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SECURITY TRANSACTIONS

FAQs OF ATTY. DE LEON-MANZANO (For midterms)


Second part of the exam may involve answering whether a statement is Correct or Incorrect,
not true or false. You might be asked to state why the answer is not correct. Usually, this part is
right minus wrong. I compiled the answers from the blue books of those who got really high
grades and I included my own answers.
I.

LOAN

COMMODATUM
Parties:
Bailor one who delivers the possession or custody of the thing bailed
Bailee one who receives the custody or possession of the thing thus delivered.
NOTE: 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 commodatum (Art. 1935); it becomes a lease contract.
Who is liable for expenses in commodatum?
In a commodatum, the bailee has the obligation to pay the ORDINARY expenses for the
use and preservation of the thing loaned (Art. 1941) since he enjoys the use of the same.
Payment for EXTRAORDINARY expenses arising from the actual use of the thing shall be
borne by both the bailor and the bailee, even though the bailee acted without fault.
EXCEPTION: Stipulation to the contrary
Is the bailee liable for the deterioration of the thing loaned?
GENERAL RULE: No. The bailee does not answer for the deterioration of the thing loaned
due to ordinary wear and tear and without his fault (Art. 1943). The depreciation caused by the
reasonable and natural use of the thing is borne by the bailor.
EXCEPTION: Agreement to the contrary
When may a bailor be made liable to pay damages for known hidden flaws in the
thing? (FHAND)
1.
2.
3.
4.
5.

Thing has a FLAW or defect,


Flaw is HIDDEN,
Bailor is AWARE of such flaw,
Bailee is NOT aware thereof; bailor did not advise the latter of such flaw, and
Bailee suffers DAMAGE by reason of said flaw or defect

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NOTE: If the above requisites concur, the bailee has the RIGHT OF RETENTION for
damages. The bailor CANNOT exempt himself from the payment of expenses or damages by
abandoning the thing to the bailee. (Reason: The expenses or damages may exceed the value
of the thing loaned.)
Does the bailee have a right of retention over the thing?
GENERAL RULE: The bailee has NO right to retain the thing loaned as security for claims
he has against the bailor even for extraordinary expenses.
EXCEPTIONS: For a claim of damages suffered by the bailee because of hidden flaws
known to bailor (Arts. 1944, 1951)
a. Right of retention ceases when the bailee is reimbursed
b. Bailee cannot lawfully sell the thing to satisfy the damages
When is the bailee liable for the loss of the thing even if it should be through a
fortuitous event?
GENERAL RULE: Bailee is not liable for loss or damage due to a fortuitous event because
ownership remains with bailor.
1.
2.
3.

4.
5.

EXCEPTIONS: (KLAS D)
When he KEEPS it longer than the period stipulated, or after the accomplishment of its
use,
When he LENDS or leases it to a third person not a member of his household,
When the thing is delivered with APPRAISAL of its value
A. UNLESS there is a stipulation exempting the bailee from responsibility in case of
fortuitous event,
When, having the choice of SAVING the thing borrowed or his own things, he chooses to
save the latter, or
When the bailee DEVOTES the thing for a use different from that agreed upon

When may the bailor demand the return of the thing at will?
Art. 1947 of CC. The bailor may demand the thing at will, and the contractual relation
called precarium arises, in the following cases (AduT):
1. ABSENCE of stipulation as to
a. The DURATION of the contract, or
b. The USE to which the thing loaned should be devoted
2. If the use of the thing is merely TOLERATED by the owner
What acts of ingratitude will justify the bailee in demanding the immediate return of
the thing?
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Art. 765, CC. The acts of ingratitude are as follows (CIUr):
1. If the bailee should COMMIT some offenses against the person, honor or property of the
bailor, or of his wife or children under his PA,
2. If the bailee IMPUTES to the bailor any criminal offense or any act involving moral
turpitude, or
3. If the bailee UNDULY REFUSES to the bailor support when the bailee is legally or morally
bound to give support to the bailor
MUTUUM
Fungible things those which cannot be used without being consumed; hence,
consumable
Distinguish mutuum from commodatum.
COMMODATUM
MUTUUM
Object: NON-CONSUMABLE
Money or other CONSUMABLE thing
Ownership of the thing: RETAINED by the TRANSFERRED to the borrower
lender/bailor
Cause: Generally GRATUITOUS
May be GRATUITOUS or ONEROUS (that is,
with stipulation to pay with interest)
Thing to be returned: EXACT THING loaned
EQUAL AMOUNT of the same kind and quality
Subject-matter: Any property (real or PERSONAL property
personal)
Purpose: Use or TEMPORARY POSSESSION
Loan for CONSUMPTION
When to return: In case of urgent need and Lender may NOT demand its return before the
commission of any acts of ingratitude, bailor lapse of the term agreed upon
may demand the return of the thing loaned
BEFORE the expiration of the term
Who bears risk of loss: Bailor (owner)
Debtor/bailee/borrower suffers the loss even if
caused by fortuitous event and he is not
discharged from his duty to pay
Purely personal in character
Not so
If what was loaned is a fungible thing other than money, what does the debtor owe?
If the thing loaned is not money, albeit consumable, 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 (Art.
1955).
II.

INTEREST

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When may the interest be charged? Discuss the exceptions to the aforementioned
rule.
GENERAL RULE: NO interest shall be due and chargeable (Art. 1947, CC)

1.
2.
3.

EXCEPTONS: (SIL):
The payment of interest is expressly STIPULATED
The agreement is IN WRITING, and
The interest is LAWFUL

When is interest due even in the absence of stipulation?


1. INDEMNITY for damages, or
2. Interest accruing from unpaid interest (COMPOUNDING INTEREST)
a. That is, after a judicial demand has been made, in accordance with Article 2212
of the Civil Code. Under this article, even interest due and unpaid may incur
additional interests after such has been judicially demanded, notwithstanding
the fact that the original obligation is silent as to this point
When does unpaid interest due earn legal interest?
GENERAL RULE: Unpaid interest shall not earn interest.
EXCEPTIONS:
1. When judicially demanded, and
2. When there the interest has been stipulated in writing,
a. In cases where no interest had been stipulated by the parties, no accrued
conventional interest could further earn interest upon judicial demand.
How is interest determined if it is payable in kind?
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 (Art. 1958,
CC)
III.

DEPOSIT principal obligation is for safekeeping

Kinds of deposit:
1. Judicial (Sequestration) takes place when an attachment or seizure of property in
litigation is ORDERED
2. Extra-judicial (Arts. 1968-1995)
a. Voluntary delivery is made by the will of the depositor or by two or more
persons each of whom believes himself entitled to the thing deposited.
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b. Necessary there is lack of free choice in the depositor

Cause
Purpose

Subject-matter
Consideration
In whose behalf

JUDICIAL
Will of the court
Security and to secure the
right of a party to recover if
judgment favorable
Generally, immovable. But
can be movable.
Always
renumerated
(onerous)
Person who, by judgment,
has a right

EXTRAJUDICIAL
Will of parties
Custody and safekeeping

Only MOVABLE
Generally, gratuitous but
may be compensated
Depositor or third person
designated

NOTE: Deposit is NOT gratuitous in the following:


1. Where there is a STIPULATION
2. Depositary is engaged in the BUSINESS of storing goods
3. Property saved from destruction WITHOUT the knowledge of owner
When is deposit perfected?
An agreement to constitute a deposit is binding and enforceable upon the parties, but
the deposit itself is not perfect until the delivery of the thing (Art. 1963). Note: Deposit is a real
contract. A contract of future deposit is consensual (Art. 1934).
Enumerate instances when deposit becomes necessary.
Art. 1996. A deposit is necessary if it is made (LoCCH)
1. In compliance with a LEGAL OBLIGATION
a. It is governed by the provisions of such law; in case of deficiency, by the rules on
voluntary deposit (Art. 1997).
b. Examples: judicial deposit of a thing the possession of which is disputed, deposit
of a thing pledged when creditor uses it without authority, etc.
2. On occasion of any CALAMITY (such as fire, storm, flood, pillage, shipwreck, etc),
a. Deposit by accident or fortuitous event
b. The more immediate object is to save the property rather than safekeeping
c. A.k.a deposito miserable, involuntary bailment, involuntary deposit
d. Governed by the rules on voluntary deposit
3. By travelers in HOTELS and inns, or
4. By travelers with COMMON carriers
Can a depositary commingle goods in its possession?
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GENERAL RULE: The depositary is permitted to commingle grain or other articles OF THE
SAME KIND OR QUALITY (Art. 1976). 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 of
the entire mass as the amount deposited by him bears to the whole (Sec. 26, WRL)
EXCPETION: The depositary cannot commingle goods, even if they are of the same kind
and quality, if so stipulated (Art. 1976).
When is the depositary liable for the loss of the thing even if it should be through a
fortuitous event? (Art. 1979 - SUDAN)
1.
2.
3.
4.
5.

If there is an express STIPULATION,


If he USES The thing without the depositors permission,
If he incurs in DELAY in the return of the thing,
If he ALLOWS others to use it though he himself had been authorized, or
If he is NEGLIGENT in taking care of the thing

How is voluntary deposit extinguished? (LRN G-d)


A deposit is extinguished
1. Upon the LOSS or destruction of the thing deposited, without the fault of either party
2. In case of a GRATUITOUS deposit, upon the DEATH of either the depositor or
depositary (Art. 1995)
3. RETURN of the thing deposited to the depositor or person designated for its return
4. NOVATION, merger, fulfillment of the resolutory condition, rescission, prescription,
annulment, etc. (See Art. 1231)
Discuss the effect of death of the depositor or depositary.
GENERAL RULE: Death of the depositor or depositary does not extinguish the obligation.
In deposit for compensation, death of either party does not extinguish it as an onerous deposit
is not personal in nature (Art. 1411). Hence, the rights and obligations arising therefrom are
transmissible to their respective heirs (Art. 1178). (But the heirs of either party have a right to
terminate the deposit even before the expiration of the term.)
EXCEPTION: In case of GRATUITOUS DEPOSITS, death of either the depositor or the
depositary extinguishes the deposit. REASON: a gratuitous deposit is a personal
contract. It can be inferred that the depositor, in choosing the depositary, took into
account the diligence that the latter exercises over his own things. The depositary, on
the other hand, entered into a deposit out of mere liberality. The same cannot be
expected from the heirs on the successors of the depositary.
Does the depositary have a right of retention over the thing deposited? (HP)
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1. Yes. The depositary may retain the thing in PLEDGE until full payment of what may be
due him by reason of the deposit (Art. 1994).
2. The HOTEL-KEEPER has a right of retention in the nature of a pledge created by
operation of law (see Arts. 2121-2122). It is given to hotel-keepers to compensate them
for the liabilities imposed upon them by law. (The act of obtaining food or
accommodation in a hotel or inn without paying therefor constitutes estafa.)
NOTE: The depositarys 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 (Art. 1991). If heir
alienates the thing in bad faith, he is liable for damages.
Can the depositary return the thing deposited prior to the expiration of the time
designated? Discuss the rules relative to the place and time of return of the thing
deposited.
What to return (PaaSa)
1. PRODUCT, ACCESSORIES, AND ACCESSIONS of the thing deposited (Art. 1983)
2. If by force majeure or government order, the depositary loses the thing and receives
money or another thing in its place, he shall deliver the SUM or ANOTHER thing to the
depositor.
When to return (D.G Jr, Vp)
1. GENERAL RULE: Depositor can demand the return of the thing at will. Depositary
must return upon DEMAND even though a specified period of time for such return
may have been fixed.
EXCEPTIONS: (JN)
a. When the thing is JUDICIALLY attached while in the depositarys possession,
or
b. Should he have been NOTIFIED of the opposition of a third person to the
return or removal of the thing deposited (Art. 1988)
NOTE: In these cases, depositary must immediately inform the depositor of
the attachment or opposition
2. If deposit GRATUITOUS, the depositary may return the thing deposited even before
the designated time if JUSTIFIABLE REASONS exist for its return
a. If the depositor refuses to receive it, remedy is to consign the thing in court.
3. If the deposit is for a VALUABLE consideration, PERIOD must be followed even if the
depositary suffers inconvenience as a consequence (Art. 1989)
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Where to return (MA)
1. Place AGREED UPON by the parties, or
2. In the absence of stipulation, at the place where the thing deposited MAY be, even if not
the same place as where deposit was made
a. Provided there was no malice on the part of depositary (Art. 1987[2], CC)
Discuss the liability of keepers of hotels and the inns regardless of the amount of
care exercised.
The hotel-keeper is liable regardless of the amount of care exercised (H2Tw)
1. When loss is caused by the HOTEL-KEEPER, his employees, servants or a stranger.
2. When the loss is caused by a THIEF or robber done WITHOUT the use of arms and
irresistible force (Art. 2001).
3. When the HOTEL-KEEPER or his employees had been
a. Notified of the effects, and that
b. The guests had followed the instructions of the hotel-keeper or his employees
regarding the care and vigilance over such effects.
When are hotel-keepers not liable?
GENERAL RULE: The hotel-keeper is liable for the vehicles, animals and articles which have
been introduced or placed in the annexes of the hotel (Art. 1999).
EXCEPTIONS: (FACTsF)
1. Loss of the thing proceeds from any FORCE MAJEURE (Art. 2000).
a. The loss arises from THEFT by a STRANGER (not hotel-keepers servant or
employee) done with the use of arms or irresistible force (force majeure).
2. Though notice of the effects was given, the guests FAILED to take precautions which
said hotel-keeper or their substitutes advised relative to the care and vigilance of their
effects (Art. 1998).
3. Loss is due to the ACT of the guests, his family, his servants or visitors.
4. The loss arises from the CHARACTER of the things brought into the hotel (Art. 2002)
Can hotel-keepers dispense with or limit their liability by posting notices that they
are not liable for articles brought in by their guests?
No. The Civil Code provides that a hotel-keeper may not free himself from liability, which
arises from the loss of articles brought by the guests, by posting signs or notices to this effect.
Art. 2003 provides that the hotel-keeper may not stipulate any provision which would diminish
or excuse him from liability for such losses. Such would be void as contrary to law, morals and
public policy (Art. 1306). Being void, said notice or stipulation would not operate to excuse the
warehouseman from liability for loss. This rule is similar to the rule on common carriers.
REASONS:
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1. Hotel-keepers and inn-keepers, in offering their accommodations to the public,
practically volunteer as depositaries; as such, they should be subject to an
extraordinary degree of responsibility. Travelers have no choice but to rely on their good
faith and care.
2. Inn-keepers, by the nature of their business, have supervision and control of their inns
and the premises thereof.
IV.

WAREHOUSE

May a warehouseman refuse to deliver the goods on the ground that he owns them?
No. Sec. 16 of the Warehouse Receipts Law provides that
GENERAL RULE: No title or right to the possession of the goods, on the part of the
warehouseman shall excuse the warehouseman from liability from refusing to deliver the goods
according to the terms of the receipt.
EXCEPTIONS: Unless such title or right is derived directly or indirectly from
1. A transfer made by the depositor at the time or subsequent to the deposit for storage,
or
2. From the warehousemans liens
What are the acts for which a warehouseman may be held liable? (NICE PMS)
1. Failure to STAMP duplicate on copies of a negotiable receipt (Sec. 6)
2. Failure to PLACE non-negotiable or not negotiable on a non-negotiable receipt (Sec.
7)
3. MISDELIVERY of goods (Sec. 10)
4. Failure to EFFECT cancellation of the negotiable receipt upon delivery of the goods (Sec.
11)
5. ISSUING receipt for non-existing goods or misdescribed goods (Sec. 20)
6. Failure to take good CARE of the goods (Sec. 21)
7. Failure to give NOTICE in case of sale of goods to satisfy his lien (Sec. 33) or beucase
the goods are perishable or hazardous (Sec. 34)
Discuss the liability of the warehouseman in case of lost or destroyed receipts.
The court before ordering the delivery of the goods when the receipt is lost or destroyed
shall (Sec. 14):
1. First pass upon the question of whether the receipt has been lost or destroyed by
requiring
a. Satisfactory PROOF of such loss, and
b. Giving of a BOND with sufficient sureties 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.
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2. The court, in its discretion, may also order the payment of the warehousemans
reasonable COSTS and counsel fees.
The warehouseman is, therefore, still liable to a holder of the receipt for value without
notice since he can secure himself of the bond given.
Discuss the duty/obligation of the warehouseman when there are several claimants.
The warehouseman is excused from liability for non-delivery until he determines the
validity of the claims. If there are several claimants to the goods, the warehouseman (DDIR)
1. Must DETERMINE within a reasonable time the validity of the conflicting claims, and
A. DELIVER to the person whom he finds is entitled to the possession of the goods
b. NOTE: The warehouseman is NOT excused from liability in case he makes a
mistake
2. Must bring a complaint in INTERPLEADER under the rules of court, and
A. REQUIRE the different claimants to litigate among themselves. (Sec. 18)
How is the warehousemans lien satisfied by sale of goods?
A warehouseman who has an unsatisfied lien may satisfy such lien by undergoing the
following the procedure (Sec. 33):
1. Sending of notice, either personally or by mail, to the depositor and any other party who
the warehouseman knows has a possessory or property interest in the goods.
2. The notice should contain the following:
a. An itemized list of all the charges to which the warehouseman bases his lien on,
the total amount of the charges, and the dates on which such charges occurred.
b. A brief description of the goods in his possession.
c. A demand that such charges be paid on or before a specified time, not earlier
than 10 days after the notice has been personally delivered or 10 days after the
mail had been received in the regular course of the postal system.
d. A statement that unless such amount of charges be paid, the goods described
therein will be advertised for sale at a public auction or a specified time and
place.
3. After the expiration of the period allowed for the payment of the charges, the
warehouseman may effect the notice and advertisement of the sale of the goods in a
public auction. Such advertisement shall contain:
a. The name of the owner or person legally entitled to the goods
b. A description of the goods
c. The date, time and place of the sale
4. Such advertisement shall be published at least once every week for two weeks in a
newspaper published in the place where such goods are to be sold. The sale shall not
take place earlier than 15 days fro the date of first publication.
5. In the absence of a newspaper, notice must be posted at least 10 days prior to the sale
in at least 6 conspicuous places in the area where the sale is to be held.
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6. After such notice or advertisement, the sale of the goods may be effected at the date
indicated in the place where the lien on the goods were incurred or in the nearest
suitable place. The sale is done through auction.
7. The warehouseman may satisfy his lien from the proceeds of the sale. He may also
reimburse himself from the reasonable charges and expenses for the advertising,
notice, and sale of the goods from the proceeds of the sale. The remaining amount after
the lien and expenses have been satisfied shall be kept by the warehouseman,
deliverable upon demand of the person who was entitled to the delivery of the goods.
8. Sale of perishable or hazardous goods deposited with the warehouseman may be
effected to satisfy the warehousemans lien, after sending notice to the depositor or
owner requiring him to satisfy the lien and withdraw the perishable or hazardous goods.
Upon the failure of the depositor or owner to do so, the goods may be sold in a private
or public auction by the warehouseman. The proceeds of the sale shall be applied in
accordance to number 9.
9. The sending of notice and the subsequent sale should be done within a reasonable time
and manner, taking into consideration the perishable or hazardous nature of the goods
deposited.
Discuss the effects of alteration of a receipt on the liability of a warehouseman.
The liability of the warehouseman under a warehouse receipt which has been altered
depends on the nature of alteration:
1. Immaterial alteration: warehouseman is liable according to its original tenor.
2. Material alteration:
a. If authorized by warehouseman, liable according to ALTERED receipt
b. If innocently made and unauthorized, liable according to original tenor
c. If fraudulently made, liable, according to the original tenor, to the
i. Purchaser of receipt for value without notice,
ii. Alterer, and
iii. Subsequent purchasers for value
What is a negotiable warehouse receipt? Discuss the advantages of a negotiable
warehouse receipt.
A warehouse receipt is a written contract between the owner of the goods and the
warehouseman to pay the compensation for that service. A negotiable receipt is a receipt in
which it is stated that the goods received will be delivered to the depositor or to any other
specified person.
A negotiable warehouse receipt is advantageous because (SPAG)
1. It PROTECTS a purchaser for value and in good faith
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2. The goods covered by the receipt are not subject to GARNISHMENT or levy upon an
execution, UNLESS (SEI)
a. The receipt is first SURRENDERED to the warehouseman,
B. IMPOUNDED by the court, or
c. Its negotiation ENJOINED
3. The person to whom a negotiable receipt is negotiated acquires the DIRECT obligation
of the warehouseman to hold possession of the goods for him in accordance with the
terms of the receipt as if he had directly contracted with the warehouseman, without
need of notice to the warehouseman.
4. The goods covered by the receipt are not subject to SELLERS lien or stoppage in
transitu. An indorsees right is superior to the latter. The Warehouseman is not obliged
to deliver goods to an unpaid seller unless the receipt is first surrendered for
cancellation (Sec. 49).

Discuss the rights of a person to whom a negotiable receipt has been duly
negotiated.
GENERAL RULE: One who purchases a negotiable receipt issued by a non-owner (e.g. a
thief) acquires no rights over the goods as the latter has no right to transfer, notwithstanding
that such purchaser is innocent.
EXCEPTION: The purchaser acquires a good title where the owner by his conduct is
estopped from asserting his title.
According to Sec. 41, the indorsee/purchaser in good faith acquires the following rights:
(TonO)
1. The TITLE over the goods covered by the receipt as against the
a. Person NEGOTIATING the receipt, and
B. OWNER/depositor (person to whose order, by the terms of the receipt, the
goods were to be delivered)
2. The direct OBLIGATION of the warehouseman to hold possession of the goods for
him, as if the warehouseman directly contracted with him.
When may a receipt be transferred?
A receipt which is not in such form that it can be negotiated by delivery may be
transferred (or assigned) by the holder by delivery to a purchaser or donee. Indorsement of a
non-negotiable receipt does not give the transferee any additional rights (Sec. 39).
Discuss the rights of a person to whom a receipt has been transferred.
According to Sec. 42, the transferee acquires the following rights: (NOT)
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1. The TITLE over the goods covered by the receipt as against
a. Transferor (person negotiating the receipt), and
b. Owner/depositor (person to whose order, by the terms of the receipt, the
goods were to be delivered)
2. If receipt is non-negotiable,
a. The right to NOTIFY the warehouseman of such transfer if the goods to him
b. Right to acquire the direct OBLIGATION of the warehouseman to hold possession
of the goods for him, as if the warehouseman directly contracted with him
HOWEVER, such rights of the transferee may be defeated if (PaN)
1. PRIOR to notifying the warehouseman of the transfer, either by the transferee or the
transferor, the goods are ATTACHED or levied upon by the creditors of the transferor, or
2. The warehouseman had been NOTIFIEDby the transferor or a subsequent purchaser of
the goodsof a subsequent sale of the goods by the transferor.
Discuss the warranties of a person negotiating or transferring a receipt.
A person negotiating or transferring a receipt, including one who for value, assigns a claim
secured by a receipt, warrants that (Sec. 44 - GLIT)
1.)
2.)
3.)
4.)

The receipt is GENUINE.


He has a LEGAL RIGHT to negotiate or transfer it
He has no knowledge of any fact which would IMPAIR the validity or worth of the receipt
He has a right to TRANSFER the title to the goods, and that the goods are merchantable
or fit for a particular purpose, if such warranties can be implied, if the intention of the
parties was to transfer title over the goods without need of the receipt.

Discuss the liabilities of a person negotiating or transferring a receipt.


It is the duty of every indorsee to know that all previous indorsements are genuine;
otherwise, he will not acquire a valid title to the instrument. The last indorser warrants that all
previous indorsements are genuine. The liability is limited only to a violation of the 4 warranties
set forth in Sec. 44. Thus, a person negotiating a receipt could be held liable, as when, for
example, the receipt was:
1. A forgery,
2. He had stolen it, or
3. He had knowledge that the receipt was invalid or that the goods had been damaged.
One who assigns for value a claim secured by a receipt of the title is also liable for the
violation of any of the four warranties enumerated, UNLESS a contrary intention appears.
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Does indorsement of a receipt make the indorser liable for any failure on the part of
the warehouseman or previous indorses to fulfill their respective obligations? Why is
an indorser of a receipt not a guarantor?
The Warehouse Receipts Law expressly provides that a person who indorses a
negotiable receipt shall not be treated as a guarantor of the receipt. The indorsement of a
warehouse receipt amounts merely to a CONVEYANCE BY THE INDORSER, not a contract of
guarantee. It shall NOT make the indorser liable for any failure on the part of the
warehouseman or previous indorsers on the receipt to fulfill their respective obligations (Sec.
45).
Such indorser shall only be liable for the receipt if he breaches any of his warranties.
Without such breach, the holder of the receipt may not go against the indorser if the receipt is
subsequently dishonored for other causes not covered by the warranties of the indorser. Unlike
a guarantor who is liable for the receipt if the person primarily liable does not perform his
obligation, an indorser is only liable if he breaches his warranties and provided he has been
notified by the holder of the dishonor of the receipt within a reasonable time.
V.

GUARANTY

Distinguish guaranty from suretyship.


GUARANTY
Liability depends on an independent
agreement to pay the obligation if primary
debtor fails to do so
Collateral undertaking
Guarantor is secondarily liable
Guarantor binds himself to pay if the principal
CANNOT pay
Insurer of solvency of debtor
Guarantor can avail the benefit of excussion
and division in case creditor proceeds against
him
Not bound to take notice of the nonperformance of his principal
Often discharged by the mere indulgence of
the creditor or want of notice of default

SURETYSHIP
Surety assumes liability as regular party to the
undertaking
Surety is an original promisor
Surety is primarily liable
Surety undertakes to pay if the principal DOES
NOT pay
Insurer of the debt
Surety cannot avail of the benefit of excussion
and division
Held to know every default of his principal
Not discharged by the mere indulgence of the
creditor or by want of notice of default

Why is a surety considered an insurer of the debt?


A surety is considered an insurer of the debt because he is PRIMARILY AND DIRECTLY
LIABLE TO THE CREDITOR. He undertakes to pay the debt without any qualification. He does
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not insure the solvency of the principal debtor; rather, he insures that the debt shall be paid if
and when the creditor demands it from him. He is, in other words, a regular party to the
undertaking. The creditor need not go against the principal debtor before going against the
surety. He is not even discharged by the indulgence of the creditor.
Discuss the nature of the suretys undertaking. Does the surety make covenant with
the principal debtor? No. Is he entitled to notice of principals debtors default? No.
How should a suretyship contract be construed?
A suretys undertaking is a primary and solidary undertaking. He is an original party to
the agreement, and hence, a principal obligor. The surety undertakes that the obligation shall
be fulfilled, and that the creditor may go against him immediately for the fulfillment of such
obligation. The suretys covenant is with the creditor and not with the principal debtor,
although an indemnity agreement could be entered into between the surety and the principal
debtor to fix their respective rights and obligations with each other. In the absence of any
stipulation, a surety is generally not entitled to a notice of the principal debtors default. As
surety, it is his duty to see to it that the obligation is fulfilled by the principal debtor, or by
himself. Knowledge of the principal debtors default is charged upon the surety, who must
immediately take steps to ensure the fulfillment of the obligation.
A contract of suretyship, if it is GRATUITOUS, shall be constructed strictissimi juris
against the creditor and in favor of the surety where ambiguities are present. It should not be
construed as to expand the suretys liability for more than what is manifestly expressed. The
rule of strictissimi juris commonly refers to an accommodation surety. The rationale is that an
accommodation surety acts gratuitously and should be protected against unjust pecuniary
impoverishment.
If the contract of surety is ONEROUS or one for compensation, such rule does not apply.
Compensated surety agreements are construed against the surety company, as they are the
ones who drafted the agreement. The rule of strictissimi juris does not apply to such onerous
surety contracts, especially if it would unduly and unjustly give benefit to the surety company
to the detriment of the principal debtor or the creditor. Such companies are already protected
by sub-sureties and sub-guaranties.
Is the guarantors liability limited only to the principal obligation?
No. Art 2055.
1. For definite guaranty, the obligation is limited in whole or in part to the principal debt, to
the exclusion of the accessories.
2. For simple or indefinite guaranty if the terms of the contract of guaranty are general
and indefinite and do not specify in clear and express manner that the liability of the
guarantor is limited to the principal obligation, in whole or part,
It extends not only to the said the principal obligation but also all its accessories,
including the judicial costs
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a. They are being comprehended within the principal because the guaranty has
secured it wilt all its consequences
b. PROVIDED, with respect to judicial costs, the guarantor shall only be liable for
those costs incurred after he has been judicially required to pay
What is the form of guaranty? What performance does the guaranty secure?
A guaranty is not presumed; it must be express and cannot extend to more than what is
stipulated therein (Art. 2055). It falls under the Statute of Frauds; hence, it must be reduced in
writing and subscribed by the party charged, otherwise, it is unenforceable.
A guaranty cannot exist without a valid obligation. Nevertheless, it may be constituted
to guarantee the performance of (Art. 2052 - VUN)
1. VOIDABLE contracts (Art. 1390: vitiated consent or incapacitated contracting party; may
be ratified; binding until annulled) inasmuch as such is binding, unless it is annulled by
a proper action in court
2. UNENFORCEABLE contracts (Art. 1403: acts of agent without Ps authority, Statute of
Frauds, etc; ratifiable) because such contract is not void
3. NATURAL OBLIGATIONS (Art. 1423: not based on positive law but on equity and natural
law; do not grant a right of action to enforce their performance, but after voluntary
fulfillment by the obligor, they authorize the retention of what has been delivered or
rendered by reason thereof)
a. Rationale: So that the creditor may proceed against the guarantor although he
has no right of action against the principal debtor for the reason that the latters
obligation is not enforceable
b. If the debtor himself offers a guaranty for his natural obligation, he impliedly
recognizes his liability, thereby transforming the obligation from natural into a
civil one (civil obligations give a right of action to compel their performance
([Art. 1423]).
When may the guarantor proceed against the principal debtor even before having
paid the debt?
This is allowed when such right is expressly stipulated in the agreement between the
guarantor and the debtor. Art. 2071 of the Civil Code also provides for seven instances when
the guarantor may proceed against the debtor even before payment. The purpose is to enable
the guarantor to take measures to protect his interest in view of the probability that he would
be called upon to pay the debt. (SILIDBA)
1. If he is SUED for payment
2. INSOLVENCY of the principal debtor
3. When he has BOUND himself to relieve him from the guaranty within a specified period,
and the period has expired
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4. When the debt has become DEMANDABLE by reason of the expiration of the period of
payment
5. After the LAPSE of 10 years, when the principal obligation has no fixed period for its
maturity
a. UNLESS it be of such nature that it cannot be extinguished except within a
period longer than 10 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
1. To obtain release from the guaranty, or
2. To demand security that shall protect him from any proceedings by the creditor and
from the danger of the insolvency of the debtor
May a guarantor be released by reason of a change in the principal contract?
It would depend on the type of change in the principal contract.
GENERAL RULE: The guarantor or surety will NOT be released by the change in the
principal contract where such change does not have the effect of making the obligation more
onerous.
EXCEPTIONS: For the guarantor or surety to be released, there must be
1. A material alteration of the principal contract that it
a. Imposes a new obligation,
b. Imposes an added burden on the party promising, or
c. Takes away some obligation already imposed
2. Non-consent by the guarantor or surety to such alteration.
3. Any change that would constitute the extinguishment of the principal contract
(novation, confusion, etc.) necessarily extinguishes the accessory contracts of
guarantyship and suretyship.
What is a bondsman?
Bond an undertaking that is sufficiently secured, and not cash or currency.
A bondsman is a surety offered in virtue of a provision of law or a judicial order. He must
have the qualifications required of a guarantor and in special laws like the Rules of Court.
The qualifications of a bondsman, subject to the creditors waiver, are as follows:
1. He possesses integrity,
2. He has capacity to bind himself, or
3. He has sufficient property to answer for the obligation which he guarantees
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Discuss the benefit of excussion.
The benefit of excussion is the right in which the guarantor cannot be compelled to pay
the creditor, UNLESS
1. Creditor has exhausted all the properties of the principal debtor, and
2. Resorted to all of the legal remedies against such debtor.
How exercised:
1. Demand for payment upon the guarantor only AFTER judgment upon the debt
2. Point out the available property (not in litigation or encumbered) of the debtor WITHIN
the Philippines
The benefit cannot begin to take place before judgment has been obtained against the
debtor (Baylon v CA). The creditor shall suffer the loss if he failed to exhaust and resort to all
legal remedies, but the loss is only to the extent of the value of said property of the insolvency
of the debtor.
What are the exceptions to the benefit of excussion? FP RAINS, SJ
I. ART. 2059. In the following cases, the guarantor is NOT entitled to the benefit of
excussion (RAINS):
1. If the guarantor expressly RENOUCNED it (waiver)
a. The benefit of excussion is a personal right; hence, its waiver is valid
b. Such waiver should be made in express terms
2. If he has bound himself SOLIDARILY with the debtor
a. He becomes a surety with primary liability as a solidary co-debtor
b. In effect, he renounces in the contract itself the benefit of excussion
3. INSOLVENCY of debtor
a. The liability of the guarantor arises as the debtor cannot fulfill his obligation
b. Insolvency must be actual, proven by unsatisfied writ of execution
4. When he has ABSOCNDED or cannot be sued within the Philippines, UNLESS he has left
a manager or representative
a. If the debtor absconded or left the country, he cannot fulfill his obligation
b. Creditor cannot be expected to go after a debtor who is in hiding
5. If it may be presumed that an execution on the property of the principal debtor would
NOT be sufficient to satisfy the obligation
a. Not necessary that he debtor be judicially declared insolvent or bankrupt
b. If the creditor wants to hold the guarantor liable, he must resort to all legal
remedies against the debtor and exhaust his properties
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c. But if such judicial action cannot satisfy the obligation, the guarantor can no
longer require the creditor to resort to all such remedies (useless formality)
II. If guarantor fails to SET UP the benefit of excussion against the creditor upon the latters
demand for payment from him
a. And he also fails to point out available property of the debtor sufficient to cover
the amount of the debt
III. If he is a JUDICIAL bondsman and sub-surety
IV. If he gives a PLEDGE or mortgage as special security
V. If he FAILS to interpose as a defense of excussion on a suit filed against him for collection
Is the benefit applicable to a contract of suretyship?
No. (Arts. 2047 par. 2; 2059 [2]). This is available only to guarantors in case the
creditors go against them. A suretys undertaking is a primary and solidary undertaking. As an
original party to the agreement (principal obligor), a surety pays when the debtor DOES not
pay. There is no need to exhaust all the properties of the principal debtor or to resort to all legal
remedies before a surety can pay.
Is a judicial bondsman entitled to the benefit of excussions? Reasons.
A judicial bondsman and the sub-surety are not entitled to the benefit of excussion
because they are not merely guarantors but sureties whose liability is primary and solidary (Art.
2084).
What is the benefit of division? In whose favor is it applicable?
GENERAL RULE: 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 (Art. 2065); liability is joint.
The benefit of division applies in favor of the guarantors (sureties not included). The creditor
can demand from the guarantors only the shares they are respectively bound to pay.
EXCEPTIONS:
1. Express stipulation
2. If any of the circumstances enumerated in Art. 2059 (RAINS) take place.
Discuss the effect of payment by a guarantor before the maturity of the principal
obligation.
1. If the debtors obligation is with a period, it becomes demandable only when the day
fixed comes (Art. 1193[1]).
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The guarantor who pays before maturity is NOT entitled to reimbursement since there is
no necessity for accelerating payment. A contract of guaranty being subsidiary in
character, the guarantor is not liable for the debt before it becomes due.
EXCEPTION: The debtor will be liable if the payment was made with
a. His CONSENT, or
b. If the payment was subsequently RATIFIED by him. The ratification may be
express or implied.
In any case, the guarantor can recover what he has paid upon the expiration of the
period (Art. 2069).
2. If the demand on the guarantor was made during the term of the guarantee, the fact
that payment was made after said term is not material. What is controlling is that
default and demand on guarantor had taken place while the guarantee was still in force
(JN Dev. Corp. v Phil Export and Foreign Loan Guarantee Corp).
Discuss the effect of payment by the guarantor without notice to the debtor.
If the guarantor should pay without notifying the debtor, the debtor may interpose
against the guarantor those defenses which he could have set up against the creditor at the
time the payment was made (Art. 2068). Thus, if the debtor has already paid the creditor, when
the guarantor pays, the debtor can set up against the guarantor the defense of previous
extinguishment of the obligation by payment.
The guarantor cannot be allowed, through his own fault or negligence, to prejudice or
impair the rights or interests of the debtor (See Arts. 2069, 2070, 2074).
When is a guarantor NOT entitled to indemnity or reimbursement?
GENERAL RULE: Guaranty is a contract of indemnity. The guarantor who makes the
payment is entitled to be reimbursed by the debtor. The indemnity consists of (DIED)
1. Total amount of the DEBT he has paid, unless there is a contrary stipulation
2. Legal INTEREST from the time payment was made known (Notice of payment =
demand)
3. Legal EXPENSES he incurred as a consequence of the guaranty (Art. 2055), after
notifying the debtor that payment is demanded
4. DAMAGES if due according to law
EXCEPTIONS:
1. Where the guaranty is constituted WITHOUT the knowledge or against the will of the
principal debtor, the guarantor can recover only insofar as the payment has been
beneficial to the debtor.
2. Payment by a THIRD person who does not intend to be reimbursed by the debtor is
deemed to be a donation.
a. Requires the debtors consent
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b. But payment in any case is valid as to the creditor who has accepted it
(Art.1238)
Correct or incorrect:
A stipulation in an indemnity agreement providing that the indemnitor shall pay the surety as
soon as the latter becomes liable to make payment to the creditor under the terms of the bond,
regardless of whether the surety has made payment actually or not, is invalid and
unenforceable.
If deposit is for a valuable consideration, the expenses or preservation are still borne by the
depositor.

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