BAR QUESTIONS IN CREDIT TRANSACTIONS
Sebastian's unpaid taxes.
GUARANTY AND SURETYSHIP
1. What is the difference between
"guaranty" and "suretyship"? (BAR
2010)
2. Kevin signed a loan agreement with
ABC Bank. To secure payment, Kevin
requested his girlfriend Rosella to
execute a document entitled
“Continuing Guaranty Agreement”
whereby she expressly agreed to be
solidarily liable for the obligation of
Kevin.
Can ABC Bank proceed directly against
Rosella upon Kevin’s default even
without proceeding against Kevin first?
Explain your answer. (BAR 2017)
Answer:
Yes, ABC Bank may proceed directly
against Rosella upon Kevin’s default even
without proceeding against Kevin first
because Rosella is a surety after she
bound herself solidarily with the principal
debtor.
Notwithstanding the use of the word
“guaranty” circumstances may be shown
which convert the contract into one of
suretyship. Under the Civil Code, when the
guarantor binds himself solidarily with the
principal debtor, the contract becomes one
of suretyship and not of guaranty proper.
In a contract of suretyship, the liability of
the surety is direct, primary and absolute.
He is directly and equally bound with the
principal debtor. Such being the case, a
creditor can go directly against the surety
although the principal debtor is solvent and
is able to pay or no prior demand is made
on the principal debtor. [Basis: Article
2047, Civil Code; Ong v. PCIB, 448 SCRA
705; discussed in pp. 810-812, Vol. 2,
Rabuya’s Civil Law Reviewer]
3. Sebastian, who has a pending
assessment from the Bureau of Internal
Revenue (BIR), was required to post a
bond. He entered into an agreement
with Solid Surety Company (SSC) for
SSC to issue a bond in favor of the BIR
to secure payment of his taxes, if found
to be due.
In consideration of the issuance of the
bond, he executed an Indemnity
Agreement with SSC whereby he
agreed to indemnify the latter in the
event that he was found liable to pay
the tax. The BIR eventually decided
against Sebastian, and judicially
commenced action against both
Sebastian and SSC to recover
Simultaneously, BIR also initiated
action to foreclose on the bond.
Even before paying the BIR, SSC
sought indemnity from Sebastian on
the basis of the Indemnity Agreement.
Sebastian refused to pay since SSC had
not paid the BIR anything yet, and
alleged that the provision in the
Indemnity Agreement which allowed
SSC to recover from him, by mere
demand, even if it (SSC) had not yet
paid the creditor, was void for being
contrary to law and public policy. (BAR
2018)
Can Sebastian legally refuse to pay
SSC?
Answer:
No, Sebastian’s argument has no merit.
In the problem, SSC as guarantor who
bound to be solidarity liable with
Sebastian, its cause of action is based on
the surety bond that it posted to
accommodate Sebastian pending
assessment by the BIR. Sebastian’s
argument that SSC cannot recover from
him because SSC has not paid anything
from BIR is wrong. Here, BIR’s foreclosure
of the bond served as payment by SSC so
as to allow him to recover indemnity from
Sebastian based on the indemnity
agreement.
NOTE: Atty. Ferrer answered this problem
saying “Parties may modify provisions of
law because their contract is the law
between them.”
MORTGAGE
4. Eulalia was engaged in the business of
buying and selling large cattle. In order
to secure the financial capital, she
advanced for her employees
(biyaheros). She required them to
surrender TCT of their properties and to
execute the corresponding Deeds of
Sale in her favor. Domeng Bandong
was not required to post any security
but when Eulalia discovered that he
incurred shortage in cattle procurement
operation, he was required to execute a
Deed of Sale over a parcel of land in
favor of Eulalia. She sold the property
to her grandneice Jocelyn who
thereafter instituted an action for
ejectment against the Spouses
Bandong.
To assert their right, Spouses Bandong
filed an action for annulment of sale
 against Eulalia and Jocelyn alleging
that there was no sale intended but only
equitable mortgage for the purpose of
securing the shortage incurred by
Domeng in the amount of P 70, 000.00
while employed as "biyahero" by
Eulalia.
Was the Deed of Sale between Domeng and
Eulalia a contract of sale or an equitable
mortgage? Explain. (BAR 2012)
Answer:
The contract between Domeng Bandong and
Eulalia was an equitable mortgage rather than
a contract of sale. The purported deed of sale
was actually intended to merely secure the
payment of the shortage incurred by Domeng
in the conduct of the cattlebuying operations.
Under Art 1602, Civil Code, the contract shall
be presumed to be an equitable mortgage
when it may be fairly inferred that the real
intention of the parties is simply to secure the
payment of a debt or the performance of any
other obligation.
The present transaction was clearly intended to
just secure the shortage incurred by Eulalia
because Bandung remained in possession of
the property inspite of the execution of the sale.
5. Lito obtained a loan of P1,000,000 from
Ferdie, payable within one year. To
secure payment, Lito executed a chattel
mortgage on a Toyota Avanza and a
real estatemortgage on a 200-square
meter piece of property.
(A) Would it be legally significant -
from the point of view of validity
and enforceability - if the loan and
the mortgages were in public or
private instruments?
6.
Answer:
From the point of view of validity and
enforceability, there would be legal
significance if the mortgage was in a public
or private instrument. As for the loan, there
is no legal significance except of interest
were charged on the loan, in which case,
the charging of interest must be in writing.
A contract of loan is a real contract and is
perfected upon delivery of the object of the
obligation (Art 1934, Civil Code). Thus, a
contract of loan is valid and enforceable
even if it is neither in a private nor in a
public document.
As a rule, contracts shall be obligatory in
whatever form they may have been
entered into provided all the essential
requisites for their validity are present.
With regards to its enforceability, a contact
of loan is not among those enumerated
under Art. 1403 (2) of the Civil Code,
which are covered by the Statute of
Frauds.
It is important to note that under Art. 1358
of the Civil Code, all the other contracts
where the amount involved exceeds Five
Hundred pesos (P500.00) must appear in
writing, even in private one. However, the
requirement is not for validity of the
contract, but only for its greater efficacy.
With regard to the chattel mortgage, Art.
1508, the Chattel Mortgage Law, requires
an affidavit of good faith stating that the
chattel mortgage is supposed to stand as
security of the loan; thus, for the validity of
the chattel mortgage, it must be in a public
document and recorded in the Chattel
Mortgage Register in the Register of
Deeds. A real estate mortgage, under the
provisions of Art. 2125 of the Civil Code,
requires that in order that a mortgage may
be validly constituted the document in
which it appears be recorded. If the
instrument is not recorded, the mortgage is
nevertheless valid and binding between
the parties. Hence, for validity of both
chattel and real estate mortgages, they
must appear in a public instrument. But the
purpose of enforceability, it is submitted
that the form of the contract, whether in a
public or private document, would be
immaterial (Mobil Oil v. Diocaresa, 29
SCRA 656, 1969).
Also, under Art 1358, acts and contracts
which have for their object the creation or
transmission of real rights over immovable
property must be in a public document for
greater efficacy and a real estate mortgage
is a real right over immovable property.
Ellen entrusted her title over the lot
where she is residing to Patrick, her
nephew, for safekeeping because of
her poor eyesight. Patrick, a gambler,
prepared a Special Power of Attorney
empowering him to mortgage the lot.
Ellen's signature was forged. With the
help of Julia who represented herself as
Ellen, Mega Bank granted a loan to
Patrick secured by a mortgage on
Ellen's lot. Due to nonpayment, Mega
Bank foreclosed the mortgage and was
declared the highest bidder. Title was
later registered in the name of the bank.
When Ellen was notified that she
should vacate the premises, she filed a
complaint to nullify the loan with
mortgage, the auction sale and the title
of Mega Bank on the ground that the
bank is not a mortgagee in good faith.

Decide the case with reasons. (BAR
2016)
Answer:
I will decide in favor of Ellen. Banks, their
business being impressed with public
interest, are expected to exercise more
care and prudence than private individuals
in their dealings, even those involving
registered lands. The highest degree of
diligence is expected , and high standards
of integrity and performance are even
required of it.
A mortagee – usually can rely on what
appears on the certificate of title presented
by the mortgagor and an innocent
mortgagee is not expected to conduct an
exhaustive investigation on the history of
the mortgagor’s title. This rule, is, however,
strictly applied against banking institutions.
Mega Bank cannot be considered a
mortgagee in good faith as it failed to
inspect the disputed property when offered
to it as security for the loan, which could
have led it to discover the forged Special
Power of Attorney.
PLEDGE
7. Donna pledged a set of diamond ring
and earrings to Jane for P200,000.00
She was made to sign an agreement
that if she cannot pay her debt within
six months, Jane could immediately
appropriate the jewelry for herself. After
six months, Donna failed to pay. Jane
then displayed the earrings and ring set
in her jewelry shop located in a mall. A
buyer, Juana, bought the jewelry set for
P300,000.00.
a) Was the agreement which Donna
signed with Jane valid? Explain with
legal basis.
b) Can Donna redeem the jewelry set
from Juana by paying the amount she
owed Jane to Juana? Explain with legal
basis.
c) Give an example of a pledge created
by operation of law. (BAR 2015)
Answer:
a) To appropriate the jewelry upon default
of Donna is considered pactum
commissorium and it is considered void by
law. ( Article 2088)
b) No, Donna cannot redeem it from Juana
because the pledge contract is between
her and Jane. Juana is not a party to the
pledge contract. (Article 1311, Civil Code)
c) One example of a pledge created by
operation of law is the right of the
depositary to retain the thing deposited
until the depositor shall have paid him
whatever may be due to the depositary by
reason of the deposit. (1994)
Another is the right of the agent to retain
the thing which is the object of the agency
until the principal reimburses him the
expenses incurred in the execution of the
agency. (Article 1914, Civil Code)
Also in the case of hotel keeper when the
guest surreptitiously left the hotel without
paying, his properties may be retained in
pledge.
ANTICHRESIS
8. Distinguish antichresis from usufruct.
(BAR 2017)
Answer:
Antichresis is always a contract while
usufruct need not arise from a contract
because it may also be constituted by law
or by other acts inter vivos, such as
donation, or in a last will and testament, or
by prescription.
The subject matter of antichresis is always
a real property while the subject matter of
usufruct may either be real property or
personal property.
Antichresis is an accessory contract or
contract of security while usufruct is a real
right.
While in both, the fruits do not pertain to
the owner, the usufructuary is entitled to
enjoy the fruits while the antichretic
creditor has the obligation to apply the
fruits to the payment of the interest, if
owing, and thereafter to the principal of the
credit.