Credit Transactions Reviewer

San Beda College of Law
182
MEMORY AID IN CIVIL LAW
CREDIT TRANSACTIONS
CREDIT TRANSACTIONS LOAN (Articles 1933 – 1961)
 All transactions involving the
purchase or loan of goods, services,  A contract wherein one of the
or money in the present with a parties delivers to another, either
promise to pay or deliver in the something not consumable so that
future the latter may use the same for a
certain time and return it or money
Contracts of security or other consumable thing, upon the
Types: condition that the same amount of
1. Secured transactions or contracts of the same kind and quality shall be
real security - supported by a paid. (Art 1933)
collateral or an encumbrance of
property Characteristics:
2. Unsecured transactions or contracts 1. Real Contract – delivery of the thing
of personal security - supported only loaned is necessary for the
by a promise or personal perfection of the contract
commitment of another such as a NOTE: An accepted promise to make
guarantor or surety a future loan is a consensual
contract, and therefore binding upon
Security the parties but it is only after
 Something given, deposited, or delivery, will the real contract of
serving as a means to ensure loan arise. (Art 1934)
fulfilment or enforcement of an
obligation or of protecting some 2. Unilateral Contract - once the
interest in property subject matter has been delivered,
 Types of Security it creates obligations on the part of
a. personal – when an individual only one of the parties (i.e.
becomes surety or guarantor borrower).
b. real or property – when a
mortgage, pledge, antichresis,  Kinds:
charge or lien or other device 1. Commodatum – when the bailor
used to have property held, out (lender) delivers to the bailee
of which the person to be made (borrower) a non-consumable thing
secure can be compensated for so that the latter may use it for a
loss certain time and return the identical
thing.
Bailment  Kinds of commodatum:
 The delivery of property of one a. Ordinary Commodatum – use by
person to another in trust for a the borrower of the thing is for a
specific purpose, with a contract, certain period of time
express or implied, that the trust b. Precarium - one whereby the
shall be faithfully executed and the bailor may demand the thing
property returned or duly accounted loaned at will and it exists in the
for when the special purpose is following cases:
accomplished or kept until the bailor i. neither the duration nor
claims it. purpose of the contract is
stipulated
 Parties: ii. the use of the thing is
1. bailor - the giver; one who delivers merely tolerated by the
property owner
2. bailee- the recipient; one who
receives the custody or possession of
the thing thus delivered
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
2. Simple loan or mutuum – where the COMMODATUM (Articles 1935 – 1952)

lender delivers to the borrower  Nature:
money or other consumable thing
upon the condition that the latter 1. PURPOSE: Bailee in commodatum
shall pay the same amount of the acquires the temporary use of the
same kind and quality. thing but not its fruits (unless
stipulated as an incidental part of
Commodatum Mutuum the contract).(Art 1935)
Key: COPS-LOTR  Use must be temporary,
1. Object otherwise the contract may be a
Non-consumable Consumable deposit.
2. Cause
Gratuitous May or may not be 2. CAUSE: Essentially gratuitous; it
gratuitous ceases to be a commodatum if any
3. Purpose compensation is to be paid by the
Use or temporary Consumption borrower who acquires the use, in
possession
such case there arises a lease
4. Subject Matter
contract.
Real or personal Only personal
property property  Similar to a donation in that it
5. Ownership of the thing confers a benefit to the
Retained by the Passes to the debtor recipient. The presumption is
bailor that the bailor has loaned the
6. Thing to be returned thing for having no need
Exact thing loaned Equal amount of the therefor.
same kind and
quality 3. SUBJECT MATTER: Generally non-
7. Who bears risk of loss consumable whether real or personal
Bailor Debtor but if the consumable goods are not
8. When to return for consumption as when they are
In case of urgent Only after the merely for exhibition, consumable
need, even before expiration of the goods may be the subject of the
the expiration of the term
commodatum. (Art 1936)
term
4. Bailor need not be the owner of the
thing owned (Art. 1938) since by the
Loan Credit
loan, ownership does not pass to the
Delivery by one party Ability of a person to
and the receipt of borrow money or
borrower.
other party of a things by virtue of  A mere lessee or usufructuary
given sum of money the trust or may lend but the borrower or
or other consumable confidence reposed bailee himself may not lend nor
thing upon an by the lender that he lease the thing loaned to him to
agreement, express will pay what he a third person (Art 1932[2])
or implied, to repay promised.
the same. 5. Purely Personal (Art 1939):
 Death of either party terminates
the contract unless by
Loan Credit stipulation, the commodatum is
1. Interest taken at Interest is taken in
transmitted to the heirs of either
the expiration of the advance
credit
or both parties.
2. Always on a Always on a single  Bailee can neither lend nor lease
double name paper name paper (i.e. the object of the contract to a
(two signatures promissory note with third person.
appear with both no indorse-ment
parties held liable other than the
for payment) maker)
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NOTE:Use of the thing loaned NOTES:

may extend to members of the  However, the bailee’s right
bailee’s household except: extends no further than
a. contrary stipulation; retention of the thing loaned
b. nature of the thing until he is reimbursed for the
forbids such use damages suffered by him.
Obligations of the Bailee: (Arts 1941 –

 He cannot lawfully sell the
thing to satisfy such damages
1945)
without court’s approval.
1. To pay for the ordinary expenses for
the use and preservation of the thing  In case there are two or
loaned. (Art 1941) more bailees, their
2. To be liable for the loss of the thing obligation shall be solidary.
even if it should be through a
fortuitous event in the following Obligations of the bailor (Art 1946 – Art
cases: (KLAS D) 1952):
a. when he keeps it longer than the 1. To respect the duration of the loan
period stipulated, or after the GENERAL RULE: Allow the bailee
accomplishment of its use the use of the thing loaned for the
b. when he lends or leases it to duration of the period stipulated or
third persons who are not until the accomplishment of the
members of his household purpose for which the commodatum
c. when the thing loaned has been was instituted.
delivered with appraisal of its EXCEPTIONS:
value a. In case of urgent need in
d. when, being able to save either which case bailee may demand
of the thing borrowed or his own its return or temporary use;
things, he chose to save the b. The bailor may demand
latter; or immediate return of the thing if
e. when the bailee devoted the the bailee commits any act of
thing for any purpose different ingratitude specified in Art. 765.
from that for which it has been
loaned (Art 1942) 2. To refund to the bailee
3. To be liable for the deterioration of extraordinary expenses for the
thing loaned (a) if expressly preservation of the thing loaned,
stipulated; (b) if guilty of fault or provided the bailee brings the same
negligence; or (c) if he devotes the to the knowledge of the bailor
thing to any purpose different from before incurring them, except when
that for which it has been loaned they are so urgent that the reply to
4. To pay for extraordinary expenses the notification cannot be awaited
arising from the actual use of the without danger.
thing by the bailee, which shall be
borne equally by both the bailor and 3. To be liable to the bailee for
the bailee, even though the bailee damages for known hidden flaws.
acted without fault, unless there is a  Requisites:
stipulation to the contrary (Art 1949 a. There is flaw or defect in the
par 2) thing loaned;
5. To return the thing loaned b. The flaw or defect is hidden;
 The bailee has no right to retain c. The bailor is aware thereof;
the thing loaned as security for d. He does not advise the bailee of
claims he has against the bailor the same; and
even for extraordinary expenses e. The bailee suffers damages by
except for a claim for damages reason of said flaw or defect
suffered because of the flaws of
the thing loaned.
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NOTES:
3. Relationship Relationship is that
 If the above requisites concur, between the parties of a landlord and
the bailee has the right of is that of obligor- tenant
retention for damages. obligee
 The bailor cannot exempt
himself from the payment of 4. Creditor receives Owner of the
expenses or damages by payment for his loan property rented
receives
abandoning the thing to the
compensation or
bailee. price either in
money, provisions,
SIMPLE LOAN OR MUTUUM (Art 1953 – chattels, or labor
1961)
 A contract whereby one party from the occupant
delivers to another, money or other thereof in return for
consumable thing with the its use (Tolentino vs
understanding that the same amount Gonzales, 50 Phil 558
1927)
of the same kind and quality shall be
paid. (Art. 1953)
Loan Sale
NOTES:
1. Real contract Consensual contract
 The mere issuance of the checks
does not result in the perfection of 2. Generally Bilateral and
the contract of loan. The Civil Code unilateral because reciprocal
provides that the delivery of bills of only borrower has
exchange and mercantile obligations
documents, such as checks, shall
produce the effect of payment only NOTE: If the property is “sold”, but the
when they have been encashed real intent is only to give the object as
(Gerales vs. CA 218 SCRA 638). It is security for a debt – as when the “price”
only after the checks have produced is comparatively small – there really is a
the effect of payment that the contract of loan with an “equitable
contract of loan may be deemed mortgage.”
perfected.
Commodatum/
 The obligation is “to pay” and not to Barter
Mutuum
return because the consumption of
the thing loaned is the distinguishing 1. Subject matter is Subject matter is
character of the contract of mutuum money or fungible non-fungible, (non
from that of commodatum. things consumable) things
 No estafa is committed by a person
who refuses to pay his debt or denies 2. In commodatum, The thing with
its existence. the bailee is bound equivalent value is
to return the given in return for
identical thing what has been
Simple Loan/Mutuum Rent borrowed when the received
time has expired or
1. Delivery of money Delivery of some non- purpose served
or some consumable consumable thing in
thing with a promise order that the other 3. Mutuum may be Onerous, actually a
to pay an equivalent may use it during a gratuitous and mutual sale
of the same kind and certain period and commodatum is
quality return it to the always gratuitous
former.
2. There is a transfer There is no transfer

of ownership of the of ownership of the
thing delivered thing delivered
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breached, the contravenor can

 Form of Payment (Art 1955): be held liable for damages.
1. If the thing loaned is money - b) With regard particularly to an
payment must be made in the award of interest in the concept
currency stipulated, if it is possible; of actual and compensatory
otherwise it is payable in the damages, the rate of interest, as
currency which is legal tender in the well as the accrual thereof, is
Philippines and in case of imposed, as follows:
extraordinary inflation or deflation, i. When the obligation
the basisi of payment shall be the breached consists of
value of the currency at the time of payment of a sum of money
the creation of the obligation (loan or forbearance of
2. If what was loaned is a fungible money), the interest shall be
thing other than money - the that which is stipulated or
borrower is under obligation to pay agreed upon by the parties.
the lender another thing of the same In absence of an agreement,
kind, quality and quantity. In case it the rate shall be the legal
is impossible to do so, the borrower rate (i.e. 12% per annum)
shall pay its value at the time of the computed from default.
perfection of the loan. NOTE: The interest due shall
itself earn legal interest
Interest from the time it is judicially
 The compensation allowed by law or demanded
fixed by the parties for the loan or ii. In other cases, the rate of
forbearance of money, goods or interest shall be six percent
credits (6%) per annum.
 Requisites for Demandability: (ELI) NOTE: No interest, however,
1. must be expressly stipulated shall be adjudged on
Exceptions: unliquidated claims or
a. indemnity for damages damages except when or
b. interest accruing from until the demand can be
unpaid interest established with reasonable
2. must be lawful certainty. When the demand
3. must be in writing cannot be established, the
interest shall begin to run
Compound Interest only from the date of the
GENERAL RULE: Unpaid interest shall judgment of the court is
not earn interest. made.
EXCEPTIONS: iii. When the judgment of the
1. when judicially demanded court awarding a sum of
2. when there is an express money becomes final and
stipulation (must be in writing in executory, the rate of legal
view of Art. 1956) interest, whether the case
falls under paragraph i or ii
Guidelines for the application of above, shall be 12% per
proper interest rates annum from such finality
1. If there is stipulation: that rate shall until its satisfaction, this
be applied interim period being deemed
2. The following are the rules of thumb to be by then an equivalent
for the application/imposition of to a forbearance of credit.
interest rates: (Eastern Shipping Lines vs.
a) When an obligation, regardless CA, July 12, 1994)
of its source, i.e., law,
contracts, quasi-contracts, NOTES:
delicts or quasi-delicts is  Central Bank Circular No. 416 fixing
the rate of interest at 12% per
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annum deals with loans, forbearance 1. Real Contract - contract is

of any money, goods or credits and perfected by the delivery of the
judgments involving such loans, or subject matter.
forbearance in the absence of 2. Unilateral (gratutitous deposit) -
express agreement to such rate only the depositary has an
 Interest as indemnity for damages is obligation.
payable only in case of default or 3. Bilateral (onerous deposit) -
non-performance of the contract. As gives rise to obligations on the
they are distinct claims, they may be part of both the depositary and
demanded separately. (Sentinel depositor.
Insurance Co., Inc. vs CA, 182 SCRA
517) Deposit Mutuum
1. Purpose
 Central Bank Circular No. 905 (Dec. Principal purpose is Principal purpose is
10, 1982) removed the Usury Law safekeeping or consumption
ceiling on interest rates for secured custody
and unsecured loans, regardless of 2. When to Return
maturity. Depositor can The lender must wait
demand the return of until the expiration
Validity of unconscionable interest rate the subject matter at of the period granted
in a loan will to the debtor
Supreme Court in Sps. Solangon 3. Subject Matter
vs. Jose Salazar, G.R. No. 125944, June Subject matter may Subject matter is
be movable or only money or other
29, 2001, said that since the usury law
immovable property fungible thing
had been repealed by CB Cir. No. 905 4. Relationship
there is no more maximum rate of Relationship is that Relationship is that
interest and the rate will just depend on of lender (creditor) of depositor and
the mutual agreement of the parties and borrower depositary.
(citing Lim Law vs. Olympic Sawmill Co., (debtor).
129 SCRA 439). But the Supreme Court
said that nothing in said circular grants 5. Compensation
lenders carta blanche authority to raise There can be NO compensation of
interest rates to level which will either compensation of things deposited with
enslave their borrowers or lead to a credits. each other (except
by mutual
hemorrhaging of their assets (citing
agreement).
Almeda vs. CA, 256 SCRS 292). In Medel
vs. CA, 299 SCRA 481, it was ruled that
Deposit Commodatum
while stipulated interest of 5.5% per
month on a loan is usurious pursuant to 1. Purpose is 1. Purpose is the
CB Circular No. 905, the same must be Safekeeping transfer of the use
equitably reduced for being iniquitous,
unconscionable and exorbitant. It is 2. May be gratuitous 2. Essentially and
contrary to morals, (contra bonos always gratuitous
mores). It was reduced to 12% per
annum in consonant with justice and fair 3. Movable/corporeal 3. Both movable and
play. things only in case of immovable may be
extrajudicial deposit the object
DEPOSIT (Articles 1962 – 2009)
 Kinds of Deposit:
 A contract constituted from the 1. Judicial (Sequestration) –takes place
moment a person receives a thing when an attachment or seizure of
belonging to another, with the property in litigation is ordered.
obligation of safely keeping it and of
returning the same. 2. Extra-judicial
a. Voluntary – one wherein the
Characteristics: delivery is made by the will of
the depositor or by two or more
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persons each of whom believes 3. property saved from destruction

himself entitled to the thing without knowledge of the owner
deposited. (Arts 1968 – 1995)
b. Necessary – one made in NOTES:
compliance with a legal  Article 1966 does not embrace
obligation, or on the occasion of incorporeal property, such as rights
any calamity, or by travellers in and actions, for it follows the person
hotels and inns (Arts 1996 - of the owner, wherever he goes.
2004), or by travellers with
common carriers (Art 1734 –
 A contract for the rent of safety
deposit boxes is not an ordinary
1735).
contract of lease of things but a
NOTE: The chief difference
special kind of deposit; hence, it is
between a voluntary deposit and a
not to be strictly governed by the
necessary deposit is that in the
provisions on deposit. The relation
former, the depositor has a
between a bank and its customer is
complete freedom in choosing the
that of a bailor and bailee. (CA Agro
depositary, whereas in the latter,
vs CA, 219 SCRA 426)
there is lack of free choice in the
depositor.
Obligations of the Depositary (Art 1972
–1991):
Judicial Extra-judicial
1. To keep the thing safely (Art 1972)
1. Creation
 Exercise over the thing
Will of the court Will of the parties
or contract deposited the same diligence as
he would exercise over his
2. Purpose
property
Security or to insure Custody and
the right of a party safekeeping 2. To return the thing (Art 1972)
to property or to  Person to whom the thing must
recover in case of be returned:
favorable judgment a. Depositor, to his heirs and
3. Subject Matter successors, or the person who
Movables or Movables only may have been designated in the
immovables, contract
but generally b. If the depositary is capacitated -
immovables he is subject to all the
obligations of a depositary
4. Cause
Always onerous May be compen-
whether or not the depositor is
sated or not, but capacitated. If the depositor is
generally gratuitous incapacitated, the depositary
must return the property to the
5. When must the thing be returned legal representative of the
Upon order of the Upon demand of incapacitated or to the depositor
court or when depositor himself if he should acquire
litigation is ended capacity (Art 1970).
6. In whose behalf it is held
c. If the depositor is capacitated
Person who has a Depositor or third and the depositary is
right person designated incapacitated - the latter does
not incur the obligation of a
depositary but he is liable:
GENERAL RULE: Contract of deposit is i..to return the thing
gratuitous (Art 1965) deposited while still in his
EXCEPTIONS: possession;
1. when there is contrary ii.to pay the depositor the
stipulation amount which he may have
2. depositary is engaged in business benefited himself with the
of storing goods thing or its price subject to
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189
the right of any third person 4. If the thing deposited should earn
who acquired the thing in interest (Art 1975):
good faith (Art 1971) a. to collect interest and the
capital itself as it fall due
 Time of return: b. to take steps to preserve its
a. Upon demand even though a value and rights corresponding to
specified period or time for such it
return may have been fixed 5. Not to commingle things deposited if
except when the thing is so stipulated (Art 1976)
judicially attached while in the 6. Not to make use of the thing
depositary’s possession or should deposited unless authorized (Art
he have been notified of the 1977)
opposition of a third person to GENERAL RULE: Deposit is for
the return or the removal of the safekeeping of the subject matter
thing deposited. (Art 1998) and not for use. The unauthorized
b. If deposit gratuitous, the use by the depositary would make
depositary may return the thing him liable for damages.
deposited notwithstanding that a EXCEPTIONS:
period has been fixed for the 1. When the preservation of the
deposit if justifiable reasons thing deposited requires its use
exists for its return. 2. When authorized by the
c. If the deposit is for a depositor
valuable consideration, the
depositary has no right to return NOTE: The permission to use is NOT
the thing deposited before the presumed except when such use is
expiration of the time necessary for the preservation of the
designated even if he should thing deposited.
suffer inconvenience as a
consequence.(Art 1989) Effect if permission to use is given
(Art 1978):
 What to return: product, 1. If thing deposited is
accessories, and accessions of non-consumable, the contract
the thing deposited (Art 1983) loses the character of a deposit
3. Not to deposit the thing with a third and acquires that of a
person unless authorized by express commodatum despite the fact
stipulation (Art 1973) that the parties may have
denominated it as a deposit,
 The depositor is liable for the
unless safekeeping is still the
loss of the thing deposited under
principal purpose.
Article 1973 if:
2. If thing deposited consists of
a. he
money/consumable things, the
transfers the deposit with a third
contract is converted into a
person without authority
simple loan or mutuum unless
although there is no negligence
safekeeping is still the principal
on his part and the third person;
purpose in which case it is called
b. he
an irregular deposit. Example:
deposits the thing with a third
bank deposits are irregular
person who is manifestly careless
deposits in nature but governed
or unfit although authorized
by law on loans.
even in the absence of
7. When the thing deposited is
negligence; or
delivered sealed and closed :
c. the thing
a. to return the thing deposited in
is lost through the negligence of
the same condition
his employees whether the latter
b. to pay for damages should the
are manifestly careless or not.
seal or lock be broken through
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190
his fault, which is presumed 1. The consumable 1. Lender is bound

unless proved otherwise thing deposited may by the provisions of
c. to keep the secret of the deposit be demanded at will the contract and
when the seal or lock is broken by the depositor cannot demand
restitution until the
with or without his fault (Art
time for payment, as
1981) provided in the
NOTE: The depositary is contract, has arisen
authorized to open the thing
deposited which is closed and 2. The only benefit is 2. Essential cause for
sealed when (Art 1982): that which accrues the transaction is the
i. there is presumed authority to the depositor necessity of the
(i.e. when the key has been borrower
delivered to him or the
instructions of the depositor 3. The irregular 3. Common creditors
depositor has a enjoy no preference
cannot be done without
preference over in the distribution of
opening it) other creditors with the debtor’s
ii. necessity respect to the thing property
8. To change the way of the deposit if deposited
under the circumstances, the
depositary may reasonably presume
that the depositor would consent to Rule when there are two or more
the change if he knew of the facts of depositors (Art 1985):
the situation, provided, that the 1. If thing deposited is divisible and
former notifies the depositor thereof depositors are not solidary: Each
and wait for his decision, unless depositor can demand only his
delay would cause danger proportionate share thereto.
9. To pay interest on sums converted to 2. If obligation is solidary or if thing is
personal use if the deposit consists not divisible: Rules on active
of money (Art 1983) solidarity shall apply, i.e. each one
10. To be liable for loss through of the solidary depositors may do
fortuitous event (SUDA): (Art 1979): whatever may be useful to the
a. if stipulated others but not anything which may
b. if he uses the thing without the be prejudicial to the latter, (Art.
depositor's permission 1212) and the depositary may return
c. if he delays its return the thing to anyone of the solidary
d. if he allows others to use it, depositors unless a demand, judicial
even though he himself may or extrajudicial, for its return has
have been authorized to use the been made by one of them in which
same case, delivery should be made to him
(Art. 1214).
NOTES: 3. Return to one of depositors
 Fixed, savings, and current deposits stipulated. The depositary is bound
of money in banks and similar to return it only to the person
institutions shall be governed by the designated although he has not made
provisions concerning simple loan. any demand for its return.
(Art 1980)
 The general rule is that a bank can NOTES:
compensate or set off the deposit in  The depositary may retain the thing
its hands for the payment of any in pledge until full payment of what
indebtedness to it on the part of the may be due him by reason of the
depositor. In true deposit, deposit (Art 1994).
compensation is not allowed.  The depositor’s heir who in good
faith may have sold the thing which
Irregular deposit Mutuum he did not know was deposited, shall
only be bound to return the price he
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191
may have received or to assign his pillage, shipwreck or other similar

right of action against the buyer in events (deposito miserable)
case the price has not been paid him 3. Made by travellers in hotels and inns
(Art 1991). or by travellers with common carrier
Obligations of the Depositor (Art 1992 –

1995):
1. To pay expenses for preservation
a. If the deposit is gratuitous, the Deposit by Travellers in hotels and
depositor is obliged to inns:
reimburse the depositary for  The keepers of hotels or inns shall be
expenses incurred for the responsible as depositaries for the
preservation of the thing deposit of effects made by travellers
deposited (Art 1992) provided:
b. If the deposit is for valuable a. Notice was given to them or to
consideration, expenses for their employees of the effects
preservation are borne by the brought by the guest; and
depositary unless there is a b. The guests take the precautions
contrary stipulation which said hotel-keepers or their
2. To pay loses incurred by the substitutes advised relative to
depositary due to the character of the care and vigilance of their
the thing deposited effects.
NOTES:
GENERAL RULE: The depositor shall  Liability extends to vehicles, animals
reimburse the depositary for any loss and articles which have been
arising from the character of the thing introduced or placed in the annexes
deposited. of the hotel.
EXCEPTIONS:
 Liability shall EXCLUDE losses which
1. at the time of the deposit, the
proceed from force majeure. The
depositor was not aware of the
act of a thief or robber is not
dangerous character of the thing
deemed force majeure unless done
2. when depositor was not expected
with the use of arms or irresistible
to know the dangerous character
force.
of the thing
3. when the depositor notified the  The hotel-keeper cannot free
depository of the same himself from the responsibility by
4. the depositary was aware of it posting notices to the effect that he
without advice from the depositor is not liable for the articles brought
by the guest. Any stipulation to such
Extinguishment of Voluntary Deposit effect shall be void.
(Art 1995)  Notice is necessary only for suing
1. Loss or destruction of the thing civil liability but not in criminal
deposited liability.
2. In case of gratuitous deposit, upon
the death of either the depositor or GUARANTY (Articles 2047 – 2084)
the depositary
3. Other causes, such as return of the  A contract whereby a person
thing, novation, merger, expiration (guarantor) binds himself to the
of the term fulfilment of the creditor to fulfil the obligation of
resolutory condition, etc (Art 1231) the principal debtor in case the
latter fail to do so.
Necessary Deposits
1. Made in compliance with a legal  Classification of Guaranty:
obligation 1. In the Broad sense:
2. Made on the occasion of any a. Personal - the guaranty is the
calamity such as fire, storm, flood, credit given by the person who
CIVIL LAW COMMITTEE
192
guarantees the fulfilment of the rather than the first should perform
principal obligation. (Agro Conglomerates, Inc. vs. CA,
b. Real - the guaranty is the 348 SCRA 450)
property, movable or NOTES:
immovable.  The reference in Article 2047 to
solidary obligations does not mean
that suretyship is withdrawn from
the applicable provisions governing
guaranty. A surety is almost the
2. As to its Origin same as a solidary debtor, except
a. Conventional - agreed upon by that he himself is a principal debtor.
the parties.
b. Legal - one imposed by virtue of
 In suretyship, there is but one
contract, and the surety is bound by
a provision of a law.
the same agreement which binds the
c. Judicial - one which is required
principal. A surety is usually bound
by a court to guarantee the
with the principal by the same
eventual right of one of the
instrument, executed at the same
parties in a case.
time and upon the same
3. As to Consideration
consideration (Palmares vs CA, 288
a. Gratuitous - the guarantor does
SCRA 422)
not receive any price or
remuneration for acting as such.  It is not for the obligee to see to it
b. Onerous - the guarantor receives that the principal debtor pays the
valuable consideration. debt or fulfill the contract, but for
4. As to the Person guaranteed the surety to see to it that the
a. Single - one constituted solely to principal debtor pays or performs
guarantee or secure (Paramount Insurance Corp vs CA,
performance by the debtor of 310 SCRA 377)
the principal obligation.
b. Double or sub-guaranty - one Nature of Surety’s undertaking:
constituted to secure the 1. Liability is contractual and
fulfilment by the guarantor of a accessory but direct
prior guaranty. NOTE: He directly, primarily and
5. As to Scope and Extent equally binds himself with the
a. Definite - the guaranty is limited principal as original promisor,
to the principal obligation only, although he possesses no direct or
or to a specific portion thereof. personal interest over the latter’s
b. Indefinite or simple - one which obligation, nor does he receive any
not only includes the principal benefits therefrom. (PNB vs CA, 198
obligation but also all its SCRA 767)
accessories including judicial 2. Liability limited by the terms of the
costs contract.
NOTE: It cannot be extended by
SURETYSHIP implication beyond the terms of the
contract (PNB vs CA, 198 SCRA 767)
 A contract whereby a person (surety) 3. Liability arises only if principal
binds himself solidarily with the debtor is held liable.
principal debtor NOTES:
 A relation which exists where one  The creditor may sue separately
person (principal) has undertaken an or together the principal debtor
obligation and another person and the surety. Where there are
(surety) is also under a direct and several sureties, the obligee may
primary obligation or other duty to proceed against any one of
the obligee, who is entitled to but them.
one performance, and as between  In the absence of collusion, the
the two who are bound, the second surety is bound by a judgment
CIVIL LAW COMMITTEE
193
against the principal even  Guaranty may be constituted to

though he was not a party to the guarantee the performance of a
proceedings. The nature of its voidable or unenforceable
undertaking makes it privy to all contract. It may also guarantee
proceedings against its principal a natural obligation. (Art 2052)
(Finman General Assurance
Corp. vs. Salik, 188 SCRA 740)
 The guarantor cannot bind
himself for more than the
principal debtor and even if he
4. Surety is not entitled to the benefit
does, his liability shall be
of exhaustion
reduced to the limits of that of
NOTE: He assumes a solidary liability
the debtor.
for the fulfilment of the principal
2. Subsidiary and Conditional - takes
obligation (Towers Assurance Corp
effect only in case the principal
vs. Ororama Supermart, 80 SCRA
debtor fails in his obligation.
262) as an original promissory and
debtor from the beginning.
NOTES:
5. Undertaking is to creditor and not
to debtor.  The guarantor cannot bind
NOTE: The surety makes no himself for more than the
covenant or agreement with the principal debtor and even if he
principal that it will fulfil the does, his liability shall be
obligation guaranteed for the benefit reduced to the limits of that of
of the principal. Such a promise is the debtor. But a guarantor may
not implied by law either; and this is bind himself for less than that of
true even where under the contract the principal (Art 2054)
the creditor is given the right to sue  A guaranty may be given as
the principal, or the latter and the security for future debts, the
surety at the same time. (Arranz vs. amount of which is not yet
Manila Fidelity & Surety Co., Inc., known; there can be no claim
101 Phil. 272) against the guarantor until the
6. Surety is not entitled to notice of debt is liquidated. A conditional
principal’s default obligation may also be secured.
NOTE: The creditor owes no duty of (Art 2053)
active diligence to take care of the 3. Unilateral - may be entered even
interest of the surety and the surety w/o the intervention of the principal
is bound to take notice of the debtor, in which case Art. 1236 and
principal’s default and to perform 1237 shall apply and it gives rise only
the obligation. He cannot complain to a duty on the part of the
that the creditor has not notified guarantor in relation to the creditor
him in the absence of a special and not vice versa.
agreement to that effect. (Palmares 4. Nominate
vs CA, 288 SCRA 422) 5. Consensual
7. Prior demand by the creditor upon 6. It is a contract between the
principal is not required guarantor/surety and creditor.
NOTE: As soon as the principal is in
default, the surety likewise is in NOTES:
default.  Acceptance of guaranty by
8. Surety is not exonerated by neglect creditor and notice thereof to
of creditor to sue principal guarantor:
Characteristics of Guaranty and  In declaring that guaranty
Suretyship: must be express, the law
1. Accessory - It is indispensable refers solely and exclusively
condition for its existence that there to the obligation of the
must be a principal obligation. guarantor because it is he
NOTES: alone who binds himself by
CIVIL LAW COMMITTEE

194
his acceptance. With respect motive of pecuniary gain and hence,

to the creditor, no such should be protected against unjust
requirement is needed pecuniary impoverishment by
because he binds himself to imposing on the principal, duties
nothing. akin to those of a fiduciary.
 However, when there is
merely an offer of a NOTES:
guaranty, or merely a  The rule will apply only after it
conditional guaranty, in the has been definitely ascertained
sense that it requires action that the contract is one of
by the creditor before the suretyship or guaranty. It cannot
obligation becomes fixed, it be used as an aid in determining
does not become binding whether a party’s undertaking is
until it is accepted and until that of a surety or guarantor.
notice of such acceptance by (Palmares vs CA, 288 SCRA 292)
the creditor is given to, or  It does not apply in case of
acquired by, the guarantor, compensated sureties.
or until he has notice or 10. It is a contract which requires that
knowledge that the creditor the guarantor must be a person
has performed the condition distinct form the debtor because a
and intends to act upon the person cannot be the personal
guaranty. guarantor of himself.
 But in any case, the creditor NOTE: However, in a real guaranty,
is not precluded from like pledge and mortgage, a person
waiving the requirement of may guarantee his own obligation
notice. with his personal or real properties.
 The consideration of the
guaranty is the same as the Guaranty Suretyship
consideration of the principal
obligation. 1. Liability depends 1. Surety assumes
upon an independent liability as regular
 The creditor may proceed agreement to pay the party to the
against the guarantor although obligation if primary undertaking
he has no right of action against debtor fails to do so
the principal debtor.
7. Not presumed. It must be expressed 2. Collateral under- 2. Surety is an
and reduced in writing. taking original promisor
NOTE: A power of attorney to loan
money does not authorize the agent 3. Guarantor is 3. Surety is
secondarily liable primarily liable
to make the principal liable as a
surety for the payment of the debt 4. Guarantor binds 4. Surety undertakes
of a third person. (BPI vs. Coster, 47 himself to pay if to pay if the principal
Phil. 594) the principal DOES NOT PAY
8. Falls under the Statute of Frauds CANNOT PAY
since it is a “special promise to
answer for the debt, default or 5. Insurer of 5. Insurer of the
miscarriage of another”. solvency of debtor debt
9. Strictly interpreted against the
creditor and in favor of the 6. Guarantor can 6. Surety cannot
guarantor/surety and is not to be avail of the benefit avail of the benefit of
of excussion and excussion and division
extended beyond its terms or
division in case
specified limits. (Magdalena Estates, creditor proceeds
Inc. vs Rodriguez, 18 SCRA 967) The against him
rule of strictissimi juris commonly
pertains to an accommodation surety Indorsement Guaranty
because the latter acts without
CIVIL LAW COMMITTEE
195
1. Primarily of 1. Contract of  It is never necessary that the

transfer security
guarantor or surety should receive
any part or benefit, if such there be,
2. Unless the note is 2. Failure in either or
promptly presented both of these accruing to the principal. (Willex
for payment at particulars does not Plastic Industries Corp. vs. CA, 256
maturity and due generally work as an SCRA 478)
notice of dishonor absolute discharge of
given to the indorser a guarantor’s
within a reasonable liability, but his is
time he will be discharged only to
discharged abso- the extent of the loss Double or sub-guaranty (Art 2051 2nd
lutely from all which he may have
par)
liability thereon, suffered in
whether he has consequence thereof  One constituted to guarantee the
suffered any actual obligation of a guarantor
damage or not
Continuing guaranty (Art 2053)
3. Indorser does not 3. Guarantor  One which is not limited to a single
warrant the solvency. warrants the solvency transaction but which contemplates
He is answerable on a of the promisor a future course of dealings, covering
strict compliance
a series of transactions generally for
with the law by the
holder, whether the an indefinite time or until revoked.
promisor is solvent or
not NOTES:
 Prospective in operation (Diño vs CA,
4. Indorser can be 4. Guarantor cannot be
216 SCRA 9)
sued as promisor sued as promisor
 Construed as continuing when by the
Guaranty Warranty terms thereof it is evident that the
A contract by which a An undertaking that object is to give a standing credit to
person is bound to the title, quality, or the principal debtor to be used from
another for the quantity of the time to time either indefinitely or
fulfilment of a subject matter of the until a certain period, especially if
promise or contract is what it the right to recall the guaranty is
engagement of a has been represented expressly reserved (Diño vs CA, 216
third party to be, and relates to SCRA 9)
some agreement
made ordinarily by  “Future debts” may also refer to
the party who makes debts existing at the time of the
the warranty constitution of the guaranty but the
amount thereof is unknown and not
NOTES: to debts not yet incurred and
 A guaranty is gratuitous, unless there existing at that time.
is a stipulation to the contrary. The  Exception to the concept of
cause of the contract is the same continuing guaranty is chattel
cause which supports the obligation mortgage. A chattel mortgage can
as to the principal debtor. only cover obligations existing at the
 The peculiar nature of a guaranty or time the mortgage is constituted and
surety agreement is that is is not those contracted subsequent to
regarded as valid despite the the execution thereof (The Belgian
absence of any direct consideration Catholic Missionaries, Inc. vs.
received by the guarantor or surety Magallanes Press, Inc., 49 Phil 647).
either from the principal debtor or An exception to this is in case of
from the creditor; a consideration stocks in department stores, drug
moving to the principal alone will stores, etc. (Torres vs. Limjap, 56
suffice. Phil 141).
CIVIL LAW COMMITTEE

196
Extent of Guarantor’s liability: (Art  Cannot even begin to take place

2055) before judgment has been obtained
1. Where the guaranty definite: It is against the debtor (Baylon vs CA,
limited in whole or in part to the 312 SCRA 502)
principal debt, to the exclusion of
accessories. When Guarantor is not entitled to the
2. Where guaranty indefinite or simple: benefit of excussion: (PAIRS)
It shall comprise not only the 1. If it may be presumed that an
principal obligation, but also all its execution on the property of the
accessories, including the judicial principal debtor would not result in
costs, provided with respect to the the satisfaction of the obligation
latter, that the guarantor shall only
be liable for those costs incurred
 Not necessary that the debtor be
judicially declared insolvent or
after he has been judicially required
bankrupt
to pay.
2. When he has absconded, or cannot
be sued within the Philippines unless
Qualifications of a guarantor: (Arts
he has left a manager or
2056-2057)
representative
1. possesses integrity
3. In case of insolvency of the debtor
2. capacity to bind himself
3. has sufficient property to answer  Must be actual
for the obligation which he 4. If the guarantor has expressly
guarantees renounced it
5. If he has bound himself solidarily
NOTES: with the debtor
 The qualifications need only be
Other grounds: (BIPS)
present at the time of the perfection
6. If he is a judicial bondsman or sub-
of the contract.
surety
 The subsequent loss of the integrity 7. If he fails to interpose it as a
or property or supervening defense before judgment is rendered
incapacity of the guarantor would against him
not operate to exonerate the 8. If the guarantor does not set up the
guarantor or the eventual liability he benefit against the creditor upon the
has contracted, and the contract of latter’s demand for payment from
guaranty continues. him, and point out to the creditor
 However, the creditor may demand available property to the debtor
another guarantor with the proper within Philippine territory, sufficient
qualifications. But he may waive it if to cover the amount of the debt (Art
he chooses and hold the guarantor to 2060)
his bargain.  Demand can be made only after
judgment on the debt
Benefit of Excussion (Art 2058)
 Demand must be actual; joining
 The right by which the guarantor
the guarantor in the suit against
cannot be compelled to pay the
the principal debtor is not the
creditor unless the latter has
demand intended by law
exhausted all the properties of the
9. Where the pledge or mortgage has
principal debtor, and has resorted to
been given by him as special security
all of the legal remedies against such
debtor.
Benefit of Division (Art 2065)
 Should there be several guarantors
NOTE:
of only one debtor and for the same
 Not applicable to a contract of debt, the obligation to answer for
suretyship (Arts 2047, par. 2; the same is divided among all.
2059[2])  Liability: Joint
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197
exhaustion even if judgment

NOTES: should be rendered against him
 The creditor can claim from the and principal debtor. His
guarantors only the shares they are voluntary appearance does not
respectively bound to pay except constitute a renunciation of his
when solidarity is stipulated or if right to excussion (see Art.
any of the circumstances 2059(1)).
enumerated in Article 2059 should  Guarantor cannot set up the
take place. defenses if he does not appear
 The right of contribution of and it may no longer be possible
guarantors who pays requires that for him to question the validity
the payment must have been made of the judgment rendered
(a) in virtue of a judicial demand, or against the debtor.
(b) because the principal debtor is 2. A guarantor is entitled to be heard
insolvent (Art 2073). before and execution can be issued
against him where he is not a party
 If any of the guarantors should be in the case involving his principal
insolvent, his share shall be borne by
(procedural due process).
the others including the paying
guarantor in the same joint
Guarantor’s Right of Indemnity or
proportion following the rule in
Reimbursement (Art 2066)
solidary obligations.
GENERAL RULE: Guaranty is a contract
 The above rule shall not be of indemnity. The guarantor who makes
applicable unless the payment has payment is entitled to be reimbursed by
been made in virtue of a judicial the principal debtor.
demand or unless the principal
debtor is insolvent. NOTE: The indemnity consists of: (DIED)
 The right to contribution or 1. Total amount of the debt – no
reimbursement from his co- right to demand reimbursement
guarantors is acquired ipso jure by until he has actually paid the
virtue of said payment without the debt, unless by the terms of the
need of obtaining from the creditor contract, he is given the right
any prior cession of rights to such before making payment. He
guarantor. cannot collect more than what
 The co-guarantors may set up he has paid.
against the one who paid, the same 2. Legal interest thereon from the
defenses which have pertained to time the payment was made
the principal debtor against the known (notice of payment in
creditor and which are not purely effect a demand so that if the
personal to the debtor. (Art 2074) debtor does not pay
immediately, he incurs in delay)
Procedure when creditor sues: (Art. to the debtor, even though it did
2062) not earn interest for the
 The creditor must sue the principal creditor. Guarantor’s right to
alone; the guarantor cannot be sued legal interest is granted by law
with his principal, much less alone by virtue of the payment he has
except in Art. 2059. made.
3. Expenses incurred by the
1. Notice to guarantor of the action guarantor after having notified
the debtor that payment has
 The guarantor must be NOTIFIED been demanded of him by the
so that he may appear, if he so creditor; only those expenses
desires, and set up defenses he that the guarantor has to satisfy
may want to offer. in accordance with law as a
 If the guarantor appears, he is consequence of the guaranty
still given the benefit of (Art. 2055) not those which
CIVIL LAW COMMITTEE
198
depend upon his will or own acts  The guarantor is subrogated by

or his fault for these are his virtue of the payment to the rights
exclusive personal responsibility of the creditor, not those of the
and it is not just that they be debtor.
shouldered by the debtor.
4. Damages if they are due in
 Guarantor cannot exercise the
right of redemption of his
accordance
principal (Urrutia & Co vs
with law. General rules on
Morena and Reyes, 28 Phil 261)
damages apply.
Effect of Payment by Guarantor
EXCEPTIONS:
1. Without notice to debtor: (Art
1. Where the guaranty is
2068)
constituted without the
knowledge or against the will of  The debtor may interpose
the principal debtor, the against the guarantor those
guarantor can recover only defenses which he could have
insofar as the payment had been set up against the creditor at the
beneficial to the debtor (Art. time the payment was made,
2050). e.g. the debtor can set up
2. Payment by a third person who against the guarantor the
does not intend to be reimbursed defense of previous
by the debtor is deemed to be a extinguishment of the obligation
donation, which, however, by payment.
requires the debtor’s consent.
But the payment is in any case 2. Before Maturity (Art 2069)
valid as to the creditor who has  Not entitled to reimbursement
accepted it (Art. 1238). unless the payment was made
3. Waiver of the right to demand with the consent or has been
reimbursement. ratified by the debtor
Guarantor’s right to Subrogation Effect of Repeat Payment by debtor:

(ART.2067) (Art 2070)
 Subrogation transfers to the person GENERAL RULE: Before guarantor pays
subrogated, the credit with all the the creditor, he must first notify the
rights thereto appertaining either debtor (Art. 2068). If he fails to give
against the debtor or against third such notice and the debtor repeats
persons, be they guarantors or payment, the guarantor can only collect
possessors of mortgages, subject to from the creditor and guarantor has no
stipulation in conventional cause of action against the debtor for
subrogation. the return of the amount paid by
guarantor even if the creditor should
NOTE: This right of subrogation is become insolvent.
necessary to enable the guarantor to
enforce the indemnity given in Art. EXCEPTION: The guarantor can still
2066. claim reimbursement from the debtor in
 It arises by operation of law upon spite of lack of notice if the following
payment by the guarantor. It is not conditions are present: (PIG)
necessary that the creditor cede to a. guarantor was prevented by
the guarantor the former’s rights fortuitous event to advise the
against the debtor. debtor of the payment; and
b. the creditor becomes insolvent;
 It is not a contractual right. The
c. the guaranty is gratuitous.
right of guarantor who has paid a
debt to subrogation does not stand
Right of Guarantor to proceed against
upon contract but upon the
debtor before payment
principles of natural justice.
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199
GENERAL RULE: Guarantor has no 6. Extension granted to the debtor by

cause of action against debtor until after the creditor without the consent of
the former has paid the obligation the guarantor (Art 2079)
EXCEPTION: Article 2071
BOND
NOTES:  An undertaking that is sufficiently
 Article 2071 is applicable and secured, and not cash or currency
available to the surety. (Manila
Surety & Fidelity Co., Inc. vs Batu Bondsman (Art 2082)
Construction & Co., 101 Phil 494)  A surety offered in virtue of a
provision of law or a judicial order.
 Remedy of guarantor: He must have the qualifications
(a) obtain release from the
required of a guarantor and in
guaranty; or
special laws like the Rules of Court.
(b) demand a security that shall
protect him from any
NOTES:
proceedings by the creditor, and
against the danger of insolvency  Judicial bonds constitute merely a
of the debtor special class of contracts of guaranty
by the fact that they are given “in
Art. 2066 Art. 2071 virtue… of a judicial order.”
Provides for the Provides for his  If the person required to give a legal
enforcement of the protection before he or judicial bond should not be able
rights of the has paid but after he to do so, a pledge or mortgage
guarantor/surety has become liable sufficient to cover the obligation
against the debtor shall admitted in lieu thereof (Art
after he has paid the
debt
2083)
Gives a right of Protective remedy  A judicial bondsman and the sub-
action after payment before payment. surety are NOT entitled to the
Substantive right Preliminary remedy benefit of excussion because they
are not mere guarantors, but
Extinguishment of guaranty: (RA2CE2) sureties whose liability is primary
1. Release in favor of one of the and solidary. (Art 2084)
guarantors, without the consent of
the others, benefits all to the extent PLEDGE, MORTGAGE AND ANTICHRESIS
of the share of the guarantor to I. Common Elements of Pledge,
whom it has been granted (Art Mortgage, and Antichresis (Articles
2078); 2085 – 2092)
2. If the creditor voluntarily accepts
immovable or other properties in A. Essential Requisites (SOD) (Art
payment of the debt, even if he 2085)
should afterwards lose the same 1. Secures the fulfillment of a principal
through eviction or conveyance of obligation;
property (Art 2077); 2. Pledgor, mortgagor, antichretic
3. Whenever by some act of the debtor must be the absolute owner
creditor, the guarantors even though of the thing pledged or mortgaged;
they are solidarily liable cannot be and
subrogated to the rights, mortgages  The reason being that in
and preferences of the former (Art anticipation of a possible
2080); foreclosure sale in case of
4. For the same causes as all other default which is still a sale, the
obligations (Art 1231); rule is that the seller must be
5. When the principal obligation is the owner of the thing sold
extinguished; (Cavite Development Bank vs.
Lim, 324 SCRA 346)
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200
3. Pledgor, mortgagor, antichretic security for the payment of the

debtor must have free disposal of principal obligation; and
their property, or be legally 2. There should be a stipulation for an
authorized for such purpose. automatic appropriation by the
creditor of the property in event of
NOTES: nonpayment of the obligation within
 Third persons can pledge or the stipulated period.
mortgage their own property to
secure the principal obligation. GENERAL RULE: Pactum Commissorium
is forbidden by law and is declared null
 It is not necessarily void simply
and void.
because the accommodation pledgor
or mortgagor did not benefit from EXCEPTION: The pledgee may
the same. So long as valid consent appropriate the thing pledged if after
was given, the fact that the loan was the first and second auctions, the thing
given solely for the benefit of the is not sold. (Art 2112)
principal debtor would not invalidate
the mortgage (GSIS vs CA, 170 SCRA NOTE: The security contract remains
533) valid; only the prohibited stipulation is
void.
 The accommodation pledgor or C. Capability to secure all kinds of
mortgagor, without expressly obligations, i.e. pure or
assuming personal liability for such conditional (Art 2091)
debt, is not liable for the payment of
any deficiency, should the property D. Indivisibility (Art 2089)
not be sufficient to cover the debt GENERAL RULE: A pledge, mortgage,
(Bank of America vs. American or antichresis is indivisible, even though
Realty Corporation, 321 SCRA 659). the debt may be divided among the
 The accommodation pledgor or successors in interest of the debtor or of
mortgagor is not solidarily bound the creditor.
with the principal obligor but his  Their indivisibility is not affected by
liability extents only to the property the fact that the debtors are jointly
pledged or mortgaged. Should there or not solidarily liable.
be any deficiency, the creditor has
recourse on the principal debtor who Consequences of indivisibility:
remains to be primarily bound. 1. Single thing – Every portion of the
 The law grants to the property pledged or mortgaged is
accommodation pledgor or answerable for the whole obligation
mortgagor the same rights as a 2. Several things – All of the several
guarantor and he cannot be things pledged or mortgaged are
prejudiced by any waiver of defense liable for the totality of the debt
by the principal debtor. 3. Debtor’s heir/creditor’s heir -
Neither the debtor’s heir who has
B. Prohibition against Pactum paid part of the debt cannot ask for
Commissorium (Art 2088; 2137) proportionate extinguishment, nor
creditor’s heir who received his
Pactum Commissorium share of the debt return the pledge
 Stipulation whereby the thing or cancel the mortgage as long as
pledged or mortgaged, or under the debt is not completely satisfied.
antichresis shall automatically
become the property of the creditor EXCEPTIONS:
in the event of non-payment of the 1. Where each one of several things
debt within the term fixed. guarantees a determinate
portion of the credit
Requisites: 2. Where only a portion of the loan
1. There should be a pledge, mortgage, was released
or antichresis of property by way of
CIVIL LAW COMMITTEE
201
3. Where there was failure of delivered shall be returned with all

consideration. its fruits and accessions.
4. Where there is no debtor-
creditor relationship  Special Requisites (in addition to
the common essential requisites):
NOTES: 1. Possession of the thing pledged must
 The mere embodiment of a real be transferred to the creditor or a
estate mortgage and a chattel third person by agreement (Art
mortgage in one document does not 2093);
have the effect of fusing both 2. It can only cover movable property
securities into an indivisible whole. and incorporeal rights evidenced by
documents of title and the
 The mortgagee, therefore, may
instruments proving the right
legally foreclose the real estate
pledged shall be delivered to the
mortgage extrajudicially and waive
creditor, and if negotiable must be
the chattel mortgage foreclosure,
endorsed (Art 2094); and
and maintain instead a personal
3. The description of the thing pledged
action for the recovery of the unpaid
and the date must appear in a public
balance of the credit (Phil. Bank of
instrument to bind third persons, but
Commerce vs. Macadaeg, 109 Phil
not for the validity of the contract
981)
(Art 2096).
E. When the principal obligation
becomes due, the things in which  Kinds:
the pledge, mortgage, or 1. Conventional /Voluntary – created
antichresis consists may be by contract
alienated for the payment to the 2. Legal – created by operation of law
creditor. (Art. 2087) (examples: Art. 546, 1731 and 1914
NCC)
NOTES:
NOTES:
 If the debtor fails to comply with the
obligation at the time it falls due,  The provisions of possession, care
the creditor is merely entitled to and sale of the thing as well as on
move for the sale of the thing the termination of the pledge
pledged or mortgaged in order to governing conventional pledges are
collect the amount of his claim from applicable to pledges created by
the proceeds. operation of law (Art 2121)
 If he wishes to secure a title to the  Unlike, however, in conventional
mortgaged property, he can buy it in pledge where the debtor is not
the foreclosure sale (Montevirgin vs. entitled to the excess unless it is
CA, 112 SCRA 641) otherwise agreed, in legal pledge,
the remainder of the price of the
F. Pledgor, mortgagor, antichretic sale after payment of the debt and
debtor retains ownership of the expenses, shall be delivered to the
thing given as a security debtor.
 In legal pledge, there is no definite
PLEDGE (Arts 2093 – 2123) period for the payment of the
principal obligation. The pledgee
 A contract wherein the debtor must make a demand for the
delivers to the creditor or to a third payment of the amount due him;
person a movable or document otherwise he cannot exercise the
evidencing incorporeal rights for the right of sale at public auction (Art
purpose of securing fulfilment of a 2122)
principal obligation with the
understanding that when the Characteristics:
obligation is fulfilled, the thing
CIVIL LAW COMMITTEE
202
1. Real KEY: D SBC BA2R2OPS2

contract – it is perfected by the 1. Option to demand replacement or
delivery of the thing pledged by the immediate payment of the debt in case
debtor who is called the pledgor to of deception as to substance or quality
the creditor who is called the (Art 2109)
pledgee, or to a third person by 2. To sell at public auction in case of
common agreement; reasonable grounds to fear destruction
2. Accessor or impairment of the thing without his
y contract – it has no independent fault (Art 2108)
existence of its own; 3. To bring actions pertaining to the
3. Unilater owner (Art 2103)
al contract – it creates an obligation 4. To choose which of several things
solely on the part of the creditor to pledged shall be sold
return the thing subject thereof 5. To bid at the public auction (Art
upon the fulfilment of the principal 2113)
obligation; and 6. To appropriate the thing in case of
4. Subsidiar failure of the 2nd public auction (Art
y contract – the obligation incurred 2112)
does not arise until the fulfilment 7. To apply said fruits, interests or
of the principal obligation which is earnings to the interest, if any, then to
secured. the principal of the credit (Art 2102)
8. To retain excess value received in
Consideration in pledge: the public sale (Art 2115)
 Insofar as the pledgor is concerned, 9. To retain the thing until after full
the cause is the principal obligation. payment of the debt (Art 2098)
10. To be reimbursed for the expenses
 If the pledgor is not the debtor, the made for the preservation of the thing
cause is the compensation stipulated
pledged (Art 2099)
for the pledge or the mere liberality
11. To object to the alienation of the
of the pledgor.
thing
12. To possess the thing (Art 2098)
Extent of pledge: Unless stipulated
13. To sell at public auction in case of
otherwise, pledge extends to the fruits,
non-payment of debt at maturity (Art
interests or earnings of the thing.
2112)
To choose which of the several things
Rights and Obligations of a Pledgor
pledged shall be sold (Art 2119)
Rights Obligations 14. Option to demand replacement or
1. To demand return in 1. To advise the
immediate payment of the debt in case
case of reasonable pledgee of the
grounds to fear flaws of the thing of deception as to substance or quality
destruction or (Art 2101) (Art 2109)
impairment of the thing 2. Not to demand 15. To sell at public auction in case of
without the pledgee’s the return of the reasonable grounds to fear destruction
fault, subject to the thing until after or impairment of the thing without his
duty of replacement full payment of fault (Art 2108)
(Art 2107) the debt, 16. To bring actions pertaining to the
2. To bid and be including interest owner (Art 2103)
preferred at the public due thereon and
17. To choose which of several things
auction (Art 2113) expenses incurred
3. To alienate the thing for its pledged shall be sold
pledged provided the preservation (Art 18. To bid at the public auction (Art
pledgee consents to the 2105) 2113)
sale (Art 2097) 19. To appropriate the thing in case of
4. To ask that the thing failure of the 2nd public auction (Art
pledged be deposited 2112)
(Arts 2104 & 2106) 20. To apply said fruits, interests or
earnings to the interest, if any, then to
Rights of the Pledgee the principal of the credit (Art 2102)
CIVIL LAW COMMITTEE
203
21. To retain excess value received

in the public sale (Art 2115) Prohibition against double pledge
22. To retain the thing until after full  Property which has been lawfully
payment of the debt (Art 2098) pledged to one creditor cannot be
23. To be reimbursed for the expenses pledged to another as long as the
made for the preservation of the thing first one subsists.
pledged (Art 2099) NOTE: Possession of a creditor of the
24. To object to the alienation of the thing pledged is an essential requisite of
thing pledge.
25. To possess the thing (Art 2098)
26. To sell at public auction in case of Extinguishment of Pledge (CRAPS)
non-payment of debt at maturity (Art 1. For the same causes as all other
2112) obligations (Art 1231)
27. To choose which of the several 2. Return of the thing pledged by the
things pledged shall be sold (Art 2119) pledgee to the pledgor (Art 2110)
3. Statement in writing by the
Obligations of the Pledgee pledgee that he renounces or
KEY: CUDA3 abandons the pledge (Art 2111)
1. Take care of the thing with the 4. Payment of the debt (Art 2105)
diligence of a good father of a family 5. Sale of thing pledged at public
(Art 2099) auction (Art 2115)
2. Not to use thing unless authorized or NOTE: The possession by the debtor or
by the owner or its preservation requires owner of the thing pledged subsequent
its use (Art 2104) to the perfection of the pledge gives rise
3. Not to deposit the thing with a 3 rd to a prima facie presumption that the
person unless so stipulated (Art 2100) thing has been returned and, therefore,
4. Responsibility for acts of agents and that the pledge has been extinguished
employees as regards the thing (Art but not the principal obligation itself.
2100) (Art 2110)
5. To advise pledgor of danger to the
thing (Art 2107) Requirements for sale of thing pledged
6. To advise pledgor of the result of the at public auction: (Art 2112)
public auction (Art 2116) 1. The debt is due and unpaid
2. Sale must be at a public auction
RIGHT OF PLEDGOR TO SUBSTITUTE 3. there must be notice to the pledgor
THING PLEDGED (ART.2107) and owner, stating the amount due
 Requisites: 4. Sale must be with the intervention
1. The pledgor has reasonable of a notary public
grounds to fear the destruction
or impairment of the thin Effect of sale of the thing pledged: (Art
pledged 2115)
2. There is no fault on the part of 1. The sale of the thing pledged shall
the pledgee extinguish the principal obligation,
3. The pledgor is offering in place whether or not the proceeds of the
of the thing, another thing in sale are equal to the amount of the
pledge which is of the same kind principal obligation, interest and
and quality as the former expenses in a proper case
4. The pledge does not choose to 2. If the price of the sale is more than
exercise his right to cause the the amount due the creditor, the
thing pledged to be sold at debtor is not entitled to the excess
public auction unless the contrary is provided
NOTE: The pledgee’s right to have the 3. If the price of the sale is less, the
thing pledged sold at public sale granted creditor is not entitled to recover
under the Article 2108 is superior to that the deficiency even if there is a
given to the pledgor to substitute the stipulation to that effect
thing pledged under Article 2107.
CIVIL LAW COMMITTEE
204
REAL ESTATE MORTGAGE  It is not an essential requisite that

(Articles 2124-2131) the principal of the mortgage credit
bears interest, or that the interest
 A contract whereby the debtor as compensation for the use of the
secures to the creditor the principal and enjoyment of its fruits
fulfilment of a principal obligation, be in the form of a certain percent
specially subjecting to such security thereof.
immovable property or real rights
over immovable property in case the  Special Requisites (in addition to
principal obligation is not complied the common essential requisites):
with at the time stipulated. 1. It can cover only immovable
property and alienable real rights
Characteristics of the contract: imposed upon immovables (Art
1. Real 2124);
2. Accessory 2. It must appear in a public instrument
3. Subsidiary (Art. 2125); and
4. Unilateral – it creates only an 3. Registration in the registry of
obligation on the part of the property is necessary to bind third
creditor who must free the persons, but not for the validity of
property from the encumbrance the contract (Art 2125).
once the obligation is fulfilled.  An order for foreclosure cannot
be refused on the ground that
the mortgage had not been
registered provided no innocent
NOTES: third parties are involved.
 As an accessory contract, its NOTE: Where a mortgage is not valid or
consideration is that of the principal false, the principal obligation which it
contract from which it receives life. guarantees is not rendered null and void.
 A mortgage does not involve a 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
creditor may be enforced in an ordinary
 A mortgage gives the mortgagee no
personal action.
right or claim to the possession of
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
lacking the formalities of a
CIVIL LAW COMMITTEE

205
mortgage, shows the intention of the transmission of property should not be

parties to make the property a unduly impeded.
security for a debt
2. Mortgagee - To claim from a 3rd
PLEDGE REAL MORTGAGE person in possession of the
1. Constituted on 1. Constituted on mortgaged property the payment of
movables immovables the part of the credit secured by the
2. Property is 2. Delivery is not which said third person possesses
delivered to pledgee necessary (Art 2129)
or by common NOTE: It is necessary that prior demand
consent to a third
for payment must have been made on
person
3. Not valid against 3. Not valid against
the debtor and the latter failed to pay
third persons unless a third persons unless (BPI vs Concepcion & Hijos, Inc., 53 Phil
description of the registered 906)
thing pledged and
date of pledge Foreclosure
appear in a public  The remedy available to the
instrument mortgagee by which he subjects the
mortgaged property to the
Extent of Mortgage: satisfaction of the obligation to
 Absent express stipulation to the secure that for which the mortgage
contrary, the mortgage includes the was given
accessions, improvements, growing
fruits and income of the property NOTES:
not yet received when the obligation  It denotes the procedure adopted by
becomes due and to the amount of
the mortgagee to terminate the
the indemnity granted or owing to
rights of the mortgagor on the
the proprietor from the insurers of
property and includes the sale itself
the property mortgaged, or in virtue
(DBP vs Zaragoza, 84 SCRA 668)
of expropriation for public use (Art
2127)  Foreclosure is valid where the
debtor is in default in the payment
Object of Mortgage: of his obligation (Gobonseng, Jr. vs
 Future property cannot be an object CA, 246 SCRA 472)
of a contract of mortgage (Art
2085[2]) However, a stipulation  Kinds:
subjecting to the mortgage lien, 1. Judicial – ordinary action for
properties (improvements) which the foreclosure under Rule 68 of the
mortgagor may subsequently acquire Rules of Court
install, or use in connection with 2. Extrajudicial – when mortgagee is
real property already mortgaged given a special power of attorney to
belonging to the mortgagor is valid sell the mortgaged property by
(People’s Bank and Trust Co. vs. public auction, under Act No. 3135
Dahican Lumber Co., 20 SCRA 84)
Judicial Extrajudicial
Special Rights: foreclosure foreclosure
1. Mortgagor - To alienate the 1. There is court 1. No court
mortgaged property but the intervention intervention
2. Decisions are 2. Not appealable
mortgage shall remain attached to
appealable because it is
the property. immediately
executory
NOTE: A stipulation forbidding the 3. Order of court 3. Foreclosure does
owner from alienating the immovable cuts off all rights of not cut off right of
mortgage shall be void (Art 2130) being the parties all parties involved
contrary to public policy inasmuch as the impleaded
4. There is equity 4. There is right of
CIVIL LAW COMMITTEE

206
of redemption redemption years from the time the right of

except on banks action accrues (Arts 1142 & 1144).
which provides for
a right of Stipulation of upset price or “tipo”
redemption
 It is a stipulation in a mortgage of
5. Period of 5. Period to redeem
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 must be sold to the highest bidder.
special power of attorney in favor of Parties cannot, by agreement,
attorney in the mortgagee is contravene the law and interfere
contract of needed in the
with the lawful procedure of the
mortgage contract
courts (BPI vs Yulo, 31 Phil 476)
NOTES:
Extrajudicial foreclosure real property
 A foreclosure sale retroacts to the (Act No. 3135)
date of registration of the mortgage  The law covers only real estate
and that a person who takes a mortgages. It is intended merely to
mortgage in good faith and for regulate the extrajudicial sale of the
valuable consideration, the record property mortgaged if and when the
showing clear title to the mortgagor, mortgagee is given a special power
will be protected against equitable of express authority to do so in the
claims on the title in favor of third deed itself or in a document
persons, of which he had no actual annexed thereto.
or constructive notice (St. Dominic  The authority to sell is not
Corporation vs. IAC 151 SCRA 577). extinguished by the death of the
 Where there is a right to redeem, 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 the province in which the property
by reason of the price obtained at sold is situated; and in case the
the auction sale and consequently place within said province in which
not sufficient to set aside the sale. the sale is to be made is the subject
Mere inadequacy of the price of stipulation, such sale shall be
obtained at the sheriff’s sale will not made in the said place in the
be sufficient to set aside the sale municipal building of the
unless “the price is so inadequate as municipality in which the property or
to shock the conscience of the part thereof is situated.
court” taking into consideration the
peculiar circumstances attendant Procedure for extrajudicial foreclosure
thereto. (Sulit vs. CA, 268 SCRA 441) 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. 2. Clerk of Court will examine whether
 The action to recover a deficiency the requirement of the law have
after foreclosure prescribes after 10 been complied with, that is, whether
the notice of sale has been posted
for not less than 20 days in at least
CIVIL LAW COMMITTEE
207
three (3) public places of the public or third persons. Failure to

municipality or city where the comply with the statutory
property is situated, and if the same requirements as to publication of
is worth more than P400.00, that notice of auction sale constitutes a
such notice has been published once jurisdictional defect which
a week for at least three (3) invalidates the sale.Lack of
consecutive weeks in a newspaper of republication of notice of
general circulation in the city of foreclosure sale made subsequently
municipality after the original date renders such
3. The certificate of sale must be sale void (PNB vs. Nepomuceno
approved by the Executive Judge Productions Inc., G.R. No. 139479.
4. Where the application concerns December 27, 2002).
extrajudicial foreclosure of real  Sec 3 of Act 3135 does not require
mortgages in different locations personal or any particular notice on
covering one indebtedness, only one the mortgagor much less on his
filing fee corresponding to such debt successors-in-interest where there is
shall be collected no contractual stipulation therefor.
5. The Clerk of Court shall issue Hence, unless required in the
certificate of payment indicating the mortgage contract, the lack of such
amount of indebtedness, the filing notice is not a ground to set aside a
fees collected, the mortgages sought foreclosure sale.
to be foreclosed, the description of
the real estates and their respective
 Neither does Sec 3 require posting of
notice of sale on the mortgage
locations
property and the certificate of
6. The notice of sale shall be published
posting is not required, much less
in a newspaper of general circulation
considered indispensable, for the
pursuant to Section 1, PD No. 1079
validity of a foreclosure sale.
7. The application of shall be raffled
among all sheriffs
8. After the redemption period has
Redemption
expired, the Clerk of Court shall
archive the records.  It is the transaction by which the
9. No auction sale shall be held unless mortgagor reacquires or buys back
there are at least two (2) the property which may have passed
participating bidders, otherwise the under the mortgage, or divests the
sale shall be postponed to another property of the lien which the
date. If on the new date set forth mortgage may have created.
for the sale there shall not be at
least two bidders, the sale shall then NOTES:
proceed. The names of the bidders  A sale by the mortgagor to a third
shall be reported to the Sheriff of party of the mortgaged property
the Notary Public, who conducted during the period for redemption
the sale to the Clerk of Court before transfers only the right to redeem
the issuance of the certificate of the property and the right to
sale. possess, use and enjoy the same
during said period.
NOTES:  Where sale with assumption of
 The Mortgagor and Mortgagee have mortgage not registered and made
no right to waive the posting and without the consent of the
publication requirements under Act. mortgagee, the buyer, thereof, was
No. 3135. Notices are given to secure not validly substituted as debtor
bidders and prevent a sacrifice of and, hence, had no right to redeem
the property. Clearly, the statutory (Bonnevie vs. CA, 125 SCRA 122).
requirements of posting and
publication are mandated, not for  Kinds:
the mortgagor’s benefit, but for the
CIVIL LAW COMMITTEE
208
1. Equity of Redemption – right of the statutory period for redemption

mortgagor to redeem the mortgaged (Ramirez vs CA, 219 SCRA 598).
property after his default in the
performance of the conditions of the Amount of the redemption price:
mortgage within the 90-day period 1. Mortgagee is not a bank (Act No.
from the date of the service of the 3135, in relation to Sec. 28, Rule 39
order of foreclosure or even of Rules of Court)
thereafter but before the a. purchase price of the property
confirmation of the sale. Applies to b. 1% interest per month on the
judicial foreclosure of real mortgage purchase price
and chattel mortgage foreclosure. c. taxes paid and amount of
purchaser’s prior lien, if any,
NOTE: Redemption of the banking with the same rate of interest
institutions is allowed within one year computed from the date of
from confirmation of sale. registration of sale, up to the
time of redemption
2. Right of Redemption – right of 2. Mortgagee is a bank (GBL 2000)
mortgagor to redeem the mortgaged a. amount due under the mortgage
property within one year from the deed
date of registration of the certificate b. interest
of sale. Applies only to extrajudicial c. cost and expenses
foreclosure of real mortgage. NOTE: Redemption price in this
case is reduced by the income
NOTE: The right of redemption, as long received from the property
as within the period prescribed, may be
exercised irrespective of whether or not
the mortgagee has subsequently
conveyed the property to some other
party (Sta. Ignacia Rural Bank, Inc. vs.
CA, 230 SCRA 513)
Period of Redemption ANTICHRESIS (Articles

1. Extra-judicial (Act #3135) 2132 -2139)
a. natural person – one year from
registration of the certificate of  A contract whereby the creditor
sale with Registry of Deeds acquires the right to receive the
b. juridical person – same rule as fruits of an immovable of the
natural person debtor, with the obligation to apply
c. juridical person (mortgagee is them to the payment of the interest,
bank) - three months after if owing, and thereafter to the
foreclosure or before principal of his credit (Art 2132)
registration of certificate of
foreclosure which ever is earlier Characteristics
(sec. 47, of General Banking 1. Accessory contract – it secures the
Law) performance of a principal obligation
2. Judicial – before confirmation of the 2. Formal contract – it must be in a
sale by the court specified form to be valid, i.e., “in
writing.” (Art 2134)
NOTE: Allowing a redemption after the
lapse of the statutory period, when the  Special Requisites (in addition to
buyer at the foreclosure sale does not the common essential requisites):
object but even consents to the 1. It can cover only the fruits of an
redemption, will uphold the policy of the immovable property; (Art 2132)
law which is to aid rather than defeat 2. Delivery of the immovable is
the right of redemption. There is nothing necessary for the creditor to receive
in the law which prevents a waiver of
CIVIL LAW COMMITTEE
209
the fruits and not that the contract principal

shall be binding; Subject matter of both is real property
3. Amount of principal and interest
must be specified in writing (Art. Obligations of antichretic creditor:
2134); and 1 To pay taxes and charges on the
4. Express agreement that debtor will estate, including necessary expenses
give possession of the property to NOTE: Creditor may avoid said
creditor and that the latter will obligation by:
apply the fruits to the interest, if a. compelling debtor to
any, then to the principal of his reacquire enjoyment of the
credit. (Art 2132) property or
b. by stipulation to the
NOTE: The obligation to pay interest is contrary
not of the essence of the contract of 2 To apply all the fruits, after
antichresis, there being nothing in the receiving them, to the payment of
Code to show that antichresis is only interest, if owing, and thereafter to
applicable to securing the payment of the principal
interest-bearing loans. On the contrary, 3 To render an account of the fruits to
antichresis is susceptible of guaranteeing the debtor
all kinds of obligations, pure or 4 To bear the expenses necessary for
conditional its preservation and repair
Antichresis Pledge Remedies of creditor in case of non-

1. Refers to real 1. Refers to personal payment of debt
property property
2. Perfected by mere 2. Perfected by 1. Bring an action for specific
consent delivery of the thing performance; or
pledged 2. Petition for the sale of the real
3. Consensual contract 3. Real Contract property as in a foreclosure of
mortgages under Rule 68 of the
Rules of Court.(Art 2137)
NOTES:
Antichresis Real Mortgage
1. Property is 1. Debtor usually
 The parties, however, may agree on
delivered to creditor retains possession of an extrajudicial foreclosure in the
the property same manner as they are allowed in
2. Creditor acquires 2. Creditor does not contracts of mortgage and pledge
only the right to have any right to (Tavera vs. El Hogar Filipino, Inc.,
receive the fruits of receive the fruits; 68 Phil 712).
the property, hence, but the mortgage  A stipulation authorizing the
it does not produce a creates a real right
real right over the property
antichretic creditor to appropriate
3. The creditor, 3. The creditor has the property upon the non-payment
unless there is no such obligation of the debt within the agreed period
stipulation to the is void (Art 2088).
contrary, is obliged
to pay the taxes and CHATTEL MORTGAGE
charges upon the (Articles 2140-2141)
estate
4. It is expressly 4. There is no such  A contract by virtue of which
stipulated that the obligation on part of
creditor given mortgagee
personal property is recorded in the
possession of the Chattel Mortgage Register as a
property shall apply security for the performance of an
all the fruits thereof obligation (Art 2140).
to the payment of
interest, if owing, Characteristics
and thereafter to the
CIVIL LAW COMMITTEE
210
1. Accessory contract – it is for the

purpose of securing the performance Effect of failure to register chattel
of a principal obligation mortgage in the chattel mortgage
2. Formal contract – registration in the registry
Chattel Mortgage Register is  Article 2140 makes the recording in
indispensable for its validity the Chattel Mortgage Register an
3. Unilateral contract – it produces essential requisite but if the
only obligations on the part of the instrument is not recorded, the
creditor to free the thing from the mortgage is nevertheless binding
encumbrance on fulfilment of the between the parties. But the person
obligation. in whose favour the law establishes a
mortgage has no other right than to
 Special Requisites (in addition to demand the execution and the
the common essential requisites): recording of the document.
1. It can cover only personal or
movable property in general;
however, the parties may treat as Chattel Mortgage Pledge
personal property that which by its 1. Delivery of the 1. Delivery of the
nature would be real property; personal property thing pledged is
2. Registration of the mortgage with to the mortgage is necessary
the Chattel Mortgage Register where not necessary
the mortgagor resides; if property is 2. registration in 2. registration not
located in a different province, the Chattel necessary to be
registration in both provinces Mortgage Registry valid
required; is necessary for its
3. Description of the property as would validity
enable the parties or other persons 3. If property is 3. Debtor is not
to identify the same after foreclosed, the entitled to excess
reasonable investigation and inquiry; excess over the unless otherwise
and amount due goes to agreed or except in
4. Accompanied by an affidavit of good the debtor case of legal
faith to bind third persons, but not pledge
for the validity of the contract. 4. If there is 4. If there is
5. It can cover only obligations existing deficiency after deficiency, creditor
at the time the mortgage is foreclosure, is not entitled to
constituted. creditor is entitled recover
NOTE: A mortgage containing a to recover the notwithstanding
stipulation in regard to future deficiency from the any stipulation to
advances in the credit will take debtor, except the contrary
effect only from the date the same under Art. 1484
are made and not from the date of Subject matter of both is movable
the mortgage (Jaca vs Davao Lumber property
Co., 113 SCRA 107)
Affidavit of Good Faith
Effect of registration: Creates a real  Oath in a contract of chattel
right mortgage wherein the parties
 The registration of the chattel "severally swear that the mortgage is
mortgage is an effective and binding made for the purpose of securing the
notice to other creditors of its obligation specified in the conditions
existence and creates a real right or thereof and for no other purposes
a lien which, being recorded, follows and that the same is a just and valid
the chattel wherever it goes. The obligation and one not entered into
registration gives the mortgagee for the purpose of fraud.” (Sec. 5,
symbolical possession (Northern Chattel Mortgage Law)
Motors, Inc. vs. Coquia, 68 SCRA
374).
CIVIL LAW COMMITTEE
211
Effect of absence  Only equity of redemption is

The special affidavit is required only available to the mortgagor; the
for the purpose of transforming an latter can no longer redeem after
already valid mortgage into the confirmation of the foreclosure
“preferred mortgage.” Thus, it is sale.
not necessary for the validity of the
chattel mortgage itself but only to Right of redemption
give it a preferred status. In other
words, its absence vitiates the
 When the condition of a chattel
mortgage is broken the following
mortgage only as against third
may redeem:
persons without notice like creditors
a) mortgagor;
and subsequent encumbrancers.
b) person holding a subsequent
mortgage; or
Foreclosure of Chattel Mortgage
c) subsequent attaching creditor.
NOTES:
 Foreclosure sale in chattel mortgage  An attaching creditor who so
redeems shall be subrogated to the
is by public auction under Act No.
rights of the mortgagee and entitled
1508, but the parties may stipulate
to foreclose the mortgage in the
that it be by private sale.
same manner that the mortgagee
 The mortgagee may, after thirty (30) could foreclose it.
days from the time of the condition
broken, cause the mortgaged
 The redemption is made by paying or
delivering to the mortgagee the
property to be sold at public auction
amount due on such mortgage and
by a public officer. The 30-day
the costs, and expenses incurred by
period is also a grace period for the
such breach of condition before the
mortgagor to discharge the mortgage
sale thereof (Sec 13, Act No. 1508).
obligation. After the sale of the
chattel at public auction, the right
Right to possession of foreclosed
of redemption is no longer available
property
to the mortgagor (Cabral vs.
1. Real mortgage – After the
Evangelista, 28 SCRA 1000).
redemption period has expired, the
purchaser of the property has the
Application of proceed of sale:
right to a conveyance and to be
1. Costs and expenses of keeping
placed in possession thereof.
and sale
2. Payment of the obligation
NOTES:
secured by the mortgage
3. Claims of persons holding  Purchaser is not obliged to bring
subsequent mortgages in their a separate suit for possession.
order He must invoke the aid of the
4. The balance, if any, shall be courts and ask for a WRIT OF
paid to the mortgagor or person POSSESSION.
holding under him  Section 7 of Act No. 3135 allows
the purchaser to take possession
NOTES: of the foreclosed property during
 The creditor may maintain an action the period of redemption upon
for the deficiency, except if the filing of an ex parte application
chattel mortgage is constituted as and approval of a bond.
security for the purchase of personal
property payable in instalments 2. Chattel mortgage – When default
(Art. 1484). occurs and the creditor desires to
foreclose, the creditor has the right
 The action for deficiency may be
to take the property as a preliminary
brought within ten (10) years from
step for its sale.
the time the cause of action accrues
(Arts 1141 and 1142).
CIVIL LAW COMMITTEE
212
NOTE: Where the debtor refuses to GENERAL RULE: Debtor is liable with
yield the property, the creditor’s all his property, present and future, for
remedy is to institute an action the fulfilment of his obligations. (Art
either to effect judicial foreclosure 2236)
directly or to secure possession
(REPLEVIN) as a preliminary to the EXEMPT PROPERTY:
sale contemplated in Section 14 or 1. Present property – those
Act. No. 1508 provided under Arts. 155 and 205
of the Family Code, Sec. 13,
CONCURRENCE AND PREFERENCE OF Rule 39 of the Rules of Court,
CREDITS (Articles 2236 – 2251) and Sec. 118 of the Public Land
Act
Concurrence of Credits 2. Future property – a debtor who
 Possession by two or more creditors obtains a discharge from his
of equal rights or privileges over the debts on account of his
same property or all of the property insolvency, is not liable for the
of the debtor unsatisfied claims of his
creditors with said property
Preference of Credits subject to certain exceptions
 Right held by a creditor to be expressly provided by law. (Secs.
preferred in the payment of his 68, 69, The Insolvency Law [Act
claim above others out of the No. 1956])
debtor’s assets. 3. Property under legal custody and
those owned by municipal
NOTES: corporations necessary for
 The rules on preference of credits governmental purposes
apply only when two or more
creditors have separate and distinct General Categories of Credit:
claims against the same debtor who 1. Special Preferred Credits - those
has insufficient property. listed in Arts. 2241 and 2242 shall be
considered as mortgages and pledges of
 Preference creates no lien on real or personal property or liens (Art.
property, and, therefore, gives no
2243). Hence, they are not included in
interest in property, specific or
the insolvent debtor's assets.
general, to the preferred creditor
but a preference in application of
NOTES:
the proceeds after the sale. (Molina
vs. Somes, 31 Phil. 76)  Arts. 2241 and 2242 do not give the
order of preference or priority of
 The preferential right of credit payment. They merely enumerate
attains significance only after the
the credits which enjoy preference
properties of the debtor have been
with respect to specific movables or
inventoried and liquidated, and the
immovables. With respect to the
claims held by his various creditors
same specific movables or
have been established. (DBP vs.
immovables, creditors, with the
NLRC, 183 SCRA 328)
exception of the State (No. 1),
merely concur.
Preference of Lien
Credit  They only find application when
Applies only to Creates a charge there is a concurrence of credits,
claims which do on a particular i.e., when the same specific
not attach to property property of the debtor is subjected
specific to the claims of several creditors and
properties the value of such property is
insufficient to pay in full all the
Liability of debtor’s property for his creditors. In such a situation, the
obligations question of preference will arise.
CIVIL LAW COMMITTEE

213
 Article 2242 makes no distinction 2244 creates are simply rights in

between registered and unregistered favour of certain creditors to have
vendor’s lien (No. 2). Hence, any the cash and other assets of the
lien of that kind enjoys the insolvent applied in a certain
preferred credit status. Unlike the sequence or order of priority.
unpaid price of real property sold,  Article 2244, particularly par (14)
mortgage credits (No. 5), in order to item (1) thereof, is not applicable to
be given preference, should be obligations of the State as it is a
recorded in the Registry of Property. recognized doctrine that the State is
But a recorded mortgage credit is always solvent. It is inconceivable
superior to an unrecorded unpaid for the State to voluntarily initiate
vendor’s lien (De Barretto vs. insolvency or general liquidation
Villanueva, 1 SCRA 288) proceedings or to be subjected to
 The priority rule applies to credits such proceedings under its own laws.
annotated in the Registry of
Property. As to credits mentioned in 3. Common Credits – those listed
No. 7 of Article 2242, there is under Art. 2245, which shall be paid
preference among the attachments pro rata regardless of dates.
or executions according to the order NOTE: Ordinary Preferred and Common
of the time they were levied upon Credits cover only “free property” of the
the property. The pro rata rule in debtor, or those not subjected to Special
Article 2249 does not apply; Preferred Credit.
otherwise, the result would be
absurd. The preference of a credit Effects of Article 110 of Labor Code to
annotated by an attachment or Art 2244:
execution could be defeated by 1. Removed the one-year limitation
simply obtaining a writ of found in No. 2 of Art. 2244
attachment or execution, no matter 2. Moving up the claims for unpaid
how much later (Manabat vs Laguna wages (and other monetary claims)
Federation of Facomas, Inc., 19 of laborers or workers of insolvent
SCRA 621). from second priority to first priority
in the order of preference
 The last paragraph of Article
established by Art. 2244
2241 applies only when the right of
ownership in such property continues
in the debtor, and, therefore, it is
not applicable to cases where the
debtor has parted with his ownership
NOTES:
therein, as where he has sold the
property (Peña vs. Mitchell, 9 Phil  In case of bankruptcy or liquidation
587) of the employer’s business, the
unpaid wages and other monetary
2. Ordinary Preferred Credits - those claims of the employees shall be
listed in Art. 2244 as amended by given first preference and shall be
Art. 110 of the Labor Code. paid in full before the claims of the
NOTES: government and other creditors may
be paid. The terms, “declaration”
 The provision not only enumerates of bankruptcy, or “judicial”
the preferred credits with respect to
liquidation have been eliminated,
other property, real and personal, of
nevertheless, according to the SC,
the debtor, but also gives their
bankruptcy or liquidation
order of preference “in the order
proceedings are still necessary for
named”.
the operation of the preference
 In contrast with Articles 2241 and accorded to workers under Art. 110
2242, Article 2244 creates no liens of the Labor Code. (DBP vs. NLRC
on determinate property which 183 SCRA 328; RA No. 6715 Sec 10)
follow such property. What Article
CIVIL LAW COMMITTEE
214
 In case of rehabilitation, the adjudicated, e.g. insolvency,

preference of credit granted to settlement of decedent’s estate, or
employees under Art 110 of the other liquidation proceedings except
Labor Code is not applicable where there are not more than one
(Rubberworld [Phils.] vs CA, 305 creditor.
SCRA 722).
Refectionary Credit
 Indebtedness incurred in the repair
or reconstruction of something
previously made, such repair or
reconstruction being made necessary
by the deterioration or destruction
of the thing as it formerly existed.
ORDER OF PREFERENCE OF CREDITS
 Arts. 2241 and 2242, jointly with

Arts. 2246 to 2249 establish a two-
tier order of preference:
1. First tier – includes taxes, duties
and fees due on specific movable or
immovable property;
2. Second tier – all other special
preferred (non-tax) credits shall be
satisfied pro-rata, out of any
residual value of the specific
property to which such credits
relate.
NOTES:
 The pro-rata rule does not apply to
credits annotated in the Registry of
Property by virtue of a judicial
order, by attachments and

executions, which are preferred as
 Credits which do not enjoy any
to “later credits”. In satisfying preference with respect to specific
several credits annotated by property because they are not
attachments or executions, the rule among those mentioned in Arts. 2241
is still preference according to the and 2242 and those while included in
priority of the credits in the order of said articles are unpaid because the
time. value of the property to which the
preference refers is less than the
 In order to make the pro rating preferred credit or credits, shall be
provided in Art 2249 fully effective, satisfied in the order established in
the preferred creditors enumerated Art. 2244 with reference to other
in Nos. 2 to 14 of Art 2242 must real and/or personal property.
necessarily be convened, and the
import of their claims ascertained.
 Common credits or those which do
not fall under Arts. 2241, 2242, and
There must be first some proceeding
2244 do not enjoy any preference
where the claims of all the preferred
and shall be paid pro rata regardless
creditors may be bindingly
CIVIL LAW COMMITTEE
215
of dates.
CIVIL LAW COMMITTEE


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San Beda College of Law

MEMORY AID IN CIVIL LAW

MEMORY AID IN CIVIL LAW

2. Simple loan or mutuum – where the COMMODATUM (Articles 1935 – 1952)

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

NOTE:Use of the thing loaned NOTES:

Obligations of the Bailee: (Arts 1941 –

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

2. There is a transfer There is no transfer

MEMORY AID IN CIVIL LAW

breached, the contravenor can

MEMORY AID IN CIVIL LAW

annum deals with loans, forbearance 1. Real Contract - contract is

MEMORY AID IN CIVIL LAW

persons each of whom believes 3. property saved from destruction

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

his fault, which is presumed 1. The consumable 1. Lender is bound

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

may have received or to assign his pillage, shipwreck or other similar

Obligations of the Depositor (Art 1992 –

MEMORY AID IN CIVIL LAW

MEMORY AID IN CIVIL LAW

against the principal even  Guaranty may be constituted to

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

his acceptance. With respect motive of pecuniary gain and hence,

MEMORY AID IN CIVIL LAW

1. Primarily of 1. Contract of  It is never necessary that the

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

Extent of Guarantor’s liability: (Art  Cannot even begin to take place

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

exhaustion even if judgment

MEMORY AID IN CIVIL LAW

depend upon his will or own acts  The guarantor is subrogated by

Guarantor’s right to Subrogation Effect of Repeat Payment by debtor:

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

GENERAL RULE: Guarantor has no 6. Extension granted to the debtor by

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

3. Pledgor, mortgagor, antichretic security for the payment of the

MEMORY AID IN CIVIL LAW

3. Where there was failure of delivered shall be returned with all

MEMORY AID IN CIVIL LAW

1. Real KEY: D SBC BA2R2OPS2

MEMORY AID IN CIVIL LAW

21. To retain excess value received

MEMORY AID IN CIVIL LAW

REAL ESTATE MORTGAGE  It is not an essential requisite that

CIVIL LAW COMMITTEE