Credit Transactions: San Beda College of Law

San Beda College of Law
182
MEMORY AID IN CIVIL LAW
CREDIT TRANSACTIONS
2. bailee- the recipient; one who
receives the custody or possession of
the thing thus delivered
CREDIT TRANSACTIONS
All transactions involving the
purchase or loan of goods, services,
or money in the present with a LOAN (Articles 1933 1961)
promise to pay or deliver in the
future A contract wherein one of the
parties delivers to another, either
Contracts of security something not consumable so that
Types: the latter may use the same for a
1. Secured transactions or contracts of certain time and return it or money
real security - supported by a or other consumable thing, upon the
collateral or an encumbrance of condition that the same amount of
property the same kind and quality shall be
2. Unsecured transactions or contracts paid. (Art 1933)
of personal security - supported only
by a promise or personal Characteristics:
commitment of another such as a 1. Real Contract delivery of the thing
guarantor or surety loaned is necessary for the
perfection of the contract
Security NOTE: An accepted promise to make
Something given, deposited, or a future loan is a consensual
serving as a means to ensure contract, and therefore binding upon
fulfilment or enforcement of an the parties but it is only after
obligation or of protecting some delivery, will the real contract of
interest in property loan arise. (Art 1934)
Types of Security
a. personal when an individual 2. Unilateral Contract - once the
becomes surety or guarantor subject matter has been delivered,
b. real or property when a it creates obligations on the part of
mortgage, pledge, antichresis, only one of the parties (i.e.
charge or lien or other device borrower).
used to have property held, out
of which the person to be made Kinds:
secure can be compensated for 1. Commodatum when the bailor
loss (lender) delivers to the bailee
(borrower) a non-consumable thing
Bailment so that the latter may use it for a
The delivery of property of one certain time and return the identical
person to another in trust for a thing.
specific purpose, with a contract, Kinds of commodatum:
express or implied, that the trust a. Ordinary Commodatum use by
shall be faithfully executed and the the borrower of the thing is for a
property returned or duly accounted certain period of time
for when the special purpose is b. Precarium - one whereby the
accomplished or kept until the bailor bailor may demand the thing
claims it. loaned at will and it exists in the
following cases:
Parties: i. neither the duration nor
1. bailor - the giver; one who delivers purpose of the contract is
property stipulated
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)
183
ii. the use of the thing is the expiration of the advance

merely tolerated by the credit
owner 2. Always on a Always on a single
double name paper name paper (i.e.
(two signatures promissory note with
appear with both no indorse-ment
parties held liable other than the
2. Simple loan or mutuum where the for payment) maker)
lender delivers to the borrower
money or other consumable thing COMMODATUM (Articles 1935 1952)
upon the condition that the latter Nature:
shall pay the same amount of the
same kind and quality. 1. PURPOSE: Bailee in commodatum
acquires the temporary use of the
Commodatum Mutuum thing but not its fruits (unless
Key: COPS-LOTR stipulated as an incidental part of
1. Object the contract).(Art 1935)
Non-consumable Consumable Use must be temporary,
2. Cause
otherwise the contract may be a
Gratuitous May or may not be
gratuitous
deposit.
3. Purpose
Use or temporary Consumption 2. CAUSE: Essentially gratuitous; it
possession ceases to be a commodatum if any
4. Subject Matter compensation is to be paid by the
Real or personal Only personal borrower who acquires the use, in
property property such case there arises a lease
5. Ownership of the thing contract.
Retained by the Passes to the debtor Similar to a donation in that it
bailor confers a benefit to the
6. Thing to be returned recipient. The presumption is
Exact thing loaned Equal amount of the that the bailor has loaned the
same kind and thing for having no need
quality
therefor.
7. Who bears risk of loss
Bailor Debtor
3. SUBJECT MATTER: Generally non-
8. When to return
consumable whether real or personal
In case of urgent Only after the
need, even before expiration of the but if the consumable goods are not
the expiration of the term for consumption as when they are
term merely for exhibition, consumable
goods may be the subject of the
commodatum. (Art 1936)
Loan Credit
Delivery by one party Ability of a person to 4. Bailor need not be the owner of the
and the receipt of borrow money or thing owned (Art. 1938) since by the
other party of a things by virtue of loan, ownership does not pass to the
given sum of money the trust or borrower.
or other consumable confidence reposed A mere lessee or usufructuary
thing upon an by the lender that he may lend but the borrower or
agreement, express will pay what he
or implied, to repay promised.
bailee himself may not lend nor
the same. lease the thing loaned to him to
a third person (Art 1932[2])
Loan Credit 5. Purely Personal (Art 1939):

1. Interest taken at Interest is taken in
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Purganan(LTD),
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Death of either party terminates the bailee, even though the bailee
the contract unless by acted without fault, unless there is a
stipulation, the commodatum is stipulation to the contrary (Art 1949
transmitted to the heirs of either par 2)
or both parties. 5. To return the thing loaned
Bailee can neither lend nor lease The bailee has no right to retain
the object of the contract to a the thing loaned as security for
third person. claims he has against the bailor
even for extraordinary expenses
except for a claim for damages
suffered because of the flaws of
NOTE:Use of the thing loaned the thing loaned.
may extend to members of the
bailees household except: NOTES:
a. contrary stipulation; However, the bailees right
b. nature of the thing extends no further than
forbids such use retention of the thing loaned
until he is reimbursed for the
Obligations of the Bailee: (Arts 1941 damages suffered by him.
1945) He cannot lawfully sell the
1. To pay for the ordinary expenses for
thing to satisfy such damages
the use and preservation of the thing
without courts approval.
loaned. (Art 1941)
2. To be liable for the loss of the thing In case there are two or
even if it should be through a more bailees, their
fortuitous event in the following obligation shall be solidary.
cases: (KLAS D)
a. when he keeps it longer than the Obligations of the bailor (Art 1946 Art
period stipulated, or after the 1952):
accomplishment of its use 1. To respect the duration of the loan
b. when he lends or leases it to GENERAL RULE: Allow the bailee
third persons who are not the use of the thing loaned for the
members of his household duration of the period stipulated or
c. when the thing loaned has been until the accomplishment of the
delivered with appraisal of its purpose for which the commodatum
value was instituted.
d. when, being able to save either EXCEPTIONS:
of the thing borrowed or his own a. In case of urgent need in
things, he chose to save the which case bailee may demand
latter; or its return or temporary use;
e. when the bailee devoted the b. The bailor may demand
thing for any purpose different immediate return of the thing if
from that for which it has been the bailee commits any act of
loaned (Art 1942) ingratitude specified in Art. 765.
3. To be liable for the deterioration of
thing loaned (a) if expressly 2. To refund to the bailee extraordinary
stipulated; (b) if guilty of fault or expenses for the preservation of the
negligence; or (c) if he devotes the thing loaned, provided the bailee
thing to any purpose different from brings the same to the knowledge of
that for which it has been loaned the bailor before incurring them,
4. To pay for extraordinary expenses except when they are so urgent that
arising from the actual use of the the reply to the notification cannot
thing by the bailee, which shall be be awaited without danger.
borne equally by both the bailor and
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Purganan(LTD),
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3. To be liable to the bailee for No estafa is committed by a person

damages for known hidden flaws. who refuses to pay his debt or denies
Requisites: its existence.
a. There is flaw or defect in the
thing loaned; Simple Loan/Mutuum Rent
b. The flaw or defect is hidden;
c. The bailor is aware thereof; 1. Delivery of money Delivery of some non-
d. He does not advise the bailee of or some consumable consumable thing in
the same; and thing with a promise order that the other
e. The bailee suffers damages by to pay an equivalent may use it during a
reason of said flaw or defect of the same kind and certain period and
quality return it to the
former.
2. There is a transfer There is no transfer

of ownership of the of ownership of the
NOTES: thing delivered thing delivered
If the above requisites concur,
the bailee has the right of
retention for damages. 3. Relationship Relationship is that
between the parties of a landlord and
The bailor cannot exempt is that of obligor- tenant
himself from the payment of obligee
expenses or damages by
abandoning the thing to the 4. Creditor receives Owner of the
bailee. payment for his loan property rented
receives
compensation or
SIMPLE LOAN OR MUTUUM (Art 1953
price either in
1961) money, provisions,
A contract whereby one party chattels, or labor
delivers to another, money or other
consumable thing with the from the occupant
understanding that the same amount thereof in return for
of the same kind and quality shall be its use (Tolentino vs
paid. (Art. 1953) Gonzales, 50 Phil 558
1927)
NOTES:
Loan Sale
The mere issuance of the checks
does not result in the perfection of 1. Real contract Consensual contract
the contract of loan. The Civil Code
provides that the delivery of bills of 2. Generally Bilateral and
exchange and mercantile unilateral because reciprocal
documents, such as checks, shall only borrower has
produce the effect of payment only obligations
when they have been encashed
(Gerales vs. CA 218 SCRA 638). It is NOTE: If the property is sold, but the
only after the checks have produced real intent is only to give the object as
the effect of payment that the security for a debt as when the price
contract of loan may be deemed is comparatively small there really is a
perfected. contract of loan with an equitable
The obligation is to pay and not to mortgage.
return because the consumption of
the thing loaned is the distinguishing Commodatum/
Barter
character of the contract of mutuum Mutuum
from that of commodatum.
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Purganan(LTD),
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1. Subject matter is Subject matter is Compound Interest

money or fungible non-fungible, (non GENERAL RULE: Unpaid interest shall
things consumable) things not earn interest.
EXCEPTIONS:
2. In commodatum, The thing with
the bailee is bound equivalent value is 1. when judicially demanded
to return the given in return for 2. when there is an express
identical thing what has been stipulation (must be in writing in
borrowed when the received view of Art. 1956)
time has expired or
purpose served Guidelines for the application of
proper interest rates
3. Mutuum may be Onerous, actually a 1. If there is stipulation: that rate shall
gratuitous and mutual sale
be applied
commodatum is
always gratuitous
2. The following are the rules of thumb
for the application/imposition of
interest rates:
a) When an obligation, regardless
of its source, i.e., law,
contracts, quasi-contracts,
Form of Payment (Art 1955): delicts or quasi-delicts is
breached, the contravenor can
1. If the thing loaned is money -
be held liable for damages.
payment must be made in the
b) With regard particularly to an
currency stipulated, if it is possible;
award of interest in the concept
otherwise it is payable in the
of actual and compensatory
currency which is legal tender in the
damages, the rate of interest, as
Philippines and in case of
well as the accrual thereof, is
extraordinary inflation or deflation,
imposed, as follows:
the basisi of payment shall be the
i. When the obligation
value of the currency at the time of
breached consists of
the creation of the obligation
payment of a sum of money
2. If what was loaned is a fungible
(loan or forbearance of
thing other than money - the
money), the interest shall be
borrower is under obligation to pay
that which is stipulated or
the lender another thing of the same
agreed upon by the parties.
kind, quality and quantity. In case it
In absence of an agreement,
is impossible to do so, the borrower
the rate shall be the legal
shall pay its value at the time of the
rate (i.e. 12% per annum)
perfection of the loan.
computed from default.
NOTE: The interest due shall
Interest
itself earn legal interest
The compensation allowed by law or
from the time it is judicially
fixed by the parties for the loan or demanded
forbearance of money, goods or ii. In other cases, the rate of
credits interest shall be six percent
Requisites for Demandability: (ELI) (6%) per annum.
1. must be expressly stipulated NOTE: No interest, however,
Exceptions: shall be adjudged on
a. indemnity for damages unliquidated claims or
b. interest accruing from damages except when or
unpaid interest until the demand can be
2. must be lawful established with reasonable
3. must be in writing certainty. When the demand
cannot be established, the
CIVIL LAW COMMITTEE
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Purganan(LTD),
187
interest shall begin to run interest rates to level which will either
only from the date of the enslave their borrowers or lead to a
judgment of the court is hemorrhaging of their assets (citing
made. Almeda vs. CA, 256 SCRS 292). In Medel
iii. When the judgment of the vs. CA, 299 SCRA 481, it was ruled that
court awarding a sum of while stipulated interest of 5.5% per
money becomes final and month on a loan is usurious pursuant to
executory, the rate of legal CB Circular No. 905, the same must be
interest, whether the case equitably reduced for being iniquitous,
falls under paragraph i or ii unconscionable and exorbitant. It is
above, shall be 12% per contrary to morals, (contra bonos
annum from such finality mores). It was reduced to 12% per
until its satisfaction, this annum in consonant with justice and fair
interim period being deemed play.
to be by then an equivalent
to a forbearance of credit. DEPOSIT (Articles 1962 2009)
(Eastern Shipping Lines vs.
CA, July 12, 1994) A contract constituted from the
moment a person receives a thing
NOTES: belonging to another, with the
Central Bank Circular No. 416 fixing obligation of safely keeping it and of
the rate of interest at 12% per returning the same.
annum deals with loans, forbearance
of any money, goods or credits and Characteristics:
judgments involving such loans, or 1. Real Contract - contract is
forbearance in the absence of perfected by the delivery of the
express agreement to such rate subject matter.
Interest as indemnity for damages is 2. Unilateral (gratutitous deposit) -
only the depositary has an
payable only in case of default or
obligation.
non-performance of the contract. As
3. Bilateral (onerous deposit) -
they are distinct claims, they may be
gives rise to obligations on the
demanded separately. (Sentinel
part of both the depositary and
Insurance Co., Inc. vs CA, 182 SCRA
depositor.
517)
Central Bank Circular No. 905 (Dec. Deposit Mutuum
10, 1982) removed the Usury Law 1. Purpose
ceiling on interest rates for secured Principal purpose is Principal purpose is
and unsecured loans, regardless of safekeeping or consumption
maturity. custody
2. When to Return
Validity of unconscionable interest rate Depositor can The lender must wait
in a loan demand the return of until the expiration
Supreme Court in Sps. Solangon the subject matter at of the period granted
will to the debtor
vs. Jose Salazar, G.R. No. 125944, June
3. Subject Matter
29, 2001, said that since the usury law
Subject matter may Subject matter is
had been repealed by CB Cir. No. 905 be movable or only money or other
there is no more maximum rate of immovable property fungible thing
interest and the rate will just depend on 4. Relationship
the mutual agreement of the parties Relationship is that Relationship is that of
(citing Lim Law vs. Olympic Sawmill Co., of lender (creditor) depositor and
129 SCRA 439). But the Supreme Court and borrower depositary.
said that nothing in said circular grants (debtor).
lenders carta blanche authority to raise
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Purganan(LTD),
188
5. Compensation Security or to insure Custody and

There can be NO compensation of the right of a party safekeeping
compensation of things deposited with to property or to
credits. each other (except recover in case of
by mutual favorable judgment
agreement).
3. Subject Matter
Movables or Movables only (it gets
Deposit Commodatum immovables, lost)
but generally
1. Purpose is 1. Purpose is the immovables
Safekeeping transfer of the use
4. Cause
2. May be gratuitous 2. Essentially and Always onerous May be compen-
always gratuitous sated or not, but
generally gratuitous
3. Movable/corporeal 3. Both movable and
things only in case of immovable may be 5. When must the thing be returned
extrajudicial deposit the object Upon order of the Upon demand of
court or when depositor
Kinds of Deposit: litigation is ended
1. Judicial (Sequestration) takes place 6. In whose behalf it is held
when an attachment or seizure of Person who has a Depositor or third
property in litigation is ordered. right person designated
2. Extra-judicial GENERAL RULE: Contract of deposit is

a. Voluntary one wherein the gratuitous (Art 1965)
delivery is made by the will of EXCEPTIONS:
the depositor or by two or more
1. when there is contrary
persons each of whom believes
stipulation
himself entitled to the thing
2. depositary is engaged in business
deposited. (Arts 1968 1995)
of storing goods
b. Necessary one made in
3. property saved from destruction
compliance with a legal
without knowledge of the owner
obligation, or on the occasion of
any calamity, or by travellers in
NOTES:
hotels and inns (Arts 1996 -
2004), or by travellers with Article 1966 does not embrace
common carriers (Art 1734 incorporeal property, such as rights
1735). and actions, for it follows the person
NOTE: The chief difference of the owner, wherever he goes.
between a voluntary deposit and a A contract for the rent of safety
necessary deposit is that in the deposit boxes is not an ordinary
former, the depositor has a contract of lease of things but a
complete freedom in choosing the special kind of deposit; hence, it is
depositary, whereas in the latter, not to be strictly governed by the
there is lack of free choice in the provisions on deposit. The relation
depositor. between a bank and its customer is
that of a bailor and bailee. (CA Agro
Judicial Extra-judicial vs CA, 219 SCRA 426)
1. Creation
Will of the court Will of the parties Obligations of the Depositary (Art 1972
or contract 1991):
2. Purpose 1. To keep the thing safely (Art 1972)
Exercise over the thing
deposited the same diligence as
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Purganan(LTD),
189
he would exercise over his c. If the deposit is for a

property valuable consideration, the
2. To return the thing (Art 1972) depositary has no right to return
Person to whom the thing must the thing deposited before the
be returned: expiration of the time
a. Depositor, to his heirs and designated even if he should
successors, or the person who suffer inconvenience as a
may have been designated in the consequence.(Art 1989)
contract
b. If the depositary is capacitated - What to return: product,
he is subject to all the accessories, and accessions of
obligations of a depositary the thing deposited (Art 1983)
whether or not the depositor is 3. Not to deposit the thing with a third
capacitated. If the depositor is person unless authorized by express
incapacitated, the depositary stipulation (Art 1973)
must return the property to the The depositor is liable for the
legal representative of the
loss of the thing deposited under
incapacitated or to the depositor
Article 1973 if:
himself if he should acquire
a. he
capacity (Art 1970).
transfers the deposit with a third
c. If the depositor is capacitated
person without authority
and the depositary is
although there is no negligence
incapacitated - the latter does
on his part and the third person;
not incur the obligation of a
b. he
depositary but he is liable:
deposits the thing with a third
i..to return the thing
person who is manifestly
deposited while still in his
careless or unfit although
possession;
authorized even in the absence
ii.to pay the depositor the
of negligence; or
amount which he may have
c. the thing
benefited himself with the
is lost through the negligence of
thing or its price subject to
his employees whether the latter
the right of any third person
are manifestly careless or not.
who acquired the thing in
4. If the thing deposited should earn
good faith (Art 1971)
interest (Art 1975):
a. to collect interest and the
Time of return:
capital itself as it fall due
a. Upon demand even though a b. to take steps to preserve its
specified period or time for such value and rights corresponding to
return may have been fixed it
except when the thing is 5. Not to commingle things deposited if
judicially attached while in the so stipulated (Art 1976)
depositarys possession or should 6. Not to make use of the thing
he have been notified of the deposited unless authorized (Art
opposition of a third person to 1977)
the return or the removal of the GENERAL RULE: Deposit is for
thing deposited. (Art 1998)
safekeeping of the subject matter
b. If deposit gratuitous, the
and not for use. The unauthorized
depositary may return the thing
use by the depositary would make
deposited notwithstanding that a
him liable for damages.
period has been fixed for the
EXCEPTIONS:
deposit if justifiable reasons
1. When the preservation of the
exists for its return.
thing deposited requires its use
CIVIL LAW COMMITTEE
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Purganan(LTD),
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2. When authorized by the depositary may reasonably presume

depositor that the depositor would consent to
the change if he knew of the facts of
NOTE: The permission to use is NOT the situation, provided, that the
presumed except when such use is former notifies the depositor thereof
necessary for the preservation of the and wait for his decision, unless
thing deposited. delay would cause danger
9. To pay interest on sums converted to
Effect if permission to use is given personal use if the deposit consists
(Art 1978): of money (Art 1983)
1. If thing deposited is 10. To be liable for loss through
non-consumable, the contract fortuitous event (SUDA): (Art 1979):
loses the character of a deposit a. if stipulated
and acquires that of a b. if he uses the thing without the
commodatum despite the fact depositor's permission
that the parties may have c. if he delays its return
denominated it as a deposit, d. if he allows others to use it,
unless safekeeping is still the even though he himself may
principal purpose. have been authorized to use the
2. If thing deposited consists of same
money/consumable things, the
contract is converted into a NOTES:
simple loan or mutuum unless Fixed, savings, and current deposits
safekeeping is still the principal of money in banks and similar
purpose in which case it is called institutions shall be governed by the
an irregular deposit. Example: provisions concerning simple loan.
bank deposits are irregular (Art 1980)
deposits in nature but governed The general rule is that a bank can
by law on loans.
compensate or set off the deposit in
7. When the thing deposited is
its hands for the payment of any
delivered sealed and closed :
indebtedness to it on the part of the
a. to return the thing deposited in
depositor. In true deposit,
the same condition
compensation is not allowed.
b. to pay for damages should the
seal or lock be broken through
his fault, which is presumed Irregular deposit Mutuum
unless proved otherwise
1. The consumable 1. Lender is bound
c. to keep the secret of the deposit thing deposited may by the provisions of
when the seal or lock is broken be demanded at will the contract and
with or without his fault (Art by the depositor cannot demand
1981) restitution until the
NOTE: The depositary is time for payment, as
authorized to open the thing provided in the
deposited which is closed and contract, has arisen
sealed when (Art 1982):
2. The only benefit is 2. Essential cause for
i. there is presumed authority
that which accrues the transaction is the
(i.e. when the key has been to the depositor necessity of the
delivered to him or the borrower
instructions of the depositor
cannot be done without 3. The irregular 3. Common creditors
opening it) depositor has a enjoy no preference
ii. necessity preference over in the distribution of
8. To change the way of the deposit if other creditors with the debtors property
under the circumstances, the respect to the thing
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Purganan(LTD),
191
deposited b. If the deposit is for valuable

consideration, expenses for
preservation are borne by the
Rule when there are two or more depositary unless there is a
depositors (Art 1985): contrary stipulation
1. If thing deposited is divisible and 2. To pay loses incurred by the
depositors are not solidary: Each depositary due to the character of
depositor can demand only his the thing deposited
proportionate share thereto.
2. If obligation is solidary or if thing is GENERAL RULE: The depositor shall
not divisible: Rules on active reimburse the depositary for any loss
solidarity shall apply, i.e. each one arising from the character of the thing
of the solidary depositors may do deposited.
whatever may be useful to the EXCEPTIONS:
others but not anything which may 1. at the time of the deposit, the
be prejudicial to the latter, (Art. depositor was not aware of the
1212) and the depositary may return dangerous character of the thing
the thing to anyone of the solidary 2. when depositor was not expected
depositors unless a demand, judicial to know the dangerous character
or extrajudicial, for its return has of the thing
been made by one of them in which 3. when the depositor notified the
case, delivery should be made to him depository of the same
(Art. 1214). 4. the depositary was aware of it
3. Return to one of depositors without advice from the depositor
stipulated. The depositary is bound
to return it only to the person Extinguishment of Voluntary Deposit
designated although he has not made (Art 1995)
any demand for its return. 1. Loss or destruction of the thing
deposited
NOTES: 2. In case of gratuitous deposit, upon
The depositary may retain the thing the death of either the depositor or
in pledge until full payment of what the depositary
may be due him by reason of the 3. Other causes, such as return of the
deposit (Art 1994). thing, novation, merger, expiration
The depositors heir who in good of the term fulfilment of the
faith may have sold the thing which resolutory condition, etc (Art 1231)
he did not know was deposited, shall
only be bound to return the price he Necessary Deposits
may have received or to assign his 1. Made in compliance with a legal
right of action against the buyer in obligation
case the price has not been paid him 2. Made on the occasion of any
(Art 1991). calamity such as fire, storm, flood,
pillage, shipwreck or other similar
Obligations of the Depositor (Art 1992 events (deposito miserable)
1995): 3. Made by travellers in hotels and inns
1. To pay expenses for preservation or by travellers with common carrier
a. If the deposit is gratuitous, the
depositor is obliged to
reimburse the depositary for
expenses incurred for the
preservation of the thing Deposit by Travellers in hotels and
deposited (Art 1992) inns:
The keepers of hotels or inns shall be
responsible as depositaries for the
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192
deposit of effects made by travellers a. Conventional - agreed upon by

provided: the parties.
a. Notice was given to them or to b. Legal - one imposed by virtue of
their employees of the effects a provision of a law.
brought by the guest; and c. Judicial - one which is required
b. The guests take the precautions by a court to guarantee the
which said hotel-keepers or their eventual right of one of the
substitutes advised relative to parties in a case.
the care and vigilance of their 3. As to Consideration
effects. a. Gratuitous - the guarantor does
NOTES: not receive any price or
Liability extends to vehicles, animals remuneration for acting as such.
and articles which have been b. Onerous - the guarantor receives
introduced or placed in the annexes valuable consideration.
of the hotel. 4. As to the Person guaranteed
Liability shall EXCLUDE losses which a. Single - one constituted solely to
guarantee or secure
proceed from force majeure. The act
performance by the debtor of
of a thief or robber is not deemed
the principal obligation.
force majeure unless done with the
b. Double or sub-guaranty - one
use of arms or irresistible force.
constituted to secure the
The hotel-keeper cannot free fulfilment by the guarantor of a
himself from the responsibility by prior guaranty.
posting notices to the effect that he 5. As to Scope and Extent
is not liable for the articles brought a. Definite - the guaranty is limited
by the guest. Any stipulation to such to the principal obligation only,
effect shall be void. or to a specific portion thereof.
Notice is necessary only for suing b. Indefinite or simple - one which
civil liability but not in criminal not only includes the principal
liability. obligation but also all its
accessories including judicial
GUARANTY (Articles 2047 2084) costs
A contract whereby a person SURETYSHIP

(guarantor) binds himself to the
creditor to fulfil the obligation of A contract whereby a person (surety)
the principal debtor in case the binds himself solidarily with the
latter fail to do so. principal debtor
A relation which exists where one
Classification of Guaranty: person (principal) has undertaken an
1. In the Broad sense: obligation and another person
a. Personal - the guaranty is the (surety) is also under a direct and
credit given by the person who primary obligation or other duty to
guarantees the fulfilment of the the obligee, who is entitled to but
principal obligation. one performance, and as between
b. Real - the guaranty is the the two who are bound, the second
property, movable or rather than the first should perform
immovable. (Agro Conglomerates, Inc. vs. CA,
348 SCRA 450)
NOTES:
The reference in Article 2047 to
solidary obligations does not mean
2. As to its Origin that suretyship is withdrawn from
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John Stephen
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the applicable provisions governing (Finman General Assurance

guaranty. A surety is almost the Corp. vs. Salik, 188 SCRA 740)
same as a solidary debtor, except
that he himself is a principal debtor. 4. Surety is not entitled to the benefit
In suretyship, there is but one of exhaustion
contract, and the surety is bound by NOTE: He assumes a solidary liability
the same agreement which binds the for the fulfilment of the principal
principal. A surety is usually bound obligation (Towers Assurance Corp
with the principal by the same vs. Ororama Supermart, 80 SCRA
instrument, executed at the same 262) as an original promissory and
time and upon the same debtor from the beginning.
consideration (Palmares vs CA, 288 5. Undertaking is to creditor and not
SCRA 422) to debtor.
It is not for the obligee to see to it NOTE: The surety makes no
covenant or agreement with the
that the principal debtor pays the
principal that it will fulfil the
debt or fulfill the contract, but for
obligation guaranteed for the benefit
the surety to see to it that the
of the principal. Such a promise is
principal debtor pays or performs
not implied by law either; and this is
(Paramount Insurance Corp vs CA,
true even where under the contract
310 SCRA 377)
the creditor is given the right to sue
the principal, or the latter and the
Nature of Suretys undertaking:
surety at the same time. (Arranz vs.
1. Liability is contractual and
Manila Fidelity & Surety Co., Inc.,
accessory but direct
101 Phil. 272)
NOTE: He directly, primarily and
6. Surety is not entitled to notice of
equally binds himself with the
principals default
principal as original promisor,
NOTE: The creditor owes no duty of
although he possesses no direct or
active diligence to take care of the
personal interest over the latters
interest of the surety and the surety
obligation, nor does he receive any
is bound to take notice of the
benefits therefrom. (PNB vs CA, 198
principals default and to perform
SCRA 767)
the obligation. He cannot complain
2. Liability limited by the terms of the
that the creditor has not notified
contract.
him in the absence of a special
NOTE: It cannot be extended by
agreement to that effect. (Palmares
implication beyond the terms of the
vs CA, 288 SCRA 422)
contract (PNB vs CA, 198 SCRA 767)
7. Prior demand by the creditor upon
3. Liability arises only if principal
principal is not required
debtor is held liable.
NOTE: As soon as the principal is in
NOTES:
default, the surety likewise is in
The creditor may sue separately default.
or together the principal debtor 8. Surety is not exonerated by neglect
and the surety. Where there are of creditor to sue principal
several sureties, the obligee may
proceed against any one of Characteristics of Guaranty and
them. Suretyship:
In the absence of collusion, the 1. Accessory - It is indispensable
surety is bound by a judgment condition for its existence that there
against the principal even must be a principal obligation.
though he was not a party to the NOTES:
proceedings. The nature of its Guaranty may be constituted to
undertaking makes it privy to all guarantee the performance of a
proceedings against its principal voidable or unenforceable
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contract. It may also guarantee to the creditor, no such

a natural obligation. (Art 2052) requirement is needed
The guarantor cannot bind because he binds himself to
himself for more than the nothing.
principal debtor and even if he However, when there is
does, his liability shall be merely an offer of a
reduced to the limits of that of guaranty, or merely a
the debtor. conditional guaranty, in the
2. Subsidiary and Conditional - takes sense that it requires action
effect only in case the principal by the creditor before the
debtor fails in his obligation. obligation becomes fixed, it
does not become binding
NOTES: until it is accepted and until
The guarantor cannot bind notice of such acceptance by
himself for more than the the creditor is given to, or
principal debtor and even if he acquired by, the guarantor,
does, his liability shall be or until he has notice or
reduced to the limits of that of knowledge that the creditor
the debtor. But a guarantor may has performed the condition
bind himself for less than that of and intends to act upon the
the principal (Art 2054) guaranty.
A guaranty may be given as But in any case, the creditor
security for future debts, the is not precluded from
amount of which is not yet waiving the requirement of
known; there can be no claim notice.
against the guarantor until the The consideration of the
debt is liquidated. A conditional guaranty is the same as the
obligation may also be secured. consideration of the principal
(Art 2053) obligation.
3. Unilateral - may be entered even The creditor may proceed
w/o the intervention of the principal against the guarantor although
debtor, in which case Art. 1236 and he has no right of action against
1237 shall apply and it gives rise only the principal debtor.
to a duty on the part of the 7. Not presumed. It must be expressed
guarantor in relation to the creditor and reduced in writing.
and not vice versa. NOTE: A power of attorney to loan
4. Nominate money does not authorize the agent
5. Consensual to make the principal liable as a
6. It is a contract between the surety for the payment of the debt
guarantor/surety and creditor. of a third person. (BPI vs. Coster, 47
Phil. 594)
NOTES: 8. Falls under the Statute of Frauds
Acceptance of guaranty by since it is a special promise to
creditor and notice thereof to answer for the debt, default or
guarantor: miscarriage of another.
In declaring that guaranty 9. Strictly interpreted against the
must be express, the law creditor and in favor of the
refers solely and exclusively guarantor/surety and is not to be
to the obligation of the extended beyond its terms or
guarantor because it is he specified limits. (Magdalena Estates,
alone who binds himself by Inc. vs Rodriguez, 18 SCRA 967) The
his acceptance. With respect rule of strictissimi juris commonly
pertains to an accommodation surety
CIVIL LAW COMMITTEE
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because the latter acts without

motive of pecuniary gain and hence, 6. Guarantor can 6. Surety cannot
should be protected against unjust avail of the benefit avail of the benefit of
pecuniary impoverishment by of excussion and excussion and division
division in case
imposing on the principal, duties
creditor proceeds
akin to those of a fiduciary. against him
NOTES:
Indorsement Guaranty
The rule will apply only after it
has been definitely ascertained 1. Primarily of 1. Contract of
that the contract is one of transfer security
suretyship or guaranty. It cannot
be used as an aid in determining 2. Unless the note is 2. Failure in either or
whether a partys undertaking is promptly presented both of these
for payment at particulars does not
that of a surety or guarantor.
maturity and due generally work as an
(Palmares vs CA, 288 SCRA 292) notice of dishonor absolute discharge of
It does not apply in case of given to the indorser a guarantors liability,
compensated sureties. within a reasonable but his is discharged
10. It is a contract which requires that time he will be only to the extent of
the guarantor must be a person discharged abso- the loss which he may
distinct form the debtor because a lutely from all have suffered in
liability thereon, consequence thereof
person cannot be the personal
whether he has
guarantor of himself. suffered any actual
NOTE: However, in a real guaranty, damage or not
like pledge and mortgage, a person
may guarantee his own obligation 3. Indorser does not 3. Guarantor
with his personal or real properties. warrant the solvency. warrants the solvency
He is answerable on a of the promisor
Guaranty Suretyship strict compliance
with the law by the
1. Liability depends 1. Surety assumes holder, whether the
upon an independent liability as regular promisor is solvent or
agreement to pay the party to the not
obligation if primary undertaking
4. Indorser can be 4. Guarantor cannot be
debtor fails to do so
sued as promisor sued as promisor
2. Collateral under- 2. Surety is an
taking original promisor Guaranty Warranty
A contract by which a An undertaking that
3. Guarantor is 3. Surety is person is bound to the title, quality, or
secondarily liable primarily liable another for the quantity of the
fulfilment of a subject matter of the
4. Guarantor binds 4. Surety undertakes promise or contract is what it
himself to pay if to pay if the principal engagement of a has been represented
the principal DOES NOT PAY third party to be, and relates to
CANNOT PAY some agreement
made ordinarily by
the party who makes
5. Insurer of 5. Insurer of the
the warranty
solvency of debtor debt
NOTES:
A guaranty is gratuitous, unless there
is a stipulation to the contrary. The
cause of the contract is the same
CIVIL LAW COMMITTEE

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cause which supports the obligation Exception to the concept of

as to the principal debtor. continuing guaranty is chattel
The peculiar nature of a guaranty or mortgage. A chattel mortgage can
surety agreement is that is is only cover obligations existing at the
regarded as valid despite the time the mortgage is constituted and
absence of any direct consideration not those contracted subsequent to
received by the guarantor or surety the execution thereof (The Belgian
either from the principal debtor or Catholic Missionaries, Inc. vs.
from the creditor; a consideration Magallanes Press, Inc., 49 Phil 647).
moving to the principal alone will An exception to this is in case of
suffice. stocks in department stores, drug
It is never necessary that the stores, etc. (Torres vs. Limjap, 56
guarantor or surety should receive Phil 141).
any part or benefit, if such there be,
accruing to the principal. (Willex Extent of Guarantors liability: (Art
Plastic Industries Corp. vs. CA, 256 2055)
SCRA 478) 1. Where the guaranty definite: It is
limited in whole or in part to the
principal debt, to the exclusion of
accessories.
2. Where guaranty indefinite or simple:
Double or sub-guaranty (Art 2051 2nd It shall comprise not only the
par) principal obligation, but also all its
One constituted to guarantee the accessories, including the judicial
obligation of a guarantor costs, provided with respect to the
latter, that the guarantor shall only
Continuing guaranty (Art 2053) be liable for those costs incurred
One which is not limited to a single after he has been judicially required
transaction but which contemplates to pay.
a future course of dealings, covering
a series of transactions generally for Qualifications of a guarantor: (Arts
an indefinite time or until revoked. 2056-2057)
1. possesses integrity
NOTES: 2. capacity to bind himself
3. has sufficient property to answer
Prospective in operation (Dio vs CA, for the obligation which he
216 SCRA 9) guarantees
Construed as continuing when by the
terms thereof it is evident that the NOTES:
object is to give a standing credit to The qualifications need only be
the principal debtor to be used from present at the time of the perfection
time to time either indefinitely or of the contract.
until a certain period, especially if
The subsequent loss of the integrity
the right to recall the guaranty is
expressly reserved (Dio vs CA, 216 or property or supervening
SCRA 9) incapacity of the guarantor would
not operate to exonerate the
Future debts may also refer to guarantor or the eventual liability he
debts existing at the time of the has contracted, and the contract of
constitution of the guaranty but the guaranty continues.
amount thereof is unknown and not
However, the creditor may demand
to debts not yet incurred and
another guarantor with the proper
existing at that time.
qualifications. But he may waive it if
CIVIL LAW COMMITTEE

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John Stephen
Purganan(LTD),
197
he chooses and hold the guarantor to to cover the amount of the debt (Art
his bargain. 2060)
Demand can be made only after
Benefit of Excussion (Art 2058) judgment on the debt
The right by which the guarantor Demand must be actual; joining
cannot be compelled to pay the
the guarantor in the suit against
creditor unless the latter has
the principal debtor is not the
exhausted all the properties of the
demand intended by law
principal debtor, and has resorted to
9. Where the pledge or mortgage has
all of the legal remedies against such
been given by him as special security
debtor.
Benefit of Division (Art 2065)
NOTE:
Should there be several guarantors
Not applicable to a contract of of only one debtor and for the same
suretyship (Arts 2047, par. 2; debt, the obligation to answer for
2059[2]) the same is divided among all.
Cannot even begin to take place Liability: Joint
before judgment has been obtained
against the debtor (Baylon vs CA, NOTES:
312 SCRA 502) The creditor can claim from the
guarantors only the shares they are
When Guarantor is not entitled to the respectively bound to pay except
benefit of excussion: (PAIRS) when solidarity is stipulated or if
1. If it may be presumed that an any of the circumstances
execution on the property of the enumerated in Article 2059 should
principal debtor would not result in take place.
the satisfaction of the obligation
The right of contribution of
Not necessary that the debtor be guarantors who pays requires that
judicially declared insolvent or the payment must have been made
bankrupt (a) in virtue of a judicial demand, or
2. When he has absconded, or cannot (b) because the principal debtor is
be sued within the Philippines unless insolvent (Art 2073).
he has left a manager or
If any of the guarantors should be
representative
3. In case of insolvency of the debtor insolvent, his share shall be borne by
the others including the paying
Must be actual guarantor in the same joint
4. If the guarantor has expressly proportion following the rule in
renounced it solidary obligations.
5. If he has bound himself solidarily
with the debtor
The above rule shall not be
applicable unless the payment has
Other grounds: (BIPS) been made in virtue of a judicial
6. If he is a judicial bondsman or sub- demand or unless the principal
surety debtor is insolvent.
7. If he fails to interpose it as a The right to contribution or
defense before judgment is rendered reimbursement from his co-
against him guarantors is acquired ipso jure by
8. If the guarantor does not set up the virtue of said payment without the
benefit against the creditor upon the need of obtaining from the creditor
latters demand for payment from any prior cession of rights to such
him, and point out to the creditor guarantor.
available property to the debtor
within Philippine territory, sufficient
CIVIL LAW COMMITTEE
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Purganan(LTD),
198
The co-guarantors may set up before making payment. He

against the one who paid, the same cannot collect more than what
defenses which have pertained to he has paid.
the principal debtor against the 2. Legal interest thereon from the
creditor and which are not purely time the payment was made
personal to the debtor. (Art 2074) known (notice of payment in
effect a demand so that if the
Procedure when creditor sues: (Art. debtor does not pay
2062) immediately, he incurs in delay)
The creditor must sue the principal to the debtor, even though it did
alone; the guarantor cannot be sued not earn interest for the
with his principal, much less alone creditor. Guarantors right to
except in Art. 2059. legal interest is granted by law
by virtue of the payment he has
1. Notice to guarantor of the action made.
3. Expenses incurred by the
The guarantor must be NOTIFIED guarantor after having notified
so that he may appear, if he so the debtor that payment has
desires, and set up defenses he been demanded of him by the
may want to offer. creditor; only those expenses
If the guarantor appears, he is that the guarantor has to satisfy
still given the benefit of in accordance with law as a
exhaustion even if judgment consequence of the guaranty
should be rendered against him (Art. 2055) not those which
and principal debtor. His depend upon his will or own acts
voluntary appearance does not or his fault for these are his
constitute a renunciation of his exclusive personal responsibility
right to excussion (see Art. and it is not just that they be
2059(1)). shouldered by the debtor.
Guarantor cannot set up the 4. Damages if they are due in
defenses if he does not appear accordance
and it may no longer be possible with law. General rules on
for him to question the validity damages apply.
of the judgment rendered
against the debtor. EXCEPTIONS:
2. A guarantor is entitled to be heard 1. Where the guaranty is
before and execution can be issued constituted without the
against him where he is not a party knowledge or against the will of
in the case involving his principal the principal debtor, the
(procedural due process). guarantor can recover only
insofar as the payment had been
Guarantors Right of Indemnity or beneficial to the debtor (Art.
Reimbursement (Art 2066) 2050).
GENERAL RULE: Guaranty is a contract 2. Payment by a third person who
of indemnity. The guarantor who makes does not intend to be reimbursed
payment is entitled to be reimbursed by by the debtor is deemed to be a
the principal debtor. donation, which, however,
requires the debtors consent.
NOTE: The indemnity consists of: (DIED) But the payment is in any case
1. Total amount of the debt no valid as to the creditor who has
right to demand reimbursement accepted it (Art. 1238).
until he has actually paid the 3. Waiver of the right to demand
debt, unless by the terms of the reimbursement.
contract, he is given the right
CIVIL LAW COMMITTEE
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Guarantors right to Subrogation

(ART.2067) Effect of Repeat Payment by debtor:
Subrogation transfers to the person (Art 2070)
subrogated, the credit with all the GENERAL RULE: Before guarantor pays
rights thereto appertaining either the creditor, he must first notify the
against the debtor or against third debtor (Art. 2068). If he fails to give
persons, be they guarantors or such notice and the debtor repeats
possessors of mortgages, subject to payment, the guarantor can only collect
stipulation in conventional from the creditor and guarantor has no
subrogation. cause of action against the debtor for
the return of the amount paid by
NOTE: This right of subrogation is guarantor even if the creditor should
necessary to enable the guarantor to become insolvent.
enforce the indemnity given in Art. 2066.
It arises by operation of law upon EXCEPTION: The guarantor can still
payment by the guarantor. It is not claim reimbursement from the debtor in
necessary that the creditor cede to spite of lack of notice if the following
the guarantor the formers rights conditions are present: (PIG)
against the debtor. a. guarantor was prevented by
It is not a contractual right. The fortuitous event to advise the
debtor of the payment; and
right of guarantor who has paid a
b. the creditor becomes insolvent;
debt to subrogation does not stand
c. the guaranty is gratuitous.
upon contract but upon the
principles of natural justice.
Right of Guarantor to proceed against
The guarantor is subrogated by debtor before payment
virtue of the payment to the rights GENERAL RULE: Guarantor has no
of the creditor, not those of the cause of action against debtor until after
debtor. the former has paid the obligation
Guarantor cannot exercise the EXCEPTION: Article 2071
right of redemption of his
principal (Urrutia & Co vs NOTES:
Morena and Reyes, 28 Phil 261) Article 2071 is applicable and
available to the surety. (Manila
Effect of Payment by Guarantor Surety & Fidelity Co., Inc. vs Batu
1. Without notice to debtor: (Art Construction & Co., 101 Phil 494)
2068)
Remedy of guarantor:
The debtor may interpose
(a) obtain release from the
against the guarantor those guaranty; or
defenses which he could have (b) demand a security that shall
set up against the creditor at the protect him from any
time the payment was made, proceedings by the creditor, and
e.g. the debtor can set up against the danger of insolvency
against the guarantor the of the debtor
defense of previous
extinguishment of the obligation
Art. 2066 Art. 2071
by payment. Provides for the Provides for his
enforcement of the protection before he
2. Before Maturity (Art 2069) rights of the has paid but after he
Not entitled to reimbursement guarantor/surety has become liable
unless the payment was made against the debtor
with the consent or has been after he has paid the
debt
ratified by the debtor
Gives a right of Protective remedy
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action after payment before payment. A judicial bondsman and the sub-
Substantive right Preliminary remedy surety are NOT entitled to the
benefit of excussion because they
Extinguishment of guaranty: (RA2CE2) are not mere guarantors, but
1. Release in favor of one of the sureties whose liability is primary
guarantors, without the consent of and solidary. (Art 2084)
the others, benefits all to the extent
of the share of the guarantor to PLEDGE, MORTGAGE AND ANTICHRESIS
whom it has been granted (Art I. Common Elements of Pledge,
2078); Mortgage, and Antichresis (Articles
2. If the creditor voluntarily accepts 2085 2092)
immovable or other properties in
payment of the debt, even if he A. Essential Requisites (SOD) (Art
should afterwards lose the same 2085)
through eviction or conveyance of
property (Art 2077);
1. Secures the fulfillment of a principal
obligation;
3. Whenever by some act of the
2. Pledgor, mortgagor, antichretic
creditor, the guarantors even though
debtor must be the absolute owner
they are solidarily liable cannot be
of the thing pledged or mortgaged;
subrogated to the rights, mortgages
and
and preferences of the former (Art
The reason being that in
2080);
4. For the same causes as all other anticipation of a possible
obligations (Art 1231); foreclosure sale in case of
5. When the principal obligation is default which is still a sale, the
extinguished; rule is that the seller must be
6. Extension granted to the debtor by the owner of the thing sold
the creditor without the consent of (Cavite Development Bank vs.
the guarantor (Art 2079) Lim, 324 SCRA 346)
3. Pledgor, mortgagor, antichretic
BOND debtor must have free disposal of
An undertaking that is sufficiently their property, or be legally
authorized for such purpose.
secured, and not cash or currency
NOTES:
Bondsman (Art 2082)
A surety offered in virtue of a Third persons can pledge or
provision of law or a judicial order. mortgage their own property to
He must have the qualifications secure the principal obligation.
required of a guarantor and in It is not necessarily void simply
special laws like the Rules of Court. because the accommodation pledgor
or mortgagor did not benefit from
NOTES: the same. So long as valid consent
Judicial bonds constitute merely a was given, the fact that the loan was
special class of contracts of guaranty given solely for the benefit of the
by the fact that they are given in principal debtor would not invalidate
virtue of a judicial order. the mortgage (GSIS vs CA, 170 SCRA
If the person required to give a legal 533)
or judicial bond should not be able The accommodation pledgor or
to do so, a pledge or mortgage mortgagor, without expressly
sufficient to cover the obligation assuming personal liability for such
shall admitted in lieu thereof (Art debt, is not liable for the payment of
2083) any deficiency, should the property
not be sufficient to cover the debt
CIVIL LAW COMMITTEE

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(Bank of America vs. American

Realty Corporation, 321 SCRA 659). D. Indivisibility (Art 2089)
The accommodation pledgor or GENERAL RULE: A pledge, mortgage, or
mortgagor is not solidarily bound antichresis is indivisible, even though
with the principal obligor but his the debt may be divided among the
liability extents only to the property successors in interest of the debtor or of
pledged or mortgaged. Should there the creditor.
be any deficiency, the creditor has Their indivisibility is not affected by
recourse on the principal debtor who the fact that the debtors are jointly
remains to be primarily bound. or not solidarily liable.
The law grants to the
accommodation pledgor or Consequences of indivisibility:
mortgagor the same rights as a 1. Single thing Every portion of the
guarantor and he cannot be property pledged or mortgaged is
prejudiced by any waiver of defense answerable for the whole obligation
by the principal debtor. 2. Several things All of the several
things pledged or mortgaged are
B. Prohibition against Pactum liable for the totality of the debt
Commissorium (Art 2088; 2137) 3. Debtors heir/creditors heir -
Neither the debtors heir who has
Pactum Commissorium paid part of the debt cannot ask for
Stipulation whereby the thing proportionate extinguishment, nor
creditors heir who received his
pledged or mortgaged, or under
share of the debt return the pledge
antichresis shall automatically
or cancel the mortgage as long as
become the property of the creditor
the debt is not completely satisfied.
in the event of non-payment of the
debt within the term fixed.
EXCEPTIONS:
Requisites: 1. Where each one of several things
1. There should be a pledge, mortgage, guarantees a determinate
or antichresis of property by way of portion of the credit
security for the payment of the 2. Where only a portion of the loan
principal obligation; and was released
2. There should be a stipulation for an 3. Where there was failure of
automatic appropriation by the consideration.
creditor of the property in event of 4. Where there is no debtor-
nonpayment of the obligation within creditor relationship
the stipulated period.
NOTES:
GENERAL RULE: Pactum Commissorium The mere embodiment of a real
is forbidden by law and is declared null estate mortgage and a chattel
and void. mortgage in one document does not
EXCEPTION: The pledgee may have the effect of fusing both
appropriate the thing pledged if after securities into an indivisible whole.
the first and second auctions, the thing The mortgagee, therefore, may
is not sold. (Art 2112) legally foreclose the real estate
mortgage extrajudicially and waive
NOTE: The security contract remains the chattel mortgage foreclosure,
valid; only the prohibited stipulation is and maintain instead a personal
void. action for the recovery of the unpaid
C. Capability to secure all kinds of balance of the credit (Phil. Bank of
obligations, i.e. pure or Commerce vs. Macadaeg, 109 Phil
conditional (Art 2091) 981)
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instrument to bind third persons, but

E. When the principal obligation not for the validity of the contract
becomes due, the things in which (Art 2096).
the pledge, mortgage, or
antichresis consists may be Kinds:
alienated for the payment to the 1. Conventional /Voluntary created
creditor. (Art. 2087) by contract
2. Legal created by operation of law
NOTES: (examples: Art. 546, 1731 and 1914
If the debtor fails to comply with the NCC)
obligation at the time it falls due,
the creditor is merely entitled to NOTES:
move for the sale of the thing The provisions of possession, care
pledged or mortgaged in order to and sale of the thing as well as on
collect the amount of his claim from the termination of the pledge
the proceeds. governing conventional pledges are
If he wishes to secure a title to the applicable to pledges created by
mortgaged property, he can buy it in operation of law (Art 2121)
the foreclosure sale (Montevirgin vs. Unlike, however, in conventional
CA, 112 SCRA 641) pledge where the debtor is not
entitled to the excess unless it is
F. Pledgor, mortgagor, antichretic otherwise agreed, in legal pledge,
debtor retains ownership of the the remainder of the price of the
thing given as a security sale after payment of the debt and
expenses, shall be delivered to the
PLEDGE (Arts 2093 2123) debtor.
In legal pledge, there is no definite
A contract wherein the debtor period for the payment of the
delivers to the creditor or to a third principal obligation. The pledgee
person a movable or document must make a demand for the
evidencing incorporeal rights for the payment of the amount due him;
purpose of securing fulfilment of a otherwise he cannot exercise the
principal obligation with the right of sale at public auction (Art
understanding that when the 2122)
obligation is fulfilled, the thing
delivered shall be returned with all Characteristics:
its fruits and accessions. 1. Real
contract it is perfected by the
Special Requisites (in addition to delivery of the thing pledged by the
the common essential requisites): debtor who is called the pledgor to
1. Possession of the thing pledged must the creditor who is called the
be transferred to the creditor or a pledgee, or to a third person by
third person by agreement (Art common agreement;
2093); 2. Accessor
2. It can only cover movable property y contract it has no independent
and incorporeal rights evidenced by existence of its own;
documents of title and the 3. Unilater
instruments proving the right al contract it creates an obligation
pledged shall be delivered to the solely on the part of the creditor to
creditor, and if negotiable must be return the thing subject thereof
endorsed (Art 2094); and upon the fulfilment of the principal
3. The description of the thing pledged obligation; and
and the date must appear in a public
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4. Subsidiar 5. To bid at the public auction (Art

y contract the obligation incurred 2113)
does not arise until the fulfilment 6. To appropriate the thing in case of
of the principal obligation which is failure of the 2nd public auction (Art
secured. 2112)
7. To apply said fruits, interests or
Consideration in pledge: earnings to the interest, if any, then to
Insofar as the pledgor is concerned, the principal of the credit (Art 2102)
the cause is the principal obligation. 8. To retain excess value received in
If the pledgor is not the debtor, the the public sale (Art 2115)
9. To retain the thing until after full
cause is the compensation stipulated
payment of the debt (Art 2098)
for the pledge or the mere liberality
10. To be reimbursed for the expenses
of the pledgor.
made for the preservation of the thing
pledged (Art 2099)
Extent of pledge: Unless stipulated
11. To object to the alienation of the
otherwise, pledge extends to the fruits,
thing
interests or earnings of the thing.
12. To possess the thing (Art 2098)
13. To sell at public auction in case of
Rights and Obligations of a Pledgor
non-payment of debt at maturity (Art
Rights Obligations 2112)
1. To demand return in 1. To advise the
To choose which of the several things
case of reasonable pledgee of the
grounds to fear flaws of the thing pledged shall be sold (Art 2119)
destruction or (Art 2101) 14. Option to demand replacement or
impairment of the thing 2. Not to demand immediate payment of the debt in case
without the pledgees the return of the of deception as to substance or quality
fault, subject to the thing until after (Art 2109)
duty of replacement full payment of 15. To sell at public auction in case of
(Art 2107) the debt, reasonable grounds to fear destruction
2. To bid and be including interest or impairment of the thing without his
preferred at the public due thereon and
fault (Art 2108)
auction (Art 2113) expenses incurred
3. To alienate the thing for its 16. To bring actions pertaining to the
pledged provided the preservation (Art owner (Art 2103)
pledgee consents to the 2105) 17. To choose which of several things
sale (Art 2097) pledged shall be sold
4. To ask that the thing 18. To bid at the public auction (Art
pledged be deposited 2113)
(Arts 2104 & 2106) 19. To appropriate the thing in case of
failure of the 2nd public auction (Art
Rights of the Pledgee 2112)
KEY: D SBC BA2R2OPS2 20. To apply said fruits, interests or
1. Option to demand replacement or earnings to the interest, if any, then to
immediate payment of the debt in case the principal of the credit (Art 2102)
of deception as to substance or quality 21. To retain excess value received
(Art 2109) in the public sale (Art 2115)
2. To sell at public auction in case of 22. To retain the thing until after full
reasonable grounds to fear destruction payment of the debt (Art 2098)
or impairment of the thing without his 23. To be reimbursed for the expenses
fault (Art 2108) made for the preservation of the thing
3. To bring actions pertaining to the pledged (Art 2099)
owner (Art 2103) 24. To object to the alienation of the
4. To choose which of several things thing
pledged shall be sold 25. To possess the thing (Art 2098)
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26. To sell at public auction in case of NOTE: Possession of a creditor of the

non-payment of debt at maturity (Art thing pledged is an essential requisite of
2112) pledge.
27. To choose which of the several things
pledged shall be sold (Art 2119) Extinguishment of Pledge (CRAPS)
1. For the same causes as all other
Obligations of the Pledgee obligations (Art 1231)
KEY: CUDA3 2. Return of the thing pledged by the
1. Take care of the thing with the pledgee to the pledgor (Art 2110)
diligence of a good father of a family 3. Statement in writing by the
(Art 2099) pledgee that he renounces or
2. Not to use thing unless authorized or abandons the pledge (Art 2111)
by the owner or its preservation requires 4. Payment of the debt (Art 2105)
its use (Art 2104) 5. Sale of thing pledged at public
3. Not to deposit the thing with a 3 rd auction (Art 2115)
person unless so stipulated (Art 2100) NOTE: The possession by the debtor or
4. Responsibility for acts of agents and owner of the thing pledged subsequent
employees as regards the thing (Art to the perfection of the pledge gives rise
2100) to a prima facie presumption that the
5. To advise pledgor of danger to the thing has been returned and, therefore,
thing (Art 2107) that the pledge has been extinguished
6. To advise pledgor of the result of the but not the principal obligation itself.
public auction (Art 2116) (Art 2110)
RIGHT OF PLEDGOR TO SUBSTITUTE Requirements for sale of thing pledged

THING PLEDGED (ART.2107) at public auction: (Art 2112)
Requisites: 1. The debt is due and unpaid
1. The pledgor has reasonable 2. Sale must be at a public auction
grounds to fear the destruction 3. there must be notice to the pledgor
or impairment of the thin and owner, stating the amount due
pledged 4. Sale must be with the intervention
2. There is no fault on the part of of a notary public
the pledgee
3. The pledgor is offering in place Effect of sale of the thing pledged: (Art
of the thing, another thing in 2115)
pledge which is of the same kind 1. The sale of the thing pledged shall
and quality as the former extinguish the principal obligation,
4. The pledge does not choose to whether or not the proceeds of the
exercise his right to cause the sale are equal to the amount of the
thing pledged to be sold at principal obligation, interest and
public auction expenses in a proper case
NOTE: The pledgees right to have the 2. If the price of the sale is more than
thing pledged sold at public sale granted the amount due the creditor, the
under the Article 2108 is superior to that debtor is not entitled to the excess
given to the pledgor to substitute the unless the contrary is provided
thing pledged under Article 2107. 3. If the price of the sale is less, the
creditor is not entitled to recover
Prohibition against double pledge the deficiency even if there is a
Property which has been lawfully stipulation to that effect
pledged to one creditor cannot be
pledged to another as long as the REAL ESTATE MORTGAGE (Articles
first one subsists. 2124-2131)
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A contract whereby the debtor bears interest, or that the interest

secures to the creditor the as compensation for the use of the
fulfilment of a principal obligation, principal and enjoyment of its fruits
specially subjecting to such security be in the form of a certain percent
immovable property or real rights thereof.
over immovable property in case the
principal obligation is not complied Special Requisites (in addition to
with at the time stipulated. the common essential requisites):
1. It can cover only immovable
Characteristics of the contract: property and alienable real rights
1. Real imposed upon immovables (Art
2. Accessory 2124);
3. Subsidiary 2. It must appear in a public instrument
4. Unilateral it creates only an (Art. 2125); and
obligation on the part of the 3. Registration in the registry of
creditor who must free the property is necessary to bind third
property from the encumbrance persons, but not for the validity of
once the obligation is fulfilled. the contract (Art 2125).
An order for foreclosure cannot
be refused on the ground that
the mortgage had not been
NOTES: registered provided no innocent
As an accessory contract, its third parties are involved.
consideration is that of the principal NOTE: Where a mortgage is not valid or
contract from which it receives life. false, the principal obligation which it
A mortgage does not involve a guarantees is not rendered null and void.
What is lost only is the right to foreclose
transfer, cession or conveyance of
the mortgage as a special remedy for
property but only constitutes a lien
satisfying or settling the indebtedness
thereon. Until discharged, it follows
which is the principal obligation but the
the property wherever it goes and
mortgage deed remains as evidence or
subsists notwithstanding changes of
proof of a personal obligation of the
ownership.
debtor and the amount due to the
A mortgage gives the mortgagee no creditor may be enforced in an ordinary
right or claim to the possession of personal action.
the property, and therefore, a mere
mortgagee has no right to eject an Kinds:
occupant of the property mortgaged 1. Voluntary agreed to by the parties
unless the mortgage should contain or constituted by the will of the
some provision to that effect. The owner of the property on which it is
only right of a mortgagee in case of created
non-payment of a debt secured by 2. Legal one required by law to be
mortgage would be to foreclose the executed in favour of certain
mortgage and have the encumbered persons
property sold to satisfy the The persons in whose favour the
outstanding indebtedness. If the law establishes a mortgage have
possession is transferred to the no other right than to demand
mortgagee, it must not expressly be the execution and the recording
for purpose of applying the fruits to of the document in which the
the interest then to the principal of mortgage is formalized (Art 2125
the credit, for then it would be an par 2)
antichresis. 3. Equitable one which, although
It is not an essential requisite that lacking the formalities of a
the principal of the mortgage credit mortgage, shows the intention of the
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parties to make the property a transmission of property should not be

security for a debt unduly impeded.
PLEDGE REAL MORTGAGE 2. Mortgagee - To claim from a 3rd

1. Constituted on 1. Constituted on person in possession of the
movables immovables mortgaged property the payment of
2. Property is 2. Delivery is not the part of the credit secured by the
delivered to pledgee necessary which said third person possesses
or by common (Art 2129)
consent to a third
NOTE: It is necessary that prior demand
person
3. Not valid against 3. Not valid against
for payment must have been made on
third persons unless a third persons unless the debtor and the latter failed to pay
description of the registered (BPI vs Concepcion & Hijos, Inc., 53 Phil
thing pledged and 906)
date of pledge
appear in a public Foreclosure
instrument The remedy available to the
mortgagee by which he subjects the
Extent of Mortgage: mortgaged property to the
Absent express stipulation to the satisfaction of the obligation to
contrary, the mortgage includes the secure that for which the mortgage
accessions, improvements, growing was given
fruits and income of the property not
yet received when the obligation NOTES:
becomes due and to the amount of It denotes the procedure adopted by
the indemnity granted or owing to
the mortgagee to terminate the
the proprietor from the insurers of
rights of the mortgagor on the
the property mortgaged, or in virtue
property and includes the sale itself
of expropriation for public use (Art
(DBP vs Zaragoza, 84 SCRA 668)
2127)
Foreclosure is valid where the
Object of Mortgage: debtor is in default in the payment
Future property cannot be an object of his obligation (Gobonseng, Jr. vs
of a contract of mortgage (Art CA, 246 SCRA 472)
2085[2]) However, a stipulation
subjecting to the mortgage lien, Kinds:
properties (improvements) which the 1. Judicial ordinary action for
mortgagor may subsequently acquire foreclosure under Rule 68 of the
install, or use in connection with Rules of Court
real property already mortgaged 2. Extrajudicial when mortgagee is
belonging to the mortgagor is valid given a special power of attorney to
(Peoples Bank and Trust Co. vs. sell the mortgaged property by
Dahican Lumber Co., 20 SCRA 84) public auction, under Act No. 3135
Special Rights: Judicial Extrajudicial

1. Mortgagor - To alienate the foreclosure foreclosure
mortgaged property but the 1. There is court 1. No court
mortgage shall remain attached to intervention intervention
2. Decisions are 2. Not appealable
the property.
appealable because it is
immediately
NOTE: A stipulation forbidding the owner executory
from alienating the immovable mortgage 3. Order of court 3. Foreclosure does
shall be void (Art 2130) being contrary to cuts off all rights of not cut off right of
public policy inasmuch as the the parties all parties involved
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impleaded The action to recover a deficiency

4. There is equity 4. There is right of after foreclosure prescribes after 10
of redemption redemption
years from the time the right of
except on banks
which provides for action accrues (Arts 1142 & 1144).
a right of
redemption Stipulation of upset price or tipo
5. Period of 5. Period to redeem It is a stipulation in a mortgage of
redemption starts start from date of real property of minimum price at
from the finality of registration of which the property shall be sold, to
the judgment until certificate of sale become operative in the event of a
order of
foreclosure sale at public auction. It
confirmation
is null and void for the property
6. No need for a 6. Special power of
special power of attorney in favor of must be sold to the highest bidder.
attorney in the mortgagee is Parties cannot, by agreement,
contract of needed in the contravene the law and interfere
mortgage contract with the lawful procedure of the
courts (BPI vs Yulo, 31 Phil 476)
NOTES:
A foreclosure sale retroacts to the Extrajudicial foreclosure real property
date of registration of the mortgage (Act No. 3135)
and that a person who takes a The law covers only real estate
mortgage in good faith and for mortgages. It is intended merely to
valuable consideration, the record regulate the extrajudicial sale of the
showing clear title to the mortgagor, property mortgaged if and when the
will be protected against equitable mortgagee is given a special power
claims on the title in favor of third of express authority to do so in the
persons, of which he had no actual deed itself or in a document
or constructive notice (St. Dominic annexed thereto.
Corporation vs. IAC 151 SCRA 577). The authority to sell is not
Where there is a right to redeem, extinguished by the death of the
mortgagor (or mortgagee) as it is an
inadequacy of price is not material
essential and inseparable part of a
because the judgment debtor may
bilateral agreement (Perez vs PNB,
reacquire the property or else sell
17 SCRA 833).
his right to redeem and thus recover
No sale can be legally made outside
any loss he claims to have suffered
by reason of the price obtained at the province in which the property
the auction sale and consequently sold is situated; and in case the
not sufficient to set aside the sale. place within said province in which
Mere inadequacy of the price the sale is to be made is the subject
obtained at the sheriffs sale will not of stipulation, such sale shall be
be sufficient to set aside the sale made in the said place in the
unless the price is so inadequate as municipal building of the
to shock the conscience of the municipality in which the property or
court taking into consideration the part thereof is situated.
peculiar circumstances attendant
thereto. (Sulit vs. CA, 268 SCRA 441) Procedure for extrajudicial foreclosure
of both real estate mortgage under Act
Should there remain a balance due No. 3135 and chattel mortgage under
to the mortgagee after applying the Act No. 1508 (A.M. No. 99-10-05-0,
proceeds of the sale, the mortgagee January 15, 2000)
is entitled to recover the deficiency. 1. Filing of application before the
This rule applies both to judicial and Executive Judge through the Clerk of
extra-judicial foreclosure real Court
mortgage.
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2. Clerk of Court will examine whether publication requirements under Act.

the requirement of the law have No. 3135. Notices are given to
been complied with, that is, whether secure bidders and prevent a
the notice of sale has been posted sacrifice of the property. Clearly, the
for not less than 20 days in at least statutory requirements of posting
three (3) public places of the and publication are mandated, not
municipality or city where the for the mortgagors benefit, but for
property is situated, and if the same the public or third persons. Failure
is worth more than P400.00, that to comply with the statutory
such notice has been published once requirements as to publication of
a week for at least three (3) notice of auction sale constitutes a
consecutive weeks in a newspaper of jurisdictional defect which
general circulation in the city of invalidates the sale.Lack of
municipality republication of notice of
3. The certificate of sale must be foreclosure sale made subsequently
approved by the Executive Judge after the original date renders such
4. Where the application concerns sale void (PNB vs. Nepomuceno
extrajudicial foreclosure of real Productions Inc., G.R. No. 139479.
mortgages in different locations December 27, 2002).
covering one indebtedness, only one Sec 3 of Act 3135 does not require
filing fee corresponding to such debt personal or any particular notice on
shall be collected the mortgagor much less on his
5. The Clerk of Court shall issue successors-in-interest where there is
certificate of payment indicating the no contractual stipulation therefor.
amount of indebtedness, the filing Hence, unless required in the
fees collected, the mortgages sought mortgage contract, the lack of such
to be foreclosed, the description of notice is not a ground to set aside a
the real estates and their respective foreclosure sale.
locations Neither does Sec 3 require posting of
6. The notice of sale shall be published
notice of sale on the mortgage
in a newspaper of general circulation
property and the certificate of
pursuant to Section 1, PD No. 1079
posting is not required, much less
7. The application of shall be raffled
considered indispensable, for the
among all sheriffs
validity of a foreclosure sale.
8. After the redemption period has
expired, the Clerk of Court shall
archive the records.
Redemption
9. No auction sale shall be held unless
It is the transaction by which the
there are at least two (2)
participating bidders, otherwise the mortgagor reacquires or buys back
sale shall be postponed to another the property which may have passed
date. If on the new date set forth under the mortgage, or divests the
for the sale there shall not be at property of the lien which the
least two bidders, the sale shall then mortgage may have created.
proceed. The names of the bidders
shall be reported to the Sheriff of NOTES:
the Notary Public, who conducted A sale by the mortgagor to a third
the sale to the Clerk of Court before party of the mortgaged property
the issuance of the certificate of during the period for redemption
sale. transfers only the right to redeem
the property and the right to
NOTES: possess, use and enjoy the same
The Mortgagor and Mortgagee have during said period.
no right to waive the posting and
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Where sale with assumption of (sec. 47, of General Banking

mortgage not registered and made Law)
without the consent of the 2. Judicial before confirmation of the
mortgagee, the buyer, thereof, was sale by the court
not validly substituted as debtor
and, hence, had no right to redeem NOTE: Allowing a redemption after the
(Bonnevie vs. CA, 125 SCRA 122). lapse of the statutory period, when the
buyer at the foreclosure sale does not
Kinds: object but even consents to the
1. Equity of Redemption right of redemption, will uphold the policy of the
mortgagor to redeem the mortgaged law which is to aid rather than defeat
property after his default in the the right of redemption. There is nothing
performance of the conditions of the in the law which prevents a waiver of
mortgage within the 90-day period the statutory period for redemption
from the date of the service of the (Ramirez vs CA, 219 SCRA 598).
order of foreclosure or even
thereafter but before the Amount of the redemption price:
confirmation of the sale. Applies to 1. Mortgagee is not a bank (Act No.
judicial foreclosure of real mortgage 3135, in relation to Sec. 28, Rule 39
and chattel mortgage foreclosure. of Rules of Court)
a. purchase price of the property
NOTE: Redemption of the banking b. 1% interest per month on the
institutions is allowed within one year purchase price
from confirmation of sale. c. taxes paid and amount of
purchasers prior lien, if any,
2. Right of Redemption right of with the same rate of interest
mortgagor to redeem the mortgaged computed from the date of
property within one year from the registration of sale, up to the
date of registration of the certificate time of redemption
of sale. Applies only to extrajudicial 2. Mortgagee is a bank (GBL 2000)
foreclosure of real mortgage. a. amount due under the mortgage
deed
NOTE: The right of redemption, as long b. interest
as within the period prescribed, may be c. cost and expenses
exercised irrespective of whether or not NOTE: Redemption price in this
the mortgagee has subsequently case is reduced by the income
conveyed the property to some other received from the property
party (Sta. Ignacia Rural Bank, Inc. vs.
CA, 230 SCRA 513)
Period of Redemption
1. Extra-judicial (Act #3135)
a. natural person one year from
registration of the certificate of
sale with Registry of Deeds ANTICHRESIS (Articles 2132 -2139)
b. juridical person same rule as
natural person A contract whereby the creditor
c. juridical person (mortgagee is acquires the right to receive the
bank) - three months after fruits of an immovable of the debtor,
foreclosure or before with the obligation to apply them to
registration of certificate of the payment of the interest, if
foreclosure which ever is earlier owing, and thereafter to the
principal of his credit (Art 2132)
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Characteristics real right over the property

1. Accessory contract it secures the 3. The creditor, 3. The creditor has no
performance of a principal obligation unless there is such obligation
2. Formal contract it must be in a stipulation to the
contrary, is obliged to
specified form to be valid, i.e., in
pay the taxes and
writing. (Art 2134) charges upon the
estate
Special Requisites (in addition to 4. It is expressly 4. There is no such
the common essential requisites): stipulated that the obligation on part of
1. It can cover only the fruits of an creditor given mortgagee
immovable property; (Art 2132) possession of the
2. Delivery of the immovable is property shall apply
necessary for the creditor to receive all the fruits thereof
to the payment of
the fruits and not that the contract
interest, if owing,
shall be binding; and thereafter to the
3. Amount of principal and interest principal
must be specified in writing (Art. Subject matter of both is real property
2134); and
4. Express agreement that debtor will Obligations of antichretic creditor:
give possession of the property to 1 To pay taxes and charges on the
creditor and that the latter will estate, including necessary expenses
apply the fruits to the interest, if NOTE: Creditor may avoid said
any, then to the principal of his obligation by:
credit. (Art 2132) a. compelling debtor to
reacquire enjoyment of the
NOTE: The obligation to pay interest is property or
not of the essence of the contract of b. by stipulation to the
antichresis, there being nothing in the contrary
Code to show that antichresis is only 2 To apply all the fruits, after
applicable to securing the payment of receiving them, to the payment of
interest-bearing loans. On the contrary, interest, if owing, and thereafter to
antichresis is susceptible of guaranteeing the principal
all kinds of obligations, pure or 3 To render an account of the fruits to
conditional the debtor
4 To bear the expenses necessary for
Antichresis Pledge its preservation and repair
1. Refers to real 1. Refers to personal
property property Remedies of creditor in case of non-
2. Perfected by mere 2. Perfected by
payment of debt
consent delivery of the thing
pledged
3. Consensual contract 3. Real Contract 1. Bring an action for specific
performance; or
2. Petition for the sale of the real
property as in a foreclosure of
mortgages under Rule 68 of the Rules
Antichresis Real Mortgage of Court.(Art 2137)
1. Property is 1. Debtor usually
delivered to creditor retains possession of
the property
2. Creditor acquires 2. Creditor does not
only the right to have any right to
receive the fruits of receive the fruits;
the property, hence, but the mortgage
it does not produce a creates a real right
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NOTES: 4. Accompanied by an affidavit of good

The parties, however, may agree on faith to bind third persons, but not
an extrajudicial foreclosure in the for the validity of the contract.
same manner as they are allowed in 5. It can cover only obligations existing
contracts of mortgage and pledge at the time the mortgage is
(Tavera vs. El Hogar Filipino, Inc., constituted.
68 Phil 712). NOTE: A mortgage containing a
A stipulation authorizing the stipulation in regard to future
advances in the credit will take
antichretic creditor to appropriate
effect only from the date the same
the property upon the non-payment
are made and not from the date of
of the debt within the agreed period
the mortgage (Jaca vs Davao Lumber
is void (Art 2088).
Co., 113 SCRA 107)
CHATTEL MORTGAGE (Articles 2140-
Effect of registration: Creates a real
2141)
right
The registration of the chattel
A contract by virtue of which
mortgage is an effective and binding
personal property is recorded in the
notice to other creditors of its
Chattel Mortgage Register as a
existence and creates a real right or
security for the performance of an
a lien which, being recorded, follows
obligation (Art 2140).
the chattel wherever it goes. The
registration gives the mortgagee
Characteristics
symbolical possession (Northern
1. Accessory contract it is for the
Motors, Inc. vs. Coquia, 68 SCRA
purpose of securing the performance
374).
of a principal obligation
2. Formal contract registration in the
Effect of failure to register chattel
Chattel Mortgage Register is
mortgage in the chattel mortgage
indispensable for its validity
registry
3. Unilateral contract it produces
Article 2140 makes the recording in
only obligations on the part of the
the Chattel Mortgage Register an
creditor to free the thing from the
essential requisite but if the
encumbrance on fulfilment of the
instrument is not recorded, the
obligation.
mortgage is nevertheless binding
between the parties. But the person
Special Requisites (in addition to
in whose favour the law establishes a
the common essential requisites):
mortgage has no other right than to
1. It can cover only personal or
demand the execution and the
movable property in general;
recording of the document.
however, the parties may treat as
personal property that which by its
nature would be real property;
Chattel Mortgage Pledge
2. Registration of the mortgage with
1. Delivery of the 1. Delivery of the
the Chattel Mortgage Register where
personal property thing pledged is
the mortgagor resides; if property is
to the mortgage is necessary
located in a different province,
not necessary
registration in both provinces
required; 2. registration in 2. registration not
3. Description of the property as would the Chattel necessary to be
enable the parties or other persons Mortgage Registry valid
to identify the same after is necessary for its
reasonable investigation and inquiry; validity
and 3. If property is 3. Debtor is not
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foreclosed, the entitled to excess mortgagor to discharge the mortgage

excess over the unless otherwise obligation. After the sale of the
amount due goes to agreed or except in chattel at public auction, the right
the debtor case of legal of redemption is no longer available
pledge to the mortgagor (Cabral vs.
4. If there is 4. If there is Evangelista, 28 SCRA 1000).
deficiency after deficiency, creditor
foreclosure, is not entitled to Application of proceed of sale:
creditor is entitled recover 1. Costs and expenses of keeping
to recover the notwithstanding and sale
deficiency from the any stipulation to 2. Payment of the obligation
debtor, except the contrary secured by the mortgage
under Art. 1484 3. Claims of persons holding
Subject matter of both is movable subsequent mortgages in their
property order
4. The balance, if any, shall be paid
Affidavit of Good Faith to the mortgagor or person
Oath in a contract of chattel holding under him
mortgage wherein the parties
"severally swear that the mortgage is NOTES:
made for the purpose of securing the The creditor may maintain an action
obligation specified in the conditions for the deficiency, except if the
thereof and for no other purposes chattel mortgage is constituted as
and that the same is a just and valid security for the purchase of personal
obligation and one not entered into property payable in instalments
for the purpose of fraud. (Sec. 5, (Art. 1484).
Chattel Mortgage Law) The action for deficiency may be
brought within ten (10) years from
Effect of absence the time the cause of action accrues
The special affidavit is required only (Arts 1141 and 1142).
for the purpose of transforming an Only equity of redemption is
already valid mortgage into
available to the mortgagor; the
preferred mortgage. Thus, it is
latter can no longer redeem after
not necessary for the validity of the
the confirmation of the foreclosure
chattel mortgage itself but only to
sale.
give it a preferred status. In other
words, its absence vitiates the
Right of redemption
mortgage only as against third
persons without notice like creditors When the condition of a chattel
and subsequent encumbrancers. mortgage is broken the following
may redeem:
Foreclosure of Chattel Mortgage a) mortgagor;
NOTES: b) person holding a subsequent
Foreclosure sale in chattel mortgage mortgage; or
c) subsequent attaching creditor.
is by public auction under Act No.
1508, but the parties may stipulate An attaching creditor who so
that it be by private sale. redeems shall be subrogated to the
The mortgagee may, after thirty (30) rights of the mortgagee and entitled
to foreclose the mortgage in the
days from the time of the condition
same manner that the mortgagee
broken, cause the mortgaged
could foreclose it.
property to be sold at public auction
by a public officer. The 30-day The redemption is made by paying or
period is also a grace period for the delivering to the mortgagee the
CIVIL LAW COMMITTEE
Rhodora
John Stephen
Purganan(LTD),
213
amount due on such mortgage and claim above others out of the
the costs, and expenses incurred by debtors assets.
such breach of condition before the
sale thereof (Sec 13, Act No. 1508). NOTES:
The rules on preference of credits
Right to possession of foreclosed apply only when two or more
property creditors have separate and distinct
1. Real mortgage After the claims against the same debtor who
redemption period has expired, the has insufficient property.
purchaser of the property has the Preference creates no lien on
right to a conveyance and to be
property, and, therefore, gives no
placed in possession thereof.
interest in property, specific or
general, to the preferred creditor
NOTES:
but a preference in application of
Purchaser is not obliged to bring the proceeds after the sale. (Molina
a separate suit for possession. vs. Somes, 31 Phil. 76)
He must invoke the aid of the The preferential right of credit
courts and ask for a WRIT OF
attains significance only after the
POSSESSION.
properties of the debtor have been
Section 7 of Act No. 3135 allows inventoried and liquidated, and the
the purchaser to take possession claims held by his various creditors
of the foreclosed property during have been established. (DBP vs.
the period of redemption upon NLRC, 183 SCRA 328)
filing of an ex parte application
and approval of a bond. Preference of Lien
Credit
2. Chattel mortgage When default Applies only to Creates a charge
occurs and the creditor desires to claims which do on a particular
foreclose, the creditor has the right not attach to property
to take the property as a preliminary specific
step for its sale. properties
NOTE: Where the debtor refuses to
yield the property, the creditors Liability of debtors property for his
remedy is to institute an action obligations
either to effect judicial foreclosure GENERAL RULE: Debtor is liable with
directly or to secure possession all his property, present and future, for
(REPLEVIN) as a preliminary to the the fulfilment of his obligations. (Art
sale contemplated in Section 14 or 2236)
Act. No. 1508
EXEMPT PROPERTY:
CONCURRENCE AND PREFERENCE OF 1. Present property those
CREDITS (Articles 2236 2251) provided under Arts. 155 and 205
of the Family Code, Sec. 13,
Concurrence of Credits Rule 39 of the Rules of Court,
Possession by two or more creditors and Sec. 118 of the Public Land
of equal rights or privileges over the Act
same property or all of the property 2. Future property a debtor who
of the debtor obtains a discharge from his
debts on account of his
Preference of Credits insolvency, is not liable for the
Right held by a creditor to be unsatisfied claims of his
preferred in the payment of his creditors with said property
subject to certain exceptions
CIVIL LAW COMMITTEE
Rhodora
John Stephen
Purganan(LTD),
214
expressly provided by law. (Secs. preference among the attachments

68, 69, The Insolvency Law [Act or executions according to the order
No. 1956]) of the time they were levied upon
3. Property under legal custody and the property. The pro rata rule in
those owned by municipal Article 2249 does not apply;
corporations necessary for otherwise, the result would be
governmental purposes absurd. The preference of a credit
annotated by an attachment or
General Categories of Credit: execution could be defeated by
1. Special Preferred Credits - those simply obtaining a writ of
listed in Arts. 2241 and 2242 shall be attachment or execution, no matter
considered as mortgages and pledges of how much later (Manabat vs Laguna
real or personal property or liens (Art. Federation of Facomas, Inc., 19
2243). Hence, they are not included in SCRA 621).
the insolvent debtor's assets. The last paragraph of Article
2241 applies only when the right of
NOTES: ownership in such property continues
Arts. 2241 and 2242 do not give the in the debtor, and, therefore, it is
order of preference or priority of not applicable to cases where the
payment. They merely enumerate debtor has parted with his ownership
the credits which enjoy preference therein, as where he has sold the
with respect to specific movables or property (Pea vs. Mitchell, 9 Phil
immovables. With respect to the 587)
same specific movables or
immovables, creditors, with the 2. Ordinary Preferred Credits - those
exception of the State (No. 1), listed in Art. 2244 as amended by
merely concur. Art. 110 of the Labor Code.
They only find application when NOTES:
there is a concurrence of credits, The provision not only enumerates
i.e., when the same specific the preferred credits with respect to
property of the debtor is subjected other property, real and personal, of
to the claims of several creditors and the debtor, but also gives their order
the value of such property is of preference in the order named.
insufficient to pay in full all the In contrast with Articles 2241 and
creditors. In such a situation, the 2242, Article 2244 creates no liens
question of preference will arise. on determinate property which
Article 2242 makes no distinction follow such property. What Article
between registered and unregistered 2244 creates are simply rights in
vendors lien (No. 2). Hence, any lien favour of certain creditors to have
of that kind enjoys the preferred the cash and other assets of the
credit status. Unlike the unpaid insolvent applied in a certain
price of real property sold, mortgage sequence or order of priority.
credits (No. 5), in order to be given Article 2244, particularly par (14)
preference, should be recorded in item (1) thereof, is not applicable to
the Registry of Property. But a obligations of the State as it is a
recorded mortgage credit is superior recognized doctrine that the State is
to an unrecorded unpaid vendors always solvent. It is inconceivable
lien (De Barretto vs. Villanueva, 1 for the State to voluntarily initiate
SCRA 288) insolvency or general liquidation
The priority rule applies to credits proceedings or to be subjected to
annotated in the Registry of such proceedings under its own laws.
Property. As to credits mentioned in
No. 7 of Article 2242, there is
CIVIL LAW COMMITTEE
Rhodora
John Stephen
Purganan(LTD),
215
3. Common Credits those listed by the deterioration or destruction

under Art. 2245, which shall be paid of the thing as it formerly existed.
pro rata regardless of dates.
NOTE: Ordinary Preferred and Common ORDER OF PREFERENCE OF CREDITS
Credits cover only free property of the
debtor, or those not subjected to Special Arts. 2241 and 2242, jointly with
Preferred Credit. Arts. 2246 to 2249 establish a two-
tier order of preference:
Effects of Article 110 of Labor Code to 1. First tier includes taxes, duties
Art 2244: and fees due on specific movable or
1. Removed the one-year limitation immovable property;
found in No. 2 of Art. 2244 2. Second tier all other special
2. Moving up the claims for unpaid preferred (non-tax) credits shall be
wages (and other monetary claims) satisfied pro-rata, out of any
of laborers or workers of insolvent residual value of the specific
from second priority to first priority property to which such credits
in the order of preference relate.
established by Art. 2244
NOTES:
The pro-rata rule does not apply to
credits annotated in the Registry of
Property by virtue of a judicial
NOTES:
In case of bankruptcy or liquidation
of the employers business, the
unpaid wages and other monetary
claims of the employees shall be order, by attachments and
given first preference and shall be executions, which are preferred as
paid in full before the claims of the to later credits. In satisfying
government and other creditors may several credits annotated by
be paid. The terms, declaration attachments or executions, the rule
of bankruptcy, or judicial is still preference according to the
liquidation have been eliminated, priority of the credits in the order of
nevertheless, according to the SC, time.
bankruptcy or liquidation In order to make the pro rating
proceedings are still necessary for
provided in Art 2249 fully effective,
the operation of the preference
the preferred creditors enumerated
accorded to workers under Art. 110
in Nos. 2 to 14 of Art 2242 must
of the Labor Code. (DBP vs. NLRC
necessarily be convened, and the
183 SCRA 328; RA No. 6715 Sec 10)
import of their claims ascertained.
In case of rehabilitation, the There must be first some proceeding
preference of credit granted to where the claims of all the preferred
employees under Art 110 of the creditors may be bindingly
Labor Code is not applicable adjudicated, e.g. insolvency,
(Rubberworld [Phils.] vs CA, 305 settlement of decedents estate, or
SCRA 722). other liquidation proceedings except
where there are not more than one
Refectionary Credit creditor.
Indebtedness incurred in the repair
or reconstruction of something
previously made, such repair or
reconstruction being made necessary
CIVIL LAW COMMITTEE

Rhodora
John Stephen
Purganan(LTD),
216
Credits which do not enjoy any

preference with respect to specific
property because they are not
among those mentioned in Arts. 2241
and 2242 and those while included in
said articles are unpaid because the
value of the property to which the
preference refers is less than the
preferred credit or credits, shall be
satisfied in the order established in
Art. 2244 with reference to other
real and/or personal property.
Common credits or those which do
not fall under Arts. 2241, 2242, and
2244 do not enjoy any preference
and shall be paid pro rata regardless
of dates.
CIVIL LAW COMMITTEE

Rhodora
John Stephen
Purganan(LTD),

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MEMORY AID IN CIVIL LAW

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

ii. the use of the thing is the expiration of the advance

Loan Credit 5. Purely Personal (Art 1939):

MEMORY AID IN CIVIL LAW

MEMORY AID IN CIVIL LAW

3. To be liable to the bailee for No estafa is committed by a person

2. There is a transfer There is no transfer

MEMORY AID IN CIVIL LAW

1. Subject matter is Subject matter is Compound Interest

MEMORY AID IN CIVIL LAW

MEMORY AID IN CIVIL LAW

5. Compensation Security or to insure Custody and

2. Extra-judicial GENERAL RULE: Contract of deposit is

MEMORY AID IN CIVIL LAW

he would exercise over his c. If the deposit is for a

MEMORY AID IN CIVIL LAW

2. When authorized by the depositary may reasonably presume

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

deposited b. If the deposit is for valuable

MEMORY AID IN CIVIL LAW

deposit of effects made by travellers a. Conventional - agreed upon by

A contract whereby a person SURETYSHIP

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

the applicable provisions governing (Finman General Assurance

MEMORY AID IN CIVIL LAW

contract. It may also guarantee to the creditor, no such

MEMORY AID IN CIVIL LAW

because the latter acts without

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

cause which supports the obligation Exception to the concept of

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

MEMORY AID IN CIVIL LAW

The co-guarantors may set up before making payment. He

MEMORY AID IN CIVIL LAW

Guarantors right to Subrogation

MEMORY AID IN CIVIL LAW

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

(Bank of America vs. American

MEMORY AID IN CIVIL LAW

instrument to bind third persons, but

MEMORY AID IN CIVIL LAW

4. Subsidiar 5. To bid at the public auction (Art

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

26. To sell at public auction in case of NOTE: Possession of a creditor of the

RIGHT OF PLEDGOR TO SUBSTITUTE Requirements for sale of thing pledged

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

A contract whereby the debtor bears interest, or that the interest

MEMORY AID IN CIVIL LAW