UST Golden Notes 2011 - Credit Transactions PDF

CREDIT TRANSACTIONS
CREDITTRANSACTIONS depend on the existence of another

contract. (e.g. commodatum and
Q:Whatiscredit? mutuum)
b. Accessory contracts They have to
A: It is a persons ability to borrow money by depend on another contract. These
virtue of confidence or trust reposed in him by accessory contracts depend on the
thelenderthathewillpaywhathemaypromise. existence of a principal contract of
loan. (e.g. guaranty proper,
suretyship, pledge, mortgage and
Q:Whatiscredittransaction?
antichresis)

A:Itreferstoagreementbasedontrustorbelief
3. Astotheirconsideration
of someone on the ability of another person to
a. Onerous This is a contract where
complywithhisobligations.
there is consideration or burden
imposedlikeinterest.
Q:Whatdocredittransactionsinclude? b. GratuitousThisisacontractwhere
there is no consideration or burden
A:Theyincludealltransactionsinvolvingloansof: imposed.(e.g.commodatum)
1. goods
2. servicew Q:Whatisbailment?
3. money extended to another either
gratuitously or onerously with a A: It is the delivery of a personal property for
promisetopayordeliverinthefuture. some particular use, or on mere deposit, upon a
contract, express or implied, that after the
Q:Whatissecurity? purposehasbeenfulfilled,itshallberedelivered
tothepersonwhodeliveredit,orotherwisedealt
A:Itissomethinggiven,deposited,orservingasa with according to his directions, or kept until he
means to ensure the fulfillment or enforcement reclaimsit,asthecasemaybe.
ofanobligationorofprotectingsomeinterestin
theproperty. Note: Generally, no fiduciaryrelationship is created
by bailment. No trusteebeneficiary relationship is
Q:Whatarethetypesofsecurity? created.

A: Q: What are the contractual bailments with
Personal: whenan individual become asurety referencetocompensation?
oraguarantor.
Real or property: when an encumbrance is A:
madeonproperty. 1. For the sole benefit of the bailor
(gratuitous)
Q:Whatarethekindsofcredittransactions? e.g.gratuitousdeposit,commodatum

A: 2. For the sole benefit of the bailee
1. Ascontractsofsecurity (gratuitous)
a. Contracts of real security These e.g.commodatum,mutuum
are contracts supported by
collateral/s or burdened by an 3. Forthebenefitofbothparties(mutual
encumbrance on property such as benefitbailments)
mortgageandpledge.
a. e.g.depositforcompensaton,
b. Contracts of personal security
involuntary deposit, pledge
These are contracts where
andbailmentsforhire:
performance by the principal debtor
is not supported by collateral/s but

only by a promise to pay or by the b. hireofthingstemporaryuse
personal undertaking or c. hire of service for work or
commitmentofanotherpersonsuch labor
asinsuretyorguaranty. d. hireofcarriageofgoodsfor
carriage
2. Astotheirexistence e. hireofcustodyforstorage
a. Principal contracts They can exist
alone. Their existence does not
375
ACADEMICSCHAIR:LESTERJAYALANE.FLORESII UNIVERSITYOFSANTOTOMAS
VICECHAIRSFORACADEMICS:KARENJOYG.SABUGO&JOHNHENRYC.MENDOZA
VICE C HAIRFORA DMINISTRATIONANDF INANCE : JEANELLE C. LEE Facultad de Derecho Civil
VICECHAIRSFORLAYOUTANDDESIGN:EARLLOUIEM.MASACAYAN&THEENAC.MARTINEZ
UST GOLDEN NOTES 2011

I.LOAN Astowhetheritisfungibleornot,itdependsupon
theintentionoftheparties.
Q:Whatisloan?
Fungiblesareusuallydeterminedbynumber,weight
A: It is a contract where one of the parties ormeasure.
delivers to another, either something not
consumable so that the latter may use the same Q:Arenonfungiblethingsirreplaceable?
for a certain time and return it, in which case is
called a commodatum; or money or other A:
consumable things, upon the condition that the GR: Nonfungible things are irreplaceable.
same amount of the same kind and quality shall Theymustbereturnedtothelenderafterthe
be paid, in which case the contract is simply purposeoftheloanhadbeenaccomplished.
calledaloanormutuum(Art.1933,NCC)
XPN:Nonfungiblethingsmaybereplacedby
Q:Whatarethekindsofloan? agreement of the parties. In such case, the
contractisbarterandnotloan.
A:
1. Commodatum where the bailor Q:Distinguishloanfrom:
(lender) delivers to the bailee Credit;
(borrower) a nonconsumable thing so Discount;
that the latter may use it for a given Rentorlease;and
timeandreturnthesamething Barter.
2. Mutuum where the bailor (lender)
deliverstothebailee(borrower)money A:
or other consumable thing upon the CREDIT LOAN
conditionthatthelattershallpaysame Abilitytoborrowmoney Deliverybyonepartyandthe
amountofthesamekindandquality byvirtueofthe receiptbytheotherpartyofa
confidencereposedby givensumofmoney,uponan

thelenderuntohimthat agreement,expressedorimplied,
Q:Whatmaybetheobjectofacontractofloan?
hewillpaywhathehas torepaythesumloaned,withor

promised withoutinterest
A:Itdependsuponthekindofloan.
DISCOUNT LOAN
1. Commodatum the object is generally Interestisdeductedin Interestistakenattheexpiration
notconsumable; advance ofacredit
2. Mutuumtheobjectisconsumable. Alwaysondoublename
Generallyonasinglenamepaper
paper
Q: Distinguish consumable from non RENT LOAN
consumablethings. Theownerofproperty
doesnotlosethe
A:Athingisconsumablewhenitcannotbeused ownership;heloseshis Thethingloanedbecomesthe
in a manner appropriate to its nature without controlovertheproperty propertyoftheobligor
being consumed. (Art. 418) (e.g. food, firewood, rentedduringtheperiod
gasoline) ofcontract
Landlordtenant
Obligorobligeerelationship
On the other hand, a nonconsumable thing is a relationship
movable thing which can be used in a manner BARTER LOAN
appropriate to its nature without it being Subjectmatterarenon Subjectmatterismoneyorother
consumed.(Art.418)(e.g.car,television,radio) fungiblethings fungiblethings
Alwaysonerous Maybegratuitousoronerous
Q:Distinguishfungiblefromnonfungiblethings. Thereisamutualsale
resultinginthetransfer inmutuum,thereistransferof
A: Fungible thing is one where the parties have ofownershiponboth ownership,thereisnosale
agreedtoallowthesubstitutionofthethinggiven sides
ordeliveredwithanequivalentthing(3Manresa incommodatum,thebailee
Thepartiesdonotreturn
returnsthethingafterthe
58). Nonfungible thing is one where the parties thethingssubjectofthe
expirationoftheperiodagreed
have the intention of having the same identical exchange
upon
thingreturnedaftertheintendeduse(Ibid).

Note:Astowhetherathingisconsumableornot,it
dependsuponthenatureofthething.
376 CIVILLAWTEAM:
ADVISER:ATTY.ELMERT.RABUYA;SUBJECTHEAD:ALFREDOB.DIMAFELIXII;
ASST.SUBJECTHEADS:KARENFELIZG.SUPNAD,LAMBERTOL.SANTOSIII;MEMBERS:PAULELBERTE.AMON,ALSTONANARNA,OZANJ.
FULLEROS,CECILIOM.JIMENO,JR.,ISMAELSARANGAYA,JR.;CONTRIBUTORS:LOISERAEG.NAVAL,MONICAJUCOM

CREDIT TRANSACTIONS
Q:Whatisbarter? 2. thebaileeacquirestheuseofthething
3. itmustbegratuitous
A: It is a contract whereby one of the parties
bindshimselftogiveonethinginconsiderationof Q:Whatcouldbethesubjectofcommodatum?
the others promise to give another thing. (Art.
1638,NCC) A:
GR: Under Art. 1933, the subject matter of
Q: What is the legal effect of an accepted commodatum must be nonconsumable
promisetodeliversomethingbywayofmutuum becausethethingmustbereturned.
orsimpleloan?
XPN:Consumablegoodsmaybetheobjectof
A:Itisbindingupontheparties,butthemutuum commodatum if the purpose is not to
or simple loan itself shall not be perfected until consume them such as when they were
the delivery of the object of the contract (Art. loaned merely for ad ostentationem or
1934,NCC). exhibitionpurposes.Aftertheaffair,thesame
and identical goods shall be returned to the
Q: What is the effect if the loan is for an lenderorbailor(Art.1936,NCC).
unlawfulpurpose?
Q:Whatmaybetheobjectofcommodatum?
A:Iftheloanisexecutedforillegalorimmoralor
unlawfulpurposeoruse,thecontractisvoid.The A:Bothmovableandimmovablepropertymaybe
bailor may immediately recover the thing before theobjectofcommodatum.(Art.1937,NCC)
any illegal act is committed and provided he is
innocent or in good faith (Arts. 1411 and 1412, Q:Whatarethekindsofcommodatum?
NCC).
A:
A.COMMODATUMANDMUTUUM 1. Ordinary commodatum bailor cannot
just demand the return of the thing at
COMMODATUM will, because there is a period agreed
uponbytheparties.
Q:Whatiscommodatum?
2. Precarium one whereby the bailor
A:Itisacontractwhereoneoftheparties(bailor) maydemandthethingloanedatwillin
delivers to another (bailee) something not thefollowingcases:
consumable so that the latter may use the same a. ifthedurationofthecontract
foracertaintimeandthereafterreturnsit. hadnotbeenstipulated;
b. if the use to which the thing
Q: What are the characteristics of a contract of loanedshouldbedevotedhad
commodatum? notbeenstipulated;or
c. if the use of the thing is
A: merely by tolerance of the
1. Real contract delivery of the thing owner
loanedisnecessaryfortheperfectionof
thecontract Note: The word owner in Art. 1947 (2) is not proper
2. Unilateral contract once subject becausethebailorneednotbetheownerofthething.
matter is delivered, creates obligations (Pineda,CreditTransactionsandQuasicontracts,p.26,
2006ed)
on the part of only one of the parties

(theborrower)
Q: What are the consequences of the purely
3. Essentiallygratuitous
personalcharacterofcommodatum?
4. Purpose is to transfer the temporary

useofthethingloaned
A:
5. Principalcontract
GR: Commodatum is purely personal in
6. Purelypersonalcontract
character hence death of either bailor
orbaileeextinguishesthecontract(Art.
Q:Whataretheelementsofcommodatum?
1939,NCC)

A:Theremustbe:
1. abaileeandbailor
377

XPN: By stipulation, the commodatum Iffungiblethingwasloaned,theborroweris
is transmitted to the heirs of either or obligedtopaythelenderanotherthing
bothparty. ofthesamekind,qualityandquantity.

In case of lease of the thing subject of Note:Mereissuanceofchecksdoesnotperfectthe
commodatum: contractofloan.Itisonlyafterthecheckshavebeen
encashed that the contact may be deemed
GR: The bailee can neither lend nor perfected. Further, when the movable thing
lease the object of the contract to a deliveredinloanisnottobereturnedtothebailor,
thirdperson. but may be substituted or replaced with another
equivalentthing,itisafungiblething.
XPN: Members of the bailees
household may make use of the thing Q:Distinguishcommodatumfrommutuum.
loaned.
A:
Note:Membersofthebaileeshousehold COMMODATUM MUTUUM
arenotconsideredasthirdpersons. Object
Nonconsumable(Non
Consumable
XPNtotheXPN: fungible)
Contrarystipulation;or Cause
Natureofthethingforbidssuchuse. Gratuitous,otherwiseitisa Mayormaynotbe
lease gratuitous

Note:Householdmembersarethosewhopermanently Purpose
living or residing within the same residence including Useortemporarypossession
thehouseholdhelpers. ofthethingloanedbut

Q:Distinguishcommodatumfromlease. GR: not its fruit because the
bailorremainstheowner

A:
XPNs: Consumption
COMMODATUM LEASE
use of the fruits is
Realcontract Consensual
stipulated;
Objectisanon
Objectmayevenbe enjoyment of the fruits
consumable(non
workorservice isstipulated;or
fungible)thing
enjoyment of the fruits
Essentiallygratuitous Onerous isincidentaltoitsuse
SubjectMatter
Real orpersonalproperty
MUTUUM
Generallynonconsumable
Q:Whatismutuum? Onlypersonal
thingsbutmaycover
property
consumablesifthepurpose
A: It is a contract whereby one of the parties ofthecontractisfor
calledthelenderdeliverstoanothercalledthe exhibition.
borrower, money or other consumable thing Ownershipofthething
subjecttotheconditionthatthesameamountof Retainedbythebailor Passestothedebtor
thesamekindandquantityshallbepaid. Thingtobereturned
Equalamountofthe
Exactthingloaned
Q: What are the characteristics of a contract of samekindandquality
mutuum? Whobearsriskofloss
Bailor Debtor
A: Whentoreturn
Borroweracquiresownershipofthething. Incaseofurgentneedeven
If the thing loaned is money, payment must beforetheexpirationof Onlyafterthe
be made in the currency which is legal term(thecontractisinthe expirationoftheterm
tenderinthePhilippinesandincaseof meantimesuspended)
extraordinary deflation or inflation, the Contract
basis of payment shall be the value of Contractof
Contractofuse
consumption
thecurrencyatthetimeofthecreation
oftheobligation.
378 CIVILLAWTEAM:

CREDIT TRANSACTIONS
Q:Distinguishmutuumfrom: contract which cannot be perfected until the

Lease;and deliveryoftheobject.
Barter.(seeArticle1954)
Q: What are the governing rules on paymentof
A: loan?
MUTUUM LEASE
Objectmaybeanything, A: It depends on the object of the contract of
Objectismoneyorany
whethermovableor loan.
consumable(fungible)
immovable,fungibleor Money governed by Arts. 1249 and 1250,
thing
nonfungible NCC
Thereistransferof
Notransferofownership
ownership GR: Payment shall be made in the
Creditordebtor currencystipulated.
Lessorlesseerelationship
relationship
Unilateral Bilateral XPN:Ifnot,thatcurrencywhichislegal
tenderinthePhilippines.
MUTUUM BARTER
Subjectmatterismoney Subjectmatterarenon Note: In case of extraordinary inflation
orotherfungiblethings fungiblethings value of the currency at the time of the
Maybegratuitousor creationoftheobligation.
Alwaysonerous
onerous
Thereisamutualsale Consumable or fungible thing debtor or
Whileinmutuum,there
resultinginthetransfer borrowershallpayanotherthingofthe
istransferofownership,
ofownershiponboth same kind, quality and quantity even if
thereisnosale
sides it should change in value. If cannot be
Themoneyor done,thevalueofthethingatthetime
consumablething of its perfection (delivery) shall be the
Thepartiesdonotreturn
loanedisnotreturned basisofthepaymentoftheloan.
thethingssubjectofthe
butthesameamount
exchange
ofthesamekindand Q:Mayapersonbeimprisonedfornonpayment
quantityshallbepaid. ofdebt?

Q:Whatisthecauseinasimpleloan? A: No. This is because of the constitutional
provision under Article III, Section 3 of the 1987
A: Constitution which expressly provides that no
1. As to the borrower the acquisition of personshallbeimprisonedfornonpaymentofa
thething debtorpolltax.
2. As to the lender the right to demand
the return of the thing loaned or its Q: Can estafa be committed by a person who
equivalent (Monte de Piedad v. Javier, refusestopayhisdebtordeniesitsexistence?
CA,36Off.Gaz.2176).
A: No, because the debtor in mutuum becomes
Q:Whatmaybetheobjectofmutuum? the owner of the thing delivered to him. If he
consumedordisposedofthething,theactwhich
A:Moneyorfungibleandconsumablethings. is an act of ownership is not misappropriation.
Hence, there is no basis for a criminal
Q:Canloanofmoneybepayableinkind? prosecution.

A: Yes, if there is an agreement between the Q: Does destruction of the thing loaned
parties(Art.1958,NCC). extinguishonesobligationinasimpleloan?

Q:Whenisacontractofsimpleloanperfected? A: The destruction of the thing loaned does not
extinguish ones obligation to pay because his
A: Real contracts, such as deposit, pledge and obligationisnottoreturnthethingloanedbutto
commodatum, are not perfected until the payagenericthing.
deliveryoftheobjectoftheobligation.(Art.1316,
NCC) While mutuum or simple loan is not
mentioned, it has the same character as
commodatum. Hence, mutuum is also a real
379

Q: Who are the parties to a commodatum? 3. thebailorisawarethereof;
Distinguish. 4. he does not advise the bailee of the
same;and
A: 5. thebaileesuffersdamagesbyreasonof
1. Bailor/Comodatario/Commodans the saidflawordefect.
giver/ lender the party who delivers
the possession or custody of the thing Q:Whatisthecauseofactionagainstthebailor
bailed. whodidnotdisclosetheflawordefect?

2. Bailee/Comodante/Commodatarius A:Actionforrecoveryofdamagesontheground
therecipient/borrowerthepartywho ofquasidelictbecauseofnegligenceorbadfaith.
receives the possession or custody of
thethingthusdelivered. RIGHTSOFABAILOR

B.OBLIGATIONSOFTHEBAILORANDBAILEE Q: Can the bailor demand the return of thing
loanedanytimehepleases?
BAILOR
A:
OBLIGATIONSOFTHEBAILOR GR:No

Q:Whataretheobligationsofthebailor? XPNs:
1. Incaseofurgentneedbythebailor
A: 2. Incaseofprecarium
Allowthebaileetheuseofthethingloaned 3. If the bailee commits an act of
forthedurationoftheperiodstipulated ingratitudetothebailor(Art.1948,NCC),
or until the accomplishment of the towit:
purpose.
a. If the bailee should commit
Refund the extraordinary expenses the some offenses against the
bailee incurred for the preservation of person,honorortheproperty
thething. of the bailor, or his wife or
children under his parental
GR: The bailee must bring to the authority;
knowledge of the bailor such expenses b. If the bailee imputes to the
beforeincurringthesame. bailoranycriminialoffense,or
any act involving moral
XPN:Incasethereisurgencyanddelay turpitude, even though he
wouldcauseimminentdanger. should prove it, unless the
crime or the act has been
Note: If the extraordinary expenses arise committedagainstthebailee,
on the occasion of the actual use of the his wife or children under his
thing loaned by the bailee, the expenses authority;or
shall be borne by the bailor and bailee c. If the bailee unduly refuses
equally,eventhoughthebaileeiswithout the bailor support when the
fault.(Art.1949,NCC) bailee is legally or morally
bound to give support to the
To be liable for damages for known hidden bailor.
defects.
Note: The rationale for the application of Art. 765
Cannot exempt himself from payment of which refers to donations is the fact that
expenses or damages by abandonment commodatum,likedonation,isgratuitousinnature.
ofthethingtobailee.
Q: If the contract of commodatum is a
Q:Whenisthebailorliableforhiddendefects? precarium,willArt.1942(1)and(2)stillapply?

A:Whenthefollowingrequisitesarepresent: A:Itdepends.Iftherehasbeenademandonthe
1. there was a flaw or defect in the thing part of the bailor before the loss of the thing
loaned; underthecircumstancessetforthunderArt.1942
2. theflawordefectishidden; (1)and(2)andthebaileedidnotreturnthething,
380 CIVILLAWTEAM:

CREDIT TRANSACTIONS
then the latter is liable. However, if there has under Articles 1207 and 1208. Solidarity is
beennodemandonthepartofthebailorandthe providedtosafeguardeffectivelytherightsofthe
thingwaslost,thebailorisestoppedandcannot bailoroverthethingloaned.
hold the bailee liable for under a contract of
precarium, the use of the thing by the bailee Note: The concurrence of two or more creditors or
depends on the pleasure of the bailor and no twoormoredebtorsinoneandthesameobligation
timeisfixedforsuchuse.Hence,demandonthe does not imply that each one of the former has a
partofthebailorisneededforthereturnofthe right to demand, or that each one of the latter is
thing. Without such, loss of the thing on the bound to render, entire compliance with the
handsofthebaileewillnotmakehimliable. prestation. There is solidary liability only when the
obligation expressly so states, or when the law or
thenatureoftheobligationrequiressolidarity.(Art.
Note:Article1942.Thebaileeisliableforthelossof
1207)
the thing, even if it should be through a fortuitous

event:
Iffromthelaw,orthenatureorthewordingofthe
Ifhedevotesthethingtoanypurposedifferent
obligationstowhichtheprecedingarticlerefersthe
fromthatforwhichithasbeenloaned;
contrarydoesnotappear,thecreditordebtshallbe
Ifhekeepsitlongerthantheperiodstipulated,
presumedtobedividedintoasmanyequalsharesas
or after the accomplishment of the use for
there are creditors or debtors, the credits or debts
whichthecommodatumhasbeenconstituted;
beingconsidereddistinctfromoneanother,subject
xxx
to the Rules of Court governing the multiplicity of
suits.(Art.1208)
Q:Mustthebailorbetheownerofthething

loaned?
OBLIGATIONSOFTHEBAILEE

A: No. The bailor in commodatum need not be
Q:Whataretheobligationsofabailee?
theownerofthethingloaned.Itissufficientthat

he has possessory interest over subject matter
A:
(Art.1938,NCC).
Payfortheordinaryexpensesfor
Astoordinary
theuseandpreservationofthe
Note: A mere lessee or usufructuary may expenses
thing
gratuitously give the use of the thing leased or in
Liableforlosseventhrough
usufruct, provided there is no prohibition against
fortuitouseventwhen
such.
[askdl]:
when being able to save

BAILEE either of the thing
borrowedorhisownthing,
Q:Iftherearetwoormorebaileestoacontract hechosetosavethelatter
of commodatum, what is the nature of their hekeepsitlongerthanthe
liability? Astothelossof
period stipulated, or after
thethingin
the accomplishment of its
caseof
A: When thereare 2 or more bailees to whoma use(indefault);
fortuitous
thing is loaned in the same contract, they are the thing loaned has been
event
liablesolidarily.(Art.1945,NCC) deliveredwithappraisalof
itsvalue
Note:Theirliabilityissolidaryinordertoprotectthe when he lends or leases it
bailorsrightsoverthethingloaned. to third persons who are
not members of his
Q: Following the principle of autonomy of household
contracts, may the parties to a contract of thereisdeviationfromthe
commodatum validly stipulate that the liability purpose
ofthebaileesshallbejoint? Notliableforthedeteriorationof
thethingloanedcausedbythe
Astothe
ordinarywearandtearofthething
A: No. Article 1245 expressly provides that in a deterioration
loaned.(Art.1943)
contractofcommodatum,whentherearetwoor ofthething

more bailees to whom a thing is loaned in the loaned
Note:Whentherearetwoormore
same contract, they are liable solidarily. It bailees,theirliabilityissolidary.
constitutesasanexceptiontothegeneralruleof
joint obligations where there are two or more
debtors, who concur in one and same obligation
381

RIGHTSOFABAILEE Q:Incommodatum,doesthebaileeacquirethe
useofthefruitsofthething?
Q:Whataretherightsofabailee?
A: No. The bailee in commodatum acquires only
A:FRUD theuseofthethingloanedbutnotitsfruits(Art.
Useofthething; 1935,NCC).
Make use of the fruits of the thing when
suchrightisstipulatedinthecontract; Q:Isastipulationthatthebaileemaymakeuse
Not answerable for the deterioration of the ofthefruitsofthethingloanedvalid?
thingloanedduetotheusethereofand
withouthisfault;and A:Yes.Itisunderstoodthattheenjoymentofthe
Right of retention for damages due to fruits must only be incidental to the use of the
hidden defects or flaws of the thing of thing.Itshouldnotbethemaincause;otherwise,
whichhewasnotadvisedbythebailor. thecontractisnotacommodatumbutausufruct
(Art.1940,NCC).
Q: Art. 1178 of the NCC provides that all rights
acquired by virtue of an obligation are Q:Willthestipulationthatthebaileemaymake
transmissible. Is the right to use the thing by use of the fruits of the thing loaned impair the
virtue of a contract of commodatum essenceofcommodatum?
transmissible?
A: No. It will not impair the essence of
A:No,itisnottransmissiblefor2reasons: commodatum because the actual cause or
Art.1178providesthatthetransmissibilityof considerationthereforeisstilltheliberalityofthe
saidacquiredrightsareeithersubjectto bailororlender.
thelawsortoacontrarysipulation;and Q:Isthererightofretentionincommodatum?
Art. 1939 provides that a contract of
commodatum is purely personal in A:
character. GR:Thebaileecannotretainthethingloaned
onthegroundthatthebailorowesthebailee.
Note:Toruleotherwisewouldbetoruncounterto
the purely personal character of the commodatum XPN:Thebaileehastherightofretentionfor
and to the proviso that transmissibility issubject to claims of damages which the bailee incurred
thelawgoverningsuchobligations. orsufferedbyreasonofthehiddendefectsor
flawsofthethingloaned,ofwhichhewasnot
Q:Canthebaileelendorleasetheobjectofthe informedoradvisedbythebailor.
contracttoathirdperson?
Note: The reason for the general rule that there is
A: norightofretentionisthatbailmentimpliesatrust
GR:Thebaileecanneitherlendnorleasethe thatassoonasthetimehasexpiredorthepurpose
objectofthecontracttoathirdperson. accomplished,thebailedpropertymustbereturned
to the bailor. Also, Art. 1287 provides that
XPN: Members of the bailees household compensation shall not be proper when one of the
maymakeuseofthethingloaned. debts arises from the obligations of a bailee in
commodatum.(Art.1287,reworded)
Note: Members of the bailees household are
notconsideredasthirdpersons. Q: Suppose during the said retention of the
bailee,thethingislostduetoafortuitousevent.
XPNtotheXPN: Canthebailorholdthebaileeliableforsaidloss
Contrarystipulation;or basedonArt.1942(2)?
Nature of the thing forbids such
use. A: No, the bailee cannot be held liable for the
loss. Art. 1942 (2) contemplates wrongful
Q:Whatisthelegaleffectifthebaileepaysfor retention or a situation where the bailee is not
theuseofthething? entitledtoretainthethingloaned.

A: The contract ceases to be commodatum; it Note: Article 1942 (2) provides that the bailee is
becomeslease. liable for the loss of the thing, even if it should be
throughafortuitouseventifhekeepsitlongerthan

the period stipulated, or after the accomplishment
382 CIVILLAWTEAM:

CREDIT TRANSACTIONS
of the use for which the commodatum has been Who shall bear the costs for the van's fuel, oil
constituted. and other materials while it was with Tito?
Explain.
Q: What if the bailee is entitled to payment or
reimbursementofexpensesincurredordamages A: The costs for the fuel and other materials are
sufferedandthebailoroffersthethingloanedas considered ordinary expenses, and consequently
payment for said expenses or damages, would Tito, the bailee, shall shoulder them (Art. 1941,
such offer be valid or not, in view of the NCC)
prohibitionunderArt.1952whichstatesthatthe
bailorcannotexempthimselffromthepayment Does Pedro have the right to retrieve the van
ofexpensesordamagesbyabandoningthething evenbeforethelapseofoneyear?Explain.
tothebailee?
A: No, Pedro cannot demand the return of the
A:Theofferisnotvalid.Itmaybeconsideredas van until after the expiration of the oneyear
dationinpayment.Inthiscase,theabandonment periodstipulated.However,ifinthemeantimehe
done by the bailor was made in favor of the should have urgent need of the van, he may
bailee for the payment of the expenses incurred demanditsreturnortemporaryuse.
by the latter, hence, a violation of what the law
hasexpresslyprohibitedunderArticle1952. Who shall bear the expenses for the accidental
damagecausedbythecargotruck,grantingthat
Q: When is the bailee not entitled to the truck driver and truck owner are insolvent?
reimbursementfortheexpensesheincurred? Explain.

A: If, for the purpose of making use and A: Both Tito and Pedro shall bear equally the
preservation of the thing, the bailee incurs costsoftheextraordinaryexpenses,havingbeen
expenses other than those ordinary and incurredontheoccasionofactualuseofthevan
extraordinaryexpenses. byTito,thebailee,eventhoughheactedwithout
fault.[Art.1949(2),NCC](2005BarQuestion)
Q: Before he left for Riyadh to work as a
mechanic, Pedro lefthis van with Tito, with the C.INTERESTANDTHESUSPENSIONOFTHE
understandingthatthelattercoulduseitforone USURYLAW
year for his personal or family use while Pedro
works in Riyadh. He did not tell Tito that the Q:Whatisinterest?
brakes of the van were faulty. Tito had the van
tuned up and the brakes repaired. He spent a A:Itisnothingmorethanthecompensationtobe
total amount of P15,000.00. After using the paid by the borrower for the use of the money
vehicle for two weeks, Tito discovered that it lenttohimbythelender.
consumed too much fuel. To make up for the
expenses,heleasedittoAnnabelle.Twomonths Q:Whatistheruleoninterests?
later, Pedro returned to the Philippines and
askedTitotoreturnthevan. A:
GR: No interest shall be due unless it is
Unfortunately, while being driven by Tito, the stipulatedinwriting.(Art.1956,NCC)
van was accidentally damaged by a cargo truck
withouthisfault. XPN: In case of interest on damages or
indemnity for damages, it need not be in
Who shall bear the P15,000.00 spent for the writing.
repairofthevan?Explain.
Q:Whatisthebasisoftherighttointerest?
A:ThecontractbetweenPedroandTitoisoneof
commodatum. Of the P15, 000.00 spent, Pedro, A: It only arises by reason of the contract
the bailor, shall bear the expenses for the repair (stipulation in writing) or by reason of delay or
of the faulty brakes, they being extraordinary failure to pay principal on which interest is
expenses incurred due to the nondisclosure by demanded (Baretto v. Santa Marina, No. 11908,
thebailorofthedefectorfault;Tito,ontheother feb.4,1918).
hand,shallshoulder"thatpartoftheP15,000.00
spent for the tuneup, said expense being Iftheobligationconsistsofthepaymentofasum
ordinaryfortheuseandpreservationofthevan. of money, and the debtor incurs delay, the

383

indemnity for damages shall be the payment of Q: In case the interest may be adjudged on
legal interest (Philrock, Inc. v. Construction unliquidatedclaimbutthepleadingsincourtdid
Industry Arbitration Commission, G.R. Nos. not spell out said amount with certitude, when
13284849,June25,2001) shalllegalinterestthereonrun?

Q:Cantherebeinterestinequitablemortgage? A: The legal interest thereon shall run only from
the promulgation of judgment of said court, it
A: No. Interest could not be collected on being at that stage that the quantification of
equitable mortgage because the same is not damages may be deemed to have been
stipulatedinwriting(Tanv.Valdehueza,G.R.No. reasonablyascertained.(Ibid)
L38745,Aug.6,1975).
Q: What is the actual base for computing such
Note: One which, although it lacks the proper legalinterest?
formalities or other requisites of a mortgage
required by law, nevertheless reveals the intention A: It shall be the amount as finally adjudged by
of the parties to burden real property as a security theSupremeCourt.(Ibid)
for a debt, and contains nothing impossible or
contrarytolaw. Q: What is the basis for computation for
indemnityfordamages?
Q:Canpaidunstipulatedinterestberecovered?
A: It shall be the interest agreed upon by the
A:Ifpaidbymistakethedebtormayrecoverasin partiesandintheabsenceofstipulation,thelegal
the case of solutio indebiti or undue payment. interestwhichis6%perannum(Art.2208,NCC).
However if payment is made voluntarily, no
recovery can be made as in the case of natural Note:6%becauseitisbasedondamagesandithas
obligation. been said that judgments other than loans,
forbearance,etc.isbasedon6%.
Q: Sabugo granted a loan to Samilin. The loan
agreement was not reduced in writing. Q:Whataretheclassesofinterest?
Thereafter, Sabugo demanded additional
interest which was paid by Samilin in cash and A:
checks. Upon advice of her lawyer, Samilin 1. Simple interest which is paid for the
demanded for the return of the amount of use of the money, at a certain rate
interestpaid.Isthepaymentofinterestvalid? stipulatedinwritingbytheparties.
2. Compound interest which is imposed
A: No. Payment of monetary interest is allowed upon accrued interest, that is, the
onlyif: interestdueandunpaid.
1. therewasanexpressstipulationforthe 3. Legal that interest which the law
paymentofinterest;and directstobepaidintheabsenceofany
2. the agreement for the payment of agreementastotherate.
interestwasreducedinwriting.
Q:Whencantherebe:
Theconcurrenceofthetwoconditionsisrequired 1. Monetaryinterest;
for the payment of monetary interest. Thus, 2. Compensatoryinterest?
collection of interest without any stipulation
thereforinwritingisprohibitedbylaw.(Sigaanv. A:
Villanueva,G.R.No.173227,Jan.20,2009.) 1. Monetary interest must be expressly
stipulated in writing and it must be
Q: May interest be adjudged on unliquidated lawful.(Art.1956,NCC)Itispayableon
claims? thedelayoftheuseofthemoney.
2. Indemnity for damages (compensatory
A: interest) the debtor in delay is liable
GR:No. to pay legal interest (6% or 12%) as
indemnity for damages even in the
XPN:Unlessthesamecanbeestablishedwith absence of stipulation for the payment
reasonablecertainty.(AtlanticGulfandPacific interest. Such interest as indemnity for
Company of Manila, Inc. v. CA, G.R. Nos. damages is payable only in case of
11484142,Aug.23,1995) defaultornonperformanceofcontract.

384 CIVILLAWTEAM:

CREDIT TRANSACTIONS
Note: If the obligation consists in the payment of a A: Back rentals being equivalent to a loan or
sum of money and the debtor incurs in delay, the forbearance of money, the interest rate due
debtorisliablefordamages.(Art.2209,NCC) thereonis12%perannumfromthetimeofextra
judicial demand (Catungal v. Hao, G.R. No.
Q: What is the basis for the interest rate for 134972,Mar.22,2001).
compensatoryinterest?
Note: Back rental is the full extended value of land
A: letbylease,payablebytenantforlifeoryears.
1. Central Bank Circular 416 12% per annum
incasesof: Q:Whatistheruleoncompoundingofinterest?
a. Loans
b. Forbearance of money, goods and A:
credits GR: Accrued interest (interest due and
c. Judgement involving such loan or unpaid)shallnotearninterest.
forbearance, in the absence of
expressagreementastosuchrate XPN:When:
ofinterest 1. judiciallydemanded;or
2. thereisexpressstipulationmadebythe
Note:Duringtheinterimperiodfrom parties that the interest due and
the date of judgment until actual unpaid shall be added to the principal
payment. obligation and the resulting total
amountshallearninterest.
d. Pursuant to P.D. No. 116 amending
Act No. 2655 (Usury Law), the Note:Compoundingofinterestmaybeavailedonly
Central Bank of the Philippines when there is a written stipulation in the contract
issued Circular No. 416 raising the forthepaymentofinterest.
legalrateofinterestfrom6%to12%
perannum. Q:Whatisfloatinginterest?

e. In the absence of a stipulation as to
A: It is the interest stipulated by banks which is
interest, the loan due will now earn
interest at the legal rate of 12% per
not fixed and made to depend upon the
annum.(Sulitv.CA,G.R.No.119247, prevailing market conditions, considering the
Feb.17,1997). fluctuatingeconomicconditions.

2. Art.2209,NCC6%perannumincasesof: Q:Isastipulationforfloatinginterestvalid?
a. Othersources(i.e.sale)
b. Damages arising from injury from A: No. While it may be acceptable for practical
person. reasonsgiventhefluctuatingeconomicconditions
c. Loss of property which does not forbankstostipulatethatinterestratesonaloan
involvealoan. not be fixed and instead be made dependent on
prevailing market conditions, there should be a
3. Interest accruing from unpaid interest reference rate upon which to peg such variable
interest due shall earn interest from the interestrates[ConsolidatedBankandTrustCorp.
time it is judicially demanded although the (Solid Bank) v. CA, G.R. No. 114672, Apr. 19,
obligationmaybesilentuponthispoint. 2001].

Q:Whatisforbearance? Q:Whatisinterestondamages?

A: It signifies the contractual obligation of the A: Interest that which is imposed in a judgment
creditor to forbear during a given period of time asindemnityfordamages.
torequirethedebtorpaymentofanexistingdebt
thendueandpayable.Suchforbearanceofgiving Note:Itneednotbeinwritingandcomputedfrom
timeforthepaymentofadebtis,insubstance,a thetimeofthefinalityofdecision.
loan(91C.J.S.598).
Q: A judgment was rendered ordering the
Q: What is the interest rate imposable for back defendant Maybel to pay Vanessa with legal
rentals? interest of 12% from the filing of the complaint
until paid. The decision became final and
executory. Maybel argues that the rate of 12%
385

underCentralBankCircular416wasmisapplied. hemorraghing of their assets (Almeda v. CA, G.R.
How much by way of legal interest should a No.113412,Apr.17,1996)
judgmentdebtorpaythejudgmentcreditor?
InthecaseofMedelv.CA(G.R.No.131622,Nov.
A: The judgments spoken of and referred to 27, 1998), the court ruled that while stipulated
underCentralBankCircular416arejudgmentsin interest of 5.5% per month on a loan is usurious
litigations involving loans or forbearances of pursuant to CBC No. 905, the same must be
money, goods or credits. Any other kind of equitably reduced for being iniquitous,
monetary judgments which has nothing to do unconscionable and exorbitant. It is contrary to
with, nor involving loans or forbearance of any morals. It was reduced to 12% per annum in
money goods or credits does not fall within the consonantwithjusticeandfairplay.
coverage of said law. Coming to the case at bar,
thedecisionhereinsoughttobeexecutedisone Q: Samuel borrowed P300,000.00 housing loan
rendered in an Action for Damages for injury to from the bank at 18% per annum interest.
personsandlossofpropertyanddoesnotinvolve However, the promissory note contained a
any loan, much less forbearances of any money, proviso that the bank "reserves the right to
goodsorcredits. increase interest within the limits allowed by
law." By virtue of such proviso, over the
Q: Carlos sues Dino for (a) collection on a objections of Samuel, the bank increased the
promissory note for a loan, with no agreement interestrateperiodicallyuntilitreached48%per
on interest, on which Dino defaulted, and (b) annum. Finally, Samuel filed an action
damages caused by Dino on his (Carlos') questioningtherightofthebanktoincreasethe
priceless Michaelangelo painting on which Dino interest rate up to 48%. The bank raised the
accidentally spilled acid while transporting.it. defensethattheCentralBankofthePhilippines
The court finds Dino liable on the promissory had already suspended the Usury Law. Will the
note and awards damages to Carlos for the actionprosperornot?Why?
damaged painting, with interests for both
awards. What rates of interest may the court A:Theactionwillprosper.Whileitistruethatthe
imposewithrespecttobothawards?Explain. interest ceilings set by the Usury Law are no
longerinforce,ithasbeenheldthatPDNo.1684
A: With respect to the collection of money or andCBCircularNo.905merelyallowcontracting
promissorynote,itbeingaforbearanceofmoney, parties to stipulate freely on any adjustment in
the legal rate of interest for having defaulted on the interest rate on a loan or forbearance of
the payment of 12% will apply. With respect to moneybutdonotauthorizeaunilateralincrease
the damages to the painting, it is 6% from the of the interest rate by one party without the
timeofthefinaldemanduptothetimeoffinality other'sconsent(PNBv.CA,G.R.No.107569,Nov.
ofthedecisionand12%ofthetotalamountfrom 8, 1994). To say otherwise will violate the
finality of judgment until judgment credit is fully principle of mutuality of contracts under Article
paid. The court considers the latter as a 1308oftheCivilCode.Tobevalid,therefore,any
forbearance of money. (Eastern Shipping Lines, changeofinterestmustbemutuallyagreedupon
Inc. v. CA, G.R. No. 97412, July 12, 1994; Arts. by the parties (Dizon v. Magsaysay, G.R. No. L
2210and2211,NCC)(2002BarQuestion) 23399, May 31, 1974). In the present problem,
the debtor not having given his consent to the
Q:Musttheprincipaldebtstillbepaidin increase in interest, the increase is void. (2001
usurioustransactions? BarQuestion)

A: Yes. Under the Usury Law, notwithstanding
stipulationsofusuriousinterest,thedebtormust II.DEPOSIT
still pay the principal debt (Lopez v. El Hogar
Filipino,No.22678,Jan.12,1925). Q:Whatisdeposit?

Q: What is the rationale behind the validity of A: It is a contract whereby a person (depositor)
unconscionableInterestrateinaloan? delivers a thing to another (depositary), for the
principal purpose of safekeeping it, with the
A:TheSupremeCourtsaidnothinginsaidcircular obligationofreturningitwhendemanded.
(Circular905)suspendingUsuryLawgrantslender
authority to raise interest rates to levels which Q:Whenisacontractofdepositconstituted?
will either enslave their borrowers or lead to a
386 CIVILLAWTEAM:

CREDIT TRANSACTIONS
A: From the moment a person receives a thing borrower

belongingtoanother,withtheobligationofsafely SubjectMatter
keepingitandreturningthesameupondemand. Movable(extrajudicial)or
Moneyorotherfungible
maybeimmovable
thing
Q: What are the characteristics of contract of (judicial)
deposit? Relationship
Depositordepositary Lenderborrower
A: Compensation
1. Real contract because it can only be Nocompensationof
perfectedbythedeliveryoftheobjectofthe thingsdepositedwith Therecanbe
contract. eachother(exceptby compensationofcredits
However, an agreement to mutualagreement)
constitute a future deposit is a
2.
consensual contract and is
thereforebinding. DEPOSIT COMMODATUM
PrincipalPurpose
Note: There is no consensual Safekeeping Transferofuse
contract of deposit; there is only a Nature
consensual promise to deliver which Maybegratuitousor
Alwaysgratuitous
isbindingifsuchisaccepted. onerous

2. Object of the contract must be a movable 3.
property. However, in cases of judicial DEPOSIT AGENCY
deposit, the subject matter may be a real Purpose
property. Representationofthe
Safekeeping
principalbytheagent
3. Purpose is for the safekeeping of the thing Reasonforcustodyofthething

deposited. This must be the principal Thecustodyofthething
purposeandnotonlysecondary. istheprincipaland Itismerelyanincidental
essentialreasonforthe obligationoftheagent
deposit
4. Itisgratuitous,unlessthereisa:
Nature
a. Contraryagreement;or
Itisgenerallyonerousor
b. The depositary is engaged in the Essentiallygratuitous
forcompensation
business of storing goods, like a
warehouseman. 4.

DEPOSIT LEASE
5. The depositary cannot use the thing
PrincipalPurpose
deposited,unless:
a. Permittedbythedepositor;or Safekeeping Useofthething
b. Preservation of the thing requires Whentoreturn
itsuse,butonlyforsaidpurpose. Upondemandofthe Uponterminationofthe
depositor leasecontract.

Maybemadeorallyorinwriting.
5.

DEPOSIT SALE
Q:Distinguishdepositfrom:
1. Mutuum; Ownership
2. Commodatum; Retainedbydepositor. Transferredtobuyer.
3. Agency;
4. Lease;and Q:Whatarethekindsofdeposit?
5. Sale.
A: A:
1. 1. Judicial(sequestration)
DEPOSIT MUTUUM 2. Extrajudicial
Purpose a. Voluntarythedeliveryismadeby
Safekeeping/custody Consumption thewillofthedepositor.
Whentoreturn b. Necessary made in compliance
Upondemandofthe Uponexpirationofthe with a legal obligation, or on the
depositor termgrantedtothe occasion of any calamity, or by
387

travelers in hotels and inns, or by A: The depositor need not be the owner of the
travelerswithcommoncarriers. thing deposited because the purpose of the
contract is safekeeping and not transfer of
Q: Distinguish judicial from extrajudicial ownership.
deposit?
Note: A deposit may also be made by two or more
A: persons each of whom believes himself entitled to
JUDICIAL EXTRAJUDICIAL the thing deposited with a third person, who shall
Creation deliver it in a proper case to the one to whom it
Willofthecontracting belongs.
Willofthecourt
parties
Purpose Q: What is the nature of advance payment in a
Securityortoensurethe contractofsale?
rightofapartyto
propertyortorecoverin Custodyandsafekeeping A: A so called deposit of an advance payment in
caseoffavorable thecaseofasaleisnotthedepositcontemplated
judgment underArt.1962.Itisthatadvancepaymentupon
SubjectMatter whichownershipistransferredtotheselleronce
Movablesor it is given subject to the completion of payment
immovablesbut Movablesonly by the buyer under an agreement. (Cruz v.
generallyimmovables AuditorGeneral,No.L12233,May30,1959).
Cause
Generallygratuitousbut
Alwaysonerous
maybecompensated A.VOLUNTARYDEPOSIT
Whenmustthethingbereturned
Uponorderofthecourt Q: What are the obligations of depositary in
Upondemandof
orwhenlitigationis voluntarydeposit?
depositor
ended
Inwhosebehalfitisheld
A:
Depositororthird
Personwhohasaright 1. Tokeepthethingsafelyandreturnit
persondesignated
2. Exercisesamediligenceashewouldexercise
overhisownproperty
Q: What is the nature of the rent of safety rd
3. Not to deposit the thing with a 3 person
depositboxes? unlessexpresslyauthorizedbystipulation

A:Therentofsafetydepositboxesisanordinary Note:Depositaryisliablefortheloss
contractofleaseofthingsandnotaspecialkind if:
of deposit because the General Banking Act as a. Hedepositsthethingtoa3rdperson
revised has deleted the part where banks are without authority, even though the
expressly authorized to accept documents or lossisduetofortuitousevents
papersforsafekeeping. b. Deposits the thing to a 3rd person
who is manifestly careless or unfit
The case of Sia v. CA, G.R. No. 102970, May 13, althoughthereisauthority.
1993 enunciating that a rent of a safety deposit
box is a special kind of deposit, was decided 4. Ifthethingshouldearninterest:
undertheformerGeneralBankingAct.However, a. collectinterestasitfallsdue
SC has not yet decided a case abandoning the b. take steps to preserve the value
ruling in Sia v. CA, making it conform with the andrightscorrespondingtoit
newGeneralBankingAct.
5. Nottocomminglethingsifsostipulated
Fixed, savings and current deposits in banks and
othersimilarinstitutionsarenottruedepositsbut 6. GR:Nottomakeuseofthethingdeposited
are considered simple loans because they earn
interest.(Art.1980,NCC) XPNs:
a. When preservation of thing
Q: Is ownership necessary in a contract of depositedrequiresitsuse
deposit? b. Whenauthorizedbydepositor

388 CIVILLAWTEAM:

CREDIT TRANSACTIONS
c. GR: In such case it is no longer a PARTIES

deposit but a contract of loan or
commodatum,asthecasemaybe. Q:Whoarethepartiestoacontractofdeposit?

d. XPN: Principal reason for the A:
contract is still safekeeping, it is 1. Depositary to whom the thing is
stilldeposit. deposited
2. Depositor the one who deposits the
7. Whenthethingdepositedisdeliveredsealed thing
andclosed:
a. return the thing in the same DEPOSITARY
condition
b. pay damages if seal be broken Q:Whoisadepositary?
throughhisfault
c. keep the secret of the deposit A:Thedepositaryistheonetowhomthethingis
when seal is broken w/ or w/o his deposited.
fault
Q:Maythedepositarychangethemannerofthe
d. However, the depositary is deposit?
authorizedtoopenthesealorlock
when: A: Yes, if he may reasonably presume that the
a. there is presumed depositorwouldconsenttothechangeifheknew
authority ofthefactsofthesituation.However,beforethe
b. outofnecessity depositarymaymakesuchchange,heshallnotify
the depositor thereof and wait for his decision,
8. GR: Pay for any loss or damage that may unlessdelaywouldcausedanger(Art.1974,NCC).
ariseduetohisfault
Q: Is a guardian a depositary of the wards
XPN:Liabilityoflossthroughfortuitousevent property?

XPNs to XPN: Even in case of loss through A: The guardian is not holding the funds of the
fortuitousevent,stillliableif(USAD): ward merely for safekeeping exclusively but also
a. Stipulated intended for the latters maintenance and
b. he Uses thing w/o depositors support. Losses, if any without the fault of the
permission guardianshallbedeductedfromthefundsofthe
c. heDelaysitsreturn ward (Phil. Trust Co. v. Ballesteros, No. L8261,
d. he Allows others to use it (even if April20,1956).
hehimselfisauthorizedtouseit)
Q: What is the effect when the depositary has
9. Returnthethingdepositedwithallitsfruits, permissiontousethethingdeposited?
accessions,andaccessories
10. Pay interest on sums converted to personal A:
useifthedepositconsistsofmoney GR: The contract loses the concept of a
deposit and becomes a loan or
Q:Whenisavoluntarydepositextinguished? commodatum.

A: XPN:Wheresafekeepingisstilltheprincipal
1. Lossordestructionofthingdeposited; purposeofthecontract(Art.1978,NCC).
2. In gratuitous deposit, upon death of
eitherdepositorordepositary;or Note:Thepermissionshallnotbepresumed,andits
3. Other causes (e.g. return of thing, existencemustbeproved.
novation, expiration of the term,
fulfillmentofresolutorycondition) Q: What is the rule with respect to the
determinationofthevalueofthething?

A:
GR: The statement of the depositor shall be
acceptedasprimafacieevidenceofthevalue
389

iftheforcibleopeningoftheboxorreceptacle Q:Whatisthedutyofthedepositarysheirifhe
isimputabletothedepositary. sold the thing which he did not know was
deposited?
XPN:Ifthereisaclear,strongandconvincing
evidencetothecontrary. A: He shall be bound to return the price he may
have received or to assign his right of action
It is significant to know the value of the thing against the buyer in case the price has not been
depositedincasewhenthereisacontroversyon paidbyhim(Art.1991,NCC).
the value of the thing deposited which is
deliveredclosedandsealed. Note: The provision applies only when the
depositary has died and left heir/s who took
Q:UnderArt.1983,whatisincludedintheterm possession of the thing in the concept of an owner
products,accessoriesandaccessions? andsolditingoodfaithtoathirdperson.

A: The depositors ownership over the thing Q: What is the right of the depositary if he has
carries with it the right to the fruits and all notbeenpaidtheamountduetohim?
accessionstheretoincluding:
A: The depositary may retain the thing in pledge
until full payment of what may be due him by
1. Naturalfruits
reasonofthedeposit(Art.1994,NCC).
2. Industrialfruits

3. Civilfruits(Art.441,NCC)
Q:Maythedepositarysellthethingretainedin

pledge?
Q: When the deposit consists of money, what

must be returned upon the extinguishment of
A: Yes, Article 2108 provides that if, without the
contract?
faultofthepledgee,thereisdanger,destruction,

impairment, or diminution in value of the thing
A: The provision of Article 1896 shall apply
pledged, he may cause the same to be sold at
wherein the money deposited must be returned
public auction. The proceeds of the auction shall
together with interest for the use thereof. The
be a security for the principal obligation in the
impositionofinterestisintheformofpenaltyfor
same manner as the thing originally pledged.
the use of money there being no agreement to
(Pineda,p.93,2006ed)
pay the interest at the outset, otherwise, the

contractwillbeamutuum.
Q:ManejaassignedandconveyedtoSerranoher

time deposit. Notwithstanding series of
Q: Can the depositary demand that the
demandsforencashmentoftheaforementioned
depositor should prove his ownership of the
time deposits, OBM refused to honor the time
thingdeposited?
deposits. Is OBM liable to Serrano despite the

fact the Central Bank declared that OBM could
A:
no longer operate due to its chronic reserve
GR:No.
deficiencies?

XPN: Should he discover that the thing has
A: Yes. Bank deposits are in the nature of
been stolen and who its true owner is, he
irregular deposits. They are really loans because
mustadvisethelatterofthedeposit.
they earn interest. All kinds of bank deposits,

whether fixed, savings or current, are to be
Note: If the depositary has reasonable grounds to
believethatthethinghasnotbeenlawfullyacquired
treatedasloansandaretobecoveredbythelaw
bythedepositor,theformermayreturnthesame. on loans. Current and savings deposits are loans
toabankbecauseitcanusethesame.Serrano,in
Q:Whatshouldthedepositarydoifhelosesthe makingtimedepositsthatearninterestwithOBM
thing through force majeure or government was in reality a creditor of the respondent bank,
orderandreceivesmoneyoranotherthinginits and not a depositor. The bank was in turn a
place? debtor of Serrano. Failure of OBM to honor the
time deposits is failure to pay its obligation as a
A: He shall deliver the sum or other thing to the debtor and not a breach of trust arising from a
depositor. depositarys failure to return the subject matter
ofthedeposit.(Serranov.CentralBank,G.R.No.
30511,Feb.14,1980)

390 CIVILLAWTEAM:

CREDIT TRANSACTIONS
DEPOSITOR 2. If the depositor was incapacitated at

the time of making the deposit, to his
Q:Whoisadepositor? guardian or administrator or to the
depositor himself should he acquire
A: The depositor is the one who deposited the capacity(Art.1970,NCC).
thing. 3. Evenifthedepositorhadcapacityatthe
time of making the deposit but he
Q:Whatistherulewhentherearetwoormore subsequently loses his capacity during
depositors? thedeposit,thethingmustbereturned
to his legal representative (Art.1988,
A:Iftheyarenotsolidary,andthethingadmitsof NCC).
division,eachonecannotdemandmorethanhis Q: Where should the thing deposited be
share. returned?

When there is solidarity or the thing does not A:
admitofdivision,theprovisionsofArt.1212and GR:Attheplaceagreedupon.
1214 shall govern. However, if there is a
stipulation that the thing should be returned to XPN: In the absence of stipulation, at the
oneofthedepositors,thedepositaryshallreturn place where the thing deposited might be,
itonlytothepersondesignated(Art.1985,NCC). evenifitshouldnotbethesameplacewhere
the original deposit was made provided the
Q:Whataretheobligationsofdepositor? transferwasaccomplishedwithoutmaliceon
thepartofthedepositary.
A:
1. Payment for necessary expenses for Q: When should the thing deposited be
preservation returned?
a. If the deposit is gratuitous
reimbursedepositary A:
b. With compensation no need for GR:Upondemandoratwill,whetherornota
reimbursement; expenses borne periodhasbeenstipulated.
bydepositary
XPNs:
2. GR:Paylossesincurredbydepositarydueto 1. Thing is judicially attached while in the
thecharacterofthethingdeposited. depositaryspossession.
2. Depositary was notified of the
XPNs: opposition of a third person to the
a. When at the time of deposit, the return or the removal of the thing
depositor was not aware of the deposited(Art.1986,NCC).
dangerous character of the thing 3. Whenthethingisstolenandtheperiod
orwasnotexpectedtoknowit; of 30 days from notice to the true
b. When the depositor notified the owner for him to claim it had not yet
depositary;or lapsed, the depositary cannot return
c. Whenthedepositarywasawareof the thing deposited to the depositor.
it without advice from the This is intended to protect the true
depositor. owner.
4. In case of gratuitous deposit, if the
3. In case of an onerous deposit, to pay the depositary has a justifiable reason for
compensationagreeduponasconsideration not keeping the deposit. If the
forthedeposit. depositor refuses, the depositary may
secure its consignation from the court
Q: To whom should the thing deposited be (Art.1989,NCC).
returned?
A:
1. To the depositor, to his heirs and
successors, or to the person who may
have been designated in the contract
(Art.1972,NCC).
391

B.NECESSARYDEPOSIT Q:Whatistheextentoftheliabilityofthehotel
keepersincaseofloss?
Q:Whenisdepositconsideredasnecessary?
A:
A: 1. It covers liability in hotel rooms which
1. When it is in compliance with a legal come under the term baggage or
obligation; articlessuchasclothingasareordinarily
2. It takes place on the occasion of any usedbytravelers.
calamity, such as fire, storm, flood, 2. It includes lost or damages in hotels
pillage, shipwreck, or other similar annexes such as vehicles in the hotels
events; garage.
3. Made by passengers with common
carriers;or Q:Canthekeepersofthehotelsorinnsexercise
4. Madebytravelersinhotelsorinns. therightofretention?

Q: When can the keepers of hotels or inns be A:Yes,assecurityforcreditsincidenttothestay
held responsible for loss of thing in case of atthehotel(inthenatureofapledgecreatedby
deposit? operationoflaw).

A:Whenbotharepresent: C.JUDICIALDEPOSIT
1. they have been previously informed by
guest about the effects the latter Q:Whendoesjudicialdeposit(sequestration)
broughtin;and takeplace?
2. the guest has taken precautions
prescribedfortheirsafekeeping. A:Whenanattachmentorseizureofpropertyin
litigationisorderedbyacourt.(Art.2005,NCC)
Note: They are liable regardless of the
degreeofcareexercisedwhen: Note: It is auxiliary to a case pending in court. The
a. loss or injury is caused by his purpose is to maintain the status quo during the
employees or even by pendency of the litigation or to insure the right of
strangers;or the parties to the property in case of a favorable
b. lossiscausedby act ofthief or judgment.(DeLeon,Commentsandcasesoncredit
robberwhenthereisnouseof transaction,p.154,2010)
armsorirresistibleforce.
Q: What may be the object of Judicial
Q: What are the instances when the keepers of sequestration?
hotels or inns are not liable for loss of thing in
caseofdeposit? A:Movablesandimmovables(Art.2006,NCC)

A:Theyarenotliablewhen: Q: When will the properties sequestered cease
1. loss or injury is caused by force tobeincustodialegis?
majeure;
2. lossduetotheactsofguests,hisfamily, A: When the insolvency proceedings of a
hisemployees,orvisitors;and partnership terminated because the assignee in
3. loss arises from the character of the insolvency has returned the remaining assets to
goods. the firm, said properties cease to be in custodia
legis(NgChoCio,etal.v.NgDiong&Hodges,L
Q:Arehotelorinnkeepersstillliableregardless 14832,Jan.28,1961)
of the posting of notices exempting themselves
fromanyliability? III.GUARANTYANDSURETYSHIP

A: Yes. Hotel/Innkeepers cannot escape or limit A.NATUREANDEXTENTOFGUARANTY
liability by stipulation or the posting of notices.
Anystipulationbetweenthehotelkeeperandthe Q:Whatisguaranty?
guest whereby the responsibility of the former
(Arts. 19982001) is suppressed or diminished A: It is a contract where a person called the
shallbevoid. guarantor binds himself to the creditor to fulfill
the obligation of the principal debtor in case the
lattershouldfailtodoso.
392 CIVILLAWTEAM:

CREDIT TRANSACTIONS
Q:Whatissuretyship? Q:Whatarethekindsofguaranty?

A: It is a contract where a person binds himself A:
solidarilywithprincipaldebtor. 1. Generalclassification
a. Personal guaranty where an
Q:Distinguishguarantyfromsuretyship. individual personally assumes
the fulfillment of the principal
A: obligation;
GUARANTY SURETYSHIP b. Real guaranty is property,
Suretyisanoriginal movable,orimmovable.
Collateralundertaking 2. Astoitsorigin
promissory
Guarantorsecondarily a. Conventional constituted by
Suretyprimarilyliable agreementoftheparties
liable
Guarantorbindshimself Suretyundertakestopay b. Legal imposed by virtue of a
topayiftheprincipal ifprincipal provisionoflaw
cannotpay doesnotpay c. Judicialrequiredbyacourtto
Insurerofsolvencyof guarantee theeventual right of
Insurerofthedebt thepartiesinacase.
debtor
Guarantorcanavailof 3. Astoconsideration
thebenefitofexcussion Suretycannotavailof a. Gratuitous guarantor does
anddivisionincase thebenefitofexcussion not receive any price or
creditorproceedsagainst anddivision remuneration for acting as
him such.
b. Onerous one where the
Q: What is the similarity between guaranty and guarantor receives valuable
considerationforhisguaranty
suretyship?
4. Astoperson
a. Single constituted solely to

A: Both guarantor and surety promise or
guarantee or secure
undertake to answer for the debt, default or
performance by the debtor of
miscarriageofanotherperson.
theprincipalobligation.
b. Double or subguaranty
Q: What are the characteristics of guaranty and constituted to secure the
suretyship? fulfillmentoftheobligationofa
guarantorbyasubguarantor
A:ACCUNCS 5. Astoscopeandextent
1. Accessory a. Definite where the guaranty
2. Consensual is limited to the principal
3. Conditional obligation only, or to a specific
4. Unilateral portionthereof.
5. Nominate b. Indefinite or simple where
6. Cannotbepresumed the guaranty included all the
7. CoveredbytheStatuteofFrauds accessory obligations of the
principal, e.g. costs, including
Q:Distinguishguarantyfromwarranty. judicialcosts.

A: B.EFFECTSOFGUARANTY
GUARANTY WARRANTY
anundertakingthatthe Q:Whataretheobligationsthatmaybesecured
acontractbywhicha title,qualityorquantityof inacontractofguaranty?
personisboundto thesubjectmatterofa
anotherforthe contractiswhatitis A:
fulfillmentofa representedtobe,and 1. Validobligations
promiseor relatestosome 2. Voidableobligations
undertakingofathird agreementmade 3. Unenforceableobligations
person ordinarilybytheparty 4. Natural obligations When the debtor
whomakesthewarranty himself offers a guaranty for his natural
obligation, he impliedly recognizes his
liability, thereby transforming the
obligationfromanaturalintoacivilone.
393

5. Conditional obligations only in case of Q:Statethegeneralcharacterofguaranty.
suspensive condition because it gives rise
totheprincipalandhence,givesrisealso A:
totheaccessoryobligation. GR:Generallygratuitous(Art.2048,NCC)

Note: Voidable contract is one which has all the XPN:Stipulationtothecontrary.
essential elements of a valid contract, except that
the element of consent is vitiated. It is valid and Q: Who are the parties to a contract of
obligatorybetweenthepartiesbeforeitsannulment. guaranty?
Unenforceable contact, on the other hand, is one

whichcannotbeenforcedbyactionorcomplaintin
A:
court, unless they have been ratified by the party
whodidnotgivehisconsentthereto.Sincebothare
1. Guarantor
considered valid obligations between the parties 2. Creditor
until their annulment, and subject to ratification,
theycanbesecuredinacontractofguaranty. GUARANTOR

Q: Is a valid principal obligation necessary in Q:Whoisaguarantor?
contractofguaranty?
A: The guarantor is the person who is bound to
A:Sinceguarantyisanaccessorycontract,itisan another for the fulfillment of a promise or
indispensable condition for its existence that undertakingofathirdperson.
theremustbeaprincipalobligation.Hence,ifthe
principalobligationisvoid,itisalsovoid. Q:Whatarethequalificationsofaguarantor?

Q:Inwhatformshouldacontractofguarantybe A:
made? 1. Possessesintegrity;
2. Capacitytobindhimself;and
A:Itmustbeexpressedandinwriting(par.2,Art. 3. Has sufficient property to answer for
1403,NCC);otherwise,itisunenforceableunless theobligationwhichheguarantees.
ratified.Itneednotbeinapublicinstrument.
Note:Thequalificationsneedonlybepresentatthe
Note: Guaranty, as a contract, requires the timeoftheperfectionofthecontract.
expressionoftheconsentoftheguarantorinorder
tobebound.Itcannotbepresumedbecauseofthe Q: What is the effect of subsequent loss of
existenceofacontractorprincipalobligation. requiredqualifications?

Q: Is acceptance necessary in a contract of A: The subsequent loss of integrity, property or
guaranty? supervening incapacity of the guarantor would
not operate to exonerate the guarantor or the
A: eventual liability he has contracted, and the
GR: The acceptance of the creditor is not contractofguarantycontinues.
essentialinsuchcontracts.
However, the creditor may demand another
XPN: When there is a mere offer of a guarantor with the proper qualifications. But he
guaranty or a conditional guaranty wherein maywaiveitifhechoosesandholdtheguarantor
theobligationdoesnotbecomebindinguntil tohisbargain.
it is accepted by the creditor and notice of
suchacceptanceisgiventotheguarantor. Q: When is the qualification of the guarantor
lost?
Q: In case of doubt, in whose favor should a
contractofguarantyorsuretyberesolved? A:
Convictionofacrimeinvolvingdishonesty
A: Insolvency
GR: Strict construction against the creditor
andliberalinfavoroftheguarantororsurety; Q: What is the effect of absence of direct
termscannotbeextendedbeyonditsterms. considerationorbenefittoguarantor?

XPN:Incasesofcompensatedsureties. A:Guarantyorsuretyagreementisregardedvalid
despite the absence of any direct consideration
394 CIVILLAWTEAM:

CREDIT TRANSACTIONS
received by the guarantor or surety, such Q: What are the situations when a guarantor
consideration need not pass directly to the may lawfully be required to pay more than the
guarantor or surety; a consideration moving to originalobligationoftheprincipaldebtor?
theprincipalwillsuffice.
A:
Q:Whatistherulewhenamarriedwomanisa 1. Ifupondemand,aguarantorfailstopay
guarantor? theobligation,hecanbeheldliablefor
interest, even if in thus paying, the
A: liability becomes more than that in the
GR:Bindsonlyherseparateproperty. principal obligation. The increased
liability is not because of the contract
XPNs: but because of the default and the
1. If with her husbands consent, it binds necessity for judicial collection. It
the community or conjugal partnership should be noted, however, that the
property. interest runs from the time the
2. Without husbands consent, in cases complaintisfiled,notfromthetimethe
provided for by law, such as when the debt becomes due and demandable
guaranty has redounded to the benefit (Tagawa v. Aldanese, No.18636, sept.
ofthefamily. 28,1922).

Q: What are the rights of a third person who 2. Creditors suing on a surety bond may
paysforthedebtguaranteedorsecured? recoverfromthesurety,aspartoftheir
damages, interest at the legal rate,
A: judicial cost and attorneys fees when
1. If payment is made without the appropriate even if the surety would
knowledge or against the will of the therebybecomeliabletopaymorethan
debtor: thetotalamountstipulatedinthebond
a. Guarantorcanrecoveronlyinsofar (Dino v. CA, G.R. No. 89775, Nov. 26,
asthepaymenthasbeenbeneficial 1995).
tothedebtor
b. Guarantor cannot compel the 3. A penalty clause may also increase the
creditor to subrogate him in his liabilityofthesurety(GeneralInsurance
rights. SuretyCo.v.Republic,G.R.No.L13873,
Jan.31,1963)
2. Ifpaymentismadewiththeknowledge
or consent of the debtor Subrogated Q:Whatistheeffectofguarantorsdeath?
to all the rights which creditor had
againstthedebtor. A: His heirs are still liable to the extent of the
valueoftheinheritancebecausetheobligationis
Q:Whatistheextentofguarantorsliability? not purely personal and is therefore
transmissible.
A:
1. Where the guaranty is definite It is Q:Whatistheeffectofthedebtorsdeath?
limited in whole or in part to the
principal debt to the exclusion of A: His obligation will survive. His estate will be
accessories. answerable.Iftheestatehasnosufficientassets,
theguarantorshallbeliable.
2. Where the guaranty is indefinite or
simple It shall comprise not only the Q:Whatistherulewithrespecttojurisdictionin
principal obligation but also all its anactionbasedonacontractofguaranty?
accessories, including the judicial costs
provided that the guarantor shall only A: The guarantor shall be subject to the
beliableforthosecostincurredafterhe jurisdiction of the court of the place where the
hasbeenjudiciallyrequiredtopay. obligationistobecompliedwith.

395

BENEFITOFEXCUSSION 1. Guarantorhasexpresslyrenouncedit.
2. Guarantor has bound himself solidarily
Q:Whatisthebenefitofexcussion? withtheDebtor.
3. Debtorisinsolvent.
A: It is a right by which the guarantor cannot be 4. Guarantorhasabsconded,orcannotbe
compelledtopaythecreditorunlessthelatterhas sued within the Philippines unless he
exhausted all the properties of the principal leftamanagerorrepresentative.
debtor and has resorted to all legal remedies 5. Ifitmaybepresumedthatanexecution
againstsuchdebtor. on the property of the Debtor cannot
satisfytheobligation.
Q: What are the requisites of benefit of 6. Guarantor does not invoke the benefit
exhaustionorexcussion? against Creditor upon demand to him
forpaymentandhedoesnotpointout
A: available property of the Debtor within
The guarantor must set up the right of the Philippines sufficient to cover the
excussionagainstthecreditoruponthe obligation(Art.2060,NCC).
lattersdemandforpaymentfromhim; 7. Guarantor is a judicial bondsman or
and subsurety.
8. A pledge or mortgage of his own
He must point out to the creditor the property has been given by Guarantor
available property of the debtor (not asspecialsecurity.
exempted from execution) found 9. Guarantor fails to interpose it as a
within the Philippine territory (Art. defensebeforejudgmentisrendered.
2060,NCC).
BENEFITOFDIVISION
Q: May a complaint be filed against the debtor
andguarantorsimultaneouslyinonecasebefore Q:Whatistheprincipleofbenefitofdivision?
the exhaustion of all the properties of the
debtor? A:Shouldtherebeseveralguarantorsofonlyone
debtor for the same debt, the obligation to
A: Yes. There is nothing procedurally answer for the same is divided among all. (Joint
objectionable in impleading the guarantor as a liability)
codefendant. As a matter of fact, the Rules of
Court on permissive joinder of parties explicitly Note:
allow it. If the creditor obtained a favorable GR: Creditor can claim from the guarantors
judgment against the debtor and guarantor, the only up to the extent they are respectively
boundtopay.
latterisentitledtoadefermentoftheexecution

of the said judgment against him until all
XPN:Whensolidarityhasbeenstipulated.
properties of the debtor shall have been
exhausted to satisfy the latters obligation Should any of the guarantors become insolvent, his
involvedinthecase. share shall be borne by the other guarantors
including the paying guarantor in the same joint
Q:Whatistheeffectofdeclarationofinsolvency proportion in accordance with the rule in solidary
withrespecttotherightofexcussion? obligations.

A: Just because the debtor has been declared Therighttobereimbursedfromhiscoguarantorsis
insolvent in insolvency proceeding does not acquiredipsojurebyvirtueofsaidpayment.
necessarily mean that he cannot pay, for part of
the debtors assets may still be available to the Q:Distinguishbenefitofdivisionfrombenefitof
creditor.Onegoodproofofthedebtorsinability contribution.
to pay is an unsatisfied writ of execution which
has been returned by the implementing sheriff A:
(Machetti v. Hospicio de San Jose, 43 Phil. 297, BENEFITOF
BENEFITOFDIVISION
Feb.7,1920) CONTRIBUTION
Controversyisbetween Controversybetween
Q:Whenistherenobenefitofexcussion? thecoguarantorsand andamongtheseveral
thecreditor coguarantors
A:RJSAIRFEDS Thereisnopayment Thereisalready
396 CIVILLAWTEAM:

CREDIT TRANSACTIONS
yet,butthereismerely paymentofdebt;the Q: What is the effect of compromise between

aclaimpressedagainst payingcoguarantoris the creditor and the guarantor to the principal
oneormoreco seekingthecontribution debtor?
guarantors ofthecoguarantors
A: If compromise is beneficial to the principal
Q:Whatistheeffectofthecreditorsnegligence debtor, it is valid; otherwise, it is not binding
inexhaustingthepropertiesofthedebtor? upon him (2nd sentence, Art. 2063, NCC). To be
binding, it must benefit both the guarantor and
A: He shall suffer the loss to the extent of the thedebtor.
value of the pointed property which was not
exhaustedbythecreditor(Art.2061,NCC). Q:Whatistheruleontherightofindemnityand
reimbursement of the guarantor who paid the
Note: The article applies when the guarantor has debt?
compliedwiththeconditionsofArt.2060(requisites
ofbenefitofexcussion). A:
GR:Guarantorisentitledtobereimbursedby
Q:Whatistherulewithregardtoactionofthe Debtorfor:
creditoragainstthedebtor? 1. totalamountofthedebtpaid;
2. legal interest from the time payment
A: wasmadeknowntothedebtor;
GR:Onlytheprincipaldebtorshouldbesued 3. expenses incurred after notifying
alone. debtor that demand to pay was made
uponhim;and
XPN: If the benefit of excussion is not 4. damagesinaccordancewithlaw.
available, the guarantor can be sued jointly
withthedebtor. XPNs:
1. Guaranty is constituted without the
Q:Istheguarantorentitledtobenotifiedofthe knowledge or against the will of the
complaintagainstthedebtor? debtor.
Effect: Guarantor may only recover only
A:Yes.Iftheguarantordesirestosetupdefenses somuchaswasbeneficialtothedebtor.
as are granted him by law, he may have the
opportunitytodoso. 2. Payment by 3rd persons who does not
intendtobereimbursed.
Q: What are the consequences of the Effect: deemed a donation and as such
guarantors appearance or nonappearance in requirestheconsentofdebtor.
thecaseagainstthedebtor?
Q: What is the right of the guarantor after the
A: paymentofthedebtismadetothecreditor?
1. If he does not appear and judgment is
renderedagainstthedebtor,hecannot A: Right of subrogation. The guarantor is
setupdefenseswhichhecouldhaveset subrogated to all the rights which the creditor
st
up had he appeared; moreover, he hadagainstthedebtor(1 par.,Art.2067)
cannotquestionthedecisionanymore;
Q: What happens when guarantor pays without
2. Ifheappearssuchasbyfilingananswer noticetothedebtor?
inintervention,hemayloseormaywin
thecase.Ifhelosses,heisstillentitled A: The debtor may interpose against the
tothebenefitofexcussion.Thereisno guarantor defenses available to the debtor as
waiverofhisbenefitofexcussionbyhis against the creditor at the time payment was
appearanceinthecase. made.

Q: What is the effect of compromise between Note:
thecreditorandthedebtortotheguarantor? GR: Guarantormust1stnotifythedebtorbefore
paying, otherwise, if the debtor pays again, the
A: If the compromise is beneficial to the guarantorcanonlycollectfromthecreditorand
guarantor, it is valid; otherwise, it is not binding guarantor will have no cause of action against
st the debtor even if the creditor becomes
uponhim(1 sentence,Art.2063,NCC).
insolvent.
397

XPN:Guarantormaystillrecoverfromdebtor SUBGUARANTY
ifthefollowingcircumstancesconcur:
Q:Whatisdoubleorsubguaranty?
1. Guarantyisgratuitous;
2. Guarantor was prevented by fortuitous A: It is one constituted to guarantee the
eventfromnotifyingthedebtor;and obligationoftheguarantor.
3. Creditorwasinsolvent.
Note: In case of insolvency of the guarantor for
Q: Can the guarantor proceed against the whomheboundhimself,heisresponsibletotheco
principal debtor even before having paid the guarantorsinthesametermsastheguarantors(Art.
creditor? 2075,NCC).

A: Q: Is a subguarantor entitled to the right of
GR:No. excussion?

XPNs: A:Yes,bothwithrespecttotheguarantorandto
theprincipaldebtor(Art.2064,NCC).
1. Whenheissuedforpayment;
2. In case of insolvency of the principal CONTINUINGGUARANTY
debtor;
3. When the debtor has bound himself to Q:Whatiscontinuingguarantyorsuretyship?
relieve him from the guaranty within a
specified period, and this period has A:
expired. GR:Itisnotlimitedtoasingletransactionbut
4. Whenthedebthasbecomedemandable contemplates a future course of dealings,
byreasonoftheexpirationoftheperiod coveringaseriesoftransactionsgenerallyfor
ofpayment; anindefinitetimeoruntilrevoked.
5. After the lapse of ten years, when the
principal obligation has no fixed period XPN: A chattel mortgage can only cover
for its maturity, unless it be of such obligations existing at the time the mortgage
nature that it cannot be extinguished is constituted and not to obligations
except within a period longer than ten subsequenttotheexecutionofthemortgage.
years;
6. If there are reasonable grounds to fear XPN to the XPN: In case of stocks in
that the principal debtor intends to departmentstores,drugstoresetc.
abscond;or
7. If the principal debtor is in imminent Q:Whatisthetestofcontinuingguaranty?
dangerofbecominginsolvent.
A: A guaranty shall be construed as continuing
when by the terms thereof it is evident that the
Note: In all these cases, the cause of action of the objectistogiveastandingcredittotheprincipal
guarantor is either to obtain release from the debtor to be used from time to time either
guaranty,ortodemandasecuritythatshallprotect indefinitely or until a certain period, especially if
himfromanyproceedingsbythecreditorandfrom the right to recall the guaranty is expressly
the danger of insolvency of the debtor (Art. 2071, reserved (Dino v. CA, G.R. No. 89775, Nov. 26,
NCC). 1995)

Q:Whatistheremedyofapersonwhobecomes Q:Mayguarantysecurefuturedebts?
a guarantor at the request of another for the
debtofathirdpersonwhoisnotpresent? A: Yes. A guaranty may be given to secure even
future debts, the amount of which may not be
A:Hehastheoptionofsuingeithertheprincipal knownatthetimetheguarantyisexecuted.This
debtorortherequestingparty(Art.2072,NCC). is the basis for contracts denominated as
continuingguarantyorsuretyship.Itisonewhich
Note:Theprovisionapplieswhentheguarantorhas covers all transactions, including those arising in
actuallypaidthedebt. the future, which are within the description or
contemplation of the contract of guaranty, until
theexpirationorterminationthereof.(Dinov.CA,
G.R.No.89775,Nov.26,1995)
398 CIVILLAWTEAM:

CREDIT TRANSACTIONS
Q: PAGRICO submitted a Surety Bond issued by

R&BSuretytosecureanincreaseinitscreditline D.LEGALANDJUDICIALBONDS
withPNB.ForconsiderationoftheSuretyBond,
Cochingyan and Villanueva entered into an Q:WhatisaBond?
Indemnity Agreement with R&B Surety and
bound themselves jointly and severally to the A: A bond, when required by law, is commonly
termsandconditionsoftheSuretyBond.When understood to mean an undertaking that is
PAGRICOdefaulted,PNBdemandedpaymentto sufficiently secured, and not cash or currency.
R&B Surety; R&B Surety, in turn, demanded Whateversuretybondsaresubmittedaresubject
payment to Cochingyan and Villanueva. R&B to any objections as to their sufficiency or as to
suedthem.Villanuevaarguedthatthecomplaint thesolvencyofthebondsman.
was premature because PNB had not yet
proceeded against R&B Surety to enforce the Q:WhatisaBondsman?
latter's liability under the Surety Bond. Is the
contentioncorrect? A:Abondsmanisasuretyofferedinvirtueofa
provisionoflaworajudicialorder.Hemusthave
A: No. Indemnity Agreements are contracts of thequalificationsrequiredofaguarantorandin
indemnification not only against actual loss but speciallawsliketheRulesofCourt.
against liability as well. While in a contract of
indemnity against loss an indemnitor will not be Q:Whatarethequalificationstoaproperty
liable until the person to be indemnified makes bond?
payment or sustains loss, in a contract of
indemnity against liability, as in this case, the A: The necessary qualifications of sureties to a
indemnitor'sliabilityarisesassoonastheliability propertybondshallbeasfollows:
ofthepersontobeindemnifiedhasarisenwithout 1. Eachofthemmustbearesidentowner
regard to whether or not he has suffered actual ofrealestatewithinthePhilippines;
loss. Accordingly, R & B Surety was entitled to 2. Wherethereisonlyonesurety,hisreal
proceed against petitioners not only for the estate must be worth at least the
partial payments already made but for the full amountoftheundertaking;
amount owed by PAGRICO to the PNB. 3. Incasetherearetwoormoresureties,
(Cochingyan, Jr. v. R&B Surety and Ins. they may justify severally in amounts
Co.,GR.No.L47369,June30,1987) lass than that expressed in the
undertaking, if the entire sum justified
toisequivalenttothewholeamountof
C.EXTINGUISHMENTOFGUARANTY bail demanded. (Sec. 12, Rule 114,
RulesofCourt)
Q: What are the grounds for extinguishing a
contractofguaranty? Q:Whatisthenatureofabond?

A: A: All bonds including judicial bonds are
1. Principalobligationisextinguished contractualinnature.
2. Samecausesasallotherobligations
3. If creditor voluntarily accepts
immovable or other properties in
payment of the debt (even if he should Q:WhatisaJudicialBond?
afterwardslosethesamethrougheviction
orconveyanceofproperty) A: Judicial bonds constitute merely as a special
4. Release in favor of one of the class of contracts of guaranty, characterized by
guarantors, w/o consent of the others, thefactthattheyaregiveninvirtueofajudicial
benefitsalltotheextentoftheshareof order.
the guarantor to whom it has been
granted Q: Is the right of excussion available to a
5. Extensiongrantedtodebtorbycreditor bondsman?
withoutconsentofguarantor
6. When by some act of the creditor, the A:No.Ajudicialbondsmanandthesubsuretyare
guarantors even though they are not entitled to the benefit of excussion because
solidarilyliablecannotbesubrogatedto theyarenotmereguarantors,butsuretieswhose
the rights, mortgages, and preferences liabilitiesisprimaryandsolidary.(ART2084,NCC)
oftheformer
399

Q: What is the liability of the surety if the Q:Whatistheeffectofasuretybondfiledforan
creditorwasnegligentincollectingthedebt? alienstayinginthecountrywhichisforfeitedfor
violatingitsterms?
A: A surety is still liable even if the creditor was
negligent in collecting from the debtor. The A: The effect of the violation is that its
contract of suretyship is not that the oblige will subsequent unauthorized cancellation thru
seethattheprincipalpaysthedebtorfulfillsthe mistake or fraud does not relieve the surety. A
contract, but that the surety will see that the bond surrendered thru mistake or fraud may,
principalpayorperform(PNBv.ManilaSurety& therefore,beconsideredasavalidandsubsisting
FidelityCo.,Inc.,14SCRA776,1965) instrument.(FarEasternSuretyandIns.Co.,v.CA,
GRNo.L12019,Oct16,1958)
Q:Whatistheeffectofviolationbythecreditor
ofthetermsofthesuretyagreement? Q: What is the rule when the performance of a
bondisrenderedimpossible?
A:Aviolationbythecreditorofthetermsofthe
surety entitles the surety to be released A:Itisthesuretysdutytoinformthecourtofthe
therefrom. (Associated Ins. & Surety Co. v. happeningoftheeventsothatitmaytakeaction
BacolodMurciaMillingCo.,GR.No.L12334,May ordecreeinthedischargeofthesuretywhenthe
22,1959) performance of the bond is rendered impossible
by an act of God, or the obligee, or the law.
(Peoplev.OtiakOmal&LuzonCo.,Inc.,GR.No.L
14457,June30,1961)

PLEDGE,MORTGAGE,ANDANTICHRESIS

Q:Whatispledge,mortgageandantichresis?Distinguish.

A:
PLEDGE MORTGAGE(Real) ANTICHRESIS
Definition
Anaccessorycontractwherebyadebtor
Itisacontractwherebythedebtor
deliverstothecreditororathirdperson AcontractwherebytheCR
securestothecreditorthe
amovableorpersonalproperty,or acquirestherighttoreceivethe
fulfillmentofaprincipalobligation,
documentevidencingincorporealrights, fruitsofanimmovableofthe
speciallysubjectingtosuch
tosecurethefulfillmentofaprincipal dedtor,withtheobligationto
security,immovablepropertyor
obligationwiththeconditionthatwhen applythemtothepaymentof
realrightsoverimmovable
theobligationissatisfied,thething interest,ifowing,andthereafter
property,incasetheprincipal
deliveredshallbereturnedtothe totheprincipalofhiscredit.
obligationisnotpaidorcomplied
pledgorwithallitsfruitsandaccessions,
withatthetimestipulated.
ifany.
Objectofthecontract
movableorpersonalproperty,or immovablepropertyorrealrights
fruitsofanimmovable
documentevidencingincorporealrights overimmovableproperty

Q: What are the similarities of pledge and Q: Are the contracts of pledge, mortgage or
mortgage? antichresisindivisible?

A: A:
1. Bothareaccessorycontracts; GR: A pledge, mortgage or antichresis is
2. Both pledgor and mortgagor must be indivisible.
theabsoluteowneroftheproperty;
3. Bothpledgorandmortgagormusthave Note: Indivisibility may be waived. Indivisibility
thefreedisposaloftheirpropertyorbe onlyappliestothecontractingparties.
authorizedtodoso;and
4. In both, the thing proffered as security XPNs:
maybesoldatpublicauction,whenthe 1. Where each one of several things
principal obligation becomes due and guarantees determinate portion of the
nopaymentismadebythedebtor. credit
400 CIVILLAWTEAM:

CREDIT TRANSACTIONS
2. Where only a portion of the loan was GR:No.

released
3. Where there was failure of XPN: If the third party pledgor or mortgagor
consideration expressly agreed to be bound solidarily with
theprincipaldebtor.
Q:Whataretheobligationsthatcanbesecured
bypledge,mortgageandantichresis? Q: What is the right of an owner of personal
propertypledgedwithoutauthority?
A:
1. Validobligations A:HemayinvokeArt.559,NCC.Thedefensethat
2. Voidableobligations pawnshopowneracquiredownershipofthething
3. Unenforceableobligations ingoodfaithisnotavailable.
4. Naturalobligations
5. Conditionalobligations Note:Art.559Thepossessionofmovableproperty
acquired in good faith is equivalent to a title.
Q: What rules are common to pledge and Nevertheless,onewhohaslostanymovableorhas
mortgage? been unlawfully deprived thereof, may recover it
fromthepersoninpossessionofthesame.
A:
Constituted to secure the fulfillment of a If the possessor of a movable lost or of which the
ownerhasbeenunlawfullydeprived,hasacquiredit
validprincipalobligation.
in good faith at a public sale, the owner cannot
Pledgor or mortgagor must be the absolute
obtainitsreturnwithoutreimbursingthepricepaid
owner of the thing pledged or therefore.
mortgaged.
They must have the free disposal of their Q:Whatisthenatureofanassignmentofrights
property, and in the absence thereof, toguaranteeanobligationofadebtor?
thattheybelegallyauthorizedforsuch
purpose. A: It is in effect a mortgage and not an absolute
Debtor retains ownership of the thing given conveyance of title which confers ownership on
asasecurity. the assignee (Manila Banking Corp. v. Teodoro,
Jr.,G.R.No.53955,Jan.13,1989)
Q: May property acquirable in the future be
mortgaged? ACCOMMODATIONMORTGAGE

A: No. Where the mortgagor mortgaged a Q:Whoisanaccommodationmortgagor?
property and in the contract he agreed to
mortgage additional properties which he may A: He is a third person who is not a party to a
acquire in the future, there was no valid principal obligation and secures the latter by
mortgageastothelatterbecausehewasnotyet mortgagingorpledginghisownproperty.
the owner of the properties at the time of the
mortgage (Dilag v. Heirs of Ressurrecion, No. Q: What is the extent of the liability of an
48941,May6,1946). accommodationmortgagor?

Q: Is mortgage constituted to secure future A: It extends up to the loan value of their
advancesvalid? mortgaged property and not to the entire loan
itself.
A: Yes. It is a continuing security and not
dischargedbyrepaymentoftheamountnamedin
the mortgage, until the full amount of the PACTUMCOMMISSORIUM
advances is paid. A chattel mortgage can only
cover obligations existing at the time the Q:Whatispactumcommisorium?
mortgage is constituted and not to obligations
subsequenttotheexecutionofthemortgage. A:Itisastipulationwherebythethingpledgedor
mortgaged or subject of antichresis shall
Q:Isathirdpersonwhopledgedandmortgaged automatically become the property of the
hispropertyliableforanydeficiency? creditorintheeventofnonpaymentofthedebt
withinthetermfixed.Suchstipulationisnulland
A: void.
401

Q: What are the elements of pactum grant of authority to the bank to sell the
commissorium? leaseholdrightsincaseofdefaultisproofthatno
suchownershipwastransferredandthatamere
A: encumbrancewasconstituted.Therewouldhave
1. There is a pledge, mortgage or beennoneedforsuchauthorityhadtherebeena
antichresis of a property by way of cession.
security;and
2. There is an express stipulation for the No, the clause in question is not a pactum
automaticappropriationbythecreditor commissorium.Itispactum commissoriumwhen
ofthepropertyincaseofnonpayment default in the payment of the loan automatically
vests ownership of the encumbered property in
Note: What are prohibited are those stipulations thebank.Intheproblemgiven,thebankdoesnot
executed or made simultaneously with the original automatically become owner of the property
contract,andnotthosesubsequentlyenteredinto. upon default of the mortgagor. The bank has to
sell the property and apply the proceeds to the
Q: ABC loaned to MNO P40,000 for which the indebtedness.(2001BarQuestion)
latterpledged400sharesofstockinXYZInc.It
was agreed that if the pledgorfailed to pay the Q:XborrowedmoneyfromYandgaveapieceof
loan with 10% yearly interestwithin four years, land as security by way of mortgage. It was
the pledgee is authorized to foreclose on the expressly agreed between the parties in the
shares of stock. As required, MNO delivered mortgagecontractthatuponnonpaymentofthe
possession of the shares to ABC with the debt on time by X, the mortgaged land would
understanding that the shares would be already belong to Y. If X defaulted in paying,
returnedtoMNOuponthepaymentoftheloan. would Y now become the owner of the
However, the loan was not paid on time. A mortgagedland?Why?
month after 4 years, may the shares of stock
pledged be deemed owned by ABC or not? A: No, Y would not become the owner of the
Reason. land. The stipulation is in the nature of pactum
commissorium which is prohibited by law. The
A:Thesharesofstockcannotbedeemedowned propertyshouldbesoldatpublicauctionandthe
by ABC upon default of MNO. They have to be proceeds thereof applied to the indebtedness.
foreclosed.UnderArticle2088,NCC,thecreditor Anyexcessshallbegiventothemortgagor.
cannot appropriate the things given by way of
pledge. And even if the parties have stipulated Q: Suppose in the preceding question, the
thatABCbecomestheownerofthesharesincase agreementbetweenXandYwasthatifXfailed
MNOdefaultsontheloan,suchstipulationisvoid topaythemortgagedebtontime,thedebtshall
for being a pactum commissorium. (2004 Bar be paid with the land mortgaged by X to Y.
Question) Would your answer be the same as in the
precedingquestion?Explain.
Q:Tosecurealoanobtainedfromaruralbank,
Purita assigned her leasehold rights over a stall A:No,theanswerwouldnotbethesame.Thisis
in the public market in favor of the bank. The avalidstipulationanddoesnotconstitutepactum
deed of assignment provides that in case of commissorium. In pactum commissorium, the
default in the payment of the loan, the bank acquisition is automatic without need of any
shallhavetherighttosellPurita'srightsoverthe furtheraction.Intheinstantproblemanotheract
marketstallasherattorneyinfact,andtoapply is required to be performed, namely, the
theproceedstothepaymentoftheloan. conveyance of the property as payment (dacion
enpago).(1999BarQuestion)
Was the assignment of leasehold rights a
mortgageoracession?Why? Q: In order to secure a bank loan, XYZ
Assumingtheassignmenttobeamortgage,does Corporation surrendered its deposit certificate,
the provision giving the bank the power to sell withamaturitydateofSeptember1,1997tothe
Purita's rights constitute pactum commissorium bank. The corporation defaulted on the due
ornot?Why? repayment of the loan, prompting the bank to
encash the deposit certificate. XYZ Corporation
A: questioned the above action taken by the bank
Theassignmentwasamortgage,notacession,of as being a case of pactum commissorium. The
the leasehold rights. A cession would have bankdisagrees.Whatisyouropinion?
transferredownershiptothebank.However,the
402 CIVILLAWTEAM:

CREDIT TRANSACTIONS
A:Isubmitthatthereisnopactumcommissorium
here. Deposits of money in banks and similar Note: A thing lawfully pledged to one creditor,
institutions are governed by the provisions of cannot be pledged to another as long as the 1st
simple loans (Art. 1980, NCC). The relationship pledgesubsists.
between the depositor and a bank is one of
creditor and debtor. Basically, this is a matter of C.ESSENTIALREQUISITES
compensation as all the elements of
compensationarepresentinthiscase.(BPIv.CA, Q: What are the essential requisites for a
G.R. No. 104612, May 10, 1994) (1997 Bar contractofpledge?
Question)
A:
Q: Spouses Uy Tong purchased seven motor 1. Constitutedtosecurethefulfillmentof
vehicles from Bayanihan Investment payable in aprincipalobligation;
installments. It was agreed that if the spouses 2. Pledgor is the absolute owner of the
shouldfailtopaytheirobligation,Bayanihanwill thingpledged;
automatically be the owner of the apartment 3. Persons constituting the pledge have
which the spouses has a leasehold right. The the free disposal of their property, and
spousesafterpayingthedownpayment,failedto in the absence thereof, that they be
pay the balance, hence, Bayanihan filed an legallyauthorizedforthepurpose.(Art.
action for specific performance against the 2085,NCC)
spouses.Thejudgmentprovidedthatincasethe
spouses failed to pay the obligation within 30 Note:Acontractofpledgenotappearinginapublic
daysfromnotice,theyaretoexecuteaDeedof instrument does not affect its validity. It is valid
Absolute Sale over the apartment and/or betweentheparties.
leasehold rights. Is the stipulation a pactum
commissorium? Q: What kind of possession is required in
pledge?
A: No. The questioned agreement evinces no
basis for the application of pactum A:Themeretakingofthepropertyisnotenough.
commissorium. There is no contract of pledge or There must be continuous possession of the
mortgage entered into by the parties. Bayanihan thing. However, the pledgee is allowed to
sought the intervention of the court by filing an temporarilyentrustthephysicalpossessionofthe
actionforspecificperformance.Hencetherewas thingpledgedtothepledgorwithoutinvalidating
no automatic appropriation of the property. (Uy the contract. But here, the pledgor would be in
Tongv.CA,G.R.No.77465,May21,1988) possessionasameretrusteeandhispossessionis
subjecttotheorderofthepledgee.

IV.PLEDGE Q: Pablo owns a tractor which he left with his
sonMikeforsafekeeping.Mikethenofferedthe
A.DEFINITION saidtractortoCaliboassecurityforthepayment
ofhisdebt.WhenPablocamebackandlearned
Q:Whatispledge? thatthetractorwasinthecustodyofCalibo,he
demanded its return. Calibo, however, refused.
A:Acontractwheredebtordeliverstocreditoror Calibo alleged that the tractor was pledged to
rd
3 person a movable or document evidencing him, and in the alternative, the tractor was left
incorporeal right for the purpose of securing with him in the concept of deposit and he may
fulfillment of a principal obligation with the validly hold on to it until Mike pays his
understanding that when the obligation is obligation.IsCalibocorrect?
fulfilled,thethingdeliveredshallbereturnedw/
allitsfruitsandaccessions. A: No. There is no valid pledge because Mike is
nottheabsoluteownerofthe propertypledged.
B.KINDSOFPLEDGE He who is not the owner or proprietor of the
propertypledgedormortgagedtoguaranteethe
Q:Whatarethekindsofpledge? fulfillmentofaprincipalobligation,cannotlegally
constitutesuchaguarantyasmayvalidlybindthe
A: propertyinfavorofhiscreditor,andthepledgee
1. Conventionalbyagreementofparties or mortgagee in such a case acquires no right
2. Legalbyoperationoflaw whatsoever in the property pledged or
mortgaged. There is likewise no valid deposit, in
403

this case, where the principal purpose for D.OBLIGATIONSOFPLEDGORANDPLEDGEE
receivingtheobjectisnotsafekeeping.(CaliboJr.
v.CA,G.R.No.120528,Jan.29,2001) Q:Whoarethepartiesinacontractofpledge?

Q: Is constructive or symbolic delivery of the A:
thingsufficienttoconstitutepledge? 1. Pledgor the debtor; the one who
delivers the thing pledged to the
A: creditor
GR:No. 2. Pledgee the creditor; the one who
receivesthethingpledged
XPN:Ifthepledgeconsistsofgoodsstoredin
a warehouse for purposes, of showing the Q:Whataretherightsofapledgee?
pledgeescontroloverthegoods,thedelivery
to him of the keys to the warehouse is A:
sufficient delivery of possession 1. Retainthethinguntildebtispaid.(Art.
(constructive/symbolicdelivery). 2018,NCC)
2. To be reimbursed for the expenses
The type of delivery will depend upon the made for the preservation of the thing
nature and peculiar circumstances of each pledged.(Art.2099,NCC)
case(Yuliongsiuv.PNB,G.R.No.L19227,Feb. 3. Creditor may bring any action
17,1968) pertaining to the pledgor in order to
rd
recoveritfromordefenditagainsta3
Note: Constructive or symbolic delivery does not person.
confer physical possession of the thing, but by
construction of law, is equivalent to acts of real Q:Whataretheobligationsofapledgee?
delivery.
A:
Q:Whatistherationalebehindtherequirement 1. Takecareofthethingpledgedwiththe
that the pledge cannot take effect against third diligence of a good father of a family.
personsifthethingisnotdescribedandthedate (Art.2099,NCC)
doesnotappearinapublicinstrument?
Note: Pledgee is liable for the loss or
A: To forestall fraud because a debtor may deterioration of the thing by reason of
attempttoconcealhispropertyfromhiscreditors fraud, negligence, delay, or violation of
when he sees it in danger of execution by thetermsofthecontract.
simulating a pledge thereof with an accomplice
(TecBi&Co.v.CharteredBankofIndia,No.9802, 2. GR: Pledgee cannot deposit the thing
Feb.5,1916/March31,1917). pledgedtoa3rdperson.

Q:Whatisadoublepledge? XPN: Unless there is stipulation to the
contract(Art.2100,NCC)
A: A double pledge is when the same thing or
property subject of a first pledge will be the Note: Pledgee is liable for the loss or
subjectofanotherpledge. deteriorationofthethingpledgedcaused
bytheactsornegligenceoftheagentsor
Q:Cantherebeavaliddoublepledge? employeesofthepledgee.

A: No. A property already pledged cannot be 3. Apply the fruits, income, dividends, or
pledged while the first pledge is subsisting interests produced or earned by the
(Mission de San Vicente v. Reyes, No. 5508, Aug. property, to interests or expenses first,
14,1911). thentotheprincipal.(Art.2102,NCC)

Q: Can incorporeal rights evidenced by proper 4. GR: Cannot use the thing pledged
documentbepledged? withoutauthority.

A: Yes (Art. 2095, NCC). It is, however, required XPNs:
that the actual instrument be delivered to the a. If the pledgor had given him
pledge. More, if the instrument is a negotiable authorityorpermissiontouse
document,itmustbeindorsed. it;
404 CIVILLAWTEAM:

CREDIT TRANSACTIONS
b. If the use of the thing is Note: The remedies are alternative and not
necessary for its preservation cumulative. Only one may be chosen. The law used
butonlyforthatpurpose. theconjunctiveor.Eitheroneismoreconvenient
thanannulment.
5. Returnthethingpledgedtothepledgor
whentheprincipalobligationisfulfilled Q: What is the effect of the return of the thing
orsatisfiedit. pledgedtothepledgorbythepledgee?

Q:Doesthedebtorcontinuetobetheownerof A: The pledge shall be extinguished. Any
thethingincasethesameisexpropriatedbythe stipulation to the contrary shall be void (Art.
State? 2110,NCC).

A: No. Ownership is transferred to the Q: What is the presumption when the thing is
expropriatingauthority. found in the possession of the pledgor
subsequenttotheperfectionofthepledge?
Note: The creditor may bring actions pertaining to
theownerofthethingpledgedinordertorecoverit A:Thereisprimafaciepresumptionthatthething
from,ordefenditagainstathirdperson(Art.2103, pledgedhasbeenreturnedbythepledgeetothe
NCC). pledgor or owner, in any of the following
circumstances:
Q:Canthedebtoraskforthereturnofthething
pledgedagainstthewillofthecreditor? 1. Ifthethingisfoundinthepossessionof
the pledgor or owner after the pledge
A: hadbeenperfected;or
GR:No. 2. Ifthethingisfoundinthepossessionof
athirdpersonwhoreceiveditfromthe
XPNs: pledgororowneraftertheperfectionof
nd
1. If the debtor has paid the debt and its thepledge(2 par.,Art.2110,NCC).
interest,withexpensesinapropercase
(Art.2105,NCC). Note:Itispresumedthattheaccessoryobligationof
2. If the thing is in danger of destruction pledge has been remitted when the thing pledged,
or impairment provided, the pledgor after its delivery to the creditor, is found in the
offers an acceptable substitute for it possession of the debtor, or of a third person who
which is of the same kind and not of ownsthething(Art.1274,NCC).
inferiorqualityandwithoutprejudiceto
the application of Art. 2108 whenever Q:Whatistherequisitefortherenunciationor
warranted. abandonmentofthepledgebythepledgee?

Q: Can the pledgee cause the sale of the thing A: There must be a statement in writing to that
st
pledgedinpublicauctionwheretheobligationis effect(1 sentence,Art.2111,NCC).
notyetdue?
Note:Therenunciationofthepledgeisnotcontrary
A:Yes,ifwithoutthefaultofthepledge,thereis to law, public order, public policy, morals or good
danger of destruction, impairment or diminution customs.Further,Art.1356oftheNCC,whichspeaks
oftheformofcontracts,mustbecompliedwith.
invalueofthethingpledged.Theproceedsofthe

auction shall be security for the principal
Q:Isacceptanceorreturnofthethingnecessary
obligation in the same manner as the thing
for the validity of the renunciation under Art.
originallypledged(Art.2108,NCC).
2111?

Q: What are the rights of the creditor who is
A: No. it is not a case of donation where
deceivedonthesubstanceorqualityofthething
acceptance is necessary to make the donation
pledged?
valid.

A:Todemand:
Q:Supposethethingwasnotreturned,isthere
1. from the pledgor an acceptable
extinctionofthepledge?
substituteofthething;or

2. theimmediatepaymentoftheprincipal
A:Yes.Evenifthethingwasnotreturned,aslong
obligation(Art.2109,NCC).
as there is an effective renunciation,
405

abandonment or waiver, the pledge is already Note:Thesameruleappliestopromissorynotes,bill
extinguished. of exchange and other negotiable instruments
because they produce the effect of payment only
The pledgor is considered a depositor and the whentheyhavebeenencashed.
pledgee shall become a depositary of the thing.
Accordingly,thelawondepositwillapply. Paymentincashmustbemadeatonce.

Q: What is the right of the pledgee when the Q:Mayathirdpersonpaythepledgorsdebt?
debthasnotbeensatisfiedinduetime?
A:Yes,ifhehasanyinterestinthefulfillmentof
A:Thepledgeehastherighttoproceedwiththe theprincipalobligation(Art.2117,NCC).
saleofthethingatapublicauctiontoraisefunds
forpaymentoftheobligation(Art.2112,NCC). Q:Whatistherulewhenwhathasbeenpledged
isacredit?
Q:Whataretherequisitesofpublicsale?
A: The pledgee may collect and receive the
A: amount due. He shall apply the same to the
1. Theobligationmustbedueandunpaid; payment of his claim, and deliver the surplus,
2. Thesaleofthethingmustbeatapublic should there be any, to the pledgor (Art. 2118,
auction; NCC).
3. There must be notice to the pledgor
and owner stating the amount for Q: Santos made time deposits with OBM. IRC,
whichthesaleistobeheld;and through its president Santos, applied for a loan
4. ThesalemustbeconductedbyaNotary withPNB.Tosecuretheloan,Santosexecuteda
Public. DeedofAssignmentofthetimedepositsinfavor
of PNB. When PNB tried to collect from OBM,
Q:Whatisdeedofacquittance? the latter did not pay the CTDs. PNB then
demanded payment from Santos and IRC, but
A:Itisadocumentofthereleaseordischargeof the latter refused payment alleging that the
the pledgor from the entire obligation including obligationwasdeemedpaidwiththeirrevocable
interestsandexpenses.Thisshallbeexecutedby assignmentoftheCTDs.
thepledgeeafterappropriatingthethingincasea
nosalewasmadeinasecondauction. IstheliabilityofIRCdeemedpaidbyvirtue
ofthedeedofassignment?
Q: May the pledgor participate in the public IsOBMliablefordamages
auction? A:
1. No. For all intents and purposes, the
A:Yes.Moreover,heshallhaveabetterrightifhe deed of assignment in this case is
offersthesametermsasthehighestbidder[Art. actually a pledge. Where a CTD in a
2113(1),NCC]. bank, payable at a future time, was
handedoverbyadebtortohiscreditor,
Q:Whocanbidinthepublicauction? itwasnotpayment,unlesstherewasan
express agreement on the part of the
A: creditortoreceiveitassuch.
1. Thepublic 2. Yes. While it is true that no interest
2. Pledgor/owner/debtor shall be shallbedueunlessithasbeenexpressly
preferred if same terms as the highest stipulatedinwriting,thisappliesonlyto
bidderisoffered interest for the use of money. It does
3. Pledgee/creditor he must not be the not comprehend interest paid as
only one bidder, otherwise, his bid is damages. Santos has the right to
invalidandvoid recover damages resulting from the
default of OBM and the measure of
Q: Can checks be accepted as payment as such damages is interest at the legal
purchasepriceinapublicsale? rate of 6% per annum on the amounts
dueandunpaidattheexpirationofthe
A:No,theyarenotlegaltenders.(CFIv.CA,No.L periods respectively provided in the
4191,April30,1952). contracts. (Integrated Realty Corp. v.
PNB,G.R.No.60705,June28,1989)

406 CIVILLAWTEAM:

CREDIT TRANSACTIONS
Q:Whatistherulewhentwoormorethingsare 2. Nofaultonthepartofthepledge
pledged? 3. Pledgorisofferinginplaceofthething,
another thing in pledge which is of the
A:Thepledgeemaychoosewhichhewillcauseto same kind and quality as the former;
be sold, unless there is a stipulation to the and
st
contrary(1 sentence,Art.2119,NCC). 4. Pledgeedoesnotchoosetoexercisehis
right to cause the thing pledged to be
Q: What is the restriction on the right of the soldatpublicauction(Art.2107,NCC)
pledgeeunderthe1stsentenceofArt.2119?
F.PERFECTION
A:Hemayonlydemandthesaleofonlyasmany
ofthethingsasarenecessaryforthepaymentof Q:Howisacontractofpledgeperfected?
nd
thedebt(2 sentence,Art.2119,NCC).
A: A contract of pledge is perfected when the
E.RIGHTSOFPLEDGOR thingpledgedisplacedintheactualpossessionof
or delivered to the pledgee or a third person
Q:Whataretherightsofthepledgor? designated by the parties by common consent.
(Art.2093,NCC)
A:
1. Right to dispose the thing pledged, Note:IfArt.2093isnotcompliedwith,thepledge
provided there is consent of the isvoid.
pledgee(Art.2097,NCC)
2. Right to ask that the thing pledged be Q:FourcarabaoswerepledgedbyTtoE.Tisthe
deposited (Art. 2104 and Art. 2106, registered owner of the carabaos. The carabaos
NCC) wereactuallyinthepossessionofJ.Enevertook
3. Right to substitute thing pledged (Art. possession of the carabaos. There is nothing in
2107,NCC) thecontractwhichstatedthatJwasbycommon
consentmadethedepositaryofthecarabaosin
Q: When may the owner ask that the thing Esbehalf.Istherealawfullyconstitutedpledge?
pledged be deposited judicially or
extrajudicially? A: None. The delivery of possession of the
property pledged requires actual possession and
A: ameresymbolicdeliveryisnotsufficient.(Betita
1. If the creditor uses the thing without vGanzon,49Phil.87)
authority
2. Ifhemisusesthethethinginanyother Q: What is the effect when possession or
way;or deliveryofthethingpledgedwasnotmade?
3. Ifthethingisindangerofbeinglostor
impaired because of the negligence or A:Anagreementtoconstituteapledgeonlygives
willfulactofthepledge(Art.2106,NCC) risetoapersonalactionbetweenthecontracting
parties.Unlessthemovablegivenasasecurityby
Q: Does the pledgor have the right to demand way of pledge be delivered to and placed in the
the return of the thing pledged against the will possession of the creditor or of a third person
ofthecreditor? designated by common agreement, the creditor
acquiresnorighttothepropertybecausepledge
A: No. He cannot ask for its return until the ismerelyalienandpossessionisindispensableto
obligation is fully paid including interest due therightofalien.
thereon and expenses incurred for its
preservation(Art.2105,NCC) Q:Whatistheeffectifthepledgeefailstotake
thepropertypledgedintohispossession?
Q: What are the requisites before the pledgor
may substitute the thing pledged with another A: If a pledgee fails or neglects to take the
thing? property pledged into his possession, he is
presumed to have waived the right granted him
A: bythecontract.(U.S.v.Terrel,2Phil.222)
1. Pledgorhasreasonablegroundstofear
the destruction or impairment of the
thingpledged;
407

Q:Whataretherequisitestobindthirdpersons A:Whenthereisnopaymentofthedebtontime,
inacontractofpledge? theobjectofthepledgemaybealienatedforthe
purposeofsatisfyingtheclaimsofthepledgee.
A: To bind third persons, the pledge must be
embodied in a public instrument where the Q:Whatistheprocedureforthepublicsaleofa
followingentriesmustappear thingpledged?
Adescriptionofthethingpledged;and
Statement of date when the pledge was A:
executed.(Art.2096,NCC) 1. Theobligationmustbedueandunpaid
2. Thesaleofthethingpledgedmustbeat
Q:AisindebtedtoB.Apledgeshisdiamondring publicauction
toB.TheringisdeliveredtoB,butinthepublic 3. Theremustbenoticetothepledgor
instrument executed, there is no description of andowner,statingtheamountfor
the ring, and the date of the pledge does not whichthesaleistobeheld
appear. If A sells the ring to C, does C have to 4. ThesalemustbeconductedbyNotary
respectthepledgeinfavorofB? Public.

A: No. C does not have to respect the pledge H.PLEDGEBYOPERATIONOFLAW
since as to him, the pledge is not effective and
valid. Q:Whatisapledgecreatedbyoperationoflaw?

Q:Whatisthereasonbehindtherequisites? A:PledgebyoperationoflaworLegalPledgesare
thoseconstitutedorcreatedbyoperationoflaw.
A:Thepurposeoftherequirementsistoforestall Thisreferstotherightofretention.
fraud, because a debtor may attempt to conceal
hispropertyfromhiscreditorswhenheseesitin Q:Whatrulesapplytolegalpledge?
danger of execution by simulating a pledge
thereof with an accomplice. (Tec Bi & Co. v. A:
CharteredBankofIndia,41Phil.576) 1. The rules governing conventional
pledgeapplies.
Q: What is the effect if no public instrument is 2. There is no definite period for the
made? paymentoftheprincipalobligation.The
pledgemust,therefore,makeademand
A:Whenthecontractofpledgeisnotrecordedin for the payment of the amount due
a public instrument, it is void as against third him. Without such demand, he cannot
persons;thebuyerofthethingpledgedisathird exercise the right of sale at public
person. The fact that the person claiming as auction.(DeLeon)
pledgee has taken actual physical possession of
the thing sold will not prevent the pledge from Q:Whataretheinstancesoflegalpledgeswhere
being declared void insofar as the innocent thereisrightofretention?
stranger is concerned. (Tec Bi & Co. v. Chartered
Bank of India, Australia and China, 16 O.G. 908; A:
Ocejo, Perez and Co. v. International Bank, 37 1. Art. 546 Right of the possessor in
Phil.631) good faith to retain the thing until
refundedofnecessaryexpenses.
Q: What is the effect of an undated contract of 2. Art. 1707 Lien on the goods
pledge? manufactured or work done by a
laboreruntilhiswageshadbeenpaid.
A:Anundatedinstrumentofpledgecannotripen 3. Art. 1731 Right to retain of a worker
intoavalidpledge.(Betitav.Ganzon,49Phil.87) who executed work upon a movable
untilheispaid.
G.FORECLOSURE 4. Art. 1914 Right of an agent to retain
the thing subject of the agency until
Q: When may a pledgee foreclose the thing reimbursed of his advances and
pledged? damages(Arts.1912and1913,NCC).
5. Art. 1994 Right of retention of a
depositaryuntilfullpaymentofwhatis
duehimbyreasonofthedeposit.
408 CIVILLAWTEAM:

CREDIT TRANSACTIONS
6. Art.2004Rightofthehotelkeeperto evenifthereisastipulationthathebe
retain things of the guest which are soliable.Suchstipulationisvoid.
brought into the hotel, until his hotel
billshadbeenpaid. Q: What is the meaning of the right of the
mortgageeorpledgeetoforeclose?
Q: What must the pledgee do before he may
causesaleofthethingpledged? A: If the debtor failed to pay on maturity date,
the thing pledged or mortgaged may be sold at
A:Thepledgeemustfirstmakeademandofthe public auction as provided by law so that the
amountforwhichthethingisretained.Afterthe proceeds may be used for payment of the
demand,thepledgeemustproceedwiththesale obligation.
of the thing within thirty (30) days. Otherwise,
the pledgor can require of him the return of the
I.PLEDGEDISTINGUISHEDFROMMORTGAGE
thingretained.

Note: there is only one public auction here. Q: Distinguish contract of pledge from chattel
(Paras) mortgage.

Q: To whom will the remainder of the price A:
pertain? CHATTELMORTGAGE PLEDGE
Delivery
A: The remainder of the price of sale shall be Deliveryisnotnecessary Deliveryisnecessary
deliveredtotheobligor.(Art.2121) Registration
Registrationinthe
Registrationinthe
ChattelMortgageregister
Q:Whataretheinstanceswhenthepledgormay RegistryPropertyisnot
isnecessaryforits
demand that the thing pledged be deposited necessary.
validity
judiciallyorextrajudicially?
Lawgoverningthesale
Procedureforthesaleof
A: thethinggivenas
1. Creditor uses the thing without Art.2112,NCC
securityisgovernedby
authority Sec.14,ActNo.1508
2. Creditormisusesthething
3. The thing is in danger of being lost or
impaired due to the negligence or Excess
willfulactsofthepledgee. Ifthepropertyissold,the
Ifthepropertyis
debtorisnotentitledto
foreclosed,theexcess
Q: What are the effects of sale of the thing theexcessunless
goestothedebtor
pledged? otherwiseagreed.
Recoveryofdeficiency
A: Thecreditorisentitledto
Thecreditorisnot
1. Extinguish the principal obligation even recoverthedeficiency
entitledtorecoverthe
iftheproceedsofthesaledonotsatisfy fromthedebtorexceptif
deficiency
thewholeamountoftheobligation. thechattelmortgageisa
notwithstandingany
2. If proceeds from the sale exceed the securityforthepurchase
stipulationtothe
amount due, the debtor is not entitled ofpropertyin
contrary.
to the excess, the excess goes to the installments
Possession
pledgee. This is to compensate him for
Possessionremains with Possessionisvested in
the eventuality where the purchase
thedebtor thecreditor
price is lesser than the amount of the
Contract
debt, wherein he cannot receive any
Formalcontract Realcontract
deficiency unless there is a contrary
Recordinginapublicinstrument
agreement or in case of legal pledge,
Mustbeinapublic
thepledgorisentitledtotheexcess
instrumentcontaining
3. If the proceeds of the sale is less than Mustberecordedina
descriptionofthething
the amount due, the creditor has no publicinstrumenttobind
pledgedandthedate
right to recover the deficiency and the thirdpersons
thereoftobindthird
pledgor is not liable for the deficiency persons

409

Q: Distinguish contract of pledge from real 1. It covers only immovable property and
estatemortgage. alienable real rights imposed upon
immovables
A: 2. Itmustappearinapublicinstrument
REALESTATE 3. Registration in the registry of property
PLEDGE rd
MORTGAGE isnecessarytobind3 persons
Realcontract Consensualcontract
Subjectmatteris Subjectmatterisreal Q:Whatarethekindsofrealmortgages?
personalproperty property
Possessionofthething Possessionofthething A:
pledgedisvestedinthe mortgagedremainswith 1. Conventional mortgages constituted
creditor thedebtor voluntarilybythecontractingparties.
Pledgeehastherightto 2. Legalmortgagerequiredbylaw.
receivethefruitsofthe 3. Equitable mortgage intention of the
thingpledged,withthe parties is to make the immovable as a
obligationofapplyingthe Mortgageedoesnot
security for the performance of the
sametotheinterestof possesssuchright
obligation but the formalities of a real
thedebt,ifowing,and
thebalance,ifany,tothe
mortgagearenotcompliedwith.
principal
Saleatpublicauctionof Q: Distinguish contract of real estate mortgage
Salemaybejudicialor fromcontractofsalewithrightofrepurchase.
thethingpledgedis
extrajudicial
alwaysextrajudicial
Descriptionofthething A:
Mustberegistered, REALESTATE SALEWITHRIGHTOF
andthedateofpledge
otherwise,itisnotvalid MORTGAGE REPURCHASE
mustappearinapublic
againstthirdpersons Principaland
instrumentotherwise,it Accessorycontract
althoughbinding independentcontract
isnotvalidastothird
betweentheparties
person Thereistransferoftitle
Thereisnotransferof
Realrightandreal andpossessionofthe
Notarealright titleandpossessionof
propertybyitself property,although
theproperty
conditional
Creditorhasnorightto Thevendeearetrois
thefruitsoftheproperty entitledtothefruitseven
V.REALMORTGAGE duringthependencyof duringtheperiodof
themortgage redemption
A.DEFINITIONANDCHARACTERISTICS Ifthedebtorfailstopay Assoonasthereisa
hisdebt,thecreditor consolidationoftitlein
Q:Whatisrealestatemortgage(REM)? cannotappropriatethe thevendeearetro,he
propertymortgagednor maydisposeofitasan
A:Itisacontractwherebythedebtorsecuresto disposeofit absoluteowner
the creditor the fulfillment of the principal
obligation, specially subjecting to such security Q:Isregistrationofmortgageamatterofright?
immovable property or real rights over
immovable property in case the principal A:Yes.Byexecutingthemortgage,themortgagor
obligationisnotfulfilledatthetimestipulated is understood to have given his consent to its
registration, and he cannot be permitted to
Note:Registrationisnecessarytobindthirdpersons revokeitunilaterally.
butnotforthevalidityofthecontract.
Q: What is the meaning of mortgage as a real
Beinganaccessorycontract,itsconsiderationisone andinseparableright?
andthesameasthatoftheprincipalobligation.
A: The mortgage directly and immediately
B.ESSENTIALREQUISITES subjects the property upon which it is imposed,
whoeverthepossessormaybe,tothefulfillment
Q:Whataretherequisitesforvalidconstitution of the obligation for whose security it was
ofarealmortgage? constituted(Art.2126,NCC).

A:
410 CIVILLAWTEAM:

CREDIT TRANSACTIONS
Q:Whatarethethingsthataredeemedincluded instrumenttheintenttosecurefutureandother
inthemortgage? indebtednesscanbegathered.Amortgagegiven
to secure advancement is a continuing security
A: and is not discharged by repayment of the
1. Naturalaccessions amount named in the mortgage, until the full
2. Improvements amount of the advancements is paid (Mojica v.
3. Growingfruits CA,G.R.No.94247,Sept.11,1991).
4. Rents
5. Income Q: May a mortgage credit be alienated or
6. Insuranceproceeds assignedtoathirdperson?
7. Expropriationprice(Art.2127,NCC)
A: Yes, in whole or in part, with the formalities
Q: When does the mortgage lien attach in case requiredbylaw(Art.2128,NCC).
ofneworfutureimprovements?
Q: What are the requisites to be followed for
A:Onthedateoftheregistrationofthemortgage assignmentofcredit?
(Luzon Lumber and Hardware Co., Inc, v.
Quiambao,G.R.No.L5638,Mar.20,1954). A:Anassignmentofacredit,rightoractionshall
producenoeffectasagainstthirdpersons,unless
Q:Whatisdragnetclause? it appears in a public instrument, or the
instrumentisrecordedintheRegistryofProperty
A: It is a mortgage provision which is specifically incasetheassignmentinvolvesrealproperty(Art.
phrased to subsume all debts of past or future 1625,NCC).
origin.Suchclausesarecarefullyscrutinizedand
strictlyconstrued.Themortgagecontractisalso Q:Maythecreditorclaimfromthethirdperson
one of adhesion (Philippine Bank of in possession of the property payment of the
Communications v. CA, G.R. No. 118552, Feb. 5, credit?
1996).
A:Yes,uptotheextentsecuredbytheproperty
Q: Is the amount stated in the contract which the third party possesses, in terms and
controlling in case of mortgage securing future with the formalities which the law establishes
advancements? (Art.2129,NCC).

A: No. The amount named in the contract does Q: Is a stipulation forbidding the owner from
not limit the amount for which the mortgage alienatingtheimmovablemortgagedvalid?
standasasecurity,if,fromthefourcornersofthe
instrumenttheintenttosecurefutureandother A: No. The prohibition to alienate is contrary to
indebtednesscanbegathered. public good inasmuch as the transmission of
property should not be unduly impeded (Report,
Q: Petitioner obtained a loan of P20K from CodeCommission,p.58).
defendant Rural Bank of Kawit. The loan was
secured by a REM over a parcel of land. The Q: What are the laws that govern contract of
mortgagecontractstatesthatthemortgagewill realmortgage?
coverthepaymentoftheloanofP20Kandsuch
other loans or other advances already obtained A:
or to be obtained by the mortgagors from the 1. NewCivilCode
bank.TheloanofP20kwasfullypaid.Thereafter 2. MortgageLaw
they again obtained a loan of P18K, secured by 3. PropertyRegistrationDecree(PD1529)
thesamemortgage.Thespousesdefaulted.The 4. Sec.194,asamendedbyActNo.3344,
bank extra judicially foreclosed the mortgage. RevisedAdministrativeCode(Phil.Bank
Wastheforeclosuresalevalid? of Commerce v. De Vera, G.R. No. L
18816,Dec.29,1962)
A: Yes. It has long been settled that mortgages 5. R.A. 4882 law governing aliens who
given to secure future advancements are valid becomemortgagees.
and legal contracts; that the amounts named as
consideration in said contract do not limit the
amount for which the mortgage may stand as
security, if from the four corners of the
411

C.FORECLOSURE (Maglaque v. Planters Development
Bank,GRNo.109472,May18,1999).
Q:Whatisforeclosure?
Q: When is judicial foreclosure considered
A: It is a remedy available to the mortgagee in completed?
whichhesubjectsthemortgagedpropertytothe
satisfactionoftheobligation. A: A foreclosure sale is not complete until it is
confirmed and before such confirmation, the
Q:Whatarethekindsofforeclosure? court retains control of the proceedings by
exercising sound discretion in regard to it either
A: grantingorwithholdingconfirmationastherights
Judicial governed by Rule 68, Rules of and interests of the parties and the ends of
Court justice may require (Rural Bank of Oroquieta v.
Extrajudicial mortgagee is given a SPA to CA,No.53466,Nov.10,1980).
sell the mortgaged property (Act No.
3135) Q: What is the significance of confirmation in
judicialforeclosure?
Q:Whatisthenatureofjudicialforeclosure?
A: Confirmation cuts off all the rights and
A: It is an action quasi in rem (Ocampo v. interestsofthemortgagorandofthemortgagee
Domalanta,20SCRA1136). and persons holding under him, and with them
the equity of redemption in the property and
Q: Does an action for foreclosure of mortgage vests them in the purchaser. Confirmation
survivethedeathofmortgagor? retroactstothedateofthesale.Itisafinalorder,
not interlocutory (Ocampo v. Domalanta, No. L
A:Yes,becausetheclaimisnotpuremoneyclaim 21011,Aug.30,1967).
but an action to enforce a mortgage lien. Being
so, the judgment rendered therein may be Note:Ifthepropertyhasbeenmortgagedinfavorof
enforced by a writ of execution. The action may thePhilippineNationalBank,redemptionisallowed
be prosecuted by the interested person against within one year from the confirmation of the sale
the executor or administrator independently of (Gonzalesv.PNB,No.24850,March1,1926).
the testate or intestate proceedings of the
settlement of the mortgagors estate for the Theredemptionmustbemadewithinoneyearafter
reason that such claims cannot in any just sense thesale,ifthemortgageeisabank,bankingorcredit
institutions(Sec.78,R.A.337).
be considered claims against the estate, but the

right to subject specific property to the claim
Q:Whataretheeffectsofconfirmationofsale?
arises from the contract of the debtor whereby

hehasduringlifesetasidecertainpropertyforits
A: There can be no redemption of the property.
payment, and such property does not, except in
Such confirmation retroacts to the date of the
sofarasitsvaluemayexceedthedebt,belongto
auctionsale.Aftertheconfirmation,theprevious
the estate (Testamentaria de Don Amadeo
ownersloseanyrighttheymayhavehadoverthe
Matute Olave v. Canlas, No. L12709, Feb. 28,
property, which rights in turn vested on the
1962).
Purchaser of the property (Lonzame v. Amores,
Q: What are the options or remedies of the
No.L53620,Jan.31,1985).
mortgageeincaseofdeathofthedebtor?

Q:Whatisthebasisofextrajudicialforeclosure?
A:

1. To waive the mortgage and claim the
A: An extrajudicial foreclosure may only be
entire debt from the estate of the
effected if in the mortgage contract covering a
mortgagorasanordinaryclaim;
realestate,aclauseisincorporatedthereingiving
2. Toforeclosethemortgagejudiciallyand
the mortgagee the power, upon default of the
prove any deficiency as an ordinary
debtor, to foreclose the mortgage by an
claim;or
extrajudicial sale of the mortgage property (Sec.
3. To rely on the mortgage exclusively,
1,ActNo.3135,asamendedbyActNo.4148).
foreclosingthesameatanytimebefore

it is barred by prescription, without
The authority to sell may be done in a separate
right to file claim for any deficiency
document but annexed to the contract of
mortgage. The authority is not extinguished by
412 CIVILLAWTEAM:

CREDIT TRANSACTIONS
thedeathofthemortgagorormortgageeasitis availabletothepublicingeneral,andnotjusttoa
an essential and inseparable part of a bilateral select few chosen by the publisher. Otherwise,
agreement (Perez v. PNB, No. L21813, July 30, the precise objective of publishing the notice of
1966). sale in the newspaper will not be realized.
(Metropolitan Bank and Trust Company, Inc. v.
Q:Howisextrajudicialforeclosureinitiated? EugenioPeafiel,G.R.No.173976,Feb.27,2009)

A:Byfilingapetitionwiththeofficeofthesheriff. Q: May a mortgagor enjoin the implementation
It may also be initiated through a Notary Public ofawritofpossessiononthegroundthatthere
commissionedintheplacewherethepropertyis is a pending case for annulment of the
situated. extrajudicialforeclosureoftheREM?

Note: Notice containing the place and date is A: No. As a rule, any question regarding the
required before an auction sale is made in validityofthemortgageoritsforeclosurecannot
extrajudicialforeclosure.(Sec.3,ActNo.3135) be a legal ground for refusing the issuance of a
writ of possession. Regardless of whether or not
Q: What governs extrajudicial foreclosure by there is a pending suit for annulment of the
PNB? mortgage or the foreclosure itself, the purchaser
is entitled to a writ of possession, without
A:ThesameshallbegovernedbySections29,30 prejudice to the outcome of the case. Hence, an
and 34 of Act No. 3135 and not by the PNB injunction to prohibit the issuance of writ of
Charter(PNBv.CA,G.R.No.60208,December5, possession is entirely out of place. Prohibition
1985). does not lie to enjoin the implementation of a
writ of possession. Once the writ of possession
Q: What are the requisites of notice of sheriffs hasbeenissued,thetrialcourthasnoalternative
sale? buttoenforcethewritwithoutdelay.(Sps.Ongv.
CA,G.R.No.121494,June8,2000)
A: It must contain the correct number of the Q:Canthemortgageerecoverthedeficiency?
certificate of title and the correct technical
description of the real property to be sold (San A: If there be a balance due to the mortgagee
Josev.CA,GRNo.106953,Aug.19,1993). after applying the proceeds of the sale, the
mortgagee is entitled to recover the deficiency
Q:Whatisthepurposeofnoticeofsale? (DBPv.Mirang,G.R.No.L29130,Aug.8,1975).

A: To inform the public of the nature and Note: In judicial foreclosure, the Rules of Court
condition of the property sold, and of the time, specificallygivesthemortgageetherighttoclaimfor
placeandtermsofthesale. deficiencyincaseadeficiencyexists(Sec.6,Rule70).

Q: MBTC granted a loan to spouses Peafiel, While Act No. 3135 governing extrajudicial
who mortgaged their two (2) parcels of land in foreclosuresofmortgagedoesnotgiveamortgagee
Mandaluyong. The spouses defaulted in the the right to recover deficiency after the public
payment. MBTC instituted an extrajudicial auction sale, neither does it expressly or impliedly
foreclosureproceedingunderActNo.3135.The prohibitsuchrecovery.
Notice of Sale was published in Maharlika
This right to recover deficiency had been
Pilipinas, which has no business permit in
categoricallyresolvedinStateInvestmentv.CA(G.R.
Mandaluyong and its list of subscribers shows
No.101163,January11,1993).Thus,themortgagee
that there were no subscribers from isentitledtorecoverthedeficiencyincasethesale
Mandaluyong. Did MBTC comply with the proceeds are not sufficient to cover the debt in
publication requirement under Section 3, Act extrajudicialforeclosures.
No.3135?
The action to recover a deficiency after foreclosure
A: No. Maharlika Pilipinas is not a newspaper of prescribes after ten (10) years from the time the
general circulation in Mandaluyong where the rightofactionaccruesasprovidedinArticle1144(2),
propertyislocated.Tobeanewspaperofgeneral NCC (DBP v. Tomeldan, G.R. No. 51269, Nov. 17,
circulation,itisenoughthatitispublishedforthe 1980).
dissemination of local news and general
information, that it has a bona fide subscription
listofpayingsubscribers,andthatitispublished
at regular intervals. The newspaper must be
413

Q:Whatisstipulationofupsetprice? Registration may be granted in the name of the
mortgagee but subject to the subordinate lien
A: It is a stipulation of minimum price at which holders equity of redemption, which should be
thepropertyshallbesoldtobecomeoperativein exercised within ninety (90) days from the date
theeventofaforeclosuresaleatpublicauction.It the decision becomes final. This registration is
isnullandvoid. merelyanecessaryconsequenceoftheexecution
of the final deed of sale in the foreclosure
REDEMPTION proceedings. (Looyuko v. CA, G.R. No. 102696,
July12,2001)
Q:Whatisredemption?
Q: What are the requisites for valid right of
A:Transactionbywhichthemortgagorreacquires redemption?
orbuysbackthepropertywhichmayhavepassed
underthemortgageordiveststhepropertyofthe A:
lienwhichthemortgagemayhavecreated. 1. Mustbemadewithinoneyearfromthe
timeoftheregistrationofthesale.
Q:Whatarethekindsofredemption? 2. Payment of the purchase price of the
property plus 1% interest per month
A: togetherwiththetaxesthereon,ifany,
1. Equity of redemption right of paid by the purchaser with the same
mortgagor to redeem the mortgaged rateofinterestcomputedfromthedate
property after his default in the ofregistrationofthesale;and
performance of the conditions of the 3. Written notice of the redemption must
mortgage but before the sale of the beservedontheofficerwhomadethe
mortgaged property or confirmation of sale and a duplicate filed with the
sale. It applies in case of judicial proper Register of Deeds (Rosales v.
foreclosure. Yboa,G.R.No.L42282,Feb.28,1983).
2. Right of redemption right of the
mortgagor to redeem the mortgaged Note: The redemptioner should make an actual
propertywithinoneyearfromthedate tender in good faith of the full amount of the
of registration of the certificate of sale. purchase price as provided above, i.e., the amount
It applies in case of extrajudicial fixed by the court in the order of execution or the
foreclosure. amount due under the mortgage deed, as the case
maybe,withinterestthereonattheratespecifiedin
Q: X and Y, judgment creditors of A, obtained the mortgage, and all the costs, and judicial and
other expenses incurred by the bank or institution
the transfer of the title of the mortgaged
concerned by reason of the execution and sale and
property in their names. Earlier, A executed a
as a result of the custody of said property less the
mortgage over the same property in favor of income received from the property. (Heirs of
FGU Insurance.The latter mortgage was Quisimbingv.PNB,G.R.No.178242,Jan.20,2009)
registered. When A defaulted, FGU foreclosed
theproperty.Acertificateofsalewasthereafter Q: Is the period of redemption a prescriptive
issued in FGUs favor, which was confirmed by period?
theRTC.However,beforethenewTCTcouldbe
issued,XandYfiledtheirrespectivemotionfor A: No. The period of redemption is not a
intervention and to set aside the judgment prescriptive period but a condition precedent
alleging that they are the new owners of the providedbylawtorestricttherightoftheperson
propertyandthefailureofFGUtoimpleadXand exercisingredemption.
Yintheactionforforeclosuredeprivedthelatter
of due process. Is the contention of X and Y Ifapersonexercisingtherightofredemptionhas
correct? offeredtoredeemthepropertywithintheperiod
fixed,heisconsideredtohavecompliedwiththe
A:No.Subordinatelienholdersacquireonlyalien condition precedent prescribed by law and may
upon the equity of redemption vested in the thereafter bring an action to enforce
mortgagor, and their rights are strictly redemption.
subordinate to the superior lien of the
mortgagee. Such equity of redemption does not If, on the other hand, the period is allowed to
constitute a bar to the registration of the lapsebeforetherightofredemptionisexercised,
property in the name of the mortgagee. then the action to enforce redemption will not
414 CIVILLAWTEAM:

CREDIT TRANSACTIONS
prosper, even if the action is brought within the A:Inforeclosureproceedings,thebuyerbecomes

ordinaryprescriptiveperiod. theabsoluteownerofthepropertypurchasedifit
is not redeemed during the prescribed period of
Q: D obtained a loan from C secured by a REM redemption, which is one year from the date of
over a parcel of land. When D defaulted, C registrationofthesale.TheSheriffscertificateof
extrajudicially foreclosed the property. C was sale was annotated in the certificate of titles on
declared the highest bidder in the auction. On April 30, 1976. DBP became the absolute owner
October 29, 1993, C caused the registration of of the properties on May 1, 1977. Thus, the
the certificate of sale. On November 9, 1994 D period to be considered in determining the
filed a complaint for annulment of the amount of collection should start from May 1,
extrajudicialforeclosureandauctionsale.CanD 1997 up to the time when the possession of the
redeem the property beyond the one year properties are actually and completely
redemptionperiod? surrendered to DBP. (La Campana Development
Corporation v. DBP, G.R. No. 146157, Feb. 13,
A:No.Dlostanyrightorinterestoverthesubject 2009)
property primarily because of his failure to
redeem the same in the manner and within the
period prescribed by law. His belated attempt to
question the legality and validity of the
foreclosure proceedings and public auction must
accordingly fail. (Sps. Landrito v. CA G.R. No.
133079,Aug.9,2005)
Q: Can a mortgagor, whose property has been
extrajudicially foreclosed and sold, validly
execute a mortgage contract over the same
property in favor of a third party during the
periodofredemption?
A: Yes. The purchaser at the foreclosure sale

merelyacquiredaninchoaterighttotheproperty
which could ripen into ownership only upon the
lapseoftheredemptionperiodwithouthiscredit
havingbeendischarged,itisillogicaltoholdthat
during that same period of twelve months the
mortgagorwas"divested"ofhisownership,since
the absurd result would be that the land will
consequently be without an owner although it
remainsregisteredinthenameofthemortgagor.
Such mortgage does not involve a transfer,
cession or conveyance of the property but only
constitutesalienthereon(Medidav.CA,G.R.No.
98334,May8,1992).
Q: DBP guaranteed LCDs loan. When LCD

defaulted, DBP paid it and sought
reimbursement. LCD failed to reimburse DBP,
hence DBP extrajudicially foreclosed the REM,
where it was the highest bidder. The Sheriffs
certificate of sale was annotated in the
certificateoftitlesonApril30,1976.LaCampana
failed to redeem the properties. The court,
amongothers,orderedLCDtopaysuchsumsof
money unlawfully collected or received by way
of rentals and/or fruits from the subject
properties to DBP. When should the period for
the remittance of collected/received
rentals/fruitsfromtheproperties,ofLCDtoDBP
start?
415

Flowchart of Extra-judicial
Foreclosure of Real Estate Mortgage
Executionofloan+REMagreement(REM
withbuiltinSPAtosellincaseofdefault)
Defaultofmortgagorfornonpaymentor
violationofthetermsoftheloanorREM
agreement
Filingofpetitionforsalewith
Clerk of Court
Publication/postingofnotice/
Onceaweekfor3consecutiveweeksina
jurisdictionalrequirements
newspaperofgeneralcirculation
Foreclosuresale
Registrationofthesale Note:Theredemptionprice:
withRegistryofDeeds
Ifthemortgageeisabank:
Oneyearredemptionperiod outstandingobligation
+intereststipulatedintheagreement
Consolidationoftitlebyfilingaffidavit
withRegistryofDeeds(operative
document)
Cancellationoftitleofthemortgagor
andissuanceofnewtitleinfavorof
mortgagee
Note:
if after the expiration of the redemption period,

Petitionforwritofpossession
thepetitionforwritofpossessionismandatoryor
ministerial
416 CIVILLAWTEAM:

CREDIT TRANSACTIONS
Flowchart for Judicial Foreclosure of Real Estate Mortgage

Complaint with the court. Include

subsequent lien holders, otherwise
Entry of
equity of redemption will not be Hearing Judgment
judgment
divested. (Lampin v. IAC, No. L-
70987, Sept. 29, 1988))
90 days 120 days

Upon failure to pay,
Mortgagee to from entry of
mortgagee to file
file motion for Execution sale judgment for
motion for execution
confirmation of mortgagor to pay his
foreclosing
sale debt, as determined
mortgage
by court
Issuance of order confirming

the sale (order is appealable)
(Ocampo v. Dimalanta, No. L- Cancellation of the title of
Registration of the order
21011, Aug. 30, 1967) the mortgagor/issuance of
confirming the sale
new title to the mortgagee
Wait for finality of order
* If mortgagee/bidder is bank or credit Secure a writ of
institution, mortgagor has one more year possession, by motion,
from registration of order confirming the from the same court that
sale + certificate of sale to redeem the ordered the foreclosure

property.
Note:
GR: In judicial foreclosure, there is only equity of redemption.
XPN: If the mortgagee is a bank or credit institution, there is one year right of redemption.
417

VI.CHATTELMORTGAGE Q: What are the laws that govern chattel
mortgages?
A.DEFINITIONANDCHARACTERISTICS
A:
Q:Whatischattelmortgage? 1. ChattelMortgageLaw(ActNo.1508)
2. ProvisionsoftheCivilCodeonpledge
A: It is a contract by virtue of which personal
property is recorded in the Chattel Mortgage Note:Incaseofconflictbetweennos.1and
Register as a security for the performance of an 2,theformershallprevail.
obligation.
3. RevisedAdministrativeCode
Q: What are the characteristics of chattel 4. RevisedPenalCode(Art.319)
mortgage? 5. Other special laws (i.e. Motor vehicle
law)
A: 6. ShipMortgageDecreeof1978(P.D.No.
1. It is a formal contract because it must 1521)
beembodiedinapublicinstrumentand Q: What may be the subject matter of chattel
recorded in the Chattel Mortgage mortgage?
Register;
A:
2. It is an accessory contract because its 1. Sharesofstockinacorporation;
existence depends upon an existing 2. Interestinbusiness;
validprincipalobligation; 3. Machinery and house of mixed
materialstreatedbypartiesaspersonal
3. It is a unilateral contract because the property and no innocent third person
obligation is only on the part of the will be prejudiced thereby (Makati
creditor to free the chattel from Leasing and Finance Corp. v. Weaver
encumbranceuponthepaymentofthe TextileMills,Inc.,No.L58469,May,16,
principalobligation; 1983);
4. Vessels, the mortgage of which have
beenrecordedwiththePhilippineCoast
4. Itdoesnotconveydominionbutisonly
Guard in order to be effective as to
a security (In re: Du Tec Chuan, No.
thirdpersons;
11156,March28,1916);
5. Motor vehicles, the mortgage of which
hadbeenregisteredbothwiththeLand
5. It creates a real right or a lien which is Transportation Commission and the
being recorded and follows the chattel Chattel Mortgage Registry in order to
whereveritgoes(NorthernMotors,Inc. affectthirdpersons;
v.Coquia,No.L40018,Dec.15,1975). 6. House which is intended to be
demolished;or
Q: What are the requisites in a chattel 7. Growing crops and large cattle (pars. 2
mortgage? and3,Sec.7,ActNo.1508).

A: Note: Section 7 of the Chattel Mortgage Law does
1. GR:Itcoversonlymovableproperty not demand specific description of every chattel
mortgaged in the deed of mortgage, but only
XPN: When the parties treat as requires that the description of the mortgaged
personaltythatwhichisaccordingtoits property be such as to enable the parties to the
naturerealty. mortgage or any other person to identify the same
afterareasonableinvestigationandinquiry(Saldana
2. Registration with the Chattel Mortgage v. Phil. Guaranty Co., Inc., No. L13194, Jan. 29,
Register. 1960);otherwise,themortgageisinvalid.
3. Descriptionoftheproperty.
4. Accompanied by an affidavit of good Q:Whatisaffidavitofgoodfaith?
rd
faithtobind3 persons.
A:Itisanoathinacontractof chattelmortgage
Note:Theabsenceofanaffidavitofgoodfaithdoes wherein the parties severally swear that the
notaffectthevalidityofthecontract. mortgageismadeforthepurposeofsecuringthe
obligationspecifiedintheconditionsthereofand
418 CIVILLAWTEAM:

CREDIT TRANSACTIONS
fornootherpurposesandthatthesameisajust Q: Should the foreclosure sale in chattel

andvalidobligationandonenotenteredintofor mortgagebedoneinpublicauction?
thepurposeoffraud.
A:ActNo.1508providesfortheforeclosuresale
Note: The absence of the affidavit vitiates the in chattel mortgage be done by public auction.
mortgage only as against third persons without However,thepartiesarefreetostipulatethatthe
noticelikecreditorsandsubsequentencumbrances. foreclosurebedonebyprivatesale.

Q:Distinguishcontractofchattelmortgagefrom Q: In case of foreclosure sale in chattel
contractofrealestatemortgage. mortgage,maythecreditorrecoverdeficiencyif
the redemption price is less than the debt
A: secured?
REALESTATE
CHATTELMORTGAGE
MORTGAGE A:
Subjectmatter GR:CRmayrecoverdeficiency.
Personalproperty Realproperty
Requirementofregistration XPN: when the chattel mortgage is used to
Essentialforthevalidity Merelyforthepurpose secure the purchase of personal property in
ofthiscontract ofbindingthirdpersons installments(RectoLaw).
Procedurefortheforeclosureofachattelmortgage
isdifferentfromtheprocedureofforeclosurefor Q:Whatistheeffectofanincreaseinmortgage
realestatemortgage credit?

B.REGISTRATION A: If the parties to a chattel mortgage take an
oaththatthedebt,honestlydueandowingfrom
Q:Whatisthelegalsignificanceofregistration? the mortgagor to the mortgagee, it is obvious
thatavalidmortgagecannotbemadetosecurea
A:Itistantamounttothesymbolicdeliveryofthe debt to be thereafter contracted (11 C.J. 448). A
mortgage to the mortgagee, which is equivalent mortgage that contains astipulation in regardto
toactualdelivery(Meyersv.Thein,No.5577,Feb. futureadvancesinthecreditwilltakeeffectonly
21,1910). from the date of the mortgage. The increase in
the mortgage credit becomes a new mortgage
Q: What is the difference in registration of real (Belgian Catholic Missionaries v. Magallanes
mortgageandchattelmortgage? Press,No.25729,Nov.24,1926).
A: A deed of real estate mortgage is considered
registered once recorded in the entry book. Q: What is the effect of obtaining a personal
However, chattel mortgage must be registered judgmentonthemortgagelien?
notonlyintheentrybookbutalsointheChattel
Mortgage Register. (Associated Insurance and A:Itisdeemedabandoned.
SuretyCo.v.LimAng,(CA)52Off.Gaz.5218)
Q: What are the offenses involving chattel
Q: What is the effect if the chattel mortgage is mortgage?
notregisteredinthechattelmortgageregister?
A:
A:Itisstillbindingbetweenthepartiesbutitwill 1. Knowingly removing any personal
notbebindingtoinnocentthirdparties. property mortgaged under the Chattel
Mortgage Law to any province or city
Q: When should the registration of the chattel other than the one in which it was
mortgagebemade? located at the time of the execution of
the mortgage without the written
A: The law is silent on the time or period when consentofthemortgagee;or
registration should be made. The Court of 2. Selling or pledging personal property
Appeals has held though that the law is alreadymortgaged,oranypartthereof,
substantiallyandsufficientlycompliedwithwhere under the terms of the Chattel
theregistrationismadebythemortgageebefore Mortgage Law without the consent of
the mortgagor has complied with his principal the mortgagee written on the back of
obligationandnorightofinnocentthirdpersons the mortgage and duly recorded in the
isprejudiced(Ledesmav.Perez,2C.A.Rep.126).
419

Chattel Mortgage Register (Art. 319, A:IfitwasthelandwhichVinichattelmortgaged,
RPC). such mortgage would be void, or at least
unenforceable,sincehewasnottheownerofthe
C.FORECLOSURE land.

Q:Howischattelmortgageforeclosed? Ifwhatwasmortgagedasachattelisthebuilding,
the chattel mortgage is valid as between the
A: partiesonly,ongroundsofestoppelwhichwould
Publicsale preclude the mortgagor from assailing the
Privatesale contract on the ground that its subjectmatter is
GR: If there is an express stipulation in an immovable. Therefore Vinis defense is
thecontract. untenable,andFeliciacanforeclosethemortgage
over the building, observing, however, the
XPN:Fraudorduress procedureprescribedfortheexecutionofsaleof
a judgment debtors immovable under Rule 39,
Q: What is the procedure in foreclosure of a Rules of Court, specifically, that the notice of
chattelmortgage? auction sale should be published in a newspaper
ofgeneralcirculation.(1994BarQuestion)
A:Themortgageemay,afterthirty(30)daysfrom
the time of the default or from the time the
condition is violated, cause the mortgaged VII.ANTICHRESIS
property to be sold at public auction by a public
officer(Sec.14,ActNo.1508) A.DEFINITIONANDCHARACTERISTICS
Q:Whatisantichresis?
The30dayperiodtoforecloseachattelmortgage
is the minimum period after violation of the A: It is a contract whereby the CR acquires the
mortgageconditionforthemortgage righttoreceivethefruitsofanimmovableofthe
The creditor has at least ten (10) days notice debtor, with the obligation to apply them to the
servedtothemortgagor payment of interest, if owing, and thereafter to
theprincipalofhiscredit.
The notice of time, place and purpose of such
sale,isposted Q:Whatarethecharacteristicsofantichresis?

Afterthesaleofthechattelatpublicauction,the A:
right of redemption is no longer available to the 1. Accessorycontract.
mortgagor. (Cabral v. Evangelista, 28 L26860, 2. Formal contract the amount of the
July30,1969) principalandoftheinterestmustbothbe
in writing; otherwise the contract of
Q: What are the legal consequences of antichresisisvoid.
establishing a chattel mortgage over a building 3. Itdealsonlywithimmovableproperty.
erectednotbytheowneroftheland? 4. Itisarealright.
5. Thecreditorhastherighttoreceivethe
A: A building is immovable or real property fruitsoftheimmovable.
whetheritiserectedbytheowneroftheland,by 6. Itisarealcontract.
a usufructuary, or by a lessee. It may be treated 7. It can guarantee all kinds of valid
asamovablebythepartiestoachattelmortgage obligations.
butsuchisbindingonlybetweenthemandnoton
third parties. As far as third parties are Note: It is not essential that the loan should earn
concerned,thechattelmortgagedoesnotexist. interest in order that it can be guaranteed with a
contract of antichresis. Antichresis is susceptible of
Q:Viniconstructedabuildingonaparcelofland guaranteeing all kinds of obligations, pure or
conditional. [Javier v. Valliser, (CA) N. 2648R, Apr.
he leased from Andrea. He chattel mortgaged
29,1950;Sta.Rosav.Noble,35O.G.27241]
the land to Felicia. When he could not pay

Felicia, Felicia initiated foreclosure proceedings, A stipulation authorizing the antichretic creditor to
Vini claimed that the building he had appropriate the property upon the nonpayment of
constructedontheleasedlandcannotbevalidly thedebtwithintheperiodagreeduponisvoid(Art.
foreclosedbecausethebuildingwas,bylaw,an 2038,NCC).
immovable.IsVinicorrect?
420 CIVILLAWTEAM:

CREDIT TRANSACTIONS
Q: What is the form of a contract of antichresis 2.

anditscontents? ANTICHRESIS PLEDGE
Referstorealproperty Personalproperty
A:FDAPa Formal Real
1. CoversonlytheFruitsofrealproperty Principalandinterest Neednotbeinwriting,
mustbespecifiedin oralevidencemaybe
2. Delivery of the property necessary so writing,otherwise allowedtoprovethe
that CR may receive the fruits contractisvoid same.
therefrom
3.
Note: Delivery of the property to the creditor is ANTICHRESIS PACTODERETROSALE
requiredonlyinorderthatthecreditormayreceive Creditorisgiventheright
thefruitsandnotforthevalidityofthecontract. toenjoythefruitsand
applythemtothe Creditordoesnothave
3. Amount of principal and interest must paymentoftheinterest suchright
be specified in writing, otherwise, the andtotheprincipalof
contractshallbevoid. theloan

4. Expressagreementthatdebtorwillgive Q: Is prescription as a mode of acquiring
Possession to the CR and that CR will ownership available to the creditor in
applythefruitstotheinterestandthen antichresis?
totheprincipal.
A:No.Hispossessionofthepropertyisnotinthe
Note: The fruits of the immovable which is the concept of an owner but that of a mere holder
object of the antichresis mustbeappraised at their during the existence of the contract (Ramirez v.
actual market value at the time of the application CA,G.R.No.L38185,September24,1986).
(Art. 2138).The property delivered stands as a
security for the payment of the obligation of the Q: How should the amount of payment in
debtor in antichresis. Hence, the debtor cannot antichresisbedetermined?
demanditsreturnuntilthedebtistotallypaid.
A: The actual market value of the fruits at the
Q:Distinguishantichresisfrom: timeoftheapplicationthereoftotheinterestand
1. Realestatemortgage; the principal shall be the measure of such
2. Pledge;and application(Art.2133,NCC).
3. Pactoderetrosale.
Q: What is the effect if the amount of the
A: principal and of the interest is not specified in
REALESTATE writing?
ANTICHRESIS
MORTGAGE

Debtorusuallyretains
Propertyisdeliveredto A:Thecontractisvoid(Art.2134,NCC).
possessionofthe
creditor
property
Q: Who are the parties to a contract of
Creditoracquiresonly
therighttoreceivethe Creditorhasnorightto
antichresis?
fruitsoftheproperty; receivefruits,but
doesnotproduceareal mortgagecreatesreal A:
rightunlessregisteredin rightagainsttheproperty 1. Antichretic creditor one who receives
theRegistryProperty thefruitsontheimmovablepropertyof
Creditorobligedtopay thedebtor.
thetaxesandcharges Creditorhasnosuch 2. Antichretic debtor one who pays his
upontheestateunless obligation debt through the application of the
stipulatedotherwise fruitsofhisimmovableproperty.

Thereisanexpress
stipulationthatthe
creditorshallapplythe Thereisnosuch
fruitstothepaymentof obligationonthepartof
theinterest,ifowing,and themortgage
thereaftertothe
principalofthedebt.
421

B.OBLIGATIONSOFANTICHRETICCREDITOR reimburse or compensate another in accordance
with the principle that no one shall be unjustly
Q: What are the obligations of an antichretic enriched at the expense of another. (Art. 2142,
creditor? NCC)

A:To: Q:Whatarethebasesforquasicontracts?
paythetaxesandchargesassessableagainst
the property like real estate taxes and A:
others; 1. No one must unjustly enrich himself at
bear the necessary expenses for the anothersexpense
preservationoftheproperty; 2. ifonebenefits,hemustreimburse
beartheexpensesnecessaryfortherepairof 3. justiceandequity
theproperty;and
applythefruitsreceivedforpaymentofthe Q:Whatareexamplesofquasicontracts?
outstanding interests, if any, and
thereafteroftheprincipal. A:
NegotiorumGestio
Q: When can the antichretic debtor reacquire SolutioIndebiti
thepossessionofhisproperty?
A.NEGOTIORUMGESTIO
A:Thedebtorcanonlydemandthereturnofthe
propertyafterhavingfullypaidhisobligationsto Q:WhatisNegotiorumGestio?
thecreditor.Itisnotfairforthedebtortoregain
thepossessionofthepropertywhenhisdebthas A:Thisisakindofquasicontractwheresomeone
notbeenfullypaid.Untilthereisfullpaymentof called the gestor takes the management of the
theobligation,thepropertyshallstandassecurity businessorpropertyofanotherpersonknownas
therefor (Macapinlac v. Gutierrez Repide, No. owner without the consent or authority of the
18574,Sept.20,1922). latter.

Q: How can the creditor be exempted from the Q: What are the essential requisites for
obligationsimposedbyArt.2135? negostiorumgestio?

A: The creditor may compel the debtor to re A:
enterintotheproperty. 1. Nomeetingoftheminds
2. Taking charge of anothers business or
Note: Article 2135. The creditor, unless, there is a property
stipulation to the contrary, is obliged to pay the 3. The property or business must have
taxesandchargesupontheestate. beenabandonedorneglected
He is also bound to bear the expenses 4. Theofficiousmanager(gestor)mustnot
necessaryforitspreservationandrepair. have been expressly or implicitly
Thesumsspentforthepurposesstatedin authorized
thisarticleshallbedeductedfromthefruits. 5. The officious manager (gestor) must
havevoluntarilytakencharge
Q:Whatistheremedyofthecreditorincaseof
nonpaymentofhiscredit? Q:Whatareexamplesofnegotiorumgestio?

A:File: A:
1. anactionforcollection;or 1. If an attorneyinfact continues to
2. a petition for the public sale of the manage the principals estate after the
property (Barretto v. Barretto, No. principals death, the former agent
11933,Dec.1,1917). becomes a gestor (Julian, et al. v. De
Antonio, [CA] 2 O.G.966, October 14,
VIII.QUASICONTRACTS 1943).
2. Ifacoownershipisillegallypartitioned,
Q:WhatisaQuasiContract? thepossessorsbecomegestorswiththe
dutytorendertheaccounting(DeGala
A: Quasicontracts are lawful, voluntary, and v.DeGala&Albatros,60Phil311).
unilateralactswhichgenerallyrequireapersonto
422 CIVILLAWTEAM:

CREDIT TRANSACTIONS
Q:Whatistherequireddiligencefromagestor? Q:Whatareexamplesofsolutioindebiti?

A: Diligence of a good father of a family (Art. A:
2145, NCC). Hence, a gestor is liable for the acts 1. Erroneous payment of interest not due
or negligence of his employees (MRR Co. v. (Velezv.Balzarza,73Phil.630)
CompaniaTransatlantica,38Phil.875). 2. Erroneouspaymentofrentalnotcalled
forinviewoftheexpirationofthelease
Note:Theliabilityfordamages,whichhowever,in contract(Yansonv.Sing,C.A.382438)
certaincases,maybemitigated. 3. Taxes erroneously given (Aquinena and
Co.v.Muertequi,32Phil.261)
Q:Whatistheeffectofratificationoftheowner
ofthebusiness? Q: Can solutio indebiti be applied because of
doubtfulordifficultquestionoflaw?
A: Ratification produces the effect of an express
agency;andthisistrueevenifthebusinessisnot A: Yes, there can be payment because of
successful(Art2149,NCC). doubtfulordifficultquestionoflawmayleadto
solutio indebiti because of the mistake
Q: What are the liabilities of the owner even if committed.(Art.2155,NCC)
thereisnoratification?
Q: GMC Corp. used to compute and pay its
A: monthly cost of living allowance (COLA) on the
1. Liability for the obligation incurred in basis of 30days a month ever since law
hisinterest. mandatedthepaymentofCOLA.WageOrder6
2. Liability for necessary and useful was implemented, increasing the COLA by P3 a
expenses and for damages. (Art 2150, day. GMC however multiplied the P3 additional
NCC) COLA by 22days. The Union objected arguing
that the managements unilateral act was
Q:Whatistheruleiftheownerisaminor? tantamounttowithdrawalofbenefits.Istherea
mistakeintheapplicationoflaw?
A: Even if the owner is a minor, he is still liable
under the article for he should not be unjustly A: GMC cannot be faulted for the erroneous
enrichedatanothersexpense.(Roteav.Delupio, applicationoflaw.Paymentmaybesaidtohave
67Phil.330) been made by reason of a mistake in the
construction or application of doubtful or
B.SOLUTIOINDEBITI difficult question of law. Since it is a past error
that is being corrected, no vested right may be
Q:WhatisSolutioIndebiti? saidtohavearisennoranydiminutionofbenefit
underArt.100oftheLaborCode,maybesaidto
A:Solutioindebitiisthequasicontractthatarises have resulted by virtue of the correction. (Globe
whenapersonisobligedtoreturnwhateverwas Mackay Cable and Radio Corp. v. NLRC, GR no.
received by him through error or mistake or 74156,June29,1988)
received by him although there was no right to
demandit. Q:Whatistheliabilityofapayeeingoodfaith?

Q:Whataretherequisitesforsolutionindebiti? A:
1. Incaseofimpairmentorloss,liabilityis
A: onlytotheextentofbenefit.
1. Receiptofsomething. 2. In case of alienation, the price is to be
2. Therewasnorighttodemandit reimbursed, or in case of credit, the
3. Unduedeliverywasbecauseofmistake. sameshouldbeassigned.

Note: When the payment was not by mistake or

voluntary, but was made because if the coercive
process of the writ of execution, solutio indebiti
does not apply (Manila Surety & Fidelity Co., Inc. v.
Lim,GRno.L0343,December29,1959)
423

IX.CONCURRENCEANDPREFERENCEOFCREDITS duties,onthemovables,moneyorsecurities
obtainedbythem;
A.MEANINGOFCONCURRENCEAND 3. Claimsfortheunpaidpriceofmovablesold,
PREFERENCE onsaidmovables,solongastheyareinthe
possessionofthedebtor,uptothevalueof
Q:Whatisconcurrenceofcredits? the same, and if the movable has been
resold by the debtor and the price is still
A: Concurrence of credit implies the possession unpaid, the lien may be enforced on the
by two or more creditors of equal rights or price; this right is not lost by the
privileges over the same property or all the immobilization of the thing by destination,
propertyofadebtor. provided it has not lost its form, substance
and identity; neither is the right lost by the
Q:Whatispreferenceofcredit? sale of the thing together with other
property for a lump sum, when the price
A:Preferenceofcreditisarightheldbyacreditor thereofcanbedeterminedproportionally;
tobepreferredinthepaymentofhisclaimabove 4. Credits guaranteed with a pledge so long as
othersoutofthedebtorsassets. the things pledged are in the hands of the
creditor, or those guaranteed by a chattel
Note: The rules apply when two or more creditors mortgageuponthethingsmortgaged,upto
have separate and distinct claims against the same thevaluethereof;
debtorwhohasinsufficientproperty. 5. Credits for making repairs or preservation or
personal property on the movable thus
B.CLASSIFICATIONOFCREDITS made,repaired,keptorpossessed;
6. Claims for laborers wages, on the goods
Q:Whatarethegeneralcategoriesofcredit? manufacturedortheworkdone;
7. For expenses of salvage, upon the goods
A: salvaged;
1. Specialpreferredcredits thoselistedin 8. Creditsbetweenthelandlordandthetenant
Arts. 22412242, NCC shall be considered arising from the contract of tenancy on
mortgages and pledges of real and shares, on the share of each in the fruits or
personal property or liens (Art. 2243). harvest;
Hence, they are not included in the 9. Credits for transportation, upon the goods
insolventdebtorsassets. carried, for the price of the contract and
2. Ordinary preferred credits those listed incidental expenses, until their delivery and
in Art 2244,NCC as amendedbyArt. 110 forthirtydaysthereafter;
oftheLaborCode
10. Credits for lodging and supplies usually
3. Commoncredits thoselistedunderArt.
furnished to travelers by hotelkeepers, on
2245, NCC, which shall be paid pro rata
themovablesbelongingtotheguestaslong
regardlessofdates.
as such movables are in the hotel, but not
Q:Whatistheextentofliabilityofadebtorfor
formoneyloanedtotheguests;
hisobligations?
11. Credits for seeds and expenses for
cultivation and harvest advanced to the
A: The debtor is liable with all his property, debtor,uponthefruitsharvested;
present and future, for the fulfillment of his 12. Credits for rent for one year, upon the
obligations, subject to the exemptions provided personal property of the lessee existing on
bylaw. the immovable leased on the fruits of the
same, but not on money or instruments of
C.PREFERREDCREDITSONSPECIFICMOVABLES credit;
13. Claims in favor of the depositor if the
Q:Whatarethepreferredcreditswithrespectto depository has wrongfully sold the thing
thespecificmovableproperty? deposited,uponthepriceofthesale.

A: Note: In the foregoing cases, if the movables to
1. Duties, taxes and fees due thereon to the which the lien or preference attaches have been
stateoranysubdivisionthereof; wrongfully taken, the creditor may demand them
2. Claimsarisingfrommisappropriation,breach fromanypossessorwithinthirty(30)daysfromthe
of trust, or malfeasance by public officials unlawfulseizures.
committed in the performance of their

424 CIVILLAWTEAM:

CREDIT TRANSACTIONS
Summary: 10. Credits of insurers, upon the property

1. taxes insured, for the insurance premium for
2. malversationbypublicofficials twoyears.
3. vendorslien
4. pledge,chattelmortgage Summary:
5. mechanicslien 1. taxes
6. laborerswages 2. vendorslien
7. salvage 3. contractorslien
8. tenancy 4. lienofmaterialmen
9. carrierslien 5. mortgage
10. hotelslien 6. expensesofpreservation
11. croploan 7. recordedattachments
12. rentalsoneyear 8. warrantyinpartition
13. deposit 9. conditionaldonations
10. premiumsfor2yearinsurers

D.PREFERREDCREDITSONSPECIFIC E.EXEMPTPROPERTIES
IMMOVABLES
Q: What are the exempt properties from
Q:Whatarethepreferredcreditswithrespectto executionandsale?
specificimmovableproperty?
A:FSTBCFPLBELMCL
A: 1. GR: Family home constituted jointly by
1. Taxesdueuponthelandorbuilding; husbandandwifeorbyunmarriedhead
2. For the unpaid price of real property ofafamily(Art.152,FC).
soldupontheimmovablesold;
3. Claims of laborers. Masons, mechanics XPNs:For:
and other workmen, as well as of a. nonpaymentoftaxes;
architects, engineers and contractors, b. debts incurred prior to the
engaged in the construction, constitution of the family
reconstruction or repair of buildings, home;
canals or other works, upon said c. debts secured by mortgages
buildings,canalsorotherworks; on the premises before or
4. Claimsoffurnishersofmaterialsusedin aftersuchconstitution;and
the construction, reconstruction, or d. debts due to laborers,
repair of buildings, canals, and other mechanics, architects,
works, upon said buildings, canals or builders, material men and
otherworks; others who have rendered
5. Mortgage credits recorded in the service or furnished material
Registry of Property, upon the real for the construction of the
estatemortgage; building
6. Expenses for the preservation or
improvementofrealpropertywhenthe 2. Right to receive Support as well as any
law authorizes reimbursement, upon money or property obtained as such
theimmovablepreservedorimproved; support.(Art.205,FC)
7. Credits annotated in the Registry of 3. Tools and implements necessarily used
Property,byvirtueofajudicialorder,by byhiminhistradeoremployment;
attachments or executions, upon the 4. Two horses, or two cows, or two
property affected, and only as to later carabaos or other Beasts of burden,
credits; such as the debtor may select, not
8. Claims of coheirs for warranty in the exceeding one thousand pesos in value
partitionofanimmovableamongthem, and necessarily used by him in his
upontherealpropertythusdivided; ordinaryoccupation;
9. Claims of donors or real property for 5. HisnecessaryClothingandthatofallhis
pecuniary charges or other conditions family.
imposed upon the donee, upon the 6. Household Furniture and utensils
immovabledonated; necessary for housekeeping and used
forthatpurposebythedebtor,suchas
425

for indemnity for damages in cases of
labor accident or illness resulting from
7. Provisions for individual or family use thenatureoftheemployment;
insufficientforthreemonths; 5. Creditsandadvancementsmadetothe
8. TheprofessionalLibrariesofattorneys, debtorforsupportofhimselforherself,
judges,physicians,pharmacists,dentist, and family, during the last preceding
engineers, surveyors, clergymen, insolvency;
teachers and other professionals, not 6. Support during the insolvency
exceeding three thousand pesos in proceedings, and for three months
value; thereafter;
9. OnefishingBoatandnet,notexceeding 7. Fines and civil indemnification arising
the total value of one thousand pesos, fromacriminaloffense;
the property of any fisherman, by the 8. Legal expenses, and expenses incurred
lawful use of which he earns a in the administration of the insolvents
livelihood; estate for the common interest of the
10. So much of the Earnings of the debtor creditors, when properly authorized
for his personal services within the andapprovedbythecourt;
month preceding the levy as are 9. Taxesandassessmentsduethenational
necessaryforthesupportofhisfamily; government, other those mentioned in
11. Letteredgravestones; Articles2241,No.1,and2242,No.1;
12. All Moneys, benefits, privileges or 10. Taxes and assessments due any
annuities accruing or in any manner province, other than those mentioned
growingoutofanylifeinsurance,ifthe inArticles2241,No.1and2242,No.1;
annual premiums paid do not exceed 11. Taxes and assessments due any city or
five hundred pesos, and if they exceed municipality other than those
the sum, a like exemption shall exist mentioned in Articles 2241, No.1 and
whichshallbearthesameproportionto 2242,No.1;
the moneys, benefits privileges and 12. Damages for death or personal injuries
annuitiessoaccruingorgrowingoutof causedbyaquasidelict;
such insurance that said five hundred 13. Gifts due to public and private
pesos bears to the whole premiums institutionsofcharityorbeneficence;
paid; 14. Credits which without special privilege,
13. Copyrights and other properties appearin(a)apublicinstrument;or(b)
especially exempted by law (Sec. 12, inthefinaljudgment,iftheyhavebeen
Rule39) the subject of litigation. These credits
14. PropertyunderLegalcustodyandofthe shall have preference among
publicdominion. themselves in the order of priority of
thedatesoftheinstrumentsandofthe
Q:Whatistheorderofpreferencewithrespect judgments,respectively(Art.2244).
tootherpropertiesofthedebtor?
Summary:
A: 1. funeralexpenses
1. Properfuneralexpensesforthedebtor, 2. wagesofemployeesoneyear
or children under his or her parental 3. expensesoflastillness
authoritywhohavenopropertyoftheir 4. workmenscompensation
own,whenapprovedbythecourt; 5. supportforoneyear
2. Credits for services rendered the 6. supportduringinsolvency
insolvent by employees, laborers, or 7. finesincrimes
household helpers for one year 8. legalexpensesadministration
preceding the commencement of the 9. taxes
proceedingsininsolvency; 10. tort
3. Expenses during the last illness of the 11. donations
debtor or of his or her spouse and 12. appearing in public instrument or final
children under his or her parental judgment
authority, if they have no property of
theirown;
4. Compensation due to the laborers of
their dependents under laws providing
426 CIVILLAWTEAM:

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F.ORDEROFPREFERENCEOFCREDIT Q:Whataretheteststodetermineinsolvency?

Q:Whatistheorderofpreferenceofcredits? A:
1. Equity test A state of inability of a
A: persontopayhisdebtsatmaturity.
1. Those credits which enjoy preference with 2. Balance sheet test The assets, if all
respect to specific movable, excluded all madeimmediatelyavailable,wouldnot
others to the extent of the value of the besufficienttodischargethebalance.
personal property to which the preference
refers(Article2246). Q: What are the remedies of an insolvent
2. Iftherearetwoormorecreditswithrespect debtor?
to the same specific movable property, they
shallbesatisfiedprorata,afterthepayment A:
of duties, taxes, and fees due the State or 1. Petitionthecourttosuspendpayments
anysubdivisionthereof(Art.2247,NCC). ofhisdebts;or
3. Those credits which enjoy preference in 2. To be discharged from his debts and
relation to specific real property or real liabilities by voluntary or involuntary
rights,excludeallotherstotheextentofthe insolvencyproceedings.(Sec.1)
valueoftheimmovableorrealrighttowhich
thepreferencerefers(Art.8). Q: What is the effect of insolvency proceedings
4. Iftherearetwoormorecreditswithrespect filedbyindividualdebtors?
to the same specific real property or real
rights, they shall be satisfied pro rata, after A:
the payment of the taxes and assessments 1. Suitspendingincourt
upon the immovable property or real right a. securedobligations
(Art.2249,NCC). suspendeduntilassignee
5. The excess, if any, after the payment of the appointed
credits which enjoy preference with respect b. unsecuredobligations
tospecificproperty,realorpersonal,shallbe terminatedexcepttofix
addedtothefreepropertywhichthedebtor amountofobligation
may have, for the payment of the other c. foreclosuresuitspending
credits(Art.2250,NCC). continue
6. Those credits which do not enjoy any 2. Suitsnotyetfiledcannotbefiled
preference with respect to specific property anymorebutclaimsmaybepresented
and those which enjoy preference, as to the toassignee.
amountnotpaid,shallbesatisfiedaccording
tothefollowingrules: Note: The result is different if the petitioner is a
a. In the order established in Article corporation because under the Revised Rules on
2244; Corporate Recovery, all claims whether secured or
b. Common credits referred to in unsecuredarestayed.
Article 2245 shall enjoy no
preference and shall be paid pro Q: If A is declared an insolvent by the court,
rataregardlessofdated(Art.2251, what would be the effect, if any, of such
NCC). declarationonhiscreditors?Explain.

A:
X.INSOLVENCYLAW
1. The sheriff shall take possession of all
assets of the debtor until the
A.DEFINITIONOFINSOLVENCY appointmentofareceiverorassignee;
2. Paymenttothedebtorofanydebtsdue
Q:Whatisinsolvency? tohimandthedeliverytothedebtorof
anypropertybelongingtohim,andthe
A:Thestateofapersonwhoseliabilitiesaremore transfer of any property by him are
than his assets. The term is frequently used in forbidden;
themorerestrictedsensetoexpressinabilityofa 3. Allcivilproceedingspendingagainstthe
person to pay his debts as they become due in insolventshallbestayed;and
theordinarycourseofhisbusiness. 4. Mortgagesandpledgesarenotaffected
by the order declaring a person
insolvent.(Sec.59,InsolvencyLaw)
427

Q:AssumingthatAhasguarantorsforhisdebts, dischargeofthefundsofthejudgmentdebtor.A
are the guarantors released from their recorded mortgage is a special preferred credit
obligationsonceAisdischargedfromhisdebts? while the preference given to workers under
Article 110 of the Labor Code is an ordinary
A: The guarantors are not discharged, because preferred credit. (DBP v. NLRC, G.R. No. 86227,
the discharge is limited to A only (Sec. 68). Jan.19,1994)
Precisely under the principle of excussion, the
liability of the guarantors arises only after the Q: Is the power to petition for the adjudication
exhaustion of the assets of the principal obligor. ofbankruptcygrantedtojuridicalpersons?
The effect of discharge merely confirms
exhaustion of the assets of the obligor available A:Thelawgrantstoajuridicalperson,aswellto
tohiscreditors. natural persons, the power to petition for the
adjudication of bankruptcy of any natural or
Q. What remedies are available to the juridical person provided that with respect to
guarantors in case they are made to pay the juridical persons, it is a resident corporation and
creditors?Explain. adjoinsatleasttwootherresidentsinpresenting
the petition to the Bankruptcy Court. When a
A: Their remedy is to prove in the insolvency foreign bank alleged in its petition that it is
proceedingthattheypaidthedebtandthatthey licensed to do business in the Philippines and
substitutedforthecreditors,ifthecreditorshave actually doing business in the country, it is in
notproventheirclaims(Sec.56). effect stating that it is a resident foreign
corporation in the Philippines. (State Investment
Under Article 2081 of the Civil Code, the House v. Citibank, N.A., G.R. Nos. 7992627, Oct.
guarantormaysetupagainstthecreditorall the 17,1991)
defensesthatpertaintotheprincipaldebtor.The
dischargeobtainedbythedebtorontheprincipal B.SUSPENSIONOFPAYMENTS
obligation can now be used as a defense by the
guarantors against the creditors. The guarantors
Q:Whatissuspensionofpayments?
arealsoentitledtoindemnityunderArticle2066

oftheCivilCode.
A:Itisthepostponement,bycourtorder,ofthe

payment of debts of one who, while possessing
Q: X and Y were employees of ATLAS which
sufficient property to cover his debts, foresees
hypothecated its certain assets to DBP. When
the impossibility of meeting them when they
ATLAS defaulted in its obligations, DBP
respectivelyfalldue.
foreclosedandacquiredthemortgagedassetsby

virtueoftheforeclosuresale.Meanwhile,Xand
Q: When is the remedy of suspension of
YfiledanactionagainstbothATLASandDBPfor
paymentsavailable?
unpaidwages.TheLaborArbiterruledinfavorof

XandY.IstheLAcorrectinconsideringworkers
A:Thedebtorwho,possessingsufficientproperty
preference under Article 110 of the Labor Code
tocoverallhisdebts,foreseestheimpossibilityof
overthatofDBPsmortgagelien?
meeting them when they respectively fall due,

may petition that he be declared in the state of
A: Declaration of bankruptcy or a judicial
suspension of payments by the court of the
liquidation must be present before the workers
province or city in which he has resided for six
preferencemaybeenforced.Adistinctionshould
months next preceding the filing of his petition
be made between a preference of credit and a
(Sec.2[1]).
lien.Apreferenceappliesonlytoclaimswhichdo

notattachtospecificproperties.Aliencreatesa
Q:Whendoessuspensiontakeeffect?
chargeonaparticularproperty.Therightoffirst

preference as regards unpaid wages recognized
A:Uponthefilingofthepetition.
by Article 110 does not constitute a lien on the

property of the insolvent debtor in favor of
Q: What are the steps in suspension of
workers. It is but a preference of credit in their
payments?
favor, a preference in application. It is a method

adopted to determine and specify the order in
A:
which credits should be paid in the final
1. Filingofthepetitionbythedebtor(Sec.
distribution of the proceeds of the insolvent's
2);
assets. It is a right to a first preference in the
428 CIVILLAWTEAM:

CREDIT TRANSACTIONS
2. Issuancebythecourtofanordercalling Q:Whataretheeffectsoffilingofthepetition?
ameetingofcreditors(Sec.3);
3. Publication of the order and service of A:
summons(Sec.4); 1. No disposition in any manner of his
4. Meetings of creditors for the propertymaybemadebythepetitioner
consideration of the debtors exceptinsofarasconcernstheordinary
proposition(Sec.8); operations of commerce or of industry
inwhichheisengaged;(Sec.3[2])
Note: To hold a valid meeting, the
creditorsrepresentingatleast3/5of 2. No payments may be made by the
the liabilities of the debtor must be petitionerexceptintheordinarycourse
present. ofhisbusinessorindustry(Ibid.);and;

5. Approval by the creditors of the 3. Upon the request to the court, all
debtorsproposition(Sec.8,[20]); pending executions against the debtor
6. The Double Majority Rule applies. To shall be suspended except execution
obtain a majority vote, it is necessary against property especially mortgaged.
that: (Sec.6)
a. At least 2/3 of the creditors
must vote on the same Q:Whoarethecreditorsaffectedbythefilingof
proposition,and thepetition?
b. Said2/3representatleast3/5
of the total liabilities of the A: Only creditors included in the schedules filed
debtor. bythedebtorshallbecitedtoappearandtotake
partinthemeeting.(Sec.5)Hence,thosewhodid
7. Objections, ifany,to thedecisionmust not appear because they were not informed of
be made within 10 days following the theproceedingsareunaffectedbythesame.
meeting.(Sec.11);
8. Issuanceoforderbythecourtdirecting Q: Who are the creditors not affected by order
that the agreement be carried out in ofsuspensionofpayments?
case the decision is declared valid, or
when no objection to said decision has A:
beenpresented. 1. Those having claims for personal labor,
maintenance, expenses of the last
Q: What are the documents that should illness and funeral of wife or child of
accompanythepetition? debtor, incurred during the 60 days
immediately preceding the filing of the
A: petition;and
1. Averifiedschedulecontainingafulland
true statement of the debts and 2. Those having legal or contractual
liabilitiesofthepetitionertogetherwith mortgages.(Sec.9)
alistofcreditors;(Secs.15,2)
2. A verified inventory containing a list of Q: When is a petition for suspension of
creditors, an accurate description of all paymentsdeemedrejected?
thepropertyofthepetitionerincluding
property exempt from execution and a A:
statement as to the value of each item 1. When the number of creditors
of property, its location, and representing at least 3/5 of the
encumbrances thereon, if any; (Secs. liabilitiesnotattend;(Secs.8,10)or
16,2) 2. When the two majorities required are
3. Astatementofhisassetsandliabilities; notinfavoroftheproposedagreement
(Sec.2)and (Sec.10).
4. The proposed agreements he requests
ofhiscreditors.(Ibid.) Q:Whatistheeffectofdisapprovalofpetition?

A: If the decision of the meeting be negative as
regardstheproposedagreementorifnodecision
is had in default of such number or of such
429

majorities, the proceeding shall be terminated 2. Verified petition for rehabilitation
without recourse. In such case, the parties under the Interim Rules of Procedure
concernedshallbeatlibertytoenforcetherights for Corporate Rehabilitation which
whichcorrespondtothem.(Sec.11) includessuspensionofpayments.

PETITION PETITIONFORCORPORATE C.VOLUNTARYINSOLVENCY
FOR REHABILITATION
ORDINARY Q:Whatisavoluntaryinsolvency?
SUSPENSION

OF
A: This is availed of a debtor who, having debts
PAYMENTS
exceedingP1,000.00,cannotdischargeallofthem
Purpose
with all of his existing assets and who, as a
Toobtain
Torehabilitatethepetitioning consequence, voluntarily goes to court to have
defermentin
company. himselfdeclaredasaninsolventsothathisassets
thepayment
maybeequitablydistributedamonghiscreditors.
ofdebts.
Law (Sec.14)
Insolvency InterimRulesonCorporate
Law. Rehabilitation Q: What is the procedure for voluntary
Creditors insolvency?
Doesnot
Coversallcreditors,whether A:
coversecured
securedornot. 1. Filing of the petition by the debtor
creditors.
Duration prayingforthedeclarationofinsolvency
Suspensionvaliduntil: (Sec.2);
Dismissalofthepetitionor 2. Issuance of an order of adjudication
180daysor3
Terminationofthe declaring the petitioner insolvent
months
rehabilitation (Sec.18);
proceedings. 3. Publication and service of the order
Filedby (Sec.19);
Corporation,partnershipor 4. Meeting of the creditors to elect the
Thedebtor,
association,or assigneeininsolvency(Sec.30);
naturalor
Thecreditorsholdingatleast 5. Conveyanceofthedebtorspropertyby
juridical
20%ofthedebtorstotal the clerk of court to the assignee (Sec.
person
liabilities. 32);
Effect
6. Liquidation of the debtors assets and
Nomore
Thecourt,still,hastoissueastay paymentofhisdebts(Sec.33);
needforthe
ordernotlaterthan5daysfrom 7. Composition,ifagreedupon(Sec.63);
courttoissue
thefilingofthepetition. 8. Discharge of the debtor on his
astayorder.
application (Sec. 64), except a
Effectsoffilingthepetition
Allactionsor Allclaimsagainstthedebtorare
corporation;
claimsagainst stayedupontheissuanceofstay 9. Objection, ifany,to thedischarge(Sec.
the order. 66);
corporation 10. AppealtotheSCincertiorari.
pending Thecreditorsmayproceedto
beforethe enforcetheirclaimagainstthe Q: X, a wellknown architect, is suffering from
court, suretyevenifduringthependency financial reverses. He has four creditors with a
tribunal, oftherehabilitationproceedings total claim of P26 Million. Despite his intention
board,or involvingthecorporatedebtor. to pay these obligations, his current assets are
bodyshallbe (Phil.BloomingMills,Inc.and insufficienttocoverallofthem.Hiscreditorsare
suspended. AlfredoChingv.CA,G.R.No. about to sue him. Consequently, he was
142381,Oct.5,2003) constrained to file a petition for insolvency.
Since X was merely forced by circumstances to
Q: What are the modes or forms of suspension petition the court to declare him insolvent, can
ofpayment? the judge properly treat the petition as one for
involuntaryinsolvency?Explain.
A:
1. Petition for ordinary suspension of A: The petition cannot be treated as one of
paymentsunderAct1956 involuntary insolvency, because it was filed by X
430 CIVILLAWTEAM:

CREDIT TRANSACTIONS
himself,thedebtor,andnotbyhiscreditors(Sec. Q:Whomaypetitionforvoluntaryinsolvency?
20). To treat it as one of involuntary insolvency
would unduly benefit X as a debtor, because he A: The petition may be filed by any officer duly
would not be subject to the limitation of time authorized by the vote of the board of directors
withinwhichheissubjectinthecaseofvoluntary ortrusteesatameetingespeciallycalledforthat
insolvencyforpurposesofdischarge(Sec.65). purpose,orbyassentinwritingofthemajorityof
thedirectorsortrustees,asthecasemaybe.(Sec.
Q: What are the requisites of petition for 52)
voluntaryinsolvency?
Q:Whatistheeffectoffilingpetition?
A:Thepetitionwhichmustbeverified(Sec.17)is
tobefiled: A: Once the petition is filed, it ipso facto takes
away and deprives the debtor petitioner of the
1. Byaninsolventdebtor righttodoorcommitanyactofpreferenceasto
2. Owing debts exceeding in amount the sum creditors, pending the final adjudication.
ofP1,000.00 (PhilippineTrustCo.v.NationalBank,42Phil413)
3. IntheRTCoftheprovinceorcityinwhichhe
hasresidedfor6monthsnextprecedingthe Q:Whataretheeffectsofcourtorderdeclaring
filingofsuchpetition,and debtorinsolvent?
4. Settingforthinhispetitionthefollowing:
a. Hisplaceofresidence; A:
b. The period of residence therein 1. Alltheassetsofthedebtornotexempt
immediately prior to filing said fromexecutionaretakenpossessionof
petition; bythesheriffuntiltheappointmentofa
c. His inability to pay all his debts in receiverorassignee;
full; 2. Thepaymenttothedebtorofanydebts
d. His willingness to surrender all his due to him and the delivery to the
property, estate, and effects not debtor or to any person for him of any
exempt from execution for the property belonging to him, and the
benefitofhiscreditors;and transfer of any property by him are
e. An application to be adjudged an forbidden;
insolvent.(Sec.14) 3. Allcivilproceedingspendingagainstthe
insolventdebtorshallbestayed;and
Q: What are the documents to accompany the 4. Mortgages or pledges, attachments, or
petition? executions on property of the debtor
dulyrecordedandnotdissolvedarenot
A: affectedbytheorder.(Sec.59)
1. Averifiedschedulemustcontain:
a. A full and true statement of all
debts and liabilities of the
D.INVOLUNTARYINSOLVENCY
insolventdebtor;and
b. Anoutlineofthefactsgivingriseor
whichmightgiverisetoacauseof Q:Whatisaninvoluntaryinsolvency?
action against such insolvent
debtor;(Sec.15) A: This is availed of by the petition of 3 or more
creditors, none of whom became a creditor by
2. Averifiedinventory,whichmustcontain: assignment within 30 days prior to filing of
a. An accurate description of all the petition and whose aggregate credit is not less
personal and real property of the thanP1,000.00,becauseofcommissionofoneor
insolvent exempt or not from moreactsofinsolvency.(Sec.20)
executionincludingastatementas
to its value, location and Q:Whataretheactsofinsolvency?
encumbrancesthereon;and
b. Anoutlineofthefactsgivingriseor A:
which might give rise to a right of 1. Such person is about to depart or has
action in favor of the insolvent departedfromthePhilippines,withintentto
debtor.(Sec.16) defraudhiscreditors;
431

2. Being absent from the Philippines, with 4. Filing of answer or motion to dismiss
intent to defraud his creditors, he remains (Sec.23);
absent; 5. Hearingofthecase(Sec.24);
3. He conceals himself to avoid the service of 6. Issuance of order or decision adjudging
legal process for purpose of hindering or debtorinsolvent(Ibid.)
delayingordefraudinghiscreditors;
4. He conceals, or is removing, any of his 7. Publication and service of order (Sec.
propertytoavoiditsbeingattachedortaken 25);
onlegalprocess; 8. Meetingsofcreditorsforelectionofan
5. Hehassufferedhispropertytoremainunder assigneeininsolvency(Sec.30);
attachment or legal process for 3 days for 9. Conveyance of debtors property by
the purpose of hindering or delaying or clerkofcourttotheassignee(Sec.32);
defraudinghiscreditors; 10. Liquidation of the debtors assets and
6. He has confessed or offered to allow paymentofdebts(Sec.33);
judgmentinfavorofanycreditororclaimant
for the purpose of hindering or delaying or Note:Assetsoftheinsolventwhicharenotexempt
defraudinganycreditororclaimant; from execution will then be distributed among his
7. He has willfully suffered judgment to be creditors in accordance with the rules of
takenagainsthimbydefaultforthepurpose concurrence and preference of credits in the Civil
of hindering or delaying or defrauding his Code.
creditors;
8. He has suffered or procured his property to 11. Composition,ifagreedupon(Sec.63);
betakenonlegalprocesswithintenttogive 12. Discharge of the debtor on his
apreferencetooneormoreofhiscreditors application, except a corporation (Sec.
and thereby hinder, delay, or defraud any 52);
oneofhiscreditors; 13. Objection, ifany,to thedischarge(Sec.
9. He has made any assignment, gift, sale, 66);and
conveyance, or transfer of his estate, 14. AppealtotheSupremeCourtincertain
property, rights, or credits with intent to cases(Sec.62)
delay,defraud,orhinderhiscreditors;
10. He has, in contemplation of insolvency, Q:Whataretherequisitesforfilingapetitionfor
made any payment, gift, grant, sale, InvoluntaryInsolvency?
conveyance, or transfer of his estate,
property,rights,orcredits; A:Thepetitionisfiledby:
11. Being a merchant or tradesman he has
generally defaulted in the payment of his 1. Threeormorecreditors;
currentobligationsforaperiodof30days; 2. None of whom has become such a
12. For a period of 30 days he has failed after creditor by assignment, within 30 days
demand, to pay any moneys deposited with priortothefilingofsaidpetition;
him or received by him in a fiduciary 3. Whose credits accrued in the
capacity;and Philippines;
13. Anexecutionhavingbeenissuedagainsthim 4. Thetotalamountofwhichcreditsisnot
on final judgment for money, he shall have lessthanP1,000.00;and
beenfoundtobewithoutsufficientproperty 5. In the RTC of the province or city in
subjecttoexecutiontosatisfythejudgment. which the debtor resides or has his
(Sec.20) principalplaceobusiness.
6. Thepetitionmust:
Q: What is the procedure in involuntary 7. be verified by at least 3 of the
insolvency? petitioningcreditors;
8. setforthoneormoreactsofinsolvency
A: mentionedinthelaw;and
1. Filing of the petition by three or more 9. be accompanied by a bond, approved
creditors(Sec.20); by the court with at least 2 sureties, in
2. Issuance of order requiring the debtor suchpenalsumasthecourtshalldirect.
to show cause why he should not be
adjudgedinsolvent(Sec.21);
3. Serviceofordertoshowcause(Sec.22);
432 CIVILLAWTEAM:

CREDIT TRANSACTIONS
Q: Can a surety institute involuntary Q:Whoarethecreditorsnotentitledtovotein

proceedings? theelectionofassignee?

A: No, a surety for the debtor is not a creditor. A:
Hence, he cannot institute involuntary 1. Those who did not file their claims at
proceedings.Allhecandoistoprovehisclaim. least2dayspriortothetimeappointed
forsuchelection;(Sec.29)
Q: Distinguish voluntary insolvency from 2. Those whose claims are barred by the
involuntaryinsolvency. statuteoflimitations;(Ibid.)
3. Securedcreditorsunlesstheysurrender
A: their security or lien to the sheriff or
VOLUNTARY receiver or unless they shall first have
INVOLUNTARYINSOLVENCY
INSOLVENCY the value of such security fixed as
Filedbythedebtor. Filedby3ormorecreditors. providedinSec.59;and
Only1creditoris 3ormorecreditorsare 4. Holders of claims for unliquidated
required. required. damagesarisingoutofpuretort.
Requirementsforcreditors:
Q:Istheassigneerequiredtogiveabond?
1. Residents of the
Philippines; A: After his election, the assignee is required to
2. Their credits or demands give a bond for the faithful performance of his
Norequirementfor
must have accrued in the
creditors. duties.(Secs.30,31)
Philippines;and

3. Must not have been a
Note:Courtshavethepowertoappointreceiversto
creditor by assignment
hold the property of individuals or corporations
within 30 days prior to the
although no insolvency proceedings are involved. A
filingofthepetition.
receiverappointedbyacourtbeforetheinstitution
Venue:wherehe
Wherethedebtorhas oftheinsolvencyproceedingsmaybeappointedthe
hasresided6
residenceorhashisprincipal permanentassigneeinsuchproceedings.
monthspriortothe
placeofbusiness.
filingofpetition.
Q:Whatisthedateofcleavage?
Noneedforthe
Debtormusthave
commissionofany
committedanyoftheactsof A:Thedatewhenthepetitionisfiled,fromwhich
oftheactsof
insolvency. is counted backward or forward, in determining
insolvency.
Amountofdebts the effects provided for under the Insolvency
Amountofdebtsmustnot Law.
mustexceed
belessthanP1,000.00.
P1,000.00.
Debtordeemed Illustrations:
insolventthrough Debtorisconsidered 1. Acreditorbyassignmentofcreditmade
anorderof insolventupontheissuance within 30 days from date of cleavage
adjudicationafter bythecourtofanorderafter shall be disqualified as petitioning
filingofthepetition; duehearingdeclaringhim creditor(Sec.20);
adjudicationmaybe insolvent;adjudication 2. Attachmentlevieduponwithinaperiod
grantedexparte. grantedonlyafterhearing. of 30 days before the date of cleavage
may be set aside by the assignee (Sec.
Bondisnot 32);
Bondisrequired.
required. 3. Judgment on cases filed and decided
within 30 days prior to the date of
Q:Whoisanassigneeininsolvency? cleavage may be set aside by the
assignee(Sec.32);
A:Apersonelectedbythecreditorsorappointed 4. Judgmentsoncasesfiledbefore30days
bythecourttowhomaninsolventdebtormakes from the date of cleavage but decided
an assignment of all his property for the benefit within30daysbecauseofconfessionof
ofhiscreditors. judgment or declaration of default by
debtor may be set aside by action of
Note: The assignee must be a person elected by assignee;
the majority of the creditors who have proven 5. Properties acquired after date of
their claims, such majority being in number and cleavage, after discharge of debtor in
amount.
433

good faith shall not be liable for debts
incurredpriortothedateofcleavage; Q:Whataretheeffectsoffilingofpetition?
6. Fraudulentpreferencesmadewithin30
days prior to the date of cleavage may A:
be set aside in action brought by 1. The proceedings are deemed to
assignee. commence against the partners at the
sametime;
Q:Whatisadividendininsolvency? 2. Upon order of the court, all the
properties of the partnership and also
A:Aparcelofthefundarisingfromtheassetsof all the separate property of each
theestate,rightfullyallottedtoacreditorentitled partner, if they are liable, shall be
to share in the fund whether in the same taken;(Sec.51)
proportion with other creditors or in a different 3. Allcreditorsofthepartnershipandthe
proportion. It is paid by the assignee only upon separatecreditorsofeachpartnershall
orderofthecourt(Secs.43,44). be allowed to prove their respective
claims;(Ibid.)
Q: When may a partnership be declared 4. The assignee shall be chosen by the
insolvent? creditorsofthepartnership;and(Ibid.)
5. Pending insolvency proceedings by or
A: A partnership may be declared insolvent by a against any partnership, person or
petitionofthe partnersandmaybedoneduring corporation no statute of limitations
the continuation of the partnership business or shallrunuponaclaimoforagainstthe
after its dissolution and before the final estateofthedebtor.(Sec.73)
settlementthereof.
Q: What is the effect of insolvency of
A partnership may be declared insolvent partnershiporanypartner?
notwithstanding the solvency of the partners
constituting the same. (Campos Rueda & Co. v. A:
Pacific Commercial Co., G.R. No. L18703 Aug. 1. A partnership may be declared
28,1922) insolvent notwithstanding the solvency
ofthepartnersconstitutingthesame.
Q: Who may petition for declaration of 2. A partnership is not necessarily
insolvencyofapartnership? insolventbecauseoneofitsmembersis
insolvent. The solvent members are
A: bound to wind up the partnership
1. Voluntary insolvency By all the affairs.
partnersoranyofthem; 3. Under the law, a partnership is
2. InvoluntaryinsolvencyByoneormore automatically dissolved by the
of the partners or three or more insolvency of any partner or of the
creditorsofthepartnership. partnership

Q:Whatistheeffectwhencorporationdeclared
Q: What are the properties included in the insolvent?
insolvencyproceedings?
A: Its property and assets shall be distributed to
A: thecreditorsbutnodischargeshallbegrantedto
Allthepropertyofthepartnership;and anycorporation.(Sec.52)
All the separate of each of the partners
except: Q:Isinsolvencylawapplicabletocorporations?
Separate properties of limited partners
(Art.1843,NCC) A:TheInsolvencyLawexpresslyprovidesthatitis
Properties which are exempt by law notapplicabletocorporations:
(Sec.51) 1. Engaged principally in the banking
business
2. Anyothercorporationastowhichthere
is a special provision of law for its
liquidationincaseofinsolvency.(Ibid)

434 CIVILLAWTEAM:

CREDIT TRANSACTIONS
Q:Inthefilingofclaimsinaninsolvencyproceeding,whatdebtsmayandmaynotbeproved?
A:
DEBTSTHATMAYBEPROVED DEBTSTHATMAYNOTBEPROVED
Thedebtswhichmaybeprovedagainsttheestateofthe
debtorininsolvencyproceedingsarethefollowing: The following debts are not provable or allowed in
insolvencyproceedings:
1. All debts due and payable from the debtor at the
timeofadjudicationofinsolvency;(Sec.53) 1. Claims barred by the statute of limitations; (Sec.
2. All debts existing at the time of the adjudication of 29,73)
insolvency but not payable until a future time, a 2. Claims of secured creditors with a mortgage or
discountbeingmadeifnointerestispayablebythe pledge in their favour unless they surrender the
termsofthecontract; security;(Sec.59)
3. Anydebtoftheinsolventarisingfromhisliabilityas 3. Claims of creditors who hold an attachment or
indorser, surety, bail or guarantor, where such execution on the property of the debtor duly
liability became absolute after the adjudication of recordedandnotdissolved;(Sec.32)
insolvency but before the final dividend shall have 4. Claims on account of which a fraudulent
beendeclare;(Sec.54) preferencewasmadeorgiven;(Sec.61)
4. Other contingent debts and contingent liabilities 5. Support, as it does not arise from any business
contracted by the insolvent if the contingency shall transactionbutfromtherelationofmarriage;and
happenbeforetheorderoffinaldividend;(Sec.55); 6. Aclaimforunliquidateddamagesarisingoutofa
and pure tort, which neither constitutes a breach of
5. Anydebtoftheinsolventarisingfromhisliabilityto an express contract nor results in any unjust
any person liable as bail, surety, or guarantor or enrichment of the tortfeasor that may form the
otherwise, for the insolvent, ho shall have paid the basisofanimpliedcontract.
debtinfull,orinpart.(Sec.56)
Q:Whatisacontingentclaim? Q: What are the alternative rights of a secured

creditor?
A: A claim in which liability depends on some
future event that may or may not happen and A:
which makes it uncertain whether there will be 1. Tomaintainhisrightsunderhissecurity
anyliability. or lien and ignore the insolvency
proceedings,inwhichcase,itistheduty
Note: After the close of the insolvency proceedings oftheassigneetosurrendertohimthe
and the happening of the contingency, the creditor propertyencumbered;
may pursue any available remedy for the collection
ofhisclaim. 2. Towaivehisrightunderthesecurityor
lien and thereby share in the
Q: How are claims arising or acquired after distributionoftheassetsofthedebtor;
insolvencytreated? or

A: 3. To have the value of the encumbered
1. Claim arose after commencement of property appraised and then share in
proceedings An obligation coming in the distribution of the assets of the
force after the initiation of the debtor with respect to the balance of
proceedings is not generally a proper hiscredit.
claimtobeproved.
Q:Whatiscomposition?
2. Claim owned by insolvent purchased
after insolvency One indebted to an A: It is an agreement, made upon a sufficient
insolvent will not be permitted to consideration, between an insolvent or
interposeasanoffset,aclaimownedby embarrassed debtor and his creditors, whereby
the insolvent which he has purchased the latter for the sake of immediate or sooner
aftertheinsolvency. payment,agreetoacceptadividendlessthanthe
whole amount of their claims, to be distributed
pro rata, in discharge and satisfaction of the
wholedebt.

435

Q:Distinguishcompositionfromaccord. 4. Theinsolventshallbereleasedfromhis
debts
A: Accord properly denotes an agreement
between a debtor and a single creditor for a Q:Whenmayconfirmationbesetaside?
discharge of the obligation by a part payment or
ondifferentterms. A: The court may, upon application of a party in
interest within 6 months after the composition
Composition, on the other hand, designates an has been confirmed, set the same aside and
arrangement between a debtor and the whole reinstate the case if it shall be made to appear
body of his creditors (or at least a considerable uponatrial:
portionofthem)fortheliquidationoftheirclaims 1. That fraud was practiced in the
bythedividendoffered. procuringofsuchcomposition;and
2. Theknowledgethereofhascometothe
Q:Whataretherequirementsforavalidofferof petitioner since the confirmation of
composition? suchcomposition.(Sec.63)

A: Q:Whatisdischarge?
1. The offer of the terms of composition
must be made after the filing of the A: Discharge, under the Insolvency Law, is the
schedule of the debtors property and formalandjudicialreleaseofaninsolventdebtor
the submission of the list of his from his debts with the exception of those
creditors; expresslyreservedbylaw.
2. The offer must be accepted in writing
by a majority of the creditors Note: Only natural persons may ask for discharge;
representing a majority of the claims corporations cannot ask for discharge. (Sec. 52)
whichhavebeenallowed; When granted, takes effect not from its date, but
3. Itmustbemadeafterthedepositingin from the commencement of the proceedings in
suchplacedesignatedbythecourt,the insolvency.
consideration to be paid and the costs
oftheproceedings;and Q: When insolvent debtor may apply for
4. The terms of the composition must be discharge?
approved or confirmed by the court.
(Sec.63) A:AdebtormayapplytotheRTCforadischarge
atanytimeaftertheexpirationof3monthsfrom
Q:Whenmaythecourtconfirmacomposition? theadjudicationofinsolvency,butnotlaterthan
1 year from such adjudication of insolvency,
A:When: unlessthepropertyoftheinsolventhasnotbeen
1. It is for the best interest of the convertedintomoney(Sec.64)withouthisfault,
creditors; thereby delaying the distribution of dividends
2. Thedebtorhasnotbeenguiltyofanyof amongthecreditorsinwhichcasethecourtmay
the acts, or of a failure to perform any extendtheperiod
of the duties which would create a bar
tohisdischarge;and Any creditor may oppose the discharge by filing
3. Theofferanditsacceptanceareingood his objections thereto, specifying the grounds of
faith and have not been made or his opposition. After the debtor has filed and
procuredinamannerforbiddenbythe servedhisverifiedanswer,thecourtshalltrythe
Act. issueorissuesraised.(Sec.66)

Q: What are the effects of confirmation of Q:Whataretherequisitesfordischarge?
composition?
A:
A: 1. Compliance with statutory
1. The consideration shall be distributed requirementsregardingsurrenderofhis
asthejudgeshalldirect; assets for the benefit of the creditors
2. The insolvency proceedings shall be and regarding the rendition of an
dismissed; accountofhisassetsandliabilities;
3. The title to the insolvents estate shall
a. Note: A discharge ininsolvency
revertinhim;
is a matter of legislative grace
436 CIVILLAWTEAM:

CREDIT TRANSACTIONS
or favour to the debtor, to be 1. It releases the debtor from all claims,

obtained only by a strict debts,liabilitiesanddemandsetforthin
compliance with the conditions the schedule or which were or might
prescribedbythestatute. have been proved against his estate in
insolvency. (Sec. 69). Hence, non
2. Applicationfordischargeshouldbefiled provable debts are not affected
after the expiration of 3 months from whether or not they were properly
theadjudicationofinsolvency,butnot scheduled;
laterthan1year;(Sec.64);and 2. It operates as a discharge of the
insolvent and future acquisitions, but
3. Insolvent debtor must not have pemits mortgagees and other lien
committedanyoftheactsofinsolvency creditors to have their satisfaction out
preventingdischarge. ofthemortgageorsubjectofthelien;
3. It is a special defense which may be
Q:Whataretheactsofdebtororgroundswhich pledged and be a complete bar to all
willpreventdischarge? suitsbroughtonanysuchdebts,claims,
liabilitiesordemands.(Ibid.)
A: No discharge shall be granted, or if granted, 4. It does not operate to release any
shallbevalid,tothefollowingcases: person liable for the same debt, for or
1. Falseswearing; withthedebtor,eitheraspartner,joint
2. Concealmentofanypartofhisestateor contractor, indorser, surety or
effects; otherwise;(Sec.68)
3. Fraudorwillfulneglectinthecareofhis 5. The certificate of discharge is prima
property or in the delivery thereof to facie evidence of the fact of release,
theassignee; andtheregularityofsuchdischarge.
4. Procuring his properties to be attached
or seized on execution within 1 month Note: Where a debtor is judicially declared
before the commencement of insolvent, the remedy of the guarantor or
insolvencyproceedings; suretywouldbetofileacontingentclaiminthe
5. Destruction, mutilation, alteration or insolvency proceeding, if his rights as such
falsification of his books, documents, guarantor or sureties are not to be barred by
andpapers; the subsequent discharge of the insolvent
6. Giving fraudulent preference to a debtorfromallhisliabilities.
creditor;
7. Nondisclosure of the assignee of a Q: What are the debts and obligations not
proven false or fictitious debt within 1 affectedbydischargeofinsolvent?
monthafteracquiringknowledge;
8. Being a merchant, failure to keep A:
properbooksoraccounts; 1. Taxes or assessments due the
9. Influencingtheactionofanycreditor,at Government,whethernationalorlocal;
any state of the proceedings, by 2. Any debt created by the fraud or
pecuniaryconsideration; embezzlementofthedebtor;
10. Effecting any transfer, conveyance or 3. Any debt created by the defalcation of
mortgage in contemplation of the debtor as a public officer or while
insolvency; actinginafiduciarycapacity;
11. Conviction of any misdemeanor under 4. Debt of any person liable for the same
theInsolvencyLaw: debt, for or with the insolvent debtor,
12. In case of voluntary insolvency, he has either as partner, joint contractor,
received the benefit of insolvency inorser,suretyorotherwise;(Sec.68)
within 6 years next preceding his 5. Debtsofacorporation(Sec.52);
applicationfordischarge;and 6. Claimforsupport;
13. If insolvency proceeding in which he 7. Discharged debt but revived by a
could have applied are pending by or subsequentnewpromisetopay;
against him in the RTC of any other 8. Debts which have not been duly
provinceorcity.(Sec.65) scheduled in time for proof and
allowance, unless the creditors had
Q:Whataretheeffectsofdischarge? notice or actual knowledge of the
insolvency proceedings, are not
A: dischargedastosuchcreditors;
437

9. Claimsforunliquidateddamagesarising
outofapuretort;
10. Claimsofsecuredcreditors;(Sec.59)
11. Claimsnotinexistenceornotmatureat
thetimeofthedischarge;
12. Claims that are contingent at the time
ofdischarge.

Q:Whendischargemayberevoked?

A:Adischargemayberevokedbythecourtwhich
granteditonpetitionofanycreditor:

1. Whose debt was proved or provable
against the estate in insolvency on the
ground that the discharge was
fraudulentlyobtained;

2. Who has discovered facts constituting
the fraud subsequent to the discharge
andfraudulenttransfer;andprovided,

3. The petition is filed within 1 year after
thedateofthedischarge.(Sec.69)

438 CIVILLAWTEAM:

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CREDIT TRANSACTIONS

CREDITTRANSACTIONS depend on the existence of another

Q:Distinguishmutuumfrom: contract which cannot be perfected until the

when being able to save

A: From the moment a person receives a thing borrower

3. Purpose is for the safekeeping of the thing Reasonforcustodyofthething

c. GR: In such case it is no longer a PARTIES

DEPOSITOR 2. If the depositor was incapacitated at

a. Single constituted solely to

yet,butthereismerely paymentofdebt;the Q: What is the effect of compromise between

Q: PAGRICO submitted a Surety Bond issued by

2. Where only a portion of the loan was GR:No.

prosper, even if the action is brought within the A:Inforeclosureproceedings,thebuyerbecomes

A: Yes. The purchaser at the foreclosure sale

Q: DBP guaranteed LCDs loan. When LCD

if after the expiration of the redemption period,

Flowchart for Judicial Foreclosure of Real Estate Mortgage

Complaint with the court. Include

90 days 120 days

Issuance of order confirming

* If mortgagee/bidder is bank or credit Secure a writ of

institution, mortgagor has one more year possession, by motion,

sale + certificate of sale to redeem the ordered the foreclosure

GR: In judicial foreclosure, there is only equity of redemption.

fornootherpurposesandthatthesameisajust Q: Should the foreclosure sale in chattel

Q: What is the form of a contract of antichresis 2.

Summary: 10. Credits of insurers, upon the property

Q: Can a surety institute involuntary Q:Whoarethecreditorsnotentitledtovotein

Q:Whatisacontingentclaim? Q: What are the alternative rights of a secured

or favour to the debtor, to be 1. It releases the debtor from all claims,

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