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Civil Law

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 (contract of security)
1. real contract – delivery is essential for
2 TYPES OF CREDIT TRANSACTIONS: perfection of the loan (BUT a promise to
1. secured transactions – those supported by lend, being consensual, is binding upon the
a collateral or an encumbrance of property parties)
2. unsecured transactions – those supported 2. unilateral contract - only the borrower has
only by a promise to pay or the personal the obligation
commitment of another such as a guarantor
or surety KINDS
1. commodatum – where the bailor delivers to
SECURITY is something given, deposited or serving the bailee a non-consumable thing so that
as a means to ensure the fulfillment or enforcement the latter may use it for a certain time and
of an obligation or of protecting some interest in the return the identical thing
property kinds of commodatum:
a. ordinary commodatum – use by the
2 TYPES OF SECURITY: bailee of the thing is for a certain
1. personal – when an individual becomes a period of time
surety or a guarantor b. precarium – one whereby the bailor
2. real or property – when an emcumbrance is may demand the thing loaned at will;
made on property exists in cases where:
i. neither the duration of the
BAILMENT is the delivery of property of one person contract nor the use to which
to another in trust for a specific purpose, with a the thing loaned should be
contract, express or implied, that the trust shall be devoted has been stipulated
faithfully executed and the property returned or duly ii. if the use of the thing is merely
accounted for when a special purpose is tolerated by the owner
accomplished or kept until the bailor reclaims it. 2. mutuum or simple loan - where the lender
delivers to the borrower money or other
PARTIES IN BAILMENT consumable thing upon the condition that the
1. bailor – the giver, the party who delivers latter will pay the same amount of the same
possession/custody of the thing bailed kind and quality (when it is consumed in a
2. bailee – the recipient, the party who receives manner appropriate to its purpose)
the possession/custody of the thing delivered
KINDS OF CONTRACTUAL BAILMENT W/ 1. delivery by one party The ability of an
REFERENCE TO COMPENSATION and the receipt by individual to borrow
1. for the sole benefit of the bailor (gratuitous) the other party of a money or things by virtue
e.g. gratuitous deposit, mandatum (do some given sum of money of the confidence or trust
act w/ respect to aQuickTime™
thing) and a or other consumable reposed by a lender that
TIFF (Uncompressed) decompressor
2. for the sole benefit
are needed toof
seethe bailee (gratuitous)
this picture.
thing upon an he will pay what he may
e.g. commodatum, gratuitous simple loan or agreement, express promise w/in a specified
mutuum or implied period
3. for the benefit of both parties e.g. deposit for 2. to repay the same
compensation, involuntary deposit, pledge amount of the same
and bailments for hire: kind and quality, w/
a. hire of things – temporary use or w/o interest
b. hire of service – for work or labor
c. hire of carriage of goods – for carriage
d. hire of custody – for storage
—Adviser: Dean Cynthia Roxas-Del Castillo; Heads: Joy Marie Ponsaran, Eleanor Mateo; Understudies: Joy Stephanie
Tajan, John Paul Lim; Subject Head: Sarah Lopez; Pledgee: Aiza Constantino—
Civil Law Summer Reviewer


Interest is usually taken Interest is deducted in
at the expiration of a advance
(Articles 1935-1952)
Always on single-name Double name paper
1. cause: essentially gratuitous (otherwise, if
there Is compensation, it might be lease)
More expensive for the 2. purpose: temporary use of the thing loaned
borrower because but not its fruits, unless stipulated or is
interest is calculated on incidental (otherwise, if the bailee is not
the amount loaned and entitled to the use of the thing, it might be
not the amount actually deposit)
received 3. subject matter: generally non-consumable
goods but if the consumable goods are not
COMMODATUM MUTUUM for consumption, such may be the subject of
(SIMPLE LOAN) the commodatum, as when merely for
Object Ordinarily non- Money or other exhibition (Art. 1936)
consumable consumable thing 4. bailor need not be the owner of the thing
Ownership Ownership is Ownership is loaned (Art 1938)
of the thing retained by the transferred to the • it is sufficient that he has a possessory
lender borrower interest
Cause Essentially Gratuitous or • a mere lessee or usufructuary may lend
gratuitous onerous (w/ but the borrower or bailee himself may
stipulation to pay not lend not lease the thing loaned to him
interest) to a third person (Art. 1932[2])
Thing to be Borrower must Borrower need 5. purely personal
returned return the same only pay the same a. death of either party terminates the
thing loaned amount of the contract UNLESS there is stipulation to the
same kind and contrary
quality b. generally, bailee can neither lend nor
lease the object to a 3rd person in the
Subject May involve real Only personal absence of some agreement to that effect
Matter or personal property c. use of the thing loaned may extend to the
property bailee’s household (who are not considered
Purpose Loan for use or Loan for 3rd persons) except:
temporary consumption 1. when there is a contrary stipulation
possession 2. nature of the thing forbids such use
When to Bailor may Lender may not 6. enjoyment of fruits – a stipulation to make
return demand the demand its return use of fruits is valid, but it is never presumed.
return of the before the lapse of The enjoyment of the fruits must only be
thing loaned the term agreed incidental to the use of the thing itself, for if it
before the upon is the main cause, the contract may be one
expiration of the of usufruct.
term in case of
urgent need
Who bears Loss TIFFof(Uncompressed)
the decompressor
QuickTime™ Borrower
and a suffers OBLIGATIONS OF THE BAILEE (Arts 1941-1945)
risk of loss subject matter is the
are needed to see t his picture.loss (even if (COOLRD2)
suffered by the caused exclusively 1. To pay for the ordinary expenses for the use
bailor since he is by a fortuitous and preservation of the thing loaned (Art.
the owner event and he is 1941)
not therefore 2. To pay for all other expenses other than those
discharged from referred to in Art. 1941 and 1949 (refund of
his duty to pay) extraordinary expenses either in full or in half)
Nature Purely personal Not purely (Art. 1950)
personal REASON: Bailee makes use of the thing.
Expenses for ostentation are to borne by the

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bailee because they are not necessary for the Reason for the presumption: to safeguard
preservation of the thing effectively the right of the bailor. The law
3. To take good care of the thing with the presumes that the bailor takes into account the
diligence of a good father of a family (Art. personal integrity and responsibility of all the
1163) bailees and that, therefore, he would not have
4. To be liable for loss even if due to a fortuitous constituted the commodatum if there were only
event: one bailee
GR: the bailee is not liable for loss or damage
due to a fortuitous event (Art. 1174)
Reason: the bailor retains the ownership of the OBLIGATIONS OF THE BAILOR (AD-READ-HA)
thing loaned 1. Primary obligation of the bailor:
Exceptions: (Art. 1942 – punishes the bailee GR: To allow the bailee the use of the thing loaned
for his improper acts although they for the duration of the period stipulated or until the
may not be the proximate cause of accomplishment of the purpose for w/c the
the loss) commodatum was constituted
a. Bad faith – if the bailee devotes the thing to Exceptions: the bailor may demand the return or
any purpose different from that for which it its temporary use upon:
has been loaned a. bailor has an urgent need for the thing (Art.
b. Delay - he keeps it longer than the period 1946) – the contract is suspended
stipulated or after the accomplishment of the • Reason: the right of the bailor is based on
use for which the commodatum has been the fact that commodatum is essentially
constituted gratuitous
c. Has been delivered with appraisal -the thing b. bailee commits an act of ingratitude (Art.
loaned has been delivered with appraisal of 1948)
its value, UNLESS there is a stipulation • if the bailee should commit an offense
exempting the bailee from responsibility in against the person, the honor or the
case of a fortuitous event property of the bailor, or of the wife or
d. Lends the subject matter to a 3rd person - he children under his parental authority
lends or leases the thing to a third person • if the bailee imputes to the bailor any
who is not a member of his household criminal offense, or any act involving
e. Ingratitude - being able to save the thing moral turpitude, even though he should
borrowed or his own thing, he chose to save prove it, unless the crime or the act has
the latter been committed against the bailee
5. The bailee has NO RIGHT to retain the thing himself, his wife, or children under his
loaned as security for claims he has against authority; and
the bailor, even though they may be by reason • if the bailee unduly refuses the bailor
of extraordinary expenses (Art. 1944) support when the bailee is legally or
Reasons: morally bound to give support to the
a. Ownership remains in bailor – the bailee bailor
acquires only the use of thing, the ownership • Reason: the person who commits any of
of which remains w/ the bailor the acts of ingratitude makes himself
b. Only temporary use given to bailee – the unworthy of the trust reposed upon him
bailee would be violating the bailor’s trust in by the bailor.
him to return the thing as soon as the period •
stipulated expires or the purpose has been 2. May demand the thing at will when the contract is
accomplished QuickTime™ and a precarium
Exception: TIFFClaim for decompressor
(Uncompressed) damages suffered
are needed to see this picture. • PRECARIUM – a kind of commodatum
because the bailor doesn’t advise bailee of where the bailor may demand the thing at
the flaws known to him (Art. 1951) will. It has been defined as a contract by
6. A bailee doesn’t answer for the deterioration of which the owner of a thing, at the request of
the thing loaned due only to the use thereof another person, gives the latter the thing for
and without his fault use as long as the owner shall please
7. Liability when there are 2 or more bailees: The
presumption is that they are solidarily liable 3. To refund the extraordinary expenses (Art. 1949)
(Art. 1945)

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GR on reimbursement: Notice should be given by e. the bailee suffers damages by reason of

the bailee to the bailor regarding such extraordinary the flaw or defect
expenses Exception: when the defect is not known to the
Reason for the rule: notice is required because it is bailor, he is not liable because commodatum is
possible that the bailor may not want to incur the gratuitous.
extraordinary expense at all.
Exception: where the extraordinary expenses are 8. The bailor has no right of abandonment for
so urgent that the reply to the notification cannot be expenses and damages (Art. 1952)
awaited w/o danger. Reason: The expense and/or damages may
exceed the value of the thing loaned
4. if the extraordinary expenses arise from the actual
use of the thing and even though bailee acted
w/o fault, the expenses will be borne equally by SIMPLE LOAN OR MUTUUM
both the bailor and the bailee (50-50) (Art. 1949,
2nd par.)
• Reasons: SIMPLE LOAN OR MUTUUM – contract whereby
a. the bailee pays ½ because of the benefit one of the parties delivers to another money or other
derived from the use of the thing loaned fungible thing w/ the understanding that the same
to him; amount of the same kind and quality shall be paid.
b. the bailor pays the other ½ because he is (Art. 1933)
the owner and the thing will be returned
to him
Exception: Stipulation to the contrary that provide SIMPLE LOAN RENT/LEASE
for a different apportionment of such expenses or Signifies the delivery of One party delivers to
that they shall be borne by the bailee or bailor money or some other another some non-
alone consumable thing to consumable thing in order
another w/ a promise to that the latter may use it
5. all other expenses which are not necessary for the repay an equivalent during a certain period
use and preservation of the thing must be amount of the same kind and return it to the former
shouldered by the borrower (bailee) and quality
6. the depreciation caused by the reasonable and There is a transfer of The owner of the lessee
natural use of the thing is borne by the bailor (Art. ownership of the thing or the lessor of the
1943) delivered property does not lose his
Reason: The parties to the contract know that the ownership. He simply
thing borrowed cannot be used without loses control over the
deterioration due to ordinary wear and tear. property rented during the
Exceptions: period of the contract
a. when there is a stipulation to the The relation between The relation is between
contrary; parties is that of obligor landlord and tenant
b. when the bailee is guilty of fault or and oblige
negligence; The creditor receives The owner of the property
c. if he devotes the thing to any purpose payment for his loan receives “compensation”
different from that for which has been or “price” either in money,
loaned provisions, chattels, or
QuickTime™ and a
labor from the occupant
7. To pay damagesTIFF for known hidden
(Uncompressed) decompressor
are needed to see this picture. flaws (Art. thereof in return for its
1951) use
Requisites: (the following must concur)
a. there is a flaw or defect in the thing
b. the flaw or defect is hidden comparison
c. the bailor is aware thereof Subject Money or Personal or Non-
d. he does not advise the bailee of the matter any other real property fungible or
same fungible (generally non- non-
things/ consumable) consumabl

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personal e things • Other sources (e.g. sale)

property • Damages arising from injury to
Obligation Pay or Return the The persons
of bailee deliver the identical thing equivalent • Loss of property which does not
same kind borrowed when thing is involve a loan
or quality the time has given in
loaned to expired or the return for 2. Interest accruing from unpaid interest - interest
the bailee purpose has what has due shall earn interest from the time it is judicially
been served been demanded although the obligation may be silent
received upon this point.
Nature of May be Always Onerous
contract gratuitous gratuitous DETERMINATION OF INTEREST PAYABLE IN
Its value shall be appraised at the current price of the
NATURE OF MUTUUM products or goods at the time and place of payment.
a. bilateral - borrower’ promise to pay is the (Art. 1958)
consideration for the lender’s obligation to Purpose: to make usury harder to perpetrate
furnish the loan
b. no criminal liability upon failure to pay COMPOUNDING INTEREST (Art. 1959)
GR: accrued interest (interest due and unpaid) shall
SUBJECT MATTER not earn interest
a. fungible or consumable-depending on the Exceptions:
intent of the parties, that the return of the thing • When judicially demanded
is equivalent only and not the identical thing • When there is an express stipulation made
b. money by the parties to wit: that the interest due and
c. if the transfer of ownership is on a non- unpaid shall be added to the principal
fungible thing, with the obligation of the other obligation and the resulting total amount shall
to give things of the same kind, quantity and earn interest
quality, it is a barter Compounding interest may be availed of only when
there is a written stipulation in the contract for the
INTEREST payment of interest.
GR: Interest must be expressly stipulated in writing,
and it must be lawful (Art. 1956)
Exceptions: BARTER
1. Indemnity for damages – the debtor in delay
is liable to pay legal interest (6%/12%) as BARTER - A contract whereby one person transfers
indemnity for damages even in the absence of the ownership of non-fungible things to another with
a stipulation for the payment of interest. the obligation on the part of the latter to give things of
Interest as indemnity for damages is payable the same kind, quantity and quality.
only in case of default or non-performance of
• Basis for computation for indemnity: DEPOSIT
a. Central Bank Circular 416 – 12% p.a. in
cases of:
DEPOSIT - A deposit is constituted from the moment
• Loans a person receives a thing belong to another, with the
• Forbearance of decompressor
money, goods or
QuickTime™ and a
TIFF (Uncompressed) obligation of safely keeping it and of returning the
are needed to see this picture.
credits same.
• Judgments involving such loans or
forbearance, in the absence of the If the safekeeping of the thing delivered is not the
express agreement as to such rate principal purpose of the contract, there is no deposit
of interest but some other contract.
• During the interim period from the NOTE: it is essential that the depository is not the
date judgment until actual payment owner of the thing deposited
b. Art. 2209 of the Civil Code – 6% p.a. in
cases of:

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CHARACTERISTICS each of whom believes himself entitled to

1. real - because it is perfected only by the the thing deposited;
delivery of the subject matter b. necessary- made in compliance with a
BUT an agreement to constitute a deposit is legal obligation, or on the occasion of
binding and enforceable, since it is merely any calamity, or by travelers in hotels
consensual and inns or by travelers with common
2. unilateral - if gratuitous carriers
3. bilateral - if with compensation
Judicial Extrajudicial
Basis of Deposit Mutuum Commodatum Creation Will of the court Will of the
contracting parties
Principal Safekeeping Consumption Transfer of the
Purpose or mere use Purpose Security or to Custody and
custody ensure the right safekeeping
Deman Demand Lender must May demand of a party to the
dability return of the wait until return at will property or to
thing at will expiration of (PRECARIUM) recover in case of
period or only after favorable
granted to the expiration judgment
debtor of the period Subject Generally Movables only
or Matter immovables
accomplishme Cause Always onerous May be
nt of the use compensated but
of the thing generally
subject to gratuitious
exceptions Return of Upon order of the Upon demand of
Object Both Only money Both movable thing court/ end of depositor
movable and and any and litigation
immovable other immovable In whose Person who has Depositor or /3rd
may be the fungible may be the behalf it is a right person designated
object thing may be object held
the object
But in
a movable 1965)
(corporeal) GR: A deposit is generally gratuitous.
thing may be Exceptions:
the object a. when there is a contrary stipulation
Nature May be May be Essentially b. where depositary is engaged in the business
of gratuitous gratuitous and always of storing goods
contract gratuitous c. where property is saved without knowledge
of the owner
1. By virtue of a court order; or SUBJECT MATTER OF DEPOSIT (Art. 1966)
2. By law QuickTime™ and a GR: only movable or personal property may be the
3. Not by the willTIFF
of the parties
(Uncompressed) decompressor
are needed to see this picture. object of deposit, whether voluntary or necessary.
4. It is essential that the depositary is not the Exception: In judicial deposit, it may cover both
owner of the property deposited (Art. 1962) movable and immovable property.

1. judicial - when an attachment or seizure of DEPOSITOR NEED NOT BE THE OWNER OF THE
property in litigation is ordered THING:
2. extrajudicial (Art. 1967) GR: The depositor must be the owner of the thing
a. voluntary- delivery is made by the will of deposited.
the depositor or by two or more persons

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Exceptions: It may belong to another person than with respect to of the debtor’s
the depositor. the thing property.
a. when two or more persons claiming to be deposited
entitled to a thing may deposit the same with
a third person. In such case, the third person OBLIGATIONS OF THE DEPOSITARY (SRT-CCC-
assumes the obligation to deliver to the one ULC-RITT-RPT-TL-HR)
to whom it belongs. 1. Two primary obligations (Art. 1972)
b. Interpleader – the action to compel the a. safekeeping of the object;
depositors to settle their conflicting claims. b. Return of the thing when required – even
Here one of the depositors is not the owner. though a specified term or time for such may
have been stipulated in the contract.
FORM OF CONTRACT OF DEPOSIT: • Degree of Care – same diligence as he
GR: A contract of deposit may be entered into orally would exercise over his property.
or in writing. (Art. 1969) • Reasons:
Exception: Delivery of the thing deposited. (It is a i. Essential requisite of judicial relation
real contract, hence, delivery is required for which involves the depositor’s
perfection.) confidence in his good faith and
Depositary - Depositary - ii. The presumption that the depositor
capacitated incapacitated took into account the diligence which
Depositor - Depositor - the depositary is accustomed with
incapacitated capacitated respect to his own property.
Depositary is subject to Depositary does not The depositary cannot excuse himself from
ALL the obligations of a incur the obligations of a liability in the event of loss by claiming that
depositary depositary he exercised the same amount of care
Depositary must return the Depositary, however is toward the thing deposited as he would
property either to: liable to: towards his own if such care is less than that
a) the legal representative a) return the thing required by the circumstances.
of the incapacitated, OR deposited while still in his
b) the depositor himself if possession; AND 2. Obligation not to transfer deposit (Art. 1973)
he should acquire b) pay the depositor the GR: the depositary is not allowed to deposit
capacity amount by which he may the thing with a third person.
have benefited himself Reason: A deposit is founded on trust and
with the thing or its price confidence and it can be supposed that the
subject to the right of any depositor, in choosing the depositary, has
3rd person who acquires taken into consideration the latter’s
the thing in good faith qualification.
Exception: The depositary is authorized by
Basis of Irregular Mutuum
express stipulation.
Comparison deposit
Liabilities: Depositary is liable for loss of the
Demandability Demandable at Lender is thing deposited when:
will of the bound by the a. He transfers the deposit with a third
irregular provisions of person without authority although there is
depositor for the contract no negligence on his part and the third
whose benefit and cannot person;
the deposit has seek restitution b. He deposits the thing with a third person
QuickTime™ and a
been constituted
TIFF (Uncompressed) decomuntil
pressor the time of
who is manifestly careless or unfit
are needed to see this picture.
payment as although authorized, even in the absence
provided in the of negligence; or
contract has c. The thing is lost through the negligence
arisen of his employees whether the latter are
Benefit Benefit accrues Necessity of manifestly careless or not.
to the depositor the borrower Exemption from liability: The thing is lost
Preference of Depositor has Enjoy no without the negligence of the third person
credit preference over preference in with whom he was allowed to deposit the
other creditors the distribution

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thing if such third person is not “manifestly Exception: When there is a stipulation to the
careless or unfit.” contrary.

3. Obligation not to change the way of deposit 6. Obligation not to make use of the things
(Art. 1974) deposited (Art. 1977)
GR: Depositary may not change the way of GR: Deposit is for safekeeping of the subject
the deposit matter and not for its use.
Exception: If there are circumstances Exceptions:
indicating that the depositor would consent to a. Expressly authorized by the depositor;
the change. This is a situation wherein the b. Such use is necessary for its
depositary would reasonably presume that preservation but limited for the purpose
the depositor would agree to the change if he only.
knows of the facts of the situation. • Effect of unauthorized use: Liability for
Requisites: damages
a. The depositary must notify the depositor • Effects of authorized use: (Art. 1978)
of such change and a. If the thing deposited is non-consumable:
b. Must wait for the reply of the depositor to GR: The contract loses the character of a
such change. deposit and acquires that of a
Exception: If the delay of the reply would commodatum despite the fact that the
cause danger. parties may have denominated it as a
4. Obligation to collect on the choses in action Exception: Safekeeping is still the
deposited (Art. 1975) principal purpose of the contract.
• If the thing deposited should earn interest, b. If the thing deposited is money or other
the depositary is under the obligation to: consumable thing:
a. Collect the interest as it becomes due; GR: Converts the contract into a simple
b. Take such steps as may be necessary to loan or mutuum.
preserve its value and the right Exception: Safekeeping is still the
corresponding to it. principal purpose of the contract, but it
• The depositary is bound to collect the capital, becomes an irregular deposit. Bank
as well as the interest, when due. deposits are in the nature of irregular
deposits but they are really loans
Contract of rent of safety deposit boxes governed by the law on loans.
(Art. 1975)
A contract for the rent of safety deposit boxes 7. Liability for loss through fortuitous event (Art.
is not an ordinary contract of lease of things, 1979)
but a special kind of deposit; hence, it is not GR: The depositary is not liable for loss
to be strictly governed by the provisions on through fortuitous event without his fault.
deposit. The prevailing rule in the US is that Exceptions:
the relation between a bank renting out a. If it is so stipulated;
safety deposit boxes and its customer with b. If he uses the thing without the
respect to the contents of the box is that of depositor’s permission
bailor and bailee. c. If he delays in its return;
d. If he allows others to use it, even though
5. Obligation not to commingle things if so he himself may have been authorized to
stipulated (Art. 1976) QuickTime™ and a use the same.
GR: The TIFF (Uncompressed) decompressor
depositary ispicture.permitted to
are needed to see this Note: Liability for loss without fortuitous event:
commingle grain or other articles of the same Depositary – presumed at fault (Art. 1265)
kind and quality. - in possession
a. The various depositors of the mingled 8. Relation between bank and depositor (Art.
goods shall own the entire mass in 1980)
common. Fixed, savings, and current deposits of
b. Each depositor shall be entitled to such money in banks and similar institutions shall
portion of the entire as the amount be governed by the provisions concerning
deposited by him bears the whole. simple loan.

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a. Contract of loan – deposits in banks are • GR: Each one of the depositors may
really loans because the bank can use do whatever may be useful to the
the same for its ordinary transactions others. (Art. 1212)
b. Relation of creditor and debtor – the Exception: Anything which may be
relation between a depositor and a bank prejudicial to the other depositors.
is that of a creditor and a debtor. • GR: The depositary may return the
thing to any one of the solidary
9. Obligation when the thing deposited is closed depositors
and sealed (Art. 1981) Exception: When a demand, judicial
The depositary has the obligation to: or extrajudicial, for its return has
a. return the thing deposited when delivered been made by one of them in which
closed and sealed in the same condition; case delivery should be made to him.
b. pay for damages should the seal or lock c. Return to one of the depositors stipulated
be broken through his fault, which is • if by stipulation, the thing should be
presumed unless proven otherwise; returned to one of the depositors, the
c. Keep the secret of the deposit when the depositary is bound to return it only to the
seal or lock is broken, with or without his person designated although he has not
fault. made any demand for its return.

10. When depositary justified in opening closed 16. Obligation to return to the person to whom
and sealed subject matter (Art. 1982) return must be made. (Art. 1986)
a. The depositary is presumed authorized a. The depositary is obliged to return the
to do so if the key has been delivered to thing deposited, when required, to:
him; • The depositor;
b. When the instructions of the depositor as • To his heirs or successors; or
regards the deposit cannot be executed • To the person who may have
without opening the box or receptacle. been designated in the contract.
(Necessity) b. If the depositor was incapacitated at the
time of making the deposit, the property
11. Obligation to return products, accessories must be returned to:
and accessions (Art. 1983) • His guardian or administrator;
• To the person who made the
12. Obligation to pay interest on sums converted deposit;
for personal use (Art. 1983)
• To the depositor himself should
he acquire capacity.
13. The depositary who receives the thing in
c. Even if the depositor had capacity at the
deposit cannot require that the depositor
time of making the deposit but he
prove his ownership over the thing (Art. 1984)
subsequently loses his capacity during
the deposit, the thing must be returned to
14. Where third person appears to be the owner
his legal representative.
(Art. 1984)
The depositary may be relieved from liability
17. Obligation to return at the place of return (Art.
1987) – same as the general rule of law
a. He advised the true owner of the thing of
regarding the place of payment. (Art. 1251)
the deposit.
GR: At the place agreed upon by the parties,
b. If the owner, is spite of such information,
QuickTime™ and a transportation expenses shall be borne by
does not TIFF
claim it within
(Uncompressed) the period of one
are needed to see this picture. the depositor.
month (30 days)
Exception: In the absence of stipulation, at
the place where the thing deposited might be
15. Obligation of the depositary when there are
even if it should not be the same place where
two or more depositors. (Art. 1985)
the original deposit was made.
a. Divisible thing and joint depositors –
each one of the depositors can demand
18. Obligation to return upon the time of return.
only his share proportionate thereto.
(Art. 1988)
b. Indivisible thing and solidary depositors –
rules on active solidarity

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GR: The thing deposited must be returned to depositary by reason of the deposit. (see Art.
the depositor upon demand, even though a 1965, 1992, 1993).
specified period or time for such return may Note: The debt must be prior to the deposit.
have been fixed.
Exceptions: Irregular Deposit Mutuum
a. When the thing is judicially attached May be demanded at will Lender is bound by the
while in the depositary’s possession by the irregular depositor provision of the contract
b. When notified of the opposition of a third for whose benefit the and cannot seek
person to the return or the removal of the deposit has been restitution until the time
thing deposited. constituted for payment, as provided
in the contract has arisen
19. Right of the depositary to return the thing Only benefit is that which If with interest, benefit if
deposited. (Art. 1989) accrues to the depositor both parties
NOTE: in this case, it is the depositary who is
returning the deposit WITH OR WITHOUT THE Depositor has preference No preference
DEMAND of the depositor over other creditors
GR: The depositary may return the thing
deposited notwithstanding that a period has
been fixed for the deposit if: OBLIGATIONS OF THE DEPOSITOR (PLD)
a. The deposit is gratuitous;
b. The reason is justifiable. 1. Obligation to pay expenses of
Remedy if depositor refuses to receive the preservation. (Art. 1992)
thing: The depositary may deposit the thing
at the disposal of the judicial authority. 2. Obligation to pay losses incurred due to
Exception: When the deposit is for a character of thing deposited. (Art. 1993)
valuable consideration, the depositary has no GR: The depositary must be reimbursed for
right to return the thing before the expiration loss suffered by him because of the
of the time designated even if he should character of the thing deposited.
suffer inconvenience as a consequence. Exceptions:
a. Depositor was not aware of the danger;
20. Depositary’s liability in case of loss by force b. Depositor was not expected to know the
majeure or government order. (Art. 1990) dangerous character of the thing;
Depositary is not liable in cases of loss by c. Depositor notified the depositary of such
force majeur or by government order. dangerous character;
However, he has the duty to deliver to the d. Depositary was aware of the danger
depositor money or another thing he receives without advice from the depositor.
in place of the thing.
3. Effect of death of depositor or depositary.
21. Liability in case of alienation of the (Art. 1995)
depositary’s heir. (Art. 1991) a. Deposit gratuitous – death of either of the
When alienation is done in GOOD FAITH: depositor or depositary extinguishes the
a. Return the value of the thing deposited deposit (personal in nature). By the word
b. Assign the right to collect from the buyer. “extinguished,” the law really means that
• The heir does not need to pay the the depositary is not obliged to continue
actual price of the thing deposited. with the contract of deposit.
When alienation is done in BAD FAITH: b. Deposit for compensation – not
QuickTime™ and a
a. Liable forTIFF
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are needed to see this picture.
b. Pay the actual price of the thing
deposited. Other Matters Concerning a Depositor
1. Depositary has a right to retain the thing in
22. Depositary may retain the thing in pledge pledge until full payment of what may be due
until the full payment of what may be due him him by reason of the deposit
by reason of the deposit. (Art. 1994) 2. A deposit is extinguished:
The thing retained serves as security for the a. upon the loss or deterioration of the thing
payment of what may be due to the deposited;

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b. upon the death of the depositary, ONLY in When hotel-keeper not liable:
gratuitous deposits; a. The loss or injury is cause by force
c. other provisions in the Civil Code majeure, like flood, fire, theft or robbery
(novation, merger, etc.) by a stranger (not the hotel-keeper’s
servant or employee) with the use of
NECESSARY DEPOSIT firearms or irresistible force.
A deposit is necessary when: Exception: Unless the hotel-keeper is
1. It is made in compliance with a legal guilty of fault or negligence in failing to
obligation; provide against the loss or injury from his
2. It takes place on the occasion of any b. The loss is due to the acts pf the guests,
calamity, such as fire, storm, flood, his family, servants, visitors.
pillage, shipwreck, or other similar c. The loss arises from the character of the
events. things brought into the hotel.
*There must be a causal relation Exemption or diminution of liability:
between the calamity and the constitution The hotel-keeper cannot free himself
of the deposit. from responsibility by posting notices
to the effect that he is not liable for
3. Made by passengers with common the articles brought by the guest.
carriers. (Art. 2003)
• as to those baggage the passengers Effect: Any stipulation between the
or their agents carry hotel-keeper and the guest whereby
the responsibility of the former (as
4. Made by travelers in hotels or inns. (Art. set forth in Art. 1998-2001) is
1998) suppressed or diminished shall be
Before keepers of hotels or inns may be held VOID.
responsible as depositaries with regard to the Hotel-keeper’s right to retain
effects of their guests, the following must The hotel-keeper has a right to retain
concur: the things brought into the hotel by
Elements: the guest, as a security for credits on
a. They have been previously informed account of:
about the effects brought by the guests; a. lodging;
and b. supplies usually furnished to
b. The latter have taken the precautions hotel guests.
prescribed regarding their safekeeping. Reason: It is given to hotel-keepers
Extent of liability: to compensate them for the liabilities
a. Liability in hotel rooms which come under imposed upon them by law. The right
the term “baggage” or articles such as of retention recognized in this article
clothing as are ordinarily used by is in the nature of a pledge created
travelers by operation of law.
b. Include those lost or damages in hotel
annexes such as vehicles in the hotel’s • In compliance with a legal obligation
garage. (governed by the law establishing it, and in
When hotel-keeper liable: (Art. 2000 – case of deficiency, the rules on voluntary
2002) deposit e.g. Arts. 538, 586 and 2104)
NOTE: In the following cases, the hotel-
QuickTime™ and a • Made on the occasion of any calamity
keeper is liable REGARDLESS
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are needed to see this picture. of the (governed by the rules on voluntary deposit
amount of care exercised: and Art. 2168)
a. The loss or injury to personal property is
caused by his servants or employees as
well as by strangers (Art. 2000). SEQUESTRATION OR JUDICIAL DEPOSIT
b. The loss is caused by the act of a thief or
robber done without the use of arms and When judicial deposit takes place: Judicial deposit
irresistible force. (Art. 2001) takes place when an attachment or seizure of
Reason: Hotel-keeper is apparently property in litigation is ordered by a court. (Art. 2005)
negligent. Nature: Auxiliary to a case pending in court.

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Purpose: To maintain the status quo during the

pendency of the litigation or to insure the right of the The Issue of Warehouse Receipts
parties to the property in case of a favorable
judgment. WHO MAY ISSUE?
1. a warehouseman - a person lawfully
Depositary of sequestered property: person engaged in the business of storing goods
appointed by the court. (Art. 2007) for profit
Obligations: 2. a duly authorized officer or agent of a
a. To take care of the property with the diligence of warehouseman
a good father of the family. (Art. 2008) NOTE: receipts not issued by a
b. He may not be relieved of his responsibility until warehouseman although in the form of
the litigation is ended or the court so orders. (Art. warehouse receipts are not warehouse
2007) receipts
Applicable law: The law on judicial deposit is
remedial or procedural in nature. Hence, the Rules of FORM AND CONTENTS: need not be in particular
Court are applicable. (Art. 2009) form, but certain essential terms must be present:
1. Location of warehouse -because the
Basis of Judicial Extra-judicial warehouseman may have other warehouses
Comparison Deposit Deposit 2. Date of issue and receipt - indicates prima
Cause or By will of the By will of the facie the date when the contract of deposit is
origin courts parties. Hence, perfected and when the storage charges
there is a shall begin
contract 3. Consecutive number of receipt - to identify
Purpose Security; Custody; each receipt with the goods for which it was
Secure the Safekeeping of issued
right of a party the thing 4. Person to whom goods are deliverable -
to recover in determines the person or persons who shall
case of prima facie be entitled lawfully to the
favorable possession of the goods deposited
judgment. 5. Rate of storage charges - consideration for
Subject Matter Either movable Only movable the contract from the view of the
or immovable property warehouseman
property but 6. Description of goods or packages - for
generally, identification
immovable 7. Signature of warehouseman - best evidence
of the fact that the warehouseman has
Remuneration Always Generally received the goods and has bound himself to
remunerated gratuitous, but assume all obligations in connection
(onerous) may be therewith
compensated 8. Warehouseman’s ownership of or interest in
In whose In behalf of the In behalf of the the goods - purpose is to prevent abuses in
behalf it is held person who, by depositor or the past when warehouseman issued receipt
the judgment, third person on their goods
has a right designated 9. Statement of advances made and liabilities
incurred (if present) - purpose is to preserve
QuickTime™ and a the lien of the warehouseman over the goods
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are needed to see this picture. stores or the proceeds thereof in his hands

Scope: all warehouses, whether public or private, NOTE: Effect of omission of any of the
bonded or not essential terms:
a. validity and negotiability of receipt is NOT
Application: applies to warehouse receipts issued by affected
a warehouseman as defined in Sec. 58(a), b. warehouseman will be liable for damages
while the Civil Code, to other cases where c. the contract will be converted to an
receipts are not issued by a ordinary deposit

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a. those contrary to this Act (e.g. exemption PRINCIPAL OBLIGATIONS WAREHOUSEMAN:
from liability for misdelivery in Sec. 10, 1. To take care of the goods, and be liable for failure
not giving statutory notice in case of sale to exercise care
of goods in Sec. 33 and 34) BUT he is not liable for loss or injury which could
b. an exemption from liability and not have been avoided
negligence UNLESS there is a stipulation to the contrary
c. those contrary to law, morals, good 2. To deliver the goods to the holder of the receipt or
customs, public order or public policy the depositor upon DEMAND accompanied with:
a. an offer to satisfy the warehouseman’s lien-
DEFINITIONS because a warehouseman may refuse
a. negotiable receipt - receipt in which it is delivery until his lien is satisfied
stated that the goods received will be b. an offer to surrender the receipt- for the
delivered to the bearer or to the order of protection of the warehouseman and to
any person named in such receipt avoid criminal liability; this is subject to
b. non-negotiable receipt - receipt in which waiver
it is stated that the goods received will be c. an offer to sign when the goods are
delivered to the depositor or to any other delivered, an acknowledgment that they
specified person have been delivered
1. a provision in a negotiable receipt that it is non- • BUT a warehouseman may still refuse
negotiable is VOID delivery on the grounds of some lawful
2. a negotiable warehouse receipt is not a excuse like:
negotiable instrument in the same sense as in 1. Sec. 10
the NIL. a. He has been requested by the
person lawfully entitled to the
Duplicate receipts (applies ONLY) to negotiable goods not to make delivery
warehouse receipts. b. He has information that the
• Whenever more than one negotiable receipt delivery about to be made was
is issued for the same goods, the word not to one lawfully entitled to the
‘DUPLICATE” shall be placed on the face of goods
the receipt except the one 1st issued. 2. Sec. 16: He has acquired title to the
• Effect: the warehouseman shall be liable for goods which was delivered from:
damages for failing to do this to anyone who a. Transfer made by the depositor
purchased the subsequent receipt (1) for at the time of the deposit for
value, and (2) supposing it to be an original; storage or subsequent thereto
even though the purchase be after delivery of b. The warehouseman’s lien
the goods by the warehouseman to the 3. Sec. 18: If there are several claimants to
holder of the original receipt. the goods
4. Sec. 21: If goods were lost and he had
Failure to make “non-negotiable” (applies only to no fault
non-negotiable warehouse receipts) 5. Sec. 36: He has already lawfully sold the
a. A non-negotiable receipt must contain goods
the word: “non-negotiable”
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b. Effect of failure to todo
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see this will give a holder PERSONS TO WHOM THE GOODS MUST BE
who purchased it for value supposing it DELIVERED
to be negotiable, the option treat it as 1. Persons lawfully entitled to the possession of the
negotiable goods or its agent
2. Persons entitled to deliver under:
CONSTRUCTION OF WAREHOUSE RECEIPTS: a. a non-negotiable receipt; or
Liberal construction of the law in favor of bona fide b. with written authority
holders. This has no application to actions against 3. person in possession of a negotiable receipt
any party other than a warehouseman. (which was lawfully negotiated)

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NOTE: a warehouseman does NOT have a any one who purchased for value in good
cause of action against a person to whom he faith such receipt
misdelivered the thing UNLESS the depositor
sues him. 5. Issuing receipt for non-existing goods or
misdescribed goods (Sec. 20):
ACTS FOR WHICH A WAREHOUSEMAN IS • GR: a warehouseman is under obligation
LIABLE: to deliver the identical property stored
with him and if he fails to do so, he is
1. Failure to stamp “duplicate” on copies of a liable.
negotiable receipt (Sec. 6 and 15) • Exception: if the description consists
• When more than one negotiable receipts are merely of marks or labels upon the goods
issued for the same goods, the word or upon the packages containing them,
“duplicate” must be plainly placed by the etc., the warehouseman is NOT liable
warehouseman upon the face of every such even if the goods are not of the kind as
receipt except the 1st. In such case, the indicated in the marks or labels
warehouseman warrants:
a. that the duplicate is an accurate copy of 6. In case of lost or destroyed receipts (Sec. 14)
the original receipt • Remember that a warehouseman must deliver
b. such original receipt is uncancelled at the to the one who has the receipt but if such was
date of the issue of the duplicate lost, a competent court may order the delivery
• NOTE: The duplicate imposes no other of the goods only:
liability upon the warehouseman. a. upon proof of the loss or destruction of
the receipt; AND
2. Failure to place “non-negotiable” on a non- b. upon giving of a bond with sufficient
negotiable receipt (Sec. 7) securities
• NOTE: the warehouseman is still liable to
3. Misdelivery of the goods (Sec. 10) a holder of the receipt for value without
• To one not lawfully entitled to possession: notice since the warehouseman can
Liable for conversion (unauthorized secure himself in the bond given.
assumption and exercise of the right of
ownership over goods belonging to another 7. Failure to take care of the goods (Sec. 12)
through alteration or the exclusion of the
owner’s right) 8. Failure to give notice in case of sales of
• To a person entitled to delivery under a non- goods to satisfy his lien (Sec. 33) or because
negotiable receipt or written authorization OR the goods are perishable and hazardous (Sec.
person in possession of a negotiable receipt 34)
Still liable for conversion if:
a. prior to delivery, he had been requested EFFECTS OF ALTERED RECEIPTS:
NOT to make such delivery 1. Alteration immaterial: whether fraudulent or
b. he had received notice of the adverse not, authorized or not, the warehouseman is
claim or title of a 3rd person liable on the altered receipt according to its
original tenor;
4. Failure to effect cancellation of a negotiable 2. Alteration material: but it was authorized,
receipt upon delivery of the goods (Sec. 11) the warehouseman is liable according to the
• This is applicable ONLY to negotiable receipts terms of the receipts as altered;
but NOT to a situation whereandthere
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sale in accordance withto see
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this picture. though unauthorized, the warehouseman is
a. When the goods are delivered already: liable on the altered receipt according to its
Failure to cancel will make him liable to original term;
any one who purchased for value in good 4. Material alteration fraudulently made:
faith such receipt warehouseman is liable according to the
b. When only some of the goods were original tenor to a:
delivered: Failure to cancel or to state a. purchaser of the receipt for value
plainly in the receipt that some goods without notice; and
were delivered will make him liable to b. to the alterer and subsequent
purchasers with notice ( BUT his

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liability is limited only to delivery as NOTE: This does NOT apply to cases where the
he is excused from any other liability) warehouseman himself makes a claim to the
* Even a fraudulent alteration cannot divest the title of
the owner of stored goods and the warehouseman is COMMINGLING OF DEPOSITED GOODS
liable to return them to the owner. BUT a bona fide • GR: A warehouseman may not mingle goods
holder acquires no right to the goods under a belonging to different depositors.
negotiable receipt which has been stolen or lost or Exception: In case of fungible goods of the
which the indorsement has been forged. same kind and grade provided:
a. he is authorized by agreement
b. he is authorized by custom
1. Ownership is not a defense for refusal to deliver a. each depositor shall own the entire mass in
• The warehouseman cannot refuse to deliver common and entitled to his portion
the goods on the ground that he has b. warehouseman is severally liable to each
acquired title or right to the possession of it depositor for the care and redelivery of
unless such is derived: their portion as if the goods had been kept
a. directly or indirectly from a transfer made by separate
the depositor at the time of the deposit for
storage or subsequent thereto; ATTACHMENT OR LEVY OF NEGOTIABLE
b. from the warehouseman’s lien RECEIPTS
2. Adverse title of a 3rd person is not a defense for • A warehouseman has the obligation to hold
refusal to deliver by a warehouseman to his the goods for the owner or for the person to
bailor on demand EXCEPT: whom the negotiable receipt has been duly
a. To persons to whom the goods must be negotiated. Therefore, the goods cannot be
livered (Sec. 9) attached or levied upon under an execution
b. To the person who wins in the interpleader UNLESS:
case (Sec. 17) a. the document be first surrendered; or
c. To the person he finds to be entitled to the b. the negotiation is enjoined, or
possession after investigation (Sec. 18) c. the document is impounded by the
d. To the buyer in case there was a valid sale of court
the goods (Sec. 36) • The warehouseman cannot be compelled to
deliver the goods until:
a. the receipt is surrendered to him;
DUTY OF WAREHOUSEMAN WHEN THERE ARE b. it is impounded by the court
SEVERAL CLAIMANTS NOTE: This provision does NOT apply if the
The warehouseman may either: person depositing is NOT the owner of the goods
1. Investigate and determine within a or one who has not the right to convey title to the
reasonable time the validity of the claims, goods binding upon the owner.
and deliver to the person whom he finds is
entitled to the possession of the goods REMEDY OF CREDITOR WHOSE DEBTOR OWNS
Effect: He is NOT excused from liability in A NEGOTIABLE RECEIPT
case he makes a mistake Attachment of the negotiable receipt (NOT the goods)
2. He may bring a complaint in interpleader NOTE: the goods themselves cannot readily be
Effect: attached or levied upon by ordinary legal process
a. he will be relieved QuickTime™ and a
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delivering theTIFF
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to see picture. whom the EXTENT OF WAREHOUSEMAN’S LIEN
court finds to have better right; 1. lawful charges for
b. he is liable for refusal to deliver to the a. storage, and
rightful claimant when it is required to have b. preservation of the goods
an interpleader; 2. lawful claims for
3. He may not do (a) and (b) a. money advanced
Effect: He will be liable after a lapse of a b. labor
reasonable time, of conversion as of the date c. interest
of the original demand for the goods. d. weighing
e. insurance

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f. cooperating 3. an offer to sign when the goods are

g. transportation delivered, an acknowledgment that they
3. other charges and expenses in relation to have been delivered
such goods
4. reasonable charges and expenses for notice REMEDIES FOR A WAREHOUSEMAN
and advertisements of sale 1. Even if without lien, all remedies allowed by
5. sale of the goods where defaults has been law to a creditor against his debtor for
made in satisfying the lien collection of charges;
2. By refusing to deliver the goods until his lien is
RECEIPT HAS BEEN ISSUED 3. All remedies allowed by law for the
1. charges for storage and preservation of the enforcement of a lien against personal property
goods and recovery of any deficiency in case it exists
2. other charges expressly enumerated (from b, after the sale of the property;
c, d and e above) although the amount is 4. By causing the extrajudicial sale of the property
NOT stated and applying the proceeds to the value of the
NOTE: For claims not specified, the lien
warehouseman shares pro rata with the other
creditors of the depositor the balance of the PROCESS OF EXTRAJUDICIAL SALE:
proceeds of the sale for the satisfaction of the 1. Written notice to the person on whose account
claims. the goods are held or to persons who claim an
interest in the goods containing:
GOODS SUBJECT TO LIEN a. itemized statement of warehouseman’s
1. goods of the depositor who is liable to the lien showing the sum due and when it
warehouseman as debtor wherever such became due
goods are deposited; b. brief description of the goods
2. goods of other persons stored by the c. a demand that a claim be paid on or
depositor who is liable to the warehouseman before a day mentioned, not less than 10
as debtor with authority to make a valid days from:
pledge 1. delivery of notice if personally
NOTE: A warehouseman has NO lien on goods delivered
belonging to another and stored by a stranger in 2. time when notice should reach its
fraud of the true owner’s right. destination if sent by mail
d. statement that if the claim is not paid, the
THE LIEN MAY BE LOST THROUGH: goods will be advertised for sale and then
1. voluntarily surrendering possession of sold at a specified time and place
goods - constitutes a waiver or 2. After the time for payment of the claim if the
abandonment notice has elapsed, the sale will be advertised
A warehouseman may NOT claim a stating:
lien on other goods of the same a. a description of the goods to be sold
depositor for unpaid charges on the b. the name of the owner or person on
goods surrendered if the goods were whose account the goods were held
delivered to him under different c. time and place of the sale
receipts. 3. Publication:
2. wrongfully refusing to deliver the goods a. if there is a newspaper published in the
to a person who holds the receipt or the
QuickTime™ and a
place of sale: once a week for 2
depositor upon DEMAND
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consecutive weeks and the sale not held
with: less than 15 days from the time of the 1st
a. an offer to satisfy the warehouseman’s publication
lien (because a warehouseman may b. if there is no newspaper: posted at least
refuse delivery until his lien is satisfied) 10 days before the sale in not less than 6
b. an offer to surrender the receipt conspicuous places in the place of sale
i. for the protection of the warehouseman 4. Sale itself in:
and to avoid criminal liability a. place where the lien was acquired
ii. this is subject to waiver b. if such place is manifestly unsuitable for
the purpose, at the nearest suitable place

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5. From the proceeds of the sale: GUARANTY (2047) - By guaranty, a person called
a. the warehouseman shall satisfy his lien the guarantor, binds himself to the creditor, to fulfill
b. including the reasonable charges of notice, the obligation of the principal debtor in case the latter
advertisement and sale should fail to do so. It is a contract between the
c. the balance shall be held by the guarantor and the creditor.
warehouseman and delivered on demand
to the person to whom he should deliver it
6. Any time before the goods are sold, any person CHARACTERISTICS OF THE CONTRACT
may pay the warehouseman for his lien and the
other expenses. The warehouseman shall deliver 1. Accessory – dependent for its existence
the goods to that person if he is entitled under this upon the principal obligation guaranteed by
Act, to the possession of the goods on payment of it;
the charges. Otherwise, the warehouseman shall 2. Subsidiary and conditional – takes effect
retain ownership of the goods. only when the principal debtor fails in his
obligation subject to limitation
• With regard to perishable and hazardous 3. Unilateral –
goods a. It gives rise only to a duty on the part of
Warehouseman will give notice to owner or the guarantor in relation to the creditor
person in whose name the goods are stored: and not vice versa
a. to satisfy his lien b. It may be entered into even without the
b. to remove the goods intervention of the principal debtor.
c. failure to do a &b will give the 4. Guarantor must be a person distinct from
warehouseman authority to sell the the debtor – a person cannot be the
goods without advertising personal guarantor of himself
d. if sale is not possible, he may
dispose of the goods in any lawful CLASSIFICATION OF GUARANTY
manner without liability
• Proceeds of the sale shall be disposed of in 1. Guaranty in the broad sense:
accordance with the PROCESS in the sale of a. Personal – guaranty is the credit
the goods. given by the person who guarantees
the fulfillment of the principal
• Effects of sale obligation; or
a. warehouseman is NOT liable for non- b. Real – guaranty is property,
delivery even if the receipt was given for movable, or immovable
the goods when they were deposited be i. Real mortgage (2124) or
negotiated antichresis (2132) – guaranty is
b. when the sale was made without the immovable
publication required and before the time ii. Chattel mortgage (2140) or
specified by law, such sale is void and the pledge (2093) – guaranty is
purchaser of the goods acquires no title in movable
them 2. As to its origin:
a. Conventional – constituted by
NEGOTIATION AND TRANSFER OF RECEIPTS agreement of the parties (2051[1])
Negotiable receipts negotiable by delivery b. Legal – imposed by virtue of a
1. if the goods are deliverable to the bearer; provision of law
or QuickTime™ and a
c. Judicial – required by a court to
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guarantee the eventual right of one
3. person to whose order the goods are of the parties in a case.
delivered or by a subsequent indorsee 3. As to consideration:
indorsed it to bearer a. Gratuitous – guarantor does not
receive any price or remuneration for
acting as such (2048)
b. Onerous – one where the guarantor
receives valuable consideration for
his guaranty
4. As to person guaranteed:

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a. Single – constituted solely to 1. Guaranty is unilateral – exists for the

guarantee or secure performance by benefit of the creditor and not for the benefit
the debtor of the principal obligation; of the principal debtor
b. Double or sub-guaranty – 2. Creditor has every right to take all
constituted to secure the fulfillment possible measures to secure payment of
by the guarantor of a prior guaranty his credit – guaranty can be constituted
5. As to its scope and extent: even against the will of the principal debtor
a. Definite – where the guaranty is
limited to the principal obligation
Rights of third persons who pay:
only, or to a specific portion thereof;
b. Indefinite or simple – where the 1. Payment without the knowledge or
guaranty included all the accessory against the will of the debtor:
obligations of the principal, e.g. a. Guarantor can recover only insofar
costs, including judicial costs. as the payment has been beneficial
to the debtor
b. Guarantor cannot compel the
creditor to subrogate him in his rights
GR: Guaranty is gratuitous 2. Payment with knowledge or consent of
the debtor: Subrogated to all the rights
Exception: When there is a stipulation to the
which the creditor had against the debtor
Cause of contract of guaranty
1. Presence of cause which supports
1. Conventional;
principal obligation: Cause of the
2. Judicial;
contract is the same cause which
3. Legal
supports the obligation as to the principal
debtor. The consideration which supports
the obligation as to the principal debtor is DOUBLE OR SUB-GUARANTY (2051[2])
a sufficient consideration to support the
One constituted to guarantee the obligation of a
obligation of a guarantor or surety.
guarantor. It should not be confounded with guaranty
2. Absence of direct consideration or
wherein several guarantors concur.
benefit to guarantor: Guaranty or surety
agreement is regarded valid despite the
absence of any direct consideration
received by the guarantor or surety, such NECESSITY OF VALID PRINCIPAL OBLIGATION
consideration need not pass directly to (2052[1])
the guarantor or surety; a consideration Guaranty is an accessory contract: It is an
moving to the principal will suffice. indispensable condition for its existence that there
must be a principal obligation. Hence, if the
MARRIED WOMAN AS GUARANTOR (2049) principal obligation is void, it is also void.

GR: Married woman binds only her separate property

1. With her husband’s consent, bind the
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(Uncompressed) decompressor property
are needed to see this picture.
2. Without husband’s consent, in cases 1. Voidable contract – such contract is
provided by law, such as when the guaranty binging, unless it is annulled by a proper
has redounded to the benefit of the family. court action
2. Unenforceable contract – because such
contract is not void
3. Natural obligation – the creditor may
proceed against the guarantor although he
has not right of action against the principal

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debtor for the reason that the latter’s pure or subject to a suspensive or resolutory
obligation is not civilly enforceable. condition.
When the debtor himself offers a guaranty for
1. Principal obligation subject to a
his natural obligation, he impliedly recognizes
suspensive condition – the guarantor is
his liability, thereby transforming the
liable only after the fulfillment of the
obligation from a natural into a civil one.
2. Principal obligation subject to a
resolutory condition – the happening of the
condition extinguishes both the principal
Continuing Guaranty or Suretyship: obligation and the guaranty
1. 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.
2. It is prospective in its operation and is
generally intended to provide security with GR: Guaranty is a subsidiary and accessory
respect to future transactions. contract – guarantor cannot bind himself for more
3. Future debts, even if the amount is not yet than the principal debtor and even if he does, his
known, may be guaranteed but there can be liability shall be reduced to the limits of that of the
no claim against the guarantor until the debtor. But the guarantor may bind himself for less
amount of the debt is ascertained or fixed than that of the principal.
and demandable.
Reason: A contract of guaranty is subsidiary.
1. Interest, judicial costs, and attorney’s fees as
a. To secure the payment of a loan at
part of damages may be recovered – creditors
maturity – surety binds himself to
suing on a suretyship bond may recover from the
guarantee the punctual payment of a
surety as part of their damages, interest at the
loan at maturity and all other obligations
legal rate, judicial costs, and attorney’s fees
of indebtedness which may become due
when appropriate, even without stipulation and
or owing to the principal by the borrower.
even if the surety would thereby become liable to
b. To secure payment if any debt to be
pay more than the total amount stipulated in the
subsequently incurred – a guaranty
shall be construed as continuing when by
the terms therof it is evident that the • Reason: Surety is made to pay, not by
object is to give a standing credit to the reason of the contract, but by reason of his
principal debtor to be used from time to failure to pay when demanded and for
time either indefinitely or until a certain having compelled the creditor to resort to
period, especially if the right to recall the the courts to obtain payment.
guaranty is expressly reserved. Interest runs from:
c. To secure existing unliquidated debts
– refer to debts existing at the time of the a. Filing of the complaint (upon judicial
constitution of the guaranty but the demand); or
amount thereof is unknown and not to b. The time demand was made upon
dents not yet incurred and existing at that the surety until the principal
time. The surety agreement itself is valid obligation is fully paid (upon extra-
and binding QuickTime™ and a
even before the principal judicial demand)
TIFF (Uncompressed) decompressor
are needed to see this picture.
obligation intended to be secured thereby 2. Penalty may be provided – a surety may be
is born, any more than there would be in held liable for the penalty provided for in a
saying that obligations which are subject bond for violation of the condition therein.
to a condition precedent are valid and
binding before the occurrence of the Principal’s liability may exceed
condition precedent guarantor’s obligations
The amount specified in a surety bond as the
GUARANTY OF CONDITIONAL OBLIGATIONS: A surety’s obligation does not limit the extent of
guaranty may secure all kinds of obligations, be they the damages that may be recovered from the

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principal, the latter’s liability being governed unfair and unreasonable for it practically
by the obligations he assumed under his nullifies the nature of the undertaking it had
contract. assumed.
Reason: The liability of the surety attaches
as soon as the principal debtor defaults, and
GUARANTY NOT PRESUMED (2055) notice thereof is given the surety within a
reasonable time to enable it to take steps to
Guaranty requires the expression of consent on the
protect its interest.
part of the guarantor to be bound. It cannot be
presumed because of the existence of a contract or Remedy of surety: Foreclose the counterbond put
principal obligation. up by the principal debtor (if there is any)
1. There be assurance that the guarantor had GUARANTY DISTINGUISHED FROM WARRANTY
the true intention to bind himself;
2. To make certain that on making it, the
guarantor proceeded with consciousness of Contract by which a An undertaking that the title,
what he was doing. person is bound to quality, or quantity of the
another for the subject matter of a contract
GUARANTY COVERED BY THE STATUTE OF fulfillment of a is what it has been
FRAUDS promise or represented to be, and
engagement of a third relates to some agreement
• Guaranty must not only be expressed but party made ordinarily by the party
must so be reduced into writing. who makes the warranty
• Hence, it shall be unenforceable by action,
unless the same or some note or
memorandum thereof be in writing, and GUARANTY DISTINGUISHED FROM SURETYSHIP
subscribed by the party charged, or by his
agent; evidence, therefore, of the agreement GUARANTY SURETYSHIP
cannot be received without the writing, or a Liability depends upon Assumes liability as a
secondary evidence of its contents. an independent regular party to the
• It need not appear in a public document. agreement to pay the undertaking
obligation if the primary

Strictly construed against the creditor in favor of the Engagement is a Charged as an original
guarantor and is not be extended beyond its terms or collateral undertaking promisor
specified limits.
Secondarily liable – he Primarily liable –
If there is any doubt on the terms and conditions of contracts to pay if, by undertakes directly for
the guaranty or surety agreements, the doubt should the use of due the payment without
be resolved in favor of the guarantor or surety. diligence, the dent reference to the solvency
1. Liability for obligation stipulated – cannot be paid of the principal, and is so
guarantor is liable only for the obligation of responsible at once the
the debtor stipulated upon, and not to latter makes default,
obligations assumed previous to the without any demand by
execution of the
QuickTime™ and a
TIFF (Uncompressed) unless an intent to
the creditor upon the
are needed to see this picture.
be so liable is clearly indicated. principal whatsoever or
2. Liability of surety limited to a fixed period any notice of default
– the surety must only be bound in the Only binds himself to Undertakes to pay if the
manner and to the extent, and under the pay if the principal principal does not pay,
circumstances which are set forth or which cannot or unable to pay without regard to his
may be inferred from the contract of guaranty ability to do so
or suretyship, and no farther.
3. Liability of surety to expire on maturity of Insurer of the solvency Insurer of the debt
principal obligation – such stipulation is

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of the debtor 3. Guarantor personally designated by the

creditor: Responsibility of the selection
Does not contract that Pay the creditor without should fall upon the creditor because he
the principal will pay, qualification if the considered the guarantor to have the
but simply that he is principal debtor does not qualifications for the purpose.
able to do so pay. Hence, the
responsibility or
obligation assumed by RIGHT OF GUARANTOR TO BENEFIT OF
the surety is greater or EXCUSSION OR EXHAUSTION (2058)
more onerous than that Reasons:
of a guarantor
1. Guarantor only secondarily liable – the
guarantor binds himself to the creditor to
QUALIFICATIONS OF GUARANTOR (2056-2057) fulfill the obligation of the principal debtor
only in case the latter should fail to do so. If
1. He possesses integrity; the principal debtor fulfills the obligation
2. He has capacity to bind himself; guaranteed, the guarantor is discharged from
3. He has sufficient property to answer for any responsibility.
the obligation which he guarantees. 2. All legal remedies against the debtor to be
Exception: The creditor waives the requirements first exhausted – to warrant recourse
against the guarantor for payment, it may not
be sufficient that the debtor appears
Effect of Subsequent Loss of Required insolvent. Such insolvency may be simulated.
Qualifications: The qualifications need only be Right of Creditor to Secure Judgment against
present at the time of the perfection of the Guarantor prior to Exhaustion
contract. The subsequent loss of integrity or property
or supervening incapacity of the guarantor would not GR: An ordinary personal guarantor (NOT a pledgor
operate to exonerate the guarantor of the eventual or mortgagor), may demand exhaustion of all the
liability he has contracted, and the contract of property of the debtor before he can be compelled to
guaranty continues. pay.

Remedy of creditor: Demand another guarantor Exception: The creditor may, prior thereto, secure a
with the proper qualifications judgment against the guarantor, who shall be entitled,
however, to a deferment of the execution of said
Exception: Creditor may waive it if he chooses and judgment against him, until after the properties of the
hold the guarantor to his bargain. principal debtor shall have been exhausted, to satisfy
Article 2057: the latter’s obligation.

1. Requires conviction in the first instance of a EXCEPTIONS TO THE BENEFIT OF EXCUSSION

crime involving dishonesty to have the right (2059)
to demand another. The guarantor is not entitled to the benefit of
2. Judicial declaration of insolvency is not excussion:
necessary in order for the creditor to have a
right to demand another guarantor. 1. As provided in Art. 2059:
a. If the guarantor has expressly
renounced it – Waiver
SELECTION OF GUARANTOR: i. Waiver is valid but it must be made
1. Specified person stipulated
QuickTime™ and a as guarantor: in express terms.
TIFF (Uncompressed) decompressor
Substitution of guarantor
are needed may not be
to see this picture. b. If he has bound himself solidarily with
demanded the debtor – liability assumed that of a
Reason: The selection of the guarantor is: surety
i. Guarantor becomes primary liable
a. Term of the agreement; as a solidary co-debtor. In effect, he
b. As a party, the creditor is, therefore, renounces in the contract itself the
bound thereby. benefit of exhaustion.
2. Guarantor selected by the principal c. In case of insolvency of the debtor –
debtor: Debtor answers for the integrity, guarantor guarantees the solvency of
capacity, and solvency of the guarantor. the debtor

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i. If the debtor becomes insolvent, the exhaustion of the principal’s property cannot
liability of the guarantor as the even begin to take place before judgment
debtor cannot fulfill his obligation has been obtained.
d. When he (debtor) has absconded, or 2. Actual demand to be made – joining the
cannot be sued within the Philippines – guarantor in the suit against the principal
the creditor is not required to go after a debtor is not the demand intended by law
debtor who is hiding or cannot be sued
in our courts, and to incur the delays
and expenses incident thereto.
Exception: Debtor has left a
manager or representative; As soon as he is required to pay, guarantor must also
point out to the creditor available property (not in
e. If it may be presumed that an execution
litigation or encumbered) of the debtor within the
on the property of the principal debtor
would not result in the satisfaction of the
obligation – if such judicial action
including execution would not satisfy the
obligation, the guarantor can no longer DUTY OF THE CREDITOR TO RESORT TO ALL
require the creditor to resort to all such LEGAL REMEDIES (2061)
remedies against the debtor as the 1. After the guarantor has fulfilled the conditions
same would be but a useless formality. required for making use of the benefit of
It is not necessary that the debtor be exhaustion, it becomes the duty of the
judicially declared insolvent. creditor to:
2. If he does not comply with Art. 2060: In 2. Exhaust all the property of the debtor pointed
order that the guarantor may make use of the out by the guarantor;
benefit of excussion, he must: 3. If he fails to do so, he shall suffer the loss but
a. Set it up against the creditor upon the only to the extent of the value of the said
latter’s demand for payment from him; property, for the insolvency of the debtor.
b. Point out to the creditor:
i. Available property of the debtor – JOINDER OF GUARANTOR AND PRINCIPAL AS
the guarantor should facilitate the PARTIES DEFENDANT
realization of the excussion since he
is the most interested in its benefit. GR: The guarantor, not being a joint contractor with
ii. Within the Philippine territory – his principal, cannot be sued with his principal.
excussion of property located Exception: Where it would serve merely to delay the
abroad would be a lengthy and ultimate accounting of the guarantor or if no different
extremely difficult proceeding and result would be attained if the plaintiff were forced to
would not conform with the purpose institute separate actions against the principal and
of the guaranty to provide the the guarantors.
creditor with the means of obtaining
the fulfillment of the obligation.
iii. Sufficient to cover the amount of the PROCEDURE WHEN CREDITOR SUES (2062)
3. If he is a judicial bondsman and sub- 1. Sent against the principal – as a rule, the
surety (2084) creditor may hold the guarantor only after
4. Where a pledge or mortgage has been judgment has been obtained against the
given by himTIFF as(Uncompressed)
a special
QuickTime™ andsecurity.
a principal debtor and the latter is unable to
5. If he fails to interpose it as a defense
are needed to see this picture. pay.
before judgment is rendered against him. 2. Notice to guarantor of the action –
guarantor must be notified so that he may
appear, if he so desires, and set up defenses
he may want to offer
DUTY OF CREDITOR TO MAKE PRIOR DEMAND a. Guaranty appears – voluntary
FOR PAYMENT FROM GUARANTOR (2060) appearance does not constitute a
renunciation of his right to excussion.
1. When demand to be made – only after b. Guaranty does not appear –
judgment on the debt for obviously the

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i. He cannot set up the defenses 2. Extent of liability of several guarantors –

which, by appearing are allowed to joint obligation: the obligation to answer for
him by law; and the debt is divided among all of them. The
ii. It may no longer be possible for him guarantors are not liable to the creditor
to question the validity of the beyond the shares which they are
judgment rendered against the respectively bound to pay.
debtor Exceptions: When solidarily has been
3. Hearing before execution can be issued expressly stipulated
against the guarantor – a guarantor is
entitled to be heard before an execution can
be issued against him where he is not a party BENEFIT OF EXCUSSION AMONG SEVERAL
in the case involving his principal. GUARANTORS:
In order that the guarantor may be entitled to the
EFFECTS OF COMPROMISE (2063) benefit of division, it is not required that he point out
the property of his co-guarantors.
Compromise – a contract whereby the parties, by
making reciprocal concessions, avoid a litigation or Reason: Obligation of the guarantor with respect to
put an end to one already commenced. his co-guarantors is not subsidiary but direct and
does not depend as to its origin on the solvency or
1. Compromise between creditor and principal
insolvency of the latter.
debtor benefits the guarantor but does not
prejudice him.
2. Compromise between guarantor and the
creditor benefits but does not prejudice the GUARANTOR’S RIGHT TO SUBROGATION (2067)
principal debtor. SUBROGATION – transfers to the person
subrogated, the credit with all the rights thereto
appertaining either against the debtor or against third
persons, be they guarantors or possessors of
mortgages, subject to stipulation in conventional
Sub-guarantor enjoys the benefit of excussion subrogation.
with respect to:
1. Accrual, basis, and nature of right – right
1. Principal debtor; and of subrogation is necessary to enable the
2. Guarantor guarantor to enforce the indemnity given in
Reason: He stands with respect to the guarantor Art. 2066
on the same footing as the latter does with a. Arises by operation of law upon
respect to the principal debtor payment by the guarantor
b. It is not a contractual right
c. The guarantor is subrogated, by
BENEFIT OF DIVISION AMONG SEVERAL virtue of the payment, to the right of
GUARANTORS (2065) the creditor, not those of the debtor.
2. When right not available – since
1. In whose favor applicable –
subrogation is the means of effectuating the
a. Several guarantors;
right of the guarantor to be reimbursed. It
b. Only one debtor;
cannot therefore be invoked in those
c. For the same debt
cases where the guarantor has no right to
• Cannot be availed of if there are: be reimbursed.
QuickTime™ and a
TIFF (Uncompressed) decompressor
b. Two or more debtors
are needed to see thisof one debt, even

if they be bound solidarily, each with EFFECT OF PAYMENT BY GUARANTOR

different guarantors; or WITHOUT NOTICE TO DEBTOR (2068)
c. Two or more guarantors of the same
debtor but not only for the same debt If the debtor has already paid the creditor, when the
d. If any of the circumstances enumerated guarantor pays, the debtor can set up against the
in Art. 2059 should take place, as would guarantor the defense of previous extinguishments of
the benefit of exhaustion of the debtor’s the obligation by payment. Hence, guarantor must
property. notify the debtor before making payment.

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Reason: The guarantor cannot be allowed, through REMEDY TO WHICH THE GUARANTOR
his own fault or negligence to prejudice or impair the ENTITLED
rights or interests of the debtor.
GR: The guarantor cannot demand reimbursement
for indemnity because he has not paid the obligation.
1. To obtain release from the guaranty; or
Debtor’s obligation with a period – demandable 2. To demand security that shall protect him
only when the day fixed comes. from:
a. Any proceedings by the creditor; and
1. The guarantor who pays before maturity is
b. Against the insolvency of the debtor.
not entitled to reimbursement since there is
Guarantor’s remedies are alternative. He has the
no necessity for accelerating payment.
right to choose the action to bring.
2. A contract of guaranty being subsidiary in
character, the guarantor is not liable for the
debt before it becomes due.
Exception: The debtor will be liable if the
payment was made:
The guaranty’s or surety’s action for release can only
a. With his consent; or
be exercised against the principal debtor and not
b. Subsequently ratified by him (ratification
against the creditor.
may be express or implied)
Reason: Release of the guarantor imports an
extinction in the obligation to the creditor; it connotes
therefore, either a remission or novation by
subrogation, and either operation requires the
GR: Guarantor has no cause of action against the creditor’s assent for its validity.
debtor until after the former has paid the obligation.
Exceptions: 2071 enumerates instances when the
guarantor may proceed against the debtor even
before the payment. 2066 2071
1. When he is sued for the payment; (Right of Guarantor to (Right of Guarantor to
2. In case of insolvency of the principal debtor; Reimbursement after Proceed against Debtor
3. When the debtor has bound himself to relieve Payment) even before payment)
him from the guaranty within a specified
period, and this period has expired; Provides for the Provides for the
4. When the debt has become demandable, by enforcement of the rights protection before he has
reason of the expiration of the period for of the guarantor against paid but after he has
payment; the debtor after he has become liable – gives a
5. After the lapse of 10 years, when the paid the debt – gives a protective remedy before
principal obligation has no fixed period for its right of action after payment
maturity, unless it be of such nature that it payment
cannot be extinguished except within a
Substantive right Preliminary remedy
period longer than 10 years;
6. If there are reasonable grounds to fear that Gives a right of action, Remedy given seeks to
QuickTime™ and a
the principal debtor intends
TIFF (Uncompressed) to abscond;
decompressor which, without the obtain from the guarantor
are needed to see this picture.
7. If the principal debtor is in imminent danger provisions of the other “release from the
of becoming insolvent. might be worthless guaranty or to demand a
Purpose: To enable the guarantor to take measures security that shall protect
for the protection of his interest in view of the him from any proceedings
probability that he would be called upon to pay the by the creditor and from
debt. the danger of insolvency
of the debtor.”

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RECOVERY OF SURETY AGAINST INDEMNITOR a. By virtue of a judicial demand; or

EVEN BEFORE PAYMENT b. Because the principal debtor is
1. Indemnity agreement for the benefit of
3. Guarantor who paid is seeking
surety – indemnity agreement is not for the
reimbursement from each of his co-
benefit of the creditor but for the benefit of
guarantors the share which is proportionately
the surety.
owing him.
2. Indemnity agreement may be against
actual loss as well as liability – such
agreement is enforceable and not violative of Effect of Insolvency of Any Guarantor:
any public policy
Follows the rule on solidary obligations :The
a. Indemnity against loss – indemnitor
share of the insolvent guarantor shall be borne by the
will not be liable until the person to be
others including the paying guarantor in the same
indemnified makes payment or sustains
joint proportion.
b. Indemnity against liability – Accrual and Basis of Right:
indemnitor’s liability arises as soon as
the liability of the person to be The right of reimbursement is acquired ipso jure
indemnified has arisen without regard to without need of any prior cession from the creditor by
the guarantor.
whether or not he has suffered actual
Where the principal debtors are (2074)
simultaneously the same persons who
executed the indemnity agreement, the GR: All defenses which the debtor would have
position occupied by them is that of a interposed against the creditor.
principal debtor and indemnitor at the same, Exception: Those which cannot be transmitted for
and their liability being joint and several. being purely personal to the debtor.
OF ANOTHER (2072) Sub-guarantor is liable to the co-guarantors in the
The guarantor who guarantees the debt of an same manner as the guarantor whom he guaranteed
absentee at the request of another has a right to in case of the insolvency of the guarantor for whom
claim reimbursement, after satisfying the debt from: he bound himself as sub-guarantor.

1. The person who requested him to be a CAUSES OF EXTINGUISHMENT OF GUARANTY

guarantor; (2076) (PL3CN-ARFP)
2. The debtor GR: Guaranty being accessory, it is extinguished
when principal obligation is extinguished, the causes
WHO PAYS (2073) 2. Loss of the thing due;
Presumption of joint liability of several 3. Condonation or remission of the debt;
guarantors when there are: 4. Confusion or merger of the rights of the
creditor and debtor;
1. Two or more guarantors; QuickTime™ and a 5. Compensation; and
2. Same debtor;TIFFar(Uncompressed) decompressor
e needed to see this picture. 6. Novation
3. Same debt 7. Other causes:
Effect: Each is bound to pay only his proportionate a. Annulment;
share. b. Rescission;
c. Fulfillment of a resolutory condition;
When Art. 2073 Applicable:
d. Prescription
1. When one guarantor has paid the debt to the Exception: The guaranty itself may be directly
creditor; extinguished although the principal obligation still
2. Payment by such guarantor must have been remains such as in the case of the release of the
made: guarantor made by the creditor.

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Material Alteration of Principal Contract – any Effect: Guarantor is discharged from his undertaking.
agreement between the creditor and the principal
Reason: Necessity of avoiding of prejudice to the
debtor which essentially varies the terms of the
guarantor. The debtor may become insolvent during
principal contract without the consent of the surety,
the extension, thus depriving the guarantor of his
will release the surety from liability.
right to reimbursement.
Such material alteration would constitute a novation
It is unimportant whether the extension given has
or change of the principal contract, which is
actually proved prejudicial or not to the guarantor or
consequently extinguished. Upon such
surety. Nor does it matter for how short a period the
extinguishments, the accessory contract to guaranty
time of payment has been extended.
is also terminator and the guarantor cannot be held
liable on the new contract to which he has not given Extension must be based on some new agreement
his consent. between the creditor and the principal debtor by
virtue of which the creditor deprives him of his claim.
When Alteration Material – where such change will
have the effect of making the obligation more 1. Where obligation payable in installments:
onerous. where a guarantor is liable for different
Imposes a new obligation or added burden on the
GR: An extension of time to one or more will
party promising; or
not affect the liability of the surety for the
1. Takes away some obligation already others.
imposed, changing the legal effect of the
Exception: When the unpaid balance has
original contract and not merely the form
become automatically due by virtue of an
acceleration clause for failure to pay an
Effect of exception: The act of the creditor
extending the payment of said installment,
GR: Payment is made in money. without the guarantor’s consent, discharges
the guarantor.
Exception: Any substitute paid in lieu of money
which is accepted by the creditor extinguishes the Reason: The extension constitutes an
obligation and in consequence, the guaranty. extension of the payment of the whole
amount of the indebtedness
In case of eviction: Eviction revives the principal
obligation but not the guaranty. 2. Where consent to an extension is waived
in advance by the guarantor: Such waiver
Reason: The creditor’s action against the debtor is
is not contrary to law, nor to public policy
for eviction and this is different from what the
Effect: Amounts to the surety’s consent to all
guarantor guaranteed.
the extensions granted.


OF OTHERS (2078)
Effect: The release benefits all to the extent of the
If there can be no subrogation because of the fault of
share of the guarantor released.
the creditor, the guarantors are thereby released,
Reason: A release made by the creditor in favor of even if the guarantors are solidary.
QuickTime™ and a
one of the guarantors without the
TIFF (Uncompressed) consent of the
are needed to see this picture. Reason: The act of one cannot prejudice another. It
others may prejudice the others should a guarantor
also avoids collusion between the creditor and the
become insolvent.
debtor or a third person.
GR: All defenses, which pertain to the principal
Release Without Consent of Guarantor: Creditor debtor and are inherent in the debt.
grants an extension of time to the debtor without the
consent of the guarantor.

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Exception: Those, which are purely personal to the 1. Liability is contractual and accessory but
debtor. direct:
2. Liability is limited by terms of contract
3. Liability arises only if principal debtor is
a. In the absence of collusion, the
MEANING AND FORM OF BOND (2082) surety is bound by a judgment
BOND – an undertaking that is sufficiently secured, against the principal event though he
and not cash or currency. was not a party to the proceedings;
b. The creditor may sue, separately or
Bondsman – a surety offered in virtue of a provision together, the principal debtor and the
of law or a judicial order. surety;
Qualifications of personal bondsman: c. A demand or notice of default is not
required to fix the surety’s liability
1. He possesses integrity; Exception: Where required by the
2. He has capacity to bind himself; provisions of the contract of
3. He has sufficient property to answer for suretyship
the obligation which he guarantees.
d. A surety bond is void where there is
not principal debtor because such an
PLEDGE OR MORTGAGE IN LIEU OF BOND undertaking presupposes that the
(2083) obligation is to be enforceable
Guaranty or suretyship is a personal security. against someone else besides the
surety, and the latter can always
Pledge or mortgage is a property or real security. claim that it was never his intention
If the person required to give a legal or judicial bond to be the sole person obligated
should not be able to do so, a pledge or mortgage thereby.
sufficient to cover the obligation shall be admitted in NOTE: Surety is not entitled to exhaustion
lieu thereof. 4. Undertaking is to creditor, not to debtor:
BONDSMAN NOT ENTITLED TO EXCUSSION The surety makes no covenant or agreement
(2084) with the principal that it will fulfill the
obligation guaranteed for the benefit of the
A judicial bondsman and the sub-surety are not principal. The surety’s undertaking is that the
entitled to the benefit of excussion. principal shall fulfill his obligation and that the
Reason: They are not mere guarantors, but sureties surety shall be relieved of liability when the
whose liability is primary and solidary. obligation secured is performed.
Exception: Unless otherwise expressly
Effect of negligence of creditor: Mere negligence provided.
on the part of the creditor in collecting from the debtor
will not relieve the surety from liability. NOTE: Surety is not entitled to notice of
principal’s default
5. Prior demand by the creditor upon
SURETYSHIP – a relation which exists where one principal not required
person (principal) has undertaken an obligation and Surety is not exonerated by neglect of
another person (surety) is also under a direct and creditor to sue principal
primary obligation or other duty to the obligee, who is
QuickTime™ and a
entitled to but one performance,
TIFF (Uncompressed)and as between the
are needed to see this picture.
two who are bound, the second, rather than the first STRICTISSIMI JURIS RULE APPLICABLE ONLY
If a person binds himself solidarily with the principal Reason: An accommodation surety acts without
debtor, the contract is called suretyship and the motive of pecuniary gain and hence, should be
guarantor is called a surety. protected against unjust pecuniary impoverishment
by imposing on the principal, duties akin to those of a

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Civil Law Summer Reviewer

This rule will apply only after it has been definitely appears in the certificate of title and does not
ascertained that the contract is one of suretyship or have to inquire further.
guaranty. 5. pledgor or mortgagor has free disposal of
6. thing pledged or mortgaged may be
COMPENSATED SURETIES 7. creditor not required to sue to enforce his
Reasons: 8. pledgor or mortgagor may be third person
1. Compensated corporate sureties are
business association organized for the
purpose of assuming classified risks in large
numbers, for profit and on an impersonal PLEDGE MORTGAGE
basis. Constituted on movables Constituted on
2. They are secured from all possible loss by immovables
adequate counter-bonds or indemnity Property is delivered to Delivery not necessary
agreements. the pledgee, or by
3. Such corporations are in fact insurers and in common consent to a 3rd
determining their rights and liabilities, the person
rules peculiar to suretyship do not apply.
Not valid against 3rd Not valid against 3rd
persons unless a persons if not registered
description of the thing
PROVISIONS COMMON TO PLEDGE AND pledged and the date of
MORTGAGE (Art 2085-2123) the pledge appear in a
public instrument
1. constituted to secure the fulfillment of a COMPLY WITH HIS OBLIGATION
principal obligation 1. creditor is merely entitled to move for the
2. pledgor or mortgagor be the absolute owner sale of the thing pledged or mortgaged with
of the thing pledged or mortgaged the formalities required by law in order to
3. the persons constituting the pledge or collect
mortgage have the free disposal of their 2. creditor cannot appropriate to himself the
property, and in the absence thereof, that thing nor can he dispose of the same as
they be legally authorized for the purpose owner.
4. cannot exist without a valid obligation
5. debtor retains the ownership of the thing PROHIBITION AGAINST PACTUM
given as a security COMMISSORIUM
6. when the principal obligation becomes due, 1. stipulation is null and void - stipulation
the thing in which the pledge or mortgage where thing or mortgaged shall automatically
consists may be alienated for the payment to become the property of the creditor in the
the creditor. event of nonpayment of the debt within the
term fixed
IMPORTANT POINTS 2. Requisites of pactum commissorium:
1. future property cannot be pledged or a. there should be a pledge or
mortgaged TIFF (Uncompressed)
QuickTime™ and a
decompressor mortgage
2. pledge/mortgage executed
are needed to see thisby one who is not
b. there should be a stipulation for an
the owner of the property pledged or automatic appropriation by the
mortgaged is without legal existence and creditor of the property in the event
registration cannot validate it. of nonpayment
3. mortgage of a conjugal property by one of 3. Effect on Security Contract
the spouses is valid only as to ½ of the entire -nullity of the stipulation does not affect
property validity and efficacy of the principal contract
4. in case of property covered by Torrens title, a
mortgagee has the right to rely upon what

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IMPORTANT POINTS 3. unilateral- creates obligation solely on the

1. debtor -owner bears the risk of loss of the part of the creditor to return the thing subject
property upon the fulfillment of the principal obligation
2. pledge or mortgage is indivisible 4. subsidiary- obligation incurred does not
EXCEPTIONS to the rule of indivisibility: arise until the fulfillment of the principal
a. where each one of several things obligation
guarantees determinate portion of
b. where only portion of loan was 1. principal obligation – in so far as the
released pledgor is concerned
c. where there was failure of 2. compensation stipulated for the pledge or
consideration mere liberality of the pledgor- if pledgor is
3. rule that real property, consisting of several not the debtor
lots should be sold separately, applies to
sales in execution, and not to foreclosure of PROVISIONS APPLICABLE ONLY TO PLEDGE
mortgages 1. transfer of possession to the creditor or to
4. the mere embodiment of a real estate third person by common agreement is
mortgage and a chattel mortgage in one essential in pledge
document does not have the effect of fusing - ACTUAL DELIVERY is important
both securities into an indivisible whole - CONSTRUCTIVE delivery or
5. contract of pledge or mortgage may secure symbolic delivery of the key to the
all kinds of obligation, be they pure or subject warehouse is sufficient to show that
to a suspensive or resolutory condition the depositary appointed by common
6. a promise to constitute pledge or mortgage consent of the parties was legally
creates no real right, only a personal right placed in possession.
biding upon the parties, only right of action to 2. all movables within commerce of men may
compel the fulfillment of the promise but be pledged as long as susceptible of
there is no pledge or mortgage yet possession
7. under RPC, estafa is committed by a person 3. incorporeal right may be pledged. The
who, pretending to be the owner of any real instruments pledged shall be delivered to the
property, shall convey, sell, encumber or creditor and if negotiable, must be indorsed.
mortgage the same knowing that the real 4. pledge shall take effect against 3rd persons
property is encumbered shall dispose of the only if the ff appears in a public instrument:
same as unencumbered. It is essential that a. description of the thing pledged
fraud or deceit be practiced upon the vendee b. date of the pledge
at the time of the sale. 5. thing pledged may be alienated by the
pledgor or owner only if with the consent of
PLEDGE: A contract by virtue of which the debtor the pledgee. Ownership of the thing pledged
delivers to the creditor or to a third person a movable is transmitted to the vendee or transferee as
or document evidencing incorporeal rights for the soon as the pledgee consents to the
purpose of securing the fulfillment of a principal alienation, butt he latter shall continue in
obligation with the understanding that when the possession
obligation is fulfilled, the thing delivered shall be 6. contract of pledge gives right to the creditor
returned with all its fruits and accessions. to retain the thing in his possession or in that
of a third person to whim it has been
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delivered, until the debt is paid
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KINDS OF PLEDGE: are needed to see this picture. 7. creditor :
1. Voluntary or conventional- created by a. shall take care of the thing pledged
agreement of the parties with the diligence of a good father of
2. Legal- created by operation of law a family
b. has the right to the reimbursement of
CHARACTERISTICS OF PLEDGE: the expenses made for its
1. real- perfected by delivery preservation is liable for its loss or
2. accessory- has no independent existence of deterioration by reason of fraud,
its own negligence, delay or violation of the

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terms of the contract, and not due to EXTINGUISHMENT OF PLEDGE (RRPP3A)

fortuitous event • If the thing pledged is returned by the pledgee to
c. may bring the actions which pertain to the pledgor or owner, pledge is extinguished.
the owner of the thing in order to • A statement in writing by the pledgee that he
recover it from, or defend it against a renounces or abandons the pledge is sufficient to
3rd person extinguish. For this purpose, neither the
d. cannot use the thing without the acceptance by the pledgor o owner, nor the return
authority of the owner, and if he of the thing pledged is necessary, the pledgee
should do so, or misuse the thing, the becoming a depositary.
owner may ask that it be judicially or • If subsequent to the perfection of the pledge, the
extrajudicially deposited thing is in the possession of the pledgor or owner,
e. may use the thing if it is necessary for there is prima facie presumption that the thing has
the preservation of the thing been returned by the pledgee.
f. may either claim another thing in • If the thing is in the possession of 3rd person who
pledge or demand immediate has received it from the pledgor or owner after the
payment of the principal obligation if constitution of the pledge, there is prima facie
he is deceived on the substance or presumption that the thing has been returned by
quality of the thing the pledgee
8. pledgee: • Payment of the debt
a. cannot deposit the thing pledged with • Sale of the thing pledged at public auction
a third person, unless there is a
stipulation authorizing him to do so FORMALITIES REQUIRED IN SALE BY A
b. is responsible for the acts of his CREDITOR IF CREDIT NOT PAID IN DUE TIME:
agents or employees with respect to 1. the debt is due and unpaid
the thing pledged 2. the sale must be at a public auction
c. has no right to use the thing or to 3. there must be notice to the pledgor and
appropriate the fruits without the owner, stating the amount due, and
authority of the owner 4. the sale must be made with the intervention
d. may cause public sale of the thing of a notary public
pledged if, without fault on his part,
there is danger of destruction, EFFECT OF THE SALE OF THE THING PLEDGED
impairment or diminution in value of 1. extinguishes the principal obligation whether
the thing. The proceeds of the the price of the sale is more or less than the
auction shall be a security for the amount due
principal obligation. 2. if the price is more than amount due, the
9. pledgor : debtor is not entitled to the excess unless the
a. has the responsibility for flaws of the contrary is provided
thing pledged. 3. if the price of the sale is less, neither is the
b. cannot ask for the return of the thing creditor entitled to recover the deficiency.
against the will of the creditor, unless Contrary stipulation is void.
and until he has paid the debt and its
interest, with expenses in a proper LEGAL PLEDGES
case 1. Necessary expenses shall be refunded to
c. is allowed to substitute the thing every possessor, but only possessor in good
which is in danger of destruction or faith may retain the thing until he has been
impairment QuickTime™
withoutandany a
fault on the reimbursed
part TIFF
the pledgee,decompressor
needed to see this picture.
with another • Useful expenses shall be refunded only
thing of the same kind and quality to the possessor in good faith with the
d. may require that the thing be same right of retention, the person who
deposited with a 3rd person if through has defeated him in the possession
the negligence or willful act of the having the option of refunding the
pledgee the thing is in danger of amount of the expenses or of paying the
being lost or impaired increase in value which the thing may
have acquired and by reason thereof (art

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2. He who has executed work upon a movable ESSENTIAL REQUISITES OF MORTGAGE:

has a right to retain it by way of pledge until 1. constituted to secure the fulfillment of a
he is paid. (art 1731) principal obligation
3. The agent may retain the things which are 2. mortgagor be the absolute owner of the thing
the objects of agency until the principal pledged or mortgaged
effects the reimbursement and pays the 3. the persons constituting the pledge or
indemnity. (art 1914) mortgage have the free disposal of their
4. The laborer’s wages shall be a lien on the property, and in the absence thereof, that
goods manufactured or the work done. (art they be legally authorized for the purpose
1707) 4. cannot exist without a valid obligation
5. when the principal obligation becomes due,
Special Laws apply to pawnshops and the thing in which the pledge or mortgage
establishments which are engaged in making loans consists may be alienated for the payment to
secured by pledges. Provisions of the Civil Code the creditor.
shall apply subsidiarily. 6. appears in a public document duly recorded
in the Registry of Property to be validly
MORTGAGE constituted

REAL MORTGAGE (Arts. 2124-2131) LEGAL MORTGAGE: the persons in whose favor
It is a contract whereby the debtor secures to the the law establishes a mortgage have on other right
creditor the fulfillment of a principal obligation, than to demand the execution and the recording of
specially subjecting to such security immovable the document in which the mortgage is formalized.
property or real rights over immovable property in
case the principal obligation is not complied with at INCIDENTS OF REGISTRATION OF MORTGAGE
the time stipulated. 1. Mortgagee entitled to registration of
mortgage as a matter of right
OBJECTS OF REAL MORTGAGE: 2. Proceedings for registration do not determine
1. immovables validity of mortgage or its effect
2. alienable real rights in accordance with the 3. Registration is without prejudice to better
laws, imposed upon immovables right of third parties
* future property cannot be object of 4. Mortgage deed once duly registered forms
mortgage part of the records for the registration of the
property mortgaged
IMPORTANT POINTS 5. Mortgage by surviving spouse of his/her
1. As a general rule, the mortgagor retains undivided share of conjugal property can be
possession of the property he may deliver registered
said property to the mortgagee without
altering the nature of the contract of EFFECT OF INVALIDITY OF MORTGAGE ON
2. It is not an essential requisite that the 1. principal obligation remains valid
principal of the credit bears interest, or that 2. mortgage deed remains as evidence of a
the interest as compensation for the use of personal obligation
the principal and the enjoyment of its fruits be
in the form of a certain percent thereof. EFFECT OF MORTGAGE
1. creates real rights, a lien inseparable from
KINDS OF MORTGAGE: QuickTime™ and a the property mortgaged, enforceable against
1. voluntary TIFF (Uncompressed) decompressor
are needed to see this picture.
the whole world
2. legal 2. creates merely an encumbrance
3. equitable – one which, although it lacks the
proper formalities of a mortgage shows the LAWS GOVERNING MORTGAGE
intention of the parties to make the property 1. New Civil Code
as a security for a debt 2. PD 1952
(provisions governing equitable mortgage - 3. Revised Administrative Code
arts 1365, 1450, 1454, 1602, 1603, 1604 and 4. RA 4882, as regards aliens becoming
1607) mortgages

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JUDICIAL FORECLOSURE (governed by Rule 68 of

FORECLOSURE OF MORTGAGE: It is the remedy Rules of Court) (B-PACE-PC)
available to the mortgagee by which he subjects the 1. May be availed of by bringing an action in the
mortgaged property to the satisfaction of the proper court which has jurisdiction over the
obligation to secure which the mortgage was given. area wherein the real property involved or a
portion thereof is situated
KINDS OF FORECLOSURE 2. If the court finds the complaint to be well-
1. judicial founded, it shall order the mortgagor to pay
2. extrajudicial the amount due with interest and other
Both should be distinguished from execution sale charges within a period of not less than 90
governed by Rule 39 of the Rules of Court. days nor more than 120 days from the entry
of judgment
Judicial foreclosure Extrajudicial 3. If the mortgagor fails to pay at time directed,
foreclosure the court, upon motion, shall order the
There is court No court intervention property to be sold to the highest bidder at a
intervention public auction.
Decisions are appealable Not appealable, it is 4. Upon confirmation of the sale by the court,
immediately executory also upon motion, it shall operate to divest
the rights of all parties to the action and to
Order of the court cuts off Foreclosure does not cut vest their rights to the purchaser subject to
all rights of the parties off right of all parties such rights of redemption as may be allowed
impleaded involved by law
There is equity of There is right of 5. Before the confirmation, the court retains
redemption except on redemption control of the proceedings; execution on
banks which provides for judgment
a right of redemption 6. The proceeds of the sale shall be applied to
Period of redemption Period to redeem start the payment of the:
starts from the finality of from date of registration a. costs of the sale;
the judgment until order of certificate of sale b. amount due the mortgagee;
of confirmation c. claims of junior encumbrancers or
No need for a special Special power of attorney persons holding subsequent
power of attorney in the in favor of mortgagee is mortgages in the order of their priority;
contract of mortgage needed in the contract and
d. the balance, if any shall be paid to the
NOTES mortgagor
ƒ A foreclosure sale retroacts to the date of 7. Sheriff’s certificate is executed,
registration of the mortgage and that a acknowledged and recorded to complete the
person who takes a mortgage in good faith foreclosure
and for valuable consideration, the record
showing clear title to the mortgagor, will be NATURE OF JUDICIAL FORECLOSURE
protected against equitable claims on the title PROCEEDINGS
in favor of third persons of which he had no 1. quasi in rem action
actual or constructive notice (St. Dominic 2. foreclosure is only the result or incident of the
Corporation v. IAC, 151 SCRA 577 [1987]) failure to pay debt
ƒ Mere inadequacy of the price obtained at the 3. survives death of mortgagor
sheriff’s sale will notQuickTime™
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the sale unlessTIFF (Uncompressed) decompressor
are price
needed is picture.
to see this so inadequate as EXTRAJUDICIAL FORECLOSURE (governed by
to shock the conscience of the court” taking Act No, 3135, as amended)
into consideration the peculiar circumstances 1. express authority to sell is given to the
attendant thereto (Sulit v. CA, 268 SCRA mortgagee.
441) 2. authority is not extinguished by death of
ƒ The action to recover a deficiency after mortgagor or mortgagee
foreclosure prescribes after 10 years from 3. public sale should be made after proper
the time the right of action accrues (Arts notice
1142 & 1144) 4. surplus proceeds of foreclosure sale belong
to the mortgagor

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5. debtor has the right to redeem the property 2. If the deficiency is embodied in a judgment, it
sold within 1 year from and after the date of is referred to as deficiency judgment.
sale 3. Action for recovery of deficiency may be filed
6. remedy of party aggrieved by foreclosure is a even during redemption period.
petition to set aside sale and cancellation of 4. Action to recover prescribes after 10 years
writ of possession. from the time the right of action accrues


MORTGAGE UNDER ACT NO. 3135 AND 1. conferred for mortgagee’s protection
CHATTEL MORTGAGE UNDER ACT NO. 1508 2. an ancillary stipulation
(A.M. N0. 99-10-05-0; January 15, 2000) (ARC-DIN- 3. a prerogative of the mortgagee
REA) Note: Stipulation of upset price in mortgage contract
1. Filing of application before the Executive is void
Judge through the Clerk of Court
2. Clerk of Court will examine whether the EFFECT OF INADEQUACY OF PRICE IN
requirement of the law have been complied FORECLOSURE SALE
with, that is, whether the notice of sale has 1. Where there is right to redeem
been posted for not less than 20 days in at GR: Inadequacy of price is immaterial because
least 3 public places of the municipality or the judgment debtor may redeem the
city where the property is situated, and if the property
same is worth more than P400.00, that such Exception: the price is so inadequate as to
notice has been published once a week for at shock the conscience of the
least 3 consecutive weeks in a newspaper of court taking into consideration
general circulation in the city or municipality the peculiar circumstances
3. the certificate of sale must be approved by 2. Property may be sold for less than its fair
the Executive Judge market value upon the theory that the lesser
4. in extrajudicial foreclosure of real mortgages the price the easier for the owner to redeem
in different locations covering one 3. The value of the mortgaged property has no
indebtedness, only one filing fee bearing on the bid price at the public auction,
corresponding to such debt shall be collected provided that the public auction was regularly
5. the Clerk of Court shall issue certificate of and honestly conducted
payment indicating the amount of
indebtedness, the filing fees collected, the WAIVER OF SECURITY BY CREDITOR
mortgages sought to be foreclosed, the 1. Mortgagee may waive right to foreclose his
description of the real estates and their mortgage and maintain a personal action for
respective locations recovery of the indebtedness
6. the notice of sale shall be published in a 2. Mortgagee cannot have both remedies
newspaper of general circulation Note: Foreclosure retroacts to the date of registration
7. the application shall be raffled among all of mortgage
8. after the redemption period has expired, the STIPULATION OF UPSET PRICE OR “TIPO”
Clerk of Court shall archive the records A stipulation of minimum price at which the property
9. no auction sale shall be held unless there are shall be sold to become operative in the event of a
at least 2 participating bidders, otherwise the foreclosure sale at public auction is NULL and VOID
sale shall be postponed to another date. If on
QuickTime™ and a
the new date TIFF
there shall
(Uncompressed)not be at least 2
are needed to see this picture.
REDEMPTION - It is a transaction by which the
bidders, the sale shall then proceed. The mortgagor reacquires the property which may have
names of the bidders shall be reported to the passed under the mortgage or divests the property of
Sheriff of the Notary Public, who conducted the lien which the mortgage may have created.
the sale to the Clerk of Court before the
issuance of the certificate of sale. KINDS OF REDEMPTION
1. equity of redemption: right of the mortgagor
RIGHT OF MORTGAGEE TO RECOVER to redeem the mortgaged property after his
DEFICIENCY default in the performance of the conditions
1. Mortgagee is entitled to recover deficiency of the mortgage but before the sale of the

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mortgaged property or confirmation of sale; NOTE: Redemption price in this case is

applies to judicial foreclosure of real reduced by the income received from the
mortgage and chattel mortgage foreclosure property
NOTE: redemption of the banking institutions is
allowed within 1 year from confirmation of sale ANTICHRESIS (Articles 2132-2139) – A contract
2. right of redemption: right of the mortgagor whereby the creditor acquires the right to receive the
to redeem the property within a certain period fruits of an immovable of the debtor, with the
after it was sold for the satisfaction of the obligation to apply then to the payment of the
debt; applies only to extrajudicial foreclosure interest, if owing, and thereafter to the principal of the
of real mortgage credit (Art 2132)
NOTE: the right of redemption, as long as within
the period prescribed, may be exercised CHARACTERISTICS
irrespective of whether or not the mortgagee has 1. Accessory contract – it secures the
subsequently conveyed the property to some performance of a principal obligation
other party (Sta. Ignacia Rural Bank,Inc v. CA, 2. formal contract – it must be in a specified
230 SCRA 513 [1994]) form to be valid (Art. 2134)
PERIOD OF REDEMPTION 1. it can cover only the fruits of an immovable
1. extra-judicial (Act No. 3135) property
a. natural person – 1 year from 2. delivery of the immovable is necessary for
registration of the certificate of sale the creditor to receive the fruits and not that
with Registry of Deeds the contract shall be binding
b. juridical person – same rule as natural 3. amount of principal and interest must be
person specified in writing
c. juridical person (mortgagee is bank) – 4. express agreement that debtor will give
3 months after foreclosure or before possession of the property to creditor and
registration of certificate of that the latter will apply the fruits to the
foreclosure whichever is earlier (Sec. interest, if any, then to the principal of his
117 of General Banking Law) credit
2. Judicial – before confirmation of the sale by 5. NOTE: The obligation to pay interest is not of
the court the essence of the contract of antichresis;
NOTE: Allowing redemption after the lapse of the there being nothing in the Code to show that
statutory period when the buyer at the antichresis is only applicable to securing the
foreclosure sale does not object but even payment of interest-bearing loans. On the
consents to the redemption, will uphold the policy contrary, antichresis is susceptible of
of the law which is to aid rather than defeat the guaranteeing all kinds of obligations, pure or
right of redemption (Ramirez v. CA, 219 SCRA conditional
598 [1993])
Antichresis Pledge
Refers to real property Refers to personal
1. Mortgagee is not a bank (Act No. 3135 in
relation to Sec. 28, Rule 39 of Rules of
Court) Perfected by mere Perfected by delivery
a. Purchase price of the property consent of the thing pledged
b. 1% interest per month on the Consensual contract Real contract
purchase price QuickTime™ and a
c. taxes TIFF
paid and amount
(Uncompressed) of purchaser’s
are needed to see this picture.
prior lien, if any, with the same rate Antichresis Real Mortgage
of interest computed from the date of Property is delivered to Debtor usually retains
registration of sale, up to the time of creditor possession of the
redemption property
2. Mortgagee is a bank (GBL 2000) Creditor acquires only Creditor does not have
a. Amount due under the mortgage deed the right to receive the any right to receive the
b. Interest fruits of the property, fruits, but the mortgage
c. Cost and expenses hence, it does not creates a real right
produce a real right over the property

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The creditor, unless The creditor has no It is a contract by virtue of which a personal property
there is stipulation to such obligation is recorded in the Chattel Mortgage Register as
the contrary, is obliged security for the performance of an obligation.
to pay the taxes and NOTE: If the movable, instead of being recorded is
charges upon the delivered to the creditor, it is pledge and not
estate chattel mortgage.
It is expressly There is no such
stipulated that the obligation on part of CHATTEL MORTGAGE PLEDGE
creditor given mortgagee Involves movable Involves movable
possession of the property property
property shall apply all Delivery of the personal Delivery of the personal
the fruits thereof to the property is NOT property is necessary
payment of interest, if necessary
owing, and thereafter
Registration is necessary Registration is NOT
to the principal
for validity necessary for validity
Subject matter of both
Procedure: Sec 14 of Act Procedure: Art 2112 of
is real property
no 1508, as amended Civil Code
OBLIGATIONS OF ANTICHRETIC CREDITOR If the property is If the property is sold, the
(FAT-P) foreclosed, the excess debtor is not entitled to
1. to pay taxes and charges on the estate, over the amount due the to the excess
including necessary expenses goes to the debtor UNLESS it is otherwise
NOTE: Creditor may avoid said obligation agreed or in case of legal
by: pledge
a. compelling debtor to reacquire Creditor is entitled to Creditor is not entitled to
enjoyment of the property deficiency from the recover deficiency
b. by stipulation to the contrary debtor EXCEPT if it is a notwithstanding any
2. to apply all the fruits, after receiving security for the purchase stipulation to the contrary
them, to the payment of interest, if of personal property in
owing, and thereafter to the principal installments
3. to render an account of the fruits to the
4. to bear the expenses necessary for its 1. Chattel Mortgage Law, Act No. 1508, as
preservation and repair amended
2. Civil Code
REMEDIES OF CREDITOR IN CASE OF NON- 3. Revised Administrative Code
PAYMENT OF DEBT 4. Revised Penal Code
1. action for specific performance 5. Ship Mortgage Decree of 1978 (PD 1521)
2. petition for the sale of the real property as in governs mortgage of vessels of domestic
a foreclosure of mortgages under Rule 68 of ownership
the Rules of Court
NOTES: AFFIDAVIT OF GOOD FAITH - An oath in a contract
• the parties, however, may agree on an of chattel mortgage wherein the parties "severally
extrajudicial foreclosure in the same swear that the mortgage is made for the purpose of
manner as they are allowed in contracts securing the obligation specified in the conditions
of mortgage and pledge
QuickTime™ and a (Tavera v. El
TIFF (Uncompressed) decompressor
thereof and for no other purposes and that the same
Hogar Filipino, Inc. 68 Phil
are needed to see this 712)
picture. is a just and valid obligation and one not entered into
• a stipulation authorizing the antichretic for the purpose of fraud.
creditor to appropriate the property upon
the non-payment of the debt within the EFFECT OF REGISTRATION
agreed period is void (Art. 2088) 1. creates real rights
2. adds nothing to mortgage
CHATTEL MORTGAGE (Arts. 2140-2141) Note: Registration of assignment of mortgage is not

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RIGHT OF REDEMPTION be asked and any contrary agreement shall

1. when the condition of a chattel mortgage is be void
broken, the ff may redeem: 3. where mortgaged property subsequently
a. mortgagor; attached and sold: mortgagee is entitle to
b. person holding a subsequent deficiency judgment in an action for specific
mortgage; performance
c. subsequent attaching creditor.
2. an attaching creditor who so redeems shall APPLICATION OF PROCEEDS OF SALE
be subrogated to the rights of the mortgagee 1. costs and expenses of keeping and sale
and entitled to foreclose the mortgage in the 2. payment of the obligation
same manner that the mortgagee could 3. claims of persons holding subsequent
foreclose it mortgages in their order
3. the redemption is made by paying or 4. balance, if any, shall be paid to the
delivering o the mortgagee the amount due mortgagor, or person holding under him
on such mortgage and the costs and
expenses incurred by such breach of
condition before the sale CONCURRENCE AND PREFERENCE OF
1. public sale
2. private sale – there is nothing illegal, immoral
or against public order in an agreement for CONCURRENCE OF CREDIT: It implies possession
the private sale of the personal properties by two or more creditors of equal right or privileges
covered by chattel mortgage over the same property or all of the property of a
1. After 30 days from the time of the condition is PREFERENCE OF CREDIT: It is the right held by a
broken creditor to be preferred in the payment of his claim
2. The 30-day period is the minimum period above other out of the debtor’s assets.
after violation of the mortgage condition for
the creditor to cause the sale at public GENERAL PROVISIONS:
auction with at least 10 days notice to the 1. the debtor is liable with all his property,
mortgagor and posting of public notice of present and future, for the fulfillment of his
time, place, and purpose of such sale, and is obligations, subjects to exemptions provided
a period of grace for the mortgagor, to by law
discharge the obligation. - exempt property:
3. After the sale at public auction, the right of a. present property
redemption is no longer available to the 1. family home (Arts 152, 153 and 155,
mortgagor. NCC)
2. right to receive support as well as
CIVIL ACTION TO RECOVER CREDIT money or property obtained by such
1. independent action not required support shall not be levied upon on
2. mortgage lien deemed abandoned by attachment or execution (Art 205,
obtaining a personal judgment NCC)
3. Sec 13, Rule 39, Rules of Court
QuickTime™ and a 4. Sec 118, the public Land Act,( CA No.
DEFICIENCY TIFF (Uncompressed) decompressor
are needed to see this picture. 141, as amended)
1. where mortgage foreclosed: creditor may b. future property
maintain action for deficiency although • a debtor who obtains a discharge from
Chattel Mortgage Law is silent on this point. his debts on account of insolvency, is
Reason is chattel mortgage is only given as a not liable for the unsatisfied claims of
security and not as payment of the debt. his creditors with said property (Secs.
2. where mortgage constituted as security 68 and 69, Insolvency Law, Act No.
for purchase of personal property payable 1956)
in installments: no deficiency judgment can c. property in custodia legis and of public

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2. insolvency shall be governed by the to the free property which the debtor may have,
Insolvency Law (Act No. 1956, as amended) for the payment of other credits.
3. Exemption of conjugal property or absolute 6. those credits which do not enjoy any preference
community or property provided that: with respect to specific property, and those which
a. Partnership or community subsists enjoy preference, as to the amount not paid, shall
b. Obligations of the insolvent spouse be satisfied according to the following rules:
have not redounded to the benefit of • order established by Art 2244
the family • common credits referred to in Art 2245 shall
4. if there is co-ownership, and one of the co- be paid pro rata regardless of dates.
owners is the insolvent debtor, his undivided
share or interest in the property shall be
possessed by the assignee in insolvency INSOLVENCY LAW
proceedings because it is part of his assets INSOLVENCY – state of a person whose liabilities
5. property held by the insolvent debtor as a are more than his assets. It is the inability of a person
trustee of an express or implied trust, shall to pay his debys as they become due in the ordinary
be excluded from the insolvency proceedings course of business.
1. special preferred credits (Arts 2241 and 2242 man’s assets and liabilities that the former if all made
of NCC) immediately available, would not be sufficient to
a. considered as mortgages or pledges of real discharge the latter.
or personal property or liens within the
purview of legal provisions governing EQUITY TEST – a person may be insolvent although
insolvency he may be able to pay his debts at some future time
b. taxes due to the State shall first be on a settlement and winding up of his affairs.
2. ordinary preferred credits (Art 2244) -
preferred in the order given by law INSOLVENCY vs. BANKRUPTCY
3. common credits (Art 2245) - credits of any The only distinction between insolvency and
other kind or class, or by any other right or title bankruptcy is a matter of terminology and the source
not comprised in Arts 2241-2244 shall enjoy of the laws relating thereto.
no preference
Either a bankruptcy or insolvency statute may
ORDER OF PREFERENCE OF CREDIT operate to discharge a debt as well as release the
1. credits which enjoy preference with respect to debtor from imprisonment, and either may operate on
specific movables, exclude all others to the the petition of the debtor or that of his creditors.
extent of the value of the personal property to
which the preference refers. INSOLVENCY PRIMARILY GOVERNED BY THE CC
2. if there are 2 or more credits with respect to the Insolvency shall be governed by special laws insofar
same specific movable property, they shall be as they are not inconsistent with the CC. Insolvency
satisfied pro rata, after the payment of duties, is thus primarily governed by the CC and subsidiarily
taxes and fees due the State or any subdivision by the Insolvency Law.
3. those credits which enjoy preference in relation to The Insolvency Law is intended to cover the entire
specific real property or real rights, exclude all subject of insolvency and bankruptcy and must be
others to the extent of the value of the immovable
QuickTime™ and a
treated as a complete body of law upon the subject.
or real right to which the preference
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are needed to see this picture.
4. if there are 2 or more credits with respect to the PURPOSES OF INSOLVENCY LAW:
same specific real property or real rights, they 1. To effect an equitable distribution of the
shall be satisfied pro rata, after the payment of bankrupt’s property among his creditors; and
the taxes and assessment of the taxes and 2. To benefit the debtor in discharging him from
assessments upon the immovable property or his liabilities and enabling him to start afresh
real right. with the property set apart to him as exempt.
5. the excess, if any, after the payment of the 3. The regulatory and unifying influence of the
credits which enjoy preference with respect to law on credit transactions and business
specific property, real or personal, shall be added usage throughout the country.

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1. Petition the court to suspend payments; Purpose Suspend or Discharge the
2. To be discharged from his debts and delay the debtor from the
liabilities by voluntary or involuntary payment of payment of
insolvency proceedings. debts debts
Sufficiency of Debtor has Debtor does not
property sufficient have sufficient
SUSPENSION OF PAYMENTS – postponement, by property to pay property to pay
court order, of the payment of debts of one who, his debts all his debts
while possessing sufficient property to cover his
Effect on Amount of The creditors
debts, foresees the impossibility of meeting them
amount of indebtedness is receive less
when they respectively fall due.
indebtedness not affected than their
credits, and in
PURPOSE: case where
To suspend or delay the payment of debts the there are
amount of which is not affected although a preferences,
postponement is declared. some creditors
may not receive
BASIS: any amount at
Probability of the debtor’s inability to meet his all
obligations when they respectively fall due, despite Number of Number of In case of
the fact that he has sufficient assets to cover all his creditors creditors is involuntary
liabilities. required immaterial insolvency,
three or more
creditors are
1. Petition is filed by a debtor;
2. Possessing sufficient property to cover all his
1. All the assets of the debtor not exempt from
execution are taken possession of by the
3. Foreseeing the impossibility of meeting them
sheriff until the appointment of a receiver or
when they respectively fall due; and
4. Petitioning that he be declared in the state of
2. The payment to the debtor of any debts due to
suspension of payments
him and the delivery to the debtor or to any
person for him of any property belonging to
him and the transfer of any property by him
are forbidden.
Majority shall be:
3. All civil proceedings pending against the
1. Two thirds (2/3) of the creditors voting upon insolvent debtor shall be stayed.
the same proposition, which 4. Mortgages or pledges, attachments or
QuickTime™ and a
2. Represents at TIFFleast threedecompressor
(Uncompressed) fifths (3/5) of the executions on property of the debtor duly
are needed to see this picture.
total liabilities of the debtor. recorded and not dissolved are not affected
by the order.
VOLUNTARY INSOLVENCY – an insolvent debtor INVOLUNTARY INSOLVENCY – an adjudication of
owing debts exceeding the amount of P1,000.00 may insolvency may be made on the petition of three or
apply to be discharged from his debts and liabilities more creditors, residents of the Philippines, whose
by petition to the RTC of the province or city in which credits or demands accrued in the Philippines, and
he has resided for six months next preceding the the amount of which credits or demands are in the
filing of the petition. aggregate of not less than P1,000.00

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2. Those whose claims are barred by the

INSOLVENCY AND INVOLUNTARY INSOLVENCY 3. Secured creditors unless they surrender their
security or lien to the sheriff or receiver or
VOLUNTARY INVOLUNTARY unless they shall first have the value of such
Number of One creditor is Three or more 4. Holders of claims for unliquidated damages
creditors sufficient creditors are arising out of pure tort.
Who may Filed by the Filed by three or EFFECTS OF ASSIGNMENT
petition the insolvent debtor more creditors 1. Assignee takes the property in the plight and
proceedings who possess the conditions that the insolvent held it.
qualifications 2. Upon appointment, the legal title to all the
required by law property of the insolvent is vested in the
assignee, and the control of the property is
Acts of Debtor must not be Debtor must have vested in the court.
insolvency guilty of any of the committed one or 3. All actions to recover all the estate, debts,
acts of insolvency more of such acts and effects of the insolvent shall be brought
(Sec. 20) of insolvency by the assignee and not by the creditors.
Amount of The amount of Amount must not 4. The assignment shall:
debt indebtedness must be less than a. Dissolve any attachment levied
exceed P1,000.00 P1,000.00 within one month next preceding the
(aggregate) commencement of insolvency
Posting of Bond is not Petition must be proceedings;
bond required accompanied by a b. Vacate and set aside judgment
bond entered in any action commenced
Ex parte An order of An order of within 30 days immediately prior to
adjudication adjudication may adjudication the commencement of insolvency
be granted ex parte granted only after proceedings;
a hearing c. Vacate and set aside execution
Residency Petition is filed in Length of issued thereon;
duration to the RTC of the residence is d. Vacate and set aside any judgment
vest province or city immaterial entered by default or consent of the
jurisdiction where the debtor debtor within 30 days prior to the
in courts has resided for six commencement of insolvency
months proceedings
Requirement Court issues the The debtor is not
of hearing order of adjudicated
adjudication insolvent until
declaring the after hearing of
*SERVICEWIDE v. CA (320 SCRA 478 [1999])
petitioner insolvent the case
upon the filing of ASSIGNMENT OF CREDIT/CONSENT: As provided
the voluntary in Article 2096 in relation to Article 2141 of the Civil
petition Code, a thing pledged may be alienated by the
pledgor or owner with the consent of the pledgee.
ASSIGNEE – person TIFF elected
QuickTime™ and a
the creditors or
decompressor This provision is in accordance with Act No. 1508
are needed to see this picture.
appointed by he court to whom an insolvent debtor
which provides that a mortgagor of personal property
makes an assignment of all his property for the shall not sell or pledge such property, or any part
benefit of his creditors. thereof, mortgaged by him without the consent of the
mortgagee in writing on the back of the mortgage and
CREDITORS NOT ENTITLED TO VOTE IN THE on the margin of the record thereof in the office
ELECTION OF ASSIGNEE where such mortgage is recorded.
1. Those who did not file their claims at least
A mortgage credit may be alienated or
two days prior to the time appointed for such assigned to a third person. Since the assignee of the
election credit steps into the shoes of the creditor-mortgagee

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to whom the chattel is mortgaged, it follows that the of every sheriff all the property and money
assignee’s consent is necessary in order to bind him in his possession belonging to the debtor.
of the alienation of the mortgaged thing by the 4. To sell, upon order of the court, any estate of
debtor-mortgagor This is tantamount to a novation. the debtor which has come into his
BOND OF THE ASSIGNEE 5. To redeem all mortgages and pledges and
After his election, the assignee is required to give a to satisfy any judgment which may be an
bond for the faithful performance of his duties. encumbrance on any property sold by him.
6. To settle all accounts between the debtor
and his debtors subject to the approval of
1. To establish his official character
the court;
2. To establish his right to sue in that capacity
7. To compound, under the order of the court,
The bond is solely for the benefit of the creditors of
with any person indebted to such debtor;
the insolvent, and that third persons have no remedy
8. To recover any property fraudulently
against the sureties if the assignee, purporting to be
conveyed by the debtor.
as such, wrongfully takes property from such third
persons and converts it to his own use.
A creditor’s transfer or assignment of his credit to
another without the knowledge and at the back of
1. All real and personal property, estate, and
other creditors of the insolvent may be a shrews
effects of the debtor, including all deeds,
surprise move that enables the transferor creditor to
books, and papers in relation thereto;
collect almost if not the entire amount of the said
2. Properties fraudulently conveyed;
3. Right of action for damages to real property
4. The undivided share or interest of the
REMEDY OF THE ASSIGNEE: Section 37 of the
insolvent debtor in property held under co-
Insolvency Law: The creditor coming within this
purview is liable to an action by the assignee for
double the value of the property so embezzled or
disposed of, to be received for the benefit of the
insolvent’s estate.
1. Property exempt from execution;
Section 37 constitutes a sort of penal clause
2. Property held in trust;
which shall be strictly construed.
3. Property of the conjugal partnership or
absolute community except insofar as the
When Sec. 37 does not apply: Not applicable where
debtor’s obligations redounded to the benefit
what has been disposed of is the creditor’s own credit
of the family.
and not the insolvent’s property.
4. Property to which a mortgage or pledge
exists unless the creditor surrenders his
security or lien.
5. After-acquired property except fruits and
DIVIDENDS IN INSOLVENCY – parcel if the fund
income of property owned by the debtor
arising from the assets of the estate, rightfully allotted
6. Non-leviable assets like life insurance policy
to a creditor entitled to share in the fund, whether in
which do not have any cash surrender value
the same proportion with other creditors or in a
7. Right of action for tort which is purely
different proportion. It is paid by the assignee only
personal in nature.
QuickTime™ and a
upon order of the court.
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are needed to see this picture.
1. To sue and recover all the estate, debts,
and claims belonging to or due to the debtor; PREFERENCE – an exception to the general rule. By
2. To take into his possession all the estate it, one person is given a superior right or claim over
of the debtor except property exempt from another. Hence, the law on preferences is strictly
execution; construed. (The general rule is that the purpose of
3. In case of non-resident or absconding or insolvency proceeding is the equitable distribution of
concealed debtor, to demand and receive the insolvent’s assets among the debtor’s creditors.)

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6. Amounts due the insolvent for sales or

merchandise on commission;
7. Merchandise bought by the insolvent on
1. The priorities fixed by law govern credit where no delivery is made or where
2. The claims which are given priority must be the right of ownership or possession has
paid in full in the order of their priority, been retained by the seller;
before the general creditors receive 8. Goods or chattels wrongfully taken by the
anything. insolvent or the amount of the value thereof.
3. Creditors claiming preference must
sufficiently establish their credits and their
right to preference to entitle them to such
preference. 1. To maintain his right under his security or lien
and ignore the insolvency proceedings – it is
the duty of the assignee to surrender to him
the property encumbered;
1. Equitable claims under Sec. 48; 2. To waive his right under the security or lien –
2. Preferred claims with respect to specific thereby, share in the distribution of the
movable property and specific immovable assets of the debtor;
property under Art. 2241 and 2242 of the CC. 3. To have the value of the encumbered
3. Preferred claims as to unencumbered property appraised and then share in the
property of the debtor which shall be paid in distribution of the assets of the debtor with
the order named in Art. 2244 of the CC. respect to the balance of his credit.
4. Common or ordinary credits which shall be
paid pro rata regardless of dates under Art.
WAIVER – release or surrender of the claim to the
2245 of the CC.
receiver, sheriff, or assignee.
With reference to specific movable and immovable
property of the debtor, the taxes due the State shall
first be satisfied. 1. Mere recommendation that the assignee be
The preferred claims enumerated in Art. 2241 and
2. Voting of a secured claim.
2242 are considered as mortgages and pledges of
real or personal property or liens within the purview of
the Insolvency Law. COMPOSITION - An agreement, made upon a
sufficient consideration, between an insolvent or
embarrassed debtor and his creditors, whereby the
EQUITABLE CLAIMS UNDER THE INSOLVENCY latter for the sake of immediate or sooner payment,
LAW (PD-MN-RCW) agree to accept a dividend less than the whole
amount of their claims, to be distributed pro rata, in
Section 48 of the Insolvency Law: Any property discharge and satisfaction of the whole debt.
found among the property of the insolvent, the
ownership of which has not been conveyed to him by
legal and irrevocable title, shall not be considered to
be property of the insolvent and shall be placed at the COMPOSITION ACCORD
disposal of its lawful owners, on order of the court on
petition of the assignee or any creditor whose right to Designates an An agreement between
the estate of the insolvent QuickTime™ and a
has been
TIFF (Uncompressed) established.
arrangement between a a debtor and a single
are needed to see this picture. debtor and the whole body creditor for a discharge
1. Paraphernal property belonging to the wife of of his creditors (or at least of the obligation by a
the insolvent; a considerable portion of part payment or on
2. Property held by the insolvent on deposit, them) for the liquidation of different terms.
administration, lease, or usufruct; their claims by the dividend
3. Merchandise held by the debtor on offered.
4. Negotiable instruments for collection or
5. Money held by the debtor for remittance; COMPOSITION (FADA)

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1. The offer of the terms of composition must be 3. Knowledge thereof has come to the petitioner
made after the filing in court of the schedule after the confirmation of such composition.
of property and submission of his list of
DISCHARGE - The formal and judicial release of an
2. The offer must be accepted in writing by a
insolvent debtor from his debts with the exception of
majority of the creditors representing a
those expressly reserved by law.
majority of the claims which have been
3. It must be made after depositing in such
place designated by the court, the WHEN AN INSOLVENT DEBTOR MAY APPLY
consideration to be paid and the costs of the FOR A DISCHARGE
proceedings; and GR: A debtor may apply to the RTC for a discharge
4. The terms of the composition must be at three months to one year after the adjudication of
approved or confirmed by the court. insolvency.
Exception: The property of the insolvent has not
WHEN COURT MAY CONFIRM A COMPOSITION been converted into money without his fault, thereby
1. If it is in the best interest of the creditors; delaying the distribution of dividends among the
2. The debtor has not been guilty of any of the creditors in which case the court may extend the
acts, or of a failure to perform any of the
duties which would create a bar to his
discharge; and
3. The offer and its acceptance are in good faith DEBTS RELEASED BY A DISCHARGE
and have not been made or procured in a 1. All claims, debts, and liabilities, and demands
manner forbidden by the Act. set forth in the schedule; and
2. All claims, debts, liabilities and demands
EFFECTS OF CONFIRMATION OF COMPOSITION which were or might have been proved
against the estate in insolvency
1. The consideration shall be distributed as the
judge shall direct;
2. The insolvency proceedings shall be DEBTS NOT RELEASED BY DISCHARGE (TED-
dismissed; LICS-REST-SEC)
3. The title to the insolvent’s property shall 1. Taxes or assessments due the Government;
revest in him; and 2. Any debt created by the fraud or
4. The insolvent shall be released from his embezzlement of the debtor;
debts. 3. Any debt created by the defalcation of the
5. The substitution, in a certain sense, debtor as a public officer or while acting in a
composition for the insolvency proceedings. fiduciary capacity;
6. A lawful composition and its performance by 4. Debt of any person liable for the same debt,
the insolvent has the same effect of a written for or with the insolvent debtor, either as a
discharge, although no written discharge is partner, joint contractor, indorser, surety or
granted. otherwise;
7. For all legal and practical purposes, the 5. Debts of a corporation (Reason: Corporation
insolvency ended on the date of the is not granted a discharge)
confirmation of composition and the firm was 6. Claim for support (Reason: It will make the
restored to its status quo.andIta reacquired its
QuickTime™ law a means of avoiding the enforcement of
TIFF (Uncompressed) decompressor
personality. Its areproperties ceased to be in
needed to see this picture. the obligation)
custodia legis. 7. Discharged debt but revived by a subsequent
new promise to pay (Reason: Discharge
WHEN CONFIRMATION MAY BE SET ASIDE does not end the moral obligation to pay)
8. Debts which have not been duly scheduled in
1. Any time within six months after the time for proof and allowance.
composition has been confirmed; Exception: The creditors had notice or
2. Fraud was practiced in procuring such actual knowledge of the insolvency
composition; proceedings

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9. Claims for: property, or the possession of property, absolutely or

a. Unliquidated damages arising out of conditionally, as a payment, pledge, mortgage, gift, or
pure tort security.
b. Secured creditors;
c. Not in existence or not mature at the
time of the discharge;
d. Contingent at the time of the 1. There must be a parting of the insolvent’s
discharged. property;
2. For the benefit of the creditor;
3. Consequent diminution of the insolvent’s
Discharge takes effect from the commencement of 4. With the result that such creditor receives a
the proceedings in insolvency. greater proportion of his claim than other
creditors of the same class.
1. Releases the debtor from all claims, debts,
liabilities and demand set forth in the
schedule or which were or might have been GR: A debtor is not prohibited from paying one
proved against his estate in insolvency. creditor in preference to another
2. Operates as a discharge of the insolvent and
Exception: In cases mentioned in the Insolvency
future acquisitions but permits mortgages
and other lien
3. It is a special defense which may be pleaded Deposit of money to one’s credit on a bank does
and be a complete bar to all suits brought on not create any preference.
any such debts, claims, liabilities or
demands. Reason: The estate of the depositor is not
4. It does not operate to release any person diminished for there is an obligation on the part of the
bank to pay the amount of the deposit as soon as the
liable for the same debts, for or with the
debtor, either as partner, joint contractor, depositor may see fit to draw a check against it.
indorser, surety, or otherwise.
5. The certificate of discharge is prima facie
evidence of the fact of release, and the WHEN FRAUDULENT PREFERENCE EXISTS
regularity of such discharge. Fraudulent preference – when the debtor procures
any part of his property to be attached, sequestered,
Remedy of guarantor or surety when debtor or seized on execution or makes any payment,
declared judicially insolvent: File a contingent pledge, mortgage, assignment, transfer, sale or
claim in the insolvency proceeding, if his rights as conveyance of any part of his property, whether
such guarantor or surety are not to be barred by the directly or indirectly, absolutely or conditionally, to
subsequent discharge of the insolvent debtor from all any one under the following circumstances:
his liabilities. 1. The debtor is insolvent or in contemplation of
2. The transaction in question is made within 30
WHEN DISCHARGE MAY BE REVOKED days before the filing of a petition by or
Discharge may be revoked by the court which against the debtor;
granted it upon petition of any creditor: 3. It is made with a view to giving preference to
any creditor or person having a claim against
1. Whose debt was proved QuickTime™orandprovable
a against him; and
TIFF (Uncompressed) decompressor
the estate in insolvency,
are needed to seeon the ground that
this picture. 4. The person receiving a benefit thereby has
the discharge was fraudulently obtained; reasonable cause to believe:
and provided, a. That the debtor is insolvent;
2. The petition is filed within one year after the b. That the transfer is made with a view
date of the discharge. to prevent his property from coming
to his assignee in insolvency, or to
prevent the same from being
distributed ratably among his
TRANSFER – includes the sale and every other and creditors, or to defeat the object of or
different modes of disposing of or parting with any way hinder the operation or

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evade the provisions of the 1. Death after the order of adjudication – the
Insolvency Law. proceedings shall be continued and
*Date of registration of sale of real property should concluded in like manner and with like
determine whether the sale was prohibited by the validity and effects as if he had lived.
Insolvency Law or not. 2. Death before the order of adjudication –
the proceedings shall be discontinued.
Remedy: File claims in the proper testate or
1. If such payment, pledge, mortgage, intestate proceedings
conveyance, sale, assignment or transfer is
not made in the usual and ordinary course of
business of the debtor; or WHEN RECEIVER MAY BE APPOINTED
2. If such seizure is made under a judgment
Anytime before the election of an assignee, when it
which the debtor has confessed or offered to
appears by the verified petition of a creditor:
allow, that fact shall be prima facie evidence
of fraud. 1. That the assets of the insolvent or a
considerable portion thereof have been
pledged, mortgaged, transferred, assigned,
conveyed, or seized on legal process in
An exchange of securities within the thirty-day period violation of Sec. 70;
is not a fraudulent preference under the law, even 2. That it is necessary to commence an action
when both parties know that the debtor is insolvent, to recover the same;
1. The security given up is a valid one at the The receiver shall deliver all the property, assets, or
time the exchange; effects remaining in his hands to the assignee who
2. Of equal value with the one received in shall be substituted for him in all pending actions or
exchange. proceedings.
Reason: Exchange takes nothing away from the
other creditor
Equal value: Not necessary that their value should
be mathematically equal, but it is sufficient if they are At anytime before the appointment of an assignee:
substantially equal.
1. Voluntary petition – upon the application of
the debtor, if no creditor files written
2. Involuntary petition –
1. Any payment, pledge, mortgage, a. Upon the application of the
conveyance, sale, assignment, or transfer of petitioning creditors; or
property of whatever character; b. By written consent of all creditors
2. Made by the insolvent; filed in court, in which case, the
3. Within one month before the filing of the proceedings may be dismissed at
petition in insolvency against him any time.
Exception: Transfer for a valuable pecuniary After the appointment of an assignee, dismissal is not
consideration in good faith allowed without the consent of all parties interested in
or affected thereby.
Effect of fraudulent transfer: Such transfer is VOID
TIFF (Uncompressed) decompressorPROPERTY
are needed to see this picture. SUPREME COURT
From an order granting or refusing:
The creditors of the insolvent are not authorized to
institute an independent action. In all actions or 1. An adjudication in insolvency and in the latter
proceedings to set aside or nullify fraudulent case, from the order fixing the amount of
preferences or transactions as VOID, the assignee costs, expenses, damages, and attorney’s
appears for, and represents the general creditors. fees allowed the debtor;
2. A creditor’s claim when the amount in dispute
exceeds P300.00

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3. A claim for property not belonging to the it was held that the said stipulation is null and void for
insolvent, presented under Sec. 48 (equitable being contrary to public policy. Prompt notice by the
claims) cardholder to the credit card company of the loss or
4. Settling an account of an assignee; theft of his card should be enough to relieve the
5. Setting apart homestead or other property former of any liability occasioned by the unauthorized
claimed as exempt from execution. use of his stolen card.
6. A discharge to the debtor. Under the said stipulation, Acol could have
theoretically done everything in his power to give
2006 JURISPRUDENCE ON SECURITY TRANSACTIONS respondent the required written notice, but if the bank
took its time to include the card in its Cancellation
Acol v. Philippine Commercial Credit Card Bulletin, it could still hold Acol liable for whatever
Incorporated, GR No. 135149 (25 July 2006): unauthorized transaction incurred during such
[1] Contracts of Adhesion, [2] Obligations and intervening period. This is iniquitous and against
Contracts on Provisions Against Public Policy. public policy under Art. 1306 of the Civil Code. The
court then, strikes down the said provision.
Acol procured from respondent a bankard
credit card and an extension, which he used for
several years. One day, he discovered that it was
missing, and so, on the following day, he called up Citibank v. Spouses Cabamongan and Sons, GR
the card company and made a report; the No. 146918 (02 May 2006):
representative spoke to him and told him that his card [1] Simple Loan, [2] Interest Rates, and [3]
would be included in the circular of lost cards. Oblicon Concept of Diligence; Diligence Required
He called again the day thereafter inquiring on Banks
as to what else he must do in connection with the
loss. The representative told him that he should put FACTS:
the report in writing and submit it, together with his The spouses Cabamongan [hereinafter
wife’s and daughter’s extension cards. He then Spouses] opened a foreign currency time deposit
promptly sent the said letter which the company with Citibank, in the amount of $55,216.69 for a term
received 2 days thereafter. Unfortunately, someone of 182 days. Prior to the maturity of the said deposit,
had already used his credit card (with purchases a person claiming to be Carmelita Cabamongan [the
amounting to P76,067.28 ) on the date that he called wife] pre-terminated the said deposit. Said person
in the loss and the day thereafter. Acol said that he presented a Bank of America Versatele Card, and
would not pay for accounts incurred after the date he ATM Card, and a Mabuhay Credit Card. She filled up
reported the loss, and after investigation and review, the required documents for pre-termination [from
the bank, through its EVP and GM, that it was not which a discrepancy in signatures was apparent],
Acol who used his card during the dates in question. with the assistance of the bank’s Acct. Officer, who
Nonetheless, the bank still decided to collect the said also interviewed her casually during the said
amounts within 15 days from notice, citing the Terms transaction. She failed to bring the original certificate
and Conditions Governing the Issuance of a Bankard, of deposit, so the bank had her execute a release
provision no. 1 [which basically says that the holder and waiver document in favor of Citibank; the said
of the card will still be liable in case of loss, until a document was not notarized on the same day, but
written notice of the loss is given to the bank and nevertheless, the money was given to the person
such loss be included in the Cancellation Bulletin]. withdrawing, with the transaction lasting onlu for 40
The bank then filed for collection with the RTC. The minutes.
RTC ruled in favor of Acol; the and
QuickTime™ CAa reversed the The person withdrawing left an ID with the
TIFF (Uncompressed) decompressor
same. are needed to see this picture. bank, prompting the said bank to call Carmelita at her
listed address. The wife of the Spouses’ son received
ISSUE: the call and was surprised to hear that Carmelita pre-
Whether provision no. 1 in the Terms and terminated the deposit because the Spouses were
Conditions is binding on Acol, considering that the then in the US. She immediately called them and
contract was one of adhesion. informed them of what happened. Previously,
someone broke into the Spouses’ home in the US,
HELD: where they reported that only a jewelry box went
Not binding. In Ermitaňo v. CA, where a missing; after the phone call, they discovered that
provision identical to the one at hand was contested,

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Civil Law Summer Reviewer

their passports and bank deposit certificates were 12%, regardless if it falls within [1] or [2] from such
also gone. finality until satisfaction, with this interim period being
Carmelita called Citibank to report the considered a forbearance of money.
incident, but the bank relented to refund the said
amount taken for the reason that the said deposit In a loan of forbearance of money, the
was pre-terminated and released to one “Carmelita” interest due should be that stipulated in writing, and
after proper identification. A case was filed by the in the absence thereof, a rate of 12% / annum
Spouses in the RTC, which ruled in their favor. The counted from the time of demand.
CA affirmed the finding of the CA that the Bank was Thus, the rate of 2.564% shall apply for the
negligent, hence this appeal. contract period of the deposit [182 days], and the rate
of 12% shall apply from the demand. In the
ISSUES: intervening period [after 182 but before demand], the
1. Whether the decision of the RTC and the CA, interest chargeable shall be interest rate granted by
finding respondent bank negligent, is correct. Citibank, since the time deposit provided for roll over
2. What is the correct interest rate to be charged? upon the maturity of the principal and interest.

HELD: Damages
Moral damages are also owed under Art.
Negligence 2220 of the Civil Code, because of the gross
The Court agrees with the observation of the negligence of the bank’s officer amounting to bad
CA that Citibank, through the Acct. Officer was faith.
negligent; even with discrepancies in the pictures and
signatures, and the failure to surrender the original of
the certificate of time deposit, the pre-termination was
allowed. Even the waiver document was not
notarized; a procedure meant to protect the bank.
Since banking institutions are impressed with
public interest, the highest degree of diligence is
expected; by nature of its functions, banks are under
the obligation to treat the accounts of its depositors
with meticulous care, always having in mind the
fiduciary nature of their relationship. Citibank is liable
for damages.

Interests Chargeable
The time Article 1980 provides that a contract
between a bank and a depositor shall be governed by
the provisions on simple loans. Thus, the said time
deposit constitutes a simple loan for which, the
interest rate on the actual damages of $55,216.69
should be in accordance with the guidelines set in
Eastern Shipping Lines v. CA:
[1] Obligation breached is a loan or
forbearance of money : (a) stipulated interest, or (b)
12% from time of demand, if no interest is stated.
[2] If the obligation is not a loan or a
QuickTime™ and a
forbearance of money, TIFF an interest
(Uncompressed) on the amount of
are needed to see this picture.
damages may be imposed at the discretion of the
court at the rate of 6%. No rate on uniquidated claims
until demand can be established with reasonable
certainty. If demand is certain, it shall run from that
time, if not, from the time of judgment; interest shall
be based on the amount finally adjudged in any case.

[3] Upon finality of the judgment of the court

awarding a sum of money, the legal rate shall be

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