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ATENEO CENTRAL BAR OPERATIONS 2007
Civil Law
SUMMER REVIEWER
—Adviser: Dean Cynthia Roxas-Del Castillo; Heads: Joy Marie Ponsaran, Eleanor Mate
o; Understudies: Joy Stephanie
Tajan, John Paul Lim; Subject Head: Sarah Lopez; Pledgee: Aiza Constantino—
2 TYPES OF CREDIT TRANSACTIONS:
1. secured transactions – those supported by
a collateral or an encumbrance of property
2. unsecured transactions – those supported
only by a promise to pay or the personal commitment of another such as a guarant
or or surety
SECURITY is something given, deposited or serving
as a means to ensure the fulfillment or enforcement of an obligation or of prote
cting some interest in the property
2 TYPES OF SECURITY:
1.personal – when an individual becomes a
surety or a guarantor
2.real or property – when an emcumbrance is
made on property
BAILMENT is the delivery of property of one person
to another in trust for a specific purpose, with a contract, express or implied,
that the trust shall be faithfully executed and the property returned or duly a
ccounted for when a special purpose is accomplished or kept until the bailor rec
laims it.
PARTIES IN BAILMENT
1.bailor – the giver, the party who delivers
possession/custody of the thing bailed
2.bailee – the recipient, the party who receives
the possession/custody of the thing delivered
KINDS OF CONTRACTUAL BAILMENT W/
REFERENCE TO COMPENSATION
1. for the sole benefit of the bailor (gratuitous) e.g. gratuitous deposit, mand
atum (do some act w/ respect to a thing)
2.for the sole benefit of the bailee (gratuitous)
e.g. commodatum, gratuitous simple loan or
mutuum
3. for the benefit of both parties e.g. depositfor
compensation, involuntary deposit, pledge
and bailments for hire:
a. hire of things – temporary use
b. hire of service – for work or labor
c. hire of carriage of goods – for carriage
d. hire of custody – for storage
LOAN
CHARACTERISTICS
1.real contract – delivery is essential for perfection of the loan (BUT a promise
to lend, being consensual, is binding upon the parties)
2.unilateral contract - only the borrower has
the obligation
KINDS
1.commodatum – where the bailor delivers to the bailee a non-consumable thing so t
hat the latter may use it for a certain time and return the identical thing
kinds of commodatum:
a. ordinary commodatum – use by the bailee of the thing is for a certain period of
time
b. precarium – one whereby the bailor may demand the thing loaned at will; exists
in cases where:
i. neither the duration of the contract nor the use to which the thing loaned sh
ould be devoted has been stipulated
ii. if the use of the thing is merely
tolerated by the owner
2.mutuum or simple loan - where the lender delivers to the borrower money or oth
er consumable thing upon the condition that the latter will pay the same amount
of the same kind and quality (when it is consumed in a manner appropriate to its
purpose)
LOAN
CREDIT
1. delivery by one party and the receipt by the other party of a given sum of mo
ney or other consumable thing
upon
an agreement, express or implied
2. to repay the same amount of the same kind and quality, w/ or w/o interest
The
ability
of
an
individual
to
borrow money or things by virtue of the confidence or trust reposed by a lender
that he will pay what he may promise w/in a specified period
CREDIT TRANSACTIONS include all transactions
involving the purchase or loan of goods, services or money in the present with a
promise to pay or deliver in the future (contract of security)
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Civil Law Summer Reviewer
ATENEO CENTRAL BAR OPERATIONS2007
Page 191 of 297
LOAN
DISCOUNTING PAPER
Interest is usually taken at the expiration of a credit
Interest is deducted in
advance
Always on single-name
paper
Double name paper
More expensive for the
borrower
because interest is calculated on the amount loaned and not the amount actually
received
COMMODATUM
MUTUUM
(SIMPLE LOAN)
Object
Ordinarily non-
consumable
Money or other
consumable thing
Ownership
of the thing
Ownership
is retained by the lender
Ownership
is transferred to the borrower
Cause
Essentially
gratuitous
Gratuitous
or
onerous
(w/ stipulation to pay interest)
Thing to be
returned
Borrower must return the same thing loaned
Borrower
need only pay the same amount of the same kind and quality
Subject
Matter
May involve real
or
personal
property
Only
personal
property
Purpose
Loan for use or
temporary
possession
Loan
for
consumption
When to
return
Bailor
may
demand
the return of the thing
loaned
before
the expiration of the term in case of urgent need
Lender may not demand its return before the lapse of the term agreed upon
Who bears
risk of loss
Loss
of
the subject matter is suffered by the bailor since he is the owner
Borrower suffers the loss (even if caused exclusively by a fortuitous event and
he is not
therefore
discharged
from
his duty to pay)
Nature
Purely personal
Not purely
personal
COMMODATUM
(Articles 1935-1952)
1.cause: essentially gratuitous (otherwise, if
there Is compensation, it might be lease)
2.purpose: temporary use of the thing loaned but not its fruits, unless stipulat
ed or is incidental (otherwise, if the bailee is not entitled to the use of the
thing, it might be deposit)
3.subject matter: generally non-consumable goods but if the consumable goods are
not for consumption, such may be the subject of the commodatum, as when merely
for exhibition (Art. 1936)
4.bailor need not be the owner of the thing
loaned (Art 1938)
!
it is sufficient that he has a possessory
interest
!
a mere lessee or usufructuary may lend but the borrower or bailee himself may no
t lend not lease the thing loaned to him to a third person (Art. 1932[2])
5. purely personal
a. death of either party terminates the contract UNLESS there is stipulation to
the contrary
b. generally, bailee can neither lend nor lease the object to a 3rd person in th
e absence of some agreement to that effect
c. use of the thing loaned may extend to the bailee’s household (who are not consi
dered 3rd persons) except:
1. when there is a contrary stipulation
2. nature of the thing forbids such use
6.enjoyment of fruits – a stipulation to make use of fruits is valid, but it is ne
ver presumed. The enjoyment of the fruits must only be incidental to the use of
the thing itself, for if it is the main cause, the contract may be one of usufru
ct.
OBLIGATIONS OF THE BAILEE (Arts 1941-1945)
(COOLRD2)
1. To pay for the ordinary expenses for the use
and preservation of the thing loaned(Art.
1941)
2. To pay for all other expenses other than those referred to in Art. 1941 and 1
949 (refund of extraordinary expenses either in full or in half)
(Art. 1950)
REASON: Bailee makes use of the thing.
Expenses for ostentation are to borne by the
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bailee because they are not necessary for the
preservation of the thing
3. To take good care of the thing with the
diligence of a good father of a family(Art.
1163)
4. To be liable for loss even if due to a fortuitous
event:
GR: the bailee is not liable for loss or damage
due to a fortuitous event (Art. 1174)
Reason: the bailor retains the ownership of the
thing loaned
Exceptions: (Art. 1942 – punishes the bailee
for his improper acts although they may not be the proximate cause of the loss)
a. Bad faith – if the bailee devotes the thing to any purpose different from that
for which it has been loaned
b. Delay - he keeps it longer than the period stipulated or after the accomplish
ment of the use for which the commodatum has been constituted
c. Has been delivered with appraisal -the thing loaned has been delivered with a
ppraisal of its value, UNLESS there is a stipulation exempting the bailee from r
esponsibility in case of a fortuitous event
d. Lends the subject matter to a 3rd person - he lends or leases the thing to a
third person who is not a member of his household
e. Ingratitude - being able to save the thing borrowed or his own thing, he chos
e to save the latter
5. The bailee has NO RIGHT to retain the thing loaned as security for claims he
has against the bailor, even though they may be by reason of extraordinary expen
ses (Art. 1944)
Reasons:
a. Ownership remains in bailor – the bailee acquires only the use of thing, the ow
nership of which remains w/ the bailor
b. Only temporary use given to bailee – the bailee would be violating the bailor’s t
rust in him to return the thing as soon as the period stipulated expires or the
purpose has been accomplished
Exception: Claim for damages suffered
because the bailor doesn’t advise bailee of
the flaws known to him (Art. 1951)
6. A bailee doesn’t answer for the deterioration of the thing loaned due only to t
he use thereof and without his fault
7. Liability when there are 2 or more bailees: The
presumption is that they are solidarily liable
(Art. 1945)
Reason for the presumption: to safeguard effectively the right of the bailor. Th
e law presumes that the bailor takes into account the personal integrity and res
ponsibility of all the bailees and that, therefore, he would not have constitute
d the commodatum if there were only one bailee
OBLIGATIONS OF THE BAILOR(AD-READ-HA)
1. Primary obligation of the bailor:
GR: To allow the bailee the use of the thing loaned
for the duration of the period stipulated or until the accomplishment of the pur
pose for w/c the commodatum was constituted
Exceptions: the bailor may demand the return or
its temporary use upon:
a. bailor has an urgent need for the thing (Art.
1946) – the contract is suspended
! Reason: the right of the bailor is based on
the fact that commodatum is essentially
gratuitous
b. bailee commits an act of ingratitude (Art.
1948)
!
if the bailee should commit an offense against the person, the honor or the prop
erty of the bailor, or of the wife or children under his parental authority
!
if the bailee imputes to the bailor any criminal offense, or any act involving m
oral turpitude, even though he should prove it, unless the crime or the act has
been committed against the bailee himself, his wife, or children under his autho
rity; and
!
if the bailee unduly refuses the bailor support when the bailee is legally or mo
rally bound to give support to the bailor
!
Reason: the person who commits any of the acts of ingratitude makes himself unwo
rthy of the trust reposed upon him by the bailor.
!
2. May demand the thing at will when the contract is
precarium
!
PRECARIUM – a kind of commodatum
where the bailor may demand the thing at will. It has been defined as a contract
by which the owner of a thing, at the request of another person, gives the latt
er the thing for use as long as the owner shall please
3. To refund the extraordinary expenses (Art. 1949)
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GR on reimbursement: Notice should be given by
the bailee to the bailor regarding such extraordinary
expenses
Reason for the rule: notice is required because it is possible that the bailor m
ay not want to incur the extraordinary expense at all.
Exception: where the extraordinary expenses are
so urgent that the reply to the notification cannot be
awaited w/o danger.
4. if the extraordinary expenses arise from the actual use of the thing and even
though bailee acted w/o fault, the expenses will be borne equally by both the b
ailor and the bailee (50-50) (Art. 1949,
2ndpar.)
!
Reasons:
a. the bailee pays½ because of the benefit derived from the use of the thing loane
d to him;
b. the bailor pays the other½ because he is the owner and the thing will be return
ed to him
Exception: Stipulation to the contrary that provide
for a different apportionment of such expenses or that they shall be borne by th
e bailee or bailor alone
5. all other expenses which are not necessary for the use and preservation of th
e thing must be shouldered by the borrower (bailee)
6. the depreciation caused by the reasonable and
natural use of the thing is borne by the bailor(Art.
1943)
Reason: The parties to the contract know that the
thing
borrowed cannot be used without
deterioration due to ordinary wear and tear.
Exceptions:
a. when there is a stipulation to the
contrary;
b. when the bailee is guilty of fault or
negligence;
c. if he devotes the thing to any purpose different from that for which has been
loaned
7. To pay damages for known hidden flaws(Art.
1951)
Requisites: (the following must concur)
a. there is a flaw or defect in the thing
loaned
b. the flaw or defect is hidden
c. the bailor is aware thereof
d. he does not advise the bailee of the
same
e. the bailee suffers damages by reason of
the flaw or defect
Exception: when the defect is not known to the
bailor, he is not liable because commodatum is
gratuitous.
8. The bailor has no right of abandonment for
expenses and damages (Art. 1952)
Reason: The expense and/or damages may
exceed the value of the thing loaned
SIMPLE LOAN OR MUTUUM
SIMPLE LOAN OR MUTUUM – contract whereby
one of the parties delivers to another money or other fungible thing w/ the unde
rstanding that the same amount of the same kind and quality shall be paid. (Art.
1933)
SIMPLE LOAN
RENT/LEASE
Signifies the delivery of money or some other consumable thing to another w/ a p
romise to repay an equivalent amount of the same kind and quality
One party delivers to
another
some
non- consumable thing in order that the latter may use it during a certain perio
d and return it to the former
There is a transfer of ownership of the thing delivered
The owner of the lessee or the lessor of the property does not lose his ownershi
p. He simply loses control over the property rented during the period of the con
tract
The relation between parties is that of obligor and oblige
The relation is between
landlord and tenant
The creditor receives
payment for his loan
The owner of the property receives “compensation” or “price” either in money, provisions
, chattels, or labor from the occupant thereof in return for its use
Basis of
comparison
MUTUUM
COMMODATUM
BARTER
Subject
matter
Money or any other fungible
things/
Personal
or
real
property (generally non- consumable)
Non-
fungible or
non-
consumabl
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personal
property
e things
Obligation
of bailee
Pay
or deliver the same kind or quality loaned to the bailee
Return
the identical thing borrowed when the time has expired or the purpose
has
been served
The
equivalent
thing
is
given
in return for what has been
received
Nature of
contract
May
be
gratuitous
Always
gratuitous
Onerous
NATURE OF MUTUUM
a.bilateral - borrower’ promise to pay is the consideration for the lender’s obligat
ion to furnish the loan
b.no criminal liability upon failure to pay
SUBJECT MATTER
a. fungible or consumable-depending on the intent of the parties, that the retur
n of the thing is equivalent only and not the identical thing
b. money
c. if the transfer of ownership is on a non- fungible thing, with the obligation
of the other to give things of the same kind, quantity and quality, it is a bar
ter
INTEREST
GR: Interest must be expressly stipulated in writing,
and it must be lawful (Art. 1956)
Exceptions:
1.Indemnity for damages – the debtor in delay is liable to pay legal interest (6%/
12%) as indemnity for damages even in the absence of a stipulation for the payme
nt of interest. Interest as indemnity for damages is payable only in case of def
ault or non-performance of contract.
!
Basis for computation for indemnity:
a. Central Bank Circular 416 – 12% p.a. in
cases of:
!
Loans
!
Forbearance of money, goods or
credits
!
Judgments involving such loans or forbearance, in the absence of the express agr
eement as to such rate of interest
!
During the interim period from the
date judgment until actual payment
b. Art. 2209 of the Civil Code – 6% p.a. in
cases of:
!
Other sources (e.g. sale)
!
Damages arising from injury to
persons
!
Loss of property which does not
involve a loan
2. Interest accruing from unpaid interest - interest due shall earn interest fro
m the time it is judicially demanded although the obligation may be silent upon
this point.
DETERMINATION OF INTEREST PAYABLE IN
KIND:
Its value shall be appraised at the current price of the products or goods at th
e time and place of payment. (Art. 1958)
Purpose: to make usury harder to perpetrate
COMPOUNDING INTEREST (Art. 1959)
GR: accrued interest (interest due and unpaid) shall
not earn interest
Exceptions:
!
When judicially demanded
!
When there is an express stipulation made by the parties to wit: that the intere
st due and unpaid shall be added to the principal obligation and the resulting t
otal amount shall earn interest
Compounding interest may be availed of only when there is a written stipulation
in the contract for the payment of interest.
BARTER
BARTER - A contract whereby one person transfers
the ownership of non-fungible things to another with
the obligation on the part of the latter to give things of
the same kind, quantity and quality.
DEPOSIT
DEPOSIT - A deposit is constituted from the moment
a person receives a thing belong to another, with the
obligation of safely keeping it and of returning the
same.
If the safekeeping of the thing delivered is not the principal purpose of the co
ntract, there is no deposit but some other contract.
NOTE:it is essential that the depository is not the
owner of the thing deposited
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CHARACTERISTICS
1.real - because it is perfected only by the
delivery of the subject matter
BUT an agreement to constitute a deposit is binding and enforceable, since it is
merely consensual
2.unilateral - if gratuitous
3.bilateral - if with compensation
Basis of
comparison
Deposit
Mutuum
Commodatum
Principal
Purpose
Safekeeping
or mere
custody
Consumption
Transfer of the
use
Deman
dability
Demand
return of the
thing at will
Lender must
wait until
expiration of
period
granted to
debtor
May demand
return at will
(PRECARIUM)
or only after
the expiration
of the period
or
accomplishme
nt of the use
of the thing
subject to
exceptions
Object
Both
movable and
immovable
may be the
object
But in
extrajudicial
deposit, only
a movable
(corporeal)
thing may be
the object
Only money
and
any
other
fungible
thing may be
the object
Both movable
and
immovable
may be the
object
Nature
of
contract
May be
gratuitous
May be
gratuitous
Essentially
and always
gratuitous
CREATION OF DEPOSIT (Art. 1964)
1. By virtue of a court order; or
2. By law
3. Not by the will of the parties
4. It is essential that the depositary is not the
owner of the property deposited (Art. 1962)
KINDS OF DEPOSIT
1.judicial - when an attachment or seizure of
property in litigation is ordered
2.extrajudicial (Art. 1967)
a.vo luntar y- delivery is made by the will of
the depositor or by two or more persons
each of whom believes himself entitled to
the thing deposited;
b.n e ce ssa ry- made in compliance with a legal obligation, or on the occasion
of any calamity, or by travelers in hotels and inns or by travelers with common
carriersJudicial
Extrajudicial
Creation
Will of the court
Will
of
the
contracting parties
Purpose
Security or to ensure the right of a party to the property or to recover in case
of favorable
judgment
Custody
and
safekeeping
Subject
Matter
Generally
immovables
Movables only
Cause
Always onerous
May
be compensated but generally
gratuitious
Return of
thing
Upon order of the court/ end of litigation
Upon demand of
depositor
In whose
behalf it is
held
Person who has
a right
Depositor or /3rd
person designated
DEPOSIT IS GENERALLY GRATUITOUS: (Art.
1965)
GR: A deposit is generally gratuitous.
Exceptions:
a. when there is a contrary stipulation
b. where depositary is engaged in the business
of storing goods
c. where property is saved without knowledge
of the owner
SUBJECT MATTER OF DEPOSIT (Art. 1966)
GR: only movable or personal property may be the
object of deposit, whether voluntary or necessary.
Exception: In judicial deposit, it may cover both
movable and immovable property.
DEPOSITOR NEED NOT BE THE OWNER OF THE
THING:
GR: The depositor must be the owner of the thing
deposited.
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a
pressor
ture.
Exceptions: It may belong to another person than
the depositor.
a. when two or more persons claiming to be entitled to a thing may deposit the s
ame with a third person. In such case, the third person assumes the obligation t
o deliver to the one to whom it belongs.
b. Interpleader – the action to compel the depositors to settle their conflicting
claims. Here one of the depositors is not the owner.
FORM OF CONTRACT OF DEPOSIT:
GR: A contract of deposit may be entered into orally
or in writing. (Art. 1969)
Exception: Delivery of the thing deposited. (It is a
real contract, hence, delivery is required for
perfection.)
Depositary
-
capacitated
Depositor
-
incapacitated
Depositary -
incapacitated
Depositor -
capacitated
Depositary is subject to ALL the obligations of a depositary
Depositary
does
not incur the obligations of a depositary
Depositary must return the
property either to:
a) the legal representative
of the incapacitated, OR
b) the depositor himself if
he
should
acquire
capacity
Depositary, however is
liable to:
a) return the thing
deposited while still in his
possession; AND
b) pay the depositor the amount by which he may have benefited himself with the
thing or its price subject to the right of any 3rd person who acquires the thing
in good faith
Basis of
Comparison
Irregular
deposit
Mutuum
Demandability
Demandable at
will
of
the
irregular
depositor
for
whose
benefit the deposit has been constituted
Lender
is bound by the provisions
of
the
contract
and
cannot seek restitution until the time of payment
as provided in the contract
has
arisen
Benefit
Benefit accrues
to the depositor
Necessity
of
the borrower
Preference of
credit
Depositor
has preference over other
creditors
Enjoy
no
preference
in
the distribution
with respect to
the
thing
deposited
of the debtor’s
property.
OBLIGATIONS OF THE DEPOSITARY(SRT-CCC-
ULC-RITT-RPT-TL-HR)
1. Two primary obligations (Art. 1972)
a.safekeeping of the object;
b.Return of the thing when required – even though a specified term or time for suc
h may have been stipulated in the contract.
! Degree of Care – same diligence as he
would exercise over his property.
!Reasons:
i.
Essential requisite of judicial relation which involves the depositor’s confidence
in his good faith and trustworthiness;
ii.
The presumption that the depositor took into account the diligence which the dep
ositary is accustomed with respect to his own property.
The depositary cannot excuse himself from liability in the event of loss by clai
ming that he exercised the same amount of care toward the thing deposited as he
would towards his own if such care is less than that required by the circumstanc
es.
2. Obligation not to transfer deposit (Art. 1973)
GR: the depositary is not allowed to deposit
the thing with a third person.
Reason: A deposit is founded on trust and confidence and it can be supposed that
the depositor, in choosing the depositary, has taken into consideration the lat
ter’s qualification.
Exception: The depositary is authorized by
express stipulation.
Liabilities: Depositary is liable for loss of the
thing deposited when:
a. He transfers the deposit with a third person without authority although there
is no negligence on his part and the third person;
b. He deposits the thing with a third person who is manifestly careless or unfit
although authorized, even in the absence of negligence; or
c. The thing is lost through the negligence of his employees whether the latter
are manifestly careless or not.
Exemption from liability: The thing is lost without the negligence of the third
person with whom he was allowed to deposit the
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thing if such third person is not “manifestly
careless or unfit.”
3. Obligation not to change the way of deposit
(Art. 1974)
GR: Depositary may not change the way of
the deposit
Exception: If there are circumstances
indicating that the depositor would consent to the change. This is a situation w
herein the depositary would reasonably presume that the depositor would agree to
the change if he knows of the facts of the situation.
Requisites:
a. The depositary must notify the depositor
of such change and
b. Must wait for the reply of the depositor to
such change.
Exception: If the delay of the reply would
cause danger.
4. Obligation to collect on the choses in action
deposited (Art. 1975)
!
If the thing deposited should earn interest,
the depositary is under the obligation to:
a. Collect the interest as it becomes due;
b. Take such steps as may be necessary to preserve its value and the right corre
sponding to it.
!
The depositary is bound to collect the capital,
as well as the interest, when due.
Contract of rent of safety deposit boxes
(Art. 1975)
A contract for the rent of safety deposit boxes is not an ordinary contract of l
ease of things, but a special kind of deposit; hence, it is not to be strictly g
overned by the provisions on deposit. The prevailing rule in the US is that the
relation between a bank renting out safety deposit boxes and its customer with r
espect to the contents of the box is that of bailor and bailee.
5. Obligation not to commingle things if so
stipulated (Art. 1976)
GR: The depositary is permitted to
commingle grain or other articles of the same
kind and quality.
Effects:
a. The various depositors of the mingled goods shall own the entire mass in comm
on.
b. Each depositor shall be entitled to such portion of the entire as the amount
deposited by him bears the whole.
Exception: When there is a stipulation to the
contrary.
6. Obligation not to make use of the things
deposited (Art. 1977)
GR: Deposit is for safekeeping of the subject
matter and not for its use.
Exceptions:
a. Expressly authorized by the depositor;
b. Such use is necessary for its preservation but limited for the purpose only.
!
Effect of unauthorized use: Liability for
damages
!
Effects of authorized use: (Art. 1978)
a. If the thing deposited is non-consumable:
GR: The contract loses the character of a
deposit and acquires that of a commodatum despite the fact that the parties may
have denominated it as a deposit.
Exception: Safekeeping is still the
principal purpose of the contract.
b. If the thing deposited is money or other
consumable thing:
GR: Converts the contract into a simple
loan or mutuum.
Exception:Safekeeping is still the
principal purpose of the contract, but it
becomes an irregular deposit.
Bank deposits are in the nature of irregular deposits but they are really loans
governed by the law on loans.
7. Liability for loss through fortuitous event (Art.
1979)
GR: The depositary is not liable for loss
through fortuitous event without his fault.
Exceptions:
a. If it is so stipulated;
b. If he uses the thing without the
depositor’s permission
c. If he delays in its return;
d. If he allows others to use it, even though he himself may have been authorize
d to use the same.
Note: Liability for loss without fortuitous event:
Depositary – presumed at fault (Art. 1265)
- in possession
8. Relation between bank and depositor (Art.
1980)
Fixed, savings, and current deposits of money in banks and similar institutions
shall be governed by the provisions concerning simple loan.
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a.Contract of loan – deposits in banks are
really loans because the bank can use
the same for its ordinary transactions
b.Relation of creditor and debtor – the relation between a depositor and a bank is
that of a creditor and a debtor.
9. Obligation when the thing deposited isclosed
and sealed (Art. 1981)
The depositary has the obligation to:
a. return the thing deposited when delivered
closed and sealed in the same condition;
b. pay for damages should the seal or lock be broken through his fault, which is
presumed unless proven otherwise;
c. Keep the secret of the deposit when the seal or lock is broken, with or witho
ut his fault.
10. When depositary justified in opening closed
and sealed subject matter (Art. 1982)
a. The depositary is presumed authorized to do so if the key has been delivered
to him;
b. When the instructions of the depositor as regards the deposit cannot be execu
ted without opening the box or receptacle. (Necessity)
11. Obligation to return products, accessories
and accessions (Art. 1983)
12. Obligation to pay interest on sums converted
for personal use (Art. 1983)
13. The depositary who receives the thing in deposit cannot require that the dep
ositor prove his ownership over the thing (Art. 1984)
14. Where third person appears to be the owner
(Art. 1984)
The depositary may be relieved from liability
when:
a. He advised the true owner of the thing of
the deposit.
b. If the owner, is spite of such information, does not claim it within the peri
od of one month (30 days)
15. Obligation of the depositary when there are
two or more depositors. (Art. 1985)
a. Divisible thing and joint depositors – each one of the depositors can demand on
ly his share proportionate thereto.
b. Indivisible thing and solidary depositors –
rules on active solidarity
!
GR: Each one of the depositors may
do whatever may be useful to the
others. (Art. 1212)
Exception: Anything which may be
prejudicial to the other depositors.
!
GR: The depositary may return the
thing to any one of the solidary
depositors
Exception: When a demand, judicial
or extrajudicial, for its return has been made by one of them in which case deli
very should be made to him.
c. Return to one of the depositors stipulated • if by stipulation, the thing shoul
d be returned to one of the depositors, the depositary is bound to return it onl
y to the person designated although he has not made any demand for its return.
16. Obligation to return to the person to whom
return must be made. (Art. 1986)
a. The depositary is obliged to return the
thing deposited, when required, to:
!
The depositor;
!
To his heirs or successors; or
!
To the person who may have
been designated in the contract.
b. If the depositor was incapacitated at the time of making the deposit, the pro
perty must be returned to:
!
His guardian or administrator;
!
To the person who made the
deposit;
!
To the depositor himself should
he acquire capacity.
c. Even if the depositor had capacity at the time of making the deposit but he s
ubsequently loses his capacity during the deposit, the thing must be returned to
his legal representative.
17.Obligation to return at the place of return (Art.
1987) – same as the general rule of law
regarding the place of payment. (Art. 1251)
GR: At the place agreed upon by the parties,
transportation expenses shall be borne by
the depositor.
Exception: In the absence of stipulation, at
the place where the thing deposited might be even if it should not be the same p
lace where the original deposit was made.
18. Obligation to return upon the time of return.
(Art. 1988)
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GR: The thing deposited must be returned to
the depositor upon demand, even though a specified period or time for such retur
n may have been fixed.
Exceptions:
a. When the thing is judicially attached
while in the depositary’s possession
b. When notified of the opposition of a third person to the return or the remova
l of the thing deposited.
19. Right of the depositary to return thething
deposited. (Art. 1989)
NOTE: in this case, it is the depositary who is returning the deposit WITH OR WI
THOUT THE DEMAND of the depositor
GR: The depositary may return the thing
deposited notwithstanding that a period has
been fixed for the deposit if:
a. The deposit is gratuitous;
b. The reason is justifiable.
Remedy if depositor refuses to receive the thing: The depositary may deposit the
thing at the disposal of the judicial authority.
Exception: When the deposit is for a
valuable consideration, the depositary has no right to return the thing before t
he expiration of the time designated even if he should suffer inconvenience as a
consequence.
20. Depositary’s liability in case of loss by force
majeure or government order. (Art. 1990)
Depositary is not liable in cases of loss by force majeur or by government order
. However, he has the duty to deliver to the depositor money or another thing he
receives in place of the thing.
21. Liability in case of alienation of the
depositary’s heir. (Art. 1991)
When alienation is done in GOOD FAITH:
a. Return the value of the thing deposited
b. Assign the right to collect from the buyer.
!
The heir does not need to pay the
actual price of the thing deposited.
When alienation is done in BAD FAITH:
a. Liable for damages;
b. Pay the actual price of the thing
deposited.
22. Depositary may retain the thing in pledge until the full payment of what may
be due him by reason of the deposit. (Art. 1994)
The thing retained serves as security for the
payment of what may be due to the
depositary by reason of the deposit. (see Art.
1965, 1992, 1993).
Note: The debt must be prior to the deposit.
Irregular Deposit
Mutuum
May be demanded at will by the irregular depositor for whose benefit the deposit
has
been
constituted
Lender is bound by the provision of the contract and
cannot
seek restitution until the time for payment, as provided in the contract has ari
sen
Only benefit is that which
accrues to the depositor
If with interest, benefit if
both parties
Depositor has preference
over other creditors
No preference
OBLIGATIONS OF THE DEPOSITOR(PLD)
1. Obligation
to
pay
expenses
of
preservation. (Art. 1992)
2. Obligation to pay losses incurred due to
character of thing deposited. (Art. 1993)
GR: The depositary must be reimbursed for
loss suffered by him because of the
character of the thing deposited.
Exceptions:
a. Depositor was not aware of the danger;
b. Depositor was not expected to know the
dangerous character of the thing;
c. Depositor notified the depositary of such
dangerous character;
d. Depositary was aware of the danger
without advice from the depositor.
3. Effect of death of depositor or depositary.
(Art. 1995)
a. Deposit gratuitous – death of either of the depositor or depositary extinguishe
s the deposit (personal in nature). By the word “extinguished,” the law really means
that the depositary is not obliged to continue with the contract of deposit.
b. Deposit for compensation – not
extinguished by the death of either party.
Other Matters Concerning a Depositor
1. Depositary has a right to retain the thing in pledge until full payment of wh
at may be due him by reason of the deposit
2. A deposit is extinguished:
a. upon the loss or deterioration of the thing
deposited;
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Reason: The guarantor cannot be allowed, through
his own fault or negligence to prejudice or impair the
rights or interests of the debtor.
EFFECT OF PAYMENT BY GUARANTOR BEFORE
MATURITY (2069)
Debtor’s obligation with a period –demandable
only when the day fixed comes.
1. The guarantor who pays before maturity is not entitled to reimbursement since
there is no necessity for accelerating payment.
2. A contract of guaranty being subsidiary in character, the guarantor is not li
able for the debt before it becomes due.
Exception: The debtor will be liable if the
payment was made:
a. With his consent; or
b. Subsequently ratified by him (ratification
may be express or implied)
RIGHT OF GUARANTOR TO PROCEED AGAINST
DEBTOR BEFORE PAYMENT (2071)
GR: Guarantor has no cause of action against the
debtor until after the former has paid the obligation.
Exceptions: 2071 enumerates instances when the
guarantor may proceed against the debtor even
before the payment.
1. When he is sued for the payment;
2. In case of insolvency of the principal debtor;
3. When the debtor has bound himself to relieve
him from the guaranty within a specified
period, and this period has expired;
4. When the debt has become demandable, by reason of the expiration of the perio
d for payment;
5. After the lapse of 10 years, when the principal obligation has no fixed perio
d for its maturity, unless it be of such nature that it cannot be extinguished e
xcept within a period longer than 10 years;
6. If there are reasonable grounds to fear that
the principal debtor intends to abscond;
7. If the principal debtor is in imminent danger
of becoming insolvent.
Purpose: To enable the guarantor to take measures
for the protection of his interest in view of the probability that he would be c
alled upon to pay the debt.
REMEDY TO WHICH THE GUARANTOR
ENTITLED
GR: The guarantor cannot demand reimbursement
for indemnity because he has not paid the obligation.
Exceptional remedies:
1. To obtain release from the guaranty; or
2. To demand security that shall protect him
from:
a. Any proceedings by the creditor; and
b. Against the insolvency of the debtor.
Guarantor’s remedies are alternative. He has the
right to choose the action to bring.
SUIT BY GUARANTOR AGAINST CREDITOR
BEFORE PAYMENT
The guaranty’s or surety’s action for release can only be exercised against the prin
cipal debtor and not against the creditor.
Reason: Release of the guarantor imports an
extinction in the obligation to the creditor; it connotes therefore, either a re
mission or novation by subrogation, and either operation requires the creditor’s a
ssent for its validity.
2066 AND 2071 DISTINGUISHED
2066
(Right of Guarantor to
Reimbursement after
Payment)
2071
(Right of Guarantor to
Proceed against Debtor
even before payment)
Provides
for
the enforcement of the rights of the guarantor against the debtor after he has p
aid the debt – gives a right of action after payment
Provides
for
the protection before he has paid but after he has become liable – gives a protect
ive remedy before payment
Substantive right
Preliminary remedy
Gives a right of action,
which,
without
the provisions of the other might be worthless
Remedy given seeks to obtain from the guarantor “release
from
the guaranty or to demand a security that shall protect him from any proceedings
by the creditor and from the danger of insolvency of the debtor.”
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RECOVERY OF SURETY AGAINST INDEMNITOR
EVEN BEFORE PAYMENT
1.Indemnity agreement for the benefit of
surety – indemnity agreement is not for the
benefit of the creditor but for the benefit of
the surety.
2. Indemnity agreement may be against
actual loss as well as liability –such
agreement is enforceable and not violative of
any public policy
a.Indemnity against loss – indemnitor will not be liable until the person to be in
demnified makes payment or sustains loss;
b.Indemnit y
against
liability
–
indemnitor’s liability arises as soon as the liability of the person to be indemni
fied has arisen without regard to whether or not he has suffered actual loss.
Where
the
principal
debtors
are simultaneously the same persons who executed the indemnity agreement, the po
sition occupied by them is that of a principal debtor and indemnitor at the same
, and their liability being joint and several.
GUARANTOR OF A THIRD PERSON AT REQUEST
OF ANOTHER (2072)
The guarantor who guarantees the debt of an absentee at the request of another h
as a right to claim reimbursement, after satisfying the debt from:
1. The person who requested him to be a
guarantor;
2. The debtor
BETWEEN CO-GUARANTORS
RIGHT TO CONTRIBUTION OF GUARANTOR
WHO PAYS (2073)
Presumption of joint liability of several
guarantors when there are:
1. Two or more guarantors;
2. Same debtor;
3. Same debt
Effect: Each is bound to pay only his proportionate
share.
When Art. 2073 Applicable:
1. When one guarantor has paid the debt to the
creditor;
2. Payment by such guarantor must have been
made:
a. By virtue of a judicial demand; or
b. Because the principal debtor is
insolvent;
3. Guarantor
who
paid
is
seeking reimbursement from each of his co- guarantors the share which is proport
ionately owing him.
Effect of Insolvency of Any Guarantor:
Follows the rule on solidary obligations :The
share of the insolvent guarantor shall be borne by the others including the payi
ng guarantor in the same joint proportion.
Accrual and Basis of Right:
The right of reimbursement is acquired ipso jure without need of any prior cessi
on from the creditor by the guarantor.
DEFENSES AVAILABLE TO CO-GUARANTORS
(2074)
GR: All defenses which the debtor would have
interposed against the creditor.
Exception: Those which cannot be transmitted for
being purely personal to the debtor.
LIABILITY OF SUB-GUARANTOR IN CASE OF
INSOLVENCY OF GUARANTOR (2075)
Sub-guarantor is liable to the co-guarantors in the same manner as the guarantor
whom he guaranteed in case of the insolvency of the guarantor for whom he bound
himself as sub-guarantor.
CAUSES OF EXTINGUISHMENT OF GUARANTY
(2076)(PL3CN -ARF P)
GR: Guaranty being accessory, it is extinguished
when principal obligation is extinguished, the causes
of which are:
1.Payment or performance;
2.Loss of the thing due;
3.Condonation or remission of the debt;
4.Confusion or merger of the rights of the
creditor and debtor; 5.Compensation; and 6.Novation
7. Other causes:
a.Annulment;
b.Rescission;
c.Fulfillment of a resolutory condition;
d.Prescription
Exception: The guaranty itself may be directly
extinguished although the principal obligation still remains such as in the case
of the release of the guarantor made by the creditor.
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Material Alteration of Principal Contract –any
agreement between the creditor and the principal debtor which essentially varies
the terms of the principal contract without the consent of the surety, will rel
ease the surety from liability.
Such material alteration would constitute anovation
or change of the principal contract, whichis
consequently
extinguished.
Upon
such extinguishments, the accessory contract to guaranty is also terminator and
the guarantor cannot be held liable on the new contract to which he has not give
n his consent.
When Alteration Material – where such change will
have the effect of making the obligation more
onerous.
Imposes a new obligation or added burden on the
party promising; or
1. Takes away some obligation already imposed, changing the legal effect of the
original contract and not merely the form thereof.
RELEASE BY CONVEYANCE OF PROPERTY
(2077)
GR: Payment is made in money.
Exception: Any substitute paid in lieu of money
which is accepted by the creditor extinguishes the
obligation and in consequence, the guaranty.
In case of eviction: Eviction revives the principal
obligation but not the guaranty.
Reason: The creditor’s action against the debtor is
for eviction and this is different from what the
guarantor guaranteed.
RELEASE OF GUARANTOR WITHOUT CONSENT
OF OTHERS (2078)
Effect: The release benefits all to the extent of the
share of the guarantor released.
Reason: A release made by the creditor in favor of
one of the guarantors without the consent of the others may prejudice the others
should a guarantor become insolvent.
RELEASE BY EXTENSION OF TERM GRANTED
BY CREDITOR TO DEBTOR (2079)
Release Without Consent of Guarantor:Creditor
grants an extension of time to the debtor without the
consent of the guarantor.
Effect: Guarantor is discharged from his undertaking.
Reason: Necessity of avoiding of prejudice to the
guarantor. The debtor may become insolvent during the extension, thus depriving
the guarantor of his right to reimbursement.
It is unimportant whether the extension given has actually proved prejudicial or
not to the guarantor or surety. Nor does it matter for how short a period the t
ime of payment has been extended.
Extension must be based on some new agreement between the creditor and the princ
ipal debtor by virtue of which the creditor deprives him of his claim.
1. Where obligation payable in installments:
where a guarantor is liable for different
payments:
GR: An extension of time to one or more will
not affect the liability of the surety for the
others.
Exception: When the unpaid balance has
become automatically due by virtue of an acceleration clause for failure to pay
an installment.
Effect of exception: The act of the creditor
extending the payment of said installment, without the guarantor’s consent, discha
rges the guarantor.
Reason: The extension constitutes an
extension of the payment of the whole
amount of the indebtedness
2. Where consent to an extension is waived
in advance by the guarantor: Such waiver
is not contrary to law, nor to public policy
Effect: Amounts to the surety’s consent to all
the extensions granted.
RELEASE WHEN GUARANTOR CANNOT BE
SUBROGATED (2080)
If there can be no subrogation because of the fault of the creditor, the guarant
ors are thereby released, even if the guarantors are solidary.
Reason: The act of one cannot prejudice another. It
also avoids collusion between the creditor and the
debtor or a third person.
DEFENSES
AVAILABLE
TO
GUARANTOR
AGAINST CREDITOR (2081)
GR: All defenses, which pertain to the principal
debtor and are inherent in the debt.
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Exception: Those, which are purely personal to the
debtor.
LEGAL AND JUDICIAL BONDS
MEANING AND FORM OF BOND (2082)
BOND – an undertaking that is sufficiently secured,
and not cash or currency.
Bondsman – a surety offered in virtue of a provision
of law or a judicial order.
Qualifications of personal bondsman:
1. He possessesintegrit y;
2. He has capacity to bind himself;
3. He has sufficient property to answer for
the obligation which he guarantees.
PLEDGE OR MORTGAGE IN LIEU OF BOND
(2083)
Guaranty or suretyship is a personal security.
Pledge or mortgage is a property or real security.
If the person required to give a legal or judicial bond should not be able to do
so, a pledge or mortgage sufficient to cover the obligation shall be admitted i
n lieu thereof.
BONDSMAN NOT ENTITLED TO EXCUSSION
(2084)
A judicial bondsman and the sub-surety are not
entitled to the benefit of excussion.
Reason: They are not mere guarantors, but sureties
whose liability is primary and solidary.
Effect of negligence of creditor: Mere negligence
on the part of the creditor in collecting from the debtor
will not relieve the surety from liability.
SURETYSHIP – a relation which exists where one
person (principal) has undertaken an obligation and another person (surety) is a
lso under a direct and primary obligation or other duty to the obligee, who is e
ntitled to but one performance, and as between the two who are bound, the second
, rather than the first should perform.
If a person binds himself solidarily with the principal debtor, the contract is
called suretyship and the guarantor is called a surety.
NATURE OF SURETY’S UNDERTAKING
1.Liability is contractual and accessory but
direct:
2.Liability is limited by terms of contract
3.Liability arises only if principal debtor is
held liable
a. In the absence of collusion, the surety is bound by a judgment against the pr
incipal event though he was not a party to the proceedings;
b. The creditor may sue, separately or together, the principal debtor and the su
rety;
c. A demand or notice of default is not
required to fix the surety’s liability
Exception: Where required by the provisions of the contract of suretyship
d. A surety bond is void where there is not principal debtor because such an und
ertaking presupposes that the obligation is to be enforceable against someone el
se besides the surety, and the latter can always claim that it was never his int
ention to be the sole person obligated thereby.
NOTE: Surety is not entitled to exhaustion
4.Undertaking is to creditor, not to debtor: The surety makes no covenant or agr
eement with the principal that it will fulfill the obligation guaranteed for the
benefit of the principal. The surety’s undertaking is that the principal shall fu
lfill his obligation and that the surety shall be relieved of liability when the
obligation secured is performed.
Exception: Unless otherwise expressly
provided.
NOTE: Surety is not entitled to notice of
principal’s default
5. Prior demand by the creditor upon
principal not required
Surety is not exonerated by neglect of
creditor to sue principal
STRICTISSIMI JURIS RULE APPLICABLE ONLY
TO ACCOMMODATION SURETY
Reason: An accommodation surety acts without
motive of pecuniary gain and hence, should be protected against unjust pecuniary
impoverishment by imposing on the principal, duties akin to those of a fiduciar
y.
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This rule will apply only after it has been definitely ascertained that the cont
ract is one of suretyship or guaranty.
STRICTISSIMI JURIS RULE NOT APPLICABLE TO
COMPENSATED SURETIES
Reasons:
1. Compensated
corporate
sureties
are business association organized for the purpose of assuming classified risks
in large numbers, for profit and on an impersonal basis.
2. They are secured from all possible loss by
adequate
counter-bonds
or
indemnity
agreements.
3. Such corporations are in fact insurers and in determining their rights and li
abilities, the rules peculiar to suretyship do not apply.
PROVISIONS COMMON TO PLEDGE AND
MORTGAGE (Art 2085-2123)
ESSENTIAL REQUISITES TO CONTRACTS OF
PLEDGE AND MORTGAGE:
1. constituted to secure the fulfillment of a
principal obligation
2. pledgor or mortgagor be the absolute owner
of the thing pledged or mortgaged
3. the persons constituting the pledge or mortgage have the free disposal of the
ir property, and in the absence thereof, that they be legally authorized for the
purpose
4. cannot exist without a valid obligation
5. debtor retains the ownership of the thing
given as a security
6. when the principal obligation becomes due, the thing in which the pledge or m
ortgage consists may be alienated for the payment to the creditor.
IMPORTANT POINTS
1. future property cannot be pledged or
mortgaged
2. pledge/mortgage executed by one who is not the owner of the property pledged
or mortgaged is without legal existence and registration cannot validate it.
3. mortgage of a conjugal property by one of the spouses is valid only as to½ of t
he entire property
4. in case of property covered by Torrens title, a
mortgagee has the right to rely upon what
appears in the certificate of title and does not
have to inquire further.
5. pledgor or mortgagor has free disposal of
property
6. thing pledged or mortgaged
may be
alienated.
7. creditor not required to sue to enforce his
credit
8. pledgor or mortgagor may be third person
PLEDGE
MORTGAGE
Constituted on movables Constituted
on
immovables
Property is delivered to the pledgee, or by common consent to a 3rd person
Delivery not necessary
Not valid against 3rd
persons
unless
a description of the thing pledged and the date of the pledge appear in a public
instrument
Not valid against 3rd
persons if not registered
RIGHT OF CREDITOR WHERE DEBTOR FAILS TO
COMPLY WITH HIS OBLIGATION
1. creditor is merely entitled to move for the sale of the thing pledged or mort
gaged with the formalities required by law in order to collect
2. creditor cannot appropriate to himself the thing nor can he dispose of the sa
me as owner.
PROHIBITION AGAINSTPACTUM
COMMISSORIUM
1.stipulation is null and void - stipulation where thing or mortgaged shall auto
matically become the property of the creditor in the event of nonpayment of the
debt within the term fixed
2.Requisites of pactum commissorium:
a. there should be a pledge or
mortgage
b. there should be a stipulation for an automatic appropriation by the creditor
of the property in the event of nonpayment
3. Effect on Security Contract
-nullity of the stipulation does not affect
validity and efficacy of the principal contract
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IMPORTANT POINTS
1. debtor -owner bears the risk of loss of the
property
2. pledge or mortgage is indivisible
EXCEPTIONS to the rule of indivisibility:
a. where each one of several things guarantees determinate portion of credit
b. where only portion of loan was
released
c. where
there
was
failure
of
consideration
3. rule that real property, consisting of several lots should be sold separately
, applies to sales in execution, and not to foreclosure of mortgages
4. the mere embodiment of a real estate mortgage and a chattel mortgage in one d
ocument does not have the effect of fusing both securities into an indivisible w
hole
5. contract of pledge or mortgage may secure all kinds of obligation, be they pu
re or subject to a suspensive or resolutory condition
6. a promise to constitute pledge or mortgage creates no real right, only a pers
onal right biding upon the parties, only right of action to compel the fulfillme
nt of the promise but there is no pledge or mortgage yet
7. under RPC, estafa is committed by a person who, pretending to be the owner of
any real property, shall convey, sell, encumber or mortgage the same knowing th
at the real property is encumbered shall dispose of the same as unencumbered. It
is essential that fraud or deceit be practiced upon the vendee at the time of t
he sale.
PLEDGE: A contract by virtue of which the debtor
delivers to the creditor or to a third person a movable or document evidencing i
ncorporeal rights for the purpose of securing the fulfillment of a principal obl
igation with the understanding that when the obligation is fulfilled, the thing
delivered shall be returned with all its fruits and accessions.
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
2.accessory- has no independent existence of
its own
3.unilateral- creates obligation solely on the part of the creditor to return th
e thing subject upon the fulfillment of the principal obligation
4.subsidiary- obligation incurred does not arise until the fulfillment of the pr
incipal obligation
CAUSE OR CONSIDERATION IN PLEDGE
1.principal obligation – in so far as the
pledgor is concerned
2.compensation stipulated for the pledge or
mere liberality of the pledgor- if pledgor is
not the debtor
PROVISIONS APPLICABLE ONLY TO PLEDGE
1. transfer of possession to the creditor or to third person by common agreement
is essential in pledge
-
ACTUAL DELIVERY is important
-
CONSTRUCTIVE
delivery
or
symbolic delivery of the key to the warehouse is sufficient to show that the dep
ositary appointed by common consent of the parties was legally placed in possess
ion.
2. all movables within commerce of men may be pledged as long as susceptible of
possession
3. incorporeal right may be pledged. The instruments pledged shall be delivered
to the creditor and if negotiable, must be indorsed.
4. pledge shall take effect against 3rdpersons
only if the ff appears in a public instrument:
a. description of the thing pledged
b. date of the pledge
5. thing pledged may be alienated by the pledgor or owner only if with the conse
nt of the pledgee. Ownership of the thing pledged is transmitted to the vendee o
r transferee as soon as the pledgee consents to the alienation, butt he latter s
hall continue in possession
6. contract of pledge gives right to the creditor to retain the thing in his pos
session or in that of a third person to whim it has been delivered, until the de
bt is paid
7.creditor :
a. shall take care of the thing pledged with the diligence of a good father of a
family
b. has the right to the reimbursement of
the
expenses
made
for
its preservation is liable for its loss or deterioration by reason of fraud, neg
ligence, delay or violation of the
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terms of the contract, and not due to
fortuitous event
c. may bring the actions which pertain to the owner of the thing in order to rec
over it from, or defend it against a 3rdperson
d. cannot use the thing without the authority of the owner, and if he should do
so, or misuse the thing, the owner may ask that it be judicially or extrajudicia
lly deposited
e. may use the thing if it is necessary for
the preservation of the thing
f. may either claim another thing in
pledge
or
demand
immediate payment of the principal obligation if he is deceived on the substance
or quality of the thing
8.pledgee:
a. cannot deposit the thing pledged with a third person, unless there is a stipu
lation authorizing him to do so
b. is responsible for the acts of his agents or employees with respect to the th
ing pledged
c.has no right to use the thing or to
appropriate the fruits without the
authority of the owner
d. may cause public sale of the thing pledged if, without fault on his part, the
re is danger of destruction, impairment or diminution in value of the thing. The
proceeds of the auction shall be a security for the principal obligation.
9.pledgor :
a. has the responsibility for flaws of the
thing pledged.
b. cannot ask for the return of the thing against the will of the creditor, unle
ss and until he has paid the debt and its interest, with expenses in a proper ca
se
c. is allowed to substitute the thing which is in danger of destruction or impai
rment without any fault on the part of the pledgee, with another thing of the sa
me kind and quality
d. may require that
the thing be deposited with a 3rd person if through the negligence or willful ac
t of the pledgee the thing is in danger of being lost or impaired
EXTINGUISHMENT OF PLEDGE(RRPP3A)
! If the thing pledged is returned by the pledgee to
the pledgor or owner, pledge is extinguished.
! A statement in writing by the pledgee that he
renounces or abandons the pledge is sufficient to extinguish. For this purpose,
neither the acceptance by the pledgor o owner, nor the return of the thing pledg
ed is necessary, the pledgee becoming a depositary.
! If subsequent to the perfection of the pledge, the
thing is in the possession of the pledgor or owner, there is prima facie presump
tion that the thing has been returned by the pledgee.
! If the thing is in the possession of 3rd person who
has received it from the pledgor or owner after the constitution of the pledge,
there is prima facie presumption that the thing has been returned by the pledgee
!Payment of the debt
! Sale of the thing pledged at publicauc tion
FORMALITIES REQUIRED IN SALE BY A
CREDITOR IF CREDIT NOT PAID IN DUE TIME:
1. the debt is due and unpaid
2. the sale must be at a public auction
3. there must be notice to the pledgor and
owner, stating the amount due, and
4. the sale must be made with the intervention
of a notary public
EFFECT OF THE SALE OF THE THING PLEDGED
1. extinguishes the principal obligation whether the price of the sale is more o
r less than the amount due
2. if the price is more than amount due, the debtor is not entitled to the exces
s unless the contrary is provided
3. if the price of the sale is less, neither is the creditor entitled to recover
the deficiency. Contrary stipulation is void.
LEGAL PLEDGES
1. Necessary expenses shall be refunded to every possessor, but only possessor i
n good faith may retain the thing until he has been reimbursed
!
Useful expenses shall be refunded only to the possessor in good faith with the s
ame right of retention, the person who has defeated him in the possession having
the option of refunding the amount of the expenses or of paying the increase in
value which the thing may have acquired and by reason thereof (art 546)
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2. He who has executed work upon a movable has a right to retain it by way of pl
edge until he is paid. (art 1731)
3. The agent may retain the things which are the objects of agency until the pri
ncipal effects the reimbursement and pays the indemnity. (art 1914)
4. The laborer’s wages shall be a lien on the goods manufactured or the work done.
(art 1707)
Special
Laws
apply
to
pawnshops
and establishments which are engaged in making loans secured by pledges. Provisi
ons of the Civil Code shall apply subsidiarily.
MORTGAGE
REAL MORTGAGE (Arts. 2124-2131)
It is a contract whereby the debtor secures to the creditor the fulfillment of a
principal obligation, specially subjecting to such security immovable property
or real rights over immovable property in case the principal obligation is not c
omplied with at the time stipulated.
OBJECTS OF REAL MORTGAGE:
1. immovables
2. alienable real rights in accordance with the
laws, imposed upon immovables
* future property cannot be object of
mortgage
IMPORTANT POINTS
1. As a general rule, the mortgagor retains possession of the property he may de
liver said property to the mortgagee without altering the nature of the contract
of mortgage.
2. It is not an essential requisite that the principal of the credit bears inter
est, or that the interest as compensation for the use of the principal and the e
njoyment of its fruits be in the form of a certain percent thereof.
KINDS OF MORTGAGE:
1. voluntary
2. legal
3. equitable – one which, although it lacks the proper formalities of a mortgage s
hows the intention of the parties to make the property as a security for a debt
(provisions governing equitable mortgage - arts 1365, 1450, 1454, 1602, 1603, 16
04 and 1607)
ESSENTIAL REQUISITES OF MORTGAGE:
1. constituted to secure the fulfillment of a
principal obligation
2. mortgagor be the absolute owner of the thing
pledged or mortgaged
3. the persons constituting the pledge or mortgage have the free disposal of the
ir property, and in the absence thereof, that they be legally authorized for the
purpose
4. cannot exist without a valid obligation
5. when the principal obligation becomes due, the thing in which the pledge or m
ortgage consists may be alienated for the payment to the creditor.
6. appears in a public document duly recorded in the Registry of Property to be
validly constituted
LEGAL MORTGAGE: the persons in whose favor
the law establishes a mortgage have on other right than to demand the execution
and the recording of the document in which the mortgage is formalized.
INCIDENTS OF REGISTRATION OF MORTGAGE
1. Mortgagee entitled to registration of
mortgage as a matter of right
2. Proceedings for registration do not determine
validity of mortgage or its effect
3. Registration is without prejudice to better
right of third parties
4. Mortgage deed once duly registered forms part of the records for the registra
tion of the property mortgaged
5. Mortgage by surviving spouse of his/her undivided share of conjugal property
can be registered
EFFECT OF INVALIDITY OF MORTGAGE ON
PRINCIPAL OBLIGATION
1. principal obligation remains valid
2. mortgage deed remains as evidence of a
personal obligation
EFFECT OF MORTGAGE
1. creates real rights, a lien inseparable from the property mortgaged, enforcea
ble against the whole world
2. creates merely an encumbrance
LAWS GOVERNING MORTGAGE
1. New Civil Code
2. PD 1952
3. Revised Administrative Code
4. RA 4882, as regards aliens becoming
mortgages
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FORECLOSURE OF MORTGAGE: It is the remedy
available to the mortgagee by which he subjects the mortgaged property to the sa
tisfaction of the obligation to secure which the mortgage was given.
KINDS OF FORECLOSURE
1. judicial
2. extrajudicial
Both should be distinguished from execution sale
governed by Rule 39 of the Rules of Court.
Judicial foreclosure
Extrajudicial
foreclosure
There
is
court
intervention
No court intervention
Decisions are appealable Not appealable, it is
immediately executory
Order of the court cuts off all rights of the parties impleaded
Foreclosure does not cut off right of all parties involved
There
is
equity
of redemption except on banks which provides for a right of redemption
There
is
right
of
redemption
Period of redemption starts from the finality of the judgment until order of con
firmation
Period to redeem start from date of registration of certificate of sale
No need for a special power of attorney in the contract of mortgage
Special power of attorney in favor of mortgagee is needed in the contract
NOTES
!
A foreclosure sale retroacts to the date of registration of the mortgage and tha
t a person who takes a mortgage in good faith and for valuable consideration, th
e record showing clear title to the mortgagor, will be protected against equitab
le claims on the title in favor of third persons of which he had no actual or co
nstructive notice (St. Dominic
Corporation v. IAC, 151 SCRA 577 [1987])
!
Mere inadequacy of the price obtained at the sheriff’s sale will not be sufficient
to set aside the sale unless “the price is so inadequate as to shock the conscien
ce of the court” taking into consideration the peculiar circumstances attendant th
ereto (Sulit v. CA, 268 SCRA 441)
!
The action to recover a deficiency after foreclosure prescribes after 10 years f
rom the time the right of action accrues (Arts 1142 & 1144)
JUDICIAL FORECLOSURE (governed by Rule 68 of
Rules of Court) (B-PACE-PC)
1. May be availed of bybringing an action in the proper court which has jurisdic
tion over the area wherein the real property involved or a portion thereof is si
tuated
2. If the court finds the complaint to be well- founded, it shall order the mort
gagor topay the amount due with interest and other charges within a period of no
t less than 90 days nor more than 120 days from the entry of judgment
3. If the mortgagor fails to pay at time directed, the court, upon motion, shall
order the property to be sold to the highest bidder at a publicauction.
4. Uponconfirmation of the sale by the court, also upon motion, it shall operate
to divest the rights of all parties to the action and to vest their rights to t
he purchaser subject to such rights of redemption as may be allowed by law
5. Before the confirmation, the court retains control of the proceedings;executi
on on judgment
6. Theproceeds of the sale shall be applied to
the payment of the:
a. costs of the sale;
b. amount due the mortgagee;
c. claims of junior encumbrancers or
persons holding subsequent
mortgages in the order of their priority;
and
d. the balance, if any shall be paid to the
mortgagor
7. Sheriff’s
certificate
is
executed, acknowledged and recorded to complete the foreclosure
NATURE OF JUDICIAL FORECLOSURE
PROCEEDINGS
1. quasi in rem action
2. foreclosure is only the result or incident of the
failure to pay debt
3. survives death of mortgagor
EXTRAJUDICIAL FORECLOSURE (governed by
Act No, 3135, as amended)
1. express authority to sell is given to the
mortgagee.
2. authority is not extinguished by death of
mortgagor or mortgagee
3. public sale should be made after proper
notice
4. surplus proceeds of foreclosure sale belong
to the mortgagor
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5. debtor has the right to redeem the property sold within 1 year from and after
the date of sale
6. remedy of party aggrieved by foreclosure is a petition to set aside sale and
cancellation of writ of possession.
PROCEDURE FOR EXTRAJUDICIAL
FORECLOSURE OF BOTH REAL ESTATE
MORTGAGE UNDER ACT NO. 3135 AND
CHATTEL MORTGAGE UNDER ACT NO. 1508
(A.M. N0. 99-10-05-0; January 15, 2000)( A RC- D IN -
REA)
1. Filing ofapplication before the Executive
Judge through the Clerk of Court
2. Clerk of Court will examine whether the
requirement of the law have been complied
with, that is, whether the notice of sale has
been posted for not less than 20 days in at
least 3 public places of the municipality or
city where the property is situated, and if the
same is worth more than P400.00, that such
notice has been published once a week for at
least 3 consecutive weeks in a newspaper of
general circulation in the city or municipality
3. thecertificate of sale must be approved by
the Executive Judge
4. in extrajudicial foreclosure of real mortgages
indifferent locations covering one
indebtedness, only one filing fee
corresponding to such debt shall be collected
5. the Clerk of Court shallissue certificate of
payment indicating the amount of
indebtedness, the filing fees collected, the
mortgages sought to be foreclosed, the
description of the real estates and their
respective locations
6. thenotice of sale shall be published in a
newspaper of general circulation
7. the application shall beraffled among all
sheriffs
8. after the redemption period hasexpired, the
Clerk of Court shall archive the records
9. noauction sale shall be held unless there are
at least 2 participating bidders, otherwise the
sale shall be postponed to another date. If on
the new date there shall not be at least 2
bidders, the sale shall then proceed. The
names of the bidders shall be reported to the
Sheriff of the Notary Public, who conducted
the sale to the Clerk of Court before the
issuance of the certificate of sale.
RIGHT
OF
MORTGAGEE
TO
RECOVER
DEFICIENCY
1. Mortgagee is entitled to recover deficiency
2. If the deficiency is embodied in a judgment, it
is referred to as deficiency judgment.
3. Action for recovery of deficiency may be filed
even during redemption period.
4. Action to recover prescribes after 10 years
from the time the right of action accrues
NATURE OF POWER OF FORECLOSURE BY
EXTRAJUDICIAL SALE
1. conferred for mortgagee’s protection
2. an ancillary stipulation
3. a prerogative of the mortgagee
Note: Stipulation of upset price in mortgage contract
is void
EFFECT OF INADEQUACY OF PRICE IN
FORECLOSURE SALE
1. Where there is right to redeem
GR: Inadequacy of price is immaterial because
the judgment debtor may redeem the
property
Exception: the price is so inadequate as to
shock the conscience of the court taking into consideration the peculiar circums
tances
2. Property may be sold for less than its fair market value upon the theory that
the lesser the price the easier for the owner to redeem
3. The value of the mortgaged property has no bearing on the bid price at the pu
blic auction, provided that the public auction was regularly and honestly conduc
ted
WAIVER OF SECURITY BY CREDITOR
1. Mortgagee may waive right to foreclose his mortgage and maintain a personal a
ction for recovery of the indebtedness
2. Mortgagee cannot have both remedies
Note: Foreclosure retroacts to the date of registration
of mortgage
STIPULATION OF UPSET PRICE OR “TIPO”
A stipulation of minimum price at which the property
shall be sold to become operative in the event of a
foreclosure sale at public auction is NULL and VOID
REDEMPTION - It is a transaction by which the
mortgagor reacquires the property which may have passed under the mortgage or di
vests the property of the lien which the mortgage may have created.
KINDS OF REDEMPTION
1.equity of redemption: right of the mortgagor to redeem the mortgaged property
after his default in the performance of the conditions of the mortgage but befor
e the sale of the
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mortgaged property or confirmation of sale; applies to judicial foreclosure of r
eal mortgage and chattel mortgage foreclosure
NOTE: redemption of the banking institutions is
allowed within 1 year from confirmation of sale
2.right of redemption: right of the mortgagor to redeem the property within a ce
rtain period after it was sold for the satisfaction of the debt; applies only to
extrajudicial foreclosure of real mortgage
NOTE: the right of redemption, as long as within
the period prescribed, may be exercised irrespective of whether or not the mortg
agee has subsequently conveyed the property to some other party (Sta. Ignacia Ru
ral Bank,Inc v. CA,
230 SCRA 513 [1994])
PERIOD OF REDEMPTION
1. extra-judicial (Act No. 3135)
a. natural person – 1 year from
registration of the certificate of sale
with Registry of Deeds
b. juridical person – same rule as natural
person
c. juridical person (mortgagee is bank) –
3 months after foreclosure or before
registration of certificate of
foreclosure whichever is earlier (Sec.
117 of General Banking Law)
2. Judicial – before confirmation of the sale by
the court
NOTE: Allowing redemption after the lapse of the
statutory period when the buyer at the
foreclosure sale does not object but even
consents to the redemption, will uphold the policy
of the law which is to aid rather than defeat the
right of redemption (Ramirez v. CA, 219 SCRA
598 [1993])
AMOUNT OF THE REDEMPTION PRICE:
1. Mortgagee is not a bank (Act No. 3135 in
relation to Sec. 28, Rule 39 of Rules of
Court)
a. Purchase price of the property
b. 1% interest per month on the
purchase price
c. taxes paid and amount of purchaser’s
prior lien, if any, with the same rate
of interest computed from the date of
registration of sale, up to the time of
redemption
2. Mortgagee is a bank (GBL 2000)
a. Amount due under the mortgage deed
b. Interest
c. Cost and expenses
NOTE: Redemption price in this case is
reduced by the income received from the
property
ANTICHRESIS (Articles 2132-2139) – A contract
whereby the creditor acquires the right to receive the fruits of an immovable of
the debtor, with the obligation to apply then to the payment of the interest, i
f owing, and thereafter to the principal of the credit (Art 2132)
CHARACTERISTICS
1. Accessory contract – it secures the
performance of a principal obligation
2. formal contract – it must be in a specified
form to be valid (Art. 2134)
SPECIAL REQUISITES:
1. it can cover only the fruits of an immovable
property
2. delivery of the immovable is necessary for the creditor to receive the fruits
and not that the contract shall be binding
3. amount of principal and interest must be
specified in writing
4. express agreement that debtor will give possession of the property to credito
r and that the latter will apply the fruits to the interest, if any, then to the
principal of his credit
5. NOTE: The obligation to pay interest is not of the essence of the contract of
antichresis; there being nothing in the Code to show that antichresis is only a
pplicable to securing the payment of interest-bearing loans. On the contrary, an
tichresis is susceptible of guaranteeing all kinds of obligations, pure or condi
tional
Antichresis
Pledge
Refers to real property
Refers to personal
property
Perfected by mere
consent
Perfected by delivery
of the thing pledged
Consensual contract
Real contract
Antichresis
Real Mortgage
Property is delivered to
creditor
Debtor usually retains
possession
of
the
property
Creditor acquires only the right to receive the fruits of the property, hence, i
t does not produce a real right
Creditor does not have any right to receive the fruits, but the mortgage creates
a real right over the property
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RULES ON ORDER OF DISTRIBUTION
1. The priorities fixed by law govern
2. The claims which are given priority must be
paid in full in the order of their priority, before the general creditors receiv
e anything.
3. Creditors
claiming
preference
must sufficiently establish their credits and their right to preference to entit
le them to such preference.
ORDER OF DISTRIBUTION(EPPC)
1. Equitable claims under Sec. 48;
2.Preferred claims with respect to specific movable property and specific immova
ble property under Art. 2241 and 2242 of the CC.
3. Preferred claims as to unencumbered property of the debtor which shall be pai
d in the order named in Art. 2244 of the CC.
4.Common or ordinary credits which shall be paid pro rata regardless of dates un
der Art. 2245 of the CC.
With reference to specific movable and immovable property of the debtor, the tax
es due the State shall first be satisfied.
The preferred claims enumerated in Art. 2241 and 2242 are considered as mortgage
s and pledges of real or personal property or liens within the purview of the In
solvency Law.
EQUITABLE CLAIMS UNDER THE INSOLVENCY
LAW( PD- MN -R CW)
Section 48 of the Insolvency Law: Any property
found among the property of the insolvent, the ownership of which has not been c
onveyed to him by legal and irrevocable title, shall not be considered to be pro
perty of the insolvent and shall be placed at the disposal of its lawful owners,
on order of the court on petition of the assignee or any creditor whose right t
o the estate of the insolvent has been established.
1.Paraphernal property belonging to the wife of
the insolvent;
2. Property held by the insolvent ondeposit,
administration, lease, or usufruct;
3.Merchandise held by the debtor on
commission;
4.Negotiable instruments for collection or
remittance;
5. Money held by the debtor forremittance;
6. Amounts due the insolvent for sales or
merchandise oncommission;
7. Merchandise bought by the insolvent on
credit where no delivery is made or where
the right of ownership or possession has
been retained by the seller;
8. Goods or chattelswrongfully taken by the
insolvent or the amount of the value thereof.
ALTERNATIVE RIGHTS OF SECURED CREDITOR
1. To maintain his right under his security or lien and ignore the insolvency pr
oceedings – it is the duty of the assignee to surrender to him the property encumb
ered;
2. To waive his right under the security or lien – thereby, share in the distribut
ion of the assets of the debtor;
3. To have the value of the encumbered property appraised and then share in the
distribution of the assets of the debtor with respect to the balance of his cred
it.
WAIVER – release or surrender of the claim to the
receiver, sheriff, or assignee.
THE FOLLOWING DO NOT CONSTITUTE
WAIVER:
1. Mere recommendation that the assignee be
appointed;
2. Voting of a secured claim.
COMPOSITION - An agreement, made upon a
sufficient consideration, between an insolvent or embarrassed debtor and his cre
ditors, whereby the latter for the sake of immediate or sooner payment, agree to
accept a dividend less than the whole amount of their claims, to be distributed
pro rata, in discharge and satisfaction of the whole debt.
COMPOSITION
ACCORD
Designates
an arrangement between a debtor and the whole body of his creditors (or at least
a considerable portion of them) for the liquidation of their claims by the divi
dend offered.
An agreement between a debtor and a single creditor for a discharge of the oblig
ation by a part payment or on different terms.
REQUIREMENTS FOR A VALID OFFER OF
COMPOSITION(FAD A)
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1. The offer of the terms of composition must be made after thefiling in court o
f the schedule of property and submission of his list of creditors;
2. The offer must beaccepted in writing by a majority of the creditors represent
ing a majority of the claims which have been allowed;
3. It must be made afterdepositing in such place designated by the court, the co
nsideration to be paid and the costs of the proceedings; and
4. The terms of the composition must be
approved or confirmed by the court.
WHEN COURT MAY CONFIRM A COMPOSITION
1. If it is in the best interest of the creditors;
2. The debtor has not been guilty of any of the acts, or of a failure to perform
any of the duties which would create a bar to his discharge; and
3. The offer and its acceptance are in good faith and have not been made or proc
ured in a manner forbidden by the Act.
EFFECTS OF CONFIRMATION OF COMPOSITION
1. The consideration shall be distributed as the
judge shall direct;
2. The insolvency proceedings shall be
dismissed;
3. The title to the insolvent’s property shall
revest in him; and
4. The insolvent shall be released from his
debts.
5. The substitution, in a certain sense,
composition for the insolvency proceedings.
6. A lawful composition and its performance by the insolvent has the same effect
of a written discharge, although no written discharge is granted.
7. For all legal and practical purposes, the insolvency ended on the date of the
confirmation of composition and the firm was restored to its status quo. It rea
cquired its personality. Its properties ceased to be in custodia legis.
WHEN CONFIRMATION MAY BE SET ASIDE
1. Any time within six months after the
composition has been confirmed;
2. Fraud was practiced in procuring such
composition;
3. Knowledge thereof has come to the petitioner
after the confirmation of such composition.
DISCHARGE - The formal and judicial release of an
insolvent debtor from his debts with the exception of
those expressly reserved by law.
WHEN AN INSOLVENT DEBTOR MAY APPLY
FOR A DISCHARGE
GR: A debtor may apply to the RTC for a discharge
at three months to one year after the adjudication of
insolvency.
Exception: The property of the insolvent has not
been converted into money without his fault, thereby delaying the distribution o
f dividends among the creditors in which case the court may extend the period.
DEBTS RELEASED BY A DISCHARGE
1. All claims, debts, and liabilities, and demands
set forth in the schedule; and
2. All claims, debts, liabilities and demands which were or might have been prov
ed against the estate in insolvency
DEBTS NOT RELEASED BY DISCHARGE(TED-
LICS-REST-SEC)
1.Taxes or assessments due the Government;
2. Any debt created by the fraud or
embezzlement of the debtor;
3. Anydebt created by the defalcation of the debtor as a public officer or while
acting in a fiduciary capacity;
4. Debt of any personliable for the same debt, for or with the insolvent debtor,
either as a partner, joint contractor, indorser, surety or otherwise;
5. Debts of acorporation (Reason: Corporation
is not granted a discharge)
6. Claim forsupport (Reason: It will make the law a means of avoiding the enforc
ement of the obligation)
7. Discharged debt butrevived by a subsequent new promise to pay (Reason: Discha
rge does not end the moral obligation to pay)
8. Debts which have not been dulyscheduled in
time for proof and allowance.
Exception: The creditors had notice or
actual knowledge of the insolvency
proceedings
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9. Claims for:
a. Unliquidated damages arising out of
puretort
b.Secured creditors;
c. Not inexistence or not mature at the
time of the discharge;
d.Contingent at the time of the
discharged.
LEGAL EFFECTS OF DISCHARGE
Discharge takes effect from the commencement of
the proceedings in insolvency.
1. Releases the debtor from all claims, debts, liabilities and demand set forth
in the schedule or which were or might have been proved against his estate in in
solvency.
2. Operates as a discharge of the insolvent and future acquisitions but permits
mortgages and other lien
3. It is a special defense which may be pleaded and be a complete bar to all sui
ts brought on any such debts, claims, liabilities or demands.
4. It does not operate to release any person liable for the same debts, for or w
ith the debtor, either as partner, joint contractor, indorser, surety, or otherw
ise.
5. The certificate of discharge is prima facie evidence of the fact of release,
and the regularity of such discharge.
Remedy of guarantor or surety when debtor
declared judicially insolvent: File a contingent
claim in the insolvency proceeding, if his rights as such guarantor or surety ar
e not to be barred by the subsequent discharge of the insolvent debtor from all
his liabilities.
WHEN DISCHARGE MAY BE REVOKED
Discharge may be revoked by the court which
granted it upon petition of any creditor:
1. Whose debt was proved or provable against
the estate in insolvency, on the ground that
the discharge was fraudulently obtained;
and provided,
2. The petition is filed within one year after the
date of the discharge.
FRAUDULENT PREFERENCES AND TRANSFERS
TRANSFER – includes the sale and every other and
different modes of disposing of or parting with
property, or the possession of property, absolutely or conditionally, as a payme
nt, pledge, mortgage, gift, or security.
WHEN PREFERENTIAL TRANSFER EXISTS
(PCDG)
1. There must be a parting of the insolvent’s
property;
2. For the benefit of the creditor;
3. Consequent diminution of the insolvent’s
estate;
4. With the result that such creditor receives a greater proportion of his claim
than other creditors of the same class.
GR: A debtor is not prohibited from paying one
creditor in preference to another
Exception: In cases mentioned in the Insolvency
Law
Deposit of money to one’s credit on a bank does
not create any preference.
Reason: The estate of the depositor is not
diminished for there is an obligation on the part of the bank to pay the amount
of the deposit as soon as the depositor may see fit to draw a check against it.
WHEN FRAUDULENT PREFERENCE EXISTS
Fraudulent preference – when the debtor procures
any part of his property to be attached, sequestered, or seized on execution or
makes any payment, pledge, mortgage, assignment, transfer, sale or conveyance of
any part of his property, whether directly or indirectly, absolutely or conditi
onally, to any one under the following circumstances:
1. The debtor is insolvent or in contemplation of
insolvency;
2. The transaction in question is made within 30 days before the filing of a pet
ition by or against the debtor;
3. It is made with a view to giving preference to any creditor or person having
a claim against him; and
4. The person receiving a benefit thereby has
reasonable cause to believe:
a. That the debtor is insolvent;
b. That the transfer is made with a view to prevent his property from coming to
his assignee in insolvency, or to prevent the same from being distributed
ratably
among
his creditors, or to defeat the object of or any way hinder the operation or
QuickTime™ and a
Page 233 of 297
evade the provisions of the
Insolvency Law.
*Date of registration of sale of real property should determine whether the sale
was prohibited by the Insolvency Law or not.
WHEN PRESUMPTION OF FRAUD EXISTS
1. If such payment, pledge, mortgage, conveyance, sale, assignment or transfer i
s not made in the usual and ordinary course of business of the debtor; or
2. If such seizure is made under a judgment which the debtor has confessed or of
fered to allow, that fact shall be prima facie evidence of fraud.
EQUAL EXCHANGE NOT A PREFERENCE
An exchange of securities within the thirty-day period is not a fraudulent prefe
rence under the law, even when both parties know that the debtor is insolvent, i
f:
1. The security given up is a valid one at the
time the exchange;
2. Of equal value with the one received in
exchange.
Reason: Exchange takes nothing away from the
other creditor
Equal value: Not necessary that their value should
be mathematically equal, but it is sufficient if they are
substantially equal.
WHEN FRAUDULENT TRANSFER EXISTS
1. Any
payment,
pledge,
mortgage, conveyance, sale, assignment, or transfer of property of whatever char
acter;
2. Made by the insolvent;
3. Within one month before the filing of the
petition in insolvency against him
Exception: Transfer for a valuable pecuniary
consideration in good faith
Effect of fraudulent transfer: Such transfer is VOID
RIGHT OF ASSIGNEE TO RECOVER PROPERTY
OR ITS VALUE
The creditors of the insolvent are not authorized to institute an independent ac
tion. In all actions or proceedings to set aside or nullify fraudulent preferenc
es or transactions as VOID, theassignee appears for, and represents the general
creditors.
EFFECT OF DEATH OF INSOLVENT DEBTOR
1.Death after the order of adjudication – the proceedings shall be continued and c
oncluded in like manner and with like validity and effects as if he had lived.
2.Death before the order of adjudication –
the proceedings shall be discontinued.
Remedy: File claims in the proper testate or
intestate proceedings
WHEN RECEIVER MAY BE APPOINTED
Anytime before the election of an assignee, when it
appears by the verified petition of a creditor:
1. That the assets of the insolvent or a considerable portion thereof have been
pledged, mortgaged, transferred, assigned, conveyed, or seized on legal process
in violation of Sec. 70;
2. That it is necessary to commence an action
to recover the same;
The receiver shall deliver all the property, assets, or effects remaining in his
hands to the assignee who shall be substituted for him in all pending actions o
r proceedings.
WHEN PETITION MAY BE DISMISSED
At anytime before the appointment of an assignee:
1.Voluntary petition – upon the application of the debtor, if no creditor files wr
itten objections;
2.Involuntary petition –
a. Upon the application of the
petitioning creditors; or
b. By written consent of all creditors filed in court, in which case, the procee
dings may be dismissed at any time.
After the appointment of an assignee, dismissal is not allowed without the conse
nt of all parties interested in or affected thereby.
WHEN APPEAL MAY BE TAKEN TO THE
SUPREME COURT
From an order granting or refusing:
1. An adjudication in insolvency and in the latter case, from the order fixing t
he amount of costs, expenses, damages, and attorney’s fees allowed the debtor;
2. A creditor’s claim when the amount in dispute
exceeds P300.00
Credit Transactions Reviewer
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