TITLE XV GUARANTY (b) Real guaranty – this is the kind of guarantee where a property (immovable or
movable) is formally committed to answer for the principal obligation of the
CHAPTER 1 Nature and Extent of Guaranty
“Article 2047. By guaranty a person, called the guarantor, binds himself to the
creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of
Section 4, Chapter 3, Title I of this Book shall be observed.”
The above article is speaks of two contracts. The first paragraph refers to a contract
of guaranty, while the second refers to the contract of suretyship. The two will be discussed
as follows.
Characteristics of guaranty
(1) It is a consensual contract. It can be perfected by mere consent.
(2) It is an accessory contract. Its existence depends upon an existing valid principal
contract like a loan;
(3) It is a conditional contract, as it will operate only when the principal debtor failed to
fulfill his obligations.
(4) It is a unilateral contract because only the guarantor has the obligation to indemnify
the creditor in case of failure of the principal debtor to perform his prestation;
(5) It is a subsidiary contract as the guarantor becomes liable to the creditor only when
the principal debtor fails to pay his obligation.
(6) Guarantor should be a different person from that of the principal parties.
Kinds of guaranty
(1) General classification:
(a) Personal guaranty – this is the guaranty where an individual personally assumes
the fulfillment of the principal obligation of the debtor such as guaranty proper
and suretyship.
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debtor. Example: (a) real estate mortgage, and (b) antichresis, where in both, the
proper to committed is an immovable, (c) pledge , or (d) chattel mortgage where
the property committed is movable.
(2) As to manner of creation (2051)
(a) Conventional or voluntary – this is guaranty constituted by agreement of the
guarantor and the debtor. (2051)
(b) Legal - this is guaranty created or required by provision of a law such as the
required to be used for a usufructuary.
(c) Judicial – this is a guaranty or bond ordered by a court in a pending case such as
that acquired in the lifting of the writ of attachment or of a writ of preliminary
injunction.
(3) As to consideration (2048)
(a) Gratuitous – that kind of guaranty where the guarantor receives no valuable
consideration because it is entered into for free. (2048)
(b) Onerous – the kind of guaranty where the guarantor is paid the valuable
consideration for his guaranty of the obligation of the debtor. (2048)
(4) As to its scope (2055)
(a) Definite – the kind where the guarantees confined or limited to the principal
obligation.
(b) Indefinite (or simple) – that kind which covers or compromises not only the
principal obligation but also its accessories including costs incurred after the
guarantor been required to pay by the court
Nature of surety
The surety contract is merely an accessory contract and must be interpreted with its
principal contract. As defined in the second paragraph of the above article, if the person
binds himself solidarily a principal debtor, it shall be a contract of suretyship.
Distinctions between guarantor and surety
(1) A guarantor’s liability depends upon an independent agreement to pay the obligation
of the principal if he fails to do so. A surety assumes liability as a regular party to the
contract.
(2) The guarantor’s obligation is secondary. The obligation of a surety is primary.
(3) A guarantor’s undertaking is to pay if the principal debtor cannot pay. A surety’s
undertaking is to pay if the principal debtor does not pay. Hence, obligation is more
onerous.
(4) A guarantor is an insurer of the solvency of the principal debtor. A surety is an insurer
of a debt.
(5) A guarantor is entitled to excussion, that is, the exhaustion of properties of the
principal debtor before he may be held liable. A surety is not entitled to the benefit of
excussion.
Simply put, a guarantor is an insurer of the solvency of the debtor while a surety is
the insurer of the debt.
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Requisites for enforcement of surety’s liability
The following requisites must be complied with in order to enforce the liability of a
surety under a bond for delivery of personal property. (replevin)
(1) Application for damages must be filed before trial or before entry of judgment;
(2) Dual notice must be given the other party and his surety; and
(3) There must be a proper hearing, and the award of damages, if any, must be included
in the final judgment.
Note: an essential alteration in the terms of the loan agreement without the consent of the
surety extinguishes the latter’s obligation. Such as if the amount of the chattel mortgage
is increased without the surety’s consent, or when without the surety’s consent, the bank
increased the borrower’s credit.
Main distinctions of the surety
(1) Insurer of the debt – in suretyship, the surety becomes liable creditor without the
benefit of excussion because the surety may be sued independently of the
principal debtor.
(2) Demand to the principal debtor is unnecessary – a charge a surety upon a
guaranty, it is not necessary that demand be made on the principal debtor.
(3) The benefit of excussion is not applicable to surety.
AS TO CONSIDERATION
“Article 2048. A guaranty is gratuitous, unless there is a stipulation to the contrary.”
Consideration in a contract of guaranty
Guaranty, as a general rule is a gratuitous contract. It becomes onerous only when
there is a stipulation to the contrary just like a contract of deposit.
It is not necessary to prove any consideration as between the guarantor or surety and
the creditor. The consideration which supports the obligation as to the principal debtor is
sufficient consideration to support the obligation of a guarantor. As between a creditor and
guarantor, but cause of the contract is the same cause which supports the obligation as to the
principal debtor.
“Article 2049. A married woman may guarantee an obligation without the husband's
consent, but shall not thereby bind the conjugal partnership, except in cases provided by
law.”
Later na lang
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“Article 2050. If a guaranty is entered into without the knowledge or consent,
or against the will of the principal debtor, the provisions of articles 1236 and 1237
shall apply.”
Effect of guaranty without consent of the principal debtor
If the guaranty is entered into without the knowledge of the debtor or against his will,
nevertheless, the guarantor may recover from the debtor what he paid to the creditor but only
to the extent of the benefits enjoyed by the debtor. Hence, articles 1236 and 1237 are applied
in such a case which provides:
“Article 1236. The creditor is not bound to accept payment or performance by a third
person who has no interest in the fulfillment of the obligation, unless there is a stipulation to
the contrary.
Whoever pays for another may demand from the debtor what he has paid, except that
if he paid without the knowledge or against the will of the debtor, he can recover only
insofar as the payment has been beneficial to the debtor. (1158a)
Article 1237. Whoever pays on behalf of the debtor without the knowledge or against
the will of the latter, cannot compel the creditor to subrogate him in his rights, such as those
arising from a mortgage, guaranty, or penalty.”
Effect of guaranty with consent of debtor
If a person becomes a guarantor with the knowledge or consent of the debtor the
former is subrogated by virtue thereof to all the rights which the creditor may have against
the debtor. Conversely, if the guaranty was without the knowledge or consent of the debtor
or against his will, the guarantor cannot enjoy the right of subrogation.
AS TO MANNER OF CREATION
Requisites of guaranty
“Article 2051. A guaranty may be conventional, legal or judicial, gratuitous,
or by onerous title. Article 2052. A guaranty cannot exist without a valid obligation. Nevertheless, a
It may also be constituted, not only in favor of the principal debtor, but also in favor guaranty may be constituted to guarantee the performance of a voidable or an unenforceable
of the other guarantor, with the latter's consent, or without his knowledge, or even over his contract. It may also guarantee a natural obligation.”
objection.”
The above article provides that for a guaranty to exist, there must be a valid
obligation between a debtor and a creditor.
This article refers to kinds of guaranty as to manner of creation. It is already
From the wordings of the article, there can be no valid guaranty of a void obligation
discussed in the previous pages.
or contract. Being merely an accessory contract, for its existence a guaranty must depend
upon the existence of a valid principal obligation. Therefore, if the principal obligation is
Sub-guaranty; consent of guarantor not needed
void, the guaranty is also void.
Guaranty may be constituted in favor of another guarantor with or without the latter’s
Guaranty of voidable, unenforceable contracts and natural obligations
consent or even against his opposition or objection. The second or subsequent guarantor is
called sub-guarantor. The sub-guarantors assume the obligation of the guarantors, while the
Unlike void obligations, voidable, unenforceable contracts and natural obligations
guarantors assume the obligation of the principal debtor.
may be the object of guarantee. The reasons for the distinctions are as follows:

(1) Voidable contract – this contract is considered valid until it is duly annulled in a
judicial proceeding.
(2) Unenforceable contract – this contract is not void but is subject to ratification.
(3) Natural obligation – this is an obligation which is not civil and therefore cannot be
enforced in court. However, when the debtor offers a guaranty for his natural
obligation, he thereby implicitly recognizes the obligation. The obligation is to those
transformed from the level of natural into a civil obligation and may now be enforced
in court.
(4) Conditional obligations – conditional obligations may also be the object of guaranty.
They are valid subject only to the fulfillment of the condition imposed. If the
condition is not fulfilled, the guaranty is extinguished.

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Continuing guaranty Debt must be liquidated

“Article 2053. A guaranty may also be given as security for future debts, the Under a continuing guaranty future debts may be secured by a guaranty even if the
amount of which is not yet known; there can be no claim against the guarantor until the exact amount is not yet known. However, the guarantor cannot be sued until the debt is
debt is liquidated. A conditional obligation may also be secured.”
liquidated, which means, the amount of the debt is already determined or fixed.
Thus, if the contract fixed the price of the delivery of future goods and the seller
The above article speaks of a continuing guaranty. A continuing guaranty is one
manifests its readiness to deliver the said goods within the period stipulated, the debt is
which covers all transactions, including those arising in the future, which are within the
already considered liquidated.
description or contemplation of the contract of guaranty until the expiration or termination
thereof.
The article provides for a guaranty of future debts. It is not limited to a single
transaction. It contemplates the future course of dealings, offering a series of transactions
generally for an indefinite time or until it is revoked.

Test of continuing guaranty

A guaranty shall be construed as continuing when by the terms thereof it is, evident
that the object is to give a standing credit to the principal debtor to be used from time to time
either indefinitely or until a certain period, especially if the right to recall the guaranty is
expressly reserved.
Hence, where the contract states that the guaranty is to secure advances to be made
“from time to time” or obligations “now in force or hereafter made”, it will be construed to
be a continuing one.

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Limit of Liability
“Article 2054. A guarantor may bind himself for less, but not for more than the
principal debtor, both as regards the amount and the onerous nature of the conditions.
Should he have bound himself for more, his obligations shall be reduced to the limits
of that of the debtor.”
This article applies also to a surety.
Limit of surety’s liability – a surety’s liability is limited to the amount of the bond.
Limits of guarantor’s liability – the guarantor’s liability cannot go beyond the
obligation of the principal debtor even if he agreed to do so. Their reason for this is that the
contract of guaranty is merely accessory. It is unfair to make the guarantor liable for more
than the obligation of the principal debtor.
The limitation of the guarantor applies both to the (a) amount and (b) onerous
character of the obligation.
Example:
If the guarantor guaranteed the payment of the principal debtor by mortgaging his real
estate in favor of the creditor, upon failure of the principal debtor to pay the obligation, the
creditor cannot foreclose the mortgage because that will make the liability of the guarantor
more onerous. The mortgage will only constitute as an evidence of the contract of guaranty
and the proper remedy of the creditor is to file an action against the guarantor.
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Exceptions
If upon demand, a guarantor fails to pay the obligation, he can be held liable for
interest, even if in thus paying, the liability becomes more than that in the principal
obligation. The increased liability is not because of the contract but because of the default
and the necessity of judicial collection.
The interest in this case shall run from the time the complaint is filed not from the
time the debt becomes due in demandable.
Another example is when there is a penalty provided for in a bond for violation of the
condition therein, even though it’s about he’s more than the amount of the principal debt, a
surety may be held liable.
Application of the rule when the guarantor binds himself for less
The guarantor bind himself with the principal debtor the sum of 10,000, although the
debt was actually 11,000. The principal debtor was able to pay only 10,000. In such a case,
that guarantor cannot refuse to pay on the ground that the amount of which it guaranteed is
only 10,000. The payment of 10,000 should be applied first to the unsecured portion because
it is more onerous than the secured one and therefore the guarantor is bound for the
deficiency.
AS TO ITS SCOPE
“Article 2055. A guaranty is not presumed; it must be express and cannot extend to
more than what is stipulated therein.
If it be simple or indefinite, it shall compromise not only the principal obligation,
but also all its accessories, including the judicial costs, provided with respect to the latter,
that the guarantor shall only be liable for those costs incurred after he has been judicially
required to pay.”
To be enforceable, the contract of guaranty must be expressed and in writing, because
it is a special promise to answer for the debt, default or miscarriage of another.
Guaranty shall be unenforceable by action, unless the same or some note or
memorandum thereof be in writing, and subscribe by the party charged, or by his agent;
evidence, therefore, of the agreement cannot be received without the writing, or a secondary
evidence of its contents.
It is not required that it be in a public instrument. An oral guaranty is unenforceable.
Example:
Suretyship cannot be extended beyond its specified limits. It will not be given
retrospective effect so as to a patch liabilities to be surety for the defaults of the principal
debtor before the suretyship was entered into, unless the intent to assume such liability is
clearly shown.
To apply the payments made by the principal debtor to the obligations which he
contracted prior to the contract of guaranty is, in effect, to make the surety answer for debts
incurred outside of the guaranteed period. This cannot be done without the express consent
of the guarantor.
Coverage of guarantor’s liability when guaranty is definite
When guaranty is definite, the obligation of the debtor is confined or limited in whole
or in part to the principal debt, to the exclusion of the accessories. The guaranty cannot go
beyond the limit.
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Coverage of indefinite or simple guaranty
At an indefinite guaranty shall compromise not only the principal obligation, but also
its accessories, including the judicial costs, provided with respect to the latter, that the
guarantor shall only be liable for those costs incurred after he has been judicially required to
pay.
Doubts in the provisions of contract of guaranty
The rule of strict construction generally applies against the credit or because guaranty
is a special obligation.
Example:
A guarantor is not liable for past or previous defaults of the debtor. A guaranty has
only a prospective and not retroactive effect, unless the contract clearly indicates a contrary
intent.
A surety is liable only for the obligations of the debtor stipulated upon, not for prior
obligations, unless this retroactive effect had been clearly agreed upon by the parties.
A guaranty generally secures only the debts contracted after the guaranty takes effect.
This as a consequence of the statutory directive that a guaranty is not presumed, but must be
express and cannot extend to more than what is stipulated.
If indefinite, rationale behind the rule
If the terms of the contract of guaranty are general and indefinite and do not specify
in clear and express manner that the liability of the guarantor is limited to the principal
obligation, in whole or in part, it extends not only to the said principal obligation but also to
all its accessories, they been comprehend that within the said principal obligation because the
guaranty has secured it with all its consequences.
The reasons for the rule is that the guarantor, in entering into the contract, could a
fixed the limits of his responsibility solely to the strict terms of the principal obligation.
Exceptions to the rule of strictissimi juris
The role of strict construction against creditors is not applicable to cases of
compensated sureties.
The presumption in favor of the guarantor is premised on the fact that guaranties were
originally gratuitous obligations which is not true at the present, at least in majority of cases.
Illustrations
The rule of strict construction of surety bonds does not apply to the engagements of
corporate sureties involved in the business of foreign issue bonds for compensation, and who
are, furthermore, secured from all possible loss by adequate counter bonds.
The rationale of this doctrine is reasonable: an accommodation surety acts without
motive of the canary gain and, hence, should be protected against unjust pecuniary
impoverishment by imposing on the principle duties akin to those of a fiduciary. This cannot
be said of a compensated corporate surety which is a business association organized for the
purpose of assuming classified risks in large numbers, for profit and on an impersonal basis,
through the medium of standardized written contract all forms drawn by its own
representatives with a primary aim of protecting its own interests.
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Release of guarantor or surety from obligation
The obligation of the guarantor or surety may be extinguished by any of the modes of
extinguishing an obligation whenever applicable. Found in article 1231 which provides:
“Article 1231. Obligations are extinguished:
(1) By payment or performance;
(2) By the loss of the thing due;
(3) By the condonation or remission of the debt;
(4) By the confusion or merger of the rights of creditor and debtor;
(5) By compensation;
(6) By novation.
Other causes of extinguishment of obligations, such as annulment, rescission,
fulfillment of a resolutory condition, and prescription, are governed elsewhere in this Code”
Also, the guarantor meet be released if the principal obligation is mutually changed or
modified by the creditor and debtor without the knowledge or consent of the former.
For the purpose of releasing a surety’s obligation, there must be a material out are
Asian of the contract in connection with which the bond is given. A surety is not released by
a change in the contract which does not have the effect of making the obligation more
onerous.
QUALIFICATIONS OF GUARANTOR When Creditor May Demand A Substitute Guarantor

“Article 2056. One who is obliged to furnish a guarantor shall present a person “Article 2057. If the guarantor should be convicted in first instance of a crime
who possesses integrity, capacity to bind himself, and sufficient property to answer for the involving dishonesty or should become insolvent, the creditor may demand another who has
obligation which he guarantees. The guarantor shall be subject to the jurisdiction of the all the qualifications required in the preceding article. The case is excepted where the
court of the place where this obligation is to be complied with.” creditor has required and stipulated that a specified person should be the guarantor.”

The above article provides for the following qualifications of the guarantor who will Explanation
guarantee the obligation of the principal debtor –
The creditor is given the right to demand another guarantor –

(a) He must be a person of integrity were honesty and truthfulness are essential elements; (a) When the original guarantor is convicted of a crime involving dishonesty like estafa
(b) He has full legal capacity whereby he can do acts with legal or binding effects; and misappropriation;
(c) He has sufficient property to answer for the obligation of the debtor he is (b) When the original guarantor becomes insolvent which means one whose assets and
guaranteeing. their present fair valuation are insufficient to pay his debts;

When the creditor was the one who selected the guarantor himself who falls short of
The creditor may, however, waive these qualifications which are intended for his
the qualifications, he cannot compel the principal debtor furnish him a substitute
protection. The qualifications need be present only at the time of the perfection of the guarantor. The obligation shall remain but without a guarantee unless the parties
contract. If one or more qualifications are impaired the due to the supervening events, the agree to solve the problem in some other acceptable ways.
creditor may demand for another qualified guarantor.
Effect of subsequent impairment or loss of required qualifications

The supervening impairment or loss of the required qualifications will not generally
end the guaranty. The creditor is given the right to demand substitution of guarantor.

Effect of guarantor’s debt

If a guarantor died, his heirs are still liable, to the extent of the value of the
inheritance because the obligation is not purely personal, and is therefore transmissible. It is
not personal because all the creditor is interested in is the recovery of the money, regardless
of its giver.

Effect of debtor’s death

If it is the principal debt or who died, his obligation will survive. His estate will be
answerable. If the estate has no sufficient assets, the guarantor shall be liable.
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 CHAPTER 2 Effects of Guaranty Effect of declaration of insolvency

SECTION 1 Effects of Guaranty Between the Guarantor and the Creditor
“Article 2058. The guarantor cannot be compelled to pay the creditor unless the
latter has exhausted all the property of the debtor, and has resorted to all the legal remedies
against the debtor.”
Just because the debtor has been declared insolvent in and insolvency proceeding
does not necessarily mean that he cannot pay, for port of the debtor’s assets may still be
available to the creditor. One good proof of the debtors inability to pay is an unsatisfied writ
of execution which has been returned by the implementing sheriff.

Execution cannot be invoked by a pledgor or mortgagor

Benefit of exhaustion or excussion (Read southern motors inc v. Barbosa, 99 Phil. 263)

The benefit of exhaustion or excussion refers to the rights of the guarantor to be free
from execution of his own properties until the creditor shall have first exhausted all the
properties of the principal debtor and has resorted to all the legal remedies against the latter

Not applicable to contract of suretyship

The present article is not applicable to suretyship because a surety binds himself
solidarily with the principal debtor. As such, excussion cannot take place.

Guarantor may be impleaded

There is nothing procedurally objectionable in impleading the guarantor as a co-

defendant. As a matter of fact, the Rules of Court on permissive joinder of parties explicitly
allows it.
If the creditor obtained a favorable judgment against the debtor and guarantor, the
latter is entitled to a deferment of the execution of said judgment against him until all the
properties of the debtor shall have been exhausted to satisfy the latter’s obligation in fault in
the case.

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WHEN EXCUSSION CANNOT TAKE PLACE Entire Instances were guarantor cannot invoke right of excussion

“Article 2059. The excussion shall not take place:
(1) If the guarantor has expressly renounced it;
(2) If he has bound himself solidarily with the debtor;
(3) In case of insolvency of the debtor;
(4) When he has absconded, or cannot be sued within the Philippines unless he has left a
manager or representative;
(5) If it may be presumed that an execution on the property of the principal debtor would
not result in the satisfaction of the obligation.
(1) When guarantor of false under any of the five instances mentioned in this article;
(2) When guarantor fails to complied with any of the two conditions in article 2060;
(3) When the guarantor pledged or mortgaged his own property to the creditor as special
security for the fulfillment of the debtor’s obligation ( Southern Motors v Barbosa)
(4) When the guarantor fails to interpose the right as a defense before judgment is rendered
against him by the court;
(5) When the guarantor is a judicial bondsman or a sub-surety because liability here is
primary in solidary.

Reasons behind the instances under the above article

(1) Renunciation of right – the benefit of excussion is a personal right. Its express waiver
is valid.
(2) Assumption of solidary liability – because the debtor becomes a surety with primary
and direct liability.
(3) Insolvency of the debtor – if the debtor becomes insolvent, the liability of the
guarantor automatically arises because the debtor could not fulfill the obligation
anymore. This insolvency must be established by evidence like an unsatisfied writ
of execution.
(4) Debtor absconded or cannot be sued in the Philippines – the creditor is not required
by law to search for his debtor who has absconded or cannot be sued in the
Philippines. Because of which, the guarantor is now subject to the creditor’s demand.
(5) Execution against the debtor would be fruitless – if it clearly appears that the
execution would be useless such as when the property levied upon is without value,
the creditor may go immediately after the guarantor.

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REQUIREMENTS OF EXCUSSION
“Article 2060. In order that the guarantor may make use of the benefit of exclusion,
he must set it up against the creditor upon the latter's demand for payment from him, and
point out to the creditor available property of the debtor within Philippine territory,
sufficient to cover the amount of the debt.”
Basic requirements before benefit of excussion may be invoked
The following must be complied with before the benefit of excussion may be invoked
by the guarantor –
(1) The guarantor must set up the right of excussion against the creditor upon the latter’s
demand from him;
(2) He points out to the creditor the available property of the debtor found in the
Philippines and sufficient call for the amount of the debt.
When can demand be made
It is only after a judgment has been rendered against the principal debtor and which
could not be satisfied may the creditor demand payment from the guarantor. Just because the
guarantor was sued at the same time as the debtor does not mean that the creditor has already
made the demand on the guarantor.
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EFFECT OF CREDITOR’S NEGLIGENCE
“Article 2061. The guarantor having fulfilled all the conditions required in the
preceding article, the creditor who is negligent in exhausting the property pointed out shall
suffer the loss, to the extent of said property, for the insolvency of the debtor resulting
from such negligence.”
Applicability
Be article applies when the guarantor has complied with the conditions of article 2060
whereby he pointed out to the credittor available property of the debtor but the creditor was
negligent in exhausting the said property and thereafter, the principal debtor became
insolvent.
Effect of negligence
For the negligence of the creditor, he shall suffer the loss to the extent of the value of
the pointed property which was not exhausted by the creditor. The guarantor shall remain
liable, however, for the remaining obligation after deducting the value of the loss caused by
the negligence of the creditor.
NOTICE TO GUARANTOR COMPROMISE

“Article 2062. In every action by the creditor, which must be against the principal “Article 2063. A compromise between the creditor and the principal debtor benefits
debtor alone, except in the cases mentioned in article 2059, the former shall ask the court to the guarantor but does not prejudice him. That which is entered into between the guarantor
notify the guarantor of the action. The guarantor may appear so that he may, if he so desire, and the creditor benefits but does not prejudice the principal debtor. “
set up such defenses as are granted him by law. The benefit of excussion mentioned in article
2058 shall always be unimpaired, even if judgment should be rendered against the principal Concept
debtor and the guarantor in case of appearance by the latter.”
A compromise is a contract whereby the parties, buying making reciprocal
consessions, avoid a litigation or put an end to one already commenced.
Principal debtor to be sued alone
Effect of compromise
As a rule, only the principal debt or should be sued alone unlike under the old Civil
Code were a joint suit is allowed. However, if the benefit of excussion is not available to the
(1) Between creditor and principal debtor – if compromises beneficial to the guarantor, it
guarantor under article 2059 is specifically the numbers 3 to 5, he can be sued jointly with
is valid; if not, it is not binding upon him.
the debtor by a way of exception. Even if they lose together in the suit, the guarantor, not
(2) Between creditor and guarantor – if compromises beneficial to the principal debtor,
being a surety, is still entitled to the benefit of excussion. Before execution can be
and is binding upon the letter. If not, it is not binding. To be binding, it must benefit
implemented against him, the creditor must first established that the debtor cannot pay and
both guarantor and the debtor.
the best proof for this is an unsatisfied writ of execution.

Notice to guarantor; reason

The guarantor and must be notified of the complaint filed against the debtor alone so
that, if the guarantor desires to set up defenses as are granted him by law, he may have the
opportunity to do so. He may or may not appear in the case and present evidence,
consequences of which are as follows;

(1) If he does not appear in judgment is rendered against the debtor, he cannot set up
defenses which he could have set up had he appeared; moreover, he cannot question
the decision anymore.
(2) If he appears such as by filing an answer in intervention, he may lose or me when the
case. Even if he loses, he is entitled to the benefit of excussion. There is no waiver
of their rights of excussion by his appearance in the case.
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SUB-GUARANTOR; EXCUSSION
“Article 2064. The guarantor of a guarantor shall enjoy the benefit of excussion,
both with respect to the guarantor and to the principal debtor.”
Sub- guarantor is entitled to right of excussion
A sub-guarantor is a guarantor. He stands on the same footing as the guarantor whom
he guarantees with respect to the principal debtor as such, he has to enjoy the benefit of
excussion both with respect to the (a) guarantor and (b) principal debtor.
Article 2065. Should there be several guarantors of only one debtor and for the same debt,
the obligation to answer for the same is divided among all. The creditor cannot claim from
the guarantors except the shares which they are respectively bound to pay, unless solidarity
has been expressly stipulated. The benefit of division against the co-guarantors ceases in the
same cases and for the same reasons as the benefit of excussion against the principal debtor.
(1837)
SECTION 2 Effects of
GuarantyBetween the Debtor and the Guarantor
Article
2066. The guarantor who pays for a debtor must be
indemnified by the latter. The indemnity comprises:
(1) The total amount of the debt;
(2) The legal interests thereon from the time the payment was made known to the debtor,
even though it did not earn interest for the creditor;
(3) The expenses incurred by the guarantor after having notified the debtor that payment had
been demanded of him;
(4) Damages, if they are due. (1838a)
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Article 2067. The guarantor who pays is subrogated by virtue thereof to all the rights
which the creditor had against the debtor. If the guarantor has compromised with the creditor,
he cannot demand of the debtor more than what he has really paid. (1839) Article 2068. If
the guarantor should pay without notifying the debtor, the latter may enforce against him all
the defenses which he
could have set up against the creditor at the time the payment was made. (1840)
Article 2069. If the debt was for a period and the guarantor paid it before it became
due, he cannot demand reimbursement of the debtor until the expiration of the period unless
the payment has been ratified by the debtor. (1841a) Article 2070. If the guarantor has paid
without notifying the debtor, and the latter not being aware of the payment, repeats the
payment, the former has no remedy whatever against the debtor, but only against the creditor.
Nevertheless, in case of a gratuitous guaranty, if the guarantor was prevented by a fortuitous
event from advising the debtor of the payment, and the creditor becomes insolvent, the debtor
shall reimburse the guarantor for the amount paid. (1842a)
Article 2071. The guarantor, even before having paid, may proceed against the
principal debtor:
(1) When he is sued for the payment;
(2) In case of insolvency of the principal debtor;
(3) When the debtor has bound himself to relieve him from the guaranty within a
specified period, and this period has expired;
(4) When the debt has become demandable, by reason of the expiration of the period
for payment;
(5) After the lapse of ten years, when the principal obligation has no fixed period for
its maturity, unless it be of such nature that it cannot be extinguished except within a period
longer than ten years;
(6) If there are reasonable grounds to fear that the principal debtor intends to abscond;
(7) If the principal debtor is in imminent danger of becoming insolvent.
 In all these cases, the action of the guarantor is to obtain release from the guaranty,
or to demand a security that shall protect him from any proceedings by the creditor and
from the danger of insolvency of the debtor. (1834a)
Article 2072. If one, at the request of another, becomes a guarantor for the debt of a third CHAPTER 3
person who is not present, the guarantor who satisfies the debt may sue either the person so
requesting or the debtor for reimbursement.

SECTION 3. Effects of Guaranty as Between Co-Guarantors

Article 2073. When there are two or more guarantors of the same debtor and for the
same debt, the one among them who has paid may demand of each of the others the share
which is proportionally owing from him.
If any of the guarantors should be insolvent, his share shall be borne by the others,
including the payer, in the same proportion.
The provisions of this article shall not be applicable, unless the payment has been made by
virtue of a judicial demand or unless the principal debtor is insolvent. (1844a)

Article 2074. In the case of the preceding article, the co-guarantors may set up
against the one who paid, the same defenses which would have pertained to the principal
debtor against the creditor, and which are not purely personal to the debtor. (1845)
ARTICLE 2075. A sub-guarantor, in case of the insolvency of the guarantor for
whom he bound himself, is responsible to the coguarantors in the same terms as the
guarantor. (1846)

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 Extinguishment of Guaranty
Article 2076. The obligation of the guarantor is extinguished at the same time as that of the
debtor, and for the same causes as all other obligations. (1847)
Article 2077. If the creditor voluntarily accepts immovable or other property in payment
of the debt, even if he should afterwards lose the same through eviction, the guarantor is
released. (1849)
Article 2078. A release made by the creditor in favor of one of the guarantors, without the
consent of the others, benefits all to the extent of the share of the guarantor to whom it has
been granted. (1850)
Article 2079. An extension granted to the debtor by the creditor without the consent of the
guarantor extinguishes the guaranty. The mere failure on the part of the creditor to demand
payment after the debt has become due does not of itself constitute any extension of time
referred to herein. (1851a)
Article 2080. The guarantors, even though they be solidary, are released from their
obligation whenever by some act of the creditor they cannot be subrogated to the rights,
mortgages, and preference of the latter. (1852)
Article 2081. The guarantor may set up against the creditor all the defenses which pertain
to the principal debtor and are inherent in the debt; but not those that are personal to the
debtor. (1853)

CHAPTER 4
Legal and Judicial Bonds Article 2082. The bondsman
who is to be offered in virtue of a provision of law or of a judicial order shall have the
qualifications prescribed in article 2056 and in special laws. (1854a)
Article 2083. If the person bound to give a bond in the cases of the preceding article, should
not be able to do so, a pledge or mortgage considered sufficient to cover his obligation shall
be admitted in lieu thereof. (1855) Article 2084. A judicial bondsman cannot demand the
exhaustion of the property of the principal debtor. A sub-surety in the same case, cannot
demand the exhaustion of the property of the debtor or of the surety.

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 TITLE XVI PLEDGE, MORTGAGE AND ANTICHRESIS
CHAPTER 1 Provisions Common to Pledge and Mortgage
“Article 2085. The following requisites are essential to the contracts of pledge and
mortgage:
(1) That they be constituted to secure the fulfillment of a principal obligation;
(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or
mortgaged;
(3) That the persons constituting the pledge or mortgage have the free disposal of
their property, and in the absence thereof, that they be legally authorized for the
purpose.
Third persons who are not parties to the principal obligation may secure the latter by
pledging or mortgaging their own property.”
Concept of pledge
Pledge is an accessory contract whereby a debtor delivers to the creditor or to a third
person a movable or personal property, or document evidencing incorporeal rights, to secure
the fulfillment of a principal obligation with the condition that when the obligation is
satisfied, the thing delivered shall be returned to the pledgor with all its fruits and accessions,
if any.
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Concept of Real Mortgage
Real estate mortgage is a contract whereby the debtor secures to the creditor the
fulfillment of the principal obligation, specially subjecting to such security, it movable
property or real rights over immovable property, in case the principal obligation is not paid or
complied with at the time stipulated.
A mortgage is a contract entered into in order to secure the fulfillment of a principal
obligation, and constituted by recording the document in which it appears with the proper
Registry of Property, although even if it is not recorded, the mortgage is nevertheless binding
between the parties.
Purpose of pledge and mortgage
The common purpose of these two contracts is to secure the fulfillment of the
principal obligation which ordinarily is a contract of loan.
First requisite of the Article
A pledge or mortgage must be constituted to secure the fulfillment of a principal
obligation. It is the nature of the contract that they are merely accessory contracts. They
cannot exist without an existing valid principal obligation. They cannot exist as independent
contracts.
Effect of invalidity of pledge or mortgage; invalidity of principal obligation
A pledge or mortgage is just an accessory contract. Its invalidity does not make the
principal obligation and void. Consequently, the debt may still be recovered in an ordinary
action as foreclosure is no longer the proper remedy.
However, if the principal obligation itself is void, the pledge or mortgage being
merely an accessory thereto is also void. The accessory follows the principal.
Cause or consideration of the Contracts of Pledge and Mortgage
If the pledgor or mortgagor is the debtor himself, the cause or consideration of the
pledge or mortgage is to principal obligation itself. The reason for this is that it is the
principal obligation which gives life to the pledge or mortgage.
If the pledgor or mortgagor is not the debtor himself but a third person, the cause or
consideration is the compensation agreed upon for the execution of the pledge or mortgage
or the plain liberality of the pledgor or mortgagor.
Second requisite of the article
The pledgor or mortgagor must be the absolute owner of the thing pledged or
mortgaged.
If the thing pledged or mortgaged does not belong to the pledgor or mortgagor, the
pledge or mortgage is void. The same goes for a chattel mortgage.
Similarities of pledge and mortgage
The similarities are common characteristics of pledge and mortgage are enumerated
in Article 2085, namely:
(1) Both contracts are constituted to secure a principal obligation; hence they are only
accessory contracts;
(2) Both pledgor and mortgagor must be absolute owners of the property pledge or
mortgage;
(3) Both pledgor and mortgagor must have the free disposal of their property or be
authorized to do so;
(4) In both, the thing proferred as security may be sold at public auction when the
principal obligation becomes due in no payment is made by the debtor.
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Distinctions between Pledge and Mortgage
(1) As to object, in pledge the object is movable property provided it is susceptible of
possession, in mortgage object is immovable property.
(2) As to necessity of delivery, in pledge property must be delivered it being a real
contract, in mortgage delivery is not necessary.
(3) As to formality for its validity, in pledge description of the thing and the date of
pledge must appear in a public instrument, otherwise it is not valid as to third persons.
In mortgage, it must be registered, otherwise it is not valid against third persons
although binding between the contracting parties.
(4) As to nature of right, a pledge is not a real right. A mortgage is a real right and real
property by itself.
May property acquirable in the future be Mortgaged?
There can be no mortgage of the property acquirable or which can be acquired in the
future simply because the mortgagor must be the absolute owner of the thing at the time of
the mortgage.
Formalities in a Pledge or Real Estate Mortgage
In order to constitute a valid pledge, property must be described with reasonable
certainty and must be delivered to the pledgee.
Similarly, to constitute a valid real mortgage, the realty must be described therein to
allow its proper identification without need of entering into a new contract between the
parties. Otherwise the contract is void.
Innocent mortgagees for value
The doctrine of innocent purchaser for value is applicable to an innocent mortgagee
for value. Just as an innocent purchaser for value may rely on what appears on the certificate
of title, a mortgagee has a right to rely on what appears on the title presented to him and in
the absence of anything to excite suspicion, he is under no obligation to look beyond the
certificate and investigate the title of the mortgagor appearing on the face of the said
certificate.
Exception
The rule that persons dealing with registered lands can rely solely on the certificate of
title does not apply to banks.
While the innocent mortgagee is not expected to conduct an exhaustive investigation
on the history of the mortgagor’s title, in the case of banking institution, mortgagee must
exercise due diligence before entering into said contract. Judicial notice is taking of the
standard practice for banks, before approving a loan, to send representatives to the premises
on the land offered as collateral and to investigate who are the real owners thereof.
While it is true that a person dealing with registered lands need not go beyond the
certificate of title, it is likewise a well settled rule that the purchaser or mortgagee cannot
close his eyes to facts which should put a reasonable man on his own guard, and then claim
that he acted in good faith under the belief that there was no defect in the title of the vendor
or mortgagor.
Possession of property
Mortgage could not be the basis of possession since it is the mortgagor in a contract
of mortgage who is entitled to the possession of the property.
As a general rule, the mortgagor retains possession of the mortgaged property since a
mortgage is merely a lien and title to the property does not pass to the mortgagee unless the
mortgage should contain some special provision to that effect.
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Effect if a torrents title was declared void after mortgage
The voiding of the Torrens title relied upon by the mortgagee does not justify the
cancellation of the mortgage lien. The land is still liable for the mortgage lien of the innocent
mortgagee for value. The true owner of them and be sued the person responsible for the
fraudulent registration or make a claim against the insurance fund.
Continuing security
A mortgage made to secure future advances is a continuing security and is not
discharged by repayment of the amount named in the mortgage, until the full amount of the
advances are paid. (lim v lutero 49 phil 703)
Third persons; accommodation mortgagor
Third persons who are not parties to the principal obligation may secure the latter by
pledging or mortgaging their own property. They’re known as accommodation mortgagor.
If the mortgagor is the debtor himself, he is referred to as the “debtor-mortgagor”.
Extent of Liability of a Third Person Pledgor or Mortgagor
It is well settled that the third-party pledgor or mortgagor who pledged or mortgaged
his property to guarantee and indebtedness of another person, without expressly assuming
personal liability for such debt, is not liable for payment of any deficiency remaining after
the mortgage is foreclosed.
The third party pledgor or mortgagor is not solidarily bound with the principal debtor,
because the pledge or mortgage is merely an accessory contract.
However, as an exception, if the third-party pledgor or mortgagor expressly agreed to
be bound solidarity with the principal debtor then he shall be so.
Right of an owner of personal property pledge without authority

The owner of the property pledged or pawned in the contract without his authority
may invoke article 559 which provides:
“Article 559. The possession of movable property acquired in good faith is
equivalent to a title. Nevertheless, one who has lost any movable or has been
unlawfully deprived thereof, may recover it from the person in possession of the
same.
If the possessor of a movable lost or which the owner has been unlawfully
deprived, has acquired it in good faith at a public sale, the owner cannot obtain its
return without reimbursing the price paid therefor.”
“Article 2086. The provisions of article 2052 are applicable to a pledge or
mortgage.”
Article 2052 refers to a contract of guaranty which cannot exist independently of a
principal obligation. In the same breath, pledge and mortgage, being merely accessory
contracts cannot also exist without a valid principal obligation.
A pledge or mortgage just like guaranty may be constituted to secure voidable and
unenforceable obligations as well as natural obligations, such contracts being susceptible of
ratification.

Therefore, the owner can successfully get back the thing pledged or pawned without
the need of reimbursing the pawnshop owner and the need of convicting the embezzler.
Neither can the pawnshop owner interpose the defense that he acquired the thing in good
faith. This is because the act of the embezzler amounts to unlawful deprivation.

Nature of assignment of rights to guarantee an obligation of a debtor

An assignment made to guarantee an obligation is in effect a mortgage and not an

absolute conveyance of title which confers ownership on the assignee. (manila banking corp.
v. teodoro, 169 scra 96, 64 phil 126.)
A deed of assignment by the way of security avoids the necessity of a public sale
imposed by the rule on pactum commisorium in effect placing the sale of the collateral up
front.

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ACCION HIPOTECARIA
“Article 2087. It is also of the essence of these contracts that when the principal
obligation becomes due, the things in which the pledge or mortgage consists may be
alienated for the payment to the creditor.”
The term alienate in the article does not mean that upon failure of the debtor to pay,
the property will automatically belong to the debtor. Such a thing, even if stipulated, will be
void being a pactum commissorium.
The term alienate only means that if the debtor failed to pay on maturity date, the
thing pledged or mortgaged may be sold at public auction as provided by law so that the
proceeds may be used for payment of the obligation.
A violation of the natural condition in the contract of mortgage such as prohibition
not to lease the property may justify an immediate foreclosure of the mortgage.
Nature of foreclosure sale
A foreclosure sale, though essentially a “forced sale,” is still assailed in accordance
with article 1458 of the Civil Code, under which the mortgagor in default, the forced seller,
becomes obliged to transfer the ownership of the things sold to the highest bidder who, in
turn is obliged to pay therefor the bid price in money or its equivalent, and the rule that the
seller must be the owner of the thing sold also applies.
Kinds of Foreclosure of Real Estate Mortgage
(1) Judicial –this is the foreclosure of mortgage ordered by the court in a judicial
proceeding for the purpose.
(2) Extrajudicial – this is the foreclosure outside of court authorized under Act. No.
3135. The mortgagor into a contract may appoint the mortgagee as his attorney-
in-fact to cause the foreclosure of the mortgage either through a sheriff or a notary
public, in case of the debtor’s failure to pay the obligation on time.
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Right of a junior mortgagee
If the property was first mortgage, and later a second mortgage was entered into by
the mortgagor with the consent of the first mortgagee, and the property was foreclosed, and
the proceeds of the sale are just enough to pay the obligation due to the first mortgagee, the
second (junior) mortgagee has no more security to lean on. The second mortgagee may only
purchase the property from the first mortgagee there being no excess from the proceeds of
the sale. (64 Phil 582) Even if there is no mortgage in favor of the second mortgagee, the
debtor remains liable to the former.
Filing of an independent action; not required
The pledgee or mortgagee is not required to file of an independent action for the
enforcement of his credit. To do so would be a modification of his lien and would defeat the
purpose of the pledge or mortgage which is to give preference over the property given as
security for the satisfaction of his credit.
Equity Of Redemption Distinguished From Right Of Redemption
Equity of redemption exists only in judicial foreclosure and which is defined as the
right of the mortgagor to redeem the mortgaged property after his default in the performance
of the conditions of the mortgage but before the sale of the property or the confirmation of
the sale.
Equity of redemption is simply the right of the mortgagor to extinguish the mortgage
and retaining ownership of the property by paying the secured debt within 90 days after the
judgment became final.
Right of redemption means the right of the mortgagor to repurchase the property
even after the confirmation of the sale, in cases of foreclosure by banks, within one year from
the registration of the sale.
 There is no right of redemption in a judicial foreclosure, but only equity of
redemption. The right of redemption applies only in (a) extrajudicial foreclosure; (b)
foreclosure by certain banks or banking institutions; and (3) sale in execution.

Nature of action to redeem

An action to redeem, or to recover title to or possession of, real property is not an

action in rem, or an action against the whole world, like the land registration proceeding or if
the probate of the will; it is an action in personam, so much so that the judgment therein is
binding only upon the parties properly included and duly heard or given an opportunity to be
heard.

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PACTUM COMMISSORIUM Prohibited acts

“Article 2088. The creditor cannot appropriate the things given by way of pledge or
mortgage, or dispose of them. Any stipulation to the contrary is null and void.”
Concept of pactum commissorium
This is an agreement in the contract of loan whereby if the property pledged or
mortgaged to secure the payment thereof, will automatically become the property of the
creditor upon failure of the debtor to pay the obligation on the time stipulated.
Elements of pactum commissorium
Article 2088, prohibits two acts:
(1) The creditor cannot appropriate to himself the things given to him by a way of pledge
or mortgage.
(2) The creditor cannot dispose of the things pledged or mortgaged.
The creditor is merely entitled, after the principal obligation has become due, to move
for the public sale of the things pledged or mortgaged, in order to satisfy disclaims out of the
proceeds thereof. This is done through foreclosure proceedings which may be judicial or
extrajudicial.

(1) There is a pledge, mortgage, or antichresis of the property by a way of security for the
payment of a principal obligation; and
(2) There is an express the stipulation for an automatic appropriation by the creditor of
the property in case of non-payment of the principal obligation by the debtor within
the period stipulated upon.
Rationale
Illustrations
There are several illustrations. The key in determining if article 2088 or pactum
commisorium is existent in a contract, the main thing to look out for is that, upon failure to
comply with the principal obligation the only remedy of the creditor given to him by law is to
proceed for foreclosure either judicial or extrajudicial which is a public auction, other than
that, he is not allowed to do anything else to the property or thing pledged or mortgaged.

Pactum commissorium is prohibited because it is contrary to good morals or public

policy. Specifically, the reason for the prohibition is that the amount of the loan obtained
from the creditor is usually much less than the actual value of the thing pledged or
mortgaged. If allowed, the creditor is effortlessly enriched at the expense of the debtor. If
there is a public auction as required, there is a good chance and possibility of securing offers
for hire purchase price from the public bidders by virtue of which excess in the proceeds may
be realized. This excess goes to the debtor thus diminishing his losses. In effect, he is not
totally deprived of the entire value of his property as when it pertains automatically to the
creditor.

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Illustrations on cases where stipulations were not considered Pactum commissorium

(1) The stipulation that in case of violation of the conditions of the mortgage contract the
same is automatically foreclosed and the mortgagee may take possession of the
mortgaged property is not pactum commissorium. For the simple reason that, it is
merely possession which is given to the mortgagee and not ownership of the thing.
(73 phil 555 agricultural and industrial bank v. Tambunting)
(2) A stipulation in a mortgage contract that the mortgaged property shall be conveyed to
the creditor in case of failure to pay the debt at its maturity is valid. It is simply an
undertaking that if the debt is not paid in money, it will be paid in another way. It is
not pactum commisorium. (Agoncillo v. Javier, 38 Phil 424)
(3) (Trillana v. manansala, 96 Phil 865)
(4) If the transaction is a sale, the vendor cannot complain that there is a pactum
commissorium
(5) Where a mortgagor promises to sell the property mortgaged to the mortgagee upon
the fault, this promise is merely a personal obligation. It does not bind the land.
Consequently, the mortgagor can still sell the land to a third person but he may be
liable for possible damages.

Risk of loss of the thing pledged or mortgaged

If the property given as security is lost, the owner bears the loss because ownership is
not transferred to the pledgee or mortgagee. This is based on the principle of res perit
domino.
Nevertheless, the principal obligation is not extinguished by the loss of the property
placed under pledge or mortgaged.
This rule also applies to property placed under a contract of antichresis.

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INDIVISIBILITY OF PLEDGE OR MORTGAGE Rule when several things are pledged or mortgaged

“Article 2089. A pledge or mortgage is indivisible, even though the debt may be
divided among the successors in interest of the debtor or of the creditor. Therefore, the
debtor's heir who has paid a part of the debt cannot ask for the proportionate extinguishment
of the pledge or mortgage as long as the debt is not completely satisfied.
Neither can the creditor's heir who received his share of the debt return the pledge or
cancel the mortgage, to the prejudice of the other heirs who have not been paid. From these
provisions is excepted the case in which, there being several things given in mortgage or
pledge, each one of them guarantees only a determinate portion of the credit.
The debtor, in this case, shall have a right to the extinguishment of the pledge or
mortgage as the portion of the debt for which each thing is specially answerable is satisfied.
When several things are pledged or mortgaged, each thing for a determinate portion
of the debt, the pledges or mortgages are considered separate from each other.
Consequently, the obligation secured by a particular thing, upon payment of the
obligation, to which the thing is specially answerable, the pledgor or mortgagor be compelled
the mortgagee or pledgee to return or release the thing.
But when the several things are given to secure the same debt in its entirety, all of
them are liable for the debt, the creditor does not have to divide his action by distributing the
debt among the various things pledged or mortgaged.
Consequently, the mortgagee or pledgee cannot be compelled to return or release the
thing which is proportionate is the value of the obligation paid in part, because the entire debt
or obligation must be paid first.
Also in case the creditor dies, his heir who received his share of the debt cannot
return or cancel the mortgage unless all of his co-heirs be paid.

“Article 2090. The indivisibility of a pledge or mortgage is not affected by the fact
that the debtors are not solidarily liable.” Indivisibility may be waived

The indivisibility of a mortgage or of a pledge, although inherent in the nature of the

Indivisibility of pledge or mortgage contract, can by express stipulation be waived by the parties, because it does not involve any
principle of public order. The waiver may be contemporaneous or subsequent to the contract.
Indivisibility of pledge or mortgage means that it cannot be divided into parts. A
mortgage constituted by the debtor on even in two or more parcels of land is one and Effect of embodying a real estate mortgage and chattel mortgage in one document
indivisible.
In other words, each parcel of land answers for the totality of the indebtedness. The (Read Phil Bank of Commerce v. Macadaeg, 109 Phil 981)
mortgagor cannot compel the mortgagee to apply any payment made to a specific portion of
the mortgage property to effect release.
The mortgage is indivisible even if the obligation of the debtor is a joint and not
solidary.

The principle on indivisibility above discussed is applicable to the heirs of the debtor
and creditor, if the latter have died. Thus, the debtor’s heir who has paid a part of the debt
cannot demand the proportionate or piecemeal extinction of the pledge or mortgage as long
as the debt has not been fully paid. Corollarily, the creditor’s heir who received his share of
the debt cannot return the thing pledged or cancel the mortgage to the prejudice of the unpaid
heirs.
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OBLIGATIONS THAT A PLEDGE OR MORTGAGE MAY SECURE

“Article 2091. The contract of pledge or mortgage may secure all kinds of
obligations, be they pure or subject to a suspensive or resolutory condition.”

All kinds of obligations may be secured as long as they are not void. Void
obligations do not exist, hence, they cannot be secured by any means.
Conditional obligations may be secured by a pledge or mortgage in the same way that
they may be guaranteed.
Future advancements or renewals may also be secured by pledge.

Promise to constitute a pledge or mortgage

“Article 2092. A promise to constitute a pledge or mortgage gives rise only to a

personal action between the contracting parties, without prejudice to the criminal
responsibility incurred by him who defrauds another, by offering in pledge or mortgage as
unencumbered, things which he knew were subject to some burden, or by misrepresenting
himself to be the owner of the same.”

A promise to constitute a pledge or mortgage, if accepted, merely gives rise to a

personal action between the contracting parties.
The accepted promise creates no legal rights. The action is only to compel the
promisor to execute the pledge or mortgage.
The action to compel the constitution of the mortgage may be joined with an action
for recovery of the debt, the two actions not being inconsistent with each other.

Art. 316 – criminal liability of encumbering a thing already pledged or mortgaged.

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 CHAPTER 2
Pledge
“Article 2093. In addition to the requisites prescribed in article 2085, it is necessary,
in order to constitute the contract of pledge, that the thing pledged be placed in the
possession of the creditor, or of a third person by common agreement.”
Continued possession required
The mere taking of the thing pledged is not enough. There must be continuous
possession of the thing. However, the pledgee is allowed to temporarily entrust the physical
possession of the thing pledged to the pledgor without invalidating the contract. But, here
the pledgor would be in possession as a mere trustee.

Basic requisites of pledge

(1) It is constituted to secure the fulfillment of a principal obligation;
(2) Pledgor is the absolute owner of the thing pledged;
(3) A person constituting the pledge (who may be the pledgor himself or a third person)
as the free disposal of the thing, and in the absence thereof, that he be legally
authorized to make the pledge.
Additional requisites
Constructive or symbolic delivery
As a general rule, constructive or symbolic delivery of the thing pledged is not
sufficient since what is required is actual possession.
As an exception to the rule, in a case decided by the Supreme Court, that type of
delivery will depend upon the nature and the peculiar circumstances of each case. Such as
delivery of the keys to a warehouse where the goods pledged are stored constitutes actual
possession.

Article 2093 provides for an additional requisite which is not required in mortgage:

(4) The thing pledged must be placed in the actual possession of the pledgee or of a third
person designated by the parties by common consent.
There is no pledge without delivery of the thing. Pledge is a real contract which
cannot be perfected without actual delivery

Other requisite

(5) Another requisite of pledge is that it must be reduced into a public instrument where
the thing was the particular the described and the date of the pledge indicated to bind
third persons.

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OBJECT OF PLEDGE

“Article 2094. All movables which are within commerce may be pledged, provided
they are susceptible of possession.”
Only personal property may be the object of pledge. Pledge is confined to a
personalty and cannot be engaged or made a lien on realty.
Personal properties are those enumerated in articles 416 in 417 of the code which
provides:
“Article 416. The following things are deemed to be personal property:
(1) Those movables susceptible of appropriation which are not included in the
preceding article;
(2) Real property which by any special provision of law is considered as personalty;
(3) Forces of nature which are brought under control by science; and
(4) In general, all things which can be transported from place to place without
impairment of the real property to which they are fixed. (335a)
Pledge of Incorporeal Rights
“Article 2095. Incorporeal rights, evidenced by negotiable instruments, bills of
lading, shares of stock, bonds, warehouse receipts and similar documents may also be
pledged. The instrument proving the right pledged shall be delivered to the creditor, and if
negotiable, must be indorsed.”
The incorporeal rights supported by instruments like promissory notes, bill of lading,
shares of stocks, quedans, warehouse receipts may be pledged.
However, it is required that the actual instruments to be delivered to the pledgee.
More, if the instrument is a negotiable instrument, it must be endorsed. However, a pledge
certificate (papel de agencia) is not a negotiable instrument. It cannot be alienated by a mere
endorsement or delivery of the certificate. The consent of the pledgee to such alienation
must first be secured.

Article 417. The following are also considered as personal property:

(1) Obligations and actions which have for their object movables or demandable sums;
and
(2) Shares of stock of agricultural, commercial and industrial entities, although they may
have real estate.”

However, not all personal properties may be pledged but only those which are within
the commerce of man and susceptible of possession. Illegal things like prohibited drugs in
firearms cannot be pledged

No Double Pledge

A property already pledged cannot be pledged again when the first pledge is still
subsisting.
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EFFECT ON THIRD PERSONS
“Article 2096. A pledge shall not take effect against third persons if a description of
the thing pledged and the date of the pledge do not appear in a public instrument. (1865a)
Pledge must be embodied in a public instrument to affect third persons
The present article requires specifically that to bind third persons the pledge must be
embodied in a public instrument for the following entries must appear:
(a) A description of the thing pledged; and
(b) Statement of date when the pledge was executed.
Unless these matters are reflected in the contract of pledge, innocent third persons
who may have transacted with the pledgor involving the thing may validly claim a better
right than the pledgee even if the latter has already taken possession thereof. The pledge may
be declared void insofar as the third person is concerned.
Rationale
The purpose of the requirement is to forestall fraud, because the debtor may attempt
to conceal his property from his creditors when he sees it in danger of execution by
simulating a pledge thereof with an accomplice.
Effect of undated contract of pledge
An undated instrument of pledge cannot ripen into a valid pledge.
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ALIENATION OF THE THING PLEDGED
Article 2097. With the consent of the pledgee, the thing pledged may be alienated by
the pledgor or owner, subject to the pledge. The ownership of the thing pledged is
transmitted to the vendee or transferee as soon as the pledgee consents to the alienation, but
the latter shall continue in possession.”
A pledgor may alienate the thing pledge
The pledgor does not transfer his ownership to the pledgee by reason of the contract
of pledge. Consequently, he remains the owner of the thing. His right to dispose of it (jus
disposidendi) is not lost. However, there is a restriction in the alienation thereof. He must
first secure the consent of the pledgee.
Reckoning time as to when ownership is transferred to vendee
If the pledgee has consented to the alienation (like sale) of the things by the pledgor,
as soon as the pledgee has given his consent, the ownership is transferred to the vendee
subject to the right of the pledgee to continue to physically possess the thing and to sell it if
the principal obligation is not paid on time. What really happens is a case of novation in the
person of the debtor which processes known as delegacion.
RIGHT OF RETENTION
“Article 2098. The contract of pledge gives a right to the creditor to retain the thing
in his possession or in that of a third person to whom it has been delivered, until the debt is
paid.”
DUTY TO TAKE CARE OF THE THING
“Article 2099. The creditor shall take care of the thing pledged with the diligence of
a good father of a family; he has a right to the reimbursement of the expenses made for its
preservation, and is liable for its loss or deterioration, in conformity with the provisions of
this Code.”
Duty of Pledgee
While the thing pledged remains in the possession of the pledgee, he is required to
take care of the thing with the diligence of a good father of a family. So if nothing is lost or
has deteriorated in value by reason of the negligence of the pledgee, the latter is responsible
for the injury caused.
However, if the loss or deterioration is due to fortuitous events, the pledgee is not
liable unless there is delay, a contrary agreement, or when the nature of the obligation
requires the assumption of risk and also in cases expressly provided by law.
Illustration
A person who takes in pledge a pawn ticket representing the jewelry already held in
pledge by a pawnbroker is bound, so long as he retains custody of the ticket, to keep the
original contract of pledge alive by payment from time to time of the premium, or interest,
required by the pawnbroker, and if he feels in this duty, he will be liable in damages to the
pledgor.
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Rule on Deterioration
In case of loss or deterioration of the thing pledged, article 1189, paragraphs 1, 2, 3
are applicable which provides:
“Article 1189. When the conditions have been imposed with the intention of
suspending the efficacy of an obligation to give, the following rules shall be observed
in case of the improvement, loss or deterioration of the thing during the pendency of
the condition:
(1) If the thing is lost without the fault of the debtor, the obligation shall be
extinguished;
(2) If the thing is lost through the fault of the debtor, he shall be obliged to pay
damages; it is understood that the thing is lost when it perishes, or goes out of
commerce, or disappears in such a way that its existence is unknown or it cannot be
recovered;
(3) When the thing deteriorates without the fault of the debtor, the impairment
is to be borne by the creditor;
DEPOSITING THE THING PLEDGED APPLICABILITY OF ARTICLE 1951 TO PLEDGE

“Article 2100. The pledgee cannot deposit the thing pledged with a third person, “Article 2101. The pledgor has the same responsibility as a bailor in commodatum in
unless there is a stipulation authorizing him to do so. the case under article 1951.”
The pledgee is responsible for the acts of his agents or employees with respect to the
thing pledged. If the pledgor knows of the dangerous condition or clause of the thing pledged
without informing the pledgee about it, the former is liable for the damages suffered by the
Exception to the rule that a pledged thing cannot be deposited with a third person matter by reason of thereof.
However, as an exception, if the defect is apparent the pledgor is not liable. The
While the pledgee may retain the thing pledged during the existence of the contract, pledge and should be cautious and vigilant enough to protect himself. He’s our short of
he is, however, forbidden from depositing it with a third person. taking ordinary care of his concerns.
This is to protect the pledgor or owner of the thing from possible loss or deterioration
of the thing pledged while in the hands of the depository who is not a privy to the pledge.
However, as an exception, deposit is allowed with the consent of the pledgor. This
time, he’s taking the risk. He cannot blame the pledgee if something goes wrong with the
same one under deposit with a third person.

Responsibility of pledgee for acts of his agents and employees

If the thing is lost, destroyed or suffered deterioration by reason of the acts or

negligence of the agents or employees of the pledgee, the latter is responsible therefore under
the principle of imputed or vicarious liability in the law on torts.

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RULE AS TO THE FRUITS OF THE PLEDGE
“Article 2102. If the pledge earns or produces fruits, income, dividends, or interests,
the creditor shall compensate what he receives with those which are owing him; but if none
are owing him, or insofar as the amount may exceed that which is due, he shall apply it to the
principal. Unless there is a stipulation to the contrary, the pledge shall extend to the interest
and earnings of the right pledged.
In case of a pledge of animals, their offspring shall pertain to the pledgor or owner
of animals pledged, but shall be subject to the pledge, if there is no stipulation to the
contrary.
Explanation
Foods and interests which the pledgee receives out of the things pledged, may be
applied to compensate for what the pledgor owes him by reason of the pledge. If there is
nothing to offset or if there is an excess after the offset, the remainder shall be applied to the
payment of the principal obligation.
The above article also provides that a pledge is not confined to the very thing
pledged. It extends to the interests and earnings of the thing or right pledged, unless there is
a contrary stipulation by the parties.
As regards pledge animals, their offspring shall belong the pledgor or owner because
they love animals are considered natural foods. However, they are subject to the pledge,
unless there is a contrary stipulation.
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Legal subrogation
“Article 2103. Unless the thing pledged is expropriated, the debtor continues to be
the owner thereof.
Nevertheless, the creditor may bring the actions which pertain to the owner of the
thing pledged in order to recover it from, or defend it against a third person.”
Expropriation
In expropriation, which is the state’s exercise of its power of eminent domain,
ownership is transferred to the expropriating entity. Hence, the pledgor ceases to be the
owner. The pledge is terminated. The price paid for the expropriated property shall be
applied to the payment of the principal obligation, the interests and other expenses due to
the pledgee. If there is any excess, the same shall be delivered to the pledgor.
Legal subrogation
The pledgee is under obligation to protect the thing pledged. The article subrogate
him to the right of the pledgor to bring such legal actions in court or to defend the thing
pledged from third persons.
USE OF THE THING
“Article 2104. The creditor cannot use the thing pledged, without the authority of
the owner, and if he should do so, or should misuse the thing in any other way, the owner
may ask that it be judicially or extrajudicially deposited. When the preservation of the thing
pledged requires its use, it must be used by the creditor but only for that purpose.”
Obligation not to use or misuse the thing
While the pledgee has the right to possess the thing pledged, he is not allowed,
however, to use it, much less, to misuse it. Otherwise, the owner may demand the deposit of
the thing judicially or extrajudicially. Moreover, the pledgee may be liable for the damage or
injury caused.
However, there are two exceptions when the thing pledged may be used by the
pledgee:
(1) If the pledgor had given him authority or permission to use it;
(2) If they use of the thing is necessary for its preservation.
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RETURN OF THE PLEDGE
“Article 2105. The debtor cannot ask for the return of the thing pledged against the
will of the creditor, unless and until he has paid the debt and its interest, with expenses in a
proper case.”
Return of the pledge, when demandable
The thing pledged cannot be returned to the pledgor against the will of the pledgee,
unless there is full payment of the obligation as well as the corresponding interest and
expenses incurred by the pledgee occasional by the pledge.
However as an exception, under article 2107 the pledgor is allowed to seek the return
of the thing if it is in danger of destruction or impairment provided he offers an acceptable
substitute for it.
When pledged thing is in danger of being lost or impaired
“Article 2106. If through the negligence or wilful act of the pledgee, the thing
pledged is in danger of being lost or impaired, the pledgor may require that it be
deposited with a third person.”
In article 2104, the owner of the thing pledged may demand that it be judicially or
extrajudicially deposited in cases provided under the article.
The present article also justifies the deposit of the thing pledged with a third person
but on a different ground which is either negligence or willful act of the pledgee which will
eminently bring about the loss or impairment of the thing pledged.
RETURN OF THE THING; WHEN DEMANDABLE
“Article 2107. If there are reasonable grounds to fear the destruction or impairment
of the thing pledged, without the fault of the pledgee, the pledgor may demand the return of
the thing, upon offering another thing in pledge, provided the latter is of the same kind as
the former and not of inferior quality, and without prejudice to the right of the pledgee
under the provisions of the following article.
The pledgee is bound to advise the pledgor, without delay, of any danger to the thing
pledged.”
When pledgor may demand the return of the thing
As a rule, until there is full satisfaction of the debt, the pledgor cannot demand the
return of the thing he pledged. However this article, as an exception to the general rule,
allows the return of the thing to the pledgor before the fulfillment of the obligation provided
that there are reasonable grounds to fear that the thing pledged would be destroyed or
impaired without the fault of the pledgee provided the pledgor offers another thing a
substitute which is of the same kind and not of inferior quality.
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RIGHT OF THE PLEDGEE TO SELL THE THING EVEN WHEN THE
OBLIGATION IS NOT DUE YET
“Article 2108. If, without the fault of the pledgee, there is danger of destruction,
impairment, or diminution in value of the thing pledged, he may cause the same to be
sold at a public sale. The proceeds of the auction shall be a security for the principal
obligation in the same manner as the thing originally pledged.”
Auction sale were obligation is not due yet
Even if the obligation does not matured yet, but there is a danger that the thing
pledged would be destroyed, impaired or its value diminished, the pledgee, was not at fault,
is granted the right to sell the thing at a public sale.
In case the pledgor, under such situation would like to substitute the thing pledged
with another acceptable thing, the pledges right to sell is given preference.
Proceeds of sale
The proceeds of the sale shall pertain to the pledgor because he has not incurred
default on the payment of his obligation. The proceeds shall be held by the pledgee as
security for the principal obligation in the same manner as the thing originally pledged was
possessed.
DECEPTION OR MISREPRESENTATION BY THE PLEDGOR; REMEDIES
“Article 2109. If the creditor is deceived on the substance or quality of the thing
pledged, he may either claim another thing in its stead, or demand immediate payment of
the principal obligation.”
Deception or misrepresentation on the substance and quality of the thing pledged
If the pledgor deceived the pledgee on the substance or quality of the thing pledged,
the contract is voidable. There is fraud in the execution of the contract. Instead of an olive,
the law gives the pledgee the option to pursue any one of the following remedies:
(a) To demand from the pledgor an acceptable substitute of the thing; or
(b) To demand immediate payment of the principal obligation.
These remedies are an alternative and not cumulative which means that only one may
be chosen.
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Return of the thing pledged
“Article 2110. If the thing pledged is returned by the pledgee to the pledgor or
owner, the pledge is extinguished. Any stipulation to the contrary shall be void.
If subsequent to the perfection of the pledge, the thing is in the possession of the
pledgor or owner, there is a prima facie presumption that the same has been returned by the
pledgee. This same presumption exists if the thing pledged is in the possession of a third
person who has received it from the pledgor or owner after the constitution of the pledge.
Return of the thing pledged to pledgor by pledgee
It is the essence of pledge that its object be in the actual possession of the pledgee.
Consequently, if the pledge he has returned it to the pledgor, the pledge is extinguished. The
rule will be the same even if the parties have voluntarily agreed that the pledge shall continue
despite the return of the thing.
Presumption when thing is found in the possession of the pledgor
There is a prima facie presumption that the thing pledged has been returned by the
pledgee to the pledgor or owner, in any of the following circumstances:
(1) If the thing is found in the possession of the pledgor or owner after the pledge had
been perfected.
(2) If the thing is found in the possession of a third person who received it from the
pledgor or owner after the perfection of the pledge.
With these presumption if not rebutted, shall prevail it and become and an unrebutted
evidence. Note that the presumption affects only the pledge in not the principal obligation.
RENUNCIATION OR WAIVER

“Article 2111. A statement in writing by the pledgee that he renounces or abandons

the pledge is sufficient to extinguish the pledge. For this purpose, neither the acceptance by
the pledgor or owner, nor the return of the thing pledged is necessary, the pledgee becoming
a depositary.”

Requisite of renunciation or abandonment

A pledge is a personal right of the pledgee. It may be renounced or waived. The

renunciation or waiver thereof is not contrary to law, public order, public policy, morals and
good customs. However, to be effective, the law requires that it be in writing in order to
effectuate the extinction of the pledge. Oral waiver or renunciation is not valid pursuant to
article 1356.

Acceptance by the pledgor and return of the thing pledged; not necessary

Acceptance of the waiver, renunciation or abandonment by the pledgor is not

necessary. This is not the case of the nation or acceptance’s mandatory to make the donation
valid.
Even if the thing was not returned, as long as there is an effective renunciation,
abandonment or waiver, the pledge is already extinguished. The pledge is now considered a
mere depositary. Accordingly, the law on the pause it will apply to them.

Other grounds for extinguishment of a pledge

The causes for the extinguishment of ordinary obligations may also apply to
extinguish or terminate a pledge provided for under article 1231 which are; (1) by payment
or performance; (2) by the loss of the thing due; (3) by the condonation or remission of the
debt; (4) by the confusion or merger of the rights of creditor and debtor; (5) by
compensation; (6) by novation.

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WHEN DEBT HAD NOT BEEN SATISFIED IN DUE TIME
“Article 2112. The creditor to whom the credit has not been satisfied in due time,
may proceed before a Notary Public to the sale of the thing pledged. This sale shall be made
at a public auction, and with notification to the debtor and the owner of the thing pledged in a
proper case, stating the amount for which the public sale is to be held. If at the first auction
the thing is not sold, a second one with the same formalities shall be held; and if at the
second auction there is no sale either, the creditor may appropriate the thing pledged. In this
case he shall be obliged to give an acquittance for his entire claim.”
Right of pledgee when debt had not been satisfied in due time
When there is no payment of the debt on time, the object of a pledge may be alienated
for the purpose of satisfying the claims of the pledgee. The pledgee has the right to
preceding the sale of the thing at a public auction to raise the funds for payment of the
obligation.
Procedure
The article provides for the formalities and procedure of the public sale –
(a) The obligation must be due and unpaid;
(b) The sale of the thing pledged must be at a public auction;
(c) There must be notice to the pledgor an owner, stating the amount for which the sale is
to be held;
(d) The sale must be conducted by Notary Public
An exception to pactum commissorium
Under article 2088, pactum commissorium is prohibited. However under this article,
an exception is provided which is when two auctions have been held and yet no sale has been
effected, the pledgee is now allowed to appropriate the thing pledged. The act of
appropriation ipso jure transfers the ownership of the thing to the pledgee.
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Acquittance
The pledgee, after appropriating the thing shall execute a deed of acquittance in favor
of the pledgor which is a document of his release for discharge from the entire obligation
including interests and expenses.
Rule on the excess
Under article 1208, the pledgor or owner of the thing is entitled to any excess
proceeding from the sale on the ground provided in such article.
Whenever under this article the rule is different, there is any excess out of the
proceeds of the auction sale after deducting the amount of the obligation in other liabilities of
the pledgor, the latter is not entitled to the said excess or surplus unless there is a contrary
agreement in the contract of pledge. The reason is that under 1208 the pledgor has incurred
any default unlike under this article, there is already failure to satisfy the debt when it
became due and demandable.
Inversely, there is any deficiency, the debtor is not liable for payment of such
deficiency, even if there is a stipulation to that effect. The stipulation will be void.
Rule at the auction
“Article 2113. At the public auction, the pledgor or owner may bid. He shall,
moreover, have a better right if he should offer the same terms as the highest bidder.
The pledgee may also bid, but his offer shall not be valid if he is the only bidder.”
The article is deviced to prevent fraud on the part of the pledgee who may maneuver
the bidding in such a way that no bidder may come so he bids alone. He will surely be the
winner.
PAYMENT MUST BE IN CASH
“Article 2114. All bids at the public auction shall offer to pay the purchase price at
once. If any other bid is accepted, the pledgee is deemed to have been received the purchase
price, as far as the pledgor or owner is concerned.”
All bid offers must be in cash
Checks cannot be accepted as payment for the purchase price. They are not legal
tenders. The produce the effect of payment only after they have been cashed. Same rule
applies to promissory notes, bills of exchange and other negotiable instruments. Payment
must be made at once or on the spot which means in cash.
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Effect of the sale of the thing pledged
“Article 2115. The sale of the thing pledged shall extinguish the principal
obligation, whether or not the proceeds of the sale are equal to the amount of the principal
obligation, interest and expenses in a proper case. If the price of the sale is more than said
amount, the debtor shall not be entitled to the excess, unless it is otherwise agreed. If the
price of the sale is less, neither shall the creditor be entitled to recover the deficiency,
notwithstanding any stipulation to the contrary.”
Effect of sale of the thing
The sale of the thing pledged extinguishes the principal obligation. The extension is
automatic regardless of whether or not the proceeds realized from the public auction sale are
more or less than the amount of the principal obligation and other incidental expenses.
Excess goes to pledgee
As previously explained the excess shall proceed to the pledgee whereas the
deficiency shall not bound to the pledgor.
Rule on deficiency does not apply to chattel mortgage
It has been held, however, that article 2115 which prohibits a deficiency judgment in
a case where a pledge is forclosed, does not apply to a chattel mortgage because Sec. 14 of
Act No. 1508 allows the mortgagee to recover the deficiency.
DUTY OF PLEDGEE
“Article 2116. After the public auction, the pledgee shall promptly advise the pledgor
or owner of the result thereof.”
The purpose of this article is to give the pledgor a last chance to protect himself if
there is any irregularity in the sale if he was not present at the auction sale when the thing
pledged is auctioned off.
PAYMENT BY A THIRD PERSON
Article 2117. Any third person who has any right in or to the thing pledged may
satisfy the principal obligation as soon as the latter becomes due and demandable.”
A third person may pay the pledgor debt, provided he has an interest in the fulfillment
of the principal obligation such as when the third person became a donee of the thing
pledged.
An interest is required pursuant to article 1236 regarding payment by third persons.
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WHEN THE THING PLEDGED IS CREDIT
“Article 2118. If a credit which has been pledged becomes due before it is
redeemed, the pledgee may collect and receive the amount due. He shall apply the same to
the payment of his claim, and deliver the surplus, should there be any, to the pledgor.”
Rule when what has been pledged is a “credit”
When the thing pledged is a “credit” such as a promissory note, the pledgee is granted
the prerogative to collect the credit when it becomes due, and before it is redeemed by the
pledgor. Simply because prompt collection becomes a duty in order to preserve the object of
the pledge. Otherwise, damage caused by reason of the negligence of the pledge you will
expose him to action for damages.
After the pledgee collects the credit, he may apply the proceeds to the satisfaction of
his claim, if there is any excess, such excess must be delivered to the pledgor.
RULE WHEN TWO OR MORE THINGS ARE PLEDGED THIRD PARTY PLEDGOR

“Article 2120. If a third party secures an obligation by pledging his own movable
“Article 2119. If two or more things are pledged, the pledgee may choose which he
property under the provisions of article 2085 he shall have the same rights as a guarantor
will cause to be sold, unless there is a stipulation to the contrary. He may demand the sale of
under articles 2066 to 2070, and articles 2077 to 2081. He is not prejudiced by any waiver of
only as many of the things as are necessary for the payment of the debt.”
defense by the principal obligor.”
Explanation
Rights of a third party pledgor
When two or more things pledged, in case of foreclosure of the pledge, and the value
A third person who pledged his own personal property to secure the obligation of the
of the several things pledged are worth more than the amount of the obligation which is the
principal debtor, has the right enjoyed by a guarantor under the articles mentioned above.
usual experience, the pledgee has the option to choose which one or some should be sold to
satisfy the obligation, unless the agreement, he is deprived of that right.
Waiver of defense by debtor
It is clear that the pledge’s right to sell is limited only to satisfy the debt and cannot
sell indiscriminately.
If the principal debtor deeds any available defense which will board a payment of the
However, it is understood that if the pledge is legal pledge, before the pledgee could
obligations such as rescission, reviews payment, etc., cannot prejudice the third-party
sell the things he must first make a demand and comply with article 2112.
pledgor. This is to avoid fraud or injustice to the latter.

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LEGAL PLEDGE
“Article 2121. Pledges created by operation of law, such as those referred to in
articles 546, 1731, and 1994, are governed by the foregoing articles on the possession, care
and sale of the thing as well as on the termination of the pledge. However, after payment of
the debt and expenses, the remainder of the price of the sale shall be delivered to the
obligor.”
Legal pledges
Legal pledges are those constituted or created by operation of law. The provisions on
the foregoing articles (Arts. 2093 to 2120) shall govern the matters of (a) possession (Art.
2098); (b) care (Art. 2099); (c) sale and (d) termination of the legal pledge (Articles 2110 and
2111).
Exception as to the rule on excess
In legal pledges if there is an excess or surplus after the payment of debts and
allowable expenses, the same shall be delivered to the pledgor. Note that involuntary pledge,
a pledge or as a rule is not entitled to the excess, unless there is a contrary agreement.
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Right Of Retention In Legal Pledges
The essence of legal pledges is the right of retention by the legal pledgee. The
following are instances of legal pledges –
(a) Art. 546 – this refers to the right of the possessor in good faith to retain the thing until
refunded of necessary expenses.
(b) Art. 1707 – this refers to the lien on the goods manufactured or work done by a
laborer until this wages had been paid.
(c) Art. 1731 – this refers to the right to retain of a worker who executed work upon a
movable until he has paid.
(d) Art. 1914 – this refers to the right of an agent to retain the thing subject of the agency
until reimbursed of his advances in damages.
(e) Art. 1994 – this refers to the right of retention of a depositary until full payment of
what is due him by reason of the deposit.
(f) Art. 2004 – this refers to the right of the hotel keeper to retain things of the guest
which are brought into the hotel, until his hotel bills had been paid.
SALE OF THING IN LEGAL PLEDGE Law governing pawnshops

“Article 2122. A thing under a pledge by operation of law may be sold only after
demand of the amount for which the thing is retained. The public auction shall take place
within one month after such demand. If, without just grounds, the creditor does not cause
the public sale to be held within such period, the debtor may require the return of the
thing.”
“Article 2123. With regard to pawnshops and other establishments, which are
engaged in making loans secured by pledges, the special laws and regulations concerning
them shall be observed, and subsidiarily, the provisions of this Title.
Explanation

The law governing pawnshops is P.D. 114. Establishments other than pawnshops
Demand required first before legal pledgee may cause sale engaged in giving of loans secured by pledges shall be governed by special laws concerning
them. The Civil Code shall be applicable suppletorily if the special laws concerned are
The pledgee must first make a demand after his payment of the amount of the debt insufficient.
due upon the pledgor, before the former can cause the sale of the thing considered under
pledge.
The reason for this is that a legal pledge unlike a voluntary pledge, has no specific
period of performance or payment. After the demand, the pledgee must proceed with the
sale of the thing pledged within 30 days.
Otherwise, the debtor can require of him the return of the thing being retained.

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 CHAPTER 3 Kinds of Real Mortgages
Mortgage
Real mortgages are classified into –
OBJECT OF MORTGAGE
(1) Conventional mortgage – that kind which is constituted voluntarily by the contracting
“Article 2124. Only the following property may be the object of a contract of
parties (Art. 138, Mortgage Law)
mortgage:

(1) Immovables; (2) Legal mortgage –that can be acquired by law to secure performance for payment (Art.
(2) Alienable real rights in accordance with the laws, imposed upon immovables. 169, Mortgage Law) to be executed in favor of certain persons (Art. 2038)

Nevertheless, movables may be the object of a chattel mortgage. (3) Equitable mortgage – that kind where the intention of the parties is to make any
movable merely as a security for the performance of an obligation but the formalities
Mortgage Defined of a real mortgage are not complied with (Arts. 1602 – 1604).

Real estate mortgage is a contract whereby the debtor secures to the credit for the
fulfillment of a principal obligation, specially subjecting to such security, immovable Real Mortgage distinguished from Chattel Mortgage
property or real rights over immovable property in case the principal obligation is not paid or
complied with at the time stipulated. A real mortgage is constituted on immovable property, while a chattel mortgage on
personal property. Real mortgage may guarantee future obligation while chattel mortgage
Object of real mortgage cannot because it requires immediate recording (Art. 2140). An obligation which does not
exist cannot be recorded.
The object of a real estate mortgage may only be (a) immovables and (b) alienable
real rights imposed upon immovables. On the other hand, the object of chattel mortgage is
personal property.

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Characteristics Of Real Mortgage
(1) It is an accessory contract –it can only exist if there is a principal obligation,
which it secures. If the principal obligation is void, the mortgage is also void.
But, the invalidity of the mortgagee does not invalidate an otherwise valid
mortgage.
(2) It is indivisible – even though the debt is divided among the debtors or their
successors in interest of the debtor, or to the credit among the credit or is or
successors in interest (Art. 2089), the mortgage remains an undivided one.
(3) It is inseparable - the mortgage attaches to the property regardless of who will be
its subsequent owner or possessor.
As the mortgage lien is inseparable from the Mortgage Property, being a
right in rem and a lien on the property, it cannot be substituted with a surety bond.
In that case, the right in rem would be converted into a right in personam.
(4) It is subsidiary – once the obligation has been paid or satisfied, the property must
be released from the encumbrance imposed. The mortgage is answerable only if
the principal obligation is not paid.
(5) It is a real right – when the mortgage is duly registered or when the purchaser
knows of its existence, it is binding upon the latter.
A recorded realty mortgage is a right in rem, a lien inseparable from the
property mortgaged. Until discharged, it follows the property. It subsists
notwithstanding changes of ownership. All subsequent purchasers of mortgaged
property must respect the mortgage whether the transfer to them be with or
without the mortgagee’s consent.
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(6) It is real property – a real estate mortgage is real property by analogy.
(7) It is comprehensive – it can secure all kinds of obligations which are not void.
(Art 2091)
Future property as object of real mortgage; the exception
Generally, future property to be owned by the mortgagor cannot be the object of a
real mortgage simply because of the requirement that the mortgagor needs to be the absolute
owner of the thing mortgaged.
However, as an exception, this stipulation in a mortgage contract the properties which
the mortgagor may acquire, construct, install, attach or use in its lumber concession, shall be
subject to the mortgage lien is a common in logical provision but is only valid in cases where
the original properties mortgaged are perishable or subject to inevitable wear and tear or
were intended to be sold or used by with understanding that they would be replaced with
others to be thereafter acquired by the mortgagor
Such a stipulation is lawful and not immoral and is intended to maintain, insofar as
possible, the original value of the properties given as security.
Cause or consideration in real mortgage
The consideration of a mortgage, which is an accessory contract, is that of the
principal contract, which it receives its life, and without which cannot exist as independent
contract, even if the obligation thereby secured is of a third person, and therefore it will be
valid, if the principal one is valid, and cannot be avoided on the ground of lack of
consideration.
Waiver of security; Effect

In the case of Danao v. CA 154 SCRA 446, the court held that:

“x x x The rule is now settled that a mortgage creditor may elect to waive his security
and bring, instead, an ordinary action to recover the indebtedness with the right to execute a
judgment thereon on all the properties of the debtor, including the subject matter of the
mortgage x x x, subject to qualification that if he fails in either remedies elected by him, he
cannot pursue further the remedy he has waived.

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ADDITIONAL REQUISITE
“Article 2125. In addition to the requisites stated in article 2085, it is
indispensable, in order that a mortgage may be validly constituted, that the document in
which it appears be recorded in the Registry of Property. If the instrument is not recorded,
the mortgage is nevertheless binding between the parties.”
The persons in whose favor the law establishes a mortgage have no other right than
to demand the execution and the recording of the document in which the mortgage is
formalized.
Additional requisite for valid constitution of real mortgage
In addition to the requisites of mortgage enumerated in article 2085, the present
article requires indispensable be that the mortgage be in a public instrument and be recorded
in the appropriate Registry of Property.
The reason for the requirement is to bind third persons who may chance to deal on the
property. However, insofar as the contracting parties are concerned, the mortgage, even if
not recorded, is still binding between them. Consequently, an order for foreclosure cannot be
refused on the ground that the mortgage had not been registered.
However, registration does not validate an otherwise invalid mortgage. Also, the
mere fact that the mortgage was registered as not stop any interested party from questioning
it that it has no force and effect due to some other reasons. Registration cannot be invoked to
shield or protect frauds.
Registration of mortgage, A Matter Of Right
The mortgagee is entitled to the registration of the mortgage as a matter of right.
Once a mortgage has been signed in due form, the mortgagee is entitled to its registration as a
matter of right. By executing the mortgage, the mortgagor is understood to have given his
consent to its registration, and he cannot be permitted to revoke it unilaterally.
Also, there is a legal presumption of sufficient cause or consideration.
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Reason for the rule
It would be too dangerous to the rights of the mortgagee to deny registration of his
mortgage because his rights can easily be defeated by a transfer or conveyance of the
mortgage property to an innocent third person.
Between two mortgages, the former being unregistered as to the second one which is
registered, the latter shall prevail is specially so when the second mortgagee acted in good
faith.
However, if the first transaction is a sale but not recorded, and the second transaction
is one of mortgage which is recorded, the former prevails. For the simple reason that the
mortgagor had nothing more to mortgage after the sale.
Right of Legal Mortgagees
The second paragraph of the present article is speaks of the right of “mortgagees” in
legal mortgages. The only right of legal mortgagees is to demand the execution of a formal
deed of mortgage and its recording with the registry of deeds.
Effect of invalidity of mortgage
If the mortgage contract is void, the principal obligation which it guarantees is not
affected at all. What is merely impaired is the mortgagee’s right to foreclose which is a
convenient remedy of satisfying the principal obligation of the debtor to the creditor.
Even then, the deed of mortgage remains useful as evidence to prove the personal
obligation of the debtor to the creditor in an ordinary personal action for collection.
MORTGAGE IS A REAL RIGHT AND INSEPARABLE
“Article 2126. The mortgage directly and immediately subjects the property upon
which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for
whose security it was constituted.”
The above article provides that whoever is the possessor of the property mortgaged,
when the obligation matures, and there is failure to pay on the part of the debtor, the mortgage
is subject to foreclosure. The mortgage follows the property until it is discharged.
Alternative action available to mortgagee
Anent real properties in particular, the courts has laid down the rule that a mortgage creditor
may institute against the mortgage debtor either a personal action for debt or a real action to foreclose
the mortgage. In other words, he may pursue either of two remedies, but not both.
A mortgagee who sued and obtained a personal judgment against a mortgagor upon his credit,
waives his right to enforce the mortgage securing it. However there is an advantage to such action.
Having chosen an ordinary collection suit he has a right to execute the judgment against all the
properties of the mortgagor and is not limited to the mortgaged property alone.
Judicial foreclosure
A judicial foreclosure of mortgage is an action quasi in rem based on a personal claim sought
to be enforced against a specific property of the defendant. Its purpose is to have the property seized
and sold by courts in order to the end that the proceeds thereof be applied to the payment of plaintiff’s
claim.
The order to sell will be issued upon motion if the mortgagor fails to pay the judgment that
within a period of not less than 90 days and not more than 120 days.
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When property purchased and subsequently foreclosed
If a third person has purchased the property and after which the mortgage was foreclosed, the
purchaser cannot be held liable for any deficiency, unless he assumed the personal liability of the
original debtor.
If the third person assumes the personal liability of the original debtor, if the creditor has not
given his consent to such transfer of the property and debt to the third person, the debtor remains
personally liable. The attempted novation is not binding upon the creditor because he did not give his
consent. And because of the nature of the mortgage, the same may still be foreclosed.
Right of mortgagee in case of non-payment of the debt
The only right of the mortgagee in case of non-payment of a debt secured by a mortgage
would be to (1) foreclose the mortgage and have the encumbered property sold to satisfy the
outstanding indebtedness or perhaps in the alternative (2) to file an ordinary collections suit against
the debtor.
Under the rule on pactum commissorium it is to be remembered that the failure or default of
the mortgagor does not operate to vest in the mortgagee the ownership of the encumbered property.
Second or subsequent mortgage during redemption
A second or subsequent mortgage is allowed. This is for the reason that the mortgagor
remains as the absolute owner of the property. During the redemption period he has still the free
disposal of his property. To hold otherwise, would create the inequitable situation wherein the
mortgagor would be deprived of the opportunity, which may be his last recourse, to raise funds of
their weight to timely we deem his property through another mortgaged thereon.
Sale with assumption of mortgage

In the sale with assumption of mortgage, the assumption by the buyer is a condition to the
seller’s consent so that without the approval of the mortgagee, no sale is perfected. In such a case, the
seller remains the owner and mortgagor of the property.
Also, where a “Deed of Absolute Sale with Assumption of Mortgage” is ineffective, the seller
remains the owner and mortgagor of the property, and as such he retains the right to redeem the
foreclosed property.
A third person who bought the mortgaged property after the mortgage had been foreclosed
without the consent of the mortgagee, bought nothing except the mortgagor’s right of redemption.
The buyer had no right to intervene in the proceeding for the issuance of a writ of possession of the
mortgaged property.

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RULE AS TO IMPROVEMENTS FRUITS AND FUTURE ADVANCES
“Article 2127. The mortgage extends to the natural accessions, to the
improvements, growing fruits, and the rents or income not yet received when the obligation
becomes due, and to the amount of the indemnity granted or owing to the proprietor from
the insurers of the property mortgaged, or in virtue of expropriation for public use, with the
declarations, amplifications and limitations established by law, whether the estate remains
in the possession of the mortgagor, or it passes into the hands of a third person.”
Things which are deemed included in a mortgage
A real mortgage is not limited to the immovable property offered and accepted as
security for the principal obligation but extends to all its natural accessions, improvements,
growing fruits, rents and income, insurance proceeds and expropriation price, in case there is
an expropriation instituted by the state or other authorized governmental authorities or
corporations.
To exclude the different things deemed included in the mortgage, there must be an
express stipulation excepting or excluding them from the coverage of the mortgage.
Such as, all improvements introduced after the constitution of the mortgage, absent
any contrary stipulation, is included in the mortgage.
As to these new or future improvements, the mortgage lien attaches and vests as of
the date of registration of mortgage.
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Mortgage securing future advancements
It has been settled by a long line of decisions, that mortgages given to secure future
advancements are valid and legal contracts; it is important to take note that the amounts
named as consideration in said contract did not limit the amount for which the mortgage may
stand as security, if from the four corners of the instrument the intent to secure future and
other indebtedness to be gathered. But where the obligation is not a series of indeterminate
sums incurred over a period of time but two specific amounts procured in a single instance,
what applies is as the general rule that the specified amount is stated in the contract of
mortgage shall be controlling.
Mortgage as continuing security
A mortgage given to secure future advancements is a continuing security is not
discharged by the repayment of the amount named in the mortgage, until the full amount of
the advancements are paid.
Growing fruits
To be included in the mortgage, the growing fruits must not have been harvested yet
at the commencement of the mortgage.
MORTGAGE CREDIT

“Article 2128. The mortgage credit may be alienated or assigned to a third person,
in whole or in part, with the formalities required by law.”

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WHEN PROPERTY MOTGAGE IS IN THIRD PERSON
“Article 2129. The creditor may claim from a third person in possession of the
mortgaged property, the payment of the part of the credit secured by the property which
said third person possesses, in the terms and with the formalities which the law establishes.”
Article 2131. The form, extent and consequences of a mortgage, both as to its constitution,
modification and extinguishment, and as to other matters not included in this Chapter, shall
be governed by the provisions of the Mortgage Law and of the Land Registration Law.

Liability of possessor of Mortgaged Property

The mortgaged property may be in the possession of a third person, who could’ve
purchased it from the debtor. The creditor, whose security is thus lessened by the alienation of the
property, has the right to claim from the third person who is in possession of the property, the
payment of the portion of the credit secured by the property. The debtor shall remain liable for the
remaining portion of the credit.
The purchaser does not assume liability for the entire debt but only to the extent of the value
of the mortgage property in his possession. It is, however, required that the creditor must have first
made a prior demand to the debtor and the latter failed to pay.

Right to dispose

Article 2130. A stipulation forbidding the owner from alienating the immovable
mortgaged shall be void.

Comment

A mortgage, which is just an incumbent on realty, does not extinguish the title of the
debtor he does not lose his principal at two because the owner, that is the right to dispose of
his property.
Since the owner may dispose of the property, the buyer, nevertheless, shall respect the
encumbrance on the property. His liability is declared in the previous article.

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Nature of Judicial Foreclosure
A proceeding for judicial foreclosure of mortgage is an action quasi in rem. It is
based on a personal claim against a specific property of the defendant. Its purpose is to have
the property seized and sold by court order to the end that the proceeds of thereof be applied
to the payment of plaintiff’s claim.
Effects of death of mortgagor
For closure of a mortgage is an action which survives the death of the mortgagor because the
claim is not a pure money claim but an action to enforce a mortgage lien. The action may be
prosecuted independently of the prostate or interstate proceedings for the reason that such claims
cannot be considered claims against the estate, but the right to subject specific property to the claim
arises from the contract of the debtor whereby he has during his life set aside certain property for its
payment.
Options or remedies of mortgagee
The three options of a secured creditor holding a real estate mortgage in case of death of the
debtor are:
(1) To waive the mortgage in claimed the entire debt from the estate of the mortgagor as an
ordinary claim;
(2) To foreclose the mortgage judicially and prove any deficiency as an ordinary claim;
(3) To rely on the mortgage exclusively, foreclosing the same at any time before it is barred by
prescription without right to file claims for any deficiency.
Where to file
It is a real action, therefore it is to be filed over the area where in the real property involved or
a portion thereof is situated.
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Rule on deficiency
If there is deficiency in judicial foreclosure, the mortgagee has the right to claim for
such deficiency.
The prescriptive period for an action for a call thereof deficiencies 10 years from the
time the action has accrued.
Waiver of mortgage
The mortgagee may waive the right to foreclose his mortgage and maintain instead a
personal action for recovery of the indebtedness. In either case, he is entitled to obtain a
deficiency judgment for whatever sum might be due after the liquidation of the property
covered by the mortgage.
However, as a restriction, the remedy of the mortgage is not cumulative but not
alternative. He has only one cause of action, the nonpayment of the mortgage debt; hence, he
cannot split up his cause of action by filing a complaint for payment of the debt, and another
complaint for foreclosure of mortgage.
The mere act of filing of an ordinary action for collection operates as a waiver of the
mortgagee-creditor’s remedy to foreclose the mortgage.
When judicial foreclosure is considered complete
In judicial foreclosures, the “foreclosure” is not completed until the sheriff’s certificate is
executed, acknowledged and recorded. In the absence of a Certificate of Sale, no title passes by the
foreclosure proceedings to the vendee.
In order that the foreclosure sale may be validly confirmed by the court, it is necessary that
the heaving be given the interested parties, at which they may have an opportunity to show cause why
the sale should not be confirmed. Notice and hearing of a motion for confirmation of sale are
essential to the validity of the order of confirmation, lack of which, the order of confirmation may be
set aside any time in the mortgagor may still redeem the property.
Period of redemption in judicial foreclosure Rule as to surplus

Surplus money arising from the sale of the land under a decree of foreclosure stands in the
The mortgagor, in the judicial foreclosure, may exercise his equity of redemption
place of the land itself with respect to liens thereon or vested rights therein. They are constructively,
before but not after the sale has been confirmed by the court. at least, real property and belong to the mortgagor or his assigns.
The reckoning period as “from the date of the service of such order”. The order
referred to here is the order requiring the debtor to pay the judgment within 90 days which period is a
mandatory requirement otherwise, the order directing the sale shall be void.
In case of appeal, the reckoning period should be from the date of the entry of judgment
because the rule, it seems cannot be complied with literally. Non-compliance with this rule is a denial
of substantial right and shall render the confirmation void.

If mortgagor is banking institution

Sec. 78 of the General Banking Act (R.A. 337) provides that

“xxx in the event the foreclosure, whether judicially or extrajudicially, the mortgagor
or debtor was real property has been sold at public auction, judicially or extrajudicially, for the full or
partial payment of an obligation to any bank, banking or credit institution within the purview of this
act, shall have the right, within one year after the sale to redeem the property by paying the amounts
fixed by the court in order of execution, or the amount due under the mortgage deed, and all the costs,
as the case may be.” (must edit)

Rule as to fruits pending redemption

Sec. 32 of Rule 39 explicitly provides that the purchaser or reduction there shall not be
entitled to receive their ends, earnings or income of the property sold on execution, or the value of the
use and occupation thereof when such property is in the possession of a tenant. Such rents, etc.,
belong to the judgment obligor until the expiration of the period of redemption.

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Extrajudicial foreclosure of mortgage
An extrajudicial foreclosure may only be effected if in the mortgage contract covering
a real estate, a clause is incorporated therein giving the mortgagee the power, upon default of
the debtor, to foreclose the mortgage by an extrajudicial sale of the mortgage property.
How initiated
Unlike an action, and extrajudicial foreclosure of real estate mortgage is initiated by
filing a petition not with any court of justice but with the office of the sheriff.
It may also be initiated through a Notary Public commissioned in the place where the
property is situated.
Foreclosure by the PNB
Extrajudicial for closures initiated by the PNB are governed by this law and not by
the PNB charter.
Notice to the public is required before auction sale
Notice shall be given by posting notices of the same for not less than 20 days in at
least three public places of the municipality or city where the property is situated and if such
property is worth more than 50,000, such notice shall also be published once a week for at
least three consecutive weeks in a newspaper of general circulation in the municipality or
city.
A newspaper, to be of general circulation, it is enough that it is published for the
dissemination of local news and general information, that it has a bonafide subscription list
of paying subscribers, and that it is published at regular intervals. The newspaper need not
have the largest circulation as long as it is of general circulation.
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Requisites of notice
The sheriff’s notice of sale to be valid, must contain the correct number of the
certificate of title and the correct technical description of the real property to be sold. Failure
to comply with this requirement, or to advertise, constitutes a jurisdictional defect
invalidating the sale.
When publication is not required
The publication is required if the property to be sold in an auction is not more than
50,000.
Personal notice to the mortgagor
As a general rule the law does not require the giving of personal notice or any particular
notice to the mortgagor, much less, on his successor in interests, except, when it is stipulated by the
parties.
That of such notice is not the ground to set aside the foreclosure sale, but lack of notice to the
public will nullify the foreclosure proceedings.
What constitutes public places
Sec. 3 of Act 3135 does not require posting of the notice of sale on the mortgaged property.
It merely requires that the notice of sale be posted in at least three public places in the city or
municipality where the property is situated, to wit: the sheriff’s office, the assessor’s office, and the
register of deeds.
Rule as to deficiency Period to redeem

In extrajudicial foreclosure, the mortgagee may take off for the deficiency after the
public auction sale, provided that there is a stipulation to that effect. Provided further, that is
the more teacher is a third person and not the debtor himself, he is not liable for any
deficiency in the absence of a contrary stipulation. The deficiency should then be filed only
against the principal debtor.
The reckoning period of their attention in cases of registered land is from the date of
registration of the certificate of sale since it is only from that date to the scene takes effect as
conveyance.
The period to redeem shall be one year from and after the date of the sale.
Rule as to fruits

When to file Same as judicial foreclosure, belongs to the mortgagor.

10 years from the time the action has accrued.

If mortgagor is banking institution

Sec. 78 of the General Banking Act (R.A. 337) provides that

“xxx in the event the foreclosure, whether judicially or extrajudicially, the mortgagor
or debtor was real property has been sold at public auction, judicially or extrajudicially, for the full or
partial payment of an obligation to any bank, banking or credit institution within the purview of this
act, shall have the right, within one year after the sale to redeem the property by paying the amounts
fixed by the court in order of execution, or the amount due under the mortgage deed, and all the costs,
as the case may be.” (must edit)

Rule as to surplus

Surplus money arising from the sale of the land under a decree of foreclosure stands in the
place of the land itself with respect to liens thereon or vested rights therein. They are constructively,
at least, real property and belong to the mortgagor or his assigns.

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Antichresis Distinctions between antichresis and pledge

“Article 2132. 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.”
Characteristics of antichresis
Antichresis as defined by the present article. Its salient characteristics are the
following –
In antichresis, object is immovable property, whereas, in pledge object is personal
property.
Antichresis is perfected by mere consent. However, delivery is required only to a
map creditor to receive the fruits and income. In pledge the object must be delivered to
pledgee or third person designated by common consent of the parties.
In antichresis, a principal and interest must be specified in writing, otherwise the
contract is void. In pledge the principal and interest need not be specified in writing. Oral
evidence may be allowed to prove the same.

Distinctions between mortgage and antichresis

(1) It is a formal contract – the amount of the principal and of the interest agreed upon
must be specified in writing. Otherwise, the antichretic contract is void. Oral
In antichresis, the creditor acquires their right to receive the fruits of the property of
evidence is not sufficient to prove antichresis.
the debtor which is under antichresis. Whereas in mortgage, the mortgagee does not have the
(2) It is an accessory contract. It cannot exist without a valid principal obligation.
right to receive the fruits of the property mortgaged.
(3) It deals only with immovable property.
In antichresis, the property is delivered to the creditor. A mortgage, the property is
(4) The creditor has the right to receive the fruits of the immovable.
generally not delivered to the mortgagee.
(5) It is a real right, if registered.
In antichresis, the creditor pays the taxes and charges upon the estate unless there is a
(6) It is a real contract because it requires delivery of the property to the creditor in order
stipulation to the contrary. A mortgagee has no obligation to pay taxes upon the estate.
that the creditor may enjoy the fruits.
In antichresis, the creditor applies the fruits of the property for payment of interest
(7) It can guarantee all kinds of valid obligations.
and principal of the credit. A mortgagee has no obligation to receive the fruits and to apply
the body of their off to the payment of the obligation.

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Rights of Antichretic Creditor Market Value

(1) Right to receive the fruits and income of the property; “Article 2133. The actual market value of the fruits at the time of the application
thereof to the interest and principal shall be the measure of such application.”
(2) Right to retain the property until the debt is fully paid;
(3) Right to have the property sold upon nonpayment of the debt when due
Held to determine the amount of payment
(4) Right of preference to the proceeds of the sale of the property.
The basis of payment is the actual market value of the fruits harvested or collected at
Prescription is not available to a creditor in antichresis because his possession of the
the time of the payment of the interest and/or principal.
property is not in the concept of an owner but that of a mere holder during the existence
As antichretic creditor, the mortgagee in possession of the mortgage band is obliged
of the contract.
to account to the better for the fruits of thereof less the expenses incurred.

Validity of Antichresis

“Article 2134. The amount of the principal and of the interest shall be specified in
writing; otherwise, the contract of antichresis shall be void.”

Form of contract of antichresis

The above article is speaks of the requirement of having the contract of antichresis in
writing, specifying the interest and principal for it to be valid. This is also in pursuant to
article 1356.

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Obligations of Antichretic Creditor
“Article 2135. The creditor, unless there is a stipulation to the contrary, is obliged to
pay the taxes and charges upon the estate.
He is also bound to bear the expenses necessary for its preservation and repair.
The sums spent for the purposes stated in this article shall be deducted from the fruits.”
The obligations of antichretic creditor
(1) To pay the taxes in charges assessible against the property like real estate taxes and
others;
(2) To bear the necessary expenses for the preservation of the property;
(3) To bear the expenses necessary for the repair of the property;
(4) To apply the foods received for payment of the outstanding interests if any and
thereafter of the principal.
Based on the foregoing, it is the owner of the property called ultimately shoulders the
same.
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Return of the property
“Article 2136. The debtor cannot reacquire the enjoyment of the immovable
without first having totally paid what he owes the creditor.
But the latter, in order to exempt himself from the obligations imposed upon him by
the preceding article, may always compel the debtor to enter again upon the enjoyment of
the property, except when there is a stipulation to the contrary.”
When can the antichretic debtor reacquire the possession of his property
The debtor can only demand the return of the property after having been fully paid his
obligations to the creditor. It is not fair for the debtor to redeem the possession of the
property when his debt has not been fully paid. Until there is full payment of the obligation,
the property shall stand the security therefor.
The second paragraph is speaks of a situation where the creditor would want to
exempt himself of his obligations mentioned in the previous article where he may compel the
debtor to reenter into his property, unless there is a stipulation to the contrary.
Prohibition

“Article 2137. The creditor does not acquire the ownership of the real estate for
non-payment of the debt within the period agreed upon.
Every stipulation to the contrary shall be void. But the creditor may petition the
court for the payment of the debt or the sale of the real property. In this case, the Rules of
Court on the foreclosure of mortgages shall apply.”

Prohibition against pactum commissorium

That rule on pactum commissorium applies in a contract of antichresis.

Remedy of creditor in case of nonpayment of his credit

And it’s possible that during the existence of the contract, the property does not bear
foods anymore or it was destroyed or impaired. The remedy of the creditor, when the debtor
failed to pay on the time stipulated is either to:

(1) File an action for collection; or

(2) File a petition for the public sale of the property. The rules on for closure of
mortgage shall apply.

Article 2138. The contracting parties may stipulate that the interest upon the debt be
compensated with the fruits of the property which is the object of the antichresis, provided
that if the value of the fruits should exceed the amount of interest allowed by the laws
against usury, the excess shall be applied to the principal.

Article 2139. The last paragraph of article 2085, and articles 2089 to 2091 are applicable to
this contract. (1886a)

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Chattel mortgage

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