Credit Transactions

A. Sara borrowed PS0,000.00 from Julia and orally promised to pay it within six months.
When Sara tried to pay her debt on the gth month, Julia demanded the payment of
interest of 12o/o per annum because of Sara's delay in payment. Sara paid her debt
and the interest claimed by Julia. After rethinking, Sara demanded back from Julia the
amount she had paid as interest. Julia claims she has no obligation to return the interest
paid by Sara because it was a natural obligation which Sara voluntarily performed and
can no longer recover. Do you agree? Explain. (4%)

No, the case is not one of a natural obligation because even if the contract of
loan is verbal, the delay of Julia made her liable for interest upon demand by
Sara. This is not a case of a natural obligation but a civil obligation to pay interest
by way of damages by reason of delay. (Article 1956; Article 1169; Article 2209
Civil Code)
1
B. Distinguish civil and natural obligations. (2%)

A civil obligation is based on positive law which gives a right of action to compel
their performance in case of breach. A natural obligation is based on equity and
natural law and cannot be enforced by court action but after voluntary
fulfilment by the obligor, they authorize the retention of what may have been
delivered or rendered by reason thereof. (Article 1423, Civil Code)

XVII.

Z, a gambler, wagered and lost P2 Million in baccarat, a card game. He was pressured
into signing a Deed of Absolute Sale in favor of the winner covering a parcel ·of land
with improvements worth P20 Million. One month later, the supposed vendee of the
property demanded that he and his family vacate the property subject of the deed of
sale. Was the deed of sale valid? What can Z do? (4%)

The sale is valid. Being pressured to sign the deed of sale is not equivalent to
vitiation of consent. Z however, can recover his losses from the winner because
the law provides that no action can be maintained by the winner for the
collection of what he has won in any game of chance. But any loser in a game
of chance may recover his loss from the winner, with legal interests from the time
he paid the amount lost. (Article 2014)

Commodatum & Mutuum Mutuum;

Interest; Solutio Indebiti (2012)

No.VI.a) Siga-an granted a loan to Villanueva in the amount of P 540, 000.00. Such
agreement was not reduced to writing. Siga-an demanded interest which was paid by
Villanueva in cash and checks. The total amount Villanueva paid accumulated to P 1,
200, 000.00. Upon advice of her lawyer, Villanueva demanded for the return of the
excess amount of P 660, 000.00 which was ignored by Siga-an.

(1) Is the payment of interest valid? Explain. (3%)

No, Art. 1956, Civil Code, provides that “no interest shall be due unless it has
been expressly stipulated in writing.”

(2) Is solutio indebiti applicable? Explain. (2%)

DO what YOU must do, but Never say, NEVER!!! – Hazel 12/18/17
 Credit Transactions

Yes, Solutio Indebiti is applicable because Villanueva Overpaid by P600,000.00

representing interest payment which is not due. He can, therefore, demand its
return.

Guaranty Guaranty (2009)

No.I. TRUE or FALSE.

TRUE if the statement is true, or FALSE if the statement is false. Explain your answer in not
more than two (2) sentences.

(D). An oral promise of guaranty is valid and binding. (1%) 2

TRUE. An oral promise of guaranty is valid and binding. While the contract is valid,
however ,it is unenforceable because it is not writing . Being a special promise
answer for the debt, or miscarriage of another, the Statute of Frauds requires it to
be in writing to be enforceable ( Article 1403 [2] b, NCC).The validity of the
contract should be distinguished from its enforceability .

Surety (2010)

No.III. Define, Enumerate or Explain. (2% each)

(A). What is the difference between "guaranty" and "suretyship"?

Guaranty and Suretyship distinguished

(1) The obligation in guaranty is secondary; whereas, in suretyship, it is primary.

(2) In guranty, the undertaking is to pay if the principal debtor cannot pay;
whereas, in suretyship, the undertaking is to pay if the principal debtor does
not pay .
(3) In guranty, the guarantor is entitled to the benefit of excussion; whereas, in
suretyship the surety is not entitled.
(4) Liability in guaranty depends upon an independent agreement to pay the
obligations of the principal if he fails to do so; whereas, in suretyship, the
surety assumes liability as a regular party.
(5) The Guarantor insures the solvency of the principal debtor; whereas, the
surety insures the debt.
(6) In a guaranty, the guarantor is subsidiarlty liable; whereas, in a suretyship, the
surety binds himself solidarity with the principal debtor (Art 2047, Civil Code).

Pledge; Pactum Commissorium (2009)

No.XVII. Rosario obtained a loan of P100,000.00 from Jennifer, and pledged her
diamond ring. The contract signed by the parties stipulated that if Rosario is unable to
redeem the ring on due date, she will execute a document in favor of Jennifer
providing that the ring shall automatically be considered full payment of the loan.

(A). Is the contract valid? Explain. (3%)

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 Credit Transactions

The contract is valid because Rosario has to execute a document in favor of

Jennifer to transfer the ownership of the pledged ring to the latter. The contract
does not amount to pactum commissorium because it does not provide for the
automatic appropriation by the pledgee of the thing pledged in case of default
by the pledgor.

(B). Will your answer to [a] be the same if the contract stipulates that upon failure of
Rosario to redeem the ring on due date, Jennifer may immediately sell the ring and
appropriate the entire proceeds thereof for herself as full payment of the loan?
Reasons. (3%)

No, my answer will be different. While the contract of pledge is valid, the
stipulation authorizing the pledgee to immediately sell the thing pledged is void 3
under Art 2088 of the New Civil Code, which provides that “the creditor cannot
appropriate the things given by way of pledge or mortgage, or dispose of them
xxx.” Jennifer cannot immediately sell by herself the thing pledged. It must be
foreclosed by selling it at a public auction in accordance with the procedure
under Art 2112 of the New Civil Code.

VI.

Lito obtained a loan of P1,000,000 from Ferdie, payable within one year. To secure
payment, Lito executed a chattel mortgage on a Toyota Avanza and a real estate
mortgage on a 200-square meter piece of property.

(A) Would it be legally significant - from the point of view of validity and enforceability -
if the loan and the mortgages were in public or private instruments? (6%)

With respect to the loan, the same is both valid and enforceable regardless of
whether it is in a private or public document because as a rule, contracts shall
be obligatory in whatever form they may have been entered into provided all
the essential requisites for their validity are present. A loan is a contract which the
law does not require to be in a particular form in order that it may be valid or
enforceable.

However, with regard to the chattel mortgage, since the law (Act 1508) requires
an affidavit of good faith stating that the chattel mortgage is supposed to stand
as security for the loan, it is submitted that for validity of the chattel mortgage, it
must be in a public document. A real estate mortgage under the provisions of
Article 2125 requires that in order that a mortgage may be validly constituted
that the document in which it appears must be recorded. If it is not recorded,
the mortgage is nevertheless valid and binding between the parties. Hence, for
validity both chattel and real estate mortgages must be in a public document.
But for purposes of enforceability, it is submitted that the form of the contract
whether in a public or private document would be immaterial. (Mobil Oil vs.
Diocares 29 SCRA 656).

(B) Lito's failure to pay led to the extra-judicial foreclosure of the mortgaged real
property. Within a year from foreclosure, Lito tendered a manager's check to Ferdie to
redeem the property. Ferdie refused to accept payment on the ground that he
wanted payment in cash: the check does not qualify as legal tender and does not
include the interest payment. Is Ferdie's refusal justified? (4%)

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 Credit Transactions

Ferdie’s refusal to accept the check on the ground that it does not qualify as
legal tender is correct because a check, whether a manager's check or ordinary
check, is not legal tender, and an offer of a check in payment of a debt is not a
valid tender of payment and may be refused receipt by the obligee or creditor.
(Philippine Airlines vs. CA and Amelia Tan – January 30, 1990)

Mere delivery of checks does not discharge the obligation under a judgment.
The obligation is not extinguished and remains suspended until the payment by
commercial document is actually realized (Art. 1249, Civil Code, par. 3). Also,
redemption within the period allowed by law is not a matter of intent but a
question of payment or valid tender of full redemption price within the said
period. Whether the redemption is being made under Act 3135 or under the
4
General Banking Law, the mortgagor or his assignee is required to tender
payment to make said redemption valid. (Heirs of Quisumbing vs. PNB aand
SLDC –G.R. No. 178242 January 20, 2009)

Commodatum & Mutuum

Commodatum (1993)

A, upon request, loaned his passenger Jeepney to B to enable B to bring his sick wife
from Paniqui. Tarlac to the Philippine General Hospital in Manila for treatment. On the
way back to Paniqui, after leaving his wife at the hospital, people stopped the
passenger Jeepney. B stopped for them and allowed them to ride on board,
accepting payment from them just as in the case of ordinary passenger Jeepneys
plying their route. As B was crossing Bamban, there was an onrush of Lahar from Mt
Pinatubo, the Jeep that was loaned to him was wrecked.

1) What do you call the contract that was entered into by A and B with respect to the
passenger Jeepney that was loaned by A to B to transport the latter's sick wife to
Manila?

The contract is called "commodatum". [Art. 1933. CivilCode). COMMODATUM is

a contract by which one of theparties (bailor) delivers to another (bailee)
something not consumable so that the latter may use it for a certain time and
return it.

2) Is B obliged to pay A for the use of the passenger jeepney?

No, B is not obliged to pay A for the use of the passenger jeepney because
commodatum is essentially gratuitous. (Art.1933. Civil Code]

3) Is B liable to A for the loss of the jeepney?

Yes, because B devoted the thing to a purpose different from that for which it
has been loaned (Art. 1942, par. 2,Civil Code)

Commodatum (2005)

Before he left for Riyadh to work as a mechanic, Pedro left his Adventure van with Tito,
with the understanding that the latter could use it for one year for his personal or family
use while Pedro works in Riyadh. He did not tell Tito that the brakes of the van were
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 Credit Transactions

faulty. Tito had the van tuned up and the brakes repaired. He spent a total amount of
P15,000.00. After using the vehicle for two weeks, Tito discovered that it consumed too
much fuel. To make up for the expenses, he leased it to Annabelle. Two months later,
Pedro returned to the Philippines and asked Tito to return the van. Unfortunately, while
being driven by Tito, the van was accidentally damaged by a cargo truck without his
fault.

a) Who shall bear the P15,000.00 spent for the repair of the van? Explain. (2%)

The P15,000.00 spent for the repair of the van should be borne by Pedro.

Art. 1933, Civil Code provides, Where the bailor delivers to the bailee a non-
consummable thing so that the latter may use it for a certain time and return the 5
identical thing, the contract perfected is a Contract of Commodatum. Art. 1949
of the Civil Code also states that, The bailor shall refund the extraordinary
expenses during the contract for the preservation of the thing loaned provided
the bailee brings the same to the knowledge of the bailor before incurring the
same, except when they are so urgent that the reply to the notification cannot
be awaited without danger.

In the given problem, Pedro left his Adventure van with Tito so that the latter
could use it for one year while he was in Riyadh. There was no mention of a
consideration. Thus, the contract perfected was commodatum. The amount
of P15,000.00 was spent by Tito to tune up the van and to repair its brakes. Such
expenses are extra-ordinary expenses because they are necessary for the
preservation of the van. Thus, the same should be borne by the bailor, Pedro.

b) Who shall bear the costs for the van's fuel, oil and other materials while it was with
Tito? Explain. (2%)

Tito must also pay for the ordinary expenses for the use and preservation of the
thing loaned. He must pay for the gasoline, oil, greasing and spraying. He cannot
ask for reimbursement because he has the obligation to return the identical thing
to the bailor.

Under Article 1941 of the Civil Code, the bailee is obliged to pay for the ordinary
expenses for the use and preservation of the thing loaned.

c) Does Pedro have the right to retrieve the van even before the lapse of one year?
Explain. (2%)

No as a rule, Pedro does not have the right to retrieve the van before the lapse
of one year.

Article 1946 of the Code provides that "the bailor cannot demand the return of
the thing loaned till after the expiration of the period stipulated, or after the
accomplishment of the use for which the commodatum has been constituted.
The parties are mutually bound by the terms of the contract. Under the Civil
Code, there are only 3 instances when the bailor could validly ask for the return
of the thing loaned even before the expiration of the period. These are when: (1)
a precarium contract was entered (Article1947); (2) if the bailor urgently needs
the thing (Article 1946);and (3) if the bailee commits acts of ingratitude (Article
1948).

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 Credit Transactions

In the given problem, Pedro allowed Tito to use the van for one year, and not
one of the situations is present in this case. The fact that Tito had leased the thing
loaned to Annabelle would not justify the demand for the return of the
thing loaned before expiration of the period. Under Article 1942 of the Civil
Code, leasing of the thing loaned to a third person not member of the
household of the bailee, will only entitle bailor to hold bailee liable for the loss of
the thing loaned.

Thus, he should be bound by the said agreement and he cannot ask for the
return of the car before the expiration of the one year period.

d) Who shall bear the expenses for the accidental damage caused by the cargo truck,
granting that the truck driver and truck owner are insolvent? Explain. (2%) 6

Generally, extraordinary expenses arising on the occasion of the actual use of

the thing loaned by the bailee, even if incurred without fault of the bailee, shall
be shouldered equally by the bailor and the bailee. (Art. 1949 of the CivilCode).

However, if Pedro had an urgent need for the vehicle, Tito would be in delay for
failure to immediately return the same, then Tito would be held liable for the
extraordinary expenses.

Commodatum vs. Usufruct (1998)

Distinguish usufruct from commodatum and state whether these may be constituted
over consumable goods. [2%]

There are several points of distinction between usufruct and commodatum.

Usufruct is constituted by law, by contract, by testamentary succession, or by

prescription (Art. 1933. CivilCode).

Usufruct creates a real right to the fruits of another's property, while

commodatum creates only a purely personal right to use another's property, and
requires a stipulation to enable the bailee to "make use" of the fruits (Arts.
1939&1940, Civil Code).

Usufruct maybe onerous while commodatum is always or essentially gratuitous

(Arts. 1933 &1935, Civil Code). The contract constituting usufruct is consensual,
while commodatum is a real contract (perfected only by delivery of the subject
matter thereof).

However, both involve the enjoyment by a person of the property of another,

differing only as to the extent and scope of such enjoyment[jus fruendi in one
and Jus utendi in the other); both may have as subject matter either an
immovable or a movable; and, both maybe constituted over consumable
goods (Arts. 574 & 1936,Civil Code). A consumable thing may be the subject-
matter of an abnormal usufruct but in a normal usufruct, the subject-matter may
be used only for exhibition. A commodatum of a consumable thing may be only
for the purpose of exhibiting, not consuming it.

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 Credit Transactions

Mutuum vs. Commodatum (2004)

Distinguish briefly but clearly between Mutuum andcommodatum.

In MUTUUM, the object borrowed must be a consumablething the ownership of

which is transferred to the borrower who incurs the obligation to return the same
consumable tothe lender in an equal amount, and of the same kind andquality.
In COMMODATUM, the object borrowed is usually a non-consumable thing the
ownership of which is nottransferred to the borrower who incurs the obligation
toreturn the very thing to the lender.

Mutuum; Interests (2001)

7
Samuel borrowed P300,000.00 housing loan from the bank at18% per annum interest.
However, the promissory notecontained a proviso that the bank "reserves the right
toincrease interest within the limits allowed by law," By virtueof such proviso, over the
objections of Samuel, the bank increased the interest rate periodically until it reached
48%per annum. Finally, Samuel filed an action questioning theright of the bank to
increase the interest rate up to 48%. Thebank raised the defense that the Central Bank
of thePhilippines had already suspended the Usury Law. Will theaction prosper or not?
Why? (5%)

The action will prosper.

While it is true that the interest ceilings set by the Usury Law are no longer in force,
it has been held that PD No. 1684 and CB Circular No. 905 merely allow
contracting parties to stipulate freely on any adjustment in the interest rate on a
loan or forbearance of money but do not authorize a unilateral increase of the
interest rate by one party without the other's consent(PNB v. CA, 238 SCRA 2O
[1994]]). To say otherwise will violate the principle of mutuality of contracts under
Article 1308 of the Civil Code. To be valid, therefore, any change of interest must
be mutually agreed upon by the parties (Dizon v, Magsaysay,57 SCRA 25O
[1974]) . In the present problem, the debtor not having given his consent to the
increase in interest, the increase is void.

Mutuum; Interests (2002)

Carlos sues Dino for (a) collection on a promissory note for aloan, with no agreement
on interest, on which Dino defaulted, and (b) damages caused by Dino on his (Carlos’)
priceless Michael Angelo painting on which Dino is liable on the promissory note and
awards damages to Carlos for the damaged painting, with interests for both awards.
What rates of interest may the court impose with respect to both awards? Explain. (5%)

With respect to the collection of money or promissory note, it being a

forbearance of money, the legal rate of interest for having defaulted on the
payment of 12% will apply. With respect to the damages to the painting, it is 6%
from the time of the final demand up to the time of finality of judgment until
judgment credit is fully paid. The court considers the latter as a forbearance of
money. (Eastern Shipping Lines, Inc. v. CA, 234 SCRA 78 [1994]; Art 2210 and2211,
CC)

Mutuum; Interests (2004)

The parties in a contract of loan of money agreed that the yearly interest rate is 12%
and it can be increased if there is a law that would authorize the increase of interest
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 Credit Transactions

rates. Suppose OB, the lender, would increase by 5% the rate of interest to be paid by
TY, the borrower, without a law authorizing such increase, would OB’s action be just
and valid? Why? Has TY a remedy against the imposition of the
rate increase? Explain. (5%)

OB's action is not just and valid.

The debtor cannot be required to pay the increase in interest there being no
law authorizing it, as stipulated in the contract. Increasing the rate in the
absence of such law violates the principle of mutuality of contracts. Even if there
was a law authorizing the increase in interest rate, the stipulation is still void
because there is no corresponding stipulation to decrease the interest due when
the law reduces the rate of interest. 8

SURETY

Recovery of Deficiency (1997)

AB sold to CD a motor vehicle for and in consideration of P120,000.00 to be paid

in twelve monthly equal installments of P10,000,00, each installment being due and
payable on the15th day of each month starting January 1997. To secure the promissory
note, CD (a) executed a chattel mortgage on the subject motor vehicle, and (b)
furnished a surety bond issued by Philam life, CD failed to pay more than two (2)
installments, AB went after the surety but he was only able to obtain three-fourths (3/4)
of the total amount still due and owing from CD. AB seeks your advice on how he
might, if at all, recover the deficiency. How would you counsel AB?

Yes, he can recover the deficiency. The action of AB to go after the surety bond
cannot be taken to mean a waiver of his right to demand payment for the
whole debt, The amount received from the surety is only payment pro tan to,
and an action may be maintained for a deficiency debt.

CREDIT TRANSACTIONS

DIFFERENTIATE BETWEEN COMMODATUM AND MUTUUM.

Commodatum involves non-consumable things while mutuum involves money or

other consumable things.

In commodatum, ownership of the thing loaned is retained by the lender, while

in mutuum, ownership is transferred to the borrower.

Commodatum is essentially gratuitous, while mutuum can be gratuitous or

onerous, i.e. with stipulated interest.

In commodatum, borrower must return the same thing loaned, while in mutuum,
borrower need only pay an equal amount of the same kind and quality.

Commodatum is a loan for permissive or temporary use, while mutuum is a loan

for consumption.

DO what YOU must do, but Never say, NEVER!!! – Hazel 12/18/17
 Credit Transactions

In commodatum, the bailor may demand the return of the thing loaned before
the expiration of the term in case of urgent need. Bailor suffers the loss of the
subject since he is the owner. In mutuum, the lender may not demand its return
before the lapse of the term agreed upon. Borrower suffers the loss even if
caused exclusively by a fortuitous event, and he is not discharged from his duty
to pay.
Commodatum is purely personal in character while mutuum is not.

WHO BEARS THE ORDINARY EXPENSES AND EXTRAORDINARY EXPENSES IN A

COMMODATUM?
9
 The bailee is obliged to pay for the ordinary expenses for the use and
preservation of the thing loaned. [Art. 1941]

 The bailor shall refund the extraordinary expenses during the contract for the
preservation of the thing loaned, provided that the bailee brings the same to the
knowledge of the bailor before incurring them, except when they are so urgent
that the reply to the notification cannot be awaited without danger.

 If the extraordinary expenses arise on the occasion of the actual use of the thing
by the bailee, even though he acted without fault, they shall be borne equally
by both the bailor and the bailee, unless there is a stipulation to the contrary.
[Art. 1949]

WHAT ARE THE RULES FOR AWARD OF INTEREST IN THE CONCEPT OF ACTUAL AND
COMPENSATORY DAMAGES?

(1) When the obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should be that
which may have been stipulated in writing.

Furthermore, the interest due shall itself earn legal interest from the time it is
judicially demanded. In the absence of stipulation, the rate of interest shall be
6% per annum to be computed from default, i.e., from judicial or extrajudicial
demand under and subject to the provisions of Art. 1169 of the Civil Code.

(2) When an obligation, not constituting a loan or forbearance of money, is

breached, an interest on the amount of damages awarded may be imposed at
the discretion of the court at the rate of 6% per annum.

No interest, however, shall be adjudged on unliquidated claims or damages,

except when or until the demand can be established with reasonable certainty.

Accordingly, where the demand is established with reasonable certainty, the

interest shall begin to run from the time the claim is made judicially or
extrajudicially [Art. 1169], but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only
from the date the judgment of the court is made (at which time the

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 Credit Transactions

quantification of damages may be deemed to have been reasonably

ascertained).

The actual base for the computation of legal interest shall, in any case, be on
the amount finally adjudged.

(3) When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 6% per annum from such finality until its satisfaction,
this interim period being deemed to be by then an equivalent to a forbearance
of credit. [Nacar v. Gallery Frames, G.R. No. 189871, August 13, 2013, modifying Eastern Shipping
Lines vs. CA, G.R. No. 97412, July 12, 1994, in light of BSP-MB Circular No. 799] 10

X ENTERED INTO A CONTRACT WITH Y FOR THE CONSTRUCTION OF A BUILDING TO BE

FINISHED AT A STIPULATED TIME. THUS, Y HAD CERTAIN CONSTRUCTION MATERIALS
DEPOSITED IN THE WAREHOUSE OWNED BY C. THE BUILDING WAS NOT FINISHED AT THE
STIPULATED TIME SO X SUED Y FOR BREACH OF CONTRACT. IN THE MEANTIME, X
DEMANDED FROM C THE RETURN OF THE MATERIALS DEPOSITED BY Y, BUT C CANNOT
PRODUCE THE SAID MATERIALS FOR Y ALREADY WITHDREW THEM AT AN EARLIER TIME. X
NOW COMMENCES AN ACTION AGAINST C FOR BREACH OF CONTRACT OF DEPOSIT.
WILL IT PROSPER? EXPLAIN.

No. In order for C to be held liable for breach of contract of deposit, X must
prove (1) the existence of any contract of deposit between him and C, or
between C and some other person in X’s favor, and (2) that the objects which
are the subject of the deposit is in C’s possession at the time of demand to return
the same.

In this case, he failed to prove the existence of any contract of deposit. If at all, it
was only between C and Y. And even if there was indeed a contract of deposit
between C and Y, X has to prove its existence and that it was executed in his
favor, which he failed to do. He also failed to prove that there were construction
materials and equipment in C’s warehouse at the time he made a demand for
their return. [Chan v. Maceda, Jr., G.R. No. 142591, April 25, 2003]

Fixed, savings, and current deposits of money in banks and similar institutions shall be
governed by the provisions concerning simple loan. [Art. 1980] Bank deposits are in the
nature of irregular deposits; they are really loans because they earn interest. The
relationship then between a depositor and a bank is one of creditor and debtor.
[Serrano v. Central Bank of the Phil., G.R. No. L-30511, February 14, 1980] The general
rule is that a bank can compensate or set off the deposit in its hands for the payment of
the indebtedness to it on the part of the depositor. [Gullas v. PNB, G.R. No. L-43191,
November 13, 1935]

WHAT IS THE NATURE OF A CONTRACT FOR THE RENT OF A SAFETY DEPOSIT BOX WITH A
BANK?

It is a special kind of deposit. It cannot be characterized as an ordinary contract

of lease because the full and absolute possession and control of the safety
deposit box was not given to the renters. The guard key of the box remained
DO what YOU must do, but Never say, NEVER!!! – Hazel 12/18/17
 Credit Transactions

with the bank; without this key, the renters could not open the box. On the other
hand, the bank could not likewise open the box without the renter's key. [CA
Agro-Industrial Development Corp. v. CA, G.R. No. 90027, March 3, 1993]

DISTINGUISH THE RIGHT OF A DEPOSITARY UNDER THE CIVIL CODE AND THAT OF A
WAREHOUSEMAN UNDER THE WAREHOUSE RECEIPTS LAW (ACT NO. 2137) AS REGARDS
THE COMMINGLING OF GOODS.

Under Art. 1976 of the Civil Code, as a general rule, a depositary may
commingle grain or other articles of the same kind and quality, unless there is a
stipulation to the contrary. As for a warehouseman, under Sec. 22 of the
Warehouse Receipts Law, a warehouseman shall keep the goods so far separate
from goods of other depositors and from other goods of the same depositor for 11
which a separate receipt has been issued, as to permit at all times the
identification and redelivery of the goods deposited. The exception, found in
Sec. 23, is, if authorized by agreement or by custom, the warehouseman may
mingle fungible goods with other goods of the same kind and grade.

DIFFERENTIATE BETWEEN GUARANTOR AND SURETY.

A guarantor is subsidiarily liable while a surety is primarily liable. A guarantor must

pay if the principal debtor cannot (benefit of excussion) while a surety must pay
if the principal debtor does not. A guarantor is an insurer of the principal debtor’s
solvency, while a surety is an insurer of the debt. [Art. 2047]

WHAT IS THE BENEFIT OF EXCUSSION AND HOW IS IT EXERCISED?

Under the benefit of excussion, the guarantor cannot be compelled to pay the
creditor unless the latter has: (1) exhausted all of the property of the debtor; and
(2) resorted to all the legal remedies against the debtor. [Art. 2058]

In order that the guarantor may make use of the benefit of excussion, he must:
(a) set it up against the creditor upon the latter’s demand for payment from him;
and (b) point out to the creditor available property of the debtor within the
Philippine territory and sufficient to cover the amount of the debt. [Art. 2060]

WHAT ARE THE REQUISITES OF PLEDGE?

(1) Constituted to secure a principal obligation;

(2) pledgor must be the absolute owner;

(3) pledgor must have free disposal of the thing pledged;

(4) when the principal obligations becomes due, the thing pledged may be
alienated to satisfy payment of such obligation; (5) the subject matter of the
contract must be a movable property; and (6) the thing pledged must be
placed in the possession of the pledgee.

WHAT IS PACTUM COMMISSORIUM?

Pactum commissorium is a stipulation that allows the creditor to appropriate the

collateral, or dispose of it, in contravention of the provisions on foreclosure.
Hence, it is considered null and void. It has two elements: (1) there is property
pledged/mortgaged by way of security for the payment of the principal
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 Credit Transactions

obligation; and (2) there is a stipulation for automatic appropriation by the

creditor of the thing mortgaged/pledged in case of non-payment of the
principal obligation within the stipulated period.

DISTINGUISH BETWEEN EQUITY OF REDEMPTION AND RIGHT OF REDEMPTION.

Equity of redemption refers to the right of the mortgagor in case of a judicial

foreclosure to redeem the mortgaged property after his default in the
performance of the conditions of the mortgage but before confirmation of the
sale of the mortgaged property. The period for equity of redemption is 90-120
days after entry of judgment requiring the debtor to pay. [Rules of Court, Sec. 2,
Rule 68]
12
On the other hand, right of redemption refers to the right of the mortgagor in
case of extrajudicial foreclosure to redeem the mortgaged property within a
certain period from and after it was sold for the satisfaction of the mortgage
debt. The period for its exercise is within twelve (12) months from the time of the
registration of the sale in the Office of the Register of Deeds [Sec. 6, Act. No.
3135]. An exception is found in Sec. 47 of the General Banking Law, which
provides that notwithstanding Act 3135, juridical persons whose property is being
sold pursuant to an extrajudicial foreclosure, shall have the right to redeem the
property in accordance with this provision until, but not after, the registration of
the certificate of foreclosure sale with the applicable Register of Deeds which in
no case shall be more than three (3) months after foreclosure, whichever is
earlier [Goldenway Merchandising Corp. v. Equitable PCI Bank, G.R. No. 195540,
March 13, 2013].

WHAT IS THE OBJECT OF A CONTRACT OF CHATTEL MORTGAGE?

Chattel mortgage covers only movable property. However, parties may treat as
movable that which by its nature is an immovable property but such contract of
chattel mortgage is binding only between them and not to third persons.
[Evangelista v. Alto Surety Inc., G.R. No. L-11139, April 23, 1958]

WHERE IS A CHATTEL MORTGAGE RECORDED?

The mortgage is recorded in the office of the register of deeds of the province in
which the mortgagor resides at the time of making the same, or, if he resides
without the Philippine Islands, in the province in which the property is situated. If
the property is situated in a different province from that in which the mortgagor
resides, the mortgage shall be recorded in the office of the register of deeds of
both the province in which the mortgagor resides and that in which the property
is situated, and for the purposes of this Act, the city of Manila shall be deemed to
be a province. [Sec. 4, Act No. 1508]

WHAT IS ANTICHRESIS?

By the contract of antichresis, the creditor acquires the right to receive the fruits
of an immovable of his debtor, with the obligation to apply them to the payment
of the interest, if owing, and thereafter to the principal of his credit. [Art. 2132]

IS THERE A SPECIFIC FORM REQUIRED FOR A CONTRACT OF ANTICHRESIS TO BE VALID?

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 Credit Transactions

Yes. The amount of the principal and of the interest shall be specified in writing;
otherwise, the contract of antichresis shall be void. [Art. 2134]

C BOUGHT CERTAIN SHARES OF STOCK FROM PF CORP. THE SHARES OF STOCK WERE
DELIVERED TO CUSTODIAN BANKS WHO HELD SUCH ON C’S BEHALF. WHEN PF CORP.
WAS PLACED UNDER RECEIVERSHIP BY THE SEC, THE RECEIVER WITHDREW THE SHARES
FROM THE CUSTODIAN BANKS AND WERE SOLD WITHOUT HIS KNOWLEDGE AND WITHOUT
AUTHORITY FROM THE SEC. THE PROCEEDS WERE COMMINGLED WITH PF CORP.’S OTHER
ASSETS. UPON LEARNING OF THIS, HE FILED A CLAIM FOR PAYMENT OF THE VALUE OF THE
STOCKS IN THE RECEIVERSHIP PROCEEDINGS. A 15% RATE OF RECOVERY WAS APPROVED
FOR PF CORP.’S CREDITORS AND INVESTORS. C CLAIMS THAT HE IS ENTITLED TO THE
ENTIRE MONETARY VALUE OF THE SHARES OF STOCK, ARGUING THAT HE IS A PREFERRED
13
CREDITOR UNDER ART. 2241 (2) OF THE CIVIL CODE SINCE HIS CLAIM FOR THE MONETARY
VALUE OF THE SHARES AROSE FROM THE UNAUTHORIZED SALE OF SUCH HIS STOCKS. IS C
CORRECT? EXPLAIN.

No. Under Art. 2241 (2), claims arising from misappropriation, breach of trust, or
malfeasance by public officials committed in the performance of their duties, on
the movables, money or securities obtained by them, are preferred with
reference to specific movable property of the debtor. While C’s shares were
specific movable property, the money raised from them after their sale is a
generic thing. C’s claim is for the payment of the monetary value of the shares,
thus it does not fall under Art. 2241 (2). At most, C is deemed an ordinary creditor
whose credit, along with other ordinary credits, shall be paid pro rata [Art.
2251(2)]. [Cordova v. Reyes Daway Lim Bernardo Lindo Rosales Law Offices, G.R.
No. 146555, July 3, 2007].

WHAT IS THE DIFFERENCE BETWEEN MORTGAGE CREDITS AND UNPAID VENDOR’S LIENS
WITH RESPECT TO PREFERRED CREDITS WITH REFERENCE TO THE DEBTOR’S SPECIFIC
IMMOVABLE PROPERTY AND REAL RIGHTS?

While Art. 2242 specifically requires mortgage credits to be recorded in the

Registry of Property in order to be given preference, no such requirement is
made with respect to the vendor's lien for the unpaid price of real property sold.
The law does not make any distinction between a registered and unregistered
vendor's lien. Any lien of that kind enjoys the preferred credit status. [De Barretto
v. Villanueva, G.R. No. L-14938, January 28, 1961]

EXPLAIN THE ORDER OF PREFERENCE AND CONCURRENCE OF CREDITS PROVIDED IN THE

CIVIL CODE.

The Civil Code establishes a two-tier order of preference among the

enumerated special preferred credits: taxes come first, and all other claims
come after. Only taxes, duties, and fees due on the movable or immovable
properties enjoy preference among the special preferred credits in Arts. 2241
and 2242. All other claims in the said articles are not preferred over any other, as
there is only a concurrence of credits among them.

PEOPLE vs. CONCEPCION, 44 Phil. 126

FACTS: Venancio Concepcion, President of the Philippine National Bank and a member of the Board
thereof, authorized an extension of credit in favor of "Puno y Concepcion, S. en C. to the manager of the

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 Credit Transactions

Aparri branch of the Philippine National Bank. "Puno y Concepcion, S. en C." was a co-partnership
where Concepcion is a partner. Subsequently, Concepcion was charged and found guilty in the Court of
First Instance of Cagayan with violation of section 35 of Act No. 2747. Section 35 of Act No. 2747
provides that the National Bank shall not, directly or indirectly, grant loans to any of the members of the
board of directors of the bank nor to agents of the branch banks. Counsel for the defense argue that the
documents of record do not prove that authority to make a loan was given, but only show the concession
of a credit. They averred that the granting of a credit to the co-partnership "Puno y Concepcion, S. en C."
by Venancio Concepcion, President of the Philippine National Bank, is not a "loan" within the meaning
of section 35 of Act No. 2747.

ISSUE: Whether or not the granting of a credit of P300,000 to the co-partnership "Puno y Concepcion, S.
en C." by Venancio Concepcion, President of the Philippine National Bank, a "loan" within the meaning
of section 35 of Act No. 2747. 14
HELD: The Supreme Court ruled in the affirmative. The "credit" of an individual means his ability to
borrow money by virtue of the confidence or trust reposed by a lender that he will pay what he may
promise. A "loan" means the delivery by one party and the receipt by the other party of a given sum of
money, upon an agreement, express or implied, to repay the sum loaned, with or without interest. The
concession of a "credit" necessarily involves the granting of "loans" up to the limit of the amount fixed in
the "credit,"

Naguiat vs CA and Queaño; GR No. 118375, 03 October 2003; 412 SCRA 591

FACTS: Queaño applied with Naguiat a loan for P200,000, which the latter granted. Naguiat indorsed
to Queaño Associated bank Check No. 090990 for the amount of P95,000 and issued also her own
Filmanbank Check to the order of Queaño for the amount of P95,000. The proceeds of these checks were
to constitute the loan granted by Naguiat to Queaño. To secure the loan, Queaño executed a Deed of Real
Estate Mortgage in favor of Naguiat, and surrendered the owner’s duplicates of titles of the mortgaged
properties. The deed was notarized and Queaño issued to Naguiat a promissory note for the amount of
P200,000. Queaño also issued a post-dated check amounting to P200,000 payable to the order of
Naguait. The check was dishonoured for insufficiency of funds. Demand was sent to Queaño. Shortly,
Queaño, and one Ruby Reubenfeldt met with Naguiat. Queaño told Naguiat that she did not receive the
loan proceeds, adding that the checks were retained by Reubenfeldt, who purportedly was Naguiat’s
agent.

Naguiat applied for extrajudicial foreclosure of the mortgage. RTC declared the Deed as null and void
and ordered Naguiat to return to Queaño the owner’s duplicates of titles of the mortgaged lots.

ISSUE: Whether or not the issuance of check resulted in the perfection of the loan contract.

HELD:The Court held in the negative. No evidence was submitted by Naguiat that the checks she issued
or endorsed were actually encashed or deposited. The mere issuance of the checks did not result in the
perfection of the contract of loan. The Civil Code provides that the delivery of bills of exchange and
mercantile documents such as checks shall produce the effect of payment only when they have been
cashed. It is only after the checks have been produced the effect of payment that the contract of loan may
have been perfected.

Article 1934 of the Civil Code provides: An accepted promise to deliver something by way of
commodatum or simple loan is binding upon the parties, but the commodatum or simple loan itsel shall
not be perfected until the delivery of the object of the contract. A loan contract is a real contract, not
consensual, and as such, is perfected only upon the delivery of the objects of the contract.

DO what YOU must do, but Never say, NEVER!!! – Hazel 12/18/17
 Credit Transactions

PRODUCERS BANK OF THE PHILIPPINES vs. COURT OF APPEALS, GR No. 115324

FACTS: Sometime in 1979, private respondent Franklin Vives, upon request of his friend Angeles
Sanchez and relying on the assurance that he could withdraw his money within a months time, issued a
check in the amount of Two Hundred Thousand Pesos in favor of Sterela Marketing and Services owned
by one Col. Arturo Doronilla. Subsequently, private respondent and his wife found out that Sterela cant
be found on the address previously given to then, so they went to petitioner Producers Bank of the
Philippines to verify if their money was still intact. They were informed that part of the amount had been
withdrawn by Doronilla and that the latter instructed the bank to debit from the savings account the
amount and deposit it in his current account Private respondent filed an action for recovery of sum of
money against Doronilla, Sanchez, Dumagpi and petitioner. The trial court ruled in favour of herein
private respondents. On appeal of the case, the appellate court affirmed the decision of the RTC.
Petitioner contends that the transaction between private respondent and Doronilla is a simple loan 15
(mutuum) since all the elements of a mutuum are present: first, what was delivered by private respondent
to Doronilla was money, a consumable thing; and second, the transaction was onerous as Doronilla was
obliged to pay interest. Hence, petitioner argues that it cannot be held liable because it is not privy to the
transaction between the latter and Doronilla. Private respondent, on the other hand, argues that the
transaction between him and Doronilla is not a mutuum but an accommodation, since he did not actually
part with the ownership of his P200,000.00 but retained some degree of control over his money through
his wife who was made a signatory to the savings account and in whose possession the savings account
passbook was given.

ISSUE: Whether or not the contract between Sanchez and Doronilla and Vives is a contract of
commodatum, thus making petitioner Bank liable.

HELD: Supreme Court held that the contract is commodatum. Although in view of Article 1933 of the
Civil Code, the object in commodatum is non-consumable, but Article 1936 of the Civil Code provides
Consumable goods may be the subject of commodatum if the purpose of the contract is not the
consumption of the object, as when it is merely for exhibition. Thus, if consumable goods are loaned only
for purposes of exhibition or when the intention of the parties is to lend consumable goods and to have
the very same goods returned at the end of the period agreed upon, the loan is commodatum and not a
mutuum. The evidence shows that private respondent merely "accommodated" Doronilla by lending his
money without consideration, as a favor to his good friend Sanchez. It was however clear to the parties to
the transaction that the money would not be removed from Sterelas savings account and would be
returned to private respondent after thirty (30) days.

Catholic Vicar Apostolic of the Mountain Province vs. Court of Appeals, Heirs of Egmidio Octaviano
and Juan Valdez

Facts: The whole controversy started when the herein petitioner filed an application for registration of
lands 1, 2, 3 and 4 in La Trinidad, Benguet on September 5, 1962. The heirs of Juan Valdez and the heirs
of Egmidio Octaviano filed an opposition on lots 2 and 3, respectively. On November 17, 1965, the land
registration court confirmed the registrable title of the petitioner. On May 9, 1977, the Court of Appeals
reversed the decision and dismissed the Vicar’s application. The heirs filed a motion for reconsideration,
praying that the lots be ordered registered under their names. The Court of Appeals denied the motion for
lack of sufficient merit. Both parties then came before the Supreme Court. The Supreme Court, in a
minute resolution, denied both petitions. The heirs filed the instant cases for the recovery and possession
of the lots.

Respondents argue that the petitioner is barred from setting up the defense of ownership or long and
continuous possession by the prior judgment of the Court of Appeals under the principle of res judicata.
Petitioner contends that the principle is not applicable because the dispositive portion of the judgment
merely dismissed the application for registration.

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 Credit Transactions

Issues:

(1) Whether the decision of the Court of Appeals constitute res judicata and therefore bars the petitioner
from alleging ownership over the lots

(2) Whether the petitioner has acquired the lots through acquisitive prescription

Held:

(1) The Court of Appeals did not positively declare private respondents as owners of the land, neither was
it declared that they were not owners of the land, but it held that the predecessors of private respondents
were possessors of Lots 2 and 3, with claim of ownership in good faith from 1906 to 1951. Petitioner was
in possession as borrower in commodatum up to 1951, when it repudiated the trust by declaring the
properties in its name for taxation purposes. When petitioner applied for registration of Lots 2 and 3 in 16
1962, it had been in possession in concept of owner only for eleven years. Ordinary acquisitive
prescription requires possession for ten years, but always with just title. Extraordinary acquisitive
prescription requires 30 years. On the above findings of facts supported by evidence and evaluated by the
Court of Appeals, affirmed by this Court, We see no error in respondent appellate court's ruling that said
findings are res judicata between the parties. They can no longer be altered by presentation of evidence
because those issues were resolved with finality a long time ago. To ignore the principle of res judicata
would be to open the door to endless litigations by continuous determination of issues without end.

(2) Private respondents were able to prove that their predecessors' house was borrowed by petitioner
Vicar after the church and the convent were destroyed. They never asked for the return of the house, but
when they allowed its free use, they became bailors in commodatum and the petitioner the bailee. The
bailees' failure to return the subject matter of commodatum to the bailor did not mean adverse possession
on the part of the borrower. The bailee held in trust the property subject matter of commodatum. The
adverse claim of petitioner came only in 1951 when it declared the lots for taxation purposes. The action
of petitioner Vicar by such adverse claim could not ripen into title by way of ordinary acquisitive
prescription because of the absence of just title.

Motion for Reconsideration

Issue: Who is entitled to the possession and ownership of the land?

Held: Pursuant to the said decision in CA-G.R. No. 38830-R, the two lots in question remained part of
the public lands. This is the only logical conclusion when the appellate court found that neither the
petitioner nor private respondents are entitled to confirmation of imperfect title over said lots. Hence, the
Court finds the contention of petitioner to be well taken in that the trial court and the appellate court have
no lawful basis in ordering petitioner to return and surrender possession of said lots to private
respondents. Said property being a public land its disposition is subject to the provision of the Public
Land Act, as amended.

Article 555 of the Civil Code provides as follows:

Art. 555. A possessor may lose his possession:

(4) By the possession of another, subject to the provisions of Article 537, if the new possession has lasted
longer than one year. But the real right of possession is not lost till after the lapse of ten years.

It is clear that the real right of possession of private respondents over the property was lost or no longer
exists after the lapse of 10 years that petitioner had been in adverse possession thereof. Thus, the action
for recover of possession of said property filed by private respondents against petitioner must fail. The
Court, therefore, finds that the trial court and the Court of Appeals erred in declaring the private
respondents to be entitled to the possession thereof. Much less can they pretend to be owners thereof.
Said lots are part of the public domain.

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 Credit Transactions

G.R. No. L-28030 January 18, 1982

THE IMPERIAL INSURANCE, INC., petitioner,

vs.

HON. WALFRIDO DE LOS ANGELES, Judge of the Court of First Instance of Rizal, Quezon City
Branch IV, ROSA V. REYES, PEDRO V. REYES and CONSOLACION V. REYES, respondents.

In the present case, the demand upon the petitioner surety was made with due notice and hearing thereon
when the private respondents filed the motion for recovery on the surety bonds dated September 9, 1966
and to which the petitioner filed their opposition dated September 24, 1966. 21

Therefore, all the requisites under Sec. 17, Rule 57, being present, namely: (1) the writ of execution must
17
be returned unsatisfied, in whole or in part; (2) the plaintiff must demand the amount due under the
judgment from the surety or sureties, and (3) notice and hearing of such demand although in a summary
manner, complied with, the liability of the petitioner automatically attaches.

In effect, the order dated November 10, 1966 rendering judgment against the counter-bonds was a
superfluity. The respondent judge could have issued immediately a writ of execution against the petitioner
surety upon demand.

As correctly held by the Court of Appeals:

In fact, respondent Judge could have even issued a writ of execution against petitioner on its bond
immediately after its failure to satisfy the judgment against the defendant upon demand, since liability on
the bond automatically attaches after the writ of execution against the defendant was returned unsatisfied
as held in the case of Tijan vs. Sibonghanoy, CA-G.R. No. 23669-R, December 11, 1927. 22

Moreover, the finality and non-appealability of the order dated November 10, 1966 is made certain and
absolute with the issuance of the order of execution dated January 19, 1967 23 upon the filing of the ex
parte motion for writ of execution 24 of which the petitioner was duly notified by the respondent Judge
and which was duly heard. 25 The general rule is that an order of execution is not appealable, otherwise
a case would never end. The two exceptions 26 to this rule are: (1) where the order of execution varies
the tenor of the judgment; and (2) when the terms of the judgment are not very clear, and there is room
for interpretation. The case at bar does not fall under either exception. There is no showing that the order
of execution varies the tenor of the judgment in Civil Cases Nos. Q-5213 and Q-5214, nor of the order
dated November 10, 1966, but is in fact, in consonance therewith and the terms of the judgment are clear
and definite, therefore, the general rule of non-appealability applies.

It is no longer necessary to discuss the fourth error assigned because of this Court's finding that the
liability expressly assumed by the petitioner on the counter-bonds is solidary with the principal debtor,
the deceased defendant, Felicisimo V. Reyes. As a solidary guarantor, the petitioner, the Imperial
Insurance, Inc., is liable to pay the amount due on such counter-bonds should the creditors, private
respondents herein, choose to go directly after it. 27

Under the law and under their own terms, the counter-bonds are only conditioned upon the rendition of
the judgment. As held by this Court in the aforecited case of Luzon Steel Corporation vs. Sia28 "where
under the rule and the bond the undertaking is to pay the judgment, the liability of the surety or sureties
attaches upon the rendition of the judgment, and the issue of an execution and its return nulla bona is not,
and should not be a condition to the right to resort to the bond." Thus, it matters not whether the
Provincial Sheriff of Bulacan, in making the return of the writ of execution served or did not serve a copy
thereof with notice of attachment on the administratrix of the intestate estate of Felicisimo V. Reyes and
filed a copy of said writ with the office of the clerk of court with notice in accordance with See. 7 (f), Rule
57 of the Revised Rules of Court. The petitioner surety as solidary obligor is liable just the same.

WHEREFORE, the decision of the Court of Appeals promulgated on July 19,1967 in CA-G.R. NO.
38824-R is affirmed and the order of the respondent judge dated January 19, 1967 and all writs or orders

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 Credit Transactions

issued in consequence or in pursuance thereof are also affirmed. The court of origin is hereby ordered to
proceed with the execution against the petitioner surety, the Imperial Insurance Inc., with costs against
said petitioner. SO ORDERED.

Section 2. Effects of Guaranty Between the Debtor and the Guarantor (Arts. 2066-2072 NCC)

Tuason, Tuason, Inc. vs. Machuca

Facts: Manila Compania de Seguros signed a note for 10,000 in favor of Tuason, Tuason Inc. to
guarantee a liability of Universal Trading Co, In turn, Universal Trading Co. and its president, Antonio
Machuca, in his personal capacity, executed a document wherein they bound themselves solidarily to
reimburse Manila Compania de Seguros all of such sum it may pay or become bound to pay, upon its 18
obligation to Tuason, Tuason Inc. whether or not it shall have actually paid such sums or any part
thereof. Universal Trading Co. was declared insolvent.

Tuason, Tuason, Inc. brought action against Manila Compania De Seguros to recover the value of the
note and obtained final judgment. Later, Manila Compania De Seguros filed a complaint against
Machuca to recover the amount which Manila Compania De Seguros was sentenced to pay Tuason,
Tuason, Inc, plus attorneys fees, judicial costs and sheriffs fees, and interest, although Manila Compania
De Seguros had not, in fact, paid the amount of the judgment.

Issues:

WON Tuason, Tuason Inc. Is entitled to the relief sought in view of the above facts?

WON Tuason, Tuason Inc. has the right to recover from Machuca more than the value of the note
executed by Tuason, Tuason, Inc. in favor of Manila Compania de Seguros?

Held:

Yes. It is indispensable that Universal Trading Co. became bound by virtue of final judgment to pay the
value of the note executed by it in favor of Manila Compania de Seguros, and according to the document
executed solidarily by Universal Trading Co. and Machuca, Machuca bound himself to pay Tuason,
Tuason, Inc. as soon as the latter may have become bound and liable, whether or not it shall have
actually paid.

Machuca must not be responsible for the expenses incurred by Manila Compania De Seguros in the
litigation between it and Tuason, Tuason, Inc. and it cannot charge Machuca with expenses it was
compelled to make by reason of its fault. It is entitled only to expenses incurred by it in the action against
Machuca.

Art. 2071 the guarantor, even before having paid, may proceed against the principal debtor:

When he is being sued for the payment

In the case of insolvency of the principal debtor

When the debtor has bound himself to relieve him from the guaranty within specified period, and this
period has expired

When the debt has become demandable, by reason of the expiration of the period of the payment

After the lapse of ten years, when the principal obligation has no fixed period for its maturity, unless it be
such nature that it cannot be extinguished except within a period longer than ten years

If there are reasonable grounds to fear that the principal debtor intends to abscond

If the principal debtor is in imminent danger of becoming insolvent

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 Credit Transactions

In all these, cases, the action of the guarantor is to obtain release from the guaranty, or to demand a
security that shall protect him from any proceedings by the creditor and from the danger of the insolvency
of the debtor.

SURETY

SECURITY BANK V. CUENCA, (2000)

Surety: Obligations Secured, Art. 2053

Facts: Being an onerous undertaking, a surety agreement is strictly construed against the creditor, and
every doubt is resolved in favor of the solidary debtor. The fundamental rules of fair play require the
19
creditor to obtain the consent of the surety to any material alteration in the principal loan agreement, or
at least to notify it thereof. Hence, petitioner bank cannot hold herein respondent liable for loans
obtained in excess of the amount or beyond the period stipulated in the original agreement, absent any
clear stipulation showing that the latter waived his right to be notified thereof, or to give consent thereto.
This is especially true where, as in this case, respondent was no longer the principal officer or major
stockholder of the corporate debtor at the time the later obligations were incurred. He was thus no longer
in a position to compel the debtor to pay the creditor and had no more reason to bind himself anew to the
subsequent obligations.

Continuing Surety

Issue: Contending that the Indemnity Agreement was in the nature of a continuing surety, petitioner
maintains that there was no need for respondent to execute another surety contract to secure the 1989
Loan Agreement. Correct? NO.

Held: That the Indemnity Agreement is a continuing surety does not authorize the bank to extend the
scope of the principal obligation inordinately.

In Dino v. CA, the Court held that “a continuing guarantyis one which covers all transactions, including
those arising in the future, which are within the description or contemplation of the contract of guaranty,
until the expiration or termination thereof.”

To repeat, in the present case, the Indemnity Agreement was subject to the two limitations of the credit
accommodation:

1. that the obligation should not exceed P8 million, and

2. that the accommodation should expire not later than November 30, 1981. Hence, it was a
continuing surety only in regard to loans obtained on or before the aforementioned expiry date and not
exceeding the total of P8 million.

In Dino, the surety Agreement specifically provided that “each suretyship is a continuing one which shall
remain in full force and effect until this bank is notified of its revocation.” Since the bank had not been
notified of such revocation, the surety was held liable even for thesubsequent obligations of the principal
borrower.

PALMARES V. CA & M. B. LENDING CORPORATION, (1998)

Surety distinguished from Guaranty, Art. 2047

Where a party signs a promissory note as a co-maker and binds herself to be jointly and severally liable
with the principal debtor in case the latter defaults in the payment of the loan, is such undertaking of the

DO what YOU must do, but Never say, NEVER!!! – Hazel 12/18/17
 Credit Transactions

former deemed to be that of a surety as an insurer of the debt, or of a guarantor who warrants the
solvency of the debtor? SURETY.

The Civil Code pertinently provides:

Art. 2047. By guaranty, a person called the guarantor binds himself to the creditor to fulfill the obligation
of the principal debtor in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title
I of this Book shall be observed. In such case the contract is called a suretyship.

In the case at bar, petitioner expressly bound herself to be jointly and severally or solidarily liable with
the principal maker of the note. The terms of the contract are clear, explicit and unequivocal that
petitioner's liability is that of a surety. Her pretension that the terms "jointly and severally or solidarily 20
liable" contained in the second paragraph of her contract are technical and legal terms which could not
be easily understood by an ordinary layman like her is diametrically opposed to her manifestation in the
contract that she "fully understood the contents" of the promissory note and that she is "fully aware" of
her solidary liability with the principal maker.

Petitioner would like to make capital of the fact that although she obligated herself to be jointly and
severally liable with the principal maker, her liability is deemed restricted by the provisions of the third
paragraph of her contract wherein she agreed "that M.B. Lending Corporation may demand payment of
the above loan from me in case the principal maker, Mrs. Merlyn Azarraga defaults in the payment of the
note," which makes her contract one of guaranty and not suretyship. The purported discordance is more
apparent than real.

Suretyship Guaranty

A surety is an insurer of the debtguarantor is an insurer of the solvency of the debtor

A suretyship is an undertaking that the debt shall be paida guaranty is an undertaking that thedebtor
shall pay

surety promises to pay the principal's debt if the principal will not pay a guarantor agrees that the
creditor, after proceeding against the principal, may proceed against the guarantor if the principal is
unable to pay

A surety binds himself to perform if the principaldoes not, without regard to his ability to do so A
guarantor does not contract that the principal will pay, but simply that he is able to do so.

a surety undertakes directly for the payment and is so responsible at once if the principal debtor makes
default a guarantor contracts to pay if, by the use of due diligence, the debt cannotbe made out of the
principal debtor

Note: Quintessentially, the undertaking to pay upon default of the principal debtor does not automatically
remove it from the ambit of a contract of suretyship. It has not been shown, either in the contract or the
pleadings, that respondent corporation agreed to proceed against herein petitioner only if and when the
defaulting principal has become insolvent. A contract of suretyship is that wherein one lends his credit by
joining in the principal debtor's obligation, so as to render himself directly and primarily responsible
with him, and without reference to the solvency of the principal.

DO what YOU must do, but Never say, NEVER!!! – Hazel 12/18/17
 Credit Transactions

Suretyship

A surety is bound equally and absolutely with the principal, and as such is deemed an original promissor
and debtor from the beginning. This is because in suretyship there is but one contract, and the surety is
bound by the same agreement which binds the principal. In essence, the contract of a surety starts with
the agreement, which is precisely the situation obtaining in this case before the Court.

A surety is usually bound with his principal by the same instrument, executed at the same time and upon
the same consideration; he is an original debtor, and his liability is immediate and direct. Thus, it has
been held that where a written agreement on the same sheet of paper with and immediately following the
principal contract between the buyer and seller is executed simultaneously therewith, providing that the
signers of the agreement agreed to the terms of the principal contract, the signers were "sureties" jointly
liable with the buyer. A surety usually enters into the same obligation as that of his principal, and the
21
signatures of both usually appear upon the same instrument, and the same consideration usually supports
the obligation for both the principal and the surety

AGRO CONGLOMERATES V. CA & SORIANO;

348 SCRA 450; GR No. 117660 ; December 18, 2000

FACTS: (1) On July 17, 1982, petitioner Agro Conglomerates, Inc. as vendor, sold two parcels of land to
Wonderland Food Industries, Inc. In their Memorandum of Agreement, the parties covenanted that the
purchase price of Five Million (P5,000,000.00) Pesos would be settled by the vendee, under the following
terms and conditions:

(1) One Million (P1,000,000.00) Pesos shall be paid in cash upon the signing of the agreement;

(2) Two Million (P2,000,000.00) Pesos worth of common shares of stock of the Wonderland Food
Industries, Inc.; and

(3) The balance of P2,000,000.00 shall be paid in four equal installments, the first installment falling due,
180 days after the signing of the agreement and every six months thereafter, with an interest rate of 18%
per annum, to be advanced by the vendee upon the signing of the agreement.

(2) Whereas, the parties have agreed to qualify the stipulated terms for the payment of the said ONE
MILLION THREE HUNDRED SIXTY THOUSAND (P1,360,000.00) PESOS through loan from the
respondent bank Regent Savings & Loan Bank (formerly Summa Savings & Loan Association), executed
as Addendum to the previous Memorandum of Agreement.

(3) This addendum was not notarized. Consequently, petitioner Mario Soriano signed as maker several
promissory notes, payable to the respondent bank. Thereafter, the bank released the proceeds of the loan
to petitioners.

(4) During that time, the bank was experiencing financial turmoil and was under the supervision of the
Central Bank. Central Bank examiner and liquidator Cordula de Jesus, endorsed the subject promissory
notes to the bank's counsel for collection. The bank gave petitioners opportunity to settle their account by
extending payment due dates. Mario Soriano manifested his intention to re-structure the loan, yet did not
show up nor submit his formal written request. In their answer, petitioners interposed the defense of
novation and insisted there was a valid substitution of debtor. They alleged that the addendum
specifically states that although the promissory notes were in their names, Wonderland shall be
responsible for the payment thereof.

ISSUE: WHETHER THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE ADDENDUM,
SIGNED BY THE PETITIONERS, RESPONDENT BANK AND WONDERLAND INC., CONSTITUTES A
NOVATION OF THE CONTRACT BY SUBSTITUTION OF DEBTOR, WHICH EXEMPTS THE
PETITIONERS FROM ANY LIABILITY OVER THE PROMISSORY NOTES.

DO what YOU must do, but Never say, NEVER!!! – Hazel 12/18/17
 Credit Transactions

----------------------------------------------------------------------------------------------------------

APPLICABLE LAW/S:

• Novation is the extinguishment of an obligation by the substitution or change of the obligation by a

subsequent one which extinguishes or modifies the first, either by changing the object or principal
conditions, or by substituting another in place of the debtor, or by subrogating a third person in the rights
of the creditor. In order that a novation can take place, the concurrence of the following requisites are
indispensable:

1) There must be a previous valid obligation;

2) There must be an agreement of the parties concerned to a new contract;

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3) There must be the extinguishment of the old contract; and

4) There must be the validity of the new contract.

• Sec. 22 of the Civil Code provides:

Every person who through an act of performance by another, or any other means, acquires or comes into
possession of something at the expense of the latter without just or legal ground, shall return the same to
him

HELD: (1) There was no novation as there was no previous valid obligation.

In the instant case, the first requisite for a valid novation is lacking. There was no novation by
“substitution” of debtor because there was no prior obligation which was substituted by a new contract.
It will be noted that the promissory notes, which bound the petitioners to pay, were executed after the
addendum. The addendum modified the contract of sale, not the stipulations in the promissory notes
which pertain to the surety contract. At this instance, Wonderland apparently assured the payment of
future debts to be incurred by the petitioners. Consequently, only a contract of surety arose. It was wrong
for petitioners to presume a novation had taken place. The well-settled rule is that novation is never
presumed, it must be clearly and unequivocally shown.

(2) Petitioners are liable as accomodation party. In the instant case the original plan was that the initial
payments would be paid in cash. Subsequently, the parties (with the participation of respondent bank)
executed an addendum providing instead, that the petitioners would secure a loan in the name of Agro
Conglomerates Inc. for the total amount of the initial payments, while the settlement of said loan would
be assumed by Wonderland. Thereafter, petitioner Soriano signed several promissory notes and received
the proceeds in behalf of petitioner-company.

By this time, we note a subsidiary contract of suretyship had taken effect since petitioners signed the
promissory notes as maker and accommodation party for the benefit of Wonderland. Petitioners became
liable as accommodation party.

(3) Wonderland is not liable for the loan and was not the substitute debtor of the promissory notes.

The contract of sale between Wonderland and petitioners did not materialize. But it was admitted that
petitioners received the proceeds of the promissory notes obtained from respondent bank. Petitioners had
no legal or just ground to retain the proceeds of the loan at the expense of private respondent bank.
Neither could petitioners excuse themselves and hold Wonderland still liable to pay the loan upon the
rescission of their sales contract.

If petitioners sustained damages as a result of the rescission, they should have impleaded Wonderland
and asked damages. The non-inclusion of a necessary party does not prevent the court from proceeding
in the action, and the judgment rendered therein shall be without prejudice to the rights of such necessary
party. But respondent appellate court did not err in holding that petitioners are duty-bound under the law
to pay the claims of respondent bank from whom they had obtained the loan proceeds.

DO what YOU must do, but Never say, NEVER!!! – Hazel 12/18/17
 Credit Transactions

DEFINITIONS:

(1) Accommodation party : person who has signed the instrument as maker, acceptor, or indorser,
without receiving value therefor, and for the purpose of lending his name to some other person and is
liable on the instrument to a holder for value, notwithstanding such holder at the time of taking the
instrument knew (the signatory) to be an accommodation party.

He has the right, after paying the holder, to obtain reimbursement from the party accommodated, since
the relation between them has in effect become one of principal and surety, the accommodation party
being the surety.

(2) Suretyship: relation which exists where one person has undertaken an obligation and another person
is also under the obligation or other duty to the obligee, who is entitled to but one performance, and as
between the two who are bound, one rather than the other should perform. 23

The surety's liability to the creditor or promisee of the principal is said to be direct, primary and
absolute; in other words, he is directly and equally bound with the principal. And the creditor may ++++

proceed against any one of the solidary debtors.

DO what YOU must do, but Never say, NEVER!!! – Hazel 12/18/17