the property of the debtor pointed assumption, however, is that the guarantor who is
out by the guarantor; subrogated to the rights of the creditor, has the
(b) If he fails to do so, he shall suffer the loss for right to be reimbursed for his answering for the
the insolvency of the debtor, but only to the obligation of the debtor. Absent this right of
extent of the value of the said property reimbursement, subrogation will not be proper.
(6) The creditor has the duty to notify the guarantor in (2) The guarantor has the duty to notify the debtor
the action against the debtor [2062] before paying the creditor [2068].
Notice to the guarantor is mandatory in the
action against the principal debtor. The Should payment be made without notification,
guarantor, however, is not duty bound to appear and supposing the debtor has already made a
in the case, and his non- appearance shall not prior payment, the debtor would be justified in
constitute default, w/ its consequential effects. setting up the defense that the obligation has
already been extinguished by the time the
Rationale: To give the guarantor the opportunity guarantor made the payment. The guarantor will
to allege and substantiate whatever defenses he then lose the right of reimbursement and
may have against the principal obligation, and consequently the right of subrogation.
chances to set up such defenses as are afforded
him by law (3) The guarantor cannot demand reimbursement for
payment made by him before the obligation has
(7) A compromise shall not prejudice the person not become due [2069].
party to it [2063]
(a) A compromise between creditor and principal General Rule: Since a contract of guaranty is only
debtor benefits the guarantor but does not subsidiary, the guarantor cannot be liable for the
prejudice him. obligation before the period on which the
(b) A compromise between guarantor and the debtor’s Liability will accrue. Any payment made
creditor benefits but does not prejudice the by the guarantor before the obligation is due
principal debtor. cannot be indemnified by the debtor.
PAGE 288
Exception: Prior consent or subsequent (b) By judicial demand

ratification by the debtor (3) The paying guarantor seeks to be indemnified
only to the extent of his proportionate share in
(4) The guarantor may proceed against the debtor the total obligation.
even before payment has been made [2071]
General Rule: Guarantor has no cause of action EXTINGUISHMENT OF GUARANTY

against the debtor until after the former has paid (1) Once the obligation of the debtor is extinguished
the obligation. in any manner provided in the Civil Code, the
obligation of the guarantor is also extinguished
Exceptions (Art. 2071) [2076]. However, there may be instances when,
(a) When he is sued for the payment; after the extinguishment of the guarantor’s
(b) In case of insolvency of the principal debtor; obligation (as in the case of a release from the
(c) When the debtor has bound himself to relieve guaranty), the obligation of the debtor still
him from the guaranty within a specified subsists.
period, and this period has expired; (2) Although the guarantor generally has to make
(d) When the debt has become demandable, by payment in money, any other thing of value, if
reason of the expiration of the period for accepted by the creditor, is valid payment and
payment; therefore releases the guarantor [dacion en pago]
(e) After the lapse of 10 years, when the principal [2077].
obligation has no fixed period for its maturity, (3) If one guarantor is released without the consent
unless it be of such nature that it cannot be of the others, the release would benefit the co-
extinguished except within a period longer guarantors to the extent of the proportionate
than 10 years; share of the guarantor released [2078].
(f) If there are reasonable grounds to fear that (4) A guarantor is released if the creditor, without the
the principal debtor intends to abscond; guarantor’s consent, extends the time within
(g) If the principal debtor is in imminent danger of which the debtor may perform his obligation
becoming insolvent. [2079]. This is to protect the interest of the
guarantor should the debtor be insolvent during
Rationale: To enable the guarantor to take the period of extension and deprive the guarantor
measures for the protection of his interest in view of his right to reimbursement.
of the probability that he would be called upon to (5) The guarantors are released if by some act of the
pay the debt. As such, he may, in the alternative, creditor they cannot be subrogated to the rights,
obtain release from the guaranty; or demand mortgages and preferences of the latter. [2080]
security that shall protect him from any
proceeding by the creditor, and against the In order to constitute an extension discharging the
insolvency of the debtor. surety, it should appear that the extension was for (1)
a definite period, (2) pursuant to an enforceable
EFFECTS OF GUARANTY AS BETWEEN CO-GUARANTORS agreement between the principal and the creditor,
When there are two or more guarantors, one debtor and (3) that it was made without the consent of the
and one debt: surety or with a reservation of rights with respect to
(a) The one who pays may demand from each of the him. (Filipinas Textile Mills v. CA, November 12, 2003)
others the share proportionally owing to him
(b) If any of the guarantors is insolvent, his share LEGAL AND JUDICIAL BONDS
shall be borne by the others, including the payer, Bond – an undertaking that is sufficiently secured,
in the same proportion [Art. 2073] and not cash or currency.
For purposes of proportionate reimbursement, the Bondsman – a surety offered in virtue of a provision
other guarantors may interpose such defenses of law or a judicial order.
against the paying guarantor as are available to the
debtor against the creditor, except those that are QUALIFICATIONS OF PERSONAL BONDSMAN [2082 IN
personal to the debtor [Art. 2074] RELATION TO ART. 2056]
(1) He possesses integrity;
Requisites for the applicability of Art. 2073: (2) He has capacity to bind himself;
(1) Payment has been made by one guarantor; (3) He has sufficient property to answer for the
(2) The payment was made because obligation which he guarantees.
(a) Of the insolvency of the debtor, or
PAGE 289
PLEDGE OR MORTGAGE IN LIEU OF BOND [2083] (6) Creditor has the right to retain the thing in his
(a) Guaranty or suretyship is a personal security. possession or in that of a third person to whom it
(b) Pledge or mortgage is a property or real security. has been delivered, until the debt is paid [2098].
If the person required to give a legal or judicial (7) Special Laws apply to pawnshops and
bond should not be able to do so, a pledge or establishments engaged in making loans secured
mortgage sufficient to cover the obligation shall by pledges. Provisions of the Civil Code shall
be admitted in lieu thereof. apply subsidiarily to them.
BONDSMAN NOT ENTITLED TO EXCUSSION [2084] In case of doubt as to whether a transaction is a

A judicial bondsman and the sub-surety are not pledge or a dation in payment, the presumption is in
entitled to the benefit of excussion. favor of pledge, the latter being the lesser
(a) Reason: They are not mere guarantors, but transmission of rights and interests. (Manila Banking
sureties whose liability is primary and solidary. Corp. v. Teodoro, 169 SCRA 95)
(b) Effect of negligence of creditor: Mere negligence
on the part of the creditor in collecting from the KINDS
debtor will not relieve the surety from liability. (1) Voluntary or conventional – Created by agreement
of parties.
(2) Legal – Created by operation of law.
Pledge ESSENTIAL REQUIREMENTS

ESSENTIAL REQUISITES COMMON TO PLEDGE AND
MORTGAGE [ART. 2085]
DEFINITION
(1) Constituted to secure the fulfillment of a principal
Pledge is a contract by virtue of which the debtor
obligation.
delivers to the creditor or to a third person a movable
(2) Pledgor or mortgagor must be the absolute
or document evidencing incorporeal rights for the
owner of the thing pledged or mortgaged.
purpose of securing the fulfillment of a principal
(3) The persons constituting the pledge or mortgage
obligation with the understanding that when the
have the free disposal of their property, and in the
obligation is fulfilled, the thing delivered shall be
absence thereof, that they be legally authorized
returned with all its fruits and accessions. [Art.2085
for the purpose.
in relation to 2093]
(4) Cannot exist without a valid obligation.
(5) Debtor retains the ownership of the thing given
PROVISIONS APPLICABLE ONLY TO PLEDGE
as a security.
(1) Transfer of possession to the creditor or to third
(6) When the principal obligation becomes due, the
person by common agreement is essential
thing pledged or mortgaged may be alienated for
[2093].
the payment to the creditor. [Art. 2087]
(a) Actual delivery is important.
(b) Constructive or symbolic delivery of the key to
OBLIGATION OF PLEDGEE
the warehouse is sufficient to show that the
(1) The pledgee cannot deposit the thing pledged
depositary appointed by common consent of
with a 3rd person, unless there is a contrary
the parties was legally placed in possession.
stipulation [2100].
(2) All movables within the commerce of man may
(2) Is responsible for the acts of his agents or
be pledged as long as they are susceptible of
employees with respect to the thing pledged
possession [2094].
[2100].
(3) Incorporeal rights may be pledged. The
(3) Has no right to use the thing or to appropriate its
instruments representing the pledged rights shall
fruits without authority from the owner [2104]
be delivered to the creditor; if negotiable, they
(4) May cause the public sale of the thing pledged if,
must be indorsed [2095].
without fault on his part, there is danger of
(4) Pledge shall take effect against 3rd persons only
destruction, impairment or dimunition in value of
if the following appear in a public instrument:
the thing. The proceeds of the auction shall be a
(a) Description of the thing pledged.
security for the principal obligation [2108].
(b) Date of the pledge [2096].
(5) The thing pledged may be alienated by the
RIGHTS OF PLEDGOR
pledgor or owner only with the consent of the
(1) Takes responsibility for the flaws of the thing
pledgee. Ownership of the thing pledged is
pledged [2101 in relation to Art. 1951].
transmitted to the vendee or transferee as soon
(2) Cannot ask for the return of the thing against the
as the pledgee consents to the alienation, but the
will of the creditor, unless and until he has paid
latter shall continue to have possession [2097].
PAGE 290
the debt and its interest, with expenses in a EFFECT OF THE SALE OF THE THING PLEDGED [Art 2115]
proper case [2105]. (1) Extinguishes the principal obligation, whether the
proceeds of the sale is more or less than the
Yuliongsiu vs. PNB: There is authority supporting the amount due.
proposition that the pledgee can temporarily entrust (2) If the price of sale is more than amount due, the
the physical possession of the chattels pledged to debtor is not entitled to the excess unless the
the pledgor without invalidating the pledge. In such contrary is provided.
a case, the pledgor is regarded as holding the (3) If the price of sale is less, the creditor is not
pledged property merely as trustee for the pledgee. entitled to recover the deficiency. A contrary
The type of delivery will depend upon the nature and stipulation is void.
the peculiar circumstances of each case.
PLEDGE BY OPERATION OF LAW – ART. 2121-
PNB vs. Atendido: according to law, a pledgee cannot 2122
become the owner of, nor appropriate to himself, the LEGAL PLEDGES/PLEDGE BY OPERATION OF LAW [Art.
thing given in pledge. If by the contract of pledge the 2121]
pledgor continues to be the owner of the thing (1) Necessary expenses shall be refunded to every
pledged during the pendency of the obligation, it possessor, but only a possessor in good faith may
stands to reason that in case of loss of the property, retain the thing until he has been reimbursed.
the loss should be borne by the pledgor. (a) Useful expenses shall be refunded only to the
possessor in good faith with the same right of
(3) Subject to the right of the pledgee under article retention, the person who has defeated him in
2108, pledgor is allowed to substitute the thing the possession having the option of refunding
which is in danger of destruction or impairment the amount of the expenses or of paying the
without any fault on the part of the pledgee with increase in value which the thing may have
another thing of the same kind and quality [2107]. acquired and by reason thereof [Art. 546]
(4) May require that the thing be deposited with a (2) He who has executed work upon a movable has a
3rd person, if through the negligence or willful right to retain it by way of pledge until he is paid.
act of the pledgee the thing is in danger of being This is called the mechanic’s lien. [Art. 1731]
lost or impaired [2106]. (3) The agent may retain the things which are the
objects of agency until the principal effects the
PERFECTION – ARTS. 2093, 2096 reimbursement and pays the indemnity. This is
REQUISITES FOR PERFECTION called the agent’s lien. [Art. 1914]
(1) The thing pledged is placed in the possession of (4) The laborer’s wages shall be a lien on the goods
the creditor or a third person [2093] manufactured or the work done. [Art. 1707]
(2) For the pledge to take effect as against third
persons, a description of the thing pledged and Note:
the date of the pledge should appear in a public (1) In legal pledges, the remainder of the price of the
instrument [2096] sale shall be delivered to the obligor.
(2) Public auction of legal pledges may only be
FORECLOSURE ARTS. 2112, 2115 executed after demand of the amount for which
REQUIREMENTS IN SALE OF THE THING PLEDGED BY A the thing is retained. It shall take place within one
CREDITOR, IF CREDIT IS NOT PAID ON TIME (ART 2112) month after the demand, otherwise the pledgor
(1) Debt is due and unpaid. may demand the return of the thing pledged,
(2) Sale must be at a public auction. provided s/he is able to show that the creditor did
(3) Notice to the pledgor and owner, stating the not cause the public sale without justifiable
amount due. grounds. [Article 2122]
(4) Sale must be made with the intervention of a
notary public. DISTINGUISHED FROM CHATTEL MORTGAGE –
(5) If at the first auction the thing is not sold, a ARTS. 2140, 1484
second one with the same formalities shall be Chattel Mortgager Pledge
held.
(6) If at the second auction, there is no sale either, Delivery of Personal Property
the creditor may appropriate the thing pledged
but he shall give an acquittance (release) for his Not required Delivery is required for the
entire claim. validity of the pledge
Registration in the Chattel Mortgage Register
PAGE 291
Chattel Mortgager Pledge property, but ownership of the property is not

parted with. It merely restricts the mortgagor’s
Necessary for validity of Not necessary; jus disponendi over the property. The mortgagor
the CM against third Public document is may still sell the property, and any stipulation to
persons enough to bind third the contrary is void [Art. 2130]
persons (4) Mortgage extends to the natural accessions, to
the improvements of growing fruits and the rents
Right to Excess of Proceeds of Sale or income NOT YET RECEIVED when the
The excess goes to the The excess goes to the obligation becomes DUE, including indemnity
debtor/ mortgagor pledgee/creditor, unless from insurance, and/or amount received from
otherwise stipulated expropriation for public use [Art. 2127]
(a) Applies only when the accessions and
Right to Recover Deficiency accessories subsequently introduced belongs
Creditor/ mortgagee can Creditor/ mortgagee is to the mortgagor.
recover from the debtor/ not entitled to recover any (b) To exclude them, there must be an express
mortgagor, except if deficiency after the stipulation, or the fruits must be collected
covered by Recto Law property is sold, before the obligation becomes due.
notwithstanding contrary (c) Third persons who introduce improvements
stipulation upon the mortgaged property may remove
them at any time
Note: The provisions of the Civil Code on pledge,
insofar as they are not in conflict with the Chattel The consideration of the accessory contract of real
Mortgage Law shall be applicable to chattel estate mortgage is the same as that of the principal
mortgages [Art. 2141] contract. [Central Bank v. CA, 139 SCRA 46]
KINDS
Real Mortgage (1) Voluntary – constituted by the will of the owner of
the property on which it is created
DEFINITION AND CHARACTERISTICS
Mortgage is a contract whereby the debtor secures to (2) Legal – required by law to be executed in favor of
the creditor the fulfillment of a principal obligation, certain persons:
immediately making immovable property or real (a) Persons in whose favor the law establishes a
rights answerable to the principal obligation in case mortgage have no other right than to demand
it is not complied with at the time stipulated. the execution and recording of the document
in which the mortgage is formalized [Article
OBJECTS OF REAL MORTGAGE [Art. 2124] 2125]
(1) Immovables (b) The bondsman who is to be offered in virtue of
(2) Alienable real rights over immovables. a provision of law or of a judicial order shall
(a) Future property cannot be an object of have the qualifications prescribed in Art 2056
mortgage; however, a stipulation subjecting to (integrity, capacity to bind himself, and
the mortgage improvements which the sufficient property to answer for the
mortgagor may subsequently acquire, install obligation), and in other laws [Article 2082]
or use in connection with real property already (c) If the person bound to give a bond should not
mortgaged belonging to the mortgagor is be able to do so, a pledge or mortgage
valid. considered sufficient to recover his obligation
shall be admitted in lieu thereof [Article 2083]
CHARACTERISTICS
(1) As a general rule, the mortgagor retains (3) Equitable – One which, although lacking the
possession of the property. He may deliver said proper formalities of a mortgage, shows the
property to the mortgagee without altering the intention of the parties to make the property a
nature of the contract of mortgage. security for the debt.
(2) It is not an essential requisite that the principal of (a) lien created through equitable mortgage
the credit bears interest, or that the interest as ought not to be defeated by requiring
compensation for the use of the principal and the compliance with formalities necessary to the
enjoyment of its fruits be in the form of a certain validity of a voluntary real estate mortgage.
percentage thereof. Ex.: Pacto de retro
(3) Mortgage creates an encumbrance over the (b) provisions governing equitable mortgage:
PAGE 292
Arts. 1365, 1450, 1454, 1602, 1603, 1604 and (4) Cannot exist without a valid obligation.
1607. (5) Debtor retains the ownership of the thing given
as a security.
(6) When the principal obligation becomes due, the
PRINCIPLE OF INDIVISIBILITY OF PLEDGE/MORTGAGE thing pledged or mortgaged may be alienated for
[ART. 2089 TO 2090] the payment to the creditor. [Art. 2087]
(a) Dayrit v. CA: A mortgage directly and immediately (7) Must be recorded in the Registry of Property in
subjects the property upon which it is imposed. It order to be validly constituted.
is indivisible even though the debt may be Note: The mortgage would still be binding
divided, and such indivisibility is likewise between the parties even if the instrument is not
unaffected by the fact that the debtors are not recorded.
solidarity liable.
(b) Central Bank v. CA: Where only a portion of the FORECLOSURE
loan is released, the mortgage becomes FORECLOSURE OF MORTGAGE
enforceable only as to the proportionate value of It is the remedy available to the mortgagee by which
the loan he subjects the mortgaged property to the
satisfaction of the obligation secured by the
Indivisibility applies only as to pledgors/mortgagors mortgage.
who are themselves debtors in the principal (a) In General: An action for foreclosure of a
obligation, and not to accommodation pledgors/ mortgage is limited to the amount mentioned in
mortgagors the mortgage, EXCEPT when the mortgage
contract intends to secure future loans or
"When several things are pledged or mortgaged, advancements
each thing for a determinate portion of the debt, the (b) BLANKET mortgage/DRAGNET– mortgage that
pledges or mortgage, are considered separate from subsumes all debts of past or future origin
each other. But when the several things are given to (c) Mortgage may be used as a “continuing security”
secure the same debt in its entirety, all of them are which secures future advancements and is not
liable for the debt, and the creditor does not have to discharged by the repayment of the amount in
divide his action by distributing the debt among the the mortgage
various things pledged or mortgaged. Even when (d) Alienation or assignment of mortgage credit is
only a part of the debt remains unpaid, all the things valid even if it is not registered
are still liable for such balance." [Tolentino]
Acceleration Clause, or the stipulation stating that on
The question is whether or not the written the occasion of the mortgagor’s default, the whole
instrument in controversy was a mortgage OR a sum remaining unpaid automatically becomes due
conditional sale. The correct test, where it can be and demandable, is ALLOWED
applied, is the continued existence of a debt or
liability between the parties. If such exists, the KINDS OF FORECLOSURE
conveyance may be held to be merely a security for (1) Judicial Foreclosure
the debt or an indemnity against the liability. (Reyes (2) Extrajudicial Foreclosure
v. Sierra, 93 SCRA 473)
JUDICIAL FORECLOSURE
ESSENTIAL REQUISITES Rule 68, ROC:
ESSENTIAL REQUISITES COMMON TO PLEDGE AND (a) May be availed of by bringing an action in the
MORTGAGE proper court which has jurisdiction over the area
(1) Constituted to secure the fulfillment of a principal wherein the real or personal (in case of chattel
obligation. mortgage) property involved or a portion thereof
(2) Pledgor or mortgagor must be the absolute is situated.
owner of the thing pledged or mortgaged. (b) If the court finds the complaint to be well-
(3) The persons constituting the pledge or mortgage founded, it shall order the mortgagor to pay the
have the free disposal of their property, and in the amount due with interest and other charges
absence thereof, that they be legally authorized within a period of not less than 90 days nor more
for the purpose. than 120 days from the entry of judgment. If the
Note: Third persons who are not parties to the mortgagor fails to pay at the time directed, the
principal obligation may secure the latter by court, upon motion, shall order the property to be
pledging or mortgaging their own property. [Art. sold to the highest bidder at a public auction.
2085] (c) Upon confirmation of the sale by the court, it
PAGE 293
shall operate to divest the rights of all parties to to the buyer, which is similar to the equity of
the action and to vest their rights to the redemption. The TCT must be registered
purchaser subject to such rights of redemption as within THREE MONTHS after the foreclosure.
may be allowed by law. (b) The mortgagor can only legally transfer the
(d) Before the confirmation, the court retains control right to redeem and the use of the property
of the proceedings during the period of redemption.
(e) Execution of judgment subject to APPEAL but not (7) Remedy of party aggrieved by foreclosure is a
annulment petition to set aside sale and the cancellation of
(f) The foreclosure of the property is completed only writ of possession. However, if the mortgagee is a
when the sheriff’s certificate is executed, bank, the mortgagor is required to post a bond
acknowledged and recorded equal to the value of the mortgagee’s claim.
(8) Republication of the notice of sale is necessary for
The Proceeds of the Sale shall be applied to the the validity of the postponed extrajudicial sale
Payment of the: (9) In foreclosure of real estate mortgage under Act
(a) Costs of the sale; 3135, the buyer at auction may petition the land
(b) Amount due the mortgagee; registration court for a writ of possession pending
(c) Claims of junior encumbrancers or persons the one-year period of redemption of the
holding subsequent mortgages in the order of foreclosed property.
their priority; and
(d) Balance, if any shall be paid to the mortgagor. Nature of Power of Foreclosure by Extrajudicial Sale
(1) Conferred for mortgagee’s protection.
Nature of Judicial Foreclosure Proceedings (2) An ancillary stipulation.
(1) Quasi in rem action. Hence, jurisdiction may be (3) A prerogative of the mortgagee.
acquired through publication.
(2) Foreclosure is only the result or incident of the Note:
failure to pay debt. (a) Both should be distinguished from execution sale
(3) Survives death of mortgagor. governed by Rule 39, ROC.
(b) Foreclosure retroacts to the date of registration of
EXTRAJUDICIAL FORECLOSURE [ACT NO. 3135] mortgage.
(1) Applies to mortgages where the authority to (c) A stipulation of upset price, or the minimum price
foreclose is granted to the mortgagee. at which the property shall be sold to become
(2) Authority is not extinguished by death of operative in the event of a foreclosure sale at
mortgagor or mortgagee. This is an agency public auction, is null and void.
coupled with interest.
(3) Public sale should be made after proper notice to Right of mortgagee to recover deficiency
the public, otherwise it is a jurisdictional defect (1) Mortgagee is entitled to recover deficiency.
which could render the sale voidable. (2) If the deficiency is embodied in a judgment, it is
(4) There is no need to notify the mortgagor, where referred to as deficiency judgment.
there is no contractual stipulation therefor. (3) Action for recovery of deficiency may be filed even
during redemption period.
Proper notice consists of: (4) Action to recover prescribes after 10 years from
(a) posting notice in three public places and/or the time the right of action accrues.
(b) publication in newspaper of general
circulation Effect of inadequacy of price in foreclosure sale
(1) Where there is right to redeem, inadequacy of
Purpose of notice is to obtain the best bid for the price is immaterial because the judgment debtor
foreclosed property may redeem the property.
(a) Exception: Where the price is so inadequate as
(5) Surplus proceeds of foreclosure sale belong to to shock the conscience of the court, taking
the mortgagor. into consideration the peculiar circumstances.
(6) Debtor (who must be a NATURAL PERSON) has (2) Property may be sold for less than its fair market
the right to redeem the property sold within 1 year value, upon the theory that the lesser the price
from and after the date of sale. the easier it is for the owner to redeem.
(a) If the mortgagee is a bank and the debtor is a (3) The value of the mortgaged property has no
juridical person, then there is no right of bearing on the bid price at the public auction,
redemption. However, it may redeem the provided that the public auction was regularly
property BEFORE the registration of the TCT and honestly conducted.
PAGE 294
A suit for the recovery of the deficiency after the

foreclosure of a mortgage is in the nature of a
Antichresis
mortgage action because its purpose is precisely to
enforce the mortgage contract. [Caltex v. IAC, 176 DEFINITION AND CHARACTERISTICS
SCRA 741] Antichresis is a contract whereby the creditor
acquires the right to receive the fruits of an
Waiver of security by creditor immovable of the debtor, with the obligation to
(1) Mortgagee may waive the right to foreclose his apply then to the payment of the interest, if owing,
mortgage and maintain a personal action for and thereafter to the principal of the credit [Art 2132]
recovery of the indebtedness.
(2) Mortgagee cannot have both remedies. This is CHARACTERISTICS
because he only has one cause of action, the non- (1) Accessory contract – it secures the performance
payment of the mortgage debt. of a principal obligation
(2) Formal contract – it must be in a specified form
Redemption to be valid [Art. 2134]
(1) It is a transaction by which the mortgagor
reacquires the property which may have passed SPECIAL REQUISITES:
under the mortgage or divests the property of the (1) It can cover only the fruits of an immovable
lien which the mortgage may have created property
(2) Kinds: (2) Delivery of the immovable is necessary for the
(a) Equity of redemption: in judicial foreclosure of creditor to receive the fruits, not to make the
real estate mortgage under the ROC, it is the contract binding
right of the mortgagor to redeem the (3) Amount of principal and interest must be
mortgaged property by paying the secured specified in writing [Art. 2134]
debt within the 120 day period from entry of (4) Express agreement that debtor will give
judgment or after the foreclosure sale, but possession of the property to creditor and that
before the sale of the mortgaged property or the latter will apply the fruits to the interest, if
confirmation of sale any, then to the principal of his credit
(i) formal offer to redeem preserves the right of
redemption, e.g., by filing an action to NOTE: The obligation to pay interest is not the
enforce the right to redeem essence of the contract of antichresis; there being
(b) Right of redemption: in extrajudicial nothing in the Code to show that antichresis is only
foreclosure of real estate mortgage, the right applicable to securing the payment of interest-
of the mortgagor to redeem the property bearing loans. On the contrary, antichresis is
within a certain period after it was sold for the susceptible of guaranteeing all kinds of obligations,
satisfaction of the debt. pure or conditional
(ii) For natural persons – one year from the
registration of the TCT OBLIGATIONS OF ANTICHRETIC CREDITOR
(iii) For juridical persons – three months from (1) To pay taxes and charges on the estate, including
the foreclosure necessary expenses [Art. 2135].
(iv) Formal offer to redeem must be with Creditor may avoid said obligation by:
tender of redemption price to preserve (a) compelling the debtor to reacquire enjoyment
right of redemption of the property
(b) by stipulation to the contrary
Note: There is no right of redemption in pledge and (2) To apply all the fruits, after receiving them, to the
chattel mortgage. payment of interest, if owing, and thereafter to
the principal
Medida v. CA: The rule up to now is that the right of a (3) To render an account of the fruits to the debtor
purchaser at a foreclosure sale is merely inchoate (4) To bear the expenses necessary for its
until after the period of redemption has expired preservation and repair
without the right being exercised. The title to land
sold under mortgage foreclosure remains, in the REMEDIES OF CREDITOR IN CASE OF NON-PAYMENT OF
mortgagor or his grantee until the expiration of the DEBT
redemption period and conveyance by the master's (1) Action for specific performance
deed (2) Petition for the sale of the real property as in a
foreclosure of mortgage under Rule 68 of the
PAGE 295
Rules of Court [Art. 2137] REGISTRATION OF ASSIGNMENT OF MORTGAGE NOT

(a) The parties, however, may agree on an REQUIRED
extrajudicial foreclosure in the same manner (a) A chattel mortgage may be alienated or assigned
as they are allowed in contracts of mortgage to a third person
and pledge [Tavera v. El Hogar Filipino, Inc. 68 (b) The debtor is protected if he pays his creditor
Phil 712] without actual knowledge that the debt has been
(b) A stipulation authorizing the antichretic assigned
creditor to appropriate the property upon the (c) Affidavit of good faith is required.
non-payment of the debt within the agreed AFFIDAVIT OF GOOD FAITH is an oath in a
period is void [Art. 2088] contract of chattel mortgage wherein the parties
“severally swear that the mortgage is made for
the purpose of securing the obligation specified in
the conditions thereof and for no other purposes
Chattel Mortgage and that the same is a just and valid obligation
and one not entered into for the purpose of
fraud.”
DEFINITION AND CHARACTERISTICS
Chattel Mortgage is a conditional sale of personal Effect of Absence: Mortgage is vitiated only as against
property as security for the payment of a debt, or the third persons without notice.
performance of some other obligation specified
therein, the condition being that the sale shall be VENUE OF REGISTRATION
void upon the seller paying to the purchaser a sum of (a) If he resides in the Philippines, in the office of the
money or doing some other act named. If the register of deeds of the province in which the
condition is performed according to its terms, the mortgagor resides at the time of the making of
mortgage and sale immediately become void, and the chattel mortgage
the mortgagee is thereby divested of his title. (b) If he does not reside in the Philippines, in the
[Section 3, Act 1508] province in which the property is situated
(c) If the property is situated in a province different
CHARACTERISTICS from that in which the mortgagor resides, the
(1) It is an accessory contract because it secures mortgage shall be recorded in both provinces.
performance of a principal obligation [Sec. 4, Act 1508]
(2) It is a formal contract because it requires
registration in the Chattel Mortgage Register for When a corporation is a party to a chattel mortgage,
its validity (but only as against third persons) the affidavit may be made and subscribed by a
(3) It is a unilateral contract because it produces only director, trustee, cashier, treasurer, or manager
obligations on the part of the creditor to free the thereof, or by a person authorized to make or receive
thing from the encumbrance on fulfillment of the such mortgage.
obligation.
(4) The excess of the proceeds of the sale goes to the When a partnership is a party, the affidavit may be
debtor/mortgagor made and subscribed by one member thereof.
(5) Creditor/mortgagee can recover deficiency from
the debtor/mortgagor, except if covered by the VALIDITY OF CHATTEL MORTGAGE
Recto Law Chattel mortgage shall not be valid against any
person except the mortgagor, his executors or
REGISTRATION administrators unless:
PERIOD WITHIN WHICH REGISTRATION SHOULD BE MADE (1) The possession of the property is delivered to and
The law is substantially and sufficiently complied retained by the mortgagee or
with where the registration is made by the (2) The mortgage is recorded. (Sec. 4, Act 1508)
mortgagee before the mortgagor has complied with
his principal obligation and no right of innocent third FORMAL REQUISITES
persons is prejudiced. (a) It should substantially comply with the form
prescribed by law
EFFECT OF REGISTRATION (b) It should be signed by the person/s executing the
(1) Creates real rights same in the presence of two witnesses who shall
(2) Adds nothing to mortgage sign the mortgage as witnesses to the execution
thereof and
PAGE 296
(c) Each mortgagor and mortgagee or, in the does not within ten days after being requested
absence of the mortgagee, his agent or attorney, thereto by any person entitled to redeem, discharge
shall make and subscribe an affidavit in the form the mortgage in the manner provided by law, the
prescribed by law, which affidavit, signed by the person entitled to redeem may recover of the person
parties to the mortgage and the two witnesses whose duty it is to discharge the same, twenty pesos
and the certificate of the oath signed by the for his neglect and all damages occasioned thereby
person authorized to administer an oath shall be in an action in any court having jurisdiction of the
appended to such mortgage and recorded subject-matter thereof. [Sec. 8]
therewith. [Sec. 5, Act 1508]
When the condition of the chattel mortgage is
DESCRIPTION OF PROPERTY broken, a mortgagor or person holding a subsequent
The mortgaged property should be described such mortgage, or a subsequent attaching creditor may
as to enable the parties to the mortgage, or any redeem the same by paying or delivering to the
other person, after reasonable inquiry and mortgagee the amount due on such mortgage and
investigation, to identify the same. the reasonable costs and expenses incurred by such
breach of condition before the sale thereof. An
Large cattle as chattel mortgage attaching creditor who so redeems shall be
The description in the mortgage shall contain the subrogated to the rights of the mortgagee and
brands, class, sex, age, knots of radiated hair entitled to foreclose the mortgage in the same
commonly known as remolinos or cowlicks, and manner that the mortgagee could foreclose it
other marks of ownership as described and set forth Foreclosure
in the certificate of ownership of said animal/s, The mortgagee, his executor, administrator or assign
together with the number and place of issue of such may cause the mortgaged property or any part
certificates of ownership. thereof to be sold at a public auction by a public
officer:
Growing crops as chattel mortgage (1) After 30 days from the time of condition broken
The mortgage may contain an agreement stipulating (2) At a public place in the municipality where the
that the mortgagor binds himself properly to tend, mortgagor resides, or where the property is
care for and protect the crop while growing, and situated
faithfully and without delay to harvest the same, and (3) Provided at least 10 day-notice of the time, place,
that in default of the performance of such duties, the and purpose of such sale has been posted at 2 or
mortgagee may enter upon the premises, take all the more public places in such municipality, and
necessary measures for the protection of said crop, (4) The mortgagee, his executor, administrator, or
and retain possession thereof and sell the same, and assign shall notify the mortgagor or person
from the proceeds of such sale pay all expenses holding under him and the persons holding
incurred in caring for, harvesting, and selling the subsequent mortgages of the time and place of
crop and the amount of the indebtedness or sale at least 10 days previous to the sale:
obligation secured by the mortgage, and the surplus, (a) either by notice in writing directed to him or
if any, shall be paid to the mortgagor or those left at his abode, if within the municipality, or
entitled to the same. (b) sent by mail if he does not reside in such
municipality
PROPERTY COVERED BY CM
It is deemed to cover only the property described DISPOSITION OF PROCEEDS
therein and not like or substituted property The proceeds of the sale shall be applied to the
thereafter acquired by the mortgagor and placed in payment:
the same depository as the property originally (1) first, to the costs and expenses of mortgage
mortgaged, anything in the mortgage to the contrary (2) the residue shall be paid to persons holding
notwithstanding. [Sec. 8, Act 1508] subsequent mortgages in their order
(3) the balance, after paying the mortgages, shall be
Breaches paid to the mortgagor or person holding under
Failure of mortgagee to discharge the mortgage him on demand
If the mortgagee, assign, administrator, executor, or
either of them,
(1) after performance of the condition before or after
the breach thereof, or
(2) after tender of the performance of the condition,
Quasi-Contracts
at or after the time fixed for the performance,
A quasi-contract is that juridical relation resulting
PAGE 297
from a lawful, voluntary and unilateral act, and (5) Be personally liable for contracts which he
which has for its purpose the payment of indemnity entered into with third persons, even though he
to the end that no one shall be unjustly enriched or acted in the name of the owner, and there shall
benefited at the expense of another [Art. 2142] be no right of action between the owner and third
persons.
NEGOTIORUM GESTIO
(UNAUTHORIZED MANAGEMENT) The gestor shall not be personally liable for such
This takes place when a person voluntarily takes contracts, provided:
charge of another’s abandoned business or property (a) The owner has expressly or tacitly ratified the
without the owner’s authority [Art. 2144]. management, or
Reimbursement must be made to the gestor (i.e. one (b) When the contract refers to things pertaining
who carried out the business) for necessary and to the owner of the business. [Art. 2152]
useful expenses, as a rule.
Note: The responsibility of two or more gestors
THE OBLIGATION DOES NOT ARISE: shall be solidary, unless the management was
(1) When the property or business is not neglected or assumed to save the thing or business from
abandoned; imminent danger.
(2) If in fact the manager has been tacitly authorized
by the owner. OBLIGATIONS OF THE OWNER OF THE PROPERTY OR
BUSINESS
In the first case, the provisions of Articles 1317, 1403, Although the management was not expressly
No. 1, and 1404 regarding unauthorized contracts ratified, the owner who enjoys the advantages of the
shall govern. same shall:
(a) Be liable for the obligations incurred in his
In the second case, the rules on agency in Title X of interest
this Book shall be applicable. [Art. 2144] (b) Reimburse the gestor for the necessary and
useful expenses and for the damages the latter
OBLIGATIONS OF A GESTOR may have suffered in the performance of his
(1) Perform his duties with all the diligence of a good duties
father of a family
(2) Pay the damages which through his fault and The above obligations shall be incumbent upon the
negligence may be suffered by the owner of the owner if the management had for its purpose the
property/business under his management [Art. prevention of an imminent and manifest loss,
2145] although no benefit may have been derived. [Art.
(3) Be liable for the acts of the persons to whom he 2150]
delegated all or some of his duties. This is
without prejudice to the direct obligation of the If the owner did not derive any benefit and there was
delegate to the owner of the business. [Art. 2146] no imminent and manifest danger to the property or
(4) Be liable for any fortuitous event under the business, the owner would still be liable for the
following conditions: abovementioned obligations and expenses,
(a) If he undertakes risky operations which the provided:
owner was not accustomed to embark upon (a) The gestor has acted in good faith; AND
(b) If he has preferred his own interest to that of (b) The property or business is intact, ready to be
the owner returned to the owner. [Art. 2151]
(c) If he fails to return the property or business
after demand of the owner EFFECT OF RATIFICATION
(d) If he assumed management in bad faith [Art. The ratification of the management by the owner of
2147] the business produces the effects of an express
(e) If he is manifestly unfit to carry on the agency, even if the business may not have been
management successful. [Art. 2149]
(f) If by his intervention he prevented a more
competent person from taking up the EXTINGUISHMENT OF MANAGEMENT
management. [Art. 2148] (1) When the owner repudiates or puts an end
thereto
Note: The gestor shall not be liable for “e” and “f” (2) When the gestor withdraws from the
if the management was assumed to save the management, subject to [Art. 2144]
property or business from imminent danger.
PAGE 298
(3) By the death, civil interdiction, insanity or (2) For the return of the price or assign the action to
insolvency of the owner or the gestor. [Art. 2153] collect the sum if he has alienated the same. [Art.
2160]
SOLUTIO INDEBITI (UNDUE PAYMENT)
This takes place when something is received when EXEMPTION FROM THE OBLIGATION TO RESTORE THE
there is no right to demand it, and it was unduly PAYMENT UNDULY MADE
delivered through mistake. The recipient has the A person who, believing in good faith that the
duty to return it [Art. 2154]. payment was being made of a legitimate and
subsisting claim,
This situation covers payment by reason of a mistake (1) destroyed the document, or
in the construction or application of a doubtful or (2) allowed the action to prescribe, or
difficult question of law [Art. 2155] (3) gave up the pledges, or
(4) cancelled the guaranties for his right shall be
WHEN DEBT NOT YET DUE exempt from the obligation to restore.
If the payer was in doubt whether the debt was due,
he may recover if he proves that it was not due. [Art. The person who paid unduly may proceed only
2156] against the true debtor or the guarantors with regard
to whom the action is still effective. [Art. 2162]
RESPONSIBILITY OF TWO OR MORE PAYEES
When there has been payment of what is not due, PRESUMPTION OF PAYMENT BY MISTAKE, DEFENSE
their responsibility is solidary. The presumption arises if something which had
never been due or had already been paid was
WHEN MONEY OR THING DELIVERED IS OWNED BY THIRD delivered; but he from whom the return is claimed
PERSON may prove that the delivery was made out of
The payee cannot demand that the payor prove his liberality or for any other just cause.
ownership of the thing delivered.
Nevertheless, should he discover that the thing has OTHER QUASI-CONTRACTS
been stolen and who its true owner is, he must (1) When, without the knowledge of the person
advise the latter. obliged to give support, it is given by a stranger,
the latter shall have a right to claim the same
If the owner, in spite of such information, does not from the former, unless it appears that he gave it
claim it within the period of one month, the payee out of piety and without intention of being repaid.
shall be relieved of all responsibility by returning the [Art. 2164]
thing deposited to the payor. (2) When funeral expenses are borne by a third
person, without the knowledge of those relatives
If the payee has reasonable grounds to believe that who were obliged to give support to the
the thing has not been lawfully acquired by the deceased, said relatives shall reimburse the third
payor, the former may return the same. [Art. 2158] person, should the latter claim reimbursement.
[Art. 2165]
LIABILITY OF PAYEE (3) When the person obliged to support an orphan,
If in bad faith, he shall be liable: or an insane or other indigent person unjustly
(1) For legal interest if a sum of money is involved, or refuses to give support to the latter, any third
(2) For the fruits received or which should have been person may furnish support to the needy
received if the thing produces fruits individual, with right of reimbursement from the
AND person obliged to give support. The provisions of
(3) For any loss or impairment of the thing for any this article apply when the father or mother of a
cause, and child under eighteen years of age unjustly refuses
(4) For damages to the person who delivered the to support him. [Art. 2166]
thing, until it is recovered. [Art. 2159] (4) When through an accident or other cause a
person is injured or becomes seriously ill, and he
If in good faith, he shall be liable: is treated or helped while he is not in a condition
(1) For the impairment or loss of the thing certain to give consent to a contract, he shall be liable to
and determinable or its accessories and pay for the services of the physician or other
accessions insofar as he has thereby been person aiding him, unless the service has been
benefited. rendered out of pure generosity. [Art. 2167]
(5) When during a fire, flood, storm, or other
calamity, property is saved from destruction by
PAGE 299
another person without the knowledge of the (2) Claims arising from misappropriation, breach of
owner, the latter is bound to pay the former just trust, or malfeasance by public officials
compensation. [Art. 2168] committed in the performance of their duties, on
(6) When the government, upon the failure of any the movables, money or securities obtained by
person to comply with health or safety them;
regulations concerning property, undertakes to
do the necessary work, even over his objection, he (3) Claims for the unpaid price of movables sold, on
shall be liable to pay the expenses. [Art. 2169] said movables, so long as they are in the
(7) When by accident or other fortuitous event, possession of the debtor, up to the value of the
movables separately pertaining to two or more same; and if the movable has been resold by the
persons are commingled or confused, the rules debtor and the price is still unpaid, the lien may
on co-ownership shall be applicable. [Art. 2170] be enforced on the price; this right is not lost by
(8) The rights and obligations of the finder of lost the immobilization of the thing by destination,
personal property shall be governed by Articles provided it has not lost its form, substance and
719 and 720. [Art. 2171] identity; neither is the right lost by the sale of the
(9) The right of every possessor in good faith to thing together with other property for a lump
reimbursement for necessary and useful sum, when the price thereof can be determined
expenses is governed by Article 546. [Art. 2172] proportionally;
(10) When a third person, without the knowledge of
the debtor, pays the debt, the rights of the former (4) Credits guaranteed with a pledge so long as the
are governed by Articles 1236 and 1237. [Art. 2173] things pledged are in the hands of the creditor, or
(11) When in a small community a nationality of the those guaranteed by a chattel mortgage, upon
inhabitants of age decide upon a measure for the things pledged or mortgaged, up to the value
protection against lawlessness, fire, flood, storm thereof;
or other calamity, any one who objects to the plan
and refuses to contribute to the expenses but is (5) Credits for the making, repair, safekeeping or
benefited by the project as executed shall be preservation of personal property, on the
liable to pay his share of said expenses. [Art. 2174] movable thus made, repaired, kept or possessed;
(12) Any person who is constrained to pay the taxes
of another shall be entitled to reimbursement (6) Claims for laborers' wages, on the goods
from the latter. [Art. 2175] manufactured or the work done;
(7) For expenses of salvage, upon the goods

salvaged;
Concurrence and Preference (8) Credits between the landlord and the tenant,
of Credits arising from the contract of tenancy on shares, on
the share of each in the fruits or harvest;
MEANING OF CONCURRENCE AND PREFERENCE
Concurrence of Credit implies possession by two or (9) Credits for transportation, upon the goods
more creditors of equal right or privileges over the carried, for the price of the contract and
same property or all of the property of a debtor. incidental expenses, until their delivery and for
thirty days thereafter;
Preference of Credit is the right held by a creditor to
be preferred in the payment of his claim above (10) Credits for lodging and supplies usually
others out of the debtor’s assets. furnished to travelers by hotel keepers, on the
movables belonging to the guest as long as such
PREFERRED CREDITS ON SPECIFIC MOVABLES movables are in the hotel, but not for money
[ART. 2241] loaned to the guests;
With reference to specific movable property of the
debtor, the following claims or liens shall be (11) Credits for seeds and expenses for cultivation and
preferred: harvest advanced to the debtor, upon the fruits
harvested;
(1) Duties, taxes and fees due thereon to the State or
any subdivision thereof; (12) Credits for rent for one year, upon the personal
property of the lessee existing on the immovable
PAGE 300
leased and on the fruits of the same, but not on (9) Claims of donors or real property for pecuniary
money or instruments of credit; charges or other conditions imposed upon the
donee, upon the immovable donated;
(13) Claims in favor of the depositor if the depositary
has wrongfully sold the thing deposited, upon the (10) Credits of insurers, upon the property insured,
price of the sale. for the insurance premium for two years.
In the foregoing cases, if the movables to which the PREFERRED CREDITS ON OTHER PROPERTY,
lien or preference attaches have been wrongfully REAL AND PERSONAL [ART. 2244]
taken, the creditor may demand them from any With reference to other property, real and personal,
possessor, within thirty days from the unlawful of the debtor, the following claims or credits shall be
seizure. preferred in the order named:
PREFERRED CREDITS ON SPECIFIC i. Proper funeral expenses for the debtor, or

IMMOVABLES AND REAL RIGHTS [ART. 2242] children under his or her parental authority who
With reference to specific immovable property and have no property of their own, when approved by
real rights of the debtor, the following claims, the court;
mortgages and liens shall be preferred, and shall
constitute an encumbrance on the immovable or real ii. Credits for services rendered the insolvent by
right: employees, laborers, or household helpers for one
year preceding the commencement of the
(1) Taxes due upon the land or building; proceedings in insolvency;
(2) For the unpaid price of real property sold, upon iii. Expenses during the last illness of the debtor or
the immovable sold; of his or her spouse and children under his or her
parental authority, if they have no property of
(3) Claims of laborers, masons, mechanics and other their own;
workmen, as well as of architects, engineers and
contractors, engaged in the construction, iv. Compensation due the laborers or their
reconstruction or repair of buildings, canals or dependents under laws providing for indemnity
other works, upon said buildings, canals or other for damages in cases of labor accident, or illness
works; resulting from the nature of the employment;
(4) Claims of furnishers of materials used in the v. Credits and advancements made to the debtor
construction, reconstruction, or repair of for support of himself or herself, and family,
buildings, canals or other works, upon said during the last year preceding the insolvency;
buildings, canals or other works;
vi. Support during the insolvency proceedings, and
(5) Mortgage credits recorded in the Registry of for three months thereafter;
Property, upon the real estate mortgaged;
vii. Fines and civil indemnification arising from a
(6) Expenses for the preservation or improvement of criminal offense;
real property when the law authorizes
reimbursement, upon the immovable preserved viii. Legal expenses, and expenses incurred in the
or improved; administration of the insolvent's estate for the
common interest of the creditors, when properly
(7) Credits annotated in the Registry of Property, in authorized and approved by the court;
virtue of a judicial order, by attachments or
executions, upon the property affected, and only ix. Taxes and assessments due the national
as to later credits; government, other than those mentioned in
Articles 2241, No. 1, and 2242, No. 1;
(8) Claims of co-heirs for warranty in the partition of
an immovable among them, upon the real x. Taxes and assessments due any province, other
property thus divided; than those referred to in Articles 2241, No. 1, and
2242, No. 1;
PAGE 301
xi. Taxes and assessments due any city or thereof [Art. 2247]
municipality, other than those indicated in Articles (3) Those credits which enjoy preference in relation
2241, No. 1, and 2242, No. 1; to specific real property or real rights exclude all
others to the extent of the value of the
xii. Damages for death or personal injuries caused by immovable or real right to which the preference
a quasi-delict; refers [Art. 2248].
(4) If there are 2 or more credits with respect to the
xiii. Gifts due to public and private institutions of same specific real property or real rights, they shall
charity or beneficence; be satisfied pro rata, after the payment of the
taxes and assessment of the taxes and
xiv. Credits which, without special privilege, appear in assessments upon the immovable property or
(a) a public instrument; or (b) in a final judgment, real right [Art. 2249].
if they have been the subject of litigation. These (5) The excess, if any, after the payment of the
credits shall have preference among themselves credits which enjoy preference with respect to
in the order of priority of the dates of the specific property, real or personal, shall be
instruments and of the judgments, respectively. added to the free property which the debtor may
have, for the payment of other credits [Art.
EXEMPT PROPERTY 2250].
(1) Present property: (6) Those credits which do not enjoy any preference
(a) Family home. [Arts. 152, 153 and 155, CC] with respect to specific property, and those
(b) Right to receive support, as well as money or which enjoy preference, as to the amount not
property obtained by such support, shall not paid, shall be satisfied according to the
be levied upon on attachment or execution. following rules:
[Art. 205, CC] (a) Order established by Art 2244
(c) Sec. 13, Rule 39, ROC. (b) Common credits referred to in Art 2245 shall
(d) Sec 118, Public Land Act. [CA 141, as be paid pro rata regardless of dates [Art.
amended] 2251].
(2) Future property:
A debtor who obtains a discharge from his debts
on account of insolvency, is not liable for the
unsatisfied claims of his creditors with said
property. [Sec. 68 and 69, Insolvency Law, Act
1956]
(3) Property in custodia legis and of public dominion.
CLASSIFICATION OF CREDITS
(1) Special preferred credits. [Art. 2241 and 2242, CC]
(a) Considered as mortgages or pledges of real or
personal property or liens within the purview
of legal provisions governing insolvency.
(b) Taxes due to the State shall first be satisfied.
(2) Ordinary preferred credits [Art. 2244] – Preferred
in the order given by law.
(3) Common credits [Art. 2245] – Credits of any other
kind or class, or by any other right or title not
comprised in Arts. 2241- 2244 shall enjoy no
preference.
ORDER OF PREFERENCE OF CREDITS

(1) Credits which enjoy preference with respect to
specific movables exclude all others to the extent
of the value of the personal property to which the
preference refers [Art. 2246].
(2) If there are 2 or more credits with respect to the
same specific movable property, they shall be
satisfied pro rata, after the payment of duties,
taxes and fees due the State or any subdivision
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UP COLLEGE OF LAW CREDIT TRANSACTIONS BAR OPERATIONS COMMISSION

TWO TYPES OF CREDIT Commodatum Mutuum

(4) To pay damages to bailee for known hidden flaws

1951. [Art. 1944] forbearance of money, the interest due should be

ELEMENTS OF USURY OBLIGATIONS OF DEPOSITOR

CONTRACT OF DEPOSIT IS GENERALLY KINDS OF DEPOSIT

KINDS OF NECESSARY DEPOSITS

EXTENT OF LIABILITY UNDER ART.1998 JUDICIAL DEPOSIT

(2) The loss is due to the acts of the guests, his

obligation of the principal debtor in case the latter

GUARANTY DISTINGUISHED FROM SURETYSHIP Exceptions

condition precedent are valid and binding

fees when appropriate, even without NATURE AND EXTENT OF SURETYSHIP

adequate counter-bonds or indemnity the satisfaction of the obligation –

Exception: Prior consent or subsequent (b) By judicial demand

General Rule: Guarantor has no cause of action EXTINGUISHMENT OF GUARANTY

BONDSMAN NOT ENTITLED TO EXCUSSION [2084] In case of doubt as to whether a transaction is a

Pledge ESSENTIAL REQUIREMENTS

Chattel Mortgager Pledge property, but ownership of the property is not

A suit for the recovery of the deficiency after the

Rules of Court [Art. 2137] REGISTRATION OF ASSIGNMENT OF MORTGAGE NOT

(7) For expenses of salvage, upon the goods

PREFERRED CREDITS ON SPECIFIC i. Proper funeral expenses for the debtor, or

ORDER OF PREFERENCE OF CREDITS

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