CIVIL LAW REVIEWER TABLE of CONTENTS

CREDIT TRANSACTIONS
Table of Contents

Chapter I. General Principles ......................307 Chapter VIII. Concurrence and Preference of

I. Types of Credit Transactions ............307 Credits........................................................... 338
II. Security .............................................307 I. General Provisions............................ 338
III. Bailment ............................................307 II. Classification of Credits .................... 338
III. Preference of Credits ........................ 338
Chapter II. Loan (Arts. 1933-1961, CC).......309
I. Definition ...........................................309
II. Characteristics of a Loan ..................309
III. Kinds of Loan: In General .................309
IV. Commodatum....................................309
V. Obligations of the Bailee in
Commodatum ............................................310
VI. Obligations of the Bailor in
Commodatum ............................................311
VII. Mutuum or Simple Loan................311
VIII. Interests ........................................312
IX. The Usury Law ..................................312

Chapter III. Deposit ......................................314

I. Definition ...........................................314 306
II. Kinds of Deposit ................................314

CREDIT TRANSACTIONS
III. Characteristics of Deposit .................314
IV. Deposit Distinguished From Mutuum
and Commodatum .....................................314
V. Obligations of the Depositary............314
VI. Obligations of the Depositor..............317
VII. Extinguishment of Deposit (Art. 1995)
317
VIII. Necessary Deposit........................317
IX. Judicial Deposit .................................318

Chapter IV. Guaranty ...................................319

I. Definition ...........................................319
II. Characteristics ..................................319
III. Classification .....................................319
IV. Rules Governing Guaranty ...............319
V. Guaranty Distinguished from Others.322
VI. The Guarantor (Arts. 2056-2057)......322
VII. Effects of Guaranty .......................322
VIII. Extinguishment of Guaranty .........325

Chapter V. Legal and Judicial Bonds.........326

Chapter VI. Suretyship.................................327

Chapter VII. Pledge, Mortgage, Antichresis

.......................................................................328
I. Essential Requisites Common to Pledge
and Mortgage (Art. 2085)...........................328
II. Pledge ...............................................329
III. Mortgage ...........................................332
IV. Foreclosure of Mortgage (Art. 2085).334
V. Antichresis.........................................336
VI. Chattel Mortgage...............................336
CIVIL LAW REVIEWER Chapter I. GENERAL PRINCIPLES

Chapter I. General Principles

CREDIT TRANSACTIONS TEAM

CREDIT TRANSACTIONS
Prof. Roberto N. Dio I. TYPES OF CREDIT TRANSACTIONS
Faculty Editor
II. SECURITY
Katrina Elena Guerrero III. BAILMENT
Lead Writer
Diana Gervacio CREDIT TRANSACTIONS - include all
Patricia Andrea Hernandez transactions involving the purchase or loan of
Mark Luciano
Ixara Maroto
goods, services or money in the present with a
Writers promise to pay or deliver in the future (contract
of security)
CIVIL LAW
Kristine Bongcaron I. Types of Credit Transactions
Patricia Tobias
Subject Editors
Secured transactions or contracts of real
ACADEMICS COMMITTEE security – Those supported by collateral or an
Kristine Bongcaron encumbrance of property
Michelle Dy
Patrich Leccio Unsecured transactions or contracts of
Editors-in-Chief personal security – Those the fulfillment of
PRINTING & DISTRIBUTION which by the principal debtor is secured or
supported only by a promise to pay or the
Kae Guerrero personal commitment of another such as a
DESIGN & LAYOUT guarantor or surety
307
Pat Hernandez

CREDIT TRANSACTIONS
Viktor Fontanilla
Rusell Aragones II. Security
Romualdo Menzon Jr.
Rania Joya SECURITY - something given, deposited or
LECTURES COMMITTEE serving as a means to ensure the fulfillment or
enforcement of an obligation or of protecting
Michelle Arias some interest in property.
Camille Maranan
Angela Sandalo
Heads 2 TYPES OF SECURITY
1. Personal Security – as when an individual
Katz Manzano Mary Rose Beley
Sam Nuñez Krizel Malabanan becomes a surety or a guarantor
Arianne Cerezo Marcrese Banaag 2. Real Security - as when a mortgage,
Volunteers pledge, antichresis, charge or lien or other
device used to have property held, out of
MOCK BAR COMMITTEE which the person to be made secure can be
Lilibeth Perez compensated for loss. Thus, a secured
creditor is one who holds a security from his
BAR CANDIDATES WELFARE debtor for payment of the latter’s debts.
Dahlia Salamat

LOGISTICS
III. Bailment
Charisse Mendoza

SECRETARIAT COMMITTEE BAILMENT - the delivery of property of one

person to another in trust for a specific purpose,
Jill Hernandez with a contract, express or implied, that the trust
Head
shall be faithfully executed and the property
Loraine Mendoza Faye Celso returned or duly accounted for when the special
Mary Mendoza Joie Bajo purpose is accomplished or kept until the bailor
Members
reclaims it.

[NOTE: The word “bailment” comes from the

French word “bailer,” meaning “to deliver”]
CIVIL LAW REVIEWER Chapter I. GENERAL PRINCIPLES

PARTIES IN BAILMENT
1. Bailor – the giver, the party who delivers
possession/custody of the thing bailed
2. Bailee – the recipient, the party who
receives the possession/custody of the thing
delivered

KINDS OF CONTRACTUAL BAILMENT

(With Reference to Compensation)
1. Those for the sole benefit of the bailor,
e.g. gratuitous deposit (Art.1965) and
mandatum, i.e., where the mandatory or
person to whom the property is delivered
undertakes to do some act with respect to
the same
2. Those for the sole benefit of the bailee,
e.g. commodatum and gratuitous simple
loan or mutuum (Art.1933)
3. Those for the benefit of both parties, e.g.
deposit for a compensation, involuntary
deposit, pledge and bailments for hire
a. Hire of things – for the temporary use
of the hirer (i.e. lease, Arts.1642-1643)
b. Hire of service – for work or labor upon 308
the goods delivered (i.e. contract for

CREDIT TRANSACTIONS
piece of work, Art.1713)
c. Hire for carriage of goods – for goods
delivered to be carried from place to
place by a common carrier (Art.1732) or
private person
d. Hire of custody – for storage of goods
delivered (Arts.1507-1520, Warehouse
Receipts Law)

Contract where one of the parties (Seller)

obligates himself to:
 Transfer ownership of and
 to deliver a determinate thing;
and the other (Buyer) to pay a price certain in
money or its equivalent.
CIVIL LAW REVIEWER Chapter II. LOAN

Borrower must return Borrower need only

Chapter II. Loan (Arts. 1933-1961, CC) the same thing loaned pay the same amount
(Art.1933) of the same kind and
I. DEFINITION quality
II. CHARACTERISTICS OF A LOAN May involve real or Refers only to personal
III. KINDS OF LOAN: IN GENERAL personal property property
IV. COMMODATUM (Art.1937)
V. OBLIGATIONS OF THE BAILEE IN Loan for use or Loan for consumption
COMMODATUM temporary possession
VI. OBLIGATIONS OF THE THE BAILOR IN (Art.1935)
COMMODATUM Bailor may demand the Lender may not
VII. MUTUUM OR SIMPLE LOAN return of the thing demand its return
VIII. INTERESTS loaned before the before the lapse of the
IX. THE USURY LAW expiration of the term term agreed upon
in case of urgent need
(Art.1946)
Bailor suffers the loss Borrower suffers the
I. Definition of the subject matter loss even if caused
since he is the owner exclusively by a
LOAN - a contract by which one of the parties (Art.1942; Art.1174) fortuitous event and he
delivers to another, either something not is not, therefore,
consumable so that the latter may use the same discharged from his
duty to pay
for a certain time and return it, in which case the
Not purely personal in Purely personal in
contract is called commodatum; or money or
character character
other consumable thing, upon the condition that
the same amount of the same kind and quality A thing is consumable when it is used in a
shall be paid, in which case the contract is 309
manner appropriate to its purpose or nature.
simply called a loan or mutuum. (Art.1933)

CREDIT TRANSACTIONS
(Art 418)

GENERAL RULE: If the subject of the contract

II. Characteristics of a Loan
Real contract
1. delivery is essential for perfection of the
contract of loan.
2. An accepted promise to loan, is
nevertheless binding on the parties, it being
a consensual contract.
is a consumable thing, such as money, the
contract would be a mutuum.
EXCEPTION: Consumable goods may be the
subject of commodatum if the purpose of the
contract is not the consumption of the object, as
when it is merely for exhibition. (Art.1936)
[Producer’s v. CA, 397 SCRA 651]

Unilateral contract
1. creates obligations on only one party, i.e., IV. Commodatum
the borrower
2. In a contract of loan, the cause is, as to the 2 KINDS OF COMMODATUM
borrower, the acquisition of the thing, and as 1. Ordinary commodatum - See Art.1933
to the lender, the right to demand its return 2. Precarium – one whereby the bailor may
or its equivalent. (Monte de Piedad v. Javier)
demand the thing loaned at will; exists in
cases where:
III. Kinds of Loan: In General a. neither the duration of the contract nor
the use to which the thing loaned should
Commodatum Mutuum be devoted has been stipulated
Ordinarily involves Involves money or b. if the use of the thing is merely tolerated
something not other consumable thing by the owner (Art 1947)
consumable*
(Art.1936) GENERAL RULE: In a commodatum, the right
to use is limited to the thing loaned, and not to
Ownership of the thing Ownership is
its fruits
loaned is retained by transferred to the
lender (Art.1933) borrower
Essentially gratuitous Maybe gratuitous or it EXCEPTION: When there is stipulation to the
(Art.1933) maybe onerous, i.e. contrary (Art.1940). In cases where there is
with stipulated interest such a stipulation, enjoyment of the fruits must
CIVIL LAW REVIEWER
be incidental to the use of the thing itself.
Otherwise, if the use of the fruits is the main
cause, the contract may be one of usufruct.
(Art.562)
What is the effect of an accepted promise to
deliver by way of commodatum or mutuum?
It is binding upon the parties, but the
contract of loan shall not be perfected until
delivery of the contract. (Art.1934)
Who may be bailor in commodatum?
1. Anyone. The bailor in commodatum need
not be the owner of the thing loaned.
(Art.1938)
2. But the bailee himself may not lend nor
lease the thing loaned to him to a third
person (Art 1939(2))
_______
GENERAL RULE: Commodatum is purely
personal in character (Art.1939) such that:
1. Death of either party extinguishes the
contract
2. Bailee can neither lend nor lease the thing
lent to him to a third person
EXCEPTION: Members of the bailee’s
household may make use of the thing loaned
EXCEPTION TO EXCEPTION: Bailee’s
household may NOT use it when:
1. There is stipulation to the contrary, or
2. The nature of the thing forbids such use
V. Obligations of the Bailee in
Commodatum
OBLIGATIONS OF THE BAILEE
1. Obligation to pay for the ordinary expenses
for the use and preservation of the thing
loaned (Art.1941)
2. Obligation to take good care of the thing with
the diligence of a good father of a family
(Art.1163)
3. Liability for loss, even if loss through
fortuitous event, in certain circumstances
(Art.1942)
4. Liability for deterioration of thing loaned,
except under certain circumstances
(Art.1943)
5. Obligation to return the thing upon expiration
of term or upon demand in case of urgent
need
Chapter II. LOAN
6. Solidary obligation where there are 2 or
more bailees to whom a thing was loaned in
the same contract (Art.1945)
_______
GENERAL RULE: Bailee is not liable for loss or
damage due to a fortuitous event (Art.1174),
since the bailor retains ownership of the thing
EXCEPTION: Bailee is liable even for loss due
to a fortuitous event when: (Art 1942)
1. He devotes the thing to any purpose
different from that for which it was loaned
2. He keeps it longer than the period
stipulated, or after the accomplishment of
the use for which the commodatum has
been constituted
3. The thing loaned has been delivered with
appraisal of its value, unless there is
stipulation exempting the bailee from
responsibility in case of a fortuitous event
4. He lends or leases the thing to a third
person who is a not a member of his
household
5. Being able to save either the thing borrowed 310
or his own thing, he chose to save the latter.
CREDIT TRANSACTIONS
_______
GENERAL RULE: Bailee is liable for
deterioration of thing loaned.
EXCEPTION: The deterioration of the thing is
due only to the use thereof and without his fault
(Art.1943)
_______
GENERAL RULE: Bailee has no right of
retention of the thing loaned, on the ground that
the bailor owes him something.
EXCEPTION: Bailee has a right of retention for
damages for known hidden flaws mentioned in
Art 1951. (Art.1944)
REQUISITES FOR THE APPLICATION OF
ART.1951
1. There is a flaw or defect in the thing loaned
2. The flaw or defect is hidden
3. The bailor is aware thereof
4. He does not advise the bailee of the same
5. The bailee suffers damages by reason of
said flaw or defect
CIVIL LAW REVIEWER Chapter II. LOAN

VI. Obligations of the Bailor in VII. Mutuum or Simple Loan

Commodatum
1. To allow the bailee the use of the thing
loaned for the duration of period stipulated
or until the accomplishment of the purpose
for which commodatum was constituted.
A mutuum or simple loan is a contract by
which a person (creditor) delivers to another
(debtor) money or other consumable thing with
the understanding that the same amount of the
same kind and quality shall be paid. (Art.1953)

EXCEPTIONS: MUTUUM AND LEASE DISTINGUISED

a. Urgent need during which time the
commodatum is suspended (Art.1946) MUTUUM LEASE
b. Precarium (Art.1947) Object is money or any Object may be any
 If duration of the contract has not consumable (fungible) thing, whether movable
been stipulated thing or immovable, fungible
 If use or purpose of the thing has
or non-fungible
Thing loaned becomes Owner does not lose
not been stipulated
 If use of thing is merely tolerated by
property of debtor his right of ownership
Relationship created is Relationship created is
the bailor that of creditor and that of landlord and
c. Bailee commits an act of ingratitude debtor tenant or lessor and
specified in Art. 765 (Art.1948):
 Commission of offenses against the
lessee (Tolentino v.
Gonzales, 50 Phil 558)
person, the honor, or the property of
the bailor, or of his wife or children MUTUUM AND COMMODATUM
under his parental authority DISTINGUISHED FROM BARTER
 Imputing to the bailor any criminal 1. In mutuum, subject matter is money or any 311
offense, or any act involving moral other fungible things; in barter, non-fungible

turpitude, even though he should
prove it, unless the crime or the act
has been committed against the
bailee himself, his wife, or children
under his authority
 Undue refusal to give the bailor
support when the bailee is legally or
morally bound to
[NOTE: Article 765 is applicable, because
like donation, commodatum is essentially
gratuitous. (Art.1933, par.2)]
2. To refund extraordinary expenses for the
preservation of the thing loaned provided
bailor is notified before the expenses were
incurred. (Art.1949)
 EXCEPTION: Urgent need hence no
notice is necessary.
3. To refund 50% of the extraordinary
expenses arising from actual use of bailee of
the thing loaned (Art.1949)
 EXCEPTION: Contrary stipulation
4. To pay damages to bailee for known hidden
flaws in the thing loaned.
[NOTE: Bailor has no right of abandonment;
he cannot exempt himself from payment of
expenses to bailee by abandoning the thing to
the latter. (art. 1952)]
CREDIT TRANSACTIONS
(non-consumable) things.
2. In commodatum, the bailee is bound to
return the identical thing borrowed when the
time has expired or the purpose has been
served. In barter, the equivalent thing is
given in return for what has been received.
3. Mutuum may be gratuitous and
commodatum is always gratuitous. Barter
on the other hand is an onerous contract. It
is really a mutual sale.
[NOTE: BARTER – contract where by one of the
parties binds himself to give one thing in
consideration of the other’s promise to give
another thing. (Art.1968)]
CONSUMABLE AND FUNGIBLE
DISTINGUISHED
 Whether a thing is consumable or not
depends on its nature and whether it is
fungible or not depends on the intention of
the parties.
 Example: Wine is consumable by nature, but
it may be non-fungible if the intention is
merely for display or exhibition.
[NOTE: Fixed, savings, and current deposits of
money in banks and similar institutions shall be
governed by the provisions concerning simple
loan. (Art.1980)]
CIVIL LAW REVIEWER
VIII. Interests
INTEREST – is the compensation allowed by
law or fixed by the parties for the loan or
forbearance of money, goods or credits
KINDS OF INTEREST
1. Simple interest – Paid for the principal at a
certain rate fixed or stipulated by the parties.
2. Compound Interest – that which is
imposed upon interest due and unpaid.
3. Legal Interest – that which the law directs
to be charged in the absence of any
agreement as to the rate between the
parties.
4. Lawful Interest – that which the laws allow
or do not prohibit
5. Unlawful or Usurious Interest – paid or
stipulated to be paid beyond the maximum
fixed by law. However, by virtue of CB
Circular 905, usury has become “legally
inexistent.”
When is compound interest allowed?
1. When there is an express written stipulation
to that effect (Art.1959)
2. Upon judicial demand. HOWEVER, debtor
is not liable to pay compound interest even
after judicial demand when there is no
stipulation for payment of interest. (Art.2212)
REQUISITES FOR INTEREST TO BE
CHARGEABLE
1. Must be expressly stipulated
2. Agreement must be in writing (Art.1956)
3. Must be lawful
EXCEPTIONS TO REQUISITE OF EXPRESS
STIPULATION
1. The debtor in delay is liable to pay legal
interest (6% or 12%) as indemnity for
damages (Art.2209)
2. Interest accruing from unpaid interest –
Interest demanded shall earn interest from
the time it is judicially demanded (Art.2212)
or where there is an express stipulation
(Art.1959)
RULES FOR AWARD OF INTEREST IN THE
CONCEPT OF ACTUAL & COMPENSATORY
DAMAGES (Eastern Shipping Lines v. CA, 234
SCRA 78)
1. When obligation is breached consists in
the payment of a sum of money, i.e., a
loan or forbearance of money, the interest
due should be that which may have been
stipulated in writing. Furthermore, the
interest due shall itself earn legal interest
Chapter II. LOAN
from the time it is judicially demanded. In
the absence of stipulation, the rate of
interest shall be 12% per annum to be
computed from default, i.e., from judicial or
extrajudicial demand under and subject to
the provisions of Art.1169.
2. When an obligation, not constituting a
loan or forbearance of money, is
breached, an interest on the amount of
damages awarded may be imposed at the
discretion of the court at the rate of 6% per
annum. No interest, however, shall be
adjudged on unliquidated claims or
damages except when or until the demand
can be established with reasonable
certainty. Accordingly, where the demand is
established with reasonable certainty, the
interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art.
1169) but when such certainty cannot be so
reasonably established at the time the
demand is made, the interest shall begin to
run only from the date the judgment of the
court is made (at which time the 312
quantification of damages may be deemed
CREDIT TRANSACTIONS
to have been reasonably ascertained). The
actual base for the computation of legal
interest shall, in any case, be on the amount
finally adjudged.
3. When the judgment of the court awarding a
sum of money becomes final and executory,
the rate of legal interest, whether the case
falls under paragraph 1 or paragraph 2,
above, shall be 12% per annum from such
finality until its satisfaction, this interim
period being deemed to be by then an
equivalent to a forbearance of credit.
IX. The Usury Law
THE USURY LAW (Act No.2566) is an act fixing
rates of interests upon loans and declaring the
effect of receiving or taking usurious rates and
for other purposes. (Arevalo v. Dimayuga 49
Phil 894)
CB Circular No. 905 – abolished interest rate
ceilings. Conversely, with the promulgation of
such circular, usury has become “legally
inexistent” as the parties can now legally agree
on any interest that may be charged on the loan.
ELEMENTS OF USURY
1. A loan or forbearance of money
2. An understanding between parties that the
loan shall and may be returned
CIVIL LAW REVIEWER Chapter II. LOAN

3. An unlawful intent to take more than the

legal rate for the use of money or its
equivalent
4. The taking or agreeing to take for the use of
the loan of something in excess of what is
allowed by law
MACALINAO v BPI (Sept 2009):
Regarding the credit card interest rate, “We
are of the opinion that the interest rate and
penalty charge of 3 percent per month
should be equitably reduced to 2 percent
per month or 24 percent per annum… we
had affirmed in a plethora of cases that
stipulated interest rates of 3 percent per
month and higher are excessive, iniquitous,
unconscionable and exorbitant. Such
stipulations are void for being contrary to
morals, if not against the law. While the
Bangko Sentral ng Pilipinas C.B. Circular
No. 905-82 dated Jan. 1, 1983 effectively
removed the ceiling on interest rates for both
secured and unsecured loans, regardless of
maturity, nothing in the said circular could
possibly be read as granting carte blanche
authority to lenders to raise interest rates to 313
levels which would either enslave their

CREDIT TRANSACTIONS
borrowers or lead to a hemorrhaging of their
assets.”

[NOTE: The case of Chua vs. Timan involving

promissory notes NOT credit cards transactions,
which stated that the said 3% interest per month
is unconscionable, was cited in this case.]
CIVIL LAW REVIEWER Chapter III. DEPOSIT

Contract of deposit is generally gratuitous.

Chapter III. Deposit (Art.1965), subject to the following exceptions:
1. There is a contrary stipulation
I. DEFINITION 2. Depository is in the business of storing
II. KINDS OF DEPOSIT goods
III. CHARACTERISTICS OF DEPOSIT
3. Property saved from destruction during
IV. DEPOSIT DISTINGUISHED FROM MUTUUM
AND COMMODATUM calamity without owner’s knowledge; just
V. OBLIGATIONS OF THE DEPOSITARY compensation should be given the
VI. OBLIGATIONS OF THE DEPOSITOR depository. (Art.1996[2] and Art.1997, par.2)
VII. EXTINGUISHMENT OF DEPOSIT
VIII. NECESSARY DEPOSIT Only movable things may be the object of a
IX. JUDICIAL DEPOSIT deposit (Art.1966) if the deposit is either
voluntary (Art.1968) or necessary (Art.1995).
I. Definition HOWEVER, a judicial deposit may cover
movable as well as immovable property, its
purpose being to protect the rights of parties to
DEPOSIT is constituted from the moment a
the suit.
person receives a thing belonging to another,
with the obligation of safely keeping it and of
returning the same. If the safekeeping of the IV. Deposit Distinguished From Mutuum
thing delivered is not the principal purpose of the and Commodatum
contract, there is no deposit but some other
contract. (Art.1962) DEPOSIT AND MUTUUMDISTINGUISHED

II. Kinds of Deposit DEPOSIT MUTUUM

314
Principal purpose is Principal purpose is
safekeeping consumption of the

CREDIT TRANSACTIONS
Judicial – takes place when an attachment or subject matter
seizure of property in litigation is ordered Depositor can demand Lender must wait until
(Arts.2005-2008) return of subject matter expiration of the period
at will granted to the debtor
Extrajudicial (Art. 1967) Both movable and Only money or any
1. Voluntary- delivery is made by the will of immovable may be the other fungible thing
the depositor or by two or more persons object may be the object
each of whom believes himself entitled to
the thing deposited; DEPOSIT AND COMMODATUM
2. Necessary- made in compliance with a legal DISTINGUISHED
obligation, or on the occasion of any
calamity, or by travelers in hotels and inns DEPOSIT COMMODATUM
(Arts.1996-2004) or by travelers with Principal purpose is Principal purpose is
common carriers (Arts.1734-1735) safekeeping transfer of use
May be gratuitous Always and essentially
gratuitous
III. Characteristics of Deposit In extrajudicial deposit, Both movable and
only movable immovable may be the
Characteristics— (corporeal) things may object.
1. Real Contract because it is perfected by the be the object. But for
judicial deposits, object
delivery of the subject matter. may be movable or
2. Principal purpose of the contract of deposit immovable.
is the safekeeping of the thing delivered.
3. If gratuitous, it is unilateral because only the
depository has an obligation. If onerous, it is V. Obligations of the Depositary
bilateral.
OBLIGATIONS
The principal purpose is safekeeping of the 1. Depositary is obliged to keep the thing
thing delivered, so that if it is only an accessory safely and to return it when required, even
or secondary obligation, deposit is not though a specified term may have been
constituted but some other contract. stipulated in the contract. (Art.1972)

2. Depositary is liable if the loss occurs

through his fault or negligence. (Art.1972
CIVIL LAW REVIEWER
in rel. to Art.1163) Loss of thing while in the
depositary’s possession raises a a. The various depositors of the mingled
presumption of fault. (Art.1265) Required
degree of care is greater if the deposit is for
compensation than when it is gratuitous.
3. Depositary is not allowed to deposit the
thing with a third person. (Art.1973)
EXCEPTION: There is a contrary stipulation
NOTE: Depositary is liable for the loss of the
thing deposited if:
a. He transfers the deposit with a third
person without authority although there
is no negligence on his part and the third
person;
b. He deposits the thing with a third person
who is manifestly careless or unfit
although authorized, even in the
absence of negligence; or
c. The thing is lost through the negligence
of his employees whether the latter are
manifestly careless or not.
EXEMPTION FROM LIABILITY: Depositary
is not responsible for loss of thing without
negligence of the third person with whom he
was allowed to deposit the thing if such third
person is not “manifestly careless or unfit.”
4. Depositary is obliged not to change way
of deposit. He may change the way or
manner of deposit only if there are
circumstances indicating that the depositor
would consent to the change and notice is
given to depositor. HOWEVER, notice is not
required if delay will cause danger.
(Art.1974)
5. If thing deposited should earn interest, the
depositary is under obligation (1) to collect
the interest as it becomes due and (2) to
take such steps as may be necessary to
preserve its value and the rights
corresponding to it. The depositary is bound
to collect not only the interest but also the
capital itself when due. (Art.1975)
6. Depositary has the obligation not to
commingle things deposited if so
stipulated, even if they are of the same kind
and quality. (Article 1976)
GENERAL RULE: The depositary is
permitted to commingle grain or other
articles of the same kind and quality.
EXCEPTION: When there is a stipulation to
the contrary
Chapter III. DEPOSIT
EFFECT OF COMMINGLING:
goods shall own the entire mass in
common
b. Each depositor shall be entitled to such
portion of the entire as the amount
deposited by him bears the whole.
7. Depositary is under obligation not to
make use of the thing deposited;
otherwise he shall be liable for damages.
(Art.1977)
EXCEPTIONS:
a. Express permission of the depositor
b. Preservation of the thing deposited
required its use
8. Depositary is liable for loss of the thing
through a fortuitous event:
a. If it is so stipulated;
b. If he uses the thing without the
depositor’s permission;
c. If he delays its return;
d. If he allows others to use it, even though 315
he himself may have been authorized to
CREDIT TRANSACTIONS
use the same (Art.1979)
9. Where thing deposited is delivered
closed and sealed, depositary has
obligation to:
a. Return the thing deposited when
delivered closed and sealed
b. Pay for damages should seal or lock be
broken through his fault, which is
presumed unless proven otherwise
c. Keep secret of the deposit when the
seal or lock is broken, with or without his
fault (Art.1982)
10. Depositary is obliged to return the
products, accessories and accessions of
the thing deposited. (Art.1983)
11. Depositary is obliged to pay interest on
sums converted to personal use.
(Art.1983)
12. Depositary who receives the thing in
deposit cannot require that the depositor
prove his ownership over the thing (Art.
1984)
13. Where the thing appears to be stolen and
the depositary knows the true owner, he
must advise the true owner about the
deposit. If the owner, in spite of such
information, does not claim it within the
period of one month, the depositary is
CIVIL LAW REVIEWER
relieved from liability. (Art.1984, pars.2 and
3) If the depositary has reasonable grounds
to believe that the thing has not been
lawfully acquired by the depositor, he may
return the same. (Art.1984, par.4)
RIGHT OF TWO OR MORE DEPOSITORS
(Art.1985)
1. Where the thing is divisible and depositors
not solidary – each one of the depositors
can demand only his share proportionate
thereto.
2. Where the thing is not divisible or the
obligation is solidary – rules on active
solidarity must apply
a. Each one of the depositors may do
whatever may be useful to the others
but not anything which may be
prejudicial to the latter. (Art.1212)
b. The depositary may return the thing to
any one of the solidary depositors
UNLESS a demand for its return has
been made by one of them in which
case delivery should be made to him.
(Art. 1214)
3. Where there is a stipulation of return to one
of the depositors, the depositary is bound to
return it only to the person designated
although he has not made any demand for
its return.
PERSONS TO WHOM RETURN MUST BE
MADE
1. The depositary is obliged to return the thing
deposited, when required, to:
a. The depositor;
b. To his heirs or successors; or
c. To the person who may have been
designated in the contract. (Art.1972)
2. If the depositor was incapacitated at the time
of making the deposit, the property must be
returned to:
a. His guardian or administrator;
b. To the person who made the deposit;
c. To the depositor himself should he
acquire capacity. (Art.1970)
3. Even if the depositor had capacity at the
time of making the deposit but he
subsequently loses his capacity during the
deposit, the thing must be returned to his
legal representative. (Art.1986)
PLACE OF RETURN (Art.1987)
1. At the place agreed upon by the parties
2. In the absence of stipulation, at the place
where the thing deposited might be even if it
should not be the same place where the
original deposit was made, provided that
Chapter III. DEPOSIT
there was no malice on the part of the
depositary
TIME OF RETURN (Art.1988)
1. GENERAL RULE: The thing deposited must
be returned to the depositor upon demand,
even though a specified period or time for
such return may have been fixed.
2. EXCEPTIONS:
a. When the thing is judicially attached
while in the depositary’s possession
b. When notified of the opposition of a third
person to the return or the removal of
the thing deposited
RIGHT OF THE DEPOSITARY TO RETURN
THE THING (Art.1989)
1. GENERAL RULE: The depositary may
return the thing deposited notwithstanding
that a period has been fixed for the deposit
if:
a. The deposit is gratuitous;
b. The reason is justifiable.
[NOTE: If the depositor refuses to receive 316
the thing, the depositary may deposit the
CREDIT TRANSACTIONS
thing at the disposal of the judicial authority.]
2. EXCEPTION: When the deposit is for a
valuable consideration, the depositary has
no right to return the thing before the
expiration of the time designated even if he
should suffer inconvenience as a
consequence.
Is the depositary liable for loss by force
majeure or government order?
 The depositary is not liable in cases of loss
by force majeure or by government order.
HOWEVER, he has the duty to deliver to the
depositor money or another thing he
receives in place of the thing. (Art.1990)
ALIENATION IN GOOD FAITH BY
DEPOSITARY’S HEIR
When alienation is done in GOOD FAITH, the
heir is obliged to:
1. Return the value of the thing deposited
2. Assign the right to collect from the buyer.
NOTE: The heir does not need to pay the
actual price of the thing deposited.
When alienation is done in BAD FAITH, the heir
must:
1. Be liable for damages;
2. Pay the actual price of the thing deposited.
CIVIL LAW REVIEWER
DEPOSITARY’S RIGHT OF RETENTION
 The depositary may retain the thing in
pledge until the full payment of what may be
due him by reason of the deposit. (Art.1994)
 NOTE: This is an example of a pledge
created by operation of law. (Art.2121)
VI. Obligations of the Depositor
1. Depositor is obliged to reimburse the
depositary for expenses incurred for
preservation – if deposit is gratuitous.
(Art.1992)
2. Depositor is obliged to pay losses
incurred due to character of thing
deposited. (Art. 1993)
GENERAL RULE: The depositary must be
reimbursed for loss suffered by him because of
the character of the thing deposited.
EXCEPTIONS:
1. Depositor was not aware of the danger;
2. Depositor was not expected to know the
dangerous character of the thing;
3. Depositor notified the depositary of such
dangerous character;
4. Depositary was aware of the danger without
advice from the depositor.
VII. Extinguishment of Deposit (Art. 1995)
A deposit is extinguished:
1. Upon the loss or deterioration of the thing
deposited;
2. Upon the death of the depositary, ONLY in
gratuitous deposits;
3. By other modes provided in the Civil Code,
e.g. novation, merger, etc. (See Art.1231)
EFFECT OF DEATH OF DEPOSITOR OR
DEPOSITARY (Art. 1995)
1. Where deposit gratuitous – death of either of
the depositor or depositary extinguishes the
deposit (personal in nature). By the word
“extinguished,” the law really means that the
depositary is not obliged to continue with the
contract of deposit.
2. (2) Where deposit for compensation – not
extinguished by the death of either party.
VIII. Necessary Deposit
KINDS OF NECESSARY DEPOSITS
1. It is made in compliance with a legal
obligation, in which case it is governed by
the law establishing it, and in case of
Chapter III. DEPOSIT
deficiency, the rules on voluntary deposit
e.g. Arts. 538, 586 and 2104
2. It takes place on the occasion of any
calamity, such as fire, storm, flood, pillage,
shipwreck, or other similar events. There
must be a causal relation between the
calamity and the constitution of the deposit.
In this case the deposit is governed by the
rules on voluntary deposit and Art. 2168
3. Made by passengers with common carriers.
(Art.1754)
4. Made by travelers in hotels or inns. (Art.
1998)
DEPOSITS BY TRAVELLERS IN HOTELS
AND INNS
Before keepers of hotels or inns may be held
responsible as depositaries with regard to the
effects of their guests, the following must concur:
1. They have been previously informed about
the effects brought by the guests; and
2. The latter have taken the precautions
prescribed regarding their safekeeping.
EXTENT OF LIABILITY UNDER ART.1998 317
1. Liability in hotel rooms which come under
CREDIT TRANSACTIONS
the term “baggage” or articles such as
clothing as are ordinarily used by travelers
2. Include those lost or damages in hotel
annexes such as vehicles in the hotel’s
garage.
2. In the following cases, the hotel- keeper is
liable
WHEN HOTEL-KEEPER LIABLE
Regardless of the amount of care exercised -
1. The loss or injury to personal property is
caused by his servants or employees as well
as by strangers (Art. 2000).
2. The loss is caused by the act of a thief or
robber done without the use of arms and
irresistible force. (Art. 2001)
WHEN HOTEL-KEEPER NOT LIABLE
1. The loss or injury is cause by force majeure,
like flood, fire, (Art.2000) theft or robbery by
a stranger - not the hotel-keeper’s servant or
employee with the use of firearms or
irresistible force (Art.2001)
EXCEPTION: Hotel- keeper is guilty of fault
or negligence in failing to provide against the
loss or injury from his cause. (Arts.1170 and
1174)
2. The loss is due to the acts of the guests, his
family, servants, visitors (Art.2002)
3. The loss arises from the character of the
things brought into the hotel (Ibid.)
CIVIL LAW REVIEWER Chapter III. DEPOSIT

[NOTE: The hotel-keeper cannot free himself DEPOSITARY OF SEQUESTERED

from responsibility by posting notices to the
effect that he is not liable for the articles brought
by the guest. Such kind of stipulation shall be
VOID. (Art. 2003)]
TRIPLE-V FOOD SERVICES v. FILIPINO
MERCHANTS INSURANCE COMPANY:
 Regarding the legal deposit of a vehicle that
was stolen while parked with Saisaki
restaurant, “the depositary may not exempt
itself from responsibility or loss or damage of
the thing deposited with it, by exclusionary
stipulation. Such stipulations are void for
being contrary to law.”
PROPERTY
A person appointed by the court (Art. 2007) with
the obligations:
1. To take care of the property with the
diligence of a good father of the family. (Art.
2008)
2. To continue in his responsibility until the
litigation is ended or the court so orders.
(Art. 2007)
APPLICABLE LAW
 The law on judicial deposit is remedial or
procedural in nature. Hence, the
 Rules of Court are applicable. (Art. 2009)

HOTEL-KEEPER’S RIGHT TO RETENTION

 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 (a)
lodging, and (b) supplies usually furnished to
hotel guests.
 NOTE: The right of retention recognized in
this article is in the nature of a pledge 318
created by operation of law.

CREDIT TRANSACTIONS
IX. Judicial Deposit

JUDICIAL DEPOSIT - Judicial deposit takes

place when an attachment or seizure of property
in litigation is ordered by a court. (Art. 2005)

NATURE AND PURPOSE

 It is auxiliary to a case pending in court. The
purpose is to maintain the status quo during
pendency of the litigation or to insure the
right of the parties to the property in case of
a favorable judgment.

EXTRAJUDICIAL AND JUDICIAL DEPOSITS

DISTINGUISHED

EXTRAJUDICIAL JUDICIAL
(Voluntary) deposit made Constituted by virtue of a
by free will of the court order
depositor.

Object must be movable Object may be either

property movable or immovable
property
Purpose is safekeeping Purpose is to secure or
of the thing deposited protect the owner’s right;
to maintain status quo
during pendency of case
Generally gratuitous Always onerous
Depositary is obliged to Thing shall be delivered
return the thing deposited only upon order of the
upon demand made by court
the depositor
CIVIL LAW REVIEWER
Chapter IV. Guaranty
I. DEFINITION
II. CHARACTERISTICS
III. CLASSIFICATION
IV. RULES GOVERNING GUARANTY
V. GUARANTY DISTIGUISHED FROM OTHERS
VI. THE GUARANTOR
VII. EFFECTS OF GUARANTY
VIII. EXTINGUISHMENT OF GUARANTY
I. Definition
GUARANTY is a contract whereby 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. (Art. 2047)
While a surety undertakes to pay if the principal
does not pay, the guarantor only binds himself
to pay if the principal cannot pay (See benefit of
excussion, 2058).
II. Characteristics
1. Accessory – dependent for its existence
upon the principal obligation guaranteed by
it;
2. Subsidiary and conditional – takes effect
only when the principal debtor fails in his
obligation
3. Unilateral –
a. It gives rise only to a duty on the part of
the guarantor in relation to the creditor
and not vice versa
b. It may be entered into even without the
intervention of the principal debtor.
4. Guarantor must be a person distinct from
the debtor – a person cannot be the
personal guarantor of himself
III. Classification
CLASSIFICATION OF GUARANTY
1. Guaranty in the broad sense:
a. Personal – guaranty is the credit given
by the person who guarantees the
fulfillment of the principal obligation; or
b. Real – guaranty is property, movable, or
immovable
 Real mortgage (2124) or antichresis
(2132) – guaranty is immovable
 Chattel mortgage (2140) or pledge
(2093) – guaranty is movable
2. As to its origin:
a. Conventional – constituted by
agreement of the parties (2051[1])
b. Legal – imposed by virtue of a provision
Chapter IV. GUARANTY
of law
c. Judicial – required by a court to
guarantee the eventual right of one of
the parties in a case.
3. As to consideration:
a. Gratuitous – guarantor does not receive
any price or remuneration for acting as
such (2048)
b. Onerous – one where the guarantor
receives valuable consideration for his
guaranty
4. As to person guaranteed:
a. Single – constituted solely to guarantee
or secure performance by the debtor of
the principal obligation;
b. Double or sub-guaranty – constituted to
secure the fulfillment by the guarantor of
a prior guaranty
5. As to its scope and extent:
a. Definite – where the guaranty is limited
to the principal obligation only, or to a
specific portion thereof;
b. Indefinite or simple – where the
guaranty included all the accessory
obligations of the principal, e.g. costs, 319
including judicial costs.
CREDIT TRANSACTIONS
IV. Rules Governing Guaranty
1. A guaranty is generally gratuitous (2048)
a. General Rule: Guaranty is gratuitous
b. Exception: When there is a stipulation to
the contrary
2. On the cause of a guaranty contract
SEVERINO v SEVERINO: “A guarantor or
surety is bound by the same consideration that
makes the contract effective between the
principal parties thereto.”
a. Presence of cause which supports
principal obligation: Cause of the
contract is the same cause which
supports the obligation as to the
principal debtor. The consideration
which supports the obligation as to the
principal debtor is a sufficient
consideration to support the obligation of
a guarantor or surety.
b. Absence of direct consideration or
benefit to guarantor: Guaranty or surety
agreement is regarded valid despite the
absence of any direct consideration
received by the guarantor or surety,
such consideration need not pass
directly to the guarantor or surety; a
consideration moving to the principal will
suffice.a
CIVIL LAW REVIEWER
3. A married woman who is a guarantor
binds only her separate property,
generally (2049)
Exceptions:
a. With her husband’s consent, bind the
community or conjugal partnership
property
b. Without husband’s consent, in cases
provided by law, such as when the
guaranty has redounded to the benefit of
the family.
4. A guaranty need not be undertaken with
the knowledge of the debtor (2050)
a. Guaranty is unilateral – exists for the
benefit of the creditor and not for the
benefit of the principal debtor
b. Creditor has every right to take all
possible measures to secure payment of
his credit – guaranty can be constituted
even against the will of the principal
debtor
However, as regards payment made by a
third person:
a. Payment without the knowledge or
against the will of the debtor:
 Guarantor can recover only insofar
as the payment has been beneficial
to the debtor
 Guarantor cannot compel the
creditor to subrogate him in his
rights
b. Payment with knowledge or consent of
the debtor: Subrogated to all the rights
which the creditor had against the
debtor
5. The guaranty must be founded on a valid
principal obligation (2052[1])
 Guaranty is an accessory contract: It is
an indispensable condition for its
existence that there must be a principal
obligation. Hence, if the principal
obligation is void, it is also void.
6. A guaranty may secure the performance
of a voidable, unenforceable, and natural
obligation (2052[2])
A guaranty may secure the performance of
a:
a. Voidable contract – such contract is
binding, unless it is annulled by a proper
court action
b. Unenforceable contract – because such
contract is not void
c. Natural obligation – the creditor may
Chapter IV. GUARANTY
proceed against the guarantor although
he has no right of action against the
principal debtor for the reason that the
latter’s obligation is not civilly
enforceable. When the debtor himself
offers a guaranty for his natural
obligation, he impliedly recognizes his
liability, thereby transforming the
obligation from a natural into a civil one.
7. A guaranty may secure a future debt
(2053)
Continuing Guaranty or Suretyship:
DIÑO v. CA: “Under the Civil Code, a guaranty
may be given to secure even future debts, the
amount of which may not known at the time the
guaranty is executed. This is the basis for
contracts denominated as continuing guaranty or
suretyship.”
Future debts, even if the amount is not yet
known, may be guaranteed but there can be
no claim against the guarantor until the 320
amount of the debt is ascertained or fixed
CREDIT TRANSACTIONS
and demandable
Rationale: A contract of guaranty is
subsidiary.
a. To secure the payment of a loan at
maturity – surety binds himself to
guarantee the punctual payment of a
loan at maturity and all other obligations
of indebtedness which may become due
or owing to the principal by the
borrower.
b. To secure payment of any debt to be
subsequently incurred – a guaranty shall
be construed as continuing when by the
terms thereof it is evident that the object
is to give a standing credit to the
principal debtor to be used from time to
time either indefinitely or until a certain
period, especially if the right to recall the
guaranty is expressly reserved.
c. To secure existing unliquidated debts –
refers to debts existing at the time of the
constitution of the guaranty but the
amount thereof is unknown and not to
debts not yet incurred and existing at
that time.
d. The surety agreement itself is valid and
binding even before the principal
obligation intended to be secured
thereby is born, any more than there
would be in saying that obligations
which are subject to a condition
CIVIL LAW REVIEWER
precedent are valid and binding before
the occurrence of the condition
precedent.
A continuing guaranty is one which is not limited to a
single transaction, but which contemplates a future
course of dealing, covering a series of transactions,
generally for an indefinite time or until revoked. It is
prospective in its operation and is generally intended
to provide security with respect to future transactions
within certain limits, and contemplates a succession of
liabilities, for which, as they accrue, the guarantor
becomes liable.
A continuing guaranty is one which covers all
transactions, including those arising in the future,
which are within the description or contemplation of
the contract, of guaranty, until the expiration or
termination thereof. A guaranty shall be construed as
continuing when by the terms thereof it is evident that
the object is to give a standing credit to the principal
debtor to be used from time to time either indefinitely
or until a certain period, especially if the right to recall
the guaranty is expressly reserved.
Where the contract of guaranty states that the same is
to secure advances to be made "from time to time"
the guaranty will be construed to be a continuing one.”
8. A guaranty may secure the performance
of a conditional obligation (2053)
a. Principal obligation subject to a
suspensive condition – the guarantor is
liable only after the fulfillment of the
condition.
b. Principal obligation subject to a
resolutory condition – the happening of
the condition extinguishes both the
principal obligation and the guaranty
9. A guarantor’s liability cannot exceed the
principal obligation (2054)
General Rule: Guaranty is a subsidiary and
accessory contract – guarantor cannot bind
himself for more than the principal debtor
and even if he does, his liability shall be
reduced to the limits of that of the debtor.
But the guarantor may bind himself for less
than that of the principal.
Exceptions:
a. Interest, judicial costs, and attorney’s
fees as part of damages may be
recovered – creditors suing on a
suretyship bond may recover from the
surety as part of their damages, interest
at the legal rate, judicial costs, and
attorney’s fees when appropriate, even
without stipulation and even if the surety
would thereby become liable to pay
Chapter IV. GUARANTY
more than the total amount stipulated in
the bond.
Interest runs from:
 Filing of the complaint (upon judicial
demand); or
 The time demand was made upon
the surety until the principal
obligation is fully paid (upon extra-
judicial demand)
Rationale: Surety is made to pay, not by
reason of the contract, but by reason of
his failure to pay when demanded and for
having compelled the creditor to resort to
the courts to obtain payment.
b. Penalty may be provided – a surety may
be held liable for the penalty provided
for in a bond for violation of the condition
therein.
Principal’s liability may exceed
guarantor’s obligations
321
The amount specified in a surety bond
CREDIT TRANSACTIONS
as the surety’s obligation does not limit
the extent of the damages that may be
recovered from the principal, the latter’s
liability being governed by theobligations
he assumed under his contract
10. The existence of a guaranty is not
presumed (2055)
Guaranty requires the expression of consent
on the part of the guarantor to be bound. It
cannot be presumed because of the
existence of a contract or principal
obligation.
Rationale:
a. There be assurance that the guarantor
had the true intention to bind himself;
b. To make certain that on making it, the
guarantor proceeded with
consciousness of what he was doing.
11. Contract of guaranty is covered by the
Statute of Frauds (See Art. 1403(2(a))
 Guaranty must not only be expressed
but must so be reduced into writing.
Hence, it shall be unenforceable by
action, unless the same or some note or
memorandum thereof be in writing, and
subscribed by the party charged, or by
his agent; evidence, therefore, of the
agreement cannot be received without
the writing, or a secondary evidence of
CIVIL LAW REVIEWER Chapter IV. GUARANTY

its contents. However, It need not The subsequent loss of integrity or property or
appear in a public document supervening incapacity of the guarantor would
not operate to exonerate the guarantor of the
V. Guaranty Distinguished from Others eventual liability he has contracted, and the
contract of guaranty continues. The creditor can
merely demand another guarantor with the
GUARANTY DISTINGUISHED FROM
proper qualifications except that the creditor may
WARRANTY
waive such remedy if he chooses and hold the
guarantor to his bargain.
Guaranty Warranty
Guaranty is a contract Warranty is an
Selection of Guarantor:
by which a person is undertaking that the title,
bound to another for the quality, or quantity of the 1. Specified person stipulated as guarantor:
fulfillment of a promise subject matter of a Substitution of guarantor may not be
or engagement of a third contract is what is has demanded
party been represented to be,
and relates to some Reason: The selection of the guarantor is:
agreement made a. Term of the agreement;
ordinarily by the party b. As a party, the creditor is, therefore,
who makes the warranty bound thereby.
GUARANTY DISTINGUISHED FROM 2. Guarantor selected by the principal debtor:
SURETYSHIP Debtor answers for the integrity, capacity,
and solvency of the guarantor.
Guaranty Suretyship
Guarantor’s liability Surety assumes liability
depends upon an as a regular party to the
3. Guarantor personally designated by the 322
creditor: Responsibility of the selection
independent agreement undertaking

CREDIT TRANSACTIONS
to pay the obligation should fall upon the creditor because he
Guarantor’s engagement Surety is an original considered the guarantor to have the
is a collateral promissor qualifications for the purpose.
undertaking
Guarantor is subsidiarily Surety is primarily liable
liable i.e. only obliged to i.e. bound to pay if the VII. Effects of Guaranty
pay if the principal principal does not pay
cannot pay
EFFECTS OF GUARANTY BETWEEN THE
Guarantor not bound to Surety ordinarily held to
take notice of default of know every default of his GUARANTOR AND THE CREDITOR
his principal principal 1. The guarantor has the right to benefit
from excussion/ exhaustion (2058)
Guarantor often Surety not discharged
discharged by the mere either by the mere
indulgence of the indulgence of the Exceptions to the benefit of excussion
creditor and is usually creditor or by want of (2059)
a. As provided in Art. 2059:
 If the guarantor has expressly
not liable unless notified notice of default of the
of the principal’s default principal
renounced it; waiver is valid but it
must be made in express terms.
VI. The Guarantor (Arts. 2056-2057)  If he has bound himself solidarily
with the debtor, the liability assumed
is that of a surety. The guarantor
Qualifications:
becomes primarily liable as a
1. He possesses integrity;
solidary co- debtor. In effect, he
2. He has capacity to bind himself;
renounces in the contract itself the
3. He has sufficient property to answer for the
benefit of exhaustion.
 In case of insolvency of the debtor –
obligation which he guarantees.
guarantor guarantees the solvency
Exception: The creditor waives the
of the debtor. If the debtor becomes
requirements
insolvent, the liability of the
guarantor as the debtor cannot fulfill
The qualifications above need only be present at
his obligation
 When he (debtor) has absconded,
the time of the perfection of the contract.
CIVIL LAW REVIEWER
or cannot be sued within the
Philippines – the creditor is not
required to go after a debtor who is
hiding or cannot be sued in our
courts, and to incur the delays and
expenses incident thereto. The
exception is when the debtor has
left a manager or representative;
 If it may be presumed that an
execution on the property of the
principal debtor would not result in
the satisfaction of the obligation – if
such judicial action including
execution b would not satisfy the
obligation, the guarantor can no
longer require the creditor to resort
to all such remedies against the
debtor as the same would be but a
useless formality. It is not necessary
that the debtor be judicially declared
insolvent.
SOUTHERN MOTORS, INC. v BARBOSA: “The
right of guarantors…to demand exhaustion of
the property of the principal debtor, exists only
when a pledge or a mortgage has not been
given as special security for the payment of the
principal obligation.”
LUZON STEEL CORP. v SIA: “The surety in the
present case bound itself "jointly and severally"
(in solidum) with the defendant; and excussion
(previous exhaustion of the property of the
debtor) shall not take place "if he (the guarantor)
has bound himself solidarily with the debtor".”
b. If he does not comply with Art. 2060: In
order that the guarantor may make use
of the benefit of excussion, he must:
 Set it up against the creditor upon
the latter’s demand for payment
from him;
 Point out to the creditor:
o Available property of the debtor
– the guarantor should facilitate
the realization of the excussion
since he is the most interested
in its benefit.
o Within the Philippine territory –
excussion of property located
abroad would be a lengthy and
extremely difficult proceeding
and would not conform with the
purpose of the guaranty to
provide the creditor with the
means of obtaining the
fulfillment of the obligation.
o Sufficient to cover the amount of
Chapter IV. GUARANTY
the debt
c. If he is a judicial bondsman and sub-
surety (2084)
d. Where a pledge or mortgage has been
given by him as a special security
e. If he fails to interpose it as a defense
before judgment is rendered against
him.
2. The creditor has the right to secure a
judgment against the guarantor prior to
the excussion
General rule: An ordinary personal
guarantor (NOT a pledgor or mortgagor),
may demand exhaustion of all the property
of the debtor before he can be compelled to
pay.
Exception: The creditor may, prior thereto,
secure a judgment against the guarantor,
who shall be entitled, however, to a
deferment of the execution of said judgment
against him, until after the properties of the
principal debtor shall have been exhausted, 323
to satisfy the latter’s obligation.
CREDIT TRANSACTIONS
3. The creditor has the duty to make prior
demand for payment from the guarantor
(2060)
a. The demand is to be made only after
judgment on the debt
b. Joining the guarantor in the suit against
the principal debtor is not the demand
intended by law. Actual demand has to
be made.
4. The guarantor has the duty to set up the
benefit of excussion (2060)
 As soon as he is required to pay,
guarantor must also point out to the
creditor available property (not in
litigation or encumbered) of the debtor
within the Philippines.
5. The creditor has the duty to resort to all
legal remedies (2061)
a. After the guarantor has fulfilled the
conditions required for making use of
the benefit of exhaustion, it becomes the
duty of the creditor to:
b. Exhaust all the property of the debtor
pointed out by the guarantor;
c. If he fails to do so, he shall suffer the
loss but only to the extent of the value of
the said property, for the insolvency of
the debtor
CIVIL LAW REVIEWER
6. The creditor has the duty to notify the
guarantor in the action against the debtor
(2062)
Under this article, notice to the guarantor is
mandatory in the action against the principal
debtor. The guarantor, however, is not duty
bound to appear in the case, and his non-
appearance shall not constitute default, w/
its consequential effect.
Rationale: The purpose of notification is to
give the guarantor the opportunity to allege
and substantiate whatever defenses he may
have against the principal obligation, and
chances to set up such defenses as are
afforded him by law if he so desires
7. A compromise shall not prejudice the
person not party to it (2063)
a. A compromise between creditor and
principal debtor benefits the guarantor
but does not prejudice him.
b. A compromise between guarantor and
the creditor benefits but does not
prejudice the principal debtor.
8. Co-guarantors are entitled to the benefit
of division (2065)
 The benefit of division applies only when
there are several guarantors and one
debtor for a single debt. Except when
solidarity has been stipulated among the
co-guarantors, a co- guarantor is liable
only to the extent of his share in the
obligation as divided among all the co-
guarantors.
EFFECTS OF GUARANTY BETWEEN THE
DEBTOR AND THE GUARANTOR
1. The guarantor has the right to be
subrogated to the rights of the creditor
(2067)
A guarantor who pays the debt is entitled to
every remedy which the creditor has against
the principal debtor, to enforce every
security and all means of payments; to stand
in the place of the creditor not only through
the medium of the contract, but even by
means of the securities entered into w/out
the knowledge of the surety; having the right
to have those securities transferred to him
though there was no stipulation for it, and to
avail himself of all securities against the
debtor
The need to enforce the provisions on
indemnity in Article 2066 forms the basis for
Chapter IV. GUARANTY
the subrogation clause of Article 2067. The
assumption, however, is that the guarantor
who is subrogated to the rights of the
creditor, has the right to be reimbursed for
his answering for the obligation of the
debtor. Absent this right of reimbursement,
subrogation will not be proper.
2. The guarantor has the duty to notify the
debtor before paying the creditor (2068).
Should payment be made without notifying
the debtor, and supposing the debtor has
already made a prior payment, the debtor
would be justified in putting up the defense
that the obligation has already been
extinguished by the time the guarantor made
the payment.
In this case, the guarantor will lose the right
of reimbursement and consequently the right
of subrogation as well.
3. The guarantor cannot make payment
before the obligation has become due 324
(2069).
CREDIT TRANSACTIONS
General rule: Since a contract of guaranty is
only subsidiary, the guarantor cannot be
liable for the obligation before the period on
which the debtor’s liability will accrue. Any
payment made by the guarantor before the
obligation is due cannot be indemnified by
the debtor.
Exception: Prior consent or subsequent
ratification by the debtor
4. The guarantor may proceed against the
debtor even before payment has been made
(2071)
General rule: Guarantor has no cause of
action against the debtor until after the
former has paid the obligation.
Exceptions:
a. When he is sued for the payment;
b. In case of insolvency of the principal
debtor;
c. When the debtor has bound himself to
relieve him from the guaranty within a
specified period, and this period has
expired;
d. When the debt has become
demandable, by reason of the expiration
of the period for payment;
e. After the lapse of 10 years, when the
principal obligation has no fixed period
CIVIL LAW REVIEWER Chapter IV. GUARANTY

for its maturity, unless it be of such released (2078).

nature that it cannot be extinguished
except within a period longer than 10
years;
f. If there are reasonable grounds to fear
that the principal debtor intends to
abscond;
g. If the principal debtor is in imminent
danger of becoming insolvent.
Rationale: To enable the guarantor to take
measures for the protection of his interest in
view of the probability that he would be
called upon to pay the debt. As such, he
may, in the alternative, obtain release from
the guaranty; or demand security that shall
protect him from any proceedings by the
creditor; and against the insolvency of the
debtor.
4. A guarantor is also released if the creditor,
without the guarantor’s consent, extends the
time within which the debtor may perform his
obligation (2079). This is to protect the
interest of the guarantor should the debtor
be insolvent during the period of extension
and deprive the guarantor of his right to
reimbursement.
5. If through the fault of the creditor the
guarantors are precluded from being
subrogated to the former’s rights, the latter
are released from the obligation. (2080)

EEFECTS OF GUARANTY AS BETWEEN CO-

GUARANTORS
Requisites for the applicability of Art. 2073:
1. Payment has already been made by one
guarantor; 325
2. The payment was made because

CREDIT TRANSACTIONS
a. Of the insolvency of the debtor, or
b. By judicial demand
3. The paying guarantor seeks to be
indemnified only to the extent of his
proportionate share in the total obligation.
For purposes of proportionate
reimbursement, the other guarantors may
interpose such defenses against the paying
guarantor as are available to the debtor
against the creditor, except those that are
personal to the debtor.

VIII. Extinguishment of Guaranty

1. Once the obligation of the debtor is

extinguished in any manner provided in the
Civil Code, the obligation of the guarantor is
also extinguished (2076). However, there
may be instances when, after the
extinguishment of the guarantor’s obligation
(as in the case of a release from the
guaranty), the obligation of the debtor still
subsists.
2. Although the guarantor generally has to
make payment in money, any other thing of
value, if accepted by the creditor, is valid
payment and therefore releases the
guarantor (2077).
3. If one guarantor is released, the release
would benefit the co-guarantors to the extent
of the proportionate share of the guarantor
CIVIL LAW REVIEWER Chapter V. LEGAL AND JUDICIAL BONDS

Chapter V. Legal and Judicial Bonds

Bond – an undertaking that is sufficiently

secured, and not cash or currency.
Bondsman – a surety offered in virtue of a
provision of law or a judicial order.

Qualifications of personal bondsman (2082 in

relation to Art. 2056):
1. He possesses integrity;
2. He has capacity to bind himself;
3. He has sufficient property to answer for
the obligation which he guarantees.

PLEDGE OR MORTGAGE IN LIEU OF BOND

(2083)
 Guaranty or suretyship is a personal
security.
 Pledge or mortgage is a property or real
security. If the person required to give a
legal or judicial bond should not be able to
do so, a pledge or mortgage sufficient to
cover the obligation shall be admitted in lieu
thereof. 326

CREDIT TRANSACTIONS
BONDSMAN NOT ENTITLED TO
EXCUSSION (2084)

A judicial bondsman and the sub-surety are not

entitled to the benefit of excussion.

Reason: They are not mere guarantors, but

sureties whose liability is primary and
solidary.

Effect of negligence of creditor: Mere

negligence on the part of the creditor in
collecting from the debtor will not relieve the
surety from liability.
CIVIL LAW REVIEWER Chapter VI. SURETYSHIP

NOTE: Surety is not entitled to notice of

Chapter VI. Suretyship principal’s default

SURETYSHIP is a relation which exists where
one person (principal) has undertaken an
obligation and another person (surety) is also
under a direct and primary obligation or other
duty to the obligee, who is entitled to but one
performance, and as between the two who are
bound, the second, rather than the first should
perform.
If a person binds himself solidarily with the
principal debtor, the contract is called suretyship
and the guarantor is called a surety.
NATURE OF SURETY’S UNDERTAKING
1. Liability is contractual and accessory but
direct
2. Liability is limited by terms of contract
3. Liability arises only if principal debtor is
held liable
a. In the absence of collusion, the surety is
bound by a judgment against the
principal event though he was not a
5. Prior demand by the creditor upon
principal not required. Surety is not
exonerated by neglect of creditor to sue
principal.
STRICTISSIMI JURIS RULE APPLICABLE
ONLY TO ACCOMMODATION SURETY
 Reason: An accommodation surety acts
without motive of pecuniary gain and hence,
should be protected against unjust
pecuniary impoverishment by imposing on
the principal, duties akin to those of a
fiduciary. This rule will apply only after it has
been definitely ascertained that the contract
is one of suretyship or guaranty.
STRICTISSIMI JURIS RULE NOT
APPLICABLE TO COMPENSATED SURETIES
Reasons:
1. Compensated corporate sureties are 327
business association organized for the

CREDIT TRANSACTIONS
party to the proceedings; purpose of assuming classified risks in large
b. The creditor may sue, separately or numbers, for profit and on an impersonal
together, the principal debtor and the basis.
surety; 2. They are secured from all possible loss by
c. A demand or notice of default is not adequate counter-bonds or indemnity
required to fix the surety’s liability agreements.
d. Exception: Where required by the 3. Such corporations are in fact insurers and in
provisions of the contract of suretyship determining their rights and liabilities, the
e. A surety bond is void where there is not rules peculiar to suretyship do not apply.
principal debtor because such an
undertaking presupposes that the
obligation is to be enforceable against
someone else besides the surety, and
the latter can always claim that it was
never his intention to be the sole person
obligated thereby.

NOTE: Surety is not entitled to exhaustion

4. Undertaking is to creditor, not to debtor

The surety makes no covenant or

agreement with the principal that it will fulfill
the obligation guaranteed for the benefit of
the principal. The surety’s undertaking is
that the principal shall fulfill his obligation
and that the surety shall be relieved of
liability when the obligation secured is
performed.

Exception: Unless otherwise expressly

provided.
CIVIL LAW REVIEWER Chapter VII. PLEDGE, MORTGAGE, ANTICHRESIS

collect.
Chapter VII. Pledge, Mortgage,
Antichresis
MANILA SURETY V VELAYO: The accessory
character is of the essence of pledge and
I. ESSENTIAL REQUISITES COMMON TO mortgage. As stated in Art 2085 CC, an
PLEDGE AND MORTGAGE
essential requisite of these contracts is that they
II. PLEDGE
III. MORTGAGE be constituted to secure the fulfillment of a
IV. FORECLOSURE OF MORTGAGE principal obligation
V. ANTICHRESIS
VI. CHATTEL MORTGAGE 2. Creditor cannot appropriate to himself the
thing nor can he dispose of the same as
I. Essential Requisites Common to owner.
Pledge and Mortgage (Art. 2085)
PROHIBITION AGAINST PACTUM
COMMISSORIUM (Art. 2088)
ESSENTIAL REQUISITES COMMON TO
1. Stipulation is null and void: Stipulation where
PLEDGE AND MORTGAGE (Art. 2085)
thing or mortgaged shall automatically
1. Constituted to secure the fulfillment of a
become the property of the creditor in the
principal obligation.
event of nonpayment of the debt within the
2. Pledgor or mortgagor must be the absolute
term fixed.
owner of the thing pledged or mortgaged.
2. Requisites of pactum commissorium:
3. The persons constituting the pledge or
a. Pledge or mortgage.
mortgage have the free disposal of their
b. A stipulation for an automatic
property, and in the absence thereof, that
appropriation by the creditor of the
they be legally authorized for the purpose.
property in the event of nonpayment. 328
4. Cannot exist without a valid obligation.
3. Effect on security contract: Nullity of the

CREDIT TRANSACTIONS
5. Debtor retains the ownership of the thing
stipulation does not affect validity and
given as a security.
efficacy of the principal contract.
6. When the principal obligation becomes due,
the thing pledged or mortgaged may be
IMPORTANT POINTS
alienated for the payment to the creditor.
1. Debtor-owner bears the risk of loss of the
property.
IMPORTANT POINTS
2. Pledge or mortgage is indivisible (2089,
1. Future property cannot be pledged or
2090).
mortgaged.
Exceptions:
2. Pledge or mortgage executed by one who is
a. Where each of several things
not the owner of the property pledged or
guarantees a determinate portion of the
mortgaged is without legal existence and
credit.
registration cannot validate it.
b. Where only a portion of loan was
3. Mortgage of a conjugal property by one of
released.
the spouses is valid only as to ½ of the
c. Where there was failure of
entire property.
consideration.
4. In case of property covered by Torrens title,
a mortgagee has the right to rely upon what
3. Rule that real property, consisting of several
appears in the certificate of title and does
lots should be sold separately, applies to
not have to inquire further.
sales in execution, and not to foreclosure of
5. Pledgor or mortgagor has free disposal of
mortgages.
property.
4. The mere embodiment of a real estate
6. Thing pledged or mortgaged may be
mortgage and a chattel mortgage in one
alienated.
document does not have the effect of fusing
7. Creditor not required to sue to enforce his
both securities into an indivisible whole.
credit.
8. Pledgor or mortgagor may be a third person.
UY TONG v CA: The 2 elements for pactum
RIGHT OF CREDITOR WHERE DEBTOR commissorium to exist:
FAILS TO COMPLY WITH HIS OBLIGATION (1) that there should be a pledge or mortgage
1. Creditor is merely entitled to move for the wherein a property is pledged or mortgaged by
sale of the thing pledged or mortgaged with way of security for the payment of the principal
the formalities required by law in order to obligation; (2) that there should be a stipulation
CIVIL LAW REVIEWER
for an automatic appropriation by the creditor of
the thing pledged or mortgaged in the event of
non-payment of the principal obligation within
the stipulated period.
5. Pledge or mortgage may secure all kinds of
obligation, be they pure or subject to
suspensive or resolutory conditions (2091).
6. A promise to constitute pledge or mortgage
creates no real right, only a personal right
binding upon the parties, only right of action
to compel the fulfillment of the promise but
there is no pledge or mortgage yet (2092).
7. Under the RPC, estafa is committed by a
person who, pretending to be the owner of
any real property, shall convey, sell,
encumber or mortgage the same knowing
that the real property is encumbered and
shall dispose of the same as
unencumbered. It is essential that fraud or
deceit be practiced upon the vendee at the
time of the sale.
II. Pledge
PLEDGE is a contract by virtue of which the
debtor delivers to the creditor or to a third person
a movable or document evidencing 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 shall be returned with all its fruits and
accessions. (Art.2085 in rel to 2093)
KINDS
1. Voluntary or conventional – Created by
agreement of parties.
2. Legal – Created by operation of law.
CENTRAL BANK vs. CA: The consideration of
the accessory contract of real estate mortgage is
the same as that of the principal contract. For
the debtor, the consideration of his obligation to
pay is the existence of a debt. Thus, in the
accessory contract of real estate mortgage, the
consideration of the debtor in furnishing the
mortgage is the existence of a valid, voidable, or
unenforceable debt (Art. 2086, in relation to Art.
2052, of the Civil Code).
It is not necessary that any consideration should
pass at the time of the execution of the contract
of real mortgage. It may either be a prior or
subsequent matter. But when the consideration
is subsequent to the mortgage, the mortgage
can take effect only when the debt secured by it
is created as a binding contract to pay. And,
when there is partial failure of consideration, the
Chapter VII. PLEDGE, MORTGAGE, ANTICHRESIS
mortgage becomes unenforceable to the extent
of such failure. Where the indebtedness actually
owing to the holder of the mortgage is less than
the sum named in the mortgage, the mortgage
cannot be enforced for more than the actual sum
due.
The rule of indivisibility of the mortgage as
outlined by Article 2089 above-quoted
presupposes several heirs of the debtor or
creditor which does not obtain in this case.
Hence, the rule of indivisibility of a mortgage
cannot apply.
BELO vs. PNB: From Art. 2089 is excepted the
case in w/c, there being several things given in
mortgage or pledge, each one of them
guarantees only a determinate portion of the
credit. The debtor, in this case, shall have a right
to the extinguishment of the pledge or mortgage
as the portion of the debt for w/c each thing is
specially answerable is satisfied. From the
wordings of the law, indivisibility arises only
when there is a debt, that is, there is a debtor-
creditor relationship. 329
CREDIT TRANSACTIONS
CHARACTERISTICS
1. Real – Perfected by delivery.
2. Accessory – Has no independent existence
of its own.
3. Unilateral – Creates obligation solely on the
part of the creditor to return the thing subject
upon the fulfillment of the principal
obligation.
4. Subsidiary – Obligation incurred does not
arise until the fulfillment of the principal
obligation.
CAUSE OR CONSIDERATION
1. Principal obligation – In so far as the pledgor
is concerned.
2. Compensation stipulated for the pledge or
mere liberality of the pledgor – If pledgor is
not the debtor.
PROVISIONS APPLICABLE ONLY TO
PLEDGE
1. Transfer of possession to the creditor or to
third person by common agreement is
essential in pledge (2093).
a. Actual delivery is important.
b. Constructive or symbolic delivery of the
key to the warehouse is sufficient to
show that the depositary appointed by
common consent of the parties was
legally placed in possession.
2. All movables within the commerce of man
may be pledged as long as they are
CIVIL LAW REVIEWER
susceptible of possession (2094).
3. Incorporeal rights may be pledged. The
instruments representing the pledged rights
shall be delivered to the creditor; if they be
negotiable instruments, they must be
indorsed (2095).
4. Pledge shall take effect against 3rd persons
only if the following appear in a public
instrument:
a. Description of the thing pledged.
b. Date of the pledge (2096).
5. The thing pledged may be alienated by the
pledgor or owner only with the consent of
the pledgee. Ownership of the thing pledged
is transmitted to the vendee or transferee as
soon as the pledgee consents to the
alienation, but the latter shall continue to
have possession (2097).
6. Pledge gives the creditor the right 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 (2098).
7. Special Laws apply to pawnshops and
establishments engaged in making loans
secured by pledges. Provisions of the Civil
Code shall apply subsidiarily to them.
RIGHTS AND DUTIES OF CREDITOR IN A
PLEDGE
1. Shall take care of the thing pledged with the
diligence of a good father of a family (2099).
2. Has right to reimbursement of the expenses
made for preserving the thing. Shall be liable
for loss or deterioration of the thing by
reason of fraud, negligence, delay or
violation of the terms of the contract, but not
for fortuitous events (2099).
3. May bring actions pertaining to the owner of
the thing in order to recover it from, or
defend it against, a 3rd person (2103).
4. Cannot use the thing without the authority of
the owner. If he uses the thing without
authority, or if he misuses the thing when he
was authorized to use it, the owner may ask
that it be judicially or extrajudicially
deposited (2104).
5. May use the thing if necessary for its
preservation (2104).
6. May either claim another thing in pledge or
demand immediate payment of the principal
obligation if he is deceived on the substance
or quality of the thing (2109).
THE PLEDGEE
1. Cannot deposit the thing pledged with a 3rd
person, unless there is a contrary stipulation
(2100).
2. Is responsible for the acts of his agents or
employees with respect to the thing pledged
Chapter VII. PLEDGE, MORTGAGE, ANTICHRESIS
(2100).
3. Has no right to use the thing or to
appropriate its fruits without authority from
the owner (2104)
4. May cause the public sale of the thing
pledged if, without fault on his part, there is
danger of destruction, impairment or
dimunition in value of the thing. The
proceeds of the auction shall be a security
for the principal obligation (2108).
RIGHTS AND DUTIES OF THE PLEDGOR
1. Takes responsibility for the flaws of the thing
pledged (2101 in relation to Art. 1951).
2. Cannot ask for the return of the thing against
the will of the creditor, unless and until he
has paid the debt and its interest, with
expenses in proper cases (2105).
YULIONGSIU vs. PNB: There is authority
supporting the proposition that the pledgee can
temporarily entrust the physical possession of
the chattels pledged to the pledgor without
invalidating the pledge. In such a case, the
pledgor is regarded as holding the pledged 330
property merely as trustee for the pledgee. The
CREDIT TRANSACTIONS
type of delivery will depend upon the nature and
the peculiar circumstances of each case.
PNB vs. ATENDIDO: according to law, a
pledgee cannot become the owner of, nor
appropriate to himself, the thing given in pledge.
If by the contract of pledge the pledgor continues
to be the owner of the thing pledged during the
pendency of the obligation, it stands to reason
that in case of loss of the property, the loss
should be borne by the pledgor.
3. Subject to the right of the pledge under article
2108, pledgor is allowed to substitute the
thing which is in danger of destruction or
impairment without any fault on the part of
the pledgee with another thing of the same
kind and quality (2107).
4. May require that the thing be deposited with
a 3rd person, if through the negligence or
willful act of the pledgee the thing is in danger
of being lost or impaired (2106).
EXTINGUISHMENT OF A PLEDGE
1. Ways to extinguish a pledge:
a. Payment of the debt.
b. Sale of the thing pledged at public
auction.
c. Thing pledged is returned by the
pledgee to the pledgor or owner (2110).
d. Written statement by the pledgee that he
renounces or abandons the pledge.For
CIVIL LAW REVIEWER
this purpose, neither the acceptance by
the pledgor or owner nor the return of
the thing pledged is necessary, and the
pledgee becomes a depositary (2111).
2. Presumptions:
a. If, subsequent to the perfection of the
pledge, the thing is found in the
possession of the pledgor or owner,
there is prima facie presumption that the
thing has been returned by the pledge
(2110).
b. If the thing is in the possession of a 3rd
person who received it from the pledgor
or owner after the constitution of the
pledge, there is prima facie presumption
that the thing has been returned by the
pledge (2110).
REQUIREMENTS IN SALE OF THE THING
PLEDGED BY A CREDITOR, IF CREDIT IS
NOT PAID ON TIME (Art 2112)
1. Debt is due and unpaid.
2. Sale must be at a public auction.
3. Notice to the pledgor and owner, stating the
amount due.
4. Sale must be made with the intervention of a
notary public.
5. If at the first auction the thing is not sold, a
second one with the same formalities shall
be held.
6. If at the second auction, there is no sale
either, the creditor may appropriate the thing
pledged but he shall give an acquittance
(release) for his entire claim.
EFFECT OF THE SALE OF THE THING
PLEDGED (Art 2115)
1. Extinguishes the principal obligation,
whether the price of the sale is more or less
than the amount due.
2. if the price is more than amount due, the
debtor is not entitled to the excess unless
the contrary is provided.
3. If the price of the sale is less, neither is the
creditor entitled to recover the deficiency. A
contrary stipulation is void.
MANILA BANKING v TEODORO:
In case of doubt as to whether a transaction is a
pledge or a dation in payment, the presumption
is in favor of pledge, the latter being the lesser
transmission of rights and interests (as earlier
established in Lopez v. Court of Appeals)
LEGAL PLEDGES (Article 2121)
1. Necessary expenses shall be refunded to
every possessor, but only a possessor in
good faith may retain the thing until he has
been reimbursed.
Chapter VII. PLEDGE, MORTGAGE, ANTICHRESIS
 Useful expenses shall be refunded only to
the possessor in good faith with the
same right of retention, the person who
has defeated him in the possession
having the option of refunding the
amount of the expenses or of paying the
increase in value which the thing may
have acquired and by reason thereof
(Art. 546)
2. He who has executed work upon a movable
has a right to retain it by way of pledge until
he is paid. This is called the mechanic’s
lien. (Art. 1731)
3. 3) The agent may retain the things which are
the objects of agency until the principal
effects the reimbursement and pays the
indemnity. This is called the agent’s lien.
(Art. 1914)
4. 4) The laborer’s wages shall be a lien on the
goods manufactured or the work done.
5. (Art. 1707)
NOTE:
1. In legal pledges, the remainder of the price
of the sale shall be delivered to the obligor. 331
2. Public auction of legal pledges may only be
CREDIT TRANSACTIONS
executed after demand of the amount for
which the thing is retained. It shall take
place within one month after the demand,
otherwise the pledgor may demand the
return of the thing pledged, provided s/he is
able to show that the creditor did not cause
the public sale without justifiable grounds.
(Article 2122)
PAWNSHOP REGULATION ACT PD 114
SEC 9: Loans granted by pawnshops shall not
be less than 30% of the value of the security
offered, UNLESS the pawner manifests in
writing the desire to borrow a lesser amount.
SEC 10:
a. Interests not to exceed usury law
b. Pawn broker prohibited from dividing the
pawn offered to collect greater interest
c. Pawn broker prohibited from requiring
additional charge for safekeeping /
insurance
d. Maximum service charge: Php5 to not
more than 1% of the principal loan
SEC 13: Pawner who fails to pay his obligation
on the date it falls due may WITHIN 90 DAYS
from the date of the maturity of the obligation,
REDEEM the pawn by payment of the principal
debt and interest
CIVIL LAW REVIEWER
SEC 15: Requisites of public auction of pawned
articles
a. Public auction must be held at the place
of business of the pawn shop, or within
the municipality or city where it is
located
b. Must be under the control and direction
of a licensed auctioneer
c. Prior publication one week before the
sale
III. Mortgage
MORTGAGE is a contract whereby the debtor
secures to the creditor the fulfillment of a
principal obligation, immediately making
immovable property or real rights over
immovable property answerable to the principal
obligation in case it is not complied with at the
time stipulated.
OBJECTS OF REAL MORTGAGE (Art. 2124)
1. Immovables
2. Alienable real rights over immovables.
Future property cannot be object of mortgage;
however, a stipulation subjecting to the
mortgage improvements which the mortgagor
may subsequently acquire, install or use in
connection with real property already mortgaged
belonging to the mortgagor is valid.
KINDS
1. Voluntary – constituted by the will of the
owner of the property on which it is created
2. Legal – required by law to be executed in
favor of certain persons:
a. Persons in whose favor the law
establishes a mortgage have no other
right than to demand the execution and
recording of the document in which the
mortgage is formalized (Article 2125)
b. The bondsman who is to be offered in
virtue of a provision of law or of a judicial
order shall have the qualifications
prescribed in Art 2056 (integrity,
capacity to bind himself, and sufficient
property to answer the obligation), an in
other laws (Article 2082)
c. If the person bound to give a bond
should not be able to do so, a pledge or
mortgage considered sufficient to
recover his obligation shall be admitted
in lieu thereof (Article 2083)
3. Equitable – One which, although lacking the
proper formalities of a mortgage, shows the
intention of the parties to make the property
Chapter VII. PLEDGE, MORTGAGE, ANTICHRESIS
as a security for a debt.
a. lien created through equitable mortgage
ought not to be defeated by requiring
compliance with formalities necessary
to the validity of a voluntary real estate
mortgage. Ex.: Pacto de retro
b. ovisions governing equitable mortgage:
Arts. 1365, 1450, 1454, 1602, 1603,
1604 and 1607.
PRINCIPLE OF INDIVISIBILITY OF PLEDGE /
MORTGAGE
(ART. 2089 TO 2090)
DAYRIT v CA: A mortgage directly and
immediately subjects the property upon which it
is imposed. It is indivisible even though the debt
may be divided, and such indivisibility is likewise
unaffected by the fact that 'the debtors are not
solidarity liable.
Central Bank v CA: Where only a portion of the
loan is released, the mortgage becomes
enforceable only as to the proportionate value of
332
the loan
CREDIT TRANSACTIONS
Indivisibility applies only as to
pledgors/mortgagors who are themselves
debtors in the principal obligation, and not to
accommodation pledgors / mortgagors
"When several things are pledged or mortgaged,
each thing for a determinate portion of the debt,
the pledges or mortgage, are considered
separate from each other. But when the several
things are given to secure the same debt in its
entirety, all of them are liable for the debt, and
the creditor does not have to divide his action by
distributing the debt among the various things
pledged or mortgaged. Even when only a part of
the debt remains unpaid, all the things are still
liable for such balance." (Tolentino)
ESSENTIAL REQUISITES
1. Constituted to secure the fulfillment of a
principal obligation.
2. Mortgagor must be the absolute owner of
the thing mortgaged.
3. The persons constituting the mortgage have
free disposal of the property; in the absence
thereof, they should be legally authorized for
the purpose. (Article 2085)
4. Cannot exist without a valid obligation. (Art.
2086 cf 2052)
5. When the principal obligation becomes due,
the thing in which the mortgage consists
may be alienated for payment to the
creditor. (Art. 2087)
CIVIL LAW REVIEWER
6. Must appear in a public document duly
recorded in the Registry of Property, to be
validly constituted. (Art. 2125)
 In a legal mortgage, the persons in whose
favor the law establishes a mortgage
have the right to demand the execution
and recording of a document formalizing
the mortgage. (Art. 2125, par. 2)
EFFECTS
1. Creates real rights, a lien inseparable from
the property mortgaged, enforceable against
the whole world.
2. Creates merely an encumbrance.
LAWS GOVERNING MORTGAGE
1. New Civil Code.
2. PD 1952.
3. Revised Administrative Code.
4. RA 4882, regarding aliens becoming
mortgagees
5. Act 3135, as amended
6. Property Registration Decree
7. General Banking Act of 2000
EFFECTS OF A MORTGAGE
1. It creates a real right, a lien inseparable from
the property mortgaged
2. If a person is the first mortgagee over a
property sold in an auction sale by the
second mortgagee, the only right left to him
is to collect his mortgage credit from the
proceeds of the sale (by virtue of merger of
rights, Art 1275).
3. The first mortgagee has superior rights over
junior mortgagees / attaching creditors
IMPORTANT POINTS
1. As a general rule, the mortgagor retains
possession of the property. He may deliver
said property to the mortgagee without
altering the nature of the contract of
mortgage.
2. It is not an essential requisite that the
principal of the credit bears interest, or that
the interest as compensation for the use of
the principal and the enjoyment of its fruits
be in the form of a certain percentage
thereof.
3. Mortgage creates an encumbrance over the
property, but ownership of the property is
not parted with. It merely restricts the
mortgagor’s jus disponendi over the
property. The mortgagor may still sell the
property, and any stipulation to the contrary
is void (Art. 2130)
4. Mortgage extends to the natural accessions,
to the improvements of growing fruits and
the rents or income NOT YET RECEIVED
Chapter VII. PLEDGE, MORTGAGE, ANTICHRESIS
when the obligation becomes DUE,
including indemnity from insurance, and / or
amount received from expropriation for
public use (Art. 2127)
a. Applies only when the accessions and
accessories subsequently introduced
belongs to the mortgagor.
b. To exclude them, there must be an
express stipulation, or the fruits must be
collected before the obligation becomes
due.
c. Third persons who introduce
improvements upon the mortgaged
property may remove them at any time
Registration – ministerial act by which deed,
contract or instrument is sought to be inscribed
in the office of the Register of Deeds and
annotated at the back of the certificate of title
covering the land subject of the deed, title, or
contract
SAMANILLA v CAJUCOM: A mortgage,
whether registered or not, is binding between the
parties, registration being necessary only to 333
make the same valid against third persons (Art.
CREDIT TRANSACTIONS
2125, CC).
Registration only operates as a notice of the
mortgage to others, but neither adds to its
validity nor convert an invalid mortgage into a
valid one between the parties. In Gurbax Singh
Pabla vs. Reyes, SC ruled that "if the purpose of
registration is merely to give notice, the
questions regarding the effect or invalidity of
instruments are expected to be decided after,
not before, registration. It must follow as a
necessary consequence that registration must
first be allowed and validity or effect litigated
afterwards".
INCIDENTS OF REGISTRATION OF
MORTGAGE
1. Mortgagee is entitled to registration of
mortgage as a matter of right.
2. Proceedings for registration do not
determine validity of the mortgage or its
effect
3. Registration is without prejudice to better
rights of third parties.
4. Mortgage deed, once duly registered, forms
part of the records for the registration of the
mortgaged property.
5. Mortgage by a surviving spouse of his/her
undivided share in the conjugal property can
be registered.
CIVIL LAW REVIEWER
EFFECT OF INVALIDITY OF MORTGAGE
ON THE PRINCIPAL OBLIGATION
1. Principal obligation remains valid.
2. Mortgage deed remains evidence of a
personal obligation.
MOJICA v CA: Mortgages given to secure future
advancements are valid and legal contracts; that
the amounts named as consideration in said
contract do not limit the amount for which the
mortgage may stand as security if from the four
corners of the instrument the intent to secure
future and other indebtedness can be gathered.
A mortgage given to secure advancements is a
continuing security and is not discharged by
repayment of the amount named in the
mortgage, until the full amount of the
advancements are paid (as established earlier in
Lim Julian v. Lutero).
IV. Foreclosure of Mortgage (Art. 2085)
FORECLOSURE OF MORTGAGE
It is the remedy available to the mortgagee by
which he subjects the mortgaged property to the
satisfaction of the obligation secured by the
mortgage.
 In General: An action for foreclosure of a
mortgage is limited to the amount mentioned
in the mortgage, EXCEPT when the
mortgage contract intends to secure future
loans or advancements
 BLANKET mortgage / DRAGNET–
mortgage that subsumes all debts of past or
future origin
 Mortgage may be used as a “continuing
security” which secures future
advancements and is not discharged by the
repayment of the amount in the mortgage
 Alienation or assignment of mortgage credit
is valid even if it is not registered
ACCELERATION CLAUSE, or the stipulation
stating that on the occasion of the mortgagor’s
default, the whole sum remaining unpaid
automatically becomes due and demandable, is
ALLOWED
KINDS OF FORECLOSURE
1. Judicial Foreclosure
2. Extrajudicial Foreclosure
JUDICIAL FORECLOSURE
Rule 68, ROC:
 May be availed of by bringing an action in
the proper court which has jurisdiction over
the area wherein the real or personal (in
Chapter VII. PLEDGE, MORTGAGE, ANTICHRESIS
case of chattel mortgage) property involved
or a portion thereof is situated.
 If the court finds the complaint to be well-
founded, it shall order the mortgagor to pay
the amount due with interest and other
charges within a period of not less than 90
days nor more than 120 days from the entry
of judgment. If the mortgagor fails to pay at
the time directed, the court, upon motion,
shall order the property to be sold to the
highest bidder at a public auction.

Upon confirmation of the sale by the court,
also upon motion, it shall operate to divest
the rights of all parties to the action and to
vest their rights to the purchaser subject to
such rights of redemption as may be allowed
by law.

Before the confirmation, the court retains
control of the proceedings

Execution of judgment subject to APPEAL
but not annulment
 The foreclosure of the property is completed
only when the sheriff’s certificate is
executed, acknowledged and recorded
334
The proceeds of the sale shall be applied to
CREDIT TRANSACTIONS
the payment of the:
a. Costs of the sale;
b. Amount due the mortgagee;
c. Claims of junior encumbrancers or
persons holding subsequent mortgages
in the order of their priority; and
d. Balance, if any shall be paid to the
mortgagor.
NATURE OF JUDICIAL FORECLOSURE
PROCEEDINGS:
1. Quasi in rem action. Hence, jurisdiction may
be acquired through publication.
2. Foreclosure is only the result or incident of
the failure to pay debt.
3. Survives death of mortgagor.
EXTRAJUDICIAL FORECLOSURE(Act No.
3135)
1. Applies to mortgages where the authority to
foreclose is granted to the mortgagee.
2. Authority is not extinguished by death of
mortgagor or mortgagee. This is an agency
coupled with interest.
3. Public sale should be made after proper
notice to the public, otherwise it is a
jurisdictional defect which could render the
sale voidable.
4. There is no need to notify the mortgagor.
Proper notice consists of:
a. posting notice in three public places
and / or
b. publication in newspaper of general
CIVIL LAW REVIEWER
circulation
c. purpose of notice is to obtain the best
bid for the foreclosed property
5. Surplus proceeds of foreclosure sale belong
to the mortgagor.
6. Debtor (who must be a NATURAL
PERSON) has the right to redeem the
property sold within 1 year from and after
the date of sale.
a. If the mortgagee is a bank and the
debtor is a juridical person, then there
is no right of redemption. However, it
may redeem the property BEFORE the
registration of the TCT to the buyer,
which is similar to the equity of
redemption. The TCT must be
registered within THREE MONTHS
after the foreclosure.
b. The mortgagor can only legally transfer
the right to redeem and the use of the
property during the period of
redemption.
7. Remedy of party aggrieved by foreclosure is
a petition to set aside sale and cancellation
of writ of possession. However, if the
mortgagee is a bank, the mortgagor is
required to post a bond equal to the value of
the mortgagee’s claim.
8. Republication is of the notice of sale
necessary for validity of postponed
extrajudicial sale
9. In foreclosure of real estate mortgage under
Act 3135, the buyer at auction may petition
the land registration court for a writ of
possession pending the one-year period of
redemption of the foreclosedproperty.
Nature of power of foreclosure by
extrajudicial sale:
1. Conferred for mortgagee’s protection.
2. An ancillary stipulation.
3. A prerogative of the mortgagee.
Note:
a. Both should be distinguished from
execution sale governed by Rule 39,
ROC.
b. Foreclosure retroacts to the date of
registration of mortgage.
c. A stipulation of upset price, or the
minimum price at which the property
shall be sold to become operative in the
event of a foreclosure sale at public
auction, is null and void.
RIGHT OF MORTGAGEE TO RECOVER
DEFICIENCY
1. Mortgagee is entitled to recover deficiency.
2. If the deficiency is embodied in a judgment,
Chapter VII. PLEDGE, MORTGAGE, ANTICHRESIS
it is referred to as deficiency judgment.
3. Action for recovery of deficiency may be
filed even during redemption period.
4. Action to recover prescribes after 10 years
from the time the right of action accrues.
EFFECT OF INADEQUACY OF PRICE IN
FORECLOSURE SALE
1. Where there is right to redeem, inadequacy
of price is immaterial because the judgment
debtor may redeem the property.
Exception: Where the price is so inadequate
as to shock the conscience of the court,
taking into consideration the peculiar
circumstances.
2. Property may be sold for less than its fair
market value, upon the theory that the lesser
the price the easier it is for the owner to
redeem.
3. The value of the mortgaged property has no
bearing on the bid price at the public
auction, provided that the public auction was
regularly and honestly conducted. 335
CREDIT TRANSACTIONS
WAIVER OF SECURITY BY CREDITOR
1. Mortgagee may waive right to foreclose his
mortgage and maintain a personal action for
recovery of the indebtedness.
2. Mortgagee cannot have both remedies.
REDEMPTION
1. It is a transaction by which the mortgagor
reacquires the property which may have
passed under the mortgage or divests the
property of the lien which the mortgage may
have created
2. Kinds:
a. Equity of redemption: in judicial
foreclosure of real estate mortgage
under the ROC, it is the right of the
mortgagor to redeem the mortgaged
property by paying the secured debt
within the 120 day period from entry of
judgment or after the foreclosure sale,
but before the sale of the mortgaged
property or confirmation of sale
 formal offer to redeem preserves the
right of redemption, e.g., by filing an
action to enforce the right to redeem
b. Right of redemption: in extrajudicial
foreclosure of real estate mortgage, the
right of the mortgagor to redeem the
property within a certain period after it
was sold for the satisfaction of the debt.
 For natural persons – one year from
the registration of the TCT
CIVIL LAW REVIEWER
 For juridical persons – three months
from the foreclosure
 Formal offer to redeem must be with
tender of redemption price to
preserve right of redemption
NOTE: There is no right of redemption in
pledge and chattel mortgage.
MEDIDA v CA: The rule up to now is that
the right of a purchaser at a foreclosure sale
is merely inchoate until after the period of
redemption has expired without the right
being exercised. The title to land sold under
mortgage foreclosure remains, in the
mortgagor or his grantee until the expiration
of the redemption period and conveyance by
the master's deed
V. Antichresis
ANTICHRESIS is a contract whereby the
creditor acquires the right to receive the fruits of
an immovable of the debtor, with the obligation
to apply then to the payment of the interest, if
owing, and thereafter to the principal of the
credit (Art 2132)
CHARACTERISTICS
1. Accessory contract – it secures the
performance of a principal obligation
2. formal contract – it must be in a specified
form to be valid (Art. 2134)
SPECIAL REQUISITES:
1. it can cover only the fruits of an immovable
property
2. delivery of the immovable is necessary for
the creditor to receive the fruits and not that
the contract shall be binding
3. amount of principal and interest must be
specified in writing
4. express agreement that debtor will give
possession of the property to creditor and
that the latter will apply the fruits to the
interest, if any, then to the principal of his
credit
5. NOTE: The obligation to pay interest is not
of the essence of the contract of antichresis;
there being nothing in the Code to show that
antichresis is only applicable to securing the
payment of interest-bearing loans. On the
contrary, antichresis is susceptible of
guaranteeing all kinds of obligations, pure or
conditional
Chapter VII. PLEDGE, MORTGAGE, ANTICHRESIS
OBLIGATIONS OF ANTICHRETIC CREDITOR
1. to pay taxes and charges on the estate,
including necessary expenses. Creditor may
avoid said obligation by:
a. compelling debtor to reacquire
enjoyment of the property
b. by stipulation to the contrary
2. to apply all the fruits, after receiving them, to
the payment of interest, if owing, and
thereafter to the principal
3. to render an account of the fruits to the
debtor
4. to bear the expenses necessary for its
preservation and repair
REMEDIES OF CREDITOR IN CASE OF NON-
PAYMENT OF DEBT
1. action for specific performance
2. Petition for the sale of the real property as in
a foreclosure of mortgages under Rule 68 of
the Rules of Court
a. The parties, however, may agree on an
extrajudicial foreclosure in the same
manner as they are allowed in contracts
of mortgage and pledge (Tavera v. El 336
Hogar Filipino, Inc. 68 Phil 712)
CREDIT TRANSACTIONS
b. A stipulation authorizing the antichretic
creditor to appropriate the property upon
the non-payment of the debt within the
agreed period is void (Art. 2088)
VI. Chattel Mortgage
CHATTEL MORTGAGE is a contract by virtue
of which a personal property is recorded in the
Chattel Mortgage Register as security for the
performance of an obligation.
If the movable, instead of being recorded, is
delivered to the creditor, it is pledge and not
chattel mortgage.
LAWS GOVERNING CHATTEL MORTGAGE
1. Chattel Mortgage Law (Act.1508, as
amended).
2. New Civil Code.
3. Revised Administrative Code.
4. Revised Penal Code.
5. Ship Mortgage Decree of 1978 (PD 1521)
governs mortgage of vessels of domestic
ownership.
AFFIDAVIT OF GOOD FAITH
 An oath in a contract of chattel mortgage
wherein the parties "severally swear that the
mortgage is made for the purpose of
securing the obligation specified in the
conditions thereof and for no other purposes
CIVIL LAW REVIEWER Chapter VII. PLEDGE, MORTGAGE, ANTICHRESIS

and that the same is a just and valid
obligation and one not entered into for the
purpose of fraud.
EFFECT OF REGISTRATION
1. Creates real rights.
2. Adds nothing to mortgage.
Note: Registration of assignment of mortgage is
not required.
RIGHT OF REDEMPTION OF MORTGAGE
1. When the condition of a chattel mortgage is
broken, the following may exercise
redemption:
a. Mortgagor.
b. Person holding a subsequent mortgage.
c. Subsequent attaching creditor.
2. An attaching creditor who so redeems shall
be subrogated to the rights of the mortgagee
and entitled to foreclose the mortgage in the
same manner as a mortgagee.
3. Redemption is made by paying or delivering
to the mortgagee the amount due on such
mortgage and the costs and expenses
incurred by such breach of condition before
RIGHT OF MORTGAGEE TO RECOVER
DEFICIENCY
1. Where mortgage foreclosed: Creditor may
maintain action for deficiency although the
Chattel Mortgage Law is silent on this point,
because a chattel mortgage is given only as
a security and not as payment of the debt.
2. Where mortgage constituted as security for
purchase of personal property payable in
installments: No deficiency judgment can be
asked and any contrary agreement shall be
void.
3. Where mortgaged property subsequently
attached and sold: Mortgagee is entitled to
deficiency judgment in an action for specific
performance.
APPLICATION OF PROCEEDS OF SALE
1. Costs and expenses of keeping and sale.
2. Payment of the obligation.
3. Claims of persons holding subsequent
mortgages in their order.
4. Balance, if any, shall be paid to the
mortgagor, or person holding rights under
him. 337

CREDIT TRANSACTIONS
the sale.

FORECLOSURE OF CHATTEL MORTGAGE

1. Public sale.
2. Private sale – There is nothing illegal,
immoral or against public order in an
agreement for the private sale of the
personal properties covered by chattel
mortgage.

PERIOD TO FORECLOSE
1. After 30 days from the time of the condition
is broken.
2. The 30-day period is the minimum period
after violation of the mortgage condition for
the creditor to cause the sale at public
auction with at least 10 days notice to the
mortgagor and posting of public notice of
time, place, and purpose of such sale, and is
a period of grace for the mortgagor, to
discharge the obligation.
3. After the sale at public auction, the right of
redemption is no longer available to the
mortgagor.

CIVIL ACTION TO RECOVER CREDIT

1. Independent action to recover debt is not
required.
2. However, mortgage lien is deemed
abandoned by obtaining a personal
judgment.
CIVIL LAW REVIEWER
Chapter VIII. Concurrence and
Preference of Credits
I. GENERAL PROVISIONS
II. CLASSIFICATION OF CREDITS
III. PREFERENCE OF CREDITS
CONCURRENCE OF CREDIT implies
possession by two or more creditors of equal
right or privileges over the same property or all
of the property of a debtor.
PREFERENCE OF CREDIT is the right held by
a creditor to be preferred in the payment of his
claim above other out of the debtor’s assets.
I. General Provisions
1. The debtor is liable with all his property,
present and future, for the fulfillment of his
obligations, subjects to exemptions provided
by law.
Exempted property:
a. Present property:
 Family home. (Arts. 152, 153 and
155, CC)
 Right to receive support, as well as
money or property obtained by such
support, shall not be levied upon on
attachment or execution. (Art. 205,
CC)
 Sec. 13, Rule 39, ROC.
 Sec 118, Public Land Act. (CA 141,
as amended)
b. Future property: A debtor who obtains a
discharge from his debts on account of
insolvency, is not liable for the
unsatisfied claims of his creditors with
said property. (Sec. 68 and 69,
Insolvency Law, Act 1956)
c. Property in custodia legis and of public
dominion.
2. Insolvency shall be governed by the
Insolvency Law. (Act 1956, as amended)
3. Exemption of conjugal property or absolute
community or property, provided that:
a. Partnership or community subsists.
b. Obligations of the insolvent spouse have
not redounded to the benefit of the
family.
4. If there is co-ownership, and one of the co-
owners is the insolvent debtor, his undivided
share or interest in the property shall be
possessed by the assignee in insolvency
proceedings because it is part of his assets.
-end of Credit Transactions -
Chapter VIII. PHILIPPINE BULK SALES LAW
5. Property held by the insolvent debtor as a
trustee of an express or implied trust, shall
be excluded from the insolvency
proceedings
II. Classification of Credits
1. Special preferred credits. (Art. 2241 and
2242, CC)
a. Considered as mortgages or pledges of
real or personal property or liens within
the purview of legal provisions
governing insolvency.
b. Taxes due to the State shall first be
satisfied.
2. Ordinary preferred credits (Art. 2244) –
Preferred in the order given by law.
3. Common credits (Art. 2245) – Credits of any
other kind or class, or by any other right or
title not comprised in Arts. 2241- 2244 shall
enjoy no preference.
III. Preference of Credits
1. Credits which enjoy preference with respect
to specific movables exclude all others to 338
the extent of the value of the personal
CREDIT TRANSACTIONS
property to which the preference refers.
2. If there are 2 or more credits with respect to
the same specific movable property, they
shall be satisfied pro rata, after the payment
of duties, taxes and fees due the State or
any subdivision thereof
3. Those credits which enjoy preference in
relation to specific real property or real rights
exclude all others to the extent of the value
of the immovable or real right to which the
preference refers.
4. If there are 2 or more credits with respect to
the same specific real property or real rights,
they shall be satisfied pro rata, after the
payment of the taxes and assessment of the
taxes and assessments upon the immovable
property or real right.
5. The excess, if any, after the payment of the
credits which enjoy preference with respect
to specific property, real or personal, shall
be added to the free property which the
debtor may have, for the payment of other
credits.
6. Those credits which do not enjoy any
preference with respect to specific property,
and those which enjoy preference, as to the
amount not paid, shall be satisfied according
to the following rules:
a. Order established by Art 2244
b. Common credits referred to in Art 2245
shall be paid pro rata regardless of
dates