INTRODUCTION

MEANING AND SCOPE OF CREDIT TRANSACTIONS Credit transactions include all transactions involving the purchase or loan of goods, services, or money in the present with a promise to pay or deliver in the future. TWO TYPES OF CREDIT TRANSACTIONS/ CONTRACTS OF SECURITY

1. Secured transactions or contracts of real security – supported by a collateral or an
encumbrance of property

2. Unsecured transactions or contracts of personal security – fulfillment by the debtor is
supported only by a promise to pay or the personal commitment of another EXAMPLES OF CREDIT TRANSACTIONS 1. 2. 3. 4. 5. Bailment contracts Contracts of guaranty and suretyship Mortgage Antichresis Concurrence and preference of credits

MEANING OF SECURITY Security (def). Something given, deposited, or serving as a means to ensure the fulfillment or enforcement of an obligation or of protecting some interest in property. KINDS OF SECURITY

1. Personal Security - when an individual becomes a surety or a guarantor 2. Property or Real Security – when a mortgage, pledge, antichresis, charge, or lien or
other device used to have property held, out of which the person to be made secure can be compensated for loss. BAILMENT Bailment (def). The delivery of property of one person to another in trust for a specific purpose, with a contract, that the trust shall be faithfully executed and the property returned or duly accounted for when the special purpose is accomplished or kept until the bailor reclaims it. To be legally enforceable, a bailment must contain all the elements of a valid contract, which are consent, object, and cause or consideration. However, a bailment may also be created by operation of law. PARTIES IN BAILMENT

1. Bailor – the giver; the one who delivers the possession of the thing bailed 2. Bailee – the recipient; the one who receives the possession or custody of the thing delivered
KINDS OF BAILMENT 1. For the sole benefit of the bailor Examples: gratuitous deposit and mandatum (bailment of goods where the bailee gratuitously undertakes to do some act with respect to the property)

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Ex. My tito from the States makes padala a balikbayan box filled with spam through another relative who’s flying to the Philippines on vacation. It only benefits my tito (the bailor). Or, Helen deposits Polsci’s baby chair with the mysterious little guy who doesn’t smile in the bag depository counter outside the lib. In this case, only Helen benefits (based on a true story). 2. For the sole benefit of the bailee Examples: commodatum and gratuitous simple loan or mutuum Ex. Xilca borrows my white blouse because she forgot to bring clothes to change from her Pasay City Jail outfit. Only Xilca is benefited, not me. Or, Xilca borrows P10 from me without interest. 3. For the benefit of both parties Examples: deposit for a compensation, involuntary deposit, pledge, bailments for hire Ex. Ansky pawns her huge diamond earrings at Villarica Pawnshop. The pawnshop gives her P10,000 and a pawn ticket. Both parties benefit – Ansky gets fast cash, while the pawnshop gets to keep the huge diamond earrings to make sure that Ansky pays, and in case she doesn’t they can sell the earrings. 1 and 2 are gratuitous bailments. There is no consideration because they are considered more as a favor by one party to the other. Bailments under number 3 are mutual-benefit bailments, and they usually result from business transactions. BAILMENT FOR HIRE Bailment for hire arises when goods are left with the bailee for some use or service by him always for some compensation. KINDS OF BAILMENT FOR HIRE

1. Hire of things – goods are delivered for the temporary use of the hirer 2. Hire of service – goods are delivered for some work or labor upon it by the bailee 3. Hire for carriage of goods – goods are delivered either to a common carrier or to a private
person for the purpose of being carried from place to place

4. Hire of custody – goods are delivered for storage

I. LOAN GENERAL PROVISIONS
Art. 1933. By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same for a certain time and return it, in which case the contract is called a commodatum; or money or other consumable thing, upon condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply called a loan or mutuum. Commodatum is essentially gratuitous. Simple loan may be gratuitous or with a stipulation to pay interest. In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the borrower. Art. 1934. An accepted promise to deliver something by way of commodatum or simple loan is binding upon the parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract.

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ESSENTIAL ELEMENTS OF A CONTRACT Consent of the parties Object Cause or Consideration

IN THE CONTEXT OF A LOAN Borrower and Lender Property For the lender: right to demand the return of the thing For the borrower: acquisition of the thing

CHARACTERISTICS OF THE CONTRACT OF LOAN

1. A real contract – the delivery of the thing loaned is necessary for the perfection of the
contract

2. A unilateral contract – once the subject matter has been delivered, it creates obligations on
the part of only one of the parties (the borrower) CAUSE OR CONSIDERATION IN A CONTRACT OF LOAN 1. 2. As to the borrower: the acquisition of the thing As to the lender: the right to demand its return or of its equivalent

KINDS OF LOAN

1. Commodatum – where the lender delivers to the borrower a non-consumable thing so that
the latter may use it for a certain time and return the identical thing

2. Simple loan or mutuum – where the lender delivers to the borrower money or other
consumable thing upon the condition that the latter shall pay the same amount of the same kind and quality. LOANS DISTINGUISHED FROM CREDIT Credit means the ability of an individual to borrow money or things by virtue of the confidence or trust reposed by a lender that he will pay what he may promise within a specified period. Loan means the delivery by one party and the receipt by the other party of a given sum of money or other consumable thing upon an agreement to repay the same amount of the same kind and quality, with or without interest. The concession of a credit necessarily involves the granting of loans up to the limit of the amount fixed in the credit. As opposed to debt, credit is a debt considered from the creditor’s standpoint. It is that which is due to any person.

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you will be liable for estafa because ownership of the property is not transferred to the borrower. In loan. Lender says okay. But is there a contract of loan at this point? No. if you do not return the thing when it is due. It is a consensual contract and is binding upon the parties. Ordinary commodatum Precarium – one whereby the bailor may demand the thing loaned at will Sheryl IID 2002 PAGE 4 . 2. I will lend you the money. it becomes onerous Borrower need only pay the same amt of the same kind and quality Personal only Consumption Lender may not demand return of the thing before the lapse of the term agreed upon Suffered by the borrower even if through fortuitous event PAYMENT BY BORROWER KIND OF PROPERTY PURPOSE WHEN LENDER MAY DEMAND Borrower must return the same thing loaned Real or personal Temporary use or possession Lender may demand return of the thing before the expiration of the term in case of urgent need Suffered by the lender (since he is the owner) LOSS OF THE THING In commodatum. This is an accepted promise to make a future loan.DISTINCTIONS BETWEEN COMMODATUM AND SIMPLE LOAN SUBJECT MATTER OWNERSHIP GRATUITOUS? COMMODATUM Not consumable Retained by the lender Gratuitous SIMPLE LOAN Money or other consumable thing Transferred to the borrower Default rule is that it is gratuitous BUT the parties may stipulate interest. because loan is a real contract and is perfected only upon delivery of the thing. the contract ceases to be a commodatum. This is because in loan. KINDS OF COMMODATUM 1. FORM OF LOAN There are no formal requisites for the validity of a contract of loan except if there is a stipulation for the payment of interest. in which case. CHAPTER 1 COMMODATUM Art. ACCEPTED PROMISE TO MAKE A FUTURE LOAN Borrower goes to Lender and asks if he could borrow P10K at 6% interest per annum. The bailee in commodatum acquires the use of the thing loaned but not its fruits. so there is no unlawful taking of property belonging to another. A stipulation for the payment of interest must be in writing. if any compensation is to be paid by him who acquires the use. His liability is only a civil liability for the breach of the obligation to pay. ownership of the thing is transferred to the borrower. 1935. the borrower who does not pay is not criminally liable for estafa.

If the dog gives birth while it is in the custody of B. The parties may stipulate that the borrower may use the fruits of the thing. It is enough that he has possessory interest in the thing or right to use it which he may assert against the bailee and third persons though not against the rightful owner. 2. The consequences of this are the following: a. Liability for loss of the thing – The general rule is the borrower is not liable for loss or damage due to a fortuitous event. At the end of the week. 1. Display of a bottle of wine). But in the following cases. B must return the dog to A. The borrower cannot lend or lease the thing to a third person. if the thing loaned has been delivered with appraisal of its value unless there is a stipulation exempting the bailee from responsibility in case of a fortuitous event is equivalent to an assumption of risk. The purpose of the contract is the temporary use of the thing loaned for a certain time. if he devotes the thing to a purpose different from that for which it was loaned (bad faith) this is a breach of the tenor of the obligation b. It is essentially gratuitous. 6. OBLIGATIONS OF THE BORROWER 1. but this must only be incidental to the use of the thing itself (because if it is the main cause.NATURE OF COMMODATUM Commodatum in simple terms is hiram – A agrees to lend his guard dog to his friend B for a week for free. However. The death of either party extinguishes the contract unless there is a contrary stipulation for the commodatum to subsist until the purpose is accomplished b. members of the borrower’s household may make use of the thing loaned except: i. The owner bears the loss. it is not commodatum but it may be a deposit.) 4. (Ex. if he keeps it longer than the period stipulated or after the accomplishment of the use for which the commodatum has been constituted (delay) c. though consumable goods may also be the subject of commodatum if the purpose is not the consumption of the object (ex. or if the nature of the thing forbids it. The subject matter is generally non-consumable real or personal property. ii. The bailee acquires the use of the thing but not its fruits. 7. 2. the puppies (fruits) belong to A. It is purely personal in character. B is entitled to use the dog for this period. A lessee may sublet the thing leased). (So if the bailee is not entitled to use the thing. Liability for ordinary expenses – The borrower should defray the expenses for the use and preservation of the thing loaned. Sheryl IID 2002 PAGE 5 this . The lender need not be the owner of the thing loaned. unless there is a stipulation to the contrary. 3. 5. the contract may be one of usufruct). if there is a stipulation to the contrary. the borrower is liable for loss through a fortuitous event: a.

While the car is in Xilca’s possession. 20. OBLIGATIONS OF THE LENDER 1. if. arbitrarily. Deterioration is a natural result of such use. However. Xilca still cannot retain the car as security. or whimsically. and 21. Kim Chong owes Xilca P3. 2. Sheryl IID 2002 PAGE 6 . But even if Kim Chong owes Xilca money in connection with the thing that he loaned. Reason: Because the lender retains ownership so he should bear the loss from ordinary deterioration. Obligation to return the thing loaned – The borrower must return the thing as soon as the period stipulated expires or the purpose has been accomplished. At the end of the 10 days. This is borne by the lender. Why? Because Xilca’s obligation as a borrower is to return the thing after the period expires. a tire explodes. he chose to save his own (ingratitude). He cannot keep the thing as security for anything that the lender may owe him. At the end of the 10 days. Xilca refuses to return the car unless Kim Chong pays her the P3.000. Pending payment of the damages by lender to borrower. if he lends or leases the thing to a third person who is not a member of his household also a breach of the tenor of the obligation.000 as an extraordinary expense for the preservation of the thing. Cayo owes her a tuna sandwich. Precarium – Precarium is a kind of commodatum where the lender may demand the thing at will.000. he may demand its return or temporary use if he should have urgent need of the thing.d. being able to save either the thing borrowed or his own thing. Also. Xilca borrows Kim Chong’s car for 10 days. Exception: If the thing loaned has hidden defects and the borrower suffers damages as a result of the hidden defect. Liability of two or more bailees – When there are two or more borrowers to whom a thing is loaned in one contract.The borrower is not liable for the ordinary deterioration or wear and tear of the thing that comes as a natural consequence of its use. Can Xilca refuse to return? No. except for a claim for damages suffered because of the flaws of the thing loaned. Xilca earlier won a bet with Cayo. (see discussion below) 5. there liability is solidary. because the purpose of commodatum is for the borrower to use the thing. Obligation to respect the duration of the loan – The lender cannot demand the return of the thing until after the expiration of the period or after the accomplishment of the use for which the commodatum was constituted. Precarium exists in the following cases: a. e. b. So for example. If there is no stipulation as to the duration of the contract or to the use to which the thing loaned should be devoted If the use of the thing is merely tolerated by the lender BUT. Or. Liability for deterioration of the thing . borrower can keep the thing as a security. the borrower can claim damages against the lender. 3. Xilca cannot refuse to return Alvin Ang’s frisbee to Cayo and hold it hostage until Cayo delivers the sandwich. and she cannot keep it as a security for anything that Cayo may owe her. Cayo loaned Alvin Ang’s Frisbee to Xilca for 10 days. 4. the lender may not demand the thing capriciously. Xilca has to buy a new tire for P3. In this case. as a result of which. since this would give rise to an action on the part of borrower for abuse of right under Articles 19.

He should have taken precautions when he opened the hood or he should have gone to a gas station or mechanic to have it fixed. No. He was. he should have known that if he opened the radiator. unless there is a contrary stipulation. Borrower opens the hood and sees lots of steam. Liability for damages for known hidden flaws . be unfair to allow the lender to just abandon the thing instead of paying for the expenses and damages. because in this case. very hot water would spray out. e. 6. he would not have been scalded. therefore. Right to demand return of thing for acts of ingratitude – If the borrower commits any of the acts enumerated in Art. Radiator water scalds his face. 765 of the Civil Code. Sheryl IID 2002 PAGE 7 . Had he been more careful. All other expenses are for the account of the borrower. But since he was negligent. and let’s forget about my obligation. Lender forgets to tell borrower that the car has a tendency to overheat after 10 minutes. the lender may demand the immediate return of the thing from the borrower. So Borrower drives. Obligation to refund extraordinary expenses a. b. in a position to know that the car just might be prone to overheating since it was old already.3. Can he claim damages from Lender and can he keep the car as security? No. (HOT TIP) Example: Borrower borrows a 1970 Mitsubishi Lancer from Lender. 5. he has only himself to blame for the damage caused. at least. Unfortunately. Just keep the thing. and it would. Buyer should have known. This is because the expenses and damages may exceed the value of the thing loaned. There is a flaw or defect in the thing loaned. (This applies to ordinary commodatum. unless the need is so urgent that the lender cannot be notified without danger. and after 10 minutes. d. Extraordinary expenses arising from actual use of the thing – Extraordinary expenses arising on the occasion of the actual use of the thing shall be borne by the lender and borrower on a 50-50 basis. the car stalls and overheats. and he suffers from burns. since in precarium the lender can demand at will. The lender cannot exempt himself from the payment of the expenses or damages by abandoning the thing to the borrower. ABANDONMENT OF THING BY THE LENDER Can the lender tell Borrower: I don’t want to pay for the extraordinary expenses and damages that I owe you. subject to the provisions against abuse of right) 4. b. He opens the radiator cap to put water inside. Extraordinary expenses for the preservation of the thing – The lender should refund the borrower the extraordinary expenses for the preservation of the thing. c. And when he opened the hood and saw lots of steam. The defect was not really hidden since Borrower was in a position to know of it even if Lender did not inform him.Requisites: (F-HADD) a. provided that the borrower informs the lender before incurring the expense. The flaw or defect is hidden The lender is aware of the flaw The lender does not advise the borrower of the flaw The borrower suffers damages by reason of the flaw or defect The lender is penalized for his failure to disclose a hidden flaw which causes damage because he is in a position to prevent the damage from happening.

Whether a thing is consumable or not depends upon its nature. or measure. The term “return” is not used since the distinguishing character of the simple loan from commodatum is the consumption of the thing. weight. the contract is a contract of barter. DISTINCTIONS BETWEEN MUTUUM. NO CRIMINAL LIABILITY FOR ESTAFA FOR FAILURE TO PAY There is no criminal liability for failure to pay a simple loan because the borrower acquires ownership of the thing. FUNGIBLE AND CONSUMABLE THINGS Fungible things (def).CHAPTER 2 SIMPLE LOAN OR MUTUUM DEFINITION Simple loan (def). If it cannot be replaced with an equivalent thing. Whether a thing is fungible or not depends on the intention of the parties. A contract whereby one of the parties delivers to another money or other consumable thing with the understanding that the same amount of the same kind and quality shall be paid. then it is non-fungible. oil. AND BARTER MUTUUM Money or other fungible things Return the equivalent May be gratuitous or onerous COMMODATUM Non-fungible things Return the identical thing borrowed Always gratuitous BARTER Non-fungible things Return the equivalent Onerous SUBJECT MATTER OBLIGATION OF THE BORROWER GRATUITOUS? Sheryl IID 2002 PAGE 8 . (ex. and quality. Those which are usually dealt with by number. so that any given unit or portion is treated as the equivalent of any other unit or portion. quantity. COMMODATUM. Rice. A simple loan involves the payment of the equivalent and not the identical thing because the borrower acquires ownership of the thing loaned. (in short. A contract where one of the parties binds himself to give one thing in consideration of the other’s promise to give another thing. Consumable things (def). exchange of property) If one person agrees to transfer the ownership of non-fungible things to another with the obligation on the part of the latter to give things of the same kind. Those which may be replaced by a thing of equal quality and quantity. BARTER Barter (def). Those which cannot be used without being consumed. sugar). CONSIDERATION What is the consideration in this kind of contract? The promise of the borrower to pay is the consideration for the obligation of the lender to furnish the loan.

then there is no such thing as unlawful interest.000 from Lender at the peso-dollar exchange rate of P50$1. otherwise it is payable in the currency which is legal tender in the Philippines. If the parties had agreed that payment would be in dollars. According to Art. FPJ becomes President. the rate becomes P60$1. So unless there’s a drastic economic situation. is applicable in payments of loans. we shouldn’t adjust the value of the currency. in writing [3. The test of an unconscionable interest rate is relative and there is a need to look at the parity/disparity in the status of the parties and in their access to information during the negotiations. the value of the currency at the time of the establishment of the obligation (not at the time of payment) should be the basis for payment. So how do you opt out of it? Stipulate! Put a stipulation that says that if it is impossible to pay a thing of the same kind. The payment of interest must be expressly stipulated. Stipulation of interest 1.000. If the object is money – Payment must be made in the currency stipulated. the legal rate for loans and forbearances of money is 12%. Why? You cannot apply 1250 and base the amount due on the value of the currency in 2000 because the inflation is not so extraordinary as to warrant the adjustment. the borrower shall pay its value at the time of the perfection of the loan. 2. quality. 2. Borrower still has to pay $1. Borrower borrowed $1. the reason for requirement is to prevent circumvention of the interest ceilings. If the parties had agreed that payment would be in pesos. In case it is impossible to do so. payable in 2004. is applicable. And the interest must be lawful (but since there is no Usury Law anymore. INTEREST Requisites for Recovery of Interest: 1. If the object is a fungible thing other than money – Borrower must pay lender another thing of the same kind. The obligation should be paid based on the value of the currency at the time of payment. The interest rate stipulated by the parties. BUT JPSP thinks that this is rarely applied because it would create a bad precedent and would wreak havoc on the economy. It would also shift the loss to the lender. Default rule: If the parties do not stipulate an interest rate. In 2004. Even if there are no longer any interest ceilings. or P60. Why does the law require that the value of the thing be based on its value at the time of the perfection of the loan? There’s a historical explanation: the rule was created at a time when there were still interest ceilings. Borrower should pay at the rate of P60 to a dollar. Ex: In 2000. so I don’t think this requisite is still included)] There is no Usury Law anymore.FORM OF PAYMENT 1. Art. and as a result. and quantity. 1250. which shouldn’t be the case since the loan is primarily for the benefit of the borrower. 1955. this rule is still applicable.000. Sheryl IID 2002 PAGE 9 . borrower shall pay the market value of the thing at the time of payment. but an interest rate may still be struck down for being unconscionable. 1250 provides that in case of extraordinary inflation or devaluation. not the legal rate of interest. and quantity. Thus. quality. 2.

The additional interest is based on the regular interest of the loan. with or without security. Indemnity for damages – The debtor in delay is liable to pay legal interest as indemnity for damages even without a stipulation for the payment of interest.). On due date. How much should he pay? Borrower should pay 10K + 10% of 10K (interest on the loan) + 10% of 10K (penalty interest) = 10K + 1K + 1K = 12. On due date. If there is no regular interest.600 Lender lends P10K at 10% interest. The penalty interest is 12% since there is no interest on the loan nor a penalty interest stipulated. How much should Borrower pay a year later? Borrower should pay P10K + 12% of P10K = 11.6K = 11. Rate in the penalty clause agreed upon by the parties b. If there is no penalty clause. But if the formula says “interest will be based on T-bill rates and other interest-setting policies as the bank may determine. Lender lends P10K. 4. It is only in contracts of loan.For other sources of obligations. the legal rate of interest is 6%. Borrower fails to pay. The extra interest is based on the legal rate of interest. Borrower only pays a year after. When the borrower is liable for interest even without a stipulation: 1. and damages arising from injury to persons and loss of property which do not involve a loan. Escalation Clause – A clause which authorizes the automatic increase in interest rate. over which neither party has any discretion. Borrower fails to pay. Increases in interest must also be expressly stipulated. Borrower only pays a year after. such as sale. over which neither party has control (ex: interest will be adjusted quarterly at a rate of 3% plus the prevailing 91-day T-bill rate.200. additional interest based on the regular interest rate of the loan c. This would violate consensuality and mutuality of contract (PNB v. CA). But the parties can agree upon a formula for determining the interest rate. Where to base the rate of damages: a. 5. On due date.000 The penalty interest in this case is 10% since there is no penalty interest stipulated. Stipulation of interest must be mutually agreed upon by the parties and may not be unilaterally increased by only one of the parties.” this is not valid. etc. An escalation clause is valid when it is accompanied by a De-Escalation Clause. Sheryl IID 2002 PAGE 10 . 3. that interest may be stipulated and demanded. Borrower fails to pay. A de-escalation clause is a clause which provides that the rate of interest agreed upon will also be automatically reduced. additional interest is equivalent to the legal interest rate (12%) Example: Lender lends P10K at 10% interest with penalty interest of 6%. There must be a specified formula for arriving at the adjusted interest rate. no interest. How much should he pay? Borrower should pay the principal + interest on the loan + penalty interest = 10K + 10% of 10K + 6% of 10K = 10K + 1K + .

) If interest is payable in kind: If interest is payable in kind.000 = 121. Express stipulation – Also called compounding interest where the parties agree that II. he may recover. binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. Interest accruing from unpaid interest – Interest due shall earn interest from the time it is judicially demanded although the obligation may be silent on this point (Art. The resulting amount is your new principal which will then earn interest again. its value shall be appraised at the current price of the products or goods at the time and place of payment. If the principal obligation consists in the payment of goods and it is impossible to deliver the goods. How does compounding interest work? Lender lends P100. the 110. Take note that you should not confuse this with the rule when the principal obligation consists of goods other than money.000. When judicially demanded (Art. since this is a case of solutio indebiti or undue payment. how much is due? Principal plus 10% interest = 110. By guaranty a person. called the guarantor. Sheryl IID 2002 PAGE 11 . General Rule: Accrued interest shall not earn interest Exceptions: 1. he cannot later recover.000 payable in 2 years at 10% interest compounded per annum.000 In compounding interest. But if interest is payable in kind. At the end of the first year. GUARANTY AND SURETYSHIP CHAPTER 1 NATURE AND EXTENT OF GUARANTY Art. how much is due? 110.2. 2. 2047. A stipulation as to compounding interest must be in writing. What if the borrower pays interest when there is no stipulation providing for it? If the debtor pays unstipulated interest by mistake. the borrower should pay the value of the thing at the time of the constitution of the obligation. The obligation to return the interest is a natural obligation.000 + 11. 2212) accrued interest shall be added to the principal and the resulting total amount shall earn interest.000 becomes the new principal amount and it is what will earn the 10% interest. it should be appraised at its value at the time of payment. you add the unpaid interest to the principal.000 = 110. On the second year. So at the end of the second year. 2212.000 + 10% of 110. But if the debtor voluntarily pays interest (either unstipulated or stipulated by not in writing) because of some moral obligation.

conventional: by agreement of the parties b. real: the guaranty is property. 4. As to consideration: a. b. As to the person guaranteed: a. In such case the contract is called a suretyship. in a real guaranty. In a contract of guaranty. a person may guarantee his own obligation with his own properties. 2. Unilateral: a. As to origin: a. If the guaranty is movable property: pledge or chatter mortgage 2. legal: imposed by law c. (Although after its fulfillment. single: constituted solely to guarantee or secure performance of the principal obligation Sheryl IID 2002 PAGE 12 . the parties are the guarantor and the creditor. Distinct Person: It requires that the person of the guarantor must be distinct from the person of the principal debtor (you cannot guaranty your own debt). Classification of Guaranty 1. Subsidiary and Conditional: It takes effect only when the principal debtor fails in his obligation. In the broad sense: a. 3. the provisions of Section 4.) A contract whereby the guarantor binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. Guaranty (def. Accessory: It is dependent for its existence upon the principal obligation guaranteed by it. If the guaranty is immovable property: real mortgage or antichresis. However. judicial: required by a court to guarantee the eventual right of one of the parties in a case 3. but this obligation is only incidental) It may be entered into even without the intervention of the principal debtor. onerous: the guarantor receives valuable consideration for acting as guarantor 4. Title 1 of this Book shall be observed. It gives rise to obligations on the part of the guarantor in relation to the creditor and not vice-versa.If a person binds himself solidarily with the principal debtor. Characteristics of the Contract of Guaranty (A-SC-U-D) 1. gratuitous: the guarantor does not receive anything for acting as guarantor b. personal: the guaranty is the credit given by the person who guarantees the fulfillment of the principal obligation (guarantor) b. the principal debtor should indemnify the guarantor. Chapter 3.

Suretyship dispenses with certain legal requirements/conditions precedent for proceeding against a guarantor. after payment. acceptor. or indorser without consideration and only for the purpose of lending his name) is. An accommodation party (one who signs an instrument as maker. b. BUT. may require that they be reimbursed. c. But. 2047: Suretyship If a person binds himself solidarily with the principal debtor. stands for some other person. the principal debtor and the surety (since they are solidarily bound). the two are similar in the following ways: 1. in effect. The guarantor is called a surety. 2. The creditor may sue. separately or together. double or sub-guaranty: constituted to secure fulfillment of a prior guaranty. indefinite or simple: includes not only the principal obligation but also all its accessories. The difference is that the lender cannot go after the surety right away. their liability to pay the creditor would be solidary.b. a surety. 2. A surety is bound by a judgment against the principal even though the party was not a party to the proceedings. the creditor can go after any of the solidary debtors on due date. a. a demand or notice of default is not required to fix the surety’s liability. Nature of a Surety’s Undertaking 1. Liability is limited by the terms of the contract: The extent of a surety’s liability is determined only by the terms of the contract and cannot be extended by implication. and absolute. 3. like a surety. drawer. He is thus liable to pay the holder of the instrument. Suretyship is governed by Articles 1207 to 1222 of the Civil Code on solidary obligations. including judicial costs. There has to be default on the part of the principal debtor before the surety becomes liable. Liability arises only if principal debtor is held liable: If the principal debtor and the surety are held liable. the surety does not incur liability unless and until the principal debtor is held liable. subject to reimbursement from the accommodated party. it is a contract of suretyship. Both debtor and surety. If it were mere solidarity among debtors. primary. Second Paragraph of Art. Generally. What is the difference between passive solidarity (solidarity among debtors) and suretyship? Review of oblicon: According to Tolentino. definite: limited to the principal obligation only or to a specific portion thereof b. As to scope and extent: a. guarantees the obligation of a guarantor 5. d. his liability to the creditor is direct. A solidary debtor. Sheryl IID 2002 PAGE 13 . Contractual and Accessory BUT Direct: The contractual obligation of the surety is merely an accessory or collateral to the obligation contracted by the principal.

Example: Tuks accommodates Shak so that he can obtain a loan from the bank. At the bottom of the loan agreement, the following signatures appear: (sgd) Tuks Lino Chris Kapunan (sgd) Shak Sherwin Shakramy

Is Tuks a surety or a solidary debtor? According to JPSP, based on this document above, Tuks is a solidary debtor. Remember the rule? I promise to pay signed by two parties = solidary. To make sure that he’s merely a guarantor or surety, Tuks should sign a separate guaranty agreement. Besides, a guaranty must be express. It is not presumed. e. A surety bond is void where there is no principal debtor.

4. Surety is not entitled to exhaustion: A surety is not entitled to the exhaustion of the
properties of the principal debtor since the surety assumes a solidary liability for the fulfillment of the principal obligation.

5. The undertaking is to the CREDITOR, not to the principal debtor: The debtor cannot
claim that the surety breached its obligation to pay for the principal obligation because there is no obligation as between the surety and the debtor. If the surety does not pay, the principal debtor is still not relieved of his obligation. Guaranty Distinguished from Suretyship: GUARANTY Guarantor promises to answer for the debt, default or miscarriage of the principal Liability of the guarantor depends upon an independent agreement to pay the obligation if the primary debtor fails to do so The engagement of the guarantor is a collateral undertaking The guarantor is secondarily liable SURETYSHIP Surety promises to answer for the debt, default or miscarriage of the principal (same) Surety assumes liability as a regular party to the undertaking Surety is charged as an original promisor A surety is primarily liable

MAIN DIFFERENCE: A surety undertakes to pay if the principal does not pay (insurer of the debt). A guarantor binds himself to pay if the principal cannot pay (insurer of the solvency of the debtor). Since the obligation of the surety is to pay so long as the principal does not pay (even if he can; even if he is solvent), the undertaking of the surety is more onerous than that of a guarantor who pays only in the event that the principal is broke. Illustration: A borrows P10,000 from B, with C agreeing to be the surety. A refuses to pay B out of spite. In this case, since C is a surety, B can immediately demand payment from C. If, in this case, C is a guarantor instead, B would have to exhaust all the property of A before he can collect from C. it is not enough that A refuses to pay even if he can; in order for C to be liable, A would have to be unable to pay. If you were a lender and the borrower offers as security either X as guarantor or a real estate mortgage, which one would you choose? Choose the mortgage. If you were the lender, a real estate mortgage is more advisable because you can collect against the property. In a guaranty/surety, you would have to go against the guarantor or

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surety – you would have to sue him, obtain judgment, and then execute judgment. This is subject to a lot of delays. The guarantor or surety can stall your claim. Art. 2048. A guaranty is gratuitous, unless there is a stipulation to the contrary. GENERAL RULE: Guaranty is gratuitous. EXCEPTION: Guaranty is onerous only if it is stipulated. What is the cause/consideration of a contract of guaranty? The cause of a contract of guaranty is the same cause which supports the principal obligation of the principal debtor. There is no need for an independent consideration in order for the contract of guaranty to be valid. The guarantor need not have a direct interest in the obligation nor receive any benefit from it. It is enough that the principal obligation has consideration. Art. 2049 A married woman may guarantee an obligation without the husband’s consent, but shall not thereby bind the conjugal partnership, except in cases provided by law. Art. 94 of the Family Code The absolute community of property shall be liable for: (3) Debts and obligations contracted by either spouse without the consent of the other to the extent that the family may have been benefited. A married woman who acts as guarantor without the consent of the husband binds only her separate property unless the debt benefited the family. There is no express prohibition against a married woman acting as guarantor for her husband. Remember that now, in order to bind the absolute community, the consent of both spouses is needed. If only the consent of one spouse is obtained, the absolute community will not be liable unless the obligation redounded to the benefit of the community. When the husband acts as a guarantor for another person without the consent of the wife, the guaranty binds only the husband since the benefit really accrues to the principal debtor and not to the husband or his family. The exception is if the husband is really engaged in the business of guaranteeing obligations because in this case, his occupation or business is deemed to be undertaken for the benefit of the family. Art. 2050. If a guaranty is entered into without the knowledge or consent, or against the will of the principal debtor, the provisions of articles 1236 and 1237 shall apply. A contract of guaranty is between the guarantor and the creditor. It can be instituted without the knowledge or even against the will of the debtor, since the purpose of the contract is to give the creditor all the possible measures to secure payment. However, if the contract of guaranty is entered into without the knowledge or consent or against the will of the principal debtor, the effect is like payment by a 3rd person: 1. 2. The guarantor can only recover insofar as the payment has been beneficial to the debtor. The guarantor cannot compel the creditor to subrogate him in the creditor’s rights such as those arising from a mortgage, guaranty or penalty.

If the guaranty was entered into with the consent of the principal debtor, the guarantor is subrogated to all the rights which the creditor had against the debtor once he pays for the obligation. Illustration:

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A owes B P10,000. Without the knowledge of A, C guarantees the obligation. C pays A P10,000. C tries to collect the P10,000 from A, but A tells him that he has already paid B 4,000. In this case, C can only collect P6,000 from A since it was only the extent to which A was benefited by his payment. If the loan was secured by a mortgage, C cannot foreclose the mortgage if A does not pay him because he is not subrogated to the rights of B. Art. 2052. A guaranty cannot exist without a valid obligation. Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or unenforceable contract. It may also guarantee a natural obligation. A guaranty is an accessory contract and cannot exist without a valid principal obligation. So if the principal obligation is void, the guaranty is also void. BUT, a guraranty may be constituted to guarantee the following defective contracts and natural obligations: 1. 2. 3. Voidable: because the contract is binding unless it is annulled Unenforceable: because an unenforceable contract is not void. Natural obligations: even if the principal obligation is not civilly enforceable, the creditor may still go after the guarantor

Art. 2053. A guaranty may also be given as security for future debts, the amount of which is not yet known; there can be no claim against the guarantor until the debt is liquidated. A conditional obligation may also be secured. Continuing Guaranty (def) – A guaranty that is not limited to a single transaction but which contemplates a future course of dealings, covering a series of transactions generally for an indefinite time or until revoked. A continuing guaranty is generally prospective in its operation and is intended to secure future transactions (generally does not include past transactions). Examples:

1. Common example given by JPSP is the credit line – The bank allows you to borrow up to
a certain ceiling, but there is no release of funds yet. If you have an obligation with a third person and you default, the third person just needs to inform the bank, and the bank will release the money. The money released will be considered as a loan from the bank to you. The bank will allow the release of the money so long as it doesn’t exceed the ceiling.

2. To secure payment of any debt to be subsequently incurred – If the contract states that
the guaranty is to secure advances made “from time to time,” “now in force or hereafter made,” or uses the words “any debt,” “any indebtedness,” “any sum,” “any transaction,” the guaranty is a continuing guaranty.

3. To secure existing unliquidated debts – Future debts may also mean debts that already
exist but whose amount is still unknown. Art. 2053 may be misleading because it says that a guaranty may be constituted to secure future debts. The important thing to remember in the guaranty of future debts is that there must be an

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that the guarantor shall only be liable for those costs incurred after he has been judicially required to pay. it must be express and cannot extend to more than what is stipulated therein. how do the parties opt out of the rule? Guarantor and Lender should enter into a new and separate agreement. the guarantor’s liability cannot exceed that of the principal obligation. This is a valid guaranty because there is already an existing obligation (the 10K loan). There is nothing to guarantee. it shall comprise not only the principal obligation. How do you opt out of this rule? Example: G guaranteed B’s 100K obligation to L to the extent of 100K. but not for more than the principal debtor. it is not valid under Article 2053 because there is no principal obligation yet. Art. As an extra consideration for lending the money. It must be express. L wants an additional 20K from guarantor (gravy. so it cannot exist without the principal. If it is subject to a resolutory condition. RULE: Guaranty is never presumed. Example: G guarantees the 10K loan that B owes L and any other indebtedness that B may incur against L. Guaranty of Conditional Obligations If the principal obligation is subject to a suspensive condition. attorney’s fees. if the creditor sues the guarantor. both as regards the amount and the onerous nature of the conditions. the guarantor is liable only after the fulfillment of the condition. If the guarantor binds himself for more than the liability of the principal debtor. If it be simple or indefinite. but also all its accessories. the happening of the condition extinguishes both the principal obligation and the guaranty. Guaranty is an accessory obligation. including the judicial costs. the guaranty would be void. 2054. G guarantees the loan that B and L will enter into tomorrow. his liability shall be reduced. Reason for the rule: Because a guarantor assumes an obligation to pay for another’s debt without any benefit to himself. and penalties even if this will make his liability exceed that of the principal. 2055. Thus. They should take it out of the context of the guaranty and have a new agreement in which L would (kunwari) perform some service for G in consideration of the additional 20K. A guaranty is not presumed. the guarantor may be made to pay costs. A guarantor may bind himself for less. provided with respect to the latter. Art.existing obligation already that is being guaranteed. However. Since the contract of guaranty is a subsidiary and accessory contract. it has to be certain that he really intends to incur such an obligation and that he proceeds with consciousness of what he is doing. according to JPSP). Because without that existing obligation. This is not valid. Since 2054 provides that the guarantor cannot bind himself for more than the principal debtor. Although it is for a future debt. his obligations shall be reduced to the limits of that of the debtor. Form required for Guaranty Guaranty must be IN WRITING Sheryl IID 2002 PAGE 17 . Should he have bound himself for more.

Definite guaranty – The liability of the guarantor is limited to the principal debt. it is presumed that he wanted to be bound not only to the principal but also to all its accessories. Construction of Guaranty A guaranty is strictly construed against the creditor and in favor of the guarantor and is not to be extended beyond its terms or specific limits. It does not apply in cases where the surety is compensated with consideration. the principal could have fixed the limits of his responsibility solely to the principal. This is because in entering into the agreement. and not to obligations assumed PREVIOUS to the execution of the guaranty unless an intent to be so liable is clearly indicated. EXCEPTION: If the guarantor merely offers to become a guaranty. Is a stipulation that says that the guaranty will subsist only until maturity of the obligation valid? Generally. JPSP says that a surety is still covered by the SOF since it is still a promise to answer for the default of another person. What is not covered by the SOF is being a solidary co-debtor. there is no way that the guarantor can be liable since default comes only at maturity date. and sufficient property to answer for the obligation which he guarantees. Such a stipulation would defeat the purpose of a guaranty which is to answer for the default of the principal debtor.” De Leon textbook says that surety is not covered by the Statute of Frauds. 2nd Paragraph of Art. On the other hand.A contract of guaranty. then the guaranty is valid. Indefinite or simple guaranty – If the agreement does not specify that the liability of the guarantor is limited to the principal obligation. the agreement is interpreted against the surety company that prepared it. Doubts should be resolved in favor of the guarantor or surety. 2056. if the guarantor makes a direct or unconditional promise of guaranty (and not merely an offer). Generally. But Cayo pointed out a situation in class where this might be possible and JPSP agreed: If the lender asked for a guaranty precisely because there was a danger of the borrower absconding or becoming insolvent prior to maturity date. 2. it extends not only to the principal but also to all its accessories. a guarantor is liable only for the obligation of the debtor stipulated upon. One who is obliged to furnish a guarantor shall present a person who possesses integrity. 2055: Extent of Guarantor’s Liability 1. this rule of construction is applicable only to an accommodation surety or one that is gratuitous. Sheryl IID 2002 PAGE 18 . default or miscarriage of another. (Prospective application of the guaranty) However. only the guarantor binds himself to do something. to the exclusion of accessories. capacity to bind himself. In such cases. Art. to be enforceable. GENERAL RULE: It is not necessary for the CREDITOR to expressly accept the contract of guaranty since the contract is unilateral. If the guaranty is only up to the date of maturity. it does not become a binding obligation unless the creditor accepts and notice of acceptance is given to the guarantor. there is no need for acceptance and notice of such acceptance from the creditor. If he did not fix it. no. must be in writing because it falls under the Statute of Frauds as a “special promise to answer for the debt.

he is bound by the terms of the agreement and he cannot thereafter deviate from it. the creditor may demand another who has all the qualifications required in the preceding article. Sheryl IID 2002 PAGE 19 . nor will it extinguish the contract of guaranty. 2. CHAPTER 2 EFFECTS OF GUARANTY Art. In case the guarantor is convicted in the first instance of a crime involving dishonesty (since he loses integrity) 2. In case the guarantor becomes insolvent (since he loses sufficient property to answer for the obligation which he guarantees) there is no need for a judicial declaration of insolvency What is the effect of the guarantor’s death on the guaranty? The guaranty survives the death of the guarantor. But the creditor can waive this right and choose to hold the guarantor to his bargain. If the guarantor should be convicted in first instance of a crime involving dishonesty or should become insolvent. 2057. Ideally. The general rule is that a party’s contractual rights and obligations are transmissible to his successors. The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor. the creditor’s claim passes to the heirs of the deceased guarantor. Effect of Subsequent Loss of Qualifications The qualifications need only to be present at the time of the perfection of the contract. If he so chooses. The case is excepted where the creditor has required and stipulated that a specified person should be the guarantor. the creditor may demand another guarantor with the proper qualifications.The guarantor shall be subject to the jurisdiction of the court of the place where this obligation is to be complied with. 2058. The rules on guaranty do not expressly provide that the guaranty is extinguished upon the death of the guarantor. 3. in accordance with the rule that accessory follows the principal. However. Applying Art. Integrity Capacity to bind himself Sufficient property to answer for the obligation which he guarantees But the creditor can waive these requirements. The subsequent loss of the qualifications would not extinguish the liability of the guarantor. Jurisdiction over the guarantor: Jurisdiction over the guarantor belongs to the court where the principal obligation is to be fulfilled. the qualifications of a guarantor are the ff: 1. Art. When may the creditor demand another guarantor? 1. and has resorted to all the legal remedies against the debtor. When may the creditor NOT demand another guarantor? Where the creditor has stipulated in the original agreement that a specified person should be the guarantor. the supervening incapacity of the guarantor does not extinguish the guaranty but merely gives the creditor the right to demand a replacement. 2057.

When the right is Renounced or waived. B has 1M in assets which are all still with him and 1. 4. 2059 If the guarantor does not comply with Art. If it may be presumed that an execution on the property of the principal debtor would not result in the satisfaction of the obligation.The liability of the guarantor is only accessory and subsidiary. 3. Art. If he fails to interpose it as a defense before judgment is rendered against him. When the principal debtor is Insolvent. G still has the benefit of excussion. 2. If he has bound himself solidarily with the debtor. Accion pauliana/ rescission of fraudulent alienations) Can the creditor implead the guarantor as a co-defendant with the debtor? No. 5. What kind of insolvency? JPSP says it’s practical insolvency meaning assets are less than liabilities. there is still no claim against these assets by the other creditors. • The waiver must be made in express terms. GENERAL RULE: The guarantor is entitled to demand that the creditor first exhaust the properties of the principal debtor before collecting from the guarantor. Thus. or cannot be sued within the Philippines unless he has left a manager or representative. 2060 If the guarantor is a judicial bondsman and sub-surety (Art. This excussion shall not take place: 1. 2. Examples: B borrows 100K from L guaranteed by G. They can still be accessed by L. 2059. If the guarantor has expressly renounced it. Except in cases provided in 2059. In this case. In case of insolvency of the debtor. • In this case. 3. When the liability assumed by the guarantor is Solidary. Can L collect from G right away? No. the ff. EXCEPTIONS: 1. and L can still file an action for collection Sheryl IID 2002 PAGE 20 . When he has absconded. 2084) Where a pledge or mortgage has been given by him as a special security. The creditor should have exhausted all the property of the debtor. in order for the creditor to collect from the guarantor. Why? Because even if B is apparently insolvent. but it still depends on the situation. B defaults. 3. 2. Article 2062 says that creditor should proceed against the principal debtor alone. EXCEPTIONS UNDER ART. and The creditor has resorted to all legal remedies against the debtor (ex. he becomes a surety with primary liability. since his liabilities exceed his assets.5M in liabilities. 5. Under Art. 2059 (RUSIA) 1. 4. conditions must be fulfilled: 1. 2.

So in this case. Still no. if he still has properties here. Only if these actions fail can L then collect from G.” Is this enough for the Guarantor to claim the benefit of excussion? No. his properties are still with him. 2060. the creditor who is negligent in exhausting the property pointed out shall suffer the loss. On due date. When resort to all legal remedies would be a Useless formality. When the principal debtor Absconds or cannot be locally sued. 1. Joining the guarantor in the suit against the principal is not the demand intended by law. 5. he must get the guarantor to either sign a waiver of the benefit of excussion or make him solidarily liable (a surety). he must set it up against the creditor upon the latter’s demand for payment from him. Can L collect from G.of money against B. Later. for the insolvency of the debtor resulting from such negligence. When should the demand be made? The demand can only be made after judgment on the debt. B defaulted. the guarantor must: Sheryl IID 2002 PAGE 21 . G still should still have the benefit of excussion. Example: B borrowed 100k guaranteed by G. and point out to the creditor available property of the debtor within Philippine territory sufficient to cover the amount of the debt. In order to demand that the creditor exhaust the properties of the principal debtor. So even if the borrower has fled to the Bahamas. it is not even necessary that the debtor is judicially declared insolvent or bankrupt. Therefore. even if B is insolvent on paper. Art. He demanded reimbursement from Lender. and he can still pay L. 4. B defaults and has zero assets but has a 200K credit/receivable from X. Can G recover? G cannot recover. The guarantor having fulfilled all the conditions required in the preceding article. G found out that he had the benefit of excussion. the creditor must make a prior demand for payment from the guarantor. To collect from the guarantor. In this case. In order that the guarantor may make use of the benefit of excussion. since doing so would be a useless formality. G paid. B borrows 100K from L guaranteed by G. to the extent of said property. Lender must sue against the property first before collecting from the guarantor. 2061. Additional Requisites in Order to Claim the Benefit of Excussion Guarantor tells Lender “Exhaust Borrower’s property first before collecting from me. L must file an action for collection and an accion subrogatoria so that he can exercise B’s right to collect the money from X. 2. How does the lender get around this requirement? If the lender wants to be able to go against the guarantor right away without having to go through excussion. Art. the guarantor cannot require the creditor to resort to these legal remedies against the debtor anymore. • • If exhausting the properties of the debtor would be useless since it would still not satisfy the obligation. Lender made a demand for payment against G. Payment constitutes a waiver of the benefit. How should it be made? The demand must be an actual demand.

Art. the creditor need only inform the bank of the default and the bank releases the money. since the compromise is beneficial to G. which allows the guarantor to hide his assets in the meantime. 2063. The guarantor may appear so that he may. If he does not appear. even if judgment should be rendered against the principal debtor and the guarantor in case of appearance by the latter. Art. judgment is not binding on him. How to get around this two-step process: A bank guaranty or a letter of credit. Reason: A compromise binds only the parties thereto and not third persons. The guarantor must be notified so that he may appear and set up his defenses if he wants to. in case he is unable to pay. collecting from the guarantor is really a two-step process. The creditor must sue the principal debtor alone. 2062. and 2. That which is entered into between the guarantor and the creditor benefits but does not prejudice the principal debtor. Set up the benefit of excussion against the creditor upon demand for payment by the creditor from him. D and C agree to reduce the debt to 8K. Example: D owes C 10K with G as guarantor. It’s like a standing loan by the bank in favor of the debtor to answer for a debt in favor of third persons. he shall suffer the loss to the extent of the value of the property. he is still given the benefit of exhaustion event after judgment is rendered against the principal debtor. if he so desires. the compromise may bind that third person. set up such defenses as are granted him by law. except in the cases mentioned in Article 2059. it cannot prejudice the guarantor or debtor who was not a party to the compromise. Thus. the creditor has the duty to exhaust all the property of the debtor and to resort to all legal remedies against the debtor. He cannot sue the guarantor with the principal or the guarantor alone except in the cases mentioned in Art. Lender must sue the guarantor to claim against him. Point out to the creditor available property of the debtor within Philippine territory sufficient to cover the amount of debt. Exception: If the compromise has a benefit in the nature of a stipulation in favor of a third person. If he fails to do so. G’s liability is also reduced to 8K in case D does not pay. If the guarantor appears. property located abroad or which is not easily available is not included among those that the guarantor can point out to the creditor. So. The purpose of the two-step process is to allow the guarantor to make use of the benefit of excussion. In every action by the creditor. In a bank guaranty. Sheryl IID 2002 PAGE 22 . (Therefore. which must be against the principal debtor alone. The disadvantage is that there is a time lag between the judgment against the principal debtor and the one against the guarantor.1. The benefit of excussion mentioned in article 2058 shall always be unimpaired. A compromise between the creditor and the principal debtor benefits the guarantor but does not prejudice him. if the debtor does not pay. 2059 where the guarantor loses the benefit of excussion. the former shall ask the court to notify the guarantor of the action.) Once the guarantor has fulfilled the requisites for making use of the benefit of excussion.

the obligation to answer for the same is divided among all. The benefit of division among the co-guarantors ceases in the same cases and for the same reasons as the benefit of excussion against the principal debtor. The Total amount of the debt – The guarantor has the right to demand reimbursement only when he has actually paid the debt UNLESS there is a stipulation which gives him the right to demand reimbursement as soon as he becomes liable even if he has not yet paid.Art. Should there be several guarantors of only one debtor and for the same debt. 3. the principal debtor must pay him back consisting of: (TIED) 1. 2066. 2. The creditor cannot claim from the guarantors except the shares which they are respectively bound to pay. if they are due. Once the guarantor pays the principal obligation. Exceptions: 1. Art. When is there a benefit of division among several guarantors? The following conditions must concur in order that several guarantors may claim the benefit of division: 1. 2059 (RUSIA). unless solidarily has been expressly stipulated. They are not liable to the creditor beyond the shares which they are bound to pay. There should be several guarantors Of only one debtor For the same debt In this case. even though it did not earn interest for the creditor. The guarantor of a guarantor shall enjoy the benefit of excussion both with respect to the guarantor and to the principal debtor.The co-guarantors cannot avail themselves of the benefit of division under the circumstances enumerated in Art. the liability of the co-guarantors is joint. 2065. Art. This is because Sheryl IID 2002 PAGE 23 . 2. (2) The legal interests thereon from the time the payment was made known to the creditor. The indemnity comprises: (1) The total amount of the debt. If he delays. 2. he is liable for damages in the form of interest. The guarantor cannot ask for more than what he has paid. The guarantor who pays the debtor must be indemnified by the latter. The guarantor can collect interest even if the principal obligation was a loan without an interest. 2064. (4) Damages. (3) The expenses incurred by the guarantor after having notified the debtor that payment had been demanded of him. A sub-guarantor can demand the exhaustion of the properties both of the guarantor and of the principal debtor before he pays the creditor. The notice is a demand upon the debtor to pay the guarantor. Interest – The guarantor is entitled to interest from the time notice of payment of the debt was made known to the debtor. If solidarity has been expressly stipulated.

If. he can only recover P500K from B. Compromise B owes lender P1M. foreclose a mortgage in case of failure of the debtor to reimburse him. G has no inducement. he would only have to pay P500K. The guarantor becomes the creditor. B should reimburse him P600K. 2067. The right of subrogation is given to the guarantor so that he can enforce his right to indemnity/ to be reimbursed. This would give B a savings of P400 K. But since there is a rule that says that G cannot ask for more than what he has actually paid. If B defaults and Guarantor pays P500K. which requires the debtor’s consent. not the original P1M. What happens really is just a change in creditor. G tells B that if G pays the P500K. who was a compadre of L. he cannot subrogate either. When the guarantor pays. but the obligation subsists in all other aspects. B owes L P1M. he would be getting the same amount that he pays? Sheryl IID 2002 PAGE 24 . Where the guaranty is constituted without the knowledge or against the will of the debtor. for some reason. Exceptions to the right to indemnity of the guarantor 1. the guarantor can only recover insofar as the payment had been beneficial to the debtor Payment by a third person who does not intend to be reimbursed by the debtor is deemed to be a donation. he has no right to be reimbursed. Since there’s no rule. Everyone will be happy. brokered a deal with L. Is there a situation where this rule would even be disadvantageous to the Debtor? Yes. he becomes subrogated to the rights of the creditor against the debtor. If the guarantor has compromised with the creditor. Expenses – This refers only to those expenses that the guarantor has to satisfy in accordance with law as a consequence of the guaranty. for example. Lender was a good friend of Guarantor and agreed that if G became liable. in which they agreed that should G become liable. 3. The basis of the right is the delay of the debtor in reimbursing. But the payment is valid with respect to the creditor. Art. It arises by operation of law upon payment by the guarantor. G. The creditor need not formally cede his rights to the guarantor. Let’s say there was no such rule. no incentive to broker that deal with his compadre L. But the right of subrogation is given only to the guarantor if he has the right to be reimbursed. 2. Damages – Guarantor is entitled to damages only if they are due. he would only pay P500K.the right of the guarantor is independent of the principal obligation to the creditor. he cannot demand of the debtor more than what he has really paid. This is limited to those expenses incurred by the guarantor after having notified the debtor that payment has been demanded of him by the creditor. Waiver 3. while G earns P100K. The guarantor who pays is subrogated by virtue thereof to all the rights which the creditor had against the debtor. G tells B about the deal with L. He may. 4. Why would he go through the trouble when in any case.

Art. 3. If the guarantor still pays before the expiration of the period. it becomes demandable only upon expiration of the period. the former has no remedy whatever against the debtor. Had he informed debtor. Exception: Guarantor may claim reimbursement from debtor if (requisites): 1. 2070. the guarantor pays before the debtor pays. Nevertheless. the guarantor must collect from him. Is Debtor liable? No. Debtor can invoke the fact of payment to the Creditor against Guarantor. If the principal debt was one with a period. may proceed against the principal debtor: (1) When he is sued for payment. and the latter not being aware of the payment. 2. Exception: Guarantor need not wait for the period if the debtor ratifies payment or consents to it. guarantor still cannot recover from debtor because he should have informed debtor of his intention to pay. 2069. Guarantor will suffer the loss of his failure to comply with his one and only obligation before paying which is to notify the debtor. Guarantor makes a demand for reimbursement from Debtor. Guarantor is only liable if the debtor defaults. the guarantor can reimburse from the principal debtor. is the sneaky creditor who nonchalantly received payment twice. aside from the guarantor who did not inform the debtor. the latter may enforce against him all the defenses which he could have set up against the creditor at the time the payment was made. Sheryl IID 2002 PAGE 25 . 2071. guarantor should first give notice to the principal debtor. Art. Guarantor’s remedy here is against sneaky Creditor. without telling Debtor. even before having paid. Example: Debtor pays Creditor. If he is solvent. and the creditor becomes insolvent.How do you get out of this situation? B should “hire” G as his agent to broker the deal with L. he cannot demand reimbursement of the debtor until the expiration of the period unless the payment has been ratified by the debtor. But Creditor is sneaky and tells Guarantor that Debtor defaulted. As compensation for the service rendered by G. Obligation of the guarantor before he pays the creditor Before he pays the creditor. but only against the creditor. the debtor shall reimburse the guarantor for the amount paid. only this time. So Guarantor pays. It is a gratuitous guaranty The guarantor was prevented by a fortuitous event from informing the debtor of payment Creditor becomes insolvent Remember that the culprit here. debtor would not have paid. Had Guarantor given notice to Debtor. but there can be no default before the expiration of the period. in case of gratuitous guaranty. Even in such a case. if the guarantor was prevented by a fortuitous event from advising the debtor of the payment. This is like the situation in 2068. But if he is insolvent and the three requisites above are present. The guarantor. B will pay him P100K. repeats the payment. If the guarantor should pay without notifying the debtor. he would have known of the defenses that Debtor had against Creditor which would have made him think twice about paying. If he does not give notice. the debtor may enforce all the defenses which he could have set up against the creditor at the time of payment. Art. So the agreement is taken out of the context of the guaranty and everyone is happy. he must wait for the period to expire before he can collect from the debtor. 2068. If the guarantor has paid without notifying the debtor. Art. If the debt was for a period and the guarantor paid it before it become due.

unless the payment has been made in virtue of a judicial demand or unless the principal debtor is insolvent. The liability of the guarantors is joint. (3) When the debtor has bound himself to relieve him from the guaranty within a specified period. Sheryl IID 2002 PAGE 26 . Right to be released if lender agrees Release from the guaranty requires that the lender consent because the guaranty is actually a contract between the lender and the guarantor Right to demand a security 2. by reason of the expiration of the period for payment. (7) If the principal debtor is in imminent danger of becoming insolvent. Art. A can collect 30 K each from B and C. or to demand a security that shall protect him from any proceedings by the creditor and from the danger of insolvency of the debtor. 2. A pays 90K. C guaranty the 90K loan of X. including the payer.(2) In case of insolvency of the principal debtor. when the principal obligation has no fixed period for its maturity unless it be of such nature that it cannot be extinguished except within a period longer than 10 years. his share shall be borne by the others. B. the guarantor who satisfies the debt may sue either the person so requesting or the debtor for reimbursement. the one among them who has paid may demand of each of the others the share which is proportionately owing from him. Under these 7 circumstances. or when the principal debtor is insolvent. (6) If there are reasonable grounds to fear that the principal debtor intends to abscond. In all these cases. (4) When the debt has become demandable. When there are two or more guarantors of the same debtor and for the same debt. at the request of another. If one. The provisions of this article shall not be applicable. 2072. If one of them pays the entire obligation. by virtue of a judicial demand. the guarantor has these rights against the debtor BEFORE he makes payment: 1. in the same proportion. the action of the guarantor is to obtain release from the guaranty. If any of the guarantors should be insolvent. This article applies only if there are two or more guarantors of the same debtor for the same debt and one of them has paid: 1. Art. he is entitled to be reimbursed the amount of the shares of the other guarantors. Example: A. becomes a guarantor for the debt of a third person who is not present. and this period has expired. (5) After the lapse of 10 years. 2073. The purpose is to enable the guarantor to take measures to protect his interest in view of the probability that debtor would default and he would be called upon to answer for the obligation.

B becomes insolvent. A can collect 45 K from C. and which are not purely personal to the debtor. A. C guaranty the 90K loan of X. and for the same causes as all other obligations. A sub-guarantor. A becomes insolvent. Art. But the extinguishment of the guaranty does not always carry with it the extinguishment of the principal obligation. 3. 2075. Can they refuse to pay? Yes. A pays 90K. In this sense. C are guarantors of X. Examples: 1. Example: A. A demands reimbursement from B and C. the obligation behaves like a solidary obligation. Because guaranty is an accessory and subsidiary contract. the same defenses which would have pertained to the principal debtor against the creditor. C pays the entire obligation. B. B. in case of the insolvency of the guarantor for whom he bound himself. because the defense is personal to X. changing the legal effect of the contract. A and C must shoulder B’s share. This is because the alteration would result in a novation of the principal contract which is consequently extinguished and replaced with a new one. B. 2075. the co-guarantors must answer for his share. 2. the guaranty is extinguished altogether. they can invoke defenses inherent in the obligation. In the case of the preceding article. Since the old principal contract is extinguished. A. Any agreement between the creditor and the principal debtor which essentially varies the terms of the principal contract without the consent of the surety will release the surety from liability.But unlike in an ordinary joint obligation. regardless of the extent of the liability assumed by the guarantor Substitution of the principal debtor Extension or shortening of the term of the principal debt In these cases. When is an alteration material? There must be a change which imposes a new obligation or added burden or which takes away some obligation already imposed. Art. such as prescription. 2076. So their liabilities become 45K each. Example: A. CHAPTER 3 EXTINGUISHMENT OF GUARANTY Art. B. Increase in the principal amount. Sheryl IID 2002 PAGE 27 . according to Art. The obligation of the guarantor is extinguished at the same time as that of the debtor. Decrease in the amount of the principal obligation: The guaranty subsists and is benefited by the change since the guarantor cannot bind himself for more than the principal obligation. D is a guarantor of A. C guaranty the obligation of X. if one of the guarantors is insolvent. A pays even if the obligation has prescribed already. Can C reimburse from D? Yes. the accessory contract of guaranty/surety is also extinguished. it is extinguished once the principal obligation is extinguished. the co-guarantors may set up against the one who paid. against the co-guarantor who pays. C guaranty the obligation of X who was a minor. 2074. A pays. Can B and C refuse to reimburse him on the ground that X is a minor? No. is responsible to the co-guarantors in the same terms as the guarantor.

This is a case of dacion. Therefore there is no benefit of excussion. The extension must be based on a new agreement between the debtor and creditor. thereby lengthening the risk of the insolvency of the principal debtor? No. it is not an extension. The creditor releases A with the consent of B and C. Since B and C consented to the release. Chapter 4 Legal and Judicial Bonds The only important thing you have to remember about a legal bond is that it is a surety. 2080. But if the guarantor consents or waives his right under this article in advance. A release made by the creditor in favor of one of the guarantors. The guarantor may set up against the creditor all the defenses which pertain to the principal debtor and are inherent in the debt. Art. the accessory obligation is also extinguished and is not revived even if the creditor is subsequently evicted from the property. The release should benefit B and C to the extent of 30K (A’s share). and the guarantor would not be able to ask for reimbursement. The length of time of the extension is also immaterial. Sheryl IID 2002 PAGE 28 . C are guarantors of X for 90K. the guaranty is extinguished. C are guarantors of X for 90K. 2077. The creditor releases A without the consent of B and C.Art. are released from their obligation whenever by some act of the creditor they cannot be subrogated to the rights. even if he should afterwards lose the same through eviction. mortgages and preference of the latter. even though they are solidary. Art. It is immaterial whether the guarantor suffers actual prejudice as a result of the extension. This is because the principal debtor could become insolvent during the extension period. The guarantors. If the creditor voluntarily accepts immovable or other property in payment of the debt. 2078. B. without the consent of the others. Art. Art. the guaranty is extinguished. An extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty. but not those that are purely personal to the debtor. B. They shall be liable only for 60K or 30K each. 2079. A. A. If the creditor merely fails to make a demand on due date. Can the guarantor sue the creditor for his delay in making a demand. benefits all to the extent of the share of the guarantor to whom it has been granted. Since dacion extinguishes the principal obligation. The mere failure on the part of the creditor to demand payment after the debt has become due does not of itself constitute any extension of time referred to herein. 2081. the extension will not extinguish the guaranty. their liability is still 90K or 45K each. the guarantor is released. As long as the period is extended. If the creditor grants the debtor an extension of time within which to comply with the principal obligation.

Legal (by operation of law). (4)Third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own property. the consideration is the principal contract. [A guaranty cannot exist without a valid obligation. because it is perfected by delivery of the thing pledged. If the pledgor is a third person. the things in which the pledge or mortgage consists may be alienated for the payment to the creditor. (2)That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged. Unilateral.PLEDGE AND MORTGAGE PROVISIONS COMMON TO PLEDGE AND MORTGAGE Article 2085. 2. The following requisites are essential to the contracts of pledge and mortgage: (1)That they be constituted to secure the fulfillment of a principal obligation. the thing delivered shall be returned with all its fruits and accessions. 2. Acessory. However. What are the characteristics of pledge? [RAUS] Pledge is: 1. (3)That the persons constituting the pledge or mortgage have the free disposal of their property and in the absence thereof. Article 2086. Subsidiary. Real. What are the kinds of pledge? Pledge may be either: 1. 2. mortgage does not. WHAT IS PLEDGE? It is a contract by virtue of which the debtor delivers to the creditor or to a third person a movable or a document involving incorporeal rights for the purpose of securing the fulfillment of a principal obligation with the understanding that when the obligation is fulfilled. Cayo IID 2002 PAGE 29 . the cause it the compensation received or the liberality of the pledgor. Delivery – pledge requires delivery for perfection. WHAT ARE THE DIFFERENCES BETWEEN PLEDGE AND MORTGAGE? 1. because it creates an obligation solely on the part of the creditor to return the thing pledged upon fulfillment of the principal obligation. WHAT IS THE CONSIDERATION IN PLEDGE? If the pledgor is also the debtor. 3. mortgage on immovables. because it has no independent existence. Voluntary or conventional (created by agreement of the parties). it may guarantee the performance of a voidable or unenforceable contract or a natural obligation] Article 2087. 4. It is also of the essence of these contracts that when the principal obligation becomes due. The provisions of article 2052 are applicable to a pledge or mortgage. Mobility – pledge is constituted on movables. because the obligation of the creditor does not arise until fulfillment of the principal obligation. that they be legally authorized for the purpose.

3. Requisites to bind third person/s – pledge, to bind third persons must be in a public
instrument; mortgage, must be registered in the proper registry. A LOAN IS SECURED BY BOTH A PLEDGE AND A GUARANTY. CAN THE CREDITOR REFUSE PAYMENT BY THE GUARANTOR AND CHOOSE TO FORECLOSE IN ORDER TO SATISFY THE DEBT? No, payment by the guarantor cannot be refused. WHAT ARE THE ESSENTIAL REQUISITES OF PLEDGE AND MORTGAGE? [PRADO]

1. Purpose - To secure fulfillment of principal obligation; 2. Real – There must be delivery of the thing. 3. Alienation – when the principal obligation becomes due and the debtor defaults, the thing
may be alienated to satisfy the former.

4. Disposal – Pledgor/mortgagor must have free disposal of the thing or capacity to dispose. 5. Ownership – Pledgor/mortgagor must be the absolute owner of the thing;

PURPOSE: To secure fulfillment of a principal obligation
WHAT IF THE THING PLEDGED/MORTGAGED IS SUBSEQUENTLY LOST; WHO BEARS THE LOSS? IS THE PRINCIPAL OBLIGATION EXTINGUISHED? The pledgor bears the loss. Remember that there hasn’t been transfer of ownership. The principal obligation is of course not extinguished, the pledge/mortgage is only accessory. However, the debtor must replace the thing or lose the benefit of the period. Pledge/mortgage is a direct lien on the property. It is better than guarantee because the property pledged can be sold upon default by the debtor, unlike in guaranty where several requirements have to be complied with first. PROBLEM: D TRANSFERS PROPERTY TO C AND AT THE SAME TIME EXECUTES AN INDEMNITY AGREEMENT; OR D TRANSFERS PROPERTY TO C TO SECURE AN EXISTING OBLIGATION. HOW WILL THE TRANSFER BE CHARACTERIZED? Both transfers will be characterized as pledges.

REAL: There must be delivery of the thing to perfect the contract.
An agreement to pledge, when there is breach, gives rise to damages.

ALIENATION: When the principal obligation becomes due and the debtor defaults, the thing may be alienated to satisfy the former.
DOES THE CREDITOR HAVE TO GO TO COURT TO ENFORCE THE PLEDGE OR MORTGAGE? No, to require litigation would be to nullify the lien and defeat the purpose of the contract.

FREE DISPOSAL:

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WHAT DO “FREE DISPOSAL” AND “CAPACITY TO DISPOSE” OF THE PROPERTY MEAN? Free disposal means that the property is not subject to any claim by a third person. Capacity to dispose means that though the pledgor/mortgagor does not have free disposal, the third person with a claim authorized him to dispose (tingin ko lang). In case of corporations, the board should adopt a resolution to approve the pledge/mortgage. If what is to be pledged or mortgaged constitutes all of the corporation’s assets, 2/3 of outstanding capital stock must approve. Rule on consent: If pledgor/mortgagor is married, consent of spouse is needed; if agent, authorization of principal. For married persons – how to wiggle out of a pledge or mortgage agreement: Pledge or mortgage your conjugal property without your spouse’s signature. In case the property is foreclosed, you can raise the defense that there was no consent (remember, half consent is no consent!) What if the pledge was constituted to secure an obligation of the family business, doesn’t this redound to the benefit of the conjugal partnership? No, JPSP said that the pledge of conjugal property con only be considered to redound to the benefit of the partnership if the family business is constituting pledges. If you are the pledgee/mortgagee, check if pledgor/mortgagor has authority to dispose of the property. Another example on free disposal or legal authority: Ex. Pledgor corporation is placed under receivership. The corporation cannot pledge shares of stock because pledge is a disposition requiring court approval.

OWNERSHIP:
CAN FUTURE PROPERTY BE PLEDGED? No, it is essential that the pledgor be the absolute owner of the thing. Note: It is the sale and not the registration in the LTO that transfers ownership of a vehicle. Note: A co-owner can only pledge/mortgage his ideal share in the co-ownership. Note: A mortgagor can rely on what is on the face of the Torrens title. WHAT IS MEANT BY ABSOLUTE OWNERSHIP? BOTH BENEFICIAL AND LEGAL TITLE must vested in the pledgor/mortgagor Ex. Trustee is legal owner of shares of stock; trustor is beneficial owner: Neither can pledge the shares. Pledge/mortgage can’t be constituted without a principal obligation even if there is a subsequent principal obligation. This is different from situation where the lender extends a credit line for 1M, though borrower has not yet drawn, the credit line can still be secured via pledge/mortgage. Ex. deed of assignment/absolute sale to secure fulfillment of obligation implied trust according to the SC. this is a mortgage or an

The pledgor/mortgagor must be absolute owner of the thing or the property. The creditor may rely on the title/stock certificate if there is no notice of defect in title. However, failure of the pledgor to present the thing is a red flag that should put the pledgee on guard as to the pledgor’s right to pledge the thing.

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Though the pledgor must own the thing and have free disposal of it, see the following problem discussed in class: Ex. On day 1, stocks are sold to X with the condition that the sale will be effective if X tops the bar. On day 2, X pledges the stocks. On day 3, the bar exam results come out, with X in the number one spot. Is the pledge valid? Yes, the pledge is valid. Remember Oblicon, conditional obligations? The effects of a conditional obligation to give, when the condition happens, retroact to the date of the constitution of the obligation. OWNERSHIP RETROACTS TO DAY 1. In the above condition, what if the condition is resolutory? As long as the pledge is registered in a public document, it is valid and binding as to third persons. Ex: Day 1 - X receives from A shares of stock with the resolutory condition that they shall be returned to A if X does not pass the bar. Day 2 – X pledges the shares. Day 3 – X fails the bar. Is the pledge valid? Yes. As long as the pledgee registered the pledge in a public instrument, such pledge is binding on A. *But if you use the argument that the effects retroact, doesn’t that mean that when X pledged the things, he wasn’t the owner? I suppose the public instrument is stronger than the legal fiction. CAN THE CREDITOR IMMEDIATELY ACCEPT A PLEDGE FURNISHED BY A DEBTOR IF THE PLEDGE BELONGS TO A THIRD PERSON? No, the creditor cannot require on the word of the pledgor/mortgagor alone, he must exercise due care and make sure the pledge/mortgage has given consent. This is especially true in the banking industry, which is impressed with public interest. WHAT IS THE CONSEQUENCE THEN IF THE CREDITOR DOES NOT VERIFY WITH THE PLEDGOR/MORTGAGOR? The pledge/mortgage is null and void. Article 599 gives the owner of a movable who has been unlawfully deprived thereof the right to recover the same.

(1) Article 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or
dispose of them. Any stipulation to the contrary is null and void. WHAT DOES THE CREDITOR WITH THE PLEDGE/MORTGAGE WHEN THE DEBTOR DEFAULTS? The creditor can move for the sale of the thing pledged or mortgaged. WHAT IF THE CREDITOR WANTS TO ACQUIRE THE THING? He may purchase it at the public auction. WHAT IF THERE IS A STIPULATION THAT THE CREDITOR WILL ACQUIRE THE THING UPON DEFAULT? The stipulation (pactum commissorium) is null and void. WHAT ARE THE REQUISITES FOR PACTUM COMMISSORIUM TO EXIST? 1. There should be a pledge/mortgage; the debtor. ARE THERE ANY EXCEPTIONS TO PACTUM COMMISSORIUM?
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2. There should be a stipulation for AUTOMATIC appropriation or the thing in case of default by

Ex. Therefore. there is automatic transfer of ownership. in this case. Examples on pactum commissorium: Ex. it is not automatic. Article 2090. non-compliance would give the creditor. Cayo IID 2002 PAGE 33 4. The execution of document transferring the shares is only a confirmation of the sale that was already consummated automatically. upon which. the creditor may appropriate the same. there being several things given in mortgage or pledge. Article 2112 provides that if the thing pledged or mortgaged is not sold in two public auctions. IS IT VOID? No. 3. The debtor can voluntarily cede the property to the creditor. Neither can the creditor’s heir who has received his share of the debt return the pledge or cancel the mortgage. the pledge agreement states that pledgee has authority to instruct Corporate Secretary of X to transfer shares in name of pledgee in case of default. HOW CAN YOU OPT OUT OF THE PROHIBITION ON PACTO COMMISSORIO? 1. Valid? Yes. From these provisions is excepted the case in which. Pledgee has the option to purchase the thing upon default at price certain. even though the debt may be divided among the successors in interest of the debtor or of the creditor. A pledge or mortgage is indivisible. Valid? YES. If the agreement is that. It is not automatic. and for the purpose. upon default. Ex. each one of them guarantees only a determinate portion of credit. there is need for another agreement to be entered into. shall have the right to the extinguishment of the pledge or mortgage as the portion of the debt for which each thing is specially answerable is satisfied. WHAT HAPPENS TO THE CONTRACT OF PLEDGE/MORTGAGE IF THERE IS A STIPULATION OF PACTUM COMMISSORIUM. Remember. In fact. WHAT IS THE REASON FOR THE PROHIBITION? The value of the thing pledged or mortgaged is usually more than the amount of the obligation. pledgor conveys property to pledgee by dation. not a right to the property. Article 2089. You can enter into another contract subsequent to the pledge/mortgage. 2. Upon default. The debtor. There can be a stipulation granting the creditor authority to take possession and not . the sale of the thing to satisfy the obligation is the essence of pledge. the debtor’s heir who has paid a part of the debt cannot ask for the proportionate share of extinguishment of the pledge or mortgage as long as the debt is not completely satisfied. pledgee sells the things pledged at market price and applies profits to the outstanding obligation. VALID? NO. but an action for damages. to the prejudice of the other heirs who have not yet been paid.Yes. for PC to exist. ownership of the property upon foreclosure. There must be a subsequent sale. The indivisibility of a pledge or mortgage is not affected by the fact that the debtors are not solidarily liable. Valid? Yes. only the stipulation is void. There is no automatic transfer of ownership. the principal contract will subsist. X corporation pledges shares. This would in effect be a novation of the pledge/mortgage. the EFFECTIVE ACT IS DEFAULT. There can be a stipulation where the debtor merely promises to sell. The prohibition applies only to stipulations made in the contract of pledge/mortgage. pledgee is attorney in fact of pledgor. Ex.

by offering in pledge or mortgage as unencumbered. unlike in the document with 100 mortgages. be they pure or subject to a suspensive or resolutory condition. Where each one of several thing guarantees a determinate portion of credit. All movables which are within commerce may be pledged. If there was only partial release of the loan. Ex: If you have 100 mortgages securing corresponding portion of the loan. stamps and reg. Creditor took over management but the business failed. then when the corresponding portion is paid. The contract of pledge or mortgage may secure all kinds of obligations.The downside is that you must again pay doc. A promise to constitute a pledge or mortgage gives rise only to a personal action between the contracting parties. Can delivery be made to the pledgor? Yes. fees. CA. provided they are susceptible of possession. Delivery may be the actual thing or a title (certificates of deposit. 2. WHAT ARE THE EXCEPTIONS TO INDIVISIBILITY: 1. In addition to the requisites prescribed in article 2085. Pledge is indivisible. where the fees are only paid once. if the parties agree to allow partial discharge of the pledge/mortgage. Article 2092. but don’t deliver to the pledgee or a third person/s. Pledge/mortgage are real contracts. in order to constitute the contract of pledge. Or. for safety reasons. there is no pledge but there is an agreement to enter into a pledge. What may be the objects of pledge? Movables within the commerce of man. however. the court ordered a corresponding portion of the REM to be released. CB v. unenforceable obligations. stocks). All 100 mortgages may be in the same document. Remember. without prejudice to the criminal responsibility incurred by him who defrauds another. Shares of stock not negotiable so no indorsement is required. the corresponding pledge/mortgage is extinguished.WHAT DO YOU MEAN PLEDGE/MORTGAGE IS INDIVISIBLE? Ex: 1M Loan. Cayo IID 2002 PAGE 34 . that the thing pledged be placed in the possession of the creditor. 3. How? Cancel pledge/mortgage and constitute a new pledge/mortgage. Article 2094. there was payment of 100K. PROVISIONS APPLICABLE ONLY TO PLEDGE Article 2093. It was secured by REM. can you ask release of corresponding amount of units? No release. it is necessary. voidable. Pledge/mortgage may secure all sorts of valid. if he is acting as agent of pledgee or where the thing pledged is so unwieldy as to make delivery impossible. constructive delivery is allowed. or by misrepresenting himself to be the owner of the same. In accordance with the schedule. Article 2091. the same may be required. things which he knew were subject to some burden. Must be indorsed. If you agree. or of a third person by common agreement. Where there was failure of consideration. The REM covered several (100) condominium units. The bank only released a portion of the loan.

the creditor shall compensate what he receives with those which are owing him. but if none are owing him. shares of stock. Remedy of pledgor if pledgee deposits it with a third party without authority? The pledgor may demand extrajudicial deposit of the thing under 2104 or deposit with a third person/s in 2106. it must be in a public instrument (notarized document). The pledgor has the same responsibility as a bailor in commodatum in the case under article 1951.] Article 2102. A pledge shall not take effect against third persons if a description of the thing pledged and the date of the pledge do not appear in a public instrument. knowing the flaws of the thing pledged. and is liable for its loss or deterioration. It can be argued that the principal consideration was that the custodian be the pledgee. The contract of pledge gives a right to the creditor to retain the thing in his possession or in that of a third person to whom it has been delivered. Why would the pledgee want to be informed – administrative purposes. Unless there is a stipulation to the contrary. The instrument proving the right pledged shall be delivered to the creditor. does not advise the pledgee of the same. evidenced by negotiable instruments. Cayo IID 2002 PAGE 35 . Incorporeal rights. If the pledgee deposits the thing with a third person without authorization. Pledge is in a public instrument. must be indorsed. dividends. now if the creditor transfers possession. warehouse receipts and similar documents may also be pledged. Red flags would be failure or inability of debtor to show the thing or the title to the thing. it’s a principal breach. he shall apply it to the principal. subject to the pledge. The creditor shall take care of the thing pledged with the diligence of a good father of a family. Substantial breach under 1191 gives the injured party the right to resolve the obligation. No requirement as to form but to affect third persons. can the pledgor demand resolution of the pledge agreement? Yes. or interests. Article 2101. shall be liable to the latter of the damages which he may suffer by reason thereof. unless there is a stipulation authorizing him to do so. Article 2096. Ex: pledgor pledges property to pledgee to secure a loan. Article 2098. Pledgor sell property to third person/s without notice to pledgee – sale is valid but transfer of ownership is suspended until pledgee consents. If the pledge earns or produces fruits. [The pledgor who. bonds. The problem here is: how do third persons check if the thing is pledged when the thing isn’t represented by some sort of title which can be annotated? They can’t but they should exercise diligence. Article 2099. but the latter shall continue in possession. who gets property when obligation is paid. income. bills of lading. The pledgee is responsible for the acts of his agents or employees with respect to the thing pledged. and if negotiable. until the debt is paid. or insofar as the amount may exceed that which is due. Article 2097. The pledgee cannot deposit the thing pledged with a third person. Article 2100. The ownership of the thing pledged is transmitted to the vendee or transferee as soon as the pledgee consents to the alienation. With the consent of the pledgee. he has a right to the reimbursement of the expenses made for its preservation. in conformity with the provisions of this Code.Article 2095. the pledge shall extend to the interest and earnings of the right pledged. the thing pledged may be alienated by the pledgor or owner.

Unless the thing pledged is expropriated. the fruits just form part of the pledge. Article 2108. if the cash value is less than the principal obligation. the pledgee may opt to sell the thing and keep the proceeds. in the same situation.In case of a pledge of animals. if the thing pledged is in danger of being lost or impaired through the pledgee’s willful act or negligence. In 2108. with expenses in a proper case. even if the obligation is not due. Ex: Lender lends Borrower money. or defend it against a third person. he may compensate against the interest or the principal. In this case. without the authority of the owner. upon due date. the creditor can still recover the balance from the debtor. Nevertheless. upon offering another thing in pledge. he may cause the same to be sold at a public sale. L. it must be used by the creditor but only for that purpose. The creditor cannot use the thing pledged. payable upon demand. the pledgor may require that it be deposited with a third person. the proceeds of the sale shall be security for the debt. the owner may ask that it be judicially or extrajudicially deposited. Article 2105. the pledgor may demand its return. without the pledgee’s fault. labo! Article 2104. he may require its deposit with a third person. The proceeds of the auction shall be a security for the principal obligation in the same manner as the thing originally pledged. The pledgee is bound to advise the pledgor. The creditor who receives the fruits should apply them to whatever amount is owing (obligations due and payable). or should misuse the thing in any other way. and without prejudice to the right of the pledgee under the provisions of the following article. If the period is for the benefit of the pledgee. Despite the pledgor’s right above. Article 2106. as the case may be. the creditor may bring the actions which pertain to the owner of the thing pledged in order to recover it from. if there is no stipulation to the contrary. unless and until he has paid the debt and its interest. without delay. L may then take the goat’s milk and offspring and compensate against what is owing him even if the obligation is not yet due. Article 2103. this looks important. without the fault of the pledgee. When the preservation of the thing pledged requires its use. of any danger to the thing pledged. there is danger of destruction. Though the pledgor cannot demand return of the thing unless the obligation is fulfilled. the debtor continues to be the owner thereof. the pledgee’s right takes precedence over the pledgor’s. unlike in foreclosure. the pledgor may demand the return of the thing. If he misuses it. B pledges a goat. To secure the loan. the thing will continue with respect to the thing given. If the thing is expropriated. their offspring shall pertain to the pledgor or owner of animals pledged. If through the negligence or willful act of the pledgee. provided he replaces it with another of the same kind and quality. Cayo IID 2002 PAGE 36 . the thing pledged is in danger of being lost or impaired. and if he should do so. without the fault of the pledgee. Article 2107. The creditor can only use the thing if he is authorized or its preservation requires use. If there are reasonable grounds to fear the destruction or impairment of the thing pledged. The debtor cannot ask for the return of the thing pledged against the will of the creditor. or diminution in value of the thing pledged. Here the benefit of the period is for the creditor. but shall be subject to the pledge. impairment. if not due. the pledgor can demand extrajudicial deposit. provided the latter is of the same kind as the former and not of inferior quality. If. If the thing is in danger of diminution or destruction.

and (4) the sale must be with the intervention of a notary public. (2) the sale must be at a public auction. drafts the rules and notifies the debtor and the owner. The notary supervises the sale of the pledged property. PROBLEM: TO SECURE HIS LOAN. CAN LENDER REFUSE TO RETURN THE CAR? No. the thing is in the possession of the pledgor or owner. or demand immediate payment of the principal obligation. This same presumption exists if the thing pledged is in the possession of a third person who has received it from the pledgor or owner after the constitution of the pledge. the pledge is extinguished. Article 2110. there is a prima facie presumption that the same has been returned by the pledgee. If subsequent to the perfection of the pledge. he may either claim another thing in its stead. See Article 2111. This sale shall be made at a public auction. Article 2109. HE WENT TO LENDER’S HOUSE TO RECOVER THE CAR BUT LENDER REFUSED AND TOLD BORROWER TO PISS OFF. the creditor may appropriate the thing pledged. and with notification to the debtor and the owner of the thing pledged in a proper case. If the thing pledged is returned by the pledgee to the pledgor or owner. Is there a period required for notification? Cayo IID 2002 PAGE 37 . BORROWER PLEDGED HIS CAR TO LENDER. a second one with the same formalities shall be held. WHEN BORROWER RECEIVED THE LETTER. the property is in the possession of the pledgor. neither the acceptance by the pledgor or owner. and if at the second auction there is no sale either. How is the public sale conducted? Default rule: Proceed before a Notary Public and ask him to conduct a notarial sale. the pledgee becoming a depositary. *Article 2111. A statement in writing by the pledgee that he renounces or abandons the pledge is sufficient to extinguish the pledge. as owner.The pledgor can question the sale. LENDER COMPOSED A LETTER RENOUNCING THE PLEDGE. alleging that he could have obtained a better price. If after the perfection of the pledge. HE USED THE CAR TO DRIVE TO THE POST OFFICE AND MAILED THE LETTER. ANY STIPULATION TO THE CONTRARY SHALL BE VOID. stating the amount for which the public sale is to be held. nor the return of the thing pledged is necessary. the creditor may demand immediate payment or delivery of another security. This is an instance where the debtor loses the benefit of the period: If the debtor dupes the creditor as to the quality of the thing. UNLESS the owner holds it as agent of the pledgee. Article 2112. If the creditor is deceived on the substance or quality of the thing pledged. stating the amount due. may proceed before a Notary Public to the sale of the thing pledged. OUT OF THE KINDNESS OF HIS HEART. (3) there must be notice to the pledgor and owner. In this case he shall be obliged to give an acquittance for his entire claim. For this purpose. The creditor to whom the credit has not been satisfied in due time. WHILE DRIVING HOME. LENDER SPOTTED BORROWER WITH LENDER’S WIFE AND FELT VERY ANGRY AND JEALOUS. If at the first auction the thing is not sold. the presumption is that it was returned and extinction of the pledge. WHAT ARE THE FORMALITIES REQUIRED FOR THE NOTARIAL SALE? (1) the debt is due and unpaid.

The stipulation giving the creditor the right to recover the deficiency is void. Cayo IID 2002 PAGE 38 . The pledgor is allowed to bid and all things being equal. book says no) OR Instead of selling the thing. the creditor may appropriate the thing and it shall be considered as full payment for the entire obligation. See Article 2115.No particular period is required by law. The pledgee may also bid. The obligation is extinguished when the pledge is sold regardless of whether the proceeds are less or more than the amount of the obligation. the pledgor would be able to litigate and obtain an injunction. JPSP says yes. there can be recovery of deficiency. according to JPSP. The sale of the thing pledged shall extinguish the principal obligation. IN PLEDGE. PROBLEM: IN THE PLEDGE AGREEMENT. but his offer shall not be valid if he is the only bidder because the law seeks to prevent fraud. Notice can be given right before close of office the day preceding the sale. bids low. his bid shall be preferred over that of others. ARE THE STIPULATIONS VALID? The stipulation that the debtor shall be entitled to the excess is valid. HOW DO YOU GUARD AGAINST THE SITUATION OF NOT BEING ABLE TO RECOVER THE DEFICIENCY IF YOU ARE THE PLEDGEE? Set a minimum bid (if this is actually allowed. The law wants to conserve the property in the owner. If the price of the sale is less. The pledgee may also bid. if there were a period. unless it is otherwise agreed. THE PARTIES STIPULATED THAT. who is bidding alone. the debtor shall not be entitled to the excess. Exception to pactum commissorium if the thing is not sold after two sales. Can it be a private sale? Ex: stocks pledged. whether or not the proceeds of the sale are equal to the amount of the principal obligation. but his offer shall not be valid if he is the only bidder. Article 2115. interest and expenses in a proper case. If any other bid is accepted. notwithstanding any stipulation to the contrary. just sue for the entire obligation. All bids at the public auction shall offer to pay the purchase price at once. but that is his lookout. the pledgee is deemed to have been received the purchase price. Article 2114. Yes – there is no express prohibition. Article 2113. Fraud is possible if the parties had stipulated that the debtor shall be allowed to the excess and the creditor. THE PLEDGOR SHALL BE ENTITLED TO THE EXCESS AND THE PLEDGEE SHALL BE ENTITLED TO RECOVER THE DEFICIENCY. Unlike in a mortgage. listed on the PSE and just coursed through a broker. he should have known a notarial sale was forthcoming. as far as the pledgor or owner is concerned. IN CASE OF NOTARIAL SALE. He shall. YOU CAN STIPULATE THAT THE DEBTOR WILL BE ENTITLED TO THE EXCESS BUT YOU CAN’T STIPULATE THAT THE CREDITOR WILL BE ALLOWED TO RECOVER DEFICIENCY. But see the de Leon book under Article 2112. At the public auction. neither shall the creditor be entitled to recover the deficiency. the pledgor or owner may bid. moreover. The reason. Pledgee can waive cash requirement. debtor already defaulted. have a better right if he should offer the same terms as the highest bidder. is. Before that date. If the price of the sale is more than said amount.

This is to allow the debtor to take reasonable steps if he suspects that the sale was not honest. Article 2118. IF YOU ARE THE LENDER. PROBLEM: A 1. After the public auction. AND THE BORROWER DEFAULTS. pursuant to 2108? JPSP says: “Maybe but speculative. Third party can be a buyer of the thing or someone with a junior lien.” Probably not if the change in price is just a day-to-day fluctuation. 1. to the pledgor. You are not required to sell by piece. DELIVERING THE SURPLUS TO THE DEBTOR.3M then the debtor will be obliged to pledge additional securities. and deliver the surplus. unlike in pledge. Article 2119. The creditor can thus collect the amount due and compensate. keeping the profits as security. Ex: 1M obligation. If a third party secures an obligation by pledging his own movable property under the provisions of article 2085 he shall have the same rights as a guarantor under articles 2066 to 2070. Article 2120. Pledgor can restrict only if there are two pledges securing the obligation. can you claim that the value of the pledge is diminishing and then choose to sell the stocks for 1. and articles 2077 to 2081.OR Stipulate that if the value of the pledge goes under a certain amount. unless there is a stipulation to the contrary. then the debtor shall be obliged to pledge additional securities. the pledgee may choose which he will cause to be sold. should there be any. WHICH SECURITY TO YOU GO AFTER FIRST? Go against the REM first. Article 2117. The creditor cannot refuse payment by a third person WITH AN INTEREST in the thing pledged. When the stocks go down top 1. the thing pledged is a credit which has become due. PROBLEM: 1M IS SECURED BY A 700K MORTGAGE AND A 900K PLEDGE. 1. The pledgee has the duty to collect any due credits. He shall apply the same to the payment of his claim. the debtor is entitled to the excess and the creditor is entitled to recover the deficiency.4M. Why would a third person with a junior lien want to pay the obligation? The property may be more valuable than the obligation and he may want his lien to become senior.5M worth of stocks pledged. Article 2116. Cayo IID 2002 PAGE 39 .4M. If two or more things are pledged. the pledgee may collect and receive the amount due. the pledgee shall promptly advise the pledgor or owner of the result thereof. Without such a stipulation. IF YOU ARE THE PLEDGEE. can Article 2108 have the same effect? Ex: 1M obligation. HOW WOULD YOU SELL? Sell all. stipulate that if the value goes below 1. as a default rule. He may demand the sale of only as many of the things as are necessary for the payment of the debt. Any third person who has any right in or to the thing pledged may satisfy the principal obligation as soon as the latter becomes due and demandable. then take the whole pledge and make $$$! In REM.5M worth of stocks pledged. If a credit which has been pledged becomes due before it is redeemed.5M DEBT IS SECURED BY 2M WORTH OF SMC SHARES. Under this article. in line with the ordinary diligence required of him.

Cayo IID 2002 PAGE 40 . care and sale of the thing as well as on the termination of the pledge. Article 2121. the remainder of the sale price shall be delivered to the debtor. 6. Pledgors are released from obligation if by some act of the creditor. and 1994. In pledges by operation of law. without just grounds. With regard to pawnshops and other establishments. Indemnity.He is not prejudiced by any waiver of defense by the principal obligor. Release in favor of one pledgor benefits all. the special laws and regulations concerning them shall be observed. Article 2122. Article 2123. I think creditor will be entitled to recover because here. he did not How about any deficiency? accept the pledge voluntarily and the reason for prohibiting recovery is absent (the reason being that creditors should know not to lend more than what can be secured). Agent may retain objects of agency until reimbursed by principal. Extension granted to debtor extinguishes pledge. If. He who works on a movable may retain the same until paid for the work. the excess. 5. is returned to the pledgor: • • • • • Possessor in good faith may retain the thing on which he spent for necessary expenses until he is reimbursed. Pledgor is released if creditor accepts property in payment of debt. the provisions of this Title. the remainder of the price of the sale shall be delivered to the obligor. Laborer’s wages are considered a lien on goods manufactured or work done. 2. are governed by the foregoing articles on the possession. BUT after sale. Depositary may retain thing until paid for the deposit. The third party pledgor is entitled to: 1. the debtor may require the return of the thing. and subsidiarily. if any. The public auction shall take place within one month after such demand. such as those referred to in articles 546. there can be no subrogation. Subrogation. 1731. However. the creditor does not cause the public sale to be held within such period. Pledgor may set up defenses inherent in the debt. Pledges created by operation of law. The foregoing articles govern the following pledges by operation of law. A thing under a pledge by operation of law may be sold only after demand of the amount for which the thing is retained. 7. after payment of the debt and expenses. 3. which are engaged in making loans secured by pledges. 4.

A real estate mortgage is a contract whereby the debtor secures to the creditor the fulfillment of a principal obligation. Alienable rights imposed upon immovables Can you mortgage future property? Future property CANNOT be the object of a contract of mortgage. accessory. However. Mortgage (def). If the mortgagor delivers the property to the mortgagee. Nevertheless. What is the subject matter of real mortgage 1. What is the consideration in a contract of mortgage? Since mortgage is an accessory contract. Equitable – Lacks the proper formalities of mortgage but shows the intention of the parties to make the property as a security for a debt. and subsidiary contract. Legal – Required by law to be executed in favor of certain persons 3. Voluntary – Agreed to between the parties or constituted by the will of the owner of the property 2. the mortgagor retains possession of the property mortgaged. it is not an essential requisite of the contract of mortgage that the property remains in the possession of the mortgagor. movables may be the object of a chattel mortgage. imposed upon immovables. What are the kinds of real mortgage? 1. it can still be a contract of mortgage. specially subjecting to such security immovable property or real rights over immovable property in case the principal obligation is not complied with at the time stipulated. Immovables 2. the consideration is the same as that of the principal contract. Who takes possession of the mortgaged property? As a general rule. What are the characteristics of the contract of mortgage? Mortgage is a real. One cannot constitute a mortgage on “any other property he might have now and those he might acquire in the Cayo IID 2002 PAGE 41 . 2124.REAL MORTGAGE Art. (2) Alienable real rights in accordance with the laws. plus some other contract. Only the following property may be the object of a contract of mortgage: (1) Immovables.

the mortgage is nevertheless binding between the parties. there is a need to comply with the fifth requisite: The document of mortgage must be recorded in the Registry of Property. 1358. 2125. Art. This is similar to the requirement in pledge that the pledge be in a public document. The persons in whose favor the law establishes a mortgage have no other right than to demand the execution and the recording of the document in which the mortgage is formalized. they are not separate from the real property already subject of the mortgage.future. It must be constituted to secure a principal obligation.” Remember that one of the essential requisites of mortgage is that the mortgagor should be the absolute owner of the thing mortgaged. the contracting parties may compel each other to observe that form. 4. When the principal obligation becomes due. 3. or extinguishment of real rights over immovable property… What are the requisites of real mortgage? 1. But a stipulation which says that the mortgage covers future improvements upon real property already mortgaged is valid. The following must appear in a public document: (1) Acts and contracts which have for their object the creation. Art. once the contract has been perfected. as in the acts and contracts enumerated in the following article. the mortgage must be recorded in the Registry of Property. Can there be an oral mortgage? Cayo IID 2002 PAGE 42 . This right may be exercised simultaneously with the action upon the contract. The mortgagor must be the absolute owner of the thing mortgaged. If the first four requisites are present. modification. To prejudice third persons. If the instrument is not recorded. that the document in which it appears be recorded in the Registry of Property. If the law requires a document or other special form. there is already a valid mortgage between the parties – mortgagor and mortgagee. He must have free disposal of the thing or otherwise be authorized to do so. it is indispensable. transmission. Art. 1357. This is because recording the document in the Registry of Property serves as notice to 3rd persons. in order that a mortgage may be validly constituted. 5. This is because these future improvements are deemed included in the real property by accession. But to affect third persons. 2. In addition to the requisites stated in Article 2085. the property mortgaged may be alienated for the payment to the creditor.

Cayo IID 2002 PAGE 43 . Step 3: Pay the documentary stamp tax within the first five days of the succeeding month.” The mortgage is registered. one party can compel the other party to observe the proper form. Once the previously oral mortgage is in a public document and is subsequently registered in the Registry of Property. there has to be a valid mortgage first. and not to the “any and all future debts. 500K. the mortgage is binding on third persons only with respect to the 100K debt. Its purpose is to compel the mortgagor to execute a public document. So he even cheated the government of its revenues in this case. the mortgagee can compel the mortgagor to execute a public document of mortgage. It does not determine the validity or even the enforceability of the mortgage between the parties.” Therefore. This is because the mortgage was registered only to the extent of 100K. Before you can invoke it. That Mortgagee paid doc stamp taxes based only on the 100K debt. Mortgagor owes another creditor. 1357 provides that if there is already a valid contract. YES.As between the parties. X can argue on two grounds: 1. X is able to obtain a writ or attachment on the house and lot. In this case. it becomes binding on third persons. 1357 and 1358. Problem: Mortgagor mortgages a house and lot worth 500K to Mortgagee to secure a principal obligation of “100K and any and all future indebtedness. As long as the four essential requisites above are present. So his remedy is to invoke Art. But the oral mortgage is not binding against third persons. On due date. or 1/5 of the house. Before you pay the registration fees. the government will require you to update payment of realty taxes on the property. so that the mortgagee can register the mortgage. Remember that 1357 is only for convenience. not on the succeeding 400K debt. since there is already a valid mortgage between the parties. After payment of the registration fees. Mortgagor fails to pay both X and Mortgagee. It need not be in writing in order to be enforceable since it is not covered by the Statute of Frauds. who will notarize the document. there is already a mortgage between the parties. The total indebtedness of Mortgagor to Mortgagee eventually reaches 500K. X. Step 4: Go to the Office of the Register of Deeds and pay the registration fees. so that the mortgagee can then register it in the Registry of Property. And the mortgagee cannot register the mortgage in the Registry of Property if it is an oral mortgage. Procedure: What happens when you enter into a contract of mortgage? Step 1: Execute the document of mortgage Step 2: Go to a notary public. the mortgage will be annotated on the title. Meanwhile. Who has a better right to the house and lot – X or mortgagee? Mortgagee has a better right with respect only to 1/5 of the house and lot. The house and lot is his only property. The doc stamp tax is a percentage of the value of the property mortgaged.

to the fulfillment of the obligation for whose security it was constituted. X has a better right with respect to the 4/5 which was not registered. He can do a credit line arrangement in which he will give the debtor a ceiling up to which he can borrow. The action of the creditor is against the guarantor himself and not against his property. Art. This way. Moreover. The better solution is that the mortgagee should execute and register a new document each time he releases funds to the mortgagor/debtor. he is under no obligation to look beyond the certificate. The only right of the mortgagee is to foreclose the mortgage and sell the property to satisfy the obligation. the mortgagee is sure that the entire 500K loan is registered. All subsequent purchasers must respect the mortgage. the property still remains subject to the fulfillment of the obligation secured by it. as long as it is registered. A mortgage does not involve a transfer. But this is costly. etc. The mortgagor’s default does not operate to vest in the mortgagee the ownership of the encumbered property. Until the principal obligation is discharged. On the other hand. obtain judgment. at the time of the mortgage. In the absence of anything to excite suspicion. even if the mortgage itself is void. or conveyance of property but only constitutes a lien thereon. the 400K debt was non-existent. execute it. The mortgage deed will say that the principal obligation is 500K. but debtor has the choice of asking for a release of funds below this ceiling. It does not extinguish the title of the debtor. Does the mortgagor lose his title to the property mortgaged? No. the property of the guarantor is not subjected to a lien. or even if it is not registered. cession. Cayo IID 2002 PAGE 44 . the property is subjected to a lien. The creditor would still have to sue the guarantor. The mortgagee has a right to rely in good faith on what appears on the certificate of title of the mortgagor. How does mortgagee opt out of this problem? 1. The mortgagor/debtor continues to be the owner. the mortgage follows the property wherever it goes and subsists even if the ownership changes. In guaranty. Besides. the mortgage is void. What happens if the mortgage is void? If for some reason.2. 2. the principal obligation subsists. It creates a real right which is inseparable from the property mortgaged. So if the mortgagor sells the mortgaged property. The mortgage directly and immediately subjects the property upon which it is imposed. in mortgage. It is enforceable against the whole world (provided it is registered). the mortgage deed remains as proof of the principal obligation. Therefore. since the doc stamp tax will be based on the ceiling and not on the actual amount released. What is lost is only the right of the creditor to foreclose the mortgage in order to satisfy the principal obligation. if the purchaser knew that it was mortgaged. 2126. whoever the possessor may be.

Is this a valid mortgage? Between mortgagor and mortgagee. the mortgage is valid with respect to both house and lot #1 and #2. Art. so that it would be binding on third parties. To exclude these things. Art. the mortgagee can apply the cash as payment for the obligation. Mortgagor mortgages house and lot #1 and another house and lot which he will acquire next month. or use in its lumber concession shall immediately become subject to the mortgage. 2. This is because they are deemed to be part of the principal thing which was already existing at the time of the constitution of the mortgage. Examples: 1. with the formalities required by law. Future property. 2127. JPSP example: In the mortgage deed.Since the mortgagor retains ownership of the mortgaged property. construct. the mortgage is only valid with respect to the first house and lot but not to the second house and lot. The mortgage deed contains a provision that “all property taken in exchange or replacement. or in virtue of expropriation for public use. in whole or in part. once mortgagor acquires the second house and lot. install. the future improvements. The mortgage credit may be alienated or assigned to a third person. accessions. Upon default. But. to the improvements. is to compel the mortgagor to execute a public document evidencing the mortgage of the 2nd house and lot and to register it. The remedy of the mortgagee. 2128. What happens if the thing mortgaged is expropriated? The security becomes the cash given by the government as indemnity. there must be an express stipulation to that effect. and others that the mortgagor may acquire. growing fruits. But. machineries. in themselves. or it passes into the hands of a third person. Cayo IID 2002 PAGE 45 . with the declarations. cannot be the subject matter of mortgage. whether the estate remains in the possession of the mortgagor. and rents or income not yet received when the obligation becomes due. as against third parties. and. as well as all buildings. The deed is registered. and fruits of property already mortgaged are also covered by the mortgage. he can even mortgage it again to another mortgagor (junior lien/encumbrance). The mortgage extends to the natural accessions.” This is a valid stipulation. especially where the property mortgaged is subject to deterioration (such as machinery and equipment). and to the amount of the indemnity granted or owing to the proprietor from the insurers of the property mortgaged. attach. equipment. until the latter is registered. The purpose of this stipulation is to maintain the value of the property mortgaged. amplifications and limitations established by law.

When a mortgagor alienates/sells the mortgaged property to a third person. B may also choose to collect P5M (not P6M) from C. which is the part of the principal obligation secured by the property sold to C. On due date. 2130. he would want to know the type of person from whom he might have to collect the credit later on. A stipulation that requires the mortgagor to notify the mortgagee in writing before he sells the property is VALID. modification and extinguishment. Example: A mortgaged his land worth P5M in favor of B to secure a debt of P6M. 2129. C is not liable for the deficiency of P1M in the absence of a contrary stipulation. The creditor may claim from a third person in possession of the mortgaged property. before the creditor can collect from the third person. It only applies to those in possession of the mortgaged property in the concept of owner. A stipulation forbidding the owner from alienating the immovable mortgaged shall be void. This is not a prohibition but a mere regulation. However. If the possession by a third person is only as lessee. in whole or in part. If A fails to pay. Registration is only necessary to affect third persons. in the terms and with the formalities which the law establishes. The assignee may then foreclose the mortgage in case of nonpayment of the principal obligation. and the latter should have failed to pay. C can go after A for reimbursement. B may foreclose the mortgage. extent and consequences of a mortgage. which follows the property wherever it goes. and as to the other matters not included in this Chapter shall be governed by the provisions of the Mortgage Law and of the Land Registration Law. 2131. 2129 does not really apply to all third persons in possession of the property. they may be alienated or assigned to third persons. by the mortgagee who is the owner of the right. This is because the mortgage credit is a real right. real rights over immovables are also considered immovables in themselves. Art. A sold the land to C. Cayo IID 2002 PAGE 46 . Art. the creditor may demand from him the payment of the principal obligation. the transferee must respect the mortgage because it is a real right. Second. he must have made a demand on the debtor. if the mortgagor alienates the property.The mortgage credit is a real right. Art.) Art. even if its ownership changes. However. The alienation or assignment of the mortgage credit is valid even if it is not registered. the creditor may not collect the credit from that third person. The form. the payment of the part of the credit secured by the property which said third person possesses. and under property law. any disposition of the mortgaged property by the mortgagor is a red flag that may indicate that the mortgagor/debtor may not be able to pay the debt later on (Because why is he suddenly disposing of his property? Maybe he doesn’t have money anymore. Thus. A stipulation forbidding the owner from alienating the mortgaged property is void for being contrary to public policy because it is an undue impediment or interference on the transmission of property. The mortgagee would want to regulate the disposition of the property by the mortgagor because first. B should demand payment of the P6M from A. both as to its constitution. If C pays B.

not from being mortgagees. The default rule is judicial foreclosure. The situation is governed by RA 133. But. AND in no case exceeding five years. However. He can only foreclose judicially. if the mortgagor defaults. the mortgagee can foreclose – he can sell the property and apply the proceeds of the sale to the payment of the principal obligation. You can only do extra-judicial foreclosure if the mortgage deed has a provision which gives the mortgagee the special power of attorney to sell the mortgaged property in accordance with Act 3135. he can possess it as lessee. It denotes the procedure adopted by the mortgagee to terminate the rights of the mortgagor on the property and includes the sale itself. Moreover. the alien-mortgagee cannot take possession of the property during the mortgage. How do you foreclose? There are two types of foreclosure – judicial and extra-judicial foreclosure. The parties may also stipulate that the sale will be a private sale.FORECLOSURE The essence of a mortgage is that upon default. Mortgage to a Foreigner – RA 133 Can you mortgage to a foreigner? Yes. Can the foreigner take possession of the property during the mortgage? Pursuant to the mortgage. the foreigner CANNOT foreclose extra-judicially. since foreigners are only prohibited from owning real property in the Philippines. But these are only default rules. he cannot bid or take part in any sale of the real property in case of foreclosure. What is foreclosure? It is the remedy available to the mortgagee by which he subjects the mortgaged property to the satisfaction of the obligation. Can the foreigner take possession of the property upon default of the mortgagor? The foreigner can take possession of the mortgaged property upon default but only for the purpose of foreclosure and receivership in accordance with the prescribed judicial procedures. When confronted with a foreclosure problem… Cayo IID 2002 PAGE 47 .

STEP 3: Within this 90 to 120 day period. RULES OF COURT STEP 1: The mortgagee should file a petition for judicial foreclosure in the court which has jurisdiction over the area where the property is situated STEP 2: The court will conduct a trial. look for the following tell-tale signs: 1. If there is such a stipulation. so long as there has been no confirmation of the sale yet. let’s go through each of the processes… JUDICIAL FORECLOSURE UNDER RULE 68. the mortgagor has the chance to pay the obligation to prevent his property from being sold. look for a stipulation in the mortgage agreement which gives the mortgagee the special power of attorney to carry out the extrajudicial foreclosure in accordance with Act 3135. the purchaser shall be entitled to the possession of the property. then there will be either judicial or extra-judicial foreclosure. the property shall be sold to the highest bidder at public auction to satisfy the judgment. If there is no stipulation for extra-judicial foreclosure under Act 3135. the equity of Cayo IID 2002 PAGE 48 . Even after the lapse of the 90 to 120 day period. If the mortgagee is not a bank. Is the mortgagee a foreigner? If it’s a foreigner. it’s automatically judicial foreclosure (Act 133).First. if it’s an extra-judicial foreclosure. STEP 5: There will be a judicial confirmation of the sale. Third. now that you know whether it’s judicial or extra-judicial foreclosure. the property can be sold at a private sale. Who is foreclosing? 1. If the mortgagee is not a foreigner. it is an extra-judicial foreclosure. Fourth. provided in Section 47 of the General Banking Act. After the confirmation of the sale. it is a judicial foreclosure governed by Rule 68 of the Rules of Court. If. 3. and all the rights of the mortgagor with respect to the property are severed or terminated. Therefore. check if there’s a stipulation saying that there will be a private sale. after trial. The equity of redemption period actually extends until the sale is confirmed. look at the parties. the extra-judicial foreclosure will be governed by Act 3135. the court finds merit in the petition. Second. 2. This is called the EQUITY OF REDEMPTION PERIOD. it will render judgment ordering the mortgagor/debtor to pay the obligation within a period not less than 90 nor more than 120 days from the finality of judgment. If there is no such stipulation. 2. STEP 4: If mortgagor fails to pay within the 90-120 days given to him by the court. the mortgagor can still redeem the property. the governing law is Act 3135. If it is a bank. If you find this stipulation. but there will be certain exceptions applicable only to banking institutions.

the excess will go back to the mortgagor. In mortgage. The exception to this rule is when the judicial foreclosure is done by a BANK. Judicial foreclosure is also more susceptible to stalling/dilatory tactics by the mortgagor. STEP 6: The proceeds of the sale of the property will be disposed as follows: 1. In such a case. In this case. the costs of the sale will be deducted from the price at which the property was sold 2. The junior encumbrances will be satisfied 4. If there is still an excess. This is also unlike the rule in extra-judicial foreclosure where the mortgagee must go to court and file another action for the collection of the deficiency. the mortgagee can ask for a DEFICIENCY JUDGMENT which can be imposed on other property of the mortgagor. First. the parties have very little control over the sale because there is court intervention. IMPORTANT: After the confirmation of the sale. The mortgagee just has to file a motion in court for the deficiency judgment. EXTRA-JUDICIAL FORECLOSURE UNDER ACT 3135 When is extra-judicial foreclosure proper? There must be a provision in the mortgage giving the mortgagee the special power of attorney to carry out the extra-judicial foreclosure under Act 3135. the mortgagor does not have a right to redeem the property anymore. where the pledgee cannot collect any deficiency. there is no need to file an action.redemption can be considered as the right of the mortgagor to redeem the property BEFORE the confirmation of the sale. This is the general rule in judicial foreclosures – there is no right of redemption after the sale is confirmed. Why should you stay away from judicial foreclosure? Judicial foreclosure is costly. This is unlike the rule in pledge. Where should the sale be made? The sale can only be made in the province where the property is situated. Moreover. Cayo IID 2002 PAGE 49 . So if several properties located in different provinces are mortgaged to secure one principal obligation. there is still a right of redemption within one year from the registration of the sale. since he can file all sorts of motions in court to prevent the sale. since the parties would need to hire lawyers. the mortgagee DOES NOT get the excess (unlike in pledge). If there is a deficiency. The amount of the principal obligation and interest will be deducted 3. the creditor must foreclose in each and every jurisdiction where the property is located. in judicial foreclosure.

and the principal obligation to be satisfied by the sale of the mortgaged property. and the Register of Deeds. and then on September 9. and place of the sale. which is a newspaper of general circulation. STEP 3: Public Auction Time for conducting the public sale: Between 9 am to 4 pm Manner of conducting the sale: The sale should be under the direction of the sheriff of the province. but which nobody consults for the purpose of checking if their mortgaged property is about to be foreclosed. For example. the sale is still valid. 2. unlike in a guaranty. then on September 2. This is because there is a right to redeem in extra-judicial foreclosure. publication for three consecutive weeks is completed within 11 days. or of a notary public of the municipality. If you’re the mortgagee. The notice should contain the description of the property to be sold. even if the mortgagee/creditor is the sole bidder. Therefore. Posting in at least 3 public places 20 days before the sale – usually in the Sheriff’s office. the Assessor’s office. having defaulted in the principal obligation. the justice or auxiliary justice of the peace of the municipality. should expect that a foreclosure is forthcoming. having defaulted in the principal obligation. unless there are exceptions stipulated in the mortgage deed. date. In this case. which is a Friday. you can publish on August 30. Can the parties stipulate a minimum price at which the property shall be sold? Cayo IID 2002 PAGE 50 . Even the mortgagee/creditor may bid. This is because the mortgagor. which is a Monday. the lower the price at which it is sold. you should publish it in Abante. the better the chances of the mortgagor/debtor to redeem the property. Who may bid: Anyone may bid at the sale.What is the procedure? STEP 1: File a complaint for extra-judicial foreclosure with the Executive Judge STEP 2: Notice of the sale There are two kinds of notices required: 1. There is no need for personal notice to the mortgagor. Publication in a newspaper of general circulation. time. should expect that a foreclosure is forthcoming. And unlike in pledge. who shall be compensated with FIVE PESOS for each day of actual work performed (wow $$$). once a week for at least three consecutive weeks if the value of the property exceeds P400 This need not be done within a span of 21 days. you would want to surprise the mortgagor so the he cannot employ dilatory tactics such as getting an injunction in order to delay the foreclosure. This is because the mortgagor. which is also a Monday. If you’re nasty.

by agreement. What happens if there is an excess? The excess should first be applied to satisfy the junior liens and encumbrances on the property. contravene the law. Remedy of the Mortgagor If the winning bidder is able to obtain the writ of possession even before the expiration of the one-year period. What happens if there is a deficiency? The mortgagee must go to court and file an action to collect the deficiency. Exception to this rule: If the party foreclosing is a BANK. What is the effect of inadequacy of the price at which the property is sold at auction? If there is a right to redeem. Mere inadequacy of price will not be sufficient to set aside the sale unless the price is so inadequate as to shock the conscience. STEP 5: Redemption Cayo IID 2002 PAGE 51 . inadequacy of price is not material because the debtor may reacquire the property. he will retain possession during the redemption period (one year from the date of the sale). this rule may not apply where the purchaser happens to be the creditor or mortgagee himself. He may file an action for a deficiency judgment even during the period of redemption. STEP 4: Possession of the Property Upon foreclosure. Parties cannot. It will even make it easier for him to redeem it if it is sold at a low price. it goes to the mortgagor.No. However. If there is still an excess. Sec 47 of the General Banking Law provides that the purchaser shall immediately have the right to take possession of the property upon confirmation of the sale. if the winning bidder already wants possession of the property. The bond will answer for any loss to the mortgagor if it is later found that he was not in default in the mortgage obligation or that the conduct of the sale violated Act 3135. because the property must be sold to the highest bidder. the mortgagor may petition that the sale be set aside and the writ of possession be cancelled on the ground that he was not in default or that the sale was not made in accordance with Act 3135. Upon approval of the bond. The petition must be filed within 30 days from the grant of the writ of possession. The mortgagor can argue that the stipulation should be binding on the mortgagee on the principle of estoppel. the court will issue a writ of possession in favor of the purchaser. if the mortgagor is in possession of the property. However. he may file a petition in court to gain possession. He must give a bond equivalent to the rent for the use of the property for 12 months.

Who may redeem? The debtor. Exception: If the mortgagee foreclosing is a BANK and the mortgagor is a JURIDICAL PERSON.The debtor has the right to redeem the property sold within one year from the date of the sale. the juridical person shall have the right to redeem the property BEFORE the registration of the certificate of sale but NOT EXCEEDING 90 DAYS FROM THE DATE OF THE FORECLOSURE. under Sec 47 of the General Banking Law. Later. JPSP says interest is at 2% per month). the mortgagor loses his right over the property. citing Rule 39 Section 28 of the Rules of Court. He may exercise the right by paying off the debt secured by the first mortgage. except when the mortgagee foreclosing is a bank. Example: Mortgagor mortgaged a house and lot to A. reckoned from date of execution of the certificate of sale since it is only from that date that the sale takes effect as a conveyance. upon the sale of the property to A. equity of redemption is the right of the mortgagor in a judicial foreclosure to pay the amount of his obligation BEFORE the confirmation of the sale of the mortgaged property. the mortgagor should pay the amount of the ORIGINAL OBLIGATION (not the purchase price) plus INTEREST AT THE ORIGINAL RATE stipulated in the mortgage contract plus all COSTS and expenses incurred by the bank from the sale of the property. A foreclosed the mortgage and bought the house and lot at the auction. the only right that B as second mortgagee has is the right to redeem. In this case. or any judicial creditor or judgment creditor of the debtor. What is the difference between the RIGHT OF REDEMPTION and EQUITY OF REDEMPTION? The right of redemption is the right of the mortgagor to redeem the mortgaged property within a certain period (in most cases. the purchaser has the absolute right to a writ of possession. B’s exercise of Mortgagor’s equity of redemption is equivalent to foreclosure of the junior mortgage. Mortgagor also mortgaged it to B. On the other hand. From then on. Cayo IID 2002 PAGE 52 . How much should the one exercising the right of redemption pay? The mortgagor (or whoever is redeeming the property) should pay the PURCHASE PRICE of the property (not the amount of the original obligation anymore) plus INTEREST OF 1% PER MONTH (this is according to De Leon. Exception: If the mortgagee foreclosing is a BANK. within 1 year) AFTER the sale of the property in satisfaction of the mortgage debt. It is not available in judicial foreclosures. It is available to the mortgagor only when the mortgage is foreclosed extrajudicially. his successors in interest. What happens if the debtor/mortgagor fails to redeem the property within the prescribed period? If the debtor/mortgagor fails to redeem the property within the prescribed period. or any person having a junior encumbrance or lien on the property may exercise the right of redemption.

Title to the property sold under a mortgage foreclosure remains with the mortgagor until the expiration of the redemption period. At the sale.the amount of the principal obligation plus interest at 17%. What happens if the mortgagor sells the property to a third person within the redemption period? The third person. The right of redemption may be exercised by the mortgagee under the same terms. he can later argue that the waiver was not valid for being contrary to the public policy of preserving the property in the hands of the owner.5M. The right of the purchaser at the foreclosure sale is merely inchoate or contingent until after the period of redemption has expired without the right being exercised. Y would then have a right to seek reimbursement from the Bank. plus costs (Sec 47 General Banking Law: Remember. A different rule would make it easy for the buyer at the foreclosure sale to render the right of redemption nugatory simply by making a conveyance of the property for an amount beyond the capacity of the mortgagor to pay. the property was sold to the Bank as the highest bidder for P800K. Can the right of redemption be waived by the mortgagor in advance? It depends if there is a fair exchange of value and information between the parties. this is the exception to the general rule that the mortgagor should pay the purchase price and 1% interest per month). If the mortgagor is a farmer who mortgages his parcel of land and he waives the right to redeem. When the debtor/mortgagor fails to redeem within the period for redemption. even if the property is subsequently sold to a third party. this waiver is valid because there is a fair exchange of value. The mortgage was foreclosed. is actually buying not the property itself but the right to redeem the property and the right to possess it within the redemption period. He should pay only P1M . the purchaser’s right becomes final. he does not really recover property since he does not lose ownership until after the expiration of the redemption period. But if the mortgagor is a businessman who waives the right to redeem in exchange for lower interest rates. X mortgaged property to a Bank to secure a P1M loan at 17% interest. What is the effect of the timely exercise of the right of redemption? If the debtor/mortgagor is able to exercise the right of redemption on time. He merely frees it of the encumbrance created by the mortgage. SUMMARY OF EXCEPTIONS UNDER SECTION 47 OF THE GENERAL BANKING LAW OF 2000 Cayo IID 2002 PAGE 53 . in buying the property. The bank then sold the property to Y for P1. to whom should he pay and how much? X should pay to the Bank. If X wants to redeem the property.

the mortgagor retains possession of the property within the redemption period. There is no such provision in the case of ordinary extra-judicial foreclosure. he must file a petition for the issuance of a writ of possession with a corresponding bond. Upon confirmation of the sale. Period of Redemption for Juridical Persons In ordinary extra-judicial foreclosure. In judicial foreclosures. the amount of the mortgage obligation b. However. the purchaser automatically has the right to take possession after the confirmation of the sale. is followed. applicable only to banks: 1. In extra-judicial foreclosure by a bank. But if the mortgagor foreclosing judicially is a bank. the following are the exceptions to the general rules. There is no distinction. 4. Injunction If anybody wants to enjoin the conduct of foreclosure proceedings instituted by a bank. the petitioner must file a bond fixed by the court to satisfy whatever damage the bank may suffer by the injunction. juridical persons may redeem the property subject only to the following conditions: a. plus the interest on the loan at the rate stipulated in the mortgage contract c. 2. it must be BEFORE the registration of the sale Cayo IID 2002 PAGE 54 . the same rule as above is applicable to natural persons. plus costs of the sale incurred by the bank 3. as the case may be. 5. whether the party redeeming is a natural or juridical person. the mortgagor cannot redeem the property anymore. there is still a right to redeem As a general rule. If the party foreclosing extrajudicially is a bank. If the purchaser wishes to have possession within the redemption period. Automatic Right of Possession In ordinary extra-judicial foreclosure. the same procedure as in judicial or extrajudicial foreclosure. BUT. the mortgagor shall have a right to redeem within one year from the sale. Redemption Price In ordinary extra-judicial foreclosure. the mortgagor may redeem the property after it is sold within one year from the execution of the certificate of sale. In extra-judicial foreclosure by a bank.When the party foreclosing the mortgage is a BANK. the redemption price is the purchase price plus interest at 1% (or 2%?) per month. the redemption price consists of: a. there is no right of redemption in judicial foreclosure.

This interpretation is according to Section 28 Rule 39 of the Rules of Court. The junior mortgagee may satisfy the obligation of the mortgagor to prevent the sale of the property. the excess should be applied to the payment of the obligation to the second mortgagee.b. the second mortgage is extinguished. but the Cayo IID 2002 PAGE 55 . the junior mortgagee may exercise the mortgagor’s right to redeem within one year from the sale. If the original debtor fails to pay within this period. If the first mortgagee forecloses judicially. in which case. But if there is no excess. the mortgagor/debtor has 60 days to reimburse the second mortgagee what he paid. When an extra-judicial sale is made. the second mortgage is subordinate to the first mortgage. 3. If the property is sold for more than the amount of the obligation to the first mortgagee. JPSP says that the junior mortgagee exercising the right to redeem should follow Act 3135 – he should pay the price at which the property was sold. What happens to the ownership of the property when the second mortgagee exercises the right of redemption? There are two interpretations – one under the Rules of Court and another under the Civil Code. ownership will be consolidated in the second mortgagee who paid. If you’re the second mortgagee. 2. not the property (since you cannot do that because the right of the first mortgagee is superior). But according to the Civil Code rules on payment (oblicon). it must not be later than 90 days from the date of the sale EFFECTS ON THE JUNIOR MORTGAGE What happens if there was a second mortgage constituted on the property that was foreclosed? If the property was mortgaged a second time. When the second mortgagee exercises the equity of redemption by paying the obligation of the mortgagor/debtor. The following are the rights of a junior mortgagee: 1. De Leon says that he should pay the amount of the original obligation. before the sale is effected. the second mortgagee merely becomes subrogated in the right of the first mortgagee to foreclose the mortgage. you can also foreclose. The first mortgagor has the right to foreclose the mortgage upon default by the debtor. the effect should be like payment of an obligation by a third person. the junior mortgagee may exercise the equity of redemption vested in the mortgagor. and.

If the movable. He must have free disposal of the thing or otherwise be authorized to do so. This is so that you would be the only one who can exercise it when the proper time comes. If the first four requisites are present. The mortgagor must be the absolute owner of the thing mortgaged. the mortgage must be recorded in the Chattel Mortgage Registry. CHATTEL MORTGAGE Art. instead of being recorded. 2140 of the Civil Code that applies now. personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation. 2140. This definition under the Chattel Mortgage Law is no longer applicable. When the principal obligation becomes due. 2. What are the characteristics of the contract of chattel mortgage? 1. 5. Cayo IID 2002 PAGE 56 . It is an accessory contract because it secures performance of a principal obligation 2. It is a unilateral contract because it produces only obligations on the part of the creditor to free the thing from the encumbrance on fulfillment of the obligation. is delivered to the creditor or a third person.right of redemption instead. What are the requisites for a valid chattel mortgage? 1. What is the subject matter of chattel mortgage? The subject matter of chattel mortgage is personal or movable property. To prejudice third persons. there is already a valid mortgage between the parties – mortgagor and mortgagee. the contract is a pledge and not a chattel mortgage. By a chattel mortgage. It is a formal contract because it requires registration in the Chattel Mortgage Register for its validity (but only against third persons) 3. 3. It is the definition under Art. What is chattel mortgage? Chattel mortgage is the contract by virtue of which personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation. 4. It must be constituted to secure a principal obligation. the property mortgaged may be alienated for the payment to the creditor.

the parties must register the personal property mortgaged in the Chattel Mortgage Register as security for the performance of an obligation. However. This is similar to the requirement in pledge that the pledge be in a public document and the requirement in Real Estate Mortgage that it must be recorded in the Registry of Property. if the chattel mortgage is not registered. shall be applicable to chattel mortgage. This is because recording the document in the Chattel Mortgage Registry serves as notice to 3rd persons. THE CHATTEL MORTGAGE LAW How do you constitute a chattel mortgage? To constitute a chattel mortgage. DISTINCTIONS BETWEEN CHATTEL MORTGAGE AND PLEDGE DELIVERY OF THE PERSONAL PROPERTY REGISTRATION IN THE REGISTRY OF PROPERTY PROCEDURE FOR SALE RIGHT TO EXCESS OF PROCEEDS OF SALE RIGHT TO RECOVER DEFICIENCY CHATTEL MORTGAGE Not necessary Necessary for validity of the chattel mortgage against third persons Governed by Section 14 of the Chattel Mortgage Law Excess goes to the debtor/mortgagor Creditor/mortgagee can recover deficiency from the debtor/mortgagor. The requirement of registration is not for validity but only for binding third parties.But to affect third persons. it is still valid and binding as between the parties. Registration gives the mortgagee symbolic possession. there is no need for actual delivery of the personal property to the mortgagee. there is a need to comply with the fifth requisite: The document of mortgage must be recorded in the Chattel Mortgage Registry. Cayo IID 2002 PAGE 57 . The provisions of this Code on pledge. What is the effect of registration? The registration of the chattel mortgage creates a real right or lien which follows the personal property wherever it goes. public document is enough to bind third persons Governed by Article 2112 of the Civil Code Excess goes to the pledgee/creditor unless otherwise stipulated Creditor/pledgee is not entitled to recover any deficiency after the property is sold. Note that unlike in pledge. notwithstanding any contrary stipulation Art. 2141. insofar as they are not in conflict with the Chattel Mortgage Law. except if covered by Recto Law PLEDGE Delivery is necessary for validity of the pledge Not necessary.

or administrators shall well and truly perform the full obligation above stated according to the terms thereof. Xilca Alvarez. The conditions of this obligation are such that if the mortgagor. Province of Rizal Philippines. Cayo IID 2002 PAGE 58 Sgd. Executed at the municipality of Taytay in the Province of Rizal this Fifth day of October 2002. and for no other purpose. and one not entered into for the purpose of fraud. with interest thereon at the rate of twenty-five per centum per annum due on 25 December 2002. personally appeared Sheryl Tanquilut. of the sum of fifty pesos. Province of Rizal Philippines.What is the form required for a chattel mortgage? According to Sec. mortgagor. Helen Arevalo FORM OF OATH (affidavit of good faith) [Tip: know the contents of an affidavit of good faith. to Anna del Castillo a resident of the municipality of Cainta. FORM OF CERTIFICATE OF OATH In the Province of Rizal. mortgagee. In the presence of: Sgd. a resident of municipality of Taytay. and Helen Arevalo. SIZE 3XS This mortgage is given as security for the payment to the said Anna del Castillo. the parties who signed the foregoing affidavit and made oath to the truth thereof before me. mortgagee. then this obligation shall be null and void. and now in the possession of said mortgagor. and that the same is a just and valid obligation. Lumabas sa past exam] We severally swear that the foregoing mortgage is made for the purpose of securing the obligation specified in the conditions thereof. Sheryl Tanquilut . to wit: A PAIR OF SKY BLUE NIKE PRESTO SNEAKERS. JPSP might ask us to make one in the exam. his heirs. 5 of the Chattel Mortgage Law. Xilca Alvarez Sgd. witnesseth: That the said mortgagor hereby conveys and mortgages to the said mortgagee all of the following-described personal property situated in the municipality of Taytay Province of Rizal. the following form should be sufficient: FORM OF CHATTEL MORTGAGE AND AFFIDAVIT This mortgage made this Fifth day of October 2002 by Sheryl Tanquilut. executors.

Sgd. Bhoy-B Notary public Cayo IID 2002 PAGE 59 .

such as creditors and subsequent encumbrancers. Right of Redemption In case of default. You can only constitute a chattel mortgage to secure debts or obligations that are existing at the time the mortgage is constituted. But as an exception to this rule. This is because the after-acquired property is actually in renewal or in replenishment of goods on hand when the mortgage was executed. you cannot mortgage property that you do not own at the time of the constitution of the mortgage. they may be acquired by the mortgagor after the mortgage is constituted. but it will not bind third persons. If it is constituted to secure an obligation that is not yet existent. you cannot mortgage future property. he is subrogated to the rights of the mortgagor. a subsequent mortgagee c. The affidavit of good faith executed by the mortgagor states that the mortgage is constituted to secure the obligation specified therein and for no other purpose. he gets a discharge from the mortgagee so that he can then cancel the lien annotated on the title and in the Chattel Mortgage Registry. Can you mortgage future property? Section 7 of the Chattel Mortgage Law provides that as a general rule. Can you constitute a chattel mortgage to secure a future obligation or “a current obligation plus any and all obligations hereinafter contracted by the mortgagor in favor of the mortgagee”? No. Cayo IID 2002 PAGE 60 .What happens if there is no affidavit of good faith? The mortgage is still valid between the parties. What happens when the mortgagor defaults on the obligation? 1. What happens when the mortgagor pays the obligation? If the mortgagor pays the obligation. the mortgagor b. Therefore. by paying the amount of the obligation plus costs and expenses incurred from the breach: a. He can foreclose the mortgage. If there is no affidavit of good faith. the following persons may redeem the property before it is sold. even if technically. the mortgage will not be preferred as against these third persons. What the parties should do is to execute a new document/ deed of chattel mortgage to cover the newly contracted obligation. a subsequent attaching creditor If an attaching creditor redeems. The SC came up with this exception in order not to hamper the circulation of capital in the industry. it is void. the inventory of retail stores can be the subject of chattel mortgage.

There is no maximum time period for holding the sale. if any. and d. Right of Mortgagee to Possession If the creditor/mortgagee wants to foreclose upon default. in the example above. The balance. Mortgagor defaulted. 2. Claims of persons holding subsequent mortgages in their order. This is a minimum grace period given to the mortgagor to redeem the property before it is sold at auction. shall be given to the mortgagor Can the mortgagee recover any deficiency after the sale of the property? Unlike in pledge. But if.But once the property is sold at auction. the creditor/mortgagee can cause the property to be sold at public auction thirty days after default. because he can sell it for more than 70K and realize more than the amount of the principal obligation. The proceeds of the sale will be applied as follows: a. If there is no stipulation. should he redeem? Cayo IID 2002 PAGE 61 . the applicable rule is Section 14 of the Chattel Mortgage Law. the creditor should file an action for replevin to take possession or for judicial foreclosure. According to Section 14. the only notice requirement is posting at two or more public places in the municipality and personal notice to the mortgagor and junior mortgagees at least ten days before the date of the sale (no publication). he has the implied right to take the mortgaged property. The procedure is the same as that for extra-judicial foreclosure of a real estate mortgage. Should mortgagor redeem the property? Yes. there can be no redemption anymore. unless the situation is covered by the Recto Law. If the debtor/mortgagor refuses to surrender the property. the mortgagor has creditors running after him for debts worth 300K. The property was sold to X for 70K. Payment of the obligation secured by the mortgage c. Mortgagee foreclosed. PROBLEMS ON REAL AND CHATTEL MORTGAGE Mortgagor mortgaged property worth 120K to secure a 100K loan. except for the notice requirements. 3. Foreclosure The parties can stipulate for a private sale upon default. Costs and expenses of the sale b. the creditor can still file an action for recovery of any deficiency in case the proceeds of the sale do not satisfy the entire obligation. In chattel mortgage.

No. not by the Civil Code provisions on guaranty. ownership will be consolidated in the lender/trustee. they should stipulate the precise effect of default. What happens if there’s default? Art. the Government – because it is never insolvent b. Lender will re-convey the shares of stock to Borrower. Insurance Company – though in some cases. If the guarantor is any of the following. he should not redeem. If it’s a trust. Art. it is also hard to collect from an insurance company (also. he spends 70K in order to re-acquire property. But if the parties don’t want any problem. he may demand the reconveyance of the property to him. 2. JPSP thinks that if there’s default. 1454 does not cover this situation. persons. If he chooses the pledge. which he may thereafter lose again to his other creditors. Borrower executes a deed of assignment by way of security over the shares of stock in favor of Lender in order to secure payment of the loan. there’s no right to foreclose). but here are the considerations: 1. it is easier to foreclose. Borrower borrows P10M from Lender. It is stipulated that upon payment of the loan by Borrower. Cayo IID 2002 PAGE 62 . But the Supreme Court has treated this in several cases as a pledge. and he can get the excess in case the shares of stock are sold for more than P10M. a TRUST by virtue of law is established. a Bank – in the form of a bank guaranty through a letter of credit c. Borrower borrows P1M from Lender. take note that they would be governed. which is probably why the Supreme Court has characterized this type of transaction as a pledge instead. It’s not really a pledge because there is an absolute conveyance of ownership by the supposed pledgor in favor of the pledgee. Borrower offers the following securities to Lender: (1) a GUARANTY by X who is worth P100M (2) a PLEDGE of shares of stock worth P10M (3) a REAL ESTATE MORTGAGE worth P15M Which one should Lender choose? It really depends on the circumstances. If he chooses the guaranty. If the fulfillment of the obligation is offered by the grantor when it becomes due. the guaranty would be a good choice: a. If he redeems. but by the Insurance Code). 1454 of the Civil Code provides that if an absolute conveyance of property is made in order to secure the performance of an obligation of the grantor toward the grantee. it is good only if he is sure that the guarantor will pay. there is no need to foreclose (actually. What is this arrangement? This can either be a PLEDGE or an IMPLIED TRUST. JPSP likes the implied trust theory better because there is a statutory basis.

2. If it’s property at a prime spot in Makati. The loan is secured by a pledge worth P8M and a guaranty by X. So what should he do? He should sue Borrower in his capacity as debtor. The shares can be sold at an ordinary execution sale. 3. ANTICHRESIS Art. In this way. not a foreclosure sale. he cannot proceed against the guarantor without foreclosing the pledge first. But if it’s located in the boondocks. Cayo IID 2002 PAGE 63 . After the execution of the judgment on the shares. Foreclose the real estate mortgage first. the Lender may have a very difficult time selling it. On the other hand. By the contract of antichresis the creditor acquires the right to receive the fruits of an immovable of his debtor. what is the best way for Lender to proceed? 1. the shares will be taken out of the context of the pledge. if owing. the Lender can then go after the Guarantor for the deficiency. and thereafter to the principal of his credit. he will have a deficiency of P2M. with the obligation to apply them to the payment of the interest. Borrower borrows P10M from Lender. In the case of the real estate mortgage. 3. When judgment in his favor is rendered. he gets to keep the excess – resulting in an upside of P6M. The Guarantor is not yet an option since he has the benefit of excussion. with the obligation to apply them to the payment of the interest. he can then execute it against the attached shares. Then get a deficiency judgment for the remaining P2M. and any deficiency in the sale can still be recovered by the lender. Then. not as a pledgor. he should attach the property pledged. The loan is secured by a guaranty by X. a real estate mortgage worth P8M. How should the Lender proceed in case of default by Borrower? If Lender forecloses the pledge. 2132. If Borrower defaults. What is antichresis? Antichresis is a contract by which the creditor acquires the right to receive the fruits of an immovable belonging to the debtor.But the disadvantage of choosing the guaranty is that the guarantor who is worth P100M can afford to hire good lawyers who can stall the Lender’s claim. Then. The Lender must first go through steps 1 and 2 and other remedies before running after X. which he cannot collect anymore. Borrower borrows P10M from Lender. foreclose the pledge because in pledge. and a pledge worth P8M. who is worth P100M. it depends on how easy it would be to dispose of the property. this might be a good choice since it can probably be sold at a good price right away. and thereafter to the principal of his credit. for collection of the debt. if owing.

To secure the loan. Manresa. antichresis gives a real right if it is registered in the Registry of Property. If the parties do not want all of the fruits to be subject to the antichresis. they must STIPULATE otherwise. There is nothing in the law that says that antichresis can only guarantee interestbearing loans. parties must stipulate otherwise Expressly stipulated that the creditor shall apply the fruits to the payment of interest. Example: A borrowed P1M from B. if owing. BUT. Is delivery of the property to the creditor required? Delivery is not required for the validity of the contract itself. Is it essential for the contract to have a stipulation for interest in order to have an accessory contract of antichresis? No. not a real right General rule is that creditor must pay the taxes and charges upon the estate. It is not essential to the contract of antichresis that the loan that it guarantees should have interest. What are the differences between antichresis and real mortgage? ANTICHRESIS Property is delivered to the creditor Creditor acquires only the right to receive the fruits of the property. it is required in order that the creditor may receive the fruits. Like pledge and mortgage. however.What are the characteristics of antichresis? 1. but mortgage creates a real right over the property which is enforceable against the world Creditor has no obligation to pay taxes and charges No obligation on the part of the mortgagee to apply the fruits to interest and principal Antichresis and real mortgage are similar in that the subject matter is real property. Accessory – It secures the performance of a principal obligation. and thereafter to the principal REAL MORTGAGE Debtor usually retains possession of the property Creditor has no right to receive the fruits. A delivered a parcel of land with coconut trees to B. 2. Does antichresis apply to all of the fruits of the immovable concerned? GENERAL RULE: The general rule is that the contract of antichresis covers ALL the fruits of the encumbered property. What is the nature of the contract? Cayo IID 2002 PAGE 64 . giving B the power to administer it and harvest the coconuts. Formal Contract – It must be in specified form to be valid (in writing). believes that it is an independent contract.

The creditor. the creditor must base the value of the fruits on their market value at the time of the application. What are the obligations of the creditor under the contract of antichresis? 1. 2133. Is there a form required for the contract of antichresis? Yes. is to apply the fruits to the payment of interest. If interest is due in May. the principal obligation is still valid. when mangoes are in season. having been given possession of the property.Answer: The contract is one of mortgage. the contract of antichresis shall be void. If this form is not followed. not antichresis. But even if the antichresis is void. if owing. he should compute at the price of P35/kilo. one kilo of mangoes costs P50/kilo. 2135. In January. The contract must state the amount of the principal and the interest IN WRITING. If the amount of taxes paid by the debtor is enough to satisfy the principal obligation. If the debtor pays the taxes on the property which the creditor should have paid. Cayo IID 2002 PAGE 65 . Art. it must be expressly agreed between creditor and debtor that the creditor. The amount of the principal and of the interest shall be specified in writing. to the principal. one kilo costs 25/kilo. the contract of antichresis is VOID. But in May. The sums spent for the purposes stated in this article shall be deducted from the fruits. In order for it to be a contract of antichresis. The requirement that it be in writing is necessary not merely to bind third persons but to make the contract valid. Pay the taxes and charges upon the estate – If the creditor does not pay the taxes. If interest is due in January. unless there is a stipulation to the contrary. He is also bound to bear the expenses necessary for its preservation and repair. and thereafter. is obliged to pay the taxes and charges upon the estate. What if the creditor does not want to pay the taxes and charges? They must so stipulate in their agreement OR see the next article. Example: The property subject of the contract of antichresis has mango trees. the creditor must return the property to the debtor. then the loan and the antichresis are extinguished. When it is time to apply the fruits to the payment of the interest or the principal. Art. 2134. The actual market value of the fruits at the time of the application thereof to the interest and principal shall be the measure of such application. otherwise. the creditor must apply the fruits to the payment of interest based on the price of P50/kilo. the amount is to be applied to the payment of the debt. he is required by law to pay indemnity for damages to the debtor. Art.

in the same manner that they are allowed in pledge and mortgage. This is because the property stands as a security for the payment of the principal obligation. In this case. and any stipulation to the contrary shall be void. may always compel the debtor to enter again upon the enjoyment of the property. 2136. the creditor may compel the debtor to get the property back. The antichretic creditor possesses the property merely as a holder. Cayo IID 2002 PAGE 66 . and thereafter to the principal. Any stipulation to the contrary shall be void. When can the debtor get back the property subject of the antichresis? The debtor can get it back only when he has totally paid the principal obligation. But the latter. The exception to this rule is if the creditor does not want to pay the taxes and charges upon the estate. which is void. the Rules of Court on the foreclosure of mortgages shall apply. UNLESS there is a contrary stipulation (exception to the exception). Is there an exception? Yes. The creditor does not acquire the ownership of the real estate for nonpayment of the debt within the period agreed upon. Can the creditor acquire the property given in antichresis by prescription? No. But this has the effect of extinguishing the contract of antichresis. Art. Petition for the sale of the real property in judicial foreclosure proceedings under Rule 68 of the Rules of Court. The debtor cannot reacquire the enjoyment of the immovable without first having totally paid what he owes the creditor. except when there is a stipulation to the contrary. In order to acquire property be prescription. this is pactum commisorium. Apply the fruits The creditor must apply the fruits of the property to the payment of interest. Also. But the creditor may petition the court for the payment of the debt or the sale of the real property. possession must be in the concept of owner. 2137. The creditor has the following remedies in case of default: 1. if owing. 2. and not its ownership. In such a case. Art. Every stipulation to the contrary shall be void. Can the parties stipulate on an extra-judicial foreclosure? Yes. What happens when the debtor defaults on the principal obligation? The creditor DOES NOT acquire ownership of the real estate. This is because the contract of antichresis covers only the right to receive the fruits from the estate.2. Bring an action for specific performance. in order to exempt himself from the obligations imposed upon him by the preceding article.

The indivisibility of the antichresis is not affected by the fact that the debtors are not solidarily liable. Nature and Effect of Preference 1. Since it is an exception to the general rule. The contracting parties may stipulate that the interest upon the debt be compensated with the fruits of the property which is the object of the antichresis. Art. who is not a party to the principal contract. the law as to preferences is strictly construed. may offer his immovable under the contract of antichresis to secure the debt of another. (2085) 2. are applicable to this contract. The contract of antichresis is indivisible. and articles 2089 to 2091. if the creditor repudiates the antichresis. provided that if the value of the fruits should exceed the amount of interest allowed by the laws against usury. Exception to the general rule – Because. generally. (2090) 4. since there is no Usury Law anymore. the excess shall be applied to the principal. then the creditor should apply the excess to the principal. If the value of the fruits exceeds the value of the interest due. it is the right to be paid first. The contract of antichresis may secure all kinds of obligations – pure or conditional. In other words. Art. The last paragraph of article 2085. Preference applies only when there are two or more creditors with separate claims against a debtor who has insufficient property. There should be no rules as to who should be paid first. A third person. (2091) CONCURRENCE AND PREFERENCE OF CREDITS What is concurrence of credits? Concurrence of credits implies the possession by two or more creditors of equal rights or privileges over the same property or all of the property of a debtor. 2138. What is preference of credit? It is the right held by a creditor to be preferred in the payment of his claim out of the debtor’s assets above others. The creditor must first apply the fruits to the payment of the interest. (2089) 3. Cayo IID 2002 PAGE 67 . you have to pay your creditors when the debt becomes due. 2139. he can acquire the property by prescription.Exception: Just like in a co-ownership. Other characteristics of Antichresis: 1. The second part of this provision is no longer applicable.

it is open to seizure by another. subject to the exemptions provided by law. for the fulfillment of his obligations. 3. 2236. A lien. Preference applies after a sale. Can a creditor whose credit is not yet due assert a right to preference? No. and the claims of the various creditors have been established. but merely a preference in the application of the proceeds of the property after it is sold. and it is a question of application of the proceeds of the sale to satisfy the debt. 4. 5. 3. on the other hand. he is deemed to have abandoned his claim of preference. CHAPTER 1 GENERAL PROVISIONS Art. creates a charge on a particular property. When are the rules on preference of credits applicable? The rules apply only where: 1.2. it is lost. present and future. thereby indicating that he did not intend to press his claim further as to that specific property. There must be a proceeding such as an insolvency proceeding wherein the creditors can file their claims. What is the difference between preference of credit and a lien? A preference applies only to claims which do not attach to specific properties. Cayo IID 2002 PAGE 68 . present and future. there are two or more creditors with separate and distinct claims against the same debtor who has insufficient property. If property has not been seized. for the fulfillment of his obligations. It does not create a lien on the property itself. The title on Concurrence and Preference of Credits refers only to credits which are already due. leaving the property in possession of the debtor. 2. It must be asserted – If the right claimed is not asserted and maintained. It must be maintained – Where a creditor released his levy. Because before that. The right becomes significant only after the properties of the debtor have been inventoried and liquidated. The creditor does not have the right to TAKE the property or SELL it as against another creditor – Preference is not a question as to who may take and sell property belonging to the debtor. and you have no liquidated property out of which you can pay them. Does not create an interest in property – Preference simply creates a right to be paid first from the proceeds of the sale of property of the debtor. The debtor is liable with all his property. you have no way of knowing who the creditors are. 4. General Rule: A debtor is liable with ALL his property.

The reason for this is that the CPG or AC is distinct from the individual spouses. The insolvency of the husband does not dissolve the CPG or AC. shall be excluded from the insolvency proceedings. by order of the court. the administration of the conjugal partnership or absolute community may. If there is property. 2237. and 2. special preferred credits listed in 2241 and 2242 2. CHAPTER 2 CLASSIFICATION OF CREDITS The Civil Code classifies credits against a particular insolvent into three general categories: 1. the shares of the other co-owners cannot be taken possession of by the assignee. one of whom is the insolvent debtor. 2240. If it is the husband who is insolvent. So long as the conjugal partnership or absolute community subsists.Exceptions: Exemptions provided by law. though he has legal title thereto. the family home. his undivided share or interest therein shall be among the assets to be taken possession of by the assignee for the payment of the insolvent debtor’s obligation. be transferred to the wife or to a third person other than the assignee. common credits under 2245 Special Preferred Credits (2241 and 2242) Cayo IID 2002 PAGE 69 . Property held by the insolvent debtor as a trustee of an express or implied trust. such as future support. these properties should not be included in insolvency proceedings. The exemption applies provided that: 1. In a trust. the trustee is not the owner of the property. Art. Insolvency shall be governed by special laws insofar as they are not inconsistent with this Code. its property shall not be among the assets to be taken possession of by the assignee for the payment of the insolvent debtor’s obligations. The obligations of the insolvent spouse have not redounded to the benefit of the family. ordinary preferred credits listed in 2244 3. the assets of the CPG or AC do not pass to the assignee in insolvency elected by the creditors or appointed by the court. 2238. The CPG or AC subsists. only his undivided share or interest in the property can be possessed by the assignee in insolvency proceedings. Art. except insofar as the latter have redounded to the benefit of the family. etc. property in custodia legis. owned by two or more persons. See page 489-492 of De Leon for the list (not very important) Art. other than that mentioned in the preceding article. If there is a co-ownership (other than CPG or AC) and one of the co-owners becomes insolvent. 2239. Since he is not the absolute owner of the property held in trust. Of course. If one of the spouses is insolvent. Art.

on said movables. or those guaranteed by a chattel mortgage. (8) Credits between the landlord and the tenant. (13) Claims in favor of the depositor if the depositary has wrongfully sold the thing deposited. With reference to specific movable property of the debtor. repaired. on the share of each in the fruits or harvest. (7) For expenses of salvage. (3) Claims for the unpaid price of movables sold. taxes and fees due thereon to the State or any subdivision thereof. repairs. on the movables. money or securities obtained by them. (5) Credits for the making. so long as they are in the possession of the debtor. (9) Credits for transportation. upon the fruits harvested. substance and identity. when the price thereof can be determined proportionally. until their delivery and for thirty days thereafter. (10) Credits for lodging and supplies usually furnished to travelers by hotel keepers. this right is not lost by the immobilization of the thing by destination. Cayo IID 2002 PAGE 70 . upon the things pledged or mortgaged. upon the goods salvaged. on the movables belonging to the guest as long as such movables are in the hotel. or malfeasance by public officials committed in the performance of their duties. but not on money or instruments of credit. up to the value of the same. safekeeping or preservation of personal property. (11) Credits for seeds and expenses for cultivation and harvest advanced to the debtor. breach of trust.The items in bold face are the important/relevant ones: Art. upon the personal property of the lessee existing on the immovable leased and on the fruits of the same. (4) Credits guaranteed with a pledge so long as the things pledged are in the hands of the creditor. provided it has not lost its form. the following claims or liens shall be preferred: (1) Duties. upon the goods carried. arising from the contract of tenancy on shares. the lien may be enforced on the price. upon the price of the sale. for the price of the contract and incidental expenses. on the goods manufactured or the work done. kept or possessed. (12) Credits for rent for one year. (6) Claims for laborers’ wages. up to the value thereof. and if the movable has been resold by the debtor and the price is still unpaid. but not for money loaned to the guests. on the movable thus made. (2) Claims arising from misappropriation. neither is the right lost by the sale of the thing together with other property for a lump sum. 2241.

P1M unpaid price Cayo IID 2002 PAGE 71 . chattel mortgage on the car worth P2M c. to the Government: Income tax of P1M Import duties on the car worth P1M b. With respect to the same specific movable or immovable. (2) Misappropriation. If it’s a chattel mortgage. there can be no more claim on the movable. the preferred creditor may get it back within 30 days through an accion subrogatoria. if the movables to which the lien or preference attaches have been wrongfully taken. There is no preference among them. creditors merely concur. the creditor may demand them from any possessor. Last paragraph of 2241 If the movable is wrongfully taken. aside from item (1) on taxes imposed in connection with the movable.5M. Problem: The Debtor’s only property is a Jaguar worth P2.In the foregoing cases. P1M promissory note (notarized) What are the preferred claims with respect to the Jaguar? 1. breach of trust. If it is sold to a purchaser for value and in good faith. it must be in a public instrument. (4) Guaranteed with a pledge or chattel mortgage To be a preferred credit: If it’s a pledge. First. It just enumerates the preferred claims with respect to specific movables. it must be registered in the chattel mortgage registry. except that the State always gets paid the taxes imposed on the property first. Also. 2141 does establish the order of priority among these claims. P2M chattel mortgage 3. His liabilities are: a. malfeasance of public officers The acquisition must have been in the performance of official functions. you must remember that. within thirty days from the unlawful seizure. P1M import duties on the car 2. (1) Taxes The tax must be due on the movable itself. unpaid price of the car of P1M d. the property must still be in the hands of the public official. exercising the right of the debtor to recover property wrongfully taken from him granted under Article 559.

the tax must be imposed on the movable itself. Investment House issued promissory notes for its obligations to other creditors. the government) are used to purchase a movable under the name of another person (the corrupt government official). 2242. (2) of 2241. It has a preferred claim over the car under par. Government official becomes insolvent. income tax is not preferred with respect to the Jaguar. mortgages and liens shall be preferred.These are the only preferred claims because they are the ones attached to the movable itself. Cayo IID 2002 PAGE 72 . the disadvantage of this is that. canals. and shall constitute an encumbrance on the immovable or real right: (1) Taxes due upon the land or building. that taxes are not always preferred. canals or other works. The income tax and the promissory note are not preferred because they are not attached to the car. such as an unpaid seller. while the trustee is the government official. reconstruction or repair of buildings. since the Jaguar is not among the properties of the insolvent debtor. For example. engineers and contractors. Problem: Government official used public funds to acquire a Jaguar from a seller in good faith. upon the immovable sold. it is not prioritized over other special preferred claims.5M left: P1M will go to the mortgagee and 500K will go to the unpaid seller. The government would have to share with the other creditors who likewise have a special preferred claim on the Jaguar. there is an implied trust. unlike the government claim for tax credits. The Government wants to recover the car. upon said buildings. But. masons. engaged in the construction. If you’re government counsel. How do you prioritize the preferred claims? 1. Investment House placed the money in a time deposit. X can show that the money is not owned by Investment House. Under a trust agreement. The trustor is the government. The trustor/government actually owns the car. The chattel mortgagee and the unpaid seller will then proportionally share the P1. so it should be excluded from the insolvency proceedings. If Investment House becomes insolvent. or other works. X gave Investment House some money. as well as of architects. When funds belonging to another (in this case. P1M import duties – the State is always the priority with respect to preferred claims 2. The better alternative is to characterize it as an implied TRUST. Note. This has to be done in the context of insolvency proceedings. Art. With reference to specific immovable property and real rights of the debtor. however. (3) Claims of laborers. In order to be preferred. (2) For the unpaid price of real property sold. how should you proceed? The textbook answer would be that the government can go after the car in insolvency proceedings. There is thus no need to go through the insolvency proceedings. mechanics and other workmen. the following claims.

by attachments or executions. (5) Mortgage The mortgage must be registered in the Registry of Property in order for the credit to be a preferred claim against the immovable.(4) Claims of furnishers of materials used in the construction. or execution The credits must also be registered in order to be preferred. To determine the Cayo IID 2002 PAGE 73 . (10) Credits of insurers. (6) Expenses for the preservation or improvement of real property when the law authorizes reimbursement upon the immovable preserved or improved. This provision covers real property taxes. (5) Mortgage credits recorded in the Registry of Property upon the real estate mortgaged. (1) Taxes Capital gains tax is NOT a preferred credit because it is really a tax on income and not on the property itself. (9) Claims of donors of real property for pecuniary charges or other conditions imposed upon the donee. canals or other works. upon the immovable donated. (7) Credits annotated in the Registry of Property. upon the property insured. in virtue of a judicial order. for the insurance premium for two years. or execution that is first registered in the Registry of Property is preferred over other credits of the same nature. The preference is only with respect to LATER CREDITS. (2) Unpaid Seller There is no need to register the sale in order for the unpaid seller to have a preferred claim against the immovable. upon said buildings. upon the property affected. this does not share equally with the other claims. and only as to later credits. reconstruction or repair of buildings. canals or other works. It merely provides that a credit by virtue of judicial order. The credit is preferred only with respect to other attachments. Therefore. attachment. not to other kinds of credit. upon the real property thus divided. Unlike the other special preferred credits. these credits do not share proportionately in the property upon which they are imposed. which are registered at a later date. attachment. (8) Claims of co-heir in the partition of an immovable among them. (7) Credits annotated in the Registry of Property in virtue of judicial order.

Problem: Realty Company entered into a contract to sell with X. The other creditors for P6M will then line up for this portion according to the order of priority established in Art. which is why it would be more difficult to recover them. But in the case of immovables. Hence. and jewelry worth 500K. This way. How can X collect from Realty Company. with the exception of taxes imposed upon the immovable. X does not have to line up and compete with other creditors’ claims. Realty Company failed to pay the installments in full. not by Realty Company. The first one to be registered will be prioritized over the others. X can also claim that the condominium project on the lot cannot be included in the insolvency proceedings either because it is an improvement on a lot owned by X. With respect to the car. and Realty Company will pay the price in installments. the real estate mortgage is preferred. Problem: Debtor’s only assets are a house and lot worth P5M. if Realty Company becomes insolvent. Debtor has other obligations worth P6M. Again. Why isn’t there a provision for malfeasance or misfeasance with respect to immovables? Corrupt public officials can easily hide movables. For the reason of the Code Commission. (This is the reason given by JPSP.order of priority among several credits of this kind. Among Debtor’s liabilities are a real estate mortgage on the house and lot to secure a loan worth P3M and a chattel mortgage on the car to secure a loan worth P500K. The lot was used in a condominium project. which is prioritized. Under the contract to sell. Cayo IID 2002 PAGE 74 . is not an order of priority. in case it becomes insolvent? X should claim that he still owns the lot since the contract was merely a contract TO sell. What are the preferred credits? How much free property does Debtor have? With respect to the house and lot. pay off the preferred claims first: House and Lot worth P5M – P3M REM obligation = P2M excess Car worth P1M – 500K chattel mortgage obligation = 500K excess The excess after the preferred claims have been satisfied will go to the free property of the debtor: Free property = Jewelry worth 500K + P2M excess from House and Lot + 500K excess from car = 500K + 2M + 500K = 3M The free property of Debtor is worth P3M. the lot should not be included in the insolvency proceedings concerning Realty Company. ask Pelagio Cuison). a car worth P1M. the chattel mortgage is preferred. Therefore. their dates should be the basis. To determine the value of the Debtor’s free property. 2244 if they are ordinary preferred credits and 2245 if they are common credits. there is a provision giving the government preference with respect to movables. the corrupt public officials cannot really hide them. because he can say that he is the owner of the property. 2242. The government can establish a preferred claim over them simply by attaching. X will sell the lot to Realty Company. 2242 is merely an enumeration.

2244. Taxes mentioned in No. 1. (11) Taxes and assessments due any city or municipality. laborers. 1. other than those indicated in Articles 2241. when approved by the court. or household helpers for one year preceding the commencement of the proceedings in insolvency. or liens within the purview of legal provisions governing insolvency. No. Art. 2243. No. (12) Damages for death or personal injuries caused by a quasi-delict. No. (10) Taxes and assessments due any province. 1. Ordinary Preferred Credits (2244) Art. and No. or children under his or her parental authority who have no property of their own. and for three months thereafter. the following claims or credits shall be preferred in the order named: (1) Proper funeral expenses for the debtor. when properly authorized and approved by the court. 1 article 2241. No. shall first be satisfied. etc. or illness resulting from the nature of the employment. Cayo IID 2002 PAGE 75 . (6) Support during the insolvency proceedings. (3) Expenses during the last illness of the debtor or his or her spouse and children under his or her parental authority. JPSP says that if you’re a creditor. (2) Credits for services rendered the insolvent by employees. (9) Taxes and assessments due the national government other than those mentioned in Articles 2241. 1. The rest of the special preferred claims share equal preference among themselves. (5) Credits and advancements made to the debtor for support of himself or herself. during the last year preceding the insolvency. 1. and expenses incurred in the administration of the insolvent’s estate for the common interest of the creditors. 1. No. (7) Fines and civil indemnification arising from a criminal offense. (8) Legal expenses. No. The claims or credits enumerated in the two preceding articles shall be considered as mortgages or pledges of real or personal property. and 2242. and family. and 2242. 1. real and personal of the debtor. if they have no property of their own. you should avoid the preferred claim route because you would rather not line up along with the other creditors. article 2242. 2243 gives the rule that taxes due on the movable or on the immovable concerned should be satisfied first. (4) Compensation due the laborers or their dependents under laws providing for indemnity for damages in case of labor accident. proving that it’s an implied trust or a contract to sell. and 2242. other than those referred to in Articles 2241. You should find a way to be the owner of the thing that you’re after – such as. With reference to other property.

2244 does not establish a preference with respect to specific property of the debtor. if they have been the subject of litigation. 2002. (10). and capital gains tax. (14) Credits which. or (b) in a final judgment. ahead of funeral expenses. (9). Examples are income tax. (14) Credits appearing in a public instrument or in a final judgment This paragraph contains the rule of preference when you have several credits appearing in public instruments or in a final judgment. so they are ordinary preferred claims. Also. then the city or municipal government. license fees. These are not imposed on specific property of the debtor. 2002. sabi nga ni CLV. priority in right. 2244 is not merely an enumeration. on the other hand. Taxes owing the national government should be satisfied first. Labor claims are still not in the level of special preferred claims under 2241 and 2242. Under 2244. The debtor’s free property will then be used to pay ordinary preferred claims in the order established in 2244. Cayo IID 2002 PAGE 76 . unlike 2241 and 2242. Unlike 2241 and 2242. or an attachment of specific real property. 2002. (11) Taxes Note that this is unlike special preferred claims where a tax is imposed upon a specific movable or immovable property. just consider the date. First in time. The preference is with respect to the mass of properties of the debtor remaining after the special preferred claims have been satisfied. which can be collected against the debtor’s free property. Once the special preferred claims under 2241 and 2242 have been satisfied. and 11th priorities with respect to the free portion of the property of the debtor.(13) Gifts due to public and private institutions of charity or beneficence. without special privilege. 110 of the Labor Code has modified 2244 by moving labor claims to number (1). Example: The claims are as follows: A notarized promissory note dated May 1. 110 of the Labor Code has removed the one-year limitation. such as those arising from a pledge or mortgage. taxes of other kinds are only ordinary preferred credits and are only 9th. This does not include those registered credits which fall under 2241 and 2242. Important Items (2) Labor Claims Art. Special preferred claims. A judgment for sum of money dated October 1. Also. it establishes the order of priority. followed by the provincial government. appear in (a) a public instrument. enjoy first preference with respect to the property upon which they are imposed. A promissory note in a private document dated January 1. Art. To determine the order of preference among them. as provided by 2243. The Labor Code merely moved it up to the top of the list of ordinary preferred claims. 10th. the property remaining constitute the debtor’s free property. These credits shall have preference among themselves in the order of priority of the dates of the instruments and of the judgments respectively.

Art. after the payment of the credits which enjoy preference with respect to specific property. APPLYING THE RULES STEP 1: MAKE AN INVENTORY OF ASSETS List down all the assets of the debtor. and 2244. 2249. exclude all others to the extent of the value of the immovable or real right to which the preference refers. if any. Art. Those credits which enjoy preference with respect to specific movables. 3. they shall be satisfied pro rata. taxes and fees due the State or any subdivision thereof. Notarized promissory note dated May 1. 2248. exclude all others to the extent of the value of the personal property to which the preference refers. If there are two or more credits with respect to the same specific real property or real rights they shall be satisfied pro rata. 2245. The excess. There is no order of preference among common creditors. after the payment of duties. 2250. CHAPTER 3 ORDER OF PREFERENCE OF CREDITS Art. If there are two or more credits with respect to the same specific movable property. shall be added to the free property which the debtor may have. (2) Common credits referred to in article 2245 shall be paid pro rata regardless of dates. Art. Those credits which enjoy preference in relation to specific real property or real rights. If it is not among those mentioned in 2241. and 2244 have been satisfied. it is a common credit. for the payment of other credits. 2242. Art. 2002 Promissory note in a private document dated January 1. Art. Group these assets into two: the Preferred Group and the Free Property Group.What is the order of priority? 1. 2246. 2247. shall be satisfied according to the following rules: (1) In the order established in article 2244. regardless of date. Those credits which do not enjoy any preference with respect to specific property and those which enjoy preference. they share whatever is left in proportion to their credit. Credits of any other kind or class. 2002 Judgment dated October 1. 2. Cayo IID 2002 PAGE 77 . as to the amount paid. 2251. after the payment of the taxes and assessments upon the immovable property or real right. real or personal. 2242. 2002 Common Credits Art. shall enjoy no preference. Creditors with common credits have to line up for the excess of the debtor’s property after claims under 2241. or by any other right or title not comprised in the four preceding articles. Those assets with special preferred claims under 2241 and 2242 imposed upon them belong to the Preferred Group.

pay the taxes first. There will only be proportionate sharing in case the value of the thing after payment of taxes is not enough to Cayo IID 2002 PAGE 78 . 3. such as notarized promissory notes Put the other credits not falling under these three together. that labor claims are on top. d.Those without special preferred claims will constitute the debtor’s Free Property. b. 2. Remember to take out property held by the debtor only in the capacity of trustee. b. since 2244 already gives the order of preference. (3) ordinary preferred credits. The same goes for property of the AC of CPG. STEP 2: GROUP THE CLAIMS Make four groups – (1) special preferred credits on movables. c. such as income taxes and license fees (In the following order: national government. provincial government. For the special preferred claims. etc. Third: Pay the preferred claim of the creditor. He may have legal title to it. These are the common claims. city or municipal government). they should not be included in the proceedings. List them down according to the order under 2244. What if you have more than one preferred creditor over the same property? Ex: The claims against a car are: import duties. 2. labor claims taxes other than those imposed directly upon a movable or an immovable. they will share the balance proportionately. and (4) common credits. Since the mortgage creditor and the unpaid seller are both special preferred creditors. Second: Pay the taxes due on the property. chattel mortgage. and unpaid seller. STEP 3: SATISFY THE SPECIAL PREFERRED CLAIMS First: Take the value of the specific movable/immovable upon which the preferred claim is imposed. The most common are: 1. Since the property does not belong to the debtor. credits in a final judgment or in a public document. look out for the following because they are the most common: 1. property held as lessee or usufructuary. (2) special preferred credits on immovables. though. c. real estate taxes an obligation secured by a real estate mortgage (registered) claim of unpaid seller for the price of the immovable credits annotated in the Registry of Property by attachment or execution upon the immovable Put the ordinary preferred claims under 2244 together. For movables: a. In this case. import duties/other taxes imposed directly on the movable an obligation secured by a pledge (in a public instrument) or a chattel mortgage (registered) claim of unpaid seller for the price of the movable For immovables: a. but the beneficial title and ownership actually belong to another person. The usual example is a promissory note in a private instrument. Remember.

STEP 4: UPDATE THE INVENTORY AND LIST OF CREDITS After you have satisfied all of the special preferred claims. Since these will not be enough to cover the debtor’s remaining liabilities (he’s insolvent). and there is a deficiency. 2. regardless of the date. follows these rules: a. STEP 5: SATISFY THE ORDINARY PREFERRED CLAIMS List down all the ordinary preferred claims in the order in which they are listed in 2244. The list of common claims If there was a deficiency in satisfying the special preferred claims. Fifth: If the value of the specific property is not enough to satisfy the taxes and other special preferred claims. Those falling on the same date will enjoy equal preference and will share the balance of the free property proportionately. The inventory of assets You may have to add to the Free Property Group if. then all the special preferred claims must be paid in full. Add up the entire value of the Free Property Group because this is what you will use to settle the ordinary preferred claims and the common claims. This is the order of preference among them. Arrange these by date. and the requirement under 2241 and 2242 is that these transactions be registered (for real and chattel mortgage) or be in a public document (for pledge). after paying the taxes and other special preferred claims. Why do we know right away that it is an ordinary preferred credit? It is a credit in a public instrument. the deficiency will be an ordinary preferred credit if it is notarized or is contained in a final judgment. Most probably. the credit will be a common credit if it is not notarized or contained in a final judgment. You know it’s in a public instrument because it was treated at first as a special preferred credit. put the deficiency in the ordinary preferred credits group. STEP 6: SATISFY THE COMMON CLAIMS Whatever is remaining of the debtor’s free property will be used to satisfy the common claims. The list of ordinary preferred claims If there was a deficiency in satisfying the special preferred claims. take the value of the excess and add it to the debtor’s Free Property. 3. If the deficiency is in a credit arising from a pledge. there is an excess. after satisfying the special preferred claims. you have an excess. or chattel mortgage. update the following: 1. If the deficiency is in a credit arising from a transaction that is not in a public document or is not contained in a final judgment (ex: unrecorded sale). Cayo IID 2002 PAGE 79 . there will be several credits in public instruments and final judgments. If the value of the thing is sufficient.satisfy all of the special preferred claims against it. Make sure that you add the excess to the Free Property Group. real mortgage. put the deficiency in the common credits group. b. the common creditors will share the balance in proportion to the amount of their credit. Fourth: If. so it is an ordinary preferred credit under (14) of 2244.

They are both ordinary preferred credits under (14) of 2244.Most probably. Next in priority are the notarized promissory note for P1M and the P2M deficiency on the mortgage credit. The last to be satisfied will be the promissory note in a private instrument. 2002. 2002 What is the order of preference? First. What is the order of priority of his creditors’ claims? 1. The mortgage credit should be satisfied first. and cash. sold to him on March 1. 3. he executes a Real Estate Mortgage over his house and lot worth P3M to secure a P5M loan. 2002 Real property tax on the house and lot Income tax Import duty on the car Unpaid seller of the lot. in case there is an excess or deficiency. JPSP will just ask us to list the order of preference of several credits. 2002. 2002 Judgment dated March 1. make the inventory: Immovable Property with Special Preferred Claim House and Lot Movable Property with Special Preferred Claim Car Free Property Cash Second. 2002 Acknowledgment receipt of debt dated March 1. they enjoy the same order of preference and will share proportionately in the free property of the Debtor. 2002 Chattel mortgage on the car dated March 1. 2. Since they were executed on the same date. The debtor’s assets are a house and lot. 2002 License fee owing the city government for business of Debtor Notarized promissory note dated March 1. 2002. The P2M will be an ordinary preferred credit. Debtor becomes insolvent. group the credits: Cayo IID 2002 PAGE 80 . Debtor executes a promissory note for 500K in a private instrument. 2002. a creditor is able to obtain a favorable judgment against Debtor for P100K. On September 1. he also executes a notarized promissory note for P1M. Examples: On January 1. His obligations are as follows: A real estate mortgage dated June 1. On the same date. with attachment on house and lot dated January 1. So my suggestion is to make the lists mentioned above and just update the list of ordinary preferred claims and common claims after satisfying the special preferred claims. there will be a deficiency of P2M. But since it is for P5M and the house and lot is only worth P3M. a car. On March 1. which is a common credit. He is insolvent.

2002 Judgment dated March 1. Real estate mortgage creditor Unpaid seller Judgment dated March 1. sold on March 1. 2002 COMMON CLAIMS Acknowledgment receipt of debt dated March 1. 2002 Deficiency in claim of unpaid seller of the lot. 2002 COMMON CLAIMS Acknowledgment receipt of debt dated March 1. 2002 Real property tax on the house and lot Unpaid seller of the lot. 2002 SPECIAL PREFERRED CLAIMS OVER MOVABLE PROPERTY Import duty on the car Chattel mortgage on the car dated March 1.SPECIAL PREFERRED CLAIMS OVER IMMOVABLE PROPERTY Real estate mortgage dated June 1. Import duty Chattel mortgage creditor Fourth. 2. 2002 Add: Deficiency in claim of Real estate mortgage creditor dated June 1. sold on March 1. 2002 with attachment on house and lot dated January 1. Real property tax The following will share proportionately the balance after the payment of the real property tax: a. 2002. b. 2002 Cayo IID 2002 PAGE 81 . update the list of credits: ORDINARY PREFERRED CLAIMS Income tax License fee owing the city government for business of Debtor Notarized promissory note dated March 1. 2. satisfy special preferred claims: With respect to the House and Lot 1. 2002 Deficiency in claim from judgment dated March 1. 2002 Third. c. 2002 ORDINARY PREFERRED CLAIMS Income tax License fee owing the city government for business of Debtor Notarized promissory note dated March 1. 2002 [Let’s assume that there was a deficiency in settling the claims of these three creditors] With respect to the Car 1. with attachment on house dated January 1.

2002 Deficiency in real estate mortgage. Sixth. 2002 4. dated March 1. 2002 Deficiency in judgment credit. pay the ordinary preferred claims out of free property in the following order: 1. pay the common claims out of free property Acknowledgment receipt of debt Cayo IID 2002 PAGE 82 . dated June 1. 2.Fifth. sale dated March 1. Income tax License fees Proportionate sharing: Notarized promissory note dated March 1. 2002 Unpaid seller’s deficiency. 3.

3. What are the laws governing suspension of payments? A debtor may file a petition for suspension of payments either under The Insolvency Law or PD 902-A. while possessing sufficient property to cover his debts. Insolvent and under the management of a Rehabilitation Receiver or Management Committee A Rehabilitation Receiver or Management Committee is a group of persons appointed by the court to take over the assets of the insolvent corporation in order to turn it around. 2. foresees the impossibility of meeting them when they respectively fall due (solvent but not liquid). Where do you file a petition for suspension of payments under PD 902-A? You file the petition with the RTC (it used to be with the SEC. The Insolvency Law provides for three remedies: 1. of the payment of debts of one who. but the law was amended). The debtor has continued access to the assets and resources of the corporation. SUSPENSION OF PAYMENTS UNDER PD 902-A Who may file for suspension of payments under PD 902-A? A corporation may file for suspension of payments under PD 902-A if it is either: 1. What are the advantages of filing a petition for suspension of payments? The advantages of filing a petition for suspension of payments are: 1. OR 2. by court order. A natural person cannot file for suspension of payments under PD 902-A. Suspension of Payments Petition for Voluntary Insolvency Petition for Involuntary Insolvency I. Solvent but not liquid. SUSPENSION OF PAYMENTS What is suspension of payments? Suspension of payments is the postponement. and Cayo IID 2002 PAGE 83 .INSOLVENCY LAW What is insolvency? It denotes the state of a person whose liabilities are more than his assets.

Cayo IID 2002 PAGE 84 .2. It gives the debtor leverage or a framework for negotiation (that is. so it’s a good chance to bargain with creditors in the meantime. not the Insolvency Law). if he files it under PD 902-A. The debtor can delay payment for as long as the court allows.

there are no exceptions. All claims are suspended. only the court decides. File a petition with the RTC where the debtor has resided for six months prior to the filing of the petition. and the proposed agreement that he requests from his creditors. Cayo IID 2002 PAGE 85 . The court will issue an order calling for the meeting of all creditors. The petition need not be verified. 3. Under PD 902-A. the debtor must be solvent but not liquid. not under the Insolvency Law). petitioning that he be declared in the state of suspension of payments. possessing sufficient property to cover all his debts (SOLVENT) 2. as long as it is under Rehabilitation Receiver or Management Committee. The order will be published and notice sent to all the creditors of the debtor. SUSPENSION OF PAYMENTS UNDER THE INSOLVENCY LAW (SECTIONS 2-13) What are the requisites of the petition for suspension of payments under the Insolvency Law? The petition must be filed by a debtor: 1. 2. what are the advantages of filing the petition for suspension of payments under PD 902-A instead of under the Insolvency Law? 1. Under the Insolvency Law. it would be better to file the petition under PD 902-A. as mentioned already. foreseeing the impossibility of meeting them when they respectively fall due (NOT LIQUID) 3. The meeting should take place not less than 2 weeks nor more than 8 weeks from the date of the order. the creditors have a say on whether to grant the petition. 3. The petition should be accompanied by a verified list of all of his creditors. The debtor may either be a natural or juridical person (Although. Under the Insolvency Law. secured creditors are not covered by the suspension. 2. Under the Insolvency Law. PD 902-A is more lenient than the Insolvency Law. Under PD 902-A even secured creditors are covered by the suspension. even if the corporation is insolvent. What is the procedure for suspension of payments? 1. if you’re a corporation. it can file for suspension of payments. a statement of his assets and liabilities. they may foreclose upon default. debts and liabilities. Under PD 902-A.If you were the debtor corporation.

Take note that the amount of the debt is not reduced. If X and Y are present. Because although he met the requirement of 60% of the liabilities. Majority required to approve the proposal: A double majority consisting in 2/3 of the number of creditors voting. which 2/3 must represent at least 60% of the total liabilities of the debtor. 2. 3. 5. represent at least P60K worth of liabilities. this shows that the debtor is liquid after all. 7. Why is it in the interest of the debtor to refrain from making any disposition or payment other than those in the ordinary course of business? Dispositions or payments made which are not in the ordinary course of business may indicate that the debtor connived with a creditor into voting in favor of the suspension of payments by buying his vote. Objections. Also.000 as follows: creditor X: 3. he does not constitute 2/3 of the number of creditors voting. in addition. Cayo IID 2002 PAGE 86 . The creditors will approve the proposition of the debtor.000. to the decision must be made within 10 days following the meeting. What if the debtor owes one creditor a total of P60K. Upon request to the court. No payments may be made by the debtor except those made in the ordinary course of business. What is the majority required to approve any proposal? The majority required is 66 creditors (2/3 of the number of creditors voting). who must.000 or 60% of the total liabilities of A.4. creditor Y: 3. there will be a quorum because they represent 6.000. There must be a double majority. 6. does not need to be placed in a state of suspension of payments. if any. Ex: A has liabilities worth P10. What are the effects of filing of the petition? 1. the creditors present must represent at least 60% of the total liabilities of the debtor. Issuance of the order of the court directing that the agreement be carried out in case the decision is declared valid.000. all pending executions against the debtor shall be suspended except execution against property especially mortgaged. or when no objection to said decision has been presented. There will be a meeting of creditors in which they will decide whether to grant the petition. is his single vote a valid majority? No. No disposition of his property may be made by the debtor except those made in the ordinary course of business. Example: There are 99 creditors representing total liabilities worth P100K. and creditor Z: 4. The debtor merely buys more time to satisfy his obligations. Quorum Requirement: To have a valid meeting. and therefore.

) What are the grounds for questioning the decision of the meeting? 1. the following creditors are also not covered by the suspension: 1. while the other 98 are against it. Cayo IID 2002 PAGE 87 . If there is proof that the debtor somehow bribed the creditor or bought his vote. They can foreclose upon default in spite of the suspension of payment. since he only represents 1/99 of the creditors. ALL creditors are covered by the suspension of payments. it is legal to give OTHER incentives to the creditor. Ex: There are 99 creditors with claims worth P100K total. Fraudulent conveyance of claims by a creditor for the purpose of obtaining a majority. Persons having claims for personal labor. expense of last illness and funeral of the wife or children of the debtor incurred in the 60 days immediately preceding the filing of the petition. The debtor is obliged to disclose all of his creditors in the petition. in which case. which caused prejudice to the rights of the creditors. The one creditor is in favor of suspension of payments. 3. 1 creditor represents 60K worth of credits. However. the decision of the meeting can be set aside. Persons having legal or contractual mortgages. and the deliberations conducted. What he can do is to assign some of his credits to 200 other people.Are all of the creditors of the debtor affected by the filing of the petition? Only those creditors included in the schedules filed by the debtor will be called upon to take part in the meeting. this is a ground for questioning the decision of the meeting. they will represent 201/299 of the creditors. 2. BUT. (But take note that this does not apply if the petition was filed under PD 902-A. How will this one creditor manipulate the situation in order to approve the petition? He has already complied with the 60% requirement. and 2. These are not bribes but merely incentives to induce them to vote in favor of suspension. That way. while the other 98 creditors represent a total of 40K. The disclosure shall be verified or confirmed under oath. maintenance. Which creditors are not affected by the order of suspension of payments? Aside from those creditors to whom notice was not given. Hence. This rule applies only when the petition is filed under the Insolvency Law. Procedural defects in the calling and holding of the meeting. such as higher interest rates. with a total claim of 60K. His problem is the 2/3 of the creditors requirement. This is enough to meet the double majority requirement. those who did not appear because they were not informed of the proceedings will not be affected. Fraudulent connivance between a creditor and the debtor for the creditor to vote in favor of the proposed agreement.

The petition shall be accompanied by: 1. the debtor himself is the petitioner. the debtor shall indicate: 1. A verified schedule containing: a. such as the residency requirement. a full and true statement of all debts and liabilities of the insolvent debtor. his place of residence and the period of residence therein prior to the filing of the petition. and effects not exempt from execution for the benefit of his creditors. Distinctions between suspension of payments and insolvency (in general) INSOLVENCY PURPOSE SOLVENCY OF DEBTOR EFFECT ON AMOUNT OF INDEBTEDNESS To discharge the debtor from the payment of debts Debtor does not have sufficient property to pay his debts The amount is affected. some creditors may not receive anything at all. an application to be adjudged insolvent. What are the jurisdictional requirements for the petition for voluntary insolvency? In the petition. an outline of the facts giving rise or which might give rise to a cause of action against the insolvent debtor Cayo IID 2002 PAGE 88 . NUMBER OF CREDITORS The number of creditors is immaterial. estate.II. and where there are preferences. 4. his inability to pay all his debts in full. 2. 3. Creditors receive less than their credits.000 may apply to be discharged from his debts and liabilities by filing a petition for voluntary insolvency in the RTC where he has resided for the last six months prior to the filing of the petition. There must be three or more creditors if it is involuntary insolvency. In voluntary insolvency. his willingness to surrender all his property. The date of the filing of the petition is important for purposes of reckoning certain periods. and b. SUSPENSION OF PAYMENTS To suspend or delay the payment of debts Debtor has sufficient property to pay his debts The amount of indebtedness is not affected. VOLUNTARY INSOLVENCY What is the concept of voluntary insolvency? An insolvent debtor whose liabilities exceed P1.

5. Conveyance of the debtor’s property by the clerk of court to the assignee. Cayo IID 2002 PAGE 89 . Unlike in involuntary insolvency. and encumbrances thereon. and the transfer of any property by him are forbidden. The court need not conduct a hearing before declaring the debtor insolvent and taking his assets. Filing of the petition by the debtor praying to be declared insolvent. What are the effects of an order declaring the petitioning debtor insolvent? 1. What is the procedure for voluntary insolvency? 1. 9. Objection. an accurate description of all the personal and real property of the insolvent. 8. The very act of filing the petition is the act of insolvency. In contrast. an outline of the facts giving rise or which might give rise to a right of action in favor of the insolvent debtor. 3. 6. in voluntary insolvency. Liquidation of the debtor’s assets and payment of his debts. the one petitioning is the debtor himself. the ones petitioning are the debtor’s creditors. there need not be an allegation of an act of insolvency by the creditors of the debtor. and b. Meeting of the creditors to elect the assignee in insolvency. Issuance of an order of adjudication declaring the debtor insolvent. 2. 3. Discharge of the debtor. All civil proceedings pending against the insolvent debtor shall be stayed. 4. Composition. Publication and service of the order to creditors. except if the debtor is a corporation. if any. 2. The sheriff takes possession of all the assets of the debtor which are not exempt from execution until the appointment of a receiver or an assignee. 10. This is because the petition is voluntary on the part of the debtor. location. It is not adversarial. in involuntary insolvency.2. Appeal to the Supreme Court in certain cases. This is because in voluntary insolvency. upon his application. whether or not exempt from execution. The payment to the debtor of any debts due to him and the delivery to the debtor or to any person for him any property belonging to him. to the discharge. 7. A verified inventory containing: a. if agreed upon. including a statement as to its value.

no residency requirement Upon hearing of the case ISSUANCE OF THE ORDER OF ADJUDICATION DECLARING THE DEBTOR INSOLVENT Cayo IID 2002 PAGE 90 . After filing for voluntary insolvency. INVOLUNTARY INSOLVENCY What is the purpose of involuntary insolvency? A petition for involuntary insolvency is not an ordinary personal action for collection of debts. JPSP thinks that the better route is still to file for suspension of payments under PD 902-A instead of filing for voluntary insolvency. If the petitioner is a corporation. however. attachments or executions on property of the debtor duly recorded and not dissolved are not. Distinctions between Voluntary Insolvency and Involuntary Insolvency VOLUNTARY INSOLVENCY NUMBER OF CREDITORS PETITIONER ACTS OF INSOLVENCY AMOUNT OF INDEBTEDNESS BOND HEARING RESIDENCY REQUIREMENT One creditor is sufficient The insolvent debtor Debtor must not be guilty of any act of insolvency Must be greater than P1. The debtor should just fight it out with his creditors. to distribute it equitably among his creditors. But otherwise. If the petitioner is a natural person. since filing for voluntary insolvency is not just demeaning but will even affect the debtor’s credit-worthiness later on.000 or more Petition must be accompanied by a bond Petition is granted only after hearing Petition must be filed with RTC where debtor resides or has his place of business.4. and to release him from further liability. there are very few advantages in filing for voluntary insolvency. III. may be granted ex parte Petition must be filed with RTC where debtor has resided for at least 6 months Upon the filing of the voluntary petition INVOLUNTARY INSOLVENCY Three or more creditors Three or more creditors who must possess the qualifications provided by law Debtor must have committed one or more of the 13 acts Must be P1.000 Not required Not necessary. no one will trust that debtor enough to lend him money again. Its purpose is to impound all of the non-exempt property of the debtor. Mortgages or pledges. affected by the order. his only incentive to file a petition for voluntary insolvency is that he will get a discharge from past debts and liabilities (corporations do not get this discharge).

Why does it have to be three creditors? Why is it not enough for one creditor to file the petition? Insolvency proceedings contemplate competing claims of several creditors over the assets of the insolvent debtor. there are no competing claims. First. the credits of these three creditors should NOT have accrued within 30 days prior to the filing of the petition. It’s just a legal tactic to get Foreign Company to settle the obligation. After waiting for 30 days (cooling-off period). Foreign Company will be forced to settle the obligation. To get around this requirement. at least three creditors of one debtor who are residents of the Philippines. The creditor can just go to court and file a simple action to collect.Who may petition for involuntary insolvency? The petitioners must be: 1. you should assign some of the credit to at least two other persons. be verified by the petitioners 2. 4. Example: Creditor extends a loan to a Foreign Company. 3. News of the Foreign Company’s insolvency will reach Hong Kong. Foreign Company fails to pay. and since it is a foreign company. then file the petition for involuntary insolvency against Foreign Company. Why would you want to do this? The petition for involuntary insolvency can be used as a tool to harass or pressure a debtor into settling his obligation with the single creditor. (According to JPSP. wait 30 days. you cannot file the petition because the Insolvency Law requires that it be filed by at least three creditors. In addition. What should Creditor do? Creditor should first assign some of the credit to two other companies. so that Creditor will withdraw the petition. set forth one or more acts of insolvency mentioned in the law Cayo IID 2002 PAGE 91 . and the price of its shares will go down. you can file the petition. Creditor can do this even if Foreign Company is not actually insolvent.000. If there is only one creditor. 5. But if you’re the single creditor of one debtor. it has no assets in the Philippines which Creditor can run after. the aggregate amount of which is at least P1. To stop the share prices from going down.) What are the requisites of the petition for involuntary insolvency? The petition must: 1. there may be instances when you would want to file a petition for involuntary insolvency against the debtor. whose credits accrued in the Philippines. 2. how do you do this? Since you’re only one creditor. which is publicly listed in the Hong Kong Stock Exchange.

What are the steps in filing a petition for involuntary insolvency? 1. Publication and service of the order. 568 of De Leon for the complete list): a. be accompanied by a bond. 6. 3. Hearing of the case. For example. the debtor committed acts to ensure that the debtor will not be able to pay b. In involuntary insolvency. 7. approved by the court with at least two sureties. where there is no need for a hearing. To protect themselves from this situation. the creditors should either ask the court for an injunction or for a receiver who will hold the properties of the debtor. 8. 2. the debtor committed acts in fraud of creditors c. Note that between the filing of the petition and the adjudication of the case by the court. and damages resulting in the filing of the petition. there is a hearing because the proceedings are adversarial. 4. expenses. the debtor committed acts giving preference to one creditor in favor of other creditors But the petition should allege at least one of the 13 specific acts of insolvency mentioned in the law. 3. Cayo IID 2002 PAGE 92 . 5. Service to debtor of the order to show cause. the debtor can dissipate his assets in the meantime. the bond will answer for damages that Foreign Company can prove as a result of the wrongful filing of the petition. Filing of the debtor’s answer or motion to dismiss. there is a period of time during which the debtor still has his assets. These may be grouped into three general categories (See p. Filing of the petition by three or more creditors in the RTC where the debtor resides or has his place of business. Issuance of the order or decision adjudging the debtor insolvent. The purpose of the bond is for the petitioners to answer for the costs. Meeting of creditors for election of an assignee in insolvency. in such penal sum as the court shall direct. While the case is being decided by the court. The debtor is given a chance to refute the claim of the petitioners that he is insolvent. in the earlier case of the single creditor who files the petition against the Foreign Company just to humiliate him. Issuance of the order requiring the debtor to show cause why he should not be adjudged insolvent. This is in contrast with voluntary insolvency. 20 of the Insolvency Law. This is a jurisdictional requirement.What are acts of insolvency? There are 13 acts of insolvency mentioned in Sec.

11. Conveyance of the debtor’s property by the clerk of court to the assignee. IV. a secured creditor cannot participate in the election. ASSIGNEES What is an assignee? An assignee is the person elected by the creditors or appointed by the court to whom an insolvent debtor makes an assignment of all his property for the benefit of his creditors.The assignee must be elected within two to eight weeks from the date of the order of the adjudication. Objection. if any. why would you surrender the security? If the security is not enough to cover the obligation. if agreed upon. How do the creditors choose the assignee? The creditors will meet in order to elect the assignee. Appeal to the Supreme Court. Composition. unless: 1. Cayo IID 2002 PAGE 93 . he has asked for the fixing of the value of the security. 10. The assignee represents the insolvent as well as the creditors in voluntary and involuntary proceedings. 12. you might as well participate in the election if you think that the portion that will be allotted to you will be greater than the value that you will realize from the sale of the security. 13. If you were the secured creditor. OR 2. As a general rule. he has surrendered the security to the sheriff or receiver of the estate of the insolvent. Who can participate in the election of the assignee? Creditors who have filed their claims in the office of the clerk of court at least two days prior to the scheduled election may participate. in certain cases. Liquidation of the assets of the debtor and payment of his debts. except if the debtor is a corporation. 9. The assignment vests title to all the assets of the debtor in favor of the assignee. 14. Discharge of the debtor on his application. to the discharge.

Having these powers.In order to validly elect an assignee. 2. the majority of the creditors both in number and in the amount of credit they represent (another case of double majority) should vote for the same assignee. 5% for sums exceeding P1.000. you will earn P4M. 4. Aside from this fee. within five days from his election. etc (for a complete enumeration. The assignee takes the property in the same conditions that the insolvent held it. If you were given an opportunity. with two or more sureties. Upon appointment. the assignee will also have other benefits. What are the effects of assignment? 1.000 but less than P10. What are the powers and duties of the assignee? The assignee has the powers of administration over the property of the insolvent. take into possession all of the property of the debtor. The bond will answer for any liability that the assignee may incur to persons aggrieved by his actions as assignee. the court will appoint the assignee. If there was an attachment or a judgment against the insolvent debtor made 30 days before the filing of the petition for insolvency. because the assignee earns a substantial fee. such as reimbursements of his expenses and the opportunity to refer legal or accounting matters to his firm. 3. the legal title to all the property of the insolvent is vested in the assignee. debts. and effects of the insolvent shall be brought by the assignee and not by the creditors. What should the assignee do once he is elected? The assignee is required to give a bond for the faithful performance of his duties. If the creditors do not attend the meeting or fail or refuse to elect an assignee. So if the amount that you can liquidate is P100M. in an amount to be fixed by the court. According to Section 42 of the Insolvency Law. if he is a lawyer or a CPA. 586-587 of De Leon). recover property fraudulently conveyed by the debtor. or if the assignee fails to qualify or subsequently becomes incapacitated. Cayo IID 2002 PAGE 94 . But the title of the assignee retroacts to the date of the filing of the petition for insolvency. he can sue and recover claims belonging to the debtor. the assignee earns commissions at the following rates: 7% for the first P1.000 that he will be able to liquidate from the properties of the debtor. see p. All actions to recover all the estate. it will be set aside. and the control of the property is vested in the court. and 4% for sums exceeding P10. will you act as an assignee? Yes.000.

rightfully allocated to a creditor entitled to a share in the fund. which provides that property found among the property of the insolvent debtor but which are not really owned by him should be taken out of the proceedings. For acts of disposition. Examples are property held in trust or as a lessor or usufructuary. properties which are exempt by law Cayo IID 2002 PAGE 95 . he shall be liable for a penalty equal to double the value of the property embezzled or disposed. VI. who knows of the pending or imminent insolvency proceedings concerning the debtor. But take note of Section 48. the assignee must obtain a court order. and not to assignments of credit made by the creditors behind each other’s backs. This relates only to embezzlement of the debtor’s property. which provides that if any person. All the separate property of each of the general partners. The penalty will go to the estate of the insolvent. if you’re a creditor. except a. It is paid by the assignee only upon order of the court. and 2. and b. such as sale of the property of the insolvent debtor or payment of the creditor’s shares. what “global” means. What is a dividend in insolvency? It is a part of the fund arising from the assets of the estate of the insolvent debtor. though. etc. apply the rules under the Civil Code. After taking them out. you may not want to do involuntary insolvency because there are a lot of costs – assignee’s fees. legal costs. CLASSIFICATION AND PREFERENCE OF CREDITORS Disregard the rules in Sec. PARTNERSHIPS AND CORPORATIONS Who may petition for declaration of insolvency of a partnership? In case of voluntary insolvency. Which properties are covered in insolvency proceedings? 1. (I don’t know.The assignee does not have powers of disposition. the petition may be filed by all or any of the partners. In case of involuntary insolvency. It might be better is you could obtain a global settlement. Section 37 of the Insolvency Law: Penalty for Embezzlement Take note of Section 37. separate properties of limited partners. etc. The applicable rules are those under the Civil Code on Concurrence and Preference of Credits (Articles 2236-2251). According to JPSP. All the property of the partnership. the petition may be filed by three or more creditors of the partnership or one or more of the partners. embezzles or disposes of any of the property of the insolvent. 48-50 of the Insolvency Law.) V.

they can just put up a new corporation and start with a clean slate. However. If the stockholders want a fresh start. a proportionate part of this surplus will be added to the partnership assets and will be used to pay partnership debts. What is the effect of a declaration that a corporation is insolvent? The property and assets of the corporation will be distributed to the creditors. after first exhausting its assets. 2. But if it’s a partnership. the surplus shall be added to the assets of the individual partners in proportion to their interests in the partnership. If there is any surplus in the property of any general partner after paying his individual debts. if they apply for one. corporations do not get a discharge. may proceed against the solvent general partners who are proportionately liable with their separate property. the property of the stockholders of the corporation cannot be used to pay the creditors of the corporation. Unlike in partnership. PROOF OF DEBTS Cayo IID 2002 PAGE 96 . Civil Code). the creditors can still go after the general partners for the deficiency. The net proceeds of the partnership property shall be used to pay the debts of the partnership. How do you distribute the net proceeds of the properties of the partnership? 1. The net proceeds of the individual estate of each partner shall be used to pay individual debts. 4.Can a partnership be declared insolvent even if the partners constituting the same are solvent? Yes. A partnership may be declared insolvent notwithstanding the solvency of the partners constituting it. What happens to the partnership when any of the partners becomes insolvent? The partnership is automatically dissolved by the insolvency of any partner or of the partnership (Art. This is why it makes sense to give them a discharge. Why doesn’t the law give corporations a discharge? Corporations do not get a discharge because their creditors can only go after the assets of the corporation. 3. the corporation will not be allowed to get a discharge. VII. 1830. The creditors cannot collect any deficiency from the stockholders. In contrast. and the assets of the partnership are not enough to cover its liabilities. If there is any surplus in the property of the partnership. The creditors of the partnership. There is no need to get a discharge in order to have a fresh start. What is the benefit given by the Insolvency Law to partnerships? Partnerships get a discharge from the obligations.

What happens to obligations of the insolvent debtor that arise after the commencement of the proceedings? These debts cannot be proved in the proceedings. Claims of secured creditors unless they waive the right to foreclose or surrender the security. Claims of creditors who hold an attachment or execution on property of the debtor. 3. the creditor can still claim from the debtor. Cayo IID 2002 PAGE 97 . Any debt of the insolvent arising from his liability as indorser. All debts due and payable at the time of the adjudication of insolvency. Those barred by prescription. But before the surety pays the principal obligation. What is a contingent claim? It is a claim in which the liability depends on a future and uncertain event. for the insolvent’s debt as bail. bail or guarantor. Which debts cannot be proved at the insolvency proceedings? 1. since there is no real claim yet. Any claim for reimbursement of a person who has answered. 4. the claim of a surety is a contingent claim because the surety can only claim reimbursement from the principal debtor once he himself has paid the obligation. All debts existing at the time of the adjudication of insolvency but not payable until a future time. he has no claim for reimbursement against the principal debtor. if the contingency happens after the termination of the proceedings. 4. surety. in whole or in part. But. and 5. or guarantor or otherwise.What are the debts which may be proved (collected) against the estate of the insolvent debtor? 1. provided that this was issued at least 30 days before the institution of the insolvency proceedings. 2. Claims on account of which a fraudulent preference was made or given. 3. For example. But the creditor can still collect from the debtor. surety. where such liability became absolute after the adjudication of insolvency but before the final dividend shall have been declared. The discharge granted the debtor from his existing debts does not cover those debts that could not have been proved in the insolvency proceedings. since the discharge given to the debtor cannot apply to claims that could not have been proved in the insolvency proceedings. 2. A claim based on a contingency which has not happened at the time of the pendency of the proceedings cannot be proved in the proceedings. Other contingent debts and liabilities contracted by the insolvent if the contingency shall happen before the order of final dividend.

When can composition be set aside? It can be challenged by any party in interest within six months after it has been confirmed on the ground of fraud. give the one claiming compensation undue preference over other creditors. in effect. 3. It would. DISCHARGE What is discharge? Discharge is the privilege given to the insolvent. The debtor must ask for it within three months to one year after he is adjudicated insolvent. Is the discharge automatically given to the insolvent debtor? No. between the insolvent or financially embarrassed debtor and all of his creditors whereby the creditors agree to accept a dividend less than the amount of their claims. freeing him from all liabilities proved during the insolvency proceedings. If the claim arose within the 30-day period before the filing of the petition. It must be made after depositing the consideration to be paid and the cost of the proceedings. made upon a sufficient consideration. The rule on preferences would be disregarded if the set-off were allowed. Damages arising out of a tort Can a creditor set up compensation/offset his own debts against the insolvent debtor? This is the case of Uy-Tong v. COMPOSITIONS What is composition? Composition is an agreement. for the sake of getting paid sooner. VIII. What are the requisites? 1. Support 6. there can be no compensation. 4. IX. The offer of the terms of composition must be made after the filing in court of the schedule of property and submission of the list of creditors. The offer must be accepted in writing by a double majority of the creditors – majority of the number of creditors representing a majority of the claims. Cayo IID 2002 PAGE 98 . Silva.5. The court must approve the terms of the composition. Compensation can be set up against the insolvent debtor but only for those debts which arose at least 30 days before the filing of the insolvency proceedings. 2.

for or with the insolvent debtor (This is because the discharge only benefits the principal debtor. indorser. The creditor must file the petition to revoke it within one year from the date of the discharge. X. Claims of secured creditors 9. he is insolvent or is in contemplation of insolvency. Debts of a surety. All those which were or might have been proved against the estate in the insolvency proceedings. 2. Contingent claims When can the petition to get a discharge be denied? The debtor cannot get a discharge if he is in bad faith or does acts to the prejudice of his creditors. when may a discharge be revoked? A discharge may be revoked by the court if a creditor can prove that it was fraudulently obtained. Debts arising from any act of swindling (because you don’t reward a person who violated a law or a trust) 3. the transaction is made within 30 days before the filing of the petition for insolvency. Debts which were not proved and could not have been proved during the insolvency proceedings 7. Once granted. Debts of a corporation 5. Which debts are not released? 1. Cayo IID 2002 PAGE 99 . Debts arising from tort 8.Which debts are released by discharge? 1. FRAUDULENT PREFERENCES AND TRANSFERS What is a preferential transfer? It is a parting with the property of the insolvent for the benefit of a creditor with the result that the estate of the insolvent is diminished and other creditors are prejudiced. Claims for support 6. or any person liable for the same debt. All those set forth in the schedule. Taxes 2. and 2. guarantor. What is a fraudulent preference? It is a disposition of property by the debtor under the following conditions: 1. Debts which were not yet existing at the time of the discharge 10. it is made with a view to giving preference to any creditor. not his co-debtors or guarantors). 4. 3.

Real contract – Deposit is perfected by the delivery of the subject matter 2. with the obligation of safely keeping it and of returning the same. A deposit is constituted from the moment a person receives a thing belonging to another. except for valuable consideration in good faith. it is made under a confession of judgment. it is rescissible for being in fraud of creditors. Debtor sells a car worth P1M to Buyer for 900K. or 2. 1962. it is not made in the usual and ordinary cause of business of the debtor. Cayo IID 2002 PAGE 100 . Within 30 days before the filing of the petition for insolvency. What are the characteristics of the contract of deposit? 1. There is a fair exchange of value. It is essential that the depositary is not the owner of the property deposited. the person receiving a benefit has reason to believe that the debtor is insolvent and that the transfer is made in order to defeat or prejudice the rights of other creditors. What is a fraudulent conveyance/transfer? It is any disposition of property made by the insolvent within one month before the filing of the petition for insolvency. the transfer is void. Is there a presumption of fraud? There is a rebuttable presumption that a conveyance is fraudulent when: 1. Is this a fraudulent conveyance? No. If the safekeeping of the thing delivered is not the principal purpose of the contract. DEPOSIT CHAPTER 1 DEPOSIT IN GENERAL AND ITS DIFFERENT KINDS Art. What is the contract of deposit? It is the receipt by a person of a thing belonging to another with the obligation of safely keeping it and of returning it. there is no deposit but some other contract. Unilateral if the deposit is gratuitous – because only the depositary has an obligation.4. Another remedy of the creditors is to file a criminal complaint against the insolvent debtor. What is the status of the fraudulent conveyance? If made within 30 days before the filing of insolvency proceedings. If made after the filing of insolvency proceedings. so the transaction does not really prejudice the creditors.

Deposit distinguished from Simple Loan (mutuum) DEPOSIT PURPOSE WHEN RETURN CAN BE DEMANDED SUBJECT MATTER Safekeeping Depositor can demand return of the thing at will Movable and immovable property (if deposit is judicial) SIMPLE LOAN Consumption Lender must wait until the expiration of the period granted to the debtor Only money and any other fungible thing Deposit distinguished from Commodatum PURPOSE GRATUITOUS? SUBJECT MATTER DEPOSIT Safekeeping May be gratuitous. legally. Is it a contract of deposit? Still. So. if the car is lost. What is the principal purpose of the contract of deposit? The principal purpose is the safekeeping of the thing delivered. The direct result of this is that parking fees will go up because it would have to cover insurance costs in addition to the regular parking fee. or agency. it is not a deposit. What is the subject matter in deposit? Only movables can be the subject matter of deposit. but maybe a contract of service. lease. If you leave a kid a Gymboree or at Kids at Work. You park your car at the car park of Powerplant. If safekeeping is merely an accessory or secondary obligation. If it were a deposit. such as commodatum. It’s still not a deposit because the purpose is not safekeeping. no. the owner of the car park (the depositary) will shoulder the loss. It’s a shortterm lease of space. Is it a contract of deposit? No. 2. even if. The purpose is merely convenience. but another contract. JPSP Examples: 1. may be onerous In extra-judicial deposit. unlike the car park of Powerplant. only movables COMMODATUM Transfer of use of the subject matter Always gratuitous Both movable and immovable property Cayo IID 2002 PAGE 101 . so that you have a place to leave your car while you shop or watch a movie or go to school. You park your car at the Dela Rosa car park. the sole reason for the existence of the Dela Rosa car park is for people to leave their cars there.Bilateral if the deposit is for compensation – gives rise to obligations on the part of both the depositary and the depositor. People who park there just want the space. it’s not a deposit. it is not a deposit. it should not be treated as a deposit. because the purpose is not safekeeping. And even for practical purposes.

or (b) Necessary – made in compliance with a legal obligation. Is there a contract at this point? Yes. whether voluntary or necessary.Art. or by travelers with common carriers. Extra-judicial (a) Voluntary – delivery is made by the will of the depositor or by two or more persons each of whom believes himself entitled to the thing deposited. A warehouseman 3. It is a contract of future deposit.m. tomorrow. A deposit may be constituted judicially or extrajudicially. A: “I will deposit my car in your garage at 8 a. 1963. This applies only to an extra-judicial deposit.” B: “Okay. Deposit is a real contract and requires delivery of the subject matter in order to be perfected. Contrary stipulation 2. Only movable things may be the object of deposit.” Is there a contract of deposit at this point? No. Since real property may not disappear or may not be lost. or by travelers in hotels and inns. Judicial – takes place when an attachment or seizure of property in litigation is ordered 2. Where property is saved from destruction without knowledge of the owner – In this case. but the deposit itself is not perfected until the delivery of the thing. and is binding upon the parties. there is no point in entrusting them to someone for safekeeping. Reason: The main purpose of deposit is safekeeping. A deposit is a gratuitous contract except when there is an agreement to the contrary or unless the depositary is engaged in the business of storing goods. An agreement to constitute a deposit is binding. It is perfected by mere consent. 1964. Kinds of Deposit 1. EXCEPTIONS: 1. Art. or on the occasion of any calamity. GENERAL RULE: Deposit is gratuitous. Depositary is engaged in business of storing goods – ex. the owner is bound to pay the person who saved his property just compensation Art. there is a contract. Cayo IID 2002 PAGE 102 . 1965. 1966. Art.

such as fire. if it takes place on the occasion of any calamity. The reason is that the purpose of a judicial deposit is different. shipwreck. 2. What is the distinction between voluntary and necessary deposit? The main difference is that in voluntary deposit. pillage. The relationship is an agency. storm.A gives the keys to his house to B for safekeeping. When there are several depositors: Cayo IID 2002 PAGE 103 . but it is not an essential element of deposit. 1968. who shall deliver it in a proper case to the one to whom it belongs. or other similar events. since the house is an immovable which cannot be the proper subject matter of deposit. if made in compliance with a legal obligation. An extra-judicial deposit is either voluntary or necessary. A voluntary deposit is that wherein the delivery is made by the will of the depositor. flood. the depositor should be the owner of the thing. But if it is a judicial deposit. The depositary cannot even require the depositor to prove that he is the owner of the thing. Art. EXCEPTIONS: Deposit is necessary in the following cases: (See discussion under necessary deposit) 1. GENERAL RULE: Deposit is voluntary. the depositor lacks the freedom to choose the depositary. Does the depositor have to be the owner of the thing deposited? Generally. It is to protect the rights of the parties to the suit. What is voluntary deposit? Deposit wherein delivery is made by the will of the depositor. even immovable property can be a valid subject matter. the depositor is free to choose the depositary. Is this a deposit of the house? No. deposit of goods made by travelers or passengers with common carriers CHAPTER 2 VOLUNTARY DEPOSIT Section 1 General Provisions Art. 3. In necessary deposit. deposit of effects made by travelers in hotels or inns 4. A deposit may also be made by two or more persons each of whom believes himself entitled to the thing deposited with a third person. 1967.

the depositor shall only have an action to recover the thing deposited while it is still in the possession of the depositary. on the ground that the deposit was not valid because of the incapacity of X? No. which is valid until annulled. However. A contract of deposit may be entered into orally or in writing. the hotel could be made liable for the loss. But definitely. they can deposit the dog with C. Ex: A and B both claim to own a dog. pending the resolution of their conflicting claims. the hotel cannot retain the jewelry. but it may be annulled for want of capacity of the tinedyers. JPSP example: Five tinedyers aged 13 to 15 check into a hotel to go on a drinking binge. If a person having capacity to contract accepts a deposit made by one who is incapacitated. Art. and may be compelled to return the thing by the guardian. deposits her basketball with Boy-B. While they are trying to settle the ownership of the dog. C’s obligation is to eventually deliver the dog to whomever is the rightful owner. Cayo IID 2002 PAGE 104 . he is subject to all the obligations of a depositary whether or not the depositor is capacitated. at the end of their drinking binge. its personnel would be liable for estafa. The only thing necessary is delivery of the thing. The tinedyers. Persons who are capacitated cannot allege the incapacity of those with whom they contract.If there are two or more persons each claiming the rightful ownership of a thing. They deposit some jewelry at the front desk for safekeeping. if a third person who acquired the thing acted in bad faith. If the depositary is capacitated. X. the tinedyers lose the jewelry. Is there a valid deposit? Yes. What should the hotel do? The hotel should return the jewelry to their legal representative. Art. If the deposit has been made by a capacitated person with another who is not. The depositary can file an action for interpleader to compel the depositors to settle their conflicting claims. go to the front desk and ask for the return of the jewelry. the depositor may bring an action against him for its recovery. or administrator or the person who made the deposit or by the latter himself if he should acquire capacity. It’s actually a voidable contract. Can Boy-B refuse to return the basketball later on. who is insane. 1969. the former shall be subject to all the obligations of the depositary. 1971. C can file an action for interpleader to compel A and B to settle the ownership of the dog. or else. he must return the property to the legal representative of X or to X herself if she should recover sanity. Hence. There are no formal requirements for the validity of a contract of deposit. they may deposit the thing with a third person. The third person assumes the obligation to deliver to the person to whom it belongs. The hotel should not return to the tinedyers because if subsequently. 1970. Art. or to compel the latter to pay him the amount by which he may be enriched or benefited himself with the thing or its price.

Boy-B can only recover P5. when required. or to the person who may have been designated in the contract. Boy-B deposits his watch with X.000 from X. The incapacitated is liable only: (1) to return the thing deposited if it is still in his possession. Primary obligations of the depositary: 1. But if Hon was a buyer in bad faith. to the depositor or to his heirs and successors. The depositor can only go after the incapacitated for the value of the thing. the depositor cannot recover from him. Boy-B can recover the watch itself from Hon. Can Boy-B recover the watch? If the watch is still in the possession of X. while the depositor is capacitated. If the deposit is gratuitous. The depositary is obliged to keep the thing safely and to return it.This is the rule that applies if you deposit with a minor or other incapacitated person. or (2) to pay the depositor the amount by which he may have benefited through the thing or its price if the incapacitated is no longer in possession If the thing was transferred to a third person who was in bad faith.000 but X sold it to Hon for P5. He should exercise the diligence of a good father of a family. If X has already sold the watch to Hon. So if the watch is worth P10. the depositor can recover the thing from him. Boy-B cannot recover the watch. Return of the thing. Safekeeping 2. this fact shall be taken into account in determining the degree of care that the depositary must observe. He can only compel X to return the price that Hon paid for the watch (the benefit that X received from the sale of the watch). His responsibility with regard to the safekeeping and loss of the thing shall be governed by the provisions of Title I of this Book. 1972. the depositary must exercise the same diligence as he would exercise over his OWN property.000. If the depositary is incapacitated. Boy-B can recover the watch itself from X. If the transferee was in good faith. who looks like she’s 22 but is actually 13. a buyer in good faith and for value. The reasons for this rule are: Cayo IID 2002 PAGE 105 . the incapacitated does not incur the obligations of a depositary. but only when required Duty of Safekeeping What is the degree of care required of the depositary? As a general rule. Section 2 Obligations of the Depositary Art.

Art.1. even if there is no negligence or even if the loss was through fortuitous event. whether it was through his or the third person’s fault or through fortuitous event. If there is no stipulation allowing him to deposit with a third person. The loss of the thing while it is in the possession of the depositary raises a presumption of fault on his part. 2. What happens if the depositary deposits the thing with a third person. Because the contract of deposit involves the depositor’s confidence in the depositary’s good faith and trustworthiness. EXCEPTION: The parties may stipulate that the depositary may deposit the thing with a third person. If the thing is lost through the negligence of the depositary’s employees. and it is lost? 1. the depositary cannot deposit the thing with a third person. if under the circumstances. took into account the diligence which the depositary normally exercises with respect to his own property. it is not necessary that the employees be manifestly careless or unfit. The depositary is responsible for the negligence of his employees. the depositary is liable for the loss. the depositary is not liable for the loss. the depositary is liable for the loss if he deposited the thing with a person who is manifestly careless or unfit. in choosing the depositary. even though a specified term or time for such may have been stipulated in the contract and such time has not yet expired. If deposit with a third person is allowed. It is presumed that in choosing the depositary. Cayo IID 2002 PAGE 106 . if the thing is deposited with a third person with permission of the depositor. Duty of Returning the Thing The thing deposited must be returned to the depositor when he claims it. he is liable for the loss. the depositary must exercise such extraordinary care. if he deposits it with a person who is manifestly careless or unfit. But there is a limitation – the depositary cannot choose a third person who is manifestly careless or unfit. the thing deposited is lost and the depositary only exercised the same diligence as he would towards his own property. a greater degree of care towards the thing deposited is necessary. and 2. If. Because it is presumed that the depositor. the depositor took into account his personal qualifications. he is liable to the depositor for the loss. the depositary is liable for the loss (The employee is the agent of the depositary. but it is necessary that the loss be through negligence. Reason for the rule: Deposit is founded on trust and confidence. However. principal bears the loss resulting from the negligence of his agent). BUT. GENERAL RULE: The depositary cannot deposit the thing with a third person. Unless there is a stipulation to the contrary. and the thing is lost through fortuitous event. in this case. 3. Generally. Here. 1973.

Take such steps as may be necessary to preserve its value and the rights corresponding to it. a special power of attorney. B did not feel so secure with the jewelry in Lamitan. there is a need for an indorsement or at least.Art. 1974. Cayo IID 2002 PAGE 107 . What is B’s defense? B can invoke Article 1974. JPSP example: A deposits to B a promissory note payable to A or order. B can infer that A would consent to the change of the manner of deposit. he shall notify the depositor thereof and wait for his decision. and to take such steps as may be necessary in order that the securities may preserve their value and the rights corresponding to them according to law. as well as the capital. What are the obligations of the depositary if the thing earns interest? 1. 1975. Therefore. GENERAL RULE: The depositary should not change the way or manner of the deposit as agreed upon. or else these parties would be discharged. and 2. Art. JPSP example: A deposited jewelry with B. However. 1975 really applies only to BEARER instruments. The above provision shall not apply to contracts for the rent of safety deposit boxes. Notice to the depositor of the change is sufficient. However. The depositary holding certificates. If delay would cause danger. a resident of Lamitan. bonds. before the depositary may make such change. Collect the interest. The instrument is an order instrument. the depositary need not wait for the consent of the depositor. securities or instruments which earn interest shall be bound to collect the latter when it becomes due. If it is an order instrument. to enable the depositary to collect the interest and capital when due. unless delay would cause danger. Art. Under the circumstances. B cannot collect the interest due on it because he is neither an indorsee nor an authorized agent of A. A sued B for damages for depositing the jewelry with a third person without A’s authorization. the depositary should first notify and wait for the decision of the depositor. so he deposited the jewelry with a bank in Davao. Ex: Depositary of a negotiable instrument should give notice of dishonor to all parties secondarily liable. The depositary may change the way of the deposit if under the circumstances he may reasonable presume that the depositor would consent to the change if he knew of the facts of the situation. as it becomes due. EXCEPTION: The depositary may change it if there are circumstances indicating that the depositor would consent to the change. Can B collect accrued interests on the note? No.

The liability rules are governed by the Civil Code provisions on obligations and contracts. It is a contractual relation between the parties. negligence. Unless there is a stipulation to the contrary. C will own 20/60 or 1/3. and not on donations. in which case the various depositors shall own or have a proportionate interest in the mass. delay. Cayo IID 2002 PAGE 108 . But if the articles deposited by different depositors are not of the same kind and quality. 1976. GENERAL RULE: The depositary may commingle grain or other articles of the same kind and quality.Safety Deposit Boxes The contract for rent of safety deposit boxes is not an ordinary contract of lease of things because the full and absolute possession and control of the safety deposit box is not given to the party renting. It is actually a special kind of deposit. Even if as a rule. EXCEPTION: If there is a contrary stipulation De Leon example: A. or if there is a stipulation forbidding it. The law on deposit provides that the depositary is liable for loss due to fraud. since there is no stipulation forbidding it. Is a stipulation which exempts the bank from liability for the things contained in the safety deposit box valid? The stipulation is void. B will own 30/60 or ½ of the whole pile. since he must return to each depositor the very same thing deposited. the agreement or stipulation must not be contrary to law and public policy. 1977. the depositary must keep them separate or at least identifiable. or contravention of the tenor of the agreement. received the following: from B: 30 cavans of rice from C: 20 cavans of rice from D: 10 cavans of rice The rice was of the same kind and quality. the depositary may commingle grain or other articles of the same kind and quality. depositary. Can A put all of the rice together? Yes. The depositary cannot make use of the thing deposited without the express permission of the depositor. and D will own 10/60 or 1/6. the Bank may limit its liability to some extent by agreement or stipulation. Any contrary stipulation would be void. Art. Art.

The depositary is liable for the loss of the thing through a fortuitous event: (1) If it is so stipulated. it retains its character as deposit. it is not deposit anymore. The permission shall not be presumed. Cayo IID 2002 PAGE 109 . Ex: When you deposit a car with someone for a week. 2. not use of the thing. in order to prevent the battery from getting discharged. except where safekeeping is still the principal purpose of the contract. However. If the purpose is use. If the purpose has become use or consumption of the thing: 1. it may be used but only for that purpose. It becomes commodatum if the thing deposited is non-consumable. it is an irregular deposit. 2. 1978. If the principal purpose is still safekeeping. However. What happens if the depositor gives the depositary permission to use the thing? It depends. When the preservation of the thing requires its use. Reason for the rule: The principal purpose of deposit is safekeeping. When the depositor has expressly given his permission. when the preservation of the things deposited requires its use. if the thing deposited is money or other consumable thing and the principal purpose is still safekeeping. Permission cannot be implied. GENERAL RULE: The depositary CANNOT make use of the thing deposited. In addition. Bank deposits are in the nature of an irregular deposit but they are really loans (See Article 1980). he shall be liable for damages. Art. It becomes simple loan or mutuum if the thing deposited is money or other consumable thing. he shall be liable for damages. and its existence must be proved. EXCEPTIONS: 1. If the depositary uses the thing deposited without permission of the depositor.Otherwise. 1979. if the thing is lost even through fortuitous event. the depositary should start the car everyday. the contract loses the concept of a deposit and becomes a loan or commodatum. When the depositary has permission to use the thing deposited. and it is not presumed. Art. the depositary shall bear the loss. it must be used but only for that purpose.

(2) If he uses the thing without the depositor’s permission. they are governed by the provisions concerning mutuum or simple loan. Art. Cayo IID 2002 PAGE 110 . and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan. Hence: 1. Since there is no breach of trust. it is not a breach of trust arising from the depositary’s failure to return the subject matter of the deposit. savings. even though he himself may have been authorized to use the same. not deposits. GENERAL RULE: The depositary is not liable for loss of the thing through fortuitous event. the members of the borrower’s household are allowed to use the thing without liability on the part of the borrower. If he uses it without the depositor’s permission – this is breach/ contravention of the tenor of the obligation 3. Relationship is Debtor-Creditor The relationship between the bank and its depositors is thus that of debtor (bank) and creditor (depositor). If the bank fails to pay its obligation to the depositor. (4) If he allows others to use it. Stipulation 2. the presumption is that it was lost through his fault. Fixed. In commodatum. but not the exact same money that was deposited (as in deposit). He has the burden of proving that the loss was not due to his own fault. Since they are loans. 1980. EXCEPTIONS: 1. it will not constitute estafa through misappropriation. If he allows others to use it – also a breach Take note that the rule is different in commodatum. (3) If he delays its return. Delay in return – this is default 4. If the thing is lost in the custody of the depositary. Nature of Bank Deposits Bank deposits are really loans to a bank because the bank has the obligation to pay the depositor the amount deposited.

compensation is not allowed. However. When it becomes necessary to open a locked box or receptacle. if the key has been delivered to him. In a true deposit. the courts may pass upon the credibility of the depositor with respect to the value claimed by him. with or without the depositary’s fault.) 3. If the lock of the baul is broken. the depositary must return it in the same condition. How is the value of the thing determined in case the baul is opened? Ultimately. should there be no proof to the contrary. A would inflate the price. with or without B’s fault. unless there is proof to the contrary. etc. A delivers a locked baul to B for safekeeping.e. B would undervalue it. he shall keep the secret of the deposit. When may B open the baul? Cayo IID 2002 PAGE 111 . he shall be liable to A for damages. the depositary is presumed authorized to do so. or when the instructions of the depositor as regards the deposit cannot be executed without opening the box or receptacle. the court will decide the value of damages that B should pay. I think that if he keeps these things a secret. he can even be liable as an accessory to the crime for helping conceal it. 1982. since the parties will always get into a dispute over the value of the thing (i. Art. provided that the legal requisites of compensation are present. 2. B must keep the secret of the deposit. the statement of the depositor shall be accepted. Besides. If the lock of the baul is broken through B’s fault. B must return the baul in the same condition – it must be locked when returned. and he shall be liable for damages should the seal or lock be broken through his fault. As regards the value of the thing deposited. The court just might exonerate him of liability for the breach because of his fulfillment of a civic duty. when the forcible opening is imputable to the depositary. If the contents of the baul turn out to be illegal – shabu.2. When the seal or lock is broken. Art. He may still be held liable for the breach of his obligation as depositary but at least he knows that he has done a greater good to society by reporting the dastardly deed to the authorities. A bank can generally compensate or set off the deposit in its hands for the payment of any indebtedness to it on the part of the depositor. 1981. B is presumed negligent until proved otherwise. When the thing deposited is delivered closed and sealed. a bloody bolo – the depositary should immediately call the cops. What are B’s obligations? 1. a dead body. Fault on the part of the depositary is presumed.

1984. The depositor is entitled to the products. Should the deposit consist of money. He should just hope and pray that it’s just a watch in there. Shak leaves right away without giving Tuks an opportunity to ask him why there is a ticking sound coming from inside the box. the former may return the same. If the owner. along with all its products. Tuks is afraid that it might be a bomb. he must advise the latter of the deposit. The thing deposited shall be returned with all its products. accessories. accessories. his obligation is to INFORM the real owner of the deposit (it is not to return the thing to the real owner yet). 1983. This is because it is not essential that the depositor be the owner of the thing deposited. The only instances when a depositary can open the box without incurring liability is if there is presumed authority or if there is necessity for opening it in order to execute the instructions of the depositor. accessories. or 2. in spite of such information. When there is presumed authority – authority is presumed if the key has been delivered to him. These two instances are not present in the situation of Tuks. The obligation of the depositary is to return the thing when the depositor demands. If the depositary finds out that the thing was stolen AND he knows the real owner. When there is necessity for opening the box in order to execute the instructions of the depositor as regards the deposit JPSP example: Shakadivas delivers a locked box to Tuks for deposit. When a third person appears to be the owner of the thing: 1. The depositary cannot demand that the depositor prove his ownership of the thing deposited. the provisions relative to agents in article 1896 shall be applied to the depositary. Nevertheless. does not claim it within the period of one month. Can he open it without liability? Tuks cannot. If the depositary has reasonable grounds to believe that the thing has not been lawfully acquired by the depositor. Cayo IID 2002 PAGE 112 .1. and accessions of the thing because he is the owner of the thing. the depositary shall be relieved of all responsibility by returning the thing deposited to the depositor. Art. and accessions. should he discover that the thing has been stolen and who its true owner is. and accessions. Art. The depositary cannot demand that the depositor prove his ownership of the thing deposited.

the more prudent thing to do would be to file an action for interpleader and consign the thing in court. the provisions of Articles 1212 and 1214 shall govern. and the thing admits of division. each one cannot demand more than his share. When there are two or more depositors. Each one of the depositors may do whatever may be useful to the others but not anything which may be prejudicial. the depositary will be liable for giving the thing to someone else or for refusing to return it to the depositor (estafa). the real owner is not known). the depositary may return the thing to the depositor (not to the real owner. Art. If the depositor should lose his capacity to contract after having made the deposit. If there is solidarity or if the thing is indivisible. When there is solidarity or the thing does not admit of division. When there are two or more depositors. the depositary should return it to his representative. The parties may also stipulate that the thing be returned to a specific depositor. the depositor shall return it only to the person designated. Art. If he claims it within a month. delivery should be made to him who made the demand. if there is a stipulation that the thing should be returned to one of the depositors. But according to JPSP. the default rule is like that in joint obligations – each depositor cannot demand more than his share from the depositary. the thing cannot be returned except to the persons who may have the administration of his property and rights. The thing deposited must be returned only to a person who is capacitated. If the depositary has reasonable grounds to believe that the thing has not been lawfully acquired by the depositor.The real owner must claim the thing within one month. It is not safe to follow 1984 because if the claim of the alleged real owner turns out to be false. In this case. 1986. (See discussion under Article 1970 on deposit by tinedyers) Cayo IID 2002 PAGE 113 . if the depositary discovers that the thing was stolen and someone else is claiming to be the real owner. 2. since in this case. the depositary can only return to the depositor stipulated. even if he does not make a demand. However. if they are not solidary. the depositary should give it to the real owner. If the depositor should subsequently lose capacity. This rule applies if the thing is divisible and there is no solidarity among the depositors. If the real owner fails to make a claim within a month. The depositary can return the thing deposited to any of the depositors unless a demand for its return has been made by one of them. the depositary’s obligation will be extinguished by returning the thing to the depositor. 1985. the rule on solidary obligations is applicable. in which case.

Where to return the thing deposited: 1. and the depositor demands the return of the thing before the period for deposit has lapsed. If no place has been designated for the return. However. If there is no stipulation. even Cayo IID 2002 PAGE 114 . moves it to the Cordillera mountains. the depositor must still pay the depositary the full compensation agreed upon. If the deposit is for compensation. the depositary must immediately inform the depositor of the attachment or opposition. Art. provided that there was no malice on the part of the depositary. However. but the expenses for transportation shall be borne by the depositor. even if it should not be the same place where the deposit was made. In this case. follow the stipulation of the parties. The thing deposited must be returned to the depositor upon demand even though a specified period of time for such return may have been fixed. GENERAL RULE: The depositary must return the thing upon demand by the depositor even if the period for the deposit has not lapsed. 2. the depositary must take the thing deposited to such place. the depositary would be liable for damages. 1987. it shall be made where the thing deposited may be. The expenses for transportation shall be borne by the depositor since the deposit was constituted for his benefit. so that the depositor would have a hard time claiming it. the more prudent thing to do in this case is not to refuse to return the thing to the depositor but to file an action for interpleader because there is a danger that the depositary would be liable for damages if the claim of the third person turns out to be false. The law says that the depositary can also refuse to return the thing if there is an opposition to its return by a third person (here. This is because the period in this case is for the benefit of both the depositary and the depositor. as discussed earlier. Unless the deposit if for a valuable consideration. there is no court order). the depositary. the depositary who may have justifiable reasons for not keeping the thing deposited may. For example.Art. follow 1987 – the thing should be returned at the place where the thing deposited may be. EXCEPTION TO THE GENERAL RULE: The depositary should not return the thing to the depositor if there is a court order enjoining him from returning the thing to the depositor (when there is attachment). This provision shall not apply when the thing is judicially attached while in the depositary’s possession or should he have been notified of the opposition of a third person to the return or the removal of the thing deposited. Art. 1988. 1989. there must be no malice on the part of the depositary. even if it was not the same place where the deposit was constituted. In these cases. If at the time the deposit was made a place was designated for the return of the thing. not wanting to return the thing anymore. First.

before the time designated, return it to the depositor; and if the latter should refuse to receive it, the depositary may secure its consignation from the court. As a general rule, the depositary should wait for either the period of the deposit to lapse or for the depositor to demand the return of the thing before he can return the thing deposited. But, if the following requisites are present, he may return the thing to the depositor even before the period of the deposit has lapsed or before it is demanded: 1. The deposit must be gratuitous; and 2. There must be a justifiable reason. If the depositary refuses to accept, the depositor can consign the thing in court. But if the deposit is for compensation, the depositary cannot return the thing until the expiration of the period or until it is demanded by the depositor. Art. 1990. If the depositary by force majeure or government order loses the thing and receives money or another thing in its place, he shall deliver the sum or the thing to the depositor. The depositary is not liable for the loss of the thing either by force majeure or government order. But, if in place of the thing lost, the depositary receives money or another thing, he must deliver it to the depositor. Ex: If the thing is expropriated by the government, the indemnity paid by the government must be turned over by the depositary to the depositor. Art. 1991. The depositor’s heir who in good faith may have sold the thing which he did not know was deposited, shall only be bound to return the price he may have received or to assign his right of action against the buyer in case the price has not been paid him. First, take note that there seems to be a typo in this provision: it should read “The depositary’s heir…” if it is to make any sense. This contemplates the following situation: A deposits a car with B. While the car is still in B’s custody, B dies. C, B’s son, finds the car among his dad’s stuff and thinks that the car belonged to his dad. C sells the car to D. What are the liabilities of C? If D has already paid C, C must return to A the price that D paid for the car (not the value of the car). If D has not yet paid, C may assign to A his right to collect from D the selling price of the car.

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Take note that A has no right to recover the car itself. Also, there must be good faith on the part of the heir and the third party buyer. If there was bad faith, the depositor can recover the car itself. Moreover, the heir will be liable for estafa.

Section 3 Obligations of the Depositor
Art. 1992. If the deposit is gratuitous, the depositor is obliged to reimburse the depositary for the expenses he may have incurred for the preservation of the thing deposited. If the deposit is gratuitous, the depositor should shoulder the costs of preservation because he is the owner of the thing. If the deposit is for compensation, the depositary should shoulder the costs of preservation of the thing because the compensation is deemed to include the costs of preservation. Example: A deposits a dog with B for 30 days for a compensation of P500. B buys a sack of dog food. By the 10th day, the dog food has run out. Can B ask for more money from A? A can refuse to give more money and argue that in charging the compensation for the deposit, B should have factored in the expected expenses of preserving the dog. But it still depends on the intention of the parties. Art. 1993. The depositor shall reimburse the depositary for any loss arising from the character of the thing deposited, unless at the time of the constitution of the deposit, the former was not aware of, or was not expected to know the dangerous character of the thing, or unless he notified the depositary of the same, or the latter was aware of it without advice from the depositor. GENERAL RULE: The depositor should compensate the depositary for any loss that the depositary may suffer from the character of the thing deposited. Example: A deposits a dog with B. It turns out that the dog has rabies. The dog bites B, and as a result, B has to get anti-rabies shots. A must pay for the damage caused and the cost of B’s shots. EXCEPTIONS: In the following cases, the depositor need not reimburse the depositary for any loss arising from the character of the thing deposited: 1. If at the time of the deposit, the depositor was not aware of the dangerous character of the thing; 2. If at the time of the deposit, the depositor was not expected to know the dangerous character of the thing; 3. If the depositor notified the depositary of the dangerous character of the thing; or 4. If the depositary was aware of the dangerous character of the thing even without the advice of the depositor.

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Art. 1994. The depositary may retain the thing in pledge until full payment of what may be due him by reason of the deposit. This is an example of a pledge created by operation of law. The depositary may keep the thing deposited as a security for anything that the depositor may owe him, but it has to be by reason of the deposit. Compare this rule with the rule in commodatum, in which the borrower may generally not retain the thing as a security for anything that the lender may owe him (remember the frisbee example?). Art. 1995. A deposit is extinguished: (1) Upon the loss or destruction of the thing deposited; (2) In case of a gratuitous deposit, upon the death of either the depositor or the depositary. Causes for extinguishment of deposit: 1. loss or destruction of the thing deposited 2. In case of gratuitous deposit, upon the death of either the depositor or the depositary But if the deposit is for compensation, it is not extinguished by the death of either party since it is not personal in nature. Hence, the rights and obligations of the parties are transmissible to their heirs. 3. 4. 5. 6. 7. return of the thing novation merger expiration of the term fulfillment of resolutory condition

CHAPTER 3 NECESSARY DEPOSIT
Art. 1996. A deposit is necessary: (1) When it is made in compliance with a legal obligation; (2) When it takes place on the occasion of any calamity, such as fire, storm, flood, pillage, shipwreck, or other similar events. Art. 1997. The deposit referred to in No. 1 of the preceding article shall be governed by the provisions of the law establishing it, and in case of its deficiency, by the rules on ordinary deposit. The deposit mentioned in No. 2 of the preceding article shall be regulated by the provisions concerning voluntary deposit and by article 2168. Art. 1998. The deposit of effects made by travelers in hotels or inns shall also be regarded as necessary. The keepers of hotels or inns shall be responsible for them as depositaries, provided that notice was given to them, or to their
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it is also governed by Art. flood. 4. 2. The relationship of X and Y. Deposit made in compliance with a legal obligation Example: In pledge. 2168. But in addition. When during a fire. is governed by the provisions on voluntary deposit. 3. The hotel or inn should have been previously informed about the effects brought by the guests. What are the instances when deposit is NECESSARY? There are FOUR instances/ examples of necessary deposit: 1. the latter is bound to pay the former just compensation. The hotel-keeper is liable for the vehicles. X becomes the depositary of the TV. X goes inside and gets Y’s TV for the purpose of saving it.employees. they take the precautions which said hotel-keepers or their substitutes advised relative to the care and vigilance of their effects. 2. The liability extends not just to effects inside the rooms but also to property of the guests in the annexes. 2168 says that the owner of the thing should pay the depositary just compensation for his expenses in preserving the thing. story. Art. which is by default gratuitous. Deposit that takes place on the occasion of any calamity Example: A fire razes Y’s house. The guests have taken the precautions prescribed regarding their safekeeping. Cayo IID 2002 PAGE 118 . or other calamity. and b. Art. such as cars in the garage. Deposit Deposit Deposit Deposit made in compliance with a legal obligation that takes place on the occasion of any calamity of effects made by travelers in hotels or inns of goods with common carriers 1. when the creditor uses the thing pledged without the authority of the owner or misuses it in any other way. 1999. property is saved from destruction by another person without the knowledge of the owner. the owner may ask that it be judicially or extrajudicially deposited. 2168 on quasicontracts. Art. So unlike a voluntary deposit. on the part of the latter. of the effects brought by the guests and that. for compensation. 3. Deposit of effects made by travelers in hotels or inns Requisites before the hotel or inn may be held responsible as depositary: a. by express provision of law. this kind of necessary deposit is. being a deposit. animals and articles which have been introduced or placed in the annexes of the hotel.

meeting place at the lobby. 2002. unless due to fortuitous event or the fault of the owner of the goods. but not that which may proceed from any force majeure. Is there a contract of deposit? Yes. Deposit of goods with common carriers This is governed by Articles 1733. When is the hotel liable for the loss of the effects of its guests? Cayo IID 2002 PAGE 119 . You don’t have to actually get a room in order to be considered a guest for purposes of constituting the contract of deposit with the hotel. Art. You turn your car over to the valet. destruction. who has entered the hotel is not deemed force majeure. servants or visitors. If you’re the guest. you’re considered a guest. The responsibility referred to in the two preceding articles shall include the loss of. The act of a thief or robber. What if you wanted to shop in Megamall. 1734. and deterioration of the goods.Example: You go to Edsa Shangri-La to eat at the Garden Café. etc. the pool. you just used the Edsa Shangri-La valet service – are you still a guest? No. Art. you should: (a) give notice to the hotel of the effects you have brought into the hotel and (b) take the precautions prescribed for their safekeeping. The fact that travelers are constrained to rely on the vigilance of the keeper of the hotels or inn shall be considered in determining the degree of care required of him. Valet parking is not a principal service of the hotel. 1735 of the Civil Code under Lease. The hotel-keeper is not liable for compensation if the loss is due to the acts of the guests. unless it is done with the use of arms or through an irresistible force. 4. you must at least use the principal services of the hotel – the gym. 2001. or injury to the personal property of the guests caused by the servants or employees of the keepers of hotels or inns as well as by strangers. or if the loss arises from the character of the things brought into the hotel. but since you didn’t want to go through the trouble of looking for parking in Megamall. 2000. Constructive notice to the employees of the hotel is enough. Art. It is sufficient that you bring in your personal effects and the hotel personnel see them. Common carriers are generally responsible for the loss. But do you need to give an itemized listing of your valuables every time you go into a hotel? No. Although you need not check-in in order to be considered a guest. his family. As long as you use the main facilities of the hotel.

provided the guest followed the two requisites under Art. fire. When the loss arises from the character of the things brought into the hotel Example of thing where the loss arises from the character of the thing: If you bring a Dalmatian. servants. 2004. When the loss is caused by the act of a thief or a robber done without the use of arms and irresistible force. and public policy. 2. So as a general rule. However. When the loss or injury is caused by force majeure. The hotel-keeper has a right to retain the things brought into the hotel by the guest. 1998 (notice and precaution). morals. and supplies usually furnished to hotel guests. 2. they could easily get lost in the premises.1. like flood. his family. or Cyrus’ pet hamster into the hotel. as discussed already. The hotel-keeper cannot free himself from responsibility by posting notices to the effect that he is not liable for the articles brought by the guest. UNLESS the hotel-keeper is guilty of fault or negligence in failing to provide against the loss or injury from this cause. Art. However. it will still be liable for its negligence. Even if the hotel-keeper posts signs or puts these little fine-print stipulations that it is not liable for any loss. this only applies to a contract of deposit. if the hotel failed to take reasonable precautions (ex: secluded island with only one security guard stationed near the shore and lots of foreigners checked in). and 3. the contract with the carpark is not a deposit but only a short-term lease. if armed men enter the hotel and steal your things. When is the hotel NOT liable? 1. as a security for credits on account of lodging. 2003. Art. it cannot escape its liabilities as a depositary under Articles 1998 to 2001. Reason: You cannot waive the liability of one who is guilty of gross negligence. theft or robbery by a stranger with the use of arms or irresistible force. And as we all know. Any stipulation between the hotel-keeper and the guest whereby the responsibility of the former as set forth in Articles 1998 to 2001 is suppressed or diminished shall be void. It is contrary to law. by the very nature of these pets. a waiver of future fraud is void. When the loss is caused by the employees of the hotel or by strangers. the hotel is excused from liability because it is considered a fortuitous event. This waiver is valid because. Gross negligence is equivalent to fraud or bad faith. When the loss is due to the acts of the guest (who is the owner of the thing). or a snake. the fine print on the tickets always contains a waiver of liability by the owner of the carpark for any loss within its premises. or visitors. In the case of carparks. Cayo IID 2002 PAGE 120 .

a judicial deposit can cover both movable and immovable property. The depositary of property sequestrated is bound to comply. How do you deposit an immovable? You annotate the attachment on the title with the Register of Deeds. The depositary of property or objects sequestrated cannot be relieved of his responsibility until the controversy which gave rise thereto has come to an end. with respect to the same. 2008. where the object must be a movable. garnishment of money 3. receiver may be appointed by the court to administer and preserve the property in litigation 4.This is another pledge created by operation of law. This means that in case of favorable judgment. where the purpose is safekeeping. If you do not pay your hotel bills. Moreover. with all the obligations of a good father of a family. What may be the object of judicial deposit? Unlike extra-judicial deposit. Examples: 1. Art. 2007. unless the court so orders. you will be liable for estafa. CHAPTER 4 SEQUESTRATION OR JUDICIAL DEPOSIT Art. the party will be assured that there will be property to satisfy the execution of the judgment. Art. 2006. What is judicial deposit? Judicial deposit is a deposit pursuant to a court order – when an attachment or seizure of property in litigation is ordered by a court. What are the obligations of the depositary of sequestrated property? Cayo IID 2002 PAGE 121 . attachment of properties by sheriff upon the filing of a complaint 2. A judicial deposit or sequestration takes place when an attachment or seizure of property in litigation is ordered. the purpose of judicial deposit is to maintain the status quo during the pendency of the litigation to insure the right of the parties to the property in case of a favorable judgment. personal property may be seized by the sheriff in suits of replevin What is the purpose of judicial deposit? Unlike extra-judicial deposit. 2005. the hotel can keep your stuff as a security. Art. Movable as well as immovable property may be object of sequestration.

He may not be relieved of his responsibility until the litigation is ended or until the court so orders. I didn’t include Warehouse Receipts Law anymore because it’s probably going to be just 5% of the exam. As to matters not provided for in this Code. though the parties may stipulate otherwise In behalf of the depositor or the third person designated Art. Good luck! May the power of greyskull be with us all ☺ Cayo IID 2002 PAGE 122 . judicial sequestration shall be governed by the Rules of Court. by the judgment. 2009. therefore it is onerous In behalf of the person who. according to JPSP.The person appointed by the court as depositary has the obligation to take care of the thing with the diligence of a good father of a family. hence there is a contract Safekeeping Only movable property As a rule. it is gratuitous. DISTINCTIONS BETWEEN JUDICIAL AND EXTRA-JUDICIAL DEPOSIT CAUSE OR ORIGIN PURPOSE SUBJECT MATTER REMUNERATION IN WHOSE BEHALF IT IS HELD JUDICIAL DEPOSIT By will of the court To secure the right of a party to recover in case of favorable judgment Movable or immovable property The depositary is always compensated. That’s all folks. has a right EXTRA-JUDICIAL DEPOSIT By will of the parties. Sorry.

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