CREDIT TRANSACTIONS REVIEWER

BY: MHAY B. JUANZON

COMMODATUM

WHAT IS COMMODATUM?
Commodatum is a contract of loan whereby one of the parties delivers to
another, either something not consumable so that the latter may use the same for a
certain time and return it.

COMMODATUM VS. MUTUUM

a) As to object, as a general rule, the object in commodatum is non-consumable thing;
while in mutuum, the object is money or any consumable thing.
b) As to cause, commodatum is essentially gratuitous; whereas mutuum may or may
not be gratuitous.
c) As to purpose, commodatum is a loan for use; while mutuum is a loan for
consumption.
d) As to transmission of ownership, in commodatum, the bailor retains the ownership of
the thing loaned, whereas in mutuum, ownership passes to the debtor.
e) As to retention, in commodatum, the bailee must return the specific thing loaned,
while in mutuum, the debtor must pay or return an equal amount of the same kind
and quality.

COMMODATUM VS. LEASE

a. As to nature of the contract, commodatum is a real contract, whereas lease is a
consensual contract.
b. As to object, commodatum involves non-consumable thing, while the object in lease
may even be work or service.
c. As to cause, commodatum is essentially gratuitous, whereas lease is not gratuitous.

USUFRUCT VS. COMMODATUM

a) Usufruct is a right given to a person to enjoy the property of another with the
obligation of preserving its form and substance; while commodatum is a contract by
which one of the parties delivers to another something not consumable so that the
latter may use it for a certain time and return it.
b) In usufruct, the usufructuary gets the right to the use and to the fruits of the same,
whereas in commodatum, the bailee only acquires the use of the thing loaned but
not its fruits.
c) Usufruct may be constituted on the whole or a part of the fruits of the thing. It may
even be constituted over consumables. On the other hand, in commodatum,
consumable goods may be subject thereof only when the purpose of the contract is
not the consumption of the object as when it is merely for exhibition.

WHAT ARE THE OBLIGATIONS OF THE BAILEE?

1. EXPENSES FOR USE AND PRESERVATION

The bailee is obliged to pay for the ordinary expenses for the use and
preservation of the thing loaned. However, the bailee does not answer for the
deterioration of the thing loaned due only to the use thereof and without his fault.
2. LOSS OF THE THING
As a general rule, the bailee is not liable for loss or damage due to a fortuitous
event. The reason is that the bailor retains the ownership of the thing loaned. By
way of exceptions, the bailee is liable for the loss of the thing, even if it is due to a
fortuitous event in the following: (D-P-A-T-S)
 a) If he devotes the thing to any purpose different from that for which it has been
loaned;
b) if he keeps it longer that the period stipulated, or after the accomplishment of the
use for which the commodatum has been constituted;
c) If the thing loaned has been delivered with appraisal of its value, unless there is
a stipulation exempting the bailee from responsibility in case of a fortuitous event;
d) If he lends or leases the thing to a third person, who is not a member of his
household; and
e) If being able to save either the thing borrowed or his own thing, he chose to save
the latter.

3. RETURN OF THE THING

As a general rule, 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, by way of exceptions, the bailor may
demand the immediate return of the thing loaned in the following instances: U-P-I
a) If the bailor should have urgent need of the thing, the commodatum is suspended
while the thing is in the possession of the bailor;
b) When a contract of precarium is made;
c) If the bailee commits any act of ingratitude.

WHAT IS A CONTRACT OF PRECARIUM?

A contract of precarium is a contract of commodatum where the bailor has the
right to demand the immediate return of the thing which is the object of the contract at
will. This takes place 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 should be merely tolerated.

WHO IS LIABLE FOR ORDINARY EXPENSES FOR THE USE AND PRESERVATION
OF THE THING LOANED?
The bailee-borrower is obliged to pay for the ordinary expenses for the use and
preservation of the thing loaned because, as a rule, the borrower must take good care
of the thing with the diligence of a good father of a family.

WHO IS LIABLE FOR EXTRAORDINARY EXPENSES FOR THE PRESERVATION

OF THE THING LOANED?
Extraordinary expenses for the preservation of the thing loaned shall be borne by
the bailor-lender, since ownership of the thing loaned remains to the latter. If the
extraordinary expenses were incurred by the bailee, the bailor must refund them
provided, however, that 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.

DOES THE BAILEE HAVE THE RIGHT TO RETAIN THE THING LOANED ON THE
GROUND THAT THE BAILOR OWES HIM SOMETHING? WHEN HAS BAILEE THE
RIGHT OF RETENTION OVER THE THING LOANED?
Except for a claim of damages mentioned in Art. 1951, the borrower has no right
to retain the thing loaned as security for claims he has against the lender, even though
they may be by reason of extraordinary expenses.
 Art. 1951 speaks of the damages which the bailee may suffer by reason of the
bailor, who, knowing the flaws of the thing loaned, does not advise the bailee of the said
flaws thereby causing damages or injury to the latter.

SIMPLE LOAN/MUTUUM

WHAT IS MUTUUM OR SIMPLE LOAN?

Mutuum or simple loan is a contract of loan whereby one of the parties delivers to
another money or other consumable thing, upon the condition that the same amount of
the same kind and quality shall be paid.

MUTUUM VS. LEASE

a. As to object, simple loan involves money or any consumable thing, whereas in
lease, the object may be anything, whether movable or immovable.
b. As to ownership, in simple loan, the thing loaned becomes the property of the
debtor, while in lease, the owner does not lose his right of ownership.
c. As to relationship, in simple loan, the relationship created is that of creditor and
debtor, whereas in lease, the relationship created is that of landlord and tenant or
lessor and lessee.

BANK DEPOSIT
A bank deposit is governed by the provisions on simple loan. When a savings
account or a checking account (also known as demand deposit) is opened, a creditor-
debtor relationship ensues with the depositor as the creditor and the bank as debtor.

INTEREST
Interest shall be due only if the following concurs:
a) payment of interest is agreed upon
b) the stipulation to pay interest must be in writing
c) the rate must not be against the law or against morals and public policy
(unconscionable)

PAYABLE IN KIND
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.

LEGAL INTEREST
If there is a written agreement that interest will be paid but the rate is not
stipulated, legal interest is the conditioning rate. As per circular issued by the BSP, the
legal rate of interest now is 6% per annum even for loans or forbearance of money,
goods or credit.

ESCALATION CLAUSE
Escalation clauses are valid stipulations in commercial contracts to maintain
fiscal stability and to retain the value of money in long term contracts.

A party cannot unilaterally increase the rate of interest. Any stipulation that
allows one of the parties to unilaterally increase the interest rate is not valid. Any
increase in the rate of interest made pursuant to an escalation clause must be the result
of an agreement between the parties.

PAYMENT BY MISTAKE
If the borrower pays interest when there has been no stipulation therefor, the
provisions of the Civil Code concerning solutio indebiti, or natural obligations, shall be
applied, as the case may be.
COMPOUNDING INTEREST (INTEREST ON INTEREST)
The general rule is that interest due and unpaid shall not earn interest, except in
the following cases:
a) upon judicial demand
b) when the compounding interest is agreed upon.

USURY LAW
Usury is legally non-existent now because, although Act No. 2626 as amended is
still good law, the BSP lifted the ceiling on interest rate. Hence, there is no more
usurious rate of interest at this time.

DEPOSIT

WHAT IS A CONTRACT OF DEPOSIT?

A contract of deposit is constituted from the moment a person receives a thing
belonging to another, with the obligation of safely keeping it and of returning the same.
If the safekeeping of the thing delivered is not the principal purpose of the contract,
there is no deposit but some other contract.

DEPOSITUM VS. COMMODATUM

a. As to purpose, the main purpose of depositum is the safekeeping of the thing, while
in commodatum, the main purpose is the use of the thing.
b. As to object, the object in depositum is immaterial, whereas in commodatum, as a
general rule, the object must be a non-consumable thing.
c. As to cause, depositum may or may not be gratuitous, while commodatum is always
gratuitous.
d. As to constitution, depositum may be constituted judicially or extra-judicially,
whereas commodatum can be constituted extra-judicially only.

WHAT ARE THE TWO KINDS OF DEPOSIT?

A deposit may be constituted judially or extrajudicially.
a) JUDICIAL DEPOSIT – a judicial deposit or sequestration takes place when an
attachment or seizure of property in litigation is ordered by the court.
b) EXTRAJUDICIAL DEPOSIT – an extrajudicial deposit is either voluntary or
necessary.

EXTRAJUDICIAL DEPOSIT VS. JUDICIAL DEPOSIT

a. As to cause or origin, extra-judicial is constituted by will of the contracting parties,
while judicial is constituted by virtue of a court order.
b. As to subject matter, extrajudicial involves movable property, whereas in judicial the
object may either be movable or immovable property.
c. As to purpose, the purpose of extrajudicial deposit is the safekeeping of the thing
deposited, while the main purpose of judicial deposit is to secure or protect the
owner’s right.
d. As to remuneration, extrajudicial may be compensated or not, but generally
gratuitous, whereas judicial is always onerous.
e. As to whose behalf it is held, extrajudicial is in behalf of the depositor or third person
designated, while judicial is in behalf of the person who, by the judgment, has a
right.

WHAT ARE THE CLASSIFICATIONS OF EXTRAJUDICIAL DEPOSIT?

An extrajudicial deposit is either voluntary or necessary.
a) VOLUNTARY DEPOSIT – is one wherein the delivery is made by the will of the
depositor.
b) NECESSARY DEPOSIT – a deposit is necessary when: 1) it made in compliance
with a legal obligation; 2) when it takes place on the occasion of any calamity, such
as fire, storm, flood, pillage, shipwreck, or other similar events; 3) made by travellers
in hotels and inns; and 4) by travellers with common carriers.

I. VOLUNTARY DEPOSIT

Rules on Capacity of Depositary and Depositor

a) Depositor, Incapacitated; Depositary, Capacitated
 Depositary is subject to all the obligations of a depositary whether or not the
depositor is capacitated
 Depositary must return the thing to the legal representative of the incapacitated
or to the depositor himself if she should acquire capacity

b) Depositary Incapacitated; Depositor Capacitated

 The depositor shall only have an action to recover the thing deposited while it is
still in the possession of the depository
 The depositor may compel the depositary to pay him the amount by which he
may have enriched or benefited himself with the thing or its price
 If a third person has already acquired the thing deposited in bad faith, the
depositor may bring an action against the said third person for its recovery

OBLIGATIONS OF THE DEPOSITARY

1. To hold the thing and keep it safe through the exercise of due diligence
2. To return the thing when required to the depositor or the latter’s heirs or
successors (Note: the thing deposited shall be returned with all its products,
accessories and accessions)
3. To be liable for the loss of the thing through his fault or negligence
4. Not to deposit the thing with a third person, unless allowed through stipulation
(Note: Even if allowed, the depositary should not deposit it with a person who is
manifestly careless or unfit otherwise he or she is still liable)
5. Not to change the way of the deposit (Except: If under the circumstances he may
reasonably presume that the depositor would consent to the change if he knew of
the facts of the situation)
6. Not make use of the thing deposited without the express permission of the
depositor. Otherwise, he shall be liable for damages (Except: When the
preservation of the thing deposited requires it use, it must be used but only for that
purpose) (Note: When the depositary has permission to use the thing deposited, the
contract loses the concept of a deposit and becomes a loan or commodatum, except
where safekeeping is still the principal purpose of the contract. The permission shall
not be presumed, and its existence must be proved).
7. To be liable for the loss of the thing through a fortuitous event in the following
cases:
a) If it is so stipulated;
b) If he uses the thing without the depositor’s permission;
c) If he delays its return;
d) If he allows others to use it, even though he himself may have been authorized to
use the same.
8. The depositary cannot demand that the depositor prove his ownership of the
thing deposited
 Nevertheless, should he discover that the thing has been stolen and who its true
owner is, he must advise the latter of the deposit. If the owner, in spite of such
information, does not claim it within the period of one month, the depositary shall
be relieved of all responsibility by returning the thing deposited to the depositor.
 If the depositary has reasonable grounds to believe that the thing has not been
lawfully acquired by the depositor, he may return the thing deposited.
9. For a depositary holding certificates, bonds, securities, or instruments which
earn interest, the depositary is obliged to:
a. collect the interest when it becomes due; and
b. take such steps as may be necessary in order that the securities may preserve
their value and the rights corresponding to them according to law.

OBLIGATIONS OF THE DEPOSITOR

1. To pay the consideration if the deposit is not gratuitous
2. If the deposit is gratuitous, to reimburse the depositary for the expenses he may
have incurred for the preservation of the thing deposited
3. To reimburse the depositary for any loss arising from the character of the thing
deposited, unless at the time of the constitution of the deposit the former was not
aware of, or was not expected to know the dangerous character of the thing, or
unless he notified the depositary of the same, or the latter was aware of it without
advice from the depositor

RIGHT OF RETENTION
The depositary may retain the thing in pledge until the full payment of what may
be due him by reason of the deposit.

EXTINGUISHMENT OF DEPOSIT
A deposit is extinguished:
1. Upon the loss or destruction of the thing deposited;
2. In case of a gratuitous deposit, upon the death of either the depositor or the
depositary.

II. NECESSARY DEPOSIT

A. DEPOSIT MADE IN COMPLIANCE WITH LEGAL OBLIGATION

1. The judicial deposit of a thing, the possession of which is being disputed in litigation
by two or more persons (Art. 538)
2. The deposit of a thing pledged when the creditor uses the same without the authority
of the owner or misuses it in any other way (Art. 2104)
3. Those required in suits as provided in the Rules of Court; and
4. Those constituted to guarantee contracts with the government. In this last case, the
deposit arises from an obligation of public or administrative character.

B. DEPOSIT MADE ON THE OCCASION OF A CALAMITY

Aside from the provisions concerning voluntary deposit, this kind of deposit shall
be governed by Art. 2168 which reads: “When during a fire, flood, storm, or other
calamity, property is saved from destruction, by another person without the knowledge
of the owner, the latter is bound to pay the former just compensation.”

C. DEPOSIT OF EFFECTS MADE BY TRAVELLERS IN HOTELS OR INNS

The keepers of hotels or inns shall be responsible for the effects deposited by
travellers provided:
a. Notice was given to them or to their employees, of the effects brought by the guests;
and
b. that, on the part of the guests, they take the precautions which said hotel-keepers or
their substitutes advised relative to the care and vigilance of their effects.

VEHICLES
The hotel-keeper is liable for the vehicles, animals and articles which have been
introduced or placed in the annexes of the hotel.
LIABILITY OF ACTS OF SERVANTS AND EMPLOYEES
The hotel or inn keepers shall be liable for the loss or, or injury to the personal
property of the guests caused by the servants or employees of the keepers of hotels or
inns as well as the stranger but not that which may proceed from any force majeure.

THIEF AND ROBBER

The act of a thief or robber, who has entered the hotel is not deemed force
majeure. Hence, the hotel is liable for the loss of the thing deposited due to robbery or
theft. However, the act of a thief or robber is a defense if it is done with the use of arms
or through an irresistible force. In this case, the depositary is not liable under this
exception.

ACTS OF GUEST, HIS FAMILY, SERVANTS OR VISITORS

The hotel-keeper is not liable for compensation if the loss is:
a) Due to the acts of the guest, his family servants or visitors; or
b) If the loss arises from the character of the tings brought into the hotel.

PROHIBITED ACTS
The hotel-keeper cannot free himself from responsibility by posting notices to the
effect that he is not liable for the articles brought by the guest. Any stipulation between
the hotel-keeper and the guest whereby the responsibility of the former is suppressed or
diminished shall be void. The reason for this is that the hotel business is imbued with
public interest.

Catering to the public, hotel-keepers are bound to provide not only lodgings for
hotel guests and security to their persons and belongings. The twin duty constitutes the
essence of the business. The law in turn does not allow such duty to the public to be
negated or diluted by any contrary stipulation. Thus, the hotel-keeper is liable even it if
made its guest sign an “Undertaking” to release and hold free and blameless the hotel-
keeper from any liability from any loss of the deposit box where the properties of the
guest was kept (the contents of which were taken by unauthorized persons).

HOTEL-KEEPER’S RIGHT OF RETENTION

The hotel-keeper has a right to retain the things brought into the hotel by the
guest, as a security for credits on account of lodging, and supplies usually furnished to
hotel guests.

GUARANTY and SURETYSHIP

WHAT IS GUARANTY?
By guaranty, a person, called the guarantor, binds himself to the creditor to fulfil
the obligation of the principal debtor in case the latter should fail to do so.

WHAT IS SURETYSHIP?
Suretyship is an agreement whereby a party called the surety guarantees the
performance by another party called the principal or obligor of an obligation or
undertaking in favour of a third party called the obligee.

GUARANTY VS. SURETYSHIP

a. The liability of the guarantor is subsidiary, whereas the liability of the surety is
primary.
b. The guarantor assumes liability by virtue of an independent agreement to pay the
obligation if the principal debtor fails to do so, while the surety assumes liability as a
regular party to the undertaking or contract.
c. The liability of a guarantor is collateral, whereas the liability of a surety is original.
d. A guarantor is the insurer of the solvency of the debtor, while a surety is the insurer
of the debt.
e. A guarantor can avail himself of the benefit of excussion and of division if the
creditor proceeds against him for payment of the obligation, whereas a surety
cannot.

WHAT ARE THE KINDS OF GUARANTY?

1. Conventional – by agreement of the parties
2. Legal – imposed by law
3. Judicial – constituted by court
4. Gratuitous
5. Onerous
6. Definite – secures the principal obligation only
7. Indefinite or Simple

QUALIFICATIONS OF GUARANTOR
1. The guarantor must possess integrity
2. He must have capacity to bind himself
3. He must have sufficient property to answer for the obligation which he guarantees.

MAY A MARRIED WOMAN GUARANTEE AN OBLIGATION WITHOUT THE

HUSBAND’S CONSENT?
A married woman may guarantee an obligation without the husband’s consent,
but shall not thereby bind the community or conjugal partnership, except in cases
provided by law.

A married woman who acts as guarantor ordinarily binds only her separate
property. However, she may also bind the community or conjugal partnership with her
husband’s consent, and even without the consent of her husband, in cases provided by
law, such as when the guaranty has redounded to the benefit of the family.

CAN A GUARANTY EXIST WITHOUT A VALID OBLIGATION?

A guaranty cannot exist without a valid obligation. Nevertheless, a guarantry
may be constituted to guarantee the performance of a voidable or an unenforceable
contract. It may also guarantee a natural obligation.

A guaranty is an accessory contract. It is an indispensable condition for its

existence that there must be a principal obligation. So if the principal obligation is void,
it is also void.

A guaranty may secure the performance of a:

1) voidable contract unless it is annulled by proper court action;
2) enforceable contract because such contract is not void;
3) natural obligation so that the creditor may proceed against the guarantor
although he has no right of action against the principal debtor for the reason that
the latter’s obligation is not civilly enforceable in court.

MAY GUARANTY ALSO BE GIVEN AS SECURITY FOR FUTURE DEBTS?

A guaranty may also be given as security for future debts, even it the amount is
not yet known, but there can be no claim against the guarantor until the amount of the
debt is ascertained or fixed and demandable. The reason is that the contract of
guaranty is subsidiary.

WHAT IS THE EXTENT OF LIABILITY OF THE GUARANTOR?

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.
MAY A CONTRACT OF GUARANTY BE PRESUMED?
As a contract, guaranty requires the expression of consent on the part of the
guarantor to be bound. It cannot be presumed because of the existence of a contract or
principal obligation. It must not only be express but must also be reduced to writing. A
contract of guaranty falls under the Statute of Frauds since it is a special promise to
answer for the debt, default or miscarriage of another.

WHAT IS THE RIGHT OF THIRD PERSON WHO PAYS FOR THE GUARANTY?
The rights of a third person who pays or performs the obligation of the debtor and
one who guarantees the obligation of the debtor are similar. Hence, the rule on
payment applies.

Thus, a person who pays without the knowledge or against the will of the debtor,
can recover only insofar as the payment has been beneficial to the debtor, and he
cannot compel the creditor to subrogate him in his (creditor’s) rights.

If he became a guarantor with the knowledge or consent of the debtor, he is

subrogated by virtue of the payment to all the rights which the creditor had against the
debtor.

WHAT ARE THE LIABILITY OF THE GUARANTOR WHERE GUARANTY IS

DEFINITE OR INDEFINITE?
In definite guaranty, the obligation of the guarantor is limited in whole or in part
to the principal debt, to the exclusion of the accessories. Thus, if the amount to be paid
or the service to be performed by the person guaranteed is specified in a contract, then
the obligation of the guarantor extends no further than the sum or service so specified.

In indefinite or simple guaranty, if the terms of the contract do not specify in

clear and express manner that liability of the guarantor is limited to the principal
obligation, in whole or in part, it extends not only to the said principal obligation but also
to all its accessories, they being comprehended within the principal.

WHAT IS MEANT BY THE BENEFIT OF EXCUSSION OR EXHAUSTION?

The benefit of excussion or exhaustion refers to the right by which such
guarantor cannot be compelled to pay the creditor unless:
1. the creditor has exhausted all the property of the debtor; and
2. the creditor has resorted to all the legal remedies against the debtor.

WHEN THE BENEFIT OF EXCUSSION IS NOT AVAILABLE

The benefit of excussion shall not take place in the following instances:
E-S-I-A-E-S-P-B-S-D (BASIS SPEED)

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;
6. If the guarantor did not set it up against the creditor upon the latter’s demand for
payment from him; and
7. If the guarantor did not point out to the creditor available property of the debtor
within the Philippine territory, sufficient to cover the amount of the debt;
8. If the guarantor is a judicial bondsman;
9. If a pledge or mortgage has been given by him as a special security; and
10. If he fails to interpose it as a defense before judgment is rendered against him.
WHEN GUARANTOR MAY MAKE USE OF THE BENEFIT OF EXCUSSION
In order that the guarantor may make use of the benefit of excussion:
1) He must set it up against the creditor upon the latter’s demand for payment from
him; and
2) Point out to the creditor available property of the debtor within Philippine territory,
sufficient to cover the amount of the debt.

EFFECT OF COMPROMISE BETWEEN CREDITOR AND PRINCIPAL DEBTOR

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.

WHAT ARE THE EFFECTS OF GUARANTY BETWEEN THE DEBTOR AND THE
GUARANTOR?
1. The guarantor who pays for a debtor must be indemnified by the latter. The
indemnity comprises:
a) the total amount of the debt;
b) 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;
c) the expenses incurred by the guarantor after having notified the debtor that
payment had been demanded of him;
d) damages, if they are due.
2. 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 had really paid.
3. If the guarantor pays without notifying the debtor, the latter may enforce against him
all the defences which he could have set up against the creditor at the time the
payment was made.
4. If the guarantor paid the debt 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.
5. 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.

WHEN THE GUARANTOR MAY PROCEED AGAINST THE DEBTOR EVEN BEFORE
PAYMENT?
As a general rule, the guarantor has no cause of action against the debtor until
after the former has paid the obligation. The following are the exceptions when the
guarantor may proceed against the debtor even before payment. (S-I-B-E-T-A-I)

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;
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.
BENEFIT OF DIVISION
The obligation is divided among the co-guarantors if the following are present:
1. there are several guarantors or only one debtor;
2. they are guarantors of the same debt.

BENEFIT OF CONTRIBUTION
A co-guarantor or co-surety, being joint debtors, need not pay the entire
obligation. If one of the guarantors will pay, he or she may demand reimbursement
from the other co-guarantors the latter’s proportional shares if:
1. the payment has been made by virtue of a judicial demand; or
2. the principal debtor is insolvent.

EXTINGUISHMENT OF GUARANTY
The guaranty may be extinguished together with the principal obligation or even if
the principal obligation subsists in certain cases. Guaranty is extinguished if:
1. the principal obligation is extinguished for the same causes as all other obligations in
general such as payment or performance, loss of the thing due, condonation or
remission of debt, confusion or merger of right of the creditor and debtor,
compensation and novation; or
2. the guaranty is extinguished in the following cases:
e) 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.
f) A release made by the creditor in favour 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.
g) An extension granted to the debtor by the creditor without the consent of the
guarantor extinguishes the guaranty.
h) The guarantors, even though they be solidary, are released for their obligation
whenever by some act of the creditor they cannot be subrogated to the rights,
mortgages, and preference of the latter.

PLEDGE, MORTGAGE, ANTICHRESIS

DEFINE PLEDGE?
Pledge is an accessory contract by virtue of which personal proepryt is delivered
to the creditor as a security for an obligation with the agreement that it can be sold at
public auction in case of non-payment to answer for the unpaid obligation or for the
creditor to return the same in case the principal obligation is paid.

DEFINE MORTGAGE
is a contract whereby the debtor secures to the creditor the fulfilment of a
principal obligation, especially subjecting to such security, immovable property or real
rights over immovable property in case the principal obligation is not complied with at
the time stipulated.

REQUISITES OF CONTRACTS OF PLEDGE AND MORTGAGE

1. Must be constituted to secure the fulfilment of a principal obligation;
2. The pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;
3. 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;
4. When the principal obligation becomes due, the things in which the pledge or
mortgage consists may be alienated for the payment of the creditor.
PLEDGE VS. MORTGAGE
1. Pledge is constituted on movables, while mortgage on immovables.
2. In pledge, the property is delivered to the pledge, or by common consent to a third
person, whereas in mortgage, delivery is not necessary.
3. Pledge is not valid against third persons unless a description of the thing pledged
and the date of the pledge appear on a public instrument, while mortgage is not valid
against third persons if not registered.

WHAT IS PACTUM COMMISSORIUM?

It is a stipulation whereby the thing pledged or mortgaged shall automatically
become the property of the creditor in the event of non-payment of the debt within the
term fixed. It is forbidden by law and declared as null and void. The stipulation does
not affect the principal contract of pledge or mortgage itself which remains valid; only
the stipulation is void.

INDIVISIBILITY OF CONTRACT OF PLEDGE or MORTGAGE

General Rule: A pledge or mortgage is indivisible as to the contracting parties and the
rule applies even if the obligation is joint and not solidary. As a consequence of this
indivisibility, the debtor’s heir who has paid a part of the debt cannot ask for the
proportionate extinction of the pledge or mortgage not can the creditor’s heir who has
received his share of the debt return the pledge or cancel the mortgage if the debt is not
completely satisfied.
Exception: Where there are several things given in pledge or mortgage and each one
of them guarantees only a determinate portion of the credit.

WHAT ARE THE OBLIGATIONS THAT CAN BE SECURED BY PLEDGE OR

MORTGAGE?
Any kind of obligation, whether pure or conditional, may be secured by a contract
of pledge or mortgage. The same applies to guaranty, which may also secure a
conditional obligation.

A promise to constitute a pledge or mortgage, if accepted gives rise only to a

personal right binding upon the parties and creates no real right in the property. In other
words, what exists is only a right of action to compel the fulfillment of the promise but
there is no pledge or mortgage yet.

Estafa is committed by a person who, pretending to be the owner of any real

property, shall convey, sell, encumber or mortgage the same or knowing that the real
property is encumbered shall dispose of the same as unencumbered.

I. PLEDGE
 Even if all the essential requisites provided in Arts. 2085 and 2093 are present, the
contract of pledge is not effective against third person, unless in addition to delivery
of the thing pledged, it is embodied in a public instrument wherein shall appear: 1)
the description of the thing pledge; 2) the date of the pledge.
 The pledgor retains his ownership of the thing pledged. He may sell the same
provided the pledgee consents to the sale. As soon as the pledgee gives his
consent, the ownership of the thing pledged is transferred to the vendee subject to
the rights of the pledgee, namely, that the thing sold may be alienated to satisfy the
obligation and that the pledgee must continue in possession during the existence of
pledge.
 The possession of the pledge constitutes his security. Hence, the debtor cannot
demand its return until the debt secured by it is paid. But the right of retention is
limited only to the fulfilment of the principal obligation for which the pledge was
created.
 Upon fulfilment of the principal obligation, the pledgee must return the thing pledged.
 Having possession of the property, the pledgee has the obligation to take care of the
thing with the diligence of a good father of the family. He is, however, entitled to
reimbursement of the expenses incurred for its preservation.
 In case of loss of deterioration of the thing due to fortuitous event, the pledgee
cannot be held responsible but he is liable for loss or deterioration by reason of
fraud, negligence, delay or violation of the terms of the contract.
 The pledgee is entitled to retain the possession of the thing pledged until the debt is
paid, but is not authorized to transfer possession to a third person, unless otherwise
stipulated to do so.
 The pledgee is responsible for the acts of his agents or employees with respect to
the thing pledged because their acts are, in legal effect, deemed his.
 The pledgee has no right to use the thing pledged or to appropriate the fruits thereof
without the authority of the owner.
 The pledgee can apply the fruits, income, dividends or interest earned or produced
by the thing pledged to the payment of interest, if owing, and thereafter to the
principal of his credit..
 Unless there is a stipulation to the contrary, the interest and earnings of the right
pledged and in case of animals, their offsprings, are included in the pledge.
 As a general rule, the pledgor cannot ask for the return of the thing pledged until the
principal obligation is fully paid including the interest due thereon. As an exception
to the rule, the pledgor is allowed to substitute the thing pledged which is in danger
of destruction or impairment with another thing of the same kind and quality.
 The possession of the thing pledged by the debtor or owner subsequent to the
perfection of the pledge gives rise to a prima facie presumption tht the thing has
been returned and, therefore, the pledge has been extinguished.

WHEN THE PLEDGOR MAY ASK THE THING PLEDGED BE DEPOSITED

JUDICIALLY OR EXTRAJUDICIALLY
1. If the creditor uses the thing without authority
2. If he misuses the thing in any other way; or
3. If the thing is in danger of being lost or impaired because of the negligence or
wilful act of the pledgee.

EXTINGUISHMENT OF PLEDGE
1. If the thing pledged is returned by the pledgee to the pledgor or owner and any
stipulation to the contrary shall be void.
2. A statement in writing that he renounces or abandons the pledge is sufficient to
extinguish the pledge.

RIGHT OF THE PLEDGEE TO CAUSE SALE OF THE THING PLEDGE

1. The debt is due and unpaid
2. The sale must be at public auction
3. There must be notice to the pledgor and owner, stating the amount due; and
4. The sale must be made with the intervention of a notary public.

RIGHT OF PLEDGEE TO APPROPRIATE THE THING PLEDGED

The pledgee may appropriate the thing pledged if after the first and second
auctions, the thing is not sold. If the creditor appropriates the thing, it shall be
considered as full payment for his entire claim. He is thus obliged to give an
acquittance for the same.

The debtor is not entitled to the excess in case the value of the thing pledged is
more than the principal obligation.
RIGHT OF PLEDGOR AND PLEDGEE TO BID AT PUBLIC SALE
If the debt is not paid and a public sale takes place, both the pledgor and the
pledgee may bid. The pledgor shall be preferred if he offers the same terms as the
highest bidder, for after all, the thing belongs to him. To avoid fraud, the pledgee is not
allowed to acquire the thing pledged if he is the only bidder.

EFFECT OF SALE OF THING PLEDGED

The sale of the thing pledged extinguishes the principal obligation whether the
price of the sale is more or less than the amount due.
1) If the price of the sale is more than the amount due, the debtor is not entitled to
the excess unless the contrary is provided.
2) In the same way, if the price of the sale is less, neither is the creditor entitled to
recover the deficiency. A contrary stipulation is void.

II. REAL MORTGAGE

ESSENTIAL REQUISITES OF MORTGAGE

In order that a mortgage may be validly constituted, it is indispensable that if
appears in a public document duly recorded in the Registry of Property. If the
instrument of mortgage is not recorded, the mortgage is nevertheless binding between
the parties. Registration is necessary only to affect third persons.

EFFECT OF MORTGAGE
A mortgage creates a real right which is enforceable against the whole world. It
follows the property wherever it goes.

The mortgage, however, is merely an encumbrance upon the property and does
not extinguish the title of the debtor who does not lose his principal attribute as owner,
that is the right to dispose.
 The mortgage credit may be alienated or assigned to a third person, in whole or in
part, with the formalities required by law.
 The creditor may claim from a third person in possession of the mortgaged property,
the payment of the part of the credit secured by the property which said third person
possesses, in the terms and with the formalities which the law establishes.
 A stipulation forbidding the owner for alienating the immovable mortgaged shall be
void.

FORECLOSURE – is the remedy available to the mortgagee by which he subjects the

mortgaged property to the satisfaction of the obligation to secure which the mortgage
was given through the sale of the property at public auction and the application of the
proceeds thereof to the payment of his claim.

REDEMPTION – a transaction by which the mortgagor-owner of mortgaged property

reacquires or buys back the property within a certain period and for a certain amount
after his default or after the foreclosure sale of the property for the satisfaction of the
mortgaged debt.

KINDS OF REDEMPTION
1. EQUITY OF REDEMPTION – the right of the mortgagor to redeem the mortgaged
property after his default in the performance of the conditions of the mortgage but
before the sale of the mortgaged property. In judicial foreclosure, the mortgagor
may exercise his equity of redemption before but not after the sale is confirmed by
the court.
2. RIGHT OF REDEMPTION – the right of the mortgagor to redeem the mortgaged
property within a certain period after it was sold for the satisfaction of the
MORTGAGEE IN GOOD FAITH
General Rules: A mortgagee has the right to rely on the face of the title. A mortgagee
without notice will not be affected by the claim of third persons.
Exception: Banks cannot rely merely on the title. By the nature of their functions,
banks are required to go beyond the title because they are required to exercise the
highest degree of diligence. They are required to investigate the title and the property.

BLANKET MORTGAGE or DRAGNET CLAUSE

A blanket clause also known as a dragnet clause is one that is specifically
phrased to subsume all debts of past or future origin. It is a continuing security. A
mortgage with a dragnet clause makes available future loans without need of executing
another set of security documents.

III. CHATTEL MORTGAGE

DEFINE CHATTEL MORTGAGE

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

PUBLIC INSTRUMENT
The chattel mortgage must be registered in the Chattel Mortgage Register of the
Register of Deeds where the mortgagor resides or if he resides in the Philippines in the
place where the property is situated. An unregistered mortgage is binding between the
parties but not on third persons.

Even in the absence of the affidavit, the chattel mortgage is valid as between the
parties. However, if it not valid as to third persons including other creditors or
mortgagees.

RIGHT OF REDEMPTION
There is no right of redemption after the foreclosure sale, there is only equity of
redemption before foreclosure.

DEFICIENCY AFTER FORECLOSURE

After foreclosure, the mortgagee may generally recover any deficiency that may
result after applying the proceeds of the foreclosure sale to the obligation. Except,
when the transaction secured is sale of personal property on installment basis under
Art. 1484 of the Civil Code, also known as Recto Law.

IV. ANTICHRESIS

DEFINE ANTICHRESIS
It is an accessory agreement whereby the creditor acquires the right to receive
the fruits of an immovable of his debtor, with the obligation to apply them to the payment
of the interest, if owing, and thereafter to the principal of his credit.

FORMALITIES
The agreement must be in writing. The amount of the principal and of the
interest shall be specified in writing, otherwise, the contract of antichresis shall be void.

OBLIGATIONS OF THE ANTICHRETIC CREDITOR

1. To pay the taxes and charges upon the estate, unless there is a stipulation to the
contrary – to be deducted from fruits.
2. To bear the expenses necessary for its preservation and repair – to be deducted
from the fruits.
REMEDIES OF THE ANTICHRETIC CREDITOR
In case of non-payment within the period agreed upon, the creditor may:

1) Abandon the security and file an action for specific performance; or

2) Petition the court for the payment of the debt or the sale of the real property, the
Rules of Court on the foreclosure of mortgages shall apply.

BAR QUESTIONS

COMMODATUM

1. A, upon request, loaned his passenger jeepney to B to enable B to bring his

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

ANSWER:
a) The contract that was entered by A and B is commodatum. Commodatum is
a contract by which one of the parties delivers to another something not
consumable so that the later may use it for a certain time and return it.
b) No, B is not obliged to pay A for the use of the passenger jeepney because
commodatum is essentially gratuitous.
c) Yes, B is liable for the loss of the jeepney because he devoted the thing to a
purpose different from that for which it has been loaned.

2. Distinguish usufruct from commodatum and state whether these may be

constituted over consumable goods.

ANSWER:
1. Usufruct is a right given to a person to enjoy the property of another with the
obligation of preserving its form and substance; while commodatum is a
contract by which one of the parties delivers to another something not
consumable so that the latter may use it for a certain time and return it.
2. In usufruct, the usufructuary gets the right to the use and to the fruits of the
same, whereas in commodatum, the bailee only acquires the use of the thing
loaned but not its fruits.
3. Usufruct may be constituted on the whole or a part of the fruits of the thing. It
may even be constituted over consumables. On the other hand, in
commodatum, consumable goods may be subject thereof only when the
purpose of the contract is not the consumption of the object but when it is
merely for exhibition.
3. Before he left for Riyadh to work as a mechanic, Pedro left his Adventure van
with Tito, with the understanding that the latter could use it for one year for
his personal or family use while Pedro works in Riyadh. He did not tell Tito that
te brakes of the van were faulty. Tito had the van tuned up and the brakes
repaired. He spent a total amount of P15,000.00. After using the vehicle for
two weeks, Tito discovered that it consumed too much fuel. To make up for
the expenses, he leased it to Annabelle.

Two months later, Pedro returned to the Philippines and asked Tito to return
the van. Unfortunately, while being driven by Tito, the van was accidentally
damaged by a cargo truck without his fault.

a) Who shall bear the P15,000.00 spent for the repair of the van? Explain.
b) Who shall bear the costs for the van’s fuel, oil and other materials while it
was with Tito? Explain.
c) Does Pedro have the right to retrieve the van even before the lapse of
one year? Explain.
d) Who shall bear the expenses for the accidental damage caused by the
cargo truck, granting that the truck driver and the truck owner are
insolvent? Explain.

ANSWER:
a) Tito must bear the P15,000.00 expenses for the van.

While the rule provides that generally extraordinary expenses for the
preservation of the thing loaned are paid by the bailor, he being the owner of
the thing loaned, it is likewise provided as an exception to the rule that the
bailee could refund from the bailor the extraordinary expenses he spent for the
preservation of the thing loaned provided that he first 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.

In this case, Tito did not inform Pedro before he incurred the extraordinary
expenses, neither was the repair shown to be urgent. Hence, Tito must bear the
P15,000.00 extraordinary expenses spent for the preservation of the van.

b) Tito must also pay for the ordinary expenses for the use and preservation of
the van. The Civil Code provides that the bailee is obliged to pay for the
ordinary expenses for the use and preservation of the thing loaned.

c) No, Pedro does not have the right to retrieve the van before the lapse of one
year.

As a general rule, 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, except when he should
have an urgent need of the thing, when a contract of precarium was entered, or
if the bailee commits any acts of ingratitude. Not one of the situations is present
in this case, hence, Pedro cannot retrieve the van before the lapse of one year.
d) Generally, extraordinary expenses arising on the occasion of the actual use
of the thing loaned by the bailee, even if incurred without the fault of the
bailee, shall be shouldered equally by the bailor and the bailee. However, if
Pedro had an urgent need of the van, Tito would be in delay for failure to
immediately return the same, then Tito would be held liable for the
extraordinary expenses.

SIMPLE LOAN/MUTUUM

1. Samuel borrowed P300,000 housing loan from the bank at 18% per annum
interest. However, the promissory note contained a proviso that the bank
“reserves the right to increase within the limits allowed by law.” By virtue of
such proviso, over the objections of Samuel, the bank increased the interest
rate periodically until it reached 48% per annum. Finally, Samuel filed an
action questioning the right of the bank to increase the interest rate up to
48%. The bank raised the defense that the Central Bank of the Philippines
had already suspended the Usury Law. Will the action prosper or not? Why?

ANSWER:
The action of Samuel will prosper. The increase of interest to 48% is void
for two reasons.

First, the bank cannot unilaterally increase the rate of interest. The law
does not authorize a unilateral increase of the interest rate by one party without
the other’s consent. To say otherwise will violate the principle of mutuality of
contracts under the Civil Code. Hence, any increase in the rate of interest
should be with the consent of Samuel. Secondly, even if there is an agreement,
the 48% interest is unconscionable, hence, it is void for being contrary to morals
and public policy.

2. Carlos sues Dino for a collection on a promissory note for a loan, with no
agreement on interest, on which Dino defaulted and damages caused by
Dino on his priceless Michangelo painting, on which Dino is liable on the
promissory note and awards damages to Carlos for the damaged painting,
with interests for both awards. What rates of interest may the court impose
with respect to both awards? Explain.

ANSWER:
With respect to the collection of money or promissory note, it being a
forbearance of money, the legal rate of interest for having defaulted on the
payment, the 12% interest rate will apply. With respect to the damages to the
painting, it is 6% per annum from the time of the final demand up to the time of
finality of judgment until judgment credit is fully paid. The court considers the
latter as forbearance of money.

3. The parties in a contract of loan of money agreed that the yearly interest
rate is 12% and it can be increased if there is a law that would authorize the
increase of interest rates. Suppose OB, the lender, would increase by 5% the
rate of interest to be paid by TY, the borrower, without a law authorizing such
increase, would OB’s action be just and valid? Why? Has TY a remedy
against the imposition of the rate increase? Explain.
ANSWER:
The increase rate is not just and valid. Unilateral increase of interest by 5%
is not allowed under the law. The act of OB violates the principle of mutuality of
contracts; the terms and conditions of the contract must be agreed upon by the
parties and cannot be changed except by mutual agreement. Furthermore,
even if there was a law authorizing the increase in interest rate, the stipulation is
still void because there is no corresponding stipulation to decrease the interest
due when the law reduces the rate of interest.

4. In a contract of loan payable in five years, the parties agreed in writing that
the interest for the first three years is 12% per annum and the interest for the
last two years is 15% per annum. Is the agreement regarding the increase of
interest valid?

ANSWER:
Yes, the agreement that the interest rate will increase to 15% is valid. This
rate was fixed by mutual agreement of the parties when they entered into the
contract of loan. This is not a case of unilateral increase of the rate of interest. In
addition, it appears that the rate of interest is reasonable and not conscionable.

5. Siga-an granted a loan to Villanueva in the amount of P540,000.00. Such

agreement was not reduced to writing. Siga-an demanded interest which
was paid by Villanueva in cash and checks. The total amount Villanueva
paid accumulated to P1,200,000.00. Upon advice of her lawyer, Villanueva
demanded for the return of the excess amount of P660,000.00 which was
ignored by Siga-an.
a) Is the payment of interest valid? Explain.
b) Is solutio indebiti applicable? Explain.

ANSWER:
a) No, the payment of interest is not valid. The Civil Code provides that no
interest shall be due unless it has been expressly stipulated in writing.
b) Yes, solutio indebiti is applicable because Villanueva overpaid by
P660,000.00 representing interest payment which is not due. He can,
therefore, demand its return.

6. What is the effect of a loan that is usurious? Explain.

ANSWER:
The entire obligation in usurious loans does not become void because of
an agreement for usurious interest. The unpaid debt still remains valid but not
the stipulation as to the interest. In a number of cases, it has been held that in
simple loan with 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 lies only as to the prestation to pay the stipulated interest. Hence,
being separable, only the latter should be deemed void, since it is only one that
is illegal.

DEPOSIT

1. Distinguish between extra-judicial and judicial deposits?

ANSWER:
The two may be distinguish from each other in the following ways:

a) The first is constituted by will of the contracting parties, while the second is
constituted by virtue of a court order;
b) In the first, the object must be movable property, whereas in the second, the
object may be either movable or immovable property;
c) The purpose of the first is the safekeeping of the thing deposited, whereas the
main purpose of the second is to secure or protect the owner’s right;
d) The first is, as a general rule, gratuitous, while the second is always onerous;
e) In the first, the depositary is obliged to return the thing deposited upon
demand made by the depositor, whereas in the second, the thing shall be
delivered only upon order of the court.

2. Would you consider deposits of money in banks and similar institutions, such
as savings deposits and current account deposits, contracts of depositum or
mutuum? Explain your answer.

ANSWER:
I would consider deposits of money in banks and similar institutions, such
as savings deposits and current account deposits as contracts of mutuum. This is
clear from Art. 1980 of the Civil Code which states that fixed, savings and current
deposits of money in banks and similar institutions shall be governed by the
provisions of the Civil Code concerning simple loan.

3. A deposited P10,000 in his current account with X Bank. Subsequently, the

Bank was declared insolvent. During the insolvency proceeding, A
intervened claiming that the P10,000 deposited doest not constitute a part of
the assets of the Bank that will be placed in the possession of the receiver or
assignee because he is still the owner thereof. Shall A’s claim prosper?
Reasons.

ANSWER:
No, A’s claim shall not prosper. This is so, because when A deposited the
P10,000 in his current account with the Bank the contract that was perfected was
a contract of simple loan and not a contract of depositum. Hence, the
relationship between A and X Bank is that of a creditor and debtor.
Consequently, the ownership of the amount deposited was transmitted to the
Bank upon the perfection of the contract.

4. Suppose that in the above problem, the P10,000 had been placed in a box,
properly sealed, marked and identified as A’s property, and such box was
found in the vaults of the Bank, would that make any difference in your
answer? Reason.

ANSWER:
Yes, it would make a difference in my answer. The contract that was
perfected in such a case is a contract of depositum. Hence, the relationship
that was established between A and X Bank is that of a depositor and
depositary. Consequently, the ownership of the amount place in the box was
not transmitted to the Bank when the deposit was constituted. Therefore, A can
properly claim that the mount cannot constitute a part of the assets of the Bank
that will be placed in the possession of the receiver or assignee, because he is
still the owner thereof.

5. In order to secure a bank loan, XYZ Corporation surrendered its deposit

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

ANSWER:
There is no pactum commissorium here. Deposits of money in banks and
similar institutions are governed by the provision on simple loans. The
relationship between the depositor and a bank is one of creditor and debtor.
Basically, this is a matter of compensation as all the elements of compensation
are present in this case. Further, where the security for the debt is also money
described in a bank, it is not illegal for the creditor to encash the time deposit
certificates to pay the debtor’s overdue obligation.

6. Due to the continuous heavy rainfall, the major streets in Manila became
flooded. This compelled Cris to check-in at Square One Hotel. As soon as
Cris got off from his Toyota Altis, the Hotel’s parking attendant got the key of
his car and gave him a valet parking customer’s claim stub. The attendant
parked his car at the basement of the hotel. Early in the morning, Cris was
informed by the hotel manager that his car was carnapped.
a) What contract, if any, was perfected between Cris and the Hotel when
Cris surrendered the key of his car to the hotel’s parking attendant?
b) What is the liability, if any, of the hotel for the loss of Cris’ car?

ANSWER:
a) The contract that was perfected between Cris and the Hotel is a contract of
necessary deposit. The Civil Code provides that deposit of effects made by
travellers in hotels or inns shall be regarded as necessary deposit. In this
case, the moment Cris surrendered his car key to the parking attendant of
the hotel, a necessary deposit has been perfected between Cris and the
hotel.
b) The Civil Code provides that keepers of hotels or inns shall be responsible for
the loss or injury to the personal property of the guests caused by the servants
or employees of the said keepers of hotels or inns, as well as by strangers. In
the case at bar, the hotel-keeper, in offering its accommodation to the
public, practically volunteered as depositary, and as such it is subject to an
extraordinary degree of responsibility, supervision and control of the hotel
and its premises, as well as the deposited valuables of its guests. Therefore,
the hotel-keeper is deemed liable for its lost.

GUARANTY/SURETY

1. AB sold to CD a motor vehicle for and in consideration of P120,000.00 to be

paid in 12 month equal instalments of P10,000.00, each installment being due
and payable on the 15th day of each month starting January 1997. To secure
the promissory note, CD executed a chattel mortgage on the subject motor
vehicle, and furnished a surety bond issued by Philam Life. CD failed to pay
more than two instalments. AB went after the surety but he was only able to
 obtain ¾ of the total amount still due and owing from CD. AB seeks your
advice on how he might, if at all, recover the deficiency. How would you
counsel AB?

ANSWER:
Yes AB can recover the deficiency. The action of AB to go after the surety
bond cannot be taken to mean a waiver of his right to demand payment for the
whole debt. The amount received from the surety is only payment pro tanto,
and an action may be maintained for a deficiency debt.

2. TRUE OR FALSE. An oral promise of guaranty is valid and binding?

ANSWER:
True. An oral promise of guaranty is valid and binding. However, while
the contract is valid, it is unenforceable because it is not in writing. Being a
special promise to answer for the debt, or miscarriage of another, the statute of
frauds requires it to be in writing to be enforceable. The validity of the contract
should be distinguished from its enforceability.

3. (a) What is meant by benefit of excussion in favour or the guarantor?

(b) When can the guarantor avail himself of his benefit?
(c) When can the guarantor not avail himself of this benefit?

ANSWER:
(a) The benefit of excussion in favour of the guarantor refers to the right by which
such guarantor cannot be compelled to pay the creditor unless the latter has
exhausted all the property of the principal debtor, and has resorted to all
legal remedies against such debtor.
(b) In order that the guarantor may avail himself of the benefit of excussion, 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 the
Philippine territory, sufficient to cover the amount of the debt.
(c) This 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;
6. In the case of a judicial bondsman; and
7. When the guarantor has constituted in favour of the creditor a place or
mortgage as additional security.

PLEDGE

1. Distinguish between a contract of pledge and a contract of real estate

mortgage?

ANSWER:
A contract of pledge and a contract of real estate mortgage may be
distinguished from each other in the following ways:
a) Pledge is a real contract, while real estate mortgage is a consensual
contract.
b) The subject matter of pledge is personal property, whereas that of real estate
mortgage is real property.
c) In pledge, the possession of the thing pledged is vested in the creditor, while
in the real estate mortgage, the possession of the thing mortgaged remains
with the debtor.
d) In pledge, the pledge has the right to receive the fruits of the thing pledged
with the obligation of applying the same to the interest of the debt, if owing,
and the balance if any, to the principal; whereas in real estate mortgage, the
mortgagee does not possess such right.
e) The sale at public auction of the thing pledged is always extrajudicial; while
the foreclosure of the thing mortgaged may be either judicial or extrajudicial.

2. Define Pactum Commissorium. What is the rule with regard to pactum

commissorium? Is there any exception to this rule?

ANSWER:
Pactum commissorium is a pact or agreement in a contract of pledge,
mortgage, or antichresis by virtue of which if the debtor cannot fulfil his
obligation, the creditor can appropriate or dispose of the thing given by way of
pledge, mortgage or antichresis. Such an agreement is prohibited by law. The
only exception is in the case of contract of pledge, but even then, certain
conditions should be complied with. In pledge, if the debtor is unable to pay his
obligation, the creditor has a right to have the thing pledged sold at public
auction for the payment of his credit. If the thing is not sold, a second public
auction should be held. If still it is not sold, then he may appropriate the thing.

3. Rosario obtained a loan of P100,000 from Jennifer and pledged her diamond
ring. The contract signed by the parties stipulated that if Rosario is unable to
redeem the ring on due date, she will execute a document in favour of
Jennifer providing that the ring shall automatically be considered as full
payment of the loan.
a) Is the contract valid?
b) Will your answer be the same if the contract stipulates that upon failure of
Rosario to redeem the ring on due date, Jennifer may immediately sell the
ring and appropriate the entire proceeds thereof for herself as full
payment of the loan?

ANSWER:
a) The contract is valid because Rosario has to execute a document in favour of
Jennifer to transfer the ownership of the pledged ring to the latter. The
contract does not amount to pactum commissorium because it does not
provide for the automatic appropriation by the pledgee of the thing pledged
in case of default of the pledgor.
b) No, my answer will be different. While the contract of pledge is valid, the
stipulation authorizing the pledgee to immediately sell the thing pledged is
void under Art. 2088 of the Civil Code, which provides that the creditor
cannot appropriate the things given by way of pledge or mortgage, or
dispose of them.” Jennifer cannot immediately sell by herself the thing
pledged. It must be foreclosed by selling it at a public auction in
accordance with the procedure under Art. 2112 of the Civil Code.
4. D borrowed P500 from C. As security for the payment of the debt, the former
pledged to the latter a diamond ring valued at P2,000. It was expressly
stipulated in the contract that if D cannot pay his debt when it matures, the
debt of P500 shall be considered as full payment of the diamond ring without
further action. D was unable to pay when the debt matured. Can C now
appropriate the ring? Reasons.

ANSWER:
C cannot appropriate the ring because the agreement stated in the
contract that in case of non-payment, the debt of P500 shall be considered as
full payment of the diamond ring without further action constitutes what is known
as pactum commissorium, which is expressly prohibited by Art. 2088 of the Civil
Code. According to this article, the creditor cannot appropriate the things given
by way of pledge or mortgage, or dispose them. Any stipulation to the contrary
is null and void.

5. Suppose that in the above problem, the agreement is to the effect that in
case of non-payment when the debt matures, “the same shall be paid with
the ring given as security” or “the debtor shall execute a deed of absolute
sale of the ring in favour of the creditor,” would that make a difference in
your answer? Reasons.

ANSWER:
Yes, that would make a difference in my answer. In both of these cases,
there is no automatic transmission of the right of ownership over the thing which
is given my way of pledge, but merely a promise to constitute an assignment of
property. What is prohibited by the law is where the stipulation would have the
effect of giving to the creditor automatic ownership of the property.

6. A debtor pledged to his surety pieces of jewelry to indemnify the latter in

case the surety would be obliged to pay the creditor. The surety paid P2,800
to the creditor. To recover the amount, the surety sold at public auction the
jewelry but realized only P500.00. May the surety recover the deficiency from
the debtor? Explain.

ANSWER:
The surety cannot recover the deficiency from the debtor. According to
Art. 2115 of the Civil Code, the sale of the things pledged shall extinguish the
principal obligation, whether or not the proceeds of the sale are equal to the
amount of the principal obligation, interest and expenses in a proper case. If
the price of the sale is more than said amount, the debtor shall not be entitled to
the excess, unless it was otherwise agreed. If the price of the sale is less, neither
shall the creditor be entitled to the deficiency, notwithstanding any stipulation to
the contrary. By electing to sell the articles pledged, the creditor waived any
other remedy, and must abide by the result of the sale.

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

ANSWER:
No. The shares of stock cannot be deemed to be owned by ABC when
the loan was not paid on time. Art. 2088 of the Civil Code provides that the
creditor cannot appropriate the things given by way of pledge and any
stipulation to the contrary is null and void. The stipulation that allows
appropriation is known as pactum commissorium, this stipulation is void under
Art. 2088. The remedy of ABC is to proceed to sell the shares at public auction
under Arts. 2112 to 2114 of the Civil Code.

MORTGAGE

1. Define real estate mortgage.

ANSWER:
Real estate mortgage may be defined as an accessory contract whereby
the debtor guarantees the performance of the principal obligation by subjecting
real property or real rights as security in case of non-performance of such
obligation within the period agreed upon.

2. Is registration in the Registry of Property necessary for the validity of a

contract of real estate mortgage?

ANSWER:
Registration in the Registry of Property is not necessary for the validity of
the contract. However it is necessary for the purpose of binding third persons.
Consequently, whether registered or not, the contract is binding upon the
parties.

3. X borrowed money from Y and gave a piece of land as security by way of

mortgage. It was expressly agreed between the parties in the mortgage
contract that upon non-payment of the debt on time by X, the mortgaged
land would already belong to Y. If X defaulted in paying, would Y now
become the owner of the mortgaged land? Why?

Suppose in the preceding question, the agreement between X and Y was

that if X failed to pay the mortgage debt on time, the debt shall be paid with
the land mortgaged by X to Y. Would your answer be the same as in the
preceding question? Explain.

ANSWER:
No, Y would not become the owner of the land. Art. 2088 of the Civil Code
provides that the creditor cannot appropriate the things given by way of pledge
and any stipulation to the contrary is null and void. The stipulation that makes Y
the owner upon failure to pay is what is known as pactum commissorium that is
considered void under Art. 2088. The remedy is to foreclose the mortgage.

No the answer would not be the same. The stipulation which states that
the property will be used as payment in a case of dacion en pago is a valid
stipulation. It does not constitute pactum commissorium because the
agreement does not provide for automatic appropriation. Despite the
agreement providing dacion en pago, Y would not become the owner of the
land. In fact, in case of breach of the undertaking to pay using the land, Y may
never get the land, subject to his right against X for breach of his undertaking.

4. Define Chattel Mortgage?

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

5. Distinguish between a contract of chattel mortgage and a contract of real

estate mortgage?

ANSWER:
The 2 contracts maybe distinguished from each other in the following
ways:
1) In a chattel mortgage, the subject matter is personal property, while in real
estate mortgage, the subject matter is real property.
2) In chattel mortgage, the requirement of registration is essential for the validity
of the contract, whereas in the real estate mortgage, the requirement of
registration is merely for the purpose of binding third persons.
3) The procedure for foreclosure of a chattel mortgage is different from the
procedure for foreclosure of real estate mortgage.

6. Is registration of a chattel mortgage in the Chattel Mortgage Register

essential for the validity of the contract?

ANSWER:
Yes, registration in the Chattel Mortgage Register is essential for the
validity of a contract of chattel mortgage. Consequently, if there is no
registration, the contract is void or inexistent.

7. Is the creditor entitled to a deficiency judgment in a chattel mortgage?

ANSWER:
Yes, the creditor is entitled to a deficiency judgment in a chattel
mortgage contract. Under the Chattel Mortgage Law, it can be inferred that if
the price of the sale of the thing mortgaged is less than the amount of the
principal obligation, an action may still be maintained by the creditor against
the debtor for the deficiency. The only exception to this rule is that if the vendee
fail to pay two or more instalments in a contract of sale of personal property the
price of which is payable in instalments, the vendor may foreclose the chattel
mortgage, but he shall now have any further action against the vendee to
recover any unpaid balance of the price.

8. On October 27, 1978, Acme Shoe Corp. obtained a loan of P3 Million from
Producers Bank of the Phil. To secure its payment, Acme executed a chattel
mortgage, subsequent promissory notes either as renewal of the former note,
as an extension thereof, or as a new loan, or is given any other kind of
accommodations. The mortgage shall also stand as security for the payment
of the said promissory notes and/or accommodations without the necessity
 of executing a new contract. This loan was paid. On January 10 and 11,
1984, the bank granted Acme a new loan of P1 Million that was not settled,
prompting the bank to institute foreclosure proceedings. Acme sought to
enjoin the bank from foreclosing but the RTC ruled that the P1 Million loan
was covered by the chattel mortgage. Is the P1 Million loan covered by the
chattel mortgage previously executed by Acme?

ANSWER:
In the case of Acme Shoes vs. CA, the Supreme Court held that while a
pledge, real estate mortgage or antichresis may secure after-incurred
obligations so long as these future debts are accurately described, a chattel
mortgage, however, can only cover obligations existing at the time the
mortgage is constituted. Although a promise expressed in a chattel mortgage
to include debts that are yet to be contracted can be a binding commitment
that can be compelled upon the security itself, however, does not come into
existence or arise until after a chattel mortgage agreement covering the newly
contracted debt is executed either by concluding a fresh chattel mortgage or
by amending the old contract conformably with the form prescribed by the
Chattel Mortgage Law.

In this case, the only obligation specified in the chattel mortgage was the
P3 Million loan that was already paid. By virtue of Sec. 3 of the Chattel Mortgage
Law, the payment of the obligation automatically rendered the chattel
mortgage void or terminated. Hence, there was no longer any chattel
mortgage that could cover the new loans that were concluded thereafter.

ANTICHRESIS

1. Define antichresis?

ANSWER:
Antichresis is a contract by virtue of which the creditor acquires the right
to receive the fruits of an immovable of his debtor with the obligation to apply
them to the payment of the interest, if owing, and thereafter to the principal of
his credit.

2. Olivia owns a vast mango plantation which she can no longer properly
manage due to a lingering illness. Since she is indebted to Peter in the
amount f P500,000 she asks Peter to manage the plantation and apply the
harvest to the payment of her obligation to him, principal and interest, until
her indebtedness shall have been fully paid. Peter aggrieves.
a) What kind of contract is entered into between Olivia and Peter? Explain.
b) What specific obligations are imposed by law on Peter as a consequence
of their contract?
c) Does the law require any specific form for the validity of their contract?
explain.
d) May Olivia re-acquire the plantation before her entire indebtedness shall
have been fully paid? Explain.

ANSWER:
a) Olivia and Peter entered into a contract of antichresis. Article 2132 of the
Civil Code provides that by a contract of antichresis, the creditor acquires
the right to receive the fruits of an immovable of his debtor, within the
 obligation to apply them to the payment of the interest, and thereafter to the
principal of his credit. Under their agreement, Peter acquired the right to
receive the fruits of the mango plantation with the agreement that the same
will be applied to Olivia’s obligation.
b) Peter is an antichretic creditor must 1) pay taxes and charges upon the land,
and 2) shoulder the necessary expenses for preservation and repair which he
may deduct from the fruits.
c) The agreement must be in writing. Article 2134 of the Civil Code provides that
the amount of the principal and interest must be specified in writing, other
wise the antichresis will be void.
d) No. Article 2136 specifically provides that the debtor cannot re-acquire the
enjoyment of the immovable without first having totally paid what he owes
the creditor. However, its is potestative on the part of the creditor to do so in
order to exempt him from his obligation under Art. 2135 of the Civil Code. The
debtor cannot re-acquire the enjoyment unless Peter compels Olivia to enter
again the enjoyment of the property.

3. Distinguish pledge, mortgage and antichresis

PLEDGE MORTGAGE ANTICHRESIS
Real contract Consensual contract Consensual contract
Personal/movable In real estate mortgage, Real/immovable
property real property; in chattel property
mortgage, personal
property
Must be in a public Must be registered in the Must be in writing to be
document for purpose of Registry of Property for valid
binding third persons the purpose of binding
third persons
In case of non-payment, In case of non-payment, In case of non-
foreclosure is always foreclosure may be
payment, as a rule,
extrajudicial judicial or extrajudicialforeclosure is judicial,
except agreed upon
by the parties to be
extrajudicial
Pledgee has the right to Creditor does not Creditor acquires the
receive the fruits of the acquire the right to right to receive the
thing pledged receive the fruits of the fruits of the property
property
Creditor is in the Debtor is always in Creditor is in possession
possession of the thing possession of the of the property
pledged property
Creditor is not obliged to Creditor must pay
the pay taxes, charges taxes and charges
and necessary expenses upon the property, and
other necessary
expenses
 PROBLEM EXERCISES

COMMODATUM/MUTUUM

1. Yesterday, C and D signed an agreement whereby C loans a sum of money

to D today.
a) Is there already a contract of loan today?
b) Suppose C is able to give the money the following day, how will you
characterize their contract. Why?

ANSWER:
a) It depends. Art. 1934 – An accepted promise to deliver something by way of
commodatum or simple loan is binding upon the parties, but the
commodatum or simple loan itself shall not be perfected until the delivery of
the object of the contract.
b) Unilateral contract because once the subject matter has been delivered, it
creates obligations on the part of only one of the parties, i.e., the borrower.

2. E borrowed a cavan of rice from R. Is the contract one of commodatum?

ANSWER:
It depends. Art. 1936 – Consumable goods may be the subject of the
commodatum if the purpose of the contract is not for consumption of the object,
as when it is merely for exhibition.

3. E borrowed R’s car to be used by him for 15 days. Now the car needs major
repairs. Is E obliged to pay for the expenses?

ANSWER:
It depends. Art. 1941- The bailee is obliged to pay for the ordinary
expenses for the use and preservation of the thing loand. Art. 1949 – The bailor
shall refund the extraordinary

4. E borrowed money from R. There was no stipulation to pay interest. After

paying interest, E seeks to recover the amount thereof. Is R obliged to return
the interest paid?

ANSWER:
It depends. 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.

5. Same example. There was a stipulation to pay interest which E has not paid.
Has R the right to demand interest.

ANSWER:
It depends. Art. 1956 – No interest shall be due unless it has been
expressly stipulated in writing.
DEPOSIT

1. R agreed to entrust to Y the fomer’s jewelry and other personal property for
safekeeping for a certain period of time in consideration of the payment by
R of P20,000. Immediately, R paid X. Is there already a perfected contract of
deposit?

ANSWER:
No. Art. 1963 – An agreement to constitute a deposit is binding, but the
deposit itself is not perfected until the delivery of the thing.

2. Same example. There was no stipulation as to how much shall be paid by R.

Is Y entitled to compensation?

ANSWER:
It depends. Art. 1965 – A deposit is a gratuitous contract, except when
there is an agreement to the contrary or unless the depositary is engaged in the
business of storing goods.

3. Y, depositary, has good reason to believe that R, depositor, is not the owner
of the thing deposited. Has Y the justification not to return the thing to R?

ANSWER:
No. Art.1984 – If the depositary has reasonable grounds to believe that the
thing has not been lawfully acquired by the depositor, the former may return the
same.
.
4. The period of time stipulated for the duration of the deposit has not yet
arrived. May R, depositor, nevertheless demand the return of the thing
deposited.

ANSWER:
It depends. Art. 1988 – The thing deposited must be returned to the
depositor upon demand, even though a specified period or time for such return
may have been fixed.

5. Y, depositary, died. H, his heir, sold the thing deposited to T, believing it

belonged to Y. Does H have any obligation to R, depositor?

ANSWER:
Yes. Art. 1991 – The depositor’s heir who in good faith may have sold the
thing which he did not know was deposited, shall only be bound to return the
price he may have received or to assign his right of action against the buyer in
case the price has not been paid.

6. The hotel-keeper posted a notice to the effect that it is not responsible for the
articles brought by guests. G, guest, lost his camera. Can G, hold the hotel-
keeper liable?

ANSWER:
It depends. Arts. 2003 – The hotel-keeper cannot free himself from
responsibility by posting notices to the effect that he is not liable for the articles
brought by the guest. Any stipulation between the hotel-keeper and the guest
whereby the responsibility of the former as set forth in the Articles 1998 to 2001 is
suppressed or diminished shall be void.

7. Same example. An investigation disclosed that the camera was stolen by a

person who entered the hotel and opened the door with the use of a false
key. Is the hotel-keeper liable?

ANSWER:
Yes. Art. 2001 – The act of a thief or robber, who has entered the hotel is
not deemed force majeure, unless it is done with the use of arms or through an
irresistible force.

GUARANTY

1. D, debtor, C creditor, and E guarantor for D’s obligation of P50,000. Because

of failure of D to pay, C sued D who was adjudged to pay interests, penalties
and judicial costs in the amount P15,000. G claims that his liability is limited
only to P50,000. Decide.

ANSWER:
It depends. Art. 2055 - 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.
2. Same parties, except that G binds himself to guarantee P55,000. D paid C
P50,000. G refuses to pay P5,000 demanded by C. Decide.

ANSWER:
Art. 2054 - In this case, C can still claim from G the balance of P5,000 by
virtue of the latter’s guaranty. This is so because the payment by D must be
applied first to the unsecured portion of P50,000 for as regard him, it is more
onerous as to the unsecured amount of P5,000.

3. D debtor, C creditor, and G guarantor for D’s debt of P30,000. D paid C

P20,000. Subsequently, G, without notifying D, being unaware of the
payment, paid P30,000. G demands reimbursement from D who refuses.
Decide.

ANSWER:
Article 2068 & 2070 (1) - 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.

4. Same sample. Suppose the guaranty is gratuitous, i.e., G makes the

guaranty without compensation. Is G entitled to reimbursement? Decide.

ANSWER:
It depends. Art. 2070 (2) - 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.
5. D debtor, C creditor and E, F, and G, guarantors of the indebtedness of D in
the amount of P15,000. C releases E who is a very close friend of his from the
guaranty. D failed to pay. Can C recover P7,500 each from F and G?

ANSWER:
It depends. Article 2078 - A release made by the creditor in favour of one
of the guarantors, without consent of the others, benefits all to the extent of the
share of the guarantor to whom it has been granted. Hence, If E is released
without the consent of F and G, then F and G will each be liable for only P5,000
because they are benefited to the extent of P5,000, the share of E.

6. Same parties. After one year from the date of maturity of D’s obligation, D
has not yet paid C; neither has C demanded payment, much less filed a
complaint against D. E, F and G claim release from their guaranty. Decide.

ANSWER:
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 extension of time referred to herein.

7. Same parties. For lack of funds, D gave C a piano in full settlement of his
debt. The piano was awarded to X in a suit by the latter against D. C tries to
recover from E, F, and G under their guaranty. Decide.

ANSWER:
Art. 2077 - If the creditor voluntarily accepts immovable property or other
property in payment of debt, even if he should afterwards lose the same through
eviction, the guarantor is released.

PLEDGE

1. D pledgor/debtor, and C pledge/creditor. When D failed to pay, it was

agreed that the thing pledged shall already become the property of C. Is
the agreement valid?

ANSWER:
Yes. 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.

2. Same parties. The amount of the obligation is P25,000 for which D pledged
his wrist watch and a camera the value of which is stated as P15,000 and
P10,000, respectively. After paying P12,000, D demands the return of the
camera. Has C the right to reject D’s demand?

ANSWER:
If D pays the 12,000, he cannot ask for the return of the camera because
both the camera and the wrist watch are given to secure payment of the entire
obligation of P25,000. However, if it was agreed that the camera was given to
secure the payment of P10,000, and the wrist watch, the balance of P15,000, and
D pays P12,000, D can demand the return of the camera.
3. D pledgor/debtor, and C pledgee/creditor. The contract of pledge of
jewelry was put in writing signed by them. Subsequently, D sold to T the
jewelry now in the possession of C. The jewelry was previously offered for sale
to T before the pledge. May T recover the jewelry from C?

ANSWER:
It depends. Art. 2096 - A pledge shall not take effect against third persons
if a description of the thing pledged and the date of the pledge do not appear
in a public instrument.

4. Same parties. C caused the sale at public auction of the jewelry for only
P20,000. The indebtedness of D is P25,000. Their agreement is that C may
recover the difference. Is D still liable for P5,000?

ANSWER:
Art. 2115 - The sale of the thing pledged extinguishes the principal
obligation whether the price of the sale is more or less than the amount of the
principal obligation. If the price of the sale is more than said amount, the debtor
shall not be entitled to the excess, unless otherwise agreed upon. If the price of
the sale is less, neither shall the creditor be entitled to recover the deficiency,
notwithstanding any stipulation to the contrary.

5. Same parties. The jewelry is later found in D’s possession. D claims that C
returned the jewelry after he paid his obligation and, therefore, both his
obligation and the pledge are extinguished. C disputes D’s allegations.
Decide.

ANSWER:
Art. 2110 – If the thing pledged is returned by the pledgee to the pledgor
or owner, the pledge is extinguished. Any stipulation to the contrary shall be
void. If subsequent to the protection of the pledge, the thing is in the possession
of the pledgor or owner, there is a prima facie presumption that the same has
been returned by the pledgee. This same presumption exists if the thing
pledged is in the possession of a third person who has received it from the
pledgor or owner after the constitution of the pledge.

REAL MORTGAGE

1. D debtor/mortgagor, and C creditor/mortgagee. The subject of the

mortgage is a parcel of land with a market value of P180,000 to secure a
debt of P200,000. D sold the property to T for P160,000. Subsequently, C
foreclosed the mortgage. The land was sold for P180,000 at the foreclosure
sale. Is T liable to C for the deficiency of P20,000.

ANSWER:
No. Art. 2129 - The creditor may claim from a third person in possession of
the mortgaged property, the payment of the part of the credit secured by the
property which said third person possesses, in the terms and with the formalities
which the law establishes.

2. Same example. There was a stipulation between C and D against sale of the
property by D. Is the sale to T valid?
ANSWER:
Yes. Art. 2128 - The mortgage credit may be alienated or assigned to a
third person, in whole or in part, with the formalities required by law.

CHATTEL MORTGAGE

1. May immovable property be mortgaged under the Chattel Mortgage Law?

ANSWER:
It depends. The law provides that generally, the subject of chattel
mortgage must always be personal or immovable property. However, for
purposes of the Chattel Mortgage Law, both growing crops and large cattle are
personal property and, therefore, capable of being mortgaged although they
would be considered as immovable property under the conditions stated in
Article 415 of the Civil Code.

2. A contract of chattel mortgage does not include an affidavit of good faith

appended to it as required by law. Is the mortgage valid?

ANSWER:
It depends. The Chattel Mortgage Law, in describing what shall be
deemed sufficient to constitute a good chattel mortgage, includes the
requirement of an affidavit of good faith appended to the mortgage and
recorded therewith. But the absence of the affidavit vitiates a mortgage only as
against third persons without notice like creditors and subsequent
encumbrancers.

ANTICHRESIS

1. D debtor and C creditor. Under the written contract of antichresis, the

indebtedness in the amount of P50,000 shall be satisfied from the harvest of
the land given as security. Later, D agreed to pay, in addition, P6,000 as
interest. Has D the right to demand the return of the property once the
market value of the harvest reaches P50.000?

ANSWER:
It depends. Art. 2134 – The amount of the principal and of the interest shall
be specified in writing; otherwise, the contract of antichresis shall be void.

2. Same example.
a) What obligations are imposed by law on C?
b) Suppose for whatever reason no harvest can be applied to D’s obligation,
what remedy does C have?

ANSWER:
a) Art. 2135 – The creditor, unless there is a stipulation fo the contrary, is
obliged to pay the taxes and charges upon the estate. He is also bound
to bear the expenses necessary for its preservation and repair. The sum
spent for the purposes stated in this article shall be deducted from the
fruits.
b) Art. 2137 – The creditor may petition the court for the payment of the debt
or the sale of the real property. In this case, the Rules of Court on the
foreclosure of mortgages shall apply.