Credit Cases

Grace and Clarz Credit Transcription Notes for Prefi Feb.
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CONTRACTS OF SECURITY All the properties of the debtor whether personal or real properties will also answer for his obligation. Receivable- 200,000 Cash Land Buildings Cars ---------------------------2,000,000 200,000 ---------------------------1,800,000 case the debtor cannot pay. If this guarantor undertakes to be bound solidarily with the principal debtor, it is already called suretyship, he is bound as solidary debtor. In solidary obligation, all for one, one for all. Creditors can go after him alone. He can be sued independently without suing first the debtor. (Co-maker is actually solidary debtor or co-debtor or surety as far as the maker is concerned; principal debtor as far as creditor is concerned). Pacific Banking Corp vs. IAC Spouses Roberto and Celia Regala applied for a credit card with the Pacific Banking Corporation but the husband signed a Guarantors Undertaking but what he understood to be bound was that he agreed to be bound jointly and severally with his wife. When he was sued for payment of the unpaid credit card obligation of his wife, he said he is only bound as guaranty. Wife did not file answer and was declared in default. Regala contended that you cannot prove insolvency of the wife because she did not answer. SC said the liability is not that of a guarantor even if what is signed was denominated as guarantors undertaking because he undertook to be bound jointly and severally. Dont rely on the denomination you are signing, read the fine print. E. Zobel Inc. vs CA Spouses Labella applied for a loan secured by a chattel mortgage over a vessel they were buying plus there was a Continuing Guaranty undertaking issued by E. Zobel but the undertaking contains that it obligates you as surety. There was a chattel mortgage which the bank failed to register, so they cannot foreclose. Under the law on guaranty, the guarantor who paid is subrogated to the rights of creditor. If this were guaranty, and if E. Zobel paid, he would have been subrogated to the rights of the bank as mortgagee and it would have been entitled to foreclose the mortgage. But since the bank cannot foreclose the mortgage because of its own fault, the guarantor cannot also foreclose. The law says that if the guarantor cannot be subrogated to the rights of the mortgagee, then the guaranty is invalid. SC said well, youre right but that does not apply to surety. That applies only to guarantors. SC said bound as surety. Machetti vs. Hospicio de San Jose SC said notwithstanding the use of the words guaranty or guarantee, circumstances may be shown to convert the contract into suretyship. GUARANTY A contract whereby a third person other than the debtor (debtor cannot by himself guaranty) undertakes to pay in case the principal debtor cannot pay. It is an accessory contract or undertaking; there must be a principal undertaking (you cannot secure something that does not exist) Security for fulfillment of a principal obligation. There must be a valid obligation even if voidable, conditional, unenforceable- all these can be secured by guaranty. It is subsidiary obligation- guarantor is liable only if the principal debtor cannot pay If guarantor binds himself solidarily, he is not bound subsidiarily anymore but principally.
Loan- 1,000,000 + 500,000 -------------------1,500,000
The assets which are supposed to answer for a loan can be decreased by a) failure to collect a receivable. b) fraudulent alienation like I will make it appear that I am donating this land to you. In order for me so that my creditors cannot go after my properties anymore. Total asset can also be decreased by: c) non-fraudulent alienation like selling the car, you get cash but it fastly dissipates, so assets decreased. Or, d) increase in the obligation, the possibility of all the obligation being paid would be lessened because the assets also did not increase. If you are the creditor what would you do? If the debtor cannot recover/collect the receivable, if you are the creditor, you can exercise subrogatory action. In case of fraudulent alienation, you can sue for rescission. If non-fraudulent, you cannot stop the debtor from disposing his property. You cannot also prevent him from incurring further loan. You require your debtor to provide a security. 2 kinds of security undertaking: 1. Personal security undertaking- it is the person himself who undertakes to pay the obligation if the principal debtor cannot pay or does not pay. This is called either guaranty or suretyship. That person who undertakes to pay under a suretyship is called a surety. The person who undertakes to pay an obligation as an ordinary guarantor is called guarantor but if solidary guarantor, the undertaking is suretyship and you are called a surety. Real security undertaking- this does not mean real property only. Property is subjected as security for the fulfillment of the obligation, not the person himself who promises to pay if the principal debtor cannot pay or does not pay but property is subjected as security. For example, I will obtain a loan from you and I will constitute a mortgage. If there is default, there is foreclosure of mortgage and the proceeds will cover payment of the obligation. Examples are pledge, real and chattel mortgage, antichresis (you deliver the fruits to creditor as payment for interest and the excess applies to the principal obligation).
2.
Characteristics: A. Subsidiary- liable only if principal debtor cannot pay Castellvi de Higgins vs. Sellner SC said a surety and a guarantor are alike in that each promises to answer for the debt of another A surety and a guarantor are unlike- surety admits liability as a regular party to the principal undertaking; guarantor- regular party to an independent undertaking from the obligation
Personal security contracts Contract of guaranty You have a principal debtor and principal contract It is an accessory contract. The person undertakes to pay the obligation of the principal debtor in
Grace and Clarz Credit Transcription Notes for Prefi Feb. 11

of the principal debtor. Surety- charged as original promissor; guarantor- merely collateral. Surety- obligation is primary; guarantor- only secondary Piczon vs. Piczon If you sign an undertaking for payment of a corporate obligation and you sign in the capacity of the president of the corporation, the principal stockholder of the corporation, it does not make you a surety even if president. SC said mere signing as president and principal stockholder of corporation does not bind the person as surety. Merely bound as guarantor, go against corporation first. Palmares vs. CA Even if a person binds himself with the principal debtor as surety, his character as guarantor is not lost in the sense that he can still recover from the principal debtor. Surety really is not the principal debtor, he only binds himself solidarily; he can still recover but he must pay first. He cannot insist that the creditors go to the principal debtors first before he can be held liable. He can be sued independently. He can recover otherwise unjust enrichment. Solidary guarantor vs. solidary debtor (table in outline) B. Consensual As to perfection- guaranty is a consensual contract. It is covered by the Statute of Frauds, consensual but cannot be enforced (in writing to be enforceable) but perfectly valid. It is a consensual contract but must be in writing to be enforced or must be covered by the statute of frauds. Gratuitous or Onerous A guarantee (just like deposit) can be gratuitous or onerous. Severino vs. Severino They had a dispute over the estate of the deceased father who was survived by the wife. Another lady claiming to be recognized natural daughter. The wife and this woman filed a case for their shares in the estate against the other children of the deceased person. In order to put an end, one of the sons decided to take over the property of the estate and promised to pay the surviving wife and this woman total sum of 100,000. At the time of the compromise agreement, he paid 40,000 so there was a remaining balance of 60,000. This undertaking by the son was secured by the promise of another person. He guaranteed the payment. The son did not pay. So the woman went after the guarantor. The guarantor said that he was not liable because there was no consideration. SC said guaranty can be gratuitous or onerous. There need not be a valuable consideration received by the guarantor for his promise because what supports the contract of guaranty is the same consideration that supports the principal obligation. Principal obligation was the promise of the son to pay the wife and half-sister, the consideration was the dropping of the case. Kinds of Guaranty A. By its origin a. Conventional- by agreement of the parties b. Legal- by substantive or procedural law c. Judicial- required by court order B. By extent a. Indefinite or unlimited or simple- covers principal obligation and accessory (ObliCon) If a third person pays without the knowledge or consent of debtor, such person can recover but only to the extent that the principal debtor was benefited and he is not subrogated the rights of the creditor (same in credit). A third person can secure the principal obligation of the debtor without the consent, even against the will of the principal debtor. But he can recover only the extent that the debtor is benefited and he cannot also exercise subrogatory action. If on top of the guaranty, the obligation is secured by a mortgage and he pays the creditor, he is not substituted as the new mortgagee, he cannot recover from the debtor, he cannot foreclose the mortgage which was previously constituted in favor of the creditor. De Guzman vs. Santos A partnership was sued for sum of money. There was default, a writ of preliminary attachment was issued and properties of the individual partners were being attached. So to discharge the attachment, a counterbond was put up by the partners guaranteed by two persons as guarantors. After the case, the partnership was ordered to pay but they did not pay so the guarantors paid. Then one of the guarantors tried to collect from one of the partners for reimbursement but the partner said that he did not give his consent for him to act as guarantor so he said he is not liable. SC said he is liable to reimburse the guarantor to the extent that he was benefited. The partner cannot escape liability by invoking the defense that he did not give his consent. b. Limited
C.
C. By the person guaranteed Guarantee proper- the one discussed Sub-guarantee- another person secures the undertaking of the guarantor; indemnity agreement- undertaking that secures the guarantor in the sense that he can go after the indemnity contract to reimburse himself. D. By the liability of the guarantor a. Normal/ ordinary- one where the guarantor undertakes to pay in case the principal debtor cannot pay b. Solidary- this is suretyship- jointly and severallyundertaking is as a surety. Or I hereby bind myself as surety Guarantor binds himself solidarily with the debtor. By his undertaking to be bound solidarily, then he is bound primarily, as an original promissor. I hereby guaranty- guarantor Machetti vs. Hospicio de San Jose Machetti was a contractor. He entered into a contract with Hospicio de San Jose. To secure fulfillment of Machettis contract or undertaking with Hospicio de San Jose, he was required to put up a performance bond. Originally, it was Machetti who filed a case against Hospicio de San Jose for the unpaid balance of the contract price. But there was a counter-claim filed by Hospicio claiming that there were deviations made by Machetti from the original plan therefore, damage was made. In the meantime, Machetti was declared insolvent through a petition filed by his creditors. And so when he was declared insolvent, all actions against him were dropped. All claims were filed in that insolvency proceedings. In the case that he filed against Hospicio where there was a counter-claim, he was also dropped as a party-defendant. What Hospicio did was to ask the court for leave for permission to file a counter-note/third-party claim against Fidelity. The court allowed the filing of the

third-party claim against Fidelity ince Machetti was already dropped as principal debtor. The lower court rendered judgment against Fidelity. In effect, it was holding Fidelity liable as surety. Guarantor is only liable when debtor cannot pay. Here, it cannot be proven that the debtor cannot pay because he was dropped as a party-defendant. Fidelity appealed. Can it (Fidelity) be considered a surety such that it can be liable even without going after the principal debtor? SC said no, the undertaking is merely that of guarantor. Even if a contract is denominated as a Guarantors Undertaking (guaranyty/guarantee), circumstances may be shown such that the undertaking is really that of suretyship and not of guaranty but these circumstances are not present in the instant case. If you undertake to secure the fulfillment of the obligation as a guarantor, then you can only be held liable if it can be proven that the principal debtor cannot pay and the best proof that you cannot collect from principal debtor is the return of the writ of execution unsatisfied. Here there can be no writ of execution issued against Machetti because he was dropped as defendant. Therefore, there is no way of proving that he cannot pay. Can Hospicio collect or it will wait until Machetti is no longer insolvent? (cannot go after Fidelity because Fidelity is a guarantor, not a surety) File the claim in the insolvency proceedings. Hospicio does not want to file a claim because it will join with the other creditors, it will not be assured of recovering the full amount of its claim, only a fraction of the amount claimed unless they are preferred creditors (maybe this is the reason Hospicio filed against Fidelity) Ong vs. PCIB What if the undertaking is that of a surety and you have a corporation which is a distressed corporation (declared to be in a state of suspension of payment because it has a filed a petition for rehabilitation with the special commercial court)? And the court granted its petition to be declared in a state of suspension of payment? And so a stay order is issued by the court. No monetary actions against the corporation shall proceed. All actions for monetary claims only are suspended. In the same manner that the case against Machetti was dropped. But here there is no declaration of insolvency. The corporation is not insolvent, it is merely a distressed corporation in the sense that it is not liquid. Issue of liquidity- cannot meet your current obligation with your current assets (assets may be in the form of real property that you cannot dispose of when the obligations are maturing). Suspension of payment- all actions suspended. Can the creditor go after the surety? Creditor can immediately go after him even without proving that it cannot collect from the corporation because of the nature of the undertaking where he bound himself solidarily as an original promissor with the debtor corporation. What if the Ong spouses were guarantors? Would the suit against them by the creditor prosper if the debtor corporation is placed under a state of suspension of payment? NO, you have to prove that you cannot collect from the debtor before you can hold the guarantor liable. The undertaking of the surety is different- similar to that of solidary debtor- can go after any of the solidary debtors even without going after the other solidary debtor. You can go after the one solidary debtor for the whole amount of the obligation even if one of the solidary debtors become insolvent. If one solidary debtor pays and another becomes insolvent, the share of the insolvent debtors is shared by all the solvent solidary debtors among themselves. Creditor can collect the whole amount from the solidary debtors. Same here, the corporation is declared in a state of suspension of payment, the creditor cannot go after the distressed corporation, but the creditor can go after the surety. There is a higher risk assumed by a surety compared to a guarantor. If the guarantors bound themselves jointly and severally with the principal debtor, then the guarantors are bound as sureties and not just as guarantors, even if the undertaking is denominated as guarantors undertaking or guaranty undertaking. International Finance Corporation vs. Imperial Textile Mills Imperial signed a Guarantors Undertaking. The tenor of the undertaking is that it bound itself together with another corporation solidarily with the principal debtor. When a collection case was filed against the principal debtor and against Imperial Textile Mills, the lower court dropped the action against Imperial because only the principal debtor is liable. CA said Imperial Textile is liable only if the principal debtor cannot pay, liable as guarantor. SC said the undertaking is that of a surety not just a guarantor and therefore, solidarily liable with principal debtor, not just subsidiarily. The judgment creditor can just go after any of the parties, principal debtors, Imperial Textile or the other surety for the satisfaction of the entire amount of the judgment credit. Not just for a proportionate share in the judgment credit but the entire amount because of the solidary undertaking.
Elements of Guaranty A. Parties What are the qualifications before a person can qualify as a guarantor? 1. He must be legally capacitated to enter into a contract. Consequence if he is not legally capacitated to enter into a contract like if a minor- voidable but still valid. The minor can invoke his minority in order to avoid paying his undertaking. This defeats the purpose of the security undertaking. Can a married woman be a guarantor of another persons obligation? Yes, as to exclusive property. Now with the absolute community, can use the exclusive property acquired through gratuitous title like inheritance or donation but cannot bind the absolute community property; if married prior to the effectivity of the Family Code, she cannot bind the conjugal partnership. 2. He must possess sufficient properties to answer for the obligation. Since this is a personal undertaking to pay the obligation of another person, then he must have the means to pay the obligation. (like if your income is only 3,000 a month and you do not have sufficient properties, you cannot qualify as a guarantor) The guarantor must possess integrity. Integrity- he must possess honesty. Good moral character.
3.
These qualifications must be possessed by the guarantor at the time of the perfection of the contract of security. What if later on, the guarantor becomes insolvent? Guarantor is convicted of a crime involving dishonesty? What is the remedy of the creditor? Require the debtor to put up another guarantor. If the debtor fails to produce another guarantor, the remedy of the creditor is to demand for the fulfillment of the obligation now even if not yet due and demandable- debtor loses the right to enjoy the period granted to him under the contract (article 1198) Same rule applies also if the guarantor is convicted of a crime involving dishonesty

If the guarantor is chosen by the creditor himself, the guaranty is constituted to the benefit of the creditor. It is to assure the creditor that he can collect or that obligation on his favor will be fulfilled. If he is the one who chooses the guarantor, then he can waive these qualifications. Since this is a contractual guaranty, then there must be the essential requisites of a contract: 1. Consent- requires the consent of the guarantor and the creditor. How about the debtor? Apply similar provisions of Oblicon that a third person can pay over the objection, against the will of the debtor. The consent of the debtor is not required in order to perfect the guaranty. What is required is the consent of the creditor. Must the consent be expressly given by the creditor? NO. 2. Object 3. consideration Texas Co. vs. Alonzo There is an agency agreement between Texas Co (Phils) and Leonora Bantug. In that agency agreement, there was this provision that the company may require additional securities in such individual, firm, bond as shall be satisfactory to the company. Note that the company may demand for additional securities. At that time that the agency agreement was signed, a security undertaking was already signed by Alonzo and upon the termination of the agency contract, Bantug still owed the company a certain sum which Bantug failed to pay. Texas wanted to hold Alonzo liable. The defense of Alonzo was that his offer of security was not accepted invoking the provision in the said agency agreement for additional security as shall be satisfactory to the company. How will you know if satisfactory? If it has conveyed acceptance to the offer of security. But it refers to additional security. The undertaking was executed simultaneously with the execution of the agency agreement. SC agreed with Alonzo saying that the offer of security must be accepted, must be shown to be satisfactory to the company. Proven to be satisfactory by conveying acceptance. Alonzo did not receive any notice of acceptance by Texas Company of is offer then he is not bound as surety. There must be express acceptance by the creditor (only if it is required). Acceptance has to be expressly made if it is a requisite before the surety undertaking becomes effective. Security put up by Alonzo was not additional security, it was constituted simultaneous with the agency agreement. The provision should not apply here. (dissenting opinion) In our previous discussion a security undertaking such as guaranty or suretyship is naturally gratuitous in the sense that it can be constituted without consideration from the debtor to the guarantor. Now we have a compensated guaranty, the debtor undertakes to pay premium to the guarantor. A bonding company executing a surety bond has an underlying agreement with the principal debtor to pay the premium. Because when you ask a bonding company to act as surety it is not for free. Although it is better if the client would put up the cash bond because premium could still be returned. Unlike in surety bond where the premium would go to the bonding company. Phil. Pryce Assurance Corp. v. CA Can a creditor-seller go after the bonding company even if the bonding company wasnt able to collect the premium due? Yes. Here, the bonding company tried to invoke the provision in the insurance code where it says insurance bond cannot be binding if the insured has not paid the premium unless the bond is accepted by the creditor. Here the seller accepted the surety bond. It released the merchandise to the buyer. SC said you cannot refuse to pay your undertaking. Even if you were not paid because the premium paid to you in check bounced. Subject matter and conditions: Q: What debts can be guaranteed? A: Debts that are valid. Remember that a surety or a guarantee undertaking is an accessory undertaking to the principal undertaking. So there must be a valid undertaking. Municipality of Gasan v. Marasigan SC said you cannot hold sureties liable for a contract they undertook to secure which was voided/ annulled by the municipality. Since the contract was annulled the security is likewise annulled. An accessory undertaking is dependent on the principal undertaking on the validity of the contract. When it was revived it did not automatically revive the undertaking. There must be a new undertaking secured by them. Luna and sevilla are not liable since it there was no valid obligation. Q: Can voidable obligation, unenforceable obligation, rescissible obligation be secured by guaranty or suretyship? A: Yes, because these are valid contract although they are defective Q: Can future debts be secured? A: Yes, but the obligation of the guarantor or surety takes effect or becomes enforeceable only when the debt is liquidated. Q: Like there is an undertaking now, a guaranty undertaking to secure a payment of a future obligation which is obtained by the debtor. Can the creditor hold the guarantor liable now? A: No, because there is no obligation guaranteed yet or secured yet. There is no obligation which is liquidated. Not yet incurred ang principal obligation. Q: When is the guarantor liable? A: When the debts are liquidated. Q: When is the debts considered liquidated? A: When the amount is known. Selegna Management and Devt Corp. v. UCPB A debt is liquidated when the amount is known or is determinable by inspection of the terms and conditions of the relevant promissory notes and related documentation. Failure to furnish a debtor a detailed statement of account does not ipso facto result in an unliquidated obligation. RCBC v. Arro Can the creditor hold the surety liable for debts incurred by the principal debtor after the execution of a comprehensive surety agreement yes because the undertaking was to secure any existing indebtedness, and/or to induce the bank at anytime or from time to time thereafter, to make loans or advances, or to extend credit in any other matter, upon which the borrower is or may become liable. The liability take effect only upon the debt becoming liquidated. Q: What is a continuing guaranty? A: One which covers all transactions including those arising in the future which are within the description or contemplation of the contract of guaranty until expiration or termination or revocation of such agreement. Q: Usually a guaranty is constituted to secure fulfillment of a present or future debt. Can it be constituted to secure a past obligation? A: Yes. For as long as the obligation is not yet fulfilled. Previously acquired obligation.

Willex Plastic Industries Corp. v. CA Although a contract of suretyship is ordinarily not to be construed as retrospective, in the end the intention of the parties as revealed by the evidence is controlling. Qualifications of a guarantor: 1. must be legally incapacitated 2. must have sufficient property to answer for the debt guaranteed 3. must have consent of the debtor i. if chosen by the debtor consent not required Form Q: In what forms must the guaranty be? A: For validity, the undertaking must be in writing for it to be enforceable, but the undertaking does not to be in writing to be valid. Macondray & Co., Inc. vs. Pinon There is no particular form required in order for a contract of guaranty to be valid. In fact a verbal contract can be entered into by the parties. What is required is that it must be in writing for it to be enforceable. Wise & Co. v. Tanglao If a mortgage is executed over a certain part of a land, can the creditor foreclose the parts not mortgaged? No, only the part where a mortgage was executed. A guaranty and suretyship must be express and cannot be presumed. Solon v. Solon The terms of a contract of suretyship determine the suretys liability and cannot extend to more than what is stipulated therein. EFFECTS OF GUARANTY Effect of guaranty between creditor and guarantor. Q: What is the obligation of the creditor to the guarantor? Or is the creditor at all obligated to the guarantor? Is notification an obligation of the creditor? Or an exercise of a right by the creditor? A: Payment of premium. If it is the creditor who proposes or undertakes to pay the compensation of the guarantor then he pays the compensation of the guarantor BUT in most cases it is the debtor who undertakes to pay the premium because after all it is the debtor whose obligation is secured by the guarantor. The guarantors obligation is to perform the principal obligation in the event that the principal debtor is unable to perform. Q: Can the guarantor bind himself for more than the principal obligation? A: He can bind himself for less but not for more. Q: What if he binds himself for more? Is it valid? A: Yes. But the amount will be reduced to the amount of the obligation. Q: Are there instances where the guarantor is liable for more than the principal obligation? A: Yes, in the case of: Gen Insurance and Surety Corp. v. Republic The undertaking of central is to comply with all the laws pertaining to the administration and management of its school including statement of salaries of teachers if it violated the rules and regulations it is liable to pay the government 10,000. The guaranty is penal in nature. Not for the payment of the salary but payment for the violation. It is like a performance bond. Q: When is isurety liable for interest? A: PNB v. Luzon surety company and commonwealth Upon default of the debtor the creditor demands from the guarantor and the guarantor fails to pay. The guarantor can be held liable from the time of demand to pay interest for the unpaid amount. Even if the obligation of the guarantor is only ten thousand. If he is adjudged to be liable for interest for default of performance of undertaking. Q: When does the guarantor pay? A: Upon maturity of the obligation. Q: But can the guarantor pay BEFORE the maturity of the obligation? A: Yes, but he cannot yet ask for indemnity from the principal debtor because the obligation is not yet due and demandable. He pays it at his own risk. Q: Why is it the duty of the guarantor to notify the debtor of the payment? A: Because the debtor may raise the ??? 1110 against him the guarantor which he can raise against the creditor like prior payment, lack or failure of consideration, simulation of contracts, prescription, statute of frauds. Another reason is that if the debtor pays not knowing that the guarantor had paid, then the guarantor cannot recover from the debtor. BUT if failure to notify is because of a fortuitous event, and the guaranty is gratuitous, and the creditor become insolvent. He can recover because it is gratuitous guaranty. ???? The guarantor can be asked to be released from the guaranty if the debtor becomes insolvent. Privileges of the guarantor Benefit of exhaustion Q: What is the right to exhaustion? A: Right of the guarantor to demand that the creditor first exhaust the properties of the debtor before he can be made liable. Because the law says that guarantor cannot be held liable unless the creditor exhaust first the properties of the debtor and exercises all legal remedies against the debtor. Going after a guarantor would be a remedy of last recourse. A: According to paras, it is the duty of the creditor to exhaust the property of the debtor and to enforce all legal remedies against the debtor to prove that the debtor is still unable to pay. If the debtor is not notified and he is prejudiced because of the lack of notice he cannot be made to pay unless there is a waiver on the part of the guarantor. According to Civil code the suit must be filed against the creditor alone and then the former must ask the court to notify the guarantor, but you cannot just do that. Because you have to amend

the complaint inorder to implead another person (Civ Pro) the practice is to implead both. If impleaded at the same time, and judgment is rendered against the debtor then the judgment would oftentimes provide for exhaustion of property of the debtor first over the guarantor. The guarantor must raise this defense. The right of exhaustion when demand is made upon him to pay but not enough to raise the benefit of exhaustion he must point to the creditor the available properties of the debtor. Q: What do you mean available properties of the debtor? A: Properties not exempt from execution like the professional library. Family home is exempted. Towers assurance corp. v. Ororama Supermarket Even if the surety cannot invoke the benefit of exhaustion it still must be notified and be heard before it can be held liable. His liability is not automatic by the mere fact that a favorable judgment is obtained by a creditor against a principal debtor. Because the undertaking of the surety bond was put up in order to discharge the writ of preliminary attachment. Towers assurance was never impleaded, summoned or notified that it was being held liable for its undertaking. Due process: Right to be heard. FInman General Assurance Corp. v. Salik Finman was impleaded and notified as a party from the beginning. Only that they did not file an answer and did not participate with the proceedings of the case. SC held that there is no need to notify the surety if its undertaking is closely intimately related to the undertaking of the principal. Adviento: I dont think it is a correct reasoning of the court considering the fact that he was really impleaded and it was afforded the right to be heard only he chose not to. Between Towers which was an earlier pronouncement and Finman which was a later pronouncement, personally I would vote for Towers. Baylon v. CA GR no. 109901 Aug 17, 1999 A creditor filed a case against the debtor and guarantor, but the debtor was not served with summons. Nevertheless the case proceeded against the guarantor. And the trial court rendered judgment against the guarantor. Can the guarantor be held liable when there is no opportunity to exhaust the properties of the debtor? There was no judgment rendered against the debtor. And here the guarantor did not waive his right of exhaustion the guarantor even raised that defense inability to invoke the benefit of exhaustion. The court nullified the judgment of the trial court. Court held that it is axiomatic that the liability of the guarantor is only subsidiary. All the properties of the principal debtor must first be exhausted before his own is levied upon. Thus, the creditor may hold the guarantor liable only after judgment has been obtained against the principal debtor and the latter is unable to pay, "for obviously the 'exhaustion of the principal's property' the benefit of which the guarantor claims cannot even begin to take place before judgment has been obtained." This rule is embodied in article 2062 of the Civil Code which provides that the action brought by the creditor must be filed against the principal debtor alone, except in some instances when the action may be brought against both the debtor and the principal debtor Q: Now if the guarantor had pointed out to the creditor the available properties of the debtor and the creditor FAILS to exhaust the properties and the debtor becomes insolvent can the guarantor be held liable for the principal amount because of the failure of the creditor to exhaust the properties of the debtor? A: The guarantor cannot be liable for the value of the property. So the value can be deducted from the total amount of obligation. NB: the benefit of exhaustion is a RIGHT. It can be waived. JN Devt Corp. v. Phil. Export and Foreign Loan Guarantee Corp. JN obtained a loan from TRB, which was secured by Phil Guarantee. When the loan matured JN did not pay and TRB notified Guarantee. Guarantor paid TRB, so He asked for reimbursement from JN but the debtor did not pay. So the guarantor had no choice but to sue in court to recover the amount that he had paid. The Trial court faulted the guarantor for paying and not having the properties of the debtor exhausted. SC held that exhaustion is a right and therefore can be waived. What better way to waive than by paying without demanding that the properties of the debtor be first exhausted which Phil Guarantee did. But this cannot be invoked by the debtor in order to escape reimbursement of the guarantor. Q: When is the benefit of exhaustion not available? A: 1. Waiver 2. If the guarantor bound himself solidarily 3. If the debtor is insolvent 4. If the debtor cannot be sued in the Philippines or absconds 5. if it may be presumed that the execution would not result in satisfaction of judgment The act of phil guarantee paying was not an express renunciation of the benefit of exhaustion. An example of an express waiver of the benefit of exhaustion is the provision in the willex case. In the willex case they were invoking the benefit of exhaustion, but the court held that there was an express waiver there of the exhaustion of properties. You cannot invoke that benefit anymore. In the JN case, there may not be a stipulation in the guaranty undertaking but the act of phil guarantee paying the obli w/o demanding first the exhaustion of the properties of the debtor first is also a waiver on his part although there is no express stipulation on the contract. Benefit of Division This happens if there are 2 or more guarantors securing the same obligation. Similar to the general rules of ObliCon. Mere plurality of debtor results in joint obligation not solidary. Because there is no presumption of solidarity. Solidary only if there is agreement between the parties, provided by law and nature of the obligation requires solidarity. Same general rule, mere plurality of debtor results in joint obligation not solidary. Therefore if you have 3 guarantors if no stipulation to the amount presumption is liable in equal shares. So the creditor can only go after each guarantor for their respective amount. Unless solidarity is agreed by the guarantors among themselves for the payment of obligation. In that case the creditor may go to any of the guarantors for the full amount. Solidarity among the guarantors does not mean they bound themselves solidarily with the principal debtor, because that is suretyship already. When is the benefit not available, same as benefit of exhaustion. 1. Waiver on part of guarantor - if one guarantor pays for the full amount he can no longer ask to be reimbursed

from his fellow guarantors, he must recover from the debtor) If bound themselves with the principal debtor NOT among themselves If the debtor is insolvent When sued for payment thats just an exercise of a creditors right under guaranty undertaking but the law gives the guarantor the right to proceed against the debtor to be relieved from the guaranty. In case of insolvency of the debtor higher risk that he will be made liable for his undertaking When the debtor has bound himself to release the guarantor after a certain period and that period has arrived. So the guarantor can demand that he be released from the undertaking. After ten years has passed when there is no stipulation of period for the fulfillment of the principal obligation, UNLESS the principal obligation cannot be performed w/in ten years. Like loans payable for 20 years like housing. If there is reasonable ground to believe that the debtor will abscond. No benefit of exhaustion. So higher risk that the guarantor will be held liable to pay the obligation. If there is reasonable ground to believe that the debtor will abscond the probability of the guarantor recovering is minimum also. Imminent danger of insolvency. NOTE: MERE imminent danger not ACTUAL insolvency affords the guarantor the right to be relieved from the guaranty.
2. 3.
Q: What is the effect if 2059 is present? A: Creditor can demand for full payment of the entire obligation to any of the co-guarantors. Q: When must the guarantor invoke it? A: Same as the benefit of exhaustion, when demand is made upon him to pay. Judicial again applies only if the several guarantors secure the same obligation. It does not apply if several guarantors secure different obligations. Mira Hermanos v. Manila Tabacconists These two guarantors secured two different obligations 3,000 and 2,000 respectively. Since the balance of manila tobacconists is only 2000 pesos it is still covered by the FIRST security. No benefit of division because they secured two different obligations. Defenses of the guarantor Q: What defenses is available to the guarantor if demand is made upon him by the creditor? A: The guarantor can raise the defense that can be raised by the debtor except those personal defenses. Q: What are these personal defenses? A: Vitiated consent cannot be invoked by the guarantor but payment, remission or condonation, compensation between the creditor and debtor. Q: Can it be invoked by the guarantor? If all the requisites for legal compensation between the creditor and debtor are present can the guarantor invoke it? A: Under the law legal compensation takes place by operation of law without the knowledge of the parties as long as all the elements are present. So the guarantor can invoke that. Q: What if there is the element of legal compensation is present among the guarantor and creditor can the guarantor invoke that? A: YES it can. But the debtor cannot invoke that. Q: If the guarantor invoke legal compensation can he seek reimbursement from the principal debtor? A: Yes, because it was his liability that was extinguished not the debtors. It benefited the debtor. The guarantor can also invoke novation of the contract. Extension of time granted by the creditor without his consent. EFFECTS OF GUARANTY BETWEEN THE DEBTOR AND GUARANTOR Rights before payment by the guarantor 2071 He can demand to be relieved from the guaranty even before he pays the principal obligation. The law allows him to be relieved from his obligation even before paying or to demand that his undertaking be secured by the debtor in case of insolvency. Q: In what instances can he ask to be relieved from the guaranty? (part of the guarantor) A:
Q: But this will prejudice the creditor right? Manresa said that it should not prejudice the creditor. But how will we reconcile? A: Go and meet halfway demand that the debtor put up security that way the creditor will not be prejudiced. And that is allowed in 2071. AKA Indemnity agreement. Benefit of exhaustion and division cannot be invoked by the surety because the benefit of exhaustion is not available if the guarantor bound himself solidarily with the principal debtor. Binding themselves solidarily (between guarantors) is a different thing. Q: Can a surety ask to be released from the suretyship undertaking in 2071? Or is it only the guarantor who can invoke the right just like the benefit of exhaustion and division. Is it available to the surety? A: Yes. Manila Surety & Fidelity Co. v. Batu Construction Co. The right of the guarantor to proceed against the principal debtor even before having paid by obtaining a release from guaranty or demanding a security which will protect him from any proceedings from the creditor and from the danger of insolvency of the debtor applies also to surety. Even if bound solidarily. If any of the instances in 2071 is present. Rights of the guarantor after paymeent To be reimbursed! TIDE! Total amount paid plus interest. Damages, rarely is the guarantor awarded this but of course he is also entitled to it. But you cannot demand this as a matter of right, it is discretionary upon the court unlike interest. Expenses, especially when guarantor is compelled to litigate in order to recover from the principal debtor. Q: When is he entitled to interest? A: From the time he demanded from the debtor that he be reimbursed. Guarantor is entitled to interest from time of demand. The guarantor also has a right of subrogation. Q: When can the guarantor subrogated?

A: Only when the guaranty is substituted with the consent of the debtor. If without consent or against the will of the debtor he cannot compel the creditor to subrogate him to his rights. So not always available to the guarantor. Q: What is the right of subrogation? A: To exercise the accessory obligation. Like aside from the guaranty it is likewise secured by mortgage or pledge. So if the creditor goes after the guarantor instead of foreclosing the mortgage, the guarantor has TIDE plus he is also subrogated to the right of the creditor as mortgagee or pledgee. Q: Must he demand from the creditor that the creditor assign the mortgage to him? Must another document be executed? A: No. Subrogation happens by operation of law. So the creditor need not execute another document. Obligation is 9,000. The creditor was able to collect from the guarantor 5,000. So there is an unpaid balance of 4,000. Q: And there is a mortgage, Who can foreclose the mortgage? The guarantor or creditor? A: Remember that upon payment or after payment, aside from the right to seek reimbursement from the debtor, the guarantor is subrogated to the right of the creditor. Q: When you have a mortgage lien, who can foreclose the mortgage? A: Remember the creditor has still a credit in the amount of 4,000 the guarantor is subrogated to the right of the creditor with respect to the 5,000 that he paid. The creditor has a priority in foreclosing the mortgage. Another scenario, the creditor foreclosed the mortgage but the proceeds from the foreclosure sale is only 5,000 there is a deficiency of 4,000 which was paid by the guarantor. When you foreclose a mortgage there is what you call the right of redemption, the mortgagor can redeem within a period of one year as a general rule. Q: Can the guarantor exercise the right of subrogation by redeeming the property not from the creditor but from the buyer? Can he redeem it from the creditor or from the buyer in the foreclosure sale? A: The rule is if the guarantor pays the 9,000 he is subrogated to the right of the creditor specially with respect to mortgage. He cannot seek reimbursement from the debtor he can foreclose the mortgage but of course he has to seek reimbursement first before he can foreclose. Because mortgage is an accessory undertaking. Q: When you foreclose you have to sell the property in a public sale, can the guarantor by invoking the right of subrogation redeem the property from X? Whose right is it to redeem? A: That is a right pertaining to the debtor. He cannot enterprise the right of the debtor by invoking the right of subrogation because when you exercise the right of subrogation you exercise the right of the creditor. You can foreclose the mortgage but you cant redeem because that is a right pertaining to the debtor.The guarantor is entitled to reimbursement but he cannot redeem. While there is no rule that requires the return the excess to the debtor but the creditor is entitled only to such amount of the proceeds in order to pay the obligation he has no right to retain the excess. But there has never been a bid in excess to the amount of obligation. Since nobody wants to buy property from a foreclosure sale other than the creditor because of the redemption period. The risk is that you will not be the owner of the property. Q: What is the advantage of subrogation over reimbursement? A: Because there is a chance that the debtor might be insolvent. And if he is insolvent you are a preferred creditor with respect to the property mortgage in case of subrogation. Q: But what is the advantage of reimbursement over subrogation? A: If you are the guarantor, it is faster. Not only that but also entitled to interest. Q: From when? A: Remember right of reimbursement, TIDE? Total amount paid, Interest from the time that he notified the debtor that he has made a demand for the debtor to reimburse him. From that moment on he is entitled to interest. So that is an advantage of resorting to demanding for reimbursement than of exercising the right of subrogation. Q: Remember that guaranty can be constituted even without consent of the debtor. If guarantor secures payment of the obligation of the debtor without his consent from whom can he seek reimbursement? A: Both. But only beneficial reimbursement from the debtor because he constituted a guaranty without his consent. Beneficial reimbursement depends how much the debtor was benefited. EFFECTS OF GUARANTY AS BETWEEN CO-GUARANTORS Remember! If there are two or more guarantors there is benefit of division. The guarantor can invoke that, therefore, If creditor demands from A payment of obligation, A is liable only for 3,000 pesos. But the benefit of division is not available to A if he waives it. Q: If he waives can he seek reimbursement from A & C? A: No. he waived the benefit but he can ask for reimbursement from the debtor. Because the right of reimbursement is from the debtor not from a co-guarantor. Another instance where there is no right of division is if the debtor becomes insolvent. So if the debtor becomes insolvent, and the creditor demands from A payment of the entire obligation and because A cannot invoke the benefit of division because the debtor is insolvent A has to pay 9,000 in this instance, a can seek contribution from B & C in the amount of 3,000 each but of course there is no preventing A from recovering 9,000 pesos from the debtor after all if he recovers from B & C they are entitled to be reimbursed by the debtor too. Another instance where A can recover from the other co-guarantors is if A is ordered by the court to pay the entire contribution. It is only when there is insolvency that the creditor can demand from one guarantor pay the entire obligation and he can seek contribution from his co-guarantors. In the instances where there is no right of division, the other co-guarantor who pays cannot seek contribution, it has to be by court order. Aside from waiver of course and insolvency, another instance is when debtor absconds, so creditor files a case against guarantor A, A cannot invoke the right of division because the debtor absconded so there is a court order that A must pay the entire obligation, if that is

the case A can seek from B & C for their contribution. If A voluntarily pays he cannot seek contribution from B & C. He can only seek contribution if the debtor is insolvent and/or ordered by the court to pay the entire thing. Q: Now if a co-guarantor pays and one of the other co-guarantors is insolvent how much can you recover from B? A: 4,500 they both share it. One cannot claim to only be liable for 3,000. But if there is a sub-guarantor, A can go to the sub-guarantor that undertook the liability of C. The co-guarantors can raise the defense that the principal debtor can raise against the creditor. EXC of course incapacity, insanity, or vitiated consent. Q: Now, if A was able to obtain a compromise from creditor and A paid instead of 9,000 only 6,000. How much can he recover from the debtor? Is he entitled to obtain 9,000 the original obligation of the debtor? A: No, only 6,000. You cannot enrich by asking 9,000. Whatever benefit he obtained benefit the debtor. even in the later case of Ang vs. Associated Bank, the court said that 2080 does not apply to contract of suretyship. It means the guarantors who bound among themselves solidarily not the guarantors binding themselves solidarily with the principal debtor because otherwise that will be suretyship already. But solidarily there refers to the obligation of the guarantor among themselves meaning that anyone of them can be held liable. B. Extension of Payment
If the creditor grants an extension of payment to the debtor without the consent of the guarantor, then the guarantor is relieved. Why? You are extending the risk of him being liable and you know that this is merely an accessory subsidiary contract especially if it is a gratuitous guaranty. The extension, in order to bind the guarantor, must be with the consent of the guarantor. Take note that mere failure to collect upon maturity of the obligation does not mean extension of the period. Or an undertaking not to file an action is not an express grant of extension. That is simpler understood if the obligation is to be fulfilled in one time. The problem arises if the obligation contains payment in installments. What is the rule in obligations consisting performance by installment? Each installment is treated as a distinct and separate obligation and therefore default in one installment does not mean default in all the other installments. Unless there is an acceleration clause. Villa vs. Garcia Bosque 4 installments for the payment of printing press and st bookstore. 1 installment upon execution of the contract; nd rd 2 installment after 1 year; 3 installment after 2 years; th 4 installment after 3 years. There was extension of the period for the payment of the second installment. There was a restructuring, so to speak, of the second installment. But it was eventually paid. And then for the third installment there was partial payment also. For the fourth installment, no payment was made. Only after all the installments became due and demandable that the sellercreditor sued for the payment of the balance of the purchase price and went after the guarantor or the surety. The defense raised by the surety was that there were released from their undertaking because there was an extension granted to the second installment. SC said there was no issue anymore with respect to the second installment because it was already totally paid. In fact you have no obligation anymore over the second installment. And besides, the rule is, extension of payment over one installment does not necessarily mean that there is extension of payment for the other installments. It pertains only to that particular installment thats not even an issue because it has already been paid and no longer liable on that second installment. You are not released from your undertaking on the third and fourth installment by the mere fact that the second installment was restructured or that there was an extension for the period of payment for the second installment. Radio Corporation vs. Roa There is a sale but there was a stipulation for the payment of the price over a period of 71 months but there was an acceleration clause. There was an extension for the payment of 3 months. There was an acceleration clause such that if you default in one installment, the other installment becomes due and demandable. (illustration on board: If you extend the payment for like 2 months, here you are in effect extending the payment for the other installments. If you default on the first installment, you can sue for the entire amount but since granted an extension for example after 2 months). If you extend the period for the payment of just one installment you are in effect extending the payment for the entire obligation. That is the reason why the guarantor is released if he does not give his consent.
Extinguishment of Guaranty I. A. Extinction of Guaranty Negligence of the creditor
Because guaranty is a contract and contract is a source of obligation, necessarily, the same ground for the extinguishment of an obligation are the grounds that extinguishes a guaranty like payment, loss, condonation, merger, novation. Some of the causes of extinguishing a guaranty. One of the rights of the guarantor is to demand that the creditor first exhaust the properties of the debtor before he can be held liable, that is exercising the right of exhaustion or excussion. If after the guarantor has pointed to the creditor properties of the debtor and yet the creditor fails to exhaust the properties of the debtor through his own negligence and after that the debtor becomes insolvent he can no longer hold the guarantor liable because of his own negligence. ImpossibiIity of subrogation? If you have 2 securities of the contract, one real security of chattel mortgage, the other is personal security of guaranty. Now chattel mortgage is the recording of personal property with the Register of Property as security for the fulfillment of an obligation. E. Zobel Inc. vs CA When E. Zobel was sued of his undertaking his defense was that he was released from his undertaking as guarantor because he could not be subrogated to the rights of the creditor over the chattel mortgage because of the failure by the bank to register the mortgage. SC said that might be true if you are a guarantor but since you are a surety you cannot invoke that defense. Lets change the facts, if E. Zobel was a guarantor and not just a surety could it invoke the defense provided under 2080 that it could not be subrogated to the rights of the creditor and therefore it was released of its undertaking as a guarantor? Yes, a guarantor can invoke that defense of impossibility of subrogation but in that particular case, could not invoke the defense because it was not a guarantor but surety.
2080 said that the guarantor, even if they be solidary, does it refer to suretyship? How do we interpret that phrase even though they be solidary, does it refer to surety? But the court has been consistent in its pronouncement that 2080 applies only to guarantor

Philippine American General Insurance Co vs. Mutuc Seamen in ocean-going vessel are required to put up a bond for the faithful fulfillment of their contract because of their experience that many would jump ship so the shipping company or the principal would require that the seaman would put up a bond by a bonding company. So for Mutuc, the bond was put up by Philippine American General Insurance Company but because of the history of seamen jumping ship and the higher probability of the bonding company being liable of its undertaking so they would require an indemnity agreement. You have the principal guaranty or suretyship undertaking in favor of the principal or employer the shipping company. Phil Am Gen required Mutuc to execute an indemnity bond. Its useless to require Mutuc, by himself, to execute an indemnity bond so other people were going to undertake to pay the surety. In the main contract that was secured by the indemnity agreement in the suretyship undertaking, there was a provision for the automatic extension of the contract if Mutucs contract with the shipping company is renewed. If the employment contract of Mutuc is renewed, automatically the surety bond is likewise extended. Because of that, in the indemnity agreement there was also a provision for the automatic extension without prior notice to the indemnitors Alberto and Mojica. In fact the contract of Mutuc was renewed a th rd couple of times. On the 4 year or the 3 renewal of his contract, he jumped ship. So Phil Am Gen paid Maersk the amount of the bond. And Phil Am Gen is now holding Alberto and Mojica liable on their indemnity agreement. The defense of Alberto was that there was an extension of the period and he did not give his consent therefore he was released from his undertaking. SC said you are wrong because you already gave your consent to the contract many times. You signed and consented to the automatic renewal or extension of the period even without notice to you and therefore you need not be notified everytime the contract of Mutuc is renewed and everytime the suretyship undertaking is renewed. Therefore, the court held Alberto liable on his indemnity undertaking even if he did not give his consent everytime there is a renewal of the contract. Prudencio vs CA A holder for value is one who is a holder who acquired the instrument not from the maker but from a party other than the maker. Therefore if you obtain it from the maker you cannot be a holder in due course. You are a holder but you cannot be a holder in due course because of course you are privy to all the other agreements or the fraud that might have been committed against the maker. There was a construction company who wanted to obtain a loan from PNB. But PNB would not grant the loan because this construction company maybe is not wellknown, it doesnt have a credit line with PNB. So its agent, Toribio, who was a relative of the Prudencio spouses, prevailed upon the Prudencio spouses to mortgage their property. They refused because they did not need the money and they are also not connected with the business but after several weeks of prodding, they were finally made to agree to subject their property as security for the loan. On top of that, they were convinced to sign the promissory note as makers of the note as accommodation makers. Of course it was known by the bank. The reason why they allowed to subject their property and to sign as makers/borrowers of the loan was the fact that the principal debtor had a contract with the government for the construction of the Municipyo of Palawan at the cost of P30,000. As contractor, he has a receivable from the state. What the principal debtor did was to assign all its receivable from the government in favor of PNB. If there is an assignment there is an assurance that the debt will be paid because all the payables from the state will be paid to PNB. The signing of the promissory note was pro-forma. Maybe that was the peace of the mind of the Prudencio spouses that the payment is assured because whatever is payable from the government will be paid to PNB. What did PNB do? It allowed the state, instead of the state paying to PNB, to pay the principal debtor even after the loan has matured. And then the principal debtor wasnt able to pay it now wants to hold the Prudencio spouses liable as accommodation maker. The defense raised by the Prudencio spouses was that PNB is not a holder in due course and therefore they can raise the defense of lack of consideration. As accommodation party we are sureties and we can raise the defense of extension of payment. SC said you are released as surety by the extension of payment. How was extension of payment manifested here? By the fact that PNB allowed the release of money by the government to the principal even after maturity of the loan. On the side of NIL, the court said the spouses were also released of their undertaking because they can invoke lack of consideration because PNB was not a holder in due course. Mere failure to demand is not an extension of payment. Cochingyan vs. R&B Surety The undertaking of PNB to hold in abeyance any action to enforce claim did not amount to an extension granted to the debtor. Payment by the debtor of the principal obligation necessarily extinguishes the guaranty because extinguishment of the principal obligation extinguishes the accessory undertaking of guaranty. What if there is partial payment made by the debtor? If the obligation of the debtor is 100,000 and the undertaking of the guarantor is to secure only 50,000. Debtor paid 50,000 is the guarantor released? What is the rule in application of payment? It is the debtor who decides, if not the creditor, if not through the most onerous. The unsecured is the most onerous. The secured portion could be absorbed by the guarantor. 50,000 will be applied to the unsecured portion so the guarantors obligation remains. If the obligation is 100,000 instead of paying the debtor delivers property also more or less 100,000. Is the principal obligation extinguished? Yes, by dacion en pago. If principal obligation is extinguished by dacion en pago, the guaranty is extinguished. Dacion en pago is governed by the rules on sales. The creditor is deprived of possession and ownership of property, there was a breach of the implied warranty against eviction. Is the obligation of the debtor reinstated? Maybe as to the breach of warranty. But if the debtor cannot perform or cannot pay his obligation under the breach, can the creditor hold the guarantor liable? Not anymore, when the principal obligation is extinguished by dacion en pago, automatically the obligation of the guarantor is also extinguished. If later on the creditor is deprived of ownership or possession, he can no longer hold the guarantor liable. If the obligation is condoned by the creditor, automatically the guarantor is released. If the guarantor has obtained a remission of the debt because of his special relationship with the creditor can he recover the amount that he guaranteed? Can he recover or can he claim from the debtor the amount that he caused to be remitted? No he cannot. Merger: Between debtor and creditor- extinguishes the guaranty because merger between debtor and creditor extinguishes the principal obligation Between creditor and guarantor- does not extinguish the principal obligation but extinguishes the guaranty because the guarantor now

becomes the creditor (absurd if the debtor cannot pay he will pay himself) Between debtor and guarantor- the principal obligation remains but the guaranty is extinguished because the guarantor cannot or debtor cannot secure his own obligation Compensation: Between guarantor and creditor Example: obligation becomes due and demandable debtor does not pay, creditor goes against the guarantor, the guarantor invokes compensation between him and the creditor. If the principal obligation is 100,000 the creditor also owes the guarantor 100,000 the same amount of obligation, both are due and demandable, both for payment of a sum of money. Can the guarantor recover from the principal debtor? Yes, because the debtor was benefited. The money of the guarantor which was made to pay for the obligation. The guarantor was supposed to collect from the creditor. He was not able to collect because he invoked compensation and therefore he is allowed to recover from the principal debtor. Unlike condonation because it involves gratuitous abandonment of the debt. In compensation, there is merely a set-off. One owes the other, the other owes the other party. Instead of both collecting from each other, quits na. Novation Extinctive novation- principal obligation is extinguished and a new one is entered into, the stipulation and conditions of which are inconsistent with the others before the first is extinguished. If thats the case and there is a security undertaking if the old obligation is extinguished the entire guaranty is extinguished. Modificatory novation- does this automatically extinguish the guaranty? Not necessarily because if the new obligation because of the modification of the terms and conditions of the parties becomes less burdensome then the guarantor is subrogated. But if by the modification of the stipulations and conditions of the parties the obligation becomes more burdensome then the guaranty is extinguished. What about the death of the guarantor, does this extinguish guaranty? No, we have seen this in the case of De Guzman vs. Santos when one of the joint guarantors died his administratrix paid of the judgment debt. Legal and Judicial Bonds Bonds or security undertakings put up by virtue of a judicial order. Now if the party or the litigant who is bound to put up a bond cannot put up a bond because bond is a personal security undertaking in lieu of that a pledge or a mortgage over property can be executed. Unlike an ordinary guarantor, a bondsman cannot impose exhaustion of the properties of the principal debtor. Even the sub-surety of the bondsman cannot invoke excussion of the property of the debtor or the principal. Real Security Undertaking Pledge- just like guaranty and suretyship, it is an accessory undertaking whereby personal property of the debtor or of a third person is delivered to the creditor or a third person to ensure fulfillment of a principal obligation. How does pledge differ from a chattel mortgage? While in pledge, personal property is delivered to the creditor or a third person, in chattel mortgage, personal property is merely recorded in the Registry of Property. There is no delivery of the personal property to the creditor or to another person, agreed by both the debtor and the creditor. Thats the principal difference between pledge and chattel mortgage. Both involve personal property. In pledge, the property is delivered not for safekeeping, not for use, its not commodatum, its not depositum, but its pledge. Like commodatum or depositum, it is a real contract because it is perfected by the delivery of the object; unlike a chattel mortgage over which the property is not delivered to the creditor. But the property is merely recorded in the Registry of Property. How does chattel mortgage differ from a real estate mortgage? Real mortgage involve real property. Like chattel mortgage, the property is not delivered to the mortgagee or the creditor or to a third person. What are the characteristics common to both pledge and mortgage? 1. It is constituted to secure fulfillment of a principal obligation. 2. It must be constituted by the owner. 3. The person constituting the pledge or mortgage must have free disposal of the property. Free disposal means it must not be burdened with any legal claim. I. Common characteristics. Flancia vs. CA William Onghinato extended a loan in favor of Oakland Development Resources Corporation, housing project. In order to develop a project, it obtained a loan from William Onghinato. And to secure fulfillment of payment of the loan, the corporation constituted a mortgage over the property where the project was developed. Then the corporation entered into a contract to sell with buyers and the spouses Godofredo and Dominica Flancia were buyers under a contract to sell. Because Oakland was unable to pay the loan Onghinato instituted proceedings for the foreclosure of the mortgage. The spouses Flancia objected saying that Oakland could not validly constitute the mortgage because it was not the owner of the property because it was already sold to them. The court had the occasion to discuss the 3 requisites of a valid mortgage which incidentally are the first 3 requisites for a valid pledge. First, it must be constituted to fulfill a principal obligation. The court said here did they comply with the first requisite? Was there a principal obligation that was secured? Yes, there was a loan extended by Onghinato in favor of Oakland. Was Oakland the owner of the property mortgaged? In a contract to sell ownership is not transferred to the buyer although the buyer may be allowed possession of the thing but that possession is not equivalent to possession as owner. Unlike in a contract of sale where delivery of the property transfers ownership to the buyer. The court said that the contract entered into was a contract to sell, it is very clear from the stipulations of the contract that while they are allowed possession of the property they are not the owners because title will be transferred only upon full payment of the purchase price. Therefore, if the house and lot occupied by the Flancia spouses was the subject of a contract of pledge, until owned by Oakland, it can validly constitute a mortgage over the property including the house and lot. Did Oakland have free disposal of the thing at the time of the mortgage? Yes, there was no claim, there were no annotations on the title of Oakland at the time it was constituted. There three elements of a valid mortgage were present. Therefore, Flancia spouses cannot object to the foreclosure. They cannot say that the mortgage was invalid.

A. Constituted to secure fulfillment of a principal obligation. This is a security undertaking. It must be a principal obligation. respect to the portion belonging to the wife. But it is invalid with respect to the portion belonging to the children. What about mortgage constituted over property which is a subject for a pending application for homestead patent? In Vda. De Bautista vs. Marcos, there was no pending application yet at the time the mortgage was constituted. What if there is a pending application and while the application is still in process and the property is subjected to a mortgage? Is the mortgage valid? Whether the applicant is the owner at the time of the application? Do you consider the applicant as the owner? If the applicant is not yet the owner at the time of the application, then he cannot validly constitute a mortgage over the property. C. Free disposal or legal authority of person constituting the pledge or mortgage
If it is constituted to secure fulfillment of an obligation what kind of obligation can be secured by the mortgage? Can it secure void obligation? NO, because a void obligation have no cause and effect. Can it secure rescissible contracts? Yes Voidable contracts? Yes Unenforceable contracts? Yes Future obligations? Yes just like guaranty which can substitute to secure future obligations but of course the obligation of the guarantor comes to effect only upon the liquidation of the principal obligation. Mortgage and pledge can be constituted to secure future obligations. But of course the property subject of the real security undertaking cannot be foreclosed until that future obligation becomes due and demandable. Mojica vs. CA The Mojica spouses obtained a loan for P20,000 from Rural Bank of Kawit. They secured the loan with a mortgage. One of the conditions in the mortgage was that it was constituted for the payment of the loan of P20,000 and such other loans and advances already obtained and to be obtained by the mortgagor. The loan of P20,000 was paid. After they paid they obtained another loan of P18,000 and there was an annotation in the promissory note that it was also secured by the mortgage constituted to secure the P20,000 loan. The Mojica spouses were not able to pay the P18,000 loan. The bank foreclosed the mortgage. The bank was the highest bidder and title was consolidated in the name of the bank. The Mojica spouses want to nullify the foreclosure claiming that the foreclosure was invalid because the mortgage was not constituted to secure the P18,000 loan because there was no real estate mortgage constituted to secure that particular loan. SC said there was no need to execute another mortgage because there was already a drag net clause or blanket mortgage clause. Similar to continuing guaranty. If you talk about mortgage it is called a drag net clause to secure such other future obligation of the mortgagee. This is to secure not only this particular loan but such other loans which may be incurred by the mortgagee or the debtor. B. Constituted only by the absolute owner of the thing pledged or mortgaged. Must be constituted by the owner.
The mortgagor must have free disposal of the thing or must be duly authorized. Why is it required that the mortgagor or the pledgor must be the owner of the property? Unlike commodatum, you need not be the owner of the property, in depositum also, because there is no transfer of ownership. In mortgage, you need not transfer the ownership because it is only constituted to secure an obligation but why is it necessary that the mortgagor or pledgor must be the absolute owner and must have the free disposal of the property? Because of the possibility that the property might be alienated to satisfy the principal obligation. If you constitute a mortgage over a property which you do not own or over which you are not duly authorized by the owner, then there can be no valid foreclosure of the mortgage. D. Things pledged or mortgaged may be alienated at the instance of the creditor
Since the essence of constituting a pledge or a mortgage is to secure fulfillment of a principal obligation, can the parties (debtors, creditors) be presumed that the debtor is also the pledgor of the mortgagor just agree to stipulate cge, if I cannot fulfill my obligation, imu na ni NO because that is pactum commissorium and that is a void stipulation. You cannot stipulate that. If there is a stipulation in the mortgage that upon default of the debtor the creditor can register the sale over the property we are looking at a scenario where a mortgage deed was executed and at the same time a sale was executed. One of the stipulations that if the debtor defaults, the creditor can register the sale. The creditor now becomes the absolute owner. Is this a valid stipulation? NO, it constitutes pactum commissorium, it is a void stipulation. Thats why many creditors would require that when they execute a mortgage deed, they execute a pacto de retro document. If one of the stipulations of the mortgage contract is that upon default the debtor will execute a deed of sale in favor of the creditor over the property subject of the mortgage. Do you consider that pactum commissorium? It is not pactum commissorium because there is still another act which will be performed by the debtor before ownership is transferred to the creditor. Pactum commissorium- no other act by the debtor in order to transfer ownership; there is automatic transfer of ownership. The stipulation provides automatic transfer and no other intervention on the part of the debtor. It is a void stipulation. If a mortgage is an accessory undertaking just like guaranty and suretyship, is the mortgagor entitle to exhaustion of the properties of the debtor? Can the mortgagor invoke the benefit of excussion or exhaustion? Benefit of excussion is available only in cases of ordinary guaranty. E. Pledge and Mortgage are Indivisible
A pledge or a mortgage can be constituted not necessarily by the principal debtor. Meaning if I owe you 100,000 the mortgage can be executed by another person for as long as he is the owner of the property. That means that the mortgagor or the pledgor may not be the debtor himself. Vda. De Bautista vs. Marcos The mortgage here was constituted by Brigida Marcos before the homestead patent was issued in her name. SC said it was invalid because at the time when it was constituted you were not yet the owner because he homestead patent was issue after the mortgage was constituted. If the mortgage was invalid there is no right of the mortgagor to foreclose the mortgage. X and Y are spouses. Their children are A B C and D. X, the husband, died. The wife survived with the 4 children. The wife obtained a loan and secures the loan by constituting a mortgage over the conjugal property. Is the mortgage valid considering that upon the death of the husband the children also inherited from the estate of the husband half of the conjugal property? It is valid only with

If several parcels of land (3 parcels of land) are the subject of one real estate mortgage in order to secure an obligation of 10 million pesos. The debtor has paid 5 million, can the mortgagor ask for partial release of the mortgage? Can you release 1 parcel? Anyway the 2 parcels are enough? NO, that is the indivisible nature of pledge and mortgage. You cannot ask for a partial release unless if a particular property is subjected as security for payment for this particular amount- if this property will secure 2 million of the loan, this one 5 million of the loan, this one 3 million of the loan. If you have paid 5 million, can you ask for the release of the parcel designated as security for 5 million? Not necessarily. Yu vs. PCIBank Several properties were mortgaged some located in Dagupan, some in QC to secure payment of a loan worth 10 million. The loan was not paid so the creditor initiated foreclosure proceedings. Under the law, foreclosure must be done in the province where the properties are located. So for properties located in Dagupan, foreclosure proceedings were initiated in Pangasinan, for those properties located in QC, there was also a scheduled foreclosure sale. There was only one application filed and only one filing fee but in the notices of the foreclosure sale in Dagupan it was stated that properties were subject as securities for payment of the 10 million loan. There was also notice in QC that these properties are being sold for the loan of 10 million. It was published in both Dagupan and QC which means that the debt is 20,000. You cannot do that. You cannot conduct foreclosure sale in Dagupan and a separate foreclosure sale in QC because of the rule of the indivisibility of the mortgage. SC said indivisibility refers to the mortgage. Does not refer to the venue for foreclosure of mortgage because the law is clear that foreclosure must be conducted in the province in where the properties are located. Indivisibility does not mean that you must conduct the foreclosure sale only in one place even if the other properties are located in other provinces because that would violate the law. Indivisibility refers to the mortgage itself where you cannot ask for partial release if there is partial payment. It does not mean prohibition against the splitting of the venue if the properties are located in different provinces. Is a promise to constitute a pledge or mortgage valid? Like a promise to constitute guaranty or suretyship is valid? If I promise to constitute a mortgage over real property to secure my loan to you and I fail to pay the loan can you foreclose? Can you sell my property in public sale? What does it mean when the law says give rise to personal action only? That means you can compel me to execute the mortgage deed but you cannot foreclose or sell the property at a public sale because there is no mortgage constituted yet. If I promise to constitute a mortgage, make sure that I execute the proper document so you can foreclose. That is your right if I merely make a promise then your remedy is only a personal action to compel me to execute the proper document. PLEDGE Pledge- is an accessory contract which is perfected by the delivery of the thing (real contract) by virtue of which the debtor or pledgor delivers to the creditor or a third person personal property as security for the performance of a specific obligation, the fulfillment of which the thing must be returned with its accessions and accessories. Requisites: 1. It must be constituted to secure fulfillment of a principal obligation 2. It must be constituted by the absolute owner not necessarily the principal debtor for as long as pledgor is the owner. 3. 4. The pledgor must free disposal of the thing or he must be duly authorized by the owner. The fourth requisite which is not found in mortgage is that the property must be delivered to the creditor or third person as agreed by the parties.
Kalibo vs. CA Mr. Abella rented the house of Mr. Kalibo in Tagbilaran. Because he failed to pay the monthly rentals, he delivered to Mr. Kalibo a tractor in pledge as security for payment of the rentals for the house. It turned out that the tractor was owned by his father Pablo Abella. And then Pablo Abella demanded for the return, the delivery to him of the tractor and Mr. Kalibo objected saying that it was delivered to him as pledge as security for the payment of the unpaid rentals. Was there a valid pledge constituted between Abella and Mr. Kalibo? SC said NO because one of the pledge to be validly constituted is that it must be constituted by the owner and here there was no dispute that the tractor was owned by the father and not by Mike Abella. There could be no valid pledge constituted. So he said if there was no valid pledge then it was deposited with him. The purpose of deposit is safekeeping but the tractor was delivered to him as pledge as security for the unpaid rentals. SC said return the tractor to Pablo Abella since there was no valid mortgage constituted Who are the parties of pledge? 1. Pledgor- the person who delivers 2. Pledgee- the party who receives or to whom the property is delivered or the creditor If the pledgor is not the principal debtor and the principal debtor fails to perform or fulfill the principal obligation, the result of that is that the thing subject of the pledge will be sold at public auction to satisfy the obligation, it is the right of the pledgor to recover from the principal debtor. He is also entitled to be subrogated to the rights of the creditor. What kind of things can be the object of a pledge? Only movable objects. Is it all kinds of movable? It does not include those outside the commerce of men like prohibited drugs or illegal things. It must be susceptible of possession. The thing must be movable. Can animals be the objects of a contract of pledge? Yes, for as long as they are delivered to a pledgee or third person. Can incorporeal rights which are invisible be the objects of a pledge? Can shares of stocks be pledged? Yes, but what you deliver are the stocks certificates Or goods stored in a warehouse? Yes, deliver the warehouse receipt instead of delivering the thing. If it is stocks certificate or negotiable documents that are delivered to the pledgee, if these are negotiable documents then these must be properly indorsed. It does not mean though that if you indorse the negotiable document or stocks certificate, the ownership is already transferred to the pledgee. It is only to facilitate sale later on. Pledge is an accessory undertaking to secure fulfillment of a principal obligation, it is not constituted to pay a principal obligation. Otherwise that would be novation or if the obligation consists a sum of money that would be dacion en pago. Even if you indorse the negotiable warehouse receipt or the negotiable quedan or the stocks certificate, it does not transfer ownership to the pledgee. What is the consideration? All the essential elements must be present. Cause, consideration, object. If there has to be consideration in a pledge, does it mean to say that the pledgor must receive a valuable consideration for constituting the pledge? We are talking of a pledgor who is not the principal

debtor. Must he receive a valuable consideration in order to validly constitute pledge? No, because the consideration that supports the principal obligation is the same consideration that supports pledge. e. Form It is the delivery of the thing that perfects the contract. Therefore in order for it to be valid between the pledgor and the pledgee, in what form must it be? No particular form is required for as long as the thing is delivered but in order to bind third persons, it must be in a public document where it sets forth the description of the property and the date when the pledge was constituted. Note that you do not indicate the amount secured. It can be constituted to secure future obligations. Betita vs. Guanzon Tiburcia is a widow. She owns several animals (carabaos) but she obtained a loan from Tiburcio. To secure payment of the loan, she signed a private document saying: I, Tiburcia Buhayan, of age, widow, and resident of do hereby execute this document extrajudicially that I am indebted toas security to my creditor I hereby offer 4 carabaos, 3 females and 1 male. Daghang utang c lola tiburcia and she was sued. SC said the 4 carabaos cannot be mortgaged because the mortgage was executed in a private document. He said the carabaos were mortgaged to me because the carabaos were delivered to my tenant. If delivered to the agent, it is tantamount to being delivered to the principal. The tenant was the live-in partner of Lola Tiburcia. SC said there was no valid transfer of possession from Tiburcia to the creditor because Effects as to the Pledgee A. Rights of the pledgee a. Retention of the thing deprivation, he can exercise the right of the owner of the thing. Preference of credit
When do you consider whether the person is a preferred creditor or not? If the debtor is insolvent because if the debtor is not insolvent we dont think about preference of credit because he has more than enough assets to satisfy all his liabilities. But if the debtor has insufficient assets to pay or to satisfy all his liabilities then there are creditors who are considered preferred creditors. If a movable object, the object of pledge, is delivered to the pledgee, the pledgee or the creditor is considered a preferred creditor with respect to that particular movable not to any other movable or to any other asset of the debtor. What does it mean? At the time of liquidation of the assets of the insolvent, the creditor or the pledgee has the right to be paid first out of the proceeds of the sale of that movable. If the proceeds are not enough to satisfy the principal obligation then he joins with the other ordinary creditors they will share with whatever assets are left.
2 instances when he can use: 1. When he is authorized to use 2. When the use of the thing is necessary for its preservation Just like a depositary (cannot generally use the thing unless he is allowed to use and for as long as the principal purpose is still safekeeping and secondly, if the use of the thing is necessary for its preservation). Just like a depositary, can the pledgee deposit the thing delivered to him in pledge with another person? General rule: no Unless he is authorized b. c. Another right of the pledgee is to seek reimbursement he is entitled to be reimbursed for the expenses in the preservation of the thing.
If the thing produces income or produces fruits (natural, civil, industrial). He applies the fruits for the expenses for the preservation. What if there are no expenses for the preservation? Apply it to the interest and to the principal debt. If the object pledged are carabaos (3 females, 1 male), granting it was a perfectly valid pledge, the female produces an offspring, is the offspring included in the pledge? Yes, it can also be sold to satisfy the principal obligation although it belongs to the pledgor, the offspring can be sold to satisfy the principal obligation. d. If there is a danger of eviction or of deprivation of the thing, it is also a right of the pledgee to institute actions or to exercise whatever right the owner of the thing has in order to defend the possession or ownership of the thing. He can exercise whatever right the pledgor may have to defend any danger or

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Grace and Clarz Credit Transcription Notes for Prefi Feb.

Loan- 1,000,000 + 500,000 -------------------1,500,000

Grace and Clarz Credit Transcription Notes for Prefi Feb. 11

Grace and Clarz Credit Transcription Notes for Prefi Feb. 11

Grace and Clarz Credit Transcription Notes for Prefi Feb. 11

Grace and Clarz Credit Transcription Notes for Prefi Feb. 11

Grace and Clarz Credit Transcription Notes for Prefi Feb. 11

Grace and Clarz Credit Transcription Notes for Prefi Feb. 11

Grace and Clarz Credit Transcription Notes for Prefi Feb. 11

Grace and Clarz Credit Transcription Notes for Prefi Feb. 11

Extinguishment of Guaranty I. A. Extinction of Guaranty Negligence of the creditor

Grace and Clarz Credit Transcription Notes for Prefi Feb. 11

Grace and Clarz Credit Transcription Notes for Prefi Feb. 11

Grace and Clarz Credit Transcription Notes for Prefi Feb. 11

Grace and Clarz Credit Transcription Notes for Prefi Feb. 11

Grace and Clarz Credit Transcription Notes for Prefi Feb. 11

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