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Title XI. - LOAN GENERAL PROVISIONS Art. 1933 By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same for certain time and return it, in which case the contract is called a commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply called a loan or mutuum. Commodatum is essentially gratuitous. Simple loan may be gratuitous or with a stipulation to pay interest. In commodatum, the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the borrower. People v Concepcion Facts: The President of PNB sent a telegram to its Aparri branch authorizing the extension of credit to Puno y Concepcion en C in the amount of PhP 30,000, for which 6 demand notes were issued for security. However, under Act No. 2747 the national bank shall not directly or indirectly grant loans to any members of the Board of Directors of the bank or agents of its branches. The wife of the president here owned ! of the capital of Puno y Concepcion. Is theloan granted to Puno y Concepcion covered by the said provision? Held: Yes. The loan in this case is an indirect loan covered by the prohibition. There is a difference between a loan and a credit, whereby a concession of credit necessarily involves granting of loans up to the limit of the amount fixed in the credit. Credit is the ability to borrow money, while a loan is the delivery by one and the receipt by another of money to be repaid. A discount on the other hand is given whereby the interest is deducted in advance, under a double name paper. In a loan the interest is taken at the expiration of the credit, under a single-name paper. Demand notes are not discount papers but are evidences of indebtedness. Lastly, a loan to a partnership of which the wife of a director of a bank is a member is an indirect loan to such director due to the conjugal partnership existing between the wife and the director. When a corporation is forbidden to do an act, the prohibition extends to the Board of Directors, and to each director individually. US v Feliciano Facts: The Provincial Treasurer of Makati was sentenced for the violation of Act No. 1780 for appropriation of public funds and application thereof to private use. The Deputy Auditor went to Makati and it was found that the missing PhP 53.00 from the cashbox was paid by the Treasurer from his own pocket and paid the missing amount. Held: There is no prima facie evidence which can be established to prove appropriation of he funds to public use, and it was only taken to pay the wages of the workers, when they did no appear, the Treasurer gave the money back. Thus, the funds were not taken for personal use. De los Santos v Jarra Facts: Jarra was the administratix of the estate of Jimenea, who previously borrowed 10 carrabaos from Santos. Jimenea then died, but the carrabaos were not returned to Santos, thus the latter sought to exclude the same from being made part of the estate. 4 of the carrabaos died, leaving 6 of them. The trial court ruled that the animals should be returned, and if such is not possible, their value should be paid at Php 120.00 each. Jarra contends that the animals were sold, but there is no instrument to evidence the sale. Held: The carrabaos were loaned without any further compensation than the return thereof, which makes the transaction one of commodatum. The bailee acquires the use of the thing, and must indemnify the owner for the failure to return the thing loaned.

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Art. 1934. An accepted promise to deliver something by way of commodatum or simple loan is binding upon parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract. (n) Saura Import v DBP Facts: Suara obtained a loan from RFC (formerly DBP) in the amount of PhP 500,000 for its jute mill. In Resolution No. 145, the loan was approved. The terms thereof provided that China Engineers shall be a co-maker, and a bond of PhP 123,000 is to be put up. The Board of Governors examined the terms, and China Eng. Agreed to sign, thus a promissory note and a deed of mortgage was executed. Upon re-examination, the loan was reduced to PhP300,000, for which China Eng. Did not wish to sign. Saura thus sent a request to cancel the loan and the mortgage, when China Eng. Agreed to sign subject to the condition that the raw materials shall be 100% from local industry. Saura entered into a mortgage contract with Prudential Bank. After 9 years from the cancellation of the loan, Saura brought suit for damages against DBP, for failure to release the proceeds of the loan. Held: It was found that there was an offer to loan money and the same was accepted, but no delivery thereof was made, due to mutual desistance. Thus, no recovery may be had, and the case was dismissed. Naguiat v CA Facts: Queano loaned from Naguiat PhP 200,000, and thus 2 checks were issued for PhP 95,000 each. A promissory note for PhP 200,000 and interests was issued to the order of Naguiat to secure the loan. A Post Dated Check was also issued to Naguiat, but it was dishonored upon presentment at maturity. Queano requested the Bank to stop the check but it was denied. A demand was made settlement of the loan, and extrajudicial foreclosure proceedings of the mortgage was instituted. The RTC ruled that the Deed of Mortgage was null and void, and this was affirmed by the CA. Held: A commodatum or a simple loan is perfected by delivery as it is a real contract. The checks received from Naguiat were never encashed or deposited, thus there was no delivery of the loan proceeds. The lender did not remit and the borrower did not receive the loan makes it null and void, and thus the accessory contract of mortgage is also null and void. CHAPTER 1

COMMODATUM SECTION 1 - Nature of Commodatum Art. 1935. The bailee in commodatum acquires the used of the thing loaned but not its fruits; if any compensation is to be paid by him who acquires the use, the contract ceases to be a commodatum. (1941a) Republic v Bagtas Facts: Jose Bagtas borrowed from the Bureau of Animal Industry 3 bulls, which were delivered to him upon payment of a 10% breeding fee. The bulls were to be returned after 1 year. Bagtas requested that the agreement be renewed, which was approved for only one of the bulls. The Director of Animal Industry demanded that Bagtas pay for the value of the bulls, upon his failure to return them. Bagtas requested to have the book value of the bull lowered, which was denied, despite which he still failed to return the bulls. A complaint was filed against Bagtas in the CFI of Manila, which ruled that he should return the bulls or pay for the book value if return is not possible. Bagtas died, and his administratix wife was notifed of the judgment. Only 2 of the bulls were returned, as one died of a gunshot wound from a Huk raid. The receipt of the return from the Bureau of Animal Industry was presented. Held: The contract between the parties is no one of commodatum, but one of loan. It is not gratuitous, due to the payment of the breeding fee. The lessee in such a contract is subject to the responsibilities of a possessor in bad faith due to his continued possession after the expiry of the contract. If the breeding fee be considered a compensation, the contract would be a lease of the bulls, it could not be a contract of comodatum because the contract is essentially gratuitous. The bulls were also delivered with an appraisal of their book value. Since 2 of the bulls were already returned, Bagtas need only pay for the value of 1 bull. Pajuyo v CA Facts: Pajuyo was the initial possessor of a 250 square meter lot in Payatas, who paid PhP 400.00 to Perez for the right over the lot. Pajuyo then constructed a house made of light materials on the lot and lived therein until December 1985. During that time, Perez executed a kasunduan with Guevarra, which provided that the latter may live in the house and he is to maintain its cleanliness and return it upon Pajuyos demand. In September 1994, Pajuyo demanded the return of the possession of the house, but the possessor thereof refused, thus he was

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constrained to file an ejecment suit in the MTC. The MTC ruled in favor of Pajuyo, which was affirmed by the RTC. But, such decision was reversed by the CA. Held: The CA decision is reversed, as between Pajuyo and Guevarra, Pajuyo had a better right over the lot, even if ownership thereof was not with him. Pajuyo had prior possession of the lot. The kasunduan created a relationship between the 2 similar to a lessor-lessee relationship, where the lease has expired, and the lessee continues in possession due to the tolerance of the owner. The kasunduan is not a commodatum, as in commodatum, one of the parties delivers to another something not consumable so that the latter may use the same for a certain time and return, and is essentially gratuitous. Under such, return may be sought but only of a temporary character. The kasunduan is not essentially gratuitous, as Guevarra (the bailee) was obliged to keep the house clean and return upon Pajuyos demand. The kasunduan was an undeniable evidence of Guevarras recognition of Pajuyos better right of physical possession. Art. 1936. Consumable goods may be the subject of commodatum if the purpose of the contract is not the consumption of the object, as when it is merely for exhibition. (n) Producers Bank v CA Facts: Vives loaned to Doronilla PhP 200,000 to be returned within 30 days, for the incorporation of the latters business, Sterela Marketing. The check issued by Vives was deposited in the account od Sterela in Producers Bank, which was opened by the wife of Vive and Sanchez, a friend of Doronilla. A passbook was issued in the name of Vives wife. It was found out that Sterela no longer occupied its office at its business address. Vives then asked the bank if the money in Sterelas account was still intact, but he was told that only PhP 90,000 remained. Vives demanded that his money be returned, for which Doronilla issued 2 checks, in the amount of PhP 212,000. The checks were, however, dishonored. An action for the recovery of a sum of money was filed with the RTC, which ordered Doronilla to pay, which was affirmed by the CA. Held: The transaction is a commodatum, as, even if the thing is consumable, it may still be a commodatum because the same money deposited with the bailee is that which is sought sought to be returned. The money was given to the bailee for exhibition purposes only. The payment of the additional PhP 12,000 refers to the fruits of the deposit, the ownership over which is retained by the owner of the principal thing. The bailee in a commodatum acquires the use of the thing loaned, but not its fruits. And even is it is a loan, the liability to return is still present. The bank is also liable through Mr. Atienza, in his ordinary authority as bank manager. There is solidary liability between the bank and Doronilla, as their connivance was the cause of the loss. Art. 1937. Movable or immovable property may be the object of commodatum. (n) Art. 1938. The bailor in commodatum need not be the owner of the thing loaned. (n) Art. 1939. Commodatum is purely personal in character. Consequently: (1) The death of either the bailor or the bailee extinguishes the contract; (2) The bailee can neither lend nor lease the object of the contract to a third person. However, the members of the bailee's household may make use of the thing loaned, unless there is a stipulation to the contrary, or unless the nature of the thing forbids such use. (n) Art. 1940. A stipulation that the bailee may make use of the fruits of the thing loaned is valid. (n) SECTION 2. - Obligations of the Bailee Art. 1941. The bailee is obliged to pay for the ordinary expenses for the use and preservation of the thing loaned. (1743a) Art. 1942. The bailee is liable for the loss of the thing, even if it should be through a fortuitous event:

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(1) If he devotes the thing to any purpose different from that for which it has been loaned; (2) If he keeps it longer than the period stipulated, or after the accomplishment of the use for which the commodatum has been constituted; (3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exemption the bailee from responsibility in case of a fortuitous event; (4) If he lends or leases the thing to a third person, who is not a member of his household; (5) If, being able to save either the thing borrowed or his own thing, he chose to save the latter. (1744a and 1745) Republic v Bagtas In this cae, Bagtas kept the thing longer than the period stipulated (par. 2 of Art. 1942). The return of the bulls was already demanded of him. Thus, when one of the bulls died due to a gunshot wound, he is liable for the value therefore to the owner. Art. 1943. The bailee does not answer for the deterioration of the thing loaned due only to the use thereof and without his fault. (1746) Art. 1944. The bailee cannot retain the thing loaned on the ground that the bailor owes him something, even though it may be by reason of expenses. However, the bailee has a right of retention for damages mentioned in Article 1951. (1747a) Art. 1945. When there are two or more bailees to whom a thing is loaned in the same contract, they are liable solidarily. (1748a) SECTION 3. - Obligations of the Bailor Art. 1946. 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 case of temporary use by the bailor, the contract of commodatum is suspended while the thing is in the possession of the bailor. (1749a)

Art. 1947. The bailor may demand the thing at will, and the contractual relation is called a precarium, in the following cases: (1) If neither the duration of the contract nor the use to which the thing loaned should be devoted, has been stipulated; or (2) If the use of the thing is merely tolerated by the owner. (1750a) Mina v Pascual Facts: Francisco Fontanilla purchased a lot in Laoag, upon which his brother Andres, with his consent, built a warehouse, on a portion thereof near the front. Francisco died leaving Mina, as his heir. Andres also died, leaving Pascual as his heir, who was only entitled to 6/7 of the ! of the lot. The current owner of the lot was Mina et al., while the owners of the warehouse was the Pascuals. Pascual, as owner, wanted to sell ! of the warehouse, to which Mina et al. opposed as the lot occupied by the warehouse was owned by them, the CFI ordered the sale of the building, and it was thus sold to Juco, without the court deciding on the ownership of the lot. After the sale, the court said that the lot where the warehouse was is owned by the owner of the warehouse. This was reversed by the CA, declaring that the lot was owned by Mina. The possession of the lot was granted to the owner thereof, but it was annulled because such would affect the rights of Juco. Thus, Mina et al. sought to annul the sale of the lot to Juco. Held: The PAscuals agree that Mina et al. are the owners of the lot in question, and they themselves only have use of the lot. He who only has use of the thing cannot validly sell the thing itself. A sale is transfer of ownership, and if there is no ownership, then there is no sale. Pascuals transferred ownership only over what they had: 6/7 part of ! of the warehouse and the lot occupied by it. Both parties may call the contract obtaining between them as one of commodatum, but contracts are not interpreted in conformity with the name given to it by the parties, as what is controlling are its elements and the laws governing it. In a commodatum, the use of the thing is given only for a certain period of time. Here there is no period of time stipulated or agreed upon by the parties. What Francisco had intended was for his brother to have surface rights over the lot. (The contract is one of precarium because there is no fixed date of return.) the owner of the land where the building is located may appropriate such to himself, after payment of indemnity, or oblige the builder to pay for the value of the land used. The sale thus to Juco is null and void, as a mere bailee may not lend or lease the thing lent to a third person, and neirther may he sell it. Quinto v Beck Facts: Beck was the tenant of Quintos and Ansaldo in a house the latter owned

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along Del Pillar st. they novated their contract of ease whereby Beck was granted by Quintos the use of the furniture in the rented place, upon the condition that they be returned upon demand. The property was sold to the Lopezes and the plaintiff gave beck 60 days to return the property. Beck however wanted Quintos to get the furniture from his place and did not want to deliver them. He also did not want to give up 3 gas heaters and 4 electric lamps. Quintos refused to get the furniture, and Beck refused to make delivery, and he thus deposited them with the Sheriff. Held: The contract between the parties in a commodatum, as it is essentially gratuitous (or more specifically a precarium). The obligation assumed by Beck was to return the furniture upon demand and to return such at plaintiffs house. As bailee, Beck is not entitled to place the furniture on deposit, nor was plaintiff under duty to accept incomplate furniture. The correctness of the value of the furniture was not admitted during trial, thus, if Beck fails to deliver them, its value is still yet to be determined by the Trial Court for Becks payment. Beck must also pay the costs of the suit. He was the party guilty of the breach, including costs of depositing the furniture with the Sheriff. A contract is a precarium if the owner of the thing may demand its return at will. Art. 1948. The bailor may demand the immediate return of the thing if the bailee commits any act of ingratitude specified in Article 765. (n) Art. 1949. 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 them, except when they are so urgent that the reply to the notification cannot be awaited without danger. If the extraordinary expenses arise on the occasion of the actual use of the thing by the bailee, even though he acted without fault, they shall be borne equally by both the bailor and the bailee, unless there is a stipulation to the contrary. (1751a) Art. 1950. If, for the purpose of making use of the thing, the bailee incurs expenses other than those referred to in Articles 1941 and 1949, he is not entitled to reimbursement. (n) Art. 1951. The bailor who, knowing the flaws of the thing loaned, does not advise the bailee of the same, shall be liable to the latter for the damages which he may suffer by reason thereof. (1752) Art. 1952. The bailor cannot exempt himself from the payment of expenses or damages by abandoning the thing to the bailee. (n) CHAPTER 2 SIMPLE LOAN OR MUTUUM Art. 1953. A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and quality. (1753a) Republic v Grijaldo Facts:Grijado obtained 5 loans from Bank of Taiwan for a total amount of PhP 1,281.97 at 6% pa. the loans were covered by 5 promissory notes, and were all considered as crop loans, and are thus considered due 1 year after they were incurred. As security for payment, a chattel mortgage was constituted on the standing crops on the land (Hacienda Campugas in Negros Occidental). Bank of Taiwan invested its assets in the government of the US at the time of the US occupation. The US thereafter transferred all of its assets, including the loan with Bank of Taiwan to the Republic of the Philippines. The Chairman of the Board of Liquidators sent an extrajudicial demand to Grijaldo. Due to his failure to pay, the Republic filed a complaint in the Peace Court of Hinagam. The court dismissed the case due to prescription, but the CFI reversed the decision. It ruled that Grijaldo must pay the amount fo the loan including interests. During the pendency of the appeal, Grijaldo died, and was substituted by his heirs. Held: The Republic of the Philippines has a cause of action as the USA, the belligerent, seized the assets of Bank of Taiwan, including the loan of Grijaldo, which then belonged to enemy country. As successor-in-interest of the US, the

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Republic had become privy to the contract between bank of Taiwan and Grijaldo. The defendant further maintains that since his loan was constituted by a chattel mortgage over his standing crops and that they were destroyed through enemy action, his obligation to pay was extinguished. But such is not the case. The obligation of Grijaldo under the promissory notes was not to deliver a determinate thing, which were the crops on the land, but rather, it was to deliver or pay a generic thing, which is the amount of money owed. The contract here is a mutuum, whereby one delivers to another a consumable thing, with a stipulation to pay interest. With the obligation to pay still standing, the court ordered Grijaldo to pay the amount due, which is PhP 2,377. Martinez v Ramos Facts: Antonio Ramos obtained a loan from Pedro Martinez in the amount of PhP 1,900, without interest to be paid after 3 years. Ramos said he was ordered by his father to obtain the loan. His father, Julian, died, and Antonio became the administrator of his estate. He said that the money was used for his business, and upon the death of his father, he transferred his business to his co-heirs. Martinez filed suit in the special proceeding for the settlement of the estate of Julian. The court said that the claim was not one against the estate, but against the co-heirs. The CFI of Batangas ordered Antonio to pay Martinez, and the estate of Julian was absolved. Held: It does not matter if Antonios co-heirs acknowledged the debt. One who receives as a loan money or any other fungible thing, acquires ownership thereof, and is bound to return to to the creditor an equal amount of the same kind and quality. The contract here states that Antonio Ramos will return to Pedro Martinez within 3 years after the signing of the contract, the amount of PhP 1,900. And thus, the payment is to be made by Antonio Ramos, not anyone else. The force of law of contracts cannot be extended to parties who do not intervenetherein. The contract between Julian and Antonio cannot be alleged against Martinez, who is not a party thereto. Judgment of the CA affirmed. Art. 1954. A contract whereby one person transfers the ownership of nonfungible things to another with the obligation on the part of the latter to give things of the same kind, quantity, and quality shall be considered a barter. (n) Art. 1955. The obligation of a person who borrows money shall be governed by the provisions of Articles 1249 and 1250 of this Code. If what was loaned is a fungible thing other than money, the debtor owes

another thing of the same kind, quantity and quality, even if it should change in value. In case it is impossible to deliver the same kind, its value at the time of the perfection of the loan shall be paid. (1754a) Art. 1956. No interest shall be due unless it has been expressly stipulated in writing. (1755a) Tan v Valdehuez (This case is confusing) Facts: 2 Deeds of Paco de Retro Sale were executed over 2 parcels of land, one of which is registered, while the other is not. The first was subject of a case for nd ownership and recovery of possession, while the 2 involved a case for consolidation of ownership. The sale was executed between Valdahuez, and Tan. Valdahueza failed to redeem the properties, but who remained in possession. The land was sold at an auction sale, with Tan as the highest bidder, in whose favor a deed of absolute sale was executed, with the right to repurchase in favor of the Valdahuezas. Tan sought to enjoin the Valdahuezas from entering the property, and the court ruled in their favor. Eventually, the lower court found Tan as the absolute owner, and Valdahuezas must pay PhP 1,500 + 6% pa interest from the filing of the complaint. Held: There is no stipulation in the deeds regarding tha payment of interests, and the lower court erred in imposing the interest in its decision. The imposition of interest is without legal basis because it was not stipulated in the contracts. An equitable mortgage is a contract whereby the property remains in the vendors possession and they pay the taxes thereon, and the contracts are presumed as equitable mortgages. Valdahuezas, thus must pay PhP1,200 for the registered mortgage, and PhP 300 for the unregistered one, and the interest of 6% pa will only apply upon finality of the decision which then becomes a forebearance of credit. (?) Jardenil v Solas Facts: This is an action for foreclosure of mortgage. The only question raised in this appeal is: Is defendant-appellee bound to pay the stipulated interest only up to the date of maturity as fixed in the promissory note, or up to the date payment is effected? (everything else is in Spanish) ! Held: Solas has clearly agreed to pay interest only up to the date of maturity, or until March 31, 1934. As the contract is silent as to whether after that date, in the event of non-payment, the debtor would continue to pay interest, we cannot in law, indulge in any presumption as to such interest; otherwise, we would be imposing

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upon the debtor an obligation that the parties have not chosen to agree upon. Article 1755 of the Civil Code provides that "interest shall be due only when it has been expressly stipulated." When a party sues on a written contract and no attempt is made to show any vice therein, he cannot be allowed to lay any claim more than what its clear stipulations accord. His omission, to which the law attaches a definite warning as an in the instant case, cannot by the courts be arbitrarily supplied by what their own notions of justice or equity may dictate. Plaintiff is, therefore, entitled only to the stipulated interest of 12 per cent on the loan of P2, 400 from November 8, 1932 to March 31, 1934. And it being a fact that extra judicial demands have been made which we may assume to have been so made on the expiration of the year of grace, he shall be entitled to legal interest upon the principal and the accrued interest from April 1, 1935, until full payment. Soncuya v Azarraga Facts: In the settlement of the state of Juan Azarraga, the heirs listed Atty. Azarraga for the amount of PhP 3,000 as fixed by the court. The heirs agreed to pay by special mortgage 4 parcels of land in Bay-ang, Capiz. The Atty. was to be in possession of the lands without payment of rent, until the full amount of his fees are paid. After 5 years, if the fees are not yet paid, the lands are to be adjudicated to the Atty. and the latter is to receive the amounts he received from the heirs. If there is full payment after 5 years, the lands will continue to be in possession of the Atty. if he has kept livestock therein. Before the end of 5 years, the Atty. sold his rights to Soncuya. Soncuya replaced the Atty. as the creditor of the heir, and granted an extension of the period of payment, but with and increase of the amount owed to PhP7,000 and the addition of a 12% interest pa. another extension was granted, with an increase in the payment to PhP12,000, and out of this, PhP 4,000 was paid to the Atty. already. Joaquin Azarraga executed a deed in favor of Soncuya grating to the latter his share on the land for the amount of PhP4,000. Within the 5 year redemption period, there will be a payment of 12% pa interest for st the 1 term, and Php7,000 + Php 3,000 payment. The deed however remained unregistered. Soncuya took possession of the whole land and placed livestock thereon and built sheephold and fences. Fruit bearing trees were found, among which were coconut trees which were planted by Joaquin. Soncuya went to the house of Joquin to seek for payment, and asked if the land would be redeemed for PhP12,000. The Azarragas were thereafter issued a TCT in their names, which was known by Soncuya. The CFI issued a writ of attachment in favor of Soncuya, with PhP16,000 delivered by the Atty. (part of the credit) for the purpose of the business, Pnay Municipal Cadastre Inc. a writ of preliminary injunction was issued and became final with respect to the PhP9,000 still owing. Held: The contract between the Azarragas and the Atty. was one of Antichresis, or a pacto comisoro. It is also a simple loan because Soncuya decided to collect and the defendants decided to pay 12% pa interest. It is only in the contract of loan rd where interest may be demanded. A simple loan with security does not affect 3 persons because it is not registered. The contract between Soncuya and Joaquin is also a simple loan. Soncuya was however negligent as he did not protest the registration of the property in the name of the Azarragas. The Azarragas cannot claim damages for the coconut trees, as there is no evidence to show that they were damaged due to the livestock on the land. Soncuya must be paid: by the azarragas in the amount of PhP2,700 + 12% pa interest, and by Joaquin PhP 4,000 + 12% pa interest. (Basically, the contract with the Atty. was initially an antichresis, when it was transferred in writing to Soncuya, it became a contract of loan, due to the extension and the imposition of 12% pa interest). Royal Shirt v Co Bon Tic Facts: Co Bon Tic contracted with Royal Shirt for 350 pairs of Ballenteenas shoes for Php 7.00 each. The order slip provided that Co Bon Tic may choose between 2 options, the first was to consider all of the shoes as sold for Php7.00 or sold for Php8.00 each, but he may return all unsold shoes. On the Invoice for the 350 pairs, Co Bon Tic wrote down in his own handwriting the total amount unpaid after every partial payment made. But, Co Bon Tic wanted the remaining shoes returned as he failed to sell them. Royal Shirt did not accept these, and instead demanded payment for his remaining balance. Held: Defendant obviously accepted the straight sale to him on credit of the whole 350 pairs of shoes for PhP2,450, and made partial payments thereof. Thus, he can no longer return the unsold shoes. The Chinabank check for PhP 420 paid to Royal Shirt was never encashed and it was returned to defendant, thus, there is still no

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payment made. What was printed on the invoice was overruled by the handwritten phrase as agreed with Mr. Chebat. CO Bon Tic ordered to pay PhP 1,422 + 6% pa interest without attorneys fees. Artwood Industries v DM Consunji Facts: Arwood Industries was the owner of a Condo in San Juan, while DM COnsunji were their contractors. The 2 parties entered into a Civil Structural and Architectural Works Agreement with a contract rice of PhP 20.8 million. The contract provided that if the owner delays in payment, the contractor has 2 options, it can suspend the work until it is finally paid, or continue its work, bu thte owner must pay 2% interest per month or a fraction of the amount due. When the condo was completed, the contract price still remained unpaid, thus DM Consunji filed suit. Held: The contract is the law between the parties, neither may impugn it as they willingly consented thereto. The contract is the best evidence of the intent of the parties. Here the contract provides the duty of the contractor to finish the condo, and the duty of the owner to pay the contractor. The appropriate measure of damages is the payment of the penalty interest at the rate agreed upon. Arwood ordered to pay the pamount of PhP 926,000 + 2% interest per month. Overseas Bank v Cordero Facts: Cordero opened a time deposit with Overseas Bank for the amount of PhP 80,000, with maturity date falling in July 1968. The Bank went through distressed financial condition, and the Central Bank issued resolution suspending the operations of the bank, and ordered the Bank Superintendent to take over. Cordero thus was not paid his time deposit upon its maturity. He thus filed suit in the CFI which ordered for the payment of his deposit, + 6% pa interest. This decision was affirmed by the CA. The recovery was barred by the state of insolvency of the bank as found by the Central Bank. But, Codero was already paidt eh amount of his deposit by ComBank, the successor of Overseas Bank, evidence by a receipt signed by Julian Cordero, his brother, who was given his special power of attorney. He questions the lack of payment of interest on such principal amount deposited. Held: What enables a bank to pay interest is its ability to engage in its operations. If it is not in operation, it has no way of paying interest. It should be read into every contract of deposit that the obligation to pay interest is suspended from the moment the banks operations are also suspended by the Central Bank. This must also be applied to other banks, as a matter of equity. Since Cordero has already been paid the principal of his deposit, the case must be dismissed.

Ramos v Central Bank The SC denied reconsideration of its ruling in Overseas Bank v Cordero, due to the lack of votes. The Central Bank wishes to reconsider, and seeks to be paid interest during the period of closure of the bank. The closed bank is not liable to the Central Bank for payments made by the latter during the time its operation were suspended. It must be noted that the Central Bank, when called upon to deal with commercial banks and extend to them emergency loans and advances, deals with them not as an ordinary creditor engaged in business, but as the ultimate monetary authority of the government charged with the supervision of the banking system. Lirag v SSS Facts: Lirag and SSS entered into a purchase agreement whereby SSS will purchase preferred shares of stock in Lirag Textile worth PhP 1 million subject to certain conditions. SSS paid PhP500,000 to LIrag and was issued 5,000 preferred shares of stock. It thereafter paid another PhP 500,000 and was again issued 5,000 shares of stock. According to the agreement, Lirag will repurchase the th stocks at regular intervals starting on the 4 year after the issuance. As security, payment of dividends will be made and the president of Basilio Lirag signed the contract in his official and personal capacities. Lirag failed to redeem the stocks and failed to pay deividends despite demands. Paragraph 5 f the agreement provided that if Lirag fails to redeem, the entire obligation becomes due and demandable., and 12% would be paid as damages. The CFI ruled that the agreement is a debt instrument and ordered Lirag to pay P 1 million + interest and dividends, damages and attorneys fees. Held: The agreement was a debt instrument. The Parties intended a repurchase on scheduled dates to be an absolute obligation, not dependent on the financial ability of Lirag. The purchase agreement was the law between the parties, and the dividends were stored as interest, with the amount fixed at 8% pa, and not dependent on profits or surplus. As for liquidated damages, 12% pa is the correct amount for breach of contract. Non-payment of dividends involves sums of money which are overdue, thus, it is bound to earn legal interest from the time of demand, which is the time of the filing of the action. Art. 1957. Contracts and stipulations, under any cloak or device whatever, intended to circumvent the laws against usury shall be void. The borrower may recover in accordance with the laws on usury. (n) Angel Jose v Childa

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Facts: 4 loans (amounting to PhP 26,500) were obtained from Angel Jose by Chelda enterprises. These remained unpaid as the checks issued for payment were dishonored. Chelda et al. aver that Angel Jose deducted usurious interest at 2% and 2.5% per month. Suit was filed by Angel Jose in the CFI to recover on the loans. It was found that there remained a principal balance of PhP20,000, and the interest charged was usurious. Despite usurious interest, Angel Jose may still collect the principal amount owing on the loan. Appeal was made directly with the SC. Held: A creditor on a loan with usurious interest may recover the principal amount of the loan. Under the usury law, a loan with usurious interest is not void, and is only void as to the interest imposed. A loan is composed of a principal (debt) and accessories (interest). The accessory follows the principal and not the other way around. Thus, if the accessory is void, it does not mean that the principal is also void. In simple loan with a stipulation of usurious interest, the prestation of the debtor to pay the principal debt, which is the cause of the contract is not illegal. The illegality only lies as to the prestation to pay the stipulated interest, hence, being separable, the latter should be deemed void, since it is the only one illegal. Art. 1413 provides interest paid in excess of the interest allowed by the usury law, may be recovered by the debtor, with interest thereon from the date of payment. The whole stipulation on interest is void, as if there is no stipulation on interest to begin with. Attorneys fees also deleted and the principal amount due to be paid by Chelda. Art. 1958. In the determination of the interest, if it is payable in kind, its value shall be appraised at the current price of the products or goods at the time and place of payment. (n) Art. 1959. Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn interest. However, the contracting parties may by stipulation capitalize the interest due and unpaid, which as added principal, shall earn new interest. (n) Cu-Unjieng v Mabalacat Facts: A suit was filed in the CFI of Pampanga by Cu-Unjieng to recover the amount due and interests thereon from Mabalacat Sugar, and to foreclose the mortgage security. 3 mortgages were constituted on the property, the first was with Cu-Unjieng, the second with PNB, and the third with Siulong & Co. the amount due to Cu-Unjieng was PhP 163,000 + interests. The CFI ordered Mabalacat to pay plaintiff the amount due + 12% interest pa and attorneys fees. It also ordered Mabalacat to pay Siulong & Co. PhP 3,205 + 9% pa interest until full payment. Held: The complaint was not prematurely filed as the agreement to extend the time of payment was voluntary and without consideration so far as the creditor is concerned, and the failure of the debtor to comply with the terms of the extension justified the creditors action in treating the extension to be with no force and effect. The mortgage contract consists of 2 parts, the principal amount, and the 12% pa interest. The parties may stipulate that interest shall be compounded and for the computation of the compound interest can certainly be made monthly, or any which way parties stipulate. But, in the absence of an express stipulation on compoun interest, no such interest may be collected and the rate shall be fixed at 6% pa. interest cannot be accumulated on unpaid interest accruing upon the capital of the debt if no stipulation is made by the parties. The usury law provides that for a mortgage loan, 12% pa is the interest. Interest cannot be allowed in the absence of a stipulation or in default thereof, except when the debt is judicially claimed, compound interest is computed at 6% pa. PhP deducted from the debt, PhP 162,000 to be paid at 12% pa interest. Art. 1960. If the borrower pays interest when there has been no stipulation therefor, the provisions of this Code concerning solutio indebiti, or natural obligations, shall be applied, as the case may be. (n) Velez v Balzarra Facts: The husband of San Jose died the lands in his estates were adjudicated to his wife Velez. Balzarza and Mabilin alleged that they obtained a loan of PhP2,400 secured by a mortgage on the said lands. PhP 4,420 was said to have already been paid. Velez sought for the recovery of the said lands saying that the defendants failed to pay rent. The lower court found that the lands were given as a

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security for the loan, and found that the total amount of the loan was PhP3,067, and paid alreadyPhp 4,429 with PhP 3,997 paid to San Jose and PhP 432,66 to Velez, and was considered by the court as principal, and ordered Velez to return the amount received. Held: All 5 contracts were loan contracts, and as security, the beneficial use of the lands were given to the creditor. It is the interest of the parties for the creditor to be compensated thereby. The contracts do not stipulate for the payment of rent nor of interest, and no interest is due unless it is expressly stipulated. The court held that PhP1,143 paid by the defendants when the loan was only PhP2,100, made it usurious, if the amount was for interest payment. The trial court was correct in finding that these payments were applied to the principal. If the borrower pays interest without any stipulation regarding it cannot recover them nor can they be applied to the principal. Velez to return the amount she received, but not the amounts paid to San Jose, as to have such, she should have appealed the decision in the settlement of the estate of her husband. The Civil Code provides that if there is something has been unduly delivered by mistake, and when there is no right to collect, the obligation to restore it arises. For this, 2 requisites must be present: 1) there must be no right to collect, and 2) the amounts were paid through mistake. As for the PhP 436 given to Velez, the 2 requisites are present, and it must be returned to prevent unjust enrichment. Art. 1961. Usurious contracts shall be governed by the Usury Law and other special laws, so far as they are not inconsistent with this Code. (n) Commodatum Ordinarily involves something nonconsumable Ownership of the thing loaned is retained by the lender Essentially gratuitous Borrower must retain the same thing loaned Rea/personal property For use or temporary possession Bailor may demand return prior to expiration Loss of the thing suffered by the bailor Mutuum Money or other consumable thing Ownership is transferred to the borrower May be gratuitous or onerous, if with stipulation for interest Borrower need only to pay the same amount of the same king and quality Only personal property For consumption May not demand return prior to expiration Borrower suffers the loss

USURY LAW (Act. 2655) (The effectivity of this Act was suspended by Central Bank Circular No. 905, dated January 1, 1983) AN ACT FIXING RATES OF INTEREST UPON LOANS AND DECLARING THE EFFECT OF RECEIVING OR TAKING USURIOUS RATES AND FOR OTHER PURPOSES Section 1. The rate of interest for the loan or forbearance of any money goods, or credits and the rate allowed in judgments, in the absence of express contract as to such rate of interest, shall be six per centum per annum or such rate as may be prescribed by the Monetary Board of the Central Bank of the Philippines for that purpose in accordance with the authority hereby granted. Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of interest for the loan or renewal thereof or the forbearance of any money, goods or credits, and to change such rate or rates whenever warranted by prevailing economic and social conditions. In the exercise of the authority herein granted, the Monetary Board may prescribe higher maximum rates for loans of low priority, such as consumer loans or renewals thereof as well as such loans made by pawnshops finance companies and other similar credit institutions although the rates prescribed for these institutions need not necessarily be uniform. The Monetary Board is also authorized to prescribe different maximum rate or rates for different types of borrowings, including deposits and deposit substitutes, or loans of financial intermediaries. Sec. 2. No person or corporation shall directly or indirectly take or receive in money or other property, real or personal, or choses in action, a higher rate of interest or greater sum or value, including commissions, premiums, fines and penalties, for the loan or renewal thereof or forbearance of money, goods, or credits, where such loan or renewal or forbearance is secured in whole or in part by a mortgage upon real estate the title to which is duly registered, or by any document conveying such real estate or an interest therein, than twelve per centum per annum or the maximum rate prescribed

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by the Monetary Board and in force at the time the loan or renewal thereof or forbearance is granted: Provided, That the rate of interest under this section or the maximum rate of interest that may be prescribed by the Monetary Board under this section may likewise apply to loans secured by other types of security as may be specified by the Monetary Board. Sec. 3. No person or corporation shall directly or indirectly demand, take, receive or agree to charge in money or other property, real or personal, a higher rate or greater sum or value for the loan or forbearance of money, goods, or credits where such loan or forbearance is not secured as provided in Section two hereof, than fourteen per centum per annum or the maximum rate or rates prescribed by the Monetary Board and in force at the time the loan or forbearance is granted. Sec. 4. No pawnbroker or pawnbroker's agent shall directly or indirectly stipulate, charge, demand, take or receive any higher rate or greater sum or value for any loan or forbearance than two and one-half per centum per month when the sum lent is less than one hundred pesos; two per centum per month when the sum lent is one hundred pesos or more, but not exceeding five hundred pesos; and fourteen per centum per annum when it is more than the amount last mentioned; or the maximum rate or rates prescribed by the Monetary Board and in force at the time the loan or forbearance is granted. A pawnbroker or pawnbroker's agent shall be considered such, for the benefits of this Act, only if he be duly licensed and has an establishment open to the public. It shall be unlawful for a pawnbroker or pawnbroker's agent to divide the pawn offered by a person into two or more fractions in order to collect greater interest than the permitted by this section. It shall also be unlawful for a pawnbroker or pawnbroker's agent to require the pawner to pay an additional charge as insurance premium for the safekeeping and conservation of the article pawned. Sec. 4-a. The Monetary Board may eliminate, exempt from, or suspend the effectivity of, interest rate ceilings on certain types of loans or renewals thereof or forbearances of money, goods, or credit, whenever warranted by prevailing economic and social conditions. Sec. 4-b. In the exercise of its authority to fix the maximum rate or rates of interest under this Act, the Monetary Board shall be guided by the following: 1. The existing economic conditions in the country and the general requirements of the national economy; 2. The supply of and demand for credit; 3. The rate of increase in the price levels; and 4. Such other relevant criteria as the Monetary Board may adopt. Sec. 5. In computing the interest on any obligation, promissory note or other instrument or contract, compound interest shall not be reckoned, except by agreement: Provided, That whenever compound interest is agreed upon, the effective rate of interest charged by the creditor shall not exceed the equivalent of the maximum rate prescribed by the Monetary Board, or, in default thereof, whenever the debt is judicially claimed, in which last case it shall draw six per centum per annum interest or such rate as may be prescribed by the Monetary Board. No person or corporation shall require interest to be paid in advance for a period of more than one year: Provided, however, That whenever interest is paid in advance, the effective rate of interest charged by the creditor shall not exceed the equivalent of the maximum rate prescribed by the Monetary Board. Sec. 6. Any person or corporation who, for any such loan or renewal thereof or forbearance, shall have paid or delivered a higher rate or greater sum or value than is hereinbefore allowed to be taken or received, may recover the whole interest, commissions, premiums penalties and surcharges paid or

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delivered with costs and attorneys' fees in such sum as may be allowed by the court in an action against the person or corporation who took or received them if such action is brought within two years after such payment or delivery: Provided, however, That the creditor shall not be obliged to return the interest, commissions and premiums for a period of not more than one year collected by him in advance when the debtor shall have paid the obligation before it is due, provided such interest, and commissions and premiums do not exceed the rates fixed in this Act. Sec. 7. All covenants and stipulations contained in conveyances, mortgages, bonds, bills, notes, and other contracts or evidences of debts, and all deposits of goods or other things, whereupon or whereby there shall be stipulated, charged, demanded, reserved, secured, taken, or received, directly or indirectly, a higher rate or greater sum or value for the loan or renewal or forbearance of money, goods, or credits than is hereinbefore allowed, shall be void: Provided, however, That no merely clerical error in the computation of interest, made without intent to evade any of the provisions of this Act, shall render a contract void: Provided, further, That parties to a loan agreement, the proceeds of which may be availed of partially or fully at some future time, may stipulate that the rate of interest agreed upon at the time the loan agreement is entered into, which rate shall not exceed the maximum allowed by law, shall prevail notwithstanding subsequent changes in the maximum rates that may be made by the Monetary Board: And Provided, finally, That nothing herein contained shall be construed to prevent the purchase by an innocent purchaser of a negotiable mercantile paper, usurious or otherwise, for valuable consideration before maturity, when there has been no intention on the part of said purchaser to evade the provisions of this Act and said purchase was not a part of the original usurious transaction. In any case, however, the maker of said note shall have the right to recover from said original holder the whole interest paid by him thereon and, in case of litigation, also the costs and such attorney's fees as may be allowed by the court. Sec. 8. All loans under which payment is to be made in agricultural products or seed or in any other kind of commodities shall also be null and void unless they provide that such products or seed or other commodities shall 6e appraised at the time when the obligation falls due at the current local market price: Provided, That unless otherwise stated in a document written in a language or dialect intelligible to the debtor and subscribed in the presence of not less than two witnesses, any contract advancing money to

be repaid later in agricultural products or seed or any other kind of commodities shall be understood to be a loan, and any person or corporation having paid otherwise shall be entitled in case action is brought within two years after such payment or delivery to recover all the products or seed delivered as interest, or the value thereof, together with the costs and attorney's fees in such sum as may be allowed by the court. Nothing contained in this section shall be construed to prevent the lender from taking interest for the money lent, provided such interest be not in excess of the rates herein fixed. Sec. 9. The person or corporation sued shall file its answer in writing under oath to any complaint brought or filed against said person or corporation before a competent court to recover the money or other personal or real property, seeds or agricultural products, charged or received in violation of the provisions of this Act. The lack of taking an oath to an answer to a complaint will mean the admission of the facts contained in the latter. Sec. 9-a. The Monetary Board shall promulgate such rules and regulations as may be necessary to implement effectively the provisions of this Act. Sec. 10. Without prejudice to the proper civil action violation of this Act and the implementing rules and regulations promulgated by the Monetary Board shall be subject to criminal prosecution and the guilty person shall, upon conviction, be sentenced to a fine of not less than fifty pesos nor more than five hundred pesos, or to imprisonment for not less than thirty days nor more than one year, or both, in the discretion of the court, and to return the entire sum received as interest from the party aggrieved, and in the case of non-payment, to suffer subsidiary imprisonment at the rate of one day for every two pesos: Provided, That in case of corporations, associations, societies, or companies the manager, administrator or gerent or the person who has charge of the management or administration of the business shall be criminally responsible for any violation of this Act. Sec. 11. All Acts and parts of Acts inconsistent with the provisions of this Act are hereby repealed. Sec. 12. This Act shall take effect on the first day of May, nineteen hundred and sixteen. ENACTED, February 24,1916.

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Art. 2212. Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point. (1109a) Reformina v Tomol Facts: In an action for the recovery of damages for injury to persons and loss of property in the CFI of Cebu, Shell and Michael Inc. was ordered by the court o pay PhP 131,084 (the value of a boat) to the Reforminas, with legal interest. The latter insist that the interest rate to be applied is 12% as provided in Central Bank Circular No. 416. The CIrcula provides an increased interest rate from 6% pa (under the usury law) to 12% pa for loans, forebearance of money, good or credit and the rate allowed in judgments. Held: The rate to be applied is 6% pa. PD 116 granted the Central Bank Monetary Board the authority to prescribe the maximum rate of interest for loans, forebearances of money, goods or credit. Act No. 2655 (on Usury) deals with interest on: 1) loans, 2) forebearances of money, goods or credits, and 3) rate allowed in judgments. The judgments provided in the law are only those involving loans, forebearances of any money, goods or credits and nothing else. If it is not a loan or forebearance, then the rate to be applied is 6% pa. Petition dismissed. Phil Rabbit Bus Lines v Cruz Facts: Manabat obtained favorable judgment in the CFI of Angeles City against Philippine Rabbit, whereby the latter was ordered to pay PhP 73,500 in damages + legal interest. The decision became final and the Sheriff garnished the funds of Phil. Rabbit in Manila Bank for the amount of PhP 155,150, which was the amount due as computed based on a 12% pa rate. The check was thereafter released to Manabat. Held: The interest rate to be applied in this case is only 6% pa. the judgment does not involve litigation on a loan or forebearance of money, goods or credit. The ruling in Reformina v Tomol was reiterated. Manabat was ordered to return PhP 41,325, as the excess interest based on the rate of 6% pa. Este del Sol obtained a loan in the amount of PhP7.38 million from FMIC for the construction and development of the Este del Sol Mountain Reserve in Barrio Puray, Montalban, Rizal. The loan agreement provided for staggered payments and 16% interest , with damages at 2% per month in case of default and payment of attorneys fees at 25%. This loan was secured by a real estate mortgage, a continuing suretyship agreement and an underwriting agreement, providing for an underwriting fee and supervision fee. There was also a consultancy agreement. 3 billing letters were sent to Este del Sol, one for PhP 200,000 underwriting fee, a PhP 1.3 million consultancy fee and PhP200,000 consultancy fee, all deducted st form the 1 release of the loan proceeds. Este thereafter failed to pay, resulting in the foreclosure of the mortgage. The property was bought by FMIC for PhP9.0 million. The remaining balance of PhP5.8 million consisted of the principal balance and the interests. When there was PhP 6.8 million remaining on the loan, FMIC instituted a collection suit, which amount consisted of 21% interest and 25% attorneys fees. The trial court ruled in favor of FMIC. This was reversed by the CA, and ruled that the agreements were mere subterfuges to camouflage the excessively usurious interest and ordered FMIC to pay Este PhP971,000 as difference between amount owed and usurious amount of interest. Held: Central Bank Circular No. 905 did not repeal the Usury law and only suspended its effectivity. The contract here was made at the time the usury law was still in effect, thus, such law still governs it. The Circular is not to be applied retroactively. The form of contract is not conclusive for the law will not permit a usurious loan to hide itself behind a legal form. Parole evidence is admissible to show that a written document though legal in form, was in fact a device to cover usury. Several facts and circumstances in this case show that the agreements by FMIC were simply cloaks/devices to cover an illegal scheme to conceal and collect excessively usurious interest. A lawful loan is usurious if it is intended that additional compensation for the loan be disguised by an ostensibly unrelated contract providing for the payment by the borrower for the lenders service which are of little value or which are not in fact to be rendered, as such is present in the instant case. But, only the usurious interest is void, and the loan still stands. The creditor may still recover the principal amount still owed. David v CA

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Facts: The RTC of Manila issued a writ of attachment over the real properties of Pena and Afable. The judge amended the decision and provided the interest to be paid from Jan. 4, 1966 to July 24, 1974. The CA and SC affirmed the decision. A wit of execution was issued for the amount of PhP270,000, but David contends that the award should be PhP302,000 because there should be compound interest. The properties seized were sold at auction to David, but no Deed of Sale was issued as there was an excess in the bid price (PhP2.9 million) which was not paid by David. The excess is based on the amount of the award (PhP270,000) and the bid price (Php 3.027 million). A motion to execute a deed of sale was filed by David, but the same was denied. The appeal was also dismissed by the CA. Held: No interest was stipulated by the parties. The Compromise agreement between them also did not stipulate any interest thereon. The judgment award contained simple interest only, and had nothing about the payment of compound interest. Art. 2212 contemplates the presence of stipulated or conventional interest which was accrued when demand was judicially made. No conventional interest could further earn interest upon judicial demand. Central Bank circular No. 416 wasa supervening event which raised the legal interest from 6% to 12% pa which happened after the decision became final and executory, thus the lower court judge was correct in amending his decision. Investors Finance Corp. v Autoworld Sales Corp. Facts: Baretto entered into a contract to sell a parcel of land with Autoworld. Autoworld gave to Baretto PhP12.9 million worth of receivables. Baretto transferred the receivables from Autoworld to FNCB. Baretto also executed a deed of assignment in favor of Autoworld, for which the latter would directly pay FNCB. Baretto later on sold the mortgaged property to FNCB. The case involves 3 contracts: 1) Contract to sell, 2) a deed of assignment, and 3) Real Estate Mortgage, all of which were under an installment paper package. Held: In usurious loans, the creditor can always recover the principal debt. The stipulation on the interest is considered void thus allowing the debtor to claim the whole interest paid. The first transaction was usurious. Mendoza v CA Facts: Mendoza was granted by PNB a Php 500,000 credit line and a PhP 1.0 million letter of credit/trust receipt. As security, a mortgage was constituted over 3 parcels of land in Santolan, Pasig, a house and lot, and certain machineries. 3 promissory notes were also executed, one for PhP500,000, one for PhP40,000 and another for Php 150,000. 11 documents were signed, which contained the

application for letter of credit, providing for 9% interest pa. Mendoza requested PNB to restructure the loan into a 5-year term and asked for an additional Php 2.0 million. For this, Mendoza executed 2 new promissory notes, each for 2 year terms. Several proposals and counter-proposals passed between the parties. The 2 promissory notes provided interest at 21% pa and 18% pa, which should have been 18% and 12% pa only. Mendoza contended that the notes were signed by him in blank, and it was PNB that put in all other details. The interest rate on the 2 new notes were increased to 29% and later on to 32%. When Mendoza failed to pay, PNB filed for foreclosure. Mendoza however filed with the RTC a complaint for specific performance as he alleged that PNB agreed to restructure his loan, but they failed to do so. The lower court ruled in his favor due to the existence of a verbal contract between the parties, which the CA reversed and dismissed the case. Held: PNB did not agree to restructure. The letters between the 2 are only correspondences or mere proposals and counter-proposals, and nowhere is there a categorical statement that PNB agreed to the 5-year restructuring plan. This means that there is no agreement, and it had not gone beyond the preparation stage. Private transactions are presumed fair and regular. As to the increase in interest rate, it did not have the prior consent of Mendoza. The unilateral determination and imposition of the increased interest rates by PNB is violative of the principle of mutuality of contracts. Changes in contracts must be made with the consent of the contracting parties. The petition is denied, but the Court declared that the increase in interest rate on the 2 promissory notes is null and void. Solangon v Salazar Facts: A real estate mortgage was constituted on a parcel of land in Sta. Maria Bulacan by the Solangons in favor of Salazar as security for a loan in the amount nd of PhP60,000 with 6% pa interest. They constituted a 2 mortgage on the property to securre a loan in the amount of Php136,512 + legal interest. Again, another mortgage was taken in the amount of Php230,000 + legal insterest. The Solangons filed an action in court to prevent the foreclosure of the mortgage, and alleged that they only obtained 1 loan, in the amount of Php60,000, and the 2 other loans were merely continuations of the 1 one. Php 78,000 was paid and a tender of Php47,000 was made, but foreclosure proceedings were still instituted by Salazar for failure of rd the Solangons to pay the 3 loan. The CA held that there were 3 mortgages and interest rate of 6% per month is not unconscionable. Held: Petitioners cannot raise the issues of fact, and they cannot insist that they already paid Php136,000. While the usury law provided a ceiling on interest rates,

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it was lifted by CB Circular No. 905, still, there is nothing in such circular which grants to creditors carte blanche authority to raise interest rates to levels which will either enslave borrowers or lead to a hemorrhaging of their assets. The interest rate of 6% per month or 72% pa is outrageous and inordinate, thus it was reduced to 12% pa. Pascual v Ramos Facts: The Pascuals executed in favor of Ramos a Deed of Absolute Sale with Right to Repurchase, involving a parcel of land in Bambang, Bulacan for the amount of Php150,000. A sinumpaang salaysay was also executed by the parties, but was not notarized. The pascuals failed t redeem the land within the 1-year period, thus Ramos filed a petition to consolidate ownership over the land. The trial court found that the transaction is actually a loan, with real estate mortgage with interest at 7% pa. the rate was later modified as the rate in the salayssay is 7% per month. The court lowered the rate to 5% per month, under Art 24. This was affirmed by the CA. Held: the Pascuals are liable t pay interest at 5% perm month. The Pascuals are actually raising an issue involving the validity of the stipulated interest rate. This was never raised as a defense or basis of their conterclaims. It was also never put in issue in the course of the trial. The parties are bound by the stipulations in their contracts validly entered into. The 7% per month interest was validly and voluntarily agreed upon by the parties. All men are presumed sane and normal. With the suspension of the usury law and the removal of the ceiling on interest rates, parties are free to stipulate the interest to be imposed on loans. The court is not in a position to impose upon the parties contractual stipulation different from what they have agreed upon. 5% pa interest rate upheld. Eastern Shipping Lines v CA Facts: Drums of Riboflavin were shipped on board a vessel of the Eastern Shipping Lines, which, upon arrival at the port, it was found that 1 drum contained spillages and the rest of the contents were adulterated or fake. Mercantile Insurance paid PhP 19,000 to the consignee according to the insurance policy and was thus subrogated as creditor. Mercantile sought repayment from Eastern and Metroport, which were both ordered by the court to jointly and severally pay Mercantile. Eastern Shipping appealed, and solidary liability was upheld. When will payment of interest on an award for loss/damage begin to be computed and what rate is to be imposed. Held: Interest here to be applied is 6% from issuance of the decision; 12% after it becomes final and executory until fully paid. The SC provided the following rules to be followed in cases like these: I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable damages. II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows: 1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1163 of the Civil Code. 2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to

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run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) 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. 3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.

3. Non-payment of Loan with Extrajudicial Demand

0%

0%

12%

12%

12%

12%

Due

Extrajudicial Demand

Judicial Demand

Decision

Finality

Payment

4. Non-payment of Loan with stipulated 10% pa interest with demand letter Examples: 1. for non-payment of goods
10% 0% 0% 6% 6% 6% Due Due Demand Decision Finality Payment 10% 10% 10%+12% 10% + 12% 12%

Extrajudicial Demand

Judicial Demand

Decision

Finality

Payment

5. Non-payment of Loan with 10% pa interest 2. Non-Payment of Loan

0% 0% 12% 12% 12% 10% Due 10% 10%+12% Demand 10%+12% Decision 12% Finality Payment Due Demand Decision Finality Payment

Starr Weigand

Please read cases in the original. Read this reviewer with Credit Transactions book by De Leon, and be familiar with the codal provisions.

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12%

6. Loan with 10% pa interest with stipulation for Compound Interest

10% 10%comp 10%+12% 10%+12% 12%

0%

0%

6%

6%

6%

Due

Extrajudicial Demand

Judicial Demand

Decision

Finality

Payment

Due

Demand

Decision

Finality

Payment

10. Loan 10% Compounded and penalty clause for 18%

7. Loan (no interest stipulated but interest due) - only compound from judicial demand
12% 12% 12%+12% 12%+12% 12% 10% 10%c 10%c+18% [10%c+18%]12% 12%

12%
Due
Due Demand Decision Finality Payment

Extrajudicial Demand

Judicial Demand

Decision

Finality

Payment

8. Non Delivery of Goods (Unliquidated)

0% 0%

0%

0%

6% Judicial Demand 12% Finality

12%

Due

Decision

Extrajudicial Demand

Payment

9. Non-delivery of Goods (Liquidated)

Eastern Assurances and Surety Corp. v CA Facts: Tan insured his building in Dumaguete against fire with Eastern Assurance in the amount of Php250,000. The building was later destroyed in a fire, for which Tan sought payment from the insurance company. His claim was refused, promptin g him to file in the RTC a complaint against Eastern Assurance. The RTC ordered the insurance company to pay Php250,000 + interest. This was affirmed by the CA, but it deleted the award for moral and exemplary damages. Petitioner tendered the Php 250,000, but it was refused, with Tan insisting on the payment of 12% pa interest. The matter was brought before the insurance commission, which provided a cut-off date for the payment in Sept. 1994. The insurance company filed with the trial court a petition to fix the interest rate to be applied, for which the rate of 12% pa was provided. This was affirmed by the CA

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Held: The Eastern Shipping case did not lay down new rules, as it only stated a comprehensive summary of existing rules on the computation of legal interest. The cut-off date previously provided must still be respected, such that the rate of 12% will be imposed from the finality of the judgment until Sept. 30, 1994. Rodzssen Supply Co. Inc. v FEBTC Facts: Rodzssen opened with FEBTC a 30-day domestice letter of credit in the amount of Php190,000 in favor of Ekman and Co. for the purchase from the latter of 5 untis of hydraulic loaders. The credit was to expire on Feb. 5, 1979. On March 16, 1979, 3 units of hydraulic loaders were delivered to Rodzssen, for which FEBTC paid Ekman Php 114,000. The first delivery, for which 2 units were delivered and php 76,000 was paid, was made before the letter of credit expired. nd But, the 2 delivery was refused to be paid by Rodzssen, for which FEBTC demanded payment. Thus, FEBTC filed a complaint in the courts to recover Php 76,000 + 25% attorneys fees. The lower court granted the award, with the CA saying that Rpdzssen was estopped from refusing payment as they received the delivery even after the expiry of the letter of credit. Held: The SC upheld the CA, and ruled that petitioner is bound to pay. But the interest rate was lowered to 6%. FEBTC paid Ekman when it was no longer bound to do so under the letter of credit. The letter of credit became invalid after the lapse of its expiry date, thus, FEBTC should not have paid Ekman. Certain lawful and voluntary acts give rise to the juridical relation of quasi-contract to the end that no one shall be enriched at the expense of another. Rodzssen voluntarily received and kept the loaders, and should not be allowed to do so at the expense of FEBTC. However, both were mutually negligent. Because of this, the fault of each ismutally cancelled. The facts here disclose that the amount in this case does not involve a loan or forebearance of money, thus 6% pa is the correct rate. This shall be increased to 12% pa from finality of the judgment until full payment is made. Plantilla v Baliwag Facts: An administrative complaint was field by Col. PLantilla against Sheriff Baliwag. The spouses Onga and Plantilla were ordered by the lower court in a civil case to pay Suiza (the tenant of the spouses). The amount to be paid was PhP1,000 for the Suizas share in the coconut harvests, + interests. The judgment became final and executory, and according to Plantilla, administrator of the spouses, the sheriff, after placing Suiza in possession of the land, served the letter of execution not on the spouses but on Plantilla, through a ltter as a statement of account payable by the spouses. The amount payable was Php481,340

representing the shares of Suiza in the harvest from August 1979 to jan. 1998 at php1,000 per harvests with 8 harvests per year and 12% pa interest, or a total of 222% and attorneys fees at php8,000the sheriff levied on the spouses land and the same was annotated on the TCT thereof. Held: The decision and the writ of execution issued by the clerk of court do not state that there are 8 harvests per year, etc. but it only stated that the harvests amounted to Php1,000 each and the interest rate is not stated. The sheriff is liable for fixing the interest rate at 12% pa and is fined Php5,000. The writ of execution addressed to the sheriff did not specifically state the amount of interests, the total costs, damages, rents due or profits due, as it only directed the sheriff to executed the judgment. The sheriff computed the amounts on his own. Under the rules of court, it is stated that a writ of execution should state specifically the amount of interests owing. The computation thereof is th duty of the judge, and the sheriff is only authorized to do a ministerial act which I to enforce the writ. Although the court cannot penalize the sheriff for arriving at an erroneous computation of the amount due by applying the wrong interest rate (as the judge is in a better position to do so) the sheriff is still guilty of negligence, as he should have directed the matter to the court. The interest rate here should only be 6% as it does not involve a loan or forebearance. The sheriff should not have arrogated upon himself judicial functions that were to be performed only by the judge. In doing so, he acted arbitrarily and without semblance of authority. PNB v CA Facts: The province of Isabela bought medicines from Lyndon, for which several checks were issued from the account of the province with PNB. The checks were turned over to Ibarolla, except for 23 checks, totaling Php98,691.40. the checks were appropriated by Lyndons agents after negotiations were made with PNB. Ibarolla failed to receive the amounts owed, who thus filed with the RTC an action for the recovery of money and damages against the province and PNB. The court ordered the province and PNB to pay jointly and severally the amount of the 23 checks with legal interest until the amount is fully paid, but the rate was not indicated. The judgment became final and executory, for which the sheriff computed the interest based on a rate of 12% pa, with PNB insisting that the rate is only 6%. Ibarolla thus sought for clarification from the courts. Held: The obligation involves a money judgment, for breach, and not a loan or forebearance, the rate is 6% pa. Where demand is established with reasonable certainty, interst is computed from the time the claim is made, judicially or extrajudicially. The basis for such computation would be the amount finally

Starr Weigand

Please read cases in the original. Read this reviewer with Credit Transactions book by De Leon, and be familiar with the codal provisions.

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adjudged. Central Bank Circular No. 416 is only for loans and forebearances of money, goods, chattels and credits and judgments involving the same. But, once the judgment becomes final and executory, it becomes equivalent to a forebearance of credit, thus the rate also becomes 12% pa from such finality. RCBC v Alfa RTW Manufacturing Corp. Facts: Alfa obtained a letter of credit from RCBC, for which it issued 4 trust receipts in favor of the latter. A surety agreement was executed signed by Alfa and its officers to guarantee prompt payment in solidum of any and all indebtedness. But such liability provided that the amount owed shall not exceed Php 4.0 million and Php 7.5 million +interest. For Alfas failure to pay, RCBC filed a case for sum of money against Alfa et al. North Atlantic and BA Finance intervened as mortgagees of the same property subject of the action. The RTC ordered Alfa to pay in solidum php 18.96 million + legal interest from Feb. 15, 1988. This was affirmed by the CA, but modified the amount to P3.06 million. RCBC appealed to the SC questioning the change. Held: In contracts contained in trusts receipts parties may establish agreements and terms and conditions as they deem advisable as long as they are not contrary to law, moral, customs, public policy or order. The CA erred in disregarding the stipulations in the receipts regarding interests, service charges, and penalties. The receipts provided for 16% interest; 2% service charge; 6%penalty; and compound interest; 10% attys fees. (Refer to timeline below)
{[16%+2% +6%]+[16 %+2%+6 %]}+12% 16%+2% Extrajudicial Demand Decision ({[16%+2%+6% ]+[16%+2%+6 %]}+12%)+10% on total [({[16%+2%+6 %]+[16%+2%+ 6%]}+12%)+10 %]+12% on total Payment

Barter Subject Matter Return Non-Fungible Same Kind, Quality & Quantity Onerous

Mutuum Money/Fungible Same Kind, Quality & Quality Gratuitous/Onerous

Commodatum Non-Consumable Same Thing

Gratuitous

Essentially Gratuitous

RULES ON INTEREST 1. Obligation breached -> Damages ensue 2. Actual/Compensatory damages (interest) a. Sum of money (loan/forbearance of credit) - interest stipulated - interest due shall earn legal interest: from time of judicial demand - no stipulation: 12% pa: from default judicial or extrajudicial b. Not loan/forbearance 6% pa - no interest on unliquidated claims - demand is established with reasonable certainty from demand - judicial or extrajudicial - not established with reasonable certainty: from time of judgment

16%+2%

16%+2%

Due Date Judicial Demand

Finality

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3. Finality of Judgment: 12% pa until fully paid (loan or forbearance: debtor owes amount with certainty) Title XV. - GUARANTY CHAPTER 1 NATURE AND EXTENT OF GUARANTY Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called a suretyship. (1822a) Machetti v Hospicio San Jose Facts: Machetti and Hospicio entered into an agreements with the former to construct a building along Calle Rosario for the amount of PhP 64,000 to be paid in stallments by the latter. As condition, a guaranty of Fidelity & Surety Co. was to be obtained by Machettie in the amount of PhP 12,800. The guaranty was granted. The building was constructed, and several payments were made by the Hospicio, except for PhP4,978.08. Hospicio refused to pay the remaining amount, because it said that the work by MAchetti was not good enough and was not of the standard required. Machetti thus filed an action, with Hospicio filing a counterclaimof damages in the amount of PhP71,350. Machetti was declared by the court as insolvent, and tus the proceedings were suspended. A complaint against Fidelity was thus filed by Hospicio for the amount PhP 12,800, as guarateed. The CFI ordered Fidelity to pay the amount of the guaranty. Fidelity thus appealed to the SC. Held: The action was converted from one against the principal Machetti to the guarator Fidelity. The lower court erred when it proceeded with the case against the guarantor while the case against the principal was suspended. Having a guarantor implies an undertaking of guarantee. It appears affirmatively that the contract is the guarantors separate undertaking in which the principal does not join, and it rests on a separate consideration moving from the principal and that although it is written in continuation of the contract for the construction of the building, and such is a collateral undertaking separate and distinct from the latter.

The guarantor only binds himself to pay if the principal cannot pay. The guarantor is the insurer of the solvency of the debtor. Machetti was found to be only unable to pay, and that his insolvency does not mean he cannot pay. Judgment reversed, but Hospicio may only go against Fidelity after exhausting the remedies it may have against Machetti. LIrag Textile v SSS Facts: Lirag and SSS entered into a purchase agreement whereby SSS will purchase preferred shares of stock in Lirag Textile worth PhP 1 million subject to certain conditions. SSS paid PhP500,000 to LIrag and was issued 5,000 preferred shares of stock. It thereafter paid another PhP 500,000 and was again issued 5,000 shares of stock. According to the agreement, Lirag will repurchase the th stocks at regular intervals starting on the 4 year after the issuance. As security, payment of dividends will be made and the president of Basilio Lirag signed the contract in his official and personal capacities. He also signed as surety, which contract rovided that if LIrag fails to pay, Basilio will pay for the principal. Lirag failed to redeem the stocks and failed to pay dividends despite demands. Paragraph 5 f the agreement provided that if Lirag fails to redeem, the entire obligation becomes due and demandable., and 12% would be paid as damages. The CFI ruled that the agreement is a debt instrument and ordered Lirag to pay P 1 million + interest and dividends, damages and attorneys fees. Held: The agreement is a debt instrument, and Basilio Lirag cannot deny liability for petitioner corporations default. As surety, he is bound to immediately pay SSS the amount still outstanding. The obligation of the surety differs from that of a guarantor, in that the surety insures the debt, whereas the guarantor merely insures the solvency of the debtor. The surety undertakes to pay if the principal does not pay, whereas a guarantor merely binds itself to pay if the principal is unable to pay. The undertaking of Basilio as surety included the payment f dividends and other obligations then outstanding. As per stipulation of facts, the petitioners did not deny the fact of non-payment of dividends (which served as interests) nor their failure to purchase the preferred shares, which involve sums of money, upon which interest is to be computed form the time of the filing of the action. Basilio as surety, bound himself with the vendor, jointly and solidarily, to pay the amounts then outstanding. He is estopped form denying liability as the principal, LIrag Textile, failed to pay. Art. 2048. A guaranty is gratuitous, unless there is a stipulation to the contrary. (n)

Starr Weigand

Please read cases in the original. Read this reviewer with Credit Transactions book by De Leon, and be familiar with the codal provisions.

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Severino and Vergara v Severino Facts: Fabiola Severino was the natural daughter of Melencio Severino, who, upon his death, left a considerable amount of property. His widow and duagther instituted litigation involving the properties left behind. A compromise agreement was entered into by the parties, whereby Guillermo took over the properties and agreed to pay Fabiola PhP100,000, with Php40,000 to be paid upon execution of the agreement, and Php20,000 to be paid every year until the full amount has been paid. At the time of the first payment, Fabiola was not yet recognized judicially as an heir of the deceased, and the Php 20,000 was held by Guillermo in deposit. Under th agreement, Echaus undertokk to guarantee the payment of the amounts stated, but, no payment was yet made of the Php20,000. The CFI of Iloilo ordered for payment to be made by Guillermo and Echaus as guarantor. Echaus however appealed, as he contended that he never received anything for signing the agreement. Held: Dismissal of the action by the Widow and the Daughter was adequate consideration to support a promise on the part of Guillermo to pay the sum of money stipulated in the contract which is the subject of the action. A guarantor or surety is bound by the same consideration that makes the contract effective between the principal parties thereto. He promise of Echaus as guarantor is therefore binding. It is never necessary that the guarantor or surety should receive any part of the benefit, if such there be, accruing to the principal. The true consideration of the contract was the detriment suffered by the plaintiff in the former action in dismissing that proceeding and it is immaterial that no benefit may have accrued either to the principal or the guarantor. WillexPlastic v CA Facts: IRIC obtained a letter of credit form Manila Bank, and to secure payment thereof, IUCP executed 2 continuing suretyship agreements, whereby IRIC and IUCP solidarily obligated themselves to pay Manila Bank. IRIC and Willex also executed a continuing suretyship agreement in favor of IUCP for the sum/s obtained or to be obtained by IRIC and IUCP. IRIC and WIllex were obligated solidarily to pay and ensure prompt payment (of PhP 1.5 million). IUCP paid Manila Bank PhP 4.3 million, for IRICs outstanding obligation. Atrium, which succeeded IUCP, demanded payment of the amount paid by IUCP from IRIC and Willex. The trial court ordered IRIC and WIllex to pay solidarily Interbank (which succeeded Atruim). This was affirmed by the CA, thus Willex appealed. Held: Willex is solidarily liable with IRIC for the amount paid by IUCP to Manila Bank. The continuing guarantee it signed was to secure the payment made by IUCp (succeeded by Interbank). The guaranty had been made to guarantee payment of the amounts made by Interbank to Manila Bank and not of its sums given by it as loans to IRIC. IRIC and Willex intended to indemnify the bank for the amounts which it may have paid Manila Bank in behalf of IRIC. It does not matter if Willex is not a party to the original surety agreement or the loan agreement between Manila Bank and IRIC. The consideration necessary to support a surety obligation need not pass directly to the surety, a consideration moving to the principal alone being sufficient. For, a guarantor or surety is bound by the same consideration that makes the contract effective between the principal parties thereto. It is never necessary that a guarantor or surety should receive any part/benefit, is such there be, to the principal. Art. 2049. A married woman may guarantee an obligation without the husband's consent, but shall not thereby bind the conjugal partnership, except in cases provided by law. (n) Art. 2050. If a guaranty is entered into without the knowledge or consent, or against the will of the principal debtor, the provisions of Articles 1236 and 1237 shall apply. (n) De Guzman v Santos Facts: Toole, Abad and Santos formed a partnership (the Phil-Am Construction) with capital of PhP14,00, whereby PhP10,00 was taken by way of a loan form Candelaria. The partnership and its partners bound themselves to pay jointly and severally the amount loaned. They however failed to pay, thus Candelaria filed an action in the CFI, which ordered the partners and the partnership to solidarily pay the amount owed. A wirt of execution was issued and the Sheriff levied on the properties of the partners. Phil. Am construction thereafter filed a bond for

#$%!&'()#!*!(&&+,!-$'.(! 3"!

PhP10,000 with Abad, Lucero and Carlos as guarantors, thus the attachment was lifted. Candelaria against sought for execution, where the administrator of Lucero paid PhP5,565, and Carlos paid PhP5,135,a and Abad paid his shares. Santos however refused to do the same. Both the lower court and the CA ordered Santos to pay the amount advanced by Lucero and Carlos. Held: Santos is bound to pay the amount advanced to Candelaria unpon the bond the deceased Lucero had executed. Under Art. 1822, by the contract of guaranty, a rd person binds himself to pay or perform for a 3 person, in case the latter should fail to do so, an obligation to another. Art 1832 also provides that any guarantor who pays for the debtor shall be indemnified by the latter even if the guaranty was undertaken without the knowledge of the debtor. Here the guarantor is Lucero, while Santos is the debtor. Santos is legally bound to pay, which payment may be made by anyone and such payor may recover the amount from the debtor. If without the debtors consent, he can recover up to the amount which has benefitted the debtor. Santos is thus liable to de Guzman (Administrator of Lucero), as debtor in solidum of Candelaria. Art. 2051. A guaranty may be conventional, legal or judicial, gratuitous, or by onerous title. It may also be constituted, not only in favor of the principal debtor, but also in favor of the other guarantor, with the latter's consent, or without his knowledge, or even over his objection. (1823) 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. (1824a) Municipality of Gasan v Marasigan Facts: The municipality held a public auction for the bidding for the privilege of gathering whitefish spawn, in which Napa and Marasigan took part. Napa bid for PhP5,000 for one year, while Marasigan bid for PhP4,200 for one year. The privilege was granted to Marasigan as Napa failed to attach a certificate in his application stating that he was not behind in any tax payments. On the protest of Napa, the provincial board reassessed the awarding of the bid. Meanwhile, a bond was filed by Marasigan with Sevilla and Luna as sureties, in case he fails to pay " quarterly advance of the PhP4,200. But, the contract between the Municipality and Marasigan was cancelled, as the contract was awarded to Nap, who however yielded the privileges to Marasigan. An action was brought by the Municipality

against Marasigan and his suretiesfor the amount of PhP 3,780, which was not yet paid. The CFI ordered Marasigan and his sureties to pay the amount. Held: Marasigan though still liable to pay for the proceeds of 1 and 1/3 quarter for the privileges of gathering whitefish spawn enjoyed by him in 1931 (until the contract was cancelled), but PhP4240 bond and Php840 to be returned by him, and he need only pay PhP140 as difference. Luna and Sevilla absolved of liability as sureties. The initial contract was cancelled when the President of the Municipal Council sent a letter to Marasigan notifying him that the contract is ineffectual. By this time, the contract ceased to have life or force to bind each of the contracting parties. At this time, the accessory suretyship contract also lost its force and effect. A suretyship agreement cannot exist without a valid principal obligation. Luna and Sevilla did not intervene in another subsequent contract which Marasigana nd the Municipality may have entered into. The suretyship must be expressly constituted, and cannot extend beyond its specified limits. After eliminating the obligation for which the sureties desired to answer for the bond, when the bond ceased, it ceased to have any effects. Art. 2053. A guaranty may also be given as security for future debts, the amount of which is not yet known; there can be no claim against the guarantor until the debt is liquidated. A conditional obligation may also be secured. (1825a) Smith Bell v PNB Facts: FM Harden entered into a contract with Smith Bell for the purchase of expellers for the extraction of coconut oil for the amount of PhP80,000, to be shipped form the US> to ensure payment, PNB, through a letter of credit signed by its President Delaney, guaranteed the payment of the price of the expellers to st Smith, upon their arrival in their proper and 1 class condition and working order. Harden later went to Smith and asked to change his order from end-drive to sidedrive, and the necessary order was made by Smith. 8 end-drive expellers arrived, and when Harden examined the, he told PNB not to pay as he had wanted sidedrive expellers. Smith Bell & Co filed quit to recover the sum of money owed. The court didmissed the suit. Held: The right of Smith Bell to recover is clear. The contract whereby PNB obligated itself is both in form and in effect an independent undertaking and Smith has complied and offered to comply with the terms thereof and the bank is bound to pay. The consideration in this promise is to be found in the credit extended to Harden by Smith and in the fact that Smith has gone to the expense of bringing to

Starr Weigand

Please read cases in the original. Read this reviewer with Credit Transactions book by De Leon, and be familiar with the codal provisions.

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these islands the expellers which Harden ordered. PNB obligation to Smith is direct and independent. The debt must be liquidated and the action is now maintained against PNB. The act of Harden of changing the order does not affect the liability of PNB, as the letter of credit calls for the delivery of new Anderson expellers, and the change was actually made in furtherance of such order. PNB is not only solidarily liable even if there was a change in the specification of the expellers. Smith may claim the amount of PhP23,705 as difference between the price of the expellers sold to others and the remaining contract price, because the debt was liquidated at the time of the case, as the price of the goods was fixed by the contract. Wise & Co. v Kelly Facts: A promissory note was executed between Kelly and Wise to guarantee the payment of PhP13,749.09 which Kelly owed to Wise for the goods to be sold. Kelly was to pay at the end of each month all sums he may receive from the sale, and if he fails to do so, Lim undertook to pay the sums to wise as the surety. Wise brought an action to recover the sum in the note by filing suit in the CFI of Manila. Lim was absolved as he only undertook to pay if and when Kelly fails to do so, and there is no evidence to show that Kelly is unable to pay. Wise and Co. appealed to the SC. Held: Lims obligation was to pay such sums as have been received from the sale of the merchandise by the principal obligor which have not been paid by the latter, thus, it is subject to a condition. He did not undertake to pay absolutely pay the entire PhP13,749.09, but his obligation was limited to respond for the performance of Kelly of one necessary pacts of the contract which was the undertaking to deliver the total proceeds of the sale of the merchandise. Kelly is liable to pay whether or not the goods were sold and for whatever price. Lim is also liable to pay for the difference between he purchase price and the profit form the sale of the merchandise, which does not include the profits therefrom. RCBC v Arro Facts: Chua and Go Sr. (the president and GM of Daicor) executed a Comprehensive Surety Agreement, for the principal Daicor, to guarantee all existing and future debts with RCBC. Daicor obtained a PhP100,000 loan from RCBC, and a promissory note was also executed, signed by Go Sr. in his official and personal capacity (not signed by Chua). Daicor failed to pay the promissory note, and a complaint for a sum of money was filed by RCBC, but was dismissed by the court. Chua contends that he is not liable to pay as he did not sign the promissory note. Held: Chua is still liable to pay. The Agreement signed by Go and Chua was made to cover all obligations current and future which Daicor may incur with RCBC, subject only to the provision that the liability shall not exceed at any one time the aggregate amount of the principal sum of PhP100,000. The guaranty is a continuing one and shall remain in full force and effect until the bank is notified of its termination. At the time of the loan, the agreement was in full force and effect, and the loan was thus covered by it. Chua is liable on the note because of the suretyship agreement, despite the fact that he did nt sign it. The agreement was an accessory obligation, and dependent on a principal which in this case is the PhP100,000 loan of Daicor. Art 2053 provides that a guaranty may also be given as a security for future debts, the amount of which is not yet known. There can be no claim against unliquidated debts against the guarantor. A conditional obligation may also be secured. The case was remanded to the court of origin for further proceedings. Art. 2054. A guarantor may bind himself for less, but not for more than the principal debtor, both as regards the amount and the onerous nature of the conditions. Should he have bound himself for more, his obligations shall be reduced to the limits of that of the debtor. (1826) Art. 2055. A guaranty is not presumed; it must be express and cannot extend to more than what is stipulated therein. If it be simple or indefinite, it shall compromise not only the principal obligation, but also all its accessories, including the judicial costs, provided with respect to the latter, that the guarantor shall only be liable for those costs incurred after he has been judicially required to pay. (1827a)

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SOCONY v Cho Siong Facts: Cho Siong obligated himself to sell as agent, SOCONYs petroleum products. As guarantee a personal bond in the amount of PhP3,000 was given, with PhP1,000 was given to SOCONY on the date of the execution of the contract with right to apply the same as payment of any amount for which he might become indebted. Ong Guan Can also signed the guaranty. Siong also bound himself to pay for attorneys fees, costs, etc. Siong received petroleum with a total value of PhP14,136, for which he paid PhP14,072, leaving a balance of PhP64.46. On the day of the execution of the contract, Siong also obligated himself to assume responsibility of SOCONYs agent Kuan, who also owed PhP3,132. Thus, he owed an outstanding amount totaling PhP2,197. SOCONY filed suit against Siong and Guan, with the lower court ordering the latter to apy the amount owed by SIong, and the additional amount owed by Kuan. Held: Guan Can is not liable to pay for the amount owed by Kuan, and is only liable for the contract of agency between Siong and SOCONY, and has nothing to do with Kuans liability. Guan Can only liable for the debts of Siong by virtue of the contract of agency, and nothing else, as a contract of suretyship is interpreted strictly and is not to be extended beyond its terms.Guan is only liable for the amount of PhP64.46 and the attorneys fees on the said amount, but Siong is liable to pay for PhP2,197. The attachment on the property of Guan Can for 2 days did not entitle him to indemnity as there was no proof of actual damage. Plaridel v Galang Machinery Facts: Constancio San Jose obligated himself to deliver to PL Galang 2.5 meter board feet of peeler and veneer logs at PhP60.00 per thousand feet fob vessel. Plaridel Surety put up a performance bond in the amount of PhP30,600, binding itself to jointly and solidarily with San Jose as principal, to rsecure the performance of the obligation of San Jose. PL Galang paid PhP15,300, but San Jose failed to deliver the logs. Galang thus sent a letter to Plaridel demanding payment of PhP30,600 for for failure of San Jose to perform his obligation. Plaridel refused to pay, thus PL Galang filed suit. Plaridel refused to pay the attorneys fees and interests as it contends that this would work an injustice as it would make its liability greater than that it had assumed on the guaranty. Held: Plaridel is liable for interests and attorneys fees. Creditors suing on a suretyship bond may recover from the surety as part of their damages, interests at the legal rate even if the surety would become liable to pay more than the total amount stipulated in the bond. Interest is only allowed by way of damages, for

delay on the part of the sureties in making payment after they should have done so. Interest is to run from the time of the filing of the complaint. The surety is made to pay interest, not by reason of the contract, but by reason of its failure to pay when demanded and for having compelled the plaintiff to resort to the courts to obtain payment. The courts are however given the authority to apportion the attorneys fees. The principal debtor openly and expressly admitted its liability and such was known to the surety, thus the award for attorneys fees is valid, but the amount thereof must be lowered to 10%. Republic v Pal-Fox Lumber, Co. Inc. Facts: Far Eastern Surety put up a surety bond in favor of the Republic of the Philippines guaranteeing faithful compliance by Pal-Fox, with all forest laws and provisions of the NIRC and as well as the prompt and complete payment of all charges accruing on forest products cut and gathered and all fines and penalties, with the amount of the bond being PhP5,000. Pal-fox failed to pay the BIR an amount of PhP11,851.56, and thus the Republic filed suit in the CFI to recover the said amount. The CFI ordered Far Eastern to pay jointly and severally with Pal-fox the amount on the bond (PhP5,000) + legal interests from the filing of the complaint until the amount is fully paid. Pal-Fox was also ordered to pay the remaining amount of PhP6,841.56. Far Eastern thus filed an appeal. Far Eastern offered to pay PHP5,000, but it refused to pay the interests. Held: The surety is liable to pay for the legal interest in the amount of the bond. While the guaranty is only for the amount of PhP5,000, the surety must pay interest on account of its failure to pay the principal obligation from and after the same had fallen due, and default had thus taken place. Art 2055 provides that the guaranty (be it simple or indefinite) shall comprise not only the principal obligation, but all its accessories, provided that the guarantor shall only be liable to pay for those costs incurred after he had been judicially required to pay. Far Eastern is thus ordered to pay the amount of the bond and legal interests thereon, computed from the time of the filing of the complaint until the amount has been fully paid. Namarco v Marquez Facts: Marquez obtained 1 tractor and 1 rice thresher from Namarco for the amount of PhP20,000. Php8,000 thereof was paid as downpayment, and the rest would be paid in installments. A promissory note was executed covering the balance of the price of the machineries, including 10% as attorneys fees in case of default. To guarantee compliance with the obligations, Plaridel Surety executed a guaranty bond of PhP12,000 in favor of Namarco (formerly PRTA) whereby Marquez and Plaridel bound themselves to jointly and solidarily pay the amount. 2

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payments of PhP 2,870 and Php326.77 were made, but Marquez defaulted on the rest, thus Namarco demanded payment from Marquez and Plaridel. An action to enforce collection of the remaining amounts was instituted in the CFI of Manila, which ordered both of them to pay PhP10,000 + 7% pa interest on the principal and 6% pa on the accrued interest. Held: The suretys liability can exceed the amount of the surety bond. The judgment for the principal was only for php 10,000, while the remaining PhP9,990 represent the moratory interest due on the account of failure to pay the remaining balance on the principal obligation from and after it had fallen due and default had taken place. A guaranty is comprised not only of the principal obligation, but it also includes its accessories. Mere delay of the creditor in proceeding against the principal debtor does not release the guarantor and will not relieve the surety who is solidarilly liable. Compensated sureties are not entitled to have their contracts interpreted strictissimi juris in their favor. Vizconde v IAC Facts: Dr. Perlas called up Vizconde to seek help in selling an 8-carat diamond ring, which Vizconde accepted evidenced by a receipt. Vizconde later introduced Perlas to Pagulayan, with the latter claiming to have a sure buyer. Pagulayan gave Perlas PDCs in the amount of PhP85,000, evidenced by receipt signed by Pagulayan and Vizconde, and the latter guaranteed payment in solidum. Pagulayan paid PhP 5,000, and 3 TCTs were also given to secure payment of the value of the ring, with a receipt signed by both Pagulayan and Vizconde. Pagulayan and Vizconde only paid a total of PhP30,000, leaving a balance of PhP55,000. For their failure to pay the remaining amount, Perlas filed in the lower court a complaint for estafa against Vizconde and Pagulayan. The lower court and CA convicted both defendants, stating that there was an agency relationship between them and thus establishing conspiracy. Held: Vizconde cannot be held criminally liable as there is no evidence showing that there was conspiracy. Vizconde was only a guarantor of Pagulayan, who guaranteed the latters obligation of Pagulayan to return the ring or pay the amount thereof. As guarantor, Vizconde undertook to perform the obligation to return the ring or pay the amount jointly and solidarily with Pagulayan. Vizconde is thus absolved form liability, but is still civilly liable for PhP55,000 as the unpaid balance on the ring. Estate of Hemady v Luxon Surety Facts: Hemady guaranteed various principals under 20 counterbonds, in consideration for Luzon Suretys havin guaranteed the same persons. Under the counterbonds, Hemady obligated himself to be jointly and severally liable for the payment of any and all expenses of Luzon Surety with regard to the bonds it extended. Hemady died, and Luzon Surety filed a contingent claim for the value of the 20 bonds against the estate of Hemady, which was opposed to by the administrator of his estate. The CFI of Rizal dismissed the claim for the failure of Luzon Surety to state a cause of action, because it found that the suretyship/guaranty ceased upon the death of the guarantor/surety. Held: The guaranty subsists even though the guarantor has already died. The agreement is not one of those which are instransmissible and there is no showing that the parties intended for it to be a personal obligation only to be effected by Hemady. Such is apparent on the bonds, and Luzon surety only wanted to be paid the amounts thereon without reference to who will actually pay. Art. 2056 provides that the guarantor must have integrity, capacity to bind himself, and sufficient property, but such is only required to be present at the time of the execution of the agreement. If the integrity ceases, the creitor has the option to appoint a replacement guarantor, but, in such a case, the previous guarantor is still not entirely exempted, as he is only relieved of the obligation as guarantor if the creditor exercises his right to choose another guarantor. The contract of suretyship entered into by Hemady in favor of Luzon Surety not being rendered intransmissible due to the contracts themselves, his eventual liability thereunder necessarily passed upon his death to his heirs. Thus, the claim must be filed against the estate. Hemady is the solidary co-debtor, Luzon may claim for him what it may claim from his principals. The solidary guarantors liability is not extinguished by his account, upon which the creditor may file a contingent claim against his estate for reimbursement. Thus, the order appealed from is reversed, and the case was remanded to the lower court.

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of the principal debtor. Decision appealed from affirmed. Wise & Co. v Tanglao Facts: David was previously the agent of Wise and Co. who upon liquidation of its accounts, found that David owed them Php640. David failed to pay the amount owed, for which a writ of attachment was obtained by Wise and Co. and to prevent execution thereof, David succeeded in having his attorney to execute a special power of attorney in his favor. Tanglao, as guarantee for Davids obligation to pay Wise and Co., mortgaged his property in Angeles, Pampanga. David made monthly installments totaling Php343.47. Wise and Co thereafter instituted an action in the CFI against Tanglao for the remaining balance of the amount owed by David, which granted the same. Tanglao thus filed an appeal in the SC. Held: Tanglao is not liable for Davids unpaid obligation. He only used the power of attorney only to mortgage the property and not to enter into a contract of suretyship. The clauses of the power of attorney are insufficient to create an obligation of suretyshipwhich, under the law, must be express and cannot be presumed. Tanglao could not have contracted any personal responsibility for the payment of the sum of PhP640. The instant case is not a foreclosure suit, but is only for a sum of money, and foreclosure cannot lie against Tanglao. The legal remedies against the debtor have not been previously exhausted. David has 2 other pieces of property, the value of which is in excess of the balance of the debt payment of which is sought of Tanglao in his alleged capacity as surety. Tanglao is thus absolved of any liability. Southern Motors v Barbosa Facts: Barbosa executed in favor of Southern Motors a real estate mortgage as security for the loan of Brillantes. Brillantes failed to pay the amount of PhP2,889.53, thus, Southern Motors brought an action to foreclose the mortgage. The CFI of Iloilo ordered Barbosa to pay the amount, and the mortgage was foreclosed. Barbosa contended that he cannot be made to pay because Southern Motors has not exhausted all the properties and remedies available to it against the principal debtor, Brillantes. Held: The deed of mortgage provides that on failure of the debtor to pay, the mortage becomes null and void, and the mortgagee may not foreclose the mortgage judicially or extrajudically, and thereafter they may sell the property at a public sale, and apply the proceeds thereof to the debt. The right of the guarantor to demand exhausting the properties of the principal debtor exists only when a pledge or mortgage has not been given as a security for the payment of the principal obligation. A mortgagor is not entitled to the exhaustion of the properties Saavedra v Price Facts: Petitioner mortgaged her property in favor of W S Price as security for the credit extended by the latter to Martinez and Ibanez for the amount of PhP15,000. For failure of the debtor to pay, Price filed a motion in court to order that the real property mortgaged be sold at public auction for the payment of the loan and its interests. The court granted the request and the property ordered to be sold at such auction. Saavedra thus appealed to the SC. Held: Saavedra is not entitled to the exhaustion of the properties of the principal debtor. It is a fact that the principal debtors are Martinez and Ibanez and that the mortgaged property belonged to the petitioner, and the lien imposed on the property was valid and legal. In case of default, the property will be subject to a sale. It is true that the petitioner is a surety with regard to Martine, and as such, she is entitled to resort to actions and remedies against him which the law affords, but we should not lose sight of the fact that she was sued not as a surety, but as a mortgage debtor being the owner of the mortgaged property. No excussion may be had for the mortgagor, as she is essentially not a guarantor. Art. 2056. One who is obliged to furnish a guarantor shall present a person who possesses integrity, capacity to bind himself, and sufficient property to answer for the obligation which he guarantees. The guarantor shall be subject to the jurisdiction of the court of the place where this obligation is to be complied with. (1828a) Art. 2057. If the guarantor should be convicted in first instance of a crime involving dishonesty or should become insolvent, the creditor may demand another who has all the qualifications required in the preceding article. The case is excepted where the creditor has required and stipulated that a specified person should be the guarantor. (1829a) CHAPTER 2 EFFECTS OF GUARANTY SECTION 1. - Effects of Guaranty Between the Guarantor and the Creditor Art. 2058. The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor, and has resorted to all the

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legal remedies against the debtor. (1830a) Art. 2059. The excussion shall not take place: (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. (1831a) Cacho v Valles Facts: The National Sporting Club executed a promissory note payable in 4 months, made to Cacho or his order, in the amount of Php9,360 as the value for commercial purposes. The note was signed by the NSC and guaranteed by Valles, Mateo, Hefting, Chesny and Roxas. CAcho sued NSC, and Roxas alleged that there is a right of division among the co-sureties and asked the court to declare that he is only liable for his shareof the debt, and that he be only liable if the the creditor exhausts all properties of the NSC first. Judgment rendered requiring the 5 guarantors to pay pro rata, the amount of the total debt in case NSC does not satisfy the debt or if the latter should appear insolvent. The judgment was later modified stating that the sahre of the insolvent guarantor be borne proportionately by the other co-sureties. Roxas, thereafter appealed to the SC. Held: Insolvency of one co-surety is not borne proportionately between the other co-sureties. Where there is concurrence of 2 or more simple debtors, each is liable only for his aliquot part of the obligation. As for excussion, A srety may proceed against the principal debtor even before paying the debt if the debtor is bankrupt or is insolvent. None of the sureties here have been declared bankrupt, and the benefit of division is not lost and the rule declaring each surety is liable only for his aliquot part of the guaranteed debt. A co-surety is entitled to the benefit of division from the moment the obligation is contracted, but if any circumstance under Art. 2059 arises, the benefit of division ceases, along with the benefit of excussion. Imperial Insurance v De Los Angeles Facts: Rosa Reyes obtained from the court a writ of preliminary attachment and all of the properties of Felicisimo Reyes were levied upon. Pedro and Consolacion also obtained writs of attachment against Felicisimo. To dissolve the attachments, Imperial Insurance, as surety of Felicisimo, posted defendants bonds in the amount of PhP60,000, in the case of Rosa, and a PhP40,000 bond in favor of Pedro and Consolacion, whose writs became final and executory after the appeal. The cases were jointly tried, and the CFI ruled in favor of the plaintiffs, which became final and executory after the appeal. The writs of execution were issued , but were returned unsatisfied by the Sheriff. The judgment creditors, thus filed for a motion to recover on the surety bonds, which was opposed to by Imperial Insurance. The motion was granted by the lower court. Held: The judgment creditors may go directly against the surety in a counter-bond prior to the exhaustion of the debtors properties. Imperial Insurance was duly notifed of the hearing on the motion to recover on the surety bonds. It also bound itself jointly and severally with Felicisimo on the counter-bonds. Excussion (previous exhaustion of the properties of the debtor) shall not take place if the debtor has bound himself solidarily with the debtor. The Rules of Court on excussion cannot be used because a procedural rule may not amend substantive law, and gufther would nullify the express stipulation of the parties that the suretys obligation should be solidary with that of the defendant. Petitioner cannot excape its liability on its counter-bonds based on excussion. To recover on the counterbonds, it is not necessary to file a separate action, as it may be hade in the same civil case. Thus, the CA decision is affirmed and the lower court was ordered to proceed with the execution. Art. 2060. In order that the guarantor may make use of the benefit of exclusion, he must set it up against the creditor upon the latter's demand for payment from him, and point out to the creditor available property of the debtor within Philippine territory, sufficient to cover the amount of the debt. (1832) Luzon Steel v Sia

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Facts: Luzon Steel sued Metal Manufacturing and Sia for breach of contract with damages, and they obtained a writ of preliminary attachment upon the properties of the defendant, but such was lifted when SIa filed a bond (as principal) with Luzon surety as guarantor for the amount of PhP25,000. Luzon and Sia entered into a compromise, whereby Sia will pay the amount in 6 monthly installments at Php600.00 per month. Defendant failed to comply with his obligation, this Luzon Steel obtained a writ of attachment against the defendant. Times Surety opposed the writ , and the lower court set it aside. Held: A writ of execution may be issued against the surety without previous exhaustion of the debtors property. Sec. 17 Rule 57 of the Rules of Court on the exhaustion of properties of the debtor or an unsatisfied writ of execution, may not be availed of. The counterbond under such rule contemplate an ordinary guaranty where the surety assumes subsidiary liability, but a solidary guarantor is not entitled to excussion or exhaustion of all the properties of the debtor. Even if the suretys undertaking is not solidary with the debtor, he may still not demand exhaustion or excussion unless he can point out sufficient leviable properties of the debtor within the Philippine territory, and here, there is no evidence that the surety has done so. Thus, the order appealed from is reversed and the court is to proceed with the excuetion against Times Surety. Arroyo v Jungsay Facts: The former guardian of Tito Jocsing (an imbecile) absconded from his liabilities, and judgment was rendered in favor of a new guardian, Arroyo, which ordered Jugnsay and his suretes to pay PhP6,000 with interest and costs. The sureties/ bondsmen appealed. Held: The sureties should not be credited with php4,400, as the alleged value of certain property attached as that of the absconding guardian, all of which is in the rd exclusive possession of 3 parties under a claim of ownership. It is not sufficient that the surety claim the benefit of excussion in a timely manner (upon demand), nor by designating property of the debtor with which to satisfy the debt. It is also necessary that the property be within the Philippines, available and sufficient to cover the amount of the debt, so as not to delay recovery of the creditor and the release from liability of the guarantors. A plea which does not meet any of these requirements must be disregarded. The property pointed out by the sureties was not sufficient to pay the whole indebtedness, it was not saleable and it is so rd encumbered that 3 parties have full possession thereof under a claim of ownership. Thus, the sureties have failed to meet the requirements provided by the law.

Art. 2061. The guarantor having fulfilled all the conditions required in the preceding article, the creditor who is negligent in exhausting the property pointed out shall suffer the loss, to the extent of said property, for the insolvency of the debtor resulting from such negligence. (1833a) Art. 2062. In every action by the creditor, which must be against the principal debtor alone, except in the cases mentioned in Article 2059, the former shall ask the court to notify the guarantor of the action. The guarantor may appear so that he may, if he so desire, set up such defenses as are granted him by law. The benefit of excussion mentioned in Article 2058 shall always be unimpaired, even if judgment should be rendered against the principal debtor and the guarantor in case of appearance by the latter. (1834a) Art. 2063. A compromise between the creditor and the principal debtor benefits the guarantor but does not prejudice him. That which is entered into between the guarantor and the creditor benefits but does not prejudice the principal debtor. (1835a) Art. 2064. The guarantor of a guarantor shall enjoy the benefit of excussion, both with respect to the guarantor and to the principal debtor. (1836) Art. 2065. Should there be several guarantors of only one debtor and for the same debt, the obligation to answer for the same is divided among all. The creditor cannot claim from the guarantors except the shares which they are respectively bound to pay, unless solidarity has been expressly stipulated. The benefit of division against the co-guarantors ceases in the same cases and for the same reasons as the benefit of excussion against the principal debtor. (1837) Mira Hermanos v Manila Tobacconists Facts: Mira Hermanos agreed to deliver to Manila Tobacconists merchandise for sale on consignment, with payment at the end of each month of the value of the merchandise sold during the preceding month. As guarantee for payment of the merchandise, Provident Insurance executed a bond up to the sum of Php3,000 to cover the payments. Due to an increase in the sales and volume of the merchandise delivered, the merchandise delivered by Mira exceeded the value of PhP3,000, and thus another rbond was executed by Compagnia de Seguros for the amount of PhP2,000. It was found that Mira owed Manila Tobacco PhP2,272, and because it could not pay, payment was demanded form the sureties. Provident

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insurance paid only 60% of the amount owing, and said that the 40% remaining should be paid by the Compagnia de Seguros. The latter refused to pay, thus an action was filed by Mira Hermanos against the 2 sureties, for the recovery of the remaining 40%. Held: Provident Insurance is not entitled to the benefit of division. The Benefit of Division is only applicable where there are several guarantors or sureties of the same debt of a single debtor. Although the 2 bonds appear to guarantee the same debt, in reality, Provident guaranteed only the first Php3,000 owed to Mira Hermanos, and Compagnia guaranteed any excess beyond that amount, but not to exceed Php5,000 as the total amount of the 2 bonds. Being separate and distinct debts, they cannot be divided between the 2 guarantors, and thus, Manila Tobacco and Provident Insurance are ordered to jointly and severally pay the remaining 40% to Mira Hermanos. Benefit of Division only available if there is more than 1 guarantor of the same debtor and over the same debt. SECTION 2. - Effects of Guaranty Between the Debtor and the Guarantor Art. 2066. The guarantor who pays for a debtor must be indemnified by the latter. 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. (1838a) Tuason v Machuca Facts: Manila Compania gave abond of PhP9,663 to guaranty the liability og Universal Trading to the Insular Collector of Customs. Universal Trading was allowed to withdraw imported sundry goods, from the latters warehouse. Universal Trading and its president, Machuca, executed a document, binding themselves solidarily to pay, reimburse and refund to Tuason and Tuason all sums or money at it or its representatives may pay or become bound to pay upon its obligation with Manila Compania, whether or not it was actually paid. Universal Trading was thereafter declared insolvent. Manila Compania brought an action in lower, recover PhP9,663 against Tuason and Tuason, and granted by the court and affirmed by the SC. Tuason and Tuason brought the instant action to recover from Machuca the amount it paid to Manila Compania, although the amount was not in fact paid by Tuason. Held: TUason and Tuason is entitled to recover the amount sought to be paid. Because of the final judgment, Tuason became bound to pay the amount to Compagni, and according to the document signed by it and the Universal Trading, Machuca bound himself to pay whatever Tuason may be bound and liable to pay to Manila Compania, despite the fact that it has not in fact actually paid. Tuason also contended that he can recover from Machuca the amount it incurred as expenses in the litigation between him and Compania, but this it may not do. Tuason failed to fulfill the obligation with Manila Compania which resulted in the said suit and thus incurred the expenses due to their own fault. But, it is entitled to revover expenses it incurred by the action it brought against Machuca, the debtor. The guarantor may be indemnified for the expenses incurred by him after being notified by the debtor that payment had been demanded of him. Machuca thus ordered to pay PhP9,663 with interests form the time of the filing of the complaint and Php1,653 as attorneys fees. PNB v Luzon Surety Facts: Villarosa obtained a crop loan from PNB for the amount of PhP32,400 secured by a chattel mortgage on the standing crops, and guaranteed by, Luzon surety in an amount of PhP 10,000, Central Surety in the amount of PhP20,000 and Associated in the amount of PhP15,000. The loan was later increased, and a balance of PhP63,222.78 was left. PNB filed suit to collect the amount owed by Villarosa in the CFI. Held: Luzon Surety cannot be absolved from liability to PNB, as it is not merely a guarantor but is a surety, and is liable as a regular party to the undertaking. Its

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surety agreement states that it incorporates the mortgage contract into its terms and conditions, and the chattel mortgage contains a provision allowing PNB to increase the amount of the loan. Luzon Surety bound itself to pay up to PhP10,000 of whatever Villarosa obligated himself to pay. Considering that Luzon Surety is engaged in the business of furnishing guarantees it is not entitled to a rule of strictissimi juris or a strained interpretation of its undertaking, the increase in the loan, or its alteration was made with the consent of the surety and thus, it is ordered to pay interest due to its delayed payment, from the time of the filing of the complaint. To release the surety from its obligation, the alteration of the contract of loan must be material and without consent of the surety. Art. 2067. The guarantor who pays is subrogated by virtue thereof to all the rights which the creditor had against the debtor. If the guarantor has compromised with the creditor, he cannot demand of the debtor more than what he has really paid. (1839) Saenz v Yap Chuan Facts: Palanca, the administrator of the estate of Jose, was ordered by the court to give a bond to guarantee his administration. The bond was executed by himself and Chuang, Alejandra Palanca and Vizmanos, in the amount of PhP60,000 in favor of the Government, jointly and severally. Palanca thereafter executed (along with 5 other people) a bond in favor of Vizmanos, whereby they jointly will pay different amounts, CHangco for PhP20,000 (executed by his attorney in fact but who later turned out not to be so authorized), and the 4 others were to pay PhP5,000 each. The second bond was to guarantee whatever Vizmanos might be required to pay because of the previous judicial bond. As guarantor, Vizmanos was ordered by the court to pay the amount of PhP48,000, out of which, he was only able to pay php8,000. Palanca could not pay Vizmanos, thus the latter sued Chuangco and the 4 other sureties for the remaining amount of PhP40,000. Chuangco was later absolved because the attorney who signed the guarantee on his behalf had no authority to do so. The 4 other guarantors was being asked by Vizmanos to pay php5,000 each based on their shares on the bonds, for which the lower court ordered them to pay. Held: The guarantors need only pay for their proportionate share in the Php8,000 amount paid by Vizmanos. The guarantors right to reimbursement is limited only to the amount he actually paid. The right of subrogation under Art 2067, cannot be interpreted in such absolute terms as to include more than the guarantors payment, for though it is true that he puts himself in the place of the creditor and should have the same rights, it is no less certain that there would be an unjust

enrichment to the prejudice of the debtor, if the surety who paid the claim were to be permitted to claim more than what he paid. When the purse of the surety who pays suffered no detriment, to sue the debtor in order that he provide funds for the surety in expectancy of the action of the creditor, is not one for an indemnity. Vizamanos may only recover from the 4 guarantors PhP8,000 which is the amount he paid to the creditor, to be equally divided among them according to their proportionate shares. Art. 2068. If the guarantor should pay without notifying the debtor, the latter may enforce against him all the defenses which he could have set up against the creditor at the time the payment was made. (1840) Art. 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. (1841a) Art. 2070. If the guarantor has paid without notifying the debtor, and the latter not being aware of the payment, repeats the payment, the former has no remedy whatever against the debtor, but only against the creditor. Nevertheless, in case of a gratuitous guaranty, if the guarantor was prevented by a fortuitous event from advising the debtor of the payment, and the creditor becomes insolvent, the debtor shall reimburse the guarantor for the amount paid. (1842a) Art. 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

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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. (1834a) Manila Surety v Batu Construction Facts: Batu Construction entered into a contract with the Government for the construction of the bacara Bridge in Ilocos Norte. Manila Surety executed a bond in the amount of PhP8,812 to guarantee the faithful performance of Batu Construction of its obligations under the contract. The Governemnt cancelled the contract due to the unsatisfactory progress of Batu Construction. Manila Surety was sued by the laborers and employees of Batu Construction for their wages, for which it filed suit against Batu Construction for indemnity of the amount sought for by the laborers, totaling PhP5,960. Held: The surety may proceed against the debtor even before paying if and when he is sued for payment, and in this case, the surety was sued by the laborers for the payment of their wages. The law did not specify that the principal debtor must be the one to be sued, and it is enough that the surety is sued for payment. A surety is an insurer of the debt and its responsibility is more onerous than that of a guarantor. In suretyship, the surety becomes liable to the creditor without the benefit of the principal debtors excussion of properties. The case was remanded to the lower court to determine the amount necessary to cover the interests of Manila Surety from any proceeding by the creditor or from insolvency of Batu Construction. Gen. Indemnity v Alvarez Facts: Gen. Indemnity filed a complaint in the CFI to recover PhP2,000 from Alvarez, as the guarantor of a loan extended to him by PNB. Alvarez, as counterguaranty, executed a real estate mortgage in favor of General Indemnity. Alvarez alleged that Gen. Indemnity has not paid any amount to PNB, and thus it cannot seek payment from him. The CFI ruled in favor of General Indemnity, and Alvarez appealed to the SC. Held: The case is to be set for new trial, to determine whether or not Gen. indemnity has in fact paid PNB to warrant recovery of the amount it paid. The matter whether or not the guarantor actually paid the creditor should be decided in the affirmative before the guarantor can claim reimbursement from the principal debtor. Under Art 2071, a guarantor who has not paid the creditor can proceed against the principal debtor only for the purpose of obtaining release fromt eh guaranty or a security against the eventual insolvency of the debtor. An action by the guarantor against the principal debtor before payment to the creditor is made, is premature. Art. 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. (n) SECTION 3. - Effects of Guaranty as Between Co-Guarantors Art. 2073. When there are two or more guarantors of the same debtor and for the same debt, the one among them who has paid may demand of each of the others the share which is proportionally owing from him. If any of the guarantors should be insolvent, his share shall be borne by the others, including the payer, in the same proportion. The provisions of this article shall not be applicable, unless the payment has been made by virtue of a judicial demand or unless the principal debtor is insolvent. (1844a) Art. 2074. In the case of the preceding article, the co-guarantors may set up against the one who paid, the same defenses which would have pertained to the principal debtor against the creditor, and which are not purely personal to the debtor. (1845) Art. 2075. A sub-guarantor, in case of the insolvency of the guarantor for whom he bound himself, is responsible to the co-guarantors in the same terms as the guarantor. (1846) CHAPTER 3

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EXTINGUISHMENT OF GUARANTY Art. 2076. The obligation of the guarantor is extinguished at the same time as that of the debtor, and for the same causes as all other obligations. (1847) Art. 2077. If the creditor voluntarily accepts immovable or other property in payment of the debt, even if he should afterwards lose the same through eviction, the guarantor is released. (1849) Art. 2078. A release made by the creditor in favor of one of the guarantors, without the consent of the others, benefits all to the extent of the share of the guarantor to whom it has been granted. (1850) Art. 2079. An extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty. The mere failure on the part of the creditor to demand payment after the debt has become due does not of itself constitute any extention of time referred to herein. (1851a) Radio Corp. of the Phils. v Roa Facts: Jesus Roa was indebted to the Phil. Theatrical Enterprises for the amount of PhP28,400 payable in monthly installments. Phil. Theatrical assigned its rights and interest in the contract to Radio Corp. of the Phils. The contract constains an acceleration clause whereby if the debtor fails to make payment of any of the installments, the whole unpaid balance becomes due and the Real Estate Mortgage and a Luzon Surety Bond may be foreclosed. Erlanger and Galinger, were the attorneys in fact of Radio Corp. who wrote to Roa, saying that his request to have the period to pay the February installment was approved. The guarantors of the debt are Chavez, Andres and Manuel Roa. The CFI ordered the debtors and the guarantors to pay the outstanding balance due to the Radio Corp.. Held: If the whole unpaid balance automatically becomes due for failure to pay an installment, the act of the creditor of extending the payment of said installment, without the guarantors consent, discharges the guarantor because, in the Philippines, the extension of the payment of the whole amount of the indebtedness. It is immaterial whether or not the extension has proven to be prejudicial he surety, and such is the same whether the term of the loan is long or short. An extension granted to the debtor by the creditor extinguishes the guaranty. Thus, Chavez, Andres and Manuel Roa are absolved of their liability as guarantors. Villa v Garcia Bosque

Facts: Monna was the owner of a printing establishment and a bookstore in Sampaloc, Manila. She sold the store and the establishment to Bosque and Ruiz for the amount of PhP55,000 payable in installments. Monna was resident of Spain and acted through her attorney in fact, Piretas. France and Goulette obligated themselves as solidary sureties with the principals Bosque and Ruiz to answer for any balance and interests which remain unpaid after the due date of the installments. Piretas went to Spain, and authorized Hermanos to collect the sums nd of money owing to Monna. On the due date of the 2 installment, Bosque et al. were unable to pay Rocha, the representative of Hermanos, and a document was executed in favor of Bosques whereby it was agreed that Hermanos received PhP5,800. The remaining balance was covered by 5 promisory notes due on different dates (with the interest was increased to 9%). A document was executed where Boque transferred his assets to Bota Printing int eh amount of PhP15,000. nd The notes on the 2 installment fell due, and in a document, Bosque stated that he was indebted to Monna for PhP32,000 and France and Goulette were jointly and solidarily liable, and the establishment was transferred to Bota. It also stipulated that France and Goulette were to be relieved of their liability.The CFI ordered Ruiz and Bosque, France and Goulette to pay Monna PhP20,509.71 as the purchase price of the establishment in Escolta. Goulette and France questioned their libility as they contend that they are discharged therefrom. Held: Where a guarantor is liable for different payments, such as installments etc. or upon a series of promissory notes, an extension of time as to one or more will not affect the liability of the surety as to the others. The document discharging the sureties from liability was executed by one Figueras, who was not specifically authorized to do so in behalf of the creditor. Such document cannot be said to have nd novated their agreement as it only pertains to one installment, the 2 one. It did not cancel the whole amount of the obligation, and thus, the sureties are not absolved. Hospicio de San Jose v Fidelity Inasmuch as suretyship is an accessory contract, the surety cannot bind himself for more than the principal obligation. Since Machetti did not offer to give a bond for the exact and faithful fulfillment of the obligation to complete the works, within a number of working days, Fidelity Surety, in consenting to be a surety, did not and could not have bound itself to the exact and faithful fulfillment of said obligation. Thus, the 25 days extension granted to Machetti within which to complete the work, without consent of Fidelity did not extinguish its liability, inasmuch as the obligation it assumed did not extend to answering for the completion of the works within the period stipulated in the contract for lease of services.

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LEGAL AND JUDICIAL BONDS 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 preference of the latter. (1852) PNB v Manila Surety Facts: PNB opened a letter of credit and advance PhP120,000 to Edington for 8,000 tons of asphalt. PhP280,000 worth of asphalt (3,000 tons) was released and delivered to ATACO under a trust receipt guaranteed by Manila Surety. To pay for the asphalt, ATACO constituted PNB as its assignee and attorney in fact to receive and collect from the Bureau of Public Works the amount aforesaid out of the funds payable to the PNB. The assignment said stated that the power of attorney shall remain irrevocable until the principals total indebtedness has been fully liquidated. PNB regularly collected from the Bureau for about 8 months, but it stopped doing so, and the money was therefore allowed by the Bureau to be taken by other creditors. PNB filed for the recovery of PhP158,563 balance in the CFI of Manila, which ordered the surety and ATACO to pay the amount. (Basically, the Government owes ATACO for Asphalt, and ATACO in turn owed PNB for a credit line, thus, ATACO just made the government pay directly to PNB, to pay off its credit line). Held: manila Surety is no longer liable as even if the assignment with SPA from the principal debtor was considered as a mere additional security, still, by allowing the funds to be exhausted without notifying the surety, PNB deprived the surety of the possibility of recourse against the security, and in such a case, it is not longer liable. Under Art 2080 which provides that the guarantors, even though they be solidary, are released from the obligation whenever by some act of the creditor, they cannot be subrogated to the rights, mortgages and preferences of the latter. Art. 2081. The guarantor may set up against the creditor all the defenses which pertain to the principal debtor and are inherent in the debt; but not those that are personal to the debtor. (1853) CHAPTER 4 Art. 2082. The bondsman who is to be offered in virtue of a provision of law or of a judicial order shall have the qualifications prescribed in Article 2056 and in special laws. (1854a) Art. 2083. If the person bound to give a bond in the cases of the preceding article, should not be able to do so, a pledge or mortgage considered sufficient to cover his obligation shall be admitted in lieu thereof. (1855) Art. 2084. A judicial bondsman cannot demand the exhaustion of the property of the principal debtor. A sub-surety in the same case, cannot demand the exhaustion of the property of the debtor of the surety. Title XVI. - PLEDGE, MORTGAGE AND ANTICHRESIS CHAPTER 1 PROVISIONS COMMON TO PLEDGE AND 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. (1857) Arenas v Raymundo Facts: Jewels owned by Arenas (with a value of PhP8,660) were delivered to de

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Vega to sell on commission. They were later delivered to Perello for the same purpose. Perello delivered to Raymundos pawnshop the jewels, and pldeged them as security of a loan of PhP1,524. Arenas, through his attorneys, filed suit against Perello for estafa, who was convicted thereof. Suit was also filed against Raymundo, for which the CFI ordered the sheriff to retrieve the jewels. Raymundo alleged that the owner of the jewels must reimburse him the amount he paid on the loan of Perello before he can be compelled to return the jewels. Held: Raymundo does not have the right to reimbursement as the owner of the jewelry did not make a contract with Perello to pledge the jewels. The pledge instituted by Perello (who was not the owner of the thing pledged) on his loan is thus void. Rural Bank of Caloocan v CA Facts: Castro, a 70 year old widow who was illiterate in English, was accompanied by the Valencias to the Rural Bank of Caloocan to obtaine a loan of PhP5,000. The application for the loan was approved, and Castro executed promissory note therefore. The Valencias applied for an additional loan of PhP3,000 which was approved, and a promissory note for the same amount was signed by the Valencias, with Castro as a co-maker. A real estate mortgage was constituted on the property of Castro, to secure both loans for the amount of Php6,000. The Sheriff gave notice of the foreclosure to castro, and her property was sold at a public auction to Reyes. Castro consigned Php3,380 and filed suit for a sum of money in the CFI which ordered the return of the property to Castro, and held that the loan of Castro was only for PhP3,000, as per the promissory note. The bank appealed to the SC. Held: The Valencias are guilty of fraud as the misrepresented the qualifications of Castro, and made her believe that she was only liable for Php3,000. The bank is negligent as it did not inquire further regarding Castros qualifications and merely relied on the representations made by the Valencias. Banks are demanded to exercise the highest order of care and prudence in its dealings with its customers, considering that it is engaged in the banking business. They should have ascertained Castros awareness of what she was signing or made her aware or understand the obligation she was assuming considering she was a mere accommodation (without consideration) to the Valencias. The authority of the Valencias was only to follow up on Castros loan application, and are not authorized to borrow on her behalf. The bank should have required the presentation of the SPA executed by Castro in favor of the Valencias. The mortgage was void as the Valencias had no authority to mortgage Castros

property to secure the loan of Php3,000. Cavite Development Bank v Spouse Lim Facts: Rodolfo Guansing obtained a loan of PhP90,000 from CDB (Mother company of FEBTC) with a mortgage on the property in La Loma, Q.C. as security. For failure to pay the loan, CDB foreclose the mortgage and bought the property at public auction. Lim offered to buy the property in installments, and gave option money in the amount of PhP30,000 to be deducted from the purchase price. It was found that Rodolfos title to the property at the time of the mortgage was not valid, as it was only based on a self-declared extra-judicial settlement of estate. The court declared that his father, Perfecto, Guansing, was the rightful owner of the property, and canceled his title thereto. Lim filed an action in the RTC for specific performance and damges, and CDB and FEBTC was ordered to pay Lim PhP30,000 earnest money and interests. This was affirmed by the CA. Held: The sale of CDB to Lim of the property mortgaged by Rodolfo is a nullity, for CDB did not have valid title to the property. CDB never acquired valid titled because the foreclosure sale is likewise void, since the mortgagor was not the owner of the property foreclosed, and thus the mortgage was also void. A foreclosure sale (essentially a forced sale) is still a sale, under which the mortgagor in default is forced to transfer ownership of the thing sold to the highest bidder who, in turn, is obliged to pay the bid price in money or its equivalent. Being a sale, the rule that the seller must be the owner of the thing sold applies in a foreclosure sale. Thus the requirement under Art 2085 that the mortgagor or pledgor be absolute owner of the thing pledged or mortgaged is really for the anticipation of an eventual foreclosure sale. CDB is negligent as it must have inquired into Rodolfos title based on Extrajudicial settlement of the estate, and it was put on notice and to exercise due diligence required of banks. Art. 2086. The provisions of Article 2052 are applicable to a pledge or mortgage. (n) 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. (1858) Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void. (1859a)

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Bustamante v Rosel Facts: Bustamante obtained a Php100,000 loan from Rosel secured by a mortgage on a 70 meter portion of their lot along congressional ave. the contract provided that upon failure to pay the loan installments, the property will be considered sold to the lender for PhP200,000. When Bustamante failed to pay, the Rosels wanted him to execute a deed of Absolute Sale in their favor. But, Bustamante refused to do so, and sought for the extension of time to pay or another property to be sold. The Rosels refused. Bustamante, upon refusal of the Rosels to accept payment, consigned the amount of PhP153,000 in court. The Rosels consigned the difference between the amount due and the purchase price stipulated in their contract, and filed an action for specific paerformance against Bustamante. Held: Despite the fact that the contract is the law between the parties, and it must be complaied with in good faith, an exception to the said rule exists when the contract or its stipulations are contrary to law, morals, good customs, etc. the stipulation of the parties reveals an intent of the creditor to acquire the property given as security for the loan, and such is embraced in the concept of Pactum Commisorum. It elements are: 1) there is property mortgaged by way of security for the payment of a principal obligation; and 2) there should be a stipulation for automatice appropriation by the creditor of the thing mortgaged in case of nonpayment of the principal obligation within the stipulated period. The debtor in this case is obliged to dispose of the collateral at the pre-arranged price amounting to practically the same amount as the loan, wn such falls within the concept of pactum commisorum. An option to purchase is not pactum commisorum, but if there is a price agreed upon at the time of the execution of the loan which is equivalent to the amount of the loan, then it is pactum commisorum. Alcantara v Alinea Facts: Alinea and Belarmino borrowed money from Alcantara in the amount fo Php480, and their contract stipulated that the property of Alinea in San Pablo, Laguna will be considered sold to Alcantara for the amount of loan in case the same is not paid in January 1905. The borrowers failed to pay, thus, Alcantara sought to have the property conveyed to him, but the borrowers refused. Thus, Alcantara filed an action in the CFI, which ordered the borrowers to deliver the property to Alcantara. Held: There is no pactum commisorum in this case as the property was not given as security by way of mortgage, pledge or antichresis. There is also no pledge because the property is not personal property and it remained in the possession of the borrowers. There is no antichresis because the property was not delivered to the creditor. Since there is not pactum commisorum, the sale must be upheld as the law between the parties, and the contract must be complied with in good faith. Alinea and Belarmino ordered to deliver the property to Alcantara. Mahoney v Tuason Facts: Blanc obtained a loan from Chartered Bak in the amount of PhP14,000, and as guarantor, Tuason received as security from P Blanc, jewelry valued at PhP14,010. The credit of Blanc was increased to Php16,000, which he failed to pay, thus, Tuason paid the amount to chartered Bank. Blanc executed a document whereby he bound himself to refund the amount to Tuason at PhP1,000 per month and in case of default, Tuason could detain the jewels for half of their value. Blanc Paid a total of Php5,000 and for his failure to pay (as he was declared insolvent and Mahoney was appointed as his receiver) Tuason prayed to the court to be declared the owner of the jewels to the extent of ! of their value. This was denied by the court, and ordered Tuason t deliver the jewels to Mahoney as receiver. Held: It is unquestionable that Blanc is indebted to Tuason and must therefore pay the amount owed. But, Tuason has no right to appropriate to himself the things pledged. He also cannot make payment by himself and to himself ! or the total value of the jewels pledged as he is only permitted to recover his credit which Blanc owes from the proceeds of the sale of the jewels and said sale should be effected in accordance with the laws in force. This stipulation in the contract allowing the creditor to appropriate for himself the thing pledged does not render the entire contract null and void, but it only nullifies the particular rstipulation. Though it is against law and is declared by the court to be immoral, the laon still stands. Jewels were thus ordered to be sold at public auction. Reyes v De Leon

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Facts: The Lanuzas conveyed to Maria Buatista and Urelia Navarro a 2-storey house in Tondo along with their leashold rights, a TV set, and Kelvinator refrigerator. They executed a document entitled deed of sale with right to repurchase, whereby the properties were sold to Reyes and Navarro for Php3,000 and the Vendors had a right to redeem within 3 months after the payment of Php3,000. If they fail to do so, the right to repurchase is fulfilled and the ownership will automatically vest in Reyes. The redemption period expired, and an annotation on the said instruments extended the period, and this was also signed by Lanuzas wife. In the meantime, the same property was mortgaged to de Leon while the Lanuzas remained in possession. The loan was not paid in the amount of P2,720, thus de Leon filed for an extrajudicial foreclosure of the mortgage. Reyes and Navarro filed for consolidation of ownership over the same property in their names. The CFI ruled that Reyes and Navarro had a better right to the property as they were first in time. De Leon appealed to the SC and alleged that the pacto de retro sale is an equitable mortgage and thus cannot be the basis of a consolidation of ownership. Held: The SC agreed with de Leon and held that the deed of pacto de retro sale is actually an equitable mortgage. There was gross inadequacy of price. There was also non-transmission of ownership to the vendees. Under the stipulations, the vendees will only acquire ownership it the Lanuzas failed to pay the loan, which is thus tantamount to pactum commisorum as it enabled the mortgagees to acquire ownership of the properties without need of a foreclosure sale. The insertion of the said stipulation is an avowal of an intent to mortgage rather than to sell. The filing of the petition for consolidation is delayed, as the Lanuzas remained in possession of the property long after they lost the right to redeem. The equitable mortgage rd cannot affect the rights of 3 parties and cannot prevail over the registered mortgage of de Leon. Art. 2089. 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. 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 expected 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 extinguishment of the pledge or mortgage as the portion of the debt for which each thing is specially answerable is satisfied. (1860) PNB v Agueldo Facts: Agueldo authorized his nephew Garucho to sell, alienate and mortgage his properties in Bacolod, and the latter used the same properties to obtain a loan of PhP 16,000 from PNB. Garuchos sister also authorized him under an SPA to sell, alienate and mortage her properties. The brother was able to mortgage them to PNB as security for a loan of PhP6,000. The 2 loans were covered by 2 promissory notes signed by Mauro Garucho. The mortgage deeds were executed in Mauros own name and they authorized PNB to take possession of the properties by means of force if necessary in case of failure to pay the loan. The 2 promissory notes were novated under one note for PhP21,000 upon their expiration. Agueldo acquired the property of Amparo who signed an affidavit accepting the transfer and agreed to the amount of the lien in the mortgage deed in favor of PNB. Thereafter, Agueldo obtained a TCT in his name. PNB filed suit to recover the amount of the loan, with the court absolving Mauro, and ordering Agueldo to pay the PhP21,000. Agueldo thus appealed to the SC. Held: The only liability of Agueldo is that which arises from the affidavit, only with regard to that particular lien and not to the principal obligation, and his liability is subsidiary and not direct. The mortgages and the notes were entered into by Mauro in his own personal capacity and thus they cannot bind his principal. In Agueldos affidavit, she only gave consent ot the mortgage on the land previously owned by Amparo. Inasmuch as a mortgage is indivisible as to the contracting parties, it is not so with respect to third persons who did not take part in their execution either personally or through an agent. Since Mauro, the person primarily liable was absolved, Agueldo must also be absolved of liability. Central Bank v CA Facts: Tolentino obtained a loan of PhP50,000 from Island Savings, secured by a real estate mortgage on a 100-hectare property in Agusan. Only PhP17,000 was released to Tolentino by the bank, for which he signed a promissory note for the amount to be paid within 3 years in installment. The bank repeatedly promised Toletino to released the remaining proceeds, but they failed to do so due to a resolution issued by the Central Bank prohibiting Island Savings from doing business, and placed it under the charge of the superintendent of banks. Tolentino failed to pay the PhP17,000 amount released, thus the Bank filed for foreclosure of the real estate mortgage, with the Sheriff scheduling the auction. Toletino sought to

Starr Weigand

Please read cases in the original. Read this reviewer with Credit Transactions book by De Leon, and be familiar with the codal provisions.

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stop the auction. Held: The bank was in default in fulfilling its reciprocal obligation under the loan agreement, and thus, Tolentino may choose between specific performance and rescission. But, since the Central Bank prohibited the bank from doing business, Tolentino may not now seek for specific performance. As to rescission, it may only be had for the remaining PhP63,000. The bank already released the PhP17,000, thus, complying with its obligation up to that amount, and it is Tolentino who is in default for not paying for such amount. The real estate mortgage cannot be entirely foreclosed to satisfy the PhP17,000 debt, as Art. 2089 on the indivisibility of a mortgage cannot apply because it presupposes several heirs of the debtor or the creditor, which does not obtain in the instant case. (This is wrong according to Atty. Lerma as it makes no sense.) Tolentino is thus ordered to pay for the PhP17,000 + interests in case of non-payment, and the mortgage may only be foreclosed as to 21.25 hectares out of the total 100 hectares to satisfy such debt. Art. 2090. The indivisibility of a pledge or mortgage is not affected by the fact that the debtors are not solidarily liable. (n) Dayrit v CA Facts: Dayrit, Sumbillo and Angeles entered into a Sales Agreement with Mobil Oil to buy from the latter certain quantities of its propducts. The same parties obtained a PhP150,000 loan from Mobil Oil and provided the property of Dayrit as security for payment. The borrowers failed to pay the installment payments, thus Mobil Oil made due demands to which Dayrit acknowledged his liability. The trial court ordered the borrowers to pay the remaining balance on the loan and in case of default, the property put up as security shall be sold through foreclosure sale. The order of the court also stated that Dayrits liability shall in no case exceed 1/3 of the total obligations to Mobil Oil. Mobil Oil filed for a motion for execution, which was received by Dayrit to which he opposed. Dayrit sought for a 20-day extension, which was granted, and a second similar request was also denied. Mobil Oil sought for the writ of execution at the end of the extension period. The court denied Dayrits manifestation and motion, and the CA dismissed his petition for certiorari. Dayrit contends that since their obligation is joint, he is only liable for 1/3 of the loan. Held: Release of the mortgaged property may only be had upon full payment of the entire loan amount, secured by the said mortgage (in accordance with the ruling of the court), and Dayrit may not deposit 1/3 of the loan, and seek for the release of the entire mortgaged property. The purpose of the mortgage and loan agreement was to secure the entire loan of PhP150,000 extended by Mobil Oil. It was found that Dayrit alone benfitted from the entire loan proceeds which he paid to the Bank of the Philippine Islands directly. A mortgage directly and immediately subjects the property upon which it is imposed, the same being indivisible though the debt may be divided and such indivisibility likewise being unaffected by the fact that the debtors are not solidarily liable. Though several properties may be given, buut if it secures one debt, all of them are liable for the entire loan amount. Petition for certiorari denied. 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. (1861) Art. 2092. A promise to constitute a pledge or mortgage gives rise only to a personal action between the contracting parties, without prejudice to the criminal responsibility incurred by him who defrauds another, by offering in pledge or mortgage as unencumbered, things which he knew were subject to some burden, or by misrepresenting himself to be the owner of the same. (1862)

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