Credit Transaction Reviewer

San Beda College of Law
182
MEMORY AID IN CIVIL LAW
CREDIT TRANSACTIONS
2. bailee- the recipient; one who
receives the custody or possession of
the thing thus delivered
CREDIT TRANSACTIONS
 All transactions involving the
purchase or loan of goods, services,
or money in the present with a LOAN (Articles 1933 – 1961)
promise to pay or deliver in the
future  A contract wherein one of the
parties delivers to another, either
Contracts of security something not consumable so that
Types: the latter may use the same for a
1. Secured transactions or contracts of certain time and return it or money
real security - supported by a or other consumable thing, upon the
collateral or an encumbrance of condition that the same amount of
property the same kind and quality shall be
2. Unsecured transactions or contracts paid. (Art 1933)
of personal security - supported only
by a promise or personal Characteristics:
commitment of another such as a 1. Real Contract – delivery of the thing
guarantor or surety loaned is necessary for the
perfection of the contract
Security NOTE: An accepted promise to make
 Something given, deposited, or a future loan is a consensual
serving as a means to ensure contract, and therefore binding upon
fulfilment or enforcement of an the parties but it is only after
obligation or of protecting some delivery, will the real contract of
interest in property loan arise. (Art 1934)
 Types of Security
a. personal – when an individual 2. Unilateral Contract - once the
becomes surety or guarantor subject matter has been delivered,
b. real or property – when a it creates obligations on the part of
mortgage, pledge, antichresis, only one of the parties (i.e.
charge or lien or other device borrower).
used to have property held, out
of which the person to be made  Kinds:
secure can be compensated for 1. Commodatum – when the bailor
loss (lender) delivers to the bailee
(borrower) a non-consumable thing
Bailment so that the latter may use it for a
 The delivery of property of one certain time and return the identical
person to another in trust for a thing.
specific purpose, with a contract,  Kinds of commodatum:
express or implied, that the trust a. Ordinary Commodatum – use by
shall be faithfully executed and the the borrower of the thing is for a
property returned or duly accounted certain period of time
for when the special purpose is b. Precarium - one whereby the
accomplished or kept until the bailor bailor may demand the thing
claims it. loaned at will and it exists in the
following cases:
 Parties: i. neither the duration nor
1. bailor - the giver; one who delivers purpose of the contract is
property stipulated
CIVIL LAW COMMITTEE
 CHAIRPERSON: Romuald Padilla  ASST.CHAIRPERSON: Vida Bocar, Joyce Vidad  EDP: Alnaiza Hassiman, Dorothy
Gayon
 SUBJECT HEADS: Christopher Rey Marasigan (Persons and Family Relations), Alejandro Casabar(Property), Ma.
Rhodora
Ferrer(Wills and Succession), Ian Dominic Pua(Obligations and Contracts), Sha Elijah Dumama(Sales and Lease),
John Stephen
Quiambao(PAT), Christopher Cabigao(Credit Transactions), Ligaya Alipao(Torts and Damages), Anthony
Purganan(LTD),
Ma. Ricasion Tugadi (Conflicts of Law)
183
ii. the use of the thing is 1. Interest taken at Interest is taken in

merely tolerated by the the expiration of the advance
owner credit
2. Always on a Always on a single
double name paper name paper (i.e.
(two signatures promissory note with
appear with both no indorse-ment
2. Simple loan or mutuum – where the parties held liable other than the
lender delivers to the borrower for payment) maker)
money or other consumable thing
upon the condition that the latter COMMODATUM (Articles 1935 – 1952)
shall pay the same amount of the  Nature:
same kind and quality.
1. PURPOSE: Bailee in commodatum
Commodatum Mutuum acquires the temporary use of the
Key: COPS-LOTR thing but not its fruits (unless
1. Object stipulated as an incidental part of
Non-consumable Consumable the contract).(Art 1935)
2. Cause  Use must be temporary,
Gratuitous May or may not be otherwise the contract may be a
gratuitous deposit.
3. Purpose
Use or temporary Consumption
2. CAUSE: Essentially gratuitous; it
possession
ceases to be a commodatum if any
4. Subject Matter
compensation is to be paid by the
Real or personal Only personal
property property borrower who acquires the use, in
5. Ownership of the thing such case there arises a lease
Retained by the Passes to the debtor contract.
bailor  Similar to a donation in that it
6. Thing to be returned confers a benefit to the
Exact thing loaned Equal amount of the recipient. The presumption is
same kind and that the bailor has loaned the
quality thing for having no need
7. Who bears risk of loss therefor.
Bailor Debtor
8. When to return 3. SUBJECT MATTER: Generally non-
In case of urgent Only after the consumable whether real or personal
need, even before expiration of the but if the consumable goods are not
the expiration of the term
for consumption as when they are
term
merely for exhibition, consumable
goods may be the subject of the
commodatum. (Art 1936)
Loan Credit
Delivery by one party Ability of a person to
and the receipt of borrow money or
4. Bailor need not be the owner of the
other party of a things by virtue of thing owned (Art. 1938) since by the
given sum of money the trust or loan, ownership does not pass to the
or other consumable confidence reposed borrower.
thing upon an by the lender that he  A mere lessee or usufructuary
agreement, express will pay what he may lend but the borrower or
or implied, to repay promised. bailee himself may not lend nor
the same. lease the thing loaned to him to
a third person (Art 1932[2])
Loan Credit 5. Purely Personal (Art 1939):

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 Death of either party terminates borne equally by both the bailor and
the contract unless by the bailee, even though the bailee
stipulation, the commodatum is acted without fault, unless there is a
transmitted to the heirs of either stipulation to the contrary (Art 1949
or both parties. par 2)
 Bailee can neither lend nor lease 5. To return the thing loaned
the object of the contract to a  The bailee has no right to retain
third person. the thing loaned as security for
claims he has against the bailor
even for extraordinary expenses
except for a claim for damages
NOTE:Use of the thing loaned suffered because of the flaws of
may extend to members of the the thing loaned.
bailee’s household except:
a. contrary stipulation; NOTES:
b. nature of the thing  However, the bailee’s right
forbids such use extends no further than
retention of the thing loaned
Obligations of the Bailee: (Arts 1941 – until he is reimbursed for the
1945) damages suffered by him.
1. To pay for the ordinary expenses for  He cannot lawfully sell the
the use and preservation of the thing thing to satisfy such damages
loaned. (Art 1941) without court’s approval.
2. To be liable for the loss of the thing  In case there are two or
even if it should be through a
more bailees, their
fortuitous event in the following
obligation shall be solidary.
cases: (KLAS D)
a. when he keeps it longer than the
Obligations of the bailor (Art 1946 – Art
period stipulated, or after the
1952):
accomplishment of its use
1. To respect the duration of the loan
b. when he lends or leases it to
GENERAL RULE: Allow the bailee
third persons who are not
the use of the thing loaned for the
members of his household
duration of the period stipulated or
c. when the thing loaned has been
until the accomplishment of the
delivered with appraisal of its
purpose for which the commodatum
value
was instituted.
d. when, being able to save either
EXCEPTIONS:
of the thing borrowed or his own
a. In case of urgent need in
things, he chose to save the
which case bailee may demand
latter; or
its return or temporary use;
e. when the bailee devoted the
b. The bailor may demand
thing for any purpose different
immediate return of the thing if
from that for which it has been
the bailee commits any act of
loaned (Art 1942)
ingratitude specified in Art. 765.
3. To be liable for the deterioration of
thing loaned (a) if expressly
2. To refund to the bailee
stipulated; (b) if guilty of fault or
extraordinary expenses for the
negligence; or (c) if he devotes the
preservation of the thing loaned,
thing to any purpose different from
provided the bailee brings the same
that for which it has been loaned
to the knowledge of the bailor
4. To pay for extraordinary expenses
before incurring them, except when
arising from the actual use of the
they are so urgent that the reply to
thing by the bailee, which shall be
CIVIL LAW COMMITTEE
Gayon
Rhodora
John Stephen
Purganan(LTD),
185
the notification cannot be awaited the thing loaned is the distinguishing

without danger. character of the contract of mutuum
from that of commodatum.
3. To be liable to the bailee for  No estafa is committed by a person
damages for known hidden flaws. who refuses to pay his debt or denies
 Requisites: its existence.
a. There is flaw or defect in the
thing loaned; Simple Loan/Mutuum Rent
b. The flaw or defect is hidden;
c. The bailor is aware thereof; 1. Delivery of money Delivery of some non-
d. He does not advise the bailee of or some consumable consumable thing in
the same; and thing with a promise order that the other
e. The bailee suffers damages by to pay an equivalent may use it during a
reason of said flaw or defect of the same kind and certain period and
quality return it to the
former.
2. There is a transfer There is no transfer

of ownership of the of ownership of the
NOTES: thing delivered thing delivered
Article I. If the above requisites
concur, the bailee has the right of
retention for damages. 3. Relationship Relationship is that
 The bailor cannot exempt between the parties of a landlord and
is that of obligor- tenant
himself from the payment of obligee
expenses or damages by
abandoning the thing to the 4. Creditor receives Owner of the
bailee. payment for his loan property rented
receives
SIMPLE LOAN OR MUTUUM (Art 1953 – compensation or
1961) price either in
 A contract whereby one party money, provisions,
delivers to another, money or other chattels, or labor
consumable thing with the
from the occupant
understanding that the same amount thereof in return for
of the same kind and quality shall be its use (Tolentino vs
paid. (Art. 1953) Gonzales, 50 Phil 558
1927)
NOTES:
 The mere issuance of the checks Loan Sale
does not result in the perfection of
the contract of loan. The Civil Code 1. Real contract Consensual contract
provides that the delivery of bills of
exchange and mercantile 2. Generally Bilateral and
unilateral because reciprocal
documents, such as checks, shall
only borrower has
produce the effect of payment only obligations
when they have been encashed
(Gerales vs. CA 218 SCRA 638). It is NOTE: If the property is “sold”, but the
only after the checks have produced real intent is only to give the object as
the effect of payment that the security for a debt – as when the “price”
contract of loan may be deemed is comparatively small – there really is a
perfected. contract of loan with an “equitable
 The obligation is “to pay” and not to mortgage.”
return because the consumption of
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Rhodora
John Stephen
Purganan(LTD),
186
b. interest accruing from

Commodatum/ unpaid interest
Barter
Mutuum 2. must be lawful
3. must be in writing
1. Subject matter is Subject matter is
money or fungible non-fungible, (non Compound Interest
things consumable) things GENERAL RULE: Unpaid interest shall
not earn interest.
2. In commodatum, The thing with
EXCEPTIONS:
the bailee is bound equivalent value is
to return the given in return for 1. when judicially demanded
identical thing what has been 2. when there is an express
borrowed when the received stipulation (must be in writing in
time has expired or view of Art. 1956)
purpose served
Guidelines for the application of
3. Mutuum may be Onerous, actually a proper interest rates
gratuitous and mutual sale 1. If there is stipulation: that rate shall
commodatum is
be applied
always gratuitous
2. The following are the rules of thumb
for the application/imposition of
interest rates:
a) When an obligation, regardless
of its source, i.e., law,
contracts, quasi-contracts,
 Form of Payment (Art 1955):
delicts or quasi-delicts is
1. If the thing loaned is money -
breached, the contravenor can
payment must be made in the
be held liable for damages.
currency stipulated, if it is possible;
b) With regard particularly to an
otherwise it is payable in the
award of interest in the concept
currency which is legal tender in the
of actual and compensatory
Philippines and in case of
damages, the rate of interest, as
extraordinary inflation or deflation,
well as the accrual thereof, is
the basisi of payment shall be the
imposed, as follows:
value of the currency at the time of
i. When the obligation
the creation of the obligation
breached consists of
2. If what was loaned is a fungible
payment of a sum of money
thing other than money - the
(loan or forbearance of
borrower is under obligation to pay
money), the interest shall be
the lender another thing of the same
that which is stipulated or
kind, quality and quantity. In case it
agreed upon by the parties.
is impossible to do so, the borrower
In absence of an agreement,
shall pay its value at the time of the
the rate shall be the legal
perfection of the loan.
rate (i.e. 12% per annum)
computed from default.
Interest
NOTE: The interest due shall
 The compensation allowed by law or
itself earn legal interest
fixed by the parties for the loan or
from the time it is judicially
forbearance of money, goods or
demanded
credits
ii. In other cases, the rate of
 Requisites for Demandability: (ELI)
interest shall be six percent
1. must be expressly stipulated
(6%) per annum.
Exceptions:
NOTE: No interest, however,
a. indemnity for damages
shall be adjudged on
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Rhodora
John Stephen
Purganan(LTD),
187
unliquidated claims or interest and the rate will just depend on

damages except when or the mutual agreement of the parties
until the demand can be (citing Lim Law vs. Olympic Sawmill Co.,
established with reasonable 129 SCRA 439). But the Supreme Court
certainty. When the demand said that nothing in said circular grants
cannot be established, the lenders carta blanche authority to raise
interest shall begin to run interest rates to level which will either
only from the date of the enslave their borrowers or lead to a
judgment of the court is hemorrhaging of their assets (citing
made. Almeda vs. CA, 256 SCRS 292). In Medel
iii. When the judgment of the vs. CA, 299 SCRA 481, it was ruled that
court awarding a sum of while stipulated interest of 5.5% per
money becomes final and month on a loan is usurious pursuant to
executory, the rate of legal CB Circular No. 905, the same must be
interest, whether the case equitably reduced for being iniquitous,
falls under paragraph i or ii unconscionable and exorbitant. It is
above, shall be 12% per contrary to morals, (contra bonos
annum from such finality mores). It was reduced to 12% per
until its satisfaction, this annum in consonant with justice and fair
interim period being deemed play.
to be by then an equivalent
to a forbearance of credit. DEPOSIT (Articles 1962 – 2009)
(Eastern Shipping Lines vs.
CA, July 12, 1994)  A contract constituted from the
moment a person receives a thing
NOTES: belonging to another, with the
 Central Bank Circular No. 416 fixing obligation of safely keeping it and of
the rate of interest at 12% per returning the same.
annum deals with loans, forbearance
of any money, goods or credits and Characteristics:
judgments involving such loans, or 1. Real Contract - contract is
forbearance in the absence of perfected by the delivery of the
express agreement to such rate subject matter.
 Interest as indemnity for damages is 2. Unilateral (gratutitous deposit) -
payable only in case of default or only the depositary has an
non-performance of the contract. As obligation.
they are distinct claims, they may be 3. Bilateral (onerous deposit) -
demanded separately. (Sentinel gives rise to obligations on the
Insurance Co., Inc. vs CA, 182 SCRA part of both the depositary and
517) depositor.
 Central Bank Circular No. 905 (Dec.
10, 1982) removed the Usury Law Deposit Mutuum
1. Purpose
ceiling on interest rates for secured
Principal purpose is Principal purpose is
and unsecured loans, regardless of safekeeping or consumption
maturity. custody
2. When to Return
Validity of unconscionable interest rate Depositor can The lender must wait
in a loan demand the return of until the expiration
Supreme Court in Sps. Solangon the subject matter at of the period granted
vs. Jose Salazar, G.R. No. 125944, June will to the debtor
29, 2001, said that since the usury law 3. Subject Matter
had been repealed by CB Cir. No. 905 Subject matter may Subject matter is
there is no more maximum rate of be movable or only money or other
CIVIL LAW COMMITTEE

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Rhodora
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Purganan(LTD),
188
immovable property fungible thing Judicial Extra-judicial

4. Relationship 1. Creation
Relationship is that Relationship is that Will of the court Will of the parties
of lender (creditor) of depositor and or contract
and borrower depositary.
2. Purpose
(debtor).
Security or to insure Custody and
the right of a party safekeeping
5. Compensation
to property or to
There can be NO compensation of
recover in case of
compensation of things deposited with
favorable judgment
credits. each other (except
by mutual 3. Subject Matter
agreement). Movables or Movables only
immovables,
Deposit Commodatum but generally
immovables
1. Purpose is 1. Purpose is the 4. Cause
Safekeeping transfer of the use Always onerous May be compen-
sated or not, but
2. May be gratuitous 2. Essentially and generally gratuitous
always gratuitous
3. Movable/corporeal 3. Both movable and 5. When must the thing be returned

things only in case of immovable may be Upon order of the Upon demand of
extrajudicial deposit the object court or when depositor
litigation is ended
 Kinds of Deposit: 6. In whose behalf it is held
1. Judicial (Sequestration) –takes place Person who has a Depositor or third
when an attachment or seizure of right person designated
property in litigation is ordered.
GENERAL RULE: Contract of deposit is
2. Extra-judicial gratuitous (Art 1965)
a. Voluntary – one wherein the EXCEPTIONS:
delivery is made by the will of 1. when there is contrary
the depositor or by two or more stipulation
persons each of whom believes 2. depositary is engaged in business
himself entitled to the thing of storing goods
deposited. (Arts 1968 – 1995) 3. property saved from destruction
b. Necessary – one made in without knowledge of the owner
compliance with a legal
obligation, or on the occasion of NOTES:
any calamity, or by travellers in  Article 1966 does not embrace
hotels and inns (Arts 1996 - incorporeal property, such as rights
2004), or by travellers with and actions, for it follows the person
common carriers (Art 1734 – of the owner, wherever he goes.
1735).
 A contract for the rent of safety
NOTE: The chief difference
deposit boxes is not an ordinary
between a voluntary deposit and a
contract of lease of things but a
necessary deposit is that in the
special kind of deposit; hence, it is
former, the depositor has a
not to be strictly governed by the
complete freedom in choosing the
provisions on deposit. The relation
depositary, whereas in the latter,
between a bank and its customer is
there is lack of free choice in the
that of a bailor and bailee. (CA Agro
depositor.
vs CA, 219 SCRA 426)
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Obligations of the Depositary (Art 1972 b. If deposit gratuitous, the

–1991): depositary may return the thing
1. To keep the thing safely (Art 1972) deposited notwithstanding that a
 Exercise over the thing period has been fixed for the
deposited the same diligence as deposit if justifiable reasons
he would exercise over his exists for its return.
property c. If the deposit is for a
2. To return the thing (Art 1972) valuable consideration, the
 Person to whom the thing must depositary has no right to return
be returned: the thing deposited before the
a. Depositor, to his heirs and expiration of the time
successors, or the person who designated even if he should
may have been designated in the suffer inconvenience as a
contract consequence.(Art 1989)
b. If the depositary is capacitated -
he is subject to all the  What to return: product,
obligations of a depositary accessories, and accessions of
whether or not the depositor is the thing deposited (Art 1983)
capacitated. If the depositor is 3. Not to deposit the thing with a third
incapacitated, the depositary person unless authorized by express
must return the property to the stipulation (Art 1973)
legal representative of the  The depositor is liable for the
incapacitated or to the depositor loss of the thing deposited under
himself if he should acquire Article 1973 if:
capacity (Art 1970). a. he
c. If the depositor is capacitated transfers the deposit with a third
and the depositary is person without authority
incapacitated - the latter does although there is no negligence
not incur the obligation of a on his part and the third person;
depositary but he is liable: b. he
i..to return the thing deposits the thing with a third
deposited while still in his person who is manifestly
possession; careless or unfit although
ii.to pay the depositor the authorized even in the absence
amount which he may have of negligence; or
benefited himself with the c. the thing
thing or its price subject to is lost through the negligence of
the right of any third person his employees whether the latter
who acquired the thing in are manifestly careless or not.
good faith (Art 1971) 4. If the thing deposited should earn
interest (Art 1975):
 Time of return: a. to collect interest and the
a. Upon demand even though a capital itself as it fall due
specified period or time for such b. to take steps to preserve its
return may have been fixed value and rights corresponding to
except when the thing is it
judicially attached while in the 5. Not to commingle things deposited if
depositary’s possession or should so stipulated (Art 1976)
he have been notified of the 6. Not to make use of the thing
opposition of a third person to deposited unless authorized (Art
the return or the removal of the 1977)
thing deposited. (Art 1998) GENERAL RULE: Deposit is for
safekeeping of the subject matter
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Rhodora
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190
and not for use. The unauthorized delivered to him or the

use by the depositary would make instructions of the depositor
him liable for damages. cannot be done without
EXCEPTIONS: opening it)
1. When the preservation of the ii. necessity
thing deposited requires its use 8. To change the way of the deposit if
2. When authorized by the under the circumstances, the
depositor depositary may reasonably presume
that the depositor would consent to
NOTE: The permission to use is NOT the change if he knew of the facts of
presumed except when such use is the situation, provided, that the
necessary for the preservation of the former notifies the depositor thereof
thing deposited. and wait for his decision, unless
delay would cause danger
Effect if permission to use is given 9. To pay interest on sums converted to
(Art 1978): personal use if the deposit consists
1. If thing deposited is of money (Art 1983)
non-consumable, the contract 10. To be liable for loss through
loses the character of a deposit fortuitous event (SUDA): (Art 1979):
and acquires that of a a. if stipulated
commodatum despite the fact b. if he uses the thing without the
that the parties may have depositor's permission
denominated it as a deposit, c. if he delays its return
unless safekeeping is still the d. if he allows others to use it,
principal purpose. even though he himself may
2. If thing deposited consists of have been authorized to use the
money/consumable things, the same
contract is converted into a
simple loan or mutuum unless NOTES:
safekeeping is still the principal  Fixed, savings, and current deposits
purpose in which case it is called of money in banks and similar
an irregular deposit. Example: institutions shall be governed by the
bank deposits are irregular provisions concerning simple loan.
deposits in nature but governed (Art 1980)
by law on loans.  The general rule is that a bank can
7. When the thing deposited is compensate or set off the deposit in
delivered sealed and closed : its hands for the payment of any
a. to return the thing deposited in indebtedness to it on the part of the
the same condition depositor. In true deposit,
b. to pay for damages should the compensation is not allowed.
seal or lock be broken through
his fault, which is presumed Irregular deposit Mutuum
unless proved otherwise
c. to keep the secret of the deposit 1. The consumable 1. Lender is bound
when the seal or lock is broken thing deposited may by the provisions of
with or without his fault (Art be demanded at will the contract and
1981) by the depositor cannot demand
NOTE: The depositary is restitution until the
authorized to open the thing time for payment, as
provided in the
deposited which is closed and
contract, has arisen
sealed when (Art 1982):
i. there is presumed authority 2. The only benefit is 2. Essential cause for
(i.e. when the key has been that which accrues the transaction is the
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Rhodora
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Purganan(LTD),
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to the depositor necessity of the a. If the deposit is gratuitous, the

borrower depositor is obliged to
reimburse the depositary for
3. The irregular 3. Common creditors expenses incurred for the
depositor has a enjoy no preference preservation of the thing
preference over in the distribution of
other creditors with the debtor’s
deposited (Art 1992)
respect to the thing property b. If the deposit is for valuable
deposited consideration, expenses for
preservation are borne by the
depositary unless there is a
Rule when there are two or more contrary stipulation
depositors (Art 1985): 2. To pay loses incurred by the
1. If thing deposited is divisible and depositary due to the character of
depositors are not solidary: Each the thing deposited
depositor can demand only his
proportionate share thereto. GENERAL RULE: The depositor shall
2. If obligation is solidary or if thing is reimburse the depositary for any loss
not divisible: Rules on active arising from the character of the thing
solidarity shall apply, i.e. each one deposited.
of the solidary depositors may do EXCEPTIONS:
whatever may be useful to the 1. at the time of the deposit, the
others but not anything which may depositor was not aware of the
be prejudicial to the latter, (Art. dangerous character of the thing
1212) and the depositary may return 2. when depositor was not expected
the thing to anyone of the solidary to know the dangerous character
depositors unless a demand, judicial of the thing
or extrajudicial, for its return has 3. when the depositor notified the
been made by one of them in which depository of the same
case, delivery should be made to him 4. the depositary was aware of it
(Art. 1214). without advice from the depositor
3. Return to one of depositors
stipulated. The depositary is bound Extinguishment of Voluntary Deposit
to return it only to the person (Art 1995)
designated although he has not made 1. Loss or destruction of the thing
any demand for its return. deposited
2. In case of gratuitous deposit, upon
NOTES: the death of either the depositor or
 The depositary may retain the thing the depositary
in pledge until full payment of what 3. Other causes, such as return of the
may be due him by reason of the thing, novation, merger, expiration
deposit (Art 1994). of the term fulfilment of the
resolutory condition, etc (Art 1231)
 The depositor’s heir who in good
faith may have sold the thing which
Necessary Deposits
he did not know was deposited, shall
1. Made in compliance with a legal
only be bound to return the price he
obligation
may have received or to assign his
2. Made on the occasion of any
right of action against the buyer in
calamity such as fire, storm, flood,
case the price has not been paid him
pillage, shipwreck or other similar
(Art 1991).
events (deposito miserable)
3. Made by travellers in hotels and inns
Obligations of the Depositor (Art 1992 –
or by travellers with common carrier
1995):
1. To pay expenses for preservation
CIVIL LAW COMMITTEE
Gayon
Rhodora
John Stephen
Purganan(LTD),
192
b. Real - the guaranty is the

property, movable or
immovable.
Deposit by Travellers in hotels and
inns:
 The keepers of hotels or inns shall be
responsible as depositaries for the
deposit of effects made by travellers 2. As to its Origin
provided: a. Conventional - agreed upon by
a. Notice was given to them or to the parties.
their employees of the effects b. Legal - one imposed by virtue of
brought by the guest; and a provision of a law.
b. The guests take the precautions c. Judicial - one which is required
which said hotel-keepers or their by a court to guarantee the
substitutes advised relative to eventual right of one of the
the care and vigilance of their parties in a case.
effects. 3. As to Consideration
NOTES: a. Gratuitous - the guarantor does
 Liability extends to vehicles, animals not receive any price or
and articles which have been remuneration for acting as such.
introduced or placed in the annexes b. Onerous - the guarantor receives
of the hotel. valuable consideration.
 Liability shall EXCLUDE losses which 4. As to the Person guaranteed
proceed from force majeure. The act a. Single - one constituted solely to
of a thief or robber is not deemed guarantee or secure
force majeure unless done with the performance by the debtor of
use of arms or irresistible force. the principal obligation.
 The hotel-keeper cannot free b. Double or sub-guaranty - one
constituted to secure the
himself from the responsibility by
fulfilment by the guarantor of a
posting notices to the effect that he
prior guaranty.
is not liable for the articles brought
5. As to Scope and Extent
by the guest. Any stipulation to such
a. Definite - the guaranty is limited
effect shall be void.
to the principal obligation only,
 Notice is necessary only for suing or to a specific portion thereof.
civil liability but not in criminal b. Indefinite or simple - one which
liability. not only includes the principal
obligation but also all its
GUARANTY (Articles 2047 – 2084) accessories including judicial
costs
 A contract whereby a person
(guarantor) binds himself to the SURETYSHIP
creditor to fulfil the obligation of
the principal debtor in case the  A contract whereby a person (surety)
latter fail to do so. binds himself solidarily with the
principal debtor
 Classification of Guaranty:  A relation which exists where one
1. In the Broad sense: person (principal) has undertaken an
a. Personal - the guaranty is the obligation and another person
credit given by the person who (surety) is also under a direct and
guarantees the fulfilment of the primary obligation or other duty to
principal obligation. the obligee, who is entitled to but
one performance, and as between
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Purganan(LTD),
193
the two who are bound, the second proceed against any one of
rather than the first should perform them.
(Agro Conglomerates, Inc. vs. CA,  In the absence of collusion, the
348 SCRA 450) surety is bound by a judgment
NOTES: against the principal even
 The reference in Article 2047 to though he was not a party to the
solidary obligations does not mean proceedings. The nature of its
that suretyship is withdrawn from undertaking makes it privy to all
the applicable provisions governing proceedings against its principal
guaranty. A surety is almost the (Finman General Assurance
same as a solidary debtor, except Corp. vs. Salik, 188 SCRA 740)
that he himself is a principal debtor.
 In suretyship, there is but one 4. Surety is not entitled to the benefit
contract, and the surety is bound by of exhaustion
the same agreement which binds the NOTE: He assumes a solidary liability
principal. A surety is usually bound for the fulfilment of the principal
with the principal by the same obligation (Towers Assurance Corp
instrument, executed at the same vs. Ororama Supermart, 80 SCRA
time and upon the same 262) as an original promissory and
consideration (Palmares vs CA, 288 debtor from the beginning.
SCRA 422) 5. Undertaking is to creditor and not
 It is not for the obligee to see to it to debtor.
that the principal debtor pays the NOTE: The surety makes no
debt or fulfill the contract, but for covenant or agreement with the
the surety to see to it that the principal that it will fulfil the
principal debtor pays or performs obligation guaranteed for the benefit
(Paramount Insurance Corp vs CA, of the principal. Such a promise is
310 SCRA 377) not implied by law either; and this is
true even where under the contract
Nature of Surety’s undertaking: the creditor is given the right to sue
1. Liability is contractual and the principal, or the latter and the
accessory but direct surety at the same time. (Arranz vs.
NOTE: He directly, primarily and Manila Fidelity & Surety Co., Inc.,
equally binds himself with the 101 Phil. 272)
principal as original promisor, 6. Surety is not entitled to notice of
although he possesses no direct or principal’s default
personal interest over the latter’s NOTE: The creditor owes no duty of
obligation, nor does he receive any active diligence to take care of the
benefits therefrom. (PNB vs CA, 198 interest of the surety and the surety
SCRA 767) is bound to take notice of the
2. Liability limited by the terms of the principal’s default and to perform
contract. the obligation. He cannot complain
NOTE: It cannot be extended by that the creditor has not notified
implication beyond the terms of the him in the absence of a special
contract (PNB vs CA, 198 SCRA 767) agreement to that effect. (Palmares
3. Liability arises only if principal vs CA, 288 SCRA 422)
debtor is held liable. 7. Prior demand by the creditor upon
NOTES: principal is not required
 The creditor may sue separately NOTE: As soon as the principal is in
default, the surety likewise is in
or together the principal debtor
default.
and the surety. Where there are
8. Surety is not exonerated by neglect
several sureties, the obligee may
of creditor to sue principal
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 Acceptance of guaranty by
Characteristics of Guaranty and creditor and notice thereof to
Suretyship: guarantor:
1. Accessory - It is indispensable  In declaring that guaranty
condition for its existence that there must be express, the law
must be a principal obligation. refers solely and exclusively
NOTES: to the obligation of the
 Guaranty may be constituted to guarantor because it is he
guarantee the performance of a alone who binds himself by
voidable or unenforceable his acceptance. With respect
contract. It may also guarantee to the creditor, no such
a natural obligation. (Art 2052) requirement is needed
 The guarantor cannot bind because he binds himself to
himself for more than the nothing.
principal debtor and even if he  However, when there is
does, his liability shall be merely an offer of a
reduced to the limits of that of guaranty, or merely a
the debtor. conditional guaranty, in the
2. Subsidiary and Conditional - takes sense that it requires action
effect only in case the principal by the creditor before the
debtor fails in his obligation. obligation becomes fixed, it
does not become binding
NOTES: until it is accepted and until
 The guarantor cannot bind notice of such acceptance by
himself for more than the the creditor is given to, or
principal debtor and even if he acquired by, the guarantor,
does, his liability shall be or until he has notice or
reduced to the limits of that of knowledge that the creditor
the debtor. But a guarantor may has performed the condition
bind himself for less than that of and intends to act upon the
the principal (Art 2054) guaranty.
 A guaranty may be given as  But in any case, the creditor
security for future debts, the is not precluded from
amount of which is not yet waiving the requirement of
known; there can be no claim notice.
against the guarantor until the  The consideration of the
debt is liquidated. A conditional guaranty is the same as the
obligation may also be secured. consideration of the principal
(Art 2053) obligation.
3. Unilateral - may be entered even  The creditor may proceed
w/o the intervention of the principal against the guarantor although
debtor, in which case Art. 1236 and he has no right of action against
1237 shall apply and it gives rise only the principal debtor.
to a duty on the part of the 7. Not presumed. It must be expressed
guarantor in relation to the creditor and reduced in writing.
and not vice versa. NOTE: A power of attorney to loan
4. Nominate money does not authorize the agent
5. Consensual to make the principal liable as a
6. It is a contract between the surety for the payment of the debt
guarantor/surety and creditor. of a third person. (BPI vs. Coster, 47
Phil. 594)
NOTES:
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195
8. Falls under the Statute of Frauds

since it is a “special promise to 4. Guarantor binds 4. Surety undertakes
answer for the debt, default or himself to pay if to pay if the principal
miscarriage of another”. the principal DOES NOT PAY
CANNOT PAY
9. Strictly interpreted against the
creditor and in favor of the
5. Insurer of 5. Insurer of the
guarantor/surety and is not to be solvency of debtor debt
extended beyond its terms or
specified limits. (Magdalena Estates, 6. Guarantor can 6. Surety cannot
Inc. vs Rodriguez, 18 SCRA 967) The avail of the benefit avail of the benefit of
rule of strictissimi juris commonly of excussion and excussion and division
pertains to an accommodation surety division in case
because the latter acts without creditor proceeds
motive of pecuniary gain and hence, against him
should be protected against unjust
pecuniary impoverishment by Indorsement Guaranty
imposing on the principal, duties
akin to those of a fiduciary. 1. Primarily of 1. Contract of
transfer security
NOTES: 2. Unless the note is 2. Failure in either or
 The rule will apply only after it promptly presented both of these
has been definitely ascertained for payment at particulars does not
that the contract is one of maturity and due generally work as an
suretyship or guaranty. It cannot notice of dishonor absolute discharge of
be used as an aid in determining given to the indorser a guarantor’s
whether a party’s undertaking is within a reasonable liability, but his is
time he will be discharged only to
that of a surety or guarantor.
discharged abso- the extent of the loss
(Palmares vs CA, 288 SCRA 292) lutely from all which he may have
 It does not apply in case of liability thereon, suffered in
compensated sureties. whether he has consequence thereof
10. It is a contract which requires that suffered any actual
the guarantor must be a person damage or not
distinct form the debtor because a
person cannot be the personal 3. Indorser does not 3. Guarantor
warrant the solvency. warrants the solvency
guarantor of himself.
He is answerable on a of the promisor
NOTE: However, in a real guaranty, strict compliance
like pledge and mortgage, a person with the law by the
may guarantee his own obligation holder, whether the
with his personal or real properties. promisor is solvent or
not
Guaranty Suretyship
4. Indorser can be 4. Guarantor cannot be
1. Liability depends 1. Surety assumes sued as promisor sued as promisor
upon an independent liability as regular
agreement to pay the party to the Guaranty Warranty
obligation if primary undertaking
debtor fails to do so
2. Collateral under- 2. Surety is an

taking original promisor
3. Guarantor is 3. Surety is
secondarily liable primarily liable
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A contract by which a An undertaking that  Construed as continuing when by the

person is bound to the title, quality, or terms thereof it is evident that the
another for the quantity of the object is to give a standing credit to
fulfilment of a subject matter of the
the principal debtor to be used from
promise or contract is what it
engagement of a has been represented time to time either indefinitely or
third party to be, and relates to until a certain period, especially if
some agreement the right to recall the guaranty is
made ordinarily by expressly reserved (Diño vs CA, 216
the party who makes SCRA 9)
the warranty  “Future debts” may also refer to
debts existing at the time of the
NOTES: constitution of the guaranty but the
 A guaranty is gratuitous, unless there amount thereof is unknown and not
is a stipulation to the contrary. The to debts not yet incurred and
cause of the contract is the same existing at that time.
cause which supports the obligation  Exception to the concept of
as to the principal debtor. continuing guaranty is chattel
 The peculiar nature of a guaranty or mortgage. A chattel mortgage can
surety agreement is that is is only cover obligations existing at the
regarded as valid despite the time the mortgage is constituted and
absence of any direct consideration not those contracted subsequent to
received by the guarantor or surety the execution thereof (The Belgian
either from the principal debtor or Catholic Missionaries, Inc. vs.
from the creditor; a consideration Magallanes Press, Inc., 49 Phil 647).
moving to the principal alone will An exception to this is in case of
suffice. stocks in department stores, drug
 It is never necessary that the stores, etc. (Torres vs. Limjap, 56
guarantor or surety should receive Phil 141).
any part or benefit, if such there be,
accruing to the principal. (Willex Extent of Guarantor’s liability: (Art
Plastic Industries Corp. vs. CA, 256 2055)
SCRA 478) 1. Where the guaranty definite: It is
limited in whole or in part to the
principal debt, to the exclusion of
accessories.
2. Where guaranty indefinite or simple:
Double or sub-guaranty (Art 2051 2nd It shall comprise not only the
par) principal obligation, but also all its
 One constituted to guarantee the accessories, including the judicial
obligation of a guarantor costs, provided with respect to the
latter, that the guarantor shall only
Continuing guaranty (Art 2053) be liable for those costs incurred
 One which is not limited to a single after he has been judicially required
transaction but which contemplates to pay.
a future course of dealings, covering
a series of transactions generally for Qualifications of a guarantor: (Arts
an indefinite time or until revoked. 2056-2057)
1. possesses integrity
NOTES: 2. capacity to bind himself
 Prospective in operation (Diño vs CA, 3. has sufficient property to answer
216 SCRA 9) for the obligation which he
guarantees
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NOTES: 5. If he has bound himself solidarily

 The qualifications need only be with the debtor
present at the time of the perfection
of the contract. Other grounds: (BIPS)
 The subsequent loss of the integrity 6. If he is a judicial bondsman or sub-
or property or supervening surety
incapacity of the guarantor would 7. If he fails to interpose it as a
not operate to exonerate the defense before judgment is rendered
guarantor or the eventual liability he against him
has contracted, and the contract of 8. If the guarantor does not set up the
guaranty continues. benefit against the creditor upon the
 However, the creditor may demand latter’s demand for payment from
him, and point out to the creditor
another guarantor with the proper
available property to the debtor
qualifications. But he may waive it if
within Philippine territory, sufficient
he chooses and hold the guarantor to
to cover the amount of the debt (Art
his bargain.
2060)
Benefit of Excussion (Art 2058)  Demand can be made only after
 The right by which the guarantor judgment on the debt
cannot be compelled to pay the  Demand must be actual; joining
creditor unless the latter has the guarantor in the suit against
exhausted all the properties of the the principal debtor is not the
principal debtor, and has resorted to demand intended by law
all of the legal remedies against such 9. Where the pledge or mortgage has
debtor. been given by him as special security
NOTE: Benefit of Division (Art 2065)

 Not applicable to a contract of  Should there be several guarantors
suretyship (Arts 2047, par. 2; of only one debtor and for the same
2059[2]) debt, the obligation to answer for
 Cannot even begin to take place the same is divided among all.
 Liability: Joint
before judgment has been obtained
against the debtor (Baylon vs CA,
NOTES:
312 SCRA 502)
 The creditor can claim from the
When Guarantor is not entitled to the guarantors only the shares they are
benefit of excussion: (PAIRS) respectively bound to pay except
1. If it may be presumed that an when solidarity is stipulated or if
execution on the property of the any of the circumstances
principal debtor would not result in enumerated in Article 2059 should
the satisfaction of the obligation take place.
 Not necessary that the debtor be  The right of contribution of
judicially declared insolvent or guarantors who pays requires that
bankrupt the payment must have been made
2. When he has absconded, or cannot (a) in virtue of a judicial demand, or
be sued within the Philippines unless (b) because the principal debtor is
he has left a manager or insolvent (Art 2073).
representative  If any of the guarantors should be
3. In case of insolvency of the debtor insolvent, his share shall be borne by
 Must be actual the others including the paying
4. If the guarantor has expressly guarantor in the same joint
renounced it
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John Stephen
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198
proportion following the rule in in the case involving his principal

solidary obligations. (procedural due process).
 The above rule shall not be
applicable unless the payment has Guarantor’s Right of Indemnity or
been made in virtue of a judicial Reimbursement (Art 2066)
demand or unless the principal GENERAL RULE: Guaranty is a contract
debtor is insolvent. of indemnity. The guarantor who makes
 The right to contribution or payment is entitled to be reimbursed by
reimbursement from his co- the principal debtor.
guarantors is acquired ipso jure by
virtue of said payment without the NOTE: The indemnity consists of: (DIED)
need of obtaining from the creditor 1. Total amount of the debt – no
any prior cession of rights to such right to demand reimbursement
guarantor. until he has actually paid the
 The co-guarantors may set up debt, unless by the terms of the
contract, he is given the right
against the one who paid, the same
before making payment. He
defenses which have pertained to
cannot collect more than what
the principal debtor against the
he has paid.
creditor and which are not purely
2. Legal interest thereon from the
personal to the debtor. (Art 2074)
time the payment was made
known (notice of payment in
Procedure when creditor sues: (Art.
effect a demand so that if the
2062)
debtor does not pay
 The creditor must sue the principal
immediately, he incurs in delay)
alone; the guarantor cannot be sued
to the debtor, even though it did
with his principal, much less alone
not earn interest for the
except in Art. 2059.
creditor. Guarantor’s right to
legal interest is granted by law
1. Notice to guarantor of the action
by virtue of the payment he has
 The guarantor must be NOTIFIED made.
so that he may appear, if he so 3. Expenses incurred by the
desires, and set up defenses he guarantor after having notified
may want to offer. the debtor that payment has
 If the guarantor appears, he is been demanded of him by the
still given the benefit of creditor; only those expenses
exhaustion even if judgment that the guarantor has to satisfy
should be rendered against him in accordance with law as a
and principal debtor. His consequence of the guaranty
voluntary appearance does not (Art. 2055) not those which
constitute a renunciation of his depend upon his will or own acts
right to excussion (see Art. or his fault for these are his
2059(1)). exclusive personal responsibility
 Guarantor cannot set up the and it is not just that they be
defenses if he does not appear shouldered by the debtor.
and it may no longer be possible 4. Damages if they are due in
for him to question the validity accordance
of the judgment rendered with law. General rules on
against the debtor. damages apply.
2. A guarantor is entitled to be heard
before and execution can be issued EXCEPTIONS:
against him where he is not a party 1. Where the guaranty is
constituted without the
CIVIL LAW COMMITTEE
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Rhodora
John Stephen
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199
knowledge or against the will of 1. Without notice to debtor: (Art

the principal debtor, the 2068)
guarantor can recover only  The debtor may interpose
insofar as the payment had been against the guarantor those
beneficial to the debtor (Art. defenses which he could have
2050). set up against the creditor at the
2. Payment by a third person who time the payment was made,
does not intend to be reimbursed e.g. the debtor can set up
by the debtor is deemed to be a against the guarantor the
donation, which, however, defense of previous
requires the debtor’s consent. extinguishment of the obligation
But the payment is in any case by payment.
valid as to the creditor who has
accepted it (Art. 1238). 2. Before Maturity (Art 2069)
3. Waiver of the right to demand  Not entitled to reimbursement
reimbursement. unless the payment was made
with the consent or has been
Guarantor’s right to Subrogation ratified by the debtor
(ART.2067)
 Subrogation transfers to the person Effect of Repeat Payment by debtor:
subrogated, the credit with all the (Art 2070)
rights thereto appertaining either GENERAL RULE: Before guarantor pays
against the debtor or against third the creditor, he must first notify the
persons, be they guarantors or debtor (Art. 2068). If he fails to give
possessors of mortgages, subject to such notice and the debtor repeats
stipulation in conventional payment, the guarantor can only collect
subrogation. from the creditor and guarantor has no
cause of action against the debtor for
NOTE: This right of subrogation is the return of the amount paid by
necessary to enable the guarantor to guarantor even if the creditor should
enforce the indemnity given in Art. become insolvent.
2066.
 It arises by operation of law upon EXCEPTION: The guarantor can still
payment by the guarantor. It is not claim reimbursement from the debtor in
necessary that the creditor cede to spite of lack of notice if the following
the guarantor the former’s rights conditions are present: (PIG)
against the debtor. a. guarantor was prevented by
 It is not a contractual right. The fortuitous event to advise the
right of guarantor who has paid a debtor of the payment; and
debt to subrogation does not stand b. the creditor becomes insolvent;
upon contract but upon the c. the guaranty is gratuitous.
principles of natural justice.
 The guarantor is subrogated by Right of Guarantor to proceed against
virtue of the payment to the rights debtor before payment
of the creditor, not those of the GENERAL RULE: Guarantor has no
debtor. cause of action against debtor until after
 Guarantor cannot exercise the the former has paid the obligation
right of redemption of his EXCEPTION: Article 2071
principal (Urrutia & Co vs
Morena and Reyes, 28 Phil 261) NOTES:
 Article 2071 is applicable and
Effect of Payment by Guarantor available to the surety. (Manila
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Surety & Fidelity Co., Inc. vs Batu Bondsman (Art 2082)

Construction & Co., 101 Phil 494)  A surety offered in virtue of a
 Remedy of guarantor: provision of law or a judicial order.
(a) obtain release from the He must have the qualifications
guaranty; or required of a guarantor and in
(b) demand a security that shall special laws like the Rules of Court.
protect him from any
proceedings by the creditor, and NOTES:
against the danger of insolvency  Judicial bonds constitute merely a
of the debtor special class of contracts of guaranty
by the fact that they are given “in
Art. 2066 Art. 2071 virtue… of a judicial order.”
Provides for the Provides for his  If the person required to give a legal
enforcement of the protection before he or judicial bond should not be able
rights of the has paid but after he to do so, a pledge or mortgage
guarantor/surety has become liable
sufficient to cover the obligation
against the debtor
after he has paid the shall admitted in lieu thereof (Art
debt 2083)
Gives a right of Protective remedy  A judicial bondsman and the sub-
action after payment before payment. surety are NOT entitled to the
Substantive right Preliminary remedy benefit of excussion because they
are not mere guarantors, but
Extinguishment of guaranty: (RA2CE2) sureties whose liability is primary
1. Release in favor of one of the and solidary. (Art 2084)
guarantors, without the consent of
the others, benefits all to the extent PLEDGE, MORTGAGE AND ANTICHRESIS
of the share of the guarantor to I. Common Elements of Pledge,
whom it has been granted (Art Mortgage, and Antichresis (Articles
2078); 2085 – 2092)
2. If the creditor voluntarily accepts
immovable or other properties in A. Essential Requisites (SOD) (Art
payment of the debt, even if he 2085)
should afterwards lose the same 1. Secures the fulfillment of a principal
through eviction or conveyance of obligation;
property (Art 2077); 2. Pledgor, mortgagor, antichretic
3. Whenever by some act of the debtor must be the absolute owner
creditor, the guarantors even though of the thing pledged or mortgaged;
they are solidarily liable cannot be and
subrogated to the rights, mortgages  The reason being that in
and preferences of the former (Art anticipation of a possible
2080); foreclosure sale in case of
4. For the same causes as all other default which is still a sale, the
obligations (Art 1231); rule is that the seller must be
5. When the principal obligation is the owner of the thing sold
extinguished; (Cavite Development Bank vs.
6. Extension granted to the debtor by Lim, 324 SCRA 346)
the creditor without the consent of 3. Pledgor, mortgagor, antichretic
the guarantor (Art 2079) debtor must have free disposal of
their property, or be legally
BOND authorized for such purpose.
 An undertaking that is sufficiently
secured, and not cash or currency NOTES:
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 Third persons can pledge or 2. There should be a stipulation for an

mortgage their own property to automatic appropriation by the
secure the principal obligation. creditor of the property in event of
 It is not necessarily void simply nonpayment of the obligation within
because the accommodation pledgor the stipulated period.
or mortgagor did not benefit from
the same. So long as valid consent GENERAL RULE: Pactum Commissorium
was given, the fact that the loan was is forbidden by law and is declared null
given solely for the benefit of the and void.
principal debtor would not invalidate EXCEPTION: The pledgee may
the mortgage (GSIS vs CA, 170 SCRA appropriate the thing pledged if after
533) the first and second auctions, the thing
 The accommodation pledgor or is not sold. (Art 2112)
mortgagor, without expressly
NOTE: The security contract remains
assuming personal liability for such
valid; only the prohibited stipulation is
debt, is not liable for the payment of
void.
any deficiency, should the property
C. Capability to secure all kinds of
not be sufficient to cover the debt
obligations, i.e. pure or
(Bank of America vs. American
conditional (Art 2091)
Realty Corporation, 321 SCRA 659).
 The accommodation pledgor or
D. Indivisibility (Art 2089)
mortgagor is not solidarily bound GENERAL RULE: A pledge, mortgage,
with the principal obligor but his or antichresis is indivisible, even though
liability extents only to the property the debt may be divided among the
pledged or mortgaged. Should there successors in interest of the debtor or of
be any deficiency, the creditor has the creditor.
recourse on the principal debtor who  Their indivisibility is not affected by
remains to be primarily bound. the fact that the debtors are jointly
 The law grants to the or not solidarily liable.
accommodation pledgor or
mortgagor the same rights as a Consequences of indivisibility:
guarantor and he cannot be 1. Single thing – Every portion of the
prejudiced by any waiver of defense property pledged or mortgaged is
by the principal debtor. answerable for the whole obligation
2. Several things – All of the several
B. Prohibition against Pactum things pledged or mortgaged are
Commissorium (Art 2088; 2137) liable for the totality of the debt
3. Debtor’s heir/creditor’s heir -
Pactum Commissorium Neither the debtor’s heir who has
 Stipulation whereby the thing paid part of the debt cannot ask for
pledged or mortgaged, or under proportionate extinguishment, nor
antichresis shall automatically creditor’s heir who received his
become the property of the creditor share of the debt return the pledge
in the event of non-payment of the or cancel the mortgage as long as
debt within the term fixed. the debt is not completely satisfied.
Requisites: EXCEPTIONS:
1. There should be a pledge, mortgage, 1. Where each one of several things
or antichresis of property by way of guarantees a determinate
security for the payment of the portion of the credit
principal obligation; and 2. Where only a portion of the loan
was released
CIVIL LAW COMMITTEE
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3. Where there was failure of understanding that when the

consideration. obligation is fulfilled, the thing
4. Where there is no debtor- delivered shall be returned with all
creditor relationship its fruits and accessions.
NOTES:  Special Requisites (in addition to

 The mere embodiment of a real the common essential requisites):
estate mortgage and a chattel 1. Possession of the thing pledged must
mortgage in one document does not be transferred to the creditor or a
have the effect of fusing both third person by agreement (Art
securities into an indivisible whole. 2093);
 The mortgagee, therefore, may 2. It can only cover movable property
legally foreclose the real estate and incorporeal rights evidenced by
mortgage extrajudicially and waive documents of title and the
the chattel mortgage foreclosure, instruments proving the right
and maintain instead a personal pledged shall be delivered to the
action for the recovery of the unpaid creditor, and if negotiable must be
balance of the credit (Phil. Bank of endorsed (Art 2094); and
Commerce vs. Macadaeg, 109 Phil 3. The description of the thing pledged
981) and the date must appear in a public
instrument to bind third persons, but
E. When the principal obligation not for the validity of the contract
becomes due, the things in which (Art 2096).
the pledge, mortgage, or
antichresis consists may be  Kinds:
alienated for the payment to the 1. Conventional /Voluntary – created
creditor. (Art. 2087) by contract
2. Legal – created by operation of law
NOTES: (examples: Art. 546, 1731 and 1914
 If the debtor fails to comply with the NCC)
obligation at the time it falls due,
NOTES:
the creditor is merely entitled to
move for the sale of the thing  The provisions of possession, care
pledged or mortgaged in order to and sale of the thing as well as on
collect the amount of his claim from the termination of the pledge
the proceeds. governing conventional pledges are
 If he wishes to secure a title to the applicable to pledges created by
operation of law (Art 2121)
mortgaged property, he can buy it in
the foreclosure sale (Montevirgin vs.  Unlike, however, in conventional
CA, 112 SCRA 641) pledge where the debtor is not
entitled to the excess unless it is
F. Pledgor, mortgagor, antichretic otherwise agreed, in legal pledge,
debtor retains ownership of the the remainder of the price of the
thing given as a security sale after payment of the debt and
expenses, shall be delivered to the
PLEDGE (Arts 2093 – 2123) debtor.
 In legal pledge, there is no definite
 A contract wherein the debtor period for the payment of the
delivers to the creditor or to a third principal obligation. The pledgee
person a movable or document must make a demand for the
evidencing incorporeal rights for the payment of the amount due him;
purpose of securing fulfilment of a otherwise he cannot exercise the
principal obligation with the
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right of sale at public auction (Art pledgee consents to the 2105)

2122) sale (Art 2097)
4. To ask that the thing
Characteristics: pledged be deposited
(Arts 2104 & 2106)
1. Real
contract – it is perfected by the
delivery of the thing pledged by the Rights of the Pledgee
debtor who is called the pledgor to KEY: D SBC BA2R2OPS2
the creditor who is called the 1. Option to demand replacement or
pledgee, or to a third person by immediate payment of the debt in case
common agreement; of deception as to substance or quality
2. Accessor (Art 2109)
y contract – it has no independent 2. To sell at public auction in case of
existence of its own; reasonable grounds to fear destruction
3. Unilater or impairment of the thing without his
al contract – it creates an obligation fault (Art 2108)
solely on the part of the creditor to 3. To bring actions pertaining to the
return the thing subject thereof owner (Art 2103)
upon the fulfilment of the principal 4. To choose which of several things
obligation; and pledged shall be sold
4. Subsidiar 5. To bid at the public auction (Art
y contract – the obligation incurred 2113)
does not arise until the fulfilment 6. To appropriate the thing in case of
of the principal obligation which is failure of the 2nd public auction (Art
secured. 2112)
7. To apply said fruits, interests or
Consideration in pledge: earnings to the interest, if any, then to
the principal of the credit (Art 2102)
 Insofar as the pledgor is concerned, 8. To retain excess value received in
the cause is the principal obligation.
the public sale (Art 2115)
 If the pledgor is not the debtor, the 9. To retain the thing until after full
cause is the compensation stipulated payment of the debt (Art 2098)
for the pledge or the mere liberality 10. To be reimbursed for the expenses
of the pledgor. made for the preservation of the thing
pledged (Art 2099)
Extent of pledge: Unless stipulated 11. To object to the alienation of the
otherwise, pledge extends to the fruits, thing
interests or earnings of the thing. 12. To possess the thing (Art 2098)
13. To sell at public auction in case of
Rights and Obligations of a Pledgor non-payment of debt at maturity (Art
Rights Obligations 2112)
1. To demand return in 1. To advise the To choose which of the several things
case of reasonable pledgee of the
pledged shall be sold (Art 2119)
grounds to fear flaws of the thing
destruction or (Art 2101)
14. Option to demand replacement or
impairment of the thing 2. Not to demand immediate payment of the debt in case
without the pledgee’s the return of the of deception as to substance or quality
fault, subject to the thing until after (Art 2109)
duty of replacement full payment of 15. To sell at public auction in case of
(Art 2107) the debt, reasonable grounds to fear destruction
2. To bid and be including interest or impairment of the thing without his
preferred at the public due thereon and fault (Art 2108)
auction (Art 2113) expenses incurred 16. To bring actions pertaining to the
3. To alienate the thing for its
pledged provided the preservation (Art
owner (Art 2103)
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17. To choose which of several things 3. The pledgor is offering in place

pledged shall be sold of the thing, another thing in
18. To bid at the public auction (Art pledge which is of the same kind
2113) and quality as the former
19. To appropriate the thing in case of 4. The pledge does not choose to
failure of the 2nd public auction (Art exercise his right to cause the
2112) thing pledged to be sold at
20. To apply said fruits, interests or public auction
earnings to the interest, if any, then to NOTE: The pledgee’s right to have the
the principal of the credit (Art 2102) thing pledged sold at public sale granted
21. To retain excess value received under the Article 2108 is superior to that
in the public sale (Art 2115) given to the pledgor to substitute the
22. To retain the thing until after full thing pledged under Article 2107.
payment of the debt (Art 2098)
23. To be reimbursed for the expenses Prohibition against double pledge
made for the preservation of the thing  Property which has been lawfully
pledged (Art 2099) pledged to one creditor cannot be
24. To object to the alienation of the pledged to another as long as the
thing first one subsists.
25. To possess the thing (Art 2098) NOTE: Possession of a creditor of the
26. To sell at public auction in case of thing pledged is an essential requisite of
non-payment of debt at maturity (Art pledge.
2112)
27. To choose which of the several Extinguishment of Pledge (CRAPS)
things pledged shall be sold (Art 2119) 1. For the same causes as all other
obligations (Art 1231)
Obligations of the Pledgee 2. Return of the thing pledged by the
KEY: CUDA3 pledgee to the pledgor (Art 2110)
1. Take care of the thing with the 3. Statement in writing by the
diligence of a good father of a family pledgee that he renounces or
(Art 2099) abandons the pledge (Art 2111)
2. Not to use thing unless authorized or 4. Payment of the debt (Art 2105)
by the owner or its preservation requires 5. Sale of thing pledged at public
its use (Art 2104) auction (Art 2115)
3. Not to deposit the thing with a 3 rd NOTE: The possession by the debtor or
person unless so stipulated (Art 2100) owner of the thing pledged subsequent
4. Responsibility for acts of agents and to the perfection of the pledge gives rise
employees as regards the thing (Art to a prima facie presumption that the
2100) thing has been returned and, therefore,
5. To advise pledgor of danger to the that the pledge has been extinguished
thing (Art 2107) but not the principal obligation itself.
6. To advise pledgor of the result of the (Art 2110)
public auction (Art 2116)
Requirements for sale of thing pledged
RIGHT OF PLEDGOR TO SUBSTITUTE at public auction: (Art 2112)
THING PLEDGED (ART.2107) 1. The debt is due and unpaid
 Requisites: 2. Sale must be at a public auction
1. The pledgor has reasonable 3. there must be notice to the pledgor
grounds to fear the destruction and owner, stating the amount due
or impairment of the thin 4. Sale must be with the intervention
pledged of a notary public
2. There is no fault on the part of
the pledgee
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Effect of sale of the thing pledged: (Art  A mortgage gives the mortgagee no
2115) right or claim to the possession of
1. The sale of the thing pledged shall the property, and therefore, a mere
extinguish the principal obligation, mortgagee has no right to eject an
whether or not the proceeds of the occupant of the property mortgaged
sale are equal to the amount of the unless the mortgage should contain
principal obligation, interest and some provision to that effect. The
expenses in a proper case only right of a mortgagee in case of
2. If the price of the sale is more than non-payment of a debt secured by
the amount due the creditor, the mortgage would be to foreclose the
debtor is not entitled to the excess mortgage and have the encumbered
unless the contrary is provided property sold to satisfy the
3. If the price of the sale is less, the outstanding indebtedness. If the
creditor is not entitled to recover possession is transferred to the
the deficiency even if there is a mortgagee, it must not expressly be
stipulation to that effect for purpose of applying the fruits to
the interest then to the principal of
REAL ESTATE MORTGAGE (Articles the credit, for then it would be an
2124-2131) antichresis.
 It is not an essential requisite that
 A contract whereby the debtor the principal of the mortgage credit
secures to the creditor the bears interest, or that the interest
fulfilment of a principal obligation, as compensation for the use of the
specially subjecting to such security principal and enjoyment of its fruits
immovable property or real rights be in the form of a certain percent
over immovable property in case the thereof.
principal obligation is not complied
with at the time stipulated.  Special Requisites (in addition to
the common essential requisites):
Characteristics of the contract: 1. It can cover only immovable
1. Real property and alienable real rights
2. Accessory imposed upon immovables (Art
3. Subsidiary 2124);
4. Unilateral – it creates only an 2. It must appear in a public instrument
obligation on the part of the (Art. 2125); and
creditor who must free the 3. Registration in the registry of
property from the encumbrance property is necessary to bind third
once the obligation is fulfilled. persons, but not for the validity of
the contract (Art 2125).
 An order for foreclosure cannot
be refused on the ground that
NOTES: the mortgage had not been
 As an accessory contract, its registered provided no innocent
consideration is that of the principal third parties are involved.
contract from which it receives life. NOTE: Where a mortgage is not valid or
 A mortgage does not involve a false, the principal obligation which it
transfer, cession or conveyance of guarantees is not rendered null and void.
property but only constitutes a lien What is lost only is the right to foreclose
thereon. Until discharged, it follows the mortgage as a special remedy for
the property wherever it goes and satisfying or settling the indebtedness
subsists notwithstanding changes of which is the principal obligation but the
ownership. mortgage deed remains as evidence or
proof of a personal obligation of the
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debtor and the amount due to the  Future property cannot be an object
creditor may be enforced in an ordinary of a contract of mortgage (Art
personal action. 2085[2]) However, a stipulation
subjecting to the mortgage lien,
 Kinds: properties (improvements) which the
1. Voluntary – agreed to by the parties mortgagor may subsequently acquire
or constituted by the will of the install, or use in connection with
owner of the property on which it is real property already mortgaged
created belonging to the mortgagor is valid
2. Legal – one required by law to be (People’s Bank and Trust Co. vs.
executed in favour of certain persons Dahican Lumber Co., 20 SCRA 84)
 The persons in whose favour the
law establishes a mortgage have Special Rights:
no other right than to demand 1. Mortgagor - To alienate the
the execution and the recording mortgaged property but the
of the document in which the mortgage shall remain attached to
mortgage is formalized (Art 2125 the property.
par 2)
3. Equitable – one which, although NOTE: A stipulation forbidding the
lacking the formalities of a owner from alienating the immovable
mortgage, shows the intention of the mortgage shall be void (Art 2130) being
parties to make the property a contrary to public policy inasmuch as the
security for a debt transmission of property should not be
unduly impeded.
PLEDGE REAL MORTGAGE
1. Constituted on 1. Constituted on 2. Mortgagee - To claim from a 3rd
movables immovables person in possession of the
2. Property is 2. Delivery is not mortgaged property the payment of
delivered to pledgee necessary the part of the credit secured by the
or by common which said third person possesses
consent to a third
(Art 2129)
person
3. Not valid against 3. Not valid against
NOTE: It is necessary that prior demand
third persons unless a third persons unless for payment must have been made on
description of the registered the debtor and the latter failed to pay
thing pledged and (BPI vs Concepcion & Hijos, Inc., 53 Phil
date of pledge 906)
appear in a public
instrument Foreclosure
 The remedy available to the
Extent of Mortgage: mortgagee by which he subjects the
 Absent express stipulation to the mortgaged property to the
contrary, the mortgage includes the satisfaction of the obligation to
accessions, improvements, growing secure that for which the mortgage
fruits and income of the property not was given
yet received when the obligation
becomes due and to the amount of NOTES:
the indemnity granted or owing to  It denotes the procedure adopted by
the proprietor from the insurers of the mortgagee to terminate the
the property mortgaged, or in virtue rights of the mortgagor on the
of expropriation for public use (Art property and includes the sale itself
2127) (DBP vs Zaragoza, 84 SCRA 668)
 Foreclosure is valid where the
Object of Mortgage:
debtor is in default in the payment
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of his obligation (Gobonseng, Jr. vs  Where there is a right to redeem,

CA, 246 SCRA 472) inadequacy of price is not material
because the judgment debtor may
 Kinds: reacquire the property or else sell
1. Judicial – ordinary action for his right to redeem and thus recover
foreclosure under Rule 68 of the any loss he claims to have suffered
Rules of Court by reason of the price obtained at
2. Extrajudicial – when mortgagee is the auction sale and consequently
given a special power of attorney to not sufficient to set aside the sale.
sell the mortgaged property by Mere inadequacy of the price
public auction, under Act No. 3135 obtained at the sheriff’s sale will not
be sufficient to set aside the sale
Judicial Extrajudicial unless “the price is so inadequate as
foreclosure foreclosure to shock the conscience of the
1. There is court 1. No court court” taking into consideration the
intervention intervention peculiar circumstances attendant
2. Decisions are 2. Not appealable thereto. (Sulit vs. CA, 268 SCRA 441)
appealable because it is
immediately  Should there remain a balance due
executory to the mortgagee after applying the
3. Order of court 3. Foreclosure does proceeds of the sale, the mortgagee
cuts off all rights of not cut off right of is entitled to recover the deficiency.
the parties all parties involved This rule applies both to judicial and
impleaded extra-judicial foreclosure real
4. There is equity 4. There is right of mortgage.
of redemption redemption  The action to recover a deficiency
except on banks
which provides for
after foreclosure prescribes after 10
a right of years from the time the right of
redemption action accrues (Arts 1142 & 1144).
5. Period of 5. Period to redeem
redemption starts start from date of Stipulation of upset price or “tipo”
from the finality of registration of  It is a stipulation in a mortgage of
the judgment until certificate of sale real property of minimum price at
order of which the property shall be sold, to
confirmation become operative in the event of a
6. No need for a 6. Special power of
foreclosure sale at public auction. It
special power of attorney in favor of
attorney in the mortgagee is
is null and void for the property
contract of needed in the must be sold to the highest bidder.
mortgage contract Parties cannot, by agreement,
contravene the law and interfere
NOTES: with the lawful procedure of the
 A foreclosure sale retroacts to the courts (BPI vs Yulo, 31 Phil 476)
date of registration of the mortgage
and that a person who takes a Extrajudicial foreclosure real property
mortgage in good faith and for (Act No. 3135)
valuable consideration, the record  The law covers only real estate
showing clear title to the mortgagor, mortgages. It is intended merely to
will be protected against equitable regulate the extrajudicial sale of the
claims on the title in favor of third property mortgaged if and when the
persons, of which he had no actual mortgagee is given a special power
or constructive notice (St. Dominic of express authority to do so in the
Corporation vs. IAC 151 SCRA 577). deed itself or in a document
annexed thereto.
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 The authority to sell is not the real estates and their respective
extinguished by the death of the locations
mortgagor (or mortgagee) as it is an 6. The notice of sale shall be published
essential and inseparable part of a in a newspaper of general circulation
bilateral agreement (Perez vs PNB, pursuant to Section 1, PD No. 1079
17 SCRA 833). 7. The application of shall be raffled
 No sale can be legally made outside among all sheriffs
the province in which the property 8. After the redemption period has
sold is situated; and in case the expired, the Clerk of Court shall
place within said province in which archive the records.
the sale is to be made is the subject 9. No auction sale shall be held unless
of stipulation, such sale shall be there are at least two (2)
made in the said place in the participating bidders, otherwise the
municipal building of the sale shall be postponed to another
municipality in which the property or date. If on the new date set forth
part thereof is situated. for the sale there shall not be at
least two bidders, the sale shall then
Procedure for extrajudicial foreclosure proceed. The names of the bidders
of both real estate mortgage under Act shall be reported to the Sheriff of
No. 3135 and chattel mortgage under the Notary Public, who conducted
Act No. 1508 (A.M. No. 99-10-05-0, the sale to the Clerk of Court before
January 15, 2000) the issuance of the certificate of
1. Filing of application before the sale.
Executive Judge through the Clerk of
Court NOTES:
2. Clerk of Court will examine whether  The Mortgagor and Mortgagee have
the requirement of the law have no right to waive the posting and
been complied with, that is, whether publication requirements under Act.
the notice of sale has been posted No. 3135. Notices are given to
for not less than 20 days in at least secure bidders and prevent a
three (3) public places of the sacrifice of the property. Clearly, the
municipality or city where the statutory requirements of posting
property is situated, and if the same and publication are mandated, not
is worth more than P400.00, that for the mortgagor’s benefit, but for
such notice has been published once the public or third persons. Failure
a week for at least three (3) to comply with the statutory
consecutive weeks in a newspaper of requirements as to publication of
general circulation in the city of notice of auction sale constitutes a
municipality jurisdictional defect which
3. The certificate of sale must be invalidates the sale.Lack of
approved by the Executive Judge republication of notice of
4. Where the application concerns foreclosure sale made subsequently
extrajudicial foreclosure of real after the original date renders such
mortgages in different locations sale void (PNB vs. Nepomuceno
covering one indebtedness, only one Productions Inc., G.R. No. 139479.
filing fee corresponding to such debt December 27, 2002).
shall be collected  Sec 3 of Act 3135 does not require
5. The Clerk of Court shall issue personal or any particular notice on
certificate of payment indicating the the mortgagor much less on his
amount of indebtedness, the filing successors-in-interest where there is
fees collected, the mortgages sought no contractual stipulation therefor.
to be foreclosed, the description of Hence, unless required in the
mortgage contract, the lack of such
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notice is not a ground to set aside a property within one year from the
foreclosure sale. date of registration of the certificate
 Neither does Sec 3 require posting of of sale. Applies only to extrajudicial
notice of sale on the mortgage foreclosure of real mortgage.
property and the certificate of
posting is not required, much less NOTE: The right of redemption, as long
considered indispensable, for the as within the period prescribed, may be
validity of a foreclosure sale. exercised irrespective of whether or not
the mortgagee has subsequently
conveyed the property to some other
Redemption party (Sta. Ignacia Rural Bank, Inc. vs.
 It is the transaction by which the CA, 230 SCRA 513)
mortgagor reacquires or buys back
the property which may have passed Period of Redemption
under the mortgage, or divests the 1. Extra-judicial (Act #3135)
property of the lien which the a. natural person – one year from
mortgage may have created. registration of the certificate of
sale with Registry of Deeds
NOTES: b. juridical person – same rule as
 A sale by the mortgagor to a third natural person
party of the mortgaged property c. juridical person (mortgagee is
during the period for redemption bank) - three months after
transfers only the right to redeem foreclosure or before
the property and the right to registration of certificate of
possess, use and enjoy the same foreclosure which ever is earlier
during said period. (sec. 47, of General Banking
 Where sale with assumption of Law)
2. Judicial – before confirmation of the
mortgage not registered and made
sale by the court
without the consent of the
mortgagee, the buyer, thereof, was
NOTE: Allowing a redemption after the
not validly substituted as debtor
lapse of the statutory period, when the
and, hence, had no right to redeem
buyer at the foreclosure sale does not
(Bonnevie vs. CA, 125 SCRA 122).
object but even consents to the
redemption, will uphold the policy of the
 Kinds:
law which is to aid rather than defeat
1. Equity of Redemption – right of
the right of redemption. There is nothing
mortgagor to redeem the mortgaged
in the law which prevents a waiver of
property after his default in the
the statutory period for redemption
performance of the conditions of the
(Ramirez vs CA, 219 SCRA 598).
mortgage within the 90-day period
from the date of the service of the
Amount of the redemption price:
order of foreclosure or even
1. Mortgagee is not a bank (Act No.
thereafter but before the
3135, in relation to Sec. 28, Rule 39
confirmation of the sale. Applies to
of Rules of Court)
judicial foreclosure of real mortgage
a. purchase price of the property
and chattel mortgage foreclosure.
b. 1% interest per month on the
purchase price
NOTE: Redemption of the banking
c. taxes paid and amount of
institutions is allowed within one year
purchaser’s prior lien, if any,
from confirmation of sale.
with the same rate of interest
computed from the date of
2. Right of Redemption – right of
mortgagor to redeem the mortgaged
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registration of sale, up to the NOTE: The obligation to pay interest is

time of redemption not of the essence of the contract of
2. Mortgagee is a bank (GBL 2000) antichresis, there being nothing in the
a. amount due under the mortgage Code to show that antichresis is only
deed applicable to securing the payment of
b. interest interest-bearing loans. On the contrary,
c. cost and expenses antichresis is susceptible of guaranteeing
NOTE: Redemption price in this all kinds of obligations, pure or
case is reduced by the income conditional
received from the property
Antichresis Pledge
1. Refers to real 1. Refers to personal
property property
2. Perfected by mere 2. Perfected by
consent delivery of the thing
pledged
3. Consensual contract 3. Real Contract
ANTICHRESIS (Articles 2132 -2139)
 A contract whereby the creditor

acquires the right to receive the
fruits of an immovable of the Antichresis Real Mortgage
debtor, with the obligation to apply 1. Property is 1. Debtor usually
delivered to creditor retains possession of
them to the payment of the interest, the property
if owing, and thereafter to the 2. Creditor acquires 2. Creditor does not
principal of his credit (Art 2132) only the right to have any right to
receive the fruits of receive the fruits;
Characteristics the property, hence, but the mortgage
1. Accessory contract – it secures the it does not produce a creates a real right
performance of a principal obligation real right over the property
2. Formal contract – it must be in a 3. The creditor, 3. The creditor has
specified form to be valid, i.e., “in unless there is no such obligation
writing.” (Art 2134) stipulation to the
contrary, is obliged
to pay the taxes and
 Special Requisites (in addition to charges upon the
the common essential requisites): estate
1. It can cover only the fruits of an 4. It is expressly 4. There is no such
immovable property; (Art 2132) stipulated that the obligation on part of
2. Delivery of the immovable is creditor given mortgagee
necessary for the creditor to receive possession of the
the fruits and not that the contract property shall apply
shall be binding; all the fruits thereof
to the payment of
3. Amount of principal and interest
interest, if owing,
must be specified in writing (Art. and thereafter to the
2134); and principal
4. Express agreement that debtor will Subject matter of both is real property
give possession of the property to
creditor and that the latter will Obligations of antichretic creditor:
apply the fruits to the interest, if 1 To pay taxes and charges on the
any, then to the principal of his estate, including necessary expenses
credit. (Art 2132) NOTE: Creditor may avoid said
obligation by:
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a. compelling debtor to 3. Unilateral contract – it produces

reacquire enjoyment of the only obligations on the part of the
property or creditor to free the thing from the
b. by stipulation to the encumbrance on fulfilment of the
contrary obligation.
2 To apply all the fruits, after
receiving them, to the payment of  Special Requisites (in addition to
interest, if owing, and thereafter to the common essential requisites):
the principal 1. It can cover only personal or
3 To render an account of the fruits to movable property in general;
the debtor however, the parties may treat as
4 To bear the expenses necessary for personal property that which by its
its preservation and repair nature would be real property;
2. Registration of the mortgage with
Remedies of creditor in case of non- the Chattel Mortgage Register where
payment of debt the mortgagor resides; if property is
located in a different province,
Article II. Bring an action for registration in both provinces
specific performance; or required;
Article III. Petition for the sale of 3. Description of the property as would
the real property as in a foreclosure of enable the parties or other persons
mortgages under Rule 68 of the Rules of to identify the same after
Court.(Art 2137) reasonable investigation and inquiry;
and
NOTES: 4. Accompanied by an affidavit of good
faith to bind third persons, but not
Section III.1 The parties,
for the validity of the contract.
however, may agree on an extrajudicial 5. It can cover only obligations existing
foreclosure in the same manner as they at the time the mortgage is
are allowed in contracts of mortgage and constituted.
pledge (Tavera vs. El Hogar Filipino, NOTE: A mortgage containing a
Inc., 68 Phil 712). stipulation in regard to future
Section III.2A stipulation authorizing the advances in the credit will take
antichretic creditor to appropriate the effect only from the date the same
property upon the non-payment of the are made and not from the date of
debt within the agreed period is void the mortgage (Jaca vs Davao Lumber
(Art 2088). Co., 113 SCRA 107)
CHATTEL MORTGAGE (Articles 2140- Effect of registration: Creates a real
2141) right
 The registration of the chattel
 A contract by virtue of which mortgage is an effective and binding
personal property is recorded in the notice to other creditors of its
Chattel Mortgage Register as a existence and creates a real right or
security for the performance of an a lien which, being recorded, follows
obligation (Art 2140). the chattel wherever it goes. The
registration gives the mortgagee
Characteristics symbolical possession (Northern
1. Accessory contract – it is for the Motors, Inc. vs. Coquia, 68 SCRA
purpose of securing the performance 374).
of a principal obligation
2. Formal contract – registration in the
Chattel Mortgage Register is
indispensable for its validity
CIVIL LAW COMMITTEE
Gayon
Rhodora
John Stephen
Purganan(LTD),
212
Effect of failure to register chattel

mortgage in the chattel mortgage Effect of absence
registry The special affidavit is required only
 Article 2140 makes the recording in for the purpose of transforming an
the Chattel Mortgage Register an already valid mortgage into
essential requisite but if the “preferred mortgage.” Thus, it is
instrument is not recorded, the not necessary for the validity of the
mortgage is nevertheless binding chattel mortgage itself but only to
between the parties. But the person give it a preferred status. In other
in whose favour the law establishes a words, its absence vitiates the
mortgage has no other right than to mortgage only as against third
demand the execution and the persons without notice like creditors
recording of the document. and subsequent encumbrancers.
Foreclosure of Chattel Mortgage

Chattel Mortgage Pledge NOTES:
1. Delivery of the 1. Delivery of the  Foreclosure sale in chattel mortgage
personal property thing pledged is is by public auction under Act No.
to the mortgage is necessary 1508, but the parties may stipulate
not necessary that it be by private sale.
2. registration in 2. registration not  The mortgagee may, after thirty (30)
the Chattel necessary to be days from the time of the condition
Mortgage Registry valid broken, cause the mortgaged
is necessary for its property to be sold at public auction
validity by a public officer. The 30-day
3. If property is 3. Debtor is not period is also a grace period for the
foreclosed, the entitled to excess mortgagor to discharge the mortgage
excess over the unless otherwise obligation. After the sale of the
amount due goes to agreed or except in chattel at public auction, the right
the debtor case of legal of redemption is no longer available
pledge to the mortgagor (Cabral vs.
4. If there is 4. If there is Evangelista, 28 SCRA 1000).
deficiency after deficiency, creditor
foreclosure, is not entitled to Application of proceed of sale:
creditor is entitled recover 1. Costs and expenses of keeping
to recover the notwithstanding and sale
deficiency from the any stipulation to 2. Payment of the obligation
debtor, except the contrary secured by the mortgage
under Art. 1484 3. Claims of persons holding
Subject matter of both is movable subsequent mortgages in their
property order
4. The balance, if any, shall be
Affidavit of Good Faith paid to the mortgagor or person
 Oath in a contract of chattel holding under him
mortgage wherein the parties
"severally swear that the mortgage is NOTES:
made for the purpose of securing the  The creditor may maintain an action
obligation specified in the conditions for the deficiency, except if the
thereof and for no other purposes chattel mortgage is constituted as
and that the same is a just and valid security for the purchase of personal
obligation and one not entered into property payable in instalments
for the purpose of fraud.” (Sec. 5, (Art. 1484).
Chattel Mortgage Law)
CIVIL LAW COMMITTEE
Gayon
Rhodora
John Stephen
Purganan(LTD),
213
 The action for deficiency may be 2. Chattel mortgage – When default

brought within ten (10) years from occurs and the creditor desires to
the time the cause of action accrues foreclose, the creditor has the right
(Arts 1141 and 1142). to take the property as a preliminary
 Only equity of redemption is step for its sale.
available to the mortgagor; the NOTE: Where the debtor refuses to
latter can no longer redeem after yield the property, the creditor’s
the confirmation of the foreclosure remedy is to institute an action
sale. either to effect judicial foreclosure
directly or to secure possession
Right of redemption (REPLEVIN) as a preliminary to the
 When the condition of a chattel sale contemplated in Section 14 or
Act. No. 1508
mortgage is broken the following
may redeem:
CONCURRENCE AND PREFERENCE OF
a) mortgagor;
CREDITS (Articles 2236 – 2251)
b) person holding a subsequent
mortgage; or
Concurrence of Credits
c) subsequent attaching creditor.
 Possession by two or more creditors
 An attaching creditor who so of equal rights or privileges over the
redeems shall be subrogated to the same property or all of the property
rights of the mortgagee and entitled of the debtor
to foreclose the mortgage in the
same manner that the mortgagee Preference of Credits
could foreclose it.  Right held by a creditor to be
 The redemption is made by paying or preferred in the payment of his
delivering to the mortgagee the claim above others out of the
amount due on such mortgage and debtor’s assets.
the costs, and expenses incurred by
such breach of condition before the NOTES:
sale thereof (Sec 13, Act No. 1508).  The rules on preference of credits
apply only when two or more
Right to possession of foreclosed creditors have separate and distinct
property claims against the same debtor who
1. Real mortgage – After the has insufficient property.
redemption period has expired, the
purchaser of the property has the
 Preference creates no lien on
property, and, therefore, gives no
right to a conveyance and to be
interest in property, specific or
placed in possession thereof.
general, to the preferred creditor
but a preference in application of
NOTES:
the proceeds after the sale. (Molina
 Purchaser is not obliged to bring vs. Somes, 31 Phil. 76)
a separate suit for possession.
He must invoke the aid of the
 The preferential right of credit
attains significance only after the
courts and ask for a WRIT OF
properties of the debtor have been
POSSESSION.
inventoried and liquidated, and the
 Section 7 of Act No. 3135 allows claims held by his various creditors
the purchaser to take possession have been established. (DBP vs.
of the foreclosed property during NLRC, 183 SCRA 328)
the period of redemption upon
filing of an ex parte application
Preference of Lien
and approval of a bond.
Credit
CIVIL LAW COMMITTEE

Gayon
Rhodora
John Stephen
Purganan(LTD),
214
Applies only to Creates a charge exception of the State (No. 1),

claims which do on a particular merely concur.
not attach to property  They only find application when
specific
properties
there is a concurrence of credits,
i.e., when the same specific
property of the debtor is subjected
Liability of debtor’s property for his
to the claims of several creditors and
obligations
the value of such property is
GENERAL RULE: Debtor is liable with
insufficient to pay in full all the
all his property, present and future, for
creditors. In such a situation, the
the fulfilment of his obligations. (Art
question of preference will arise.
2236)
 Article 2242 makes no distinction
EXEMPT PROPERTY: between registered and unregistered
1. Present property – those vendor’s lien (No. 2). Hence, any
provided under Arts. 155 and 205 lien of that kind enjoys the
of the Family Code, Sec. 13, preferred credit status. Unlike the
Rule 39 of the Rules of Court, unpaid price of real property sold,
and Sec. 118 of the Public Land mortgage credits (No. 5), in order to
Act be given preference, should be
2. Future property – a debtor who recorded in the Registry of Property.
obtains a discharge from his But a recorded mortgage credit is
debts on account of his superior to an unrecorded unpaid
insolvency, is not liable for the vendor’s lien (De Barretto vs.
unsatisfied claims of his Villanueva, 1 SCRA 288)
creditors with said property  The priority rule applies to credits
subject to certain exceptions annotated in the Registry of
expressly provided by law. (Secs. Property. As to credits mentioned in
68, 69, The Insolvency Law [Act No. 7 of Article 2242, there is
No. 1956]) preference among the attachments
3. Property under legal custody and or executions according to the order
those owned by municipal of the time they were levied upon
corporations necessary for the property. The pro rata rule in
governmental purposes Article 2249 does not apply;
otherwise, the result would be
General Categories of Credit: absurd. The preference of a credit
1. Special Preferred Credits - those annotated by an attachment or
listed in Arts. 2241 and 2242 shall be execution could be defeated by
considered as mortgages and pledges of simply obtaining a writ of
real or personal property or liens (Art. attachment or execution, no matter
2243). Hence, they are not included in how much later (Manabat vs Laguna
the insolvent debtor's assets. Federation of Facomas, Inc., 19
SCRA 621).
NOTES:  The last paragraph of Article
 Arts. 2241 and 2242 do not give the 2241 applies only when the right of
order of preference or priority of ownership in such property continues
payment. They merely enumerate in the debtor, and, therefore, it is
the credits which enjoy preference not applicable to cases where the
with respect to specific movables or debtor has parted with his ownership
immovables. With respect to the therein, as where he has sold the
same specific movables or property (Peña vs. Mitchell, 9 Phil
immovables, creditors, with the 587)
CIVIL LAW COMMITTEE

Gayon
Rhodora
John Stephen
Purganan(LTD),
215
2. Ordinary Preferred Credits - those  In case of bankruptcy or liquidation

listed in Art. 2244 as amended by of the employer’s business, the
Art. 110 of the Labor Code. unpaid wages and other monetary
NOTES: claims of the employees shall be
 The provision not only enumerates given first preference and shall be
the preferred credits with respect to paid in full before the claims of the
other property, real and personal, of government and other creditors may
the debtor, but also gives their be paid. The terms, “declaration”
order of preference “in the order of bankruptcy, or “judicial”
named”. liquidation have been eliminated,
 In contrast with Articles 2241 and nevertheless, according to the SC,
2242, Article 2244 creates no liens bankruptcy or liquidation
on determinate property which proceedings are still necessary for
follow such property. What Article the operation of the preference
2244 creates are simply rights in accorded to workers under Art. 110
favour of certain creditors to have of the Labor Code. (DBP vs. NLRC
the cash and other assets of the 183 SCRA 328; RA No. 6715 Sec 10)
insolvent applied in a certain  In case of rehabilitation, the
sequence or order of priority. preference of credit granted to
 Article 2244, particularly par (14) employees under Art 110 of the
item (1) thereof, is not applicable to Labor Code is not applicable
obligations of the State as it is a (Rubberworld [Phils.] vs CA, 305
recognized doctrine that the State is SCRA 722).
always solvent. It is inconceivable
for the State to voluntarily initiate Refectionary Credit
insolvency or general liquidation  Indebtedness incurred in the repair
proceedings or to be subjected to or reconstruction of something
such proceedings under its own laws. previously made, such repair or
reconstruction being made necessary
3. Common Credits – those listed by the deterioration or destruction
under Art. 2245, which shall be paid of the thing as it formerly existed.
pro rata regardless of dates.
NOTE: Ordinary Preferred and Common ORDER OF PREFERENCE OF CREDITS
Credits cover only “free property” of the
debtor, or those not subjected to Special  Arts. 2241 and 2242, jointly with
Preferred Credit. Arts. 2246 to 2249 establish a two-
tier order of preference:
Effects of Article 110 of Labor Code to 1. First tier – includes taxes, duties
Art 2244: and fees due on specific movable or
1. Removed the one-year limitation immovable property;
found in No. 2 of Art. 2244 2. Second tier – all other special
2. Moving up the claims for unpaid preferred (non-tax) credits shall be
wages (and other monetary claims) satisfied pro-rata, out of any
of laborers or workers of insolvent residual value of the specific
from second priority to first priority property to which such credits
in the order of preference relate.
established by Art. 2244
NOTES:
 The pro-rata rule does not apply to
credits annotated in the Registry of
Property by virtue of a judicial
NOTES:
CIVIL LAW COMMITTEE

Gayon
Rhodora
John Stephen
Purganan(LTD),
216
order, by attachments and

executions, which are preferred as
to “later credits”. In satisfying
several credits annotated by  Credits which do not enjoy any
attachments or executions, the rule preference with respect to specific
is still preference according to the property because they are not
priority of the credits in the order of among those mentioned in Arts. 2241
time. and 2242 and those while included in
 In order to make the pro rating said articles are unpaid because the
provided in Art 2249 fully effective, value of the property to which the
the preferred creditors enumerated preference refers is less than the
in Nos. 2 to 14 of Art 2242 must preferred credit or credits, shall be
necessarily be convened, and the satisfied in the order established in
import of their claims ascertained. Art. 2244 with reference to other
There must be first some proceeding real and/or personal property.
where the claims of all the preferred  Common credits or those which do
creditors may be bindingly not fall under Arts. 2241, 2242, and
adjudicated, e.g. insolvency, 2244 do not enjoy any preference
settlement of decedent’s estate, or and shall be paid pro rata regardless
other liquidation proceedings except of dates.
where there are not more than one
creditor.
CIVIL LAW COMMITTEE

Gayon
Rhodora
John Stephen
Purganan(LTD),

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San Beda College of Law

MEMORY AID IN CIVIL LAW

MEMORY AID IN CIVIL LAW

ii. the use of the thing is 1. Interest taken at Interest is taken in

Loan Credit 5. Purely Personal (Art 1939):

MEMORY AID IN CIVIL LAW

MEMORY AID IN CIVIL LAW

the notification cannot be awaited the thing loaned is the distinguishing

2. There is a transfer There is no transfer

MEMORY AID IN CIVIL LAW

b. interest accruing from

MEMORY AID IN CIVIL LAW

unliquidated claims or interest and the rate will just depend on

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

immovable property fungible thing Judicial Extra-judicial

3. Movable/corporeal 3. Both movable and 5. When must the thing be returned

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

Obligations of the Depositary (Art 1972 b. If deposit gratuitous, the

MEMORY AID IN CIVIL LAW

and not for use. The unauthorized delivered to him or the

MEMORY AID IN CIVIL LAW

to the depositor necessity of the a. If the deposit is gratuitous, the

MEMORY AID IN CIVIL LAW

b. Real - the guaranty is the

MEMORY AID IN CIVIL LAW

MEMORY AID IN CIVIL LAW

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

8. Falls under the Statute of Frauds

2. Collateral under- 2. Surety is an

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

A contract by which a An undertaking that  Construed as continuing when by the

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

NOTES: 5. If he has bound himself solidarily

NOTE: Benefit of Division (Art 2065)

MEMORY AID IN CIVIL LAW

proportion following the rule in in the case involving his principal

MEMORY AID IN CIVIL LAW

knowledge or against the will of 1. Without notice to debtor: (Art

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

Surety & Fidelity Co., Inc. vs Batu Bondsman (Art 2082)

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

 Third persons can pledge or 2. There should be a stipulation for an

MEMORY AID IN CIVIL LAW

3. Where there was failure of understanding that when the

NOTES:  Special Requisites (in addition to

MEMORY AID IN CIVIL LAW

right of sale at public auction (Art pledgee consents to the 2105)

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

17. To choose which of several things 3. The pledgor is offering in place

MEMORY AID IN CIVIL LAW

MEMORY AID IN CIVIL LAW

MEMORY AID IN CIVIL LAW

of his obligation (Gobonseng, Jr. vs  Where there is a right to redeem,

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW