Second Exam Transcript-2

CREDIT TRANSACTIONS
Atty. Jazzie M. Sarona, CPA
GUARANTY & SURETYSHIP

(Art 2047 2084)
Two Classifications of Security:
1.) Personal Security: wherein we have unsecured
securities only supported only by a promise to
pay. There is no person involved but only the
words of the guarantor or surety.
2.) Real Security: here you have a property which is
used as security for the obligation such as a
pledge or antichresis.
We begin our discussion with personal guarantors and
sureties.
Nature and Extent of Guaranty

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.
You have two kinds of contracts under 2047, a contract of
guaranty and a contract of suretyship.
Here you have three parties:
a.) principal debtor
b.) Creditor
c.) Guarantor or surety
Do take not however that when you talk about contract of
guraranty or surety it is more of a contract between the
creditor and the guarantor and the creditor and the surety.
Characteristics of a contract of a guaranty:
1. Accessory: dependent for its existence upon the
principal obligation
2. Subsidiary and conditional: takes effect when the
principal debtor fails in his obligation subject to
limitation.
GUARANTY TO PLEDGE
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2.) As to consideration:
a.) Gratuitous: guarantor does not receive any
price or remuneration for acting as a guaranty
b.) Onerous: gurantor receives a valuable
consideration
3.) As to the person guaranteed:
a.) Single: constituted solely to guarantee the
performance by the debtor of the principal
obligation
b.) Double or sub-guaranty: constituted to
secure the fulfillment by the guarantor of a
prior guaranty.
4.) As to its scope and content:
a.) Definite: limited to the principal obligation
only or to a specific portion thereof
b.) Indefinite or simple: includes not only the
principal obligation but also all its accessories
including judicial costs
Q: What is a contract of suretyship
A: A contractual relation resulting from an agreement
whereby one person, the surety, engages to be
answerable to a third person, the oblige, for the debt,
default or miscarriage of another known as the principal
obligor. (Visayan Surety & Insurance Co. v. CA)
Q: What is the difference between a guaranty and
suretyship?
A: With respect to their condition on when the obligation
arises. In a contract of guaranty, the guarantor will only be
held liable when the debtor cannot pay. In a surety, when
the debtor will not pay. At the moment of the debtors
default the surety can already be held liable for the
obligation while in a guaranty, the guarantor will be onlhy
held liable when the debtor can no longer pay.
When does obligation arise?
Guaranty: debtor cannot pay
Surety: debtor will not pay
Remember with regard to surety, the creditor can collect
from him as soon as default sets in because his liability is
direct and primary.
ASSET BUILDERS CO. vs STRONGHOLD INSURANCE
Q: Is there a contract of surety here? Who is the surety here?
A: Yes, the surety here is stronghold
Q: What is the principal obligation subject to the surety?
A: the completion of the construction of the building.
3. Unilateral: gives rise only to a duty on the part of

the guarantor in relation to the creditor; it may be
entered into even without the intervention of the
principal debtor.
Q: Is stronghold liable here?

A: Yes. Article 2047 provides that if the person binds himself
solidarily with the principal debtor, the provisions of Sec. 4,
Chapter 3, Title I of this Book shall be observed. In this case
the contract is called a suretyship.
4. It requires that the guarantor must be a person

distinct from the debtor because a debtor cannot
be the personal guarantor for himself .
As a surety, Stronghold is directly and primarily bound to the

construction contract between Lucky Star and Asset Builders
Co.
However, take note that in real guaranty, like pledge and

mortgage, a person may guarantee his own obligation
with his personal or real property.
Q: Was there a valid ground for the rescission of the contract

here?
A: Yes, there was a valid ground for rescission because lucky
star was not able to fulfill its obligation or complete the said
building contract as it has only finished 10% of the work.
Under Article 2047, the first paragraph gives you definition

of a contract of guaranty, and suretyship in the second
paragraph.
Classifications of a Guaranty:
1.) As to origin:
a.) Conventional: by stipulation of the parties
b.) Legal: by operation of law
c.) Judicial: required by court
Q: If the principal obligation is rescinded isnt it that the

obligation of the surety should likewise be rescinded
considering that it is an accessory contract dependent upon
the principal obligation?
A: No, in this case the obligation by Asset builders was to the
completion of the building within the agreed period and at the
moment Asset failed to complete the building at the day
agreed upon, they had already defaulted in their obligation in
which the obligation or liability of Stronghold as a surety
already arises from that moment Asset incurred delay.
For the use of all students of Atty Sarona

Contributors: Bagundang, Ching, Dayhon, Harun, Lopez, Montefolca, Rodriguez, Uy, Tan, Villacampa Page 1 of 40
CREDIT TRANSACTIONS
In this case, we have a suretyship. Now although a

contract of surety is ancillary obligation the surety
becomes liable for the obligation of another although it
has no direct or personal interest in the obligation. The
surety assumes liability as if he was a principal party to
the obligation. His liability to the creditor is direct, primary
and absolute. The surety is equally bound with the
prinicipal debtor.
Take note here that even if there is a resccsision between
Lucky star and Stronghold it does not mean that
Stronghold was automatically released from his liability
because precisely the liability of the surety from the surety
contract comes to light upon the solidary obligors default.
What is the difference between a surety and a solidary codebtor?
- A solidary debtor who effected the payment to a
creditor may claim from his co-debtors only the
share which corresponds to him in the interest for
the payment already made. A solidary co-debtor
will not be able to claim from his co-debtors the
full amount already paid to the creditor because
his right to recovery extends only the
proportionate share of his other do-debtors.
Which is different for a surety because if he pays
the creditor, he has the right to recover the full
amount paid not just any proportional share.
Illustration
So, with that, let us say that we have 3 persons acting as
co-debtors, if they borrowed money from the creditor and
they are solidarily liable, anybody can be bound to pay for
the full amount of the obligation. Let us say 9,000 if A
pays the whole amount, he can demand only 3,000 each
from the other co-debtors let us say B and C. But, if A acts
as a surety of the obligation of B and C and he pays the
full amount to the creditor, he can demand 4,500 each
from B and C, in the absence of any stipulation that they
bound themselves solidarily to the surety. Here, it is not
impossible that as between petitioners that there could
have been an agreement that one of them would act as a
surety. But then again, there is no evidence of such. The
mere indication of the term sureties could not work in the
sense that they will be considered solidarily liable.
Especially when it does not appear who exactly here is
the principal debtor. No principal debtor whose obligation
is assured or guarantied by the surety.
GUARANTY TO PLEDGE
concurrence of two or more creditors or of two or more
debtors in one and the same obligation, and in the absence
of express and indubitable terms characterizing the obligation
as solidary, the presumption is that the obligation is only joint.
It thus becomes incumbent upon the party alleging that the
obligation is indeed solidary in character to prove such fact
with a preponderance of evidence. Note that Article 2047
itself specifically calls for the application of the provisions on
joint and solidary obligations to suretyship contracts. Article
1217 of the Civil Code thus comes into play, recognizing the
right of reimbursement from a co-debtor (the principal debtor,
in case of suretyship) in favor of the one who paid (i.e. the
surety).
A significant distinction lies between a joint and several

debtor, on one hand, and a surety on the other. Solidarity
signifies that the creditor can compel any one of the joint
and several debtors or the surety alone to answer for the
entirety of the principal debt. The difference lies in the
respective faculties of the joint and several debtor and the
surety to seek reimbursement for the sums they paid out
to the creditor. In the case of joint and several debtors,
Article1217 makes plain that the solidary debtor who
effected the payment to the creditor may claim from his
co-debtors only the share which corresponds to each,
with the interest for the payment already made. Such
solidary debtor will not be able to recover from the codebtors the full amount already paid to the creditor,
because the right to recovery extends only to the
proportional share of the other co-debtors, and not as to
the particular proportional share of the solidary debtor
who already paid. In contrast, even as the surety is
solidarily bound with the principal debtor to the creditor,
the surety who does pay the creditor has the right to
recover the full amount paid, and not just any proportional
share, from the principal debtor or debtors. Such right to
full reimbursement falls within the other rights, actions and
benefits which pertain to the surety by reason of the
subsidiary obligation assumed by the surety.
Petitioners and Matti are jointly liable to Ortigas, Jr. in the
amount of P1.3M; Legal interest of 12% per annum on P
1.3M computed from March 14, 1994. Assailed rulings are
affirmed.
ESCANO vs ORTIGAS
In this case, what we have here is not a contract of

suretyship, but rather, an undertaking wherein the legal
tie that binds the Ortigas group and the Escano group is
that we are joint debtors. We have here several
paragraphs in the undertaking that would show that even
if they used the term surety, referring to the Escano, we
only have here joint debtors.
Q: Do we have a contract of surety here?

A: the contract entered into was stipulated as a surety
agreement but the SC held here that obligation of Escano to
Ortigas is not surety but that of a joint liability.
First, upon receipt by any of the obligors - in this case the

Ortigas group- of any demand from PDCP, they must
inform the sureties in order that they can timely take
appropriate measures.
Q: Why was there an issue here with regard to the obligation

here of Ortigas?
A: Because although the agreement was initially
denominated as a contract of surety they later stipulated that
they bound themselves jointly and severally liable. But
thereafter, when Ortigas was collecting or demanding
payment from Escano, Escanowere denying liability to
Ortigas.
Q: What was the basis here of Ortigas demanding
reimbursement from Escano?
A: In case, there is a concurrence of two or more creditors or
of two or more debtors in one and the same obligation, Article
1207 of the Civil Code states that among them, [t]here is a
solidary liability only when the obligation expressly so states,
or when the law or the nature of the obligation requires
solidarity. Article 1210 supplies further caution against the
broad interpretation of solidarity by providing: The
indivisibility of an obligation does not necessarily give rise to
solidarity. Nor does solidarity of itself imply indivisibility.
These Civil Code provisions establish that in case of
Second, should any and/or all obligors be impleaded by

PDCP, the sureties agree to defend the obligors on their
own expense without prejudice to any and/or all obligors
___ for confusion, indemnity, subrogation, and other
relief.
Third, if any of the obligors is for any reason made to pay
any amount, the sureties would reimburse obligors for the
said amount. Now, although petitioners claim that Ortigas
was not made to pay, but rather paid voluntarily, again it
was not the intention here of the parties that they would
only pay if the Ortigas was not made to pay. That was not
the intention of the parties and they were already
benefited by Ortigas in the act of paying PDCP. The clear
intent of the undertaking was for the petitioners to relieve
the burden on Ortigas with the execution of the
undertaking and not only when Ortigas has been
subjected to a final and executory adverse judgment.
Now, on the other hand, Ortigas here alleged that
petitioners here are solidarily liable jointly and severally

CREDIT TRANSACTIONS
GUARANTY TO PLEDGE
liable. It points out that it uses the word sureties all over
the document. However, take note, the obligation here in
the undertaking is presumed only to be joint. The
undertaking does not contain any express stipulation that
the petitioners agreed to bind themselves jointly and
severally. So they are considered only as joint debtors.
Likewise, there was no suretyship agreement here
because a suretyship agreement requires a principal
debtor to whom the surety is solidarily bound by way of an
ancillary the obligation of segregate entity from the
obligation between the principal debtor and the creditor.
Now, do take note of the distinction pointed out between
a solidary co-debtor and a surety. A guarantor who binds
himself in solidum in other words, a surety does not
become a solidary co-debtor for all intents and purposes.
Again, there are distinctions.
2. A surety is charged as an original promisor while the

engagement of the guarantor is a collateral undertaking;
With that, take note of the distinction and take note of the
nature of the obligation of a suretys undertaking.
1. It is contractual and accessory but direct. Immediate,
primary and absolute.
5. Usually, a surety will not be discharged either by the

mere indulgence of the creditor of the principal or by want
of notice of the default of the principal, no matter how
much he may be injured thereby, while a guarantor is
often discharged by the mere indulgence of the creditor of
the principal, and is usually not liable unless notified of the
default of the principal.
2. Also, if you noticed in the succeeding provision and

cases, the liability of a surety is limited by the terms of the
contract. His liability ordinarily restricted to the obligation
expressly stipulated therein A contract of surety is not
presumed; it cannot extend to more than what is
stipulated.
3. Liability only arises if principal debtor is held liable. The
creditor may sue separately or together, the principal
debtor and the surety. Where there are several sureties,
the creditor may proceed even as against only one of
them. Also, since it is an accessory contract, if the
principal obligation is void, then the surety agreement is
likewise considered void.
4. In the distinctions, a surety is not entitled to exhaustion
unlike that of a guarantor. For a surety assumes a solidary
liability for the fulfillment of the principal obligation.
5. Do remember that a suretys undertaking is to the
creditor, not to the debtor. The surety cannot claim that
there has been a breach of the suretys obligation to him
under the suretyship contract when the surety fails or
refuses to pay the debt for the principals account.
6. A surety is not entitled to notice of the principal debtors
default. Demand on the surety is not necessary before
bringing suit against them, since the commencement of
the suit is a sufficient demand. A surety is not even
entitled, as a matter of right, to be given notice of the
principals default in the absence of an agreement to that
effect in the contract of suretyship.
7. Prior demand by the creditor upon the principal is not
required. Because again, here, demand may be made
judicial or extrajudicial and would still result to default on
the part of the principal debtor.
8. A surety is not exonerated by neglect of creditor to sue
upon principal.
Now, you will notice that a guaranty and suretyship
promise to answer for the neglect, default, or miscarriage
of another. But of course there are several distinctions
between these two contracts.
Guaranty distinguished from Suretyship
(Note: with De Leons discussion)
1. 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 debtor fails to do so;
3. The guarantor is secondarily or subsidiarily liable, i.e.,

he contracts to pay if, by the use of due diligence, the debt
cannot be paid by the principal, while a surety is primarily
liable, i.e., he undertakes directly for the payment without
reference to the solvency of the principal (regardless of
whether or not the principal is financially capable to fulfill
his obligation), and is so responsible at once if the latter
makes default, without any demand by the creditor upon
the principal whatsoever or any notice of default.
4. A surety is ordinarily held to know every default of his
principal, while a guarantor is not bound to take notice of
the non-performance of his principal; and
CASTELVI vs SELLNER
Q: Who is Sellner here? Is he a surety or a guarantor?
A: A guarantor.
Q: Who is the debtor here?
A: The debtor here is Mining, Clarke and Maye.
Q: Why is Sellner a guarantor when it was stated in the
promissory note that he signed that he is jointly and severally
liable?
A: It is because the term jointly and severally liable in the
note refers not to Sellners obligation but refers to Keystone
Mining and John Maye to creditor Higgins. It does not pertain
to the obligation of Sellner which was a guaranty.
Q:Why was it a guaranty and not a surety?
A: the nature of the obligation of Selner is evidenced by the
note executed. It was an independent agreement, his liability
was subject to the condition that the primary payor fails to do
so. It is perfectly clear that the obligation assumed by
defendant is simply that of a guarantor.
We have here a 1920 case, Old Civil Coode pa. So fianza

refers to security and appears as a translation of
suretyship. But again, suretyship and guaranty, take note
of its distinctions. In this case, the nature of the obligation
of Sellner is evidenced by the note executed. It was an
independent agreement, his liability was subject to the
condition that the primary payor fails to do so. It is
perfectly clear that the obligation assumed by defendant
is simply that of a guarantor.
The letter of Sellner recites that if the promissory note is
not paid at maturity, then 15 days after notice of such
default and upon surrender to him of 3,000 shares of
Keystone, he will assume responsibility. Sellner is not
bound with the principals by the same instrument
executed at the same time and with the same
consideration. But rather, his liability is a secondary one
found in an independent collateral agreement. So again,
take note of the distinctions between a contract of
guaranty and a suretyship.
The obligation of the guarantor is not solidary with the
principal debtor. It is only if the principal debtor cannot pay
and the principal creditor has exhausted all the properties
of the principal debtor, and that no property is present to
answer for the obligation of the debtor. That is the only
time that the creditor can proceed against the guarantor.
Unlike is suretyship, the surety is solidarily liable. The
creditor can proceed against the principal debtor, or
against the surety, or against both of them. There is no

CREDIT TRANSACTIONS
benefit of excussion of property in favor of the surety
unlike in the contract of guaranty.
MACHETTI vs HOSPICIO DE SAN JOSE
Q: What is the issue here?
A: Whether or not there is a contract of guaranty or surety.
Q: What do we have here?
A: A contract of guaranty. The guarantor is Fidelity and Surety
Co.
Q: Why is there a contract of guaranty here and not a
suretyship?
A: It is because Fidelity having bound itself to pay only in the
event its principal, Machetti, cannot pay it follows that it
cannot be compelled to pay until it is shown that Machetti is
unable to pay.
Remember that the guarantor is not an insurer of the debt

guaranteed.as in this case of Machetti, Fidelity is only
considered as a guarantor and not a surety even though
its company name is Fidelity and Surety Company. When
the surety undertakes to pay what the debtor cannot pay,
the guarantor only binds himself
A surety and a guarantor 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 as
a regular party to upon an independent agreement to pay
the obligation if the primary pay or fails to do so. A surety
is charged as an original promissory; the engagement of
the guarantor is a collateral undertaking. The obligation of
the surety is primary; the obligation of the guarantor is
secondary.
Now, while a surety undertakes to pay if the principal does
not pay, the guarantor only binds himself to pay if the
principal cannot pay. The one is the insurer of the debt,
the other an insurer of the solvency of the debtor.
This latter liability is what the Fidelity and Surety
Company assumed in the present case. The undertaking
is perhaps not exactly that of a fianza under the Civil
Code, but is a perfectly valid contract and must be given
the legal effect if ordinarily carries. The Fidelity and Surety
Company having bound itself to pay only the event its
principal, Machetti, cannot pay it follows that it cannot be
compelled to pay until it is shown that Machetti is unable
to pay. Such ability may be proven by the return of a writ
of execution unsatisfied or by other means, but is not
sufficiently established by the mere fact that he has been
declared insolvent in insolvency proceedings under our
statutes, in which the extent of the insolvent's inability to
pay is not determined until the final liquidation of his
estate.
again, take note of the distinctions between a contract of
guaranty and a suretyship.
PALMARES vs CA
Q: But isnt it that Palmares bound herself to be jointly and
severally liable? There is also a condition there that in every
A: Yes, the surety here is stronghold
Q: What is the principal obligation subject to the surety?
A: the completion of the construction of the building.
Now, in this case, observe that petitioner's undertaking as

co-maker immediately follows the terms and conditions
stipulated between respondent corporation, as creditor,
and the principal obligors. A surety is usually bound with
his principal by the same instrument, executed at the
same time and upon the same consideration; he is an
original debtor, and his liability is immediate and direct.
Thus, it has been held that where a written agreement on
the same sheet of paper with and immediately following
the principal contract between the buyer and seller is
GUARANTY TO PLEDGE
executed simultaneously therewith, providing that the
signers of the agreement agreed to the terms of the
principal contract, the signers were "sureties" jointly liable
with the buyer.
A surety usually enters into the same obligation as that
of his principal, and the signatures of both usually appear
upon the same instrument, and the same consideration
usually supports the obligation for both the principal and
the surety.
There is no merit in petitioner's contention that the
complaint was prematurely filed because the principal
debtors cannot as yet be considered in default, there
having been no judicial or extrajudicial demand made by
respondent corporation. Petitioner has agreed that
respondent corporation may demand payment of the loan
from her in case the principal maker defaults, subject to
the same conditions expressed in the promissory note.
Significantly, paragraph of the note states that "should I
fail to pay in accordance with the above schedule of
payment, I hereby waive my right to notice and demand."
Hence, demand by the creditor is no longer necessary in
order that delay may exist since the contract itself already
expressly so declares. As a surety, petitioner is equally
bound by such waiver.
So you have here a contract of guaranty. Again, take note
of the distinctions between suretyship and guaranty.
1. A surety undertakes to pay if the principal does
not pay. A guarantor only binds himself to pay if
the principal cannot pay. . A surety is the insurer
of the debt. A guarantor is the insurer of the
solvency of the debtor.
2.
A guarantor only binds himself to pay if the

principal cannot pay. . A surety is the insurer of
the debt. A guarantor is the insurer of the
solvency
GILAS SATELITTE vs UCPB
Q: Is there a contract of surety here? Who is the surety here?

A: Yes
Q: Who is the surety?
A: UCPB.
Q: What was the ruling of the RTC?
A: The trial court ruled that UCPB is liable to Gilat by the
amount of 2 million dollars with interest and that such is final
and executory until the obligation has been settled.
Q: What was the ruling of the CA?
A: The court of appeals dismissed the petition of Gilat
regarding the computation of the interest and that under the
surety agrrement it required both parties to undergo first
arbitration.
In this case, the appellate court considered the Purchase
Agreement entered into between petitioner and One Virtual
as the principal contract, whose stipulations are also binding
on the parties to the suretyship. Bearing in mind the
arbitration clause contained in the Purchase and pursuant to
the policy of the courts to encourage alternative dispute
resolution methods, the trial courts Decision was vacated;
petitioner and One Virtual were ordered to proceed to
arbitration.
Q:With regard to the arbitration clause of the surety
agreement, how did the SC address that?
A: The SC ruled that if the payment of UCPB to Gilat should
undergo voluntary arbitration first then the principal of surety
will be rendered nugatory since the liability of UCPB is
solidarily liable One virtual then UCPB should only pay when
One virtual does not pay. If they will still undergo voluntary
arbitration before there is payment then the contract of surety
will baseless.

CREDIT TRANSACTIONS
Q: With regard to that issue, was the defense of UCPB here
that it should refer to arbitration first before it can be held
liable, was that upheld by the SC?
A: No, The existence of a suretyship agreement does not give
the surety the right to intervene in the principal contract, nor
can an arbitration clause between the buyer and the seller be
invoked by a non-party such as the surety. Petitioner alleges
that arbitration laws mandate that no court can compel
arbitration, unless a party entitled to it applies for this relief.
This referral, however, can only be demanded by one who is
a party to the arbitration agreement. Considering that neither
petitioner nor One Virtual has asked for a referral, there is no
basis for the CAs order to arbitrate.
Here the parties to the arbitration clause are only One Virtual
and Gilat Satellite, UCPB is not a party thereto.
Moreover, Articles 1216 and 2047 of the Civil Code clearly
provide that the creditor may proceed against the surety
without having first sued the principal debtor. Even the Surety
Agreement itself states that respondent becomes liable upon
"mere failure of the Principal to make such prompt payment."
Thus, petitioner should not be ordered to make a separate
claim against One Virtual (via arbitration) before proceeding
against respondent.
On the other hand, respondent maintains that a surety
contract is merely an accessory contract, which cannot exist
without a valid obligation. Thus, the surety may avail itself of
all the defenses available to the principal debtor and inherent
in the debt that is, the right to invoke the arbitration clause
in the Purchase Agreement.
Q: Is UCPB still liable?
A: Yes, UCPB is still liable. Is is the oft-repeated rule is that a
suretys liability is joint and solidary with that of the principal
debtor. This undertaking makes a surety agreement an
ancillary contract, as it presupposes the existence of a
principal contract.
Although the contract of a surety is in essence secondary

only to a valid principal obligation, its liability to the
creditor or "promise" of the principal is direct, primary and
absolute.
In this case, we have a surety. In fact in this case the
surety agreement itself states that the surety is liable upon
mere failure of the principal obligor to make such
payment. Therefore the petitioner no longer need to make
a separate claim against One virtual before going after the
respondent UCPB. A surety is directly and equally bound
with the principal. He becomes liable for the debt and duty
of the principal obligor, even without possessing a direct
or personal interest in the obligations constituted by the
latter. Thus, a surety is not entitled to a separate notice of
default or to the benefit of excussion. It may in fact be
sued separately or together with the principal debtor.
Also, the acceptance does not give the surety the right to
intervene in the principal contract. The suretys role arises
only upon the debtors default, at which time, it can be
directly held liable by the creditor for payment as a
solidary obligor." Hence, the surety remains a stranger to
the Purchase Agreement.
Respondent UCPB cannot invoke in its favor the
arbitration clause in the Purchase Agreement, because it
is not a party to that contract. An arbitration agreement
being contractual in nature, it is binding only on the parties
thereto, as well as their assigns and heirs. It can only be
Gilat or One virtual who can invoke the arbitration clause.
Also take note of the distinction, sureties do not insure the
solvency of the debtor, but rather the debt itself. They are
contracted precisely to mitigate risks of non-performance
on the part of the obligor. This responsibility necessarily
places a surety on the same level as that of the principal
debtor. The effect is that the creditor is given the right to
directly proceed against either principal debtor or surety.
This is the reason why excussion cannot be invoked.
GUARANTY TO PLEDGE
Take note in this case that to require the creditor to
proceed to arbitration would render the very essence of
suretyship nugatory and diminish its value in commerce.
The court here made mention of the ruling in Palmares v.
Court of Appeals that "if the surety is dissatisfied with the
degree of activity displayed by the creditor in the pursuit
of his principal, he may pay the debt himself and become
subrogated to all the rights and remedies of the creditor."
Article 2048. A guaranty is gratuitous, unless there is a
stipulation to the contrary.
General Rule: A contract of guaranty is gratuitous in
nature.
Exception: (onerous) by stipulation of the parties
WILLEX PLASTIC INDUSTRIES, CO vs CA
Q: Do you have a guraranty here or suretyhip?
A: A suretyship.
Q: Isnt it that was denominated in the agreement that is was
a continuing guaranty? Why did the court rule that it was a
suretyship?
A: The SC held that the name or the title of the contract is not
controlling but it is the stipulations of the agreement that
shows the intent of the parties.
Q: Since you are saying that there was a surety contract,
what was the consideration?
A: The consideration to secure the payment of Interbank
(formerly IUCP) of amounts paid to Manilabank. Such, gave
rise to the execution of a continuing guaranty. Willexs
contention based on the fact that it is not a party either to the
Continuing Surety Agreement or to the loan agreement
between Manilabank and Inter-Resin Industria is untenable.
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. . . . It
is never necessary that a guarantor or surety should receive
any part or benefit, if such there be, accruing to his principal.
Notice here that even if the document executed was a

continuing guaranty Willex was considered a surety
because again, we have there interest in Industrial and
Willex Plastic Co. jointly and severally guaranteed a
suretyship agreement whereby they bound themselves
solidarily to pay Manilabank obligations of every, on which
Inter Resin may now be indebted or hereafter become
indebted to Manilabank.
Consideration as we know is necessary to support an
obligation. Because again a surety is a contract and one
of the essential elements of the contract is a
consideration. However, such consideration need not
pass directly to the surety where the consideration of the
principal alone is sufficient. Remember that the guarantor
or surety is bound by the same consideration that made
the contract between the principal parties thereto. So the
consideration in the principal contract can also be
considered for the contract of guaranty or suretyship.
The parties to the continuing guaranty clearly provided
that the parties to the Continuing Guaranty clearly
provided that the guaranty would cover sums obtained
and/or to be obtained by Inter-Resin Industrial from
Interbank.
In Obligations and Contracts, the consideration of a
contract is required for the validity thereof, no
consideration, no valid contract. But here a contract of
surety or guaranty is an accessory contract and its
existence is dependent upon the consideration of the
principal contract. So in the absence of a stipulation on
the consideration of the guaranty or suretyship then the
cause or consideration is the consideration of the principal
contract/obligation.

CREDIT TRANSACTIONS
Now of course if the principal contract has no

consideration, then there is no valid contract at all. And
therefore, the contract of guaranty or suretyship will
likewise be considered as void.
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.
So this emphasizes the right of a married woman to enter
into a contract of guaranty. In persons you have there the
different property relations between husband and wife.
You have absolute community property that in the
absence of any agreement between the husband and
wife, this shall govern their property relations.
Under the Law on Sales, any alienation of a property
supported by a contract of sale, without the consent of the
other spouse, will be void but it will be considered as a
continuing offer between the persons.
With regard to Art 2049 this refers to the separate
property of a married woman. In other words, the contract
of guaranty here refers to the separate property or
paraphernal property of the married woman.
For example she acted as a guarantor, what property can
the creditor go after? Her paraphernal property. Now if
she has no separate property, you have to consider
whether it has redounded to the benefit of the family
because it is only then can the creditor go after the
conjugal property of the married woman and her husband.
So how about the husband? There is no express
prohibition in the New Civil Code. He may likewise enter
into contracts of guaranty and surety and the same rules
are applicable. However, take note of the provisions
under the Family Code that in case of disagreement the
husbands decision shall prevail but without prejudice to
the wife to seek relief from the courts. So if the wife does
not agree with the husband then she can seek relief
before the court.
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.
Remember that in a contract of guaranty or suretyship the
agreement again is only between the principal creditor
and the guarantor or the principal creditor or the surety.
The consent of the principal debtor as I mentioned earlier
is not necessary for the validity of the contract of guaranty.
It is only the consent on the part of the gurantor and the
creditor will be required. This is for the benefit of the
creditor.
If in case the principal debtor failed to fulfill his obligation
then the guarantor will be answerable to the principal
creditor.
With regard to the payment, we have a third person of the
obligation of the principal debtor, he may do so without
the consent or against the will of the debtor. But as you
remember, under 1236, the creditor cannot be compelled
to accept the payment of a third person who has no
interest in the fulfillment of the obligation unless there is a
stipulation to the contrary. But of course the creditor can
accept it if he wants it.
Now what is the effect if he accepts payment from a third
person? So Article 1237:
Article 1237. Whoever pays on behalf of the debtor
without the knowledge or against the will of the latter,
GUARANTY TO PLEDGE
cannot compel the creditor to subrogate him in his
rights, such as those arising from a mortgage,
guaranty, or penalty.
He who pays for another may demand from the debtor
what he has paid; except that if he has 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. In other words, that is beneficial reimbursement.
For example:
Giovanni borrowed money from Ron. Here comes Jordan,
who without the knowledge of Giovanni, paid his
obligation to Ron. Even if Giovanni did not give his
express consent to Jordans act of paying his obligation
to Ron, Jordan can still seek reimbursement from
Giovanni. However, if it was without the consent of
Giovanni or knowledge on his part, Jordan can only be
reimbursed to the extent that Giovanni was benefited.
That is beneficial reimbursement.
Lets say part of Giovannis debt has already prescribed,
but Jordan paid the full obligation of Giovanni and Ron
accepted the payment by Jordan. Can Jordan recover the
full obligation? Jordan cannot anymore recover the
payment for the prescribed obligation of Giovanni, but
only the balance which was beneficial on the part of
Giovanni. The excess will be borne by Ron, and he will be
liable to Jordan, because here there is solution indebiti.
Now, distinguish, if the payment was made with the
consent of Giovanni, Jordan is not only entitled to
beneficial reimbursement but also subrogation to all the
rights available to the creditor.
So if for example, Giovanni executed a chattel mortgage
to Ron to secure his obligation, if Jordan pays Giovannis
obligation with his consent, then Jordan can seek not only
beneficial reimbursement for whatever he has paid but
eventually, he can subsequently seek for the foreclosure
of the chattel mortgage as he is now subrogated to the
rights of the creditor.
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.
The first paragraph deals with the classification I
mentioned earlier. The second paragraph also deals with
what I mentioned earlier with double guaranty and sub
guaranty.
You have another person who
performance of another guarantor.
guarantees
the
Article 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
Again this emphasizes that a contract of guaranty is an
accessory contract. It cannot exist without a valid
obligation. Nevertheless, under your obligations and
contracts, there are certain defective contracts,
rescissible, voidable, unenforceable contracts. Of course,
a void cantract cannot be subject of a contract of
guaranty. However, if it is voidable, it can be subject to a
guaranty. Why? Because is valid until annulled. And what
if its rescissible? It can also, because it is valid until

CREDIT TRANSACTIONS
rescinded. Unenforceable? Again, it is also valid but it
cannot be enforced, nevertheless it can be a valid
contract of guaranty.
Also a natural obligation can also be subject to a
guaranty. This obligation is valid, you cannot enforce the
natural obligation but once there is performance, the
debtor cannot demand what he has given or paid.
Therefore, if the guarantor secured the performance of a
natural obligation, the creditor may proceed against the
guarantor although he does not have the right of action
against the principal debtor. So, the debtors obligation is
not unenforceable anymore. When the debtor himself
offers to guaranty his natural obligation, he impliedly
recognizes his liability and as to him it transforms the
natural obligation from a natural to a simple one.
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.
GUARANTY TO PLEDGE
Article 2049, just take note when a married woman enters
into a contract of guaranty.
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.
So the effect is beneficial reimbursement or subrogation,
when is there subrogation or when is there beneficial
reimbursement only.
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 guarantor, with
the latters consent, or without his knowledge, or even
his objection.
So here we have the different kinds of guaranty. We have
a double guaranty or sub guaranty or one constituted to
guarantee the obligation of the guarantor.
A conditional obligation may also be secured.

Alright we have here the concept of a continuing guaranty
or a suretyship.
Q: What is the arrangement of a continuing guaranty or
suretyship?
A: A continuing guaranty is one where 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.
Recap
Characteristics of a guaranty:
1.) accessory: because it is dependent for its
existence upon the principal obligation;
2.) subsidiary & conditional;
3.) unilateral
Also take note on the nature of the undertaking of a
Surety:
1.) Direct
2.) Immediate
3.) Absolute
4.) Primary
In other words we can also say that it is solidary in nature.
Nevertheless, distinguish or dont forget the distinction
between a solidary co-debtor and a surety. Again, in the
cases that we have discussed we had pointed out the
distinctions between these two different circumstances.
Also, we have mentioned the distinctions between a
contract of guaranty and suretyship, always take not
these distinctions to be able to point out whether the
contract involves a guaranty or a suretyship because it is
relevant especially on the discussion on credit
exhaustion.
Article 2048. A guaranty is gratuitous, unless there is a
stipulation to the contrary.
Under Art 2048 we have already discussed that a
guaranty is a gratuitous contract unless there is a
stipulation to the contrary. Now, if there is no cause or
consideration in the institution of the suretyship or
guaranty then the consideration will be the same as that
of the principal obligation.
Article 2049. A married woman may guarantee an
obligation without the husbands consent, but shall not
thereby bind the conjugal partnership, except in cases
provided by law.

obligation.
obligation.
A very important provision is Article 2053.
there can be no claim against the guarantor until the
debt is liquidated.
Conditional obligation may also be secured.
Q: What is a continuing guaranty or suretyship?
A: It is one which 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 covers all transactions including those
arising in the future, which are within the description or
contemplation of the contract of guaranty, until the
expiration or termination thereof.
ATOK vs CA
Q: Who is the principal debtor here?
A: Sanyu Chemical Corporation.
Q: Do we have a contract of guaranty or suretyship?
A: A contract of suretyship.
Q: Why?
A: Because
Q: Who is the creditor?
A: the creditor is Atok Finance.
Q: How did Sanyu Chemical try to pay off Atok? What
happened in November 1981?
A: Sanyu Chemical Corporation assigned three receivables
to Atok Finance as payment for their obligation.
Q: Why did it assign to Atok Finance?
A: Because it cannot pay for the obligation.
Maam: Because here with the assignment it gives Atok
Finance the right to collect from the debtors of Sanyu
Chemical. So the proceeds to be collected will be applied to
the obligation to pay to Atok Finance. However, they were not
able to collect. That is why they were going against the
sureties of Sanyu Chemical.
Q: So are the sureties here liable?

CREDIT TRANSACTIONS
A: Yes, they are liable.
Q: Now when was the obligation or the contract if loan
perfected?
A: It was perfected at the time of the agreement itself.
Q: What is the ruling of the court that there is no consideration
for that continuing suretyship agreement?
A: The SC held in the wise, Surety agreements may secure
future debts.
Q: Now how was this suretyship agreement one of a
suretyship agreement? What was provided in the
agreement?
Q: Now how was this suretyship agreement one of a
suretyship agreement? What was provided in the
agreement?
A:The terms any indebtedness of the Principal now or
hereafter held by the Surety is hereby subordinated to the
indebtedness of the Principal to the Creditor; and if the
Creditor so requests, such indebtedness of the Principal of
the Surety shall be collected, enforced and shall be paid over
to the Creditor and shall be paid over to the Creditor and shall
be paid over to the Creditor on account of the indebtedness
of the Principal to the Creditor but without reducing or
affecting in any manner the liability of the Surety under the
provisions of this suretyship.
For valuable and/or other consideration . . ., jointly and
severally unconditionally guarantee to ATOK FINANCE
CORPORATION (hereinafter called Creditor), the full, faithful
and prompt payment and discharge of any and all
indebtedness of [Sanyu Chemical] . . . (hereinafter called
Principal) to the Creditor. The word "indebtedness" is used
herein in its most comprehensive sense and includes any and
all advances, debts, obligations and liabilities of Principal or
any one or more of them, here[to]fore, now or hereafter
made, incurred or created, whether voluntary or involuntary
and however arising, whether direct or acquired by the
Creditor by assignment or succession, whether due or not
due, absolute or contingent, liquidated or unliquidated,
determined or undetermined and whether the Principal may
be may be liable individually of jointly with others, or whether
recovery upon such indebtedness may be or hereafter
become barred by any statute of limitations, or whether such
indebtedness may be or otherwise become unenforceable.
It is true that a guaranty or a suretyship agreement is an

accessory contract in the sense that it is entered into for
the purpose of securing the performance of another
obligation which 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.
Future debts, even if the amount is not yet known, may be
guaranteed but there can be no claim against the
guarantor until the amount of the debt is ascertained or
fixed or demandable.
Rationale: a contract of guaranty is subsidiary
there can be no claim against the guarantor until the debt
is liquidated. A conditional obligation may also be
secured.
Here the SC explained the nature of a continuing surety
in this wise: Comprehensive or continuing surety
agreements are in fact quite commonplace in present day
financial and commercial practice.
A bank or financing company, commonly requires the
projected principal debtor to execute a continuing surety
agreement along with its sureties. By executing such an
agreement, the principal places itself in a position to enter
into the projected series of transactions with its creditor;
GUARANTY TO PLEDGE
which such surety agreement, there would be no need to
execute a separate surety contract or bond for each
financing or credit accommodation extended to the
principal debtor.
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.
GATEWAY vs ASIANBANK
Q: What is the effect of the order of insolvency of gateway?
A: The declaration of insolvency merely suspends the action
to collect of sum of money but it does not extinguish the
obligation of gateway.
Now why is this important because, in insolvency
proceedings all the civil actions are suspended in the
meantime because
Q: How about on the part of Geronimo?
A: The court held here that Geronimo is also liable because
he acted as a surety of gateway.
Q: Can I not say that the obligation here of Geronimo is
suspended in the sense that it would be unfair because the
collection to gateway is suspended by reason of insolvency
but Geronimo as a surety can still be held liable?
A: The court ruled that Geronimo will still be held liable
because to free him or to suspend him from his liability
defeats the very purpose of suretyship agreements which is
to pay the obligation of the principal debtor in case he
defaults.
Q: What kind of a suretyship agreement is contemplated
here? A continuing suretyship?
A: Yes, in this case Geronimo will be held liable for all the
debts Gateway has incurred with Asianbank.
Rule: Insolvency of the principal debtor does not affect the

liability of the surety
In relation to Article 2054 do take note that even if the
principal debtor has been declared insolvent, even if the
courts already ruled that all pending civil actions will be
suspended it doesnt that mean that the creditors cannot
continue from collecting from the sureties as in this case.
Remember that a surety secures payment and
responsible in case the principal debtor defaults. The
surety cannot at law, in the absence of an
agreement/stipulation limit the application of the security
or limit the creditors right to go against the surety in
requiring the creditor to exhaust all remedies against the
principal debtor before collecting from the him as surety.
Article 2054 is not applicable, the rule cannot possible be
stretched to mean that the guarantor or surety is freed
from liability. As such, the guarantor or the surety in the
event the principal debtor becomes insolvent is still liable.
Why? Because it defeats the essence of the surety
contract.
Take note that the contract executed here was continuing
suretyship agreement wherein Geronimo is liable
payment for all the obligations of gateway under the
domestic bills purchase line and the omnibus credit line
without any specific limitation.
SECURITY BANK vs CUENCA
Q: How is Cuenca related to the principal debtor?
A: He is the president of the board of Directors of Sta. Ines.
Q: Is he a gurantor or a surety?
A: He is a surety maam. He solidarily bound himself.
Q: Is he liable?

CREDIT TRANSACTIONS
GUARANTY TO PLEDGE
A: No. The court held here that there was a novation that
extinguished the obligation.
doesnt mean that you cannot anymore be held liable as

a surety.
Q: Was there a waiver of consent on the part of Cuenca that

he no longer needs to be notified in case of changes or
novation?
A: No. there was no evidence showing that Cuenca
dispensed with his right to be notified in case of changes.
Here, the main reason why Cuenca was not held liable
was because of that provision that said without his
consent and not because he was no longer a stockholder
of the corporation then. Your obligation as a surety can
still continue even if you are no longer a stockholder it will
depend on the provisions of the agreement.
Remember that a waiver should always be express.

Otherwise if it is vague it is ivalid. There is no waiver here that
he should be notified in case of any change so therefore he
SHOULD be notified. In the absence of that notice in relation
to the novation or its change then the obligation of the surety
will be extinguished.
Q: Why do you think that the liability of the surety will be
extinguished if there is a novation in the principal obligation?
A: Because novation is form of extinguishing an obligation. In
this case, it was expressly stated that the principal obligation
was novated.
So the indemnity agreement that was executed here was

actually a novation. It was continuing surety but up to a
certain limitation. However, do take note there was a
novation here. The 1999 agreement extinguished the
1980 accommodation. So we can say that there was a
novation to pay the principal or extinguish the principal
obligation and in connection with the extinguishment of
the original obligation, the obligation of the surety in
relation to that, was likewise extinguished. An extension
granted to the debtor granted by the creditor extinguished
the guaranty.
Distinguish this from the suretyship agreements in credit
cards that there is a stipulation that waive or discharge in
cases of changes or novation, in this case there was
none. So novation extinguishes the liability of Cuenca, the
surety in this case.
Now, it was also mentioned here by the SC that it is a
common practice to require the issuance of this indemnity
agreement or in a continuing suretyship agreement
wherein you have this guarantors or suretys act wherein
sureties are joint and solidarily liable. As we have noticed
in these cases, usually it is the major stockholder or the
president of the corporation that are the sureties. This is
because you would notice that the obligation of a
corporation is limited it would only extend to the assets of
the corporation so what would happen if the corporation
gets bankrupt? They cannot just go after the stockholders
or to their personal assets. The personality or identity of
the corporation is distinct from that of its stockholders.
That is why in order for the creditor to be secured, they
require corporations to execute suretyship agreements.
If the corporation has no more assets you can only run
against those personal assets of the sureties and that
such surety shall make sure that the proceeds of the loan
is used solely for that purpose which it has been obtained
by the corporation. If you act as a surety it can extend to
your personal assets.
However, there is a discussion of the SC that the time
frame when the indemnity agreement was executed,
Cuenca was a stockholder or officer of the corporation, at
the time of the 1989 indemnity agreement he was no
longer a stockholder of the corporation. Does it
automatically mean that he is no longer liable?
Not necessarily, here the SC said that he was not in a
position to ensure the payment of the obligation, there is
then no reason for Sta. Ines to assume that Cuenca would
accede or consent to the indemnity agreement because
he is no longer a stockholder.
It does not necessarily mean that when you are a
stockholder and acted as a surety for the corporations
loan and thereafter, at the time of the execution of another
indemnity agreement you were no longer an officer, it
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.
There is no presumption that there is a contract of
guaranty or suretyship, you always look at the terms of
the contract and what are the stipulations wherein for one
to be considered a contract guaranty there must be no
doubt that indeed that such person under the agreement
answers the obligation of another.
With respect to the guarantor he shall only be liable only
at the time the principal debtor can no longer pay and not
at mere default.
What is the effect if demand was made upon the
guarantor and he did not pay?
Any interest penalties or judicial costs will still be
shouldered by the guarantor from the time demand was
paid upon him.
PIXON vs PIXON
Q: When did he become liable as a surety? In the agreement
he was referred to as what?
A: A guarantor.
Q: Even if he was referred to as a guarantor is it possible that
he can be made as surety?
A: It can be possible that although what was denominated in
the agreement was that he was a guarantor, he can still be
made a surety in that he binds himself to be jointly and
severally liable.
Take note of that, here the SC was clear that it would be

violative to hold one as a surety when he was
denominated as a guaranty but be careful with that, you
have to still look at the provisions clearly, the words jointly
and severally liable it makes them not only a guarantor
but a surety as well. This is essential because the extent
of the liability of the guarantor is different from that of a
surety with the extent of interest and penalty. The
guarantor can only be held upon demand.
BA FINANCE vs CA
Q: Who is the principal debtor here? Who is BA Finance in
this case?
A: BA Finance should be the guarantor of Renato (debtor)
Q: Who is the creditor?
A: Traders Royal Bank
Q: Suertyship or guaranty?
A: Guaranty.
Q: Who is the guarantor?
A: BA Finance
Q: What obligation was guaranteed by BA Finance? Who
executed a suretyship agreement?
The transaction here is some sort of a double guaranty,

however, there was no authority to issue guaranty.

CREDIT TRANSACTIONS
Therefore, BA Finance cannot guaranty the obligation of
the Cayetanos as surety of the obligation of Renatos to
Traders Royal Bank.
Recap
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.
There is no presumption that a contract of guaranty exists.
The obligation of the one who executed, that he
undertakes to answer for the obligation of another, such
document must be clearly stipulated. And of course if
were talking about the person who acts as a surety must
likewise be clearly stipulated clearly the nature of his
obligation, that he is solidarily bound with the principal
debtor.
Also remember the distinction between a contract of
guaranty and suretyship. The contract of guaranty is
covered by the statute of frauds. Under the statute of
fraud, specifically Article 1403 paragraph 2(e):
Article 1403.
xxx
Section 2.
(a) x x x
xxx
(e) An agreement of the leasing for a longer period
than one year, or for the sale of real property
or of an interest therein;
A special promise to answer for the debt or miscarriage of
another refers to a contract of guaranty.
The requirement that the contract of guaranty be in writing
is for enforceability. It is not required for validity. What is
required from a person to be considered as a guarantor is
that it must be express, as clearly stipulated in 2055. It
must be express and cannot extend to more than what is
stipulated therein. However, there is no requirement that
the contract of guaranty be in a public instrument.
How about on the part of the creditor regarding the
acceptance of a person who acts as a guarantor or
surety? On the part of the creditor, his acceptance need
not be express or in writing.
You have 2 kinds of acceptance here in which we have to
consider:
1.) If it is merely an offer of guaranty or
2.) If it an unconditional promise of guaranty.
This was emphasized in the case of Texas Company v.
Alonso.
TEXAS COMPANY vs ALONSO
Q: Is there a surety or guarantor under the facts of this case?
A: None.
Q: Why Not?
A: There was only an offer.
Q: Thomas Alonso made an offer, what is the relevance of
the nature of the obligation or the offer here? What if it is
merely an offer of guaranty?
Q: Was it stated there that it must be accepted? Why was it
considered merely as an offer and not an unconditional
promise of guaranty?
GUARANTY TO PLEDGE
Q: Now what is the importance, or why is there a need to
determine that it is merely an offer and not an unconditional
promise of guaranty? Why do we have to make the
distinction? You said, it was merely an offer of guaranty. Why
do we have to determine that it was merely an offer of
guaranty that could not bind Alonso as a guarantor or surety
in this case?
Q: So the extent of the liability here of the party who executed
a contract, if it is an unconditional promise, which was not
accepted by the creditor, would the person who executed the
guaranty or suretyship, be liable even if it was not accepted?
A: Yes.
We have to make a distinction. Were not saying that in all

contracts of guaranty or suretyship, there must be
approval or the acceptance of the creditor. It depends as
to the nature of the contract that has been executed by
(supposedly) the guarantor or the surety in order for him
to be bound by such manner. If it is merely an offer of
proposition or a guaranty or merely a conditional guaranty
in the sense that it requires action by the creditor before
the obligation becomes fixed, it does not become a
binding obligation until it is accepted and unless there is
a waiver of notice until notice of such acceptance is given
to or acquired by the guarantor or until he has notice or
knowledge that the creditor has performed the conditions
and he intends to act upon the guaranty. Acceptance in
this case need not be necessarily expressed or in writing
but may be indicated by acts amounting to acceptance.
Under the facts of this case, there is only have an offer of
guaranty made by Alonso. Why? In the additional security
provision, it is stipulated, x x x upon the Agent's faithful
performance of this contract, in such individuals of firms
as joint and several sureties as shall be satisfactory to the
Company. In other words, if it is satisfactory to the
company or when the suretyship (the security) is
satisfactory to the company, then that is the time that the
person who executed this document (in this case: Alonso)
will be bound as a surety. But in this case there was no
acceptance or notice that such offer was satisfactory to
the creditor, thus Alonso was not bound. However, if the
guarantor or surety made an unconditional promise to be
bound, unless notice of acceptance is a condition thereto,
all that is necessary is to make the promise binding. The
promisee should act upon it and notice of acceptance is
not necessary. Distinguish first if it is merely an offer or an
unconditional promise. If it is merely an offer, then there
must be acceptance for the guarantor or surety to be held
as such.
Applying Article 2055, for a person to be considered as a
guarantor or surety, the provisions in the contract
executed are STRICTLY CONSTRUED, in the sense that
it must be expressly and clearly indicated therein the
nature and indication of his obligation. So the construction
is strictly interpreted against the creditor and in favor of
the guarantor and should not be extended beyond its
terms or specified limits.
VISAYAN SURETY vs. CA
Q; What is an action for replevin?
A: An action for replevin is to recover possession of personal
property.
Q: What is the purpose of a replevin bond? Why is Dominador
claiming against the replevin bond that was filed by the
spouses? What is the nature of a bond?
A: It is a form of security.
Q: In this case, who acts as the guarantor or surety?
A: Visayan Surety they were the ones who issued a replevin
bond in case the spouses will be held liable, the bond will be
used as payment.
Q: Was the claim of Ibajan against the bond granted by the
court?
A: No.

CREDIT TRANSACTIONS
Q: Why not? Under the facts of the case, who could have the
right to file a claim against the replevin bond by Visayan
surety?
A: Only the spouses Bartolome because of the case between
the spouses Danilo and Mila Ibajan and spouses Bartolome
to which Dominador is not a party thereto.
Obligationwhether a guarantor or surety, cannot be

extended by indication beyond its specified limits. The
extent of the suretys liability is determined only by the
clause of the contract of suretyship. A contract of Surety
is not presumed; it cannot extend to more than what is
stipulated. In the case at bar, Spouses Danilo and Mila
Ibajan filed a complaint against Sps Bartolome to recover
the possession of the jeepney. In an action for replevin,
which seeks to recover possession of the personal
property, it is also required to post a bond that in case the
person to whom you want to get the property has a better
right, then the bond would answer for the damages or any
damages that may be suffered by the defendant.
In this case, the one who has a better right is Ibajan, who
was not a party, but was merely an intervenor in the action
for replevin filed by spouses Danilo and Mila against
Bartolome. In other words, the bond is not applicable to
him. It cannot extend by implication beyond the limits
provided therein. If it was spouses Bartolome who was
proven to have suffered damages by virtue of that action
for replevin, then they have the right to claim against that
bond. But in this case, it was Dominador who filed against
that bond, but the liability of Visayan cannot extend to him.
Take note that is in regard to the interpretation of a
contract of guaranty as well as suretyship under Article
2055.
Article 2056. One who is obliged to furnish a guarantor
shall present 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.
Qualifications of the guarantor:
1.) The guarantor should have integrity
2.) He must have the capacity to bind himself.
a. He must be of legal of legal age.
b. Must have capacity to enter into a contract
c. Not convicted of a crime with a penalty of civil
interdiction.
3.) He has sufficient property to answer for the obligation
which he guaranties.
So with these qualifications the guarantor must have at
least the amount equal to the amount of the principal
obligation involved.
However, what happens if the guarantor has integrity,
capacity, but do not have sufficient property to answer for
the principal obligation? Does it mean that if the guarantor
executed a contract of guaranty, it is already void because
you do not have the qualifications in 2056? Not
necessarily, because the requirements here can be
waived by the creditor. Wherein if the creditor accepts or
does not object with the guarantor (whose qualification is
not complete) acting as a guarantor or surety, then he
waives the requirements of qualifications provided in
2056. But the creditor cannot be forced to accept a person
as a guarantor wherein one of these qualifications is not
present. But again, if the requirements are lacking, but the
creditor accepted the guarantor, it constitutes as waiver
on the part of the creditor. So, it is still valid. But again,
the creditor cannot be forced to accept a guarantor whose
qualifications is not complete.
The qualifications are not to be considered as essential
elements to a contract of guaranty. The absence of any
GUARANTY TO PLEDGE
qualifications here does not necessarily render the
contract void.
The second sentence or the last sentence in 2056, it
refers to the jurisdiction. The place of performance and,
that is the court, which has the jurisdiction over the case.
This in consonance with the provisions of the Rules of
Court regarding venue and jurisdiction.
Article 2057. If the guarantor should be convicted in the
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 expected where the creditor has
required and stipulated that a specified person should
be the guarantor.
The qualifications under Article 2056 if all of these are
present upon the perfection of the contract of guaranty, it
is not required that it be present until the maturity of the
obligation or until demand is made by the creditor. While
under Article 2056 qualifications are required at the
inception of contract of guaranty, unless waived by the
creditor, it is not required that these qualifications must
continually subsist afterwards as emphasized in Article
2057.
Under Article 2057, the guarantor is subsequently
convicted of a crime involving dishonesty. In other words,
he is now a person without integrity or lacks integrity or
becomes insolvent so he does not have sufficient property
to answer for the obligation. If that happens, it will not
affect the validity of the contract. But it gives the creditor
the right to demand for another guarantor. In fact under
Obligations and Contracts, if the parties have agreed for
securities or collateral and the security becomes impaired
or destroyed, the obligation becomes immediately
demandable wherein the debtor uses the right to make
use of the period. So these are the consequences if the
guarantor loses any of the qualifications in Article 2056
the creditor may ask or may require from the debtor for
another guarantor or surety; otherwise, the obligation
becomes immediately demandable.
Will the death of the surety or guarantor extinguish his
obligation? No.
ESTATE OF HEMADY vs LUZON SURETY
Q: Is he a guarantor or a surety?
A: Surety.
Q: What is the effect of the death of Hemady on his the
obligation as a surety?
A: It bound his successor.
Q: So his successors will now be liable to the principal
obligation of which Hemady acted as a surety?
A: No. However, the estate of Hemady will be held
accountable for his obligation as surety,
Q: So what if his properties at the time of his death are not
sufficient to answer his obligations as a surety?
A: His heirs cannot be asked more than what the estate of
Hemady can cover.
In the case of Estate of Hemady, under Article 1311 as

emphasized:
Article 1311. Contracts take effect only between the
parties, their assigns and heirs, except in case where
the rights and obligations arising from the contract are
not transmissible by their nature, or by stipulation or by
provision of law. The heir is not liable beyond the value
of the property he received from the decedent.
If a contract should contain some stipulation in favor of
a third person, he may demand its fulfillment provided
he communicated his acceptance to the obligor before
its revocation. A mere incidental benefit or interest of a

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person is not sufficient. The contracting parties must
have clearly and deliberately conferred a favor upon a
third person.
Article 1311 is the application of the doctrine of relativity.
During his lifetime Hemady acted as a surety in this case,
wherein he will become liable to Luzon Surety Company.
When such surety company demanded from the estate of
Hemady, the trial court dismissed its claim on the ground
that upon Hemadys death he ceased to be a surety.
However, take note in this case, the contract he executed
takes effect as against the successors or heirswhich in
this case, the estate at the time of his death. As pointed
out, his successors or heirs will not be liable more than
what they have received from the estate of Hemady.
Therefore, the death of Hemady did not extinguish his
liability as a surety, thus the Luzon insurance company
can go after the remaining estate of the deceased
Hemady. But if it turns out that the estate is not sufficient
to answer for the liability of Hemady as against Luzon
Surety, Luzon Surety has no recourse against the heirs or
successors of Hemady because the heirs cannot be held
personally liable for the obligations of Hemady.
Also in this case, it was pointed out that if any of the
qualifications would supervene after the execution of the
contract of guaranty or suretyship, it will not terminate the
contract. But applying Article 2057, it gives the creditor the
right to demand a replacement. The right to make a
demand [a replacement] is not a duty, therefore it remains
optional to the creditor, and he may waive it and chooses
and hold the guarantor to his bargain.
In Article 2057, it provides that in case he should be
convicted in the first instance of the crime involving
dishonesty. Conviction in the sense that there is already
a final judgment.
How about insolvency? Is it required that the court has
declared the guarantor to be insolvent? NOT
NECESSARILY. As long as the guarantor is incapable of
meeting his obligations when they become due he can
already be considered as insolvent which then be gives
the creditor the right to demand for another guarantor as
provided in Article 2057.
Those are the provisions in relation to the nature and
extent of guaranty and suretyship.
Effects of Guaranty
How about the effects thereof? Article 2058:
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.
What we have in Article 2058 is what the main distinction
between a guarantor and a surety. The benefit if
excussion or also known as the benefit of exhaustion.
What is the nature of this benefit? Remember that this
benefit is only available to a guarantor. This benefit is in
favor of the guarantor and unlike the obligation of a surety,
the obligation of the guarantor is merely accessory and
subsidiary in nature. It cannot be enforced before the
obligation of the principal debtor is enforced.
Before the creditor can proceed and collect from the
guarantor, he must first proceed and try to collect from the
principal debtor. Because again the obligation of the
guarantor is only subsidiary and secondary. Only when
the principal debtor fails to pays, shall the guarantor be
GUARANTY TO PLEDGE
liable. And if the principal debtor fulfills his obligation, then
the guarantor is discharged from any responsibility.
When do we say that the benefit of excussion or benefit
of exhaustion is given to the guarantor? When the creditor
has exhausted all the property of the debtor. So try to
collect first from the debtor and also resort to all legal
remedies available as against the debtor. If these are not
done by the creditor, then he cannot collect from the
guarantor.
The general rule with regard to guarantorbenefit of
excussion: before you can proceed to the guarantor, go
after first the principal debtor.
WISE COMPANY vs TANGLAO
Q: Is there suretyship here? So there is no suretyship here?
No contract of guaranty?
A: No.
Q: Why is it that we have the term guarantor in the power of
attorney?
Q: Assuming that Atty. Tanglao agreed to act as a guarantor,
can Wise Company demand payment from him?
A: No.
Q: Why not?
Q: What are the legal remedies that are available?
A: Foreclosure, because there was a mortgage that was
executed.
In this case, Atty. Tanglao executed a power of attorney:

To sign for me as guarantor for himself in his
indebtedness to Wise & Company of Manila, which
indebtedness appears in civil case No. 41129, of the
Court of First Instance of Manila, and to mortgage my lot
(No. 517-F of the subdivision plan Psd-20, being a portion
of lot No. 517 of the cadastral survey of Angeles, G. L. R.
O. Cad. Rec. No. 124), to guarantee the said obligations
to the Wise & Company, Inc., of Manila.
Notice that the intention of Atty. Tanglao in executing the
power of attorney was only to authorize David to
mortgage the property. He did not enter into a contract of
suretyship, he did not even enter into a contract of
guaranty.
Again going back to Article 2055, the obligation of surety
or a guarantor must be expressed and cannot be
presumed.
So it appears that Atty Tanglao could not have contracted
any personal responsibility for the payment of the 640
pesos. Of course, this is 1936 case pa.
Take note here that it in the case there is a portion which
provides that at any rate even granting that Tanglao be
considered as as surety since this was enacted in 1936,
there was yet not much distinction between surety and
guarantor. The term surety here refers to a guarantor.
Because assuming that Tanglao is a guarantor, the action
does not yet lie against him on the ground that all the legal
remedies against the debtor have not been previously
exhausted. That is the benefit of excussion which is only
given to a guarantor. So if you take the term surety (as
used in this case) literally, youll be confused why in this
case it state that it need not previously exhaust [other
remedies]. The term surety there is used referring to a
guarantor. Again, the benefit of exhaustion or excussion
is given to a guarantor and not a surety.
Take note also that when it comes to the benefit of
excussion, it is not sufficient that you just say that the
debtor is insolvent because the creditor must resort to all
the legal remedies against the debtor. As in the case of
Wise Company, there is a mortgage executed and he
could have foreclosed that mortgage before he could try

CREDIT TRANSACTIONS
to collect from Tanglao. All legal remedies, such as if
there is mortgage have it foreclosed, or filing an action for
sum of money against the principal debtor.
Also another remedy that may be available, is
emphasized in the case of PB COM vs CA.
PB COM vs CA
Q: What is the nature of the action filed by PB Com against
Chua?
A: Accion Pauliana
Q: What do you mean by that?
Q: So in this case was it proven that the deed of exchange
was executed in bad faith?
Q: To whom was the property transferred?
A: Jaleco Deveopment, Corp
Q: Why would it constitute as a defraudation on the part of
Chua in addition to your basis that it was his only property at
the time and also the fact that it was entered into after he
agreed to be a surety? What is the relation of Chua to Jaleco?
Q: After there was an execution of the deed of exchange,
what happened to the property?
Q: Who remains in possession of the property even after the
execution of the deed of exchange?
A: It was still Chua who remained in possession of the
property which provides additional proof indeed the deed of
exchange and subsequent transactions were entered into to
defraud the creditor.
Remember that under Obligations and Contracts, accion

pauliana has already been discussed, which is an action
intended to rescind or impugn the contract or alienation
made by the debtor (or in this case, we have the surety
who is also considered as the debtor) in fraud of the
creditor. It appears here that in the case of Fortune, Chua
had only one property at the time he agreed to be a surety
in the agreement. So after the obligation was incurred he
made an alienation of such property by virtue of that deed
of exchange in favor of Jaleco in exchange for the shares
of stocks. That was considered as an evidence that the
alienation was intended to defraud the creditor.
This is also another legal remedy available to the creditor
before he can actually proceed against the guarantor.
This case was just pointed out to show another legal
remedy available to a creditor emphasizing the benefit of
exhaustion. Again in this case, we have a surety. What I
am trying to point out is the nature of this accion pauliana.
In this case, it was only his property nevertheless, even
he executed the surety agreement. His only property was
sold to Jaleco after the debts became due. Petitioner
PBCOM has the right to file an annulment to a deed of
Exchange. The issue in this case is whether the action of
annulment was premature. In this case, it was not
premature because this was a legal remedy available to
the creditor.
Rescission requires the existence of creditors at the time
of the fraudulent alienation, and this must be proved as
one of the bases of the judicial pronouncement setting
aside the contract; without prior existing debts, there can
be neither injury nor fraud. The credit must be existing at
the time of the fraudulent alienation, even if it is not yet
due. But at the time the accion pauliana is brought, the
credit must already be due. Rescission is a subsidiary
action, which presupposes that the creditor has
exhausted the property of the debtor, which is impossible
in credits which cannot be enforced because of the term
or condition.
Also in this case evidence showed that Chua continued to
stay in the said property despite the fact of the execution
of the deed of exchange and the subsequent transaction.
GUARANTY TO PLEDGE
Relate this again to the concept of a corporation having a
personality separate and distinct from its stockholders.
That is general rule. So therefore, Jaleco has a separate
personality from Chua.
In this case, this is an exception. Under Corporation Law,
there is the doctrine of piercing the corporate fiction or
corporate entitythe corporation has no separate entity
corporation if that separation of personality is used to
defraud third person. In this case, Chua and his
immediate family was actually in control of Jaleco
Corporation. So the execution of that deed of exchange
was clearly not into exchange, not into sale, as all the
evidences under the circumstance of this case would
show that it was a sham or simulated transaction, wherein
the property was not really divested from Chua as he
remained in control of the property. It is clear as the
evidence shown in this case that it is to defraud the
creditor so that they cannot go after Chua.
Recap
The main distinction between a guaranty and a suretyship
is that a guarantor is given the benefit of excussion. This
is provided under Article 2058. So, the guarantor here
cannot be compelled to pay the creditor unless the
creditor has exhausted all the properties of the debtor and
has resorted to all the legal remedies available against the
debtor. Again, this benefit of excussion is in favor of the
guarantor because unlike the obligation of a surety, the
obligation of a guarantor is subsidiary in nature.
As emphasized in the case of PBCOM vs. CA, one of the
legal remedies that is available to the creditor is the
accion pauliana, an action intended to rescind or refute
the contract or alienation made by the debtor in fraud of
the creditor. Aside from that, other remedies would be
collection for sum of [money], mortgage or foreclosure of
such mortgage.
As discussed in the case of Wise Co. vs. Tanglao, the
benefit of excussion is applicable in a contract of guaranty
and not in a contract of suretyship.
Now, if you are the principal creditor and the debtor is
already in default, and despite demand the debtor refuses
to pay. So you now file an action against the debtor. What
about the guarantor? Is it necessary that the guarantor be
included in the action? Or do you have to wait for the court
to adjudge that the principal debtor is indeed liable to the
creditor before you can implead the guarantor?
PRUDENTIAL BANK vs CA
Q: What is the basis here that the contract was a contract of
guaranty and not a contract of suretyship? (Despite the fact
that it was labeled as a solidary guaranty clause)
Q: Was it proper that Anacleto be included as a defendant in
the complaint?
A: (He may or may not be included in the complaint. The
guarantor is considered as a permissive party in Civil
Procedure)
Q: What is the effect of the benefit of excussion in relation to
the fact that the defendants guarantor may or may not be
included?
Q: When can the guarantor be made liable?
A: After the debtor has been found liable to the principal
creditor. Thereafter, before the creditor can collect from the
guarantor, the guarantor can of course avail of the benefit of
excussion. Meaning, before the creditor can collect from the
guarantor, the former must collect first from the principal
debtor.
In this case, Philippine Rayon applied for a letter of credit

from Prudential Bank which was opened in favor of
Nissho Co., a company in Japan. Then, there is the
correspondent bank in Japan, the Bank of Tokyo.

CREDIT TRANSACTIONS
First, the nature of the obligation of Anacleto Chi. It is

evident that Chis signature is affixed in the dorsal portion
of the trust receipt. But the SC held that this did not bind
him solidarily with Philippine Rayon. In other words, he is
not a surety. Why is he not considered as a surety? Now
the clause [in the dorsal portion of the contract] is referred
to as a solidary guaranty clause. Even with the words
solidary, this is still a contract of guaranty. Why?
Because what is solidary here is as to the persons who
will sign as guarantors. They will be considered as
among themselves, the guarantors, solidarily liable. So
after the principal debtor is found indeed liable to the
creditor, after applying the benefit of excussion, the
creditor can demand the whole obligation from any of the
guarantors. That is what you call x x x jointly and
severally agree. The we refer to the persons who will
sign the guaranty clause. So here, this would mean that
even if it was only Chi who signed, he is bound thereto as
a guarantor.
Further, while there is a waiver of excussion, again it was
not filled up. In the interpretation of contracts, it must be
resolved against the bank and in this case in favor of Chi
as a guarantor.
However, even if it was only Chi who signed the same it
did not render the clause totally meaningless because he
became a sole guarantor by agreeing or affixing his
signature in the solidary guaranty clause.
Now, with respect to a guaranty, for it to be enforceable it
must be in writing. So in this case, it can be enforced as
against Chi. There was a defense raised here by Chi that
he is entitled to the benefit of excussion and therefore he
should not be impleaded in the initial complaint as against
the debtor. Please take note that this benefit of excussion
is not a condition sine qua non for the institution of an
action against a guarantor. Again, you go back to the rule
against multiplicity of suits.
While it is true that he may be impleaded as a defendant
in a collection case together with the principal debtor
[with] the benefit of excussion, the guarantor shall only be
liable after the benefit of excussion has been exercised.
Further, the SC emphasized that the liability of the
guarantor is limited to the principal obligation in the trust
receipt and all accessories including judicial costs; but
with respect to judicial costs, [he] is liable only to those
incurred after being judicially required to pay.
Take note that a guarantor can be impleaded as a codefendant of the principal debtor in an action filed by the
creditor. Even if he is made as a co-defendant, you cannot
collect yet from him. There must be a judgment first
holding the principal debtor liable to the principal creditor
and then execution against the properties of the debtor. If
his [debtor] property is insufficient, then only at that time
you can proceed against the guarantor.
The guarantor enjoys the benefit of excussion. You can
implead the guarantor but you cannot collect as yet. You
can only collect against the guarantor if the principal
debtor cannot pay or is insolvent. The creditor may secure
a judgment as against the guarantor who shall be entitled;
so if the court says the debtor is liable that also means the
guarantor is liable but the guarantors liability will be
deferred until after the properties of the debtor have been
exhausted to satisfy his principal obligation.
Art. 2059. The 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;
GUARANTY TO PLEDGE
(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.
GENERAL RULE: Benefit of excussion
EXCEPTION: Article 2059
The creditor, need not need exhaust all the properties of
the debtor before he can proceed against the guarantor.
The exceptions are the following:
1. If the guarantor has expressly renounced it
- This is a privilege or a right granted to the
guarantor. So like any other right, the person
entitled to that right, in this case the guarantor,
can waive it. However such waiver must be
express and it is only the guarantor who can
make such waiver; it cannot be made by the
creditor or debtor in behalf of the guarantor since
the right to waive is a personal right.
2. If he has bound himself solidarily with the debtor
- In this case he becomes a surety. Because of the
term solidarily meaning he makes himself
primarily liable with the debtor.
3. In case of insolvency of the debtor
- Take note that it is not required that the debtor be
declared insolvent or bankrupt by the court. As
long as his assets are not sufficient to meet his
obligations when it mature, the debtor shall be
considered insolvent and excussion will not be
available anymore; so no need of a judicial
declaration of bankruptcy or insolvency.
Insolvency here must be actual.
- Also, while there is no need for a judicial
declaration of insolvency of the debtor, do recall
the case of Machetti vs. Hospico where there was
already a declaration of insolvency. However the
Court held there that the declaration of insolvency
is not enough, there must be a final liquidation.
4. When he has absconded, or cannot be sued
within the Philippines unless he has left a
manager or representative
- It is not expected that the creditor should first
proceed against the principal debtor since it is
impossible to enforce a court decision against the
principal debtor who is abroad. But if he has
properties in the Philippines then you go after
such properties first. In relation to jurisdiction of
the court in CivPro, if the debtor is outside of the
Philippines or not residing herein, the court
cannot acquire jurisdiction over him unless he
voluntarily presents himself to the jurisdiction of
the Philippine courts. For an action for sum of
money and he has properties in the Philippines
then you can acquire jurisdiction over the thing.
But if there is no property here in the Philippines,
even if he has properties abroad still it would be
useless since it would be expensive for the
creditor to go after such properties abroad.
- However, do take note of the exception unless
he has left a manager or a 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
- If it appears that the debtor has no more
properties, you do not have to wait to exhaust the
properties of the principal debtor since it is
already evident that even if there are still
properties [or no properties at all] it would not
result in the satisfaction of the obligation.

CREDIT TRANSACTIONS
Now, Article 2059 is not exclusive as there are instances

where there is no benefit of excussion. We can see these
in:
1. Article 2060
2. Article 2084 wherein you have a judicial
bondsman or a subsurety, and
3. In a pledge or mortgage executed as a form of
security, and
4. Lastly, if the guarantor fails to interpose it as a
defense because failure to raise as a defense the
benefit of excussion serves as a waiver on the
part of the guarantor.
Article 2060. In order that the guarantor may make use
of the benefit of exclusion, 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.
So in 2059, the benefit of excussion is not available as
against the guarantor. The creditor therein is not required
to pursue all the remedies against the principal debtor.
Here in Article 2060, there are 3 requisites before one can
avail of the benefit of excussion, it must first be set up as
a defense. If demand was made by the creditor against
the guarantor, the latter must raise it as a defense.
Otherwise this benefit is deemed waived. In addition,
2060 provides that a guarantor must point out to the
creditor properties of the debtor in the Philippines that are
available and sufficient to cover the amount of the
obligation.
So two pre-requisites in order to set up the benefit of
excussion:
1. He must allege this benefit; he must set it out as
a defense that there is no cause of action against
him.
2. Guarantor must be able to point out to the
creditor available property of the debtor within
Philippine territory, sufficient to cover the amount
of the debt.
If it is not shown that the creditor has first proceeded
against the debtor, and that the debtor has failed to satisfy
his obligation, and the guarantor has raised this as a
defense, then the guarantor has complied with the first
requisite.
In the second requisite, the properties must be within the
Philippines.
If the properties are outside of the
Philippines, it would be impossible for the creditor to
proceed to such properties since the cost of going after
the same would possibly be greater than that of the
obligation.
Also, such properties must be sufficient to cover the
amount of the obligation. It must also be available,
meaning it is not subject to any lien or encumbrance.
BITANGA vs PYRAMID
Q. Can we say that even if the benefit of excussion was raised
as a defense, it was not anymore entitled to such benefit? Is
2059 applicable?
A. Yes, in the 5th instance [in Article 2059] If it may be
presumed that an execution on the property of the principal
debtor would not result in the satisfaction of the obligation.
Here there is a contract of guaranty. Petitioner Bitanga

himself cannot avail of the benefit of excussion even he is
a guarantor. First, Article 2060 is applicable. The
guarantor 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. Here
GUARANTY TO PLEDGE
despite having been served of a demand letter, Bitanga
failed to point out properties of Macrogen Realty. Such
failure forecloses his right to set up the defense of
excussion. Even if he was the one who pointed out such
amount, look at Article 2059, such defense is not available
anymore when it is presumed that an execution on the
property of the principal debtor would not result in the
satisfaction of the obligation.
JN DEVT vs PHIL. EXPORT
Q. What was the role here of Phil Guaratee?
A. It is the guarantor of JN Devt for the credit line extended
by Traders Royal Bank (TRB).
Q. If you look at the facts of this case, it is Phil Guarantee
who sued JN Devt, who is the principal debtor. What is then
the basis of the action of Phil Guarantee against JN Devt?
A. For the payment [of JN] of what it[Phil Guarantee] has paid
to TRB by virtue of the guaranty executed in favor of JN.
Q. What are the reasons why JN Devt refuse to pay Phil
Guarantee?
A. One of the reasons alleged by JN was that Phil Guarantee
has no more obligation to pay TRB since the contract of
guaranty has already expired. Here the guaranty was only up
to December 17, 1980 but the payment made by Phil
Guarantee was made after the expiration of the contract of
guaranty.
Q. Was that defense upheld by the SC?
A. No.
Q. What about the allegation raised by JN that Phil Guarantee
have raised the benefit of excussion?
A. SC said that this excussion is a right personal only to Phil
Guarantee and it may waive it. JN therefore cannot (exercise)
Phil Guarantees option to waive such benefit.
Q. Can Phil Guarantee still seek for reimbursement of what it
has paid to TRB even if the property of JN was already
foreclosed?
A. Yes, here, notice of payment by Phil Guarantee [to TRB]
was given to JN. So JN should have filed motion to stop the
foreclosure, in order to prevent the double payment.
Q. With the foreclosure of JNs property by TRB, and the
payment made by Phil Guarantee to TRB, what is then the
remedy available to JN Devt?
A. Run after the creditor, TRB.
While it is true that generally such benefit of excussion is

applicable to a guarantor, nothing prevents him from
paying the obligation when a demand is made on him.
Excussion after all is a right granted to him by law and as
such he may opt to use it or to waive it. As in this case,
Phil Guarantees waiver of the right of excussion does not
prevent him from seeking reimbursement to JN. The law
requires the debtor to indemnify the guarantor what the
latter has paid. With regard to the fact that the guarantor
has paid after the expiration of the contract of guaranty,
again what is controlling is that default or demand has
taken place while the guaranty was still in force.
Also, with respect to the foreclosure, it was made on
August 1993 after the case was submitted for decision in
1992 and before the issuance of the decision of the court
in 1998. Such foreclosure was resorted to by TRB when
both had become aware that Phil Guarantee had already
paid, and that there was already a case filed by Phil
Guarantee against [JN]. In other words, there was already
notice of such payment. Phil Guarantee therefore has a
right to demand reimbursement. JN on the other hand
should go after TRB for the foreclosure but not against
Phil Guarantee.
Again a guarantor has a right to seek for reimbursement
for whatever amount it paid to TRB because it had clearly
benefited JN.

CREDIT TRANSACTIONS
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.
Who is at fault here in Article 2061? The creditor.
The creditor fails to proceed against the property of the
principal debtor and it proceeded against the guarantor.
And the guarantor as provided under 2060 was able to set
up the benefit of excussion and pointed out to the creditor
properties of the debtor that are sufficient and available in
the Philippines to cover such obligation. However, even
after compliance by the guarantor [under 2060], the
creditor, despite such knowledge, fails to proceed against
the properties of the debtor. What happens thereafter?
The principal debtor becomes insolvent. Now can the
creditor go after the guarantor? NOT ANYMORE. The
creditor cannot anymore proceed against the properties
of the debtor or even if the debtor still has some properties
but becomes insolvent.
But what is the effect as to obligation of the guarantor?
The creditor who is negligent, or did not make action, shall
suffer the loss provided that the guarantor has complied
with the conditions as provided under 2060.
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.
If the creditor files an action for collection, it must be made
first against the principal debtor. But there is no legal
impediment if the creditor includes the guarantor in the
action. As mentioned, it would be a permissive joinder of
parties wherein the cause of action or transaction arose
out of the same proceeding. So even if the guarantor is
impleaded in the proceeding as a co-defendant, as long
as the conditions set forth under Article 2060 is complied
with (raise as defense, point out properties) the benefit of
excussion is not deemed waived.
While the creditor can proceed against the property of the
debtor, it is only when the debtor cannot pay his obligation
can the creditor go after the guarantor. In 2062, if the
creditor files an action against the principal debtor, then
the court shall notify the guarantor if such action. Of
course, the creditor shall move to ask the court to notify
the guarantor of such action.
Once the guarantor is notified, he may appear in the
proceedings. Take note of the word may, meaning it is
not required. But also do take note of the effect. If he
appears in the case, the guarantor can set up the
defenses which are otherwise available to the principal
debtor. Examplesthat the obligation has already
prescribed, or that there was already partial payment, or
it is null and void because there is no consideration.
These are the same defenses that can be raised by the
guarantor once he is notified and appeared in the same
case. If these defenses are successfully proven, then the
principal debtor would not be made liable at the same
time, also the guarantor.
It is also possible that the creditor files a case against the
principal debtor but the guarantor was not notified.
Nevertheless, the guarantor voluntarily appears in the
GUARANTY TO PLEDGE
case. Now he can still raise the defense of the benefit of
excussion but the creditor must first go after the properties
of the debtor first.
What if after notice, the guarantor does not appear? Take
note that 2062 uses the word may, meaning it is
permissive. He may or he may not. But if he does not
appear despite such notice he cannot set up the defenses
that are allowed to him under the law. And it would no
longer be possible for him to question the validity of the
decision or judgment against the debtor.
Can the guarantor be sued alone? NO. The creditor must
go first against the principal debtor.
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.
We have here a compromise agreement. Review under
Article 2028:
Article 2028. A compromise is a contract whereby the
parties, by making reciprocal concessions, avoid a
litigation or put an end to one already commenced.
Here there is a reciprocal concession, give and take []
situation for both parties so they do not go to further
litigation. We already know that it is a preferred mode
since if you go to a litigation you will incur more expenses
and time.
But what if there is a litigation and there is a compromise.
Obviously it is binding to the guarantor if such
compromise benefits the guarantor even if the same is
without the consent of the latter.
Lets say the total obligation is 100,000. They entered into
a compromise agreement that only 70,000 be paid after
the execution of the compromise agreement. What if
despite the compromise agreement with approval from
the court the debtor still fails to pay the agreement, then
the guarantor would become liable but only up to the
extent of the compromise agreement. If the debtor pays
the obligation is deemed extinguished.
Now what if they agreed that the obligation will be more
than the amount of the original obligation, say instead of
100,000 they agreed to pay 120,000 to be paid at the end
of the year. But in this case the guarantor will be
prejudiced because there is an increase in the obligation.
Hence such increase will not be applied to the guarantor.
You cannot compel the guarantor to guaranty more than
what was originally stipulated; UNLESS the guarantor
consents to such increase in the compromise agreement.
Compromise between the creditor and the debtor will
benefit but should not prejudice the guarantor. The
compromise between the creditor and the guarantor will
benefit but will not prejudice the principal debtor.
Article 2064. The guarantor of a guarantor shall enjoy
the benefit of excussion, both with respect to the
guarantor and to the principal debtor.
This is the concept of double guaranty or subguaranty.
We have the creditor, the debtor, the guarantor and the
subguarator who guarantees the obligation of the first
guarantor. We all know that the first guarantor is entitled
to the benefit of excussion. In the same manner the
subguarantor is also entitled to the same benefit. All the
properties of the debtor and the first guarantor must first
be exhausted before the creditor can go against the
subguarantor.

CREDIT TRANSACTIONS
GUARANTY TO PLEDGE
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.
Compania assured the performance of any amount

beyond 3, 000 not to exceed 5,000 pesos. While it is true
that you have several sureties in this case, you do not
have one obligation. They do not guarantee the same
debt--- Provident covering the first 3,000 and Manila on
the obligation exceeding 3,000 but not more than 5,000.
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.
So the benefit of division cannot be expressly renounced.

Its either benefit of division or solidary liability by express
stipulation. It is not required however that the guarantor
point out properties of its co-guarantors. The pointing out
of properties is only in relation to the guarantor pointing
out the properties of the principal debtor.
Here we have the BENEFIT OF DIVISION. So we have

here the creditor, the debtor and several guarantors. We
can relate this to the previous case, the one with solidary
guaranty wherein several guarantors expressly stipulated
that they are solidarily bound to the obligation of the
debtor.
In the benefit of division, if the total obligation of the debtor
is 120,000 and the creditor exhausted the properties of
the debtor but fails to satisfy the same to the obligation,
then the creditor can collect from the guarantors. But up
to what amount? You apply it with the concept of joint
obligationthere are as many debts as there are debtors.
For the 120,000, if there are 3 guarantors, then each is
compelled to pay only up to 40, 000. But if guarantor 1
has a lot of money, he can pay the whole obligation with
a right of reimbursement.
The creditor here cannot proceed for the entire amount
against any of the guarantors because of the benefit of
division unless solidary liability has been expressly
stipulated.
Remember the case of Prudential Bank (the solidarity
clause), in that case solidarity was between the
guarantors; if it is present then the creditor can go against
a guarantor the whole amount of the obligation.
Distinguish it with a person who solidarily binds himself to
pay the obligation of the principal debtor.
The case of Mira Hermanos vs Manila:
MIRA HERMANOS vs MANILA
Q. What was the basis of the 60/40 ratio defense raised by
Provident Insurance?
A. Based on the amount of the bond.
Q. Was it proper that what was paid was only 60% of the total
amount due?
A. NO. The Court cited Article 1837 of the civil code which
provides:
Article 1837. Should there be several sureties of only one
debtor for the same debt, the liability therefor shall be divided
among them all. The creditor can claim from each surety only
his proportional part unless liability in solidum has been
expressly stipulated.
The right to the benefit of division against the co-sureties for
their respective shares ceases in the same cases and for the
same reason as that to an exhaustion of property against the
principal debtor.
Q: In other words, this is the benefit of division under 2065,
can we apply this in this case?
A. No (different obligation)
Notice the requirements to benefit of division:

1. One obligation
2. One debtor
3. One creditor
4. Several guarantors/sureties (as in this case)
However in this case there are several sureties, so the
benefit if division is not applicable because the
surety/bond made by Provident Insurance covered only
the first 3,000 obligation. On the other hand, Manila
Article 2066. The guarantor who pays for a debtor must

be indemnified by the latter.
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.
Article 2066 refers to the rights of the guarantors. These
rights are available only to the guarantors who paid. Do
remember that the contract of guaranty is a contract of
indemnity; in other words, the guarantor recovers what he
had paid. One cannot be indemnified of something he did
not pay. Indemnity here essentially refers to
reimbursement. That is the concept of contract of
guaranty with respect to the right of the guarantor to seek
reimbursement or indemnity as against the principal
debtor.
What can you recover from the principal debtor? The total
amount of the debt. This is the amount paid by the
guarantor to the creditor [with] legal interest from the time
payment was made to the creditor even though it did not
earn interest. So even if the guarantor did not pay interest
to the creditor, (creditor did not collect the interest at the
time of payment) but after the guarantor paid the credit
and notified the debtor nevertheless despite notification
the debtor did not pay in which case the debtor is
considered in default or legal delay where there will be
liability for legal interest. Legal interest shall now accrue
in favor of the guarantor from the time of default. The
basis here is that had the guarantor did not pay the
creditor, he could have made use of the money [for some
other benefit or purpose] as it could have benefit some
other person or use such money for some particular
period of time. So the interest here is from the time of
notice to the debtor up to the time of payment; so from the
tie demand is made to the debtor until the time payment
of the debtor to the guarantor even if the guarantor did not
pay such interest to the creditor.
We also have expenses. Assuming that in paying the
obligation the guarantor borrowed money to pay the
creditor, then notified the debtor to pay him because he
only borrowed the money to pay to the principal creditor
and that such contract of loan was subject to interest.
Even with that interest it must be considered as an
expense which must be reimbursed by the debtor to the
guarantor. Other expenses for example photocopy of
docs, transportation, and the like.
Damages, so assuming you have sleepless nights,
mental anguish and the guarantor is able to testify these
instances then the guarantor may collect from the debtor
for damages.

CREDIT TRANSACTIONS
TUAZON vs MACHUCA
Q. When you say recover, do you mean reimbursement in
this case? Was the action here for reimbursement?
A. Yes.
Q. Do you have a guaranty here or a suretyship?
A. Surety
Q. Was there payment here to Manila Compania?
A. NO.
Q. But can the plaintiff recover from the principal debtor?
A. Yes. It was expressly stipulated. It was stated in the
document [which was solidarily executed by the defendant
and the Universal Trading Co.] that the defendant bound
himself to pay as soon as the latter has become bound and
liable whether or not he has actually paid.
While it is true that a contract of guaranty or suretyship is

a contract of indemnity in the sense that it can seek
reimbursement from the debtor, here even if no actual
payment has been made to the principal creditor,
remember that the debtor has bound himself to pay the
plaintiff as soon as he becomes bound and liable whether
or not he shall have actually paid. So by express
stipulation, it provides that this is not an action for
reimbursement. They can go after the debtor even if no
payment has yet been made to the creditor. In other
words, this is only an exception to the general rule that a
contract of guaranty or suretyship is a contract of
indemnity for reimbursement.
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.
Again, go back to beneficial reimbursement and
subrogation. If the guarantor guarantees the debt without
the knowledge of the debtor then there is no subrogation,
only beneficial reimbursement. The person cannot say
that he is subrogated to the rights of the creditor.
Article 2067 is applicable in the instance where the debtor
has knowledge as to the contract of guaranty. What are
the rights to which the guarantor is subrogated thereto--All the rights which the creditor had against the debtor.
For example the right to foreclose in a mortgage or
pledge, right to collect, these can be imposed by the
guarantor as against the debtor. Remember this is only
available to a guarantor who has already paid.
Example the creditor demanded from the debtor but failed
to collect so he proceeded against the guarantor. But prior
to payment the guarantor demanded that a mortgage be
foreclosed, obviously he cannot do that because the right
of subrogation can only be effective after payment [of the
guarantor] to the creditor.
If the original debt is for 200,000, and there was a
compromise between the guarantor and the creditor that
the guarantor should only pay 50,000. If that is the amount
that is paid by the guarantor, then that is the
reimbursement he can seek from the debtor. The purpose
is to prevent collusion as between the creditor and the
guarantor. Indemnify only up to the extent of what he has
paid.
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.
GUARANTY TO PLEDGE
So you have here the debtor who was not notified of the
payment made by the guarantor to the principal creditor.
The right available to the debtor if the guarantor seeks
reimbursement from him--- he may enforce all the
defenses which he could have set up against the creditor
at the time the payment was made.
So we have here a guarantor who acted as such, paid the
creditor without notifying the debtor or against the will of
the debtor. So the right of the guarantor here is limited to
beneficial reimbursement.
What is now the obligation of the guarantor? In applying
2068, beneficial reimbursement, and subrogation, it is
best that the guarantor forst notify the debtor that he is
going to pay the creditor. Because in this case the debtor
can advise him as to what extent the payment can be
made. Even if the guarantor acted as such at the time of
payment, still notification to the debtor is necessary
otherwise his right to reimbursement would only be limited
up to the extent that the debtor was benefited.
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.
Even if the obligation is not yet due, you cannot stop the
guarantor from paying the creditor. And as long as
accepted by the creditor, then the obligation will be
extinguished. But as to the right of reimbursement from
the debtor---if he paid before due date, the guarantor
cannot demand reimbursement until after expiration of the
period. The only exception is that if payment was ratified
by the debtor. So the guarantor has to wait until the debt
becomes due unless the payment made by the guarantor
before due date was ratified by the debtor himelf.
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.
This is in relation to Article 2068 in the sense that the
guarantor should first notify the debtor so that the debtor
can properly advise the guarantor regarding the
obligation. But in 2070, the situation here is that the
guarantor did not notify the debtor of the payment. Since
the debtor here has no knowledge of the payment made
by the guarantor, the debtor likewise paid to the creditor.
Hence there was a repeat payment. In this instance, the
debtor pays after the guarantor paid without the
knowledge of the former. What are the rights of the
guarantor, can it seek reimbursement from the debtor?
No. the guarantor cannot seek reimbursement from the
debtor because of the absence of advice. The remedy
then of the guarantor is to go against the creditor. Again,
no one shall be unjustly enriched at the expense of the
other. Reimbursement here would come from the creditor
and not the debtor.
Distinguish it with the case of Phil Guarantee where it paid
the bank TRB. The subsequent foreclosure by TRB in that
case was made with the knowledge (of both the debtor
and TRB) of payment by Phil Guarantee. So the debtor
here should have objected to the foreclosure. Because
there was already notice to both of them that payment
was already made.

CREDIT TRANSACTIONS
EXCEPTION: There is an exception where the guarantor
can nevertheless recover from the debtor in case of
double payment. But ALL these requisites must be
present:
1. It has to be a gratuitous guaranty.
2. That the guarantor was prevented by a fortuitous
event from notifying the principal debtor.
3. The creditor becomes insolvent. (in other words
he cannot anymore reimburse the guarantor)
In absence of any of these requisites, the guarantor
cannot proceed against the debtor--- general rule is to go
against the creditor.
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.
First thing to notice here is that this is a remedy available
to a guarantor even before payment has been made to
the creditor. The guarantor has not yet paid but he can
already proceed against the debtor. The general rule that
a contract of guaranty is a contract of indemnity, where it
is only when the guarantor has already paid the creditor
can the former seek reimbursement from the debtor. But
under 2071, the guarantor even if no payment has yet
been made can nevertheless proceed against the debtor.
Is there a contradiction here? NO, because 2071 is not a
proceeding for reimbursement.
What is the purpose of this article? To enable the
guarantor to take measures for the protection of his
interests in view of the probability that he may be called
upon to pay. What are these instances?
1. When he is sued for payment
2. The benefit of excussion will not be applied
because of debtors insolvency.
3. The debtor is now in breach of his obligation with
respect to the guarantor.
o Example there is an agreement in the
contract of guaranty that payment shall
be made at a specified period, so it
presupposes that the debtor really has to
pay upon that period. But then period has
elapsed but the debtor has not yet paid.
4. The obligation has become due and demandable
5. The general rule is after 10 years if the obligation
has no fixed period.
o But suppose the obligation has a fixed
period, then apply that period. If the
obligation cannot be performed until after
GUARANTY TO PLEDGE
10 years and they have agreed that it will
be demandable on the 11th year (after
the expiration of the contract) of course
within 10 years it cannot be enforced as
yet.
6. There are reasonable grounds to believe that the
debtor intends to abscond.
o Here intent to abscond is sufficient.
7. If the principal debtor is in imminent danger of
becoming insolvent.
o How is this shown? If there are several
attachments made by other creditors in
the properties of the debtor so there is a
probability in that case that the debtor will
become insolvent.
What is then the action under Article 2071?
1. To seek relief from the guaranty;
2. To demand another security to protect him from
the proceedings.
A contract of guaranty is executed between a guarantor
and a creditor; if the guarantor seeks relief under 2071 [to
release him from the contract guaranty], the same must
be made with the consent of the creditor.
If he files an action under 2071 to release him from the
guaranty but he cannot acquire the consent of the creditor
then he can apply the other remedy---to demand another
security to protect him from the proceedings. The
guarantor will demand, for example, that the debtor set up
a counterbond or surety to answer for whatever obligation
that the guarantor may be compelled to answer.
If there is a showing that the debtor intends to abscond,
by filing an action under 2071 then the guarantor may ask
the debtor to put up a bond in case that he will indeed
abscond and the guarantor will be made to pay.
After the action under 2071 and the guarantor pays the
creditor, he can then file a separate action for
reimbursement under 2066.
What is the difference under Arts. 2066 and 2071 (as cited
in the case of Kuenzle vs. Sunco):
1. In 2066, it provides for the enforcement of the
rights of the guarantor against the debtor after he
has paid the debt; whereas in 2071, it provides
for his protection before he has paid but after he
has become liable;
2. Art 2066 gives a right of action after payment
whereas Art 2071 gives a protective remedy
before payment;
3. Art 2066 is a substantive right while Art 2071 is in
the nature of a preliminary remedy;
4. Art 2066 gives a right of action, which, without the
provisions of the other, might be worthless; in Art
2071, the remedy seeks to obtain for the
guarantor 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. Art 2066 has no such
purpose. When the guarantors rights under this
article becomes available, he is past the point
where a preliminary protective remedy is of any
value to him.
Art 2066
provides
for
the
enforcement of the rights
of the guarantor against
the debtor after he has
paid the debt
gives a right of action after
payment
Art 2071
it
provides
for
his
protection before he has
paid but after he has
become liable
gives a protective remedy
before payment

CREDIT TRANSACTIONS
a substantive right
gives a right of action,
which,
without
the
provisions of the other,
might be worthless
GUARANTY TO PLEDGE
in the nature of a
preliminary remedy
the remedy seeks to
obtain for the guarantor
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
KUENZLE vs SUNCO
Q. What was applied here? 2071 or 2066?
A. 2071.
Q. What was the limitation?
A. Until he has satisfied or has caused for the satisfaction of
the debt, that is the time where he can actually collect.
What was referred here was 2071 (1843 in the old code)
which provides for the enforcement of the rights of the
surety protection before he has paid but after he becomes
liable.
Art 2071 provides the surety a remedy in anticipation of
payment of the debt which being due can be called upon
to pay at any time. In this connection, the only procedure
is to enforce the right by action. Sunco availed himself of
that right against the debtor by going after the properties
of the latter and such action is not considered fraudulent.
But while the surety has the right to obtain, as in this case
a favorable judgment against the principal debtor, he
ought not to be allowed to realize such judgment. In other
words, he cannot yet execute to the point of actual
collection until he has satisfied or caused to satisfy the
payment of the obligation to which he assures. Otherwise,
it will bring an opportunity for collusion between the surety
and his principal which might result to the prejudice of
other creditors.
Sunco should not execute the said judgment until he has
paid the debt to which he stands as a surety.
RECAP
We have already discussed 2071 we need to discuss the
difference between 2071 and 2066.
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.
Article 2066. The guarantor who pays for a debtor must
be indemnified by the latter.
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.
In 2071, the action is not [], because here the guarantor
has not paid yet the creditor but rather for the guarantor
in order to obtain relief of the guarantee but it must be with
the consent of the creditor or to demand security that shall
protect him from any proceedings by the creditor and from
the danger of insolvency of the debtor.
So take note between the distinctions in 2066 which is an
action for reimbursement or indemnification from 2071 or
an action to release or to demand security.
1.) In 2066 it is an action after the guarantor has
already paid and in 2071 before the guarantor
has paid but after he has become liable.
2.) In 2066, the right of action is after payment and
2071, is a protective remedy before the payment
is made by the guarantor to the creditor.
3.) In 2066 it is a substantive right while 2071 is a
preliminary remedy.
4.) In 2066 is a right of action which, without the
other, might be worthless. On the other hand
2071 seeks to obtain relief from the guarantee or
demand security to protect him.
So in Article 2071 we have there the guarantor even
before having paid will proceed against the principal
debtor.
Question: Can the article 2071 apply to a surety?
A: YES.
MANILA SURETY vs BATU
Take note Art 2071 both applies to contracts of guaranty
and surety. There is no distinction here such as in the
case 2071 is applicable to surety, the fact that under 2047
as to suretyship articles, the joint and solidary or solidary
obligations are the ones applicable to the suretyship, it
does not mean that suretyship is withdrawn from its
applicable provision of law governing guaranty. Even
before having paid, the surety may proceed against the
principal debtor to obtain relief from the guarantee or to
demand security from any proceeding by the creditor or
from the danger of insolvency of the debtor when he is
sued for payment.
It does not provide that the guarantor be sued by the
creditor for the payment of the debt simply provides that
the guarantor or surety be sued for the payment of an
amount for which the surety bond was put up to secure
for the fulfillment of the obligation undertaken by the
principal debtor.
Now, for the other paragraphs, it is clear that it is not
applicable, for paragraph 2, there is no proof that of the
defendant's insolvency, the fact that the contract was
annulled because of lack of progress is no proof of such
insolvency. Paragraph 3 is not applicable because the
defendants do not find themselves to relieve the plaintiff
from liability which expired; there is no specific provision
within which to expire. Par 4 not applicable because it
does not become demandable by reason of extinction of
the payment.
Par 5 is also not applicable because a lapse of 10 years
is not applicable to the instances herein. Paragraph 6 is
not applicable there is no reason or proof that the debtor
attempts to abscond.

CREDIT TRANSACTIONS
Par 7 does not apply no reason of becoming insolvent,
there was no proof. So just take note of the instances
where 2071 will apply and remember that it also applies
to contracts of suretyship.
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.
We have here a person who is not a party to the principal
obligation, he's not a party to the guaranty but he
nevertheless liable. Why? Because he is the one who
requested a person to become a guarantor.
Illustration
Giovanni borrowed money from Ron but let us say, here
comes Dolly, without Giovanni, goes to Jordan. Dolly
(being the one endorsing Jordan to Ron to pay) Jordan
who has the money to pay Ron but Ron will not be lent
without a guarantor/surety.
So if Jordan agrees, if the principal debtor fails to pay and
the guarantor becomes liable, take note, Dolly who is not
a party to the principal obligation, not a party to the
accessory contract of guaranty or suretyship can
nevertheless be liable as expressly stipulated in Article
2072. The third person here, Dolly, cannot make the
defense that she cannot be sued because she is not a
party to the contract. The third person here can be held
liable.
EFFECTS OF GUARANTY AS BETWEEN COGUARANTORS
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.
GUARANTY TO PLEDGE
Illustration
Let us say Julian is insolvent, so what happens to that
P120,000?
Jordan can collect 60,000 so 50/50 because they [Jordan
and Azzedine] have to shoulder the proportionate share
of Julian in their respective shares.
If Julian obtains money the two guarantors can collect
20,000 each from him.
So regarding insolvency of guarantors, we cannot use
that as a defense: Azzedine cannot say it is not my fault
Julian does not have money. So what would happen?
The co-guarantors will have to shoulder their
proportionate share.
Any of the guarantors should be insolvent, his share will
be in proportion.
However under the last paragraph, not applicable unless
the payment be made by virtue of a judicial demand or
unless the principal debtor is insolvent. In other words, for
example, Jordan can seek reimbursement from Azzedine
and/or Julian if he has paid by virtue of a judicial demand
or unless the principal debtor is insolvent.
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.
Remember under contract of guaranty, any of
defenses of the principal debtor can be made by
guarantor as against the co-guarantor who paid
obligation.
However, he cannot invoke those defenses which
purely personal to the debtor.
the
the
the
are
If the defense of Giovanni is that he is a minor or he is

insane, of course, he can refuse to pay because it is a
voidable contract. But this is a purely personal defense
which cannot be used by the co-guarantors for example
Jordan would seek reimbursement from Azzedine and
Julian.
We have here co-guarantors. There is a benefit of division

in which the creditor cannot compel the co-guarantors to
pay more than their share.
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.
Illustration
It is possible for example Jordan, who has a lot of money,
pays for the whole obligation. So for the P120,000
obligation the proportionate share is only 40,000 for each.
But upon demand from Ron, all the guarantors pay for the
P120,000.
We have the concept here of sub-guarantor before the

sub-guarantor be made to pay, exhaustion of the assets
of the debtor part of the guarantors as well and if the
guarantors is insolvent, it is as if the sub-guarantor
becomes now the guarantor as where his liability will be
replaced as to the person for whom it guarantee.
Its the same with obligation and contracts wherein all of

them are liable. Then Jordan can seek reimbursement
from Azzedine and Julian of P40,000 each. Obviously, he
has to shoulder the P40,000. So 50/50 share between
Julian [and Jordan] considering that Jordan is coguarantor as well. Remember the difference between a
surety, which can be solidarily liable to the principal debtor
to seek reimbursement from the whole amount compared
it to solidary co-guarantor, for even if they are not
solidarily bound, we have this guarantor or co-guarantor
for the whole obligation, remember to consider his share
and therefore yung proportionate share lang ang ipay
from the other.
Extinguishment of Guaranty
Article 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 obligation.
There are several modes of extinguishing obligations:
compensation, confusion, payment or performance etc.
Recall in the case of Estate of Hemandy vs Luzon
Surety where there are several debtors and previously
the surety died, his estate could nevertheless be liable to
the obligation of which he insured.
Question: what is the effect if one of them, the coguarantors, is insolvent?

CREDIT TRANSACTIONS
But what if the principal debtor dies; will it extinguish the
obligation releasing the guarantor/surety of the
obligation?
STRONGHOLD vs REPUBLIC
The death of the surety/guarantor will not extinguish the
accessory contract and also with regard to death of the
principal debtor, same, it will not also extinguish the debt
of guaranty or suretyship but take note of the distinction
here, if the principal debtor dies, the creditor can demand
performance of the obligation from the surety/guaranty to
the extent of other stipulations in their contract.
In other words, it should be instituted in the remaining
estate of the principal debtor.
When you compare it in the surety/guarantor who dies,
his estate will be liable to the principal obligation but the
limitation is up to his estate and their successors in
interest could not be held liable or in other words, they
cannot be held personally liable.
Remember that if the rights existed from the principal
obligation, if any of the modes of extinguishment is
present, then the principal obligation is extinguished as
well as the contract of guaranty/suretyship but it is
possible that the contract of guaranty/suretyship be
extinguished but the principal obligation remains.
Remember the principle: the accessory follows the
principal and not the other way.
Article 2077. If 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.
Dation of payment is a form of extinguishing an obligation
and that if the principal obligation is extinguished; the
contract of guaranty/suretyship is also extinguished.
Illustration
Giovanni borrowed money from Ron P120,000. So
Giovanni said that instead of paying cash, he has a parcel
of land.
Will that constitute dation in payment?
- Yes, the guarantors obligation will also be
extinguished but what happens if upon such dacion
en pago, Ron who received such property as a form
of payment was subsequently evicted. Why?
Because apparently Giovanni has no right with
respect to the real property and some person has a
better right over the property.
So what is the effect thereof as to the obligation of the
guaranty or surety?
Take note, the creditor is evicted because the debtor has
no right or title over the said property. Then the contract
of guaranty/suretyship is not revived, it will be considered
as extinguished. So in other words, the creditor cannot go
after the guarantor/suretyship.
So it will be the principal debtor who would be liable to the
creditor. So the principal creditor would have to take into
consideration that when he would enter into dacion en
pagohe would have to take into the possibility that he
would be evicted, but in the event that it will happen, he
can no longer go after the guaranty/suretyship
considering that the obligation of the latter has already
been extinguished by virtue of such dacion en pago. But
he can go after the principal debtor.
Take note as well that dacion en pago is different from
pactum commisorium. Pactum commisorium is automatic
GUARANTY TO PLEDGE
appropriation of property in case the principal debtor fails
for the payment of his obligation which is against public
policy and the law as well Article 2088:
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.
It is different from dacion en pago because the original
obligation is a sum of money, at the time it is due and
demandable, that would only be the time that the debtor
will offer the property as a form of payment. In fact, it will
not extinguish the obligation unless the creditor consents
because he can refuse.
So he still needs to get the consent of the creditor
because he will use a property to satisfy the monetary
obligation. Unlike in pactum commisorium, automatic
appropriationif the debtor fails to fulfill the obligation,
then it (the property) will be automatically appropriated or
will automatically belong to the creditor which again is not
a valid provision in the contract in violation of Article 2088.
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.
Illustration
You have here 3 co-guarantors and the obligation is
120,000 so by benefit of division 40,000 is the share of
each co-guarantors. If the creditor condoned 40,000 of
the obligation of one of the co-guarantor, what is the effect
to the other co-guarantors?
You cannot impose the share of the one being condoned
(co-gurantor) against the others if such condonation is
made without the consent of the other co-guarantors. So
the creditor could only collect up to their proportionate
share of 40,000 each. But if the others consented, they
are not released of their obligation because they are not
prejudiced as they consented.
So if the others consented by virtue of such condonation
in favor of one of the co-guarantors, the others respective
share of such portion is 60,000 each.
Assuming that the guaranty is solidary, you cannot seek
reimbursement from your co-guarantors as in this case.
The person compelled to pay may still recover from the
others if there is a release in favor of onethis does not
amount to release of the entire obligation but only with his
share.
So regardless if the co-guarantors are solidary or their
share is proportionate, if one of the co-guarantors is
released from his obligation, the other co-guarantor could
only be held liable for their respective shares.
Side comment: (Meaning, magiging 80,000 nlang ang
pwedeng bayaran nung other co-guarantors dito in case
solidary ung obligation and was made without the consent
of the other co-guarantors.)
Same concept applies: therefore, take note if the consent
was given or not. Of course, if it is the debtor being the
one condoned then the principal obligation is extinguished
as well as all the guarantors are also released from their
liability. (The accessory follows the principal)
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 extention
of time referred to herein.

CREDIT TRANSACTIONS
So we have here a specific provision dealing with the
extinguishment of contract of guaranty wherein there is an
extension granted to the debtor.
The guaranty is extinguished. Why? Because if you give
an extension to the principal debtor to pay his liability,
there is a possibility that he will become insolvent so such
extension would be prejudicial to the guarantor therefore
is such extension was made without the consent of the
guarantor, the latter would be released from his obligation
or the guaranty will be extinguished.
If the guarantor consented, then it will imply that the
guarantor agreed to the extension so he will not be
prejudiced and he can still be held liable despite such
extension.
There must be a specific period giving the debtor an
extension of time to pay is what is contemplated by this
provision that will extinguish the obligation of the
guarantor. The mere failure to demand payment on the
part of the creditor is not what is contemplated by this
provision that will extinguish the obligation of the guaranty
after the debt has become due.
GUARANTY TO PLEDGE
exhausted, without notifying the surety, the bank deprived
the surety of recourse against the debtor. Thats why
Article 2080 is applicable in this case, because of PNBs
neglect and consequently, the other creditors of Ataco
were able to collect. Thus, there was no more [money] for
the bank to collec, and Manila Surety was prejudiced,
thats why the surety must be released.
Because of the neglect on the part of the creditor, the
surety is released from his obligation. This is an
application of article 2080.
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 personal to the debtor.
Whatever defenses are available to the principal debtor
are available to the guarantor.
EXAMPLE: the obligation has already prescribed, and
then the guarantor can refuse to pay on the ground of
prescription.
How about if the debt is payable in installment and there

is an extension of time given to one or more installments,
but such extension will not affect the surety for the other
but what is the whole unpaid balance of the same was
extended? For example, there is an acceleration clause
failure to pay 1 or 2 installments, the whole shall become
due, the act of the creditor extending the payment without
the guarantors consent will discharge the latter from
liability. Nevertheless, an extension granted without the
consent of the guarantor but the latter himself waives
how does the guarantor waive? Payment.
Remember, we already had 2068 (defenses available to

the guarantor) and the provisions on the defenses of coguarantors.
That right can be waived in advance by the guarantor.

SPOUSES TOH vs SOLID BANK
(obtained from case digest)
The qualification made by the court in article 2056 is the

same with that of a bondsman.
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.
The Continuing Guaranty is a valid and binding contract

of petitioner-spouses as it is a public document that
enjoys the presumption of authenticity and due execution.
The foregoing extensions of the letters of credit made by
respondent Bank without observing the rigid restrictions
for exercising the privilege are not covered by the waiver
stipulated in the Continuing Guaranty. Evidently, they
constitute illicit extensions prohibited under Art. 2079 of
the Civil Code, "[a]n extension granted to the debtor by
the creditor without the consent of the guarantor
extinguishes the guaranty." This act of the Bank is not
mere failure or delay on its part to demand payment after
the debt has become due, as was the case in unpaid five
(5) letters of credit which the Bank did not extend, defer
or put off, but comprises conscious, separate and binding
agreements to extend the due date.
As a result of these illicit extensions, petitioner spouses
Luis Toh and Vicky Tan Toh are relieved of their
obligations as sureties of respondent FBPC under Art.
2079 of the Civil Code.
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 preference of the latter.
PNB vs Manila Surety
Article 2080 is applicable in this case. Here, there was an
assignment in favor of PNB to collect from the Bureau of
Public Works, the amount that the Bureau was liable to
Ataco. Because Ataco owes PNB under the letter of
credit.
Even if the assignment is considered as additional
security, the bank, by allowing the assigned funds to be
Legal and Judicial Bonds

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

as a surety. There must be a bond or undertaking which
is sufficiently secured. What happens is the person
[benefitting from the bond] must pay the bondsman
premium; sometimes in a one-time fee, sometimes
annually. Fees must be paid and the bond must be
renewed for as long as the bond is required.
For example, if the accused gives a bail bond, he must
pay for such bond. If the accused pays the premiums,
even if the accused is eventually acquitted, the can no
longer recover what they have given as a bond. However,
if the accused pays in the form of a cash bond, then he
can still recover the money in case of acquittal.
Another instance where a bond is required is in an action
from preliminary attachment.
All bonds including judicial bonds are contractual in
nature. Judicial bonds are merely a special class of
contracts of guaranty since they are given by virtue of law
or by judicial order.
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.
A bond must be given by a bondsman and if he fails to do
so, we have Article 2083. Remember that a guaranty or
surety is forms of personal security while pledge and

CREDIT TRANSACTIONS
mortgage are real securities, because properties are
involved.
The pledge or mortgage given must be sufficient to cover
or secure the obligation in lieu of a legal or judicial bond.
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.
A judicial bondsman does not have the right pertaining to
that of a guarantor. A judicial bondsman and sub-surety
are not entitled to the benefit of excussion, because their
liability is that of a surety: primary and direct.
Remember that guaranty and surety are contracts of
security which are personal since there are no properties
involved. You have a third person who is not party to the
principal obligation who acts to secure the principal
obligation.
PLEDGE
(Art 2085-2123)
Remember that pledge and mortgage are contracts of real
security. The property itself is the security and not the
promise of the owner of the property. Compare that to
guaranty and security where you only have the promise
of the guarantor and the surety. For suretyship, it is
required that the surety has sufficient property. But take
note that the property is not the security itself, but it is the
undertaking or promise of the surety to pay when the
creditor demands paymentthat is the difference
between
surety/guaranty
with
respect
to
pledge/mortgage.
Provisions common to pledge & mortgage

Article 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 pledge 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.
A pledge is a contract by virtue of which the debtor
delivers to the creditor or to a third person a movable or
document evidencing incorporeal rights for the purpose of
securing the fulfillment of a principal obligation with the
understanding that when the obligation is fulfilled, the
movable delivered or the document delivered shall be
returned with all its fruits and accessions.
If the obligation is not fulfilled, the creditor-pledgee may
move against the movable delivered or the incorporeal
right. When the principal obligation is paid, the creditorpledgee has the obligation to return the thing itself plus
accessions and accessories.
Types of Pledge:
1. Voluntary or conventional pledge
o created by agreement of the parties
2. Legal pledge
o created by operation of law.
o an example is in contract of deposit
whereby the depositary retains the thing
GUARANTY TO PLEDGE
depositedthat can be considered as a
pledge by operation of law.
Parties in a contract of pledge
1. Pledger
2. Pledgee
We have the pledgor and the pledgee. Take note that the
pledgor may not be necessarily the debtor in the principal
obligation while the pledgee is the creditor.
Characteristics of pledge
1. Pledge is a real contract.
o It is perfected by the delivery of the thing
pledged by the debtor or a third person
who is called the pledgor to the creditor
who is called the pledgee. So delivery of
the subject matter results into the
perfection of the contract of pledge.
2. Pledge is an accessory contract.
o Relate that with the first requirement
under Article 2085 which says that
they be constituted to secure the
fulfillment of a principal obligation. A
contract of pledge cannot exist on its own
and its existence depends upon the
validity of the principal obligation.
Remember that when an accessory
contract is void, it does automatically
mean that the principal is also void. But
when the principal is void, the accessory
is also void by virtue of the principle the
accessory follows the principal.
3. Pledge is a unilateral contract.
o It creates an obligation solely on the part
of the creditor to return the thing subject
thereof upon the fulfillment of the
principal obligation.
o
4. Pledge is a subsidiary contract.
o The obligation incurred does not arise
until the fulfillment of the principal
obligation which is secured.
What is the cause and consideration for a contract of
pledge? In default, it is the consideration of the principal
obligation. The money borrowed by the debtor is the
consideration. But what if the pledgor is a third person or
he is not the debtor? You cannot say that the loan or
money borrowed in the principal obligation is the
consideration. In that instance, the consideration of the
pledgor is the cost agreed upon by the debtor and pledgor
or the mere liberality of the pledgor.
Do take note that pledge is specific to movables; a thing
that can be moved from one place to another. Usually, it
involves vehicles or jewelry or even cellphones. How
about good will? It is intangible, it has no physical form.
The right of a stockholder is also not tangible. These are
incorporeal rights. So you have two types of properties
involved in pledge: movables and incorporeal rights.
Incorporeal rights refer to those that are intangible but
exist by provision of law. If the stockholder has a
certificate of stocks, he cannot say that he owns the
stocks by virtue of that paper. His share certificate is
merely an evidence of his right. In a pledge, what is
delivered is the document evidencing the incorporeal
right.
We also have a contract of antichresis. This type of
contract is also a contract of real security intended to
secure the principal obligation by subjecting to the
security the property as well as the fruits thereof.

CREDIT TRANSACTIONS
Article 2085 not only governs pledge but mortgage as
well. The key difference is that mortgage involves real
property. Under the Civil Code, the term mortgage is
most often used to refer to real estate mortgage rather
than chattel mortgage, because there are specific
provisions for chattel mortgage. Chattel mortgage
involves movable property, while real estate mortgage
involves real or immovable properties.
The purpose of mortgage is to secure the principal
obligation and if the debtor cannot fulfill his obligation, the
creditor can proceed against the property and apply the
proceeds to the payment of the obligation.
Pledge versus mortgage
(1) Pledge is constituted on movables while real
mortgage is on immovable.
(2) Mortgage has different requisites. Delivery is
essential for the validity of the pledge while
delivery is not essential in mortgage.
Again, in mortgage, delivery is not essential, in
contrast with pledge. For example, in a real
mortgage, of course you cannot deliver the parcel
of land. There is no requirement of actual
delivery.
(3) Pledge is not valid against third persons unless a
description of the thing pledged and the date of
the pledge appear in a public instrument, while
mortgage is not valid against third persons if not
registered.
Requisites of pledge/mortgage under Article 2085
(1) That they be constituted to secure the fulfillment
of a principal obligation.
- Again as an accessory contract, when the
principal is void, the accessory contract is also
void.
(2) That the pledgor or mortgagor be the absolute
owner of the thing pledged or mortgaged;
- Even if you have rights over the property because
you are the lessee, you cannot mortgage the
property because that would be considered as a
void contract. If you borrow jewelry from you
friend, and you place those properties under
pledge to another person, there is no contract of
pledge that actually arises because you are not
the owner of the movable.
The reason why ownership over the thing is essential in
pledge and mortgage is because such involves acts of
disposition. Remember what would happen if the debtor
fails to comply with his obligation, the property would be
foreclosed and sold to the highest bidder. There is an act
of disposition. The act of pledging or mortgaging is an act
of strict ownership as it does an alienation or transmission
of real rights in property.
Under the Law on Sales, the ownership is transferred
from the seller to the buyer by delivery. It could be actual
or constructive.
CALIBO vs CA
In a contract of pledge, the creditor is given the right to retain
his debtors movable property in his possession, or in that of
a third person to whom it has been delivered, until the debt is
paid.
For the contract to be valid, it is necessary that:
a. the pledge is constituted to secure the fulfillment of a
principal obligation;
(1) the pledgor be the absolute owner of the thing
pledged; and
GUARANTY TO PLEDGE
(2) the person constituting the pledge has the free
disposal of his property, and in the absence thereof,
that he be legally authorized for the purpose.
Q: You mentioned that one of the requisites is that the
personal is legally authorized, so can we not say that Mike
(the pledger) acted as an agent?
A: There is no implied agency in this case because Dr. Abella
(the owner) had no idea that Mike pledge the property. For
an agency relationship to be deemed as implied, the principal
must know that another person is acting on his behalf without
authority.
Applying the concepts in deposit, there is only a contract

of deposit between Dr. Abella (the owner) and Mike (the
borrower).
As between Dr. Abella and Calibo (the supposed
pledgee), there is no contract of pledge because it is
required that the pledgor be the absolute owner of the
thing. It was Mike who acted to secure his obligation by
delivering the tractor to Calibo. Even if there is delivery in
this case, the element of ownership is absent. There can
be no contract agency here and even implied agency is
not applicable.
Absolute ownership over the property is required for a
contract of pledge. Therefore, as a general rule, future
property cannot be the subject of a pledge or mortgage.
At the time the pledge or mortgage was entered into, there
is no property to speak of because you are talking about
future property. So while future property can be subject
matter of a contract of sale, it cannot be the subject matter
of a pledge or mortgage.
(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.
Under the last paragraph of Article 2085, it is not
necessary that it is the principal debtor who will give the
property to be pledged. It could be a third person who is
not part of the principal obligation. Going back to the case
of Calibo versus CA, it would have been valid if Dr. Abella
authorized his son Mike to deliver the tractor to Calibo to
secure the obligation of Mike. If that was the case, Mike
would have been the principal debtor and the pledgor
would have been Dr. Abella, which is valid. But that was
not the case.
A contract of pledge entered into by a pledgor who is not
the absolute owner is without legal existence. In fact, even
in registering the contract of pledge in such a case, the
contract is still void. Again it is not necessary that the
principal debtor be the pledgor or mortgagor, what is
important is the consent given to the third person who
wants to act in accordance to the intention of the owner.
The fact that the pledge was for the benefit of the third
party-pledgor will not invalidate the mortgage. So the
pledgor cannot say I did not receive anything from the
creditor because for as long as there is the consent of
the owner of the thing, there is a valid contract of pledge.
Creditor has the obligation to exercise due care by making
further inquiry and not relying solely on the representation
of the debtor. If a third person acts a as pledgor, the
creditor should check into the pledgor and make further
inquiry as to the extent of the authority given for and
behalf of the owner of the property.
The pledgor or mortgagor is not liable in case of
insufficiency of the property in covering the debt.
Remember if the pledgor is a third person and the pledge
or mortgage happens to be insufficient, the creditor
cannot go after the third person-pledgor for the
insufficiency. The deficiency shall be borne by the
principal debtor. Why? The pledgor in this instance did not
bind himself solidarily. In acting as a pledgor or

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mortgagor, he is not solidarily bound with the obligor. He
did not guarantee to pay. But he offered his property as a
security for the obligation. His liability is only to the extent
of the value of the property offered.
Again, in relation to the last paragraph of Article 2085,
remember that pledge and mortgage are strict acts of
ownership involving alienation and disposition of real right
over the property so therefore, the pledgor or mortgagor
has the capacity to dispose of the property.
When you say free disposal of the property it means that
the property is not subject to a claim of a third person. It
should not be subject to an encumbrance or a lien,
otherwise, you do not have free disposal over the
property.
If you recall your Revised Penal Code, there is that
provision that punishes those who mortgage a property
while claiming it is unencumbered, when in fact it is not:
Article 316. Other forms of swindling. - The penalty of
arresto mayor in its minimum and medium period and
a fine of not less than the value of the damage caused
and not more than three times such value, shall be
imposed upon:
1. Any person who, pretending to be owner of any real
property, shall convey, sell, encumber or mortgage the
same.
xxx
Another instance, if the property is in the custody of the
court or if there is an attachment, there is no free disposal
thereof.
As to capacity to dispose property, the person must not
be convicted of a crime with a penalty of civil interdiction.
He must also be legally authorized for that purpose, like
for example an agent authorized to pledge the property.
Another example is when the property is attached by the
court, the owner can ask the permission of the court to
pledge the property and the court may authorized the
pledge of that property. But again, the owner needs the
consent of the court.
DEVELOPMENT BANK vs PRUDENTIAL BANK
Q: There were trust receipts issued. Who was the entrustor
and who is the entrustee?
A: The entruster is Prudential Bank. The entrustee is Litex
Company.
Q: What is the obligation of the entrustee?
A: The obligation of the entrustee is to turn over to the
entruster the proceeds of the goods to the extent of the
amount owing to the entruster or as appears in the trust
receipt or the goods.
Q: So who is in possession of the property?
A: it is Litex Company.
Q: So with the nature of trust receipt transactions, is there a
chattel mortgage here?
A: Litex had neither absolute ownership, free disposal nor
the authority to freely dispose of the articles. Litex could not
have subjected them to a chattel mortgage.
GUARANTY TO PLEDGE
entruster or as appears in the trust receipt, or the
goods, documents or instruments themselves if
they are unsold or not otherwise disposed of, in
accordance with the terms and conditions
specified in the trust receipt.
So with that, the various agreements between Prudential
Bank (entruster) and Litex (entrustee) commonly
denominated as trust receipts were valid. So therefore,
the article were owned by Prudential Bank and held by
Litex in trust.
So the chattel mortgage executed by Litex in favor or
Prudential Bank is void because Article 2085 requires that
the pledgor is the absolute owner of the thing pledged or
mortgaged. The person must have the free disposal of the
property.
Litex had neither absolute ownership, free disposal nor
the authority to freely dispose of the articles. Litex could
not have subjected them to a chattel mortgage. Their
inclusion in the mortgage was void and had no legal
effect. There being no valid mortgage, there could also be
no valid foreclosure or valid auction sale. Thus, DBP
could not be considered either as a mortgagee or as a
purchaser in good faith.
It is important for a mortgagee to check into the title or the
right of the mortgagor over the property subjected to the
pledge or mortgage. What happened in this case? Instead
of benefitting, DBP even became liable to Prudential
Bank.
CAVITE DEVELOPMENT BANK vs SPS LIM
Q: In a contract of sale, when is it required that the seller own
the property?
A: At the time of delivery
Q: But in this case, do they have to wait for the delivery in
order for there to be a valid contract of mortgage?
A: Yes.
Q: Is it possible for a contract of pledge or mortgage even if
the pledgor or mortgagor is not the owner?
A: No.
Q: Who was the owner at the time of the mortgage and who
was the mortgagor?
A: Spouses Lim were the owner and Rodolfo Guansing was
the mortgagor.
Q: One of the contentions of the bank here is they are
mortgagees in good faith is that upheld by the court?
A: No. We are not convinced, however, that under the
circumstances of this case, CDB can be considered a
mortgagee in good faith. While petitioners are not expected
to conduct an exhaustive investigation on the history of the
mortgagor's title, they cannot be excused from the duty of
exercising the due diligence required of banking institutions.
Q: What should have the bank done?
A: The self-executed deed should have placed CDB on guard
against any possible defect in or question as to the
mortgagor's title.
Q: Who discovered that it was the father who actually owned
the property?
A: It was Lim who discovered.
In a trust receipt transaction, the goods are released by

the entruster (who owns or holds absolute title or security
interests over the said goods) to the entrustee on the
latters execution and delivery to the entruster of a trust
receipt.
So in this case it was not even the bank who discovered

the fraud. Again it is required that at the time of the
mortgage the mortgagor is the owner of the property.
Take note of the two-fold obligation of the entrustee:

1. to hold the designated goods, documents or
instruments in trust for the purpose of selling or
otherwise disposing of them and
2. to turn over to the entruster either the proceeds
thereof to the extent of the amount owing to the
A foreclosure sale, though essentially a "forced sale," is

still a sale in accordance with Art. 1458 of the Civil Code,
under which the mortgagor in default, the forced seller,
becomes obliged to transfer the ownership of the thing
sold to the highest bidder who, in turn, is obliged to pay
therefor the bid price in money or its equivalent. Being a

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GUARANTY TO PLEDGE
sale, the rule that the seller must be the owner of the thing
sold also applies in a foreclosure sale.
surrender of the premises. The alienation via dacion en pago

was made by Asiancars to MBTC was valid.
In sale, there must be ownership at the time of the delivery

and not at the time of perfection. In fact, if there is an
ownership requirement, it must be at the time of delivery.
But here in foreclosure sale, at the time the sale is
executed, at the time that the pledge or mortgage is
perfected, the pledgor or mortgagor must be the owners,
in anticipation of a possible foreclosure sale.
So this time, Metrobank is a mortgagee in good faith. The

spouses Jayme are not the debtors, they are the ones
who executed the real estate mortgage to secure the debt
of the principal debtor, Asian Cars, with respect to debt
owed to Metrobank.
There is, however, a situation where, despite the fact that

the mortgagor is not the owner of the mortgaged property,
his title being fraudulent, the mortgage contract and any
foreclosure sale arising therefrom are given effect by
reason of public policy. This is the doctrine of "the
mortgagee in good faith" based on the rule that all
persons dealing with property covered by a Torrens
Certificate of Title, as buyers or mortgagees, are not
required to go beyond what appears on the face of the
title.
This was the defense used by the bank but the court
nevertheless ruled that while petitioners [Cavite
Development] are not expected to conduct an exhaustive
investigation on the history of the mortgagor's title, they
cannot be excused from the duty of exercising the due
diligence required of banking institutions.
It is standard practice for banks, before approving a loan,
to send representatives to the premises of the land
offered as collateral and to investigate who are real
owners thereof, noting that banks are expected to
exercise more care and prudence than private individuals.
In this case, it was private individuals who discovered
that Rodolfo was not the owner of the property. There is
no evidence that CDB observed its duty of diligence in
ascertaining the validity of Rodolfo Guansing's title. In
fact, Cavite Development admits that they are aware that
the subject land was being occupied by persons other
than Rodolfo Guansing and that said persons, who are
the heirs of Perfecto Guansing, contest the title of
Rodolfo.
So, in other words, the bank cannot be considered a
mortgagee in good faith.
Also take note that the mortgagee or pledgee does not
automatically become the owner of the property at the
time the obligation goes unfulfilled. The remedy here of
the mortagee or pledgee here is to have the property sold
in public auction and have the proceeds thereof applied
to the obligation secured by the mortgage or pledge.
VDA DE JAYME vs CA
Q: What is the effect of dacion en pago.
A: The ownership of the property is transferred to the creditor
as a form of payment.
Q: Who file the case for the real estate mortgage?
A: Spouses Jayme
Q: How about the contention that the mortgage was invalid
because consent was vitiated, was that accepted by the
Supreme Court?
A: No. With the assistance of a lawyer and consultation with
their literate children, the spouses though illiterate could not
feign ignorance of the stipulations in the deed.
Q: How about the condition that they agreed where the
proceeds for the loan will be for the construction of a building
which, upon the termination of the lease, shall automatically
become the property of the Jayme spouses?
A: The alienation of the building by Asiancars in favor of
Metrobank for the partial satisfaction of its indebtedness is
also valid. The ownership of the building had been effectively
in the name of the lessee-mortgagor (Asiancars), though with
the provision that said ownership be transferred to the
Jaymes upon termination of the lease or the voluntary
The heirs of Jayme failed to show proof that there was

vitiated consent and that is why the mortgage was upheld.
All requisites of Article 2085 are present in this case.
Now with regard to the agreement between Asian Cars
and De Jayme, about the condition that they agreed
where the proceeds for the loan will be for the
construction of a building which, upon the termination of
the lease, shall automatically become the property of the
Jayme spouses, the Supreme Court said that such
condition cannot affect the right of Asian Cars to execute
a dacion en pago. Now also, that stipulation does not bind
Metrobank and Metrobank is considered a purchaser in
good faith. Metrobank was charged with constructive
knowledge only of the fact of lease of the land and not of
the specific provision stipulating transfer of ownership of
the building to the Jaymes upon termination of the
lease. There was no annotation on the title of any
encumbrance.
Article 2086. The provisions of Article 2052 are
applicable to a pledge or mortgage.
obligation.
obligation.
In this case we have an accessory obligation but the
principal obligation must be valid. But even if we have a
natural principal obligation or a principal obligation which
is voidable or unenforceable, these are still valid
contracts. When a contract is voidable it is valid until
annulled. A natural obligation can be enforced as long as
there is voluntarily performance by the debtor. However,
once there has been performance the debtor cannot
anymore demand the return what has been voluntarily
delivered.
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.
The pledge or mortgage may be alienated for the payment
to the creditor but it does not mean that the mortgagee
pledgee appropriates the thing. He cannot appropriate
the thing in case the debtor cannot pay. The remedy here
is to alienate the thing for the payment of the obligation.
In other words, to foreclose the property, sell it at a public
auction and it is sold to the highest bidder. The proceeds
thereof may be applied to the obligation.
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.
This refers to pactum commissorium which is a stipulation
which is not valid for being contrary to law, xxx and also
contrary to good morals and public policy.
HECHANOVA vs ADIL
Q: Was there a valid mortgage here?

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GUARANTY TO PLEDGE
A: No because it was only embodied in a private instrument

and was not registered.
understood that the house and lot be considered as

absolutely sold to the plaintiff.
The case was for the annulment of the deed of sale and
the evidence to question the execution of the private
document which was the basis of the sale. They could
redeem the said property with a stipulation that in case
they cannot redeem the said property they shall become
the sole owner thereof. In this case there is a contract of
mortgage. In order for a contract of mortgage to be valid
one must conform to the requisites not just of article 2085
but also the subsequent articles.
So the sum loaned shall be considered as a consideration

for the contract of sale. the supreme court held that If the
promise of sale is not vitiated because, according to the
agreement between the parties thereto, the price of the
same is to be the amount loaned and not repaid, neither
would the loan be null or illegal, for the reason that the
added agreement provides that in the event of failure of
payment the sale of property as agreed will take effect,
the consideration being the amount loaned and not paid.
In this case there is no contract of mortgage constituted

because what we have here is only a private document
and it was not registered. As to the mortgagor and
mortgagee, the contract of mortgage is valid but it is not
binding to third persons.
The mortgaged in favor of the creditor, because in order

to constitute a valid mortgage it is indispensable that the
instrument be registered said document is not vested with
the character and conditions of a public instrument.
Moreover, it contains a pactum commissorium stipulation

which is clearly, under article 2088, null and void. Even if
assuming that there is a valid mortgage, there is no
automatic appropriation of the property because the
remedy here is to foreclose the mortgage.
Said property cannot be pledged because it is not a

personal property. No antichresis by reason of the
contract of loan in as much as the creditor plaintiff has
never been in possession thereof nor could he enjoy said
property or receive its rent because in antichresis the
creditor has the right to enjoy the fruits and apply it to the
principal obligation.
Pactum commissorium is not just applicable to mortgage

but also to a contract of pledge.
Article 2088 is in relation to Article 2087 because in 2087
you cannot appropriate the thing pledged but it may be
alienated for the payment of the principal obligation. This
pactum commissorium is a stipulation for automatic
appropriation of the thing pledged or mortgaged.
This is null and void because this is contrary to law, public
order and public policy. The reason is that usually the
amount involved in the principal obligation is less that the
real value or fair market value of the thing subject to the
pledge or mortgage and therefore if the law would allow
this stipulation it would be very unfair to the debtor.
So here, the remedy is to foreclose the mortgage even if
the mortgagor waives his right thereto. Even if he
voluntarily agrees to such pactum commissorium
stipulation, that is not allowed as provided under article
2088 and is therefore null and void.
If the debtor cannot pay, the property shall be foreclosed
and the proceeds shall be applied to the principal
obligation. Although later at the public auction, the
mortgagee can be one of the bidders. He can purchase
the property. That is valid because there is no automatic
appropriation
which
would
constitute
pactum
commissorium.
ALCANTARA vs ALINEA
Q: Do we have an automatic appropriation here which would
constitute pactum commissorium?
A: No. there is no stipulation in the contract for automatic
appropriation.
Q: what are the requisites for a stipulation to be considered
as pactum commissorium?
A: there should be a pledge mortgage or antichresis of
property and there should be a stipulation for an automatic
appropriation of the property case of default or nonpayment.
Q: what is an antichresis?
A: 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. In other
words it is an accessory obligation.
The Supreme Court held that the contract of loan and a

promise of sale of a house, here there was an agreement
that the house shall be payable xxx under the agreement
that upon the expiration, the amount not being paid, it is
One of the requisites of pactum commissorium is that

there should be a valid contract of pledge mortgage
otherwise there is no pactum commissorium. In this case
the contract was held to be a loan with a promise of a sale
which was held to be valid.
UY TONG vs CA
Q: Do we have a pactum commisorium here?
A: No. the contract here is a contract of sale and not a
contract of pledge or mortgage and there is no automatic
appropriation here.
Clearly, there was no automatic vesting of title on

BAYANIHAN because it took the intervention of the trial
court to exact fulfillment of the obligation, which, by its
very nature is ". .anathema to the concept of pacto
commissorio. In pactum commissorium there is
automatic appropriation in case of default.
This case emphasized the elements of a pactum
commisorium:
(1) there should be a pledge mortgage or antichresis
of property by way of security for the payment of
the principal obligation and
(2) there should be a stipulation for an automatic
appropriation by the creditor of the property in the
event of nonpayment of the obligation within the
stipulated period.
Both of these requisites are not present in this case.
Therefore, no indication of any mortgage entered; no case
of automatic appropriation and therefore Bayanihan has
a right over the said property.
The main reason why Bayanihan was considered to be
owner of the subject property is because there was no
pactum commissorium or automatic appropriation. In the
case of Alcantara, the basis for the judgment of the court
is that there was no mortgage or sale executed.
Always take into consideration the intention of the parties.
Because it is possible (related to article 1602 equitable
mortgage in a contract of sale) that the parties signed a
contract of sale but if you could show that it was intended
as a security for an obligation so it is an equitable
mortgage and not a sale.
In Alcantara there was a loan and promise of sale. But if
it was shown that it was intended to secure a principal

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GUARANTY TO PLEDGE
obligation, the Supreme Court may possibly rule that

there is a pactum commissorium here.
SPS ONG vs ROBAN LENDING
The intention of the parties must be taken into

consideration. If the contract, regardless of its
nomenclature was intended to secure the payment of that
loan, then it can be said to be a contract of equitable
mortgage and if there is a stipulation for automatic
appropriation then that would be considered as pactum
commissorium.
Be cautious in citing Alcantara vs. Alinea because aside
from being an old case, the Supreme Court is also a court
of equity in the sense that it will take into consideration
why the contract was executed. If the reason is to secure
a contract of loan then it may be constituted as pactum
commissorium.
However, despite whatever contract was entered into if
the intention is to secure the obligation, what has been
entered is an equitable mortgage.
MANILA BANKING vs TEODORO
Q: What was the subject of that deed of assignment? What
was assigned?
A: The subject of the deed of assignment was in
consideration of certain credits, loans, drafts, and other credit
obligations extended to the teodoros as security for the
payment of the said sum as well as the interest.
Q: Why is it that the execution of that deed of assignment did
not extinguish the obligation? What were assigned?
A: The receivables were assigned. The assignment could
not extinguish the obligation since when the deed of
assignment was executed, the promissory notes did not yet
exist.
Q: In other words, there was no extinguishment of a debt or
obligation, what we have there is the assignment of a right
the right to collect. Was there dacion en pago here?
A: No. because there was no transfer of ownership from the
Teodoros to Manila Banking
Q: Can you say we have here a pledge or mortgage?
A: Yes in the sense that if the promissory note is not paid the
receivables will be collected by Manila bank, thereafter there
will be an extinguishment of the loans and not at the time of
the assignment.
The assignment of the receivables did not result in the xxx

of the transaction. It cannot be constituted to be dacion en
pago which would extinguish the obligation. A demand
that a deed of assignment would be executed, said loans
not being released yet, and therefore what we have here
is the assignment of the right to collect the said
receivables. At most it may be dacion in payment for P
10,000. But at the time the assignment was executed
there was no obligation to be extinguished in the debt of
P10,000.
In case of doubt as to whether we have a pledge or dacion
in payment, presumption is in favor of pledge the latter
being the lesser transmission of rights and interests.
The obligation of appellants under the promissory notes
not having been released by the assignment of
receivables, appellants remain as the principal debtors of
appellee bank rather than mere guarantors. It is of course
of the essence of a contract of pledge or mortgage 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. In that case we could say
that there is credit.
There could be no dacion en pago; no transfer of
ownership and therefore no extinguishment of obligation.
Q: What was really the intention of the parties?

A: The parties entered into the agreement that after one year
if spouses ong cannot fulfill their obligation, Roban can xxx
into dacion en pago and thus automatically transfers
ownership in its favor.
Here there is a partial circumvention. Go back to the

intention of the parties. In the case at bar, the
Memorandum of Agreement and the Dacion in Payment
contain no provisions for foreclosure proceedings nor
redemption.
Under the Memorandum of Agreement, the failure by the
petitioners to pay their debt within the one-year period
gives respondent the right to enforce the Dacion in
Payment transferring to it ownership of the properties.
Respondent, in effect, automatically acquires ownership
of the properties upon petitioners' failure to pay their debt
within the stipulated period. So therefore this is not
dacion en pago.
After they executed the agreement, they were made to
execute a promissory note. This shows that there was no
dacion en pago because the purpose of dacion en pago
is to extinguish an obligation. So here the alienation of the
property was by way of security and not by way of
extinguishing a debt. The dacion in payment did not
extinguish petitioners debt to respondent. So with that,
pactum commissorium is present
Dacion en pago
stipulation under Article
1235 of the New Civil
Code
property is alienated to
the creditor in the
payment of the debt.
It is a simple money
obligation
maybe
a
contract of loan but not
necessarily a contract of
mortgage, pledge or
antichresis
No
automatic
appropriation.
Pactum Commissorium
null and void under Article
2088.
If the debtor cannot pay

the creditor has other
remedies because for
dacion en pago to
extinguish the obligation
they still have to get the
consent of the debtor
The
property
upon
nonpayment
of
the
obligation
automatically
transfer to the creditor
a contract, of pledge,
mortgage or antichresis
There
is
automatic
appropriation of the subject
matter.
Creditor has no right over

the property; he cannot
just
foreclose
the
property.
There has to be a sale so
that the property of the
debtor can be transferred
to the creditor.
Even if there is a stipulation of pactum commissorium that

stipulation is void even if voluntarily agreed upon. The
pledge or mortgage may still be considered as valid. What
is void is that stipulation allowing automatic appropriation.
So as long as the pledge or mortgage is made under the
requirements of the law they can still be enforced. What
is void is merely the automatic forfeiture of the property in

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GUARANTY TO PLEDGE
favor of the creditor. The remedy therefore is to foreclose

the property.
indivisible, the debtors may still be considered jointly

liable.
So under Art 2089 do take note that the contract of pledge

with REM are indivisible contracts. So what do we mean
by that?
Illustration
Let us say the debtor A B C and D who borrowed money
from X in the amount of 100,000. In the absence of any
stipulation, the debtors here will be jointly liable. But to
secure, A executed a REM. Even if A pays his
proportionate share of 25,000, he cannot seek the release
the REM whether partially or wholly. Again indivisibility of
the mortgage will not affect the joint liability of the debtors.
Even if there has been partial payment it does not mean

that the mortgage may be partially released.
Example
A borrowed money from B for 100k. Now A executed a
REM and told B that I will make a partial payment of
25,000. Remember under Obligations and Contracts, you
cannot compel the creditor to accept partial payment.
But if for example, B accepts the partial payment of 25k
take note it will not release the REM even 25% thereof
because a REM is indivisible.
It also mean that for example A dies (let has say his heirs
are W X Y Z) and the property owned by A was subject to
mortgage. Now in a mortgage there is no transfer, so
essentially A dies then the heirs have a right over the
property even though it is subject to REM
Now W paid his share proportionate to the amount 25k.
just the same he cannot seek release of this REM even of
its 25%. It will only be released upon the full payment of
the obligation.
What will just happen is that if the remaining balance will
not be paid like the 75%, then the mortgage may be
foreclosed then the proceeds will be applied to the
obligation. Then if there is excess, generally it will be
returned to the debtor. In this case since W paid, it will go
to him.
Let us say it is the creditor who dies and we have here a
REM. When B dies (let us say his heirs are Y and G) if A
pays partially to Y his share 50k and Y accepts just the
same, A cannot seek release even partially of the REM
because mortgage is an indivisible contract.
Now with regard to pledge: let us say you borrowed
100,000 and as a form of security you delivered a
personal property iPhone 6 which is worth 60,000. Then
the creditor will say that the security is not enough, a pair
of earrings worth 40,000 may be added as security. Then
the loan was released and the items are the security. So
let us say you paid the amount of 60,000 can you demand
the release of the iPhone 6? No because again pledge is
indivisible.
Now its a different thing if you have different or separate
obligations wherein it is secured by different subject
matter. Let us say the debtor borrowed 60,000 then
delivered the iPhone. He borrowed again 40,000 and
delivered as a security the pair of earrings worth 40,000.
In this example, there are two different obligations. If there
is a payment of 60k, then the obligation secured by the
iPhone is deemed extinguished and the iPhone now will
be returned.
In relation thereto we have now article 2090:
Article 2090. The indivisibility of a pledge or mortgage
is not affected by the fact that the debtors are not
solidarily liable.
Again remember under Obligations and Contracts,
indivisibility is different from solidarity. When we say the
obligation is indivisible, we refer to the subject matter.
When we say solidarity this refers to the juridical tie of the
parties. It does not mean that it is solidary, it is already
indivisible or if it is divisible it is always joint. Again do not
confuse that form the other. While a pledge will always be
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.
As long as the principal obligation is valid, it can be
secured by a pledge. Obligations that are subject to
condition whether resolutory or pure principal obligation,
it can be secured by a pledge or mortgage and of course
even if we have a natural obligation.
Article 2092. A promise to constitute a pledge or
mortgage gives rise only to a personal action between
the contracting parties, without 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.
Remember that a contract of pledge is a real contract
perfected by mere delivery. Now it is possible however
there is a merely a promise to constitute pledge or
mortgage. If you give merely a promise to constitute
pledge of mort obviously you cannot foreclose the
property in case of default because what we have here is
merely a consensual contract. A promise to constitute
pledge of mort, it will still be enforceable but it is only a
personal action.
However if there has been delivery, then that is the time
he can step into foreclosure in case there is default. So a
promise to constitute pledge or mort even if accepted will
give rise to a personal right. There is a perfected
consensual contract binding upon the parties. It does not
create real right. The real right is only created upon
delivery.
However under the RPC, estafa may be committed who
pretends to be the owner of the property and conveys
sells or encumbers it knowing that it is already
encumbered and disposes the same as it were
unencumbered.
Provisions applicable only to pledge

Now let us go to the specific provisions applicable to
pledge.
Do take note this does not apply to pawnshops. There is
a special law. The civil code will not apply to pawnshops.
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.
Now if you have a contract of pledge that is now an
additional requisite to 2085.
When we say delivery here the property must be actually
delivered and must be placed in the possession of the

CREDIT TRANSACTIONS
GUARANTY TO PLEDGE
creditor. In the absence of delivery no contract of pledge

is perfected.
a form of security. So since that was the intention clearly they

agreed to enter in to a contract of pledge because all the
requisites are present.
MCMICKING vs MARTINEZ
Held:
This case emphasizes that a contract of pledge is a real
contract there must be delivery for its perfection.
But remember the right of Caltex cannot be enforced as a lien

against the bank because of the failure to comply with the
requisites of 2096.
What we have here is just a written contract; evidenced by a

public instrument, even if it is a public instrument you cannot
say that you have a valid contract of pledge in the absence of
delivery. Nevertheless the SC here held that since you have
this written instrument this was used as an admission of the
indebtedness but pledge was void for failure to deliver to the
creditor.
Now take note here that since it is in PI it will be a preference
over a judgment secured against the pledgor subsequent to
the date of the said PI.
Now possession, there must be delivery, there must be

actually possession. The creditor himself should have
possession. Or take note you could have a 3rd person to
hold the thing by common agreement of the parties.
General rule actual delivery. It is still possible to have a
contract of pledge if delivery is constructive as an
exception. Warehouse receipts are an example of such.
Article 2094. All movables which are within commerce

may be pledged, provided they are susceptible of
possession.
When you say pledge, it is confined and limited to
personal property, REM to real property.
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.
Warehouse receipts and similar instruments are
susceptible to pledge. For purposes of pledge, it must be
delivered to the creditor. If it is a negotiable instrument it
must be delivered and endorsed in favor of the creditor.
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.
Requirement to bind 3rd persons. Not for validity but to
bind 3rd person:
1. Description of the thing pledged
2. Date of the pledge
3. Must appear in a public instrument.
These are the additional requirements to bind 3rd persons.
It must be notarized. If not notarized, contract is valid as
long as there is delivery but it is not valid as against 3rd
persons.
CALTEX vs CA
Held:
We have certificated of time deposits and the SC held that
looking at the cert of time deposit these were held to be
negotiable instruments, as bearer instruments it can be
negotiated by delivery.
Do take note that there was a delivery of the certificates to
Caltex but SC held that this will not be a negotiation, because
this was only to guarantee the purchase of fuel products. So
there was no negotiation in the sense of a transfer of a legal
title. Because that is the intention, when you negotiation an
instrument as in this case there is an intention to transfer title
to the subsequent transferee. But again the delivery was only
PACIFIC REHOUSE vs EIB

Held:
Take note, there could have been no valid contract of pledge,
as it is required that the pledgor is the absolute owner of the
thing pledge. In this case the shares were already sold to 3 rd
parties, and therefore Pacific already lost their right of
ownership of the said shares. From the time of the complaint,
petitioners were no longer the absplute owners of the shares,
making the pledge null and void. The petioners no longer
have the predisposal of the shares for the requirements when
EIB sold such shares at the stock exchange, as they are no
longer owners of the shares. So no valid pledge constituted.
Even assuming all requisites are present for its validity, it
cannot be enforced as against 3rd persons for failure to
conform with the requirements under 2096.
Property does not satisfy description under 2096. SC held it
is vague, broad and confusing. The notice of sale is also not
in a public instrument. So it cannot be enforced as against 3rd
persons.
Now let's have Article 2097:

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.
This is very specific in a contract of pledge. Remember a
contract of pledge is merely a lien. So even if there is
delivery to the pledgee, there is no transfer of ownership.
The delivery does not disposess the pledgor of his
ownership over the thing. The pledgor still remains the
owner despite delivery to the pledgee. So if he is the
owner, of course, he has the right to alienate or sell the
thing to third persons. That is allowed under Article 2097.
Do take note that we have here that the pledgee or the
creditor must consent to the alienation. With the consent
of the pledgee, the thing may be alienated. However,
between the sale and the pledge, of course it is the pledge
that will prevail. What do we mean by that?
If subsequently the debtor has not been able to pay his
obligation, the pledgee will still be given the right to
foreclose the pledge and sell the property in a public
auction. The third person who purchased the property
from the pledgor cannot raise the defense that he is
already the owner or that he has already purchased the
property from the pledgor-owner.
Also take note here that despite the thing being in
possession of the pledgee, the ownership will still be
transmitted to the vendee. Without consent on the part of
the pledgee, while the sale may be valid (for a sale is a
consensual contract), the ownership on the part of the
third person who purchased the property will not be
transferred until there is consent on the part of the
plegdee. Ownership of the thing is transmitted as soon as
the plegdee consents. So what do we have here? This is
not actual delivery but constructive delivery as provided
for by law. Even here that the thing has already been
pledged, owner-pledgor can still sell it to third persons but
it will always be subject to the pledge. No transfer of
ownership in the absence of the consent on the part of the
pledgee. Do take note that even if the pledgee consents,
the thing still remains in the possession of the pledgee.
But again, you could say that with the consent, the third

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person becomes the owner thereof. If the debtor fails to
pay, the property will be foreclosed. The debtor may
proceed against the thing pledged and any proceeds will
be applied to the obligation. The excess will not go to the
debtor but to the real owner, as we can see in the
suceeding articleswhat would happen if in the public
auction, the puchase price is more than or less than the
obligation.
We have the case of Estate of Litton vs Mendoza. What
happened here?
GUARANTY TO PLEDGE
A pledge is a real contract, perfected by the delivery of
the thing to the pledgee. As long as the obligation or the
debt has not yet been paid, obviously, the pledgee has
the right to retain possession of the subject matter. You
distinguish it from commodatum where there is no right to
retain. And also compare it to the right to retain available
in a contract of deposit.
In pledge, once the debt has been paid, it is the obligation
of the pledgee to return the thing to the pledgor. Take
note, notwithstanding the debtor contracts another debt.
What do we mean by that?
ESTATE OF LITTON vs MENDOZA

Q: Do we have a contract of pledge here?
A: Yes.
Q: Who is the pledgor?
A: Tan.
Q: And the pledgee is?
A: Litton.
Q: What is the subject of the pledge?
A: His litigated credit.
Atty Sarona: So what we have here is an incorporeal right
covered by the credit wherein a deed of assignment was
executed. So what was the issue here?
A: Whether the compromise agreement entered into by Tan
and Mendoza was valid. And the Supreme court held no.
Although it is true that Tan may validly alienate the litigatious
credit as ruled by the appellate court, citing Article 1634 of
the Civil Code, said provision should not be taken to mean as
a grant of an absolute right on the part of the assignor Tan to
indiscriminately dispose of the thing or the right given as
security. The Court rules that the said provision should be
read in consonance with Article 2097 of the same
code. Although the pledgee or the assignee, Litton, Sr. did
not ipso facto become the creditor of private respondent
Mendoza, the pledge being valid, the incorporeal right
assigned by Tan in favor of the former can only be alienated
by the latter with due notice to and consent of Litton, Sr. 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 a
pledge or an assignment of credit. So the compromise
agreement entered into was null and void without the consent
of Litton or any of his authorized representatives.
So here the validity of the guaranty or pledge in favor of

Litton has not been questioned. Litton here was the
plegdee. The deed of assignment shows the requisites of
a valid plegde. Here you have a subject matter, an
incorporeal right, and therefore constitues as a valid
pledge. The circumstances of this case should be read in
consonance with 2097. Although the pledgee or assignee,
Litton, did not become the creditor of Mendoza, the
pledge being valid, the iincorporeal right assigned by Tan
in favor of Litton can only be alienated with due notice and
consent by 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 a pledge or asisgnment of
credit. Clearly, the respondent here was estopped in
enntering into any compromise agreement involving the
same litigated credit without notice and consent of the
assignee, Litton.
Again take note that this is very ___, typically available in
a contract of pledge. Consent is required.
Let's have Article 2098:
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.
Illustration
The debtor borrows from the creditor, let us say, P50,000
and delivers a watch subject to a pledge. Now if the debtor
borrows P20,000, and delivers a pair of earrings. If he pay
the P50,000, the debtor already has the right to demand
the return of the watch. If he already paid the second
obligation, then obviously, he will have to return the pair
of earrings.
But if he still another legal obligationsay another
P50,000which was not secured by any contract
(pledge, mortgage, or others), can the pledgee retain the
thing and say Uy, may utang ka pa sa akin. So dito muna
sa akin itong watch or earrings? Remember, if a contract
of pledge is executed, it is in relation to an existing
principal obligation. Therefore, in that circumstance, the
pledgee has the obligation to return the thing,
notwithstanding that the debtor has some other obligation
which has remained unpaid. Unless of course, the debtorpledgor agrees that the same thing may secure the other
obligation.
Again, as a plegdee, you cannot retain the thing if the
debtor transacted another debt if the principal obligation
secured by the thing pledged has already been paid
unless, the debtor-pledgor consents thereto. So the right
of retention here is limited only to the fulfillment of the
principal obligation which the pledge was created.
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.
We have here the obligation of the creditor-pledgee. What
if a watch was delivered to secure the obligation? Then
the pledgee has the obligation to take care of it with the
diligence of a good father of a family. Remember here, the
creditor-pledgee is in possession of the thing, but he
cannot be considered as the owner thereof. In other
words, he cannot make use of it in any manner that he
wants to because he is not the owner of the thing [held as
security]. Remember, the creditor still has to return the
thing pledged to the debtor once the obligation is paid.
And of course, he has the obligation to take care of it. So
when the thing is returned to the debtor, it is in the same
condition when it was delivered to him (creditor) subject
to the ordinary wear and tear under the circumstance of
each case.
If the thing requires for its preservation, expenses shall be
advanced by the pledgee, but he is entitled to
reimbursement from the pledgor-debtor.
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.

CREDIT TRANSACTIONS
Remember that the general rule here is that the pledgee
cannot deposit the thing pledged to a third person. The
Exception is that stipulated by the parties. Likewise, the
pledgee is responsible for the acts of his employees with
respect to the thing pledged because the acts of the
employees are deemed the acts of the pledgee-creditor
since they (employees) are under the supervision of the
latter (employee).
Article 2101. The pledgor has the same responsibility
as a bailor in commodatum in the case under Article
1951.
So Article 1951 states that:
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.
Here, same obligation on the part of the pledgor. If he
(pledgor) knows that the flaws of the thing pledged, and
he delivers the thing to the pledgee, he has to advise the
creditor. Otherwise, if the pledgee suffers from the
damages from the thing loaned, then the pledgor is liable
to the pledgee.
Example
What should be the example here? For example, some
appliancerefrigerator and it was delivered by the
pledgor to the pledgee for an obligation. However, there
is an electrical defect on the refrigerator and the pledgor
was aware thereof, then he must inform the pledgee.
Otherwise, if the pledgee will figure into an accident, then
there will be damages on the part of the pledgor.
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.
Again, even if there is delivery of the thing, ownership is
still not transferred. So the pledgor still owns the thing. He
still has the right to the fruits thereof. So the owner of the
thing owns the fruits thereof as well as the accessions and
accessories.
What happens to the fruits? Remember that the thing is
still with the pledgee. The pledgee may apply the interest
in payment of the loan or obligation wherein it would
reduce the obligation of the debtor. This is consistent with
the principle that in pledge, there is no transfer of
ownership. The pledgor still owns the thing and therefore,
their fruits and income has to benefit said pledgors. So it
would be applied to the payment of the debt or to the
interest or the principal debt.
If you have a pledge in the form of an animalthe subject
matter is an animal. Of course, upon delivery, the pledgor
still owns the animals. During the possession of the thing
on the part of the pledgee, what happens to the offspring?
It shall pertain to the pledgor. He will still remain the owner
of the animals and of their offsprings. But the offsprings
shall be subject to the pledge, if there is no stipulation to
the contrary. So the parties can stipulate that if the animal
delivered subject to the pledge will give birth to offspring
which are not included in the pledge, then they must
clearly stipulate that.
GUARANTY TO PLEDGE
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.
Ownership of the thing continues with the pledgor. There
is no transfer of ownership in pledge unless the thing
pledged is expropriated. So if it is expropriated, obviously,
the debtor has not owned the thing anymore. Obviously,
the pledgee could not own the thing.
The right of the pledge. Remember it is a real right
enforceable against third persons. But if there is
expropriation, the expropriation prevails.
The creditor, however, may bring actions which pertain to
the owner of the thing pledged in order to recover it from
or defend it against a third person. Here, since there is a
real right, you can enforce as a pledgeenot as an
ownerto third persons. But remember the requirements
under Article 2093that it must be in a public instrument,
the description of the thing and the date pledgedso you
can enforce your right as a pledgee as against third
persons.
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.
Again, as a x x x, it transfers to the pledgee. Nevertheless,
the general rule is that the pledgee cannot use the thing
pledged in the absence of consent or permission from the
pledgor. This is the same rule with respect to deposit
the thing cannot be borrowed by a third person. However,
if the use of the thing is allowed in a certain way, then it is
limited to that. The pledgee must use the thing in the way
agreed upon. If he uses it in a different way, then what is
the remedy here on the part of the debtor? He can
demand it be judicially or extrajudicially deposited. Take
note, he cannot demand the return of the thing to him.
Why? What is mentioned here is to be deposited,
judicially or extrajudicially. Again, when the pledgeecreditor uses the thing or he misuses the thing in any other
way. So judicial or extrajudicial deposit to a third person.
When the preservation of the thing requires its use, again,
it will only be used by the creditor for that purpose. If from
the use of the property profits are derived, therefore the
obligation here of the pledgee is to account for such fruits
and apply the proceeds as payment to be made.
So there are instances when the owners may ask the
thing be deposited judicially or extrajudicially, under
Article 2104. When the creditor uses the thing without
authority or misuses the thing in any other way different
from what was agreed upon. And when we go to 2103, if
the thing is in danger of being lost or impaired because of
the negligence or acts of the pledgee.
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.
On the part of the debtor, he cannot ask that the thing be
returned to him unless the obligation has already been
paid. Remember, this contract of pledge, it acts as a
security or a collateral to the payment of the obligation.
The only instance where the pledgor-debtor may ask for
the return of the thing is when he already paid the debt.

CREDIT TRANSACTIONS
This includes the interest and the expenses incurred for
its preservation. In any other circumstance, you can ask
for the return of the thing but you have to replace it with
another thing as we will see in the succeeding articles.
The only reason for the return of the thing is the
extinguishment of the obligation or extinguishment of the
contract of pledge. This is because in the subsequent
articles that will be discussed, if the thing pledged is found
in the possession of the pledgor after the constitution of
the pledge, there is a presumption that the pledge is
already extinguished.
Article 2106. If through the negligence or wilful 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 is another instance wherein the pledgor can require
that the thing be deposited. This is the third instance, as I
have mentioned before, in relation to Article 2104. Here,
the pledgee is negligent and by his willful act, the thing
pledged is in danger of being lost or impaired. This is in
relation to the obligation of the pledgee to preserve the
thing with the diligence of a good father of a family.
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.
Here, the pledgor has reasonable grounds to believe to
fear the destruction or impairment of the thing pledged.
Do take note that here, it is without the fault on the part of
the pledgee.
You compare with Article 2106in danger of being lost or
impaired through the willful act of the pledgee. When it is
in 2106, there is deposit, while in Art 2107, the destruction
or impairment is without the fault of the pledgee. The
pledgor here may demand the return of the thing, but is
asked to substitute the thing pledged. Again, you connect
those to the concept that the demand for the return of the
thing for which the obligation has been made.
Under Article 2107, it is not required that the pledge has
already been extinguished, what is required here is the
fear for the destruction or impairment of the thing on the
part of the pledgee. But the obligation is to offer
something in substitution and not just to return the thing
and retain the possession thereof.
Substitution must be of the same kind and not of an
inferior quality. Thus, it is allowed that the same kind or
superior kind. When there is danger of the thing, the
obligation is to advise the pledgor. Again, this is in
connection to the obligation of the pledgee to observe due
diligence of a good father of a family.
So requisites for the application of Article 2107:
1. The pledgor has reasonable grounds to fear the
destruction or impairment of the thing pledged.
2. No fault on the part of the pledgee
3. The pledgor is offerning in replacement of the
thing or matter being pledged, which is of the
same kind and not of inferior quality.
4. The pledgee does not choose to exercise his right
to cause the thing pledged to be sold in a public
auction.
GUARANTY TO PLEDGE
Where does the 4th requisite come from?
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.
The purpose of Arts 2108 and 2107 are one and the
same. In Art 2107, there is a reasonable ground of fear
for the destruction of the thing pledged, while in Art 2108,
there is danger of destruction, impairment or diminuition
of the thing pledged.
Under Art 2108, the pledgee has the right to cause the
sale or to sell the thing pledged in a public sale.
Art 2108 vs Art 2107
1. In Art 2108 there is danger of destruction,
impairment, or diminution in the value without the
fault of the pledgee. In Art 2107 there are
reasonable grounds to fear the destruction or
impairment of the thing pledged, without the fault
of the pledgee.
2. In Art 2108, the pledgee will have the right to sell
the thing pledged in a public auction; while in Art
2107, there is a right to substitute on the part of
the pledgor.
So, how do we reconcile these two articles? Notice that in
Art 2107, we have there the phrase without prejudice to
the right of the pledgee under the provisions of the
following article. The following Article is 2108. That is
why, in the requisites mentioned earlier for the application
of 2107, the fourth requisite is that the pledgee does not
choose to exercise his right to cause the thing pledged to
be sold at a public auctionthat is what is provided for
under Art 2108. That would mean that Article 2108
prevails over Article 2107. So if the thing is in danger of
destruction, impairment of the value of the thing being
pledged without the fault of the pledgee, the pledgee may
choose to sell the thing in a public auction. The proceeds
of the thing, however (and take note), will not be
considered as payment. But the proceeds from the said
sale will be considered as a security. This is because the
obligation here is not yet due.
The right to sell the property mentioned in Art 2108, in
case of destruction, impairment or diminuition of value, is
merely: MAY sell. So in other words, the pledgee may not
exercise this right if he wants to. If the pledgee does not
want to sell it in a public auction and all the other
requisites in Art 2107 are present, then that's the time that
the pledgor can demand the return of the thing provided
again, he offers a substitute. So please take note of these
two articles.
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.
So here the creditor is prejudiced, wherein he was
deceived on the substance or quality of the thing pledged.
Example
The debtor borrows money from the creditor. And as a
form of security, delivered a diamond ring. However, the
diamond on the ring is just crystal. So that is deception on
the part of the pledgor.
What are the rights here of the creditor-pledgee? He may
claim another thing in its stead or demand immediate
payment of the principal obligation wherein the obligation
becomes due and demandable. Again, the creditor here
is deceived on the substance or quality of the thing

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pledged. Remedy on the part of the creditor is that he may
demand immediate payment or claim another thing
substitute another thing that was delivered.
Relate this to Article 1198 under the Obligations and
Contracts wherein the debtor loses the right to use the
period:
Article 1198. The debtor shall lose every right to make
use of the period:
(1) When after the obligation has been contracted,
he becomes insolvent, unless he gives a
guaranty or security for the debt;
(2) When he does not furnish to the creditor the
guaranties or securities which he has
promised;
(3) When by his own acts he has impaired said
guaranties
or
securities
after
their
establishment, and when through a fortuitous
event they disappear, unless he immediately
gives new ones equally satisfactory;
(4) When the debtor violates any undertaking, in
consideration of which the creditor agreed to
the period;
(5) When the debtor attempts to abscond.
For example in a diamond ring, and what was actually
delivered was not a diamond ring but a crystal. So,
remember here that the creditor cannot yet demand the
obligation because it is not yet due. But because he was
deceived, the debtor did not deliver the security as
promised, then the obligation becomes immediately due
and demandable. The debtor loses the right to make use
of the period.
So there are two remedies here in case of deceit:
1. To claim another thing in pledge; or
2. To demand payment of the principal obligation.
These two remedies are alternative. They are not
cumulative. The creditor cannot exercise both. He (the
creditor) cannot claim another thing and at the same time
declare the obligation to be due and demandable and
demand payment from the debtor.
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.
This is what I mentioned earlier regarding the
presumption on the return of the thing. If the thing is
returned by the pledgee to the debtor, then it is
considered that the pledge has already been
extinguished. Once the thing pledged is in the possession
of the pledgor, then there is now a presumption that the
pledge is already extinguished.
The presumption in Article 2110 is not a conclusive
presumption, as evidence to the contrary may be
presented. Like for example, why is the subject matter of
the contract of pledge with the pledgor? Because he stole
it. But the presumption is that, it was returned to the
pledgor; thus extinguishing the contract of pledge. If the
pledgee says otherwise, of course, you have the burden
of proof.
GUARANTY TO PLEDGE
Any stipulation to the contrary shall be void. What does
this mean? If the thing is in the possession of the pledgorowner, and they agreed that the possession shall be with
the pledgor-owner but nevertheless the pledge still
subsists. That stipulation to the contrary is not valid.
Remember that this is with relation to the nature of the
contract of pledge wherein it is a contract perfected by
delivery. When the pledgor and the pledgee stipulate that
the thing pledged which is in the possession of the
pledgor [and that there is still a contract of pledge] will not
be considered as valid.
However, take note of what happened in the case of
Yuliongsiu vs Philippine National Bank. What happened
in this case?
YULIONGSIU vs PNB
Q: Who is the pledgor here?
A: Yuliongsiu.
Q: And the pledgee was?
A: PNB.
Q: Who was in possession of the vessels here?
A: PNB (since there was a loan obtained by Yuliongsiu from
PNB).
Q: Was there a delivery from Yuliongsiu to PNB?
A: There was a constructive delivery here ma'am.
Q: So with constructive delivery, can you say that there is a
valid contract of pledge presented?
A: Considering the circumstances of this case and the nature
of the objects pledged, i.e., vessels used in maritime
business, such delivery is sufficient. The provision of Art.
2110 of the present Civil Code being new cannot apply to
the pledge contract here which was entered into on June 30,
1947. On the other hand, there is an authority supporting the
proposition that the pledgee can temporarily entrust the
physical possession of the chattels pledged to the pledgor
without invalidating the pledge. In such a case, the pledgor is
regarded as holding the pledged property merely as trustee
for the pledgee.
Q: What if the pledge was constituted at the time when the
New Civil Code already took effect? Can we say that the
presumption is applicable here?
A: The presumption will apply. Nevertheless, it can be
overturned by the evidences presented.
Q: So what would be the evidence here that would say na
even if the vessels were in the possession of Yuliongsiu, his
obligation was not yet extinguished?
A: The defendant bank as pledgee was therefore entitled to
the actual possession of the vessels. While it is true that
plaintiff continued operating the vessels after the pledge
contract was entered into, his possession was expressly
made "subject to the order of the pledgee."
Q: In other words, in what capacity was Yuliongsiu in
possession of the said vessels?
A: He was merely a trustee.
So what you have here is an exception to the rule

provided under Article 2110, wherein the pledgor
remained in possession of the thing. Nevertheless, there
was constructive delivery when the object of pledge was
delivered. Yuliongsiu retained possession of the thing
which is not really in the concept of an owneralthough
he is still the owner. But it is in a sense that he is still under
the x x x of PNB. The defendant bank as pledgee was
therefore entitled to the actual possession of the vessels.
While it is true that plaintiff continued operating the
vessels after the pledge contract was entered into, his
possession was expressly made "subject to the order of
the pledgee." Although the Supreme Court here said that
the provision of Art. 2110 of the present Civil Code being
new cannot apply to the pledge contract here which
was entered into on June 30, 1947nevertheless, there
is an authority supporting the proposition that the pledgee
can temporarily entrust the physical possession of the

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chattels pledged to the pledgor without invalidating the
pledge. Here, the pledgor is regarded as holding the
pledged property merely as trustee for the pledgee.
Also in this case, it was emphasized that there could still
be a contract of pledge through symbolic delivery. We
have also discussed this before. Again here, for purposes
of showing the transfer of control to the pledgee, delivery
to him of the keys to the warehouse sufficed. In other
words, the type of delivery will depend upon the nature
and the peculiar circumstances of each case. Likewise we
have discussed before that the goods subject by the
pledge is covered by the warehouse receipt. The
evidence of the goods is the warehouse receipt itself,
although what was delivered was not the goods but the
warehouse receipt. Nevertheless, there is a perfected
contract of sale. So here, there is symbolic delivery.
Nevertheless, a contract of pledge is perfected.
So let's go to Article 2111:
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.
Here, while a pledge is a real right, as to the pledgee it is
a personal right which he can waive. So here, this is an
example of an extinguishment of a pledge. Take note of
the requirement: there must be a statement in writing by
the pledgee that he renounces or abandons the pledge.
There must be a statement in writing and not verbal;
otherwise, it is not valid. The statement, however, need
not be under oath. What is required under 2111 is that it
must only be in writing.
Likewise, it is not required that the pledgor be notified of
the said statement or that the pledgor must accept the
waiver made by the pledgee. What is clear under 2111 is
the requirement that the statement must be in writing and
that the pledgee abandons or renounces his plegde. But
he remains in possession of the thing.
Now what happened in the possession? There is no more
pledge but he remains in possession? He will now be
considered as a depositary. And therefore, his liability will
be subject to the obligations of the depositary in the
Articles applicable to contracts of deposit.
Do take note that Article 2111 was made only in a contract
of pledge. Unless otherwise stipulated, it only the pledge
that is extinguished which would mean that the principal
obligation still subsists. So the principal debtor will not be
affected by the waiver of the pledgee unless the pledgee
condones or renounces said principal obligation. But of
course, if it was made to the principal obligation,
automatically, the contract of pledge is likewise
extinguished.
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.
This is the procedure to be observed by the creditor if the
principal obligation has not been paid. So of course, the
requirements are to apply 2112 are:
GUARANTY TO PLEDGE
1. The obligation must be already due and
demandable.
2. The debtor has not yet paid his obligation, and
3. Thereafter, the creditor cannot sell the thing
pledged at a public auction.
4. There must be notice to the pledgor-owner
stating the amount due;
5. The sale shall be made with the intervention of a
notary public.
However, it is required that the pledgee must notify the
debtor. The claim must be made in a public auction. It is
not a private sale but a public auction in a sense that it
must be announced. So there is a bidding and it will be
awarded to the highest bidder.
Who intervene or can conduct the sale? It is clear under
2112 that you have a notary public. The sale here is
extrajudicial in nature. So the bid starts as to the amount
of the obligation. The highest bidder may be given the
thing pledged. The proceeds will be applied as payment
of the obligation. This time, the sale of the property will be
applied to the obligation. This is different from Art 2108
wherein it was sold but the proceeds will be taken as a
security. However, what happened under Art 2108, there
is danger of destruction or diminuition of value. Here, the
obligation is already due and demandable.
If in the first public auction the thing is not sold, then there
shall be a second public auction. Then if there is no
highest bid, then that is the time wherein the creditor can
apply the proceeds as payment of the obligation. Again,
do not confuse this with Article 2088 on pactum
commissorium. Because in pactum commissorium, there
is automatic appropriation, while in Article 2112, there is
no automatic appropriation because in the first place,
there has to be two public auctions. However, if there are
no highest bidders then that's the time the creditor can
appropriate it as payment of the obligation.
At first instance, you appropriate the proceedsthen
that's pactum commissorium. But as to the second sale, if
it cannot be sold, then that's the time the creditor-pledgee
may now appropriate the thing.
So what is required under Article 2112?
1. The obligation must be already due and
demandable.
2. The debtor has not yet paid his obligation, and
3. Thereafter, the creditor cannot sell the thing
pledged at a public auction.
4. There must be notice to the pledgor-owner
stating the amount due;
5. The sale shall be made with the intervention of a
notary public.
It is also clear under Article 2112 that there is no
requirement of posting of notice of sale and publication.
Notice to the pledgor and owner of the thing pledged is
sufficient.
Recap
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.
Formalities required to apply 2112:

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a. The debt is due and unpaid
b. The sale must be at a public auction
c. There must be notice to the pledger and
owner, stating the amount due;
d. The sale must be made with the intervention
of a notary public.
LIM TAY VS CA
Q: What kind of controversy or issue does SEC have
jusrisdiction over?
A: Intracoporate controversies.
Q: In this case was there an intracorporate controversy?
A: No because Lim Tay is not the part of the corporation.
Q:Why can he not be considerd as the owner?
A: Because in this case, he is a mere pledgee, and the
contract of pledge does not vest ownership over the shares
of stocks.
Q: But he remains in possession of the shares of stocks?
A: Yes.
Q: Can we not say that through prescription he is considered
as the owner of the subject shares?
A: No because for acquisitive prescription to apply, one must
be in possession in the concept of an owner. Here, he is a
mere pledgee, his possession of the stocks is in the concept
of a holder. His possession cannot ripen into ownership.
Q: What are the steps that Lim Tay should have taken so he
can own the said shares?
A: He should have foreclosed the debt and there should be a
public sale and that he bids for it. It is only then would he be
able to acquire ownership over the shares.
The dertemination of whether or not Lim Tay is the owner

is necessary to know whether the controversy will fall
under the jurisdiction of SEC.
The petition filed here by Lim Tay was a petition for
mandamus for SEC to recognize him as the owner of the
shares of stocks. But it is clear that Lim Tay was only
authorized to foreclose the stocks and no to own them.
Nowhere in the complaint filed that petitioner Lim Tay had
in fact foreclosed the shares. His status was that of
pledgee and not an owner. In a contract of pledge,
ownership is not transferred to the pledgee. It is to note
that the pledger remains the owner of the object pledged.
The best remedy available to Lim Tay was to foreclose
the stocks. In fact it was petitioner who is guilty of laches
as he did not foreclose the pledge as soon as the
obligation became due.
INSULAR LIFE vs YOUNG
GUARANTY TO PLEDGE
Q: Was there any issue on the validity of the pledge?

A: The pledge was valid. There was no question with respect
to the validity of the pledge but only with the foreclosure
proceedings.
Maam: Right, the foreclosure proceedings was the one being
questioned. Here there were two sales and apparently it was
considered sold in the second sale.
Q: Was notice required to schedule the foreclosure sale?
A: Notice is required but it is not required that there be a
separate notice between the first and second foreclosure
sales. The first notice with respect to the first foreclosure sale
is sufficient compliance with the requisite notice.
Here the shared was pledged to Insular Life by Young

under the credit agreement. You will notice here that there
was no question as to the validity of the contract of pledge.
With obligation already anddue and demandable, Insular
Life has now the right to institute foreclosure proceedings
on the shares in satisfaction of Youngs loans.
There is no prohibition that one notice for is sufficient to
cover the first and second auction sale. As what we see
here in this case, Insular Life issued a notice for the first
sale which extends to the second sale.
The purpose of the law in requiring notice is to apprise the
debtor and the pledger that thing pledged to secure the
payment of the loan will be sold in a public auction and
the proceeds thereof shall be applied to satisfy the debt.
when Insular Life sent a notice to Young informing of the
public auction to be held on Oct. 28 and the second
auction on Oct. 29 in the event the shares are not sold on
the first auction, the purpose of the law was achieved.
Notice as long as the debtor pledger of the two auction
dates that would be sufficient.
Take note that the same here must take place within the
said dates stated in the notice otherwise there is a
procedural defect in the sale if the date on the notice is
incorrect.
Remember that even if it is a not notice but merely a letter
to inform the debtor pledger of the dates of the auction
sale, and the dates are correct, in compliance with the
other requisites, that is sufficient enough for the
foreclosure proceedings to be deemed proper.
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.
Q: What is check kiting?

A: a form of check fraud, involving taking advantage of
the float to make use of non-existent funds in a checking or
other bank account. In this way, instead of being used as
a negotiable instrument, checks are misused as a form of
unauthorized credit.
So who can bid here? The public including the pledgor

and the pledgee. The pledger can bid and he should have
a better right if he offers the same terms as the highest
bid.
Q: What was the issue here?

A: Whether or not the memorandum of agreement was valid
between the parties despite respondent Youngs failure to
comply with the terms and conditions thereof.
Illustration
Let us say the pledger bids for 100K that is the same bid
as the highest bidderas between them the pledger will
only be preferred if he offers the same terms. By terms, it
could be terms of payment, because this can vary. If the
offer of pledger is 100K but in installment but the third
person (highest bidder) offers 100k in cash or one-time
payment, then here the pledger would have no better
preference as to the highest bidder.
And, whether or not the foreclosure of the pledge is void.

Q: Who are in possession of the shares here?
A: Insular Life.
Q: In what capacity since there was no foreclosure sale so
there was no transfer of ownership, in what capacity?
A: In this case the MOA was merely a contract to sell. Hence,
the obligation on either parties, only arises upon meeting all
the conditions laid down in the agreement. However, the
terms and conditions were not complied with as such, no
obligation on either arises.
Take note same terms. What do you mean by that?
With respect to the pledgee, if he is the only one who bids,

his offer should not be considered during the first auction
sale. A second public auction must take place. But, if in
the same instance, the pledgee is still the sole bidder,

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then that is the time the pledgee can appropriate the thing
pledged to him and apply the proceeds to the obligation.
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.
If you will bid you must have the amount in cash ready
with you. So if you are required to pay at once. But the
pledgee has the discretion if he agrees to a bidder who
offers to pay in installment but that will not bind the debtor.
Because as to the debtor if a bid has been accepted
regardless of the nature of the payment thereof, as far as
the debtor is concerned, the debt has already been
extinguished.
If you are the pledgee you have to take note, if you accept
payment on installment basis, if subsequently the bidder
fails to pay the balance, you no longer can go after the
debtor.
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
case. If the price of the sale is more than said amount,
the debtor shall not be entitled to the excess, unless it
is otherwise agreed. If the price of the sale is less,
neither shall the creditor be entitled to recover the
deficiency, notwithstanding any stipulation to the
contrary.
Take note of the effect of the foreclosure sale
extinguishes the principal obligation regardless of the bid
of the said public auction.
What happens if the price of the bid is higher than the
amount of the principal obligation? Article 2115 states that
it is the pledgee who is entitled to the excess and the
debtor shall not claim unless there is a stipulation to the
contrary.
What about if there is a deficiency? The principal
obligation is higher than the bid of the auction sale, it is
still the pledgee who will shoulder the deficiency. This is
just to be fair because if there is an excess it accrues to
the favor of the pledgee as such, if there is also a
deficiency, it is also the pledgee who shall bear the same.
General Rule: In case of excess benefit accrues to the
benefit of the pledgee.
Exception: If there is a stipulation to the contrary.
In case of deficiency, pledgee shall bear the same even if
there is a stipulation that says that the debtor shall be
liable in case of deficiency, that stipulation is INVALID.
Rationale: For the creditor to hold an honest public
auction sale. Otherwise, it would be very easy for the
creditor-pledgee to be in collusion with third persons to
bid a lower price just to get the deficiency from the
debtor.
MANILA SURETY vs VELAYO
Q: What do you mean by monetary value of the jewelry, what
does it pertain to, the value of the jewelry or the proceeds?
A: The value of the proceeds.
Maam: There is a difference of the value of the jewelry and
proceeds. Because what is considered in a foreclosure sale
is the proceeds.
Q: How much was the obligation to the surety company?
GUARANTY TO PLEDGE
A: 2,800 pesos
Q: How much was the jewelry sold for?
A: 235 pesos.
Alright, so there is a deficiency.

So you have here as collateral security by Velayo delivers
fourpieces of jewelry to the surety company. Thereafter
the surety company paid the obligation of Velayo, it seeks
now the reimbursement of 2,800. For failure to pay on the
part of Velayo the jewelries were sold at a public auction
but only for the amount of 235 pesos. So there is a
deficnecy.
Manila surety tried to collect the deficiency from Velayo,
but Velayo countered that his obligation has already been
extinguished. So remember by virtue of the auction sale
the principal obligation has already been extinguished.
Also the law is clear that notwithstanding that there be a
stipulation that the debtor can be held liable for the
deficiency, such stipulation is invalid and the pledgee can
no longer go after the debtor-pledgor for the deficiency for
the obligation is already extinguished.
Now why such express prohibition?
Because aside from the reason that the creditor can be
compelled to hold an honest public auction. There are
other remedies available to the creditor-pledgee. He can
file for a collection for sum of money.
What is the difference between both remedies? Because
In a civil case for collection of sum of money you can
attach the properties of the debtor, then those properties
may be by order of the court, sold through an execution
sale. In other words, under the civil procedure if there is
an execution sale it will be applied to the obligation but
you can still collect for the deficiency. Unlike if you follow
the procedure in Art 2115 of extrajudicial nature, it may be
easier and less expensive because you dont need to pay
a filing fee, but notice you cannot recover the deficiency.
Article 2116. After the public auction, the pledgee shall
promptly advise the pledgor or owner of the result
thereof.
So you have here another notice rule, the first notice
pertaining to the first auction sale and the second notice
under 2116, after the public auction the pledgee shall
advise the pledgor-owner the results of the public auction
and let the pledgor-owner know that the pledge was
conducted according to the law.
This is to enable the pledger owner with respect to his
right where he has reasonable grounds to believe that the
sale was not an honest one or that it did not comply with
the requirement under Art 2112.
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.
Who can discharge the obligation? Relate this to your
obligations and contracts, who can force the creditor to
accept payment? Aside from the debtor, a person who as
interest in the obligation, and by stipulation of the parties.
So third persons cannot compel the creditor to accept
payment. Under Art 2117, we have here a third person
who has in interest and a right in the fulfillment of the
obligation. As a pledgee who is not the principal debtor
but a third person who pledged his thing for the principal
debtor, the third-person here as pledgee has the right to
compel the creditor to accept payment having an interest
over the same.

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Under Art 2117, the debtor and the pledgor are different
persons.
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.
The subject matter of the [pledge] here is receivables,
credit so the debtor here is a creditor of another person.
What he pledges to the pledgee is the account receivable.
It is not obligatory for the pledgee to collect the amounts
receivable that are due on the credit pledged. He is
merely given the right to collect the amount.
In other words the pledgee may choose not to collect, the
law does not impose upon him to really collect and apply
the amount due. Now distinguish this with our discussion
on guarantors because here the creditor, where he will be
considered negligent in collecting, so what will happen?
He can no longer collect from the guarantor but in the
case of pledge the creditor can still collect.
In other words, if the right is available under Art 2118 and
the creditor-pledgee fails to collect on the credit which is
already due and then subsequently the third person who
has a debt to the creditor becomes insolvent, can the
debtor say that the pledgee is negligent because you did
not collect, thus I have no more liability to you? No, the
debtor cannot do that. Such is not a proper defense
because it is clear under Art 2118, it is not the obligation
of the creditor to collect and receive the amount of the
said credits. The creditor has the right but it is not an
obligation on his part.
Now, if the creditor chooses to apply it and collect, he shall
apply the proceeds collected and if there is any excess he
can give it to the debtor. This is different from 2115 where
the pledgee is entitled to the surplus.
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.
As soon as the obligation becomes due and demandable,
and the debtor refuses to pay, the pledgee is given the
right to sell the thing pledged.
Example
What if the obligation is 100k and several things were
delivered to secure the obligation. For instance, a
cellphone, a watch, and a pair of earrings. The pledgee
has the discretion to choose which of those will he first
like to sell.
But again, as soon as the debt is already satisfied from
the sale of only one of the things pledged. The creditor is
obliged to return the other things pledged and has no
more right to sell the remaining things pledged.
Let us say from the example above, he chose to sell the
watch and it was sold but the proceeds was not sufficient
to satisfy the principal obligation? The pledgee can
choose another one of the remaining things pledged to be
sold until the proceeds thereof are sufficient to satisfy the
obligation.
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.
GUARANTY TO PLEDGE
Here, there is a third person who acts as the pledgor but

he is not the principal debtor. Such person shall have the
same right as that of a guarantor except he does not have
the benefit of [excussion] and division. The rights here
only refer to the right to indemnity and whatever the
obligation against the principal can present against the
creditor the pledger can likewise raise the same defenses.
But again there is no benefit of division and benefit of
exhaustion.
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.
In Article 2121 we have legal pledge. As we have
discussed before we have two kinds of pledge:
conventional pledge- by stipulation of the parties, and
legal pledge which is by operation of law.
You have take note of the distinction between the two.
Distinctions between legal pledge and conventional
pledge, with respect to excess. Conventional pledge, the
excess is to the favor of the pledgee. Legal pledge,
excess shall be delivered to the debtor.
So with that you have to take not what are the pledges
created by operation of law.
Kinds of Legal Pledge
1. Art 546
Article 546. Necessary expenses shall be refunded
to every possessor; but only the possessor in good
faith may retain the thing until he has been
reimbursed therefor.
Useful expenses shall be refunded only to the
possessor in good faith with the same right of
retention, the person who has defeated him in the
possession having the option of refunding the
amount of the expenses or of paying the increase
in value which the thing may have acquired by
reason thereof.
2. Art 1731
Article 1731. He who has executed work upon a
movable has a right to retain it by way of pledge
until he is paid.
So for example you had your portrait sketched. Of course
there is payment for that after the portrait was done you
have no means of payment. The one who did your portrait
has the right to sell the same because it now becomes a
pledge. Here the proceeds in case someone will buy your
portrait the proceeds will be applied to your obligation.
3. Art 1994
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.
Again you have here the expenses by the depositary
where he must be reimbursed by the depositor. And
failure to pay the depositary has the right ot retain and has
the right to sell it in a public auction.
So the main distinction between a legal pledge and a
conventional pledge, is the rule on excess. Just take note
of that.
Another difference is under 2122:

CREDIT TRANSACTIONS
GUARANTY TO PLEDGE
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.
Notice here that there is requirement demand of the
amount for which the thing is to be paid. Demand is clearly
required under 2122 for legal pledge because if you
compare the thing with conventional pledge there is
already a period for payment between the parties. But in
legal pledge you are only really seeking to be reimbursed
with the expenses or unpaid fees. So to be able to have
period there must be a demand and if after the demand
the obligation is still unpaid, the public auction can only be
held one month after such demand.
You have to take note of the one month period because if
the creditor-pledgee does not hold the public sale within
the one month period the debtor may require the return of
the thing.
The right to retain by the possessor of the property in god
faith for that matter, the debtor can now demand fot the
return of the property. BUT it does NOT extinguish the
obligation, the pledge will be extinguished.
As we go along with our study, we will discuss right to
recognition
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.


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CREDIT TRANSACTIONS

Atty. Jazzie M. Sarona, CPA

GUARANTY & SURETYSHIP

Nature and Extent of Guaranty

3. Unilateral: gives rise only to a duty on the part of

Q: Is stronghold liable here?

4. It requires that the guarantor must be a person

As a surety, Stronghold is directly and primarily bound to the

However, take note that in real guaranty, like pledge and

Q: Was there a valid ground for the rescission of the contract

Under Article 2047, the first paragraph gives you definition

Q: If the principal obligation is rescinded isnt it that the

For the use of all students of Atty Sarona

In this case, we have a suretyship. Now although a

A significant distinction lies between a joint and several

In this case, what we have here is not a contract of

Q: Do we have a contract of surety here?

First, upon receipt by any of the obligors - in this case the

Q: Why was there an issue here with regard to the obligation

Second, should any and/or all obligors be impleaded by

For the use of all students of Atty Sarona

2. A surety is charged as an original promisor while the

5. Usually, a surety will not be discharged either by the

2. Also, if you noticed in the succeeding provision and

3. The guarantor is secondarily or subsidiarily liable, i.e.,

We have here a 1920 case, Old Civil Coode pa. So fianza

For the use of all students of Atty Sarona

Remember that the guarantor is not an insurer of the debt

Now, in this case, observe that petitioner's undertaking as

A guarantor only binds himself to pay if the

Q: Is there a contract of surety here? Who is the surety here?

For the use of all students of Atty Sarona

Although the contract of a surety is in essence secondary

Notice here that even if the document executed was a

For the use of all students of Atty Sarona

Now of course if the principal contract has no

Article 2052. A guaranty cannot exist without a valid

For the use of all students of Atty Sarona

A conditional obligation may also be secured.

Article 2052. A guaranty cannot exist without a valid

For the use of all students of Atty Sarona

It is true that a guaranty or a suretyship agreement is an

Rule: Insolvency of the principal debtor does not affect the

For the use of all students of Atty Sarona

doesnt mean that you cannot anymore be held liable as

Q: Was there a waiver of consent on the part of Cuenca that

Remember that a waiver should always be express.

So the indemnity agreement that was executed here was

Article 2055. A guaranty is not presumed; it must be

Take note of that, here the SC was clear that it would be

The transaction here is some sort of a double guaranty,

For the use of all students of Atty Sarona

We have to make a distinction. Were not saying that in all

For the use of all students of Atty Sarona

Obligationwhether a guarantor or surety, cannot be

In the case of Estate of Hemady, under Article 1311 as

For the use of all students of Atty Sarona

In this case, Atty. Tanglao executed a power of attorney:

For the use of all students of Atty Sarona

Remember that under Obligations and Contracts, accion

In this case, Philippine Rayon applied for a letter of credit

For the use of all students of Atty Sarona

First, the nature of the obligation of Anacleto Chi. It is

For the use of all students of Atty Sarona