Credit Transactions Compress

Law 107
CREDIT TRANSACTIONS
A2016 Prof. Hector de Leon, Jr.
ANNOTATIONS
Apo Española
DIGESTS
Carlos Marin
WITH NOTES FROM

Comments & Cases on
Credit Transactions (2013)
De Leon & De Leon, Jr.
I. INTRODUCTION
A. M EANING & SCO PE of CREDIT
TRANSACTIO NS Parties in a bailment
1. Bailor—The giver, or the party who delivers
Definition of credit transactions possession or custody of the thing
All transactions involving the loan or purchase of 2. Bailee—The recipient, or the party who receives
goods, services, or money in the present with a possession or custody of the thing
promise to pay or deliver in the future.
via de Leon Sr. & de Leon Jr. Parties in a bailment
Classified according to compensation:
Credit transactions involve: 1. For the sole benefit of the bailor
- The trust and confidence reposed in one person (the Example: Gratuitous deposit
borrower) by another (the lender) 2. For the sole benefit of the bailee
- The expectation that the thing loaned will be returned Examples: Commodatum, gratuitous mutuum
3. For the benefit of both parties
What is the borrower’s credit? Examples: Mutuum with interest, deposit for
It is his ability to make a loan or purchase goods and compensation, involuntary deposit, bailment for
services based on his promise that he will pay later. hire (of things, of service, for carriage of goods,
and of custody)
- Now: Loan/delivery » money/thing, or purchase »
goods/services Bailments for hire
- Future: Promise to pay/deliver A bailment for hire (location et conductio) is when
goods are left with the bailee for his use or for a
service by him, always with compensation. The kinds
Principal vs. accessory contracts
of bailment for hire are:
Credit transactions such as that of loan and deposit 1. Hire of things—Goods are delivered for the
are principal contracts, and may be accompanied by temporary use of the hirer (location rei)
the accessory contract of security. Example: Lease
2. Hire of service—Goods are delivered for some work
B. M EANING & KINDS of SECURITY or labor upon it (location operis faciendi)
Example: Contract for a piece of work
Definition of security 3. Hire for carriage of goods—Goods are delivered
Something given, deposited, or serving as a means to either to a common carrier or to a private person
ensure the fulfillment or enforcement of an obligation for the purpose of being carried from place to
or of protecting some interest in property. place (location operis mercium vehendarum)
via de Leon Sr. & de Leon Jr. 4. Hire of custody—Where goods are delivered for
storage (location custodiae)
Kinds of security via de Leon Sr. & de Leon Jr.
1. Personal—Fulfillment by the principal debtor is
secured only by a promise to pay or the personal
commitment of another
Examples: Guaranty, surety
2. Real—Supported by a collateral or an
encumbrance of property
Examples: Pledge, chattel mortgage, real estate
mortgage, antichresis
C. CO NTRACTS of BAILMENT
Definition of bailment
Delivery of property of one person to another in trust
for a specific purpose, with a contract, express or
implied, that the trust shall be faithfully executed and
the property returned or duly accounted for when the
special purpose is accomplished or kept until the
bailor reclaims it.
via de Leon Sr. & de Leon Jr.
The key elements of this definition are, therefore:

1. There is a delivery of property;
2. Such delivery has been in trust; and
3. There is a promise to return the thing delivered.
APO ESPAÑOLA & CARLOS MARIN BLOCK A 2016 PROF. HECTOR DE LEON, JR.
II. LOAN
A. GENERAL PRINCIPLES B. CO MMO DATUM
1. Definition 1. Concept
A R T . 1 9 3 3, C C A R T . 1 9 3 5, C C
By the contract of loan, one of the parties delivers to The bailee in commodatum acquires the use of the
another, either something not consumable so that the thing loaned but not its fruits; if any compensation is
latter may use the same for a certain time and return to be paid by him who acquires the use, the contract
it, in which case the contract is called a commodatum; ceases to be a commodatum. (1941a)
or money or other consumable thing, upon the
condition that the same amount of the same kind and Requisites of commodatum
quality shall be paid, in which case the contract is 1. The thing given is non-consumable;
simply called a loan or mutuum. 2. The thing is given for the borrower’s use; and
Commodatum is essentially gratuitous. 3. The borrower must return the thing after the
Simple loan may be gratuitous or with a period given or the purpose of the loan achieved.
stipulation to pay interest.
In commodatum the bailor retains the ownership 2. Characteristics
of the thing loaned, while in simple loan, ownership
passes to the borrower. (1740a) Characteristics of commodatum (RUNP IG)
(2)
1. Real
A loan is a contract whereby a thing owned by one person is 2. Unilateral
delivered to another, with the obligation that the latter should 3. Nominate
return it. 4. Principal
5. Personal*
2. Types 6. Informal
7. Gratuitous
Kinds of loan compared
Commodatum Mutuum a. Real
Thing Non-consumable,
Consumable
delivered in general A R T . 1 3 1 6, C C
Mutuus, meaning Real contracts, such as deposit, pledge and
Origin of
Commodare “borrow;” mutare, commodatum, are not perfected until the delivery of
term
meaning “change” the object of the obligation. (n)
Borrower may use Borrower may consume
Effect of
the thing (contract the thing (contract of A R T . 1 9 3 4, C C
contract
of use) consumption) An accepted promise to deliver something by way of
Borrower’s Return a thing of same commodatum or simple loan is binding upon the
Return the
obligation at kind or quality, or the parties, but the commodatum or simple loan itself
identical thing
termination value of the thing shall not be perfected until the delivery of the object
of the contract. (n)
3. Distinguished from other
contracts A contract of loan is thus a real contract, perfected upon delivery
of the subject matter (as opposed to a consensual contract,
Loans compared to other contracts whereby a simple meeting of the minds between the parties
Lease Commodatum perfects the contract).
Lessee must pay rent Gratuitous; no compensation
Donation Commodatum Contract to loan vs. perfected contract of loan
Bailor does not transfer An accepted promise to deliver something by way of
Donor transfers ownership ownership; the bailee has the commodatum is thus a contract to loan, which is
obligation to return the thing consensual—that is, perfected by mere consent.
Barter Mutuum Therefore, a contract to loan is enforceable.
Involves the lending of a However, the contract of loan of either
Involves the exchange of a commodatum or mutuum is a real contract. This
fungible thing, with an
non-fungible thing for another means that a contract of commodatum or mutuum is
obligation to return its value,
thing of the same kind, perfected only upon delivery of the subject matter.
or a thing of the same kind,
quantity, and quality
quantity, and quality
Why is delivery essential to perfection?
A R T . 1 9 5 4, C C The nature and purpose of a commodatum is that the
A contract whereby one person transfers the borrower is entitled to the use of the thing. Only when
ownership of non-fungible things to another with the delivery is made does the use of the thing become
obligation on the part of the latter to give things of available to the borrower. Hence, only when delivery
the same kind, quantity, and quality shall be has already been made does the commodatum
considered a barter. become perfected.
CREDIT TRANSACTIONS 4
b. Unilateral Exception: Must appear in a public document if it

creates or transmits real rights over immovable
The bailee’s primary obligation is to return the thing after the property.1
1
expiration of the period or the completion of the purpose for Art. 1358
which the commodatum was constituted. He has several other
obligations during the duration of the commodatum (to be g. Gratuitous
discussed later on).
Commodatum is essentially gratuitous
Meanwhile, commentators describe the bailor’s obligations as Any compensation paid by the borrower who acquires
merely possible, arising only under special circumstances. It is the use of the thing removes the contract from the
thus the bailee who bears the obligations of the contract: a ambit of a commodatum. In such case, the contract
commodatum is thus unilateral in this sense. that arises is a lease. See Arts. 1933 (parag. 2) and
1935.
c. Nominate
3. Essential requisites
It is a nominate contract, as opposed to an innominate one,
because the Civil Code specifically gives it a name. a. Consent
d. Principal A R T . 1 3 1 9, C C
Consent is manifested by the meeting of the offer and
It is a principal contract, as opposed to an accessory one, because the acceptance upon the thing and the cause which
it can stand alone without need of relying on any other contract. are to constitute the contract. The offer must be
certain and the acceptance absolute. A qualified
e. Personal* acceptance constitutes a counter-offer.
A R T . 1 9 3 9, C C Consent by natural persons

Commodatum is purely personal in character. Consent must be given by one who has capacity to do
Consequently: so. Thus, unemancipated minors, insane or demented
(1) The death of either the bailor or the bailee persons, and deaf-mutes who do not know how to
extinguishes the contract; write1 cannot give consent to a contract, and thus
(2) The bailee can neither lend nor lease the object of cannot enter into a contract of commodatum.
the contract to a third person. However, the 1
via Art. 1327
members of the bailee’s household may make
use of the thing loaned, unless there is a b. Object
stipulation to the contrary, or unless the nature of
the thing forbids such use. (n) A R T . 1 9 3 6, C C
Consumable goods may be the subject of
* Note: Sir discussed the personal nature of commodatum under commodatum if the purpose of the contract is not for
its essential requisites, i.e. parties, but since this characteristic is the consumption of the object, as when it is merely for
definitive of commodatum, we’ll insert the discussion here. exhibition. (n)
Consequences of being personal in character A R T . 1 9 3 7, C C

1. As to use Movable or immovable property may be the object of
General rule—Only the bailee may use the thing. commodatum. (n)
Exception—The use may extend to the members of
the bailee’s household (not family). A R T . 4 1 8, C C
Exceptions to the exception: Movable property is either consumable or non-
a. Stipulation prohibits such use consumable. To the first class belong those movables
b. The nature of the thing forbids such use which cannot be used in a manner appropriate to their
2. As to termination—The contract is extinguished nature without their being consumed; to the second
upon the death of either party. class belong all the others. (337)
f. Informal A R T . 1 9 4 0, C C
A stipulation that the bailee may make use of the
A R T . 1 3 5 8, C C fruits of the thing loaned is valid.
The following must appear in a public document:
(1) Acts and contracts which have for their object the Requisites of valid object of commodatum
creation, transmission, modification or 1. Must fulfill requisites of object of a valid contract
extinguishment of real rights over immovable - Not outside the commerce of men1
property; sales of real property or of an interest - Not impossible2
therein are governed by Articles 1403, No. 2, and - Determinate3
1405; 2. Must be non-consumable
May also be consumable, if only for exhibition or
Summary of rules on form of commodatum display—that is, if the purpose of the bailee’s use is
General rule: May be either oral or written not consumption
3. May be either movable or immovable property bailees to whom a thing is

4. Use must be limited to the thing which is the loaned in the same
principal object of the contract contract
- Use does not extend to the thing’s fruits, * via Art. 1942
although the parties may stipulate to that
effect4 a. Take good care of the thing with the
- Reason: Bailor retains ownership and he is diligence of a good father of the
therefore entitled to the fruits of the thing family
- Stipulation for enjoyment of the fruits:
cannot be presumed and must only be A R T . 1 1 6 3, C C
incidental to the use of the thing itself Every person obliged to give something is also obliged
1
via Art. 1347 3
via Art. 1349 to take care of it with the proper diligence of a good
2
via Art. 1348 4
via Art. 1940 father of a family, unless the law or the stipulation of
the parties requires another standard of care. (1094a)
c. Cause
The failure to take care of the thing loaned with the diligence of a
Because commodatum is essentially gratuitous, its cause is the good father of a family makes the bailee liable for damages.
liberality of the bailor.
b. Use the thing loaned only for the
d. Delivery purpose for which it was loaned, and
for no other purpose
As a real contract, delivery is an essential requisite to perfecting
commodatum. Art. 1935, supra
Art. 1939, supra
4. Parties to the contract Art. 1940, supra
A R T . 1 9 3 8, C C If there is no agreement as to the purpose of the thing, then it is

The bailor in commodatum need not be the owner of presumed it shall be used according to its nature.
the thing loaned. (n)
The breach of this obligation makes the bailee liable for
The lender is called the bailor. The borrower is called the bailee. damages, and also makes him liable for the loss of the thing due
to fortuitous event.
The bailor need not be the owner of the thing loaned:
commodatum does not transfer ownership, so there is no c. Pay ordinary expenses for the use &
requirement that the bailor be capable of transferring ownership preservation of the thing, and portion
at the time the contract is constituted. of extraordinary expenses for the
actual use of the thing
Commodatum is also personal in character. See table
“Consequences of being personal in character” under
A R T . 1 9 4 1, C C
Characteristics » Personal. The bailee is obliged to pay for the ordinary expenses
for the use and preservation of the thing loaned.
(1743a)
5. Obligations of the bailee
A R T . 1 9 5 0, C C
Summary of bailee’s obligations and If, for the purpose of making use of the thing, the
liabilities in case of failure to fulfill them bailee incurs expenses other than those referred to in
Obligation Liabilities Articles 1941 and 1949, he is not entitled to
1. Take good care of the thing reimbursement. (n)
with the diligence of a good Damages to bailor
father of the family Who between the parties is liable for expenses
2. Use the thing loaned only
Damages to bailor Use Preservation
for the purpose for which it
Loss of thing due to fortuitous Ordinary Bailee
was loaned, and for no
event* Bailor; also refunds to
other purpose
bailee extraordinary
3. Pay ordinary expenses for
Bailee & bailor, in expenses for preserva-
the use and preservation of Extraordinary
50:50 proportion tion that have been
the thing, and portion of Damages
duly brought to bailor’s
extraordinary expenses for
attention
the actual use of the thing
All other expenses for the thing’s use are borne by the bailee.
Damages
4. Return and not retain thing
Possible liability for estafa
loaned, except under d. Return and not retain thing loaned,
Loss of thing due to fortuitous
certain circumstances except under certain circumstances
event*
5. Be solidarily liable when A R T . 1 9 4 4, C C
—
there are two or more The bailee cannot retain the thing loaned on the
ground that the bailor owes him something, even from the actual use of the thing
though it may be by reason of expenses. However, the 3. Pay damages for known hidden flaws
bailee has a right of retention for damages mentioned
in Article 1951 (1747a). a. Refund extraordinary expenses for
the preservation of the thing loaned
A R T . 1 9 4 6, C C
The bailor cannot demand the return of the thing A R T . 1 9 4 9, C C
loaned till after the expiration of the period stipulated, The bailor shall refund the extraordinary expenses
or after the accomplishment of the use for which the during the contract for the preservation of the thing
commodatum has been constituted. However, if in the loaned, provided the bailee brings the same to the
meantime, he should have urgent need of the thing, knowledge of the bailor before incurring them, except
he may demand the return or temporary use. when they are so urgent that the reply to the
In case of temporary use by the bailor, the notification cannot be awaited without danger.
contract of commodatum is suspended while the If the extraordinary expenses arise on the occasion
thing is in the possession of the bailor. (1749a) of the actual use of the thing by the bailee, even
though he acted without fault, they shall be borne
This obligation to essential to commodatum: the obligation to equally by both the bailor and the bailee, unless there
return is part of its definition. Further, failure to return would be a is a stipulation to the contrary. (1751a)
violation of the trust reposed by the bailor in the bailee.
The bailee is required to give notice to the bailor of extraordinary
Breach of this obligation makes the bailee liable for damages, expenses incurred for the preservation of the thing. The decision,
loss as a result of fortuitous event, and even estafa under Art. 315 however, is to be made by the owner of the thing, i.e. the bailor.
RPC.
There is no required form for the notice—it may be oral or
The general rule is also that the bailee has no right of retention. written. The notice is however not required if the expense to be
incurred is urgent, i.e. if waiting for the response of the bailor
e. Be solidarily liable when there are may endanger the thing or cause its loss.
two or more bailees to whom a thing
is loaned in the same contract b. Refund portion of extraordinary
expenses arising from the actual use
A R T . 1 9 4 5, C C of the thing
When there are two or more bailees to whom a thing
is loaned in the same contract, they are liable Art. 1949, supra
solidarily. (1748a)
Extraordinary expenses for the use of the thing shall be borne by
A R T . 1 2 0 7, C C the bailor and the bailee on a 50-50 basis. This is because the
The concurrence of two or more creditors or of two or bailor is the owner, and the thing will be returned to him, while
more debtors in one and the same obligation does not the bailee has derived benefit from the thing.
imply that each one of the former has a right to
demand, or that each one of the latter is bound to c. Pay damages for known hidden flaws
render, entire compliance with the prestations. There
is a solidary liability only when the obligation A R T . 1 9 5 1, C C
expressly so states, or when the law or the nature of The bailor, who, knowing the flaws of the thing
the obligation requires solidarity. (1137a) loaned, does not advise the bailee of the same, shall
be liable to the latter for the damages which he may
This is not actually an obligation by itself, but only goes to the suffer by reason thereof. (1752)
nature of the liability.
A R T . 1 9 5 2, C C
6. (Possible) obligations of the The bailor cannot exempt himself from the payment
bailor of expenses or damages by abandoning the thing to
the bailee. (n)
These obligations are described as possible, because they only
arise under special circumstances. Requisites for damages to be paid to bailee
1. Flaw must be hidden from bailee
Obligation to respect duration of loan 2. Bailor is aware of the flaw/defect
Pursuant to Art. 1946, the bailor has the obligation to 3. Bailor neglects to advise bailee of flaw/defect
respect the period or purpose for which the 4. Bailee suffers damage due to hidden flaw/defect
commodatum was constituted. The de Leons call this
the “primary obligation of the bailor.” Though generally a bailee has no right of retention, the
exception is that when he has incurred damages under Art.
1951, he may retain the thing until he has been paid.
Summary of bailor’s obligations
1. Refund extraordinary expenses for the
preservation of the thing loaned
2. Refund portion of extraordinary expenses arising
7. Risk of loss & deterioration Art. 1942, supra

Art. 1946, supra
A R T . 1 9 4 2, C C
The bailee is liable for the loss of the thing, even if it A R T . 1 9 4 7, C C
should be through a fortuitous event: The bailor may demand the thing at will, and the
(1) If he devotes the thing to any purpose different contractual relation is called a precarium, in the
from that for which it has been loaned; following cases:
(2) If he keeps it longer than the period stipulated, or (1) If neither the duration of the contract nor the use
after the accomplishment of the use for which the to which the thing loaned should be devoted, has
commodatum has been constituted; been stipulated; or
(3) If the thing loaned has been delivered with (2) If the use of the thing is merely tolerated by the
appraisal of its value, unless there is a stipulation owner. (1750a)
exempting the bailee from responsibility in case of
a fortuitous event; A R T . 1 9 4 8, C C
(4) If he lends or leases the thing to a third person, The bailor may demand the immediate return of the
who is not a member of his household; thing if the bailee commits any act of ingratitude
(5) If, being able to save either the thing borrowed or specified in Article 765. (n)
his own thing, he chose to save the latter. (1744a
and 1745) Definition of “term”
Period agreed upon by the parties, or period required
Summary of rules on liability for risk of loss for the accomplishment of the purpose, for which the
General rule: Bailor is liable for loss or damage due to fortuitous thing will be loaned
event.
Exception: If the following circumstances are present, the bailee Summary of rules on term of commodatum
will be liable for loss or damage due to fortuitous event. General rule: If a term has been constituted, the bailor
Exception Basis for liability must respect it
1. The bailee uses the thing for a different Bailee is deemed Exceptions:
purpose other than that for which it was to have acted in 1. If the bailor has urgent need of the thing, he may
loaned bad faith demand its return temporarily or permanently;1 or
2. The bailee keeps it beyond the 2. If the contract is one of precarium.
Bailee incurs in 1
via Art. 1946
stipulated period/after the purpose has
delay
been accomplished
3. The bailee lends/leases the thing to a Definition of “precarium”
Commodatum is
third person not a member of his A commodatum where no period has been agreed
purely personal
household upon, or no purpose has been established, or the use
4. The bailee was able to save either the of the thing is merely tolerated by its owner. In these
Bailee shows his cases, the thing may be demanded at the bailor’s will.
thing borrowed or his own thing, and he
ingratitude
chose to save his own
5. The thing was delivered to the bailee Law presumes A R T . 1 2 3 1, C C
with an appraisal of its value—unless that parties Obligations are extinguished:
there is a stipulation exempting the intend that bailee (1) By payment or performance:
bailee from liability for fortuitous event be liable (2) By the loss of the thing due:
(3) By the condonation or remission of the debt;
A R T . 1 9 4 3, C C (4) By the confusion or merger of the rights of creditor
The bailee does not answer for the deterioration of the and debtor;
thing loaned due only to the use thereof and without (5) By compensation;
his fault. (1746) (6) By novation.
Deterioration arising from use is Summary of ways to extinguish commodatum

for the bailor’s account, provided that: Under the general provisions1 on extinguishment:
1. Deterioration is due only to use; and 1. Loss of thing
2. It was without the bailee’s fault. 2. Condonation
3. Confusion/merger
8. Term & extinguishment 4. Novation
A R T . 1 2 8 7, C C Specific to commodatum:
Compensation shall not be proper when one of the 1. Return of the thing
debts arises from a depositum or from the obligations 2. Death of either party
1
of a depositary or of a bailee in commodatum. As per Art. 1287, compensation
Neither can compensation be set up against a does not apply to commodatum.
creditor who has a claim for support due by gratuitous
title, without prejudice to the provisions of paragraph PAJUYO v. CA (2004)
2 of Article 301. (1200a)
The contract of commodatum is essentially
gratuitous. As per the CC, payment of

compensation or the imposition of any condition Facts: Bagtas had three bulls that he borrowed from the Bureau
will change the contract from one of of Animal Industry for one year. Note that they had
commodatum to another kind of contract—in this corresponding appraised values. Upon the expiry of the one-year
case a contract of rent.* period, he tried to keep them despite demand being made for
* However, this ruling is flawed in that the condition to keep the their return. He was able to return two while one was shot in a
thing in good condition is part and parcel of commodatum. Huk raid.
Facts: Pajuyo allowed Guevarra to stay in his house rent-free with Issue: WON Bagtas’s estate is liable for the cost of the bull – YES
the sole condition that he will vacate upon demand. Upon
demand, however, Guevarra failed to leave. The CA ruled that the Ratio: The case falls under situations 2 and 3 of Art. 1942. [see
agreement was in the nature of a commodatum—Guevarra doctrine]
hence had the better right because he was in rightful possession
thereof.
C. M UTUUM
Issue: WON the contract they entered into was a loan or
commodatum—LOAN 1. Concept
Ratio: Being that it was not essentially gratuitous because of the A R T . 1 9 5 3, C C
obligation, it was in the nature of a loan A person who receives a loan of money or any other
fungible thing acquires ownership thereof, and is
QUINTOS v. BECK (1939) bound to pay to the creditor an equal amount of the
same kind and quality. (1753a)
The obligation of the bailee to return the property
of the bailor in a contract of commodatum covers A mutuum is thus a loan for consumption, whereby a transfer of
all of what was lent without exception. Further, ownership occurs.
actual physical return is required—depositing the
same to a sheriff will constitute breach of the
2. Characteristics
obligation to return. Art. 1934, supra
Facts: Beck rented a house owned by Quintos. The latter
Characteristics of commodatum (RUNPIGO)
gratuitously lent the use of some furniture to Beck. Quintos sold
1. Real
the property and subsequently demanded the return of the
2. Unilateral
furniture. Beck refused to return three gas heaters and
3. Nominate
subsequently deposited the other pieces of property with the
4. Principal
sheriff.
5. Informal
6. May be either gratuitous or onerous
Issue: WON Beck was in breach of his obligation to return the
property of Quintos – YES
a. Real
Ratio: Being that the contract entered into was one of
Delivery of the money subject of the mutuum is essential to its
commodatum, the obligation of beck mean that he should return
perfection. However, delivery either actual or constructive: it
all of what was lent to Quintos at the latter’s residence or house.
need not be actually put in the borrower’s hands, e.g. deposit in
the debtor’s account.
REPUBLIC v. BAGTAS (1962)
A contract to loan, however, is consensual, perfected by the
While the general rule is that the bailee in a
parties’ mere consent. It is thus demandable at once.
contract of commodatum will not be liable for the
loss of the thing when it was caused by a b. Unilateral
fortuitous event, he will be liable in such an
instance if: The debtor is the one who is mainly obliged in a mutuum, and
1. The thing is devoted to a purpose not the obligation is to return the equivalent of the amount
contemplated; borrowed.
2. Keeps it longer than the period stipulated/after
the accomplishment of the use for which it was c. Nominate
lent;
3. The thing been delivered with an appraisal of It is nominate, because the Civil Code provides a name for it. Yes
its value, unless there is a stipulation that indeed!
exempts the bailee;
4. Lends or leases the thing to a third person who d. Principal
is not a member of his household;
5. If the bailee chooses to save his property It is principal, because it can stand alone as a contract, without
dependence on the existence and/or validity of any other
instead of what was borrowed.
contract.
Summary of rules on form of mutuum

e. Informal General rule: May be either oral or written
Exceptions:
The Civil Code does not provide a form in which a mutuum need 1. Interest—Must be stipulated in writing1
be constituted: it may be either written or oral. 2. Agency—An agent borrowing in behalf of his
principal must have a special power of attorney,
An interest, however, must be stipulated in writing in order to be unless the things in his control must be urgently
demandable. preserved
1
via Art. 1956
2
f. Gratuitous or onerous via Art. 1878
The mutuum is gratuitous if without a stipulated interest, but if 8. Obligations of the debtor
the parties agree upon an interest, then it is onerous.
Summary of obligations of the debtor
3. Essential requisites 1. Pay the creditor an equal amount of the same kind
and quality
a. Consent 2. Pay interest, if stipulated in writing
Consent to the contract must be given by parties with capacity to A R T . 1 9 5 5, C C

do so, i.e. not incapacitated by minority, insanity, etc. The obligation of a person who borrows money shall
be governed by the provisions of articles 1249 and
b. Object 1250 of this Code.
If what was loaned is a fungible thing other than
Art. 418, supra money, the debtor owes another thing of the same
Art. 1953, supra kind, quantity and quality, even if it should change in
value. In case it is impossible to deliver the same kind,
The object of a mutuum must be money, or other fungible its value at the time of the perfection of the loan shall
things. By fungible things are meant those usually dealt with by be paid. (1754a)
number, weight, or measure, such that units may be treated as
equivalents. a. Pay the creditor an equal amount of
the same kind
If a non-fungible thing is given, but the obligation is to give
something of the same value, then the contract is of barter. A R T . 1 2 4 9, C C
The payment of debts in money shall be made in the
c. Cause currency stipulated, and if it is not possible to deliver
such currency, then in the currency which is legal
If gratuitous, i.e. without interest, the cause is the mere liberality tender in the Philippines.
of the creditor. If onerous, the payment of interest is the cause. The delivery of promissory notes payable to order,
or bills of exchange or other mercantile documents
d. Delivery shall produce the effect of payment only when they
have been cashed, or when through the fault of the
Mutuum being a real contract, delivery must first be made before creditor they have been impaired.
it can be deemed perfected. In the meantime, the action derived from the
original obligation shall be held in abeyance. (1170)
4. Parties to the contract
A R T . 1 2 5 0, C C
The lender is called the creditor. The borrower is called the In case an extraordinary inflation or deflation of the
bailee. currency stipulated should supervene, the value of the
currency at the time of the establishment of the
The creditor must have the capacity to transfer ownership of the obligation shall be the basis of payment, unless there
thing to the debtor at the time that the mutuum is constituted. is an agreement to the contrary. (n)
5. Form of the contract Art. 1953, supra
Art. 1955, supra
A R T . 1 8 7 8, C C
Special powers of attorney are necessary in the
How payment must be made
following cases:
(7) To loan or borrow money, unless the latter act be 1. Loan of money—Must be made in the currency
urgent and indispensable for the preservation of the stipulated, if it is possible; otherwise, it must be
things which are under administration; made in the currency that is legal tender in the
Philippines.
In case of extraordinary inflation/deflation, the
A R T . 1 9 5 6, C C
value of the currency must be computed at the
No interest shall be due unless it has been expressly
time the obligation was created, i.e. at the time
stipulated in writing. (1755a)
the money lent was delivered to the debtor.
2. Loan of fungible thing—Something of the same A R T . 1 9 5 8, C C

kind, quantity, and quality should be delivered; In the determination of the interest, if it is payable in
even if the value changes, the change must be kind, its value shall be appraised at the current price
borne by the debtor/borrower of the products or goods at the time and place of
payment. (n)
When payment must be made
General rule: Payment must be made on the maturity A R T . 1 9 5 9, C C
date stipulated between the parties. Without prejudice to the provisions of Article 2212,
Exceptions: interest due and unpaid shall not earn interest.
1. Prepayment—Acceptable if the mutuum is However, the contracting parties may by stipulation
gratuitous; if onerous, then acceptable only if so capitalize the interest due and unpaid, which as
stipulated; added principal, shall earn new interest. (n)
2. Debtor is insolvent;
3. Debtor fails to give guaranties/securities that have A R T . 2 2 1 2, C C
been promised; Interest due shall earn legal interest from the time it is
4. Debtor impairs the guaranties/securities through judicially demanded, although the obligation may be
his own acts; silent upon this point. (1109a)
5. Debtor violates an undertaking, in consideration of
which the creditor had agreed to the period; and A R T . 1 1 6 9, C C
6. Debtor attempts to abscond.1 Those obliged to deliver or to do something incur in
1
Nos. 2 to 6 are via Art. 1198 (When a debtor loses delay from the time the obligee judicially or
every right to make use of the period stipulated) extrajudicially demands from them the fulfillment of
their obligation.
Where payment must be made However, the demand by the creditor shall not be
Payment may be made in these places: necessary in order that delay may exist:
1. The place agreed upon by the parties; (1) When the obligation or the law expressly so
2. Absent such agreement, where the mutuum was declares;
constituted; or (2) When from the nature and the circumstances of
3. The debtor’s domicile. the obligation it appears that the designation of
See also Art. 2179, CC. the time when the thing is to be delivered or the
service is to be rendered was a controlling motive
Failure to pay the value of the loan makes the debtor liable for for the establishment of the contract; or
damages, which may be in the form of an interest. (3) When demand would be useless, as when the
obligor has rendered it beyond his power to
b. Pay interest, if stipulated in writing perform.
In reciprocal obligations, neither party incurs in
Art. 1956, supra delay if the other does not comply or is not ready to
comply in the proper manner with what is incumbent
Forms of interest upon him. From the moment one of the parties fulfills
1. Monetary interest—Compensation for the use of his obligation, delay by the other begins. (1100)
money
2. Compensatory interest—Imposed by law or by When unpaid interest earns interest
courts, as indemnity for damages General rule: Interest that has accrued, or has become
due yet gone unpaid, shall not earn interest
Requisites for recovery of interest Exceptions:
1. Interest must be expressly stipulated; 1. When judicially demanded;
2. Agreement must be in writing; 2. When the parties expressly so stipulate.
3. Interest must be lawful.
The parties may stipulate that both an interest and a penalty in
A R T . 1 9 5 7, C C case of default on the debtor’s part be paid.
Contracts and stipulations, under any cloak or device
whatever, intended to circumvent the laws against A R T . 1 9 6 0, C C
usury shall be void. The borrower may recover in If the borrower pays interest when there has been no
accordance with the laws on usury. (n) stipulation therefor, the provisions of this Code
concerning solutio indebitii, or natural obligations,
A R T . 1 9 6 1, C C shall be applied, as the case may be. (n)
Usurious contracts shall be governed by the Usury
Law and other special laws, so far as they are not If unstipulated interest is paid by mistake, it would be a case of
inconsistent with this Code. (n) solutio indebitii. However, if unstipulated interest is paid
voluntarily, there can be no recovery, as in the case of natural
A usurious contract would not be considered void in its entirety, obligations.
but only as far as the interest involved.
A R T . 2 2 0 9, C C
If the obligation consists in the payment of a sum of
money, and the debtor incurs in delay, the indemnity nine years shall be valid. (1543a)
for damages, there being no stipulation to the
contrary, shall be the payment of the interest agreed Distinguished from contract of lease
upon, and in the absence of stipulation, the legal Mutuum Contract of lease
interest, which is six per cent per annum. (1108) Delivery of money or Delivery of a non-
some other consumable thing,
BSP CIRCULAR 799, Series of 2013 consumable thing, allowing use for a
Sec. 1. The rate of interest for the loan of any Nature promising to repay certain period, after
forbearance of money, goods, or credits and the rate the equivalent which it must be
allowed in judgments, in the absence of an express amount of the same returned to the owner
contract as to such rate of interest, shall be six kind and quality
percent (6%) per annum. Relation
Obligor and obligee Landlord and tenant
between parties
Summary of rules on interest Nature of Compensation to
Interest on principal Interest on interest Payment to creditor
money received owner of property
General rule None None1
Expressly agreed upon Expressly agreed upon Art. 1954, supra
in writing, then pay: in writing, then pay:
a. Rate stipulated a. Rate stipulated Distinguishing loan from barter
b. Legal interest of b. Legal interest of Loan Barter
6%2 6% Mutuum—Money or Non-fungible, non-
Exceptions Object
No stipulation, but There has been judicial other fungible things consumable things
there is delay, then paydemand, then pay 6%, Commodatum— Equivalent of the thing
6% interest, computed counted from date of What must
Identical thing must be received must be given
from date of judicial orwhen such demand be returned
returned in return
extrajudicial demand was made Commodatum—
1
via Art. 1959 Gratuitous Onerous, since it is
2
via BSP Circ. No. 799 Nature
Mutuum—Gratuitous or really a mutual sale
onerous
In case of failure to pay interest, the creditor cannot avail of
rescission under Art. 1191, because this applies to reciprocal
obligations, and not to unilateral ones like mutuum. The creditor
PEOPLE v. CONCEPCION (1922)
may, however, avail of specific performance.
The concession of credit is in the nature of
9. Term & extinguishment granting a loan up to the amount fixed in the
credit granted.
Causes for extinguishment of mutuum
The general rules on extinguishment of obligations Discount Loan
apply. Interest is deducted in Interest is collected at the
1. Payment of the loan; advance from principal sum expiration of the credit
2. Condonation or remission; Always on double-name Generally on single-name
3. Confusion or merger; paper paper
4. Compensation; and
5. Novation. Facts: Concepcion, President of PNB, was charged with a
via Art. 1231 violation of Act No. 2747 for granting credit to his wife. He
argued that the granting of credit was not tantamount to
Loss of the thing does not extinguish the obligation, since there granting a loan.
is no obligation to return the same thing anyway.
Issue: WON the grant of credits is in the nature of granting loans
Who bears the risk of loss and deterioration? – YES
The owner bears the risk of loss and deterioration. In
mutuum, a transfer of ownership occurs between the Ratio: To take the position that the granting of credits is not, in
creditor and the debtor, whereby the debtor becomes itself, an act of loaning money to another would defeat the
the owner of the thing borrowed. Thus, the debtor purpose of the law when it enacted safeguards regarding
must bear the risk of loss and deterioration. commercial transactions. In this case what was sought to be
prevented was a conflict of interest.
10. Distinguished from other
contracts GARCIA v. THIO (2007)
A R T . 1 6 4 3, C C The delivery that perfects a contract of mutuum

In the lease of things, one of the parties binds himself does not require actual physical possession of
to give to another the enjoyment or use of a thing for a what is lent—it is enough that what is lent is
price certain, and for a period which may be definite or placed under the control and possession of the
indefinite. However, no lease for more than ninety- debtor.
Absent written stipulation, the payment of Issue: WON the contract was perfected on the date stipulated in
interest cannot be enforced. their agreement (May 1, 1981) – NO
Facts: Garcia would give crossed checks under the name of Ratio: A contract of loan is a real contract; perfected only upon
Santiago to Thio. Thio would then give the checks to Marilou, delivery of the object. The proper date of perfection was when
receive payment from the latter, and remit the amounts due to Roa received the full loan.
Garcia. Upon default in the payments, Garcia filed a case against
Thio. Thio argued that Garcia should proceed against Santiago PRODUCERS’ BANK v. CA (2003)
because she the money lent was never delivered to her in the
sense that it was never placed at her disposal. When money (or something consumable) is
gratuitously lent without the intent of
Issue: WON Thio is liable for the amounts owed to Garcia – YES spending/consuming it, as when it is used for
exhibitions, the contract entered into is one of
Ratio: What they are engaged in is re-lending whereby one party commodatum and not mutuum.
lends to another who then lends it to a third person at higher
interest rates. As applied, delivery was made to Thio when the Facts: Vives deposited 200k in the account of Doronilla in order
checks under the name of Santiago were placed in her to help the latter incorporate her business. Vives attempted to
possession. Also, Thio was the listed creditor of Santiago in the recover the money lent but found out that only 90k remained.
latter’s insolvency proceedings. Further, the bank refused to release what was left because it was
to answer for several postdated checks. Vives filed an action for
SAURA IMPORT & EXPORT v. DBP (1972) recovery of a sum of money against Doronilla and the bank.
Mutuum contracts are only perfected upon the Issue: WON the contract was of mutuum or commodatum –
actual delivery of the object of the contract. Commodatum
Notwithstanding fact that all documentary
requirements have been signed, mutual Ratio: The intent of the parties was not for Doronilla to consume
desistance prior delivery of the object, as signified the money but to keep it in her account for the purpose of
by the acts of the parties, may terminate the satisfying incorporation requirements. Doronilla’s attempt to
contract. return 212k with the 12k as supposed interest did not convert it
into one of mutuum. Further, the 12k constituted the fruits of the
Facts: Saura, Inc. filed for a loan of 500k from the bank. Despite thing loaned and not interest; in a commodatum the bailee is
the fact that the loan documents were signed and the obliged to return the fruits of the thing to the owner.
accompanying mortgage registered, the parties could not fully
agree as regards it terms. Saura, towards the end, asked the PEOPLE v. PUIG (2008)
bank to cancel the mortgage constituted on its property. As a
result of the failure of the bank to release the amount sought to The relationship between a bank and its clients is
be borrowed, Saura defaulted in its other obligations. Saura then in the nature of debtor and creditor.
sued the bank for damages.
A relationship based on confidence exists between
Issue: WON the contract was validly terminated by the conduct of the bank and its employees, so the latter may be
the parties—YES liable for qualified theft for misappropriating the
money of the bank.
Ratio: Saura’s request for the cancellation of the contract and
their failure to initially accuse the bank of breach when their Facts: Bank filed 112 cases of qualified theft against two of its
negotiations turned sour exhibit mutual desistance between the employees for taking various accounts from the money deposited
parties. by its clients. RTC ruled that the elements of qualified were not
present because there was no showing that the amounts were
BPI INVESTMENT CORP. v. CA (2002) taken without the consent of the bank’s clients, neither was it
alleged that a relationship of confidence present between the
A contract of loan is perfected upon complete bank and its employees (the RTC was of the opinion that the
delivery of the object and not upon the meeting of clients retained ownership of the money).
minds of the parties or when they execute a
written agreement. Being a reciprocal agreement, Issue: WON the employees are liable for qualified theft – YES
the creditor cannot demand payment until full
delivery of what the debtor seeks to borrow. Ratio: Under Arts. 1980 and 1953, it is clear that banks acquire
ownership of money deposited by its clients because their
Facts: Roa obtained a loan fron the bank which was re- relationship is governed by the provisions of the civil code on
structured—it contained a stipulation that the payment of simple loans. As such, ownership passes from the clients to the
monthly amortizations would begin on May 1, 1981. However, the bank upon the act of depositing their money. The bank was
bank only released the entirety of the loan on Sept. 1982. Dispute correct in charging its employees with qualified theft.
arose regarding when the contract was perfected for purposes of
determining when Roa should have begun paying the monthly BPI FAMILY BANK v. FRANCO (2007)
amortizations.
The creditor-debtor relationship that exists Allowing the debtor to benefit from the loan
between clients and banks is coupled with an without the accrual of the agreed-upon interest
obligation to pay the former what is owed them by constitutes unjust enrichment.
the latter upon demand. Neither do banks have a
right to unilaterally freeze the assets of its clients Facts: Frias entered into a transaction with San Diego for the sale
on mere suspicion extraordinary diligence in the of her house that provided that the latter will pay 3M to signify
administration and handling of the same. her intent provided that Frias will return the money with interest
should San Diego decide against buying the property within 6
Facts: Franco opened a savings account with BPI that he filled months of such notice. Frias received 2M when San Diego
with money from checks issued by Tevesteco. In turn, the money informed him that she no longer wanted to buy the property—the
from Tevesteco was sourced from amounts of money debited 2M thus became a loan extended by San Diego to Frias. Frias
from FMIC’s account. It turned out that the signatures that failed to pay within 6 months and issue arose as regards the
authorized the debiting of money from FMIC’s account were computation of interest. Frias argued that as per their
forgeries. To protect its interests, the bank placed the account of agreement, interest would only run for the duration of the 6
Franco under garnishment pursuant to an order issued by the month period while San Diego argued that it would continue to
RTC. Franco filed a case against BPI in response to the latter’s run despite the expiration of the original period given.
failure to unfreeze his account.
Issue: WON the interest continued to accrue after the 6 month
Issue: WON Franco was entitled to the money notwithstanding period given to pay – YES
the fact that the manner of its procurement may have been
tainted by fraud – YES Ratio: To give merit to Frias’s contention would create an absurd
situation wherein no additional interest would accrue after the
Ratio: The bank raised the defense that under Art. 599 one who expiration of the 6 month period even if it would take an eternity
has lost a movable or has been unlawfully deprived thereof may for Frias to settle her indebtedness.
proceed against the person who took it. The court found this
contention bereft of merit and held that while the bank owned EASTERN SHIPPING LINES, INC. v. CA (1994)
the money deposited, it did not have the right to retain
possession of it when demand was made. Further, Art. 599 is Court awards are in the nature of forbearances of
inapplicable because it only applies to specific or determinate money and are subject to the legal interest from
things. The bank must bear the cost of its own negligence in not the time of judgment until full payment; the
thoroughly examining the signature of its clients. current legal interest is 6%.
CONCEPCION v. CA (1997) Facts: Eastern Shipping shipped two drums riboflavin one of
which, upon arrival, turned out to be damaged. MIC paid the
A bank may not unilaterally increase interest rates insurance claim of the consignee and was subrogated to the
through escalator clauses absent a showing of a rights of the latter. Dispute arose as regards the liability of the
written stipulation that allows them to do the petitioner and the manner of computation of legal interest.
same and, further, that all the conditions of the
written stipulation have been met. Unless both Issue: WON the damages awarded by the Court are subject to
requisites are met, no mutuality is present legal interest – YES
between the parties and such acts will be void.
Ratio: When the judgment of the court awarding a sum of money
Facts: The sps. Concepcion took out a loan from the bank whose becomes final and executory, the rate of legal interest, is 6% per
terms included authorization for the bank to increase the interest annum from such finality until its satisfaction, as it constitutes a
rates in response to any increases that the Central Bank may forbearance upon the finality of the judgment.
make to rediscount rates. Under their contract, the spouses were
also entitled to prior notification of any unilateral increases. The LIGUTAN v. CA (2002)
bank proceeded to increase interest rates on three occasions
without showing cause for the same. Eventually, the spouses The addition of a mortgage to a loan contract
defaulted and the property mortgaged was foreclosed. does not constitute novation because it is only an
accessory contract that attaches to the latter. No
Issue: WON the bank validly increased the interest rates of the incompatibility results therefrom and the parties
loan – NO are bound by the terms and conditions of the
earlier contract.
Ratio: Any increase on the interest rate was necessarily
conditioned on previous modifications made by the CB on re- Facts: Petitioners argue that the introduction of a real estate
discount rates. The bank failed to show that any such adjustment mortgage novated their contract of loan and extinguished their
was made. No justification for the increase of the interest rates. liabilities therein.
FRIAS v. SAN DIEGO-SISON (2007) Issue: WON the contract was extinguished because of novation –
NO
Interest placed on onerous loans will run from the
moment that the debtor receives the sums Ratio: For an incompatibility to extinguish a contract such must
borrowed until full payment of the principal sum. exist in any of the essential elements of the contract (changing it
from one type of contract to another, change in the nature of the

prestation, change of parties thereto through substitution or
subrogation.
D. CO MMO DATUM vs. MUTUUM
Commodatum Mutuum
Loan for
Concept Loan for use
consumption
The equivalent
What must be The identical thing
amount of the same
returned loaned
kind and quality
Real
Real
Unilateral
Unilateral
Nominate
Nominate
Characteristics Principal
Principal
Informal
Informal
Either gratuitous or
Essentially gratuitous
onerous
Consent must be
Consent must be
given by a
given by a
capacitated party.
capacitated party.
Generally, object is
Generally, object
either money or a
Essential must be a non-
fungible thing.
requisites consumable thing.
The cause is either
The cause is
liberality or payment
liberality.
of interest.
Delivery is essential
Delivery is essential
for perfection.
for perfection.
Lender should have
No transfer of
Parties capacity to transfer
ownership
ownership
Either oral or written,
Form Either oral or written but interest should
be written
Debtor bears risk of
Risk of loss Bailor bears risk of
loss, because of
(general rule) loss
ownership
Not extinguished by
Extinguishment Extinguished by loss
loss
III. DEPOSIT
A. INTRO DUCTIO N A R T . 1 9 6 3, C C
An agreement to constitute a deposit is binding, but
1. Definition the deposit itself is not perfected until the delivery of
the thing. (n)
A R T . 1 9 6 2, C C
A deposit is constituted from the moment a person The contract of deposit is perfected upon the delivery of the
receives a thing belonging to another, with the thing, but a contract of future deposit or contract to deposit is
obligation of safely keeping it and of returning the perfected by mere consent. The nature and primary obligation is
same. If the safekeeping of the thing delivered is not that a thing must be kept—without delivery, this nature cannot
the principal purpose of the contract, there is no be satisfied.
deposit but some other contract. (1758a)
b. Unilateral or bilateral
In a deposit, one person receives something belonging to
another, with the obligations to safely keep and return it. It is unilateral if no compensation has been paid to the
depositary, and bilateral if compensation has been paid.
2. Types
c. Principal
A R T . 1 9 6 4, C C
A deposit may be constituted judicially or A voluntary deposit is principal, not dependent on another
extrajudicially. (1759) contract.
A R T . 1 9 6 7, C C d. Informal
An extrajudicial deposit is either voluntary or
necessary. (1762) A R T . 1 9 6 9, C C
A contract of deposit may be entered into orally or in
Kinds of deposit writing. (n)
1. Extrajudicial—No court intervention
a. Voluntary It may be constituted either orally or in writing.
b. Necessary
2. Judicial—Court intervention e. Nominate
B. VO LUNTARY DEPO SIT It is nominate because the Civil Code said so. Yes indeed!
1. Concept f. Onerous or gratuitous
A R T . 1 9 6 8, C C A R T . 1 9 6 5, C C
A voluntary deposit is that wherein the delivery is A deposit is a gratuitous contract, except when there
made by the will of the depositor. A deposit may also is an agreement to the contrary, or unless the
be made by two or more persons each of whom depositary is engaged in the business of storing
believes himself entitled to the thing deposited with a goods. (1760a)
third person, who shall deliver it in a proper case to
the one to whom it belongs. (1763) Summary of rules on whether onerous/gratuitous
General rule: Gratuitous
Deposit and credit Exceptions: Onerous in cases of—
A voluntary deposit involves a relationship of trust, 1. Contrary stipulation
which takes into account the depositary’s personal 2. Depositary engaged in business of storing goods
quality of trustworthiness. It is a contract of 3. Property was saved from destruction, without the
confidence. knowledge of the owner—The owner is bound to
pay the depositary just compensation
2. Characteristics 3. Essential requisites
Characteristics of voluntary deposit (RUBPINGO) a. Consent
1. Real
2. Either unilateral or bilateral A R T . 1 9 7 0, C C
3. Principal If a person having capacity to contract accepts a
4. Informal deposit made by one who is incapacitated, the former
5. Nominate shall be subject to all the obligations of a depositary,
6. Either gratuitous or onerous and may be compelled to return the thing by the
guardian, or administrator of the person who made
a. Real the deposit, or by the latter himself if he should
acquire capacity. (1764)
Art. 1316, supra
A R T . 1 9 7 1, C C d. Delivery
If the deposit has been made by a capacitated person
with another who is not, the depositor shall only have Deposit being a real contract, delivery is an essential requisite to
an action to recover the thing deposited while it is still its perfection.
in the possession of the depositary, or to compel the
latter to pay him the amount by which he may be 4. Parties
enriched or benefited himself with the thing or its See also discussion on consent as an essential requisite.
price. However if a third person who acquired the
thing acted in bad faith, the depositor may bring an Characteristics of the parties to a deposit
action against him for its recovery. (1765a) Depositor Depositary
Makes the deposit Receives thing in deposit
A R T . 1 9 8 6, C C
Not required to be the owner May not transfer the deposit
If the depositor should lose his capacity to contract
of the thing deposited, since to third persons2
after having made the deposit, the thing cannot be
deposit does not transfer
returned except to the persons who may have the
ownership
administration of his property and rights. (1773)
Not required that the
depositor prove his ownership
Rules on incapacity of parties to deposit
of the thing to the depositary1
Incapacity Effect 1
via Art. 1984
Return must be made to: 2
via Art. 1973
Depositor
- The depositary’s guardian/administrator
does not have
- Depositor himself, once he acquires/regains 5. Obligations of the depositary
capacity
capacity
- If thing is still in depositary’s possession, the Summary of obligations of the depositary
depositor may recover it A. Keep the thing
- If thing is in the possession of another who - Safely keep the thing
Depositary has acquired it in good faith, then the
- Not to transfer the deposit
does not have depositor may recover the thing deposited
- Not to change way of deposit
capacity AND be paid the amount by which the
- Collect interest on choses in action
depositary has been enriched
- Not to commingle things, if so stipulated
- If third person has acquired it in bad faith,
then the depositor may recover it
B. Not to use the thing, unless authorized
Either one
incapacitated Contract is voidable
C. Return the thing
at perfection
- Return the thing closed and sealed
Both
- Return the thing with its products,
incapacitated Contract is unenforceable
accessories, and accessions
at perfection
b. Object a. Keep the thing
A R T . 1 9 6 6, C C
Safely keep the thing
Only movable things may be the object of a deposit.
A R T . 1 9 7 2, C C
(1761)
The depositary is obliged to keep the thing safely and
to return it, when required, to the depositor, or to his
Only movables may be the object of extrajudicial deposit,
heirs and successors, or to the person who may have
whether voluntary or necessary. However, other forms of deposit,
been designated in the contract. His responsibility,
i.e. judicial deposit, may cover both movable and immovable
with regard to the safekeeping and the loss of the
property.
thing, shall be governed by the provisions of Title I of
this Book.
Art. 1966, however, does not cover rights and actions.
If the deposit is gratuitous, this fact shall be taken
into account in determining the degree of care that
c. Cause
the depositary must observe. (1766a)
Art. 1965, supra
The degree of care required of the depositary is the same
The cause for a deposit may be either mere liberality of the diligence that he would exercise over his own property. This is
depositary (if gratuitous) or the payment of compensation (if because deposit is a contract of confidence: the depositor is
onerous). presumed to have chosen the depositary by considering the
latter’s good faith and trustworthiness.
Not to transfer the deposit In case the depositary is permitted to commingle grain or other
articles, the various depositors of the mingled goods shall own
A R T . 1 9 7 3, C C the entire mass in common. Each of them shall be entitled to the
Unless there is a stipulation to the contrary, the portion of the entire mass corresponding to their share, i.e. the
depositary cannot deposit the thing with a third amount they deposited.
person. If deposit with a third person is allowed, the
depositary is liable for the loss if he deposited the If there is stipulation that prohibits commingling, the depositary
thing with a person who is manifestly careless or unfit. cannot commingle goods, even if they are of the same kind and
The depositary is responsible for the negligence of his quality.
employees. (n)
b. Not to use the thing, unless
The depositary is not allowed to deposit the thing with a third authorized
person, unless authorized by express stipulation. Unauthorized
transfer would make him liable for damages. A R T . 1 9 7 7, C C
The depositary cannot make use of the thing
Not to change the way of deposit deposited without the express permission of the
depositor.
A R T . 1 9 7 4, C C Otherwise, he shall be liable for damages.
The depositary may change the way of the deposit if However, when the preservation of the thing
under the circumstances he may reasonably presume deposited requires its use, it must be used only for
that the depositor would consent to the change if he that purpose. (1767a)
knew the facts of the situation. However, before the
depositary may make such change, he shall notify the Summary of rules on use of the thing deposited
depositor thereof and wait for his decision. (n) General rule: Not allowed
Exceptions:
The exceptions under the obligation not to change the way of the 1. When stipulated in writing
deposit are: 2. When such use is necessary to the preservation of
1. That there is stipulation allowing it; or the thing
2. The depositor consents, after being notified.
Failure to observe this obligation makes the depositary liable for
When effected without stipulation or depositor’s consent, the damages.
depositary becomes liable for damages.
A R T . 1 9 7 8, C C
Collect interest on choses in action When the depositary has permission to use the thing
deposited, the contract loses the concept of a deposit
A R T . 1 9 7 5, C C and becomes a loan or commodatum, except where
The depositary holding certificates, bonds, securities, safekeeping is still the principal purpose of the
or instruments which earn interest shall be bound to contract.
collect the latter when it becomes due, and to take The permission shall not be presumed, and its
such steps as may be necessary in order that the existence must be proved. (1768a)
securities may preserve their value and the rights
corresponding to them according to law. Effects if permission to use is given
The above provision shall not apply to contracts Thing deposited Effect
for the rent of safety deposit boxes. (n) Contract loses character of deposit and
Non-consumable becomes commodatum, unless
If the thing deposited earns interest, the depositary is obligated thing safekeeping is still the principal purpose of
to: the contract
1. Collect the interest, and also the capital itself, as it Permission to use results in consumption,
becomes due; and Money or other converting contract into a mutuum
2. Take the necessary steps to preserve the value and consumable thing If safekeeping is still principal purpose of
rights corresponding to the property contract, an irregular deposit results
Not to commingle things, if so Irregular deposit

stipulated Where money or other consumable thing is deposited
for safekeeping, and is demandable at will by the
A R T . 1 9 7 6, C C depositor, the contract is an irregular deposit.
Unless there is a stipulation to the contrary, the
depositary may commingle grain or other articles of c. Return the thing
the same kind and quality, in which case the various
depositors shall own or have a proportionate interest A R T . 1 9 8 3, C C
in the mass. (n) The thing deposited shall be returned with all its
products, accessories, and accessions.
Should the deposit consist of money, the
provisions relative to agents in Article 1896 shall be Art. 1986, supra

applied to the depositary. (1770)
To whom depository is bound to return thing deposited
A R T . 1 9 9 0, C C Who made deposit To whom return must be made
If the depositary by force majeure or government order Depositor, his heirs and successors, or to
loses the thing and receives money or another thing in General rule the person who may have been
its place, he shall deliver the sum or other thing to the designated in the contract
depositor. (1776a) Each of them, returning the thing only to
Joint depositors
the extent that they claim
A R T . 1 9 9 1, C C Any of them, unless one has been
The depositor’s heir who in good faith may have sold Solidary depositors specifically designated; then return must
the thing which he did not know was deposited, shall be made to him
only be bound to return the price he may have
Incapacity at time deposit was made—
received or to assign his right of action against the
Guardian, administrator, or depositor
buyer in case the price has not been paid by him. Incapacitated
himself, should he acquire capacity
(1778) depositor
Capacity lost later, during deposit—
Legal representative
What depositary is bound to return
True owner, if depositary knows who it is,
Condition What must be returned Depositor of stolen
and after advising true owner of the
Identical thing thing
deposit
General rule Its products, accessories,
and accessions A R T . 1 9 8 7, C C
Loss (force majeure or Sum received as If at the time the deposit was made a place was
government order) compensation designated for the return of the thing, the depositary
Sale by depositary’s Sum received as a result must take the thing deposited to such place; but the
heir in good faith of the sale expenses for transportation shall be borne by the
Exceptions
Deposit of a fungible depositor.
Thing of the same value
thing If the depositor has been designated for the
Thing of same kind or return, it shall be made where the thing deposited
Commingling may be, even if it should not be the same place where
quality
the deposit was made, provided that there was no
A R T . 1 9 8 4, C C malice on the part of the depositary. (1774)
The depositary cannot demand that the depositor
prove his ownership of the thing deposited. Where depositary is bound to make return
Nevertheless, should he discover that the thing 1. Place agreed upon by the parties, with expenses
has been stolen and who its true owner is, he must for transportation being borne by the depositor; or
advise the latter of the deposit. 2. Absent stipulation, at the place where the thing
If the owner, in spite of such information, does not deposited should be, even if this is not the same
claim it within the period of one month, the depositary place where the deposit was originally made,
shall be relieved of all responsibility by returning the provided that the transfer is made without bad
thing deposited to the depositor. faith on the part of the depositary.
If the depositary has reasonable grounds to
believe that the thing has not been lawfully acquired What happens in case there is malice/bad faith?
by the depositor, the former may return the same. If the malice spoken of in Art. 1987 is present when
(1771a) the depositary brings the thing to the wrong place,
what may he be liable for? Sir believes that aside from
Requisites of requirement to advise true owner damages, the depositary may be liable for the
For paragraph 2 of Art. 1984 to apply, the following expenses of bringing the thing to the original place.
requisites must be met:
1. The thing deposited must be stolen; and A R T . 1 9 8 8, C C
2. The depositary must know who its true owner is. The thing deposited must be returned to the depositor
upon demand, even though a specified period or time
A R T . 1 9 8 5, C C for such return may have been fixed.
When there are two or more depositors, if they are not This provision shall not apply when the thing is
solidary, and the thing admits of division, each one judicially attached while in the depositary’s
cannot demand more than his share. possession, or should he have been notified of the
When there is solidarity or the thing does not opposition of a third person to the return or the
admit of division, the provisions of Articles 1212 and removal of the thing deposited. In these cases, the
1214 shall govern. However, if there is a stipulation depositary must immediately inform the depositor of
that the thing should be returned to one of the the attachment or opposition. (1775)
depositors, the depositary shall return it only to the
person designated. (1772a) A R T . 1 9 9 4, C C
The depositary may retain the thing in pledge until
the full payment of what may be due him by reason of unpaid amounts
the deposit. (1780) 4. Pay fees for deposit
When payment must be made A R T . 1 9 9 2, C C
General rule: Upon demand (given a reasonable time), If the deposit is gratuitous, the depositor is obliged to
regardless of the period agreed upon reimburse the depositary for the expenses he may
have incurred for the preservation of the thing
Exceptions: deposited. (1779a)
1. Judicial attachment
2. Opposition by third person This applies only to gratuitous deposits, because these expenses
3. Right of retention, whereby depositary must be would have been incurred by the depositor had he not made the
compensated first deposit.
Return the thing closed & sealed If the deposit were onerous, the expenses of preservation would
be deemed included in the compensation paid to the depositary.
A R T . 1 9 8 1, C C Such expenses are therefore for his account.
When the thing deposited is delivered closed and
sealed, the depositary must return it in the same The right to reimbursement covers all expenses for preservation,
condition, and he shall be liable for damages should whether ordinary or extraordinary.
the seal or lock be broken through his fault.
Fault on the part of the depositary is presumed A R T . 1 9 9 3, C C
unless there is proof to the contrary. The depositor shall reimburse the depositary for any
As regards the value of the thing deposited, the loss arising from the character of the thing deposited,
statement of the depositor shall be accepted, when unless at the time of the constitution of the deposit
the forcible opening is imputable to the depositary, the former was not aware of, or was not expected to
should there be no proof to the contrary. However, the know the dangerous character of the thing, or unless
courts may pass upon the credibility of the depositor he notified the depositary of the same, or the latter
with respect to the value claimed by him. was aware of it without advice from the depositor. (n)
When the seal or lock is broken, with or without
the depositary’s fault, he shall keep the secret of the Exceptions under Art. 1993
deposit. (1769a) In an onerous deposit, the depositor shall reimburse
the depositary for losses arising from the character of
Obligations & liabilities under Art. 1981 the thing, except if:
The depositary has the ff. obligations & liabilities: 1. The depositor was not aware of the thing’s
1. When thing deposited has been delivered closed dangerous character;
and sealed, return it in the same condition; 2. The depositor could not have been expected to
2. Pay for damages should the seal or lock be broken know the thing’s dangerous character;
through his fault, which is presumed unless proven 3. Depositary was notified of such character
otherwise; (assumption of risk);
3. Keep the secret of the deposit when the seal or lock 4. Depositary was aware of such character, even
is broken, whether or not with his fault. without advice from the depositor.
A R T . 1 9 8 2, C C A R T . 1 9 9 4, C C
When it becomes necessary to open a locked box or The depositary may retain the thing in pledge until
receptacle, the depositary is presumed authorized to the full payment of what may be due him by reason of
do so, if the key has been delivered to him; or when the deposit. (1780)
the instructions of the depositor cannot be executed
without opening the box or receptacle. (n) What the depositary is entitled to
The depositary may exercise his right of retention if he
When depositary is justified to open sealed thing has not been paid:
1. Presumed authority —Key has been delivered to 1. Reimbursement for necessary expenses; or
him; or 2. Liability for losses (damages).
2. Necessity—Depositor’s wishes cannot be carried
out without opening the sealed thing. 7. Risk of loss and deterioration
6. Obligations of the depositor A R T . 1 9 4 7, C C

The depositary is liable for the loss of the thing
Summary of obligations of the depositor through a fortuitous event:
(1) If it is so stipulated;
1. If deposit gratuitous, reimburse depositary for
(2) If he uses the thing without the depositor’s
expenses incurred to preserve thing
permission;
2. If deposit onerous, reimburse depositary only for
(3) If he delays its return;
losses incurred or arising from character of thing
(4) If he allows others to use it, even though he
deposit
himself may have been authorized to use the
3. Respect depositary’s right to retain things for
same. (n) (2) When it takes place on the occasion of any

calamity, such as fire, storm, flood, pillage,
Summary of rules on who bears the risk of loss shipwreck, or other similar events. (1781a)
General rule: Depositor shall bear the risk of loss (res
perit domino) A R T . 1 9 9 7, C C
The deposit referred to in No. 1 of the preceding article
Exceptions: Depositary shall bear the risk of loss if— shall be governed by the provisions of the law
1. Stipulation by the parties to the effect that the establishing it, and in case of its deficiency, by the
depositor shall be paid indemnity for the loss of rules on voluntary deposit.
the thing while in the depositary’s hands; The deposit mentioned in No. 2 of the preceding
2. Depositary uses thing without permission from article shall be regulated by the provisions concerning
depositor; voluntary deposit and by Article 2168. (1782)
3. Depositary incurs in delay, i.e. failure to return
upon demand or after the period; 2. Types
4. Depository was allowed to use the thing, but he let
third parties use it Types of necessary deposits and their governing laws
Kind of necessary deposit Governing law
8. Extinguishment Provisions of the law that
Made in compliance with a established the obligation +
A R T . 1 9 8 8, C C legal obligation provisions on voluntary
The thing deposited must be returned to the depositor deposit
upon demand, even though a specified period or time Taking place on calamitous
for such return may have been fixed. Art. 2168 + provisions on
occasions (deposito/depositum
This provision shall not apply when the thing is voluntary deposit
miserabile)
judicially attached while in the depositary's Made by travellers in hotels or
possession, or should he have been notified of the Arts. 1998 to 2004
inns
opposition of a third person to the return or the Made by passengers with
removal of the thing deposited. In these cases, the Art. 1754
common carriers
depositary must immediately inform the depositor of
the attachment or opposition. (1775) a. Made in compliance with a legal
obligation
A R T . 1 9 8 9, C C
Unless the deposit is for a valuable consideration, the Some examples of this kind of deposit:
depositary who may have justifiable reasons for not 1. Judicial deposit of a thing whose possession is being disputed
keeping the thing deposited may, even before the in litigation;
time designated, return it to the depositor; and if the 2. Deposit to guarantee contracts with the government;
latter should refuse to receive it, the depositary may 3. Other deposits required in suits, as provided by the Rules of
secure its consignation from the court. (1776a) Court.
Summary of ways to extinguish deposit b. Deposito miserabile

Under the general provisions1 on extinguishment:
1. Return of thing A R T . 2 1 6 8, C C
2. Loss or destruction of thing When during a fire, flood, storm, or other calamity,
3. Condonation property is saved from destruction by another person
4. Confusion/merger without the knowledge of the owner, the latter is
5. Novation bound to pay the former just compensation.
6. Expiration of term
7. Fulfillment of resolutory condition These deposits occur when movable things pass from one person
to another by accident/fortuitous event. The more immediate
Specific to gratuitous deposits: object of the deposit is to save the property, rather than to safely
1. Death of either party keep it.
2. Return by depositary for justifiable reason
1
As per Art. 1287, compensation It is governed by Art. 2168, which establishes a quasi-contract:
does not apply to deposit. the owner of the thing becomes liable to pay the person who
saved his property just compensation.
C. NECESSARY DEPO SIT
c. Made by travellers in hotels or inns
1. Concept
A R T . 1 9 9 8, C C
A R T . 1 9 9 6, C C The deposit of effects made by the travellers in hotels
A deposit is necessary: or inns shall also be regarded as necessary. The
(1) When it is made in compliance with a legal keepers of hotels or inns shall be responsible for them
obligation; as depositaries, provided that notice was given to
them, or to their employees, of the effects brought by liable, regardless of caused by servants, employees, or
the guests and that, on the part of the latter, they take amount of care strangers
the precautions which said hotel-keepers or their exercised Theft by stanger, without use of arms
substitutes advised relative to the care and vigilance and/or irresistible force (due to apparent
of their effects. (1783) negligence)
Force majeure
A R T . 1 9 9 9, C C Roberry with the use of arms/irresistible
The hotel-keeper is liable for the vehicles, animals force
and articles which have been introduced or placed in When not liable Loss due to acts of guests, and their
the annexes of the hotel. (n) family, servants, or visitors
Loss arises from character of things
This kind of deposit is embedded in a contract of lodging. brought into the hotel
Coverage of law on hotel/inn deposits A R T . 2 0 0 4, C C
Travellers’ personal effects The hotel-keeper has a right to retain the things
Vehicles brought into the hotel by the guest, as a security for
Items covered
Animals credits on account of lodging, and supplies usually
Articles introduced or placed in hotel premises furnished to hotel guests. (n)
Hotel rooms and common areas
Places covered
Hotel annexes, e.g. parking lots This right of retention may be enforced against guests who have
yet to fully pay the fees for the lodging received and amenities
A R T . 2 0 0 0, C C used.
The responsibility referred to in the two preceding
articles shall include the loss of, or injury to the d. Made by passengers with common
personal property of the guests caused by the carriers
servants or employees of the keepers of hotels or inns
as well as strangers; but not that which may proceed A R T . 1 7 5 4, C C
from any force majeure. The fact that travellers are The provisions of Articles 1733 to 17531 shall apply to
constrained to rely on the vigilance of the keeper of the passenger's baggage which is not in his personal
the hotels or inns shall be considered in determining custody or in that of his employee. As to other
the degree of care required of him. (1784a) baggage, the rules in Articles 1998 and 2000 to 2003
concerning the responsibility of hotel-keepers shall be
A R T . 2 0 0 1, C C applicable.
1
The act of a thief or robber, who has entered the hotel The provisions on common carriers.
is not deemed force majeure, unless it is done with the
use of arms or through an irresistible force. (n) D. SEQUESTRATION/JUDICIAL DEPOSIT
A R T . 2 0 0 2, C C 1. Concept
The hotel-keeper is not liable for compensation if the
loss is due to the acts of the guest, his family, servants A R T . 2 0 0 5, C C
or visitors, or if the loss arises from the character of A judicial deposit or sequestration takes place when
the things brought into the hotel. (n) an attachment or seizure of property in litigation is
ordered. (1785)
A R T . 2 0 0 3, C C
The hotel-keeper cannot free himself from A R T . 2 0 0 9, C C
responsibility by posting notices to the effect that he is As to matters not provided for in this Code, judicial
not liable for the articles brought by the guest. Any sequestration shall be governed by the Rules of Court.
stipulation between the hotel-keeper and the guest (1789)
whereby the responsibility of the former as set forth in
articles 1998 to 2001 is suppressed or diminished Nature and purpose of judicial deposit
shall be void. (n) Judicial deposit is auxiliary to a case pending in court.
It is remedial or procedural in nature; hence, it is
Requisites for liability governed by the Rules of Court. Its purpose is to
1. Hotel/innkeeper must have been previously maintain the status quo during the pendency of the
informed about the effects brought by guests; and litigation, or insure the right of the parties to the
2. Guests have taken the prescribed precautions for property in case of a favorable judgment.
safekeeping their items;
2. Object
Extent of liability
All those who offer lodging for A R T . 2 0 0 6, C C
Who is responsible Movable as well as immovable property may be the
compensation, whatever their character
When hotel-keeper Loss or injury to guests’ personal property object of sequestration. (1786)
Generally, immovable property is sequestrated, though either May be either onerous or Essentially and always
movables or immovables may be the object of judicial deposit. gratuitous gratuitous
(Extrajudicial deposit) Only Both movable and
3. Obligation of the depositary movable (corporeal) things immovables may be given
may be given
A R T . 2 0 0 8, C C
The depositary of property sequestrated is bound to F. JUDICIAL DEPO SIT vs.
comply, with respect to the same, with all the EXTRAJUDICIAL DEPO SIT
obligations of a good father of a family. (1788)
Distinguishing loan from barter
The depositary is a person appointed by the court. He has the Judicial deposit Extrajudicial deposit
obligation to take care of the property with the diligence of a By the will of the court By the will of the
Cause/origin
good father of a family. (no contract) parties (contract)
As security, to secure
Custody and
4. Term & extinguishment the right of a party to
Purpose safekeeping of the
recover in case of a
thing
A R T . 2 0 0 7, C C favorable judgment
The depositary of property or objects sequestrated Either movable or
cannot be relieved of his responsibility until the immovable, though Only movable
Subject matter
controversy which gave rise thereto has come to an generally immovable, property
end, unless the court so orders. (1787a) property
Generally gratuitous,
Always onerous
E. DEPO SIT DISTINGUISHED FRO M Remuneration but may be
(remunerated)
O THER CO NTRACTS compensated or not
In behalf of person In behalf of depositor
In whose
1. From mutuum behalf held
who, by the judgment, or third person
has a right designated
A R T . 1 9 8 0, C C
Fixed, savings, and current deposits of money in banks BPI v. IAC (1988)
and similar institutions shall be governed by the
provisions concerning simple loan. (n) The primary purpose of the contract of deposit is
the safekeeping of the depositor’s property by
Deposit vs. mutuum placing possession thereof in the hands of the
Deposit Mutuum depositary—the depositary may not put what is
Principal purpose = Consumption of thing given deposited to any use.
safekeeping/mere custody
Depositor can demand return Creditor must wait until the Facts: Rizaldy entrusted, through the bank’s manager (Garcia),
of thing given at will expiration of the period 3000usd with the bank for safekeeping—the terms of their
granted to the debtor agreement expressly stipulate that the purpose of their
Both movable and immovable Only money and other arrangement was safekeeping. When Rizaldy asked for the
property may be given fungible things may be given return of the sum deposited, the bank stated that dollars he had
deposited had been credited to his account in its peso equivalent.
Irregular deposit v. mutuum Further, the bank denied the existence of a contract of depositum
Irregular deposit Mutuum by alleging that Garcia exceeded his authority when he entered
Consumable thing may be Creditor cannot seek into the same in the name of the bank.
demanded at will by depositor restitution until time for
payment as provided in Issue: WON a contract of depositum existed—YES
contract has arisen
Benefit accrues only to the Essential cause for transaction Ratio: The wording of the agreement between the bank and
depositor = debtor’s necessity Rizaldy and their subsequent acts clearly point to the fact that
Depositor has preference over Common creditors enjoy no what they intended to exist between them was a contract of
other creditors with respect to preference in the distribution depositum. While the bank is technically in breach of its
thing deposited of debtor’s property obligation to safeguard the thing and return it as it was received,
Rizaldy cannot recover because the transaction that they entered
2. From commodatum into is against the law; in pari delicto.
Art. 1978, supra TRIPLE V v. FILIPINO MERCHANTS (2005)
Deposit v. commodatum Valet car services are in the nature of deposits

Deposit Commodatum made by the car owner to the valet service
Principal purpose = Transfer of use provider. Provisions that exempt the service
safekeeping/mere custody provider from liability in case of loss are in the
nature of contracts of adhesion and are void; it liable unless his negligence led to its loss.
would be contrary to the nature of a deposit.
Facts: Father de la Pena had in his possession as a trustee money
Facts: De Asis ate at Kamayan restaurant where she entrusted that was meant to be used for the construction of a leper
her car to the restaurant’s valet service. After eating her fill, she hospital. He deposited the money in his own bank account.
discovered that her car had been stolen. FMICI, the insurer of De During the war, the military authorities confiscated all the money
Asis’s vehicle, paid her insurance claim and proceeded against in his account with HSBC because he was accused of being an
Triple V by virtue of subrogation. Triple V argued that it was not insurgent and that the money in his account was suspected to be
negligent in parking her car and that the valet ticket included a used for revolutionary purposes.
stipulation that they could not be sued for any loss incurred by
the depositor of the car. Issue: WON Father de la Pena is liable for the loss of the money –
NO
Issue: WON a deposit contract existed between the two parties
that could become the source of Triple V’s liability – YES Ratio: Being that the war is a fortuitous cause in the eyes of the
law, he cannot be held liable for its loss on occasion thereof.
Ratio: As regards negligence, the Court held that it was There was no stipulation or law that prevented him from
immaterial because this was an action premised on contractual depositing the money into his account.
breach—the breach occurred when Kamayan failed to secure the
car from theft. The contract of deposit was constituted the Dissent: The moment he deposited the money into his personal
moment possession of the car was placed in the hands of the account, it (the money) lost the protection and immunities
restaurant’s valet drivers; it did not matter that the service was accorded by the law.
gratuitous.
DURBAN APARTMENTS v. PIONEER (2011)
CA AGRO-INDUSTRIAL DEV’T. v. CA (1993)
Hotels are liable for the loss of the possessions of
The relation between a bank renting out safe- its guests that are deposited to its staff or
deposit boxes and its clients is that of a bailor and facilities. Under Art. 1968, such deposits are in the
bailee. It cannot disclaim liability from the loss of nature of necessary deposits and are valid sources
the objects inside its safety deposit boxes by of liabilities.
claiming that the same is in the nature of a
contract of lease Facts: See checked in at the City Garden Hotel and left the key of
his car with a hotel employee for the purpose of valet parking.
Facts: Titles of parcels of land that were the subject of The car was stolen and the insurance company after settling
transactions were placed in the bank’s safety-deposit box. When See’s claims proceeded against the hotel.
the parties to the transaction opened the safety-deposit box to
get the titles, the same were not inside. CA Agro then filed a Issue: WON Durban Apartments is liable for the loss of the car—
complaint for damages against the bank. The CA absolved the YES
bank of liability on the strength of its opinion that the
relationship between the bank and CA Agro was that of lessee Ratio: It is obvious that See deposited his vehicle for safekeeping
and lessor and not of bailor and bailee. with the staff of the hotel—the contract of deposit was perfected
the moment See turned over his keys to the valet service staff.
Issue: WON the relationship between a bank and those who rent
its safety-deposit boxes is that of a lessor and lessee – NO, it is in CHAN v. MACEDA (2003)
the nature of bailor-bailee relationship.
In order for a party claiming damages arising from
Ratio: It cannot be deemed as an ordinary lease because full and a contract of deposit he must prove two things:
absolute possession of the boxes was never given to CA Agro. 1. That a contract of deposit exists between him
Under prevailing jurisprudence, it is in the nature of a special and the party he seeks to hold liable
deposit. As such, the bank may be made liable if it is found that it 2. That the things sought to be withdrawn were in
was in breach of its obligation to keep whatever is stored inside the depositary’s possession at the time
safe (fraud, negligence, delay, etc.); the degree to be observed is demand was made
that of a good father of a family (though as one of the parties is a
bank it may be argued that extraordinary diligence should be Facts: Maceda and Moreman entered into a building construction
observed). However, this was dismissed because it was not contract. Maceda bought various construction materials that
proven that the bank was in breach of its contractual obligation Moreman deposited in the warehouse of the Chans. Moreman
to keep the titles safe—it did not know about the agreement that failed to construct the building within the period agreed upon so
both transacting parties must be present in order to withdraw Maceda filed an action for rescission. While the case was
the titles. pending, Maceda made demand upon Chans to return the
deposited materials. The latter replied that Moreman had
BISHOP of JARO v. DE LA PEÑA (1913) already withdrawn the materials. Maceda then sued them for
damages.
When the thing deposited is lost through
fortuitous event, the depositary will not be held
Issue: WON the Chans are liable for the loss of the materials
because of Moreman’s withdrawal – NO
Ratio: First, Bonifacio failed to prove the existence of a contract

of deposit; if anything, it would have existed between the Chans
and Moreman. Second, Maceda did not prove that the Chans still
had possession of the materials when he made demand.
YHT REALTY v. CA (2005)
Since the hotel industry is impressed with public

interest and that the law creates necessary
deposits between hotels and their clients, they
(hotels) cannot exempt themselves from liability
caused by mishandling the property of their
guests through waivers and notices.
Facts: McLoughlin deposited various amounts of money and

jewelry in the safety deposit boxes of YHT hotel. Whatever he
deposited would consistently be diminished upon subsequent
inspection. He found out that the hotel staff had been allowing
his companion/lover/tour guide to open the safety deposit box
that was assigned exclusively to him. He sued the hotel for
damages. Hotel tried to escape liability by pointing to the terms
and conditions regarding the use of their safety deposit boxes
that stated that it would not be liable for any loss incurred
through the use of such.
Issue: WON the hotel is liable for the loss of McLoughlin’s

possessions – YES
Ratio: If the hotel had exercised due diligence in taking care of

McLoughlin’s property, then no loss would have occurred; two
key system. Further, the waivers and notices that claim that the
hotel is exempt from liability from the loss of things deposited
are in contravention of the law and are void.
IV. GUARANTY
A. CO NCEPT 5. As to its scope and extent
a. Definite—Guaranty limited to the principal
A R T . 2 0 4 7, C C obligation only, or to a specific portion thereof
By guaranty a person, called the guarantor, binds b. Indefinite or simple—Includes the principal
himself to the creditor to fulfill the obligation of the obligation’s accessories and judicial costs
principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the B. CHARACTERISTICS
principal debtor, the provisions of Section 4, Chapter
3, Title I of this Book shall be observed. In such case Characteristics (CUGSCAF)
the contract is called a suretyship. (1822a) 1. Consensual
2. Unilateral
A guarantor is a person who binds himself to the creditor to 3. Gratutious
fulfill the obligation of the principal debtor. 4. Subsidiary and conditional
5. Accessory
The guarantor ensures the solvency of the debtor through his 6. Formal
promise to pay in case of default.
a. Consensual
Classification of guaranty
No delivery of a thing is required to perfect the guaranty. The
A R T . 2 0 5 1, C C guarantor’s promise and the acceptance by the creditor is
A guaranty may be conventional, legal or judicial, enough.
gratuitous, or by onerous title.
It may also be constituted, not only in favor of the b. Unilateral
principal debtor, but also in favor of the other
guarantor, with the latter's consent, or without his It is unilateral because it only gives rise to a duty on the part of
knowledge, or even over his objection. (1823) the guarantor, and it may be entered into even without the
intervention of the principal debtor.
A R T . 2 0 5 5, C C
A guaranty is not presumed; it must be express and c. Gratuitous
cannot extend to more than what is stipulated
therein. A R T . 2 0 4 8, C C
If it be simple or indefinite, it shall compromise A guaranty is gratuitous, unless there is a stipulation
not only the principal obligation, but also all its to the contrary. (n)
accessories, including the judicial costs, provided with
respect to the latter, that the guarantor shall only be Generally, guaranty is gratuitous, but the parties may stipulate
liable for those costs incurred after he has been otherwise.
judicially required to pay. (1827a)
d. Subsidiary & conditional
Classification of guaranty
1. Guaranty in the broad sense It takes effect only when the principal debtor fails in his
a. Personal—Guarantee = credit given by person obligation, and his property and legal remedies against him must
who guarantees fulfillment of principal debt first be exhausted before the guarantor may be made liable.
b. Real—Property, movable or immovable is
given to guarantee fulfillment e. Accessory
2. As to its origin The guaranty is dependent upon the existence of an obligation

a. Conventional—Constituted by agreement of between the debtor and creditor, e.g. a loan, which is the
the parties principal contract.
b. Legal—Imposed by virtue of provision of law
c. Judicial—Required by a court f. Formal
3. As to consideration Art. 2055 provides that a guaranty must be express and its terms
a. Gratuitous—Guarantor does not receive any must be stipulated. Further, the Statute of Frauds mandates that
price or remuneration a “special promise to answer for the debt of another” must be in
b. Onerous—Guarantor receives valuable writing, though there is no need that it appear in a public
consideration document.
4. As to the person guaranteed C. ESSENTIAL REQ UISITES

a. Single—Secures performance by the debtor of
the principal obligation 1. Consent
b. Double—Secures performance by the
guarantor of a prior guaranty Consent to become a guarantor must be given by one with
capacity.
2. Object guarantees; and

4. Has not been convicted of a crime in the first
A R T . 2 0 5 2, C C instance involving dishonesty, or does not become
A guaranty cannot exist without a valid obligation. insolvent
Nevertheless, a guaranty may be constituted to Exception: if a specific person was designated as
guarantee the performance of a voidable or an guarantor, then the creditor may not demand
unenforceable contract. It may also guarantee a substitution.
natural obligation. (1824a)
E. FO RM
A R T . 2 0 5 3, C C
A guaranty may also be given as security for future
A R T . 1 4 0 3, C C
debts, the amount of which is not yet known; there The following contracts are unenforceable, unless
they are ratified:
can be no claim against the guarantor until the debt is
liquidated. A conditional obligation may also be (2) Those that do not comply with the Statute of
secured. (1825a) Frauds as set forth in this number. In the
following cases an agreement hereafter made
shall be unenforceable by action, unless the
The object of the guaranty is the performance of the principal
same, or some note or memorandum, thereof, be
obligation.
in writing, and subscribed by the party charged,
or by his agent; evidence, therefore, of the
3. Consideration agreement cannot be received without the
writing, or a secondary evidence of its contents:
Art. 2048, supra
(b) A special promise to answer for the debt,
default, or miscarriage of another;
Unless stipulated, a guaranty is generally gratuitous. Therefore,
the consideration is the liberality of the guarantor. If onerous, the
consideration is the compensation for the guaranty.
Art. 2055, supra
A contract of guaranty must be in writing, but it need not be in a

D. PARTIES
public instrument.
A R T . 2 0 4 9, C C
A married woman may guarantee an obligation Because it is generally gratuitous, as per Art. 2048, it is strictly
without the husband's consent, but shall not thereby construed against the creditor.
bind the conjugal partnership, except in cases
provided by law. (n) F. O BLIGATIO NS of the G U ARANTO R
A R T . 2 0 5 6, C C Art. 2047, supra

One who is obliged to furnish a guarantor shall
The guarantor must fulfill the principal obligation.
present a person who possesses integrity, capacity to
bind himself, and sufficient property to answer for the
obligation which he guarantees. The guarantor shall 1. Types of obligations that may
be subject to the jurisdiction of the court of the place be secured
where this obligation is to be complied with. (1828a) Valid
Voidable
As to validity
A R T . 2 0 5 7, C C Unenforceable
If the guarantor should be convicted in first instance Natural
of a crime involving dishonesty or should become Present debts, including past debts not yet
insolvent, the creditor may demand another who has paid
all the qualifications required in the preceding article. As to period Future debts not yet incurred/due, but
The case is excepted where the creditor has required demand can only be made if already
and stipulated that a specified person should be the liquidated
guarantor. (1829a) As to Conditional
conditionality Absolute
Parties to the contract
1. Creditor and guarantor; or 2. Extent of obligations
2. Principal debtor and guarantor, with stipulation in
favor of third party, who is the creditor A R T . 2 0 5 4, C C
The principal debtor is not necessary to the contract of A guarantor may bind himself for less, but not for
guaranty. more than the principal debtor, both as regards the
amount and the onerous nature of the conditions.
Qualifications of a guarantor Should he have bound himself for more, his
1. Integrity; obligations shall be reduced to the limits of that of the
2. Capacity to bind himself; debtor. (1826)
3. Sufficient property to answer for obligation that he
The guarantor’s liability may be less than the principal debt, but Summary of time and place of payment
cannot be more, or be subject to more onerous terms. If his Where payment Place designated in contract of guaranty; or
liability is more, it shall be reduced to match the debtor’s. must be made Place designated in principal obligation
After the creditor has exhausted all the
When payment
3. Items covered debtor’s property and resorted to all legal
must be made
remedies against him
Art. 2055, supra
G. EFFECTS of GUARANTY BETW EEN
Items covered by guaranty GUARANTO R & CREDITO R
1. The principal obligation, or a portion thereof; and
2. If simple/indefinite, then also accessories and 1. Benefit of excussion
judicial costs.
a. Concept
4. Payment made without
knowledge/against consent of A R T . 2 0 5 8, C C
debtor The guarantor cannot be compelled to pay the
creditor unless the latter has exhausted all the
A R T . 1 2 3 6, C C property of the debtor, and has resorted to all the
The creditor is not bound to accept payment or legal remedies against the debtor. (1830a)
performance by a third person who has no interest in
the fulfillment of the obligation, unless there is a A R T . 2 0 6 3, C C
stipulation to the contrary. A compromise between the creditor and the principal
Whoever pays for another may demand from the debtor benefits the guarantor but does not prejudice
debtor what he has paid, except that if he paid him. That which is entered into between the guarantor
without the knowledge or against the will of the and the creditor benefits but does not prejudice the
debtor, he can recover only insofar as the payment principal debtor. (1835a)
has been beneficial to the debtor. (1158a)
A R T . 2 0 6 4, C C
A R T . 1 2 3 7, C C The guarantor of a guarantor shall enjoy the benefit of
Whoever pays on behalf of the debtor without the excussion, both with respect to the guarantor and to
knowledge or against the will of the latter, cannot the principal debtor. (1836)
compel the creditor to subrogate him in his rights,
such as those arising from a mortgage, guaranty, or Benefit of excussion
penalty. (1159a) Through excussion, the guarantor cannot be
compelled to pay the creditor until the debtor’s
A R T . 2 0 5 0, C C property has been exhausted and all legal remedies
If a guaranty is entered into without the knowledge or have been resorted to. Sub-guarantors also enjoy the
consent, or against the will of the principal debtor, the benefit of excussion of the principal debtor and the
provisions of Articles 1236 and 1237 shall apply. (n) previous guarantor.
Effects of payment without knowledge/consent b. Rationale

1. Guarantor may only recover amount insofar as his
payment has been beneficial to the debtor; and This arises from the nature of guaranty as an accessory and
2. There is no subrogation. subsidiary contract.
5. Time & place of payment c. Requisites
A R T . 1 2 5 1, C C For the guarantor to pay, the creditor must first:

Payment shall be made in the place designated in the 1. Exhaust all of the principal debtor’s properties to
obligation. satisfy the obligation; and
There being no express stipulation and if the 2. Resort to all legal remedies against him.
undertaking is to deliver a determinate thing, the
payment shall be made wherever the thing might be For guarantor to benefit from excussion, he must:
at the moment the obligation was constituted. 1. Set it up against the creditor when demand is
In any other case the place of payment shall be made upon him; and
the domicile of the debtor. 2. Point out to the creditor properties of the debtor in
If the debtor changes his domicile in bad faith or the Philippines sufficient to cover the debt.
after he has incurred in delay, the additional expenses
shall be borne by him. d. When unavailable
These provisions are without prejudice to venue
under the Rules of Court. (1171a) A R T . 2 0 5 9, C C
The excussion shall not take place:
(1) If the guarantor has expressly renounced it;
(2) If he has bound himself solidarily with the debtor; - However, lack of notice does not release him
(3) In case of insolvency of the debtor; from his obligation
(4) When he has absconded, or cannot be sued - Neither does non-appearance impair the benefit
within the Philippines unless he has left a of excussion
manager or representative; 2. Judgment against debtor
(5) If it may be presumed that an execution on the - Judgment does not impair/remove excussion
property of the principal debtor would not result - Writ of execution shall issue against the debtor’s
in the satisfaction of the obligation. (1831a) properties
- If there is a notice of satisfaction, then it means
A R T . 2 0 6 0, C C that the debt has been sufficiently covered
In order that the guarantor may make use of the 3. Exhaustion of debtor’s properties
benefit of exclusion, he must set it up against the 4. Demand against guarantor
creditor upon the latter's demand for payment from - If writ of execution shows that the debt has not
him, and point out to the creditor available property of been covered, demand may be made against the
the debtor within Philippine territory, sufficient to guarantor
cover the amount of the debt. (1832) 5. Guarantor sets up benefit of excussion
- The guarantor must set up excussion
A R T . 2 0 6 1, C C - He must point out the debtor’s property in the
The guarantor having fulfilled all the conditions PH that would sufficiently cover the debt
required in the preceding article, the creditor who is
negligent in exhausting the property pointed out shall 2. Benefit of division among
suffer the loss, to the extent of said property, for the
insolvency of the debtor resulting from such
several guarantors
negligence. (1833a)
a. Concept
When excussion is unavailable A R T . 2 0 6 5, C C
1. Guarantor expressly renounces it; Should there be several guarantors of only one debtor
2. Debtor binds himself solidarily (i.e. enters a and for the same debt, the obligation to answer for
suretyship); the same is divided among all. The creditor cannot
3. Debtor is insolvent; claim from the guarantors except the shares which
4. Debtor has absconded or cannot be sued within they are respectively bound to pay, unless solidarity
the PH (unless he has left a has been expressly stipulated.
manager/representative); The benefit of division against the co-guarantors
5. Execution on principal debtor’s property would not ceases in the same cases and for the same reasons as
satisfy the obligation; the benefit of excussion against the principal debtor.
6. Guarantor fails to set up the benefit of excussion (1837)
and point out debtor’s properties in the PH
sufficient to cover the debt; b. Rationale
7. The guarantor has set up the benefit of excussion,
but the creditor is negligent in exhausting the The obligation of a guarantor with respect to his co-guarantors is
debtor’s property; and not subsidiary, but direct, and does not depend on their solvency
8. Where the guarantor is a judicial bondsman. or insolvency.
e. Typical procedure c. Availability of benefit
A R T . 2 0 6 2, C C Limitations to availability of benefit of division
In every action by the creditor, which must be against When available When unavailable
the principal debtor alone, except in the cases
Solidarity has been expressly
mentioned in Article 2059, the former shall ask the
stipulated
court to notify the guarantor of the action. The When there are several
In the same cases and for the
guarantor may appear so that he may, if he so desire, guarantors of only one debtor
set up such defenses as are granted him by law. The same reasons that the benefit
for the same debt
of excussion may cease to be
benefit of excussion mentioned in Article 2058 shall
always be unimpaired, even if judgment should be available
rendered against the principal debtor and the
guarantor in case of appearance by the latter. (1834a) 3. Effect of compromise
A R T . 2 0 6 3, C C
Procedure
A compromise between the creditor and the principal
1. Suit by creditor against debtor
debtor benefits the guarantor but does not prejudice
- Generally against the debtor, unless the him. That which is entered into between the guarantor
guarantor has no benefit of excussion and the creditor benefits but does not prejudice the
- Guarantor must be notified in every case principal debtor. (1835a)
- He may set up defenses granted by law
notified of
Effect of compromise payment;
Between whom Effect 3. Damages; and
4. Expenses after
Creditor & Benefits the guarantor, but does not
debtor was
principal debtor prejudice him
notified.
Creditor & Benefits the principal debtor, but does not
Right to Available to Not available to
guarantor prejudice him
subrogation guarantor guarantor
H. EFFECTS of GUARANTY BETW EEN
GUARANTO R & DEBTO R Hence, payment with the debtor’s knowledge and consent
entitles the guarantor to TIDES = total of debt + indemnity +
damages + expenses + subrogation.
Effects of payment under certain conditions
Condition of payment Effect on guarantor
May recover amount which debtor
2. Effect of payment without
Without debtor’s
benefited from
notifying debtor
knowledge/consent
No subrogation occurs A R T . 2 0 6 8, C C
Debtor may enforce against him all If the guarantor should pay without notifying the
No notice given to
defenses w/c could have been set up debtor, the latter may enforce against him all the
debtor
against creditor at time of payment defenses which he could have set up against the
Cannot be reimbursed until maturity creditor at the time the payment was made. (1840)
Early payment
date, except if debtor ratifies payment
No remedy against debtor, only 3. Effect of early payment
against creditor, except if:
Double payment a. Guaranty gratuitous; A R T . 2 0 6 9, C C
(guarantor & debtor) b. Fortuitous event prevents notice to If the debt was for a period and the guarantor paid it
principal debtor; AND before it became due, he cannot demand
c. Creditor is insolvent. reimbursement of the debtor until the expiration of
the period unless the payment has been ratified by
1. Effect of payment with & the debtor. (1841a)
without debtor’ s
knowledge/consent 4. Effect of repeat payment
A R T . 2 0 6 6, C C A R T . 2 0 7 0, C C
The guarantor who pays for a debtor must be If the guarantor has paid without notifying the debtor,
indemnified by the latter. and the latter not being aware of the payment,
The indemnity comprises: repeats the payment, the former has no remedy
(1) The total amount of the debt; whatever against the debtor, but only against the
(2) The legal interests thereon from the time the creditor. Nevertheless, in case of a gratuitous
payment was made known to the debtor, even guaranty, if the guarantor was prevented by a
though it did not earn interest for the creditor; fortuitous event from advising the debtor of the
(3) The expenses incurred by the guarantor after payment, and the creditor becomes insolvent, the
having notified the debtor that payment had been debtor shall reimburse the guarantor for the amount
demanded of him; paid. (1842a)
(4) Damages, if they are due. (1838a)
A R T . 2 0 6 7, C C
5. Right to proceed against
The guarantor who pays is subrogated by virtue
debtor before payment
thereof to all the rights which the creditor had against
A R T . 2 0 7 1, C C
the debtor.
The guarantor, even before having paid, may proceed
If the guarantor has compromised with the
against the principal debtor:
creditor, he cannot demand of the debtor more than
(1) When he is sued for the payment;
what he has really paid. (1839)
(2) In case of insolvency of the principal debtor;
(3) When the debtor has bound himself to relieve
Effects of payment vis-à-vis knowledge & consent him from the guaranty within a specified period,
Payment with Payment without and this period has expired;
knowledge & consent knowledge & consent (4) When the debt has become demandable, by
Must be indemnified: reason of the expiration of the period for
1. Total amount of payment;
Right to May only recover
debt; (5) After the lapse of ten years, when the principal
indemnity amount which the
2. Legal interests obligation has no fixed period for its maturity,
(TIDE) debtor benefited from
counted from the unless it be of such nature that it cannot be
time debtor was extinguished except within a period longer than
ten years; If any of the guarantors should be insolvent, his

(6) If there are reasonable grounds to fear that the share shall be borne by the others, including the
principal debtor intends to abscond; payer, in the same proportion.
(7) If the principal debtor is in imminent danger of The provisions of this article shall not be
becoming insolvent. applicable, unless the payment has been made by
In all these cases, the action of the guarantor is to virtue of a judicial demand or unless the principal
obtain release from the guaranty, or to demand a debtor is insolvent. (1844a)
security that shall protect him from any proceedings
by the creditor and from the danger of insolvency of
the debtor. (1834a) A R T . 2 0 7 4, C C
In the case of the preceding article, the co-guarantors
Summary of rules on right against debtor may set up against the one who paid, the same
General rule: Remedy only available to guarantor after defenses which would have pertained to the principal
he has paid debtor against the creditor, and which are not purely
personal to the debtor. (1845)
Exceptions:
1. Guarantor is sued for payment; Summary of co-guarantors’ obligation
2. Principal debtor becomes insolvent; General rule: Co-guarantors’ obligation is joint
3. Guaranty is for a certain period and period has Exception: Solidary if—
already expired, without the debtor paying; 1. So stipulated
4. Period for payment has expired, making the debt 2. Payment was made pursuant to judicial demand
due & demandable; 3. Principal debtor has become insolvent
5. Lapse of 10 years, if there is no fixed period, except
if the nature of the contract is not extinguished 2. Effect of insolvency of a co-
within 10 years; guarantor
6. Reasonable ground to fear that principal debtor
intends to abscond; and Art. 2073 provides that in case of an insolvent co-guarantor,
7. Imminent danger of principal debtor’s insolvency his share shall be borne by the others, including the one who
made payment, in proportion.
Remedies the guarantor may request
These are alternative remedies: 3. Effect of insolvency of sub-
1. Obtain release from the guaranty (essentially, with guarantor
the creditor’s consent); or
2. Ask for a security for his protection. A R T . 2 1 8 3, C C
A sub-guarantor, in case of the insolvency of the
6. Effect of request made by a guarantor for whom he bound himself, is responsible
person for guarantee of debt of to the co-guarantors in the same terms as the
third person guarantor. (1846)
A R T . 2 0 7 2, C C J. EXTINGUISHM ENT of GUARANTY;

If one, at the request of another, becomes a guarantor DEFENSES AVAILABLE to
for the debt of a third person who is not present, the GUARANTO R
guarantor who satisfies the debt may sue either the
person so requesting or the debtor for Art. 1231, supra
reimbursement. (n)
Causes for extinguishment of the guaranty
Whom guarantor may proceed against 1. Payment/performance;
If requested to become a guarantor for an absent 2. Dacion en pago;
third person, the guarantor may proceed against: 3. Loss of the thing due;
1. The absent principal debtor; or 4. Impossibility of service;
2. The person who made such request. 5. Consignation;
6. Condonation;
I. EFFECTS of GUARANTY AM O NG CO- 7. Merger/confusion;
GUARANTO RS 8. Compensation;
9. Novation;
1. Effect of payment by a co- 10. Extension;
guarantor 11. Failure of subrogation; and
12. Release.
A R T . 2 0 7 3, C C
When there are two or more guarantors of the same a. Payment/performance
debtor and for the same debt, the one among them
who has paid may demand of each of the others the A R T . 1 2 3 2, C C
share which is proportionally owing from him. Payment means not only the delivery of money but
also the performance, in any other manner, of an

obligation. (n) g. Merger or confusion
b. Dacion en pago A R T . 1 2 7 5, C C
The obligation is extinguished from the time the
A R T . 2 0 7 7, C C characters of creditor and debtor are merged in the
If the creditor voluntarily accepts immovable or other same person. (1192a)
property in payment of the debt, even if he should
afterwards lose the same through eviction, the A R T . 1 2 7 6, C C
guarantor is released. (1849) Merger which takes place in the person of the
principal debtor or creditor benefits the guarantors.
Payment is usually made in money. But any substitute paid in Confusion which takes place in the person of any of
lieu of money that is accepted by the creditor extinguishes the the latter does not extinguish the obligation. (1193)
obligation and, consequently, the guaranty.
Effect of merger or confusion
c. Loss of the thing due Parties merged Effect
Principal obligation is extinguished;
A R T . 1 2 6 2, C C Debtor & creditor
guaranty also extinguished
An obligation which consists in the delivery of a
Principal obligation remains, but
determinate thing shall be extinguished if it should be Creditor & guarantor
guaranty is extinguished
lost or destroyed without the fault of the debtor, and
before he has incurred in delay. Principal obligation remains, but the
Debtor & guarantor
When by law or stipulation, the obligor is liable guaranty is extinguished
even for fortuitous events, the loss of the thing does
not extinguish the obligation, and he shall be One cannot guarantee his own debt; thus, merger extinguishes
responsible for damages. The same rule applies when the guaranty if the guarantor’s personality merges with either the
the nature of the obligation requires the assumption creditor or the personal debtor.
of risk. (1182a)
h. Compensation
The principal debtor’s obligation must have been to deliver a
A R T . 1 2 7 9, C C
thing, and loss must be without debtor’s fault or negligence.
In order that compensation may be proper, it is
necessary:
d. Impossibility of service
(1) That each one of the obligors be bound
A R T . 1 2 6 6, C C principally, and that he be at the same time a
The debtor in obligations to do shall also be released principal creditor of the other;
when the prestation becomes legally or physically (2) That both debts consist in a sum of money, or if
impossible without the fault of the obligor. (1184a) the things due are consumable, they be of the
same kind, and also of the same quality if the
latter has been stated;
The impossibility of fulfilling the principal obligation is cause for
(3) That the two debts be due;
its extinguishment, and consequently also extinguishes the
(4) That they be liquidated and demandable;
guaranty.
(5) That over neither of them there be any retention
e. Consignation or controversy, commenced by third persons and
communicated in due time to the debtor. (1196)
A R T . 1 2 6 1, C C
If, the consignation having been made, the creditor A R T . 1 2 8 0, C C
should authorize the debtor to withdraw the same, he Notwithstanding the provisions of the preceding
shall lose every preference which he may have over article, the guarantor may set up compensation as
the thing. The co-debtors, guarantors and sureties regards what the creditor may owe the principal
shall be released. (1181a) debtor. (1197)
f. Condonation i. Novation
A R T . 1 2 7 3, C C A R T . 2 1 8 3, C C
The renunciation of the principal debt shall extinguish When the principal obligation is extinguished in
the accessory obligations; but the waiver of the latter consequence of a novation, accessory obligations may
shall leave the former in force. (1190) subsist only insofar as they may benefit third persons
who did not give their consent. (1207)
A R T . 2 0 7 8, C C
A release made by the creditor in favor of one of the There must be a material alteration for novation to extinguish the
guarantors, without the consent of the others, benefits contract of guaranty, i.e. that the obligations therein become
all to the extent of the share of the guarantor to more onerous or burdensome to the guarantor.
whom it has been granted. (1850)
L. LEG AL & JU DICIAL BONDS

j. Extension
A R T . 2 0 8 2, C C
A R T . 2 0 7 9, C C The bondsman who is to be offered in virtue of a
An extension granted to the debtor by the creditor provision of law or of a judicial order shall have the
without the consent of the guarantor extinguishes the qualifications prescribed in Article 2056 and in special
guaranty. The mere failure on the part of the creditor laws. (1854a)
to demand payment after the debt has become due
does not of itself constitute any extention of time A R T . 2 0 8 3, C C
referred to herein. (1851a) If the person bound to give a bond in the cases of the
preceding article, should not be able to do so, a
This provision contemplates an extension of the period of the pledge or mortgage considered sufficient to cover his
principal obligation without the guarantor’s consent. obligation shall be admitted in lieu thereof. (1855)
The extension must be based on some new agreement between A R T . 2 0 8 4, C C

the creditor and the principal debtor—mere failure or neglect on A judicial bondsman cannot demand the exhaustion
the creditor’s part to enforce payment does not constitute an of the property of the principal debtor.
extension. A sub-surety in the same case, cannot demand
the exhaustion of the property of the debtor of the
k. Failure of subrogation surety.
A R T . 2 0 8 0, C C Nature of judicial bonds

The guarantors, even though they be solidary, are The judicial bond is an “undertaking sufficiently
released from their obligation whenever by some act secured” (the de Leons). All bonds are contractual,
of the creditor they cannot be subrogated to the resulting from a meeting of the minds, but judicial
rights, mortgages, and preference of the latter. (1852) bonds are a special class of contracts of guaranty,
since they are judicially ordered.
The failure of subrogation must be due to the creditor’s fault.
This provision applies even though the guarantors are solidary. Who is a bondsman?
A bondsman binds himself solidarily with the principal
l. Release debtor: he is, in essence, a surety offered by virtue of
a provision of law or a judicial order. As a surety, his
A R T . 2 0 7 8, C C liability is primary and solidary, and he is not entitled
A release made by the creditor in favor of one of the to the benefit of excussion.
guarantors, without the consent of the others, benefits Nonetheless, he must still possess the
all to the extent of the share of the guarantor to qualifications of a guarantor required by Art. 2056.
whom it has been granted. (1850)
M . DISTINGUISHED FRO M O THER
K. DEFENSES THE GUARANTO R MAY CO NTRACTS/TERMS
RAISE
a. Distinguished from warranty
A R T . 2 0 8 1, C C
The guarantor may set up against the creditor all the Guaranty vs. warranty
defenses which pertain to the principal debtor and are
Guaranty Warranty
inherent in the debt; but not those that are personal
Contract by which a person is Undertaking that the title,
to the debtor. (1853)
bound to another for the quality, or quantity of the
fulfillment of a promise of a object of the contract is what
Defenses such as prescription, remission, illegality, and payment
principal debtor it has been represented to be
may be raised by the guarantor, since they are defenses inherent
in the obligation.
b. Distinguished from suretyship
But the defense of the debtor’s incapacity, e.g. through minority,
Guaranty vs. suretyship
may not be raised, since it is personal to the debtor, and goes
Guaranty Suretyship
into his capacity to give consent.
Surety is answerable to
Guarantor is bound to
The defense of fraud or vitiated consent, however, is not a the obligee for the
another for the
personal defense. Though it seems to inquire into the consent of Definition debt, default or
fulfillment of a promise
the debtor, the defense of vitiated consent presumes that there miscarriage of a
of a principal debtor
was capacity to give consent, but the act of giving consent was principal/obligor
defective. Thus, fraud may also be raised as a defense. Applicable Provisions on solidary
Provisions on guaranty
law obligations
Nature of Subsidiary and
Solidary and primary
undertaking accessory
A R T . 1 2 1 6, C C respect to those which personally belong to the

The creditor may proceed against any one of the others, he may avail himself thereof only as regards
solidary debtors or some or all of them that part of the debt for which the latter are
simultaneously. The demand made against one of responsible. (1148a)
them shall not be an obstacle to those which may
subsequently be directed against the others, so long TUPAZ v. CA (2005)
as the debt has not been fully collected. (1144a)
The general rule is that a corporation has a
A R T . 1 2 1 7, C C juridical personality distinct and separate from its
Payment made by one of the solidary debtors directors, officers, and employees. Hence, debts
extinguishes the obligation. If two or more solidary incurred by those individuals in their capacity as
debtors offer to pay, the creditor may choose which corporate officers will hold only the corporation
offer to accept.
liable therefor. The exceptions are when they
He who made the payment may claim from his
expressly stipulate assuming liability for the
co-debtors only the share which corresponds to each,
with the interest for the payment already made. If the corporation’s debts and when the corporation is
payment is made before the debt is due, no interest being used as a shield for fraud and
for the intervening period may be demanded. misrepresentation.
When one of the solidary debtors cannot, because
of his insolvency, reimburse his share to the debtor Facts: Officers of El Oro signed trust receipts on behalf of the
paying the obligation, such share shall be borne by all company in favor of BPI. They defaulted in their obligations and
his co-debtors, in proportion to the debt of each. while they were acquitted of estafa, they were held solidarily
(1145a) liable with the corporation for the latter’s debts.
A R T . 1 2 1 8, C C Issue: WON the petitioners, in their capacity as corporate officers,

Payment by a solidary debtor shall not entitle him to can be made solidarily liable for the corporation’s liabilities – NO
reimbursement from his co-debtors if such payment is
made after the obligation has prescribed or become Ratio: [see doctrine] the Court held that Tupaz may be held liable
illegal. (n) under the second trust receipt because he signed in his personal
capacity. His liability, however, is that of a guarantor and not as
A R T . 1 2 1 9, C C surety as per the terms of the agreement that he signed. He is
The remission made by the creditor of the share which solidary liable as regards the other guarantors but with with
affects one of the solidary debtors does not release regard to the corporation. Lastly, excussion is not a pre-requisite
the latter from his responsibility towards the co- to secure judgment from a guarantor. Judgment may be
debtors, in case the debt had been totally paid by rendered against a guarantor prior to exhausting the property of
anyone of them before the remission was effected. the principal debtor. Note, also, that excussion may be waived.
(1146a)
ZOBEL, INC. v. CA (1998)
A R T . 1 2 2 0, C C
The remission of the whole obligation, obtained by Guaranty vs. surety
one of the solidary debtors, does not entitle him to Guaranty Surety
reimbursement from his co-debtors. (n) An accessory
promise by which a
A collateral
A R T . 1 2 2 1, C C person binds himself
undertaking to pay
If the thing has been lost or if the prestation has for another already
Definition the debt of another in
become impossible without the fault of the solidary bound, and agrees
case the latter does
debtors, the obligation shall be extinguished. with the creditor to
not pay the debt
If there was fault on the part of any one of them, satisfy the obligation
all shall be responsible to the creditor, for the price if the debtor does not
and the payment of damages and interest, without Guarantor’s separate
prejudice to their action against the guilty or negligent undertaking,
debtor. principal does not
Bound with the
If through a fortuitous event, the thing is lost or join Entered into
principal by the
the performance has become impossible after one of before or after that
When entered & same instrument,
the solidary debtors has incurred in delay through the of the principal and
consideration of executed at the same
judicial or extrajudicial demand upon him by the is often supported on
the contract time, and on the
creditor, the provisions of the preceding paragraph a separate
same consideration
shall apply. (1147a) consideration from
that supporting the
A R T . 1 2 2 2, C C contract of the
A solidary debtor may, in actions filed by the creditor, principal
avail himself of all defenses which are derived from Original contract of Original promissor
Knowledge of
the nature of the obligation and of those which are the principal is not and debtor from the
default
personal to him, or pertain to his own share. With his contract, and he is beginning and is
not bound to take ordinarily held to the word guaranty in its contract and said that it was only
notice of its non- know every default of subsidiarily liable.
performance his principal
Usually not Issue: WON ITM was a surety – YES
Often discharged by discharged, either by
the mere indulgence mere indulgence of Ratio: Upon perusal of the contract, the Court found that its
of the creditor to the the creditor to the terms unambiguously made ITM a surety. As a surety is primarily
principal, and is principal, or by want liable for the debt incurred by IFC.
Discharge
usually not liable of notice of the
unless notified of the default of the PHILIPPINE BLOOMING MILLS v. CA (2003)
default of the principal, no matter
principal how much he may be A surety is not relieved of his obligation for the
injured thereby debts incurred by the principal debtor just
Surety is because the latter has been placed under SEC
While a guarantor is distinguished from a receivership. The rationale stems from the
the insurer of the guaranty in that a
personal liability of a surety and the separate
solvency of the surety is the insurer
juridical personality of the corporation. While
Bottomline debtor and thus of the debt, and he
creditors may not pursue the corporation placed
binds himself to pay obligates
if the principal is himself to pay if the under receivership, they may proceed against
unable to pay principal does not sureties who remain to be liable in their personal
pay capacity.
Table by Carlos Pagdanganan. Thanks, buddy!
Facts: Ching, as VP of PBM, signed a deed of suretyship in favor
** As per sir De Leon: Even if excussion is waived by the of the latter in his personal capacity for present and future
guarantor, the creditor would still have to make demand upon indebtedness of the same. PBM encountered financial difficulties
the debtor before pursuing the guarantor. Thus, waiving and was placed under SEC receivership. TRB, one of PBM’s
excussion does not convert the contract into a suretyship. creditors, proceeded against Ching. Ching disclaimed liability on
the strength of the fact that PBM, the principal debtor, was under
Facts: Sps. Claveria obtained a loan from the bank in order to receivership.
purchase vessels over which chattel mortgages were constituted
to secure payment. Also, a continuing guaranty was executed in Issue: WON Ching is still liable as surety – YES
favor of Solidbank.; Zobel was such “guarantor”. Upon
defaulting, the bank sought to collect the remaining amount Ratio: SEC only took over the properties of the corporation and
through the properties mortgaged and Zobel. Petitioner not the properties of its individual sureties. As such, TRB could
attempted to invoke Art. 2080 because the bank did not register proceed against Ching who had a personality distinct and
the chattel mortgages (as a result, he could not be subrogated to separate from that of PBM. Further, he is liable for the entire
the rights of the previous debtor if they paid). Bank claimed that amount owed by PBM and not the amount stated in the latter’s
registration was immaterial because Zobel was a surety. rehabilitation plan.
Issue: WON the contract between them was a surety – YES ESCAÑO v. ORTIGAS (2007)
Ratio: Notwithstanding the denomination of the contract as a Absent express stipulation, the liability of persons
continuing guaranty, the Court found that its provisions created a who secure the debt of another is joint.
suretyship. Under its terms the Zobel was explicitly obligated as
surety. The title or name given to a contract is not controlling Facts: Falcon Materials borrowed 320,000usd from PDCP which
when its provisions are in the nature of another contract. was secured by several of its stockholders. These shareholders
sold their shares to the petitioners under the condition that the
IFC v. IMPERIAL TEXTILE MILLS (2005) purchasers would assume liability over Falcon’s debts—they
executed a document wherein the petitioners were identified as
The use of the word “guaranty” in the title of a sureties. Falcon defaulted and PDCP proceeded against the
contract and within its provisions does not ipso supposed sureites. The shareholders all executed compromise
facto make the party thereto a guarantor. For arguments. Ortigas then brought suit in order to recover from the
example, when the word “guaranty” is qualified other sureties what he recovered (he ended up paying the most
by the term “jointly and severally”, it becomes a between all of them).
suretyship. Particular attention must be paid to all
Issue: WON the obligation is joint and several – NO
the provisions of an agreement.
Ratio: Under Art. 1207 of the CC, solidary liability between
Facts: ITM served as the “guarantor” of PPIC with regard to a
creditors exists only when explicitly stipulated or when the nature
loan extended to the latter by IFC. PPIC defaulted in its
of the obligation requires solidary liability. No such express
payments so IFC proceeded against ITM when the proceeds from
stipulation was present in the agreement. The term sureties,
the sale of the mortgaged properties proved to be insufficient to
cover the entirety of the debt. ITM pointed to the repeated use of
though it appeared multiple times throughout the agreement, is

not sufficient to satisfy the explicit provision required by law.
AGLIBOT v. SANTIA (2012)

Facts: Santia loaned P2.5M to PLCC which was guaranteed by
Aglibot by issuing 11 post-dated personal checks. The checks
were dishonored and Aglibot and PLCC failed to pay upon
Santia’s demand. As a result, Santia initiated 11 cases for
violation of BP 22 against the principal debtor and its guarantor.
CA acquitted Aglibot but held her civilly liable for the debt of
PLCC. Aglibot claimed that she was a guarantor tried to avail of
excussion
Issue: WON she is a guarantor and thus entitled to excussion –

NO
Ratio: Under Art. 1403(2)(b), an agreement wherein one agrees

to answer for the indebtedness of another must appear in a note
or memorandum; unenforceable otherwise. Further, Art. 2055
that contracts of guaranty are not presumed but must be
express. Aglibot has failed to show any written proof of the
contract that establishes her as surety. Under the law, she is
considered an accommodation party and the nature of an
accommodation party’s liability is as surety. It is immediate and
direct. The act of issuing post-dating checks and the absence of a
written agreement to limit her liability as guarantor, when taken
together, make Aglibot personally and solidarily liable for the
debts of Santia.
** An accommodation party is not released by an extension of

the period granted to the principal debtor. He may avail of it but
he may not use the same as basis for extinguishing his liability.
V. PLEDGE & MORTGAGE
A. INTRO DUCTIO N Kinds of obligations that may be secured
Valid
Pledge and mortgage are both real guaranties, where property is As to validity Voidable
given in order to secure an obligation. The remedy of a creditor Unenforceable
against a debtor who fails to pay is the foreclosure of the thing As to Pure
and the application of its proceeds to the outstanding conditionality Conditional (suspensive or resolutory)
obligation.
Present obligations
As to time
1. Essential requisites Future obligations, if accurately described
Civil obligations
As to basis
A R T . 2 0 8 5, C C Natural obligations
The following requisites are essential to the contracts
of pledge and mortgage: b. Pledgor/mortgagor absolute owner
(1) That they be constituted to secure the fulfillment
of a principal obligation; Because the remedy of a creditor is a foreclosure sale, the debtor
(2) That the pledger or mortgagor be the absolute who gives the property in pledge or mortgage must have
owner of the thing pledged or mortgaged; capacity to transfer ownership.
(3) That the persons constituting the pledge or
mortgage have the free disposal of their property, What is the consequence if the pledgor or
and in the absence thereof, that they be legally mortgagor is not the absolute owner?
authorized for the purpose. The pledge or mortgage is void, without prejudice to
Third persons who are not parties to the principal the pledgor or mortgagor’s possible liability for estafa,
obligation may secure the latter by pledging or because of his misrepresentation.
mortgaging their own property. (1857) The exception is a mortgagee in good faith, who
relies on a Torrens title given by the mortgagor who is
A R T . 2 0 8 6, C C not the rightful owner, or has no valid title to the
The provisions of Art. 2052 are applicable to a pledge property. In this case, the mortgagee is still entitled to
or mortgage. (n) protection.
A R T . 2 0 8 7, C C c. Free disposal
It is also of the essence of these contracts that when
the principal obligation becomes due, the things in Plege/mortgage being an act of strict ownership, the
which the pledge or mortgage consists may be pledgor/mortgagor must have capacity to make a disposition of
alienated for the payment to the creditor. (1858) the property. Free disposal means that the property must not be
subject to any claim of a third person.
Essential requisites of pledge/mortgage
1. It must be constituted to secure the fulfillment of a 2. Prohibitions against
principal obligation; appropriation
2. The pledgor/mortgagor must be the absolute
owner of the thing pledged/mortgaged; and a. Rationale
3. The pledgor/mortgagor must have free disposal of
the thing or legal authority therefor. The reason for the prohibition is that the amount of the loan is
ordinarily much less than the real value of the thing pledged or
a. Secure a principal obligation mortgaged.
Pledge and mortgage are accessory contracts constituted by b. General rule & exception
either the debtor or a third person, in order to secure the
debtor’s principal obligation. A R T . 2 0 8 8, C C
The creditor cannot appropriate the things given by
A R T . 2 0 5 2, C C way of pledge or mortgage, or dispose of them. Any
A guaranty cannot exist without a valid obligation. stipulation to the contrary is null and void. (1859a)
Nevertheless, a guaranty may be constituted to
guarantee the performance of a voidable or an A R T . 2 1 1 2, C C
unenforceable contract. It may also guarantee a The creditor to whom the credit has not been satisfied
natural obligation. (1824a) in due time, may proceed before a Notary Public to
the sale of the thing pledged. This sale shall be made
Art. 2086, supra at a public auction, and with notification to the debtor
and the owner of the thing pledged in a proper case,
A R T . 2 0 9 1, C C stating the amount for which the public sale is to be
The contract of pledge or mortgage may secure all held. If at the first auction the thing is not sold, a
kinds of obligations, be they pure or subject to a second one with the same formalities shall be held;
suspensive or resolutory condition. (1861) 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. affected by the fact that the debtors are not solidarily
liable. (n)
Pactum commissorium is when the creditor-pledgee/mortgagee
automatically appropriates the property given, without Rules on indivisibility
foreclosure. A stipulation allowing it is forbidden by law and is Every portion of the property is
void. A single thing is given
answerable for the whole obligation
All of them are liable for the debt
The default of the debtor-pledgor/mortgagor in his obligation Even when only a part of the debt
does not give the creditor-pledgee/mortgagee a right to remains unpaid, all of the things are
automatically appropriate the property given. If he wants to liable for the balance
secure the title to the property, he must buy it in a foreclosure Several things are
given Until the debt has been fully paid, the
sale. debtor cannot ask for the release of
one or some of the things given or the
The only exception is provided by Art. 2112, where if a thing given proportionate extinguishment of the
in pledge is not sold after two foreclosure sales, the creditor pledge or mortgage
may appropriate it. The debtor’s heir who has paid part of
the debt cannot ask for the
c. Requisites Debtor’s heir
proportionate extinction of the pledge
or mortgage
1. There should be a pledge, mortgage, or antichresis The creditor’s heir who has received
of property by way of security for the payment of his share of the debt cannot return the
the principal obligation; and Creditor’s heir
pledge or cancel the mortgage if the
2. There should be a stipulation for an automatic debt is not completely satisfied
appropriation by the creditor of the property in the
event of non-payment of the obligation within the
Exceptions
stipulated period.
1. If several things are given, and each of them
guarantees only a determinate portion of the
d. Permissible stipulations
credit;
2. If only a portion of the loan was released; and
1. Modification of original contract, by subsequent
3. If there was failure of consideration; and
agreement of the parties;
4. If a third party to the debt gives an
2. Voluntary cession of the property by the debtor,
accommodation pledge or mortgage, such that
which amounts to a novation of the original
there was no debtor-creditor relationship.
contract and a voluntary sale; and
3. Promise by the mortgagor to assign or sell the
property. 4. Promise to constitute a pledge
or mortgage
3. Indivisibility of pledge & A R T . 2 0 9 2, C C
mortgage A promise to constitute a pledge or mortgage gives
rise only to a personal action between the contracting
A R T . 2 0 8 9, C C
parties, without prejudice to the criminal responsibility
A pledge or mortgage is indivisible, even though the
incurred by him who defrauds another, by offering in
debt may be divided among the successors in interest
pledge or mortgage as unencumbered, things which
of the debtor or of the creditors.
he knew were subject to some burden, or by
Therefore, the debtor’s heir who has paid a part of
misrepresenting himself to be the owner of the same.
the debt cannot ask for the proportionate
(1862)
extinguishment of the pledge or mortgage as long as
the debt is not completely satisfied.
Neither can the creditor's heir who received his A promise to constitute a pledge or mortgage does not create a
real right over the property. There is only a personal right, or a
share of the debt return the pledge or cancel the
mortgage, to the prejudice of the other heirs who have right of action to compel that the pledge or mortgage be
constituted, but no actual pledge or mortgage is created yet.
not been paid.
From these provisions is expected the case in
The mortgagor may also be held liable for estafa under the
which, there being several things given in mortgage or
pledge, each one of them guarantees only a Revised Penal Code, if he pretends to be the owner of real
property and conveys, sells, encumbers, or mortgages said
determinate portion of the credit.
The debtor, in this case, shall have a right to the property, or dispose of property as unencumbered with
knowledge that it is encumbered.
extinguishment of the pledge or mortgage as the
portion of the debt for which each thing is specially
answerable is satisfied. (1860)
A R T . 2 0 9 0, C C
The indivisibility of a pledge or mortgage is not
B. PLEDGE c. Formal
1. Concept A pledge requires that it be set forth in a public instrument in

order to be effective against third persons.
Art. 2085, supra
Art. 2087, supra d. Subsidiary
In a contract of pledge, a debtor or third person delivers The obligations of a pledge do not arise until there has been
movable property or an incorporeal right to a creditor or third failure to perform the principal obligation.
person, in order to secure the fulfillment of a principal obligation.
e. Unilateral
A R T . 2 1 2 1, C C
Pledges created by operation of law, such as those The obligations of a pledge are imposed only on the pledgee.
referred to in Articles 546, 1731, and 1994, are The pledgor only incurs obligations under special circumstances.
governed by the foregoing articles on the possession,
care and sale of the thing as well as on the f. Nominate
termination of the pledge. However, after payment of
the debt and expenses, the remainder of the price of The Civil Code gave it a name. Yessir.
the sale shall be delivered to the obligor. (n)
g. Gratuitous or onerous
Some pledges (Arts. 546, 1731, and 1994), are created by
operation of law and are governed by the provisions on pledges. It is gratuitous if given by a third person. It is onerous if given by
the debtor, because the consideration for the creditor’s
2. Characteristics acceptance is the payment of the principal obligation.
Characteristics (Raf sung, “O!”) (Hehe) 3. Essential requisites

1. Real
2. Accessory a. Consent
3. Formal
4. Subsidiary The pledgor must have capacity to give consent to a contract.
5. Unilateral
6. Nominate b. Object
7. Gratuitous or onerous
A R T . 2 0 9 4, C C
a. Real All movables which are within commerce may be
pledged, provided they are susceptible of possession.
A R T . 1 3 1 6, C C (1864)
Real contracts, such as deposit, pledge and
commodatum, are not perfected until the delivery of A R T . 2 0 9 5, C C
the object of the obligation. (n) Incorporeal rights, evidenced by negotiable
instruments, bills of lading, shares of stock, bonds,
Art. 2092, supra warehouse receipts and similar documents may also
be pledged. The instrument proving the right pledged
A R T . 2 0 9 3, C C shall be delivered to the creditor, and if negotiable,
In addition to the requisites prescribed in Article must be indorsed. (n)
2085, it is necessary, in order to constitute the
contract of pledge, that the thing pledged be placed A R T . 4 1 6, C C
in the possession of the creditor, or of a third person The following things are deemed to be personal
by common agreement. (1863) property:
(1) Those movables susceptible of appropriation
Delivery is required for a pledge to be effective. However, a which are not included in the preceding article;
consensual contract to pledge is enforceable between the (2) Real property which by any special provision of law
parties. is considered as personal property;
(3) Forces of nature which are brought under control
b. Accessory by science; and
(4) In general, all things which can be transported
The purpose of a pledge is that it secures a principal obligation. It from place to place without impairment of the real
is an accessory contract whose validity and extinguishment property to which they are fixed. (335a)
depends upon the principal obligation.
A R T . 4 1 7, C C
Please see page 36 for a summary of the obligations that a The following things are also considered as personal
pledge may secure. property:
(1) Obligations and actions which have for their object
movables or demandable sums; and
(2) Shares of stock of agricultural, commercial and 4. Parties

industrial entities, although they may have real
estate. (336a) A R T . 2 1 0 3, C C
Unless the thing pledged is expropriated, the debtor
A R T . 4 1 8, C C continues to be the owner thereof.
Movable property is either consumable or Nevertheless, the creditor may bring the actions
nonconsumable. To the first class belong those which pertain to the owner of the thing pledged in
movables which cannot be used in a manner order to recover it from, or defend it against a third
appropriate to their nature without their being person. (1869)
consumed; to the second class belong all the others.
(337) A R T . 1 1 1, F A M I L Y C O D E
A spouse of age may mortgage, encumber, alienate or
Things that may be given in pledge otherwise dispose of his or her exclusive property,
Movables susceptible of possession without the consent of the other spouse, and appear
As to Incorporeal rights represented by titles (requires alone in court to litigate with regard to the same. (n)
corporeality delivery of the document evidencing the
incorporeal right) Parties to a contract of pledge
Only existing property Owns the thing given in pledge
As to However, there may be a promise to pledge Pledgor
Either debtor or third person
existence future property, e.g. future dividends, through a Receives the thing in pledge
pledge supplement Pledgee
Either creditor or third person
c. Cause 5. Form
A R T . 1 3 5 0, C C A R T . 2 0 9 6, C C
In onerous contracts the cause is understood to be, for
A pledge shall not take effect against third persons if
each contracting party, the prestation or promise of a
a description of the thing pledged and the date of the
thing or service by the other; in remuneratory ones,
pledge do not appear in a public instrument. (1865a)
the service or benefit which is remunerated; and in
contracts of pure beneficence, the mere liberality of
the benefactor. (1274)
Formal requisites of a pledge
To be effective against third persons:
1. The pledge must be made in a public instrument,
Gratuitous pledge vs. onerous pledge
which sets forth
Gratuitous Onerous
2. A description of the subject of the pledge, and
Third person not party to Debtor in the principal 3. The date of the pledge.
Pledgor
principal obligation obligation
Fulfillment of the 6. Obligations of the pledgor
Cause Liberality
principal obligation
Summary of pledgor’s obligations
d. Delivery
1. Allow alienation of the thing, in case the principal
Art. 1316, supra obligation becomes due
Art. 2096, supra 2. Pay damages for known hidden flaws
Since pledge is a real contract, delivery is an essential requisite to a. Allow alienation of thing, in case
its perfection. The lien created only upon delivery of the thing. principal obligation becomes due
Kinds of delivery Art. 2087, supra

A thing given in pledge may be delivered in two ways:
This is the essence of pledge. It is necessarily implied as an
1. Through actual delivery, or
inherent element of the contract of pledge, since alienation of the
2. Through constructive delivery.
thing through foreclosure and sale and the application of the
The delivery required depends on the nature of the
proceeds thereof are the remedies given to the creditor.
thing given.
b. Pay damages for known hidden flaws
To whom delivery must be made
Delivery must be made to the pledgee, who may be A R T . 2 1 0 1, C C
either: The pledgor has the same responsibility as a bailor in
1. The creditor in the principal obligation; or commodatum in the case under Article 1951. (n)
2. A third person agreed upon by the parties.
A R T . 1 9 5 1, C C
The bailor, who, knowing the flaws of the thing
loaned, does not advise the bailee of the same, shall
be liable to the latter for the damages which he may

suffer by reason thereof. (1752) A R T . 2 1 1 8, C C
If a credit which has been pledged becomes due
This obligation is merely conditional upon the existence of before it is redeemed, the pledgee may collect and
hidden flaws and the pledgor’s knowledge thereof. It does not receive the amount due. He shall apply the same to
arise at the time the pledge was constituted. the payment of his claim, and deliver the surplus,
should there be any, to the pledgor. (n)
7. Obligations of the pledgee
The pledge retains ownership of the fruits. However, the pledge
generally extends to the fruits and interests. Hence, the pledgee
Summary of pledgee’s obligations can apply the fruits, income, dividends, or interests earned or
1. Take care of the thing pledged produced by the thing pledged to the payment of interest, if
2. Not to deposit the thing pledged with a third party owing, and thereafter to the principal of his credit.
3. Obligation with respect to matured credits, and to
fruits, income dividends, or interests Application of fruits, income, dividends, or interest
4. Not to use the thing pledged 1. To interest first, if it is owing;
5. Return the thing pledged 2. Then, to the principal credit
a. Take care of the thing pledged Unless there is contrary stipulation, the interest and earnings
and, in case of animals, their offspring, are included in the
A R T . 2 0 9 9, C C pledge.
The creditor shall take care of the thing pledged with
the diligence of a good father of a family; he has a d. Not to use the thing pledged
right to the reimbursement of the expenses made for
its preservation, and is liable for its loss or A R T . 2 1 0 4, C C
deterioration, in conformity with the provisions of this The creditor cannot use the thing pledged, without
Code. (1867) the authority of the owner, and if he should do so, or
should misuse the thing in any other way, the owner
The diligence required is that of a good father of a family. may ask that it be judicially or extrajudicially
deposited. When the preservation of the thing
b. Not to deposit thing with third party pledged requires its use, it must be used by the
creditor but only for that purpose. (1870a)
A R T . 2 1 0 0, C C
The pledgee cannot deposit the thing pledged with a General rule: The pledgee has no right to use the thing.
third person, unless there is a stipulation authorizing Exceptions:
him to do so. 1. If there is authority from the owner; or
The pledgee is responsible for the acts of his 2. If the thing pledged requires that it be used in order to
agents or employees with respect to the thing properly care for it. In this case, the duty of the creditor
pledged. (n) is to use the thing, but only for the purpose of
preservation. If fruits are derived from the use, the
General rule: The pledgee cannot deposit the thing with a third pledgee must account these to the pledgor and apply
person. the proceeds of the use to the principal obligation.
Exception: He is allowed to do so by way of stipulation
Pledgor has a right to ask for the deposit of the
This prohibition is necessary for the protection of the pledgor or thing pledged judicially or extrajudicially, when:
the owner of the thing pledged. 1. The creditor uses the thing without authority;
2. The creditor misuses the thing in any way; or
c. With respect to matured credits and 3. If the thing is in danger of being lost or impaired
fruits, income dividends, or interests because of the pledgee’s negligence or willful act.
A R T . 2 1 0 2, C C e. Return the thing pledged

If the pledge earns or produces fruits, income,
dividends, or interests, the creditor shall compensate A R T . 2 1 0 5, C C
what he receives with those which are owing him; but The debtor cannot ask for the return of the thing
if none are owing him, or insofar as the amount may pledged against the will of the creditor, unless and
exceed that which is due, he shall apply it to the until he has paid the debt and its interest, with
principal. Unless there is a stipulation to the contrary, expenses in a proper case. (1871)
the pledge shall extend to the interest and earnings of
the right pledged. General rule: The debtor whose debt and its interest are unpaid
In case of a pledge of animals, their offspring has no right to ask for the return of the thing pledged, against
shall pertain to the pledgor or owner of animals the creditor’s will.
pledged, but shall be subject to the pledge, if there is
no stipulation to the contrary. (1868a)
Exception: The pledgor may substitute the thing pledged, which the right of the pledgee under the provisions of the
is in danger of destruction or impairment, with another thing of following article.
the same kind and quality. The pledgee is bound to advise the pledgor,
without delay, of any danger to the thing pledged. (n)
8. Special rules
A R T . 2 1 0 8, C C
a. As to ownership of the thing pledged If, without the fault of the pledgee, there is danger of
destruction, impairment, or diminution in value of the
A R T . 2 0 9 7, C C thing pledged, he may cause the same to be sold at a
With the consent of the pledgee, the thing pledged public sale. The proceeds of the auction shall be a
may be alienated by the pledgor or owner, subject to security for the principal obligation in the same
the pledge. The ownership of the thing pledged is manner as the thing originally pledged. (n)
transmitted to the vendee or transferee as soon as the
pledgee consents to the alienation, but the latter shall Remedies of pledgor in case of danger of destruction
continue in possession. (n) With pledgee’s fault Without pledgee’s fault
Pledgor may demand return of the
Art. 2103, supra Pledgor may ask that the thing, upon offering another thing
thing be deposited with a of the same kind and quality
A R T . 2 1 2 0, C C third person Pledgee may cause the thing to be
If a third party secures an obligation by pledging his sold at a public sale
own movable property under the provisions of Article
2085 he shall have the same rights as a guarantor c. Deception on substance & quality of
under Articles 2066 to 2070, and Articles 2077 to thing pledged
2081. He is not prejudiced by any waiver of defense by
the principal obligor. (n) A R T . 2 1 0 9, C C
If the creditor is deceived on the substance or quality
Summary of rules of the thing pledged, he may either claim another
As to ownership Pledge does not transfer ownership, but the thing in its stead, or demand immediate payment of
of thing pledged creditor has the right to possess the thing. the principal obligation. (n)
The pledgor can sell or alienate the thing,
given that: Remedies of creditor in case of deception
Sale of thing a. The pledgee consents; on substance & quality of thing pledged
pledged b. The pledgee continues in possession; 1. Claim another thing instead; or
and 2. Demand immediate payment of the principal
c. The pledge follows the property. obligation.
The creditor has the right of retention for the
Retention of the principal debt, interest, and expenses of d. Specific rules for third party
thing pledged preservation. The debtor cannot demand pledgors
the thing while these remain unpaid.
General rule: Loss or deterioration is borne A R T . 2 1 1 7, C C
by the pledgor, as the owner (doctrine of res Any third person who has any right in or to the thing
perit domino). pledged may satisfy the principal obligation as soon
Risk of loss & as the latter becomes due and demandable. (n)
Exception: If the loss or deterioration is due
deterioration
to the fraud, negligence, delay, or violation
of the terms of the contract by the creditor, A R T . 2 1 2 0, C C
then he shall be liable. If a third party secures an obligation by pledging his
own movable property under the provisions of Article
b. When thing pledged is in danger of 2085 he shall have the same rights as a guarantor
destruction under Articles 2066 to 2070, and Articles 2077 to
2081. He is not prejudiced by any waiver of defense by
A R T . 2 1 0 6, C C the principal obligor. (n)
If through the negligence or wilful act of the pledgee,
the thing pledged is in danger of being lost or Accommodation pledge
impaired, the pledgor may require that it be deposited An accommodation pledge is one where a third
with a third person. (n) person gives his movable property in order to secure
the principal obligation of another. The third person in
A R T . 2 1 0 7, C C this case, or any third person with a right in/to the
If there are reasonable grounds to fear the destruction thing given in pledge, may fulfill the principal
or impairment of the thing pledged, without the fault obligation as soon as it becomes due and
of the pledgee, the pledgor may demand the return of demandable. He shall have the same rights as that of
the thing, upon offering another thing in pledge, a guarantor, as per Art. 2120. Neither can he be
provided the latter is of the same kind as the former prejudiced if the principal debtor waives any available
and not of inferior quality, and without prejudice to defenses.
purchase price at once

e. Procedure for foreclosure b. Be made in cash
Failure to bid is when there are no
Art. 2112, supra bids
If several properties are pledged:
A R T . 2 1 1 3, C C a. The creditor may choose which
At the public auction, the pledgor or owner may bid. ones are to be sold
He shall, moreover, have a better right if he should b. But the sale demanded must
offer the same terms as the highest bidder. only be insofar as necessary to
The pledgee may also bid, but his offer shall not pay the debt
be valid if he is the only bidder. (n) Effect of sale: Extinguishment of
principal obligation, regardless of
A R T . 2 1 1 4, C C whether price of sale is more or
All bids at the public auction shall offer to pay the less than the amount due
purchase price at once. If any other bid is accepted, If the creditor accepts a bid other
the pledgee is deemed to have been received the than for cash, the pledgor/owner
purchase price, as far as the pledgor or owner is has the right to consider that the
concerned. (n) creditor has received the purchase
price in cash
A R T . 2 1 1 5, C C 4. Sale to highest bidder
Rules on deficiency & excess:
The sale of the thing pledged shall extinguish the a. Price of sale > amount due =
principal obligation, whether or not the proceeds of debtor not entitled to excess
the sale are equal to the amount of the principal unless there is agreement to the
obligation, interest and expenses in a proper case. If contrary
the price of the sale is more than said amount, the b. Price of sale < amount due =
debtor shall not be entitled to the excess, unless it is creditor not entitled to
otherwise agreed. If the price of the sale is less, recover deficiency and any
neither shall the creditor be entitled to recover the stipulation allowing it is void
deficiency, notwithstanding any stipulation to the Pledgee is obligated to advise the
contrary. (n) pledgor/owner of the result of the
sale, so that the latter may take
A R T . 2 1 1 6, C C 5. Notice to pledgor
necessary steps to protect his
After the public auction, the pledgee shall promptly rights if he believe the sale was not
advise the pledgor or owner of the result thereof. (n) an honest one.
Art. 2117, supra f. Pawnshops
Requisites of a valid foreclosure sale A R T . 2 1 2 3, C C
1. The debt is due and unpaid; With regard to pawnshops and other establishments,
2. The sale must be at a public auction; which are engaged in making loans secured by
3. There must be notice to the pledgor and owner, pledges, the special laws and regulations concerning
stating the amount due; and them shall be observed, and subsidiarily, the
4. The sale must be made with the intervention of a provisions of this Title. (1873a)
notary public.
The laws on pledge, mortgage and antichresis are also
Summary of foreclosure proceedings in pledge applicable to pawnshops that make loans with these securities.
May simply be a letter to the But if you actually want to establish and operate a pawnshop,
1. Notice by creditor to
debtor you should see PD 114. J
debtor
No need for posting
2. Conduct of the auction Court does not direct foreclosure; 9. Extinguishment
by notary public hence, extrajudicial in character
Who may bid: Causes for extinguishment of a pledge
a. Pledgee can submit a bid, but Principal obligation Sale of the thing at public auction
the offer will be invalid if he is is also extinguished Payment of the debt
the only bidder; Return of thing pledged by the pledgee
b. Pledgor may submit a bid, and Only pledge is
Renunciation or abandonment of the
he shall have preference/a extinguished
3. Bidding pledge
better right if he offers the
same terms as the highest a. Of the principal obligation
bidder;
c. Third persons may also bid Art. 2115, supra
All bids shall:
a. Offer to pay the entire
The extinguishment of the principal obligation in any way also possession having the option of refunding the amount
extinguishes the pledge, since the latter is an accessory contract of the expenses or of paying the increase in value
whose life is dependent upon that of the principal. which the thing may have acquired by reason thereof.
(453a)
b. Of the pledge A R T . 1 7 3 1, C C
He who has executed work upon a movable has a
A R T . 2 1 1 0, C C right to retain it by way of pledge until he is paid.
If the thing pledged is returned by the pledgee to the (1600)
pledgor or owner, the pledge is extinguished. Any
stipulation to the contrary shall be void. A R T . 1 9 9 4, C C
If subsequent to the perfection of the pledge, the The depositary may retain the thing in pledge until
thing is in the possession of the pledgor or owner, the full payment of what may be due him by reason of
there is a prima facie presumption that the same has the deposit. (1780)
been returned by the pledgee. This same presumption
exists if the thing pledged is in the possession of a MANILA BANKING CORP. v. TEODORO (1989)
third person who has received it from the pledgor or
owner after the constitution of the pledge. (n) Where ambiguity exists as to whether or not a
transaction is a pledge or dation in payment, the
Presumption of extinguishment due to return presumption is in favor of it being a contract of
The presumption of extinguishment due to return by pledge because there is lesser transmission of
the pledgee arises if, subsequent to constituting the rights and interests.
pledge:
1. The pledgor has possession of the thing; and Pledgors cannot insist that a creditor first exhaust
2. The pledgor grants possession of the thing to a all the properties of the debtor.
third person.
Facts: MBC extended a loan to Teodoro for the purpose of
A R T . 2 1 1 1, C C purchasing fishing boats. As security for the loan, he executed a
A statement in writing by the pledgee that he deed of assignment of receivables in favor of MBC. Teodoro
renounces or abandons the pledge is sufficient to defaulted in the loan and the bank sought to collect the
extinguish the pledge. For this purpose, neither the remainder of the debt as well as the security provided therefor.
acceptance by the pledgor or owner, nor the return of
the thing pledged is necessary, the pledgee becoming Issues:
a depositary. (n) WON the assignment of receivables was a dation in payment or
pledge –PLEDGE
The renunciation by the pledgee must be in writing, but it does WON the bank first had to exhaust the property of the debtor
not require acceptance nor the return of the thing to be before seizing the items pledged – NO
effective. However, while the thing is not yet returned, a contract
of deposit arises between the pledgor and pledgee. Held: The benefit of excussion cannot be availed of in the context
of a pledge. Art 2087 provides that when the principal obligation
10. Legal pledges becomes due, the thing pledged may be alienated the moment
the debt becomes due.
Legal pledges are—you guessed it!—created by operation of law.
CITIBANK v. SABENIANO (2006)
Kinds of legal pledges in the Civil Code
1. A possessor in good faith becomes pledgee and Facts: Respondent Sabeniano deposited money and market
may hold the thing, until reimbursement of placements with Citibank, with which it had debts, secured by
necessary expenses for the thing; Deeds of Assignment of Sabeniano’s money market placements
2. One who has executed work upon a movable in FNCB Finance. When Sabeniano failed to pay her debts to
becomes pledgee and may hold the thing, until he Citibank, the latter collected on the Deed of Assignment.
is paid for the price of said work;
3. A depositary becomes pledgee and may hold the Issue: Whether the money market placements can compensate
thing, until he is paid damages or expenses due to for Sabeniano’s indebtedness. YES
him by reason of the deposit.
Held: The court considered these money market placements as
A R T . 5 4 6, C C having been pledged through Deeds of Assignment. Though the
Necessary expenses shall be refunded to every documents conveyed to Citibank were entitled Deeds of
possessor; but only the possessor in good faith may Assignment, the court held that she had actually pledged the
retain the thing until he has been reimbursed money market deposits from FNCB Finance to Citibank.
therefor. Therefore, what occurred was not so much a compensation, but
Useful expenses shall be refunded only to the an action collecting on the security of the obligation in which
possessor in good faith with the same right of Sabeniano had defaulted.
retention, the person who has defeated him in the
CALIBO v. CA (2001) acquired is worth less than the amount of the

debt.
Requisites of a contract of pledge
1. The pledge acts as security for the fulfillment of Facts: As security for paying the cost of the cement that she
the principal obligation (accessory contract) purchased on credir, Chu pledged her time deposits in a bank.
2. The pledger is the absolute owner of the thing Upon failure to pay her obligations, the company encashed her
pledged time deposit and applied it to her debt.
3. The pledger has free disposal of the property or is
legally authorized to enter into a contract of Issue: WON the appropriation of the pledged property without a
pledge as regards the thing pledged public auction was void for running against the prohibition
regarding pactum commissorium – NO
Facts: In order to secure payment of amounts owed to Atty.
Calibo under their contract of lease, Mike pledged his father’s Held: Taking into consideration the fact that the monetary
tractor as security. Mike’s father confronted Atty. Calibo and equivalent of the time deposits was less than the amount owed
demanded that possession of the tractor be returned to him. by Chu to the company, then it was not illegal for the former to
When Atty. Calibo refused to return the tractor because the encash the same. Note that Chu consented to such
amounts owed to him had yet to be paid, Mike’s father filed a suit appropriation.
for replevin.
Issue: WON the contract of pledge regarding the tractor between

Atty. Calibo and Mike was valid – NO
Held: Applying the requisites of a contract of pledge [see

doctrine], it was clear that Mike did not own the tractor and, as a
result thereof, the contract of pledge was void. The action for
replevin was proper.
PARAY v. RODRIGUEZ (2006)
The right of redemption applies to real properties

and not personal properties.
The amount paid to the creditor by virtue of the

public auction of the thing pledged extinguishes
the indebtedness of the debtor notwithstanding
the fact that a deficiency (or excess) may exist
between the auction price and the principal
obligation. The foreclosure of pledged property is
always extrajudicial in nature.
Facts: Upon defaulting in their obligation to pay, the petitioners

auctioned off the stocks pledged by the respondents as security
for their loan. The respondents assailed the validity of the auction
because they attempted to redeem the stocks a day before the
auction by tendering payment of their loan—they consigned the
payment with the RTC.
Issue: WON the consignation of payment extinguished the

contract of pledge – NO
Held: The right of redemption is a statutory privilege given to

specific persons within the context of certain transactions—
nothing exists in law or jurisprudence that established the right
of owners of personal property to redeem the same.
CHU v. CA (1989)
The rationale behind prohibiting pactum

commissorium is to protect debtors from losing
property offered as security for loans to creditors
that may be worth more than the debt itself. The
prohibition does not apply when the thing
C. CHATTEL M O RTGAGE
d. Accessory
1. Concept
The chattel mortgage is constituted in order to secure a principal
A R T . 2 1 4 0, C C obligation.
By a chattel mortgage, personal property is recorded
in the Chattel Mortgage Register as a security for the Kinds of obligations that may be secured
performance of an obligation. If the movable, instead Valid
of being recorded, is delivered to the creditor or a third As to validity Voidable
person, the contract is a pledge and not a chattel Unenforceable
mortgage. (n) As to Pure
conditionality Conditional (suspensive or resolutory)
A R T . 2 1 4 1, C C
As to time Present obligations
The provisions of this Code on pledge, insofar as they
are not in conflict with the Chattel Mortgage Law shall As to specific Payment
be applicable to chattel mortgages. (n) obligation Performance
SEC. 3, CHATTEL MORTGAGE LAW e. Gratuitous or onerous

Chattel mortgage defined. — A chattel mortgage is a
conditional sale of personal property as security for It is gratuitous if given by a third person who is not a party to the
the payment of a debt, or the performance of some principal obligation, and onerous if given by the debtor to the
other obligation specified therein, the condition being principal obligation.
that the sale shall be void upon the seller paying to
the purchaser a sum of money or doing some other f. Formal
act named. If the condition is performed according to
its terms the mortgage and sale immediately become The requirement of recording in the Chattel Mortgage Register is
void, and the mortgagee is thereby divested of his essential.
title.
3. Essential requisites
Chattel mortgage is a contract by virtue of which personal
property is recorded in the Chattel Mortgage Register as a. Consent
security for the performance of an obligation.
There must be capacity to give consent to the contract.
Under the Chattel Mortgage Law, chattel mortgage was defined
as a conditional sale, but the Code Commission for the New Civil
b. Object
Code considered this inaccurate. Hence, the new definition under A R T . 2 1 2 4, C C
the (N)CC. Only the following property may be the object of a
contract of mortgage:
2. Characteristics (1) Immovables;
(2) Alienable real rights in accordance with the laws,
Characteristics of chattel mortgage (CUNAGOF) imposed upon immovables.
1. Consensual Nevertheless, movables may be the object of a chattel
2. Unilateral mortgage. (1874a)
3. Nominate
4. Accessory SEC. 2, CHATTEL MORTGAGE LAW
5. Gratuitous or onerous All personal property shall be subject to mortgage,
6. Formal agreeably to the provisions of this Act, and a
mortgage executed in pursuance thereof shall be
a. Consensual termed chattel mortgage.
No delivery is required in a chattel mortgage. However, mere SEC. 7, CHATTEL MORTGAGE LAW
consent does not yet perfect the contract: formal requirements Descriptions of property. — The description of the
must still be fulfilled. mortgaged property shall be such as to enable the
parties to the mortgage, or any other person, after
b. Unilateral reasonable inquiry and investigation, to identify the
same.
The main obligation is upon the mortgagee/creditor, who must If the property mortgaged be large cattle," as
free the property from all encumbrances once the debt is paid. defined by section one of Act Numbered Eleven and
forty-seven, 2 and the amendments thereof, the
c. Nominate description of said property in the mortgage shall
contain the brands, class, sex, age, knots of radiated
The Civil Code gives it a specific name. Wow so amaze much hair commonly known as remolinos, or cowlicks, and
learn other marks of ownership as described and set forth in
the certificate of ownership of said animal or animals,

together with the number and place of issue of such 5. Form
certificates of ownership.
If growing crops be mortgaged the mortgage may What must appear in contract of CM
contain an agreement stipulating that the mortgagor
1. Description of the property sufficient to enable
binds himself properly to tend, care for and protect
identification;
the crop while growing, and faithfully and without
2. Signature of parties and 2 witnesses;
delay to harvest the same, and that in default of the 3. Amount of principal obligation to be secured; and
performance of such duties the mortgage may enter
4. Affidavit of good faith.
upon the premises, take all the necessary measures
for the protection of said crop, and retain possession
thereof and sell the same, and from the proceeds of Affidavit of good faith
such sale pay all expenses incurred in caring for, Oath that:
harvesting, and selling the crop and the amount of 1. Mortgage is constituted in order to secure
the indebtedness or obligation secured by the What it the obligation specified, and for no other
mortgage, and the surplus thereof, if any shall be paid contains purpose; and
to the mortgagor or those entitled to the same. 2. Obligation is just and valid, and not entered
A chattel mortgage shall be deemed to cover only into for fraudulent purposes
the property described therein and not like or Effect of its Vitiates mortgage only as against third persons
substituted property thereafter acquired by the absence without notice
mortgagor and placed in the same depository as the
property originally mortgaged, anything in the SEC. 4, CHATTEL MORTGAGE LAW
mortgage to the contrary notwithstanding. Validity. — A chattel mortgage shall not be valid
against any person except the mortgagor, his
Rules as to what may be given in chattel mortgage executors or administrators, unless the possession of
General rule: Only MOVABLE THINGS the property is delivered to and retained by the
mortgagee or unless the mortgage is recorded in the
Exceptions:
office of the register of deeds of the province in which
1. Growing crops (considered personal
the mortgagor resides at the time of making the
property under CML)
same, or, if he resides without the Philippine Islands,
2. Large cattle are considered immovable
As to movability in the province in which the property is situated:
under the CC
Provided, however, That if the property is situated in a
3. By estoppel—when parties have treated as
different province from that in which the mortgagor
movable property something that was
resides, the mortgage shall be recorded in the office
immovable, they are estopped from
of the register of deeds of both the province in which
assailing the validity of the CM executed
the mortgagor resides and that in which the property
Only existing properties may be mortgaged
As to current is situated, and for the purposes of this Act the city of
Generally does not cover subsequently Manila shall be deemed to be a province.
existence
acquired properties, unless so stipulated
Thing must be sufficiently described in the SEC. 5, CHATTEL MORTGAGE LAW
As to formal affidavit of CM such that it is identifiable by Form. — A chattel mortgage shall be deemed to be
requirement the parties/any person after reasonable sufficient when made substantially in accordance with
investigation and inquiry the following form, and shall be signed by the person
As to Several chattel mortgages may be or persons executing the same, in the presence of two
simultaneity constituted over the same movable thing witnesses, who shall sign the mortgage as witnesses
As to ownership Mortgagor retains possession of property to the execution thereof, and each mortgagor and
mortgagee, or, in the absence of the mortgagee, his
c. Cause agent or attorney, shall make and subscribe an
affidavit in substance as hereinafter set forth, which
Art. 1350, supra affidavit, signed by the parties to the mortgage as
above stated, and the certificate of the oath signed by
The cause may either be liberality, in the case of a gratuitous CM the authority administering the same, shall be
(executed by a third person), or the payment of the principal appended to such mortgage and recorded therewith.
obligation in the case of an onerous CM (executed by the
principal debtor). FORM OF CHATTEL MORTGAGE AND AFFIDAVIT.
"This mortgage made this ____ day of ______19____ by
4. Parties _______________, a resident of the municipality of
______________, Province of ____________, Philippine
Parties to a contract of chattel mortgage Islands mortgagor, to ____________, a resident of the
Owns the thing given in mortgage municipality of ___________, Province of ______________,
Mortgagor
Either debtor or third person Philippine Islands, mortgagee, witnesseth:
Receives the thing in mortgage
Mortgagee "That the said mortgagor hereby conveys and
Creditor in principal obligation
mortgages to the said mortgagee all of the following-
described personal property situated in the mortgage. When a partnership is a party to the
municipality of ______________, Province of ____________ mortgage the affidavit may be made and subscribed
and now in the possession of said mortgagor, to wit: by one member thereof.
(Here insert specific description of the property Sec. 7, Chattel Mortgage Law, supra
mortgaged.)
SEC. 198, ADMINISTRATIVE CODE*
"This mortgage is given as security for the payment to Registration of chattel mortgages and fees collectible
the said ______, mortgagee, of promissory notes for the in connection therewith. — A chattel mortgage shall
sum of ____________ pesos, with (or without, as the case be deemed to cover only the property described
may be) interest thereon at the rate of ___________ per therein and not like or substituted property thereafter
centum per annum, according to the terms of acquired by the mortgagor and placed in the same
__________, certain promissory notes, dated _________, depository as the property originally mortgaged,
and in the words and figures following (here insert anything in the mortgage to the contrary
copy of the note or notes secured). notwithstanding.
The recording of a mortgage shall be effected by
"(If the mortgage is given for the performance of some making an entry, which shall be given a correlative
other obligation aside from the payment of number, setting forth the names of the mortgagee,
promissory notes, describe correctly but concisely the and the mortgagor, the sum or obligation guaranteed,
obligation to be performed.) date of the instrument, name of the notary before
whom it was sworn to or acknowledged, and a note
"The conditions of this obligation are such that if the that the property mortgaged, as well as the terms and
mortgagor, his heirs, executors, or administrators conditions of the mortgage, is mentioned in detail in
shall well and truly perform the full obligation (or the instrument filed, giving the proper file number
obligations) above stated according to the terms thereof. The recording of other instruments relating to
thereof, then this obligation shall be null and void. a recorded mortgage shall be effected by way of
annotations on the space provided therefor in the
"Executed at the municipality of _________, in the registration book, after the same shall have been
Province of ________, this _____ day of 19_____ entered in the primary entry book.
The register of deeds shall also certify the officer's
____________________ return of sale upon any mortgage, making reference
(Signature of mortgagor.) upon the record of such officer's return to the volume
and page of the record of the mortgage, and a
"In the presence of reference of such return on the record of the
mortgage itself, and give a certified copy thereof,
"_________________ when requested, upon payment of the lawful fees for
"_________________ such copy; and certify upon each mortgage officer's
(Two witnesses sign here.) return of sale or discharge of mortgage; and upon any
other instrument relating to such a recorded
FORM OF OATH. mortgage, both on the original and on the duplicate,
"We severally swear that the foregoing mortgage is the date, hour, and minute when the same is received
made for the purpose of securing the obligation for record and record such certificate with the return
specified in the conditions thereof, and for no other itself and keep an alphabetical index of mortgagors
purpose, and that the same is a just and valid and mortgagees, which record and index shall be
obligation, and one not entered into for the purpose of open to public inspection.
fraud." Duly certified copies of such records and of filed
instruments shall be receivable as evidence in any
FORM OF CERTIFICATE OF OATH. court.
"At ___________, in the Province of _________, personally The register of deeds shall collect the following
appeared ____________, the parties who signed the fees for services rendered by him under this section:
foregoing affidavit and made oath to the truth thereof (a) For entry or presentation of any document in the
before me. primary entry book, one peso. Supporting papers
presented together with the principal document
"_____________________________" need not be charged any entry or presentation fee
(Notary public, justice of the peace, 1 or other officer, unless the party in interest desires that they be
as the case may be.) likewise entered.
(b) For filing and recording each chattel mortgage,
SEC. 6, CHATTEL MORTGAGE LAW including the necessary certificates and affidavits,
Corporations. — When a corporation is a party to such the fees established in the following schedule
mortgage the affidavit required may be made and shall be collected:
subscribed by a director, trustee, cashier, treasurer, or 1. When the amount of the mortgage does not
manager thereof, or by a person authorized on the exceed six thousand pesos, three pesos and
part of such corporation to make or to receive such fifty centavos for the first five hundred pesos
or fractional part thereof, and one peso and established in the schedule under paragraph (b)
fifty centavos for each additional five above shall be collected on the basis of five per
hundred pesos or fractional part thereof. centum of the amount of the mortgage.
2. When the amount of the mortgage is more (f) For recording each release of attachment,
than six thousand pesos but does not exceed including the proper annotations, two pesos.
thirty thousand pesos, twenty-four pesos for (g) For recording each sheriff's return of sale,
the initial amount not exceeding eight including the index and references, three pesos.
thousand pesos, and four pesos for each (h) For recording a power of attorney, appointment
additional two thousand pesos or fractional of judicial guardian, administrator, or trustee, or
part thereof. any other instrument in which a person is given
3. When the amount of the mortgage is more power to act in behalf of another in connection
than thirty thousand pesos but does not with a mortgage, three pesos.
exceed one hundred thousand pesos, (i) For recording each instrument or order relating to
seventy-five pesos for the initial amount not a recorded mortgage, including the necessary
exceeding thirty-five thousand pesos, and index and references, for which no specific fee is
seven pesos for each additional five provided above, two pesos.
thousand pesos or fractional part thereof. (j) For certified copies of records, such fees as are
4. When the amount of the mortgage is more allowed by law for copies kept by the register of
than one hundred thousand pesos but does deeds.
not exceed five hundred thousand pesos, (k) For issuing a certificate relative to, or showing the
one hundred and seventy-six pesos for the existence or non-existence of, an entry in the
initial amount not exceeding one hundred registration book, or a document on file, for each
ten thousand pesos, and ten pesos for each such certificate containing not more than two
additional ten thousand pesos or fractional hundred words, three pesos; if it exceeds that
part thereof. number, an additional fee of fifty centavos shall
5. When the amount of the mortgage is more be collected for every one hundred words or
than five hundred thousand pesos, five fractional part thereof, in excess of the first two
hundred eighty-one pesos for the initial hundred words.
amount not exceeding five hundred twenty This provision supersedes Sec. 15
thousand pesos, and fifteen pesos for each of the Chattel Mortgage Law.
additional twenty thousand pesos or
fractional part thereof: Provided, however, 6. Rights & obligations of the
That registration of the mortgage in the mortgagor
province where the property is situated shall Right To possession of the thing
be sufficient registration: And provided, Not to remove the thing
further, That if the mortgage is to be Not to sell or dispose of the thing without the
registered in more than one city or province, Obligations
mortgagee’s consent
the register of deeds of the city or province Take care of the thing
where the instrument is first presented for
registration shall collect the full amount of 7. Rights & obligations of the
the fees due in accordance with the schedule
prescribed above, and the register of deeds
mortgagee
To possession
of the other city or province where the same Rights
instrument is also to be registered shall To foreclose the mortgage
collect only a sum equivalent to twenty per To free thing from all encumbrances upon
Obligation
centum of the amount of fees due and paid fulfillment of the principal obligation
in the first city or province, but in no case
shall the fees payable in any registry be less a. Free property from all encumbrances
than the minimum fixed in said schedule. once obligation has been fulfilled
(c) For recording each instrument of sale,
SEC. 8, CHATTEL MORTGAGE LAW
conveyance, or transfer of the property which is
Failure of mortgagee to discharge the mortgage. — If
subject of a recorded mortgage, or of the
the mortgagee, assign, administrator, executor, or
assignment of mortgage credit, the fees
either of them, after performance of the condition
established in the preceding schedule shall be
before or after the breach thereof, or after tender of
collected on the basis of ten per centum of the
the performance of the condition, at or after the time
amount of the mortgage or unpaid balance
fixed for the performance, does not within ten days
thereof: Provided, That the latter is stated in the
after being requested thereto by any person entitled
instrument.
to redeem, discharge the mortgage in the manner
(d) For recording each notice of attachment,
provided by law, the person entitled to redeem may
including the necessary index and annotations,
recover of the person whose duty it is to discharge the
four pesos.
same twenty pesos for his neglect and all damages
(e) For recording each release of mortgage, including
occasioned thereby in an action in any court having
the necessary index and references, the fees
jurisdiction of the subject-matter thereof.
persons holding subsequent mortgages in their order,

This is the obligation to release the property from and the balance, after paying the mortgages, shall be
encumbrances once the principal obligation has been fulfilled. It paid to the mortgagor or person holding under him on
is the mortgagee’s main obligation. demand.
If the sale includes any "large cattle," a certificate
b. Right to possession of transfer as required by section sixteen of Act
Numbered Eleven hundred and forty-seven 5 shall be
SEC. 13, CHATTEL MORTGAGE LAW issued by the treasurer of the municipality where the
When the condition of a chattel mortgage is broken, a sale was held to the purchaser thereof.
mortgagor or person holding a subsequent mortgage,
or a subsequent attaching creditor may redeem the Summary of foreclosure proceedings in chattel mortgage
same by paying or delivering to the mortgagee the Must be posted in 2 public places of
amount due on such mortgage and the reasonable municipality:
costs and expenses incurred by such breach of a. Where mortgagor resides, or
condition before the sale thereof. An attaching b. Where property is situated
creditor who so redeems shall be subrogated to the 1. Notice by creditor
Must also be given to mortgagor either
rights of the mortgagee and entitled to foreclose the to debtor
in writing or at his residence, or sent to
mortgage in the same manner that the mortgagee him by mail, if he does not situate in the
could foreclose it by the terms of this Act. municipality
Must be made 10 days prior to the sale
Prior to default, the mortgagee has no right to possess the thing. No right of redemption—only equity of
It arises only when the mortgagor breaches a condition of the redemption
chattel mortgage.
Must be a public sale made by a public
officer at a public place in municipality
c. Right to foreclose
where mortgagor resides
SEC. 14, CHATTEL MORTGAGE LAW Officer must make a return in writing
Sale of property at public auction; Officer's return; particularly describing the things sold
Fees; Disposition of proceeds. — The mortgagee, his and the amounts for which they were
executor, administrator, or assign, may, after thirty sold—return discharges the lien
days from the time of condition broken, cause the Application of proceeds of the sale:
mortgaged property, or any part thereof, to be sold at a. Costs and expenses of keeping and
public auction by a public officer at a public place in 2. Foreclosure sale sale;
the municipality where the mortgagor resides, or b. Payment of principal obligation;
where the property is situated, provided at least ten c. Persons holding subsequent
days' notice of the time, place, and purpose of such mortgages on the thing; and
sale has been posted at two or more public places in d. If any balance remains, it shall be
such municipality, and the mortgagee, his executor, returned to the mortgagor.
administrator, or assign, shall notify the mortgagor or Rules on deficiency & excess:
person holding under him and the persons holding a. Price of sale > amount due = debtor
subsequent mortgages of the time and place of sale, entitled to excess
either by notice in writing directed to him or left at his b. Price of sale < amount due =
abode, if within the municipality, or sent by mail if he creditor entitled to recover
does not reside in such municipality, at least ten days deficiency
previous to the sale.
The officer making the sale shall, within thirty 8. Special rules involving chattel
days thereafter, make in writing a return of his doings mortgage
and file the same in the office of the register of deeds
where the mortgage is recorded, and the register of a. Registration of chattel mortgage
deeds shall record the same. The fees of the officer for
selling the property shall be the same as in the case of A R T . 2 1 4 0, C C
sale on execution as provided in Act Numbered One By a chattel mortgage, personal property is recorded
hundred and ninety, 4 and the amendments thereto, in the Chattel Mortgage Register as a security for the
and the fees of the register of deeds for registering the performance of an obligation. If the movable, instead
officer's return shall be taxed as a part of the costs of of being recorded, is delivered to the creditor or a third
sale, which the officer shall pay to the register of person, the contract is a pledge and not a chattel
deeds. The return shall particularly describe the mortgage. (n)
articles sold, and state the amount received for each
article, and shall operate as a discharge of the lien Sec. 4, Chattel Mortgage Law, supra
thereon created by the mortgage. The proceeds of
such sale shall be applied to the payment, first, of the S E C . 1 1 4, P . D . 1 5 2 9
costs and expenses of keeping and sale, and then to Recording of chattel mortgages. A chattel mortgage
the payment of the demand or obligation secured by shall be recorded in the office of the Register of Deeds
such mortgage, and the residue shall be paid to of the province or city where the mortgagor resides as
well as where the property is situated or ordinarily personal property mortgaged under the Chattel
kept. Mortgage Law to any province or city other than
the one in which it was located at the time of the
S E C . 1 1 4, P . D . 1 5 2 9 execution of the mortgage, without the written
Manner of recording chattel mortgages. Every consent of the mortgagee, or his executors,
Register of Deeds shall keep a Primary Entry Book administrators or assigns.
and a Registration Book for chattel mortgages; shall (2) Any mortgagor who shall sell or pledge personal
certify on each mortgage filed for record, as well as on property already pledged, or any part thereof,
its duplicate, the date, hour, and minute when the under the terms of the Chattel Mortgage Law,
same was by him received; and shall record in such without the consent of the mortgagee written on
books any chattel mortgage, assignment or discharge the back of the mortgage and noted on the record
thereof, and any other instrument relating to a hereof in the office of the Register of Deeds of the
recorded mortgage, and all such instruments shall be province where such property is located.
presented to him in duplicate, the original to be filed
and the duplicate to be returned to the person Acts punished under Art. 319 and their elements
concerned. Acts punished Elements
The recording of a mortgage shall be effected by 1. Personal property is
making an entry, which shall be given a correlative mortgaged under the Chattel
number, setting forth the names of the mortgagee Knowingly removing any Mortgage Law;
and the mortgagor, the sum or obligation guaranteed, personal property 2. Offender knows that such
date of the instrument, name of the notary before mortgaged under the CML property is so mortgaged;
whom it was sworn to or acknowledged, and a note to any province or city 3. Offender removes such
that the property mortgaged, as well as the terms and other than the one in property to any province/city
conditions of the mortgage, is mentioned in detail in which it was located at the other than the one in which it
the instrument filed, giving the proper file number time of execution of the was located at the time
thereof. The recording of other instruments relating to mortgage, without the mortgage was executed;
a recorded mortgage shall be effected by way of mortgagee's written 4. The removal is permanent;
annotation on the space provided therefor in the consent or the consent of and
Registration Book, after the same shall have been his executors, 5. There is no written consent
entered in the primary Entry Book. administrators, or assigns from the mortgagee or his
The Register of Deeds shall also certify the executors, administrators, or
officer's return of sale upon any mortgage, making assigns.
reference upon the record of such officer's return to Selling or pledging
the volume and page of the record of the mortgage, 1. Personal property is already
personal property already
and a reference of such return on the record of the pledged under the terms of
pledged, or any part
mortgage itself, and give a certified copy thereof, the Chattel Mortgage Law;
thereof, under the terms of
when requested, upon payment of the legal fees for 2. Offender, who is the
the CML, without the
such copy thereof, when requested, upon payment of mortgagor, sells/pledges such
consent of the mortgagee
the legal fees for such copy and certify upon each property or any part of it;
written on the back of the
mortgage officer's return of sale or discharge of 3. There is no consent of the
mortgage and noted on
mortgage, and upon any other instrument relating to mortgagee written on the back
the record thereof in the
such a recorded mortgage, both on the original and in of the mortgage and noted on
office of the Register of
the duplicate, the date, hour, and minute when the the record thereof in the office
Deeds of the province
same is received for record and record such certificate of the Register of Deeds
where such property is
index of mortgagors and mortgagees, which record located
and index shall be open to public inspection. via Elements of Felonies in the Revised
Duly certified copies of such records and of filed Penal Code and Their Penalties (2007)
instruments shall be receivable as evidence in any
court. 9. Risk of loss & deterioration
What must be recorded in the CM Register Since no transfer of ownership occurs, the principle of res perit
1. Chattel mortgage contract domino governs, i.e. the owner (the mortgagor) shall suffer risk of
2. All supplements and amendments loss and deterioration.
3. Deed of release upon extinguishment of the
chattel mortgage 10. Extinguishment
b. Offenses involving chattel mortgage Sec. 8, Chattel Mortgage Law, supra
Sec. 13, Chattel Mortgage Law, supra
A R T . 3 1 9, REVISED PENAL CODE
Removal, sale or pledge of mortgaged property. — The The general provisions on extinguishment of obligations apply.
penalty or arresto mayor or a fine amounting to twice However, upon extinguishment of the chattel mortgage, a deed
the value of the property shall be imposed upon: of release must be made and filed with the Register of Deeds.
(1) Any person who shall knowingly remove any
ACME SHOE RUBBER & PLASTIC v. CA (1996)

Facts: Wilfredo bought a truck and tractor which he mortaged to
A chattel mortgage can only cover obligations Libra Finance in order to secure payment of their purchase price.
existing at the time the mortgage was constituted. Perfecto, Wilfredo’s brother, bought the tractor with the consent
Provisions that are to the effect that previously of Libra. Libra refused to accept payment for the purchase price
established chattel mortgages will cover of just the tractor for purposes of extinguishing the mortgage
subsequent loans are invalid. over it and insisted that Perfecto pay for the truck as well. Gelac,
another creditor of Wilfredo, on the strength of a favorable ruling
Facts: The loan between the petitioner and the bank contained a in a complaint for collection of sum of money against the latter
provision that the chattel mortgage put up by the former as caused the sheriff to seize the tractor and sell it through public
security for a P3M loan extended by the latter would also serve auction. Perfecto filed an action to recover the tractor.
as security for any future debts between the two parties. After the
P3M loan was timely paid, the petitioner obtained more loans. Issue: WON the tractor should be given back to Perfecto – YES
He defaulted on some of the later loans which led the bank to
foreclose the chattel mortgage. Held: The seizure and subsequently sale of Gelac of the truck was
invalid because it was no longer the property of Wilfredo—
Issue: WON the bank could foreclose the chattel mortgage based ownership had transferred by virtue of the sale between the
on the provision in their loan contract that made the chattel brothers. The rule is that only properties unquestionably owned
mortgage cover all future obligations – NO by the judgment debtor may be levied upon.
Held: While the promise to provide a chattel mortgage is SERVICEWIDE SPECIALIST v. CA (1999)
enforceable between the parties, the mortgage itself does not
come into existence until a new chattel mortgage contract is Notice of assignment of credit is required to be
executed between the parties or until the old chattel mortgage given to the debtor; his consent is not required.
contract is amended. As applied, the only obligation covered by On the other hand, the consent of the creditor-
the chattel mortgage was the initial P3M loan. Further, upon mortgagee to the alienation of the property
payment of the initial loan, the chattel mortgage was mortgaged is necessary to bind him to the
extinguished. transaction.
MAKATI LEASING v. WEAREVER TEXTILE Facts: Sps. Ponce bought a car from CRTE over which they
executed a contract of chattel mortgage in favor of the latter.
Parties to a contract may, by agreement, treat real CRTE assigned their credit to Filinivest Credit Corp. after giving
property as personal property as long as such notice to the spouses. Filinvest then assigned all its rights and
treatment will not prejudice the rights of third interests over the mortgage to Servicewide without giving notice
parties. to the souses. Upon the failure of the spouses to pay the
installments, Servicewide filed a case for replevin and damages.
Facts: As security for its loans to Makati Leasing, Wearever As defense, the spouses denied liability because the car had been
executed a chattel mortgage over raw materials and a piece of sold to Tecson under a Deed of Sale with Assumption of
machinery. Upon defaulting, Makati Leasing sought to foreclose Mortgage.
properties mortgaged, including the said piece of machinery. The
CA ruled that the machinery cannot be foreclosed because it is a Issue: WON the sale was binding upon Servicewide—NO
real property as defined by the civil code.
Held: Although the spouses were not notified by Filinvest
Issue: WON the machinery in question is real or personal property regarding the transfer of its interest over the chattel mortgage to
– PERSONAL Servicewide, the transaction was still not binding to Servicewide
because the spouses did not obtain the consent of Filinvest (who
Held: Multiple pieces of jurisdiction provide that “the they thought was still the creditor-mortgagee). In other words,
characterization of the subject machinery as chattel by the notwithstanding the fact that as far as the spouses were
private respondent is indicative of intention and impresses upon concerned, it was still Filinvest, and not Servicewide, who had an
the property the character determined by the parties.” As interest in the chattel mortgage, no consent was given by
applied, it was clear that the parties intended to treat the piece of Filinvest to the transaction. Therefore, Servicewide, who stepped
machinery as personal property when they executed a contract of into the shoes of Filinvest when it assigned to the former its
chattel mortgage that covered the same. interest in the chattel mortgage, may raise the defenses available
to Filinvest.
DY v. CA (1991)
RCBC v. ROYAL CARGO (2009)
As a result of the fact that the chattel mortgagor
retains ownership over the personal property Equity redemption is the right of the mortgagor to
mortgaged, he may still validly alienate the same. redeem the mortgaged property after his default
In order to avoid incurring criminal liability, in the performance of the conditions of the
however, the consent of the mortgagee as regards mortgage but before the sale of the property to
the sale must be obtained. clear it from the encumbrance of the mortgage.
Facts: Terrymanila owed RCBC P3M secured by a chattel D. REAL ESTATE M O RTG AG E
mortgage. Royal Cargo who was another creditor of Terrymanila
filed an action for collection of sum of money before the RTC and 1. Concept
preliminarily attached some properties of Terrymanila. The RTC
ruled in favor of Royal Cargo regarding its claims. Subsequently, Art. 2085, supra
RCBC foreclosed the chattel mortgaged and caused the sheriff to Art. 2087, supra
sell the property over which it was executed. Royal Cargo
assailed the foreclosure and auction sale because it involved A real estate mortgage is a contract whereby immovable
pieces of property that it had already attached and that they property or real rights over immovable property are given in
were not duly notified of the sale 10 days before it took place order to secure the fulfillment of a principal obligation. If the
pursuant to the provisions of the Chattel Mortgage law. debtor defaults, the property given must be sold at a foreclosure
sale, and the proceeds thereof applied to the principal
Issue: WON Royal Cargo was entitled to notice of the foreclosure obligation.
sale 10 days before it took place – YES
2. Characteristics
Held: The attachment that Royal Cargo obtained over certain
properties of Terrymanila had the effect of attaching the latter’s Art. 2052, supra
right to equity redemption—it did not take the properties Art. 2086, supra
attached outside of the chattel mortgage foreclosed by RCBC. Art. 2092, supra
Hence, Royal Cargo had the right to be informed of the date of
sale of the mortgaged assets for it to exercise such equity Characteristics of REM (CUNSAGOF)
redemption over the properties previously attached. However, 1. Consensual
the Court here held that Royal Cargo had been put on notice 2. Unilateral
regarding the impending foreclosure sale and that its negligence 3. Nominate
to act upon such notice was a waiver of its right to equitably 4. Subsidiary
redeem the disputed properties. 5. Accessory
PAMECA WOOD TREATMENT v. CA (1999) 7. Formal
Unlike in contracts of pledge, the creditor in a. Consensual

obligations secured by a chattel mortgage may
recover the deficiency. Similarly, the creditor is not The REM is perfected upon consent, subject to the formal
entitled to keeping the excess. requirements.
Facts: Pameca obtained a loan from the bank and defaulted

b. Unilateral
which led to the bank foreclosing the chattel mortgage executed
It creates only an obligation on the part of the creditor, who must
over certain properties of Pameca. After the auction sale, the
free the property from the encumbrance, once the principal
bank filed a complaint for collecting the remaining balance of
obligation has been fulfilled.
the loan.
c. Nominate
Issue: WON the bank may claim the balance –YES
The Civil Code gives it a specific name.
Held: Sec. 14 of the Chattel Mortgage Law explicitly provides that
the mortgagee is entitled to the balance of the proceeds. The d. Subsidiary
reason for this is that the value of chattels, as compared to the
value of real properties, fluctuates more frequently. Hence, in The right to foreclose arises only when there has been breach of
order for the creditor-mortgagee to fully satisfy his claim, the law or default in fulfilling the principal obligation.
allows him to sue on the deficiency. Protection is also afforded to
the debtor-mortgagor in that the creditor-mortgagee cannot e. Accessory
keep the excess if any should be obtained following the auction
sale. REM secures a principal obligation.
Kinds of obligations that may be secured by REM

Valid
As to validity Voidable
Unenforceable
As to Pure
conditionality Conditional (suspensive or resolutory)
Present obligations
As to time
Future obligations
As to specific Payment
obligation Performance
income not yet received when the obligation becomes

f. Gratuitous or onerous due, and to the amount of the indemnity granted or
owing to the proprietor from the insurers of the
The REM is gratuitous if given by a third person who is not a property mortgaged, or in virtue of expropriation for
party to the principal obligation, and onerous if given by the public use, with the declarations, amplifications and
debtor. limitations established by law, whether the estate
remains in the possession of the mortgagor, or it
g. Formal passes into the hands of a third person. (1877)
In order to be valid, the REM must be made in a public document Valid subject matter of real estate mortgage
and recorded in the Registry of Property. 1. Immovable property
2. Real rights over immovable property
3. Essential requisites 3. Natural accessions, improvements, growing fruits,
rents or income of the property (principle of
a. Consent accession follows principal)
The parties must have capacity to give consent to a contract. Future property generally cannot be given in a REM.
b. Object c. Cause
A R T . 4 1 5, C C Art. 1350, supra
The following are immovable property:
(1) Land, buildings, roads and constructions of all For a third person, the cause is liberality (gratuitous REM). For
kinds adhered to the soil; the debtor, the cause is his fulfillment of the principal obligation
(2) Trees, plants, and growing fruits, while they are (onerous REM).
attached to the land or form an integral part of
an immovable; 4. Parties
(3) Everything attached to an immovable in a fixed
manner, in such a way that it cannot be separated Art. 2085, supra
therefrom without breaking the material or Art. 111, Family Code, supra
deterioration of the object;
(4) Statues, reliefs, paintings or other objects for use Parties to a contract of real estate mortgage
or ornamentation, placed in buildings or on lands Owns the thing given in mortgage
by the owner of the immovable in such a manner Mortgagor
Either debtor or third person
that it reveals the intention to attach them
Receives the thing in mortgage
permanently to the tenements; Mortgagee
Creditor in principal obligation
(5) Machinery, receptacles, instruments or
implements intended by the owner of the
tenement for an industry or works which may be 5. Form
carried on in a building or on a piece of land, and
which tend directly to meet the needs of the said
A R T . 1 8 7 9, C C
industry or works; A special power to sell excludes the power to
(6) Animal houses, pigeon-houses, beehives, fish mortgage; and a special power to mortgage does not
ponds or breeding places of similar nature, in include the power to sell. (n)
case their owner has placed them or preserves
them with the intention to have them
A R T . 2 1 2 5, C C
In addition to the requisites stated in Article 2085, it is
permanently attached to the land, and forming a
indispensable, in order that a mortgage may be
permanent part of it; the animals in these places
validly constituted, that the document in which it
are included;
(7) Fertilizer actually used on a piece of land; appears be recorded in the Registry of Property. If the
instrument is not recorded, the mortgage is
(8) Mines, quarries, and slag dumps, while the
matter thereof forms part of the bed, and waters nevertheless binding between the parties.
The persons in whose favor the law establishes a
either running or stagnant;
mortgage have no other right than to demand the
(9) Docks and structures which, though floating, are
execution and the recording of the document in which
intended by their nature and object to remain at a
the mortgage is formalized. (1875a)
fixed place on a river, lake, or coast;
(10) Contracts for public works, and servitudes and
other real rights over immovable property. (334a) Rules on form of real estate mortgage
Must be made in a public instrument
Art. 2124, supra Formal requisites Must be recorded in the Registry of
Property
A R T . 2 1 2 7, C C If mortgage is in a private instrument, it is
Effect of private
The mortgage extends to the natural accessions, to not binding as a mortgage, but parties may
document
the improvements, growing fruits, and the rents or compel conformity with form (Art. 1357)*
Effect of not Binding between the parties, but not upon Governed by Act 3135
recording third persons Extrajudicial Applies only when mortgagee has the
Right of parties in May compel execution of REM document foreclosure special power to sell property in a
legal mortgage foreclosure
May demand recording of such document
8. Obligations of the mortgagee
6. Types
Release the mortgaged property
Art. 2125, supra from encumbrance
A R T . 1 6 0 2, C C A mortgagee who is in lawful possession of the thing is entitled
The contract shall be presumed to be an equitable to continue in possession until the indebtedness is fully satisfied.
mortgage, in any of the following cases: But once the mortgagor has fulfilled the principal obligation, the
(1) When the price of a sale with right to repurchase mortgagee must release the property from the encumbrance.
is unusually inadequate;
(2) When the vendor remains in possession as lessee 9. Special rules
or otherwise;
(3) When upon or after the expiration of the right to a. Ownership of property after creation
repurchase another instrument extending the of mortgage
period of redemption or granting a new period is
executed; A R T . 2 1 3 0, C C
(4) When the purchaser retains for himself a part of A stipulation forbidding the owner from alienating the
the purchase price; immovable mortgaged shall be void. (n)
(5) When the vendor binds himself to pay the taxes
on the thing sold; Rules on ownership
(6) In any other case where it may be fairly inferred As to transfer of ownership No transfer of ownership occurs
that the real intention of the parties is that the Thing remains in mortgagor’s
transaction shall secure the payment of a debt or As to possession
possession
the performance of any other obligation. Mortgagor may sell the
In any of the foregoing cases, any money, fruits, or mortgaged property
other benefit to be received by the vendee as rent or
Stipulation forbidding sale is void
otherwise shall be considered as interest which shall As to sale of thing
be subject to the usury laws. (n) Stipulation requiring mortgagee’s
consent before sale also void
Types of real estate mortgage Mortgage lien follows property
Voluntary or
Created by agreement of the parties b. Registration requirement; effects
conventional
Legal Arises by operation of law A R T . 1 3 1 2, C C
Lacks proper formalities of a mortgage, but In contracts creating real rights, third persons who
Equitable reveals parties’ intention to burden property as come into possession of the object of the contract are
mortgage security for a debt, and contains nothing bound thereby, subject to the provisions of the
contrary to law Mortgage Law and the Land Registration Laws. (n)
7. Obligations of the mortgagor Art. 2125, supra
Summary of obligations of the mortgagor A R T . 2 1 2 6, C C
1. Implied right to take care of the thing The mortgage directly and immediately subjects the
2. Allow foreclosure property upon which it is imposed, whoever the
possessor may be, to the fulfillment of the obligation
a. Implied right to take care of thing for whose security it was constituted. (1876)
Delivery of the thing is not required for the validity of the REM A R T . 2 1 2 9, C C
constituted. Hence, the mortgagor retains the right to have the The creditor may claim from a third person in
thing in his possession, and to take care of the thing such that possession of the mortgaged property, the payment of
the creditor’s rights may be preserved. the part of the credit secured by the property which
said third person possesses, in the terms and with the
b. Allow foreclosure formalities which the law establishes. (1879)
Art. 2087, supra Registration creates a real right binding upon third persons.
Kinds of foreclosure Where the REM must be indicated

Done through court proceedings 1. As an entry in the books of the Register of Deeds
Judicial foreclosure
Governed by Rule 68, Rules of Court 2. As an annotation on the back of the TCT/OCT
the holder of the mortgage, all of whom shall be

c. Stipulations made defendants in the action. (1a)
Art. 2088, supra Section 2. Judgment on foreclosure for payment or

sale. — If upon the trial in such action the court shall
Kinds of stipulations in REM contracts and their validity find the facts set forth in the complaint to be true, it
Definition Valid shall ascertain the amount due to the plaintiff upon
Pactum Appropriation upon default of debtor, the mortgage debt or obligation, including interest
No and other charges as approved by the court, and
commissorium without foreclosure sale
Right of first Gives mortgagee a preferential right costs, and shall render judgment for the sum so found
Yes due and order that the same be paid to the court or to
refusal should mortgagor decide to sell thing
Acceleration Upon default, all future payments also the judgment obligee within a period of not less than
Yes ninety (90) days nor more than one hundred twenty
clause become due and demandable
Sets a minimum price for which (120) days from the entry of judgment, and that in
Upset price property should be sold during No default of such payment the property shall be sold at
foreclosure public auction to satisfy the judgment. (2a)
Stipulates that mortgage covers not
Section 3. Sale of mortgaged property; effect. — When
Dragnet clause just an existing obligation between
the defendant, after being directed to do so as
or blanket parties, but further loans/credits that Yes
provided in the next preceding section, fails to pay the
mortgage the creditor-mortgagee may extend to
amount of the judgment within the period specified
the debtor-mortgagor
therein, the court, upon motion, shall order the
d. Indivisibility of mortgage property to be sold in the manner and under the
provisions of Rule 39 and other regulations governing
Art. 2089, supra sales of real estate under execution. Such sale shall
Art. 2090, supra not affect the rights of persons holding prior
encumbrances upon the property or a part thereof,
(See general provisions of pledge & mortgage for rules.) and when confirmed by an order of the court, also
upon motion, it shall operate to divest the rights in the
e. Alienation of mortgage credit property of all the parties to the action and to vest
their rights in the purchaser, subject to such rights of
A R T . 2 1 2 8, C C redemption as may be allowed by law.
The mortgage credit may be alienated or assigned to Upon the finality of the order of confirmation or
a third person, in whole or in part, with the formalities upon the expiration of the period of redemption when
required by law. (1878) allowed by law, the purchaser at the auction sale or
last redemptioner, if any, shall be entitled to the
Mortgage is a real right owned by the mortgagee, and he may possession of the property unless a third party is
assign or alienate this right to another person, provided that they actually holding the same adversely to the judgment
comply with the legal formalities. But registration of the obligor. The said purchaser or last redemptioner may
assignment only serves to bind third parties, and is not required secure a writ of possession, upon motion, from the
for validity. Hence, an unregistered transfer is binding between court which ordered the foreclosure. (3a)
the parties.
Section 4. Disposition of proceeds of sale. — The
f. Foreclosure amount realized from the foreclosure sale of the
mortgaged property shall, after deducting the costs of
There can only be foreclosure when the debt has become due, the sale, be paid to the person foreclosing the
and the debtor defaults in fulfillment. mortgage, and when there shall be any balance or
residue, after paying off the mortgage debt due, the
RULE 68, RULES of COURT same shall be paid to junior encumbrancers in the
(If you don’t want to read this/have already read this while order of their priority, to be ascertained by the court,
reviewing for Civpro [NAKS], skip ahead to the next table for a
summary. J) or if there be no such encumbrancers or there be a
Section 1. Complaint in action for foreclosure. — In an balance or residue after payment to them, then to the
action for the foreclosure of a mortgage or other mortgagor or his duly authorized agent, or to the
encumbrance upon real estate, the complaint shall person entitled to it. (4a)
set forth the date and due execution of the mortgage;
its assignments, if any; the names and residences of Section 5. How sale to proceed in case the debt is not
the mortgagor and the mortgagee; a description of all due. — If the debt for which the mortgage or
the mortgaged property; a statement of the date of encumbrance was held is not all due as provided in
the note or other documentary evidence of the the judgment as soon as a sufficient portion of the
obligation secured by the mortgage, the amount property has been sold to pay the total amount and
claimed to be unpaid thereon; and the names and the costs due, the sale shall terminate; and afterwards
residences of all persons having or claiming an as often as more becomes due for principal or interest
interest in the property subordinate in right to that of and other valid charges, the court may, on motion,
order more to be sold. But if the property cannot be

sold in portions without prejudice to the parties, the A C T N O . 3 1 3 5
whole shall be ordered to be sold in the first instance, An Act to Regulate the Sale of Property Under
and the entire debt and costs shall be paid, if the Special Powers Inserted In or Annexed To
proceeds of the sale be sufficient therefor, there being Real-Estate Mortgages (1924)
a rebate of interest where such rebate is proper. (5a)
(Sorry, you skip this at your own risk. Nevertheless, there’s still a
summary. If you are a #daredevil, next table is a summary.)
Section 6. Deficiency judgment. — If upon the sale of
any real property as provided in the next preceding Sec. 1. When a sale is made under a special power
section there be a balance due to the plaintiff after inserted in or attached to any real-estate mortgage
applying the proceeds of the sale, the court, upon hereafter made as security for the payment of money
motion, shall render judgment against the defendant or the fulfillment of any other obligation, the
for any such balance for which, by the record of the provisions of the following election shall govern as to
case, he may be personally liable to the plaintiff, upon the manner in which the sale and redemption shall be
which execution may issue immediately if the balance effected, whether or not provision for the same is
is all due at the time of the rendition of the judgment; made in the power.
otherwise; the plaintiff shall be entitled to execution
at such time as the balance remaining becomes due Sec. 2. Said sale cannot be made legally outside of
under the terms of the original contract, which time the province in which the property sold is situated;
shall be stated in the judgment. (6a) and in case the place within said province in which the
sale is to be made is subject to stipulation, such sale
Section 7. Registration. — A certified copy of the final shall be made in said place or in the municipal
order of the court confirming the sale shall be building of the municipality in which the property or
registered in the registry of deeds. If no right of part thereof is situated.
redemption exists, the certificate of title in the name
of the mortgagor shall be cancelled, and a new one Sec. 3. Notice shall be given by posting notices of the
issued in the name of the purchaser. sale for not less than twenty days in at least three
Where a right of redemption exists, the certificate public places of the municipality or city where the
of title in the name of the mortgagor shall not be property is situated, and if such property is worth
cancelled, but the certificate of sale and the order more than four hundred pesos, such notice shall also
confirming the sale shall be registered and a brief be published once a week for at least three
memorandum thereof made by the registrar of deeds consecutive weeks in a newspaper of general
upon the certificate of title. In the event the property is circulation in the municipality or city.
redeemed, the deed of redemption shall be registered
with the registry of deeds, and a brief memorandum Sec. 4. The sale shall be made at public auction,
thereof shall be made by the registrar of deeds on between the hours or nine in the morning and four in
said certificate of title. the afternoon; and shall be under the direction of the
If the property is not redeemed, the final deed of sheriff of the province, the justice or auxiliary justice of
sale executed by the sheriff in favor of the purchaser the peace of the municipality in which such sale has to
at the foreclosure sale shall be registered with the be made, or a notary public of said municipality, who
registry of deeds; whereupon the certificate of title in shall be entitled to collect a fee of five pesos each day
the name of the mortgagor shall be cancelled and a of actual work performed, in addition to his expenses.
new one issued in the name of the purchaser. (n)
Sec. 5. At any sale, the creditor, trustee, or other
Section 8. Applicability of other provisions. — The persons authorized to act for the creditor, may
provisions of sections 31, 32 and 34 of Rule 39 shall be participate in the bidding and purchase under the
applicable to the judicial foreclosure of real estate same conditions as any other bidder, unless the
mortgages under this Rule insofar as the former are contrary has been expressly provided in the mortgage
not inconsistent with or may serve to supplement the or trust deed under which the sale is made.
provisions of the latter. (8a)
Sec. 6. In all cases in which an extrajudicial sale is
Procedure for judicial foreclosure made under the special power hereinbefore referred
to, the debtor, his successors in interest or any judicial
1. Judicial action brought for purpose of foreclosure
creditor or judgment creditor of said debtor, or any
2. Hearing
person having a lien on the property subsequent to
3. Court order to pay within 90-120 days from entry
the mortgage or deed of trust under which the
of judgment
property is sold, may redeem the same at any time
4. Sale at public auction
within the term of one year from and after the date of
5. Confirmation of sale—Divests mortgagor of his
the sale; and such redemption shall be governed by
right to the property
the provisions of sections four hundred and sixty-four
6. Registration of confirmation with the Register of
to four hundred and sixty-six, inclusive, of the Code of
Deeds
Civil Procedure, in so far as these are not inconsistent
7. Issuance of TCT, subject to the right of redemption
with the provisions of this Act.
for banks and financial institutions
Sec. 7. In any sale made under the provisions of this Procedure for extrajudicial foreclosure
Act, the purchaser may petition the Court of First 1. Notice
Instance of the province or place where the property - Posted for 20 days in 3 public places in
or any part thereof is situated, to give him possession city/municipality where property is located
thereof during the redemption period, furnishing bond - If property > P400, published at least once a
in an amount equivalent to the use of the property for week for 3 consecutive weeks in newspaper of
a period of twelve months, to indemnify the debtor in general circulation in same city/municipality
case it be shown that the sale was made without - Notice to mortgagor not required, unless
violating the mortgage or without complying with the otherwise stipulated
requirements of this Act. Such petition shall be made 2. Sale at public auction
under oath and filed in form of an ex parte motion in 3. Registration of certificate of sale
the registration or cadastral proceedings if the 4. Redemption period—Possessor must give a bond
property is registered, or in special proceedings in the 5. Issuance of TCT
case of property registered under the Mortgage Law 6. Issuance of writ of possession to mortgagee, if
or under section one hundred and ninety-four of the redemption period expires without mortgagor’s
Administrative Code, or of any other real property exercise of his right (bond no longer required)
encumbered with a mortgage duly registered in the
office of any register of deeds in accordance with any Right of mortgagee to recover deficiency
existing law, and in each case the clerk of the court The right is available in both judicial and
shall, upon the filing of such petition, collect the fees extrajudicial foreclosures. Rule 68, ROC, specifically
specified in paragraph eleven of section one hundred grants this right to the mortgagee in a judicial
and fourteen of Act Numbered Four hundred and foreclosure. Meanwhile, Act 3135 does not specifically
ninety-six, as amended by Act Numbered Twenty- prohibit it, so the requirement is only that the
eight hundred and sixty-six, and the court shall, upon extrajudicial foreclosure is valid.
approval of the bond, order that a writ of possession However, the mortgagee cannot pursue the
issue, addressed to the sheriff of the province in which deficiency against a third person mortgagor, but
the property is situated, who shall execute said order must do so against the debtor. The action to recover
immediately. deficiency prescribes after 10 years.
Sec. 8. The debtor may, in the proceedings in which g. Redemption & equity of redemption
possession was requested, but not later than thirty
days after the purchaser was given possession, Redemption is the right to reacquire mortgaged property free of
petition that the sale be set aside and the writ of the lien, within a certain period.
possession cancelled, specifying the damages
suffered by him, because the mortgage was not Right of redemption vs. equity of redemption
violated or the sale was not made in accordance with Right of redemption Equity of redemption
the provisions hereof, and the court shall take After extrajudicial
cognizance of this petition in accordance with the foreclosure, generally
summary procedure provided for in section one within 1 year from
hundred and twelve of Act Numbered Four hundred registration of certificate
and ninety-six; and if it finds the complaint of the of sale; except where
debtor justified, it shall dispose in his favor of all or mortgagor is juridical
part of the bond furnished by the person who person, then 3 months
obtained possession. Either of the parties may appeal from foreclosure or
from the order of the judge in accordance with section before registration,
fourteen of Act Numbered Four hundred and ninety- whichever comes first
six; but the order of possession shall continue in effect Before judicial
Exceptions:
during the pendency of the appeal. foreclosure, within 90
a. Mortgagor is a
juridical person and days after service of
Sec. 9. When the property is redeemed after the When
mortgagee is a order requiring debtor to
purchaser has been given possession, the redeemer available
bank/financial pay OR after foreclosure
shall be entitled to deduct from the price of sale but prior to its
institution, then
redemption any rentals that said purchaser may have
period 3 months from confirmation
collected in case the property or any part thereof was
foreclosure (whether
rented; if the purchaser occupied the property as his
judicial or
own dwelling, it being town property, or used it
extrajudicial), or
gainfully, it being rural property, the redeemer may
before registration of
deduct from the price the interest of one per centum
certificate of sale, or
per month provided for in section four hundred and
before court confirms
sixty-five of the Code of Civil Procedure.
the sale, whichever
comes first
Sec. 10. This Act shall take effect on its approval.
b. Parties agree to
extend period
Payment of purchase 11. Extinguishment

price + interest and taxes
thereon, computed from
Causes for extinguishment of REM
date of registration of
How Payment of amount 1. Exercise of right to redemption/equity of
sale AND written notice
exercised ordered by court redemption
served on officer who
2. Lapse of period of redemption without mortgagor
made sale + duplicate
exercising his right
filed with Register of
3. Fulfillment of principal obligation
Deeds
Requisites of valid extension of redemption period

12. Distinguished from equitable
1. Voluntary agreement of parties to extend
mortgage
redemption period; and
Art. 1602, supra
2. Debtor’s commitment to pay redemption price on
a fixed date A R T . 1 6 0 3, C C
In case of doubt, a contract purporting to be a sale
Requisites of valid redemption with right to repurchase shall be construed as an
1. Redemption is made within 1 year from date of equitable mortgage. (n)
registration of certificate of sale
2. Tender of payment for full amount of #3, made A R T . 1 6 0 4, C C
within the prescribed period The provisions of Article 1602 shall also apply to a
3. Payment of the following, to either the purchaser contract purporting to be an absolute sale. (n)
or the officer who made the sale:
a. Purchase price of property A R T . 1 6 0 5, C C
b. 1% interest per month, counted from date of In the cases referred to in Articles 1602 and 1604, the
registration apparent vendor may ask for the reformation of the
c. Taxes instrument. (n)
d. Amount of prior lien, if any
4. Written notice of redemption served on officer who An equitable mortgage is one that lacks the formalities of a
made the sale mortgage, but the intent of the parties to burden the property as
5. Duplicate of written notice filed with Register of a security for a principal obligation is still evident, and nothing in
Deeds the contract is contrary to law.
Effects of valid exercise of right of redemption Art. 1602 provides the cases in which a contract, regardless of its
It does not “restore ownership” to mortgagor, since nomenclature, will be considered an equitable mortgage. The
ownership is not lost until the redemption period lien created on the thing thus cannot be defeated by requiring
lapses without the exercise of the right. Redemption compliance with the requisites of a REM.
only defeats purchaser’s inchoate right to the thing
and frees thing from encumbrance. PRUDENTIAL BANK v. ALVIAR (2005)
The exercise of the right to redemption also
admits the validity of the foreclosure, such that the A blanket mortgage clause, otherwise known as a
mortgagor is later estopped from impugning it. dragnet clause, is one that is meant to secure all
debts incurred in the past or future.
Who may exercise the right of redemption Dragnet clauses, however, will not be
Redemption may be exercised not only by the debtor, automatically applied to other loans that are
but also his successors-in-interest, i.e. the following: separately secured. In such a case, the separate
1. One to whom the debtor has transferred the right; securities will first have to be exhausted before
2. One to whom the debtor has conveyed his interest the property covered by a dragnet clause can be
in the property, for the purpose of redemption;
foreclosed.
3. One who succeeds to the debtor’s interest by
operation of law;
Facts: The Alviars executed a real estate mortgage over a parcel
4. One or more joint debtors who jointly owned the
of land in order to secure his loan worth P250k—the mortgage
property sold; or
contract contained a dragnet clause. Subsequently, they
5. One with a joint interest in the property, or his
acquired other loans that were secured with other pieces of
spouse or heirs.
property. Upon the default of the spouses in one of the
subsequently acquired loans, the bank attempted to foreclose
10. Risk of loss & deterioration the mortgage that secured the first loan through its dragnet
clause.
Art. 2103, supra
Issue: Which between the dragnet or the subsequently
The risk of loss is borne by the mortgagor, who remains the constituted securities should be foreclosed first – THE
owner of the thing. SUBSEQUENTLY ACQUIRED SECURITIES
period that follows because no distinction is made between a

Ratio: The constitution of further securities over loans already mortgage constituted over the property before or after the
secured by a dragnet clause gives rise to the presumption that auction sale thereof. Only the right to alienate the land through
the parties intended to rely on the subsequently constituted contracts of sale (jus disponendi) is prevented by the foreclosure
securities instead. As a consequence, the same will first have to of the property.
be exhausted before the creditor will be allowed to exercise his
rights on the mortgage covered by the dragnet clause. DBP v. CA (1998)
PEOPLE’S BANK & TRUST CO. v. DAHICAN An assignment of rights over property to
LUMBER CO. (1967) guarantee an obligation is, in effect, a mortgage.
A provision in a real estate mortgage contract Facts: DBP appropriated the leasehold rights of Lydia without
stating that (real or personal) property foreclosure proceedings on the strength of a provision in their
subsequently acquired will be included therein is mortgage that empowered the former to take actual possession
valid and requires no additional registration for of the property as attorney-in-fact. Subsequently, the bank
the mortgage over the same to be valid between entered into a conditional sale of the leasehold rights with Lydia
the parties and third parties. whose condition was that she would pay the amortizations on
the lot. Lydia failed to comply with the condition so DBP sent a
Facts: Dahican loaned various sums of money from the bank and notice of rescission and took possession of the fishpond and
secured the same with a real estate mortgage that contained a corresponding leasehold rights again. DBP sold the fishpond and
provision that extended the mortgage to properties subsequently leasehold rights through public bidding.
acquired. When the bank attempted to foreclose the mortgaged
properties, Dahican attempted to raise the defense that the Issue: WON DBP can appropriate the leasehold rights over the
mortgage over the movable properties because they were not fishpond without foreclosure proceedings – NO
registered in the Chattel Mortgage registry.
Held: First, the condition in their agreement that allowed DBP to
Issue: WON the subsequently acquired properties were covered take possession of the property is not in violation of Art. 2208. It
by the deeds of mortgage – YES merely provided the appointment of DBP as atty-in-fact to sell or
dispose of the property and apply the proceeds thereof to the
Held: Provisions in real estate mortgages that include debt owed to it by Lydia. DBP, however, exceeded its authority
subsequently acquired property are commonplace and legal. The when it actually appropriated the leasehold rights without first
properties did not have to be registered in the chattel mortgage foreclosing them—remember that they executed a contract of
registry because they had been treated as immovable properties conditional sale which meant that DBP acquired ownership over
by Dahican and the bank by virtue of the provision that included the property. The assignment merely operated as a security, a
them in the real estate mortgage. guarantee for the payment of the obligation; not an absolute
conveyance of title. DBP should have foreclosed the mortgage
upon Lydia’s default.
MEDIDA v. CA (1992)
SUICO v. PNB (2007)
The real estate mortgagor remains the absolute
owner of the property and what is delimited by the Unless the discrepancies in the notice of sale are
foreclosure and auction sale is the full right to fraudulent and would gravely misinform and deter
dispose of the land. potential bidders, they will not render the
extrajudicial foreclosure and subsequent sale null
Subsequent mortgagees after foreclosure are and void.
subordinate to the rights of the purchaser, and
thus only gain the mortgagee’s right of The creditor-mortgagee is bound to return the
redemption. excess, if any, of the purchase price of the
foreclosed property over the amount of the
Facts: During the redemption period for their foreclosed parcel of principal obligation.
land, the sps. Dolino entered into a contract of loan with the
bank and gave the foreclosed piece of land as security. They Facts: Sps. Suico sought to declare the extrajudicial foreclosure
defaulted in their loan contract and the bank foreclosed the of mortgage conducted by PNB as null and void because of the
parcel of land given as security. Gandioncho, the purchaser of the latter’s failure to account for how the purchase price of the
land when it was first foreclosed, came before the court and auctioned property was applied to their loan. Further, they also
asked it to nullify the second public auction sale. alleged that PNB failed to remit the excess of the purchase price
over the amount of their indebtedness to the sheriff. Also, they
Issue: WON the real estate mortgage in favor of the bank is void – assailed the auction sale because of discrepancies that existed in
NO the notice of sale regarding the amount owed by the Suicos.
Held: There is no obstacle to the legal creation of such a lien even Issue:
after the auction sale of the property within the redemption
1. WON the foreclosure sale was void for discrepancies between Held: The enforcement of such an agreement would be
the notice of sale and amounts actually owed – NO tantamount to the creditor automatically appropriating the
2. WON PNB should remit the excess of the proceeds to the property of the debtor upon the latter’s default. It does not
Suicos – YES matter that such an agreement was freely reached by the parties
because it was in contravention of explicit provisions of law.
Held: The discrepancy between the amount of petitioners’
obligation as reflected in the Notice of Sale and the amount RAMOS v. OBISPO (2013)
actually due and collected from the petitioners at the time of the
auction sale do not constitute the sort of fraud which renders the The law does not prohibit third parties to a loan
extrajudicial foreclosure sale null and void. from offering their property as security by way of a
real estate mortgage. In the absence of evidence
The application of the proceeds from the sale of the mortgaged signifying fraud or other means of vitiating
property to the mortgagor’s obligation is an act of payment, not consent, third party mortgages are presumed to
payment by dacion; hence, it is the mortgagee’s duty to return be legal and willingly entered into.
any surplus in the selling price to the mortgagor.
Facts: Dispute arose between Ramos and Obispo and the bank
regarding the constitution of a real estate mortgage over the
BUSTAMANTE v. ROSEL (1999) former’s property. Ramos claimed that Obispo defrauded him
into signing a blank real estate mortgage form that Obispo
A stipulation in a mortgage contract that contains subsequently used to mortgage the former’s property as security
an option to buy clause in case of default is in the for his own loan. As defense, Obispo alleged that Ramos was a
nature of a pactum commissorrium and is thus third party mortgagor and that no evidence had been presented
void. that pointed to any fraudulent act that he had committed.
Facts: Bustamante entered into a contract of loan with Rosel that Issue: WON the mortgage executed by Ramos that secured the
was secured by a parcel of land. Their agreement contained a obligations of Ramos is valid – YES
stipulation that in the event that Bustamente would default in
paying, then Rosel would have the option to buy the land for Held: Art. 2085 explicitly allows third parties to secure the loans
200k. Rosel refused to accept payment of the loan and insisted of others by pledging or mortgaging their own property; they are
that Bustamante allow him to exercise his contract to buy the otherwise referred to as accommodation mortgagors. As applied,
land. Ramos was not able provide clear and convincing evidence that
the execution of the real estate mortgage was attended to by
Issue: WON Rosel can exercise the option to buy the land – NO fraudulent acts of Obispo.
Held: First, it must be noted that Bustamante attempted to pay “It is not always necessary that the accommodation mortgagor
the loan even before it was due—it was only the refusal of Rosel be apprised beforehand of the entire amount of the loan nor
to accept payment that kept Bustamante from extinguishing his should it first be determined before the execution of the SPA in
obligation. favor of the debtor. This is especially true when the words used
by the parties indicate that the mortgage serves as a continuing
Second, the stipulation is void for being in the nature of pactum security for credit obtained as well as future loan availments.”
commissorium. The fact that Rosel would have first needed to (Belo v. PNB)
pay Bustamante 200k is of no moment; appropriation of the
creditor of the mortgaged property without going through Dissent (CJ Sereno):
foreclosure and an auction sale is void. The bank should have exercised extraordinary diligence in
making sure that the mortgage executed by the parties for a loan
ONG v. ROBAN (2008) that it extended was validly entered into.
A dacion en pago agreement between contracting ERMITANO v. PAGLAS (2013)

parties that allows the creditor to enforce the
same upon default of the debtor is in the nature of Until the expiration of the redemption period, a
pactum commissorium and is thus void. purchaser of property through foreclosure
proceedings has only an inchoate right to the
Facts: Ong loaned various amounts from Roban which were ownership of the property. As a result, the
secured by a real estate mortgaged that covered several parcels mortgagor is entitled to any rentals and fruits that
of land. They also entered into a dacion en pago agreement the foreclosed property may earn during the
wherein certain properties of Ong were to be accepted as redemption period.
payment if Ong failed to settle his liabilities within a year. Ong
then filed before the RTC to annul the agreement for being in the Facts: Ermitano owned a house and lot which he leased to
nature of a pactum commissorium. Paglas. Ermitano used the same house and lot as security for the
loans extended to him by Yap. When he defaulted in the
Issue: WON the dacion en pago was void – YES payment of those loans, Yap foreclosed the property, and then
sold the same to Paglas. Ermitano, notwithstanding the
conveyance of the foreclosed property to Paglas, demanded void.

rental payments from the latter.
Facts: Due to defaulting in their loan, the property of the Lims
Issue: WON Ermitano is entitled to the rentals due to him under was foreclosed by DBP and sold through public auction. The
his lease contract with Paglas – YES Lims now assail the validity of such sale because DBP failed to
give them personal notice of foreclosure to them. Such notice
Held: A purchaser of foreclosed property only becomes the was required under their mortgage contract.
absolute owner thereof upon the expiration of the redemption
period. The mortgagor, in the meantime, is entitled to possession Issue: WON the failure of DBP to comply with the additional
of the property and to whatever earnings that the property may conditions contained in their mortgage contract nullified the
produce. Ermitano is entitled to the rentals that accrued during foreclosure proceedings – YES
the redemption period.
Held: Although DBP had every right to foreclose the property, the
SPS. DELOS SANTOS v. METROBANK (2012) exercise of such right was subject to compliance to the conditions
laid down by the parties to the mortgage contract. The right to
Default in payment necessarily grants the something and the valid exercise of that right are two different
mortgagee the right to foreclose the mortgaged things.
property.
GOLDENWAY MERCHANDISING CORP. v.
EQUITABLE PCI BANK (2013)
Parties to a mortgage may validly stipulate that
the mortgagee is authorized to foreclose the The legislature may validly enact laws that
mortgage upon the debtor’s default in payment. shorten the redemption period with regard to
Where such stipulation has been validly entered mortgages.
into, a writ of preliminary injunction will not be
issued to prevent the mortgagee from exercising Facts: Equitable foreclosed the mortgaged properties of
such a right. Goldenway upon the latter’s default in payment. The attempt of
Goldenway to redeem the property was denied because the
Escalator clauses (stipulations that allow the redemption period had lapsed under RA 8791. Goldenway then
creditor to unilaterally increase the interest rate assailed the constitutionality of RA 8791 because it provided a
upon the occurrence of specified and pre- shorter period for redeeming foreclosed properties.
determined events) are valid.
Issue: WON RA 8791 is constitutional – YES
Facts: Delos Santos executed a real estate mortgage over a
parcel of land to secure their indebtedness to Metrobank. When Held: The enactment of RA 8791 does not impair vested rights or
they defaulted, Metrobank sought to extrajudicially foreclose the violate the equal protection clause. First, no vested rights are
mortgaged property. Delos Santos sought a writ of preliminary impaired because it only shortens the period for redemption; the
injunction that the RTC initially granted but subsequently right to redeem foreclosed property remains. Second, it does not
withdrew upon reconsideration. Note that their mortgage violate the equal protection clause because it applies equally to
contract and the related promissory notes contained a all juridical perosns. It is a valid exercise of the state’s police
stipulation that Metrobank could extrajudicially foreclose the power.
mortgage upon default.
Issue: WON the writ of preliminary injunction may be issued – NO
Held: The fact that Delos Santos had defaulted in paying his
obligations to Metrobank had been indisputably established. As
a result of such default, Metrobank had every right to foreclose
the property offered as security. Injunction will not issue in cases
wherein the applicant has no right to the relief sought. As
applied, Delos Santos had no right to prevent Metrobank from
foreclosing his mortgaged property because of his earlier default.
LIM v. DBP (2013)
While the law only requires the posting of notices

of the sale in 3 public places and the publication
of the same in a newspaper of general circulation
with regard to the sale of foreclosed properties,
the parties may impose additional conditions for
the validity of the same. Failure to comply with the
additional conditions provided for by the
mortgage contract renders the foreclosure sale
E. PLEDGE, REAL ESTATE M O RTGAGE &

CHATTEL MO RTGAGE DISTINGUISHED
Pledge & real estate mortgage
distinguished
Differences between pledge & real estate mortgage
Pledge Real estate mortgage
Subject matter Movables Immovables
To pledgee or a
Delivery third person agreed Delivery not necessary
upon
Not valid against
third persons unless
Validity Not valid against third
description of thing
against third persons unless
+ date of pledge
persons registered
appear in a public
instrument
May be made even
Must be made with
Sale by debtor without mortgagee’s
pledgee’s consent
consent
Pledge & chattel mortgage

distinguished
Similarities between pledge & chattel mortgage
1. Both executed to secure performance of principal
obligation
2. Both constituted only on personal property
3. Both are indivisible
4. Both constitute a lien on the property
5. Creditor cannot appropriate property for himself
in payment of the debt
6. Property must be sold when debtor defaults
7. Both extinguished by fulfillment of principal
obligation or destruction of thing given
via De Leon & De Leon, Jr.
Differences between pledge & chattel mortgage

Pledge Chattel mortgage
Delivery Necessary Not necessary
Registration in Required by law in
Registration Registry of Property Chattel Mortgage
not necessary Register
Procedure for Art. 2112, CC, Sec. 14, Act 1508
sale of thing governs governs
Debtor has no right
Debtor’s right to excess unless Excess of amount goes
to excess stipulated or legal to debtor
pledge
Creditor may not
Creditor’s right recover deficiency; Creditor may recover
to deficiency contrary stipulation deficiency from debtor
void
VI. ANTICHRESIS
A. CO NCEPT 5. Gratuitous or onerous
A R T . 2 1 3 2, C C It is gratuitous when a third person gives the fruits of his
By the contract of antichresis the creditor acquires the property, and onerous when it is the debtor who gives the fruits
right to receive the fruits of an immovable of his of his property.
debtor, with the obligation to apply them to the
payment of the interest, if owing, and thereafter to the 6. Formal
principal of his credit. (1881)
The contract must be in writing in order to be valid.
In a contract of antichresis, the creditor receives the rights to the
fruits of an immovable owned by the debtor, and the creditor has C. ESSENTIAL REQ UISITES
the obligation to apply said fruits to the interest of the principal
obligation, if owing, and thereafter, to the principal obligation 1. Consent
itself.
The parties must have capacity to consent to a contract.
B. CHARACTERISTICS
2. Object
A R T . 2 1 3 9, C C
The last paragraph of Article 2085, and Articles 2089 Art. 2132, supra
to 2091 are applicable to this contract. (1886a)
General rule: The antichresis covers all the fruits of the
Art. 2091, supra immovable thing. The immovable itself is not covered by the
antichresis.
Characteristics of antichresis (CUNAGOF)
1. Consensual Exception: The parties may stipulate that only certain fruits of
2. Unilateral the immovable be given in antichresis.
3. Nominate
4. Accessory 3. Cause
6. Formal Art. 1350, supra
1. Consensual D. PARTIES
Delivery is not required for the validity of the contract, but Art. 2085, supra
required only in order that the creditor may receive the fruits. Art. 2132, supra
2. Unilateral E. FO RM
It is unilateral because it imposes certain obligations only upon A R T . 2 1 3 4, C C
the antichretic creditor. The amount of the principal and of the interest shall
be specified in writing; otherwise, the contract of
3. Nominate antichresis shall be void. (n)
It is nominate because the Civil Code specifically gave it a name. What must be written
To be valid, a contract of antichresis must contain:
4. Accessory 1. The amount of the principal; and
2. The amount of the interest to be paid.
A contract of antichresis secures a principal obligation.
F. O BLIGATIO NS of the CREDITO R
Kinds of obligations that may be secured by antichresis
Valid Summary of creditor’s obligations
As to validity Voidable 1. Apply fruits to interest and principal
Unenforceable 2. Pay taxes and charges upon the estate
As to Pure
conditionality Conditional (suspensive or resolutory) 1. Apply fruits to interest &
As to time Present obligations principal
As to specific Payment
obligation Performance
Art. 2132, supra
A R T . 2 1 3 3, C C
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. (n)
A R T . 2 1 3 8, C C Summary on rules of ownership

The contracting parties may stipulate that the interest Transfer of ownership Does not occur
upon the debt be compensated with the fruits of the Enjoyed by creditor
property which is the object of the antichresis, Possession in the concept of holder—
provided that if the value of the fruits should exceed therefore creditor cannot acquire
the amount of interest allowed by the laws against Right to possession
immovable by prescription without
usury, the excess shall be applied to the principal. repudiating status as antichretic
(1885a) creditor
When depositor may Upon total payment of what is owed to
Summary of rules on application of fruits reacquire immovable the creditor
1. Taxes and charges upon estate
Payments to 2. Expenses necessary for preservation and 2. Creditor’ s acquisition of
which fruits repair ownership upon default
must be applied 3. Interest, if owing
4. Principal obligation A R T . 2 1 3 7, C C
Actual market value at the time fruits are to The creditor does not acquire the ownership of the
Value of fruits
be applied real estate for non-payment of the debt within the
General rule: All fruits may be applied to period agreed upon.
payments Every stipulation to the contrary shall be void. But
What fruits may
Exception: Parties may stipulate that only the creditor may petition the court for the payment of
be applied
certain fruits be applied, and the rest the debt or the sale of the real property. In this case,
redound to debtor the Rules of Court on the foreclosure of mortgages
shall apply. (1884a)
2. Pay taxes & charges upon the
estate Ownership upon the debtor’s default is pactum commissorium,
and is thus prohibited. Appropriation is not the proper remedy for
A R T . 2 1 3 5, C C a creditor to pursue the amount of his credit.
The creditor, unless there is a stipulation to the
contrary, is obliged to pay the taxes and charges upon Remedies of a creditor upon debtor’s default
the estate. 1. Action for specific performance
He is also bound to bear the expenses necessary 2. Judicial foreclosure
for its preservation and repair. 3. Extrajudicial foreclosure
The sums spent for the purposes stated in this These are alternative—one remedy precludes the
article shall be deducted from the fruits. (1882) others.
Summary of rules on taxes & charges 3. Indivisibility
1. Taxes
What charges
2. Expenses necessary for preservation Art. 2138, supra
are covered
3. Expenses of repair Art. 2089, supra
Charges must be deducted from the fruits Art. 2090, supra
Creditor is obligated to render an accounting
If fruits are not sufficient, the creditor must The provisions of indivisibility of pledge and mortgage are also
How charges answer for these expenses applicable to antichresis. Please see discussion of those
must be paid If the creditor does not want to incur the provisions.
expenses, he may return possession of the
immovable to the debtor, without prejudice H. RISK of LO SS & DETERIO RATIO N
to the continuing right to receive the fruits
The rule on risk of loss or deterioration in case of force majeure is
G. SPECIAL RULES res perit domino. Hence, the debtor, who continues to be the
owner of both the immovable and its fruits, must bear loss or
1. Ownership deterioration in such case.
A R T . 2 1 3 6, C C I. EXTINGUISHM ENT
The debtor cannot reacquire the enjoyment of the
immovable without first having totally paid what he Causes for extinguishment of antichresis
owes the creditor. 1. Fulfillment of principal obligation
But the latter, in order to exempt himself from 2. Loss of the thing given in antichresis
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. (1883)
J. DISTINGUISHED FRO M O THER

CO NTRACTS Facts: To secure a loan of P2000, Fernando executed a deed of
mortgage in favor of Diego over two pieces of land. After Diego
1. Pledge filed to timely pay his debts, Fernando proceeded to foreclose the
mortgage. As defense, Diego claimed that the contract between
Differences between pledge & antichresis them was actually one of antichresis because there was no
Pledge Antichresis stipulation of interest and because there was transfer of
Subject matter Movable property Fruits of immovable possession. Further, he alleged that Fernando had received a
Perfection Upon delivery By consent total of 120 cavans of palay from the fruits of his properties which
Kind Real Consensual was more than enough to pay for his indebtedness.
2. Real estate mortgage Issue: WON the contract between them was an antichresis
contract – NO
Differences between real estate mortgage & antichresis
Held: Even if the contract between the parties stipulated a
REM Antichresis
transfer of possession for the purpose of the creditor-mortgagee
Subject matter Immovable thing Fruits of immovable
gathering the fruits of the property, it did not contain a
Usually retained by Given to creditor so that stipulation that required the creditor-mortgagee to apply the
Possession
debtor he may derive fruits fruits to the payment of interest and then to the payment of the
Creditor entitled only principal obligation. Hence the contract is one of mortgage and
fruits, so no real right not antichresis. However, given the attendant circumstances, the
Creditor has a real
Kind of right created, unless Court said that Fernando could not appropriate the fruits without
right over property
registered in the accounting for the same. As a mortgagee in possession, he has
Registry of Property the same rights as an antichretic creditor.
Creditor obliged to pay,
Pay taxes & Creditor has no unless there is
charges obligation to pay stipulation to the
contrary
Creditor must apply
Application of Creditor not obliged
fruits to interest (if
fruits to apply fruits
owing) and principal
DIEGO v. FERNANDO (1960)
For a contract to be antichresis, it must be

expressly agreed between creditor and debtor
that the creditor, having been given possession of
the properties given as security, is to apply their
fruits to the payment of the interest, if owing, and
thereafter to the principal of his credit.
Rights & obligations of antichretic creditor

1. If the mortgagee acquires possession in any lawful
manner, he is entitled to retain such possession
until the indebtedness is satisfied and the property
redeemed
2. That the non-payment of the debt within the term
agreed does not vest the ownership of the property
in the creditor
3. That the general duty of the mortgagee in
possession towards the premises is that of the
ordinary prudent owner
4. That the mortgagee must account for the rents
and profits of the land, or its value for purposes of
use and occupation, any amount thus realized
going towards the discharge on the mortgage debt
5. That if the mortgage remains in possession after
the mortgage debt has been satisfied, he becomes
a trustee for the mortgagor as to the excess of the
rents and profits over such debt
6. That the mortgagor can only enforce his rights to
the land by an equitable action for an account and
to redeem
VII. CONCURRENCE & PREFERENCE of CREDITS
A. M EANING of CO NCURRENCE &
PREFERENCE of CREDITS a. Family home & support
Concurrence of credits A R T . 1 5 3, F A M I L Y C O D E
Two or more creditors possess equal rights or The family home is deemed constituted on a house
privileges over the same property or all of the property and lot from the time it is occupied as a family
of a debtor. residence. From the time of its constitution and so
long as any of its beneficiaries actually resides therein,
Preference of credit the family home continues to be such and is exempt
A creditor has a right to be preferred in the payment from execution, forced sale or attachment except as
of his claim above the others, i.e. to be paid first, out hereinafter provided and to the extent allowed by law.
of the debtor’s assets.
A R T . 2 0 5, F A M I L Y C O D E
B. NATURE & EFFECT of PREFERENCE The right to receive support under this Title as well as
Nature of any money or property obtained as such support shall
An exception to the general rule of concurrence not be levied upon on attachment or execution.
preference
Does not create an interest in or lien on the
Effect of b. Properties exempt from execution
property; simply creates for one creditor the
preference under the Rules of Court
right to be paid ahead of other creditors
SEC. 13, RULE 68, RULES of COURT
C. W HEN RULES APPLY Property exempt from execution. — Except as
otherwise expressly provided by law, the following
The rules on preference apply where two or more creditors have property, and no other, shall be exempt from
separate and distinct claims against the same debtor, who has execution:
insufficient property. Further, the credits must already be due. (a) The judgment obligor's family home as provided
by law, or the homestead in which he resides, and
Thus, in order for the preference to take effect, there must first be land necessarily used in connection therewith;
the proper proceedings for the debtor’s properties to be (b) Ordinary tools and implements personally used
inventoried and liquidated and his creditors’ claims established. by him in his trade, employment, or livelihood;
(c) Three horses, or three cows, or three carabaos, or
D. GENERAL RULES other beasts of burden, such as the judgment
obligor may select necessarily used by him in his
1. Liability of debtor ordinary occupation;
(d) His necessary clothing and articles for ordinary
A R T . 2 2 3 6, C C personal use, excluding jewelry;
The debtor is liable with all his property, present and
(e) Household furniture and utensils necessary for
future, for the fulfillment of his obligations, subject to housekeeping, and used for that purpose by the
the exemptions provided by law. (1911a)
judgment obligor and his family, such as the
judgment obligor may select, of a value not
Classification of debtor’s property exceeding one hundred thousand pesos;
1. Exempt property (f) Provisions for individual or family use sufficient
2. Property subject to special preferred credit for four months;
3. Property subject to ordinary preferred credit (g) The professional libraries and equipment of
4. Free property judges, lawyers, physicians, pharmacists, dentists,
engineers, surveyors, clergymen, teachers, and
The general rule is that all of the debtor’s property, both existing other professionals, not exceeding three hundred
and future, may be pursued to fulfill his obligations. The thousand pesos in value;
exceptions are provided below. (h) One fishing boat and accessories not exceeding
the total value of one hundred thousand pesos
2. Exempt properties owned by a fisherman and by the lawful use of
which he earns his livelihood;
Summary of debtor’s exempt properties (i) So much of the salaries, wages, or earnings of the
1. The family home; judgment obligor for his personal services within
2. Any money or property obtained in support; the four months preceding the levy as are
3. Properties subject from attachment and execution necessary for the support of his family;
under the Rules of Court; (j) Lettered gravestones;
4. Free patent or homestead land; (k) Monies, benefits, privileges, or annuities accruing
5. Assets that belong to the conjugal or in any manner growing out of any life
partnership/absolute community of property; insurance;
6. Undivided share on interest in co-owned property; (l) The right to receive legal support, or money or
and property obtained as such support, or any
7. Property under legal custody pension or gratuity from the Government;
8. Property held in trust by insolvent debtor (m) Properties specially exempted by law.
But no article or species of property mentioned in this f. Property under legal custody
section shall be exempt from execution issued upon a
judgment recovered for its price or upon a judgment Property under legal custody has been held to be exempt from
of foreclosure of a mortgage thereon. (12a) attachment or execution (Springer v. Odlin, 3 Phil 344, 1903).
c. Free patent or homestead land 3. Insolvency

SEC. 118, PUBLIC LAND ACT (CA 141) a. Meaning
Except in favor of the Government or any of its
branches, units or institutions, or legally constituted S E C . 4 ( P ), F R I A
banking corporations, lands acquired under free Insolvent shall refer to the financial condition of a
patent or homestead provisions shall not be subject to debtor that is generally unable to pay its or his
encumbrance or alienation from the date of the liabilities as they fall due in the ordinary course of
approval of the application and for a term of five years business or has liabilities that are greater than its or
from and after the date of issuance of the patent or his assets.
grant nor shall they become liable to the satisfaction
of any debt contracted prior to the expiration of said b. Governing law
period; but the improvements or crops on the land
may be mortgaged or pledged to qualified persons, A R T . 2 2 3 7, C C
associations, or corporations. Insolvency shall be governed by special laws insofar
No alienation, transfer, or conveyance of any as they are not inconsistent with this Code. (n)
homestead after five years and before twenty-five
years after issuance of title shall be valid without the The old Insolvency Law was superseded by the Financial
approval of the Secretary of Agriculture and Natural Rehabilitation and Insolvency Act (FRIA) of 2010.
Resources, which approval shall not be denied except
on constitutional and legal grounds. (As amended by c. Applicability to properties held in
Com. Act No. 456, approved June 8, 1939. trust
d. Assets belonging to conjugal A R T . 2 2 4 0, C C
partnership/absolute community Property held by the insolvent debtor as a trustee of
an express or implied trust, shall be excluded from the
A R T . 2 2 3 8, C C insolvency proceedings. (n)
So long as the conjugal partnership or absolute
community subsists, its property shall not be among Where the insolvent debtor is merely a trustee, and not the
the assets to be taken possession of by the assignee owner, of certain property, these should be excluded from
for the payment of the insolvent debtor's obligations, insolvency proceedings.
except insofar as the latter have redounded to the
benefit of the family. If it is the husband who is E. GENERAL CATEGO RIES of CREDIT
insolvent, the administration of the conjugal
partnership of absolute community may, by order of 1. Special preferred credits
the court, be transferred to the wife or to a third
person other than the assignee. (n) Tiers of special preferred credits
1. Taxes, which enjoy absolute preference
Requisites for application of this exemption 2. All other special preferred credits, paid pro rata
1. The partnership or community subsists; and
2. The obligations of the insolvent spouse have not Special preferred credits are merely enumerated in Arts. 2241
redounded to the family’s benefit. and 2242; these provisions do not give an order of payment (in
contrast to ordinary preferred credits under Art. 2244). There is
e. Undivided share on interest in the only concurrence among the credits enumerated.
co-owned property
SPCs do, however, create a lien on the properties specified, which
A R T . 2 2 3 9, C C may either be movables or immovables. Hence, the provisions on
If there is property, other than that mentioned in the pledge and mortgage are also applicable to them.
preceding article, owned by two or more persons, one
of whom is the insolvent debtor, his undivided share 2. Ordinary preferred credits
or interest therein shall be among the assets to be
taken possession of by the assignee for the payment
Ordinary preferred credits are set forth in Art. 2244, and should
of the insolvent debtor's obligations. (n)
be paid in the order specified therein.
The undivided share is an asset of the co-owner/insolvent debtor.
3. Common credits
An assignee of one co-owner’s share has no right to the share of
Common credits are described in Art. 2245, and enjoy no
the other co-owners. preference. They shall be paid pro rata.
(11) Credits for seeds and expenses for cultivation and

F. CLASSIFICATIO N of CREDITS harvest advanced to the debtor, upon the fruits
harvested;
Sequence of payment (12) Credits for rent for one year, upon the personal
1. Taxes property of the lessee existing on the immovable
2. All special preferred credits specified in Arts. 2241 leased and on the fruits of the same, but not on
(movables) and 2242 (immovables), paid pro rata money or instruments of credit;
3. If there is excess, it shall go to the debtor’s free (13) Claims in favor of the depositor if the depositary
property has wrongfully sold the thing deposited, upon the
4. If there is deficiency, it shall the creditors must be price of the sale.
paid according to Art. 2244 (ordinary preferred In the foregoing cases, if the movables to which the
credits lien or preference attaches have been wrongfully
taken, the creditor may demand them from any
1. Preferred credits with respect possessor, within thirty days from the unlawful
to specific movable property seizure. (1922a)
A R T . 2 2 4 1, C C A R T . 2 2 4 3, C C
With reference to specific movable property of the The claims or credits enumerated in the two
debtor, the following claims or liens shall be preceding articles shall be considered as mortgages
preferred: or pledges of real or personal property, or liens within
(1) Duties, taxes and fees due thereon to the State or the purview of legal provisions governing insolvency.
any subdivision thereof; Taxes mentioned in No. 1, Article 2241, and No. 1,
(2) Claims arising from misappropriation, breach of Article 2242, shall first be satisfied. (n)
trust, or malfeasance by public officials
committed in the performance of their duties, on A R T . 2 2 4 6, C C
the movables, money or securities obtained by Those credits which enjoy preference with respect to
them; specific movables, exclude all others to the extent of
(3) Claims for the unpaid price of movables sold, on the value of the personal property to which the
said movables, so long as they are in the preference refers.
possession of the debtor, up to the value of the
same; and if the movable has been resold by the A R T . 2 2 4 7, C C
debtor and the price is still unpaid, the lien may If there are two or more credits with respect to the
be enforced on the price; this right is not lost by same specific movable property, they shall be satisfied
the immobilization of the thing by destination, pro rata, after the payment of duties, taxes and fees
provided it has not lost its form, substance and due the State or any subdivision thereof. (1926a)
identity; neither is the right lost by the sale of the
thing together with other property for a lump A R T . 2 2 5 0, C C
sum, when the price thereof can be determined The excess, if any, after the payment of the credits
proportionally; which enjoy preference with respect to specific
(4) Credits guaranteed with a pledge so long as the property, real or personal, shall be added to the free
things pledged are in the hands of the creditor, or property which the debtor may have, for the payment
those guaranteed by a chattel mortgage, upon of the other credits. (1928a)
the things pledged or mortgaged, up to the value
thereof; 2. Preferred credits with respect
(5) Credits for the making, repair, safekeeping or to specific immovable
preservation of personal property, on the movable property
thus made, repaired, kept or possessed;
(6) Claims for laborers' wages, on the goods A R T . 2 2 4 2, C C
manufactured or the work done; With reference to specific immovable property and
(7) For expenses of salvage, upon the goods real rights of the debtor, the following claims,
salvaged; mortgages and liens shall be preferred, and shall
(8) Credits between the landlord and the tenant, constitute an encumbrance on the immovable or real
arising from the contract of tenancy on shares, on right:
the share of each in the fruits or harvest; (1) Taxes due upon the land or building;
(9) Credits for transportation, upon the goods (2) For the unpaid price of real property sold, upon
carried, for the price of the contract and the immovable sold;
incidental expenses, until their delivery and for (3) Claims of laborers, masons, mechanics and other
thirty days thereafter; workmen, as well as of architects, engineers and
(10) Credits for lodging and supplies usually furnished contractors, engaged in the construction,
to travellers by hotel keepers, on the movables reconstruction or repair of buildings, canals or
belonging to the guest as long as such movables other works, upon said buildings, canals or other
are in the hotel, but not for money loaned to the works;
guests; (4) Claims of furnishers of materials used in the
construction, reconstruction, or repair of (5) Credits and advancements made to the debtor for
buildings, canals or other works, upon said support of himself or herself, and family, during
buildings, canals or other works; the last year preceding the insolvency;
(5) Mortgage credits recorded in the Registry of (6) Support during the insolvency proceedings, and
Property, upon the real estate mortgaged; for three months thereafter;
(6) Expenses for the preservation or improvement of (7) Fines and civil indemnification arising from a
real property when the law authorizes criminal offense;
reimbursement, upon the immovable preserved (8) Legal expenses, and expenses incurred in the
or improved; administration of the insolvent's estate for the
(7) Credits annotated in the Registry of Property, in common interest of the creditors, when properly
virtue of a judicial order, by attachments or authorized and approved by the court;
executions, upon the property affected, and only (9) Taxes and assessments due the national
as to later credits; government, other than those mentioned in
(8) Claims of co-heirs for warranty in the partition of Articles 2241, No. 1, and 2242, No. 1;
an immovable among them, upon the real (10) Taxes and assessments due any province, other
property thus divided; than those referred to in Articles 2241, No. 1, and
(9) Claims of donors or real property for pecuniary 2242, No. 1;
charges or other conditions imposed upon the (11) Taxes and assessments due any city or
donee, upon the immovable donated; municipality, other than those indicated in
(10) Credits of insurers, upon the property insured, for Articles 2241, No. 1, and 2242, No. 1;
the insurance premium for two years. (1923a) (12) Damages for death or personal injuries caused by
a quasi-delict;
Art. 2243, supra (13) Gifts due to public and private institutions of
charity or beneficence;
A R T . 2 2 4 8, C C (14) Credits which, without special privilege, appear in
Those credits which enjoy preference in relation to (a) a public instrument; or (b) in a final judgment,
specific real property or real rights, exclude all others if they have been the subject of litigation. These
to the extent of the value of the immovable or real credits shall have preference among themselves
right to which the preference refers. in the order of priority of the dates of the
instruments and of the judgments, respectively.
A R T . 2 2 4 9, C C (1924a)
If there are two or more credits with respect to the
same specific real property or real rights, they shall be A R T. 1 1 0, L A B O R C O D E
satisfied pro rata, after the payment of the taxes and In the event of bankruptcy or liquidation of an
assessments upon the immovable property or real employer’s business, his workers shall enjoy first
right. (1927a) preference as regards their wages and other monetary
claims, any provisions of law to the contrary
Art. 2250, supra notwithstanding. Such unpaid wages and monetary
claims shall be paid in full before claims of the
3. Order of preference with government and other creditors may be paid. (As
respect to other properties of amended by Sec. 1, Rep. Act No. 6715, March 21, 1989).
the debtor
Art. 110 of the Labor Code is an ordinary preferred credit, whose
A R T . 2 2 4 4, C C effect is to raise #2 of Art. 2244 to first priority.
With reference to other property, real and personal, of
the debtor, the following claims or credits shall be 4. Other credits enjoying no
preferred in the order named: preference
(1) Proper funeral expenses for the debtor, or
children under his or her parental authority who A R T . 2 2 4 5, C C
have no property of their own, when approved by Credits of any other kind or class, or by any other right
the court; or title not comprised in the four preceding articles,
(2) Credits for services rendered the insolvent by shall enjoy no preference. (1925)
employees, laborers, or household helpers for one
year preceding the commencement of the A R T . 2 2 5 1, C C
proceedings in insolvency; Those credits which do not enjoy any preference with
(3) Expenses during the last illness of the debtor or respect to specific property, and those which enjoy
of his or her spouse and children under his or her preference, as to the amount not paid, shall be
parental authority, if they have no property of satisfied according to the following rules:
their own; (1) In the order established in Article 2244;
(4) Compensation due the laborers or their (2) Common credits referred to in Article 2245 shall
dependents under laws providing for indemnity be paid pro rata regardless of dates. (1929a)
for damages in cases of labor accident, or illness
resulting from the nature of the employment;
DE BARETTO v. VILLANUEVA (1961)

Art. 2242 applies only when there’s an actual
The Civil Code provisions on concurrence and concurrence of credits owed to several creditors.
preference of credits may only be invoked when all
the claims of the preferred creditors may be Facts: Dispute arose because the municipality failed to pay the
bindingly adjudicated in proper proceedings. construction company the amounts owed to it for the
construction of the public market. The construction company
Facts: Rosario Cruzado took out a loan from RFC and mortgaged filed a case against the municipality for breach of contract,
her land, but she failed to pay, so RFC foreclosed and acquired specific performance, and collection of money with a prayer for
the land. Later, RFC resold the land to her conditionally, preliminary attachment and the enforcement of creditor’s lien.
authorizing her to sell it. She sold it to respondent Villanueva, The RTC ruled favorably and granted all the reliefs prayed for. By
who borrowed money from petitioner De Baretto to pay for the virtue of the creditor’s lien, the RTC allowed the construction
land. To secure the loan, Villanueva mortgaged the land to De company to take possession of the public market and to apply
Baretto (silly woman). whatever proceeds it may earn to the amount owed to it by the
municipality.
When Villanueva failed to pay both Cruzado for the value of the
land and De Baretto the value of the loan, both her creditors filed Issue: WON the contractor’s lien was properly granted – NO
actions—Cruzado, to recover the land, and De Baretto, to
foreclose upon it. When the lower court granted the foreclosure Held: A creditor’s lien on the strength of Art. 2242 may only be
to De Baretto, Cruzado filed to attach a “vendor’s lien” to the issued by the court within the context of a proceeding where the
property. claims of preferred creditors may be bindingly adjudicated. As
applied to the case at bar, there were no proceedings of the sort
Issue: Whether Cruzado may attach a vendor’s lien to the that would allow for all the claims of the preferred creditors to be
property. NO. (The court held yes in 1961, but reversed itself in adjudicated (note that the construction company filed a
1962.) complaint for breach of contract and specific performance) – the
claims of other potential preferred creditors as regards the
Held: Cruzado cannot claim the proceeds of the foreclosure sale, construction of the public market place could not be adjudicated
because it is not the proper proceeding contemplated by law to within the context of JL Bernardo’s suit against the municipality.
enforce preferences. Her claim as an unpaid vendor thus did not
acquire the rank of a statutory lien co-equal to the recorded CORDOVA v. REYES (2007)
encumbrance of a mortgage. Hence, Cruzado’s claim is only
subordinate to the mortgage to De Baretto. Art. 2241 only grants a person the status of
preferred creditor when what he claims is a
DBP v. CA (2001) specific movable property—money is a generic
piece of property.
Extrajudicial foreclosures are not the proper
liquidation proceedings required by the civil code Facts: Cordova’s share of stock were sold without his consent and
before the provisions on concurrence and the proceeds of the said sale were added to the assets of
preference of credits (in this case Art. 2242) may Philfinance which was undergoing receivership. Cordova filed a
be applied. petition before the SEC in order to recover the monetary value of
the stocks. The SEC ruled that he was a mere ordinary creditor
Facts: Upon foreclosing the mortgaged properties of MMIC, PNB and thus not entitled to recover the entire monetary equivalent of
and DBP assigned the rights over the foreclosed properties to his alienated stocks. Cordova argued that under Art 2241, he was
Nocnoc Mining, Maricalum Mining Corp., and the Asset a preferred creditor because his stocks were misappropriated by
Privatization Trust. Before the foreclosed properties could be public officials.
sold, however, Remington filed a complaint against all of the
previously mentioned parties in order to secure payment for Issue: WON he was a preferred creditor – NO
construction materials and merchandise that MMIC obtained
from it on credit. It asserted its rights as a preferred creditor Held: Art. 2241 applies only in cases where the property involved
under Art. 2242. is specific movable property. As applied to the case at bar, the
stocks whose value he wished to recover seized to be specific
Issue: WON Remington, as a preferred creditor, may recover the movable property the moment they were sold. The sale of the
amount it extended to MMIC through the extrajudicial shares of stock had the effect of converting the same from
foreclosure proceedings initiated by PNB et al.—NO specific or determinate movable properties to generic property
that was capable of commingling.
Held: In order to avail of the benefits provided by Art. 2242 to
preferred creditors, all the preferred creditors must be convened Note: Sir says that, using the provisions on Sales, he should still
and their claims ascertained in the proper proceeding. All their have been able to recover his property because it was alienated
claims must be bindingly adjudicated. Extrajudicial foreclosure without his consent
sales are not the proceedings envisioned by the law for the
enforcement of the preferred creditor’s claims. PDIC v. BIR
JL BERNARDO CONSTRUCTION v. CA (2000) The PDIC need not obtain a tax clearance before
proceeding with liquidation proceedings for the

following reasons:
1. Banks under liquidation by the PDIC as ordered
by the monetary board constitute special cases
governed by special rules and procedures that
do not require a tax clearance from the BIR
2. The interest of the BIR in liquidation
proceedings is best served by a final tax return;
it is unreasonable for the court to require a tax
clearance before it approves a project of
distribution regarding a bank under liquidation
3. Requiring a tax clearance runs contrary to the
spirit and intent of the law because it would
make the tax liabilities of the bank under
liquidation absolutely preferred in all
instances—the law does not mean to grant
taxes owed the government a preference to
that extent.
Facts: The Monetary Board placed RBTI under receivership and

appointed PDIC as receiver. PDIC determined that RBTI was
insolvent and proceeded to commence liquidation proceedings
with the approval of the Monetary Board. The BIR, as creditor,
prayed that the liquidation proceedings be suspended until PDIC
had secured a tax clearance with regard to the bank’s obligations
in compliance with the Tax Reform Act of 1997.
Issue: WON the PDIC needed to secure a tax clearance before it

could carry out the duly-approved liquidation proceedings – NO
Held: [see doctrine]
VIII. SPECIAL LAWS
A. FINANCIAL REHABILITATIO N & c. Rehabilitation
INSO LVENCY ACT of 2010 (FRIA)
S E C . 4 ( G G ), F R I A
1. Purpose of the law Rehabilitation shall refer to the restoration of the
debtor to a condition of successful operation and
S E C . 2, F R I A solvency, if it is shown that its continuance of
Declaration of Policy. - It is the policy of the State to operation is economically feasible and its creditors
encourage debtors, both juridical and natural persons, can recover by way of the present value of payments
and their creditors to collectively and realistically projected in the plan, more if the debtor continues as
resolve and adjust competing claims and property a going concern than if it is immediately liquidated.
rights. In furtherance thereof, the State shall ensure a
timely, fair, transparent, effective and efficient d. Liquidation
rehabilitation or liquidation of debtors. The
rehabilitation or liquidation shall be made with a view S E C . 4 ( U ), F R I A
to ensure or maintain certainly and predictability in Liquidation shall refer to the proceedings under
commercial affairs, preserve and maximize the value Chapter V of this Act.
of the assets of these debtors, recognize creditor
rights and respect priority of claims, and ensure Types of proceedings under the FRIA
equitable treatment of creditors who are similarly Debtor asks for a reprieve in his obligation to
Suspension of
situated. When rehabilitation is not feasible, it is in the pay outstanding obligations, because of the
payments
interest of the State to facilities a speedy and orderly absence of liquid assets
liquidation of these debtor's assets and the Seeks to restore debtor to financially
settlement of their obligations. Rehabilitation
successful operation and solvency
As a last resort, debtor’s assets are inventoried
Liquidation
The purpose of the FRIA is to provide for a fair procedure for the and used to discharge his liabilities
liquidation and rehabilitation of an insolvent debtor.
3. Suspension of payment
2. Concepts
a. Concept
a. Insolvent
The purpose of a suspension is to give the debtor breathing
S E C . 4 ( P ), F R I A space, so he can liquidate or acquire properties in order to pay.
Insolvent shall refer to the financial condition of a
debtor that is generally unable to pay its or his b. To whom available
liabilities as they fall due in the ordinary course of
business or has liabilities that are greater than its or Only an individual debtor may file for suspension of payment.
his assets. Hence, a suspension of payment is always voluntary.
The definition of an “insolvent” under the FRIA is an expanded c. Procedure

one, covering also a debtor who is illiquid.
Procedure for suspension of payments
Insolvency vs. illiquidity 1. Filing of petition by the debtor—operates as:
Insolvency Illiquidity - Stay of all collection proceedings by creditors
Liabilities > assets Liabilities < assets - Prohibits payment to any creditor
Assets not sufficient to pay BUT assets not in cash—therefore - Prohibits debtor from selling or encumbering
for liabilities cannot pay when debt is due property
Does not cover secured creditors
b. Suspension of payment 2. Action by court—finding that petition is sufficient
in form and substance
S E C . 9 4, F R I A 3. Court order to convene creditors for approval or
Petition. - An individual debtor who, possessing disapproval
sufficient property to cover all his debts but foreseeing - Quorum requirement: Creditors representing
the impossibility of meeting them when they 3/5 of total liabilities
respectively fall due, may file a verified petition that he - Approval requirement: 2/3 of creditors
be declared in the state of suspension of payments by representing 3/5 of total liabilities
the court of the province or city in which he has - Secured creditors need not attend
resides for six (6) months prior to the filing of his - If no agreement is reached between the
petition. He shall attach to his petition, as a minimum: creditors, or there is no quorum, the court may
(a) a schedule of debts and liabilities; (b) an inventory rule upon petition as it pleases
of assess; and (c) a proposed agreement with his 4. Approval or disapproval—Creditors may object
creditors. and court will rule whether to sustain (no
agreement) or to disregard (agreement approved)
5. Court order
- Agreement must contain a schedule of lapse when three (3) months shall have passed
liabilities without the proposed agreement being accepted by
- Binding upon creditors: the creditors or as soon as such agreement is denied.
a. Whose debts are included in the schedule No creditor shall sue or institute proceedings to
b. Who were properly summoned (therefore collect his claim from the debtor from the time of the
binding even upon those who made filing of the petition for suspension of payments and
objections) for as long as proceedings remain pending except:
- Agreement NOT binding upon secured (a) Those creditors having claims for personal labor,
creditors, who may enforce the debtor’s liability maintenance, expense of last illness and funeral
according the agreement of the wife or children of the debtor incurred in
the sixty (60) days immediately prior to the filing
Filing of petition of the petition; and
(b) Secured creditors.
Sec. 94, FRIA, supra
Creditors’ meeting
Action on petition
S E C . 9 7, F R I A
S E C . 9 5, F R I A Creditors' Meeting. - The presence of creditors holding
Action on the Petition. - If the court finds the petition claims amounting to at least three-fifths (3/5) of the
sufficient in form and substance, it shall, within five (5) liabilities shall be necessary for holding a meeting.
working days from the filing of the petition, issue an The commissioner appointed by the court shall
Order: preside over the meeting and the clerk of court shall
(a) Calling a meeting of all the creditors named in act as the secretary thereof, subject to the following
the schedule of debts and liabilities at such time rules:
not less than fifteen (15) days nor more than forty (a) The clerk shall record the creditors present and
(40) days from the date of such Order and amount of their respective claims;
designating the date, time and place of the (b) The commissioner shall examine the written
meeting; evidence of the claims. If the creditors present
(b) Directing such creditors to prepare and present hold at least three-fifths (3/5) of the liabilities of
written evidence of their claims before the the individual debtor, the commissioner shall
scheduled creditors' meeting; declare the meeting open for business;
(c) Directing the publication of the said order in a (c) The creditors and individual debtor shall discuss
newspaper of general circulation published in the the propositions in the proposed agreement and
province or city in which the petition is filed once put them to a vote;
a week for two (2) consecutive weeks, with the (d) To form a majority, it is necessary:
first publication to be made within seven (7) days (1) That two-thirds (2/3) of the creditors voting
from the time of the issuance of the Order; unite upon the same proposition; and
(d) Directing the clerk of court to cause the sending (2) That the claims represented by said majority
of a copy of the Order by registered mail, postage vote amount to at least three- fifths (3/5) of
prepaid, to all creditors named in the schedule of the total liabilities of the debtor mentioned
debts and liabilities; in the petition; and
(e) Forbidding the individual debtor from selling, (e) After the result of the voting has been
transferring, encumbering or disposing in any announced, all protests made against the
manner of his property, except those used in the majority vote shall be drawn up, and the
ordinary operations of commerce or of industry in commissioner and the individual debtor together
which the petitioning individual debtor is with all creditors taking part in the voting shall
engaged so long as the proceedings relative to sign the affirmed propositions.
the suspension of payments are pending; No creditor who incurred his credit within ninety (90)
(f) Prohibiting the individual debtor from making any days prior to the filing of the petition shall be entitled
payment outside of the necessary or legitimate to vote.
expenses of his business or industry, so long as
the proceedings relative to the suspension of S E C . 9 8, F R I A
payments are pending; and Persons Who May Refrain From Voting. - Creditors who
(g) Appointing a commissioner to preside over the are unaffected by the Suspension Order may refrain
creditors' meeting. from attending the meeting and from voting therein.
Such persons shall not be bound by any agreement
S E C . 9 5, F R I A determined upon at such meeting, but if they should
Actions Suspended. - Upon motion filed by the join in the voting they shall be bound in the same
individual debtor, the court may issue an order manner as are the other creditors.
suspending any pending execution against the
individual debtor. Provide, That properties held as S E C . 9 9, F R I A
security by secured creditors shall not be the subject Rejection of the Proposed Agreement. - The proposed
of such suspension order. The suspension order shall agreement shall be deemed rejected if the number of
creditors required for holding a meeting do not attend

thereat, or if the two (2) majorities mentioned in S E C . 1 0 2, F R I A
Section 97 hereof are not in favor thereof. In such Failure of Individual Debtor to Perform Agreement. - If
instances, the proceeding shall be terminated without the individual debtor fails, wholly or in part, to
recourse and the parties concerned shall be at liberty perform the agreement decided upon at the meeting
to enforce the rights which may correspond to them. of the creditors, all the rights which the creditors had
against the individual debtor before the agreement
Approval of agreement & objections shall revest in them. In such case the individual debtor
may be made subject to the insolvency proceedings in
S E C . 1 0 0, F R I A the manner established by this Act.
Objections. - If the proposal of the individual debtor, or
any amendment thereof made during the creditors'
meeting, is approved by the majority of creditors in
4. Rehabilitation
accordance with Section 97 hereof, any creditor who
a. Concept
attended the meeting and who dissented from and
protested against the vote of the majority may file an Sec. 4(gg), FRIA, supra
objection with the court within ten (10) days from the
date of the last creditors' meeting. The causes for Rehabilitation
which objection may be made to the decision made by
Restore debtor to successful operation and
the majority during the meeting shall be: (a) defects in Goal
solvency
the call for the meeting, in the holding thereof and in
1. Feasibility of restoration to successful
the deliberations had thereat which prejudice the
Conditions for operation and solvency
rights of the creditors; (b) fraudulent connivance
undertaking 2. Rehab is of greater value to creditors
between one or more creditors and the individual
rehabilitation than if corporation was immediately
debtor to vote in favor of the proposed agreement; or
liquidated
(c) fraudulent conveyance of claims for the purpose of
obtaining a majority. The court shall hear and pass
b. Types
upon such objection as soon as possible and in a
summary manner.
Types of rehabilitation
In case the decision of the majority of creditors to
Type Definition
approve the individual debtor's proposal or any
As to who Voluntary Filed by debtor
amendment thereof made during the creditors'
meeting is annulled by the court, the court shall files Involuntary Filed by creditor
declare the proceedings terminated and the creditors Involves court
shall be at liberty to exercise the rights which may Court supervised proceedings; usual type of
correspond to them. rehab
Parties ask court to
As to court
Court order approve a rehab plan that
supervision Pre-negotiated
has been previously
S E C . 1 0 1, F R I A agreed upon
Effects of Approval of Proposed Agreement. - If the Parties agree among
Out of court
decision of the majority of the creditors to approve the themselves
proposed agreement or any amendment thereof
made during the creditors' meeting is uphold by the S E C . 1 2, F R I A
court, or when no opposition or objection to said Petition to Initiate Voluntary Proceedings by Debtor. -
decision has been presented, the court shall order When approved by the owner in case of a sole
that the agreement be carried out and all parties proprietorship, or by a majority of the partners in case
bound thereby to comply with its terms. of a partnership, or in case of a corporation, by a
The court may also issue all orders which may be majority vote of the board of directors or trustees and
necessary or proper to enforce the agreement on authorized by the vote of the stockholders
motion of any affected party. The Order confirming representing at least two-thirds (2/3) of the
the approval of the proposed agreement or any outstanding capital stock, or in case of nonstock
amendment thereof made during the creditors' corporation, by the vote of at least two-thirds (2/3) of
meeting shall be binding upon all creditors whose the members, in a stockholder's or member's meeting
claims are included in the schedule of debts and duly called for the purpose, an insolvent debtor may
liabilities submitted by the individual debtor and who initiate voluntary proceedings under this Act by filing
were properly summoned, but not upon: (a) those a petition for rehabilitation with the court and on the
creditors having claims for personal labor, grounds hereinafter specifically provided. The petition
maintenance, expenses of last illness and funeral of shall be verified to establish the insolvency of the
the wife or children of the debtor incurred in the sixty debtor and the viability of its rehabilitation, and
(60) days immediately prior to the filing of the include, whether as an attachment or as part of the
petition; and (b) secured creditors who failed to attend body of the petition, as a minimum the following:
the meeting or refrained from voting therein. (a) Identification of the debtor, its principal activities
and its addresses;
(b) Statement of the fact of and the cause of the fifty percent (50%) of the total unsecured claims of
debtor's insolvency or inability to pay its the debtor. The petition shall include as a minimum:
obligations as they become due; (a) A schedule of the debtor's debts And liabilities;
(c) The specific relief sought pursuant to this Act; (b) An inventory of the debtor's assets;
(d) The grounds upon which the petition is based; (c) The pre-negotiated Rehabilitation Plan, including
(e) Other information that may be required under the names of at least three (3) qualified nominees
this Act depending on the form of relief for rehabilitation receiver; and
requested; (d) A summary of disputed claims against the debtor
(f) Schedule of the debtor's debts and liabilities and a report on the provisioning of funds to
including a list of creditors with their addresses, account for appropriate payments should any
amounts of claims and collaterals, or securities, if such claims be ruled valid or their amounts
any; adjusted.
(g) An inventory of all its assets including receivables
and claims against third parties; S E C . 8 3, F R I A
(h) A Rehabilitation Plan Out-of-Court or Informal Restructuring Agreements
(i) The names of at least three (3) nominees to the and Rehabilitation Plans. - An out-of-curt or informal
position of rehabilitation receiver; and restructuring agreement or Rehabilitation Plan that
(j) Other documents required to be filed with the meets the minimum requirements prescribed in this
petition pursuant to this Act and the rules of chapter is hereby recognized as consistent with the
procedure as may be promulgated by the objectives of this Act.
Supreme Court.
A group of debtors may jointly file a petition for c. Who may file petition
rehabilitation under this Act when one or more of its
members foresee the impossibility of meeting debts Sec. 12, FRIA, supra
when they respectively fall due, and the financial Sec. 13, FRIA, supra
distress would likely adversely affect the financial Sec. 76, FRIA, supra
condition and/or operations of the other members of Sec. 83, FRIA, supra
the group and/or the participation of the other
members of the group is essential under the terms Types of entities who may file &
and conditions of the proposed Rehabilitation Plan. who must approve petition for rehab
Debtor entities Who must consent to petition
S E C . 1 3, F R I A Single proprietorship Owner
Circumstances Necessary to Initiate Involuntary Partnership Majority of partners
Proceedings. - Any creditor or group of creditors with a Majority of board of directors + 2/3
claim of, or the aggregate of whose claims is, at least Corporation of stockholders of outstanding
One Million Pesos (Php1,000,000.00) or at least capital stock
twenty-five percent (25%) of the subscribed capital Creditors Amount of claim
stock or partners' contributions, whichever is higher, At least P1M or 25% of
may initiate involuntary proceedings against the All creditors capital/partner’s contribution,
debtor by filing a petition for rehabilitation with the whichever is higher
court if:
(a) There is no genuine issue of fact on law on the d. Procedure for court-supervised
claim/s of the petitioner/s, and that the due and rehabilitation
demandable payments thereon have not been (Super haba ng provisions. I suggest reading the summaries first. J)
made for at least sixty (60) days or that the
debtor has failed generally to meet its liabilities Procedure for court-supervised rehabilitation
as they fall due; or 1. Filing of petition, which alleges facts to support
(b) A creditor, other than the petitioner/s, has rehab;
initiated foreclosure proceedings against the 2. Action by court
debtor that will prevent the debtor from paying - If petition not sufficient in form and substance,
its debts as they become due or will render it allow amendment/supplement
insolvent. 3. Commencement order
- Issued if petition sufficient in form and
S E C . 7 6, F R I A substance
Petition by Debtor. - An insolvent debtor, by itself or - Includes stay/suspension order, except as
jointly with any of its creditors, may file a verified provided in Sec. 18 (see next table for
petition with the court for the approval of a pre- summary)
negotiated Rehabilitation Plan which has been 4. Initial hearing
endorsed or approved by creditors holding at least 5. Rehab receiver submits report as to WON rehab is
two-thirds (2/3) of the total liabilities of the debtor, feasible
including secured creditors holding more than fifty 6. Court determines WON to give due course to
percent (50%) of the total secured claims of the petition
debtor and unsecured creditors holding more than 7. Rehab receiver prepares rehab plan
- Actual plan on how to achieve the rehab goals S E C . 1 4, F R I A

- Must be approved by each class of creditor Petition to Initiate Involuntary Proceedings. - The
(vote requirement = 50% of total claims of creditor/s' petition for rehabilitation shall be verified
each class) to establish the substantial likelihood that the debtor
- Other creditors may object may be rehabilitated, and include:
8. Hearing for creditors’ objections (a) Identification of the debtor its principal activities
9. Approval/disapproval of rehab plan by court and its address;
- Even if creditors disapprove, court may approve (b) The circumstances sufficient to support a petition
rehab plan, given all the requisites exist to initiate involuntary rehabilitation proceedings
- Binding effect: under Section 13 of this Act;
a. Upon all creditors & debtor (c) The specific relief sought under this Act;
b. Upon all those who will be affected (d) A Rehabilitation Plan;
10. Termination proceedings if goals are achieved and (e) The names of at least three (3) nominees to the
creditors are paid position of rehabilitation receiver;
(f) Other information that may be required under
Effects of commencement order this Act depending on the form of relief
1. Prohibit/render void any extrajudicial activity to requested; and
seize debtor’s property, sell his encumbered B. (g) Other documents required to be filed with the
property, or any attempt to enforce a claim against petition pursuant to this Act and the rules of
him procedure as may be promulgated by the
2. Render void any setoff of any debt owed to the Supreme Court.
debtor by any of the creditors
3. Render void any lien against the debtor’s property Action on the petition
S E C . 1 5, F R I A
Exceptions to stay/suspension order Action on the Petition. - If the court finds the petition
1. Cases pending appeal in SC as of commencement for rehabilitation to be sufficient in form and
date; substance, it shall, within five (5) working days from
2. Cases pending at specialized court/quasi-judicial the filing of the petition, issue a Commencement
agency, subject to court’s discretion; Order. If, within the same period, the court finds the
3. Enforcement of claims against sureties & other petition deficient in form or substance, the court may,
persons solidarily liable with debtor, or third in its discretion, give the petitioner/s a reasonable
party/accommodation mortgagors; period of time within which to amend or supplement
4. Customers/clients of securities market participant; the petition, or to submit such documents as may be
5. Actions of licensed broker/dealer to sell pledged necessary or proper to put the petition in proper order.
securities In such case, the five (5) working days provided above
6. Clearing and settlement of financial transactions for the issuance of the Commencement Order shall be
through duly authorized clearing agencies or reckoned from the date of the filing of the amended or
similar entities supplemental petition or the submission of such
7. Criminal action against individual debtor or any documents.
officer/director/partner of debtor corporation
Issuance of commencement
Effects of pending rehab proceedings order/stay or suspension order
1. Taxes due will be waived
2. Contracts may be terminated, unless confirmed by S E C . 1 6, F R I A
the rehab receiver within 90 days (continued Commencement of Proceedings and Issuance of a
validity of contracts requires his positive action) Commencement Order. - The rehabilitation
3. Any damages resulting from termination of proceedings shall commence upon the issuance of the
contracts are considered a pre-commencement Commencement Order, which shall:
claim (a) Identify the debtor, its principal business or
activity/ies and its principal place of business;
Avoidance proceedings (b) Summarize the ground/s for initiating the
The court may nullify/render void certain contracts proceedings;
that are deemed in fraud of creditors. These were (c) State the relief sought under this Act and any
those usually entered into within 90 days before the requirement or procedure particular to the relief
filing of the petition for rehab. sought;
(d) State the legal effects of the Commencement
Filing of petition Order, including those mentioned in Section 17
hereof;
Sec. 12, FRIA, supra (e) Declare that the debtor is under rehabilitation;
Sec. 13, FRIA, supra (f) Direct the publication of the Commencement
Order in a newspaper of general circulation in the
Philippines once a week for at least two (2)
consecutive weeks, with the first publication to be
made within seven (7) days from the time of its the commencement date except as may be
issuance; provided herein.
(g) If the petitioner is the debtor direct the service by
personal delivery of a copy of the petition on each S E C . 2 1, F R I A
creditor holding at least ten percent (10%) of the Effectivity and Duration of Commencement Order. -
total liabilities of the debtor as determined from Unless lifted by the court, the Commencement Order
the schedule attached to the petition within five shall be for the effective for the duration of the
(5) days; if the petitioner/s is/are creditor/s, direct rehabilitation proceedings for as long as there is a
the service by personal delivery of a copy of the substantial likelihood that the debtor will be
petition on the debtor within five (5) days; successfully rehabilitated. In determining whether
(h) Appoint a rehabilitation receiver who may or not there is substantial likelihood for the debtor to be
be from among the nominees of the petitioner/s successfully rehabilitated, the court shall ensure that
and who shall exercise such powers and duties the following minimum requirements are met:
defined in this Act as well as the procedural rules (a) The proposed Rehabilitation Plan submitted
that the Supreme Court will promulgate; complies with the minimum contents prescribed
(i) Summarize the requirements and deadlines for by this Act;
creditors to establish their claims against the (b) There is sufficient monitoring by the rehabilitation
debtor and direct all creditors to their claims with receiver of the debtor's business for the protection
the court at least five (5) days before the initial of creditors;
hearing; (c) The debtor has met with its creditors to the extent
(j) Direct Bureau of internal Revenue (BIR) to file reasonably possible in attempts to reach
and serve on the debtor its comment on or consensus on the proposed Rehabilitation Plan;
opposition to the petition or its claim/s against (d) The rehabilitation receiver submits a report,
the debtor under such procedures as the based on preliminary evaluation, stating that the
Supreme Court provide; underlying assumptions and the goals stated in
(k) Prohibit the debtor's suppliers of goods or the petitioner's Rehabilitation Plan are realistic
services from withholding the supply of goods reasonable and reasonable or if not, there is, in
and services in the ordinary course of business for any case, a substantial likelihood for the debtor to
as long as the debtor makes payments for the be successfully rehabilitated because, among
services or goods supplied after the issuance of others:
the Commencement Order; (1) There are sufficient assets with/which to
(l) Authorize the payment of administrative rehabilitate the debtor; (2) there is sufficient
expenses as they become due; cash flow to maintain the operations of the
(m) Set the case for initial hearing, which shall not be debtor;
more than forty (40) days from the date of filing (2) The debtor's, partners, stockholders,
of the petition for the purpose of determining directors and officers have been acting in
whether there is substantial likelihood for the good faith and which due diligence;
debtor to be rehabilitated; (3) The petition is not s sham filing intended
(n) Make available copies of the petition and only to delay the enforcement of the rights of
rehabilitation plan for examination and copying the creditor's or of any group of creditors;
by any interested party; and
(o) Indicate the location or locations at which (4) The debtor would likely be able to pursue a
documents regarding the debtor and the viable Rehabilitation Plan;
proceedings under Act may be reviewed and (e) The petition, the Rehabilitation Plan and the
copied; attachments thereto do not contain any
(p) State that any creditor or debtor who is not the materially false or misleading statement;
petitioner, may submit the name or nominate any (f) If the petitioner is the debtor, that the debtor has
other qualified person to the position of met with its creditor/s representing at least
rehabilitation receiver at least five (5) days before three-fourths (3/4) of its total obligations to the
the initial hearing; extent reasonably possible and made a good faith
(q) Include a Stay or Suspension Order which shall: effort to reach a consensus on the proposed
(1) Suspend all actions or proceedings, in court Rehabilitation Plan if the petitioner/s is/are a
or otherwise, for the enforcement of claims creditor or group of creditors, that/ the
against the debtor; petitioner/s has/have met with the debtor and
(2) Suspend all actions to enforce any judgment, made a good faith effort to reach a consensus on
attachment or other provisional remedies the proposed Rehabilitation Plan; and
against the debtor; (g) The debtor has not committed acts
(3) Prohibit the debtor from selling, misrepresentation or in fraud of its creditor/s or a
encumbering, transferring or disposing in group of creditors.
any manner any of its properties except in
the ordinary course of business; and Initial hearing
(4) Prohibit the debtor from making any
payment of its liabilities outstanding as of S E C . 2 2, F R I A
Action at the Initial Hearing. - At the initial hearing, the
court shall: timely, fair, transparent, effective and efficient

(a) Determine the creditors who have made timely rehabilitation or liquidation of debtors. The
and proper filing of their notice of claims; rehabilitation or liquidation shall be made with a view
(b) Hear and determine any objection to the to ensure or maintain certainly and predictability in
qualifications of the appointment of the commercial affairs, preserve and maximize the value
rehabilitation receiver and, if necessary appoint a of the assets of these debtors, recognize creditor
new one in accordance with this Act; rights and respect priority of claims, and ensure
(c) Direct the creditors to comment on the petition equitable treatment of creditors who are similarly
and the Rehabilitation Plan, and to submit the situated. When rehabilitation is not feasible, it is in the
same to the court and to the rehabilitation interest of the State to facilities a speedy and orderly
receiver within a period of not more than twenty liquidation of these debtor's assets and the
(20) days; and settlement of their obligations.
(d) Direct the rehabilitation receiver to evaluate the
financial condition of the debtor and to prepare S E C . 2 6, F R I A
and submit to the court within forty (40) days Petition Given Due Course. - If the petition is given due
from initial hearing the report provided in Section course, the court shall direct the rehabilitation
24 hereof. receiver to review, revise and/or recommend action on
the Rehabilitation Plan and submit the same or a new
S E C . 2 3, F R I A one to the court within a period of not more than
Effect of Failure to File Notice of Claim. - A creditor ninety (90) days.
whose claim is not listed in the schedule of debts and The court may refer any dispute relating to the
liabilities and who fails to file a notice of claim in Rehabilitation Plan or the rehabilitation proceedings
accordance with the Commencement Order but pending before it to arbitration or other modes of
subsequently files a belated claim shall not be dispute resolution, as provided for under Republic Act
entitled to participate in the rehabilitation No. 9285, Or the Alternative Dispute Resolution Act
proceedings but shall be entitled to receive of 2004, should it determine that such mode will
distributions arising therefrom. resolve the dispute more quickly, fairly and efficiently
than the court.
Submission of report by
rehabilitation receiver S E C . 2 7, F R I A
Dismissal of Petition. - If the petition is dismissed
S E C . 2 4, F R I A pursuant to paragraph (b) of Section 25 hereof, then
Report of the Rehabilitation Receiver. - Within forty the court may, in its discretion, order the petitioner to
(40) days from the initial hearing and with or without pay damages to any creditor or to the debtor, as the
the comments of the creditors or any of them, the case may be, who may have been injured by the filing
rehabilitation receiver shall submit a report to the of the petition, to the extent of any such injury.
court stating his preliminary findings and
recommendations on whether: Preparation of rehab plan & approval
(a) The debtor is insolvent and if so, the causes by creditors
thereof and any unlawful or irregular act or acts
committed by the owner/s of a sole S E C . 6 3, F R I A
proprietorship partners of a partnership or Consultation with Debtor and Creditors. – If the court
directors or officers of a corporation in gives due course to the petition, the rehabilitation
contemplation of the insolvency of the debtor or receiver shall confer with the debtor and all the
which may have contributed to the insolvency of classes of creditors, and may consider their views and
the debtor; proposals ill the review, revision or preparation of a
(b) The underlying assumptions, the financial goals new Rehabilitation Plan.
and the procedures to accomplish such goals as
stated in the petitioner's Rehabilitation Plan are S E C . 6 4, F R I A
realistic, feasible and reasonable; Creditor Approval of Rehabilitation Plan. – The
(c) There is a substantial likelihood for the debtor to rehabilitation receiver shall notify the creditors and
be successfully rehabilitated; (d) the petition stakeholders that the Plan is ready for their
should be dismissed; and (e) the debtor should examination. Within twenty (2Q) days from the said
be dissolved and/or liquidated. notification, the rehabilitation receiver shall convene
the creditors, either as a whole or per class, for
Grant of due course to/dismissal of purposes of voting on the approval of the Plan. The
petition Plan shall be deemed rejected unless approved by all
classes of creditors w hose rights are adversely
S E C . 2 5, F R I A modified or affected by the Plan. For purposes of this
Declaration of Policy. - It is the policy of the State to section, the Plan is deemed to have been approved by
encourage debtors, both juridical and natural persons, a class of creditors if members of the said class
and their creditors to collectively and realistically holding more than fifty percent (50%) of the total
resolve and adjust competing claims and property claims of the said class vote in favor of the Plan. The
rights. In furtherance thereof, the State shall ensure a votes of the creditors shall be based solely on the
amount of their respective claims based on the Confirmation of rehab plan

registry of claims submitted by the rehabilitation
receiver pursuant to Section 44 hereof. S E C . 6 8, F R I A
Notwithstanding the rejection of the Rehabilitation Confirmation of the Rehabilitation Plan. – If no
Plan, the court may confirm the Rehabilitation Plan if objections are filed within the relevant period or, if
all of the following circumstances are present: objections are filed, the court finds them lacking in
(a) The Rehabilitation Plan complies with the merit, or determines that the basis for the objection
requirements specified in this Act. has been cured, or determines that the debtor has
(b) The rehabilitation receiver recommends the complied with an order to cure the objection, the court
confirmation of the Rehabilitation Plan; shall issue an order confirming the Rehabilitation
(c) The shareholders, owners or partners of the Plan.
juridical debtor lose at least their controlling The court may confirm the Rehabilitation Plan
interest as a result of the Rehabilitation Plan; and notwithstanding unresolved disputes over claims if
(d) The Rehabilitation Plan would likely provide the the Rehabilitation Plan has made adequate provisions
objecting class of creditors with compensation for paying such claims.
which has a net present value greater than that For the avoidance of doubt, the provisions of
which they would have received if the debtor were other laws to the contrary notwithstanding, the court
under liquidation. shall have the power to approve or implement the
Rehabilitation Plan despite the lack of approval, or
Submission of rehab plan to the objection from the owners, partners or stockholders of
court the insolvent debtor: Provided, That the terms thereof
are necessary to restore the financial well-being and
S E C . 6 5, F R I A viability of the insolvent debtor.
Submission of Rehabilitation Plan to the Court. – If the
Rehabilitation Plan is approved, the rehabilitation S E C . 6 9, F R I A
receiver shall submit the same to the court for Effect of Confirmation of the Rehabilitation Plan. - The
confirmation. Within five (5) days from receipt of the confirmation of the Rehabilitation Plan by the court
Rehabilitation Plan, the court shall notify the creditors shall result in the following:
that the Rehabilitation Plan has been submitted for (a) The Rehabilitation Plan and its provisions shall
confirmation, that any creditor may obtain copies of be binding upon the debtor and all persons who
the Rehabilitation Plan and that any creditor may file may be affected by . it, including the creditors,
an objection thereto. whether or not such persons have participated in
the proceedings or opposed the Rehabilitation
Filing of objections to the rehab plan Plan or whether or not their claims have been
& hearing on objections scheduled;
(b) The debtor shall comply with the provisions of the
S E C . 6 6, F R I A Rehabilitation Plan and shall take all actions
Filing of Objections to Rehabilitation Plan. – A creditor necessary to carry out the Plan;
may file an objection to the Rehabilitation Plan within (c) Payments shall be made to the creditors in
twenty (20) days from receipt of notice from the court accordance with the provisions of the
that the Rehabilitation Plan has been submitted for Rehabilitation Plan;
confirmation. Objections to a Rehabilitation Plan shall (d) Contracts and other arrangements between the
be limited to the following: debtor and its creditors shall be interpreted as
(a) The creditors' support was induced by fraud; continuing to apply to the extent that they do not
(b) The documents or data relied upon in the conflict with the provisions of the Rehabilitation
Rehabilitation Plan are materially false or Plan;
misleading; or (e) Any compromises on amounts or rescheduling of
(c) The Rehabilitation Plan is in fact not supported timing of payments by the debtor shall be
by the voting creditors. binding on creditors regardless of whether or not
the Plan is successfully implement; and
S E C . 6 7, F R I A (f) Claims arising after approval of the Plan that are
Hearing on the Objections. - If objections have been
otherwise not treated by the Plan are not subject
submitted during the relevant period, the court shall
to any Suspension Order.
issue an order setting the time and date for the
The Order confirming the Plan shall comply with
hearing or hearings on the objections.
Rules 36 of the Rules of Court: Provided, however,
If the court finds merit in the objection, it shall That the court may maintain jurisdiction over the case
order the rehabilitation receiver or other party to cure
in order to resolve claims against the debtor that
the defect, whenever feasible. If the court determines remain contested and allegations that the debtor has
that the debtor acted in bad faith, or that it is not
breached the Plan.
feasible to cure the defect, the court shall convert the
proceedings into one for the liquidation of the debtor S E C . 7 2, F R I A
under Chapter V of this Act. Period for Confirmation of the Rehabilitation Plan. -
The court shall have a maximum period of one (1) year
from the date of the filing of the petition to confirm a creditors; or

Rehabilitation Plan. (5) Enforce the applicable provisions of the
If no Rehabilitation Plan is confirmed within the Rehabilitation Plan through a writ of execution.
said period, the proceedings may upon motion or
motu propio, be converted into one for the liquidation S E C . 7 5, F R I A
of the debtor . Effects of Termination. - Termination of the
proceedings shall result in the following:
Submission of final report; (a) The discharge of the rehabilitation receiver
accounting & discharge of receiver subject to his submission of a final accounting;
and
S E C . 7 3, F R I A (b) The lifting of the Stay Order and any other court
Accounting Discharge of Rehabilitation Receiver. - order holding in abeyance any action for the
Upon the confirmation of the Rehabilitation Plan, the enforcement of a claim against the debtor.
rehabilitation receiver shall provide a final report and Provided, however, That if the termination of
accounting to the court. Unless the Rehabilitation proceedings is due to failure of rehabilitation or
Plan specifically requires and describes the role of the dismissal of the petition for reasons other than
rehabilitation receiver after the approval of the technical grounds, the proceedings shall be
Rehabilitation Plan, the court shall discharge the immediately converted to liquidation as provided in
rehabilitation receiver of his duties. Section 92 of this Act.
Termination proceedings e. Special matters

S E C . 7 4, F R I A Management committee
Termination of Proceedings. - The rehabilitation
proceedings under Chapter II shall, upon motion by Rules regarding management
any stakeholder or the rehabilitation receiver be General rule of Management of the corporation continues to
terminated by order of the court either declaring a management be vested with board of directors during rehab
successful implementation of the Rehabilitation Plan The court may appoint a management
or a failure of rehabilitation. committee in cases of:
There is failure of rehabilitation in the following cases: 1. Actual/imminent danger of dissipation,
(a) Dismissal of the petition by the court; loss, wastage, or destruction of debtor’s
(b) The debtor fails to submit a Rehabilitation Plan; assets;
(c) Under the Rehabilitation Plan submitted by the Exceptions
2. Paralyzation of debtor’s business
debtor, there is no substantial likelihood that the operations; or
debtor can be rehabilitated within a reasonable 3. Debtor’s gross mismanagement, fraud,
period; other wrongful conduct, or gross/willful
(d) The Rehabilitation Plan or its amendment is violation of FRIA
approved by the court but in the implementation
thereof, the debtor fails to perform its obligations
S E C . 3 6, F R I A
thereunder or there is a failure to realize the
Displacement of Existing Management by the
objectives, targets or goals set forth therein,
Rehabilitation Receiver or Management Committee. –
including the timelines and conditions for the
Upon motion of any interested party, the court may
settlement of the obligations due to the creditors
appoint and direct the rehabilitation receiver to
and other claimants;
assume the powers of management of the debtor, or
(e) The commission of fraud in securing the approval
appoint a management committee that will
of the Rehabilitation Plan or its amendment; and
undertake the management of the debtor, upon clear
(f) Other analogous circumstances as may be
and convincing evidence of any of the following
defined by the rules of procedure.
circumstances:
Upon a breach of, or upon a failure of the
(a) Actual or imminent danger of dissipation, loss,
Rehabilitation Plan the court, upon motion by an
wastage or destruction of the debtor’s assets or
affected party may:
other properties;
(1) Issue an order directing that the breach be cured
(b) Paralyzation of the business operations of the
within a specified period of time, falling which the
debtor; or
proceedings may be converted to a liquidation;
(c) Gross mismanagement of the debtor or fraud or
(2) Issue an order converting the proceedings to a
other wrongful conduct on the part of, or gross or
liquidation;
willful violation of this Act by existing
(3) Allow the debtor or rehabilitation receiver to
management of the debtor or the owner, partner,
submit amendments to the Rehabilitation Plan,
director, officer or representative/s in
the approval of which shall be governed by the
management of the debtor.
same requirements for the approval of a
In case the court appoints the rehabilitation receiver
Rehabilitation Plan under this subchapter;
to assume the powers of management of the debtor.
(4) Issue any other order to remedy the breach
the court may:
consistent with the present regulation, other
(1) Require the rehabilitation receiver to post an
applicable law and the best interests of the
additional bond; be authorized by the court or by the rehabilitation

(2) Authorize him to engage the services or to receiver to perform such other tasks and functions as
employ persona or entities to assist him in the may be defined by the procedural rules in order to
discharge of his managerial functions; and facilitate the rehabilitation process.
(3) Authorize a commensurate increase in his
compensation. Effects of commencement order
S E C . 3 7, F R I A S E C . 1 7, F R I A
Role of the Management Committee. – When Effects of the Commencement Order. - Unless
appointed pursuant to the foregoing section, the otherwise provided for in this Act, the court's issuance
management committee shall take the place of the of a Commencement Order shall, in addition to the
management and the governing body of the debtor effects of a Stay or Suspension Order described in
and assume their rights and responsibilities. Section 16 hereof:
The specific powers and duties of the (a) Vest the rehabilitation with all the powers and
management committee, whose members shall be functions provided for this Act, such as the right
considered as officers of the court, shall be prescribed to review and obtain records to which the debtor's
by the procedural rules. management and directors have access,
including bank accounts or whatever nature of
S E C . 4 7, F R I A the debtor subject to the approval by the court of
Management. - Unless otherwise provided herein, the the performance bond filed by the rehabilitation
management of the juridical debtor shall remain with receiver;
the existing management subject to the applicable (b) Prohibit or otherwise serve as the legal basis
law/s and agreement/s, if any, on the election or rendering null and void the results of any
appointment of directors, managers or managing extrajudicial activity or process to seize property,
partner. However, all disbursements, payments or sell encumbered property, or otherwise attempt
sale, disposal, assignment, transfer or encumbrance to collection or enforce a claim against the debtor
of property , or any other act affecting title or interest after commencement date unless otherwise
in property, shall be subject to the approval of the allowed in this Act, subject to the provisions of
rehabilitation receiver and/or the court, as provided in Section 50 hereof;
the following subchapter. (c) Serve as the legal basis for rendering null and
void any setoff after the commencement date of
Creditors’ committee any debt owed to the debtor by any of the
debtor's creditors;
The creditors’ committee acts as a liaison, coordinating between (d) Serve as the legal basis for rendering null and
the creditors and the rehab receiver. void the perfection of any lien against the debtor's
property after the commencement date; and
S E C . 4 2, F R I A (e) Consolidate the resolution of all legal
Creditors' Committee. - After the creditors' meeting proceedings by and against the debtor to the
called pursuant to Section 63 hereof, the creditors court Provided. However, That the court may
belonging to a class may formally organize a allow the continuation of cases on other courts
committee among themselves. In addition, the where the debtor had initiated the suit.
creditors may, as a body, agree to form a creditors' Attempts to seek legal of other resource against the
committee composed of a representative from each debtor outside these proceedings shall be sufficient to
class of creditors, such as the following: support a finding of indirect contempt of court.
(a) Secured creditors;
(b) Unsecured creditors; S E C . 1 8, F R I A
(c) Trade creditors and suppliers; and Exceptions to the Stay or Suspension Order. - The Stay
(d) Employees of the debtor. or Suspension Order shall not apply:
In the election of the creditors' representatives, the (a) To cases already pending appeal in the Supreme
rehabilitation receiver or his representative shall Court as of commencement date Provided, That
attend such meeting and extend the appropriate any final and executory judgment arising from
assistance as may be defined in the procedural rules. such appeal shall be referred to the court for
appropriate action;
S E C . 4 3, F R I A (b) Subject to the discretion of the court, to cases
Role of Creditors' Committee. - The creditors' pending or filed at a specialized court or quasi-
committee when constituted pursuant to Section 42 judicial agency which, upon determination by the
of this Act shall assist the rehabilitation receiver in court is capable of resolving the claim more
communicating with the creditors and shall be the quickly, fairly and efficiently than the court:
primary liaison between the rehabilitation receiver Provided, That any final and executory judgment
and the creditors. The creditors' committee cannot of such court or agency shall be referred to the
exercise or waive any right or give any consent on court and shall be treated as a non-disputed
behalf of any creditor unless specifically authorized in claim;
writing by such creditor. The creditors' committee may (c) To the enforcement of claims against sureties and
other persons solidarily liable with the debtor, circumstance, is perishable, costly to maintain,
and third party or accommodation mortgagors as susceptible to devaluation or otherwise in jeopardy.
well as issuers of letters of credit, unless the
property subject of the third party or S E C . 5 0, F R I A
accommodation mortgage is necessary for the Sale or Disposal of Encumbered Property of the Debtor
rehabilitation of the debtor as determined by the and Assets of Third Parties Held by Debtor. - The court
court upon recommendation by the rehabilitation may authorize the sale, transfer, conveyance or
receiver; disposal of encumbered property of the debtor, or
(d) To any form of action of customers or clients of a property of others held by the debtor where there is a
securities market participant to recover or security interest pertaining to third parties under a
otherwise claim moneys and securities entrusted financial, credit or other similar transactions if, upon
to the latter in the ordinary course of the latter's application of the rehabilitation receiver and with the
business as well as any action of such securities consent of the affected owners of the property, or
market participant or the appropriate regulatory secured creditor/s in the case of encumbered property
agency or self-regulatory organization to pay or of the debtor and, after notice and hearing, the court
settle such claims or liabilities; determines that:
(e) To the actions of a licensed broker or dealer to (a) Such sale, transfer, conveyance or disposal is
sell pledged securities of a debtor pursuant to a necessary for the continued operation of the
securities pledge or margin agreement for the debtor's business; and
settlement of securities transactions in (b) The debtor has made arrangements to provide a
accordance with the provisions of the Securities substitute lien or ownership right that provides an
Regulation Code and its implementing rules and equal level of security for the counter-party's
regulations; claim or right.
(f) The clearing and settlement of financial Provided, That properties held by the debtor where
transactions through the facilities of a clearing the debtor has authority to sell such as trust receipt or
agency or similar entities duly authorized, consignment arrangements may be sold or disposed
registered and/or recognized by the appropriate of by the .debtor, if such sale or disposal is necessary
regulatory agency like the Bangko Sentral ng for the operation of the debtor's business, and the
Pilipinas (BSP) and the SEC as well as any form of debtor has made arrangements to provide a
actions of such agencies or entities to reimburse substitute lien or ownership right that provides an
themselves for any transactions settled for the equal level of security for the counter-party's claim or
debtor; and right.
(g) Any criminal action against individual debtor or Sale or disposal of property under this section
owner, partner, director or officer of a debtor shall shall not give rise to any criminal liability under
not be affected by any proceeding commend applicable laws.
under this Act.
S E C . 5 1, F R I A
S E C . 1 9, F R I A Assets of Debtor Held by Third Parties. – In the case of
Waiver of taxes and Fees Due to the National possessory pledges, mechanic's liens or similar claims,
Government and to Local Government Units (LGUs). - third parties who have in their possession or control
Upon issuance of the Commencement Order by the property of the debtor shall not transfer, conveyor
court, and until the approval of the Rehabilitation otherwise dispose of the same to persons other than
Plan or dismissal of the petition, whichever is earlier, the debtor, unless upon prior approval of the
the imposition of all taxes and fees including rehabilitation receiver. The rehabilitation receiver may
penalties, interests and charges thereof due to the also:
national government or to LGUs shall be considered (a) Demand the surrender or the transfer of the
waived, in furtherance of the objectives of possession or control of such property to the
rehabilitation. rehabilitation receiver or any other person,
subject to payment of the claims secured by any
S E C . 4 8, F R I A possessory Iien/s thereon;
Use or Disposition of Assets. - Except as otherwise (b) Allow said third parties to retain possession or
provided herein, no funds or property of the debtor control, if such an arrangement would more likely
shall he used or disposed of except in the ordinary preserve or increase the value of the property in
course of business of the debtor, or unless necessary question or the total value of the assets of the
to finance the administrative expenses of the debtor; or
rehabilitation proceedings. (c) Undertake any otI1er disposition of the said
property as may be beneficial for the
S E C . 4 9, F R I A rehabilitation of the debtor, after notice and
Sale of Assets. - The court, upon application of the hearing, and approval of the court.
rehabilitation receiver, may authorize the sale of
unencumbered property of the debtor outside the S E C . 5 2, F R I A
ordinary course of business upon a showing that the Rescission or Nullity of Sale, Payment, Transfer or
property, by its nature or because of other Conveyance of Assets. - The court may rescind or
declare as null and void any sale, payment, transfer or accordance with the order prescribed under the
conveyance of the debtor's unencumbered property or rules of concurrence and preference of credits.
any encumbering thereof by the debtor or its agents
or representatives after the commencement date S E C . 5 4, F R I A
which are not in the ordinary course of the business of Post-commencement Interest. - The rate and term of
the debtor: Provided, however, That the interest, if any, on secured and unsecured claims shall
unencumbered property may be sold, encumbered or be determined and provided for in the approved
otherwise disposed of upon order of the court after Rehabilitation Plan.
notice and hearing:
(a) If such are in the interest of administering the S E C . 5 5, F R I A
debtor and facilitating the preparation and Post-commencement Loans and Obligations. - With
implementation of a Rehabilitation Plan; the approval of the court upon the recommendation
(b) In order to provide a substitute lien, mortgage or of the rehabilitation receiver, the debtor, in order to
pledge of property under this Act; enhance its rehabilitation, may:
(c) For payments made to meet administrative (a) Enter into credit arrangements; or
expenses as they arise; (b) Enter into credit arrangements, secured by
(d) For payments to victims of quasi delicts upon a mortgages of its unencumbered property or
showing that the claim is valid and the debtor has secondary mortgages of encumbered property
insurance to reimburse the debtor for the with the approval of senior secured parties with
payments made; regard to the encumbered property; or
(e) For payments made to repurchase property of the (c) Incur other obligations as may be essential for its
debtor that is auctioned off in a judicial or rehabilitation.
extrajudicial sale under. This Act; or The payment of the foregoing obligations shall be
(f) For payments made to reclaim property of the considered administrative expenses under this Act.
debtor held pursuant to a possessory lien.
S E C . 5 6, F R I A
S E C . 5 3, F R I A Treatment of Employees, Claims. - Compensation of
Assets Subject to Rapid Obsolescence, Depreciation employees required to carry on the business shall be
and Diminution of Value. - Upon the application of a considered an administrative expense. Claims of
secured creditor holding a lien against or holder of an separation pay for months worked prior to the
ownership interest in property held by the debtor that commencement date shall be considered a pre-
is subject to potentially rapid obsolescence, commencement claim. Claims for salary and
depreciation or diminution in value, the court shall, separation pay for work performed after the
after notice and hearing, order the debtor or commencement date shall be an administrative
rehabilitation receiver to take reasonable steps expense.
necessary to prevent the depreciation. If depreciation
cannot be avoided and such depreciation is S E C . 5 7, F R I A
jeopardizing the security or property interest of the Treatment of Contracts. - Unless cancelled by virtue of
secured creditor or owner, the court shall: a final judgment of a court of competent jurisdiction
(a) Allow the encumbered property to be foreclosed issued prior to the issuance of the Commencement
upon by the secured creditor according to the Order, or at anytime thereafter by the court before
relevant agreement between the debtor and the which the rehabilitation proceedings are pending, all
secured creditor, applicable rules of procedure valid and subbsisting contracts of the debtor with
and relevant legislation: Provided. That the creditors and other third parties as at the
proceeds of the sale will be distributed in commencement date shall continue in force:
accordance with the order prescribed under the Provided, That within ninety (90)days following the
rules of concurrence and preference of credits; or commencement of proceedings, the debtor, with the
(b) Upon motion of, or with the consent of the consent of the rehabilitation receiver, shall notify each
affected secured creditor or interest owner, order contractual counter-party of whether it is confirming
the conveyance of a lien against or ownership the particular contract. Contractual obligations of the
interest in substitute property of the debtor to the debtor arising or performed during this period, and
secured creditor: Provided. That other creditors afterwards for confirmed contracts, shall be
holding liens on such property, if any, do not considered administrative expenses. Contracts not
object thereto, or, if such property is not available; confirmed within the required deadline shall be
(c) Order the conveyance to the secured creditor or considered terminated. Claims for actual damages, if
holder of an ownership interest of a lien on the any, arising as a result of the election to terminate a
residual funds from the sale of encumbered contract shall be considered a pre- commencement
property during the proceedings; or claim against the debtor. Nothing contained herein
(d) Allow the sale or disposition of the property: shall prevent the cancellation or termination of any
Provided. That the sale or disposition will contract of the debtor for any ground provided by law.
maximize the value of the property for the benefit
of the secured creditor and the debtor, and the S E C . 5 8, F R I A
proceeds of the sale will be distributed in Rescission or Nullity of Certain Pre-commencement
Transactions. - Any transaction occurring prior to S E C . 6 0, F R I A

commencement date entered into by the debtor or No Diminution of Secured Creditor Rights. - The
involving its funds or assets may be rescinded or issuance of the Commencement Order and the
declared null and void on the ground that the same Suspension or Stay Order, and any other provision of
was executed with intent to defraud a creditor or this Act, shall not be deemed in any way to diminish or
creditors or which constitute undue preference of impair the security or lien of a secured creditor, or the
creditors. Without limiting the generality of the value of his lien or security, except that his right to
foregoing, a disputable presumption of such design enforce said security or lien may be suspended during
shall arise if the transaction: the term of the Stay Order.
(a) Provides unreasonably inadequate consideration The court, upon motion or recommendation of
to the debtor and is executed within ninety (90) the rehabilitation receiver, may allow a secured
days prior to the commencement date; creditor to enforce his security or lien, or foreclose
(b) Involves an accelerated payment of a claim to a upon property of the debtor securing his/its claim, if
creditor within ninety (90) days prior to the the said property is not necessary for the
commencement date; rehabilitation of the debtor. The secured creditor
(c) Provides security or additional security executed and/or the other lien holders shall be admitted to the
within ninety (90) days prior to the rehabilitation proceedings only for the balance of his
commencement date; claim, if any.
(d) Involves creditors, where a creditor obtained, or
received the benefit of, more than its pro rata S E C . 6 1, F R I A
share in the assets of the debtor, executed at a Lack of Adequate Protection. - The court, on motion or
time when the debtor was insolvent; or motu proprio, may terminate, modify or set conditions
(e) Is intended to defeat, delay or hinder the ability of for the continuance of suspension of payment, or
the creditors to collect claims where the effect of relieve a claim from the coverage thereof, upon
the transaction is to put assets of the debtor showing that:
beyond the reach of creditors or to otherwise (b) A creditor does not have adequate protection
prejudice the interests of creditors. over property securing its claim; or
Provided, however, That nothing in this section shall (c) The value of a claim secured by a lien on property
prevent the court from rescinding or declaring as null which is not necessary for rehabilitation of the
and void a transaction on other grounds provided by debtor exceeds the fair market value of the said
relevant legislation and jurisprudence: Provided, property.
further, That the provisions of the Civil Code on For purposes of this section, a creditor shall be
rescission shall in any case apply to these deemed to lack adequate protection if it can be shown
transactions. that:
(a) The debtor fails or refuses to honor a pre-existing
S E C . 5 9, F R I A agreement with the creditor to keep the property
Actions for Rescission or Nullity. – insured;
(a) The rehabilitation receiver or, with his conformity, (b) The debtor fails or refuses to take commercially
any creditor may initiate and prosecute any action reasonable steps to maintain the property; or
to rescind, or declare null and void any (c) The property has depreciated to an extent that
transaction described in Section 58 hereof. If the the creditor is under secured.
rehabilitation receiver does not consent to the Upon showing of a lack of protection, the court shall
filing or prosecution of such action, order the debtor or the rehabilitation receiver to make
(b) If leave of court is granted under subsection (a), arrangements to provide for the insurance or
the rehabilitation receiver shall assign and maintenance of the property; or to make payments or
transfer to the creditor all rights, title and interest otherwise provide additional or replacement security
in the chose in action or subject matter of the such that the obligation is fully secured. If such
proceeding, including any document in support arrangements are not feasible, the court may modify
thereof. the Stay Order to allow the secured creditor lacking
(c) Any benefit derived from a proceeding taken adequate protection to enforce its security claim
pursuant to subsection (a), to the extent of his against the debtor: Provided, however, That the court
claim and the costs, belongs exclusively to the may deny the creditor the remedies in this paragraph
creditor instituting the proceeding, and the if the property subject of the enforcement is required
surplus, if any, belongs to the estate. for the rehabilitation of the debtor.
(d) Where, before an order is made under subsection
(a), the rehabilitation receiver (or liquidator) Conversion into liquidation
signifies to the court his readiness to institute the proceedings
proceeding for the benefit of the creditors, the
order shall fix the time within which he shall do so If rehab is not possible, then the proceedings may be converted
and, m that case, the benefit derived from the to liquidation.
proceeding, if instituted within the time limits so
fixed, belongs to the estate. S E C . 9 2, F R I A
Conversion by the Court into Liquidation Proceedings. -
During the pendency of court-supervised or pre-
negotiated rehabilitation proceedings, the court may (e) That he has suffered his property to remain under
order the conversion of rehabilitation proceedings to attachment or legal process for three (3) days for
liquidation proceedings pursuant to (a) Section 25(c) the purpose of hindering or delaying the
of this Act; or (b) Section 72 of this Act; or (c) Section liquidation or of defrauding his creditors;
75 of this Act; or (d) Section 90 of this Act; or at any (f) That he has confessed or offered to allow
other time upon the recommendation of the judgment in favor of any creditor or claimant for
rehabilitation receiver that the rehabilitation of the the purpose of hindering or delaying the
debtor is not feasible. Thereupon, the court shall issue liquidation or of defrauding any creditors or
the Liquidation Order mentioned in Section 112 hereof. claimant;
(g) That he has willfully suffered judgment to be
5. Liquidation taken against him by default for the purpose of
hindering or delaying the liquidation or of
a. Concept defrauding his creditors;
(h) That he has suffered or procured his property to
Liquidation is a last resort for creditors. Through this remedy, the be taken on legal process with intent to give a
debtor’s assets are inventoried and then used to discharge his preference to one or more of his creditors and
liabilities. thereby hinder or delay the liquidation or defraud
any one of his creditors;
After liquidation, a debtor corporation loses juridical existence. (i) That he has made any assignment, gift, sale,
The individual debtor, however, will not cease to exist. J conveyance or transfer of his estate, property,
rights or credits with intent to hinder or delay the
b. Types liquidation or defraud his creditors;
(j) That he has, in contemplation of insolvency,
Types of liquidation made any payment, gift, grant, sale, conveyance
Type Filed by or transfer of his estate, property, rights or credits;
Voluntary Insolvent debtor (k) That being a merchant or tradesman, he has
Involuntary Creditor generally defaulted in the payment of his current
obligations for a period of thirty (30) days;
S E C . 1 0 3, F R I A (l) That for a period of thirty (30) days, he has failed,
Application. - An individual debtor whose properties after demand, to pay any moneys deposited with
are not sufficient to cover his liabilities, and owing him or received by him in a fiduciary; and
debts exceeding Five hundred thousand pesos (m) That an execution having been issued against
(Php500,000.00), may apply to be discharged from him on final judgment for money, he shall have
his debts and liabilities by filing a verified petition with been found to be without sufficient property
the court of the province or city in which he has subject to execution to satisfy the judgment.
resided for six (6) months prior to the filing of such The petitioning creditor/s shall post a bond in such as
petition. He shall attach to his petition a schedule of the court shall direct, conditioned that if the petition
debts and liabilities and an inventory of assets. The for liquidation is dismissed by the court, or withdrawn
filing of such petition shall be an act of insolvency. by the petitioner, or if the debtor shall not be declared
an insolvent the petitioners will pay to the debtor all
S E C . 1 0 5, F R I A costs, expenses, damages occasioned by the
Petition; Acts of Insolvency. - Any creditor or group of proceedings and attorney's fees.
creditors with a claim of, or with claims aggregating at
least Five hundred thousand pesos (Php500, 000.00) c. Who may file petition
may file a verified petition for liquidation with the Individuals
court of the province or city in which the individual Debtors
Juridical persons
debtor resides. 3 or more creditors with
The following shall be considered acts of aggregate claims of at least P1M
insolvency, and the petition for liquidation shall set or at least 25% of debtor’s
forth or allege at least one of such acts: Creditors subscribed capital or partner’s
(a) That such person is about to depart or has contribution, whichever is higher
departed from the Republic of the Philippines, If individual debtor, aggregate
with intent to defraud his creditors; claim of at least P500k
(b) That being absent from the Republic of the
Philippines, with intent to defraud his creditors, Sec. 103, FRIA, supra
he remains absent; Sec. 105, FRIA, supra
(c) That he conceals himself to avoid the service of
legal process for the purpose of hindering or d. Procedure
delaying the liquidation or of defrauding his
creditors; Summary of liquidation proceedings
(d) That he conceals, or is removing, any of his 1. Filing of petition
property to avoid its being attached or taken on 2. Action on petition
legal process; 3. Appointment of liquidator; preparation of
liquidation plan (a) There is no genuine issue of fact or law on the

4. Implementation of liquidation plan claims/s of the petitioner/s, and that the due and
5. Termination of corporation/discharge of demandable payments thereon have not been
individual’s liability made for at least one hundred eighty (180) days
or that the debtor has failed generally to meet its
Concurrence & preference of credits in liquidation liabilities as they fall due; and
- Civil Code rules apply (b) There is no substantial likelihood that the debtor
- No prejudice to power of regulatory agency to may be rehabilitated.
liquidate trade-related claims of securities market At any time during the pendency of or after a
participants, which has absolute priority insofar as rehabilitation court-supervised or pre-negotiated
trade-related assets are concerned rehabilitation proceedings, three (3) or more creditors
- Therefore alters Art. 2241 with regard to trade- whose claims is at least either One million pesos
related assets (Php1,000,000.00) or at least twenty-five percent
(25%) of the subscribed capital or partner's
Effect of liquidation order on secured creditor contributions of the debtor, whichever is higher, may
The liquidation order does not affect the rights of also initiate liquidation proceedings by filing a motion
secured creditors. They may still foreclose on the in the same court where the rehabilitation
security, but only after the lapse of the 180 day period proceedings are pending to convert the rehabilitation
provided in the law. proceedings into liquidation proceedings. The motion
shall be verified, shall contain or set forth the same
Filing of petition matters required in the preceding paragraph, and
state that the movants are seeking the immediate
S E C . 9 0, F R I A liquidation of the debtor.
Voluntary Liquidation. - An insolvent debtor may apply If the petition or motion is sufficient in form and
for liquidation by filing a petition for liquidation with substance, the court shall issue an Order:
the court. The petition shall be verified, shall establish (1) Directing the publication of the petition or motion
the insolvency of the debtor and shall contain, in a newspaper of general circulation once a week
whether as an attachment or as part of the body of for two (2) consecutive weeks; and
the petition; (2) Directing the debtor and all creditors who are not
(a) A schedule of the debtor's debts and liabilities the petitioners to file their comment on the
including a list of creditors with their addresses, petition or motion within fifteen (15) days from
amounts of claims and collaterals, or securities, if the date of last publication.
any; If, after considering the comments filed, the court
(b) An inventory of all its assets including receivables determines that the petition or motion is meritorious,
and claims against third parties; and it shall issue the Liquidation Order mentioned in
(c) The names of at least three (3) nominees to the Section 112 hereof.
position of liquidator.
At any time during the pendency of court-supervised Sec. 103, FRIA, supra
or pre-negotiated rehabilitation proceedings, the Sec. 105, FRIA, supra
debtor may also initiate liquidation proceedings by
filing a motion in the same court where the Issuance of show cause
rehabilitation proceedings are pending to convert the order/liquidation order
rehabilitation proceedings into liquidation
S E C . 1 0 4, F R I A
proceedings. The motion shall be verified, shall
Liquidation Order. - If the court finds the petition
contain or set forth the same matters required in the
sufficient in form and substance it shall, within five (5)
preceding paragraph, and state that the debtor is
working days issue the Liquidation Order mentioned
seeking immediate dissolution and termination of its
in Section 112 hereof.
corporate existence.
If the petition or the motion, as the case may be,
S E C . 1 0 6, F R I A
is sufficient in form and substance, the court shall
Order to Individual Debtor to Show Cause. - Upon the
issue a Liquidation Order mentioned in Section 112
filing of such creditors' petition, the court shall issue
hereof.
an Order requiring the individual debtor to show
cause, at a time and place to be fixed by the said
S E C . 9 1, F R I A
court, why he should not be adjudged an insolvent.
Involuntary Liquidation. - Three (3) or more creditors
Upon good cause shown, the court may issue an
the aggregate of whose claims is at least either One
Order forbidding the individual debtor from making
million pesos (Php1,000,000,00) or at least twenty-
payments of any of his debts, and transferring any
five percent (25%0 of the subscribed capital stock or
property belonging to him. However, nothing
partner's contributions of the debtor, whichever is
contained herein shall affect or impair the rights of a
higher, may apply for and seek the liquidation of an
secured creditor to enforce his lien in accordance with
insolvent debtor by filing a petition for liquidation of
its terms.
the debtor with the court. The petition shall show
that:
S E C . 1 1 2, F R I A (a) waive his right under the security or lien, prove his
Liquidation Order. - The Liquidation Order shall: claim in the liquidation proceedings and share in
(a) Declare the debtor insolvent; the distribution of the assets of the debtor; or
(b) Order the liquidation of the debtor and, in the (b) maintain his rights under the security or lien.
case of a juridical debtor, declare it as dissolved; If the secured creditor maintains his rights under the
(c) Order the sheriff to take possession and control of security or lien:
all the property of the debtor, except those that (1) the value of the property may be fixed in a
may be exempt from execution; manner agreed upon by the creditor and the
(d) Order the publication of the petition or motion in liquidator. When the value of the property is less
a newspaper of general circulation once a week than the claim it secures, the liquidator may
for two (2) consecutive weeks; convey the property to the secured creditor and
(e) Direct payments of any claims and conveyance of the latter will be admitted in the liquidation
any property due the debtor to the liquidator; proceedings as a creditor for the balance. If its
(f) Prohibit payments by the debtor and the transfer value exceeds the claim secured, the liquidator
of any property by the debtor; may convey the property to the creditor and waive
(g) Direct all creditors to file their claims with the the debtor's right of redemption upon receiving
liquidator within the period set by the rules of the excess from the creditor;
procedure; (2) the liquidator may sell the property and satisfy
(h) Authorize the payment of administrative the secured creditor's entire claim from the
expenses as they become due; proceeds of the sale; or
(i) State that the debtor and creditors who are not (3) the secure creditor may enforce the lien or
petitioner/s may submit the names of other foreclose on the property pursuant to applicable
nominees to the position of liquidator; and laws.
(j) Set the case for hearing for the election and
appointment of the liquidator, which date shall Appointment of liquidator &
not be less than thirty (30) days nor more than preparation of liquidation plan
forty-five (45) days from the date of the last
publication. S E C . 1 2 9, F R I A
The Liquidation Plan. - Within three (3) months from
S E C . 1 1 3, F R I A his assumption into office, the Liquidator shall submit
Effects of the Liquidation Order. - Upon the issuance of a Liquidation Plan to the court. The Liquidation Plan
the Liquidation Order: shall, as a minimum enumerate all the assets of the
(a) the juridical debtor shall be deemed dissolved debtor and a schedule of liquidation of the assets and
and its corporate or juridical existence payment of the claims.
terminated;
(b) legal title to and control of all the assets of the Implementation of liquidation plan &
debtor, except those that may be exempt from sale of assets
execution, shall be deemed vested in the
liquidator or, pending his election or S E C . 1 3 1, F R I A
appointment, with the court; Sale of Assets in Liquidation. - The liquidator may sell
(c) all contracts of the debtor shall be deemed the unencumbered assets of the debtor and convert
terminated and/or breached, unless the the same into money. The sale shall be made at
liquidator, within ninety (90) days from the date public auction. However, a private sale may be
of his assumption of office, declares otherwise allowed with the approval of the court if; (a) the goods
and the contracting party agrees; to be sold are of a perishable nature, or are liable to
(d) no separate action for the collection of an quickly deteriorate in value, or are disproportionately
unsecured claim shall be allowed. Such actions expensive to keep or maintain; or (b) the private sale is
already pending will be transferred to the for the best interest of the debtor and his creditors.
Liquidator for him to accept and settle or contest. With the approval of the court, unencumbered
If the liquidator contests or disputes the claim, property of the debtor may also be conveyed to a
the court shall allow, hear and resolve such creditor in satisfaction of his claim or part thereof.
contest except when the case is already on
appeal. In such a case, the suit may proceed to Order removing debtor from list of
judgment, and any final and executor judgment registered entities
therein for a claim against the debtor shall be
filed and allowed in court; and S E C . 1 3 4, F R I A
(e) no foreclosure proceeding shall be allowed for a Order Removing the Debtor from the List of Registered
period of one hundred eighty (180) days. Entitles at the Securities and Exchange Commission. -
Upon determining that the liquidation has been
S E C . 1 1 4, F R I A completed according to this Act and applicable law,
Rights of Secured Creditors. - The Liquidation Order the court shall issue an Order approving the report
shall not affect the right of a secured creditor to and ordering the SEC to remove the debtor from the
enforce his lien in accordance with the applicable registry of legal entities.
contract or law. A secured creditor may:
Termination order RCBC v. IAC (1999)

S E C . 1 3 5, F R I A A secured creditor does not lose his right to
Termination of Proceedings. - Upon receipt of evidence foreclose property mortgaged in his favor upon
showing that the debtor has been removed from the the debtor’s filing a petition for rehabilitation. The
registry of legal entities at the SEC. The court shall right to foreclose is lost only upon the
issue an Order terminating the proceedings.
appointment of a management committee tasked
e. Special matters to oversee the debtor’s rehabilitation.
Concurrence & preference of credits Facts: BF Homes filed a petition for rehabilitation with the SEC.
Subsequently, RCBC, one of its creditors, sought to extrajudicially
S E C . 1 3 0, F R I A foreclose the properties. Despite the issuance of a TRO and Writ
Exempt Property to be Set Apart. - It shall be the duty of preliminary injunction by the SEC, RCBC proceeded to
of the court, upon petition and after hearing, to foreclose and sell the property through public auction. In
exempt and set apart, for the use and benefit of the response, BF homes filed an action to have the sale of the
said insolvent, such real and personal property as is by properties nullified on the strength of their argument that the
law exempt from execution, and also a homestead; disputed could no longer be foreclosed as a result of the SEC
but no such petition shall be heard as aforesaid until it assuming jurisdiction through their petition for rehabilitation.
is first proved that notice of the hearing of the Note that the RCBC foreclosed the property 6 months before a
application therefor has been duly given by the clerk, management committee was appointed.
by causing such notice to be posted it at least three
(3) public places in the province or city at least ten (10) Issue: WON RCBC lost its right to foreclose upon the filing of a
days prior to the time of such hearing, which notice petition for rehabilitation – NO
shall set forth the name of the said insolvent debtor,
and the time and place appointed for the hearing of Held:The creditors of a debtor undergoing rehabilitation only
such application, and shall briefly indicate the have to settle issues regarding the concurrence and preference of
homestead sought to be exempted or the property their credits when a management committee, rehabilitation
sought to be set aside; and the decree must show that receiver, or any such body performing similar acts is appointed.
such proof was made to the satisfaction of the court, Prior to appointment, secured mortgagees need not even go into
and shall be conclusive evidence of that fact. the issue of whether or not other preferred creditors may be
prejudiced by their foreclosing the property mortgaged in their
S E C . 1 3 3, F R I A favor.
Concurrence and Preference of Credits. - The
Liquidation Plan and its Implementation shall ensure Note: If decided under the FRIA, then the right to foreclose is lost
that the concurrence and preference of credits as upon the commencement order. It is also upon the
enumerated in the Civil Code of the Philippines and commencement order that a stay order is issued.
other relevant laws shall be observed, unless a
preferred creditor voluntarily waives his preferred SOBREJUANITE v. ASB DEV’T CORP. (2005)
right. For purposes of this chapter, credits for services
rendered by employees or laborers to the debtor shall In the context of corporate rehabilitation
enjoy first preference under Article 2244 of the Civil proceedings a claim is defined as “all claims or
Code, unless the claims constitute legal liens under demands, of whatever nature or character against
Article 2241 and 2242 thereof. a debtor or its property, whether for money or
otherwise.”
Liquidation of securities market
participant The rule is that the execution of final judgments
are held in abeyance when a corporation is under
S E C . 1 3 6, F R I A rehabilitation.
Liquidation of a Securities Market Participant. - The
foregoing provisions of this chapter shall be without Facts: Sobrejuanite entered into a contract to sell with ASBDC
prejudice to the power of a regulatory agency or self- over a condominium unit. Upon full payment of the purchase
regulatory organization to liquidate trade-related price, they demanded delivery of their unit but the company
claims of clients or customers of a securities market failed to do so. As a result, the spouses filed a complaint for the
participant which, for purposes of investor protection, rescission of their contract, refund of payments, and damages.
are hereby deemed to have absolute priority over The company filed a motion to suspend the petition of
other claims of whatever nature or kind insofar as Sobrejuanite in consideration of the fact that the SEC had
trade-related assets are concerned. approved the former’s rehabilitation plan and that a
For purposes of this section, trade -related assets rehabilitation receiver had been appointed to oversee the same.
include cash, securities, trading right and other owned Notwithstanding such opposition, the HLURB proceeded to hear
and used by the securities market participant in the and try the case on its members—it rendered a decision in favor
ordinary course of this business. of the Sobrejuanite.
Issue: WON the complaint of Sobrejuanite ought to be the company’s officers. Rehabilitation concerns
suspended pending the rehabilitation of the company – YES itself with the finances and liabilities of the
company, which has its own juridical personality,
Held: The reason for suspending the execution of the favorable while criminal proceedings are concerned with the
judgment rendered by the HLURB in favor of Sobrejuanite during individual liabilities of the accused.
the pendency of rehabilitation proceddings is to prevent him
from gaining an undue advantage over his fellow creditors—their Facts: The officers of SIHI filed a petition for rehabilitation with
claims must first be collectively ascertained in order to a the RTC. The RTC acted favorably upon their petition and issued
partitioning of the creditor’s property that is in line with civil code a staying order against all claims against SIHI. Dispute arose
provisions regarding the concurrence and preference of credits. when the officers, who were facing a number criminal charges for
Another reason for such suspension is so that the person or acts committed as company officers, tried to use the staying
entities charged with the rehabilitation can focus on the task at order issued by the RTC to suspend the criminal proceedings
hand; settling the liabilities of the corporation under against them.
rehabilitation to various creditors as they fall due would detract
from such purpose. Issue: WON the suspension of all claims as a result of the
issuance of a staying order extends to claims arising out of
Note: If decided under the FRIA, quasi-judicial agencies may still criminal charges filed against the company’s officers – NO
continue the proceedings despite the approval of the court with
regard to corporate rehabilitation. Held: The rehabilitation of a corporation is not a legal ground for
the suspension or extinguishment of the criminal liability
MWSS v. DAWAY & MAYNILAD (2004) incurred by its corporate officers. The rehabilitation and criminal
proceedings seek to address different things; rulings and
Rehabilitation courts only acquire jurisdiction (to issuances in one will not be automatically applicable to the other
the exclusion of all creditors) over claims on other notwithstanding the fact that it may involve the same parties.
entities that are not solidarily liable with the
debtor.
Facts: Maynilad undertook to oversee the operations of MWSS in

the West Zone Service Area—in consideration of such an
arrangement, Maynilad obliged itself to pay concession fees to
MWSS. As security for the obligations of Maynilad under their
concession agreement, an irrevocable standby letter of credit
worth $120M was issued in favor of MWSS. Upon failure of
Maynilad to comply with its obligations under the concession
agreement, MWSS sought to claim the amounts provided for in
the letter of credit. Maynilad attempted to prevent MWSS from
collecting the mounts owed to it by presenting a stop order that
the RTC issued upon the former’s petition for rehabilitation.
Issue: WON the stay order issued by the rehabilitation court could
prevent MWSS from claiming the amounts owed to it from the
line of credit – NO
Held: First, the Court pointed out that the claim of MWSS was not
against Maynilad but against the banks that had agreed to
extend a line of credit to secure the obligations of the latter.
Further, the only guarantors and sureties that were exempt from
being proceeded against by creditors in the event that the debtor
is undergoing rehabilitation are those who are not solidarily
liable with the debtor. As applied, an irrevocable letter of credit is
in the nature of a primary obligation; it is essentially solidarily
liable. The function of letters of credit in this context is to provide
the creditor with a means to secure payment at will upon the
default of the debtor.
NOTE: Under the FRIA, the stay order will not prevent the
creditor from going after sureties, issuers of letters of credit given
as security, or accommodation mortgagors. See sec. 18 (c)
PANLILIO v. RTC (2011)
Rehabilitation proceedings have no effect on the

criminal prosecution and accompanying liability of
B. TRUTH IN LENDING ACT (RA 3765) 3. Disclosure required

1. Purpose S E C . 4, R A 3 7 6 5
Any creditor shall furnish to each person to whom
S E C . 2, R A 3 7 6 5 credit is extended, prior to the consummation of the
Declaration of Policy. It is hereby declared to be the transaction, a clear statement in writing setting forth,
policy of the State to protect its citizens from a lack of to the extent applicable and in accordance with rules
awareness of the true cost of credit to the user by and regulations prescribed by the Board, the following
assuring a full disclosure of such cost with a view of information:
preventing the uninformed use of credit to the (1) The cash price or delivered price of the property
detriment of the national economy. or service to be acquired;
(2) The amounts, if any, to be credited as down
The purpose of the law is to enable borrowers to know the full payment and/or trade-in;
cost of credit by advising him of all charges. (3) The difference between the amounts set forth
under clauses (1) and (2);
2. Coverage (4) The charges, individually itemized, which are paid
or to be paid by such person in connection with
S E C . 3, R A 3 7 6 5 the transaction but which are not incident to the
As used in this Act, the term: extension of credit;
(1) "Board" means the Monetary Board of the Central (5) The total amount to be financed;
Bank of the Philippines. (6) The finance charge expressed in terms of pesos
(2) "Credit" means any loan, mortgage, deed of trust, and centavos; and
advance, or discount; any conditional sales (7) The percentage that the finance bears to the total
contract; any contract to sell, or sale or contract amount to be financed expressed as a simple
of sale of property or services, either for present or annual rate on the outstanding unpaid balance of
future delivery, under which part or all of the price the obligation.
is payable subsequent to the making of such sale
or contract; any rental-purchase contract; any Sec. 4 enumerates the items that must appear in the disclosure
contract or arrangement for the hire, bailment, or statement, which must be given to the debtor before the
leasing of property; any option, demand, lien, consummation of the transaction or before the first draw-down.
pledge, or other claim against, or for the delivery
of, property or money; any purchase, or other 4. Penalties for violation
acquisition of, or any credit upon the security of,
any obligation of claim arising out of any of the S E C . 6, R A 3 7 6 5
foregoing; and any transaction or series of (a) Any creditor who in connection with any credit
transactions having a similar purpose or effect. transaction fails to disclose to any person any
(3) "Finance charge" includes interest, fees, service information in violation of this Act or any
charges, discounts, and such other charges regulation issued thereunder shall be liable to
incident to the extension of credit as the Board such person in the amount of P100 or in an
may be regulation prescribe. amount equal to twice the finance charged
(4) "Creditor" means any person engaged in the required by such creditor in connection with such
business of extending credit (including any transaction, whichever is the greater, except that
person who as a regular business practice make such liability shall not exceed P2,000 on any
loans or sells or rents property or services on a credit transaction. Action to recover such penalty
time, credit, or installment basis, either as may be brought by such person within one year
principal or as agent) who requires as an incident from the date of the occurrence of the violation, in
to the extension of credit, the payment of a any court of competent jurisdiction. In any action
finance charge. under this subsection in which any person is
(5) "Person" means any individual, corporation, entitled to a recovery, the creditor shall be liable
partnership, association, or other organized for reasonable attorney's fees and court costs as
group of persons, or the legal successor or determined by the court.
representative of the foregoing, and includes the (b) Except as specified in subsection (a) of this
Philippine Government or any agency thereof, or section, nothing contained in this Act or any
any other government, or of any of its political regulation contained in this Act or any regulation
subdivisions, or any agency of the foregoing. thereunder shall affect the validity or
enforceability of any contract or transactions.
All creditors are covered by this Act. Creditors are defined as (c) Any person who willfully violates any provision of
persons engaged in the business of extending credit who require, this Act or any regulation issued thereunder shall
as an incident to the extension, the payment of a finance charge. be fined by not less than P1,00 or more than
P5,000 or imprisonment for not less than 6
A finance charge includes interests, fees, collection charges, months, nor more than one year or both.
discounts, and other such charges. The effective interest rate is (d) No punishment or penalty provided by this Act
thus the interest + all other charges. shall apply to the Philippine Government or any
agency or any political subdivision thereof. C. LETTERS of CREDIT

(e) A final judgment hereafter rendered in any
criminal proceeding under this Act to the effect ART. 567, CODE of COMMERCE
that a defendant has willfully violated this Act Letters of credit are those issued by one merchant to
shall be prima facie evidence against such another or for the purpose of attending to a
defendant in an action or proceeding brought by commercial transaction.
any other party against such defendant under this
Act as to all matters respecting which said ART. 568, CODE of COMMERCE
judgment would be an estoppel as between the The essential conditions of letters of credit shall be:
parties thereto. 4. To be issued in favor of a definite person and not
to order.
The law provides both civil [Sec. 6(a)] and criminal [Sec. 6(c)] 5. To be limited to a fixed and specified amount, or
penalties for failure to disclose. However, failure to disclose does to one or more undetermined amounts, but
not void the contract [Sec. 6(b)]. within a maximum the limits of which has to be
stated exactly.
UCPB v. SAMUEL & BELUSO
Violations of the Truth in Lending Act give rise to

1. Concept
both criminal and civil liabilities. In the context of
Letters of credit are documents usually issued by a bank,
credit lines, violations of the TinLA for failure to whereby the bank promises to pay out money to the beneficiary
adhere to its requirements do not take place upon of a letter of credit upon presentation of certain documents.
the grating of the credit line itself—they take place
when the amounts made available by the same It is usually used in import/export transactions. Essentially, it
are availed. The reason behind this is that it is only secures the payment to the buyer of the price of the goods sold.
at the point of availment that a contract of loan
begins to exist between the parties. Lastly, 2. Types
pursuant to Sec. 4 of the law, the disclosure Irrevocable (the usual kind)
statement must be furnished prior to the As to revocability
Revocable
consummation of the transaction. Sight—Payable upon “sight” of documents,
As to when
or immediately after presentation thereof
Facts: The sps. Beluso were extended a credit line by UCPB in the payment should
Term—Payable x number of days after
amount of P2.35M. Pursuant to such an arrangement the sps. be made
presentation of documents
Beluso executed several promissory notes and real estate Commercial—Used as payment in
mortgages in favor of UCPB. The interest rates on the loaned commercial transactions
amounts, however, were unilaterally imposed and modified by As to use Standby—Essentially a security device; not
UCPB; ranged from 18% to 34%. Upon their default in payment, drawn unless there is default in the
the bank foreclosed the mortgaged properties. The sps. Beluso
obligation to do or to pay
then filed for an annulment of their contract with the bank as
well as for damages.
3. Strict compliance rule
Issue: WON the interest rates unilaterally applied by UCPB were The rule is that documents must strictly comply with
valid – NO the terms and conditions before the bank makes
payment, and the bank has no discretion to waive any
Held: The Supreme Court held that the bank violated civil code of these terms and conditions.
provisions on mutuality of contracts and the Truth in Lending Act
by unilaterally increasing interest rates without giving due notice 4. Independence principle
or appropriate reasons therefor. The Court, however, held that The principle is that the bank deals only with the
the sps. were still liable for the compounded interest and penalty documents submitted, regardless of other incidents,
charge—it merely lowered the rates of the same from 36% and e.g. breach of the main contract, etc., in considering
30%-36%, respectively, to 12%. whether or not payment should be made.
D. USURY LAW
d. The Usury Law and CB Circular No.
1. Concept 905
Definition of usury In 1982, the Central Bank issued Circular No. 905, which did not
Contracting for or receiving something in excess of the repeal, but only suspended the effectivity of, the Usury Law. It
amount allowed by law for the loan or forbearance of provided that interest rates in loans or forbearances shall not be
money, goods, or chattels. It is a purely statutory subject to the ceilings prescribed in the Usury Law, and thus can
creation—absent any restriction, any interest rate may be fixed according to the parties’ agreement.
be charged.
3. Interest
Elements of usury
1. Loan or forbearance
a. Concept
2. Understanding between the parties that the loan
Interest is the compensation allowed by law or fixed by the
shall be returned
parties for the loan or forbearance of money, goods or security.
3. Unlawful intent to take more than the legal rate
for the use of money or its equivalent The interest is to be determined based on the prevailing market
4. Taking or agreeing to take for the use of the loan rates.
of something in excess of what is allowed by law
b. Kinds
2. The Usury Law Lawful That which the law allows
As to That which is paid or stipulated to be
A R T . 1 1 7 5, C C Unlawful/
legality paid beyond the maximum fixed by
Usurious transactions shall be governed by special usurious
law
laws. (n) Paid upon principal, at a rate fixed or
Simple
As to stipulated by the parties
A R T . 1 9 6 1, C C principal Imposed upon principal + accrued
Usurious contracts shall be governed by the Usury Compound
interest
Law and other special laws, so far as they are not
Interest imposed by law upon the
inconsistent with this Code. (n)
parties, absent any agreement of a
Legal
rate between them
a. Purpose, theory & nature
Currently at 6% per annum
Purpose of the law
c. Power of BSP Monetary Board to
It is for the protection of borrowers from unscrupulous prescribe interest rates
lenders, since charging excessive interest rates is
against public policy. S E C. 1, A C T N O. 2 6 5 5
The rate of interest for the loan or forbearance of any
Theory of the law money goods, or credits and the rate allowed in
The inequality between a lender and borrower judgments, in the absence of express contract as to
deprives the borrower of freedom, placing him at the such rate of interest, shall be six per centum per
lender’s mercy, so it is necessary to give him annum or such rate as may be prescribed by the
protection. Monetary Board of the Central Bank of the Philippines
for that purpose in accordance with the authority
Nature of law hereby granted.
Our Usury Law is both remedial and penal.
S E C. 1 - A, A C T N O. 2 6 5 5
b. Construction of the law The Monetary Board is hereby authorized to prescribe
the maximum rate or rates of interest for the loan or
The law must be strictly construed against the lender, and is renewal thereof or the forbearance of any money,
generally given prospective application. goods or credits, and to change such rate or rates
whenever warranted by prevailing economic and
c. Transactions to which the Usury Law social conditions.
applies In the exercise of the authority herein granted, the
Monetary Board may prescribe higher maximum rates
The law applies to two transactions: loans and forbearances. for loans of low priority, such as consumer loans or
renewals thereof as well as such loans made by
Loan vs. forbearance of a debt pawnshops finance companies and other similar
Loan Forbearance of a debt credit institutions although the rates prescribed for
Mutuum (and not Contractual obligation of the creditor these institutions need not necessarily be uniform.
commodatum, which is to forbear payment of an existing The Monetary Board is also authorized to prescribe
essentially gratuitous) debt already due and payable different maximum rate or rates for different types of
borrowings, including deposits and deposit equivalent of the maximum rate prescribed by the
substitutes, or loans of financial intermediaries. Monetary Board, or, in default thereof, whenever the
debt is judicially claimed, in which last case it shall
S E C. 4 - B, A C T N O. 2 6 5 5 draw six per centum per annum interest or such rate
In the exercise of its authority to fix the maximum rate as may be prescribed by the Monetary Board. No
or rates of interest under this Act, the Monetary Board person or corporation shall require interest to be paid
shall be guided by the following: in advance for a period of more than one year:
3. The existing economic conditions in the country Provided, however, That whenever interest is paid in
and the general requirements of the national advance, the effective rate of interest charged by the
economy; creditor shall not exceed the equivalent of the
4. The supply of and demand for credit; maximum rate prescribed by the Monetary Board.
5. The rate of increase in the price levels; and
6. Such other relevant criteria as the Monetary e. Coverage of interest
Board may adopt.
Penalties
S E C. 9 - A, A C T N O. 2 6 5 5
The Monetary Board shall promulgate such rules and For loans under Sec. 2, penalties are included in considering the
regulations as may be necessary to implement interest. For loans under Sec. 3, penalties are not included.
effectively the provisions of this Act.
Attorney’s fees
d. Rates of interest under Usury Law &
BSP Circular No. 799 Attorney’s fees are not included in the interest.
Sec. 1, Act No. 2655, supra 4. Prohibited acts

S E C. 2, A C T N O. 2 6 5 5 Sec. 2, Act No. 2655, supra
No person or corporation shall directly or indirectly Sec. 3, Act No. 2655, supra
take or receive in money or other property, real or
personal, or choses in action, a higher rate of interest Acts prohibited in Sec. 2 vs. Sec. 3
or greater sum or value, including commissions, Sec. 2 Sec. 3
premiums, fines and penalties, for the loan or renewal Taking, receiving,
thereof or forbearance of money, goods, or credits, Act Taking or receiving
demanding, or agreeing
where such loan or renewal or forbearance is secured punished usurious interest
to a usurious interest
in whole or in part by a mortgage upon real estate the Loan secured by REM
title to which is duly registered, or by any document Loan
over registered real Unsecured loan
conveying such real estate or an interest therein, than referred to
estate
twelve per centum per annum or the maximum rate Maximum
prescribed by the Monetary Board and in force at the 12% p.a. 14% p.a.
interest
time the loan or renewal thereof or forbearance is Commissions,
granted: Provided, That the rate of interest under this Inclusions
premiums, fines, and None
section or the maximum rate of interest that may be in interest
penalties
prescribed by the Monetary Board under this section
may likewise apply to loans secured by other types of S E C. 4, A C T N O. 2 6 5 5
security as may be specified by the Monetary Board. No pawnbroker or pawnbroker's agent shall directly or
indirectly stipulate, charge, demand, take or receive
S E C. 3, A C T N O. 2 6 5 5
any higher rate or greater sum or value for any loan or
No person or corporation shall directly or indirectly
forbearance than two and one-half per centum per
demand, take, receive or agree to charge in money or
month when the sum lent is less than one hundred
other property, real or personal, a higher rate or
pesos; two per centum per month when the sum lent
greater sum or value for the loan or forbearance of
is one hundred pesos or more, but not exceeding five
money, goods, or credits where such loan or
hundred pesos; and fourteen per centum per annum
forbearance is not secured as provided in Section two
when it is more than the amount last mentioned; or
hereof, than fourteen per centum per annum or the
the maximum rate or rates prescribed by the
maximum rate or rates prescribed by the Monetary
Monetary Board and in force at the time the loan or
Board and in force at the time the loan or forbearance
forbearance is granted. A pawnbroker or pawnbroker's
is granted.
agent shall be considered such, for the benefits of this
Act, only if he be duly licensed and has an
S E C. 5, A C T N O. 2 6 5 5
establishment open to the public.
In computing the interest on any obligation,
It shall be unlawful for a pawnbroker or
promissory note or other instrument or contract,
pawnbroker's agent to divide the pawn offered by a
compound interest shall not be reckoned, except by
person into two or more fractions in order to collect
agreement: Provided, That whenever compound
greater interest than the permitted by this section.
interest is agreed upon, the effective rate of interest
It shall also be unlawful for a pawnbroker or
charged by the creditor shall not exceed the
pawnbroker's agent to require the pawner to pay an collected by him in advance when the debtor shall
additional charge as insurance premium for the have paid the obligation before it is due, provided
safekeeping and conservation of the article pawned. such interest, and commissions and premiums do not
exceed the rates fixed in this Act.
S E C. 1 0, A C T N O. 2 6 5 5
Without prejudice to the proper civil action violation of S E C. 7, A C T N O. 2 6 5 5
this Act and the implementing rules and regulations All covenants and stipulations contained in
promulgated by the Monetary Board shall be subject conveyances, mortgages, bonds, bills, notes, and
to criminal prosecution and the guilty person shall, other contracts or evidences of debts, and all deposits
upon conviction, be sentenced to a fine of not less of goods or other things, whereupon or whereby there
than fifty pesos nor more than five hundred pesos, or shall be stipulated, charged, demanded, reserved,
to imprisonment for not less than thirty days nor more secured, taken, or received, directly or indirectly, a
than one year, or both, in the discretion of the court, higher rate or greater sum or value for the loan or
and to return the entire sum received as interest from renewal or forbearance of money, goods, or credits
the party aggrieved, and in the case of non-payment, than is hereinbefore allowed, shall be void: Provided,
to suffer subsidiary imprisonment at the rate of one however, That no merely clerical error in the
day for every two pesos: Provided, That in case of computation of interest, made without intent to evade
corporations, associations, societies, or companies the any of the provisions of this Act, shall render a
manager, administrator or gerent or the person who contract void: Provided, further, That parties to a loan
has charge of the management or administration of agreement, the proceeds of which may be availed of
the business shall be criminally responsible for any partially or fully at some future time, may stipulate
violation of this Act. that the rate of interest agreed upon at the time the
loan agreement is entered into, which rate shall not
5. Remedies exceed the maximum allowed by law, shall prevail
notwithstanding subsequent changes in the
Effect of usurious stipulation maximum rates that may be made by the Monetary
Stipulation Voided Board: And Provided, finally, That nothing herein
On principal loan Principal loan not voided contained shall be construed to prevent the purchase
On security on principal Security not voided by an innocent purchaser of a negotiable mercantile
On creditor’s right to Right subsists, with forfeiture of paper, usurious or otherwise, for valuable
consideration before maturity, when there has been
recover principal right to recover interest
no intention on the part of said purchaser to evade the
On debtor’s right to recover
May recover entire amount provisions of this Act and said purchase was not a part
usurious interest paid
of the original usurious transaction. In any case,
however, the maker of said note shall have the right to
In jurisprudence, the Court has either struck down excessive
recover from said original holder the whole interest
interest rate stipulations or reduced them. If the effect of a
paid by him thereon and, in case of litigation, also the
usurious stipulation is that it is void, why should it be reduced?
costs and such attorney's fees as may be allowed by
the court.
If Usury Law effective If Usury Law not effective
The debtor may recover the The debtor may recover the S E C. 8, A C T N O. 2 6 5 5
whole interest difference between the All loans under which payment is to be made in
excessive interest and the agricultural products or seed or in any other kind of
reduced rate commodities shall also be null and void unless they
provide that such products or seed or other
Remedies provided under the law commodities shall 6e appraised at the time when the
1. Civil (recovery of interest paid)—prescribes after 2 obligation falls due at the current local market price:
years Provided, That unless otherwise stated in a document
2. Criminal—prescribes in 4 years written in a language or dialect intelligible to the
debtor and subscribed in the presence of not less than
S E C. 6, A C T N O. 2 6 5 5 two witnesses, any contract advancing money to be
Any person or corporation who, for any such loan or repaid later in agricultural products or seed or any
renewal thereof or forbearance, shall have paid or other kind of commodities shall be understood to be a
delivered a higher rate or greater sum or value than is loan, and any person or corporation having paid
hereinbefore allowed to be taken or received, may otherwise shall be entitled in case action is brought
recover the whole interest, commissions, premiums within two years after such payment or delivery to
penalties and surcharges paid or delivered with costs recover all the products or seed delivered as interest,
and attorneys' fees in such sum as may be allowed by or the value thereof, together with the costs and
the court in an action against the person or attorney's fees in such sum as may be allowed by the
corporation who took or received them if such action is court. Nothing contained in this section shall be
brought within two years after such payment or construed to prevent the lender from taking interest
delivery: Provided, however, That the creditor shall not for the money lent, provided such interest be not in
be obliged to return the interest, commissions and excess of the rates herein fixed.
premiums for a period of not more than one year
S E C. 9, A C T N O. 2 6 5 5 be excessive, the remedy is not to nullify the entire

The person or corporation sued shall file its answer in loan contract but to merely reduce the interest
writing under oath to any complaint brought or filed rate to one which is in accord with public policy.
against said person or corporation before a competent
court to recover the money or other personal or real Facts: Carpo sought to declare the mortgage contract
property, seeds or agricultural products, charged or constituted over his property void because of the excessive
received in violation of the provisions of this Act. The interest rate that was imposed on his principal obligation. He
lack of taking an oath to an answer to a complaint will argued that a finding of the court that excessive interest rates
mean the admission of the facts contained in the were imposed by the creditor necessarily resulted in the
latter. avoidance of the loan contract; the mortgage, being an accessory
contract, would also be nullified as a consequence.
S E C. 1 0, A C T N O. 2 6 5 5
Without prejudice to the proper civil action violation of Issue: WON a finding made by the court that excessive interest
this Act and the implementing rules and regulations rates were imposed nullified the contract of loan – NO
promulgated by the Monetary Board shall be subject
to criminal prosecution and the guilty person shall, Held: As provided by various pieces of jurisprudence, the principal
upon conviction, be sentenced to a fine of not less obligation subsists despite the nullity of the stipulated interest.
than fifty pesos nor more than five hundred pesos, or As such, there is no instance wherein a mortgage contract will be
to imprisonment for not less than thirty days nor more nullified simply because the interest rate imposed on the
than one year, or both, in the discretion of the court, principal obligation is excessive.
and to return the entire sum received as interest from
the party aggrieved, and in the case of non-payment, SPS. MALLARI v. PRUDENTIAL BANK (2013)
to suffer subsidiary imprisonment at the rate of one
day for every two pesos: Provided, That in case of As provided by multiple pieces of jurisprudence,
corporations, associations, societies, or companies the
an interest rate of 24% is not unconscionable.
manager, administrator or gerent or the person who
Similarly, a penalty charge of 12% has been
has charge of the management or administration of
the business shall be criminally responsible for any
previously upheld.
violation of this Act.
Facts: Mallari’s loan from Prudential which was subjected to a
A R T . 1 4 1 3, C C 23% interest rate. Upon default Prudential sought to foreclose
Interest paid in excess of the interest allowed by the the property mortgaged. Mallari then assailed the validity of the
usury laws may be recovered by the debtor, with terms of his loan because he claimed that the terms thereof were
interest thereon from the date of the payment. too onerous.
Issue: WON the 23% p.a. was unconscionable – NO

ADVOCATES for TRUTH in LENDING, INC. v.
BSP (2013)
Held: [see doctrine]
CB Circular No. 905 merely suspended the
effectivity of the Usury Law and did not repeal it.
Facts: The petitioners assailed the constitutionality of CB Circular

905 which suspended the prevailing Usury Law at that time. Its
practical effect was to effectively remove the ceiling regarding
interest rates governing monetary transactions. They claimed
that the Monetary Board exceeded its authority when it
promulgated a circular that had the effect of repealing a law.
Issue: WON the Monetary Board exceeded its authority in issuing

CB Circular 905 – NO
Held: CB 905 did not repeal the Usury Law—it merely suspended
its operation. Further, the main effect of lifting the interest rate
ceiling was that the freedom of parties to contract was
emphasized. Lastly, the lifting of the interest ceiling did not
mean that creditors were free to charge exorbitant interest rates
without consequence—recourse may always be had by going to
the courts who will not hesitate to strike down unconscionable or
iniquitous provisions.
CARPO v. CHUA & DY NG (2005)
In the event that the court finds an interest rate to
E. W AREHO USE RECEIPTS LAW (ACT (i) A statement of the amount of advances made
NO . 2137) and of liabilities incurred for which the
warehouseman claims a lien. If the precise
1. Concepts amount of such advances made or of such
liabilities incurred is, at the time of the issue of,
a. Warehouse unknown to the warehouseman or to his agent
who issues it, a statement of the fact that
The law does not define a “warehouse,” but De Leon & De Leon advances have been made or liabilities incurred
Jr. define it as “the building or place where goods are deposited and the purpose thereof is sufficient.
and stored for profit.” A warehouseman shall be liable to any person injured
thereby for all damages caused by the omission from
b. Warehouseman a negotiable receipt of any of the terms herein
required.
S E C . 5 8, A C T N O . 2 1 3 7
"Warehouseman" means a person lawfully engaged in Effect of omission of essential terms;
the business of storing goods for profit. other terms
c. Warehouse receipts Effect of omission of essential terms of WHR

Validity of receipt Not affected
Warehouse receipts are documents of title. They are documents Negotiability of receipt Not affected
that evidence ownership, and, at least for negotiable WHRs, the Effect on contract Converted to ordinary deposit
act of transferring them also transfers ownership. Warehouseman’s Liable for damages to those injured by
liability the omission
Who may issue receipts
S E C . 3, A C T N O . 2 1 3 7
S E C . 1, A C T N O . 2 1 3 7 Form of receipts. — What terms may be inserted. — A
Persons who may issue receipts. — Warehouse warehouseman may insert in a receipt issued by him
receipts may be issued by any warehouseman. any other terms and conditions provided that such
terms and conditions shall not:
Only the warehouseman may issue receipts, but his authorized (a) Be contrary to the provisions of this Act.
agent may sign the warehouse receipt, pursuant to Sec. 2(g). (b) In any wise impair his obligation to exercise that
degree of care in the safe-keeping of the goods
Form of receipts; essential terms entrusted to him which is reasonably careful man
would exercise in regard to similar goods of his
Form of warehouse receipts own.
No particular form is prescribed for warehouse
receipts, except that: Types
1. It must appear in writing; and
2. The requirements under Sec. 2 of the Act must Types of warehouse receipts
appear in the written instrument. Negotiable Non-negotiable
Goods received will be Goods received will be
There are no oral WHRs J delivered to bearer or to the delivered to the
order of any person named in depositor/person specified
S E C . 2, A C T N O . 2 1 3 7 the receipt therein
Form of receipts; essential terms. — Warehouse
receipts need not be in any particular form but every S E C . 4, A C T N O . 2 1 3 7
such receipt must embody within its written or printed Definition of non-negotiable receipt. — A receipt in
terms: which it is stated that the goods received will be
(a) The location of the warehouse where the goods delivered to the depositor or to any other specified
are stored, person, is a non-negotiable receipt.
(b) The date of the issue of the receipt,
(c) The consecutive number of the receipt, S E C . 5, A C T N O . 2 1 3 7
(d) A statement whether the goods received will be Definition of negotiable receipt. — A receipt in which it
delivered to the bearer, to a specified person or to is stated that the goods received will be delivered to
a specified person or his order, the bearer or to the order of any person named in
(e) The rate of storage charges, such receipt is a negotiable receipt.
(f) A description of the goods or of the packages No provision shall be inserted in a negotiable
containing them, receipt that it is non-negotiable. Such provision, if
(g) The signature of the warehouseman which may inserted shall be void.
be made by his authorized agent,
(h) If the receipt is issued for goods of which the S E C . 6, A C T N O . 2 1 3 7
warehouseman is owner, either solely or jointly or Duplicate receipts must be so marked. — When more
in common with others, the fact of such than one negotiable receipt is issued for the same
ownership, and
goods, the word "duplicate" shall be plainly placed 3. An offer to surrender the WHR, if it is
upon the face of every such receipt, except the first negotiable;
one issued. A warehouseman shall be liable for all 4. Delivery receipt, if requested by WHman
damages caused by his failure so to do to any one who 1. Person lawfully entitled to possession, or
purchased the subsequent receipt for value supposing his agent;
To whom
it to be an original, even though the purchase be after 2. Person entitled to delivery through a non-
delivery may be
the delivery of the goods by the warehouseman to the negotiable receipt, or another person
made
holder of the original receipt. authorized by the former; or
3. Person with a negotiable receipt.
S E C . 7, A C T N O . 2 1 3 7 Rationale of Because a negotiable WHR can transfer
Failure to mark "non-negotiable." — A non-negotiable surrender & ownership by mere delivery, the surrender
receipt shall have plainly placed upon its face by the cancellation of and cancellation of the WHR after delivery is
warehouseman issuing it "non-negotiable," or "not negotiable to prevent further transfers and protect
negotiable." In case of the warehouseman's failure so WHRs buyers in good faith.
to do, a holder of the receipt who purchased it for Cannot be set up by WHman, unless the title
value supposing it to be negotiable, may, at his Defense of he claims arose:
option, treat such receipt as imposing upon the ownership 1. At the time of the deposit for storage
warehouseman the same liabilities he would have 2. After the WHR was issued
incurred had the receipt been negotiable. If more than one person claims
This section shall not apply, however, to letters, title/possession of the goods, WHman may
memoranda, or written acknowledgment of an Adverse require interpleader either:
informal character. claimants 1. As defense to an action brought against
him for non-delivery of goods; or
2. Rights & obligations of 2. As original suit.
warehouseman
Right To lien S E C . 8, A C T N O . 2 1 3 7
To take care of goods deposited Obligation of warehousemen to deliver. — A
Obligations
Deliver the goods upon demand warehouseman, in the absence of some lawful excuse
provided by this Act, is bound to deliver the goods
a. Obligation to take care of the goods upon a demand made either by the holder of a receipt
for the goods or by the depositor; if such demand is
S E C . 2 1, A C T N O . 2 1 3 7 accompanied with:
Liability for care of goods. — A warehouseman shall (a) An offer to satisfy the warehouseman's lien;
be liable for any loss or injury to the goods caused by (b) An offer to surrender the receipt, if negotiable,
his failure to exercise such care in regard to them as with such indorsements as would be necessary
reasonably careful owner of similar goods would for the negotiation of the receipt; and
exercise, but he shall not be liable, in the absence of (c) A readiness and willingness to sign, when the
an agreement to the contrary, for any loss or injury to goods are delivered, an acknowledgment that
the goods which could not have been avoided by the they have been delivered, if such signature is
exercise of such care. requested by the warehouseman.
In case the warehouseman refuses or fails to deliver
The diligence required is that of a reasonably careful owner of the goods in compliance with a demand by the holder
similar goods, or a good father of a family. or depositor so accompanied, the burden shall be
upon the warehouseman to establish the existence of
Rule on commingling a lawful excuse for such refusal.
The WHman cannot commingle fungible goods
absent a stipulation allowing it. To whom delivery should be made
Rule on perishable/hazardous goods S E C . 9, A C T N O . 2 1 3 7

When the goods are perishable or hazardous, and the Justification of warehouseman in delivering. — A
person who must receive them is unable to remove warehouseman is justified in delivering the goods,
them from the warehouse, the WHman may sell them subject to the provisions of the three following
at a public or private sale. If he is unable to sell them, sections, to one who is:
he can dispose of them in any lawful manner, and he (a) The person lawfully entitled to the possession of
will not be liable for this disposal. the goods, or his agent;
(b) A person who is either himself entitled to delivery
b. Obligation to deliver by the terms of a non-negotiable receipt issued
for the goods, or who has written authority from
Summary of rules on delivery the person so entitled either indorsed upon the
The holder of the receipt/depositor must: receipt or written upon another paper; or
Requisites for 1. Make a demand for the goods, (c) A person in possession of a negotiable receipt by
delivery accompanied by the terms of which the goods are deliverable to
2. An offer to satisfy the WHman’s lien; him or order, or to bearer, or which has been
indorsed to him or in blank by the person to brought against him for non-delivery of the goods or
whom delivery was promised by the terms of the as an original suit, whichever is appropriate, require
receipt or by his mediate or immediate indorser. all known claimants to interplead.
Cancellation of negotiable receipts Sec. 1, Act 2137, supra

upon delivery or part delivery
S E C . 1 9, A C T N O . 2 1 3 7
S E C . 1 1, A C T N O . 2 1 3 7 Adverse title is no defense except as above provided.
Negotiable receipt must be cancelled when goods — Except as provided in the two preceding sections
delivered. — Except as provided in section thirty-six, and in sections nine and thirty-six, no right or title of a
where a warehouseman delivers goods for which he third person shall be a defense to an action brought
had issued a negotiable receipt, the negotiation of by the depositor or person claiming under him against
which would transfer the right to the possession of the the warehouseman for failure to deliver the goods
goods, and fails to take up and cancel the receipt, he according to the terms of the receipt.
shall be liable to any one who purchases for value in
good faith such receipt, for failure to deliver the goods Attachment/levy of goods covered
to him, whether such purchaser acquired title to the by negotiable receipt
receipt before or after the delivery of the goods by the
warehouseman. S E C . 2 5, A C T N O . 2 1 3 7
Attachment or levy upon goods for which a negotiable
S E C . 1 2, A C T N O . 2 1 3 7 receipt has been issued. — If goods are delivered to a
Negotiable receipts must be cancelled or marked warehouseman by the owner or by a person whose act
when part of goods delivered. — Except as provided in in conveying the title to them to a purchaser in good
section thirty-six, where a warehouseman delivers part faith for value would bind the owner, and a negotiable
of the goods for which he had issued a negotiable receipt is issued for them, they can not thereafter,
receipt and fails either to take up and cancel such while in the possession of the warehouseman, be
receipt or to place plainly upon it a statement of what attached by garnishment or otherwise, or be levied
goods or packages have been delivered, he shall be upon under an execution unless the receipt be first
liable to any one who purchases for value in good surrendered to the warehouseman or its negotiation
faith such receipt, for failure to deliver all the goods enjoined. The warehouseman shall in no case be
specified in the receipt, whether such purchaser compelled to deliver up the actual possession of the
acquired title to the receipt before or after the delivery goods until the receipt is surrendered to him or
of any portion of the goods by the warehouseman. impounded by the court.
S E C . 3 6, A C T N O . 2 1 3 7 S E C . 2 6, A C T N O . 2 1 3 7
Effect of sale. — After goods have been lawfully sold Creditor's remedies to reach negotiable receipts. — A
to satisfy a warehouseman's lien, or have been creditor whose debtor is the owner of a negotiable
lawfully sold or disposed of because of their receipt shall be entitled to such aid from courts of
perishable or hazardous nature, the warehouseman appropriate jurisdiction, by injunction and otherwise,
shall not thereafter be liable for failure to deliver the in attaching such receipt or in satisfying the claim by
goods to the depositor or owner of the goods or to a means thereof as is allowed at law or in equity in
holder of the receipt given for the goods when they these islands in regard to property which can not
were deposited, even if such receipt be negotiable. readily be attached or levied upon by ordinary legal
process.
Estoppel to raise defense of
ownership c. Right of lien
S E C . 1 6, A C T N O . 2 1 3 7 Summary of rules on right of lien
Warehouseman cannot set up title in himself . — No Charges for storage and preservation, money
title or right to the possession of the goods, on the advanced, interest, insurance, transportation,
part of the warehouseman, unless such title or right is Claims labor, weighing, coopering, and other charges
derived directly or indirectly from a transfer made by included and expenses of such goods
the depositor at the time of or subsequent to the Reasonable charges and expenses for notice
deposit for storage, or from the warehouseman's lien, and advertisements of sale
shall excuse the warehouseman from liability for May be
refusing to deliver the goods according to the terms of All goods deposited belonging to the person
enforced
the receipt. liable as debtor, or deposited by the debtor but
against what
belonging to others
property
Adverse claimants 1. By surrendering possession; or
Ways of
2. By refusing to deliver goods when valid
S E C . 1 7, A C T N O . 2 1 3 7 losing lien
demand is made
Interpleader of adverse claimants. — If more than one
1. WHman causes sale of goods at auction
person claims the title or possession of the goods, the Ways of
2. Action for collection of sum of money
warehouseman may, either as a defense to an action enforcing lien
3. Refusal to deliver until lien satisfied
advances which the depositor has expressly or

S E C . 2 7, A C T N O . 2 1 3 7 impliedly contracted with the warehouseman to pay.
What claims are included in the warehouseman's lien.
— Subject to the provisions of section thirty, a S E C . 3 3, A C T N O . 2 1 3 7
warehouseman shall have a lien on goods deposited Satisfaction of lien by sale. — A warehouseman's lien
or on the proceeds thereof in his hands, for all lawful for a claim which has become due may be satisfied as
charges for storage and preservation of the goods; follows:
also for all lawful claims for money advanced, interest, (a) An itemized statement of the warehouseman's
insurance, transportation, labor, weighing, coopering claim, showing the sum due at the time of the
and other charges and expenses in relation to such notice and the date or dates when it becomes
goods, also for all reasonable charges and expenses due;
for notice, and advertisements of sale, and for sale of (b) A brief description of the goods against which the
the goods where default had been made in satisfying lien exists,
the warehouseman's lien. (c) A demand that the amount of the claim as stated
in the notice of such further claim as shall accrue,
S E C . 2 8, A C T N O . 2 1 3 7 shall be paid on or before a day mentioned, not
Against what property the lien may be enforced. — less than ten days from the delivery of the notice
Subject to the provisions of section thirty, a if it is personally delivered, or from the time when
warehouseman's lien may be enforced: the notice shall reach its destination, according to
(a) Against all goods, whenever deposited, belonging the due course of post, if the notice is sent by
to the person who is liable as debtor for the mail,
claims in regard to which the lien is asserted, and (d) A statement that unless the claim is paid within
(b) Against all goods belonging to others which have the time specified, the goods will be advertised
been deposited at any time by the person who is for sale and sold by auction at a specified time
liable as debtor for the claims in regard to which and place.
the lien is asserted if such person had been so In accordance with the terms of a notice so given, a
entrusted with the possession of goods that a sale of the goods by auction may be had to satisfy any
pledge of the same by him at the time of the valid claim of the warehouseman for which he has a
deposit to one who took the goods in good faith lien on the goods. The sale shall be had in the place
for value would have been valid. where the lien was acquired, or, if such place is
manifestly unsuitable for the purpose of the claim
S E C . 2 9, A C T N O . 2 1 3 7 specified in the notice to the depositor has elapsed,
How the lien may be lost. — A warehouseman loses and advertisement of the sale, describing the goods to
his lien upon goods: be sold, and stating the name of the owner or person
(a) By surrendering possession thereof, or on whose account the goods are held, and the time
(b) By refusing to deliver the goods when a demand and place of the sale, shall be published once a week
is made with which he is bound to comply under for two consecutive weeks in a newspaper published
the provisions of this Act. in the place where such sale is to be held. The sale
shall not be held less than fifteen days from the time
S E C . 3 0, A C T N O . 2 1 3 7 of the first publication. If there is no newspaper
Negotiable receipt must state charges for which the published in such place, the advertisement shall be
lien is claimed. — If a negotiable receipt is issued for posted at least ten days before such sale in not less
goods, the warehouseman shall have no lien thereon than six conspicuous places therein.
except for charges for storage of goods subsequent to From the proceeds of such sale, the
the date of the receipt unless the receipt expressly warehouseman shall satisfy his lien including the
enumerated other charges for which a lien is reasonable charges of notice, advertisement and
claimed. In such case, there shall be a lien for the sale. The balance, if any, of such proceeds shall be
charges enumerated so far as they are within the held by the warehouseman and delivered on demand
terms of section twenty-seven although the amount of to the person to whom he would have been bound to
the charges so enumerated is not stated in the deliver or justified in delivering goods.
receipt. At any time before the goods are so sold, any
person claiming a right of property or possession
S E C . 3 1, A C T N O . 2 1 3 7 therein may pay the warehouseman the amount
Warehouseman need not deliver until lien is satisfied. necessary to satisfy his lien and to pay the reasonable
— A warehouseman having a lien valid against the expenses and liabilities incurred in serving notices and
person demanding the goods may refuse to deliver advertising and preparing for the sale up to the time
the goods to him until the lien is satisfied. of such payment. The warehouseman shall deliver
the goods to the person making payment if he is a
S E C . 3 2, A C T N O . 2 1 3 7 person entitled, under the provision of this Act, to the
Warehouseman's lien does not preclude other possession of the goods on payment of charges
remedies. — Whether a warehouseman has or has not thereon. Otherwise, the warehouseman shall retain
a lien upon the goods, he is entitled to all remedies the possession of the goods according to the terms of
allowed by law to a creditor against a debtor for the the original contract of deposit.
collection from the depositor of all charges and
Non-existence/misdescription of
S E C . 3 4, A C T N O . 2 1 3 7 goods
Perishable and hazardous goods. — If goods are of a
perishable nature, or by keeping will deteriorate S E C . 2 0, A C T N O . 2 1 3 7
greatly in value, or, by their order, leakage, Liability for non-existence or misdescription of goods.
inflammability, or explosive nature, will be liable to — A warehouseman shall be liable to the holder of a
injure other property , the warehouseman may give receipt for damages caused by the non-existence of
such notice to the owner or to the person in whose the goods or by the failure of the goods to correspond
names the goods are stored, as is reasonable and with the description thereof in the receipt at the time
possible under the circumstances, to satisfy the lien of its issue. If, however, the goods are described in a
upon such goods and to remove them from the receipt merely by a statement of marks or labels upon
warehouse and in the event of the failure of such them or upon packages containing them or by a
person to satisfy the lien and to receive the goods statement that the goods are said to be goods of a
within the time so specified, the warehouseman may certain kind or that the packages containing the
sell the goods at public or private sale without goods are said to contain goods of a certain kind or by
advertising. If the warehouseman, after a reasonable words of like purport, such statements, if true, shall
effort, is unable to sell such goods, he may dispose of not make liable the warehouseman issuing the
them in any lawful manner and shall incur no liability receipt, although the goods are not of the kind which
by reason thereof. the marks or labels upon them indicate or of the kind
The proceeds of any sale made under the terms they were said to be by the depositor.
of this section shall be disposed of in the same way as
the proceeds of sales made under the terms of the Failure to take care of the goods
preceding section.
Sec. 21, Act 2137, supra
S E C . 3 5, A C T N O . 2 1 3 7
Other methods of enforcing lien. — The remedy for S E C . 2 2, A C T N O . 2 1 3 7
enforcing a lien herein provided does not preclude any Goods must be kept separate. — Except as provided in
other remedies allowed by law for the enforcement of the following section, a warehouseman shall keep the
a lien against personal property nor bar the right to goods so far separate from goods of other depositors
recover so much of the warehouseman's claim as shall and from other goods of the same depositor for which
not be paid by the proceeds of the sale of the a separate receipt has been issued, as to permit at all
property. times the identification and redelivery of the goods
deposited.
S E C . 3 6, A C T N O . 2 1 3 7
Effect of sale. — After goods have been lawfully sold S E C . 2 3, A C T N O . 2 1 3 7
to satisfy a warehouseman's lien, or have been Fungible goods may be commingled if
lawfully sold or disposed of because of their warehouseman authorized. — If authorized by
perishable or hazardous nature, the warehouseman agreement or by custom, a warehouseman may
shall not thereafter be liable for failure to deliver the mingle fungible goods with other goods of the same
goods to the depositor or owner of the goods or to a kind and grade. In such case, the various depositors
holder of the receipt given for the goods when they of the mingled goods shall own the entire mass in
were deposited, even if such receipt be negotiable. common and each depositor shall be entitled to such
portion thereof as the amount deposited by him bears
d. Liabilities to the whole.
Acts for which a warehouseman may be liable S E C . 2 4, A C T N O . 2 1 3 7

1. Failure to stamp “duplicate” on copies of a Liability of warehouseman to depositors of
negotiable receipt; commingled goods. — The warehouseman shall be
2. Failure to place “non-negotiable”/”not severally liable to each depositor for the care and
negotiable” on a non-negotiable receipt redelivery of his share of such mass to the same
3. Misdelivery of goods extent and under the same circumstances as if the
4. Failure to effect cancellation of a negotiable goods had been kept separate.
receipt upon delivery of goods
5. Issuing receipt for non-existing goods or Failure to stamp “duplicate on copies
misdescribed goods of a negotiable receipt
6. Failure to take care of the goods
Sec. 6, Act 2137, supra
7. Failure to give notice in case of sale of goods to
satisfy his lien or because the goods are Failure to place “non negotiable”/”not
perishable/hazardous negotiable” on a non-negotiable
receipt
Effect of failure to indicate type of warehouse receipt
Failure to put “non-negotiable” Converted to negotiable Sec. 7, Act 2137, supra
Failure to put “negotiable” Not converted to non-nego
Misdelivery of the goods delivery may incur by reason of the original receipt
remaining outstanding. The court may also in its
S E C . 1 0, A C T N O . 2 1 3 7 discretion order the payment of the warehouseman's
Warehouseman's liability for misdelivery. — Where a reasonable costs and counsel fees.
warehouseman delivers the goods to one who is not in The delivery of the goods under an order of the
fact lawfully entitled to the possession of them, the court as provided in this section, shall not relieve the
warehouseman shall be liable as for conversion to all warehouseman from liability to a person to whom the
having a right of property or possession in the goods negotiable receipt has been or shall be negotiated for
if he delivered the goods otherwise than as authorized value without notice of the proceedings or of the
by subdivisions (b) and (c) of the preceding section, delivery of the goods.
and though he delivered the goods as authorized by
said subdivisions, he shall be so liable, if prior to such S E C . 1 5, A C T N O . 2 1 3 7
delivery he had either: Effect of duplicate receipts. — A receipt upon the face
(a) Been requested, by or on behalf of the person of which the word "duplicate" is plainly placed is a
lawfully entitled to a right of property or representation and warranty by the warehouseman
possession in the goods, not to make such deliver; that such receipt is an accurate copy of an original
or receipt properly issued and uncanceled at the date of
(b) Had information that the delivery about to be the issue of the duplicate, but shall impose upon him
made was to one not lawfully entitled to the no other liability.
possession of the goods.
Issuing receipt for non-
Failure to effect cancellation of a existing/misdescribed goods
negotiable receipt upon delivery of
the goods Sec. 20, Act 2137, supra
Sec. 11, Act 2137, supra Failure to take care of the goods
Altered, lost, or duplicate receipts Sec. 21, Act 2137, supra
S E C . 1 3, A C T N O . 2 1 3 7 Failure to give notice in case of sale

Altered receipts. — The alteration of a receipt shall of goods to satisfy his lien/because
not excuse the warehouseman who issued it from any goods are perishable or hazardous
liability if such alteration was:
(a) Immaterial, Sec. 33, Act 2137, supra
(b) Authorized, or Sec. 34, Act 2137, supra
(c) Made without fraudulent intent.
If the alteration was authorized, the warehouseman 3. Negotiation & transfer of
shall be liable according to the terms of the receipt as receipts
altered. If the alteration was unauthorized but made
without fraudulent intent, the warehouseman shall be Rules on negotiation & transfer of warehouse receipts
liable according to the terms of the receipt as they Negotiable WHR Non-negotiable WHR
were before alteration. Nature May be negotiated May only be transferred
Material and fraudulent alteration of a receipt 1. Delivery (if WHR “to
shall not excuse the warehouseman who issued it bearer” or
from liability to deliver according to the terms of the How indorsement in blank)
Delivery
receipt as originally issued, the goods for which it was made 2. Indorsement +
issued but shall excuse him from any other liability to delivery (if WHR “to
the person who made the alteration and to any person the order of X”)
who took with notice of the alteration. Any purchaser Title
That of original owner That of predecessor
of the receipt for value without notice of the alteration acquired
shall acquire the same rights against the
warehouseman which such purchaser would have a. Negotiable receipts
acquired if the receipt had not been altered at the
time of purchase. Who may negotiate
S E C . 1 4, A C T N O . 2 1 3 7 S E C . 4 0, A C T N O . 2 1 3 7
Lost or destroyed receipts. — Where a negotiable Who may negotiate a receipt. — A negotiable receipt
receipt has been lost or destroyed, a court of may be negotiated:
competent jurisdiction may order the delivery of the (a) By the owner thereof, or
goods upon satisfactory proof of such loss or (b) By any person to whom the possession or custody
destruction and upon the giving of a bond with of the receipt has been entrusted by the owner, if,
sufficient sureties to be approved by the court to by the terms of the receipt, the warehouseman
protect the warehouseman from any liability or undertakes to deliver the goods to the order of
expense, which he or any person injured by such the person to whom the possession or custody of
the receipt has been entrusted, or if, at the time essential for negotiation, the transferee acquires a
of such entrusting, the receipt is in such form that right against the transferor to compel him to indorse
it may be negotiated by delivery. the receipt unless a contrary intention appears. The
negotiation shall take effect as of the time when the
Manner of negotiation & indorsement indorsement is actually made.
S E C . 3 7, A C T N O . 2 1 3 7 Liability of person negotiating a

Negotiation of negotiable receipt of delivery. — A receipt
negotiable receipt may be negotiated by delivery:
(a) Where, by terms of the receipt, the S E C . 4 5, A C T N O . 2 1 3 7
warehouseman undertakes to deliver the goods Indorser not a guarantor. — The indorsement of a
to the bearer, or receipt shall not make the indorser liable for any
(b) Where, by the terms of the receipt, the failure on the part of the warehouseman or previous
warehouseman undertakes to deliver the goods indorsers of the receipt to fulfill their respective
to the order of a specified person, and such obligations.
person or a subsequent indorsee of the receipt
has indorsed it in blank or to bearer. When negotiation not impaired by
Where, by the terms of a negotiable receipt, the goods fraud, etc.
are deliverable to bearer or where a negotiable receipt
has been indorsed in blank or to bearer, any holder S E C . 4 7, A C T N O . 2 1 3 7
may indorse the same to himself or to any other When negotiation not impaired by fraud, mistake or
specified person, and, in such case, the receipt shall duress. — The validity of the negotiation of a receipt is
thereafter be negotiated only by the indorsement of not impaired by the fact that such negotiation was a
such indorsee. breach of duty on the part of the person making the
negotiation or by the fact that the owner of the receipt
S E C . 3 8, A C T N O . 2 1 3 7 was induced by fraud, mistake or duress or to entrust
Negotiation of negotiable receipt by indorsement. — A the possession or custody of the receipt to such
negotiable receipt may be negotiated by the person, if the person to whom the receipt was
indorsement of the person to whose order the goods negotiated or a person to whom the receipt was
are, by the terms of the receipt, deliverable. Such subsequently negotiated paid value therefor, without
indorsement may be in blank, to bearer or to a notice of the breach of duty, or fraud, mistake or
specified person. If indorsed to a specified person, it duress.
may be again negotiated by the indorsement of such
person in blank, to bearer or to another specified Subsequent negotiation
person. Subsequent negotiation may be made in like
manner. S E C . 4 8, A C T N O . 2 1 3 7
Subsequent negotiation. — Where a person having
Rights of person to whom a receipt sold, mortgaged, or pledged goods which are in
was negotiated warehouse and for which a negotiable receipt has
been issued, or having sold, mortgaged, or pledged
S E C . 4 1, A C T N O . 2 1 3 7 the negotiable receipt representing such goods,
Rights of person to whom a receipt has been continues in possession of the negotiable receipt, the
negotiated. — A person to whom a negotiable receipt subsequent negotiation thereof by the person under
has been duly negotiated acquires thereby: any sale or other disposition thereof to any person
(a) Such title to the goods as the person negotiating receiving the same in good faith, for value and without
the receipt to him had or had ability to convey to notice of the previous sale, mortgage or pledge, shall
a purchaser in good faith for value, and also such have the same effect as if the first purchaser of the
title to the goods as the depositor or person to goods or receipt had expressly authorized the
whose order the goods were to be delivered by subsequent negotiation.
the terms of the receipt had or had ability to
convey to a purchaser in good faith for value, and b. Non-negotiable receipts
(b) The direct obligation of the warehouseman to
hold possession of the goods for him according to Who may transfer
the terms of the receipt as fully as if the
warehouseman and contracted directly with him. The holder of the non-negotiable WHR may transfer it by
delivery.
Rights of person to whom negotiable
receipt was transferred without Manner of transfer: delivery
indorsement
S E C . 3 9, A C T N O . 2 1 3 7
S E C . 4 3, A C T N O . 2 1 3 7 Transfer of receipt. — A receipt which is not in such
Transfer of negotiable receipt without indorsement. — form that it can be negotiated by delivery may be
Where a negotiable receipt is transferred for value by transferred by the holder by delivery to a purchaser or
delivery and the indorsement of the transferor is donee.
A non-negotiable receipt can not be negotiated, the time of issuing such receipt, shall be guilty of a
and the indorsement of such a receipt gives the crime, and, upon conviction, shall be punished for
transferee no additional right. each offense by imprisonment not exceeding five
years, or by a fine not exceeding ten thousand pesos,
Rights of persons to whom a receipt or both.
was transferred
S E C . 5 1, A C T N O . 2 1 3 7
S E C . 4 2, A C T N O . 2 1 3 7 Issue of receipt containing false statement. — A
Rights of person to whom receipt has been warehouseman, or any officer, agent or servant of a
transferred. — A person to whom a receipt has been warehouseman who fraudulently issues or aids in
transferred but not negotiated acquires thereby, as fraudulently issuing a receipt for goods knowing that
against the transferor, the title of the goods subject to it contains any false statement, shall be guilty of a
the terms of any agreement with the transferor. crime, and upon conviction, shall be punished for each
If the receipt is non-negotiable, such person also offense by imprisonment not exceeding one year, or
acquires the right to notify the warehouseman of the by a fine not exceeding two thousand pesos, or by
transfer to him of such receipt and thereby to acquire both.
the direct obligation of the warehouseman to hold
possession of the goods for him according to the S E C . 5 2, A C T N O . 2 1 3 7
terms of the receipt. Issue of duplicate receipt not so marked. — A
warehouse, or any officer, agent, or servant of a
c. Warranties on sale of receipts warehouseman who issues or aids in issuing a
duplicate or additional negotiable receipt for goods
S E C . 4 4, A C T N O . 2 1 3 7 knowing that a former negotiable receipt for the same
Warranties of a sale of receipt. — A person who, for goods or any part of them is outstanding and
value, negotiates or transfers a receipt by indorsement uncanceled, without plainly placing upon the face
or delivery, including one who assigns for value a thereof the word "duplicate" except in the case of a
claim secured by a receipt, unless a contrary intention lost or destroyed receipt after proceedings are
appears, warrants: provided for in section fourteen, shall be guilty of a
(a) That the receipt is genuine, crime, and, upon conviction, shall be punished for
(b) That he has a legal right to negotiate or transfer each offense by imprisonment not exceeding five
it, years, or by a fine not exceeding ten thousand pesos,
(c) That he has knowledge of no fact which would or by both.
impair the validity or worth of the receipt, and
(d) That he has a right to transfer the title to the
S E C . 5 3, A C T N O . 2 1 3 7
goods and that the goods are merchantable or fit
Issue for warehouseman's goods or receipts which do
for a particular purpose whenever such
not state that fact. — Where they are deposited with
warranties would have been implied, if the
or held by a warehouseman goods of which he is
contract of the parties had been to transfer
owner, either solely or jointly or in common with
without a receipt of the goods represented
others, such warehouseman, or any of his officers,
thereby.
agents, or servants who, knowing this ownership,
issues or aids in issuing a negotiable receipt for such
S E C . 4 6, A C T N O . 2 1 3 7
goods which does not state such ownership, shall be
No warranty implied from accepting payment of a
guilty of a crime, and, upon conviction, shall be
debt. — A mortgagee, pledgee, or holder for security
punished for each offense by imprisonment not
of a receipt who, in good faith, demands or receives
exceeding one year, or by a fine not exceeding two
payment of the debt for which such receipt is security,
thousand pesos, or by both.
whether from a party to a draft drawn for such debt or
from any other person, shall not, by so doing, be
deemed to represent or to warrant the genuineness of
S E C . 5 4, A C T N O . 2 1 3 7
Delivery of goods without obtaining negotiable
such receipt or the quantity or quality of the goods
receipt. — A warehouseman, or any officer, agent, or
therein described.
servant of a warehouseman, who delivers goods out of
the possession of such warehouseman, knowing that
Sec. 47, Act 2137, supra a negotiable receipt the negotiation of which would
transfer the right to the possession of such goods is
4. Criminal offenses outstanding and uncanceled, without obtaining the
possession of such receipt at or before the time of
S E C . 5 0, A C T N O . 2 1 3 7 such delivery, shall, except in the cases provided for in
Issue of receipt for goods not received. — A sections fourteen and thirty-six, be found guilty of a
warehouseman, or an officer, agent, or servant of a crime, and, upon conviction, shall be punished for
warehouseman who issues or aids in issuing a receipt each offense by imprisonment not exceeding one year,
knowing that the goods for which such receipt is or by a fine not exceeding two thousand pesos, or by
issued have not been actually received by such both.
warehouseman, or are not under his actual control at
S E C . 5 5, A C T N O . 2 1 3 7 F. TRUST RECEIPTS LAW

Negotiation of receipt for mortgaged goods. — Any
person who deposits goods to which he has no title, or
upon which there is a lien or mortgage, and who takes
1. Concepts
for such goods a negotiable receipt which he
The Trust Receipts Law covers trust receipt transactions,
afterwards negotiates for value with intent to deceive
whereby an entruster owns or has interest in goods and delivers
and without disclosing his want of title or the
them to an entrustee who must receive the goods, sell them,
existence of the lien or mortgage, shall be guilty of a
and turn over the proceeds of such sale to the entruster, or
crime, and, upon conviction, shall be punished for
return them if he fails to sell the same.
each offense by imprisonment not exceeding one year,
or by a fine not exceeding two thousand pesos, or by
Trust receipts are the documents that evidence this transaction,
both.
and may cover goods, documents, and instruments given in
trust to the entrustee.
PNB v. SE (1996)
a. Trust receipts
A warehouseman may validly refuse to deliver the
property entrusted to him when his S E C. 3 ( J ), P D N O. 1 1 5
warehouseman’s lien has not yet been satisfied. "Trust Receipt" shall refer to the written or printed
The rational for such right to demand payment document signed by the entrustee in favor of the
before delivery is that the warehouse man’s lien is entruster containing terms and conditions
extinguished upon surrendering the goods in his substantially complying with the provisions of this
possession. Decree. No further formality of execution or
authentication shall be necessary to the validity of a
Facts: Ramos and Zoleta offered their quedans that pertained to trust receipt.
sugar stocks in the possession of NASR as security for their loans
with PNB—the receipts were endorsed in favor of the bank. Upon b. Entruster
their default, PNB demanded that NASR release the sugar stocks
covered by the quedans. NASR refused to do so and claimed S E C. 3 ( C ), P D N O. 1 1 5
ownership over the same. "Entruster" shall refer to the person holding title over
the goods, documents, or instruments subject of a
Issue: WON NASR was the owner of the sugar stocks – NO. It trust receipt transaction, and any successor in interest
was, however, entitled to payment of the proper storage fees. of such person.
Held: The Supreme Court affirmed the finding of the RTC and CA c. Entrustee
that the NASR was actually a warehouseman charged with the
S E C. 3 ( B ), P D N O. 1 1 5
safekeeping with the sugar stocks. As a result of such
"Entrustee" shall refer to the person having or taking
designation, it was entitled to the payment of the proper storage
possession of goods, documents or instruments under
fees and the amounts spent to preserve the property deposited.
a trust receipt transaction, and any successor in
PNB can not refuse to pay such charges because by enforcing its
interest of such person for the purpose or purposes
claim under the quedans, it also recognized the role of NASR as
specified in the trust receipt agreement.
a warehouseman whose rights are provided for by law. As is often
held by the court, a party will not be allowed to claim benefits
d. Trust receipt transaction
from a contract and deny its validity in the same breath.
S E C. 4, P D N O. 1 1 5
What constitutes a trust receipt transaction. A trust
receipt transaction, within the meaning of this Decree,
is any transaction by and between a person referred to
in this Decree as the entruster, and another person
referred to in this Decree as entrustee, whereby the
entruster, who owns or holds absolute title or security
interests over certain specified goods, documents or
instruments, releases the same to the possession of
the entrustee upon the latter's execution and delivery
to the entruster of a signed document called a "trust
receipt" wherein the entrustee binds himself to hold
the designated goods, documents or instruments in
trust for the entruster and to sell or otherwise dispose
of the goods, documents or instruments with the
obligation to turn over to the entruster the proceeds
thereof to the extent of the amount owing to the
entruster or as appears in the trust receipt or the
goods, documents or instruments themselves if they
are unsold or not otherwise disposed of, in accordance
with the terms and conditions specified in the trust b. Currency

receipt, or for other purposes substantially equivalent
to any of the following: S E C. 6, P D N O. 1 1 5
7. In the case of goods or documents, (a) to sell the Currency in which a trust receipt may be denominated.
goods or procure their sale; or (b) to manufacture A trust receipt may be denominated in the Philippine
or process the goods with the purpose of ultimate currency or any foreign currency acceptable and
sale: Provided, That, in the case of goods eligible as part of international reserves of the
delivered under trust receipt for the purpose of Philippines, the provisions of existing law, executive
manufacturing or processing before its ultimate orders, rules and regulations to the contrary
sale, the entruster shall retain its title over the notwithstanding: Provided, however, That in the case
goods whether in its original or processed form of trust receipts denominated in foreign currency,
until the entrustee has complied fully with his payment shall be made in its equivalent in Philippine
obligation under the trust receipt; or (c) to load, currency computed at the prevailing exchange rate on
unload, ship or tranship or otherwise deal with the date the proceeds of sale of the goods, documents
them in a manner preliminary or necessary to or instruments held in trust by the entrustee are
their sale; or turned over to the entruster or on such other date as
8. In the case of instruments, may be stipulated in the trust receipt or other
a) to sell or procure their sale or exchange; or agreements executed between the entruster and the
b) to deliver them to a principal; or entrustee.
c) to effect the consummation of some
transactions involving delivery to a The value of the goods in the trust receipt may be designated in
depository or register; or PH peso or in any foreign currency agreed upon by the parties,
d) to effect their presentation, collection or but payments shall always be made in PhP. Hence if a foreign
renewal currency is designated, payment must be made in its equivalent
The sale of goods, documents or instruments by a amount in PhP, at the prevailing exchange rate at the time of the
person in the business of selling goods, documents or turnover or at any time agreed upon.
instruments for profit who, at the outset of the
transaction, has, as against the buyer, general 3. Rights of entruster
property rights in such goods, documents or 1. Right to proceeds of sale
instruments, or who sells the same to the buyer on 2. Right to return of things, in case no sale is made
credit, retaining title or other interest as security for 3. Right to cancel trust upon entrustee’s default
the payment of the purchase price, does not 4. Right to enforce terms and conditions of the trust
constitute a trust receipt transaction and is outside receipt
the purview and coverage of this Decree.
S E C. 7, P D N O. 1 1 5
2. Trust receipts Rights of the entruster. The entruster shall be entitled
to the proceeds from the sale of the goods,
a. Form & contents documents or instruments released under a trust
receipt to the entrustee to the extent of the amount
S E C. 5, P D N O. 1 1 5 owing to the entruster or as appears in the trust
Form of trust receipts; contents. A trust receipt need receipt, or to the return of the goods, documents or
not be in any particular form, but every such receipt instruments in case of non-sale, and to the
must substantially contain (a) a description of the enforcement of all other rights conferred on him in the
goods, documents or instruments subject of the trust trust receipt provided such are not contrary to the
receipt; (2) the total invoice value of the goods and provisions of this Decree.
the amount of the draft to be paid by the entrustee; The entruster may cancel the trust and take
(3) an undertaking or a commitment of the entrustee possession of the goods, documents or instruments
(a) to hold in trust for the entruster the goods, subject of the trust or of the proceeds realized
documents or instruments therein described; (b) to therefrom at any time upon default or failure of the
dispose of them in the manner provided for in the entrustee to comply with any of the terms and
trust receipt; and (c) to turn over the proceeds of the conditions of the trust receipt or any other agreement
sale of the goods, documents or instruments to the between the entruster and the entrustee, and the
entruster to the extent of the amount owing to the entruster in possession of the goods, documents or
entruster or as appears in the trust receipt or to return instruments may, on or after default, give notice to the
the goods, documents or instruments in the event of entrustee of the intention to sell, and may, not less
their non-sale within the period specified therein. than five days after serving or sending of such notice,
The trust receipt may contain other terms and sell the goods, documents or instruments at public or
conditions agreed upon by the parties in addition to private sale, and the entruster may, at a public sale,
those hereinabove enumerated provided that such become a purchaser. The proceeds of any such sale,
terms and conditions shall not be contrary to the whether public or private, shall be applied (a) to the
provisions of this Decree, any existing laws, public payment of the expenses thereof; (b) to the payment
policy or morals, public order or good customs. of the expenses of re-taking, keeping and storing the
goods, documents or instruments; (c) to the
satisfaction of the entrustee's indebtedness to the 6. Rights of purchaser for value &
entruster. The entrustee shall receive any surplus but
shall be liable to the entruster for any deficiency.
in good faith
Notice of sale shall be deemed sufficiently given if in
S E C. 1 1, P D N O. 1 1 5
writing, and either personally served on the entrustee
Rights of purchaser for value and in good faith. Any
or sent by post-paid ordinary mail to the entrustee's
purchaser of goods from an entrustee with right to
last known business address.
sell, or of documents or instruments through their
customary form of transfer, who buys the goods,
S E C. 8, P D N O. 1 1 5 documents, or instruments for value and in good faith
Entruster not responsible on sale by entrustee. The from the entrustee, acquires said goods, documents
entruster holding a security interest shall not, merely
or instruments free from the entruster's security
by virtue of such interest or having given the entrustee interest.
liberty of sale or other disposition of the goods,
documents or instruments under the terms of the
A purchaser for value and in good faith who buys goods from
trust receipt transaction be responsible as principal or
the entrustee acquires the goods free from the security interest.
as vendor under any sale or contract to sell made by
the entrustee.
7. Validity of entruster’ s security
4. Obligations of entrustee interest as against creditors
1. Hold goods, documents, and instruments in trust
S E C. 1 2, P D N O. 1 1 5
2. Sell or otherwise dispose of them according to
Validity of entruster's security interest as against
terms and conditions of trust receipt
creditors. The entruster's security interest in goods,
3. Turn over proceeds of sale
documents, or instruments pursuant to the written
4. Return the goods, documents, or instruments
terms of a trust receipt shall be valid as against all
when not sold
creditors of the entrustee for the duration of the trust
5. Insure the goods for their total value
receipt agreement.
6. Not to commingle entrustor’s goods with others
S E C. 9, P D N O. 1 1 5 8. Penalty clause
Obligations of the entrustee. The entrustee shall (1)
hold the goods, documents or instruments in trust for S E C. 1 3, P D N O. 1 1 5
the entruster and shall dispose of them strictly in Penalty clause. The failure of an entrustee to turn over
accordance with the terms and conditions of the trust the proceeds of the sale of the goods, documents or
receipt; (2) receive the proceeds in trust for the instruments covered by a trust receipt to the extent of
entruster and turn over the same to the entruster to the amount owing to the entruster or as appears in
the extent of the amount owing to the entruster or as the trust receipt or to return said goods, documents or
appears on the trust receipt; (3) insure the goods for instruments if they were not sold or disposed of in
their total value against loss from fire, theft, pilferage accordance with the terms of the trust receipt shall
or other casualties; (4) keep said goods or proceeds constitute the crime of estafa, punishable under the
thereof whether in money or whatever form, separate provisions of Article Three hundred and fifteen,
and capable of identification as property of the paragraph one (b) of Act Numbered Three thousand
entruster; (5) return the goods, documents or eight hundred and fifteen, as amended, otherwise
instruments in the event of non-sale or upon demand known as the Revised Penal Code. If the violation or
of the entruster; and (6) observe all other terms and offense is committed by a corporation, partnership,
conditions of the trust receipt not contrary to the association or other juridical entities, the penalty
provisions of this Decree. provided for in this Decree shall be imposed upon the
directors, officers, employees or other officials or
persons therein responsible for the offense, without
5. Liability of entrustee for loss prejudice to the civil liabilities arising from the
criminal offense.
S E C. 1 0, P D N O. 1 1 5
Liability of entrustee for loss. The risk of loss shall be
Failure to turn over the proceeds of the sale or to return the
borne by the entrustee. Loss of goods, documents or
goods in case of non-sale would make the entrustee liable for
instruments which are the subject of a trust receipt,
estafa under Art. 315, RPC.
pending their disposition, irrespective of whether or
not it was due to the fault or negligence of the
entrustee, shall not extinguish his obligation to the HUR TIN YANG v. PEOPLE of the PH (2013)
entruster for the value thereof.
An entrustee under the Trust Receipts Law has
For loss through force majeure pending disposition, the entrustee two obligations:
is liable, regardless of whether or not it was due to his fault or 1. To return the money received through selling
negligence. This is an exception to the rule of res perit domino. the property entrusted to him (entregarla)
2. To return the goods received that remain
unsold (devolverla)
The violation of any of these obligations

constitutes estafa. The absence or impossibility of
complying with either of these requirements,
however, renders the provisions of the Trust
Receipts Law inapplicable as to the concerned
transaction.
Facts: Supermax obtained loans from Metrobank in order to

finance their purchase of various construction materials. As
security for their loan, Superbank signed 24 trust receipts for the
materials purchased and obliged itself to hold the same or the
proceeds thereof in trust to the extent of the amount stated in
the receipts. Upon the default of Supermax in paying its
outstanding liabilities, the bank filed a criminal complaint of
estafa against it. Supermax alleged that the trust receipts were
only meant to act as additional security for their loan and that
they had procured the construction materials to use them
personally, not to resell them. Further, they alleged that
Metrobank knew of such intent to personally use the construction
materials bought with the amounts that the latter loaned.
Issue: WON the petitioner is liable for estafa as a result of

violating the Trust Receipt Law’s provisions – NO
Held: When two parties enter into an agreement with the

understanding that the return of the goods subject of the trust
receipt is not possible through no fault of the entrustee, it is not a
trust receipt transaction penalized under Sec. 13 of PD 115 in
relation to the RPC. In such a case, the only obligation of the
receiving party is to return the proceeds of said sale transaction—
in effect it takes the nature of a simple loan.
SPS. DELA CRUZ v. PLANTERS (2013)
The sale of goods by a person in the business of

selling goods for profit who at the outset of the
transaction, has, as against the buyer, general
property rights in the good, or who sells the goods
to the buyer on credit, retaining title or other
interest as security for the payment of the
purchase price, does not constitute a trust receipts
transaction and is outside the law’s coverage.
Facts: PPI granted the spouses Dela Cruz a regular credit line
worth 200k with trust receipts as collaterals. Pursuant to their
contract, PPI released various fertilizer and agricultural chemical Acknow ledgm ents
products which the spouses sold to several farmers. After the Comments and Cases
credit term lapsed, the PPI sought to enforce payment of what on Credit Transactions.
remained of the spouses’s obligations by holding the spouses De Leon and De Leon, Jr. References
liable under the provisions of the trust receipts law.
A2016 digests
Issue: WON the spouses Dela Cruz are liable under the Trust
Receipts Law – NO DJ Dolot
Additional notes
Victoria Tiangco
Held: The agreement between the parties and their
contemporaneous acts evidenced a regular loan and a creditor- Dianne Cadorna
debtor relationship and not entruster-entrustee. Maye Cristobal
Info vetting
Carlos Pagdanganan
Further, Sec. 42 provides a specific exception to the applicability Carlos Poblador
of the TRL. The act of PPI in selling the agricultural products to
the spouses on credit by virtue of the credit line took their Block A2016 Best block ever
transaction outside the ambit of the Trust Receipts Law.

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Law 107

WITH NOTES FROM

The key elements of this definition are, therefore:

b. Unilateral Exception: Must appear in a public document if it

A R T . 1 9 3 9, C C Consent by natural persons

Consequences of being personal in character A R T . 1 9 3 7, C C

3. May be either movable or immovable property bailees to whom a thing is

A R T . 1 9 3 8, C C If there is no agreement as to the purpose of the thing, then it is

7. Risk of loss & deterioration Art. 1942, supra

Deterioration arising from use is Summary of ways to extinguish commodatum

gratuitous. As per the CC, payment of

Summary of rules on form of mutuum

Consent to the contract must be given by parties with capacity to A R T . 1 9 5 5, C C

2. Loan of fungible thing—Something of the same A R T . 1 9 5 8, C C

A R T . 1 6 4 3, C C The delivery that perfects a contract of mutuum

from one type of contract to another, change in the nature of the

D. CO MMO DATUM vs. MUTUUM

1. Concept f. Onerous or gratuitous

b. Object a. Keep the thing

Not to commingle things, if so Irregular deposit

provisions relative to agents in Article 1896 shall be Art. 1986, supra

6. Obligations of the depositor A R T . 1 9 4 7, C C

same. (n) (2) When it takes place on the occasion of any

Summary of ways to extinguish deposit b. Deposito miserabile

Art. 1978, supra TRIPLE V v. FILIPINO MERCHANTS (2005)

Deposit v. commodatum Valet car services are in the nature of deposits

Ratio: First, Bonifacio failed to prove the existence of a contract

YHT REALTY v. CA (2005)

Since the hotel industry is impressed with public

Facts: McLoughlin deposited various amounts of money and

Issue: WON the hotel is liable for the loss of McLoughlin’s

Ratio: If the hotel had exercised due diligence in taking care of

2. As to its origin The guaranty is dependent upon the existence of an obligation

4. As to the person guaranteed C. ESSENTIAL REQ UISITES

2. Object guarantees; and

A contract of guaranty must be in writing, but it need not be in a

A R T . 2 0 5 6, C C Art. 2047, supra

Effects of payment without knowledge/consent b. Rationale

5. Time & place of payment c. Requisites

A R T . 1 2 5 1, C C For the guarantor to pay, the creditor must first:

ten years; If any of the guarantors should be insolvent, his

A R T . 2 0 7 2, C C J. EXTINGUISHM ENT of GUARANTY;

also the performance, in any other manner, of an

L. LEG AL & JU DICIAL BONDS

The extension must be based on some new agreement between A R T . 2 0 8 4, C C

A R T . 2 0 8 0, C C Nature of judicial bonds

A R T . 1 2 1 6, C C respect to those which personally belong to the

A R T . 1 2 1 8, C C Issue: WON the petitioners, in their capacity as corporate officers,

though it appeared multiple times throughout the agreement, is

AGLIBOT v. SANTIA (2012)

Issue: WON she is a guarantor and thus entitled to excussion –

Ratio: Under Art. 1403(2)(b), an agreement wherein one agrees

** An accommodation party is not released by an extension of

1. Concept A pledge requires that it be set forth in a public instrument in

Characteristics (Raf sung, “O!”) (Hehe) 3. Essential requisites

(2) Shares of stock of agricultural, commercial and 4. Parties

Kinds of delivery Art. 2087, supra

be liable to the latter for the damages which he may

A R T . 2 1 0 2, C C e. Return the thing pledged

purchase price at once

CALIBO v. CA (2001) acquired is worth less than the amount of the

Issue: WON the contract of pledge regarding the tractor between

Held: Applying the requisites of a contract of pledge [see

PARAY v. RODRIGUEZ (2006)