GUARANTY (Articles 2047 – 2084)

A contract whereby a person (guarantor) binds himself to the creditor to fulfil the obligation of the principal
debtor in case the latter fail to do so.

Classification of Guaranty:
1. In the Broad sense:
a. Personal - the guaranty is the credit given by the person who guarantees the fulfilment of the principal
obligation.
b. Real - the guaranty is the property, movable or immovable.
2. As to its Origin
a. Conventional - agreed upon by the parties.
b. Legal - one imposed by virtue of a provision of a law.
c. Judicial - one which is required by a court to guarantee the eventual right of one of the parties in a
case.
3. As to Consideration
a. Gratuitous - the guarantor does not receive any price or remuneration for acting as such.
b. Onerous - the guarantor receives valuable consideration.
4. As to the Person guaranteed
a. Single - one constituted solely to guarantee or secure performance by the debtor of the principal
obligation.
b. Double or sub-guaranty - one constituted to secure the fulfilment by the guarantor of a prior guaranty.
5. As to Scope and Extent
a. Definite - the guaranty is limited to the principal obligation only, or to a specific portion thereof.
b. Indefinite or simple - one which not only includes the principal obligation but also all its accessories
including judicial costs

SURETYSHIP
 A contract whereby a person (surety) binds himself solidarily with the principal debtor
 A relation which exists where one person (principal) has undertaken an obligation and another person (surety)
is also under a direct and primary obligation or other duty to the obligee, who is entitled to but one
performance, and as between the two who are bound, the second rather than the first should perform ( Agro
Conglomerates, Inc. vs. CA, 348 SCRA 450)

NOTES:
 The reference in Article 2047 to solidary obligations does not mean that suretyship is withdrawn from the
applicable provisions governing guaranty. A surety is almost the same as a solidary debtor, except that he
himself is a principal debtor.
 In suretyship, there is but one contract, and the surety is bound by the same agreement which binds the
principal. A surety is usually bound with the principal by the same instrument, executed at the same time and
upon the same consideration (Palmares vs CA, 288 SCRA 422).
 It is not for the obligee to see to it that the principal debtor pays the debt or fulfill the contract, but for the
surety to see to it that the principal debtor pays or performs (Paramount Insurance Corp vs CA, 310 SCRA 377)

Nature of Surety’s undertaking:

1. Liability is contractual and accessory but direct
NOTE: He directly, primarily and equally binds himself with the principal as original promisor, although he
possesses no direct or personal interest over the latter’s obligation, nor does he receive any benefits therefrom.
(PNB vs CA, 198 SCRA 767)
2. Liability limited by the terms of the contract.
NOTE: It cannot be extended by implication beyond the terms of the contract (PNB vs CA, 198 SCRA 767)
3. Liability arises only if principal debtor is held liable.
NOTES:
 The creditor may sue separately or together the principal debtor and the surety. Where there are several
sureties, the obligee may proceed against any one of them.
 In the absence of collusion, the surety is bound by a judgment against the principal even though he was not a
party to the proceedings. The nature of its undertaking makes it privy to all proceedings against its principal
(Finman General Assurance Corp. vs. Salik, 188 SCRA 740)
4. Surety is not entitled to the benefit of exhaustion
NOTE: He assumes a solidary liability for the fulfillment of the principal obligation (Towers Assurance Corp vs.
Ororama Supermart, 80 SCRA 262) as an original promissory and debtor from the beginning.
5. Undertaking is to creditor and not to debtor.
NOTE: The surety makes no covenant or agreement with the principal that it will fulfill the obligation guaranteed
for the benefit of the principal. Such a promise is not implied by law either; and this is true even where under the
contract the creditor is given the right to sue the principal, or the latter and the surety at the same time. (Arranz
vs. Manila Fidelity & Surety Co., Inc., 101 Phil. 272)
6. Surety is not entitled to notice of principal’s default
NOTE: The creditor owes no duty of active diligence to take care of the interest of the surety and the surety is
bound to take notice of the principal’s default and to perform the obligation. He cannot complain that the creditor
has not notified him in the absence of a special agreement to that effect. (Palmares vs CA, 288 SCRA 422)
7. Prior demand by the creditor upon principal is not required
1
 NOTE: As soon as the principal is in default, the surety likewise is in default.
8. Surety is not exonerated by neglect of creditor to sue principal
Characteristics of Guaranty and Suretyship:
1. Accessory - It is indispensable condition for its existence that there must be a principal obligation.
NOTES:Guaranty may be constituted to guarantee the performance of a voidable or unenforceable contract. It
may also guarantee a natural obligation. (Art 2052). The guarantor cannot bind himself for more than the
principal debtor and even if he does, his liability shall be reduced to the limits of that of the debtor.
2. Subsidiary and Conditional - takes effect only in case the principal debtor fails in his obligation.
NOTES:
 The guarantor cannot bind himself for more than the principal debtor and even if he does, his liability shall be
reduced to the limits of that of the debtor. But a guarantor may bind himself for less than that of the principal
(Art 2054).
 A guaranty may be given as security for future debts, the amount of which is not yet known; there can be no
claim against the guarantor until the debt is liquidated. A conditional obligation may also be secured. (Art
2053)
3. Unilateral - may be entered even w/o the intervention of the principal debtor, in which case Art. 1236 and 1237
shall apply and it gives rise only to a duty on the part of the guarantor in relation to the creditor and not vice
versa.
4. Nominate
5. Consensual
6. It is a contract between the guarantor/surety and creditor.
NOTES:
Acceptance of guaranty by creditor and notice thereof to guarantor:
 In declaring that guaranty must be express, the law refers solely and exclusively to the obligation of the
guarantor because it is he alone who binds himself by his acceptance. With respect to the creditor, no such
requirement is needed because he binds himself to nothing.
 However, when there is merely an offer of a guaranty, or merely a conditional guaranty, in the sense that
it requires action by the creditor before the obligation becomes fixed, it does not become binding until it is
accepted and until notice of such acceptance by the creditor is given to, or acquired by, the guarantor, or
until he has notice or knowledge that the creditor has performed the condition and intends to act upon the
guaranty.
 But in any case, the creditor is not precluded from waiving the requirement of notice. The consideration of
the guaranty is the same as the consideration of the principal obligation. The creditor may proceed against
the guarantor although he has no right of action against the principal debtor.
7. Not presumed. It must be expressed and reduced in writing.
NOTE: A power of attorney to loan money does not authorize the agent to make the principal liable as a surety for
the payment of the debt of a third person. (BPI vs. Coster, 47 Phil. 594)
8. Falls under the Statute of Frauds since it is a “special promise to answer for the debt, default or miscarriage of
another”.
9. Strictly interpreted against the creditor and in favor of the guarantor/surety and is not to be extended beyond
its terms or specified limits. (Magdalena Estates, Inc. vs Rodriguez, 18 SCRA 967) The rule of strictissimi juris
commonly pertains to an accommodation surety because the latter acts without motive of pecuniary gain and
hence, should be protected against unjust pecuniary impoverishment by imposing on the principal, duties akin to
those of a fiduciary.
NOTES: The rule will apply only after it has been definitely ascertained that the contract is one of suretyship or
guaranty. It cannot be used as an aid in determining whether a party’s undertaking is that of a surety or guarantor.
(Palmares vs. CA, 288 SCRA 292). It does not apply in case of compensated sureties.
10. It is a contract which requires that the guarantor must be a person distinct form the debtor because a person
cannot be the personal guarantor of himself.
NOTE: However, in a real guaranty, like pledge and mortgage, a person may guarantee his own obligation with his
personal or real properties.

GUARANTY SURETYSHIP
1. Liability depends upon an independent agreement to 1. Surety assumes liability as regular party to the
pay the obligation if primary debtor fails to do so undertaking
2. Collateral undertaking 2. Surety is an original promisor
3. Guarantor is secondarily liable 3 . Surety is primarily liable
4. Guarantor binds himself to pay if the principal CANNOT
4. Surety undertakes to pay if the principal DOES NOT PAY
PAY
5. Insurer of solvency of debtor 5. Insurer of the debt
6. Guarantor can avail of the benefit of the excussion and 6. Surety cannot avail of the benefit of excussion and
division and division in case creditor proceeds against him division

INDORSEMENT GUARANTY
1. Primarily of transfer 1. Contract of security

2
 2. Unless the note is promptly presented for
payment at maturity and due notice of dishonor
2. Failure in either or both these particulars does not
given to the indorser within a reasonable time he generally work as an absolute discharge of a
will be discharged absolutely from all liability guarantor’s liability, but his discharged only to the
thereon, whether he has suffered any actual extent of the loss which he may have suffered in
damage or not consequence thereof

3. Indorser does not warrant the solvency. He is

answerable on a strict compliance with the law by 3. Guarantor warrants the solvency of the promisor
the holder, whether the promisor is solvent or not
4. Indorser can be sued as a promisor 4. Guarantor cannot be sued as promisor

GUARANTY
A contract by which a person is bound to another for the
fulfillment of a promise or engagement of a third party
WARRANTY
An undertaking that the title, quality, or quantity of the
subject matter of the contract is what it has been
represented to be, and relates to some agreement made
ordinarily by the party who makes the warranty

NOTES:
 A guaranty is gratuitous, unless there is a stipulation to the contrary. The cause of the contract is the same
cause which supports the obligation as to the principal debtor.
 The peculiar nature of a guaranty or surety agreement is that is is regarded as valid despite the absence of any
direct consideration received by the guarantor or surety either from the principal debtor or from the creditor;
a consideration moving to the principal alone will suffice.
 It is never necessary that the guarantor or surety should receive any part or benefit, if such there be, accruing
to the principal. (Willex Plastic Industries Corp. vs. CA, 256 SCRA 478)

Double or sub-guaranty (Art 2051 2nd par)

One constituted to guarantee the obligation of a guarantor

Continuing guaranty (Art 2053)

One which is not limited to a single transaction but which contemplates a future course of dealings, covering a
series of transactions generally for an indefinite time or until revoked.

NOTES:
 Prospective in operation (Diño vs CA, 216 SCRA 9)
 Construed as continuing when by the terms thereof it is evident that the object is to give a standing credit to
the principal debtor to be used from time to time either indefinitely or until a certain period, especially if the
right to recall the guaranty is expressly reserved (Diño vs CA, 216 SCRA 9)
 “Future debts” may also refer to debts existing at the time of the constitution of the guaranty but the amount
thereof is unknown and not to debts not yet incurred and existing at that time.
 Exception to the concept of continuing guaranty is chattel mortgage. A chattel mortgage can only cover
obligations existing at the time the mortgage is constituted and not those contracted subsequent to the
execution thereof (The Belgian Catholic Missionaries, Inc. vs. Magallanes Press, Inc., 49 Phil 647). An exception
to this is in case of stocks in department stores, drug stores, etc. (Torres vs. Limjap, 56 Phil 141).

Extent of Guarantor’s liability: (Art 2055)

1. Where the guaranty definite: It is limited in whole or in part to the principal debt, to the exclusion of accessories.
2. Where guaranty indefinite or simple: It shall comprise not only the principal obligation, but also all its accessories,
including the judicial costs, provided with respect to the latter, that the guarantor shall only be liable for those
costs incurred after he has been judicially required to pay.

Qualifications of a guarantor: (Arts 2056-2057)

1. possesses integrity
2. capacity to bind himself
3. has sufficient property to answer for the obligation which he guarantees

NOTES:
 The qualifications need only be present at the time of the perfection of the contract.
 The subsequent loss of the integrity or property or supervening incapacity of the guarantor would not operate
to exonerate the guarantor or the eventual liability he has contracted, and the contract of guaranty continues.
 However, the creditor may demand another guarantor with the proper qualifications. But he may waive it if he
chooses and hold the guarantor to his bargain.

Benefit of Excussion (Art 2058)

The right by which the guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the

3
 properties of the principal debtor, and has resorted to all of the legal remedies against such debtor.

NOTE:
 Not applicable to a contract of suretyship (Arts 2047, par. 2; 2059[2])
 Cannot even begin to take place before judgment has been obtained against the debtor (Baylon vs CA, 312
SCRA 502)

When Guarantor is not entitled to the benefit of excussion: (PAIRS)

1. If it may be presumed that an execution on the property of the principal debtor would not result in the
satisfaction of the obligation.
 Not necessary that the debtor be judicially declared insolvent or bankrupt
2. When he has absconded, or cannot be sued within the Philippines unless he has left a manager or
representative
3. In case of insolvency of the debtor.
 Must be actual
4. If the guarantor has expressly renounced it
5. If he has bound himself solidarily with the debtor

Other grounds: (BIPS)

6. If he is a judicial bondsman or sub-surety
7. If he fails to interpose it as a defense before judgment is rendered against him
8. If the guarantor does not set up the benefit against the creditor upon the latter’s demand for payment from him,
and point out to the creditor available property to the debtor within Philippine territory, sufficient to cover the
amount of the debt (Art 2060)
 Demand can be made only after judgment on the debt
 Demand must be actual; joining the guarantor in the suit against the principal debtor is not the
 Demand intended by law
9. Where the pledge or mortgage has been given by him as special security

Benefit of Division (Art 2065)

 Should there be several guarantors of only one debtor and for the same debt, the obligation to answer for the
same is divided among all.

 Liability: Joint

NOTES:
 The creditor can claim from the guarantors only the shares they are respectively bound to pay except when
solidarity is stipulated or if any of the circumstances enumerated in Article 2059 should take place.
 The right of contribution of guarantors who pays requires that the payment must have been made
 in virtue of a judicial demand, or
 because the principal debtor is insolvent (Art 2073).
 If any of the guarantors should be insolvent, his share shall be borne by the others including the paying
guarantor in the same joint proportion following the rule in Solidary obligations.
 The above rule shall not be applicable unless the payment has been made in virtue of a judicial demand or
unless the principal debtor is insolvent.
 The right to contribution or reimbursement from his coguarantors is acquired ipso jure by virtue of said
payment without the need of obtaining from the creditor any prior cession of rights to such guarantor.
 The co-guarantors may set up against the one who paid, the same defenses which have pertained to the
principal debtor against the creditor and which are not purely personal to the debtor. (Art 2074)

Procedure when creditor sues: (Art. 2062)

The creditor must sue the principal alone; the guarantor cannot be sued with his principal, much less alone except
in Art. 2059.
1. Notice to guarantor of the action - The guarantor must be NOTIFIED so that he may appear, if he so desires, and
set up defenses he may want to offer.
 If the guarantor appears, he is still given the benefit of exhaustion even if judgment should be rendered
against him and principal debtor. His voluntary appearance does not constitute a renunciation of his right to
excussion (see Art.2059(1)).
 Guarantor cannot set up the defenses if he does not appear and it may no longer be possible for him to
question the validity of the judgment rendered against the debtor.
2. A guarantor is entitled to be heard before and execution can be issued against him where he is not a party in the
case involving his principal (procedural due process).

Guarantor’s Right of Indemnity or Reimbursement (Art 2066)

GENERAL RULE: Guaranty is a contract of indemnity. The guarantor who makes payment is entitled to be
reimbursed by the principal debtor. NOTE: The indemnity consists of: (DIED)
1. Total amount of the debt – no right to demand reimbursement until he has actually paid the debt, unless by
the terms of the contract, he is given the right before making payment. He cannot collect more than what he
has paid.

4
 2. Legal interest thereon from the time the payment was made known (notice of payment in effect a demand so
that if the debtor does not pay immediately, he incurs in delay) to the debtor, even though it did not earn
interest for the creditor. Guarantor’s right to legal interest is granted by law by virtue of the payment he has
made.
3. Expenses incurred by the guarantor after having notified the debtor that payment has been demanded of him
by the creditor; only those expenses that the guarantor has to satisfy in accordance with law as a consequence
of the guaranty (Art. 2055) not those which depend upon his will or own acts or his fault for these are his
exclusive personal responsibility and it is not just that they be shouldered by the debtor.
4. Damages if they are due in accordance with law. General rules on damages apply.

EXCEPTIONS:
1. Where the guaranty is constituted without the knowledge or against the will of the principal debtor, the
guarantor can recover only insofar as the payment had been beneficial to the debtor (Art. 2050).
2. Payment by a third person who does not intend to be reimbursed by the debtor is deemed to be a donation,
which, however, requires the debtor’s consent. But the payment is in any case valid as to the creditor who has
accepted it (Art. 1238).
3. Waiver of the right to demand reimbursement.

Guarantor’s right to Subrogation (ART.2067)

 Subrogation transfers to the person subrogated, the credit with all the rights thereto appertaining either
against the debtor or against third persons, be they guarantors or possessors of mortgages, subject to
stipulation in conventional subrogation.

NOTE: This right of subrogation is necessary to enable the guarantor to enforce the indemnity given in Art. 2066.
 It arises by operation of law upon payment by the guarantor. It is not necessary that the creditor cede to the
guarantor the former’s rights against the debtor.
 It is not a contractual right. The right of guarantor who has paid a debt to subrogation does not stand upon
contract but upon the principles of natural justice.
 The guarantor is subrogated by virtue of the payment to the rights of the creditor, not those of the debtor.
 Guarantor cannot exercise the right of redemption of his principal (Urrutia & Co vs Morena and Reyes, 28 Phil
261)

Effect of Payment by Guarantor

1. Without notice to debtor: (Art 2068) The debtor may interpose against the guarantor those defenses which he
could have set up against the creditor at the time the payment was made, e.g. the debtor can set up against
the guarantor the defense of previous extinguishment of the obligation by payment.
2. Before Maturity (Art 2069) Not entitled to reimbursement unless the payment was made with the consent or
has been ratified by the debtor

Effect of Repeat Payment by debtor: (Art 2070)

GENERAL RULE: Before guarantor pays the creditor, he must first notify the debtor (Art. 2068). If he fails to
give such notice and the debtor repeats payment, the guarantor can only collect from the creditor and guarantor has
no cause of action against the debtor for the return of the amount paid by guarantor even if the creditor should
become insolvent.
EXCEPTION: The guarantor can still claim reimbursement from the debtor in spite of lack of notice if the
following
conditions are present: (PIG)
a. guarantor was prevented by fortuitous event to advise the debtor of the payment; and
b. the creditor becomes insolvent;
c. the guaranty is gratuitous.

Right of Guarantor to proceed against debtor before payment

GENERAL RULE: Guarantor has no cause of action against debtor until after the former has paid the obligation
EXCEPTION: Article 2071
NOTES:
 Article 2071 is applicable and available to the surety. (Manila Surety & Fidelity Co., Inc. vs Batu Construction
& Co., 101 Phil 494)
 Remedy of guarantor:
a. obtain release from the guaranty; or
b. demand a security that shall protect him from any proceedings by the creditor, and against the danger
of insolvency of the debtor

Art. 2066 Art. 2071

Provides for the enforcement of the rights of the
Provides for his protection before he has paid but after he
guarantor/surety against the debtor after he has paid the
has become liable
debt
Gives a right of action after payment Protective remedy before payment
Substantive right Preliminary remedy

5
 Extinguishment of guaranty: (RA2CE2)
1. Release in favor of one of the guarantors, without the consent of the others, benefits all to the extent of the
share of the guarantor to whom it has been granted (Art 2078);
2. If the creditor voluntarily accepts immovable or other properties in payment of the debt, even if he should
afterwards lose the same through eviction or conveyance of property (Art 2077);
3. Whenever by some act of the creditor, the guarantors even though they are solidarily liable cannot be
subrogated to the rights, mortgages and preferences of the former (Art 2080);
4. For the same causes as all other obligations (Art 1231);
5. When the principal obligation is extinguished;
6. Extension granted to the debtor by the creditor without the consent of the guarantor (Art 2079)

BOND - An undertaking that is sufficiently secured, and not cash or currency

Bondsman (Art 2028) – A surety offered in virtue of a provision of law or a judicial order. He must have the
qualifications required of a guarantor and in special laws like the Rules of Court.

NOTES:
 Judicial bonds constitute merely a special class of contracts of guaranty by the fact that they are given “in
virtue… of a judicial order.”
 If the person required to give a legal or judicial bond should not be able to do so, a pledge or mortgage
sufficient to cover the obligation shall admitted in lieu thereof (Art 2083).
 A judicial bondsman and the sub-surety are NOT entitled to the benefit of excussion because they are not
mere guarantors, but sureties whose liability is primary and solidary. (Art 2084)

PLEDGE, MORTGAGE AND ANTICHRESIS

I. Common Elements of Pledge, Mortgage, and Antichresis (Articles 2085 – 2092)
a. Essential Requisites (SOD) (Art 2085)
1. Secures the fulfillment of a principal obligation;
2. Pledgor, mortgagor, antichretic debtor must be the absolute owner of the thing pledged or
mortgaged; and The reason being that in anticipation of a possible foreclosure sale in case of default
which is still a sale, the rule is that the seller must be the owner of the thing sold (Cavite
Development Bank vs. Lim, 324 SCRA 346)
3. Pledgor, mortgagor, antichretic debtor must have free disposal of their property, or be legally
authorized for such purpose.

NOTES:
 Third persons can pledge or mortgage their own property to secure the principal obligation.
 It is not necessarily void simply because the accommodation pledgor or mortgagor did not benefit from the
same. So long as valid consent was given, the fact that the loan was given solely for the benefit of the principal
debtor would not invalidate the mortgage (GSIS vs CA, 170 SCRA 533)
 The accommodation pledgor or mortgagor, without expressly assuming personal liability for such debt, is not
liable for the payment of any deficiency, should the property not be sufficient to cover the debt ( Bank of
America vs. American Realty Corporation, 321 SCRA 659).
 The accommodation pledgor or mortgagor is not solidarily bound with the principal obligor but his liability
extents only to the property pledged or mortgaged. Should there be any deficiency, the creditor has recourse
on the principal debtor who remains to be primarily bound.
 The law grants to the accommodation pledgor or mortgagor the same rights as a guarantor and he cannot be
prejudiced by any waiver of defense by the principal debtor.

B. Prohibition against Pactum Commissorium (Art 2088; 2137)

Pactum Commissorium - Stipulation whereby the thing pledged or mortgaged, or under antichresis
shall automatically become the property of the creditor in the event of non-payment of the debt within the term fixed.
Requisites:
1. There should be a pledge, mortgage, or antichresis of property by way of security for the payment of the
principal obligation; and
2. There should be a stipulation for an automatic appropriation by the creditor of the property in event of
nonpayment of the obligation within the stipulated period.
GENERAL RULE: Pactum Commissorium is forbidden by law and is declared null and void.
EXCEPTION: The pledgee may appropriate the thing pledged if after the first and second auctions, the thing is not
sold. (Art 2112)
NOTE: The security contract remains valid; only the prohibited stipulation is void.

C. Capability to secure all kinds of obligations, i.e. pure or conditional (Art 2091)

D. Indivisibility (Art 2089)

GENERAL RULE: A pledge, mortgage, or antichresis is indivisible, even though the debt may be divided among
the successors in interest of the debtor or of the creditor.
 Their indivisibility is not affected by the fact that the debtors are jointly or not solidarily liable.
6
Consequences of indivisibility:
1. Single thing – Every portion of the property pledged or mortgaged is answerable for the whole obligation
2. Several things – All of the several things pledged or mortgaged are liable for the totality of the debt
3. Debtor’s heir/creditor’s heir - Neither the debtor’s heir who has paid part of the debt cannot ask for
proportionate extinguishment, nor creditor’s heir who received his share of the debt return the pledge or
cancel the mortgage as long as the debt is not completely satisfied.

EXCEPTIONS:
1. Where each one of several things guarantees a determinate portion of the credit
2. Where only a portion of the loan was released
3. Where there was failure of consideration.
4. Where there is no debtor creditor relationship

NOTES:
 The mere embodiment of a real estate mortgage and a chattel mortgage in one document does not have the
effect of fusing both securities into an indivisible whole.
 The mortgagee, therefore, may legally foreclose the real estate mortgage extrajudicially and waive the chattel
mortgage foreclosure, and maintain instead a personal action for the recovery of the unpaid balance of the
credit (Phil. Bank of Commerce vs. Macadaeg, 109 Phil 981)
E. When the principal obligation becomes due, the things in which the pledge, mortgage, or
antichresis consists may be alienated for the payment to the creditor. (Art. 2087)

NOTES:
 If the debtor fails to comply with the obligation at the time it falls due, the creditor is merely entitled to move
for the sale of the thing pledged or mortgaged in order to collect the amount of his claim from the proceeds.
 If he wishes to secure a title to the mortgaged property, he can buy it in the foreclosure sale (Montevirgin
vs.CA, 112 SCRA 641)

F. Pledgor, mortgagor, antichretic debtor retains ownership of the thing given as a security
PLEDGE (Arts 2093 – 2123)
 A contract wherein the debtor delivers to the creditor or to a third person a movable or document evidencing
incorporeal rights for the purpose of securing fulfillment of a principal obligation with the understanding that
when the obligation is fulfilled, the thing delivered shall be returned with all its fruits and accessions.

Special Requisites (in addition to the common essential requisites):

1. Possession of the thing pledged must be transferred to the creditor or a third person by agreement (Art 2093);
2. It can only cover movable property and incorporeal rights evidenced by documents of title and the instruments
proving the right pledged shall be delivered to the creditor, and if negotiable must be endorsed (Art 2094); and
3. The description of the thing pledged and the date must appear in a public instrument to bind third persons,
but not for the validity of the contract (Art 2096).
Kinds:
1. Conventional /Voluntary – created by contract
2. Legal – created by operation of law (examples: Art. 546, 1731 and 1914 NCC)

NOTES:
 The provisions of possession, care and sale of the thing as well as on the termination of the pledge governing
conventional pledges are applicable to pledges created by operation of law (Art 2121)
 Unlike, however, in conventional pledge where the debtor is not entitled to the excess unless it is otherwise
agreed, in legal pledge, the remainder of the price of the sale after payment of the debt and expenses, shall
be delivered to the debtor.
 In legal pledge, there is no definite period for the payment of the principal obligation. The pledge must make a
demand for the payment of the amount due him; otherwise he cannot exercise the right of sale at public
auction (Art 2122)

Characteristics:
1. Real contract – it is perfected by the delivery of the thing pledged by the debtor who is called the pledgor to
the creditor who is called the pledgee, or to a third person by common agreement;
2. Accessory contract – it has no independent existence of its own;
3. Unilateral contract – it creates an obligation solely on the part of the creditor to return the thing subject
thereof upon the fulfillment of the principal obligation; and
4. Subsidiary contract – the obligation incurred does not arise until the fulfillment of the principal obligation
which is secured.

Consideration in pledge:
 Insofar as the pledgor is concerned, the cause is the principal obligation.
 If the pledgor is not the debtor, the cause is the compensation stipulated for the pledge or the mere liberality
of the pledgor.

Extent of pledge: Unless stipulated otherwise, pledge extends to the fruits, interests or earnings of the thing.
7
Rights and Obligations of a Pledgor
Rights Obligation
1. to demand return in case of reasonable grounds to fear
destruction or impairment of the thing without the 1. To advise the pledge of the flaws of the thing (Art.
pledge’s fault, subject to the duty of replacement (Art. 2101)
2107)

2. Not to demand the return of the thing until after full

2 .To bid and be preferred at the public auction (Art.
payment of the debt, including interest due thereon and
2113)
expenses incurred for its preservation (art. 2105)

3. To alienate the thing pledged provided the pledgee

consents to the sale (Art. 2097)

4. To ask that the thing pledge be deposited (Art.2104 &

2106

Rights of the Pledgee KEY: D SBC BA2R2OPS2

1. Option to demand replacement or immediate payment of the debt in case of deception as to substance or
quality (Art 2109)
2. To sell at public auction in case of reasonable grounds to fear destruction or impairment of the thing without
his fault (Art 2108)
3. To bring actions pertaining to the owner (Art 2103)
4. To choose which of several things pledged shall be sold
5. To bid at the public auction (Art 2113)
6. To appropriate the thing in case of failure of the 2nd public auction (Art 2112)
7. To apply said fruits, interests or earnings to the interest, if any, then to the principal of the credit (Art 2102)
8. To retain excess value received in the public sale (Art 2115)
9. To retain the thing until after full payment of the debt (Art 2098)
10. To be reimbursed for the expenses made for the preservation of the thing pledged (Art 2099)
11. To object to the alienation of the thing
12. To possess the thing (Art 2098)
13. To sell at public auction in case of non-payment of debt at maturity (Art 2112)

To choose which of the several things pledged shall be sold (Art 2119)
14. Option to demand replacement or immediate payment of the debt in case of deception as to substance or
quality (Art 2109)
15. To sell at public auction in case of reasonable grounds to fear destruction or impairment of the thing without
his fault Art 2108)
16. To bring actions pertaining to the owner (Art 2103)
17. To choose which of several things pledged shall be sold
18. To bid at the public auction (Art 2113)
19. To appropriate the thing in case of failure of the 2nd public auction (Art 2112)
20. To apply said fruits, interests or earnings to the interest, if any, then to the principal of the credit (Art 2102)
21. To retain excess value received in the public sale (Art 2115)
22. To retain the thing until after full payment of the debt (Art 2098)
23. To be reimbursed for the expenses made for the preservation of the thing pledged (Art 2099)
24. To object to the alienation of the thing
25. To possess the thing (Art 2098)
26. To sell at public auction in case of non-payment of debt at maturity (Art 2112)
27. To choose which of the several things pledged shall be sold (Art 2119)

Obligations of the Pledgee

KEY: CUDA3
1. Take care of the thing with the diligence of a good father of a family (Art 2099)
2. Not to use thing unless authorized or by the owner or its preservation requires its use (Art 2104)
3. Not to deposit the thing with a 3rd person unless so stipulated (Art 2100)
4. Responsibility for acts of agents and employees as regards the thing (Art 2100)
5. To advise pledgor of danger to the thing (Art 2107)
6. To advise pledgor of the result of the public auction (Art 2116)

RIGHT OF PLEDGOR TO SUBSTITUTE THING PLEDGED (ART.2107)

Requisites:
1. The pledgor has reasonable grounds to fear the destruction or impairment of the thin pledged
2. There is no fault on the part of the pledgee
3. The pledgor is offering in place of the thing, another thing in pledge which is of the same kind and quality as
the former
4. The pledge does not choose to exercise his right to cause the thing pledged to be sold at public auction
8
 NOTE: The pledgee’s right to have the thing pledged sold at public sale granted under the Article 2108 is
superior to that given to the pledgor to substitute the thing pledged under Article 2107.

Prohibition against double pledge

 Property which has been lawfully pledged to one creditor cannot be pledged to another as long as the first one
subsists.
NOTE: Possession of a creditor of the thing pledged is an essential requisite of pledge.

Extinguishment of Pledge (CRAPS)

1. For the same causes as all other obligations (Art 1231)
2. Return of the thing pledged by the pledgee to the pledgor (Art 2110)
3. Statement in writing by the pledge that he renounces or abandons the pledge (Art 2111)
4. Payment of the debt (Art 2105)
5. S ale of thing pledged at public auction (Art 2115)
NOTE: The possession by the debtor or owner of the thing pledged subsequent to the perfection of the pledge
gives rise to a prima facie presumption that the thing has been returned and, therefore, that the pledge has
been extinguished but not the principal obligation itself. (Art 2110)

Requirements for sale of thing pledged at public auction: (Art 2112)

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

Effect of sale of the thing pledged: (Art 2115)

1. The sale of the thing 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
2. If the price of the sale is more than the amount due the creditor, the debtor is not entitled to the excess
unless the contrary is provided
3. If the price of the sale is less, the creditor is not entitled to recover the deficiency even if there is a stipulation
to that effect

REAL ESTATE MORTGAGE (Articles 2124-2131)

 A contract whereby the debtor secures to the creditor the fulfillment of a principal obligation, specially
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.

Characteristics of the contract:

1. Real
2. Accessory
3. Subsidiary
4. Unilateral – it creates only an obligation on the part of the creditor who must free the property from the
encumbrance once the obligation is fulfilled.
NOTES:
 As an accessory contract, its consideration is that of the principal contract from which it receives life.
 A mortgage does not involve a transfer, cession or conveyance of property but only constitutes a lien thereon.
Until discharged, it follows the property wherever it goes and subsists notwithstanding changes of ownership.
 A mortgage gives the mortgagee no right or claim to the possession of the property, and therefore, a mere
mortgagee has no right to eject an occupant of the property mortgaged unless the mortgage should contain
some provision to that effect. The only right of a mortgagee in case of non-payment of a debt secured by
mortgage would be to foreclose the mortgage and have the encumbered property sold to satisfy the
outstanding indebtedness. If the possession is transferred to the mortgagee, it must not expressly be for
purpose of applying the fruits to the interest then to the principal of the credit, for then it would be an
antichresis.
 It is not an essential requisite that the principal of the mortgage credit bears interest, or that the interest as
compensation for the use of the principal and enjoyment of its fruits be in the form of a certain percent
thereof.

Special Requisites (in addition to the common essential requisites):

1. It can cover only immovable property and alienable real rights imposed upon immovables (Art 2124);
2. It must appear in a public instrument (Art. 2125); and
3. Registration in the registry of property is necessary to bind third persons, but not for the validity of the
contract (Art 2125).
 An order for foreclosure cannot be refused on the ground that the mortgage had not been
registered provided no innocent third parties are involved.
NOTE: Where a mortgage is not valid or false, the principal obligation which it guarantees is not rendered null
and void. What is lost only is the right to foreclose the mortgage as a special remedy for satisfying or settling the
indebtedness which is the principal obligation but the mortgage deed remains as evidence or proof of a personal
obligation of the debtor and the amount due to the creditor may be enforced in an ordinary personal action.

9
Kinds:
1. Voluntary – agreed to by the parties or constituted by the will of the owner of the property on which it is
created
2. Legal – one required by law to be executed in favor of certain persons  The persons in whose favor the law
establishes a mortgage have no other right than to demand the execution and the recording of the document in
which the mortgage is formalized (Art 2125 par 2)
3. Equitable – one which, although lacking the formalities of a mortgage, shows the intention of the parties to
make the property a security for a debt

PLEDGE REAL MORTGAGE

1. Constituted on movables 1. Constituted on immovables
2. Property is delivered to pledgee or by common consent
2 . Delivery is not necessary
to a third person
3. Not valid against third persons unless a description of
the thing pledged and date of pledge appear in a public 3. Not valid against third persons unless registered.
instrument

Extent of Mortgage:
 Absent express stipulation to the contrary, the mortgage includes the accessions, improvements, growing fruits
and income of the property not yet received when the obligation becomes due and to the amount of the
indemnity granted or owing to the proprietor from the insurers of the property mortgaged, or in virtue of
expropriation for public use (Art 2127)

Object of Mortgage:
 Future property cannot be an object of a contract of mortgage (Art 2085[2]) However, a stipulation subjecting
to the mortgage lien, properties (improvements) which the mortgagor may subsequently acquire install, or use
in connection with real property already mortgaged belonging to the mortgagor is valid (People’s Bank and
Trust Co. vs. Dahican Lumber Co., 20 SCRA 84)

Special Rights:
1. Mortgagor - To alienate the mortgaged property but the mortgage shall remain attached to the property.
NOTE: A stipulation forbidding the owner from alienating the immovable mortgage shall be void (Art 2130)
being contrary to public policy inasmuch as the transmission of property should not be unduly impeded.
2. Mortgagee - To claim from a 3rd person in possession of the mortgaged property the payment of the part of
the credit secured by the which said third person possesses (Art 2129)
NOTE: It is necessary that prior demand for payment must have been made on the debtor and the latter
failed to pay (BPI vs Concepcion & Hijos, Inc., 53 Phil 906)

Foreclosure
 The remedy available to the mortgagee by which he subjects the mortgaged property to the satisfaction of the
obligation to secure that for which the mortgage was given
NOTES:
o It denotes the procedure adopted by the mortgagee to terminate the rights of the mortgagor on the
property and includes the sale itself (DBP vs Zaragoza, 84 SCRA 668)
o Foreclosure is valid where the debtor is in default in the payment of his obligation (Gobonseng, Jr. vs
CA, 246 SCRA 472)

Kinds:
1. Judicial – ordinary action for foreclosure under Rule 68 of the Rules of Court
2. Extrajudicial – when mortgagee is given a special power of attorney to sell the mortgaged property by public
auction, under Act No. 3135

JUDICIAL FORECLOSURE EXTRAJUDICIAL FORECLOSURE

1. There is court intervention 1. No court intervention

2. Decisions are appealable 2. Not appealable because it is immediately executory

3. Order of court cuts off all rights of parties impleaded
4. There is equity of redemption except on banks which
provides for a right of redemption
5. Period of redemption starts from the finality of the
judgment until order of confirmation
6. No need for a special power of attorney in the contract
of mortgage
3. Foreclosure does not cut off right of all parties
involved
4 . There is right of redemption
5. Period to redeem start from date of registration of
certificate of sale
6. Special power of attorney in favor of mortgagee is
needed in the contract

10
NOTES:
 A foreclosure sale retroacts to the date of registration of the mortgage and that a person who takes a mortgage
in good faith and for valuable consideration, the record showing clear title to the mortgagor, will be protected
against equitable claims on the title in favor of third persons, of which he had no actual or constructive notice
(St. Dominic Corporation vs. IAC 151 SCRA 577).
 Where there is a right to redeem, inadequacy of price is not material because the judgment debtor may
reacquire the property or else sell his right to redeem and thus recover any loss he claims to have suffered by
reason of the price obtained at the auction sale and consequently not sufficient to set aside the sale. Mere
inadequacy of the price obtained at the sheriff’s sale will not be sufficient to set aside the sale unless “the
price is so inadequate as to shock the conscience of the court” taking into consideration the peculiar
circumstances attendant thereto. (Sulit vs. CA, 268 SCRA 441)
 Should there remain a balance due to the mortgagee after applying the proceeds of the sale, the mortgagee is
entitled to recover the deficiency. This rule applies both to judicial and extra-judicial foreclosure real
mortgage.
 The action to recover a deficiency after foreclosure prescribes after 10 years from the time the right of action
accrues (Arts 1142 & 1144).

Stipulation of upset price or “tipo”

 It is a stipulation in a mortgage of real property of minimum price at which the property shall be sold, to
become operative in the event of a foreclosure sale at public auction. It is null and void for the property must
be sold to the highest bidder. Parties cannot, by agreement, contravene the law and interfere with the lawful
procedure of the courts (BPI vs Yulo, 31 Phil 476)

Extrajudicial foreclosure real property (Act No. 3135)

 The law covers only real estate mortgages. It is intended merely to regulate the extrajudicial sale of the
property mortgaged if and when the mortgagee is given a special power of express authority to do so in the
deed itself or in a document annexed thereto.
 The authority to sell is not extinguished by the death of the mortgagor (or mortgagee) as it is an essential and
inseparable part of a bilateral agreement (Perez vs PNB, 17 SCRA 833).
 No sale can be legally made outside the province in which the property sold is situated; and in case the place
within said province in which the sale is to be made is the subject of stipulation, such sale shall be made in the
said place in the municipal building of the municipality in which the property or part thereof is situated.

Procedure for extrajudicial foreclosure of both real estate mortgage under Act No. 3135 and
chattel mortgage under Act No. 1508 (A.M. No. 99-10-05-0, January 15, 2000)
1. Filing of application before the Executive Judge through the Clerk of Court
2. Clerk of Court will examine whether the requirement of the law have been complied with, that is, whether the
notice of sale has been posted for not less than 20 days in at least three (3) public places of the municipality or
city where the property is situated, and if the same is worth more than P400.00, that such notice has been
published once a week for at least three (3) consecutive weeks in a newspaper of general circulation in the city
of municipality
3. The certificate of sale must be approved by the Executive Judge
4. Where the application concerns extrajudicial foreclosure of real mortgages in different locations covering one
indebtedness, only one filing fee corresponding to such debt shall be collected
5. The Clerk of Court shall issue certificate of payment indicating the amount of indebtedness, the filing fees
collected, the mortgages sought to be foreclosed, the description of the real estates and their respective
locations.
6. The notice of sale shall be published in a newspaper of general circulation pursuant to Section 1, PD No. 1079
7. The application of shall be raffled among all sheriffs
8. After the redemption period has expired, the Clerk of Court shall archive the records.
9. No auction sale shall be held unless there are at least two (2) participating bidders, otherwise the sale shall be
postponed to another date. If on the new date set forth for the sale there shall not be at least two bidders, the
sale shall then proceed. The names of the bidders shall be reported to the Sheriff of the Notary Public, who
conducted the sale to the Clerk of Court before the issuance of the certificate of sale.
NOTES:
 The Mortgagor and Mortgagee have no right to waive the posting and publication requirements under Act. No.
3135. Notices are given to secure bidders and prevent a sacrifice of the property. Clearly, the statutory
requirements of posting and publication are mandated, not for the mortgagor’s benefit, but for the public or
third persons. Failure to comply with the statutory requirements as to publication of notice of auction sale
constitutes a jurisdictional defect which invalidates the sale. Lack of republication of notice of foreclosure sale
made subsequently after the original date renders such sale void (PNB vs. Nepomuceno Productions Inc.,
G.R. No. 139479. December 27, 2002).
 Sec 3 of Act 3135 does not require personal or any particular notice on the mortgagor much less on his
successors-in-interest where there is no contractual stipulation therefor. Hence, unless required in the
mortgage contract, the lack of such notice is not a ground to set aside a foreclosure sale.
 Neither does Sec 3 require posting of notice of sale on the mortgage property and the certificate of posting is
not required, much less considered indispensable, for the validity of a foreclosure sale.

Redemption
11
  It is the transaction by which the mortgagor reacquires or buys back the property which may have passed under
the mortgage, or divests the property of the lien which the mortgage may have created.

NOTES:
 A sale by the mortgagor to a third party of the mortgaged property during the period for redemption transfers
only the right to redeem the property and the right to possess, use and enjoy the same during said period.
 Where sale with assumption of mortgage not registered and made without the consent of the mortgagee, the
buyer, thereof, was not validly substituted as debtor and, hence, had no right to redeem (Bonnevie vs. CA,
125 SCRA 122).

Kinds:
1. Equity of Redemption – right of mortgagor to redeem the mortgaged property after his default in the
performance of the conditions of the mortgage within the 90-day period from the date of the service of the
order of foreclosure or even thereafter but before the confirmation of the sale. Applies to judicial foreclosure
of real mortgage and chattel mortgage foreclosure. NOTE: Redemption of the banking institutions is allowed
within one year from confirmation of sale.
2. Right of Redemption – right of mortgagor to redeem the mortgaged property within one year from the date
of registration of the certificate of sale. Applies only to extrajudicial foreclosure of real mortgage.

NOTE: The right of redemption, as long as within the period prescribed, may be exercised irrespective of whether or
not the mortgagee has subsequently conveyed the property to some other party (Sta. Ignacia Rural Bank, Inc. vs.
CA, 230 SCRA 513)

Period of Redemption
1. Extra-judicial (Act #3135)
a. natural person – one year from registration of the certificate of sale with Registry of Deeds
b. juridical person – same rule as natural person
c. juridical person (mortgagee is bank) - three months after foreclosure or before registration of
certificate of foreclosure whichever is earlier (sec. 47, of General Banking Law)
2. Judicial – before confirmation of the sale by the court

NOTE: Allowing a redemption after the lapse of the statutory period, when the buyer at the foreclosure sale does not
object but even consents to the redemption, will uphold the policy of the law which is to aid rather than defeat the
right of redemption. There is nothing in the law which prevents a waiver of the statutory period for redemption
(Ramirez vs CA, 219 SCRA 598).

Amount of the redemption price:

1. Mortgagee is not a bank (Act No. 3135, in relation to Sec. 28, Rule 39 of Rules of Court)
a. purchase price of the property
b. 1% interest per month on the purchase price
c. taxes paid and amount of purchaser’s prior lien, if any, with the same rate of interest computed from
the date of registration of sale, up to the time of redemption
2. Mortgagee is a bank (GBL 2000)
a. amount due under the mortgage deed
b. interest
c. cost and expenses
NOTE: Redemption price in this case is reduced by the income received from the property

ANTICHRESIS (Articles 2132 -2139)

 A contract whereby the creditor acquires the right to receive the fruits of an immovable of the debtor, with
the obligation to apply them to the payment of the interest, if owing, and thereafter to the principal of his
credit (Art 2132)

Characteristics
1. Accessory contract – it secures the performance of a principal obligation
2. Formal contract – it must be in a specified form to be valid, i.e., “in writing.” (Art 2134)

Special Requisites (in addition to the common essential requisites):

1. It can cover only the fruits of an immovable property; (Art 2132)
2. Delivery of the immovable is necessary for the creditor to receive the fruits and not that the contract shall be
binding;
3. Amount of principal and interest must be specified in writing (Art. 2134); and
4. Express agreement that debtor will give possession of the property to creditor and that the latter will apply the
fruits to the interest, if any, then to the principal of his credit. (Art 2132)
NOTE: The obligation to pay interest is not of the essence of the contract of antichresis, there being nothing in the
Code to show that antichresis is only applicable to securing the payment of interest-bearing loans. On the contrary,
antichresis is susceptible of guaranteeing all kinds of obligations, pure or conditional

ANTICHRESIS PLEDGE

12
 1. Refers to real property 1. Refers to personal property
2. Perfected by mere consent 2. Perfected by delivery of the thing pledge
3. Consensual contract 3. Real contract

ANTICHRESIS REAL MORTGAGE

1. Property is delivered to creditors
2. Creditor acquires only the right to receive the
fruits of the property, hence it does not produce a
real right
3. The creditor, unless there is stipulation to the
contrary, is obliged to pay taxes and charges upon
the estate.
1. Debtor usually retains possession of the property
2 . Creditor does not have any right to receive the
fruits; but the mortgage creates a real right over
the property
3 . The creditor has no such obligation

4. It is expressly stipulated that the creditor given

possession of the property shall apply all the fruits 4 . There is no such obligation on part of
thereof to the payment of interest, if owing, and mortgagee
thereafter to the principal

Subject matter of both is real property

Obligations of antichretic creditor:

1. To pay taxes and charges on the estate, including necessary expenses
NOTE: Creditor may avoid said obligation by:
a. compelling debtor to reacquire enjoyment of the property or
b. by stipulation to the contrary
2. To apply all the fruits, after receiving them, to the payment of interest, if owing, and thereafter to the
principal
3. To render an account of the fruits to the debtor
4. To bear the expenses necessary for its preservation and repair

Remedies of creditor in case of nonpayment of debt

1. Bring an action for specific performance; or
2. Petition for the sale of the real property as in a foreclosure of mortgages under Rule 68 of the Rulesof Court.
(Art 2137)

NOTES:
 The parties, however, may agree on an extrajudicial foreclosure in the same manner as they are allowed in
contracts of mortgage and pledge (Tavera vs. El Hogar Filipino, Inc., 68 Phil 712).
 A stipulation authorizing the antichretic creditor to appropriate the property upon the non-payment of the
debt within the agreed period is void (Art 2088).

CHATTEL MORTGAGE (Articles 2140-2141)

 A contract by virtue of which personal property is recorded in the Chattel Mortgage Register as a security for
the performance of an obligation (Art 2140).

Characteristics
1. Accessory contract – it is for the purpose of securing the performance of a principal obligation
2. Formal contract – registration in the Chattel Mortgage Register is indispensable for its validity
3. Unilateral contract – it produces only obligations on the part of the creditor to free the thing from the
encumbrance on fulfilment of the obligation.

Special Requisites (in addition to the common essential requisites):

1. It can cover only personal or movable property in general; however, the parties may treat as personal property
that which by its nature would be real property;
2. Registration of the mortgage with the Chattel Mortgage Register where the mortgagor resides; if property is
located in a different province, registration in both provinces required;
3. Description of the property as would enable the parties or other persons to identify the same after reasonable
investigation and inquiry; and
4. Accompanied by an affidavit of good faith to bind third persons, but not for the validity of the contract.
5. It can cover only obligations existing at the time the mortgage is constituted.
NOTE: A mortgage containing a stipulation in regard to future advances in the credit will take effect only
from the date the same are made and not from the date of the mortgage (Jaca vs Davao Lumber Co., 113
SCRA 107)

Effect of registration: Creates a real right

13
  The registration of the chattel mortgage is an effective and binding notice to other creditors of its existence
and creates a real right or a lien which, being recorded, follows the chattel wherever it goes. The registration
gives the mortgagee symbolical possession (Northern Motors, Inc. vs. Coquia, 68 SCRA 374).

Effect of failure to register chattel mortgage in the chattel mortgage registry

 Article 2140 makes the recording in the Chattel Mortgage Register an essential requisite but if the instrument is
not recorded, the mortgage is nevertheless binding between the parties. But the person in whose favour
the law establishes a mortgage has no other right than to demand the execution and the recording of the
document.

CHATTEL MORTGAGE PLEDGE

1. Delivery of the personal property to the mortgage
1. Delivery of the thing pledge is necessary
is not necessary
2. Registration in the Chattel Mortgage Registry is
2. Registration not necessary to be valid
necessary for its validity
3. If property is foreclosed, the excess over the 3. Debtor is not entitled to excess unless otherwise
amount due goes to the debtor agreed or except in case of legal pledge
4. If there is deficiency after foreclosure, creditor is 4. If there is deficiency, creditor is not entitled to
entitled to recover the deficiency from the recover notwithstanding any stipulation to the
debtor, except Art. 1484 contrary
5. Subject matter of both is movable property

Affidavit of Good Faith

 Oath in a contract of chattel mortgage wherein the parties "severally swear that the mortgage is made for the
purpose of securing the obligation specified in the conditions thereof and for no other purposes and that the
same is a just and valid obligation and one not entered into for the purpose of fraud.” (Sec. 5, Chattel
Mortgage Law)

Effect of absence
The special affidavit is required only for the purpose of transforming an already valid mortgage into “preferred
mortgage.” Thus, it is not necessary for the validity of the chattel mortgage itself but only to give it a preferred status.
In other words, its absence vitiates the mortgage only as against third persons without notice like creditors and
subsequent encumbrancers.

Foreclosure of Chattel Mortgage

NOTES:
 Foreclosure sale in chattel mortgage is by public auction under Act No. 1508, but the parties may stipulate that
it be by private sale.
 The mortgagee may, after thirty (30) days from the time of the condition broken, cause the mortgaged
property to be sold at public auction by a public officer. The 30-day period is also a grace period for the
mortgagor to discharge the mortgage obligation. After the sale of the chattel at public auction, the right of
redemption is no longer available to the mortgagor (Cabral vs. Evangelista, 28 SCRA 1000).

Application of proceed of sale:

1. Costs and expenses of keeping and sale
2. Payment of the obligation secured by the mortgage
3. Claims of persons holding subsequent mortgages in their order
4. The balance, if any, shall be paid to the mortgagor or person holding under him

NOTES:
 The creditor may maintain an action for the deficiency, except if the chattel mortgage is constituted as
security for the purchase of personal property payable in instalments (Art. 1484).
 The action for deficiency may be brought within ten (10) years from the time the cause of action accrues (Arts
1141 and 1142).
 Only equity of redemption is available to the mortgagor; the latter can no longer redeem after the
confirmation of the foreclosure sale.

Right of redemption
 When the condition of a chattel mortgage is broken the following may redeem:
a. mortgagor;
b. person holding a subsequent mortgage; or
c. subsequent attaching creditor.
 An attaching creditor who so redeems shall be subrogated to the rights of the mortgagee and entitled to
foreclose the mortgage in the same manner that the mortgagee could foreclose it.
 The redemption is made by paying or delivering to the mortgagee the amount due on such mortgage and the
costs, and expenses incurred by such breach of condition before the sale thereof (Sec 13, Act No. 1508).

Right to possession of foreclosed property

14
 1. Real mortgage – After the redemption period has expired, the purchaser of the property has the right to a
conveyance and to be placed in possession thereof.
NOTES:
 Purchaser is not obliged to bring a separate suit for possession. He must invoke the aid of the
courts and ask for a WRIT OF POSSESSION.
 Section 7 of Act No. 3135 allows the purchaser to take possession of the foreclosed property during
the period of redemption upon filing of an ex parte application and approval of a bond.
2. Chattel mortgage – When default occurs and the creditor desires to foreclose, the creditor has the right to take
the property as a preliminary step for its sale.
NOTE: Where the debtor refuses to yield the property, the creditor’s remedy is to institute an action either
to effect judicial foreclosure directly or to secure possession (REPLEVIN) as a preliminary to the sale contemplated in
Section 14 or Act. No. 1508

CONCURRENCE AND PREFERENCE OF CREDITS (Articles 2236 – 2251) Concurrence of Credits

 Possession by two or more creditors of equal rights or privileges over the same property or all of the property
of the debtor

Preference of Credits
 Right held by a creditor to be preferred in the payment of his claim above others out of the debtor’s assets.

NOTES:
 The rules on preference of credits apply only when two or more creditors have separate and distinct claims
against the same debtor who has insufficient property.
 Preference creates no lien on property, and, therefore, gives no interest in property, specific or general, to
the preferred creditor but a preference in application of the proceeds after the sale. (Molina vs. Somes,
31 Phil. 76)
 The preferential right of credit attains significance only after the properties of the debtor have been
inventoried and liquidated, and the claims held by his various creditors have been established. (DBP vs.
NLRC, 183 SCRA 328)

Preference of Credit Lien

Applies only to claims which do not attach to specific
Creates a charge on a particular property
properties

Liability of debtor’s property for his obligations

 GENERAL RULE: Debtor is liable with all his property, present and future, for the fulfilment of his
obligations. (Art 2236)

EXEMPT PROPERTY:
1. Present property – those provided under Arts. 155 and 205 of the Family Code, Sec. 13, Rule 39 of the Rules of
Court, and Sec. 118 of the Public Land Act
2. Future property – a debtor who obtains a discharge from his debts on account of his insolvency, is not liable for
the unsatisfied claims of his creditors with said property subject to certain exceptions expressly provided by
law. (Secs. 68, 69, The Insolvency Law [Act No. 1956])
3. Property under legal custody and those owned by municipal corporations necessary for governmental purposes

General Categories of Credit:

1. Special Preferred Credits – those listed in Arts. 2241 and 2242 shall be considered as mortgages and
pledges of real or personal property or liens (Art. 2243). Hence, they are not included in the insolvent debtor's
assets.

NOTES:
 Arts. 2241 and 2242 do not give the order of preference or priority of payment. They merely enumerate the
credits which enjoy preference with respect to specific movables or immovables. With respect to the same
specific movables or immovables, creditors, with the exception of the State (No. 1), merely concur.
 They only find application when there is a concurrence of credits, i.e., when the same specific property of the
debtor is subjected to the claims of several creditors and the value of such property is insufficient to pay in full
all the creditors. In such a situation, the question of preference will arise.
 Article 2242 makes no distinction between registered and unregistered vendor’s lien (No. 2). Hence, any lien of
that kind enjoys the preferred credit status. Unlike the unpaid price credits (No. 5), in order to be given
preference, should be recorded in the Registry of Property. But a recorded mortgage credit is superior to an
unrecorded unpaid vendor’s lien (De Barretto vs. Villanueva, 1 SCRA 288)
 The priority rule applies to credits annotated in the Registry of Property. As to credits mentioned in No. 7 of
Article 2242, there is preference among the attachments or executions according to the order of the time they
were levied upon the property. The pro rata rule in Article 2249 does not apply; otherwise, the result would
be absurd. The preference of a credit annotated by an attachment or execution could be defeated by simply
obtaining a writ of attachment or execution, no matter how much later (Manabat vs Laguna Federation of
Facomas, Inc., 19 SCRA 621).

15
  The last paragraph of Article 2241 applies only when the right of ownership in such property continues in the
debtor, and, therefore, it is not applicable to cases where the debtor has parted with his ownership therein, as
where he has sold the property (Peña vs. Mitchell, 9 Phil 587)
2. Ordinary Preferred Credits – those listed in Art. 2244 as amended by Art. 110 of the Labor Code.

NOTES:
 The provision not only enumerates the preferred credits with respect to other property, real and personal, of
the debtor, but also gives their order of preference “in the order named”.
 In contrast with Articles 2241 and 2242, Article 2244 creates no liens on determinate property which follow
such property. What Article 2244 creates are simply rights in favour of certain creditors to have the cash and
other assets of the insolvent applied in a certain sequence or order of priority.
 Article 2244, particularly par (14) item (1) thereof, is not applicable to obligations of the State as it is a
recognized doctrine that the State is always solvent. It is inconceivable for the State to voluntarily initiate
insolvency or general liquidation proceedings or to be subjected to such proceedings under its own laws.
3. Common Credits – those listed under Art. 2245, which shall be paid pro rata regardless of dates.

NOTE: Ordinary Preferred and Common Credits cover only “free property” of the debtor, or those not subjected to
Special Preferred Credit.

Effects of Article 110 of Labor Code to Art 2244:

1. Removed the one-year limitation found in No. 2 of Art. 2244
2. Moving up the claims for unpaid wages (and other monetary claims) of laborers or workers of insolvent from
second priority to first priority in the order of preference established by Art. 2244

NOTES:
 In case of bankruptcy or liquidation of the employer’s business, the unpaid wages and other monetary claims of
the employees shall be given first preference and shall be paid in full before the claims of the government and
other creditors may be paid. The terms, “declaration” of bankruptcy, or “judicial” liquidation have been
eliminated, nevertheless, according to the SC, bankruptcy or liquidation proceedings are still necessary for the
operation of the preference accorded to workers under Art. 110 of the Labor Code. (DBP vs. NLRC 183 SCRA
328; RA No. 6715 Sec 10)
 In case of rehabilitation, the preference of credit granted to employees under Art 110 of the Labor Code is not
applicable (Rubberworld [Phils.] vs CA, 305 SCRA 722).

Refectionary Credit
Indebtedness incurred in the repair or reconstruction of something previously made, such repair or
reconstruction being made necessary by the deterioration or destruction of the thing as it formerly existed.

ORDER OF PREFERENCE OF CREDITS

Arts. 2241 and 2242, jointly with Arts. 2246 to 2249 establish a twotier order of preference:
1. First tier – includes taxes, duties and fees due on specific movable or immovable property;
2. Second tier – all other special preferred (non-tax) credits shall be satisfied pro-rata, out of any residual
value of the specific property to which such credits relate.

NOTES:
 The pro-rata rule does not apply to credits annotated in the Registry of Property by virtue of a judicial order,
by attachments and executions, which are preferred as to “later credits”. In satisfying several credits
annotated by attachments or executions, the rule is still preference according to the priority of the credits in
the order of time.
 In order to make the pro rating provided in Art 2249 fully effective, the preferred creditors enumerated in Nos.
2 to 14 of Art 2242 must necessarily be convened, and the import of their claims ascertained. There must be
first some proceeding where the claims of all the preferred creditors may be bindingly adjudicated, e.g.
insolvency, settlement of decedent’s estate, or other liquidation proceedings except where there are not more
than one creditor.
 Credits which do not enjoy any preference with respect to specific property because they are not among those
mentioned in Arts. 2241 and 2242 and those while included in said articles are unpaid because the value of the
property to which the preference refers is less than the preferred credit or credits, shall be satisfied in the
order established in Art. 2244 with reference to other real and/or personal property.
 Common credits or those which do not fall under Arts. 2241, 2242, and 2244 do not enjoy any preference and
shall be paid pro rata regardless of dates.

16