Credit - San Beda

San Beda College of Law
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!CEAlRPLRSCN: Romuuld Pudlllu !ASS1.CEAlRPLRSCN: vldu 8ocur, 'oyce vldud !LLP: Alnulzu Eusslmun, Lorothy Cuyon
! SU8'LC1 ELALS: Chrlstoher Rey Muruslgun (Persons und lumlly Relutlons), Alejundro Cusubur(Proerty), Mu. Rhodoru
lerrer(vllls und Successlon), lun Lomlnlc Puu(Cbllgutlons und Contructs), Shu Llljuh Lumumu(Sules und Leuse), 'ohn Stehen
Qulumbuo(PA1), Chrlstoher Cublguo(Credlt 1runsuctlons), Llguyu Alluo(1orts und Lumuges), Anthony Purgunun(L1L),
Mu. Rlcuslon 1ugudl (Confllcts of Luw)

CREDIT TRANSACTIONS
" All transactions involving the
purchase or loan of goods, services,
or money in the present with a
promise to pay or deliver in the
future

Contracts of security
Types:
1. Secured transactions or contracts of
real security - supported by a
collateral or an encumbrance of
property
2. Unsecured transactions or contracts
of personal security - supported only
by a promise or personal
commitment of another such as a
guarantor or surety

Security
" Something given, deposited, or
serving as a means to ensure
fulfilment or enforcement of an
obligation or of protecting some
interest in property
" Types of Security
a. personal when an individual
becomes surety or guarantor
b. real or property when a
mortgage, pledge, antichresis,
charge or lien or other device
used to have property held, out
of which the person to be made
secure can be compensated for
loss

Bailment
" The delivery of property of one
person to another in trust for a
specific purpose, with a contract,
express or implied, that the trust
shall be faithfully executed and the
property returned or duly accounted
for when the special purpose is
accomplished or kept until the bailor
claims it.

" Parties:
1. bailor - the giver; one who delivers
property
2. bailee- the recipient; one who
receives the custody or possession of
the thing thus delivered

LOAN (Articles 1933 1961)

" A contract wherein one of the
parties delivers to another, either
something not consumable so that
the latter may use the same for a
certain time and return it or money
or other consumable thing, upon the
condition that the same amount of
the same kind and quality shall be
paid. (Art 1933)

Characteristics:
1. Real Contract delivery of the thing
loaned is necessary for the
perfection of the contract
NOTE: An accepted promise to make
a future loan is a consensual
contract, and therefore binding upon
the parties but it is only after
delivery, will the real contract of
loan arise. (Art 1934)

2. Unilateral Contract - once the
subject matter has been delivered,
it creates obligations on the part of
only one of the parties (i.e.
borrower).

" Kinds:
1. Commodatum when the bailor
(lender) delivers to the bailee
(borrower) a non-consumable thing
so that the latter may use it for a
certain time and return the identical
thing.
" Kinds of commodatum:
a. Ordinary Commodatum use by
the borrower of the thing is for a
certain period of time
b. Precarium - one whereby the
bailor may demand the thing
loaned at will and it exists in the
following cases:
i. neither the duration nor
purpose of the contract is
stipulated
ii. the use of the thing is
merely tolerated by the
owner

CREDIT TRANSACTIONS
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2. Simple loan or mutuum where the
lender delivers to the borrower
money or other consumable thing
upon the condition that the latter
shall pay the same amount of the
same kind and quality.

Commodatum Mutuum
Key: COPS-LOTR
1. Object
Non-consumable Consumable
2. Cause
Gratuitous May or may not be
gratuitous
3. Purpose
Use or temporary
possession
Consumption
4. Subject Matter
Real or personal
property
Only personal
property
5. Ownership of the thing
Retained by the
bailor
Passes to the debtor
6. Thing to be returned
Exact thing loaned Equal amount of the
same kind and
quality
7. Who bears risk of loss
Bailor Debtor
8. When to return
In case of urgent
need, even before
the expiration of the
term
Only after the
expiration of the
term

Loan Credit
Delivery by one party
and the receipt of
other party of a
given sum of money
or other consumable
thing upon an
agreement, express
or implied, to repay
the same.
Ability of a person to
borrow money or
things by virtue of
the trust or
confidence reposed
by the lender that he
will pay what he
promised.

Loan Credit
1. Interest taken at
the expiration of the
credit
Interest is taken in
advance
2. Always on a
double name paper
(two signatures
appear with both
parties held liable
for payment)
Always on a single
name paper (i.e.
promissory note with
no indorse-ment
other than the
maker)

COMMODATUM (Articles 1935 1952)
" Nature:

1. PURPOSE: Bailee in commodatum
acquires the temporary use of the
thing but not its fruits (unless
stipulated as an incidental part of
the contract).(Art 1935)
" Use must be temporary,
otherwise the contract may be a
deposit.

2. CAUSE: Essentially gratuitous; it
ceases to be a commodatum if any
compensation is to be paid by the
borrower who acquires the use, in
such case there arises a lease
contract.
" Similar to a donation in that it
confers a benefit to the
recipient. The presumption is
that the bailor has loaned the
thing for having no need
therefor.

3. SUBJECT MATTER: Generally non-
consumable whether real or personal
but if the consumable goods are not
for consumption as when they are
merely for exhibition, consumable
goods may be the subject of the
commodatum. (Art 1936)

4. Bailor need not be the owner of the
thing owned (Art. 1938) since by the
loan, ownership does not pass to the
borrower.
" A mere lessee or usufructuary
may lend but the borrower or
bailee himself may not lend nor
lease the thing loaned to him to
a third person (Art 1932[2])

5. Purely Personal (Art 1939):
" Death of either party terminates
the contract unless by
stipulation, the commodatum is
transmitted to the heirs of either
or both parties.
" Bailee can neither lend nor lease
the object of the contract to a
third person.

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NOTE:Use of the thing loaned
may extend to members of the
bailees household except:
a. contrary stipulation;
b. nature of the thing
forbids such use

Obligations of the Bailee: (Arts 1941
1945)
1. To pay for the ordinary expenses for
the use and preservation of the thing
loaned. (Art 1941)
2. To be liable for the loss of the thing
even if it should be through a
fortuitous event in the following
cases: (KLAS D)
a. when he keeps it longer than the
period stipulated, or after the
accomplishment of its use
b. when he lends or leases it to
third persons who are not
members of his household
c. when the thing loaned has been
delivered with appraisal of its
value
d. when, being able to save either
of the thing borrowed or his own
things, he chose to save the
latter; or
e. when the bailee devoted the
thing for any purpose different
from that for which it has been
loaned (Art 1942)
3. To be liable for the deterioration of
thing loaned (a) if expressly
stipulated; (b) if guilty of fault or
negligence; or (c) if he devotes the
thing to any purpose different from
that for which it has been loaned
4. To pay for extraordinary expenses
arising from the actual use of the
thing by the bailee, which shall be
borne equally by both the bailor and
the bailee, even though the bailee
acted without fault, unless there is a
stipulation to the contrary (Art 1949
par 2)
5. To return the thing loaned
" The bailee has no right to retain
the thing loaned as security for
claims he has against the bailor
even for extraordinary expenses
except for a claim for damages
suffered because of the flaws of
the thing loaned.

NOTES:
# However, the bailees right
extends no further than
retention of the thing loaned
until he is reimbursed for the
damages suffered by him.
# He cannot lawfully sell the
thing to satisfy such damages
without courts approval.
# In case there are two or
more bailees, their
obligation shall be solidary.

Obligations of the bailor (Art 1946 Art
1952):
1. To respect the duration of the loan
!GENERAL RULE: Allow the bailee
the use of the thing loaned for the
duration of the period stipulated or
until the accomplishment of the
purpose for which the commodatum
was instituted.
!EXCEPTIONS:
a. In case of urgent need in
which case bailee may demand
its return or temporary use;
b. The bailor may demand
immediate return of the thing if
the bailee commits any act of
ingratitude specified in Art. 765.

2. To refund to the bailee
extraordinary expenses for the
preservation of the thing loaned,
provided the bailee brings the same
to the knowledge of the bailor
before incurring them, except when
they are so urgent that the reply to
the notification cannot be awaited
without danger.

3. To be liable to the bailee for
damages for known hidden flaws.
" Requisites:
a. There is flaw or defect in the
thing loaned;
b. The flaw or defect is hidden;
c. The bailor is aware thereof;
d. He does not advise the bailee of
the same; and
e. The bailee suffers damages by
reason of said flaw or defect

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NOTES:
# If the above requisites concur,
the bailee has the right of
retention for damages.
# The bailor cannot exempt
himself from the payment of
expenses or damages by
abandoning the thing to the
bailee.

SIMPLE LOAN OR MUTUUM (Art 1953
1961)
" A contract whereby one party
delivers to another, money or other
consumable thing with the
understanding that the same amount
of the same kind and quality shall be
paid. (Art. 1953)

NOTES:
# The mere issuance of the checks
does not result in the perfection of
the contract of loan. The Civil Code
provides that the delivery of bills of
exchange and mercantile
documents, such as checks, shall
produce the effect of payment only
when they have been encashed
(Gerales vs. CA 218 SCRA 638). It is
only after the checks have produced
the effect of payment that the
contract of loan may be deemed
perfected.
# The obligation is to pay and not to
return because the consumption of
the thing loaned is the distinguishing
character of the contract of mutuum
from that of commodatum.
# No estafa is committed by a person
who refuses to pay his debt or denies
its existence.

Simple Loan/Mutuum Rent

1. Delivery of money
or some consumable
thing with a promise
to pay an equivalent
of the same kind and
quality

Delivery of some
non-consumable
thing in order that
the other may use it
during a certain
period and return it
to the former.

2. There is a transfer
of ownership of the
thing delivered

There is no transfer
of ownership of the
thing delivered

3. Relationship
between the parties
is that of obligor-
obligee

Relationship is that
of a landlord and
tenant

4. Creditor receives
payment for his loan

Owner of the
property rented
receives
compensation or
price either in
money, provisions,
chattels, or labor

from the occupant
thereof in return for
its use (Tolentino vs
Gonzales, 50 Phil 558
1927)

Loan Sale

1. Real contract

Consensual contract

2. Generally
unilateral because
only borrower has
obligations

Bilateral and
reciprocal

NOTE: If the property is sold, but the
real intent is only to give the object as
security for a debt as when the price
is comparatively small there really is a
contract of loan with an equitable
mortgage.

Commodatum/
Mutuum
Barter

1. Subject matter is
money or fungible
things

Subject matter is
non-fungible, (non
consumable) things

2. In commodatum,
the bailee is bound
to return the
identical thing
borrowed when the
time has expired or
purpose served

The thing with
equivalent value is
given in return for
what has been
received

3. Mutuum may be
gratuitous and
commodatum is
always gratuitous

Onerous, actually a
mutual sale

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" Form of Payment (Art 1955):
1. If the thing loaned is money -
payment must be made in the
currency stipulated, if it is possible;
otherwise it is payable in the
currency which is legal tender in the
Philippines and in case of
extraordinary inflation or deflation,
the basisi of payment shall be the
value of the currency at the time of
the creation of the obligation
2. If what was loaned is a fungible
thing other than money - the
borrower is under obligation to pay
the lender another thing of the same
kind, quality and quantity. In case it
is impossible to do so, the borrower
shall pay its value at the time of the
perfection of the loan.

Interest
" The compensation allowed by law or
fixed by the parties for the loan or
forbearance of money, goods or
credits
" Requisites for Demandability: (ELI)
1. must be expressly stipulated
Exceptions:
a. indemnity for damages
b. interest accruing from
unpaid interest
2. must be lawful
3. must be in writing

Compound Interest
!GENERAL RULE: Unpaid interest shall
not earn interest.
!EXCEPTIONS:
1. when judicially demanded
2. when there is an express
stipulation (must be in writing in
view of Art. 1956)

Guidelines for the application of
proper interest rates
1. If there is stipulation: that rate shall
be applied
2. The following are the rules of thumb
for the application/imposition of
interest rates:
a) When an obligation, regardless
of its source, i.e., law,
contracts, quasi-contracts,
delicts or quasi-delicts is
breached, the contravenor can
be held liable for damages.
b) With regard particularly to an
award of interest in the concept
of actual and compensatory
damages, the rate of interest, as
well as the accrual thereof, is
imposed, as follows:
i. When the obligation
breached consists of
payment of a sum of money
(loan or forbearance of
money), the interest shall be
that which is stipulated or
agreed upon by the parties.
In absence of an agreement,
the rate shall be the legal
rate (i.e. 12% per annum)
computed from default.
NOTE: The interest due shall
itself earn legal interest
from the time it is judicially
demanded
ii. In other cases, the rate of
interest shall be six percent
(6%) per annum.
NOTE: No interest, however,
shall be adjudged on
unliquidated claims or
damages except when or
until the demand can be
established with reasonable
certainty. When the demand
cannot be established, the
interest shall begin to run
only from the date of the
judgment of the court is
made.
iii. When the judgment of the
court awarding a sum of
money becomes final and
executory, the rate of legal
interest, whether the case
falls under paragraph i or ii
above, shall be 12% per
annum from such finality
until its satisfaction, this
interim period being deemed
to be by then an equivalent
to a forbearance of credit.
(Eastern Shipping Lines vs.
CA, July 12, 1994)

NOTES:
# Central Bank Circular No. 416 fixing
the rate of interest at 12% per
annum deals with loans, forbearance
of any money, goods or credits and
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judgments involving such loans, or
forbearance in the absence of
express agreement to such rate
# Interest as indemnity for damages is
payable only in case of default or
non-performance of the contract. As
they are distinct claims, they may be
demanded separately. (Sentinel
Insurance Co., Inc. vs CA, 182 SCRA
517)
# Central Bank Circular No. 905 (Dec.
10, 1982) removed the Usury Law
ceiling on interest rates for secured
and unsecured loans, regardless of
maturity.

Validity of unconscionable interest rate
in a loan
Supreme Court in Sps. Solangon
vs. Jose Salazar, G.R. No. 125944, June
29, 2001, said that since the usury law
had been repealed by CB Cir. No. 905
there is no more maximum rate of
interest and the rate will just depend on
the mutual agreement of the parties
(citing Lim Law vs. Olympic Sawmill Co.,
129 SCRA 439). But the Supreme Court
said that nothing in said circular grants
lenders carta blanche authority to raise
interest rates to level which will either
enslave their borrowers or lead to a
hemorrhaging of their assets (citing
Almeda vs. CA, 256 SCRS 292). In Medel
vs. CA, 299 SCRA 481, it was ruled that
while stipulated interest of 5.5% per
month on a loan is usurious pursuant to
CB Circular No. 905, the same must be
equitably reduced for being iniquitous,
unconscionable and exorbitant. It is
contrary to morals, (contra bonos
mores). It was reduced to 12% per
annum in consonant with justice and fair
play.

DEPOSIT (Articles 1962 2009)

" A contract constituted from the
moment a person receives a thing
belonging to another, with the
obligation of safely keeping it and of
returning the same.

Characteristics:
1. Real Contract - contract is
perfected by the delivery of the
subject matter.
2. Unilateral (gratutitous deposit) -
only the depositary has an
obligation.
3. Bilateral (onerous deposit) -
gives rise to obligations on the
part of both the depositary and
depositor.

Deposit Mutuum
1. Purpose
Principal purpose is
safekeeping or
custody
Principal purpose is
consumption
2. When to Return
Depositor can
demand the return of
the subject matter at
will
The lender must wait
until the expiration
of the period granted
to the debtor
3. Subject Matter
Subject matter may
be movable or
immovable property
Subject matter is
only money or other
fungible thing
4. Relationship
of lender (creditor)
and borrower
(debtor).

of depositor and
depositary.
5. Compensation
There can be
compensation of
credits.
NO compensation of
things deposited with
each other (except
by mutual
agreement).

Deposit Commodatum

1. Purpose is
Safekeeping

1. Purpose is the
transfer of the use

2. May be gratuitous

2. Essentially and
always gratuitous

3. Movable/corporeal
things only in case of
extrajudicial deposit

3. Both movable and
immovable may be
the object

" Kinds of Deposit:
1. Judicial (Sequestration) takes place
when an attachment or seizure of
property in litigation is ordered.

2. Extra-judicial
a. Voluntary one wherein the
delivery is made by the will of
the depositor or by two or more
persons each of whom believes
himself entitled to the thing
deposited. (Arts 1968 1995)
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b. Necessary one made in
compliance with a legal
obligation, or on the occasion of
any calamity, or by travellers in
hotels and inns (Arts 1996 -
2004), or by travellers with
common carriers (Art 1734
1735).
NOTE: The chief difference
between a voluntary deposit and a
necessary deposit is that in the
former, the depositor has a
complete freedom in choosing the
depositary, whereas in the latter,
there is lack of free choice in the
depositor.

Judicial Extra-judicial
1. Creation
Will of the court Will of the parties
or contract
2. Purpose
Security or to insure
the right of a party
to property or to
recover in case of
favorable judgment
Custody and
safekeeping
3. Subject Matter
Movables or
immovables,
but generally
immovables
Movables only
4. Cause
Always onerous May be compen-
sated or not, but
generally gratuitous
5. When must the thing be returned
Upon order of the
court or when
litigation is ended
Upon demand of
depositor
6. In whose behalf it is held
Person who has a
right
Depositor or third
person designated

!GENERAL RULE: Contract of deposit is
gratuitous (Art 1965)
!EXCEPTIONS:
1. when there is contrary
stipulation
2. depositary is engaged in business
of storing goods
3. property saved from destruction
without knowledge of the owner

NOTES:
# Article 1966 does not embrace
incorporeal property, such as rights
and actions, for it follows the person
of the owner, wherever he goes.
# A contract for the rent of safety
deposit boxes is not an ordinary
contract of lease of things but a
special kind of deposit; hence, it is
not to be strictly governed by the
provisions on deposit. The relation
between a bank and its customer is
that of a bailor and bailee. (CA Agro
vs CA, 219 SCRA 426)

Obligations of the Depositary (Art 1972
1991):
1. To keep the thing safely (Art 1972)
" Exercise over the thing
deposited the same diligence as
he would exercise over his
property
2. To return the thing (Art 1972)
" Person to whom the thing must
be returned:
a. Depositor, to his heirs and
successors, or the person who
may have been designated in the
contract
b. If the depositary is capacitated -
he is subject to all the
obligations of a depositary
whether or not the depositor is
capacitated. If the depositor is
incapacitated, the depositary
must return the property to the
legal representative of the
incapacitated or to the depositor
himself if he should acquire
capacity (Art 1970).
c. If the depositor is capacitated
and the depositary is
incapacitated - the latter does
not incur the obligation of a
depositary but he is liable:
i..to return the thing
deposited while still in his
possession;
ii.to pay the depositor the
amount which he may have
benefited himself with the
thing or its price subject to
the right of any third person
who acquired the thing in
good faith (Art 1971)

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" Time of return:
a. Upon demand even though a
specified period or time for such
return may have been fixed
except when the thing is
judicially attached while in the
depositarys possession or should
he have been notified of the
opposition of a third person to
the return or the removal of the
thing deposited. (Art 1998)
b. If deposit gratuitous, the
depositary may return the thing
deposited notwithstanding that a
period has been fixed for the
deposit if justifiable reasons
exists for its return.
c. If the deposit is for a
valuable consideration, the
depositary has no right to return
the thing deposited before the
expiration of the time
designated even if he should
suffer inconvenience as a
consequence.(Art 1989)

" What to return: product,
accessories, and accessions of
the thing deposited (Art 1983)
3. Not to deposit the thing with a third
person unless authorized by express
stipulation (Art 1973)
" The depositor is liable for the
loss of the thing deposited under
Article 1973 if:
a. he transfers the deposit
with a third person without
authority although there is no
negligence on his part and the
third person;
b. he deposits the thing
with a third person who is
manifestly careless or unfit
although authorized even in the
absence of negligence; or
c. the thing is lost through
the negligence of his employees
whether the latter are
manifestly careless or not.
4. If the thing deposited should earn
interest (Art 1975):
a. to collect interest and the
capital itself as it fall due
b. to take steps to preserve its
value and rights corresponding to
it
5. Not to commingle things deposited if
so stipulated (Art 1976)
6. Not to make use of the thing
deposited unless authorized (Art
1977)
!GENERAL RULE: Deposit is for
safekeeping of the subject matter
and not for use. The unauthorized
use by the depositary would make
him liable for damages.
!EXCEPTIONS:
1. When the preservation of the
thing deposited requires its use
2. When authorized by the
depositor

NOTE: The permission to use is NOT
presumed except when such use is
necessary for the preservation of the
thing deposited.

Effect if permission to use is given
(Art 1978):
1. If thing deposited is
non-consumable, the contract
loses the character of a deposit
and acquires that of a
commodatum despite the fact
that the parties may have
denominated it as a deposit,
unless safekeeping is still the
principal purpose.
2. If thing deposited consists of
money/consumable things, the
contract is converted into a
simple loan or mutuum unless
safekeeping is still the principal
purpose in which case it is called
an irregular deposit. Example:
bank deposits are irregular
deposits in nature but governed
by law on loans.
7. When the thing deposited is
delivered sealed and closed :
a. to return the thing deposited in
the same condition
b. to pay for damages should the
seal or lock be broken through
his fault, which is presumed
unless proved otherwise
c. to keep the secret of the deposit
when the seal or lock is broken
with or without his fault (Art
1981)
NOTE: The depositary is
authorized to open the thing
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deposited which is closed and
sealed when (Art 1982):
i. there is presumed authority
(i.e. when the key has been
delivered to him or the
instructions of the depositor
cannot be done without
opening it)
ii. necessity
8. To change the way of the deposit if
under the circumstances, the
depositary may reasonably presume
that the depositor would consent to
the change if he knew of the facts of
the situation, provided, that the
former notifies the depositor thereof
and wait for his decision, unless
delay would cause danger
9. To pay interest on sums converted to
personal use if the deposit consists
of money (Art 1983)
10. To be liable for loss through
fortuitous event (SUDA): (Art 1979):
a. if stipulated
b. if he uses the thing without the
depositor's permission
c. if he delays its return
d. if he allows others to use it,
even though he himself may
have been authorized to use the
same

NOTES:
# Fixed, savings, and current deposits
of money in banks and similar
institutions shall be governed by the
provisions concerning simple loan.
(Art 1980)
# The general rule is that a bank can
compensate or set off the deposit in
its hands for the payment of any
indebtedness to it on the part of the
depositor. In true deposit,
compensation is not allowed.

Irregular deposit Mutuum

1. The consumable
thing deposited may
be demanded at will
by the depositor

1. Lender is bound
by the provisions of
the contract and
cannot demand
restitution until the
time for payment, as
provided in the
contract, has arisen

2. The only benefit is
that which accrues
to the depositor

2. Essential cause for
the transaction is
the necessity of the
borrower

3. The irregular
depositor has a
preference over
other creditors with
respect to the thing
deposited

3. Common creditors
enjoy no preference
in the distribution of
the debtors
property

Rule when there are two or more
depositors (Art 1985):
1. If thing deposited is divisible and
depositors are not solidary: Each
depositor can demand only his
proportionate share thereto.
2. If obligation is solidary or if thing is
not divisible: Rules on active
solidarity shall apply, i.e. each one
of the solidary depositors may do
whatever may be useful to the
others but not anything which may
be prejudicial to the latter, (Art.
1212) and the depositary may return
the thing to anyone of the solidary
depositors unless a demand, judicial
or extrajudicial, for its return has
been made by one of them in which
case, delivery should be made to him
(Art. 1214).
3. Return to one of depositors
stipulated. The depositary is bound
to return it only to the person
designated although he has not made
any demand for its return.

NOTES:
# The depositary may retain the thing
in pledge until full payment of what
may be due him by reason of the
deposit (Art 1994).
# The depositors heir who in good
faith may have sold the thing which
he did not know was deposited, shall
only be bound to return the price he
may have received or to assign his
right of action against the buyer in
case the price has not been paid him
(Art 1991).

Obligations of the Depositor (Art 1992
1995):
1. To pay expenses for preservation
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a. If the deposit is gratuitous, the
depositor is obliged to
reimburse the depositary for
expenses incurred for the
preservation of the thing
deposited (Art 1992)
b. If the deposit is for valuable
consideration, expenses for
preservation are borne by the
depositary unless there is a
contrary stipulation
2. To pay loses incurred by the
depositary due to the character of
the thing deposited

!GENERAL RULE: The depositor shall
reimburse the depositary for any loss
arising from the character of the thing
deposited.
!EXCEPTIONS:
1. at the time of the deposit, the
depositor was not aware of the
dangerous character of the thing
2. when depositor was not expected
to know the dangerous character
of the thing
3. when the depositor notified the
depository of the same
4. the depositary was aware of it
without advice from the depositor

Extinguishment of Voluntary Deposit
(Art 1995)
1. Loss or destruction of the thing
deposited
2. In case of gratuitous deposit, upon
the death of either the depositor or
the depositary
3. Other causes, such as return of the
thing, novation, merger, expiration
of the term fulfilment of the
resolutory condition, etc (Art 1231)

Necessary Deposits
1. Made in compliance with a legal
obligation
2. Made on the occasion of any
calamity such as fire, storm, flood,
pillage, shipwreck or other similar
events (deposito miserable)
3. Made by travellers in hotels and inns
or by travellers with common carrier

Deposit by Travellers in hotels and
inns:
" The keepers of hotels or inns shall be
responsible as depositaries for the
deposit of effects made by travellers
provided:
a. Notice was given to them or to
their employees of the effects
brought by the guest; and
b. The guests take the precautions
which said hotel-keepers or their
substitutes advised relative to
the care and vigilance of their
effects.
NOTES:
# Liability extends to vehicles, animals
and articles which have been
introduced or placed in the annexes
of the hotel.
# Liability shall EXCLUDE losses which
proceed from force majeure. The act
of a thief or robber is not deemed
force majeure unless done with the
use of arms or irresistible force.
# The hotel-keeper cannot free
himself from the responsibility by
posting notices to the effect that he
is not liable for the articles brought
by the guest. Any stipulation to such
effect shall be void.
# Notice is necessary only for suing
civil liability but not in criminal
liability.

GUARANTY (Articles 2047 2084)

" A contract whereby a person
(guarantor) binds himself to the
creditor to fulfil the obligation of
the principal debtor in case the
latter fail to do so.

" Classification of Guaranty:
1. In the Broad sense:
a. Personal - the guaranty is the
credit given by the person who
guarantees the fulfilment of the
principal obligation.
b. Real - the guaranty is the
property, movable or
immovable.

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2. As to its Origin
a. Conventional - agreed upon by
the parties.
b. Legal - one imposed by virtue of
a provision of a law.
c. Judicial - one which is required
by a court to guarantee the
eventual right of one of the
parties in a case.
3. As to Consideration
a. Gratuitous - the guarantor does
not receive any price or
remuneration for acting as such.
b. Onerous - the guarantor
receives valuable consideration.
4. As to the Person guaranteed
a. Single - one constituted solely
to guarantee or secure
performance by the debtor of
the principal obligation.
b. Double or sub-guaranty - one
constituted to secure the
fulfilment by the guarantor of a
prior guaranty.
5. As to Scope and Extent
a. Definite - the guaranty is
limited to the principal
obligation only, or to a specific
portion thereof.
b. Indefinite or simple - one which
not only includes the principal
obligation but also all its
accessories including judicial
costs

SURETYSHIP

" A contract whereby a person (surety)
binds himself solidarily with the
principal debtor
" A relation which exists where one
person (principal) has undertaken an
obligation and another person
(surety) is also under a direct and
primary obligation or other duty to
the obligee, who is entitled to but
one performance, and as between
the two who are bound, the second
rather than the first should perform
(Agro Conglomerates, Inc. vs. CA,
348 SCRA 450)
NOTES:
# 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
same as a solidary debtor, except
that he himself is a principal debtor.
# In suretyship, there is but one
contract, and the surety is bound by
the same agreement which binds the
principal. A surety is usually bound
with the principal by the same
instrument, executed at the same
time and upon the same
consideration (Palmares vs CA, 288
SCRA 422)
# It is not for the obligee to see to it
that the principal debtor pays the
debt or fulfill the contract, but for
the surety to see to it that the
principal debtor pays or performs
(Paramount Insurance Corp vs CA,
310 SCRA 377)

Nature of Suretys undertaking:
1. Liability is contractual and accessory
but direct
NOTE: He directly, primarily and
equally binds himself with the
principal as original promisor,
although he possesses no direct or
personal interest over the latters
obligation, nor does he receive any
benefits therefrom. (PNB vs CA, 198
SCRA 767)
2. Liability limited by the terms of the
contract.
NOTE: It cannot be extended by
implication beyond the terms of the
contract (PNB vs CA, 198 SCRA 767)
3. Liability arises only if principal
debtor is held liable.
NOTES:
# The creditor may sue separately
or together the principal debtor
and the surety. Where there are
several sureties, the obligee may
proceed against any one of
them.
# In the absence of collusion, the
surety is bound by a judgment
against the principal even
though he was not a party to the
proceedings. The nature of its
undertaking makes it privy to all
proceedings against its principal
(Finman General Assurance
Corp. vs. Salik, 188 SCRA 740)

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4. Surety is not entitled to the benefit
of exhaustion
NOTE: He assumes a solidary liability
for the fulfilment of the principal
obligation (Towers Assurance Corp
vs. Ororama Supermart, 80 SCRA
262) as an original promissory and
debtor from the beginning.
5. Undertaking is to creditor and not to
debtor.
NOTE: The surety makes no
covenant or agreement with the
principal that it will fulfil the
obligation guaranteed for the benefit
of the principal. Such a promise is
not implied by law either; and this is
true even where under the contract
the creditor is given the right to sue
the principal, or the latter and the
surety at the same time. (Arranz vs.
Manila Fidelity & Surety Co., Inc.,
101 Phil. 272)
6. Surety is not entitled to notice of
principals default
NOTE: The creditor owes no duty of
active diligence to take care of the
interest of the surety and the surety
is bound to take notice of the
principals default and to perform
the obligation. He cannot complain
that the creditor has not notified
him in the absence of a special
agreement to that effect. (Palmares
vs CA, 288 SCRA 422)
7. Prior demand by the creditor upon
principal is not required
NOTE: As soon as the principal is in
default, the surety likewise is in
default.
8. Surety is not exonerated by neglect
of creditor to sue principal

Characteristics of Guaranty and
Suretyship:
1. Accessory - It is indispensable
condition for its existence that there
must be a principal obligation.
NOTES:
# Guaranty may be constituted to
guarantee the performance of a
voidable or unenforceable
contract. It may also guarantee
a natural obligation. (Art 2052)
# The guarantor cannot bind
himself for more than the
principal debtor and even if he
does, his liability shall be
reduced to the limits of that of
the debtor.
2. Subsidiary and Conditional - takes
effect only in case the principal
debtor fails in his obligation.

NOTES:
# The guarantor cannot bind
himself for more than the
principal debtor and even if he
does, his liability shall be
reduced to the limits of that of
the debtor. But a guarantor may
bind himself for less than that of
the principal (Art 2054)
# A guaranty may be given as
security for future debts, the
amount of which is not yet
known; there can be no claim
against the guarantor until the
debt is liquidated. A conditional
obligation may also be secured.
(Art 2053)
3. Unilateral - may be entered even
w/o the intervention of the principal
debtor, in which case Art. 1236 and
1237 shall apply and it gives rise only
to a duty on the part of the
guarantor in relation to the creditor
and not vice versa.
4. Nominate
5. Consensual
6. It is a contract between the
guarantor/surety and creditor.

NOTES:
# Acceptance of guaranty by
creditor and notice thereof to
guarantor:
" In declaring that guaranty
must be express, the law
refers solely and exclusively
to the obligation of the
guarantor because it is he
alone who binds himself by
his acceptance. With respect
to the creditor, no such
requirement is needed
because he binds himself to
nothing.
" However, when there is
merely an offer of a
guaranty, or merely a
conditional guaranty, in the
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sense that it requires action
by the creditor before the
obligation becomes fixed, it
does not become binding
until it is accepted and until
notice of such acceptance by
the creditor is given to, or
acquired by, the guarantor,
or until he has notice or
knowledge that the creditor
has performed the condition
and intends to act upon the
guaranty.
" But in any case, the creditor
is not precluded from
waiving the requirement of
notice.
# The consideration of the
guaranty is the same as the
consideration of the principal
obligation.
# The creditor may proceed
against the guarantor although
he has no right of action against
the principal debtor.
7. Not presumed. It must be expressed
and reduced in writing.
NOTE: A power of attorney to loan
money does not authorize the agent
to make the principal liable as a
surety for the payment of the debt
of a third person. (BPI vs. Coster, 47
Phil. 594)
8. Falls under the Statute of Frauds
since it is a special promise to
answer for the debt, default or
miscarriage of another.
9. Strictly interpreted against the
creditor and in favor of the
guarantor/surety and is not to be
extended beyond its terms or
specified limits. (Magdalena Estates,
Inc. vs Rodriguez, 18 SCRA 967) The
rule of strictissimi juris commonly
pertains to an accommodation surety
because the latter acts without
motive of pecuniary gain and hence,
should be protected against unjust
pecuniary impoverishment by
imposing on the principal, duties
akin to those of a fiduciary.

NOTES:
# The rule will apply only after it
has been definitely ascertained
that the contract is one of
suretyship or guaranty. It cannot
be used as an aid in determining
whether a partys undertaking is
that of a surety or guarantor.
(Palmares vs CA, 288 SCRA 292)
# It does not apply in case of
compensated sureties.
10. It is a contract which requires that
the guarantor must be a person
distinct form the debtor because a
person cannot be the personal
guarantor of himself.
NOTE: However, in a real guaranty,
like pledge and mortgage, a person
may guarantee his own obligation
with his personal or real properties.

Guaranty Suretyship

1. Liability depends
upon an independent
agreement to pay the
obligation if primary
debtor fails to do so

1. Surety assumes
liability as regular
party to the
undertaking

2. Collateral under-
taking

2. Surety is an
original promisor

3. Guarantor is
secondarily liable

3. Surety is
primarily liable

4. Guarantor binds
himself to pay if
the principal
CANNOT PAY

4. Surety undertakes
to pay if the principal
DOES NOT PAY

5. Insurer of
solvency of debtor

5. Insurer of the
debt

6. Guarantor can
avail of the benefit
of excussion and
division in case
creditor proceeds
against him

6. Surety cannot
avail of the benefit
of excussion and
division

Indorsement Guaranty

1. Primarily of
transfer

1. Contract of
security

2. Unless the note is
promptly presented
for payment at
maturity and due
notice of dishonor
given to the indorser
within a reasonable

2. Failure in either or
both of these
particulars does not
generally work as an
absolute discharge of
a guarantors
liability, but his is
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time he will be
discharged abso-
lutely from all
liability thereon,
whether he has
suffered any actual
damage or not
discharged only to
the extent of the loss
which he may have
suffered in
consequence thereof

3. Indorser does not
warrant the solvency.
He is answerable on a
strict compliance
with the law by the
holder, whether the
promisor is solvent or
not

3. Guarantor
warrants the solvency
of the promisor

4. Indorser can be
sued as promisor

4. Guarantor cannot
be sued as promisor

Guaranty Warranty
A contract by which a
person is bound to
another for the
fulfilment of a
promise or
engagement of a
third party
An undertaking that
the title, quality, or
quantity of the
subject matter of the
contract is what it
has been represented
to be, and relates to
some agreement
made ordinarily by
the party who makes
the warranty

NOTES:
# A guaranty is gratuitous, unless there
is a stipulation to the contrary. The
cause of the contract is the same
cause which supports the obligation
as to the principal debtor.
# The peculiar nature of a guaranty or
surety agreement is that is is
regarded as valid despite the
absence of any direct consideration
received by the guarantor or surety
either from the principal debtor or
from the creditor; a consideration
moving to the principal alone will
suffice.
# It is never necessary that the
guarantor or surety should receive
any part or benefit, if such there be,
accruing to the principal. (Willex
Plastic Industries Corp. vs. CA, 256
SCRA 478)

Double or sub-guaranty (Art 2051 2nd
par)
" One constituted to guarantee the
obligation of a guarantor

Continuing guaranty (Art 2053)
" One which is not limited to a single
transaction but which contemplates
a future course of dealings, covering
a series of transactions generally for
an indefinite time or until revoked.

NOTES:
# Prospective in operation (Dio vs CA,
216 SCRA 9)
# Construed as continuing when by the
terms thereof it is evident that the
object is to give a standing credit to
the principal debtor to be used from
time to time either indefinitely or
until a certain period, especially if
the right to recall the guaranty is
expressly reserved (Dio vs CA, 216
SCRA 9)
# Future debts may also refer to
debts existing at the time of the
constitution of the guaranty but the
amount thereof is unknown and not
to debts not yet incurred and
existing at that time.
# Exception to the concept of
continuing guaranty is chattel
mortgage. A chattel mortgage can
only cover obligations existing at the
time the mortgage is constituted and
not those contracted subsequent to
the execution thereof (The Belgian
Catholic Missionaries, Inc. vs.
Magallanes Press, Inc., 49 Phil 647).
An exception to this is in case of
stocks in department stores, drug
stores, etc. (Torres vs. Limjap, 56
Phil 141).

Extent of Guarantors liability: (Art
2055)
1. Where the guaranty definite: It is
limited in whole or in part to the
principal debt, to the exclusion of
accessories.
2. Where guaranty indefinite or simple:
It shall comprise not only the
principal obligation, but also all its
accessories, including the judicial
costs, provided with respect to the
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latter, that the guarantor shall only
be liable for those costs incurred
after he has been judicially required
to pay.

Qualifications of a guarantor: (Arts
2056-2057)
1. possesses integrity
2. capacity to bind himself
3. has sufficient property to answer
for the obligation which he
guarantees

NOTES:
# The qualifications need only be
present at the time of the perfection
of the contract.
# The subsequent loss of the integrity
or property or supervening
incapacity of the guarantor would
not operate to exonerate the
guarantor or the eventual liability he
has contracted, and the contract of
guaranty continues.
# However, the creditor may demand
another guarantor with the proper
qualifications. But he may waive it if
he chooses and hold the guarantor to
his bargain.

Benefit of Excussion (Art 2058)
" The right by which the guarantor
cannot be compelled to pay the
creditor unless the latter has
exhausted all the properties of the
principal debtor, and has resorted to
all of the legal remedies against such
debtor.

NOTE:
# Not applicable to a contract of
suretyship (Arts 2047, par. 2;
2059[2])
# Cannot even begin to take place
before judgment has been obtained
against the debtor (Baylon vs CA,
312 SCRA 502)

When Guarantor is not entitled to the
benefit of excussion: (PAIRS)
1. If it may be presumed that an
execution on the property of the
principal debtor would not result in
the satisfaction of the obligation
" Not necessary that the debtor be
judicially declared insolvent or
bankrupt
2. When he has absconded, or cannot
be sued within the Philippines unless
he has left a manager or
representative
3. In case of insolvency of the debtor
" Must be actual
4. If the guarantor has expressly
renounced it
5. If he has bound himself solidarily
with the debtor

Other grounds: (BIPS)
6. If he is a judicial bondsman or sub-
surety
7. If he fails to interpose it as a
defense before judgment is rendered
against him
8. If the guarantor does not set up the
benefit against the creditor upon the
latters demand for payment from
him, and point out to the creditor
available property to the debtor
within Philippine territory, sufficient
to cover the amount of the debt (Art
2060)
" Demand can be made only after
judgment on the debt
" Demand must be actual; joining
the guarantor in the suit against
the principal debtor is not the
demand intended by law
9. Where the pledge or mortgage has
been given by him as special security

Benefit of Division (Art 2065)
" Should there be several guarantors
of only one debtor and for the same
debt, the obligation to answer for
the same is divided among all.
" Liability: Joint

NOTES:
# The creditor can claim from the
guarantors only the shares they are
respectively bound to pay except
when solidarity is stipulated or if
any of the circumstances
enumerated in Article 2059 should
take place.
# The right of contribution of
guarantors who pays requires that
the payment must have been made
(a) in virtue of a judicial demand, or
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(b) because the principal debtor is
insolvent (Art 2073).
# If any of the guarantors should be
insolvent, his share shall be borne by
the others including the paying
guarantor in the same joint
proportion following the rule in
solidary obligations.
# The above rule shall not be
applicable unless the payment has
been made in virtue of a judicial
demand or unless the principal
debtor is insolvent.
# The right to contribution or
reimbursement from his co-
guarantors is acquired ipso jure by
virtue of said payment without the
need of obtaining from the creditor
any prior cession of rights to such
guarantor.
# The co-guarantors may set up
against the one who paid, the same
defenses which have pertained to
the principal debtor against the
creditor and which are not purely
personal to the debtor. (Art 2074)

Procedure when creditor sues: (Art.
2062)
" The creditor must sue the principal
alone; the guarantor cannot be sued
with his principal, much less alone
except in Art. 2059.

1. Notice to guarantor of the action
" The guarantor must be NOTIFIED
so that he may appear, if he so
desires, and set up defenses he
may want to offer.
" If the guarantor appears, he is
still given the benefit of
exhaustion even if judgment
should be rendered against him
and principal debtor. His
voluntary appearance does not
constitute a renunciation of his
right to excussion (see Art.
2059(1)).
" Guarantor cannot set up the
defenses if he does not appear
and it may no longer be possible
for him to question the validity
of the judgment rendered
against the debtor.
2. A guarantor is entitled to be heard
before and execution can be issued
against him where he is not a party
in the case involving his principal
(procedural due process).

Guarantors Right of Indemnity or
Reimbursement (Art 2066)
!GENERAL RULE: Guaranty is a contract
of indemnity. The guarantor who makes
payment is entitled to be reimbursed by
the principal debtor.

NOTE: The indemnity consists of: (DIED)
1. Total amount of the debt no
right to demand reimbursement
until he has actually paid the
debt, unless by the terms of the
contract, he is given the right
before making payment. He
cannot collect more than what
he has paid.
2. Legal interest thereon from the
time the payment was made
known (notice of payment in
effect a demand so that if the
debtor does not pay
immediately, he incurs in delay)
to the debtor, even though it did
not earn interest for the
creditor. Guarantors right to
legal interest is granted by law
by virtue of the payment he has
made.
3. Expenses incurred by the
guarantor after having notified
the debtor that payment has
been demanded of him by the
creditor; only those expenses
that the guarantor has to satisfy
in accordance with law as a
consequence of the guaranty
(Art. 2055) not those which
depend upon his will or own acts
or his fault for these are his
exclusive personal responsibility
and it is not just that they be
shouldered by the debtor.
4. Damages if they are due in
accordance
with law. General rules on
damages apply.

!EXCEPTIONS:
1. Where the guaranty is
constituted without the
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knowledge or against the will of
the principal debtor, the
guarantor can recover only
insofar as the payment had been
beneficial to the debtor (Art.
2050).
2. Payment by a third person who
does not intend to be reimbursed
by the debtor is deemed to be a
donation, which, however,
requires the debtors consent.
But the payment is in any case
valid as to the creditor who has
accepted it (Art. 1238).
3. Waiver of the right to demand
reimbursement.

Guarantors right to Subrogation
(ART.2067)
" Subrogation transfers to the person
subrogated, the credit with all the
rights thereto appertaining either
against the debtor or against third
persons, be they guarantors or
possessors of mortgages, subject to
stipulation in conventional
subrogation.

NOTE: This right of subrogation is
necessary to enable the guarantor to
enforce the indemnity given in Art.
2066.
# It arises by operation of law upon
payment by the guarantor. It is not
necessary that the creditor cede to
the guarantor the formers rights
against the debtor.
# It is not a contractual right. The
right of guarantor who has paid a
debt to subrogation does not stand
upon contract but upon the
principles of natural justice.
# The guarantor is subrogated by
virtue of the payment to the rights
of the creditor, not those of the
debtor.
" Guarantor cannot exercise the
right of redemption of his
principal (Urrutia & Co vs
Morena and Reyes, 28 Phil 261)

Effect of Payment by Guarantor
1. Without notice to debtor: (Art
2068)
" The debtor may interpose
against the guarantor those
defenses which he could have
set up against the creditor at the
time the payment was made,
e.g. the debtor can set up
against the guarantor the
defense of previous
extinguishment of the obligation
by payment.

2. Before Maturity (Art 2069)
" Not entitled to reimbursement
unless the payment was made
with the consent or has been
ratified by the debtor

Effect of Repeat Payment by debtor:
(Art 2070)
!GENERAL RULE: Before guarantor pays
the creditor, he must first notify the
debtor (Art. 2068). If he fails to give
such notice and the debtor repeats
payment, the guarantor can only collect
from the creditor and guarantor has no
cause of action against the debtor for
the return of the amount paid by
guarantor even if the creditor should
become insolvent.

!EXCEPTION: The guarantor can still
claim reimbursement from the debtor in
spite of lack of notice if the following
conditions are present: (PIG)
a. guarantor was prevented by
fortuitous event to advise the
debtor of the payment; and
b. the creditor becomes insolvent;
c. the guaranty is gratuitous.

Right of Guarantor to proceed against
debtor before payment
!GENERAL RULE: Guarantor has no
cause of action against debtor until after
the former has paid the obligation
!EXCEPTION: Article 2071

NOTES:
# Article 2071 is applicable and
available to the surety. (Manila
Surety & Fidelity Co., Inc. vs Batu
Construction & Co., 101 Phil 494)
# Remedy of guarantor:
(a) obtain release from the
guaranty; or
(b) demand a security that shall
protect him from any
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proceedings by the creditor, and
against the danger of insolvency
of the debtor

Art. 2066 Art. 2071
Provides for the
enforcement of the
rights of the
guarantor/surety
against the debtor
after he has paid the
debt
Provides for his
protection before he
has paid but after he
has become liable
Gives a right of
action after payment
Protective remedy
before payment.
Substantive right Preliminary remedy

Extinguishment of guaranty: (RA
2
CE
2
)
1. Release in favor of one of the
guarantors, without the consent of
the others, benefits all to the extent
of the share of the guarantor to
whom it has been granted (Art
2078);
2. If the creditor voluntarily accepts
immovable or other properties in
payment of the debt, even if he
should afterwards lose the same
through eviction or conveyance of
property (Art 2077);
3. Whenever by some act of the
creditor, the guarantors even though
they are solidarily liable cannot be
subrogated to the rights, mortgages
and preferences of the former (Art
2080);
4. For the same causes as all other
obligations (Art 1231);
5. When the principal obligation is
extinguished;
6. Extension granted to the debtor by
the creditor without the consent of
the guarantor (Art 2079)

BOND
" An undertaking that is sufficiently
secured, and not cash or currency

Bondsman (Art 2082)
" A surety offered in virtue of a
provision of law or a judicial order.
He must have the qualifications
required of a guarantor and in
special laws like the Rules of Court.

NOTES:
# Judicial bonds constitute merely a
special class of contracts of
guaranty by the fact that they are
given in virtue of a judicial
order.
# If the person required to give a legal
or judicial bond should not be able
to do so, a pledge or mortgage
sufficient to cover the obligation
shall admitted in lieu thereof (Art
2083)
# A judicial bondsman and the sub-
surety are NOT entitled to the
benefit of excussion because they
are not mere guarantors, but
sureties whose liability is primary
and solidary. (Art 2084)

PLEDGE, MORTGAGE AND ANTICHRESIS
I. Common Elements of Pledge,
Mortgage, and Antichresis (Articles
2085 2092)

A. Essential Requisites (SOD) (Art
2085)
1. Secures the fulfillment of a principal
obligation;
2. Pledgor, mortgagor, antichretic
debtor must be the absolute owner
of the thing pledged or mortgaged;
and
" The reason being that in
anticipation of a possible
foreclosure sale in case of
default which is still a sale, the
rule is that the seller must be
the owner of the thing sold
(Cavite Development Bank vs.
Lim, 324 SCRA 346)
3. Pledgor, mortgagor, antichretic
debtor must have free disposal of
their property, or be legally
authorized for such purpose.

NOTES:
# Third persons can pledge or
mortgage their own property to
secure the principal obligation.
# It is not necessarily void simply
because the accommodation pledgor
or mortgagor did not benefit from
the same. So long as valid consent
was given, the fact that the loan was
given solely for the benefit of the
principal debtor would not invalidate
the mortgage (GSIS vs CA, 170 SCRA
533)
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# The accommodation pledgor or
mortgagor, without expressly
assuming personal liability for such
debt, is not liable for the payment of
any deficiency, should the property
not be sufficient to cover the debt
(Bank of America vs. American
Realty Corporation, 321 SCRA 659).
# The accommodation pledgor or
mortgagor is not solidarily bound
with the principal obligor but his
liability extents only to the property
pledged or mortgaged. Should there
be any deficiency, the creditor has
recourse on the principal debtor who
remains to be primarily bound.
# The law grants to the
accommodation pledgor or
mortgagor the same rights as a
guarantor and he cannot be
prejudiced by any waiver of defense
by the principal debtor.

B. Prohibition against Pactum
Commissorium (Art 2088; 2137)

Pactum Commissorium
" Stipulation whereby the thing
pledged or mortgaged, or under
antichresis shall automatically
become the property of the creditor
in the event of non-payment of the
debt within the term fixed.

Requisites:
1. There should be a pledge, mortgage,
or antichresis of property by way of
security for the payment of the
principal obligation; and
2. There should be a stipulation for an
automatic appropriation by the
creditor of the property in event of
nonpayment of the obligation within
the stipulated period.

!GENERAL RULE: Pactum Commissorium
is forbidden by law and is declared null
and void.
!EXCEPTION: The pledgee may
appropriate the thing pledged if after
the first and second auctions, the thing
is not sold. (Art 2112)

NOTE: The security contract remains
valid; only the prohibited stipulation is
void.
C. Capability to secure all kinds of
obligations, i.e. pure or
conditional (Art 2091)

D. Indivisibility (Art 2089)
!GENERAL RULE: A pledge, mortgage, or
antichresis is indivisible, even though
the debt may be divided among the
successors in interest of the debtor or of
the creditor.
" Their indivisibility is not affected by
the fact that the debtors are jointly
or not solidarily liable.

Consequences of indivisibility:
1. Single thing Every portion of the
property pledged or mortgaged is
answerable for the whole obligation
2. Several things All of the several
things pledged or mortgaged are
liable for the totality of the debt
3. Debtors heir/creditors heir -
Neither the debtors heir who has
paid part of the debt cannot ask for
proportionate extinguishment, nor
creditors heir who received his
share of the debt return the pledge
or cancel the mortgage as long as
the debt is not completely satisfied.

!EXCEPTIONS:
1. Where each one of several things
guarantees a determinate
portion of the credit
2. Where only a portion of the loan
was released
3. Where there was failure of
consideration.
4. Where there is no debtor-
creditor relationship

NOTES:
# The mere embodiment of a real
estate mortgage and a chattel
mortgage in one document does not
have the effect of fusing both
securities into an indivisible whole.
# The mortgagee, therefore, may
legally foreclose the real estate
mortgage extrajudicially and waive
the chattel mortgage foreclosure,
and maintain instead a personal
action for the recovery of the unpaid
balance of the credit (Phil. Bank of
Commerce vs. Macadaeg, 109 Phil
981)
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E. When the principal obligation
becomes due, the things in which
the pledge, mortgage, or
antichresis consists may be
alienated for the payment to the
creditor. (Art. 2087)

NOTES:
# If the debtor fails to comply with the
obligation at the time it falls due,
the creditor is merely entitled to
move for the sale of the thing
pledged or mortgaged in order to
collect the amount of his claim from
the proceeds.
# If he wishes to secure a title to the
mortgaged property, he can buy it in
the foreclosure sale (Montevirgin vs.
CA, 112 SCRA 641)

F. Pledgor, mortgagor, antichretic
debtor retains ownership of the
thing given as a security

PLEDGE (Arts 2093 2123)

" A contract wherein the debtor
delivers to the creditor or to a third
person a movable or document
evidencing incorporeal rights for the
purpose of securing fulfilment of a
principal obligation with the
understanding that when the
obligation is fulfilled, the thing
delivered shall be returned with all
its fruits and accessions.

" Special Requisites (in addition to
the common essential requisites):
1. Possession of the thing pledged must
be transferred to the creditor or a
third person by agreement (Art
2093);
2. It can only cover movable property
and incorporeal rights evidenced by
documents of title and the
instruments proving the right
pledged shall be delivered to the
creditor, and if negotiable must be
endorsed (Art 2094); and
3. The description of the thing pledged
and the date must appear in a public
instrument to bind third persons, but
not for the validity of the contract
(Art 2096).

" Kinds:
1. Conventional /Voluntary created
by contract
2. Legal created by operation of law
(examples: Art. 546, 1731 and 1914
NCC)

NOTES:
# The provisions of possession, care
and sale of the thing as well as on
the termination of the pledge
governing conventional pledges are
applicable to pledges created by
operation of law (Art 2121)
# Unlike, however, in conventional
pledge where the debtor is not
entitled to the excess unless it is
otherwise agreed, in legal pledge,
the remainder of the price of the
sale after payment of the debt and
expenses, shall be delivered to the
debtor.
# In legal pledge, there is no definite
period for the payment of the
principal obligation. The pledgee
must make a demand for the
payment of the amount due him;
otherwise he cannot exercise the
right of sale at public auction (Art
2122)

Characteristics:
1. Real contract it is perfected by
the delivery of the thing pledged by
the debtor who is called the
pledgor to the creditor who is
called the pledgee, or to a third
person by common agreement;
2. Accessory contract it has no
independent existence of its own;
3. Unilateral contract it creates an
obligation solely on the part of the
creditor to return the thing subject
thereof upon the fulfilment of the
principal obligation; and
4. Subsidiary contract the obligation
incurred does not arise until the
fulfilment of the principal
obligation which is secured.

Consideration in pledge:
# Insofar as the pledgor is concerned,
the cause is the principal obligation.
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# If the pledgor is not the debtor, the
cause is the compensation stipulated
for the pledge or the mere liberality
of the pledgor.

Extent of pledge: Unless stipulated
otherwise, pledge extends to the fruits,
interests or earnings of the thing.

Rights and Obligations of a Pledgor
Rights Obligations
1. To demand return in
case of reasonable
grounds to fear
destruction or
impairment of the thing
without the pledgees
fault, subject to the
duty of replacement
(Art 2107)
2. To bid and be
preferred at the public
auction (Art 2113)
3. To alienate the thing
pledged provided the
pledgee consents to the
sale (Art 2097)
4. To ask that the thing
pledged be deposited
(Arts 2104 & 2106)
1. To advise the
pledgee of the
flaws of the thing
(Art 2101)
2. Not to demand
the return of the
thing until after
full payment of
the debt,
including interest
due thereon and
expenses incurred
for its
preservation (Art
2105)

Rights of the Pledgee
KEY: D SBC BA
2
R
2
OPS
2

1. Option to demand replacement or
immediate payment of the debt in case
of deception as to substance or quality
(Art 2109)
2. To sell at public auction in case of
reasonable grounds to fear destruction
or impairment of the thing without his
fault (Art 2108)
3. To bring actions pertaining to the
owner (Art 2103)
4. To choose which of several things
pledged shall be sold
5. To bid at the public auction (Art
2113)
6. To appropriate the thing in case of
failure of the 2
nd
public auction (Art
2112)
7. To apply said fruits, interests or
earnings to the interest, if any, then to
the principal of the credit (Art 2102)
8. To retain excess value received in
the public sale (Art 2115)
9. To retain the thing until after full
payment of the debt (Art 2098)
10. To be reimbursed for the expenses
made for the preservation of the thing
pledged (Art 2099)
11. To object to the alienation of the
thing
12. To possess the thing (Art 2098)
non-payment of debt at maturity (Art
2112)
To choose which of the several things
pledged shall be sold (Art 2119)
14. Option to demand replacement or
immediate payment of the debt in case
of deception as to substance or quality
(Art 2109)
reasonable grounds to fear destruction
or impairment of the thing without his
fault (Art 2108)
16. To bring actions pertaining to the
owner (Art 2103)
17. To choose which of several things
pledged shall be sold
18. To bid at the public auction (Art
2113)
19. To appropriate the thing in case of
failure of the 2
nd
public auction (Art
2112)
20. To apply said fruits, interests or
earnings to the interest, if any, then to
the principal of the credit (Art 2102)
21. To retain excess value received
in the public sale (Art 2115)
22. To retain the thing until after full
payment of the debt (Art 2098)
23. To be reimbursed for the expenses
made for the preservation of the thing
pledged (Art 2099)
24. To object to the alienation of the
thing
25. To possess the thing (Art 2098)
non-payment of debt at maturity (Art
2112)
27. To choose which of the several
things pledged shall be sold (Art 2119)

Obligations of the Pledgee
KEY: CUDA
3
1. Take care of the thing with the
diligence of a good father of a family
(Art 2099)
2. Not to use thing unless authorized or
by the owner or its preservation requires
its use (Art 2104)
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3. Not to deposit the thing with a 3
rd

person unless so stipulated (Art 2100)
4. Responsibility for acts of agents and
employees as regards the thing (Art
2100)
5. To advise pledgor of danger to the
thing (Art 2107)
6. To advise pledgor of the result of the
public auction (Art 2116)

RIGHT OF PLEDGOR TO SUBSTITUTE
THING PLEDGED (ART.2107)
" Requisites:
1. The pledgor has reasonable
grounds to fear the destruction
or impairment of the thin
pledged
2. There is no fault on the part of
the pledgee
3. The pledgor is offering in place
of the thing, another thing in
pledge which is of the same kind
and quality as the former
4. The pledge does not choose to
exercise his right to cause the
thing pledged to be sold at
public auction
NOTE: The pledgees right to have the
thing pledged sold at public sale granted
under the Article 2108 is superior to that
given to the pledgor to substitute the
thing pledged under Article 2107.

Prohibition against double pledge
" Property which has been lawfully
pledged to one creditor cannot be
pledged to another as long as the
first one subsists.
NOTE: Possession of a creditor of the
thing pledged is an essential requisite of
pledge.

Extinguishment of Pledge (CRAPS)
1. For the same causes as all other
obligations (Art 1231)
2. Return of the thing pledged by the
pledgee to the pledgor (Art 2110)
3. Statement in writing by the
pledgee that he renounces or
abandons the pledge (Art 2111)
4. Payment of the debt (Art 2105)
5. Sale of thing pledged at public
auction (Art 2115)
NOTE: The possession by the debtor or
owner of the thing pledged subsequent
to the perfection of the pledge gives
rise to a prima facie presumption that
the thing has been returned and,
therefore, that the pledge has been
extinguished but not the principal
obligation itself. (Art 2110)

Requirements for sale of thing pledged
at public auction: (Art 2112)
1. The debt is due and unpaid
2. Sale must be at a public auction
3. there must be notice to the pledgor
and owner, stating the amount due
4. Sale must be with the intervention of
a notary public

Effect of sale of the thing pledged: (Art
2115)
1. The sale of the thing pledged shall
extinguish the principal obligation,
whether or not the proceeds of the
sale are equal to the amount of the
principal obligation, interest and
expenses in a proper case
2. If the price of the sale is more than
the amount due the creditor, the
debtor is not entitled to the excess
unless the contrary is provided
3. If the price of the sale is less, the
creditor is not entitled to recover
the deficiency even if there is a
stipulation to that effect

REAL ESTATE MORTGAGE (Articles
2124-2131)

" A contract whereby the debtor
secures to the creditor the
fulfilment of a principal obligation,
specially subjecting to such security
immovable property or real rights
over immovable property in case the
principal obligation is not complied
with at the time stipulated.

Characteristics of the contract:
1. Real
2. Accessory
3. Subsidiary
4. Unilateral it creates only an
obligation on the part of the
creditor who must free the
property from the encumbrance
once the obligation is fulfilled.

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NOTES:
# As an accessory contract, its
consideration is that of the principal
contract from which it receives life.
# A mortgage does not involve a
transfer, cession or conveyance of
property but only constitutes a lien
thereon. Until discharged, it follows
the property wherever it goes and
subsists notwithstanding changes of
ownership.
# A mortgage gives the mortgagee no
right or claim to the possession of
the property, and therefore, a mere
mortgagee has no right to eject an
occupant of the property mortgaged
unless the mortgage should contain
some provision to that effect. The
only right of a mortgagee in case of
non-payment of a debt secured by
mortgage would be to foreclose the
mortgage and have the encumbered
property sold to satisfy the
outstanding indebtedness. If the
possession is transferred to the
mortgagee, it must not expressly be
for purpose of applying the fruits to
the interest then to the principal of
the credit, for then it would be an
antichresis.
# It is not an essential requisite that
the principal of the mortgage credit
bears interest, or that the interest
as compensation for the use of the
principal and enjoyment of its fruits
be in the form of a certain percent
thereof.

1. It can cover only immovable
property and alienable real rights
imposed upon immovables (Art
2124);
2. It must appear in a public instrument
(Art. 2125); and
3. Registration in the registry of
property is necessary to bind third
persons, but not for the validity of
the contract (Art 2125).
" An order for foreclosure cannot
be refused on the ground that
the mortgage had not been
registered provided no innocent
third parties are involved.
NOTE: Where a mortgage is not valid or
false, the principal obligation which it
guarantees is not rendered null and void.
What is lost only is the right to foreclose
the mortgage as a special remedy for
satisfying or settling the indebtedness
which is the principal obligation but the
mortgage deed remains as evidence or
proof of a personal obligation of the
debtor and the amount due to the
creditor may be enforced in an ordinary
personal action.

" Kinds:
1. Voluntary agreed to by the parties
or constituted by the will of the
owner of the property on which it is
created
2. Legal one required by law to be
executed in favour of certain persons
" The persons in whose favour the
law establishes a mortgage have
no other right than to demand
the execution and the recording
of the document in which the
mortgage is formalized (Art 2125
par 2)
3. Equitable one which, although
lacking the formalities of a
mortgage, shows the intention of the
parties to make the property a
security for a debt

PLEDGE REAL MORTGAGE
1. Constituted on
movables
1. Constituted on
immovables
2. Property is
delivered to pledgee
or by common
consent to a third
person
2. Delivery is not
necessary
3. Not valid against
third persons unless a
description of the
thing pledged and
date of pledge
appear in a public
instrument
3. Not valid against
third persons unless
registered

Extent of Mortgage:
" Absent express stipulation to the
contrary, the mortgage includes the
accessions, improvements, growing
fruits and income of the property not
yet received when the obligation
becomes due and to the amount of
the indemnity granted or owing to
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the proprietor from the insurers of
the property mortgaged, or in virtue
of expropriation for public use (Art
2127)

Object of Mortgage:
" Future property cannot be an object
of a contract of mortgage (Art
2085[2]) However, a stipulation
subjecting to the mortgage lien,
properties (improvements) which the
mortgagor may subsequently acquire
install, or use in connection with
real property already mortgaged
belonging to the mortgagor is valid
(Peoples Bank and Trust Co. vs.
Dahican Lumber Co., 20 SCRA 84)

Special Rights:
1. Mortgagor - To alienate the
mortgaged property but the
mortgage shall remain attached to
the property.

NOTE: A stipulation forbidding the
owner from alienating the immovable
mortgage shall be void (Art 2130) being
contrary to public policy inasmuch as the
transmission of property should not be
unduly impeded.

2. Mortgagee - To claim from a 3
rd

person in possession of the
mortgaged property the payment of
the part of the credit secured by the
which said third person possesses
(Art 2129)
NOTE: It is necessary that prior demand
for payment must have been made on
the debtor and the latter failed to pay
(BPI vs Concepcion & Hijos, Inc., 53 Phil
906)

Foreclosure
" The remedy available to the
mortgagee by which he subjects the
mortgaged property to the
satisfaction of the obligation to
secure that for which the mortgage
was given

NOTES:
# It denotes the procedure adopted by
the mortgagee to terminate the
rights of the mortgagor on the
property and includes the sale
itself (DBP vs Zaragoza, 84 SCRA 668)
# Foreclosure is valid where the debtor
is in default in the payment of his
obligation (Gobonseng, Jr. vs CA,
246 SCRA 472)

" Kinds:
1. Judicial ordinary action for
foreclosure under Rule 68 of the
Rules of Court
2. Extrajudicial when mortgagee is
given a special power of attorney to
sell the mortgaged property by
public auction, under Act No. 3135

Judicial
foreclosure
Extrajudicial
foreclosure
1. There is court
intervention
1. No court
intervention
2. Decisions are
appealable
2. Not appealable
because it is
immediately
executory
3. Order of court
cuts off all rights of
the parties
impleaded
3. Foreclosure does
not cut off right of
all parties involved
4. There is equity
of redemption
except on banks
which provides for
a right of
redemption
4. There is right of
redemption
5. Period of
redemption starts
from the finality of
the judgment until
order of
confirmation
5. Period to redeem
start from date of
registration of
certificate of sale
6. No need for a
special power of
attorney in the
contract of
mortgage
6. Special power of
attorney in favor of
mortgagee is
needed in the
contract

NOTES:
# A foreclosure sale retroacts to the
date of registration of the mortgage
and that a person who takes a
mortgage in good faith and for
valuable consideration, the record
showing clear title to the mortgagor,
will be protected against equitable
claims on the title in favor of third
persons, of which he had no actual
or constructive notice (St. Dominic
Corporation vs. IAC 151 SCRA 577).
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# Where there is a right to redeem,
inadequacy of price is not material
because the judgment debtor may
reacquire the property or else sell
his right to redeem and thus recover
any loss he claims to have suffered
by reason of the price obtained at
the auction sale and consequently
not sufficient to set aside the sale.
Mere inadequacy of the price
obtained at the sheriffs sale will not
be sufficient to set aside the sale
unless the price is so inadequate as
to shock the conscience of the
court taking into consideration the
peculiar circumstances attendant
thereto. (Sulit vs. CA, 268 SCRA 441)
# Should there remain a balance due
to the mortgagee after applying the
proceeds of the sale, the mortgagee
is entitled to recover the deficiency.
This rule applies both to judicial and
extra-judicial foreclosure real
mortgage.
# The action to recover a deficiency
after foreclosure prescribes after 10
years from the time the right of
action accrues (Arts 1142 & 1144).

Stipulation of upset price or tipo
" It is a stipulation in a mortgage of
real property of minimum price at
which the property shall be sold, to
become operative in the event of a
foreclosure sale at public auction. It
is null and void for the property must
be sold to the highest bidder. Parties
cannot, by agreement, contravene
the law and interfere with the lawful
procedure of the courts (BPI vs Yulo,
31 Phil 476)

Extrajudicial foreclosure real property
(Act No. 3135)
" The law covers only real estate
mortgages. It is intended merely to
regulate the extrajudicial sale of the
property mortgaged if and when the
mortgagee is given a special power
of express authority to do so in the
deed itself or in a document
annexed thereto.
" The authority to sell is not
extinguished by the death of the
mortgagor (or mortgagee) as it is an
essential and inseparable part of a
bilateral agreement (Perez vs PNB,
17 SCRA 833).
" No sale can be legally made outside
the province in which the property
sold is situated; and in case the
place within said province in which
the sale is to be made is the subject
of stipulation, such sale shall be
made in the said place in the
municipal building of the
municipality in which the property or
part thereof is situated.

Procedure for extrajudicial foreclosure
of both real estate mortgage under Act
No. 3135 and chattel mortgage under
Act No. 1508 (A.M. No. 99-10-05-0,
January 15, 2000)
1. Filing of application before the
Executive Judge through the Clerk of
Court
2. Clerk of Court will examine whether
the requirement of the law have
been complied with, that is, whether
the notice of sale has been posted
for not less than 20 days in at least
three (3) public places of the
municipality or city where the
property is situated, and if the same
is worth more than P400.00, that
such notice has been published once
a week for at least three (3)
consecutive weeks in a newspaper of
general circulation in the city of
municipality
3. The certificate of sale must be
approved by the Executive Judge
4. Where the application concerns
extrajudicial foreclosure of real
mortgages in different locations
covering one indebtedness, only one
filing fee corresponding to such debt
shall be collected
5. The Clerk of Court shall issue
certificate of payment indicating the
amount of indebtedness, the filing
fees collected, the mortgages sought
to be foreclosed, the description of
the real estates and their respective
locations
6. The notice of sale shall be published
in a newspaper of general circulation
pursuant to Section 1, PD No. 1079
7. The application of shall be raffled
among all sheriffs
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8. After the redemption period has
expired, the Clerk of Court shall
archive the records.
9. No auction sale shall be held unless
there are at least two (2)
participating bidders, otherwise the
sale shall be postponed to another
date. If on the new date set forth
for the sale there shall not be at
least two bidders, the sale shall then
proceed. The names of the bidders
shall be reported to the Sheriff of
the Notary Public, who conducted
the sale to the Clerk of Court before
the issuance of the certificate of
sale.

NOTES:
# The Mortgagor and Mortgagee have
no right to waive the posting and
publication requirements under Act.
No. 3135. Notices are given to secure
bidders and prevent a sacrifice of
the property.

Clearly, the statutory
requirements of posting and
publication are mandated, not for
the mortgagors benefit, but for the
public or third persons. Failure to
comply with the statutory
requirements as to publication of
notice of auction sale constitutes a
jurisdictional defect which
invalidates the sale.Lack of
republication of notice of
foreclosure sale made subsequently
after the original date renders such
sale void (PNB vs. Nepomuceno
Productions Inc., G.R. No. 139479.
December 27, 2002).
# Sec 3 of Act 3135 does not require
personal or any particular notice on
the mortgagor much less on his
successors-in-interest where there is
no contractual stipulation therefor.
Hence, unless required in the
mortgage contract, the lack of such
notice is not a ground to set aside a
foreclosure sale.
# Neither does Sec 3 require posting of
notice of sale on the mortgage
property and the certificate of
posting is not required, much less
considered indispensable, for the
validity of a foreclosure sale.

Redemption
" It is the transaction by which the
mortgagor reacquires or buys back
the property which may have passed
under the mortgage, or divests the
property of the lien which the
mortgage may have created.

NOTES:
# A sale by the mortgagor to a third
party of the mortgaged property
during the period for redemption
transfers only the right to redeem
the property and the right to
possess, use and enjoy the same
during said period.
# Where sale with assumption of
mortgage not registered and made
without the consent of the
mortgagee, the buyer, thereof, was
not validly substituted as debtor
and, hence, had no right to redeem
(Bonnevie vs. CA, 125 SCRA 122).

" Kinds:
1. Equity of Redemption right of
mortgagor to redeem the mortgaged
property after his default in the
performance of the conditions of the
mortgage within the 90-day period
from the date of the service of the
order of foreclosure or even
thereafter but before the
confirmation of the sale. Applies to
judicial foreclosure of real mortgage
and chattel mortgage foreclosure.

NOTE: Redemption of the banking
institutions is allowed within one year
from confirmation of sale.

2. Right of Redemption right of
mortgagor to redeem the mortgaged
property within one year from the
date of registration of the certificate
of sale. Applies only to extrajudicial
foreclosure of real mortgage.

NOTE: The right of redemption, as long
as within the period prescribed, may be
exercised irrespective of whether or not
the mortgagee has subsequently
conveyed the property to some other
party (Sta. Ignacia Rural Bank, Inc. vs.
CA, 230 SCRA 513)

#9"

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Period of Redemption
1. Extra-judicial (Act #3135)
a. natural person one year from
registration of the certificate of
sale with Registry of Deeds
b. juridical person same rule as
natural person
c. juridical person (mortgagee is
bank) - three months after
foreclosure or before
registration of certificate of
foreclosure which ever is earlier
(sec. 47, of General Banking
Law)
2. Judicial before confirmation of the
sale by the court

NOTE: Allowing a redemption after the
lapse of the statutory period, when the
buyer at the foreclosure sale does not
object but even consents to the
redemption, will uphold the policy of the
law which is to aid rather than defeat
the right of redemption. There is nothing
in the law which prevents a waiver of
the statutory period for redemption
(Ramirez vs CA, 219 SCRA 598).

Amount of the redemption price:
1. Mortgagee is not a bank (Act No.
3135, in relation to Sec. 28, Rule 39
of Rules of Court)
a. purchase price of the property
b. 1% interest per month on the
purchase price
c. taxes paid and amount of
purchasers prior lien, if any,
with the same rate of interest
computed from the date of
registration of sale, up to the
time of redemption
2. Mortgagee is a bank (GBL 2000)
a. amount due under the mortgage
deed
b. interest
c. cost and expenses
NOTE: Redemption price in this
case is reduced by the income
received from the property

ANTICHRESIS (Articles 2132 -2139)

" A contract whereby the creditor
acquires the right to receive the
fruits of an immovable of the
debtor, with the obligation to apply
them to the payment of the interest,
if owing, and thereafter to the
principal of his credit (Art 2132)

Characteristics
1. Accessory contract it secures the
performance of a principal obligation
2. Formal contract it must be in a
specified form to be valid, i.e., in
writing. (Art 2134)

1. It can cover only the fruits of an
immovable property; (Art 2132)
2. Delivery of the immovable is
necessary for the creditor to receive
the fruits and not that the contract
shall be binding;
3. Amount of principal and interest
must be specified in writing (Art.
2134); and
4. Express agreement that debtor will
give possession of the property to
creditor and that the latter will
apply the fruits to the interest, if
any, then to the principal of his
credit. (Art 2132)

NOTE: The obligation to pay interest is
not of the essence of the contract of
antichresis, there being nothing in the
Code to show that antichresis is only
applicable to securing the payment of
interest-bearing loans. On the contrary,
antichresis is susceptible of guaranteeing
all kinds of obligations, pure or
conditional

Antichresis Pledge
1. Refers to real
property
1. Refers to personal
property
2. Perfected by mere
consent
2. Perfected by
delivery of the thing
pledged
3. Consensual contract 3. Real Contract

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Antichresis Real Mortgage
1. Property is
delivered to creditor
1. Debtor usually
retains possession of
the property
2. Creditor acquires
only the right to
receive the fruits of
the property, hence,
it does not produce a
real right
2. Creditor does not
have any right to
receive the fruits;
but the mortgage
creates a real right
over the property
3. The creditor,
unless there is
stipulation to the
contrary, is obliged
to pay the taxes and
charges upon the
estate
3. The creditor has
no such obligation
4. It is expressly
stipulated that the
creditor given
possession of the
property shall apply
all the fruits thereof
to the payment of
interest, if owing,
and thereafter to the
principal
4. There is no such
obligation on part of
mortgagee
Subject matter of both is real property

Obligations of antichretic creditor:
1 To pay taxes and charges on the
estate, including necessary expenses
NOTE: Creditor may avoid said
obligation by:
a. compelling debtor to
reacquire enjoyment of the
property or
b. by stipulation to the
contrary
2 To apply all the fruits, after
receiving them, to the payment of
interest, if owing, and thereafter to
the principal
3 To render an account of the fruits to
the debtor
4 To bear the expenses necessary for
its preservation and repair

Remedies of creditor in case of non-
payment of debt

1. Bring an action for specific
performance; or
2. Petition for the sale of the real
property as in a foreclosure of
mortgages under Rule 68 of the Rules
of Court.(Art 2137)

NOTES:
# The parties, however, may agree on
an extrajudicial foreclosure in the
same manner as they are allowed in
contracts of mortgage and pledge
(Tavera vs. El Hogar Filipino, Inc.,
68 Phil 712).
# A stipulation authorizing the
antichretic creditor to appropriate
the property upon the non-payment
of the debt within the agreed period
is void (Art 2088).

CHATTEL MORTGAGE (Articles 2140-
2141)

" A contract by virtue of which
personal property is recorded in the
Chattel Mortgage Register as a
security for the performance of an
obligation (Art 2140).

Characteristics
1. Accessory contract it is for the
purpose of securing the performance
of a principal obligation
2. Formal contract registration in the
Chattel Mortgage Register is
indispensable for its validity
3. Unilateral contract it produces only
obligations on the part of the
creditor to free the thing from the
encumbrance on fulfilment of the
obligation.

1. It can cover only personal or
movable property in general;
however, the parties may treat as
personal property that which by its
nature would be real property;
2. Registration of the mortgage with
the Chattel Mortgage Register where
the mortgagor resides; if property is
located in a different province,
registration in both provinces
required;
3. Description of the property as would
enable the parties or other persons
to identify the same after reasonable
investigation and inquiry; and
4. Accompanied by an affidavit of good
faith to bind third persons, but not
for the validity of the contract.
#!9

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5. It can cover only obligations existing
at the time the mortgage is
constituted.
NOTE: A mortgage containing a
stipulation in regard to future
advances in the credit will take
effect only from the date the same
are made and not from the date of
the mortgage (Jaca vs Davao Lumber
Co., 113 SCRA 107)

Effect of registration: Creates a real
right
" The registration of the chattel
mortgage is an effective and binding
notice to other creditors of its
existence and creates a real right or
a lien which, being recorded, follows
the chattel wherever it goes. The
registration gives the mortgagee
symbolical possession (Northern
Motors, Inc. vs. Coquia, 68 SCRA
374).

Effect of failure to register chattel
mortgage in the chattel mortgage
registry
" Article 2140 makes the recording in
the Chattel Mortgage Register an
essential requisite but if the
instrument is not recorded, the
mortgage is nevertheless binding
between the parties. But the person
in whose favour the law establishes a
mortgage has no other right than to
demand the execution and the
recording of the document.

Chattel Mortgage Pledge
1. Delivery of the
personal property
to the mortgage is
not necessary
1. Delivery of the
thing pledged is
necessary
2. registration in
the Chattel
Mortgage Registry
is necessary for its
validity
2. registration not
necessary to be
valid

3. If property is
foreclosed, the
excess over the
amount due goes to
the debtor
3. Debtor is not
entitled to excess
unless otherwise
agreed or except in
case of legal
pledge
4. If there is
deficiency after
foreclosure,
creditor is entitled
to recover the
deficiency from the
debtor, except
under Art. 1484
4. If there is
deficiency,
creditor is not
entitled to recover
notwithstanding
any stipulation to
the contrary
Subject matter of both is movable
property

Affidavit of Good Faith
" Oath in a contract of chattel
mortgage wherein the parties
"severally swear that the mortgage is
made for the purpose of securing the
obligation specified in the conditions
thereof and for no other purposes
and that the same is a just and valid
obligation and one not entered into
for the purpose of fraud. (Sec. 5,
Chattel Mortgage Law)

Effect of absence
The special affidavit is required only
for the purpose of transforming an
already valid mortgage into
preferred mortgage. Thus, it is
not necessary for the validity of the
chattel mortgage itself but only to
give it a preferred status. In other
words, its absence vitiates the
mortgage only as against third
persons without notice like creditors
and subsequent encumbrancers.

Foreclosure of Chattel Mortgage
NOTES:
# Foreclosure sale in chattel mortgage
is by public auction under Act No.
1508, but the parties may stipulate
that it be by private sale.
# The mortgagee may, after thirty (30)
days from the time of the condition
broken, cause the mortgaged
property to be sold at public auction
by a public officer. The 30-day
period is also a grace period for the
mortgagor to discharge the mortgage
obligation. After the sale of the
chattel at public auction, the right
of redemption is no longer available
to the mortgagor (Cabral vs.
Evangelista, 28 SCRA 1000).

#!!

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Application of proceed of sale:
1. Costs and expenses of keeping
and sale
2. Payment of the obligation
secured by the mortgage
3. Claims of persons holding
subsequent mortgages in their
order
4. The balance, if any, shall be
paid to the mortgagor or person
holding under him

NOTES:
# The creditor may maintain an action
for the deficiency, except if the
chattel mortgage is constituted as
security for the purchase of personal
property payable in instalments (Art.
1484).
# The action for deficiency may be
brought within ten (10) years from
the time the cause of action accrues
(Arts 1141 and 1142).
# Only equity of redemption is
available to the mortgagor; the
latter can no longer redeem after
the confirmation of the foreclosure
sale.

Right of redemption
# When the condition of a chattel
mortgage is broken the following
may redeem:
a) mortgagor;
b) person holding a subsequent
mortgage; or
c) subsequent attaching creditor.
# An attaching creditor who so
redeems shall be subrogated to the
rights of the mortgagee and entitled
to foreclose the mortgage in the
same manner that the mortgagee
could foreclose it.
# The redemption is made by paying or
delivering to the mortgagee the
amount due on such mortgage and
the costs, and expenses incurred by
such breach of condition before the
sale thereof (Sec 13, Act No. 1508).

Right to possession of foreclosed
property
1. Real mortgage After the
redemption period has expired, the
purchaser of the property has the
right to a conveyance and to be
placed in possession thereof.

NOTES:
# Purchaser is not obliged to bring
a separate suit for possession.
He must invoke the aid of the
courts and ask for a WRIT OF
POSSESSION.
# Section 7 of Act No. 3135 allows
the purchaser to take possession
of the foreclosed property during
the period of redemption upon
filing of an ex parte application
and approval of a bond.

2. Chattel mortgage When default
occurs and the creditor desires to
foreclose, the creditor has the right
to take the property as a preliminary
step for its sale.
NOTE: Where the debtor refuses to
yield the property, the creditors
remedy is to institute an action
either to effect judicial foreclosure
directly or to secure possession
(REPLEVIN) as a preliminary to the
sale contemplated in Section 14 or
Act. No. 1508

CONCURRENCE AND PREFERENCE OF
CREDITS (Articles 2236 2251)

Concurrence of Credits
" Possession by two or more creditors
of equal rights or privileges over the
same property or all of the property
of the debtor

Preference of Credits
" Right held by a creditor to be
preferred in the payment of his
claim above others out of the
debtors assets.

NOTES:
# The rules on preference of credits
apply only when two or more
creditors have separate and distinct
claims against the same debtor who
has insufficient property.
# Preference creates no lien on
property, and, therefore, gives no
interest in property, specific or
general, to the preferred creditor
#!#

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but a preference in application of
the proceeds after the sale. (Molina
vs. Somes, 31 Phil. 76)
# The preferential right of credit
attains significance only after the
properties of the debtor have been
inventoried and liquidated, and the
claims held by his various creditors
have been established. (DBP vs.
NLRC, 183 SCRA 328)

Preference of
Credit
Lien
Applies only to
claims which do
not attach to
specific
properties
Creates a charge
on a particular
property

Liability of debtors property for his
obligations
!GENERAL RULE: Debtor is liable with
all his property, present and future, for
the fulfilment of his obligations. (Art
2236)

!EXEMPT PROPERTY:
1. Present property those
provided under Arts. 155 and 205
of the Family Code, Sec. 13,
Rule 39 of the Rules of Court,
and Sec. 118 of the Public Land
Act
2. Future property a debtor who
obtains a discharge from his
debts on account of his
insolvency, is not liable for the
unsatisfied claims of his
creditors with said property
subject to certain exceptions
expressly provided by law. (Secs.
68, 69, The Insolvency Law [Act
No. 1956])
3. Property under legal custody and
those owned by municipal
corporations necessary for
governmental purposes

General Categories of Credit:
1. Special Preferred Credits - those
listed in Arts. 2241 and 2242 shall be
considered as mortgages and pledges of
real or personal property or liens (Art.
2243). Hence, they are not included in
the insolvent debtor's assets.

NOTES:
# Arts. 2241 and 2242 do not give the
order of preference or priority of
payment. They merely enumerate
the credits which enjoy preference
with respect to specific movables or
immovables. With respect to the
same specific movables or
immovables, creditors, with the
exception of the State (No. 1),
merely concur.
# They only find application when
there is a concurrence of credits,
i.e., when the same specific
property of the debtor is subjected
to the claims of several creditors and
the value of such property is
insufficient to pay in full all the
creditors. In such a situation, the
question of preference will arise.
# Article 2242 makes no distinction
between registered and unregistered
vendors lien (No. 2). Hence, any
lien of that kind enjoys the
preferred credit status. Unlike the
unpaid price of real property sold,
mortgage credits (No. 5), in order to
be given preference, should be
recorded in the Registry of Property.
But a recorded mortgage credit is
superior to an unrecorded unpaid
vendors lien (De Barretto vs.
Villanueva, 1 SCRA 288)
# The priority rule applies to credits
annotated in the Registry of
Property. As to credits mentioned in
No. 7 of Article 2242, there is
preference among the attachments
or executions according to the order
of the time they were levied upon
the property. The pro rata rule in
Article 2249 does not apply;
otherwise, the result would be
absurd. The preference of a credit
annotated by an attachment or
execution could be defeated by
simply obtaining a writ of
attachment or execution, no matter
how much later (Manabat vs Laguna
Federation of Facomas, Inc., 19
SCRA 621).
# The last paragraph of Article 2241
applies only when the right of
ownership in such property continues
in the debtor, and, therefore, it is
#!3

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not applicable to cases where the
debtor has parted with his ownership
therein, as where he has sold the
property (Pea vs. Mitchell, 9 Phil
587)

2. Ordinary Preferred Credits - those
listed in Art. 2244 as amended by
Art. 110 of the Labor Code.
NOTES:
# The provision not only enumerates
the preferred credits with respect to
other property, real and personal, of
the debtor, but also gives their order
of preference in the order named.
# In contrast with Articles 2241 and
2242, Article 2244 creates no liens
on determinate property which
follow such property. What Article
2244 creates are simply rights in
favour of certain creditors to have
the cash and other assets of the
insolvent applied in a certain
sequence or order of priority.
# Article 2244, particularly par (14)
item (1) thereof, is not applicable to
obligations of the State as it is a
recognized doctrine that the State is
always solvent. It is inconceivable
for the State to voluntarily initiate
insolvency or general liquidation
proceedings or to be subjected to
such proceedings under its own laws.

3. Common Credits those listed
under Art. 2245, which shall be paid
pro rata regardless of dates.
NOTE: Ordinary Preferred and Common
Credits cover only free property of the
debtor, or those not subjected to Special
Preferred Credit.

Effects of Article 110 of Labor Code to
Art 2244:
1. Removed the one-year limitation
found in No. 2 of Art. 2244
2. Moving up the claims for unpaid
wages (and other monetary claims)
of laborers or workers of insolvent
from second priority to first priority
in the order of preference
established by Art. 2244

NOTES:
# In case of bankruptcy or liquidation
of the employers business, the
unpaid wages and other monetary
claims of the employees shall be
given first preference and shall be
paid in full before the claims of the
government and other creditors may
be paid. The terms, declaration
of bankruptcy, or judicial
liquidation have been eliminated,
nevertheless, according to the SC,
bankruptcy or liquidation
proceedings are still necessary for
the operation of the preference
accorded to workers under Art. 110
of the Labor Code. (DBP vs. NLRC
183 SCRA 328; RA No. 6715 Sec 10)
# In case of rehabilitation, the
preference of credit granted to
employees under Art 110 of the
Labor Code is not applicable
(Rubberworld [Phils.] vs CA, 305
SCRA 722).

Refectionary Credit
" Indebtedness incurred in the repair
or reconstruction of something
previously made, such repair or
reconstruction being made necessary
by the deterioration or destruction
of the thing as it formerly existed.

ORDER OF PREFERENCE OF CREDITS

" Arts. 2241 and 2242, jointly with
Arts. 2246 to 2249 establish a two-
tier order of preference:
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

#!4

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order, by attachments and
executions, which are preferred as
to later credits. In satisfying
several credits annotated by
attachments or executions, the rule
is still preference according to the
priority of the credits in the order of
time.
# In order to make the pro rating
provided in Art 2249 fully effective,
the preferred creditors enumerated
in Nos. 2 to 14 of Art 2242 must
necessarily be convened, and the
import of their claims ascertained.
There must be first some proceeding
where the claims of all the preferred
creditors may be bindingly
adjudicated, e.g. insolvency,
settlement of decedents estate, or
other liquidation proceedings except
where there are not more than one
creditor.

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

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