Credit Transactions: San Beda College of Law

San Beda College of Law 182
MEMORY AID IN CIVIL LAW
CREDIT TRANSACTIONS
CREDIT TRANSACTIONS LOAN (Articles 1933 – 1961)
 All transactions involving the
purchase or loan of goods, services,  A contract wherein one of the
or money in the present with a parties delivers to another, either
promise to pay or deliver in the something not consumable so that
future the latter may use the same for a
certain time and return it or money
Contracts of security or other consumable thing, upon the
Types: condition that the same amount of
1. Secured transactions or contracts of the same kind and quality shall be
real security - supported by a paid. (Art 1933)
collateral or an encumbrance of
property Characteristics:
2. Unsecured transactions or contracts 1. Real Contract – delivery of the thing
of personal security - supported only loaned is necessary for the
by a promise or personal perfection of the contract
commitment of another such as a NOTE: An accepted promise to make
guarantor or surety a future loan is a consensual
contract, and therefore binding upon
Security the parties but it is only after
 Something given, deposited, or delivery, will the real contract of
serving as a means to ensure loan arise. (Art 1934)
fulfilment or enforcement of an
obligation or of protecting some 2. Unilateral Contract - once the
interest in property subject matter has been delivered,
 Types of Security it creates obligations on the part of
a. personal – when an individual only one of the parties (i.e.
becomes surety or guarantor borrower).
b. real or property – when a
mortgage, pledge, antichresis,  Kinds:
charge or lien or other device 1. Commodatum – when the bailor
used to have property held, out (lender) delivers to the bailee
of which the person to be made (borrower) a non-consumable thing
secure can be compensated for so that the latter may use it for a
loss certain time and return the identical
thing.
Bailment  Kinds of commodatum:
 The delivery of property of one a. Ordinary Commodatum – use by
person to another in trust for a the borrower of the thing is for a
specific purpose, with a contract, certain period of time
express or implied, that the trust b. Precarium - one whereby the
shall be faithfully executed and the bailor may demand the thing
property returned or duly accounted loaned at will and it exists in the
for when the special purpose is following cases:
accomplished or kept until the bailor i. neither the duration nor
claims it. purpose of the contract is
stipulated
 Parties: ii. the use of the thing is
1. bailor - the giver; one who delivers merely tolerated by the
property owner
2. bailee- the recipient; one who
receives the custody or possession of
the thing thus delivered
CIVIL LAW COMMITTEE

CHAIRPERSON: Romuald Padilla ASST.CHAIRPERSON: Vida Bocar, Joyce Vidad EDP: Alnaiza Hassiman, Dorothy Gayon
 SUBJECT HEADS: Christopher Rey Marasigan (Persons and Family Relations), Alejandro Casabar(Property), Ma. Rhodora
Ferrer(Wills and Succession), Ian Dominic Pua(Obligations and Contracts), Sha Elijah Dumama(Sales and Lease), John Stephen
Quiambao(PAT), Christopher Cabigao(Credit Transactions), Ligaya Alipao(Torts and Damages), Anthony Purganan(LTD),
Ma. Ricasion Tugadi (Conflicts of Law)
2. Simple loan or mutuum – where the COMMODATUM (Articles 1935 – 1952)

lender delivers to the borrower  Nature:
money or other consumable thing
upon the condition that the latter 1. PURPOSE: Bailee in commodatum
shall pay the same amount of the acquires the temporary use of the
same kind and quality. thing but not its fruits (unless
stipulated as an incidental part of
Commodatum Mutuum the contract).(Art 1935)
Key: COPS-LOTR  Use must be temporary,
1. Object otherwise the contract may be a
Non-consumable Consumable deposit.
2. Cause
Gratuitous May or may not be 2. CAUSE: Essentially gratuitous; it
gratuitous ceases to be a commodatum if any
3. Purpose compensation is to be paid by the
Use or temporary Consumption borrower who acquires the use, in
possession such case there arises a lease
4. Subject Matter contract.
Real or personal Only personal  Similar to a donation in that it
property property
confers a benefit to the
5. Ownership of the thing
recipient. The presumption is
Retained by the Passes to the debtor
bailor
that the bailor has loaned the
6. Thing to be returned thing for having no need
Exact thing loaned Equal amount of the therefor.
same kind and
quality 3. SUBJECT MATTER: Generally non-
7. Who bears risk of loss consumable whether real or personal
Bailor Debtor but if the consumable goods are not
8. When to return for consumption as when they are
In case of urgent Only after the merely for exhibition, consumable
need, even before expiration of the goods may be the subject of the
the expiration of the term commodatum. (Art 1936)
term
4. Bailor need not be the owner of the
thing owned (Art. 1938) since by the
Loan Credit loan, ownership does not pass to the
Delivery by one party Ability of a person to borrower.
and the receipt of borrow money or  A mere lessee or usufructuary
other party of a things by virtue of
may lend but the borrower or
given sum of money the trust or
or other consumable confidence reposed bailee himself may not lend nor
thing upon an by the lender that he lease the thing loaned to him to
agreement, express will pay what he a third person (Art 1932[2])
or implied, to repay promised.
the same. 5. Purely Personal (Art 1939):
 Death of either party terminates
the contract unless by
Loan Credit stipulation, the commodatum is
1. Interest taken at Interest is taken in transmitted to the heirs of either
the expiration of the advance or both parties.
credit  Bailee can neither lend nor lease
2. Always on a Always on a single the object of the contract to a
double name paper name paper (i.e.
third person.
(two signatures promissory note with
appear with both no indorse-ment
parties held liable other than the
for payment) maker)
CIVIL LAW COMMITTEE

NOTE:Use of the thing loaned NOTES:

may extend to members of the  However, the bailee’s right
bailee’s household except: extends no further than
a. contrary stipulation; retention of the thing loaned
b. nature of the thing until he is reimbursed for the
forbids such use damages suffered by him.
 He cannot lawfully sell the
Obligations of the Bailee: (Arts 1941 – thing to satisfy such damages
1945) without court’s approval.
1. To pay for the ordinary expenses for  In case there are two or
the use and preservation of the thing more bailees, their
loaned. (Art 1941) obligation shall be solidary.
2. To be liable for the loss of the thing
even if it should be through a Obligations of the bailor (Art 1946 – Art
fortuitous event in the following 1952):
cases: (KLAS D) 1. To respect the duration of the loan
a. when he keeps it longer than the GENERAL RULE: Allow the bailee
period stipulated, or after the the use of the thing loaned for the
accomplishment of its use duration of the period stipulated or
b. when he lends or leases it to until the accomplishment of the
third persons who are not purpose for which the commodatum
members of his household was instituted.
c. when the thing loaned has been EXCEPTIONS:
delivered with appraisal of its a. In case of urgent need in
value which case bailee may demand
d. when, being able to save either its return or temporary use;
of the thing borrowed or his own b. The bailor may demand
things, he chose to save the immediate return of the thing if
latter; or the bailee commits any act of
e. when the bailee devoted the ingratitude specified in Art. 765.
thing for any purpose different
from that for which it has been 2. To refund to the bailee
loaned (Art 1942) extraordinary expenses for the
3. To be liable for the deterioration of preservation of the thing loaned,
thing loaned (a) if expressly provided the bailee brings the same
stipulated; (b) if guilty of fault or to the knowledge of the bailor
negligence; or (c) if he devotes the before incurring them, except when
thing to any purpose different from they are so urgent that the reply to
that for which it has been loaned the notification cannot be awaited
4. To pay for extraordinary expenses without danger.
arising from the actual use of the
thing by the bailee, which shall be 3. To be liable to the bailee for
borne equally by both the bailor and damages for known hidden flaws.
the bailee, even though the bailee  Requisites:
acted without fault, unless there is a a. There is flaw or defect in the
stipulation to the contrary (Art 1949 thing loaned;
par 2) b. The flaw or defect is hidden;
5. To return the thing loaned c. The bailor is aware thereof;
 The bailee has no right to retain d. He does not advise the bailee of
the thing loaned as security for the same; and
claims he has against the bailor e. The bailee suffers damages by
even for extraordinary expenses reason of said flaw or defect
except for a claim for damages
suffered because of the flaws of
the thing loaned.
CIVIL LAW COMMITTEE

NOTES:
 If the above requisites concur, 3. Relationship Relationship is that
the bailee has the right of between the parties of a landlord and
is that of obligor- tenant
retention for damages.
obligee
 The bailor cannot exempt
himself from the payment of 4. Creditor receives Owner of the
expenses or damages by payment for his loan property rented
abandoning the thing to the receives
bailee. compensation or
price either in
SIMPLE LOAN OR MUTUUM (Art 1953 – money, provisions,
chattels, or labor
1961)
 A contract whereby one party from the occupant
delivers to another, money or other thereof in return for
consumable thing with the its use (Tolentino vs
understanding that the same amount Gonzales, 50 Phil 558
of the same kind and quality shall be 1927)
paid. (Art. 1953)
Loan Sale
NOTES:
 The mere issuance of the checks 1. Real contract Consensual contract
does not result in the perfection of
the contract of loan. The Civil Code 2. Generally Bilateral and
unilateral because reciprocal
provides that the delivery of bills of
only borrower has
exchange and mercantile obligations
documents, such as checks, shall
produce the effect of payment only NOTE: If the property is “sold”, but the
when they have been encashed real intent is only to give the object as
(Gerales vs. CA 218 SCRA 638). It is security for a debt – as when the “price”
only after the checks have produced is comparatively small – there really is a
the effect of payment that the contract of loan with an “equitable
contract of loan may be deemed mortgage.”
perfected.
 The obligation is “to pay” and not to Commodatum/
return because the consumption of Barter
Mutuum
the thing loaned is the distinguishing
character of the contract of mutuum 1. Subject matter is Subject matter is
from that of commodatum. money or fungible non-fungible, (non
 No estafa is committed by a person things consumable) things
who refuses to pay his debt or denies
its existence. 2. In commodatum, The thing with
the bailee is bound equivalent value is
to return the given in return for
Simple Loan/Mutuum Rent identical thing what has been
borrowed when the received
1. Delivery of money Delivery of some time has expired or
or some consumable non-consumable purpose served
thing with a promise thing in order that
to pay an equivalent the other may use it 3. Mutuum may be Onerous, actually a
of the same kind and during a certain gratuitous and mutual sale
quality period and return it commodatum is
to the former. always gratuitous
2. There is a transfer There is no transfer

of ownership of the of ownership of the
thing delivered thing delivered
CIVIL LAW COMMITTEE

 Form of Payment (Art 1955): b) With regard particularly to an

1. If the thing loaned is money - award of interest in the concept
payment must be made in the of actual and compensatory
currency stipulated, if it is possible; damages, the rate of interest, as
otherwise it is payable in the well as the accrual thereof, is
currency which is legal tender in the imposed, as follows:
Philippines and in case of i. When the obligation
extraordinary inflation or deflation, breached consists of
the basisi of payment shall be the payment of a sum of money
value of the currency at the time of (loan or forbearance of
the creation of the obligation money), the interest shall be
2. If what was loaned is a fungible that which is stipulated or
thing other than money - the agreed upon by the parties.
borrower is under obligation to pay In absence of an agreement,
the lender another thing of the same the rate shall be the legal
kind, quality and quantity. In case it rate (i.e. 12% per annum)
is impossible to do so, the borrower computed from default.
shall pay its value at the time of the NOTE: The interest due shall
perfection of the loan. itself earn legal interest
from the time it is judicially
Interest demanded
 The compensation allowed by law or ii. In other cases, the rate of
fixed by the parties for the loan or interest shall be six percent
forbearance of money, goods or (6%) per annum.
credits NOTE: No interest, however,
 Requisites for Demandability: (ELI) shall be adjudged on
1. must be expressly stipulated unliquidated claims or
Exceptions: damages except when or
a. indemnity for damages until the demand can be
b. interest accruing from established with reasonable
unpaid interest certainty. When the demand
2. must be lawful cannot be established, the
3. must be in writing interest shall begin to run
only from the date of the
Compound Interest judgment of the court is
GENERAL RULE: Unpaid interest shall made.
not earn interest. iii. When the judgment of the
EXCEPTIONS: court awarding a sum of
1. when judicially demanded money becomes final and
2. when there is an express executory, the rate of legal
stipulation (must be in writing in interest, whether the case
view of Art. 1956) falls under paragraph i or ii
above, shall be 12% per
Guidelines for the application of annum from such finality
proper interest rates until its satisfaction, this
1. If there is stipulation: that rate shall interim period being deemed
be applied to be by then an equivalent
2. The following are the rules of thumb to a forbearance of credit.
for the application/imposition of (Eastern Shipping Lines vs.
interest rates: CA, July 12, 1994)
a) When an obligation, regardless
of its source, i.e., law, NOTES:
contracts, quasi-contracts,  Central Bank Circular No. 416 fixing
delicts or quasi-delicts is the rate of interest at 12% per
breached, the contravenor can annum deals with loans, forbearance
be held liable for damages. of any money, goods or credits and
CIVIL LAW COMMITTEE

judgments involving such loans, or 2. Unilateral (gratutitous deposit) -

forbearance in the absence of only the depositary has an
express agreement to such rate obligation.
 Interest as indemnity for damages is 3. Bilateral (onerous deposit) -
payable only in case of default or gives rise to obligations on the
non-performance of the contract. As part of both the depositary and
they are distinct claims, they may be depositor.
demanded separately. (Sentinel
Insurance Co., Inc. vs CA, 182 SCRA Deposit Mutuum
517) 1. Purpose
 Central Bank Circular No. 905 (Dec. Principal purpose is Principal purpose is
10, 1982) removed the Usury Law safekeeping or consumption
custody
ceiling on interest rates for secured
2. When to Return
and unsecured loans, regardless of Depositor can The lender must wait
maturity. demand the return of until the expiration
the subject matter at of the period granted
Validity of unconscionable interest rate will to the debtor
in a loan 3. Subject Matter
Supreme Court in Sps. Solangon Subject matter may Subject matter is
vs. Jose Salazar, G.R. No. 125944, June be movable or only money or other
29, 2001, said that since the usury law immovable property fungible thing
had been repealed by CB Cir. No. 905 4. Relationship
there is no more maximum rate of Relationship is that Relationship is that
of lender (creditor) of depositor and
interest and the rate will just depend on
and borrower depositary.
the mutual agreement of the parties (debtor).
(citing Lim Law vs. Olympic Sawmill Co.,
129 SCRA 439). But the Supreme Court 5. Compensation
said that nothing in said circular grants There can be NO compensation of
lenders carta blanche authority to raise compensation of things deposited with
interest rates to level which will either credits. each other (except
enslave their borrowers or lead to a by mutual
hemorrhaging of their assets (citing agreement).
Almeda vs. CA, 256 SCRS 292). In Medel
vs. CA, 299 SCRA 481, it was ruled that Deposit Commodatum
while stipulated interest of 5.5% per
month on a loan is usurious pursuant to 1. Purpose is 1. Purpose is the
Safekeeping transfer of the use
CB Circular No. 905, the same must be
equitably reduced for being iniquitous,
2. May be gratuitous 2. Essentially and
unconscionable and exorbitant. It is always gratuitous
contrary to morals, (contra bonos
mores). It was reduced to 12% per 3. Movable/corporeal 3. Both movable and
annum in consonant with justice and fair things only in case of immovable may be
play. extrajudicial deposit the object
DEPOSIT (Articles 1962 – 2009)  Kinds of Deposit:

1. Judicial (Sequestration) –takes place
 A contract constituted from the when an attachment or seizure of
moment a person receives a thing property in litigation is ordered.
belonging to another, with the
obligation of safely keeping it and of 2. Extra-judicial
returning the same. a. Voluntary – one wherein the
delivery is made by the will of
Characteristics: the depositor or by two or more
1. Real Contract - contract is persons each of whom believes
perfected by the delivery of the himself entitled to the thing
subject matter. deposited. (Arts 1968 – 1995)
CIVIL LAW COMMITTEE

b. Necessary – one made in NOTES:

compliance with a legal  Article 1966 does not embrace
obligation, or on the occasion of incorporeal property, such as rights
any calamity, or by travellers in and actions, for it follows the person
hotels and inns (Arts 1996 - of the owner, wherever he goes.
2004), or by travellers with  A contract for the rent of safety
common carriers (Art 1734 – deposit boxes is not an ordinary
1735). contract of lease of things but a
NOTE: The chief difference special kind of deposit; hence, it is
between a voluntary deposit and a not to be strictly governed by the
necessary deposit is that in the provisions on deposit. The relation
former, the depositor has a between a bank and its customer is
complete freedom in choosing the that of a bailor and bailee. (CA Agro
depositary, whereas in the latter, vs CA, 219 SCRA 426)
there is lack of free choice in the
depositor. Obligations of the Depositary (Art 1972
–1991):
Judicial Extra-judicial 1. To keep the thing safely (Art 1972)
1. Creation  Exercise over the thing
Will of the court Will of the parties deposited the same diligence as
or contract he would exercise over his
2. Purpose property
Security or to insure Custody and 2. To return the thing (Art 1972)
the right of a party safekeeping  Person to whom the thing must
to property or to be returned:
recover in case of a. Depositor, to his heirs and
favorable judgment
successors, or the person who
3. Subject Matter may have been designated in the
Movables or Movables only contract
immovables, b. If the depositary is capacitated -
but generally he is subject to all the
immovables obligations of a depositary
4. Cause whether or not the depositor is
Always onerous May be compen- capacitated. If the depositor is
sated or not, but incapacitated, the depositary
generally gratuitous must return the property to the
legal representative of the
5. When must the thing be returned incapacitated or to the depositor
Upon order of the Upon demand of himself if he should acquire
court or when depositor capacity (Art 1970).
litigation is ended c. If the depositor is capacitated
and the depositary is
6. In whose behalf it is held
incapacitated - the latter does
Person who has a Depositor or third
right person designated not incur the obligation of a
depositary but he is liable:
i..to return the thing
GENERAL RULE: Contract of deposit is deposited while still in his
gratuitous (Art 1965) possession;
EXCEPTIONS: ii.to pay the depositor the
1. when there is contrary amount which he may have
stipulation benefited himself with the
2. depositary is engaged in business thing or its price subject to
of storing goods the right of any third person
3. property saved from destruction who acquired the thing in
without knowledge of the owner good faith (Art 1971)
CIVIL LAW COMMITTEE

 Time of return: 5. Not to commingle things deposited if

a. Upon demand even though a so stipulated (Art 1976)
specified period or time for such 6. Not to make use of the thing
return may have been fixed deposited unless authorized (Art
except when the thing is 1977)
judicially attached while in the GENERAL RULE: Deposit is for
depositary’s possession or should safekeeping of the subject matter
he have been notified of the and not for use. The unauthorized
opposition of a third person to use by the depositary would make
the return or the removal of the him liable for damages.
thing deposited. (Art 1998) EXCEPTIONS:
b. If deposit gratuitous, the 1. When the preservation of the
depositary may return the thing thing deposited requires its use
deposited notwithstanding that a 2. When authorized by the
period has been fixed for the depositor
deposit if justifiable reasons
exists for its return. NOTE: The permission to use is NOT
c. If the deposit is for a presumed except when such use is
valuable consideration, the necessary for the preservation of the
depositary has no right to return thing deposited.
the thing deposited before the
expiration of the time Effect if permission to use is given
designated even if he should (Art 1978):
suffer inconvenience as a 1. If thing deposited is non-
consequence.(Art 1989) consumable, the contract loses
the character of a deposit and
 What to return: product, acquires that of a commodatum
accessories, and accessions of despite the fact that the parties
the thing deposited (Art 1983) may have denominated it as a
3. Not to deposit the thing with a third deposit, unless safekeeping is
person unless authorized by express still the principal purpose.
stipulation (Art 1973) 2. If thing deposited consists of
 The depositor is liable for the money/consumable things, the
loss of the thing deposited under contract is converted into a
Article 1973 if: simple loan or mutuum unless
a. he transfers the deposit safekeeping is still the principal
with a third person without purpose in which case it is called
authority although there is no an irregular deposit. Example:
negligence on his part and the bank deposits are irregular
third person; deposits in nature but governed
b. he deposits the thing by law on loans.
with a third person who is 7. When the thing deposited is
manifestly careless or unfit delivered sealed and closed :
although authorized even in the a. to return the thing deposited in
absence of negligence; or the same condition
c. the thing is lost through b. to pay for damages should the
the negligence of his employees seal or lock be broken through
whether the latter are his fault, which is presumed
manifestly careless or not. unless proved otherwise
4. If the thing deposited should earn c. to keep the secret of the deposit
interest (Art 1975): when the seal or lock is broken
a. to collect interest and the with or without his fault (Art
capital itself as it fall due 1981)
b. to take steps to preserve its NOTE: The depositary is
value and rights corresponding to authorized to open the thing
it
CIVIL LAW COMMITTEE

deposited which is closed and

sealed when (Art 1982): 2. The only benefit is 2. Essential cause for
i. there is presumed authority that which accrues the transaction is
(i.e. when the key has been to the depositor the necessity of the
borrower
delivered to him or the
instructions of the depositor 3. The irregular 3. Common creditors
cannot be done without depositor has a enjoy no preference
opening it) preference over in the distribution of
ii. necessity other creditors with the debtor’s
8. To change the way of the deposit if respect to the thing property
under the circumstances, the deposited
depositary may reasonably presume
that the depositor would consent to
the change if he knew of the facts of Rule when there are two or more
the situation, provided, that the depositors (Art 1985):
former notifies the depositor thereof 1. If thing deposited is divisible and
and wait for his decision, unless depositors are not solidary: Each
delay would cause danger depositor can demand only his
9. To pay interest on sums converted to proportionate share thereto.
personal use if the deposit consists 2. If obligation is solidary or if thing is
of money (Art 1983) not divisible: Rules on active
10. To be liable for loss through solidarity shall apply, i.e. each one
fortuitous event (SUDA): (Art 1979): of the solidary depositors may do
a. if stipulated whatever may be useful to the
b. if he uses the thing without the others but not anything which may
depositor's permission be prejudicial to the latter, (Art.
c. if he delays its return 1212) and the depositary may return
d. if he allows others to use it, the thing to anyone of the solidary
even though he himself may depositors unless a demand, judicial
have been authorized to use the or extrajudicial, for its return has
same been made by one of them in which
case, delivery should be made to him
NOTES: (Art. 1214).
 Fixed, savings, and current deposits 3. Return to one of depositors
of money in banks and similar stipulated. The depositary is bound
institutions shall be governed by the to return it only to the person
provisions concerning simple loan. designated although he has not made
(Art 1980) any demand for its return.
 The general rule is that a bank can
compensate or set off the deposit in NOTES:
its hands for the payment of any  The depositary may retain the thing
indebtedness to it on the part of the in pledge until full payment of what
depositor. In true deposit, may be due him by reason of the
compensation is not allowed. deposit (Art 1994).
 The depositor’s heir who in good
Irregular deposit Mutuum faith may have sold the thing which
he did not know was deposited, shall
1. The consumable 1. Lender is bound only be bound to return the price he
thing deposited may by the provisions of may have received or to assign his
be demanded at will the contract and right of action against the buyer in
by the depositor cannot demand case the price has not been paid him
restitution until the
(Art 1991).
time for payment, as
provided in the
contract, has arisen Obligations of the Depositor (Art 1992 –
1995):
1. To pay expenses for preservation
CIVIL LAW COMMITTEE

a. If the deposit is gratuitous, the Deposit by Travellers in hotels and

depositor is obliged to inns:
reimburse the depositary for  The keepers of hotels or inns shall be
expenses incurred for the responsible as depositaries for the
preservation of the thing deposit of effects made by travellers
deposited (Art 1992) provided:
b. If the deposit is for valuable a. Notice was given to them or to
consideration, expenses for their employees of the effects
preservation are borne by the brought by the guest; and
depositary unless there is a b. The guests take the precautions
contrary stipulation which said hotel-keepers or their
2. To pay loses incurred by the substitutes advised relative to
depositary due to the character of the care and vigilance of their
the thing deposited effects.
NOTES:
GENERAL RULE: The depositor shall  Liability extends to vehicles, animals
reimburse the depositary for any loss and articles which have been
arising from the character of the thing introduced or placed in the annexes
deposited. of the hotel.
EXCEPTIONS:  Liability shall EXCLUDE losses which
1. at the time of the deposit, the proceed from force majeure. The act
depositor was not aware of the of a thief or robber is not deemed
dangerous character of the thing force majeure unless done with the
2. when depositor was not expected use of arms or irresistible force.
to know the dangerous character  The hotel-keeper cannot free
of the thing himself from the responsibility by
3. when the depositor notified the posting notices to the effect that he
depository of the same is not liable for the articles brought
4. the depositary was aware of it by the guest. Any stipulation to such
without advice from the depositor effect shall be void.
 Notice is necessary only for suing
Extinguishment of Voluntary Deposit
civil liability but not in criminal
(Art 1995)
liability.
1. Loss or destruction of the thing
deposited
GUARANTY (Articles 2047 – 2084)
2. In case of gratuitous deposit, upon
the death of either the depositor or
 A contract whereby a person
the depositary
(guarantor) binds himself to the
3. Other causes, such as return of the
creditor to fulfil the obligation of
thing, novation, merger, expiration
the principal debtor in case the
of the term fulfilment of the
latter fail to do so.
resolutory condition, etc (Art 1231)
 Classification of Guaranty:
Necessary Deposits
1. In the Broad sense:
1. Made in compliance with a legal
a. Personal - the guaranty is the
obligation
credit given by the person who
2. Made on the occasion of any
guarantees the fulfilment of the
calamity such as fire, storm, flood,
principal obligation.
pillage, shipwreck or other similar
b. Real - the guaranty is the
events (deposito miserable)
property, movable or
3. Made by travellers in hotels and inns
immovable.
or by travellers with common carrier
CIVIL LAW COMMITTEE

2. As to its Origin same as a solidary debtor, except

a. Conventional - agreed upon by that he himself is a principal debtor.
the parties.  In suretyship, there is but one
b. Legal - one imposed by virtue of contract, and the surety is bound by
a provision of a law. the same agreement which binds the
c. Judicial - one which is required principal. A surety is usually bound
by a court to guarantee the with the principal by the same
eventual right of one of the instrument, executed at the same
parties in a case. time and upon the same
3. As to Consideration consideration (Palmares vs CA, 288
a. Gratuitous - the guarantor does SCRA 422)
not receive any price or  It is not for the obligee to see to it
remuneration for acting as such. that the principal debtor pays the
b. Onerous - the guarantor receives debt or fulfill the contract, but for
valuable consideration. the surety to see to it that the
4. As to the Person guaranteed principal debtor pays or performs
a. Single - one constituted solely to (Paramount Insurance Corp vs CA,
guarantee or secure 310 SCRA 377)
performance by the debtor of
the principal obligation. Nature of Surety’s undertaking:
b. Double or sub-guaranty - one 1. Liability is contractual and accessory
constituted to secure the but direct
fulfilment by the guarantor of a NOTE: He directly, primarily and
prior guaranty. equally binds himself with the
5. As to Scope and Extent principal as original promisor,
a. Definite - the guaranty is limited although he possesses no direct or
to the principal obligation only, personal interest over the latter’s
or to a specific portion thereof. obligation, nor does he receive any
b. Indefinite or simple - one which benefits therefrom. (PNB vs CA, 198
not only includes the principal SCRA 767)
obligation but also all its 2. Liability limited by the terms of the
accessories including judicial contract.
costs NOTE: It cannot be extended by
implication beyond the terms of the
SURETYSHIP contract (PNB vs CA, 198 SCRA 767)
3. Liability arises only if principal
 A contract whereby a person (surety) debtor is held liable.
binds himself solidarily with the NOTES:
principal debtor  The creditor may sue separately
 A relation which exists where one or together the principal debtor
person (principal) has undertaken an and the surety. Where there are
obligation and another person several sureties, the obligee may
(surety) is also under a direct and proceed against any one of
primary obligation or other duty to them.
the obligee, who is entitled to but
 In the absence of collusion, the
one performance, and as between
surety is bound by a judgment
the two who are bound, the second
against the principal even
rather than the first should perform
though he was not a party to the
(Agro Conglomerates, Inc. vs. CA,
proceedings. The nature of its
348 SCRA 450)
undertaking makes it privy to all
NOTES:
proceedings against its principal
 The reference in Article 2047 to (Finman General Assurance
solidary obligations does not mean Corp. vs. Salik, 188 SCRA 740)
that suretyship is withdrawn from
the applicable provisions governing
guaranty. A surety is almost the
CIVIL LAW COMMITTEE

4. Surety is not entitled to the benefit does, his liability shall be

of exhaustion reduced to the limits of that of
NOTE: He assumes a solidary liability the debtor.
for the fulfilment of the principal 2. Subsidiary and Conditional - takes
obligation (Towers Assurance Corp effect only in case the principal
vs. Ororama Supermart, 80 SCRA debtor fails in his obligation.
262) as an original promissory and
debtor from the beginning. NOTES:
5. Undertaking is to creditor and not to  The guarantor cannot bind
debtor. himself for more than the
NOTE: The surety makes no principal debtor and even if he
covenant or agreement with the does, his liability shall be
principal that it will fulfil the reduced to the limits of that of
obligation guaranteed for the benefit the debtor. But a guarantor may
of the principal. Such a promise is bind himself for less than that of
not implied by law either; and this is the principal (Art 2054)
true even where under the contract  A guaranty may be given as
the creditor is given the right to sue security for future debts, the
the principal, or the latter and the amount of which is not yet
surety at the same time. (Arranz vs. known; there can be no claim
Manila Fidelity & Surety Co., Inc., against the guarantor until the
101 Phil. 272) debt is liquidated. A conditional
6. Surety is not entitled to notice of obligation may also be secured.
principal’s default (Art 2053)
NOTE: The creditor owes no duty of 3. Unilateral - may be entered even
active diligence to take care of the w/o the intervention of the principal
interest of the surety and the surety debtor, in which case Art. 1236 and
is bound to take notice of the 1237 shall apply and it gives rise only
principal’s default and to perform to a duty on the part of the
the obligation. He cannot complain guarantor in relation to the creditor
that the creditor has not notified and not vice versa.
him in the absence of a special 4. Nominate
agreement to that effect. (Palmares 5. Consensual
vs CA, 288 SCRA 422) 6. It is a contract between the
7. Prior demand by the creditor upon guarantor/surety and creditor.
principal is not required
NOTE: As soon as the principal is in NOTES:
default, the surety likewise is in  Acceptance of guaranty by
default. creditor and notice thereof to
8. Surety is not exonerated by neglect guarantor:
of creditor to sue principal
 In declaring that guaranty
must be express, the law
Characteristics of Guaranty and
refers solely and exclusively
Suretyship:
to the obligation of the
1. Accessory - It is indispensable
guarantor because it is he
condition for its existence that there
alone who binds himself by
must be a principal obligation.
his acceptance. With respect
NOTES:
to the creditor, no such
 Guaranty may be constituted to requirement is needed
guarantee the performance of a because he binds himself to
voidable or unenforceable nothing.
contract. It may also guarantee
 However, when there is
a natural obligation. (Art 2052)
merely an offer of a
 The guarantor cannot bind guaranty, or merely a
himself for more than the conditional guaranty, in the
principal debtor and even if he
CIVIL LAW COMMITTEE

sense that it requires action that the contract is one of

by the creditor before the suretyship or guaranty. It cannot
obligation becomes fixed, it be used as an aid in determining
does not become binding whether a party’s undertaking is
until it is accepted and until that of a surety or guarantor.
notice of such acceptance by (Palmares vs CA, 288 SCRA 292)
the creditor is given to, or  It does not apply in case of
acquired by, the guarantor, compensated sureties.
or until he has notice or 10. It is a contract which requires that
knowledge that the creditor the guarantor must be a person
has performed the condition distinct form the debtor because a
and intends to act upon the person cannot be the personal
guaranty. guarantor of himself.
 But in any case, the creditor NOTE: However, in a real guaranty,
is not precluded from like pledge and mortgage, a person
waiving the requirement of may guarantee his own obligation
notice. with his personal or real properties.
 The consideration of the
guaranty is the same as the Guaranty Suretyship
consideration of the principal
obligation. 1. Liability depends 1. Surety assumes
 The creditor may proceed upon an independent liability as regular
agreement to pay the party to the
against the guarantor although obligation if primary undertaking
he has no right of action against debtor fails to do so
the principal debtor.
7. Not presumed. It must be expressed 2. Collateral under- 2. Surety is an
and reduced in writing. taking original promisor
NOTE: A power of attorney to loan
money does not authorize the agent 3. Guarantor is 3. Surety is
to make the principal liable as a secondarily liable primarily liable
surety for the payment of the debt
of a third person. (BPI vs. Coster, 47 4. Guarantor binds 4. Surety undertakes
Phil. 594) himself to pay if to pay if the principal
the principal DOES NOT PAY
8. Falls under the Statute of Frauds CANNOT PAY
since it is a “special promise to
answer for the debt, default or 5. Insurer of 5. Insurer of the
miscarriage of another”. solvency of debtor debt
9. Strictly interpreted against the
creditor and in favor of the 6. Guarantor can 6. Surety cannot
guarantor/surety and is not to be avail of the benefit avail of the benefit
extended beyond its terms or of excussion and of excussion and
specified limits. (Magdalena Estates, division in case division
Inc. vs Rodriguez, 18 SCRA 967) The creditor proceeds
against him
rule of strictissimi juris commonly
pertains to an accommodation surety
because the latter acts without Indorsement Guaranty
motive of pecuniary gain and hence,
1. Primarily of 1. Contract of
should be protected against unjust transfer security
pecuniary impoverishment by
imposing on the principal, duties 2. Unless the note is 2. Failure in either or
akin to those of a fiduciary. promptly presented both of these
for payment at particulars does not
NOTES: maturity and due generally work as an
 The rule will apply only after it notice of dishonor absolute discharge of
given to the indorser a guarantor’s
has been definitely ascertained
within a reasonable liability, but his is
CIVIL LAW COMMITTEE

time he will be discharged only to Double or sub-guaranty (Art 2051 2nd

discharged abso- the extent of the loss par)
lutely from all which he may have  One constituted to guarantee the
liability thereon, suffered in obligation of a guarantor
whether he has consequence thereof
suffered any actual
damage or not Continuing guaranty (Art 2053)
 One which is not limited to a single
3. Indorser does not 3. Guarantor transaction but which contemplates
warrant the solvency. warrants the solvency a future course of dealings, covering
He is answerable on a of the promisor a series of transactions generally for
strict compliance an indefinite time or until revoked.
with the law by the
holder, whether the NOTES:
promisor is solvent or
not
 Prospective in operation (Diño vs CA,
216 SCRA 9)
4. Indorser can be 4. Guarantor cannot  Construed as continuing when by the
sued as promisor be sued as promisor terms thereof it is evident that the
object is to give a standing credit to
Guaranty Warranty the principal debtor to be used from
A contract by which a An undertaking that time to time either indefinitely or
person is bound to the title, quality, or until a certain period, especially if
another for the quantity of the the right to recall the guaranty is
fulfilment of a subject matter of the expressly reserved (Diño vs CA, 216
promise or contract is what it
SCRA 9)
engagement of a has been represented
third party to be, and relates to  “Future debts” may also refer to
some agreement debts existing at the time of the
made ordinarily by constitution of the guaranty but the
the party who makes amount thereof is unknown and not
the warranty to debts not yet incurred and
existing at that time.
NOTES:  Exception to the concept of
 A guaranty is gratuitous, unless there continuing guaranty is chattel
is a stipulation to the contrary. The mortgage. A chattel mortgage can
cause of the contract is the same only cover obligations existing at the
cause which supports the obligation time the mortgage is constituted and
as to the principal debtor. not those contracted subsequent to
 The peculiar nature of a guaranty or the execution thereof (The Belgian
surety agreement is that is is Catholic Missionaries, Inc. vs.
regarded as valid despite the Magallanes Press, Inc., 49 Phil 647).
absence of any direct consideration An exception to this is in case of
received by the guarantor or surety stocks in department stores, drug
either from the principal debtor or stores, etc. (Torres vs. Limjap, 56
from the creditor; a consideration Phil 141).
moving to the principal alone will
suffice. Extent of Guarantor’s liability: (Art
 It is never necessary that the 2055)
guarantor or surety should receive 1. Where the guaranty definite: It is
any part or benefit, if such there be, limited in whole or in part to the
accruing to the principal. (Willex principal debt, to the exclusion of
Plastic Industries Corp. vs. CA, 256 accessories.
SCRA 478) 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
CIVIL LAW COMMITTEE

latter, that the guarantor shall only judicially declared insolvent or

be liable for those costs incurred bankrupt
after he has been judicially required 2. When he has absconded, or cannot
to pay. be sued within the Philippines unless
he has left a manager or
Qualifications of a guarantor: (Arts representative
2056-2057) 3. In case of insolvency of the debtor
1. possesses integrity  Must be actual
2. capacity to bind himself 4. If the guarantor has expressly
3. has sufficient property to answer renounced it
for the obligation which he 5. If he has bound himself solidarily
guarantees with the debtor
NOTES: Other grounds: (BIPS)

 The qualifications need only be 6. If he is a judicial bondsman or sub-
present at the time of the perfection surety
of the contract. 7. If he fails to interpose it as a
 The subsequent loss of the integrity defense before judgment is rendered
or property or supervening against him
incapacity of the guarantor would 8. If the guarantor does not set up the
not operate to exonerate the benefit against the creditor upon the
guarantor or the eventual liability he latter’s demand for payment from
has contracted, and the contract of him, and point out to the creditor
guaranty continues. available property to the debtor
 However, the creditor may demand within Philippine territory, sufficient
another guarantor with the proper to cover the amount of the debt (Art
qualifications. But he may waive it if 2060)
he chooses and hold the guarantor to  Demand can be made only after
his bargain. judgment on the debt
 Demand must be actual; joining
Benefit of Excussion (Art 2058) the guarantor in the suit against
 The right by which the guarantor the principal debtor is not the
cannot be compelled to pay the demand intended by law
creditor unless the latter has 9. Where the pledge or mortgage has
exhausted all the properties of the been given by him as special security
principal debtor, and has resorted to
all of the legal remedies against such Benefit of Division (Art 2065)
debtor.  Should there be several guarantors
of only one debtor and for the same
NOTE: debt, the obligation to answer for
 Not applicable to a contract of the same is divided among all.
suretyship (Arts 2047, par. 2;  Liability: Joint
2059[2])
 Cannot even begin to take place NOTES:
before judgment has been obtained  The creditor can claim from the
against the debtor (Baylon vs CA, guarantors only the shares they are
312 SCRA 502) respectively bound to pay except
when solidarity is stipulated or if
When Guarantor is not entitled to the any of the circumstances
benefit of excussion: (PAIRS) enumerated in Article 2059 should
1. If it may be presumed that an take place.
execution on the property of the  The right of contribution of
principal debtor would not result in guarantors who pays requires that
the satisfaction of the obligation the payment must have been made
 Not necessary that the debtor be (a) in virtue of a judicial demand, or
CIVIL LAW COMMITTEE

(b) because the principal debtor is 2. A guarantor is entitled to be heard

insolvent (Art 2073). before and execution can be issued
 If any of the guarantors should be against him where he is not a party
insolvent, his share shall be borne by in the case involving his principal
the others including the paying (procedural due process).
guarantor in the same joint
proportion following the rule in Guarantor’s Right of Indemnity or
solidary obligations. Reimbursement (Art 2066)
 The above rule shall not be GENERAL RULE: Guaranty is a contract
applicable unless the payment has of indemnity. The guarantor who makes
been made in virtue of a judicial payment is entitled to be reimbursed by
demand or unless the principal the principal debtor.
debtor is insolvent.
 The right to contribution or NOTE: The indemnity consists of: (DIED)
reimbursement from his co- 1. Total amount of the debt – no
guarantors is acquired ipso jure by right to demand reimbursement
virtue of said payment without the until he has actually paid the
need of obtaining from the creditor debt, unless by the terms of the
any prior cession of rights to such contract, he is given the right
guarantor. before making payment. He
cannot collect more than what
 The co-guarantors may set up
he has paid.
against the one who paid, the same
2. Legal interest thereon from the
defenses which have pertained to
time the payment was made
the principal debtor against the
known (notice of payment in
creditor and which are not purely
effect a demand so that if the
personal to the debtor. (Art 2074)
debtor does not pay
immediately, he incurs in delay)
Procedure when creditor sues: (Art.
to the debtor, even though it did
2062)
not earn interest for the
 The creditor must sue the principal
creditor. Guarantor’s right to
alone; the guarantor cannot be sued
legal interest is granted by law
with his principal, much less alone
by virtue of the payment he has
except in Art. 2059.
made.
3. Expenses incurred by the
1. Notice to guarantor of the action
guarantor after having notified
 The guarantor must be NOTIFIED the debtor that payment has
so that he may appear, if he so been demanded of him by the
desires, and set up defenses he creditor; only those expenses
may want to offer. that the guarantor has to satisfy
 If the guarantor appears, he is in accordance with law as a
still given the benefit of consequence of the guaranty
exhaustion even if judgment (Art. 2055) not those which
should be rendered against him depend upon his will or own acts
and principal debtor. His or his fault for these are his
voluntary appearance does not exclusive personal responsibility
constitute a renunciation of his and it is not just that they be
right to excussion (see Art. shouldered by the debtor.
2059(1)). 4. Damages if they are due in
 Guarantor cannot set up the accordance
defenses if he does not appear with law. General rules on
and it may no longer be possible damages apply.
for him to question the validity
of the judgment rendered EXCEPTIONS:
against the debtor. 1. Where the guaranty is
constituted without the
CIVIL LAW COMMITTEE

knowledge or against the will of against the guarantor those

the principal debtor, the defenses which he could have
guarantor can recover only set up against the creditor at the
insofar as the payment had been time the payment was made,
beneficial to the debtor (Art. e.g. the debtor can set up
2050). against the guarantor the
2. Payment by a third person who defense of previous
does not intend to be reimbursed extinguishment of the obligation
by the debtor is deemed to be a by payment.
donation, which, however,
requires the debtor’s consent. 2. Before Maturity (Art 2069)
But the payment is in any case  Not entitled to reimbursement
valid as to the creditor who has unless the payment was made
accepted it (Art. 1238). with the consent or has been
3. Waiver of the right to demand ratified by the debtor
reimbursement.
Effect of Repeat Payment by debtor:
Guarantor’s right to Subrogation (Art 2070)
(ART.2067) GENERAL RULE: Before guarantor pays
 Subrogation transfers to the person the creditor, he must first notify the
subrogated, the credit with all the debtor (Art. 2068). If he fails to give
rights thereto appertaining either such notice and the debtor repeats
against the debtor or against third payment, the guarantor can only collect
persons, be they guarantors or from the creditor and guarantor has no
possessors of mortgages, subject to cause of action against the debtor for
stipulation in conventional the return of the amount paid by
subrogation. guarantor even if the creditor should
become insolvent.
NOTE: This right of subrogation is
necessary to enable the guarantor to EXCEPTION: The guarantor can still
enforce the indemnity given in Art. claim reimbursement from the debtor in
2066. spite of lack of notice if the following
 It arises by operation of law upon conditions are present: (PIG)
payment by the guarantor. It is not a. guarantor was prevented by
necessary that the creditor cede to fortuitous event to advise the
the guarantor the former’s rights debtor of the payment; and
against the debtor. b. the creditor becomes insolvent;
 It is not a contractual right. The c. the guaranty is gratuitous.
right of guarantor who has paid a
debt to subrogation does not stand Right of Guarantor to proceed against
upon contract but upon the debtor before payment
principles of natural justice. GENERAL RULE: Guarantor has no
 The guarantor is subrogated by cause of action against debtor until after
virtue of the payment to the rights the former has paid the obligation
of the creditor, not those of the EXCEPTION: Article 2071
debtor.
 Guarantor cannot exercise the NOTES:
right of redemption of his  Article 2071 is applicable and
principal (Urrutia & Co vs available to the surety. (Manila
Morena and Reyes, 28 Phil 261) Surety & Fidelity Co., Inc. vs Batu
Construction & Co., 101 Phil 494)
Effect of Payment by Guarantor  Remedy of guarantor:
1. Without notice to debtor: (Art (a) obtain release from the
2068) guaranty; or
 The debtor may interpose (b) demand a security that shall
protect him from any
CIVIL LAW COMMITTEE

proceedings by the creditor, and by the fact that they are given “in
against the danger of insolvency virtue… of a judicial order.”
of the debtor  If the person required to give a legal
or judicial bond should not be able
Art. 2066 Art. 2071 to do so, a pledge or mortgage
Provides for the Provides for his sufficient to cover the obligation
enforcement of the protection before he shall admitted in lieu thereof (Art
rights of the has paid but after he 2083)
guarantor/surety has become liable
against the debtor  A judicial bondsman and the sub-
after he has paid the surety are NOT entitled to the
debt benefit of excussion because they
Gives a right of Protective remedy are not mere guarantors, but
action after payment before payment. sureties whose liability is primary
Substantive right Preliminary remedy and solidary. (Art 2084)
Extinguishment of guaranty: (RA2CE2) PLEDGE, MORTGAGE AND ANTICHRESIS

1. Release in favor of one of the I. Common Elements of Pledge,
guarantors, without the consent of Mortgage, and Antichresis (Articles
the others, benefits all to the extent 2085 – 2092)
of the share of the guarantor to
whom it has been granted (Art A. Essential Requisites (SOD) (Art
2078); 2085)
2. If the creditor voluntarily accepts 1. Secures the fulfillment of a principal
immovable or other properties in obligation;
payment of the debt, even if he 2. Pledgor, mortgagor, antichretic
should afterwards lose the same debtor must be the absolute owner
through eviction or conveyance of of the thing pledged or mortgaged;
property (Art 2077); and
3. Whenever by some act of the  The reason being that in
creditor, the guarantors even though anticipation of a possible
they are solidarily liable cannot be foreclosure sale in case of
subrogated to the rights, mortgages default which is still a sale, the
and preferences of the former (Art rule is that the seller must be
2080); the owner of the thing sold
4. For the same causes as all other (Cavite Development Bank vs.
obligations (Art 1231); Lim, 324 SCRA 346)
5. When the principal obligation is 3. Pledgor, mortgagor, antichretic
extinguished; debtor must have free disposal of
6. Extension granted to the debtor by their property, or be legally
the creditor without the consent of authorized for such purpose.
the guarantor (Art 2079)
NOTES:
BOND  Third persons can pledge or
 An undertaking that is sufficiently mortgage their own property to
secured, and not cash or currency secure the principal obligation.
 It is not necessarily void simply
Bondsman (Art 2082) because the accommodation pledgor
 A surety offered in virtue of a or mortgagor did not benefit from
provision of law or a judicial order. the same. So long as valid consent
He must have the qualifications was given, the fact that the loan was
required of a guarantor and in given solely for the benefit of the
special laws like the Rules of Court. principal debtor would not invalidate
the mortgage (GSIS vs CA, 170 SCRA
NOTES: 533)
 Judicial bonds constitute merely a
special class of contracts of guaranty
CIVIL LAW COMMITTEE

 The accommodation pledgor or C. Capability to secure all kinds of

mortgagor, without expressly obligations, i.e. pure or
assuming personal liability for such conditional (Art 2091)
debt, is not liable for the payment of
any deficiency, should the property D. Indivisibility (Art 2089)
not be sufficient to cover the debt GENERAL RULE: A pledge, mortgage, or
(Bank of America vs. American antichresis is indivisible, even though
Realty Corporation, 321 SCRA 659). the debt may be divided among the
 The accommodation pledgor or successors in interest of the debtor or of
mortgagor is not solidarily bound the creditor.
with the principal obligor but his  Their indivisibility is not affected by
liability extents only to the property the fact that the debtors are jointly
pledged or mortgaged. Should there or not solidarily liable.
be any deficiency, the creditor has
recourse on the principal debtor who Consequences of indivisibility:
remains to be primarily bound. 1. Single thing – Every portion of the
 The law grants to the property pledged or mortgaged is
accommodation pledgor or answerable for the whole obligation
mortgagor the same rights as a 2. Several things – All of the several
guarantor and he cannot be things pledged or mortgaged are
prejudiced by any waiver of defense liable for the totality of the debt
by the principal debtor. 3. Debtor’s heir/creditor’s heir -
Neither the debtor’s heir who has
B. Prohibition against Pactum paid part of the debt cannot ask for
Commissorium (Art 2088; 2137) proportionate extinguishment, nor
creditor’s heir who received his
Pactum Commissorium share of the debt return the pledge
 Stipulation whereby the thing or cancel the mortgage as long as
pledged or mortgaged, or under the debt is not completely satisfied.
antichresis shall automatically
become the property of the creditor EXCEPTIONS:
in the event of non-payment of the 1. Where each one of several things
debt within the term fixed. guarantees a determinate
portion of the credit
Requisites: 2. Where only a portion of the loan
1. There should be a pledge, mortgage, was released
or antichresis of property by way of 3. Where there was failure of
security for the payment of the consideration.
principal obligation; and 4. Where there is no debtor-
2. There should be a stipulation for an creditor relationship
automatic appropriation by the
creditor of the property in event of NOTES:
nonpayment of the obligation within  The mere embodiment of a real
the stipulated period. estate mortgage and a chattel
mortgage in one document does not
GENERAL RULE: Pactum Commissorium have the effect of fusing both
is forbidden by law and is declared null securities into an indivisible whole.
and void.  The mortgagee, therefore, may
EXCEPTION: The pledgee may legally foreclose the real estate
appropriate the thing pledged if after mortgage extrajudicially and waive
the first and second auctions, the thing the chattel mortgage foreclosure,
is not sold. (Art 2112) and maintain instead a personal
action for the recovery of the unpaid
NOTE: The security contract remains balance of the credit (Phil. Bank of
valid; only the prohibited stipulation is Commerce vs. Macadaeg, 109 Phil
void. 981)
CIVIL LAW COMMITTEE

E. When the principal obligation  Kinds:

becomes due, the things in which 1. Conventional /Voluntary – created
the pledge, mortgage, or by contract
antichresis consists may be 2. Legal – created by operation of law
alienated for the payment to the (examples: Art. 546, 1731 and 1914
creditor. (Art. 2087) NCC)
NOTES: NOTES:
 If the debtor fails to comply with the  The provisions of possession, care
obligation at the time it falls due, and sale of the thing as well as on
the creditor is merely entitled to the termination of the pledge
move for the sale of the thing governing conventional pledges are
pledged or mortgaged in order to applicable to pledges created by
collect the amount of his claim from operation of law (Art 2121)
the proceeds.  Unlike, however, in conventional
 If he wishes to secure a title to the pledge where the debtor is not
mortgaged property, he can buy it in entitled to the excess unless it is
the foreclosure sale (Montevirgin vs. otherwise agreed, in legal pledge,
CA, 112 SCRA 641) the remainder of the price of the
sale after payment of the debt and
F. Pledgor, mortgagor, antichretic expenses, shall be delivered to the
debtor retains ownership of the debtor.
thing given as a security  In legal pledge, there is no definite
period for the payment of the
PLEDGE (Arts 2093 – 2123) principal obligation. The pledgee
must make a demand for the
 A contract wherein the debtor payment of the amount due him;
delivers to the creditor or to a third otherwise he cannot exercise the
person a movable or document right of sale at public auction (Art
evidencing incorporeal rights for the 2122)
purpose of securing fulfilment of a
principal obligation with the Characteristics:
understanding that when the 1. Real contract – it is perfected by
obligation is fulfilled, the thing the delivery of the thing pledged by
delivered shall be returned with all the debtor who is called the
its fruits and accessions. pledgor to the creditor who is
called the pledgee, or to a third
 Special Requisites (in addition to person by common agreement;
the common essential requisites): 2. Accessory contract – it has no
1. Possession of the thing pledged must independent existence of its own;
be transferred to the creditor or a 3. Unilateral contract – it creates an
third person by agreement (Art obligation solely on the part of the
2093); creditor to return the thing subject
2. It can only cover movable property thereof upon the fulfilment of the
and incorporeal rights evidenced by principal obligation; and
documents of title and the 4. Subsidiary contract – the obligation
instruments proving the right incurred does not arise until the
pledged shall be delivered to the fulfilment of the principal
creditor, and if negotiable must be obligation which is secured.
endorsed (Art 2094); and
3. The description of the thing pledged Consideration in pledge:
and the date must appear in a public  Insofar as the pledgor is concerned,
instrument to bind third persons, but the cause is the principal obligation.
not for the validity of the contract
(Art 2096).
CIVIL LAW COMMITTEE

 If the pledgor is not the debtor, the 10. To be reimbursed for the expenses
cause is the compensation stipulated made for the preservation of the thing
for the pledge or the mere liberality pledged (Art 2099)
of the pledgor. 11. To object to the alienation of the
thing
Extent of pledge: Unless stipulated 12. To possess the thing (Art 2098)
otherwise, pledge extends to the fruits, 13. To sell at public auction in case of
interests or earnings of the thing. non-payment of debt at maturity (Art
2112)
Rights and Obligations of a Pledgor To choose which of the several things
Rights Obligations pledged shall be sold (Art 2119)
1. To demand return in 1. To advise the 14. Option to demand replacement or
case of reasonable pledgee of the immediate payment of the debt in case
grounds to fear flaws of the thing of deception as to substance or quality
destruction or (Art 2101) (Art 2109)
impairment of the thing 2. Not to demand 15. To sell at public auction in case of
without the pledgee’s the return of the reasonable grounds to fear destruction
fault, subject to the thing until after
or impairment of the thing without his
duty of replacement full payment of
(Art 2107) the debt, fault (Art 2108)
2. To bid and be including interest 16. To bring actions pertaining to the
preferred at the public due thereon and owner (Art 2103)
auction (Art 2113) expenses incurred 17. To choose which of several things
3. To alienate the thing for its pledged shall be sold
pledged provided the preservation (Art 18. To bid at the public auction (Art
pledgee consents to the 2105) 2113)
sale (Art 2097) 19. To appropriate the thing in case of
4. To ask that the thing
failure of the 2nd public auction (Art
pledged be deposited
(Arts 2104 & 2106) 2112)
20. To apply said fruits, interests or
Rights of the Pledgee earnings to the interest, if any, then to
KEY: D SBC BA2R2OPS2 the principal of the credit (Art 2102)
1. Option to demand replacement or 21. To retain excess value received
immediate payment of the debt in case in the public sale (Art 2115)
of deception as to substance or quality 22. To retain the thing until after full
(Art 2109) payment of the debt (Art 2098)
2. To sell at public auction in case of 23. To be reimbursed for the expenses
reasonable grounds to fear destruction made for the preservation of the thing
or impairment of the thing without his pledged (Art 2099)
fault (Art 2108) 24. To object to the alienation of the
3. To bring actions pertaining to the thing
owner (Art 2103) 25. To possess the thing (Art 2098)
4. To choose which of several things 26. To sell at public auction in case of
pledged shall be sold non-payment of debt at maturity (Art
5. To bid at the public auction (Art 2112)
2113) 27. To choose which of the several
6. To appropriate the thing in case of things pledged shall be sold (Art 2119)
failure of the 2nd public auction (Art
2112) Obligations of the Pledgee
7. To apply said fruits, interests or KEY: CUDA3
earnings to the interest, if any, then to 1. Take care of the thing with the
the principal of the credit (Art 2102) diligence of a good father of a family
8. To retain excess value received in (Art 2099)
the public sale (Art 2115) 2. Not to use thing unless authorized or
9. To retain the thing until after full by the owner or its preservation requires
payment of the debt (Art 2098) its use (Art 2104)
CIVIL LAW COMMITTEE

3. Not to deposit the thing with a 3rd rise to a prima facie presumption that
person unless so stipulated (Art 2100) the thing has been returned and,
4. Responsibility for acts of agents and therefore, that the pledge has been
employees as regards the thing (Art extinguished but not the principal
2100) obligation itself. (Art 2110)
5. To advise pledgor of danger to the
thing (Art 2107) Requirements for sale of thing pledged
6. To advise pledgor of the result of the at public auction: (Art 2112)
public auction (Art 2116) 1. The debt is due and unpaid
2. Sale must be at a public auction
RIGHT OF PLEDGOR TO SUBSTITUTE 3. there must be notice to the pledgor
THING PLEDGED (ART.2107) and owner, stating the amount due
 Requisites: 4. Sale must be with the intervention of
1. The pledgor has reasonable a notary public
grounds to fear the destruction
or impairment of the thin Effect of sale of the thing pledged: (Art
pledged 2115)
2. There is no fault on the part of 1. The sale of the thing pledged shall
the pledgee extinguish the principal obligation,
3. The pledgor is offering in place whether or not the proceeds of the
of the thing, another thing in sale are equal to the amount of the
pledge which is of the same kind principal obligation, interest and
and quality as the former expenses in a proper case
4. The pledge does not choose to 2. If the price of the sale is more than
exercise his right to cause the the amount due the creditor, the
thing pledged to be sold at debtor is not entitled to the excess
public auction unless the contrary is provided
NOTE: The pledgee’s right to have the 3. If the price of the sale is less, the
thing pledged sold at public sale granted creditor is not entitled to recover
under the Article 2108 is superior to that the deficiency even if there is a
given to the pledgor to substitute the stipulation to that effect
thing pledged under Article 2107.
REAL ESTATE MORTGAGE (Articles
Prohibition against double pledge 2124-2131)
 Property which has been lawfully
pledged to one creditor cannot be  A contract whereby the debtor
pledged to another as long as the secures to the creditor the
first one subsists. fulfilment of a principal obligation,
NOTE: Possession of a creditor of the specially subjecting to such security
thing pledged is an essential requisite of immovable property or real rights
pledge. over immovable property in case the
principal obligation is not complied
Extinguishment of Pledge (CRAPS) with at the time stipulated.
1. For the same causes as all other
obligations (Art 1231) Characteristics of the contract:
2. Return of the thing pledged by the 1. Real
pledgee to the pledgor (Art 2110) 2. Accessory
3. Statement in writing by the 3. Subsidiary
pledgee that he renounces or 4. Unilateral – it creates only an
abandons the pledge (Art 2111) obligation on the part of the
4. Payment of the debt (Art 2105) creditor who must free the
5. Sale of thing pledged at public property from the encumbrance
auction (Art 2115) once the obligation is fulfilled.
NOTE: The possession by the debtor or
owner of the thing pledged subsequent
to the perfection of the pledge gives
CIVIL LAW COMMITTEE

NOTES: NOTE: Where a mortgage is not valid or

 As an accessory contract, its false, the principal obligation which it
consideration is that of the principal guarantees is not rendered null and void.
contract from which it receives life. What is lost only is the right to foreclose
 A mortgage does not involve a the mortgage as a special remedy for
transfer, cession or conveyance of satisfying or settling the indebtedness
property but only constitutes a lien which is the principal obligation but the
thereon. Until discharged, it follows mortgage deed remains as evidence or
the property wherever it goes and proof of a personal obligation of the
subsists notwithstanding changes of debtor and the amount due to the
ownership. creditor may be enforced in an ordinary
 A mortgage gives the mortgagee no personal action.
right or claim to the possession of
the property, and therefore, a mere  Kinds:
mortgagee has no right to eject an 1. Voluntary – agreed to by the parties
occupant of the property mortgaged or constituted by the will of the
unless the mortgage should contain owner of the property on which it is
some provision to that effect. The created
only right of a mortgagee in case of 2. Legal – one required by law to be
non-payment of a debt secured by executed in favour of certain persons
mortgage would be to foreclose the  The persons in whose favour the
mortgage and have the encumbered law establishes a mortgage have
property sold to satisfy the no other right than to demand
outstanding indebtedness. If the the execution and the recording
possession is transferred to the of the document in which the
mortgagee, it must not expressly be mortgage is formalized (Art 2125
for purpose of applying the fruits to par 2)
the interest then to the principal of 3. Equitable – one which, although
the credit, for then it would be an lacking the formalities of a
antichresis. mortgage, shows the intention of the
parties to make the property a
 It is not an essential requisite that security for a debt
the principal of the mortgage credit
bears interest, or that the interest
PLEDGE REAL MORTGAGE
as compensation for the use of the
1. Constituted on 1. Constituted on
principal and enjoyment of its fruits
movables immovables
be in the form of a certain percent 2. Property is 2. Delivery is not
thereof. delivered to pledgee necessary
or by common
 Special Requisites (in addition to consent to a third
the common essential requisites): person
1. It can cover only immovable 3. Not valid against 3. Not valid against
property and alienable real rights third persons unless a third persons unless
imposed upon immovables (Art description of the registered
2124); thing pledged and
date of pledge
2. It must appear in a public instrument appear in a public
(Art. 2125); and instrument
3. Registration in the registry of
property is necessary to bind third Extent of Mortgage:
persons, but not for the validity of  Absent express stipulation to the
the contract (Art 2125). contrary, the mortgage includes the
 An order for foreclosure cannot accessions, improvements, growing
be refused on the ground that fruits and income of the property not
the mortgage had not been yet received when the obligation
registered provided no innocent becomes due and to the amount of
third parties are involved. the indemnity granted or owing to
CIVIL LAW COMMITTEE

the proprietor from the insurers of property and includes the sale itself
the property mortgaged, or in virtue (DBP vs Zaragoza, 84 SCRA 668)
of expropriation for public use (Art  Foreclosure is valid where the debtor
2127) is in default in the payment of his
obligation (Gobonseng, Jr. vs CA,
Object of Mortgage: 246 SCRA 472)
 Future property cannot be an object
of a contract of mortgage (Art  Kinds:
2085[2]) However, a stipulation 1. Judicial – ordinary action for
subjecting to the mortgage lien, foreclosure under Rule 68 of the
properties (improvements) which the Rules of Court
mortgagor may subsequently acquire 2. Extrajudicial – when mortgagee is
install, or use in connection with given a special power of attorney to
real property already mortgaged sell the mortgaged property by
belonging to the mortgagor is valid public auction, under Act No. 3135
(People’s Bank and Trust Co. vs.
Dahican Lumber Co., 20 SCRA 84) Judicial Extrajudicial
foreclosure foreclosure
Special Rights: 1. There is court 1. No court
1. Mortgagor - To alienate the intervention intervention
mortgaged property but the 2. Decisions are 2. Not appealable
mortgage shall remain attached to appealable because it is
the property. immediately
executory
NOTE: A stipulation forbidding the 3. Order of court 3. Foreclosure does
cuts off all rights of not cut off right of
owner from alienating the immovable the parties all parties involved
mortgage shall be void (Art 2130) being impleaded
contrary to public policy inasmuch as the 4. There is equity 4. There is right of
transmission of property should not be of redemption redemption
unduly impeded. except on banks
which provides for
2. Mortgagee - To claim from a 3rd a right of
person in possession of the redemption
mortgaged property the payment of 5. Period of 5. Period to redeem
redemption starts start from date of
the part of the credit secured by the
from the finality of registration of
which said third person possesses the judgment until certificate of sale
(Art 2129) order of
NOTE: It is necessary that prior demand confirmation
for payment must have been made on 6. No need for a 6. Special power of
the debtor and the latter failed to pay special power of attorney in favor of
(BPI vs Concepcion & Hijos, Inc., 53 Phil attorney in the mortgagee is
906) contract of needed in the
mortgage contract
Foreclosure
 The remedy available to the NOTES:
mortgagee by which he subjects the  A foreclosure sale retroacts to the
mortgaged property to the date of registration of the mortgage
satisfaction of the obligation to and that a person who takes a
secure that for which the mortgage mortgage in good faith and for
was given valuable consideration, the record
showing clear title to the mortgagor,
NOTES: will be protected against equitable
 It denotes the procedure adopted by claims on the title in favor of third
the mortgagee to terminate the persons, of which he had no actual
rights of the mortgagor on the or constructive notice (St. Dominic
Corporation vs. IAC 151 SCRA 577).
CIVIL LAW COMMITTEE

 Where there is a right to redeem, bilateral agreement (Perez vs PNB,

inadequacy of price is not material 17 SCRA 833).
because the judgment debtor may  No sale can be legally made outside
reacquire the property or else sell the province in which the property
his right to redeem and thus recover sold is situated; and in case the
any loss he claims to have suffered place within said province in which
by reason of the price obtained at the sale is to be made is the subject
the auction sale and consequently of stipulation, such sale shall be
not sufficient to set aside the sale. made in the said place in the
Mere inadequacy of the price municipal building of the
obtained at the sheriff’s sale will not municipality in which the property or
be sufficient to set aside the sale part thereof is situated.
unless “the price is so inadequate as
to shock the conscience of the Procedure for extrajudicial foreclosure
court” taking into consideration the of both real estate mortgage under Act
peculiar circumstances attendant No. 3135 and chattel mortgage under
thereto. (Sulit vs. CA, 268 SCRA 441) Act No. 1508 (A.M. No. 99-10-05-0,
 Should there remain a balance due January 15, 2000)
to the mortgagee after applying the 1. Filing of application before the
proceeds of the sale, the mortgagee Executive Judge through the Clerk of
is entitled to recover the deficiency. Court
This rule applies both to judicial and 2. Clerk of Court will examine whether
extra-judicial foreclosure real the requirement of the law have
mortgage. been complied with, that is, whether
 The action to recover a deficiency the notice of sale has been posted
after foreclosure prescribes after 10 for not less than 20 days in at least
years from the time the right of three (3) public places of the
action accrues (Arts 1142 & 1144). municipality or city where the
property is situated, and if the same
Stipulation of upset price or “tipo” is worth more than P400.00, that
 It is a stipulation in a mortgage of such notice has been published once
real property of minimum price at a week for at least three (3)
which the property shall be sold, to consecutive weeks in a newspaper of
become operative in the event of a general circulation in the city of
foreclosure sale at public auction. It municipality
is null and void for the property must 3. The certificate of sale must be
be sold to the highest bidder. Parties approved by the Executive Judge
cannot, by agreement, contravene 4. Where the application concerns
the law and interfere with the lawful extrajudicial foreclosure of real
procedure of the courts (BPI vs Yulo, mortgages in different locations
31 Phil 476) covering one indebtedness, only one
filing fee corresponding to such debt
Extrajudicial foreclosure real property shall be collected
(Act No. 3135) 5. The Clerk of Court shall issue
 The law covers only real estate certificate of payment indicating the
mortgages. It is intended merely to amount of indebtedness, the filing
regulate the extrajudicial sale of the fees collected, the mortgages sought
property mortgaged if and when the to be foreclosed, the description of
mortgagee is given a special power the real estates and their respective
of express authority to do so in the locations
deed itself or in a document 6. The notice of sale shall be published
annexed thereto. in a newspaper of general circulation
 The authority to sell is not pursuant to Section 1, PD No. 1079
extinguished by the death of the 7. The application of shall be raffled
mortgagor (or mortgagee) as it is an among all sheriffs
essential and inseparable part of a
CIVIL LAW COMMITTEE

8. After the redemption period has Redemption

expired, the Clerk of Court shall  It is the transaction by which the
archive the records. mortgagor reacquires or buys back
9. No auction sale shall be held unless the property which may have passed
there are at least two (2) under the mortgage, or divests the
participating bidders, otherwise the property of the lien which the
sale shall be postponed to another mortgage may have created.
date. If on the new date set forth
for the sale there shall not be at NOTES:
least two bidders, the sale shall then  A sale by the mortgagor to a third
proceed. The names of the bidders party of the mortgaged property
shall be reported to the Sheriff of during the period for redemption
the Notary Public, who conducted transfers only the right to redeem
the sale to the Clerk of Court before the property and the right to
the issuance of the certificate of possess, use and enjoy the same
sale. during said period.
 Where sale with assumption of
NOTES: mortgage not registered and made
 The Mortgagor and Mortgagee have without the consent of the
no right to waive the posting and mortgagee, the buyer, thereof, was
publication requirements under Act. not validly substituted as debtor
No. 3135. Notices are given to secure and, hence, had no right to redeem
bidders and prevent a sacrifice of (Bonnevie vs. CA, 125 SCRA 122).
the property. Clearly, the statutory
requirements of posting and  Kinds:
publication are mandated, not for 1. Equity of Redemption – right of
the mortgagor’s benefit, but for the mortgagor to redeem the mortgaged
public or third persons. Failure to property after his default in the
comply with the statutory performance of the conditions of the
requirements as to publication of mortgage within the 90-day period
notice of auction sale constitutes a from the date of the service of the
jurisdictional defect which order of foreclosure or even
invalidates the sale.Lack of thereafter but before the
republication of notice of confirmation of the sale. Applies to
foreclosure sale made subsequently judicial foreclosure of real mortgage
after the original date renders such and chattel mortgage foreclosure.
sale void (PNB vs. Nepomuceno
Productions Inc., G.R. No. 139479. NOTE: Redemption of the banking
December 27, 2002). institutions is allowed within one year
 Sec 3 of Act 3135 does not require from confirmation of sale.
personal or any particular notice on
the mortgagor much less on his 2. Right of Redemption – right of
successors-in-interest where there is mortgagor to redeem the mortgaged
no contractual stipulation therefor. property within one year from the
Hence, unless required in the date of registration of the certificate
mortgage contract, the lack of such of sale. Applies only to extrajudicial
notice is not a ground to set aside a foreclosure of real mortgage.
foreclosure sale.
 Neither does Sec 3 require posting of NOTE: The right of redemption, as long
notice of sale on the mortgage as within the period prescribed, may be
property and the certificate of exercised irrespective of whether or not
posting is not required, much less the mortgagee has subsequently
considered indispensable, for the conveyed the property to some other
validity of a foreclosure sale. party (Sta. Ignacia Rural Bank, Inc. vs.
CA, 230 SCRA 513)
CIVIL LAW COMMITTEE

Period of Redemption ANTICHRESIS (Articles 2132 -2139)

1. Extra-judicial (Act #3135)
a. natural person – one year from  A contract whereby the creditor
registration of the certificate of acquires the right to receive the
sale with Registry of Deeds fruits of an immovable of the
b. juridical person – same rule as debtor, with the obligation to apply
natural person them to the payment of the interest,
c. juridical person (mortgagee is if owing, and thereafter to the
bank) - three months after principal of his credit (Art 2132)
foreclosure or before
registration of certificate of Characteristics
foreclosure which ever is earlier 1. Accessory contract – it secures the
(sec. 47, of General Banking performance of a principal obligation
Law) 2. Formal contract – it must be in a
2. Judicial – before confirmation of the specified form to be valid, i.e., “in
sale by the court writing.” (Art 2134)
NOTE: Allowing a redemption after the  Special Requisites (in addition to

lapse of the statutory period, when the the common essential requisites):
buyer at the foreclosure sale does not 1. It can cover only the fruits of an
object but even consents to the immovable property; (Art 2132)
redemption, will uphold the policy of the 2. Delivery of the immovable is
law which is to aid rather than defeat necessary for the creditor to receive
the right of redemption. There is nothing the fruits and not that the contract
in the law which prevents a waiver of shall be binding;
the statutory period for redemption 3. Amount of principal and interest
(Ramirez vs CA, 219 SCRA 598). must be specified in writing (Art.
2134); and
Amount of the redemption price: 4. Express agreement that debtor will
1. Mortgagee is not a bank (Act No. give possession of the property to
3135, in relation to Sec. 28, Rule 39 creditor and that the latter will
of Rules of Court) apply the fruits to the interest, if
a. purchase price of the property any, then to the principal of his
b. 1% interest per month on the credit. (Art 2132)
purchase price
c. taxes paid and amount of NOTE: The obligation to pay interest is
purchaser’s prior lien, if any, not of the essence of the contract of
with the same rate of interest antichresis, there being nothing in the
computed from the date of Code to show that antichresis is only
registration of sale, up to the applicable to securing the payment of
time of redemption interest-bearing loans. On the contrary,
2. Mortgagee is a bank (GBL 2000) antichresis is susceptible of guaranteeing
a. amount due under the mortgage all kinds of obligations, pure or
deed conditional
b. interest
c. cost and expenses Antichresis Pledge
NOTE: Redemption price in this 1. Refers to real 1. Refers to personal
case is reduced by the income property property
received from the property 2. Perfected by mere 2. Perfected by
consent delivery of the thing
pledged
3. Consensual contract 3. Real Contract
CIVIL LAW COMMITTEE

Antichresis Real Mortgage NOTES:

1. Property is 1. Debtor usually  The parties, however, may agree on
delivered to creditor retains possession of an extrajudicial foreclosure in the
the property same manner as they are allowed in
2. Creditor acquires 2. Creditor does not contracts of mortgage and pledge
only the right to have any right to
(Tavera vs. El Hogar Filipino, Inc.,
receive the fruits of receive the fruits;
the property, hence, but the mortgage 68 Phil 712).
it does not produce a creates a real right  A stipulation authorizing the
real right over the property antichretic creditor to appropriate
3. The creditor, 3. The creditor has the property upon the non-payment
unless there is no such obligation of the debt within the agreed period
stipulation to the is void (Art 2088).
contrary, is obliged
to pay the taxes and
CHATTEL MORTGAGE (Articles 2140-
charges upon the
estate 2141)
4. It is expressly 4. There is no such
stipulated that the obligation on part of  A contract by virtue of which
creditor given mortgagee personal property is recorded in the
possession of the Chattel Mortgage Register as a
property shall apply security for the performance of an
all the fruits thereof obligation (Art 2140).
to the payment of
interest, if owing, Characteristics
and thereafter to the
principal
1. Accessory contract – it is for the
Subject matter of both is real property purpose of securing the performance
of a principal obligation
Obligations of antichretic creditor: 2. Formal contract – registration in the
1 To pay taxes and charges on the Chattel Mortgage Register is
estate, including necessary expenses indispensable for its validity
NOTE: Creditor may avoid said 3. Unilateral contract – it produces only
obligation by: obligations on the part of the
a. compelling debtor to creditor to free the thing from the
reacquire enjoyment of the encumbrance on fulfilment of the
property or obligation.
b. by stipulation to the
contrary  Special Requisites (in addition to
2 To apply all the fruits, after the common essential requisites):
receiving them, to the payment of 1. It can cover only personal or
interest, if owing, and thereafter to movable property in general;
the principal however, the parties may treat as
3 To render an account of the fruits to personal property that which by its
the debtor nature would be real property;
4 To bear the expenses necessary for 2. Registration of the mortgage with
its preservation and repair the Chattel Mortgage Register where
the mortgagor resides; if property is
Remedies of creditor in case of non- located in a different province,
payment of debt registration in both provinces
required;
1. Bring an action for specific 3. Description of the property as would
performance; or enable the parties or other persons
2. Petition for the sale of the real to identify the same after reasonable
property as in a foreclosure of investigation and inquiry; and
mortgages under Rule 68 of the Rules 4. Accompanied by an affidavit of good
of Court.(Art 2137) faith to bind third persons, but not
for the validity of the contract.
CIVIL LAW COMMITTEE

5. It can cover only obligations existing 4. If there is 4. If there is

at the time the mortgage is deficiency after deficiency,
constituted. foreclosure, creditor is not
NOTE: A mortgage containing a creditor is entitled entitled to recover
stipulation in regard to future to recover the notwithstanding
advances in the credit will take deficiency from the any stipulation to
effect only from the date the same debtor, except the contrary
are made and not from the date of under Art. 1484
the mortgage (Jaca vs Davao Lumber Subject matter of both is movable
Co., 113 SCRA 107) property
Effect of registration: Creates a real Affidavit of Good Faith

right  Oath in a contract of chattel
 The registration of the chattel mortgage wherein the parties
mortgage is an effective and binding "severally swear that the mortgage is
notice to other creditors of its made for the purpose of securing the
existence and creates a real right or obligation specified in the conditions
a lien which, being recorded, follows thereof and for no other purposes
the chattel wherever it goes. The and that the same is a just and valid
registration gives the mortgagee obligation and one not entered into
symbolical possession (Northern for the purpose of fraud.” (Sec. 5,
Motors, Inc. vs. Coquia, 68 SCRA Chattel Mortgage Law)
374).
Effect of absence
Effect of failure to register chattel The special affidavit is required only
mortgage in the chattel mortgage for the purpose of transforming an
registry already valid mortgage into
 Article 2140 makes the recording in “preferred mortgage.” Thus, it is
the Chattel Mortgage Register an not necessary for the validity of the
essential requisite but if the chattel mortgage itself but only to
instrument is not recorded, the give it a preferred status. In other
mortgage is nevertheless binding words, its absence vitiates the
between the parties. But the person mortgage only as against third
in whose favour the law establishes a persons without notice like creditors
mortgage has no other right than to and subsequent encumbrancers.
demand the execution and the
recording of the document. Foreclosure of Chattel Mortgage
NOTES:
 Foreclosure sale in chattel mortgage
Chattel Mortgage Pledge is by public auction under Act No.
1. Delivery of the 1. Delivery of the 1508, but the parties may stipulate
personal property thing pledged is that it be by private sale.
to the mortgage is necessary  The mortgagee may, after thirty (30)
not necessary days from the time of the condition
2. registration in 2. registration not broken, cause the mortgaged
the Chattel necessary to be property to be sold at public auction
Mortgage Registry valid by a public officer. The 30-day
is necessary for its period is also a grace period for the
validity mortgagor to discharge the mortgage
3. If property is 3. Debtor is not obligation. After the sale of the
foreclosed, the entitled to excess chattel at public auction, the right
excess over the unless otherwise of redemption is no longer available
amount due goes to agreed or except in to the mortgagor (Cabral vs.
the debtor case of legal Evangelista, 28 SCRA 1000).
pledge
CIVIL LAW COMMITTEE

Application of proceed of sale: right to a conveyance and to be

1. Costs and expenses of keeping placed in possession thereof.
and sale
2. Payment of the obligation NOTES:
secured by the mortgage  Purchaser is not obliged to bring
3. Claims of persons holding a separate suit for possession.
subsequent mortgages in their He must invoke the aid of the
order courts and ask for a WRIT OF
4. The balance, if any, shall be POSSESSION.
paid to the mortgagor or person  Section 7 of Act No. 3135 allows
holding under him the purchaser to take possession
of the foreclosed property during
NOTES: the period of redemption upon
 The creditor may maintain an action filing of an ex parte application
for the deficiency, except if the and approval of a bond.
chattel mortgage is constituted as
security for the purchase of personal 2. Chattel mortgage – When default
property payable in instalments (Art. occurs and the creditor desires to
1484). foreclose, the creditor has the right
 The action for deficiency may be to take the property as a preliminary
brought within ten (10) years from step for its sale.
the time the cause of action accrues NOTE: Where the debtor refuses to
(Arts 1141 and 1142). yield the property, the creditor’s
 Only equity of redemption is remedy is to institute an action
available to the mortgagor; the either to effect judicial foreclosure
latter can no longer redeem after directly or to secure possession
the confirmation of the foreclosure (REPLEVIN) as a preliminary to the
sale. sale contemplated in Section 14 or
Act. No. 1508
Right of redemption
 When the condition of a chattel CONCURRENCE AND PREFERENCE OF
mortgage is broken the following CREDITS (Articles 2236 – 2251)
may redeem:
a) mortgagor; Concurrence of Credits
b) person holding a subsequent  Possession by two or more creditors
mortgage; or of equal rights or privileges over the
c) subsequent attaching creditor. same property or all of the property
 An attaching creditor who so of the debtor
redeems shall be subrogated to the
rights of the mortgagee and entitled Preference of Credits
to foreclose the mortgage in the  Right held by a creditor to be
same manner that the mortgagee preferred in the payment of his
could foreclose it. claim above others out of the
debtor’s assets.
 The redemption is made by paying or
delivering to the mortgagee the
NOTES:
amount due on such mortgage and
the costs, and expenses incurred by  The rules on preference of credits
such breach of condition before the apply only when two or more
sale thereof (Sec 13, Act No. 1508). creditors have separate and distinct
claims against the same debtor who
Right to possession of foreclosed has insufficient property.
property  Preference creates no lien on
1. Real mortgage – After the property, and, therefore, gives no
redemption period has expired, the interest in property, specific or
purchaser of the property has the general, to the preferred creditor
CIVIL LAW COMMITTEE

but a preference in application of NOTES:

the proceeds after the sale. (Molina  Arts. 2241 and 2242 do not give the
vs. Somes, 31 Phil. 76) order of preference or priority of
 The preferential right of credit payment. They merely enumerate
attains significance only after the the credits which enjoy preference
properties of the debtor have been with respect to specific movables or
inventoried and liquidated, and the immovables. With respect to the
claims held by his various creditors same specific movables or
have been established. (DBP vs. immovables, creditors, with the
NLRC, 183 SCRA 328) exception of the State (No. 1),
merely concur.
Preference of Lien  They only find application when
Credit there is a concurrence of credits,
Applies only to Creates a charge i.e., when the same specific
claims which do on a particular property of the debtor is subjected
not attach to property to the claims of several creditors and
specific
the value of such property is
properties
insufficient to pay in full all the
creditors. In such a situation, the
Liability of debtor’s property for his question of preference will arise.
obligations
GENERAL RULE: Debtor is liable with
 Article 2242 makes no distinction
between registered and unregistered
all his property, present and future, for
vendor’s lien (No. 2). Hence, any
the fulfilment of his obligations. (Art
lien of that kind enjoys the
2236)
preferred credit status. Unlike the
unpaid price of real property sold,
EXEMPT PROPERTY:
mortgage credits (No. 5), in order to
1. Present property – those
be given preference, should be
provided under Arts. 155 and 205
recorded in the Registry of Property.
of the Family Code, Sec. 13,
But a recorded mortgage credit is
Rule 39 of the Rules of Court,
superior to an unrecorded unpaid
and Sec. 118 of the Public Land
vendor’s lien (De Barretto vs.
Act
Villanueva, 1 SCRA 288)
2. Future property – a debtor who
obtains a discharge from his  The priority rule applies to credits
debts on account of his annotated in the Registry of
insolvency, is not liable for the Property. As to credits mentioned in
unsatisfied claims of his No. 7 of Article 2242, there is
creditors with said property preference among the attachments
subject to certain exceptions or executions according to the order
expressly provided by law. (Secs. of the time they were levied upon
68, 69, The Insolvency Law [Act the property. The pro rata rule in
No. 1956]) Article 2249 does not apply;
3. Property under legal custody and otherwise, the result would be
those owned by municipal absurd. The preference of a credit
corporations necessary for annotated by an attachment or
governmental purposes execution could be defeated by
simply obtaining a writ of
General Categories of Credit: attachment or execution, no matter
1. Special Preferred Credits - those how much later (Manabat vs Laguna
listed in Arts. 2241 and 2242 shall be Federation of Facomas, Inc., 19
considered as mortgages and pledges of SCRA 621).
real or personal property or liens (Art.  The last paragraph of Article 2241
2243). Hence, they are not included in applies only when the right of
the insolvent debtor's assets. ownership in such property continues
in the debtor, and, therefore, it is
CIVIL LAW COMMITTEE

not applicable to cases where the NOTES:

debtor has parted with his ownership  In case of bankruptcy or liquidation
therein, as where he has sold the of the employer’s business, the
property (Peña vs. Mitchell, 9 Phil unpaid wages and other monetary
587) claims of the employees shall be
given first preference and shall be
2. Ordinary Preferred Credits - those paid in full before the claims of the
listed in Art. 2244 as amended by government and other creditors may
Art. 110 of the Labor Code. be paid. The terms, “declaration”
NOTES: of bankruptcy, or “judicial”
 The provision not only enumerates liquidation have been eliminated,
the preferred credits with respect to nevertheless, according to the SC,
other property, real and personal, of bankruptcy or liquidation
the debtor, but also gives their order proceedings are still necessary for
of preference “in the order named”. the operation of the preference
 In contrast with Articles 2241 and accorded to workers under Art. 110
2242, Article 2244 creates no liens of the Labor Code. (DBP vs. NLRC
on determinate property which 183 SCRA 328; RA No. 6715 Sec 10)
follow such property. What Article  In case of rehabilitation, the
2244 creates are simply rights in preference of credit granted to
favour of certain creditors to have employees under Art 110 of the
the cash and other assets of the Labor Code is not applicable
insolvent applied in a certain (Rubberworld [Phils.] vs CA, 305
sequence or order of priority. SCRA 722).
 Article 2244, particularly par (14)
item (1) thereof, is not applicable to Refectionary Credit
obligations of the State as it is a  Indebtedness incurred in the repair
recognized doctrine that the State is or reconstruction of something
always solvent. It is inconceivable previously made, such repair or
for the State to voluntarily initiate reconstruction being made necessary
insolvency or general liquidation by the deterioration or destruction
proceedings or to be subjected to of the thing as it formerly existed.
such proceedings under its own laws.
ORDER OF PREFERENCE OF CREDITS
3. Common Credits – those listed
under Art. 2245, which shall be paid  Arts. 2241 and 2242, jointly with
pro rata regardless of dates. Arts. 2246 to 2249 establish a two-
NOTE: Ordinary Preferred and Common tier order of preference:
Credits cover only “free property” of the 1. First tier – includes taxes, duties
debtor, or those not subjected to Special and fees due on specific movable or
Preferred Credit. immovable property;
2. Second tier – all other special
Effects of Article 110 of Labor Code to preferred (non-tax) credits shall be
Art 2244: satisfied pro-rata, out of any
1. Removed the one-year limitation residual value of the specific
found in No. 2 of Art. 2244 property to which such credits
2. Moving up the claims for unpaid relate.
wages (and other monetary claims)
of laborers or workers of insolvent NOTES:
from second priority to first priority  The pro-rata rule does not apply to
in the order of preference credits annotated in the Registry of
established by Art. 2244 Property by virtue of a judicial
CIVIL LAW COMMITTEE

order, by attachments and  Credits which do not enjoy any

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


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MEMORY AID IN CIVIL LAW

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2. Simple loan or mutuum – where the COMMODATUM (Articles 1935 – 1952)

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MEMORY AID IN CIVIL LAW

NOTE:Use of the thing loaned NOTES:

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MEMORY AID IN CIVIL LAW

2. There is a transfer There is no transfer

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MEMORY AID IN CIVIL LAW

 Form of Payment (Art 1955): b) With regard particularly to an

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MEMORY AID IN CIVIL LAW

judgments involving such loans, or 2. Unilateral (gratutitous deposit) -

DEPOSIT (Articles 1962 – 2009)  Kinds of Deposit:

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MEMORY AID IN CIVIL LAW

b. Necessary – one made in NOTES:

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MEMORY AID IN CIVIL LAW

 Time of return: 5. Not to commingle things deposited if

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MEMORY AID IN CIVIL LAW

deposited which is closed and

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MEMORY AID IN CIVIL LAW

a. If the deposit is gratuitous, the Deposit by Travellers in hotels and

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MEMORY AID IN CIVIL LAW

2. As to its Origin same as a solidary debtor, except

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

4. Surety is not entitled to the benefit does, his liability shall be

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MEMORY AID IN CIVIL LAW

sense that it requires action that the contract is one of

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MEMORY AID IN CIVIL LAW

time he will be discharged only to Double or sub-guaranty (Art 2051 2nd

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MEMORY AID IN CIVIL LAW

latter, that the guarantor shall only judicially declared insolvent or

NOTES: Other grounds: (BIPS)

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MEMORY AID IN CIVIL LAW

(b) because the principal debtor is 2. A guarantor is entitled to be heard

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MEMORY AID IN CIVIL LAW

knowledge or against the will of against the guarantor those

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

Extinguishment of guaranty: (RA2CE2) PLEDGE, MORTGAGE AND ANTICHRESIS

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

 The accommodation pledgor or C. Capability to secure all kinds of

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MEMORY AID IN CIVIL LAW

E. When the principal obligation  Kinds:

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW