GUARANTY AND SURETYSHIP (1997, 2010)

Q: What is the difference between "guaranty" and "suretyship"? (2010 BAR)

A: Guaranty and Suretyship distinguished:

1. The obligation in guaranty is secondary; whereas, in suretyship, it is primary.

2. In guaranty, the undertaking is to pay if the principal debtor cannot pay; whereas, in
suretyship, the undertaking is to pay if the principal debtor does not pay.
3. In guaranty, the guarantor is entitled to the benefit of excussion; whereas, in suretyship the
surety is not entitled.
4. Liability in guaranty depends upon an independent agreement to pay the obligations of the
principal if he fails to do so; whereas, in suretyship, the surety assumes liability as a regular
party.
5. The Guarantor insures the solvency of the principal debtor; whereas, the surety insures the
debt.
6. In a guaranty, the guarantor is subsidiarlty liable; whereas, in a suretyship, the surety binds
himself solidarity with the principal debtor (Art. 2047)

Q: AB sold to CD a motor vehicle for and in consideration of P120, 000, to be paid in twelve
monthly equal instalments of P10, 000.00, each instalment being due and payable on the
15th day of each month starting January 1997.

To secure the promissory note, CD (a) executed a chattel mortgage on the subject motor
vehicle, and (b) furnished a surety bond issued by Philamlife. CD failed to pay more than two
(2) instalments.

AB went after the surety but he was only able to obtain three-fourths (3/4) of the total
amount still due and owing from1 CD. AB seeks your advice on how he might, if at all recover
the deficiency.

How would you counsel AB? (1997 BAR)

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

PLEDGE, MORTGAGE AND ANTICHRESIS (1991, 1994, 1995, 1999, 2003)

1995, 1999, 2003 BAR)

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

Will the complaint prosper, or will the tilte of Catalino and the mortgage to Desiderio be
sustained? (1991 BAR)

A: The complaint for the annulment of Catalino’s Title will prosper. In the first place, the second
owner’s copy of the title secured by him form the Land Registration Court is void ab initio, the
owner’s copy thereof having never been lost let alone the fact that said second owner’s copy of
the title was fraudulently procured and improvidently issued by the Court. In the second place,
the Transfer Certificate of Title procured by Catalino is equally null and void, it having been
issued on the basis of a simulated or forged Deed of Sale. A forged deed is an absolute nullity
and conveys no title.

The mortgage in favor of Desiderio is likewise null and void because the mortgagor is not the
owner of the mortgaged property. While it may be true that under the “Mirror Principle” of the
Torrens System of Land Registration, a buyer or mortgagee has the right to rely on what appears
on the Certificate of Title, and in the absence of anything to excite suspicion, is under no
obligation to look beyond the certificate and investigate the mortgagor’s title, this rule

does not find application in the case at hand because here, Catalino’s title suffers from two fatal
infirmities, namely:

The fact that it emanated from a forged deed of a simulated sale;

The fact that it was derived from a fraudulently procured or improvidently issued second owner’s
copy, the real owner’s copy being still intact and in the possession of the true owner, Bruce.

The mortgage to Desiderio should be cancelled without prejudice to his right to go after Catalino
and/or the government for compensation from the assurance fund.

Q: In 1982, Steve borrowed P400, 000.00 from Danny, collateralized by a pledge of shares
of stock of Concepcion Corporation worth P800, 000.00. In 1983, because of the economic
crisis, the value of the shares pledged fell to only P100, 000.00. Can Danny demand that
Steve surrender the other shares worth P700, 000.00? (1994 BAR)

A: No. Bilateral contracts cannot be changed unilaterally. A pledge is only a subsidiary contract,
and Steve is still indebted to Danny for the amount of P400, 000.00 despite the fall in the value
of the stocks pledged.
Q: Distinguish a contract of chattel mortgage from a contract of pledge. (1999 BAR)

A: In a contract of CHATTEL MORTGAGE possession belongs to the creditor, while in a contract

of PLEDGE possession belongs to the debtor.

A chattel mortgage is a formal contract while a pledge is a real contract.

A contract of chattel mortgage must be recorded in a public instrument to bind third persons
while a contract of pledge must be in a public instrument containing description of the thing
pledged and the date thereof to bind third persons.

Q: Are the right of redemption and the equity of redemption given by law to a mortgagor
the same? Explain. (1999 BAR)

A: The equity of redemption is different from the right of redemption. EQUITY OF

REDEMPTION is the right of the mortgagor after judgment in a judicial foreclosure proceedings,
within a period of not less than 90 days, before the sale or confirmation of the sale, to pay into
the court the amount of the judgment debt. On the other hand, RIGHT OF REDEMPTION is the
right of the mortgagor, after the sale of the mortgaged property, to redeem the property by
paying to the purchaser in the sale or for him to the sheriff who made the sale, the amount paid
by him, with interest, within one year from the sale. There is no right of redemption, only equity
of redemption, in a judicial foreclosure under the Rules of Court.

Q: Olivia owns a vast mango plantation which she can no longer properly manage due to
a lingering illness. Since she is indebted to Peter in the amount of P500, 000.00 she asks
Peter to manage the plantation and apply the harvest to the payment of her obligation to
him, principal and interest, until her indebtedness shall have been fully paid. Peter agrees.

1. What kind of contract is entered into between Olivia and Peter? Explain.
2. What specific obligations are imposed by law on Peter as a consequence of their
contract?
3. Does the law require any specific form for the validity of their contract? Explain
4. May Olivia reacquire the plantation before her entire indebtedness shall have been fully
paid? Explain. (1995 BAR)

A:

1. A contract of antichresis was entered into between Olivia and Peter. Under Art. 2132, by a
contract of antichresis the creditor acquires the right to receive the fruits of an immovable
of his debtor, with the obligation to apply them to the payment of the interest, and
thereafter to the principal of his credit.
2. Peter must pay taxes and charges upon the land and bear the necessary expenses for
preservation and repair which he may deduct from the fruits (Art. 2135).
3. The amount of the principal and interest must be specified in writing, otherwise the
antichresis will be void (Art. 2134).
4. No. Art. 2136 specifically provides that the debtor cannot reacquire the enjoyment of the
immovable without first having totally paid what he owes the creditor. However, it is
potestative on the part of the creditor to do so in order to exempt him from his obligation
under Art. 2135, the debtor cannot re- acquire the enjoyment unless Peter compels Olivia to
enter again the enjoyment of the property.

Q: X constructed a house on a lot which he was leasing from Y. Later, X executed a chattel
mortgage over said house in favor of Z as security for a loan obtained from the latter. Still
later, X acquired ownership of the land where his house was constructed, after which he
mortgaged both house and land in favor of a bank, which mortgage was annotated on the
Torrens Certificate of Title. When X failed to pay his loan to the bank, the latter, being the
highest bidder at the foreclosure sale, foreclosed the mortgage and acquired X’s house and
lot. Learning of the proceedings conducted by the bank, Z is now demanding that the bank
reconvey to him X’s house or pay X’s loan to him plus interests. Is Z’s demand against the
bank valid and sustainable? Why? (1994, 2003 BAR)

A: No, Z’s demand is not valid. A building is immovable or real property whether it is erected by
the owner of the land, by a usufructuary, or by a lessee. It may be treated as a movable by the
parties to chattel mortgage but such is binding only between them and not on third parties
(Evangelista v. Alto Surety Col, Inc., G.R. No. L-11139, April 23, 1958). In this case, since the bank
is not a party to the chattel mortgage, it is not bound by it, as far as the Bank is concerned, the
chattel mortgage, does not exist. Moreover, the chattel mortgage does not exist. Moreover, the
chattel mortgage is void because it was not registered. Assuming that it is valid, it does not bind
the Bank because it was not annotated on the title of the land mortgaged to the bank. Z cannot
demand that the Bank pay him the loan Z extended to X, because the Bank was not privy to such
loan transaction.