Commodatum

A, upon request, loaned his passenger Jeepney to B to enable B to bring his sick
wife from Paniqui, Tarlac to the Philippine General Hospital in Manila for
treatment. On the way back to Paniqui, after leaving his wife at the hospital,
people stopped the passenger Jeepney. B stopped for them and allowed them to
ride on board, and accepting payment from them just as in the case of ordinary
passenger Jeepneys plying their route. As B was crossing Bamban, there was an
onrush of Lahar from Mt Pinatubo and the Jeep that was loaned to him was
wrecked.
(a) What do you call the contract that was entered into by A and B with respect
to the passenger Jeepney that was loaned by A to B to transport the latter's
sick wife to Manila?
(b) Is B obliged to pay A for the use of the passenger jeepney?
(c) Is B liable to A for the loss of the Jeepney?

SUGGESTED ANSWER:
(a) The contract is called "commodatum". (Article 1933. Civil Code).
COMMODATUM is a contract by which one of the parties (bailor) delivers
to another (bailee) something not consumable so that the latter may use it
for a certain time and return it.

(b) No, B is not obliged to pay A for the use of the passenger Jeepney because
commodatum is essentially gratuitous. (Article 1933. Civil Code)

(c) Yes, because B devoted the thing to a purpose different from that for which
it has been loaned (Article 1942, par. 2, Civil Code).
ALTERNATIVE ANSWER:
No, because an obligation which consists in the delivery of a determinate thing
shall be extinguished if it should be lost or destroyed without the fault of the
debtor, and before he has incurred in delay. (Article 1262. Civil Code)

Commodatum
Before he left for Riyadh to work as a mechanic, Pedro left his Adventure van with
Tito, with the understanding that the latter could use it for one year for his
personal or family use while Pedro works in Riyadh. He did not tell Tito that the
brakes of the van were faulty. Tito had the van tuned up and the brakes repaired.
He spent a total amount of P15,000.00. After using the vehicle for two weeks, Tito
discovered that it consumed too much fuel. To make up for the expenses, he
leased it to Annabelle. Two months later, Pedro returned to the Philippines and
asked Tito to return the van. Unfortunately, while being driven by Tito, the van
was accidentally damaged by a cargo truck without his fault.
(a) Who shall bear the P15,000.00 spent for the repair of the van? Explain.
(b) Who shall bear the costs for the van's fuel, oil and other materials while it
was with Tito? Explain.
(c) Does Pedro have the right to retrieve the van even before the lapse of one
year? Explain.
(d) Who shall bear the expenses for the accidental damage caused by the cargo
truck, granting that the truck driver and truck owner are insolvent? Explain.

SUGGESTED ANSWER:
(a) Tito must bear the P15,000.00 expenses for the van. Generally,
extraordinary expenses for the preservation of the thing loaned are paid by
the bailor, he being the owner of the thing loaned. In this case however, Tito
should bear the expenses because he incurred the expenses without first
informing Pedro about it. Neither was the repair shown to be urgent. Under
Article 1949 of the Civil Code, bailor generally bears the extraordinary
expenses for the preservation of the thing and should refund the said
expenses if made by the bailee; Provided, The bailee brings the same to the
attention of the bailor before incurring them, except only if the repair is
urgent that reply cannot be awaited.
ALTERNATIVE ANSWER:
The P15,000.00 spent for the repair of the van should be borne by Pedro.
Where the bailor delivers to the bailee a non-consummable thing so that the
latter may use it for a certain time and return the identical thing, the contract
perfected is a Contract of Commodatum (Article 1933, Civil Code). The
bailor shall refund the extraordinary expenses during the contract for the
preservation of the thing loaned provided the bailee brings the same to the
knowledge of the bailor before incurring the same, except when they are so
urgent that the reply to the notification cannot be awaited without danger
(Article 1949 of the Civil Code). In the given problem, Pedro left his
Adventure van with Tito so that the latter could use it for one year while he
was in Riyadh. There was no mention of a consideration. Thus, the contract
perfected was commodatum. The amount of P15,000.00 was spent by Tito
to tune up the van and to repair its brakes. Such expenses are extra-ordinary
expenses because they are necessary for the preservation of the van. Thus,
the same should be borne by the bailor, Pedro.

(b) Tito must also pay for the ordinary expenses for the use and preservation of
the thing loaned. He must pay for the gasoline, oil, greasing and spraying.
He cannot ask for reimbursement because he has the obligation to return the
identical thing to the bailor. Under Article 1941 of the Civil Code, the
bailee is obliged to pay for the ordinary expenses for the use and
preservation of the thing loaned.

(c) No, Pedro does not have the right to retrieve the van before the lapse of one
year. The parties are mutually bound by the terms of the contract. Under the
Civil Code, there are only 3 instances when the bailor could validly ask for
the return of the thing loaned even before the expiration of the period. These
are when: (1) a precarium contract was entered (Article 1947); (2) if the
bailor urgently needs the thing (Article 1946); and (3) if the bailee commits
acts of ingratitude (Article 1948). Not one of the situations is present in this
case. The fact that Tito had leased the thing loaned to Annabelle would not
justify the demand for the return of the thing loaned before expiration of the
period. Under Article 1942 of the Civil Code, leasing of the thing loaned to
a third person not member of the household of the bailee, will only entitle
bailor to hold bailee liable for the loss of the thing loaned.
ALTERNATIVE ANSWER:
As a rule, Pedro does not have the right to retrieve the van before the lapse
of one year. Article 1946 of the Code provides that "the bailor cannot
demand the return of the thing loaned till after the expiration of the period
stipulated, or after the accomplishment of the use for which the
commodatum has been constituted. However, if in the meantime, he should
have urgent need of the thing, he may demand its return or temporary use."
In the given problem, Pedro allowed Tito to use the van for one year. Thus,
he should be bound by the said agreement and he cannot ask for the return
of the car before the expiration of the one year period. However, if Pedro
has urgent need of the van, he may demand for its return or temporary use.

(d) Generally, extraordinary expenses arising on the occasion of the actual use
of the thing loaned by the bailee, even if incurred without fault of the bailee,
shall be shouldered equally by the bailor and the bailee (Article 1949 of the
Civil Code). However, if Pedro had an urgent need for the vehicle, Tito
would be in delay for failure to immediately return the same, then Tito
would be held liable for the extraordinary expenses.

Commodatum vs. Usufruct

Distinguish usufruct from commodatum and state whether these may be
constituted over consumable goods.

SUGGESTED ANSWER:
USUFRUCT is a right given to a person (usufructuary) to enjoy the property of
another with the obligation of preserving its form and substance. (Article 562. Civil
Code) On the other hand, COMMODATUM is a contract by which one of the parties
(bailor) delivers to another (bailee) something not consumable so that the latter
may use it for a certain time and return it. In usufruct the usufructuary gets the
right to the use and to the fruits of the same, while in commodatum, the
bailee only acquires the use of the thing loaned but not its fruits. Usufruct may be
constituted on the whole or a part of the fruits of the thing. (Article 564. Civil
Code). It may even be constituted over consumables like money (Alunan v. Veloso,
52 Phil. 545). On the other hand, in commodatum, consumable goods may be
subject thereof only when the purpose of the contract is not the consumption of
the object, as when it is merely for exhibition. (Article 1936, Civil Code)
ANOTHER ANSWER:
There are several points of distinction between usufruct and commodatum.
Usufruct is constituted by law, by contract, by testamentary succession, or by
prescription (Article 1933. Civil Code). Usufruct creates a real right to the fruits of
another's property, while commodatum creates only a purely personal right to use
another's property, and requires a stipulation to enable the bailee to "make use"
of the fruits (Arts. 1939& 1940, Civil Code). Usufruct maybe onerous while
commodatum is always or essentially gratuitous (Arts. 1933 & 1935, Civil Code).
The contract constituting usufruct is consensual, while commodatum is a real
contract (perfected
only by delivery of the subject matter thereof). However, both involve the
enjoyment by a person of the property of another, differing only as to the extent
and scope of such enjoyment [jus fruendi in one and Jus utendi in the other); both
may have as subject matter either an immovable or a movable; and, both maybe
constituted over consumable goods (Arts. 574 & 1936, Civil Code). A consumable
thing may be the subject-matter of an abnormal usufruct but in a normal usufruct,
the subject-matter may be used only for exhibition. A commodatum of a
consumable thing may be only for the purpose of exhibiting, not consuming it.

Mutuum vs. Commodatum

Distinguish briefly but clearly between Mutuum and commodatum.

SUGGESTED ANSWER:
In MUTUUM, the object borrowed must be a consumable thing the ownership of
which is transferred to the borrower who incurs the obligation to return the same
consumable to the lender in an equal amount, and of the same kind and quality. In
COMMODATUM, the object borrowed is usually a non-consumable thing the
ownership of which is not transferred to the borrower who incurs the obligation to
return the very thing to the lender.

Mutuum; Interests
Samuel borrowed P300,000.00 housing loan from the bank at 18% per annum
interest. However, the promissory note contained a proviso that the bank
"reserves the right to increase interest within the limits allowed by law," By virtue
of such proviso, over the objections of Samuel, the bank increased the interest rate
periodically until it reached 48% per annum. Finally, Samuel filed an action
questioning the right of the bank to increase the interest rate up to 48%. The bank
raised the defense that the Central Bank of the Philippines had already suspended
the Usury Law. Will the action prosper or not? Why?

SUGGESTED ANSWER:
The action will prosper. While it is true that the interest ceilings set by the Usury
Law are no longer in force, it has been held that PD No. 1684 and CB Circular No.
905 merely allow contracting parties to stipulate freely on any adjustment in the
interest rate on a loan or forbearance of money but do not authorize a unilateral
increase of the interest rate by one party without the other's consent (PNB v. CA,
238 SCRA 2O [1994]). To say otherwise will violate the principle of mutuality of
contracts under Article 1308 of the Civil Code. To be valid, therefore, any change
of interest must be mutually agreed upon by the parties (Dizon v, Magsaysay, 57
SCRA 25O [1974]). In the present problem, the debtor not having given his consent
to the increase in interest, the increase is void.
Mutuum; Interests
Carlos sues Dino for (a) collection on a promissory note for a loan, with no
agreement on interest, on which Dino defaulted, and (b) damages caused by Dino
on his (Carlos’) priceless Michaelangelo painting on which Dino is liable on the
promissory note and awards damages to Carlos for the damaged painting, with
interests for both awards. What rates of interest may the court impose with
respect to both awards? Explain.

SUGGESTED ANSWER:
With respect to the collection of money or promissory note, it being a forbearance
of money, the legal rate of interest for having defaulted on the payment of 12%
will apply. With respect to the damages to the painting, it is 6% from the time of
the final demand up to the time of finality of judgment until judgment credit is
fully paid. The court considers the latter as a forbearance of money. (Eastern
Shipping Lines, Inc. v. CA, 234 SCRA 78 [1994]; Art 2210 and 2211, CC)
***the answer should be amended pursuant to BSP MC No. 799

Mutuum; Interests
The parties in a contract of loan of money agreed that the yearly interest rate is
12% and it can be increased if there is a law that would authorize the increase of
interest rates. Suppose OB, the lender, would increase by 5% the rate of interest to
be paid by TY, the borrower, without a law authorizing such increase, would OB’s
action be just and valid? Why? Has TY a remedy against the imposition of the rate
increase? Explain.

SUGGESTED ANSWER:
OB's action is not just and valid. The debtor cannot be required to pay the increase
in interest there being no law authorizing it, as stipulated in the contract.Increasing
the rate in the absence of such law violates the principle of mutuality of contracts.
ALTERNATIVE ANSWER:
Even if there was a law authorizing the increase in interest rate, the stipulation is
still void because there is no corresponding stipulation to decrease the interest due
when the law reduces the rate of interest.

Compensation; Bank Loan

In order to secure a bank loan, XYZ Corporation surrendered its deposit certificate,
with a maturity date of 01 September 1997 to the bank. The corporation defaulted
on the due repayment of the loan, prompting the bank to encash the deposit
certificate. XYZ Corporation questioned the above action taken by the bank as
being a case of pactum commissorium. The bank disagrees. What is your opinion?

SUGGESTED ANSWER:
We submit that there is no pactum commissorium here. Deposits of money in
banks and similar institutions are governed by the provisions on simple loans
(Article 1980. Civil Code). The relationship between the depositor and a bank is one
of
creditor and debtor. Basically this is a matter of compensation as all the elements
of compensation are present in this case (BPI vs. CA, 232 SCRA 302).
ADDITIONAL ANSWER:
Where the security for the debt is also money deposited in a bank, it is not illegal
for the creditor to encash the time deposit certificates to pay the debtor's overdue
obligation. (Chu us. CA, et al., G.R 78519, September 26, 1989).

Deposit; Exchange
X and Y staged a daring bank robbery in Manila at 10:30 AM in the morning of a
regular business day, and escaped with their loot of two (2) bags, each bag
containing P50,000,00. During their flight to elude the police, X and Y entered the
nearby locked house of A, then working in his Quezon City office. From A's house,
X and Y stole a box containing cash totaling P50,000.00 which box A had been
keeping in deposit for his friend B. In their hurry, X and Y left in A's bedroom one
(1) of the bags which they had taken from the bank. With X and Y now at large and
nowhere to be found, the bag containing P50.000.00 is now claimed by B, by the
Mayor of Manila, and by the bank. B claims that the depository. A, by force
majeure had obtained the bag of money in place of the box of money deposited by
B. The Mayor of Manila, on the other hand, claims that the bag of money should be
deposited with the Office of the Mayor as required of the finder by the provisions
of the Civil Code. The bank resists the claims of B and the Mayor of Manila. To
whom should a deliver the bag of money? Decide with reasons.

SUGGESTED ANSWER:
B would have no right to claim the money. Article 1990 of the Civil Code is not
applicable. The law refers to another thing received in substitution of the object
deposited and is predicated upon something exchanged. The Mayor of Manila
cannot invoke. Article 719 of the Civil Code requires the finder to deposit the thing
with the Mayor only when the previous possessor is unknown. In this case, a must
return the bag of money to the bank as the previous possessor and known owner.

Recovery of Deficiency
AB sold to CD a motor vehicle for and in consideration of P120,000.00 to be paid in
twelve monthly equal installments of P10,000,00, each installment being due and
payable on the 15th day of each month starting January 1997. To secure the
promissory note, CD (a) executed a chattel mortgage on the subject motor vehicle,
and (b) furnished a surety bond issued by Philam life, CD failed to pay more than
two (2) installments, AB went after the surety but he was only able to obtain
threefourths (3/4) of the total amount still due and owing from CD. AB seeks your
advice on how he might, if at all, recover the deficiency. How would you counsel
AB?

SUGGESTED ANSWER:
Yes, he can recover the deficiency. The action of AB to go after the surety bond
cannot be taken to mean a waiver of his right to demand payment for the whole
debt, The amount received from the surety is only payment pro tanto, and an
action may be maintained for a deficiency debt.
Antichresis
Olivia owns a vast mango plantation which she can no longer properly manage due
to a lingering illness. Since she is indebted to Peter in the amount of P500.000.00
she asks Peter to manage the plantation and apply the harvest to the payment of
her obligation to him, principal and interest, until her indebtedness shall have
been fully paid. Peter agrees.
(a) What kind of contract is entered into between Olivia and Peter? Explain.
(b) What specific obligations are imposed by law on Peter as a consequence of
their contract?
(c) Does the law require any specific form for the validity of their contract?
Explain.
(d) May Olivia re-acquire the plantation before her entire indebtedness shall
have been fully paid? Explain.

SUGGESTED ANSWER:
(a) A contract of antichresis was entered into between Olivia and Peter. Under
Article 2132, NCC, by a 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, and thereafter to the principal
of his credit.

(b) Peter must pay taxes and charges upon the land and bear the necessary
expenses for preservation and repair which he
may deduct from the fruits. (Art, 2135, NCC)

(c) The amount of the principal and interest must be specified in writing,
otherwise the antichresis will be void. (Article 2134,NCC)

(d) No. Article 2136 specifically provides that the debtor cannot re-acquire the
enjoyment of the immovable without first having totally paid what he owes the
creditor. However, it is potestative on the part of the creditor to do so in order to
exempt him from his obligation under Article 2135, NCC, The debtor
cannot re-acquire the enjoyment unless Peter compels Olivia to enter again
the enjoyment of the property.

Pledge
In 1982, Steve borrowed P400.000.00 from Danny, collateralized by a pledge of
shares of stock of Concepcion Corporation worth P800,000,00. In 1983, because of
the economic crisis, the value of the shares pledged fell to only P100,000.00. Can
Danny demand that Steve surrender the other shares worth P700,000.00?

SUGGESTED ANSWER:
(a) No. Bilateral contracts cannot be changed unilaterally. A pledge is only a
subsidiary contract, and Steve is still indebted to Danny for the amount of
P400,000.00 despite the fall in the value of the stocks pledged.
(b) No. Danny's right as pledgee is to sell the pledged shares at a public sale
and keep the proceeds as collateral for the loan. There is no showing that
the fall in the value of the pledged property was attributable to the pledger's
fault or fraud. On the contrary, the economic crisis was the culprit. Had the
pledgee been deceived as to the substance or quality of the pledged shares
of stock, he would have had the right to claim another thing in their place or
to the immediate payment of the obligation. This is not the case here.

Pledge
ABC loaned to MNO P40,000 for which the latter pledged 400 shares of stock in
XYZ Inc. It was agreed that if the pledgor failed to pay the loan with 10% yearly
interest within four years, the pledgee is authorized to foreclose on the shares of
stock. As required, MNO delivered possession of the shares to ABC with the
understanding that the shares would be returned to MNO upon the payment of
the loan. However, the loan was not paid on time. A month after 4 years, may the
shares of stock pledged be deemed owned by ABC or not? Reason.

SUGGESTED ANSWER:
The shares of stock cannot be deemed owned by ABC upon default of MNO. They
have to be foreclosed. Under Article 2088 of the Civil Code, the creditor cannot
appropriate the things given by way of pledge. And even if the parties have
stipulated that ABC becomes the owner of the shares in case MNO defaults on the
loan, such stipulation is void for being a pactum commissorium.

Pledge; Mortgage; Antichresis

In the province, a farmer couple borrowed money from the local merchant. To
guarantee payment, they left the Torrens Title of their land with the merchant, for
him to hold until they pay the loan. Is there a - a) contract of pledge, b) contract of
mortgage, c) contract of antichresis, or d) none of the above? Explain.

SUGGESTED ANSWER:
None of the above. There is no pledge because only movable property may be
pledged (Article 2094. NCC). If at all, there was a pledge of the paper or document
constituting the Torrens Title, as a movable by itself, but not of the land which the
title represents. There is no mortgage because no deed or contract was executed in
the manner required by law for a mortgage (Arts. 2085 to 2092, NCC; 2124 to
2131, NCC). There is no contract of antichresis because no right to the fruits of the
property was given to the creditor (Article 2132 NCC). A contract of simple loan
was entered into with security arrangement agreed upon by the parties which is
not one of those mentioned above.
ALTERNATIVE ANSWER:
There is a contract of mortgage constituted over the land. There is no particular
form required for the validity of a mortgage of real property. It is not covered by
the statute of frauds in Article 1403, NCC and even assuming that it is covered, the
delivery of the title to the creditor has taken it out of the coverage thereof. A
contract of mortgage of real property is consensual and is binding on the parties
despite
absence of writing. However, third parties are not bound because of the absence
of a written instrument evidencing the mortgage and, therefore the absence of
registration. But this does not affect the validity of the mortgage between the
parties (Article 2125, NCC). The creditor may compel the debtor to execute the
mortgage in a public document in order to allow its registration (Article 1357. NCC
in relation to Article 1358. NCC).

Mutuum; Interest; Solutio Indebiti

Siga-an granted a loan to Villanueva in the amount of P 540, 000.00. Such
agreement was not reduced to writing. Siga-an demanded interest which was paid
by Villanueva in cash and checks. The total amount Villanueva paid athe Civil
Codeumulated to P 1, 200, 000.00. Upon advice of her lawyer, Villanueva
demanded for the return of the excess amount of P 660, 000.00 which was ignored
by Siga-an.
(a) Is the payment of interest valid? Explain.
(b) Is solution indebiti applicable? Explain.

SUGGESTED ANSWER:
(a) No, Article 1956, Civil Code, provides that “no interest shall be due unless
it has been expressly stipulated in writing.”

(b) Yes, Solutio Indebiti is applicable because Villanueva Overpaid by

P600,000.00 representing interest payment which is not due. He can,
therefore, demand its return.

Guaranty
TRUE or FALSE. Answer TRUE if the statement is true, or FALSE if the statement
is false. Explain your answer in not more than two (2) sentences.

An oral promise of guaranty is valid and binding.

SUGGESTED ANSWER:
FALSE. An oral contract of guaranty, being a special promise to answer for the debt
of another, is unenforceable unless in writing (Article 1403 [2] b, NCC).
ALTERNATIVE ANSWER:
TRUE. An oral promise of guaranty is valid and binding. While the contract is valid,
however, it is unenforceable because it is not writing. Being a special promise
answer for the debt, or miscarriage of another, the Statute of Frauds requires it to
be in writing to be enforceable (Article 1403 [2] b, NCC).The validity of the contract
should be distinguished from its enforceability .

Surety
What is the difference between "guaranty" and "suretyship"?

SUGGESTED ANSWER:
Guaranty and Suretyship distinguished
(a) The obligation in guaranty is secondary; whereas, in suretyship, it is
primary.
(b) In guranty, the undertaking is to pay if the principal debtor cannot pay;
whereas, in suretyship, the undertaking is to pay if the principal debtor does
not pay.

(c) In guranty, the guarantor is entitled to the benefit of excussion; whereas, in

suretyship the surety is not entitled.

(d) Liability in guaranty depends upon an independent agreement to pay the

obligations of the principal if he fails to do so; whereas, in suretyship, the
surety assumes liability as a regular party.

(e) The Guarantor insures the solvency of the principal debtor; whereas, the
surety insures the debt.

(f) In a guaranty, the guarantor is subsidiarlty liable; whereas, in a suretyship,

the surety binds himself solidarity with the principal debtor (Art 2047,
Civil Code).

Pledge; Pactum Commissorium

Rosario obtained a loan of P100,000.00 from Jennifer, and pledged her diamond
ring. The contract signed by the parties stipulated that if Rosario is unable to
redeem the ring on due date, she will execute a document in favor of Jennifer
providing that the ring shall automatically be considered full payment of the loan.
(a) Is the contract valid? Explain.
(b) Will your answer to [a] be the same if the contract stipulates that upon
failure of Rosario to redeem the ring on due date, Jennifer may
immediately sell the ring and appropriate the entire proceeds thereof for
herself as full payment of the loan? Reasons.

SUGGESTED ANSWER:
(a) The contract is valid because Rosario has to execute a document in favor of
Jennifer to transfer the ownership of the pledged ring to the latter. The
contract does not amount to pactum commissorium because it does not
provide for the automatic appropriation by the pledgee of the thing pledged
in case of default by the pledgor.

(b) No, my answer will be different. While the contract of pledge is valid, the
stipulation authorizing the pledgee to immediately sell the thing pledged is
void under Art 2088 of the New Civil Code, which provides that “the
creditor cannot appropriate the things given by way of pledge or mortgage,
or dispose of them xxx.” Jennifer cannot immediately sell by herself the
thing pledged. It must be foreclosed by selling it at a public auction in
accordance with the procedure under Art 2112 of the New Civil Code.
Guarantee; Foreclosure MCQ
Amador obtained a loan of P300,000 from Basilio payable on March 25, 2012. As
security for the payment of his loan, Amador constituted a mortgage on his
residential house and lot in Basilio's favor. Cacho, a good friend of Amador,
guaranteed and obligated himself to pay Basilio, in case Amador fails to pay his
loan at maturity.
1. If Amador fails to pay Basilio his loan on March 25, 2012, can Basilio compel
Cacho to pay?
a. No, Basilio cannot compel Cacho to pay because as guarantor, Cacho can invoke
the principle of excussion, i.e., all the assets of Basilio must first be exhausted.
b. No, Basilio cannot compel Cacho to pay because Basilio has not exhausted the
available remedies against Amador.
c. Yes, Basilio can compel Cacho to pay because the nature of Cacho's undertaking
indicates that he has bound himself solidarily with Amador.
d. Yes, Basilio can compel Cacho who bound himself to unconditionally pay in case
Amador fails to pay; thus the benefit of excussion will not apply.

SUGGESTED ANSWER:
(B) No, Basilio cannot compel Cacho to pay because Basilio has not exhausted the
available remedies against Amador. The guarantor cannot be compelled to pay the
creditor unless the latter has exhausted all the property of the debtor and has
resorted to all the legal remedies against the debtor (Art. 2058, Civil Code) (Note:
“A” is not the correct answer because it states that “all the assets of Basilio (the
creditor) must first be exhausted”)

2. If Amador sells his residential house and lot to Diego, can Basilio foreclose
the real estate mortgage?

a. Yes, Basilio can foreclose the real estate mortgage because real estate mortgage
creates a real right that attaches to the property.
b. Yes, Basilio can foreclose the real estate mortgage. It is binding upon Diego as
the mortgage is embodied in a public instrument.
c. No, Basilio cannot foreclose the real estate mortgage. The sale confers
ownership on the buyer, Diego, who must therefore consent.
d. No, Basilio cannot foreclose the real estate mortgage. To deprive the new owner
of ownership and possession is unjust and inequitable.

SUGGESTED ANSWER:
(B) Yes, Basilio can foreclose the real estate mortgage. It is binding upon Diego as
the mortgage is embodied in a public instrument. Since the mortgage is in a public
instrument, there is constructive notice to Diego, who is the buyer if the
mortgaged property.
ALTERNATIVE ANSWER:
(C) No, Basilio cannot foreclose the real estate mortgage. The sale confers
ownership on the buyer, Diego, who must therefore consent. The mortgage is not
registered, thus, cannot be binding against third persons (Art. 2125, Civil Code)
Commodatum; Necessary Expenses; Loss of the Thing; MCQ
Cruz lent Jose his car until Jose finished his Bar exams. Soon after Cruz delivered
the car, Jose brought it to Mitsubishi Cubao for maintenance check up and incurred
costs of P8,000. Seeing the car's peeling and faded paint, Jose also had the car
repainted for P10,000. Answer the two questions below based on these common
facts.
1. After the bar exams, Cruz asked for the return of his car. Jose said he would
return it as soon as Cruz has reimbursed him for the car maintenance and
repainting costs of P 18,000. Is Jose's refusal justified?
a. No, Jose's refusal is not justified. In this kind of contract, Jose is obliged to pay
for all the expenses incurred for the preservation of the thing loaned.
b. Yes, Jose's refusal is justified. He is obliged to pay for all the ordinary and
extraordinary expenses, but subject to reimbursement from Cruz.
c. Yes, Jose's refusal is justified. The principle of unjust enrichment warrants the
reimbursement of Jose's expenses.
d. No, Jose's refusal is not justified. The expenses he incurred are useful for the
preservation of the thing loaned. It is Jose's obligation to shoulder these useful
expenses.

SUGGESTED ANSWER:
(D) No, Jose's refusal is not justified. The expenses he incurred are useful for the
preservation of the thing loaned. It is Jose's obligation to shoulder these useful
expenses. In commodatum, the bailee is obliged to pay for the ordinary expenses
for the use and preservation of the thing loaned (Art 1941, Civil Code). The bailee,
Jose, has no right of retention on the ground that the bailor owes him something,
even if it may be by reason of expenses. He can only retain it if he suffers damages
by reason of a flaw or defect in the thing loaned of which the bailor knows (Art
1951, Civil Code).

2. During the bar exam month, Jose lent the car to his girlfriend, Jolie, who
parked the car at the Mall of Asia's open parking lot, with the ignition key
inside the car. Car thieves broke into and took the car. Is Jose liable to Cruz
for the loss of the car due to Jolie's negligence?
a. No, Jose is not liable to Cruz as the loss was not due to his fault or negligence.
b. No, Jose is not liable to Cruz. In the absence of any prohibition, Jose could lend
the car to Jolie. Since the loss was due to force majeure, neither Jose nor Jolie is
liable.
c. Yes, Jose is liable to Cruz. Since Jose lent the car to Jolie without Cruz's consent,
Jose must bear the consequent loss of the car.
d. Yes, Jose is liable to Cruz. The contract between them is personal in nature. Jose
can neither lend nor lease the car to a third person.

SUGGESTED ANSWER:
(C) Yes, Jose is liable to Cruz. Since Jose lent the car to Jolie without Cruz's consent,
Jose must bear the consequent loss of the car. The bailee is liable for the loss of the
thing, even if it should be through a fortuitous event if he lends or leases the thing
to a third person, who is not a member of his household (Art 1942, Civil Code).
Parties to Bailment; MCQ
The parties to a bailment are the:
a. bailor;
b. bailee;
c. comodatario;
d. all the above;
e. letters a and b

SUGGESTED ANSWER:
(E). letters a and b
ALTERNATIVE ANSWER:
(D). all the above

Deposit; MCQ
A deposit made in compliance with a legal obligation is:
a. an extrajudicial deposit;
b. a voluntary deposit;
c. a necessary deposit;
d. a deposit with a warehouseman;
e. letters a and b

SUGGESTED ANSWER:
(C) . a necessary deposit

Antichresis; MCQ A contract of antichresis is always:

a. (A). a written contract;
b. a contract, with a stipulation that the debt will be paid through receipt of the
fruits of an immovable;
c. Involves the payment of interests, if owing;
d. All of the above;
e. Letters a and b

SUGGESTED ANSWER:
(D). All of the above;

Necessary Deposit: Hotel/Inn

Due to the continuous heavy rainfall, the major streets in Manila became flooded.
This compelled Cris to check-in at Square One Hotel. As soon as Cris got off from
his Toyota Altis, the Hotel’s parking attendant got the key of his car and gave him a
valet parking customer’s claim stub. The attendant parked his car at the basement
of the hotel. Early in the morning, Cris was informed by the hotel manager that his
car was carnapped.
(a) What contract, if any, was perfected between Cris and the Hotel when Cris
surrendered the key of his car to the Hotel’s parking attendant?
(b) What is the liability, if any, of the Hotel for the loss of Cris’ car?
SUGGESTED ANSWER:
(a) A contract of deposit was perfected between Cris and the Hotel when Cris
surrendered the key to his car to the Hotel’s parking attendant. In Triple-V
Food Services v. Filipino Merchants Insurance Co. (G.R. No. 160544,
February 21, 2005), it was ruled that when a car is entrusted to valet
attendant, there is a contract of deposit. Article 1962 of the Civil Code
provides that a deposit is constituted from the moment a person receives a
thing belonging to another, with the obligation of safely keeping it and of
returning the same (Durban Apartments v. Pioneer Insurance, [G.R. No.
179419, March 30, 2011]). Furthermore, Article 1998 of the Civil Code
provides that the deposit of effects made by travelers in hotels or inns shall
be regarded as necessary, and that the keepers of hotels and inns are
responsible for the effects deposited as depositaries subject to their being
notified of the effects being brought in by the travelers and the taking by the
travelers of such precautions which the hotel or inn-keepers or their
substitutes advised relative to the care and vigilance of such effects. Article
1999 of the Civil Code also provides for the liability of the hotel-keeper for
the vehicles introduced or placed in the annexes of the hotel, which in this
case is the basement of the hotel

(b) The Hotel was constituted as depositary in this case. This, it has the
obligation to safely keep the car which is expected by Cris to be returned to
him. With the loss of the car, the Hotel is liable for the cost of the car as
actual damages.
SUGGESTION FOR ADDITIONAL CREDIT:
Article 2001 of the Civil Code provides that the act of thief or robber who has
entered the hotel is not deemed force majeure, unless it is done with the use of
arms or through an irresistible force. In this case, there is no indication that the
carnapping was done with the use of arms or through irresistible force; hence, the
hotel cannot claim that it is not liable for the loss of Cris’ car.

Compensatory Interest
Sara borrowed P50,000.00 from Julia and orally promised to pay it within six
months. When Sarah tried to pay her debt on the 8th month, Julia demanded the
payment of interest of 12% per annum because of Sara’s delay in payment. Sara
paid her debt and the interest claimed by Julia. After rethinking, Sara demanded
back from Julia the amount she had paid as interest. Julia claims that she has no
obligation to return the interest paid by Sara because it was a natural obligation
which Sara voluntarily performed and can no longer recover. Do you agree?
Explain.

SUGGESTED ANSWER:
No, I do not agree with Julia. For a creditor to be entitled to compensatory interest,
the debtor must be in delay. As a rule, in order for delay to exit, demand must
have been made. In this case, there was no demand made upon the expiration of
the 6- month period; thus Sara cannot be considered in delay, and is not liable to
pay compensatory interest. There being no obligation to pay compensatory
interest, Julia must return the interest mistakenly paid since she was not entitled
thereto, and the delivery was made merely through mistake. If something is
received when there is no right to demand it, and it was unduly delivered through
mistake, the obligation to return arises (Article 2154, Civil Code).

Pledge; Pactum Commissorium

Donna pledged a set of diamond sing and earrings to Jane for P200,000.00 She was
made to sign an agreement that is she cannot pay her debt within six months, Jane
could immediately appropriate the jewelry for herself. After six months, Donna
failed to pay. Jane then displayed the earnings and ring set in her jewelry shop
located in a mall. A buyer, Juana, bought the jewelry set for P300,000.00
(a) Was the agreement which Donna signed with Jane valid? Explain with legal
basis.
(b) Can Donna redeem the jewelry set from Juana by paying the amount she
owed Jane to Juana? Explain with legal basis.
(c) Give an example of pledge by operation of law.

SUGGESTED ANSWERS:
(a) No, the agreement that if Donna cannot pay her debt within 6 months, Jane
could immediately appropriate the jewelry for herself is void as it
constitutes pactum commissorium, which is void under the law. Under
Article 2088, pactum commissorium is a provision in a pledge or mortgage
agreement where the property pledged or mortgaged by the debtor
automatically becomes the property of the creditor in the event the debtor
fails to pay the debt or commits a breach of the loan or agreement.

(b) No. Donna cannot redeem the jewelry set from Juana because there is no
privity of contract between Donna and Juana. Moreover, Juana is a third
person who purchased the thing in good faith from a merchant store. Under
Article 1505, even if the seller does not have the right to sell, the buyer
acquires absolute ownership over the thing id he bought it in a merchant
store in good faith, the owner neither having been unlawfully deprived
thereof, nor was the thing lost (Sun Brothers v. Velasco [1963]).

(c) (Any of the following answers should be given full credit)

a. Article 546 states: “Necessary expenses shall be refunded to every
possessor; but only the possessor in good faith may retain the thing
until he has been reimbursed therefore. 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
by reason thereof.”
b. Article 1731 states: “He who has executed work upon a movable
has a right to retain it by way of pledge until he is paid.”
c. Art 1994 states: “The depositary may retain the thing in pledge
until the full payment of what may be due him by reason of the
deposit.”
d. Art 1914 states: “The agent may retain in pledge the things which are the object
of the agency until the principal effects the reimbursement and pays the indemnity
set forth in the two preceding articles.”

Legal Interest
With regard to an award of interest in the concept of actual and compensatory
damages, please state the guidelines regarding the manner of computing legal
interest in the following situations:
(a) When the obligation is breached and it consists in the payment of a sum of
money like a loan or forbearance of money
(b) When the obligation does not constitute a loan or forbearance of money
Consider the issuance of BSP-MB Circular No. 799, which became effective on July
1, 2013.

SUGGESTED ANSWER:
(a) When the obligation is breached and it consists in the payment of a sum of
money like a loan or forbearance of money, in the absence of stipulation,
the rate of interest shall be the legal rate of 6% per annum (Article 2009 of
the Civil Code), which was increased to 12% per NB Circular No. 905,
(Series of 1982) to be computed from default. The twelve percent, 12%, per
annum legal interest shall apply only until June 30, 2013. From July 1,
2013, the new rate of six percent (6%) per annum shall be the prevailing
rate of interest when applicable (Nacar v. Gallery Frames, 703 SCRA 439
[2013], applying BSP-MB Circular No. 799).
[NOTE: It is suggested that credit also be given in the event that the
examinee cite Tanada v. Tuvera to support the conclusion that publication is
unnecessary in the case of interpretative regulations and those merely
internal I nature, as the language of the problem may be interpreted by the
examinees to refer only to mere guidelines or directory matters.
The examinee should be given credit if he mentions that the actual base for
computing the interest due on the loan or forbearance of money, goods or
credit is the amount of the loans, forbearance, plus whatever interest is
stipulated in writing; otherwise, no interest may be charge for using the
money (Article 1956 THE CIVIL CODE)]

(b) The 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 extra-judicially,
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 quantification of damages
may be deemed to have been reasonably ascertained). The actual base for
the computation of legal interest shall, in any case, be on the amount finally
adjudged (Nacar v. Gallery Fraems, 703 SCRA 439 [2013]).
Guaranty; Extension of Time
Jerico, the project owner, entered into a Construction Contract with Ivan for the
latter to construct his house. Jojo executed a Surety undertaking to guarantee the
performance of the work by Ivan. Jerico and Ivan later entered into a
Memorandum of Agreement (MOA) revising the work schedule of Ivan and the
subcontractors. The MOA stated that all the stipulations of the original contract
not in conflict with the said agreement shall remain valid and legally effective. Jojo
filed a suit to declare him relieved of his undertaking as a result of the MOA
because of the change in the work schedule. Jerico claims there is no novation of
the Construction Contract. Decide the case and explain.

SUGGESTED ANSWER:
I will decide in favor of Jerico as there is no novation of the Construction Contract.
Novation is never presumed, and may only take place when the following are
present: (1) a previous valid obligation; (2) the agreement of all the parties to the
new contract; (3) the extinguishment of the old contract; and (4) validity of the
new one. There must be consent of all the parties to the substitution, resulting in
the extinction of the old obligation and the creation of a new valid one. In this
case, the revision of the work schedule of Ivan and the subcontractors is not shown
to be so substantial as to extinguish the old contract, and there was also no
irreconcilable incompatibility between the old and new obligations. It has also
been held in jurisprudence that a surety may only be relieved of his undertaking if
there is a material change in the principal contract and such would make the
obligation of the surety onerous. The principal contract subject of the surety
agreement still exists, and Jojo is still bound as a surety.
ALTERNATIVE ANSWER
I will decide against Jerico. The provisions of the Civil Code on Gurantee, other that
the benefit of excussion (Article 2059 of the Civil Code), are applicable and
available to surety because a surety is a guarantor who binds himself solidarily
(Article 2047 2nd par. of the Civil Code). The Supreme Court has held that there is
no reason why the provisions of Art. 2079 would not apply to a surety (Autocorp
Group v. Intra Strata Assurance Corp., 556 SCRA 250 [2008]). Article 2079 of the
Civil Code provides that an extension granted to the debtor by the creditor without
the consent of the guarantor extinguishes the guarantee. The changes in the work
schedule amount to an extension granted to the debtor without the consent of the
surety. Hence, Jojo’s obligation as surety is extinguished. Of the change of work
schedule, on the other hand, shortens the time of completion of the project, it will
amount to a novation. The old obligation, where Jojo was obligated as surety is
extinguished relatively as to him, leaving Ivan as still bound
QUESTION
Lito obtained a loan of P1,000,000 from Ferdie, payable within one year. To secure
payment, Lito executed a chattel mortgage on a Toyota Avanza and a real estate
mortgage on a 200- square meter piece of property.
(A) Would it be legally significant - from the point of view of validity and
enforceability - if the loan and the mortgages were in public or private
instruments?

SUGGESTED ANSWER:
As regards the loan, it is valid and enforceable whether it is in a public or a private
instrument, but the same is not true if the contract involves mortgages.

The laws do not require a contract of loan to be executed in a public instrument for
its validity and enforceability. A contract of loan, once constituted, is binding
between the parties.

However, a mortgage on a personal property (in this case, the car) is required to be
in a public instrument to bind third persons, not for it to be valid and enforceable.
On the other hand, a real estate mortgage (in this case, the land) must be in a
public instrument for its validity and enforceability by virtue of Article 1358 of the
New Civil Code. Under the law, if the contract involves creation, transmission,
modification or extinguishment of real rights over immovables, it
must appear in a public instrument. Thus, a chattel mortgage is still valid and
enforceable even if it is in a private instrument, but a real estate mortgage is
validly constituted only if it is in a public instrument. Article 2125 of the New Civil
Code provides that it is indispensable, that the document in which the mortgage
appears be recorded in the Registry of Property. If the instrument is not recorded,
the mortgage is nevertheless binding between the parties. The
article further provides that 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.

Thus, unlike a simple loan or mutuum or a chattel mortgage, a contract of real

estate mortgage, to be valid and enforceable, must be executed in a public
instrument and must be recorded in the Registry of Property.

QUESTION:
B Bank, a large universal bank, regularly extends revolving credit lines to business
establishments under what it terms as socially responsible banking and private
business partnership relations. All loans that are extended to clients have a
common "Escalation Clause," to wit: "B Bank hereby reserves its right to make
successive increases in interest rates in accordance with the bank's adopted
policies as approved by the Monetary Board; Provided that
each successive increase shall be with the written assent of the depositor.”
[a] X, a regular client of the bank, contends that the "Escalation Clause" is unfair,
unconscionable and contrary to law, morals, public policy and customs. Rule on the
issue and explain.
[b] Suppose that the "Escalation Clause" instead reads: "B Bank hereby reserves
the right to make reasonable increases in interest rates in accordance with bank
policies as approved by the Monetary Board; Provided, there shall be
corresponding reasonable decreases in interest rates as approved by the Monetary
Board." Would this be valid? Explain.

SUGGESTED ANSWER:
[a] The “escalation clause” is valid because each successive increase shall be with
the written assent of the depositor. This stipulation does not violate the principle
of mutuality of contracts and it would only have been void if the supposed consent
is given prior to the increase in interest rate.

[b] An escalation clause with a de-escalation clause is valid provided that the
client’s consent is still secured prior to any increase in interest rate; otherwise, the
escalation clause is void.

QUESTION
X, a government official, has a number of bank accounts in T Bank containing
millions of pesos. He also opened several trust accounts in the same bank which
specifically covered the placement and/or investment of funds. X was later
charged with graft and corruption before the Sandiganbayan (SB) by the
Ombudsman. The Special Prosecutor filed a motion praying for a
court order authorizing it to look into the savings and trust accounts of X in T Bank.
X opposed the motion arguing that the trust accounts are not "deposits" under the
Law on Secrecy of Bank Deposits (Rep. Act No. 1405). Is the contention of X
correct? Explain.

SUGGESTED ANSWER
NO, X’s contention is wrong. Deposits according to the Law on Secrecy of Bank
Deposits include deposits of whatever nature and kind. As held in Ejercito v.
Sandiganbayan, deposits include funds deposited in the bank giving rise to a
creditor-debtor relationship, as well as funds in the bank like trust accounts.
Therefore, X’s opposition to the Special Prosecutor’s Motion for a Court Order to
authorize it to look into the savings and trust accounts of X in T Bank on the
ground that the trust accounts are not "deposits" under the Law on Secrecy of
Bank Deposits (Rep. Act No. 1405) is without merit.

QUESTION
Kevin signed a loan agreement with ABC Bank. To secure payment, Kevin
requested his girlfriend Rosella to execute a document entitled “Continuing
Guaranty Agreement” whereby she expressly agreed to be solidarily liable for the
obligation of Kevin. Can ABC Bank proceed directly against Rosella upon Kevin’s
default even without proceeding against Kevin first? Explain your answer.
SUGGESTED ANSWERS:
Yes, ABC Bank may proceed directly against Rosella upon Kevin’s default even
without proceeding against Kevin first because Rosella is a surety after she bound
herself solidarily with the principal debtor.
Notwithstanding the use of the word “guaranty” circumstances may be shown
which convert the contract into one of suretyship. Under the Civil Code, when the
guarantor binds himself solidarily with the principal debtor, the contract becomes
one of suretyship and not of guaranty proper. In a contract of suretyship, the
liability of the surety is direct, primary and absolute. He is directly and equally
bound with the principal debtor. Such being the case, a creditor can go
directly against the surety although the principal debtor is solvent and is able to
pay or no prior demand is made on the principal debtor. [Basis: Article 2047,
Civil Code; Ong v. PCIB, 448 SCRA 705; discussed in pp. 810-812, Vol. 2, Rabuya’s
Civil Law Reviewer] In this case, since Rosella is a surety, ABC Bank can go directly
against her even without proceeding against the principal debtor because the
surety insures the debt, regardless of whether or not the principal debtor is
financially capable to fulfil his obligation.

QUESTION
Bruce is the registered owner, of a parcel of land with a building thereon and is in
peaceful possession thereof. He pays the real estate taxes and collects the rentals
therefrom. Later, Catalino, the only brother of Bruce, filed a petition where he,
misrepresenting to be the attorney-in-fact of Bruce and falsely alleging that the
certificate of title was lost, succeeded in obtaining a second owner’s duplicate copy
of the title and then had the same transferred from his name through a simulated
deed of sale in his favor. Catalino then mortgaged the property to
Desiderio who had the mortgage annotated on the title. Upon learning of the
fraudulent transaction, Bruce filed a complaint against Catalino and Desiderio to
have the title of Catalino and the mortgage in favor of Desiderio declared null and
void. Will the complaint prosper, or will the title of Catalino and the mortgage to
Desiderio by sustained?

SUGGESTED ANSWER:
Yes. The complaint will prosper against both the title of Catalino and the mortgage
to Desiderio.
Both Article 1346 and Art. 1409(2) of the New Civil Code provide that absolutely
simulated or fictitious contracts are void and inexistant. In this case, the Transfer
Certificate of title procured by Catalino was issued on the basis of a simulated
Deed of Sale. Thus, such title is void.
Article 2085 of the New Civil Code, in providing for the essential requisites of the
contract of mortgage, requires that the mortgagor be the absolute owner of the
thing mortgaged.
In this case, Catalino was not the true owner of the parcel of land, with the second
owner’s duplicate copy of the title having been obtained through fraud. Hence, the
mortgage is void. In conclusion, the complaint will prosper.
QUESTION
Question: In June 1988, X obtained a loan from A and executed with Y as solidary
co-maker a promissory note in favor of A for the sum of P200,000 with interest
monthly within the first week of each month beginning July 1988 until maturity in
April 1989. To secure the payment of the loan, X put up as security a chattel
mortgage on his car, a Toyota Corolla sedan. Because of failure of X and Y to pay
the principal amount of the loan, the car was extrajudicially foreclosed.
A acquired the car at A’s highest bid of P120,000 during the auction sale.
After several fruitless letters of demand against X and Y, A sued Y alone for the
discovery of P80,000 constituting the deficiency.
Y resisted raising that Y should not be held liable for the deficiency of P80,000
because he was not a co-mortgagor in the chattel mortgage of the car, which
contract was executed by X alone as owner and mortgagor. Decide with reasons.

SUGGESTED ANSWER
The defense of Y in untenable.
Suretyship is a contract whereby one person engages to a third person, for the
debt, default of miscarriage of the principl or obligor. A surety binds himself
solidarily with the principal debtor.
Here, Y is a surety of X and the extrajudicial demand against the principal debtor is
not inconsistent with a judicial demand against the surety. This is because one can
enter into a suretyship and at the same time mortgage a property.
Thus, Y is solidarily liable with the principal debtor for the P80,000 deficiency.

QUESTION
No. XIX. Industry Bank, which has a net worth of P1 Billion, extended a loan to
Celestial Properties Inc. amounting to P270 Million. The loan was secured by a
mortgage over a vast commercial lot in the Fort Bonifacio Global City, appraised at
P350 Million. After audit, the Banko Sentral ng Pilipinas gave notice that the loan
to Celestial Properties exceeded the single borrower’s limit of 25% of the bank’s
net worth under a recent BSP Circular. In light of other previous similar violations
of the credit limit requirement, the BSP advised Industry Bank to reduce the
amount of the loan to Celestial Properties under pain of severe sanctions. When
Industry Bank informed Celestial Properties that it intended to reduce the loan by
P50 Million, Celestial Properties countered that the bank should first release a part
of the collateral worth P50 Million. Industry Bank rejected the counter-proposal,
and referred the matter to you as counsel. How would you advise Industry Bank to
proceed, with its best interests in mind?

SUGGESTED ANSWER:
I shall advise Industry Bank that the mortgage is indivisible. Article 2089 of the Civil
Code provides that “a pledge or mortgage is indivisible, even though the debt may
be divided among the successors in interest of the debtor or of the creditor.
Therefore, the debtor's heir who has paid a part of the debt cannot ask for the
proportionate extinguishment of the pledge or mortgage as long as the debt is not
completely satisfied.” In this case, the collateral is a single
commercial lot in the Fort, covered by a single title and beings essentially
indivisible in character. Therefore, Celestial Properties cannot ask for a partial
release of the mortgage so long as the loan has not been completely paid.

QUESTION
VI. Gary is a tobacco trader and also a lending investor. He sold tobacco leaves to
Homer for delivery within a month, although the period for delivery was not
guaranteed. Despite Gary's efforts to deliver on time, transportation problems and
government red tape hindered his efforts and he could only deliver after 30 days.
Homer refused to accept the late delivery and to pay on the ground that the
agreed term had not been complied with. As lending investor, Gary granted a
Pl,000,000 loan to Isaac to be paid within two years from execution of the contract.
As security for the loan, Isaac promised to deliver to Gary his Toyota
Innova within seven (7) days, but Isaac failed to do so. Gary was thus compelled to
demand payment for the loan before the end of the agreed two-year term.
VI. (2) Can Gary compel Isaac to pay his loan even before the end of the two-year
period?

SUGGESTED ANSWER:
(A) Yes, Gary can compel Isaac to immediately pay the loan. Non-compliance
with the promised guaranty or security renders the obligation immediately
demandable. Isaac lost his right to make use of the period.

(B) Yes, Gary can compel Isaac to immediately pay the loan. The delivery of the
Toyota Innova is a condition for the loan. Isaac's failure to deliver the car violated
the condition upon which the loan was granted. It is but fair for Gary to demand
immediate payment.

(C) No, Gary cannot compel Isaac to immediately pay the loan. The delivery of
the car as security for the loan is an accessory contract; the principal contract is
still the P 1,000,000 loan. Thus, Isaac can still make use of the period.

(D) No, Gary cannot compel Isaac to immediately pay the loan. Equity dictates
that Gary should have granted a reasonable extension of time for Isaac to deliver
his Toyota Innova. It would be unfair and burdensome for Isaac to pay
the P1,000,000 simply because the promised security was not delivered