Credit Transactions Reviewer-1

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INTRODUCTION Ex. My tito from the States makes padala a balikbayan box filled with spam through another
relative who’s flying to the Philippines on vacation. It only benefits my tito (the bailor). Or,
Helen deposits Polsci’s baby chair with the mysterious little guy who doesn’t smile in the bag
MEANING AND SCOPE OF CREDIT TRANSACTIONS
depository counter outside the lib. In this case, only Helen benefits (based on a true story).
Credit transactions include all transactions involving the purchase or loan of goods, services, or
2. For the sole benefit of the bailee
money in the present with a promise to pay or deliver in the future.
Examples: commodatum and gratuitous simple loan or mutuum
Ex. Xilca borrows my white blouse because she forgot to bring clothes to change from her
TWO TYPES OF CREDIT TRANSACTIONS/ CONTRACTS OF SECURITY
Pasay City Jail outfit. Only Xilca is benefited, not me. Or, Xilca borrows P10 from me without
interest.
1. Secured transactions or contracts of real security – supported by a collateral or an
encumbrance of property
3. For the benefit of both parties
Examples: deposit for a compensation, involuntary deposit, pledge, bailments for hire
2. Unsecured transactions or contracts of personal security – fulfillment by the debtor is Ex. Ansky pawns her huge diamond earrings at Villarica Pawnshop. The pawnshop gives
supported only by a promise to pay or the personal commitment of another her P10,000 and a pawn ticket. Both parties benefit – Ansky gets fast cash, while the
pawnshop gets to keep the huge diamond earrings to make sure that Ansky pays, and in case
EXAMPLES OF CREDIT TRANSACTIONS she doesn’t they can sell the earrings.
1. Bailment contracts 1 and 2 are gratuitous bailments. There is no consideration because they are considered more
2. Contracts of guaranty and suretyship as a favor by one party to the other. Bailments under number 3 are mutual-benefit bailments,
3. Mortgage and they usually result from business transactions.
4. Antichresis
5. Concurrence and preference of credits BAILMENT FOR HIRE
MEANING OF SECURITY Bailment for hire arises when goods are left with the bailee for some use or service by him
always for some compensation.
Security (def). Something given, deposited, or serving as a means to ensure the fulfillment or
enforcement of an obligation or of protecting some interest in property. KINDS OF BAILMENT FOR HIRE
KINDS OF SECURITY 1. Hire of things – goods are delivered for the temporary use of the hirer
1. Personal Security - when an individual becomes a surety or a guarantor 2. Hire of service – goods are delivered for some work or labor upon it by the bailee
3. Hire for carriage of goods – goods are delivered either to a common carrier or to a private
person for the purpose of being carried from place to place
2. Property or Real Security – when a mortgage, pledge, antichresis, charge, or lien or
other device used to have property held, out of which the person to be made secure can be 4. Hire of custody – goods are delivered for storage
compensated for loss.
I. LOAN
BAILMENT
Bailment (def). The delivery of property of one person to another in trust for a specific purpose, GENERAL PROVISIONS
with a contract, 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. Art. 1933. By the contract of loan, one of the parties delivers to another, either something not
consumable so that the latter may use the same for a certain time and return it, in which case the
To be legally enforceable, a bailment must contain all the elements of a valid contract, which are contract is called a commodatum; or money or other consumable thing, upon condition that the
consent, object, and cause or consideration. However, a bailment may also be created by operation same amount of the same kind and quality shall be paid, in which case the contract is simply called
of law. a loan or mutuum.
Commodatum is essentially gratuitous.

PARTIES IN BAILMENT
Simple loan may be gratuitous or with a stipulation to pay interest.
1. Bailor – the giver; the one who delivers the possession of the thing bailed
2. Bailee – the recipient; the one who receives the possession or custody of the thing delivered In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership
passes to the borrower.
KINDS OF BAILMENT
Art. 1934. An accepted promise to deliver something by way of commodatum or simple loan is
1. For the sole benefit of the bailor binding upon the parties, but the commodatum or simple loan itself shall not be perfected until the
Examples: gratuitous deposit and mandatum (bailment of goods where the bailee gratuitously delivery of the object of the contract.
undertakes to do some act with respect to the property)
Sheryl IID 2002 PAGE 1 Sheryl IID 2002 PAGE 2

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ESSENTIAL ELEMENTS OF A CONTRACT IN THE CONTEXT OF A LOAN DISTINCTIONS BETWEEN COMMODATUM AND SIMPLE LOAN
Consent of the parties Borrower and Lender
Object Property COMMODATUM SIMPLE LOAN
Cause or Consideration For the lender: right to demand the return of the SUBJECT MATTER Not consumable Money or other consumable
thing thing
OWNERSHIP Retained by the lender Transferred to the borrower
For the borrower: acquisition of the thing GRATUITOUS? Gratuitous Default rule is that it is
gratuitous BUT the parties may
stipulate interest, in which case,
CHARACTERISTICS OF THE CONTRACT OF LOAN it becomes onerous
PAYMENT BY BORROWER Borrower must return the same Borrower need only pay the
1. A real contract – the delivery of the thing loaned is necessary for the perfection of the thing loaned same amt of the same kind and
contract quality
KIND OF PROPERTY Real or personal Personal only
2. A unilateral contract – once the subject matter has been delivered, it creates obligations on PURPOSE Temporary use or possession Consumption
the part of only one of the parties (the borrower) WHEN LENDER MAY DEMAND Lender may demand return of Lender may not demand return
the thing before the expiration of the thing before the lapse of
CAUSE OR CONSIDERATION IN A CONTRACT OF LOAN of the term in case of urgent the term agreed upon
need
1. As to the borrower: the acquisition of the thing LOSS OF THE THING Suffered by the lender (since he Suffered by the borrower even if
2. As to the lender: the right to demand its return or of its equivalent is the owner) through fortuitous event
KINDS OF LOAN Õ In commodatum, if you do not return the thing when it is due, you will be liable for estafa because
ownership of the property is not transferred to the borrower.
1. Commodatum – where the lender delivers to the borrower a non-consumable thing so that
the latter may use it for a certain time and return the identical thing Õ In loan, the borrower who does not pay is not criminally liable for estafa. His liability is only a civil
liability for the breach of the obligation to pay. This is because in loan, ownership of the thing is
2. Simple loan or mutuum – where the lender delivers to the borrower money or other transferred to the borrower, so there is no unlawful taking of property belonging to another.
consumable thing upon the condition that the latter shall pay the same amount of the
same kind and quality. ACCEPTED PROMISE TO MAKE A FUTURE LOAN
LOANS DISTINGUISHED FROM CREDIT Borrower goes to Lender and asks if he could borrow P10K at 6% interest per annum. Lender says
okay, I will lend you the money. This is an accepted promise to make a future loan. It is a
Credit means the ability of an individual to borrow money or things by virtue of the confidence or consensual contract and is binding upon the parties.
trust reposed by a lender that he will pay what he may promise within a specified period.
But is there a contract of loan at this point? No, because loan is a real contract and is perfected only
Loan means the delivery by one party and the receipt by the other party of a given sum of upon delivery of the thing.
money or other consumable thing upon an agreement to repay the same amount of the same kind
and quality, with or without interest. FORM OF LOAN
Õ The concession of a credit necessarily involves the granting of loans up to the limit of the amount There are no formal requisites for the validity of a contract of loan except if there is a stipulation for
fixed in the credit. the payment of interest. A stipulation for the payment of interest must be in writing.
As opposed to debt, credit is a debt considered from the creditor’s standpoint. It is that which is due
to any person. CHAPTER 1 COMMODATUM
Art. 1935. The bailee in commodatum acquires the use of the thing loaned but not its fruits; if any
compensation is to be paid by him who acquires the use, the contract ceases to be a commodatum.
KINDS OF COMMODATUM
1. Ordinary commodatum
2. Precarium – one whereby the bailor may demand the thing loaned at will

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NATURE OF COMMODATUM
d. if he lends or leases the thing to a third person who is not a member of his
ÕCommodatum in simple terms is hiram – A agrees to lend his guard dog to his friend B for a week household also a breach of the tenor of the obligation;
for free. B is entitled to use the dog for this period. At the end of the week, B must return the dog to
A. If the dog gives birth while it is in the custody of B, the puppies (fruits) belong to A. e. if, being able to save either the thing borrowed or his own thing, he chose to save his
own (ingratitude).
1. The bailee acquires the use of the thing but not its fruits, unless there is a stipulation to the
contrary. 3. Liability for deterioration of the thing - The borrower is not liable for the ordinary
deterioration or wear and tear of the thing that comes as a natural consequence of its use.
2. It is essentially gratuitous. This is borne by the lender. Reason: Because the lender retains ownership so he should bear
the loss from ordinary deterioration. Also, because the purpose of commodatum is for the
3. The purpose of the contract is the temporary use of the thing loaned for a certain time. borrower to use the thing. Deterioration is a natural result of such use.
(So if the bailee is not entitled to use the thing, it is not commodatum but it may be a
deposit.) 4. Obligation to return the thing loaned – The borrower must return the thing as soon as the
period stipulated expires or the purpose has been accomplished. He cannot keep the thing as
4. The subject matter is generally non-consumable real or personal property, though security for anything that the lender may owe him, except for a claim for damages suffered
consumable goods may also be the subject of commodatum if the purpose is not the because of the flaws of the thing loaned.
consumption of the object (ex. Display of a bottle of wine).
So for example, Xilca earlier won a bet with Cayo, as a result of which, Cayo owes her a tuna
5. The lender need not be the owner of the thing loaned. It is enough that he has possessory sandwich. Cayo loaned Alvin Ang’s Frisbee to Xilca for 10 days. At the end of the 10 days,
interest in the thing or right to use it which he may assert against the bailee and third persons Xilca cannot refuse to return Alvin Ang’s frisbee to Cayo and hold it hostage until Cayo
though not against the rightful owner. (Ex. A lessee may sublet the thing leased). delivers the sandwich. Why? Because Xilca’s obligation as a borrower is to return the thing
after the period expires, and she cannot keep it as a security for anything that Cayo may owe
6. It is purely personal in character. The consequences of this are the following: her.
a. The death of either party extinguishes the contract unless there is a contrary Or, Xilca borrows Kim Chong’s car for 10 days. While the car is in Xilca’s possession, a tire
stipulation for the commodatum to subsist until the purpose is accomplished explodes. Xilca has to buy a new tire for P3,000. At the end of the 10 days, Xilca refuses to
return the car unless Kim Chong pays her the P3,000. Can Xilca refuse to return? No. In this
case, Kim Chong owes Xilca P3,000 as an extraordinary expense for the preservation of the
b. The borrower cannot lend or lease the thing to a third person. However,
thing. But even if Kim Chong owes Xilca money in connection with the thing that he loaned,
members of the borrower’s household may make use of the thing loaned except:
Xilca still cannot retain the car as security.
i. if there is a stipulation to the contrary; or
Exception: If the thing loaned has hidden defects and the borrower suffers damages as a
ii. if the nature of the thing forbids it.
result of the hidden defect, the borrower can claim damages against the lender. Pending
payment of the damages by lender to borrower, borrower can keep the thing as a security.
7. The parties may stipulate that the borrower may use the fruits of the thing, but this must (see discussion below)
only be incidental to the use of the thing itself (because if it is the main cause, the contract
may be one of usufruct). 5. Liability of two or more bailees – When there are two or more borrowers to whom a thing
is loaned in one contract, there liability is solidary.
OBLIGATIONS OF THE BORROWER
OBLIGATIONS OF THE LENDER
1. Liability for ordinary expenses – The borrower should defray the expenses for the use and 1. Obligation to respect the duration of the loan – The lender cannot demand the return of
preservation of the thing loaned.
the thing until after the expiration of the period or after the accomplishment of the use for
which the commodatum was constituted. However, he may demand its return or temporary
2. Liability for loss of the thing – The general rule is the borrower is not liable for loss or use if he should have urgent need of the thing.
damage due to a fortuitous event. The owner bears the loss. But in the following cases,
the borrower is liable for loss through a fortuitous event: 2. Precarium – Precarium is a kind of commodatum where the lender may demand the thing
at will. Precarium exists in the following cases:
a. if he devotes the thing to a purpose different from that for which it was loaned (bad
faith) this is a breach of the tenor of the obligation a. If there is no stipulation as to the duration of the contract or to the use to which the
thing loaned should be devoted
b. if he keeps it longer than the period stipulated or after the accomplishment of the use
for which the commodatum has been constituted (delay) b. If the use of the thing is merely tolerated by the lender
c. if the thing loaned has been delivered with appraisal of its value unless there is a BUT, the lender may not demand the thing capriciously, arbitrarily, or whimsically, since this
stipulation exempting the bailee from responsibility in case of a fortuitous event this would give rise to an action on the part of borrower for abuse of right under Articles 19, 20,
is equivalent to an assumption of risk; and 21.

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CHAPTER 2 SIMPLE LOAN OR MUTUUM

3. Right to demand return of thing for acts of ingratitude – If the borrower commits any of
the acts enumerated in Art. 765 of the Civil Code, the lender may demand the immediate
DEFINITION
return of the thing from the borrower. (This applies to ordinary commodatum, since in
precarium the lender can demand at will, subject to the provisions against abuse of right)
Simple loan (def). A contract whereby one of the parties delivers to another money or other
consumable thing with the understanding that the same amount of the same kind and quality
4. Obligation to refund extraordinary expenses
shall be paid.
a. Extraordinary expenses for the preservation of the thing – The lender should A simple loan involves the payment of the equivalent and not the identical thing because the
refund the borrower the extraordinary expenses for the preservation of the thing, borrower acquires ownership of the thing loaned. The term “return” is not used since the
provided that the borrower informs the lender before incurring the expense, distinguishing character of the simple loan from commodatum is the consumption of the thing.
unless the need is so urgent that the lender cannot be notified without danger.
CONSIDERATION
b. Extraordinary expenses arising from actual use of the thing – Extraordinary
expenses arising on the occasion of the actual use of the thing shall be borne by the What is the consideration in this kind of contract? The promise of the borrower to pay is the
lender and borrower on a 50-50 basis, unless there is a contrary stipulation. consideration for the obligation of the lender to furnish the loan.
5. All other expenses are for the account of the borrower. NO CRIMINAL LIABILITY FOR ESTAFA FOR FAILURE TO PAY
6. Liability for damages for known hidden flaws - Requisites: (F-HADD) There is no criminal liability for failure to pay a simple loan because the borrower acquires ownership
of the thing.
a. There is a flaw or defect in the thing loaned;
b. The flaw or defect is hidden FUNGIBLE AND CONSUMABLE THINGS
c. The lender is aware of the flaw
Fungible things (def). Those which are usually dealt with by number, weight, or measure, so that
d. The lender does not advise the borrower of the flaw
any given unit or portion is treated as the equivalent of any other unit or portion. Those which may
e. The borrower suffers damages by reason of the flaw or defect be replaced by a thing of equal quality and quantity. (ex. Rice, oil, sugar). If it cannot be replaced
with an equivalent thing, then it is non-fungible.
The lender is penalized for his failure to disclose a hidden flaw which causes damage because
he is in a position to prevent the damage from happening. Consumable things (def). Those which cannot be used without being consumed.
(HOT TIP) Example: Borrower borrows a 1970 Mitsubishi Lancer from Lender. Unfortunately, Õ Whether a thing is consumable or not depends upon its nature. Whether a thing is fungible or
Lender forgets to tell borrower that the car has a tendency to overheat after 10 minutes. So not depends on the intention of the parties.
Borrower drives, and after 10 minutes, the car stalls and overheats. Borrower opens the hood
and sees lots of steam. He opens the radiator cap to put water inside. Radiator water scalds
his face, and he suffers from burns. Can he claim damages from Lender and can he keep the BARTER
car as security?
Barter (def). A contract where one of the parties binds himself to give one thing in consideration of
No, because in this case, Buyer should have known. He was, at least, in a position to know the other’s promise to give another thing. (in short, exchange of property)
that the car just might be prone to overheating since it was old already. And when he opened
the hood and saw lots of steam, he should have known that if he opened the radiator, very hot If one person agrees to transfer the ownership of non-fungible things to another with the
water would spray out. He should have taken precautions when he opened the hood or he obligation on the part of the latter to give things of the same kind, quantity, and quality, the contract
should have gone to a gas station or mechanic to have it fixed. But since he was negligent, he is a contract of barter.
has only himself to blame for the damage caused. The defect was not really hidden since
Borrower was in a position to know of it even if Lender did not inform him. Had he been more DISTINCTIONS BETWEEN MUTUUM, COMMODATUM, AND BARTER
careful, he would not have been scalded.
MUTUUM COMMODATUM BARTER
ABANDONMENT OF THING BY THE LENDER SUBJECT MATTER Money or other fungible Non-fungible things Non-fungible things
things
Can the lender tell Borrower: I don’t want to pay for the extraordinary expenses and damages that I OBLIGATION OF THE Return the equivalent Return the identical Return the equivalent
owe you. Just keep the thing, and let’s forget about my obligation. BORROWER thing borrowed
GRATUITOUS? May be gratuitous or Always gratuitous Onerous
No. The lender cannot exempt himself from the payment of the expenses or damages by abandoning onerous
the thing to the borrower. This is because the expenses and damages may exceed the value of the
thing loaned, and it would, therefore, be unfair to allow the lender to just abandon the thing instead of
paying for the expenses and damages.

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FORM OF PAYMENT For other sources of obligations, such as sale, and damages arising from injury to persons and
loss of property which do not involve a loan, the legal rate of interest is 6%.
1. If the object is money – Payment must be made in the currency stipulated; otherwise it is
payable in the currency which is legal tender in the Philippines. According to Art. 1955, Art. 3. Increases in interest must also be expressly stipulated.
1250, is applicable in payments of loans. 1250 provides that in case of extraordinary inflation
or devaluation, the value of the currency at the time of the establishment of the 4. It is only in contracts of loan, with or without security, that interest may be stipulated and
obligation (not at the time of payment) should be the basis for payment. demanded.
BUT JPSP thinks that this is rarely applied because it would create a bad precedent and would 5. Stipulation of interest must be mutually agreed upon by the parties and may not be
wreak havoc on the economy. It would also shift the loss to the lender, which shouldn’t be the unilaterally increased by only one of the parties. This would violate consensuality and
case since the loan is primarily for the benefit of the borrower. So unless there’s a drastic mutuality of contract (PNB v. CA). But the parties can agree upon a formula for determining
economic situation, we shouldn’t adjust the value of the currency. The obligation should be the interest rate, over which neither party has control (ex: interest will be adjusted quarterly
paid based on the value of the currency at the time of payment. at a rate of 3% plus the prevailing 91-day T-bill rate, etc.). But if the formula says “interest
will be based on T-bill rates and other interest-setting policies as the bank may determine,”
Ex: In 2000, Borrower borrowed $1,000 from Lender at the peso-dollar exchange rate of P50- this is not valid.
$1, payable in 2004. In 2004, FPJ becomes President, and as a result, the rate becomes P60-
$1. If the parties had agreed that payment would be in dollars, Borrower still has to pay Escalation Clause – A clause which authorizes the automatic increase in interest rate.
$1,000. If the parties had agreed that payment would be in pesos, Borrower should pay at
the rate of P60 to a dollar, or P60,000. Why? You cannot apply 1250 and base the amount An escalation clause is valid when it is accompanied by a De-Escalation Clause. A de-escalation
due on the value of the currency in 2000 because the inflation is not so extraordinary as to clause is a clause which provides that the rate of interest agreed upon will also be automatically
warrant the adjustment. reduced. There must be a specified formula for arriving at the adjusted interest rate, over which
neither party has any discretion.
2. If the object is a fungible thing other than money – Borrower must pay lender another
thing of the same kind, quality, and quantity. In case it is impossible to do so, the borrower When the borrower is liable for interest even without a stipulation:
shall pay its value at the time of the perfection of the loan.
1. Indemnity for damages – The debtor in delay is liable to pay legal interest as indemnity for
Why does the law require that the value of the thing be based on its value at the time of the damages even without a stipulation for the payment of interest.
perfection of the loan? There’s a historical explanation: the rule was created at a time when
there were still interest ceilings. Thus, the reason for requirement is to prevent circumvention Where to base the rate of damages:
of the interest ceilings. a. Rate in the penalty clause agreed upon by the parties
b. If there is no penalty clause, additional interest based on the regular interest rate of
Even if there are no longer any interest ceilings, this rule is still applicable. So how do you opt the loan
out of it? Stipulate! Put a stipulation that says that if it is impossible to pay a thing of the c. If there is no regular interest, additional interest is equivalent to the legal interest rate
same kind, quality, and quantity, borrower shall pay the market value of the thing at the time (12%)
of payment.
Example: Lender lends P10K at 10% interest with penalty interest of 6%. On due date,
INTEREST Borrower fails to pay. Borrower only pays a year after. How much should he pay?
Requisites for Recovery of Interest: Borrower should pay the principal + interest on the loan + penalty interest
= 10K + 10% of 10K + 6% of 10K
1. The payment of interest must be expressly stipulated. = 10K + 1K + .6K
2. in writing = 11,600
[3. And the interest must be lawful (but since there is no Usury Law anymore, then there is no
such thing as unlawful interest, so I don’t think this requisite is still included)] Lender lends P10K at 10% interest. On due date, Borrower fails to pay. Borrower only pays a
year after. How much should he pay?
There is no Usury Law anymore, but an interest rate may still be struck down for being
unconscionable. The test of an unconscionable interest rate is relative and there is a need to look at Borrower should pay 10K + 10% of 10K (interest on the loan) + 10% of 10K (penalty
the parity/disparity in the status of the parties and in their access to information during the interest)
negotiations. = 10K + 1K + 1K
= 12,000
Stipulation of interest The penalty interest in this case is 10% since there is no penalty interest stipulated.
The additional interest is based on the regular interest of the loan.
1. The interest rate stipulated by the parties, not the legal rate of interest, is applicable.
Lender lends P10K, no interest. On due date, Borrower fails to pay. How much should
2. Default rule: If the parties do not stipulate an interest rate, the legal rate for loans and Borrower pay a year later?
forbearances of money is 12%.
Borrower should pay P10K + 12% of P10K = 11,200. The penalty interest is 12% since
there is no interest on the loan nor a penalty interest stipulated. The extra interest is based
on the legal rate of interest.

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If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3,
2. Interest accruing from unpaid interest – Interest due shall earn interest from the time it Title 1 of this Book shall be observed. In such case the contract is called a suretyship.
is judicially demanded although the obligation may be silent on this point (Art. 2212.)
Guaranty (def.) A contract whereby the guarantor binds himself to the creditor to fulfill the
If interest is payable in kind: obligation of the principal debtor in case the latter should fail to do so.
If interest is payable in kind, its value shall be appraised at the current price of the products or In a contract of guaranty, the parties are the guarantor and the creditor.
goods at the time and place of payment.
Characteristics of the Contract of Guaranty (A-SC-U-D)
Take note that you should not confuse this with the rule when the principal obligation consists of
goods other than money. If the principal obligation consists in the payment of goods and it is 1. Accessory: It is dependent for its existence upon the principal obligation guaranteed by it.
impossible to deliver the goods, the borrower should pay the value of the thing at the time of the
constitution of the obligation. 2. Subsidiary and Conditional: It takes effect only when the principal debtor fails in his
obligation.
But if interest is payable in kind, it should be appraised at its value at the time of payment.
3. Unilateral:
General Rule: Accrued interest shall not earn interest
Exceptions:
a. It gives rise to obligations on the part of the guarantor in relation to the creditor and
not vice-versa. (Although after its fulfillment, the principal debtor should indemnify
1. When judicially demanded (Art. 2212)
the guarantor, but this obligation is only incidental)
2. Express stipulation – Also called compounding interest where the parties agree that
accrued interest shall be added to the principal and the resulting total amount shall earn b. It may be entered into even without the intervention of the principal debtor.
interest.
Õ A stipulation as to compounding interest must be in writing. 4. Distinct Person: It requires that the person of the guarantor must be distinct from the
person of the principal debtor (you cannot guaranty your own debt). However, in a real
How does compounding interest work?
guaranty, a person may guarantee his own obligation with his own properties.
Lender lends P100,000 payable in 2 years at 10% interest compounded per annum.
Classification of Guaranty
At the end of the first year, how much is due? Principal plus 10% interest = 110,000.
1. In the broad sense:
On the second year, the 110,000 becomes the new principal amount and it is what will earn the 10%
interest. So at the end of the second year, how much is due?
a. personal: the guaranty is the credit given by the person who guarantees the
fulfillment of the principal obligation (guarantor)
110,000 + 10% of 110,000
= 110,000 + 11,000
= 121,000 b. real: the guaranty is property. If the guaranty is immovable property: real mortgage
or antichresis; If the guaranty is movable property: pledge or chatter mortgage
In compounding interest, you add the unpaid interest to the principal. The resulting amount is your
new principal which will then earn interest again. 2. As to origin:
What if the borrower pays interest when there is no stipulation providing for it? a. conventional: by agreement of the parties
If the debtor pays unstipulated interest by mistake, he may recover, since this is a case of solutio b. legal: imposed by law
indebiti or undue payment.
c. judicial: required by a court to guarantee the eventual right of one of the parties in a
But if the debtor voluntarily pays interest (either unstipulated or stipulated by not in writing) because case
of some moral obligation, he cannot later recover. The obligation to return the interest is a natural
obligation. 3. As to consideration:
II. GUARANTY AND SURETYSHIP a. gratuitous: the guarantor does not receive anything for acting as guarantor
b. onerous: the guarantor receives valuable consideration for acting as guarantor

CHAPTER 1 NATURE AND EXTENT OF GUARANTY
4. As to the person guaranteed:
Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so. a. single: constituted solely to guarantee or secure performance of the principal
obligation

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b. double or sub-guaranty: constituted to secure fulfillment of a prior guaranty; Example: Tuks accommodates Shak so that he can obtain a loan from the bank. At
guarantees the obligation of a guarantor the bottom of the loan agreement, the following signatures appear:
5. As to scope and extent:

(sgd) Tuks (sgd) Shak
a. definite: limited to the principal obligation only or to a specific portion thereof Lino Chris Kapunan Sherwin Shakramy
Is Tuks a surety or a solidary debtor? According to JPSP, based on this document

b. indefinite or simple: includes not only the principal obligation but also all its
above, Tuks is a solidary debtor. Remember the rule? I promise to pay signed by two
accessories, including judicial costs.
parties = solidary. To make sure that he’s merely a guarantor or surety, Tuks should
sign a separate guaranty agreement. Besides, a guaranty must be express. It is not
presumed.
Second Paragraph of Art. 2047: Suretyship
e. A surety bond is void where there is no principal debtor.
If a person binds himself solidarily with the principal debtor, it is a contract of suretyship. The
guarantor is called a surety. Suretyship is governed by Articles 1207 to 1222 of the Civil Code on
solidary obligations. Suretyship dispenses with certain legal requirements/conditions precedent for
4. Surety is not entitled to exhaustion: A surety is not entitled to the exhaustion of the
proceeding against a guarantor. properties of the principal debtor since the surety assumes a solidary liability for the
fulfillment of the principal obligation.
What is the difference between passive solidarity (solidarity among debtors) and
suretyship? 5. The undertaking is to the CREDITOR, not to the principal debtor: The debtor cannot
claim that the surety breached its obligation to pay for the principal obligation because there
Review of oblicon: According to Tolentino, the two are similar in the following ways: is no obligation as between the surety and the debtor. If the surety does not pay, the
principal debtor is still not relieved of his obligation.
1. A solidary debtor, like a surety, stands for some other person.
Guaranty Distinguished from Suretyship:
2. Both debtor and surety, after payment, may require that they be reimbursed.
GUARANTY SURETYSHIP
Guarantor promises to answer for the debt, Surety promises to answer for the debt, default or
The difference is that the lender cannot go after the surety right away. There has to be default on
default or miscarriage of the principal miscarriage of the principal (same)
the part of the principal debtor before the surety becomes liable. If it were mere solidarity among
Liability of the guarantor depends upon an Surety assumes liability as a regular party to
debtors, the creditor can go after any of the solidary debtors on due date.
independent agreement to pay the obligation if the undertaking
the primary debtor fails to do so
Nature of a Surety’s Undertaking
The engagement of the guarantor is a collateral Surety is charged as an original promisor
undertaking
1. Contractual and Accessory BUT Direct: The contractual obligation of the surety is merely The guarantor is secondarily liable A surety is primarily liable
an accessory or collateral to the obligation contracted by the principal. BUT, his liability to the
creditor is direct, primary, and absolute.
Õ MAIN DIFFERENCE: A surety undertakes to pay if the principal does not pay (insurer of the debt).
A guarantor binds himself to pay if the principal cannot pay (insurer of the solvency of the debtor).
2. Liability is limited by the terms of the contract: The extent of a surety’s liability is
determined only by the terms of the contract and cannot be extended by implication. Õ Since the obligation of the surety is to pay so long as the principal does not pay (even if he can;
even if he is solvent), the undertaking of the surety is more onerous than that of a guarantor who
3. Liability arises only if principal debtor is held liable: If the principal debtor and the pays only in the event that the principal is broke.
surety are held liable, their liability to pay the creditor would be solidary. But, the surety does
not incur liability unless and until the principal debtor is held liable. Illustration:
a. A surety is bound by a judgment against the principal even though the party was not a A borrows P10,000 from B, with C agreeing to be the surety. A refuses to pay B out of spite. In this
party to the proceedings. case, since C is a surety, B can immediately demand payment from C.
b. The creditor may sue, separately or together, the principal debtor and the surety If, in this case, C is a guarantor instead, B would have to exhaust all the property of A before he can
(since they are solidarily bound). collect from C. it is not enough that A refuses to pay even if he can; in order for C to be liable, A
would have to be unable to pay.
c. Generally, a demand or notice of default is not required to fix the surety’s liability.
If you were a lender and the borrower offers as security either X as guarantor or a real
d. An accommodation party (one who signs an instrument as maker, drawer, acceptor, or estate mortgage, which one would you choose?
indorser without consideration and only for the purpose of lending his name) is, in
effect, a surety. He is thus liable to pay the holder of the instrument, subject to Choose the mortgage. If you were the lender, a real estate mortgage is more advisable because you
reimbursement from the accommodated party. can collect against the property. In a guaranty/surety, you would have to go against the guarantor or

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surety – you would have to sue him, obtain judgment, and then execute judgment. This is subject to
a lot of delays. The guarantor or surety can stall your claim. A owes B P10,000. Without the knowledge of A, C guarantees the obligation. C pays A P10,000. C
tries to collect the P10,000 from A, but A tells him that he has already paid B 4,000.
Art. 2048. A guaranty is gratuitous, unless there is a stipulation to the contrary.
In this case, C can only collect P6,000 from A since it was only the extent to which A was benefited
GENERAL RULE: Guaranty is gratuitous. by his payment.
EXCEPTION: Guaranty is onerous only if it is stipulated.
If the loan was secured by a mortgage, C cannot foreclose the mortgage if A does not pay him
What is the cause/consideration of a contract of guaranty? because he is not subrogated to the rights of B.
The cause of a contract of guaranty is the same cause which supports the principal obligation of Art. 2052. A guaranty cannot exist without a valid obligation.
the principal debtor. There is no need for an independent consideration in order for the contract of
guaranty to be valid. The guarantor need not have a direct interest in the obligation nor receive any Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or
benefit from it. It is enough that the principal obligation has consideration. unenforceable contract. It may also guarantee a natural obligation.
Art. 2049 A married woman may guarantee an obligation without the husband’s consent, but shall A guaranty is an accessory contract and cannot exist without a valid principal obligation. So if the
not thereby bind the conjugal partnership, except in cases provided by law. principal obligation is void, the guaranty is also void.
Art. 94 of the Family Code BUT, a guraranty may be constituted to guarantee the following defective contracts and natural
The absolute community of property shall be liable for: obligations:
(3) Debts and obligations contracted by either spouse without the consent of the other to the extent 1. Voidable: because the contract is binding unless it is annulled
that the family may have been benefited.
2. Unenforceable: because an unenforceable contract is not void.
A married woman who acts as guarantor without the consent of the husband binds only her separate
property unless the debt benefited the family. 3. Natural obligations: even if the principal obligation is not civilly enforceable, the creditor may
still go after the guarantor
There is no express prohibition against a married woman acting as guarantor for her husband.
Art. 2053. A guaranty may also be given as security for future debts, the amount of which is not yet
Remember that now, in order to bind the absolute community, the consent of both spouses is needed. known; there can be no claim against the guarantor until the debt is liquidated. A conditional
If only the consent of one spouse is obtained, the absolute community will not be liable unless the obligation may also be secured.
obligation redounded to the benefit of the community.
Continuing Guaranty (def) – A guaranty that is not limited to a single transaction but which
When the husband acts as a guarantor for another person without the consent of the wife, the contemplates a future course of dealings, covering a series of transactions generally for an
guaranty binds only the husband since the benefit really accrues to the principal debtor and not to the indefinite time or until revoked.
husband or his family. The exception is if the husband is really engaged in the business of
guaranteeing obligations because in this case, his occupation or business is deemed to be undertaken A continuing guaranty is generally prospective in its operation and is intended to secure future
for the benefit of the family. transactions (generally does not include past transactions).
Art. 2050. If a guaranty is entered into without the knowledge or consent, or against the will of the Examples:
principal debtor, the provisions of articles 1236 and 1237 shall apply.
1. Common example given by JPSP is the credit line – The bank allows you to borrow up to
A contract of guaranty is between the guarantor and the creditor. It can be instituted without the a certain ceiling, but there is no release of funds yet. If you have an obligation with a third
knowledge or even against the will of the debtor, since the purpose of the contract is to give the person and you default, the third person just needs to inform the bank, and the bank will
creditor all the possible measures to secure payment. release the money. The money released will be considered as a loan from the bank to you.
The bank will allow the release of the money so long as it doesn’t exceed the ceiling.
However, if the contract of guaranty is entered into without the knowledge or consent or against the
will of the principal debtor, the effect is like payment by a 3rd person: 2. To secure payment of any debt to be subsequently incurred – If the contract states that
the guaranty is to secure advances made “from time to time,” “now in force or hereafter
1. The guarantor can only recover insofar as the payment has been beneficial to the debtor. made,” or uses the words “any debt,” “any indebtedness,” “any sum,” “any
transaction,” the guaranty is a continuing guaranty.
2. The guarantor cannot compel the creditor to subrogate him in the creditor’s rights such as
those arising from a mortgage, guaranty or penalty. 3. To secure existing unliquidated debts – Future debts may also mean debts that already
exist but whose amount is still unknown.
If the guaranty was entered into with the consent of the principal debtor, the guarantor is subrogated
to all the rights which the creditor had against the debtor once he pays for the obligation. Art. 2053 may be misleading because it says that a guaranty may be constituted to secure future
debts. The important thing to remember in the guaranty of future debts is that there must be an
Illustration:

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existing obligation already that is being guaranteed. Because without that existing obligation, the
guaranty would be void. Guaranty is an accessory obligation, so it cannot exist without the principal. A contract of guaranty, to be enforceable, must be in writing because it falls under the Statute of
Frauds as a “special promise to answer for the debt, default or miscarriage of another.” De Leon
Example: G guarantees the 10K loan that B owes L and any other indebtedness that B may textbook says that surety is not covered by the Statute of Frauds. JPSP says that a surety is still
incur against L. This is a valid guaranty because there is already an existing obligation (the covered by the SOF since it is still a promise to answer for the default of another person. What is not
10K loan). covered by the SOF is being a solidary co-debtor.
G guarantees the loan that B and L will enter into tomorrow. This is not valid. Although it is Construction of Guaranty
for a future debt, it is not valid under Article 2053 because there is no principal obligation yet.
There is nothing to guarantee. A guaranty is strictly construed against the creditor and in favor of the guarantor and is not to
be extended beyond its terms or specific limits. Doubts should be resolved in favor of the guarantor
Guaranty of Conditional Obligations or surety.
If the principal obligation is subject to a suspensive condition, the guarantor is liable only after the Õ Generally, a guarantor is liable only for the obligation of the debtor stipulated upon, and not to
fulfillment of the condition. obligations assumed PREVIOUS to the execution of the guaranty unless an intent to be so
liable is clearly indicated. (Prospective application of the guaranty)
If it is subject to a resolutory condition, the happening of the condition extinguishes both the principal
obligation and the guaranty. However, this rule of construction is applicable only to an accommodation surety or one that is
gratuitous. It does not apply in cases where the surety is compensated with consideration. In such
Art. 2054. A guarantor may bind himself for less, but not for more than the principal debtor, both as cases, the agreement is interpreted against the surety company that prepared it.
regards the amount and the onerous nature of the conditions.
Is a stipulation that says that the guaranty will subsist only until maturity of the obligation
Should he have bound himself for more, his obligations shall be reduced to the limits of that of the valid?
debtor.
Generally, no. Such a stipulation would defeat the purpose of a guaranty which is to answer for the
Since the contract of guaranty is a subsidiary and accessory contract, the guarantor’s liability default of the principal debtor. If the guaranty is only up to the date of maturity, there is no way that
cannot exceed that of the principal obligation. If the guarantor binds himself for more than the the guarantor can be liable since default comes only at maturity date.
liability of the principal debtor, his liability shall be reduced.
But Cayo pointed out a situation in class where this might be possible and JPSP agreed: If the
However, if the creditor sues the guarantor, the guarantor may be made to pay costs, attorney’s fees, lender asked for a guaranty precisely because there was a danger of the borrower absconding or
and penalties even if this will make his liability exceed that of the principal. becoming insolvent prior to maturity date, then the guaranty is valid.
How do you opt out of this rule? 2nd Paragraph of Art. 2055: Extent of Guarantor’s Liability
Example: G guaranteed B’s 100K obligation to L to the extent of 100K. As an extra 1. Definite guaranty – The liability of the guarantor is limited to the principal debt, to the
consideration for lending the money, L wants an additional 20K from guarantor (gravy, exclusion of accessories.
according to JPSP). Since 2054 provides that the guarantor cannot bind himself for more than
the principal debtor, how do the parties opt out of the rule? 2. Indefinite or simple guaranty – If the agreement does not specify that the liability of the
guarantor is limited to the principal obligation, it extends not only to the principal but also
Guarantor and Lender should enter into a new and separate agreement. They should take to all its accessories.
it out of the context of the guaranty and have a new agreement in which L would (kunwari)
perform some service for G in consideration of the additional 20K. This is because in entering into the agreement, the principal could have fixed the limits of
his responsibility solely to the principal. If he did not fix it, it is presumed that he wanted to
Art. 2055. A guaranty is not presumed; it must be express and cannot extend to more than what is be bound not only to the principal but also to all its accessories.
stipulated therein.
GENERAL RULE: It is not necessary for the CREDITOR to expressly accept the contract of
If it be simple or indefinite, it shall comprise not only the principal obligation, but also all its guaranty since the contract is unilateral; only the guarantor binds himself to do something.
accessories, including the judicial costs, provided with respect to the latter, that the guarantor shall
only be liable for those costs incurred after he has been judicially required to pay. EXCEPTION:
RULE: Guaranty is never presumed. It must be express. If the guarantor merely offers to become a guaranty, it does not become a binding obligation unless
the creditor accepts and notice of acceptance is given to the guarantor.
Reason for the rule: Because a guarantor assumes an obligation to pay for another’s debt without
any benefit to himself. Thus, it has to be certain that he really intends to incur such an obligation and On the other hand, if the guarantor makes a direct or unconditional promise of guaranty (and not
that he proceeds with consciousness of what he is doing. merely an offer), there is no need for acceptance and notice of such acceptance from the creditor.
Form required for Guaranty Art. 2056. One who is obliged to furnish a guarantor shall present a person who possesses integrity,
capacity to bind himself, and sufficient property to answer for the obligation which he guarantees.
Guaranty must be IN WRITING

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The guarantor shall be subject to the jurisdiction of the court of the place where this obligation is to The liability of the guarantor is only accessory and subsidiary. Thus, in order for the creditor to collect
be complied with. from the guarantor, the ff. conditions must be fulfilled:
Art. 2057. If the guarantor should be convicted in first instance of a crime involving dishonesty or 1. The creditor should have exhausted all the property of the debtor; and
should become insolvent, the creditor may demand another who has all the qualifications required in
the preceding article. The case is excepted where the creditor has required and stipulated that a 2. The creditor has resorted to all legal remedies against the debtor (ex. Accion pauliana/
specified person should be the guarantor. rescission of fraudulent alienations)
Ideally, the qualifications of a guarantor are the ff: Can the creditor implead the guarantor as a co-defendant with the debtor?
1. Integrity No. Except in cases provided in 2059, Article 2062 says that creditor should proceed against the
2. Capacity to bind himself principal debtor alone.
3. Sufficient property to answer for the obligation which he guarantees
Art. 2059. This excussion shall not take place:
Õ But the creditor can waive these requirements.
1. If the guarantor has expressly renounced it;
Jurisdiction over the guarantor:
2. If he has bound himself solidarily with the debtor;
Jurisdiction over the guarantor belongs to the court where the principal obligation is to be fulfilled, in
accordance with the rule that accessory follows the principal. 3. In case of insolvency of the debtor;
Effect of Subsequent Loss of Qualifications 4. When he has absconded, or cannot be sued within the Philippines unless he has left a manager or
representative;
The qualifications need only to be present at the time of the perfection of the contract. The
subsequent loss of the qualifications would not extinguish the liability of the guarantor, nor will it 5. If it may be presumed that an execution on the property of the principal debtor would not result
extinguish the contract of guaranty. in the satisfaction of the obligation.
However, the creditor may demand another guarantor with the proper qualifications. GENERAL RULE: The guarantor is entitled to demand that the creditor first exhaust the properties of
the principal debtor before collecting from the guarantor.
When may the creditor demand another guarantor?
EXCEPTIONS:
1. In case the guarantor is convicted in the first instance of a crime involving dishonesty (since
he loses integrity) 1. Under Art. 2059
2. If the guarantor does not comply with Art. 2060
2. In case the guarantor becomes insolvent (since he loses sufficient property to answer for the 3. If the guarantor is a judicial bondsman and sub-surety (Art. 2084)
obligation which he guarantees) there is no need for a judicial declaration of insolvency 4. Where a pledge or mortgage has been given by him as a special security.
5. If he fails to interpose it as a defense before judgment is rendered against him.
What is the effect of the guarantor’s death on the guaranty?
EXCEPTIONS UNDER ART. 2059 (RUSIA)
The guaranty survives the death of the guarantor. The general rule is that a party’s contractual rights
and obligations are transmissible to his successors. The rules on guaranty do not expressly provide 1. When the right is Renounced or waived.
that the guaranty is extinguished upon the death of the guarantor. Applying Art. 2057, the • The waiver must be made in express terms.
supervening incapacity of the guarantor does not extinguish the guaranty but merely gives the
creditor the right to demand a replacement. But the creditor can waive this right and choose to hold 2. When the liability assumed by the guarantor is Solidary.
the guarantor to his bargain. If he so chooses, the creditor’s claim passes to the heirs of the deceased • In this case, he becomes a surety with primary liability.
guarantor.
3. When the principal debtor is Insolvent.
When may the creditor NOT demand another guarantor?
What kind of insolvency? JPSP says it’s practical insolvency meaning assets are less than
Where the creditor has stipulated in the original agreement that a specified person should be the liabilities, but it still depends on the situation.
guarantor, he is bound by the terms of the agreement and he cannot thereafter deviate from it.
Examples:
CHAPTER 2 EFFECTS OF GUARANTY B borrows 100K from L guaranteed by G. B has 1M in assets which are all still with him and
1.5M in liabilities. B defaults. Can L collect from G right away?
Art. 2058. The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all
the property of the debtor, and has resorted to all the legal remedies against the debtor. No. In this case, G still has the benefit of excussion. Why? Because even if B is apparently
insolvent, since his liabilities exceed his assets, there is still no claim against these assets by
the other creditors. They can still be accessed by L, and L can still file an action for collection

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of money against B. So in this case, even if B is insolvent on paper, his properties are still 1. Set up the benefit of excussion against the creditor upon demand for payment by the creditor
with him, and he can still pay L. Therefore, G still should still have the benefit of excussion. from him; and
B borrows 100K from L guaranteed by G. On due date, B defaults and has zero assets but has 2. Point out to the creditor available property of the debtor within Philippine territory
a 200K credit/receivable from X. Can L collect from G. sufficient to cover the amount of debt. (Therefore, property located abroad or which is not
easily available is not included among those that the guarantor can point out to the creditor.)
Still no. L must file an action for collection and an accion subrogatoria so that he can
exercise B’s right to collect the money from X. Only if these actions fail can L then collect Õ Once the guarantor has fulfilled the requisites for making use of the benefit of excussion, the
from G. creditor has the duty to exhaust all the property of the debtor and to resort to all legal remedies
against the debtor. If he fails to do so, he shall suffer the loss to the extent of the value of the
4. When the principal debtor Absconds or cannot be locally sued. property.
So even if the borrower has fled to the Bahamas, if he still has properties here, Lender must Art. 2062. In every action by the creditor, which must be against the principal debtor alone, except
sue against the property first before collecting from the guarantor. in the cases mentioned in Article 2059, the former shall ask the court to notify the guarantor of the
action. The guarantor may appear so that he may, if he so desires, set up such defenses as are
5. When resort to all legal remedies would be a Useless formality. granted him by law. The benefit of excussion mentioned in article 2058 shall always be unimpaired,
even if judgment should be rendered against the principal debtor and the guarantor in case of
• If exhausting the properties of the debtor would be useless since it would still not satisfy appearance by the latter.
the obligation, the guarantor cannot require the creditor to resort to these legal remedies
against the debtor anymore, since doing so would be a useless formality. The creditor must sue the principal debtor alone. He cannot sue the guarantor with the principal or
• In this case, it is not even necessary that the debtor is judicially declared insolvent or the guarantor alone except in the cases mentioned in Art. 2059 where the guarantor loses the benefit
bankrupt. of excussion.
How does the lender get around this requirement? If the lender wants to be able to go against the The guarantor must be notified so that he may appear and set up his defenses if he wants to.
guarantor right away without having to go through excussion, he must get the guarantor to either sign
a waiver of the benefit of excussion or make him solidarily liable (a surety). If the guarantor appears, he is still given the benefit of exhaustion event after judgment is rendered
against the principal debtor.
Example: B borrowed 100k guaranteed by G. B defaulted. Lender made a demand for
payment against G. G paid. Later, G found out that he had the benefit of excussion. He If he does not appear, judgment is not binding on him. Lender must sue the guarantor to claim
demanded reimbursement from Lender. Can G recover? against him.
G cannot recover. Payment constitutes a waiver of the benefit. So, collecting from the guarantor is really a two-step process. The purpose of the two-step process is
to allow the guarantor to make use of the benefit of excussion. The disadvantage is that there is a
Art. 2060. In order that the guarantor may make use of the benefit of excussion, he must set it up time lag between the judgment against the principal debtor and the one against the guarantor, which
against the creditor upon the latter’s demand for payment from him, and point out to the creditor allows the guarantor to hide his assets in the meantime.
available property of the debtor within Philippine territory sufficient to cover the amount of the debt.
How to get around this two-step process: A bank guaranty or a letter of credit. In a bank guaranty, if
Art. 2061. The guarantor having fulfilled all the conditions required in the preceding article, the the debtor does not pay, the creditor need only inform the bank of the default and the bank releases
creditor who is negligent in exhausting the property pointed out shall suffer the loss, to the extent of the money. It’s like a standing loan by the bank in favor of the debtor to answer for a debt in favor of
said property, for the insolvency of the debtor resulting from such negligence. third persons, in case he is unable to pay.
To collect from the guarantor, the creditor must make a prior demand for payment from the
guarantor. Art. 2063. A compromise between the creditor and the principal debtor benefits the guarantor but
does not prejudice him. That which is entered into between the guarantor and the creditor benefits
1. When should the demand be made? The demand can only be made after judgment on the but does not prejudice the principal debtor.
debt.
Reason: A compromise binds only the parties thereto and not third persons. Thus, it cannot prejudice
2. How should it be made? The demand must be an actual demand. Joining the guarantor in the guarantor or debtor who was not a party to the compromise.
the suit against the principal is not the demand intended by law.
Exception: If the compromise has a benefit in the nature of a stipulation in favor of a third person,
Additional Requisites in Order to Claim the Benefit of Excussion the compromise may bind that third person.
Guarantor tells Lender “Exhaust Borrower’s property first before collecting from me.” Is this enough Example: D owes C 10K with G as guarantor.
for the Guarantor to claim the benefit of excussion?
D and C agree to reduce the debt to 8K. G’s liability is also reduced to 8K in case D does not pay,
No. In order to demand that the creditor exhaust the properties of the principal debtor, the guarantor since the compromise is beneficial to G.
must:

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Art. 2064. The guarantor of a guarantor shall enjoy the benefit of excussion both with respect to the the right of the guarantor is independent of the principal obligation to the creditor. The basis
guarantor and to the principal debtor. of the right is the delay of the debtor in reimbursing.
A sub-guarantor can demand the exhaustion of the properties both of the guarantor and of the 3. Expenses – This refers only to those expenses that the guarantor has to satisfy in accordance
principal debtor before he pays the creditor. with law as a consequence of the guaranty. This is limited to those expenses incurred by the
guarantor after having notified the debtor that payment has been demanded of him by the
Art. 2065. Should there be several guarantors of only one debtor and for the same debt, the creditor.
obligation to answer for the same is divided among all. The creditor cannot claim from the
guarantors except the shares which they are respectively bound to pay, unless solidarily has been 4. Damages – Guarantor is entitled to damages only if they are due.
expressly stipulated.
The benefit of division among the co-guarantors ceases in the same cases and for the same reasons Exceptions to the right to indemnity of the guarantor
as the benefit of excussion against the principal debtor.
1. Where the guaranty is constituted without the knowledge or against the will of the debtor, the
When is there a benefit of division among several guarantors? guarantor can only recover insofar as the payment had been beneficial to the debtor
The following conditions must concur in order that several guarantors may claim the benefit of 2. Payment by a third person who does not intend to be reimbursed by the debtor is deemed to
division: be a donation, which requires the debtor’s consent. But the payment is valid with respect to
the creditor.
1. There should be several guarantors
2. Of only one debtor 3. Waiver
3. For the same debt
Art. 2067. The guarantor who pays is subrogated by virtue thereof to all the rights which the
In this case, the liability of the co-guarantors is joint. They are not liable to the creditor beyond creditor had against the debtor.
the shares which they are bound to pay.
If the guarantor has compromised with the creditor, he cannot demand of the debtor more than
Exceptions: what he has really paid.
1.The co-guarantors cannot avail themselves of the benefit of division under the circumstances When the guarantor pays, he becomes subrogated to the rights of the creditor against the debtor.
enumerated in Art. 2059 (RUSIA). What happens really is just a change in creditor. The guarantor becomes the creditor, but the
obligation subsists in all other aspects. He may, for example, foreclose a mortgage in case of failure
2. If solidarity has been expressly stipulated. of the debtor to reimburse him.
Art. 2066. The guarantor who pays the debtor must be indemnified by the latter. The right of subrogation is given to the guarantor so that he can enforce his right to indemnity/ to be
reimbursed.
The indemnity comprises:
It arises by operation of law upon payment by the guarantor. The creditor need not formally cede his
(1) The total amount of the debt; rights to the guarantor.
(2) The legal interests thereon from the time the payment was made known to the creditor, even
though it did not earn interest for the creditor; But the right of subrogation is given only to the guarantor if he has the right to be reimbursed. If, for
(3) The expenses incurred by the guarantor after having notified the debtor that payment had been some reason, he has no right to be reimbursed, he cannot subrogate either.
demanded of him;
(4) Damages, if they are due. Compromise
Once the guarantor pays the principal obligation, the principal debtor must pay him back consisting B owes lender P1M. Lender was a good friend of Guarantor and agreed that if G became liable, he
of: would only have to pay P500K. If B defaults and Guarantor pays P500K, he can only recover P500K
from B, not the original P1M.
(TIED)
Is there a situation where this rule would even be disadvantageous to the Debtor?
1. The Total amount of the debt – The guarantor has the right to demand reimbursement only
when he has actually paid the debt UNLESS there is a stipulation which gives him the right to Yes. Let’s say there was no such rule. B owes L P1M. G, who was a compadre of L, brokered a
demand reimbursement as soon as he becomes liable even if he has not yet paid. The deal with L, in which they agreed that should G become liable, he would only pay P500K. Since
guarantor cannot ask for more than what he has paid. there’s no rule, G tells B about the deal with L. G tells B that if G pays the P500K, B should reimburse
him P600K. This would give B a savings of P400 K, while G earns P100K. Everyone will be happy.
2. Interest – The guarantor is entitled to interest from the time notice of payment of the debt
was made known to the debtor. The notice is a demand upon the debtor to pay the But since there is a rule that says that G cannot ask for more than what he has actually paid, G has no
guarantor. If he delays, he is liable for damages in the form of interest. The guarantor can inducement, no incentive to broker that deal with his compadre L. Why would he go through the
collect interest even if the principal obligation was a loan without an interest. This is because trouble when in any case, he would be getting the same amount that he pays?

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How do you get out of this situation? B should “hire” G as his agent to broker the deal with L. As
compensation for the service rendered by G, B will pay him P100K. So the agreement is taken out of (2) In case of insolvency of the principal debtor;
the context of the guaranty and everyone is happy.
(3) When the debtor has bound himself to relieve him from the guaranty within a specified period,
Art. 2068. If the guarantor should pay without notifying the debtor, the latter may enforce against and this period has expired;
him all the defenses which he could have set up against the creditor at the time the payment was
made. (4) When the debt has become demandable, by reason of the expiration of the period for payment;
Obligation of the guarantor before he pays the creditor (5) After the lapse of 10 years, when the principal obligation has no fixed period for its maturity
unless it be of such nature that it cannot be extinguished except within a period longer than 10
Before he pays the creditor, guarantor should first give notice to the principal debtor. If he does not years;
give notice, the debtor may enforce all the defenses which he could have set up against the creditor at
the time of payment. (6) If there are reasonable grounds to fear that the principal debtor intends to abscond;
Example: Debtor pays Creditor. But Creditor is sneaky and tells Guarantor that Debtor defaulted. So (7) If the principal debtor is in imminent danger of becoming insolvent.
Guarantor pays, without telling Debtor. Guarantor makes a demand for reimbursement from Debtor.
Is Debtor liable? In all these cases, the action of the guarantor is to obtain release from the guaranty, or to demand a
security that shall protect him from any proceedings by the creditor and from the danger of
No. Debtor can invoke the fact of payment to the Creditor against Guarantor. Had Guarantor given insolvency of the debtor.
notice to Debtor, he would have known of the defenses that Debtor had against Creditor which would
have made him think twice about paying. Guarantor’s remedy here is against sneaky Creditor. Under these 7 circumstances, the guarantor has these rights against the debtor BEFORE he makes
payment:
Art. 2069. If the debt was for a period and the guarantor paid it before it become due, he cannot
demand reimbursement of the debtor until the expiration of the period unless the payment has been 1. Right to be released if lender agrees
ratified by the debtor. Release from the guaranty requires that the lender consent because the guaranty is actually
a contract between the lender and the guarantor
If the principal debt was one with a period, it becomes demandable only upon expiration of the period.
Guarantor is only liable if the debtor defaults, but there can be no default before the expiration of the 2. Right to demand a security
period. If the guarantor still pays before the expiration of the period, he must wait for the period to
expire before he can collect from the debtor. The purpose is to enable the guarantor to take measures to protect his interest in view of the
probability that debtor would default and he would be called upon to answer for the obligation.
Exception: Guarantor need not wait for the period if the debtor ratifies payment or consents to it.
Art. 2072. If one, at the request of another, becomes a guarantor for the debt of a third person who
Art. 2070. If the guarantor has paid without notifying the debtor, and the latter not being aware of is not present, the guarantor who satisfies the debt may sue either the person so requesting or the
the payment, repeats the payment, the former has no remedy whatever against the debtor, but only debtor for reimbursement.
against the creditor. Nevertheless, in case of gratuitous guaranty, if the guarantor was prevented
by a fortuitous event from advising the debtor of the payment, and the creditor becomes insolvent, Art. 2073. When there are two or more guarantors of the same debtor and for the same debt, the
the debtor shall reimburse the guarantor for the amount paid. one among them who has paid may demand of each of the others the share which is proportionately
owing from him.
This is like the situation in 2068, only this time, the guarantor pays before the debtor pays. Even in
such a case, guarantor still cannot recover from debtor because he should have informed debtor of his If any of the guarantors should be insolvent, his share shall be borne by the others, including the
intention to pay. Had he informed debtor, debtor would not have paid. Guarantor will suffer the loss payer, in the same proportion.
of his failure to comply with his one and only obligation before paying which is to notify the debtor.
The provisions of this article shall not be applicable, unless the payment has been made in virtue of
Exception: Guarantor may claim reimbursement from debtor if (requisites): a judicial demand or unless the principal debtor is insolvent.
1. It is a gratuitous guaranty This article applies only if there are two or more guarantors of the same debtor for the same debt and
2. The guarantor was prevented by a fortuitous event from informing the debtor of payment one of them has paid:
3. Creditor becomes insolvent
1. by virtue of a judicial demand; or
Remember that the culprit here, aside from the guarantor who did not inform the debtor, is the 2. when the principal debtor is insolvent.
sneaky creditor who nonchalantly received payment twice. If he is solvent, the guarantor must collect
from him. But if he is insolvent and the three requisites above are present, the guarantor can The liability of the guarantors is joint. If one of them pays the entire obligation, he is entitled to be
reimburse from the principal debtor. reimbursed the amount of the shares of the other guarantors.
Art. 2071. The guarantor, even before having paid, may proceed against the principal debtor: Example: A, B, C guaranty the 90K loan of X. A pays 90K. A can collect 30 K each from B and C.
(1) When he is sued for payment;

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But unlike in an ordinary joint obligation, if one of the guarantors is insolvent, the co-guarantors must Art. 2077. If the creditor voluntarily accepts immovable or other property in payment of the debt,
answer for his share. In this sense, the obligation behaves like a solidary obligation. even if he should afterwards lose the same through eviction, the guarantor is released.
Example: A, B, C guaranty the 90K loan of X. A pays 90K. B becomes insolvent. A and C must This is a case of dacion. Since dacion extinguishes the principal obligation, the accessory obligation is
shoulder B’s share. So their liabilities become 45K each. A can collect 45 K from C. also extinguished and is not revived even if the creditor is subsequently evicted from the property.
Art. 2074. In the case of the preceding article, the co-guarantors may set up against the one who Art. 2078. A release made by the creditor in favor of one of the guarantors, without the consent of
paid, the same defenses which would have pertained to the principal debtor against the creditor, and the others, benefits all to the extent of the share of the guarantor to whom it has been granted.
which are not purely personal to the debtor.
A, B, C are guarantors of X for 90K. The creditor releases A without the consent of B and C. The
Example: A, B, C guaranty the obligation of X. A pays even if the obligation has prescribed already. A release should benefit B and C to the extent of 30K (A’s share). They shall be liable only for 60K or
demands reimbursement from B and C. Can they refuse to pay? Yes, they can invoke defenses 30K each.
inherent in the obligation, such as prescription, against the co-guarantor who pays.
A, B, C are guarantors of X for 90K. The creditor releases A with the consent of B and C. Since B and
A, B, C guaranty the obligation of X who was a minor. A pays. Can B and C refuse to reimburse him C consented to the release, their liability is still 90K or 45K each.
on the ground that X is a minor? No, because the defense is personal to X.
Art. 2079. An extension granted to the debtor by the creditor without the consent of the guarantor
Art. 2075. A sub-guarantor, in case of the insolvency of the guarantor for whom he bound himself, is extinguishes the guaranty. The mere failure on the part of the creditor to demand payment after
responsible to the co-guarantors in the same terms as the guarantor. the debt has become due does not of itself constitute any extension of time referred to herein.
A, B, C are guarantors of X. D is a guarantor of A. C pays the entire obligation. A becomes insolvent. If the creditor grants the debtor an extension of time within which to comply with the principal
Can C reimburse from D? Yes, according to Art. 2075. obligation, the guaranty is extinguished. This is because the principal debtor could become insolvent
during the extension period, and the guarantor would not be able to ask for reimbursement.
CHAPTER 3 EXTINGUISHMENT OF GUARANTY
But if the guarantor consents or waives his right under this article in advance, the extension will not
Art. 2076. The obligation of the guarantor is extinguished at the same time as that of the debtor, extinguish the guaranty.
and for the same causes as all other obligations.
It is immaterial whether the guarantor suffers actual prejudice as a result of the extension. The
length of time of the extension is also immaterial. As long as the period is extended, the guaranty is
Because guaranty is an accessory and subsidiary contract, it is extinguished once the principal
extinguished.
obligation is extinguished.
The extension must be based on a new agreement between the debtor and creditor. If the creditor
But the extinguishment of the guaranty does not always carry with it the extinguishment of the
merely fails to make a demand on due date, it is not an extension.
principal obligation.
Can the guarantor sue the creditor for his delay in making a demand, thereby lengthening the risk of
Any agreement between the creditor and the principal debtor which essentially varies the terms of the
the insolvency of the principal debtor? No.
principal contract without the consent of the surety will release the surety from liability. This is
because the alteration would result in a novation of the principal contract which is consequently
extinguished and replaced with a new one. Since the old principal contract is extinguished, the Art. 2080. The guarantors, even though they are solidary, are released from their obligation
accessory contract of guaranty/surety is also extinguished. whenever by some act of the creditor they cannot be subrogated to the rights, mortgages and
preference of the latter.
When is an alteration material?
Art. 2081. The guarantor may set up against the creditor all the defenses which pertain to the
There must be a change which imposes a new obligation or added burden or which takes away some principal debtor and are inherent in the debt; but not those that are purely personal to the debtor.
obligation already imposed, changing the legal effect of the contract.
Chapter 4 Legal and Judicial Bonds
Examples:
The only important thing you have to remember about a legal bond is that it is a surety. Therefore
1. Increase in the principal amount, regardless of the extent of the liability assumed by the
there is no benefit of excussion.
guarantor
2. Substitution of the principal debtor
3. Extension or shortening of the term of the principal debt
In these cases, the guaranty is extinguished altogether.
Decrease in the amount of the principal obligation: The guaranty subsists and is benefited by the
change since the guarantor cannot bind himself for more than the principal obligation.

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PLEDGE AND MORTGAGE 3. Requisites to bind third person/s – pledge, to bind third persons must be in a public
instrument; mortgage, must be registered in the proper registry.
PROVISIONS COMMON TO PLEDGE AND MORTGAGE
A LOAN IS SECURED BY BOTH A PLEDGE AND A GUARANTY. CAN THE CREDITOR REFUSE
Article 2085. The following requisites are essential to the contracts of pledge and mortgage: PAYMENT BY THE GUARANTOR AND CHOOSE TO FORECLOSE IN ORDER TO SATISFY THE
DEBT?
(1)That they be constituted to secure the fulfillment of a principal obligation;
No, payment by the guarantor cannot be refused.
(2)That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;
WHAT ARE THE ESSENTIAL REQUISITES OF PLEDGE AND MORTGAGE? [PRADO]
(3)That the persons constituting the pledge or mortgage have the free disposal of their property 1. Purpose - To secure fulfillment of principal obligation;
and in the absence thereof, that they be legally authorized for the purpose.
(4)Third persons who are not parties to the principal obligation may secure the latter by pledging or
2. Real – There must be delivery of the thing.
mortgaging their own property. 3. Alienation – when the principal obligation becomes due and the debtor defaults, the thing
Article 2086. The provisions of article 2052 are applicable to a pledge or mortgage. may be alienated to satisfy the former.
[A guaranty cannot exist without a valid obligation. However, it may guarantee the performance of a 4. Disposal – Pledgor/mortgagor must have free disposal of the thing or capacity to dispose.
voidable or unenforceable contract or a natural obligation]
5. Ownership – Pledgor/mortgagor must be the absolute owner of the thing;
Article 2087. It is also of the essence of these contracts that when the principal obligation becomes
due, the things in which the pledge or mortgage consists may be alienated for the payment to the
creditor.
PURPOSE: To secure fulfillment of a principal obligation
WHAT IF THE THING PLEDGED/MORTGAGED IS SUBSEQUENTLY LOST; WHO BEARS THE
WHAT IS PLEDGE?
LOSS? IS THE PRINCIPAL OBLIGATION EXTINGUISHED?
It is a contract by virtue of which the debtor delivers to the creditor or to a third person a movable
The pledgor bears the loss. Remember that there hasn’t been transfer of ownership.
or a document involving incorporeal rights for the purpose of securing the fulfillment of a
principal obligation with the understanding that when the obligation is fulfilled, the thing delivered The principal obligation is of course not extinguished, the pledge/mortgage is only accessory.
shall be returned with all its fruits and accessions. However, the debtor must replace the thing or lose the benefit of the period.
Pledge/mortgage is a direct lien on the property. It is better than guarantee because the property
What are the kinds of pledge?
pledged can be sold upon default by the debtor, unlike in guaranty where several requirements have
Pledge may be either: to be complied with first.
1. Voluntary or conventional (created by agreement of the parties); PROBLEM: D TRANSFERS PROPERTY TO C AND AT THE SAME TIME EXECUTES AN
INDEMNITY AGREEMENT; OR D TRANSFERS PROPERTY TO C TO SECURE AN EXISTING
2. Legal (by operation of law).
OBLIGATION. HOW WILL THE TRANSFER BE CHARACTERIZED?
What are the characteristics of pledge? [RAUS] Both transfers will be characterized as pledges.
Pledge is: REAL: There must be delivery of the thing to perfect the contract.
1. Real, because it is perfected by delivery of the thing pledged. An agreement to pledge, when there is breach, gives rise to damages.
2. Acessory, because it has no independent existence.
ALIENATION: When the principal obligation becomes due and the
3. Unilateral, because it creates an obligation solely on the part of the creditor to return the debtor defaults, the thing may be alienated to satisfy the former.
thing pledged upon fulfillment of the principal obligation.
DOES THE CREDITOR HAVE TO GO TO COURT TO ENFORCE THE PLEDGE OR MORTGAGE?
4. Subsidiary, because the obligation of the creditor does not arise until fulfillment of the
principal obligation. No, to require litigation would be to nullify the lien and defeat the purpose of the contract.
WHAT IS THE CONSIDERATION IN PLEDGE?

FREE DISPOSAL:
If the pledgor is also the debtor, the consideration is the principal contract.
If the pledgor is a third person, the cause it the compensation received or the liberality of the pledgor.
WHAT ARE THE DIFFERENCES BETWEEN PLEDGE AND MORTGAGE?

1. Mobility – pledge is constituted on movables; mortgage on immovables.
2. Delivery – pledge requires delivery for perfection; mortgage does not.
Cayo IID 2002 PAGE 29 Cayo IID 2002 PAGE 30

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WHAT DO “FREE DISPOSAL” AND “CAPACITY TO DISPOSE” OF THE PROPERTY MEAN? Though the pledgor must own the thing and have free disposal of it, see the following problem
discussed in class:
Free disposal means that the property is not subject to any claim by a third person.
Ex. On day 1, stocks are sold to X with the condition that the sale will be effective if X tops the bar.
Capacity to dispose means that though the pledgor/mortgagor does not have free disposal, the third
person with a claim authorized him to dispose (tingin ko lang). On day 2, X pledges the stocks.
On day 3, the bar exam results come out, with X in the number one spot.
In case of corporations, the board should adopt a resolution to approve the pledge/mortgage. If what
is to be pledged or mortgaged constitutes all of the corporation’s assets, 2/3 of outstanding capital Is the pledge valid?
stock must approve.
Yes, the pledge is valid. Remember Oblicon, conditional obligations? The effects of a conditional
obligation to give, when the condition happens, retroact to the date of the constitution of the
Rule on consent: obligation. OWNERSHIP RETROACTS TO DAY 1.
If pledgor/mortgagor is married, consent of spouse is needed; if agent, authorization of principal.
In the above condition, what if the condition is resolutory?
For married persons – how to wiggle out of a pledge or mortgage agreement: As long as the pledge is registered in a public document, it is valid and binding as to third persons.
Pledge or mortgage your conjugal property without your spouse’s signature. In case the property is Ex: Day 1 - X receives from A shares of stock with the resolutory condition that they shall be returned
foreclosed, you can raise the defense that there was no consent (remember, half consent is no to A if X does not pass the bar.
consent!)
Day 2 – X pledges the shares.
What if the pledge was constituted to secure an obligation of the family business, doesn’t this redound
to the benefit of the conjugal partnership? Day 3 – X fails the bar.
No, JPSP said that the pledge of conjugal property con only be considered to redound to the benefit of Is the pledge valid?
the partnership if the family business is constituting pledges. Yes. As long as the pledgee registered the pledge in a public instrument, such pledge is binding on A.
If you are the pledgee/mortgagee, check if pledgor/mortgagor has authority to dispose of the *But if you use the argument that the effects retroact, doesn’t that mean that when X pledged the
property. things, he wasn’t the owner? I suppose the public instrument is stronger than the legal fiction.
Another example on free disposal or legal authority: CAN THE CREDITOR IMMEDIATELY ACCEPT A PLEDGE FURNISHED BY A DEBTOR IF THE
PLEDGE BELONGS TO A THIRD PERSON?
Ex. Pledgor corporation is placed under receivership. The corporation cannot pledge shares of stock
because pledge is a disposition requiring court approval. No, the creditor cannot require on the word of the pledgor/mortgagor alone, he must exercise due
care and make sure the pledge/mortgage has given consent. This is especially true in the banking
OWNERSHIP: industry, which is impressed with public interest.
CAN FUTURE PROPERTY BE PLEDGED? WHAT IS THE CONSEQUENCE THEN IF THE CREDITOR DOES NOT VERIFY WITH THE
PLEDGOR/MORTGAGOR?
No, it is essential that the pledgor be the absolute owner of the thing.
The pledge/mortgage is null and void. Article 599 gives the owner of a movable who has been
Note: It is the sale and not the registration in the LTO that transfers ownership of a vehicle. unlawfully deprived thereof the right to recover the same.
Note: A co-owner can only pledge/mortgage his ideal share in the co-ownership.
(1) Article 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or
Note: A mortgagor can rely on what is on the face of the Torrens title. dispose of them. Any stipulation to the contrary is null and void.
WHAT IS MEANT BY ABSOLUTE OWNERSHIP? WHAT DOES THE CREDITOR WITH THE PLEDGE/MORTGAGE WHEN THE DEBTOR DEFAULTS?
BOTH BENEFICIAL AND LEGAL TITLE must vested in the pledgor/mortgagor The creditor can move for the sale of the thing pledged or mortgaged.
Ex. Trustee is legal owner of shares of stock; trustor is beneficial owner: Neither can pledge the WHAT IF THE CREDITOR WANTS TO ACQUIRE THE THING?
shares. He may purchase it at the public auction.
Pledge/mortgage can’t be constituted without a principal obligation even if there is a subsequent WHAT IF THERE IS A STIPULATION THAT THE CREDITOR WILL ACQUIRE THE THING UPON
principal obligation. This is different from situation where the lender extends a credit line for 1M, DEFAULT?
though borrower has not yet drawn, the credit line can still be secured via pledge/mortgage.
The stipulation (pactum commissorium) is null and void.
Ex. deed of assignment/absolute sale to secure fulfillment of obligation this is a mortgage or an
implied trust according to the SC. WHAT ARE THE REQUISITES FOR PACTUM COMMISSORIUM TO EXIST?
The pledgor/mortgagor must be absolute owner of the thing or the property. The creditor may rely on 1. There should be a pledge/mortgage;
the title/stock certificate if there is no notice of defect in title.
2. There should be a stipulation for AUTOMATIC appropriation or the thing in case of default by
However, failure of the pledgor to present the thing is a red flag that should put the pledgee on guard the debtor.
as to the pledgor’s right to pledge the thing.
ARE THERE ANY EXCEPTIONS TO PACTUM COMMISSORIUM?

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Yes, Article 2112 provides that if the thing pledged or mortgaged is not sold in two public auctions, WHAT DO YOU MEAN PLEDGE/MORTGAGE IS INDIVISIBLE?
the creditor may appropriate the same.
Ex: 1M Loan. It was secured by REM. The REM covered several (100) condominium units. In
WHAT IS THE REASON FOR THE PROHIBITION? accordance with the schedule, there was payment of 100K, can you ask release of corresponding
amount of units?
The value of the thing pledged or mortgaged is usually more than the amount of the obligation.
No release. Pledge is indivisible.
WHAT HAPPENS TO THE CONTRACT OF PLEDGE/MORTGAGE IF THERE IS A STIPULATION OF
PACTUM COMMISSORIUM; IS IT VOID? WHAT ARE THE EXCEPTIONS TO INDIVISIBILITY:
No, only the stipulation is void; the principal contract will subsist. 1. Where each one of several thing guarantees a determinate portion of credit.
HOW CAN YOU OPT OUT OF THE PROHIBITION ON PACTO COMMISSORIO? Ex: If you have 100 mortgages securing corresponding portion of the loan, then when the
corresponding portion is paid, the corresponding pledge/mortgage is extinguished. All 100 mortgages
1. You can enter into another contract subsequent to the pledge/mortgage. The prohibition
may be in the same document.
applies only to stipulations made in the contract of pledge/mortgage.
Or, if the parties agree to allow partial discharge of the pledge/mortgage. How? Cancel
2. The debtor can voluntarily cede the property to the creditor. This would in effect be a novation
pledge/mortgage and constitute a new pledge/mortgage.The downside is that you must again pay
of the pledge/mortgage.
doc. stamps and reg. fees, unlike in the document with 100 mortgages, where the fees are only paid
3. There can be a stipulation where the debtor merely promises to sell; non-compliance would once.
give the creditor, not a right to the property, but an action for damages.
2. If there was only partial release of the loan. CB v. CA. The bank only released a portion of the
4. There can be a stipulation granting the creditor authority to take possession and not loan; the court ordered a corresponding portion of the REM to be released.
ownership of the property upon foreclosure. 3. Where there was failure of consideration. Creditor took over management but the business
failed.
Examples on pactum commissorium:
Ex. X corporation pledges shares; the pledge agreement states that pledgee has authority to instruct Article 2091. The contract of pledge or mortgage may secure all kinds of obligations, be they pure
Corporate Secretary of X to transfer shares in name of pledgee in case of default. VALID? or subject to a suspensive or resolutory condition.
NO. The execution of document transferring the shares is only a confirmation of the sale that was Pledge/mortgage may secure all sorts of valid, voidable, unenforceable obligations.
already consummated automatically.
Article 2092. A promise to constitute a pledge or mortgage gives rise only to a personal action
Ex. If the agreement is that, upon default, pledgee sells the things pledged at market price and between the contracting parties, without prejudice to the criminal responsibility incurred by him
applies profits to the outstanding obligation. Valid? who defrauds another, by offering in pledge or mortgage as unencumbered, things which he knew
were subject to some burden, or by misrepresenting himself to be the owner of the same.
Yes. There is no automatic transfer of ownership. In fact, the sale of the thing to satisfy the obligation
is the essence of pledge.
Ex. Upon default, pledgor conveys property to pledgee by dation; and for the purpose, pledgee is PROVISIONS APPLICABLE ONLY TO PLEDGE
attorney in fact of pledgor. Valid?
YES. It is not automatic; there is need for another agreement to be entered into. Article 2093. In addition to the requisites prescribed in article 2085, it is necessary, in order to
Ex. Pledgee has the option to purchase the thing upon default at price certain. Valid? constitute the contract of pledge, that the thing pledged be placed in the possession of the
creditor, or of a third person by common agreement.
Yes. There must be a subsequent sale; it is not automatic.
Remember. Pledge/mortgage are real contracts.
Remember, for PC to exist, the EFFECTIVE ACT IS DEFAULT, upon which, there is automatic transfer
of ownership. If you agree, but don’t deliver to the pledgee or a third person/s, there is no pledge but there is an
agreement to enter into a pledge.
Article 2089. A pledge or mortgage is indivisible, even though the debt may be divided among the Can delivery be made to the pledgor?
successors in interest of the debtor or of the creditor.
Yes, if he is acting as agent of pledgee or where the thing pledged is so unwieldy as to make delivery
Therefore, the debtor’s heir who has paid a part of the debt cannot ask for the proportionate share of impossible, constructive delivery is allowed.
extinguishment of the pledge or mortgage as long as the debt is not completely satisfied.
What may be the objects of pledge?
Neither can the creditor’s heir who has received his share of the debt return the pledge or cancel the
mortgage, to the prejudice of the other heirs who have not yet been paid. Movables within the commerce of man.
From these provisions is excepted the case in which, there being several things given in mortgage or Delivery may be the actual thing or a title (certificates of deposit, stocks).
pledge, each one of them guarantees only a determinate portion of credit. Must be indorsed. Shares of stock not negotiable so no indorsement is required, however, for safety
The debtor, in this case, shall have the right to the extinguishment of the pledge or mortgage as the reasons, the same may be required.
portion of the debt for which each thing is specially answerable is satisfied.
Article 2094. All movables which are within commerce may be pledged, provided they are
Article 2090. The indivisibility of a pledge or mortgage is not affected by the fact that the debtors susceptible of possession.
are not solidarily liable.

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Article 2095. Incorporeal rights, evidenced by negotiable instruments, bills of lading, shares of In case of a pledge of animals, their offspring shall pertain to the pledgor or owner of animals
stock, bonds, warehouse receipts and similar documents may also be pledged. The instrument pledged, but shall be subject to the pledge, if there is no stipulation to the contrary.
proving the right pledged shall be delivered to the creditor, and if negotiable, must be indorsed.
The creditor who receives the fruits should apply them to whatever amount is owing (obligations due
Article 2096. A pledge shall not take effect against third persons if a description of the thing and payable), if not due, the fruits just form part of the pledge.
pledged and the date of the pledge do not appear in a public instrument.
The problem here is: how do third persons check if the thing is pledged when the thing isn’t If the period is for the benefit of the pledgee, even if the obligation is not due, he may compensate
represented by some sort of title which can be annotated? against the interest or the principal, as the case may be.
They can’t but they should exercise diligence. Red flags would be failure or inability of debtor to show Ex: Lender lends Borrower money, payable upon demand. To secure the loan, B pledges a goat. Here
the thing or the title to the thing. the benefit of the period is for the creditor, L. L may then take the goat’s milk and offspring and
compensate against what is owing him even if the obligation is not yet due.
No requirement as to form but to affect third persons, it must be in a public instrument (notarized
document). Article 2103. Unless the thing pledged is expropriated, the debtor continues to be the owner
thereof.
Article 2097. With the consent of the pledgee, the thing pledged may be alienated by the pledgor or Nevertheless, the creditor may bring the actions which pertain to the owner of the thing pledged in
owner, subject to the pledge. order to recover it from, or defend it against a third person.
The ownership of the thing pledged is transmitted to the vendee or transferee as soon as the pledgee If the thing is expropriated, the thing will continue with respect to the thing given. labo!
consents to the alienation, but the latter shall continue in possession.
Ex: pledgor pledges property to pledgee to secure a loan. Pledge is in a public instrument. Pledgor sell Article 2104. The creditor cannot use the thing pledged, without the authority of the owner, and if
property to third person/s without notice to pledgee – sale is valid but transfer of ownership is he should do so, or should misuse the thing in any other way, the owner may ask that it be
suspended until pledgee consents. judicially or extrajudicially deposited.
Why would the pledgee want to be informed – administrative purposes; who gets property when When the preservation of the thing pledged requires its use, it must be used by the creditor but only
obligation is paid. for that purpose.
The creditor can only use the thing if he is authorized or its preservation requires use.
Article 2098. The contract of pledge gives a right to the creditor to retain the thing in his possession
or in that of a third person to whom it has been delivered, until the debt is paid. If he misuses it, the pledgor can demand extrajudicial deposit.
Article 2099. The creditor shall take care of the thing pledged with the diligence of a good father of Article 2105. The debtor cannot ask for the return of the thing pledged against the will of the
a family; he has a right to the reimbursement of the expenses made for its preservation, and is creditor, unless and until he has paid the debt and its interest, with expenses in a proper case.
liable for its loss or deterioration, in conformity with the provisions of this Code.
Article 2106. If through the negligence or willful act of the pledgee, the thing pledged is in danger of
Article 2100. The pledgee cannot deposit the thing pledged with a third person, unless there is a being lost or impaired, the pledgor may require that it be deposited with a third person.
stipulation authorizing him to do so.
Though the pledgor cannot demand return of the thing unless the obligation is fulfilled, if the thing
The pledgee is responsible for the acts of his agents or employees with respect to the thing pledged. pledged is in danger of being lost or impaired through the pledgee’s willful act or negligence, he may
Remedy of pledgor if pledgee deposits it with a third party without authority? require its deposit with a third person.
The pledgor may demand extrajudicial deposit of the thing under 2104 or deposit with a third Article 2107. If there are reasonable grounds to fear the destruction or impairment of the thing
person/s in 2106. pledged, without the fault of the pledgee, the pledgor may demand the return of the thing, upon
offering another thing in pledge, provided the latter is of the same kind as the former and not of
If the pledgee deposits the thing with a third person without authorization, can the pledgor demand inferior quality, and without prejudice to the right of the pledgee under the provisions of the
resolution of the pledge agreement? following article.
Yes. Substantial breach under 1191 gives the injured party the right to resolve the obligation. It can The pledgee is bound to advise the pledgor, without delay, of any danger to the thing pledged.
be argued that the principal consideration was that the custodian be the pledgee; now if the creditor
transfers possession, it’s a principal breach. Article 2108. If, without the fault of the pledgee, there is danger of destruction, impairment, or
diminution in value of the thing pledged, he may cause the same to be sold at a public sale. The
proceeds of the auction shall be a security for the principal obligation in the same manner as the
Article 2101. The pledgor has the same responsibility as a bailor in commodatum in the case under
thing originally pledged.
article 1951.
[The pledgor who, knowing the flaws of the thing pledged, does not advise the pledgee of the same, If the thing is in danger of diminution or destruction, without the pledgee’s fault, the pledgor may
shall be liable to the latter of the damages which he may suffer by reason thereof.] demand its return, provided he replaces it with another of the same kind and quality.
Article 2102. If the pledge earns or produces fruits, income, dividends, or interests, the creditor Despite the pledgor’s right above, in the same situation, the pledgee may opt to sell the thing and
shall compensate what he receives with those which are owing him; but if none are owing him, or keep the proceeds; the pledgee’s right takes precedence over the pledgor’s. In this case, the proceeds
insofar as the amount may exceed that which is due, he shall apply it to the principal. Unless there of the sale shall be security for the debt.
is a stipulation to the contrary, the pledge shall extend to the interest and earnings of the right In 2108, upon due date, if the cash value is less than the principal obligation, the creditor can still
pledged. recover the balance from the debtor, unlike in foreclosure. this looks important.

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The pledgor can question the sale, alleging that he could have obtained a better price. No particular period is required by law. Notice can be given right before close of office the day
preceding the sale. Before that date, debtor already defaulted; he should have known a notarial sale
Article 2109. If the creditor is deceived on the substance or quality of the thing pledged, he may was forthcoming.
either claim another thing in its stead, or demand immediate payment of the principal obligation. The reason, according to JPSP, is, if there were a period, the pledgor would be able to litigate and
This is an instance where the debtor loses the benefit of the period: If the debtor dupes the creditor obtain an injunction.
as to the quality of the thing, the creditor may demand immediate payment or delivery of another
security. Can it be a private sale?
Ex: stocks pledged, listed on the PSE and just coursed through a broker. Yes – there is no express
Article 2110. If the thing pledged is returned by the pledgee to the pledgor or owner, the pledge is prohibition. But see the de Leon book under Article 2112.
extinguished. ANY STIPULATION TO THE CONTRARY SHALL BE VOID.
If subsequent to the perfection of the pledge, the thing is in the possession of the pledgor or owner, Exception to pactum commissorium if the thing is not sold after two sales, the creditor may
there is a prima facie presumption that the same has been returned by the pledgee. This appropriate the thing and it shall be considered as full payment for the entire obligation.
same presumption exists if the thing pledged is in the possession of a third person who has
received it from the pledgor or owner after the constitution of the pledge. Article 2113. At the public auction, the pledgor or owner may bid. He shall, moreover, have a better
right if he should offer the same terms as the highest bidder.
If after the perfection of the pledge, the property is in the possession of the pledgor, as owner, the
presumption is that it was returned and extinction of the pledge, UNLESS the owner holds it as agent The pledgee may also bid, but his offer shall not be valid if he is the only bidder.
of the pledgee.
The pledgor is allowed to bid and all things being equal, his bid shall be preferred over that of others.
The law wants to conserve the property in the owner.
*Article 2111. A statement in writing by the pledgee that he renounces or abandons the pledge is
sufficient to extinguish the pledge. For this purpose, neither the acceptance by the pledgor or The pledgee may also bid, but his offer shall not be valid if he is the only bidder because the law
owner, nor the return of the thing pledged is necessary, the pledgee becoming a depositary. seeks to prevent fraud. Fraud is possible if the parties had stipulated that the debtor shall be allowed
to the excess and the creditor, who is bidding alone, bids low.
PROBLEM: TO SECURE HIS LOAN, BORROWER PLEDGED HIS CAR TO LENDER. OUT OF THE KINDNESS
OF HIS HEART, LENDER COMPOSED A LETTER RENOUNCING THE PLEDGE. HE USED THE CAR TO
Article 2114. All bids at the public auction shall offer to pay the purchase price at once. If any other
DRIVE TO THE POST OFFICE AND MAILED THE LETTER.
bid is accepted, the pledgee is deemed to have been received the purchase price, as far as the
WHILE DRIVING HOME, LENDER SPOTTED BORROWER WITH LENDER’S WIFE AND FELT VERY ANGRY pledgor or owner is concerned.
AND JEALOUS.
Pledgee can waive cash requirement, but that is his lookout.
WHEN BORROWER RECEIVED THE LETTER, HE WENT TO LENDER’S HOUSE TO RECOVER THE CAR BUT
LENDER REFUSED AND TOLD BORROWER TO PISS OFF. CAN LENDER REFUSE TO RETURN THE CAR? Article 2115. The sale of the thing pledged shall extinguish the principal obligation, whether or not
No. See Article 2111. the proceeds of the sale are equal to the amount of the principal obligation, interest and expenses
in a proper case.
Article 2112. The creditor to whom the credit has not been satisfied in due time, may proceed If the price of the sale is more than said amount, the debtor shall not be entitled to the excess,
before a Notary Public to the sale of the thing pledged. This sale shall be made at a public auction, unless it is otherwise agreed. If the price of the sale is less, neither shall the creditor be entitled to
and with notification to the debtor and the owner of the thing pledged in a proper case, stating the recover the deficiency, notwithstanding any stipulation to the contrary.
amount for which the public sale is to be held.
The obligation is extinguished when the pledge is sold regardless of whether the proceeds are less or
If at the first auction the thing is not sold, a second one with the same formalities shall be held; and more than the amount of the obligation. Unlike in a mortgage, there can be recovery of deficiency.
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. IN PLEDGE, YOU CAN STIPULATE THAT THE DEBTOR WILL BE ENTITLED TO THE EXCESS
BUT YOU CAN’T STIPULATE THAT THE CREDITOR WILL BE ALLOWED TO RECOVER
WHAT ARE THE FORMALITIES REQUIRED FOR THE NOTARIAL SALE? DEFICIENCY.
(1) the debt is due and unpaid; PROBLEM: IN THE PLEDGE AGREEMENT, THE PARTIES STIPULATED THAT, IN CASE OF NOTARIAL
SALE, THE PLEDGOR SHALL BE ENTITLED TO THE EXCESS AND THE PLEDGEE SHALL BE ENTITLED TO
(2) the sale must be at a public auction;
RECOVER THE DEFICIENCY. ARE THE STIPULATIONS VALID?
(3) there must be notice to the pledgor and owner, stating the amount due; and
The stipulation that the debtor shall be entitled to the excess is valid. The stipulation giving the
(4) the sale must be with the intervention of a notary public. creditor the right to recover the deficiency is void. See Article 2115.
How is the public sale conducted? HOW DO YOU GUARD AGAINST THE SITUATION OF NOT BEING ABLE TO RECOVER THE DEFICIENCY
IF YOU ARE THE PLEDGEE?
Default rule: Proceed before a Notary Public and ask him to conduct a notarial sale. The notary
supervises the sale of the pledged property, drafts the rules and notifies the debtor and the owner. Set a minimum bid (if this is actually allowed; JPSP says yes, book says no)
Is there a period required for notification? OR
Instead of selling the thing, just sue for the entire obligation.

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OR He is not prejudiced by any waiver of defense by the principal obligor.

Stipulate that if the value of the pledge goes under a certain amount, then the debtor shall be obliged The third party pledgor is entitled to:
to pledge additional securities.
1. Indemnity;
Ex: 1M obligation, 1.5M worth of stocks pledged; stipulate that if the value goes below 1.3M then the
debtor will be obliged to pledge additional securities. 2. Subrogation;
3. Pledgor is released if creditor accepts property in payment of debt;
Without such a stipulation, can Article 2108 have the same effect?
4. Release in favor of one pledgor benefits all;
Ex: 1M obligation, 1.5M worth of stocks pledged. When the stocks go down top 1.4M, can you claim
5. Extension granted to debtor extinguishes pledge;
that the value of the pledge is diminishing and then choose to sell the stocks for 1.4M, keeping the
profits as security, pursuant to 2108? 6. Pledgors are released from obligation if by some act of the creditor, there can be no
subrogation;
JPSP says: “Maybe but speculative.” Probably not if the change in price is just a day-to-day
fluctuation. 7. Pledgor may set up defenses inherent in the debt.
PROBLEM: 1M IS SECURED BY A 700K MORTGAGE AND A 900K PLEDGE. IF YOU ARE THE LENDER, Article 2121. Pledges created by operation of law, such as those referred to in articles 546, 1731,
AND THE BORROWER DEFAULTS, WHICH SECURITY TO YOU GO AFTER FIRST? and 1994, are governed by the foregoing articles on the possession, care and sale of the thing as
well as on the termination of the pledge. However, after payment of the debt and expenses, the
Go against the REM first, then take the whole pledge and make $$$! In REM, unlike in pledge, the
remainder of the price of the sale shall be delivered to the obligor.
debtor is entitled to the excess and the creditor is entitled to recover the deficiency, as a default rule.
Article 2122. A thing under a pledge by operation of law may be sold only after demand of the
Article 2116. After the public auction, the pledgee shall promptly advise the pledgor or owner of the amount for which the thing is retained.
result thereof.
The public auction shall take place within one month after such demand. If, without just grounds,
This is to allow the debtor to take reasonable steps if he suspects that the sale was not honest. the creditor does not cause the public sale to be held within such period, the debtor may require
the return of the thing.
Article 2117. Any third person who has any right in or to the thing pledged may satisfy the principal In pledges by operation of law, the remainder of the sale price shall be delivered to the debtor.
obligation as soon as the latter becomes due and demandable.
The foregoing articles govern the following pledges by operation of law; BUT after sale, the excess, if
The creditor cannot refuse payment by a third person WITH AN INTEREST in the thing pledged. any, is returned to the pledgor:
Third party can be a buyer of the thing or someone with a junior lien. • Possessor in good faith may retain the thing on which he spent for necessary expenses until
Why would a third person with a junior lien want to pay the obligation? The property may be more he is reimbursed.
valuable than the obligation and he may want his lien to become senior. • He who works on a movable may retain the same until paid for the work.
Article 2118. If a credit which has been pledged becomes due before it is redeemed, the • Depositary may retain thing until paid for the deposit.
pledgee may collect and receive the amount due. He shall apply the same to the payment of his • Agent may retain objects of agency until reimbursed by principal.
claim, and deliver the surplus, should there be any, to the pledgor.
• Laborer’s wages are considered a lien on goods manufactured or work done.
Under this article, the thing pledged is a credit which has become due. The creditor can thus collect
the amount due and compensate, DELIVERING THE SURPLUS TO THE DEBTOR. How about any deficiency? I think creditor will be entitled to recover because here, he did not
accept the pledge voluntarily and the reason for prohibiting recovery is absent (the reason being that
creditors should know not to lend more than what can be secured).
The pledgee has the duty to collect any due credits, in line with the ordinary diligence required of him.
Article 2123. With regard to pawnshops and other establishments, which are engaged in making
loans secured by pledges, the special laws and regulations concerning them shall be observed,
Article 2119. If two or more things are pledged, the pledgee may choose which he will cause to be
and subsidiarily, the provisions of this Title.
sold, unless there is a stipulation to the contrary.
He may demand the sale of only as many of the things as are necessary for the payment of the debt.
PROBLEM: A 1.5M DEBT IS SECURED BY 2M WORTH OF SMC SHARES. IF YOU ARE THE PLEDGEE,
HOW WOULD YOU SELL?
Sell all. You are not required to sell by piece.
Pledgor can restrict only if there are two pledges securing the obligation.
Article 2120. If a third party secures an obligation by pledging his own movable property under the
provisions of article 2085 he shall have the same rights as a guarantor under articles 2066 to
2070, and articles 2077 to 2081.

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REAL MORTGAGE future.” Remember that one of the essential requisites of mortgage is that the mortgagor
should be the absolute owner of the thing mortgaged.
Art. 2124. Only the following property may be the object of a contract of mortgage:
But a stipulation which says that the mortgage covers future improvements upon real property
(1) Immovables; already mortgaged is valid. This is because these future improvements are deemed included in
(2) Alienable real rights in accordance with the laws, imposed upon immovables. the real property by accession; they are not separate from the real property already subject of
the mortgage.
Nevertheless, movables may be the object of a chattel mortgage.
Art. 2125. In addition to the requisites stated in Article 2085, it is indispensable, in order that a
Mortgage (def). A real estate mortgage is a contract whereby the debtor secures to the creditor mortgage may be validly constituted, that the document in which it appears be recorded in the
the fulfillment of a principal obligation, specially subjecting to such security immovable property Registry of Property. If the instrument is not recorded, the mortgage is nevertheless binding
or real rights over immovable property in case the principal obligation is not complied with at the between the parties.
time stipulated.
The persons in whose favor the law establishes a mortgage have no other right than to
What are the characteristics of the contract of mortgage? demand the execution and the recording of the document in which the mortgage is formalized.
Mortgage is a real, accessory, and subsidiary contract. Art. 1357. If the law requires a document or other special form, as in the acts and contracts
enumerated in the following article, the contracting parties may compel each other to observe
that form, once the contract has been perfected. This right may be exercised simultaneously
Who takes possession of the mortgaged property? with the action upon the contract.
As a general rule, the mortgagor retains possession of the property mortgaged. Art. 1358. The following must appear in a public document:
However, it is not an essential requisite of the contract of mortgage that the property remains in (1) Acts and contracts which have for their object the creation, transmission, modification, or
the possession of the mortgagor. If the mortgagor delivers the property to the mortgagee, it extinguishment of real rights over immovable property…
can still be a contract of mortgage, plus some other contract.
What are the requisites of real mortgage?
What is the consideration in a contract of mortgage?
1. It must be constituted to secure a principal obligation.
Since mortgage is an accessory contract, the consideration is the same as that of the principal
contract. 2. The mortgagor must be the absolute owner of the thing mortgaged.
What are the kinds of real mortgage? 3. He must have free disposal of the thing or otherwise be authorized to do so.
1. Voluntary – Agreed to between the parties or constituted by the will of the owner of the 4. When the principal obligation becomes due, the property mortgaged may be alienated
property for the payment to the creditor.
2. Legal – Required by law to be executed in favor of certain persons 5. To prejudice third persons, the mortgage must be recorded in the Registry of Property.
3. Equitable – Lacks the proper formalities of mortgage but shows the intention of the If the first four requisites are present, there is already a valid mortgage between the parties –
parties to make the property as a security for a debt. mortgagor and mortgagee.
What is the subject matter of real mortgage But to affect third persons, there is a need to comply with the fifth requisite: The document of
mortgage must be recorded in the Registry of Property. This is because recording the
1. Immovables document in the Registry of Property serves as notice to 3rd persons. This is similar to the
2. Alienable rights imposed upon immovables requirement in pledge that the pledge be in a public document.
Can you mortgage future property? Can there be an oral mortgage?

Future property CANNOT be the object of a contract of mortgage. One cannot constitute a
mortgage on “any other property he might have now and those he might acquire in the

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As between the parties, YES. As long as the four essential requisites above are present, there 2. Besides, at the time of the mortgage, the 400K debt was non-existent.
is already a mortgage between the parties. It need not be in writing in order to be enforceable
since it is not covered by the Statute of Frauds. Therefore, X has a better right with respect to the 4/5 which was not registered.
But the oral mortgage is not binding against third persons. And the mortgagee cannot register How does mortgagee opt out of this problem?
the mortgage in the Registry of Property if it is an oral mortgage. So his remedy is to invoke
Art. 1357 and 1358. 1357 provides that if there is already a valid contract, one party can 1. He can do a credit line arrangement in which he will give the debtor a ceiling up to which
compel the other party to observe the proper form. In this case, since there is already a valid he can borrow. The mortgage deed will say that the principal obligation is 500K, but
mortgage between the parties, the mortgagee can compel the mortgagor to execute a public debtor has the choice of asking for a release of funds below this ceiling. This way, the
document of mortgage, so that the mortgagee can then register it in the Registry of Property. mortgagee is sure that the entire 500K loan is registered. But this is costly, since the
doc stamp tax will be based on the ceiling and not on the actual amount released.
Remember that 1357 is only for convenience. Its purpose is to compel the mortgagor to
execute a public document, so that the mortgagee can register the mortgage. It does not 2. The better solution is that the mortgagee should execute and register a new document
determine the validity or even the enforceability of the mortgage between the parties. Before each time he releases funds to the mortgagor/debtor.
you can invoke it, there has to be a valid mortgage first.
What happens if the mortgage is void?
Once the previously oral mortgage is in a public document and is subsequently registered in the
Registry of Property, it becomes binding on third persons. If for some reason, the mortgage is void, the principal obligation subsists. What is lost is only
the right of the creditor to foreclose the mortgage in order to satisfy the principal obligation.
Procedure: What happens when you enter into a contract of Moreover, even if the mortgage itself is void, the mortgage deed remains as proof of the
mortgage? principal obligation.
Step 1: Execute the document of mortgage Art. 2126. The mortgage directly and immediately subjects the property upon which it is
imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security
Step 2: Go to a notary public, who will notarize the document. it was constituted.
Step 3: Pay the documentary stamp tax within the first five days of the succeeding month. The In guaranty, the property of the guarantor is not subjected to a lien. The action of the creditor is
doc against the guarantor himself and not against his property. The creditor would still have to sue
stamp tax is a percentage of the value of the property mortgaged. the guarantor, obtain judgment, execute it, etc.
Step 4: Go to the Office of the Register of Deeds and pay the registration fees. Before you pay On the other hand, in mortgage, the property is subjected to a lien. It creates a real right which
the is inseparable from the property mortgaged. It is enforceable against the whole world (provided
registration fees, the government will require you to update payment of realty taxes on it is registered). Until the principal obligation is discharged, the mortgage follows the property
the property. After payment of the registration fees, the mortgage will be annotated on wherever it goes and subsists even if the ownership changes.
the title.
So if the mortgagor sells the mortgaged property, the property still remains subject to the
Problem: Mortgagor mortgages a house and lot worth 500K to Mortgagee to secure a principal fulfillment of the obligation secured by it. All subsequent purchasers must respect the
obligation of “100K and any and all future indebtedness.” The mortgage is registered. mortgage, as long as it is registered, or even if it is not registered, if the purchaser knew that it
Meanwhile, Mortgagor owes another creditor, X, 500K. The total indebtedness of Mortgagor to was mortgaged.
Mortgagee eventually reaches 500K. On due date, Mortgagor fails to pay both X and
Mortgagee. The house and lot is his only property. X is able to obtain a writ or attachment on The mortgagee has a right to rely in good faith on what appears on the certificate of title of the
the house and lot. Who has a better right to the house and lot – X or mortgagee? mortgagor. In the absence of anything to excite suspicion, he is under no obligation to look
beyond the certificate.
Mortgagee has a better right with respect only to 1/5 of the house and lot. This is because
the mortgage was registered only to the extent of 100K, and not to the “any and all future Does the mortgagor lose his title to the property mortgaged?
debts.” Therefore, the mortgage is binding on third persons only with respect to the 100K debt,
or 1/5 of the house. X can argue on two grounds: No. A mortgage does not involve a transfer, cession, or conveyance of property but only
constitutes a lien thereon. It does not extinguish the title of the debtor. The mortgagor/debtor
1. That Mortgagee paid doc stamp taxes based only on the 100K debt, not on the continues to be the owner. The only right of the mortgagee is to foreclose the mortgage and
succeeding 400K debt. So he even cheated the government of its revenues in this sell the property to satisfy the obligation. The mortgagor’s default does not operate to vest in
case. the mortgagee the ownership of the encumbered property.

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The mortgage credit is a real right, and under property law, real rights over immovables are
Since the mortgagor retains ownership of the mortgaged property, he can even mortgage it also considered immovables in themselves. Thus, they may be alienated or assigned to third
again to another mortgagor (junior lien/encumbrance). persons, in whole or in part, by the mortgagee who is the owner of the right. The assignee may
then foreclose the mortgage in case of nonpayment of the principal obligation.
Art. 2127. The mortgage extends to the natural accessions, to the improvements, growing
fruits, and rents or income not yet received when the obligation becomes due, and to the The alienation or assignment of the mortgage credit is valid even if it is not registered.
amount of the indemnity granted or owing to the proprietor from the insurers of the property Registration is only necessary to affect third persons.
mortgaged, or in virtue of expropriation for public use, with the declarations, amplifications
and limitations established by law, whether the estate remains in the possession of the Art. 2129. The creditor may claim from a third person in possession of the mortgaged
mortgagor, or it passes into the hands of a third person. property, the payment of the part of the credit secured by the property which said third person
possesses, in the terms and with the formalities which the law establishes.
Future property, in themselves, cannot be the subject matter of mortgage. But, the future
improvements, accessions, and fruits of property already mortgaged are also covered by the Art. 2129 does not really apply to all third persons in possession of the property. It only applies
mortgage. This is because they are deemed to be part of the principal thing which was already to those in possession of the mortgaged property in the concept of owner. If the possession
existing at the time of the constitution of the mortgage. by a third person is only as lessee, the creditor may not collect the credit from that third person.
To exclude these things, there must be an express stipulation to that effect. When a mortgagor alienates/sells the mortgaged property to a third person, the creditor may
demand from him the payment of the principal obligation. This is because the mortgage credit
Examples: is a real right, which follows the property wherever it goes, even if its ownership changes.
However, before the creditor can collect from the third person, he must have made a demand
1. The mortgage deed contains a provision that “all property taken in exchange or on the debtor, and the latter should have failed to pay.
replacement, as well as all buildings, machineries, and, equipment, and others that the
mortgagor may acquire, construct, install, attach, or use in its lumber concession shall Example: A mortgaged his land worth P5M in favor of B to secure a debt of P6M. A sold the
immediately become subject to the mortgage.” land to C.
This is a valid stipulation, especially where the property mortgaged is subject to On due date, B should demand payment of the P6M from A. If A fails to pay, B may foreclose
deterioration (such as machinery and equipment). The purpose of this stipulation is to the mortgage. B may also choose to collect P5M (not P6M) from C, which is the part of the
maintain the value of the property mortgaged. principal obligation secured by the property sold to C. C is not liable for the deficiency of P1M
in the absence of a contrary stipulation. If C pays B, C can go after A for reimbursement.
2. JPSP example: In the mortgage deed, Mortgagor mortgages house and lot #1 and
another house and lot which he will acquire next month. The deed is registered. Is this Art. 2130. A stipulation forbidding the owner from alienating the immovable mortgaged shall
a valid mortgage? be void.
Between mortgagor and mortgagee, the mortgage is valid with respect to both house A stipulation forbidding the owner from alienating the mortgaged property is void for being
and lot #1 and #2. The remedy of the mortgagee, once mortgagor acquires the second contrary to public policy because it is an undue impediment or interference on the transmission
house and lot, is to compel the mortgagor to execute a public document evidencing the of property. However, if the mortgagor alienates the property, the transferee must respect the
mortgage of the 2nd house and lot and to register it, so that it would be binding on third mortgage because it is a real right.
parties.
A stipulation that requires the mortgagor to notify the mortgagee in writing before he sells the
But, as against third parties, the mortgage is only valid with respect to the first house property is VALID. This is not a prohibition but a mere regulation.
and lot but not to the second house and lot, until the latter is registered.
The mortgagee would want to regulate the disposition of the property by the mortgagor
What happens if the thing mortgaged is expropriated? because first, he would want to know the type of person from whom he might have to collect the
credit later on. Second, any disposition of the mortgaged property by the mortgagor is a red
The security becomes the cash given by the government as indemnity. Upon default, the flag that may indicate that the mortgagor/debtor may not be able to pay the debt later on
mortgagee can apply the cash as payment for the obligation. (Because why is he suddenly disposing of his property? Maybe he doesn’t have money
anymore.)
Art. 2128. The mortgage credit may be alienated or assigned to a third person, in whole or in
part, with the formalities required by law. Art. 2131. The form, extent and consequences of a mortgage, both as to its constitution,
modification and extinguishment, and as to the other matters not included in this Chapter shall
be governed by the provisions of the Mortgage Law and of the Land Registration Law.

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First, check if there’s a stipulation saying that there will be a private sale. If there is such a
FORECLOSURE stipulation, the property can be sold at a private sale. If there is no such stipulation, then there
will be either judicial or extra-judicial foreclosure.
The essence of a mortgage is that upon default, the mortgagee can foreclose – he can sell the
property and apply the proceeds of the sale to the payment of the principal obligation. Second, look for the following tell-tale signs:
What is foreclosure? 1. Is the mortgagee a foreigner? If it’s a foreigner, it’s automatically judicial foreclosure
(Act 133).
It is the remedy available to the mortgagee by which he subjects the mortgaged property to the
satisfaction of the obligation. It denotes the procedure adopted by the mortgagee to terminate 2. If the mortgagee is not a foreigner, look for a stipulation in the mortgage agreement
the rights of the mortgagor on the property and includes the sale itself. which gives the mortgagee the special power of attorney to carry out the extra-
judicial foreclosure in accordance with Act 3135. If you find this stipulation, it is an
extra-judicial foreclosure.
How do you foreclose?
3. If there is no stipulation for extra-judicial foreclosure under Act 3135, it is a judicial
There are two types of foreclosure – judicial and extra-judicial foreclosure.
foreclosure governed by Rule 68 of the Rules of Court.
The default rule is judicial foreclosure. You can only do extra-judicial foreclosure if the
Third, if it’s an extra-judicial foreclosure, look at the parties. Who is foreclosing?
mortgage deed has a provision which gives the mortgagee the special power of attorney to sell
the mortgaged property in accordance with Act 3135.
1. If it is a bank, the governing law is Act 3135, but there will be certain exceptions
applicable only to banking institutions, provided in Section 47 of the General Banking
But these are only default rules. The parties may also stipulate that the sale will be a private
Act.
sale.
2. If the mortgagee is not a bank, the extra-judicial foreclosure will be governed by Act
Mortgage to a Foreigner – RA 133 3135.
Can you mortgage to a foreigner? Fourth, now that you know whether it’s judicial or extra-judicial foreclosure, let’s go through
each of the processes…
Yes, since foreigners are only prohibited from owning real property in the Philippines, not from
being mortgagees. The situation is governed by RA 133. JUDICIAL FORECLOSURE UNDER RULE 68, RULES OF COURT
However, if the mortgagor defaults, the foreigner CANNOT foreclose extra-judicially. He can STEP 1: The mortgagee should file a petition for judicial foreclosure in the court which has
only foreclose judicially. Moreover, he cannot bid or take part in any sale of the real jurisdiction over the area where the property is situated
property in case of foreclosure.
STEP 2: The court will conduct a trial. If, after trial, the court finds merit in the petition, it will
Can the foreigner take possession of the property during the render judgment ordering the mortgagor/debtor to pay the obligation within a period not less
mortgage? than 90 nor more than 120 days from the finality of judgment.
Pursuant to the mortgage, the alien-mortgagee cannot take possession of the property during STEP 3: Within this 90 to 120 day period, the mortgagor has the chance to pay the obligation to
the mortgage. But, he can possess it as lessee. prevent his property from being sold. This is called the EQUITY OF REDEMPTION PERIOD.
STEP 4: If mortgagor fails to pay within the 90-120 days given to him by the court,
Can the foreigner take possession of the property upon default of the the property shall be sold to the highest bidder at public auction to satisfy the
mortgagor? judgment.
The foreigner can take possession of the mortgaged property upon default but only for the STEP 5: There will be a judicial confirmation of the sale. After the confirmation of the
purpose of foreclosure and receivership in accordance with the prescribed judicial procedures, sale, the purchaser shall be entitled to the possession of the property, and all the
AND in no case exceeding five years. rights of the mortgagor with respect to the property are severed or terminated.
The equity of redemption period actually extends until the sale is confirmed. Even after
When confronted with a foreclosure problem… the lapse of the 90 to 120 day period, the mortgagor can still redeem the property,
so long as there has been no confirmation of the sale yet. Therefore, the equity of

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redemption can be considered as the right of the mortgagor to redeem the property What is the procedure?
BEFORE the confirmation of the sale.
Õ IMPORTANT: After the confirmation of the sale, the mortgagor does not have a STEP 1: File a complaint for extra-judicial foreclosure with the
right to redeem the property anymore. This is the general rule in judicial foreclosures Executive Judge
– there is no right of redemption after the sale is confirmed.
STEP 2: Notice of the sale
The exception to this rule is when the judicial foreclosure is done by a BANK. In
such a case, there is still a right of redemption within one year from the There are two kinds of notices required:
registration of the sale.
1. Posting in at least 3 public places 20 days before the sale – usually in the Sheriff’s
STEP 6: The proceeds of the sale of the property will be disposed as follows:
office, the Assessor’s office, and the Register of Deeds.
1. First, the costs of the sale will be deducted from the price at which the
2. Publication in a newspaper of general circulation, once a week for at least three
property was sold
consecutive weeks if the value of the property exceeds P400
2. The amount of the principal obligation and interest will be deducted
This need not be done within a span of 21 days. For example, you can publish on
3. The junior encumbrances will be satisfied August 30, which is a Friday, then on September 2, which is a Monday, and then on
September 9, which is also a Monday. In this case, publication for three consecutive
4. Õ If there is still an excess, the excess will go back to the mortgagor. In mortgage, weeks is completed within 11 days.
the mortgagee DOES NOT get the excess (unlike in pledge).
The notice should contain the description of the property to be sold, date, time, and place of the
Õ If there is a deficiency, the mortgagee can ask for a DEFICIENCY JUDGMENT sale, and the principal obligation to be satisfied by the sale of the mortgaged property.
which can be imposed on other property of the mortgagor. This is unlike the
rule in pledge, where the pledgee cannot collect any deficiency. This is also There is no need for personal notice to the mortgagor, unlike in a guaranty. This is because
unlike the rule in extra-judicial foreclosure where the mortgagee must go to the mortgagor, having defaulted in the principal obligation, should expect that a foreclosure is
court and file another action for the collection of the deficiency. In this case, forthcoming. This is because the mortgagor, having defaulted in the principal obligation,
there is no need to file an action. The mortgagee just has to file a motion in should expect that a foreclosure is forthcoming. If you’re the mortgagee, you would want to
court for the deficiency judgment. surprise the mortgagor so the he cannot employ dilatory tactics such as getting an injunction in
order to delay the foreclosure. If you’re nasty, you should publish it in Abante, which is a
Why should you stay away from judicial foreclosure? newspaper of general circulation, but which nobody consults for the purpose of checking if their
mortgaged property is about to be foreclosed.
Judicial foreclosure is costly, since the parties would need to hire lawyers. Moreover, in judicial
foreclosure, the parties have very little control over the sale because there is court STEP 3: Public Auction
intervention. Judicial foreclosure is also more susceptible to stalling/dilatory tactics by the
mortgagor, since he can file all sorts of motions in court to prevent the sale. Time for conducting the public sale: Between 9 am to 4 pm
EXTRA-JUDICIAL FORECLOSURE UNDER ACT 3135 Manner of conducting the sale: The sale should be under the direction of the sheriff of the
province, the justice or auxiliary justice of the peace of the municipality, or of a notary public of
When is extra-judicial foreclosure proper? the municipality, who shall be compensated with FIVE PESOS for each day of actual work
performed (wow $$$).
There must be a provision in the mortgage giving the mortgagee the special power of attorney
to carry out the extra-judicial foreclosure under Act 3135. Who may bid: Anyone may bid at the sale, unless there are exceptions stipulated in the
mortgage deed. Even the mortgagee/creditor may bid. And unlike in pledge, even if the
Where should the sale be made? mortgagee/creditor is the sole bidder, the sale is still valid. This is because there is a right
to redeem in extra-judicial foreclosure. Therefore, the lower the price at which it is sold, the
The sale can only be made in the province where the property is situated. So if several better the chances of the mortgagor/debtor to redeem the property.
properties located in different provinces are mortgaged to secure one principal obligation, the
creditor must foreclose in each and every jurisdiction where the property is located. Can the parties stipulate a minimum price at which the property
shall be sold?

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No, because the property must be sold to the highest bidder. Parties cannot, by agreement, The debtor has the right to redeem the property sold within one year from the date of the
contravene the law. However, this rule may not apply where the purchaser happens to be the sale, reckoned from date of execution of the certificate of sale since it is only from that date
creditor or mortgagee himself. The mortgagor can argue that the stipulation should be binding that the sale takes effect as a conveyance.
on the mortgagee on the principle of estoppel.
Õ Exception: If the mortgagee foreclosing is a BANK and the mortgagor is a JURIDICAL
What is the effect of inadequacy of the price at which the property is PERSON, the juridical person shall have the right to redeem the property BEFORE the
sold at auction? registration of the certificate of sale but NOT EXCEEDING 90 DAYS FROM THE DATE OF
THE FORECLOSURE.
If there is a right to redeem, inadequacy of price is not material because the debtor may
reacquire the property. It will even make it easier for him to redeem it if it is sold at a low price. Õ What is the difference between the RIGHT OF REDEMPTION and EQUITY OF REDEMPTION?
Mere inadequacy of price will not be sufficient to set aside the sale unless the price is so The right of redemption is the right of the mortgagor to redeem the mortgaged
inadequate as to shock the conscience. property within a certain period (in most cases, within 1 year) AFTER the sale of the
property in satisfaction of the mortgage debt. It is available to the mortgagor only
when the mortgage is foreclosed extrajudicially. It is not available in judicial
What happens if there is an excess?
foreclosures, except when the mortgagee foreclosing is a bank.
The excess should first be applied to satisfy the junior liens and encumbrances on the property.
On the other hand, equity of redemption is the right of the mortgagor in a judicial
If there is still an excess, it goes to the mortgagor. foreclosure to pay the amount of his obligation BEFORE the confirmation of the sale of
the mortgaged property.
What happens if there is a deficiency?
Who may redeem?
The mortgagee must go to court and file an action to collect the deficiency. He may file an
action for a deficiency judgment even during the period of redemption. The debtor, his successors in interest, or any judicial creditor or judgment creditor
of the debtor, or any person having a junior encumbrance or lien on the property
STEP 4: Possession of the Property may exercise the right of redemption.
Example: Mortgagor mortgaged a house and lot to A. Later, Mortgagor also

Upon foreclosure, if the mortgagor is in possession of the property, he will retain possession
mortgaged it to B. A foreclosed the mortgage and bought the house and lot at the
during the redemption period (one year from the date of the sale).
auction. In this case, upon the sale of the property to A, the only right that B as
second mortgagee has is the right to redeem. He may exercise the right by paying
However, if the winning bidder already wants possession of the property, he may file a petition off the debt secured by the first mortgage. B’s exercise of Mortgagor’s equity of
in court to gain possession. He must give a bond equivalent to the rent for the use of the redemption is equivalent to foreclosure of the junior mortgage.
property for 12 months. The bond will answer for any loss to the mortgagor if it is later found
that he was not in default in the mortgage obligation or that the conduct of the sale violated Act How much should the one exercising the right of redemption pay?
3135. Upon approval of the bond, the court will issue a writ of possession in favor of the
purchaser. The mortgagor (or whoever is redeeming the property) should pay the PURCHASE
PRICE of the property (not the amount of the original obligation anymore) plus
Õ Exception to this rule: If the party foreclosing is a BANK, Sec 47 of the General Banking INTEREST OF 1% PER MONTH (this is according to De Leon, citing Rule 39 Section 28
Law provides that the purchaser shall immediately have the right to take possession of the of the Rules of Court. JPSP says interest is at 2% per month).
property upon confirmation of the sale.
Õ Exception: If the mortgagee foreclosing is a BANK, under Sec 47 of the General
Remedy of the Mortgagor Banking Law, the mortgagor should pay the amount of the ORIGINAL OBLIGATION
(not the purchase price) plus INTEREST AT THE ORIGINAL RATE stipulated in the
If the winning bidder is able to obtain the writ of possession even before the expiration of the mortgage contract plus all COSTS and expenses incurred by the bank from the sale
one-year period, the mortgagor may petition that the sale be set aside and the writ of of the property.
possession be cancelled on the ground that he was not in default or that the sale was not made
What happens if the debtor/mortgagor fails to redeem the property within the prescribed
in accordance with Act 3135. The petition must be filed within 30 days from the grant of the writ
period?
of possession.
If the debtor/mortgagor fails to redeem the property within the prescribed period, the purchaser
STEP 5: Redemption has the absolute right to a writ of possession. From then on, the mortgagor loses his right over
the property.

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When the party foreclosing the mortgage is a BANK, the same procedure as in judicial or extra-
Title to the property sold under a mortgage foreclosure remains with the mortgagor until the judicial foreclosure, as the case may be, is followed. However, the following are the exceptions
expiration of the redemption period. The right of the purchaser at the foreclosure sale is merely to the general rules, applicable only to banks:
inchoate or contingent until after the period of redemption has expired without the right being
exercised. When the debtor/mortgagor fails to redeem within the period for redemption, the 1. In judicial foreclosures, there is still a right to redeem
purchaser’s right becomes final.
As a general rule, there is no right of redemption in judicial foreclosure. Upon
What is the effect of the timely exercise of the right of redemption? confirmation of the sale, the mortgagor cannot redeem the property anymore.
If the debtor/mortgagor is able to exercise the right of redemption on time, he does not really But if the mortgagor foreclosing judicially is a bank, the mortgagor shall have a right to
recover property since he does not lose ownership until after the expiration of the redemption redeem within one year from the sale.
period. He merely frees it of the encumbrance created by the mortgage.
2. Redemption Price
What happens if the mortgagor sells the property to a third person within the redemption
period? In ordinary extra-judicial foreclosure, the redemption price is the purchase price plus
interest at 1% (or 2%?) per month.
The third person, in buying the property, is actually buying not the property itself but the right
to redeem the property and the right to possess it within the redemption period. In extra-judicial foreclosure by a bank, the redemption price consists of:
X mortgaged property to a Bank to secure a P1M loan at 17% interest. The mortgage was a. the amount of the mortgage obligation
foreclosed. At the sale, the property was sold to the Bank as the highest bidder for P800K. b. plus the interest on the loan at the rate stipulated in the mortgage contract
The bank then sold the property to Y for P1.5M. If X wants to redeem the property, to c. plus costs of the sale incurred by the bank
whom should he pay and how much?
3. Automatic Right of Possession
X should pay to the Bank. He should pay only P1M - the amount of the principal obligation plus
interest at 17%, plus costs (Sec 47 General Banking Law: Remember, this is the exception to In ordinary extra-judicial foreclosure, the mortgagor retains possession of the
the general rule that the mortgagor should pay the purchase price and 1% interest per month). property within the redemption period. If the purchaser wishes to have possession
Y would then have a right to seek reimbursement from the Bank. within the redemption period, he must file a petition for the issuance of a writ of
possession with a corresponding bond.
The right of redemption may be exercised by the mortgagee under the same terms, even if the
property is subsequently sold to a third party. A different rule would make it easy for the buyer In extra-judicial foreclosure by a bank, the purchaser automatically has the right to take
at the foreclosure sale to render the right of redemption nugatory simply by making a possession after the confirmation of the sale.
conveyance of the property for an amount beyond the capacity of the mortgagor to pay.
4. Injunction
Can the right of redemption be waived by the mortgagor in advance?
If anybody wants to enjoin the conduct of foreclosure proceedings instituted by a
bank, the petitioner must file a bond fixed by the court to satisfy whatever damage
It depends if there is a fair exchange of value and information between the parties.
the bank may suffer by the injunction.
If the mortgagor is a farmer who mortgages his parcel of land and he waives the right to
There is no such provision in the case of ordinary extra-judicial foreclosure.
redeem, he can later argue that the waiver was not valid for being contrary to the public policy
of preserving the property in the hands of the owner.
5. Period of Redemption for Juridical Persons
But if the mortgagor is a businessman who waives the right to redeem in exchange for lower
In ordinary extra-judicial foreclosure, the mortgagor may redeem the property after
interest rates, this waiver is valid because there is a fair exchange of value.
it is sold within one year from the execution of the certificate of sale. There is no
distinction, whether the party redeeming is a natural or juridical person.
SUMMARY OF EXCEPTIONS UNDER SECTION 47 OF THE GENERAL BANKING LAW If the party foreclosing extrajudicially is a bank, the same rule as above is applicable
OF 2000 to natural persons. BUT, juridical persons may redeem the property subject only to
the following conditions:
a. it must be BEFORE the registration of the sale

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b. and, it must not be later than 90 days from the date of the sale right of redemption instead. This is so that you would be the only one who can
exercise it when the proper time comes.
EFFECTS ON THE JUNIOR MORTGAGE CHATTEL MORTGAGE

What happens if there was a second mortgage constituted on the property that was Art. 2140. By a chattel mortgage, personal property is recorded in the Chattel
foreclosed? Mortgage Register as a security for the performance of an obligation. If the
movable, instead of being recorded, is delivered to the creditor or a third person,
If the property was mortgaged a second time, the second mortgage is subordinate the contract is a pledge and not a chattel mortgage.
to the first mortgage. The first mortgagor has the right to foreclose the mortgage
upon default by the debtor.
What is chattel mortgage?
The following are the rights of a junior mortgagee:
Chattel mortgage is the contract by virtue of which personal property is recorded in
the Chattel Mortgage Register as a security for the performance of an obligation.
1. If the first mortgagee forecloses judicially, before the sale is effected, the
junior mortgagee may exercise the equity of redemption vested in the
This definition under the Chattel Mortgage Law is no longer applicable. It is the
mortgagor. The junior mortgagee may satisfy the obligation of the
definition under Art. 2140 of the Civil Code that applies now.
mortgagor to prevent the sale of the property.
What are the characteristics of the contract of chattel mortgage?
What happens to the ownership of the property when the second mortgagee
exercises the right of redemption?
1. It is an accessory contract because it secures performance of a principal
obligation
There are two interpretations – one under the Rules of Court and another
under the Civil Code.
2. It is a formal contract because it requires registration in the Chattel Mortgage
Register for its validity (but only against third persons)
When the second mortgagee exercises the equity of redemption by paying
the obligation of the mortgagor/debtor, the mortgagor/debtor has 60 days
3. It is a unilateral contract because it produces only obligations on the part of
to reimburse the second mortgagee what he paid. If the original debtor fails
the creditor to free the thing from the encumbrance on fulfillment of the
to pay within this period, ownership will be consolidated in the second
obligation.
mortgagee who paid. This interpretation is according to Section 28 Rule 39
of the Rules of Court.
What is the subject matter of chattel mortgage?
But according to the Civil Code rules on payment (oblicon), the effect should
The subject matter of chattel mortgage is personal or movable property.
be like payment of an obligation by a third person, in which case, the second
mortgagee merely becomes subrogated in the right of the first mortgagee to
What are the requisites for a valid chattel mortgage?
foreclose the mortgage.
1. It must be constituted to secure a principal obligation.
2. When an extra-judicial sale is made, the junior mortgagee may exercise the
mortgagor’s right to redeem within one year from the sale. De Leon says
2. The mortgagor must be the absolute owner of the thing mortgaged.
that he should pay the amount of the original obligation. JPSP says that the
junior mortgagee exercising the right to redeem should follow Act 3135 – he
should pay the price at which the property was sold. 3. He must have free disposal of the thing or otherwise be authorized to do so.
3. If the property is sold for more than the amount of the obligation to the first 4. When the principal obligation becomes due, the property mortgaged may be alienated
mortgagee, the excess should be applied to the payment of the obligation to for the payment to the creditor.
the second mortgagee.
5. To prejudice third persons, the mortgage must be recorded in the Chattel Mortgage
But if there is no excess, the second mortgage is extinguished. Registry.
If the first four requisites are present, there is already a valid mortgage between the parties –
Õ If you’re the second mortgagee, you can also foreclose, not the property (since mortgagor and mortgagee.
you cannot do that because the right of the first mortgagee is superior), but the

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But to affect third persons, there is a need to comply with the fifth requisite: The document of
mortgage must be recorded in the Chattel Mortgage Registry. This is because recording the What is the form required for a chattel mortgage?
document in the Chattel Mortgage Registry serves as notice to 3rd persons. This is similar to
the requirement in pledge that the pledge be in a public document and the requirement in Real According to Sec. 5 of the Chattel Mortgage Law, the following form should be
Estate Mortgage that it must be recorded in the Registry of Property. sufficient:
Note that unlike in pledge, there is no need for actual delivery of the personal property to the
mortgagee. FORM OF CHATTEL MORTGAGE AND AFFIDAVIT
DISTINCTIONS BETWEEN CHATTEL MORTGAGE AND PLEDGE This mortgage made this Fifth day of October 2002 by Sheryl
Tanquilut, a resident of municipality of Taytay, Province of Rizal Philippines,
CHATTEL MORTGAGE PLEDGE mortgagor, to Anna del Castillo a resident of the municipality of Cainta,
DELIVERY OF THE PERSONAL Not necessary Delivery is necessary for Province of Rizal Philippines, mortgagee, witnesseth:
PROPERTY validity of the pledge
REGISTRATION IN THE Necessary for validity of Not necessary; public That the said mortgagor hereby conveys and mortgages to the said
REGISTRY OF PROPERTY the chattel mortgage document is enough to mortgagee all of the following-described personal property situated in the
against third persons bind third persons municipality of Taytay Province of Rizal, and now in the possession of said
PROCEDURE FOR SALE Governed by Section 14 of Governed by Article 2112 mortgagor, to wit:
the Chattel Mortgage Law of the Civil Code
RIGHT TO EXCESS OF Excess goes to the Excess goes to the A PAIR OF SKY BLUE NIKE PRESTO SNEAKERS, SIZE 3XS
PROCEEDS OF SALE debtor/mortgagor pledgee/creditor unless
otherwise stipulated This mortgage is given as security for the payment to the said Anna
RIGHT TO RECOVER Creditor/mortgagee can Creditor/pledgee is not del Castillo, mortgagee, of the sum of fifty pesos, with interest thereon at
DEFICIENCY recover deficiency from entitled to recover any the rate of twenty-five per centum per annum due on 25 December 2002.
the debtor/mortgagor, deficiency after the
except if covered by Recto property is sold, The conditions of this obligation are such that if the mortgagor, his
Law notwithstanding any heirs, executors, or administrators shall well and truly perform the full
contrary stipulation obligation above stated according to the terms thereof, then this obligation
shall be null and void.
Art. 2141. The provisions of this Code on pledge, insofar as they are not in
Executed at the municipality of Taytay in the Province of Rizal this
conflict with the Chattel Mortgage Law, shall be applicable to chattel mortgage.
Fifth day of October 2002.
THE CHATTEL MORTGAGE LAW
Sgd. Sheryl Tanquilut
In the presence of:
How do you constitute a chattel mortgage?
Sgd. Xilca Alvarez
To constitute a chattel mortgage, the parties must register the personal property
Sgd. Helen Arevalo
mortgaged in the Chattel Mortgage Register as security for the performance of an
obligation. However, if the chattel mortgage is not registered, it is still valid and
FORM OF OATH (affidavit of good faith)
binding as between the parties. The requirement of registration is not for validity
but only for binding third parties.
[Tip: know the contents of an affidavit of good faith. JPSP might
ask us to make one in the exam. Lumabas sa past exam]
What is the effect of registration?
We severally swear that the foregoing mortgage is made for the purpose of
The registration of the chattel mortgage creates a real right or lien which follows
securing the obligation specified in the conditions thereof, and for no other purpose,
the personal property wherever it goes. Registration gives the mortgagee
and that the same is a just and valid obligation, and one not entered into for the
symbolic possession.
purpose of fraud.
FORM OF CERTIFICATE OF OATH
In the Province of Rizal, personally appeared Sheryl Tanquilut, Xilca

Alvarez, and Helen Arevalo, the parties who signed the foregoing affidavit
and made oath to the truth thereof before me.

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What happens if there is no affidavit of good faith?
Sgd. Bhoy-B The mortgage is still valid between the parties, but it will not bind third persons,
Notary public such as creditors and subsequent encumbrancers. If there is no affidavit of good
faith, the mortgage will not be preferred as against these third persons.
Can you constitute a chattel mortgage to secure a future obligation or “a current obligation
plus any and all obligations hereinafter contracted by the mortgagor in favor of the
mortgagee”?
No. You can only constitute a chattel mortgage to secure debts or obligations that
are existing at the time the mortgage is constituted. If it is constituted to secure
an obligation that is not yet existent, it is void. The affidavit of good faith executed
by the mortgagor states that the mortgage is constituted to secure the obligation
specified therein and for no other purpose.
What the parties should do is to execute a new document/ deed of chattel

mortgage to cover the newly contracted obligation.
Can you mortgage future property?
Section 7 of the Chattel Mortgage Law provides that as a general rule, you cannot
mortgage property that you do not own at the time of the constitution of the
mortgage. Therefore, you cannot mortgage future property.
But as an exception to this rule, the inventory of retail stores can be the subject of
chattel mortgage, even if technically, they may be acquired by the mortgagor after
the mortgage is constituted. This is because the after-acquired property is actually
in renewal or in replenishment of goods on hand when the mortgage was executed.
The SC came up with this exception in order not to hamper the circulation of capital
in the industry.
What happens when the mortgagor pays the obligation?
If the mortgagor pays the obligation, he gets a discharge from the mortgagee so
that he can then cancel the lien annotated on the title and in the Chattel Mortgage
Registry.
What happens when the mortgagor defaults on the obligation?
1. Right of Redemption
In case of default, the following persons may redeem the property before it
is sold, by paying the amount of the obligation plus costs and expenses
incurred from the breach:
a. the mortgagor
b. a subsequent mortgagee
c. a subsequent attaching creditor
If an attaching creditor redeems, he is subrogated to the rights of the

mortgagor. He can foreclose the mortgage.

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But once the property is sold at auction, there can be no redemption

anymore. No, he should not redeem. If he redeems, he spends 70K in order to re-acquire
property, which he may thereafter lose again to his other creditors.
2. Right of Mortgagee to Possession
Borrower borrows P1M from Lender. Borrower executes a deed of assignment by way of
If the creditor/mortgagee wants to foreclose upon default, he has the security over the shares of stock in favor of Lender in order to secure payment of the loan.
implied right to take the mortgaged property. If the debtor/mortgagor It is stipulated that upon payment of the loan by Borrower, Lender will re-convey the shares
refuses to surrender the property, the creditor should file an action for of stock to Borrower. What is this arrangement?
replevin to take possession or for judicial foreclosure.
This can either be a PLEDGE or an IMPLIED TRUST.
3. Foreclosure
It’s not really a pledge because there is an absolute conveyance of ownership by
The parties can stipulate for a private sale upon default. the supposed pledgor in favor of the pledgee. But the Supreme Court has treated
this in several cases as a pledge.
If there is no stipulation, the applicable rule is Section 14 of the Chattel
Mortgage Law. JPSP likes the implied trust theory better because there is a statutory basis. Art.
1454 of the Civil Code provides that if an absolute conveyance of property is made in
According to Section 14, the creditor/mortgagee can cause the property to order to secure the performance of an obligation of the grantor toward the grantee, a
be sold at public auction thirty days after default. This is a minimum grace TRUST by virtue of law is established. If the fulfillment of the obligation is offered
period given to the mortgagor to redeem the property before it is sold at by the grantor when it becomes due, he may demand the reconveyance of the
auction. There is no maximum time period for holding the sale. property to him.
The procedure is the same as that for extra-judicial foreclosure of a real If it’s a trust, there is no need to foreclose (actually, there’s no right to foreclose).
estate mortgage, except for the notice requirements. In chattel mortgage,
the only notice requirement is posting at two or more public places in the What happens if there’s default? Art. 1454 does not cover this situation, which is
municipality and personal notice to the mortgagor and junior mortgagees at probably why the Supreme Court has characterized this type of transaction as a
least ten days before the date of the sale (no publication). pledge instead. JPSP thinks that if there’s default, ownership will be consolidated
in the lender/trustee. But if the parties don’t want any problem, they should
The proceeds of the sale will be applied as follows: stipulate the precise effect of default.
a. Costs and expenses of the sale Borrower borrows P10M from Lender. Borrower offers the following securities to Lender:
b. Payment of the obligation secured by the mortgage
c. Claims of persons holding subsequent mortgages in their order; (1) a GUARANTY by X who is worth P100M
and (2) a PLEDGE of shares of stock worth P10M
d. The balance, if any, shall be given to the mortgagor (3) a REAL ESTATE MORTGAGE worth P15M
Can the mortgagee recover any deficiency after the sale of the property? Which one should Lender choose?
Unlike in pledge, the creditor can still file an action for recovery of any It really depends on the circumstances, but here are the considerations:
deficiency in case the proceeds of the sale do not satisfy the entire
obligation, unless the situation is covered by the Recto Law. 1. If he chooses the pledge, it is easier to foreclose, and he can get the excess
in case the shares of stock are sold for more than P10M.
PROBLEMS ON REAL AND CHATTEL MORTGAGE 2. If he chooses the guaranty, it is good only if he is sure that the guarantor
will pay. If the guarantor is any of the following, persons, the guaranty
Mortgagor mortgaged property worth 120K to secure a 100K loan. Mortgagor defaulted. would be a good choice:
Mortgagee foreclosed. The property was sold to X for 70K. Should mortgagor redeem the
property? a. the Government – because it is never insolvent
b. a Bank – in the form of a bank guaranty through a letter of credit
Yes, because he can sell it for more than 70K and realize more than the amount of c. Insurance Company – though in some cases, it is also hard to collect
the principal obligation. from an insurance company (also, take note that they would be
governed, not by the Civil Code provisions on guaranty, but by the
But if, in the example above, the mortgagor has creditors running after him for debts worth Insurance Code).
300K, should he redeem?

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But the disadvantage of choosing the guaranty is that the guarantor who is
worth P100M can afford to hire good lawyers who can stall the Lender’s What are the characteristics of antichresis?
claim.
1. Accessory – It secures the performance of a principal obligation. Manresa, however,
3. In the case of the real estate mortgage, it depends on how easy it would be believes that it is an independent contract.
to dispose of the property. If it’s property at a prime spot in Makati, this
might be a good choice since it can probably be sold at a good price right 2. Formal Contract – It must be in specified form to be valid (in writing).
away. But if it’s located in the boondocks, the Lender may have a very
difficult time selling it. Is delivery of the property to the creditor required?
Borrower borrows P10M from Lender. The loan is secured by a guaranty by X, who is worth
Delivery is not required for the validity of the contract itself. BUT, it is required in order that the
P100M, a real estate mortgage worth P8M, and a pledge worth P8M. If Borrower defaults,
creditor may receive the fruits.
what is the best way for Lender to proceed?
1. Foreclose the real estate mortgage first. Then get a deficiency judgment for Does antichresis apply to all of the fruits of the immovable concerned?
the remaining P2M.
GENERAL RULE: The general rule is that the contract of antichresis covers ALL the fruits of
2. Then, foreclose the pledge because in pledge, he gets to keep the excess – the encumbered property.
resulting in an upside of P6M.
If the parties do not want all of the fruits to be subject to the antichresis, they must STIPULATE
3. The Guarantor is not yet an option since he has the benefit of excussion. otherwise.
The Lender must first go through steps 1 and 2 and other remedies before
running after X. Is it essential for the contract to have a stipulation for interest in order to have an accessory
contract of antichresis?
Borrower borrows P10M from Lender. The loan is secured by a pledge worth P8M and a
guaranty by X. How should the Lender proceed in case of default by Borrower? No. It is not essential to the contract of antichresis that the loan that it guarantees should have
interest. There is nothing in the law that says that antichresis can only guarantee interest-
If Lender forecloses the pledge, he will have a deficiency of P2M, which he cannot bearing loans.
collect anymore. On the other hand, he cannot proceed against the guarantor
without foreclosing the pledge first. What are the differences between antichresis and real mortgage?
So what should he do? He should sue Borrower in his capacity as debtor, not as a
ANTICHRESIS REAL MORTGAGE
pledgor, for collection of the debt. Then, he should attach the property pledged.
Property is delivered to the creditor Debtor usually retains possession of the
When judgment in his favor is rendered, he can then execute it against the
property
attached shares. The shares can be sold at an ordinary execution sale, not a
foreclosure sale. In this way, the shares will be taken out of the context of the
Creditor acquires only the right to receive the Creditor has no right to receive the fruits, but
pledge, and any deficiency in the sale can still be recovered by the lender. After fruits of the property; not a real right mortgage creates a real right over the property
the execution of the judgment on the shares, the Lender can then go after the which is enforceable against the world
Guarantor for the deficiency. General rule is that creditor must pay the Creditor has no obligation to pay taxes and
taxes and charges upon the estate; parties charges
must stipulate otherwise
ANTICHRESIS Expressly stipulated that the creditor shall No obligation on the part of the mortgagee to
apply the fruits to the payment of interest, if apply the fruits to interest and principal
owing, and thereafter to the principal
Art. 2132. By the contract of antichresis the creditor acquires the right to receive the fruits of
an immovable of his debtor, with the obligation to apply them to the payment of the interest, if Õ Antichresis and real mortgage are similar in that the subject matter is real property.
owing, and thereafter to the principal of his credit.
Õ Like pledge and mortgage, antichresis gives a real right if it is registered in the Registry of
What is antichresis? Property.
Antichresis is a contract by which the creditor acquires the right to receive the fruits of an Example: A borrowed P1M from B. To secure the loan, A delivered a parcel of land with
immovable belonging to the debtor, with the obligation to apply them to the payment of the coconut trees to B, giving B the power to administer it and harvest the coconuts. What is
interest, if owing, and thereafter to the principal of his credit. the nature of the contract?

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2. Apply the fruits

Answer: The contract is one of mortgage, not antichresis. In order for it to be a contract of
antichresis, it must be expressly agreed between creditor and debtor that the creditor, having The creditor must apply the fruits of the property to the payment of interest, if
been given possession of the property, is to apply the fruits to the payment of interest, if owing, owing, and thereafter to the principal.
and thereafter, to the principal.
Art. 2136. The debtor cannot reacquire the enjoyment of the immovable without first having
Art. 2133. The actual market value of the fruits at the time of the application thereof to the totally paid what he owes the creditor.
interest and principal shall be the measure of such application.
But the latter, in order to exempt himself from the obligations imposed upon him by the
When it is time to apply the fruits to the payment of the interest or the principal, the creditor preceding article, may always compel the debtor to enter again upon the enjoyment of the
must base the value of the fruits on their market value at the time of the application. property, except when there is a stipulation to the contrary.
Example: When can the debtor get back the property subject of the antichresis?
The property subject of the contract of antichresis has mango trees. In January, one kilo of The debtor can get it back only when he has totally paid the principal obligation. This is
mangoes costs P50/kilo. But in May, when mangoes are in season, one kilo costs 25/kilo. If because the property stands as a security for the payment of the principal obligation.
interest is due in January, the creditor must apply the fruits to the payment of interest based on
the price of P50/kilo. If interest is due in May, he should compute at the price of P35/kilo. Is there an exception?
Art. 2134. The amount of the principal and of the interest shall be specified in writing; Yes. The exception to this rule is if the creditor does not want to pay the taxes and charges
otherwise, the contract of antichresis shall be void. upon the estate. In such a case, the creditor may compel the debtor to get the property back,
UNLESS there is a contrary stipulation (exception to the exception).
Is there a form required for the contract of antichresis?
But this has the effect of extinguishing the contract of antichresis.
Yes. The contract must state the amount of the principal and the interest IN WRITING. If
this form is not followed, the contract of antichresis is VOID. The requirement that it be in Art. 2137. The creditor does not acquire the ownership of the real estate for nonpayment of
writing is necessary not merely to bind third persons but to make the contract valid. the debt within the period agreed upon.
But even if the antichresis is void, the principal obligation is still valid. Every stipulation to the contrary shall be void. But the creditor may petition the court for
the payment of the debt or the sale of the real property. In this case, the Rules of Court on
Art. 2135. The creditor, unless there is a stipulation to the contrary, is obliged to pay the taxes the foreclosure of mortgages shall apply.
and charges upon the estate.
What happens when the debtor defaults on the principal obligation?
He is also bound to bear the expenses necessary for its preservation and repair.
The creditor DOES NOT acquire ownership of the real estate. Any stipulation to the contrary
The sums spent for the purposes stated in this article shall be deducted from the fruits. shall be void. This is because the contract of antichresis covers only the right to receive the
fruits from the estate, and not its ownership. Also, this is pactum commisorium, which is void.
What are the obligations of the creditor under the contract of antichresis?
The creditor has the following remedies in case of default:
1. Pay the taxes and charges upon the estate –
1. Bring an action for specific performance.
If the creditor does not pay the taxes, he is required by law to pay indemnity for damages to 2. Petition for the sale of the real property in judicial foreclosure proceedings under Rule
the debtor. 68 of the Rules of Court.
If the debtor pays the taxes on the property which the creditor should have paid, the amount Can the parties stipulate on an extra-judicial foreclosure? Yes, in the same manner that
is to be applied to the payment of the debt. If the amount of taxes paid by the debtor is they are allowed in pledge and mortgage.
enough to satisfy the principal obligation, then the loan and the antichresis are extinguished;
the creditor must return the property to the debtor. Can the creditor acquire the property given in antichresis by prescription?
What if the creditor does not want to pay the taxes and charges? They must so stipulate in No, and any stipulation to the contrary shall be void. In order to acquire property be
their agreement OR see the next article. prescription, possession must be in the concept of owner. The antichretic creditor possesses
the property merely as a holder.

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2. Does not create an interest in property – Preference simply creates a right to be paid
Exception: Just like in a co-ownership, if the creditor repudiates the antichresis, he can acquire first from the proceeds of the sale of property of the debtor. It does not create a lien on
the property by prescription. the property itself, but merely a preference in the application of the proceeds of the
property after it is sold.
Art. 2138. The contracting parties may stipulate that the interest upon the debt be
compensated with the fruits of the property which is the object of the antichresis, provided that 3. The creditor does not have the right to TAKE the property or SELL it as against
if the value of the fruits should exceed the amount of interest allowed by the laws against another creditor – Preference is not a question as to who may take and sell property
usury, the excess shall be applied to the principal. belonging to the debtor. Preference applies after a sale, and it is a question of
application of the proceeds of the sale to satisfy the debt.
The creditor must first apply the fruits to the payment of the interest. If the value of the fruits
exceeds the value of the interest due, then the creditor should apply the excess to the principal. 4. It must be asserted – If the right claimed is not asserted and maintained, it is lost. If
property has not been seized, it is open to seizure by another.
The second part of this provision is no longer applicable, since there is no Usury Law anymore.
5. It must be maintained – Where a creditor released his levy, leaving the property in
Art. 2139. The last paragraph of article 2085, and articles 2089 to 2091, are applicable to this possession of the debtor, thereby indicating that he did not intend to press his claim
contract. further as to that specific property, he is deemed to have abandoned his claim of
preference.
Other characteristics of Antichresis: When are the rules on preference of credits applicable?
1. A third person, who is not a party to the principal contract, may offer his immovable The rules apply only where:
under the contract of antichresis to secure the debt of another. (2085)
1. there are two or more creditors
2. The contract of antichresis is indivisible. (2089) 2. with separate and distinct claims
3. against the same debtor
3. The indivisibility of the antichresis is not affected by the fact that the debtors are not 4. who has insufficient property.
solidarily liable. (2090)
There must be a proceeding such as an insolvency proceeding wherein the creditors can file
4. The contract of antichresis may secure all kinds of obligations – pure or conditional. their claims. The right becomes significant only after the properties of the debtor have been
(2091) inventoried and liquidated, and the claims of the various creditors have been established.
Because before that, you have no way of knowing who the creditors are, and you have no
CONCURRENCE AND PREFERENCE OF CREDITS liquidated property out of which you can pay them.
What is the difference between preference of credit and a lien?

What is concurrence of credits?
A preference applies only to claims which do not attach to specific properties. A lien, on the
Concurrence of credits implies the possession by two or more creditors of equal rights or
other hand, creates a charge on a particular property.
privileges over the same property or all of the property of a debtor. Can a creditor whose credit is not yet due assert a right to preference?
What is preference of credit?

No. The title on Concurrence and Preference of Credits refers only to credits which are already
due.
It is the right held by a creditor to be preferred in the payment of his claim out of the debtor’s
assets above others. In other words, it is the right to be paid first.
CHAPTER 1 GENERAL PROVISIONS
Nature and Effect of Preference
Art. 2236. The debtor is liable with all his property, present and future, for the fulfillment of his
1. Exception to the general rule – Because, generally, you have to pay your creditors obligations, subject to the exemptions provided by law.
when the debt becomes due. There should be no rules as to who should be paid first.
Preference applies only when there are two or more creditors with separate claims General Rule: A debtor is liable with ALL his property, present and future, for the fulfillment of
against a debtor who has insufficient property. Since it is an exception to the general his obligations.
rule, the law as to preferences is strictly construed.

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Exceptions: Exemptions provided by law, such as future support, the family home, property in The items in bold face are the important/relevant ones:
custodia legis, etc. See page 489-492 of De Leon for the list (not very important)
Art. 2241. With reference to specific movable property of the debtor, the following claims or
Art. 2237. Insolvency shall be governed by special laws insofar as they are not inconsistent liens shall be preferred:
with this Code.
(1) Duties, taxes and fees due thereon to the State or any subdivision thereof;
Art. 2238. So long as the conjugal partnership or absolute community subsists, its property (2) Claims arising from misappropriation, breach of trust, or malfeasance by public
shall not be among the assets to be taken possession of by the assignee for the payment of officials committed in the performance of their duties, on the movables, money or
the insolvent debtor’s obligations, except insofar as the latter have redounded to the benefit of securities obtained by them;
the family. If it is the husband who is insolvent, the administration of the conjugal partnership
or absolute community may, by order of the court, be transferred to the wife or to a third (3) Claims for the unpaid price of movables sold, on said movables, so long as they
person other than the assignee. are in the possession of the debtor, up to the value of the same, and if the movable
has been resold by the debtor and the price is still unpaid, the lien may be enforced
If one of the spouses is insolvent, the assets of the CPG or AC do not pass to the assignee in on the price; this right is not lost by the immobilization of the thing by destination,
insolvency elected by the creditors or appointed by the court. The reason for this is that the provided it has not lost its form, substance and identity; neither is the right lost by
CPG or AC is distinct from the individual spouses. The exemption applies provided that: the sale of the thing together with other property for a lump sum, when the price
thereof can be determined proportionally;
1. The CPG or AC subsists; and
2. The obligations of the insolvent spouse have not redounded to the benefit of the (4) Credits guaranteed with a pledge so long as the things pledged are in the hands
family. of the creditor, or those guaranteed by a chattel mortgage, upon the things
pledged or mortgaged, up to the value thereof;
The insolvency of the husband does not dissolve the CPG or AC.
(5) Credits for the making, repairs, safekeeping or preservation of personal property, on the
Art. 2239. If there is property, other than that mentioned in the preceding article, owned by movable thus made, repaired, kept or possessed;
two or more persons, one of whom is the insolvent debtor, his undivided share or interest
therein shall be among the assets to be taken possession of by the assignee for the payment (6) Claims for laborers’ wages, on the goods manufactured or the work done;
of the insolvent debtor’s obligation.
(7) For expenses of salvage, upon the goods salvaged;
If there is a co-ownership (other than CPG or AC) and one of the co-owners becomes insolvent,
only his undivided share or interest in the property can be possessed by the assignee in (8) Credits between the landlord and the tenant, arising from the contract of tenancy on
insolvency proceedings. Of course, the shares of the other co-owners cannot be taken shares, on the share of each in the fruits or harvest;
possession of by the assignee.
(9) Credits for transportation, upon the goods carried, for the price of the contract and
Art. 2240. Property held by the insolvent debtor as a trustee of an express or implied trust, incidental expenses, until their delivery and for thirty days thereafter;
shall be excluded from the insolvency proceedings.
(10) Credits for lodging and supplies usually furnished to travelers by hotel keepers, on the
movables belonging to the guest as long as such movables are in the hotel, but not for money
In a trust, the trustee is not the owner of the property, though he has legal title thereto. Since
loaned to the guests;
he is not the absolute owner of the property held in trust, these properties should not be
included in insolvency proceedings.
(11) Credits for seeds and expenses for cultivation and harvest advanced to the debtor, upon
the fruits harvested;
CHAPTER 2 CLASSIFICATION OF CREDITS
(12) Credits for rent for one year, upon the personal property of the lessee existing on the
The Civil Code classifies credits against a particular insolvent into three general categories: immovable leased and on the fruits of the same, but not on money or instruments of credit;
1. special preferred credits listed in 2241 and 2242 (13) Claims in favor of the depositor if the depositary has wrongfully sold the thing deposited,
2. ordinary preferred credits listed in 2244 upon the price of the sale.
3. common credits under 2245
Special Preferred Credits (2241 and 2242)

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In the foregoing cases, if the movables to which the lien or preference attaches
have been wrongfully taken, the creditor may demand them from any possessor, within These are the only preferred claims because they are the ones attached to the movable itself.
thirty days from the unlawful seizure. The income tax and the promissory note are not preferred because they are not attached to the
car.
First, you must remember that, aside from item (1) on taxes imposed in connection with the
How do you prioritize the preferred claims?
movable, 2141 does establish the order of priority among these claims. It just enumerates the
preferred claims with respect to specific movables.
1. P1M import duties – the State is always the priority with respect to preferred claims
With respect to the same specific movable or immovable, creditors merely concur. There is no 2. The chattel mortgagee and the unpaid seller will then proportionally share the P1.5M
preference among them, except that the State always gets paid the taxes imposed on the left: P1M will go to the mortgagee and 500K will go to the unpaid seller.
property first.
Note, however, that taxes are not always preferred. For example, income tax is not preferred
(1) Taxes with respect to the Jaguar. In order to be preferred, the tax must be imposed on the movable
itself.
The tax must be due on the movable itself.
Õ This has to be done in the context of insolvency proceedings.
(2) Misappropriation, breach of trust, malfeasance of public officers
Problem: Government official used public funds to acquire a Jaguar from a seller in good
The acquisition must have been in the performance of official functions. faith. Government official becomes insolvent. The Government wants to recover the car. If
you’re government counsel, how should you proceed?
Also, the property must still be in the hands of the public official. If it is sold to a purchaser for value
and in good faith, there can be no more claim on the movable.
The textbook answer would be that the government can go after the car in insolvency
(4) Guaranteed with a pledge or chattel mortgage
proceedings. It has a preferred claim over the car under par. (2) of 2241. But, the
disadvantage of this is that, unlike the government claim for tax credits, it is not prioritized over
To be a preferred credit: other special preferred claims. The government would have to share with the other creditors
who likewise have a special preferred claim on the Jaguar, such as an unpaid seller.
If it’s a pledge, it must be in a public instrument.
The better alternative is to characterize it as an implied TRUST. When funds belonging to
If it’s a chattel mortgage, it must be registered in the chattel mortgage registry. another (in this case, the government) are used to purchase a movable under the name of
another person (the corrupt government official), there is an implied trust. The trustor is the
Last paragraph of 2241 government, while the trustee is the government official. The trustor/government actually owns
the car. There is thus no need to go through the insolvency proceedings, since the Jaguar is
If the movable is wrongfully taken, the preferred creditor may get it back within 30 days through not among the properties of the insolvent debtor.
an accion subrogatoria, exercising the right of the debtor to recover property wrongfully taken
from him granted under Article 559. Under a trust agreement, X gave Investment House some money. Investment House placed
the money in a time deposit. Investment House issued promissory notes for its obligations
Problem: The Debtor’s only property is a Jaguar worth P2.5M. His liabilities are: to other creditors.
a. to the Government: Income tax of P1M If Investment House becomes insolvent, X can show that the money is not owned by
Import duties on the car worth P1M Investment House, so it should be excluded from the insolvency proceedings.
b. chattel mortgage on the car worth P2M Art. 2242. With reference to specific immovable property and real rights of the debtor, the
following claims, mortgages and liens shall be preferred, and shall constitute an encumbrance
on the immovable or real right:
c. unpaid price of the car of P1M
(1) Taxes due upon the land or building;
d. P1M promissory note (notarized)
(2) For the unpaid price of real property sold, upon the immovable sold;
What are the preferred claims with respect to the Jaguar?
(3) Claims of laborers, masons, mechanics and other workmen, as well as of architects,
1. P1M import duties on the car engineers and contractors, engaged in the construction, reconstruction or repair of buildings,
2. P2M chattel mortgage canals or other works, upon said buildings, canals, or other works;
3. P1M unpaid price

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order of priority among several credits of this kind, their dates should be the basis.
(4) Claims of furnishers of materials used in the construction, reconstruction or repair of The first one to be registered will be prioritized over the others.
buildings, canals or other works, upon said buildings, canals or other works;
Õ Again, 2242, is not an order of priority, with the exception of taxes imposed upon the
(5) Mortgage credits recorded in the Registry of Property upon the real estate immovable, which is prioritized. 2242 is merely an enumeration.
mortgaged;
Why isn’t there a provision for malfeasance or misfeasance with respect to immovables?
(6) Expenses for the preservation or improvement of real property when the law authorizes
reimbursement upon the immovable preserved or improved; Corrupt public officials can easily hide movables, which is why it would be more difficult to
recover them. Hence, there is a provision giving the government preference with respect to
movables. But in the case of immovables, the corrupt public officials cannot really hide them.
(7) Credits annotated in the Registry of Property, in virtue of a judicial order, by
attachments or executions, upon the property affected, and only as to later credits;
The government can establish a preferred claim over them simply by attaching. (This is the
reason given by JPSP. For the reason of the Code Commission, ask Pelagio Cuison).
(8) Claims of co-heir in the partition of an immovable among them, upon the real property thus Problem: Debtor’s only assets are a house and lot worth P5M, a car worth P1M, and jewelry
divided; worth 500K. Among Debtor’s liabilities are a real estate mortgage on the house and lot to
secure a loan worth P3M and a chattel mortgage on the car to secure a loan worth P500K.
(9) Claims of donors of real property for pecuniary charges or other conditions imposed upon Debtor has other obligations worth P6M. What are the preferred credits? How much free
the donee, upon the immovable donated; property does Debtor have?
(10) Credits of insurers, upon the property insured, for the insurance premium for two years. With respect to the house and lot, the real estate mortgage is preferred. With respect to the
car, the chattel mortgage is preferred.
(1) Taxes
To determine the value of the Debtor’s free property, pay off the preferred claims first:
Capital gains tax is NOT a preferred credit because it is really a tax on income and not on the
property itself. House and Lot worth P5M – P3M REM obligation = P2M excess
This provision covers real property taxes. Car worth P1M – 500K chattel mortgage obligation = 500K excess
(2) Unpaid Seller The excess after the preferred claims have been satisfied will go to the free property of the
debtor:
There is no need to register the sale in order for the unpaid seller to have a preferred claim
against the immovable. Free property = Jewelry worth 500K + P2M excess from House and Lot + 500K excess from
car
(5) Mortgage = 500K + 2M + 500K
= 3M
The mortgage must be registered in the Registry of Property in order for the credit to be a
preferred claim against the immovable. The free property of Debtor is worth P3M. The other creditors for P6M will then line up for this
portion according to the order of priority established in Art. 2244 if they are ordinary preferred
(7) Credits annotated in the Registry of Property in virtue of judicial order, attachment, or credits and 2245 if they are common credits.
execution
Problem: Realty Company entered into a contract to sell with X. Under the contract to sell,
The credits must also be registered in order to be preferred. X will sell the lot to Realty Company, and Realty Company will pay the price in installments.
Realty Company failed to pay the installments in full. The lot was used in a condominium
The preference is only with respect to LATER CREDITS. project. How can X collect from Realty Company, in case it becomes insolvent?
The credit is preferred only with respect to other attachments, not to other kinds of credit. X should claim that he still owns the lot since the contract was merely a contract TO sell.
Therefore, this does not share equally with the other claims. It merely provides that a credit by Therefore, the lot should not be included in the insolvency proceedings concerning Realty
virtue of judicial order, attachment, or execution that is first registered in the Registry of Company. X can also claim that the condominium project on the lot cannot be included in the
Property is preferred over other credits of the same nature, which are registered at a later date. insolvency proceedings either because it is an improvement on a lot owned by X, not by Realty
Company. This way, if Realty Company becomes insolvent, X does not have to line up and
Unlike the other special preferred credits, these credits do not share compete with other creditors’ claims, because he can say that he is the owner of the property.
proportionately in the property upon which they are imposed. To determine the

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Õ JPSP says that if you’re a creditor, you should avoid the preferred claim route because you
would rather not line up along with the other creditors. You should find a way to be the owner (13) Gifts due to public and private institutions of charity or beneficence;
of the thing that you’re after – such as, proving that it’s an implied trust or a contract to sell, etc.
(14) Credits which, without special privilege, appear in (a) a public instrument; or (b) in a
Art. 2243. The claims or credits enumerated in the two preceding articles shall be considered final judgment, if they have been the subject of litigation. These credits shall have
as mortgages or pledges of real or personal property, or liens within the purview of legal preference among themselves in the order of priority of the dates of the instruments and
provisions governing insolvency. Taxes mentioned in No. 1 article 2241, and No. 1, article of the judgments respectively.
2242, shall first be satisfied.
Once the special preferred claims under 2241 and 2242 have been satisfied, the property
2243 gives the rule that taxes due on the movable or on the immovable concerned should be remaining constitute the debtor’s free property. The debtor’s free property will then be used to
satisfied first. The rest of the special preferred claims share equal preference among pay ordinary preferred claims in the order established in 2244. Unlike 2241 and 2242, 2244 is
themselves. not merely an enumeration; it establishes the order of priority. Also, unlike 2241 and 2242,
2244 does not establish a preference with respect to specific property of the debtor. The
Ordinary Preferred Credits (2244) preference is with respect to the mass of properties of the debtor remaining after the special
preferred claims have been satisfied.
Art. 2244. With reference to other property, real and personal of the debtor, the following
claims or credits shall be preferred in the order named: Important Items
(1) Proper funeral expenses for the debtor, or children under his or her parental authority who (2) Labor Claims
have no property of their own, when approved by the court; Art. 110 of the Labor Code has modified 2244 by moving labor claims to number (1), ahead of funeral
expenses. Labor claims are still not in the level of special preferred claims under 2241 and 2242. The
(2) Credits for services rendered the insolvent by employees, laborers, or Labor Code merely moved it up to the top of the list of ordinary preferred claims. Also, Art. 110 of the
household helpers for one year preceding the commencement of the proceedings in Labor Code has removed the one-year limitation.
insolvency;
(9), (10), (11) Taxes
(3) Expenses during the last illness of the debtor or his or her spouse and children under his
Note that this is unlike special preferred claims where a tax is imposed upon a specific movable or
or her parental authority, if they have no property of their own; immovable property. Special preferred claims, as provided by 2243, enjoy first preference with
respect to the property upon which they are imposed.
(4) Compensation due the laborers or their dependents under laws providing for indemnity for
damages in case of labor accident, or illness resulting from the nature of the employment; Under 2244, on the other hand, taxes of other kinds are only ordinary preferred credits and are only
9th, 10th, and 11th priorities with respect to the free portion of the property of the debtor. Examples
(5) Credits and advancements made to the debtor for support of himself or herself, and family, are income tax, license fees, and capital gains tax. These are not imposed on specific property of the
during the last year preceding the insolvency; debtor, so they are ordinary preferred claims, which can be collected against the debtor’s free
property.
(6) Support during the insolvency proceedings, and for three months thereafter; Taxes owing the national government should be satisfied first, followed by the provincial government,
then the city or municipal government.
(7) Fines and civil indemnification arising from a criminal offense;
(14) Credits appearing in a public instrument or in a final judgment
(8) Legal expenses, and expenses incurred in the administration of the insolvent’s estate for
the common interest of the creditors, when properly authorized and approved by the court; This paragraph contains the rule of preference when you have several credits appearing in public
instruments or in a final judgment. To determine the order of preference among them, just consider
(9) Taxes and assessments due the national government other than those mentioned in the date. First in time, priority in right, sabi nga ni CLV.
Articles 2241, No. 1, and 2242, No. 1;
This does not include those registered credits which fall under 2241 and 2242, such as those arising
from a pledge or mortgage, or an attachment of specific real property.
(10) Taxes and assessments due any province, other than those referred to in Articles
2241, No. 1, and 2242, No. 1; Example:
(11) Taxes and assessments due any city or municipality, other than those indicated in The claims are as follows:
Articles 2241, No. 1, and 2242, No. 1; A notarized promissory note dated May 1, 2002.
A promissory note in a private document dated January 1, 2002.
(12) Damages for death or personal injuries caused by a quasi-delict; A judgment for sum of money dated October 1, 2002.

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What is the order of priority? Those without special preferred claims will constitute the debtor’s Free Property.
1. Notarized promissory note dated May 1, 2002 Remember to take out property held by the debtor only in the capacity of trustee. He may have legal
2. Judgment dated October 1, 2002 title to it, but the beneficial title and ownership actually belong to another person. Since the property
3. Promissory note in a private document dated January 1, 2002 does not belong to the debtor, they should not be included in the proceedings. The same goes for
property of the AC of CPG, property held as lessee or usufructuary, etc.
Common Credits
STEP 2: GROUP THE CLAIMS
Art. 2245. Credits of any other kind or class, or by any other right or title not comprised in the four Make four groups – (1) special preferred credits on movables, (2) special preferred credits on
preceding articles, shall enjoy no preference. immovables, (3) ordinary preferred credits, and (4) common credits.
If it is not among those mentioned in 2241, 2242, and 2244, it is a common credit. Creditors with For the special preferred claims, look out for the following because they are the most common:
common credits have to line up for the excess of the debtor’s property after claims under 2241, 2242,
and 2244 have been satisfied. There is no order of preference among common creditors; they share 1. For movables:
whatever is left in proportion to their credit, regardless of date.
a. import duties/other taxes imposed directly on the movable
b. an obligation secured by a pledge (in a public instrument) or a chattel mortgage
CHAPTER 3 ORDER OF PREFERENCE OF CREDITS
(registered)
c. claim of unpaid seller for the price of the movable
Art. 2246. Those credits which enjoy preference with respect to specific movables, exclude all others
to the extent of the value of the personal property to which the preference refers. 2. For immovables:
Art. 2247. If there are two or more credits with respect to the same specific movable property, they a. real estate taxes
shall be satisfied pro rata, after the payment of duties, taxes and fees due the State or any b. an obligation secured by a real estate mortgage (registered)
subdivision thereof. c. claim of unpaid seller for the price of the immovable
d. credits annotated in the Registry of Property by attachment or execution upon the
Art. 2248. Those credits which enjoy preference in relation to specific real property or real rights, immovable
exclude all others to the extent of the value of the immovable or real right to which the preference
refers. Put the ordinary preferred claims under 2244 together. List them down according to the order under
2244, since 2244 already gives the order of preference. Remember, though, that labor claims are on
Art. 2249. If there are two or more credits with respect to the same specific real property or real top. The most common are:
rights they shall be satisfied pro rata, after the payment of the taxes and assessments upon the
immovable property or real right. 1. labor claims
2. taxes other than those imposed directly upon a movable or an immovable, such as income
Art. 2250. The excess, if any, after the payment of the credits which enjoy preference with respect taxes and license fees (In the following order: national government, provincial
to specific property, real or personal, shall be added to the free property which the debtor may government, city or municipal government).
have, for the payment of other credits. 3. credits in a final judgment or in a public document, such as notarized promissory notes
Art. 2251. Those credits which do not enjoy any preference with respect to specific property and Put the other credits not falling under these three together. These are the common claims. The usual
those which enjoy preference, as to the amount paid, shall be satisfied according to the following example is a promissory note in a private instrument.
rules:
STEP 3: SATISFY THE SPECIAL PREFERRED CLAIMS
(1) In the order established in article 2244;
First: Take the value of the specific movable/immovable upon which the preferred claim is imposed.
(2) Common credits referred to in article 2245 shall be paid pro rata regardless of dates.
Second: Pay the taxes due on the property.
APPLYING THE RULES Third: Pay the preferred claim of the creditor.
STEP 1: MAKE AN INVENTORY OF ASSETS What if you have more than one preferred creditor over the same property?
List down all the assets of the debtor. Ex: The claims against a car are: import duties, chattel mortgage, and unpaid seller.
Group these assets into two: the Preferred Group and the Free Property Group. In this case, pay the taxes first. Since the mortgage creditor and the unpaid seller are both
special preferred creditors, they will share the balance proportionately. There will only be
Those assets with special preferred claims under 2241 and 2242 imposed upon them belong to the proportionate sharing in case the value of the thing after payment of taxes is not enough to
Preferred Group.

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satisfy all of the special preferred claims against it. If the value of the thing is sufficient, then Most probably, JPSP will just ask us to list the order of preference of several credits. So my
all the special preferred claims must be paid in full. suggestion is to make the lists mentioned above and just update the list of ordinary preferred claims
and common claims after satisfying the special preferred claims, in case there is an excess or
Fourth: If, after paying the taxes and other special preferred claims, there is an excess, take the value deficiency.
of the excess and add it to the debtor’s Free Property.
Examples:
Fifth: If the value of the specific property is not enough to satisfy the taxes and other special preferred
claims, and there is a deficiency, follows these rules: On January 1, 2002, Debtor executes a promissory note for 500K in a private instrument.
On March 1, 2002, he executes a Real Estate Mortgage over his house and lot worth P3M to
a. If the deficiency is in a credit arising from a pledge, real mortgage, or chattel mortgage, secure a P5M loan. On the same date, he also executes a notarized promissory note for
put the deficiency in the ordinary preferred credits group. Why do we know right away P1M. On September 1, 2002, a creditor is able to obtain a favorable judgment against
that it is an ordinary preferred credit? It is a credit in a public instrument, so it is an Debtor for P100K. Debtor becomes insolvent. What is the order of priority of his creditors’
ordinary preferred credit under (14) of 2244. You know it’s in a public instrument because claims?
it was treated at first as a special preferred credit, and the requirement under 2241 and
2242 is that these transactions be registered (for real and chattel mortgage) or be in a 1. The mortgage credit should be satisfied first. But since it is for P5M and the house and lot is
public document (for pledge). only worth P3M, there will be a deficiency of P2M. The P2M will be an ordinary preferred
credit.
b. If the deficiency is in a credit arising from a transaction that is not in a public document or
is not contained in a final judgment (ex: unrecorded sale), put the deficiency in the 2. Next in priority are the notarized promissory note for P1M and the P2M deficiency on the
common credits group. mortgage credit. They are both ordinary preferred credits under (14) of 2244. Since they
were executed on the same date, they enjoy the same order of preference and will share
STEP 4: UPDATE THE INVENTORY AND LIST OF CREDITS proportionately in the free property of the Debtor.
After you have satisfied all of the special preferred claims, update the following: 3. The last to be satisfied will be the promissory note in a private instrument, which is a common
credit.
1. The inventory of assets
The debtor’s assets are a house and lot, a car, and cash. He is insolvent. His obligations
You may have to add to the Free Property Group if, after satisfying the special preferred are as follows:
claims, you have an excess. Make sure that you add the excess to the Free Property Group.
A real estate mortgage dated June 1, 2002
Add up the entire value of the Free Property Group because this is what you will use to settle Chattel mortgage on the car dated March 1, 2002
the ordinary preferred claims and the common claims. Real property tax on the house and lot
Income tax
2. The list of ordinary preferred claims Import duty on the car
Unpaid seller of the lot, sold to him on March 1, 2002
If there was a deficiency in satisfying the special preferred claims, the deficiency will be an License fee owing the city government for business of Debtor
ordinary preferred credit if it is notarized or is contained in a final judgment. Notarized promissory note dated March 1, 2002
Acknowledgment receipt of debt dated March 1, 2002
3. The list of common claims Judgment dated March 1, 2002, with attachment on house and lot dated January 1, 2002
If there was a deficiency in satisfying the special preferred claims, the credit will be a common What is the order of preference?
credit if it is not notarized or contained in a final judgment.
First, make the inventory:
STEP 5: SATISFY THE ORDINARY PREFERRED CLAIMS
Immovable Property with Special Preferred Claim
List down all the ordinary preferred claims in the order in which they are listed in 2244. This is the
order of preference among them. House and Lot
Most probably, there will be several credits in public instruments and final judgments. Arrange these Movable Property with Special Preferred Claim
by date. Those falling on the same date will enjoy equal preference and will share the balance of the
free property proportionately. Car
STEP 6: SATISFY THE COMMON CLAIMS Free Property
Whatever is remaining of the debtor’s free property will be used to satisfy the common claims. Since Cash
these will not be enough to cover the debtor’s remaining liabilities (he’s insolvent), the common
creditors will share the balance in proportion to the amount of their credit, regardless of the date. Second, group the credits:

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SPECIAL PREFERRED SPECIAL PREFERRED ORDINARY COMMON CLAIMS Fifth, pay the ordinary preferred claims out of free property in the following order:
CLAIMS OVER CLAIMS OVER PREFERRED CLAIMS
IMMOVABLE MOVABLE PROPERTY 1. Income tax
PROPERTY
Real estate mortgage Import duty on the car Income tax Acknowledgment 2. License fees
dated June 1, 2002 receipt of debt dated
Chattel mortgage on License fee owing the March 1, 2002 3. Proportionate sharing:
Real property tax on the car dated March 1, city government for Notarized promissory note dated March 1, 2002
the house and lot 2002 business of Debtor Unpaid seller’s deficiency, sale dated March 1, 2002
Deficiency in judgment credit, dated March 1, 2002
Unpaid seller of the lot, Notarized promissory
sold on March 1, 2002 note dated March 1, 4. Deficiency in real estate mortgage, dated June 1, 2002
2002
Judgment dated March Sixth, pay the common claims out of free property
1, 2002, with
attachment on house Acknowledgment receipt of debt
dated January 1, 2002
Third, satisfy special preferred claims:
With respect to the House and Lot
1. Real property tax

2. The following will share proportionately the balance after the payment of the real property
tax:
a. Real estate mortgage creditor

b. Unpaid seller
c. Judgment dated March 1, 2002 with attachment on house and lot dated January 1,
2002
[Let’s assume that there was a deficiency in settling the claims of these three creditors]
With respect to the Car
1. Import duty
2. Chattel mortgage creditor
Fourth, update the list of credits:
ORDINARY PREFERRED CLAIMS COMMON CLAIMS

Income tax Acknowledgment receipt of debt dated March 1,
2002
License fee owing the city government for
business of Debtor
Notarized promissory note dated March 1, 2002
Add:
Deficiency in claim of
Real estate mortgage creditor dated June 1, 2002
Deficiency in claim of unpaid seller of the lot, sold

on March 1, 2002
Deficiency in claim from judgment dated March 1,

2002

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INSOLVENCY LAW 2. It gives the debtor leverage or a framework for negotiation (that is, if he files it under PD
902-A, not the Insolvency Law). The debtor can delay payment for as long as the court
What is insolvency? allows, so it’s a good chance to bargain with creditors in the meantime.
It denotes the state of a person whose liabilities are more than his assets.
The Insolvency Law provides for three remedies:
1. Suspension of Payments
2. Petition for Voluntary Insolvency
3. Petition for Involuntary Insolvency
I. SUSPENSION OF PAYMENTS
What is suspension of payments?
Suspension of payments is the postponement, by court order, of the payment of debts of one who,
while possessing sufficient property to cover his debts, foresees the impossibility of meeting them
when they respectively fall due (solvent but not liquid).
What are the laws governing suspension of payments?
A debtor may file a petition for suspension of payments either under The Insolvency Law or PD
902-A.
SUSPENSION OF PAYMENTS UNDER PD 902-A
Who may file for suspension of payments under PD 902-A?
A corporation may file for suspension of payments under PD 902-A if it is either:
1. Solvent but not liquid; OR

2. Insolvent and under the management of a Rehabilitation Receiver or Management
Committee
A Rehabilitation Receiver or Management Committee is a group of persons appointed by the

court to take over the assets of the insolvent corporation in order to turn it around.
Õ A natural person cannot file for suspension of payments under PD 902-A,
Where do you file a petition for suspension of payments under PD

902-A?
You file the petition with the RTC (it used to be with the SEC, but the law was amended).
What are the advantages of filing a petition for suspension of

payments?
The advantages of filing a petition for suspension of payments are:
1. The debtor has continued access to the assets and resources of the corporation; and

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If you were the debtor corporation, what are the advantages of filing the petition for 4. There will be a meeting of creditors in which they will decide whether to grant the
suspension of payments under PD 902-A instead of under the Insolvency Law? petition. Take note that the amount of the debt is not reduced. The debtor merely buys
more time to satisfy his obligations.
1. PD 902-A is more lenient than the Insolvency Law. Under the Insolvency Law, the
debtor must be solvent but not liquid. Under PD 902-A, even if the corporation is Quorum Requirement: To have a valid meeting, the creditors present must represent
insolvent, as long as it is under Rehabilitation Receiver or Management Committee, it at least 60% of the total liabilities of the debtor.
can file for suspension of payments.
Ex: A has liabilities worth P10,000 as follows: creditor X: 3,000; creditor Y: 3,000, and
2. Under the Insolvency Law, the creditors have a say on whether to grant the petition. creditor Z: 4,000. If X and Y are present, there will be a quorum because they represent
Under PD 902-A, only the court decides. 6,000 or 60% of the total liabilities of A.
3. Under PD 902-A even secured creditors are covered by the suspension; there are no 5. The creditors will approve the proposition of the debtor.
exceptions. All claims are suspended. Under the Insolvency Law, secured creditors are
not covered by the suspension; they may foreclose upon default. Majority required to approve the proposal: A double majority consisting in 2/3 of the
number of creditors voting, which 2/3 must represent at least 60% of the total liabilities
SUSPENSION OF PAYMENTS UNDER THE INSOLVENCY LAW (SECTIONS 2-13) of the debtor.
What are the requisites of the petition for suspension of payments Example: There are 99 creditors representing total liabilities worth P100K. What is the
under the Insolvency Law? majority required to approve any proposal?
The petition must be filed by a debtor: The majority required is 66 creditors (2/3 of the number of creditors voting), who
must, in addition, represent at least P60K worth of liabilities.
1. possessing sufficient property to cover all his debts (SOLVENT)
What if the debtor owes one creditor a total of P60K, is his single vote a valid majority?
2. foreseeing the impossibility of meeting them when they respectively fall due (NOT
LIQUID) No. Because although he met the requirement of 60% of the liabilities, he does not
constitute 2/3 of the number of creditors voting. There must be a double majority.
3. petitioning that he be declared in the state of suspension of payments.
6. Objections, if any, to the decision must be made within 10 days following the meeting.
The debtor may either be a natural or juridical person (Although, as mentioned already, if you’re
a corporation, it would be better to file the petition under PD 902-A, not under the Insolvency 7. Issuance of the order of the court directing that the agreement be carried out in case the
Law). decision is declared valid, or when no objection to said decision has been presented.
The petition need not be verified. What are the effects of filing of the petition?
1. No disposition of his property may be made by the debtor except those made in the
What is the procedure for suspension of payments? ordinary course of business;
1. File a petition with the RTC where the debtor has resided for six months prior to the 2. No payments may be made by the debtor except those made in the ordinary course of
filing of the petition. business;
The petition should be accompanied by a verified list of all of his creditors, debts and 3. Upon request to the court, all pending executions against the debtor shall be suspended
liabilities, a statement of his assets and liabilities, and the proposed agreement that he except execution against property especially mortgaged.
requests from his creditors.
Why is it in the interest of the debtor to refrain from making any disposition or payment
2. The court will issue an order calling for the meeting of all creditors. The meeting should other than those in the ordinary course of business?
take place not less than 2 weeks nor more than 8 weeks from the date of the order.
Dispositions or payments made which are not in the ordinary course of business may indicate
3. The order will be published and notice sent to all the creditors of the debtor. that the debtor connived with a creditor into voting in favor of the suspension of payments by
buying his vote. Also, this shows that the debtor is liquid after all, and therefore, does not need
to be placed in a state of suspension of payments.

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Are all of the creditors of the debtor affected by the filing of the
petition? II. VOLUNTARY INSOLVENCY
Only those creditors included in the schedules filed by the debtor will be called upon to take part What is the concept of voluntary insolvency?
in the meeting. Hence, those who did not appear because they were not informed of the
proceedings will not be affected. The debtor is obliged to disclose all of his creditors in the An insolvent debtor whose liabilities exceed P1,000 may apply to be discharged from his debts
petition. The disclosure shall be verified or confirmed under oath. and liabilities by filing a petition for voluntary insolvency in the RTC where he has resided for
the last six months prior to the filing of the petition. In voluntary insolvency, the debtor himself
Which creditors are not affected by the order of suspension of is the petitioner.
payments?
The date of the filing of the petition is important for purposes of reckoning certain periods, such
Aside from those creditors to whom notice was not given, the following creditors are also not as the residency requirement.
covered by the suspension:
Distinctions between suspension of payments and insolvency (in general)
1. Persons having claims for personal labor, maintenance, expense of last illness and
funeral of the wife or children of the debtor incurred in the 60 days immediately INSOLVENCY SUSPENSION OF
preceding the filing of the petition; and PAYMENTS
PURPOSE To discharge the debtor from To suspend or delay the
2. Persons having legal or contractual mortgages. They can foreclose upon default in the payment of debts payment of debts
spite of the suspension of payment. SOLVENCY OF DEBTOR Debtor does not have Debtor has sufficient property
sufficient property to pay his to pay his debts
(But take note that this does not apply if the petition was filed under PD 902-A, in which debts
case, ALL creditors are covered by the suspension of payments. This rule applies only EFFECT ON AMOUNT OF The amount is affected. The amount of indebtedness
when the petition is filed under the Insolvency Law.) INDEBTEDNESS Creditors receive less than is not affected.
their credits; and where there
What are the grounds for questioning the decision of the meeting? are preferences, some
creditors may not receive
1. Procedural defects in the calling and holding of the meeting, and the deliberations anything at all.
conducted, which caused prejudice to the rights of the creditors; NUMBER OF CREDITORS There must be three or more The number of creditors is
creditors if it is involuntary immaterial.
2. Fraudulent connivance between a creditor and the debtor for the creditor to vote in insolvency.
favor of the proposed agreement;
What are the jurisdictional requirements for the petition for voluntary insolvency?
If there is proof that the debtor somehow bribed the creditor or bought his vote, the
decision of the meeting can be set aside. However, it is legal to give OTHER incentives In the petition, the debtor shall indicate:
to the creditor, such as higher interest rates. These are not bribes but merely incentives
to induce them to vote in favor of suspension. 1. his place of residence and the period of residence therein prior to the filing of the
petition;
3. Fraudulent conveyance of claims by a creditor for the purpose of obtaining a majority. 2. his inability to pay all his debts in full;
3. his willingness to surrender all his property, estate, and effects not exempt from
Ex: There are 99 creditors with claims worth P100K total. 1 creditor represents 60K execution for the benefit of his creditors;
worth of credits, while the other 98 creditors represent a total of 40K. The one creditor 4. an application to be adjudged insolvent.
is in favor of suspension of payments, while the other 98 are against it. How will this
one creditor manipulate the situation in order to approve the petition? The petition shall be accompanied by:
He has already complied with the 60% requirement. His problem is the 2/3 of the 1. A verified schedule containing:
creditors requirement, since he only represents 1/99 of the creditors. What he can do is
to assign some of his credits to 200 other people. That way, they will represent 201/299 a. a full and true statement of all debts and liabilities of the insolvent debtor, and
of the creditors, with a total claim of 60K. This is enough to meet the double majority b. an outline of the facts giving rise or which might give rise to a cause of action
requirement. BUT, this is a ground for questioning the decision of the meeting. against the insolvent debtor

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2. A verified inventory containing: 4. Mortgages or pledges, attachments or executions on property of the debtor duly
recorded and not dissolved are not, however, affected by the order.
a. an accurate description of all the personal and real property of the insolvent,
whether or not exempt from execution, including a statement as to its value, If the petitioner is a corporation, JPSP thinks that the better route is still to file for suspension of
location, and encumbrances thereon; and payments under PD 902-A instead of filing for voluntary insolvency.
b. an outline of the facts giving rise or which might give rise to a right of action in If the petitioner is a natural person, his only incentive to file a petition for voluntary insolvency is
favor of the insolvent debtor. that he will get a discharge from past debts and liabilities (corporations do not get this
discharge). But otherwise, there are very few advantages in filing for voluntary insolvency. The
What is the procedure for voluntary insolvency? debtor should just fight it out with his creditors, since filing for voluntary insolvency is not just
demeaning but will even affect the debtor’s credit-worthiness later on. After filing for voluntary
1. Filing of the petition by the debtor praying to be declared insolvent. insolvency, no one will trust that debtor enough to lend him money again.
Unlike in involuntary insolvency, in voluntary insolvency, there need not be an III. INVOLUNTARY INSOLVENCY
allegation of an act of insolvency by the creditors of the debtor. This is because in
voluntary insolvency, the one petitioning is the debtor himself. The very act of filing the What is the purpose of involuntary insolvency?
petition is the act of insolvency. In contrast, in involuntary insolvency, the ones
petitioning are the debtor’s creditors. A petition for involuntary insolvency is not an ordinary personal action for collection of debts. Its
purpose is to impound all of the non-exempt property of the debtor, to distribute it equitably
2. Issuance of an order of adjudication declaring the debtor insolvent. among his creditors, and to release him from further liability.
The court need not conduct a hearing before declaring the debtor insolvent and Distinctions between Voluntary Insolvency and Involuntary Insolvency
taking his assets. This is because the petition is voluntary on the part of the debtor. It is
not adversarial. VOLUNTARY INSOLVENCY INVOLUNTARY
INSOLVENCY
3. Publication and service of the order to creditors.
NUMBER OF CREDITORS One creditor is sufficient Three or more creditors
PETITIONER The insolvent debtor Three or more creditors who
4. Meeting of the creditors to elect the assignee in insolvency.
must possess the
qualifications provided by law
5. Conveyance of the debtor’s property by the clerk of court to the assignee.
ACTS OF INSOLVENCY Debtor must not be guilty of Debtor must have committed
any act of insolvency one or more of the 13 acts
6. Liquidation of the debtor’s assets and payment of his debts.
AMOUNT OF Must be greater than P1,000 Must be P1,000 or more
7. Composition, if agreed upon. INDEBTEDNESS
BOND Not required Petition must be accompanied
8. Discharge of the debtor, upon his application, except if the debtor is a corporation. by a bond
HEARING Not necessary; may be Petition is granted only after
9. Objection, if any, to the discharge. granted ex parte hearing
RESIDENCY REQUIREMENT Petition must be filed with Petition must be filed with
10. Appeal to the Supreme Court in certain cases. RTC where debtor has RTC where debtor resides or
resided for at least 6 months has his place of business; no
What are the effects of an order declaring the petitioning debtor insolvent? residency requirement
ISSUANCE OF THE ORDER Upon the filing of the Upon hearing of the case
OF ADJUDICATION voluntary petition
1. The sheriff takes possession of all the assets of the debtor which are not exempt from
execution until the appointment of a receiver or an assignee. DECLARING THE DEBTOR
INSOLVENT
2. The payment to the debtor of any debts due to him and the delivery to the debtor or to
any person for him any property belonging to him, and the transfer of any property by
him are forbidden.
3. All civil proceedings pending against the insolvent debtor shall be stayed.

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Who may petition for involuntary insolvency? What are acts of insolvency?
The petitioners must be: There are 13 acts of insolvency mentioned in Sec. 20 of the Insolvency Law. These
may be grouped into three general categories (See p. 568 of De Leon for the complete
1. at least three creditors of one debtor list):
2. who are residents of the Philippines,
3. whose credits accrued in the Philippines, a. the debtor committed acts to ensure that the debtor will not be able to pay
4. the aggregate amount of which is at least P1,000. b. the debtor committed acts in fraud of creditors
5. In addition, the credits of these three creditors should NOT have accrued within 30 c. the debtor committed acts giving preference to one creditor in favor of other
days prior to the filing of the petition. creditors
Why does it have to be three creditors? Why is it not enough for one creditor to file the But the petition should allege at least one of the 13 specific acts of insolvency
petition? mentioned in the law. This is a jurisdictional requirement.
Insolvency proceedings contemplate competing claims of several creditors over the assets of 3. be accompanied by a bond, approved by the court with at least two sureties, in such
the insolvent debtor. If there is only one creditor, there are no competing claims. The creditor penal sum as the court shall direct.
can just go to court and file a simple action to collect.
The purpose of the bond is for the petitioners to answer for the costs, expenses, and
Õ But if you’re the single creditor of one debtor, there may be instances when you would damages resulting in the filing of the petition. For example, in the earlier case of the
want to file a petition for involuntary insolvency against the debtor. single creditor who files the petition against the Foreign Company just to humiliate him,
the bond will answer for damages that Foreign Company can prove as a result of the
First, how do you do this? Since you’re only one creditor, you cannot file the petition because wrongful filing of the petition.
the Insolvency Law requires that it be filed by at least three creditors. To get around this
requirement, you should assign some of the credit to at least two other persons. After waiting What are the steps in filing a petition for involuntary insolvency?
for 30 days (cooling-off period), you can file the petition.
1. Filing of the petition by three or more creditors in the RTC where the debtor resides or
Why would you want to do this? has his place of business.
The petition for involuntary insolvency can be used as a tool to harass or pressure a debtor into 2. Issuance of the order requiring the debtor to show cause why he should not be
settling his obligation with the single creditor. adjudged insolvent.
Example: Creditor extends a loan to a Foreign Company, which is publicly listed in the Hong 3. Service to debtor of the order to show cause.
Kong Stock Exchange. Foreign Company fails to pay, and since it is a foreign company, it has
no assets in the Philippines which Creditor can run after. What should Creditor do? 4. Filing of the debtor’s answer or motion to dismiss.
Creditor should first assign some of the credit to two other companies, wait 30 days, then file 5. Hearing of the case.
the petition for involuntary insolvency against Foreign Company. News of the Foreign
Company’s insolvency will reach Hong Kong, and the price of its shares will go down. To stop This is in contrast with voluntary insolvency, where there is no need for a hearing. In
the share prices from going down, Foreign Company will be forced to settle the obligation, so involuntary insolvency, there is a hearing because the proceedings are adversarial. The
that Creditor will withdraw the petition. (According to JPSP, Creditor can do this even if Foreign debtor is given a chance to refute the claim of the petitioners that he is insolvent.
Company is not actually insolvent. It’s just a legal tactic to get Foreign Company to settle the
obligation.) 6. Issuance of the order or decision adjudging the debtor insolvent.
What are the requisites of the petition for involuntary insolvency? Note that between the filing of the petition and the adjudication of the case by the
court, there is a period of time during which the debtor still has his assets. While the
case is being decided by the court, the debtor can dissipate his assets in the meantime.
The petition must:
To protect themselves from this situation, the creditors should either ask the court for an
injunction or for a receiver who will hold the properties of the debtor.
1. be verified by the petitioners
7. Publication and service of the order.
2. set forth one or more acts of insolvency mentioned in the law
8. Meeting of creditors for election of an assignee in insolvency.

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In order to validly elect an assignee, the majority of the creditors both in number and in the
The assignee must be elected within two to eight weeks from the date of the order of amount of credit they represent (another case of double majority) should vote for the same
the adjudication. assignee.
9. Conveyance of the debtor’s property by the clerk of court to the assignee. If the creditors do not attend the meeting or fail or refuse to elect an assignee, or if the
assignee fails to qualify or subsequently becomes incapacitated, the court will appoint the
10. Liquidation of the assets of the debtor and payment of his debts. assignee.
11. Composition, if agreed upon. What should the assignee do once he is elected?
12. Discharge of the debtor on his application, except if the debtor is a corporation. The assignee is required to give a bond for the faithful performance of his duties, within five
days from his election, in an amount to be fixed by the court, with two or more sureties. The
13. Objection, if any, to the discharge. bond will answer for any liability that the assignee may incur to persons aggrieved by his
actions as assignee.
14. Appeal to the Supreme Court, in certain cases.
If you were given an opportunity, will you act as an assignee?
IV. ASSIGNEES Yes, because the assignee earns a substantial fee. According to Section 42 of the Insolvency
Law, the assignee earns commissions at the following rates:
What is an assignee?
7% for the first P1,000 that he will be able to liquidate from the properties of the debtor;
An assignee is the person elected by the creditors or appointed by the court to whom an 5% for sums exceeding P1,000 but less than P10,000; and
insolvent debtor makes an assignment of all his property for the benefit of his creditors. The 4% for sums exceeding P10,000.
assignment vests title to all the assets of the debtor in favor of the assignee.
So if the amount that you can liquidate is P100M, you will earn P4M.
The assignee represents the insolvent as well as the creditors in voluntary and involuntary
proceedings. Aside from this fee, the assignee will also have other benefits, such as reimbursements of his
expenses and the opportunity to refer legal or accounting matters to his firm, if he is a lawyer or
Who can participate in the election of the assignee? a CPA.
Creditors who have filed their claims in the office of the clerk of court at least two days prior What are the effects of assignment?
to the scheduled election may participate.
1. The assignee takes the property in the same conditions that the insolvent held it.
As a general rule, a secured creditor cannot participate in the election, unless:
2. Upon appointment, the legal title to all the property of the insolvent is vested in the
1. he has asked for the fixing of the value of the security; assignee, and the control of the property is vested in the court. But the title of the
assignee retroacts to the date of the filing of the petition for insolvency.
OR
3. All actions to recover all the estate, debts, and effects of the insolvent shall be brought
2. he has surrendered the security to the sheriff or receiver of the estate of the insolvent. by the assignee and not by the creditors.
If you were the secured creditor, why would you surrender the security? 4. If there was an attachment or a judgment against the insolvent debtor made 30
days before the filing of the petition for insolvency, it will be set aside.
If the security is not enough to cover the obligation, you might as well participate in the election
if you think that the portion that will be allotted to you will be greater than the value that you will What are the powers and duties of the assignee?
realize from the sale of the security.
The assignee has the powers of administration over the property of the insolvent. Having
How do the creditors choose the assignee? these powers, he can sue and recover claims belonging to the debtor, take into possession all
of the property of the debtor, recover property fraudulently conveyed by the debtor, etc (for a
The creditors will meet in order to elect the assignee. complete enumeration, see p. 586-587 of De Leon).

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The assignee does not have powers of disposition. For acts of disposition, such as sale of
the property of the insolvent debtor or payment of the creditor’s shares, the assignee must Can a partnership be declared insolvent even if the partners constituting the same are
obtain a court order. solvent?
Section 37 of the Insolvency Law: Penalty for Embezzlement Yes. A partnership may be declared insolvent notwithstanding the solvency of the partners
constituting it. The creditors of the partnership, after first exhausting its assets, may proceed
Take note of Section 37, which provides that if any person, who knows of the pending or against the solvent general partners who are proportionately liable with their separate property.
imminent insolvency proceedings concerning the debtor, embezzles or disposes of any of the
property of the insolvent, he shall be liable for a penalty equal to double the value of the What happens to the partnership when any of the partners becomes insolvent?
property embezzled or disposed. The penalty will go to the estate of the insolvent.
The partnership is automatically dissolved by the insolvency of any partner or of the partnership
This relates only to embezzlement of the debtor’s property, and not to assignments of credit (Art. 1830, Civil Code).
made by the creditors behind each other’s backs.
What is the benefit given by the Insolvency Law to partnerships?
What is a dividend in insolvency?
Partnerships get a discharge from the obligations, if they apply for one. In contrast,
It is a part of the fund arising from the assets of the estate of the insolvent debtor, rightfully corporations do not get a discharge.
allocated to a creditor entitled to a share in the fund. It is paid by the assignee only upon order
of the court. Why doesn’t the law give corporations a discharge?
Õ According to JPSP, if you’re a creditor, you may not want to do involuntary insolvency Corporations do not get a discharge because their creditors can only go after the assets of the
because there are a lot of costs – assignee’s fees, legal costs, etc. It might be better is you corporation. The creditors cannot collect any deficiency from the stockholders. If the
could obtain a global settlement. (I don’t know, though, what “global” means.) stockholders want a fresh start, they can just put up a new corporation and start with a clean
slate. There is no need to get a discharge in order to have a fresh start.
V. CLASSIFICATION AND PREFERENCE OF CREDITORS But if it’s a partnership, and the assets of the partnership are not enough to cover its liabilities,
the creditors can still go after the general partners for the deficiency. This is why it makes
Disregard the rules in Sec. 48-50 of the Insolvency Law. The applicable rules are those under sense to give them a discharge.
the Civil Code on Concurrence and Preference of Credits (Articles 2236-2251).
How do you distribute the net proceeds of the properties of the partnership?
But take note of Section 48, which provides that property found among the property of the
insolvent debtor but which are not really owned by him should be taken out of the proceedings. 1. The net proceeds of the partnership property shall be used to pay the debts of the
Examples are property held in trust or as a lessor or usufructuary, etc. After taking them out, partnership.
apply the rules under the Civil Code.
2. The net proceeds of the individual estate of each partner shall be used to pay individual
VI. PARTNERSHIPS AND CORPORATIONS debts.
Who may petition for declaration of insolvency of a partnership? 3. If there is any surplus in the property of any general partner after paying his individual
debts, a proportionate part of this surplus will be added to the partnership assets and
In case of voluntary insolvency, the petition may be filed by all or any of the partners. will be used to pay partnership debts.
In case of involuntary insolvency, the petition may be filed by three or more creditors of the 4. If there is any surplus in the property of the partnership, the surplus shall be added to
partnership or one or more of the partners. the assets of the individual partners in proportion to their interests in the partnership.
Which properties are covered in insolvency proceedings? What is the effect of a declaration that a corporation is insolvent?
1. All the property of the partnership; and The property and assets of the corporation will be distributed to the creditors. Unlike in
2. All the separate property of each of the general partners, except partnership, the property of the stockholders of the corporation cannot be used to pay the
creditors of the corporation. However, the corporation will not be allowed to get a discharge.
a. separate properties of limited partners; and
b. properties which are exempt by law VII. PROOF OF DEBTS

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What are the debts which may be proved (collected) against the estate of the insolvent 5. Support
debtor?
6. Damages arising out of a tort
1. All debts due and payable at the time of the adjudication of insolvency;
Can a creditor set up compensation/offset his own debts against the insolvent debtor?
2. All debts existing at the time of the adjudication of insolvency but not payable until a
future time. This is the case of Uy-Tong v. Silva. Compensation can be set up against the insolvent debtor
but only for those debts which arose at least 30 days before the filing of the insolvency
3. Any debt of the insolvent arising from his liability as indorser, surety, bail or proceedings. If the claim arose within the 30-day period before the filing of the petition, there
guarantor, where such liability became absolute after the adjudication of insolvency can be no compensation. The rule on preferences would be disregarded if the set-off were
but before the final dividend shall have been declared; allowed. It would, in effect, give the one claiming compensation undue preference over other
creditors.
4. Other contingent debts and liabilities contracted by the insolvent if the contingency
shall happen before the order of final dividend; and VIII. COMPOSITIONS
5. Any claim for reimbursement of a person who has answered, in whole or in part, for the What is composition?
insolvent’s debt as bail, surety, or guarantor or otherwise.
Composition is an agreement, made upon a sufficient consideration, between the insolvent
What is a contingent claim? or financially embarrassed debtor and all of his creditors whereby the creditors agree to
accept a dividend less than the amount of their claims, for the sake of getting paid sooner.
It is a claim in which the liability depends on a future and uncertain event. For example, the
claim of a surety is a contingent claim because the surety can only claim reimbursement from What are the requisites?
the principal debtor once he himself has paid the obligation. But before the surety pays the
principal obligation, he has no claim for reimbursement against the principal debtor. 1. The offer of the terms of composition must be made after the filing in court of the
schedule of property and submission of the list of creditors;
A claim based on a contingency which has not happened at the time of the pendency of the
proceedings cannot be proved in the proceedings, since there is no real claim yet. But, if the 2. The offer must be accepted in writing by a double majority of the creditors – majority
contingency happens after the termination of the proceedings, the creditor can still claim from of the number of creditors representing a majority of the claims;
the debtor. The discharge granted the debtor from his existing debts does not cover those
debts that could not have been proved in the insolvency proceedings. 3. It must be made after depositing the consideration to be paid and the cost of the
proceedings;
What happens to obligations of the insolvent debtor that arise after the commencement
of the proceedings? 4. The court must approve the terms of the composition.
These debts cannot be proved in the proceedings. But the creditor can still collect from the When can composition be set aside?
debtor, since the discharge given to the debtor cannot apply to claims that could not have been
proved in the insolvency proceedings. It can be challenged by any party in interest within six months after it has been confirmed on the
ground of fraud.
Which debts cannot be proved at the insolvency proceedings?
IX. DISCHARGE
1. Those barred by prescription;
What is discharge?
2. Claims of secured creditors unless they waive the right to foreclose or surrender the
security; Discharge is the privilege given to the insolvent, freeing him from all liabilities proved during the
insolvency proceedings.
3. Claims of creditors who hold an attachment or execution on property of the debtor,
provided that this was issued at least 30 days before the institution of the insolvency Is the discharge automatically given to the insolvent debtor?
proceedings;
No. The debtor must ask for it within three months to one year after he is adjudicated insolvent.
4. Claims on account of which a fraudulent preference was made or given;

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Which debts are released by discharge?

4. the person receiving a benefit has reason to believe that the debtor is insolvent and that
1. All those set forth in the schedule; and the transfer is made in order to defeat or prejudice the rights of other creditors.
2. All those which were or might have been proved against the estate in the insolvency
proceedings. What is a fraudulent conveyance/transfer?
Which debts are not released? It is any disposition of property made by the insolvent within one month before the filing of
the petition for insolvency, except for valuable consideration in good faith.
1. Taxes
2. Debts arising from any act of swindling (because you don’t reward a person who What is the status of the fraudulent conveyance?
violated a law or a trust)
3. Debts of a surety, guarantor, indorser, or any person liable for the same debt, for or with If made within 30 days before the filing of insolvency proceedings, the transfer is void.
the insolvent debtor (This is because the discharge only benefits the principal debtor,
not his co-debtors or guarantors). If made after the filing of insolvency proceedings, it is rescissible for being in fraud of creditors.
4. Debts of a corporation
5. Claims for support Another remedy of the creditors is to file a criminal complaint against the insolvent debtor.
6. Debts which were not proved and could not have been proved during the insolvency
proceedings Is there a presumption of fraud?
7. Debts arising from tort
8. Claims of secured creditors There is a rebuttable presumption that a conveyance is fraudulent when:
9. Debts which were not yet existing at the time of the discharge
10. Contingent claims 1. it is not made in the usual and ordinary cause of business of the debtor; or
2. it is made under a confession of judgment.
When can the petition to get a discharge be denied?
Within 30 days before the filing of the petition for insolvency, Debtor sells a car worth
The debtor cannot get a discharge if he is in bad faith or does acts to the prejudice of his P1M to Buyer for 900K. Is this a fraudulent conveyance?
creditors.
No. There is a fair exchange of value, so the transaction does not really prejudice the creditors.
Once granted, when may a discharge be revoked?
DEPOSIT
A discharge may be revoked by the court if a creditor can prove that it was fraudulently
obtained. The creditor must file the petition to revoke it within one year from the date of the
discharge. CHAPTER 1 DEPOSIT IN GENERAL AND ITS DIFFERENT KINDS
Art. 1962. A deposit is constituted from the moment a person receives a thing belonging to
X. FRAUDULENT PREFERENCES AND TRANSFERS another, with the obligation of safely keeping it and of returning the same. If the safekeeping
of the thing delivered is not the principal purpose of the contract, there is no deposit but some
other contract.
What is a preferential transfer?
It is a parting with the property of the insolvent for the benefit of a creditor with the result that What is the contract of deposit?
the estate of the insolvent is diminished and other creditors are prejudiced.
It is the receipt by a person of a thing belonging to another with the obligation of safely
What is a fraudulent preference? keeping it and of returning it.
It is a disposition of property by the debtor under the following conditions: Õ It is essential that the depositary is not the owner of the property deposited.
1. he is insolvent or is in contemplation of insolvency; What are the characteristics of the contract of deposit?
2. the transaction is made within 30 days before the filing of the petition for insolvency; 1. Real contract – Deposit is perfected by the delivery of the subject matter
3. it is made with a view to giving preference to any creditor; 2. Unilateral if the deposit is gratuitous – because only the depositary has an obligation;

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Bilateral if the deposit is for compensation – gives rise to obligations on the part of both Art. 1963. An agreement to constitute a deposit is binding, but the deposit itself is not
the depositary and the depositor. perfected until the delivery of the thing.
What is the principal purpose of the contract of deposit? A: “I will deposit my car in your garage at 8 a.m. tomorrow.”
B: “Okay.”
The principal purpose is the safekeeping of the thing delivered. If safekeeping is merely an
accessory or secondary obligation, it is not a deposit, but another contract, such as Is there a contract of deposit at this point?
commodatum, lease, or agency.
No. Deposit is a real contract and requires delivery of the subject matter in order to be
What is the subject matter in deposit? perfected.
Only movables can be the subject matter of deposit. If you leave a kid a Gymboree or at Kids Is there a contract at this point?
at Work, it’s not a deposit, but maybe a contract of service.
Yes, there is a contract. It is a contract of future deposit. It is perfected by mere consent, and
JPSP Examples: is binding upon the parties.
1. You park your car at the car park of Powerplant. Is it a contract of deposit? No, Art. 1964. A deposit may be constituted judicially or extrajudicially.
because the purpose is not safekeeping. The purpose is merely convenience, so that
you have a place to leave your car while you shop or watch a movie or go to school. Kinds of Deposit
2. You park your car at the Dela Rosa car park. Is it a contract of deposit? Still, no, even 1. Judicial – takes place when an attachment or seizure of property in litigation is ordered
if, unlike the car park of Powerplant, the sole reason for the existence of the Dela Rosa
car park is for people to leave their cars there. It’s still not a deposit because the 2. Extra-judicial
purpose is not safekeeping. People who park there just want the space. It’s a short-
term lease of space. (a) Voluntary – delivery is made by the will of the depositor or by two or more
persons each of whom believes himself entitled to the thing deposited; or
So, legally, it is not a deposit. And even for practical purposes, it should not be treated
as a deposit. If it were a deposit, if the car is lost, the owner of the car park (the (b) Necessary – made in compliance with a legal obligation, or on the occasion
depositary) will shoulder the loss. The direct result of this is that parking fees will go up
of any calamity, or by travelers in hotels and inns, or by travelers with common
because it would have to cover insurance costs in addition to the regular parking fee.
carriers.
Deposit distinguished from Simple Loan (mutuum)
Art. 1965. A deposit is a gratuitous contract except when there is an agreement to the
contrary or unless the depositary is engaged in the business of storing goods.
DEPOSIT SIMPLE LOAN
PURPOSE Safekeeping Consumption GENERAL RULE: Deposit is gratuitous.
WHEN RETURN CAN BE Depositor can demand return Lender must wait until the
DEMANDED of the thing at will expiration of the period EXCEPTIONS:
granted to the debtor
SUBJECT MATTER Movable and immovable Only money and any other 1. Contrary stipulation
property (if deposit is judicial) fungible thing
2. Depositary is engaged in business of storing goods – ex. A warehouseman
Deposit distinguished from Commodatum
3. Where property is saved from destruction without knowledge of the owner – In this case,
the owner is bound to pay the person who saved his property just compensation
DEPOSIT COMMODATUM
PURPOSE Safekeeping Transfer of use of the subject
Art. 1966. Only movable things may be the object of deposit.
matter
GRATUITOUS? May be gratuitous, may be Always gratuitous
onerous This applies only to an extra-judicial deposit, whether voluntary or necessary.
SUBJECT MATTER In extra-judicial deposit, only Both movable and immovable
movables property Reason: The main purpose of deposit is safekeeping. Since real property may not disappear or
may not be lost, there is no point in entrusting them to someone for safekeeping.
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If there are two or more persons each claiming the rightful ownership of a thing, pending the
A gives the keys to his house to B for safekeeping. Is this a deposit of the house? No, since resolution of their conflicting claims, they may deposit the thing with a third person. The third
the house is an immovable which cannot be the proper subject matter of deposit. The person assumes the obligation to deliver to the person to whom it belongs. The depositary can
relationship is an agency. file an action for interpleader to compel the depositors to settle their conflicting claims.
But if it is a judicial deposit, even immovable property can be a valid subject matter. The Ex: A and B both claim to own a dog. While they are trying to settle the ownership of the dog,
reason is that the purpose of a judicial deposit is different. It is to protect the rights of the they can deposit the dog with C. C can file an action for interpleader to compel A and B to
parties to the suit. settle the ownership of the dog. C’s obligation is to eventually deliver the dog to whomever is
the rightful owner.
Art. 1967. An extra-judicial deposit is either voluntary or necessary.
Art. 1969. A contract of deposit may be entered into orally or in writing.
GENERAL RULE: Deposit is voluntary.
There are no formal requirements for the validity of a contract of deposit. The only thing
EXCEPTIONS: Deposit is necessary in the following cases: (See discussion under necessary is delivery of the thing.
necessary deposit)
Art. 1970. If a person having capacity to contract accepts a deposit made by one who is
1. if made in compliance with a legal obligation; incapacitated, the former shall be subject to all the obligations of the depositary, and may be
compelled to return the thing by the guardian, or administrator or the person who made the
2. if it takes place on the occasion of any calamity, such as fire, storm, flood, pillage, deposit or by the latter himself if he should acquire capacity.
shipwreck, or other similar events;
X, who is insane, deposits her basketball with Boy-B. Can Boy-B refuse to return the
3. deposit of effects made by travelers in hotels or inns basketball later on, on the ground that the deposit was not valid because of the incapacity
of X?
4. deposit of goods made by travelers or passengers with common carriers
No. If the depositary is capacitated, he is subject to all the obligations of a depositary whether
CHAPTER 2 VOLUNTARY DEPOSIT or not the depositor is capacitated. Hence, he must return the property to the legal
representative of X or to X herself if she should recover sanity. Persons who are capacitated
Section 1 General Provisions cannot allege the incapacity of those with whom they contract.
JPSP example: Five tinedyers aged 13 to 15 check into a hotel to go on a drinking binge.
Art. 1968. A voluntary deposit is that wherein the delivery is made by the will of the depositor.
They deposit some jewelry at the front desk for safekeeping.
A deposit may also be made by two or more persons each of whom believes himself entitled
to the thing deposited with a third person, who shall deliver it in a proper case to the one to Is there a valid deposit?
whom it belongs.
Yes, but it may be annulled for want of capacity of the tinedyers. It’s actually a
What is voluntary deposit? voidable contract, which is valid until annulled.
Deposit wherein delivery is made by the will of the depositor. The tinedyers, at the end of their drinking binge, go to the front desk and ask for the return
of the jewelry. What should the hotel do?
What is the distinction between voluntary and necessary deposit?
The hotel should return the jewelry to their legal representative. The hotel should
The main difference is that in voluntary deposit, the depositor is free to choose the depositary. not return to the tinedyers because if subsequently, the tinedyers lose the jewelry,
In necessary deposit, the depositor lacks the freedom to choose the depositary. the hotel could be made liable for the loss. But definitely, the hotel cannot retain
the jewelry, or else, its personnel would be liable for estafa.
Does the depositor have to be the owner of the thing deposited?
Art. 1971. If the deposit has been made by a capacitated person with another who is not, the
Generally, the depositor should be the owner of the thing, but it is not an essential element of depositor shall only have an action to recover the thing deposited while it is still in the
deposit. The depositary cannot even require the depositor to prove that he is the owner of the possession of the depositary, or to compel the latter to pay him the amount by which he may
thing. be enriched or benefited himself with the thing or its price. However, if a third person who
acquired the thing acted in bad faith, the depositor may bring an action against him for its
When there are several depositors: recovery.
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This is the rule that applies if you deposit with a minor or other incapacitated person. 1. Because the contract of deposit involves the depositor’s confidence in the depositary’s
good faith and trustworthiness; and
If the depositary is incapacitated, while the depositor is capacitated, the incapacitated does not
incur the obligations of a depositary. 2. Because it is presumed that the depositor, in choosing the depositary, took into account
the diligence which the depositary normally exercises with respect to his own property.
The incapacitated is liable only:
BUT, if under the circumstances, a greater degree of care towards the thing deposited is
(1) to return the thing deposited if it is still in his possession; or necessary, the depositary must exercise such extraordinary care. If, in this case, the thing
(2) to pay the depositor the amount by which he may have benefited through the thing or deposited is lost and the depositary only exercised the same diligence as he would towards his
its price if the incapacitated is no longer in possession own property, he is liable to the depositor for the loss.
If the thing was transferred to a third person who was in bad faith, the depositor can recover the The loss of the thing while it is in the possession of the depositary raises a presumption of fault
thing from him. If the transferee was in good faith, the depositor cannot recover from him. The on his part.
depositor can only go after the incapacitated for the value of the thing.
Duty of Returning the Thing
Boy-B deposits his watch with X, who looks like she’s 22 but is actually 13. Can Boy-B
recover the watch? The thing deposited must be returned to the depositor when he claims it, even though a
specified term or time for such may have been stipulated in the contract and such time has not
If the watch is still in the possession of X, Boy-B can recover the watch itself from X. yet expired.
If X has already sold the watch to Hon, a buyer in good faith and for value, Boy-B cannot Art. 1973. Unless there is a stipulation to the contrary, the depositary cannot deposit the thing
recover the watch. He can only compel X to return the price that Hon paid for the watch (the with a third person. If deposit with a third person is allowed, the depositary is liable for the
benefit that X received from the sale of the watch). So if the watch is worth P10,000 but X sold loss if he deposited the thing with a person who is manifestly careless or unfit. The depositary
it to Hon for P5,000, Boy-B can only recover P5,000 from X. is responsible for the negligence of his employees.
But if Hon was a buyer in bad faith, Boy-B can recover the watch itself from Hon. GENERAL RULE: The depositary cannot deposit the thing with a third person.
Section 2 Obligations of the Depositary Reason for the rule: Deposit is founded on trust and confidence. It is presumed that in
choosing the depositary, the depositor took into account his personal qualifications.
Art. 1972. The depositary is obliged to keep the thing safely and to return it, when required, to
the depositor or to his heirs and successors, or to the person who may have been designated EXCEPTION: The parties may stipulate that the depositary may deposit the thing with a
third person. But there is a limitation – the depositary cannot choose a third person who is
in the contract. His responsibility with regard to the safekeeping and loss of the thing shall be manifestly careless or unfit.
governed by the provisions of Title I of this Book.
What happens if the depositary deposits the thing with a third person, and it is lost?
If the deposit is gratuitous, this fact shall be taken into account in determining the
degree of care that the depositary must observe. 1. If there is no stipulation allowing him to deposit with a third person, he is liable
for the loss, whether it was through his or the third person’s fault or through
Primary obligations of the depositary: fortuitous event.
1. Safekeeping 2. Generally, if the thing is deposited with a third person with permission of the
2. Return of the thing, but only when required depositor, and the thing is lost through fortuitous event, the depositary is
not liable for the loss.
Duty of Safekeeping
However, if he deposits it with a person who is manifestly careless or unfit,
What is the degree of care required of the depositary? even if there is no negligence or even if the loss was through fortuitous
event, the depositary is liable for the loss.
As a general rule, the depositary must exercise the same diligence as he would exercise
over his OWN property. He should exercise the diligence of a good father of a family. The 3. If the thing is lost through the negligence of the depositary’s employees, the
reasons for this rule are: depositary is liable for the loss (The employee is the agent of the depositary;
principal bears the loss resulting from the negligence of his agent). Here, it
is not necessary that the employees be manifestly careless or unfit, but it is
necessary that the loss be through negligence.
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Art. 1974. The depositary may change the way of the deposit if under the
circumstances he may reasonable presume that the depositor would consent to Safety Deposit Boxes
the change if he knew of the facts of the situation. However, before the
depositary may make such change, he shall notify the depositor thereof and wait The contract for rent of safety deposit boxes is not an ordinary contract of lease of
for his decision, unless delay would cause danger. things because the full and absolute possession and control of the safety deposit
box is not given to the party renting.
GENERAL RULE: The depositary should not change the way or manner of the deposit as
agreed upon. It is actually a special kind of deposit. It is a contractual relation between the
parties. The liability rules are governed by the Civil Code provisions on obligations
EXCEPTION: The depositary may change it if there are circumstances indicating that and contracts, and not on donations.
the depositor would consent to the change. However, the depositary should first
notify and wait for the decision of the depositor. Is a stipulation which exempts the bank from liability for the things contained in the safety
deposit box valid?
If delay would cause danger, the depositary need not wait for the consent of the
depositor. Notice to the depositor of the change is sufficient. The stipulation is void. Even if as a rule, the Bank may limit its liability to some
extent by agreement or stipulation, the agreement or stipulation must not be
JPSP example: contrary to law and public policy.
The law on deposit provides that the depositary is liable for loss due to fraud,
A deposited jewelry with B, a resident of Lamitan. B did not feel so secure with the jewelry negligence, delay, or contravention of the tenor of the agreement. Any contrary
in Lamitan, so he deposited the jewelry with a bank in Davao. A sued B for damages for stipulation would be void.
depositing the jewelry with a third person without A’s authorization. What is B’s defense?
Art. 1976. Unless there is a stipulation to the contrary, the depositary may
B can invoke Article 1974. Under the circumstances, B can infer that A would commingle grain or other articles of the same kind and quality, in which case the
consent to the change of the manner of deposit. various depositors shall own or have a proportionate interest in the mass.
Art. 1975. The depositary holding certificates, bonds, securities or instruments GENERAL RULE: The depositary may commingle grain or other articles of the same kind and
which earn interest shall be bound to collect the latter when it becomes due, and quality.
to take such steps as may be necessary in order that the securities may preserve
their value and the rights corresponding to them according to law. EXCEPTION: If there is a contrary stipulation
The above provision shall not apply to contracts for the rent of safety De Leon example:
deposit boxes.
A, depositary, received the following:
What are the obligations of the depositary if the thing earns interest?
from B: 30 cavans of rice
1. Collect the interest, as well as the capital, as it becomes due; and from C: 20 cavans of rice
2. Take such steps as may be necessary to preserve its value and the rights from D: 10 cavans of rice
corresponding to it.
The rice was of the same kind and quality.
Ex: Depositary of a negotiable instrument should give notice of dishonor to
all parties secondarily liable, or else these parties would be discharged. Can A put all of the rice together?
JPSP example: Yes, since there is no stipulation forbidding it. B will own 30/60 or ½ of the whole
pile; C will own 20/60 or 1/3; and D will own 10/60 or 1/6.
A deposits to B a promissory note payable to A or order. Can B collect accrued interests on
the note? But if the articles deposited by different depositors are not of the same kind and
quality, or if there is a stipulation forbidding it, the depositary must keep them
No. The instrument is an order instrument. B cannot collect the interest due on it separate or at least identifiable, since he must return to each depositor the very
because he is neither an indorsee nor an authorized agent of A. same thing deposited.
Õ Therefore, Art. 1975 really applies only to BEARER instruments. If it is an order Art. 1977. The depositary cannot make use of the thing deposited without the
instrument, there is a need for an indorsement or at least, a special power of express permission of the depositor.
attorney, to enable the depositary to collect the interest and capital when due.
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Otherwise, he shall be liable for damages.

(2) If he uses the thing without the depositor’s permission;
However, when the preservation of the things deposited requires its use, it
must be used but only for that purpose. (3) If he delays its return;
GENERAL RULE: The depositary CANNOT make use of the thing deposited. (4) If he allows others to use it, even though he himself may have been
authorized to use the same.
EXCEPTIONS:
1. When the depositor has expressly given his permission. Permission cannot be GENERAL RULE: The depositary is not liable for loss of the thing through fortuitous event.
implied, and it is not presumed.
EXCEPTIONS:
2. When the preservation of the thing requires its use, it may be used but only for
that purpose. 1. Stipulation
Ex: When you deposit a car with someone for a week, the depositary should 2. If he uses it without the depositor’s permission – this is breach/
start the car everyday, in order to prevent the battery from getting contravention of the tenor of the obligation
discharged.
3. Delay in return – this is default
Reason for the rule: The principal purpose of deposit is safekeeping, not use of the
thing. If the purpose is use, it is not deposit anymore. 4. If he allows others to use it – also a breach
If the depositary uses the thing deposited without permission of the depositor, he Take note that the rule is different in commodatum. In commodatum, the
shall be liable for damages. In addition, if the thing is lost even through fortuitous members of the borrower’s household are allowed to use the thing without
event, the depositary shall bear the loss. liability on the part of the borrower.
Art. 1978. When the depositary has permission to use the thing deposited, the If the thing is lost in the custody of the depositary, the presumption is that it was
contract loses the concept of a deposit and becomes a loan or commodatum, lost through his fault. He has the burden of proving that the loss was not due to
except where safekeeping is still the principal purpose of the contract. his own fault.
The permission shall not be presumed, and its existence must be proved. Art. 1980. Fixed, savings, and current deposits of money in banks and similar
institutions shall be governed by the provisions concerning simple loan.
What happens if the depositor gives the depositary permission to use the thing?
Nature of Bank Deposits
It depends.
Bank deposits are really loans to a bank because the bank has the obligation to pay
If the principal purpose is still safekeeping, it retains its character as deposit. the depositor the amount deposited, but not the exact same money that was
However, if the thing deposited is money or other consumable thing and the deposited (as in deposit).
principal purpose is still safekeeping, it is an irregular deposit.
Since they are loans, they are governed by the provisions concerning mutuum or
If the purpose has become use or consumption of the thing: simple loan, not deposits.
1. It becomes commodatum if the thing deposited is non-consumable. Relationship is Debtor-Creditor

2. It becomes simple loan or mutuum if the thing deposited is money or other
consumable thing. The relationship between the bank and its depositors is thus that of debtor (bank)
and creditor (depositor). Hence:
Bank deposits are in the nature of an irregular deposit but they are really loans (See
Article 1980). 1. If the bank fails to pay its obligation to the depositor, it is not a breach of
trust arising from the depositary’s failure to return the subject matter of the
Art. 1979. The depositary is liable for the loss of the thing through a fortuitous deposit. Since there is no breach of trust, it will not constitute estafa
event: through misappropriation.
(1) If it is so stipulated;
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2. A bank can generally compensate or set off the deposit in its hands for the 1. When there is presumed authority – authority is presumed if the key has been
payment of any indebtedness to it on the part of the depositor, provided that delivered to him; or
the legal requisites of compensation are present. In a true deposit,
compensation is not allowed. 2. When there is necessity for opening the box in order to execute the
instructions of the depositor as regards the deposit
Art. 1981. When the thing deposited is delivered closed and sealed, the
depositary must return it in the same condition, and he shall be liable for JPSP example:
damages should the seal or lock be broken through his fault.
Shakadivas delivers a locked box to Tuks for deposit. Shak leaves right away without giving
Fault on the part of the depositary is presumed, unless there is proof to the Tuks an opportunity to ask him why there is a ticking sound coming from inside the box.
contrary. Tuks is afraid that it might be a bomb. Can he open it without liability?
As regards the value of the thing deposited, the statement of the depositor Tuks cannot. The only instances when a depositary can open the box without
shall be accepted, when the forcible opening is imputable to the depositary, incurring liability is if there is presumed authority or if there is necessity for
should there be no proof to the contrary. However, the courts may pass upon the opening it in order to execute the instructions of the depositor. These two
credibility of the depositor with respect to the value claimed by him. instances are not present in the situation of Tuks. He should just hope and pray
that it’s just a watch in there.
When the seal or lock is broken, with or without the depositary’s fault, he
shall keep the secret of the deposit. Art. 1983. The thing deposited shall be returned with all its products, accessories,
and accessions.
Art. 1982. When it becomes necessary to open a locked box or receptacle, the
depositary is presumed authorized to do so, if the key has been delivered to him; Should the deposit consist of money, the provisions relative to agents in
or when the instructions of the depositor as regards the deposit cannot be article 1896 shall be applied to the depositary.
executed without opening the box or receptacle.
The obligation of the depositary is to return the thing when the depositor demands,
A delivers a locked baul to B for safekeeping. What are B’s obligations? along with all its products, accessories, and accessions. The depositor is entitled
to the products, accessories, and accessions of the thing because he is the owner
1. B must return the baul in the same condition – it must be locked when of the thing.
returned.
2. If the lock of the baul is broken through B’s fault, he shall be liable to A for Art. 1984. The depositary cannot demand that the depositor prove his ownership
damages. B is presumed negligent until proved otherwise. of the thing deposited.
How is the value of the thing determined in case the baul is opened? Nevertheless, should he discover that the thing has been stolen and who its
Ultimately, the court will decide the value of damages that B should pay, true owner is, he must advise the latter of the deposit.
since the parties will always get into a dispute over the value of the thing
(i.e. A would inflate the price, B would undervalue it, etc.) If the owner, in spite of such information, does not claim it within the
period of one month, the depositary shall be relieved of all responsibility by
3. If the lock of the baul is broken, with or without B’s fault, B must keep the returning the thing deposited to the depositor.
secret of the deposit.
If the depositary has reasonable grounds to believe that the thing has not
If the contents of the baul turn out to be illegal – shabu, a dead body, a been lawfully acquired by the depositor, the former may return the same.
bloody bolo – the depositary should immediately call the cops. He may still
be held liable for the breach of his obligation as depositary but at least he The depositary cannot demand that the depositor prove his ownership of the thing
knows that he has done a greater good to society by reporting the dastardly deposited. This is because it is not essential that the depositor be the owner of the
deed to the authorities. The court just might exonerate him of liability for thing deposited.
the breach because of his fulfillment of a civic duty. Besides, I think that if
he keeps these things a secret, he can even be liable as an accessory to the When a third person appears to be the owner of the thing:
crime for helping conceal it.
1. If the depositary finds out that the thing was stolen AND he knows the real
When may B open the baul? owner, his obligation is to INFORM the real owner of the deposit (it is not to
return the thing to the real owner yet).
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The real owner must claim the thing within one month. If he claims it within Art. 1987. If at the time the deposit was made a place was designated for the
a month, the depositary should give it to the real owner. If the real owner return of the thing, the depositary must take the thing deposited to such place;
fails to make a claim within a month, the depositary’s obligation will be but the expenses for transportation shall be borne by the depositor.
extinguished by returning the thing to the depositor.
If no place has been designated for the return, it shall be made where the
2. If the depositary has reasonable grounds to believe that the thing has not thing deposited may be, even if it should not be the same place where the deposit
been lawfully acquired by the depositor, the depositary may return the thing was made, provided that there was no malice on the part of the depositary.
to the depositor (not to the real owner, since in this case, the real owner is
not known). Where to return the thing deposited:
Õ But according to JPSP, if the depositary discovers that the thing was stolen and 1. First, follow the stipulation of the parties. The expenses for transportation
someone else is claiming to be the real owner, the more prudent thing to do would shall be borne by the depositor since the deposit was constituted for his
be to file an action for interpleader and consign the thing in court. It is not safe to benefit.
follow 1984 because if the claim of the alleged real owner turns out to be false, the
depositary will be liable for giving the thing to someone else or for refusing to 2. If there is no stipulation, follow 1987 – the thing should be returned at the
return it to the depositor (estafa). place where the thing deposited may be, even if it was not the same place
where the deposit was constituted.
Art. 1985. When there are two or more depositors, if they are not solidary, and
the thing admits of division, each one cannot demand more than his share. However, there must be no malice on the part of the depositary. For
example, the depositary, not wanting to return the thing anymore, moves it
When there is solidarity or the thing does not admit of division, the provisions of to the Cordillera mountains, so that the depositor would have a hard time
Articles 1212 and 1214 shall govern. However, if there is a stipulation that the claiming it. In this case, the depositary would be liable for damages.
thing should be returned to one of the depositors, the depositor shall return it
only to the person designated. Art. 1988. The thing deposited must be returned to the depositor upon demand
even though a specified period of time for such return may have been fixed.
When there are two or more depositors, the default rule is like that in joint
obligations – each depositor cannot demand more than his share from the This provision shall not apply when the thing is judicially attached while in
depositary. This rule applies if the thing is divisible and there is no solidarity the depositary’s possession or should he have been notified of the opposition of a
among the depositors. third person to the return or the removal of the thing deposited. In these cases,
the depositary must immediately inform the depositor of the attachment or
If there is solidarity or if the thing is indivisible, the rule on solidary obligations is opposition.
applicable. Each one of the depositors may do whatever may be useful to the
others but not anything which may be prejudicial. The depositary can return the GENERAL RULE: The depositary must return the thing upon demand by the depositor even if
thing deposited to any of the depositors unless a demand for its return has been the period for the deposit has not lapsed.
made by one of them, in which case, delivery should be made to him who made the
demand. If the deposit is for compensation, and the depositor demands the return of the
thing before the period for deposit has lapsed, the depositor must still pay the
The parties may also stipulate that the thing be returned to a specific depositor. In depositary the full compensation agreed upon. This is because the period in this
this case, the depositary can only return to the depositor stipulated, even if he case is for the benefit of both the depositary and the depositor.
does not make a demand.
EXCEPTION TO THE GENERAL RULE: The depositary should not return the thing to the
Art. 1986. If the depositor should lose his capacity to contract after having made depositor if there is a court order enjoining him from returning the thing to the
the deposit, the thing cannot be returned except to the persons who may have depositor (when there is attachment).
the administration of his property and rights.
The law says that the depositary can also refuse to return the thing if there is an
The thing deposited must be returned only to a person who is capacitated. If the opposition to its return by a third person (here, there is no court order). However,
depositor should subsequently lose capacity, the depositary should return it to his as discussed earlier, the more prudent thing to do in this case is not to refuse to
representative. return the thing to the depositor but to file an action for interpleader because there
is a danger that the depositary would be liable for damages if the claim of the third
(See discussion under Article 1970 on deposit by tinedyers) person turns out to be false.
Art. 1989. Unless the deposit if for a valuable consideration, the depositary who
may have justifiable reasons for not keeping the thing deposited may, even
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before the time designated, return it to the depositor; and if the latter should Take note that A has no right to recover the car itself. Also, there must be good
refuse to receive it, the depositary may secure its consignation from the court. faith on the part of the heir and the third party buyer. If there was bad faith, the
depositor can recover the car itself. Moreover, the heir will be liable for estafa.
As a general rule, the depositary should wait for either the period of the deposit to
lapse or for the depositor to demand the return of the thing before he can return Section 3 Obligations of the Depositor
the thing deposited.
Art. 1992. If the deposit is gratuitous, the depositor is obliged to reimburse the
But, if the following requisites are present, he may return the thing to the depositary for the expenses he may have incurred for the preservation of the
depositor even before the period of the deposit has lapsed or before it is thing deposited.
demanded:
If the deposit is gratuitous, the depositor should shoulder the costs of preservation
1. The deposit must be gratuitous; and because he is the owner of the thing.
2. There must be a justifiable reason.
If the deposit is for compensation, the depositary should shoulder the costs of
If the depositary refuses to accept, the depositor can consign the thing in court. preservation of the thing because the compensation is deemed to include the costs
of preservation.
But if the deposit is for compensation, the depositary cannot return the thing until
the expiration of the period or until it is demanded by the depositor. Example: A deposits a dog with B for 30 days for a compensation of P500. B buys a sack of
dog food. By the 10th day, the dog food has run out. Can B ask for more money from A?
Art. 1990. If the depositary by force majeure or government order loses the thing
and receives money or another thing in its place, he shall deliver the sum or the A can refuse to give more money and argue that in charging the compensation for
thing to the depositor. the deposit, B should have factored in the expected expenses of preserving the
dog. But it still depends on the intention of the parties.
The depositary is not liable for the loss of the thing either by force majeure or
government order. Art. 1993. The depositor shall reimburse the depositary for any loss arising from
the character of the thing deposited, unless at the time of the constitution of the
But, if in place of the thing lost, the depositary receives money or another thing, he deposit, the former was not aware of, or was not expected to know the
must deliver it to the depositor. dangerous character of the thing, or unless he notified the depositary of the
same, or the latter was aware of it without advice from the depositor.
Ex: If the thing is expropriated by the government, the indemnity paid by the
government must be turned over by the depositary to the depositor. GENERAL RULE: The depositor should compensate the depositary for any loss that the
depositary may suffer from the character of the thing deposited.
Art. 1991. The depositor’s heir who in good faith may have sold the thing which
he did not know was deposited, shall only be bound to return the price he may Example: A deposits a dog with B. It turns out that the dog has rabies. The dog
have received or to assign his right of action against the buyer in case the price bites B, and as a result, B has to get anti-rabies shots. A must pay for the damage
has not been paid him. caused and the cost of B’s shots.
First, take note that there seems to be a typo in this provision: it should read “The EXCEPTIONS: In the following cases, the depositor need not reimburse the
depositary’s heir…” if it is to make any sense. depositary for any loss arising from the character of the thing deposited:
This contemplates the following situation: 1. If at the time of the deposit, the depositor was not aware of the dangerous
character of the thing;
A deposits a car with B. While the car is still in B’s custody, B dies. C, B’s son,
finds the car among his dad’s stuff and thinks that the car belonged to his dad. C 2. If at the time of the deposit, the depositor was not expected to know the
sells the car to D. What are the liabilities of C? dangerous character of the thing;
If D has already paid C, C must return to A the price that D paid for the car (not the 3. If the depositor notified the depositary of the dangerous character of the
value of the car). thing; or
If D has not yet paid, C may assign to A his right to collect from D the selling price 4. If the depositary was aware of the dangerous character of the thing even
of the car. without the advice of the depositor.
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Art. 1994. The depositary may retain the thing in pledge until full payment of employees, of the effects brought by the guests and that, on the part of the latter,
what may be due him by reason of the deposit. they take the precautions which said hotel-keepers or their substitutes advised
relative to the care and vigilance of their effects.
This is an example of a pledge created by operation of law. The depositary may
keep the thing deposited as a security for anything that the depositor may owe Art. 1999. The hotel-keeper is liable for the vehicles, animals and articles which
him, but it has to be by reason of the deposit. have been introduced or placed in the annexes of the hotel.
Compare this rule with the rule in commodatum, in which the borrower may Art. 2168. When during a fire, flood, story, or other calamity, property is saved
generally not retain the thing as a security for anything that the lender may owe from destruction by another person without the knowledge of the owner, the
him (remember the frisbee example?). latter is bound to pay the former just compensation.
Art. 1995. A deposit is extinguished: What are the instances when deposit is NECESSARY?
(1) Upon the loss or destruction of the thing deposited; There are FOUR instances/ examples of necessary deposit:
(2) In case of a gratuitous deposit, upon the death of either the depositor or the 1. Deposit made in compliance with a legal obligation
depositary. 2. Deposit that takes place on the occasion of any calamity
3. Deposit of effects made by travelers in hotels or inns
Causes for extinguishment of deposit: 4. Deposit of goods with common carriers
1. loss or destruction of the thing deposited

2. In case of gratuitous deposit, upon the death of either the depositor or the 1. Deposit made in compliance with a legal obligation
depositary
Example:
But if the deposit is for compensation, it is not extinguished by the death of
either party since it is not personal in nature. Hence, the rights and In pledge, when the creditor uses the thing pledged without the authority of
obligations of the parties are transmissible to their heirs. the owner or misuses it in any other way, the owner may ask that it be
judicially or extrajudicially deposited.
3. return of the thing
4. novation 2. Deposit that takes place on the occasion of any calamity
5. merger
6. expiration of the term Example: A fire razes Y’s house. X goes inside and gets Y’s TV for the
7. fulfillment of resolutory condition purpose of saving it. X becomes the depositary of the TV.
CHAPTER 3 NECESSARY DEPOSIT The relationship of X and Y, being a deposit, is governed by the provisions on
voluntary deposit. But in addition, it is also governed by Art. 2168 on quasi-
contracts. Art. 2168 says that the owner of the thing should pay the depositary
Art. 1996. A deposit is necessary: just compensation for his expenses in preserving the thing. So unlike a
voluntary deposit, which is by default gratuitous, this kind of necessary
(1) When it is made in compliance with a legal obligation; deposit is, by express provision of law, for compensation.
(2) When it takes place on the occasion of any calamity, such as fire, storm, 3. Deposit of effects made by travelers in hotels or inns
flood, pillage, shipwreck, or other similar events.
Requisites before the hotel or inn may be held responsible as depositary:
Art. 1997. The deposit referred to in No. 1 of the preceding article shall be
governed by the provisions of the law establishing it, and in case of its deficiency, a. The hotel or inn should have been previously informed about the effects
by the rules on ordinary deposit. brought by the guests; and
The deposit mentioned in No. 2 of the preceding article shall be regulated b. The guests have taken the precautions prescribed regarding their
by the provisions concerning voluntary deposit and by article 2168. safekeeping.
Art. 1998. The deposit of effects made by travelers in hotels or inns shall also be The liability extends not just to effects inside the rooms but also to property
regarded as necessary. The keepers of hotels or inns shall be responsible for of the guests in the annexes, such as cars in the garage.
them as depositaries, provided that notice was given to them, or to their
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1. When the loss is caused by the employees of the hotel or by strangers,

Example: You go to Edsa Shangri-La to eat at the Garden Café. You turn your car provided the guest followed the two requisites under Art. 1998 (notice and
over to the valet. Is there a contract of deposit? precaution).
Yes. You don’t have to actually get a room in order to be considered a 2. When the loss is caused by the act of a thief or a robber done without the
guest for purposes of constituting the contract of deposit with the hotel. As use of arms and irresistible force.
long as you use the main facilities of the hotel, you’re considered a guest.
When is the hotel NOT liable?
What if you wanted to shop in Megamall, but since you didn’t want to go through the
trouble of looking for parking in Megamall, you just used the Edsa Shangri-La valet 1. When the loss or injury is caused by force majeure, like flood, fire, theft or
service – are you still a guest? robbery by a stranger with the use of arms or irresistible force, UNLESS the
hotel-keeper is guilty of fault or negligence in failing to provide against the
No. Although you need not check-in in order to be considered a guest, you loss or injury from this cause.
must at least use the principal services of the hotel – the gym, the pool,
meeting place at the lobby, etc. Valet parking is not a principal service of So as a general rule, if armed men enter the hotel and steal your things, the
the hotel. hotel is excused from liability because it is considered a fortuitous event.
However, if the hotel failed to take reasonable precautions (ex: secluded
If you’re the guest, you should: (a) give notice to the hotel of the effects you island with only one security guard stationed near the shore and lots of
have brought into the hotel and (b) take the precautions prescribed for their foreigners checked in), it will still be liable for its negligence.
safekeeping.
2. When the loss is due to the acts of the guest (who is the owner of the thing),
But do you need to give an itemized listing of your valuables every time you go into his family, servants, or visitors; and
a hotel?
3. When the loss arises from the character of the things brought into the hotel
No. Constructive notice to the employees of the hotel is enough. It is
sufficient that you bring in your personal effects and the hotel personnel see Example of thing where the loss arises from the character of the thing: If
them. you bring a Dalmatian, or a snake, or Cyrus’ pet hamster into the hotel, by
the very nature of these pets, they could easily get lost in the premises.
4. Deposit of goods with common carriers
Art. 2003. The hotel-keeper cannot free himself from responsibility by posting
This is governed by Articles 1733, 1734, 1735 of the Civil Code under Lease. notices to the effect that he is not liable for the articles brought by the guest.
Common carriers are generally responsible for the loss, destruction, and Any stipulation between the hotel-keeper and the guest whereby the
deterioration of the goods, unless due to fortuitous event or the fault of the responsibility of the former as set forth in Articles 1998 to 2001 is suppressed or
owner of the goods. diminished shall be void.
Art. 2000. The responsibility referred to in the two preceding articles shall include Even if the hotel-keeper posts signs or puts these little fine-print stipulations that
the loss of, or injury to the personal property of the guests caused by the it is not liable for any loss, it cannot escape its liabilities as a depositary under
servants or employees of the keepers of hotels or inns as well as by strangers; Articles 1998 to 2001.
but not that which may proceed from any force majeure. The fact that travelers
are constrained to rely on the vigilance of the keeper of the hotels or inn shall be Reason: You cannot waive the liability of one who is guilty of gross negligence.
considered in determining the degree of care required of him. Gross negligence is equivalent to fraud or bad faith. And as we all know, a waiver
of future fraud is void. It is contrary to law, morals, and public policy.
Art. 2001. The act of a thief or robber, who has entered the hotel is not deemed
force majeure, unless it is done with the use of arms or through an irresistible However, this only applies to a contract of deposit. In the case of carparks, the
force. fine print on the tickets always contains a waiver of liability by the owner of the
carpark for any loss within its premises. This waiver is valid because, as discussed
Art. 2002. The hotel-keeper is not liable for compensation if the loss is due to the already, the contract with the carpark is not a deposit but only a short-term lease.
acts of the guests, his family, servants or visitors, or if the loss arises from the
character of the things brought into the hotel. Art. 2004. The hotel-keeper has a right to retain the things brought into the hotel
by the guest, as a security for credits on account of lodging, and supplies usually
When is the hotel liable for the loss of the effects of its guests? furnished to hotel guests.
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This is another pledge created by operation of law. If you do not pay your hotel The person appointed by the court as depositary has the obligation to take care of
bills, the hotel can keep your stuff as a security. Moreover, you will be liable for the thing with the diligence of a good father of a family. He may not be relieved of
estafa. his responsibility until the litigation is ended or until the court so orders.
CHAPTER 4 SEQUESTRATION OR JUDICIAL DEPOSIT DISTINCTIONS BETWEEN JUDICIAL AND EXTRA-JUDICIAL DEPOSIT
Art. 2005. A judicial deposit or sequestration takes place when an attachment or JUDICIAL DEPOSIT EXTRA-JUDICIAL DEPOSIT
seizure of property in litigation is ordered. CAUSE OR ORIGIN By will of the court By will of the parties;
hence there is a contract
Art. 2006. Movable as well as immovable property may be object of PURPOSE To secure the right of a Safekeeping
sequestration. party to recover in case of
favorable judgment
Art. 2007. The depositary of property or objects sequestrated cannot be relieved SUBJECT MATTER Movable or immovable Only movable property
of his responsibility until the controversy which gave rise thereto has come to an property
end, unless the court so orders. REMUNERATION The depositary is always As a rule, it is gratuitous,
compensated; therefore it though the parties may
Art. 2008. The depositary of property sequestrated is bound to comply, with is onerous stipulate otherwise
respect to the same, with all the obligations of a good father of a family. IN WHOSE BEHALF IT IS In behalf of the person In behalf of the depositor
HELD who, by the judgment, or the third person
What is judicial deposit? has a right designated
Judicial deposit is a deposit pursuant to a court order – when an attachment or Art. 2009. As to matters not provided for in this Code, judicial sequestration shall
seizure of property in litigation is ordered by a court. be governed by the Rules of Court.
Examples:
That’s all folks. Sorry, I didn’t include Warehouse Receipts Law anymore
1. attachment of properties by sheriff upon the filing of a complaint because it’s probably going to be just 5% of the exam, according to JPSP.
2. garnishment of money Good luck!
3. receiver may be appointed by the court to administer and preserve the
May the power of greyskull be with us all ☺
property in litigation
4. personal property may be seized by the sheriff in suits of replevin
What is the purpose of judicial deposit?
Unlike extra-judicial deposit, where the purpose is safekeeping, the purpose of

judicial deposit is to maintain the status quo during the pendency of the litigation to
insure the right of the parties to the property in case of a favorable judgment. This
means that in case of favorable judgment, the party will be assured that there will
be property to satisfy the execution of the judgment.
What may be the object of judicial deposit?
Unlike extra-judicial deposit, where the object must be a movable, a judicial

deposit can cover both movable and immovable property.
How do you deposit an immovable?
You annotate the attachment on the title with the Register of Deeds.
What are the obligations of the depositary of sequestrated property?

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hange E hange E

Commodatum is essentially gratuitous.

Sheryl IID 2002 PAGE 1 Sheryl IID 2002 PAGE 2

Sheryl IID 2002 PAGE 3 Sheryl IID 2002 PAGE 4

Sheryl IID 2002 PAGE 5 Sheryl IID 2002 PAGE 6

CHAPTER 2 SIMPLE LOAN OR MUTUUM

Sheryl IID 2002 PAGE 7 Sheryl IID 2002 PAGE 8

Sheryl IID 2002 PAGE 9 Sheryl IID 2002 PAGE 10

b. onerous: the guarantor receives valuable consideration for acting as guarantor

Sheryl IID 2002 PAGE 11 Sheryl IID 2002 PAGE 12

5. As to scope and extent:

Is Tuks a surety or a solidary debtor? According to JPSP, based on this document

Sheryl IID 2002 PAGE 13 Sheryl IID 2002 PAGE 14

Sheryl IID 2002 PAGE 15 Sheryl IID 2002 PAGE 16

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(1) When he is sued for payment;

Sheryl IID 2002 PAGE 25 Sheryl IID 2002 PAGE 26

In these cases, the guaranty is extinguished altogether.

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WHAT IS THE CONSIDERATION IN PLEDGE?

WHAT ARE THE DIFFERENCES BETWEEN PLEDGE AND MORTGAGE?

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OR He is not prejudiced by any waiver of defense by the principal obligor.

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Can you mortgage future property? Can there be an oral mortgage?

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Example: Mortgagor mortgaged a house and lot to A. Later, Mortgagor also

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a. it must be BEFORE the registration of the sale

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EFFECTS ON THE JUNIOR MORTGAGE CHATTEL MORTGAGE

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FORM OF CERTIFICATE OF OATH

In the Province of Rizal, personally appeared Sheryl Tanquilut, Xilca

Cayo IID 2002 PAGE 57 Cayo IID 2002 PAGE 58

What happens if there is no affidavit of good faith?

What the parties should do is to execute a new document/ deed of chattel

Can you mortgage future property?

What happens when the mortgagor pays the obligation?

What happens when the mortgagor defaults on the obligation?

If an attaching creditor redeems, he is subrogated to the rights of the

Cayo IID 2002 PAGE 59 Cayo IID 2002 PAGE 60

But once the property is sold at auction, there can be no redemption

Cayo IID 2002 PAGE 61 Cayo IID 2002 PAGE 62

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2. Apply the fruits

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What is the difference between preference of credit and a lien?

What is preference of credit?

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Special Preferred Credits (2241 and 2242)