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CREDIT TRANSACTIONS
CREDIT TRANSACTIONS
All transactions involving the purchase or loan of
goods, services, or money in the present with a
promise to pay or deliver in the future
Contracts of security
Types:
1. Secured transactions or contracts of real security
- supported by a collateral or an encumbrance of
property
2. Unsecured transactions or contracts of personal
security - supported only by a promise or
personal commitment of another such as a
guarantor or surety
Security
Something given, deposited, or serving as a
means to ensure fulfilment or enforcement of an
obligation or of protecting some interest in
property
Types of Security
a. personal when an individual becomes
surety or guarantor
b. real or property when a mortgage, pledge,
antichresis, charge or lien or other device
used to have property held, out of which the
person to be made secure can be
compensated for loss
Bailment
The delivery of property of one person to another
in trust for a specific purpose, with a contract,
express or implied, that the trust shall be
faithfully executed and the property returned or
duly accounted for when the special purpose is
accomplished or kept until the bailor claims it.
Parties:
1. bailor - the giver; one who delivers property
2. bailee- the recipient; one who receives the
custody or possession of the thing thus delivered

LOAN (Articles 1933 1961)

A contract wherein one of the parties delivers to

another, either something not consumable so that
the latter may use the same for a certain time
and return it or money or other consumable
thing, upon the condition that the same amount
of the same kind and quality shall be paid. (Art
1933)

Characteristics:
1. Real Contract delivery of the thing loaned is
necessary for the perfection of the contract
NOTE: An accepted promise to make a future
loan is a consensual contract, and therefore
binding upon the parties but it is only after
delivery, will the real contract of loan arise. (Art
1934)
2. Unilateral Contract - once the subject matter has
been delivered, it creates obligations on the part
of only one of the parties (i.e. borrower).
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Kinds:
1. Commodatum when the bailor (lender) delivers to
the bailee (borrower) a non-consumable thing so that
the latter may use it for a certain time and return
the identical thing.
Kinds of commodatum:
a. Ordinary Commodatum use by the borrower of
the thing is for a certain period of time
b. Precarium - one whereby the bailor may demand
the thing loaned at will and it exists in the
following cases:
i. neither the duration nor purpose of the
contract is stipulated
ii. the use of the thing is merely tolerated by
the owner

2. Simple loan or mutuum where the lender delivers

to the borrower money or other consumable thing
upon the condition that the latter shall pay the same
amount of the same kind and quality.
Commodatum
Mutuum
Key: COPS-LOTR
1. Object
Consumable
2. Cause
Gratuitous
May or may not be
gratuitous
3. Purpose
Use or temporary Consumption
possession
4. Subject Matter
Real or personal Only
personal
property
property
5. Ownership of the thing
Retained
by
the Passes to the debtor
bailor
6. Thing to be returned
Exact thing loaned
Equal amount of the
same
kind
and
quality
7. Who bears risk of loss
Bailor
Debtor
8. When to return
In case of urgent Only
after
the
need, even before expiration of the
the expiration of the term
term
Non-consumable

Loan

Credit

Delivery by one party

and the receipt of
other party of a
given sum of money
or other consumable
thing
upon
an
agreement, express
or implied, to repay
the same.

Ability of a person to
borrow money or
things by virtue of
the
trust
or
confidence reposed
by the lender that he
will pay what he
promised.

Loan

Credit

1. Interest taken at
the expiration of the
credit
2. Always on a
double name paper
(two
signatures
appear with both
parties held liable

Interest is taken in
advance
Always on a single
name paper (i.e.
promissory note with
no
indorse-ment
other
than
the

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for payment)

maker)

COMMODATUM (Articles 1935 1952)

Nature:
1. PURPOSE: Bailee in commodatum acquires the
temporary use of the thing but not its fruits
(unless stipulated as an incidental part of the
contract).(Art 1935)
Use must be temporary, otherwise the
contract may be a deposit.
2. CAUSE: Essentially gratuitous; it ceases to be a
commodatum if any compensation is to be paid
by the borrower who acquires the use, in such
case there arises a lease contract.
Similar to a donation in that it confers a
benefit to the recipient. The presumption is
that the bailor has loaned the thing for
having no need therefor.
3. SUBJECT MATTER: Generally non-consumable
whether real or personal but if the consumable
goods are not for consumption as when they are
merely for exhibition, consumable goods may be
the subject of the commodatum. (Art 1936)
4. Bailor need not be the owner of the thing owned
(Art. 1938) since by the loan, ownership does not
pass to the borrower.
A mere lessee or usufructuary may lend but
the borrower or bailee himself may not lend
nor lease the thing loaned to him to a third
person (Art 1932[2])
5. Purely Personal (Art 1939):
Death of either party terminates the contract
unless by stipulation, the commodatum is
transmitted to the heirs of either or both
parties.
Bailee can neither lend nor lease the object
of the contract to a third person.

NOTE:Use of the thing loaned may extend to

members of the bailees household except:
a.
contrary stipulation;
b.
nature of the thing forbids such use
Obligations of the Bailee: (Arts 1941 1945)
1. To pay for the ordinary expenses for the use and
preservation of the thing loaned. (Art 1941)
2. To be liable for the loss of the thing even if it
should be through a fortuitous event in the
following cases: (KLAS D)
a. when he keeps it longer than the period
stipulated, or after the accomplishment of its
use
b. when he lends or leases it to third persons
who are not members of his household
c. when the thing loaned has been delivered
with appraisal of its value
d. when, being able to save either of the thing
borrowed or his own things, he chose to save
the latter; or
e. when the bailee devoted the thing for any
purpose different from that for which it has
been loaned (Art 1942)
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3. To be liable for the deterioration of thing loaned (a)

if expressly stipulated; (b) if guilty of fault or
negligence; or (c) if he devotes the thing to any
purpose different from that for which it has been
loaned
4. To pay for extraordinary expenses arising from the
actual use of the thing by the bailee, which shall be
borne equally by both the bailor and the bailee, even
though the bailee acted without fault, unless there is
a stipulation to the contrary (Art 1949 par 2)
5. To return the thing loaned
The bailee has no right to retain the thing loaned
as security for claims he has against the bailor
even for extraordinary expenses except for a
claim for damages suffered because of the flaws
of the thing loaned.
NOTES:

However, the bailees right extends no

further than retention of the thing loaned

until he is reimbursed for the damages
suffered by him.
He cannot lawfully sell the thing to satisfy
such damages without courts approval.
In case there are two or more bailees, their
obligation shall be solidary.

Obligations of the bailor (Art 1946 Art 1952):

1. To respect the duration of the loan
GENERAL RULE: Allow the bailee the use of the
thing loaned for the duration of the period stipulated
or until the accomplishment of the purpose for which
the commodatum was instituted.
EXCEPTIONS:
a.
In case of urgent need in which case
bailee may demand its return or temporary use;
b.
The bailor may demand immediate return
of the thing if the bailee commits any act of
ingratitude specified in Art. 765.
2. To refund to the bailee extraordinary expenses for
the preservation of the thing loaned, provided the
bailee brings the same to the knowledge of the bailor
before incurring them, except when they are so
urgent that the reply to the notification cannot be
awaited without danger.
3. To be liable to the bailee for damages for known
hidden flaws.
Requisites:
a. There is flaw or defect in the thing loaned;
b. The flaw or defect is hidden;
c. The bailor is aware thereof;
d. He does not advise the bailee of the same; and
e. The bailee suffers damages by reason of said flaw
or defect

NOTES:
If the above requisites concur, the bailee has the
right of retention for damages.
The bailor cannot exempt himself from the
payment of expenses or damages by abandoning
the thing to the bailee.
SIMPLE LOAN OR MUTUUM (Art 1953 1961)

A contract whereby one party delivers to another,

money or other consumable thing with the
understanding that the same amount of the same
kind and quality shall be paid. (Art. 1953)

NOTES:
The mere issuance of the checks does not result
in the perfection of the contract of loan. The
Civil Code provides that the delivery of bills of
exchange and mercantile documents, such as
checks, shall produce the effect of payment only
when they have been encashed (Gerales vs. CA
218 SCRA 638). It is only after the checks have
produced the effect of payment that the contract
of loan may be deemed perfected.
The obligation is to pay and not to return
because the consumption of the thing loaned is
the distinguishing character of the contract of
mutuum from that of commodatum.
No estafa is committed by a person who refuses
to pay his debt or denies its existence.
Simple Loan/Mutuum

Rent

1. Delivery of money
or some consumable
thing with a promise
to pay an equivalent
of the same kind and
quality

Delivery of some nonconsumable thing in

order that the other
may use it during a
certain period and
return it to the
former.

2. There is a transfer
of ownership of the
thing delivered

There is no transfer
of ownership of the
thing delivered

3. Relationship
between the parties
is that of obligorobligee

Relationship is that
of a landlord and
tenant

4. Creditor receives
payment for his loan

Owner of the
property rented
receives
compensation or
price either in
money, provisions,
chattels, or labor
from the occupant
thereof in return for
its use (Tolentino vs
Gonzales, 50 Phil 558
1927)

Loan
1.

Real contract

2. Generally
unilateral because
only borrower has
obligations

Sale
Consensual contract
Bilateral
reciprocal

and

NOTE: If the property is sold, but the real intent is

only to give the object as security for a debt as
when the price is comparatively small there really
is a contract of loan with an equitable mortgage.
Commodatum/
Mutuum
1. Subject matter is

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Barter
Subject matter is

money or fungible
things

non-fungible, (non
consumable) things

2. In commodatum,
the bailee is bound
to return the
identical thing
borrowed when the
time has expired or
purpose served

The thing with

equivalent value is
given in return for
what has been
received

3. Mutuum may be
gratuitous and
commodatum is
always gratuitous

Onerous, actually a
mutual sale

Form of Payment (Art 1955):

1. If the thing loaned is money - payment must be made
in the currency stipulated, if it is possible; otherwise
it is payable in the currency which is legal tender in
the Philippines and in case of extraordinary inflation
or deflation, the basisi of payment shall be the value
of the currency at the time of the creation of the
obligation
2. If what was loaned is a fungible thing other than
money - the borrower is under obligation to pay the
lender another thing of the same kind, quality and
quantity. In case it is impossible to do so, the
borrower shall pay its value at the time of the
perfection of the loan.
Interest
The compensation allowed by law or fixed by the
parties for the loan or forbearance of money, goods
or credits
Requisites for Demandability: (ELI)
1. must be expressly stipulated
Exceptions:
a. indemnity for damages
b. interest accruing from unpaid interest
2. must be lawful
3. must be in writing
Compound Interest
GENERAL RULE: Unpaid interest shall not earn interest.
EXCEPTIONS:
1. when judicially demanded
2. when there is an express stipulation (must be in
writing in view of Art. 1956)
Guidelines for the application of proper interest rates
1. If there is stipulation: that rate shall be applied
2.
The following are the rules of thumb for the
application/imposition of interest rates:
a) When an obligation, regardless of its source, i.e.,
law, contracts, quasi-contracts, delicts or quasidelicts is breached, the contravenor can be held
liable for damages.
b) With regard particularly to an award of interest
in the concept of actual and compensatory
damages, the rate of interest, as well as the
accrual thereof, is imposed, as follows:
i. When the obligation breached consists of
payment of a sum of money (loan or
forbearance of money), the interest shall be
that which is stipulated or agreed upon by
the parties. In absence of an agreement, the

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rate shall be the legal rate (i.e. 12% per
annum) computed from default.
NOTE: The interest due shall itself earn
legal interest from the time it is
judicially demanded
ii. In other cases, the rate of interest shall
be six percent (6%) per annum.
NOTE: No interest, however, shall be
adjudged on unliquidated claims or
damages except when or until the
demand can be established with
reasonable certainty. When the demand
cannot be established, the interest shall
begin to run only from the date of the
judgment of the court is made.
iii. When the judgment of the court awarding
a sum of money becomes final and
executory, the rate of legal interest,
whether the case falls under paragraph i
or ii above, shall be 12% per annum from
such finality until its satisfaction, this
interim period being deemed to be by
then an equivalent to a forbearance of
credit. (Eastern Shipping Lines vs. CA,
July 12, 1994)
NOTES:
Central Bank Circular No. 416 fixing the rate of
interest at 12% per annum deals with loans,
forbearance of any money, goods or credits and
judgments involving such loans, or forbearance in
the absence of express agreement to such rate
Interest as indemnity for damages is payable only
in case of default or non-performance of the
contract. As they are distinct claims, they may be
demanded separately. (Sentinel Insurance Co.,
Inc. vs CA, 182 SCRA 517)
Central Bank Circular No. 905 (Dec. 10, 1982)
removed the Usury Law ceiling on interest rates
for secured and unsecured loans, regardless of
maturity.
Validity of unconscionable interest rate in a loan
Supreme Court in Sps. Solangon vs. Jose
Salazar, G.R. No. 125944, June 29, 2001, said that
since the usury law had been repealed by CB Cir. No.
905 there is no more maximum rate of interest and
the rate will just depend on the mutual agreement of
the parties (citing Lim Law vs. Olympic Sawmill Co.,
129 SCRA 439). But the Supreme Court said that
nothing in said circular grants lenders carta blanche
authority to raise interest rates to level which will
either enslave their borrowers or lead to a
hemorrhaging of their assets (citing Almeda vs. CA,
256 SCRS 292). In Medel vs. CA, 299 SCRA 481, it was
ruled that while stipulated interest of 5.5% per month
on a loan is usurious pursuant to CB Circular No. 905,
the same must be equitably reduced for being
iniquitous, unconscionable and exorbitant. It is
contrary to morals, (contra bonos mores). It was
reduced to 12% per annum in consonant with justice
and fair play.
DEPOSIT (Articles 1962 2009)

A contract constituted from the moment a person

receives a thing belonging to another, with the
obligation of safely keeping it and of returning
the same.

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Characteristics:
1. Real Contract - contract is perfected by the
delivery of the subject matter.
2. Unilateral (gratutitous deposit) - only the
depositary has an obligation.
3. Bilateral (onerous deposit) - gives rise to
obligations on the part of both the depositary
and depositor.
Deposit

Mutuum

1. Purpose
Principal purpose is
Principal purpose is
safekeeping or
consumption
custody
2. When to Return
Depositor can
The lender must wait
demand the return of until the expiration
the subject matter at of the period granted
will
to the debtor
3. Subject Matter
Subject matter may
Subject matter is
be movable or
only money or other
immovable property
fungible thing
4. Relationship
Relationship is that
Relationship is that of
of lender (creditor)
depositor and
and borrower
depositary.
(debtor).
5. Compensation
There can be
NO compensation of
compensation of
things deposited with
credits.
each other (except
by mutual
agreement).

Deposit

Commodatum

1. Purpose is
Safekeeping

1. Purpose is the
transfer of the use

2. May be gratuitous

2. Essentially and
always gratuitous

3. Movable/corporeal
things only in case of
extrajudicial deposit

3. Both movable and

immovable may be
the object

Kinds of Deposit:
1. Judicial (Sequestration) takes place when an
attachment or seizure of property in litigation is
ordered.
2. Extra-judicial
a. Voluntary one wherein the delivery is made by
the will of the depositor or by two or more
persons each of whom believes himself entitled
to the thing deposited. (Arts 1968 1995)
b. Necessary one made in compliance with a legal
obligation, or on the occasion of any calamity, or
by travellers in hotels and inns (Arts 1996 2004), or by travellers with common carriers (Art
1734 1735).
NOTE: The chief difference between a voluntary
deposit and a necessary deposit is that in the
former, the depositor has a complete freedom in
choosing the depositary, whereas in the latter, there
is lack of free choice in the depositor.
Judicial

Extra-judicial

1. Creation
Will of the court
Will of the parties
or contract

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ii.to pay the depositor the amount which he
may have benefited himself with the thing or
its price subject to the right of any third
person who acquired the thing in good faith
(Art 1971)

2. Purpose
Security or to insure
Custody and
the right of a party
safekeeping
to property or to
recover in case of
favorable judgment
3. Subject Matter
Movables or
Movables only
immovables,
but generally
immovables
Always onerous

4. Cause
May be compensated or not, but
generally gratuitous

5. When must the thing be returned

Upon order of the
Upon demand of
court or when
depositor
litigation is ended
6. In whose behalf it is held
Person who has a
Depositor or third
right
person designated

GENERAL RULE: Contract of deposit is gratuitous

(Art 1965)
EXCEPTIONS:
1. when there is contrary stipulation
2. depositary is engaged in business of storing
goods
3. property saved from destruction without
knowledge of the owner
NOTES:
Article 1966 does not embrace incorporeal
property, such as rights and actions, for it follows
the person of the owner, wherever he goes.
A contract for the rent of safety deposit boxes
is not an ordinary contract of lease of things but
a special kind of deposit; hence, it is not to be
strictly governed by the provisions on deposit.
The relation between a bank and its customer is
that of a bailor and bailee. (CA Agro vs CA, 219
SCRA 426)
Obligations of the Depositary (Art 1972 1991):
1. To keep the thing safely (Art 1972)
Exercise over the thing deposited the same
diligence as he would exercise over his
property
2. To return the thing (Art 1972)
Person to whom the thing must be
returned:
a. Depositor, to his heirs and successors, or the
person who may have been designated in the
contract
b. If the depositary is capacitated - he is subject
to all the obligations of a depositary whether
or not the depositor is capacitated. If the
depositor is incapacitated, the depositary
must return the property to the legal
representative of the incapacitated or to the
depositor himself if he should acquire
capacity (Art 1970).
c. If the depositor is capacitated and the
depositary is incapacitated - the latter does
not incur the obligation of a depositary but
he is liable:
i..to return the thing deposited while still
in his possession;
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Time of return:
a. Upon demand even though a specified period
or time for such return may have been fixed
except when the thing is judicially attached
while in the depositarys possession or should he
have been notified of the opposition of a third
person to the return or the removal of the thing
deposited. (Art 1998)
b. If deposit gratuitous, the depositary may
return the thing deposited notwithstanding that a
period has been fixed for the deposit if
justifiable reasons exists for its return.
c.
If the deposit is for a valuable
consideration, the depositary has no right to
return the thing deposited before the expiration
of the time designated even if he should suffer
inconvenience as a consequence.(Art 1989)

3.

4.

5.
6.

What to return: product, accessories, and

accessions of the thing deposited (Art 1983)
Not to deposit the thing with a third person unless
authorized by express stipulation (Art 1973)
The depositor is liable for the loss of the thing
deposited under Article 1973 if:
a.
he transfers the deposit
with a third person without authority although
there is no negligence on his part and the third
person;
b.
he deposits the thing
with a third person who is manifestly careless or
unfit although authorized even in the absence of
negligence; or
c.
the thing is lost through
the negligence of his employees whether the
latter are manifestly careless or not.
If the thing deposited should earn interest (Art 1975):
a. to collect interest and the capital itself as it fall
due
b. to take steps to preserve its value and rights
corresponding to it
Not to commingle things deposited if so stipulated
(Art 1976)
Not to make use of the thing deposited unless
authorized (Art 1977)
GENERAL RULE: Deposit is for safekeeping of the
subject matter and not for use. The unauthorized use
by the depositary would make him liable for
damages.
EXCEPTIONS:
1. When the preservation of the thing deposited
requires its use
2. When authorized by the depositor
NOTE: The permission to use is NOT presumed except
when such use is necessary for the preservation of
the thing deposited.
Effect if permission to use is given (Art 1978):
1.
If thing deposited is non-consumable,
the contract loses the character of a deposit and
acquires that of a commodatum despite the fact
that the parties may have denominated it as a
deposit, unless safekeeping is still the principal
purpose.

7.

8.

9.
10.

2. If
thing
deposited
consists
of
money/consumable things, the contract is
converted into a simple loan or mutuum
unless safekeeping is still the principal
purpose in which case it is called an irregular
deposit. Example: bank deposits are irregular
deposits in nature but governed by law on
loans.
When the thing deposited is delivered sealed and
closed :
a. to return the thing deposited in the same
condition
b. to pay for damages should the seal or lock be
broken through his fault, which is presumed
unless proved otherwise
c. to keep the secret of the deposit when the
seal or lock is broken with or without his fault
(Art 1981)
NOTE: The depositary is authorized to open
the thing deposited which is closed and
sealed when (Art 1982):
i. there is presumed authority (i.e. when the
key has been delivered to him or the
instructions of the depositor cannot be
done without opening it)
ii. necessity
To change the way of the deposit if under the
circumstances, the depositary may reasonably
presume that the depositor would consent to the
change if he knew of the facts of the situation,
provided, that the former notifies the depositor
thereof and wait for his decision, unless delay
would cause danger
To pay interest on sums converted to personal use
if the deposit consists of money (Art 1983)
To be liable for loss through fortuitous event
(SUDA): (Art 1979):
a. if stipulated
b. if he uses the thing without the depositor's
permission
c. if he delays its return
d. if he allows others to use it, even though he
himself may have been authorized to use the
same

NOTES:
Fixed, savings, and current deposits of money in
banks and similar institutions shall be governed
by the provisions concerning simple loan. (Art
1980)
The general rule is that a bank can compensate
or set off the deposit in its hands for the payment
of any indebtedness to it on the part of the
depositor. In true deposit, compensation is not
allowed.
Irregular deposit

Mutuum

1. The consumable
thing deposited may
be demanded at will
by the depositor

1. Lender is bound
by the provisions of
the contract and
cannot demand
restitution until the
time for payment, as
provided in the
contract, has arisen

2. The only benefit is

that which accrues
to the depositor

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2. Essential cause for

the transaction is the
necessity of the
borrower

3. The irregular
depositor has a
preference over
other creditors with
respect to the thing
deposited

3. Common creditors
enjoy no preference
in the distribution of
the debtors property

Rule when there are two or more depositors (Art

1985):
1. If thing deposited is divisible and depositors are not
solidary:
Each depositor can demand only his
proportionate share thereto.
2. If obligation is solidary or if thing is not divisible:
Rules on active solidarity shall apply, i.e. each one of
the solidary depositors may do whatever may be
useful to the others but not anything which may be
prejudicial to the latter, (Art. 1212) and the
depositary may return the thing to anyone of the
solidary depositors unless a demand, judicial or
extrajudicial, for its return has been made by one of
them in which case, delivery should be made to him
(Art. 1214).
3. Return to one of depositors stipulated. The
depositary is bound to return it only to the person
designated although he has not made any demand for
its return.
NOTES:
The depositary may retain the thing in pledge until
full payment of what may be due him by reason of
the deposit (Art 1994).
The depositors heir who in good faith may have sold
the thing which he did not know was deposited, shall
only be bound to return the price he may have
received or to assign his right of action against the
buyer in case the price has not been paid him (Art
1991).
Obligations of the Depositor (Art 1992 1995):
1. To pay expenses for preservation
a. If the deposit is gratuitous, the depositor is
obliged to reimburse the depositary for expenses
incurred for the preservation of the thing
deposited (Art 1992)
b. If the deposit is for valuable consideration,
expenses for preservation are borne by the
depositary unless there is a contrary stipulation
2. To pay loses incurred by the depositary due to the
character of the thing deposited

GENERAL RULE: The depositor shall reimburse the

depositary for any loss arising from the character of the
thing deposited.
EXCEPTIONS:
1. at the time of the deposit, the depositor was not
aware of the dangerous character of the thing
2. when depositor was not expected to know the
dangerous character of the thing
3. when the depositor notified the depository of the
same
4. the depositary was aware of it without advice from
the depositor
Extinguishment of Voluntary Deposit (Art 1995)
1. Loss or destruction of the thing deposited
2. In case of gratuitous deposit, upon the death of
either the depositor or the depositary
3. Other causes, such as return of the thing, novation,
merger, expiration of the term fulfilment of the
resolutory condition, etc (Art 1231)

Necessary Deposits
1. Made in compliance with a legal obligation
2. Made on the occasion of any calamity such as
fire, storm, flood, pillage, shipwreck or other
similar events (deposito miserable)
3. Made by travellers in hotels and inns or by
travellers with common carrier

Deposit by Travellers in hotels and inns:

The keepers of hotels or inns shall be responsible
as depositaries for the deposit of effects made by
travellers provided:
a. Notice was given to them or to their
employees of the effects brought by the
guest; and
b. The guests take the precautions which said
hotel-keepers or their substitutes advised
relative to the care and vigilance of their
effects.
NOTES:
Liability extends to vehicles, animals and articles
which have been introduced or placed in the
annexes of the hotel.
Liability shall EXCLUDE losses which proceed from
force majeure. The act of a thief or robber is not
deemed force majeure unless done with the use
of arms or irresistible force.
The hotel-keeper cannot free himself from the
responsibility by posting notices to the effect
that he is not liable for the articles brought by
the guest. Any stipulation to such effect shall be
void.
Notice is necessary only for suing civil liability
but not in criminal liability.
GUARANTY (Articles 2047 2084)

A contract whereby a person (guarantor) binds

himself to the creditor to fulfil the obligation of
the principal debtor in case the latter fail to do
so.

Classification of Guaranty:
1. In the Broad sense:
a. Personal - the guaranty is the credit given by
the person who guarantees the fulfilment of
the principal obligation.
b. Real - the guaranty is the property, movable
or immovable.

2. As to its Origin
a. Conventional - agreed upon by the parties.
b. Legal - one imposed by virtue of a provision
of a law.
c. Judicial - one which is required by a court to
guarantee the eventual right of one of the
parties in a case.
3. As to Consideration
a. Gratuitous - the guarantor does not receive
any price or remuneration for acting as such.
b. Onerous - the guarantor receives valuable
consideration.
4. As to the Person guaranteed
7|Page

a. Single - one constituted solely to guarantee or

secure performance by the debtor of the
principal obligation.
b. Double or sub-guaranty - one constituted to
secure the fulfilment by the guarantor of a prior
guaranty.
5. As to Scope and Extent
a. Definite - the guaranty is limited to the principal
obligation only, or to a specific portion thereof.
b. Indefinite or simple - one which not only
includes the principal obligation but also all its
accessories including judicial costs
SURETYSHIP
A contract whereby a person (surety) binds himself
solidarily with the principal debtor
A relation which exists where one person (principal)
has undertaken an obligation and another person
(surety) is also under a direct and primary obligation
or other duty to the obligee, who is entitled to but
one performance, and as between the two who are
bound, the second rather than the first should
perform (Agro Conglomerates, Inc. vs. CA, 348 SCRA
450)
NOTES:
The reference in Article 2047 to solidary obligations
does not mean that suretyship is withdrawn from the
applicable provisions governing guaranty. A surety is
almost the same as a solidary debtor, except that he
himself is a principal debtor.
In suretyship, there is but one contract, and the
surety is bound by the same agreement which binds
the principal. A surety is usually bound with the
principal by the same instrument, executed at the
same time and upon the same consideration
(Palmares vs CA, 288 SCRA 422)
It is not for the obligee to see to it that the principal
debtor pays the debt or fulfill the contract, but for
the surety to see to it that the principal debtor pays
or performs (Paramount Insurance Corp vs CA, 310
SCRA 377)

Nature of Suretys undertaking:

1. Liability is contractual and accessory but direct
NOTE: He directly, primarily and equally binds
himself with the principal as original promisor,
although he possesses no direct or personal interest
over the latters obligation, nor does he receive any
benefits therefrom. (PNB vs CA, 198 SCRA 767)
2. Liability limited by the terms of the contract.
NOTE: It cannot be extended by implication beyond
the terms of the contract (PNB vs CA, 198 SCRA 767)
3. Liability arises only if principal debtor is held liable.
NOTES:
The creditor may sue separately or together the
principal debtor and the surety. Where there are
several sureties, the obligee may proceed against
any one of them.
In the absence of collusion, the surety is bound
by a judgment against the principal even though
he was not a party to the proceedings. The
nature of its undertaking makes it privy to all
proceedings against its principal (Finman General
Assurance Corp. vs. Salik, 188 SCRA 740)
4. Surety is not entitled to the benefit of exhaustion
NOTE: He assumes a solidary liability for the
fulfilment of the principal obligation (Towers

5.

6.

7.

8.

Assurance Corp vs. Ororama Supermart, 80 SCRA

262) as an original promissory and debtor from
the beginning.
Undertaking is to creditor and not to debtor.
NOTE: The surety makes no covenant or
agreement with the principal that it will fulfil
the obligation guaranteed for the benefit of the
principal. Such a promise is not implied by law
either; and this is true even where under the
contract the creditor is given the right to sue the
principal, or the latter and the surety at the
same time. (Arranz vs. Manila Fidelity & Surety
Co., Inc., 101 Phil. 272)
Surety is not entitled to notice of principals
default
NOTE: The creditor owes no duty of active
diligence to take care of the interest of the
surety and the surety is bound to take notice of
the principals default and to perform the
obligation. He cannot complain that the creditor
has not notified him in the absence of a special
agreement to that effect. (Palmares vs CA, 288
SCRA 422)
Prior demand by the creditor upon principal is
not required
NOTE: As soon as the principal is in default, the
surety likewise is in default.
Surety is not exonerated by neglect of creditor
to sue principal

Characteristics of Guaranty and Suretyship:

1. Accessory - It is indispensable condition for its
existence that there must be a principal
obligation.
NOTES:
Guaranty may be constituted to guarantee
the performance of a voidable or
unenforceable contract.
It may also
guarantee a natural obligation. (Art 2052)
The guarantor cannot bind himself for more
than the principal debtor and even if he does,
his liability shall be reduced to the limits of
that of the debtor.
2. Subsidiary and Conditional - takes effect only in
case the principal debtor fails in his obligation.

3.

4.
5.
6.

NOTES:
The guarantor cannot bind himself for more
than the principal debtor and even if he does,
his liability shall be reduced to the limits of
that of the debtor. But a guarantor may bind
himself for less than that of the principal (Art
2054)
A guaranty may be given as security for future
debts, the amount of which is not yet known;
there can be no claim against the guarantor
until the debt is liquidated. A conditional
obligation may also be secured. (Art 2053)
Unilateral - may be entered even w/o the
intervention of the principal debtor, in which
case Art. 1236 and 1237 shall apply and it gives
rise only to a duty on the part of the guarantor in
relation to the creditor and not vice versa.
Nominate
Consensual
It is a contract between the guarantor/surety and
creditor.
NOTES:

8|Page

Acceptance of guaranty by creditor and notice

thereof to guarantor:
In declaring that guaranty must be express,
the law refers solely and exclusively to the
obligation of the guarantor because it is he
alone who binds himself by his acceptance.
With respect to the creditor, no such
requirement is needed because he binds
himself to nothing.
However, when there is merely an offer of 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 binding until it is
accepted and until notice of such acceptance
by the creditor is given to, or acquired by,
the guarantor, or until he has notice or
knowledge that the creditor has performed
the condition and intends to act upon the
guaranty.
But in any case, the creditor is not precluded
from waiving the requirement of notice.
The consideration of the guaranty is the same as
the consideration of the principal obligation.
The creditor may proceed against the guarantor
although he has no right of action against the
principal debtor.
7. Not presumed. It must be expressed and reduced in
writing.
NOTE: A power of attorney to loan money does not
authorize the agent to make the principal liable as a
surety for the payment of the debt of a third person.
(BPI vs. Coster, 47 Phil. 594)
8. Falls under the Statute of Frauds since it is a special
promise to answer for the debt, default or
miscarriage of another.
9. Strictly interpreted against the creditor and in favor
of the guarantor/surety and is not to be extended
beyond its terms or specified limits. (Magdalena
Estates, Inc. vs Rodriguez, 18 SCRA 967) The rule of
strictissimi juris commonly pertains to an
accommodation surety because the latter acts
without motive of pecuniary gain and hence, should
be
protected
against
unjust
pecuniary
impoverishment by imposing on the principal, duties
akin to those of a fiduciary.
NOTES:
The rule will apply only after it has been
definitely ascertained that the contract is one of
suretyship or guaranty. It cannot be used as an
aid in determining whether a partys undertaking
is that of a surety or guarantor. (Palmares vs CA,
288 SCRA 292)
It does not apply in case of compensated
sureties.
10. It is a contract which requires that the guarantor
must be a person distinct form the debtor because a
person cannot be the personal guarantor of himself.
NOTE: However, in a real guaranty, like pledge and
mortgage, a person may guarantee his own obligation
with his personal or real properties.
Guaranty

Suretyship

1. Liability depends
upon an independent
agreement to pay the
obligation if primary
debtor fails to do so

1. Surety assumes
liability as regular
party
to
the
undertaking

2. Collateral
taking

2. Surety is
original promisor

an

3.
Surety
primarily liable

is

under-

3.
Guarantor
secondarily liable

is

4. Guarantor binds
himself to pay if
the
principal
CANNOT PAY

4. Surety undertakes
to pay if the principal
DOES NOT PAY

5.
Insurer of
solvency of debtor

5.
Insurer of the
debt

6.
Guarantor can
avail of the benefit
of
excussion
and
division
in
case
creditor
proceeds
against him

6.
Surety cannot
avail of the benefit of
excussion and division

Indorsement

Guaranty

1.
Primarily
transfer

of

1.
Contract
security

of

2. Unless the note is

promptly presented
for
payment
at
maturity and due
notice of dishonor
given to the indorser
within a reasonable
time he will be
discharged
absolutely
from
all
liability
thereon,
whether
he
has
suffered any actual
damage or not

2. Failure in either or
both
of
these
particulars does not
generally work as an
absolute discharge of
a guarantors liability,
but his is discharged
only to the extent of
the loss which he may
have
suffered
in
consequence thereof

3. Indorser does not

warrant the solvency.
He is answerable on a
strict
compliance
with the law by the
holder, whether the
promisor is solvent or
not

3.
Guarantor
warrants the solvency
of the promisor

4. Indorser can
sued as promisor

be

4. Guarantor cannot be
sued as promisor

Guaranty

Warranty

A contract by which a
person is bound to
another for the
fulfilment of a
promise or
engagement of a
third party

An undertaking that
the title, quality, or
quantity of the
subject matter of the
contract is what it
has been represented
to be, and relates to
some agreement
made ordinarily by
the party who makes
the warranty

NOTES:
A guaranty is gratuitous, unless there is a
stipulation to the contrary. The cause of the
9|Page

contract is the same cause which supports the

obligation as to the principal debtor.
The peculiar nature of a guaranty or surety
agreement is that is is regarded as valid despite the
absence of any direct consideration received by the
guarantor or surety either from the principal debtor
or from the creditor; a consideration moving to the
principal alone will suffice.
It is never necessary that the guarantor or surety
should receive any part or benefit, if such there be,
accruing to the principal. (Willex Plastic Industries
Corp. vs. CA, 256 SCRA 478)

Double or sub-guaranty (Art 2051 2nd par)

One constituted to guarantee the obligation of a
guarantor
Continuing guaranty (Art 2053)
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.
NOTES:
Prospective in operation (Dio vs CA, 216 SCRA 9)
Construed as continuing when by the terms thereof it
is evident that the object is to give a standing credit
to the principal debtor to be used from time to time
either indefinitely or until a certain period,
especially if the right to recall the guaranty is
expressly reserved (Dio vs CA, 216 SCRA 9)
Future debts may also refer to debts existing at
the time of the constitution of the guaranty but the
amount thereof is unknown and not to debts not yet
incurred and existing at that time.
Exception to the concept of continuing guaranty is
chattel mortgage.
A chattel mortgage can only
cover obligations existing at the time the mortgage is
constituted and not those contracted subsequent to
the execution thereof (The Belgian Catholic
Missionaries, Inc. vs. Magallanes Press, Inc., 49 Phil
647). An exception to this is in case of stocks in
department stores, drug stores, etc. (Torres vs.
Limjap, 56 Phil 141).
Extent of Guarantors liability: (Art 2055)
1. Where the guaranty definite: It is limited in whole or
in part to the principal debt, to the exclusion of
accessories.
2. Where guaranty indefinite or simple: It shall
comprise not only the principal obligation, but also
all its accessories, including the judicial costs,
provided with respect to the latter, that the
guarantor shall only be liable for those costs incurred
after he has been judicially required to pay.
Qualifications of a guarantor: (Arts 2056-2057)
1. possesses integrity
2. capacity to bind himself
3. has sufficient property to answer for the
obligation which he guarantees
NOTES:
The qualifications need only be present at the time
of the perfection of the contract.

10

The subsequent loss of the integrity or property

or supervening incapacity of the guarantor would

not operate to exonerate the guarantor or the
eventual liability he has contracted, and the
contract of guaranty continues.
However, the creditor may demand another
guarantor with the proper qualifications. But he
may waive it if he chooses and hold the guarantor
to his bargain.

Benefit of Excussion (Art 2058)

The right by which the guarantor cannot be
compelled to pay the creditor unless the latter
has exhausted all the properties of the principal
debtor, and has resorted to all of the legal
remedies against such debtor.
NOTE:
Not applicable to a contract of suretyship (Arts
2047, par. 2; 2059[2])
Cannot even begin to take place before judgment
has been obtained against the debtor (Baylon vs
CA, 312 SCRA 502)
When Guarantor is not entitled to the benefit of
excussion: (PAIRS)
1. If it may be presumed that an execution on the
property of the principal debtor would not result
in the satisfaction of the obligation
Not necessary that the debtor be judicially
declared insolvent or bankrupt
2. When he has absconded, or cannot be sued within
the Philippines unless he has left a manager or
representative
3. In case of insolvency of the debtor
Must be actual
4. If the guarantor has expressly renounced it
5. If he has bound himself solidarily with the debtor
Other grounds: (BIPS)
6. If he is a judicial bondsman or sub-surety
7. If he fails to interpose it as a defense before
judgment is rendered against him
8. If the guarantor does not set up the benefit
against the creditor upon the latters demand for
payment from him, and point out to the creditor
available property to the debtor within Philippine
territory, sufficient to cover the amount of the
debt (Art 2060)
Demand can be made only after judgment on
the debt
Demand must be actual; joining the
guarantor in the suit against the principal
debtor is not the demand intended by law
9. Where the pledge or mortgage has been given by
him as special security
Benefit of Division (Art 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.
Liability: Joint
NOTES:
The creditor can claim from the guarantors only
the shares they are respectively bound to pay
except when solidarity is stipulated or if any of
the circumstances enumerated in Article 2059
10 | P a g e

should take place.

The right of contribution of guarantors who pays
requires that the payment must have been made (a)
in virtue of a judicial demand, or (b) because the
principal debtor is insolvent (Art 2073).
If any of the guarantors should be insolvent, his share
shall be borne by the others including the paying
guarantor in the same joint proportion following the
rule in solidary obligations.
The above rule shall not be applicable unless the
payment has been made in virtue of a judicial
demand or unless the principal debtor is insolvent.
The right to contribution or reimbursement from his
co-guarantors is acquired ipso jure by virtue of said
payment without the need of obtaining from the
creditor any prior cession of rights to such guarantor.
The co-guarantors may set up against the one who
paid, the same defenses which have pertained to the
principal debtor against the creditor and which are
not purely personal to the debtor. (Art 2074)

Procedure when creditor sues: (Art. 2062)

The creditor must sue the principal alone; the
guarantor cannot be sued with his principal, much
less alone except in Art. 2059.
1. Notice to guarantor of the action
The guarantor must be NOTIFIED so that he may
appear, if he so desires, and set up defenses he
may want to offer.
If the guarantor appears, he is still given the
benefit of exhaustion even if judgment should be
rendered against him and principal debtor. His
voluntary appearance does not constitute a
renunciation of his right to excussion (see Art.
2059(1)).
Guarantor cannot set up the defenses if he does
not appear and it may no longer be possible for
him to question the validity of the judgment
rendered against the debtor.
2. A guarantor is entitled to be heard before and
execution can be issued against him where he is not
a party in the case involving his principal (procedural
due process).
Guarantors Right of Indemnity or Reimbursement (Art
2066)
GENERAL RULE: Guaranty is a contract of indemnity.
The guarantor who makes payment is entitled to be
reimbursed by the principal debtor.
NOTE: The indemnity consists of: (DIED)
1. Total amount of the debt no right to demand
reimbursement until he has actually paid the
debt, unless by the terms of the contract, he is
given the right before making payment. He
cannot collect more than what he has paid.
2. Legal interest thereon from the time the
payment was made known (notice of payment in
effect a demand so that if the debtor does not
pay immediately, he incurs in delay) to the
debtor, even though it did not earn interest for
the creditor. Guarantors right to legal interest is
granted by law by virtue of the payment he has
made.
3. Expenses incurred by the guarantor after having
notified the debtor that payment has been
demanded of him by the creditor; only those
expenses that the guarantor has to satisfy in

11
accordance with law as a consequence of the
guaranty (Art. 2055) not those which depend
upon his will or own acts or his fault for these
are his exclusive personal responsibility and it
is not just that they be shouldered by the
debtor.
4. Damages if they are due in accordance
with law. General rules on damages apply.

EXCEPTIONS:
1. Where the guaranty is constituted without
the knowledge or against the will of the
principal debtor, the guarantor can recover
only insofar as the payment had been
beneficial to the debtor (Art. 2050).
2. Payment by a third person who does not
intend to be reimbursed by the debtor is
deemed to be a donation, which, however,
requires the debtors consent.
But the
payment is in any case valid as to the creditor
who has accepted it (Art. 1238).
3. Waiver
of
the
right
to
demand
reimbursement.
Guarantors right to Subrogation (ART.2067)
Subrogation transfers to the person subrogated,
the credit with all the rights thereto appertaining
either against the debtor or against third persons,
be they guarantors or possessors of mortgages,
subject
to
stipulation
in
conventional
subrogation.
NOTE: This right of subrogation is necessary to
enable the guarantor to enforce the indemnity given
in Art. 2066.
It arises by operation of law upon payment by the
guarantor. It is not necessary that the creditor
cede to the guarantor the formers rights against
the debtor.
It is not a contractual right. The right of
guarantor who has paid a debt to subrogation
does not stand upon contract but upon the
principles of natural justice.
The guarantor is subrogated by virtue of the
payment to the rights of the creditor, not those
of the debtor.
Guarantor cannot exercise the right of
redemption of his principal (Urrutia & Co vs
Morena and Reyes, 28 Phil 261)
Effect of Payment by Guarantor
1. Without notice to debtor: (Art 2068)
The debtor may interpose against the
guarantor those defenses which he could have
set up against the creditor at the time the
payment was made, e.g. the debtor can set
up against the guarantor the defense of
previous extinguishment of the obligation by
payment.
2. Before Maturity (Art 2069)
Not entitled to reimbursement unless the
payment was made with the consent or has
been ratified by the debtor
Effect of Repeat Payment by debtor: (Art 2070)
GENERAL RULE: Before guarantor pays the creditor,
he must first notify the debtor (Art. 2068). If he fails
to give such notice and the debtor repeats payment,
11 | P a g e

the guarantor can only collect from the creditor and

guarantor has no cause of action against the debtor for
the return of the amount paid by guarantor even if the
creditor should become insolvent.

EXCEPTION:
The
guarantor
can
still
claim
reimbursement from the debtor in spite of lack of notice
if the following conditions are present: (PIG)
a. guarantor was prevented by fortuitous event to
advise the debtor of the payment; and
b. the creditor becomes insolvent;
c. the guaranty is gratuitous.
Right of Guarantor to proceed against debtor before
payment
GENERAL RULE: Guarantor has no cause of action
against debtor until after the former has paid the
obligation
EXCEPTION: Article 2071
NOTES:
Article 2071 is applicable and available to the surety.
(Manila Surety & Fidelity Co., Inc. vs Batu
Construction & Co., 101 Phil 494)
Remedy of guarantor:
(a) obtain release from the guaranty; or
(b) demand a security that shall protect him from
any proceedings by the creditor, and against the
danger of insolvency of the debtor
Art. 2066

Art. 2071

Provides for the

enforcement of the
rights of the
guarantor/surety
against the debtor
after he has paid the
debt
Gives a right of
action after payment
Substantive right

Provides for his

protection before he
has paid but after he
has become liable

Protective remedy
before payment.
Preliminary remedy

Extinguishment of guaranty: (RA2CE2)

1. Release 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 (Art 2078);
2. If the creditor voluntarily accepts immovable or
other properties in payment of the debt, even if he
should afterwards lose the same through eviction or
conveyance of property (Art 2077);
3. Whenever by some act of the creditor, the guarantors
even though they are solidarily liable cannot be
subrogated to the rights, mortgages and preferences
of the former (Art 2080);
4. For the same causes as all other obligations (Art
1231);
5. When the principal obligation is extinguished;
6. Extension granted to the debtor by the creditor
without the consent of the guarantor (Art 2079)
BOND
An undertaking that is sufficiently secured, and not
cash or currency
Bondsman (Art 2082)
A surety offered in virtue of a provision of law or a
judicial order. He must have the qualifications
required of a guarantor and in special laws like the
Rules of Court.

12
NOTES:
Judicial bonds constitute merely a special class of
contracts of guaranty by the fact that they are
given in virtue of a judicial order.
If the person required to give a legal or judicial
bond should not be able to do so, a pledge or
mortgage sufficient to cover the obligation shall
admitted in lieu thereof (Art 2083)
A judicial bondsman and the sub-surety are NOT
entitled to the benefit of excussion because they
are not mere guarantors, but sureties whose
liability is primary and solidary. (Art 2084)
PLEDGE, MORTGAGE AND ANTICHRESIS
I. Common Elements of Pledge, Mortgage, and
Antichresis (Articles 2085 2092)
A. Essential Requisites (SOD) (Art 2085)
1. Secures the fulfillment of a principal obligation;
2. Pledgor, mortgagor, antichretic debtor must be
the absolute owner of the thing pledged or
mortgaged; and
The reason being that in anticipation of a
possible foreclosure sale in case of default
which is still a sale, the rule is that the seller
must be the owner of the thing sold (Cavite
Development Bank vs. Lim, 324 SCRA 346)
3. Pledgor, mortgagor, antichretic debtor must have
free disposal of their property, or be legally
authorized for such purpose.
NOTES:
Third persons can pledge or mortgage their own
property to secure the principal obligation.
It is not necessarily void simply because the
accommodation pledgor or mortgagor did not
benefit from the same. So long as valid consent
was given, the fact that the loan was given solely
for the benefit of the principal debtor would not
invalidate the mortgage (GSIS vs CA, 170 SCRA
533)
The accommodation pledgor or mortgagor,
without expressly assuming personal liability for
such debt, is not liable for the payment of any
deficiency, should the property not be sufficient
to cover the debt (Bank of America vs. American
Realty Corporation, 321 SCRA 659).
The accommodation pledgor or mortgagor is not
solidarily bound with the principal obligor but his
liability extents only to the property pledged or
mortgaged. Should there be any deficiency, the
creditor has recourse on the principal debtor who
remains to be primarily bound.
The law grants to the accommodation pledgor or
mortgagor the same rights as a guarantor and he
cannot be prejudiced by any waiver of defense by
the principal debtor.
B. Prohibition against Pactum Commissorium (Art
2088; 2137)
Pactum Commissorium
Stipulation whereby the thing pledged or
mortgaged,
or
under
antichresis
shall
automatically become the property of the
creditor in the event of non-payment of the debt
within the term fixed.
12 | P a g e

Requisites:
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
event of nonpayment of the obligation within the
stipulated period.

GENERAL RULE: Pactum Commissorium is forbidden by

law and is declared null and void.
EXCEPTION: The pledgee may appropriate the thing
pledged if after the first and second auctions, the thing
is not sold. (Art 2112)
NOTE: The security contract remains
valid; only the
prohibited stipulation is void.
C. Capability to secure all kinds of obligations, i.e.
pure or conditional (Art 2091)
D. Indivisibility (Art 2089)
GENERAL RULE: A pledge, mortgage, or antichresis is
indivisible, even though the debt may be divided among
the successors in interest of the debtor or of the creditor.
Their indivisibility is not affected by the fact that the
debtors are jointly or not solidarily liable.
Consequences of indivisibility:
1. Single thing Every portion of the property pledged
or mortgaged is answerable for the whole obligation
2. Several things All of the several things pledged or
mortgaged are liable for the totality of the debt
3. Debtors heir/creditors heir - Neither the debtors
heir who has paid part of the debt cannot ask for
proportionate extinguishment, nor creditors heir
who received his share of the debt return the pledge
or cancel the mortgage as long as the debt is not
completely satisfied.
EXCEPTIONS:
1. Where each one of several things guarantees a
determinate portion of the credit
2. Where only a portion of the loan was released
3. Where there was failure of consideration.
4. Where there is no debtor-creditor
relationship
NOTES:
The mere embodiment of a real estate mortgage and
a chattel mortgage in one document does not have
the effect of fusing both securities into an indivisible
whole.
The mortgagee, therefore, may legally foreclose the
real estate mortgage extrajudicially and waive the
chattel mortgage foreclosure, and maintain instead a
personal action for the recovery of the unpaid
balance of the credit (Phil. Bank of Commerce vs.
Macadaeg, 109 Phil 981)
E. When the principal obligation becomes due, the
things in which the pledge, mortgage, or
antichresis consists may be alienated for the
payment to the creditor. (Art. 2087)
NOTES:
If the debtor fails to comply with the obligation at
the time it falls due, the creditor is merely entitled
to move for the sale of the thing pledged or
mortgaged in order to collect the amount of his claim
from the proceeds.

13

If he wishes to secure a title to the mortgaged

property, he can buy it in the foreclosure sale
(Montevirgin vs. CA, 112 SCRA 641)
F. Pledgor, mortgagor, antichretic debtor retains
ownership of the thing given as a security
PLEDGE (Arts 2093 2123)

A contract wherein the debtor delivers to the

creditor or to a third person a movable or
document evidencing incorporeal rights for the
purpose of securing fulfilment of a principal
obligation with the understanding that when the
obligation is fulfilled, the thing delivered shall be
returned with all its fruits and accessions.

Special Requisites (in addition to the common

essential requisites):
1. Possession of the thing pledged must be
transferred to the creditor or a third person by
agreement (Art 2093);
2. It can only cover movable property and
incorporeal rights evidenced by documents of
title and the instruments proving the right
pledged shall be delivered to the creditor, and if
negotiable must be endorsed (Art 2094); and
3. The description of the thing pledged and the
date must appear in a public instrument to bind
third persons, but not for the validity of the
contract (Art 2096).

1.
2.

Kinds:
Conventional /Voluntary created by contract
Legal created by operation of law (examples:
Art. 546, 1731 and 1914 NCC)

NOTES:
The provisions of possession, care and sale of the
thing as well as on the termination of the pledge
governing conventional pledges are applicable to
pledges created by operation of law (Art 2121)
Unlike, however, in conventional pledge where
the debtor is not entitled to the excess unless it
is otherwise agreed, in legal pledge, the
remainder of the price of the sale after payment
of the debt and expenses, shall be delivered to
the debtor.
In legal pledge, there is no definite period for the
payment of the principal obligation. The pledgee
must make a demand for the payment of the
amount due him; otherwise he cannot exercise
the right of sale at public auction (Art 2122)
Characteristics:
1.
Real contract it is
perfected by the delivery of the thing pledged
by the debtor who is called the pledgor to the
creditor who is called the pledgee, or to a third
person by common agreement;
2.
Accessory contract
it has no independent existence of its own;
3.
Unilateral contract
it creates an obligation solely on the part of the
creditor to return the thing subject thereof upon
the fulfilment of the principal obligation; and
4.
Subsidiary contract
the obligation incurred does not arise until the
fulfilment of the principal obligation which is
secured.
13 | P a g e

Consideration in pledge:
Insofar as the pledgor is concerned, the cause is the
principal obligation.
If the pledgor is not the debtor, the cause is the
compensation stipulated for the pledge or the mere
liberality of the pledgor.
Extent of pledge: Unless stipulated otherwise, pledge
extends to the fruits, interests or earnings of the thing.
Rights and Obligations of a Pledgor
Rights
Obligations
1. To demand return in
case of reasonable
grounds to fear
destruction or
impairment of the thing
without the pledgees
fault, subject to the
duty of replacement
(Art 2107)
2. To bid and be
preferred at the public
auction (Art 2113)
3. To alienate the thing
pledged provided the
pledgee consents to the
sale (Art 2097)
4. To ask that the thing
pledged be deposited
(Arts 2104 & 2106)

1. To advise the
pledgee of the
flaws of the thing
(Art 2101)
2. Not to demand
the return of the
thing until after
full payment of
the debt,
including interest
due thereon and
expenses incurred
for its
preservation (Art
2105)

Rights of the Pledgee

KEY: D SBC BA2R2OPS2
1. Option to demand replacement or immediate
payment of the debt in case of deception as to substance
or quality (Art 2109)
2. To sell at public auction in case of reasonable
grounds to fear destruction or impairment of the thing
without his fault (Art 2108)
3. To bring actions pertaining to the owner (Art 2103)
4. To choose which of several things pledged shall be
sold
5. To bid at the public auction (Art 2113)
6. To appropriate the thing in case of failure of the 2 nd
public auction (Art 2112)
7. To apply said fruits, interests or earnings to the
interest, if any, then to the principal of the credit (Art
2102)
8. To retain excess value received in the public sale (Art
2115)
9. To retain the thing until after full payment of the
debt (Art 2098)
10. To be reimbursed for the expenses made for the
preservation of the thing pledged (Art 2099)
11. To object to the alienation of the thing
12. To possess the thing (Art 2098)
13. To sell at public auction in case of non-payment of
debt at maturity (Art 2112)
To choose which of the several things pledged shall be
sold (Art 2119)
14. Option to demand replacement or immediate
payment of the debt in case of deception as to substance
or quality (Art 2109)
15. To sell at public auction in case of reasonable
grounds to fear destruction or impairment of the thing
without his fault (Art 2108)
16. To bring actions pertaining to the owner (Art 2103)
17. To choose which of several things pledged shall be
sold
18. To bid at the public auction (Art 2113)

14
19. To appropriate the thing in case of failure of the
2nd public auction (Art 2112)
20. To apply said fruits, interests or earnings to the
interest, if any, then to the principal of the credit
(Art 2102)
21. To retain excess value received
in the public sale (Art 2115)
22. To retain the thing until after full payment of the
debt (Art 2098)
23. To be reimbursed for the expenses made for the
preservation of the thing pledged (Art 2099)
24. To object to the alienation of the thing
25. To possess the thing (Art 2098)
26. To sell at public auction in case of non-payment
of debt at maturity (Art 2112)
27. To choose which of the several things pledged
shall be sold (Art 2119)
Obligations of the Pledgee
KEY: CUDA3
1. Take care of the thing with the diligence of a good
father of a family (Art 2099)
2. Not to use thing unless authorized or by the owner
or its preservation requires its use (Art 2104)
3. Not to deposit the thing with a 3 rd person unless so
stipulated (Art 2100)
4. Responsibility for acts of agents and employees as
regards the thing (Art 2100)
5. To advise pledgor of danger to the thing (Art 2107)
6. To advise pledgor of the result of the public
auction (Art 2116)
RIGHT OF PLEDGOR TO SUBSTITUTE THING PLEDGED
(ART.2107)
Requisites:
1. The pledgor has reasonable grounds to fear
the destruction or impairment of the thin
pledged
2. There is no fault on the part of the pledgee
3. The pledgor is offering in place of the thing,
another thing in pledge which is of the same
kind and quality as the former
4. The pledge does not choose to exercise his
right to cause the thing pledged to be sold at
public auction
NOTE: The pledgees right to have the thing pledged
sold at public sale granted under the Article 2108 is
superior to that given to the pledgor to substitute the
thing pledged under Article 2107.
Prohibition against double pledge
Property which has been lawfully pledged to one
creditor cannot be pledged to another as long as
the first one subsists.
NOTE: Possession of a creditor of the thing pledged is
an essential requisite of pledge.
Extinguishment of Pledge (CRAPS)
1. For the same causes as all other obligations (Art
1231)
2.
Return of the thing pledged by the pledgee to
the pledgor (Art 2110)
3.
Statement in writing by the pledgee that he
renounces or abandons the pledge (Art 2111)
4.
Payment of the debt (Art 2105)
5.
Sale of thing pledged at public auction (Art
2115)
NOTE: The possession by the debtor or owner of the
thing pledged subsequent to the perfection of the
pledge gives rise to a prima facie presumption that
the thing has been returned and, therefore, that the
14 | P a g e

pledge has been extinguished but not the principal

obligation itself. (Art 2110)
Requirements for sale of thing pledged at public
auction: (Art 2112)
1. The debt is due and unpaid
2. Sale must be at a public auction
3. there must be notice to the pledgor and owner,
stating the amount due
4. Sale must be with the intervention of a notary public
Effect of sale of the thing pledged: (Art 2115)
1. 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
2. If the price of the sale is more than the amount due
the creditor, the debtor is not entitled to the excess
unless the contrary is provided
3. If the price of the sale is less, the creditor is not
entitled to recover the deficiency even if there is a
stipulation to that effect
REAL ESTATE MORTGAGE (Articles 2124-2131)

A contract whereby the debtor secures to the

creditor the fulfilment of a principal obligation,
specially subjecting to such security immovable
property or real rights over immovable property in
case the principal obligation is not complied with at
the time stipulated.

Characteristics of the contract:

1. Real
2. Accessory
3. Subsidiary
4. Unilateral it creates only an obligation on the
part of the creditor who must free the property
from the encumbrance once the obligation is
fulfilled.

NOTES:
As an accessory contract, its consideration is that of
the principal contract from which it receives life.
A mortgage does not involve a transfer, cession or
conveyance of property but only constitutes a lien
thereon. Until discharged, it follows the property
wherever it goes and subsists notwithstanding
changes of ownership.
A mortgage gives the mortgagee no right or claim to
the possession of the property, and therefore, a mere
mortgagee has no right to eject an occupant of the
property mortgaged unless the mortgage should
contain some provision to that effect. The only right
of a mortgagee in case of non-payment of a debt
secured by mortgage would be to foreclose the
mortgage and have the encumbered property sold to
satisfy the outstanding indebtedness. If the
possession is transferred to the mortgagee, it must
not expressly be for purpose of applying the fruits to
the interest then to the principal of the credit, for
then it would be an antichresis.
It is not an essential requisite that the principal of
the mortgage credit bears interest, or that the
interest as compensation for the use of the principal
and enjoyment of its fruits be in the form of a
certain percent thereof.

15
Special Requisites (in addition to the common
essential requisites):
1. It can cover only immovable property and
alienable real rights imposed upon immovables
(Art 2124);
2. It must appear in a public instrument (Art. 2125);
and
3. Registration in the registry of property is
necessary to bind third persons, but not for the
validity of the contract (Art 2125).
An order for foreclosure cannot be refused on
the ground that the mortgage had not been
registered provided no innocent third parties
are involved.
NOTE: Where a mortgage is not valid or false, the
principal obligation which it guarantees is not
rendered null and void. What is lost only is the right
to foreclose the mortgage as a special remedy for
satisfying or settling the indebtedness which is the
principal obligation but the mortgage deed remains
as evidence or proof of a personal obligation of the
debtor and the amount due to the creditor may be
enforced in an ordinary personal action.

Kinds:
1. Voluntary agreed to by the parties or
constituted by the will of the owner of the
property on which it is created
2. Legal one required by law to be executed in
favour of certain persons
The persons in whose favour the law
establishes a mortgage have no other right
than to demand the execution and the
recording of the document in which the
mortgage is formalized (Art 2125 par 2)
3. Equitable one which, although lacking the
formalities of a mortgage, shows the intention of
the parties to make the property a security for a
debt
PLEDGE
1. Constituted on
movables
2. Property is
delivered to pledgee
or by common
consent to a third
person
3. Not valid against
third persons unless a
description of the
thing pledged and
date of pledge
appear in a public
instrument

REAL MORTGAGE
1. Constituted on
immovables
2. Delivery is not
necessary

3. Not valid against

third persons unless
registered

Extent of Mortgage:
Absent express stipulation to the contrary, the
mortgage includes the accessions, improvements,
growing fruits and income of the property not yet
received when the obligation becomes due and to
the amount of the indemnity granted or owing to
the proprietor from the insurers of the property
mortgaged, or in virtue of expropriation for
public use (Art 2127)
Object of Mortgage:
Future property cannot be an object of a contract
of mortgage (Art 2085[2]) However, a stipulation
subjecting to the mortgage lien, properties
(improvements) which the mortgagor may
subsequently acquire install, or use in connection
15 | P a g e

with real property already mortgaged belonging to

the mortgagor is valid (Peoples Bank and Trust Co.
vs. Dahican Lumber Co., 20 SCRA 84)
Special Rights:
1. Mortgagor - To alienate the mortgaged property but
the mortgage shall remain attached to the property.
NOTE: A stipulation forbidding the owner from alienating
the immovable mortgage shall be void (Art 2130) being
contrary to public policy inasmuch as the transmission of
property should not be unduly impeded.
2. Mortgagee - To claim from a 3rd person in possession
of the mortgaged property the payment of the part
of the credit secured by the which said third person
possesses (Art 2129)
NOTE: It is necessary that prior demand for payment
must have been made on the debtor and the latter failed
to pay (BPI vs Concepcion & Hijos, Inc., 53 Phil 906)
Foreclosure
The remedy available to the mortgagee by which he
subjects the mortgaged property to the satisfaction
of the obligation to secure that for which the
mortgage was given
NOTES:
It denotes the procedure adopted by the mortgagee
to terminate the rights of the mortgagor on the
property and includes the sale itself (DBP vs
Zaragoza, 84 SCRA 668)
Foreclosure is valid where the debtor is in default in
the payment of his obligation (Gobonseng, Jr. vs CA,
246 SCRA 472)
Kinds:
1. Judicial ordinary action for foreclosure under Rule
68 of the Rules of Court
2. Extrajudicial when mortgagee is given a special
power of attorney to sell the mortgaged property by
public auction, under Act No. 3135
Judicial
foreclosure
1. There is court
intervention
2. Decisions are
appealable
3. Order of court
cuts off all rights of
the parties
impleaded
4. There is equity
of redemption
except on banks
which provides for
a right of
redemption
5. Period of
redemption starts
from the finality of
the judgment until
order of
confirmation
6. No need for a
special power of
attorney in the
contract of
mortgage

Extrajudicial
foreclosure
1. No court
intervention
2. Not appealable
because it is
immediately
executory
3. Foreclosure does
not cut off right of
all parties involved
4. There is right of
redemption

5. Period to redeem
start from date of
registration of
certificate of sale
6. Special power of
attorney in favor of
mortgagee is
needed in the
contract

16
NOTES:
A foreclosure sale retroacts to the date of
registration of the mortgage and that a person
who takes a mortgage in good faith and for
valuable consideration, the record showing clear
title to the mortgagor, will be protected against
equitable claims on the title in favor of third
persons, of which he had no actual or
constructive notice (St. Dominic Corporation vs.
IAC 151 SCRA 577).
Where there is a right to redeem, inadequacy of
price is not material because the judgment
debtor may reacquire the property or else sell his
right to redeem and thus recover any loss he
claims to have suffered by reason of the price
obtained at the auction sale and consequently
not sufficient to set aside the sale.
Mere
inadequacy of the price obtained at the sheriffs
sale will not be sufficient to set aside the sale
unless the price is so inadequate as to shock the
conscience of the court taking into consideration
the peculiar circumstances attendant thereto.
(Sulit vs. CA, 268 SCRA 441)
Should there remain a balance due to the
mortgagee after applying the proceeds of the
sale, the mortgagee is entitled to recover the
deficiency. This rule applies both to judicial and
extra-judicial foreclosure real mortgage.
The action to recover a deficiency after
foreclosure prescribes after 10 years from the
time the right of action accrues (Arts 1142 &
1144).
Stipulation of upset price or tipo
It is a stipulation in a mortgage of real property
of minimum price at which the property shall be
sold, to become operative in the event of a
foreclosure sale at public auction. It is null and
void for the property must be sold to the highest
bidder. Parties cannot, by agreement, contravene
the law and interfere with the lawful procedure
of the courts (BPI vs Yulo, 31 Phil 476)
Extrajudicial foreclosure real property (Act No.
3135)
The law covers only real estate mortgages. It is
intended merely to regulate the extrajudicial sale
of the property mortgaged if and when the
mortgagee is given a special power of express
authority to do so in the deed itself or in a
document annexed thereto.
The authority to sell is not extinguished by the
death of the mortgagor (or mortgagee) as it is an
essential and inseparable part of a bilateral
agreement (Perez vs PNB, 17 SCRA 833).
No sale can be legally made outside the province
in which the property sold is situated; and in case
the place within said province in which the sale is
to be made is the subject of stipulation, such sale
shall be made in the said place in the municipal
building of the municipality in which the property
or part thereof is situated.
Procedure for extrajudicial foreclosure of both real
estate mortgage under Act No. 3135 and chattel
mortgage under Act No. 1508 (A.M. No. 99-10-05-0,
January 15, 2000)
1. Filing of application before the Executive Judge
through the Clerk of Court
16 | P a g e

2. Clerk of Court will examine whether the requirement

of the law have been complied with, that is, whether
the notice of sale has been posted for not less than
20 days in at least three (3) public places of the
municipality or city where the property is situated,
and if the same is worth more than P400.00, that
such notice has been published once a week for at
least three (3) consecutive weeks in a newspaper of
general circulation in the city of municipality
3. The certificate of sale must be approved by the
Executive Judge
4. Where the application concerns extrajudicial
foreclosure of real mortgages in different locations
covering one indebtedness, only one filing fee
corresponding to such debt shall be collected
5. The Clerk of Court shall issue certificate of payment
indicating the amount of indebtedness, the filing fees
collected, the mortgages sought to be foreclosed,
the description of the real estates and their
respective locations
6. The notice of sale shall be published in a newspaper
of general circulation pursuant to Section 1, PD No.
1079
7. The application of shall be raffled among all sheriffs
8. After the redemption period has expired, the Clerk of
Court shall archive the records.
9. No auction sale shall be held unless there are at least
two (2) participating bidders, otherwise the sale shall
be postponed to another date. If on the new date
set forth for the sale there shall not be at least two
bidders, the sale shall then proceed. The names of
the bidders shall be reported to the Sheriff of the
Notary Public, who conducted the sale to the Clerk of
Court before the issuance of the certificate of sale.
NOTES:
The Mortgagor and Mortgagee have no right to waive
the posting and publication requirements under Act.
No. 3135. Notices are given to secure bidders and
prevent a sacrifice of the property. Clearly, the
statutory requirements of posting and publication are
mandated, not for the mortgagors benefit, but for
the public or third persons. Failure to comply with
the statutory requirements as to publication of
notice of auction sale constitutes a jurisdictional
defect which invalidates the sale.Lack of
republication of notice of foreclosure sale made
subsequently after the original date renders such sale
void (PNB vs. Nepomuceno Productions Inc., G.R. No.
139479. December 27, 2002).
Sec 3 of Act 3135 does not require personal or any
particular notice on the mortgagor much less on his
successors-in-interest where there is no contractual
stipulation therefor. Hence, unless required in the
mortgage contract, the lack of such notice is not a
ground to set aside a foreclosure sale.
Neither does Sec 3 require posting of notice of sale
on the mortgage property and the certificate of
posting is not required, much less considered
indispensable, for the validity of a foreclosure sale.
Redemption
It is the transaction by which the mortgagor
reacquires or buys back the property which may have
passed under the mortgage, or divests the property
of the lien which the mortgage may have created.
NOTES:

17
c. cost and expenses
NOTE: Redemption price in this case is reduced by
the income received from the property

A sale by the mortgagor to a third party of the

mortgaged property during the period for

redemption transfers only the right to redeem
the property and the right to possess, use and
enjoy the same during said period.
Where sale with assumption of mortgage not
registered and made without the consent of the
mortgagee, the buyer, thereof, was not validly
substituted as debtor and, hence, had no right to
redeem (Bonnevie vs. CA, 125 SCRA 122).

Kinds:
1. Equity of Redemption right of mortgagor to
redeem the mortgaged property after his default
in the performance of the conditions of the
mortgage within the 90-day period from the date
of the service of the order of foreclosure or even
thereafter but before the confirmation of the
sale. Applies to judicial foreclosure of real
mortgage and chattel mortgage foreclosure.
NOTE: Redemption of the banking institutions is
allowed within one year from confirmation of sale.
2. Right of Redemption right of mortgagor to
redeem the mortgaged property within one year
from the date of registration of the certificate of
sale. Applies only to extrajudicial foreclosure of
real mortgage.
NOTE: The right of redemption, as long as within the
period prescribed, may be exercised irrespective of
whether or not the mortgagee has subsequently
conveyed the property to some other party (Sta.
Ignacia Rural Bank, Inc. vs. CA, 230 SCRA 513)
Period of Redemption
1. Extra-judicial (Act #3135)
a. natural person one year from registration of
the certificate of sale with Registry of Deeds
b. juridical person same rule as natural person
c. juridical person (mortgagee is bank) - three
months
after
foreclosure
or
before
registration of certificate of foreclosure
which ever is earlier (sec. 47, of General
Banking Law)
2. Judicial before confirmation of the sale by the
court
NOTE: Allowing a redemption after the lapse of the
statutory period, when the buyer at the foreclosure
sale does not object but even consents to the
redemption, will uphold the policy of the law which is
to aid rather than defeat the right of redemption.
There is nothing in the law which prevents a waiver
of the statutory period for redemption (Ramirez vs
CA, 219 SCRA 598).
Amount of the redemption price:
1. Mortgagee is not a bank (Act No. 3135, in relation
to Sec. 28, Rule 39 of Rules of Court)
a. purchase price of the property
b. 1% interest per month on the purchase price
c. taxes paid and amount of purchasers prior
lien, if any, with the same rate of interest
computed from the date of registration of
sale, up to the time of redemption
2. Mortgagee is a bank (GBL 2000)
a. amount due under the mortgage deed
b. interest
17 | P a g e

ANTICHRESIS (Articles 2132 -2139)

A contract whereby the creditor acquires the right to

receive the fruits of an immovable of the debtor,
with the obligation to apply them to the payment of
the interest, if owing, and thereafter to the principal
of his credit (Art 2132)

Characteristics
1. Accessory contract it secures the performance of a
principal obligation
2. Formal contract it must be in a specified form to be
valid, i.e., in writing. (Art 2134)

1.
2.
3.
4.

Special Requisites (in addition to the common

essential requisites):
It can cover only the fruits of an immovable
property; (Art 2132)
Delivery of the immovable is necessary for the
creditor to receive the fruits and not that the
contract shall be binding;
Amount of principal and interest must be specified in
writing (Art. 2134); and
Express agreement that debtor will give possession of
the property to creditor and that the latter will apply
the fruits to the interest, if any, then to the principal
of his credit. (Art 2132)

NOTE: The obligation to pay interest is not of the

essence of the contract of antichresis, there being
nothing in the Code to show that antichresis is only
applicable to securing the payment of interest-bearing
loans. On the contrary, antichresis is susceptible of
guaranteeing all kinds of obligations, pure or conditional
Antichresis

Pledge

1. Refers to real
property
2. Perfected by mere
consent

1. Refers to personal
property
2.
Perfected
by
delivery of the thing
pledged
3. Consensual contract 3. Real Contract

Antichresis

Real Mortgage

1. Property is
delivered to creditor

1. Debtor usually
retains possession of
the property
2. Creditor does not
have any right to
receive the fruits;
but the mortgage
creates a real right
over the property
3. The creditor has no
such obligation

2. Creditor acquires
only the right to
receive the fruits of
the property, hence,
it does not produce a
real right
3. The creditor,
unless there is
stipulation to the
contrary, is obliged to
pay the taxes and
charges upon the
estate

18
4. It is expressly
4. There is no such
stipulated that the
obligation on part of
creditor given
mortgagee
possession of the
property shall apply
all the fruits thereof
to the payment of
interest, if owing,
and thereafter to the
principal
Subject matter of both is real property

Obligations of antichretic creditor:

1 To pay taxes and charges on the estate, including
necessary expenses
NOTE: Creditor may avoid said obligation by:
a. compelling
debtor
to
reacquire
enjoyment of the property or
b. by stipulation to the contrary
2 To apply all the fruits, after receiving them, to
the payment of interest, if owing, and thereafter
to the principal
3 To render an account of the fruits to the debtor
4 To bear the expenses necessary for its
preservation and repair
Remedies of creditor in case of non-payment of
debt
1. Bring an action for specific performance; or
2. Petition for the sale of the real property as in a
foreclosure of mortgages under Rule 68 of the
Rules of Court.(Art 2137)
NOTES:
The parties, however, may agree on an
extrajudicial foreclosure in the same manner as
they are allowed in contracts of mortgage and
pledge (Tavera vs. El Hogar Filipino, Inc., 68 Phil
712).
A stipulation authorizing the antichretic creditor
to appropriate the property upon the nonpayment of the debt within the agreed period is
void (Art 2088).
CHATTEL MORTGAGE (Articles 2140-2141)

A contract by virtue of which personal property is

recorded in the Chattel Mortgage Register as a
security for the performance of an obligation (Art
2140).

Characteristics
1. Accessory contract it is for the purpose of
securing the performance of a principal
obligation
2. Formal contract registration in the Chattel
Mortgage Register is indispensable for its validity
3. Unilateral contract it produces only obligations
on the part of the creditor to free the thing from
the encumbrance on fulfilment of the obligation.
Special Requisites (in addition to the common
essential requisites):
1. It can cover only personal or movable property in
general; however, the parties may treat as
personal property that which by its nature would
be real property;
2. Registration of the mortgage with the Chattel
Mortgage Register where the mortgagor resides; if

18 | P a g e

property is located in a different province,

registration in both provinces required;
3. Description of the property as would enable the
parties or other persons to identify the same after
reasonable investigation and inquiry; and
4. Accompanied by an affidavit of good faith to bind
third persons, but not for the validity of the
contract.
5. It can cover only obligations existing at the time the
mortgage is constituted.
NOTE: A mortgage containing a stipulation in regard
to future advances in the credit will take effect only
from the date the same are made and not from the
date of the mortgage (Jaca vs Davao Lumber Co.,
113 SCRA 107)
Effect of registration: Creates a real right
The registration of the chattel mortgage is an
effective and binding notice to other creditors of its
existence and creates a real right or a lien which,
being recorded, follows the chattel wherever it goes.
The registration gives the mortgagee symbolical
possession (Northern Motors, Inc. vs. Coquia, 68
SCRA 374).
Effect of failure to register chattel mortgage in the
chattel mortgage registry
Article 2140 makes the recording in the Chattel
Mortgage Register an essential requisite but if the
instrument is not recorded, the mortgage is
nevertheless binding between the parties. But the
person in whose favour the law establishes a
mortgage has no other right than to demand the
execution and the recording of the document.
Chattel Mortgage
1. Delivery of the
personal property
to the mortgage is
not necessary
2. registration in
the Chattel
Mortgage Registry
is necessary for its
validity
3. If property is
foreclosed, the
excess over the
amount due goes to
the debtor

Pledge
1. Delivery of the
thing pledged is
necessary
2. registration not
necessary to be
valid
3. Debtor is not
entitled to excess
unless otherwise
agreed or except in
case of legal
pledge
4. If there is
deficiency, creditor
is not entitled to
recover
notwithstanding
any stipulation to
the contrary

4. If there is
deficiency after
foreclosure,
creditor is entitled
to recover the
deficiency from the
debtor, except
under Art. 1484
Subject matter of both is movable
property

Affidavit of Good Faith

Oath in a contract of chattel mortgage wherein the
parties "severally swear that the mortgage is made
for the purpose of securing the obligation specified in
the conditions thereof and for no other purposes and
that the same is a just and valid obligation and one

19
not entered into for the purpose of fraud. (Sec.
5, Chattel Mortgage Law)
Effect of absence
The special affidavit is required only for the
purpose of transforming an already valid
mortgage into preferred mortgage. Thus, it is
not necessary for the validity of the chattel
mortgage itself but only to give it a preferred
status. In other words, its absence vitiates the
mortgage only as against third persons without
notice
like
creditors
and
subsequent
encumbrancers.
Foreclosure of Chattel Mortgage
NOTES:
Foreclosure sale in chattel mortgage is by public
auction under Act No. 1508, but the parties may
stipulate that it be by private sale.
The mortgagee may, after thirty (30) days from
the time of the condition broken, cause the
mortgaged property to be sold at public auction
by a public officer. The 30-day period is also a
grace period for the mortgagor to discharge the
mortgage obligation. After the sale of the chattel
at public auction, the right of redemption is no
longer available to the mortgagor (Cabral vs.
Evangelista, 28 SCRA 1000).
Application of proceed of sale:
1. Costs and expenses of keeping and sale
2. Payment of the obligation secured by the
mortgage
3. Claims of persons holding subsequent
mortgages in their order
4. The balance, if any, shall be paid to the
mortgagor or person holding under him
NOTES:
The creditor may maintain an action for the
deficiency, except if the chattel mortgage is
constituted as security for the purchase of
personal property payable in instalments (Art.
1484).
The action for deficiency may be brought within
ten (10) years from the time the cause of action
accrues (Arts 1141 and 1142).
Only equity of redemption is available to the
mortgagor; the latter can no longer redeem after
the confirmation of the foreclosure sale.
Right of redemption
When the condition of a chattel mortgage is
broken the following may redeem:
a) mortgagor;
b) person holding a subsequent mortgage; or
c) subsequent attaching creditor.
An attaching creditor who so redeems shall be
subrogated to the rights of the mortgagee and
entitled to foreclose the mortgage in the same
manner that the mortgagee could foreclose it.
The redemption is made by paying or delivering
to the mortgagee the amount due on such
mortgage and the costs, and expenses incurred by
such breach of condition before the sale thereof
(Sec 13, Act No. 1508).
Right to possession of foreclosed property
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1. Real mortgage After the redemption period has

expired, the purchaser of the property has the right
to a conveyance and to be placed in possession
thereof.
NOTES:
Purchaser is not obliged to bring a separate suit
for possession. He must invoke the aid of the
courts and ask for a WRIT OF POSSESSION.
Section 7 of Act No. 3135 allows the purchaser to
take possession of the foreclosed property during
the period of redemption upon filing of an ex
parte application and approval of a bond.
2. Chattel mortgage When default occurs and the
creditor desires to foreclose, the creditor has the
right to take the property as a preliminary step for
its sale.
NOTE: Where the debtor refuses to yield the
property, the creditors remedy is to institute an
action either to effect judicial foreclosure directly or
to secure possession (REPLEVIN) as a preliminary to
the sale contemplated in Section 14 or Act. No. 1508
CONCURRENCE AND PREFERENCE OF CREDITS (Articles
2236 2251)
Concurrence of Credits
Possession by two or more creditors of equal rights or
privileges over the same property or all of the
property of the debtor
Preference of Credits
Right held by a creditor to be preferred in the
payment of his claim above others out of the debtors
assets.
NOTES:
The rules on preference of credits apply only when
two or more creditors have separate and distinct
claims against the same debtor who has insufficient
property.
Preference creates no lien on property, and,
therefore, gives no interest in property, specific or
general, to the preferred creditor but a preference
in application of the proceeds after the sale. (Molina
vs. Somes, 31 Phil. 76)
The preferential right of credit attains significance
only after the properties of the debtor have been
inventoried and liquidated, and the claims held by
his various creditors have been established. (DBP vs.
NLRC, 183 SCRA 328)
Preference of
Credit

Lien

Applies only to
claims which do
not attach to
specific
properties

Creates a charge
on a particular
property

Liability of debtors property for his obligations

GENERAL RULE: Debtor is liable with all his property,
present and future, for the fulfilment of his obligations.
(Art 2236)

EXEMPT PROPERTY:
1. Present property those provided under Arts. 155
and 205 of the Family Code, Sec. 13, Rule 39 of

20
the Rules of Court, and Sec. 118 of the Public
Land Act
2. Future property a debtor who obtains a
discharge from his debts on account of his
insolvency, is not liable for the unsatisfied
claims of his creditors with said property
subject to certain exceptions expressly
provided by law. (Secs. 68, 69, The Insolvency
Law [Act No. 1956])
3. Property under legal custody and those
owned by municipal corporations necessary
for governmental purposes
General Categories of Credit:
1. Special Preferred Credits - those listed in Arts.
2241 and 2242 shall be considered as mortgages and
pledges of real or personal property or liens (Art.
2243). Hence, they are not included in the insolvent
debtor's assets.
NOTES:
Arts. 2241 and 2242 do not give the order of
preference or priority of payment. They merely
enumerate the credits which enjoy preference
with respect to specific movables or immovables.
With respect to the same specific movables or
immovables, creditors, with the exception of the
State (No. 1), merely concur.
They only find application when there is a
concurrence of credits, i.e., when the same
specific property of the debtor is subjected to
the claims of several creditors and the value of
such property is insufficient to pay in full all the
creditors. In such a situation, the question of
preference will arise.
Article 2242 makes no distinction between
registered and unregistered vendors lien (No. 2).
Hence, any lien of that kind enjoys the preferred
credit status. Unlike the unpaid price of real
property sold, mortgage credits (No. 5), in order
to be given preference, should be recorded in the
Registry of Property. But a recorded mortgage
credit is superior to an unrecorded unpaid
vendors lien (De Barretto vs. Villanueva, 1 SCRA
288)
The priority rule applies to credits annotated in
the Registry of Property. As to credits mentioned
in No. 7 of Article 2242, there is preference
among the attachments or executions according
to the order of the time they were levied upon
the property. The pro rata rule in Article 2249
does not apply; otherwise, the result would be
absurd. The preference of a credit annotated by
an attachment or execution could be defeated by
simply obtaining a writ of attachment or
execution, no matter how much later (Manabat
vs Laguna Federation of Facomas, Inc., 19 SCRA
621).

The last paragraph of Article 2241 applies

only when the right of ownership in such property
continues in the debtor, and, therefore, it is not
applicable to cases where the debtor has parted
with his ownership therein, as where he has sold
the property (Pea vs. Mitchell, 9 Phil 587)
Ordinary Preferred Credits - those listed in Art.
2244 as amended by Art. 110 of the Labor Code.
NOTES:
2.

20 | P a g e

The provision not only enumerates the preferred

credits with respect to other property, real and

personal, of the debtor, but also gives their order of
preference in the order named.
In contrast with Articles 2241 and 2242, Article 2244
creates no liens on determinate property which
follow such property. What Article 2244 creates are
simply rights in favour of certain creditors to have
the cash and other assets of the insolvent applied in
a certain sequence or order of priority.
Article 2244, particularly par (14) item (1) thereof, is
not applicable to obligations of the State as it is a
recognized doctrine that the State is always solvent.
It is inconceivable for the State to voluntarily initiate
insolvency or general liquidation proceedings or to be
subjected to such proceedings under its own laws.

Common Credits those listed under Art. 2245,

which shall be paid pro rata regardless of dates.
NOTE: Ordinary Preferred and Common Credits cover
only free property of the debtor, or those not
subjected to Special Preferred Credit.
3.

Effects of Article 110 of Labor Code to Art 2244:

1. Removed the one-year limitation found in No. 2 of
Art. 2244
2. Moving up the claims for unpaid wages (and other
monetary claims) of laborers or workers of insolvent
from second priority to first priority in the order of
preference established by Art. 2244

NOTES:
In case of bankruptcy or liquidation of the employers
business, the unpaid wages and other monetary
claims of the employees shall be given first
preference and shall be paid in full before the claims
of the government and other creditors may be paid.
The terms, declaration of bankruptcy, or judicial
liquidation have been eliminated, nevertheless,
according to the SC, bankruptcy or liquidation
proceedings are still necessary for the operation of
the preference accorded to workers under Art. 110 of
the Labor Code. (DBP vs. NLRC 183 SCRA 328; RA No.
6715 Sec 10)
In case of rehabilitation, the preference of credit
granted to employees under Art 110 of the Labor
Code is not applicable (Rubberworld [Phils.] vs CA,
305 SCRA 722).
Refectionary Credit
Indebtedness incurred in the repair or reconstruction
of something previously made, such repair or
reconstruction being made necessary by the
deterioration or destruction of the thing as it
formerly existed.
ORDER OF PREFERENCE OF CREDITS

Arts. 2241 and 2242, jointly with Arts. 2246 to 2249

establish a two-tier order of preference:
1. First tier includes taxes, duties and fees due on
specific movable or immovable property;
2. Second tier all other special preferred (non-tax)
credits shall be satisfied pro-rata, out of any residual
value of the specific property to which such credits
relate.

21

NOTES:
The pro-rata rule does not apply to credits
annotated in the Registry of Property by virtue of
a judicial

order, by attachments and executions, which are

preferred as to later credits. In satisfying
several credits annotated by attachments or
executions, the rule is still preference according
to the priority of the credits in the order of time.
In order to make the pro rating provided in Art
2249 fully effective, the preferred creditors
enumerated in Nos. 2 to 14 of Art 2242 must
necessarily be convened, and the import of their
claims ascertained. There must be first some
proceeding where the claims of all the preferred
creditors may be bindingly adjudicated, e.g.
insolvency, settlement of decedents estate, or
other liquidation proceedings except where there
are not more than one creditor.

Credits which do not enjoy any preference with

respect to specific property because they are not

among those mentioned in Arts. 2241 and 2242
and those while included in said articles are
unpaid because the value of the property to
which the preference refers is less than the
preferred credit or credits, shall be satisfied in
the order established in Art. 2244 with reference
to other real and/or personal property.
Common credits or those which do not fall under
Arts. 2241, 2242, and 2244 do not enjoy any
preference and shall be paid pro rata regardless

21 | P a g e

of dates.