Credit Transaction

San Beda College of Law 1
MEMORY AID IN CIVIL LAW

CREDIT TRANSACTIONS 2. Unilateral Contract - once the subject matter has
been delivered, it creates obligations on the part of
only one of the parties (i.e. borrower).
CREDIT TRANSACTIONS
 All transactions involving the purchase or loan of  Kinds:
goods, services, or money in the present with a 1. Commodatum – when the bailor (lender) delivers to
promise to pay or deliver in the future the bailee (borrower) a non-consumable thing so that
the latter may use it for a certain time and return
Contracts of security the identical thing.
Types:  Kinds of commodatum:
1. Secured transactions or contracts of real security a. Ordinary Commodatum – use by the borrower of
- supported by a collateral or an encumbrance of the thing is for a certain period of time
property b. Precarium - one whereby the bailor may demand
2. Unsecured transactions or contracts of personal the thing loaned at will and it exists in the
security - supported only by a promise or following cases:
personal commitment of another such as a i. neither the duration nor purpose of the
guarantor or surety contract is stipulated
ii. the use of the thing is merely tolerated by
Security the owner
 Something given, deposited, or serving as a
means to ensure fulfilment or enforcement of an
obligation or of protecting some interest in
property 2. Simple loan or mutuum – where the lender delivers
 Types of Security to the borrower money or other consumable thing
a. personal – when an individual becomes upon the condition that the latter shall pay the same
surety or guarantor amount of the same kind and quality.
b. real or property – when a mortgage, pledge,
antichresis, charge or lien or other device Commodatum Mutuum
used to have property held, out of which the Key: COPS-LOTR
person to be made secure can be 1. Object
compensated for loss Non-consumable Consumable
2. Cause
Bailment Gratuitous May or may not be
 The delivery of property of one person to another gratuitous
in trust for a specific purpose, with a contract, 3. Purpose
express or implied, that the trust shall be Use or temporary Consumption
faithfully executed and the property returned or possession
duly accounted for when the special purpose is 4. Subject Matter
accomplished or kept until the bailor claims it. Real or personal Only personal
property property
5. Ownership of the thing
 Parties:
Retained by the Passes to the debtor
1. bailor - the giver; one who delivers property bailor
2. bailee- the recipient; one who receives the 6. Thing to be returned
custody or possession of the thing thus delivered Exact thing loaned Equal amount of the
same kind and
quality
7. Who bears risk of loss
LOAN (Articles 1933 – 1961) Bailor Debtor
8. When to return
 A contract wherein one of the parties delivers to In case of urgent Only after the
another, either something not consumable so that need, even before expiration of the
the latter may use the same for a certain time the expiration of the term
and return it or money or other consumable term
thing, upon the condition that the same amount
of the same kind and quality shall be paid. (Art
1933) Loan Credit
Delivery by one party Ability of a person to
Characteristics: and the receipt of borrow money or
other party of a things by virtue of
1. Real Contract – delivery of the thing loaned is
given sum of money the trust or
necessary for the perfection of the contract or other consumable confidence reposed
NOTE: An accepted promise to make a future thing upon an by the lender that he
loan is a consensual contract, and therefore agreement, express will pay what he
binding upon the parties but it is only after or implied, to repay promised.
delivery, will the real contract of loan arise. (Art the same.
1934)
CIVIL LAW COMMITTEE

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

Loan Credit a. when he keeps it longer than the period
1. Interest taken at Interest is taken in stipulated, or after the accomplishment of its use
the expiration of the advance b. when he lends or leases it to third persons who
credit are not members of his household
2. Always on a Always on a single c. when the thing loaned has been delivered with
double name paper name paper (i.e. appraisal of its value
(two signatures promissory note with
d. when, being able to save either of the thing
appear with both no indorse-ment
parties held liable other than the borrowed or his own things, he chose to save the
for payment) maker) latter; or
e. when the bailee devoted the thing for any
COMMODATUM (Articles 1935 – 1952) purpose different from that for which it has been
 Nature: loaned (Art 1942)
3. To be liable for the deterioration of thing loaned (a)
1. PURPOSE: Bailee in commodatum acquires the if expressly stipulated; (b) if guilty of fault or
temporary use of the thing but not its fruits negligence; or (c) if he devotes the thing to any
(unless stipulated as an incidental part of the purpose different from that for which it has been
contract).(Art 1935) loaned
 Use must be temporary, otherwise the 4. To pay for extraordinary expenses arising from the
contract may be a deposit. actual use of the thing by the bailee, which shall be
borne equally by both the bailor and the bailee, even
2. CAUSE: Essentially gratuitous; it ceases to be a though the bailee acted without fault, unless there is
commodatum if any compensation is to be paid a stipulation to the contrary (Art 1949 par 2)
by the borrower who acquires the use, in such 5. To return the thing loaned
case there arises a lease contract.  The bailee has no right to retain the thing loaned
 Similar to a donation in that it confers a as security for claims he has against the bailor
benefit to the recipient. The presumption is even for extraordinary expenses except for a
that the bailor has loaned the thing for claim for damages suffered because of the flaws
having no need therefor. of the thing loaned.
3. SUBJECT MATTER: Generally non-consumable NOTES:

whether real or personal but if the consumable  However, the bailee’s right extends no
goods are not for consumption as when they are further than retention of the thing loaned
merely for exhibition, consumable goods may be until he is reimbursed for the damages
the subject of the commodatum. (Art 1936) suffered by him.
 He cannot lawfully sell the thing to satisfy
4. Bailor need not be the owner of the thing owned such damages without court’s approval.
(Art. 1938) since by the loan, ownership does not  In case there are two or more bailees, their
pass to the borrower. obligation shall be solidary.
 A mere lessee or usufructuary may lend but
the borrower or bailee himself may not lend Obligations of the bailor (Art 1946 – Art 1952):
nor lease the thing loaned to him to a third 1. To respect the duration of the loan
person (Art 1932[2]) GENERAL RULE: Allow the bailee the use of the
thing loaned for the duration of the period stipulated
5. Purely Personal (Art 1939): or until the accomplishment of the purpose for which
 Death of either party terminates the contract the commodatum was instituted.
unless by stipulation, the commodatum is EXCEPTIONS:
transmitted to the heirs of either or both a. In case of urgent need in which case
parties. bailee may demand its return or temporary use;
 Bailee can neither lend nor lease the object b. The bailor may demand immediate return
of the contract to a third person. of the thing if the bailee commits any act of
ingratitude specified in Art. 765.
2. To refund to the bailee extraordinary expenses for

NOTE:Use of the thing loaned may extend to the preservation of the thing loaned, provided the
members of the bailee’s household except: bailee brings the same to the knowledge of the bailor
a. contrary stipulation; before incurring them, except when they are so
b. nature of the thing forbids such use urgent that the reply to the notification cannot be
awaited without danger.
Obligations of the Bailee: (Arts 1941 – 1945)
1. To pay for the ordinary expenses for the use and 3. To be liable to the bailee for damages for known
preservation of the thing loaned. (Art 1941) hidden flaws.
2. To be liable for the loss of the thing even if it  Requisites:
should be through a fortuitous event in the a. There is flaw or defect in the thing loaned;
following cases: (KLAS D) b. The flaw or defect is hidden;
c. The bailor is aware thereof;
d. He does not advise the bailee of the same; and
CIVIL LAW COMMITTEE

e. The bailee suffers damages by reason of said
flaw or defect Loan Sale
1. Real contract Consensual contract
2. Generally Bilateral and

NOTES: unilateral because reciprocal
only borrower has
Article I. If the above requisites concur, the
obligations
bailee has the right of retention for damages.
 The bailor cannot exempt himself from the NOTE: If the property is “sold”, but the real intent is
payment of expenses or damages by only to give the object as security for a debt – as when
abandoning the thing to the bailee. the “price” is comparatively small – there really is a
contract of loan with an “equitable mortgage.”
SIMPLE LOAN OR MUTUUM (Art 1953 – 1961)
 A contract whereby one party delivers to Commodatum/
another, money or other consumable thing with Barter
Mutuum
the understanding that the same amount of the
same kind and quality shall be paid. (Art. 1953) 1. Subject matter is Subject matter is
money or fungible non-fungible, (non
NOTES: things consumable) things
 The mere issuance of the checks does not result
in the perfection of the contract of loan. The 2. In commodatum, The thing with
Civil Code provides that the delivery of bills of the bailee is bound equivalent value is
to return the given in return for
exchange and mercantile documents, such as
identical thing what has been
checks, shall produce the effect of payment only borrowed when the received
when they have been encashed (Gerales vs. CA time has expired or
218 SCRA 638). It is only after the checks have purpose served
produced the effect of payment that the contract
of loan may be deemed perfected. 3. Mutuum may be Onerous, actually a
 The obligation is “to pay” and not to return gratuitous and mutual sale
because the consumption of the thing loaned is commodatum is
always gratuitous
the distinguishing character of the contract of
mutuum from that of commodatum.
 No estafa is committed by a person who refuses
to pay his debt or denies its existence.
Simple Loan/Mutuum Rent  Form of Payment (Art 1955):

1. If the thing loaned is money - payment must be made
1. Delivery of money Delivery of some non-
or some consumable consumable thing in in the currency stipulated, if it is possible; otherwise
thing with a promise order that the other it is payable in the currency which is legal tender in
to pay an equivalent may use it during a the Philippines and in case of extraordinary inflation
of the same kind and certain period and or deflation, the basisi of payment shall be the value
quality return it to the of the currency at the time of the creation of the
former. obligation
2. If what was loaned is a fungible thing other than
2. There is a transfer There is no transfer money - the borrower is under obligation to pay the
of ownership of the of ownership of the lender another thing of the same kind, quality and
thing delivered thing delivered
quantity. In case it is impossible to do so, the
borrower shall pay its value at the time of the
3. Relationship Relationship is that perfection of the loan.
between the parties of a landlord and
is that of obligor- tenant Interest
obligee  The compensation allowed by law or fixed by the
parties for the loan or forbearance of money, goods
4. Creditor receives Owner of the or credits
payment for his loan property rented  Requisites for Demandability: (ELI)
receives 1. must be expressly stipulated
compensation or
Exceptions:
price either in
money, provisions, a. indemnity for damages
chattels, or labor b. interest accruing from unpaid interest
2. must be lawful
from the occupant 3. must be in writing
thereof in return for
its use (Tolentino vs Compound Interest
Gonzales, 50 Phil 558 GENERAL RULE: Unpaid interest shall not earn interest.
1927)
CIVIL LAW COMMITTEE

EXCEPTIONS:
1. when judicially demanded Validity of unconscionable interest rate in a loan
2. when there is an express stipulation (must be Supreme Court in Sps. Solangon vs. Jose Salazar,
in writing in view of Art. 1956) G.R. No. 125944, June 29, 2001, said that since the usury
law had been repealed by CB Cir. No. 905 there is no
Guidelines for the application of proper interest more maximum rate of interest and the rate will just
rates depend on the mutual agreement of the parties (citing
1. If there is stipulation: that rate shall be applied Lim Law vs. Olympic Sawmill Co., 129 SCRA 439). But the
2. The following are the rules of thumb for the Supreme Court said that nothing in said circular grants
application/imposition of interest rates: lenders carta blanche authority to raise interest rates to
a) When an obligation, regardless of its source, level which will either enslave their borrowers or lead to
i.e., law, contracts, quasi-contracts, delicts a hemorrhaging of their assets (citing Almeda vs. CA, 256
or quasi-delicts is breached, the contravenor SCRS 292). In Medel vs. CA, 299 SCRA 481, it was ruled
can be held liable for damages. that while stipulated interest of 5.5% per month on a
b) With regard particularly to an award of loan is usurious pursuant to CB Circular No. 905, the
interest in the concept of actual and same must be equitably reduced for being iniquitous,
compensatory damages, the rate of interest, unconscionable and exorbitant. It is contrary to morals,
as well as the accrual thereof, is imposed, as (contra bonos mores). It was reduced to 12% per annum
follows: in consonant with justice and fair play.
i. When the obligation breached consists of
payment of a sum of money (loan or DEPOSIT (Articles 1962 – 2009)
forbearance of money), the interest shall
be that which is stipulated or agreed  A contract constituted from the moment a person
upon by the parties. In absence of an receives a thing belonging to another, with the
agreement, the rate shall be the legal obligation of safely keeping it and of returning the
rate (i.e. 12% per annum) computed from same.
default.
NOTE: The interest due shall itself earn Characteristics:
legal interest from the time it is 1. Real Contract - contract is perfected by the
judicially demanded delivery of the subject matter.
ii. In other cases, the rate of interest shall 2. Unilateral (gratutitous deposit) - only the
be six percent (6%) per annum. depositary has an obligation.
NOTE: No interest, however, shall be 3. Bilateral (onerous deposit) - gives rise to
adjudged on unliquidated claims or obligations on the part of both the depositary
damages except when or until the and depositor.
demand can be established with
reasonable certainty. When the demand Deposit Mutuum
cannot be established, the interest shall 1. Purpose
begin to run only from the date of the Principal purpose is Principal purpose is
judgment of the court is made. safekeeping or consumption
iii. When the judgment of the court awarding custody
a sum of money becomes final and 2. When to Return
executory, the rate of legal interest, Depositor can The lender must wait
demand the return of until the expiration
whether the case falls under paragraph i
the subject matter at of the period granted
or ii above, shall be 12% per annum from will to the debtor
such finality until its satisfaction, this 3. Subject Matter
interim period being deemed to be by Subject matter may Subject matter is
then an equivalent to a forbearance of be movable or only money or other
credit. (Eastern Shipping Lines vs. CA, immovable property fungible thing
July 12, 1994) 4. Relationship
Relationship is that Relationship is that
NOTES: of lender (creditor) of depositor and
and borrower depositary.
 Central Bank Circular No. 416 fixing the rate of (debtor).
interest at 12% per annum deals with loans,
forbearance of any money, goods or credits and 5. Compensation
judgments involving such loans, or forbearance in There can be NO compensation of
the absence of express agreement to such rate compensation of things deposited with
 Interest as indemnity for damages is payable only credits. each other (except
in case of default or non-performance of the by mutual
contract. As they are distinct claims, they may be agreement).
demanded separately. (Sentinel Insurance Co.,
Inc. vs CA, 182 SCRA 517) Deposit Commodatum
 Central Bank Circular No. 905 (Dec. 10, 1982)
1. Purpose is 1. Purpose is the
removed the Usury Law ceiling on interest rates Safekeeping transfer of the use
for secured and unsecured loans, regardless of
maturity. 2. May be gratuitous 2. Essentially and
CIVIL LAW COMMITTEE

always gratuitous  Article 1966 does not embrace incorporeal property,
such as rights and actions, for it follows the person of
3. Movable/corporeal 3. Both movable and the owner, wherever he goes.
things only in case of immovable may be
extrajudicial deposit the object  A contract for the rent of safety deposit boxes is
not an ordinary contract of lease of things but a
 Kinds of Deposit: special kind of deposit; hence, it is not to be strictly
1. Judicial (Sequestration) –takes place when an governed by the provisions on deposit. The relation
attachment or seizure of property in litigation is between a bank and its customer is that of a bailor
ordered. and bailee. (CA Agro vs CA, 219 SCRA 426)
2. Extra-judicial Obligations of the Depositary (Art 1972 –1991):

a. Voluntary – one wherein the delivery is made 1. To keep the thing safely (Art 1972)
by the will of the depositor or by two or more  Exercise over the thing deposited the same
persons each of whom believes himself diligence as he would exercise over his property
entitled to the thing deposited. (Arts 1968 – 2. To return the thing (Art 1972)
1995)  Person to whom the thing must be returned:
b. Necessary – one made in compliance with a a. Depositor, to his heirs and successors, or the
legal obligation, or on the occasion of any person who may have been designated in the
calamity, or by travellers in hotels and inns contract
(Arts 1996 - 2004), or by travellers with b. If the depositary is capacitated - he is subject to
common carriers (Art 1734 – 1735). all the obligations of a depositary whether or not
NOTE: The chief difference between a voluntary the depositor is capacitated. If the depositor is
deposit and a necessary deposit is that in the incapacitated, the depositary must return the
former, the depositor has a complete freedom in property to the legal representative of the
choosing the depositary, whereas in the latter, incapacitated or to the depositor himself if he
there is lack of free choice in the depositor. should acquire capacity (Art 1970).
c. If the depositor is capacitated and the depositary
Judicial Extra-judicial is incapacitated - the latter does not incur the
1. Creation obligation of a depositary but he is liable:
i..to return the thing deposited while still in his
Will of the court Will of the parties
or contract possession;
ii.to pay the depositor the amount which he
2. Purpose
Security or to insure Custody and
may have benefited himself with the thing or
the right of a party safekeeping its price subject to the right of any third
to property or to person who acquired the thing in good faith
recover in case of (Art 1971)
favorable judgment
 Time of return:
3. Subject Matter
Movables or Movables only
a. Upon demand even though a specified period
immovables, or time for such return may have been fixed
but generally except when the thing is judicially attached
immovables while in the depositary’s possession or should he
have been notified of the opposition of a third
4. Cause
person to the return or the removal of the thing
Always onerous May be compen-
sated or not, but deposited. (Art 1998)
generally gratuitous b. If deposit gratuitous, the depositary may
return the thing deposited notwithstanding that a
period has been fixed for the deposit if
5. When must the thing be returned
Upon order of the Upon demand of
justifiable reasons exists for its return.
court or when depositor c. If the deposit is for a valuable
litigation is ended consideration, the depositary has no right to
return the thing deposited before the expiration
6. In whose behalf it is held
Person who has a Depositor or third
of the time designated even if he should suffer
right person designated inconvenience as a consequence.(Art 1989)
GENERAL RULE: Contract of deposit is gratuitous  What to return: product, accessories, and
accessions of the thing deposited (Art 1983)
(Art 1965)
3. Not to deposit the thing with a third person unless
EXCEPTIONS:
authorized by express stipulation (Art 1973)
1. when there is contrary stipulation
2. depositary is engaged in business of storing
 The depositor is liable for the loss of the thing
deposited under Article 1973 if:
goods
a. he transfers the deposit
3. property saved from destruction without
with a third person without authority although
knowledge of the owner
there is no negligence on his part and the third
person;
NOTES:
CIVIL LAW COMMITTEE


b. he deposits the thing presume that the depositor would consent to the
with a third person who is manifestly careless change if he knew of the facts of the situation,
or unfit although authorized even in the provided, that the former notifies the depositor
absence of negligence; or thereof and wait for his decision, unless delay would
c. the thing is lost cause danger
through the negligence of his employees 9. To pay interest on sums converted to personal use if
whether the latter are manifestly careless or the deposit consists of money (Art 1983)
not. 10. To be liable for loss through fortuitous event (SUDA):
4. If the thing deposited should earn interest (Art (Art 1979):
1975): a. if stipulated
a. to collect interest and the capital itself as it b. if he uses the thing without the depositor's
fall due permission
b. to take steps to preserve its value and rights c. if he delays its return
corresponding to it d. if he allows others to use it, even though he
5. Not to commingle things deposited if so himself may have been authorized to use the
stipulated (Art 1976) same
6. Not to make use of the thing deposited unless
authorized (Art 1977) NOTES:
GENERAL RULE: Deposit is for safekeeping of  Fixed, savings, and current deposits of money in
the subject matter and not for use. The banks and similar institutions shall be governed by
unauthorized use by the depositary would make the provisions concerning simple loan. (Art 1980)
him liable for damages.  The general rule is that a bank can compensate or
EXCEPTIONS: set off the deposit in its hands for the payment of
1. When the preservation of the thing deposited any indebtedness to it on the part of the depositor.
requires its use In true deposit, compensation is not allowed.
2. When authorized by the depositor
Irregular deposit Mutuum
NOTE: The permission to use is NOT presumed
except when such use is necessary for the 1. The consumable 1. Lender is bound
preservation of the thing deposited. thing deposited may by the provisions of
be demanded at will the contract and
Effect if permission to use is given (Art 1978): by the depositor cannot demand
1. If thing deposited is non-consumable, restitution until the
the contract loses the character of a deposit time for payment, as
provided in the
and acquires that of a commodatum despite
contract, has arisen
the fact that the parties may have
denominated it as a deposit, unless 2. The only benefit is 2. Essential cause for
safekeeping is still the principal purpose. that which accrues the transaction is the
2. If thing deposited consists of to the depositor necessity of the
money/consumable things, the contract is borrower
converted into a simple loan or mutuum
unless safekeeping is still the principal 3. The irregular 3. Common creditors
purpose in which case it is called an irregular depositor has a enjoy no preference
deposit. Example: bank deposits are irregular preference over in the distribution of
other creditors with the debtor’s
deposits in nature but governed by law on
respect to the thing property
loans. deposited
7. When the thing deposited is delivered sealed and
closed :
a. to return the thing deposited in the same Rule when there are two or more depositors (Art
condition 1985):
b. to pay for damages should the seal or lock be 1. If thing deposited is divisible and depositors are not
broken through his fault, which is presumed solidary: Each depositor can demand only his
unless proved otherwise proportionate share thereto.
c. to keep the secret of the deposit when the 2. If obligation is solidary or if thing is not divisible:
seal or lock is broken with or without his fault Rules on active solidarity shall apply, i.e. each one of
(Art 1981) the solidary depositors may do whatever may be
NOTE: The depositary is authorized to open useful to the others but not anything which may be
the thing deposited which is closed and prejudicial to the latter, (Art. 1212) and the
sealed when (Art 1982): depositary may return the thing to anyone of the
i. there is presumed authority (i.e. when the solidary depositors unless a demand, judicial or
key has been delivered to him or the extrajudicial, for its return has been made by one of
instructions of the depositor cannot be them in which case, delivery should be made to him
done without opening it) (Art. 1214).
ii. necessity 3. Return to one of depositors stipulated. The
8. To change the way of the deposit if under the depositary is bound to return it only to the person
circumstances, the depositary may reasonably
CIVIL LAW COMMITTEE


designated although he has not made any demand a. Notice was given to them or to their employees
for its return. of the effects brought by the guest; and
b. The guests take the precautions which said hotel-
NOTES: keepers or their substitutes advised relative to
 The depositary may retain the thing in pledge the care and vigilance of their effects.
until full payment of what may be due him by NOTES:
reason of the deposit (Art 1994).  Liability extends to vehicles, animals and articles
 The depositor’s heir who in good faith may have which have been introduced or placed in the annexes
sold the thing which he did not know was of the hotel.
deposited, shall only be bound to return the price  Liability shall EXCLUDE losses which proceed from
he may have received or to assign his right of force majeure. The act of a thief or robber is not
action against the buyer in case the price has not deemed force majeure unless done with the use of
been paid him (Art 1991). arms or irresistible force.
 The hotel-keeper cannot free himself from the
Obligations of the Depositor (Art 1992 – 1995): responsibility by posting notices to the effect that he
1. To pay expenses for preservation is not liable for the articles brought by the guest. Any
a. If the deposit is gratuitous, the depositor is stipulation to such effect shall be void.
obliged to reimburse the depositary for  Notice is necessary only for suing civil liability but
expenses incurred for the preservation of the not in criminal liability.
thing deposited (Art 1992)
b. If the deposit is for valuable consideration, GUARANTY (Articles 2047 – 2084)
expenses for preservation are borne by the
depositary unless there is a contrary  A contract whereby a person (guarantor) binds
stipulation himself to the creditor to fulfil the obligation of the
2. To pay loses incurred by the depositary due to principal debtor in case the latter fail to do so.
the character of the thing deposited
 Classification of Guaranty:
GENERAL RULE: The depositor shall reimburse the 1. In the Broad sense:
depositary for any loss arising from the character of a. Personal - the guaranty is the credit given by the
the thing deposited. person who guarantees the fulfilment of the
EXCEPTIONS: principal obligation.
1. at the time of the deposit, the depositor was b. Real - the guaranty is the property, movable or
not aware of the dangerous character of the immovable.
thing
2. when depositor was not expected to know the
dangerous character of the thing
3. when the depositor notified the depository of
the same 2. As to its Origin
4. the depositary was aware of it without advice a. Conventional - agreed upon by the parties.
from the depositor b. Legal - one imposed by virtue of a provision of a
law.
Extinguishment of Voluntary Deposit (Art 1995) c. Judicial - one which is required by a court to
1. Loss or destruction of the thing deposited guarantee the eventual right of one of the
2. In case of gratuitous deposit, upon the death of parties in a case.
either the depositor or the depositary 3. As to Consideration
3. Other causes, such as return of the thing, a. Gratuitous - the guarantor does not receive any
novation, merger, expiration of the term price or remuneration for acting as such.
fulfilment of the resolutory condition, etc (Art b. Onerous - the guarantor receives valuable
1231) consideration.
4. As to the Person guaranteed
Necessary Deposits a. Single - one constituted solely to guarantee or
1. Made in compliance with a legal obligation secure performance by the debtor of the
2. Made on the occasion of any calamity such as principal obligation.
fire, storm, flood, pillage, shipwreck or other b. Double or sub-guaranty - one constituted to
similar events (deposito miserable) secure the fulfilment by the guarantor of a prior
3. Made by travellers in hotels and inns or by guaranty.
travellers with common carrier 5. As to Scope and Extent
a. Definite - the guaranty is limited to the principal
obligation only, or to a specific portion thereof.
b. Indefinite or simple - one which not only
includes the principal obligation but also all its
Deposit by Travellers in hotels and inns: accessories including judicial costs
 The keepers of hotels or inns shall be responsible
as depositaries for the deposit of effects made by SURETYSHIP
travellers provided:
CIVIL LAW COMMITTEE


 A contract whereby a person (surety) binds the obligation guaranteed for the benefit of the
himself solidarily with the principal debtor principal. Such a promise is not implied by law
 A relation which exists where one person either; and this is true even where under the
(principal) has undertaken an obligation and contract the creditor is given the right to sue the
another person (surety) is also under a direct and principal, or the latter and the surety at the same
primary obligation or other duty to the obligee, time. (Arranz vs. Manila Fidelity & Surety Co., Inc.,
who is entitled to but one performance, and as 101 Phil. 272)
between the two who are bound, the second 6. Surety is not entitled to notice of principal’s default
rather than the first should perform (Agro NOTE: The creditor owes no duty of active diligence
Conglomerates, Inc. vs. CA, 348 SCRA 450) to take care of the interest of the surety and the
NOTES: surety is bound to take notice of the principal’s
 The reference in Article 2047 to solidary default and to perform the obligation. He cannot
obligations does not mean that suretyship is complain that the creditor has not notified him in the
withdrawn from the applicable provisions absence of a special agreement to that effect.
governing guaranty. A surety is almost the same (Palmares vs CA, 288 SCRA 422)
as a solidary debtor, except that he himself is a 7. Prior demand by the creditor upon principal is not
principal debtor. required
 In suretyship, there is but one contract, and the NOTE: As soon as the principal is in default, the
surety is bound by the same agreement which surety likewise is in default.
binds the principal. A surety is usually bound with 8. Surety is not exonerated by neglect of creditor to
the principal by the same instrument, executed sue principal
at the same time and upon the same
consideration (Palmares vs CA, 288 SCRA 422) Characteristics of Guaranty and Suretyship:
 It is not for the obligee to see to it that the 1. Accessory - It is indispensable condition for its
existence that there must be a principal obligation.
principal debtor pays the debt or fulfill the
NOTES:
contract, but for the surety to see to it that the
principal debtor pays or performs (Paramount  Guaranty may be constituted to guarantee the
Insurance Corp vs CA, 310 SCRA 377) performance of a voidable or unenforceable
contract. It may also guarantee a natural
Nature of Surety’s undertaking: obligation. (Art 2052)
1. Liability is contractual and accessory but direct  The guarantor cannot bind himself for more than
NOTE: He directly, primarily and equally binds the principal debtor and even if he does, his
himself with the principal as original promisor, liability shall be reduced to the limits of that of
although he possesses no direct or personal the debtor.
interest over the latter’s obligation, nor does he 2. Subsidiary and Conditional - takes effect only in case
receive any benefits therefrom. (PNB vs CA, 198 the principal debtor fails in his obligation.
SCRA 767)
2. Liability limited by the terms of the contract. NOTES:
NOTE: It cannot be extended by implication  The guarantor cannot bind himself for more than
beyond the terms of the contract (PNB vs CA, 198 the principal debtor and even if he does, his
SCRA 767) liability shall be reduced to the limits of that of
3. Liability arises only if principal debtor is held the debtor. But a guarantor may bind himself for
liable. less than that of the principal (Art 2054)
NOTES:  A guaranty may be given as security for future
 The creditor may sue separately or together debts, the amount of which is not yet known;
the principal debtor and the surety. Where there can be no claim against the guarantor until
there are several sureties, the obligee may the debt is liquidated. A conditional obligation
proceed against any one of them. may also be secured. (Art 2053)
 In the absence of collusion, the surety is 3. Unilateral - may be entered even w/o the
bound by a judgment against the principal intervention of the principal debtor, in which case
even though he was not a party to the Art. 1236 and 1237 shall apply and it gives rise only
proceedings. The nature of its undertaking to a duty on the part of the guarantor in relation to
makes it privy to all proceedings against its the creditor and not vice versa.
principal (Finman General Assurance Corp. 4. Nominate
vs. Salik, 188 SCRA 740) 5. Consensual
6. It is a contract between the guarantor/surety and
4. Surety is not entitled to the benefit of creditor.
exhaustion
NOTE: He assumes a solidary liability for the NOTES:
fulfilment of the principal obligation (Towers  Acceptance of guaranty by creditor and notice
Assurance Corp vs. Ororama Supermart, 80 SCRA thereof to guarantor:
262) as an original promissory and debtor from  In declaring that guaranty must be express,
the beginning. the law refers solely and exclusively to the
5. Undertaking is to creditor and not to debtor. obligation of the guarantor because it is he
NOTE: The surety makes no covenant or alone who binds himself by his acceptance.
agreement with the principal that it will fulfil With respect to the creditor, no such
CIVIL LAW COMMITTEE

requirement is needed because he binds
himself to nothing. 1. Liability depends 1. Surety assumes
 However, when there is merely an offer upon an independent liability as regular
agreement to pay the party to the
of a guaranty, or merely a conditional
obligation if primary undertaking
guaranty, in the sense that it requires debtor fails to do so
action by the creditor before the
obligation becomes fixed, it does not 2. Collateral under- 2. Surety is an
become binding until it is accepted and taking original promisor
until notice of such acceptance by the
creditor is given to, or acquired by, the 3. Guarantor is 3. Surety is
guarantor, or until he has notice or secondarily liable primarily liable
knowledge that the creditor has
performed the condition and intends to 4. Guarantor binds 4. Surety undertakes
act upon the guaranty. himself to pay if to pay if the principal
the principal DOES NOT PAY
 But in any case, the creditor is not CANNOT PAY
precluded from waiving the requirement
of notice. 5. Insurer of 5. Insurer of the
 The consideration of the guaranty is the same solvency of debtor debt
as the consideration of the principal
obligation. 6. Guarantor can 6. Surety cannot
avail of the benefit avail of the benefit of
 The creditor may proceed against the of excussion and excussion and division
guarantor although he has no right of action division in case
against the principal debtor. creditor proceeds
7. Not presumed. It must be expressed and reduced against him
in writing.
NOTE: A power of attorney to loan money does Indorsement Guaranty
not authorize the agent to make the principal
liable as a surety for the payment of the debt of 1. Primarily of 1. Contract of
a third person. (BPI vs. Coster, 47 Phil. 594) transfer security
8. Falls under the Statute of Frauds since it is a
“special promise to answer for the debt, default 2. Unless the note is 2. Failure in either or
or miscarriage of another”. promptly presented both of these
9. Strictly interpreted against the creditor and in for payment at particulars does not
maturity and due generally work as an
favor of the guarantor/surety and is not to be
notice of dishonor absolute discharge of
extended beyond its terms or specified limits. given to the indorser a guarantor’s
(Magdalena Estates, Inc. vs Rodriguez, 18 SCRA within a reasonable liability, but his is
967) The rule of strictissimi juris commonly time he will be discharged only to
pertains to an accommodation surety because the discharged abso- the extent of the loss
latter acts without motive of pecuniary gain and lutely from all which he may have
hence, should be protected against unjust liability thereon, suffered in
pecuniary impoverishment by imposing on the whether he has consequence thereof
principal, duties akin to those of a fiduciary. suffered any actual
damage or not
NOTES: 3. Indorser does not 3. Guarantor
 The rule will apply only after it has been warrant the solvency. warrants the solvency
definitely ascertained that the contract is He is answerable on a of the promisor
one of suretyship or guaranty. It cannot be strict compliance
used as an aid in determining whether a with the law by the
party’s undertaking is that of a surety or holder, whether the
guarantor. (Palmares vs CA, 288 SCRA 292) promisor is solvent or
not
 It does not apply in case of compensated
sureties. 4. Indorser can be 4. Guarantor cannot be
10. It is a contract which requires that the guarantor sued as promisor sued as promisor
must be a person distinct form the debtor
because a person cannot be the personal Guaranty Warranty
guarantor of himself. A contract by which a An undertaking that
NOTE: However, in a real guaranty, like pledge person is bound to the title, quality, or
and mortgage, a person may guarantee his own another for the quantity of the
obligation with his personal or real properties. fulfilment of a subject matter of the
promise or contract is what it
engagement of a has been represented
Guaranty Suretyship third party to be, and relates to
some agreement
made ordinarily by
the party who makes
the warranty
CIVIL LAW COMMITTEE


the guarantor shall only be liable for those costs
NOTES: incurred after he has been judicially required to pay.
 A guaranty is gratuitous, unless there is a
stipulation to the contrary. The cause of the Qualifications of a guarantor: (Arts 2056-2057)
contract is the same cause which supports the 1. possesses integrity
obligation as to the principal debtor. 2. capacity to bind himself
 The peculiar nature of a guaranty or surety 3. has sufficient property to answer for the
agreement is that is is regarded as valid despite obligation which he guarantees
the absence of any direct consideration received
by the guarantor or surety either from the NOTES:
principal debtor or from the creditor; a  The qualifications need only be present at the time
consideration moving to the principal alone will of the perfection of the contract.
suffice.  The subsequent loss of the integrity or property or
 It is never necessary that the guarantor or surety supervening incapacity of the guarantor would not
should receive any part or benefit, if such there operate to exonerate the guarantor or the eventual
be, accruing to the principal. (Willex Plastic liability he has contracted, and the contract of
Industries Corp. vs. CA, 256 SCRA 478) guaranty continues.
 However, the creditor may demand another
guarantor with the proper qualifications. But he may
waive it if he chooses and hold the guarantor to his
bargain.
Double or sub-guaranty (Art 2051 2nd par)
 One constituted to guarantee the obligation of a Benefit of Excussion (Art 2058)
guarantor  The right by which the guarantor cannot be
compelled to pay the creditor unless the latter has
Continuing guaranty (Art 2053) exhausted all the properties of the principal debtor,
 One which is not limited to a single transaction and has resorted to all of the legal remedies against
but which contemplates a future course of such debtor.
dealings, covering a series of transactions
generally for an indefinite time or until revoked. NOTE:
 Not applicable to a contract of suretyship (Arts 2047,
NOTES: par. 2; 2059[2])
 Prospective in operation (Diño vs CA, 216 SCRA 9)  Cannot even begin to take place before judgment has
 Construed as continuing when by the terms been obtained against the debtor (Baylon vs CA, 312
thereof it is evident that the object is to give a SCRA 502)
standing credit to the principal debtor to be used
from time to time either indefinitely or until a When Guarantor is not entitled to the benefit of
certain period, especially if the right to recall the excussion: (PAIRS)
guaranty is expressly reserved (Diño vs CA, 216 1. If it may be presumed that an execution on the
SCRA 9) property of the principal debtor would not result in
 “Future debts” may also refer to debts existing at the satisfaction of the obligation
the time of the constitution of the guaranty but  Not necessary that the debtor be judicially
the amount thereof is unknown and not to debts declared insolvent or bankrupt
not yet incurred and existing at that time. 2. When he has absconded, or cannot be sued within
 Exception to the concept of continuing guaranty the Philippines unless he has left a manager or
is chattel mortgage. A chattel mortgage can representative
only cover obligations existing at the time the 3. In case of insolvency of the debtor
mortgage is constituted and not those contracted  Must be actual
subsequent to the execution thereof (The Belgian 4. If the guarantor has expressly renounced it
Catholic Missionaries, Inc. vs. Magallanes Press, 5. If he has bound himself solidarily with the debtor
Inc., 49 Phil 647). An exception to this is in case
of stocks in department stores, drug stores, etc. Other grounds: (BIPS)
(Torres vs. Limjap, 56 Phil 141). 6. If he is a judicial bondsman or sub-surety
7. If he fails to interpose it as a defense before
Extent of Guarantor’s liability: (Art 2055) judgment is rendered against him
1. Where the guaranty definite: It is limited in 8. If the guarantor does not set up the benefit against
whole or in part to the principal debt, to the the creditor upon the latter’s demand for payment
exclusion of accessories. from him, and point out to the creditor available
2. Where guaranty indefinite or simple: It shall property to the debtor within Philippine territory,
comprise not only the principal obligation, but sufficient to cover the amount of the debt (Art 2060)
also all its accessories, including the judicial  Demand can be made only after judgment on the
costs, provided with respect to the latter, that debt
CIVIL LAW COMMITTEE


 Demand must be actual; joining the
guarantor in the suit against the principal Guarantor’s Right of Indemnity or Reimbursement (Art
debtor is not the demand intended by law 2066)
9. Where the pledge or mortgage has been given by GENERAL RULE: Guaranty is a contract of indemnity.
him as special security The guarantor who makes payment is entitled to be
reimbursed by the principal debtor.
Benefit of Division (Art 2065)
 Should there be several guarantors of only one NOTE: The indemnity consists of: (DIED)
debtor and for the same debt, the obligation to 1. Total amount of the debt – no right to demand
answer for the same is divided among all. reimbursement until he has actually paid the
 Liability: Joint debt, unless by the terms of the contract, he is
given the right before making payment. He
NOTES: cannot collect more than what he has paid.
 The creditor can claim from the guarantors only 2. Legal interest thereon from the time the
the shares they are respectively bound to pay payment was made known (notice of payment in
except when solidarity is stipulated or if any of effect a demand so that if the debtor does not
the circumstances enumerated in Article 2059 pay immediately, he incurs in delay) to the
should take place. debtor, even though it did not earn interest for
 The right of contribution of guarantors who pays the creditor. Guarantor’s right to legal interest
is granted by law by virtue of the payment he has
requires that the payment must have been made
made.
(a) in virtue of a judicial demand, or (b) because
3. Expenses incurred by the guarantor after having
the principal debtor is insolvent (Art 2073).
notified the debtor that payment has been
 If any of the guarantors should be insolvent, his demanded of him by the creditor; only those
share shall be borne by the others including the expenses that the guarantor has to satisfy in
paying guarantor in the same joint proportion accordance with law as a consequence of the
following the rule in solidary obligations. guaranty (Art. 2055) not those which depend
 The above rule shall not be applicable unless the upon his will or own acts or his fault for these are
payment has been made in virtue of a judicial his exclusive personal responsibility and it is not
demand or unless the principal debtor is just that they be shouldered by the debtor.
insolvent. 4. Damages if they are due in accordance
 The right to contribution or reimbursement from with law. General rules on damages apply.
his co-guarantors is acquired ipso jure by virtue
of said payment without the need of obtaining EXCEPTIONS:
from the creditor any prior cession of rights to 1. Where the guaranty is constituted without the
such guarantor. knowledge or against the will of the principal
 The co-guarantors may set up against the one debtor, the guarantor can recover only insofar as
who paid, the same defenses which have the payment had been beneficial to the debtor
pertained to the principal debtor against the (Art. 2050).
creditor and which are not purely personal to the 2. Payment by a third person who does not intend
debtor. (Art 2074) to be reimbursed by the debtor is deemed to be
a donation, which, however, requires the
Procedure when creditor sues: (Art. 2062) debtor’s consent. But the payment is in any case
 The creditor must sue the principal alone; the valid as to the creditor who has accepted it (Art.
guarantor cannot be sued with his principal, 1238).
much less alone except in Art. 2059. 3. Waiver of the right to demand reimbursement.
1. Notice to guarantor of the action Guarantor’s right to Subrogation (ART.2067)

 The guarantor must be NOTIFIED so that he  Subrogation transfers to the person subrogated, the
may appear, if he so desires, and set up credit with all the rights thereto appertaining either
defenses he may want to offer. against the debtor or against third persons, be they
 If the guarantor appears, he is still given the guarantors or possessors of mortgages, subject to
benefit of exhaustion even if judgment should stipulation in conventional subrogation.
be rendered against him and principal debtor.
His voluntary appearance does not constitute NOTE: This right of subrogation is necessary to enable
a renunciation of his right to excussion (see the guarantor to enforce the indemnity given in Art.
Art. 2059(1)). 2066.
 Guarantor cannot set up the defenses if he  It arises by operation of law upon payment by the
does not appear and it may no longer be guarantor. It is not necessary that the creditor cede
possible for him to question the validity of to the guarantor the former’s rights against the
the judgment rendered against the debtor. debtor.
2. A guarantor is entitled to be heard before and  It is not a contractual right. The right of guarantor
execution can be issued against him where he is who has paid a debt to subrogation does not stand
not a party in the case involving his principal upon contract but upon the principles of natural
(procedural due process). justice.
CIVIL LAW COMMITTEE

 The guarantor is subrogated by virtue of the Gives a right of Protective remedy
payment to the rights of the creditor, not those action after payment before payment.
of the debtor. Substantive right Preliminary remedy
 Guarantor cannot exercise the right of
Extinguishment of guaranty: (RA2CE2)
redemption of his principal (Urrutia & Co vs
1. Release in favor of one of the guarantors, without
Morena and Reyes, 28 Phil 261)
the consent of the others, benefits all to the extent
of the share of the guarantor to whom it has been
Effect of Payment by Guarantor
granted (Art 2078);
1. Without notice to debtor: (Art 2068)
2. If the creditor voluntarily accepts immovable or
 The debtor may interpose against the other properties in payment of the debt, even if he
guarantor those defenses which he could have should afterwards lose the same through eviction or
set up against the creditor at the time the conveyance of property (Art 2077);
payment was made, e.g. the debtor can set 3. Whenever by some act of the creditor, the
up against the guarantor the defense of guarantors even though they are solidarily liable
previous extinguishment of the obligation by cannot be subrogated to the rights, mortgages and
payment. preferences of the former (Art 2080);
4. For the same causes as all other obligations (Art
2. Before Maturity (Art 2069) 1231);
 Not entitled to reimbursement unless the 5. When the principal obligation is extinguished;
payment was made with the consent or has 6. Extension granted to the debtor by the creditor
been ratified by the debtor without the consent of the guarantor (Art 2079)
Effect of Repeat Payment by debtor: (Art 2070) BOND

GENERAL RULE: Before guarantor pays the creditor,  An undertaking that is sufficiently secured, and not
he must first notify the debtor (Art. 2068). If he fails cash or currency
to give such notice and the debtor repeats payment,
the guarantor can only collect from the creditor and Bondsman (Art 2082)
guarantor has no cause of action against the debtor  A surety offered in virtue of a provision of law or a
for the return of the amount paid by guarantor even judicial order. He must have the qualifications
if the creditor should become insolvent. required of a guarantor and in special laws like the
Rules of Court.
EXCEPTION: The guarantor can still claim
reimbursement from the debtor in spite of lack of NOTES:
notice if the following conditions are present: (PIG)  Judicial bonds constitute merely a special class of
a. guarantor was prevented by fortuitous event contracts of guaranty by the fact that they are given
to advise the debtor of the payment; and “in virtue… of a judicial order.”
b. the creditor becomes insolvent;
c. the guaranty is gratuitous.
 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 admitted in
Right of Guarantor to proceed against debtor
lieu thereof (Art 2083)
before payment
GENERAL RULE: Guarantor has no cause of action  A judicial bondsman and the sub-surety are NOT
against debtor until after the former has paid the entitled to the benefit of excussion because they are
obligation not mere guarantors, but sureties whose liability is
EXCEPTION: Article 2071 primary and solidary. (Art 2084)
NOTES: PLEDGE, MORTGAGE AND ANTICHRESIS

I. Common Elements of Pledge, Mortgage, and
 Article 2071 is applicable and available to the
Antichresis (Articles 2085 – 2092)
surety. (Manila Surety & Fidelity Co., Inc. vs Batu
Construction & Co., 101 Phil 494)
A. Essential Requisites (SOD) (Art 2085)
 Remedy of guarantor: 1. Secures the fulfillment of a principal obligation;
(a) obtain release from the guaranty; or 2. Pledgor, mortgagor, antichretic debtor must be the
(b) demand a security that shall protect him absolute owner of the thing pledged or mortgaged;
from any proceedings by the creditor, and and
against the danger of insolvency of the  The reason being that in anticipation of a
debtor possible foreclosure sale in case of default which
is still a sale, the rule is that the seller must be
Art. 2066 Art. 2071 the owner of the thing sold (Cavite Development
Provides for the Provides for his Bank vs. Lim, 324 SCRA 346)
enforcement of the protection before he
rights of the has paid but after he
3. Pledgor, mortgagor, antichretic debtor must have
guarantor/surety has become liable free disposal of their property, or be legally
against the debtor authorized for such purpose.
after he has paid the
debt NOTES:
CIVIL LAW COMMITTEE


 Third persons can pledge or mortgage their own 1. Single thing – Every portion of the property pledged
property to secure the principal obligation. or mortgaged is answerable for the whole obligation
 It is not necessarily void simply because the 2. Several things – All of the several things pledged or
accommodation pledgor or mortgagor did not mortgaged are liable for the totality of the debt
benefit from the same. So long as valid consent 3. Debtor’s heir/creditor’s heir - Neither the debtor’s
was given, the fact that the loan was given solely heir who has paid part of the debt cannot ask for
for the benefit of the principal debtor would not proportionate extinguishment, nor creditor’s heir
invalidate the mortgage (GSIS vs CA, 170 SCRA who received his share of the debt return the pledge
533) or cancel the mortgage as long as the debt is not
 The accommodation pledgor or mortgagor, completely satisfied.
without expressly assuming personal liability for
EXCEPTIONS:
such debt, is not liable for the payment of any
1. Where each one of several things guarantees a
deficiency, should the property not be sufficient
determinate portion of the credit
to cover the debt (Bank of America vs. American
2. Where only a portion of the loan was released
Realty Corporation, 321 SCRA 659).
3. Where there was failure of consideration.
 The accommodation pledgor or mortgagor is not
4. Where there is no debtor-creditor relationship
solidarily bound with the principal obligor but his
liability extents only to the property pledged or NOTES:
mortgaged. Should there be any deficiency, the
creditor has recourse on the principal debtor who
 The mere embodiment of a real estate mortgage and
a chattel mortgage in one document does not have
remains to be primarily bound.
the effect of fusing both securities into an indivisible
 The law grants to the accommodation pledgor or
whole.
mortgagor the same rights as a guarantor and he
cannot be prejudiced by any waiver of defense by
 The mortgagee, therefore, may legally foreclose the
real estate mortgage extrajudicially and waive the
the principal debtor.
chattel mortgage foreclosure, and maintain instead a
personal action for the recovery of the unpaid
B. Prohibition against Pactum Commissorium (Art
balance of the credit (Phil. Bank of Commerce vs.
2088; 2137)
Macadaeg, 109 Phil 981)
Pactum Commissorium
E. When the principal obligation becomes due, the
 Stipulation whereby the thing pledged or
things in which the pledge, mortgage, or
mortgaged, or under antichresis shall
antichresis consists may be alienated for the
automatically become the property of the
payment to the creditor. (Art. 2087)
creditor in the event of non-payment of the debt
within the term fixed.
NOTES:
Requisites:  If the debtor fails to comply with the obligation at
1. There should be a pledge, mortgage, or the time it falls due, the creditor is merely entitled
antichresis of property by way of security for the to move for the sale of the thing pledged or
payment of the principal obligation; and mortgaged in order to collect the amount of his claim
2. There should be a stipulation for an automatic from the proceeds.
appropriation by the creditor of the property in  If he wishes to secure a title to the mortgaged
event of nonpayment of the obligation within the property, he can buy it in the foreclosure sale
stipulated period. (Montevirgin vs. CA, 112 SCRA 641)
GENERAL RULE: Pactum Commissorium is forbidden F. Pledgor, mortgagor, antichretic debtor retains
by law and is declared null and void. ownership of the thing given as a security
EXCEPTION: The pledgee may appropriate the thing
pledged if after the first and second auctions, the PLEDGE (Arts 2093 – 2123)
thing is not sold. (Art 2112)
 A contract wherein the debtor delivers to the
NOTE: The security contract remains valid; only creditor or to a third person a movable or document
the prohibited stipulation is void. evidencing incorporeal rights for the purpose of
C. Capability to secure all kinds of obligations, securing fulfilment of a principal obligation with the
i.e. pure or conditional (Art 2091) understanding that when the obligation is fulfilled,
the thing delivered shall be returned with all its
D. Indivisibility (Art 2089) fruits and accessions.
GENERAL RULE: A pledge, mortgage, or antichresis
is indivisible, even though the debt may be divided  Special Requisites (in addition to the common
among the successors in interest of the debtor or of essential requisites):
the creditor. 1. Possession of the thing pledged must be transferred
 Their indivisibility is not affected by the fact that to the creditor or a third person by agreement (Art
the debtors are jointly or not solidarily liable. 2093);
2. It can only cover movable property and incorporeal
Consequences of indivisibility: rights evidenced by documents of title and the
CIVIL LAW COMMITTEE

instruments proving the right pledged shall be without the pledgee’s the return of the
delivered to the creditor, and if negotiable must fault, subject to the thing until after
be endorsed (Art 2094); and duty of replacement full payment of
3. The description of the thing pledged and the (Art 2107) the debt,
2. To bid and be including interest
date must appear in a public instrument to bind
preferred at the public due thereon and
third persons, but not for the validity of the auction (Art 2113) expenses incurred
contract (Art 2096). 3. To alienate the thing for its
pledged provided the preservation (Art
 Kinds: pledgee consents to the 2105)
1. Conventional /Voluntary – created by contract sale (Art 2097)
2. Legal – created by operation of law (examples: 4. To ask that the thing
Art. 546, 1731 and 1914 NCC) pledged be deposited
(Arts 2104 & 2106)
NOTES:
 The provisions of possession, care and sale of the Rights of the Pledgee
KEY: D SBC BA2R2OPS2
thing as well as on the termination of the pledge
1. Option to demand replacement or immediate
governing conventional pledges are applicable to
payment of the debt in case of deception as to substance
pledges created by operation of law (Art 2121)
or quality (Art 2109)
 Unlike, however, in conventional pledge where 2. To sell at public auction in case of reasonable
the debtor is not entitled to the excess unless it grounds to fear destruction or impairment of the thing
is otherwise agreed, in legal pledge, the without his fault (Art 2108)
remainder of the price of the sale after payment 3. To bring actions pertaining to the owner (Art 2103)
of the debt and expenses, shall be delivered to 4. To choose which of several things pledged shall be
the debtor. sold
 In legal pledge, there is no definite period for the 5. To bid at the public auction (Art 2113)
payment of the principal obligation. The pledgee 6. To appropriate the thing in case of failure of the 2 nd
must make a demand for the payment of the public auction (Art 2112)
amount due him; otherwise he cannot exercise 7. To apply said fruits, interests or earnings to the
the right of sale at public auction (Art 2122) interest, if any, then to the principal of the credit (Art
2102)
Characteristics: 8. To retain excess value received in the public sale
1. Real contract – it is (Art 2115)
perfected by the delivery of the thing pledged 9. To retain the thing until after full payment of the
by the debtor who is called the pledgor to the debt (Art 2098)
creditor who is called the pledgee, or to a third 10. To be reimbursed for the expenses made for the
person by common agreement; preservation of the thing pledged (Art 2099)
2. Accessory contract – 11. To object to the alienation of the thing
it has no independent existence of its own; 12. To possess the thing (Art 2098)
3. Unilateral contract – 13. To sell at public auction in case of non-payment of
it creates an obligation solely on the part of the debt at maturity (Art 2112)
creditor to return the thing subject thereof upon To choose which of the several things pledged shall be
the fulfilment of the principal obligation; and sold (Art 2119)
4. Subsidiary contract – 14. Option to demand replacement or immediate
the obligation incurred does not arise until the payment of the debt in case of deception as to substance
fulfilment of the principal obligation which is or quality (Art 2109)
secured. 15. To sell at public auction in case of reasonable
grounds to fear destruction or impairment of the thing
Consideration in pledge: without his fault (Art 2108)
 Insofar as the pledgor is concerned, the cause is 16. To bring actions pertaining to the owner (Art 2103)
the principal obligation. 17. To choose which of several things pledged shall be
 If the pledgor is not the debtor, the cause is the sold
compensation stipulated for the pledge or the 18. To bid at the public auction (Art 2113)
mere liberality of the pledgor. 19. To appropriate the thing in case of failure of the 2 nd
public auction (Art 2112)
Extent of pledge: Unless stipulated otherwise, 20. To apply said fruits, interests or earnings to the
pledge extends to the fruits, interests or earnings of interest, if any, then to the principal of the credit (Art
the thing. 2102)
21. To retain excess value received
Rights and Obligations of a Pledgor in the public sale (Art 2115)
Rights Obligations 22. To retain the thing until after full payment of the
1. To demand return in 1. To advise the debt (Art 2098)
case of reasonable pledgee of the 23. To be reimbursed for the expenses made for the
grounds to fear flaws of the thing preservation of the thing pledged (Art 2099)
destruction or (Art 2101) 24. To object to the alienation of the thing
impairment of the thing 2. Not to demand 25. To possess the thing (Art 2098)
CIVIL LAW COMMITTEE

26. To sell at public auction in case of non-payment 3. there must be notice to the pledgor and owner,
of debt at maturity (Art 2112) stating the amount due
27. To choose which of the several things pledged 4. Sale must be with the intervention of a notary public
shall be sold (Art 2119)
Effect of sale of the thing pledged: (Art 2115)
Obligations of the Pledgee 1. The sale of the thing pledged shall extinguish the
KEY: CUDA3 principal obligation, whether or not the proceeds of
1. Take care of the thing with the diligence of a good the sale are equal to the amount of the principal
father of a family (Art 2099) obligation, interest and expenses in a proper case
2. Not to use thing unless authorized or by the owner 2. If the price of the sale is more than the amount due
or its preservation requires its use (Art 2104) the creditor, the debtor is not entitled to the excess
3. Not to deposit the thing with a 3 rd person unless so unless the contrary is provided
stipulated (Art 2100) 3. If the price of the sale is less, the creditor is not
4. Responsibility for acts of agents and employees as entitled to recover the deficiency even if there is a
regards the thing (Art 2100) stipulation to that effect
5. To advise pledgor of danger to the thing (Art 2107)
6. To advise pledgor of the result of the public REAL ESTATE MORTGAGE (Articles 2124-2131)
auction (Art 2116)
 A contract whereby the debtor secures to the
RIGHT OF PLEDGOR TO SUBSTITUTE THING creditor the fulfilment of a principal obligation,
PLEDGED (ART.2107) specially subjecting to such security immovable
 Requisites: property or real rights over immovable property in
1. The pledgor has reasonable grounds to fear case the principal obligation is not complied with at
the destruction or impairment of the thin the time stipulated.
pledged
2. There is no fault on the part of the pledgee Characteristics of the contract:
3. The pledgor is offering in place of the thing, 1. Real
another thing in pledge which is of the same 2. Accessory
kind and quality as the former 3. Subsidiary
4. The pledge does not choose to exercise his 4. Unilateral – it creates only an obligation on the
right to cause the thing pledged to be sold at part of the creditor who must free the property
public auction from the encumbrance once the obligation is
NOTE: The pledgee’s right to have the thing pledged fulfilled.
sold at public sale granted under the Article 2108 is
superior to that given to the pledgor to substitute the
thing pledged under Article 2107.
NOTES:
Prohibition against double pledge  As an accessory contract, its consideration is that of
 Property which has been lawfully pledged to one the principal contract from which it receives life.
creditor cannot be pledged to another as long as  A mortgage does not involve a transfer, cession or
the first one subsists. conveyance of property but only constitutes a lien
NOTE: Possession of a creditor of the thing pledged is thereon. Until discharged, it follows the property
an essential requisite of pledge. wherever it goes and subsists notwithstanding
changes of ownership.
Extinguishment of Pledge (CRAPS)  A mortgage gives the mortgagee no right or claim to
1. For the same causes as all other obligations (Art
the possession of the property, and therefore, a
1231)
mere mortgagee has no right to eject an occupant of
2. Return of the thing pledged by the pledgee to
the property mortgaged unless the mortgage should
the pledgor (Art 2110)
contain some provision to that effect. The only right
3. Statement in writing by the pledgee that he
of a mortgagee in case of non-payment of a debt
renounces or abandons the pledge (Art 2111)
secured by mortgage would be to foreclose the
4. Payment of the debt (Art 2105)
mortgage and have the encumbered property sold to
5. Sale of thing pledged at public auction (Art
satisfy the outstanding indebtedness. If the
2115)
possession is transferred to the mortgagee, it must
NOTE: The possession by the debtor or owner of the
not expressly be for purpose of applying the fruits to
thing pledged subsequent to the perfection of the
the interest then to the principal of the credit, for
pledge gives rise to a prima facie presumption that
then it would be an antichresis.
the thing has been returned and, therefore, that the
pledge has been extinguished but not the principal
 It is not an essential requisite that the principal of
obligation itself. (Art 2110) the mortgage credit bears interest, or that the
interest as compensation for the use of the principal
Requirements for sale of thing pledged at public and enjoyment of its fruits be in the form of a
auction: (Art 2112) certain percent thereof.
1. The debt is due and unpaid
2. Sale must be at a public auction  Special Requisites (in addition to the common
essential requisites):
CIVIL LAW COMMITTEE

1. It can cover only immovable property and subjecting to the mortgage lien, properties
alienable real rights imposed upon immovables (improvements) which the mortgagor may
(Art 2124); subsequently acquire install, or use in connection
2. It must appear in a public instrument (Art. 2125); with real property already mortgaged belonging to
and the mortgagor is valid (People’s Bank and Trust Co.
3. Registration in the registry of property is vs. Dahican Lumber Co., 20 SCRA 84)
necessary to bind third persons, but not for the
validity of the contract (Art 2125). Special Rights:
 An order for foreclosure cannot be refused on 1. Mortgagor - To alienate the mortgaged property but
the ground that the mortgage had not been the mortgage shall remain attached to the property.
registered provided no innocent third parties
are involved. NOTE: A stipulation forbidding the owner from alienating
NOTE: Where a mortgage is not valid or false, the the immovable mortgage shall be void (Art 2130) being
principal obligation which it guarantees is not contrary to public policy inasmuch as the transmission of
rendered null and void. What is lost only is the right property should not be unduly impeded.
to foreclose the mortgage as a special remedy for
satisfying or settling the indebtedness which is the 2. Mortgagee - To claim from a 3rd person in possession
principal obligation but the mortgage deed remains of the mortgaged property the payment of the part
as evidence or proof of a personal obligation of the of the credit secured by the which said third person
debtor and the amount due to the creditor may be possesses (Art 2129)
enforced in an ordinary personal action. NOTE: It is necessary that prior demand for payment
must have been made on the debtor and the latter failed
 Kinds: to pay (BPI vs Concepcion & Hijos, Inc., 53 Phil 906)
1. Voluntary – agreed to by the parties or
constituted by the will of the owner of the Foreclosure
property on which it is created  The remedy available to the mortgagee by which he
2. Legal – one required by law to be executed in subjects the mortgaged property to the satisfaction
favour of certain persons of the obligation to secure that for which the
 The persons in whose favour the law mortgage was given
establishes a mortgage have no other right
than to demand the execution and the NOTES:
recording of the document in which the  It denotes the procedure adopted by the mortgagee
mortgage is formalized (Art 2125 par 2) to terminate the rights of the mortgagor on the
3. Equitable – one which, although lacking the property and includes the sale itself (DBP vs
formalities of a mortgage, shows the intention of Zaragoza, 84 SCRA 668)
the parties to make the property a security for a  Foreclosure is valid where the debtor is in default in
debt the payment of his obligation (Gobonseng, Jr. vs CA,
246 SCRA 472)
PLEDGE REAL MORTGAGE
1. Constituted on 1. Constituted on  Kinds:
movables immovables 1. Judicial – ordinary action for foreclosure under Rule
2. Property is 2. Delivery is not
68 of the Rules of Court
delivered to pledgee necessary
or by common 2. Extrajudicial – when mortgagee is given a special
consent to a third power of attorney to sell the mortgaged property by
person public auction, under Act No. 3135
3. Not valid against 3. Not valid against
third persons unless a third persons unless Judicial Extrajudicial
description of the registered foreclosure foreclosure
thing pledged and 1. There is court 1. No court
date of pledge intervention intervention
appear in a public 2. Decisions are 2. Not appealable
instrument appealable because it is
immediately
Extent of Mortgage: executory
 Absent express stipulation to the contrary, the 3. Order of court 3. Foreclosure does
mortgage includes the accessions, improvements, cuts off all rights of not cut off right of
growing fruits and income of the property not yet the parties all parties involved
received when the obligation becomes due and to impleaded
4. There is equity 4. There is right of
the amount of the indemnity granted or owing to
of redemption redemption
the proprietor from the insurers of the property except on banks
mortgaged, or in virtue of expropriation for which provides for
public use (Art 2127) a right of
redemption
Object of Mortgage: 5. Period of 5. Period to redeem
 Future property cannot be an object of a contract redemption starts start from date of
of mortgage (Art 2085[2]) However, a stipulation from the finality of registration of
CIVIL LAW COMMITTEE

the judgment until certificate of sale the place within said province in which the sale is to
order of be made is the subject of stipulation, such sale shall
confirmation be made in the said place in the municipal building
6. No need for a 6. Special power of of the municipality in which the property or part
special power of attorney in favor of
thereof is situated.
attorney in the mortgagee is
contract of needed in the
mortgage contract Procedure for extrajudicial foreclosure of both real
estate mortgage under Act No. 3135 and chattel
NOTES: mortgage under Act No. 1508 (A.M. No. 99-10-05-0,
January 15, 2000)
 A foreclosure sale retroacts to the date of
1. Filing of application before the Executive Judge
registration of the mortgage and that a person
through the Clerk of Court
who takes a mortgage in good faith and for
2. Clerk of Court will examine whether the requirement
valuable consideration, the record showing clear
of the law have been complied with, that is, whether
title to the mortgagor, will be protected against
the notice of sale has been posted for not less than
equitable claims on the title in favor of third
20 days in at least three (3) public places of the
persons, of which he had no actual or
municipality or city where the property is situated,
constructive notice (St. Dominic Corporation vs.
and if the same is worth more than P400.00, that
IAC 151 SCRA 577).
such notice has been published once a week for at
 Where there is a right to redeem, inadequacy of least three (3) consecutive weeks in a newspaper of
price is not material because the judgment general circulation in the city of municipality
debtor may reacquire the property or else sell his 3. The certificate of sale must be approved by the
right to redeem and thus recover any loss he Executive Judge
claims to have suffered by reason of the price 4. Where the application concerns extrajudicial
obtained at the auction sale and consequently foreclosure of real mortgages in different locations
not sufficient to set aside the sale. Mere covering one indebtedness, only one filing fee
inadequacy of the price obtained at the sheriff’s corresponding to such debt shall be collected
sale will not be sufficient to set aside the sale 5. The Clerk of Court shall issue certificate of payment
unless “the price is so inadequate as to shock the indicating the amount of indebtedness, the filing fees
conscience of the court” taking into consideration collected, the mortgages sought to be foreclosed,
the peculiar circumstances attendant thereto. the description of the real estates and their
(Sulit vs. CA, 268 SCRA 441) respective locations
 Should there remain a balance due to the 6. The notice of sale shall be published in a newspaper
mortgagee after applying the proceeds of the of general circulation pursuant to Section 1, PD No.
sale, the mortgagee is entitled to recover the 1079
deficiency. This rule applies both to judicial and 7. The application of shall be raffled among all sheriffs
extra-judicial foreclosure real mortgage. 8. After the redemption period has expired, the Clerk of
 The action to recover a deficiency after Court shall archive the records.
foreclosure prescribes after 10 years from the 9. No auction sale shall be held unless there are at least
time the right of action accrues (Arts 1142 & two (2) participating bidders, otherwise the sale shall
1144). be postponed to another date. If on the new date
set forth for the sale there shall not be at least two
Stipulation of upset price or “tipo” bidders, the sale shall then proceed. The names of
 It is a stipulation in a mortgage of real property the bidders shall be reported to the Sheriff of the
of minimum price at which the property shall be Notary Public, who conducted the sale to the Clerk of
sold, to become operative in the event of a Court before the issuance of the certificate of sale.
foreclosure sale at public auction. It is null and
void for the property must be sold to the highest NOTES:
bidder. Parties cannot, by agreement, contravene  The Mortgagor and Mortgagee have no right to waive
the law and interfere with the lawful procedure the posting and publication requirements under Act.
of the courts (BPI vs Yulo, 31 Phil 476) No. 3135. Notices are given to secure bidders and
prevent a sacrifice of the property. Clearly, the
Extrajudicial foreclosure real property (Act No. statutory requirements of posting and publication are
3135) mandated, not for the mortgagor’s benefit, but for
 The law covers only real estate mortgages. It is the public or third persons. Failure to comply with
intended merely to regulate the extrajudicial sale the statutory requirements as to publication of
of the property mortgaged if and when the notice of auction sale constitutes a jurisdictional
mortgagee is given a special power of express defect which invalidates the sale.Lack of
authority to do so in the deed itself or in a republication of notice of foreclosure sale made
document annexed thereto. subsequently after the original date renders such sale
 The authority to sell is not extinguished by the void (PNB vs. Nepomuceno Productions Inc., G.R. No.
death of the mortgagor (or mortgagee) as it is an 139479. December 27, 2002).
essential and inseparable part of a bilateral  Sec 3 of Act 3135 does not require personal or any
agreement (Perez vs PNB, 17 SCRA 833). particular notice on the mortgagor much less on his
 No sale can be legally made outside the province successors-in-interest where there is no contractual
in which the property sold is situated; and in case
CIVIL LAW COMMITTEE

stipulation therefor. Hence, unless required in 2. Judicial – before confirmation of the sale by the
the mortgage contract, the lack of such notice is court
not a ground to set aside a foreclosure sale.
 Neither does Sec 3 require posting of notice of NOTE: Allowing a redemption after the lapse of the
sale on the mortgage property and the certificate statutory period, when the buyer at the foreclosure sale
of posting is not required, much less considered does not object but even consents to the redemption,
indispensable, for the validity of a foreclosure will uphold the policy of the law which is to aid rather
sale. than defeat the right of redemption. There is nothing in
the law which prevents a waiver of the statutory period
for redemption (Ramirez vs CA, 219 SCRA 598).
Redemption
 It is the transaction by which the mortgagor Amount of the redemption price:
reacquires or buys back the property which may 1. Mortgagee is not a bank (Act No. 3135, in relation to
have passed under the mortgage, or divests the Sec. 28, Rule 39 of Rules of Court)
property of the lien which the mortgage may a. purchase price of the property
have created. b. 1% interest per month on the purchase price
c. taxes paid and amount of purchaser’s prior lien,
NOTES: if any, with the same rate of interest computed
 A sale by the mortgagor to a third party of the from the date of registration of sale, up to the
mortgaged property during the period for time of redemption
redemption transfers only the right to redeem 2. Mortgagee is a bank (GBL 2000)
the property and the right to possess, use and a. amount due under the mortgage deed
enjoy the same during said period. b. interest
 Where sale with assumption of mortgage not c. cost and expenses
NOTE: Redemption price in this case is reduced by
registered and made without the consent of the
the income received from the property
mortgagee, the buyer, thereof, was not validly
substituted as debtor and, hence, had no right to
redeem (Bonnevie vs. CA, 125 SCRA 122).
 Kinds:
1. Equity of Redemption – right of mortgagor to
redeem the mortgaged property after his default
in the performance of the conditions of the
ANTICHRESIS (Articles 2132 -2139)
mortgage within the 90-day period from the date
of the service of the order of foreclosure or even
 A contract whereby the creditor acquires the right to
thereafter but before the confirmation of the
receive the fruits of an immovable of the debtor,
sale. Applies to judicial foreclosure of real
with the obligation to apply them to the payment of
mortgage and chattel mortgage foreclosure.
the interest, if owing, and thereafter to the principal
of his credit (Art 2132)
NOTE: Redemption of the banking institutions is
allowed within one year from confirmation of sale.
Characteristics
1. Accessory contract – it secures the performance of a
2. Right of Redemption – right of mortgagor to
principal obligation
redeem the mortgaged property within one year
2. Formal contract – it must be in a specified form to be
from the date of registration of the certificate of
valid, i.e., “in writing.” (Art 2134)
sale. Applies only to extrajudicial foreclosure of
real mortgage.
 Special Requisites (in addition to the common
essential requisites):
NOTE: The right of redemption, as long as within the
1. It can cover only the fruits of an immovable
period prescribed, may be exercised irrespective of
property; (Art 2132)
whether or not the mortgagee has subsequently
2. Delivery of the immovable is necessary for the
conveyed the property to some other party (Sta.
creditor to receive the fruits and not that the
Ignacia Rural Bank, Inc. vs. CA, 230 SCRA 513)
contract shall be binding;
3. Amount of principal and interest must be specified in
Period of Redemption
writing (Art. 2134); and
1. Extra-judicial (Act #3135)
4. Express agreement that debtor will give possession of
a. natural person – one year from registration of
the property to creditor and that the latter will apply
the certificate of sale with Registry of Deeds
the fruits to the interest, if any, then to the principal
b. juridical person – same rule as natural person
of his credit. (Art 2132)
c. juridical person (mortgagee is bank) - three
months after foreclosure or before
NOTE: The obligation to pay interest is not of the
registration of certificate of foreclosure
essence of the contract of antichresis, there being
which ever is earlier (sec. 47, of General
nothing in the Code to show that antichresis is only
Banking Law)
applicable to securing the payment of interest-bearing
loans. On the contrary, antichresis is susceptible of
CIVIL LAW COMMITTEE

guaranteeing all kinds of obligations, pure or NOTES:
conditional
Section III.1 The parties, however, may agree
on an extrajudicial foreclosure in the same manner as
Antichresis Pledge
1. Refers to real 1. Refers to personal
they are allowed in contracts of mortgage and pledge
property property (Tavera vs. El Hogar Filipino, Inc., 68 Phil 712).
2. Perfected by mere 2. Perfected by Section III.2A stipulation authorizing the antichretic
consent delivery of the thing creditor to appropriate the property upon the non-
pledged payment of the debt within the agreed period is void (Art
3. Consensual contract 3. Real Contract 2088).
CHATTEL MORTGAGE (Articles 2140-2141)
 A contract by virtue of which personal property is

Antichresis Real Mortgage recorded in the Chattel Mortgage Register as a
1. Property is 1. Debtor usually security for the performance of an obligation (Art
delivered to creditor retains possession of 2140).
the property
2. Creditor acquires 2. Creditor does not Characteristics
only the right to have any right to 1. Accessory contract – it is for the purpose of securing
receive the fruits of receive the fruits;
the performance of a principal obligation
the property, hence, but the mortgage
it does not produce a creates a real right 2. Formal contract – registration in the Chattel
real right over the property Mortgage Register is indispensable for its validity
3. The creditor, 3. The creditor has 3. Unilateral contract – it produces only obligations on
unless there is no such obligation the part of the creditor to free the thing from the
stipulation to the encumbrance on fulfilment of the obligation.
contrary, is obliged
to pay the taxes and  Special Requisites (in addition to the common
charges upon the essential requisites):
estate 1. It can cover only personal or movable property in
4. It is expressly 4. There is no such
general; however, the parties may treat as personal
stipulated that the obligation on part of
creditor given mortgagee property that which by its nature would be real
possession of the property;
property shall apply 2. Registration of the mortgage with the Chattel
all the fruits thereof Mortgage Register where the mortgagor resides; if
to the payment of property is located in a different province,
interest, if owing, registration in both provinces required;
and thereafter to the 3. Description of the property as would enable the
principal parties or other persons to identify the same after
Subject matter of both is real property reasonable investigation and inquiry; and
4. Accompanied by an affidavit of good faith to bind
Obligations of antichretic creditor: third persons, but not for the validity of the
1 To pay taxes and charges on the estate, including contract.
necessary expenses 5. It can cover only obligations existing at the time the
NOTE: Creditor may avoid said obligation by: mortgage is constituted.
a. compelling debtor to reacquire NOTE: A mortgage containing a stipulation in regard
enjoyment of the property or to future advances in the credit will take effect only
b. by stipulation to the contrary from the date the same are made and not from the
2 To apply all the fruits, after receiving them, to date of the mortgage (Jaca vs Davao Lumber Co.,
the payment of interest, if owing, and thereafter 113 SCRA 107)
to the principal
3 To render an account of the fruits to the debtor Effect of registration: Creates a real right
4 To bear the expenses necessary for its  The registration of the chattel mortgage is an
preservation and repair effective and binding notice to other creditors of its
existence and creates a real right or a lien which,
Remedies of creditor in case of non-payment of being recorded, follows the chattel wherever it goes.
debt The registration gives the mortgagee symbolical
possession (Northern Motors, Inc. vs. Coquia, 68
Article II. Bring an action for specific SCRA 374).
performance; or
Article III. Petition for the sale of the real Effect of failure to register chattel mortgage in the
property as in a foreclosure of mortgages under Rule chattel mortgage registry
68 of the Rules of Court.(Art 2137)  Article 2140 makes the recording in the Chattel
Mortgage Register an essential requisite but if the
instrument is not recorded, the mortgage is
nevertheless binding between the parties. But the
CIVIL LAW COMMITTEE

person in whose favour the law establishes a longer available to the mortgagor (Cabral vs.
mortgage has no other right than to demand the Evangelista, 28 SCRA 1000).
execution and the recording of the document.
Application of proceed of sale:
1. Costs and expenses of keeping and sale
Chattel Mortgage Pledge 2. Payment of the obligation secured by the
1. Delivery of the 1. Delivery of the mortgage
personal property thing pledged is 3. Claims of persons holding subsequent mortgages
to the mortgage is necessary in their order
not necessary 4. The balance, if any, shall be paid to the
2. registration in 2. registration not mortgagor or person holding under him
the Chattel necessary to be
Mortgage Registry valid NOTES:
is necessary for its  The creditor may maintain an action for the
validity deficiency, except if the chattel mortgage is
3. If property is 3. Debtor is not constituted as security for the purchase of personal
foreclosed, the entitled to excess property payable in instalments (Art. 1484).
excess over the unless otherwise  The action for deficiency may be brought within ten
amount due goes to agreed or except in (10) years from the time the cause of action accrues
the debtor case of legal (Arts 1141 and 1142).
pledge  Only equity of redemption is available to the
4. If there is 4. If there is mortgagor; the latter can no longer redeem after the
deficiency after deficiency, creditor confirmation of the foreclosure sale.
foreclosure, is not entitled to
creditor is entitled recover Right of redemption
to recover the notwithstanding  When the condition of a chattel mortgage is broken
deficiency from the any stipulation to the following may redeem:
debtor, except the contrary a) mortgagor;
under Art. 1484 b) person holding a subsequent mortgage; or
Subject matter of both is movable c) subsequent attaching creditor.
property
 An attaching creditor who so redeems shall be
subrogated to the rights of the mortgagee and
Affidavit of Good Faith entitled to foreclose the mortgage in the same
 Oath in a contract of chattel mortgage wherein manner that the mortgagee could foreclose it.
the parties "severally swear that the mortgage is
made for the purpose of securing the obligation
 The redemption is made by paying or delivering to
specified in the conditions thereof and for no the mortgagee the amount due on such mortgage and
other purposes and that the same is a just and the costs, and expenses incurred by such breach of
valid obligation and one not entered into for the condition before the sale thereof (Sec 13, Act No.
purpose of fraud.” (Sec. 5, Chattel Mortgage Law) 1508).
Effect of absence Right to possession of foreclosed property

The special affidavit is required only for the 1. Real mortgage – After the redemption period has
purpose of transforming an already valid expired, the purchaser of the property has the right
mortgage into “preferred mortgage.” Thus, it is to a conveyance and to be placed in possession
not necessary for the validity of the chattel thereof.
mortgage itself but only to give it a preferred
status. In other words, its absence vitiates the NOTES:
mortgage only as against third persons without  Purchaser is not obliged to bring a separate suit
notice like creditors and subsequent for possession. He must invoke the aid of the
encumbrancers. courts and ask for a WRIT OF POSSESSION.
 Section 7 of Act No. 3135 allows the purchaser to
Foreclosure of Chattel Mortgage take possession of the foreclosed property during
NOTES: the period of redemption upon filing of an ex
 Foreclosure sale in chattel mortgage is by public parte application and approval of a bond.
auction under Act No. 1508, but the parties may
stipulate that it be by private sale. 2. Chattel mortgage – When default occurs and the
 The mortgagee may, after thirty (30) days from creditor desires to foreclose, the creditor has the
the time of the condition broken, cause the right to take the property as a preliminary step for
mortgaged property to be sold at public auction its sale.
by a public officer. The 30-day period is also a NOTE: Where the debtor refuses to yield the
grace period for the mortgagor to discharge the property, the creditor’s remedy is to institute an
mortgage obligation. After the sale of the chattel action either to effect judicial foreclosure directly or
at public auction, the right of redemption is no to secure possession (REPLEVIN) as a preliminary to
the sale contemplated in Section 14 or Act. No. 1508
CIVIL LAW COMMITTEE


CONCURRENCE AND PREFERENCE OF CREDITS NOTES:
(Articles 2236 – 2251)  Arts. 2241 and 2242 do not give the order of
preference or priority of payment. They merely
Concurrence of Credits enumerate the credits which enjoy preference with
 Possession by two or more creditors of equal respect to specific movables or immovables. With
rights or privileges over the same property or all respect to the same specific movables or
of the property of the debtor immovables, creditors, with the exception of the
State (No. 1), merely concur.
Preference of Credits  They only find application when there is a
 Right held by a creditor to be preferred in the concurrence of credits, i.e., when the same specific
payment of his claim above others out of the property of the debtor is subjected to the claims of
debtor’s assets. several creditors and the value of such property is
insufficient to pay in full all the creditors. In such a
NOTES: situation, the question of preference will arise.
 The rules on preference of credits apply only  Article 2242 makes no distinction between registered
when two or more creditors have separate and and unregistered vendor’s lien (No. 2). Hence, any
distinct claims against the same debtor who has lien of that kind enjoys the preferred credit status.
insufficient property. Unlike the unpaid price of real property sold,
 Preference creates no lien on property, and, mortgage credits (No. 5), in order to be given
therefore, gives no interest in property, specific preference, should be recorded in the Registry of
or general, to the preferred creditor but a Property. But a recorded mortgage credit is superior
preference in application of the proceeds after to an unrecorded unpaid vendor’s lien (De Barretto
the sale. (Molina vs. Somes, 31 Phil. 76) vs. Villanueva, 1 SCRA 288)
 The preferential right of credit attains  The priority rule applies to credits annotated in the
significance only after the properties of the Registry of Property. As to credits mentioned in No. 7
debtor have been inventoried and liquidated, and of Article 2242, there is preference among the
the claims held by his various creditors have been attachments or executions according to the order of
established. (DBP vs. NLRC, 183 SCRA 328) the time they were levied upon the property. The
pro rata rule in Article 2249 does not apply;
Preference of Lien otherwise, the result would be absurd. The
Credit preference of a credit annotated by an attachment
Applies only to Creates a charge or execution could be defeated by simply obtaining a
claims which do on a particular writ of attachment or execution, no matter how
not attach to property much later (Manabat vs Laguna Federation of
specific
Facomas, Inc., 19 SCRA 621).
properties
 The last paragraph of Article 2241 applies only
Liability of debtor’s property for his obligations when the right of ownership in such property
GENERAL RULE: Debtor is liable with all his continues in the debtor, and, therefore, it is not
property, present and future, for the fulfilment of his applicable to cases where the debtor has parted with
obligations. (Art 2236) his ownership therein, as where he has sold the
property (Peña vs. Mitchell, 9 Phil 587)
EXEMPT PROPERTY:
1. Present property – those provided under Arts. 2. Ordinary Preferred Credits - those listed in Art.
155 and 205 of the Family Code, Sec. 13, Rule 2244 as amended by Art. 110 of the Labor Code.
39 of the Rules of Court, and Sec. 118 of the NOTES:
Public Land Act  The provision not only enumerates the preferred
2. Future property – a debtor who obtains a credits with respect to other property, real and
discharge from his debts on account of his personal, of the debtor, but also gives their order of
insolvency, is not liable for the unsatisfied preference “in the order named”.
claims of his creditors with said property  In contrast with Articles 2241 and 2242, Article 2244
subject to certain exceptions expressly creates no liens on determinate property which
provided by law. (Secs. 68, 69, The follow such property. What Article 2244 creates are
Insolvency Law [Act No. 1956]) simply rights in favour of certain creditors to have
3. Property under legal custody and those the cash and other assets of the insolvent applied in
owned by municipal corporations necessary a certain sequence or order of priority.
for governmental purposes  Article 2244, particularly par (14) item (1) thereof, is
not applicable to obligations of the State as it is a
General Categories of Credit: recognized doctrine that the State is always solvent.
1. Special Preferred Credits - those listed in Arts. It is inconceivable for the State to voluntarily initiate
2241 and 2242 shall be considered as mortgages and insolvency or general liquidation proceedings or to be
pledges of real or personal property or liens (Art. subjected to such proceedings under its own laws.
2243). Hence, they are not included in the insolvent
debtor's assets.
CIVIL LAW COMMITTEE


3. Common Credits – those listed under Art. 2245, executions, the rule is still preference according to
which shall be paid pro rata regardless of dates. the priority of the credits in the order of time.
NOTE: Ordinary Preferred and Common Credits cover  In order to make the pro rating provided in Art 2249
only “free property” of the debtor, or those not fully effective, the preferred creditors enumerated
subjected to Special Preferred Credit. in Nos. 2 to 14 of Art 2242 must necessarily be
convened, and the import of their claims
Effects of Article 110 of Labor Code to Art 2244: ascertained. There must be first some proceeding
1. Removed the one-year limitation found in No. 2 where the claims of all the preferred creditors may
of Art. 2244 be bindingly adjudicated, e.g. insolvency, settlement
2. Moving up the claims for unpaid wages (and other of decedent’s estate, or other liquidation
monetary claims) of laborers or workers of proceedings except where there are not more than
insolvent from second priority to first priority in one creditor.
the order of preference established by Art. 2244
NOTES:
 In case of bankruptcy or liquidation of the
employer’s business, the unpaid wages and other
monetary claims of the employees shall be given
first preference and shall be paid in full before
the claims of the government and other creditors
may be paid. The terms, “declaration” of
bankruptcy, or “judicial” liquidation have been
eliminated, nevertheless, according to the SC,
bankruptcy or liquidation proceedings are still
necessary for the operation of the preference
accorded to workers under Art. 110 of the Labor
Code. (DBP vs. NLRC 183 SCRA 328; RA No. 6715
Sec 10)
 In case of rehabilitation, the preference of credit
granted to employees under Art 110 of the Labor
Code is not applicable (Rubberworld [Phils.] vs
CA, 305 SCRA 722).
Refectionary Credit
 Indebtedness incurred in the repair or
reconstruction of something previously made,
such repair or reconstruction being made
necessary by the deterioration or destruction of
the thing as it formerly existed.
ORDER OF PREFERENCE OF CREDITS
 Arts. 2241 and 2242, jointly with Arts. 2246 to

2249 establish a two-tier order of preference:  Credits which do not enjoy any preference with
1. First tier – includes taxes, duties and fees due on respect to specific property because they are not
specific movable or immovable property; among those mentioned in Arts. 2241 and 2242 and
2. Second tier – all other special preferred (non- those while included in said articles are unpaid
tax) credits shall be satisfied pro-rata, out of any because the value of the property to which the
residual value of the specific property to which preference refers is less than the preferred credit or
such credits relate. credits, shall be satisfied in the order established in
Art. 2244 with reference to other real and/or
NOTES: personal property.
 The pro-rata rule does not apply to credits  Common credits or those which do not fall under
annotated in the Registry of Property by virtue of Arts. 2241, 2242, and 2244 do not enjoy any
a judicial preference and shall be paid pro rata regardless of
dates.
order, by attachments and executions, which are

preferred as to “later credits”. In satisfying
several credits annotated by attachments or
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San Beda College of Law 1

MEMORY AID IN CIVIL LAW

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MEMORY AID IN CIVIL LAW

3. SUBJECT MATTER: Generally non-consumable NOTES:

2. To refund to the bailee extraordinary expenses for

MEMORY AID IN CIVIL LAW

1. Real contract Consensual contract

2. Generally Bilateral and

Simple Loan/Mutuum Rent  Form of Payment (Art 1955):

MEMORY AID IN CIVIL LAW

MEMORY AID IN CIVIL LAW

2. Extra-judicial Obligations of the Depositary (Art 1972 –1991):

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MEMORY AID IN CIVIL LAW

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

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MEMORY AID IN CIVIL LAW

MEMORY AID IN CIVIL LAW

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

1. Notice to guarantor of the action Guarantor’s right to Subrogation (ART.2067)

MEMORY AID IN CIVIL LAW

Effect of Repeat Payment by debtor: (Art 2070) BOND

NOTES: PLEDGE, MORTGAGE AND ANTICHRESIS

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MEMORY AID IN CIVIL LAW

MEMORY AID IN CIVIL LAW

MEMORY AID IN CIVIL LAW

MEMORY AID IN CIVIL LAW

MEMORY AID IN CIVIL LAW

MEMORY AID IN CIVIL LAW

MEMORY AID IN CIVIL LAW

CHATTEL MORTGAGE (Articles 2140-2141)

 A contract by virtue of which personal property is

MEMORY AID IN CIVIL LAW

Effect of absence Right to possession of foreclosed property

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MEMORY AID IN CIVIL LAW

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

ORDER OF PREFERENCE OF CREDITS

 Arts. 2241 and 2242, jointly with Arts. 2246 to

order, by attachments and executions, which are

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