IV. RULES GOVERNING GUARANTY V. GUARANTY DISTIGUISHED FROM OTHERS VI. THE GUARANTOR VII. EFFECTS OF GUARANTY VIII.

EXTINGUISHMENT OF GUARANTY I. Definition GUARANTY is a contract whereby a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. (Art. 2047) While a surety undertakes to pay if the principal does not pay, the guarantor only binds himself to pay if the principal cannot pay (See benefit of excussion, 2058). II. Characteristics 1. Accessory dependent for its existence upon the principal obligation guaranteed by it; 2. Subsidiary and conditional takes effect only when the principal debtor fails in his obligation 3. Unilateral a. It gives rise only to a duty on the part of the guarantor in relation to the creditor and not vice versa b. It may be entered into even without the intervention of the principal debtor. 4. Guarantor must be a person distinct from the debtor a person cannot be the personal guarantor of himself III. Classification CLASSIFICATION OF GUARANTY 1. Guaranty in the broad sense: a. Personal guaranty is the credit given by the person who guarantees the fulfillment of the principal obligation; or b. Real guaranty is property, movable, or immovable (2132) guaranty is immovable

(2093) guaranty is movable 2. As to its origin: a. Conventional constituted by agreement of the parties (2051[1]) b. Legal imposed by virtue of a provision of law c. Judicial required by a court to guarantee the eventual right of one of the parties in a case. 3. As to consideration: a. Gratuitous guarantor does not receive any price or remuneration for acting as such (2048) b. Onerous one where the guarantor receives valuable consideration for his guaranty 4. As to person guaranteed: a. Single constituted solely to guarantee or secure performance by the debtor of the principal obligation; b. Double or sub-guaranty constituted to secure the fulfillment by the guarantor of a prior guaranty 5. As to its scope and extent: a. Definite where the guaranty is limited to the principal obligation only, or to a specific portion thereof; b. Indefinite or simple where the guaranty included all the accessory obligations of the principal, e.g. costs, including judicial costs. IV. Rules Governing Guaranty 1. A guaranty is generally gratuitous (2048) a. General Rule: Guaranty is gratuitous b. Exception: When there is a stipulation to the contrary 2. On the cause of a guaranty contract SEVERINO v SEVERINO: A guarantor or surety is bound by the same consideration that makes the contract effective between the principal parties thereto. a. Presence of cause which supports

principal obligation: Cause of the contract is the same cause which supports the obligation as to the principal debtor. The consideration which supports the obligation as to the principal debtor is a sufficient consideration to support the obligation of a guarantor or surety. b. Absence of direct consideration or benefit to guarantor: Guaranty or surety agreement is regarded valid despite the absence of any direct consideration received by the guarantor or surety, such consideration need not pass directly to the guarantor or surety; a consideration moving to the principal will suffice.a CIVIL LAW REVIEWER Chapter IV. GUARANTY 320 CREDIT TRANSACTIONS 3. A married woman who is a guarantor binds only her separate property, generally (2049) Exceptions: a. With her husbands consent, bind the community or conjugal partnership property b. Without husbands consent, in cases provided by law, such as when the guaranty has redounded to the benefit of the family. 4. A guaranty need not be undertaken with the knowledge of the debtor (2050) a. Guaranty is unilateral exists for the benefit of the creditor and not for the benefit of the principal debtor b. Creditor has every right to take all possible measures to secure payment of his credit guaranty can be constituted even against the will of the principal debtor However, as regards payment made by a

third person: a. Payment without the knowledge or against the will of the debtor: as the payment has been beneficial to the debtor creditor to subrogate him in his rights b. Payment with knowledge or consent of the debtor: Subrogated to all the rights which the creditor had against the debtor 5. The guaranty must be founded on a valid principal obligation (2052[1]) an indispensable condition for its existence that there must be a principal obligation. Hence, if the principal obligation is void, it is also void. 6. A guaranty may secure the performance of a voidable, unenforceable, and natural obligation (2052[2]) A guaranty may secure the performance of a: a. Voidable contract such contract is binding, unless it is annulled by a proper court action b. Unenforceable contract because such contract is not void c. Natural obligation the creditor may proceed against the guarantor although he has no right of action against the principal debtor for the reason that the latters obligation is not civilly enforceable. When the debtor himself offers a guaranty for his natural obligation, he impliedly recognizes his liability, thereby transforming the obligation from a natural into a civil one. 7. A guaranty may secure a future debt (2053)

Continuing Guaranty or Suretyship: DIO v. CA: Under the Civil Code, a guaranty may be given to secure even future debts, the amount of which may not known at the time the guaranty is executed. This is the basis for contracts denominated as continuing guaranty or suretyship. Future debts, even if the amount is not yet known, may be guaranteed but there can be no claim against the guarantor until the amount of the debt is ascertained or fixed and demandable Rationale: A contract of guaranty is subsidiary. a. To secure the payment of a loan at maturity surety binds himself to guarantee the punctual payment of a loan at maturity and all other obligations of indebtedness which may become due or owing to the principal by the borrower. b. To secure payment of any debt to be subsequently incurred a guaranty shall be construed as continuing when by the terms thereof it is evident that the object is to give a standing credit to the principal debtor to be used from time to time either indefinitely or until a certain period, especially if the right to recall the guaranty is expressly reserved. c. To secure existing unliquidated debts refers to debts existing at the time of the constitution of the guaranty but the amount thereof is unknown and not to debts not yet incurred and existing at that time. d. The surety agreement itself is valid and binding even before the principal obligation intended to be secured thereby is born, any more than there

would be in saying that obligations which are subject to a condition CIVIL LAW REVIEWER Chapter IV. GUARANTY 321 CREDIT TRANSACTIONS precedent are valid and binding before the occurrence of the condition precedent. A continuing guaranty is one which is not limited to a single transaction, but which contemplates a future course of dealing, covering a series of transactions, generally for an indefinite time or until revoked. It is prospective in its operation and is generally intended to provide security with respect to future transactions within certain limits, and contemplates a succession of liabilities, for which, as they accrue, the guarantor becomes liable. A continuing guaranty is one which covers all transactions, including those arising in the future, which are within the description or contemplation of the contract, of guaranty, until the expiration or termination thereof. A guaranty shall be construed as continuing when by the terms thereof it is evident that the object is to give a standing credit to the principal debtor to be used from time to time either indefinitely or until a certain period, especially if the right to recall the guaranty is expressly reserved.

Where the contract of guaranty states that the same is to secure advances to be made "from time to time" the guaranty will be construed to be a continuing one. 8. A guaranty may secure the performance of a conditional obligation (2053) a. Principal obligation subject to a suspensive condition the guarantor is liable only after the fulfillment of the condition. b. Principal obligation subject to a resolutory condition the happening of the condition extinguishes both the principal obligation and the guaranty 9. A guarantors liability cannot exceed the principal obligation (2054) General Rule: Guaranty is a subsidiary and accessory contract guarantor cannot bind himself for more than the principal debtor and even if he does, his liability shall be reduced to the limits of that of the debtor. But the guarantor may bind himself for less than that of the principal. Exceptions: a. Interest, judicial costs, and attorneys fees as part of damages may be recovered creditors suing on a suretyship bond may recover from the surety as part of their damages, interest at the legal rate, judicial costs, and attorneys fees when appropriate, even without stipulation and even if the surety would thereby become liable to pay more than the total amount stipulated in the bond. Interest runs from: demand); or the surety until the principal

obligation is fully paid (upon extrajudicial demand) Rationale: Surety is made to pay, not by reason of the contract, but by reason of his failure to pay when demanded and for having compelled the creditor to resort to the courts to obtain payment. b. Penalty may be provided a surety may be held liable for the penalty provided for in a bond for violation of the condition therein. Principals liability may exceed guarantors obligations The amount specified in a surety bond as the suretys obligation does not limit the extent of the damages that may be recovered from the principal, the latters liability being governed by theobligations he assumed under his contract 10. The existence of a guaranty is not presumed (2055) Guaranty requires the expression of consent on the part of the guarantor to be bound. It cannot be presumed because of the existence of a contract or principal obligation. Rationale: a. There be assurance that the guarantor had the true intention to bind himself; b. To make certain that on making it, the guarantor proceeded with consciousness of what he was doing. 11. Contract of guaranty is covered by the Statute of Frauds (See Art. 1403(2(a)) but must so be reduced into writing. Hence, it shall be unenforceable by action, unless the same or some note or memorandum thereof be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without

the writing, or a secondary evidence of which may have passed under the mortgage or divests the property of the lien which the mortgage may have created 2. Kinds: a. Equity of redemption: in judicial foreclosure of real estate mortgage under the ROC, it is the right of the mortgagor to redeem the mortgaged property by paying the secured debt within the 120 day period from entry of judgment or after the foreclosure sale, but before the sale of the mortgaged property or confirmation of sale right of redemption, e.g., by filing an action to enforce the right to redeem b. Right of redemption: in extrajudicial foreclosure of real estate mortgage, the right of the mortgagor to redeem the property within a certain period after it was sold for the satisfaction of the debt. one year from the registration of the TCT CIVIL LAW REVIEWER Chapter VII. PLEDGE, MORTGAGE, ANTICHRESIS 336 CREDIT TRANSACTIONS three months from the foreclosure tender of redemption price to preserve right of redemption NOTE: There is no right of redemption in pledge and chattel mortgage. MEDIDA v CA: The rule up to now is that the right of a purchaser at a foreclosure sale is merely inchoate until after the period of redemption has expired without the right being exercised. The title to land sold under mortgage foreclosure remains, in the

mortgagor or his grantee until the expiration of the redemption period and conveyance by the master's deed V. Antichresis ANTICHRESIS is a contract whereby the creditor acquires the right to receive the fruits of an immovable of the debtor, with the obligation to apply then to the payment of the interest, if owing, and thereafter to the principal of the credit (Art 2132) CHARACTERISTICS 1. Accessory contract it secures the performance of a principal obligation 2. formal contract it must be in a specified form to be valid (Art. 2134) SPECIAL REQUISITES: 1. it can cover only the fruits of an immovable property 2. delivery of the immovable is necessary for the creditor to receive the fruits and not that the contract shall be binding 3. amount of principal and interest must be specified in writing 4. express agreement that debtor will give possession of the property to creditor and that the latter will apply the fruits to the interest, if any, then to the principal of his credit 5. NOTE: The obligation to pay interest is not of the essence of the contract of antichresis; there being nothing in the Code to show that antichresis is only applicable to securing the payment of interest-bearing loans. On the contrary, antichresis is susceptible of guaranteeing all kinds of obligations, pure or conditional OBLIGATIONS OF ANTICHRETIC CREDITOR 1. to pay taxes and charges on the estate, including necessary expenses. Creditor may avoid said obligation by: a. compelling debtor to reacquire

enjoyment of the property b. by stipulation to the contrary 2. to apply all the fruits, after receiving them, to the payment of interest, if owing, and thereafter to the principal 3. to render an account of the fruits to the debtor 4. to bear the expenses necessary for its preservation and repair REMEDIES OF CREDITOR IN CASE OF NONPAYMENT OF DEBT 1. action for specific performance 2. Petition for the sale of the real property as in a foreclosure of mortgages under Rule 68 of the Rules of Court a. The parties, however, may agree on an extrajudicial foreclosure in the same manner as they are allowed in contracts of mortgage and pledge (Tavera v. El Hogar Filipino, Inc. 68 Phil 712) b. A stipulation authorizing the antichretic creditor to appropriate the property upon the non-payment of the debt within the agreed period is void (Art. 2088) VI. Chattel Mortgage CHATTEL MORTGAGE is a contract by virtue of which a personal property is recorded in the Chattel Mortgage Register as security for the performance of an obligation. If the movable, instead of being recorded, is delivered to the creditor, it is pledge and not chattel mortgage. LAWS GOVERNING CHATTEL MORTGAGE 1. Chattel Mortgage Law (Act.1508, as amended). 2. New Civil Code. 3. Revised Administrative Code. 4. Revised Penal Code. 5. Ship Mortgage Decree of 1978 (PD 1521) governs mortgage of vessels of domestic ownership.

AFFIDAVIT OF GOOD FAITH 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 CIVIL LAW REVIEWER Chapter VII. PLEDGE, MORTGAGE, ANTICHRESIS 337 CREDIT TRANSACTIONS and that the same is a just and valid obligation and one not entered into for the purpose of fraud. EFFECT OF REGISTRATION 1. Creates real rights. 2. Adds nothing to mortgage. Note: Registration of assignment of mortgage is not required. RIGHT OF REDEMPTION OF MORTGAGE 1. When the condition of a chattel mortgage is broken, the following may exercise redemption: a. Mortgagor. b. Person holding a subsequent mortgage. c. Subsequent attaching creditor. 2. An attaching creditor who so redeems shall be subrogated to the rights of the mortgagee and entitled to foreclose the mortgage in the same manner as a mortgagee. 3. Redemption is made by paying or delivering to the mortgagee the amount due on such mortgage and the costs and expenses incurred by such breach of condition before the sale. FORECLOSURE OF CHATTEL MORTGAGE 1. Public sale. 2. Private sale There is nothing illegal, immoral or against public order in an agreement for the private sale of the personal properties covered by chattel mortgage. PERIOD TO FORECLOSE

1. After 30 days from the time of the condition is broken. 2. The 30-day period is the minimum period after violation of the mortgage condition for the creditor to cause the sale at public auction with at least 10 days notice to the mortgagor and posting of public notice of time, place, and purpose of such sale, and is a period of grace for the mortgagor, to discharge the obligation. 3. After the sale at public auction, the right of redemption is no longer available to the mortgagor. CIVIL ACTION TO RECOVER CREDIT 1. Independent action to recover debt is not required. 2. However, mortgage lien is deemed abandoned by obtaining a personal judgment. RIGHT OF MORTGAGEE TO RECOVER DEFICIENCY 1. Where mortgage foreclosed: Creditor may maintain action for deficiency although the Chattel Mortgage Law is silent on this point, because a chattel mortgage is given only as a security and not as payment of the debt. 2. Where mortgage constituted as security for purchase of personal property payable in installments: No deficiency judgment can be asked and any contrary agreement shall be void. 3. Where mortgaged property subsequently attached and sold: Mortgagee is entitled to deficiency judgment in an action for specific performance. APPLICATION OF PROCEEDS OF SALE 1. Costs and expenses of keeping and sale. 2. Payment of the obligation. 3. Claims of persons holding subsequent mortgages in their order. 4. Balance, if any, shall be paid to the mortgagor, or person holding rights under

him. CIVIL LAW REVIEWER Chapter VIII. PHILIPPINE BULK SALES LAW 338 CREDIT TRANSACTIONS Chapter VIII. Concurrence and Preference of Credits I. GENERAL PROVISIONS II. CLASSIFICATION OF CREDITS III. PREFERENCE OF CREDITS CONCURRENCE OF CREDIT implies possession by two or more creditors of equal right or privileges over the same property or all of the property of a debtor. PREFERENCE OF CREDIT is the right held by a creditor to be preferred in the payment of his claim above other out of the debtors assets. I. General Provisions 1. The debtor is liable with all his property, present and future, for the fulfillment of his obligations, subjects to exemptions provided by law. Exempted property: a. Present property: 155, CC) money or property obtained by such support, shall not be levied upon on attachment or execution. (Art. 205, CC)

as amended) b. 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) c. Property in custodia legis and of public dominion.

2. Insolvency shall be governed by the Insolvency Law. (Act 1956, as amended) 3. Exemption of conjugal property or absolute community or property, provided that: a. Partnership or community subsists. b. Obligations of the insolvent spouse have not redounded to the benefit of the family. 4. If there is co-ownership, and one of the coowners is the insolvent debtor, his undivided share or interest in the property shall be possessed by the assignee in insolvency proceedings because it is part of his assets. 5. Property held by the insolvent debtor as a trustee of an express or implied trust, shall be excluded from the insolvency proceedings II. 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. III. 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. 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 thereof 3. Those credits which enjoy preference in relation to specific real property or real rights exclude all others to the extent of the value of the immovable or real right to which the preference refers. 4. If there are 2 or more credits with respect to the same specific real property or real rights, they shall be satisfied pro rata, after the payment of the taxes and assessment of the taxes and assessments upon the immovable property or real right. 5. The excess, if any, after the payment of the credits which enjoy preference with respect to specific property, real or personal, shall be added to the free property which the debtor may have, for the payment of other credits. 6. Those credits which do not enjoy any preference with respect to specific property, and those which enjoy preference, as to the amount not paid, shall be satisfied according to the following rules: a. Order established by Art 2244 b. Common credits referred to in Art 2245 shall be paid pro rata regardless of dates -end of Credit Transac