Credit Transactions
2nd Examination – Case Summary
Escano v Ortigas
The mere utilization of the term “SURETIES” could not make the
Undertaking a surety. Moreover, the concurrence of 2 or more
creditors or of 2 or more debtors the presumption is that the
obligation is only joint. Further, the absence of any express stipulation
that the petitioners agreed to bind themselves “jointly and severally”
in their obligations the Undertaking is presumed to be joint.
In this case, the court distinguished between a surety and a solidary
co-debtor.
Asset Builders v Stronghold
A surety’s undertaking is contractual and accessory but direct,
primary and absolute. Nevertheless, the surety’s liability to the
creditor or promisee arises only upon the obligor’s default.
Castellvi v Sellner
Court distinguished a surety from a guarantor. Sellner’s responsibility
is that of a Guarantor not a surety. Hence, it is merely a secondary
obligation founded on an independent collateral agreement.
Machetti v Hospicio de San Jose
While the surety undertakes to pay if the principal does not pay the
guarantor only binds himself to pay if the principal cannot pay.
Even if the Court has declared the debtor as insolvent, you cannot go
directly to the guarantor until the assets of the debtor has been
liquidated and is found to be insufficient.
Note: Insolvency means that the debtor does not have sufficient assets
to pay off its obligations as they became due.
Gilat Satellite v UCPB
The surety cannot invoke in its favor the arbitration clause in the
Purchase agreement as it is not a party to the contract (it is a mere
stranger thereto) . Sureties do not insure the solvency of the debtor
but the debt itself.
3 Requisites to declare the debtor in default
1. the obligation is demandable and already liquidated
2. debtor delays performance
3. creditor requires the performance judicially or extrajudicially
Further, where the surety upon demand fails to pay it can be held
liable for interest even in so doing its obligation becomes more than
that of the principal obligation. The increased liability is not because
of the contract but because of the default and the necessity of judicial
collection.
A surety is directly and equally bound with the principal and is not
entitled to a separate notice of default or benefit of excussion. It can
be sued separately or together with the principal debtor.
Palmares v CA
A surety and guarantor was distinguished in this case. Where one
binds herself as “Jointly and severally liable as a comaker” his or her
liability is solidary.
Further, for the contract to be strictly construed it must be clearly
identified that it is a contract of suretyship and not guarantee.
For an extension to discharge the surety it must be for a definite
period and made without the consent of the surety. The contract
must be one which precludes the creditor from or hinders him from
enforcing the principal contract within the period during which he
could have enforced it and which precludes the surety from paying
the debt.
Note: Contract of Adhesion is a contract or document prepared by one
party whereby the other merely affixes his signature signifying his
adherence to provisions therein.
Willex Plastic v CA
The guarantor or surety is bound by the same consideration that
makes the contract effective between the principal parties thereto. It
is not necessary that a guarantor or surety receive any part or benefit
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thereto. Hence, it cannot be a defense on the part of the surety that
it did not receive anything for agreeing to be a surety.
Dino v CA
A continuing guaranty is one which covers all transactions including
those arising in the future which are within the description or
contemplation of the contract of guaranty until the expiration or
termination thereof. Hence where a contract of guaranty states that
it is to secure advances to be made from time to time the guaranty
will be construed as a continuing one.
Payment of “any debt” “any indebtedness” “any deficiency” or “any
sum” or the guaranty of “any transaction” or money to be furnished
the principal debtor “at any time” or “on such time” that the principal
debtor may require have been constructed as continuing guaranty
Reiterated here is rule on interest that said surety may be liable to
pay interest for delay in making payment after demand. Payment of
interest shall run on the date when the complaint was filed in court.
Atok v CA
“this is a continuing suretyship relating to any indebtedness including
that arising under successive transactions which shall either continue
the indebtedness from time to time or renew it after it has been
established”
A suretyship agreement is valid even before the principal obligation
intended to be secured is born.
Purpose of surety agreement: With such surety agreement there
would be no need to execute separate surety contract or bond for
each financing or credit accommodation extended to the principal
debtor.
RCBC v Judge Arro
The comprehensive continuing agreement is a continuing guaranty.
Further Daicor is liable thereto as maker.
Fortune Morots v CA
There was a continuing agreement
Rule: The President of a company who signed in a surety agreement
in the name of the company can be liable as a surety. When officers
sign the contract as authorized representatives of the corporation and
in their personal capacity they can be held solidarily liable.
South City Homes v BA Finance
There is no novation of the obligation when there as an assignment
of credit. The debtor’s consent is not essential for the validity of the
Assignment of Credit, what the law requires is mere notice to him to
effect payment. Since there is no novation, there is no extinguishment
of the liabilities of the sureties.
Assignment of Credit – an agreement by which the owner of credit
(Assignor), by a legal cause and without consent of the debtor,
transfers his credit and accessory rights to another (assignee) who
acquires power to enforce it to the same extent as the assignor could
enforce it against the debtor. (legal cause: dacion en pago, exchange,
donation)
Pacific Banking v IAC
The husband Roberto bound himself as a continuing surety when he
sighed the “Guarantor’s Undertaking” holding himself solidarily liable
to the debts of his wife. He further waived “any changes of or
novation in the terms and conditions or any extension shall not in any
manner release him”
Lim v Security Bank
“petitioner, as surety, shall, without need for any notice, demand or
any other act or deed, immediately become liable and shall pay "all
credit accommodations extended by the Bank to the Debtor, including
increases, renewals, roll-overs, extensions, restructurings,
amendments or novations thereof, as well as (i) all obligations of the
Debtor presently or hereafter owing to the Bank, as appears in the
accounts, books and records of the Bank, whether direct or indirect,
and”
The agreement is a continuing surety.
Molino v Security Diners International
Upgrading of the card was a novation of the original agreement but it
did not release the surety Molino because under the Surety
Undertaking she expressly waived discharge in case of change or
novation in the agreement governing the use of the first credit card.
Gateway v Asianbank
A suit against a surety is not affected by an insolvency proceeding
instituted by or against the principal debtor. A creditor’s right to
proceed against a surety exists independent of his right to proceed
against the principal debtor.
The possibility that the surety may only recover a portion of the
amount which he is liable to pay is the risk he assumed as a surety.
Further, the Deed of Suretyship is a continuing suretyship agreement
since it covers current and future loans.
Security Bank v Cuenca
The 1989 Loan agreement extinguished the original credit
accommodation and along with it the accessory contract of the
indemnity agreement was also extinguished.
A contract of surety cannot extend to more than what is stipulated
and is construed against the creditor. Where the surety did not waive
its right to be notified od any alteration to the credit accommodation,
its extinguishment released said surety of his liability.
Hence, the creditor cannot hold the surety liable for loans obtained in
excess of the amount or beyond the period stipulated in the original
agreement, absent any clear stipulation showing that the surety
waived his right to be notified thereof or to give consent thereto.
Further, mere fact that the surety is no longer a stockholder of the
corporation to which he became a surety he is still liable because he
signed as a surety in his personal capacity.
INSERT EMMA INDUSTRIES v SECURITY BANK (CHECK DROPBOX)
INSERT ALLIED BANKING v YUJUICO (CHECK DROPBOX)
Erma v Security Bank
while respondent Ortiz signed the Credit Agreement as an officer of
Erma (as an accommodation party being the Administrative Vice
President of Erma) does not absolve him from liability subsequently
executed a Continuing Suretyship agreement wherein he guaranteed
the "due and full payment and performance" of all credit
accommodations granted to Erma and bound himself solidarily liable
with Ernesto Marcelo for the obligations of Erma.
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corporate surety differs significantly from the individual private
surety.
1. First, unlike the private surety, the corporate surety signs
for cash and not for friendship. The private surety is
regarded as someone doing a rather foolish act for
praiseworthy motives; the corporate surety, to the
contrary, is in business to make a profit and charges a
premium depending upon the amount of guaranty and the
risk involved.
2. Second, the corporate surety, like an insurance company,
prepares the instrument, which is a type of contract of
adhesion whereas the private surety usually does not
prepare the note or bond which he signs.
3. Third, the obligation of the private surety often is assumed
simply on the basis of the debtor's representations and
without legal advice, while the corporate surety does not
bind itself until a full investigation has been made.
For these reasons, the courts distinguish between the individual
gratuitous surety and the vocational corporate surety
The rationale of this doctrine is reasonable; 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 fiduciary. This cannot be said of
a compensated corporate surety which is a business association
organized for the purpose of assuming classified risks in large
numbers, for profit and on an impersonal basis, through the medium
of standardized written contractual forms drawn by its own
representatives with the primary aim of protecting its own interests.
Note: guarantor is liable only from the time when the guaranty was
made and cannot be faulted for the delay of the debtor. Hence he
cannot liable for costs incurred or interests incurred from the time the
principal debtor was in delay.
Allied Banking v Yujico
the usage of term guaranty or guarantee in the caption of the
documents, or of the word guarantor in the contents of the
documents did not conclusively characterize the nature of the
obligations assumed therein. What properly characterized and
defined the undertakings were the contents of the documents and
the intention of the parties.
The surety is no longer liable where there is non-renewal of a
continuing-guaranty agreement.
BA Finance v CA
Although the credit administrator was authorized to approve loans
nothing in said memorandum vesting him power grants the power to
issue guarantees. Such authority cannot be subsumed under the
phrase “contingent commitment.” A guaranty is not presumed it must
be expressed and cannot be extended beyond its specific limits.
Hence the letter of guaranty issued by such credit administrator is
invalid because it was issued beyond authority.
Note: Even if a guaranty is not in writing it is valid but not enforceable.
A contract of surety need not be in writing to be enforceable.
Aglibot v Santia
Where Aglibot has not shown any proof that she agrees to issue
checks in behalf of the company (as a guarantor) there can be no
contract of guaranty. The relation between an accommodation party
and the party accommodated is one of principal and surety – the
accommodation party being the surety.
The difference between an accommodation party and a surety is that
the liability of an accommodation party remains unconditional to a
holder for value hence even an extension of the period of payment
without the accommodation party’s consent will not release him from
liability.
Accomodation Party – one who has signed the instrument as maker,
drawer, indorser without receiving value therefor and for the purpose
of lending his name to some other person.
Texas Company v Alonso
Note the distinction between an offer of guaranty and a direct or
unconditional promise of guaranty. When there is an offer of guaranty
it requires action by the creditor before the obligation becomes fixed
and does not become binding until accepted unless there is waiver of
notice or until notice of such acceptance is given to or acquired by the
guarantor or until he has notice or knowledge that the creditor
performed the condition and indents to act upon the guaranty.
Acceptance need not be in writing it may be indicated by acts
amounting to acceptance.
If the transaction amounts to a direct or unconditional promise of
guaranty, unless notice of acceptance is made a condition of a
guaranty, all that is necessary to make the promise binding is that the
promisor should act upon it and notice of acceptance is not necessary.
The reason being is that a contract of guaranty is unilateral in nature.
Visayan Surety v CA
A surety cannot be held liable to an intervenor when the relationship
and obligation of the surety is limited to the defendants specified in
the contract of surety. The obligation of a surety cannot be extended
by implication beyond its specified limits. The extent of a surety’s
liability is determined only by the clause of the contract of suretyship.
A contract of surety is not presumed and cannot extend to more than
what is stipulated.
Intervenor is a person not originally impleaded who has a legal
interest in the matter in litigation.
Estate of Hemady v Luzon Surety
The articles of the Civil Code contain no provision that the guaranty
or suretyship is extinguished upon death of gurantor or surety.
Further as a general rule the party’s contractual rights and obligations
are transmissible to the successors. However, note that the heirs
cannot be liable beyond the value of the property they received from
the decedent.
Further it was held that the qualities under Article 2056 of a guarantor
are required to be present only at the time of the perfection of the
contract of guaranty. Hence, supervening incapacity of the guarantor
will not operate to exonerate him of the eventual liability he has
contracted. The supervening dishonesty of the guarantor does not
terminate the contract but merely entitles the creditor to demand a
replacement of the guarantor.
Hence, the solidary guarantor’s liability is not extinguished upon his
death, hence the creditor had the right to file against the the surety’s
estate a claim for reimbursement.
Yulim v International Exchange Bank
When the obligors undertake to be “jointly and severally” liable it
means that the obligation is solidary. The Deed of Assignment in this
case did not extinguish the solidary obligation for such assignment
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was but a security and not a satisfaction of the principal’s
indebtedness. It did not have the effect of a Dacion en Pago.
Wise and Co v Tanglao
Tanglao here was held to have only mortgaged his property, he did
not bind himself as a guarantor. However, assuming that Tanglao is a
guarantor. the action still cannot lie against him on the ground that
all the legal remedies against the principal debtor has not been
resorted to by the creditor. It does not appear that an execution of
the judgement against the principal debtor was asked by the creditor,
further the court notes that the principal debtor has two pieces of
property which is sufficient to pay the debt.
PBCOM v CA (not in syllabus but in TSN)
It is not sufficient that the debtor is insolvent for the creditor to go
after the guarantor; The creditor must resort to all remedies against
the debtor; One remedy is an accion pauliana.
An accion pauliana can be resorted to to rescind or impugn the
contract or alienation made by the debtor in fraud of the creditor. The
creditor can file his action before proceeding against the guarantor.
Prudential bank v IAC
“In consideration of Prudential bank complying with the foregoing
we jointly and severally agree and undertake to pay on demand to
Prudential bank all sums which said bank may call upon us to pay
Sgd Anacleto Chi”
Anacleto here is bound as a guarantor. This would have been a
guaranty solidary between the guarantors where two gurantors had
signed it. While indeed it would have been signed by two guarantors
the fact that it was only Chi who signed it did not render the clause
meaningless. By signing he became the sole guarantor.
Further the attestation by witnesses and the acknowledgement
before a notary public are not required by law to make a party liable
on the instrument as a guarantor.
Further, Chi cannot be bound to pay as a guarantor until the creditor
has exhausted and resorted to all legal remedies against the principal
debtor. Excussion is not a condition sine qua non for the institution of
an action against a guarantor. However, it was proper to implead Chi
for trial convenience and in order to avoid the necessity of filing
another case to go against the guarantor.
It was also held that the provision on waiver of exhaustion is
ineffective because the space therein where the property may not be
exhausted was not filled up.
Note: Requisites of Art 2060
1. Guaranty must allege benefit of excussion
2. If a demand is made against him he must set this as a
defense against the creditor; that there is no cause of action
against him because he has the benefit of excussion
3. The guarantor must be able to point out specific properties
of the principal debtor available (not subject to litigation
nor encumbered) in the Philippines
Bitanga v Pyramid
The liability of the guarantor arises when the insolvency or inability of
the debtor to pay the amount of the debt is proven by the return of
the writ of execution that had been unsatisfied. IN this case where
Bitanga failed to point out sufficient property of the principal debtor
he cannot avail of the benefit of excussion.
JN Development v Phil Export
Escussion is a right granted to the guarantor by the law and as such
he may opt to make use of it or waive it. The guarantor’s waiver of
the right of excussion cannot prevent it from demanding
reimbursement from the principal debtor. The law clearly requires the
debtor to indemnify the guarantor what the guarantor has paid.
Mire Hermanos v Manila
There can be no benefit of division where as in the instant case there
are two obligations. There are three requisites
1. There are several guarantors
2. There is one principal debtor
3. There is one obligation.
Manila Surety v Batu
A Surety may avail of the remedy under Article 2071. He is an insurer
of the debt and he assumes a responsibility more onerous than that
of a guarantor hence 2071 under guaranty is applicable to a surety.
Manila Surety’s cause falls under 2071(1) because there is an action
filed against it for collection of unpaid wages. Such provision does not
provide that the guarantor be sued by creditor for payment of debt,
it simply provides that the guarantor or surety be sued for payment.
Reconciled with the case of Special Steel v Villareal
The remedy given to a surety is to file a separate civil action. Here the
Court emphasized that the surety could not in the same action
exercise the remedy that may have been available under 2071.
RCBC v Bernardino INSERT FROM DROPBOX
Bernardino cannot now renege on his obligation to pay the
promissory notes under the claim that there was a previous
agreement between the parties for RCBC to execute a subrogation
agreement before Bernardino could be held liable under the surety
agreements.
We stress that the right to subrogation of a paying surety is by
operation of law. Article 2067 of the Civil Code provides in part that
the guarantor who, pays is subrogated to all the rights which the
creditor had against the debtor. Although Article 2067 explicitly
pertains to guarantors, the right to subrogation extends as well to
sureties.
Citing 2071; Hence, even before paying, whatever right to a security
the surety may have can only be demanded from principal debtor and
not from the creditor.
Tuason v Machuca
Where actual payment has not been taken and the demand is not for
reimbursement but for the enforcement of their contractual
obligations, 2071 is not applicable.
Kuenzle v Sunco
In this case the Court distinguished Art. 2066 from Art.2071;
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 and it effectively extinguished the liability of the guarantor by virtue
of Article 2079.

Note: extension of payment as to installments will not affect liability

of guarantor but extension of payment as to the whole debt will affect
his liability.

PNB v Manila Surety

The creditor PNB was negligent in collecting the debt of the principal;
debt when it allowed the assigned funds to be exhausted by other
creditors without notifying the surety. Hence, the creditor deprived
the surety of any possibility of recoursing against that security. The
bank thereby exonerated the surety pursuant to Article 2080.

Contract of Pledge

Calibo v CA
Where the pledgor Mike was not the absolute owner of the tractor
there is no valid pledge.
While the surety has the right to obtain as he did the judgements
against the principal debtor he ought not to be allowed to realize the
Bangko Central v Libo-on
said judgements to the point of actual collection until he has satisfied
the Rural Bank of Hinigaran was neither the absolute owner of the
the obligation which he assures. Otherwise a great opportunity for
subject property nor the security documents it had pledged to BSP,
collusion and improper practices between the surety and his principal
there is still an existing real estate mortgage contract between the
would be offered which might prejudice the creditor.
Spouses Libo-on and the Rural Bank of Hinigaran. The possession of
the security documents was given to the Rural Bank of Hinigaran
Tidcorp v Asia Paces Corp
merely as security collateral in case of non-payment of the loan. Thus,
The payment extensions under the Restructuring Agreement did not
unless the subject property is foreclosed and there was subsequent
have the effect of extending the payment under the Letters of
consolidation of title, the Spouses Libo-on remains to be the owner of
Guaranty but merely provide a new payment scheme. Hence, they did
the subject property. Since it is not the absolute owner there is no
not have the effect of extinguishing the liability of the guarantor
valid pledge.
pursuant to Article 2079.
Development Bank v Prudential Bank
Stronghold v Republic
There is no valid chattel mortgage since Litex had neither absolute
As a GR, the death of the creditor or the debtor does NOT extinguish
ownership nor free disposal of the articles. Since there is no valid
the obligation. Obligations are transmissible to the heirs, except when
mortgage the effect is that there ca also be no valid foreclosure or
the transmission is prevented by:
auction sale.
1. The law
*Apply the same rule to pledge
2. The stipulation of the parties
3. The nature of the obligation
DBP is not a mortgagee in GF because it had knowledge that the goods
Only obligations that are personal or are identified with the persons
had been under a trust receipt before the foreclosure of the sale.
themselves are extinguished by death.
Cavite Devt Bank v Sps Lim
In this case the death of the principal debtor did not extinguish his
There could be a situation where despite the fact that
liability, which merely passed on to his estate. Surety’s obligation is
mortgagor(pledgor) is not the owner of the mortgaged or pledged
accessory to the obligation of the principal but his liability is direct,
property his title being fraudulent, and yet the mortgage contract and
primary and absolute as he is equally bound with the principal.
any foreclosure sale arising therefrom are given effect by reason of
public policy.
Note however that the creditor can only seek payment to the extent
of the estate of the principal debtor.
CDC however cannot be a mortgagee in good faith for as a banking
institution it is expected to exercise more care and prudence than
Note: Novation can only extinguish the liability if it constitutes a
private individuals in their dealings even those involving registered
material alteration which varies the term of the principal contract.
lands, for their business is affected public interest.
Note: Any doubt in the terms and conditions of the surety agreement
Doctrine of Mortgagee in good faith is based on the rule that all
should be resolved in favor of the surety.
persons dealing with property covered by a TCT are not required to
go beyond what appears on the face of the title. Mortgagee has a right
Sps Toh v Solid Bank
to rely on the face of title.
Where there was a waiver that the Bank may from time to time in its
discretion change the time of payment such waiver is subject to
Vda. De Jayme v CA
certain prerequisites and contemplates only authorized extensions.
A Third Party Mortgage is an instance when persons not directly
Where Solid Bank made extensions for payment without complying
parties to a loan agreement may give as security their own properties
with the prerequisites agreed upon such extensions are unauthorized
for the principal transaction. So long as valid consent was given the

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fact that the loans were solely for the benefit of the debtor will not
invalidate the mortgage with respect to the third party.

Note that when several things are given the secure the same debt in
its entirety all of them are liable for the debt and the creditor does
not have to divide his action by distributing the debt among various
things pledged or mortgaged. Even when only a part of the debt
remains unpaid, all the things are liable for such balance.

Manila Banking v Teodoro

In case of doubt as to whether a transaction is a pledge or a dation in
payment the presumption is in favor of pledge, the latter being the
lesser transmission of rights and interests.

Note: Assignment of credit is an agreement by virtue of which the

owner of a credit (assignor) by legal cause (sale, dation in payment,
exchange or donation) and without need of consent from debtor,
transfers his credit and accessory rights to another known as assignee
who acquires the power to enforce it to the same extent as the
assignor could have enforced it against the debtor.

Hechanova v Adil
There is no valid mortgage here for the nortgage was constituted in a
private document and not registered. Moreover it contained a
stipulation involving automatic appropriation of the property (Pactum
Commissorium) which is null and void under Art 2988.

Even assuming that there was a valid mortgage the creditor’ recourse
was to foreclose the mortgage not to seek annulment of the sale.

Alcantara v Alinea
Pactum Commissorium presupposes the existence of the contracts of
mortgage or pledge or that of antichresis. Since none of which are
present there can be no pactum commissorium.

Note: in pactum Commissorium what is prohibited is automatic

appropriation if there is still an act required for the parties to
consummate the transfer of the property from the debtor to creditor
than that is no pactum commissorium.
Sps Uy Tong v CA
Article 2088 furnishes 2 elements for Pactum COmmissorium:
1. That there should be a pledge or mortgage wherein a
property is pledged or mortgaged by way of security for the
payment of the principal obligation
2. There should be a stipulation for automatic appropriation
by the creditor of the thing pledged or mortgaged in the
event of non-payment of the principal obligation within the
stipulated period.
Here there is no pactum commisorium as there is no pledge or
mortgage. Further there is no case of automatic appropriation since
when the spouses defaulted the creditor still had to file an action for
specific performance in court to which the court ordered the debtor
spouses to pay the balance and in its failure execute a deed of
assignment over the property.
PHILNICO v PMO
Both elements of pactum commissorium are present in this case.
There is a pledge agreement and there is automatic appropriation.
The ARDA and pledge agreement although executed in separate
written instruments are embodied in only one contract as they refer
to the very same shares of stock which were pledged.
Sps Ong v Roban Lending
Here the contract contains a stipulation that upon default the creditor
is given the right to enforce Dacion in payment transferring to it
ownership of the properties covered by the same. Here there is a
pactum commissorium and there is no true Dacion en pago.
In a true Dacion en pago, the assignment of the property extinguishes
the monetary debt but in this case alienation did not satisfy the debt.
Note: what is considered void is the stipulation on automatic
appropriation the pledge and mortgage itself is still valid provided all
the elements required for its validity are present.
Sps Pen v Julian
The deed of sale is a Pactum Commissorium; The first element was
present considering that the property of the respondents was
mortgaged. As to the second, the authorization for Adelaida to
appropriate the property subject of the mortgage upon Linda's
default was implied from Linda's having signed the blank deed of sale
simultaneously with her signing of the real estate mortgage.
The haste with which the transfer of property was made upon the
default by Linda on her obligation, and the eventual transfer of the
property in a manner not in the form of a valid dacion en
pago ultimately confirmed the nature of the transaction as a pactum
commissorium
Mcmicking v Martinez
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In the absence of delivery there can be no valid contract of pledge. In
this case although we have a public document it can only be
considered as evidence of indebtedness but the pledge would still be
considered VOID for failure of delivery.

Note: there can still be a valid pledge even if there is no actual delivery
(symbolic or constructive delivery) note pledge may include intangible
properties evidenced by a document.
e.g. delivery of warehouse receipt may give rise to a perfected
contract of pledge.

Caltex v CA
Where the pledgor failed to present documents evidencing the
contract of pledge mere delivery of the Certificate of Time Deposit did
no vest in Caltex any right as pledgor. The requirement under Article
2096 is not a mere rule of adjective law prescribing the mode whereby
proof be made of the date of the pledge contract but a rule of
substantive law prescribing a condition without which the execution
of a pledge contract cannot affect third persons adversely.

Estate of Litton v Ciriaco

Where the pledge is valid the incorporeal right evidenced by a
document in possession of the creditor can only be alienated with due
notice and consent of the creditor or his duly authorized
representative.

Not in TSN but discussed in Clss:

Yuliongsiu v PNB
G.R. No. L-19227 February 17, 1968
“The provision of Art. 2110 of the present Civil Code 11 being new —
cannot apply to the pledge contract here which was entered into on
June 30, 1947. On the other hand, there is an authority supporting the
proposition that the pledgee can temporarily entrust the physical
possession of the chattels pledged to the pledgor without invalidating
the pledge. In such a case, the pledgor is regarded as holding the
pledged property merely as trustee for the pledgee.”

Lim Tay v CA
The creditor did not acquire ownership of the thing pledged when
there was no showing that a foreclosure or attempt to sell through
public or private auction as required under Article 2112 was complied
with. Ownership could not have passed to him. Further, the pledgor
remains the owner during the pendency of the pledge and prior to
foreclosure and sale.

Insular Life v Young

The foreclosure sale is valid; there is no need for a separate notice for
the 2nd auction sale. A notice that a public auction will be held on Oct
28 and a second auction on the next day is sufficient.

Manila Surety v Velayo

The creditor was held not entitled to the balance or deficiency after
the thing pledged was sold in the public auction, pursuant to Article
2115.

-End of 2nd Examination coverage-

“Fall in love, stay in love, and it will decide everything”
-Fr. Arrupe

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