Reviewer for Credit Transaction

I. NATURE AND EXTENT OF GUARANTY

REAL PROPERTY

1. Real mortgage

2. Antichresis

PERSONAL PROPERTY

1. Pledge

2. Chattel Mortgage

If Guarantor/Creditor – Contract of Guaranty

If Debtor/Guarantors – Contract of indemnity

Exam material ☆☆☆

When a person acts merely as a guarantor of the obligation, the liability is merely civil not criminal. It is
error therefore, to convict the guarantor.

As to form, the contract of guaranty is governed by the Statute of Frauds, being a special promise to
answer for the debt, default, or miscarriage of another. Hence, an oral promise of guaranty is not
enforceable.

Guarantor vs Surety

G- Subsidiary Liability S – Primary Liability

G- pays if debtor CANNOT S- pays if debtor DOES NOT

G- insurer of the debtor’s insolvency S- insurer of the debt

Although, a contract of suretyship is in essence accessory or collateral to a valid principal obligation, the
surety’s liability to the creditor is immediately primary and absolute – he is directly and equally-bound
with the principal.

A guarantor can recover from the debtor even if without the debtor’s consent or against his will, but the
recovery will only be to the extent that the debtor had been benefited.

2051 – A guaranty may be

Conventional, Legal or Judicial, Gratuitous, or by Onerous title

2052 – A guaranty is merely an accessory contract, so if the obligation is void, the guaranty is also void.
However, under Article 2052 (2) a guaranty can be valid even if the principal obligation is (a) voidable (b)
unenforceable (c) natural

There can be guaranty for present/future debts

Hence, a bond posted to secure additional credit that the principal debtor had applied for is not void just
because the said bond was signed and filed before the additional credit was extended by the creditor

Debt considered liquidated under Art. 2053 – when it is for a price fixed in a contract for the delivery of
future goods and the seller is now ready to deliver said good within the period stipulated

Exam Material ☆☆☆

Guarantor mortgaged his land in favor of the debtor. May the creditor foreclose the mortgage if the
obligation is not fulfilled?

NO. The obligation of (G) being merely accessory to A’s debt, it should not be more onerous than the
latter.

Can C act as surety and guarantee the payment and limit his liability?

YES, the guarantor or the surety can bind himself for less than the principal debtor

Application of payments (Secured/Unsecured)

10 ang utang

7 unsecured

3 secured

Under jurisprudence, the Supreme Court repeatedly stated that; payment should first be applied to the
unsecured portion of the debt

This is so because the unsecured debt is clearly more onerous that the secured one

If the indebtedness is increased without the guarantor’s consent, he is completely released from the
obligation as guarantor or surety

If a guarantor upon demand fails to pay, he can be held liable for interest, even if the liability becomes
more than that in the principal obligation

To be enforceable, the contract of guaranty between the guarantor and the creditor must be in writing

A guaranty is strictly construed against the creditor and in favor of the guarantor or surety

Article 2056 – Qualifications of the guarantor

(1) Integrity (2) Capacity to bind himself (3) Sufficient Property

Article 2057 – Crime involving dishonesty or becomes insolvent

Creditor is given the right to demand SUBSTITUTION OF GUARANTOR. This right may be waived

If a guarantor dies, his heirs are still liable, to the extent of the value of the inheritance because the
obligation is not purely personal, and is therefore transmissible.
SURETY IS NOT ENTITLED TO EXHAUSTION

➢ A surety is not entitled to the exhaustion of the properties of the principal debtor. The reason is that
a surety assumes a solidary liability for the fulfillment of the principal obligation as an original promissor
and debtor from the beginning

SURETIES DO NOT INSURE THE SOLVENCY OF THE DEBTOR, BUT RATHER THE DEBT ISELF. THEY ARE
CONTRACTED PRECISELY TO MITIGATE RISKS OF NONPERFORMANCE ON THE PART OF THE OBLIGOR.
THIS RESPONSIBILITY NECESSARILY PLACES A SURETY ON THE SAME LEVEL AS THAT OF THE PRINCIPAL
DEBTOR.

THE EFFECT IS THAT THE CREDITOR IS GIVEN THE RIGHT TO DIRECTLY PROCEED AGAINST EITHER
PRINCIPAL DEBTOR OR SURETY. THIS IS THE REASON WHY EXCUSSION CANNOT BE INVOKED

BUT WHEN DEMANDED BY THE REQUIREMENTS OF JUSTICE, THE PRINCIPAL OBLIGOR RATHER THAN
THE SURETY MAY BE REQUIRED TO PAY THE INSURED OBLIGATION SUC AS WHERE THE FORMER HAS
THE NECESSARY AMOUN IT GOT UNDER T BOND WITH WHICH TO COMPLY WITH THE TERMS THEREOF.

II. EFFECTS OF GUARANTY

General Rule:

(1) The guarantor is entitled to the benefit of excussion except in the cases mentioned under Art. 2059,
provided that the guarantor follows Art. 2060

(2) A compromise between the creditor and the principal debtor benefits but does not prejudice the
guarantor. (Art. 2063)

(3) If there should be several guarantors, they are in general entitled to the benefit of division (pro-rata
liability) (Art. 2065)

(A mortgagor is not entitled to the benefit of exhaustion)

Exam material ☆☆☆

What do you understand by excussion?

By excussion is meant the right of the guarantor to have all the properties of the debtor and all legal
remedies against him first exhausted before he can be compelled to pay the creditor (Art. 2058)

Duty of the creditor

(1) exhaust all the property of the debtor (2) resort to all the legal remedies against the debtor (3) prove
that the debtor is still unable to pay (4) notify the guarantor

Just because the debtor has been declared insolvent in insolvency proceedings this does not mean that
the debtor cannot pay, for part of the debtor’s assets may still be available to the creditor

Exam material ☆☆☆

Suppose the guarantor has already been sued, will a writ of execution be rendered against him?

Not necessarily, for it is essential to sue first the debtor and exhaust his assets
Article 2059. The excussion shall not take place: (RUSIA)

(1) If the guarantor has expressly renounced it;

(2) If he has bound himself solidarily with the debtor;

(3) In case of insolvency of the debtor;

(4) When he has absconded, or cannot be sued within the Philippines unless he has left a manager or
representative;

(5) If it may be presumed that an execution on the property of the principal debtor would not result in
the satisfaction of the obligation.

RUSIA – renounce, useless because execution will not be satisfied, solidarily bound, insolvency of
debtor, absconded etc.

Additional instances: (1) judicial bond (2) art.2060 not complied (3) principal debt is a natural, voidable,
or unenforceable obligation

Art. 2060 –

The demand can be made only AFTER a judgment has been rendered against the principal debtor. Just
because the guarantor was sued at the same time as the debtor this does not mean that the creditor has
already made the demand on the guarantor

Guarantor must point out AVAILABLE (not under litigation or encumbered) property of debtor WITHIN
the Philippines

Art. 2061 –

The article says that the negligent creditor suffers the loss to the extent of the value of the property
pointed out by the guarantor but not exhausted by the creditor

Art. 2062 –

GR: the creditor must generally sue ONLY the principal debtor

Exception: when the guarantor is not entitled to the benefit of excussion

Art. 2064 –

Sub-guarantor shall also enjoy the benefit of excussion with respect to the guarantor and to the
principal debtor

Article 2066. The guarantor who pays for a debtor must be indemnified by the latter. (TIED)

The indemnity comprises:

(1) The total amount of the debt;

(2) The legal interests thereon from the time the payment was made known to the debtor, even though
it did not earn interest for the creditor;
(3) The expenses incurred by the guarantor after having notified the debtor that payment had been
demanded of him;

(4) Damages, if they are due.

Article 2069 - If the debt was for a period and the guarantor paid it before it became due, he cannot
demand reimbursement of the debtor until the expiration of the period unless the payment has been
ratified by the debtor.

Exam Material ☆☆☆

A owes B P100,000 with C as guarantor. C paid the P100,000 to B when the debt fell due, but C did this
without first notifying A. Not being aware of the payment by C, A repeated the payment. Can C recover
from A?

ANS.: No. C cannot recover from A. C has no remedy whatever against A, the debtor. C’s only remedy is
to recover from B, the creditor.

Suppose in example (a), the guaranty was gratuitous, and suppose the only reason C was not able to
notify A was because of a fortuitous event, what are C’s rights?

ANS.: C must still recover from B. But if B, the creditor is insolvent, then A, the debtor, shall reimburse C,
the guarantor, for the amount paid. This is therefore a different case from that presented in example (a),
because in said example, even if B, the creditor, is insolvent A does not have to reimburse C, the
guarantor, because under the facts of the case, C is clearly at fault for having no justifiable reason for
not advising the debtor of the payment.

Note that the second sentence of Art. 2070 is applicable only in case of a gratuitous guaranty. It is clear
that it should not be applied if the guaranty is onerous or for a compensation.

Article 2071 - The guarantor, even before having paid, may proceed against the principal debtor:

(1) When he is sued for the payment;

(2) In case of insolvency of the principal debtor;

(3) When the debtor has bound himself to relieve him from the guaranty within a specified period, and
this period has expired;

(4) When the debt has become demandable, by reason of the expiration of the period for payment;

(5) After the lapse of ten years, when the principal obligation has no fixed period for its maturity, unless
it be of such nature that it cannot be extinguished except within a period longer than ten years;

(6) If there are reasonable grounds to fear that the principal debtor intends to abscond;

(7) If the principal debtor is in imminent danger of becoming insolvent.

In all these cases, the action of the guarantor is to obtain release from the guaranty, or to demand a
security that shall protect him from any proceedings by the creditor and from the danger of insolvency
of the debtor.
2071 – before payment

2066 – after payment

2071 – is of the nature of a preliminary remedy

2066 – is a substantive right

Exam Material ☆☆☆

A borrowed P900,000 from B. C is the guarantor. The debt has already fallen due, for the term has
already expired. Is C allowed to bring an action against A even before C had paid B?

ANS.: Yes. (Art. 2071, par. 4). The purpose is to obtain release from the guaranty, or to demand a
security that shall protect him from any proceedings by the creditor and from the danger of insolvency
of the debtor. (Art. 2071, 1st par.). The purpose is certainly not to recover money, since the guarantor
has not yet paid.

In problem (a), suppose the guarantor wins in this action, and suppose, for example, he obtains a
security from the principal debtor, would this be proper?

ANS.: Yes, this would be proper for such a remedy is one of those enumerated. And, therefore, a
judgment on this point is proper, BUT he ought not to be allowed to realize on said judgment to the
point of actual collection of the same until he (the guarantor) has satisfied or caused to be satisfied the
obligation the payment of which he assumed. Otherwise, a great opportunity for collusion and improper
practices between the guarantor and the principal debtor would be offered which might result in injury
and prejudice to the creditor who holds the claim against them.

The creditor failed to make a demand upon the principal debtor although the debt was already due. The
guarantor, afraid that the principal debtor might sooner or later become insolvent, brought an action
against the creditor to compel said creditor to make the demand upon the principal debtor. Will the
action prosper?

ANS.: No, the action will not prosper because the remedy of the fearful guarantor should be against the
principal debtor in accordance with Art. 2071.

The remedies provided for under Art. 2071 are alternative remedies in favor of the guarantor at his
election and the guarantor who brings an action under this article must choose the remedy and apply
for it specifically.

Article 2072 - If one, at the request of another, becomes a guarantor for the debt of a third person who
is not present, the guarantor who satisfies the debt may sue either the person so requesting or the
debtor for reimbursement

Article 2073 - This Article is applicable only when there has been payment. If there has been no payment
by way of the guarantors, this Article cannot be applied. Furthermore, this payment must have been
made: (a) in virtue of a judicial demand; (b) or because the principal debtor is insolvent
Example of Par. 1

A, B, and C are D’s guarantors. D was insolvent, and A had to pay the whole debt. Later, A can demand
from B and C 1/3 of the debt from each. This is so because A’s share is supposed to be also 1/3. Of
course, each of them can later demand proportional reimbursement from the principal debtor.

Example of Par. 2

A, B, and C are D’s guarantors of a debt of P300,000 in favor of E. Since D was insolvent, A paid P300,000
to E. Under par. 1, he can therefore demand P100,000 each from B and C. But B is insolvent. How much
can A demand from C?

ANS.: P150,000. A cannot demand the extra P100,000 (share of B) from C because in that way, C would
have a greater burden. The law provides that the insolvent guarantor’s share (B) must be borne by the
others (including the payer A) proportionally.

This Article should not be confused with the article giving as a rule to several guarantors the benefit of
division (Art. 2065) for in said article, there has been no payment as yet. Moreover, in Art. 2073, the
payment must have been made because of judicial proceedings or because the principal debtor was
insolvent.

III. EXTINGUISHMENT OF GUARANTY

direct (when the guaranty itself is extinguished, independently of the principal obligation)

indirect (when the principal obligation ends, the accessory obligation of guaranty naturally ends).

Exam material ☆☆☆

A borrowed money from B, payable in installments, with C as the guarantor. The contract provided that
upon the failure to pay one installment, the whole unpaid balance automatically became due
(acceleration clause). A failed to pay one installment on time, but was granted extension by B, without
C’s consent. Issue: Is C released?

Answer: Yes, inasmuch as the extension here referred really to the whole amount of the indebtedness.

Suppose in problem (a), there was no “balance automatically due” clause, and suppose the creditor had
granted an extension for merely one installment without the consent of the guarantor, does this release
the guarantor?

Answer: There is a release insofar as that particular installment is concerned, but not insofar as the
other installments are concerned.

Art. 2080. The guarantors, even though they be solidary, are released from their obligation whenever by
some act of the creditor they cannot be subrogated to the rights, mortgages, and preferences of the
latter.

Art. 2080 Does Not Apply in a Contract of Suretyship

Defenses Available to the Guarantor

defenses inherent in the principal obligation

Examples: Prescription, res judicata, payment, illegality of cause.

defenses ordinarily personal to the principal debtor, but which are inherent in the debt

Vitiated consent (or intimidation, etc.)

defenses of the guarantor himself

(1) vitiated consent on his part (2) compensation between debtor and creditor (3) remission of the
principal obligation or of the guaranty (4) merger of the person of debtor and creditor

Surety bonds should be signed not only by the sureties but also by the principal obligors (the defendants
in a case, for example). If not signed by the latter the surety bonds are void, there being no principal
obligation (which is of course the cause or consideration of such surety bonds)

A judicial bondsman, being a surety, is not entitled to the benefit of excussion granted a guarantor. The
benefit is also denied a sub-surety

IV. PLEDGE & MORTGAGE

Art. 2085. The following requisites are essential to the contracts of pledge and mortgage:

(1) That they be constituted to secure the fulfillment of a principal obligation;

(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;

(3) That the persons constituting the pledge or mortgage have the free disposal of their property, and in
the absence thereof, that they be legally authorized for the purpose.

Third persons who are not parties to the principal obligation may secure the latter by pledging or
mortgaging their own property.

The pledgor or mortgagor need not be the debtor or borrower; thus, one who owns property can pledge
or mortgage it to secure another’s debt. Note here that pledgor or mortgagor is the OWNER of the
property.

If a forger pledges or mortgages another’s property, the pledge or mortgage is VOID, unless the land
concerned was already registered in the forger’s name, in which case innocent third parties should not
be prejudiced. (Jurisprudence)

Even if the pledge or mortgage is VOID the principal obligation (loan) may still be VALID. Therefore, the
debt may still be recovered in an ordinary action.

Art. 2086. The provisions of Article 2052 are applicable to a pledge or mortgage.

COMMENT:

Applicability of Art. 2052 (Guaranty of Voidable, Etc., Obligations)

(a) Even if the principal debt is voidable, unenforceable, or merely natural, the pledge or mortgage is
valid.

(b) If the principal obligation is void, the pledge or mortgage is also void.

(c) Art. 2052. “A guaranty cannot exist without a valid obligation.

Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or an

unenforceable contract. It may also guarantee a natural obligation.’’

Art. 2087. It is also of the essence of these contracts that when the principal obligation becomes due,
the things in which the pledge or mortgage consists may be alienated for the payment to the creditor.

This Article does not mean that the creditor automatically become the owner, if at the time the debt
falls due, the debt is still unpaid. It only means that the property pledged or mortgaged may be sold (to
anybody, including the creditor) so that from the proceeds of such alienation the debt might be paid.

As a rule, the mortgage can be foreclosed only when the debt remains unpaid at the time it is due, but
the violation of certain conditions in the mortgage may authorize immediate foreclosure.

Just because the price is considered inadequate this does not mean that the foreclosure sale should be
cancelled. It would be otherwise if the price were shocking (Jurisprudence)

A was indebted to B. As a security, A’s land was mortgaged in favor of B. A did not pay his taxes, and so
the land was sold at a tax sale to C. Does C have to respect the mortgage in B’s favor?

Answer: Yes. The tax title issued under the procedure adopted in the City of Manila for the recovery of
delinquent taxes, conveys only such title as was vested in the delinquent taxpayer. Such sale cannot
affect the rights of other lien holders unless by the procedure adopted, they had been given an
opportunity to defend their rights.

Note also: that “if the property is sold for non-payment of taxes due and not made known to the vendee
before the sale, the vendor is liable for eviction.”

Pactum Commissorium

A borrowed from B a sum of money. A offered his house by way of a mortgage. It was expressly
stipulated in the contract that upon non-payment of the debt on time, the house would belong to B. Is
the stipulation valid?

ANS.: No, such a stipulation (pacto comisorio) is null and void. “This forfeiture clause has traditionally
not been allowed because it is contrary to good morals and public policy.”

A pledged his property in favor of B to secure a loan. It was expressly stipulated in the contract that the
pledgee could purchase the things pledged at the current purchase price if the debt was not paid on
time. Is this a valid stipulation?

ANS: Yes. What is prohibited by Art. 2088, dealing with pacto comisorio, is the automatic appropriation
by the creditor or pledgee in payment of the loan at the expiration of the period agreed upon. The
reason for the prohibition is that the amount of the loan is ordinarily much less than the real value of
the things pledged. Where there is express authorization of the pledgee to purchase the things pledged
at the current market price, the contract would not come within the prohibition. (Jurisprudence)

NOTE: If a mortgagor promises to sell the property to the mortgagee upon default, this is merely a
personal obligation, and does not bind the land. Hence, he can still sell the land to a stranger BUT he
would be liable for damages.

Is a mortgagee allowed during the existence of the principal debt, to sell the property mortgaged to
him?

ANS.: No, because this would certainly be an act of disposition. The answer would be the same even if
the contract allows the sale, for in such a case, said stipulation would be null and void.

READ 2089 CODAL

A borrowed P1 million from B, secured by a mortgage on A’s land. A died leaving children X and Y. X paid
P50,000 to B. Can X ask for the proportionate extinguishment of the mortgage?

ANS.: No (Par. 2, Art. 2089), but of course the debt is now only half. Indeed, a mortgage is indivisible, but
the principal obligation may be divisible

A borrowed P1 million from B, secured by a mortgage on A’s land. B died leaving two children, R and T. A
paid R P500,000. Is R allowed to cancel the mortgage?

ANS.: No. (Par. 3, Art. 2089)

A borrowed P1 Million from B, secured by the pledge of a ring for a debt of P200,000; and by a mortgage
on A’s land, for the balance of P800,000. If A pays P200,000, can he demand the return of the ring?

ANS.: Yes, because in this case the ring guaranteed only P200,000. (Pars. 3 and 4, Art. 2089).

If a mortgage is constituted on a house and its lot, both should be sold TOGETHER at the foreclosure,
and not separately. Similarly, if the mortgage is on two lots, the mortgagee can demand the sale of
either or both. This is because the mortgage is INDIVISIBLE. (Jurisprudence)

The indivisibility of a mortgage does not apply to third persons

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

A borrowed 10 million from B. A promised to execute a mortgage to guarantee this debt. The promise
was accepted. Suppose A has not yet constituted the mortgage, can we say that there already exists a
mortgage here?

ANS.: No, there is no mortgage as yet — no real right has been created. What exists, however, is a
personal right of B to demand the constitution of the mortgage. Thus in one case, inasmuch as the
debtor had made a promise to constitute a pledge and inasmuch as the promise had been accepted by
the creditor-bank, it was held that the bank could have, under Art. 2082, compelled the fulfillment of
the agreement.
Any person who, pretending to be the owner of any real property, shall convey, sell, encumber, or
mortgage the same shall be guilty of estafa. (Art. 316, par. 1, Revised Penal Code). This crime has 3
constituent elements:

(1) the property should be real property, for otherwise, the crime might be theft or another crime, but
not estafa;

(2) the offender must have pretended to be the owner, that is, he should not have been in good faith;
otherwise, deceit or fraud would not be present; and

(3) the fictitious owner must have executed some acts of ownership to the prejudice of the true owner.

Any person who, knowing that real property is encumbered, shall dispose of the same as
unencumbered, is also guilty of estafa.

Ownership Not a Necessary Element of Estafa

V. PLEDGE

Exam material ☆☆☆

Art. 2093. In addition to the requisites prescribed in Article 2085, it is necessary, in order to constitute
the contract of pledge, that the thing pledged be placed in the possession of the creditor, or of a third
person by common agreement.

This requisite is most essential and is characteristic of a pledge without which the contract cannot be
regarded as entered into because precisely in this delivery lies the security of the pledge. (Manresa).
Indeed, if Art. 2093 is not complied with, the pledge is VOID. Until the delivery of the thing, the whole
rests in an executory contract, however strong may be the engagement to deliver it, and the “pledgee”
acquires no right of property in the thing. Hence, if a pledgee fails or neglects to take this property into
his possession, he is presumed to have waived the right granted him by the contract. Furthermore, mere
taking of possession is insufficient to continue the pledge. The pledgee must continue in said possession.
Furthermore, mere symbolical delivery is insufficient. There must be actual possession — actual delivery
of possession.

A pledgee shall not take effect against third persons if a description of the thing pledged and the date of
the pledge do not appear in a public instrument.

Although we have seen that symbolic delivery is not sufficient, still if the pledgee, before the pledge, had
the thing already in his possession, then the requirement of the law has been satisfied. For then, said
pledgee would be in actual possession. The same thing may be said in case the thing pledged is in the
possession of a third person by common agreement.

Art. 2094. All movables which are within commerce may be pledged, provided they are susceptible of
possession.

(1) movables (2) certificates of stock or of stock dividends or negotiable instruments

Art. 2096. A pledge shall not take effect against third persons if a description of the thing pledged and
the date of the pledge do not appear in a public instrument.
The ring is delivered to B, but in the public instrument executed, there is no description of the ring, and
the date of the pledge does not appear. If A sells the ring to C, does C have to respect the pledge in favor
of B?

ANS.: No. C does not have to respect the pledge since as to him, the pledge is not effective and valid.
(Art. 2096). (THIRD PERSON)

When the contract of pledge is not recorded in a public instrument, it is void as against third persons;
the buyer of the thing pledged is a third person within the meaning of the article. The fact that the
person claiming as pledgee has taken actual physical possession of the thing sold will not prevent the
pledge from being declared void insofar as the innocent stranger is concerned

A pledged his diamond ring with B. A may sell the ring provided that B consents. The sale is, however,
subject to the pledge, that is, the pledge would bind third persons if Art. 2096 has been followed. If C
buys the ring, the ownership of the ring is transferred to him, as soon as B consents to the sale but B
shall continue to be in possession of the ring.

NO DOUBLE PLEDGE

Property which has been lawfully pledged to a creditor cannot be pledged to another as long as the first
one subsists

Art. 2104. The creditor cannot use the thing pledged, without the authority of the owner, and if he
should do so, or should misuse the thing in any other way, the owner may ask that it be judicially or
extrajudicially deposited. When the preservation of the thing pledged requires its use, it must be used
by the creditor but only for that purpose.

Art. 2105. The debtor cannot ask for the return of the thing pledged against the will of the creditor,
unless and until he has paid the debt and its interest, with expenses in a proper case.

READ 2106 2107 2108

Example: A pledged canned goods with B. Because the goods were in danger of deterioration, B sold
them for P20,000. Who owns the P20,000? ANS.: A owns the P20,000, but B shall keep the money as
security in the same manner as the canned goods originally pledged.

Note that the sale under this Article must be a “public sale.” Note also that here the pledgee is without
fault.

Art. 2109. If the creditor is deceived on the substance or quality of the thing pledged, he may either
claim another thing in its stead, or demand immediate payment of the principal obligation.

READ 2210

A pledged with B a diamond ring to secure a loan of P100,000. It was agreed that after a week, B would
return the ring although the debt would be paid only after one year. It was also agreed that although A
would once more be in possession of the ring, the pledge would continue. After a week, B, as stipulated,
returned the ring. Has the pledge been extinguished?

ANS.: Yes. (Par. 1, Art. 2110). The stipulation about the continuation of the pledge is VOID.
A pledged with B a Mont Blanc-Meisterstuck fountain pen. A week later, the pen was found in A’s
possession. There is presumption here that B has returned the fountain pen and that therefore the
pledge has been extinguished. May this presumption be rebutted? ANS.: Yes, since the presumption is
merely prima facie. For example, B may have returned the pen and asked that it be substituted; or a
stranger may have stolen the pen, and given it to A. (1st sentence, 2nd paragraph, Art. 2110).

COMPARE 2112 TO 2122

Right of Creditor to Sell if Credit is Not Satisfied

Under Art. 2087, the law says that it is of the essence of the contract of pledge that when the principal
obligation becomes due, the things in which the pledge consists may be alienated for the payment to
the creditor.

(a) The debt is already due. (b) There must be the intervention of a notary public. (c) There must be a
public auction (if at the first, it is not sold, a second auction must be held with the same formalities). (d)
Notice to debtor or owner stating the amount due, that is, the amount for which the public sale is to be
held.

If he believes that the pledged thing is worth much more than the principal debt, should the pledgee
give the excess?

ANS.: No. It is his right to get the whole value of the thing. (Contrast with the rule in case it was sold.)
(Art. 2115).

If the value happens to be less and the pledgee appropriates the thing for himself, is he entitled to any
deficiency judgment?

ANS.: No. He is obliged to cancel the entire obligation. After all, why did he accept a pledge of something
worth less than the principal obligation?

Art. 2113. At the public auction, the pledgor or owner may bid. He shall, moreover, have a better right if
he should offer the same terms as the highest bidder. The pledgee may also bid, but his offer shall not
be valid if he is the only bidder.

COMMENT: Right of Pledgor and Pledgee to Bid at the Public Auction

Example: A pledged his diamond ring with B. The debt was not paid on time, and a public auction took
place. Can A bid? Can B bid?

ANS.: Yes, A can bid. Furthermore, he shall have a better right if he should offer the same terms as the
highest bidder. Reason for the preference: after all, the thing belongs to him. Yes, B may also bid but his
offer shall not be valid if he is the only bidder.

ARTICLE 2215

Rules if the Price At the Sale Is More or Less Than the Debt

(a) If the price at sale is MORE — excess goes to the creditor, unless the contrary is provided. (This is
rather unfair, because the pledgor is the OWNER.)
(b) If the price is LESS — creditor does NOT get the deficiency. A contrary stipulation is VOID.

Art. 2116. After the public auction, the pledgee shall promptly advise the pledgor or owner of the result
thereof

Art. 2117. Any third person who has any right in or to the thing pledged may satisfy the principal
obligation as soon as the latter becomes due and demandable.

Right of a Third Person to Pay the Debt Example: A promised to give B a particular diamond ring if B
should pass the bar. But because A needed money, he pledged the ring with C to secure a loan. When
the debt becomes due and demandable, B, if he passed the bar, may pay the debt to C and thus get the
diamond ring. C cannot refuse payment by B because B has a right in the thing pledged.

Art. 2118. If a credit which has been pledged becomes due before it is redeemed, the pledgee may
collect and receive the amount due. He shall apply the same to the payment of his claim, and deliver the
surplus, should there be any, to the pledgor.

Pledge of a Credit That Later on Becomes Due

Example: A borrowed from B P100,000. This was secured by a negotiable promissory note made by X in
favor of A to the amount of P180,000. The negotiable promissory note was endorsed by A in B’s favor. If
the note becomes due before it is redeemed, B can collect and receive the P180,000 from X, B should
get P100,000 and deliver the surplus of P80,000 to A

READ CODAL 2119 2120 2121

2121 - Pledges Created by Operation of Law

(a) This Article speaking of “pledges created by operation of law” refers to the right of retention.

(b) Note that in this legal pledge, the remainder of the price shall be given to the debtor. This rule is
different from that in Art. 2115.

Art. 2122. A thing under a pledge by operation of law may be sold only after demand of the amount for
which the thing is retained. The public auction shall take place within one month after such demand. If,
without just grounds, the creditor does not cause the public sale to be held within such period, the
debtor may require the return of the thing. (2112 VS 2122)

VI. MORTAGE

Art. 2124. Only the following property may be the object of a contract of mortgage:

(1) Immovables; (2) Alienable real rights in accordance with the laws, imposed upon immovables.
Nevertheless, movables may be the object of a chattel mortgage.

‘Real Mortgage’ Defined It is a contract in which the debtor guarantees to the creditor the fulfillment of
a principal obligation, subjecting for the faithful compliance therewith a real property in case of non-
fulfillment of said obligation at the time stipulated.
Characteristics of a Real Mortgage (a) It is a real right. (b) It is an accessory contract. (c) It is indivisible.
(d) It is inseparable. (e) It is real property. (f) It is a limitation on ownership. (g) It can secure all kinds of
obligations. (h) The property cannot be appropriated. (i) The mortgage is a lien. (MEMORIZE)

A and B mortgaged their land in C’s favor. While the mortgage debt was pending, A and B partitioned
the land between them, and A paid his share of the debt. Is the mortgage on A’s share of the land
extinguished?

HELD: No, because a mortgage is indivisible.

The mortgage adheres to the property, regardless of who its owner may subsequently be.

A mortgage encumbers, but does not end ownership; it may thus be foreclosed.

Kinds of Real Mortgages

(a) Voluntary or Conventional — created by the parties. (Art. 138, Mortgage Law).

(b) Legal Mortgage — one required by law to guarantee performance. (Art. 169, Mortgage Law).

(c) Equitable Mortgage — one which reveals an intent to make the property a security, even if the
contract lacks the proper formalities of a real estate mortgage. (See 41 C.J. 303).

A mortgagee usually does NOT possess the land mortgaged; however, even if he does possess it, say, by
agreement, he cannot acquire the property by prescription, for his possession is not in the concept of an
owner. And even if the obligation is not paid at maturity, the mortgagee cannot appropriate the
property for himself. Any stipulation to the contrary is prohibited. (Jurisprudence)

Mortgages given to secure future advancements are valid and legal contracts. 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.

DEFAULT OR DELAY

Under the civil code, there is default when a party obliged to deliver something fails to do so.

Thus, the foreclosure of the real estate mortgage (REM) is proper once the debtor has incurred default
or delay in performing his obligation.

JURISPRUDENCE – it is a well-settled rule that while a real estate mortgage (REM) may exceptionally
secure future loans or advancements, these future debts must be specifically described in the mortgage
contract. An obligation is not secured by a mortgage unless it comes fairly within the terms of the
mortgage contract.

Art. 2125. In addition to the requisites stated in Article 2085, it is indispensable, in order that a mortgage
may be validly constituted, that the document in which it appears be recorded in the Registry of
Property. If the instrument is not recorded, the mortgage is nevertheless binding between the parties.
The persons in whose favor the law establishes a mortgage have no other right than to demand the
execution and the recording of the document in which the mortgage is formalized.
Is an unrecorded mortgage? (a) effective against innocent third parties? (b) effective, valid, and binding
between the parties themselves?

(a) Not effective against innocent third parties

(b) Under the new Civil Code, however, even if the mortgage is not recorded, the mortgage (whether
land is registered under the Torrens System, Spanish Mortgage Law, or not at all registered is
nevertheless binding between the parties.

Once a mortgage has been signed in due form, the mortgagee is entitled to its registration as a matter of
right. By executing the mortgage, the mortgagor is understood to have given his consent to its
registration, and he cannot be permitted to revoke it unilaterally. The validity and fulfillment of
contracts cannot be left to the will of one of the contracting parties. And the legal presumption of
sufficient cause or consideration supporting a contract, even if such cause is not stated therein, cannot
be overcome by a simple assertion of lack of consideration. (Jurisprudence)

Rule in Case of Legal Mortgages

In case of legal mortgages (where the law establishes a mortgage in favor of certain persons) the
persons entitled have no other right than to demand the execution and the recording of the document
in which the mortgage is formalized.

Effect of Registration

A mortgage, whether registered or not is binding between the parties, registration being necessary only
to make the same valid against third persons. In other words, 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. If the purpose of registration is merely to give notice, the question regarding the
effect or invalidity of instrument, are expected to be decided AFTER, not before registration. It must
follow as a necessary consequence that registration must first be allowed and the validity or the effect
litigated afterwards.

Art. 2126. The mortgage directly and immediately subjects the property upon which it is imposed,
whoever the possessor may be to the fulfillment of the obligation for whose security it was constituted.

The Article simply means that a mortgage is a real right following the property. Therefore, if a mortgagor
sells the property, the buyer must respect the mortgage (if registered, or if he knows of its existence).

If in the above example, the creditor forecloses the mortgage, the buyer will not be responsible for the
deficiency, if any, for the encumbrance is only on the property itself. The exception of course would be
in the case of novation, where all the parties consent to the buyer’s assumption of personal liability.

Art. 2126 applies even if the mortgagor is NOT the principal debtor

If a mortgagor, without the creditor’s consent, transfers the property and the debt to another, the
mortgagor would still be personally liable, for the attempted novation here would not be valid in view of
the lack of consent on the part of the creditor. On the other hand, the mortgage on the property can still
be foreclosed upon, in view of the real nature of a mortgage.
Marcial mortgaged his land to Rodrigo to obtain a debt of P100,000. Marcial then sold the land to
Alfredo. When the debt falls due, Rodrigo may demand payment from Marcial; and if Marcial fails to
pay, Rodrigo may now demand from Alfredo. If Alfredo does not pay, the mortgage may be foreclosed.
Of course, if there is a deficiency, Alfredo cannot be held liable for such deficiency, in the absence of a
contrary stipulation.

FACTS: A decedent in his lifetime had mortgaged his land in favor of Y. The estate was then distributed
among the heirs, one of which was W, who received for his part the land subject to the mortgage. If Y
decides to foreclose, does he have to bring the action against the executor and other heirs also, or
against W alone?

HELD: Against W alone, because it was he to whom said mortgaged property had been allotted.

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

May the parties to a mortgage of a house and lot validly stipulate that during the period of mortgage,
the mortgagor may not sell the mortgaged property? Reason. ANS.: No, for such a stipulation is void
under Art. 2130 of the Civil Code, being contrary to public policy.

A stipulation wherein the mortgagor is required to get the consent of the mortgagee before
subsequently mortgaging the property is valid and binding when the land is registered under the Torrens
system. But if the property was originally registered under the Spanish Mortgage Law, then such a
stipulation is not valid and may be disregarded by the mortgagor.

A mortgagor sold his mortgaged lot to a buyer without the consent of the mortgagee (the contract
required said consent). The buyer assumed the mortgage, also without the mortgagee’s knowledge and
consent. If later, both the mortgagor and the buyer offer to redeem the property by paying the debt,
whose offer must the mortgagee accept?

The offer of the mortgagor, not the offer of the buyer whose purchase and whose assumption of
mortgage had not been authorized by the mortgagee.

If the making of a second mortgage, except with the written consent of the mortgagee is prohibited, and
the contract states the penalty for such a violation, namely, “the violation gives the mortgagee the right
to immediately foreclose the mortgage,” the violation does not give the first mortgagee the right to
treat the second mortgage as null and void.

A stipulation in a contract which fixes a tipo or upset price, at which the property will be sold at a
foreclosure proceedings is null and void. This stipulation violates Sec. 3, Rule 70 of the Rules of Court
(now Rule 68) which provides that the property mortgaged should be sold to the highest bidder. Hence,
even if the contract contains such a stipulation, the sale of the property must take place, and the
property should be awarded to the highest bidder.

‘Equity of Redemption’ Distinguished from ‘Right of Redemption’ (a) Equity of redemption — This is the
right of the mortgagor to redeem the mortgaged property after his default in the performance of the
conditions of the mortgage but before the sale of the mortgaged property. [NOTE: Under the Rules of
Court, the mortgagor may exercise his equity of redemption at any time before the judicial sale is
confirmed by the court.
(b) Right of redemption — This is the right of the mortgagor to purchase the property within a certain
period after it was sold for the purpose of paying the mortgage debt.

VII. ANTICHRESIS & CHATTEL MORTGAGE

Art. 2132. By the contract of antichresis the creditor acquires the right to receive the fruits of an
immovable of his debtor, with the obligation to apply them to the payment of the interest, if owing, and
thereafter to the principal of his credit.

Characteristics:

Antichresis is an accessory contract and gives a real right.

It is a formal contract because it must be in writing; otherwise, it is VOID.

Distinguished from ‘Pledge’ and ‘Mortgage’

It differs from a pledge because the latter refers only to personal property, whereas antichresis deals
only with immovable property.

It differs from mortgage because in the latter, there is NO RIGHT to the FRUITS.

While the creditor in antichresis is entitled to the fruits, still the fruits must be applied to the interest, if
owing.

In both antichresis and mortgage, the property may or may not be delivered to the creditor.

In general, however, in mortgage, the property is NOT DELIVERED whereas in antichresis, the property is
DELIVERED.

A borrower obtained a loan, delivered the property as security so that the creditor may use the fruits.
But no interest was mentioned; and it was not stated that the fruits would be applied to the interest
first and then to the principal. What kind of a contract is this?

ANS.: This is a real mortgage, not an antichresis. What characterizes a contract of antichresis is that the
creditor acquires the right to receive the fruits of the property of his debtor, with the obligation to apply
them to the payment of interest, if any is due, and then to the principal of his credit — and when such a
covenant is not made in the contract, the contract cannot be an antichresis. (where the Court held that
the mere taking of land products in lieu of the receipt of interest originally stipulated upon does not
necessarily convert the contract into one of an antichresis in view of the lack of provision in the contract
specifically authorizing the receipt of the fruits.) Jurisprudence

Jurisprudence:

The claim that an instrument of antichresis had been executed by the parties’ predecessors-in-interest
in the latter part of 1930, based on testimonial evidence, cannot be considered legally sufficient.

An antichretic creditor cannot acquired by prescription the land surrendered to him by the debtor. The
creditor is not a possessor in the concept of owner but a mere holder placed in possession of the land by
the owner. Hence, their possession cannot serve as a title for acquiring dominion.
Art. 2134. The amount of the principal and of the interest shall be specified in writing; otherwise, the
contract of antichresis shall be void.

The amount of the PRINCIPAL and the INTEREST must be in WRITING. This is mandatory; therefore, if
not in writing, the contract of antichresis is VOID.

Even if the antichresis is VOID, the principal obligation may still be VALID.

Article 2135 – Obligations of the creditor

(a) To pay the taxes and charges upon the estate — unless there is a contrary stipulation. (b) To pay
expenses for necessary repairs.

If the creditor does not pay the taxes, the debtor is prejudiced; hence, the creditor is liable for damages.

Rule if the Fruit Are Insufficient

Since the first paragraph provides for responsibility on the part of the creditor, it follows that he has to
pay for the taxes and charges, even if the fruits be insufficient. This duty is implied also from the second
paragraph of Art. 2136. However, insofar as they can be deducted from the fruits, it is as if the debtor is
really paying for such taxes and necessary repairs.

Reimbursement in Favor of Creditor

An antichretic creditor is entitled to be reimbursed for his expenses for machinery and other
improvements on the land, and for the sums paid as land taxes. Said reimbursement may of course
come from the fruits.

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

The evils of pactum commissorium may arise in the contract of antichresis — hence, the prohibition.

The parties may validly agree on an extrajudicial foreclosure.

Art. 2139. The last paragraph of Article 2085, and Articles 2089 to 2091 are applicable to this contract.

Applicability of Other Articles

(a) Art. 2085. The following requisites are essential to the contracts of pledge and mortgage:

1) That they be constituted to secure the fulfillment of the principal obligation;

2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;

3) That the persons constituting the pledge or mortgage have the free disposal of their property, and in
the absence thereof, that they be legally authorized for the purposes.

Third persons who are not parties to the principal obligation may secure the latter by pledging or
mortgaging their own property.
(b) Art. 2089. A pledge or mortgage is indivisible, even though the debt may be divided among the
successors in interest of the debtor of the creditor.

Therefore, the debtor’s heir who has paid a part of the debt cannot ask for the proportionate
extinguishments of the pledge or mortgage as long as the debt is not completely satisfied.

Neither can the creditor’s heir who received his share of the debt return the pledge or cancel the
mortgage, to the prejudice of the other heirs who have not been paid.

From these provisions is excepted the case in which, there being several things given in mortgage or
pledge each one of them guarantees only a determinate portion of the credit.

The debtor, in this case, shall have a right to the extinguishments of the pledge or mortgage as the
portion of the debt for which each thing is specially answerable is satisfied.

(c) Art. 2090. The indivisibility of a pledge or mortgage is not affected by the fact that the debtors are
not solidarily liable.

(d) Art. 2091. The contract of pledge or mortgage may secure all kinds of obligations, be they pure or
subject to a suspensive or resolutory condition.

Art. 2140. By a chattel mortgage, personal property is recorded in the Chattel Mortgage Register as a
security for the performance of an obligation. If the movable, instead of being recorded, is delivered to
the creditor or a third person, the contract is a pledge and not a chattel mortgage.

The personal property must be RECORDED or REGISTERED in the Chattel Mortgage Register.

A chattel mortgage is an accessory contract by virtue of which personal property is recorded in the
Chattel Mortgage Register as a security for the performance of an obligation.

When Mortgage Must Be Registered in Two Registries If under the Chattel Mortgage Law, the mortgage
must be registered in two registries (as when the mortgagor resides in one province, but the property is
in another), the registration must be in BOTH; otherwise, the chattel mortgage is VOID.

Exam material ☆☆☆

May a house constructed on rented land be the subject of a chattel mortgage? State your reasons.
(BAR).

ANS.: Generally no, because the house is real property. This is so even if the house belongs to a person
other than the owner of the land. However, in the following instances there may be such a chattel
mortgage: (a) If the parties to the contract agree and no third persons are prejudiced. This is really
because one who has so agreed is ESTOPPED from denying the existence of the chattel mortgage.

NOTE: Insofar as third persons are concerned, the chattel mortgage on the building even if registered is
VOID.

(b) If what is mortgaged is a house intended to be demolished or removed –– for here, what are really
mortgaged are the MATERIALS thereof, hence, mere personal property.

Navarro v. Pineda
The house in question was treated as personal property by the parties to the contract themselves.
Hence, as to them, the chattel mortgage is VALID. Besides, the Court, speaking of the size of the house,
said “The house was small and made of light material, sawali, and wooden posts; and built on the land
of another.”

Evidence of indebtedness – Capulong v. People

(1) In a chattel mortgage of a vehicle, why should the so-called “Official Receipt and Certificate of
Registration (OR-CR) be considered as evidence of indebtedness; and (2) In case of default in payment,
why should the mortgaged property be sold at public auction?

Answer:
(1) This is because the OR-CR serves as part and parcel of the entire mortgage documents, without
which the mortgage’s right to foreclose cannot be effectively enforced

(2) The reason is for its proceeds to be able to satisfy inter alia, the payment of the obligation secured by
the mortgage

Exam material ☆☆☆

Where the proceeds from the sale of mortgaged property (chattel mortgage) do not fully satisfy the
secured debt, is the mortgagee entitled to recover the deficiency from the mortgagor? State the rule,
and the exception, if any. (BAR).

ANS.: (a) Generally YES, the mortgagee is entitled to recover the deficiency from the mortgagor.

REASON: Although the Chattel Mortgage Law contains no provision on this point, still previous court
decision have held that there can be a recovery. The Chattel Mortgage Law therefore read in the light of
these decisions, allows such a recovery. Therefore, the new Civil Code provisions on pledge prohibiting
recovery do NOT apply. (Jurisprudence)

(b) An exception to the aforementioned rule may be found in Art. 1484, which speaks of a chattel
mortgage as security for the purchase of personal property payable in installments. Here, no deficiency
judgment can be asked. Any agreement to the contrary shall be VOID.

No Registry of Buildings

There is no legal compulsion to register, as notice to third persons, transactions over buildings that do
not belong to the owners of the lands on which they stand. There is no registry of buildings in this
jurisdiction apart from the land.

No Necessity of Very Detailed Description of the Chattel Mortgage

Very detailed descriptions of a chattel mortgage are not required. All that is needed is a description
which would enable both parties and strangers, after reasonable inquiry and investigation to identify the
property mortgaged.

Chattel Mortgagee Preferred Over Judgment Creditor of Mortgagor (Jurisprudence)

The chattel mortgagee (Northern Motors) has the preferential lien. As long as the mortgage debt is not
yet paid, the judgment creditor of the mortgagor can only levy on the debtor’s equity or right of
redemption. Unless the purchaser at the levy-on-execution sale pays the mortgage debt, he cannot
obtain possession over the properties, nor can he obtain delivery thereof.

When a Third Person Becomes Solidarily Bound With Debtor

A third person who constitutes chattel mortgage on his own property as security to another’s obligation
not solely by reason thereof becomes solidarily bound with principal debtor.