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Secured Transaction Law

PART 1
A.

LOAN

1. GENERAL PROVISIONS
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Articles 1933, 1934 of the Civil Code

Article 1933
By the contract of loan, one of the parties delivers to another,
either something not consummable so that the latter may use the same
for a certain time and return it, in which case the contract is called a
commodatum; or money or other consumable thing, upon the condition
that the same amount of the same kind and quality shall be paid, in
which case the contract is simply called a loan or mutuum.
Commodatom is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay
interest.
In commodatum the bailor retains the ownership of the thing
loaned, while in simple loan, ownership passes to the borrower.
COMMENT:
1.

Two kinds of loan


a. mutuum or simple loan, and
b. commodatum.

2.

Distinction between mutuum and commodatum


Mutuum
a) E q u i v a l e n t a m o u n t t o b e
returned ( fungible things)
b) May be gratuitous or onerous
( with interest)
c) Ownership goes to borrower or
bailee
d) Refers to personal property only

Commodatum
a) Same thing to be returned
( non- fungible things)
b) Essentially gratuitous
c) Ownership retained by lender
or bailor
d) May involve real or personal
property

Secured Transaction Law

a) R e f e r r e d t o a s l o a n f o r
consumption

a) Referred to as loan for use or


temporary possession

b) Borrower bears risks of loss

b) Resperit domino. Lender bears


the risk of loss

c) To be paid only at the end of


period
d) Not personal in character

c) To return object at end of


period or return upon demand
in proper cases even before
the end of the period
d) Personal in character

Article 1934
An accepted promise to deliver something by way of
commodatum or simple loan is binding upon the parties, but the
commodatum or simple loan itself shall not be perfected until the
delivery of the object of the contract.
COMMENT:
1.

Nature of the contract of loan


Commodatum and loan are real contract. They are perfected by the delivery of
the object loaned. On the other hand, consensual contracts are perfected by mere
consent.

2.

Need for delivery


To affect either a commodatum or a mutuum, a delivery either real or
constructive, is essential. This is so because unless there is delivery, the borrower in
commodatum cannot exercise due diligence over the thing loaned.
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In relation to: Art. 1740a of the Civil Code


If the common carrier negligently incurs in delay in transporting the goods, a
natural disaster shall not free such carrier from responsibility.

2.

COMMODATUM
a)a. Nature and Effects: Art. 1935 - 1940 Civil code

Article 1935
The bailee in commodatum acquires the use of the thing loaned
but not its fruits; if any compensation is to be paid by him who acquires
the use, the contract ceases to be a commodatum.
COMMENT:
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Secured Transaction Law

1.

Commodatum Defined
Commodatum is a real, principal, essentially gratuitous and personal contract
where the bailor or lender delivers to the bailee or borrower a non-consumable object, so
that the latter may use the same for a certain period and later return it.

2.

Characteristics of Commodatum as a Contract


a.
b.
c.
d.

real (because perfected by delivery)


principal ( because it can stand alone by itself)
gratuitous (otherwise, the contract is one of lease)
personal in nature (because of the trust) (See Art. 1939)

Article 1936
Consumable goods may be the subject of commodatum if the
purpose of the contract is not the consumption of the object, as when it
is merely for exhibition.
COMMENT:
Subject Matter of Commodatum
Usually, only non-consumable goods may be the object of a commodatum for the thing
itself should not be consumed and must be returned, but consumable thing may also the object
of commodatum if the same is only for exhibition or used ad ostentationem.

commodatum.

Article 1937
Movable or immovable property may be the object of

COMMENT:
Properties that may be the object of Commodatum
a. immovable property
b. movable property

loaned.

Article 1938
The bailor in commodatum need not be the owner of the thing

COMMENT:
Reason for the law
Bailor need not be the owner because the law said: the contract of commodatum does not
transfer ownership. All that is required is that the bailor has the right to the use of the property
which he is lending, and that he be allowed to alienate this right to use.

Secured Transaction Law

Article 1939
Commodatum is purely personal in character. Consequently:
1)

The death of either the bailor or the bailee extinguishes the


contract;
The bailee can neither lend nor lease the object of the contract
to a third person. However, the members of the bailees
household may make use of the thing loaned, unless there is a
stipulation to the contrary, or unless the nature of the thing
forbids such use.

2)

This article is self-explanatory

Article 1940
A stipulation that the bailee may make use of the fruits of the
thing loaned is valid.
COMMENT:
Does the Bailee have right to use the fruits?
As a rule bailee is not entitled to the fruits, otherwise the contract may be one of
usufruct. However, to stipulate that the bailee makes use of the fruits would not destroy the
essence of a commodatum, for liberality is still the actual cause or consideration of the contract.

CASES on nature and effects of Commodatum


Republic v. Jose V. Bagtas
6 SCRA 262
Bailor: Jose Bagtas
Bailee: Republic of the Philippines through the Bureau of Animal Industry
Facts:

Jose Bagtas borrowed three bulls from the Bureau of Animal Industry, for breeding
purposes but subject to a charge of breeding fee of 10% of the book value of the bulls. The
contract is from May 8, 1948 to May 7, 1949.
Upon the expiration of the contract Jose asked for a renewal for another period of one
year, the Bureau then approves such renewal but limited only to one bull and asked for the
return of the other two. Before the contract lapse Jose Bagtas make known of his desire to buy
the three bulls, subject to the approval of the Auditor General. But Bagtas later on failed to buy
three bulls and pay the book value of said bulls, and kept in his possession the bull even after the
contract lapsed.
Contention of the parties:
Republic:
Bagtas:

Bagtas should pay the book value or return the bulls

Secured Transaction Law

Issue:

Felicidad Bagtas being the administrative of the late Jose Bagtas contends that the
contract made between his husband and the Republic is a contract of
commodatum, and for that reason they are not liable for the death of the one bull
due to force majeure as against the claim of the Republic.

Is the contract one of commodatum?

Ruling:
The court on its decision explained that the contract may not be that of commodatum,
but a contract of lease in consideration of the compensation gained or being gained.
Furthermore, even if the contract be that of a commodatum they are still liable for they acted in
bad faith by with holding the bulls longer than stipulated without valid reason.
Republic v. CA
November 26, 1986
Bailor: Domingo P. Baloy
Bailee: U.S. Navy
Third party claimant: Republic of the Philippines
Facts:

The land in issue has been occupied by the U.S Navy by virtue of Act 627 for 57 years,
and was later been abandoned. The said land is owned by Domingo P. Baloy and his heirs
privately, since 1894 as attested by an Informacion Possesoria Title issued by the Spanish
Government. The heirs of Domingo wishes to register the land in question in their names but
they were opposed by the Republic.
Contention of the parties:
Republic:
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The land had become public and could not be subject to a valid registration for
private ownership.
the failure of the heirs of Domingo to comply with the 6 months period to file a
claim to the subject private land barred them of any claims in the future and said
land be ipso facto become public land as implied under Act 627 of the Philippine
Commission, pursuant to the executive order of the President of the U.S..

Issue:

Is the occupancy by the US Navy in the concept of an owner, ripen into ownership in
commodatum?
Ruling:

No. ownership is not transferred to the US Navy. The occupancy of the U.S. Navy was
not in the concept of owner but partakes of the character of a commodatum, therefore it cannot
militate against the title of Domingo Baloy and his successors-in-interest for ownership is not
transferred.
Mina v. Pascual
October 14, 1913
Bailor: Alejandra Mina through Francisco Fontanilla
Bailee: Repurta Pascual through Andres Fontanilla
Third party complainant or the buyer: Cu Joco
Facts:
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Secured Transaction Law

Francisco Fontanilla (the ascendant of Alejandra Mina) is the then owner of a lot at
Laoag Ilocos Norte, which with consent allowed his brother Andres Fontanilla( ascendant of
Repurta Pascual) to build and erect a warehouse over said lot.
After which Repurta Pascual sold the warehouse with the lot to a certain Cu Joco. Hence,
Alejandra Mina filed a case to annul said sale of the lot and warehouse. Contending that said
sale is void for it is not Ruperta Pascual who is the owner of the lot and the whole of the
warehouse. Thus they have no right to sell the same.
Contention of the parties:
Cu Joco:
Issue:

Contends the legality of the sale of the land warehouse for it was done through
auction by which gives him a right over said properties.

Is there a contract of commodatum?

Ruling:
The contract or agreement made between Francisco and Andres is that of a contract of
commodatum; (despite the lack of definite time of us by Andres of the lot, due to personal
motive of Francisco with respect to a certain Fructuoso Fontanilla)
By said contract under art. 1740, Civil Code a sale of land belonging to another, on which
a building of the vendors is located, is null and void, for the vendor cannot sell or transfer
property that does not belong to him.
Saura Import and Export Company Inc. v. DBP
April 27, 1972
Bailor: Rehabilitation Finance Corp. or Development Bank of the Philippines DBP.
Bailee: Saura Import and Export Company Incoporated.
Facts:

Saura Import and export Co., applied for loan to Rehabilitation Finance Corporation
(RFC) which later on converted to DBP. The said bank due to disagreement as to the laid
conditions imposed against herein Saura the said loan was then denied. Saura then filed a case
contending that the denial of the loan made by the bank is against or violates their right under
the civil code on obligation and contracts because said bank made such denial in mutual
manner. There was a breach of contract.
The DBP on the other hand contends that there was no breach of contract violated; Sauras
cause of action prescribes, and that there was a contract but it was Saura who did not comply
with the terms thereof.
Issue:

Was there a perfected contract of loan?

Ruling:
Yes. There was indeed a perfected consensual contract, as recognized in Art. 1934 of the
Civil Code which provides: An accepted promise to deliver something by way of commodatum or
simple loan is binding upon the parties, but the commodatum or simple loan itself shall not be
perfected until the delivery of the object of the contract. Manresa. - mutuo disenso principle
was then applied in the extinguishment of the contract; that since mutual agreement can create
a contract, mutual disagreement by the parties can cause its extinguishment.

Secured Transaction Law

b)

The bailee; 1941-1945 Civil Code:

Article 1941
The bailee is obliged to pay for the ordinary expenses for the
use and preservation of the thing loaned.
COMMENT:
Duty of the borrower to pay ordinary expenses
Reason for the law: the bailee is supposed to return the identical thing, so he is obliged
to take care of the thing with the diligence of a good father of a family. It follows necessarily that
ordinary expenses for the use and preservation of the thing loaned must be borne by the bailee.

Article 1942
The bailee is liable for the loss of the thing, even if it should be
through a fortuitous event:
1) If he devotes the thing to any purpose different from that
for which it has been loaned;
2) If he keeps it longer than the period stipulated, or after
the accomplishment of the use for which the
commodatum has been constituted;
3) If the thing loaned has been delivered with appraisal of its
value, unless there is a stipulation exempting the bailee
from responsibility in case of a fortuitous event;
4) If he lends or leases the thing to a third person, who is not
a member of his household;
5) If, being able to save either the thing borrowed or his own
thing, he chose to have the latter.
COMMENT:
Liability for loss due to a fortuitous event
As a rule, debtor of a thing is not responsible for its loss thru a fortuitous event. This
Article gives the exceptions in a case of commodatum.

Article 1943
The bailee does not answer for the deterioration of the thing
loaned due only to the use thereof and without his fault.
COMMENT:
This article provides for non-liability for deterioration without fault.

Secured Transaction Law

Article 1944
The bailee cannot retain the thing loaned on the ground that the
bailor owes him something, even though it may be by reason of
expenses. However, the bailee has a right of retention for damages
mentioned in article 1951.
COMMENT:
Reason for the law
Bailment implies a trust that as son as the time has expired, or the purpose
accomplished, the bailed property must be restored t the bailor.
Article 1945
When there are two or more bailees to whom a thing is loaned in
the same contract, they are liable solidarily.
COMMENT:
This article provides for solidary liability of Bailees
Margarita Quintos et al. v. Beck
November 3, 1939
Bailor: Margarita Quintos
Bailee: Beck
Facts:

Beck was a tenant of Quintos at her house on M.H. Del Pilar Steet No. 1175. Upon the
novation of the contract of lease between the parties, the leassor gratuitously granted to Beck the
use of the furniture (three gas heaters and four electric lamps) subject to the condition that Beck
would return the same upon demand.
Later on, upon demand of the furniture by Quintos, Beck instead of delivering the same
to the formers house he surrendered them to the sheriff.
Contention of the parties:
Quintos:
-

Beck:

That since the contract of commodatum with condition as agreed upon was then
violated as to the condition implied by Beck, therefore he must borne all expenses
and Quintos be excluded therefrom.
Insisted that she should only return the furnitures upon the expiration of the lease.

Issue:

Is the bailor liable for the judicial or legal expenses due to act of the bailee affecting the
thing loaned?
Ruling:

Secured Transaction Law

The costs should be borne by Beck because Quintos is the prevailing party. Beck was the
one who breached the contract of commodatum, and without any reason he refused to return
and deliver all the furniture upon demand. It is just and equitable that he pays the legal
expenses and other judicial costs which Quintos would not have otherwise defrayed.

De Los Santos v. Jarra


February 10, 1910
Bailor: Felix De Los Santos
Bailee: Magdaleno Jimenea
Facts:

A contact of loan ( commodatum) of ten carabaos made between Felix De Los Santos,
bailor and Magdaleno Jimenea, bailee was made after the latter died. In said contract the said
carabaos shall be returned to the owner until the work in the formers mill would be finished, but
unluckily the bailee died, and Agustina Jarra became the administratrix of the estate of Jimenea.
Felix then presented his claim to the carabaos to the commissioner of the estate of
Jimenea, with the legal term, but his claim was then rejected. Hence he filed an action for the
recovery of the same.
Contention of the parties:
Jarra:

Issue:

contends that said carabaos were sold to Jimenea as to the 3, 4 had died due to
sickness, that only 3 carabaos had been in there possession.

Is the bailee liable for the loss of the thing loaned due to fortuitous event?

Ruling:
The bailee is at fault to any damages or losses caused thereby, for he was guilty of delay
for delivery to return the carabaos to the bailor or owner thereof.
In a contract of commodatum whereby one the parties delivers to the other a thing that is
not perishable, to be used for a certain time and afterwards return it, it is imperative duty of
the bailee, if he should unable to return the thing itself to the owner, to pay damages to the latter
if through the fault of the bailee, the thing loaned was lost or destroyed, inasmuch as the bailor
retains the ownership thereof.

Producers Bank of the Philippines v. CA and Franklin Vives


Bailor: Franklin Vives
Bailee: Doronilla and Estrella Dumagpi
Facts:
Franklin was asked by a friend Angeles Sanches to deposit 200,000.00 pesos in favor of
his friend Doronilla and Estrella Dumagpi to be used in incorporating a business. Franklin later
on agreed to give or lend the amount with the assurance that the same be delivered back to him
after the lapse of 30 days or a month.

Secured Transaction Law

Franklin upon knowing that Sterela ( the company) was no longer holding office in the
address previously given to him, he and his wife went to the Bank wherein, to verify if their
money was still intact, and they have learned that what was left is only 90,000.00 pesos, for
Doronilla had withdrawn the amount missing.
By legal means Franklin demanded the return of his money (200,000.00pesos).
The trial court and CA rendered decision in favor of Franklin. Hence this petition.
The Bank alleged that CA erred in its decision saying:
Contention of the parties:
Petitioners:
Claim that the transaction is a mutuum thus petitioner cannot be held liable for the
return of the 200,000.00.
Issues:
1) Was there a contract of loan between the parties; and
2) Is the bank liable for any damages?
Ruling:
That the contract is that of commodatum for the subject may be consumable but the
ultimate intention of the loan is not to consume the same.
Under art. 2180 of the Civil Code employers shall be held liable primarily and solidarily
liable for damages caused by their employees acting within the scope of their assigned tasks. The
said manager failed to exercise due diligence to prevent the unauthorized withdrawal.

c) The bailor: articles 1946-1952 Civil Code; in re art. 765 Civil Code.

Article 1946
The bailor cannot demand the return of the thing loaned till after
the expiration of the period stipulated, or after the accomplishment of
the use for which the commodatum has been constituted. However, if
in the meantime, he should have urgent need of the thing, he may
demand its return or temporary use.
In case of temporary use by the bailor, the contract of
commodatum is suspended while the thing is in the possession of the
bailor.
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This article is self-explanatory

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Secured Transaction Law

Article 1947
The bailor may demand the thing at will, and the contractual
relation is called a precarium, in the following cases:
1) If neither the duration of the contract nor the use to which the
thing loaned should be devoted, has been stipulated; or
2) If the use of the thing is merely tolerated by the owner.
COMMENT:
Precarium
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is a special form of commodatum. In a true commodatum, the possession of the


borrower is more secure. The possession of the borrower in precarium is
precarious, that is , dependent on the lenders will.

Article 1948
The bailor may demand immediate return of the thing if the
bailee commits any acts of ingratitude specified in Article 765.
COMMENT:
Grounds for Ingratitude
Art. 765 of the Civil Code provides:
The donation may also be revoked at the instance of the donor, by reason of
ingratitude in the following cases:
1) If the donee should commit some offense against the person, the honor or the
property of the donor, or of his wife or children under his parental authority;
2) If the donee imputes to the donor any criminal offense, or any act involving
moral turpitude, even though he should prove it, unless the crime or the act has
been committed against the donee himself, his wife or children under his
authority;
3) If he unduly reduses him support when the donee is legally or morally bound to
give support to the donor.

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Secured Transaction Law

Article 1949
The bailor shall refund the extraordinary expenses during the
contract for the preservation of the thing loaned, provided the bailee
brings the same to the knowledge of the bailor before incurring them,
except when they are so urgent that the reply to the notification
cannot be awaited without danger.
If the extraordinary expenses arise on the occasion of the actual
use of the thing by the bailee, even though he acted without fault, they
shall be borne equally by both the bailor and the bailee, unless there is
a stipulation to the contrary.
COMMENT:
Extraordinary Expenses
a. As a rule, the extraordinary expenses should be paid by the bailor because it is he who
profits by said expenses, otherwise the thing borrowed would be destroyed.
b. Generally notice is required because the bailor should be given discretion as to what he
wants to do his own property.

Article 1950
If, for the purpose of making use of the thing, the bailee incurs
expenses other than those referred to in Article 1941 and 1949, he is
not entitled to reimbursement.
-

This article is self-explanatory.

Article 1951
The bailor who, knowing the flaws of the thing loaned does not advise
the bailee of the same, shall be liable to the latter for the damages
which he may suffer by reason thereof.

COMMENT:
Reason for the law
When a person lends, he ought to confer a benefit, and not to do a mischief. If he does
not reveal the flaws, he is liable for his bad faith. The flaws referred to must be hidden defects,
not obvious ones.

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Secured Transaction Law

Article 1952
The bailor cannot exempt himself from the payment of expenses
or damages by abandoning the thing to the bailee.
COMMENT:
Reason for the law
The value of the thing borrowed might be less than the value of the expenses or damages.
Manzano v. Perez Sr.
August 9, 2001
Bailor: Emilia Manzano
Bailee: Nieves M. Perez
Facts:
Emilia Manzano lent her house and lot to her sister Nieves M. Perez for the latter o use it
as a collateral for a projected loan, upon the promise that she would return the property
immediately upon payment of her loan.
Pursuant to the previous agreement both parties end up executing deeds of conveyance
for the sale of subject house and lot, in favor of Nieves in consideration of 1.00 peso plus other
valuables, which was allegedly received by Emilia.
Contention of the parties:
Petitioner:
claims the subject property contending that there was no contact of sale made, that
the contract made by them is that of a commodatum, and that said property be
delivered back to her. All of which are made in oral.
Respondents:
showed or presented evidence to prove and deny all belied allegation or contention
of the petitioner. Like notarial document; two Kasulatan ng Bilihang Tulayan.
Issue:

Whether or not the contract be that of a sale or loan.

Ruling:
The court reiterates the evidence offered by petitioner to prove the claim is sadly lacking.
Jurisprudence on the subject matter, points to the existence of a sale, not a commodatum, over
the subject house and lot.
Note: oral testimony as to a certain fact depending as it does exclusively on human
memory is not as reliable as written or documentary evidence.
The fact that the deed of sale was not notarized does not render the agreement null and
void and without any effect. The necessity of public document is only for convenience not for
validity or enforceability.

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Secured Transaction Law

1. Simple Loan or Mutuum


- Arts. 1953-1960 Civil Code, in relation to Art. 1933

Article 1953
A person who receives a loan of money or any other fungible
thing acquires the ownership thereof, and is bound to pay to the
creditor an equal amount of the same kind and quality.
COMMENT:
Ownership Passes in Mutuum
Ownership passes to the barrower, but of course he must pay later.

Article 1954
A contract whereby one person transfers the ownership of nonfungible things to another with the obligation on the part of the latter
to give things of the same kind, quantity, and quality shall be
considered barter.
COMMENT:
Barter of Non-Consumable things
Here, the word non-fungible does not really mean non-fungible but non-consumable.
Reason: if the thing were really non-fungible the identical thing must be returned. Here, an
equivalent thing is returned.

Article 1955
The obligation of a person who borrows money shall be governed
by the provisions of Articles 1249 and 1250 of this Code.
If what was loaned is a fungible thing other than money, the
debtor owes another thing of the same kind, quantity and quality,
even if it should change in value. In case it is impossible to deliver the
same kind, its value at the time of the perfection of the loan shall be
paid.
COMMENT:
Liabilty of Borrower of Money
Liability is governed by Arts. 1249 and 1250.
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Secured Transaction Law

Article 1249: The payment of debt in money shall be made in the currency
stipulated, and if it is not possible to deliver such currency, then in the currency
which is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or
other mercantile documents shall produce the effect of payment only when they have
been cashed, or when through the fault of the creditor they have been impaired.
In the meantime, the action derived from the original obligation shall be held
in abeyance

Article 1250: In case an extraordinary inflation or deflation of the currency


stipulated should supervene, the value of the currency at the time of the
establishment of the obligation shall be th basis of payment, unless there is an
agreement to the contrary.

Article 1956
No interest shall be due unless it has been expressly stipulated
in writing.
COMMENT:
1.

Formality for Interest (for the use of money)


The interest must be stipulated in WTITING

2.

How interest arises


The right to interest arises only by virtue of a contract or by virtue of damages for
delay or failure to pay principal on which interest is demanded.

3.

When interest earns interest


Interest due shall earn legal interest from the time it is judicially demanded; the
obligation may be silent upon this point. (Article 2212 civil code)

4.

Interest by Way of Damages


Article 2209: if the obligation consist in the payment of sum of money, and the
debtor incurs in delay, the indemnity for damages, there being no stipulation to the
contrary, shall be the payment of the interest agreed upon, and in the absence of
stipulation, the legal interest, which is six percent per annum. (The rate now is 12% per
annum)
Article 1957
Contracts and stipulations, under any cloak or device whatever,
intended to circumvent the laws against usury shall be void. The
borrower may recover in accordance with the laws on usury.
-

This article is self-explanatory.

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Secured Transaction Law

Article 1958
In the determination of the interest, if it is payable in kind, its
value shall be appraised at the current price of the products or goods at
the time and place of payment.
COMMENT:
Determination of Interest in kind
Value should be at the time and place of PAYMENT.

Article 1959
Without prejudice to the provisions of Article 2212, interest due
and unpaid shall not earn interest. However, the contracting parties
may by stipulation capitalize the interest due and unpaid, which as
added principal shall earn new interest.
COMMENT:
1.

When accrued interest earns interest


The general rule is that accrued interest (interest due and unpaid) will not bear
interest, BUT
a. If there is agreement to this effect (art. 1959), or
b. If there is judicial demand (Art. 2212)
Then such accrued interest will bear interest at the legal rate (Art. 2212) unless, a
differen rate is stipulated.

2.

Compound interest
Compound interest is interest on accrued interest. It is valid to charge compound
interest, but there must be a written agreement to this effect; otherwise said compound
interest should not be charged unless it is interest charged upon judicial demand.

Article 1960
If the borrower pays interest when there has been no stipulation
therefore, the provisions of this Code concerning solutio indebiti, or
natural obligation, shall be applied, as the case may be.
-

This article is self-explanatory

Article 1961
Usurious contracts shall be governed by the Usury Law and other
special laws, so far as they are not inconsistent with this Code.

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Secured Transaction Law

a.

This article is self-explanatory

Definition
a. Art. 418. - movable property is either consumable or non-consumable. To the first class
belong those movables which cannot be used in manner appropriate to their nature
without their being consumed; to the second class belong all the others.
b. Obligation to pay/nature of mutuum
- As to loan: money or other fungible thing: bailee is bound to pay the equal amount of
the same kind and quality.
- Contract: non-fungible things: to give things of the same kind, quantity, and qualitybarter
- ownership: is transferred to the bailee but he is obliged to pay to the bailor/creditor
an equal amount of the same kind and quality.
c. Payment - legal mode of extinguishing an obligation by way of delivery of money, giving
of a thing, or doing of an act, or not doing of an act.
d. Trust receipts - Written document signed by the entrustee and delivered to the entrustor
for the former to comply with the obligations stated on the receipts, in the payment of
interest. Failure of which may result to criminal or civil action against the entrustee.
Colinares et al. v. CA, and People of the Philippines
September 5, 2000

Entrustor: Philippine Banking Corpoartion


Entrustee: Colinares and Veloso
Facts:

Colinares and Veloso were contracted by the Carmelite Sisters of Cagayan de Oro City to
renovate the latters convent for 40,000 pesos.
In order to pursue with the construction project due to lack of budget, Colinares applied
for a commercial letter of credit with the Phil. Banking Corp. (PBC) to cover the full invoice
value of the goods. They signed a pro-formal trust receipt as security.
A case in violation of P.D. 115 (trust receipt law) in relation to Art. 315 of the RPC
(estafa), was filed against Colinares for their failure to comply with the demand made by the
Bank against them.
Issue:

Whether or not there was a breach of contract against the trustees.

Ruling:
SC court said that. - Colinares are contractors and are not importers acquiring the goods
for re-sale, but obtained the goods for their construction project.
The practice of banks of making borrowers sign trust receipts to facilitate collection of
loans and place them under the threats of criminal prosecution should they be unable to pay t
may be unjust and inequitable, if not reprehensible. Such agreement is contract of adhesion
which borrowers have no option but to sign lest their loan be disapproved.

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Secured Transaction Law

e.

Interest/ forbearance / usury


i.

Interest.
- The compensation which is paid by the borrower of money to the lender
for its use, and generally by a debtor to his creditor, in recompense for
his detention of the debt.

ii.

Usury
- is contracting for or receiving interest in excess of the amount allowed by
law for the loan or use of money, goods, chattels or credits.

iii. Interest payable in kind


- Art. 1958 if payable in kind, its value shall be appraised at the current
price of the products or goods at the time and place of payment.
iv.

Unpaid Interest. - Arts. 1959, 2212, 195.


Art.2212: interest due shall earn legal interest from the time it is judicially
demanded although the obligation may be silent upon this point.
Arts 1956 and 1959: interest due and unpaid shall not earn interest.
Except by way of stipulation.

v.

Exception to the requirement of stipulation.


Republic v. Jose Grijaldo
L-202420, Dec.31, 1965

Facts:

In 1943, Jose Grijaldo borrowed money from a bank, evidenced by five promissory notes,
and secured by a chattel mortgage on the standing crops on his land. During the war, the crops
were destroyed as a result of enemy action.
Contention of the parties:
Republic:
Grijaldo:
Issue:

he is able to pay the principal amount plus interest


he is not liable to pay principal amount and interest because his obligation is
extinguished due to destruction of the standing crop.

Must the borrower still pay?

Held:

Yes, for his obligation was to pay a generic thing-money representing the loan with
interest. The chattel mortgage on the crops simply stood as security for the fulfillment of his
obligation, and therefore, the loss of the crops did not extinguish his obligation to pay, because
the account can still be paid from sources other than said mortgaged crops.

18

Secured Transaction Law

Overseas Bank of Manila v. Cordero


March 30, 1982
Depositor: Vicente Cordero
Depositary: Overseas Bank of Manila
Facts:
Vicente Cordero opened a one-year time deposit with petitioner bank in the amount of
80,000.00 pesos with interest at the rate of 6% per annum. Due to its distressed financial
condition petitioner was unable to pay Cordero his said time deposit together with the interest.
RTC and CA ruled in favor of Cordero.
Contention of the parties:
Cordero:
Issue:

the bank did not cease in its operation


payment of interest and attorneys fees

Is Cordero entitled for the interest due to him by the Overseas Bank?

Ruling:
No, Cordero is not entitled for the payment of interest. The Overseas Bank was totally
crippled during the period of financial distressed. It must be understood that the obligation to
pay interest on deposit ceases the moment the bank is completely suspended by the duly
constituted authorities.
De Vera v. CA,
October 18, 2001
Buyer: Gregorio De Vera
Seller: Q.P. San Diego Construction Incorporated
Facts:

Gregorio De Vera entered into a Condominium Reservation Agreement with Q.P. San
Diego Construction Inc. (QPSDCI). It is worth 325, 000.00 pesos, De Vera gave a down payment
in cash and the balance of him is through Pag-ibig and Open- Housing Loan, which was later on
approved and accepted by QPSDCI.
De Vera assumed that by way of the loan and personal payment of its obligation made by
him that the subject condominium unit is already owned by him, and be entitled to its name.
QPSDCIs failure to remit De Veras payment caused the mortgage of the unit be
foreclosed by the funders (consist of the Syndicate Loan Agreement by different banks and
companies involve in selling the subject condominium property).
De Vera filed a civil case against the Funders, praying that the mortgage between them
be declared null and void; and that the condominium he had paid be titled on his name.
Contention of the parties:

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Secured Transaction Law

QPSDI:
Issue:

petitioner should deal directly to Asia Trust, because they sold the property to him
and issued a DOAs thru bank.

Is the petitioner liable to pay interest?

Ruling:
The essence of financing loan is to obtain funds through an interim loan, while the main
loan is not yet available. This does not mean that the petitioner is liable to private respondent
for penalties, interest and other charges that accrued by reason of non-payment of the balance of
the purchase price.

Naguiat v. CA and Queano


October 3, 2003
Bailor: Naguiat
Bailee: Queano
Facts:

Queano applied a loan with Naguiat , which the latter granted. Naguiat for a loan in the
amount of 200,000 pesos which Naguiat granted. To secure the loan Queano executed a Deed of
Real Estate Mortgage in favor of Naguiat, and surrendered her owners duplicate of title
covering the mortgage properties. A promissory note for the amount of 200,000 pesos with
interest of 12% was also issued.
When Naguiat demanded the settlement of the loans, Queano claims that she did not
receive the proceeds of the loan adding that checks was retained by Ruebenfeldt, Naguiats
agent. Naguiat then sseks to foreclose of the mortgage.
Contention of the parties:
Queano:
-

Issue:

Queano told that Naguiat, upon the latters demand the settlement of the loan,
Queano claims that she did not receive the proceeds of the loan adding that the
checks was retained by Ruebenfeldt who was Naguiats agent.

Is Queano liable to pay the principal amount with 12% interest?

Held:

No, as stated by Supreme Court, a loan contract is a real contract not consensual, and
such is perfected only upon the delivery of the object of the contract. In this case the object of
the contract are the loan proceeds which has all told, that the lender did not remit and the
borrower did not receive. That being the case, Queano is not oblige to pay the principal amount
with 12% interest.
Moreover, the mortgaged which is supposed to secure the loan is null and void.
Severino Tolentino et al. v. Benito Gonzales et al.
August 12, 1927
Buyer: Tolentino and Manio
Seller: Luzon Rice Mills Incorporated

20

Secured Transaction Law

Facts:

Tolentino and Manio purchased a parcel of land before Luzon Rice Mills Inc., in Tarlac
to be paid by way of installment and non-payment would revolt the property to the original
owner. A transfer certificate was then given to Tolentino and Manio, despite the remaining
balance of 15,000.00 pesos.
The representative of the vendor then wrote the vendees to comply with its obligation or
else a case be filed against them, that said obligation is due and demandable. The vendee failed
to comply, hence, this cause of action and claim for the recovery of the property in question.
Contention of the parties:
Tolentino:
Sy Chian:
Issue:

Borrower, it should be 6% because the contract was rent.


12% because there was a contract of loan.

Is the contract usurious on the ground that higher interest rate was imposed?

Ruling:
The Usury Law applies only to contract of loan and not to an absolute sale with right to
repurchase. It is well-settled rule that the legal interest of the contract of sale is 6% per annum if
there was stipulation and 12% per annum for contract of loan.

f.

Usurious Transaction Cases


Aguilar vs. Rubiato
40 Phil 570

Debtor: Rubiato
Creditor: Aguilar
Facts:

Juan Rubiato was the owner of various parcel of land at Nagcarlan, Province of
Laguna. That Manuel Vila by way of force and fraud made Rubiato to sign a power of attorney in
his favor in order to obtain a loan. That by that reason Vila and company were able to sell the
property to Hilaria Aguilar, using said document. In the contract of sale the vendor was allowed
to stay at the subject property but to pay rent, until demand be ordered by the purchaser.
Hilaria then never received any rent to Vila or Rubiato, hence this cause of action.
Contention of the Plaintiff:
That he is entitled to 60% interest per annum when the pacto de retro was
formulated until the usury law took effect and 12% PA after such date.
Contention of the Respondent
The interest is usurious.
Ruling:
Rubiato was only responsible to the plaintiff for the loan because of the inadequacy of the
price which Vila obtained for the 8 parcels of land owned by Rubiato and it failed to name a
lawful rate of interest.
The 60% is usurious, as such the plaintiff shall only recover 6% interest PA rate on the
sum of P800.

21

Secured Transaction Law

Rono vs. Gomez


83 Phil 890
Debtor: Rono
Creditor: Gomez
Facts:

Repayment of the loans given in Japanese currency during the lost war of the Pacific.
Rono on October 5, 1944, received as a loan 4,000 in Japanese fiat money from Gomez
and agreed to pay said debt one year after date, in the currency then prevailing that time; this
was done by way of promissory note. On October 15, 1945 Rono failed to comply with its
obligation, hence this cause of action.
Contention of the Plaintiff:
That the contract is contrary to usury law because he only received P100 and now
he is required to discharge P4000.
Contention of Respondent:
That Rono should pay his debt amounting to P4000
Issue:

Whether or not the liability would remain in Japanese fiat not Philippine currency.

Ruling:
Rono should pay Gomez the sum of only P100 with legal interest from the date of the
filing of the complaint plus cost. Because Peso during the time of contract is somewhat valueless
than that of its equivalent during the expiration of the contact which is more in value, this fact
was then considered, and in order to give everyone its due and in fair Rono is to pay Gomez 100
pesos which is equivalent of peso on October 5, 1944.
Eastern ShippingLines vs. CA
234 SCRA 578
Facts:
Petitioner is a common carrier which brought the cargo of private respondent from
Japan to Manila. Due to bad weather, water was able to come in the cargo hold and damaged the
goods. Herein defendant brought the action to the RTC. CA ruled in favor of First National
Assurance (private respondent) and ordered ESL to pay damages with interest starting from the
judicial demand. Petitioner contended that the interest is usurious and that it should commence
upon final order.
Contention of the parties:
ESL:
FNA:
Issue:

Interest should start upon final order

Interest should start from the judicial demand.

Whether or not the contention of the petitioner (ESL) is tenable.

Ruling:
The interest due on the amount should commence from the date of judicial demand. The
legal interest to be paid is 6% on the amount due computed from the decision of the court a quo.

22

Secured Transaction Law

Integrated Realty Corporation vs. PNB


174 SCRA 295
Facts:
Raul Santos was issued certificate of deposit totaling to P700, 000.00 by OBM. IRC
through Raul Santos applied a loan for P700, 000.00 with PNB . To secure the loan, he executed
a Deed of Assignment of the two Time Deposit in favor of PNB. OBM after due dates did not pay.
Contention of the Plaintiff:
That the Trial Court erred in its judgment ordering them to pay for the amount
with additional penalty interest.
Contention of the Respondent:
The plaintiff should pay additional penalty interest.
Issues:
Whether or not OBM is liable to pay the 6.5% interest
Ruling:
While it is true that under Art 1956, no interest shall be due unless it has been expressly
stipulated in writing, this applies only to interest for the use of money. It does not comprehend
interest paid as damages.
Jardenil vs. Salas
73 Phil 976
Facts:

A mortgage deed was executed between Jardenil and Salas whereby the latter agreed to
pay interest to the date of maturity in March 1934.
Contention of the Plaintiff:
Should be entitled for the payment of interest up to the date of full payment of the
principal.
Contention of the Respondent:
Should only be liable up to the date of the maturity of the PNB.
Issue:

Whether or not Salas is bound to pay the stipulated interest only up to the date of
maturity as fixed in the promissory note, or up to the payment is affected?
Ruling:
The contract is silent as to whether after the date, in the event of non-payment, the
debtor would continue to pay interest. No legal presumption as to such interest could be
indulged for this would be imposing upon the debtor an obligation that the parties have not
chosen to agree upon. As such, plaintiff is only entitled to the stipulated interest of 12% on the
loan. Legal interest shall accrue since judicial demand had been made.
Cu Unjeng vs.Mabalacat Sugar Co.
54 Phil 976
Surety- Siulong and Co.
Mortgagor-PNB
Facts:
23

Secured Transaction Law

Cu Unjieng instituted this cause of action to recover from Mabalacat Sugar Company
indebtedness, with interest and to foreclose a mortgage given by the debtor to secure the same.
Collection of debt-168,000.00 plus interest
Contention of the Plaintiff:
Collection of the debt plus interest.
Contention of the Respondent:
The extension of time of payment had the effect of abrogating the stipulation of the
original contract with respect to the acceleration of the maturity.
Issue:

What is the interest to be imposed?

Ruling:
The provision merely requires the debtor to pay interest monthly at the end of each
month, such to be computed upon the capital of the loan not already paid. Compound interest
must be eliminated. It must always be in writing or when there is judicial demand.
GSIS vs. CA
145 SCRA 311
Debtor- Spouses Medina
Creditor- GSIS
Facts:

Spouse Medina applied for a loan with the GSIS. GSIS approved said application with the
following conditions: that the rate of interest is 9% per annum compounded monthly; payable in
10 years, at monthly amortization; and that any installment or amortization that remains due
and unpaid shall bear interest of 9% to 12% per month. Medinas executed 2 real estate
mortgage as security in favor to GSIS.
That the Medinas defaulted in paying the monthly amortization on their loan, the GSIS
imposed 9% to 12% interest on all installment due and unpaid.
Contention of the Plaintiff:
The amended REM did not supersede the original document, therefore, all interest
and stipulations should be imposed.
Contention of the Respondent:
The compound interest should not be imposed since it was not in writing in the
amended REM.
Issue:

Whether or not the compounded interest as stipulated in the original mortgage contract
be enforced in the later mortgage.
Ruling:
The amendment did not replace or supersede the stipulations in the original contract.
The original mortgage contract embodies the same terms and conditions as in the additional
loan. The amendment should also be subject to the same terms and conditions.
Eastern Assurance vs. CA
322 SCRA 73

24

Secured Transaction Law

Insurer: Vicente Tan


Insurance company: Eastern Assurance Company
Facts:

Vicente Tan insured his building in Dumaguete City against fire with EASCO for P250,
000.00. In June 1982, the building was destroyed by fire. EASCO was then ordered to pay Tan
for damages. EASCO was about to pay Tan with 6% interest per annum as legal interest of the
failure to pay Tan. Tan on the other hand refused to accept said payment saying that the proper
legal interest must be 12% per annum.
Note: RTC did not impose any interest to its decision.
Contention of the Plaintiff:
The applicable legal rate should be 6%per annum.
Contention of the Respondent:
The applicable rate should be 12% per annum.
Ruling:
Petitioners contentions are without merit. The judgment of the court awarding sum of
money becomes final and executor. The legal interest, whether the case falls under breach of
contract constituting sum of money,i.e. loan or forbearance, or loans constituting sum of money,
should be 12%.
Delgado vs. Valgona
44 Phil 739
Debtor-Valgona
Creditor- Delgado
Facts:

Alonso sold to Delgado 12 parcels agricultural land at Goa, in the province of Camarines
Sur. Alonso obtained or bought said land from certain Stickney, in the amount of 15,000.00
pesos. In said contract of sale between Alonso and Delgado, the latter is to give payment to the
lots in 2 semi annual installments with15% interest, which is more than what the law required 12
% per annum, within 12 years and none compliance would make the creditor possess the lot in
question.
Delagado then failed to comply with his obligation, but had already given 2,625 pesos in
the previous installments. Alonso was about to move the foreclosure of the mortgage, when by
way of Delgados lawyer he made known that the contract was usurious, hence this cause of
action. On the other hand Alonso filed a cross-complaint contending that he is the aggrieved and
that he must be reimbursed the amount of 15,000.00 pesos for the 12 parcel of land conveyed by
him in favor of Delgado, that be deducted of the amount of 2,625 pesos.
Interest: 15% per annum, Principal-P15, 000.00
Contention of the Plaintiff:
Recovery of the sum of P2, 625.00 paid upon by way of interest and P2, 500.00
attorneys fees.
Contention of the Respondent:
Special defense that the contract in question had been entered into by him
innocently and in total ignorance on his part of the existence of the Usury Law.
Moved for the setting aside of the Mortgage and payment of P15,000.00.
Issue:

Whether or not the stipulation is valid.

25

Secured Transaction Law

Ruling:
The mortgage is usurious because it is in excess of that allowed by law. Interest to be
imposed should be 6% per annum.
Bataan Seedling vs. Republic
383 SCRA 590
Facts:

Bataan Seedling Association Incorporated entered into a reforestation contract with the
Republic of the Philippines, represented by DENR. It undertaken a reforestation of a 50
hectares open or detruded forest land in Liyang Pilar, Bataan with a period of 3years. When
BSAI failed to comply with its obligations, respondent sent notice of cancellation of the contract.
BSAI did not reply, respondent filed a complaint asking among others that the mobilization fond
and advance payment be refunded with 12 % interest.
Community Based Reforestation Contract with DENR with the following claims:
Principal- P56, 290.69; Interest Rate- 12%
Consideration- P975, 126.61-Reforestation-50 hectares in Pilar, Bataan for 3 years.
Contention of the Plaintiff:
The order to refund the amount of P56, 269.69 with interest at the rate of 12% per
annum representing the balance of the mobilization fund is palpable as being
contrary to the facts.
Contention of the Respondent:
The rate should be at 6% per annum.
Issue:

Whether or not the imposition of the 12 % interest is usurious or proper?

Ruling:
The interest rate on the P56, 290.69 shall be at the 6% PA from the decision of the CA
and 12% in lieu of the 6% shall b imposed upon finality of this decision, until full payment
thereof.
Ligutan vs. CA
376 SCRA 560
Debtor-Ligutan and Liana
Creditor-Security Bank
Facts:

Ligutan and de la Llama obtained a loan from Security bank and Trust Company.
Ligutan and Llama executed a promissory note binding themselves jointly and severally to pay
the sum borrowed with an interes of 15. 189% per annum upon maturity and to pay a penalty of
5% every month on the outstanding principal and interest in case of default. In addition, they
agreed to pay 10% of the total amount due by way of attorneys fees of a suit were instituted to
enforce payment. Despite demand, petitioners failed to pay. The filing of complaint was
instituted by the bank, where the RTC rendered decision ordering petitioners to pay the sum of
14,416 pesos of corresponding interest as agreed upon plus 2% service charge.
Contention of the Plaintiff:
The imposed interest is excessive. 15.189% PA interest and 3% per month penalty
rate are manifestly exorbitant, iniquitous and unconscionable.
26

Secured Transaction Law

Contention of the Respondent:


The rates are valid as stipulated in the PN.
Ruling:
Separate rates for interest and penalty are valid because they are distinct from each other
and are equally demandable due to an express stipulation. However, the interest rate is reduced
to3% because there was partial payment.
RCBC vs. CA
289 SCRA 292
Debtor: Goyu and Sons, Inc.
Creditor: RCBC
Facts:

Goyu and Sons Incorporated have fire claims against Malayan Insurance Company
Incorporated in connection with the mortgage contracts entered into by and between RCBC and
Goyu in consideration of the latters application for credit facilities and accommodation with
RCBC in consideration of a loan from RCBCs counterclaim, ordering Goyu to pay its loan
obligation with RCBC in the amount of 68, 785.069 pesos.
Surcharges and penalties are adjudged at 2% and 3% respectively per computation.
Inexplicably, the CA without even laying down the factual or legal justification for its
ruling modified the trial courts ruling and ordered Goyu to pay the principal amount.
Contention of the parties:
RCBC:
Goyu:
Issue:

claims that Goyu should pay its loan obligation as executed by them in favor of the
former.

should not pay for the interest because it is not in the contract.

Is the RCBC the rightful claimant of the insurance?

Ruling:
The presence of indorsements documents give rise to a right which in this case is a claim
for insurance from the company. Goyu is still liable to pay its loan obligation with interest. Goyu
must comply with the payment of its loan obligation with the agreed interest through RCBC had
waived collection of surcharges and penalties.
Segovia vs. Dumatal
364 SCRA 159
Facts:
Segovia Devt Corp and JLDRDC entered into 3 identical contracts to sell 3 condo units
of which out of P6.05 million as purchase price, but only P4.4 million was paid. However, later
Duamtal failed to fulfill his obligation to Segonia leading to the rescission of the contract. The
case was adjudicated by the HLURB until it reached the office of the President, where it was
decided that
Dumatal should pay remaining outstanding balance of 3M plus additional 3% per month
for each delayed payment plus 50% a contract price adjustment with 6% interest per annum
from November 1990 until fully paid.
Contention of the parties:
27

Secured Transaction Law

Segovia
Dumatol
-

To pay for the remaining balance plus interest of 3% and 6% per annum as
damages.
3% is grossly iniquitous. There was no basis for the imposition of the 6% per
annum.

Ruling:
The 3% per month translates to 36% PA. The interest rate is reduced to 12% PA. The 6%
as compensation for damage has no statutory justification because there was neither stipulation
nor judicial demand to that effect.
First Metro Investment Corp. vs. Este Del Sol
369 SCRA 99
Facts:
Este Del Sol applied for a loan to the First Metro Investment, for an amount of 7M, for the
construction of a resort and mountain reserve. Consequently, both parties executed a loan
agreement where they stipulated that:
1) Interest on the loan was rigged at 16% P.A. based on the diminishing balance.
2) Incase of default, an acceleration clause was among others provided and the
amount due was made subject to a 20% onetime penalty on the amount due and
such amount shall bear interest at the highest rate permitted by law from the
date of default until full payment thereof plus liquidated damages at the rate of
2% p.m. compounded quarterly on the unpaid balance and accrued interest.
3) Plus attorneys fee equivalently to 20% of the sum sought to be recovered which
in no case be less than 20,000 pesos if the service of a lawyer were hired.
Later, the petitioner also imposed to the respondent that in order for the loan to be
granted, an underwriting and consultancy agreement should be made, obliging the respondent
to pay the petitioner a supervising and consulting fee of 200thousand for 4 years. Thus, the
agreement was perfected. Later, the respondent failed to fulfill his obligation. Hence, the filing
of the suit in the trial court.
Contention of the Plaintiff:
The instant collection suit against respondent to collect the alleged deficiency
balance from the loan agreement including what is due to them from the
Underwriting and Consultancy Agreement.
Contention of the Respondent:
The underwriting and consultancy agreement executed simultaneously with and as
integral part of the loan agreement and which provided for the payment, were in
reality subterfuges resorted to by FMIC to camouflage the usurious interest.
Issue:

Was the underwriting and consultancy agreement a device to cloak the usurious
transaction made by the petitioner?
Ruling:
Art. 1957: Contracts and stipulations, under any cloak device or whatsoever.
Such penalties, liquidated damages and attorneys fees are excessive, iniquitous and
unconscionable and revolting to the conscience as they hardly allow the borrower any chances of
survival in case of default.

28

Secured Transaction Law

Banco Filipino v. CA
332 SCRA 241
Bailor:Banco Filipino
Bailee: Arcilla et al.
Facts:

Arcilla et al. obtained a loan with the Banco Filipino at a rate of 12 % per annum. The
loan provides an escalation clause empowering the bank to increase the interest rate as may be
provided by law. The loan is payable in 19 years. Later, Central Bank circular 494 was issued
increasing the ceiling of interest on loans with maturity of more than 730 days by bank and
other financial groups engaged in banking transactions to 17% pursuant to the circular, from
12% interest it becaome 17%.
A suit was filed against the Banco Filipino for the annulment of the contract of loan; the
trial court rendered a decision in favor of the respondent finding the interest usurious.
Contention of the parties:
Petitioners claim:
respondent is not entitled to refund.
Respondents claim:
they are entitled to the refund in as much as the escalation clause and is therefore
illegal.
Ruling:
It may not although Circular Bank 494 has the force and effect of law, it is not a law and
is not the law contemplated by the parties which authorized the petitioner to unilaterally raise
the interest rate of the loan.

g. Special Cases
Soncuya vs. Azzaraga
65 Phil 635
Debtor: Soncuya
Creditor: Attorney Azzaraga
Facts:

In payment for attorneys fees, the defendant mortgaged his land to his lawyer. The
lawyer sold the credit to the plaintiff. No payment was made. Extension was made but with
express condition that 12% interest shall be paid.
Contention of the Plaintiff:
Since there was nonpayment of the property in question, ownership should be
passed to him through the contract of assignment of debt and right to repurchase.
Contention of the Respondent:
The plaintiff cannot have ownership through the assignment of credit or pacto de
retro because such was not stipulated, thus, does not have any right over the
property.
Ruling:

29

Secured Transaction Law

When the plaintiff agreed to extend the period of payment plus interest, the pacto de
retro contract was converted into simple loan with or without guaranty, such interest may be
demanded.
Herrera vs. Petrophil
GR No. 48349; 12/29/86
Lessor: Herrera
Lessee: Petrophil
Facts:

Herrera and Petrophil entered into a lease agreement for 20 years. Petrophil made
advance payments for the first 8 years subtracting there from the discount of 12% PA.
Contention of the Plaintiff:
The deduction is not proper because it is in violation of the Usury Law. The interest
to be deducted should be reduced to P29, 000.00.
Contention of the Respondent:
The deduction was not usurious interest but a discount for paying in advance for 8
years.
Issue:
Whether or not there is a usurious transaction.s
Ruling:
Discount is not unusual in a lease contract as long as it is not contrary to laws.
No usury because there is no money given by the defendant to plaintiff nor did it allow
him to use its money already in his possession and there was neither loan nor forbearance, but
only a mere discount which the plaintiff allowed the defendant to deduct.
Elements of Usury
1) Loan express or implied;
2) Understanding between the parties that the money shall be returned;
3) That for such loan a greater rate or interest that is allowed by law shall be paid,
agreed to be paid as the case may be;
4) Corrupt intent to take more then the legal rate for the use of money loaned.
Discount does not have to be paid.
Forbearance subject to repayment and is therefore governed by the laws on usury law.
Equitable mortgage the deposit of title of deeds, by the owner of the estate with a person from
whom her has borrowed money, with an accompanying agreement to execute a regular
mortgage or by the mere deposit without even any verbal agreement respecting regular security.
Bonnevie vs. CA (Philippine Bank of Commerce-Resp)
125 SCRA 122
Facts:
Spouses Lozano mortgaged their property to secure a loan of P75, 000.00 from PBC.
They executed a deed of sale in favor of Bonnevie with assumption of mortgage for P100,
000.00. PBC foreclosed the property and sold in public auction.
Contention of the Plaintiff:
The collection of interest on the loan up to July 12, 1968 extends the maturity
hence the foreclosure was not proper.
Contention of the Respondent:

30

Secured Transaction Law

The loan matured already because it was 6 months overdue, hence the foreclosure
was valid.

Ruling:
The loan matured on December 26, 1967. The payment of interest on July 12, 1968 does
not thereby make the earlier act of the bank iniquitous nor does it ipso facto result in the
renewal of the loan.
Santulan vs. Fule(Heirs of Lusin)
133 SCRA 762
Facts:
The collection of interest in the sum of P30, 000.00 as the value of improvement on the
foreshore land. The heirs of Santulan were asked by the court to reimburse cost plus legal
interest from 1955 until paid.
Contention of the Plaintiff:
The interest was not demanded by Lusin when the case was pending in the
administrative agencies and in the courts; hence there is no reason for the
collection of interest.
Contention of the Respondent:
They should be entitled to the interest applying article 2209.
Ruling:
Such case is not sanctioned by Article 2209 of the Civil code because the interest was not
demanded by Lusin when the case was pending. The decision of the Supreme Court did not
provide for interest, hence there is no reason for the trial court to add interest.

Sentinel Insurance vs. CA (Rose Industries-Respondent)


182 SCRA 517
Facts:

Sentinel Insurance and Nemesio Azcueta Sr. bound themselves jointly and severally, to
guarantee the compliance with the terms of the credit line granted by the private respondent in
favor of Azcueta in the amount of P180, 000.00. Azcueta failed to perform his obligation, hence
the surety was ordered to pay with 14% PA interest.
Contention of the Plaintiff:
The interest is usurious because aside from the interest, additional 2%/45 days as
penalty has been imposed.
Contention of the Respondent:
Should be entitled to the said interest and penalty.
Ruling:
Contention of the petitioner is incorrect. The damage dues do not include and are not
included in the computation of interest as the two are different and distinct which may be
demanded separately.

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Secured Transaction Law

Relucio vs. Brillante


187 SCRA 405
Facts:
Both parties entered into Buy and Sell Contract over 2 residential lots. Relucio was
ordered to return to Brillante the excess payment of P650,000 plus 6% Per annum.
Contention of the Plaintiff:
Respondent was obliged to pay interest on the installment payments of the unpaid
balance even if paid on these due dates per schedule of payments.
Contention of the Respondent:
That she had never incurred delay so the stipulated interest of 6% PA is null and
void.
Ruling:
Petitioner cannot anymore charge 6% interest PA. The stipulation clearly specified that
the 6% interest PA was included in the installment price. The installment price had an interest
component which compensated the vendor.
Ruiz vs. Canuba
191 SCRA 865
Facts:

Ruiz rents a house owned by Sanggalang amounting to P650.00. Ruiz and Sanggalang
agreed that the former will buy the house and lot and will continue to pay the rental until full
payment.
Due to disagreement with the amount paid, the former demands return with 24%
interest compounded annually.
Contention of the Plaintiff:
That he is entitled to the interest of 24% compounded annually.
Contention of the Respondent:
That he should not be held liable to pay for the said rate.
Ruling:
Where the court judgment did not provide interest, there is no reason to add interest in
the judgment. Interest was not demanded by the Ruizes when the case was pending before the
lower court, hence, there is nor reason to grant.
Tio Khe Cheo vs. CA
202 SCRA 119
Facts:

Cheo imported 1000 kgs of fish meal. The goods were insured by EASCO. The goods
were found to be damaged by the seawater rendering them useless.
Contention of the Plaintiff:
Since his claimed is based on an insurance contract, the Insurance Code should
govern the interest to be applied.
Contention of the Respondent:

32

Secured Transaction Law

The interest to be imposed should be 6% in accordance with Article 2209 of the


Civil Code.

Ruling:
The Insurance Code applies only when the court finds an unreasonable delay or refusal
in the payment of the claims. The 12% in the circular refers only to loans or forbearances of
money, goods or credit and court judgments.

33

Secured Transaction Law

B.

DEPOSIT

1.1. GENERAL PROVISIONS


2.
Articles 1962 - 1967, 1978 and 1980

Article 1962
A deposit is constituted from the moment a person receives a
thing belonging to another, with the obligation of safely keeping it and
of returning the same. If the safekeeping of the thing delivered is not
the principal purpose of the contract, there is no deposit but some
other contract. (1758a)
COMMENT:
1.

Purpose of Deposit: Safekeeping of the thing delivered.

2.

Two instances where depositary can use the thing:


a. With the express permission of the depositor.
b. When the preservation of the thing deposited requires its use, it must be used but
only for that purpose.

3.

Kinds of Deposit:
a. Judicial (Sequestration) When an attachment or seizure of property in litigation is
ordered.
b. Extra-judicial:
1. Voluntary made by the will of depositor.
2. Necessary
a) made in compliance with a legal obligation
b) on the occasion of a calamity
c) made by travellers in hotels or inns
d) made by travellers with common carrier

4.

Characteristics of the Contract of Deposit:


a. It is a real contract perfected by delivery.
b. The principal purpose is the safekeeping of the thing delivered.
c. The depositary cannot use the thing deposited except:
- With the express permission of depositor
- When the preservation of the thing deposited requires its use.
d. Only movable thins can be the object of a deposit.
e. It is a gratuitous contract, except when there is an agreement to the contrary
or unless the depositary is engaged in the business of storing goods.
f. The contract is either unilateral or bilateral, according to whether it is
gratuitous or compensated.

5.

Deposit and Commodatum Distinguished:

34

Secured Transaction Law

a. Deposit may be gratuitous, while commodatum is essentially and always


gratuitous.
b. The principal purpose of deposit is for safekeeping, while the principal purpose of
commodatum is for use.
Article 1963
An agreement to constitute a deposit is binding but the deposit
itself is not perfected until the delivery of the thing.(n)
-

This article is self-explanatory.

Article 1964
A deposit may be constituted judicially or extra-judicially.
COMMENT:
1.

Distinctions Between Extra judicial and Judicial Deposits:


a. As to origin:
Extra-judicial: the will of the parties
Judicial: the will of the court
b. As to Status:
Extra-judicial: there is a contract
Judicial: there is no contract
c. As to purpose:
Extra-judicial: custody and safekeeping of the thing for the benefit of the depositor
Judicial: to guarantee the right of the plaintiff to recover compensation in case of a
favorable judgment
d. As to Cause:
Extra-judicial: gratuitous, as a rule
Judicial: onerous
e. As to Subject Matter:
Extra-judicial: always movable property
Judicial: either movable or immovable property, but generally immovable
f. As to in whose behalf it is held:
Extra-judicial: in behalf of the depositor
Judicial: in behalf of the winner
Article 1965
A deposit is a gratuitous contract except when there is an
agreement to the contrary or unless the depositary is engaged in the
business of storing goods. (1760a)
-

This article is self-explanatory.

35

Secured Transaction Law

Article 1966
Only movable things may be the object of a deposit. (1761)
COMMENT:
1.

Why only movable things may be the object of deposit?


The object of a deposit is the safekeeping of a thing, for without such safekeeping
of the thing it may be lost or it may disappear or be stolen. This will not happen in real
property.

Article 1967
An extrajudicial deposit is either voluntary or necessary. (1762)
COMMENT:
1.

Kinds of Extra-judicial Deposit:


a. Voluntary - as when there is mutual consent
b. Necessary - when there is a deposit because of a calamity.

Article 1978
When the depositary has permission to use the thing deposited,
the contract loses the concept of a deposit and becomes a loan or
commodatum, except where safekeeping is still the principal purpose
of the contract.
The permission shall not be presumed, and its existence must be
proved.
-

This article is self-explanatory.

Article 1980
Fixed savings and current deposits of money in banks and similar
institutions shall be governed by the provisions concerning simple
loan.

CASE:
BPI vs. IAC
164 SCRA 630

36

Secured Transaction Law

Petitioner: BPI
Respondents: IAC and Rizaldy Zshomack
What Happened:
Zshornack and Commercial Bank and Trust Co. Of the Phils. (COMTRUST) were the
original parties to this case. BPI absorbed COMTRUST through a corporate merger and
substituted as party to the case. Zshornack entrusted to COMTRUST the amount of 3,000 US
dollars for safekeeping. After sometime, Zshornack ask the bank to release his money back to
him. However, the bank claimed that they do not enter into a contract of deposit, and that the
3,000 US dollars was sold and the peso proceeds were deposited in petitioners account. The
bank prayed it be totally absolved from any liability to Zshornack.
Contention of the Parties:
COMTRUST (substituted by BPI):
-
Claims that they did not enter into a contract of deposit, and that the 3000 US
dollar was sold and the peso proceeds were deposited in petitioners account.
Zshornack:
-
Claims that it is a deposit.
Supreme Court Ruling:
The transaction between Zshornack and COMTRUST is of a deposit. Since, the
agreement stated that the 3000 US dollars given to the bank were for safekeeping. Article 1962
states that a deposit is constituted the moment a person receives a thing belonging to another,
with the obligation of safely keeping it and for returning the same. The parties did not intend to
sell the US dollars to the Central Bank otherwise, the contract of deposit never had been entered
into.
But, since the mere safekeeping of the US dollars, without selling them to the Central
Bank within one business day from receipt, is prohibited, the contract of deposit is void. Thus,
both parties are in pari delicto, they have no cause of action against each other.

1.2.
a.

VOLUNTARY DEPOSIT
IN GENERAL : Articles 1968 1971

Article 1968
A voluntary deposit is that wherein the delivery is made by the
will of the depositor. A deposit may also be made by two or more
persons each of whom believes himself entitled to the thing deposited
with a third person, who shall deliver it in a proper case to the one to
whom it belongs. (1763)
COMMENT:
1.

Depositor Need Not Be the Owner:


Generally, the depositor must be the owner. As a matter of fact, the law provides
that the depositary cannot demand that the depositor prove his ownership of the thing
deposited.
37

Secured Transaction Law

Article 1969
A contact of deposit may be entered into orally or in writing. (n)
COMMENT:
Form of the Contract of Deposit
a. oral
b. written

Article 1970
If a person having capacity to contract accepts deposit made by
one who is incapacitated the former shall be subject to al the
obligations of a depositary and may be compelled to return the thing
by the guardian or administrator of the person who made the deposit
or by the latter himself if he could acquire capacity. (1964)
COMMENT:
1.

Validity of the Contract entered into


-

2.

The contract entered into under Art. 1970 is a voidable one.

Capacity of Depositary
-

The depositary himself must be sui juris capacitated to enter into binding
contracts. He is subject to all the obligations of a depositary. The law says
that persons who are capable cannot allege the incapacity of those with
whom they contracted. (Art. 1379, Civil Code)

Article 1971
If the deposit has been made by a capacitated person with
another who is not the depositor shall only have an action to recover
the thing deposited while it is still in the possession of the depositary
or to compel the latter to pay him the amount by which he may have
enriched or benefited himself with the thing or its price. However if a
third person who acquired the thing in bad faith the depositor may
bring an action against him for its recovery. (1765a)
COMMENT:
1.

Rule id Depositary is Incapacitated


Example:
A deposited something with B, who is insane. B in turn disposed of it in favour of
C. Can A go against C?
38

Secured Transaction Law

ANS.: Yes, if C acted in bad faith. But if C acted in good faith, As only recourse would be
to compel B to give him (A) the amount by which he (B) might be enriched or benefited
himself.
2.

Validity of the contract entered into


-

The contract entered into under Art. 1971 is avoidable one, in view of the
incapacity of one of the contracting parties.

a.b. Obligations of the Depositary - Articles 1972 -1991


Articles1972
The depositary is obliged to keep the thing safely and to return it,
when required, to the depositor, or to his heirs and successor, or to the
person who may have been designated in the contract. His
responsibility, with regard to the safekeeping and the loss of the thing,
shall be governed by the provisions of Title 1 of this Book.
If the deposit is gratuitous, this fact shall be taken into account
in determining the degree of care that the depositary must observe.
(1766a)
COMMENT:
1.

Principal Obligations of the Depositary:


The safekeeping and the return of the thing deposited.

2.

Duty of safekeeping:
a. If the contract does not state the diligence which is to observed in the performance,
that of a good father of a family shall be required.
b. The depositary is responsible if the loss occurs through his fault. But as a rule, not if
the loss is through a fortuitous event.

Article 1973
Unless there is a stipulation to the contrary the depositor cannot
deposit the thing with a third person. If deposit with a third person is
allowed the depositary is liable for the loss if he deposited the thing
with a person who is manifestly careless or unfit. The depositary is
responsible for the negligence of his employees. (n)
COMMENT:
General Rule:
-
A depositary is not liable for the loss if he is allowed to transfer the thing to a third
person
Exception:
-
If he deposited the thing to a person who is manifestly careless and unfit.
39

Secured Transaction Law

Article 1974
The depositary may change the way of the deposit if under the
circumstances he may reasonably presume that the depositor would
consent to the change if he knew of the facts of the situation.
However, before the depositary may make such change, he shall notify
the depositor thereof and wait for his decision, unless delay would
cause danger. (n)
COMMENT:
1.

General Rule:
-
Allowed to change without permission.
Exception:
-
Unless delay would cause danger.

2.

Reason for the Law


-

This is in accordance with the rule that generally the depositary must take care of
the thing with the diligence of a good father of a family.

Article 1975
The depositary holding certificates, bonds, securities or
instruments which earn interest shall be bound to collect the latter
when it becomes due, and to take such steps as may be necessary in
order that the securities may preserve their value and the rights
corresponding to them according to law.
The above provision shall not apply to contracts for the rent of
safety deposit boxes. (n)
-

This article is self-explanatory.

Article 1976
Unless there is a stipulation to the contrary, the depositary may
commingle grain or other articles of the same kind and quality, in
which case the various depositors shall own or have a proportionate
interest in the mass. (n)
-

This article is self-explanatory.

40

Secured Transaction Law

Article 1977
The depositary cannot make use of the thing deposited without
the express permission of the depositor.
Otherwise, he shall be liable for damages.
However, when the preservation of the thing deposited requires
its use, it must be used but only for that purpose.
COMMENT:
1.

Generally, depositary cannot use:


-

Generally the use of the thing is not allowed the depositary.

Article 1978
When the depositary has permission to use the thing deposited,
the contract loses the concept of a deposit and becomes a loan or
commodatum, except where safekeeping is still the principal purpose
of the contract.
The permission shall not be presumed, and its existence must be
proved. (1768a)
COMMENT:
1.

Presumption
-

The law creates the presumption in a deposit, the permission to use it not
presumed, except when such use needed for preservation. Therefore, a person who
alleges that permission or authority to use the thing deposited has been given, has
the burden the proving the allegation.

Article 1979
The depositary is liable for the loss of the thing through a
fortuitous event:
(1)
If it is so stipulated;
(2)
If he uses the thing without the depositor's permission;
(3)
If he delays its return;
(4)
If he allows others to use it, even though he himself may
have been authorized to use the same. (n)
COMMENT:
1.

The depositary is liable for the loss of the thing through a fortuitous event:
(1)
(2)
(3)
(4)

If it is so stipulated;
If he uses the thing without the depositors permission;
If he delays its return;
If he allows others to use it, even though he himself may have been authorized to
use the same.
41

Secured Transaction Law

General Rule: Depositary is not liable


Exception: SUDA
Article 1980
Fixed, savings, and current deposits of money in banks and
similar institutions shall be governed by the provisions concerning
simple loan. (n)
COMMENT:
1.

Bank Deposit
a. The relationship between the bank and the depositor is that of debtor and creditor
not depositary and depositor.
b. Current and savings deposit are loans to a bank because it can use the same.

Article 1981
When the thing deposited is delivered closed and sealed, the
depositary must return it in the same condition, and he shall be liable
for damages should the seal or lock be broken through his fault.
Fault on the part of the depositary is presumed, unless there is
proof to the contrary.
As regards the value of the thing deposited, the statement of the
depositor shall be accepted, when the forcible opening is imputable to
the depositary, should there be no proof to the contrary. However, the
courts may pass upon the credibility of the depositor with respect to
the value claimed by him.
When the seal or lock is broken, with or without the depositarys
fault, he shall keep the secret of the deposit. (1969a)
COMMENT:
The Depositary must keep the secret of the deposit.
When the thing deposited is delivered closed and sealed, the depositary must
return it in the same condition, and he shall be liable for damages should the seal or lock
be broken through his fault. When the seal or lock is broken, with or without the
depositarys fault, he shall keep the secret of the deposit. (Art. 1981, pars. 1 and 4) If the
seal or lock is broken through the depositarys fault, the presumption is that the fault is
on the part of the depositary, unless there is proof to the contrary. (Art. 1981, par. 2)
As regards the value of the thing deposited, the statement of the depositor shall
be accepted, when the forcible opening is imputable to the depositary, should there be no
proof to the contrary. However, the courts may pass upon the credibility of the depositor
with respect to the value claimed by him. (Art. 1981, par. 3)

42

Secured Transaction Law

Article 1982
When it becomes necessary to open a locked box or receptacle,
the depositary is presumed authorized to do so, if the key has been
delivered to him; or when the instructions of the depositor as regards
the deposit cannot be executed without opening the box or receptacle.
COMMENT:
Necessity of Opening Locked Box.
-

See comments under the preceding Article.

Article 1983
The thing deposited shall be returned with all its products,
accessories and accessions.
Should the deposit consists of money, the provisions relative to
agents in article 1896 shall be applied to the depositary. (1770)
-

This article is self-explanatory.

Article 1984
The depositary cannot demand that the depositor prove his
ownership of the thing deposited.
Nevertheless, should he discover that the thing has been stolen
and who its true owner is, he must advise the latter of the deposit.
If the owner, in spite of such information, does not claim it
within the period of one month the depositary shall be relieved of all
responsibility by returning the thing deposited to the depositor.
If the depositary has reasonable grounds to believe that the
thing has not been lawfully acquired by the depositor, the former may
return the same. (1771a)
-

This article is self-explanatory.

43

Secured Transaction Law

Article 1985
When there are two or more depositors, if they are not solidary,
and the thing admits of division, each one cannot demand more than
his share.
When there is solidarity or the thing does not admit of division,
the provisions of articles 1212 and 1214 shall govern. However, if
there is stipulation that the thing should be returned to one of the
depositors, the depositary shall return it only to the person designated.
(1772a)
COMMENT:
Two or more Depositors
a. Example of Paragraph 1:
If A and B deposit 1000 sacks of rice, A can demand 500 sacks.
b. If A and B deposited a car, the depositary can return to either, in the absence of a
contrary stipulations. (see Arts. 1212 and 1214, Civil Code)
-

Art. 1212. Each one of the solidary creditors may do whatever may be
useful to the others, but not anything which may be prejudicial to the
latter.

Art. 1214. The debtor may pay anyone of the creditors; but if any
demand, judicial or extrajudicial, has been made by one of them, payment
should be made to him.

Article1986
If the depositor should lose his capacity to contract after having
been made the deposit, the thing cannot be returned except to the
persons who may have the administration of his property and rights.
(1773)
COMMENT:
Rule of Depositor Becomes Insane
-

If the depositor returns to a depositor who is NOW insane, the depositary is


discharged from his obligation only if the insane depositor has kept the thing
delivered or insofar as delivery has been beneficial to such insane depositor (Art.
1241, Civil Code).

44

Secured Transaction Law

Article1987
If at the time the deposit was made a place was designated for
the return of the thing, the depositary must take the thing deposited to
such place; but the expenses for the transportation shall be borne by
the depositor.
If no place has been designated for the return, it shall be made
where the thing deposited may be, even if it should not be the same
place where the deposit was made, provided that there was no malice
on the part of the depositary. (1774)
-

Self-explanatory

Article 1988
The thing deposited must be returned to the depositor upon
demand, even though a specified period or time for such return may
have been fixed.
This provision shall not apply when the thing is judicially
attached while in the depositarys possession, or should he have been
notified of the opposition of a third person to the return or the removal
of the thing deposited. In these cases the depositary must immediately
inform the depositor of the attachment or opposition.
COMMENT:
1.

When deposit must be returned


-

2.

As a rule, the thing deposited should be returned at the will of the


depositor. This is true whether a period has been stipulated or not.

Exceptions to the General Rule


a. When the thing is judicially attached while in the depositarys possession. Reason:
The property will be subject to judicial orders.
b. Should the depositary have been notified of the opposition of a third person to the
return or the removal of the thing deposited. Reason: The oppositor may claim to be
the owner.
Article 1989
Unless the deposit is for a valuable consideration, the depositary
who may have justifiable reasons for not keeping the thing deposited
may, even before the time designated, return it to the depositor; and if
the latter should refuse to receive it, the depositary may secure its
consignation from the court. (1776a)

COMMENT:
45

Secured Transaction Law

Consignation is the act of depositing the things due at the disposal of judicial
authority to relieve liability.
Article 1990
If the depositary by force majeure or government order loses the
thing and receives money or another thing in its place, he shall deliver
the sum or other thing to the depositor. (1777a)
COMMENT:
If not delivered
-
Liable as if it was lost not to a fortuitous event. And be obliged to pay charges and
the amount of the thing deposited.
Article 1991
The depositors heir who in good faith may have sold the thing which
he did not know was deposited, shall only be bound to return the price he
may have received or to assign his right of action against the buyer in case
the price has not been paid him. (1778)

CASES:
Palacio vs. Sudario
7 Phil 275
Plaintiff: Aniceta Palacio
Defendant: Dionisio Sudario
Facts:

Palacio made an agreement with Sudario., for Sudario to pasture the 81 cattles owned by
Palacio. It was stipulated in their agreement that Palacio would pay Sudario .50 cents for every
calf born during the existence of their agreement and that half of which will be awarded to
defendant. Upon demand, Sudario only returned 48 of the cattle, leading to Palacios filing of a
suit against Sudario for the recovery of the other 33.
Contention of the Parties:
Sudario
-
Palacio:
-

claimed that he is not liable for the loss of the unreturned cattle because they were
either drowned in a flood or died due to disease.
claimed that Sudario is liable.

Ruling:
The court did not specifically identify what is the nature of the contract of whether is a
contract of deposit or a contract according to local custom of pasturing, however, they stated
that either way, their obligation remains the same.
Sudario being the depositary has obligation to safekeep the thing deposited and return
the same to depositor. While the thing deposited is under his possession, he is required to
exercise diligence of that of a good father. And in other cases where loss or destruction of the

46

Secured Transaction Law

thing deposited happened, the depositary is presumed to be at fault and he has the burden to
prove otherwise.
In the case at bar, the burden of prooflies on Sudario to prove that the loss of the cattle is
without his fault or through fortuitous event. The court ruled that Sudario failed to overcome the
presumption and therefore, liable for the loss of the cattle.
RC Bishop of Jaro (RCBJ) vs. Dela Pena
26 Phil 144

Plaintiff: RC Bishop of Jaro


Defendant: Father Pea represented by his administrator Gregorio dela Pea
Facts:
RCBJ is a trustee of a charitable bequest made for the construction of a leper hospital to
be constructed in Jaro. RCBJ authorized Fr. Agustin dela Pena as representative of the former to
receive the amount of P6,000 intended for the project. Later, Father Pena received the amount,
but instead of depositing the same in an independent bank account, he deposited the amount
into his personal bank account in Hong Kong and Shanghai Bank of Ilo-ilo. During the war,
Father Pena was detained by US military official. His bank account from which he deposited the
amount was also confiscated alleging that the funds in the said bank will be used for insurgency
purposes. A complaint was filed for the recovery of 6,000. Father Pena died at that time and
represented by the administrator of his estate Gregorio dela Pena.
Contention of the Parties:
RCBJ:

Pena

claimed that Father Pea is liable for the amount as trust funds which was not
included as a part of the funds deposited and which were removed and confiscated
by the military authorities of the US.

claimed that Father Pea is not liable.

Ruling:
A careful examination of the case leads us to the conclusion that said trust funds were a
part of the funds deposited and which were removed and confiscated by the military authorities
of the US. In this jurisdiction, Father dela Penas liability is determined by those portions of the
Civil Code which relates to obligations (Book 4, Title 1). The NCC provides, following the
principles of the Roman Law: No one shall be liable for events which could not be foreseen, or
which having been foreseen were inevitable, with exception of the cases expressly mentioned in
the law or those in which the obligation so declares.
By placing the money in the bank and mixing it with his personal funds, dela Pena did
not thereby assume an obligation different from that under which he would have lain of such
deposit had not been made, nor did he thereby make himself liable to repay the money at all
hazards.
Father dela Pena was not liable for its loss.
Sociedad Dalisay vs. De Los Reyes
55 Phil 542
Depositary: Dalisay
Depositor: De Los Reyes
47

Secured Transaction Law

Facts:
La Sociedad Dalisay is an industrial partnership located in Sta. Rosa Laguna. Prior to
May 20,1923, it received in its warehouse certain palay belonging to several persons. Early on
that morning of May 20, 1923, a fire broke in the said warehouse which at that time contained
thousands of cavans of palay, the exact number being disputed and 568 cavans outside. Only
1,052 cavans of palay plus 568 cavans outside were saved.
Contention of the Parties:
Dalisa:
-

claims that the palay was burned unintentionally and without their fault, thus they
must not be held liable for the damages.

De Los Reyes:
-
claims that Dalisay Company has not alleged that the palay burned was destroyed
without negligence on its part, thus Dalisay is liable for damages.
Ruling:
Dalisay is not liable in returning any quantity of the palay burned, except those cavans of
palays saved. It was proved that the fire was neither intentional nor caused by the fault of the
depositary, who as a matter of fact had even attempted to save the goods.
Lavadia vs. Mendoza
72 Phil 196
Depositor: Lavadia
Depositary: Mendoza (Rosario- administrator)
Facts:

Sisters Paula and Pia martina and Mateo and sisters Isabel and Engracia are surnamed
Lavadia owned and contributed jewels to decorate the image of Our Lady of Guadalupe in
Laguna. After the jewels will be placed under the custody of one for safekeeping and Paula was
designated to be the depositary. The five died except Engracia who demand the return of the
jewel from Rosario, the heir of Paula, who refused its return.
Contention of the Parties:
Engracia:
-
Rosario:
-

claims that the agreement was only for safekeeping.


claims that the agreement is not a deposit because every year the jewels are used to
decorate the image of Our Lady of Guadalupe and also enthrusted for safekeeping
and administration of the jewels.

Ruling:
The agreement is one for deposit because the purpose is for safekeeping and that Rosario
as administrator be obliged to return the belonging to Engracia and the heirs of Martina, Mateo
and Isabel upon the latters demand.

48

Secured Transaction Law

Lavadia vs. Mendoza


72 Phil 196
Depositor: Essabhoy
Depositary: Smith, Bell & Co.
Facts:
In 1993, steamship Umballa arrived in Manila having on board 50,000 bags of rice,
owned by the plaintiff. Plaintiff agent made a contract with defendants, where they agreed to
land the rice and store it in a bonded warehouse. Smith, Bell & Co. Stored 40,000 bags were
stored in a warehouse and 10,000 bags were stored in a warehouse not bonded. Essabhoy called
upon the defendant to deliver the 10,000 bags but the defendant refused unless the plaintiff
repay them the custom duties they have paid to the government.
Contention of the Parties:
Smith, Bell & Co.:
-
Claims that they are not liable for the payment of the custom duties levied upon to
the 10,000 bags of rice, thus the reimbursement made was proper.
Essabhoy:
-

claims that he is entitled to the amount which he reimbursed under protest to


Smith, Bell & Co. in which the latter paid as custom duties. That the 6,000 dollars
custom duties would have been avoided if only all the bags of rice were stored to a
bonded warehouse as agreed upon.

Ruling:
Smith, Bell & Co. must pay the custom duties of the articles delivered into a bonded
warehouse immediately upon arrival in Manila can be shipped out of the country from such
bonded warehouse not bonded must however, pay duties whether they are shipped out of the
country or not. Therefore Smith, Bell & Co. is liable for custom duties on the 10,000 bags which
was not stored in a bonded warehouse.
As a rule, a warehouseman is entitled to reimbursement for expenses he had incurred in
the performance of the contract. But for expenses incurred in violation of the contract, he is not
entitled to reimbursement.
Under Article 1975 - the depositary holding certificates, bonds, securities or instruments
which earn interest shall be bound to collect the latter when it becomes due, and to take such
steps as may be necessary in order that the securities may preserve their value and the rights
corresponding to them according to law.
The above provision shall not apply to contracts for the rent of safety deposit boxes. (n)

CA Agro Indust. Dev. Vs. CA


219 SCRA 426 (1993)
Depositor: CA Agro
Depositary: Security Bank
Facts:

CA Agro and spouses Pugao entered into an agreement whereby CA Agro purchase two
lots of Pugao, and that the titles shall only be transferred upon full payment of the purchase
price, and the owners certificate of title shall be deposited in a safety deposit box of any bank.
49

Secured Transaction Law

They now entered a safety deposit box from Security Bank and trust Co. and then executed a
contract of lease where spouses Pugao were given a key. Thereafter, certain Margarita Ramos
offered to buy the said lot from CA Agro and to execute a deed of sale, the certificate of title
should be presented. But when CA Agro and Pugao opened the safety deposit box, the certificate
of title was missing.
Contention of the Parties:
CA Agro:
-

claims that the contract for the rent of the safety deposit box is actually a contract
of deposit and that the bank is liable for the loss of the certificate.

Security bank:
-
claims that the contract entered into was a contract of lease.
Ruling:
It is a special kind of contact of deposit, because the full and absolute possession and
control of the safety deposit box was not given to the joint renters. In the case at bar, it is clear
that the petitioner and spouses Pugao intended to rent a safety deposit box from Security Bank,
for the bank to receive documents and other valuables for safekeeping. The security bank in turn
is required to observe reasonable diligence of a good father of a family while in possession of the
safety deposit box containing the title.
The court also ruled that since the contract is identified as a special kind of deposit and
such can be made orally or in writing, the parties in such contacts may stipulate agreements,
clauses or terms as may be deemed convenient provided not contrary to law, public policy or
morals. Therefore, the bank is liable.
Under article 1978 When the depositary has permission to use the thing deposited, the contract
loses the concept of a deposit and becomes a loan or commodatum, except where safekeeping is
still the principal purpose of the contract.
The permission shall not be presumed, and its existence must be proved. (1768a)

Javellana vs. Lim


11 Phil 141 (1908)
Depositor: Angel Javellana
Depositary: Jose and Ceferino Lim
Facts:

Jose and Ceferino Lim received from Javellana the amount of 2,686.58 on May 26,
1897. They executed and subscribed a document considered as a deposit to be returned jointly
and severally on January 20, 1898 in favour of Javellana. When the obligation became due, Lim
ask for an extension of the payment, binding themselves to pay an interest of 15% per annum on
the amount of their indebtedness to which Javellana had agreed upon.
Contention of the Parties:
Javellana:
-

Lim:

claims that the transaction was that of a loan because Lim failed to deliver the
money on the due date. Moreover, when Lim agreed to pay the interest, it was
tantamount to admittance that their transaction was a contract of aloan.
claims that the transaction between them was a deposit that only the amount they
initially received by way of the contract of deposit should be returned to the
50

Secured Transaction Law

appellee and since they have already paid an aggregate amount of more than 5,000
pesos, they are entitled for reimbursement of the excess amount.
Ruling:
The transaction was loan because when the depositary had permission to use the thing
deposited, the contract loses the concept of deposit and became a contract of loan or
commodatum, except if safekeeping is still the principal purpose of the deposit. The permission
shall not be presumed, and its existence must be proved.
Baron vs. David
51 Phil 2 (1927)
Depositor: Silvestra and Guillermo Baron
Depositary: Pablo David
Facts:

David was the owner of a rice mill in Pampanga. Baron delivered around 2,000cavans of
palay to him, with the understanding that David was free to convert them into rice, and dispose
of them at his pleasure. After sometime, the rice mill was burned, including its contents at
around 360 cavans of palay. This action was brought to recover the value of said cavans.
Contention of the Parties:
Baron:

David:

claims that the cavan of palays was delivered to David under a contract of sale, thus
David is liable to cover the value of the cavans of palays destroyed by fire.

claims that the delivery is under a contract of depositthat since the palays were
destroyed by fire, he is absolve from any liability.

Ruling:
The owner of the rice mill who in conformity with customs prevailing in the trade
receives palay and converts it into rice, selling the product for his own benefit, must account for
the palay to the owner at the price prevailing at the time demand is made. The destruction of the
rice mill with its contents by fire, after the palay thus deposited and been milled and marketed
does not affect the liability of the owner of the mill. Even supposing that the palay had been
delivered in the character of a deposit, subject to future sale or withdrawal at the plaintiffs
election, nevertheless, if it was understood that the defendant might mill the palay and he has in
fact appropriated it to his own use, he is off course bound to account for its value, because under
the law, such a deposit loses the concept of deposit and becomes a loan. By appropriating the
thing, the bailee become responsible for its value. The defendant should be liable for the whole
quantity delivered, without deducting the 360 that were burned.
Under Article 1980, fixed, savings and current deposits of money in banks and similar
institutions shall be governed by the provisions concerning simple loan. (n)
Bank of the Phil. Islands vs. CA
232 SCRA 302 (1994)
Petitioner: BPI
Respondents: CA, Eastern Plywood Corporation and Benigno Lim
Facts:

Private respondents, Lim and Eastern have a joint checking account with BPI. Later, the
joint checking account was withdrawn and same was deposited to BPI in a joint account under

51

Secured Transaction Law

the names of Lim and Mariano Velasco. Thereafter, Eastern applied for a loan with BPI. A heldout agreement was made by the parties stating that the loan shall be secured by the joint account
of Lim and Velasco after the respective interest of the said account is established by judicial
determination. Velasco died then the trial court ordered the heirs to withdraw half of the joint
account made by Lim and Velasco and was allowed. Later, a collection suit was filed by BPI for
the payment of the loan applied by eastern.
Contention of the Parties:
Petitioner:
-

asserts that they are relieved from paying the withdrawn amount by the heirs of
Velasco in the joint account because, they are in good faith, allowed the withdrawal
by virtue of the court order in the estate settlement proceedings.
Respondents:
-
contended in their counterclaim that they, being the depositor and real owner of
the joint account, has the right to demand for the refund and the bank as
depositary, has obligation to do so.
Ruling:
Re. Article 1980, bank deposits are by its nature irregular deposits which are regarded as
a simple loan because they earn interest. Hence, the relationship between the bank and
depositor is a creditor debtor relationship in which bank deposits are payable upon demand
by the depositor. In the case at bar, it was established by the court that the joint account in
question really belongs to the private respondents notwithstanding the facts that it was under
the names of Lim and Velasco. Hence, the said account is payable upon demand by the real
owners, which is Eastern. The private respondents being the true creditors of the bank, have the
right to demand the payment of the said account. The petitioner bank cannot rely upon the
judgment in the estate proceeding of Velasco, since the judgment thereof authorizing the heirs
to withdraw half of the said account, is not final determination of ownership in the joint
account, it is provisional in nature and cannot be subjected to execution.
Thus the petitioner bank cannot be relieved from its obligation to refund the account
simply because it was withdrawn already, even if the petitioner acted in good faith. The only way
that they be relieved in such obligation is to refund the account to the person of their creditor
depositor. Therefore, it is a contract of loan.
Central bank vs. Morfe
63 SCRA 114 (1975)
Petitioner: Central Bank
Respondents: Judge Morfe and spouses Padilla and Elizes
Facts:
The Fidelity bank was declared insolvent by the Monetary Board of the petitioner Central
bank and ordered that the Fidelity bank shall halt its business transactions. After the declaration
of the banks insolvency, a judgment was rendered in favour of the private respondent spouses
Padilla and Elizes for the refund of their existing time deposits against the Fidelity Bank. A writ
of execution was then ordered by the liquidation court for the execution of the said judgment.
Controversy arose in this case in the ordered execution of the judgment by the respondent judge
in favour of the spouses which in turn refused by the bank.
Contention of the Parties:
Central bank:
-
contended that it is a contract of loan, that since the judgment in favor of the
spouses Padilla and Elizes were favourably obtained after the bank was declared
insolvent, such judgment cannot obtained preference against other depositors be
executed against Fidelity Bank.

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Secured Transaction Law

Respondent Judge:
-

claims that it is a contract of deposit, that since the judgment in favour of the
spouses is not suspended, such claim is considered preferred credits pursuant to
Article 2244 of the Civil Code and therefore, be executed in preference to claims of
other depositors.

Supreme Court Ruling:


The respondent judge erred in treating time deposits as preferred credits. Article 2244 as
invoked by the respondent cannot apply in the case at bar. Therefore, such judgment cannot be a
preferred claim after the bank is declared insolvent. The court ruled pursuant to Article 1980
that fixed, savings and current deposits to bank and other similar institutions are not by nature
deposits, but rather simple loans, and therefore no preferred credits.
In the case at bar, time deposits of spouses Padilla and Elizes are by its nature simple
loans and not true deposits, therefore they cannot be regarded as preferred credits, ruling
otherwise would generate undue preference to prejudice of other depositors who did not
institute actions after their depositary bank is declared insolvent. Therefore, the bank is not
liable.
Serrano vs. Central Bank
96 SCRA 96 (1980)
Petitioner: Manuel Serrano
Respondents: Cebtral Bank and OBM
What Happened:
Serrano deposited a one year, 6% interest, time deposit account with respondent bank,
Overseas Bank of Manila. After sometime, demand was made by the petitioner to OBM for
encashment of his time deposit, but OBM did not obliged to honor the said demand. Hence this
case of recovery of the time deposit from OBM and a damages against Central Bank.
Contention of the Parties:
Petitioner:
-
claims that since Central bank is the guarantor of banks in the Philippines
including respondent bank, OBM, it should protect the interests of depositors of
OBM from non-payment of bank deposits, thus, when the petitioner was not given
his time deposit upon demand, Central bank is liable for the damages incurred
against the petitioner by virtue of OBMs non-payment of the time deposit of the
petitioner. Petitioner also claimed that all assets assigned by OBM to the
respondent CB is treated as trust properties, and the same should be used to cover
liabilities of the OBM, including the claims of the petitioner.
OBM:
-
claimed that it may be true that Central bank has the duty for administration and
supervision of banking institutions, it does not mean that Central bank should be
treated as guarantor of every depositors claim against an insolvent bank, making
Central Bank as a safety net to whom depositors can run into in cases of time bank
deposit claim.
Supreme Court Ruling:
Central bank is not liable for the claims of the petitioner and all OBMs depositors. The
court ruled that, while it may be true that Central bank has the duty to administer and supervise
banking transactions in the Philippines, Central Bank should not be treated by all depositors of
an insolvent bank as a safety net to answer all claims of unpaid bank deposits. It is not
ministerial duty of the Central bank to answer the liability of an insolvent and hold all of OBMs
assets or mortgaged properties as trust properties in favour of all of its creditors. Since there is
53

Secured Transaction Law

no established trust as invoked by the petitioner, no breach of trust is committed by the


respondent Central bank.
Thus, the law on loan be applied, since bank deposits is by its nature a contract of loan,
and the same is govern by the law on loans. Thus pursuant to the law of loans, OBMs nonpayment of the petitioners time deposit is tantamount to OBMs failure to pay an obligation as a
debtor. OBM, being declared as insolvent bank and being a debtor of petitioner, the remedy of
the latter is to file a claim in the liquidation proceedings of OBM not a mandamus against the
Central Bank. Central bank has no obligation to pay deposits in an insolvent bank.

Distinction between Force Majeure and Fortuitous Event:


Force Majeure

inevitable accident or casualty; an accident produced by any physical


cause which i irresistible; such as lightning, tempest, perils of the sea,
inundation or earthquake; the sudden illness or death of a person.

The event which we would neither foresee nor resist; as for example, the
lightning, stroke, inundation, hurricane, public enemy, attack of
robbers.Any accident due to natural causes, directly, exclusively without
human intervention, such as could not have been prevented by any kind
of oversight, pains and care reasonably to have been expected.

Fortuitous Event
-

An event
which takes place by accident and could not have been
foreseen, such as destruction of houses, unexpected fire, shipwreck,
violence of robbers.
An unexpected event act of God which could neither be foreseen nor
resisted, such as floods, torrents, shipwrecks, conflagration, lightning,
compulsion, insurrections, destruction of buildings by unforeseen
accidents on other occurrences of a similar nature.

c. Obligations of the Depositor


Articles1992 1995 ; 1231

Article 1992
If the deposit is gratuitous, the depositor is obliged to reimburse
the depositary for the expenses he may have incurred for the
preservation of the thing deposited. (1779a)
COMMENT:
If Onerous
-
Depositor is not obliged to reimburse, because the depositary is paid.

54

Secured Transaction Law

Article 1993
The depositor shall reimburse the depositary for any loss arising
from the character of the thing deposited, unless at the time of the
constitution of the deposit the former was not aware of, or was not
expected to know the dangerous character of the thing, or unless he
notified the depositary of the same, or the latter was aware of it
without advice from the depositor. (n)
COMMENT:
General Rule
-
If the depositary suffers because of the character of the thing deposited, the
depositor should be responsible for the loss sustained by the depositary.
Exception:
a) If at the time the deposit was made, the depositor was not aware of, or was not
expected to know the dangerous character of the thing.
b) If at the time the deposit was made, the depositor knew of the danger but he notified
the depositary of the same.
c) If at the time the deposit was made, the depositary was aware of the danger, even
though he had not been notified by the depositor.

Article 1994
The depositary may retain the thing in pledge until the full
payment of what may be due him by reason of the deposit. (1780)

COMMENT:
1.

Pledge by Operation of Law


-

Art. 1994 gives an example of a pledge created by operation of law. As a matter of


fact, the thing deposited but now pledged may even be sold after the requirements
and formalities in the case of sale things pledged have been complied with.

Article 1995
A deposit is extinguished:
1) Upon the loss or destruction of the thing deposited;
2) In case of a gratuitous deposit, upon the death of either the
depositor or the depositary. (n)
In relation to Article 1231: Obligations are extinguished:
1)
2)
3)
4)
5)

By payment or performance
By the loss of the thing due
By the condonation or remission of the debt
By the confusion or merger of the rights of creditor and debtor
By compensation
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Secured Transaction Law

6) By novation
7) Other causes: annulment, rescission, fulfilment of a resolutory condition,
prescription

3. Necessary Deposit, Articles 1996-2004

A deposit is necessary:

Article 1996

1. When it is made in compliance with a legal obligation;


2. When it takes place on the occasion of any calamity, such as
fire, storm, flood, pillage, shipwreck, or other similar events.
COMMENT:
1.

Other examples of necessary deposits in compliance with a legal obligation


a. cash deposits to be made by certain officers or officials
b. deposits to be made by those who desire to use firearms

2.

Kinds of Necessary Deposits


a. That made by travelers in hotels or inns.
b. That made with common carriers.
Article 1997
The deposit referred to in No. 1 of the preceding article shall be
governed by the provisions of the law establishing it, and in case of its
deficiency, by the rules on voluntary deposit.
The deposit mentioned in No. 2 of the preceding article shall be
regulated by the provisions concerning voluntary deposit and by Art.
2168.

COMMENT:
1.

Governing Rules for Deposits Made in Compliance with a Legal Obligation


a. Firstly, the law creating said deposit
b. Suppletorily, the rule on Voluntary Deposits

2.

Rules Governing Deposits Made because of a Calamity


a. Firstly, the rules on Voluntary Deposits
b. Also Art. 2168 of the CC
- Art. 2168. When during a fire, flood, storm, or other calamity, property
is saved from destruction by another person without the knowledge of the
owner, the latter is bound to pay the former just compensation.

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Secured Transaction Law

Article 1998
The deposit of effects made by travelers in hotels or inns shall
also be regarded as necessary. The keepers of hotels or inns shall be
responsible for them as depositaries, provided that notice was given to
them, or to their employees, of the effects brought by the guests and
that, on the part of the latter, they take the precautions which said
hotel-keepers or their substitutes advised relative to the care and
vigilance of their effects.
COMMENT:
1.

Innkeeper defined
-

2.

The keeper of an inn for the lodging of travelers and passengers for a reasonable
compensation

Occasional Entertainment defined


-

3.

The occasional entertainment of travelers does not of itself make one an innkeeper

Travelers
-

4.

Refers to the transient and was certainly not meant to include ordinary or regular
boarders in any apartment, house, inn or hotel

Reasons for the Liability of the Hotels or Inns:


a. It is a good policy to encourage travel;
b. Travelers and strangers must of necessity trust in the honesty and vigilance of
the innkeeper and those in his employ;
c. The opportunity and temptation to connive with evil-disposed persons and to
afford facilities in stealing the goods of those in his house; and
d. The innkeeper is as a rule better able to protect himself against loss than the
guest who is practically helpless to enforce his rights.

5.

When liability begins


-

6.

Liability or responsibility by the hotel or innkeeper commences as soon as there is


an evident intention on the part of the travelers to avail himself of the
accommodations of the hotel or inn. It does not matter whether compensation has
already paid or not, or whether the guest has already partaken of food and drink or
not.

Meaning of Effects
-

All kinds of personal property, like jewelry, fountain pens, cash

Article 1999
The hotel-keeper is liable for the vehicles, animals and articles
which have been introduced or placed in the annexes of the hotel.
-

This article is self-explanatory

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Secured Transaction Law

Article 2000
The responsibility referred to in the two preceding articles shall
include the loss of, or injury to the personal property of the guests
caused by the servants or employees of the keepers of hotels or inns as
well as by strangers; but not that which may proceed from any force
majeure. The fact that the travelers are constrained to rely on the
vigilance of the keeper of the hotels or inns shall be considered in
determining the degree of care required of him.
COMMENT:
1. Rules of Liability
a. As a rule, the master is responsible for the acts of servants or employees of the
hotel provided of course that notice have been given and the proper precautions
taken.
b. The master is also liable for the acts of strangers, like malicious mischief or theft.
2. Non-liability for force majeure
The master should be exempted in case:
a. There has, for example, been robbery by intimidation of persons, or
b. A fortuitous event, like flood.

Article 2001
The act of a thief or robber, who has entered the hotel is not
deemed force majeure, unless it is done with the use of arms or
through an irresistible force.
COMMENT:
1.

Reason for Art. 2001


-

The innkeeper is bound is bound to keep his house safe from the intrusion of
thieves, day and night, and if they are allowed to gain access to the house, and
specially without the use of such force as will show its marks upon the house, it is
fairly presumable that the innkeeper is at fault.

Article 2002
The hotel-keeper is not liable for compensation if the loss is due
to the acts of the guests, his family, servants or visitors, or if the loss
arises from the character of the things brought into the hotel.
COMMENT:
1.

Instances when hotel-keeper is not-liable


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Secured Transaction Law

The acts mentioned in the article be either the result of a voluntary malicious act or
simply of negligence.
2.

Examples:
a. Act of the guest himself when turning on his radio, he may have forgotten to attach
the transformer.
b. Acts of visitors of the guest.
c. Acts of the guests own servant may have appropriated the thing for himself.

Article 2003
The hotel-keeper cannot free himself from responsibility by
posting notices to the effect that he is not liable for the articles
brought by the guest. Any stipulation between the hotel-keeper and
the guest whereby the responsibility of the former as set forth in
Articles 1998 to 2001 is suppressed or diminished shall be void.
-

This article is self-explanatory

Article 2004.
The hotel-keeper has a right to retain the things brought into the
hotel by the guest, as a security for credits on account of lodging, and
supplies usually furnish to the guests.
COMMENT:
1.

Right to sell
-

2.

Why the right of retention is given


-

According to a member of the Code Commission, this right of retention is in the


nature of a pledge created by operation of law, and thus, the hotel-keeper is allowed
the power of sale.

The right of retention is given to compensate the innkeeper for the extraordinary
liabilities imposed upon the law.

Some Examples of Necessary Deposit:


Articles 538, 559, 586, 2104 of the Civil Code
-

Art. 538. Possession as a fact cannot be recognized at the same time in


two different personalities except in the cases of co-possession. Should a
question arise regarding the fact of possession, the present possessor shall
be preferred; if there are two possessors, the one longer in possession; if
the dates of the possession are the same, the one who presents a title; and
if all these conditions are equal, the thing shall be placed in judicial
deposit pending determination of its possession or ownership through
proper proceedings.

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Secured Transaction Law

Art. 559. The possession of movable property acquired in good faith is


equivalent to a title. Nevertheless, one who has lost any movable or has
been unlawfully deprived thereof, may recover it from the person in
possession of the same.
If the possessor of a movable lost or of which the owner has been
unlawfully deprived, has acquired it in good faith at a public sale, the owner
cannot obtain its return without reimbursing the price paid therefore.
-

Art. 586. Should the usufructuary fail to give security in the cases in
which he is bound to give it, the owner may demand that the immovable
be placed under administration, that the movables be sold, that the public
bonds, instruments of credit payable to order or to bearer be converted
into registered certificates or deposited in a bank or public institution,
and that the capital or sums in cash and the proceeds of the sale of the
movable property be invested in safe securities.

Art. 2104. The creditor cannot use the thing pledged, without the
authority of the owner, and if he should do so, or should misuse the thing
in any other way, the owner may ask that it be judicially or extra judicially
deposited. When the preservation of the thing pledged requires its use, it
must be used by the creditor but only for that purpose.

CASE:
Goodman vs. Lichauco
71 Phil. 237
Facts:

Edward Mitchell, proprietor of New Plaza Hotel in Manila, was declared insolvent.
Lichauco was nominated a receiver of the insolvency (new proprietor). Goodman was
accommodated in the hotel, thus, depositing his personal properties. Goodman did not pay the
rent. Controversy arises when during the insolvency proceedings, Goodman wants the return of
his personal properties but the respondent Lichauco refused.
Contention of the parties
Goodman:
-
I want my personal belonging back to me. I only deposited it to you and therefore it
should be exempt from sequestration.
Lichauco:
-

We are in a true insolvency of money. Your debt is more valuable than your
personal properties. We could not return it until you pay us with your debt.

Ruling:
The court ruled that inn-keepers have the obligation to receive travelers and for the
safety of their effects. However, the law establishes a presumption that inn-keepers have the
right of pledge in the effects brought in. Hence, if one owes for the accommodation to a
proprietor of hotel, this one has a right to retain it as a token until he pays his debt for
accommodation. Also under Art.2004 of the CC states that: The hotel keeper has the right to
retain the things brought into the hotel by the guest, as security for credits on account of lodging
and supplies usually furnish to the guests.

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Secured Transaction Law

4. Judicial Deposit or Sequestration, Articles 2005 - 2009

Article 2005
A judicial deposit or sequestration takes place when an
attachment or seizure of property in litigation is ordered.
COMMENT:
1.

Nature of Garnishment or Judicial Deposit


-

The garnishment of property to satisfy a writ of execution operates as an


attachment and fastens upon the property a lien which the property is brought
under the jurisdiction of the court issuing a writ. It is brought into custodia legis,
under the sole control of such court. Property is in custody of the court when it as
been seized by an officer either under a writ of attachment or mesne process or
under a writ of execution. A court has no control of such property, exercises
exclusive jurisdiction over same. No court, except one having supervisory control
or superior jurisdiction in the premises has a right to interfere with and change that
possession.

Article 2006
Movable as well as immovable property may be the object of
sequestration.
COMMENT:
Object of judicial sequestration
1. movables
2. immovables

Article 2007
The depositary of property or objects sequestrated cannot be
relieved of his responsibility until the controversy which gave rise
thereto has come to an end, unless the court so orders.
COMMENT:
1.

When Depositary can be relieved of liability


-

Only when the controversy ends, unless the Court orders otherwise.

Article 2008
The depositary of the property sequestrated is bound to comply,
with respect to the same, with all the obligations of a good father of a
family.

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Secured Transaction Law

This article is self-explanatory

Article 2009
As to matters not provided for in this Code, judicial sequestration
shall be governed by the Rules of Court.
COMMENT:
1.

Suppletory Rules in Rules of Court


-

The Civil Code prevails in case of conflict.

Kinds of Diligence
1. Ordinary Diligence
-
Ordinary diligence is the steps or conduct observed in the fulfillment of the
obligation; taking into consideration its nature and circumstances of persons, time
and place and as a good father of a family if the obligation fails to state the conduct
required.
Example: Safety of goods or passengers transported by private carrier
2.

Extraordinary Diligence
-

3.

Extraordinary diligence is the conduct to observe in the fulfillment of the obligation


safely as far as human care and foresight can provide; using the utmost diligence of
very cautious persons, with due regard for all the circumstances.

Diligence of a Good Father of a Family


-

The diligence which an ordinary prudent man would exercise with regard to his
own property. The diligence of a good father of a family which the law requires to
avoid damage is not confined to the careful and prudent selection of subordinates
and employees but include inspection of their work and supervision of the
discharge of their duties.
Example: Diligence to be observed by the depositary in changing the
way of the deposit and on property sequestrated.

5. The Warehouse Receipts Law (see and read Annex B)

CASES:
PNB vs. Producers Warehouse Asso.
42 Phil. 108
Facts:

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Secured Transaction Law

Producers Warehouse Assoc. entered into a written contract with the Producers
Company in which the latter was appointed as the general manager of the business of the
former, a warehouse business. Producer Warehouse Assoc. issued to the Produce Company its 7
negotiable quedans for 15,699.34 piculs of copra and agreed to deliver said copra to the Produce
Company or its order.
The Produce Company arranged for an overdraft payable on demand with the PNB of
P1M. To secure such overdraft, the quedans were endorsed in blank by the Produce Company
and delivered to the PNB which became the owner and holder thereof. When the bank asked for
the possession of the goods represented by quedans, the defendant said that it could not deliver
the goods because they are not in their warehouse. But on its own amended answer, they
admitted that Produce Company deposited goods to their warehouse but the two officers who
issued the warehouse receipt had no authority to do so.
Contention of the parties
PNB:

contends that the Producer Company should deliver the copra stated in the
quedans by virtue of the warehouse receipt duly negotiated in their favor of which
they became holder/endorsee.

Producers Warehouse Assoc.:


-
while it may be true that the goods were stored in the defendants warehouse and
that the warehouse receipts were issued by defendant to Philippine Produce, the
said quedans were nevertheless invalid as it was signed by unauthorized personnel
of the defendant.
Ruling:
The court ruled that the defendant, by first denying the validity of the warehouse receipt
as their defense, is stopped from asserting that the Philippine Produce failed to comply with
their contract as stipulated in their receipt because in the first place, the quedans will never
come into existence if the agreement of the parties is yet to be fulfilled. In short, since the
receipt was duly negotiated, the agreement for negotiation of the receipt has been fulfilled.
Thus, in the case at bar, since the receipt was duly negotiated by the defendant in favor
of the Philippine Produce, the latter, being the manager of the defendant has the authority to
transfer ownership of the copras described in the quedans in favor of the plaintiff.

BPI vs. Hedridge


47 Phil. 57
Facts:
The appellee, Umberto De Poli, is a businessman involve in exporting Philippine
products such as maguey, hemp and tobacco. He is also a warehouseman. Sometime, De Poli
opened an account credit with the BPI and other banks such as Hongkong and Shanghai Bank
etc., where De Poli drew checks for the purchase of some of the products. The said products
were then stored in his warehouse. As security for the account credit, a warehouse receipt for
the products stored in his warehouse was made in favor of BPI and other banks which he had
account credits. Later, De Poli was declared insolvent. The appellant, Hedridge was elected as
assignee and took over the goods stored in the warehouse of the De Poli. Dispute arose in the
claims of ownership over the products stored in De Polis warehouse between the appellee banks
and other banks which De Poli has secured warehouse receipts and other creditors of De Poli.
Contention of the parties
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Secured Transaction Law

Hedridge:
-

BPI:

The appellee banks dont have the preference over them since the warehouse
receipts they held are not negotiable instruments. This is because, while it may be
true that in the face of the warehouse receipts held by the appellee, that was
endorsed by De Poli, there is no expression in the said document to make it
negotiable because it was not indicated therein that the receipt is deliverable to (1)
specified person (2) to bearer (3) or order of specified person.
Contends that by virtue of the warehouse receipt which was endorsed by De Poli in
their favor, it conveys ownership over the merchandise and therefore they should
be given preference for the payment of De Polis credits.

Ruling of the Supreme Court


Examining the receipts in question in the case at bar, it shows that it was endorsed by De
Poli and that the word nonnegotiable was not indicated therein, therefore the intention of De
Poli is to make the receipts held by the bank negotiable.
Moreover, while it may be rue that there was no indication that the goods indicated in
the receipt is deliverable to (1) specified person (2) to bearer (3) or order of specified person, it
does not destroy the negotiability of said instruments because it is presumed that the
merchandise in the warehouse is subject in the orders of their owner, who is also the
warehouseman, De Poli.
Thus, when he endorsed the receipts in favor of the appellants as security of his credit
account, De Poli, the owner of the goods intended to transfer ownership thereof.
American Foreign Banking Corp. vs. Hedridge
49 Phil. 975
Facts:
Umberto De Poli issued a warehouse receipt known as quedan for sales of tobacco
particularly described as Cagayan Tobbaco with remarks specified in the receipt. Said receipt
was endorsed in blank to AFBC as security for overdraft. De Poli later became insolvent and
AFBC presented its claim for delivery of tobaccos stated in the warehouse receipt. The
warehouse receipts were purchased for value by AFBC, believing that it is insolvent. It was
therefore issued by De Poli in favor of AFBC as security for his overdraft.
Contention of the parties:
Hedridge and De Poli
-
claimed that the warehouse receipts were negotiable. Title of the goods cannot be
transferred to AFBC for they only claim ownership over Isabela Tobacco in which
the good appearing the receipt indicates that it is Cagayan Tobacco, therefore
rendering the warehouse receipt null and void.
American Foreign Banking Corp. (AFBC)
-
claims that regardless of the description of the tobaccos indicated in the receipt and
its actual quality in the warehouse of De Poli, ownership therefore is still in their
favor by virtue of the warehouse receipts they purchased from De Poli.
Ruling of the Supreme Court
The court ruled that the intention of De Poli and AFBC should prevail over technical
objection as to the discrepancy of the description of the tobacco.
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Secured Transaction Law

In the case at bar, despite the fact that in the face of the receipt, Cagayan Tobacco was
indicated contrary to what is claimed by AFBC as Isabela Tobacco, evidenced adduced by De
Poli shows that he intended that regardless of the quality of the tobacco, be intended to use the
same as security of his overdraft. Moreover, he acknowledges the fact that in his Azcarraga
warehouse, no other kind of tobacco was stored other than Isabela Tobacco, which he intended
to use as security.
Roman vs. Asia Banking Corporation
46 Phil. 705
Facts:

An insolvency proceeding was filed concerning Umberto De Poli and 576 bales of tobacco
which were in possession of Asia Banking Corporation through a quedan issued by De Poli to the
banks. The receipt is endorsed in blank and it is not marked nonnegotiable or no negotiable.
However, the 576 bales of tobacco are part and parcel of the 2,777 bales purchased by De Poli
from appellee Felisa Roman. She claims the 576 bales of tobacco under and by virtue of an
instrument.
Contention of the parties
Felisa Roman:
-
She declares the lien upon the bales of tobacco be superior to that of the claim of
Asia Banking Corporation.
Asia Banking Corporation:
-
contended that by virtue of the warehouse receipt issued in their favor by de Poli,
transfers the ownership of the goods in their favor and therefore is preferred rather
than the claim of the appellee.
Ruling of the Supreme Court
Though the instrument states that the tobacco should remain in the warehouse of De
Poli as a deposit until the price was paid, it appears clearly from the language of the instrument
that it evidences a contract of sale and the recitals show that De Poli received from Roman 2,777
bales of tobacco of the total value of P78, 815.69, the only lien upon the tobacco which Roman
can claim is a vendors lien.
The order appealed from is based upon the theory that the tobacco was transferred to the
Asia Banking Corporation as security for a loan and that as the transfer neither fulfilled the
requirements of the Civil Code for a pledge nor constituted a Chattel Mortgage under Act No.
1508, the vendors lien of Felisa Roman should be accorded preference over it.
Lu Kian vs. Manila Railroad
19 SCRA 5
Facts:
The appellee, Lu Kian imported 2,000 cases of carnation milk. Upon delivery in the
Philippines; only 1,829 marked Lu Kian were only discharged and it was received by the Manila
Port Service, a subsidiary of the Manila Railroad. On the same date (Dec. 1959) and by the same
vessels (SS Golden Bear), 3,171 cases marked Cebu united of the same goods owned by Cebu
were discharged, over delivering of 171 cases of goods. 1,913 cases of carnation milk is then
delivered to Lu Kian as consignee then claimed that the 2000, and therefore seeks recovery of
the value of the undelivered goods.

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Secured Transaction Law

Contention of the parties:


Lu Kian:
-

claims that the appellant short delivered the goods they imported; therefore they
are liable for the value of undelivered goods.

Manila Railroad:
-
claims since they in fact delivered 1,913 cases to Lu Kian, they should not be held
liable to pay for the value of the short delivered 87 cases as what was discharged in
the shipment was only 1,829, that they actually over delivered and seeks the
reimbursement of the value of the over delivered goods.
Ruling:
The legal relationship between the parties is that of a depositor and a warehouseman.
Thus, Manila Railroad being the warehouseman and custodian of the goods discharged from the
vessel, has the duty like that of an ordinary depositor to take good care of the goods and turn
them over to the party entitled to their possession.
Thus, Manila Railroad, being the warehouseman should have withheld the delivery of the
merchandise or in accordance with Art. 2137, should have conducted investigation or call the
attention of the disputing parties to file a special civil action of interpleader to determine the
rightful owner of the properties.
PNB vs. Sayo
292 SCRA 202
Facts:

Noahs Ark Sugar Refinery issued warehouse receipts. Subsequently, the warehouse
receipts were negotiated and endorsed to Luis T. Ramos and Cresencia K. Zoleta. Ramos and
Zoleta then used the quedans as security for two loan agreements obtained by them from the
PNB. Ramos and Zoleta failed to pay their loans. Consequently, the PNB wrote to Noahs Ark
Sugar Refinery demanding delivery of the sugar stocks covered by the quedans. Noahs Ark
Sugar Refinery refused to comply with the demand alleging ownership thereof for which reason
the PNB filed with the RTC of Manila a verified complaint for Specific Performance with
Damages and Application for Writ of Attachment.
Contention of the parties
Noahs Ark:
-
claimed that they were the owners of the subject quedans. Defendants agreed to
sell to RNS Merchandising and St. Therese Merchandising the total volume of
sugar. Considering that the vendees and the first endorsers of the subject quedans
did not acquire ownership thereof, the subsequent endorsers and plaintiff itself did
not acquire a better right of ownership than the original vendees/first endorsers.
Ruling:
While the PNB is entitled to the stocks of sugar as the endorsee of the quedans, delivery
to it shall be effected only upon payment of the storage fees. Imperative is the right of the
warehouseman to demand payment of his lien at his juncture because in accordance with the
Warehouse Receipts Law, the warehouseman loses his lien upon the goods by surrendering
possession thereof. In other words, the lien may be lost where the warehouseman surrenders the
possession of the goods without requiring payment of his lien because the warehousemans lien
is possessory in nature.
The endorsement and delivery of the warehouse receipts by Ramos and Zoleta to
petitioner was not to convey title to or ownership of the goods but to secure the loans granted to
Ramos and Zoleta by petitioner.
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Secured Transaction Law

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Secured Transaction Law

C.
1.

GUARANTY AND SURETYSHIP

Nature and Extent of Guaranty and Surety


INTRODUCTORY COMMENT:
(1) Guaranty in the Broad Sense
(a) Personal guaranty;
(b) Or real guaranty.
(2) Personal Guaranty
This may be in the form of:
(a) Guaranty (properly so-called or guaranty in the strict sense)
(b) Suretyship (one where the surety binds himself solidarily, not subsidiarily, with
the principal debtor)
(3) Real Guaranty
Here, the guaranty is PROPERTY
(a) If real property the guaranty may be in the form of:
1) A real mortgage;
2) Antichresis.
(b) If personal property the guaranty may be in the form of:
1) Pledge;
2) Chattel mortgage.
(4)Classification of Guaranty
(a) As to origin
1) Conventional agreed upon by the parties
2) Legal imposed by virtue of a provision of a law
3) Judicial one which is required by a court to guarantee the eventual right of
one of the parties in a case
(b) As to Consideration
1) Gratuitous the guarantor does not receive anything for acting as such
2) Onerous the guarantor receives valuable consideration
(c) As to the Person Guaranteed
1) Single one constituted solely to guarantee or secure performance by the
debtor of the principal obligation
2) Double/Sub-guaranty one constituted to secure the fulfillment by the
guarantor of a prior guaranty
(d) As to Scope and Extent

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Secured Transaction Law

1) Definite the guaranty is limited to the principal obligation only, or to a


specific portion thereof
2) Indefinite or simple ones where the guaranty includes not only the
principal obligation but also all its accessories
Article 2047
By guaranty a person, called the guarantor, binds himself to the
creditor to fulfill the obligation of the principal debtor in case the latter
should fail to do so.
If a person binds himself solidarily with the principal debtor, the
provisions of Section 4, Chapter 3, Title I of this Book shall be
observed. In such case the contract is called a suretyship.
COMMENT:
1.

Guaranty in the Strict Sense


This Article refers to guaranty properly so-called, or guaranty in the strict sense.
The first paragraph defines this contract of guaranty. The parties thereto are the
guarantor and the creditor. Strictly speaking, the contract between the debtor and the
guarantors is called the contract of indemnity.

2.

Characteristics of the Contract of Guaranty


(a) It is a contract between the guarantor and the creditor.
(b) There must be a meeting of the minds between the parties (PNB v. Garcia, 47 Phil.
662; Texas [Phil.] Co. v. Alonzo, 73 Phil. 90).
(c) Accessorybecause it is dependent for its existence upon the principal obligation
guaranteed by it
(d) Subsidiary and conditionalit takes effect only when the principal debtor fails in his
obligation subject to limitation
(e) Unilateral (1) gives rise only to the duty on the part of the guarantor in relation to
the creditor and not vice versa; and (2) it may be entered into even without the
intervention of the principal debtor
(f) Nominate
(g) Consensual
(h) It is not presumed. It must be expressed and reduced in writing.
(i) As to form, the contract of guaranty falls under the Statute of Frauds (See Art. 1403,
No. 2).
(j) It is strictly interpreted against the creditor and in favor of the guarantor/surety and
is not to be extended beyond its terms or specified limits.
(k) Guarantor must not be the principal debtor.

3.

4.

Guarantor Distinguished from Surety


GUARANTOR
(a) subsidiary liability

SURETY
(a) primary liability

(b) pays if debtor CANNOT

(b) pays if debtor DOES NOT

(c) insurer of the debtors solvency


(c) insurer of the debt
Surety Distinguished from a Solidary Debtor
A surety is almost the same as a solidary debtor, except that the latter is himself a
principal debtor. In all applicable provisions, the provisions of this Title also apply to a
surety (Manila Surety and Fidelity Co. v. Batu Construction & Co., et al., 53 O.G. 8836).
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Secured Transaction Law

5.

Procedure for Enforcement of Suretys Liability


The procedure for the enforcement of the suretys liability under a bond for
delivery of personal property is described in Sec. 8, Rule 58 and Sec. 20, Rule 57 of the
Revised Rules of Court (Luneta Motor Co. v. Antonio Menendez, L-16880, April 30,
1963). The following are requisites in order to recover on a replevin bond:
(a) application for damages must be filed before trial or before entry of trial judgment;
(b) due notice must be given to the other party and his surety; and
(c) there must be a proper hearing, and the award of damages, if any, must be included
in the final judgment (Alliance Surety Co., Inc. v. Piccio, L-9950, July 31, 1959).

6.

Guarantor Distinguished from the Debtor


A guarantor is a person distinct from the debtor. While the guarantor is
subsidiarily liable, the debtor is principally liable.
CARMEN CASTELLVI DE HIGGINS and HORACE HIGGINS v.
GEORGE SELLNER
G.R. No. L-158025; November 5, 1920; 41 Phil. 142

Parties:
Creditor: Castellvi
Debtor: Keystone
Guarantor: Sellner
Facts:

Sellner wrote John Macleod, agent of the Higgins, a letter of the following tenor: Dear
Sir: I hereby obligate and bind myself, my heir, successors and assignees that if the promissory
note executed by the Keystone Mining Co. in your favor and due six months after date for P10K
is not fully paid at maturity with interest, I will, within 15 days after notice of such default, pay
you in cash the sum of P10K and interest upon your surrendering to me the 3000 shares of stock
of Keystone Mining Co. held by you as security for the payment of said note.
Contention of the Plaintiff:
That he is a surety.
Contention of the Defendant:
That he is a guarantor.
Ruling:
We hold that Sellner is a guarantor within the meaning of the provisions of Article 2047.
It is perfectly clear that the obligation assumed by Sellner was simply that of a guarantor
whose responsibility is fixed in the CC. The letter of Sellner recites that if the promissory note is
not paid at maturity, then he will assume responsibility after notice and upon surrender to him
of the share stocks. Sellner is not bound with the principals by the same instrument executed at
the same time and on the same consideration, but his responsibility is a secondary one found in
an independent collateral agreement.
A surety and a guaranty are alike in that each promises to answer for the debt or default
of another. A surety and a guarantor are unlike in that the surety assumes liability as a regular
party to the undertaking, while the liability of the guarantor depends upon an independent
agreement to pay the obligation if the primary payer fails to do so. A surety is charged as an
original promissory; the engagement of a guarantor is a collateral undertaking. The obligation if
the surety is primary; the obligation of the guarantor is secondary.

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Secured Transaction Law

ROMULO MACHETTI v. HOSPICIO DE SAN JOSE and FIDELITY &


SURETY COMPANY OF THE PHILIPPINE ISLANDS; G.R. No. L-16666;
April 10, 1922; 43 Phil. 297
Parties:
Creditor: Hospicio
Debtor: Machetti
Guarantor: Fidelity and Surety Company of the Philippine Islands (FSCPI)
Facts:

Machetti entered into a contract with Hospicio for the construction of a building.
Hospicio imposed a condition that Machetti should obtain the guarantee from Fidelity Bank to
the amount of P12K out of the P54K contract price. When the building was completed, Hospicio
refused to pay the balance because the specification in the contact was not complied. Machetti
filed a suit for the payment of the balance. Hospicio, by way of counterclaim, asked for damages.
Machetti was declared insolvent. Hospicio claimed to the Fidelity Bank the amount for which it
guaranteed in their contract.
Contention of the Plaintiff:
He is not liable for damages because he was declared insolvent.
Contention of the Defendants:
Hospicio de San Jose claims that the work done had not been carried in accordance
with the specification thus they are not going to pay Machetti. On the other hand,
FSCPI argues that it is bound to pay only in the event that its principal, Machetti,
cannot pay.
Ruling:
The terms of the endorsement must be given the signification, which ordinarily attaches
to them in that language. It is very true that notwithstanding the use of the words "guarantee" or
"guaranty" circumstances may be shown which convert the contract into one of suretyship but
such circumstances do not exist in the present case; on the contrary it appear affirmatively that
the contract is the guarantor's separate undertaking in which the principal does not join, that its
rests on a separate consideration moving from the principal and that although it is written in
continuation of the contract for the construction of the building, it is a collateral undertaking
separate and distinct from the latter. All of these circumstances are distinguishing features of
contracts of guaranty.
AGRO CONGLOMERATES, INC. and MARIO SORIANO v. THE COURT OF
APPEALS and REGENT SAVINGS & LOAN BANK
G.R. No. 117660; December 18, 2000; 348 SCRA 450
Parties:
Creditor: Regent Savings and Loan Bank
Debtor: Agro Conglomerates, Inc
Guarantor: Wonderland Food Industries
Accommodation Party: Mario Soriano
Facts:

Agro sold to Wonderland two parcels of land. They stipulated under a Memorandum of
Agreement that the terms of payment would
be
P1,000,000
in
cash,
P2,000,000 in shares of stock, and thebalance would be payable in monthly installments.
Thereafter, an addendum was executed between them, qualifying the cash payment. Instead of
cash payment, Wonderland authorized Agro to obtain a loan from the Regent Bank on
which Wonderland bound itself to pay for. This loan was to cover for the payment of P1,
000,000. This addendum was not notarized.
71

Secured Transaction Law

Soriano signed as maker the promissory notes payable to the Regent Bank. However,
Agro failed to pay the obligations, as they were due. During that time, the bank was in
financial distress and this prompted it to endorse the promissory notes for collection.
The trial court held in favor of the bank. It didn't find merit to the contention that
Wonderland was the one to be held liable for the promissory notes.
Contention of the Plaintiff:
There was a novation, i.e. there was a valid substitution of debtor, and therefore
they are free from liability. Wonderland should be held liable.
Contention of the Defendants:
Agro Conglomerates is liable because the loan was under their name.
Ruling:
Agro and Soriano are liable.
A subsidiary contract of suretyship had taken effect since petitioners signed the
promissory notes as maker and accommodation party for the benefit of Wonderland. Petitioners
became liable as accommodation party. He has the right, after paying the holder, to obtain
reimbursement from the party accommodated, since the relation between them has in effect
become one of principal and surety, the accommodation party being the surety. The suretys
liability to the creditor of the principal is said to be direct, primary, and absolute; in other words,
he is directly and equally bound with the principal.
(NOTE: ACCOMMODATION PARTY a person who has signed the instrument as maker,
acceptor, or indorser, without receiving value therefore, and for the purpose of lending his name
to some other person and is liable on the instrument to a holder for value, notwithstanding such
holder at the time of taking the instrument knew [the signatory] to be an accommodation party)
FINMAN GENERAL ASSURANCE CORPORATION v.
ABDULGANI SALIK et al.;
G.R. No. 84084; August 20, 1990; 188 SCRA 740
Parties:
Creditor: Abdulgani Salik, et al
Debtor: Pan Pacific Overseas Recruiting Services
Surety: Finman General Assurance Corp.
Facts:
Salik and his four companions applied for a job abroad with Pan Pacific. They paid fees
totaling P30K in consideration thereof. Despite numerous assurances of employment abroad,
they were not employed. They filed a complaint with the POEA with claims for refund of the
P30K. POEA automatically impleaded Finman, Pan Pacifics bonding company as a party to the
case. Pan Pacific and Finman were ordered to pay jointly and severally the complainants.
Contention of the Plaintiff:
Salik should proceed directly against Pan Pacific because he is not privy to any
transaction undertaken by Pan Pacific.
Contention of the Defendants:
Finman is also liable being Pan Pacifics surety.
Ruling:
In the case at bar, it remains uncontroverted that Finman and Pan Pacific entered into a
suretyship agreement, with the FInman agreeing that the bond is conditioned upon the true and
faithful performance and observance of the bonded principal (Pan Pacific) of its duties and
obligations. It was also understood that under the suretyship agreement, Finman undertook
itself to be jointly and severally liable for all claims arising from recruitment violation of Pan
Pacific.

72

Secured Transaction Law

contrary.

Article 2048
A guaranty is gratuitous, unless there is a stipulation to the

FABIOLA SEVERINO v. GUILLERMO SEVERINO et al.


and ENRIQUE ECHAUS
G.R. No. 34642; September 24, 1931; 56 Phil. 187
Parties:
Creditor: Fabiola Severino
Debtor: Guillermo Severino
Guarantor: Enrique Echaus
Facts:
Melecio is the father of Fabiola and Guillermo Severino. Upon Melecios death, he left a
property, which became subject to litigation among his heirs, herein plaintiff and defendant. To
end the litigation, a compromise was effected wherein Guillermo took over the property and
agreed to pay the heirs corresponding value (P100K). Enrique Echaus affixed his name as
guarantor to this contract. P60K remained unpaid and of it, Fabiola is entitled P20K and thus
she filed collection for the money. The trial court favored Fabiola the execution of judgment
should issue first against Guillermo, and if no property should be found, execution should be
against the property of Echaus as guarantor.
Contention of the Plaintiff:
Echaus is liable as guarantor in the compromise agreement made by Guillermo.
Contention of the Defendant:
He is not liable because he received nothing for affixing his signature to the
contract; that the contract was lacking in consideration as to him.
Ruling:
Echaus is liable as a guarantor.
A guarantor or surety is bound by the same consideration that makes the contract
effective between the principal parties thereto. The compromise and dismissal of a lawsuit is
recognized in law as a valuable consideration. The promise of Echaus as guarantor is therefore
binding.
It is never necessary that a guarantor or surety should receive any part of the benefit, if
such there be, accruing to his principal.

WILLEX PLASTIC INDUSTRIES CORPORATION v. THE COURT OF


APPEALS and the INTERNATIONAL CORPORATE BANK
G.R. No. 103066; April 25, 1996; 256 SCRA 478
Parties:
Creditor: Manila Bank
Debtor: Inter Resin Industrial Corp
Guarantor: Investment and Underwriting Corp of the Philippines
Sub-guarantor: Willex Plastic Industries, Corporation
Facts:

Inter Resin obtained credit accommodation from Manila Bank. To secure payment, Inter
Resin executed a continuing surety agreement binding them solidarily to pay Manila Bank.
Then, Inter Resin and Willex executed a continuing guaranty in favor of Investment Corp.
73

Secured Transaction Law

Upon demand, Investment Corp paid Manila Bank Inter Resins outstanding obligation.
Investment Corp demanded from Inter Resin and Willex reimbursement of the amount paid to
Manila Bank. No one paid so a case for collection of sum of money was filed by Investment Corp.
Contention of the Plaintiff:
The Continuing Guaranty is an accessory contract and as such cannot legally exist
because of the absence of a valid principal obligation. Its contention is because it is
not a party either to the continuing surety agreement or to the loan agreement.
Contention of the Defendant:
Willex is liable because the continuing guarantys purpose is to secure payment
for the amount it paid to Manila Bank.
Ruling:
Willex is jointly and severally liable with Inter Resin for the amount paid by Investment
Corp to Mnaila Bank.
The consideration necessary to support a surety obligation need not pass directly to the
surety, a consideration moving to the principal alone being sufficient. For a guarantor or surety
is bound by the same consideration that makes the contract effective between the principal
parties thereto.
A guaranty is gratuitous. It is never necessary that a guarantor or surety should receive
any part or benefit, if such there be, accruing to his principal

Article 2049
A married woman may guarantee an obligation without the
husband's consent, but shall not thereby bind the conjugal partnership,
except in cases provided by law.
COMMENT:
Married Woman as Guarantor
Generally, a wife-guarantor responds with her paraphernal property.

Article 2050
If a guaranty is entered into without the knowledge or consent,
or against the will of the principal debtor, the provisions of Articles
1236 and 1237 shall apply.
COMMENT:
1.
Guaranty Entered Into Without Debtors Knowledge, Consent, or Against
the Latters Will
A guarantor can recover from the debtor what the former had to pay the creditor,
even if the guaranty was without the debtors consent or against his will, but the recovery
will only be to the extent that the debtor had been benefited (See Arts. 1236 and 1237
and De Guzman v. Santos, 68 Phil. 371)
2.

Cross-References

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Secured Transaction Law

(a) Art. 1236. The creditor is not bound to accept payment or performance by a third
person who has no interest in the fulfillment of the obligation, unless there is a
stipulation to the contrary.
Whoever pays for another may demand from the debtor, what he has paid, except
that if paid without the knowledge or against the will of the debtor, he can recover
only insofar as the payment has been beneficial to the debtor.
(b) Art. 1237. Whoever pays in behalf of the debtor without the knowledge or against the
will of the latter, cannot compel the creditor to subrogate him in his rights, such as
those arising from a mortgage, guaranty or penalty.

Article 2051
A guaranty may be conventional, legal or judicial, gratuitous, or
by onerous title.
It may also be constituted, not only in favor of the principal
debtor, but also in favor of the other guarantor, with the latter's
consent, or without his knowledge, or even over his objection.
COMMENT:
1.

Guaranty Classified According to Manner of Creation


According to manner of creation, guaranty may be:
(a) Conventional by agreement
(b) Legal required by law
(c) Judicial required by the contract as when an attachment is to be lifted

2.

Sub-Guaranty
A sub-guaranty may be created. This is to guarantee an obligation of a guarantor.

Art. 2052.
A guaranty cannot exist without a valid obligation.
Nevertheless, a guaranty may be constituted to guarantee the
performance of a voidable or an unenforceable contract. It may also
guarantee a natural obligation.
COMMENT:
1.

Can a Guaranty Exist Even Without a Valid Principal Obligation


A guaranty is merely an accessory contract, so if the principal obligation is void, the
guaranty is also void (De la Rosa v. De Borja, 53 Phil. 990). However by express
provision of the second paragraph, a guaranty can be valid even if the principal
obligation is:
(a) voidable;
(b) unenforceable;
(c) natural.
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Secured Transaction Law

2.

Consideration
The consideration of the guaranty is the same as the consideration of the principal
obligation. As long as the principal debtor receives some benefit, this is all right even if
the guarantor himself has NOT received any benefit (Phil. Guaranty Co. v. Dinio, 54
O.G. 5331).

Article 2053
A guaranty may also be given as security for future debts, the
amount of which is not yet known; there can be no claim against the
guarantor until the debt is liquidated. A conditional obligation may also
be secured.
COMMENT:
1.

Guaranty for Present and Future Debts


There can be guaranty for:
(a) Present debts
(b) Future debts (even if the amount is not yet known)

2.

Liquidated Debt
A debt is liquidated when it is for a price fixed in a contract for the delivery of
future goods and the seller is now ready to deliver said goods within the period
stipulated (Smith, Bell & Co. v. Nat. Bank, 42 Phil. 733).

3.

Continuing Surety Agreements are Quite Commonplace in Present Day


Commercial Practice
CONTINUING GUARANTY one which isnt 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 . It is
prospective in its operations and is generally intended to provide security with respect to
future transactions.

RIZAL COMMERCIAL BANKING CORPORATION v.


HON. JOSE P. ARRO and RESIDORO CHUA
G.R. No. L-49401; July 30, 1982; 115 SCRA 777
Parties:
Creditor: Rizal Commercial Banking Corp
Debtor: Davao Agricultural Industrial Corp
Surety: Residoro Chua/Enrique Go
Facts:

Chua and Go executed a comprehensive surety agreement to guaranty any existing


indebtedness of Davao Corp and to induce RCBC to grant Davao Corp loan. A promissory note
was issued in favor of RCBC signed by Go. The promissory note was not paid despite demand.

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Secured Transaction Law

RCBC filed a complaint for a sum of money in the sala of the respondent judge against Davao
Corp, Chua, and Go.
Contention of the Plaintiff:
By virtue of the comprehensive surety agreement, Chua is liable because said
agreement covers not merely the promissory note, but it is continuing and it
encompasses every other indebtedness of Davao Corp may from time to time incur
with RCBC.
Contention of the Defendant:
He is not liable because it was only Go who signed the promissory note and such
debt was not covered by the surety agreement because it was incurred after the
surety agreement was signed by him.
Ruling:
The comprehensive agreement was jointly executed to cover existing as well as further
obligations, which Davao Corp may incur with RCBC.
In the case at bar, there is no doubt that the agreement is by its nature a continuing
contract, and therefore remains in full force and in effect until a notice to RCBC for its
termination. Chua and Go are liable even though Chua was not a signatory in the latter
transaction.
ATOK FINANCE CORPORATION v. COURT OF APPEALS,
SANYU CHEMICAL CORPORATION et al.
G.R. No. 80078; May 18, 1993; 222 SCRA 232
Parties:
Creditor: Atok Finance Corp
Debtor: Sanyu Chemical Corp
Sureties: Sanyu Trading, Spouses Arrieta, Bermudo, Halili
Facts:

Sanyu Chemical along with its sureties executed a continuing surety agreement in favor
of Atok Finance. Sanyu assigned its trade receivables to Atok Finance. Sanyu failed to collect and
remit the amounts due under the trade receivables. Atok Finance commenced an action to
collect the sum plus penalty charges again Sanyu Chemical and its sureties.
Contention of the Plaintiff:
A continuing suretyship agreement can be effected to secure future debts and that
the agreement is valid.
Contention of the Defendant:
The continuing surety agreement could not be enforced, because this contract like
guaranty cannot exist without a valid obligation. They are not liable with Sanyu
because the continuing surety is null.
Ruling:
There is a valid surety agreement.
It is true that a serious guaranty or a suretyship agreement is an accessory contract in the
sense that it is entered into for securing the performance of another obligation that is
denominated as the principal obligation. It is also true that Article 2052 of the Civil Code states
that "a guarantee cannot exist without a valid obligation." This legal proposition is not, however,
like most legal principles, to be read in an absolute and literal manner and carried to the limit of
its logic.

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Secured Transaction Law

Article 2054
A guarantor may bind himself for less, but not for more than the
principal debtor, both as regards the amount and the onerous nature of
the conditions.
Should he have bound himself for more, his obligations shall be
reduced to the limits of that of the debtor.
COMMENT:
1.

Guarantors Liability Cannot Exceed Principal Obligation


(a) Guaranty is a subsidiary and accessory contractthe guarantor cannot bind himself
for more than the principal debtor and even if he does, his liability shall be reduced
to the limits of that of the debtor
(b) Interest, judicial costs, attorneys fees as part of the damages may be recovered
1) The surety is made to pay not by reason of the contract but by reason of
his failure to pay when demanded and for having compelled the creditor to
resort to the courts to obtain payment
2) Interest doesnt run from the time the obligation becomes due but from the filing
of the complaint
(c) Penalty may be provided

2.

Rule if a Person Has Two Debts


When a person has two debts, one as a sole debtor, and another as solidary codebtor, his more onerous obligation to which first payment is to be applied, is the debt as
sole debtor.

3.

Rule if Debt is Increased


If the indebtedness is increased without the guarantors consent, he is completely
released from the obligation as guarantor or surety (Nat. Bank v. Veraguth, 50 Phil.
253).

4.

Liability of Guarantor for Interest


If a guarantor fails to pay upon demand, he can be held liable for interest, even if
in thus paying, the liability becomes more than that in the principal obligation. The
interest runs from the time the complaint is filed (Tagana v. Aldanese, 43 Phil. 582, and
Plaridel Surety & Insur. Co. v. P.I. Galang Machinery Co., 53 O.G. 1449).

5.

Effect of a Penalty Clause


Said penalty maybe demanded in the proper case even if its value is MORE than
the amount of the principal debt (General Insurance & Surety Corp. v. Republic,
L-13873, January 31, 1963).

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Secured Transaction Law

Article 2055
A guaranty is not presumed; it must be express and cannot
extend to more than what is stipulated therein.
If it be simple or indefinite, it shall compromise not only the
principal obligation, but also all its accessories, including the judicial
costs, provided with respect to the latter, that the guarantor shall only
be liable for those costs incurred after he has been judicially required
to pay.
COMMENT:
1.

Guaranty is Not Presumed


It cannot be presumed because of the existence of a contract or principal
obligation. Reason for the law: The law wants not only that there be assurance that
the guarantor has the true intention to bind himself but also to make certain that on
making it, he proceeded with consciousness of what he was doing.

2.

Form of the Contract


To be enforceable, the contract of guaranty must be in writing, since this is a
special promise to answer for the debt, default or miscarriage of another (Art. 1403,
Civil Code). Thus guaranty must be EXPRESS (it is not presumed).
Extent of Guarantors Liability

3.

For definite guaranty: it is limited in whole or in part to the principal debt, to the
exclusion of accessories.
For indefinite or simple guaranty: it shall comprise not only the principal
obligation, but also all its accessories, including the judicial costs, provided with respect
to the latter, that the guarantor shall only be liable for those costs incurred after he has
been judicially required to pay.
REPUBLIC OF THE PHILIPPINES v. PAL-FOX LUMBER CO., INC., et al.
G.R. No. L-26473; February 29, 1972; 43 SCRA 365
Parties:
Creditor: BIR
Debtor: PalFox Lumber Co Inc
Surety: Far Eastern Surety And Insurance Co
Facts:

PalFox was indebted to BIR for forest charges and surcharges amounting to P11, 851. Far
Eastern Surety was jointly and severally liable with PalFOx for the payment of said charges up to
P5K because of forestry bond that it executed in favor of BIR guaranteeing faithful compliance
by PalFox. Palfox failed to comply, BIR seek to recover from PalFox and Far Eastern P5K plus
interest from filing of complaint and P6, 842 from PalFox alone as balance plus legal interest.
Contention of the Plaintiff:
The surety company is liable to pay the legal interest being an accessory to the
principal obligation.
Contention of the Defendant:

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Secured Transaction Law

It is not liable to pay the legal interest because it is stipulated in the bond that it
was bound to pay BIR the sum of P5K only.

Ruling:
Far Eastern Surety is liable. A guaranty cannot be presumed.
If the guaranty be simple or indefinite, it shall compromise not only the principal
obligation, but also all its accessories, including the judicial costs, provided with respect to the
latter, that the guarantor shall only be liable for those costs incurred after he has been judicially
required to pay. Nevertheless, a guaranty maybe constituted to guarantee the performance of a
voidable or unenforceable contract.
ESTRELLA PALMARES v. COURT OF APPEALS
and M.B. LENDING CORPORATION
G.R. No. 126490; March 31, 1998; 288 SCRA 292
Parties:
Creditor: MB Lending Corp
Debtor: Osmena and Merlyn Azzaraga
Surety: Estrella Palmares
Facts:

MB Lending Corp extended a loan to spouses Azzaraga together with Palmares as comaker in the amount of P30K with compounded interest of 6% per annum. The Azzaragas and
Palmares paid P16, 300 leaving P13, 700. They failed to pay the balance and the spouses became
insolvent. MB Lending Corp filed a complaint for collection of money against Palmares on the
basis of her solidary liability under the promissory note.
Contention of the Plaintiff:
She can only be held liable to pay for the outstanding principal obligation excluding
the imposed interests by MB Lending Corp. This is on the ground that she cannot
be compelled to pay liabilities other that what was stipulated.
Contention of the Defendant:
Palmares is liable since she signed as co-maker, and therefore she assumes solidary
liability.
Ruling:
Palmares is a surety who is equally principally liable in accordance with Article 2055 and
thus he is liable for the payment of interest. However, the law also empowers the court to reduce
the rate of interest in cases where the obligation has been partially paid and when the rate is
found to be excessive or unconscionable.
In the case at bar, Palmares is a surety and being such, she assumed principal liability.
The creditor may proceed against her in case the principal debtor does not pay.
It is not necessary for the creditor to proceed against a principal in order to hold the
surety liable. The obligation of the surety is the same as that of the principal.

Article 2056
One who is obliged to furnish a guarantor shall present a person
who possesses integrity, capacity to bind himself, and sufficient
property to answer for the obligation which he guarantees. The
guarantor shall be subject to the jurisdiction of the court of the place
where this obligation is to be complied with.

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Secured Transaction Law

COMMENT:
Qualifications of Guarantor
(a) Integrity (at time of perfection)
(b) Capacity to bind (at time of perfection)
(c) Sufficient property to answer for the obligation which he guarantees (at time of
perfection; excluding his own properties that may be out of reach, or which are
under litigation)
(NOTE: The creditor can naturally WAIVE the requirements, for right in general
is waivable.)
Article 2057
If the guarantor should be convicted in first instance of a crime
involving dishonesty or should become insolvent, the creditor may
demand another who has all the qualifications required in the
preceding article. The case is excepted where the creditor has required
and stipulated that a specified person should be the guarantor.
COMMENT:
1.

Effect of Conviction of a Crime Involving Dishonesty


(a) Creditor may demand a substitute guarantor.
(b) Exception the guarantor had been selected by the creditor.
(c) The law says first instance not court of first instance.

2.

Subsequent Loss of Integrity or Insolvency


Subsequent loss of integrity or insolvency generally does not end the guaranty;
creditor is given the right to demand SUBSTITUTION OF GUARANTOR. This right may
be waived (Estate of Hemady v. Luzon Surety & Ins. Co., 53 O.G. 2786).

3.

Liability of Heirs if the Guarantor Dies


His heirs are still liable to the extent of the value of the inheritance because the
obligation is not purely personal, and is therefore transmissible. It is not personal
because all the guarantors are interested in the recovery of money regardless of its giver
(Estate of Hemady v. Luzon Surety & Ins. Co., 53 O.G. 2786).
ESTATE OF K.H. HEMADY v. LUZON SURETY CO., INC.
G.R. No. L-8437; November 28, 1956; 101 Phil. 388

Parties:
Surety to various debtors: K. Hemady (deceased)
Surety in the counter bonds: Luzon Surety Co Inc
Facts:
Hemady is the surety at 20 different indemnity agreements, or counterbids, each
subscribed by distinct principals. Luzon Surety guaranteed various principals in favor of
different creditors. Hemady died and left his obligation unfulfilled. Luzon Surety paid the
indemnities wherein Hemady is the guarantor. Luzon Surety seeks reimbursement. It prayed
allowance as a contingent claim of the value of the counter bonds.

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Secured Transaction Law

Contention of the Plaintiff:


The obligation of Hemady as a guarantor was extinguished by his death. Moreover,
integrity, as a qualification of a guarantor cannot be transmitted to his heir.
Contention of the Defendant:
The obligation of Hemady is transmissible to his heirs.
Ruling:
The guarantors liability is not extinguished by his death.
The general rule is that, a partys contractual rights and obligations are transmissible to
his successor. No provision in the Civil Code states that guaranty is extinguished upon the death
of the guarantor or surety.
The supervening incapacity of the guarantor does not terminate the contract but merely
entitles the creditor to demand replacement of the guarantor, which is optional not a duty but
a right.
1.

Effects of Guaranty Between the Guarantor and the Creditor

INTRODUCTORY COMMENT:
In general, the effects between the guarantor and the creditor are the following:
(1) The guarantor is entitled to the benefit of excussion (benefit of exhaustion) of the
debtors properties except in the cases mentioned under Art. 2059, and provided
the guarantor follows Art. 2060.
(2) A compromise between the creditor and the principal debtor benefits but does
not prejudice the guarantor (Art. 2063, Civil Code).
(3) If there should be several guarantors, they are in general entitled to the benefit of
division (pro-rata liability) (See Art. 2065, Civil Code).

Article 2058
The guarantor cannot be compelled to pay the creditor unless the
latter has exhausted all the property of the debtor, and has resorted to
all the legal remedies against the debtor.
COMMENT:
1.

Benefit of Excussion
The right of the guarantor to have all the properties of the debtor and all legal
remedies against him first exhausted before he can be compelled to pay the creditor.
Provided:
(a) He sets it up as defense before judgment is rendered against himself (guarantor) (See
Saavedra v. Price 68 Phil. 699);
(b) He has not pledged nor mortgaged his own property to the creditor for the
satisfaction of the principal obligation (Southern Motors, Inc. v. Barbosa, 99 Phil.
263);
(c) He does not fall in the cases enumerated in Art. 2059 (See Jaucian v. Querol, 38 Phil.
707);
(d) He complies with Art. 2060 (See Garcia v. Lianco, C.A., 50 O.G. 1145).

2.

Duty of Creditor
If a creditor wants to hold the guarantor liable, he must do the following:
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Secured Transaction Law

(a) Exhaust all the property of the debtor (Art. 2058) unless the guarantor is not entitled
to such benefit under Art. 2059;
(b) Resort to all the legal remedies against the debtor (Art. 2058) (including suit) (See
Wise and Co., Inc. v. Tanglao, 63 Phil. 372);
(c) Prove that the debtor is still unable to pay (See Wise and Co., Inc. v. Tanglao, 63
Phil. 372);
(d) Notify the guarantor of the debtors inability to pay (Roces Hermanos, Inc. v. China
Insurance and Surety Co., Inc., Aug. 9, 1941 issue of the Official Gazette, p. 1257).
ROMULO MACHETTI v. HOSPICIO DE SAN JOSE and FIDELITY &
SURETY COMPANY OF THE PHILIPPINE ISLANDS
G.R. No. L-16666; April 10, 1922; supra
Ruling:
Hospicio cannot proceed immediately to Fidelity and claim damages because it has not
yet exhausted all the remedies against Machetti. The debt is not yet liquidated.
Liability of Machetti to pay its principal obligation cannot be proven by mere declaration of
Machettis insolvency but by way of filing a claim against the liquidation if the estate of
Machetti.

SOUTHERN MOTORS, INC., v. ELISEO BARBOSA


G.R. No. L-9306; May 25, 1956; 99 Phil. 263
Parties:
Creditor: Southern Motor Inc
Debtor: Alfredo Brillantes
Guarantor: Eliseo Barbosa
Facts:
Brillantes obtained a loan from Southern Motors Inc. Barbosa, as guarantor, executed a
real estate mortgage in favor of Southern Motors as security of the loan. Brillantes failed to pay.
Southern Motors brought an action against Barbosa to foreclose the real estate mortgage.
Contention of the Plaintiff:
Barbosa has mortgaged his real property and that it can be foreclosed to cover such
payment.
Contention of the Defendant:
The real estate mortgage cannot be foreclosed because Southern Motors has not yet
exhausted Brillantes property.
Ruling:
Barbosa, the guarantor, is not entitled to the benefit of excussion.
The right of the guarantor under Art 2058 to demand exhaustion of the property of the
principal debtor exists only when a pledge or a mortgage has not been given as special security
for the payment of the obligation.

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Secured Transaction Law

Article 2059
This excussion shall not take place:
(1) If the guarantor has expressly renounced it;
(2) If he has bound himself solidarily with the debtor;
(3) In case of insolvency of the debtor;
(4) When he has absconded, or cannot be sued within the
Philippines unless he has left a manager or representative;
(5) If it may be presumed that an execution on the property of
the principal debtor would not result in the satisfaction of the
obligation.
COMMENT:
1.

When Guarantor is Not Entitled to Benefit of Excussion


Keyword for the instances when the guarantor is not entitled to the BENEFIT OF
EXCUSSION
R renounce
U useless because execution will not be satisfied
S solidarily bound
I insolvency of the debtor
A absconded, etc.
2. Additional Instances When Guarantor is NOT Entitled to the Benefit of
Excussion
(a) If the guaranty is in a judicial bond (Art. 2084)
(b) If Art. 2060 is not complied with
(c) If the principal debt is a natural, voidable, or unenforceable obligation (See Art.
2062, where there can still be guaranty but generally the principal debtor would not
be liable)
THE IMPERIAL INSURANCE, INC. v. HON. WALFRIDO
DE LOS ANGELES, ROSA REYES, et al.
G.R. No. L-28030; January 18, 1982; 111 SCRA 24

Parties:
Creditor: Rosa, Pedro and Consolacion Reyes
Debtor: Felicisimo Reyes
Surety: Imperial Insurance
Facts:

Felicisimo Reyes failed to pay the Reyeses. The Reyeses obtained a writ of preliminary
attachment and levied upon all the properties of Felicisimo. Imperial Insurance and F. Reyes
posted a defendants bond for dissolution of attachment in the amount of P100K. RTC favored
the creditors. Writs of execution was issued but was returned unsatisfied. Creditors filed a
motion for recovery on the surety bonds. Creditors sent a letter of demand to Imperial to pay the
amount of the counter bond, which the latter opposed. Respondent judge rendered judgment
against the counter bonds.
Contention of the Plaintiff:
The creditor should exhaust all the properties of F. Reyes before going after the
surety in the counter bond.
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Secured Transaction Law

Contention of the Defendant:


They can go directly after the surety without prior exhaustion of Felicisimos
properties.
Ruling:
Imperial Insurance is primarily liable to pay the counter bond.
Imperial Insurance, Inc. had bound itself solidarily with the principal, the deceased
defendant Felicisimo V. Reyes. In accordance with Article 2059, par. 2, excussion (previous
exhaustion of the property of the debtor) shall not take place "if he (the guarantor) has bound
himself solidarily with the debtor." Section 17, Rule 57 of the Rules of Court cannot be construed
that an "execution against the debtor be first returned unsatisfied even if the bond were a
solidary one, for a procedural rule may not amend the substantive law expressed in the Civil
Code, and further would nullify the express stipulation of the parties that the surety's obligation
should be solidary with that of the defendant.

Article 2060
In order that the guarantor may make use of the benefit of
excussion, he must set it up against the creditor upon the latter's
demand for payment from him, and point out to the creditor available
property of the debtor within Philippine territory, sufficient to cover
the amount of the debt.
COMMENT:
1.

Requisites Before Guarantor Can Make Use of Excussion


(a) Guarantor must set it up when the creditor demands payment (NOTE: Demand can
be made only AFTER a judgment has been rendered against the principal debtor).
(b) Guarantor must point out AVAILABLE (not things in litigation) property of debtor
WITHIN the Philippines.

2.

Duty of the Guarantor to Set Up Benefit of Excussion


It isnt enough that the guarantor claims the benefit of excussion. As soon as
he is required to pay, he must also point out to the creditor available property of
the debtor within the Philippines.

3.

Duty of Creditor to Resort to All Legal Remedies


Failure to comply with duty of creditor would mean that he would suffer the loss
but only to the extent of the value of said property, for the insolvency of the debtor.
CONCEPCION J. VIUDA DE SYQUIA v. PERFECTO JACINTO,
et al. and RAFAEL PALMA
G.R. No. L-41320; November 9, 1934; 60 Phil. 861

Parties:
Creditor: BPI
Debtor: Felipe Jacinto
Guarantor: Jose Palma
Facts:

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Secured Transaction Law

Jacinto obtained a promissory note from BPI and Palma was the guarantor. Jacinto
failed to pay. A complaint was filed against Jacinto and Palma. Judgment was executed against
them but all the rights of BPI were transferred to Gregorio Syquia who bought the property.
Jacinto and Palma never paid anything.
Contention of the Plaintiff:
Since the Jacintos became insolvent, guarantor Palma should pay the balance.
Contention of the Defendant:
He is not liable because he was only impleaded in the case, and, that being a
guarantor, the creditor had not demanded payment from him.
Ruling:
With reference to the entire defense available to a guarantor, Palma as guarantor is still
entitled to the benefit of excussion as the judgment creditor has made no demand on him. That
joining him in the suit against the principal debtor is not the demand intended by Article 2060.
That demand can be made only after the judgment on the debt for obviously the exhaustion of
the principals property the benefit at which the guarantor cannot begin to take place before
judgment has been obtained.
LUZON STEEL CORPORATION v. JOSE SIA and
TIMES SURETY & INSURANCE CO. INC.
G.R. No. L-26449; May 15, 1969; 28 SCRA 58
Parties:
Creditor: Luzon Steel Corp
Debtor: Jose Sia
Surety: Times Surety and Insurance Co.
Facts:

Luzon Steel Corp sued Metal Manufacturing and Sia for breach of contract and damages.
A writ of preliminary attachment was obtained. Such attachment was lifted upon a P25K counter
bond executed by Sia and Times Surety as a solidary guarantor. Parties entered into a
compromise but Sia failed to comply.
Contention of the Plaintiff:
Times Surety should pay since it bound itself to jointly and severally to pay and
that the surety cannot avail of the benefit of excussion, unless, he can point out
sufficient property of the debtor within the Philippines.
Contention of the Defendant:
It was not a party to the compromise and the writ was issued without giving the
surety notice and hearing; that the writ of execution against it is invalid because
the writ issued against its principal (Sia) had been returned satisfied and that Sias
properties must first be exhausted before the surety will be liable.
Ruling:
Excussion is not applicable to surety. The surety is therefore liable.
The suretys contention is untenable. The counter bond contemplated in the rule is
evidently an ordinary guaranty where the sureties assume a subsidiary liability. This is not the
case here, because the surety in the present case bound itself "jointly and severally" (in solidum)
with the debtor and it is prescribed in Article 2059, paragraph 2 that excussion (previous
exhaustion of the property of the debtor) shall not take place "if he (the guarantor) has bound
himself solidarily with the debtor". Moreover, even if the surety's undertaking were not solidary
with that of the principal debtor, still he may not demand exhaustion of the property of the
latter, unless he can point out sufficient leviable property of the debtor within Philippine
territory.
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Secured Transaction Law

Article 2061
The guarantor having fulfilled all the conditions required in the
preceding article, the creditor who is negligent in exhausting the
property pointed out shall suffer the loss, to the extent of said
property, for the insolvency of the debtor resulting from such
negligence.
COMMENT:
Effect of Creditors Negligence
The negligent creditor suffers the loss to the extent of the value of the property
pointed out by the guarantor but not exhausted by the creditor.

Article 2062
In every action by the creditor, which must be against the
principal debtor alone, except in the cases mentioned in Article 2059,
the former shall ask the court to notify the guarantor of the action. The
guarantor may appear so that he may, if he so desire, set up such
defenses as are granted him by law. The benefit of excussion
mentioned in Article 2058 shall always be unimpaired, even if
judgment should be rendered against the principal debtor and the
guarantor in case of appearance by the latter.
COMMENT:
Procedure When Creditor Sues
The creditor must sue the principal alone. The guarantor cannot be sued together
with his principal except when the guarantor is not entitled to the benefit of excussion.
(a) Notice to the guarantor the guarantor must be notified so that he may appear, if he
so desires, and set up the defenses he may want to offer.
1) If the guarantor appears, he is still given the benefit of excussion even if
judgment should be rendered against him and the principal debtor. Voluntary
appearance does not constitute a renunciation of his right to excussion.
2) If he doesnt appear, the guarantor cannot set up the defenses, and it may
no longer be possible for him to question the validity of the judgment.
(b) Hearing before execution can be issued against guarantor.

TOWERS ASSURANCE CORP v. ORORAMA SUPERMARKET, et al.


80 SCRA 262; 1977
Parties:
Creditor: See Hong
Debtor: Spouses Ernesto and Conching Ong
Surety: Towers Assurance Corp

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Secured Transaction Law

Facts:

Spouses Ong owed See Hong P58, 400, which they failed to pay. Hong sued the spouses
for the collection of such plus expenses. A writ of preliminary attachment was issued. To lift
attachment, spouses Ong filed a counterbond with Towers Assurance as surety. Spouses Ong
were declared in default for failure to appear at the pre-trial. A writ of execution was issued
against spouses and Towers Assurance. Towers Assurance assailed the writ of execution.
Contention of the Plaintiff:
The issuance of the writ of execution against them was invalid because being a
surety they must first be given the opportunity to be heard.
Ruling:
The surety is entitled to be heard before an execution can be issued against him since he
is not a party in the case involving his principal. Notice and hearing constitute the essence of
procedural due process.
In order that the judgment creditor might recover from the surety on the counter bond, it
is necessary:
a. That the execution be first issued against the principal debtor and that such execution
was returned unsatisfied in whole or in part,
b. That the creditor made a demand upon the surety for the satisfaction of the judgment,
and
c. That the surety be given notice and a summary hearing in the same action as to his
liability for the judgment under his counter bond.

Article 2063
A compromise between the creditor and the principal debtor
benefits the guarantor but does not prejudice him. That which is
entered into between the guarantor and the creditor benefits but does
not prejudice the principal debtor.
COMMENT:
1.

Compromise
A compromise is a contract whereby the parties, by asking reciprocal concessions,
avoid litigation or put an end to one already commenced.

2.

Effects of Compromise
(a) Between creditor and principal debtor the guarantor BENEFITS, but is NOT
PREJUDICED
(b) Between guarantor and creditor the debtor BENEFITS, but is NOT PREJUDICED

Article 2064
The guarantor of a guarantor shall enjoy the benefit of
excussion, both with respect to the guarantor and to the principal
debtor.

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Secured Transaction Law

Article 2065
Should there be several guarantors of only one debtor and for
the same debt, the obligation to answer for the same is divided among
all. The creditor cannot claim from the guarantors except the shares
which they are respectively bound to pay, unless solidarity has been
expressly stipulated.
The benefit of division against the co-guarantors ceases in the
same cases and for the same reasons as the benefit of excussion
against the principal debtor.
COMMENT:
Benefit of Division
(a) This Article speaks of the BENEFIT OF DIVISION.
(b) Should there be several guarantors of only one debtor and for the same debt, the
obligation to answer for the same is divided among all. (Liability: JOINT).
MIRA HERMANOS, INC. v. MANILA TOBACCONISTS, et al.
G.R. No. L-48979; September 29, 1949; 74 Phil. 367
Parties:
Creditor: Mira Hermanos
Debtor: Manila Tobacconists Inc
Sureties: Provident Insurance Co and Manila Compaa de Seguros
Facts:

Mira Hermanos and Manila Tobacconists entered into a contract whereby Mira agreed to
deliver to Manila Tobacconists merchandise for sale on consignment. To secure fulfillment of
the obligation of the Tobacconists, a bond of P3K was executed by Provident. An additional
bond was executed by Manila Compaa. Upon final liquidation of transactions between Mira
and Tobacconists, there was a balance still unpaid. Mira demanded the two sureties for
payment.
Contention of the Plaintiff:
The two sureties are liable to pay the amount of P2, 500 binding themselves jointly
and severally with the debtor.
Contention of the Defendants:
Manila Compaa: So long as the liability of the Tobacconists did not exceed P3K, it
was not bound to pay anything because its bond referred only to the obligation of
the Tobacconists in excess of P3K and up to P5K.
Provident:
It had already paid the sum of P1363 which is the 60% of the amount owed by the
Tobacconists to Mira alleging that the remaining 40% should be paid by the other
surety.
Ruling:
The benefit of division does not apply in this case. The two sureties did not guarantee the
same debt.
The benefit of division is only applicable where there are several guarantors or sureties of
only one debtor for the same debt.

1. Effects of Guaranty Between the Guarantor and the Debtor


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latter.

Article 2066
The guarantor who pays for a debtor must be indemnified by the

The indemnity comprises:


(1)The total amount of the debt;
(2)The legal interests thereon from the time the payment was made
known to the debtor, even though it did not earn interest for the
creditor;
(3)The expenses incurred by the guarantor after having notified the
debtor that payment had been demanded of him;
(4)Damages, if they are due.

COMMENT:
1.

Indemnity to be Paid by the Debtor for Whom the Guarantor has Paid
Keyword TIED:
T total amount of debt
I interest (legal)
E expenses
D damages, if due

2.

Guaranty as a Strict Indemnity


Since a guaranty is a strict indemnity, he can recover only what he has paid plus
losses and damages, including costs and interest (Tagawa v. Aldanese and Union
Guarantee Co., 43 Phil. 852; Saenz v. Yap Chuan, 16 Phil. 76 and Perez v. Barcia, 52
Phil. 197).
Article 2067
The guarantor who pays is subrogated by virtue thereof to all the
rights which the creditor had against the debtor.
If the guarantor has compromised with the creditor, he cannot
demand of the debtor more than what he has really paid.

COMMENT:
Right of Guarantor to Subrogation
(a) 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 subrogation
(change in the person of the creditor by the guarantor, the obligation subsists in all
respects as before payment) (Art. 1212).
(b) Purpose of the right: To enable the guarantor to enforce the indemnity given in the
preceding article. Right of subrogation is a result by operation of law from the act of
payment and there is no necessity for the guarantor to ask the creditor to expressly
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assign his right to action. Such right is not contractual; it is based on natural
obligation.
(c) Subrogation can be availed of only by the guarantor upon: knowledge and consent of
the principal debtor and creditor. The right of subrogation is absolute even if the
debtor refuses subrogation as long as consent to subrogation was obtained.

Article 2068
If the guarantor should pay without notifying the debtor, the
latter may enforce against him all the defenses which he could have
set up against the creditor at the time the payment was made.
COMMENT:
Reason for the Article
The liability of the guarantor being merely subsidiary he should really wait until
the debtor has tried to comply. The guarantor should not, thru his own fault or
negligence, be allowed to jeopardize the rights of the debtor. By paying the debt without
first notifying the debtor, deprives him of the opportunity to set up defenses against the
creditor.

Article 2069
If the debt was for a period and the guarantor paid it before it
became due, he cannot demand reimbursement of the debtor until the
expiration of the period unless the payment has been ratified by the
debtor.

Article 2070
If the guarantor has paid without notifying the debtor, and the
latter not being aware of the payment, repeats the payment, the
former has no remedy whatever against the debtor, but only against
the creditor. Nevertheless, in case of a gratuitous guaranty, if the
guarantor was prevented by a fortuitous event from advising the
debtor of the payment, and the creditor becomes insolvent, the debtor
shall reimburse the guarantor for the amount paid.
COMMENT:
Gratuitous Guaranty
Note that the second sentence of Art. 2070 is applicable only in case of a
gratuitous guaranty. It is clear that it should not be applied if the guaranty is onerous or
for a compensation. The law favors a gratuitous guarantor because he receives nothing
extra for his efforts and obligations, and it would be rather unfair if under the premises
given, he cannot recover from the principal debtor, who should not indeed unjustly

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a. Total amount of debt but cannot demand more than amount paid

LUIS SAENZ DE VIZMANOS-ONG QUICO v. YAP CHUAN, et al.


G.R. No. L-5470; March 22, 1910; 16 Phil. 76
Facts:

Engracio Palanca, while judicial administrator of the estate of Margarita Jose, executed a
bond by order of the court. To guarantee his administration, such bond was executed jointly and
severally by Engracio Palanca himself, Luis S. de Vizmanosa and four others.
On the same date, Engracio Palanca and five others executed in favor of Luis S. de
Vizmanos the following bonds: Yap Chuangco, for P20,000; Yap Chutco, for P5,000; Palanca
Yap Poco, for P5,000; Palanca Tanguinlay, for P5,000; and Lim Pongco, for P5,000. All of them
signed the bond except Yap Chuangco, who did not personally execute the bond; this was done
for him by his attorney, Yap Chengtua. An instrument was instituted for the purpose of
guaranteeing the reimbursement of the said bond or a part thereof to the executors.
The court then ordered Luis Saenz de Vizmanos Ong-Quico, as surety in solidum of the
ex-administrator Engracio Palanca, to pay to the estate the sum of P41,690.15, Philippine
currency, also the interest on the said sum at the rate of 8 per cent per annum, in which he paid
P8,000 only. Subsequently, he instituted suit against the five sureties above named who, with
Engracio Palanca, executed the bond before mentioned in his favor, praying the Court of First
Instance of the city of Manila to sentence them to pay him.
Contention of the Plaintiff:
Each one of the four should pay P5,000.
Contention of the Defendant:
Each of them should only P1,000, instead of P2,000 according to the terms of the
contract, each one of them was bound to pay to the plaintiff.
Ruling:
In the present case the plaintiff, by virtue of the contract ad cautelam, is entitled to an
action against the four defendants for recovery from each of them up to the maximum amount
of P5,000, but he cannot by such action, as surety for the principal debtor, collect more than the
sum which he himself was actually compelled to pay.
The amount to be paid is hereby fixed at P1,000, to the payment of which, in favor of the
aforesaid plaintiff, each of the four defendants mentioned were sentenced, "with legal interest at
the rate of 6 per cent per annum on the said respective sums, from March 31, 1908, the date on
which the plaintiff paid to the present administrator of the said estate the said sum of P8,000,
until its complete payment. The said four defendants shall pay the costs in equal shares." the
costs of this instance shall be assessed against the plaintiff and appellant Vizmanos.

TUAZON, TUAZON, INC. v. ANTONIO MACHUCA; G.R. No. L-22104;


December 2, 1924; 46 Phil. 561
Parties:
Creditor: Manila Compaia de Seguros
Debtor: Universal Trading Company
Guarantor: Tuazon Company
Facts:

Manila Compaia de Seguros signed a note in favor of the Universal Trading Company,
while Tuazon Company guaranteed the liability of the latter to the former for P10,000. In turn,
Universal Trading Company and Antonio Machuca, in his personal capacity as president, signed
a document, wherein they bound themselves solidarily to pay, reimburse, and refund to the

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company all such sums or amounts of money as it upon its obligation with Manila Compaia de
Seguros.
The creditor brought an action against Tuazon to recover the value of the note obtained.
Later, Tuazon Company filed a complaint against Machuca to recover the amount which Tuazon
was obliged to pay plus attorneys fees and interest although Tuazon had not, in fact, paid the
amount of the judgment.
Contention of the Plaintiff:
The plaintiff company argues that, at all events, it is entitled to bring this action
under Article 1843 of the Civil Code, which provides that the surety may, even
before making payment, bring action against the principal debtor.
Contention of the Defendant:
Machuca challenges the propriety of the judgment of the trial court awarding the
plaintiff more than what he actually paid in favor of Manila Compaia de Seguros.
Ruling:
Our conclusion is that the plaintiff has the right to recover of the defendant the sum of
P9,663, the value of the note executed by the plaintiff in favor of "Manila Compaia de Seguros"
which the plaintiff is under obligation to pay by virtue of final judgment.
b.

Legal interests

PHILIPPINE NATIONAL BANK v. LUZON SURETY CO., INC.


and THE COURT OF APPEALS
G.R. No. L-29587; November 28, 1975; 68 SCRA 207
Parties:
Principal Debtor: Augusto Villarosa
Creditor: PNB
Bondsmen: Luzon Surety, Central Surety, Associated Surety
Facts:
PNB seeks a review and reversal of the decision absolving Luzon Surety of its liability to
PNB. Villarosa applied for a crop loan with PNB, which was later on approved. He then executed
a chattel mortgage on standing crops to guarantee the loan.
Because of non-payment, PNB filed a complaint against the three bondsmen, the
defendant being one of them. It filed a bond of P10,000 to guarantee faithful performance of the
obligation to PNB.
Contention of the Plaintiff:
The Court of Appeals erred when it released the Luzon Surety from liability, and
that the benefit of excussion should not be availed of because they are surety of
principal debtor, and that they are liable for the payment of interest even if they
guaranteed only up to P10,000.
Contention of the Defendant:
Luzon Surety on the other hand raised as its defense the alleged material alteration
of the terms and conditions of the contract as the basis of its prayer for release.
Ruling:
Luzon Surety is liable to pay for legal interest. If a surety upon demand fails to pay, he
can be held for interest even if the liability becomes more than that in the principal obligation.
The increased liability is not because of the contract, but because of the default and the necessity
of judicial collection. However, the interest should run from the time the debt becomes due and
demandable.

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c.

Expenses
TUAZON, TUAZON, INC. v. ANTONIO MACHUCA; G.R. No. L-22104;
December 2, 1924; 46 Phil. 561

Ruling:
We do not believe that the defendant must pay the plaintiff the expenses incurred by it in
the litigation between it and "Manila Compaia de Seguros." That litigation was originated by
the plaintiff having failed to fulfill its obligation with "Manila Compaia de Seguros," and it
cannot charge the defendant with expenses, which it was compelled to make due to its own fault.
It is entitled, however, to the expenses incurred by it in this action brought against the
defendant, which are fixed at P1,653.65 as attorney's fees.
d.

Damages
Article 1238 (CC) Payment made by a third person who does not intend to be
reimbursed by the debtor is deemed to be a donation, which requires the debtors
consent. But the payment is in any case valid as to the creditor who has accepted it.
Article 2050 (CC) If a guaranty is entered into without the knowledge or consent,
or against the will of the principal debtor the provisions of Articles 1236 and 1237 shall
apply.
Article 1236. The creditor is not bound to accept payment of performance
by a third person who has no interest in the fulfillment of the obligation,
unless there is a stipulation to the contrary.
Whoever pays for another may demand from the debtor what he
has paid, except that if he paid without the knowledge or against the will
of the debtor, he can recover only insofar as the payment has been
beneficial to the debtor.
Article 1237. Whoever pays on behalf of the debtor without the knowledge
or against the will of the latter, cannot compel the creditor to subrogate
him in his rights, such as those arising from a mortgage, guaranty, or
penalty.

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Article 2071
The guarantor, even before having paid, may proceed against the
principal debtor:
(1)When he is sued for the payment;
(2)In case of insolvency of the principal debtor;
(3)When the debtor has bound himself to relieve him from the
guaranty within a specified period, and this period has expired;
(4)When the debt has become demandable, by reason of the
expiration of the period for payment;
(5)After the lapse of ten years, when the principal obligation has no
fixed period for its maturity, unless it be of such nature that it
cannot be extinguished except within a period longer than ten
years;
(6)If there are reasonable grounds to fear that the principal debtor
intends to abscond;
(7)If the principal debtor is in imminent danger of becoming
insolvent.
In all these cases, the action of the guarantor is to obtain
release from the guaranty, or to demand a security that shall protect
him from any proceedings by the creditor and from the danger of
insolvency of the debtor.
COMMENT:
Rights of the Guarantor Before Payment
It should be noted that Article 2071 differs from Article 2066; Article 2071 refers
to the rights of the guarantor before payment, whereas the former refers to the rights of
the guarantor after payment. Article 2071 does not give the guarantor the right to obtain
money judgment in his favor for the simple reason that he has not yet paid, whereas in
the latter, a money judgment would be proper since in this case, there has already been a
payment. Article 2071 is of the nature of a preliminary remedy, whereas Article 2066 is a
substantive right, it gives a right of action, which without the provisions of the other
might be worthless (Kuenzle & Streiff v. Tan Sunco, 16 Phil. 670 and Perez v. Baria, 52
Phil. 197). In Art. 2071, the guarantor has either of two rights:
(a) to obtain release from the guaranty;
(b) to demand security.

KUENZLE & STREIFF STATES v. JOSE TAN SUNCO, et al.


G.R. No. L-5075; December 1, 1909; 16 Phil. 670
Parties:
Surety: Tan Sunco
Debtor: Chang Chu Sing
Creditor: Kuenzle and Streiff
Facts:

Tan Sunco was a surety for Chung Chu Sing for the payment by the latter of the purchase
price of certain merchandise purchased by said Chung Chu Sing of Ed. and A. Keller and Co. The
total debt was composed of four invoices of varying amounts P395.50, P450, P565, and

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P320.20 issued in favor of Chung Chu Sing. Upon his default Tan Sunco instituted four separate
actions against the Chu Sing. Judgment was obtained in favor of the plaintiff, resulting in the
levy of the properties of Chu Sing for the satisfaction of the judgment.
Contention of the Plaintiff:
The plaintiff in this action contends that the debtor did not owe anything to Sunco
at the time the four judgments were secured, basing that contention on the fact,
that Sunco had not yet paid the sums, for which he becomes a surety.
Contention of the Defendant:
He claims that even if he is yet to pay A. Keller Inc. he has the right to proceed
against his principal debtor.
Ruling:
Sunco has the right to obtain judgment against principal debtor. Article 2071 provides
the protective or preliminary remedy in favor of surety:
a.) obtain relief from burden of his suretyship or guaranty :
b.) to defend him against any proceeding of the creditor ; and
c.) from the danger of insolvency of the debtor.
However, while it may be true that the law provides right of the guarantor to poceed
against the debtor before payment, the guarantor is not allowed to execute the secured judgment
until he has satisfied his obligation to pay the creditor.
JOSEPH COCHINGYAN, JR. and JOSE K. VILLANUEVA v. R & B
SURETY AND INSURANCE COMPANY, INC.;
G.R. No. L-47369; June 30, 1987; 151 SCRA 339
Parties:
Debtor: Pacific Agricultutal Supplies (PAGRICO)
Creditor: PNB
Surety: R & B Surety and Insurance Company
Facts:

PAGRICO applied for a loan with PNB in 1963. PAGRICO submitted surety bond
by the R & B Surety and s and conditions of the advance line of credit established by PNB. In
consideration of the issuance of the surety bond, R & B entered into an indemnity agreement
with CCM, in the name of Cochingyan.
When PAGRICO failed to comply with its principal obligation with PNB, R & B
demanded reimbursement from Cochingyan for the payment made to PNB and for the discharge
of its liability to PNB under the surety bond.
Contention of the Plaintiff:
R&B Surety has no cause of action because the indemnity agreement is merely a
trust agreement that the PNB will hold in abeyance any action to enforce its claims
against R & B, thus it constitutes extension of the maturity date on which the
indemnity agreement will commence.
Contention of the Defendant:
R&B maintains that even before payment the surety has the right to proceed
against the debtor.
Ruling:
The court favored the surety, mere failure on the part of the creditor to demand
payment after the debt has become due does not in itself constitute any extension of time
referred to herein. Thus, despite the fact of absence of demand from PNB to respondent-surety
for the execution of the surety bond, for as long as the liability of the respondent under the
surety has matured it is also a liability of the petitioners under the indemnity agreement.
Agreement also matures and become due and demandable in favor of the respondent. Therefore,
R&B surety has the right to proceed against the debtor even before payment in full of the
creditor because the law grants said remedy.
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MERCANTILE INSURANCE CO., INC v. FELIPE


YSMAEL, JR., & CO., INC.
G.R. No. L-43862; January 13, 1989; 169 SCRA 66
Parties:
Debtor: Felipe Ysmael
Creditor: PNB
Surety: Mercantile Insurance Company
Facts:

Felipe Ysmael, Jr. & Co., Inc. filed and acquired credit accommodation with Philippine
National Bank. To secure the loan, Ysmael were required to furnish a bond together with
Mercantile as his surety. It was stipulated that as long as the principal obligation to PNB is
perform, the surety bond shall be extinguish. An indemnity agreement was also entered into
among the parties stipulating among others that the payment of indemnity and compensation
maybe claimed regardless of whether or not Mercantile has actually paid its obligation to PNB.
Ysmael defaulted in paying his obligation, PNB then proceeded against Mercantile as surety, and
subsequently Mercantile filed a notice of such demand from PNB against Ysmael.
Trial Court initially ruled in favor of Mercantile, ordering Ysmael to indemnify
Mercantile and in return ordered the latter to deliver the indemnification to PNB for satisfaction
of the judgment.
Contention of the Plaintiff:
Mercantile asserts that they have the right to proceed against the debtor with the
fact that there is non-payment to the creditor.
Contention of the Defendant:
He contends that Mercantiles cause of action is pre-mature on the ground that
Mercantile is not to be indemnified for something they have not paid as surety,
otherwise unjust enrichment will set in to his prejudice.
Ruling:
The stipulation in the indemnity agreement allowing the surety to recover even before it
paid the creditor is enforceable. In accordance therewith, the surety may demand from the
indemnitors even before paying the creditors. (Cosmopolitan Ins. Co., Inc. v. Reyes, 15 SCRA
528 [1965] citing; Security Bank v. Globe Assurance, 58 Off. Gaz. 3709 [April 30, 1962]; Alto
Surety and Ins. Co., v. Aguilar, et al., G.R. No. L-5625, March 16, 1954).
Hence, appellants contention that the action of the appellee (surety company) is
premature or that the complaint fails to state a cause of action because the surety has not paid
anything to the bank, cannot be sustained (Cosmopolitan Ins. Co., Inc. v. Reyes, supra). In fact,
such contention is belied not only by the allegations in the complaint but also by the agreement
entered into between the appellants and the appellee in favor of the bank.

Article 2072
If one, at the request of another, becomes a guarantor for the
debt of a third person who is not present, the guarantor who satisfies
the debt may sue either the person so requesting or the debtor for
reimbursement.

1. Effects of Guaranty Between Co Guarantors

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Article 2073
When there are two or more guarantors of the same debtor and
for the same debt, the one among them who has paid may demand of
each of the others the share which is proportionally owing from him.
If any of the guarantors should be insolvent, his share shall be
borne by the others, including the payer, in the same proportion.
The provisions of this article shall not be applicable, unless the
payment has been made by virtue of a judicial demand or unless the
principal debtor is insolvent.
COMMENT:
1.

Right of Guarantor Who Pays


This Article is applicable only when there has been payment. If there has been no
payment by way of the guarantors, this Article cannot be applied. Furthermore, this
payment must have been made:
(a) By virtue of a judicial demand;
(b) Or because the principal debtor is insolvent.

2.

Distinguished from Benefit of Division


This Article should not be confused with the article giving as a rule to several
guarantors the benefit of division (Art. 2065) for in said article, there has been no
payment as yet. Moreover, in Art. 2073, the payment must have been made because of
judicial proceedings or because the principal debtor was insolvent (Cacho v. Valles, 45
Phil. 107).

Article 2074
In the case of the preceding article, the co-guarantors may set
up against the one who paid, the same defenses which would have
pertained to the principal debtor against the creditor, and which are
not purely personal to the debtor.
COMMENT:
Right of Co-Guarantors Against the Guarantors Who Paid
The Article gives the co-guarantors the SAME defenses which would have
pertained to the principal debtor. EXCEPTION: defenses purely personal to the debtor
(like fraud or force).

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Article 2075
A sub-guarantor, in case of the insolvency of the guarantor for
whom he bound himself, is responsible to the co-guarantors in the
same terms as the guarantor.

1.

Extinguishment of Guaranty
Art. 2076. The obligation of the guarantor is extinguished at the
same time as that of the debtor, and for the same causes as all
other obligations.

COMMENT:
1.

Two Causes for Extinguishment of the Guaranty


(a) Direct (when the guaranty itself is extinguished, independently of the principal
obligation)
(b) Indirect (when the principal obligation ends, the accessory obligation of guaranty
naturally ends) (See Shannon v. Phil. Lumber & Trans. Co., 61 Phil. 876)

2.

Effect of Novation
(a) If a contract is novated without the guarantors consent, the guaranty ends (Barreto
v. Albo, 62 Phil. 593; Natl Ban v. Veraguth, 50 Phil. 254).
(b) Therefore, a novation where the debtor is substituted or where the credit is
increased, releases the guarantor who did not consent thereto (Barreto v. Albo, 62
Phil. 593; Natl Ban v. Veraguth, 50 Phil. 254)
[NOTE: Consent, however on the part of the guarantor may be given expressly or
implicitly before or after the novation. (Naric v. Guillioso, et al., {C.A} 53 O.G.
4151).]
[NOTE: If the interest rates are increased without the guarantors consent, he is
not liable for the increase, but is liable still for the principal obligation and the
original rate of interest. (Bank of the P.I v. Albaledjo y Cia, 53 Phil. 141).]
ASIATIC PETROLEUM COMPANY, LTD. v. FRANCISCO
HIZON Y SINGIAN and JUSTINO DAVID;
G.R. No. L-20588; December 17, 1923; 45 Phil. 532

Parties:
Creditor: Asiatic Petroleum Co.
Debtor: Justino David
Surety: Francisco Hizon
Facts:
Asiatic Petroleum Co. made a contract with David to become a selling agent at San
Fernando Pampanga. In the original contract, Hizon will guaranty P5,000.00 of Davids
indebtedness as selling agent in San Fernando. Without Hizons knowledge, the document was
altered. The document in the possession of Asiatic shows that places Guaga, Angeles, San
Simon, Capas, Magalang and Mabalacat are included. At the end of the contract, David was
found out to be indebted to Asiatico which cause the latter to file an action to recover from his
surety Hizon.
Contention of the Defendant:
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Secured Transaction Law

Hizon claims that he is not liable since the original contract was changed without
his knowledge and consent and that the surety is further extinguished.

Ruling:
The surety could not be held liable for the indebtedness incurred by the agent under the
changed contract.
Material alteration of the principal contract effected by the creditor and the principal
debtor without the knowledge and consent from all liability on the contract of suretyship.
PHILIPPINE NATIONAL BANK v. COURT OF APPEALS
and B.P. MATA and CO., INC.
G.R. No. 97995; January 21, 1993; 147 SCRA 273
Parties:
Creditor: PNB
Debtor: Marino P. Rubin
Surety: Philippine Phoenix Surety and Insurance Co.
Facts:
Rubin obtained from PNB a 1954 1955 sugar crop loan in the amount of Php
40,200.00 secured by a chattel mortgage. As additional security, Phoenix issued surety bond in
favor of PNB. Three months later, PNB increased the loan from Php 40,200 to Php 56,800
without the knowledge and consent of Phoenix. Rubin Failed to liquidate the loan. PNB
demanded Phoenix to pay.
Contention of the Plaintiff:
PNB claims that the contract in question is a continuing chattel mortgage so the
knowledge and consent of the surety is not necessary for an increase in the amount
of the principal obligation.
Contention of the Defendant:
Phoenix claims that it is not liable since the increase was done without its
knowledge and consent and therefore is released from liability as a surety.
Ruling:
The increase in the indebtedness from Php 40,200.00 to Php 56,800.00 is material and
prejudicial to private respondent phoenix. While the liability of the private respondent under the
bond is limited to Php 70,000.00, the increase in the amount of the debt proportionally
decreased the probability of the principal debtor being able to liquidate the debt thus, increasing
the risk undertaken by the surety to answer for the failure of the debtor to pay.
Material alteration of the principal contract effected by the creditor and the principal
debtor without the knowledge and consent from all liability on the contract of suretyship.
(Asiatic Petroleum Co. vs. Hizon 45 Phil. 532).
SECURITY BANK & TRUST COMPANY v. RODOLFO CUENCA
G.R. No. 138544; October 3, 2000; 341 SCRA 781
Parties:
Creditor: Security Bank and Trust Co. (SBTC)
Debtor: Sta. Inez Melate Corp. (SIMC)
Surety: Rodolfo Cuenca
Facts:

Sta. Inez is a corporation engaged in logging operations. In 1980, Security bank granted
Sta. Ines a credit line in the amount of Php 8,000,000.00 to assist in meeting the additional

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capitalization requirements of its logging operations. To secure payment, Sta. Ines executed a
chattel mortgage over some of its machineries and equipments.
As additional security, Cuenca executed Indemnity agreement whereby he bound himself
jointly and severally with Sta. Ines for payment in favor of Security Bank. After Cuenca resigned,
Sta. Ines repeatedly availed of its credit line, obtained another Php 6,000,000.00 loan, and
executed promissory note to cover the amount of the additional loan against the credit line.
Sta. Ines had difficulty in making the amortization payments. It requested Security Bank
a complete restructure of its indebtedness, which was approved without notice to, or prior
consent of Cuenca.
Sta. Inez was not able to pay its restructured loan. Sta. Inez and Cuenca individually and
collectively refused to pay.
Contention of the Plaintiff:
The 1989 loan agreement was a mere renewal of or extension of the Php
8,000,000.00 Original accommodation and it did not change the original loan in
respect to the parties involved or the obligation incurred.
Contention of the Defendant:
The 1989 agreement extinguished the obligation obtained under the 1980 credit
accommodation, which is evident from its explicit provision to liquidate the
principal and the interest of the earlier indebtedness, and that the increase in the
loan extinguishes the liability of the surety/guarantor.
Ruling:
An essential alteration in the terms of the loan agreement without the consent of the
surety extinguishes the latters obligation.
It is fundamental in the law of suretyship that any agreement between the creditor and
the principal debtor that essentially varies the terms of the principal contract without the
consent of the surety, will release the surety from liability.

Article 2077
The creditor voluntarily accepts immovable or other property in
payment of the debt, even if he should afterwards lose the same
through eviction, the guarantor is released.
COMMENT:
Effect of Dacion En Pago
(a) Note that the dacion en pago here refers to either IMMOVABLE or OTHER
(personal) PROPERTY.
(b) Eviction revives the principal obligation, but NOT the guaranty, for the creditor here
took the risk.

Article 2078
A release made by the creditor in favor of one of the guarantors,
without the consent of the others, benefits all to the extent of the
share of the guarantor to whom it has been granted.

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Article 2079
An extension granted to the debtor by the creditor without the
consent of the guarantor extinguishes the guaranty. The mere failure
on the part of the creditor to demand payment after the debt has
become due does not of itself constitute any extension of time referred
to herein.
COMMENT:
Release by Extension of Term Granted by Creditor to Debtor
(a) Where the release without consent of guarantor guarantor is released from his
undertaking
(b) Where obligation payable in installments where a guarantor is liable for several
payments, such as installments, an extension of time as to one or more will not affect
the liability of the surety for the others. But in case of an acceleration clause, the act
of the creditor of extending payment of said installment without guarantors consent,
discharges the guarantor because this constitutes an extension of the principal
obligation
(c) Prejudice to guarantor and period of extension is immaterial
(d) Extension must be based on new agreement
(e) Diligence on the part of the creditor to enforce his claim
RADIO CORPORATION OF THE PHILIPPINES v. JESUS ROA, et al.
and RAMON CHAVEZ, et al.
G.R. No. 42829; September 30, 1935; 62 Phil. 211
Parties:
Debtor: Jesus Roa
Creditor: Radio Corp. of the Phil.
Guarantors: Ramon, Andres and Manuel Roa
Facts:

Jesus Roa is indebted to Theatrical Enterprise in the sum of Php 28,400 payable in 712
equal monthly installment of Php 400 where Ramon, Andres and Manuel Roa were the
guarantors. It was further agreed that failure to pay one installment will make the whole amount
due and payable. Later Theatrical Enterprises assigned all its rights and interest in favor of
Radio Corporation.
Jesus Roa failed to pay one installment but Radio Corp. did not demand the whole
amount. Then Roa wrote Radio corp. without the consent of the sureties requesting to extend
the payment of installment which was also granted.
Despite the extension, Jesus Roa failed to pay hence an action for recovery against
debtor and guarantors were commenced.
Contention of the Plaintiff:
Their mere failure to demand the payment of the whole amount and instead
granted extension does not extinguish the surety and their obligation.
Contention of the Defendant:
The extension for the payment granted by Radio Corp. to Jesus Roa without their
consent extinguishes the surety and their liability not only in the installments due
but also all amounts of obligation.
Ruling:

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Secured Transaction Law

A mere delay in suing for the collection of the debt does not release the sureties but an
extension granted to the debtor by the creditor without the consent of the guarantor
extinguishes the latters liability.
EULALIO PRUDENCIO v. COURT OF APPEALS, et al.
G.R. No. L-34539; July 14, 1986; 143 SCRA 7
Parties:
Guarantor: Eulalia and Elisa Prudencio
Creditor: PNB
Debtor: Conception and Tamayo Construction, Co.
Facts:

The Prudencios mortgaged their parcel of land to guaranty the loan of Conception and
Tamayo Construction, Co. (CTC) in favor of PNB (Php 10,000). After the promissory notes were
signed, Jose Toribio (Atty.-In-fact of the company) executed a deed of assignment assigning all
the payments to be tendered by the Bureau of Public Works (BPW) to CTC in favor of PNB. This
assignment of credit to the contrary notwithstanding, the bureau with the approval of PNB
conditioned however that they should be for labor and materials, made release of the three
payments directly to the company without the knowledge of the appellant. Later, BPW
rescinded the contract of construction. The petitioners then wrote PNB to cancel the real estate
mortgage.
Contention of the Plaintiff:
When PNB did not apply the initial and subsequent payments to the debt as
provided for in the deed of assignment, they were released from their obligation as
sureties and therefore, the real estate mortgaged executed by them should have
been cancelled.
Contention of the Defendant:
Prudencios liability is that of solidary co-makers since the amount released to the
construction company were used and therefore were spent for the successful
accomplishment of the work constructed. The solidary debtor cannot constitute a
valid defense on the part of the other solidary debtor.
Ruling:
Prudencios can validly set up their personal defense of release from the real estate
mortgage against PNB.
After the court ruled that by applying the payments to the promissory notes in which
CTC and petitioners signed accommodation party, after the promissory note became due, in
effect, PNB waived all the payment and extended the term of payment of the note without the
consent and knowledge of the accommodation makers who stand as sureties to the
accommodated party.
PEOPLES BANK & TRUST COMPANY v. JOSE MARIA
TAMBUNTING and FRANCISCO SANTANA
G.R. No. L-29666; October 29, 1971; 42 SCRA 119
Parties:
Creditor: Peoples Bank and Trust Company
Debtor: Jose Maria Tambunting and Maria Paz Tambunting
Guarantor: Francisco Santana
Facts:

Peoples Bank and Tambunting executed an overdraft agreement and pledge wherein
Peoples Bank granted spouses Tambunting an overdraft from time to time on their current
account with Peoples Bank not to exceed Php 200,000.00. Francisco, as guarantor, executed as
103

Secured Transaction Law

absolute guaranty in consideration of the overdraft agreement and pledge and bound himself
jointly and severally liable to the bank.
Later, spouses Tambunting requested for extension to the bank, who in turn granted the
same with the condition that the interest will increase and the amount of the overdraft will be
reduced. But the former failed to pay their indebtedness on the date due. A demand for payment
was made.
Contention of the Plaintiff:
Francisco is liable because of the absolute guaranty he executed.
Contention of the Defendant:
is released from his obligation because the plaintiff had extended the time of
payment without his consent.
Ruling:
The surety is not released from his obligation.
The contract of absolute guaranty expressly authorized Peoples Bank to extend the time
of payment and to release or surrender any security or part thereof held by it without notice to
or consent of the guarantor, the latter cannot complain that when the creditor released certain
securities given by the debtor or extended the duration of the loan, he was deprived of right of
subrogation.
JOSEPH COCHINGYAN, JR. and JOSE K. VILLANUEVA v. R & B
SURETY AND INSURANCE COMPANY, INC.
G.R. No. L-47369; June 30, 1987; supra
Ruling:
Cochingyan argues that the extension granted by PNB to R & B without the consent of
the guarantor extinguishes the guaranty. However, the Supreme Court held that Article 2079 is
not applicable to Cochingyan because he is a mere indemnitor of R & B Surety but not to PNB,
such that PNB could not directly demand payment from Cochingyan.

Article 2080
The guarantors, even though they be solidary, are released from
their obligation whenever by some act of the creditor they cannot be
subrogated to the rights, mortgages, and preferences of the latter.
COMMENT:
1.

When Guarantors are Released Because of an Act of the Creditor that


Prevents Subrogation
The Article releases the guarantors even if they be solidary.

2.

Reason for the Article


It is possible that the guarantor became one only because of the presence of
rights, mortgages, and preferences of the creditor to all of which he expected to be
subrogated.

3.

Meaning of Act
Act should also include inaction.
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Secured Transaction Law

Examples:
a. Of act when the creditor remits a mortgage or a pledge
b. Inaction when the creditor fails to register a mortgage
4.

When Guarantor is at Fault


If there can be no subrogation because of the guarantors fault, he cannot avail
himself of this Article; hence, he is still bound as guarantor (Manila Trading and Supply
Co. v. Jordana, [C.A.] 37 O.G. 2722)

5.

When Guarantor Can Make Use of the Article


The guarantor can make use of this Article only during the proceeding against
him for payment, not before (Municipality of Gasan v. Marasigan, 63 Phil. 510), nor
after rendition of judgment (See Molina v. De la Riva, 8 Phil. 569).
PHILIPPINE NATIONAL BANK v. MANILA SURETY &
FIDELITY CO., INC. and THE COURT OF APPEALS
G.R. No. L-20567; July 30, 1965; 14 SCRA 776

Parties:
Creditor: PNB
Guarantor: Manila Surety & Fidelity Co. Inc.
Debtor: Adams and Taguba Corp. (ATACO)
Facts:

PNB opened a letter of credit to Edgington Oil Refinery for 8,000 tons of hot asphalt.
2,000 tons worth of Php 279,000.00 were released and delivered to ATACO under trust receipt
guaranteed by Manila Surety for up to Php 75,000.00. To pay the asphalt, ATACO assigned PNB
to collect and receive from the Bureau of Public Works the amount of aforesaid funds payable to
assignor under the purchase order.
ATACO delivered to BPW the asphalt valued at Php 431,466.00. The amount was
regularly collected by PNB, until for unknown reason, the bank ceased to collect. After 4 years
investigators found that more money was payable to ATACO from Public Works office, because
the latter had allowed another creditor to collect funds due to ATACO under the same purchase
order to a total of Php 311,230.41. Later, PNB demanded to recover from ATACO and Manila
Surety the unpaid balance.
Contention of the Plaintiff:
Manila Surety is still liable for Php 75,000.00.
Contention of the Defendant:
They are no longer liable because the creditor failed to notify them when the
assigned funds were exhausted, that they were deprived at any possibility of
recoursing against that security.
Ruling:
The surety is no longer liable. By allowing the assigned funds to be exhausted without
being notifying the surety, the Bank deprived the former of any possibility of recoursing against
the security and therefore, the surety is released.
Article 2080 provides The guarantors, even though they be solidary, are released from
their obligation whenever by some act of the creditor they cannot be subrogated to the rights,
mortgages, and preferences of the latter.

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Secured Transaction Law

Article 2081
The guarantor may set up against the creditor all the defenses
which pertain to the principal debtor and are inherent in the debt; but
not those that are purely personal to the debtor.
COMMENT:
Defenses Available to the Guarantor
a. Defenses inherent in the principal obligation (Art. 2081).
Examples: Prescription, res judicata, payment, illegality of cause (Chinese
Chamber or Commerce v. Pua Te Ching, 16 Phil. 406)
b. Defenses ordinarily personal to the principal debtor, but which are inherent in the
debt (Art. 2081).
Example: Vitiated consent (or intimidation, etc.) (Chinese Chamber or
Commerce v. Pua Te Ching, 16 Phil. 406)
c. Defenses of the guarantor himself.
Examples:
i.
vitiated consent on his part
ii. compensation between debtor and creditor
iii. remission of the principal obligation or of the guaranty
iv. merger of the person of the debtor and creditor
(NOTE: Reason for the last 3 examples: extinguishment of the principal
obligation extinguishes the guaranty.)
1.

Legal and Judicial Bonds

Article 2082
The bondsman who is to be offered in virtue of a provision of a
law or of a judicial order shall have the qualifications prescribed in
Article 2056 and in special laws.
COMMENT:
1.

Qualification of a Bondsman
See Rule 114, Sec. 9, Revised Rules of Court.

2.

The Bond
(a) A bond merely stands as a guaranty (solidary guaranty) for a principal obligation,
which exists independently of said bond, the latter being merely an accessory
obligation (Valencia v. RFC, et al., L-10749, April 25, 1958).
(b) A bond being for the benefit for the benefit of the creditor (in some cases, the
government), it follows that the creditor can legally waive a bond requirement. This
may be done for example by extending the principal contract once or twice, despite
the expiration of the bond originally set up (Board of Liquidators v. Floro, et al.,
L-15155, December 29, 1960).
(c) If a bond is given to suspend the execution of a final decree, the object is impossible,
hence the bond is void. The surety company would therefore incur no obligation

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Secured Transaction Law

under such a bond (Republic Savings Bank v. Far Eastern Surety, L- 14959, Aug. 31,
1960).
(d) Surety bonds should be signed not only by the sureties but also by the principal
obligors (the defendants in a case, for example). If not signed by the latter the surety
bonds are void, there being no principal obligation (which is of course the cause or
consideration of such surety bonds) (Singson v. Babida L-30096, Sept. 27, 1977).
3.

Right to be Heard
A bondsman or surety must be given an opportunity to be heard; otherwise the writ of
execution issued is void (Luzon Surety Co., v. Guerrero, 17 SCRA 400 [1966] and Luzon
Surety Co. v. Beson, et al., L-26865-66, Jan. 30, 1970). Even when execution is proper,
the party against whom it is directed is still entitled to a hearing if he wants to show
subsequent facts that would make the execution unjust (Luzon Surety Co. v. Beson, et
al., L-26865-66, Jan. 30, 1970 and Abellana v. Dosdos, 13 SCRA 244 [1965]) (See,
however, Sy Bang v. Mendez, Sr., 226 SCRA 770 [1993]), where the rules do not require
a hearing on the approval of the bond, provided that the Judge is satisfied with the
solvency of the surety.)

Article 2083
If the person bound to give a bond in the cases of the preceding
article, should not be able to do so, a pledge or mortgage considered
sufficient to cover his obligation shall be admitted in lieu thereof.
COMMENT:
Rule if the Bond is Not Given
Note that instead of the bond, a pledge or a mortgage may be made.
Article 2084
A judicial bondsman cannot demand the exhaustion of the
property of the principal debtor.
A sub-surety in the same case, cannot demand the exhaustion of
the property of the debtor or of the surety.
COMMENT:
a. No Right to Excussion
A judicial bondsman, being a surety, is not entitled to the benefit of excussion
granted a guarantor. The benefit is also defined as a sub-surety.
b. Liability of Surety if Creditor was Negligent in Collecting
A surety is still liable even if the creditor was negligent in collecting from the
debtor. As stated in American Jurisprudence, the contract of suretyship is not that the
obligee will see that the principal pays the debt or fulfills the contract, but that the
surety will see that the principal pay or perform (50 Am. Jur.904 and Judge Advocate
General v. Court of Appeals & Alto Surety Co., L-10671, Oct. 23, 1958).
c. Effect of Violation by Creditor of Terms of the Surety Agreement
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Secured Transaction Law

A violation by the creditor of the terms of the surety agreement entitles the surety
to be released therefrom (Associated Ins. & Surety Co. v. Bacolod Murcis Milling Co.,
L-12334, May 22, 1959). However, where an assurance company has profited in the
issuance of the bond which it had furnished for a premium on the mere allegation or
ground that the release of a prisoner was unauthorized under the provisions of law
(People v. Enriquez, et al., l-13006, Feb. 29, 1960).
d. Bond Filed for Aliens Stay
If a surety bond filed for an alien stay in the country is forfeited because of
violation of its conditions, its subsequent unauthorized cancellation thru mistakes or
fraud does not relieve the surety. A bond surrendered thru mistake or fraud may,
therefore, be considered as a valid and subsisting instrument (Far Eastern Surety and
Ins. Co. v. Court of Appeals, L-12019, Oct. 16, 1958).
e. Rule When Performance is Rendered Impossible
Even when a suretys performance of the bond is rendered impossible by an act of
God, or of the obligee, or of the law, it is the suretys duty to inform the court of the
happening of the event so that it may take action or decree in the discharge of the surety.
Thus, if the surety took no such steps, it is equally chargeable with negligence in this
connection (People v. Otiak Omal & Luzon Surety Co., Inc., L-14457, June 30, 1961).
f. Obligation of Surety to Keep the Accused Under His Surveillance
It is well settled that surety is the jailer of the accused, and is responsible for the
latters custody. Therefore, it is not merely his right but his obligation to keep the
accused at all times under his surveillance (People v. Tuising, 61 Phil. 404). A trial court
has no authority to relieve the bonding company from a part of its liability under the bail
bond by ordering a mere trial confiscation of the bond, where the body of its principal
has not been surrendered to the court despite several extensions of time granted said
company to produce him. For it is the bonding companys responsibility to produce the
accused before the court whenever required. Failure to do so is indisputably complete
breach of the guaranty (People v. Gantang Kasim and Luzon Surety Co., L-12624, May
25, 1960). However, if three days after the forfeiture of the bond, the accused
immediately submitted to the jurisdiction of the court giving weighty reasons for his
failure to appear, the amount to be forfeited really may be reduced to a certain degree
(People v. Cruz & Globe Assurance, L-15214-15, Oct. 26, 1960).
PHILIPPINE NATIONAL BANK v. LUZON SURETY CO., INC.
and THE COURT OF APPEALS
G.R. No. L-29587; November 28, 1975; 68 SCRA 207, Supra
Ruling:
The surety bond executed by Luzon Surety covers the chattel mortgage executed by
Villarosa in favor of PNB. The unrefuted testimony of PNBs witness that the chattel mortgage
was the only contract executed by Villarosa evidencing the crop loan contract upon which the
Luzon Surety agreed to assume liability up to the amount of Php 10,000.00 by posting the said
surety bond that a judicial bondsman cannot demand the exhaustion of the property of the
principal debtor. Hence, despite of the execution of the chattel mortgage by the debtor on his
obligation, the surety is not entitled to the benefit of excussion because he is not a mere
guarantor but surety whose liability is primary and solidary.

STRONGHOLD INSURANCE CO., INC. v. COURT OF APPEALS


G.R. No. 89020; May 5, 1992; 208 SCRA 336
108

Secured Transaction Law

Parties:
Creditor: northern Motors
Bondsman (Surety): Stronghold Insurance
Debtor: Leisure Club (Macromies)
Facts:

Macromies Marketing is a sister company of leisure club in which Macromies and


Northern Motors had a lease agreement where in Macromies failed to pay its bills so Northern
Motors force to sell Macromies property in an auction sale which Northern Motors was the
highest bidder.
The lower court filed a case against Northern Motors for replevin and damages and
sought the recovery of certain office furnitures and equipments. Leisure Club ordered the
delivery of such furniture to leisure club subject to the posting of a bond which was issued by
strong hold in the amount of Php 42,000.00. The lower Court favored Northern Motors and
Ordered Stronghold to pay the value of the properly exemplary damages and attorneys fees.
Contention of the Plaintiff:
It is not a party to the case and that the decision clearly becomes final and
executory and therefore, is no longer liable on the bond. The Surety Company
likewise raised the issue as to when the decision became final and executory.
Contention of the Defendant:
Stronghold is a bondsman/surety therefore; he is solidarily liable with Macromies.
Ruling:
The obligation of stronghold under the bond is to assure the payment of such sum as
may in the case be recovered against plaintiff (Leisure club) and the cause of the action. Hence,
stronghold is liable for damages and Attorneys fees.
LUZON SURETY COMPANY, INC. v. PASTOR QUEBRAR
and FRANCISCO KILAYKO
G.R. No. L-40517; January 31, 1984; 127 SCRA 295
Parties:
Surety: Luzon Surety
Administrator (Debtor): Pastor Quebrar
Debtor: Francisco Kilayko
Facts:

Pastor Quebrar is an administrator in two special proceedings for the real estate of
Chinsu and Lipa. Luzon Surety issued two administrators bond in favor of the court where the
proceedings being taken in behalf of Quebrar.
Quebrar and Kilayko executed two indemnity agreements to pay Luzon Surety the
amount of Php 300.00 in advance as premium for every 12 months. Upon the termination of the
testate proceedings, Quebrar and Kilayko prayed that bond be cancelled.
Luzon demanded the deficiency of the premium from August 9, 1951.
Contention of the Plaintiff:
The bond still subsists despite the proceeding having stopped until the full
payment of the premiums.
Contention of the Defendant:
The bond (administrator) and the indemnity agreements ceased to have any force
and effect, the former since June 6, 1957 with the approval of the project of
partition and the latter since August 9, 1955 with the non- payment of the stated
premiums.
Ruling:

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Secured Transaction Law

The Administrators bond does not cease to be effective with the approval of the partition
and statement of accounts, because administration is for the purpose of liquidation of the estate
and distribution of the residue among heirs and legalities.
CENTRAL SURETY & INSURANCE COMPANY, INC. v.
HON. ALBERTO UBAY and ONG CHI;
G.R. No. L-40334; February 28, 1985; 135 SCRA 58
Parties:
Surety: Central Surety and Insurance Co.
Principal Obligator: Francisco Reyes
Creditor: Ong Chi
Facts:

Ong Chi sued for a sum of money and applied for a writ of attachment and upon filing a
bond amounting to P6K, a jeep belonging to Reyes placed on custodia legis. Reyes moved to
dissolve the writ of attachment and posted a counter bond in the amount of Php 6,465.00 with
Central Surety Insurance Co. as surety.
The condition of the counter bond states that Central Surety and Reyes will, upon
demand, pay to Ong Chi the full value of the property released. The attachment was lifted and
the jeep was made available for execution in which it was sold for Php 4,000 to satisfy the
judgment. Central surety then filed a motion to cancel the counter bond; Ong Chi opposed and
prayed for the payment of deficiency.
Contention of the Plaintiff:
Their only obligation is to redeliver the jeep.
Contention of the Defendant:
Central Surety is liable for the deficiency on the judgment to the amount of Php
5,730.00 as found by the court.
Ruling:
The suretys main obligation was to redeliver the jeep so that it could be sold in case
execution was issued against the principal debtor the amount of Php 6,000.00 was merely to fix
the limit of the suretys liability in case the jeep cannot be reached. The jeep was made available
for execution of the judgment. Therefore his obligation as a bondsman is discharged.
PHILIPPINE PHOENIX SURETY and INSURANCE INC. v.
SANDIGANBAYAN; G.R. No. L-64157-58; April 29, 1987; 149 SCRA 317
Parties:
Surety: Phil. Phoenix Surety and Insurance Co.
Accused: Rembert Castro and Winston Dulay
Facts:

Castro and Dulay were detained in Camp Crame because of an alleged economic
sabotage. Phoenix issued personal bail bonds, Castro in turn paid for premium. Castro escaped
from custody of his military escorts while en route to attend trial and left the country, Dulay
remained at large. Phoenix filed an urgent motion for cancellation of bail bond before CFI.
In due time the Sandiganbayan directed Phoenix to reproduce Castro and Dulay before
the court. Phoenix was unable to comply and so the Sandiganbayan declared the forfeiture of
Dulays bond and refused to cancel Castros bond.
Contention of the Plaintiff:
The bail bonds it posted for Castro were null and void since Castro was under
military detention of the time of his escape.
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Secured Transaction Law

Contention of the Defendant:


The bond cannot be cancelled because Phoenix has the obligation to present the
accused before the court and failure to do so shall be ground for the forfeiture of
the personal bond.
Ruling:
When Phoenix posted a bond for the temporary liberty of the accused, it became its jailer
and such is at all times charged with the duty to keep him under its surveillance which duly
continues until the bond is cancelled, or the surety is discharged.
1.

Special Cases

PACIFIC BANKING CORPORATION v. INTERMEDIATE APPELLATE


COURT and ROBERTO REGALA, JR.
G.R. No. 72275; November 13, 1991
Parties:
Guarantor: Roberto Regala
Debtor: Celia Regala
Creditor: Pacific Banking Corporation
Facts:

The spouse of Regala applied and obtained from the Pacific Banking Corporation a
pacific credit card. By reason thereof, the Regalas also executed a guarantors undertaking
wherein they held themselves solidarily liable for any indebtedness that may arise from the use
of the said credit card; that their undertaking is a continuing one and; that any changes or
novation in the said undertaking shall release the defendants from liabilities thereon. Later, the
Regalas wife defaulted to pay the credit line leading to a suit by the petitioners against Regala.
The trial court ruled in favor of the plaintiff. The case was appealed to the respondent court,
modifying the obligation of the defendant to only P2, 000.00 a month as averred by the
respondent.
Contention of the Plaintiff:
The liability of the defendants should not be limited to only P2,000.00 a month
since in accordance with the guarantors undertaking, the spouse held themselves
that they are solidarily liable to any indebtedness incurred in the use of the said
credit card.
Contention of the Defendant:
The defendants maintained the decision of the respondent court and contended
that they only undertook a credit line limit of P2, 000.00 a month.
Ruling:
The court ruled that the nature of the guarantors undertaking is a contract of suretyship
due to the fact that the respondent bind themselves solidarily in any indebtedness that may arise
from the use of the said card. The nature and extent of the liabilities of a guarantor or a surety is
determined by the clauses in the contract of suretyship. The court ruled that while it may be true
that a guarantor can bind himself for less but not more than that of the principal debtor, the
court however cannot agree that the liability of the respondent should not be limited to
P2,000.00 a month as contended by the respondent and ruled by the respondent court.

LIBERTY CONSTRUCTION & DEVELOPMENT CORPORATION, et al. v.


HON. COURT OF APPEALS, HON. REBECCA SALVADOR and MERCANTILE
FINANCING CORPORATION
G.R. No. 106601; 257 SCRA 696
Parties:
111

Secured Transaction Law

Principal Debtor: Liberty Construction


Surety: Rebecca Salvador
Creditor: Mercantile Financing
Facts:

Liberty applied for a discounting credit line with the respondent Mercantile Financing
Corp (MFC). Later, the parties, Liberty, as principal and plaintiff spouse Abrantes, a surety, and
MFC, as creditor, executed a Continuing Suretyship Agreement. It was stipulated that the
spouse and Liberty bound themselves solidarily liable to existing and future obligations to the
MFC in line with credit accommodations. Then credit accommodation was secured by Trade
Acceptance which Builders Wood Products (BWP) assigned in favor of the MFC and shares of
stocks of the spouses to Manila Banking Corp. Controversy arose when the parties disagreed in
the amount of what has been actually paid by the plaintiff. The defendant then filed a suit
against the plaintiffs. The trial court initially ruled in favor of the defendants. The respondent
court affirmed the appealed decision.
Contention of the Plaintiff:
Liberty contended that BWP assumed the o0bligations of Liberty and spouses
Abrantes in their contract of suretyship when BWP assigned its Trade Acceptance
as security for the credit accommodation of Liberty to MFC. It was also alleged that
the spouses are not liable as surety under the suretyship agreement since it was
procured through fraud and misrepresentation.
Contention of the Defendant:
The defendant maintained the decision of the trial and respondent court that
plaintiffs are liable.
Ruling:
The court ruled that there is no merit in the contentions of the plaintiffs as they were not
corroborated by convincing evidence. The court ruled that the SC is not a trier of facts but only
of cases having questions of law and that the finding of the trial and the respondent court is
given great weight. The plaintiffs in this case only rehashed their allegations raised in both trial
and respondent court. The court ruled that it is clear in the facts and circumstances that the
Trade Acceptance assigned by the petitioner BWP is intended as additional security in favor of
the petitioner Liberty in their credit accommodation with the respondent MFC.
CORAZON VIZCONDE v. INTERMEDIATE APPELLATE COURT
G.R. No. 74231; April 10, 1987; 149 SCRA 226
Parties:
Accused: Corazon Vizconde and Pilar Pagulayan
Offended Party: Marylon Perlas
Agent: Pilar Pagulayan
Surety: Corazon Vizconde
Facts:
Vizconde was asked by the complainant Perlas to sell a ring. Pagulayan, later made
notice to Perlas that she is a sure buyer for the ring. A post-dated check was issued by Pagulayan
and the plaintiff guaranteed, jointly and solidarily, that the check is with sufficient balance to
cover the purchase price of the ring. The check was dishonored leading to a filing of a criminal
case of estafa against Vizconde and Pagulayan despite payment of P30,000.00 to Perlas. The
trial court and respondent court convicted Vizconde and Pagulayan of estafa.
Contention of the Plaintiff:
- In the Supreme Court, the Solicitor-General was asked to comment. The SolicitorGeneral then asserts that the plaintiff be acquitted on the ground that the joint and
112

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several undertaking of the plaintiff merely guaranteed the civil obligation of Pagulayan to
pay Perlas the value of the ring in the event of Pagulayans failure to return the said
article. Thus, such undertaking is a mere civil liability assumed by the plaintiff and not
criminal responsibility consequent to Pagulayans failure to return the value of the thing
sold.
Contention of the Defendant:
- The respondent court maintained its decision contending that the undertaking in
question is equal to the theory that the plaintiff assumes beyond civil liability.
Ruling:
The court ruled that the contention of the Solicitor-General is correct. Such undertaking
only means that the petitioner assumes civil liability as a guarantor and not criminal
responsibility of Pagulayan in account of Pagulayans failure to return the value of the thing
sold. For a person to be convicted criminally, he at least must participate in the crime itself,
conspired with others or its omission or at least benefited from the fruits thereof. Upholding the
theory of the prosecution that the petitioner assumes criminal responsibility of Pagulayan would
counteract the very essence of a contract of surety/guaranty where it only creates civil liability
on the part of the surety/guaranty. A guarantor/surety cannot be held criminally liable in
default of another.

ARGUENZA v. METROPOLITAN BANK


271 SCRA 1
Parties:
Debtor: Arrieta and Perez
Creditor: Metropolitan Bank
Surety: Arguenza
Facts:

The plaintiff was empowered to open a credit line with the respondent bank Metrobank.
Later, the defendant Arrieta and Perez executed a Continuing Suretyship Agreement with the
plaintiff that they held themselves solidarily liable for the payment of the said credit line to
Metrobank. Defendant Arrieta and Perez obtained a loan from the creditor bank and
subsequently a promissory note was executed by both defendants binding themselves solidarily
liable to pay the respondent Metrobank up to the amount indicated in the notes. However, due
to default by the makers of the note (Perez and Arrieta), the respondent bank instituted a
collection suit against defendant Arrieta et al. The trial court initially ruled against the
respondents Arrieta. The decision was appealed, reversing the decision holding the plaintiff
liable for the outstanding balance and holding that the surety agreement, despite full payment,
is a corporate undertaking and therefore covers the deficiency of the payment of the said notes.
Contention of the Plaintiff:
- The plaintiff asserts that they should not be held liable in the outstanding balance to the
respondent bank on the ground that the promissory note executed by Arrieta and Perez
is not a corporate undertaking and that the suretyship agreement does not cover the
obligation of the note signed by Perez and Arrieta. Also, that they cannot be held liable
for the outstanding balance incurred by default of payments of the notes since the Surety
Agreement was fully paid and therefore does not cover the deficiency of the notes.
Contention of the Defendant:
- The defendant maintained the decision of the appellate court holding the plaintiff liable
for the outstanding balance and that the surety agreement, despite full payment, is a
corporate undertaking and therefore covers the deficiency of the payment of the said
notes.
Ruling:

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The court ruled that the note signed by defendants Perez and Arrieta is a corporate
undertaking. In the case at bar, Arrieta and Perez are merely bookkeepers of the said intertrade
company and that they have signed the note without any authorizing document such as a Power
of Attorney and the said note was ratified by the Board of Directors of intertrade. In addition, it
follows that the defendants Arrieta and Perez are not authorized to transact business in behalf of
the company and therefore, the note is not a corporate undertaking. It follows that the said note
is not covered by the Continuing Surety Agreement. This is because under the law, the contract
of surety is never presumed. It must be express and cannot extend to more than what is
stipulated, it is strictly construed against the creditor, every doubt being resolved against
enlarging the liability of the surety.
RIZAL COMMERCIAL BANKING CORPORATION v. JOSE ARRO
and RESIDORO CHUA
G.R. No. L-49401; July 30, 1982; 115 SCRA 777
Parties:
Debtor: Davao Agriculture Industries Corporation (DAICOR)
Creditor: Rizal Commercial Banking Corporation (RCBC)
Surety: Residoro Chua
Facts:
The defendant Chua et el, executed a comprehensive surety agreement with the principal
debtor Davao Agriculture Industries Corporation (DAICOR) and with RCBC to guaranty among
others, the existing indebtedness of DAICOR to the petitioner bank; to induce the petitioner
bank to make loans or advance/extend the credit of DAICOR, by request or in any other
manner, with or without security, and; any loans or advances evidenced by any instruments
upon which DAICOR may be held liable. Provided, that such liability shall not exceed at any one
time the aggregate principal sum of P100, 000. A promissory note was then issued in favor of
RCBC. The said note was signed by Go Sr. in behalf of DAICOR and in his own personal
capacity. Despite several demands, the note was not paid leading to a collection suit filed in the
sala of the respondent judge, against DAICOR, Go Sr. and the private respondent. The
respondent judge absolved the liability of the respondent, hence, this case praying for the
annulment of the decision of the respondent judge.
Contention of the Plaintiff:
The surety agreement is continuing in nature. Thus, the respondent Chua can be
held liable as the said agreement covers all kinds of indebtedness that DAICOR
may incur with the petitioner bank.
Contention of the Defendant:
Respondent Chua maintains the decision of the respondent judge, arguing that he
cannot be held liable, as respondent is not a signatory in the said note. Since Go Sr.,
in behalf of DAICOR, signing in his personal capacity, the obligation is solely to the
maker of the said note.
Ruling:
The petition is meritorious. The law provides that:
Article 2053. A guaranty may also be given as security for future debts, the amount of
which is not yet known, there can be no claim against the guarantor until the debt is liquidated.
A conditional obligation may also be secured.
The provision means that it is allowed by law that a guarantor may guaranty a future
debt of the principal obligation. It is clear from the stipulation of the said agreement that Chua
and Go Sr., guarantees the payment of existing as well as indebtedness, of whatever kind, that
Daicor may incur with the petitioner. In the case at bar, there is no doubt that the agreement is
by its nature a continuing contract, and therefore remains in full and in effect until a notice to
the petitioner bank for its termination.

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THE PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY, INC. v.


EUGENIO RAMOS and PILAR MIRANDA
G.R. No. L-20978; February 28, 1966; 16 SCRA 298
Parties:
Debtor: Associated Reclamation & Development (ARDC)
Creditor: General Acceptance & Finance Corporation (GAFC)
Surety: Philippine American General Insurance Company
Guarantor of Surety Bond: Eugenio Ramos and Pilar Miranda
Facts:

Associated Reclamation & Development (ARDC) executed a promissory note P11, 765 in
favor of Gen. Acceptance & Finance Corporation (GAFC). Later, the appellant Phil- Am executed
a surety bond to secure the payment of the promissory note. Subsequently, the appellee Ramos
and Miranda executed a counter guaranty with real estate mortgage in favor of the appellant for
the appellants liability under the surety bond. Moreover, the appellee Ramos and the debtor of
GAFC, ARDC executed an indemnity agreement in favor of the appellant whereby Ramos and
ARDC bind themselves solidarily to indemnify the appellant for whatever it may suffer because
of the surety bond and they waived their right of exhaustion. ARDC defaulted, and therefore, the
appellant Phil-Am is forced to pay its obligations in the surety bond in favor of GAFC. In turn,
the appellant sued the spouses Ramos and Miranda for indemnification and in their default, the
mortgage property be foreclosed. The trial court ruled against the appellant, holding that the
properties of ARDC be exhausted first.
Contention of the Plaintiff:
Since the principal ARDC defaulted in its obligation to GAFC and that as surety, the
appellant paid the obligation to GAFC, it is but proper to proceed against the
respondent spouses who executed indemnity agreement in their favor.
Contention of the Defendant:
They are mere guarantors in accordance with the executed counter guaranty, and
that they invoked their benefit of excussion, before the appellant can validly
proceeded against them.
Ruling:
The court ruled in favor of the contentions of the plaintiff. Under the stipulations in the
indemnity agreement, it is clear that the defendants assumed solidarily liability in favor of the
plaintiff. Thus, they are by nature assumed primarily liable, who in according to law are not
entitled to the benefit of exhaustion. Moreover, under the said agreement, the defendants
waived their right of exhaustion. Therefore, such contract should be complied with by the
defendants in good faith for the contract has the force of law between the parties.
PRUDENTIAL BANK v. INTERMEDIATE APPELLATE COURT, PHILIPPINE
RAYON MILLS, INC., and ANACLETO CHI; G.R. No. 74886; December 8,
1992; supra
Ruling:
The petitioner contented that the dismissal of the respondent court of the claims for
liabilities against Chi on the ground of principle of excussion is improper. The petitioner is
correct. While it may be true that the law provides in favor of the guarantor the benefit of
excussion, the exhaustion of the principal debtors property is not a condition precedent in filing
claims against guarantor. As held in the Southern Motors case, while the guarantor may demand
prior exhaustion, the creditor, nonetheless, has the action to secure payment by se curing
judgment against the guarantor, who0 in turn has the right to defer for the execution of the said
payment until the property of the principal debtor has been exhausted to satisfy the obligations
stated in the judgment.

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ANTONIO GARCIA, JR. v. COURT OF APPEALS; G.R. No. 80201;


November 20, 1990; 191 SCRA 493
Parties:
Debtor: Western Minolco Corporation (WMC)
Creditor: Philippine Investments System Corporation (PISO)
Surety: Antonio Garcia
Facts:
Western Minolco Corp. (WMC) obtained two loans with Phil. Investment Systems Corp.
(PISO), P2.5M, and P1M. WMC then executed a promissory note in favor of PISO for the
payment of the said loan. Later Garcia et al. executed a surety agreement wherein they bound
themselves solidarily liable for the payment of the said loan, P2.5M only. WMC defaulted and
upon demand to the surety-petitioner, Garcia defaulted. Hence, a collection suit was filed by the
respondent Lasal against Garcia as the surety of WMC. The trial court dismissed the complaint
on the ground that there was no consideration in favor of Garcia, and therefore, no COA can be
imputed against the respondent. The CA reversed the decision.
Contention of the Plaintiff:
Garcia contended that the surety agreement was invalid because no consideration
had been paid to him by PISO for executing the contract and that the amount of the
entire loan had been received and enjoyed by WMC. Moreover, it was also
contended that the principal contract was novated since subsequent development
in the said contract is effected to their prejudice such as extension of time of
payment and the compounding of interest in the principal obligation.
Contention of the Defendant:
The respondent on the other hand invoked that consideration in favor of the surety
is not necessary for the surety to bind himself or herself in a contract of surety.
Ruling:
The court ruled against the petitioner. The court ruled that while it may be true that a
contract of suretyship, like any other contract, needs the support of consideration for it to be
valid, the consideration necessary to support a surety obligation need not pass directly to the
surety; what is needed is that there is a consideration received by the debtor from the creditor.
Thus, it has the effect that the indirect consideration to the surety will suffice for the surety to
bind itself in the contract, i.e. the delivery of the consideration in the principal contract from the
creditor to the debtor. Thus, when the debtor binds itself in the principal contract it means that
the contract of suretyship is in effect, since the contract of surety co-exist with the completion of
the principal contract.

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PART II

A.

PLEDGE

1. Provisions common to pledge and mortgage

Article 2085
The following requisites are essential to the contract of pledge
and mortgage:
(1)That they be constituted to secure the fulfillment of a principal
obligation;
(2)That the pledgor or mortgagor be the absolute owner of the
thing pledged or mortgaged;
(3)That the persons constituting the pledge or mortgage have the
free disposal of their property, and in the absence thereof, that
they be legally authorized for the purpose.
Third persons who are not parties to the principal obligation may
secure the latter by pledging or mortgaging their own property.
COMMENT:
1.

Consideration of Pledge or Mortgage


Pledges and mortgages are accessory contracts; therefore, their consideration is
the same as the consideration of the principal obligation (China Banking Corp. v.
Lichauco, 46 Phil. 460). If the principal contract is void, so also is the pledge given as
security therefor.

2.

Ownership
(a) Pledge or mortgage is VOID if the one making it is not the owner of the thing pledged
or mortgaged. Future property therefore cannot be mortgaged or pledged because of
the lack of ownership (Dilag v Heirs of Resurreccion, 75 Phil. 650).
(b) Agency: If the agent will pledge or mortgage the property of the principal under his
name the accessory contract is VOID, but if there is an authorization (special power
of attorney) from the principal, the agent will pledge or mortgage under the name of
the principal then it is valid (Arenas v Raymundo, 19 Phil. 46).
(c) The pledgor or mortgagor needs not to be the debtor or borrower; third parties can
pledge or mortgage his property (being the absolute owner) to accommodate
(accommodation party) the debtor or borrower to secure a loan.
(d) If a forger pledges or mortgages anothers property then it is VOID, unless the
property was transferred to the forgers name and registered in the registry of
property then it cannot affect third parties who accept it under good faith, meaning
an innocent third party should not be prejudiced (Veloso v. La Urbana, 58 Phil. 681;
Lopez v. Seva, 69 Phil. 331 and De Lara v. Ayroso, 95 Phil. 185).
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3.

Nullity of Pledge or Mortgage


If the pledge or mortgage is VOID the principal obligation (loan) may still be
VALID meaning the debt can be recovered through an ordinary action (Lozano v Tan
Suico, 23 Phil. 16 and Julian v. Lutero, 43 Phil. 703).

4.

Liability of a Mortgagor for Anothers Debt


One who mortgages his property to guaranty anothers debt, without expressly
assuming personal liability for such debt, CANNOT be compelled to pay the deficiency
remaining after the mortgage has been foreclosed (Phil. Trust Co. v. Echaus Tan Siua, 52
Phil. 852).

5.

Essential Requisites for Pledge and Mortgage


PLEDGE
(a) accessory contracts made to
secure fulfillment of a principal
obligation
(b) pledgor must be absolute owner
of property pledged
(c) pledgor must have free disposal
or be authorized
(d) thing pledged may be alienated
when principal becomes due for
payment to the creditor (Art.
2087)
(e) thing pledged must be placed in
the possession of the creditor,
or of a third person by common
agreement (Art. 2093)

mortgage.

MORTGAGE
(a) same as in pledge
(b) mortgagor must be absolute
owner of property mortgaged
(c) mortgagor must have free
disposal or authorized
(d) mortgaged property may be
alienated when principal
obligation becomes due for
payment to the creditor (Art.
2087)

Article 2086
The provisions of Article 2052 are applicable to a pledge or

COMMENT:
Applicability of Art. 2052 (Guaranty of Voidable, Etc., Obligations)
(a) Even if the principal debt is voidable, unenforceable, or merely natural, the pledge or
mortgage is VALID.
(b) If the principal obligation is VOID, the accessory obligation is also VOID.
(c) Art. 2052. A guaranty cannot exist without a valid obligation.
Nevertheless, a guaranty may be constituted to guarantee the performance of a
voidable or an unenforceable contract. It may also guarantee a natural obligation.
Article 2087
It is also of the essence of these contracts that when the
principal obligation becomes due, the things in which the pledge or
mortgage consists may be alienated for the payment to the creditor.
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COMMENT:
1.

Right to Have the Property Alienated So That the Debt May Be Paid
When the due date comes and without satisfaction of settlement of the loan was
made, the creditor has the right to alienate the property (NOT AUTOMATICALLY
APPROPRIATE) to be sold to anybody including the creditor for the payment of the
debt.

2.

Violations of Conditions May Authorize Immediate Foreclosure


If there are violation to the contract of pledge or mortgage, the creditor may
demand at once the payment of loan or the early foreclosure of the mortgage, example a
provision of no second mortgage on the property or to execute a lease on the property
such violation will render the immediate foreclosure of the property. (Lopez & Javelona
v. El Hogar Filipino, 47 Phil. 247)

3.

Price
Price of the rendered in the public auction is inadequate thus cancelling the sale,
no unless it is shocking to the conscience. (Go Letting & Sons, etc v. Leyte Land
Transportation Co., et al., L-8887, May 28 1958)
Article 2088.
The creditor cannot appropriate the things given by way of
pledge or mortgage, or dispose of them. Any stipulation to the contrary
is null and void.

COMMENT:
1.

Pactum Commissorium
In the contract of pledge or mortgage or antichresis, stipulations stating that if
the debtor failed to pay the principal obligation on the time stipulated, the creditor will
automatically appropriate the thing placed as security for the loan, are VOID.
Example: C borrowed from D sum of money. C offered his house by way of a
mortgage. It was expressly stipulated in the contract that upon non-payment of the debt
on time, the house would belong to D. Such stated is Pactum Commissorium VOID
stipulation.

2.

Mortgagee Cannot Sell During Existence of Principal Obligation


Is a mortgagee allowed, during the existence of the principal debt, to sell the
property mortgaged to him?
Answer: NO, because this would be an act of disposition. The answer would be
the same even if the contract allows the sale, for in such a case, said stipulation would be
null and void.
Article 2089
A pledge or mortgage is indivisible, even though the debt may be
divided among the successors in interest of the debtor or of the
creditor.
Therefore, the debtors heir who has paid a part of the debt
cannot ask for the proportionate extinguishment of the pledge or
mortgage as long as the debt is not completely satisfied.
Neither can the creditors heirs who received his share of the
debt return the pledge or cancel the mortgage, to the prejudice of the

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COMMENT:
1.

Indivisibility of a Pledge or Mortgage


The obligation can be divisible but the mortgage remains indivisible.
Example:
X died leaving two children, C and D. W owes X 1 million, thus the obligation was
divided to C and D 500,000 each. W paid C 500,000. Can C release half of the
mortgaged property?
Answer: No (par. 2, Art. 2089), but of course the debt is now only half. Indeed, a
mortgage is indivisible, but the principal obligation may be divisible.

2.

Example of the Exception

3.

X borrowed from W 1 million, secured by a pledge of a diamond ring for a debt of


P200,000; and a piece of land was mortgaged for the balance of P800,000. Can X
demand the return of the diamond ring upon payment of P300,000?
Answer: Yes, because the ring guarantees only 300,000.oo of the debt and it was
specified accordingly (pars. 3 and 4, Art. 2089).
Mortgage on Both a House and Its Lot
If a mortgage is constituted on a house and its lot, both should be sold
TOGETHER at the foreclosure, and not separately (Bisayas, et al. v. Lee, et al., [C.A.] 53
O.G. 1518). Similarly, if the mortgage is on two lots, the mortgagee can demand the sale
of either or both. This is because the mortgage is INDIVISIBLE (Aquino v. Macondray
and Co., 97 Phil. 731).

4.

Non-Applicability to Third Persons


The indivisibility of a mortgage does not apply to third persons (Nat. Bank v.
Agudelo, 58 Phil. 655).

Article 2090
The indivisibility of a pledge or mortgage is not affected by the
fact that the debtors are not solidarily liable.
-

This article is self-explanatory

Article 2091
The contract of pledge or mortgage may secure all kinds of
obligations, be they pure or subject to a suspensive or resolutory
condition.
-

This article is self-explanatory

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Article 2092
A promise to constitute a pledge or mortgage gives rise only to a
personal action between the contracting parties, which prejudice to
the criminal responsibility incurred by him who defrauds another, by
offering in pledge or mortgage as unencumbered, things which he
knew were subject to some burden, or by misrepresenting himself to
be the owner of the same.
COMMENT:
1.

A Promise to Constitute a Pledge or Mortgage


If a promise is accepted it will give rise to personal rights (no real rights created)
only between parties. There is no mortgage as yet no real right has been created. What
exists, however, is a personal right of the creditor to demand the constitution of the
mortgage. Thus in one case, inasmuch as the debtor had made a promise to constitute a
pledge and inasmuch as the promise had been accepted by the creditor-bank, it was held
that the bank could have under Art. 2082, compelled the fulfillment of the agreement
(Mitsui Bussan Kaisha v. Hongkong & Shanghai Bank, 36 Phil. 27).

2.

Judicial Declaration of Lien is Sufficient


It has been held that though there is nothing wrong in requiring the debtor to
execute the mortgage, still in certain cases a judicial declaration of the existence of the
lien would be sufficient. A court of equity never requires an unnecessary thing, and in
this case, all the rights of the creditor will be adequately protected by declaring that the
indebtedness recognized by the debtor, constitutes a lien in the nature of a mortgage
upon the Hacienda Salvacion, it appearing that the registration of the whole has been
effected. It is a maxim of jurisprudence that equity regards that as done which ought to
be done, and in obedience to this precept, as between the parties to this record, the
property must be considered to be subject to the same lien, as if the mortgage which had
been agreed to be made had been actually executed (Laplana v. Garchitorena Chereau,
48 Phil. 163).

3.

Double Remedies
Is it inconsistent to ask in one action that: (a) the mortgage be constituted; or (b)
the indebtedness be paid?
Held: No, they are not inconsistent (Laplana v. Garchitorena Chereau, supra).

ESTANISLAUA ARENAS, et al. v. FAUSTO RAYMUNDO


G.R. No. L-5741; March 13, 1911; 19 Phil. 46
Parties:
Owner: E. Arenas
Agent: E. De Vega
Mortgagor/Pledgor: C. Perello
Pledgee: Faustino Raymundo
Facts:

The jewelry was delivered to De Vega to sell on commission, who, in turn, delivered it to
Perello to, likewise, sell said jewelry on commission. However, the latter pledged the jewelry in

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Raymundos pawnshop instead, and appropriated to her own use the money obtained thereby.
Perello was prosecuted and convicted for estafa. The jewelry remained under the control and
possession of the defendant.
Contention of the Petitioner:
Perello was not the lawful owner of the thing pledged nor did she have authority to
do so. Therefore, they have the authority to redeem the subject property from the
defendant.
Contention of the Respondent:
Prior to the return of the jewelry in question, he is entitled to reimbursement of the
amount loaned to embezzler.
Ruling of the Supreme Court:
Under the law, one of the essential requisites of the contract of pledge, that the thing
pledged must belong to the person who pledges or mortgages it. This being absent, the contract
is devoid of value and force as if it not had been made.

CHINA BANKING CORPORATION v. FAUSTINO LICHAUCO, et al.


G.R. No. L-22001; November 4, 1924; 46 Phil. 460
Parties:
Debtor: Lichauco
Creditor: China Banking Corp.
Mortgagor: Lichauco
Facts:

China Bank granted Lichauco a loan. He and his spouse executed, in favor of the bank, a
mortgage to secure the payment of part of the loan in the amount of 50,000.00 with interest.
The Lichaucos ratified the former document, the loan not having been paid, CBC brought the
present action to recover payment and or foreclose the mortgage.
Contention of the Respondent:
The obligation lacks consideration because what they guaranteed with this
mortgage was a debt of Lichauco Co. Inc.
Ruling:
The accessory contract is not separated from the principal obligation; the accessory
contract must in its totality guarantees the main obligation, meaning the value of the security
must be equal to the principal obligation so to speak, an accessory contract cannot stand alone;
therefore the defendants contention does not find support of the law.
ANDRES PUIG v. GEO SELLNER and B.A. GREEN
G.R. No. L-20013; October 18, 1923; 45 Phil. 826
Parties:
Debtor/Pledgor: Sellner
Creditor: Puig
Facts:

Sellner borrowed money from Puig. As a security to the same, Sellner executed a
promissory note and pledge 570 shares of stocks. A stipulation in the agreement provides that
if Sellner failed to pay; the shares of stocks pledged shall become property of Puig.
Contention of the Petitioner:

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Secured Transaction Law

The above-mentioned stipulation is valid because it was agreed upon by both


parties.
Contention of the Respondent:
The stipulation in question is not valid, hence not binding upon the parties.
Ruling:
The stipulation is void, because contrary to public policy, it is considered as in the nature
of Pactum Commissorium.
JUAN DALAY v. BERNARDO AQUIATIN and PROCESO MAXIMO
G.R. No. 20132; September 22, 1923; 47 Phil. 951
Parties:
Debtor: C. Villarin
First Creditor: E. Gomez
Buyer: J. Dalay
Second Creditor: B. Aquiatin
Deputy Sheriff: P. Maximo
Facts:

Villarin was the owner of six parcels of land. He then executed a debt in favor of Gomez
with an agreement that if Villarin fails to pay, the debt shall be paid with the property given as
security. When Villarin failed to pay, Gomez sold the parcels of land to Dalay. Villarin
acknowledged that the lands had been transferred to Gomez by virtue of a real and absolute sale,
but he later on contracted a debt in favor of Aquiatin. The CFI ruled in favor of herein
respondent and execution was issued and levied upon the subject property.
Contention of the Petitioner:
Dalay claims that he is the absolute owner of the lands in question and that there
was an effective transfer and absolute waiver of the title to the lands.
Contention of the Respondent:
The sale was simulated and fraudulent.
Ruling:
Two things are prohibited by the law, which are: (a) the appropriation of the creditor of
the things pledged or mortgaged; and, (b) the disposition thereof by the same creditor. The
stipulation in question does not authorize either one or the other. Therefore, the agreement does
not constitute a pactum commissorium, and, as such, is valid making Dalay the absolute owner
of the lands.
(NOTE: But many authors disagree with the holding of the court. Although it is not a
form of pactum commissorium, it has the same effect which is contrary to public moral.)

2. Provisions Applicable to Pledge

Article 2093
In addition to the requisites prescribed in Article 2085, it is
necessary, in order to constitute the contract of pledge, that the thing
pledged be placed in the possession of the creditor, or of a third person
by common agreement.
COMMENT:

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1.

Thing Pledged Must Be in Possession of the Creditor or a Third Person by


Common Agreement
This requisite is most essential and is the characteristic of a pledge without which
the contract cannot be regarded as entered into because precisely in this delivery lies the
security of the pledge (Manresa). Indeed, if Art. 2093 is not complied with, the pledge is
VOID (El Banco Espaol-Filipino v. Peterson, 7 Phil. 409).

2.

Effectivity Against Third Persons


A pledge shall not take effect against third persons if a description of the thing
pledged and the date of the pledge do not appear in a public instrument (Art. 2096).

3.

Symbolic Delivery
Although we have seen that symbolic delivery is not sufficient, still if the pledge,
before the pledge, had the thing already in his possession, then the requirement of the
law has been satisfied. For then, said pledgee would be in actual possession. The same
thing may be said in case the thing pledged is in the possession of a third person by
common agreement (See Art. 2093).
Article 2094
All movables which are within commerce may be pledged,
provided they are susceptible of possession.

COMMENT:
What May Be Pledged
(a) Only movables can be pledged (including incorporeal rights see Art. 2095).
(b) Real property cannot be pledged. A pledge cannot include a lien on real property
(Pac. Com. Co. v. Phil. Natl Bank, 49 Phil. 236).
(c) Certificates of stock or of stock dividends, under the Corporation Code, are quasinegotiable instruments in the sense that they may be given in pledge to secure an
obligation.
Article 2095
Incorporeal rights, evidenced by negotiable instruments, bills of
lading, shares of stock, bonds, warehouse receipts and similar
documents may also be pledged. The instrument proving the right
pledged shall be delivered to the creditor, and if negotiable, must be
indorsed.

COMMENT:
1.

Pledge of Incorporeal Rights


(a) The instrument proving the right pledged must be DELIVERED.
(b) If negotiable, said instrument must be ENDORSED.

2.

Pledge Certificate

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A pledge certificate by itself is not a negotiable instrument and therefore, even if


delivered and endorsed to an assignee, he would have no right to redeem the property,
unless the creditor-pledgee consents (Concepcion v. Agencia Empeos de la A. Aguirre,
[C.A.] 63 O.G. 1431).
Article 2096
A pledge shall not take effect against third persons if a
description of the thing pledged and the date of the pledge do not
appear in a public instrument.

COMMENT:
1.

Effectivity of Pledge Against Third Persons


(a) A public instrument must be made.
(b) The instrument must contain the DESCRIPTION of the thing pledged and the DATE
of the pledge.

2.

Reason for the Law


A debtor in bad faith may attempt to conceal his property by simulating a pledge
thereof with an accomplice. Art. 2096 is, of course, mandatory in character.

3.

Mere Delivery Not Sufficient


To affect third persons, mere delivery of possession is insufficient, This
provision (Art. 2096) has been interpreted in the sense that for the contract to affect
third persons, it must appear in a public instrument in addition to delivery of the thing
pledged (Bachrach Motor Co. v. Lacson Ledesma, 64 Phil. 681).

4.

Assignee Under the Insolvency Law


An assignee of a person under the Insolvency Law is a third person within the
meaning of Art. 2096 of the Civil Code. This is because the assignee insofar as the
collection of credits is concerned, is the representative of the creditors and not of the
bankrupt. Furthermore, when goods or merchandise have been pledged to secure the
payment of a debt of a particular creditor, the other creditors of the pledgor are third
persons with relation to the pledge contract and pledgor and pledgee (Te Pate v.
Ingersoll, 43 Phil. 394).

5.

Effect if No Public Instrument is Made


When the contract of pledge is not recorded in a public instrument, it is void as
against third persons; the buyer of the thing pledged is a third person within the
meaning of the article. The fact that the person claiming as pledge has taken actual
physical possession of the thing sold will not prevent the pledge from being declared void
insofar as the innocent stranger is concerned (Tec Bi and Co. v. Chartered Bank of India,
Australia and China, 16 O.G. 908; Ocejo, Perez and Co. v. International Bank, 37 Phil.
631)
Article 2097
With the consent of the pledgee, the thing pledged may be
alienated by the pledgor or owner, subject to the pledge. The
ownership of the thing pledged is transmitted to the vendee or
transferee as soon as the pledgee consents to the alienation, but the
latter shall continue in possession.

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COMMENT:
Pledgor May Alienate Thing Pledged
Example:
C pledged his diamond ring with D. C may sell the ring provided that D consents. The sale is,
however, subject to the pledge, that is, the pledge would bind third persons if Art. 2096 has been
Article 2098
The contract of pledge gives a right to the creditor to retain the
thing in his possession or in that of a third person to whom it has been
delivered, until the debt is paid.
followed. If B buys the ring, the ownership of the ring is transferred to him, as soon as D
consents to the sale but D shall continue to be in possession of the ring.

COMMENT:
1.
Creditors Right to Retain
Example:
B owes C P1 million. As security, B pledged his diamond ring with C. C has the
right to retain the ring until the P1 million debt is paid.
2.

No Double Pledge
Property that has been lawfully pledged to a creditor cannot be pledged to
another as long as the first one subsists (Mission de San Vicente v. Reyes, 19 Phil. 524).
This is so, for otherwise, how can the thing pledged be delivered to the second creditor?
It must be noted that if the first pledge or creditor gives up the possession of the property
pledged, such pledge is thereby extinguished notwithstanding the continuation of the
principal obligation guaranteed by the pledge (Art. 2110, Civil Code).
Article 2099
The creditor shall take care of the thing pledged with the
diligence of a good father of a family; he has a right to the
reimbursement of the expenses made for its preservation, and is liable
for its loss or deterioration, in conformity with the provisions of this
Code.

COMMENT:
Duty of Pledgee to Take Care of Thing Pledged
(a) When the possession of property belonging to a debtor is delivered to a creditor
simply as a guaranty for the payment of a debt, the title does not pass to the

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temporary possessor, who has no right to damage or to destroy, and is liable for any
injury he may cause (Bonjoc v. Cuison, 13 Phil. 301).
(b) If the pledgee has exercised all the care and diligence which the law requires of her,
she cannot be held responsible for the theft of the jewelry pledged with her. Had the
theft occurred as a result of her fault or negligence, she would have been liable (San
Jose and Carlos v. Ruiz, 71 Phil. 541).
Article 2100
The pledgee cannot deposit the thing pledged with a third
person, unless there is a stipulation authorizing him to do so.
The pledgee is responsible for the acts of his agents or
employees with respect to the thing pledged.
COMMENT:
1.

Pledgee Cannot Deposit the Thing Pledged

2.

Generally, the pledgee cannot deposit the thing pledged with a third person.
Exception if there is a stipulation authorizing such deposit.
Responsibility of Pledgee for Subordinates Acts
The second paragraph stresses the master and servant rule.
Article 2101
The pledgor has the same responsibility as a bailor in
commodatum in the case under Article 1951.

COMMENT:
Same Responsibility as a Bailor in Commodatum
Article 1951. The bailor who, knowing the flaws of the thing loaned, does not
advise the bailee of the same, shall be liable to the latter for the damages which he may
Article 2102
If the pledge earns or produces fruits, income, dividends, or
interests, the creditor shall compensate what he receives with those
which are owing him; but if none are owing him, or insofar as the
amount may exceed that which is due, he shall apply it to the principal.
Unless there is a stipulation to the contrary, the pledge shall extend to
the interest and earnings of the right pledged.
In case of a pledge of animals, their offspring shall pertain to the
pledgor or owner of animals pledged, but shall be subject to the
pledge, if there is no stipulation to the contrary.
suffer by reason thereof.
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COMMENT:
Rules if Pledge Produces Fruits or Interests
(a) Fruits and interests may compensate for those to which the pledgee himself is
entitled or may be applied to the principal.
(b) Generally, the pledge extends to offspring of animals, but there can be a contrary
stipulation.

Article 2103
Unless the thing pledged is expropriated, the debtor continues
to be the owner thereof.
Nevertheless, the creditor may bring the actions which pertain
to the owner of the thing pledged in order to recover it from, or defend
it against a third person.
COMMENT:
1.
2.

Ownership Retained By Pledgor


Generally, the pledgor continues to be the owner. Exception when the object is
expropriated.
Exercise By Pledge of Rights of Owner
owner.

Despite ownership by the pledgor, the pledgee may exercise certain rights of the

Article 2104
The creditor cannot use the thing pledged, without the authority
of the owner, and if he should do so, or should misuse the thing in any
other way, the owner may ask that it be judicially or extrajudicially
deposited. When the preservation of the thing pledged requires its use,
it must be used by the creditor but only for that purpose.

This article is self-explanatory

Article 2105
The debtor cannot ask for the return of the thing pledged
against the will of the creditor, unless and until he has paid the debt
and its interest, with expenses in a proper case.

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COMMENT:
When Debtor Can Demand the Return of Thing Pledged
(a) He has PAID the debt, interest, and expenses in the proper case.
(b) In an obligatioin with a term, there can be no demand of the property pledged till
after the term had arrived. The prescriptive period for recovery of the property
begins from the time the debt is extinguished by payment and a demand for the
return of the property is made. (Sarmiento v. Javellana, 43 Phil. 880)
Article 2106
If through the negligence or willful act of the pledgee, the thing
pledged is in danger of being lost or impaired, the pledgor may require
that it be deposited with a third person.

This article is self-explanatory.

Article 2107
If there are reasonable grounds to fear the destruction or
impairment of the thing pledged, without the fault of the pledgee, the
pledgor may demand the return of the thing, upon offering another
thing in pledge, provided the latter is of the same kind as the former
and not of inferior quality, and without prejudice to the right of the
pledgee under the provisions of the following article.
The pledgee is bound to advise the pledgor, without delay, of any
danger to the thing pledged.
COMMENT:
When Destruction or Impairment is Feared, Without the Fault of the
Pledgee
This is applicable if the danger arises without fault or negligence on the part of
the pledgee. Two remedies are granted, one for the pledgor, the other for the pledge.
(a) For the pledgor- demand the return but there must be a substitute.
(b) For the pledgee- he may cause the same to be sold at a public sale. The pledge
continues on the proceeds.
(NOTE: The pledgees right is superior to that of the pledgor. The law says
the pledgor is given the right without prejudice to the right of the pledgee.)
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Article 2108
If, without the fault of the pledgee, there is danger of
destruction, impairment, or diminution in value of the thing pledged,
he may cause the same to be sold at a public sale. The proceeds of the
auction shall be a security for the principal obligation in the same
manner as the thing originally pledged.

This article is self-explanatory.

Article 2109
If the creditor is deceived on the substance or quality of the
thing pledged, he may either claim another thing in its stead, or
demand immediate payment of the principal obligation.
-

This article is self-explanatory.

Article 2110
If the thing pledged is returned by the pledgee to the pledgor or
owner, the pledge is extinguished. Any stipulation to the contrary shall
be void.
If subsequent to the perfection of the pledge, the thing is in the
possession of the pledgor or owner, there is a prima facie presumption
that the same has been returned by the pledgee. This same
presumption exists if the thing pledged is in the possession of a third
person who has received it from the pledgor or owner after the
constitution of the pledge.
COMMENT:
1.

Return of Thing Pledged


One of the essential requisites of pledge is that the thing pledged be placed in
the possession of the pledgee or a third person designated by the parties.
Hence, the pledge is extinguished once the thing pledged is return in the
possession of the pledgor. This notwithstanding any stipulation that the pledge would
continue although the pledgee is no longer in possession of the thing pledged.

2.

The pledge is also extinguished by payment of the debt, by renunciation or


abandonment of the pledge and by sale of the thing pledged at public auction.
When Thing Pledged is Found in the Possession of the Pledgor or Owner
The presumption may be rebutted since it is merely prima facie. For example, the
creditor-pledgee may have returned the thing pledged and asked that it be substituted;
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or a stranger may have stolen the thing pledged, and gave it to debtor-pledgor (1st
sentence, 2nd paragraph, Art. 2110).
Article 2111
A statement in writing by the pledgee that he renounces or
abandons the pledge is sufficient to extinguish the pledge. For this
purpose, neither the acceptance by the pledgor or owner, nor the
return of the thing pledged is necessary, the pledgee becoming a
depositary.

COMMENT:
1.
When Pledgee Renounces or Abandons the Pledge
Example:
B pledged his diamond ring to C. C took possession of the ring. Later, although
the principal obligation had not been paid, C wrote on a private document that he was
renouncing the pledge. B did not accept this renunciation, and the ring remained in Cs
possession. Has the pledge been extinguished?
Answer: Yes. C in this case is no longer a pledgee, but a depositary, with the
rights and obligations of a depositary (Art. 2111).
2.

Form Needed Statement in Writing


An oral waiver is not sufficient. But if the pledgee orally renounces the pledge,
and returns the thing pledged to the pledgor, the pledge is thereby extinguished, not
because of Art. 2111, but because of Art. 2110, first paragraph.
Article 2112
The creditor to whom the credit has not been satisfied in due
time, may proceed before a Notary Public to the sale of the thing
pledged. This sale shall be made at a public auction, and with
notification to the debtor and the owner of the thing pledged in a
proper case, stating the amount for which the public sale is to be held.
If at the first auction the thing is not sold, a second one with the same
formalities shall be held; and if at the second auction there is no sale
either, the creditor may appropriate the thing pledged. In this case he
shall be obliged to give an acquittance for his entire claim.

COMMENT:
1.

Right of Creditor to Sell if Credit is Not Satisfied


Under Art. 2087, the law says that it is of the essence of the contract of pledge
that when the principal obligation becomes due, the things in which the pledge consists
may be alienated for the payment to the creditor.

2.

Formalities Required
(a) The debt is due and unpaid.
(b) The sale must be made with the intervention of a notary public.

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(c) The sale must be at a public auction (if at the first, it is not sold, a second auction
must be held with the same formalities).
(d) There must be notice to the pledgor and owner, stating the amount due.
3.

Rule When the Pledgee is Expressly Authorized to Sell Upon Default

If in the contract of pledge, the pledgee is authorized to sell upon default, the requirements in
this Article (Art. 2112) must be complied with; if the conditions of the sale are set forth already
i
n
t h e
Article 2113
At the public auction, the pledgor or owner may bid. He shall,
moreover, have a better right if he should offer the same terms as the
highest bidder.
The pledgee may also bid, but his offer shall not be valid if he is
the only bidder.
contract, Art. 2112 does not have to be observed (Tan Chun Tic v. West Coast Life Ins. Co., 54
Phil. 361).

COMMENT:
Right of Pledgor and Pledgee to Bid at the Public Auction
Pledgor: He may bid; furthermore, he shall have a better right if he should offer
the same terms as the highest bidder. Reason for the preference: after all, the thing
belongs to him.
Pledgee: He may also bid but his offer shall not be valid if he is the only bidder.
Article 2114
All bids at the public auction shall offer to pay the purchase
price at once. If any other bid is accepted, the pledgee is deemed to
have been received the purchase price, as far as the pledgor or owner
is concerned.

COMMENT:
Nature of the Bids at the Public Auction
The bids must be for CASH for said bids shall offer to pay the purchase price
AT ONCE. Even if a purchase on installment is accepted by the pledgee, the sale is still
for cash- insofar as the pledgor or owner is concerned.
Article 2115
The sale of the thing pledged shall extinguish the principal
obligation, whether or not the proceeds of the sale are equal to the
amount of the principal obligation, interest and expenses in a proper

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COMMENT:
Rules if the Price At the Sale is More or Less Than the Debt
(a) If the price at sale is MORE excess goes to the creditor, unless the contrary is
provided.
(b) If the price is LESS creditor does NOT get the deficiency. A contrary stipulation is
VOID.
Article 2116
After the public auction, the pledgee shall promptly advise the
pledgor or owner of the result thereof.

article is self-explanatory

-This

Article 2117
Any third person who has any right in or to the thing pledged
may satisfy the principal obligation as soon as the latter becomes due
and demandable.
COMMENT:
Rights of a Third Person to Pay the Debt
A third person who has a right in or to the thing pledged may pay the debt as
soon as it becomes due and demandable and the creditor cannot refuse to accept
the payment.
Article 2118
If a credit which has been pledged becomes due before it is
redeemed, the pledgee may collect and receive the amount due. He
shall apply the same to the payment of his claim, and deliver the
surplus, should there be any, to the pledgor.

COMMENT:
Pledge of a Credit That Later on Becomes Due
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Example: B borrowed from C P100,000. This was secured by a negotiable promissory


note made by X in favor of B to the amount of P180,000. The negotiable promissory note
was endorsed by B in Cs favor. If the note becomes due before it is redeemed, C can
collect and receive the P180,000 from X, C should get P100,000 and deliver the surplus
of P80,000 to B.
Article 2119
If two or more things are pledged, the pledgee may choose
which he will cause to be sold, unless there is a stipulation to the
contrary. He may demand the sale of only as many of the things as are
necessary for the payment of the debt.
-

This article is self-explanatory

Article 2120
If a third party secures an obligation by pledging his own
movable property under the provisions of Article 2085 he shall have
the same rights as a guarantor under Articles 2066 to 2070, and
Articles 2077 to 2081. He is not prejudiced by any waiver of defense by
the principal obligor.
-

This article is self-explanatory

Article 2121
Pledges created by operation of law, such as those referred to in
Articles 546, 1731, and 1994, are governed by the foregoing articles on
the possession, care and sale of the thing as well as on the termination
of the pledge. However, after payment of the debt and expenses, the
remainder of the price of the sale shall be delivered to the obligor.
COMMENT:
1.

Pledges Created by Operation of Law


(a) This Article speaking of pledges created by operation of law refers to the right of
retention.
(b) Note that in this legal pledge, the remainder of the price shall be given to the debtor.
This rule is different from that in Art. 2115.

2.

Samples
(a)
(b)
(c)
(d)
(e)

Art. 546 refers to necessary and useful expenses


Art. 1731 to work on a movable
Art. 1994 refers to a depositary
Art. 1914 (also legal pledge) refers to the right of an agent to retain
Art. 2004 (also a legal pledge) refers to the right of a hotel-keeper

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Article 2122
A thing under a pledge by operation of law may be sold only
after demand of the amount for which the thing is retained. The public
auction shall take place within one month after such demand. If,
without just grounds, the creditor does not cause the public sale to be
held within such period, the debtor may require the return of the thing.
-

This article is self-explanatory

Article 2123
With regard to pawnshops and other establishments, which are
engaged in making loans secured by pledges, the special laws and
regulations concerning them shall be observed, and subsidiarily, the
provisions of this Title.

UNITED STATES v. HOWARD TERRELL


G.R. No. 1227; May 13, 1903; 2 Phil. 222
Parties:
Pledgor-Debtor: H. Terrell
Pledgee-Creditor: J. Lim Jap
Buyer: W. Tutherly
Facts:
Terrell sold his law library to Jacinto Lim Jap for P1,000 in Mexican currency. He issued
a letter with a promissory note for the sum and a bill of sale as security for the loan. After a year,
he formed a partnership with Tutherly for the practice of law. Terrell sold half of his interest in
the law library to Tutherly. Upon dissolution of the partnership, he again sold the remaining half
of his interest to Tutherly. Jacinto did not take possession of the library nor demanded
possession of the same.
Contention of the Private Petitioner:
Tutherly argues that he was defrauded by Terrell by falsely and fraudulently
representing to him that the property was unencumbered.
Contention of the Respondent:
Jacinto Lim Jap had not complied with the requirements of the law to make his
security good, i.e. Jacinto had not yet taken possession of the property.
Ruling:
In order to constitute the contract of pledge, it is necessary that the thing pledged be
placed in the possession of the creditor, or of a third person, by common consent. The
abandonment of the custody by Jap of the articles over which the right extends necessarily
frustrates any power to obtain or retain them and operates as an absolute waiver of the lien.
Since there was no valid pledge, it follows that the possession of the defendant was absolute and
unqualified, and that he committed no crime in selling the subject property.
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EULOGIO BETITA v. SIMEON GANZON, ALEJO DE LA FLOR and


CLEMENTE PEDRENA;
G.R. No. L-24137; March 29, 1926; 49 Phil. 87
Parties:
Pledgor: T. Buhayan
Pledgee: E. Betita
Possessor: Jacinto
Sheriff: S. Ganzon
Buyer: C. Pedrena
Facts:
Tiburcia Buhayan was indebted to Betita for P470. The former offered four heads of
carabaos as security, which were actually in possession of Jacinto. Betita never took possession
of the carabaos, and there was no stipulation that Jacinto would act as depositary in behalf of
Betita.
De la Flor acquired a judgment against Buhayan. Despite Betitas oppositions, Ganzon,
as sheriff, executed the judgment and levied upon the subject carabaos. The same were sold at a
public auction in favor of Pedrena.
Contention of the Petitioner:
Betita insists that the carabaos were mortgaged to him as evidenced by the
document signed by Tiburcia.
Ruling:
The document does not constitute a sufficient pledge valid against third parties because
it is not in a public instrument.
The pledge is also ineffective because the plaintiff never had actual possession of the
property. The delivery of possession of the property pledged requires actual possession and a
mere symbolic delivery is insufficient. In the instant case, the animals were in the possession of
Buhayan and Jacinto before the alleged pledge was entered into. Apparently, the animals
remained with them until the execution was levied. Therefore, there was no change in
EL BANCO ESPAOL-FILIPINO v. JAMES PETERSON et al.
G.R. No. 3088; February 6, 1907; 7 Phil. 409
possession.
Parties:
Pledgor: F. Reyes
Pledgee: El Banco Espaol-Filipino
Sheriff: J. Peterson
Depositary: R. Garcia (later on substituted by Sierra)
Facts:
Francisco Reyes pledged goods and executed a mortgage to secure the loan of P144,702
with the plaintiff bank. As agreed, the goods were delivered to Ramon Garcia, later substituted
by Luis Sierra for safekeeping. Reyes turned over the keys to the warehouseman. A judgment in
a different action was rendered against Reyes, and Peterson levied upon the pledged goods for
the satisfaction of said judgment. Reyes had not paid the amount loaned from the bank.
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Contention of the Petitioner:


The Banks claim had preference over the claim of a third person not secured by a
pledge, with reference to the property pledged and the extent of its value, and
therefore such property could not have been legally levied upon by the respondent
sheriff.
Contention of the Respondent:
The plaintiff bank had no interest in the property whatsoever.
Ruling:
There was a valid contract of pledge because all the essential requisites are present. The
contract in question was a perfect contract of pledge it having conclusively shown that the
pledgee took charge and possession of the goods pledged through a depositary and a special
agent appointed by it, each of whom had a duplicate key to the warehouse and that the pledgee
itself received and collected the proceeds of the goods as they were sold.
The Bank has preference over the claim of the defendants, the latter having failed to
show that the contract of pledge was fraudulent, Banco Espaol had the preferential right over
the goods.
ESTATE OF GEORGE LITTON v. CIRIACO MENDOZA
and COURT OF APPEALS;
G.R. No. L-49120; June 30, 1988; 163 SCRA 246
Parties:
Guarantor: C. Mendoza
Debtor of Tan and Mendoza: Bernals
Assignee of Tan: G. Litton
Creditor: Tan
Facts:
Bernals purchased on credit from Tan some cotton materials worth P80,796.62,
payment of which was guaranteed by Mendoza. Mendoza issued two checks in favor of Tan and
informed the Bernals of the same and that they were indebted to him. Bernals failed to deposit
the necessary funds for the checks, hence, Tan brought an action against Mendoza.
Mendoza entered into a compromise agreement with Tan, wherein Tan acknowledged
that all his claims against Mendoza had been settled and that both parties waive, release and
quit whatever claims they may have against each other.
Contention of the Petitioner:
Due to the compromise agreement, he is released from liability.
Contention of the Respondent:
Compromise agreement is null and void because he was not duly represented by his
counsel and that he had no right to alienate said credit.
Ruling:
The Deed of Assignment is valid for it fulfills the requisites of a valid pledge or mortgage.
The pledgee or assignee, Litton, did not ipso facto become the creditor of Mendoza, the pledge
being valid; the incorporeal rights assigned by Tan in favor of the estate of Litton can only be
alienated by Tan with due notice and consent of Litton or his duly authorized representative.
To allow the assignor to dispose of or alienate the security without notice and consent of
the assignee will render nugatory the very purpose of pledge.
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DIOSDADO YULIONGSIU v. PHILIPPINE NATIONAL BANK;


G.R. No. L-19227; February 17, 1968; 22 SCRA 585
Parties:
Debtor-Pledgor: D. Yuliongsiu
Creditor-Pledgee: PNB
Facts:
Yuliongsiu obtained a loan from PNB, and to guarantee its payment, he pledged two
vessels and his equity in another vessel. Plaintiff effected partial payment of the loan and
executed two promissory notes for the balance, but never paid the same.
Yuliongsiu was prosecuted for estafa and was declared insolvent. PNB took possession of
the pledged properties, and executed a document of sale transferring said vessels to the
defendant bank.
Contention of the Petitioner:
The contract is a chattel mortgage, and the bank cannot take possession of the
chattels until after there has been default.
Ruling:
The contract is a contract of pledge. PNB therefore is entitled to actual possession of the
vessels as pledgee. While it is true that the plaintiff continued operating the vessels after the
pledge contract was entered into, his possession was expressly made subject to the order of the
pledgee. The pledgor is regarded as trustee of the thing pledged.
CORNELIO CRUZ and CIRIACA SERRANO v. CHUA LEE
G.R. No. L-31018; November 6, 1929; 54 Phil. 10
Parties:
Pawner/ Debtor-Pledgor: C. Cruz
Pawnee/ Creditor: Monte de Piedad and I. Tambunting
Creditor-Pledgee: Chua Lee
Facts:
Cornelio Cruz pledged valuable jewelry to two different pawnshops, Monte de Piedad
and Ildefonso Tambunting receiving therefore twelve pawn tickets showing that these tickets
were renewable, according to the custom of pawnbrokers, upon payment from time to time of
the sum of money representing the intent accruing upon the debts.
Cruz presented himself to Chua and pledged to him six pawn tickets of Monte de Piedad
and a week after obtained another loan from Chua. Chua renewed the tickets issued by Monte de
Piedad by paying the interest necessary to effect renewal, but these tickets expired and they were
not renewed. The jewelries were sold at a public auction and were not redeemed.
Contention of the Respondent:
Chua alleged that the tickets had been drawn in the form of sale with stipulation for
repurchase, but it was understood between the parties that the transaction was a
loan and that the jewelry and tickets held by him constituted a mere security for the
money advanced by him to Cruz.
Ruling:
Chua is liable for the loss of the value of the pawn tickets.

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The ordinary pawn ticket is a document by virtue of which the property in the thing
pledged passes from hand to hand by mere delivery of the ticket, and the contract of pledge is,
therefore, absolvable to bearer. It results that one who takes a pawn ticket in pledge acquires
domination over the pledge, as it is the holder who must renew the pledge to keep it alive. The
law contemplates that the pledgee may have to undergo expenses in order to prevent the pledge
from being lost; and is entitled to reimbursement from the pledgor.

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B.

REAL ESTATE MORTGAGE

Article 2124
Only the following property may be the object of a contract of
mortgage:
(1) Immovables;
(2) Alienable real rights in accordance with the laws, imposed
upon immovables.
Nevertheless, movables may be the object of a chattel mortgage.

COMMENTS
1.

Definition of Mortgage

Mortgage is a contract in which the debtor guarantees to the creditor the fulfillment of a
principal obligation, subjecting for the faithful compliance therewith a real property in case of
non-fulfillment of said obligation at the time stipulated (Paras).
Mortgage is a contract whereby the debtor secures to the creditor the fulfillment of a
principal obligation, especially subjecting to such security, immovable property or real rights
over immovable property in case the principal obligation is not complied with at the time
stipulated (De Leon).
2.

Subject Matter of Mortgage

Article 2124 provides the objects of a contract of mortgage which are immovables and
alienable real rights imposed upon immovables. A real right over real property is real property.
Hence, a mortgage on real property is in itself a real property.
The object of pledge and chattel mortgage are movables.
3.

Characteristics of a Real Mortgage


a. It is a real right.
- A mortgage binds a purchases who knows of its existence or if the mortgage
was registered.
b. It is an accessory contract.
- It is a contract attached to the principal obligation. The rule is: if the principal
obligation is void, the mortgage is also void. But if a mortgage is void because
it was not made by the owner of the property, the principal contract of loan
may still be valid.
- The consideration of the contract is the same for the principal contract
without which it cannot exist as an independent contract.
c. It is indivisible.
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It cannot be divided nor subject to partition.

d. It is inseparable.
- The mortgage adheres to the property, regardless of who its owner may
subsequently be.
e. It is real property.
- A mortgage on real property is by itself real property. (See Article 415 of the
Civil Code, paragraph 10).
Other characteristics of real estate mortgage are: it is a limitation on ownership, it can
secure all kinds of obligation, the property cannot be appropriated and the mortgage is a lien.
4.

Kinds of Mortgage
a. Voluntary one by which is agreed to between the parties or constituted by the
will of the owner of the property on which it is created.
b. Legal one required by law to be executed in favor of certain persons.
c. Equitable one which, although it lacks the proper formalities of a mortgage,
shows the intention of the parties to make the property as a security for a debt.

Real Mortgage Distinguished from Pledge


REAL MORTGAGE
a) Constituted on real property
b) As a rule, mortgagor retains the
property

c) Not valid against third person if


not registered.

PLEDGE
a) Constituted on personal property
b) Pledgor must deliver the property
to the creditor, or, by common
consent, to a third person.
c) Not valid against third person
unless a description of the thing
pledged and the date of the
pledge appear in a public
instrument.

Real Mortgage Distinguished from Chattel Mortgage


REAL MORTGAGE
a) Constituted on immovables
b) May guarantee future obligations

CHATTEL MORTGAGE
a) On movables
b) C a n n o t g u a r a n t e e f u t u r e
obligations

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Article 2125
In addition to the requisites stated in Article 2085, it is
indispensable, in order that a mortgage may be validly constituted,
that the document in which it appears be recorded in the Registry of
Property. If the instrument is not recorded, the mortgage is
nevertheless binding between the parties.
The persons in whose favor the law establishes a mortgage have
no other right than to demand the execution and the recording of the
document in which the mortgage is formalized.

COMMENTS
1.
2125 in Relation to 2085
This provision provides for the fourth essential requisite of Mortgage, added to the
requisites provided by Article 2085.
Art. 2085. The following requisites are essential to the contracts of pledge and
mortgage:
(1) That they be constituted to secure the fulfillment of a principal obligation;
(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or
mortgaged;
(3) That the persons constituting the pledge or mortgage have the free disposal of
their property, and in the absence thereof, that they be legally authorized for the
purpose.
Third persons who are not parties to the principal obligation may secure the latter by
pledging or mortgaging their own property.
It is indispensable in order that a mortgage may be validly constituted that it appears in
a public document duly recorded in the Registry of Property. An additional provision is made
that if the instrument of mortgage is not recorded the mortgage is nevertheless binding between
parties.
Hence, an order for foreclosure can not be refused on the ground that the mortgage had
not been registered.
2.

Second Paragraph of Article 2125: Legal Mortgage

The paragraph refers to legal mortgages. It is in conformity with the rules established
under the law on Form of contracts which gives to the contracting parties the right to compel

Article 2126
The mortgage directly and immediately subjects the property
upon which it is imposed, whoever the possessor may be, to the
fulfillment of the obligation for whose security it was constituted.

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each other to observe the form required by law like the execution of a document or other special
forms provided the contract between them is valid and enforceable.

COMMENTS
1.

Effects of Mortgage
a. Creates a real right.
- A mortgage creates what is called a real right which is enforceable against the
whole world. It follows the property wherever it goes. Therefore, if the
mortgagor sells the mortgaged property, the property remains subject to the
fulfillment of the obligations secured by it. But the mortgage must be
registered or if not, the buyer must know of its existence.
b. Creates merely an encumbrance.
- The mortgage, however, is merely an encumbrance upon the property and
does not extinguish the title of the debtor who does not lose his principal
attribute as owner, that is, the right to dispose. Indeed, the law considers void
any stipulation forbidding the owner from alienating the mortgaged
immovable.

Article 2127
The mortgage extends to the natural accessions, to the
improvements, growing fruits, and the rents or income not yet received
when the obligation becomes due, and to the amount of the indemnity
granted or owing to the proprietor from the insurers of the property
mortgaged, or in virtue of expropriation for public use, with the
declarations, amplifications and limitations established by law,
whether the estate remains in the possession of the mortgagor, or it
passes into the hands of a third person.

COMMENT:
1.

Extent of Mortgage

A mortgage constituted on immovable property is not limited to the property itself but
also extends to all its accessions, improvements, growing fruits and rents or income as well as to
the proceeds of insurance should the property be destroyed or the expropriation value of the
property should it be expropriated.

Article 2128
The mortgage credit may be alienated or assigned to a third
person, in whole or in part, with the formalities required by law.

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COMMENT:
1.

In Case of Assignment or Alienation of Mortgage

The mortgaged credit (the credit of the mortgagee) is real right and directly and
immediately subjects the mortgaged property to the fulfillment of the principal obligation. Such
a real right may be alienated or assigned to a third person, in whole or in par, by the mortgagee
who is the owner of said right.
The sale or assignment is valid even if it is not registered. Registration is necessary only
to affect third persons.

Article 2129
The creditor may claim from a third person in possession of the
mortgaged property, the payment of the part of the credit secured by
the property which said third person possesses, in the terms and with
the formalities which the law establishes.

COMMENT:
1.

Rights of the Creditor Against the Transferee of Mortgaged Property

The fact that the mortgagor has transferred the mortgaged property to a third person
does not relieve him from his obligation to pay the debt to the mortgage creditor in the absence
of novation.
The mortgage credit being a real right which follows the property, the creditor may
demand from any possessor the payment only of the part of the credit secured by said property.
It is necessary, however, that prior demand for payment must have been made on the debtor
and the latter failed to pay.

Article 2130.
A stipulation forbidding the owner from alienating the
immovable mortgaged shall be void.

COMMENT:
1.

Stipulations Forbidding the Alienation of Property

The law considers void any stipulation forbidding the owner from alienating the
mortgaged property. such a prohibition would be contrary to the public good inasmuch as the
transmission of property should not be unduly impeded.
However, if the mortgagor alienates the property, the transferred is bound to respect the
encumbrance because being a real right, the property remains subject to the fulfillment of the
obligation for whose guaranty it was constituted.

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Article 2131
The form, extent and consequences of a mortgage, both as to its
constitution, modification and extinguishment, and as to other matters
not included in this Chapter, shall be governed by the provisions of the
Mortgage Law and of the Land Registration Law.

COMMENT:
1.

The Laws Governing Mortgage:


a.
b.
c.
d.
e.
f.

2.

New Civil Code


PD 1952
Revised Administrative Code
RA 4882, as regards alien becoming mortgages
Act 3135
Rule 68, Revised Rules of Court

Foreclosure of Mortgage

It is the remedy available to the mortgagee by which he subjects the mortgaged property
to the satisfaction of the obligation to secure which the mortgage was given.
Judicial Foreclosure
a) There is court intervention
b) Decisions are appealable
c) Order of the court cuts off all
rights of the parties
impleaded
d) There is equity of redemption
except on banks which
provides for right of
redemption
e) Period of redemption starts
from the finality of judgment
until the order of
confirmation
f) No need for a special power of
attorney in the contract of
mortgage

Extrajudicial Foreclosure
a) No court intervention
b) Not appealable, it is immediate
executor
c) Foreclosure does not cut off right
of all parties involved
d) There is right of redemption

e) Period to redeem start from the


date of registration of the
certification of sale
f) Special power of attorney in favor
of mortgagee is needed in the
contract

KINDS OF FORECLOSURE
1.

JUDICIAL FORECLOSURE OF REAL ESTATE

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Secured Transaction Law

governed by Rule 68 of the Revised Rules of Court. This kind of action is quasi in rem
action which is the result or incident of the failure to pay debt and it survives death of
mortgagor. The proceeding shall be treated like an ordinary civil action.

Nature of a Judicial Foreclosure of Real Estate Mortgage:


This action is a real action, incapable of pecuniary estimation (RTC has jurisdiction). So
the place where the property is situated is the venue of the action. But when there are several
properties situated in different places, it can be filed any of the place where one of the properties
is located.
Exception: There is a stipulation of the parties with regards to the venue of the action.
WHAT SHOULD BE STATED IN THE COMPLAINT/PETITION:
The complaint in foreclosure of a mortgage or other encumbrance shall set forth:
(a) Date and due execution of the mortgage
(b)Its assignments, if any
(c) Names/residences of mortgagor/mortgagee
(d)Description of the mortgaged property
(e) Statement of the date of the note or other documentary evidence of the obligation
secured by the mortgage
(f) Amount claimed to be unpaid
(g) Name/residences of persons having or claiming an interest in the property subordinate
in right to that of the holder of the mortgage, all of whom shall be made defendants.
The duty of the Court after trial:
After trial, if the court shall find the facts to be true, it shall ascertain the amount
due the plaintiff and render judgment for the sum with an order for it to be paid by adverse
party to the court or judgment oblige within a period of not less than 90 days nor more than 120
days from entry of judgment, and that in default, the property shall be sold at public auction.
This period is known as Mortgagors Equity of Redemption.
Effect if there is No Payment
1. Upon motion, the court shall order the property sold in the manner prescribed under
Rule 39, such SALE shall not affect the rights of persons holding prior liens/
encumbrances on the property or parts thereof.
2. Upon motion, sale shall be CONFIRMED, and such shall operate to divest the rights in
the property of all the parties to the action and to vest their rights in the purchaser,
subject to such rights of redemption as may be allowed by law.
Note that when judicial foreclosure is resorted to there is no right of redemption
EXCEPT when the law allows redemption.
EXAMPLE: Section 47 of the Philippine General Banking Law which allows a one year
period for redemption.

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Secured Transaction Law

3. Upon finality of the order of confirmation or upon expiration of the period of


redemption when allowed by law, the purchaser at auction is entitled to possession
unless a third party is holding it adversely to the judgment obligor, in which case, the
purchaser at the auction sale may secure a writ of possession from the Court ordering
the sale.
What is to be registered is the order of confirmation.
If there is no right of redemption, the title of the mortgagor is cancelled and a
new one issued in the name of the purchaser.
*If with right of redemption, the annotation is to await final deed of sale executed by
Sheriff (Section 7).
4. PROCEEDS OF THE SALE shall, after deducting the costs, be paid to the persons
foreclosing the mortgage. If there be a balance or residue, it shall be paid to the junior
encumbrancers, in the order of priority ascertained by the Court, if none or there still
be a balance or residue after payment, to the mortgagor.
5. If debt is not all due, as soon as a sufficient portion of the property has been sold to pay
the total amount, the sale shall terminate. Afterwards, no more shall be sold, BUT if
property cannot be sold in portions, the entire property is to be sold with rebate of
interest if proper when the full debt is paid.
6. Deficiency judgments, if there is a balance, upon motion, the court shall render
judgment against the defendant for the balance, upon which execution may issue. If
balance is due at the time of rendition of judgment OR at such time as the remaining
balance becomes due under the terms of the original contract, which time shall be
stated in the judgment.
Note that the provisions of Section 31 as to use of premises by obligor, Section 32 as to
rents still due the obligor, and Section 34 as to recovery of price if sale is not effective of Rule 39
are applicable as far as the former are not inconsistent.
2.

EXTRAJUDICIAL FORECLOSURE OR REAL ESTATE MORTGAGE


-

governed by Act No. 3135, as amended. This kind is conferred for mortgagees
protection wherein there is an ancillary stipulation in the contract which is a
prerogative of the mortgagee.

Act 3135, as amended:


AN ACT TO REGULATE THE SALE OF PROPERTY UNDER SPECIAL
POWERS INSERTED IN OR ANNEXED TO REAL ESTATE MORTGAGES
The purpose of the law:
The purpose of the law is to regulate the manner in which the extrajudicial foreclosure
and redemption of real estate mortgages may be made.

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The resort to the process of extra-judicial foreclosure emanates from the presence of a
stipulation that allows the creditor/mortgagee to extra-judicially foreclose and designating the
said party as the attorney-in-fact of the mortgagor to cause the same and to sell the subject
property at a foreclosure sale by an insertion into or attachment to the real estate mortgage.

The process of extrajudicial foreclosure:


1.
The application for extrajudicial foreclosure of mortgage shall be filed with the Executive
Judge through the Clerk of Court (who is also the Ex-Officio Sheriff). After receipt of the
application, the Clerk of Court shall, among other duties:
(a) examine the same to ensure that the special power of attorney authorizing the
extrajudicial foreclosure of the real property is either inserted into or attached to the
deed of real estate mortgage;
(b) raffle the application among the Sheriffs and
(c) cause the posting and/or publication of the notice of sale. This likewise applies to
applications that involve the conduct of a foreclosure sale under the direction of a Notary
Public, as he is an officer of the Court and is legally subject to its supervision.
This examination of the Clerk of Court is always under the supervision of the Executive
Judge as he must see to it that the applicant has fully complied with the requirements before it is
scheduled for auction sale by posting of the publication and notice of public auction.
It is within this time, but before clearance is given to proceed that an administrative
objection to the petition for foreclosure can be made. If such is filed, the Executive Judge shall
now cause to be examined whether the applicant has complied with the requirements before
public auction is conducted. His subsequent finding can only pertain to defects in form or in
substance, which shall then cause him not to give due course to the petition. There should be no
finding as to the validity of the loan or the like.
If a petition is given due course, the objecting mortgagor has a choice between
two judicial remedies:
a.
Filing a Petition for Certiorari and Prohibition with Application for Issuance of a
Writ of Preliminary Injunction or Temporary Restraining Order under Rule 65 with the
court of Appeals to review the Order of the Executive Judge giving due course to the
Petition, if grave abuse of discretion on the part of the Executive Judge can be shown;
b.
An ordinary civil action to annul the Foreclosure Proceedings with Application
for Issuance of a Writ of Preliminary Injunction or Temporary Restraining Order may be
filed with the Regional Trial Court.
2.

If a sale is not restrained or enjoined, and is subsequently conducted, the same must be:
(a) made in the province where the property to be sold is situated. Sale outside the
province is illegal;
(b) In case the mortgage deed specified a place in a municipality in the province where
the sale would be made, such sale shall be made in such place or
(c) if the place of sale in the municipality was not stipulated, in the municipal building of
the municipality in which the property or part thereof is situated.
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Secured Transaction Law

3.
As a rule, notices of sale shall be posted for not less than 20 days in at least 3 public
places in the city or municipality where the property is situated. If the property is worth more
than P400, the notice of sale shall also be published once a week for 3 consecutive weeks in a
newspaper of general circulation in the city or municipality. Unless otherwise stipulated by the
parties to the mortgage contract, the debtor/mortgagor need not be personally served a copy of
the notice of extrajudicial foreclosure.
4.
The extrajudicial foreclosure sale be conducted by public auction or bidding made
through sealed bids which must be submitted to the Sheriff who shall conduct the sale between
the hours of 9:00 a.m. and 4:00 p.m. of the date of the auction. The property mortgaged shall
be awarded to the party submitting the highest bid and, in case of a tie, an open bidding shall be
conducted between the highest bidders. Payment of the winning bid shall be made either in
cash or in managers check, in Philippine currency, within 5 days from notice (Sec. 5[a],
Guidelines)
The creditor may be barred from participating in the bidding if so provided in the
mortgage deed.
5.
The sheriff shall then sign and issue the certificate of sale, subject to the approval of the
Executive Judge, or in his absence, the Vice-Executive Judge. No certificate of sale shall be
issued in favor of the highest bidder until all fees provided for in the aforementioned sections
and in Rule 141, Section 9(l) as amended by A.M. No. 00-2-01-SC, shall have been paid;
Provided, that in no case shall the amount payable under Rule 141, Section 9(l) as amended,
exceed P100,000.00
6.
After the certificate of sale has been issued to the highest bidder, keep the complete
records, while awaiting any redemption within a period of one (1) year from date of registration
of the certificate of sale with the Register of Deeds concerned, after which, the records shall be
archived.
Grounds to Restrain or Enjoin Foreclosure:
1.
In general, formal and substantive defects in the real estate mortgage and the foreclosure
proceedings provide the legal and equitable grounds to enjoin or eventually nullify foreclosure
proceedings, if not the real estate mortgage itself.
The general basis would be Article 5, Civil Code, which provides: Acts executed against
the provisions of mandatory or prohibitory laws shall be void, except, when the law authorizes
their validity
2.
Disputes in the amount of the obligation may cause the foreclosure to be enjoined as a
bank may legally proceed with foreclosure only when the exact amount of the obligation of the
mortgagor is determined in a trial on the merits and the mortgagor cannot meet the obligation
following that determination.
Where the debtor is not given an opportunity to settle the debt at the correct amount and
without iniquitous interest imposed, no foreclosure proceedings can be instituted.
The total amount due on the mortgage is also undetermined if some of the properties are
subject to the coverage of the CARP, in which case a portion of the mortgage indebtedness will
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Secured Transaction Law

be assumed by the government up to the amount equivalent to the landowners compensation.


Hence, until the final valuation of the lands subject to CARP is determined, the amount of the
mortgage debt is unliquidated
3.
Issue of the legality of the Floating Rate of Interest, which refers to the rate of interest
periodically fixed by a bank based on the prevailing interest rate in the market, such as the
Manila Reference Rate or Treasury Bill Rate, plus a margin as determined by the bank.
If this rate of interest is unilaterally fixed by the bank for each interest period without the
written conformity of the borrower, the interest may be declared null and void for being
potestative and for lack of mutuality based on essential equality between the parties. Its being a
potestative condition (one within the sole power of the one obligated to perform), consequently
null and void finds basis in Article 1308 of the Civil Code that provides that the fulfillment of a
condition cannot be left to the sole will of one of the contracting parties.
As held by the Supreme Court in Almeda v. Court of Appeals and PNB,256 SCRA 293:
The binding effect of any agreement between the parties to contract is premised on two settled
principles: (1) that any obligation arising from contract has the force of law between the parties;
and (2) that there must be mutuality between the parties based on their essential equality. Any
contract which appears to be heavily weighed in favor of one of the parties so as to lead to an
unconscionable result is void. Any stipulation regarding the validity or compliance of the
contract which is left solely to the will of one of the parties is likewise invalid.
The floating rate of interest being unilaterally fixed and determined by the bank also
violates the provision of CB Circular No. 1191 that the interest rate for each re-pricing period is
subject to mutual agreement between the Borrower and the Bank.
Under Article 1956 of the Civil Code, no interest is due unless it has been expressly
stipulated in writing. The floating rate being unilaterally fixed by the Bank without the written
mutual agreement of the Borrower for each re-pricing of interest is null and void under Art.
1956 of the Civil Code, and for violation of CB Circular No. 1191 that the interest rate for each repricing period under the floating rate of interest in subject to mutual agreement.
Consequently, if the interest is declared null and void, the foreclosure sale for a higher
amount than what is legally due is likewise null and void because under the Civil Code, a
mortgage may be foreclosed only to enforce the fulfillment of the obligation for whose security it
was constituted. In fact, because there is a dispute on the amount of the interest legally due, the
Bank may legally proceed with foreclosure or consolidation only when the exact amount of the
obligations of the Mortgagor is determined after trial on the merit and the mortgagor cannot
meet the obligation following that determination.
4.
Issue of the mortgage as security for future loans. The rule is unless a continuing real
estate mortgage is involved, a real estate mortgage is not a valid security for future loans under
the so called Dragnet Clause.
This finds basis in the fact that real estate mortgage is an accessory contract, which
cannot exist independently of the principal obligation. The consideration for the mortgage is the
consideration of the contract of loan. Consequently, the amount of the loan must be specified,
otherwise the contract of loan, as well as the accessory contract of mortgage, shall not be
perfected for lack of consideration with respect to the unspecified loan in the future. The
Supreme Court has held in China Banking Corporation vs. Lichuaco, 46 Phil 460 that: a
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Secured Transaction Law

mortgage is an accessory contract, its consideration is the very consideration of the principal
contract, from which it derives life, and without which it cannot exist as an independent
contract.
Further, under Article 2176 of the Civil Code, a mortgage may only be foreclosed for the
fulfillment of the obligation for whose security it was constituted. A mortgage with a dragnet
clause is a contract of adhesion that must be strictly construed as against the bank. To constitute
a real estate mortgage as security for future loans, the future loans must be agreed upon and
fixed in the mortgage deed at the time of the execution of the same. A stipulation that the
amounts named as consideration in a contract of mortgage do not limit the amount for which
the mortgage may stand as security if from the four corners of the instrument the intent to
secure future and other indebtedness can be gathered is valid and binding and is known in
American Jurisprudence as the blanket mortgage clause.
5.
Issue of PD 385 prohibiting the issuance of an injunction against foreclosure by any
government financial institution is arbitrary and unreasonable. Hence, may be argued as being
unconstitutional. Hence, it cannot be sustained if there is a clear legal ground to restrain
foreclosure
6.
Issue of the right to take possession. The rule is that the purchaser still has to file a
petition for the issuance of a writ of possession to obtain possession.
The proceedings related thereto allow the mortgagor to participate although
jurisprudence provides that the hearings are ex-parte. However, with the mandate of Section 8
of Act 3135 which allow the mortgagor to set aside foreclosure in the same proceedings, it is the
better rule to actually allow the mortgagors active participation. The obligation of the court to
issue a writ of possession in favor of the purchaser in an extrajudicial foreclosure sale ceases to
be ministerial once it is shown that there is a third party in possession of the property who is
claiming a right adverse to that of the mortgagor and that such third party is a stranger to the
foreclosure proceedings in which the ex-parte writ of possession was applied for.
As a limitation on the right to possession, a writ of possession may be legally issued only
if the debtor is in possession and no third person has intervened. Order granting a writ of
possession under Act 3135 is a final order. Hence, it is appealable. In expropriation, it is
interlocutory.
7.
Grounds for the proper annulment of the foreclosure sale are the following: (a) there was
fraud, collusion, accident, mutual mistake, breach of trust or misconduct by the purchaser (b)
the sale was not fairly and regularly conducted (c) price was inadequate and the inadequacy was
so great as to shock the conscience of the court.

MATTERS ON REDEMPTION
Redemption is a transaction by which the mortgagor reacquires the property which may
have passed under the mortgage or divests the property of the lien which the mortgage may have
created.
Kinds of Redemption.

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1.
Equity of Redemption right of the mortgagor to redeem the mortgaged property
after his default in the performance of the conditions of the mortgage but before the sale of the
mortgaged property or confirmation of sale; applies to judicial foreclosure of real mortgage and
chattel mortgage foreclosure
2.Right of Redemption right of the mortgagor to redeem the property within a certain
period after it was sold for the satisfaction of the debt; applies only to extrajudicial foreclosure of
mortgage.
DISTINGUISHING EQUITY OF REDEMPTION FROM RIGHT OF REDEMPTION

Equity of Redemption

Right of Redemption

the equitable right of the mortgagor to


redeem

available before auction sale

available only judicial foreclosure

the statutory right of the mortgagor to


redeem
available after auction sale
available only in extra-judicial foreclosure,
but by exception is allowed in judicial
foreclosure when the mortgagee is the PNB
or a bank or a banking institution

one year from redemption is within one


year from date of registration of the
sheriffs certificate of sale but not after, the
registration of the certificate of sale with
the applicable register of deeds which in no
case shall be more than three months after
foreclosure, whichever is earlier

The period for the exercise is within 90 days


but no more than 120 days from entry of
foreclosure judgment

Period of Redemption:
1.

Extra-judicial
a. Natural person 1 year from the registration of the certificate of sale with
Registry of Deeds
b. Juridical Person same rule as natural person
c. Juridical Person (mortgagee is bank) 3 moths after foreclosure or before
registration of certificate of foreclosure whichever is earlier

2.

Judicial before confirmation of the sale by the court


Note: Allowing redemption after the lapse of the statutory period when the buyer at the
statutory period when the buyer at the foreclosure sale does not object but even consents
to the redemption, will uphold the policy of the law which is to aid rather than defeat the
right of redemption.

Amount of the Redemption Price.

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Secured Transaction Law

1. Mortgage is not a bank (Act No. 3135 in relation to Section 28, Rule 39 of the Revised
Rules of Court)
a. Purchase price of the property
b. 1% interest per month on the purchase price
c. Taxes paid and amount of purchasers prior lien, if any, with the same rate of
interest computed from the date of registration of sale, up to the time of
redemption.
2. Mortgagee is a bank. (General Banking Law of 2000)
a. Amount due under the mortgage deed
b. Interest
c. Cost and expenses
Redemption price in this case is reduced by the income received from the property.

CASES ON REAL ESTATE MORTGAGE


GEMMA HECHANOVA, ET.AL., VS. HON. MIDPANTO ADIL,Presiding
Judge and PIO SERVANDO
144 SCRA 450 (1966)
Mortgagor: JOSE SERVANDO
Mortgagee: PIO SERVANDO
Facts:
On August 20, 1970 Jose Servando, borrowed a sum of money from his cousin Pio
Servando. To secure the loan, he mortgaged his 3 parcels of land in a private document,
stipulating that in case of default by Jose, Pio the mortgagee, shall be the absolute owner of the
mortgaged property.
On March 11, 1978, Jose sold same property to petitioners Hechanova. Pio challenged
the validity of the sale contending the same is fraudulent.
Respondent Judge Adil ordered the annulment of the sale and the delivery of the title of
said parcel of lands to Pio Servando.
Hence this case.
Contentions:
HECHANOVA:
the Deed of Mortgage executed between Pio and Jose is invalid on the ground that
it was executed in a private document; it was not registered in the Registry of
Deeds; and the stipulation that in case of default, Pio shall be the owner of the
property mortgaged is a pactum commissorium, which is proscribed by law.
PIO SERVANDO:
maintained that the Deed of Sale executed by Jose Servando in favor of petitioners
Hechanova is fraudulent, claiming that the said parcels of land were previously
mortgaged to him.
SC Ruling:
The Court ruled that the Contract ct of Mortgage between Jose and Pio is invalid. The
law on mortgage requires that the contract should be in a public document, duly registered in
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Secured Transaction Law

the Registry of Deed to be validly constituted. In the case at bar, the Contract of Mortgage
executed between Pio and Jose was in the form of a private document and not registered in the
Registry of Deeds.
Moreover, it contains a stipulation (pacto comisorio) which is null and void under Article
2088 of the Civil Code.
Even if assuming that the property was validly mortgaged to the plaintiff, his recourse
was to foreclose the mortgage, not to seek annulment of the sale.

MOBIL OIL PHILIPPINES INC. VS. RUTH DIOCARES et.al


29 SCRA 656
Mortgagee: MOBIL OIL PHILIPPINES INC.
Mortgagor: RUTH DIOCARES and LOPE T. DIOCARES
Facts:
Defendants Ruth and Lope Diocares obtained a P45, 000.00 loan from Mobil Oil Phils.
Inc. To secure the loan, they executed a Contract of Real Estate Mortgage in favor of Mobil. Such
contract was not registered in the Reg. of Deeds.
Later, defendants failed to fulfill their obligation, therefore a suit was filed against them
in the lower court for performance of their obligation, furthermore, should the defendants still
fail to perform their obligation, the plaintiff would move for the foreclosure of the mortgaged
properties and shall apply the proceeds in the mortgagors outstanding balance.
The Trial Court ruled in favor of the plaintiff ordering the defendants to pay the former
up to the extent of the outstanding balance, denying however, the plaintiffs prayer for
foreclosure of the mortgaged property on the ground that the mortgage is not valid, it being not
registered in the Reg. of Deeds. Hence this appeal.
Contentions:
MOBIL:
It challenged the decision of the TC and contended that there was a valid mortgage
and despite non- registry of said mortgage, it has the right to foreclose the
mortgaged property and apply the proceeds thereof for the payment of mortgagors
obligation.
DIOCARES:
maintained the decision of the TC.
SC Ruling:
The SC ruled that the lower court erred in relying merely on the opening sentence of the
governing article that is indispensable, in order that a mortgage may be validly constituted, the
document in which it appears be recorded in the Registry of Property. Note that it ignored the
succeeding sentence: if the instrument is not recorded, the mortgage is nevertheless binding
between the parties.
The provision is clear and explicit. Even if the instrument was not recorded, the
mortgage is nevertheless binding between the parties. The law cannot be any clearer. Effect
must be given to it as written. The mortgage subsists; the parties are bound as between them,

154

Secured Transaction Law

the mere fact that there is as yet no compliance with the requirement that it be recorded cannot
be a bar to foreclosure.
Purpose of registration: Registration of Mortgage is necessary only to make the same valid
against third persons

APOLONIA SANTIAGO VS. ANGELA DIONISIO, ET.AL


92 PHIL 495
Mortgagor: SANTIAGO
Mortgagee: RESURRECCION
Previous owner: SAN DIEGO
Facts:
Apolonia Santiago bought a parcel of land from San Diego. She then applied said land for
registration but found out that said land was previously mortgaged by San Diego in favor of
Resureccion and such mortgage was duly registered.
San Diego failed to pay his obligation to Resureccion so the latter had the property
foreclosed and sold the same in a public auction. Angela Dionesio bought the land being the
highest bidder. Santiago then filed a suit for the annulment of the sale.
The TC favored Santiago holding that the foreclosure of the property in dispute is null
and void. Therefore, ordered the registration of the land under the Santiagos name. Hence this
appeal.
Contentions:
DIONESIO:
Claimed that Santiago, having intervened in the action, is bound by the result of the
foreclosure proceedings.
SANTIAGO:
Contended that it is required by rules that all parties having interest in a land
subject to foreclosure, including those who are purchasers of a mortgaged land,
shall be impleaded for the decision of the foreclosure proceeding to be binding unto
them, otherwise, it cannot affect their rights.
SC Ruling:
The Court ruled that while it may be true that the sale in the foreclosure proceeding is
valid between the parties therein so as to register the land in question under the name of
Dionesio, but subject however to Santiagos equitable right of redemption which she can
exercise within a period of three months.
Furthermore, under the law, all parties having claiming rights over the land subject to
foreclosure proceedings should be impleaded for the decision in the case to be binding upon the
parties. In the case at bar, Santiago, being the purchaser was not impleaded in the foreclosure
proceedings. While it may true that she intervened with the registration of the land under the
name of Dionisio, it does not mean that she was made party to the foreclosure proceedings since
her intervention is only subject to the opposition in the conformance of the sale to Dionesio.

155

Secured Transaction Law

Judgment in the foreclosure proceeding has already been issued and that the land is only for
execution. The decision cannot affect the rights of Santiago.

RURAL BANK OF CALOOCAN, INC. AND JOSE DESIDERIO JR.


VS CA AND MAXIMA CASTRO
104 SCRA 151
Mortgagor: SPOUSES VALENCIA with MAXIMA CASTRO as co- maker
Mortgagee: RURAL BANK OF CALOOCAN INC.
Facts:
Maxima Castro, accompanied by spouses Valencia, obtained an industrial loan of
P3000.00 from Rural Bank. On the same day, Valencia spouses obtained a loan from the same
bank an equal amount of loan for P3000.00. They signed a promissory note affixing Castro as
their co-maker. The two loans were secured by a real estate mortgage on Castros house and lot.
Later, a letter of notice from Provincial Sheriff was received by Castro notifying her that
her mortgaged properties were to be sold at a public auction to satisfy their obligation to the
mortgagee bank. That time Castro was made aware that her mortgaged properties were to be
sold for satisfaction of her obligation amounting to P6, 000.00. She then filed a collection suit
against the petitioner bank and the spouses Valencia alleging that she was induced to sign a
promissory note including obligations of the latter to her personal obligations.
The TC ruled in favor of the respondents. Upon appeal the CA affirmed the decision of
the TC declaring that the real estate mortgage is void in so far as it exceeds P3000.00
representing the principal obligation of Castro
Contentions:
Rural Bank:
challenged the decision of the respondent court in so far as declaring the real estate
mortgage valid only up to the extent of P3,000.00 representing the obligation of
the respondent.
Castro:
maintained the decision of the respondent court; the extra judicial foreclosure is
invalid since she was not notified of the extra judicial foreclosure sale conducted on
April 11 after scheduled sale on April 10 was declared holiday.
SC Ruling:
The Court affirmed the decision of the CA. Evidence adduced shows that that the spouses
Valencia defrauded Castro in making her sign the promissory notes and the real estate
mortgage. The spouses Valencia also misrepresented the bank by modifying the qualifications of
Castro for the bank to grant the loan.
The result of such fraud upon Castro and
misrepresentation to the bank, both Castro and the bank committed mistake in consenting the
contract of REM and since their consent was vitiated, it follows that the promissory note is
invalidated in so far as its effect to Castros liability on the bank.; and that the REM is only valid
up to the extent of P3, 000.00 representing the principal obligation of Castro.
As to the validity of the extra judicial foreclosure sale, the Court ruled that such
foreclosure conducted on April 11 after April 10 has been declared holiday is invalid. If the trial
court fixes the trial of a case on a certain day but the said date us subsequently declared a public
holiday, the trial thereof is not automatically transferred to the next succeeding business day.
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Secured Transaction Law

Since April 10, 1961 was not the day or the last day set by law for the extra judicial foreclosure
sale, nor the last day of a given period, but a date fixed by the deputy sheriff, the aforesaid sale
cannot legally be made on the next succeeding business day without the notices of the sale on
the day being posted as prescribed in Section 9, of Act 1335:
Notice shall be given by posting of the sale for not less than twenty days in at least three
public places of the municipality or city where the property is situated, and if such property is
worth more than four hundred pesos, such notice shall also be published once a week for at least
three consecutive weeks in a newspaper of a general circulation in the municipality or city.
FIESTAN VS. CA
185 SCRA 75
Mortgagor: FIESTAN AND ARCONADA
Mortgagee: DBP
Facts:
Dionesio Fiestan and Juanita Arconada mortgaged to DBP a parcel of land as security of
their P22, 000.00 loan.
Mortgagors failed to pay their obligation to DBP. The bank sought for foreclosure of the
mortgaged property. DBP acquired the property being the highest bidder at the public auction
sale. After 1 year, the mortgagor failed to redeem the property and so the bank sold said
property to Francisco Peria. Such sale was registered in the Registry of Deeds and a TCT was
issued to him.
Petitioners then filed a suit before the RTC for annulment of sale, mortgage and
cancellation of the TCT against the defendants. The court dismissed the complaint. Hence this
case.
Contentions:
FIESTAN AND ARCONADA:
the extrajudicial foreclosure of the mortgaged land is void on the ground that it was
conducted without the provincial Sheriff affecting a levy over the said property
before selling the same in the public auction.
DBP:
maintained that the extra judicial foreclosure of the mortgaged
property as valid as well as its sale afterwards to Peria.
SC Ruling:
The Court ruled that the extra judicial foreclosure is valid. A levy by a sheriff is not
necessary for the validity of an extrajudicial foreclosure of a mortgaged property. What is only
needed is to:
a. Post notices in public view; and
b. Publish such notice in a newspaper of general circulation, stating the time
and the place where the public auction will be conducted.
In the case at bar, evidence adduced show that the formalities provided for by Act 3135
has been complied with.

157

Secured Transaction Law

STA. IGNACIA RURAL BANK INC. vs. THE HONORABLE COURT OF


APPEALS and SPS. CONRADO PABLO AND JUANITA GONZALES.
230 SCRA 513
Mortgagee: STA. IGNACIA RURAL BANKING INC.
Mortgagor: SPS Conrado Pablo and Juanita Gonzales
Facts:
Spouses Gonzales loaned from the petitioner bank. As a security, the respondent spouses
executed real estate mortgage in favor of the bank. Because the respondent-debtor defaulted, it
leaded to an extrajudicial foreclosure of the mortgaged properties. The properties were sold in
public auction to the petitioner bank, being the highest bidder. The title of the properties was
then issued under the name of the petitioner and later to spouses Rico.
A suit was filed against the petitioner bank for the repurchase of the properties. The trial
court dismissed the complaint in the ground that the period for which respondents spouses can
exercise their right of redemption has lapsed, pursuant to the Rural Banks Act.
The decision was appealed, the respondent contended that the Public Land Act, which
provides a five year period within which the right of repurchase can be exercise should be
applied not the Rural Banks Act. CA reversed the appealed decision. Hence thus petition.
Contentions:
The petitioner Bank:
maintained the decision of the lower court contending among
others
that the provision provided in the Rural Banks Act should prevail because it is a
special law. Thus, pursuant to the said law, the period of redemption is limited to
two years in mortgaged loans in rural banks.
The private respondents:
maintained the decision of the CA that the five year period as prescribed by the
Public Land Act should be applied in the case at bar. The Rural Banks Act cannot
be applied because the subject land is acquired through Public Land Act and has a
Free Patent Title.
SC Ruling:
The court held that the law that should be applied is the Public Land Act. This is because
it is clear from the record that the mortgaged land of the private respondent to the petitioner
bank is a land covered by Free Patent Title. Thus, it is not within the operation of the Rural
Banks Act because it covers those lands which are not covered by Torrens title, homestead or
free patent title.
Hence, when the title of the land was issued under the name of the bank on November
1981, from this day, the respondent spouses has two years to exercise their right of redemption
as provided by public Land Act.
If the respondent spouses failed within said period, they still have five years counted
from the expiration of one year period of repurchase under Act 3135.

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Secured Transaction Law

PHILIPPINE COMMERCIAL INTERNATIONAL BANK vs HONORABLE


COURT OF APPEALS, MARIA LETBEE ANG, et al.
344 SCRA 596
Mortgagee: PCI BANK
Mortgagor: JESUS ANG
Facts:
The decedent, Jesus Ang, loaned from the petitioner PCA Bank which extended to JA
enterprises. As security, Ang executed a surety agreement and a real estate mortgage. Ang
defaulted which lead to the extrajudicial foreclosure of the mortgaged properties at demand
from the petitioner bank. The petitioner won in the public auction however it failed to recover
the full amount of indebtedness of Ang, as the value of the properties sold in public auction was
lower than the principal obligation.
The petitioner filed its claim against Ang for the recovery of deficiency, and moreover
prayed for the consolidation of title of the property under its name. The private respondent,
Maria Ang filed an opposition against the claim contending the imposed interest is so usurious
that it will wipe out all the intestate estate of the deceased. Moreover, the legal wife of the
decedent, Blanquita Ang, intervened in the proceeding for the purpose of protecting his conjugal
share. She also filed a petition for the issuance of writ of preliminary injunction in the trial
court. The respondent court CA upon application of the petitioner, issued a temporary
restraining order against the trial court of preliminary injunction. Hence this petition for
certiorari.
Contentions:
The petitioner PCI bank:
contended among others that the issuance of the preliminary injunction by the trial
court is tantamount to adjudication of ownership in favor of Blanquita Ang and
that a hearing for the application of injunctive writ should be first conducted before
its issuance, thus the issuance of preliminary injunction by the trial court without
conducting any hearing for the petitioner bank to present its case is void.
The private respondent:
in the other hand contended that the insistence of the petitioner to have a hearing
is a mere delaying tactic to force the lapse of one year within which the respondents
can exercise their right of redemption. Moreover, the respondent never posted any
issue of ownership in question because in the first place, the property of the
decedent is clearly owned by the surviving spouse of Jesus Ang.
SC Ruling:
The court ruled that the issuance of the injunctive writ is proper and that a need for
joinder of issues in a case is not a requisite for the validity of issuance of preliminary injunction.
Such writ can be issued at any stage of the proceeding but before final judgment, ordering a
party or a court, agency or a person to refrain from performing particular act or acts.
Furthermore, the court ruled that the ownership of the land sold in a foreclosure sale
becomes consolidated in the purchaser only when upon expiration of the redemption period,
without judgment debtor having made use of his right of redemption. Thus, the contention of
the petitioner that the issuance of preliminary injunction is in effect an adjudication of
ownership of the properties in question in favor of the surviving spouse of the decedent is
misplaced.
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Secured Transaction Law

PHILIPPINE NATIONAL BANK vs BERNARDO P. LANDETA


and COURT OF APPEALS
18 SCRA 272
Mortgagee: PNB
Mortgagor: BERNARDO LANDETA
Facts:
Landeta loaned from the petitioner bank the amount of P600 and as a security, he
mortgaged his land which he acquired through homestead patent. Landeta defaulted; it led to
the foreclosure sale of his mortgaged property. It was subsequently sold to the petitioner bank
being the highest bidder. However, it was only until two years after the foreclosure sale that the
title of the land was issued under the name of the bank. Later, a letter was sent to Landeta by the
bank, informing the respondent that he has only ten days from receipt of the said letter where he
can redeem his property. Landeta in turn requested that he be given a year to exercise his right
of redemption. Notwithstanding the request, the petitioner bank sold all his rights and interest
over the mortgaged land to Yabes at a higher price and informed Landeta that he can exercise
his right to repurchase from Yabes, being the present owner of his mortgaged property, five
years from conveyance to Yabes.
The respondent then filed a suit against the bank and Yabes invoking his right to redeem
the said property by virtue of the Public Land Act. The trial court ruled in favor of the
respondent, ordering Yabes to resell the property in favor of Landeta. The respondent court
modified the decision wherein ruled that Landeta should repurchase the property from the bank
by such amount as may correspond to the principal obligation and the accumulated interest up
to and including the time of the actual interest. Moreover, the CA ordered the petitioner bank to
reimburse the expenses incurred by Yabes in purchasing the land in question from them.
Contentions:
Petitioner bank:
contended among other that they are purchasers in good faith, not knowing that
the mortgage property was acquired by the private respondent through homestead
patent.
Private respondent
maintained the decision of the respondent court, invoking his right as provided by
the Public Land Act.
SC Ruling:
The court ruled that the respondent Court is correct in ruling that the land should be
repurchased by Landeta from the bank and that the consideration for the repurchase be only up
to such amount as may correspond to the principal obligation and the accumulated interest up
to and including the time of actual repurchase.
The reason for this ruling is to avoid the bank to render the right of repurchase by the
debtor-mortgagor useless by conveying the property upon to an amount which is beyond the
capability of the owner to pay.
Moreover, the court also ruled that regardless of whether the bank has sold the property
to a third person even before the prescription of the debtor-mortgagor right of repurchase as
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Secured Transaction Law

provided in Public Land Act, the debtor-mortgagor has the right to repurchase the same for such
right of redemption is an absolute right.

GREGORIO LIMPIN and ROGELIO SARMIENTO vs. INTERMEDIATE


APPELLATE COURT and GUILLERMO PONCE.
166 SCRA 87
Mortgagee: GUILLERMO PONCE
Mortgagor: SPOUSES AQUINO
Facts:
Spouses Aquino mortgaged 4 parcels of land in favor of the respondent. Later, 2 parcels
of the said land were sold by the same spouses to the Butuan Wood Export Company. Later, the
petitioner Limpin obtained a money judgment against the company, the parcels of land were
levied upon and sold at public auction. Limpin bought the said land being the highest bidder
and the same was later sold to his co-petitioner Sarmiento. However, a day before the execution
of judgment against the Butuan Company, Ponce initiated a judicial foreclosure proceeding of
the four parcels of land originally mortgage in his favor including the land subject to execution
against the company. Ponce was able to purchase the land at public auction; however in the
confirmation of title, only two of the parcels of land were issued under his name as the trial
court refused to include the other two lands.
Ponce then filed a special civil action in the trial court impleading both Sarmiento and
Limpin. Going up to the Supreme Court, the Court ordered the trial court to confirm the sale
and issue a writ of possession in favor of Ponce, subject to Sarmientos equity of redemption.
Sarmiento, instead of redemption, filed two separate actions for relitigation. SC, after knowing
that Sarmiento attempted to relitigate the same issues already adjudged by the court, issued a
resolution finding Sarmiento and his counsel guilty of contempt. After nine months, the order of
the SC has become final and executory and thus the period within which he can exercise his
right of equity of redemption has prescribed (the sale was already confirmed by virtue of the
order of the SC), Sarmiento offered Ponce a redemption price, signifying that he now wanted to
exercise his equity of redemption.
Contentions:
Petitioner:
contended that when SC made an order, this did not mean that the period within
which he can exercise his equity of redemption has been cut off. Moreover he
prayed that he be given a year counting from the date of confirmation of title in
Ponces favor because in the first place, he was not notified as to when the period
within which he can exercise his equity of redemption will prescribe.
Respondent Ponce:
contended that the judgment of the court has become final and executory and that
the period within which he can exercise his equity of redemption has prescribed.
SC Ruling:
The court ruled that the contention of the petitioner with prayer of allowing him a year to
which he can exercise his equity of redemption is misplaced. Equity of redemption is different
from right of redemption.

161

Secured Transaction Law

A right of redemption exists in extrajudicial foreclosure or mortgage. It is a prerogative


vested by law in favor of the debtor-mortgagor, to re-acquire or redeem his property within a
period of one year after registration of foreclosure. On the other hand, equity of redemption
exists only in judicial foreclosure proceedings. This is the right of the debtor-mortgagor to
extinguish the mortgage and retain ownership of the property by paying the secured debt within
90 day period after judgment has become final under Rule 68 of the Revised Rules of Court, or
even after the foreclosure sale but prior to its confirmation.
In the case at bar, records show that what was instituted for the consolidation of title by
Ponce is judicial foreclosure of the mortgaged properties. Thus, what the petitioner has in the
case at bar is equity, not right of redemption.

HUERTE ALBA VS. CA, SYNDICATED MANAGEMENT GROUP INC.


339 SCRA 534
Mortgagee: INTERCON
Mortgagor: HUERTA ALBA
Facts:
Huerta Alba Resort applied for and obtained a loan from Intercon ( a credit institution).
To secure the payment of obligation, Alba Inc. executed a deed of mortgage over his properties
in favor of Intercon. Intercon assigned all its rights in the said mortgage to SMG (Syndicated
Management Group Inc.). SMG sought to judicially foreclose the mortgage. The Trial Court
granted the judicial foreclosure proceeding filed by the SMG. Controversy arose when Huerta
invoked his right of redemption pursuant to the General Banking Act, wherein, even if the
foreclosure of the mortgaged properties is judicial in nature, nonetheless, it has the right of
redemption of one year.
Contention:
Huerta:
contended that the predecessor in interest of the SMG, Intercon, is a credit
institution, and therefore, despite the fact that the mortgaged properties were
judicially foreclosed, the petitioners have, nonetheless, a one year period within
which to exercise their right of redemption pursuant to the General Banking Act.
SMG:
-

contended that even granting without conceding that the petitioner has the right of
redemption, it is estopped from doing so since it was raised for the first time on
appeal to the Supreme Court.

SC Ruling:
The Court ruled that the respondent court is correct in holding that the petitioner has
only an equity of redemption since the foreclosure is judicial in nature. Facts presented also
show that Huerta indeed failed to raise such issue in the earliest possible time. It did not even
invoke such right on appeal to the respondent court, for even if he did, the CA cannot entertain
the same. Hence, it is the petitioner who orchestrated his own downfall. For even if indeed it has
the right of redemption, it cannot exercise the same for his failure to invoke such right, by way of
counterclaim, when he failed to raise the issue at the outset of the case.

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Secured Transaction Law

DIMASICAT AND ROBLES VS. CA, PNB AND LAGDAMEO


27 SCRA 101
Mortgagee: PHILIPPINE NATIONAL BANK
Mortgagor: LAGDAMEO
Facts:
Lagdameo mortgaged his parcel of land in favor of PNB, subject to the latters right of
extra judicial foreclosure in case of default for the payment of the obligation on the part of
Lagdameo. During the pendency of the mortgage, Lagdameo separately sold part and parcel of
the said mortgaged land to Dimasicat and Robles. Both notarial deeds however were not
registered. Lagdameo defaulted and the mortgage was extrajudicial foreclosed. Before the
expiration of the redemption period, Dimasicat and Robles offered to repurchase the said
foreclosed land, which the bank refused, and the redemption period lapsed without having the
mortgage repurchased. A suit was filed by the petitioner but the trial court ruled that the
petitioners do not have the right to repurchase. Hence this case.
Contention:
Dimasicat and Robles:
contended among others that they have the right to repurchase the whole portion
of the foreclosed land, and the their right to repurchase should be granted.
PNB:
maintained the decision of the respondent court.
SC Ruling:
The Court ruled that the jurisprudence wherefrom the petitioners anchored their
contention cannot be applied in the case at bar. The court ruled that what the petitioners
acquired only after the buying of the foreclosed land is a personal right to demand their status as
co-owners of the said foreclosed land, by virtue of the following reasons: 1) their deed of sale was
not registered; 2) that the portion of the conveyed land was not surveyed as to segregate their
respective lands to Lagdameos property. However, having the right to be recognized as coowners of the said land, they may have the right to redeem the whole and as a co- owners as in
the law of co- owners, it is akin to a trust relationship wherein the act of one benefits all. Thus,
even if the petitioners succeeded to redeem the property in question, they will be recognized as
co-owners of the land and that Lagdameo will have the right of partition the said land
segregating Lagdameos land to that of the petitioners.

LIM VS. CA, LAMBERANG AND DIRECTOR OF LANDS


137 SCRA 782
Mortgagee: AMPARO LIM
Mortgagee: CATALINO ALEMAN
Facts:
Catalino Aleman obtained a loan from Amparo Lim. To secure the obligation, Aleman
mortgaged his land in favor of Lim. Aleman defaulted, resulting to the foreclosure of the
mortgage. After foreclosure, Lim took possession of the said lands. Thereafter, the land was sold
in public auction (Feb. 1959) and Lamberang became the highest bidder. Aleman, further sold
the same to Lim (1960). The latter declared the said land for tax declaration under her name.
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Secured Transaction Law

In the same year (1960), the provincial sheriff then issued a writ of possession in favor of
Lamberang. Lim then made Lamberang an offer for the redemption of the land in question,
which Lamberang refused. A case was filed by the petitioner contending that they acquired the
right of redemption after Aleman sold the land in question in their favor prior to the foreclosure
proceedings.
Contention:
Lim:
contended that they acquired the right of redemption after Aleman sold the land in
question prior to Lamberangs acquisition of the property in public auction, thus
when they offered to redeem the land within the redemption period, Lamberang is
duty bound to allow Lim to exercise their right of redemption.
Lamberang
maintained the decision of the Trial Court.
SC Ruling:
The Court ruled that the petitioner has the right of redemption in repurchasing the
property in question. It should be noted that prior to the auction sale (1960) in which
Lamberang acquired his right over the said property, the ownership of the property in question
has already transferred in favor of Lim, thus, Lim being the at the time of the redemption period
has the right to redeem the property with held by the private respondent. Thus, Lamberang
should not have allowed Lim to redeem the property in questions.
The Court ruled that the sale in favor of Lamberang could not have been valid since at
the time of the public auction, the mortgage debtor is no longer the owner of the foreclosed
property but the ownership had already been acquired by Lim.
ONG VS.CA, PREMIRE DEVELOPMENT BANK
333 SCRA 189
Mortgagee: DEVELOPMENT BANK OF THE PHILIPPINES
Mortgagor: KENLENE LABORATORIES
Facts:
Kenlene Laboratories obtained a loan from the creditor bank DBP. As security, spouses
Ong, executed a real estate mortgage in favor of the DBP. The spouses Ong defaulted, leading
to the extrajudicial foreclosure of the mortgaged properties. DPB, being the highest bidder and
upon filing the necessary bond, applied for a writ of possession which was granted by the trial
court. The said writ was challenged by the petitioners, their petition having been denied, filed an
appeal to the CA but was also denied.
Contention:
Ong:
contended that the implementation of the writ of possession would render the
judgment nugatory because there is still a pending case for the annulment of the
extrajudicial foreclosure.
PDB:
contended that prohibition does not lie since the petitioners have to two remedies
available, (1) appeal the order issuing the writ of possession under Sec. 8 of Act
3135, and (2) file a separate action for annulment of foreclosure of mortgage.
SC Ruling:
164

Secured Transaction Law

The case at bar falls under circumstance of Extrajudicial foreclosure of real estate,
wherein writ of possession may be issued under two conditions: 1) within one (1) year
redemption period, upon filing of the bond; 2) after the lapse of the redemption period, without
need of a bond. Moreover, it was also ruled that the contention of the petitioner that the
issuance of writ of possession is erroneous as it may run counter to the pending case of
annulment of the mortgage involving the same property is bereft of merit. The issuance of the
writ is a ministerial function, thus the enforcement of the same by the sheriff is also a ministerial
duty.

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Secured Transaction Law

C.

ANTICHRESIS

Article 2132
By the contract of antichresis the creditor acquires the right to
receive the fruits of an immovable of his debtor, with the obligation to
apply them to the payment of the interest, if owing, and thereafter to
the principal of his credit.
COMMENT:
1.

Definition of Antichresis
Antichresis is a contract whereby the creditor acquires the right to receive the
fruits of an immovable of his debtor, with the obligation to apply them to the payment of
the interest, if owing, and thereafter to the principal of his credit.

2.

Characteristics
a. It is an accessory contract because it secures the performance of a principal
obligation.
b. It is a formal contract because the amount of the principal and of the interest
must both be in writing; otherwise the contract of antichresis is void.

3.

Distinctions
a) Antichresis and Real Mortgage

a. delivery/possession

ANTICHRESIS
REAL MORTAGAGE
the property is delivered to the property is NOT
the creditor
delivered to the creditor

the debtor usually retains


possession of the property

b. right to receive the


fruits

the creditor acquires the the creditor does not


right to receive the fruits of have any right to receive
the property
the fruits

c. subject

real property

real property

b) Antichresis and Pledge

a. subject matter

ANTICHRESIS
real property

PLEDGE
personal property

b. perfection

perfected by mere consent

perfected by the delivery of


the thing pledge

166

Secured Transaction Law

Note:
1. Delivery of the property to the creditor is required only in order that the creditor may
receive the fruits and not for the validity of the contract.
2. It is not essential that the loan should earn interest in order that it can be guaranteed
with a contract of antichresis. Antichresis is susceptible of guaranteeing all kinds of
obligations, pure or conditional.
3. The fruits of the immovable which is the object of the antichresis must be appraised at
their actual market value at the time of the application (see Article 2138).
4. The property delivered stands as a security for the payment of the obligation of the
debtor in antichresis. Hence, the debtor cannot demand its return until the debt is totally
paid.
5. A stipulation authorizing the antichretic creditor to appropriate the property upon the
non-payment of the debt within the period agreed upon is void (see Article 2038).
4.

Remedy of Creditor in Case of Default


a.

bring an action for specific performance;

b. file petition for the sale of the real property as in a foreclosure of mortgages
under Rule 68 of the Rules of Court.
***The parties, however, may agree on an extrajudicial foreclosure in the same
manner as they are allowed in contracts of mortgage and pledge.

DBP vs. SPS. JESUS and ANACORITA DOYON


G.R. No. 167238
March 25, 2009
Parties:
DBP petitioner; creditor/mortgagee
Sps. Doyon respondent; debtor/mortgagor
Facts:

Respondent spouses Jesus and Anacorita Doyon obtained several loans amounting to
P10 million from petitioner Development Bank of the Philippines (DBP). As security for the
loans, respondents mortgaged their real estate properties as well as the motor vehicles of JD Bus
Lines. Respondents failed to pay their loan. Consequently, petitioner filed an application for
extrajudicial foreclosure of real estate mortgages. To forestall the foreclosure proceedings,
respondents immediately filed an action for their nullification claiming that they had already
paid the principal amount of their loans (or P10 million) to petitioner.
Contention of the Parties:
Respondents:
- claimed that the provision in the mortgage contracts allowing petitioner as mortgagee to
take constructive possession of the mortgaged properties upon respondents default was
void. The provision allegedly constituted a pactum commissorium since it permitted
petitioner to appropriate the mortgaged properties.
- Respondents also assailed the validity of the public auctions conducted by the DBP
special sheriff. The September 9, 1998 notices of sale stated that the foreclosed real
properties would be sold at public auction on "September 16, 1998 at 10:00 a.m. or soon

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thereafter" while the foreclosed motor vehicles would be sold on "September 16, 1998 at
2:00 p.m. or soon thereafter. Section 4 of Act 3135 however, requires that public
auctions must take place from 9 a.m. until 4 p.m. or, allegedly, for seven continuous
hours.
Petitioner:
- basically asserts that it did not act in bad faith when it foreclosed on respondents real
and chattel mortgages anew. Because respondents loans were past due, it had the right
to satisfy its credit by foreclosing on the mortgages.
Ruling:
A stipulation allowing the mortgagee to take actual or constructive possession of a
mortgaged property upon foreclosure is valid. In Agricultural and Industrial Bank v.
Tambunting, the Supreme court ruled that:
A stipulation authorizing the mortgagee, for the purpose stated therein
specified, to take possession of the mortgaged premises upon the foreclosure of a
mortgage is not repugnant [to either Article 2088 or Article 2137]. On the contrary, such
a stipulation is in consonance or analogous to the provisions of Article [2132], et seq. of
the Civil Code regarding antichresis and the provision of the Rules of Court regarding the
appointment of a receiver as a convenient and feasible means of preserving and
administering the property in litigation.

The real estate and chattel mortgage contracts uniformly provided that petitioner could
take possession of the foreclosed properties upon the failure of respondents to pay even one
amortization. Thus, respondents refusal to pay their obligations gave rise to petitioners right to
take constructive possession of the foreclosed motor vehicles.
In Philippine National Bank v. Cabatingan, held that a sale at public auction held at any
time between 9:00 a.m. and 4:00 p.m. of a particular day, regardless of duration, was valid.
Since the sale at public auction of the foreclosed real properties and chattels was conducted
between 10:00 a.m. and 11:00 a.m. and between 2:00 p.m. and 3:30 p.m., respectively, the
auctions were valid.

Article 2133
The actual market value of the fruits at the time of the
application thereof to the interest and principal shall be the measure of
such application.
COMMENT:
1.

Fruits of the immovable


The object of the antichresis is the fruits of the immovable. The fruits must be
appraised at their actual market value at the time of the application.

Article 2134
The amount of the principal and of the interest shall be specified
in writing; otherwise, the contract of antichresis shall be void.
COMMENT:
1.

Form of contract
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2.

3.

Article 2134 is an instance when the law requires that a contract be in some form
in order that it may be valid and not only to affect third persons.
Must be in writing
a) amount of the principal
b) amount of the interest
*otherwise, the contract of antichresis shall be void
Effect if the antichresis is void
Even if the antichresis is void, the principal obligation, however, may still valid.
Article 2135
The creditor, unless there is a stipulation to the contrary, is
obliged to pay the taxes and charges upon the estate.
He is also bound to bear the expenses necessary for its
preservation and repair.
The sums spent for the purposes stated in this article shall be
deducted from the fruits.

COMMENT:
1.

Obligations of Antichretic Creditor


a) The creditor is obliged, unless there is a stipulation to the contrary, to pay the
*taxes and charges upon the estate. If he does not pay the taxes, he is, by law
(Article 1170), required to pay indemnity for damages to the debtor.
b) He is also bound to bear the *expenses necessary for its preservation and
repair.
* sums spent for these purposes shall be deducted from the fruits.

c) Another obligation of the creditor is to apply the fruits, after receiving them to
the interest, if owing, and thereafter to the principal (Article 2132) in
accordance with the provisions of Article 2133 or 2138.
Hence, the duty of the creditor to render an account of said fruits to the
debtor and the corresponding right of the latter that the said fruits be applied
to the debt.

Article 2136
The debtor cannot reacquire the enjoyment of the immovable
without first having totally paid what he owes the creditor.
But the latter, in order to exempt himself from the
obligations imposed upon him by the preceding article, may always
compel the debtor to enter again upon the enjoyment of the
property, except when there is a stipulation to the contrary.
COMMENT:
1.

Property delivered, a security for the payment of the obligation


The property delivered stands as a security for the payment of the obligation of
the debtor in antichresis.
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2.

Obligation of the Antichretic Debtor


The debtor cannot demand its return until the debt is totally paid.
If the creditor does not want to pay taxes and incur the expenses necessary for
the preservation and repair of the property, he may compel the debtor to reacquire the
enjoyment of the same except when there is contrary stipulation.

Article 2137
The creditor does not acquire the ownership of the real
estate for non-payment of the debt within the period agreed upon.
COMMENT:
1.

Effect of debtors non-payment of the debt within the period agreed upon
-the creditor does not acquire the ownership of the real estate

2.

3.

*Every stipulation to the contrary shall be void. But the creditor may petition the
court for the payment of the debt or the sale of the real property.
In this case, the Rules of Court on the foreclosure of mortgages shall apply.
The right of creditor in case of non-payment of debt
If the debt is not paid, it is clear that the creditor does not acquire ownership of
the immovable since what was transferred is not the ownership but merely the
right to receive the fruits. A stipulation authorizing the antichretic creditor to
appropriate the property upon the non-payment of the debt within the period agreed
upon is void.
Remedy of the creditor in case of debtors non-payment of debt
a. to bring an action for specific performance; or
b. to petition for the sale of real property as in a foreclosure of mortgage under
RULE 68 of the Rules of Court.

Article 2138
The contracting parties may stipulate that the interest upon
the debt be compensated with the fruits of the property which is
the object of the antichresis, provided that if the value of the fruits
should exceed the amount of interest allowed by the laws against
usury, the excess shall be applied to the principal.
COMMENT:
1.

Payment preference
The antichretic creditor is under obligation to apply the fruits in satisfaction,
first, of whatever interest on the debt is due, and secondly, to non payment of the
principal.

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Article 2139
The last paragraph of Article 2085 and Articles 2089 to 2091 are
applicable to this contract.
COMMENT:
1.
Provisions applicable to antichresis
Art. 2085, last paragraph. Third persons who are not parties to the principal
obligation may secure the latter by pledging or mortgaging their own property.
Art. 2089. A pledge or mortgage is indivisible, even though the debt may be
divided among the successors in interest of the debtor or of the creditor.
Therefore, the debtors heir who has paid a part of the debt cannot ask for the
proportionate extinguishment of the pledge or mortgage as long as the debt is not
completely satisfied.
Neither can the creditors heir who received his share of the debt return the
pledge or cancel the mortgage, to the prejudice of the other heirs who have not been
paid.
From these provisions is excepted the case in which, there being several things
given in mortgage or pledge, each one of them guarantees only a determinate portion of
the credit.
The debtor, in this case, shall have a right to the extinguishment of the pledge or
mortgage as the portion of the debt for which each thing is specifically answerable is
satisfied.
Art. 2090. The indivisibility of a pledge or mortgage is not affected by the fact
that the debtors are not solidarily liable.
Art. 2091. The contract of pledge or mortgage may secure all kinds of
obligations, be they pure or subject to a suspensive or resolutory condition.
2.

3.

Additional benefit in having a contract of antichresis


a. In the absence of a contract of antichresis, the debtor could just issue a special power
of attorney in favor of the creditor for the collection of the fruits of the immovable.
b. The additional benefit is that at the failure of the debtor to
pay the principal obligation, the creditor may have the property subject of antichresis
foreclosed.
Default rules to be followed
a.The creditor advances for the taxes, charges, as well as the necessary expenses
for the preservation of the property.
b.The law uses the term advances as the fruits of the immovable may be
applied to the expenses and charges. If the creditor doesn't want to
advance, he may just surrender the immovable to the debtor.
c.The debtor may not reacquire the enjoyment of the thing until full payment of the
obligation.
d.The creditor does not acquire ownership of the immovable for nonpayment of the
debt within the period agreed upon. Every stipulation to the contrary is void.
The creditor may petition the court to foreclose the property.

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Macapinlac vs. Gutierrez Repide


43 Phil. 770
Parties:
Macapinlac - petitioner; transferor
EM Bachrach Co. - transferee
Gutierrez Repide - respondent; transferees successor
Facts:
The petitioner Macapinlac is the owner of Hacienda Dolores, which was registered under
Act 496. He made several promissory notes for the payment of his debt to EM Bachrach Co. and
as security. He executed a deed of sale with right of repurchase, which includes several parcels of
land including the Hacienda Dolores. In the said deed of sale with pacto de retro, it was
annotated that the same is subject to the interest of EM Bachrach as transferee, instead of a real
estate creditor. Later, the respondent, Gutierrez Repide, acquired all the rights of EM Bachrach
with respect to the said property conveyed by the plaintiff to Bachrach Co. Repide has
knowledge of the prior transactions between EM Bachrach and Macapinlac. He then filed a
petition to register the certificate of the said properties under his name, which the trial court
granted. Thus, the petitioner filed an action to challenge and nullify the registration of the
defendant in the said properties with a prayer for declaratory relief.
Contention of the Parties:
Petitioner Macapinlac:
- contended that the registration was obtained through fraud and collusion with EM
Bachrach Co. The petitioner also prayed for relief for declaratory rights.
Respondent Repide:
- contended that the certificate of title of the properties is unimpeachable; therefore, he
has a valid title over the acquired through EM Bachrach.
Ruling:
It is a cardinal rule that, a party who acquired any interest in property with notice of an
existing equity takes subject to that equity; thus, if a purchaser of a property or interest even
valuable consideration, with notice of any existing claims, right or interest of the same property
or interest held by third person, is liable in equity to the same extent and in same manner as the
person from whom he made the purchase. In such case, the rights and interest of transferee of a
property or interest is subject to the rights or interest of the transferor.
In the case at bar, Repide, prior to his acquisition of the properties, is aware to the prior
arrangement between Bachrach and Plaintiff Macapinlac that is the deed of conveyance with
pacto de retro is executed as security of a debt by Macapinlac. Thus, Repides relation with
petitioner Macapinlac after acquisition of the properties stands the same ground as would have
been occupied by EM Bachrach.

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D.

CHATTEL MORTGAGE

Article 2141
The provisions of this Code on pledge, insofar as they are not in
conflict with the Chattel Mortgage Law shall be applicable to chattel
mortgages.

COMMENT:
1.

Laws governing Chattel Mortgage


a.
b.
c.
d.

2.

Chattel mortgage law, Act 1508


Civil Code provisions
Revised Administrative Code
Revised Penal Code

Offenses involving Chattel Mortgage


a. Knowingly removing personal property mortgaged to any province or city other
than the one in which it was located at the time of the execution of the mortgage
without the written consent
b. Selling or pledging personal property already mortgaged or any part thereof, under
the terms of the Chattel Mortgage Law without the consent of the mortgage
written on the back of the mortgage and duly recorded in the CM Register

3.

Registration
a. Registration shall be done in the Register of Deeds where the mortgagor resides
b. And when the property is situated somewhere else, it needs to be registered also
in the Register of Deeds of the area where the property is situated
c. Chattel mortgage would not be valid and binding as against third persons absent
any registration
d. If what is mortgaged is a car, registration with the LTO is also needed. Absent this,
again, it would not be binding and invalid as against third persons

4.

Form of contract, as stated in law


Theoretically, the mortgagor may sign the contract alone but practically, the
mortgagee must sign also given that they both need to sign the affidavit of good faith

5.

Affidavit of Good Faith

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Secured Transaction Law

Part of the chattel mortgage contract wherein it is stated that the chattel
mortgage has been constituted to secure a principal obligation and not meant .
It for fraud or any ill purpose is possible to defraud using mortgage.
You can take away property through mortgage from an unsecured creditor.
6.

Formal requirement of description of property


Attach
a
description
or
schedule
of
the
properties mortgaged.
There is also the requirement of payment of registration fees and documentary stamp
taxes

7.

Foreclosure as to Sec.14 of the Chattel Mortgage Law


a. There is a 30-day cooling off period before the public auction, from the time
the condition is broken.
b.

Noticeat least 10 days notice of the time, day, place, and purpose of such sale
has been posted at 2 or more public places in such municipality.
Personal
notice or mail shall also be given to the mortgagor or person holding under
him and the persons holding subsequent mortgages of the time and place of sale.

c.

Sheriff should possess the property as he needs to deliver the same to the
winning bidder. If the mortgagor refuses to do so, the mortgagee can seek the
help of the court. There could also be a stipulation in the contract as well.
But if the debtor is not willing and able, the loss is with the creditor.

d.

There is a 30-day equity of redemption period (payment of obligation).

e. After foreclosure, there could be recovery of deficiency, but there is Recto


Law (1484) pertaining to sale of personal property in installments and there
is a Chattel Mortgage to secure payment of price.
8.

An action for specific performance is tantamount to the abandonment of


rights of the mortgagee.
Application for proceeds of foreclosure to:
a. Costs
b. Obligation itself; pay first the interest and then the principal. If there is penalty,
then pay it first
c. Junior encumbrances
d. Owner
**Art. 319. (Revised Penal Code). Removal, sale or pledge of
mortgaged property. The penalty of arresto mayor or fine amounting to
twice the value of the property shall be imposed upon**

COMMENTS
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Secured Transaction Law

a. Any person who shall knowingly remove any personal property mortgaged under
the Chattel Mortgage Law to any province or city other than the one in which it
was located at the time of the execution of the mortgage, without the written
consent of the mortgagee or his executors, administrators or assigns.
b. Any mortgagor who shall sell or pledge personal property already pledged, or any
part thereof under the terms of Chattel Mortgage Law, without the consent of the
mortgagee written on the back of the mortgage and noted on the record thereof in
the office of the register of deeds of the province where such property is located.
More on Chattel Mortgage
1.

Subject Matter of Chattel Mortgage


Article 2140. By a chattel mortgage, personal property is recorded in the Chattel
Mortgage Register as a security for the performance of an obligation. If the movable,
instead of being recorded, is delivered to the creditor or a third person, the contract is a
pledge and not a chattel mortgage.
Requisites of Chattel Mortgage
A chattel mortgage is an accessory contract by virtue of which personal property
is recorded in the Chattel Mortgage Register as a security for the performance of an
obligation. The requisites of a chattel mortgage are:
a. Affidavit of good faith and;
b. It must be registered.
Things Deemed to be Personal Property:
a. Those movables susceptible of appropriation.
b. Real Property which by any special provision of law is considered as personal
property.
c. Forces of nature which are brought under control of science.
d. In general, all things which can be transported from place to place without
impairment of the real property to which they are fixed.

Sec. 2 (Act No. 1508). All personal property shall be subject to mortgage,
agreeably to the provisions of this Act, and a mortgage executed in pursuance thereof
shall be termed a chattel mortgage.
A. Vessels
Vessels are considered as personal property. They may be subject of chattel
mortgage. However, mortgages on vessels are recorded in the Philippine Coast Guard of
the port of documentation.
B. Motor Vehicles

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Secured Transaction Law

A chattel mortgage on a car in order to affect third persons should not only be
recorded in the chattel registry but also be recorded with the Land Transportation Office
where the vehicle is recorded, the place where the property may be found and the
residence of the owner thereof.
C. Houses
Generally, they cannot be subject of chattel mortgage because the house is a real
property. This is so even if the house belongs to person other than the owner of the land.
However, there may be such a chattel mortgage in the following instances:
- If the parties to the contract agreed and no third persons are prejudiced;
- If what is mortgage is a house intended to be demolished or removed- for here,
what is mortgaged are the materials thereof are mere personal property.
2.

Description of Subject Matter


Art. 415(Civil Code). The following are immovable property:
1.
2.

Land, buildings, roads and constructions of all kinds adhered to the soil;
Trees, plants, and growing fruits, while they are attached to the land or form an
integral part of an immovable;
3. Everything attached to an immovable in a fixed manner, in such a way that it
cannot be separated therefrom without breaking the material or deterioration of
the object;
4. Statutes, reliefs, paintings or other objects for use or ornamentation, placed on
buildings or on lands by the owner of the immovable in such a manner that it
reveals the intention to attach them permanently to the tenements;
5. Machinery, receptacles, instruments or implements intended by the owner of the
tenement for an industry or works which may be carried on in a building or on a
piece of land, and which tend directly to meet the needs of the said industry or
works.
6. Animal houses, pigeon-houses, beehives, fish ponds, or breeding places of similar
nature, in case their owner has placed them or preserves them with the intention
to have them permanently attached to the land, and forming a permanent part of
it; the animals in those places are included.
7. Fertilizer actually used on a piece of land.
8. Mines, quarries, and slag damps, while the matter thereof forms part of the bed,
and waters either running or stagnant.
9. Docks, structures which though floating, are intended by the nature and object to
remain at a fixed place on a river, lake or coast.
10. Contracts for public works and servitudes and other real rights over immovable
property.
Art. 416( Civil Code). The following are deemed to be personal property:
1. Those movables susceptible of appropriation which are not included in the
preceding article;
2. Real property which by special provision of law is considered personal property;
3. Forces of nature which are brought under the control of science; and
4. In general, all things which can be transported from place to place without
impairment of the real property to which they are fixed.
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3.

Extent of Chattel Mortgage


** see, CEBU vs. FINANCE in cases

4.

Obligation exists at the time of the constitution of the mortgage


**see JACA vs. DAVAO in cases

5.

Registration Essential
For the chattel mortgage to be valid between the parties, the personal property
must be recorded or registered in the Chattel Mortgage Register. Registration in the Day
Book is not enough.
**see FILIPINAS vs. IAC in cases

6.

Effect of Registration / Affidavit of Good Faith


Section 4 (Chattel Mortgage Law). A chattel mortgage shall not be valid against
any person except the mortgagor, his executors or administrators, unless the possession
of the property is delivered to and retained by the mortgagee or unless the mortgage is
recorded in the office of the Register of Deeds of the province in which the mortgagor
resides at the time of making the same, or if, he resides within the Philippines, in the
province in which the property is situated: Provided, however, That if the property is
situated in a different province from that in which the mortgagor resides, that mortgage
shall be recorded in the office of the Register of Deeds of both the province in which the
mortgagor resides and that in which the property is situated, and for the purposes of this
Act, the City of Manila shall be deemed to be a province.
Section 5. A chattel mortgage shall be deemed to be sufficient when made
substantially in accordance with the following form, and shall be signed by the person or
persons executing the same, in the presence of two witnesses, who shall sign the
mortgage as witnesses to the execution thereof, and each mortgagor and mortgagee, or,
in the absence of the mortgagee, his agent or attorney, shall make and subscribe an
affidavit in substance as hereinafter set forth, which affidavit, signed by the parties to the
mortgage as above stated, and the certificate of the oath signed by the authority
administering the same, shall be appended to such mortgage and recorded therewith.
For the chattel mortgage to be valid as against third persons, the personal
property must also be registered in the Chattel Mortgage Register. Moreover, the
registration must be accompanied by an affidavit of good faith.
**see ALLIED BANKING vs. SALAS in cases

7.

Assignment of Chattel Mortgage to credit


Article 2128. The mortgage credit may be alienated or assigned to a third person,
in whole or in part, with the formalities required by law.

The mortgage credit (the right of the mortgagee) may be alienated or assigned, in
whole or in part. This is because the mortgagee is the owner of said right.

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Even if the alienation is not registered, it would still be valid as between the parties.
Registration is needed only to affect third parties.
**see SERVICEWIDE vs. CA in cases
8.

Foreclosure
**see PAMECA vs. CA in cases
Ship Mortgage Law
Presidential Decree No. 1521 (The Ship Mortgage Decree of 1978)
Ship Mortgage
It is a mortgage or any lien or encumbrance on a vessel and its equipment with any bank,
or other financial institutions, domestic or foreign, for the purpose of financing the construction,
acquisition, purchase of vessels or initial operation of vessels.
Purpose of 1521:
The purpose of PD No. 1521 is to accelerate the growth and development of the shipping
industry in the Philippines and to finance the acquisition, construction, purchase or initial
operation of vessels.
Who May Constitute a Ship Mortgage?
1. Any citizen of the Philippines; or
2. Any association or corporation organized under laws of the Philippines at least 60%
of the capital of which is owned by the citizens of the Philippines.
Salient Features of the Decree:
In order for a mortgage to be valid, such mortgage shall be recorded in the office of the
Philippine Coast Guard of the port of documentation of such vessel. (sec. 3)
Port of Documentation shall be deemed to mean the port of registry of the vessel. (sec.
27)
Preferred Mortgage is a valid mortgage which at the time it is made, includes the whole
of the vessel of domestic ownership, provided that:
- The mortgage is recorded;
- An affidavit of good faith is filed and without design to hinder, delay or defraud
any creditor or lienor; and
- That the mortgage does not stipulate that the mortgagee waives the preferred
status thereof.
A vessel holding a Provisional Certificate of Philippine Registry is considered a vessel of
domestic ownership and can be a subject of preferred mortgage.
Foreign vessel shall also be subject of preferred mortgage provided that such mortgage,
hypothecation, or similar charge has been duly and validly executed in accordance with the laws

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Secured Transaction Law

of foreign nation under the laws of which the vessel is documented and has duly registered in
accordance with such laws in public register.
Upon the default of any term or condition of the mortgage, the mortgagee may enforce
such lien by suit, wherein the vessel itself may be made a party defendant and be arrested. (Sec.
10)
Upon the filing of the petition for judicial foreclosure, the applicant may apply ex parte
for an order for the arrest of the vessel provided that:
o Affidavit is presented; and
o Applicant must file a bond with the condition that the latter will pay costs
which may be adjudged to the adverse party and damages if the court shall finally
adjudged that the applicant is not entitled thereto.
Original Jurisdiction is granted to the courts of first instance where the applicant resides,
defendant resides or where the property is located.
Discharge of order of arrest may be done upon filing of a counterbond by the defendant
or if a cash deposit is made.

Chattel Mortgage Cases:


MAKATI LEASING AND FINANCE VS. WEAVER
122 SCRA 83
Mortgagor: Weaver Textile Mills
Mortgagee: Makati Leasing and Finance Corporation
Facts:
The respondents-mortgagor, weaver textile executed a Chattel Mortgage over raw
materials inventory and some machineries as security for the collection of receivables assigned
to the petitioner-mortgagee, Makati leasing.
Upon the mortgagors default, the petitioner mortgagee Makati leasing, filed an
extrajudicial foreclosure for the said articles, but had failed due to failure to seize the mortgaged
properties.
Subsequently, the petitioner filed for a judicial foreclosure, but the same was also
suspended because the respondents filing of motion for reconsideration.
Again, a petition for replevin was filed by the petitioner and this time, the sheriff was
able to seize the machineries from the mortgagor-respondent.
The respondent filed a petition for certiorari and prohibition, to challenge the seizure of
the said machineries. The respondent court, Court of Appeals, ruled in favor of the respondentmortgagor.
Hence this petition for certiorari.
Contentions:
Petitioner:
contended that the CA erred in its decision by holding that the machineries in the
house of the respondents is a personal and not a real property, therefore, there is
no valid constitution chattel mortgage, on the ground that:

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Secured Transaction Law

a. The respondents-mortgagor is estopped from claiming that the machineries


are real properties because of the constitution of a chattel mortgage.
Respondent-mortgagor:
on the other hand contented among others that:
a. The machineries are real property and not personal property; therefore it is
not suitable to be a subject of a chattel mortgage.
b. That the same are real properties because the machineries are firmly placed
in the concrete floor of the house and the only way to remove the same is to
drill the floor, causing substantial damage to the real property where the
machineries was attached.
c. Lastly, private respondent contends that estoppel cannot apply against
because it had never represented nor agreed that the machinery in suit be
considered as personal property but was not merely required and dedicated
on by herein petitioner to sign a printed form of chattel mortgage which was
in a blank form at the time of signing.
Issue:
Is the chattel mortgage null and void because the subject of which (machineries) is a real
property and not a personal property?
Held:
No. The chattel mortgage in question is valid.
It is a well-engraved rule that when an immovable, like a house of strong materials, or a
machinery maybe considered as a personal property for purposes of executing a chattel
mortgage as long as parties to the contract so agreed and no innocent third party will be
prejudiced thereby.
Thus, in the case at bar, the machinery, which is movable by its nature and only became
immobilized only by destination (purpose) maybe also treated as a movable property and the
parties agreed to such contract is estopped from denying its nature and the existence of a
chattel mortgage. Moreover, the characterization of the subject machinery as chattel by the
private respondent is indicative of intention and impresses upon the property the character
determined by the parties.

ASSOCIATED INSURANCE AND SURETY COMPANY, INC VS.


ISABEL IYA, ADRIANO VALINO AND LUCIA VALINO
104 PHIL. 971
Mortgagor: Spouses Valino
Mortgagee: Associated Insurance ( Chattel Mortgage over the house)
Mortgagee: Isabel Iya (Real Estate Mortgage over the house and lot)
Facts:
Spouses Valino executed a chattel mortgage in favor of Associated Insurance, which was
duly registered. When spouses Valino became the registered owner of both the house and lot,

180

Secured Transaction Law

they executed a real estate mortgage over the house and lot in favor of Isabel Iya to secure a loan
of php 12,000.00 which was registered and annotated.
Due to non payment of debt to associated insurance the house was foreclosed and was
sold to associated insurance as the highest bidder. Subsequently because of nonpayment of the
debt due to Iya, the former filed a suit to foreclose the real estate mortgage. She obtained a
judgment favorable to her and the mortgaged properties were sold to her at the auction sale.
Contentions of Parties:
Associated Insurance:
The Exclusion of the house from the foreclosure of the real estate mortgage is
proper because at the time of the execution of the chattel mortgage over the house,
the house is still considered personal property because the spouses were not the
owner of the land where the properties situated.
Isabel Iya:
She has the superior right over the house and lot.
Issue:
Is the chattel mortgage executed over the house valid?
Ruling:
No. the chattel mortgage executed is not valid.
A building certainly cannot be divested of its character of realty by the fact that the land
on which it is constructed belongs to another. In the case presented personal property could
only be the subject of a chattel mortgage and that the house in question is not one. The
execution of the chattel mortgage is really invalid and the registration of the chattel mortgage
produces no effect.
Therefore has the right to foreclose both land and house.

PEOPLES BANK VS. DAHICAN LUMBER


20 SCRA 84
Mortgagor: Dahican Lumber
Mortgagee: Peoples Bank and Trust Company
Facts:
Atlantic, Gulf and Pacific Company (AG & P) assigned all its rights to Dahican Lumber
Company (DALCO) which obtained loans from the Peoples Bank and Company. DALCO
executed a deed of mortgage covering parcels of land situated in Camarines Norte together with
all the buildings and personal properties of DALCO. It executed a second mortgage on the same
properties in favor of AG & P. Both deeds contain provisions extending lien to the properties and
were registered in the Office of the Register of Deeds of Camarines Norte. After the execution of
the mortgages, DALCO purchased machineries and equipment. Peoples Bank requested a list of
the properties but DALCO failed to submit the same. Upon the refusal of DALCO to cancel such
agreement, Peoples Bank and AG & P commenced foreclosure proceedings. The trial court
ordered the sale of the after acquired properties and ordered DALCO to pay Peoples Bank.
DALCO appealed.

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Contentions:
Peoples Bank:
The so called after acquired properties covered by and subject to the deeds of
mortgage can be foreclosed.
DALCO:
The mortgages are invalid and not binding on the properties because they were not
registered in accordance with the Chattel Mortgage Law.
Ruling:
Under both deeds of mortgage, it is crystal clear that all properties of every nature and
prescription taken and in exchange or replacement, as were as all buildings, machineries,
fixtures, equipment, and other properties that the mortgagor may acquire, construct, install,
attach or use in, to, upon, or in connection with the premises that is, its lumber concession
shall immediately and become subject to the lien of both mortgage in the same manner and to
the same extent as if already included therein at the time of their execution. As the language
thus used leaves no room for doubt as to the intention of the parties, we see no useful purpose in
discussing the matter extensively. Suffice it to say that the stipulation referred to is common,
and we might say logical, in all cases where the property given as collateral are perishable or
subject to inevitable wear and tear but with understanding express or implied that they
shall be replaced with others to be thereafter acquired by the mortgagor. Such stipulation is
neither unlawful nor immoral, its obvious purpose being to maintain, to the extent allowed by
the circumstances, the original value of the properties given as security.
The Chattel Mortgage Law does not apply. The deeds provide that the after acquired
properties shall immediately become subject to the lien of this mortgage in the same manner
and to the extent as if now included therein. Where the machinery and fixtures installed by a
lumber company in its concession had become immobilized and were included in the registered
real mortgage as after acquired properties, it is not necessary to register them a second time as
chattel mortgages in order to affect third persons. The fact that the lumber company is not the
owner of the land is not important since the parties to the mortgage had characterized the said
after acquired properties as the real properties. The mortgagor is estopped to contend that the
said properties had become immobilized.

TOLENTINO VS. BALTAZAR


1 SCRA 822
Mortgagor: Angel Baltazar
Mortgagee: Pastor Tolentino
Facts:
Angel Baltazar filed a homestead application on a piece of land which he mortgaged the
present and future improvements thereon to Pastor Tolentino. After the death of Angel Baltazar,
Basilio Baltazar, the son of the deceased filed a petition for the cancellation of the homestead
application. Tolentino filed an action for the cancellation of the Original Certificate of Title in
the name of Basilio on the ground that the latter obtained it through fraud but was dismissed.
Hence, this action.

Contentions:
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Tolentino:
Baltazar:
-

Basilio Baltazar had acquired the land through fraud

denied the allegation of fraud and maintained that Tolentino had no cause of
action except against the deceased, Angel Baltazar, and that this is neither the
proper action nor the proper court to settle Tolentino's claim.

Issue:
Whether or not the present and future improvements of the land are subject to a chattel
mortgage?
Ruling:
No. Because while the homestead itself may not be encumbered or alienated within five
(5) years from the issuance of the patent, the improvements cannot be the subject of mortgage
or pledge. A mortgage constituted on said improvements must be susceptible of registration as a
real estate mortgage and on the certificate of the title to the land of which they form part,
although the land itself may not be subject to said encumbrance. If the debt guaranteed thereby
was constructed within the period stated in section 118 of the Commonwealth Act No. 191.
Otherwise, the provision authorizing the mortgage of the improvement would be defeated.
When the improvements of the land are real property which fall under article 715 of the
Civil Code are immovable property as third persons are concerned then the mortgaged
constituted thereon must be susceptible of registration as real estate mortgage.
Where Basilio, son of the homesteader Angel, secured a patent and title for the
homestead, with knowledge that the improvement thereon had been mortgaged by his father, he
must be deemed to have received to a subsisting trust. He may be compelled to execute the
proper instrument necessary for the registration of said mortgage and its annotation on the title.

1.

Extent of chattel mortgage


CEBU INTERNATIONAL FINANCE VS. CA
268 SCRA 178

Mortgagor: Robert Ong


Mortgagee: Cebu International Financing Corporation
Facts:
Jacinto Dy executed a SPA in favor of Ang Tay, authorizing the latter to sell Dys cargo
vessel. Ang Tay sold the vessel to Robert Ong. The vessel however is not yet registered to the
name of Ong. Ong on the other hand, obtained possession of the vessel and copies of
unauthorized deed of sale. Using the copies of title notarized and registered the sale with the
Philippine coast guard without Ang Tays knowledge; Ong obtained in loan from Cebu
International Finance and executed a chattel mortgage over the vessel to secure the obligation.
Contentions:
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Petitioner:
-

The nullification of the chattel mortgage is erroneous because they (mortgagepetitioner) is not required to look further from the certificate of title over
mortgaged property. That they are mortgagee in good faith and as between two
innocent parties, the one who caused the damage by virtue of his act confidence
mustbear the loss.

Respondents:
The chattel mortgage between the petitioner and respondent is not valid because
Ong is not yet the owner of the mortgaged vessel at the time of its execution.
-

Moreover, in the deed of mortgage, Ong and the petitioner-mortgagee made it


appear that the latter sold the vessel to Ong, which is erroneous for it was
established that Tantay and Dy owned the vessel at the time of the execution.
That the filling of an affidavit of god faith as required by the Ship mortgage law is
lacking in their contract of mortgage, making the same void. Thus, the
nullification of the chattel mortgage is proper.

Issue:
Is the chattel mortgage valid considering that the vessel was obtained through fraud and
was mortgaged by Ong who is not the owner?
Ruling:
The chattel mortgage is valid and subsisting. It should not be viewed in such a myopic
context. The key lies in the certificate of ownership issued in Ongs name.
A mortgagee has to rely in good faith on the certificate of title of the mortgagor of the
property given as security and in the absence of any sign that might arose suspicion to under
further investigation.
Hence, even if the mortgagor is not the owner of the property, the mortgagee is entitled
to protection. An affidavit of good faith is required only for the purpose of transforming an
already valid mortgage into a preferred mortgage.

1.

When obligation exists


JACA VS. DAVAO LUMBER
113 SCRA 107

Mortgagor: Urbano Jaca


Mortgagee: Davao Lumber Company
Facts:
Urbano Jaca entered into an agreement whereby it may secure by way of advances from
Davao Lumebr Company (DLC), cash or materials, or foodstuffs from the said company. The
payment was to be made either in cash or by turning over to Davao Lumber Company their logs.

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While this relationship was subsisting, Davao Lumber Company made Jaca execute, in their
favor, a chattel mortgage, a copy of which was never furnished to Jaca. The mortgage covers any
and all obligations contracted by the mortgagor prior to the constitution of the mortgage.
Contentions:
Jaca:
the rendered judgment of foreclosure is null and void.
Davao:
Urbano Jaca and Bonifacio Jaca are the ones indebted to the defendant in the sum
of P756,236.52 and P91,651.97, respectively; that on January 24, 1961, the plaintiff
Urbano Jaca executed a chattel mortgage in favor of the defendant to secure the
payment of any and all obligations contracted by him in favor of the defendant
covering several chattels valued at P532,000.00; that said obligation of Urbano
Jaca totalling P756,236.52 is overdue and unpaid despite repeated formal demands
for settlement thereof made by defendant.
Issue:
Is there a valid mortgage considering that it covers any and all obligations prior to the
constitution of the mortgage?
SC Ruling:
The chattel mortgage is void because it provides that the security is for the payment of
any and all obligations contracted by the mortgagor in favor of the mortgagee before the
constitution of the mortgage.
A valid mortgage cannot be made to secure a debt to be thereafter contracted.

1. Registration is essential
FILIPINAS MARBLE CORPORATION VS. IAC
142 SCRA 180
Mortgagor: Filipinas Marble Corporation
Mortgagee: Development Bank of the Philippines
Facts:
Filipinas Marble Corporation applied a $ 5 million loan with Development Bank of the
Philippines, which was granted by the latter subject to onerous conditions. Such loan was
secured by the mortgages of properties of Filipinas Marble Corporation. On January 19, 1983
Filipinas Marble Corporation filed an action for nullification of the deeds and damages with
prayer for temporary restraining order. The court granted the temporary restraining order.
Contentions:
Petitioner:
That there was never a loan to be secured because the applied was never delivered
to the petitioner-mortgagor and therefore there is lack of consideration in the

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executed deed of mortgage. The chattel mortgage is nonetheless invalid for it was
not registered.
Respondent:
That pursuant to P.D. 385, the DBPs power to foreclose is absolute in cases where
the borrower reached arrears at the total of 20% of its total obligation. That there is
a consideration in the deed of mortgage because the applied loan by the petitioner
is constructively received by the petitioners through agents acting on their behalf.
Issue:
Can Development Bank of the Philippines foreclose the mortgage under P.D. No. 385?
SC Ruling:
No. Development Bank of the Philippines cannot foreclose the mortgage although P.D.
No 385 was issued to see to it that government financial institutions are not denied substantial
inflows, which are necessary to finance development projects over the country. But the same is
not made to protect government officials and institutions that mismanaged and misappropriate
funds.
To allow foreclosure of Finance Marble Corporation Company properties would unduly
prejudice employees.

1. Effect of registration
ALLIED BANKING CORPORATION VS. SALAS
168 SCRA 414
Mortgagor: Gencor Incorporated
Mortgagee: General Bank and Trust Company
Facts:
General Bank and Trust Company granted Gencor Marketing, Inc. a time loan evidenced
by a Promissory Note executed by the latter through its President, Dr. Clarencio Yujuico. As
security for the loan, a Deed of Chattel Mortgage was executed by Gencor involving personal
properties. The Deed of Chattel Mortgage was duly recorded in the Chattel Mortgage Registry.
On maturity date, Gencor failed to pay its obligations either to General Bank or to Allied
Banking which took over the affairs and/or required all the assets and assumed the liabilities of
General Bank. Consequently, Allied extrajudicially foreclosed the Chattel Mortgage and
requested the City Sheriff of Quezon City to effect the said foreclosure. The Sheriff, through
Deputy Sheriff Tabbada levied upon the personal properties in question.
It appears however that prior to the extrajudicial foreclosure, Metropolitan Bank and
Trust Company filed an action for a sum of money with preliminary attachment against
Clarencio Yujuico and Jesus Yujuico. A writ of preliminary attachment was issued in said case
and the Sheriff of the Court of First Instance of Rizal levied upon the personal properties.
Thus upon learning of the Notice sent by Sheriff Tabbada, Metropolitan filed an Urgent
Motion to Enjoin the Sheriff of Quezon City from foreclosing and selling the properties alleging
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that the printing machineries and equipment belonging to Clarencio Yujuico may not legally be
foreclosed and sold at auction.
Meanwhile, Metropolitan filed a Third Party Claim alleging that these same personal
properties had been previously levied upon by the Deputy Sheriff of Branch I of the Court of
First Instance of Rizal, pursuant to a Writ of Attachment issued by Judge Emilio Salas.
However, Judge Salas rendered an Order restraining the Sheriff of Quezon City from
selling at public auction the printing machineries and equipment. Allied filed the instant
petition for certiorari, prohibition and mandamus with preliminary injunction.
Contentions:
Allied:
respondent judge lacks jurisdiction over the person of petitioner and the city sheriff
of Quezon City, and that the respondent judge acted without and/or in excess of
jurisdiction and/or with grave abuse of discretion amounting to lack of jurisdiction
in acting upon the motion of respondent Metropolitan Bank and Trust Company
Salas:
Gencor Marketing Inc. had no authority to mortgage the properties in question
and, consequently, the same cannot be sold at public auction in an extra-judicial
foreclosure of the mortgage to the General Bank and Trust Co.
Issue:
Whether or not respondent judge may validly enjoin the public sale of the extrajudicially
foreclosed properties?
Ruling:
Finding the chattel mortgage to be valid, the Court takes special note of the fact that said
chattel mortgage was registered and duly recorded in the Chattel Mortgage Registry of Quezon
City on February 7, 1974, prior to April 22, 1977, the date the writ of attachment of the
properties in question was issued. This is a significant factor in determining who of two
contending claimants should be given preference over the same properties in question.
The registration of the chattel mortgage more than three years prior to the writ of
attachment issued by Judge Salas is an effective and binding notice to other creditors of its
existence and creates a real right or a lien, which being recorded, follows the chattel wherever it
goes. The chattel mortgage lien attaches to the property wherever it may be. Thus, Metropolitan
as attaching creditor acquired the properties in question subject to petitioners mortgage lien as
it existed thereon at the time of the attachment.
In this regard, it must be stressed that the right of those who so acquire said properties
should not and cannot be superior to that of the creditor who has in his favor an instrument of
mortgage executed with the formalities of law, in good faith, and without the least indication of
fraud.
Applying the foregoing principle to the case at bar, the Court finds the lien of petitioners
chattel mortgage over the mortgaged properties in question superior to the levy on attachment
made on the same by private respondent as creditor of chattel mortgagor Clarencio Yujuico.
What may be attached by private respondent as creditor of said chattel mortgagor is only the
equity or right of redemption of the mortgagor.

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1. Assignment of Chattel Mortgage Credit


SERVICEWIDE SPECIALISTS, INCORPORATED VS. COURT OF APPEALS
320 SCRA 478
Mortgagor: Spouses Ponce
Mortgagee: Tecson Enterprises
Facts:
Spouses Atty. Jesus and Elizabeth Ponce bought a Holden Torana vehicle from C. R.
Tecson Enterprises. They executed a promissory note and a chattel mortgage which was
registered both in the Registry of Deeds and the Land Transportation Office. C. R. Tecson, in
turn, executed a deed of assignment in favor of Filinvest Credit Corporation with the conformity
of respondent spouses. The spouses transferred and delivered the vehicle to Conrado R. Tecson
by way of sale with assumption of mortgage. Subsequently, Filinvest assigned all its rights and
interest to Servicewide Specialists Inc. without notice to respondent spouses. Due to the failure
of respondent spouses to pay, Servicewide was constrained to file a complaint for replevin with
damages against them. The spouses denied any liability claiming they had already returned the
car to Conrado Tecson; thus, they filed a third party complaint against Conrado Tecson praying
that in case they are adjudged liable to petitioner, Tecson should reimburse them.
The lower court found the spouses liable to Servicewide, however, Tecson was ordered to
reimburse them. The Court of Appeals reversed and set aside the judgment of the court on the
ground that the spouses were not notified. Hence, this petition for review.
Contentions:
Servicewide:
notice is not required
CA:
respondent spouses were not notified of the assignment of the promissory note and
chattel mortgage to petitioner
Spouses Ponce:
denied any liability claiming they had already returned the car to Conrado Tecson
pursuant to the Deed of Sale with Assumption of Mortgage. Thus, they filed a third
party complaint against Conrado Tecson praying that in case they are adjudged
liable to petitioner, Conrado Tecson should reimburse them.
Ruling:
The resolution of the petition hinges on whether the assignment of a credit requires
notice to the debtor in order to bind him. More specifically, is the debtor-mortgagor who sold
the property to another entitled to notice of the assignment of credit made by the creditor to
another party such that if the debtor was not notified of the assignment, he can no longer be
held liable since he already alienated the property? Conversely, is the consent of the creditormortgagee necessary when the debtor-mortgagor alienates the property to a third person?
Only notice to the debtor of the assignment of credit is required. His consent is not
required. In contrast, consent of the creditor-mortgagee to the alienation of the mortgaged
property is necessary in order to bind said creditor. To evade liability, respondent spouses

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invoked Article 1626 of the Civil Code which provides that the debtor who, before having
knowledge of the assignment, pays his creditor shall be released from the obligation. They
argue that they were not notified of the assignment made to petitioner. This provision, however,
is applicable only where the debtor pays the creditor prior to acquiring knowledge of the latters
assignment of his credit. It does not apply, nor is it relevant, to cases of non-payment after the
debtor came to know of the assignment of credit. This is precisely so since the debtor did not
make any payment after the assignment.

1.

Foreclosure
PAMECA WOOD TREATMENT PLANT, INC. VS. COURT OF APPEALS
310 SCRA 281

Mortgagor: PAMECA Wood Treatment Plant


Mortgagee: Development Bank of the Philippines
Facts:
PAMECA Wood Treatment Plant, Inc. obtained a loan from Development Bank of the
Philippines. PAMECA executed a promissory note and a chattel mortgage over PAMECAs
properties in Dumaguete City consisting of inventories, furniture and equipment. Upon
PAMECAs failure to pay, DBP extrajudicially foreclosed the chattel mortgage and purchased the
properties for a sum of PhP 322, 350.00. DBP filed a complaint for the collection of the balance
of PhP 4,366,332.46 with the trial court. The RTC rendered a decision ordering PAMECA to pay
which was affirmed by the Court of Appeals. Hence, this petition.
Contentions:
PAMECA:
The public auction sale of PAMECAs chattels was tainted with fraud as the chattels
were bought by DBP as sole bidder in only 1/6 of the market value of the property.
DBP:
The public auction sale was valid so PAMECA should pay the remaining balance.
Ruling:
It is clear that the effects of foreclosure under the Chattel Mortgage Law run inconsistent
with those of pledge under Article 2115. Whereas, in pledge, the sale of the thing pledged
extinguishes the entire principal obligation, such that the pledgor may no longer recover
proceeds of the sale in excess of the amount of the principal obligation, Section 14 of the Chattel
Mortgage Law expressly entitles the mortgagor to the balance of the proceeds, upon satisfaction
of the principal obligation and costs.
Since the Chattel Mortgage Law bars the creditor-mortgagee from retaining the excess of
the sale proceeds there is a corollary obligation on the part of the debtor-mortgagee to pay the
deficiency in case of a reduction in the price at public auction.
We do not find the application by analogy of Article 1484 of the Civil Code to the instant
case tenable. As correctly pointed out by the trial court, the said article applies clearly and solely
to the sale of personal property the price of which is payable in installments. Although Article
1484, paragraph (3) expressly bars any further action against the purchaser to recover an unpaid
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balance of the price, where the vendor opts to foreclose the chattel mortgage on the thing sold,
should the vendees failure to pay cover two or more installments, this provision is specifically
applicable to a sale on installments.
To accommodate petitioners prayer even on the basis of equity would be to expand the
application of the provisions of Article 1484 to situations beyond its specific purview, and ignore
the language and intent of the Chattel Mortgage Law. Equity, which has been aptly described as
justice outside legality, is applied only in the absence of, and never against, statutory law or
juridical rules of procedure.

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PART III
CONCURRENCE AND PREFERENCE OF CREDITS
A.

Concurrence of Credits, defined


A concurrence of credit implies the possession by two or more creditors of equal
rights or privileges over the same property or all of the property of the debtor.

B.

Preference of Credits, defined


A preference of credit is the right held by a creditor to be preferred in the
payment of his claim above others (to be paid first) out of the debtors assets.

C.

Characteristics of Concurrence and Preference


1.
2.
3.
4.
5.

D.

The liens and mortgages with respect to specific movable and immovable
property have been increased.
The New Civil Code and the Insolvency Law have been brought into harmony.
Preferred claims as to the free property of the insolvent have also been
augmented.
The order of preference among claims with respect to specific personal and real
property has been abolished, except that taxes must first be satisfied.
A concurrence or preference of credit does not create a lien. It merely creates a
right of one creditor to be paid first as against other creditors. If the property is
not sufficient, creditors who concur share pro-rata.

Application of the Rules on Preference


The rules on preference generally apply only when the debtor does not have
sufficient property to pay his debts. These rules are inapplicable when there is
enough to pay everyone. Specifically, these rules apply only when the following concur:
1. There are two or more creditors.
2. The debtors assets are not enough.
3. The claims held by various creditors have been established (in a proper
proceeding).
4. All the credits must be due.

E.

Preference and Lien, distinguished


A preference applies only to claims that do not attach to specific properties, while
a lien creates a charge on a particular property.

Article 2236
The debtor is liable with all his property, present and future, for
the fulfillment of his obligations, subject to the exemptions provided
by law.
COMMENTS
1.
Right of the Creditors
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a. right to pursue the property in possession of the debtor to satisfy the debt
b. may impugn the acts which the debtor may have done to defraud them
2.

Exempt Property

a.

Present property
family home; those enumerated in Rule 39, Sec. 13 of the Rules of Court; and Sec.
118 of Public Land Act

b.

Future property
a debtor who obtains a discharge from his debts on account of insolvency is not
liable for the unsatisfied claims of his creditors with said property subject to
certain exceptions provided by law

c.

Custodia legis & public dominion


under legal custody and those owned by municipal corporations necessary for
governmental purposes
Article 2237
Insolvency shall be governed by special laws insofar as they are
not inconsistent with this Code.

COMMENTS
1.

Preference between Special Laws on Insolvency and the Civil Code


The Civil Code prevails in case of conflict with special laws on insolvency unless
otherwise provided
Example of a special law governing insolvency: Art. 110, Labor Code- preference
of workers as regards unpaid wages and money claims

2.

Insolvency Proceedings
Insolvency proceedings have for their aim the conservation of all the remaining
assets of the insolvent/liquidated person/corporation for distribution to the creditors,
after payment of taxes.

Article 2238
So long as the conjugal partnership or absolute community
subsists, its property shall not be among the assets to be taken
possession of by the assignee for the payment of the insolvent debtor's
obligations, except insofar as the latter have redounded to the benefit
of the family. If it is the husband who is insolvent, the administration
of the conjugal partnership of absolute community may, by order of
the court, be transferred to the wife or to a third person other than the
assignee.
COMMENTS

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1.

General Rule: Subsisting conjugal partnership or absolute community property is


exempt from assignment in insolvency
Exception: if the obligation has redounded to the benefit of the family.

2.

Sample Problem
As finance officer of K and Co., Victorino arranged a loan of P5 Million from PNB
for the corporation. However, he was required by the bank to sign a Continuing Surety
Agreement to secure the repayment of the loan. The corporation failed to pay the loan,
and the bank obtained a judgment against it and Victorino, jointly and severally. To
enforce the judgment, the sheriff levied on a farm owned by the conjugal partnership of
Victorino and his wife Elsa. Is the levy proper or not? (BAR)
ANSWER: The levy is not proper there being no showing that the surety
agreement executed by the husband redounded to the benefit of the family. An obligation
contracted by the husband alone is chargeable against the conjugal partnership only
when it was contracted for the benefit of the family. When the obligation was contracted
on behalf of the family business, the law presumes that such obligation will redound to
the benefit of the family. However, when the obligation was to guarantee the debt of a
third party, as in the problem, the obligation is presumed for the benefit of the third
party, not the family. Hence, for the obligation under the surety agreement to be
chargeable against the partnership it must be proven that the family was benefited and
that the benefit was a direct result of such agreement (Ayala Investment v. Ching, 286
SCRA 272).

Article 2239
If there is property, other than that mentioned in the preceding
article, owned by two or more persons, one of whom is the insolvent
debtor, his undivided share or interest therein shall be among the
assets to be taken possession of by the assignee for the payment of the
insolvent debtor's obligations.
COMMENT
1. Rule on co-ownership
If there is co-ownership, the undivided share/ interest of one co-owner can be possessed
by the assignee for the payment of debtors obligation.

Article 2240
Property held by the insolvent debtor as a trustee of an express
or implied trust shall be excluded from the insolvency proceedings.
COMMENT
1.

Excluded from the insolvency proceedings


- property held by the insolvent debtor as a trustee of an express or
implied trust (or, otherwise stated, subject matter of a trust in
possession of trustee).

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

COMMENT:
1. Article 2241
This is just an enumeration of the credits that enjoy preference with respect to specific
movables; no order of preference, except as regards the State.
2. Last paragraph of the article
The last paragraph applies only when the right of ownership in the specific property
continues in the debtor.

Art. 2242. With reference to specific immovable property and real


rights of the debtor, the following claims, mortgages and liens shall be
preferred, and shall constitute an encumbrance on the immovable or
real right:
(1) Taxes due upon the land or building;
(2) For the unpaid price of real property sold, upon the
immovable sold;
(3) Claims of laborers, masons, mechanics and other workmen,
as well as of architects, engineers and contractors, engaged in the
construction, reconstruction or repair of buildings, canals or other
works, upon said buildings, canals or other works;
(4) Claims of furnishers of materials used in the construction,
reconstruction, or repair of buildings, canals or other works, upon said
buildings, canals or other works;
(5) Mortgage credits recorded in the Registry of Property, upon
the real estate mortgaged;
(6) Expenses for the preservation or improvement of real
property when the law authorizes reimbursement, upon the immovable
preserved or improved;
(7) Credits annotated in the Registry of Property, in virtue of a
judicial order, by attachments or executions, upon the property
affected, and only as to later credits;
(8) Claims of co-heirs for warranty in the partition of an
immovable among them, upon the real property thus divided;
(9) Claims of donors or real property for pecuniary charges or
other conditions imposed upon the donee, upon the immovable
donated;
(10) Credits of insurers, upon the property insured, for the
insurance premium for two years.
COMMENT:
1.

Article 2242

This is just an enumeration of the credits that enjoy preference with respect to specific
immovable; no order of preference, except as regards the State.
2.

Note

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a) A recorded mortgage credit is a special preferred credit.


b) Unrecorded sale is superior to a recorded mortgage, since execution in a public
instrument is equivalent to delivery.
c) Registered mortgage of a latter date is superior to a prior unregistered mortgage.
d) There is a preference among the credits mentioned in 2242 (7) according to the
order of the time they were levied upon the property.
e) Pro-rata rule in 2249 does not apply; otherwise a preference of credit could be
defeated by a writ of attachment or execution even if such was obtained much later.
BARRETTO vs. VILLANUEVA
1 SCRA 288
Parties:
Rosario Cruzado debtor/ vendor
Rehabilitation Finance Corporation (RFC) creditor
Pina Villanueva vendee/ mortgagor
Magdalena Baretto mortgagee
Facts:

Rosario Cruzado obtained from Rehabilitation Finance Corporation (RFC) a loan in the
amount of P11, 000.00. She mortgaged the land issued in her name and that of her deceased
husband as security. As she failed to pay certain installments on the loan, the mortgage was
foreclosed upon a consideration totaling P11, 000.00. Upon her application, the land was sold
back to her conditionally for the amount of P14, 269.03, payable in seven (7) years.
Two years later, Rosario was authorized by the court to sell the land in question together
with the improvements, with the previous consent of the RFC. Thus, she sold it to Pina for P19,
000.00 transferring all their rights, interests, title and dominion over the land together with the
existing improvements thereon, with the exception of the sum of P11, 009.52, which the vendor
is still presently obligated to the RFC and which the vendee herein now assumes to pay to the
RFC.
Having paid in advance, Pina executed a promissory note in favor of the vendor, Rosario.
She later made an additional payment in the promissory note and was able to secure in her
name a TCT. Then, Pina mortgaged the said property to Magdalena Barretto as security for a
loan totaling P30, 000.00.
Pina failed to pay the remaining installments, thus, Rosario filed a case against her.
Pending the trial of the case, a lien was constituted upon the property in the nature of a levy in
attachment in favor of the Cruzados. Pina likewise failed to pay her indebtedness of P30,
000.00 to Barretto, thus the latter filed and action for foreclosure of mortgage.
The Barrettos filed a motion for the issuance of a writ of execution while the Cruzados
filed their Vendors Lien over the real property. RTC favored the Cruzados. On the same date,
the sheriff of Manila sold at public auction the property. As highest bidder, the Barrettos
themselves acquired the property for P49, 000.00.
Contentions:
Barretto:
-

Cruzado:
Ruling:

She argued that in asmuch as the unpaid vendors lien in this case was not
registered, it should not prejudice the said appellants registered rights over the
property.
Being an unpaid vendor, she is entitled to the unpaid balance of the purchase
price of the property.

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The fact remains that Rosario Cruzado was an unpaid vendor for the unpaid balance of
the price of the property bought by Pina Villanueva, and that she has the right to share pro-rata
with the appellants the proceeds of the foreclosure sale. Article 2242 of the NCC enumerates the
claims, mortgage and liens that constitute an encumbrance in specific immovable property and
among them are for the unpaid price of real property sold, and mortgage credits recorded in the
Registry of Property. Article 2249 of the same Code provides that if there are two or more
credits with respect to the same specific real property, they shall be satisfied pro-rata after the
payment of the taxes and assessment upon the immovable property.
Also, it is to be noted that unlike the unpaid price of real property sold, mortgage credits,
in order to be given preference, should be recorded in the Registry of Property. The law,
however, does not make any distinction between registered and unregistered vendors lien,
which only goes to show that any lien of that kind enjoys the preferred credit status.
JL BERNARDO CONSTRUCTION vs. CA
324 SCRA 24
Parties:
JL Bernardo Construction creditor
Municipality of San Antonio thru Salonga respondent/ debtor
Facts:

The municipal government of San Antonio, Nueva Ecija approved the construction of the
San Antonio Public Market in April 1990. Bernardo Construction, thru petitioner Santiago
Sugay, submitted its bid together with qualified bidders. After evaluating the bid, the contract
was awarded to petitioners. On June 1990, a Constructive Agreement was entered into by the
Municipality of San Antonio thru Salonga and petitioner Bernardo. Under this agreement, the
municipality agreed to assume the expenses for the demolition, clearing and site filling of the
construction site in the amount of P1M and in addition, to provide cash equity of P767, 305.99
to be remitted directly to petitioner.
The cash equity and the advance expenses of Bernardo were not paid despite demand.
On July 1991, petitioners filed a complaint for breach of contract, specific performance and
collection of a sum of money, with prayer for preliminary attachment and enforcement of
contractors lien against the Municipality and Salonga.
Contention:
JL Bernardo Construction:
Article 2241 and 2242 of the NCC enumerates certain credits which enjoy
preferences with respect to specific personal/ real property of the debtor.
Specifically, the contractors lien claimed by petitioner is granted under Art. 2242
(3) which provides that the claims of contactors engaged in the construction,
reconstruction or repair of buildings/ other works shall be preferred with respect
to the specific building or other immovable property constructed.
Ruling:
Article 2242 only finds application when there is concurrence of credits, i.e., when the
same specific property of the debtor is subjected to the claims of several creditors and the value
of said property of the debtor is insufficient to pay in full all the creditors.
In such a situation, the question of preference will arise, that is, there will be a need to
determine which of the creditors will be paid ahead of the others. Fundamental tenets of due
process will dictate that this statutory lien should then only be enforced in the context of some
kind of a proceeding where the claim of all the preferred creditors may be bindingly
adjudicated, such as insolvency proceedings.
The claim filed by petitioners in the trial court does not partake of the nature of an
insolvency proceeding. It is basically for specific performance and damages.

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PSB v. HON. LANTIN AND CANDIDO RAMOS


124 SCRA 476
Parties:
Sps. Filomeno and Socorro Tabligan debtor/ mortgagor
Ramos contractor/creditor
Philippine Savings Bank (PSB) creditor/ mortgagee
Facts:

A duplex apartment house was built for the Sps. Filomeno and Socorro Tabligan by
Ramos. The spouses paid Ramos the sum of P7, 139.00 only, thus, Ramos made use of his
money to finish the construction of the apartment. Meanwhile, Sps. Tabligan obtained a loan
from Philippine Savings Bank (PSB) in the amount of P35, 000.00 for the purpose of
completing the construction. The spouses executed three promissory notes and three deeds of
REM over the duplex apartment. In Dec. 1996, PSB registered the deed of REM. The
subsequent mortgages were also registered in the Registry of Deeds of Manila. At the time of the
registration of these mortgages, the TCT was free from all liens and encumbrances. Spouses
failed to pay, causing PSB to foreclose the mortgages. PSB was also the highest bidder at the
auction sale enabling it to have the certificate of sale registered in its name.
Upon the other hand, Ramos filed an action against the spouses to collect the unpaid
cost of the construction. During its pendency, Ramos obtained a writ of preliminary attachment
over the subject property. On Aug. 26, 1968, CFI OF Manila decided in favor of Ramos. The
spouses did not have property to satisfy the judgment so Ramos sent a letter to the PSB for the
delivery of his pro-rata share in the value of the duplex apartment in accordance with Art. 2242
of the NCC. PSB refused to pay.
Contentions:
Ramos:
He is entitled to his pro-rata share in accordance with Art. 2242 and that the
proceedings the lower court had before can qualify as a general liquidation of the
estate of the spouses Tabligan because the only existing property of said spouses
is the duplex apartment.
PSB:
In order that Art. 2242 will apply, an insolvency proceeding or other liquidation
proceeding of similar import must first be conducted. Also, there could have
been no insolvency proceeding as there were only two known creditors. Thus, the
spouses contractors claim did not acquire the character of a statutory lien equal
to PSBs registered mortgage.
Ruling:
Concurrence of credits occurs when the same specific property of the debtor or all of his
property is subjected to the claims of several creditors. It becomes material when said assets are
insufficient for some creditors if necessity will not be paid/ some creditors will not obtain the
full satisfaction of their claims. In this respect, the question of preference arises.
Under the system established by Art. 2242 and 2249, only taxes and assessments upon
an immovable property enjoy absolute preference. All the remaining specified classes of
preferred creditors under Art. 2242 enjoy no priority among themselves. Their credits shall be
satisfied pro-rata. Under the Barretto case, the full application of the foregoing articles
demands that there must first be some proceeding where the claims of all the preferred creditors
may be bindingly adjudicated, such as insolvency.

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Article 2243
The claims or credits enumerated in the two preceding articles
shall be considered as mortgages or pledges of real or personal
property or liens within the purview of legal provisions governing
insolvency. Taxes mentioned in No. 1, Article 2241, and No. 1, Article
2242, shall first be satisfied.
COMMENT:
1.

Provisions on pledge and mortgage, applicable


Nature of claims in 2241 and 2242 are considered as mortgages or pledges of real
or personal property; thus, provisions on pledge and mortgage are applicable.
In case of insolvency, such claims shall be considered as liens within the purview
of legal insolvency.

2.

Preference in Arts. 2241 and 2242


The preference in 2241 and 2242 are to be enforced in accordance with the
Insolvency Law, taxes will still be paid first.

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Article 2244
With reference to other property, real and personal of the debtor,
the following claims or credits shall be preferred in the order named:
(1) Proper funeral expenses for the debtor, or children under his
or her parental authority who have no property of their own,
when approved by the court;
(2) Credits for services rendered the insolvent by employees,
laborers, or household helpers for one year preceding the
commencement of the proceedings in insolvency;
(3) Expenses during the last illness of the debtor or of his or her
spouse and children under his or her parental authority, if
they have no property of their own;
(4) Compensation due the laborers or their dependents under
the law providing for indemnity for damages in cases of labor
accident, or illness resulting for the nature of the
employment;
(5)Credits and advancements made to the debtor for support of
himself or herself, and family, during the last year preceding
the insolvency;
(6) Support during the insolvency proceedings, and for three
months thereafter;
(7) Fines and civil indemnification arising from a criminal
offense;
(8) Legal expenses, and expenses incurred in the administration
of the insolvents estate for the common interest of the
creditors, when properly authorized and approved by the
court;
(9) Taxes and assessments due the national government, other
than those mentioned in Articles 2241, No. 1, and 2242, No.
1;
(10) Taxes and assessments due any province, other than those
referred in Articles 2241, No. 1, and 2242, No. 1;
(11)Taxes and assessments due any city or municipality, other
than those indicated in Articles 2241, No. 1, and 2242, No. 1;
(12) Damages for death or personal injuries caused by a quasidelict;
(13) Gifts due to public and private institutions or charity or
beneficence;
(14) Credits which, without special privilege, appear in (a) a
public instrument; or (b) in a final judgment, if they have
been the subject of litigation.
These credits shall have
preference among themselves in the order of priority of the
dates of the instruments and of the judgments, respectively.
COMMENT:
1.

Article 2244
This article enumerates the preferred credits and gives their order of preference
in the order named.

2.

Taxes and Assessments

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Secured Transaction Law

Taxes and assessments are mentioned as No. 9, 10, and 11 in preference, if


property is specific; duties and taxes on said property are placed as No. 1 in order of
preference.
3.

Difference with Arts. 2241 and 2242


In contrast to Arts. 2241 and 2242, Art. 2244 does not create liens on
determinate property; Art. 2244 only creates rights in favor of certain creditors to
have the cash and other assets of the insolvent applied in a certain sequence or order of
priority.

4.

Specially preferred credits

5.

Specially preferred credits, because they constitute liens, take precedence over
ordinary preferred credits insofar as the attached property is concerned
Modification of Article 2244
Art. 110 of the Labor Code modified Art.2244 of the Civil Code: it is an
ordinary preferred credit (when not falling within 2241(6) and 2242(3)) that became
first in priority, and the one-year limitation in 2244(2) is abolished.
From the provisions of the Labor Code, a declaration of bankruptcy or a
judicial liquidation must be enforced; if not, then the worker is put above the State.

6.

Rationale why judicial proceeding is to be held first before the concurrence


and preference of credits
The reason behind the necessity for a judicial proceeding before the concurrence
and preference of credits may be applied is to bind interested parties; there must be
an authoritative, fair, and binding adjudication

7.

Credits evidenced by a public instrument and by final judgment


Credits evidenced by a public instrument and by final judgment are placed in the
same order of preference; preference among themselves is determined by considering
the priority of the dates of the instruments/final judgments.

8.

Notarized over non-notarized


Among notarized credits, earlier date prevails.
Note: The statutory preferences listed in Title XIX (Concurrence and Preference
of Credits) of the Civil Code do not apply to the obligations of State since the
government cannot voluntarily subject itself to or be compelled to undergo insolvency or
liquidation proceedings.
REPUBLIC vs. PERALTA
150 SCRA 37

Parties:
Creditors:
USTC Association of Employees and Workers Union
Federation dela Industria Tabaquera y Otros Trabajadores de Filipinas (FOITAF)
Bureau of Internal Revenue (BIR)
Bureau of Customs

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Quality Tobacco Corp. debtor/ employer


Facts:

In the involuntary insolvency proceedings commenced in May 1977 by private


respondent Quality Tobacco Corp., the following claims of creditors were filed:
1. P2, 806, 729.92 by the USTC Association of Employees and Workers Union
PTGWO (USTC), as separation pay for their members. This amount plus attorneys
fees of P280, 672.99.
2. P53, 805.05 by the Federation dela Industria Tabaquera y Otros Trabajadores de
Filipinas (FOITAF) as separation pay for their members.
3. P1, 085, 182.22 by the BIR for tobacco inspection fees.
4. P276, 161 by the Bureau of Customs for customs duties and taxes.
The trial court ruled that the claims of USTC and FOITAF were to be preferred over
the claims of BIR and Bureau of Customs.
This decision is relied upon Art. 110 of the Labor Code on worker preference in case of
bankruptcy.
Contention:
Solicitor General:
Article 110 of the Labor Code is not applicable as it speaks of wages, a term which
does not include separation pay.
Ruling:
Wages under Art. 110 of the Labor Code may be regarded as embracing within its scope
severance/termination/separation pay. Article 110 does not purport to create lien in favor of
workers/ employees for unpaid wages either upon all of the properties or upon any particular
property covered by their employer.
Claims for unpaid wages do not therefore fall within the category of special preferred
claims established under Art. 2241 and 2242 of the NCC, except to the extent that such claims
for unpaid wages are already covered by Art. 2241 (6) claims for laborers, wages, in the goods
manufactured or for the work done; or by Art. 2242 (3) claims of laborers and other workers in
the construction, reconstruction/ repair of buildings, canals, and other works upon said
buildings, canals, or other works. To the extent that claims for unpaid wages fall outside the
scope of Art. 2241 (6) and Art. 2242 (3), they would come into the ambit of the category of
ordinary preferred credits under Art. 2244.
PNB vs. CRUZ
180 SCRA 206
Parties:
Aggregate Mining Exponents (AMEX) employer/obligor/ lessor
T.M. San Andres Devt. Corp. lessee
PNB mortgagee/ creditor
Facts:

Sometime in 1980, Aggregate Mining Exponents (AMEX) laid off about 70% of its
employees because it was experiencing business reverses. The retained employees constituting
30% of the work force however, were not paid their wages. This non-payment of salaries went
on until 1982 when AMEX completely ceased operations and entered into an operating
agreement with T.M. San Andres Devt. Corp. whereby the latter would be leasing the equipment
and machineries of AMEX.
The unpaid employees sought redress form the Labor Arbiter who rendered a decision
finding that the claims of these employees for payment of unpaid wages and separation pay is
valid and meritorious, ordering AMEX to pay the employees. AMEX and T.M. San Andres
Devt. Corp. and PNB agreed that, should the principal obligor be unable to satisfy these awards,
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the same can be satisfied from the proceeds/ fruits of its machineries and equipment being
operated by T.M. San Andres Devt. Corp. either by operating agreement with employer AMEX
or thru lease of the same from PNB.
Contention:
PNB as mortgagee/ creditor interposed an appeal based on the allegation that the
workers lien covers unpaid wages only and not the termination/ severance pay. It questioned
whether or not the workers lien takes precedence over other claims considering that the
Supreme Court has ruled otherwise in Republic v. Peralta, wherein tax claims of the State
prevails against workers lien.
Ruling:
Article 110 of the Labor Code provides for worker preference in case of bankruptcy. In
the event of bankruptcy or liquidation of an employees business, his workers shall enjoy first
preference as regards their unpaid wages and other monetary claims. Such unpaid wages and
monetary claims shall be paid in full before claims of the Government and other creditors may
be paid. This indicates that such preference shall prevail despite the order set forth in Arts.
2241-2245 of NCC. No exceptions were provided under the said article, henceforth, none shall
be considered. The Labor Code was signed into law decades after the NCC took effect.
DEVELOPMENT BANK OF THE PHILIPPINES vs. NLRC
242 SCRA 594
Parties:
Leonor Ang TPWIIs employee/cpmplainant
Tropical Philippines Wood Industries, Inc. (TPWII) mortgagor
Development Bank Of The Philippines (DBP) mortgagee
Facts:

Leonor Ang started employment as Executive Secretary with Tropical Philippines Wood
Industries, Inc. (TPWII), a corporation engaged in the manufacture and sale of veneer, plywood
and sawdust panel boards. In 1982, she was promoted to the position of Personal Officer. In
September 1983, DBP, as mortgagee of TPWII, foreclosed TPWIIs properties, but continued its
business operations. In 1986 DBP took possession of the foreclosed properties. As a
consequence, Ang was verbally terminated form the service.
In 1987, aggrieved by the termination of her employment, Ang filed with the Labor
Arbiter a complaint for separation pay, 13th month pay, vacation and sick leave pay, salaries and
allowances against TPWII. The Labor Arbiter found TPWII primarily liable.
The Labor Arbiter rationalized that DBP was also subsidiarily liable in the event the
company failed to satisfy the judgment.
Contentions:
DBP:
the decision of the NLRC runs counter to the consistent rulings of the Supreme
Court emphasizing that the application of Article 110 of the Labor Code is
contingent upon the institution of bankruptcy/ judicial liquidation proceedings
against the employer, and DBP further anchors its claim on a mortgage credit.
NLRC:
That the right of an employee to be paid benefits due him from the property of his
employer is superior to the right of TPWIIs mortgage.
Ang:
Under Art. 110 of the Labor Code, complainant enjoys a preference of credit over
the properties of TPWII being held in possession of DBP.
Ruling:
DBPs contention is granted. A declaration of bankruptcy or a judicial liquidation must
be present before the workers preference may be enforced. Worker preference will find
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Secured Transaction Law

application when, in proceedings such as insolvency, such unpaid wages shall be paid in full
before the claims of the Government and other creditor may be paid. The preferential right of
credit attains significance only after the properties of the debtor have been inventoried and
liquidated, and the claims held by various creditors have been established.
A recorded mortgage credit is a special preference credit under Art. 2242 (5) on
classification of credits. The preference given by Art. 110 of the Labor Code, when not falling
within Art. 2241 (6) and Art. 2242 (3) of the NCC and not attached to any specific property, is an
ordinary preferred credit although its impact is to move it from second priority in the order of
preference established by Art. 2244 of the Civil Code.

Article 2245
Credits of any other kind or class, or by any other right or title
not comprised in the four preceding articles, shall enjoy no preference.

Article 2246
Those credits which enjoy preference with respect to specific
movables, exclude all others to the extent of the value of the personal
property to which the preference refers.

Preference of the Credits over Specific Movables


Example:
Sonia has one car, the taxes on which have not yet been paid. Once, the car fell
into the sea, was salvaged, was repaired, and has now been pledged with a creditor. If
Sonia is insolvent and has not paid for any of the acts done on her car, how will the
following be paid the State, the person who salvaged it, the repairman and the pledgee?
Answer:
All said four credits have preference over the car to the exclusion of all other
creditors.

Article 2247
If there are three or more credits with respect to the same
specific movable property, they shall be satisfied pro rata, after the
payment of duties, taxes and fees due the State or any subdivision
thereof.
Example:
Suppose from the given example on Art.2246, the State will first be paid for taxes
on the car, how will the salvager, the repairman, and the pledgee be paid?
Answer:

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They shall be paid through pro rata sharing (proportional sharing). The salvager,
the repairman, and the pledgee shall all be paid pro rata from the remaining value of the
car. There is no preference as among them; there is only concurrence.

Article 2248
Those credits which enjoy preference in relation to specific real
property or real rights, exclude all others to the extent of the value of
the immovable or real right to which the preference refers.
COMMENT
1.

Concurrence, not Preference


Again, it must be stressed that with the sole exception of the State, the creditors
with respect to the same specific immovable merely concur; there is no preference.

Article 2249
If there are two or more credits with respect to the same specific real
property
or real rights, they shall be satisfied pro rata, after the
payment of the taxes and assessments upon the immovable property
or real right.
COMMENT:
1.

Two or more credits with respect to the same specific immovable


shall be satisfied pro rata (only after the taxes and assessments upon the
immovable has been paid)

2.

Specific properties
If the property is specific, taxes are given first preference.
Again, it must be stressed that with the sole exception of the State, the creditors
with respect to the same specific immovable merely concur; there is no preference.
Example:
X borrowed money from Y to finance the construction of a building, mortgaging
his land and building to be constructed thereon to secure the loan. After the building was
erected, X failed to pay the laborers who worked on the building and some suppliers who
furnished materials thereon. Upon foreclosure of the mortgage, who would have a
preferential right to the proceeds of the sale the laborers, the suppliers, or the
mortgagee? Explain.
Answer:
a.) Regarding the proceeds of the sale of the land; the mortgagee has the
preferential right because the laborers and the suppliers certainly have no lien on the
land.
b.) Regarding the proceeds of the sale of the building; the mortgagee, the
laborers and the suppliers will all share pro rata after the taxes on the building
shall have been paid.
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Article 2250
The excess , if any, after the payment of the credits which enjoy
preference with respect to specific property, real or personal, shall be
added to the free property which the debtor may have, for the payment
of the other credits.

Article 2251
Those credits which do not enjoy any preference with respect to
specific property, and those which enjoy preference, as to the amount
not paid shall be satisfied according to the following rules:
1) In the order established in Article 2244;
2) Common credits referred to in Article 2245 shall be paid pro
rata regardless of dates;
COMMENT
1.

Order of preference in connection with other properties:


a. The order of preference is very important.
b. The order of preference here does not refer to specific real/ personal property. It refers
to other property.
Example:

X, an insolvent, owes P100,000.00 in favor of a funeral parlor; P100,000.00 for the


hospital expenses during the last illness of his late wife; and P100,000.00 in favor of a
pedestrian whom he had hurt while driving his car carelessly and for which he was held
criminally and civilly liable. Unfortunately, he has only P160,000.00 and an automobile, the
purchase price of which he has not yet paid.
Give the order of preference of the various credits involved.
Answer:
a.
b.
c.

With respect to the automobile (specific personal property), the unpaid seller shall be
preferred (art.2241).
With respect to the P160,000.00, we should apply Article 2244. The funeral parlor
comes first, then the hospital, then the pedestrian.

Here, there is no pro rata sharing; there is a preference. Therefore, the funeral parlor will
be given P100,000.00; the hospital only P60,000.00. The hospital cannot recover the deficiency
of P40,000.00 and the pedestrian cannot recover his P100,000.00.
RCBC v. IAC
213 SCRA 830
Parties:

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Secured Transaction Law

BF Homes debtor
RCBC creditor
Facts:

BF Homes filed a Petition for Rehabilitation and for Declaration or Suspension of


Payments with the Securities and Exchange Commission (SEC). One of the creditors listed in its
inventory of creditors and liabilities was RCBC. RCBC requested the Provincial Sheriff of Rizal
to extra judicially foreclose its REM on some properties of BF Homes. On motion of BF Homes,
the SEC issued a TRO for 20 days enjoining RCBC and the sheriff from proceeding with the
public auction. The sale was re-scheduled from Nov. 29, 1984 to Jan. 29, 1985. On Jan. 29,
1985, despite the bond filed by BF Homes for the issuance of a writ of preliminary injunction,
the sheriff proceeded with the public auction. RCBC was the highest bidder.
BF Homes filed in the SEC a consolidated motion to annul the sale and to cite RCBC in
contempt. SEC issued a writ of preliminary injunction. However, despite such issuance, RCBC
filed an action for mandamus to compel the provincial sheriff to execute a certificate of sale of
the properties auctioned.
Contentions:
BF Homes:
RCBC cannot assert payment because of its Petition for Rehabilitation and
Suspension of Payments filed with the SEC, and since the properties involved one
asset of a distressed firm, SEC is fully justified in issuing the corresponding TRO
against the consolidation of title in RCBC, pursuant to Sec. 3, P.D. 902-A as
amended.
RCBC:

It is recognized as a preferred creditor and likewise the highest bidder, hence,


titles of the properties should be consolidated in its favor.

Ruling:
While it is recognized that RCBC is a preferred creditor and likewise the highest bidder
at the auction sale, the Supreme Court have, however, stated that whenever a distressed
corporation asks the SEC for rehabilitation and suspension of payments, preferred creditors
may no longer assert such preference but as earlier stated, stand on equal footing with other
creditors. Foreclosure shall be disallowed so as not to prejudice other creditors, or cause
discrimination among them.
If foreclosure is undertaken despite that a petition for
rehabilitation is filed, the certificate of sale shall not be delivered pending rehabilitation.
Likewise, if this has also been done, no transfer of title shall be effected also within the period of
rehabilitation. The rationale behind P.D. 902-A is to effect a feasible and viable rehabilitation.
This cannot be adhered to if one of the creditors is preferred over the others.

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APPENDIX A
WAREHOUSE RECIPT LAW
I THE ISSUE OF WAREHOUSE RECEIPTS
SECTION 1. Persons who may issue receipts. Warehouse receipts may be issued by any
warehouseman.
SECTION 2. Form of receipts; essential terms. Warehouse receipts need not be in any particular form but every
such receipt must embody within its written or printed terms:
(a) The location of the warehouse where the goods are stored,
(b) The date of the issue of the receipt,
(c) The consecutive number of the receipt,
(d) A statement whether the goods received will be delivered to the bearer, to a specified person or to a specified
person or his order,
(e) The rate of storage charges,
(f) A description of the goods or of the packages containing them,
(g) The signature of the warehouseman which may be made by his authorized agent,
(h) If the receipt is issued for goods of which the warehouseman is owner, either solely or
jointly or in common with others, the fact of such ownership, and
(i) A statement of the amount of advances made and of liabilities incurred for which the warehouseman claims a lien.
If the precise amount of such advances made or of such liabilities incurred is, at the time of the issue of, unknown to
the warehouseman or to his agent who issues it, a statement of the fact that advances have been made or liabilities
incurred and the purpose thereof is sufficient.
A warehouseman shall be liable to any person injured thereby for all damages caused by the
omission from a negotiable receipt of any of the terms herein required.
SECTION 3. Form of receipts. What terms may be inserted. A warehouseman may insert in a receipt issued by
him any other terms and conditions provided that such terms and conditions shall not:
(a) Be contrary to the provisions of this Act.
(b) In any wise impair his obligation to exercise that degree of care in the safe-keeping of the goods entrusted to him
which is reasonably careful man would exercise in regard to similar goods of his own.
SECTION 4. Definition of non-negotiable receipt. A receipt in which it is stated that the goods received will be
delivered to the depositor or to any other specified person, is a non- negotiable receipt.
SECTION 5. Definition of negotiable receipt. A receipt in which it is stated that the goods
received will be delivered to the bearer or to the order of any person named in such receipt is a negotiable receipt.
No provision shall be inserted in a negotiable receipt that it is non-negotiable. Such provision,
if inserted shall be void.
SECTION 6. Duplicate receipts must be so marked. When more than one negotiable receipt is issued for the same
goods, the word "duplicate" shall be plainly placed upon the face of every such receipt, except the first one issued. A
warehouseman shall be liable for all damages caused by his failure so to do to any one who purchased the subsequent
receipt for value supposing it to be an original, even though the purchase be after the delivery of the goods by the
warehouseman to the holder of the original receipt.
SECTION 7. Failure to mark "non-negotiable." A non-negotiable receipt shall have plainly placed upon its face by
the warehouseman issuing it "non-negotiable," or "not negotiable." In case of the warehouseman's failure so to do, a
holder of the receipt who purchased it for value supposing it to be negotiable, may, at his option, treat such receipt as
imposing upon the warehouseman the same liabilities he would have incurred had the receipt been negotiable.
This section shall not apply, however, to letters, memoranda, or written acknowledgment of an
informal character.
II OBLIGATIONS AND RIGHTS OF WAREHOUSEMEN UPON THEIR RECEIPTS
SECTION 8. Obligation of warehousemen to deliver. A warehouseman, in the absence of some lawful excuse
provided by this Act, is bound to deliver the goods upon a demand made either by the holder of a receipt for the goods
or by the depositor; if such demand is accompanied with:
(a) An offer to satisfy the warehouseman's lien;
(b) An offer to surrender the receipt, if negotiable, with such indorsements as would be necessary for the negotiation
of the receipt; and
(c) A readiness and willingness to sign, when the goods are delivered, an acknowledgment that they have been
delivered, if such signature is requested by the warehouseman.
In case the warehouseman refuses or fails to deliver the goods in compliance with a demand by the holder or
depositor so accompanied, the burden shall be upon the warehouseman to establish the existence of a lawful excuse
for such refusal.

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SECTION 9. Justification of warehouseman in delivering. A warehouseman is justified in delivering the goods,
subject to the provisions of the three following sections, to one who is:
(a) The person lawfully entitled to the possession of the goods, or his agent;
(b) A person who is either himself entitled to delivery by the terms of a non-negotiable receipt issued for the goods, or
who has written authority from the person so entitled either indorsed upon the receipt or written upon another paper;
or
(c) A person in possession of a negotiable receipt by the terms of which the goods are deliverable to him or order, or to
bearer, or which has been indorsed to him or in blank by the person to whom delivery was promised by the terms of
the receipt or by his mediate or immediate indorser.
SECTION 10. Warehouseman's liability for misdelivery. Where a warehouseman delivers the goods to one who is
not in fact lawfully entitled to the possession of them, the warehouseman shall be liable as for conversion to all having
a right of property or possession in the goods if he delivered the goods otherwise than as authorized by subdivisions
(b) and (c) of the preceding section, and though he delivered the goods as authorized by said subdivisions, he shall be
so liable, if prior to such delivery he had either:
(a) Been requested, by or on behalf of the person lawfully entitled to a right of property or possession in the goods, not
to make such deliver; or
(b) Had information that the delivery about to be made was to one not lawfully entitled to the possession of the goods.
SECTION 11. Negotiable receipt must be cancelled when goods delivered. Except as provided in section thirty-six,
where a warehouseman delivers goods for which he had issued a negotiable receipt, the negotiation of which would
transfer the right to the possession of the goods, and fails to take up and cancel the receipt, he shall be liable to any
one who purchases for value in good faith such receipt, for failure to deliver the goods to him, whether such purchaser
acquired title to the receipt before or after the delivery of the goods by the warehouseman.
SECTION 12. Negotiable receipts must be cancelled or marked when part of goods delivered. Except as provided in
section thirty-six, where a warehouseman delivers part of the goods for which he had issued a negotiable receipt and
fails either to take up and cancel such receipt or to place plainly upon it a statement of what goods or packages have
been delivered, he shall be liable to any one who purchases for value in good faith such receipt, for failure to deliver all
the goods specified in the receipt, whether such purchaser acquired title to the receipt before or after the delivery of
any portion of the goods by the warehouseman.
SECTION 13. Altered receipts. The alteration of a receipt shall not excuse the warehouseman who issued it from
any liability if such alteration was:
(a) Immaterial,
(b) Authorized, or
(c) Made without fraudulent intent.
If the alteration was authorized, the warehouseman shall be liable according to the terms of the receipt as altered. If
the alteration was unauthorized but made without fraudulent intent, the warehouseman shall be liable according to
the terms of the receipt as they were before alteration.
Material and fraudulent alteration of a receipt shall not excuse the warehouseman who issued it from liability to
deliver according to the terms of the receipt as originally issued, the goods for which it was issued but shall excuse
him from any other liability to the person who made the alteration and to any person who took with notice of the
alteration. Any purchaser of the receipt for value without notice of the alteration shall acquire the same rights against
the warehouseman which such purchaser would have acquired if the receipt had not been altered at the time of
purchase.
SECTION 14. Lost or destroyed receipts. Where a negotiable receipt has been lost or destroyed, a court of
competent jurisdiction may order the delivery of the goods upon satisfactory proof of such loss or destruction and
upon the giving of a bond with sufficient sureties to be approved by the court to protect the warehouseman from any
liability or expense, which he or any person injured by such delivery may incur by reason of the original receipt
remaining outstanding. The court may also in its discretion order the payment of the warehouseman's reasonable
costs and counsel fees.
The delivery of the goods under an order of the court as provided in this section, shall not relieve the warehouseman
from liability to a person to whom the negotiable receipt has been or shall be negotiated for value without notice of
the proceedings or of the delivery of the goods.
SECTION 15. Effect of duplicate receipts. A receipt upon the face of which the word "duplicate" is plainly placed is a
representation and warranty by the warehouseman that such receipt is an accurate copy of an original receipt
properly issued and uncanceled at the date of the issue of the duplicate, but shall impose upon him no other liability.
SECTION 16. Warehouseman cannot set up title in himself . No title or right to the possession of the goods, on the
part of the warehouseman, unless such title or right is derived directly or indirectly from a transfer made by the
depositor at the time of or subsequent to the deposit for storage, or from the warehouseman's lien, shall excuse the
warehouseman from liability for refusing to deliver the goods according to the terms of the receipt.
SECTION 17. Interpleader of adverse claimants. If more than one person claims the title or possession of the goods,
the warehouseman may, either as a defense to an action brought against him for non-delivery of the goods or as an
original suit, whichever is appropriate, require all known claimants to interplead.

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SECTION 18. Warehouseman has reasonable time to determine validity of claims. If someone other than the
depositor or person claiming under him has a claim to the title or possession of goods, and the warehouseman has
information of such claim, the warehouseman shall be excused from liability for refusing to deliver the goods, either
to the depositor or person claiming under him or to the adverse claimant until the warehouseman has had a
reasonable time to ascertain the validity of the adverse claim or to bring legal proceedings to compel claimants to
interplead.
SECTION 19. Adverse title is no defense except as above provided. Except as provided in the two preceding sections
and in sections nine and thirty-six, no right or title of a third person shall be a defense to an action brought by the
depositor or person claiming under him against the warehouseman for failure to deliver the goods according to the
terms of the receipt.
SECTION 20. Liability for non-existence or misdescription of goods. A warehouseman shall be liable to the holder
of a receipt for damages caused by the non-existence of the goods or by the failure of the goods to correspond with the
description thereof in the receipt at the time of its issue. If, however, the goods are described in a receipt merely by a
statement of marks or labels upon them or upon packages containing them or by a statement that the goods are said
to be goods of a certain kind or that the packages containing the goods are said to contain goods of a certain kind or
by words of like purport, such statements, if true, shall not make liable the warehouseman issuing the receipt,
although the goods are not of the kind which the marks or labels upon them indicate or of the kind they were said to
be by the depositor.
SECTION 21. Liability for care of goods. A warehouseman shall be liable for any loss or injury to the goods caused
by his failure to exercise such care in regard to them as reasonably careful owner of similar goods would exercise, but
he shall not be liable, in the absence of an agreement to the contrary, for any loss or injury to the goods which could
not have been avoided by the exercise of such care.
SECTION 22. Goods must be kept separate. Except as provided in the following section, a warehouseman shall
keep the goods so far separate from goods of other depositors and from other goods of the same depositor for which a
separate receipt has been issued, as to permit at all times the identification and redelivery of the goods deposited.
SECTION 23. Fungible goods may be commingled if warehouseman authorized. If authorized by agreement or by
custom, a warehouseman may mingle fungible goods with other goods of the same kind and grade. In such case, the
various depositors of the mingled goods shall own the entire mass in common and each depositor shall be entitled to
such portion thereof as the amount deposited by him bears to the whole.
SECTION 24. Liability of warehouseman to depositors of commingled goods. The warehouseman shall be severally
liable to each depositor for the care and redelivery of his share of such mass to the same extent and under the same
circumstances as if the goods had been kept separate.
SECTION 25. Attachment or levy upon goods for which a negotiable receipt has been issued. If goods are delivered
to a warehouseman by the owner or by a person whose act in conveying the title to them to a purchaser in good faith
for value would bind the owner, and a negotiable receipt is issued for them, they can not thereafter, while in the
possession of the warehouseman, be attached by garnishment or otherwise, or be levied upon under an execution
unless the receipt be first surrendered to the warehouseman or its negotiation enjoined. The warehouseman shall in
no case be compelled to deliver up the actual possession of the goods until the receipt is surrendered to him or
impounded by the court.
SECTION 26. Creditor's remedies to reach negotiable receipts. A creditor whose debtor is the owner of a negotiable
receipt shall be entitled to such aid from courts of appropriate jurisdiction, by injunction and otherwise, in attaching
such receipt or in satisfying the claim by means thereof as is allowed at law or in equity in these islands in regard to
property which can not readily be attached or levied upon by ordinary legal process.
SECTION 27. What claims are included in the warehouseman's lien. Subject to the provisions of section thirty, a
warehouseman shall have a lien on goods deposited or on the proceeds thereof in his hands, for all lawful charges for
storage and preservation of the goods; also for all lawful claims for money advanced, interest, insurance,
transportation, labor, weighing, coopering and other charges and expenses in relation to such goods, also for all
reasonable charges and expenses for notice, and advertisements of sale, and for sale of the goods where default had
been made in satisfying the warehouseman's lien.
SECTION 28. Against what property the lien may be enforced. Subject to the provisions of section thirty, a
warehouseman's lien may be enforced:
(a) Against all goods, whenever deposited, belonging to the person who is liable as debtor for the claims in regard to
which the lien is asserted, and
(b) Against all goods belonging to others which have been deposited at any time by the person who is liable as debtor
for the claims in regard to which the lien is asserted if such person had been so entrusted with the possession of goods
that a pledge of the same by him at the time of the deposit to one who took the goods in good faith for value would
have been valid.
SECTION 29. How the lien may be lost. A warehouseman loses his lien upon goods:
(a) By surrendering possession thereof, or

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(b) By refusing to deliver the goods when a demand is made with which he is bound to comply under the provisions of
this Act.
SECTION 30. Negotiable receipt must state charges for which the lien is claimed. If a negotiable receipt is issued
for goods, the warehouseman shall have no lien thereon except for charges for storage of goods subsequent to the date
of the receipt unless the receipt expressly enumerated other charges for which a lien is claimed. In such case, there
shall be a lien for the charges enumerated so far as they are within the terms of section twenty-seven although the
amount of the charges so enumerated is not stated in the receipt.
SECTION 31. Warehouseman need not deliver until lien is satisfied. A warehouseman having a lien valid against
the person demanding the goods may refuse to deliver the goods to him until the lien is satisfied.
SECTION 32. Warehouseman's lien does not preclude other remedies. Whether a warehouseman has or has not a
lien upon the goods, he is entitled to all remedies allowed by law to a creditor against a debtor for the collection from
the depositor of all charges and advances which the depositor has expressly or impliedly contracted with the
warehouseman to pay.
SECTION 33. Satisfaction of lien by sale. A warehouseman's lien for a claim which has become due may be satisfied
as follows:
(a) An itemized statement of the warehouseman's claim, showing the sum due at the time of the notice and the date or
dates when it becomes due,
(b) A brief description of the goods against which the lien exists,
(c) A demand that the amount of the claim as stated in the notice of such further claim as shall accrue, shall be paid
on or before a day mentioned, not less than ten days from the delivery of the notice if it is personally delivered, or
from the time when the notice shall reach its destination, according to the due course of post, if the notice is sent by
mail,
(d) A statement that unless the claim is paid within the time specified, the goods will be advertised for sale and sold by
auction at a specified time and place.
In accordance with the terms of a notice so given, a sale of the goods by auction may be had to satisfy any valid claim
of the warehouseman for which he has a lien on the goods. The sale shall be had in the place where the lien was
acquired, or, if such place is manifestly unsuitable for the purpose of the claim specified in the notice to the depositor
has elapsed, and advertisement of the sale, describing the goods to be sold, and stating the name of the owner or
person on whose account the goods are held, and the time and place of the sale, shall be published once a week for
two consecutive weeks in a newspaper published in the place where such sale is to be held. The sale shall not be held
less than fifteen days from the time of the first publication. If there is no newspaper published in such place, the
advertisement shall be posted at least ten days before such sale in not less than six conspicuous places therein.
From the proceeds of such sale, the warehouseman shall satisfy his lien including the reasonable charges of notice,
advertisement and sale. The balance, if any, of such proceeds shall be held by the warehouseman and delivered on
demand to the person to whom he would have been bound to deliver or justified in delivering goods.
At any time before the goods are so sold, any person claiming a right of property or possession therein may pay the
warehouseman the amount necessary to satisfy his lien and to pay the reasonable expenses and liabilities incurred in
serving notices and advertising and preparing for the sale up to the time of such payment. The warehouseman shall
deliver the goods to the person making payment if he is a person entitled, under the provision of this Act, to the
possession of the goods on payment of charges thereon. Otherwise, the warehouseman shall retain the possession of
the goods according to the terms of the original contract of deposit.
SECTION 34. Perishable and hazardous goods. If goods are of a perishable nature, or by keeping will deteriorate
greatly in value, or, by their order, leakage, inflammability, or explosive nature, will be liable to injure other property ,
the warehouseman may give such notice to the owner or to the person in whose names the goods are stored, as is
reasonable and possible under the circumstances, to satisfy the lien upon such goods and to remove them from the
warehouse and in the event of the failure of such person to satisfy the lien and to receive the goods within the time so
specified, the warehouseman may sell the goods at public or private sale without advertising. If the warehouseman,
after a reasonable effort, is unable to sell such goods, he may dispose of them in any lawful manner and shall incur no
liability by reason thereof.
The proceeds of any sale made under the terms of this section shall be disposed of in the same way as the proceeds of
sales made under the terms of the preceding section.
SECTION 35. Other methods of enforcing lien. The remedy for enforcing a lien herein provided does not preclude
any other remedies allowed by law for the enforcement of a lien against personal property nor bar the right to recover
so much of the warehouseman's claim as shall not be paid by the proceeds of the sale of the property.
SECTION 36. Effect of sale. After goods have been lawfully sold to satisfy a warehouseman's lien, or have been
lawfully sold or disposed of because of their perishable or hazardous nature, the warehouseman shall not thereafter
be liable for failure to deliver the goods to the depositor or owner of the goods or to a holder of the receipt given for
the goods when they were deposited, even if such receipt be negotiable.
III NEGOTIATION AND TRANSFER OF RECEIPTS
SECTION 37. Negotiation of negotiable receipt of delivery. A negotiable receipt may be negotiated by delivery:
(a) Where, by terms of the receipt, the warehouseman undertakes to deliver the goods to the bearer, or

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(b) Where, by the terms of the receipt, the warehouseman undertakes to deliver the goods to the order of a specified
person, and such person or a subsequent indorsee of the receipt has indorsed it in blank or to bearer.
Where, by the terms of a negotiable receipt, the goods are deliverable to bearer or where a negotiable receipt has been
indorsed in blank or to bearer, any holder may indorse the same to himself or to any other specified person, and, in
such case, the receipt shall thereafter be negotiated only by the indorsement of such indorsee.
SECTION 38. Negotiation of negotiable receipt by indorsement. A negotiable receipt may be negotiated by the
indorsement of the person to whose order the goods are, by the terms of the receipt, deliverable. Such indorsement
may be in blank, to bearer or to a specified person. If indorsed to a specified person, it may be again negotiated by the
indorsement of such person in blank, to bearer or to another specified person. Subsequent negotiation may be made
in like manner.
SECTION 39. Transfer of receipt. A receipt which is not in such form that it can be negotiated by delivery may be
transferred by the holder by delivery to a purchaser or done.
A non-negotiable receipt can not be negotiated, and the indorsement of such a receipt gives the transferee no
additional right.
SECTION 40. Who may negotiate a receipt. A negotiable receipt may be negotiated:
(a) By the owner thereof, or
(b) By any person to whom the possession or custody of the receipt has been entrusted by the owner, if, by the terms
of the receipt, the warehouseman undertakes to deliver the goods to the order of the person to whom the possession
or custody of the receipt has been entrusted, or if, at the time of such entrusting, the receipt is in such form that it
may be negotiated by delivery.
SECTION 41. Rights of person to whom a receipt has been negotiated. A person to whom a
negotiable receipt has been duly negotiated acquires thereby:
(a) Such title to the goods as the person negotiating the receipt to him had or had ability to convey to a purchaser in
good faith for value, and also such title to the goods as the depositor or person to whose order the goods were to be
delivered by the terms of the receipt had or had ability to convey to a purchaser in good faith for value, and
(b) The direct obligation of the warehouseman to hold possession of the goods for him according to the terms of the
receipt as fully as if the warehouseman and contracted directly with him.
SECTION 42. Rights of person to whom receipt has been transferred. A person to whom a receipt has been
transferred but not negotiated acquires thereby, as against the transferor, the title of the goods subject to the terms of
any agreement with the transferor.
If the receipt is non-negotiable, such person also acquires the right to notify the warehouseman of the transfer to him
of such receipt and thereby to acquire the direct obligation of the warehouseman to hold possession of the goods for
him according to the terms of the receipt.
Prior to the notification of the warehouseman by the transferor or transferee of a non- negotiable receipt, the title of
the transferee to the goods and the right to acquire the obligation of the warehouseman may be defeated by the levy of
an attachment or execution upon the goods by a creditor of the transferor or by a notification to the warehouseman by
the transferor or a subsequent purchaser from the transferor of a subsequent sale of the goods by the transferor.
SECTION 43. Transfer of negotiable receipt without indorsement. Where a negotiable receipt is transferred for
value by delivery and the indorsement of the transferor is essential for negotiation, the transferee acquires a right
against the transferor to compel him to indorse the receipt unless a contrary intention appears. The negotiation shall
take effect as of the time when the indorsement is actually made.
SECTION 44. Warranties of a sale of receipt. A person who, for value, negotiates or transfers a receipt by
indorsement or delivery, including one who assigns for value a claim secured by a receipt, unless a contrary intention
appears, warrants:
(a) That the receipt is genuine,
(b) That he has a legal right to negotiate or transfer it,
(c) That he has knowledge of no fact which would impair the validity or worth of the receipt,
and
(d) That he has a right to transfer the title to the goods and that the goods are merchantable or fit for a particular
purpose whenever such warranties would have been implied, if the contract of the parties had been to transfer
without a receipt of the goods represented thereby.
SECTION 45. Indorser not a guarantor. The indorsement of a receipt shall not make the indorser liable for any
failure on the part of the warehouseman or previous indorsers of the receipt to fulfill their respective obligations.
SECTION 46. No warranty implied from accepting payment of a debt. A mortgagee, pledgee, or holder for security
of a receipt who, in good faith, demands or receives payment of the debt for which such receipt is security, whether
from a party to a draft drawn for such debt or from any other person, shall not, by so doing, be deemed to represent or
to warrant the genuineness of such receipt or the quantity or quality of the goods therein described.
SECTION 47. When negotiation not impaired by fraud, mistake or duress. The validity of the negotiation of a
receipt is not impaired by the fact that such negotiation was a breach of duty on the part of the person making the
negotiation or by the fact that the owner of the receipt was induced by fraud, mistake or duress or to entrust the

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possession or custody of the receipt to such person, if the person to whom the receipt was negotiated or a person to
whom the receipt was subsequently negotiated paid value therefore, without notice of the breach of duty, or fraud,
mistake or duress.
SECTION 48. Subsequent negotiation. Where a person having sold, mortgaged, or pledged goods which are in
warehouse and for which a negotiable receipt has been issued, or having sold, mortgaged, or pledged the negotiable
receipt representing such goods, continues in possession of the negotiable receipt, the subsequent negotiation thereof
by the person under any sale or other disposition thereof to any person receiving the same in good faith, for value and
without notice of the previous sale, mortgage or pledge, shall have the same effect as if the first purchaser of the goods
or receipt had expressly authorized the subsequent negotiation.
SECTION 49. Negotiation defeats vendor's lien. Where a negotiable receipt has been issued for goods, no seller's
lien or right of stoppage in transitu shall defeat the rights of any purchaser for value in good faith to whom such
receipt has been negotiated, whether such negotiation be prior or subsequent to the notification to the warehouseman
who issued such receipt of the seller's claim to a lien or right of stoppage in transitu. Nor shall the warehouseman be
obliged to deliver or justified in delivering the goods to an unpaid seller unless the receipt is first surrendered for
cancellation.
IV CRIMINAL OFFENSES
SECTION 50. Issue of receipt for goods not received. A warehouseman, or an officer, agent, or servant of a
warehouseman who issues or aids in issuing a receipt knowing that the goods for which such receipt is issued have not
been actually received by such warehouseman, or are not under his actual control at the time of issuing such receipt,
shall be guilty of a crime, and, upon conviction, shall be punished for each offense by imprisonment not exceeding five
years, or by a fine not exceeding ten thousand pesos, or both.
SECTION 51. Issue of receipt containing false statement. A warehouseman, or any officer, agent or servant of a
warehouseman who fraudulently issues or aids in fraudulently issuing a receipt for goods knowing that it contains any
false statement, shall be guilty of a crime, and upon conviction, shall be punished for each offense by imprisonment
not exceeding one year or by a fine not exceeding two thousand pesos, or by both.
SECTION 52. Issue of duplicate receipt not so marked. A warehouse, or any officer, agent, or servant of a
warehouseman who issues or aids in issuing a duplicate or additional negotiable receipt for goods knowing that a
former negotiable receipt for the same goods or any part of them is outstanding and uncanceled, without plainly
placing upon the face thereof the word "duplicate" except in the case of a lost or destroyed receipt after proceedings
are provided for in section fourteen, shall be guilty of a crime, and, upon conviction, shall be punished for each
offense by imprisonment not exceeding five years, or by a fine not exceeding ten thousand pesos, or by both.
SECTION 53. Issue for warehouseman's goods or receipts which do not state that fact. Where they are deposited
with or held by a warehouseman goods of which he is owner, either solely or jointly or in common with others, such
warehouseman, or any of his officers, agents, or servants who, knowing this ownership, issues or aids in issuing a
negotiable receipt for such goods which does not state such ownership, shall be guilty of a crime, and, upon
conviction, shall be punished for each offense by imprisonment not exceeding one year, or by a fine not exceeding two
thousand pesos, or by both.
SECTION 54. Delivery of goods without obtaining negotiable receipt. A warehouseman, or any officer, agent, or
servant of a warehouseman, who delivers goods out of the possession of such warehouseman, knowing that a
negotiable receipt the negotiation of which would transfer the right to the possession of such goods is outstanding and
uncanceled, without obtaining the possession of such receipt at or before the time of such delivery, shall, except in the
cases provided for in sections fourteen and thirty-six, be found guilty of a crime, and, upon conviction, shall be
punished for each offense by imprisonment not exceeding one year, or by a fine not exceeding two thousand pesos, or
by both.
SECTION 55. Negotiation of receipt for mortgaged goods. Any person who deposits goods to which he has no title,
or upon which there is a lien or mortgage, and who takes for such goods a negotiable receipt which he afterwards
negotiates for value with intent to deceive and without disclosing his want of title or the existence of the lien or
mortgage, shall be guilty of a crime, and, upon conviction, shall be punished for each offense by imprisonment not
exceeding one year, or by a fine not exceeding two thousand pesos, or by both.
V INTERPRETATION
SECTION 56. Case not provided for in Act. Any case not provided for in this Act shall be governed by the provisions
of existing legislation, or in default thereof, by the rule of the law merchant.
SECTION 57. Name of Act. This Act may be cited as the Warehouse Receipts Act.
SECTION 58. Definitions. (a) In this Act, unless the content or subject matter otherwise requires:
"Action" includes counterclaim, set-off, and suits in equity as provided by law in these islands.
"Delivery" means voluntary transfer of possession from one person to another.

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"Fungible goods" means goods of which any unit is, from its nature by mercantile custom, treated as the equivalent of
any other unit.
"Goods" means chattels or merchandise in storage or which has been or is about to be stored.
"Holder" of a receipt means a person who has both actual possession of such receipt and a right of property therein.
"Order" means an order by indorsement on the receipt.
"Owner" does not include mortgagee.
"Person" includes a corporation or partnership or two or more persons having a joint or common interest.
To "purchase" includes to take as mortgagee or as pledgee.
"Receipt" means a warehouse receipt.
"Value" is any consideration sufficient to support a simple contract. An antecedent or pre- existing obligation,
whether for money or not, constitutes value where a receipt is taken either in satisfaction thereof or as security
therefore.
"Warehouseman" means a person lawfully engaged in the business of storing goods for profit.
(b) A thing is done "in good faith" within the meaning of this Act when it is in fact done honestly, whether it be done
negligently or not.
SECTION 59. Application of Act. The provisions of this Act do not apply to receipts made and delivered prior to the
taking effect hereof.
SECTION 60. Repeals. All acts and laws and parts thereof inconsistent with this Act are hereby repealed.
SECTION 61. Time when Act takes effect. This Act shall take effect ninety days after its publication in the Official
Gazette of the Philippines shall have been completed.
Enacted: February 5, 1912

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APPENDIX B
REPUBLIC ACT No. 6552
AN ACT TO PROVIDE PROTECTION TO BUYERS OF REAL ESTATE ON INSTALLMENT PAYMENTS.
(Rep. Act No. 6552)
Section 1. This Act shall be known as the "Realty Installment Buyer Act."
Section 2. It is hereby declared a public policy to protect buyers of real estate on installment payments against
onerous and oppressive conditions.
Section 3. In all transactions or contracts involving the sale or financing of real estate on installment payments,
including residential condominium apartments but excluding industrial lots, commercial buildings and sales to
tenants under Republic Act Numbered Thirty-eight hundred forty-four, as amended by Republic Act Numbered Sixtythree hundred eighty-nine, where the buyer has paid at least two years of installments, the buyer is entitled to the
following rights in case he defaults in the payment of succeeding installments:
(a) To pay, without additional interest, the unpaid installments due within the total grace period earned by
him which is hereby fixed at the rate of one month grace period for every one year of installment payments
made: Provided, That this right shall be exercised by the buyer only once in every five years of the life of the
contract and its extensions, if any.
(b) If the contract is canceled, the seller shall refund to the buyer the cash surrender value of the payments
on the property equivalent to fifty per cent of the total payments made, and, after five years of installments,
an additional five per cent every year but not to exceed ninety per cent of the total payments made: Provided,
That the actual cancellation of the contract shall take place after thirty days from receipt by the buyer of the
notice of cancellation or the demand for rescission of the contract by a notarial act and upon full payment of
the cash surrender value to the buyer.
Down payments, deposits or options on the contract shall be included in the computation of the total number of
installment payments made.
Section 4. In case where less than two years of installments were paid, the seller shall give the buyer a grace period
of not less than sixty days from the date the installment became due.
If the buyer fails to pay the installments due at the expiration of the grace period, the seller may cancel the contract
after thirty days from receipt by the buyer of the notice of cancellation or the demand for rescission of the contract by
a notarial act.
Section 5. Under Section 3 and 4, the buyer shall have the right to sell his rights or assign the same to another
person or to reinstate the contract by updating the account during the grace period and before actual cancellation of
the contract. The deed of sale or assignment shall be done by notarial act.
Section 6. The buyer shall have the right to pay in advance any installment or the full unpaid balance of the purchase
price any time without interest and to have such full payment of the purchase price annotated in the certificate of title
covering the property.
Section 7. Any stipulation in any contract hereafter entered into contrary to the provisions of Sections 3, 4, 5 and 6,
shall be null and void.
Section 8. If any provision of this Act is held invalid or unconstitutional, no other provision shall be affected thereby.
Section 9. This Act shall take effect upon its approval.
Approved: August 26, 1972.

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APPENDIX C
ACT NO. 3135
AN ACT TO REGULATE THE SALE OF PROPERTY UNDER SPECIAL POWERS INSERTED IN OR
ANNEXED TO REAL-ESTATE MORTGAGES
SECTION 1. When a sale is made under a special power inserted in or attached to any real-estate mortgage hereafter
made as security for the payment of money or the fulfillment of any other obligation, the provisions of the following
election shall govern as to the manner in which the sale and redemption shall be effected, whether or not provision for
the same is made in the power.
SECTION 2. Said sale cannot be made legally outside of the province in which the property sold is situated; and in
case the place within said province in which the sale is to be made is subject to stipulation, such sale shall be made in
said place or in the municipal building of the municipality in which the property or part thereof is situated.
SECTION 3. Notice shall be given by posting notices of the sale for not less than twenty days in at least three public
places of the municipality or city where the property is situated, and if such property is worth more than four hundred
pesos, such notice shall also be published once a week for at least three consecutive weeks in a newspaper of general
circulation in the municipality or city.
SECTION 4. The sale shall be made at public auction, between the hours or nine in the morning and four in the
afternoon; and shall be under the direction of the sheriff of the province, the justice or auxiliary justice of the peace of
the municipality in which such sale has to be made, or a notary public of said municipality, who shall be entitled to
collect a fee of five pesos each day of actual work performed, in addition to his expenses.
SECTION 5. At any sale, the creditor, trustee, or other persons authorized to act for the creditor, may participate in
the bidding and purchase under the same conditions as any other bidder, unless the contrary has been expressly
provided in the mortgage or trust deed under which the sale is made.
SECTION 6. In all cases in which an extrajudicial sale is made under the special power hereinbefore referred to, the
debtor, his successors in interest or any judicial creditor or judgment creditor of said debtor, or any person having a
lien on the property subsequent to the mortgage or deed of trust under which the property is sold, may redeem the
same at any time within the term of one year from and after the date of the sale; and such redemption shall be
governed by the provisions of sections four hundred and sixty-four to four hundred and sixty-six, inclusive, of the
Code of Civil Procedure, in so far as these are not inconsistent with the provisions of this Act.
SECTION 7. In any sale made under the provisions of this Act, the purchaser may petition the Court of First
Instance of the province or place where the property or any part thereof is situated, to give him possession thereof
during the redemption period, furnishing bond in an amount equivalent to the use of the property for a period of
twelve months, to indemnify the debtor in case it be shown that the sale was made without violating the mortgage or
without complying with the requirements of this Act. Such petition shall be made under oath and filed in form of an
ex parte motion in the registration or cadastral proceedings if the property is registered, or in special proceedings in
the case of property registered under the Mortgage Law or under section one hundred and ninety-four of the
Administrative Code, or of any other real property encumbered with a mortgage duly registered in the office of any
register of deeds in accordance with any existing law, and in each case the clerk of the court shall, upon the filing of
such petition, collect the fees specified in paragraph eleven of section one hundred and fourteen of Act Numbered
Four hundred and ninety-six, as amended by Act Numbered Twenty-eight hundred and sixty-six, and the court shall,
upon approval of the bond, order that a writ of possession issue, addressed to the sheriff of the province in which the
property is situated, who shall execute said order immediately.
SECTION 8. The debtor may, in the proceedings in which possession was requested, but not later than thirty days
after the purchaser was given possession, petition that the sale be set aside and the writ of possession cancelled,
specifying the damages suffered by him, because the mortgage was not violated or the sale was not made in
accordance with the provisions hereof, and the court shall take cognizance of this petition in accordance with the
summary procedure provided for in section one hundred and twelve of Act Numbered Four hundred and ninety-six;
and if it finds the complaint of the debtor justified, it shall dispose in his favor of all or part of the bond furnished by
the person who obtained possession. Either of the parties may appeal from the order of the judge in accordance with
section fourteen of Act Numbered Four hundred and ninety-six; but the order of possession shall continue in effect
during the pendency of the appeal.
SECTION 9. When the property is redeemed after the purchaser has been given possession, the redeemer shall be
entitled to deduct from the price of redemption any rentals that said purchaser may have collected in case the
property or any part thereof was rented; if the purchaser occupied the property as his own dwelling, it being town
property, or used it gainfully, it being rural property, the redeemer may deduct from the price the interest of one per
centum per month provided for in section four hundred and sixty-five of the Code of Civil Procedure.
SECTION 10. This Act shall take effect on its approval.
Approved: March 6, 1924

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APPENDIX D
ACT NO. 1508
AN ACT PROVIDING FOR THE MORTGAGING OF PERSONAL PROPERTY AND FOR THE
REGISTRATION OF THE MORTGAGES SO EXECUTED
SECTION 1. The short title of this Act shall be "The Chattel Mortgage Law."
SECTION 2. All personal property shall be subject to mortgage, agreeably to the provisions of this Act, and a
mortgage executed in pursuance thereof shall be termed chattel mortgage.
SECTION 3. Chattel mortgage defined. A chattel mortgage is a conditional sale of personal property as security
for the payment of a debt, or the performance of some other obligation specified therein, the condition being that the
sale shall be void upon the seller paying to the purchaser a sum of money or doing some other act named. If the
condition is performed according to its terms the mortgage and sale immediately become void, and the mortgagee is
thereby divested of his title.
SECTION 4.

Validity. A chattel mortgage shall not be valid against any person except the mortgagor, his

executors or administrators, unless the possession of the property is delivered to and retained by the mortgagee or
unless the mortgage is recorded in the office of the register of deeds of the province in which the mortgagor resides at
the time of making the same, or, if he resides without the Philippine Islands, in the province in which the property is
situated: Provided, however, That if the property is situated in a different province from that in which the mortgagor
resides, the mortgage shall be recorded in the office of the register of deeds of both the province in which the
mortgagor resides and that in which the property is situated, and for the purposes of this Act the city of Manila shall
be deemed to be a province.
SECTION 5.

Form. A chattel mortgage shall be deemed to be sufficient when made substantially in accordance

with the following form, and shall be signed by the person or persons executing the same, in the presence of two
witnesses, who shall sign the mortgage as witnesses to the execution thereof, and each mortgagor and mortgagee, or,
in the absence of the mortgagee, his agent or attorney, shall make and subscribe an affidavit in substance as
hereinafter set forth, which affidavit, signed by the parties to the mortgage as above stated, and the certificate of the
oath signed by the authority administering the same, shall be appended to such mortgage and recorded therewith.
FORM OF CHATTEL MORTGAGE AND AFFIDAVIT.
"This mortgage made this ____ day of ______19____ by _______________, a resident of the municipality of
______________, Province of ____________, Philippine Islands mortgagor, to ____________, a resident of
the municipality of ___________, Province of ______________, Philippine Islands, mortgagee, witnesseth:

"That the said mortgagor hereby conveys and mortgages to the said mortgagee all of the following-described personal
property situated in the municipality of ______________, Province of ____________ and now in the possession
of said mortgagor, to wit:

(Here insert specific description of the property mortgaged.)

"This mortgage is given as security for the payment to the said ______, mortgagee, of promissory notes for the sum
of ____________ pesos, with (or without, as the case may be) interest thereon at the rate of ___________ per

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centum per annum, according to the terms of __________, certain promissory notes, dated _________, and in
the words and figures following (here insert copy of the note or notes secured).

"(If the mortgage is given for the performance of some other obligation aside from the payment of promissory notes,
describe correctly but concisely the obligation to be performed.)
"The conditions of this obligation are such that if the mortgagor, his heirs, executors, or administrators shall well and
truly perform the full obligation (or obligations) above stated according to the terms thereof, then this obligation shall
be null and void.

"Executed at the municipality of _________, in the Province of ________, this _____ day of 19_____
____________________
(Signature of mortgagor.)

"In the presence of

"_________________
"_________________
(Two witnesses sign here.)

FORM OF OATH.
"We severally swear that the foregoing mortgage is made for the purpose of securing the obligation specified in the
conditions thereof, and for no other purpose, and that the same is a just and valid obligation, and one not entered into
for the purpose of fraud."
FORM OF CERTIFICATE OF OATH.
"At ___________, in the Province of _________, personally appeared ____________, the parties who signed
the foregoing affidavit and made oath to the truth thereof before me.
"_____________________________"
(Notary public, justice of the peace, 1 or other officer, as the case may be.)

SECTION 6.

Corporations. When a corporation is a party to such mortgage the affidavit required may be made

and subscribed by a director, trustee, cashier, treasurer, or manager thereof, or by a person authorized on the part of
such corporation to make or to receive such mortgage. When a partnership is a party to the mortgage the affidavit
may be made and subscribed by one member thereof.
SECTION 7.

Descriptions of property. The description of the mortgaged property shall be such as to enable the

parties to the mortgage, or any other person, after reasonable inquiry and investigation, to identify the same.

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If the property mortgaged be large cattle," as defined by section one of Act Numbered Eleven and forty-seven, 2 and
the amendments thereof, the description of said property in the mortgage shall contain the brands, class, sex, age,
knots of radiated hair commonly known as remolinos, or cowlicks, and other marks of ownership as described and set
forth in the certificate of ownership of said animal or animals, together with the number and place of issue of such
certificates of ownership.
If growing crops be mortgaged the mortgage may contain an agreement stipulating that the mortgagor binds himself
properly to tend, care for and protect the crop while growing, and faithfully and without delay to harvest the same,
and that in default of the performance of such duties the mortgage may enter upon the premises, take all the
necessary measures for the protection of said crop, and retain possession thereof and sell the same, and from the
proceeds of such sale pay all expenses incurred in caring for, harvesting, and selling the crop and the amount of the
indebtedness or obligation secured by the mortgage, and the surplus thereof, if any shall be paid to the mortgagor or
those entitled to the same.
A chattel mortgage shall be deemed to cover only the property described therein and not like or substituted property
thereafter acquired by the mortgagor and placed in the same depository as the property originally mortgaged,
anything in the mortgage to the contrary notwithstanding.
SECTION 8.

Failure of mortgagee to discharge the mortgage. If the mortgagee, assign, administrator, executor,

or either of them, after performance of the condition before or after the breach thereof, or after tender of the
performance of the condition, at or after the time fixed for the performance, does not within ten days after being
requested thereto by any person entitled to redeem, discharge the mortgage in the manner provided by law, the
person entitled to redeem may recover of the person whose duty it is to discharge the same twenty pesos for his
neglect and all damages occasioned thereby in an action in any court having jurisdiction of the subject-matter thereof.
SECTION 9-12. (Repealed by Art. 367, Revised Penal Code).
SECTION 13.

When the condition of a chattel mortgage is broken, a mortgagor or person holding a subsequent

mortgage, or a subsequent attaching creditor may redeem the same by paying or delivering to the mortgagee the
amount due on such mortgage and the reasonable costs and expenses incurred by such breach of condition before the
sale thereof. An attaching creditor who so redeems shall be subrogated to the rights of the mortgagee and entitled to
foreclose the mortgage in the same manner that the mortgagee could foreclose it by the terms of this Act.
SECTION 14.

Sale of property at public auction; Officer's return; Fees; Disposition of proceeds. The mortgagee,

his executor, administrator, or assign, may, after thirty days from the time of condition broken, cause the mortgaged
property, or any part thereof, to be sold at public auction by a public officer at a public place in the municipality where
the mortgagor resides, or where the property is situated, provided at least ten days' notice of the time, place, and
purpose of such sale has been posted at two or more public places in such municipality, and the mortgagee, his
executor, administrator, or assign, shall notify the mortgagor or person holding under him and the persons holding
subsequent mortgages of the time and place of sale, either by notice in writing directed to him or left at his abode, if
within the municipality, or sent by mail if he does not reside in such municipality, at least ten days previous to the
sale.
The officer making the sale shall, within thirty days thereafter, make in writing a return of his doings and file the same
in the office of the register of deeds where the mortgage is recorded, and the register of deeds shall record the same.
The fees of the officer for selling the property shall be the same as in the case of sale on execution as provided in Act
Numbered One hundred and ninety, 4 and the amendments thereto, and the fees of the register of deeds for
registering the officer's return shall be taxed as a part of the costs of sale, which the officer shall pay to the register of

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deeds. The return shall particularly describe the articles sold, and state the amount received for each article, and shall
operate as a discharge of the lien thereon created by the mortgage. The proceeds of such sale shall be applied to the
payment, first, of the costs and expenses of keeping and sale, and then to the payment of the demand or obligation
secured by such mortgage, and the residue shall be paid to persons holding subsequent mortgages in their order, and
the balance, after paying the mortgages, shall be paid to the mortgagor or person holding under him on demand.
If the sale includes any "large cattle," a certificate of transfer as required by section sixteen of Act Numbered Eleven
hundred and forty-seven 5 shall be issued by the treasurer of the municipality where the sale was held to the
purchaser thereof.
SECTION 15.
Superseded by section 198 of the Administrative Code. The following is the present text of section 198 as
amended by RA 2711, approved June 18, 1960.

"SECTION 198.

Registration of chattel mortgages and fees collectible in connection therewith. Every register

of deeds shall keep a primary entry book and a registration book for the chattel mortgages; shall certify on each
mortgage filed for record, as well as on its duplicate, the date, hour, and minute when the same was by him received;
and shall record in such books any chattel mortgage, assignment, or discharge thereof, and any other instruments
relating to a recorded mortgage, and all such instruments shall be presented to him in duplicate, the original to be
filed and the duplicate to be returned to the person concerned.

"The recording of a mortgage shall be effected by making an entry, which shall be given a correlative number,
setting forth the names of the mortgagee, and the mortgagor, the sum or obligation guaranteed, date of the
instrument, name of the notary before whom it was sworn to or acknowledged, and a note that the property
mortgaged, as well as the terms and conditions of the mortgage, is mentioned in detail in the instrument filed, giving
the proper file number thereof. The recording of other instruments relating to a recorded mortgage shall be effected
by way of annotations on the space provided therefor in the registration book, after the same shall have been entered
in the primary entry book.

"The register of deeds shall also certify the officer's return of sale upon any mortgage, making reference upon the
record of such officer's return to the volume and page of the record of the mortgage, and a reference of such return on
the record of the mortgage itself, and give a certified copy thereof, when requested, upon payment of the lawful fees
for such copy; and certify upon each mortgage officer's return of sale or discharge of mortgage; and upon any other
instrument relating to such a recorded mortgage, both on the original and on the duplicate, the date, hour, and
minute when the same is received for record and record such certificate with the return itself and keep an alphabetical
index of mortgagors and mortgagees, which record and index shall be open to public inspection.

"Duly certified copies of such records and of filed instruments shall be receivable as evidence in any court.

"The register of deeds shall collect the following fees for services rendered by him under this section:
"(a)

For entry or presentation of any document in the primary entry book, one peso. Supporting papers

presented together with the principal document need not be charged any entry or presentation fee unless the party in
interest desires that they be likewise entered.

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"(b)

For filing and recording each chattel mortgage, including the necessary certificates and affidavits, the

fees established in the following schedule shall be collected:

"1. When the amount of the mortgage does not exceed six thousand pesos, three pesos and fifty centavos for
the first five hundred pesos or fractional part thereof, and one peso and fifty centavos for each additional five hundred
pesos or fractional part thereof.

"2. When the amount of the mortgage is more than six thousand pesos but does not exceed thirty thousand
pesos, twenty-four pesos for the initial amount not exceeding eight thousand pesos, and four pesos for each additional
two thousand pesos or fractional part thereof.
"3. When the amount of the mortgage is more than thirty thousand pesos but does not exceed one hundred
thousand pesos, seventy-five pesos for the initial amount not exceeding thirty-five thousand pesos, and seven pesos
for each additional five thousand pesos or fractional part thereof.

"4.

When the amount of the mortgage is more than one hundred thousand pesos but does not exceed five

hundred thousand pesos, one hundred and seventy-six pesos for the initial amount not exceeding one hundred ten
thousand pesos, and ten pesos for each additional ten thousand pesos or fractional part thereof.

"5.

When the amount of the mortgage is more than five hundred thousand pesos, five hundred eighty-one

pesos for the initial amount not exceeding five hundred twenty thousand pesos, and fifteen pesos for each additional
twenty thousand pesos or fractional part thereof: Provided, however, That registration of the mortgage in the
province where the property is situated shall be sufficient registration: And provided, further, That if the mortgage is
to be registered in more than one city or province, the register of deeds of the city or province where the instrument is
first presented for registration shall collect the full amount of the fees due in accordance with the schedule prescribed
above, and the register of deeds of the other city or province where the same instrument is also to be registered shall
collect only a sum equivalent to twenty per centum of the amount of fees due and paid in the first city or province, but
in no case shall the fees payable in any registry be less than the minimum fixed in said schedule.
"(c)

For recording each instrument of sale, conveyance, or transfer of the property which is subject of a

recorded mortgage, or of the assignment of mortgage credit, the fees established in the preceding schedule shall be
collected on the basis of ten per centum of the amount of the mortgage or unpaid balance thereof: Provided, That the
latter is stated in the instrument.

"(d) For recording each notice of attachment, including the necessary index and annotations, four pesos.

"(e)

For recording each release of mortgage, including the necessary index and references, the fees

established in the schedule under paragraph (b) above shall be collected on the basis of five per centum of the amount
of the mortgage.

"(f) For recording each release of attachment, including the proper annotations, two pesos.

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"(g) For recording each sheriff's return of sale, including the index and references, three pesos.
"(h)

For recording a power of attorney, appointment of judicial guardian, administrator, or trustee, or any

other instrument in which a person is given power to act in behalf of another in connection with a mortgage, three
pesos.

"(i)

For recording each instrument or order relating to a recorded mortgage, including the necessary index

and references, for which no specific fee is provided above, two pesos.

"(j) For certified copies of records, such fees as are allowed by law for copies kept by the register of deeds.

"(k)

For issuing a certificate relative to, or showing the existence or non-existence of, an entry in the

registration book, or a document on file, for each such certificate containing not more than two hundred words, three
pesos; if it exceeds that number, an additional fee of fifty centavos shall be collected for every one hundred words or
fractional part thereof, in excess of the first two hundred words."
SECTION 16. This Act shall take effect on August first, nineteen hundred and six.

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APPENDIX E
PRESIDENTIAL DECREE No. 1521
THE SHIP MORTGAGE DECREE OF 1978
WHEREAS, it is the declared policy of the State to accelerate the growth and development of the shipping industry;
WHEREAS, due to the heavy capital requirement for ship acquisition and operation, the shipping industry has turned
to financial institutions, both local and foreign, for assistance;
WHEREAS, Philippine laws on ship mortgage have not been responsive to the needs of vessel financing such that it
has deterred the extensions of needed loans to the industry;
WHEREAS, there is a recognized need for extending the benefits accorded to overseas shipping under Presidential
Decree No. 214 to domestic shipping.
NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the powers vested in me
by the Constitution, do hereby order the enactment of a ship mortgage law as follows:
Section 1. Title. This Decree shall be known as "The Ship Mortgage Decree of 1978."
Section 2. Who may Constitute a Ship Mortgage. Any citizen of the Philippines, or any association or corporation
organized under the laws of the Philippines, at least sixty per cent of the capital of which is owned by citizens of the
Philippines may, for the purpose of financing the construction, acquisition, purchase of vessels or initial operation of
vessels, freely constitute a mortgage or any other lien or encumbrance on his or its vessels and its equipment with any
bank or other financial institutions, domestic or foreign.
Section 3. Mortgage of Vessel of Domestic Ownership; records.
(a) No mortgage, which at the time such mortgage is made includes a vessel of domestic ownership as this
term is defined in Presidential Decree No. 761, or any portion thereof, as the whole or any part of the
property mortgaged, shall be valid, in respect to such vessel, against any person other than the mortgagor,
his heir or assign, and a person having actual notice thereof, until such mortgage is recorded in the office of
the Philippine Coast Guard of the port of documentation of such vessel.
(b) The Coast Guard District or Station Commander shall record mortgages delivered to him, in the order of
their reception, in books to be kept for that purpose and indexed to show
1. The name of the vessel;
2. The names of the parties tot he mortgage;
3. The time and date of reception of the instrument;
4. The interest in the vessel so mortgaged;
5. The amount and date of maturity of the mortgage;
6. Name, citizenship, nationality and residence of owner, and
7. Any material change of condition in respect to any of the preceding items.
A copy of the instrument or mortgage shall be furnished the Central Bank of the Philippines.
Section 4. Preferred Mortgages
(a) A valid mortgage which at the time it is made includes the whole of any vessel of domestic ownership
shall have, in respect to such vessel and as of the date of recordation, the preferred status given by the
provisions of Section 17 hereof, if
1. The mortgage is recorded as provided in Section 3 hereof;
2. An affidavit is filed with the record of such mortgage to the effect that the mortgage is made in
good faith and without any design to hinder, delay, or defraud any existing or future creditor of the
mortgagor or any lien or of the mortgaged vessel;
3. The mortgage does not stipulate that the mortgagee waives the preferred status thereof;
(b) Any mortgage which complies with the above conditions is hereafter called a "preferred mortgage". For
purposes of this Decree, a vessel holding a Provisional Certificate of Philippine Registry is considered a
vessel of domestic ownership such that it can be subject of preferred mortgage. The Philippine Coast Guard
is hereby authorized to enter a vessel holding a Provisional Certificate of Philippine Registry in the Registry
of Vessels and to record any mortgage executed thereon. Such mortgage shall have the preferred status as of
the date of recordation upon compliance with the above conditions.
(c) There shall be endorsed upon the documents of a vessel covered by a preferred mortgage
1. The names of the mortgagor and mortgagee;
2. The time and date the endorsement is made;
3. The amount and date of maturity of the mortgage; and

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4. Any amount required to be endorsed by the provisions of paragraphs (e) or (f) of this Section.
(d) Such endorsement shall be made (1) by the Coast Guard District or Station Commander of the port of
documentation of the mortgaged vessel, or (2) by the Coast Guard District or Station Commander of any port
in which the vessel is found, if such Coast Guard District or Station Commander is directed to make the
endorsement by the Coast Guard District or Station Commander of the port of documentation. The Coast
Guard District or Station Commander of the port of documentation shall give such direction by wire of letter
at the request of the mortgagee and upon the tender of the cost of communication of such direction.
Whenever any new document is issued for the vessel, such endorsement shall be transferred to and endorsed
upon the new document by the Coast Guard District or Station Commander.
In the case of a vessel holding a provincial certificate of Philippine Registry, the endorsement shall be made
by the Philippine consul abroad upon direction by wire or letter from the Maritime Industry Authority at the
request of the mortgagee and upon tender of the cost of communication of such direction. A certificate of
such endorsement, giving the place, time and description of the endorsement, shall be recorded with the
records of registration to be maintained at the Philippine Consulate.
(e) A mortgage which includes property other than a vessel shall not be held a preferred mortgage unless the
mortgage provides for the separate discharge of such property by the payment of a specified portion of the
mortgage indebtedness. If a preferred mortgage so provides for the separate discharge, the amount of the
portion of such payment shall be endorsed upon the documents of the vessel.
(f) A preferred mortgage includes more than one vessel and provides for the separate discharge of each
vessel by the payment of a portion of mortgage indebtedness, the amount of such portion of such payment
shall be endorsed upon the documents of the vessel. In case such mortgage does not provide for the separate
discharge of a vessel and the vessel is to be sold upon the order of a district court of the Philippines in a suit
in rem in admiralty, the court shall determine the portion of the mortgage indebtedness increased by 20 per
centum (1) which, in the opinion of the court, the approximate value of all the vessels covered by the
mortgage, and (2) upon the payment of which the vessel shall be discharged from the mortgage.
Section 5. Certified Copies of Mortgage; exhibition. The Coast Guard District or Station Commander upon the
recording of a preferred mortgage shall deliver two certified copies thereof to the mortgagor who shall place, and use
due diligence to retain, one copy on board the mortgaged vessel notice of which shall be posted in a conspicuous place
thereat and cause such copy and the documents of the vessel to be exhibited by the master to any person having
business with the vessel, which give rise to a maritime lien upon the vessel or to the sale, conveyance, or mortgage
thereof. The master of the vessel shall upon the request of any such person, exhibit to him the documents of the vessel
placed on board thereof. The requirement of this Section that a copy of a preferred mortgage be placed and retained
on board the mortgaged vessel shall not apply in the case of a mortgaged vessel which is not self-propelled (including
but not limited to, barges, scors, lighters, and car floats).
If the master of the vessel willfully fails to exhibit the documents of the vessel or the copy of any preferred mortgage
thereof, the Philippine Coast Guard may suspend or cancel the master's license.
Section 6. Prior and Subsequent Maritime Liens on Mortgaged Vessel. The mortgagor (1) shall, upon request of the
mortgagee, disclose in writing to him prior to the execution of any preferred mortgage, the existence of any maritime
lien, prior mortgage, or other obligation or liability upon the vessel to be mortgaged, that is known to the mortgagor,
and (2) without the consent of the mortgagee, shall not incur, after the execution of such mortgage and before the
mortgagee has had a reasonable time in which to record the mortgage and have indorsements in respect thereto made
upon the documents of the vessel, any contractual obligation creating a lien upon the vessel other than a lien for
wages of stevedores when employed directly by the owner, operator, master, ship's husband, or agent of the vessel, for
wages of the crew of the vessel, for general average, or for salvage, including contract salvage, in respect to the vessel,
tonnage dues and all other charges (not to exceed P20,000) of the Philippine Government in respect to the vessel.
A mortgagor, who, with intent to defraud, violates the above provision and if the mortgagor is a corporation or
association, the president or other principal executive officer of the corporation or association, shall be punished by a
fine of not, more than P5,000 or imprisonment of not more than two years, or both. The mortgage indebtedness shall
thereupon become immediately due and payable at the election of the mortgagee.
Section 7. Record of Notice of Claim of Lien on Mortgaged Vessel; discharge of lien
(a) The Coast Guard District or Station Commander of the port of documentation shall, upon the request of
any person, record notice of his claim of a lien upon a vessel covered by a preferred mortgage, together with
the nature, date of creation, and amount of the lien, and the name and address of the person. Any person
who has caused notice of his claim of lien to be so recorded shall, upon a discharge in whole or in part of the
indebtedness, forthwith file with the Coast Guard District or Station Commander a certificate of such
discharge. The Coast Guard District or Station Commander shall thereupon record the certificate.
(b) The mortgagor upon a discharge in whole or in part of the mortgage indebtedness, shall forthwith file
with the Coast Guard District or Station Commander for the port of documentation of the vessel, a certificate
of such discharge duly executed by the mortgagee. Such Coast Guard District or Station Commander shall
there upon record the certificate. In case of a vessel covered by a preferred mortgage, the Coast Guard
District or Station Commander at the port of documentation shall endorse upon the documents of the vessel,
or direct the Coast Guard District or Station Commander at any port in which the vessel is found, to so
endorse, the fact of such discharge.

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A certificate of such endorsement, giving the time, place and description of the endorsement, shall be recorded with
the Philippine Coast Guard. Where the endorsement is made by a person other than the Coast Guard District or
Station Commander such certificate shall be promptly forwarded to the Philippine Coast Guard.
Section 8. Conditions Precedent to Record; interest on Preferred Mortgage
(a) No mortgage shall be recorded unless it states the interest of the mortgagor in the vessel, and the interest
so mortgaged.
(b) No mortgage, notice of claim of lien, or certificate of discharge thereof, shall be recorded unless
previously acknowledged before the Coast Guard District or Station Commander of the port of
documentation or a notary public or other officer authorized by a law of the Philippines to take
acknowledgment of deeds or before a Philippine consul or consular agent.
(c) In case of a change in the port of documentation of a vessel of the Philippines, no mortgage shall be
recorded at the new port of documentation unless there is furnished to the Coast Guard District or Station
Commander of such port, together with the copy of the mortgage to be recorded, a certified copy of the
record of the vessel at the former port of documentation furnished by the Coast Guard District or Station
Commander of such port. The Coast Guard District or Station Commander at the new port of documentation
is authorized and directed to record such certified copy.
Section 9. Inspection of the Copies for Records; fees. Each Coast Guard District or Station Commander shall permit
records made under the provisions of this decree to be inspected during office hours, under such reasonable
regulation as the Philippine Coast Guard may establish. Upon the request of any person the Coast Guard District or
Station Commander shall furnish him from the records of the Coast Guard's office (1) a certificate setting forth the
names of the owners of any vessel, the interest held by each owner, and the material facts as to any mortgage
covering, or any lien or other encumbrance upon, a specified vessel, (2) a certified copy of any mortgage, notice of
claim of lien, or certified copy discharge in respect to such vessel, or (3) a certified copy as required by subsection (c)
of Section 8 hereof. The Philippine Coast Guard shall collect the fees as provided for under existing laws and
regulations for any mortgage recorded, or any certificate or certified copy furnished by it.
Section 10. Lien of preferred Mortgage; foreclosure; jurisdiction; procedure A preferred mortgage shall constitute a
lien upon the mortgaged vessel in the amount of the outstanding mortgage indebtedness secured by such vessel. Upon
the default of any term or condition of the mortgage such lien may be enforced by the mortgagee by suit in remaining
admiralty, wherein the vessel itself may be made a partly defendant and be arrested in the manner as provided in
Section 11 hereof. Original jurisdiction of all such suits is granted to the Court of First Instance of the Philippines
exclusively. In addition to any notice by publication, actual notice of commencement of any such suit shall direct, to
(1) the master, other ranking officer, or caretaker of the vessel, and (2) any person who has recorded a notice of claim
of an undischarged lien upon the vessel, as provided in Section 7 hereof, unless after search by the mortgage
satisfactory to the court, such mortgagor, master, other ranking officer, caretaker, or claimant is not found within the
Philippines. Failure to give notice to any such person, as required by this Section, shall be liable to such person for
damages in the amount of his interest in the vessel terminated by the suit.
In case of judicial foreclosure as provided herein, the provisions of Rule 68 of the New Rules of Court, if not
inconsistent herewith, shall apply.
The lien of a preferred ship mortgage may also be enforced by a suit in rem in admiralty or otherwise in any foreign
country in which the vessel may be found pursuant to the procedure of said country for the enforcement of ship
mortgages constituting maritime liens on vessels documented under the laws of said country.
Section 11. Arrest of Vessels Upon the filing of the petition for the judicial foreclosure of a Preferred Ship Mortgage,
or immediately thereafter, the applicant may apply ex-parte for an order for the arrest of the mortgaged vessel or
vessels and the judge shall immediately issue the same, provided that it is made to appear by affidavit of the
applicant, or of some other person who personally knows the facts that a default in the mortgage has occurred and
that applicant files a bond executed to the adverse party in an amount to be fixed by the judge, not exceeding the
applicant's claim, conditioned that the latter will pay all the costs which may be adjudged to the adverse party and all
damages which he may sustain by reason of such arrest, if the court shall finally adjudge that the applicant was not
entitled thereto.
Section 12. Discharge of Order of Arrest; Counterbond At any time after an order of arrest has been granted, the
party whose vessel or vessels had been arrested, or the person appearing in his behalf, may, upon reasonable notice to
the applicant, apply to the judge who granted the order, or to the judge of the court in which the action is pending, for
an order discharging the order of arrest. That judge shall order the discharge of the arrest if a cash deposit is made, or
counterbond executed to the creditor is filed, on behalf of the adverse party, with the clerk or judge of the court where
the application is made in an amount double the value of the claim to secure the payment of any judgment that the
creditor may recover in the action. Upon the filing of such counterbond, copy thereof shall forthwith be served on the
creditor or his lawyer. Upon discharge of the order of arrest, the property arrested or seized shall be delivered to the
party making the deposit or giving the counterbond, or the person appearing in his behalf, the deposit or counterbond
aforesaid standing in place of the vessel or vessels released. Should such deposit or counterbond for any reason be
found to be, or become insufficient, and the party furnishing the same fails to file an additional co-counterbond, the
attaching creditor may apply for a new order of arrest or seizure.
Section 13. Discharge of Order of Arrest for Improper or Irregular Issuance The party whose vessel/s has been
arrested may also, at any time either before or after the release of the arrested vessel, or before any arrest or seizure
has been effected, upon reasonable notice to the creditor, apply to the judge who granted the order, or to the judge of
the court in which the action is pending, for an order to discharge the order of arrest or seizure on the ground that the

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same improperly or irregularly issued. After hearing, the judge shall order the discharge of the order of arrest or
seizure if it appears that it was improperly or irregularly issued and the defect is not cured forthwith.
Section 14. Extrajudicial Foreclosure The provisions of the Chattel Mortgage Law on the remedy of extra-judicial
foreclosure of mortgages in so far as they are not inconsistent herewith shall still apply. For the purpose of taking
possession of the vessel or vessels, the foreclosing creditor may secure from a judge of the Court of First Instance of
the province where the vessel may be found or where the creditor or debtor resides an order for the arrest or seizure
of the vessel. Upon such order of seizure or arrest being issued, the sheriff shall immediately take possession of the
vessel or vessels for the purpose of foreclosure and sale. The vessel may only be released in accordance with the
provisions of Section 13 of this Act, or when the debtor pays the outstanding obligation.
Section 15. Foreign Ship Mortgages As used in Sections 10 to 18 hereof, the term "preferred mortgage" shall include,
in addition to a preferred mortgage made pursuant to the provisions of this Decree, any mortgage, hypothecation, or
similar charge created as security upon any documented foreign vessel if such mortgage, hypothecation, or similar
charge has been duly and validly executed in accordance with the laws of the foreign nation under the laws of which
the vessel is documented and has been duly registered in accordance with such laws in a public register either at the
port of registry of the vessel or at a central office; and the term "preferred mortgage lien" shall also include the lien of
such mortgage, hypothecation, or similar charge: Provided, however, That such "preferred mortgage lien" in the case
of a foreign vessel shall be subordinate to maritime liens for repairs, supplies, towage, use of drydock or marine
railway, or other necessaries, performed or supplied in the Philippines.
Section 16. Receiver in Foreclosure; possession by sheriff In any suit in rem in admiralty for the enforcement of the
preferred mortgage lien, the court may appoint a receiver and, in its discretion, authorize the receiver to operate the
mortgaged vessel. The sheriff may be authorized and directed by the court to take possession of the mortgaged vessel
notwithstanding the fact that the vessel is in the possession or under the control of any person claiming a possessory
common law lien.
Section 17. Preferred Maritime Lien, Priorities, Other Liens (a) Upon the sale of any mortgaged vessel in any extrajudicial sale or by order of a district court of the Philippines in any suit in rem in admiralty for the enforcement of a
preferred mortgage lien thereon, all pre-existing claims in the vessel, including any possessory common-law lien of
which a lienor is deprived under the provisions of Section 16 of this Decree, shall be held terminated and shall
thereafter attach in like amount and in accordance with the priorities established herein to the proceeds of the sale.
The preferred mortgage lien shall have priority over all claims against the vessel, except the following claims in the
order stated: (1) expenses and fees allowed and costs taxed by the court and taxes due to the Government; (2) crew's
wages; (3) general average; (4) salvage; including contract salvage; (5) maritime liens arising prior in time to the
recording of the preferred mortgage; (6) damages arising out of tort; and (7) preferred mortgage registered prior in
time.
(b) If the proceeds of the sale should not be sufficient to pay all creditors included in one number or grade,
the residue shall be divided among them pro rata. All credits not paid, whether fully or partially shall subsist
as ordinary credits enforceable by personal action against the debtor. The record of judicial sale or sale by
public auction shall be recorded in the Record of Transfers and Encumbrances of Vessels in the port of
documentation.
Section 18. Suit in Personam in Admiralty on Default
(a) Upon the default of any term or condition of a preferred mortgage upon a vessel, the mortgagee may, in
addition to all other remedies granted by this Decree, bring suit in personal in admiralty in a district court of
the Philippines, against the mortgagor for the amount of the outstanding mortgage indebtedness secured by
such vessel or any deficiency in the full payment thereof.
(b) This Decree shall not be construed, in the case of a mortgage covering, in addition to vessels, realty or
personality other than vessels, or both, to authorize the enforcement by suit in rem in admiralty of the rights
of the mortgage in respect to such realty or personality other than vessels.
Section 19. Surrender of Documents; termination of mortgagee's interest; sale of mortgaged vessel
(a) The documents of a vessel of the Philippines covered by a preferred mortgaged may not be surrendered
(except in the case of the forfeiture of the vessel or its sale by the order of any court of the Philippines or any
foreign country) without the approval of the Maritime Industry Authority. The Administrator shall not grant
such approval without the mortgagee's consent.
(b) The interest of the mortgage in a vessel of the Philippines covered by a mortgage, shall not be terminated
by the forfeiture of the vessel for a violation of any law of the Philippines, unless the mortgage authorized,
consented, or conspired to effect the illegal act, failure, or omission which constituted such violation. Neither
shall the chance by the shipowner in the use or character of the vessel or in the business of the mortgagor,
without the consent of the mortgagee, nor the failure by the mortgagor to comply with the provisions of
Section 5 hereof affect the validity or preference of the preferred ship mortgage as against third persons.
(c) Upon the sale of any vessel of the Philippines covered by a preferred mortgage in any extrajudicial sale or
by order of a district court of the Philippines in any suit in rem in admiralty for the enforcement of a
maritime lien other than a preferred maritime lien, the vessel shall be sold free from all pre-existing claims
thereon; but the court shall, upon the request of the mortgagee, the plaintiff, or any intervenor, require the
purchase at such sale to give and the mortgagee to accept a new mortgage of the vessel for the balance of the
term of the original mortgage. The conditions of such new mortgage shall be the same, so far as practicable,
as those of the original mortgage and shall be subject to the approval of the court. If such new mortgage is

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given, the mortgagee shall not be paid from the proceeds of the sale and the amount payable as the purchase
price shall be held diminished in the amount of the new mortgage indebtedness.
(d) No vessel of domestic ownership shall be mortgaged, nor, any rights under said mortgage shall be
assigned, to any person not a citizen of the Philippines without the approval of the Maritime Industry
Authority. The penalties and sanctions provided for under Commonwealth Act No. 606 shall apply in case of
any violation hereof.
(e) The foreclosure sale of vessels mortgaged under the provisions of this Decree, whether judicially or extrajudicially, shall not require the approval of the Maritime Industry Authority.
Section 20. Who May Bid in the Foreclosure Sale The following persons are qualified to bid in the foreclosure sale of
the mortgaged vessel:
(a) Citizens of the Philippines or corporations 60% of the capital of which is owned by Filipino citizens.
(b) A foreign mortgagee or foreign national whose country has diplomatic relations with the Philippines or
whose country grants reciprocal rights to Filipino citizens.
In case the purchaser is a foreign individual or entity, the Philippine Coast Guard shall, upon presentation of the
certificate of sale, cancel the registration of the vessel and issue a certificate to that effect upon request.
Section 21. Maritime Lien for Necessaries; persons entitled to such lien Any person furnishing repairs, supplies,
towage, use of dry dock or marine railway, or other necessaries to any vessel, whether foreign or domestic, upon the
order of the owner of such vessel, or of a person authorized by the owner, shall have a maritime lien on the vessel,
which may be enforced by suit in rem, and it shall be necessary to allege or prove that credit was given to the vessel.
Section 22. Persons Authorized to Procure Repairs, Supplies, and Necessaries The following persons shall be
presumed to have authority from the owner to procure repairs, supplies, towage, use of dry dock or marine railway,
and other necessaries for the vessel: The managing owner, ship's husband, master or any person to whom the
management of the vessel at the port of supply is entrusted. No person tortuously or unlawfully in possession or
charge of a vessel shall have authority to bind the vessel.
Section 23. Notice to Person Furnishing Repairs, Supplies, and Necessaries The officers and agents of a vessel
specified in Section 22 of this Decree shall be taken to include such officers and agents when appointed by a character,
by an owner pro hac vice, or by an agreed purchaser in possession of the vessel; but nothing in this Decree shall be
construed to confer a lien when the furnisher know, or by exercise of reasonable diligence could have ascertained, that
because of the terms of a charter party, agreement for sale of the vessel, or for any other reason, the person ordering
the repairs, supplies, or other necessaries was without authority to bind the vessel therefor.
Section 24. Waiver of Right to Lien Nothing in this Decree shall be construed to prevent the furnisher of repairs,
supplies, towage, use of dry dock or marine railway, or other necessaries, or the mortgagee, from waiving his right to a
lien, or in the case of a preferred mortgage lien, to the preferred status of such lien, at any time by agreement or
otherwise.
Section 25. Existing Mortgages Not Affected; exception This Decree shall not apply (1) to any existing mortgage, or
(2) to any mortgage hereafter placed at any vessel under an existing mortgage, so long as such existing mortgage
remains undischarged. The Decree shall, however, apply to mortgages executed pursuant to Presidential Decree No.
214, provided, that no vested rights of third parties are affected thereby.
Section 26. Rules and Regulations by Philippine Coast Guard and the Maritime Industry Authority The Philippine
Coast Guard and the Maritime Industry Authority are hereby authorized to make such rules and regulations within
their respective spheres of jurisdiction, as they may deem necessary for the efficient execution of the provisions of this
Decree.
Section 27. Port of Documentation Whenever in the Ship Mortgage Decree of 1978 the words "port of
documentation" are used, they shall be deemed to mean the port of registry of the vessel.
Section 28. Instruments and Acts Validated All mortgages of any vessel of any part thereof, and all documentations,
recordations, indorsements and indexing thereof, and proceedings incidental thereto made or done, prior to the
effectivity of this Decree are declared valid to the extent they would have been valid if the port or ports at which it
should have been documented in accordance with law; and this Section is declared retroactive so as to accomplish
such validations: Provided, That nothing herein contained shall be construed to deprive any person of any vested
right.
Section 29. Repealing Clause The provisions of the New Civil Code, the Code of Commerce, the Chattel Mortgage
Law, the Revised Rules of Court and of such other laws, decrees, executive orders, rules and regulations which are in
conflict or inconsistent with the provisions of this Decree are hereby repealed, amended or modified accordingly. If
for any reason, any section, subsection, sentence, clauses or term of this Decree is held to be unconstitutional such
decision shall not affect the validity of the other provisions of this Decree.
Section 30. Effectivity This Decree shall take a effect upon its approval.
Done in the City of Manila, this 11th day of June, in the year of Our Lord, nineteen hundred and seventy-eight.

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APPENDIX F
REPUBLIC ACT NO. 4122
AN ACT TO FURTHER AMEND SECTION ONE HUNDRED EIGHTY-FIVE OF COMMONWEALTH ACT
NUMBERED FOUR HUNDRED AND SIXTY-SIX, OTHERWISE KNOWN AS THE NATIONAL
INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES
SECTION 1. Section one hundred and eighty-five of Commonwealth Act Numbered Four hundred and sixty-six, as
amended, is hereby further amended by deleting from subsection (g) thereof the following articles: phonographs,
combination radio and phonograph sets, television sets, combination radio and televisions sets, gramophones, and
similar articles for reproducing music.
SECTION 2. A new section is hereby inserted between Sections one hundred eighty-five and one hundred eighty-six,
which shall read as follows:
"Sec. 185-B. Percentage tax on sales of phonographs, combination radio and phonograph sets of all types, television
sets, combination radio and television sets, combination radio-phonograph-televisions sets, gramophones and similar
articles. There shall be levied, assessed, and collected, one only on every original sale, barter, exchange, or similar
transaction intended to transfer ownership of, or title to, the articles hereinbelow enumerated a tax equivalent to
thirty per centum of the gross selling price or gross value in money of the articles so sold, bartered, exchanged or
transferred, such tax to be paid by the manufacturer or producer: provided, however, that where the articles
hereinbelow enumerated are locally manufactured articles as hereinafter defined, the tax shall be seven per centum:
provided, further, that where the articles enumerated hereinbelow are manufactured from materials subject to tax
under this section, the total cost of such materials shall be deducted from the gross selling price or gross value in
money of such manufactured articles:
(a) Phonographs;
(b) Combination radio and phonograph sets of all types;
(c) Television sets;
(d) Combination radio and television sets;
(e) Combination radio-phonograph-television sets;
(f) Gramophones; and
(g) Similar articles for reproducing and/or recording music and sound, like tape recorders, etc.
"The words 'locally manufactured articles' means articles manufactured in a manufacturing enterprise which
processes physically and/or chemically raw materials such as copper clad boards, silicon, steel laminations, other
metal sheets, wires, plastic powder and/or pallets, fiber boards, wood, metallic and non-metallic tubes, roads, special
paper, etc., into the various intermediate components and parts, and subsequently assembling or fitting them
together with other imported collaterals or intermediate components and parts into such completed and finished
articles: provided, however, that if the following parts are intermediate components of a finished article, except as
used in the tuner assembly, they must be locally manufactured within the manufactured enterprise or any other local
manufacturing enterprise:
1. Printed circuit roads;
2. Transformers;
3. Coils, except yoke and flyback, and sheet metalware attached thereto except the mask;
4. Cabinets;
5. Chassis."
SECTION 3. This Act shall take effect upon its approval.
Approved: June 20, 1964

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APPENDIX G
PRESIDENTIAL DECREE No. 114 January 29, 1973
REGULATING THE ESTABLISHMENT AND OPERATION OF PAWNSHOPS
WHEREAS, pawnshops provide an additional source of credit especially for small borrowers left unserved by
the banking and other financial institutions in the country;
WHEREAS, there is no specific law in the Philippines that governs pawnshop establishments, particularly
providing definite and uniform standards for their operation;
WHEREAS, the recommendations contained in a report on the financial system which have been accepted,
with modifications, by monetary authorities, strongly advocate the enactment of a law regulating pawnshops;
NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the powers
vested in me by the Constitution, as Commander-in-Chief of all the Armed Forces of the Philippines, and pursuant to
Proclamation No. 1081, dated September 21, 1972, and General Order No. 1, dated September 22, 1972, as amended,
and in order to effect the desired changes and reforms in the social, economic, and political structure of our society,
do hereby order and decree and make as part of the law of the land the following:
Section 1. Short Title. This Decree may be cited as the "Pawnshop Regulation Act".
Section 2. Declaration of policy. It is hereby declared the policy of the State to regulate the establishment of
pawnshops and to place their operation on a sound and stable basis to derive the optimum advantages from them as
an additional source of credit; to prevent and mitigate, as far as practicable, practices prejudicial to public interest;
and to lay down the minimum requirements and standards under which they may be established and do business.
Section 3. Definitions. As used in this Decree, unless the context otherwise requires, the following terms shall have
the following meanings:
"Pawnshop" shall refer to a person or entity engaged in the business of lending money on personal property delivered
as security for loans and shall be synonymous, and may be used interchangeably, with pawnbroker or pawnbrokerage.
"Pawner" shall refer to the borrower from a pawnshop.
"Pawnee" shall refer to the pawnshop or pawnbroker.
"Pawn" is the personal property delivered by the pawner to the pawnee as security for a loan.
"Pawn ticket" is the pawnbrokers' receipt for a pawn. It is neither a security nor a printed evidence of indebtedness.
"Property" shall include only such personal property as may actually be delivered to the control and possession of the
pawnshop: Provided, however, That certain specified chattels such as guns, knives and similar weapons whose
reception in pawn is expressly prohibited by other laws or regulations shall not be included.
Section 4. Form of organization. A pawnshop may be established as a single proprietorship, partnership or
corporation.
Section 5. Registration and licensing. Any person or entity desiring to engage in the pawnshop business shall (a)
register with the Bureau of Commerce in the case of single proprietorship or the Securities and Exchange Commission
in the case of a corporation or any other association and (b) secure a license from the appropriate city or municipality
having territorial jurisdiction over the place of establishment and operation.
Section 6. Requirement of registration with the Central Bank. Any individual, corporation or association duly
registered and licensed to engage in the pawnshop business shall file an information sheet, under oath, with the
Central Bank before commencement of actual operations: Provided, however, That pawnshops duly licensed and
operating before the approval of this Decree shall, within six months from the date of effectivity of the same, register
with the Central Bank. For this purpose, the Central Bank shall furnish pawnshops, upon request, with necessary
copies of the prescribed information sheet.
Section 7. Capital. The minimum paid-in capital of any pawnshop which may be established after the effectivity of
this Decree shall be one hundred thousand pesos (P100,000.00): Provided, however, That pawnshops established
and in operation prior thereto shall comply with the minimum capitalization required under the provisions of this
section within such time as may be prescribed by the Monetary Board, which time shall, in no case, be less than three
years from the date of effectivity of this Decree.
Section 8. Citizenship requirement. Upon the effectivity of this Decree, only Filipino citizens may establish and own
a pawnshop organized in the form of a single proprietorship: Provided, however, That in the case of a partnership, at
least seventy per cent (70%) of its capital shall be owned by Filipino citizens: Provided, further, That in the case of a
corporation, at least seventy per cent (70%) of the voting capital stock shall be owned by citizens of the Philippines, or
if there be no capital stock, at least seventy per cent (70%) of the members entitled to vote, shall be citizens of the
Philippines.
The percentage of foreign-owned voting stock or non-citizens entitled to vote in any domestic pawnshop existing prior
to the effectivity of this Decree, if such percentage is in excess of thirty per cent (30%) of the voting stock or members
entitled to vote of the pawnshop shall not be increased but may be reduced, and once reduced, shall not be increased
thereafter beyond thirty per cent (30%) of the voting stock, or number of members entitled to vote, of the pawnshop.

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The percentage of foreign-owned voting stocks in any pawnshop shall be determined by the citizenship of the
individual stockholders in that pawnshop. In the case of corporations owning shares in a pawnshop, the citizenship of
the individual owners of voting stock in such corporations shall be the basis of computing the percentage.
Section 9. Amount of loan. Pawnshops may grant such amount of loans as may be agreed upon between the parties:
Provided, That the amount of loan shall, in no case, be less than thirty per cent (30%) of the appraised value of the
security offered for the loan unless the pawner manifests in writing the desire to borrow a lesser amount.
Section 10. Rates of interest. No pawnshop shall directly or indirectly stipulate, charge, demand, take or receive any
higher rate or greater sum or value for any loan or forbearance than the rate allowed by the Usury Law for such
transactions. It shall be unlawful for a pawnshop to divide the pawn offered by a pawner in order to collect greater
interest and/or to require the pawner to pay an additional charge as insurance premium for the safekeeping and
conservation of the article pawned.
In addition to interest charges, pawnshops may impose a maximum service charge of five pesos (P5.00), but in no
case to exceed one per cent (1%) of the principal loan.
Section 11. Maintenance of records. Every pawnbroker shall keep a memorandum book in which shall be entered, in
ink, at the time of each loan or pledge, an accurate account and description, in Pilipino or English with corresponding
translation in the local dialect of every pawn, the amount of money loaned thereon, the date of pawning or pledging
the same, the rate of interest to be paid on the loan, and the name and residence of each pawner, together with a
particular description of such pawner, including his or her nationality, sex, and general appearance, and no
pawnbroker or other person shall alter or erase any entry made in such book. Every person pawning or pledging any
article or thing with a pawnbroker shall sign his name and give his address to said pawnbroker and such name and
address shall be made part of the record heretofore described in this section: Provided, That a person who is unable to
write shall imprint his thumbmark, and his name shall be written by a competent person, who shall sign his own
name as witness to said thumbmark.
Section 12. Pawn ticket. Every pawnbroker shall, at the time of every such loan or pledge, deliver to each person
pawning or pledging any article or thing a memorandum or ticket signed by such pawnbroker and containing the
substance of the record required to be kept in such pawnbroker's memorandum book in section eleven hereof,
excluding the description of the person so pawning or pledging such article or thing, and no compensation of any kind
whatsoever shall be received by any pawnbroker for any such memorandum or ticket.
Section 13. Redemption. The pawner who fails to pay his obligation on the date it falls due may, within ninety days
from the date of maturity of the obligation, redeem the pawn by payment of the principal of the debt with interest:
Provided, however, That for the purpose of computing interest due after maturity of the obligation, the basis shall be
the sum of the principal of the obligation and interest earned at the time the obligation matured.
Section 14. Disposition of pawn on default of pawner. In the event the pawner fails to redeem the pawn within
ninety days from the date of maturity of the obligation in accordance with the preceding section, the pawnbroker may
sell or otherwise dispose of any article taken or received by him in pawn: Provided, however, That the pawner shall be
duly notified of such sale on or before the termination of the ninety- day period, the notice particularly stating the
date, hour, and place of sale.
Section 15. Public auction of pawned articles. No pawnbroker shall sell or otherwise dispose of any article or thing
taken or received in pawn or pledge except at public auction in his place of business as such pawnbroker or in any
other public place within the territorial limits of the municipality or city where the pawnshop has its place of business,
under the control and direction of an auctioneer with license duly issued by the corresponding authorities, nor shall
any such article or thing be sold or disposed of unless said pawnbroker has published a notice once in at least two
daily newspapers printed in the city or municipality during the week preceding the date of such sale. In remote areas
where the newspapers are neither published nor circulated notice by newspaper publication shall be substituted by
posting notices in conspicuous public places within the territorial limits of the city or municipality where the
pawnshop has its place of business. Said notice, whether published or posted, shall be in English, and either in
Filipino or in the local dialect, and shall contain the name of the pawnshop, its owner, address of the establishment,
hour, and date of the auction sale.
Section 16. Closing and removal of business period. No pawnbroker shall close or transfer his place of business
within three months after the expiration of the period for which any article or thing shall have been taken or received
by him at his place of business in pawn or pledge, or before any such article or thing shall have been sold or otherwise
disposed of in accordance with the provisions of this Decree: Provided, however, That removal or transfer of a
pawnbroker's place of business from one place to another within the territorial limits of the same city or municipality
may be authorized on condition that the pawnbroker shall publish a notice of such removal in two local daily papers,
one in English, another in Pilipino or in the local dialect, for a period of not less than three days, the last day of which
shall take place five days before the removal, stating in the notice the date of removal, the address of the premises to
be vacated and of the premises to which the pawnshop will transfer; and that he shall likewise post in a conspicuous
place in both premises one copy of the notice in English and another in either Pilipino or the local dialect during the
period of its publication in the said local papers.
Section 17. Grant of authority to the Central Bank. The Central Bank is hereby authorized
(a) to issue rules and regulations to implement the provisions contained herein:
(b) to require from pawnshops reports of condition and such other reports necessary to determine
compliance with the provisions of this Decree:
(c) to exercise visitatorial powers whenever deemed necessary; and

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(d) to impose such administrative sanctions including the imposition of fines for violations of this Decree
and regulations issued by the Central Bank in pursuance thereto.
Section 18. Penalties. A fine of not less than one hundred pesos (P100.00) and not more than one thousand pesos
(P1,000.00) or imprisonment for not less than thirty days and not more than one year, or both, at the discretion of
the court, shall be imposed for violations of the provisions of this Decree and its implementing rules and regulations:
Provided, That if the violation is committed by a corporation, partnership or an association, the penalty provided for
in this Decree shall be imposed upon the directors, officers, employees or persons therein responsible for the offense,
without prejudice to civil liabilities arising from the criminal offense.
Section 19. Matters not covered by this Decree. The provisions of existing law, insofar as they are not in conflict
with any provision of this Decree, shall apply in matters not otherwise specifically provided for in this Decree.
Section 20. Separability clause. If any provision or section of this Decree, or the application thereof to any person
or circumstance, is held invalid, the other provisions or sections of this Decree, and the application of such provisions
or sections to other persons or circumstances, shall not be affected thereby.
Section 21. Effectivity. This Decree shall take effect immediately.
Done in the City of Manila, this 29th day of January, in the year of Our Lord, nineteen hundred and seventy-three.

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APPENDIX H

Multiple Choice Questions


(Secured Transactions)

Instruction: Choose the best answer. Write the answer before the number.
I. LOAN
______ 1. Referred to as loan for consumption
a. Mutuum
b. Commodatum
c. Bailments
d. Deposit
______ 2. Referred to as loan for use
a. Mutuum
b. Commodatum
c. Bailments
d. Deposit
______ 3. E borrowed P5,000 from R to be paid after three months with P150 as interest. The
contract between them is called:
a. Mutuum
b. Commodatum
c. Deposit
d. Pledge
______ 4. X borrowed the book of Y with the obligation to return the same after their exam.
The contract between them is called:
a. Mutuum
b. Commodatum
c. Deposit
d. Pledge
______ 5. Commodatum and mutuum are:
a. Real contracts
b. Consensual Contracts
c. Only Mutuum is a real contract
d. Only Commodatum is a consensual contract
______ 6. E promised to lend P1000,000 to R. The promise was accepted by the latter. The
contract is?
a. not enforceable
b. not valid
c. already binding between the parties
d. partially valid
______ 7. The subject of commodatum involves:
a. consumable goods only
b. non-consumable goods only
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c. consumable or non-consumable goods


d. movable and consumable goods only
______ 8. A stipulation that the bailee may make use of the fruits of the thing loaned is:
a. Unenforceable
b. Void
c. Valid
d. Voidable
______ 9. The bailee is bound to pay ________ expense for the use and preservation of the
thing loaned.
a. Extraordinary
b. Ordinary
c. Customary
d. Regular
______ 10. X borrowed the car of Y for one week. X spent for gasoline oils as well as
vulcanizing expenses when he travelled to and from Bontoc, Mt. Province. What is
the right/obligation of X?
a. X should ask reimbursement from Y for the expenses incurred by him.
b. Y should pay X for the expenses made by him in using his car.
c. X should shoulder those expenses as they are ordinary expenses.
d. X should shoulder those expenses as they are extraordinary expenses.
______ 11. The bailee is liable for the loss of the thing even if due to fortuitous event in the
following instances, except:
a. If he devotes the thing to any purpose different from that for which it has been
loaned
b. If he keeps it longer than the period stipulated
c. If the thing has been delivered without appraisal of its value
d. If he lends the thing to a third person who is a member of his household
______ 12. The bailee, on the ground that the bailor owes him something, even though it may
be by reason of expenses,
a. can retain the thing loaned
b. cannot retain the thing loaned
c. can appropriate the thing loaned
d. cannot alienate the thing loaned
______ 13. X is indebted to Y for P450,000. Y later borrowed Xs car but refused to return it for
the reason that the latter is indebted to him. Which of the following is correct?
a. Ys act is tenable up to a certain period of use.
b. Y cannot retain the thing loaned.
c. Y can validly retain the thing loaned until payment of the amount due.
d. X cannot ask for the return of the thing loaned until he has paid the amount due.
______ 14. Where two or more bailees to whom a thing is loaned, they are liable:
a. Severally
b. Jointly
c. Equally
d. Proportionately
______ 15. A and B borrowed the horse of Z. What can Z do?
a. He may demand the return from either A or B.
b. He may demand return from both A and B.
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c. He may demand return at anytime from both A and B.


d. He may demand return at due time from either A or B.
______ 16. The bailor cannot demand the return of the thing loaned in the following cases,
except:
a. Until the expiration of the period stipulated
b. After the accomplishment of the use for which it has been constituted
c. If the use is not urgent
d. If the use is urgent
______ 17. In case of temporary use by the bailor, the contract of commodatum
a. continues until expiration of the period stipulated
b. suspended while the thing is in the possession of the bailor
c. suspended if returned by the bailor
d. suspended until the expiration of the period stipulated
______ 18. H borrowed the computer of K for one week of which K agreed to it. Which of the
following is correct?
a. K cannot demand the return of the thing loaned until the expiration of the period
stipulated if there is urgent need to it.
b. H can be demanded for the return if K should have urgent need of the thing loaned
c. H cannot be demanded after the expiration of the period
d. K can demand return if the period stipulated did not expire.
______ 19. If H returned the thing loaned, what will happen?
a. In case of temporary use by the bailor, the contract of commodatum is suspended.
b. The contract of commodatum continues until it expires.
c. The contract of commodatum is revoked.
d. The contract of commodatum ceases.
______ 20. If the neither the duration of the contract nor the use to which the thing loaned
should be devoted has been stipulated,
a. the bailor cannot demand the return of the thing at will
b. the bailor can demand return at will
c. the bailor can demand if agreed upon
d. the bailor cannot demand even if agreed upon.
______ 21. If the use of the thing is merely tolerated by the owner,
a. the bailor cannot demand the return of the thing at will
b. the bailor can demand return at will
c. the bailor can demand if agreed upon
d. the bailor cannot demand even if agreed upon
______ 22. The contractual relation is called precarium in the following cases, except:
a. If no duration of the contract has been stipulated
b. If no use to which the thing loaned should be devoted has been stipulated
c. If the use of the thing is merely tolerated by the owner
d. If there is misuse in the thing loaned
______ 23. If the bailor committed any act of ingratitude specified by law, the bailor:
a. can demand return at will
b. can demand return of the thing immediately
c. can demand return of the thing immediately if there is stipulation to that effect
d. can demand return of the thing if there is urgent need of the thing loaned

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______ 24. For extraordinary expenses on As car, B, the borrower spent P150,000. What is the
recourse of B against A?
a. B cannot ask for reimbursement because the expense was extraordinary
b. B cannot ask for reimbursement if there is stipulation to that effect
c. B may demand reimbursement because A cannot exempt himself from the
payment of expenses by abandoning the thing loaned.
d. B may demand reimbursement unless A abandoned the thing loaned
______ 25. A borrowed money from a bank secured by a chattel mortgage on the standing
crops on his land. During the war, the crops were destroyed. Is A still liable?
a. No, because his obligation is extinguished
b. No, because his obligation was to pay for a generic thing
c. Yes, because his obligation is not a generic thing. It cannot be paid from sources
other than the said mortgaged crops.
d. Yes, because his obligation was to pay a generic thing. The chattel mortgage on the
crops simply stood as security for the fulfillment of his obligation. The account can
still be paid from sources other than said mortgage.
______ 26. A contract whereby one person transfers the ownership of non-fungible things to
another with the obligation on the part of the latter to give things of the same
kind, quantity and quality is calleda. Mutuum
b. Sale
c. Barter
d. Commodatum
______ 27. A borrowed P1,000,000 from B. No mention was made of interest. Which of the
following is true?
a. No interest can be charged.
b. No interest can be charged, except for the legal interest.
c. Interest may be charged at 12% per annum.
d. Interest may be charged at 6% per annum.
______ 28. A borrowed P1,000,000 from B. Orally, they agreed that interest shall be charged.
Which of the following is true?
a. No interest can be charged because it was not expressly stipulated in writing.
b. No interest can be charged, except for the legal interest.
c. Interest may be charged at 12% per annum.
d. Interest may be charged at 6% per annum.
______ 29. A borrowed P1,000,000 from B. They agreed expressly in writing that interest shall
be charged. However no rate was mentioned. Which of the following is true?
a. No interest can be charged.
b. No interest can be charged, except for the legal interest.
c. Interest may be charged at 12% PA.
d. Interest may be charged at 6% PA.
______ 30. When shall interest due shall earn legal interest?
a. From the time it is judicially demanded
b. From the time the due date expires
c. There shall be no interest to accrue because it is against public policy
d. There shall be no interest to accrue if not stipulated

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______ 31. In the determination of interest, if it is payable in kind, its value shall be appraised
at:
a. the forecasted rate of the products or goods.
b. current price of the products or goods at the time and place of the perfection of
the contract.
c. current price of the products or goods at the time and place of the payment.
d. fair market value of the products or goods .
______ 32. Accrued interest shall earn interest in the following instances, except:
a. if there is stipulation to that effect in writing.
b. if it is judicially demanded.
c. if there is demand to that effect.
d. if the parties agreed to it in writing.
______ 33. A movable which cannot be used in a manner appropriate to its nature without its
being consumed is called:
a. Consumable Goods
b. Non-Consumable Goods
c. Fungible Goods
d. Non Fungible Goods
______ 34. A movable which can be used in a manner appropriate to its nature without its
being consumed is called:
a. Consumable Goods
b. Non-Consumable Goods
c. Fungible Goods
d. Non Fungible Goods

______ 35. If the intention is to allow a substitution of the thing given, the object is called:
a. Consumable Goods
b. Non-Consumable Goods
c. Fungible Goods
d. Non Fungible Goods
______ 36. If the intention is to compel the return of the identical thing given, the object is
called:
a. Consumable Goods
b. Non-Consumable Goods
c. Fungible Goods
d. Non-Fungible Goods
______ 37. If a property is sold but the real intent is only to give the object as security far a
debt as when the price is comparatively small, which of the following is the best
statement?
a. There is really a contract of loan with an equitable mortgage
b. The contract is strictly sale
c. It is partially contract of Sale and Loan
d. There is a Contract of Loan
______ 38. Which of the of the following is not a characteristic of Commodatum?
a. Real Contract
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b. Principal Contract
c. Gratuitous Contract
d. Consensual Contract
______ 39. The bailor in commodatum:
a. must be the owner of the thing loaned
b. may be the owner of the thing loaned
c. need not be the owner of the thing loaned
d. should not be the owner of the thing loaned
______ 40. The death of either the bailor or the bailee:
a. suspends the termination of the contract of loan
b. extinguishes the contract of commodatum
c. suspends the termination of the contract of loan
d. suspends the extinguishment of the commodatum
______41. In commodatum, the person who borrows the thing loaned is best called:
a. bailee
b. usufructuary
c. borrower
d. lessee
______42. In commodatum, the person who delivers to another a thing so that the latter may
use the same for a certain time and return it is best called:
a. lessor
b. bailor
c. administrator
d. creditor
______ 43. Commodatum isa. essentially gratuitous
b. necessarily onerous
c. necessary consensual
d. one with stipulation to pay interest
______ 44. Which of the following is true about simple loan?
a. It may be gratuitous or with stipulation to pay interest
b. It is essentially gratuitous
c. It is necessarily gratuitous
d. It is gratuitous
______ 45. Which of the following is true about commodatum?
a. Only movables may be the object of commodatum
b. Movables or immovables may be the object of commodatum
c. Non-consumables cannot be the object of commodatum
d. Consumables cannot be the object of commodatum
______ 45. Comodatario is referred to asa. agent
b. borrower
c. lender
d. buyer

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______ 46. The bailee is liable for the loss of the thing, even if it should be through a fortuitous
event except:
a. If the thing loaned has been delivered with appraisal of its value.
b. If he lends or leases the thing to a third person, who is not a member of his
household.
c. If being able to save either the thing borrowed or his own thing, he chose to save
the latter.
d. If the thing is lost or destroyed through the use of arms or irresistible force.
______ 47. Solutio indebiti in mutuum means
a. if the borrower pays interest when there has been no stipulation thereof.
b. if the borrower pays interest because he consider it his moral obligation to pay said
interest.
c. if the borrower pays interest upon court order.
d. if the borrower pays interest as agreed upon by the parties orally.
______ 48. Circular 416 fixing the rate of interest at 12% per annum deals with the following,
except
a. Guaranty and Suretyship
b. Loans
c. Forbearance of any money, goods or credit
d. Judgment
______ 49. It is derived from the french word bailer, meaning to deliver.
a. barter
b. deposit
c. loan
d. bailment
______ 50. The delivery of property by one person to another in trust for a specific purpose is
defined as.
a. bailment
b. barter
c. deposit
d. loan
______ 51. The ability to borrow money or thing by virtue of the confidence or trust reposed
by a lender that the borrower will pay what he may promise is called:
a. moral obligation
b. debt
c. credit
d. guaranty
______ 52. The contract of commodatum is suspended only when:
a. the object is delivered to a third person as authorized by the bailor.
b. the object is lost due to fault of the bailor.
c. the object is temporarily used and in the possession of the bailor or lender.
d. the object is delivered before a sheriff.
______ 53. In commodatum _________ expenses shall be refunded by the bailor upon
proper notice by the bailee.

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a. ordinary expenses
b. luxurious expenses
c. extraordinary expenses
d. judicial expenses
______ 54. Mutuum is similar to:
a. a compound interest
b. an abnormal usufruct
c. a barter
d. advance interest
______ 55. Consumable goods may be the subject of commodatum if
a. the object is to be consumed
b. the object is to be used adostentationem
c. agreed by the parties
d. the object be can be change by the same kind and quantity

II.

Deposit

______ 1. A contract of deposit is considered a real contract because___________.

a. the contract of deposit is not perfected unless there is symbolic delivery of the
subject matter
b. the contract of deposit is not perfected unless there is the delivery of the subject
matter
c. the contract of deposit is not perfected unless there is a consensual agreement
between the parties
d. the contract of deposit is not perfected unless there is written agreement between
the parties

______ 2. The best distinction between Extrajudicial and Judicial Deposit is:

a. extrajudicial deposit refers to movable property while Judicial deposit refers to


either movable or immovable property.
b. extrajudicial deposit refers to immovable property while Judicial deposit refers to
movable or immovable property.
c. extrajudicial deposit refers to movable property while Judicial deposit refers to
immovable property.
d. extrajudicial deposit refers to movable property while Judicial deposit refers to
non-movable property.

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______ 3. Which of the following is constituted from the moment a person receives a thing
belonging to another, with the obligation of safely keeping it and returning the
same?

a. Contract of Loan
b. Mortgage Contract
c. Contract of deposit
d. Contract of Lease

______ 4. The depositary is obligated to return the thing deposited upon demand by the
depositor in_______________.

a. Deposit
b. Sequestration
c. Judicial Deposit
d. Extrajudicial Deposit

______ 5. The thing shall be delivered only upon court order in ______________.

a. Voluntary Deposit
b. Necessary Deposit
c. Extrajudicial Deposit
d. Judicial Deposit

______ 6. A deposit is a gratuitous contract, except when:

a. there is an agreement to the contrary, or unless the depositary is engaged in the


business of storing goods;
b. there is no agreement to the contrary, or unless the depositary is not engaged in
the business of storing goods;
c. there is an agreement to the contrary, or unless the depositor is not engaged in
the business of storing goods;
d. there is an agreement to the contrary, or unless the depositor is engaged in the
business of storing goods;

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______ 7. The contract loses the concept of a deposit and becomes a loan or commodatum
when _____________________.

a. the depositary has no permission to use the thing deposited


b. the depositary has permission to use the thing deposited
c. the depositor has permission to use the thing deposited
d. the depositor has no permission to use the thing deposited

______ 8. In number 7, an exception is _________________________.

a. where use with consumption is still the principal purpose of the contract
b. where use with obligation to return is still the principal purpose of the contract
c. where safekeeping is the principal purpose of the contract
d. where safekeeping with obligation to return the thing after use is still the
principal purpose of the contract

______ 9. Fixed, savings, and current deposits of money in banks and similar institutions shall
be governed by the provisions concerning ___________.

a. Commodatum
b. Real Estate Mortgage
c. Guaranty
d. Simple Loan

______ 10. Which of the following statement is correct?

a. The law provides that the depositary can demand that the depositor prove his
ownership of the thing deposited.
b. The law provides that the depositary cannot demand the depositor prove his
ownership of the thing deposited.
c. The law provides that the depositor cannot demand the depositary prove his
ownership of the thing deposited.
d. The law provides that the depositor can demand the depositary prove his
ownership of the thing deposited.

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______ 11. Article 1970 of Book 5 of the Civil code provides that If a person having capacity to
contract accepts a deposit made by one who is incapacitated, the former shall be
subject to all the obligations of a depositary, and may be compelled to return the
thing by the guardian, or administrator, of the person who made the deposit, or by
the latter himself if he could acquire capacity. The contract entered into is a:

a. Unenforceable Contract
b. Valid Contract
c. Voidable Contract
d. Enforceable Contract

______ 12. Juan deposited something with Pedro, who is insane. Pedro in turn disposed of it in
favor of Maria. Can Juan go against Maria?

a. No, if Maria acted in bad faith. But if Maria acted in good faith, Juans only
recourse would be to compel Pedro to give him the amount by which Pedro might
be enriched or benefited himself;
b. Yes, if Maria acted in bad faith. But if Maria acted in good faith, Juans only
recourse would be to compel Pedro to give him the amount by which Pedro might
be enriched or benefited himself;
c. No, if Maria acted in good faith. But if Maria acted in bad faith, Juans only
recourse would be to compel Pedro to give him the amount by which Pedro might
be enriched or benefited himself;
d. Yes, if Maria acted in good faith. But if Maria acted in bad faith, Juans only
recourse would be to compel Pedro to give him the amount by which Pedro might
be enriched or benefited himself;

______ 13. The two principal obligations of the depositary are:

a. The safekeeping and the return of the thing


b. The use and the return of the thing
c. The consumption and the return of the thing
d. The custody and return of the thing only

______ 14. The general rule is that if deposit with a third person is allowed, the depositary is
not liable for the loss except if ___________.

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a. He deposited the thing with a person who is careful and fit;


b. He deposited the thing with a person who is responsible;
c. He deposited the thing with a person who is insane;
d. He deposited the thing with a person who is manifestly careless or unfit;

______ 15. The depositary is liable for the loss of the through a fortuitous under the following
instances. Which is not included?

a. If it is so stipulated
b. If he uses the thing with the depositors permission
c. If he delays its return
d. If he allows others to use it, even though he himself may have been authorized to
use the same
______ 16. Which of the following takes place when an attachment or seizure of property in
litigation is ordered?
a.Extra-judicial deposit
b.Judicial deposit
c.Consignation
d.Lien
______ 17. Plaintiff contracted SBC to store his 50 bags of rice in a bonded warehouse, but SBC
stored 40 bags in a bonded warehouse and the rest in the non-bonded warehouse.
As to the rest in a non-bonded warehouse, duties were levied by the government in
the amount of P2, 500 which SBC paid without the knowledge and consent of the
plaintiff. Plaintiff then demanded SBC to repay it before releasing the rice. SBC:
a.
b.
c.
d.

should pay the amount of P2, 500 because it is unlawful.


violated the contract; hence they are not entitled to reimbursement.
is entitled to expenses he incurs in the performance of his contract.
violated the contract so the plaintiff must rescind the contract.

______ 18. If Claire and Clara deposit 1,000 sacks of rice, each of them can demand:

a. 1,000 sacks of rice each


b. 500 sacks of rice each
c. 250 sacks of rice only
d. 750 sacks of rice only

______ 19. If Juan and Juana deposited a car, to whom may the depositary return the car?

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a. Both of Juan and Juana, in the absence of a contrary stipulation


b. Juan alone, in the absence of a contrary stipulation
c. Juana alone, in the absence of a contrary stipulation
d. Either Juan or Juana, in the absence of a contrary stipulation

______ 20. When there are two or more depositors, if they are not solidary, and the thing
admits of division, each one:

a. Cannot demand more than his share


b. Can demand more than his share
c. Can demand less than his share
d. Cannot demand less than his share
______ 21. Which of the following best describe a necessary deposit in compliance with a legal
obligation?
a. The deposit with a bank or public bonds or instruments if credit payable to order
or to bearer given in usufruct when the usufructuary does not give proper security
for their conservation.
b. The thing deposited is non-consumable and the depositary has permission to use
the thing.
c. The judicial deposit of a thing, the possession of which is being disputed in a
litigation by two or more persons.
d. Those required in suits as provided in the Rules of Court.
______ 22. Jane deposits a car with John in Baguio. John later on resided in La Union,
bringing the car along with her. In the absence of stipulation, where must the car
be returned?

a. In La Union, provided there was no malice on the part of John;


b. In La Union, provided there was malice on the part of John;
c. In Baguio, provided there was no malice on the part of Jane and John;
d. In Baguio, provided there was no malice on the part of John;

______ 23. The depositary who may have justifiable reasons for not keeping the thing
deposited may, even before the time designated, return it to the depositor, unless
the deposit is for a valuable consideration. And if the depositor should refuse to
receive it, the depositor may secure its:

a. Return from the court


b. Sequestration from the court
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c. Consignation from the court


d. Surrender from the court

______ 24. The act of depositing the things due at the disposal of judicial authority

a. Lease
b. Consignation
c. Attachment
d. Mortgage
______ 25. Depositary is liable for the loss of the thing deposited if:
a. he transfers the deposit with a third person without authority.
b. he deposits the thing with a third person who is manifestly careless or unfit
although authorized, even in the absence of negligence.
c. the thing is lost without negligence of the third person with whom he was allowed
to deposit the thing if such third person is not manifestly careless or unfit.
d. the thing is lost through the negligence of his employees whether the latter are
manifestly careless or not.
______ 26. If the deposit is gratuitous, the depositor is obliged to:

a. Reimburse the depositary for the expenses he may have incurred for the
preservation of the thing deposited.
b. Reimburse the depositary for the expenses he may have incurred for the use of
the thing deposited.
c. Reimburse the depositary for the expenses he may have incurred for the
safekeeping of the thing deposited.
d. Reimburse the depositary for the expenses he may have incurred for returning
the thing deposited.

______ 27. As a rule, if the depositary suffers because of the character of the thing deposited,
the depositor should be responsible for the loss sustained by the depositary. Which
of the following is not an exception?

a. If at the time the deposit was made, the depositor was not aware of, or was not
expected to know the dangerous character of the thing
b. If at the time the deposit was made, the depositor knew of the danger but he
notified the depositary of the same
c. If at the time the deposit was made, the depositary was aware of the danger, even
though he had not been notified by the depositor

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d. If at the time the deposit was made, the depositary was pretending as not aware
of the danger, even though he had been notified by the depositor

______ 28. Which of the following is not a mode of extinguishing deposit?

a. loss of the thing deposited


b. destruction of the thing deposited
c. demand at the will of a third person
d. In case of gratuitous deposit, upon the death of either the depositor or the
depositary
______ 29. A deposit is necessary when:

a. it is not made in compliance with a legal obligation


b. it takes place on the occasion of any calamity, such as fire, storm, flood, pillage,
shipwreck, or other similar events
c. made by strangers in hotels or inns
d. made with private carriers

______ 30. Hotel-keeper is considered liable when:

a. the loss is due to the acts of the guest, his family, servants or visitors
b. the loss arises from the character of the things brought into the hotel
c.

the loss is caused by the act of a thief or robber done without the use of arms and
irresistible force

d. the loss or injury is caused by force majeure

______ 31. Hotel-keeper is considered not liable when:

a. The loss or injury is caused by force majeure like flood, fire, robbery by force or
intimidation.
b. The loss or injury is caused by his servants or employees as well as by strangers.

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c. The loss is caused by the act of a thief or robber done without the use of arms and
irresistible force.
d. The loss does not arises from the character of the things brought into the hotel.

______ 32. What will take place when an attachment or seizure of property in litigation is
ordered?

a. Extrajudicial Deposit
b. Judicial Deposit
c. Real Estate Mortgage
d. Chattel Mortgage
______ 33. The document which embodies the contract states that the $3,000 was received by
the bank for safekeeping. The subsequent acts of the parties were really for the bank
to safely keep the dollars and return it at a later time. What is the contract entered
into by the parties?
a.
b.
c.
d.

Contract of loan
Contract of deposit
Contract of commodatum
Contract of lease

______ 34. As to matters not provided for in the Civil Code, judicial sequestration shall be
governed by:

a. Code of Commerce
b. Special Proceedings
c. The Rules of Court
d. The Labor Code

______ 35. The hotel-keeper has a right to retain the things brought into the hotel by the quest,
as a:

a. Security for credits on account of lodging, and supplies usually furnish to the
guests
b. Payment for credits on account of lodging, and supplies usually furnish to the
guests
c. Depositary for the things of the guests
d. Caretaker for the things of the guests

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______ 36. The hotel-keeper cannot free himself from responsibility by:

a. posting notices to the effect that he is not liable for the articles brought by the
guest;
b. posting notices to the effect that he is liable for the articles brought by the guest
c. any stipulation between the hotel-keeper and the guest suppressing the
responsibility of the former
d. any stipulation between the hotel-keeper and the guest diminishing the
responsibility of the former
______ 37. If the deposit is onerous, the depositary is obliged to spend, without the right of
reimbursement, for the necessary expenses for preservation. What is the reason
behind?

a. He has no right to seek reimbursement because said expenses are deemed not
included in the compensation
b. He has no right to seek reimbursement because said expenses are considered
ordinary expenses
c. He has no right to seek reimbursement because said expenses are considered
luxury expenses
d. He has no right to seek reimbursement because said expenses are deemed
included in the compensation

______ 38. As a rule, the thing deposited should be returned at the will of the depositor. This is
true whether a period has been stipulated or not. An exception to the rule is:

a. When the thing is not judicially attached while in the depositarys possession
b. Should the depositary have been notified of the opposition of a third person to
the return or the removal of the thing deposited;
c. When the thing is extra judicially attached while in the depositarys possession
d. Should the depositary have not been notified of the opposition of a third person
to the return or the removal of the thing deposited;

______ 39. The depositary holding certificates, bonds, securities or instruments which earn
interest shall be bound to collect the latter when it becomes due, and to take such
steps as may be necessary in order that the securities may preserve their value and
the rights corresponding to them according to law. This provision does not apply
to:

a. Contract of loan

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b. Contract of commodatum
c. Contracts for the rent of safety deposit boxes
d. Contract of agency

______ 40. Which statement is correct?

a. Unless there is a stipulation to the contrary, the depositary may not commingle
grain or other articles of the same kind and quality, in which case the various
depositors shall own or have a proportionate interest in the mass.
b. Unless there is a stipulation to the contrary, the depositary may commingle grain
or other articles of the same kind and quality, in which case the various
depositors shall not own or shall not have a proportionate interest in the mass.
c. Unless there is no stipulation to the contrary, the depositary may commingle
grain or other articles of the same kind and quality, in which case the various
depositors shall own or have a proportionate interest in the mass.
d. Unless there is a stipulation to the contrary, the depositary may commingle grain
or other articles of the same kind and quality, in which case the various
depositors shall own or have a proportionate interest in the mass.

______ 41. Extra judicial deposit is generally ___________, while judicial deposit is always
____________.

a. Onerous; gratuitous
b. Gratuitous; Onerous
c. Gratuitous; Generous
d. Onerous; generous
______ 42. The document which embodies the contract states that the P300,000 was received
by the bank for safekeeping. The subsequent acts of the parties were really for the
bank to safely keep the dollars and return it at a later time. What is the contract
entered into by the parties?
a.Contract of loan
b.Contract of deposit
c.Contract of commodatum
d.Contract of lease
______ 43. Which is not included as one of the characteristics of a contract of a deposit?

a. It is a real contract perfected by delivery.


b. The principal purpose is the safekeeping of the thing delivered.

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c. Real and personal property can be the object of a deposit.


d. The depositary cannot use the thing deposited except with the express permission
of the depositor.

______ 44. Which of the following is not one of the distinctions between extrajudicial and
judicial deposit?

a. Extrajudicial deposit is by the will of the parties, while judicial deposit is by the
will of the court.
b. There is no contract in extrajudicial deposit, while there is a contract in judicial
deposit.
c. Extrajudicial deposit is generally gratuitous, while judicial deposit is onerous.
d. Extrajudicial deposit is in behalf of the depositor, while judicial deposit is in
behalf of the winner.

______ 45. When the thing delivered can be used by the depositary and he is obliged to pay
interest for said use, it follows that the contract cannot be considered a deposit but
a _____________.

a. Loan or mutuum
b. Commodatum
c. Irregular Deposit
d. Special kind of deposit

______ 46. What is the nature of the action of the depositor who has deposited something still
in the possession of an insane depositary?

a. His is an owners action to recover or vindicate a thing. The insane depositary,


because of the insanity, does incur the obligations of a depositary.
b. His is an owners action not to recover or vindicate a thing. The insane
depositary, because of the insanity, does not incur the obligations of a depositary.
c. His is an owners action not to recover or vindicate a thing. The insane
depositary, because of the insanity, does incur the obligations of a depositary.
d. His is an owners action to recover or vindicate a thing. The insane depositary,
because of the insanity, does not incur the obligations of a depositary.

______ 47. As a rule, the depositary may change the way of the deposit without permission
after notifying the depositor and wait for his decision unless:

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a. there is no delay.
b. delay would cause danger.
c. depositor consented with the change.
d. there was delay but does not cause danger.

______ 48. Where money, consisting of coins of legal tender, is deposited with a person, and
the latter is authorized by the depositor to use and dispose of the same, the
agreement thus entered into between the depositor and the depositary is:
a.
b.
c.
d.

Contract of loan
Contract of deposit
Contract of commodatum
Contract of lease

______ 49. When it becomes necessary to open a locked box or receptacle, the depositary is
authorized to do so if:

a. The key has been delivered to him or when the instructions of the depositor as
regards the deposit cannot be executed without opening the box or receptacle.
b. The key has not been delivered to him.
c. When the instructions of the depositor as regards the deposit can be executed
without opening the box or receptacle.
d. The key has not been delivered to him or when the instructions of the depositor
as regards the deposit can be executed without opening the receptacle.

______ 50. If the depositary by force majeure or government order loses the thing and receives
money or another thing in its place, he shall deliver the sum or other thing to the:

a. The court
b. Depositor
c. Depositary
d. Government

III.Guarantee

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______ 1. X, RG and Z are guarantors of the debt of D to C in the amount of P75, 000.00. Each
of them had guaranteed the following amount: X for P25, 000.00; RG for P30,
000.00; and Z for P20, 000.00. RG had fulfilled the entire obligation because D is
insolvent. Which of the following statement is not correct in case of co-guarantors?
a. RG may demand X for P25, 000.00 and Z for P20, 000.00
b. RG may demand X for P25, 000.00 and Z for P25, 000.00
c. In case Z is insolvent, X will accumulate P9, 000.00 and RG will accumulate
P11,000.00
d. All of the above
______ 2. In cases where there are two or more guarantors, the following are correct except:
a. A co-guarantor who has paid the entire obligation may demand each of the others
the share that is proportionally owing from him.
b. If one of the co-guarantors is insolvent his share shall be borne by the others,
including the payer, in the same proportion.
c. Co-guarantors may not set up against the one who paid the defenses which would
have pertained to the principal debtor against the creditor
d. Payment by one of the guarantors can only be made after judicial demand or after
the insolvency of the principal debtor.
______ 3. A guarantor can be indemnified by the debtor as provided by law. Among the things
which he could be indemnified are the following except:
a. The total amount of the debt
b. The legal interest after the payment even before the knowledge of the debtor,
even though it did not earn interest for the creditor
c. The expenses incurred by the guarantor after having notified the debtor that
payment had been demanded of him
d. Damages, if they are due
______ 4. Which of the following statements is not an instance when the guarantor may
proceed against the principal debtor even before his payment of the principal
obligation?
a. When the debtor has bound himself to relieve him from the guaranty within a
specified period, and this period has expired
b. When the debt has become demandable, by reason of the expiration of the period
for payment
c. After the lapse of ten years, when the principal obligation has fixed period for its
maturity, unless it is of such nature that it cannot be extinguished except within a
period longer than ten years
d. If there are reasonable grounds to fear that the principal debtor intends to
abscond
______ 5. RG is a guarantor of the P50, 000.00 indebtedness of PG to ZX, which should be
paid before August 16, 2010. RG made the payment without notifying PG.
Thereafter, PG without knowing that obligation was already fulfilled had repeated
the payment. What is the remedy of RG to recover the amount paid?
a. RG may go after ZX or PG for reimbursement
b. RG has remedy against PG only
c. RG may demand reimbursement from PG if fortuitous event had prevented him
from notifying PG of the payment, even if ZX is solvent.
d. RG may demand reimbursement from PG if ZX is insolvent and if fortuitous
event had prevented him from notifying PG of the payment.

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______ 6. A sub-guarantor, in case of the insolvency of the guarantor for whom he bound
himself, is responsible to the co-guarantors in the same terms as the:
a.
b.
c.
d.

principal debtor
creditor
co-makers
guarantor

______ 7. Z furnished a bond in favor of X Company. X was then allowed to withdraw the
cosigned goods to PNB. Thereafter PNB obligates Z to pay the debt of X Company.
Before paying the said amount Z obtained a solidary note from X Company. XX, as
president of X Company, signed a document wherein they bound themselves
solidarily to pay, reimburse, and refund to Z all such sums or amounts of money as
it, or its representative, may pay or become bound to pay, upon its obligation with Z.
X Company was declared insolvent. Which of the following statements is correct?
a.XX, as the defendant, shall not pay the plaintiff Z the expenses incurred by X
Company in the litigation between X Company and Z.
b.XX, as the defendant, shall pay the plaintiff the expenses incurred by X Co in the
litigation between X Company and Z.
c.XX, as the defendant, shall not pay the plaintiff the expenses incurred in the
litigation brought against him.
d.XX, as the defendant, shall pay the expenses incurred in the action brought
against him.
______ 8. BF and BB are friends. Unknown to BF, a contract of guaranty was entered into by
BB in an obligation to CC where BF is the principal debtor. Which of the following
statement is not correct?
a. The creditor is bound to accept payment of performance by a third person who
has no interest in the fulfillment of the obligation, unless there is a stipulation to
the contrary.
b. If he paid without the knowledge or against the will of the debtor, he can recover
only insofar as the payment has been beneficial to the debtor.
c. He can compel the creditor to subrogate him in his rights, such as those arising
from a mortgage, guaranty, or penalty.
d. None of the above
______ 9. The guarantor is to obtain release from the guaranty, or to demand a security that
shall protect him from any proceedings by the creditor and from the danger of
insolvency of the debtor when:
a. The debtor has bound himself to relieve him from the guaranty within a specified
period, and this period has not yet expired.
b. After the lapse of ten years, when the principal obligation has a fixed period for
its maturity, unless it is of such nature that it cannot be extinguished except
within a period longer than ten years.
c. There are reasonable grounds to fear that the principal debtor intends to
abscond.
d. The debt has become demandable by reason of default on the part of the principal
debtor
______ 10.The right to subrogation is available to guarantors. In relation to this concept, which
of the statements is not correct?
a. Its purpose is to enable the guarantor to enforce the indemnity provided by the
law.

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b. Right of subrogation is a result by operation of law from the act of payment and
there is no necessity for the guarantor to ask the creditor to expressly assign his
right to action.
c. The right is not contractual it is based on natural obligation.
d. Subrogation can be availed of by the guarantor even without the consent of the
creditor.
______ 11. The obligation of the guarantor is extinguished in the following except:
a.
b.
c.
d.

When the principal obligation is extinguished


In the case of the release of the guarantor by the creditor
If a contract is novated with the guarantors consent
The creditor voluntarily accepts immovable or other property in payment of
the debt
e. An essential alteration in the terms of the loan agreement without the consent of
the surety

______ 12. Material alteration in the contract of guaranty is present in the following cases
except:
a. In the original contract, A will guaranty Bs indebtedness as selling agent in
Baguio but the document was altered. The document shows that places Guaga,
Angeles, San Simon, Capas, Magalang and Mabalacat are included.
b. The creditor increased the loan from Php 40,200 to Php 56,800 without the
knowledge and consent of the surety.
c. The guarantor executed an absolute guaranty in consideration of the overdraft
agreement and pledge and bound himself jointly and severally liable to the bank
but the creditor and debtor had extended the time of payment without his
consent.
d. The surety executed an indemnity agreement whereby he bound himself jointly
and severally with debtor for payment of loan in favor of creditor. Debtor
obtained another loan and requested creditor bank a complete restructure of its
indebtedness that was approved without notice to or prior consent of surety.
______ 13. D obtained from C a 1954- 1955 sugar crop loan in the amount of Php 40,200.00
secured by a chattel mortgage. As additional security, S issued surety bond in favor
of C. Three months later, C increased the loan from Php 40,200 to Php 56,800
without the knowledge and consent of S. D failed to liquidate the loan. What is the
implication?
a. The contract in question is a continuing chattel mortgage so the knowledge and
consent of the surety is not necessary for an increase in the amount of the
principal obligation.
b. Ss liability is that of a solidary co- maker so the knowledge and consent of the
surety is not necessary for an increase in the amount of the principal obligation.
c. S waived his right to be notified by virtue of the stipulation in the indemnity
agreement.
d. The increase in the indebtedness from Php40,200.00 to Php56,800.00 is
material and prejudicial to S.
______ 14. The following acts of the debtor extinguish the contract of guaranty except:
a. An extension to pay granted to the debtor by the creditor without the consent of
the guarantor.

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b. Failure on the part of the creditor to demand payment after the debt has become
due.
c. In case of an acceleration clause, the act of the creditor of extending
payment of an installment without guarantors consent.
d. When the creditor does not apply the initial and subsequent payments to the debt
as provided for in the deed of assignment
______15. A, B, C and D are co-guarantors of Php 1,000.00. A is released by
the creditor WITHOUT the consent of the other co- guarantors. Which of the
following statements holds true?
a. The Php1,000.00 debt will be divided among B, C and D.
b. The amount guaranteed by the released guarantor shall be divided among the
others.
c. The other guarantors will pay only their original share of the obligation, which is
Php250.00.
d. The amount guaranteed by the released debtor shall be extinguished.

______ 16. What happens if A, B, C and D are co guarantors of Php1,000.00 and A is released
by the creditor WITH the consent of the other co- guarantors?
a.The Php1,000.00 debt will be divided among B, C and D.
b.The remaining Php750.00 shall be divided among the four of them.
c.The other guarantors will pay only their original share of the obligation, which is
Php250.00.
d.The amount guaranteed by the released debtor shall be extinguished.
______ 17. CBank and D executed an overdraft agreement and pledge wherein CBank granted
D an overdraft from time to time on his current account with CBank not to exceed
Php200,000.00. G executed an absolute guaranty in consideration of the overdraft
agreement, pledged and bound himself jointly and severally liable to the bank.
Later, D requested for extension to the bank, who in turn granted with the
condition that the interest will increase and the amount of the overdraft will be
reduced but the former failed to pay their indebtedness on the date due. What is
the extent of liability of G considering the renewal of the overdraft without his
knowledge?
a. He is released from his obligation because the plaintiff had extended the time of
payment without his consent.
b. The contract of absolute guaranty expressly authorized CBank to extend the time
of payment and to release or surrender any security or part thereof held by it
without notice to or consent of guarantor, and, as such, his liability remains
unaltered.
c. The contract of absolute guaranty expressly authorized the release of the
guarantor upon extension of time for payment without notice to or his consent.
d. The contract of absolute guaranty expressly authorized CBank to extend the time
of payment and to decrease guarantors obligation if renewal was made without
notice to or consent of the guarantor.
______ 18. C Bank delivered an amount of a credit line to D guaranteed by G to purchase
asphalt, which was subsequently delivered to Department of Public Works (DPW).
D assigned C Bank to collect the value of the asphalt from DPW and in return,
apply the said value to Ds credit line as payment.
The amount was regularly collected by C Bank, until for unknown reason, the bank
ceased to collect, until after 4 years investigators found that more money were
payable to D from DPW, because the latter had allowed another creditor to collect

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funds for D. What is the implication when C Bank ceased to collect the money from
DPW?
a. It is the guarantors duty to collect the proceeds and to apply in Ds credit line
b. The power of attorney authorizing D to collect the amount is a mere security for
the credit line.
c. C Bank may go against G incase D is incapable to pay the credit line.
d. G is no longer liable by allowing the assigned funds to be exhausted without being
notified, the bank deprived the former of any possibility of recoursing against the
security.
______ 19. Who are released from their obligation even if they be solidary whenever by some
act of the creditor they cannot be subrogated to the rights, mortgages, and
preference of the latter?
a.
b.
c.
d.

Creditor
Debtor
Guarantor
Surety

______ 20. What is the effect of a surety bond that is not signed by the principal obligor?
a.
b.
c.
d.

Valid between the parties


It is deemed as if no principal obligation is existing
It only suspends its validity against third parties
The signature maybe waived by the obligor

______ 21. The following are not entitled to the benefit of exhaustion except:
a.
b.
c.
d.

Surety
Judicial bondsman
Sub- surety
Guarantor

______ 22. What is the obligation of a surety upon posting a bond for the accused?
a.
b.
c.
d.

Pay the debt of the accused


Provide counsel for the accused
He is the jailer of the accused and responsible for the latters custody
Only to provide bail bond for the accused

______ 23. The benefit of excussion shall not take place when?
a.
b.
c.
d.

The guarantor does not bind himself solidarily


The guarantor binds himself solidarily with the debtor
The debtor prohibits the exhaustion of his property
The debtor waives the exhaustion of his property

______ 24. A suretyship is a contract whereby one person engages to be answerable for the
debt, default, or miscarriage of the principal. The following statements are true in
relation to the nature of suretys undertaking, except:
a.
b.
c.
d.

Liability is contractual and accessory but direct.


Liability is limited by terms of contract.
Liability arises only if principal debtor is held liable.
Liability depends on an independent agreement to pay the obligation if primary
debtor fails to do so.

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______ 25. A relationship which exists where one person (principal) has undertaken an
obligation, and another person is also under a direct and primary obligation or
other duty to the obligee, who is entitled to but one performance, and as between
the two who are bound, the second, rather than the first should perform.
a.
b.
c.
d.

Guaranty
Suretyship
Accommodation Surety
Pledge

______ 26. Guaranty is a subsidiary and accessory contract. A guarantor cannot bind himself
for more than the principal debtor, and even if he does, his liability shall be
reduced to the limits of that of the debtor. Nevertheless, the guarantor may bind
himself for less than that of the principal, except:
a. When the principal obligation is subject to a suspensive condition
b. When the principal obligation is subject to a resolutory condition
c. When the amount specified in a surety bond as the suretys obligation does not
limit the extent of the damages that may be recovered.
d. In relation to interests, judicial costs, and attorneys fees as part of damages
______ 27. Guaranty, being accessory, is extinguished when principal obligation is
extinguished. The causes of which are the following except:
a. The guaranty itself may be directly extinguished although the principal obligation
remains such as in the case of the release of the guarantor made by the creditor.
b. Condonation or Remission of the debt
c. Confusion or Merger of the rights of the creditor and debtor
d. Fulfillment of a resolutory condition
______ 28. Future debts, even if the amount is not yet known, may be guaranteed but there
can be no claim against the guarantor until the debt is ascertained or fixed and is
demandable in order to:
a.
b.
c.
d.

Secure the payment of a loan at maturity


Secure payment if any debt to be subsequently incurred
Secure existing unliquidated debts
All of the above

______ 29. The absence of direct consideration or benefit to guarantor in guaranty or surety
agreement is regarded as:
a. Valid. The guarantor or surety is not entitled to any consideration.
b. Valid. Despite the absence of any direct consideration received by the guarantor
or surety, such consideration need not pass directly to the guarantor or surety, a
consideration moving to the principal will suffice.
c. Invalid. A contract of guaranty is subsidiary and conditional in character, the
absence of any direct consideration will make the contract void.
d. Invalid. The absence of consideration will make the contract insufficient to
support the obligation of a guarantor or surety.
______ 30. It refers to an obligation that is not limited to a single transaction but which
contemplates a future course of dealings, covering a series of transactions generally
for an indefinite time or until revoked. It is generally prospective in its operation
and is intended to secure future transactions.
a. Continuing Guaranty
b. Continuing Suretyship

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c. Continuing Suretyship Agreement


d. Suretyship Agreement
______ 31. The following statements are exceptions to the right to indemnity of the guarantor,
except:
a. Where the guaranty is constituted without the knowledge or against the will of
the debtor, the guarantor can only recover insofar as the payment had been
beneficial to the debtor.
b. The legal interest thereon from the time the payment was made known to the
creditor, even though it did not earn interest for the creditor.
c. Payment by a third person who does not intend to be reimbursed by the debtor is
deemed a donation, which requires the debtors consent. But the payment is valid
with respect to the creditor.
d. Waiver on the part of the guarantor.
______ 32. The following statements are exceptions to the general rule that guarantor has the
right to the benefit of excussion or exhaustion of the debtors property, except:
a. If it may be presumed that an execution on the debtors property will not satisfy
the obligation
b. If guarantor does not set up the benefit of excussion and fails to point out to the
creditor available property of the debtor within the Philippines
c. Where a pledge or mortgage has been given by the guarantor as a special security
d. If guarantor has interpose it as a defense before judgment is rendered against
him.
______ 33. The surety must only be bound in the manner and to the extent, and under the
circumstances which are set forth or which may be inferred from the contract of
guaranty or suretyship, and no further.
a.
b.
c.
d.

Liability for obligation stipulated


Liability of surety limited to a fixed period
Liability of surety to expire on maturity of principal obligation
Liability depends upon an independent agreement to pay the obligation if the
primary debtor fails to do so.

______ 34. This provides for the enforcement of the rights of the guarantor against the debtor
after he has paid the debt.
a.
b.
c.
d.

Right of guarantor to proceed against debtor even before payment


Right of guarantor to reimbursement after payment
Right of surety to proceed against debtor before payment
Right of surety to reimbursement after payment

______ 35. The benefit of division among several guarantors under Article 2065 can be availed
of if there are:
a. Two or more debtors of one debt, even if they be bound solidarily, each with
different guarantors
b. Two or more guarantors of the same debtor but not only for the same debt
c. If any of the circumstances enumerated in Art. 2059 should take place, as would
the benefit of exhaustion of the debtors property
d. If there are several guarantors of only one debtor, for the same debt
______ 36. A contract whereby the parties, by making reciprocal concessions, avoid litigation
or put an end to one already commenced.

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a.
b.
c.
d.

Compromise
Suretyship
Subrogation
Guaranty

______ 37. A classification of guaranty that, not only includes the principal obligation, but also
all its accessories including judicial costs:
a.
b.
c.
d.

Conventional
Legal
Definite
Indefinite

______ 38. The following are nature of suretys undertaking, except:


a.
b.
c.
d.

Liability is limited by the contract.


Liability arises only if principal debtor is held liable.
Surety is entitled to notice of principal debtors default.
Undertaking is to creditor and to debtor.

______ 39. Which of the following statements does not describe the differences of guaranty
and suretyship:
a. The guarantor is the insurer of the solvency of debtor while the surety is the debt.
b. The guarantor is primarily liable while the surety is secondarily liable.
c. The guarantor binds himself to pay if the principal cannot pay while the surety
undertakes to pay if the principal does not pay.
d. The guarantor can avail of the benefits of excussion and division while the surety
cannot avail of such benefits.
______ 40. When is the guarantor not entitled to the benefit of excussion?
a.
b.
c.
d.

When the pledge or mortgage has been given by him as special security.
In case of insolvency of the creditor.
When he interposes it as a defense before judgment it rendered against him.
If it maybe presumed that an execution on the property of the principal debtor
would result in the satisfaction of the obligation.

______ 41. Who are the parties in a contract of guaranty?


a.
b.
c.
d.

debtors and guarantors


creditors and guarantors
creditors, debtors and guarantors
accommodation party, creditors, debtors and guarantors

______ 42. Which is not a characteristic of guaranty?


a.
b.
c.
d.

It is subsidiary and conditional.


It is consensual.
It is bilateral.
It is an accessory.

______ 43. A guaranty is not valid when the principal obligation is:
a. Natural
b. Void

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c. Voidable
d. Unenforceable
______ 44. The following are duties of the creditor if he wants to hold the guarantor liable,
except:
a.
b.
c.
d.

Notify the guarantors of the debtors inability to pay


Prove that the debtor is still unable to pay
Resort to possible remedies excluding a suit
Exhaust the properties of the debtor

______ 45. The following defenses are available to the guarantor, except:
a.
b.
c.
d.

Defenses which are purely personal to the debtor


Defenses inherent to the principal obligation
Defenses of the guarantor himself like vitiated consent on his part
Defenses ordinarily personal to the principal debtor but which are inherent to the
debt

______ 46. What is the effect of dacion en pago in a contract of guaranty/suretyship?


a.
b.
c.
d.

The guaranty ends if a contract is novated without the guarantors consent.


Eviction revives the principal obligation but not the guaranty.
The neglect of creditor to sue discharges the guarantors from their liability.
The release made by the creditor in favor of one of the guarantors benefits all
other guarantors.

______ 47. The guarantor can still claim reimbursement from the debtor in spite of lack of
notice if the following conditions are present, except:
a.
b.
c.
d.

Guarantor was prevented by fortuitous event.


The principal debtor becomes insolvent.
The guaranty is gratuitous.
The guaranty is unilateral.

______ 48. Other than those enumerated in Article 2059, select an instance when the
guarantor is NOT entitled to the benefit of excussion:
a. It would be useless to exercise this right because it will not result in the
satisfaction of the obligation.
b. If Article 2061 is not complied with.
c. If the guaranty is in a judicial bond.
d. If the principal debt is void.
______ 49. Mr. X entered into a contract with Mr. Y for the importation of cotton textile. To
secure payment, Mr. X obtained a letter of credit from ABC Bank in Mr. Ys favor.
A trust receipt was issued and signed by Mr. Z where there was a solidary guaranty
clause in said receipt. When the balance of Mr. X remained unpaid, Mr. Y went
after Mr. Z, who in turn refused to pay stating that he is not a guarantor. Is Mr. Z
correct?
a. Yes. Mr. Zs liabilities as guarantor never arose for the trust receipt never bound
the Mr. Z due to its insufficiency and that even if Mr. Z is a guarantor; he is still
entitled to the benefit of excussion.
b. No. What is merely needed is that the contract of guaranty is in writing to be
effective between the parties.
c. Yes. In order that Mr. Z be liable as guarantor, the trust receipt should have been
notarized by a Notary Public.

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d. No. The solidary guaranty clause was binding with respect to Mr. X, Mr. Y and
Mr. Z; although it would not have the same effect as against third parties.
______ 50. Which among the following is not a qualification of a guarantor?
a.
b.
c.
d.

Integrity
Capacity to bind
Sufficient property
Debtor is personally known to him

IV. Pledge
______ 1. What is the purpose of a contract of pledge or mortgage?
a.
b.
c.
d.

To facilitate approval of a loan


To facilitate appropriation of the thing pledge in there is default in payment
To secure fulfillment of a principal obligation
To secure fulfillment of an accessory obligation

______ 2. In order the pledge to be valid the pledgor or mortgagor must be what?
a.
b.
c.
d.

The agent of the owner of the thing pledge or mortgage


The assignee of the thing pledge or mortgage
The relative of the owner of the thing pledge or mortgage
The absolute owner of the thing pledged or mortgaged

______ 3. Which among the following is lawfully acceptable in pledge or mortgage?


a. Third persons are not allowed to secure the loan of a debtor.
b. Third persons who are not parties to the principal obligation may secure the
debtor using his own property as pledge or mortgage.
c. Third persons are persona non grata in pledge or mortgage.
d. Third persons can only create verbal promise to secure the loan of a debtor.
______ 4. In what manner must the thing pledged be transferred to the creditor?
a.
b.
c.
d.

It must be only by means of ceremonial transfer.


It must be only by means of symbolic transfer.
It must be only by means of actual or physical transfer.
There must be no transfer to take place.

______ 5. What is the effect to the accessory contract of pledge or mortgage if the principal
obligation is voidable and unenforceable?
a.
b.
c.
d.
e.

It becomes voidable and unenforceable as well.


It is deemed void ab initio.
It remains valid.
It is considered rectifiable.
It is considered non-rectifiable.

______ 6. If the principal obligation is void the accessory obligation is:


a. Valid
b. Void

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c. Voidable
d. Unenforceable
______ 7. A guaranty cannot exist without a?
a.
b.
c.
d.

Valid obligation
Invalid obligation
There should be no obligation
There should a valid accessory obligation

______ 8. If the principal obligation becomes due, the thing pledge or mortgage may be:
a.
b.
c.
d.

Alienated for the payment to the creditor


Sold in private to settle debt
Sold in a public auction to settle debt
Repossessed due to default

______ 9. What does pactum commissorium mean?


a. Commission of the third party being an accommodation party
b. Facts stated in the contract of pledge.
c. Upon default of the debtor the thing pledge ownership automatically retained by
the debtor.
d. A stipulation in the contract of mortgage or pledge that if the debtor defaulted in
payment the thing pledge or mortgage ownership will be automatically
transferred to the creditor.
______ 10. The contract of pledge gives a right to the creditor to ______ the thing in his
possession or in that of a third person to whom it has been delivered, until the debt
is paid.
a.
b.
c.
d.

dispose
retain
alienate
enjoy

______11. What is needed before the thing pledged can be validly placed in the possession of a
third person?
a.
b.
c.
d.

Agreement between the pledgor and pledge


Agreement between the debtor and the accommodation party
Agreement between the debtor and the pledgor
Agreement between the creditor and the pledge

______12. What object of the accessory contract can be acceptable in pledge?


a.
b.
c.
d.

Immovable things
Movable things
Real rights
Anything within the commerce of man

______ 13. What needs to be done to the thing pledged if it is a negotiable instrument?
a.
b.
c.
d.

It must be delivered to the creditor.


It must be a dated and demandable negotiable instrument.
It must be endorsed.
It must be a crossed check.

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______ 14. If the creditor consents to the selling of the thing pledged by the debtor or pledgor,
transferring ownership to the buyer, what will happen to the thing pledged?
a.
b.
c.
d.

The thing remains with the creditor or pledgee.


The thing will be delivered to the buyer.
The thing will be delivered to the debtor.
The thing will be consigned to the courts.

______15. What is the degree of diligence needed as a creditor-pledgee?


a.
b.
c.
d.

Extraordinary diligence
Ordinary diligence
Diligence of a good father of a family
Diligence of father of a good family

______16. If there are fruits/interest or income of the thing pledge, where will it be applied?
a.
b.
c.
d.

The extraordinary expenses


Expenses for preservation
Expenses for contingency
Will apply to the taxes

______17. When can the creditor-pledgee use the thing pledged?


a.
b.
c.
d.

Any time as the creditor pleases


After 30 days upon actual delivery
When the nature of the thing dictates its use for preservation
Never

______18. When will the debtor or pledgor demand the thing pledged to be deposited to a third
person?
a.
b.
c.
d.

When the thing has an expiry date


When the thing is a real right
When the thing is an incorporeal right
When the creditor-pledgee exercise willful neglect, lost or impaired

______19. When can a pledgor debtor demand the return of the thing pledged to be replaced
by another thing of the same value?
a. When the thing is in endangered of destruction due to the fault of the pledgee
b. When because without the fault of the pledge it is susceptible to be damage or
destroy
c. When the thing is taken by a third person
d. When the government expropriates it
______20. Abe acquired a loan from Gani. The former issued a promissory note for the sum
borrowed and a bill of sale for his car as security for the loan. Gani never took
possession of the car nor did he demand possession of the same. Is the pledge
valid?
a. Yes, both parties have given their consent resulting in the perfection of the
pledge.
b. Yes, the possession of Gani of the car does not have to be actual possession it can
be symbolic.
c. No, the pledge was not in writing, therefore it produces no binding effect.
d. No, the abandonment of the custody of the car by Gani constitutes a waiver of the
pledge.

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______21.What happens to the creditor-pledgee when the thing is returned by the pledge and a
written statement is given to that effect?
a.
b.
c.
d.

He becomes a depository of the thing pledged.


He is deemed a third party.
He turns into an accommodation party.
He befalls the role of trustee.

______22. Who wins in the public auction when the highest bidder equals the bid of the owner
of the thing pledge?
a.
b.
c.
d.

The highest bidder, not the owner


The lowest bidder in good faith
The owner in equal bid with the highest bidder
The winner will be selected randomly

______23.When is the debtor released from his debt if the winner in the bidding paid in
installments?
a.
b.
c.
d.

At once if the payment is in full


After the last installment has been paid
When the first installment has been given
After the public bidding is closed

______24.When the negotiable instrument is due and demandable, the pledgee can collect
from the one who issued the said negotiable instrument. If there is an excess after
offset the amount of the principal obligation, to whom must said excess be given?
a.
b.
c.
d.

The debtor-pledgor
The issuer of the negotiable instrument
The creditor-pledgee
To the government

______25. B entrusted to A his jewelry to sell on commission. A, in turn, gave it to C for the
same purpose without the knowledge of B. C, however, pledged it to XYZ pawnshop
and appropriated to himself (C) the money he acquired from the transaction. In
view of the foregoing, which of the following statements is correct?
a.
b.
c.
d.

XYZ pawnshop is entitled to reimbursement of the amount he gave C.


The contract of pledge between C and XYZ pawnshop is void.
B can demand payment from A or C for the value of the jewelry.
A is primarily liable for the loss of the jewelry because he gave the jewelry to C
without Bs consent.

______26. Lauro borrowed money from Renato. As security to the same, Lauro executed a
promissory note and pledged his shares of stock. A stipulation in their agreement
provides that if Lauro fails to pay, the shares of stock pledged shall become
property of Renato. Is this stipulation valid?
a.
b.
c.
d.

Yes, as long as the agreement has been duly notarized by a Notary Public.
No, this stipulation is considered contrary to public policy.
Yes, since both parties have consented and agreed to it.
No, because there was no definite number of stocks indicated in the agreement.

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______27. Which is not a formality required prior to the exercise of the creditor of his right to
sell if the credit is not satisfied?
a.
b.
c.
d.

Notice to debtor
Notice to the public
Debt is already due
Public auction

______28. Which among the following is a remedy when destruction or impairment is feared,
without fault of the pledgee?
a. The pledgor may cause the thing pledged to be sold at a public sale.
b. The pledgee can demand the return of the thing pledged but there must be a
substitute.
c. The thing pledged can be sold to a third party by common agreement of the
parties.
d. The pledgor can demand the return of the thing pledged.
______29. Based on the concept of pactum commissorium, the following are prohibited by
law, except:
a. Disposition of the things pledged by the creditor
b. Appropriation of the creditor of the things pledged or mortgaged
c. Transfer of ownership of the things pledged by the debtor to the creditor in case
of non-payment
d. Alienation of property by the debtor in favor of the creditor to satisfy the debt
______30. Which of the following cannot be pledged?
a.
b.
c.
d.

Stock dividends
Motor vehicles
Machinery
Incorporeal rights

IV. Real Estate Mortgage


______ 1. Does the non-registration of the Real Estate Mortgage in the Registry of Property bar
the mortgagee from foreclosing the mortgaged property?
a. Yes, because the law requires that Real Estate Mortgage must be registered to be
binding between the parties.
b. No, because even if the instrument is not recorded, the mortgage is nevertheless
binding between the parties.
c. Yes, because unrecorded mortgage does not bind the parties
d. No, because registration of the mortgage is not an essential requisite in judicial
foreclosure proceeding.
______ 2. It is a stipulation in a contract of mortgage to the effect that the mortgagee is allowed
to appropriate to himself the thing mortgaged:

a. Pactum commisorium
b. Precarium
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c. Antichresis
d. Precarium commisorium
______ 3. A mortgaged his land to B in a private document. Same was not registered in the
Registry of Deeds. Later, A sold same land to C. Such sale was registered. B
questioned the validity of the sale. C contended that the sale is valid because the
mortgage between A and B is not binding upon him. Is Cs contention correct?

a. Yes, because the contract of mortgage between A and B is executed in a private


instrument and is not duly registered making it invalid against third persons.
Therefore, the sale is valid.
b. No, because even if the instrument is unregistered, the mortgage is nevertheless
binding upon third persons. Therefore, the sale is invalid.
c. Yes, because the registration of the instrument will not validate the sale.
d. No, because the registration of the instrument is not necessary for the same to be
duly constituted. Therefore, the mortgage is valid.
______ 4. This pertains when the mortgagor can redeem the property within a certain period
after it was sold for the satisfaction of his debt.

a.
b.
c.
d.

Right of redemption
Equity of redemption
Redemption of personal property
Redemption of real property

______ 5. When does the right of redemption starts?

a. It starts form the time of receipt of the notice of the extra-judicial foreclosure by
the mortgagor.
b. It starts from the filing of the petition for extra judicial foreclosure of the
mortgaged property by the mortgagee.
c. It starts form the registration of the certificate of sale by the clerk of court.
d. It starts from the time the mortgagor defaulted in fulfilling his obligation to the
mortgagee.
______ 6. Is a foreclosure valid even without prior publication and posting of notice?

a. Yes, because notice and publication is not an essential requisite in a foreclosure


proceeding.
b. No, because strict compliance with the notice and publication requirements are
strictly required by law.
c. It depends. If it is a foreclosure of a chattel mortgage, notice and publication may
not be strictly complied with, but if it is a real estate mortgage, notice and
publication must be strictly complied with.
d. None of the above is correct.
______ 7. The following are formalities provided in an extra-judicial foreclosure except:

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a.
b.
c.
d.

Posting of notices in public view


Publication of such notice in a newspaper of general circulation
A levy by a sheriff
Hearing

_____ 8. Which o the following is not an essential requisite to the contracts of mortgage?

a.
b.
c.
d.

The persons constituting the mortgage have the free disposal of their property.
The mortgagor is not the absolute owner of the property mortgaged.
The document shall be recorded in the Registry of property to bind third parties.
They are constituted to secure the fulfillment of a principal obligation.

______ 9. The following can redeem the foreclosed property except:

a.
b.
c.
d.

judicial creditor
any person having lien on the property sold
debtor
any person who wants to buy the property

______ 10. Pactum Commisorium is void under the following contracts except in:

a.
b.
c.
d.

contract of Real Estate Mortgage


contract of Chattel Mortgage
contract of Pledge
all of the above

______ 11. What law should govern the redemption of a land with free patent title?

a.
b.
c.
d.

Public Land Act


Rural Banks Act
Maceda Law
Ship Mortgage Law

______ 12. What is the rule on redemption if the land is mortgaged to a rural bank under R.A.
No. 720, as amended?

a. The mortgagor has no right to redeem at all.


b. The mortgagor may redeem the property within two years from the date of
foreclosure or registration of the sheriffs certificate of title.
c. The mortgagors right to redeem does not prescribe. He can redeem at any time
he wants.
d. The mortgagor may redeem the property within one year from the date of
foreclosure or registration of the sheriffs certificate of title.

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______ 13. At what instance when the title of ownership over the property sold in the
foreclosure sale is determined?

a. Only after a period of redemption has lapsed without the debtor-mortgagor or his
heirs performing their right of redemption.
b. Only before the period of redemption has lapsed without the debtor-mortgagor or
his heirs performing their right of redemption.
c. One year after redemption without the debtor-mortgagor or his heirs performing
their right of redemption.
d. One year before the period of redemption without the debtor-mortgagor or his
heirs performing their right of redemption
______ 14. What is the extent of the amount of consideration for the redemption?

a. Amount or of the principal obligation.


b. Amount of the principal obligation and interest.
c. Amount of the principal obligation accumulated interest up to and including the
time of actual repurchase.
d. Amount of the property mortgaged.
______ 15. Equity of redemption exists on:

a. judicial foreclosure
extra judicial foreclosure
b. redemption of real property
c. redemption of personal property
______ 16. Under the General Banking Law of 2000, if the mortgagee is a bank, the
redemptioner shall pay the following except:

a.
b.
c.
d.

Amount due under the mortgage deed


Interest
Cost and expenses
Tax of the subject property

_______ 17. This is a kind of mortgage when there is agreement between the parties or
constituted by the will of the owner of the property on which it is created.

a.Legal
b.Equitable
c.Voluntary
d.None of the above

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______ 18. Which of the following is not a nature of judicial foreclosure?

a.It is quasi in rem action.


b.It is the result or incident of the failure to pay debt.
c.It survives even the mortgagor dies.
d.It is capable of pecuniary estimation.
______ 19. Which of the following is not a characteristic of a real estate mortgage?

a.
b.
c.
d.

It is indivisible.
It is an accessory contract.
It is a personal right.
It is real property.

______ 20. What is the effect of a mortgage?

a.
b.
c.
d.

It creates a real right and it creates merely an encumbrance.


It creates a personal right and it creates merely an encumbrance.
Ownership is transferred to the mortgagee.
It secures a principal obligation.

_____ 21. A applied and obtained a loan from B, a credit institution. To secure the
payment of the obligation, A executed a deed of mortgage. A failed to comply
with the obligation, B judicially foreclosed the mortgage. A invoke his right of
redemption. Is As contention is correct?
a. Yes, A is correct pursuant to the General Banking Act, wherein, even if the
foreclosure of the mortgaged properties is judicial in nature, nonetheless it has
the right of redemption for one year.
b. No, A is not correct because according to the decided cases of the Supreme Court
they held that A only have an equity of redemption since the foreclosure is
judicial in nature.
c. Yes, A is correct because B is a credit institution and even if it is judicially
foreclosed, A has a one (1) year period within which to exercise the right of
redemption.
d. No, A is not correct because there is no right of redemption at all.

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______ 22. What is the EQUITY OF REDEMPTION?


a. The right of mortgagor to redeem the mortgaged property within a certain period
after it was sold for the satisfaction of the mortgage debt.
b. The right of mortgagor to redeem the property within one (1) year from the and
after the date of registration of the sale.
c. The right of mortgagor to return the mortgaged property after his default in the
performance of the conditions of the mortgaged but before the sale of the
mortgaged property.
d. The right of mortgagor to return the mortgaged property before his default in the
performance of the conditions of the mortgaged.
______ 23. X mortgaged his parcel of land in favor of ZHY bank, subject to extrajudicial foreclosure in case of default of payment of the obligation on the
part of X. During the pendency of the mortgaged, X separately sold part and
parcel of the said land to C and D. Both notarial deeds is not registered. Is C
and D have the right to repurchase the said foreclosed land?
a. Yes, C and D have the right to repurchase because the expiration of the
redemption period they offered to repurchased the land to ZHY bank, which the
bank refused.
b. Yes, C and D have the right to repurchase because a co-owner of the said land
they have the right to exercise their right of redemption of the land.
c. No, C and D have no right to repurchased the land because they already their
right to repurchase the property after buying a portion of the land.
d. No, C and D have no right to repurchased the land because after buying a portion
of the foreclosed land they only have the right to demand a personal right as coowners of the foreclosed land.
______ 24. EXTRA- JUDICIAL is the following except:
a. Extra- judicial foreclosure cannot be done in another province even if with
stipulation it should be within the province where the property is situated.
b. Extra- judicial foreclosure a mortgage may be foreclosed extra judicially where
there is inserted in the contract a clause giving the mortgage the power upon
default of the debtor to foreclose the mortgage by an extra judicial sale of the
property.
c. Extra- judicial foreclosure can be redeem within one (1) year period.
d. Extra- judicial foreclosure may be foreclosed judicially by bringing an action for
that purpose in the RTC of the province or city where the property or any part
thereof lies.
______ 25. What are the GROUNDS in redeeming the property which is extra judicially
foreclosed?
a.
b.
c.
d.

Fraud, accident, mistake, excusable negligence.


Forgery and material alteration of the contract.
Abandonment, destruction, depreciation.
Fraud, intimidation, stealth, threat, strategy.

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______ 26. What is the PERIOD OF REDEMPTION in judicial foreclosure?


a. The right to redeem must be exercised within 6 months after the foreclosure or
before the registration of the certificate of foreclosure.
b. The right to redeem must be exercised within 3 months after the foreclosure or
before the registration of the certificate of foreclosure.
c. The right to redeem must be exercised within 2 months after the foreclosure or
before the registration of the certificate of foreclosure whichever is earlier.
d. The right to redeem must be exercised not less than ninety (90) days nor more
than one hundred twenty (120) days from the entry of judgment.
______ 27. What is the PERIOD OF REDEMPTION in extra- judicial foreclosure?
a.The right to redeem must be exercised within 6 months after the foreclosure or
before the registration of the certificate of foreclosure.
b.The right to redeem must be exercised within 3 months after the foreclosure or
before the registration of the certificate of foreclosure.
c.The right to redeem must be exercised within 2 months after the foreclosure or
before the registration of the certificate of foreclosure whichever earlier.
d.The right to redeem must be exercised within the term of one (1) year after the date
of the sale.
______ 28. What is the subject matter of Mortgage?
a.
b.
c.
d.

Movables
Immovables and inalienable right
Movables and alienable rights
Immovables only

______ 29. What is the PRESCRIPTION PERIOD of a mortgagee to recover the deficiency?
a. The action to cover a deficiency after foreclosure prescribes after 6 months after
the foreclosure or before the registration of the certificate of foreclosure.
b. The action to cover a deficiency after foreclosure prescribes after 3 months after
the foreclosure or before the registration of the certificate of foreclosure.
c. The action to cover a deficiency after foreclosure prescribes after 2 months after
the foreclosure or before the registration of the certificate of foreclosure
whichever earlier.
d. The action to cover a deficiency after foreclosure prescribes after ten (10) years
from the time the right of action accrues.
______ 30. Mere inadequacy of the price obtained at the Sherriffs sale will not be sufficient to
set aside the sale unless:

a. The price deficiency cannot be recovered within 10 years from the time the right
of action accrues.
b. The price is so inadequate so as to shock the conscience of the court taking into
consideration the peculiar circumstances attendant thereto.
c. The price is not consistent with applicable laws and jurisprudence.
d. The price is not enough to cover all the expenses in the foreclosure of the
property including attorneys fees and necessary expenses.

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______ 31. A foreclosure sale retroacts to the date of registration of the mortgage and that a
person who takes a mortgage in good faith and for valuable consideration, the
record showing clear title to the mortgagor, will be protected against equitable
claims on
the title in favor of third persons of which he had no actual or constructive notice.

a.
b.
c.
d.

The statement is false


The statement is true.
The statement is partially correct.
The statement is partially wrong.

______ 32. Allowing redemption after the lapse of the statutory period when the buyer at the
foreclosure sale does not object but even consents to the redemption:

a.
b.
c.
d.

Will not uphold the policy of redemption


Will uphold the policy of redemption
Will uphold the policy on redemption but on certain conditions
Will not uphold the policy on redemption except on reasonable circumstances.

______ 33. Which is not a ground for the authority to motu proprio or upon verified complaint
filed by a buyer of a subdivision project or condominium, revoke the registration
and the license to sell any unit, if upon examination into the affairs there is
satisfactory evidence that the said dealer or owner?

a.Is insolvent
b.Is a good person but of bad business repute.
c.Has made any misrepresentation in any prospectus, brochure, circular or other
literature about the subdivision
d.Has been engaged or about to engage in fraudulent transactions
______ 34. No mortgage on any unit or lot shall be made by the owner or developer without
prior written approval of the authority and :

a. Such approval shall not be granted unless it is shown that the proceeds of the
mortgage loan shall be used for the development of the condominium.
b. The buyer shall register his title to the Registry of Deeds.
c. The loan value of each lot or unit covered by the mortgage shall be determined
and the buyer thereof, shall be notified before the release of the loan.
d. The buyer may, at his option pay his installment directly to the mortgagee who
shall apply the payments to the corresponding mortgage indebtedness secured by
the particular lot.
______ 35. The fact of extrajudicial settlement or adjudication is published once a week
for three consecutive weeks in a newspaper of general circulation in the
province and proof thereof is filed with the Register of Deeds. Which of the

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Secured Transaction Law

following constitutes a complete proof of publication?

a.The proof must necessarily consist of the certification of the sale, prize, the foreman
or principal clerk, or of the editor, business or advertising manager of the
newspaper concerned, or a copy of each week's issue of the newspaper wherein
the publication appeared.
b.The proof must consist of the affidavit of the publisher, printer, his foreman or
principal clerk, or of the editor, business or advertising manager of the
newspaper concerned.
c.The proof shall consist of the certification of the publisher, printer, his foreman or
principal clerk, or of the editor, business or advertising manager of the
newspaper concerned, or a copy of each week's issue of the newspaper wherein
the publication appeared.
d.The proof shall consist of contract of sale, prize, the foreman or principal clerk, or
of the editor, business or advertising manager of the newspaper concerned.
______ 36. The following are the powers and the functions vested to the Board except:

a.Provide comprehensive policy guidelines for the promotion and development of the
real estate industry;
b.Conduct licensure examinations for the practice of the real estate service profession
and prescribe the appropriate, syllabi of the subjects for examination
c.Issue, suspend, revoke or reinstate, without due notice and hearing, certificates of
registration or professional identification cards for the practice of real estate
service.
d.Maintain a comprehensive and updated register of licensed real estate service
professionals;
______ 37. Every applicant seeking to be registered and licensed as a real estate service
practitioner, except a real estate salesperson, shall undergo an examination as
provided for in this Act. Examinations for the practice of real estate service in the
Philippines shall be given by the Board at least __________ in such places and
dates as the Commission may designate.

a.
b.
c.
d.

Thrice a year
Once a year
Twice a year
Every six months

______ 38. When the property is redeemed after the purchaser has been given possession, the
redeemer shall be entitled to deduct from the price of redemption any rentals that
said purchaser may have collected in case the property or any part thereof was
rented; if the purchaser occupied the property as his own dwelling, it being town
property, or used it gainfully, it being rural property, the redeemer may deduct
from the price the interest of one per centum per month provided for in section
four hundred and sixty-five of the Code of Civil Procedure.
a.
b.
c.
d.

The statement is true under P.D 957


The statement is true under P.D 1952
The statement is true under Act. No. 4118
The statement is true under Act. No. 3135
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Secured Transaction Law

______ 39. In accordance of Act 3135, the venue of the action shall be:
a.
b.
c.
d.

In the place where the property is located


In the residence of the mortgagor
In the residence of the mortgagee
Either in the residence of the mortgagor or mortgagee, at the option of the
mortgagee

______ 40. Rule 68 requires that the action for judicial foreclosure of a land shall be filed in:
a. In the residence of the mortgagor
b. In the place where the property is located or in the place where the parties had
agreed upon
c. In the residence of the mortgagee
d. Either in the residence of the mortgagor or mortgagee, at the option of the
mortgagee.
V. Chattel Mortgage
______ 1. It is a conditional sale of personal property as security for the payment of a
debt, or the performance of some other obligation specified therein, the condition
being that the sale shall be void upon the seller paying to the purchaser a sum of
money or doing some other act named.
a.
b.
c.
d.

Chattel mortgage
Real mortgage
Pledge
Mortgage Law

______ 2. When a ___________ is a party to such mortgage, the affidavit required


may be made and subscribed by a director, trustee, cashier, treasurer, or manager
thereof, or by a person authorized on the part of such corporation to make or to
receive such mortgage.
a.
b.
c.
d.

Corporation
Firm
Association
Partnership

______ 3. An act providing for the mortgage of personal property and the registration
of the mortgages so executed.
a.
b.
c.
d.

Act. No. 385


Act. No. 1509
Act No. 1510
Act No. 1508

______ 4. A chattel mortgage shall not be valid against any person except:
a.
b.
c.
d.

mortgagor, his executors or administrators


mortgagee
Third persons
mortgagees executors or administrators

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______ 5. A resides in Baguio City. He executed a chattel mortgage in favor of B over


his property situated in Pampanga. What should be done with the chattel mortgage
to be valid and binding between A and B and as against C who is a third person?
a.
b.
c.
d.

The mortgage must be registered in Baguio City.


The mortgage must be registered in two registries.
The mortgage must be registered in Pampanga.
The mortgage does not need to be registered.

______ 6. No restraining order, temporary or permanent injunction shall be issued by


the court against any government financial institution in any action taken by such
institution in compliance with the mandatory foreclosure provided in Section 1
hereof, whether such restraining order, temporary or permanent injunction is
sought by the borrower(s) or any third party or parties, except after due hearing in
which it is established by the borrower and admitted by the government financial
institution concerned that twenty percent (20%) of the outstanding arrearages has
been paid after the filing of:
a.
b.
c.
d.

motion for reconsideration


foreclosure proceedings.
auction proceedings
mandatory injunction

______ 7. Upon the application for foreclosure of the collateral of delinquent


borrowers, whether judicially or extrajudicial, by any government financial
institution, the court and/or officials concerned shall immediately act and give
priority to the same and schedule the publication thereof within Five (5) days from
receipt of the application, the auction sale to be held not later than ten (10) days
from date of the last publication. The Certificate of Sale must be issued on the date
of sale and the same must be registered by the Register of Deeds concerned not
later than ______days after submission of the Certificate of Sale.
a.
b.
c.
d.

15 days
10 days
25 days
5 days

______ 8. To be valid between the parties, is recording or registration in the Chattel


Mortgage Register required?
a. Yes because of the working of article 2140.
b. No because section 4 of the Chattel Mortgage Law states that the recording or
registration is only for effectivity as against third persons.
c. Both a and b.
d. None of the above.
______ 9. Which among the statements is true?
a. The provisions on pledge, even in conflict with the Chattel Mortgage Law, shall be
applicable to chattel mortgage.
b. The provisions on real estate mortgage shall be applicable to chattel mortgage.
c. The provisions on pledge, insofar as they are not in conflict with the Chattel
Mortgage Law, shall be applicable to chattel mortgage.
d. The provisions on chattel mortgage shall be applicable to all laws.
______ 10. It is a mortgage or any lien or encumbrance on a vessel and its equipment

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with any bank, or other financial institutions, domestic or foreign, for the purpose
of financing the construction, acquisition, purchase of vessels or initial operation of
vessels.
a.
b.
c.
d.

Motor Vehicle Mortgage


Ship Mortgage
Ship Vehicle Mortgage
Motor Mortgage

______ 11. What is the purpose of Presidential Decree No. 1521?


a.
b.
c.
d.

to accelerate the development and charity of many industries


to promote charity and development
to promote the development of the motor industry
to accelerate the growth and development of the shipping industry

______ 12. When can there be a chattel mortgage over a house?


a.
b.
c.
d.

if the parties to the contract agreed


if the house is intended to be demolished or removed
if no third persons are prejudiced
all of the above

______ 13. Which among the statements is true?


a. The mortgage credit may be alienated or assigned to a third
person.
b. The mortgage credit may not be alienated to a third person.
c. The mortgage credit may be alienated or assigned in part only.
d. None of the above.
______ 14. What should be done for the chattel mortgage to be valid between the
parties?
a. The real property must be recorded or registered in the Chattel Mortgage
Register.
b. Registration in the Day Book is enough.
c. The personal property must be recorded in the Chattel Mortgage Register.
d. The property must be recorded or registered in the Register of Deeds.
______ 15. What should be done for the chattel mortgage to be valid against third
persons?
a.
b.
c.
b.

The personal property must be registered in the Chattel Mortgage Register.


The registration must be accompanied by an affidavit of good faith.
Registration in the Day Book is not enough.
All of the above.

______ 16. Who may constitute a ship mortgage?


a. any citizen of the Philippines
b. any association at least 70% of the capital of which is owned by the citizens of the
Philippines
c. any corporation at least 30% of the capital of which is owned by foreign citizens
d. all of the above
______ 17. What should be done with a mortgage constituted on a car in order to affect

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third persons?
a. It should be registered in the Chattel Mortgage Register.
b. It should be registered in the Motor Vehicles Office.
c. It should be registered in the Chattel Mortgage Register and the Motor Vehicles
Office.
d. It does not need any registration at all.
______ 18. Under the old law, a chattel mortgage was considered a conditional sale.
The Code Commission considered the old definition:
a.
b.
c.
b.

valid
not binding
correct
defective

______ 19. A mortgage credit is considered as:


a.
b.
c.
d.

the right of the mortgagor


the right of the mortgagee
the obligation of the mortgagor
the obligation of the mortgagee

______ 20. What happens if the alienation of the mortgage credit is not registered?
a.
b.
c.
b.

It would still be valid as between the parties.


It would still be valid as against third parties.
It would still be valid as between the parties and as against third parties.
It would not be valid.

______ 21. In ship mortgages, the following must be contained therein except:
a.
b.
c.
d.

the name of the vessel


the names of the parties to the mortgage
the time and date of reception of the instrument
the citizenship of both the parties to the mortgage

______ 22. The Coast Guard District or Station Commander upon the recording of a
preferred mortgage shall deliver _________________ thereof to the
mortgagor.
a.
b.
c.
b.

one (1) certified copy


two (2) certified copies
three (3) certified copies
four (4) certified copies

______ 23. The following are conditions precedent to record in a ship mortgage except:
a. No mortgage shall be recorded unless it states the interest of the mortgagee.
b. No mortgage shall be recorded unless it states the interest of the mortgagor in
the vessel.
c. No mortgage shall be recorded unless previously acknowledged before the
Coast Guard District.
d. No mortgage shall be recorded at the new port of documentation unless there
is furnished to the Coast Guard District.0

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______ 24. Original jurisdiction of al suits involving the default of the mortgagor in
ship mortgages is granted to the:
a.
b.
c.
b.

Municipal Trial Court


Regional Trial Court
Court of Appeals
Administrative Bodies

______ 25. In ship mortgages, the preferred mortgage lien shall have priority over all
claims against the vessel, except the following claims:
a.
b.
c.
d.

crews wages
specific average
salvage but not including contract salvage
damages arising out of a crime

______ 26. The documents of a vessel of the Philippines covered by a preferred


mortgage may not be surrendered without the approval of the :
a.
b.
c.
d.

Maritime Industry Authority


Chattel Mortgage Register
Motor Vehicles Office
Courts of Justice

______ 27. Presidential Decree No. 1521 shall not apply:


a. to any existing mortgage
b. to any mortgage placed at any vessel under an existing mortgage
c. to any mortgage entered into by the parties before the principal obligation is
perfected
d. to mortgage as to a third party with the same subject property
______ 28. A stipulation in a contract which fixes an upset price is void. This
stipulation violates:
a.
b.
c.
d.

Rule 66 of the Rules of Court


Rule 67 of the Rules of Court
Rule 68 of the Rules of Court
Rule 69 of the Rules of Court

______ 29. It is the transaction by which the mortgagor reacquires or buys back the
property which may have passed under the mortgage.
a.
b.
c.
b.
______ 30.
a.
b.
c.
d.
______ 31.

act of redemption
equity of redemption
right of redemption
period of redemption
These are things deemed to be real property except:
Fertilizer actually used on a piece of land
Paintings inside the St. Vincent Church
Animal houses
A house intended to be demolished
It is a mortgage or lien or encumbrance on a vessel and its equipment
with any bank or other financial institution, domestic or foreign, for

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purpose of financing the construction, acquisition, purchase or initial


operation of vessels:
a.
b.
c.
d.
______ 32.

Ship mortgage
Chattel Mortgage
Real Estate Mortgage
Pledge
A chattel mortgage is:

a. A contract in which the debtor guarantees to the creditor the fulfillment of a


principal obligation, subjecting for the faithful compliance thereof a real property
in case of non fulfillment of said obligation at the time stipulated.
b. A contract by which the creditor acquires the right to receive the fruits of an
immovable of his debtor, with the obligation to apply them to the payment of the
interest, if owing, and thereafter to the principal.
c. A contract by which a personal property is recorded in the Chattel Mortgage
Register as a security for the performance of an obligation.
d. A contract by which one of the parties delivers to another, either something not
consumable so that the latter may use the same for a certain time and return it.
______ 33. These are characteristics of a chattel mortgage except:
a.
b.
c.
d.

Indivisible
Formal
Accessory
In good faith

______ 34. A preferred mortgage is a valid mortgage whenever the following instances
are done except:
a. The mortgage is recorded.
b. An affidavit of good faith is filed
c. That the mortgage does not stipulate that the mortgagee waives the preferred
status thereof
d. The mortgaged property is appropriated.
______ 35. The penalty for removal, sale or pledge of a mortgaged property is:
a.
b.
c.
d.

Prision menor
Prision mayor
Arresto mayor or fine
Arresto

______ 36. A chattel mortgage on car in order to affect third persons should not only be
recorded in the chattel mortgage register but also with the:
a.
b.
c.
d.

Land Transportation Office


Treasurers Office
Chattel Mortgage Register
Port of Documentation

______ 37. It is a mortgage or lien or encumbrance on a vessel and its equipment with
any bank or other financial institution, domestic or foreign, for purpose of
financing the construction, acquisition, purchase or initial operation of vessels.
a. Ship mortgage

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Secured Transaction Law

b. Chattel Mortgage
c. Real Estate Mortgage
d. Pledge
______ 38. A chattel mortgage is:
a. A contract in which the debtor guarantees to the creditor the fulfillment of a
principal obligation, subjecting for the faithful compliance thereof a real property
in case of non-Fulfillment of said obligation at the time stipulated.
b. A contract by which the creditor acquires the right to receive the fruits of an
immovable of his debtor, with the obligation to apply them to the payment of the
interest, if owing, and thereafter to the principal.
c. A contract by which a personal property is recorded in the Chattel Mortgage
Register as a security for the performance of an obligation.
d. A contract by which one of the parties delivers to another, either something not
consumable so that the latter may use the same for a certain time and return it.
______ 39. A preferred mortgage is a valid mortgage whenever the following instances
are done except:
a. The mortgage is recorded.
b. An affidavit of good faith is filed
c. That the mortgage does not stipulate that the mortgagee waives the preferred
status thereof
d. The mortgaged property is appropriated.
______ 40. The penalty for removal, sale or pledge of a mortgaged property is:
a.
b.
c.
d.

Prision menor
Prision mayor
Arresto mayor or fine
Arresto

VI. Antichresis
______ 1. It is a contract by which the creditor acquires the right to receive the fruits of an
immovable of his debtor, with the obligation to apply them to the payment of the
interest, if owing and thereafter to the principal of his credit.
a.
b.
c.
d.

antichresis
pledge
mortgage
equity

______ 2. Antichresis refers to:


a.
b.
c.
d.

real property
personal property
personal and real proper
none of the above

______ 3. In a contract of antichresis must be in specified to be valid in writing this refers to:
a. a formal contract
b. a unilateral contract
c. accessory contract

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Secured Transaction Law

d. formal and accessory contract


______ 4. Because antichresis secures the performance of principal obligation, it is considered
as:
a.
b.
c.
d.

a unilateral contract
an accessory contract
a formal contract
a real contract

______ 5. Which of the following is not a correct comparison of antichresis and real
mortgage?
a. In antichresis, the property is delivered to the creditor; while in mortgage, the
debtor usually retains possession of the property.
b. In antichresis, the creditor acquires the right to receive the fruits of the property;
whereas in mortgage, the creditor does not have any right to receive the fruits.
c. Both must be in a form of a public instrument.
d. Both are similar that the subject is real property.
______ 6. Which of the following is a proper distinction of antichresis and pledge?
a. Antichresis is a real contract while pledge is a formal contract.
b. Antichresis requires symbolic delivery whereas pledge need not.
c. Antichresis is perfected by mere consent while pledge is perfected by the delivery
of the thing pledge.
d. Antichresis refers to both real and personal property while pledge refers to
personal property.
______ 7. Which of the following statement is not true?
a. It is essential that the loan should earn interest in order that it can be guaranteed
with a contract of antichresis. Antichresis is susceptible of guaranteeing all kinds
of obligations, pure or conditional.
b.
The fruits of the immovable which is the object of the antichresis must be
appraised at their actual market value at the time of the application.
c. The property delivered stands as a security for the payment of the obligation of
the debtor in antichresis. Hence, the debtor cannot demand its return until the
debt is totally paid.
d. A stipulation authorizing the antichretic creditor to appropriate the property
upon the non-payment of the debt within the period agreed upon is void.
______ 8. How shall the object of antichresis be appraised?
a.
b.
c.
d.

at the current market value at the time of the application thereof


at the fair market value at the time of the application thereof
at the actual market value at the time of the application thereof
at the future market value at the time of the application thereof

______ 9. What is the remedy of creditor in case of non payment of debt by the debtor?
a.
b.
c.
d.

to rescind the contract


to bring an action for collection of sum of money
to bring an action for specified performance
to annul the contract

______ 10. What is the effect if the creditor does not pay the proper taxes?

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a.
b.
c.
d.

the creditor is liable for damages


bthe debtor has the right to demand for indemnity
the debtor has the right to demand for the return of the property
the creditor is obliged to pay the amount of the tax plus interest

______ 11. The following are the obligations of the antichretic creditor except:
a. to return to the debtor the fruits of the property delivered, if owing
b. to pay the taxes and charges upon the estate
c. to bear the expenses necessary for its preservation and repair
d. to apply the fruits after receiving them to the interest if owing and thereafter to
the principal
______ 12. The sums spent by the creditor in fulfillment of the obligations under Art. 2135
shall be charged:
a. against the actual market value of the property
b. against the fruits of the property
c. against the liens and encumbrances of the property
d. against the debtors property
______ 13. An antichretic creditor is deemed to be:
a. a possessor in the concept of an owner
b. a co-owner
c. a mere holder placed in possession of the property
d. a mortagee or pledge
______ 14. If a contract of antichresis is void, the principal obligation:
a. is also void
b. may still be valid
c. is voidable only
d. is always valid
______ 15. It is a legal and procedural rule, including doctrines by virtue of which, aids or
overrides and statue law protect rights and enforce duties fixed by substantive law.
a.
b.
c.
d.

antchresis
pledge
mortgage
equity

______16. The ___________ stands as a security for the payment of the obligation of the
debtor in antichresis.The debtor cannot demand its return until the debt is totally
paid.
a. property delivered
b. object of the contract

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Secured Transaction Law

c. fruit of the property


d. real property conveyed
______ 17. In the absence of a contract of antichresis, the debtor could just issue a
___________ the creditor for the collection of the fruits of the immovable.
a.
b.
c.
d.

demand against
special power of attorney in favor
promissory note in favor
demand letter against

______ 18. The following are default rules to be followed in antichresis except:
a. The creditor advances for the taxes, charges, as well as the necessary expenses
for the preservation of the property
b. The law uses the term advances as the fruits of the immovable may be
applied to the expenses and charges. If the creditor doesn't want to
advance, he may just surrender the immovable to the debtor
c. The debtor may reacquire the enjoyment of the thing until full payment of the
obligation.
d. The creditor does not acquire ownership of the immovable for nonpayment of the
debt within the period agreed upon. Every stipulation to the contrary is void.
The creditor may petition the court to foreclose the property.
______ 19. What can the creditor do if he does not want to pay taxes and incur the expenses
necessary for the preservation and repair of the property?
a.

He may compel the debtor to reacquire the enjoyment of the property except
when there is contrary stipulation.
b. He may retain possession of the property provided he will pay the amount due
upon demand
c. He may lend the property to a third party provided the latter will pay the taxes
and expenses due
d. He may return the property
______ 20. What is the object of a contract of antichresis?
a.
b.
c.
d.

Immovable property
The fruits of the immovable
The interest of the property
Movable and immovable property

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VII. Concurrence and Preference


______ 1. It implies the possession by two or more creditors of equal rights or privileges over
the same property or all of the property of the debtor.
a.
b.
c.
d.

Preference of credit
Concurrence of credit
Contract of Antichresis
Right of Excussion

______ 2. It is the right held by a creditor to be preferred in the payment of his claim above
others (to be paid first) out of the debtors assets?
a.
b.
c.
d.

Preference of credit
Concurrence of credit
Contract of Antichresis
Right of Excussion

______ 3. The rule on preference is applicable in the following instance except:


a. There are two or more creditors.
b. The debtors assets are sufficient.
c. The claims held by various creditors have been established (in a proper
proceeding).
d. All the credits must be due.
______ 4. The debtor is liable with all his _________ properties for the fulfillment of his
obligations, subject to the exemptions provided by law.
a.
b.
c.
d.

present and future


present
future
personal

______ 5. If there is co-ownership, the undivided share/ interest of one co-owner can be
possessed by the _______ for the payment of debtors obligation.

a.

assignee

b. administrator
c. creditor
d. assignee
______6. So long as the conjugal partnership or absolute community subsists, its property
shall not be among the assets to be taken possession of by the assignee for the
payment of the insolvent debtor's obligations, except insofar as the latter have
redounded to the benefit of the family. If it is the husband who is insolvent, the
administration of the conjugal partnership of absolute community may, by order of
the court, be transferred to the _______ or to a third person other than the
assignee.
a. legal heirs
b. legitimate children

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c. wife
d. compulsory heirs
______ 7. In concurrence and preference, what happens to the property held by the insolvent
debtor as a trustee of an express or implied trust?
a.
b.
c.
d.

It shall be included from the insolvency proceedings.


It shall be excluded from the insolvency proceedings.
It shall be judicially foreclosed.
It shall be extra-judicially foreclosed.

______ 8. In Article 2241, with reference to specific movable property of the debtor; the
following claims or liens shall be preferred except:
a. Duties, taxes and fees due thereon to the State or any subdivision thereof.
b. Claims arising from misappropriation, breach of trust, malfeasance by public
official committed in the performance of his duties, on the movables, money or
securities obtained by them.
c. Credits for rent for one year, upon personal property of the lessee existing on the
movable leased and on the fruits of the same, but on money or instruments of
credit.
d. Claims for laborers wages, on the goods manufactured or the work done.
______ 9. What must be considered in terms of preference of credit over specific personal
properties?
a.If there are three or more credits with respect to the same specific movable
property, they shall be satisfied pro rata, after the payment of duties, taxes and
fees due the State or any subdivision thereof.
b.Those credits which enjoy preference with respect to specific movables exclude all
others to the extent of the value of the personal property to which the preference
refers.
c.If there are three or more credits with respect to the same specific movable
property, they shall be satisfied solidarily, after the payment of duties, taxes and
fees due the State or any subdivision thereof.
d.Those credits which enjoy preference with respect to specific movables include all
others to the extent of the value of the personal property to which the preference
refers.
______ 10. Sonia has one car, the taxes on which have not yet been paid. Once, the car fell into
the sea, was salvaged, was repaired, and has now been pledged with a creditor. If
Sonia is insolvent and has not paid for any of the acts done on her car, the State,
the person who salvaged it, the repairer and the pledge will be paid through the
following except:
a.All said four credits have preference over the car to the exclusion of all other
creditors.
b.The State will first be paid for taxes on the car.
c.The salvage, the repairman and the pledge will all be paid pro rata from the
remaining value of the car.
d.All said four credits have preference over the car to the einclusion of all other
creditors.

______ 11. The claims on credits enumerated in Art. 2241 are considered as the
following except:

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Secured Transaction Law

a.Pledges of personal property.


b.Liens within the purview of legal provisions governing insolvency.
c.Chattel mortgage.
d.Taxes
______ 12. As liens, they are considered charges; generally unless otherwise
stated:
a.
b.
c.
d.

possessory liens with the right of retention.


possessory rights without right of retention.
possessory liens without right of retention.
Possessory rights with right of retention.

______ 13. The duties, taxes, and fees referred to are:


a.those on the general movable concerned.
b.those on the specific immovable concerned.
c.those on the specific movable concerned.
d.those incorporeal rights.
______ 14. In the unpaid price of movables sold, there are two liens referred except the one:
a.ordinary lien on the price (not a possessory lien) if the property has not been resold
and still unpaid.
b.possessory lien (as long as the property is still in the possession of the debtor).
c.ordinary lien on the price (not a possessory lien) if the property has been resold and
still unpaid.
d.possessory lien of whatever nature.
______ 15. In terms of Laborers Wages, the laborer must have been employed by the:
a.owner of the goods
b.contractor who in turn was employed to do the work
c.proprietor
d.employer
______ 16. In Article 2242, with reference to specific immovable property and real rights of the
debtor, the following claims, mortgages and liens shall be preferred, and shall
constitute an encumbrance on the immovable or real right except the one:
a.taxes due upon the land or building.
b.for the unpaid price of real property sold, upon the immovable sold.
c.claims of co-heirs for warranty in the partition of an immovable among then, upon
the real property thus divided.
d.credits of insurer, upon the property insured, for the insurance premium for three
years.
______ 17. The order of preference in Article 2244 refers to:
a.other property.
b.specific or personal property.
c.Specific or real property
d.Real property only
______ 18. It is the right to exercise all rights and actions except those inherent in the person.

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Secured Transaction Law

a.accion publiciana
b.accion subrogatoria
c.accion reinvindicatoria
d.accion paulina
______ 19. It is the impugn or rescind acts or contracts done by the debtor to
defraud the creditors.
a.accion pauliana
b.accion subrogatoria
c.accion publiciana
d.accion reinvindicatoria
______ 20. It refers to assignment in favor of creditors.
a.
b.
c.
d.

File insolvency proceedings.


Datio in solutom, cession.
File a foreclosure case
File a declaratory relief

______ 21. X borrowed money from Y to finance the construction of a building,


mortgaging his land and building to be constructed thereon to secure the loan.
After the building was erected, X failed to pay the laborers who worked on the
building and some suppliers who furnished materials thereon. Upon foreclosure of
the mortgage, who would have a preferential right to the proceeds of the sale of the
land?
a.Laborers
b.Mortgagee
c.Suppliers
d.Motgagor
______ 22. They have no lien on the land certainly.
a.Suppliers and Laborers
b.Laborers and Mortgagee
c.Mortgagee and Suppliers
d.Mortgagor and suppliers
______ 23. Regarding the proceeds of the sale of the building, which statement is correct?
a.Both laborers and suppliers will share prop rata after the taxes on the building shall
have been paid.
b.Only the mortgagee will share pro rata after the taxes on the building shall have been
paid.
c.Mortgagee, laborers and suppliers will all share pro rata after the taxes on the
building shall have been paid.
d.a and b
______ 24. The reason for the pro rata sharing:
a.If there are two credits with respect to the same specific real property or real rights,
they shall be satisfied pro rata, after the payment of the taxes and assessments
upon the movable property or real right.
b.If there are two or more credits with respect to the same specific real property or real
rights,. they shall be satisfied pro rata, after the payment of the taxes and
assessments upon the immovable property or real right.

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Secured Transaction Law

c.If there are two credits with respect to the different specific real property or real
rights, they shall be satisfied pro rata, after the payment of the taxes and
assessments upon the movable property or real right.
d.If there are two or more credits with respect to the different specific real property or
real rights,. they shall be satisfied pro rata, after the payment of the taxes and
assessments upon the immovable property or real right.
______ 25. It is a credit for the repair or reconstruction of something that had
previously been made.
a.Mortgage credits
b.Refectionary credits
c.Credits of insurers
d.Debtor credits
______ 26. Under Art.2244, taxes (duties, assessments) are placed only as nos. 9, 10, 11. This
rule applies to property other than specific. What if the taxes are specific?
a.taxes are given first preference.
b.duties are given first preference.
c.Taxes are given the last preference
d.Duties are given the last preference
______ 27. What happens when an ordinary credit evidence by a public instrument and a final
judgment are placed on an equal plane, hence, both are of the same date?
a.there will be no pro rate sharing.
b.there will be a pro rata sharing.
c.It is within the option of the creditor, either pro rata or not
d.None of the above
______ 28. The following properties are exempt from attachment except:
a.
b.
c.
d.

The family home except in certain cases;


Property in custodial egis
Homesteads acquired under the Public Land Act;
Properties of a municipal corporation used for non-governmental purposes

______ 29. The exemption of properties of the conjugal partnership or of the absolute
community applies provided that:
a. The conjugal partnership or the absolute community subsists and the obligation
did not redound to the benefit of the family;
b. The conjugal partnership or the absolute community subsists
c. The obligation did not redound to the benefit of the family;
d. The obligation redounded to the benefit of the family
______ 30. The following statements on preference of credit are true except:
a. A recorded mortgage credit is a special preferred credit.
b. Unrecorded sale is superior to a recorded mortgage, since execution in a public
instrument is equivalent to delivery.
c. Registered mortgage of a latter date is superior to a prior unregistered mortgage.
d. Pro-rata rule applies

288

Secured Transaction Law

KEY ANSWER
I. Loan

1. A
2. B
3. A
4. B
5. A
6. C
7. C
8. C
9. B
10. C
11. C
12. B
13. B
14. A
15. A
16. D
17. B
18. B
19. A
20. B
21. B
22. D
23. B
24. C
25. D
26. A
27. A
28. A

1. C
2. A
3. C
4. C
5. A
6. B
7. C
8. D
9. A
10. D
11. A
12. B
13. A
14. B
15. A
16. A
17. B
18. C
19. A
20. A
21. D
22. A
23. C
24. C
25. C
26. B
27. B

V. Real Estate Mortgage

II. Deposit

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.

B
A
C
D
D
A
B
C
D
B
C
C
B
A
B
B
B
B
D
A
C
A
C
B
C

1. A
2. D
3. C
4. B
5. C
6. A
7. B
8. B
9. C
10. A
11. A
12. D
13. B
14. C
15. D
16. B
17. B
18. C
19. B
20. A
21. D
22. B
23. A
24. A
25.B

VI. Chattel Mortgage

III. Guarantee

1. B
2. C
3. B
4. C
5. D
6. D
7. D
8. D
9. C
10. D
11. C
12. C
13. D
14. B
15. C
16. A
17. B
18. D
19. C
20. B
21. D
22. C
23. B
24. D
25. B

1. D
2. A
3. D
4. B
5. A
6. B
7. D
8. B
9. B
10. B
11. A
12. D
13. C
14. B
15. A
16. B
17. C
18. B
19. C
20. A
21. B
22. B
23. C
24. B
25. D

VII. Antichresis

IV. Pledge

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.

C
D
B
C
C
B
A
A
D
B
A
A
C
A
C

1. B
2. C
3. D
4. B
5. D
6. A
7. C
8. A
9. A
10. B
11. B
12. B
13. D
14. D
15. C

VIII. Concurrence &


Preference

289

Secured Transaction Law

APPENDIX I
ANSWERS TO BAR EXAMINATIONS
(Secured Transactions)
1975
A.
A partnership borrowed PhP20,000.00 from A at clearly usurious interest. Can the creditor recover
anything from the debtor? Explain.
Answer
Yes, the creditor can recover the principal together with legal interest thereon from the date of demand
(Art. 2209), and legal interest on the interests paid in excess of the lawful rate from the date of payment
(Art. 1413).
The usurious interest, that is to say, the whole usurious interest can not be recovered, because of Article
1413 of the Civil Code and Section 6 of the Usury Law. However, the illegality of the stipulation concerning
the usurious interests does not affect the creditors right to recover the principal, inasmuch as a contract
of loan with usurious interest is a divisible contract. The illegal terms can be separated from the legal ones
(Art. 1420). [Angel Jose v. Chelda, 23 SCRA 119; Briones v. Cammayo, 41 SCRA 404]
B.
A debtor pledged to his surety pieces of jewelry to indemnify the latter in case the surety would be
obliged to pay the creditor. The surety paid PhP2,800.00 to the creditor. To recover the amount, the
surety sold at public auction the jewelry but realized only PhP500.00. May the surety recover the
deficiency from the debtor? Explain.
Answer
No, the surety is not entitled to recover the deficiency. Article 2115 of the Civil Code provides that
in a foreclosure of a pledge, if the price of the sale is less than the indebtedness secured by the pledge, the
creditor shall not be entitled to recover the deficiency, notwithstanding any stipulation to the contrary. By
electing to sell the articles pledged, the creditor waived any other remedy, and must abide by the results of
the sale. No deficiency is recoverable. [Manila Surety v. Velayo, 21 SCRA 515]
1976
A.
A sells his 1976 Colt Lancer Sedan to B, a compadre. If A and B fix the price at PhP50,000.00
payable in installment, secured by a chattel mortgage on the car and a real estate mortgage by a third
party, upon foreclosure of the chattel mortgage, may A foreclose the real estate mortgage for the unpaid
balance? Explain.
Answer
No, according to the decided cases of Cruz and Reyes v. Filipinas Investment and Financing
Corporation and Pascual v. Universal Motors, the seller cannot recover the deficiency by foreclosing the
real estate mortgage given by the third party because the latter would have a right to be indemnified by B
and therefore indirectly the seller would be recovering the deficiency from B which is prohibited by law
(Art. 1484).
B.
May it be stipulated that in a foreclosure of the chattel mortgage to secure the purchase of a car on
installment, the installments paid will not be refunded? Explain.
Answer
Yes, such a stipulation may be construed as a penalty clause and shall be held valid insofar as the sum is
not unconscionable (Art. 1486).

1977

290

Secured Transaction Law


A.
The Court found that the loan by C to D of PhP20,000.00 was usurious because it provided for
the payment of PhP5,000.00 as interest in 1 year.
(1)
If the principal and the interest were paid, what can D recover from C?
(2)
If no payment whatsoever was made, can D resist an action to collect by C on the ground
that the transaction is illegal and void?
Answer
(1)

(2)

D can recover from C the entire interest paid by him to the latter with interest thereon
from the date of payment. This is expressly directed by the Civil Code (Art. 1413). True,
the Usury Law (Sec. 6) merely states that he can recover only the whole interest paid, but
the Civil Code (Art. 1413) adds that the same can be recovered with interest thereon from
the date of payment (Angel Jose Warehousing Co. v. Chelda Enterprises, 23 SCRA 119).
No, D cannot. According to the Civil Code (Art. 1420), in case of a divisible contract, if the
illegal terms can be separated from the legal ones, the latter may be enforced. In a simple
contract of a loan with usurious interest, the prestation of the debtor to pay the principal
debt is not illegal; what is illegal is to pay the stipulated interest. Hence, being separable,
the latter only should be deemed void (Angel Jose v. Chelda, supra, Briones v.
Cammayo, 41 SCRA 404).

B.
R borrowed PhP5,000.00 from H and he authorized his bank to pay the loan. The bank agreed.
Eventually, the bank paid only PhP2,550.00. H sued both R and the bank. Discuss the banks liability.
Answer
The bank cannot be held liable for the remaining PhP2,500.00. Even assuming that H gave his
consent to Rs proposal that the bank shall pay his indebtedness of PhP5,000.00, in reality, there was no
substitution of debtor by delegacion resulting in a novation of the obligation. There was merely an
authorization, which was accepted by the bank, that the latter shall pay Rs debt. As it turned out, the bank
paid only PhP2,500.00 to H. Beyond that amount, the bank cannot be held liable (Hodges v. Rey, 111 Phil.
219).
C.

Differentiate mutuum from commodatum.

Answer
In mutuum, the object is money or any consumable (fungible) thing; in commodatum, the object
is, as a general rule, a non-consumable (non-fungible) thing.
The former may or may not be gratuitous; the latter is essentially gratuitous.
The purpose of the former is consumption; the purpose of the latter is use.
In the former, ownership passes to the debtor; in the latter, ownership remains with the bailor.
In the former, the debtor must pay or return an equal amount of the same kind or quality; in the
latter, the bailee must return the specific thing loaned.

1978
A.
A signed a promissory note dated July 25, 1960 in favor of B, which reads: For value received I
promise to pay B at his residence at 43 Caledonia St., Malate, the sum of ten thousand pesos
(PhP10,000.00) with interest at twelve per cent (12%) per annum upon demand. Twelve (12) years later
on August 15, 1972, B brought an action to collect the sum due under the promissory note. A interposed
the defense of prescription as more than ten (10) years had transpired. Decide the case with reasons.
Answer
The action brought by B against A to collect the sum due under the promissory note has already
prescribed more than ten years had already elapsed from the time of the execution of the promissory note.

291

Secured Transaction Law


Under our statute of limitations, the law declares that actions upon a written contract must be brought
within ten years from the time the right of action accrues. Here, the promissory note expressly states that
A shall pay B the sum of PhP10,000 with interest at 12% per annum upon demand. Obviously Bs right of
action accrued immediately upon the execution of the promissory note. Unfortunately for him, he brought
the action for collection twelve years later. The action, therefore, was filed out of time.
(NOTE: The answer above is based on Art. 1144 of the Civil Code and on decided cases.)
B.
A bought from B a parcel of land and paid for the purchase price except for an unpaid balance of
PhP6,000. A, therefore, executed a promissory note for the balance of PhP6,000 with interest at ten per
cent (10%) to be paid within sixty (60) days. On the same date, C surety company executed a bond in favor
of B for the amount of PhP6,000 representing the unpaid balance of the purchase price of the parcel of
land, without any stipulation regarding payment of interest. On the due date, A failed to pay, and C surety
company paid PhP6,000 to B. B then sued A for the accumulated interest on the principal of PhP6,000. A
claimed novation of the obligation when B accepted unqualifiedly the surety bond which merely
guaranteed payment of PhP6,000. Is A correct? Explain your answer.
Answer
A is not correct. There is no novation so long as there is no agreement that the principal debtor
shall be released from responsibility. Here, there is no such agreement. True, C surety company executed
a bond in favor of B for the amount of PhP6,000, but that did not have the effect of releasing A from the
obligation. The surety bond is not a new and separate contract but is merely an accessory contract of the
original contract entered into by and between A and C surety company on one hand and B on the other
hand. It provided merely for a more definite and solid arrangement for payment. Therefore, A and B are
still bound under their old contract. The former is still liable for accumulated interests on the principal of
PhP6,000.
(NOTE: The above answer is based on Arts. 1291, No. 1, and 1292, Civil Code, and on Dugo v. Lopena,
L-18377, Dec. 29, 1962, and Magdalena Estate v. Rodriguez, 18 SCRA 967.)
Alternative Answer
A is not correct. The defense of implied novation requires clear and convincing proof of complete
incompatibility between the two obligations. The test is whether the two obligations can stand together. If
they cannot, incompatibility arises, and the second obligation novates the first. If they can stand together,
no incompatibility results and novation does not take place. Applying this test to the instant case, it is
clear that the original contract between A and B and the surety bond executed by C surety company can
stand together. The bond is merely an accessory of the original contract. Therefore, there is no novation.
(NOTE: The above answer is based on decided cases applying Arts. 1291, No. 1, and 1292 of the Civil
Code.)
1979
A.
DT borrowed PhP50,000.00 from a bank and to secure the payment thereof, signed a Deed of
Real Estate Mortgage in favor of the bank in the usual printed form wherein it is provided among others
that for the purpose of extra-judicial foreclosure, the mortgagor hereby appoints the mortgagee his
attorney-in-fact to sell the property mortgaged under Act 3135, as amended, to sign all documents and
perform any act requisite and necessary to accomplish said purpose. Upon failure of DT to pay the loan,
the bank foreclosed and bought the property at the foreclosure sale. During the one-year period of
redemption, DT died and the property was not redeemed despite the lapse of one year. The bank, despite
its actual knowledge of DTs death, consolidated its title by executing the affidavit of consolidation and
Deed of Sale of the land in its favor as empowered in the Deed of Real Estate Mortgage. After the bank had
consolidated its title, the heirs of DT asked the bank to allow them to redeem the property by paying only
PhP50,000.00 plus accrued interest and expense of foreclosure, contending that the sale in favor of the
bank was invalid due to the prior death of DT which therefore revoked the power of attorney inserted in
the Deed of Mortgage but the bank demanded payment of PhP200,000.00, the then fair market value of
the property. Can the bank be compelled to accept the tender of redemption by the heirs of DT? Why?

292

Secured Transaction Law


Answer
The bank cannot be compelled to accept the tender of redemption by the heirs of DT. True, agency
is extinguished by the death of the principal, but there are two well-known exceptions. The first exception
is where the agency is coupled with an interest and the second where the agent, unaware of the death of
his principal, enters into a contract in behalf of his principal with a third person who is also unaware of
the death of the principal (Arts. 1930, 1931, Civil Code). The instant case falls squarely within the purview
of agency coupled with an interest. According to the Civil Code, the agency shall remain in full force and
effect even after the death of the principal, if it has been constituted in the common interest of the latter
and of the agent, or in the interest of a third person who has accepted the stipulation in his favor. Hence,
despite the death of DT, the power granted by him to the bank to sell the property mortgaged and to sign
all documents and perform any act requisite and necessary to accomplish the extra-judicial foreclosure in
case he is unable to pay the loan is still of full force and effect. The foreclosure, therefore, and the
consolidation by the bank of its title over the mortgaged property are perfectly valid.
B.
DL borrowed PhP200,000.00 from T & Co. with which he imported 400 heads of breeding cows
from New Zealand. Upon their arrival in the Philippines, the cattle were sent to the ranch of T & Co. for
pasture under the agreement that for as long as DL has not paid the PhP200,000.00, he cannot get his
cattle from the ranch; that the cattle is to be taken care of by T & Co.s personnel there, and that one-half
of all the offspring shall go to T & Co. for these services. Without anybodys fault, all the cattle died of
disease and the PhP200,000.00 plus interest. Will the action prosper? Why?
Answer
The action will prosper. It is submitted that the 400 heads of New Zealand cows were pledged by
DL to T & Co. in order to secure the payment of the loan of PhP200,000.00. As an adjunct of the
accessory contract of pledge, the parties also agreed that the cows shall be kept at the ranch of T & Co. for
pasture, that the personnel of the latter shall be entitled to one-half of the offspring. Unfortunately, they
all died without the fault of anybody. Now what is the effect of the loss? Since the loss was due to a
fortuitous event, it is clear that both the accessory contract of pledge and the corollary contract of services
are totally extinguished. The principal contract of loan, however, still subsists. As a matter of fact, the
obligation of DL to pay the loan plus interest has become immediately demandable (see Art. 1198, par. 3,
Civil Code).
1980
A.
M and N were very good friends. N borrowed PhP10,000.00 from M. Because of their
close relationship, the promissory note executed by N provided that he would pay the loan whenever
his means permit. Subsequently, M and N quarreled. M now asks you to collect the loan because he
is in dire need of money.
What legal action, if any, would you take in behalf of M?
Answer
M must bring an action against N for the purpose of asking the court to fix the duration of the
term or period for payment (Arts. 1180, 1197, Civil Code). Once the court has fixed the duration of the
term or period, it becomes a part of the covenant of the two contracting parties. If the debtor defaults in
the payment of the obligation after the expiration of the period fixed by the court, the creditor can then
bring an action against him for collection. Any action brought before that would be premature. This is
well-settled (Gonzales v. Jose, 66 Phil. 369; Concepcion v. People of the Phil., 74 Phil. 62; Pages v.
Basilan, 104 Phil. 882).

Alternative Answer
Normally, before an action for collection may be maintained by the creditor against the latter
asking the court to fix the duration of the term or period for payment (Art. 1197, Civil Code). However, an
action combining such action with that of an action for collection may be allowed if it can be shown that a
separate action for collection would be a mere formality because no additional proofs other than the
admitted facts will be presented and would serve no purpose other than to delay. Here, there is no legal
obstacle to such course of action (Borromeo v. Court of Appeals, 47 SCRA 65).

293

Secured Transaction Law


B.
FF and GG executed a promissory note binding themselves, jointly and severally, to pay X
Bank PhP10,000.00 within 90 days from January 10, 1979. FF signed the note as principal and GG as
guarantor. Upon failure to pay the note on due date, X bank sued FF and GG for payment. GG
interposed the defense that he was just a guarantor and the Bank must first exhaust all the remedies
against the principal FF.
Is GGs defense tenable?
Answer
GGs defense is untenable. Had he not bound himself solidarily with FF to pay the obligation,
undoubtedly, as guarantor, he could have availed of the defense of benefit of excussion. In other words, he
cannot be compelled to pay, the creditor unless the latter has exhausted all the property of the debtor and
he resorted to all the legal remedies against the said debtor. But then in the promissory note, he bound
himself jointly and severally with FF to pay the obligation to the creditor. According to the law, such a
defense now invoked by GG is no longer available.
(NOTE: The above answer is based on Arts. 2058, 2059, Civil Code.)
1983
A.
To secure the payment to B of a loan, A, the owner of a lot, executed a chattel mortgage on the
building erected thereon as well as on some newly bought machinery stored therein. Thereafter, a
judgment was rendered against A in favor of C who had the building and machinery levied upon to satisfy
the judgment.
Is the chattel mortgage binding on C? Explain
Answer:
It is, in so far as the machinery is concerned but void as to the building. The machinery is movable
property as it does not appear that A introduced it in the building in connection with any industry or
works being carried on therein, while the building is immovable property and consequently cannot be the
subject of a chattel mortgage.
B.
A borrowed Bs truck. During a fire which broke out in As garage, he had time to save only one
vehicle and he saved his car instead of the truck. Is he liable for the loss of Bs truck? Why?
Answer:
Yes. The bailee in a commodatum is liable for the loss of the thing loaned even if thru a fortuitous
event where, being able to save it or his own thing, he choose to save the latter.
1984
A.
A bought a truck from B payable in installment secured by a chattel mortgage executed by A on
the truck. As additional security, As brother, C, executed a real estate mortgage in favor of B.
A defaulted in the payment of several installments. Consequently, B file an action for replevin,
repossessed the truck, and foreclosed the chattel mortgage.
Can B proceed against the other properties of A and the real estate mortgage executed by C to
recover the deficiency, if any, after the chattel mortgage foreclosure sale? Explain.
Answer:
No. Under Art. 1484, in the contract of sale of personal property the price of which is payable on
installments, if the seller elects to foreclose after buyer defaults, he shall have no further action against the
purchaser to recover any unpaid balance. Since the principal obligation is extinguished, the mortgaged
executed by C as security therefor will also necessarily be released. (Art. 2086)

294

Secured Transaction Law


B.
On January 1, 1983, A borrowed P 10,000 from B payable on December 1, 1983. As security
therefor, A pledged his car to B with an agreement that B could use it. On June 30, 1983, A offered to pay
the loan in full and asked for the return of his car.
Can A compel B to accept the payment and to return the car? Why?
Answer:
No. Under the agreement with A, B is authorized to use the car. The creditor may use the thing
pledged with the consent of the owner (Art. 2104). A period for the payment of the obligation was also
stipulated. Under Article 1196, it is presumed that whenever a period is designated, it is presumed to have
been established for the benefit of both the creditors and the debtor. Hence, A cannot prepay the loan and
demand the return of the pledged property until the term had arrived.
1986
A.
Mr. Matunod lent MR. Maganaka the amount of P100,000.00. As security of the payment of said
amount Maganaka delivered to Matunod two rings in pledge. When Maganaka failed to pay, Matunod
foreclosed, and had the rings sold at auction. The proceeds of the sale, after deducting price expenses,
amounted to only P70,000.00.
a. May Matunod demand the deficiency from Maganaka? Explain.
b. Assume that the proceeds, after deducting expenses, had come up to P150,000.00. Would
Matunod have been entitled to the excess? Explain.
c. Suppose the rings, instead of being pledged, had been mortgaged to Matunod, would Matunod
have been entitled to the deficiency if the sales proceeds were less than the indebtedness or to the
excess, if the proceed were more? Explain.
Answer:
The New Civil Code on pledge provide that the foreclosure of the pledge extinguishes the principal
obligation, whether the proceeds of the sale are more, or less than the obligation. Hence,
a) Matunod cannot recover the deficiency.
b) Matunod is entitled to keep the excess, unless there is a stipulation to the contrary.
c) If it is a chattel mortgage, Matunod can still recover the deficiency as there is no prohibition in the
Chattel Mortgage Law similar to pledge and the excess, if any should be returned to the mortgagor
(Maganaka).
1987
A.
Ana rented a safety deposit box at the Alto Bank, paid the rental fee and was given the key. Ana
put her jewelry and gold coins in the box. Days after, three armed men gained entry into the Alto Bank,
opening its vault and several deposit boxes, including Anas and emptied them of their contents.
Could Ana hold the Alto Bank liable for the loss of the contents of her deposit box? Explain.

Answer:
No, because under Article 1990 of the Civil Code, if the depository by force majeure loses the
thing receives money or another thing in its place, he shall deliver the sum or other thing to be depositor.
There being no showing that there was anything received in place of the things deposited, the Alto Bank is
not liable for the contents of the safety box.
Alternative Answer:
The Alto Bank is not liable because the contract is not a deposit but a rental of the safety deposit
box. Hence, the Alto Bank is not liable for the loss of the contents of the box.

295

Secured Transaction Law


1989
A.
Distinguish between a contract of real estate mortgage and a contract of sale with right of
repurchase.
Answer:
1. Real Estate Mortgage is an accessory contract. A contract of sale with right of repurchase is a
principal contract.
2. Real Estate Mortgage involves no transfer of title. A contract of sale involves a condition transfer
of title.
3. Real Estate Mortgage involves no transfer of possession. A contract of sale involves a conditional
transfer of possession.
4. In a Real Estate Mortgage the creditor has no rights to the fruits. In a contract of sale, the vendee
is entitled to the fruits.
5. In a real estate mortgage, upon default the creditor is not the owner. In a contract of sale, upon
consolidation, the vendee is the owner.
B.
What do you understand by ANTICHRESIS? How is it distinguished from pledge and mortgage?
Answer:
Antichresis is a contract whereby the creditor acquires the right to receive the fruits of an
immovable of his debtor with the obligation to apply them to the payment of interest if owing and
thereafter to the principal.
Pledge is an accessory and real contract whereby the debtor delivers to the creditor movable
property as security for the performance of a principal obligation upon the fulfillment of which the thing
pledged shall be returned to the debtor.
A real estate mortgage is an accessory contract whereby the debtor guarantees the performance of
the principal obligation by subjecting real property or real right as security for the performance of such
obligation.
Alternative Extended Answer:
By the contract of antichresis the creditor acquires the right to receive the fruits of an immovable
of his debtor, with the obligation to apply them to the payment of the interest, if owing, and thereafter to
the principal of his credit.
Antichresis distinguished from pledge:
1. Antichresis is consensual, pledge is a real contract.
2. Antichresis involves real property, pledge involves personal property.
3. In antichresis, the principal and the interest must be provided in writing for validity. In pledge,
the date and description of the pledge must be in a public instrument to affect third persons.

Antichresis distinguished from mortgage:


1. In antichresis the fruits are applied to the interest and thereafter to the principal. In mortgage the
fruits are not applied to the principal obligation.
2. In antichresis, the creditor is in possession. In mortgage, the debtor is in possession.
3. In antichresis, the principal and interest must be in writing for validity. In mortgage, registration
is required to bind third persons.
4. In antichresis, the creditor pays the taxes. In mortgage, taxes are not impose on the creditor.

1992
A.
On 20 December 1970, Juliet, a widow, borrowed from Romeo P4,000.00 and, as security
therefore, she executed a deed of mortgage over one of her two (2) registered lots which has a market
value of P15,000.00. The document and the certificate of title of the property were delivered to Romeo.

296

Secured Transaction Law


On 2 June 1971, Juliet obtained a additional sum of P3,000.00 from Romeo. On this date,
however, Romeo cause the preparation of a deed of absolute sale of the above property to which Juliet
affixed her signature without first reading the document. The consideration indicated is P7,000.00. She
thought that this document was similar to the first she signed. When she reached home, her son X, after
reading the duplicate copy of the deed, informed her that what she signed was not a mortgage but a deed
of absolute sale. On the following day, 3 June 1971, Juliet, accompanied by X, went back to Romeo and
demanded the reformation of it, Romeo prepared and signed a document wherein, as vendee in the deed
of sale above mentioned, he obligated and bound himself to resell the land to Juliet or her heirs and
successors for the same consideration as reflected in the deed of sale (P7,000.00) within a period of two
(2) years, or until 3 June 1973. It is further stated therein that should the Vendor (Juliet) fail to exercise
her right to redeem within the said period, the conveyance shall be deemed absolute and irrevocable.
Romeo did not take possession of the property. He did not pay the taxes thereon.
Juliet died in January 1973 without having repurchased the property. Her only surviving heir, her
son X, failed to purchase the property on or before 3 June 197. In 1975, Romeo sold the property to Y for
P50,000.00. Upon learning of the sale, X filed an action for the nullification of the sale and for the
recovery of the property on the ground that the so-called deed of absolute sale executed by his mother was
merely an equitable mortgage, taking into account the inadequacy of the price and the failure of Romeo to
take possession of the property and to pay the taxes thereon. Romeo and Y maintain that there was a valid
absolute sale and that the document signed by the former on 3 June 1973 was merely a promise to sell.
(a) If you were the judge, would you uphold the theory of X?
(b) If you decide in favor of Romeo and Y, would you uphold the validity of the promise to sell?
ANSWER
a)I will not uphold the theory of X for the nullification of the sale and for the recovery of the
property on the ground that the so-called sale was only an equitable mortgage. An equitable
mortgage may arise only if, in truth, the sale was one with the right of repurchase. The facts of
the case state that the right to repurchase was granted after the absolute deed of sale was
executed. Following the rule in Cruzo vs. Carriaga (174 SCRA 330), a deed of repurchase
executed independently of the deed of sale where the two stipulations are found in two
instruments instead of one document the right of repurchase would amount only to one
option granted by the buyer to the seller. Since the contract cannot be upheld as a contract of
sale with the right to purchase, Art. 1602 of the Civil Code on equitable mortgage will not
apply. The rule could have been different of both deeds were executed on the same occasion
or date, in which, under the ruling in spouses Claravall v. CA (190 SCRA 439), the contract
may still be sustained as an equitable mortgage, given the circumstances expressed in Art.
1602. The reserve right to purchase is then deemed an original intention.
b)If I were to decide in favor of Romeo and Y, I would not uphold the validity of the promise to
sell, so as to enforce it by action for specific performance. The promise to sell would only
amount to a mere offer and, therefore, it is not enforceable unless it was sought to be
exercised before a withdrawal or denial thereof. Even assuming the facts given at the end of
the case, there would have been no separate consideration for such promise to sell. The
contract would at most amount to an option which again may not be the basis for an action
for specific performance.
B.
X and Y staged a daring bank robbery in Manila at 10:30 A.M. in the morning of a regular business
day, and escaped with their loot of two (2) bags, each bag containing P50,000.00.
During their flight to elude the police, X and Y entered the nearby locked house of A, then working
in his Quezon City office. From As house, X and Y stole a box containing cash totaling P50,000.00 which
box A had been keeping in deposit for his friend. B.
In their hurry, X and Y left in As bedroom one (1) of the bags which they had taken from the bank.
With X and Y now at large and nowhere to be found, the bag containing P50,000.00 is now
claimed by the Mayor of Manila, and by the bank.
B claims that the depositary, A, by force majeure had obtained the bag of money in place of the box
of money deposited by B.

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The Mayor of Manila, on the other hand, claims that the bag of money should be deposited with the
Office of the Mayor as required of the finder by the provisions of the Civil Code.
The bank resists the claims of B and the Mayor of Manila.
To whom should A deliver the bag of money? Decide with reasons.
ANSWER
B would have no right to claim the money. Article 1990 of the Civil Code is not applicable. The law
refers to another thing received in substitution of the object deposited and is predicated upon something
exchanged.
The Mayor of Manila cannot invoke Article 719 of the Civil Code which requires the finder to
deposit the thing with the Mayor only when the previous possessor is unknown.
In this case, A must return the bag of money to the bank as the previous possessor and known
owner (Arts. 719 and 1990, Civil Code).
C.
A, B and C are the co-owners in equal shares of a residential house and lot. During their coownership, the following acts were respectively done by the co-owners:
1. A undertook the repair of the foundation of the house, then tilting to one side, to prevent
the house from collapsing.
2. B and C mortgaged the house and lot to secure a loan.
3. B engaged a contractor to build a concrete fence all around the lot.
4. C built a beautiful grotto in the garden.
5. A and C sold the land to X for a very good price.
What is the legal effect of the mortgage contract executed by B and C?
ANSWER
The mortgage shall not bind the 1/3 right and interest of A and shall be deemed to cover only the
rights and interests of B and C in the house and lot. The mortgage shall be limited to the portion (2/3)
which may be allotted to b and C in the partition (Art. 493, Civil Code).
1993
A.
A, about to leave the country on a foreign assignment, entrusted to B his brand new car and its
certificate of registration. Falsifying As signature, B sold As car to C for P200,000.00. C then registered
the car in his name. To complete the needed amount, C then registered the car in his name. To complete
the needed amount, C borrowed P100,000.00 from the savings and loan association in his office,
constituting a chattel mortgage on the car. For failure of C to pay the amount owed, the savings and loan
association filed in the RTC a compliant for collection with application for issuance of a writ of replevin to
obtain possession of the vehicle so that the chattel mortgage could be foreclosed. The RTC issued the writ
of replevin. The car was then seized from C and sold by the sheriff at public auction at which the savings
and loan association was the lone bidder. Accordingly, the car was sold to it. A few days later, A arrived
from his foreign assignment. Learning of what happened to his car, A sought to recover possession and
ownership of it from the savings and loan association. Can A recover his car from the savings and loan
association? Explain your answer.
ANSWER
Under the prevailing rulings of the Supreme Court, A can recover the car from the Savings and
Loan Association provided he pays the price at which the Association bought the car at a public auction.
Under that doctrine, there has been an unlawful deprivation by B of A of his car and, therefore, A can
recover it from any person in possession thereof. But since it was bought at a public auction in good faith
by the Savings and Loan Association, he must reimburse the Association at the price for which the car was
bought.
ALTERNATIVE ANSWER

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Yes, A can recover his car from the Savings and Loan Association. In a Chattel Mortgage, the
mortgagor must be the absolute owner of the thing mortgaged. Furthermore, the person constituting the
mortgage must have the free disposal of the property, and in the absence thereof, must be legally
authorized for the purpose. In the case at bar, these essential requisites did not apply to the mortgagor B,
hence the chattel Mortgage was not valid.
B.
A, upon request, loaned his passenger jeepney to B to enable B to bring his sick wife from Paniqui,
Tarlac to the Philippine General Hospital in Manila for treatment. On the way back to Paniqui, after
leaving his wife at the hospital, people stopped the passenger jeepney. B stopped for them and allowed
them to ride on board, accepting payment from them just as in the case of ordinary passenger jeepneys
plying the route. As B was crossing Bamban, there was an onrush of lahar from Mt. Pinatubo. The jeep
that was loaned to him was wrecked.
a) What do you call the contract that was entered into by A and B with respect to the passenger
jeepney that was loaned by A to B to transport the latters sick wife to manila?
b) Is B obliged to pay A for the use of the passenger jeepney?
c) Is B liable to for the loss of the jeepney?
ANSWER
a) The contract is called commodatum. (Art. 1933, Civil Code)
b) No, B is not obliged to pay A for the use of the passenger jeepney because commodatum is
essentially gratuitous. (Art. 1933, Civil Code)
C) Yes, because b devoted the thing to a purpose different from that for which it has been loaned
(Art. 1942, par. 2, Civil Code)
ALTERNATIVE ANSWER
No, because an obligation which consists in the delivery of a determinate thing shall be
extinguished if it should be lost or destroyed without the fault of the debtor, and before he has incurred in
delay. (Art. 1262, Civil Code)
1994
A.
In 1978, Bobby borrowed P1,000,000.00 from Chito payable in two years. The loan, which was
evidenced by a promissory note, was secured by a mortgage on real property. No action was filed by Chito
to collect the loan or to foreclose the mortgage. But in 1991, Bobby, without receiving any amount from
Chito, executed another promissory note which was worded exactly as the 1978 promissory note, except
for the date thereof, which was the date of its execution.
a) Can Chito demand payment on the 1991 promissory note in 1994?
b) Can Chito foreclose the real estate mortgage if Bobby fails to make good of his obligation under the
1991 promissory note?
ANSWER
a) Yes Chito can demand payment on the 1991 promissory note in 1994. Although the 1978
promissory note for P1 million payable two years later or in 1980 became a natural obligation after the
lapse of ten (10) years, such natural obligation can be a valid consideration of a novated promissory note
dated in 1991 and payable two years later, or in 1993.
All the elements of an implied real novation are present:
an old valid obligation;
a new valid obligation;
capacity of the parties;
animus novandi or intention to novate; and
The old and the new obligation should be incompatible with each other on all material
points (Article 1292). The two promissory notes cannot stand together; hence, the period
of prescription of ten (10) years has not yet lapsed.

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b) No, the mortgage being an accessory contract prescribed with the loan. The novation of the
loan, however, did not expressly include the mortgage; hence, the mortgage is extinguished under article
1296 of the NCC. The contract has been extinguished by the novation or extinction of the principal
obligation insofar as third parties are concerned.
B. Vini constructed a building on a parcel of land he leased from Andrea. He chattel mortgaged the land
to Felicia. When he could not pay Felicia, Felicia initiated foreclosure proceedings. Vini claimed that the
building he had constructed on the leased land cannot be validly foreclosed because the building was, by
law, an immovable. Is Vini correct?
ALTERNATIVE ANSWERS
a) The Chattel Mortgage is void and cannot be enforced because the building is an immovable and
cannot be an object of a chattel mortgage.
b) It depends. If the building was intended and is built of light materials, the chattel mortgage
may be considered as valid as between the parties and it may be considered in respect to them as movable
property, since it can be removed from one place to another. But if the building is of strong material and is
not capable of being removed or transferred without being destroyed, the chattel mortgage is void and
cannot be foreclosed.
c) If it was the land which Vini chattel mortgaged, such mortgage would be void, or at least
unenforceable, since he was not the owner of the land.
If what was mortgage as a chattel is the building, the chattel mortgage is valid as between the
parties only, on grounds of estoppel which would preclude the mortgagor from assailing the contract on
the ground that its subject-matter is an immovable. Therefore Vinis defense untenable, and Felicia can
foreclose the mortgage over the building, observing, however, the procedure prescribed for the execution
of sale of a judgment debtors immovable under rule 39, Rules of Court, specifically, that the notice of
auction sale should be published in a newspaper of general circulation.
d) The problem that Vini mortgaged the land by of chattel mortgage was the building on leased
land, then the parties are treating the building as chattel. A building that is not merely superimposed on
the ground is an immovable property and a chattel mortgage on said building is legally void but the
parties cannot be allowed to disavow their contract on account of estoppel be deed. However, if third
parties are involved such chattel mortgage is void and has no effect.

C.
In 1982, Steve borrowed P400,000.00 from Danny, collateralized by a pledge of shares of stock of
Conception corporation worth P800,000.00. In 1983, because of the economic crisis, the value of the
shares pledged fell to only P100,000.00. Can Danny demand that Steve surrender the other shares worth
P700,000.00?
ALTERNATIVE ANSWERS
a) No. Bilateral contracts cannot be changed unilaterally. A pledge is only a subsidiary contract,
and Steve is still indebted to Danny for the amount of P400,000.00 despite the fall in the value of the
stocks pledged.
b) No. Dannys right as pledgee is to sell the pledged shares at a public sale and keep the proceeds
as collateral for the loan. There is no showing that the fall in value of the pledged or property was
attributable to the pledgers fault or fraud. On the contrary, the economic crisis was the culprit. Had the
pledgee been deceived as to the substance or quality of the pledged shares of stock, he would have had the
right to claim another thing in their place or to the immediate payment of the obligation. This is not the
case here.
1995
A. Olivia owns a vast mango plantation which she can no longer properly manage due to a lingering
illness. Since she is indebted to Peter in the amount of P500,000.00 she asks Peter to manage the
plantation and apply the harvest to the payment of her obligation to him, principal and interest, until
her indebtedness shall have been fully paid. Peter agrees.
a.

What kind of contract is entered into between Olivia and Peter? Explain.

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b. What specific obligations are imposed by law on Peter as a consequence of their contract?
c. May Olivia re-acquire the plantation before her entire indebtedness shall have been fully
paid? Explain.
ANSWER
a.

A contract of antichresis was entered into between Olivia and Peter. Under Article 2132 of the
new Civil Code, by a contract of antichresis the creditor acquires the right to receive the fruits
of an immovable of his debtor, with the obligation to apply them to the payment of the
interest, and thereafter to the principal of his credit.

b. Peter must pay taxes and charges and interest must be specified in writing, otherwise the
antichresis will be void. (Art. 2134, NCC)
c.

No. Art. 2136 specifically provides that the debtor cannot re-acquire the enjoyment of the
immovable without first having totally paid what he owes the creditor. However, it is
potestative on the part of the creditor to do so in order.

B.In 1983 PHILCREDIT extended loans to Rivett-Strom Machineries, Inc. (RIVETT-STROM), consisting
of US$10 Million for the cost of machineries imported and directly paid by PHILCREDIT, and 5 Million in
cash payable in installments over a period of ten (10) years on the basis of the value thereof computed at
the rate of exchange of the U.S. dollar vis--vis the Philippine peso at the time of payment.
RIVETT-STROM made payments on both loans which if based on the rate of exchange in 1983
would have fully settled the loans.
PHILCREDIT contends that the payments on both loans should be based on the rate of exchange
existing at the time of payment, which rate of exchange has been consistently increasing, and for
which reason there would still be a considerable balance on each loan.
Is the contention of PHILCREEDIT correct? Discuss fully.
ANSWER
As regards the loan consisting of dollars, the contention of PHILCREDIT is correct. It has to be
paid in Philippine currency computed on the basis of the exchange rate at the time of payment of each
installment, as held in Kalao v. Luz, 34 SCRA 337. As regards the P5 Million loan in Philippine pesos,
PHILCREDIT is wrong. The payment thereof cannot be measured by the peso-dollar exchange rate. That
will be violative of the Uniform Currency Act (R.A. 529) which prohibits the payment of an obligation
which, although to be paid in Philippine currency, is measured by a foreign currency. (Palanca v. CA, 238
SCRA 593).
1996
A.
In the province, a farmer couple borrowed money from the local merchant. To guarantee payment,
they left the Torrens Title of their land with the merchant, for him to hold until they pay the loan. Is there
aa. contract of pledge,
b. contract of mortgage,
c. contract of antichresis, or
d. none of the above?
ANSWER
None of the above. There is no pledge because only movable property may be pledged (Art. 2094,
NCC). If at all, there was a pledge of the paper or document constituting the Torrens Title, as a movable by
itself, but not of the land which the title represents. There is no mortgage because no deed or contract was
executed in the manner required by law for a mortgage (Arts. 2085 to 2092, NCC; 2124 to 2131, NCC).

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There is no contract of antichresis because no right to the fruits of the property was given to the creditor
(Art. 2132 NCC).
A contract of simple loan was entered into with security arrangement agreed upon by the parties
which is not one of those mentioned above.
ALTERNATIVE ANSWER
There is a contract of mortgage constituted over the land. There is no particular form required for
the validity of a mortgage of real property. It is not covered by the statute of frauds in Art. 1403, NCC and
even assuming that it is covered, the delivery of the title to the creditor has taken it out of the coverage
thereof. A contract of mortgage of real property is consensual and is binding on the parties despite
absence of writing. However, third parties are not bound because of the absence of a written instrument
evidencing the mortgage and, thereof the absence of registration. But this does not affect the validity of
the mortgage between the parties (Art. 2125, NCC). The creditor may compel the debtor to execute the
mortgage in a public document in order to allow its registration (Art. 1357, NCC in relation to Art. 1358,
NCC) .
1997
A.In order to secure a bank loan, XYZ Corporation surrenders its deposit certificate, with a maturity date
of 01 September 1997 to the bank. The corporation defaulted on the due repayment of the loan, prompting
the bank to encash the deposit certificate. XYZ Corporation questioned the above action taken by the bank
as being a case of pactum commissorium. The bank disagrees. What is your opinion?
ANSWER
We submit that there is no pactum commissorium here. Deposits of money in banks and similar
institutions are governed by the provisions on simple loans (Art. 1980, Civil Code). The relationship
between the depositor and a bank is one of creditor and debtor. Basically this is a matter of compensation
as all the elements of compensation are present in this case (BPI vs. CA, 232 SCRA 302).
B.
B sold to CD a motor vehicle for and in consideration of P120,000.00, to be paid in twelve
monthly installments of P10,000.00, each installment being due and payable on the 15th day of each
month starting January 1997. To secure the promissory note, CD (a) executed a chattel mortgage on the
subject motor vehicle, and (b) furnished a surety bond issued by Philamlife. CD failed to pay more than
two (2) installments. AB went after the surety but he was only able to obtain three-fourths (3/4) of the
total amount still due and owing from CD. AB seeks your advice on how he might, if at all, recover the
deficiency. How would you counsel AB?
ANSWER
Yes, he can recover the deficiency. The action of AB to go after the surety bond cannot be taken
to mean a waiver of his right to demand payment for the whole debt. The amount received from the surety
is only payment pro tanto, and an action may be maintained for a deficiency debt.

1998
A.Distinguish usufruct from commodatum and state whether these may be constituted over consumable
goods.
ANSWER
Usufruct is a right given to a person (usufructuary) to enjoy the property of another with the
obligation of preserving its form and substance (Art. 562, Civil Code)
On the other hand, commodatum is a contract by which one of the parties (bailor) delivers to
another (bailee) something not consumable so that the latter may use it for a certain time and return it. In
usufruct the usufructuary gets the right to the use and to the fruits of the same, while in commodatum, the
bailee only acquires the use of the thing loaned but not its fruits.

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Usufruct may be constituted on the whole or a part of the fruits of the thing. (Art. 564, Civil
Code). It may even be constituted over consumables like money (Alunan v. Veloso, 52 Phil. 545). On the
other hand, in commodatum, consumable goods may be subject thereof only when the purpose of the
contract is not the consumption of the object, as when it is merely for exhibition. (Art. 1936, Civil Code)
ANOTHER ANSWER
There are several points of distinction between usufruct and commodatum. Usufruct is
constituted by law, by contract, by testamentary succession, or by prescription (Art. 1933, Civil Code).
Usufruct creates a real right to the fruits of anothers property, while commodatum creates only a purely
personal right to use anothers property, and requires a stipulation to enable the bailee to make use of
the fruits (Arts. 1939 & 1940, Civil Code). Usufruct may be onerous while commodatum is always or
essentially gratuitous (Arts. 1933 & 1935, Civil Code). The contract constituting usufruct is consensual,
while commodatum is a real contract (perfected only by delivery of the subject matter thereof). However,
both involve the enjoyment by a person of the property of another, differing only as to the extent and
scope of such enjoyment (jus fruendi in one and jus utendi in the other); both may have as subject matter
either an immovable or a movable; and, both may be constituted over consumable goods (Arts. 574 &
1936, Civil Code).
A consumable thing may be the subject-matter of an abnormal usufruct but in a normal
usufruct, the subject-matter may be used only for exhibition. A commodatum of a consumable thing may
be only for the purpose of exhibiting, not consuming it.
B.
Joey, Jovy and Jojo are solidary debtors under a loan obligation of P300,000.00 which has fallen
due. The creditor has, however, condoned Jojos entire share in the debt. Since Jovy has become
insolvent, the creditor makes a demand on Joey to pay the debt How much, if any, may Joey be complied
to pay?
(a)To what extent, if at all, can Jojo be compelled by Joey to contribute to such payment?
ANSWER
(a)
Joey can be compelled to pay only the remaining balance of P200,000, in view of the
remission of Jojos share by the creditor. (Art. 1219, Civil Code)
(b)
Jojo can be compelled by Joey to contribute P50,000. Art. 1217, par. 3, Civil Code
provides, When one of the solidary debtors cannot, because of his insolvency, reimburse his
share to the debtor paying the obligation, such share shall be borne by all his co-debtors, in
proportion to the debt of each.
Since the insolvent debtors share which Joey paid was P100,000, and there are only two
remaining debtors- namely Joey and Jojo- these two shall share equally the burden of reimbursement.
Jojo may thus be compelled by Joey to contribute P50,000.00.
1999
A.
X, who has a savings deposit with Y Bank in the sum of P1,000,000.00, incurs a loan obligation
with the said Bank in the sum of P800,000.00 which has become due. When X tries to withdraw his
deposit, Y Bank allows only P200,000.00 to be withdrawn , less service charges, claiming that
compensation has extinguished its obligation under the savings account to the concurrent amount of Xs
debt. X contends that compensation is improper when one of the debts, as here, arises from a contract of
deposit. Assuming that the promissory note signed by X to evidence the loan does not provide for
compensation between said loan and his savings deposit, who is correct?
ANSWER:
Y bank is correct. Art. 1287, Civil Code, does not apply. All the requisites of Art. 1279, Civil Code
are present. In the case of Gullas vs. PNB (62 Phil. 519), the Supreme Court held: The Civil Code contains
provisions regarding compensation (set off) and deposit. These portions of Philippine law provide that
compensation shall take place when two persons are reciprocally creditor and debtor of each other.
B.Are the right of redemption and the equity of redemption given by law to a mortgagor the same?
Explain.

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ANSWER:
The equity of redemption is different from the right of redemption. Equity of redemption is the
right of the mortgagor after judgment in a judicial foreclosure to redeem the property by paying to the
court the amount of the judgment debt before the sale or confirmation of the sale. On the other hand,
right of redemption is the right of the mortgagor to redeem the property sold at an extra-judicial
foreclosure by paying to the buyer in the foreclosure sale the amount paid by the buyer within one year
from such sale.
C.What are the so-called Maceda and Recto laws in connection with sales on installments? Give the
most important features of each law.
ANSWER:
The Maceda Law (R.A. 655) is applicable to sales of immovable property on installments. The
most important features are (Rillo v. CA, 247 SCRA 461):
(1) After having paid installments for at least two years, the buyer is entitled to a mandatory
grace period of one month for every year of installment payments made, to pay the unpaid
installments without interest.
If the contract is cancelled, the seller shall refund to the buyer the cash surrender value
equivalent to fifty percent (50%) of the total payments made, and after five years of installments, an
additional five percent (5%) every year but not to exceed ninety percent (90%) of the total payments
made.
(2) In case the installments paid were less than 2 years, the seller shall give the buyer a grace
period of not less than 60 days. If the buyer fails to pay the installments due at the expiration of the grace
period, the seller may cancel the contract after 30 days from receipt by the buyer of the notice of
cancellation or demand for rescission by notarial act.
The Recto Law (Art. 1484) refers to sale of movables payable in installments and limiting the
right of seller, in case of default by the buyer, to one of three remedies:
(a) exact fulfillment;
(b) cancel the sale if two or more installments have not been paid;
(c) foreclose the chattel mortgage on the thing sold, also in case of default of two or more
installments, with no further action against the purchaser.

2000
A.Ambrocio died, leaving his three daughters, Belen, Rosario and Sylvia hacienda which was mortgaged
to the Philippine National Bank. Due to the failure of the daughters to pay the bank, the latter foreclosed
the mortgaged and the hacienda was sold to it as the highest bidder. Six months later, Sylvia won the
grand prize at the lotto and used part of it to redeem the hacienda from the bank. Thereafter, she took
possession of the hacienda and refused to share its fruits with her sisters, contending that it was owned
exclusively by her, having bought it from the bank with her own money. Is she correct or not?
SUGGESTED ANSWER:
Sylvia is not correct. The 3 daughters are the co-owners of the hacienda being the only heirs of
Ambrosio. When the property was foreclosed, the right of redemption belongs also to the 3 daughters.
When Sylvia redeemed the entire property before the lapse of the redemption period, she also exercised
the right of redemption of her co-owners on their behalf. As such she is holding the shares of her two
sisters in the property, and all the fruits corresponding thereto, in trust for them. Redemption by one coowner inures to the benefit of all (Adille v. CA, 157 SCRA 455). Sylvia, however, is entitled to be
reimbursed the shares of her two sisters in the redemption price.

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B.As finance officer of K and Co., Victorino arranged a loan of P5 Million from PNB for the corporation.
However, he was required by the bank to sign a Continuing Surety Agreement to secure the repayment of
the loan. The corporation failed to pay the loan, and the bank obtained a judgment against it and
Victorino, jointly and severally. To enforce the judgment, the sheriff levied on a farm owned by the
conjugal partnership of Victorino and his wife Elsa. Is the levy proper or not?
SUGGESTED ANSWER:
The levy is not proper there being no showing that the surety agreement executed by the husband
redounded to the benefit of the family. An obligation contracted by the husband alone is chargeable
against the conjugal partnership only when it was contracted for the benefit of the family. When the
obligation was contracted on behalf of the family business the law presumes that such obligation will
redound to the benefit of the family. However, when the obligation was to guarantee the debt of a third
party, as in the problem, the obligation is presumed for the benefit of the third party, not the family.
Hence, for the obligation under the surety agreement to be chargeable against the partnership it must be
proven that the family was benefited and that the benefit was a direct result of such agreement. (Ayala
Investment v. Ching, 286 SCRA 272)

C.
Kristina brought her diamond ring to a jewelry shop for cleaning. The jewelry shop undertook to
return the ring by February 1, 1999." When the said date arrived, the jewelry shop informed Kristina that
the Job was not yet finished. They asked her to return five days later. On February 6, 1999, Kristina went
to the shop to claim the ring, but she was informed that the same was stolen by a thief who entered the
shop the night before. Kristina filed an action for damages against the jewelry shop which put up the
defense of force majeure. Will the action prosper or not?

SUGGESTED ANSWER:
The action will prosper. Since the defendant was already in default not having delivered the ring
when delivery was by plaintiff at due date, the defendant is liable for the loss of the thing and even when
the loss was due to force majeure.

2001
A.
Samuel borrowed P300,000.00 housing loan from the bank at 18% per annum interest. However,
the promissory note contained a proviso that the bank "reserves the right to increase interest within the
limits allowed by law," By virtue of such proviso, over the objections of Samuel, the bank increased the
interest rate periodically until it reached 48% per annum. Finally, Samuel filed an action questioning the
right of the bank to increase the interest rate up to 48%. The bank raised the defense that the Central
Bank of the Philippines had already suspended the Usury Law. Will the action prosper or not? Why?
SUGGESTED ANSWER:
The action will prosper. While it is true that the interest ceilings set by the Usury Law are no
longer in force, it has been held that PD No. 1684 and CB Circular No. 905 merely allow contracting
parties to stipulate freely on any adjustment in the interest rate on a loan or forbearance of money but do
not authorize a unilateral increase of the interest rate by one party without the other's consent (PNB v.
CA, 238 SCRA 2O [1994]]). To say otherwise will violate the principle of mutuality of contracts under
Article 1308 of the Civil Code. To be valid, therefore, any change of interest must be mutually agreed upon
by the parties (Dizon v, Magsaysay, 57 SCRA 25O [1974]). In the present problem, the debtor not having
given his consent to the increase in interest, the increase is void.
B.
To secure a loan obtained from a rural bank, Purita assigned her leasehold rights over a stall in
the public market in favor of the bank. The deed of assignment provides that in case of default in the

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payment of the loan, the bank shall have the right to sell Purita's rights over the market stall as her
attorney-in-fact, and to apply the proceeds to the payment of the loan.
4) Was the assignment of leasehold rights a mortgage or a cession? Why?
5) Assuming the assignment to be a mortgage, does the provision giving the bank the power
to sell Purita's rights constitute pactum commissorium or not? Why?
SUGGESTED ANSWER:
1) The assignment was a mortgage, not a cession, of the leasehold rights. A cession would have transferred
ownership to the bank. However, the grant of authority to the bank to sell the leasehold rights in case of
default is proof that no such ownership was transferred and that a mere encumbrance was constituted.
There would have been no need for such authority had there been a cession.
2) No, the clause in question is not a pactum commissorium. It is pactum commissorium when default in
the payment of the loan automatically vests ownership of the encumbered property in the bank. In the
problem given, the bank does not automatically become owner of the property upon default of the
mortgagor. The bank has to sell the property and apply the proceeds to the indebtedness.

2002
A.
Carlos sues Dino for (a) collection on a promissory note for a loan, with no agreement on interest,
on which Dino defaulted, and (b) damages caused by Dino on his (Carlos) priceless Michaelangelo
painting on which Dino is liable on the promissory note and awards damages to Carlos for the damaged
painting, with interests for both awards. What rates of interest may the court impose with respect to both
awards? Explain.
SUGGESTED ANSWER:
With respect to the collection of money or promissory note, it being a forbearance of money, the
legal rate of interest for having defaulted on the payment of 12% will apply. With respect to the damages
to the painting, it is 6% from the time of the final demand up to the time of finality of judgment until
judgment credit is fully paid. The court considers the latter as a forbearance of money. (Eastern Shipping
Lines, Inc. v. CA, 234 SCRA 78 [1994]; Art 2210 and
2211, CC)
2003
A.
X constructed a house on a lot which he was leasing from Y. Later, X executed a chattel mortgage
over said house in favor of Z as security for a loan obtained from the latter. Still later, X acquired
ownership of the land where his house was constructed, after which he mortgaged both house and land in
favor of a bank, which mortgage was annotated on the Torrens Certificate of Title. When X failed to pay
his loan to the bank, the latter, being the highest bidder at the foreclosure sale foreclosed the mortgage
and acquired Xs house and lot. Learning of the proceedings conducted by the bank, Z is now demanding
that the bank reconvey to him Xs house or pay Xs loan to him plus interests. Is Zs demand against the
bank valid and sustainable? Why?
SUGGESTED ANSWER:
No, Zs demand is not valid. A building is immovable or real property whether it is erected by the
owner of the land, by a usufructuary, or by a lessee. It may be treated as a movable by the parties to
chattel mortgage but such is binding only between them and not on third parties (Evangelista v. Alto
Surety Col, inc. 103 Phil. 401 [1958]). In this case, since the bank is not a party to the chattel mortgage, it
is not bound by it, as far as the Bank is concerned, the chattel mortgage, does not exist. Moreover, the
chattel mortgage does not exist. Moreover, the chattel mortgage is void because it was not registered.
Assuming that it is valid, it does not bind the Bank because it was not annotated on the title of the land
mortgaged to the bank. Z cannot demand that the Bank pay him the loan Z extended to X, because the
Bank was not privy to such loan transaction.

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ANOTHER SUGGESTED ANSWER:
No, Zs demand against the bank is not valid. His demand that the bank reconvey to him Xs
house presupposes that he has a real right over the house. All that Z has is a personal right against X for
damages for breach of the contract of loan. The treatment of a house, even if built on rented land, as
movable property is void insofar as third persons, such as the bank, are concerned. On the other hand, the
Bank already had a real right over the house and lot when the mortgage was annotated at the back of the
Torrens title. The bank later became the owner in the foreclosure sale. Z cannot ask the bank to pay for Xs
loan plus interest. There is no privity of contract between Z and the bank.
ALTERNATIVE ANSWER:
The answer hinges on whether or not the bank is an innocent mortgagee in good faith or a
mortgagee in bad faith. In the former case, Zs demand is not valid. In the latter case, Zs demand against
the bank is valid and sustainable. Under the Torrens system of land registration, every person dealing
with registered land may rely on the correctness of the certificate of title and the law will not in any way
oblige to him to look behind or beyond the certificate in order to determine the condition of the title. He is
not bound by anything not annotated or reflected in the certificate. If he proceeds to buy the land or
accept it as a collateral relying on the certificate, he is considered a buyer or a mortgagee in good faith. On
this ground, the Bank acquires a clean title to the land and the house. However, a bank is not an ordinary
mortgagee. Unlike private individuals, a bank is expected to exercise greater care and prudence in its
dealings. The ascertainment of the condition of a property offered as collateral for a loan must be a
standard and indispensable part of its operation. The bank should have conducted further inquiry
regarding the house standing on the land considering that it was already standing there before X acquired
the title to the land. The bank cannot be considered as a mortgagee in good faith. On this ground, Zs
demand against the Bank is valid and sustainable.
2004
A.

Distinguish briefly but clearly between Mutuum and Commodatum.

SUGGESTED ANSWER:
In MUTUUM, the object borrowed must be a consumable thing, the ownership of which is
transferred to the borrower who incurs the obligation to return the same consumable to the lender in an
equal amount, and of the same kind and quality. In COMMODATUM, the object borrowed is usually a
non-consumable thing, the ownership of which is not transferred to the borrower who incurs the
obligation to return the very thing to the lender.
B.
The parties in a contract of loan of money agreed that the yearly interest rate is 12% and it can be
increased if there is a law that would authorize the increase of interest rates. Suppose OB, the lender,
would increase by 5% the rate of interest to be paid by TY, the borrower, without a law authorizing such
increase, would OBs action be just and
valid? Why? Has TY a remedy against the imposition of the rate increase? Explain.
SUGGESTED ANSWER:
OB's action is not just and valid. The debtor cannot be required to pay the increase in interest,
there being no law authorizing it, as stipulated in the contract. Increasing the rate in the absence of such
law violates the principle of mutuality of contracts.
ALTERNATIVE ANSWER:
Even if there was a law authorizing the increase in interest rate, the stipulation is still void
because there is no corresponding stipulation to decrease the interest due when the law reduces the rate
of interest.
C.
ABC loaned to MNO P40,000 for which the latter pledged 400 shares of stock in XYZ Inc. It was
agreed that if the pledgor failed to pay the loan with 10% yearly interest within four years, the pledgee is

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authorized to foreclose on the shares of stock. As required, MNO delivered possession of the shares to
ABC with the understanding that the shares would be returned to MNO upon the time. A month after 4
years, may the shares of stock pledged be deemed owned by ABC or not? Reason.
SUGGESTED ANSWER:
The shares of stock cannot be deemed owned by ABC upon default of MNO. They have to be
foreclosed. Under Article 2088 of the Civil Code, the creditor cannot appropriate the things given by way
of pledge. And even if the parties have stipulated that ABC becomes the owner of the shares in case MNO
defaults on the loan, such stipulation is void for being a pactum commissorium.

2005
A.
Before he left for Riyadh to work as a mechanic, Pedro left his Adventure van with Tito, with the
understanding that the latter could use it for one year for his personal or family use while Pedro works in
Riyadh. He did not tell Tito that the brakes of the van were faulty. Tito had the van tuned up and the
brakes repaired. He spent a total amount of P15,000.00. After using the vehicle for two weeks, Tito
discovered that it consumed too much fuel. To make up for the expenses, he leased it to Annabelle. Two
months later, Pedro returned to the Philippines and asked Tito to return the van. Unfortunately, while
being driven by Tito, the van was accidentally damaged by a cargo truck without his fault.
a) Who shall bear the P15,000.00 spent for the repair of the van? Explain.
ALTERNATIVE ANSWER:
Tito must bear the P15,000.00 expenses for the van. Generally, extraordinary expenses for the
preservation of the thing loaned are paid by the bailor, he being the owner of the thing loaned. In this case
however, Tito should bear the expenses because he incurred the expenses without first informing Pedro
about it. Neither was the repair shown to be urgent. Under Article 1949 of the Civil Code, bailor generally
bears the extraordinary expenses for the preservation of the thing and should refund the said expenses if
made by the bailee; Provided, The bailee brings the same to the attention of the bailor before incurring
them, except only if the repair is urgent that reply cannot be awaited.
ALTERNATIVE ANSWER:
The P15,000.00 spent for the repair of the van should be borne by Pedro. Where the bailor
delivers to the bailee a non-consummable thing so that the latter may use it for a certain time and return
the identical thing, the contract perfected is a Contract of Commodatum. (Art. 1933, Civil Code) The bailor
shall refund the extraordinary expenses
during the contract for the preservation of the thing loaned provided the bailee brings the same to the
knowledge of the bailor before incurring the same, except when they are so
urgent that the reply to the notification cannot be awaited without danger. (Art. 1949 of the Civil Code) In
the given problem, Pedro left his Adventure van with Tito so that the latter could use it for one year while
he was in Riyadh. There was no mention of a consideration. Thus, the contract perfected was
commodatum. The amount of P15,000.00 was spent by Tito to tune up the van and to repair its brakes.
Such expenses are extra-ordinary expenses because they are necessary for the preservation of the van.
Thus, the same should be borne by the bailor, Pedro.
b) Who shall bear the costs for the van's fuel, oil and other materials while it was with Tito?
SUGGESTED ANSWER:
Tito must also pay for the ordinary expenses for the use and preservation of the thing loaned. He
must pay for the gasoline, oil, greasing and spraying. He cannot ask for reimbursement because he has the
obligation to return the identical thing to the bailor. Under Article 1941 of the Civil Code, the bailee is
obliged to pay for the ordinary expenses for the use and preservation of the thing loaned.

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c) Does Pedro have the right to retrieve the van even before the lapse of one year?
ALTERNATIVE ANSWER:
No, Pedro does not have the right to retrieve the van before the lapse of one year. The parties are
mutually bound by the terms of the contract. Under the Civil Code, there are only 3 instances when the
bailor could validly ask for the return of the thing loaned even before the expiration of the period. These
are when: (1) a precarium contract was entered (Article 1947); (2) if the bailor urgently needs the thing
(Article 1946); and (3) if the bailee commits acts of ingratitude (Article 1948). Not one of the situations is
present in this case. The fact that Tito had leased the thing loaned to Annabelle would not justify the
demand for the return of the thing loaned before expiration of the period. Under Article 1942 of the Civil
Code, leasing of the thing loaned to a third person not member of the household of the bailee, will only
entitle bailor to hold bailee liable for the loss of the thing loaned.
ALTERNATIVE ANSWER:
As a rule, Pedro does not have the right to retrieve the van before the lapse of one year. Article
1946 of the Code provides that "the bailor cannot demand the return of the
thing loaned till after the expiration of the period stipulated, or after the accomplishment of the use for
which the commodatum has been constituted. However, if in the meantime, he should have urgent need
of the thing, he may demand its return or temporary use." In the given problem, Pedro allowed Tito to use
the van for one year. Thus, he should be bound by the said agreement and he cannot ask for the return of
the car before the expiration of the one year period. However, if Pedro has urgent need of the van, he may
demand for its return or temporary use.
d) Who shall bear the expenses for the accidental damage caused by the cargo truck, granting that
the truck driver and truck owner are insolvent?
SUGGESTED ANSWER:
Generally, extraordinary expenses arising on the occasion of the actual use of the thing by the
bailee, even if incurred without fault of the bailee, shall be shouldered equally by the bailor and the bailee.
(Art. 1949 of the Civil Code). However, if Pedro had an urgent need for the vehicle, Tito would be in delay
for failure to immediately return the same, then Tito would be held liable for the extraordinary expenses.

2007
1.

the parties to a bailment are the:


a. bailor:
b. bailee;
c. comodatario;
d. all of the above;
e. letters a and b

2.

a deposit made in compliance with a legal obligation is:


a. an extrajudicial deposit;
b. a voluntary deposit;
c. a necessary deposit;
d. a deposit with warehouseman;
e. letters a and b.

3.

a contract of antichresis is always:


a. a written contract;
b. a contract with stipulation that the debt will be paid through the receipt of the fruits of an
immovable;
c. involves the payment of interest, if owing;
d. all of the above;
e. letters a and b.

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2008
A.
Eduardo was granted a loan by XYZ Bank for the purpose of improving a building which XYZ
leased from him. Eduardo, executed the promissory note ("PN") in favor of the bank, with his friend
Recardo as co-signatory. In the PN, they both acknowledged that they are "individually and collectively"
liable and waived the need for prior demand. To secure the PN, Recardo executed a real estate
mortgageon his own property. When Eduardo defaulted on the PN, XYZ stopped payment of rentals on
the building on the ground that legal compensation had set in. Since there was still a balance due on the
PN after applying the rentals, XYZ foreclosed the real estate mortgage over Recardo's property. Recardo
opposed the foreclosure on the ground that he is only a co-signatory; that no demand was made upon him
for payment, and assuming he is liable, his liability should not go beyond half the balance of the loan.
Further, Recardo said that when the bank invoked compensation between the rentals and the amount of
the loan, it amounted to a new contract or novation, and had the effect of extinguishing the security since
he did not give his consent (as owner of the property under the real estate mortgage) thereto.
Can Recardo's property be foreclosed to pay the full balance of the loan?
Suggested Answer
Yes Recardo's property can be foreclosed to pay the full balance of the loan because he is cosignatory to the PN. As a co-signatory, he is considered as surety, hence,he is solidarily liable for the loan
obtained by Eduardo from XYZ Corp. As laid down by the Supreme Court, a surety is bound equally and
absolutely with the principal, and as such is deemed an original promisor and debtor from the
beginning. This is because in suretyship there is but one contract, and the surety is bound by the same
agreement which binds the principal.
2009
A.

TRUE OR FALSE
An oral promise of guaranty is valid and binding.

ANSWER
TRUE. Since the law only requires that the contract of guaranty be express but does not provide
that it be in writing, then an oral promise of guaranty is valid. However, under the Statute of Frauds, a
promise to answer for the debt, default or miscarriage of another (which includes guaranty) must be in
writing; otherwise, it is unenforceable unless ratified.
B.
Rosario obtained a loan of P100,000.00 from Jennifer, and pledged her diamond ring. The
contract signed by the parties stipulated that if Rosario is unable to redeem the ring on due date, she will
execute a document in favor of Jennifer providing that the ring shall automatically be considered full
payment of the loan.
[a] Is the contract valid? Explain.
[b] Will your answer to [a] be the same if the contract stipulates that upon failure of Rosario to
redeem the ring on due date, Jennifer may immediately sell the ring and appropriate the entire proceeds
thereof for herself as full payment of the loan? Reasons?
ANSWER

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a. No, the contract is not valid. In accordance with Art. 2088, the creditor may not appropriate
the thing given by way of pledge, nor can he dispose of the same, and any stipulation to the contrary is
void. Furthermore, the thing pledged is merely a security for the loan, and not payment.
b. Yes the anwswer would be the same. The creditor is not allowed to appropriate the thing to
himself the thing held as pledge or under mortgage, nor can he dispose of the same as owner. He is
merely entitled, after the principal becomes due, to move for the sale of the things pledged, in order to
collect the amount of the claim from the proceeds (Ranjo vs. Salmon 15 Phil. 436).
2010
What is the difference between "guaranty" and "suretyship"?
Guaranty
Guarantor is secondarily liable

Suretyship
Surety is primarily liable and it therefore not
entitled to the benefit of excussion
Guarantor binds himself to pay only when the
Surety assumes liability as a regular party and
principal cannot pay
undertakes to pay if the principal does not pay.
Guarantor is an insurer of the debtors insolvency Surety is an insurer of the debt
The engagement of the guarantor is a collateral A surety is charged as an actual promissory
undertaking
A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the
debtor. A suretyship is an undertaking that the debt shall be paid; a guaranty, an undertaking that the
debtor shall pay. Stated differently, a surety promises to pay the principal's debt if the principal will not
pay, while a guarantor agrees that the creditor, after proceeding against the principal, may proceed
against the guarantor if the principal is unable to pay. A surety binds himself to perform if the principal
does not, without regard to his ability to do so. A guarantor, on the other hand, does not contract that the
principal will pay, but simply that he is able to do so. In other words, a surety undertakes directly for the
payment and is so responsible at once if the principal debtor makes default, while a guarantor contracts to
pay if, by the use of due diligence, the debt cannot be made out of the principal debtor (Palmares vs. CA
March 21, 1998).

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