Credit Transactions

CREDIT TRANSACTIONS
Credit vs. Credit Transactions

Credit Credit Transactions
The ability to borrow money or things, by
Contracts/agreements based on the trust &
virtue of the confidence/trust reposed by a
confidence on the ability of another to pay in
lender that he will pay what he may promise
the future.
within a specific period.
Security
 Something given, promise or delivered (tangible or intangible)
 The means to ensure the fulfilment or enforcement of an obligation
Kinds of Credit Transactions

 As to security
o Real – property is collateralized
o Personal – supported by a mere promise
 As to existence
o Principal – e.g. commodatum
o Accessory – e.g. mortgage
 As to consideration
o Gratuitous – e.g. commodatum
o Onerous
GR: Loan is essentially gratuitous

XPN:
a) Stipulation of interest
b) Default in payment
Bailment
 Delivery of real/personal property from one person to another
 In trust for a specific purpose
 With a contract that the trust shall be faithfully executed & the property returned & accounted for
 Kinds:
a) For sole benefit of bailor – gratuitous deposit, mandatum Comment [NSC1]:
b) For sole benefit of bailee – commodatum, mutuum Bailment of goods without compensation
c) For benefit of both parties – compensation, pledge
Notes in Credit Transactions - Chua | 1

COMMODATUM
Section 1. Nature of Commodatum
Contract of Loan
 One of the parties delivers to another
a) Something not consumable, so that the latter may use the same for a certain time & return it. Comment [NSC2]:
- XPN: consumables may be the object of commodatum only for purposes of COMMODATUM
exhibition (e.g. show money)

b) Money or a consumable, that the same amount of the same kind & quality shall be paid. Comment [NSC3]:
MUTUUM
Essence of Commodatum
 Delivery & use of the thing for the purpose for which it is intended.
Kinds of Commodatum
1) Ordinary Commodatum
 Bailor cannot demand return at will
 The time stipulated must be respected
2) Precarium
 Bailor may demand the return of the object at will
 Conditions:
i. No time stipulated
ii. Bailor has urgent need of the thing OR borrower commits an act of ingratitude Comment [NSC4]:
Effect: suspends the commodatum.
Commodatum Mutuum
However if there is a purpose stipulated, demand
may be made only once said purpose is fulfilled.
Compensation Gratuitous May or may not be gratuitious
If there is no period/purpose, or in case of mere
GR: non-consumable accommodation, the bailor may demand return at
Subject Matter XPN: consumable for display/exhibition Money or other consumable property will.
(commodatum ad ostentantionem) Comment [NSC5]:
Effect: extinguishes the commodatum
Transfer of
No transfer of ownership Transfer of ownership
Ownership
Obligation to
Return the very thing borrowed Return a thing of the same kind/quality
Return
Credit Loan
Transfer of consumable with return, with or without interest
The ability to borrow, based on trust &
confidence GR: a real contract (perfected by delivery)
XPN: if future loan, it is a consensual Comment [NSC6]:
Cause of action in case of breach: damages
Forbearance
 A contractual obligation to refrain, within a given period of time, from demanding payment even if
the obligation is due & demandable.
 Prevents the debtor from collecting until the expiration of a period agreed upon.

Characteristics of Commodatum
1) Real contract
2) Unilateral
3) Essentially gratuitous
- The moment it becomes onerous, it ceases to be Commodatum & becomes lease.
4) Purpose is to Transfer Temporary Use of the Thing
- If primarily for the use of the fruits, it is usufruct
5) Principal
6) Purely Personal (based on trust & confidence)
- XPN: stipulation of transfer to heirs upon death
7) Bailor need not be the Owner
- Mere possessory interest is sufficient
Section 2. Obligations of the Bailee
I. Ordinary Expenses (Art. 1941) Comment [NSC7]:

Ratio: so the thing may be returned in the same
 For use & preservation; cannot demand reimbursement condition it was delivered
 Consent of bailor is not required
Comment [NSC8]:
Caused by ordinary wear & tear
 (Extraordinary expenses are shouldered by the bailor) → Consent of bailor is required
II. Loss of the Thing (Art. 1942)

 GR: bailee is not liable for loss/damages due to fortuitous event
o XPN:
1) Devotes the thing for any purpose different from that for which it was
intended; Comment [NSC9]:
2) Keeps it longer than the period stipulated; Signifies bad faith
3) Thing loaned was delivered with appraisal of value; Comment [NSC10]:

Bailee is in default
4) Lends or leases the thing to a third person;
Comment [NSC11]:
- XPN: to a member of his household The law presumes that the bailee is always liable for
5) Being able to save either the thing borrowed or his own thing, he chose to loss/damage
- XPN: contrary stipulation
save the latter.
Comment [NSC12]:
Purely personal
III. Deterioration due to Fault/Negligence of Bailee (Art. 1943)
Comment [NSC13]:
 No liability for deterioration due to ordinary wear & tear and without his fault Ingratitude
IV. Obligation to Return (Art. 1944)

 No right to retain as security for claims against the lender. Comment [NSC14]:
Ratio: nature of commodatum as a bailment
- XPN: Damages suffered because of the thing loaned (known & hidden flaws)
contract for the sole benefit of bailee
(Held in trust)
V. Solidary Liability (Art. 1945)
 When there are 2 or more bailees in the same contract Comment [NSC15]:
Passive solidarity – on the part of the creditor
Active solidarity – on the part of the debtor

Section 3. Obligations of the Bailor
(1) Respect the Duration of the Loan (Art. 1946)

Effects:
 XPNs: Rights & duties of the parties are suspended
a) Urgent need (in case of temporary use by bailor)
b) Borrower commits an act of ingratitude or
Commodatum is extinguished (permanent
return)
(2) Right to Demand Return for Acts of Ingratitude
a) Bailee commits offenses against the person, honor, property, wife or children of bailor
b) Bailor imputes a criminal offense/act involving moral turpitude
c) Bailor unduly refuses the bailor support (if legally or morally bound to do so)
(3) Refund Extraordinary Expenses (Art. 1949)

 For preservation in its essence; to prevent loss or deterioration of the object
 GR: prior consent is needed (to be reimbursed)
- XPN: if the situation is so urgent (only notice is needed)
 If extraordinary expenses arise from actual use

- 50-50 split with the bailee, regardless of negligence (XPN: contrary stipulation)
(4) Liability to Pay Damages for Known, Hidden Flaws (Art. 1951) Comment [NSC16]:
Meanwhile, the BAILEE has the right of RETENTION
 Requisites:
a) Flaw/defect But the bailee cannot just sell the thing. There is a
b) Hidden trust agreemet.
c) Bailor is aware
d) Bailor does not advise the bailee
e) Bailee suffers damage
(5) No Right of Abandonment for Expenses & Damages (Art. 1952) Comment [NSC17]:
Ratio: damages may exceed value of the thing
 XPN: if the extraordinary expense is unauthorized by the bailor, then there is a right to loaned
abandon

SIMPLE LOAN or MUTUUM
Simple Loan or Mutuum
 One party delivers money or other consumable thing
 With the understanding that the same amount of the same kind & quality shall be paid Comment [NSC18]:
It may include the accessory duty to pay interest.
 Borrower acquires ownership

 May be payable in kind
 No criminal liability for failure to pay

- No criminal aspect; no misappropriation but actually an act of ownership
Simple Loan Rent/Lease

Object Money or consumable Non-consumable
Cause or Purpose Acquisition of the thing Use for a certain period
What is Only control (not ownership) is
Ownership is transferred
Transferred lost/transferred
Compensation is received (always Comment [NSC19]:
Compensation? May or may not be onerous
onerous) Money, provisions, chattels, labor
Simple Loan Trust Receipt Transaction

A security transaction wherein the lender, having no
One party delivers money or other
prior title in the goods, & not having possession
consumable thing with the understanding
(which remains with the borrower), lends his money
that the same amount of the same kind &
to the borrower on security of the goods, which the
quality shall be paid
borrower is privileged to sell.
Fungible Things
 Those dealt with by number, weight or measure
 Any given unit/portion is treated as equivalent of any other unit/portion
 Depends upon the intention of the parties Comment [NSC20]:
On the other hand, consumability depends upon the
nature of the thing.
Barter
 Non-fungible or non-consumable things
 Equivalent thing is given in return for what has been received
 Onerous
 Deemed a mutual sale
Form of Payment of Simple Loan

1) Loan of Money
 In the currency stipulated, otherwise in Philippine legal tender Comment [NSC21]:
Checks are not legal tender. They only produce the
 In case of extraordinary inflation: effect of payment once encashed.
- The basis of payment shall be the value of the currency at the time of the creation of
the obligation.

2) Loan of a Fungible Thing
 With a thing of the same kind & quantity
 If impossible, pay the value at the time of the perfection of the loan.
GR: No Interest Due

 XPN: Lawful rate of interest is expressly stipulated in writing
o XPN to XPN: Comment [NSC22]:
1) Monetary interest → compensation for use of money; reckoned from the time the Also known as the KINDS OF INTEREST
money is received
2) Compensatory interest → imposed by law/courts as penalty or indemnity for
breach of contractual obligations. Comment [NSC23]:
Set at 6% per annum.
Classes of Interest
1) Simple → for use of money
2) Compound → imposed upon accrued interest (due & unpaid); must be stipulated in the contract
3) Legal → 6% per annum

 By virtue of C.B. Circular No. 799 (July 1, 2013)
 Applicable when there is no stipulation of interest, or in cases of court judgments re: money
claim
Rule on Compounding of Interest

 GR: accrued interest shall not earn interest
o XPNs: (a) Judicially demanded (b) Express stipulation of parties
Usury is Now Legally Non-Existent

 Interest legally chargeable now depends upon agreement of the parties.
 C.B. No. 905 (effective January 1, 1983) simply suspended the effectivity of the Usury Law
“In-Kind” Interest
 Merely a form of payment
 Agreement to pay interest + agreement to pay interest in kind (2 separate agreements)
Rules on Interest
 Stipulated interest → must not be unconscionable Comment [NSC24]:
Case-to-case basis, but 3% per month has been
 In absence of stipulated interest, legal interest applies: ruled to be unconsionable.
o Commences from time of judicial or extrajudicial demand
o Computed from
 Final judgment (if unliquidated)
 Moment of demand (if liquidated)

DEPOSIT
Concept of Deposit
 Depositor delivers a thing to another (depositary);
Essential elements of deposit
 For the principal purpose of safekeeping it; Comment [NSC25]:
Does not preclude other, incidental purposes
 With the obligation of returning it when demanded. (IRREGULAR DEPOSIT)
 Constituted or perfected from the moment a person receives a thing belonging to another, with the
obligation to return upon demand (Art. 1962)
Contract for Rent of Safety Deposit Box
- A special kind of deposit, but more of a contract of lease

- Primary function is safekeeping; renting is related thereto
- Bank has possession & control over the box and its contents.
Characteristics of Deposit
1) Real (Art. 1963)
- Perfected by mere delivery
2) Movable Property Comment [NSC26]:
- XPN: judicial deposit or sequestration (putting property in authority of the court may include Ratio: Essence of safekeeping is to protect against
loss/destruction
immovable property)
3) Safekeeping is the Principal Purpose Comment [NSC27]:
4) Gratuitous How about documents for litigation entrusted to a
lawyer?
- XPN: - Not a deposit; it is Commodatum
a) Contrary agreement - Main purpose is utilization
b) Depositary is engaged in the business of storing goods
Immovable + Gratuitous = Innominate contract

Immovable + Onerous = Lease of service (e.g. mall parking)
5) Depositary Cannot Use the Thing Deposited

- XPN:
a) Expressly permitted by the depositor Comment [NSC28]:
b) Use is necessary for preservation Others are not allowed to use the thing deposited,
otherwise the depositary will be liable for loss due
6) Either Bilateral or Unilateral to fortuitous event (failure to safekeep the thing)
Kinds of Deposit (Art. 1964)

I. Judicial
II. Extrajudicial
a) Voluntary → depositor chooses the depositary; delivery is made by will of the depositor
b) Necessary → lack of free choice as to depositary
 Made in compliance with a legal obligation
 Made on the occasion of a calamity
 Made by travellers in hotels, inns or to common carriers

Voluntary Deposit
Section 1. General Provisions

Concept of Voluntary Deposit
 GR: only 2 parties
o XPN: depositary is a 3rd person
 GR: depositor must be the owner of the thing

o XPN: carrier, commission agent, lessee
 Depositor cannot dispute the title of the depositor to the thing deposited (estoppel) Comment [NSC29]:
Art. 1984
 Ownership need not be proven, because deposit does not transfer ownership.
Interpleader
- An action to compel parties to litigate & settle their conflicting claims
- In essence, an action brought by a party with no interest in the property or his
interest is undisputed
- Proper when 2 or more people claim ownership over the thing deposited
- Depositary holds the thing in the meantime, while the court decides to whom
the property should be delivered.
Form
a) Oral
b) Written
Incapacity of Either Party (Art. 1970-1971) Comment [NSC30]:

1. Unemancipated minors
Depositor Incapacitated; Depositor Capacitated; 2. Insane or demented
Depositary Capacitated Depositor Incapacitated 3. Deaf-mutes who do not know how to write
(Art. 1970) (Art. 1971)
Status of Deposit Voidable
Subject to all obligations of a Does not incur the obligation of a
Depositary’s Obligations
depositary depositary
If in possession:
 Liable to return the thing
(may be compelled by the
depositor)
Return the property to the:
If no longer in possession:
a) Guardian
What Depositary must Do b) Administrator, or  Pay the depositor the
c) Depositor himself (should amount by which he may
he acquire capacity) benefitted himself with the Comment [NSC31]:
thing or its price, subject to The depositor may recover any deficiency from a
third party in bad faith.
the right of any third person
who may have acquired it in
good faith. Comment [NSC32]:
If the third party acquired the thing in good faith,
the depositor may recover the property from him.

Section 2. Obligations of the Depositary
(1) Keep the Thing Deposited & Return It (Art. 1972)

 Degree of care: GR → degree stipulated by the parties
o In the absence of stipulation, abide by diligence of a good father of a family
 Rules applicable:
- Liable for loss through fault/negligence even if it was insured
- Presumption of fault in case of loss
 Return before specified term, if claimed (even though a specific term was stipulated)
(2) Not to Transfer Deposit (Art. 1973) Comment [NSC33]:

XPN: express authorization
 Otherwise, depositor is liable for loss if:
a. He transfers the deposit to a third person; XPN to XPN:
b. He deposits the thing with a third person manifestly careless/unfit, although Depositor deposits the thing with a third person
manifestly careless/unfit
authorized;
Comment [NSC34]:
c. The thing is lost through negligence of employees. If not manifestly careless/unfit, then depositary is
exempt from liability.
(3) Not to Change the Way of Deposit (Art. 1974) Comment [NSC35]:
Situation:
 Depositary may nonetheless change the manner of deposit if circumstances indicate that the Depositary re-deposits the thing with permission to
depositor would consent thereto. an employee. The thing was damaged.
There was no finding of guilt, but there were
 GR: depositary must first notify the depositor, & wait for the latter’s decision
findings of manifest unfitness. Is the depositary
- XPN: delay would case danger (notification & waiting for decision may be dispensed with) liable?
YES, he is liable. Depositing to a manifestly unjust

(4) Obligation to Collect Interest on Choses in Action (Art. 1975) person is negligence in itself. Depositary is liable due
 Certificates, bonds, securities, or instruments which earn interest to this negligence.
 If the thing should earn interest, the depositary has the obligation to: Comment [NSC36]:
Not applicable to contracts for the rent of safety
a. Collect interest as it becomes due; deposit boxes
b. Take steps as may be necessary to preserve its value or rights corresponding to it.
c. Collect the capital, when due.
(5) Not to Commingle Things Deposited if so Stipulated (Art. 1976)

Comment [NSC37]:
 But if there is a contrary stipulation: If a 3rd party uses the thing, the depositary will be
- Depositary may commingle the thing, but only with things of the same kind/quality liable even for fortuitous event
- Each depositor shall be entitled to have a proportionate interest in the mass Art. 1979 – Liability for Loss Through Fortuitous
Event
1. When stipulated
(6) Not to Make Use of the Thing Deposited (Art. 1977) 2. Depositary uses the thing without express
 XPNs: (a) If authorized (b) Preservation of the thing requires it use authorization
3. Depositary allows a 3rd persons to use the
thing, even if depositary was authorized
Effect if Permission to Use is Given (Art. 1978)
1) Non-Consumable Comment [NSC38]:
Not presumed
 Becomes a commodatum, unless safekeeping is still the principal purpose
Comment [NSC39]:
Irregular deposit:
2) Money or Other Consumable - Consumable thing may be demanded at will by
the irregular depositor
 Becomes a simple loan, unless safekeeping is still the principal purpose (irregular deposit) - Benefit accrues to the depositor
- Depositor has preference over other creditors

Relation between a Bank & Depositor (Art. 1980)
 Fixed, savings, & current bank deposits are really loans to the bank
 An irregular deposit → earns interest
 No obligation to return the exact money deposited
 Creditor-debtor relationship
Where the Thing Deposited is Delivered Closed &Sealed (Art. 1982)

 Obligations of Depositary
1) Return the thing in the same condition; Comment [NSC40]:
Presumption: he cannot open it, otherwise liable for
2) Pay for damages, should the seal/lock be broken through his own fault;
damages
3) Keep the secret of the deposit when the seal/lock is broken with or without his fault.
- If under litigation for valuation, one may use what he sees Return of the thing includes products, accessories &
accessions.
 When depositary is justified to open Should the deposit consist of money, Art. 1896 shall
be applied to the depositary:
a) Presumed authority → key was left to him - The agent owes interest on the sums which he
b) Necessity → depositor’s instructions cannot be followed without opening the receptacle has applied to his own use from the day on which
he did so, & on those which he still owes after
the extinguishment of the agency.
Where a Third Person appears to be the Owner (Art. 1984)
 Depositor must advise the third person of the deposit Comment [NSC41]:
Actual damages, based on the amount of the thing
o Such third person has a period of 1 month (from notice) to claim the thing. at the time of perfection, as appraised by the
o If no response, the depositary shall be relieved of liability if he returns the thing to the depositor. depositor.
RULES ON VALUATION OF DAMAGES:

 If the thing appears to be unlawfully acquired:
o Return to the depositor Fault of depositary
- Based on appraisal of depositor
o XPN: contrary proof
 If the thing appears to be a lost & found thing:
o No right to return; no liability anyway (not a justifiable reason for depositary to return) Fault of depositor
- Based on proof
o But if the depositary has reasonable ground to believe that the thing was unlawfully acquired, the
depositary still has the right to return. Comment [NSC42]:
Fault is presumed unless proven otherwise.
 If depositary refuses to return the object upon the depositor’s demand? Comment [NSC43]:
o Depositor may file an action for replevin Impliedly, the depositary may refuse the depositor
during the 30-day period.
 Defense of depositary in such case?
Comment [NSC44]:
o Petition for interpleader
Under the Anti-Fencing Law, good faith is not a
defense if a person has possession over a stolen
thing.
Right of 2 of more Depositors (Art. 1985)
 Divisible obligation; depositors not solidary
- Each one can only demand his proportional share
 Indivisible or solidary obligation
- Each one may do whatever may be useful to the others, but nothing prejudicial
- May be returned to any or either depositor unless there is a stipulation of return to one
depositor.
 Return to one of the depositors stipulated
- Cannot be returned to a different depositor

Persons to Whom Return Must be Made (Art. 1986)
1) Depositor, his heirs and successors, person designated in the contract
2) Guardian or administrator
3) Legal representative
Place of Return (Art. 1987)

1) Place agreed upon (expenses for transportation shall be borne by the depositor)
2) Place where the thing deposited may be, without malice on the part of the depositary Comment [NSC45]:
Even if it should not be the same place where the
deposit was made
Time of Return (Art. 1988) Comment [NSC46]:
 Upon demand, despite a specified time/period If there was malice, the depositor may demand
return where such deposit was made
XPN: - when the thing is judicially attached (contempt of court)
- opposition from a third party (damages)
Right of Depositary to Return Thing (Art. 1989)

 Only if deposit is gratuitous, or for justifiable reasons Comment [NSC47]:
e.g. incapacity of depositor
 No right to return if the deposit is for a valuable consideration
Comment [NSC48]:
If the depositor demands return before the period
No Liability for Loss by Force Majeure or Government Order/Action (Art. 1990) agreed upon, the depositor must pay the
consideration for the entire period (penalty)
 If in place thereof, he receives money or another thing, he must deliver the same to the depositor.
XPN: breach of confidence (must be proven)
Alienation in Good Faith by Depositary’s Heir (Art. 1991)

 Heir must return the price or assign the right to collect the price if he has not been paid yet. Comment [NSC49]:
Only to the extent of benefit received.
Consignation Example:
- Deposit to the court for judicial determination
True value = 100k
- To relieve the depositary of liability or to extinguish his liability
Received 80k; Return 80k

Section 3. Obligations of the Depositor
(1) Pay Expenses for Preservation

 Applicable only to gratuitous deposit Comment [NSC50]:
GR: Deemed included in deposit for compensation
 Necessary expenses only XPN: contrary stipulation
(2) Pay Losses Incurred due to Character of the Thing Deposited

 XPN:
a) Depositor was not aware
b) Depositor was not expected to know the dangerous character of the thing
c) Depositor notified the depositary There is an assumption of
d) Depositary was aware without advice from depositor risk.
(3) Pay Fees

 Only if onerous
Depositary’s Right of Retention

 Created in both gratuitous & onerous deposit
 In pledge (by operation of law) as security for payment of what may be due by reason of the deposit Comment [NSC51]:
A real guaranty of a personal property. If not paid,
the thing may be sold & the proceeds applied to the
Extinguishment of Deposit debt.
(1) Loss or destruction of the thing Comment [NSC52]:

The list is not exclusive.
(2) Death of either party (for gratuitous deposit only)
- If compensated, the deposit passes to the heirs of the depositary Other causes:
- Expiration of term
- Fulfilment of resolutory condition
- Mutual withdrawal

Necessary Deposit
Instances of Necessary Deposit (Art. 1996)

(1) Made in compliance with a legal obligation;
(2) On the occasion of a calamity; Comment [NSC53]:
(3) Made by travellers in hotels or inns; To save the property; creates a quasi-contract
(4) Made by passengers with common carriers. Involuntary Bailment or Involuntary Deposit
“DEPOSITO MISERABLE”
Deposit by Travellers in Hotels or Inns (Art. 1998) Comment [NSC54]:

e.g. safety fault
 Travellers – transients who enter hotels/inns seeking lodging; excludes those boarders in dormitories or
Comment [NSC55]:
boarding houses. Hand-carry baggage in overhead cabin
 Vehicles, animals & articles introduced or placed in the annexes of the hotel are covered (Art. 1999) Comment [NSC56]:
 Requisites: If not a transient, and there is loss without arms or
force:
1) They have been previously informed about the effects brought by the guests; - Inn-keeper remains liable, but not under this
2) The latter have taken the precautions prescribed regarding their safekeeping provision.
Comment [NSC57]:
Situation:
 Hotel Business X frequents various branches of a Hotel A, whereby
- Imbued with public interest X is usually notified of prescribed precautions. In
one branch, X is not given precaution & there is a
- Hotelkeepers are bound to provide lodging for guests & security to persons & belongings loss of effects. Is Hotel A liable?
- The hotel cannot interpose the defense that X

When Hotel-Keeper Liable (Art. 2000-2001) ought to know the precautionary measures.
(1) Loss/injury to personal property of guests is caused by his servants/employees or strangers Every branch must notify its guests.
(2) Loss is caused by the act of thief/robber without use of arms & irresistible force
Comment [NSC58]:
Ratio:
When Hotel-Keeper NOT Liable (Art. 2002) 1. Trust & confidence
2. It encourages travel
(1) Loss or injury is caused by: 3. Hotel-keepers are better equipped to protect
a. Force majeure – does not include the act of a stranger without use of arms or irresistible force) such effects
b. Theft/robber by a stranger with the use of arms or irresistible force

- XPN: hotel-keeper is guilty of fault or negligence
(2) Loss is due to the acts of the guests, his family, servants or visitors
(3) Loss arises from the character of the thing brought into the hotel
Exemption or Diminution of Liability (Art. 2003)

 Stipulation or posting of notices by the hotel-keeper to exempt himself from liability
 VOID! Contrary to law, morals & public policy
Hotel-Keeper’s Right to Retain (Art. 2004)

 As security for credits on account of lodging & supplies furnished to the hotel guest
 A pledge is created by operation of law, thus the hotel keeper is allowed to sell the articles &
apply the proceeds thereof.

Employee LIABLE
Arms/ Force Not Liable

Assuming the requirements of Stranger
notice & observance of LIABLE
precautions have been No XPN: HK is guilty
followed... Arms/Force of
fault/negligence
Force
Who is the culprit? Majeure
Not Liable
Character of
Not Liable
the Thing
Sequestration or Judicial Deposit
When Judicial Deposit (Sequestration) Takes Place (Art. 2005)

 When there is attachment or seizure of property in litigation is ordered
 Rule 57 (preliminary attachment); Rule 59 (receivership); Rule 60 (replevin)
Nature & Purpose of Judicial Deposit

- To maintain the status quo during the pendency of the litigation
- To insure the right of the parties to the property in case of a favourable judgment
- Covers both movable & immovable property (Art. 2006)
Obligation of Depositary of Sequestrated Property (Art. 2007-2008)

(1) Take care of the property with the diligence of a good father of a family
(2) May not be relieved of his responsibility until the litigation is ended, or the court so orders
Judicial Deposit Extra-Judicial Deposit

Cause/Origin By will of the court By will of the parties; contract
As security & to secure the right of a
Purpose party to recover in case of a favourable Custody & safekeeping
judgment
Subject Matter Movable or immovable Movable only
Remuneration Always onerous Generally gratuitous
As to Whose In behalf of the person, who by In behalf of depositor or third person
Behalf it is Held judgment, has a right designated

GUARANTY
Chapter 1. Nature & Extent of Guaranty
Contract of Guaranty (Art. 2047)

 A contract where a person called the guarantor binds himself to the creditor to fulfil the obligation of
the principal debtor in case the latter should fail to do so.
 A contract between the guarantor & creditor; always in favour of the creditor
 A contract of indemnity
 Includes pledge & mortgage, because the purpose of guaranty may be accomplished by:
o Securing the fulfilment of an obligation through the personal guaranty of a third person; Comment [NSC59]:
o Furnishing to the creditor for his security, property with authority to collect the debt from Personal guaranty
the proceeds of the same in case of default. Comment [NSC60]:

Real guaranty
Guaranty Suretyship
Undertakes to pay if debtor is unable to Undertakes to pay the loan itself (insurer of
Undertaking
pay (insurer of insolvency) debt)
Liability Subsidiary (benefit of excussion) Direct & Primary
Surety undertakes to pay if the principal does

Guarantor binds himself to pay if the
Insolvency not pay → INSOLVENCY NOT
principal cannot pay → INSOLVENT
REQUIRED
Insurer of
Solvency of Debtor The debt itself (solidarily liable). Comment [NSC61]:
What But not a party to the principal obligation
Benefits of Guarantor can avail of the benefit of

Excussion & excussion & division if creditor proceeds Not available due to solidary liability
Division against him
Notice of
Not bound to take notice of non- Ordinarily led to know every default of the
Non-
performance by the principal principal
Performance
Often discharged by indulgence of the
Not discharged by indulgence or by want of
Discharge creditor of the principal; usually not liable
notice of default
unless notified of the default
May be embodied in the same instrument as
Form Always in a separate instrument
the debt itself
Similarity: Both guaranty & surety promise or undertake to answer for the debt default or miscarriage of
another person
 A guaranty, by itself, need not be written

- But it must be put in writing for purposes of enforceability (Statute of Frauds)
- Need not be in a public instrument (Art. 1358)

Characteristics of Guaranty
1) Accessory (Art. 2052)
2) Consensual
a. Acceptance by the creditor; Comment [NSC62]:
b. Knowledge/consent of the guarantor (communicated to the guarantor). Orally or in writing
3) Subsidiary & conditional Comment [NSC63]:

XPN: when the offer is direct & unconditional
- Takes effect only when the principal debtor fails in his obligation (insolvent) (acceptance not needed)
4) Unilateral
Ratio:
- Duty only on the part of the guarantor in relation to the creditor - Marks the meeting of the minds
- May be entered into even without intervention of the principal debtor - Informs the guarantor of the extent of his
obligation
5) Nominate
6) Cannot be presumed (Art. 2055)
7) Covered by the Statute of Frauds
8) Requires that the guarantor be a person distinct from the debtor
Kinds of Guaranty (Art. 2051)

1) General classification
a. Personal – guaranty is the credit given
b. Real – guaranty is property
 Immovable → REM or antichresis
 Movable → pledge or chattel mortgage
2) As to origin Comment [NSC64]:
a. Conventional – agreed upon by parties Nonetheless, guaranty still arises from contract
b. Legal – imposed by law

c. Judicial – constituted by decree of court
3) As to consideration
a. Gratuitous – the consideration is the same as that in the principal contract (payment of principal
obligation)
b. Onerous – guarantor receives remuneration
4) As to person
a. Single
b. Double or Sub-guaranty
5) As to scope & extent
a. Definite – only the principal obligation is covered Comment [NSC65]:
b. Indefinite or Simple – also includes accessories of the principal obligation Guarantor may further limit his liability to a portion
of the principal obligation. (Art. 2054)
6) As to term
a. With a term But guarantor may nonetheless stipulate to be liable
for interest.
b. Subject to a resolutory condition
c. Indefinite
7) As to continuity
a. Continuing
b. Not continuing

Suretyship
 A relationship where one person (principal or obligor) has undertaken an obligation & another
person (surety) is also under a direct and primary obligation or other duty to a third person (oblige)
 Law applicable: Art. 2047
o If a person binds himself solidarily with the principal debtor, the provisions of Sec. 4, Chap.3, Title I of this Comment [NSC66]:
Book shall be observed. In such case the contract is called a Suretyship. Joint & solidary obligations
 Requirements for surety’s liability:

a. Application for damages must be filed before trial or before entry of judgment
b. Due notice to the other party & his surety
c. There must be a proper hearing & award of damages must be included in the final judgment
Suretyship Solidary Debtor
He is himself a debtor, though he mutually

Undertakes to pay the obligation of
Undertaking guarantees the payment of the other
another
solidary debtors
Entitled to reimbursement with respect to

Liability Entitled to full reimbursement
the share of the other solidary debtors.
Where a Party Binds Himself Solidarily with the Principal Debtor

1) Guarantor with Solidary Liability
- Possible for guarantor to bind himself solidarily with the principal debtor without affecting
the nature of the contract
2) Character & rights as Guarantor Remain
- Depending on the terms of the contract or the intention of the third person
- Nonetheless, an action may be brought against him by reason of fraud
3) Case different from Suretyship
Nature of Surety’s Undertaking

1) Contractual & Accessory, but Direct Comment [NSC67]:
2) Liability is Limited by Terms of Contract Despite lack of personal/direct interest or benefit
 Liability on a bond is contractual in nature; ordinarily restricted to the obligation expressly

assumed therein
 Contract of surety is not presumed; it cannot extend to more than what is stipulated
 Surety is not released by a change in the contract which does not have the effect of making
the obligation more onerous
3) Liability Arises only if Principal Debtor is Held Liable Comment [NSC68]:
Due to a surety contract’s accessory nature
 A surety contract is made principally for the benefit of the creditor-obligee & this is ensured
by the solidary nature of the surety undertaking
- XPN: Collusion → surety will not be bound by judgment against the principal
 The creditor may sue the surety & debtor separately or together. A creditor’s right to
proceed against the surety exists independently of his right to proceed against the principal.
 When there are several sureties, the oblige may proceed against any of them

4) Surety is Not Entitled to Exhaustion Comment [NSC69]:
Of properties of the principal debtor
 XPN: when demanded by the requirements of justice (e.g. obligor has the necessary amount)
5) Undertaking is to Creditor, not to Debtor Ratio: surety assumed solidary liability
 Therefore the principal cannot claim that there has been a breach of the surety’s obligation
to him under the suretyship contract if surety fails/refuses to pay the debt.
6) Surety is Not Entitled to Notice of Principal’s Default
 Demand on the surety is not necessary before bringing suit against them
 Commencement of the suit is sufficient demand
7) Prior Demand by the Creditor
 As soon as the principal is in default, the surety likewise is in default
8) Surety is Not Exonerated by Neglect of Creditor to Sue Principal
 Mere want of diligence or forbearance does not affect the creditor’s rights vis-à-vis the
surety
 There is nothing to prevent the creditor from proceeding against the principal at any time
Accommodation Party
 The person who has signed the instrument as make, drawer, acceptor or indorser without receiving
value therefor, & for the purpose of lending his name to some other persons.
- Liable on the instrument despite knowledge of holder as mere accommodation party
- Accommodation party has the right, after paying the holder, to obtain reimbursement
 Principal & surety relationship
Guarantor Not Insurer of Debt Guaranteed

 Only binds himself to pay if the principal cannot or is unable to pay
- Whereas the obligation of a surety is to pay the creditor, without qualification
Terminologies Used by Parties; Not Controlling

 Use of the terms “guarantee” or “guarantor” is not conclusive that the contract is one of guaranty
 The term “guarantee” is frequently employed in business transactions with the intention to be bound
by a primary or independent obligation.
Guaranty Indorsement
Primarily that of security Primarily that of transfer
Liability is more extensive than indorser Less liability
Warrants solvency of the debtor Does not warrant the solvency of the promisor
Cannot be sued as promisor May be sued as promisor
Guaranty Warranty
Each is an undertaking by one party to another or make good the assured against some possible
default or defect in the contemplation of the parties
Undertaking that the title, quality or quantity of
A person is bound to another for the fulfilment
the subject matter of a contract is what it has
of a promise or engagement of a 3 party
rd
been represented to be

Guaranty is Generally Gratuitous (Art. 2048)
 GR: Guaranty is gratuitous
o XPN: contrary stipulation
Cause of Contract of Guaranty

 Same cause which supports the obligation as to the principal debtor
- Consideration between the guarantor or surety & the creditor need not be proven
- It is never necessary that the guaranty or surety receive any consideration or benefit from the
principal debtor or from the creditor
Married Woman as Guarantor (Art. 2049)

 GR: Married woman only binds her separate property
o XPN:
a) With the consent of her husband
b) Without the consent of her husband in cases provided by law. Comment [NSC70]:
When may a spouse bind conjugal property?
- When he/she does not have separate property
 There is no express prohibition against a married woman acting as a guarantor for her husband - When he/she has separate property, but the
same is insufficient
Guaranty Undertaken Without Knowledge of Debtor (Art. 2050) Effect: considered as an advance on the share of the
spouse in case of liquidation
 Valid!
- Guaranty is unilateral; it exists for the benefit of the creditor (to take all possible measures to
secure payment)
- Principal (debtor) is not a party to the contract of guaranty
 The guaranty may be constituted without the knowledge & even against the will of the principal
debtor
o Legal consequence: creditor cannot be compelled to subrogate the guarantor in his rights;
guarantor can only demand to the extent that debtor has been benefitted*
Rights of Third Person Who Pays

1) Without knowledge or against the will of the debtor
a) Third person can recover only insofar as the payment has been beneficial to the debtor
b) Third person cannot compel the creditor to subrogate him in his rights, such as those arising
from mortgage, guaranty or penalty.
2) With the knowledge or consent of the debtor
 He is subrogated to all the rights which the creditor had against the debtor
Double or Sub-Guaranty
 One constituted to guarantee the obligation of a guarantor
 Different from guaranty wherein several guarantors concur
i. In case of insolvency of the guarantor for who he bound himself, he is responsible
to the co-guarantors in the same terms as the guarantors
ii. Sub-guarantor is entitled to the right of excussion with respect to the guarantor &
the principal debtor Comment [NSC71]:
Effectively, 2 levels of excussion

Necessity of Valid Principal Obligation
 A guaranty cannot exist without a valid obligation
o Includes conditional obligations (even if suspensive condition, it is retroactive)
Guaranty of Voidable, Unenforceable & Natural Obligations

 Common condition: guarantor must have knowledge of such defect, otherwise the guarantee is
invalid (against the interest of the guarantor) Comment [NSC72]:
Assumption of risk is not presumed by law.
1) Voidable Comment [NSC73]:

a) One of the parties is incapable of giving consent to a contract; The principal obligation’s voidability CANNOT be
used as a defense by the guarantor
b) Consent is vitiated by mistake, violence, intimidation, undue influence or fraud. - Such defense is personal in character
2) Unenforceable Comment [NSC74]:

a) Entered into without authority or legal representation, or acted beyond his powers; Guarantor cannot invoke benefit of excussion if he
knew of the unenforceable nature of the obligation
b) Does not comply with the Statute of Frauds:
Comment [NSC75]:
1. Not to be performed within 1 year from making thereof Personal defense, but excussion is available
2. Special promise to answer for the debt, default or miscarriage of another
3. Made in consideration of marriage
4. Sale of goods, chattel or things in action at a price not less than P500
5. Lease for a period longer than 1 year or sale of real property or interest therein
6. Representation as to the credit of a third person
c) Where both parties are incapable of giving consent to a contract. Comment [NSC76]:
Personal defense, but excussion is available
3) Natural Comment [NSC77]:

a. No right of subrogation (irrelevant)
Guarantor cannot invoke benefit of excussion if he
- XPN: If the debtor in a natural obligation offers a guaranty, there is conversion into a civil knew of the natural nature of the obligation
obligation. Thus there would be subrogation.
b. The fact that it is a natural obligation does not compel the debtor to pay Comment [NSC78]:
If creditor cannot compel the debtor to pay, the
guarantor cannot compel the debtor to pay
Guaranty of Future Debt (Art. 2053) Comment [NSC79]:
 Becomes binding only upon liquidation of such future debt There should be at least an executory agreement.
E.g. agreement to lend
 “Continuing guaranty” → undertakes to answer for future debts
Definite Guaranty (Art. 2054)

 GR: a guarantor (or surety) cannot bind himself for more than the liability of the principal debtor. Comment [NSC80]:
Even if the guarantor/surety binds himself for more
o XPN:
than the principal debtor’s liability, the same would
a) Guarantor is in default – from date of judicial demand still be valid. But the liability would be reduced
b) Penalty clause – failure to comply with a certain obligation or violation of conditions accordingly.
Also applicable when a more onerous obligation is

entered into by the guarantor/surety.
- E.g. guarantor provides a mortgage/pledge to
secure his obligation as guaranty (He has allowed
some of his property to be set aside to secure his
personal guaranty)

Subsequent Increase of Principal Obligation
 Initial:
- Principal: 100k
- Guaranty: 150k
 Subsequently, the principal obligation is increased to 200k
 In such case, the guarantor will be liable for nothing.

 Once the amount is changed without the consent of the guarantor, the contract of guaranty is
extinguished.
Form of Contract of Guaranty

 Must be express → to determine the extent of liability; to protect the guarantor
 Nonetheless must be in writing to be enforceable (Statute of Frauds)
o XPN: waiver by guarantor of required of Statute of Frauds. Comment [NSC81]:
Art. 1403(2)(b)
When Does Application of Guaranty Commence?

 When the debt becomes due & demandable
 GR: guaranty is prospective in application
o XPN: contrary stipulation (to guaranty previous obligations)
Qualifications of a Guarantor (Art. 2056-2057)

(1) Integrity Not continuing requirements.
(2) Capacity
(3) Sufficient Property (Solvency) Needed only at the time of perfection.
 In case of supervening incapacity, loss of integrity, or insufficiency of property: Comment [NSC82]:

Conviction of a crime involving dishonesty
o Contract of guaranty remains valid
o Creditor has 2 options:
 Disregard the qualifications (waiver)
 Demand for a substitute guarantor
 XPNs:
- If initial guarantor was stipulated upon regardless of
qualification, or
- If creditor chose the initial guarantor
Estate of Hemady case:

Guaranty of indemnity agreement; contingent claims
Issue: Is guaranty extinguished loss of qualification due to death?
NO.
- It only gives the creditor an option to demand a substitute guarantor
- It is an obligation to pay; monetary obligations survive death
- No express provision in law
Chapter 2. Effects of Guaranty
Section 1. Effects of Guaranty between the Guarantor & the Creditor
General Effects of Guaranty (between guarantor & creditor)

(1) Excussion
(2) Subrogation Comment [NSC83]:
(3) Division If guaranty was allowed by creditor ONLY
(4) Compromise Comment [NSC84]:

That is beneficial to the debtor
Benefit of Excussion (Art. 2058) Comment [NSC85]:

Personal to the guarantor; cannot be invoked by
 Right by which the guarantor cannot be compelled to pay the creditor anyone else
 Unless the latter has exhausted all the properties of the principal debtor & has resorted to all legal
remedies against such debtor Comment [NSC86]:
Filing a suit for collection
 Requisites (Art. 2060):
Final judgment
a) Guarantor must setup the right of excussion (as a defense) against the debtor upon the Unsatisfied writ of execution*
latter’s demand for payment (at the first opportunity)
b) He must point out to the creditor the available property of the debtor Comment [NSC87]:
c) He has not pledged/mortgaged his own property to secure the debt of the personal - Must be found in the Philippines (ratio:
jurisdiction for execution & to avoid costs of
debtor having judgment recognized abroad)
d) He does not fall within the exceptions to the benefit of excussion - Must not be exempt from execution
- Sufficient to cover the amount of the debt
Duties of Creditor
1. Exhaust properties Comment [NSC88]:
2. Exhaust legal remedies Proof of exhaustion of properties of the debtor:
- Unsatisfied writ of execution (the trigger point
3. Prove that debtor cannot pau for guarantor’s liability)
4. Notify the guarantor of his liability
Exceptions to Benefit of Excussion (Art. 2059)

(1) Guarantor has expressly renounced it
 Personal right; may be waived
(2) If he has bound himself solidarily with the debtor

 Waiver has been made at the outset
 Liability as a surety or guarantor solidarily bound
(3) Insolvency of the debtor

 Must be actual; proven by unsatisfied writ of execution
(4) Debtor absconds or cannot be sued within the Philippines Comment [NSC89]:
 XPN: if the debtor has left a manager or representative (for summons) or there is property left behind Presumes no properties in the Philippines
even without a mangager/representative
(5) When resort to all legal remedies would be a useless formality

 E.g. property of debtor is exempt from execution

Additional Exceptions:
(6) If he does not comply with Art. 2060 Comment [NSC90]:
(7) If he is a judicial bondsman & sub-surety* Requisites of benefit of excussion
(8) Where a pledge or mortgage has been given by the guarantor as a special security
(9) If he fails to interpose it as a defense before judgment is rendered against him
(10) If the debt is a natural or unenforceable obligation, & the guarantor had knowledge of the character
of the principal obligation (estoppel)
Prior Demand by Creditor

 When?
- Only after judgment on the debt (against the principal debtor)
 How?
- Extrajudicial demand
- Judicial demand → therefore, the creditor is allowed to file a new action against the guarantor
 Actual Demand
- Joining the guarantor in the suit against the principal debtor, not intended by law
- GR: guarantor is not a joint contractor with his principal; cannot be sued with principal
 XPN: where it would serve merely to delay the ultimate accounting of the guarantor
Procedure when Creditor Sues (Art. 2062)

1) Creditor must sue the principal alone
2) The guarantor must be notified so that he may appear
a. If he appears
- He is still given the benefit of exhaustion, even if the judgment would be adverse Comment [NSC91]:
b. If he does not appear Unimpaired.
Judgment against the debtor is not judgment
- He cannot setup his defenses against the guarantor, even if the guarantor
- It may no longer be possible for him to question the validity of judgment against the participated in the earlier proceedings.
debtor
3) If he appears, a hearing before execution can be issued against guarantor
- Procedural due process
Compromise between Creditor & Principal Guarantor (Art. 2063)

 A contract whereby the parties, by making reciprocal concessions, avoid a litigation or put an end to
one already commenced
 A compromise between the creditor & principal debtor benefits the guarantor, but does not
prejudice him.
 Effect of compromise between the guarantor & creditor:
a. If prejudicial → not binding on the debtor, when he is not a party to such compromise
b. If beneficial
- It can benefit the debtor; stipulation in favor of a third person (pour autrui) Comment [NSC92]:
- He may accept it unless it is revoked before acceptance Only up to the extend beneficial to the debtor

Sub-Guarantor’s Right to Excussion (Art. 2064)
 He stands on the same footing as the guarantor with respect to the principal debtor. Comment [NSC93]:
Thus in Art. 2075:
 Thus, the law expressly grants the right of excussion to the sub-guarantor as well (with respect to A sub-guarantor, in case of the insolvency of the
guarantor & principal creditor) guarantor for whom he bound himself, is
responsible to the co-guarantors in the same terms
as the guarantor.
Situation: 3 sub-guarantors
1. Exhaustion as to debtor
2. Exhaustion as to guarantor
3. Liability may be mitigated via benefit of division
Benefit of Division Among Several Guarantors (Art. 2065) Comment [NSC94]:

Right of guarantor to be liable only for the amount
 Should there be several guarantors of only one debtor for the same debt, the obligation to answer for for which he bound himself
the same is divided among them all. (Joint liability)
 GR: creditor can claim from the guarantors only up to the extent they are respectively bound to pay.
o XPN: solidarity has been stipulated among themselves (benefit of division is waived, but benefit of Comment [NSC95]:
excussion remains) If solidarity is stipulated with the debtor, there is no
division & no excussion.
Stipulation of Solidarity
GR: Joint liability among several guarantors (benefit of division)
 Solidarity among themselves

o No division; excussion only
 Solidarity with debtor
o No excussion because they become sureties
a. Joint among themselves → Creditor must proceed against all sureties
b. Solidarity among themselves → no division; no excussion
Division Contribution
Controversy is between the co-guarantors & Controversy is between & among the
debtor several co-guarantors
There is already payment; the paying co-
No payment yet; only a claim against one or
guarantors are seeking reimbursement from
more co-guarantors
the others
Cannot be availed of:
a) If there are 2 or more debtors of Cannot be availed of if payment was not
one debt, even if they are bound made in virtue of:
solidarily, each with different
a) Judicial demand
guarantors or
b) Insolvency of principal debtor
b) If there be 2 or more guarantors of
the same debtor for the same debt

Section 2. Effects of Guaranty between the Debtor & the Guarantor
Guaranty; a Contract of Indemnity (Art. 2066)

 The debtor is the one directly & principally liable.
 The guarantor who makes payment must be indemnified. Comment [NSC96]:
Only for the amount actually paid, if less than the
total amount of debt.
 Indemnity, comprised of:
a) Total amount of the debt
b) The legal interests from the time payment was made known to the debtor Comment [NSC97]:
Even though it did not earn interest for the creditor
c) Expenses incurred by guarantor after notifying the debtor
d) Damages, if due How enforced?
- Collection only by judicial demand
 Exceptions to right of indemnity:

a) Guaranty was established without knowledge or against the will of the debtor Comment [NSC98]:
b) Payment by third person who does not intend to be reimbursed; deemed a donation Guarantor can recover only insofar as payment has
been beneficial to the debtor
c) Waiver
d) Prescription → 10 years
- XPN: contrary stipulation
Guarantor’s Right to Subrogation (Art. 2067) Comment [NSC99]:

Extinguishes guaranty because of payment
 Transfer of credit, with all rights thereto appertaining against the debtor or third persons
 Extends as well to sureties
 Basis & nature:
o Arises by operation of law upon payment by the guarantor unless the guarantee was entered into
without knowledge or against the will of the principal debtor
o Principles of natural justice
o Not a contractual right (subrogation to the rights of the creditor, not the debtor)
o If the guarantor paid a smaller amount to the creditor, by virtue of a compromise, he cannot
demand more than he actually paid
Subrogation Confusion
Guarantor can exercise the Guarantor becomes the creditor
creditor’s rights at the same time
*Right to subrogation cannot be invoked in cases where the guarantor has no right to be reimbursed
Effect of Payment by Guarantor without Notice to Debtor (Art. 2068)

 Debtor may interpose against the guarantor, those defenses which he could have set up against the
creditor at the time payment was made
 Thus is the debtor has already paid the creditor, when the guarantor pays, the debtor can set up
against the guarantor the defense of previous extinguishment of the obligation by payment
 The guarantor cannot be allowed, through his own fault & negligence, to prejudice or impair the
rights of the debtor.

Effect of Payment by Guarantor Before & After Maturity (Art. 2069)
 Before maturity:
o Guarantor not entitled to reimbursement unless ratified by debtor via voluntary payment to guarantor Comment [NSC100]:
- No necessity for accelerating payment If the debtor changes his mind, the guarantor
cannot be compelled to return the reimbursement.
- Guarantor not liable for debt before it becomes due
 After maturity:
o The fact that payment was actually made after the term is immaterial
- Controlling: default & demand on guarantor took place while the guaranty was still
in force
Effect of Repeat Payment by Debtor (Art. 2070)

 GR: Before the guarantor pays the creditor, he must first notify the debtor (Art. 2068) Comment [NSC101]:
If the guarantor fails to inform the debtor & the
o XPN:
latter repeats payment, the only remedy is to collect
a) Stipulated/previous authority for the guarantor to pay without notice from the creditor.
b) Creditor becomes insolvent
Guarantor has no cause of action against the debtor
c) Guarantor was prevented by fortuitous event to advise the debtor of the payment because there is no privity of contract.
d) Guaranty is gratuitous
- Gratuitous payment → guarantor receives nothing & it would be unfair to deny Comment [NSC102]:
him the right to recover from the principal debtor (Debtor need not be informed)
Right of Guarantor to Proceed Against the Debtor Before Payment (Art. 2071)
 GR: Guarantor has no cause of action against the debtor until after the former has paid the
obligation
o XPN:
1) When he is sued for payment Comment [NSC103]: Ask for security
2) In case of insolvency of the principal debtor Comment [NSC104]: Ask for security, even
3) Debtor has bound himself to relieve the guarantor from the guaranty within a from a 3rd person
specific period, & such period has expired Comment [NSC105]: Ask for security
4) Debt has become demandable by reason of expiration of period for payment Comment [NSC106]: Ask for release
5) After the lapse of 10 years (and there is no fixed period for maturity) Comment [NSC107]: Ask for release
- Unless, it is of such nature that it cannot be extinguished within 10 years
6) Reasonable grounds to fear that the debtor will abscond Comment [NSC108]: Ask for security
7) Principal debtor is in imminent danger of becoming insolvent Need not be actual
Comment [NSC109]: Ask for security
 In all of the above cases, the action of the guarantor is to obtain release from the principal debtor or
to demand a security that shall protect him from any proceedings by the creditor & from danger of Comment [NSC110]:
insolvency by the latter. From the debtor or a 3rd person
 Can be exercised only against the principal debtor

- Creditor is not compellable to release the guarantor before payment of his credit against his will
- Remission/novation requires assent of creditor

Art. 2066 Art. 2071
Provides for the enforcement of the rights
Provides for the protection before he has paid, but
of the guarantor against the debtor after he
after he has become liable
has paid the debt
Right of action after payment Protective remedy before payment
Substantive right Preliminary remedy
Worthless without Art. 2071
Recovery by Surety against Indemnitor Even Before Payment

 For the benefit of the surety
 Indemnity agreement
o Indemnitor binds himself to indemnify the surety for any damage or prejudice the latter may Comment [NSC111]:
sustain under the surety bond Principal debtor
o May provide for indemnification not only against actual loss, but against liability as well
o Enforceable; not against public policy
Contract of Indemnity against Loss Contract of Indemnity against Liability

Indemnitor will not be liable until the person Indemnitor’s liability arises as soon as the liability of
to be indemnified makes payments or the person to be indemnified has arisen, without
sustains loss. regard to whether or not he has suffered actual loss.
Guaranty of a Third Person at Request of Another (Art. 2072)

 Guarantor who guarantees the debt of an absentee at the request of another, has a right to claim
reimbursement after satisfying the debt, either from:
a) The person who requested him to be a guarantor or
b) The debtor
Section 3. Effects of Guaranty as Between Co-Guarantors
Contribution (Art. 2073)

 Available only if payment was made in virtue of:
a) Judicial demand or Otherwise, the remedy is
b) Insolvency of principal debtor only against the principal
debtor
 Right of co-guarantor to demand of each of the others, the share proportionally owing from him
- If a co-guarantor is insolvent, the other co-guarantors (including the payer) will shoulder his
share
 No need for consent of other co-guarantors
 Defense of Co-Guarantors (Art. 2074)

Comment [NSC112]:
o GR: Same defenses of debtor against the creditor - Inherent in the principal obligation
- XPN: defenses purely personal to the debtor (fraud, force) - Ordinarily person to the debtor, but inherent in
the debt
- Defenses of the guarantor himself

Chapter 3. Extinguishment of Guaranty
Causes of Extinguishment (Art. 2076)
I. Direct → the guaranty itself is extinguished Comment [NSC113]:

(1) Usual causes of extinguishment of obligations; Common thread among the grounds enumerated:
- Anything which increases the burden of the
a) Novation guarantor without his consent, extinguishes the
i. Change in principal obligation; guaranty
ii. Change in person of creditor;

Comment [NSC114]:
iii. Change in person of debtor. Effect: legal subrogation
b) Dacion En Pago Comment [NSC115]:
c) Loss of Thing Due Must result in material alteration to the principal
d) Condonation obligation to extinguish guaranty
i. In favour of the debtor (indirect)

ii. In favour of the guarantor (direct) Comment [NSC116]:
e) Confusion/Merger If there is consideration for the Condonation, the
principal obligation is also extinguished
i. Creditor & debtor (extinguishes the principal obligation)
ii. Creditor & guaratnro (extinguishes only the guaranty)
f) Payment
(2) Acceptance of property by the creditor, even with breach of warranty from eviction; Comment [NSC117]:
Art. 2077
(3) Release of a guarantor without consent of the other guarantors; Comment [NSC118]:
Art. 2078
(4) Extension of time/term; Comment [NSC119]:

Art. 2079
- Ratio: increased risk of insolvency
- There must be a new unequivocal agreement between the debtor & creditor without
consent of the guarantor to extinguish the guaranty
- GR: mere delay in demand of payment will not extinguish guaranty Comment [NSC120]:
In such case, the guarantor has a remedy in Art.
o XPN: 2071:
a) Delay that will allow prescription of the principal obligation - Release or additional security
b) Guarantor upon maturity notified the debtor, but the creditor
failed to collect & the debtor became insolvent
(5) Act of creditor preventing subrogation Comment [NSC121]:

Art. 2080
- Release of pledge & mortgage existing at the time of guaranty
- Inactions & negligence are also subsumed in “act”
II. Indirect → the principal obligation is extinguished, which thus extinguishes the guaranty as well

PROVISIONS COMMON TO PLEDGE & MORTGAGE
Pledge
 Contract by virtue of which the debtor delivers to the creditor or a third persons:
o A movable or
o Document evidencing incorporeal rights
 For the purpose of securing the fulfilment of a principal obligation
 With the understanding that when the obligation is fulfilled, the thing delivered shall be returned with
all its fruits & accessions.
Mortgage
 A contract whereby the debtor secures to the creditor the fulfilment of a principal obligation,
specially subjecting to such security:
o Immovable property or
o Real rights over immovable property
 In case the principal obligation is not paid or complied with at the time stipulated.
Pledge Mortgage
Subject Movables Immovables (or movables if chattel mortgage)
Property is to be delivered to the pledge,
Delivery Delivery is not necessary
or by common consent to a 3rd person
Requirement Not valid against 3rd persons unless Not valid against 3rd persons unless registered
for Validity embodied in a public instrument in the Registry of Property Comment [NSC122]:
Indicating the description of the property pledged &
date.
Common Grounds between Pledge & Mortgage The pledge itself need not appear in the public
instrument.
 Both are:
a) Accessory contracts
b) Obligation may be pure or subject to a condition
c) Absolute ownership is required
d) Free disposal is required
e) Thing given as security may be sold at public auction (Art. 2087) Comment [NSC123]:
f) May be constituted by a person other than the principal debtor It is also the essence of these contracts that when
the principal obligation becomes due, the things in
g) Indivisible which the pledge or mortgage consists may be
alienated for the payment to the creditor.
Kinds of Pledge
1) Voluntary or Conventional → created by agreement of the parties
2) Legal → created by operation of law
Characteristics of Pledge
1) Real
- Perfected by delivery of the thing by the debtor (pledgor) to the creditor (pledgee) or to a 3rd
person by common agreement
2) Accessory

3) Unilateral
- Creates an obligation solely on the part of the creditor to return the thing upon fulfilment of
the principal obligation
4) Subsidiary
- Obligation does not arise until fulfilment of the principal obligation secured
Cause & Consideration of Pledge

 Insofar as the pledgor is concerned, it is the principal obligation
 If he is not the debtor, the cause is the compensation stipulated or the mere liberality of the pledgor
 GR: constructive or symbolic delivery is not allowed Comment [NSC124]:

Ratio: possession is the basis of pledge
o XPN: good stored in a warehouse (delivery of keys is sufficient delivery of possession)
Obligations That May Be Secured (Art. 2091)

1) Valid
2) Voidable
3) Unenforceable
4) Natural
5) Pure
6) Conditional
Essential Requisites of Pledge & Mortgage (Art. 2085)*

(1) Constituted to secure the fulfilment of a principal obligation
(2) Pledgor is the absolute owner of the thing pledged (otherwise, void)
 XPN: mortgagee in good faith
o XPN to XPN: mortgagee bank
(3) Persons constituting the pledge have the free disposal of their property Comment [NSC125]:
Not subject to any claim by a 3rd person
 Contract of pledge not appearing in a public instrument does not affect its validity
o Nonetheless valid between the parties
“Constituted to Secure Fulfilment of a Principal Obligation”

 Determined by intention, regardless of language used or form of transfer
o Transfer of property, even if sufficient on its face to make an absolute conveyance,
should be treated as a pledge or mortgage if the debt continues in its existence & is
not discharged by the transfer.
 Doubt if a contract is a pledge or dation in payment: Comment [NSC126]:

Transmission of ownership of a thing by the debtor
o Presumption in favour of pledge (lesser transmission of rights & interests) to the creditor as an accepted equivalent of the
performance of an obligation.

“Constituted by the Absolute Owner” (Present Ownership)
 Or at least by the pledgor/mortgagor with authority or consent of the owner (in the name of
the latter) Comment [NSC127]:
If constituted in his own name, the
 Ratio: in anticipation of a possible foreclosure sale pledge/mortgage is VOID!
o Future property → cannot be pledged; not yet the owner
o Property subsequently acquired → void & ineffective; without legal existence
o Transfer of vehicles registered subsequently

 Valid
 Registration merely constitutes an administrative proceeding which does not bear
any essential relation
o Share in a co-ownership → valid (Art. 493, NCC), but effects shall be limited to the portion
which may be allotted to him in the division upon termination of the co-ownership
o Property covered by Torrens title

 Exception to the rule on requirement of absolute ownership
 Innocent purchase for value (like mortgage) relying on Torrens title issued is
protected
- XPN: banks, GSIS, similar institutions Comment [NSC128]:
Should exercises more prudence or negligence
“Free Disposal or Legal Authority”

 Free disposal → not subject to any claim by 3rd person
 Capacity to dispose of property → capacity or authority to make a disposition of the property
Thing Pledged/Mortgaged May be Alienated (Art. 2087)

 The very essence of pledge/mortgage
 Creditor does not become automatically the owner if the obligation is not fulfilled within the time
stipulated (Art. 2088)
o Unfulfilled obligation
 Only remedy of the mortgagee/pledgee is to sell the security via public auction & the
proceeds thereof applied to the payment of the obligation secured
o Is creditor required to sue to enforce his credit?

 No! He has preference over the property given as security of his credit.
Pledgor/Mortgagor may be a Third Person

 It is not necessary that the principal debtor should always be the pledgor or mortgagor
Accommodation pledge/mortgage
- Third person who is not a party to the principal obligation
- Secures the latter by mortgaging/pledging his own property
- Extent of liability → up to the loan value of the mortgaged property (not the entire loan)
- Benefit & prior appraisal not always necessary; valid consent

Duty of mortgagee to make proper inquiry
- Creditor is required to exercise due case & prudence to ensure that property being mortgaged is with
consent of the owner thereof.
Where mortgage gratuitous

- Should be strictly construed as to effect the least transmission of rights or interests possible
- If onerous → settled in favour of the greatest reciprocity of interests
Liability for deficiency
- Without expressly assuming personal liability, is not liable for such debt nor deficiency thereof
- Creditor has recourse on the principal debtor in case of deficiency
Special power of attorney to mortgage property

- Does not make the person executing the S.P.A. as co-mortgagor of the debtor
- Accommodation mortgagor is not liable for payment of the loan; only for the value of the mortgaged
property
Right of Creditor Where Debtor Fails to Comply with his Obligation

 Sale of subject property with formalities required by law
o Creditor is merely entitled to move for the sale of the thing pledged/mortgaged
 Prohibition against automatic appropriation Comment [NSC129]:

Ratio:
o Against public policy
- Thing pledged is a security; not payment for the
o Only foreclosure is allowed principal obligation
- To avoid unjust enrichment
Pactum Commissorium
 Stipulation whereby the thing pledged/mortgaged or subject of antichresis shall automatically become
the property of the creditor in the event of non-payment of the debt within the term fixed
 Null & void; contrary to morals & public policy; mortgage/pledge is not meant to be a form of
payment (to avoid abuse by the creditor & improper advantage at the time of stipulation)
 Elements:
a) Pledge/mortgage contract
b) Express stipulation of automatic appropriation upon failure to pay the obligation
 Effect on Security Contract

- Remains valid; only the prohibited stipulation is void
 Permissible stipulations:
a) Subsequent modification of original contract
- Prohibition refers to stipulations executed or made simultaneously with the original
contract
b) Subsequent voluntary cession of property
- Amounts to novation & voluntary sale
c) Promise to assign or sell
- Merely a personal obligation of the mortgagor; does not in any way bind the property
d) Authority to take possession of property upon foreclosure
- Convenient & feasible means of preserving & administering the property in litigation

Risk of Loss of Property Pledged/Mortgaged
 Res perit domino
 Debtor-owner bears the loss
*The principal obligation is not extinguished by the loss of the pledged/mortgaged property
Indivisibility of Pledge & Mortgage (Art. 2089)* Comment [NSC130]:

Effects:
 Consequences of Indivisibility - There is no partial return or extinguishment of a
1) Single Thing pledge/mortgage
- Refers to the thing/things pledged or mortgaged
- Every portion of the property pledged/mortgaged is answerable for the whole
obligation as soon as it falls due
2) Several Things
- All of them are liable for the totality of the debt
- Creditor need not divide his action by distributing the debt
- Even when only a part of the debt remains unpaid, all the things are liable for such
balance
- Debtor cannot ask for the release of one/some of the properties
pledged/mortgaged, or the proportionate extinguishment of the pledge/mortgage
unless the debt has been fully paid
3) Debtor’s Heir or Creditor’s Heir

i. Debtor’s heir who has paid part of the debt cannot ask for the proportionate
extinction of the pledge/mortgage
ii. Creditor’s heir who has received his share of the debt cannot return the
pledge or cancel the mortgage if the debt is not completely satisfied
 GR: The divisibility of the principal obligation is not affected by the indivisibility of the
pledge/mortgage
 XPNs to the Rule of Indivisibility

(1) Where each one of several things guarantees a determinate portion of the credit
- There are as many pledges/mortgages as there are things given in pledge/mortgage
(2) Where only part of the loan was released
- Pledge/mortgage subsists only for percent of total amount actually released
(3) Failure of consideration
- It is as if the loan was never delivered
(4) No debtor-creditor relationship
- Indivisibility applies only to contacting parties & successor-in-interest, but not with
respect to a 3rd person who did not take part in the constitution either personally or
through another
*The concept of indivisibility is not applicable to the right of redemption of an accommodation mortgagor and his
assignee with respect to whom this relationship is not present

Foreclosure of Mortgage Constituted on Several Properties
 Still indivisible.
 It cannot be divided among the different properties, either or both, jointly or singly, sold to satisfy
his claim
Where Real Mortgage & Chattel Mortgage in One Instrument

 Divisible; does not have the effect of fusing both securities into an indivisible whole
o Mortgagee must legally foreclosure the REM extrajudicially & waive the chattel mortgage
foreclosure, and maintain instead a personal action for the recovery of the unpaid balance of
the credit
Promise to Constitute Pledge/Mortgage (Art. 2092)

 Creates no real right
 Only a personal right arises; action to compel fulfilment of the promise
o Right to recover indebtedness may also be enforced + criminal liability
Criminal Responsibility of Pledgor or Mortgagor

a) Defrauding another by offering in pledge/mortgagor as unencumbered, things which he knew were
subject to some burden or
b) Misrepresenting himself to be the owner of the same
*It is important that fraud/deceit be practiced upon the vendee at the time of the sale

PLEDGE
Chattel Mortgage Pledge
Required to be recorded in the Chattel

Registration n/a
Mortgage Registry
Security for May secure present & future indebtedness

n/a
Future Debts (continuing contract of pledge)
Recovery of GR: deficiency may be recovered

n/a
Deficiency XPN: when Recto Law is applicable
Essential Requisites of Pledge

(1) Art. 2085 (secures a principal obligation; absolute ownership; free disposal or legal authority)
(2) Placed in actual possession of the pledgee or designated 3rd person
(3) Description of the thing pledged & date of pledge appears in a public instrument
Transfer of Possession
 Essential in pledge; delivery is required for perfection
a) To constitute the contract
b) To affect third persons
 Pledge is merely a lien; possession is indispensable to create the possessory lien
Type of Delivery
 GR: actual delivery is required; mere symbolic delivery is not sufficient
o XPN: where the thing is not capable of actual or manual delivery Comment [NSC131]:
E.g. delivery of keys to the warehouse where the
goods are stored
Subject Matter of Pledge
 Personal property only
 Incorporeal rights may also be pledged (evidenced by documents)
o Must also be delivered, and indorsed (if applicable)
Public Instrument Necessary to Bind Third Persons Comment [NSC132]:

Does not make the pledge valid; it only makes the
 The public instrument must contain: contract public
o Description of the thing pledged
Gives presumption of regularity
o Date of the pledge - Burden shifts to the person alleging otherwise
Alienation by the Pledgor of the Thing Pledged (Art. 2097)

 Pledgor retains ownership, thus he may sell the thing pledged, provided the pledgee consents thereto.
 If alienated:
o Ownership of the thing pledged is transmitted to the vendee/transferee as soon as the
pledgee consents to the alienation Comment [NSC133]:
o BUT the pledgee must continue in possession during the existence of the pledge Consent given amounts to constructive/symbolic
delivery

Rights of a Pledgee Obligations of a Pledgee
(1) Retention
(2) To have the thing sold at public auction (1) Take care of the thing with due diligence
upon maturity (2) Not to use or benefit from the thing
(3) Right to proceeds of the sale (priority) (3) To return the object to the debtor upon
(4) Right to demand adjudication of the thing to payment of the obligation
him if there is no buyer
Right of Retention (Art. 2098)

 Limited only to the fulfilment of the principal obligation for which the pledge was created
Diligence Required of Pledgee (Art. 2099)

 Good father of a family
o But is entitled to reimbursement of expenses incurred for preservation
 GR: Pledgee not responsible for loss/deterioration due to fortuitous event

o XPN: loss/deterioration occurred by reason of fraud, negligence, delay, or violation of terms
of contract
Obligation of Pledgee not to Deposit Thing Pledged with Another (Art. 2100)
 GR: He must retain possession until the debt is paid
o XPN:
a) Stipulation authorizing him to do so or
b) If there is danger of loss & impairment
Responsibility of Pledgee for Acts of His Employees/Agents

 Their acts, are in legal effect, deemed his.
Responsibility of Pledgee for Flaws of Thing Pledged (Art. 2101)

 Essentially the same as Art. 1951 → damages
 Requisites:
a) Flaw/defect
b) Hidden
c) Bailor is aware
d) Bailor does not advise the bailee
e) Bailee suffers damage
No Right to Use the Thing Pledged or Appropriate Fruits Thereof (Art. 2102)
 Authority of the owner is needed Comment [NSC134]:
First applied to whatever is owing
o Pledgee can apply the fruits/income/dividends/interests earned or produced by the thing to (e.g. expenses for preservation)
the principal of his credit
 GR: interests & earnings of right pledged and in case of animals, their offspring → included in pledge Comment [NSC135]:
o XPN: contrary stipulation Owned by the pledgor, but retained by the pledgee
XPN: contrary stipulation

Right of Pledgee Against Third Persons (Art. 2103)
 To bring action as pertaining to the owner (pledgor) in order to recover/defend it against third-party
claims.
Obligation of Pledgee Not to Use the Thing Pledged (Art. 2104)

 GR: creditor cannot use the thing pledged without the authority of the owner
o XPN:
a) Preservation of the thing requires its use
b) When authorized to do so
Right of Pledgor to Ask that the Thing Pledged be Deposited (Art. 2106)
(1) Creditor uses the thing without authority; Comment [NSC136]:
(2) Creditor misuses the thing in any other way; Art. 2104
(3) If the thing is in danger of being lost or impaired because of negligence or wilful act of Comment [NSC137]:
Art. 2104
pledgee.
Comment [NSC138]:
If the pledgee is not at fault, pledgor’s remedy lies in
Pledgor cannot ask for the Return of the Thing until Obligation is Fully Paid (Art. 2105) Art. 2107-2108.
 The thing pledged is security for fulfilment of the pledgor’s obligation Comment [NSC139]:
With interest & expenses
 Possession of pledgee cannot ripen into ownership; not in the concept of an owner
Remedies under Art. 2107 & 2108

(1) Right to demand the return of the thing pledged, upon offering another thing in pledge.
(PLEDGOR)
 Requisites for application:
a) Pledgor has reasonable grounds to fear destruction/impairment of the thing pledged
b) There is no fault on the part of the pledgee
c) The pledgor is offering in place of the thing, another thing of the same kind & quality
d) The pledgee does not choose to exercise his right to cause the thing to be sold at public
auction
(2) Right to cause the thing pledged to be sold at a public sale. (PLEDGEE) Comment [NSC140]:
Superior right over pledgor’s right.
Right of Pledgee to Demand Substitute or Immediate Payment

 In case he is deceived as to the substance or quality of the thing pledged
 Alternative remedies:
a) Claim another thing in pledge or
b) Demand immediate payment of the principal obligation
Extinguishment of Pledge
(1) Return of the thing pledged (Art. 2110);
Comment [NSC141]:
(2) Payment of the debt; A statement in writing by the pledgee that he
(3) Renunciation or Abandonment (Art. 2111); renounces or abandons the pledge is sufficient to
extinguish the pledge.
(4) Sale of the thing pledged at public auction.
Acceptance & return not needed; the pledgee thus
becomes a depositary.

Presumption of Extinguishment (Art. 2110)
 Possession by the debtor or owner of the thing pledged, subsequent to the perfection of the pledge
o May be rebutted by evidence to the contrary (substitution, theft)
 However, the pledgee may temporarily entrust physical possession of the chattel pledged to the
pledgor → pledgor holds the property merely as a trustee
Extinguishment via Renunciation or Abandonment (Art. 2111)

 Personal right of the pledgee; may be waived
 Must be in writing
o Such waiver transforms the pledgee into a depositary if the thing is not returned
o Principal debt is not affected by the waiver of the pledge
o Acceptance by the pledgor is not needed
Right of Pledgee to Cause Sale of Thing Pledged (Art. 2112)

 For the payment to the creditor when the principal obligation becomes due
 Formalities required:
1) Debt is due & unpaid; Comment [NSC142]:
2) Sale must be at a public auction; GR: no need for demand
XPN: legal pledge (demand + sale within 30 days)
3) Notice to pledgor & owner, stating the amount due;
4) Sale must be made with the intervention of a notary public. Comment [NSC143]:
Notice is required even at the 2nd auction.
 Right of pledgee to appropriate thing pledged

- If after the 1st and 2nd auctions, the thing is not sold Comment [NSC144]:
- Considered as full payment for his entire claim But if sold, inform the pledgor of the results.
 Pledgee is obliged to give an acquittance of his claim. Comment [NSC145]:

To prove fulfilment of the obligation &
extinguishment of the pledge.
 Both pledgor & pledgee may bid
- Pledgor shall be preferred if he offers the same terms as highest bidder.
- Pledgee is not allowed to acquire the thing pledged if he is the only bidder
 2nd round of auction has to be conducted; if pledgee is still the highest/only pledge, it can be
appropriated to him
 All bids must be for cash

- Otherwise, the pledgor/owner has the right to consider that the pledgee has received the
purchase price in cash
Effect of Sale of Thing Pledged (Art. 2115)

 Extinguishes the principal obligation whether the price of the sale is more/less than the amount due
o Right of debtor to excess
- GR: Debtor is not entitled to the excess XPN: contrary agreement
o Right of creditor to recover deficiency
- Not entitled to recover deficiency in all cases (absolute)
 After the public auction, the pledgee shall promptly advise the pledgor/owner of the results thereof. Comment [NSC146]:
Art. 2116

Right of Third Person to Satisfy Obligation (Art. 2117)
 As soon as the debt becomes due & demandable
 Creditor cannot refuse to accept the payment
Right of Pledgee to Collect & Receive Amount Due on Credit Pledged (Art. 2118)
 Actually an obligation vis-à-vis required diligence of a good father of a family
 Also, duty to collect if delay would endanger the recovery of the credit
Right of Pledgee to Choose Which of Several Things Pledged Shall be Sold (Art. 2119)
 After sufficient property has been sold to satisfy the obligation plus interest & expenses, no more
shall be sold.
Third Persons (Art. 2120)

 May secure the principal obligation by pledging his own property
 Same rights as a guarantor
Pledge by Operation of Law (Art. 2121)

 Art. 546 → possessor in good faith may retain the thing until necessary expenses are reimbursed
 Art. 1731 → movable may be retained by one who has executed work thereon until he is paid
 Art. 1994 → retention by depositary
 Art. 1914 → retention of things object of the agency until reimbursed & indemnified
 Art. 1707 → labourer’s wages shall be a lien on the goods manufactured or work done
Rules
- Same rules on possession, care & sale of the thing pledged.
- Debtor is entitled to remainder of the price of the sale after payment of debt & expenses.*
- No definite period for payment of principal obligation. * Comment [NSC147]:
Pledgee must make a demand for payment of
amount due to him.
Pawnshops & other Establishments (Art. 2123)
 Those engaged in making loans secured by pledge
 Governed by P.D. 114

REAL ESTATE MORTGAGE
Contract of Mortgage
 An accessory contract whereby the debtor secures to the creditor the fulfilment of the principal
obligation;
 Involves immovable property or real rights over immovable property; Comment [NSC148]:
A building may be mortgaged apart from land on
 In case the obligation is not complied with, at the time stipulated, the proceeds of the sale of said which it is built.
property or rights shall satisfy the obligation;
Real Mortgage Chattel Mortgage

Real property or alienable real
Object Personal property (general rule)
rights
Obligations
Present & future Present only
Guaranteed
A house as subject of chattel mortgage
 May only be the subject of chattel mortgage if:

a) There is a stipulation and
b) No third parties will be prejudiced thereby
 Allowed, because of estoppel to deny that the property is immovable does not apply
to 3rd persons
Characteristics
1) Accessory
2) Indivisible → no partial extinguishment
3) Inseparable → follows the property where it goes
4) Subsidiary
5) Unilateral
6) Comprehensive → covers all improvements, unless owned by another
7) Creates real rights
8) Lien or Encumbrance
9) Can secure all kinds of obligations
10) Limitation on ownership
Essence of Mortgage
 Property has been identified or set apart from the mass of property of the debtor as security for the
fulfilment of his obligation, in case of default of payment
 Retention of possession by the mortgagor
Not essential
 Interest
*If it is expressly agreed that the creditor shall apply the fruits of the property to the payment of interest & thereafter to the
principal of his credit, the contract is a true antichresis.

Cause/Consideration
 As an accessory contract, its consideration is the same as that of the principal contract
Kinds of Mortgage
1) Voluntary or Conventional
- Agreed to between the parties or constituted by the will of the owner of the property on
which it is created
2) Legal
- Required by law to be executed in favour of certain persons (e.g. in case of a judicial bondsman) Comment [NSC149]:
3) Equitable Also see Art. 2125
- Although lacking in proper or legal formalities, nevertheless reveals the intention of the
parties to burden real property as security for debt & contains nothing impossible or
contrary to law
- Instances:
a. When the price of a sale with right to repurchase is unusually inadequate
b. Vendor remains in possession as lessee or otherwise
c. Upon or after the expiration of the right to repurchase, another instrument
extending the period of redemption or granting a new period, is executed
d. Purchaser retains for himself a part of the purchase price
e. Vendor binds himself to pay the taxes on the thing sold
f. Any other case where it may be fairly inferred that the real intention of the parties is
that the transaction shall secure the payment of a debt or performance of any other
obligation.
*In any of the foregoing cases, any money, fruits or other benefit to be received by
the vendee as rent or otherwise shall be considered as interest which shall be subject
to the usury laws.
Contract purporting to be a sale with right to repurchase

- In case of doubt, it shall be construed as an equitable mortgage
Future Property
 GR: cannot be the subject of mortgage
o XPN: stipulation subjecting to the mortgage lien, properties which the mortgagor may
subsequently acquire, install or use in connection with real property already mortgaged
belonging to the mortgagor
Essential Requisites of Mortgage

(1) Art. 2085
 Constituted to secure fulfilment of a principal obligation
 Mortgagor is the absolute owner of the thing mortgaged
 Free disposal of the property (or that they were legally authorized for the purpose)
(2) It must appear in a public document, duly recorded in the Registry of Property
Comment [NSC150]:
 If in a private document, it is not recorded thus no valid mortgage. Creditor may nonetheless recover on the loan.

Effect of Non-Registered Mortgage
 Mortgage is still binding between the parties
 Registration only operates as a notice of the mortgage to others; no effect on
validity
Mortgagee in Good Faith

 One who relied on the certificate of title of the mortgagor in good faith
- Absence of any sign that might arouse suspicion
- No obligation to undertake further investigation
Innocent Purchaser for Value

 Where there is nothing on the certificate of title to indicate any cloud/vice in the
ownership of the property, purchaser is not required to explore beyond the four
corners of the Torrens title
- XPN: greater diligence is required of banks & persons regularly engaged in
the business of lending money secured by real estate mortgages
Right in case of Legal Mortgages

 Contracting parties have the right to compel each other to observe the form
required by law, provided the contract between them is valid & enforceable.
Registration; without Prejudice to Better Right of Third Parties

 Registered mortgage right over property previously sold
- Inferior to the buyer’s unregistered right
- Superior to a contract to sell
When mortgage deed contains a prohibition against encumbrance of mortgaged land Comment [NSC151]:
Presupposes absence of mortgagee’s consent
 Encumbrances acquired after registration cannot be annotated as an adverse claim
on the title of the land over the mortgagee’s opposition
Effect of Mortgage
 Creates a right in rem; a real right; a lien inseparable from the property mortgaged
- Follows the property notwithstanding changes of ownership until discharged upon payment
of the obligation
Extent of Mortgage (Art. 2127)

(1) The property itself
(2) All accessions, improvements, growing fruits, rents, income
(3) Proceeds of insurance (should the property be destroyed)
(4) Expropriation value of the property (should it be expropriated)

 Other things deemed included:
- New plantings
- Fruits (except those collected before the obligation falls due; those removed & stored when it falls due)
- Accrued & unpaid rents
- Buildings, machinery & accessories belonging to the mortgage debtor
- All objects permanently attached to a mortgaged load or building, even if placed after
execution of mortgage
- A more costly building erected in place of the mortgaged building which was torn down by
the debtor (unless the mortgaged estate passes to the hands of a 3rd person)
 Stipulation including after-acquired properties

- Valid; to maintain original value of the properties given as security
- Attaches & vests at the time of the recording & registration of the deed of mortgage
 Future advancements
- A mortgage may secure future advancements
Dragnet Clause
 Operates as a convenience & accommodation to the borrowers

 Makes available additional funds without having to secure additional documents,
thereby savings time & costs
 Subsumes all debts of past or future origin
 Carefully scrutinized; strictly construed especially if the mortgage contract is one
of adhesion.
Alienation or Assignment of Mortgage Credit (Art. 2128)

 May be alienated or assigned to a third person, by the mortgagee who is the owner of said right. Comment [NSC152]:
In whole or in part
 Assignee may foreclose the mortgage in case of non-payment of the mortgage indebtedness
 Valid even if not registered
- Registration is necessary only to affect third persons
Right of Creditor against Transferee or Mortgaged Property (Art. 2129)

 The fact that the mortgagor has transferred the mortgaged property to a third person does not relieve
him from the obligation to pay the debt to the mortgage creditor in the absence of novation
 As a real right, creditor may demand from any possessor the payment only of the part of the credit
secured by said property.
Stipulation Forbidding Owner from Alienating Immovable Property (Art. 2130)

 Pactum de non alienando
 Void! Contrary to the public good inasmuch as the transmission of property should not be unduly
impeded.
 Unconscionable advantage for the mortgagee

Stipulation granting right of refusal to mortgagee
- Valid. Consideration for the loan mortgage may be said to include the consideration for the
right of first refusal.
- A sale made in violation of the mortgagee’s right of first refusal is rescissible.
Subsequent mortgage on property already mortgaged

- Nothing legally objectionable
- Subject to the prior rights of previous mortgagee
Rules Governing Mortgage (Art. 2131)

 To matters not included in the Civil Code:
o Spanish Mortgage Law of 1889
o Land Registration Law
o Revised Administrative Code, as amended by Act No. 3344
o R.A. 4882 → for aliens becoming mortgagees
Foreclosure
 A remedy available to the mortgagee, by which he subjects the mortgaged property to the satisfaction
of the obligation to secure which the mortgage was given, through the sale of the property at public
auction & the application of the proceeds thereof to the payment of his claim.
 Once the proceeds have been applied to the payment of the obligation
o Debtor cannot be anymore required to pay unless there is a deficiency between the amount of the loan
& the foreclosure sale price
 If the mortgagee is unable to obtain possession of the mortgaged property for its sale on foreclosure:
o Civil action to obtain possession (as a preliminary step) or
o Judicial foreclosure
 Kinds of Foreclosure
1) Judicial Foreclosure (Rule 68, Rules of Court)
 By bringing an action for that purpose
 In case of balance after applying the proceeds of the sale of the court:
o Mortgagee is entitled to recover the deficiency
o If mortgagor is a 3rd person, he is not liable for any deficiency unless otherwise
stipulated Comment [NSC153]:
Action for recovery of deficiency must be directed
 Proceeds of the sale shall be applied to:
against the DEBTOR
a) Costs of the sale
b) Amount due to the mortgage
c) Claims of persons holding subsequent mortgage in the order of their
priority
d) Balance, if any, shall be paid to the mortgagor

2) Extra-Judicial Foreclosure (Act No. 3135)
 Only if there is a clause in the mortgage contract, giving the power to the Comment [NSC154]:
Special power of attorney
mortgagee, upon default of the debtor, to foreclose the mortgage by an extrajudicial
sale of the mortgaged property.
Basis Judicial Foreclosure Extrajudicial Foreclosure

Court
With Without
Intervention
Decisions are not appealable;
Right of Appeal Decisions are appealable
immediately executory
Cutting-off of Order of the court cuts of all Foreclosure does not cut off the
Rights rights of the parties impleaded rights of all parties involved
GR: no right of redemption
Right of
XPN: if mortgagee is a bank, There is right of redemption
Redemption
quasi-bank or trust entity
Equity of
Yes No
Redemption
Starts from finality of judgment From the date of registration of

Period of
until order of confirmation the certificate of sale
Redemption
(90-120 days) (1 year)
SPA in favour of mortgagee
Necessity of SPA No need
essential
Governing Rule Rule 68, Rules of Court Act No. 3135
 Kinds of Redemption
1) Equity of Redemption Comment [NSC155]:
Judicial in nature.
 Right of the mortgagor to redeem the mortgaged property after his default in the
Purpose is to pre-empt the sale.
performance of the conditions of the mortgage, but before the sale of the
Comment [NSC156]:
mortgaged property By paying the amount of the mortgage debt
 Not less than 90 days; not greater than 120 days
2) Right of Redemption Comment [NSC157]:

Extra-judicial in nature.
 Right to redeem the mortgaged property within a certain period after it was sold for
the satisfaction of the mortgage debt
 Period:
Creditor-Mortgagee is a Natural
Creditor-Mortgagee is a Juridical Person
Person
90 days from date of sale or registration of sale
1 year from registration
(whichever comes first)

 Redemption Price
A. When mortgagee is not a bank (Act No. 3135 in relation to Sec. 28, Rule 39, Rules of Court)
1) Purchase price of the property
2) 1% interest per month on the purchase price from the date of registration of the
certificate up to the time of redemption
3) Necessary expenses incurred by the purchase for the improvements made by him to
preserve the property during the period of redemption
4) Taxes paid & amount of purchaser’s prior lien, if any, with the same rate of interest
computed from the date of registration of sale, up to the time of redemption
B. When mortgagee is a bank (General Banking Law of 2000)

1) Amount fixed by the court or amount due under the mortgage deed
2) Interest
3) Cost & expenses
 Effect of Redemption
o Mortgagor retains the property; it was never lost
 Sale After Foreclosure

o Allowed, although the REM is inseparable from the property.

CHATTEL MORTGAGE
Contract of Chattel Mortgage

 A contract by virtue of which personal property is recorded in the Chattel Mortgage Register, as a
security for the performance of an obligation.
 If the movable instead of being recorded is delivered to the creditor or a third person, the contract is
a pledge.
Chattel Mortgage vs. Pledge*

Basis Chattel Mortgage Pledge
Necessity of Delivery Not necessary Necessary
Requirement of
Required by law Not necessary
Registration
Procedure for sale Sec. 14, Act No. 1508, as amended Art. 2112, NCC
GR: debtor is not entitled to the excess
Entitlement to
XPN:
Excess over the Goes to debtor
Amount Due a) Otherwise agreed upon
b) Legal pledge
GR: creditor is entitled to recover the
deficiency from the debtor
Right of Creditor to Creditor is not entitled to recover
recover Deficiency deficiency, notwithstanding any
from Debtor XPN: if the chattel mortgage is a stipulation to the contrary (Art. 2115)
security for the purchase of personal
property in instalments (Art. 1484)
Requisites
(1) Covers only movable property
A house (or other immovable) as subject of chattel mortgage
 May only be the subject of chattel mortgage if:

c) There is a stipulation and
d) No third parties will be prejudiced thereby
 Allowed, because of estoppel to deny that the property is immovable does not apply
to 3rd persons
(2) Registration with the Chattel Mortgage Register where the mortgagor resides. Comment [NSC158]:
(3) Description of the property If the property is located in a different province,
registration in both provinces is required.
(4) Affidavit of good faith
Comment [NSC159]:
 Wherein the parties severally swear that the mortgage is made for the purpose of securing Absence of an affidavit of good faith does not affect
the obligation specified in the conditions thereof & for no other purposes & and that the the validity of the contract
same is a just and valid, existing obligation and one not entered into for the purpose of Such absence only vitiates the mortgage only as
fraud. against third persons without notice.
(5) It can cover only obligations existing at the time the mortgage is constituted

Characteristics
1) Formal contract
2) Accessory contract
3) Unilateral contract
4) Does not convey dominion; only a security
5) Creates a real right or lien which is being recording & follows the chattel wherever it goes
Governing Law
1) Chattel Mortgage Law (Act No. 1508)
2) Provisions on the Civil Code on pledge
3) Revised Administrative Code
4) Revised Penal Code (Art. 319)
5) Other special laws (e.g. motor vehicle law)
6) Ship Mortgage Decree of 1978

ANTICHRESIS
Contract of Antichresis
 By the contract of antichresis, the creditor acquires the right to:
o Receive the fruits of an immovable of his debtor
o With the obligation to apply them to payment of the interest, if owing, and thereafter to the
principal of his credit
Characteristics
1) Accessory contract → secures the performance of a principal obligation
2) Formal contract → must be in a specified form (in writing) to be valid
 GR: interest rate must be specified
o XPN: if parties stipulate on interest, but fail to state the rate, apply the legal rate.
Delivery of Property
 Required only in order that the creditor may receive the fruits; not for validity Comment [NSC160]:
In this sense, antichresis is a real right
Comment [NSC161]:
Right of Creditor to the Fruits Still perfected by consent
 GR: antichresis covers all of the fruits of the encumbered property Comment [NSC162]:
o XPN: contrary stipulation by the parties Natural, civil, industrial
Payment of Interest
 Not essential to antichresis
 Antichresis is susceptible of securing all kinds of obligations
Antichresis Pledge
Property
Refers to real properties Personal property
Covered
Perfected by mere consent (consensual Perfected by mere delivery of the thing pledged
Perfection
contract) (real contract)
Control Debtor loses control over the subject matter of the contract

REM Antichresis
Delivery of immovable to creditor is the very
Delivery Not required
essence of antichresis.
Creditor acquires right to fruits, but with
Right to
n/a corresponding obligation to apply the same to
Acquire Fruits
interest (if owing) & then to the principal
Taxes & Creditor is obliged to pay the taxes & charges upon
No such obligation
Charges the estate unless there is a contrary stipulation
Subject
Real property
Matter
Measure of Application of Fruits → Interest & Principal (Art. 2133)

 Only the fruits of the immovable are covered
 Appraised at their actual market value at the time of the application Comment [NSC163]:
Ratio: to prevent violation of the Usury law
Form of the Contract (Art. 2134)

 Amount of the principal & the interest shall be in writing
- Otherwise, void.
 To forestall the use of antichresis for purposes of usury
Obligations of the Antichretic Creditor (Art. 2135)

(1) Payment of taxes & charges upon the estate Comment [NSC164]:
XPN: contrary stipulation
 Otherwise, he is required to pay indemnity for damages to the debtor
 Where the debtor has paid for the taxes which the creditor would have paid:
a. The amount is to be applied to the payment of the debt
b. Debtor is entitled to the return of the property, free from all encumbrance by
advancing the taxes
(2) Application of the fruits of the estate

 To the interest, if owing, & theafter to the principal
 Creditor has the duty to render an account of said fruits to the debtor
 Corresponding right of debtor to apply the said fruits to the debt
 The sums spent by the creditor in fulfilment of the obligation under this article shall be charged
against the fruits of the property.
Right of Antichretic Creditor to Reacquire Enjoyment of the Property (Art. 2136)

 Property delivered stands as security for the payment of the obligation of the debtor in antichresis
- Hence the debtor cannot demand its return until the debt is full paid
 If the creditor does not want to pay the taxes & incur expenses for the preservation & repair of the Comment [NSC165]:
Because the fruits are insufficient
property
- He may compel the debtor to reacquire the enjoyment of the same except when there is contrary stipulation

Remedy of Creditor in case of Non-Payment of Debt (Art. 2137)
 If the debt is not paid, the creditor does not acquire ownership of the real estate Comment [NSC166]:
Any contrary stipulation is VOID
 Remedies of the creditor:
o Bring an action for specific performance Even if there were such contrary stipulation, the
o Petition for the sale of the real property (as in foreclosure of real estate mortgages) contract remains valid.
Acquisition of Property by Creditor via Prescription
GR: not possible; possession is not in the concept of an owner (mere holder)
XPN: if he repudiates his status as antichretic creditor
Interest in Antichresis, Subject to the Usury Law (Art. 2138)

 If the value of the fruits should exceed the amount of interest allowed by the laws of usury, the
excess shall be applied to the principal.
Applicability of Certain Articles (Art. 2139)

 Last paragraph of Art. 2085
o Third persons who are not parties to the principal obligation may secure the latter with their
own property
 Art. 2089 → indivisibility
 Art. 2090 → indivisibility not affected by the fact that the debtors are not solidarily liable
 Art. 2091 → may secure all kinds of obligations

CONCURRENCE & PREFERENCE OF CREDIT
These provisions are relevant only in case of proceedings for insolvency, bankruptcy or liquidation.
I. SPECIAL PREFERRED CREDITS (Art. 2241 and 2242) Comment [NSC167]:

Memorize, but not necessarily in order.
Only taxes are absolutely preferred.
A. Taxes, duties & fees on specific property
B. Non-tax credits
 no preference among them
Art. 2241. With reference to specific movable property of the debtor, the following claims or liens
shall be preferred:
(1) Duties, taxes and fees due thereon to the State or any subdivision thereof;
(2) Claims arising from misappropriation, breach of trust, or malfeasance by public officials
committed in the performance of their duties, on the movables, money or securities obtained
by them;
(3) Claims for the unpaid price of movables sold, on said movables, so long as they are in the
possession of the debtor, up to the value of the same; and if the movable has been resold by
the debtor and the price is still unpaid, the lien may be enforced on the price; this right is not
lost by the immobilization of the thing by destination, provided it has not lost its form,
substance and identity; neither is the right lost by the sale of the thing together with other
property for a lump sum, when the price thereof can be determined proportionally;
(4) Credits guaranteed with a pledge so long as the things pledged are in the hands of the
creditor, or those guaranteed by a chattel mortgage, upon the things pledged or mortgaged,
up to the value thereof;
(5) Credits for the making, repair, safekeeping or preservation of personal property, on the
movable thus made, repaired, kept or possessed;
(6) Claims for laborers' wages, on the goods manufactured or the work done;
(7) For expenses of salvage, upon the goods salvaged;
(8) Credits between the landlord and the tenant, arising from the contract of tenancy on shares,
on the share of each in the fruits or harvest;
(9) Credits for transportation, upon the goods carried, for the price of the contract and incidental
expenses, until their delivery and for thirty days thereafter;
(10) Credits for lodging and supplies usually furnished to travellers by hotel keepers, on the
movables belonging to the guest as long as such movables are in the hotel, but not for
money loaned to the guests;
(11) Credits for seeds and expenses for cultivation and harvest advanced to the debtor, upon the
fruits harvested;
(12) Credits for rent for one year, upon the personal property of the lessee existing on the
immovable leased and on the fruits of the same, but not on money or instruments of credit;
(13) Claims in favor of the depositor if the depositary has wrongfully sold the thing deposited,
upon the price of the sale.
*In the foregoing cases, if the movables to which the lien or preference attaches have been wrongfully taken,
the creditor may demand them from any possessor, within thirty days from the unlawful seizure.

Art. 2242. With reference to specific immovable property and real rights of the debtor, the following
claims, mortgages and liens shall be preferred, and shall constitute an encumbrance on the
immovable or real right:
(1) Taxes due upon the land or building;

(2) For the unpaid price of real property sold, upon the immovable sold;
(3) Claims of laborers, masons, mechanics and other workmen, as well as of architects,
engineers and contractors, engaged in the construction, reconstruction or repair of
buildings, canals or other works, upon said buildings, canals or other works;
(4) Claims of furnishers of materials used in the construction, reconstruction, or repair of
buildings, canals or other works, upon said buildings, canals or other works;
(5) Mortgage credits recorded in the Registry of Property, upon the real estate mortgaged;
(6) Expenses for the preservation or improvement of real property when the law authorizes
reimbursement, upon the immovable preserved or improved;
(7) Credits annotated in the Registry of Property, in virtue of a judicial order, by attachments or
executions, upon the property affected, and only as to later credits;
(8) Claims of co-heirs for warranty in the partition of an immovable among them, upon the real
property thus divided;
(9) Claims of donors or real property for pecuniary charges or other conditions imposed upon
the donee, upon the immovable donated;
(10) Credits of insurers, upon the property insured, for the insurance premium for two years.
(1923a)
Art. 2243. The claims or credits enumerated in the two preceding articles shall be considered as mortgages or
pledges of real or personal property, or liens within the purview of legal provisions governing insolvency.
Taxes mentioned in No. 1, Article 2241, and No. 1, Article 2242, shall first be satisfied.

II. ORDINARY PREFERRED CREDITS (Art. 2244) Comment [NSC168]:
MEMORIZE IN ORDER!!!
A. Worker’s preference under Art. 110 of the Labor Code Memory Aid:
 It is not a specially preferred credit FSILS2 – Flea – T3DG - Pj
 Instead of being #2 among ordinary preferred credits, it has become #1 by virtue of the
amendment to Art. 110, LC.
B. The rest follow priority as provided in Art. 2244
Art. 2244. With reference to other property, real and personal, of the debtor, the following claims or
credits shall be preferred in the order named:
(1) Proper funeral expenses for the debtor, or children under his or her parental authority who
have no property of their own, when approved by the court;
(2) Credits for services rendered the insolvent by employees, laborers, or household helpers for
one year preceding the commencement of the proceedings in insolvency;
(3) Expenses during the last illness of the debtor or of his or her spouse and children under his
or her parental authority, if they have no property of their own;
(4) Compensation due the laborers or their dependents under laws providing for indemnity for
damages in cases of labor accident, or illness resulting from the nature of the employment;
(5) Credits and advancements made to the debtor for support of himself or herself, and family,
during the last year preceding the insolvency;
(6) Support during the insolvency proceedings, and for three months thereafter;
(7) Fines and civil indemnification arising from a criminal offense;
(8) Legal expenses, and expenses incurred in the administration of the insolvent's estate for the
common interest of the creditors, when properly authorized and approved by the court;
(9) Taxes and assessments due the national government, other than those mentioned in Articles
2241, No. 1, and 2242, No. 1;
(10) Taxes and assessments due any province, other than those referred to in Articles 2241, No. 1,
and 2242, No. 1;
(11) Taxes and assessments due any city or municipality, other than those indicated in Articles
2241, No. 1, and 2242, No. 1;
(12) Damages for death or personal injuries caused by a quasi-delict;
(13) Gifts due to public and private institutions of charity or beneficence;
(14) Credits which, without special privilege, appear in (a) a public instrument; or (b) in a final
judgment, if they have been the subject of litigation. These credits shall have preference
among themselves in the order of priority of the dates of the instruments and of the
judgments, respectively. (1924a)
III. COMMON CREDITS
 They do not enjoy preference. They are to be satisfied equally, pro rata.
Art. 2245. Credits of any other kind or class, or by any other right or title not comprised in the
four preceding articles, shall enjoy no preference.
~ END ~

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Credit vs. Credit Transactions

Kinds of Credit Transactions

GR: Loan is essentially gratuitous

c) For benefit of both parties – compensation, pledge

Notes in Credit Transactions - Chua | 1

exhibition (e.g. show money)

Notes in Credit Transactions - Chua | 2

Section 2. Obligations of the Bailee

I. Ordinary Expenses (Art. 1941) Comment [NSC7]:

II. Loss of the Thing (Art. 1942)

3) Thing loaned was delivered with appraisal of value; Comment [NSC10]:

IV. Obligation to Return (Art. 1944)

Notes in Credit Transactions - Chua | 3

(1) Respect the Duration of the Loan (Art. 1946)

(3) Refund Extraordinary Expenses (Art. 1949)

 If extraordinary expenses arise from actual use

Notes in Credit Transactions - Chua | 4

 Borrower acquires ownership

 No criminal liability for failure to pay

Simple Loan Rent/Lease

Simple Loan Trust Receipt Transaction

Form of Payment of Simple Loan

Notes in Credit Transactions - Chua | 5

GR: No Interest Due

3) Legal → 6% per annum

Rule on Compounding of Interest

Usury is Now Legally Non-Existent

Notes in Credit Transactions - Chua | 6

Contract for Rent of Safety Deposit Box

- A special kind of deposit, but more of a contract of lease

Immovable + Gratuitous = Innominate contract

5) Depositary Cannot Use the Thing Deposited

Kinds of Deposit (Art. 1964)

Notes in Credit Transactions - Chua | 7

Section 1. General Provisions

 GR: depositor must be the owner of the thing

Incapacity of Either Party (Art. 1970-1971) Comment [NSC30]:

Notes in Credit Transactions - Chua | 8

(1) Keep the Thing Deposited & Return It (Art. 1972)

(2) Not to Transfer Deposit (Art. 1973) Comment [NSC33]:

YES, he is liable. Depositing to a manifestly unjust

(5) Not to Commingle Things Deposited if so Stipulated (Art. 1976)

Notes in Credit Transactions - Chua | 9

Where the Thing Deposited is Delivered Closed &Sealed (Art. 1982)

RULES ON VALUATION OF DAMAGES:

Notes in Credit Transactions - Chua | 10

Place of Return (Art. 1987)

Right of Depositary to Return Thing (Art. 1989)

Alienation in Good Faith by Depositary’s Heir (Art. 1991)

Notes in Credit Transactions - Chua | 11

(1) Pay Expenses for Preservation

(2) Pay Losses Incurred due to Character of the Thing Deposited

(3) Pay Fees

Depositary’s Right of Retention

(1) Loss or destruction of the thing Comment [NSC52]:

Notes in Credit Transactions - Chua | 12

Instances of Necessary Deposit (Art. 1996)

Deposit by Travellers in Hotels or Inns (Art. 1998) Comment [NSC54]:

- The hotel cannot interpose the defense that X

b. Theft/robber by a stranger with the use of arms or irresistible force

Exemption or Diminution of Liability (Art. 2003)

Hotel-Keeper’s Right to Retain (Art. 2004)

Notes in Credit Transactions - Chua | 13