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| ATENEO LAW

CREDIT TRANSACTIONS o Parties:
Comments & Cases on Credit Transaction | Atty. Hector S. De Leon 1. Bailoe – the giver; the party who delivers the possession or custody of
Block 2C | Atty. Lee Benjamin Z. Lerma the thing bailed.
2. Bailee – the recipient; the party who receives the possession or custody
of the thing thus delivered.
WARNING o Kinds of contractual bailment:
1. Ordinary
This document shall not be used as primary reference in a. Sole benefit of the bailor;
lieu of the annotated books and reviewers it is based on. b. Sole benefit of the bailee;
c. Benefit of both parties:
i. Mere keeping;
INTRODUCTION ii. Carriage;
iii. Goods delivered to another to do work upon;
Ø Credit transactions – all transactions involving the loan of money and goods, or the iv. Goods delivered to another to work with;
purchase or delivery of goods and services in the present, with a promise to pay or deliver v. Security;
in the future. vi. Vendor in possession after sale.
o Allows more exchanges – persons are able to enjoy a thing today but pay for it d. Fortuitous bailments (Ex. Salvage, theft, etc.)
later. 2. Extraordinary – cover businesses that peculiarly serve the public. (Ex.
o May consist of a principal contract and a contract of security. Innkeeper, common carrier, etc.)
o Ex. Bailment contracts, usury, guaranty and suretyship, mortgage, antichresis, o Kinds of bailment for hire – when goods are left with the bailee for some use or
and concurrence and preference of credits. service by him and is always for some compensation:
Ø Types of credit transactions as to security: 1. Hire of things – goods are delivered for the temporary use of the hirer.
1. Secured transactions – supported by a collateral or an encumbrance of property 2. Hire of service – goods are delivered for some work or labor upon it
or some other security intended to secure the fulfillment of the principal by the bailee.
obligations. (Ex. pledge or mortgage) 3. Hire of carriage of goods – goods are delivered either to a common
2. Unsecured transactions – the fulfillment of which by the principal debtor is carrier or to a private person for the purpose of being carried from one
secured or supported only by a promise to pay or the personal commitment of the place to another.
debtor. 4. Hire of custody – goods are delivered for storage.
Ø Security – something that is given as a means to ensure the fulfillment or enforcement of o The subject matter in bailment is personal or movable property.
an obligation or of protecting some interest in property. o The person who has possession is under the obligation to return the same goods,
o Kinds: either in the same or in altered form to the owner, or dispose of them for his
1. Personal security – when an individual becomes a surety or a benefit, when the purpose of the bailment shall have been accomplished.
guarantor. o The contract of bailment may be expressed, implied, or created by operation of
2. Property or real security – when a lien or other device is used to have law.
property held, out of which the person to be made secure can be o Distinguished from custody because in custody, there is no intent to possess and
compensated for loss. control. (Ex. Property in litigation in the custody of a court sheriff)
o Secured creditor – one who holds a security from his debtor for payment of the
latter’s debts.
Ø Bailment – a contractual relation involving an agreement between the parties that the
property ultimately is to be returned by the bailee to the bailor or is to be delivered to a
designated third party; ownership and possession are separated.
o Elements:
1. Bailor retains title;
2. Transfer of possession to the bailee;
3. Acceptance by the bailee;
4. Specific purpose for which the bailee is in possession; and
5. Intent of the parties that the identical property will be returned to the
bailor at the end of the bailment, unless the bailor directs that it be
given to a designated third person.

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TITLE XI Fig. 3
LOAN Commodatum Mutuum

GENERAL PROVISIONS Involves something not consumable. Involves money or other consumable thing.
Ownership of the thing loaned is retained
Ownership is transferred to the borrower.
ART. 1933. BY THE CONTRACT OF LOAN, ONE OF THE PARTIES DELIVERS TO ANOTHER, EITHER by the lender.
SOMETHING NOT CONSUMABLE SO THAT THE LATTER MAY USE THE SAME FOR A CERTAIN TIME May be gratuitous or onerous (with
AND RETURN IT, IN WHICH CASE THE CONTRACT IS CALLED A COMMODATUM; OR MONEY OR Essentially gratuitous.
stipulation to pay interest).
OTHER CONSUMABLE THING, UPON THE CONDITION THAT THE SAME AMOUNT OF THE SAME
KIND AND QUALITY SHALL BE PAID, IN WHICH CASE THE CONTRACT IS SIMPLY CALLED A LOAN Borrower must return the same thing Borrower need only pay the same amount
OR MUTUUM. loaned. of the same kind and quality.
May involve real or personal property. Refers only to personal property.
COMMODATUM IS ESSENTIALLY GRATUITOUS.
A loan for use or temporary possession. A loan for consumption.
SIMPLE LOAN MAY BE GRATUITOUS OR WITH A STIPULATION TO PAY INTEREST. Bailor may demand the return of the thing Lender may not demand its return
loaned before the expiration of the term in before the lapse of the term agreed
IN COMMODATUM THE BAILOR RETAINS THE OWNERSHIP OF THE THING LOANED, WHILE IN case of urgent need. upon.
SIMPLE LOAN, OWNERSHIP PASSES TO THE BORROWER.
Borrower suffers loss even if caused
Loss of the subject matter is suffered by the exclusively by a fortuitous event and
Ø Classifications of loan: bailor since he is the owner. he is not, therefore, discharged from
1. Commodatum – loan of use – where one of the parties delivers to another, either his duty to pay.
something not consumable so that the latter may use the same for a certain time
and return it. Ø Case Doctrine/s:
2. Mutuum – loan of consumption – where one of the parties delivers to another
money or other consumable thing, upon the condition that the same amount of People v. Concepcion (1922) : A concession of a “credit” necessarily involves the granting of
the same kind and quality shall be paid. “loans” up to the limit of the amount fixed in the “credit.”
o The demand notes signed by the firm were not discount papers but were mere evidence
Fig. 1 of indebtedness because (1) interest was not deducted from the face of the notes, but
Loan Credit was paid when the notes fell due; and (2) they were single-name paper.
Mutuum – the delivery and receipt of a An individual’s ability to borrow money or
De Los Santos v. Jarra (1910) : It is the imperative duty of the bailee to return the thing itself
given sum of money or other consumable things by virtue of the confidence or trust
to its owner, or to pay him damages if through the fault of the bailee the thing should have been
thing upon an agreement to repay the same reposed by a lender that he will pay what he
lost or injured.
amount of the same kind and quality, with may promise within a specified period.
o Being a purely personal contract, the thing bailed does not pass on to heirs upon the
or without interest.
death of the bailee, it was not made in consideration for the bailee.
A debt is that which one owes to any That which is due any person. A debt
person. considered from the creditor’s standpoint. ART. 1934. AN ACCEPTED PROMISE TO DELIVER SOMETHING BY WAY OF COMMODATUM OR
SIMPLE LOAN IS BINDING UPON PARTIES, BUT THE COMMODATUM OR SIMPLE LOAN ITSELF
SHALL NOT BE PERFECTED UNTIL THE DELIVERY OF THE OBJECT OF THE CONTRACT.
Fig. 2
Loan Discount
Ø Loans are real contracts – require the delivery of the subject matter thereof for their
Interest is usually taken at the expiration of perfection. The purpose of delivery is to transfer either use or ownership of the thing
Interest is deducted in advance.
a credit. loaned.
Always on a double-name paper – Ø An accepted promise to make a future loan is a consensual contract, binding upon the
Generally on a single-name paper – has parties pursuant to Art. 1934, but it is only after delivery that the real contract of loan arises.
commercial paper having more than one
only one signor or more than one maker o It will constitute a “contract to loan,” but it will not yet constitute a contract of
obligor, usually a maker or endorser, both
signing for the exact same paper. commodatum.
of whom are fully liable.
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Ø The rule on delay in reciprocal obligations apply likewise to cases of loan – when one party
has performed or is ready and willing to perform, the other party who has not performed or
is not ready and willing to perform incurs in delay.
Ø Case Doctrine/s:
Saura Import v. DBP (1972) : Although there was a perfected consensual contract, there was
a deviation from the terms/conditions when Saura realized it could not meet the conditions
required by DBP.
Naguiat v. CA (2003) : The delivery of bills of exchange and mercantile documents such as
checks shall produce the effect of payment only when they have been cashed. It is only after the
checks have produced the effect of payment that the contract of loan may be deemed perfected.
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CHAPTER ONE: COMMODATUM
SECTION ONE: NATURE OF COMMODATUM
ART. 1935. THE BAILEE IN COMMODATUM ACQUIRES THE USE OF THE THING LOANED BUT NOT
ITS FRUITS; IF ANY COMPENSATION IS TO BE PAID BY HIM WHO ACQUIRES THE USE, THE
CONTRACT CEASES TO BE A COMMODATUM.
Ø Characteristics of commodatum:
1. Real contract – because the delivery of the thing loaned is necessary for the
perfection of the contract.
2. Unilateral contract – because once the subject matter has been delivered, it
creates obligations on the part of only the borrower.
§ Only the bailee has obligations at the time of the perfection of the
contract. Those of the bailor are mere necessary consequences which
may or may not arise.
3. Nominate contract – because it has been given a specific name in the Civil Code.
4. Principal contract – because its existence is not dependent on another contract.
5. Informal contract – because no particular form is required for the contract.
§ General rule: May be made orally or in writing.
a. Exceptions:
1. If it involves immovable property, and the parties
wish to create real rights over the property, then
the agreement must be in a public instrument (non-
compliance still results in a valid contract of loan,
but it shall not bind third parties if not in a public
document).
2. If it shall not be performed within 1 year from
making thereof, it must be in writing or at least in
a memorandum.
6. Gratuitous contract – because the bailee does not pay the bailor for the use of the
thing.
Ø Essential requisites of commodatum:
1. Consent of the contracting parties;
§ Must be given by parties who have capacity to consent. Remember that
when both parties do not have capacity to consent, ie. minors, the
contract reached is unenforceable.
2. Object which is the thing to be loaned; and
§ The thing (a) must not be consumable; (b) within the commerce of
men; and (c) determinate.
§ General rule: The bailee is entitled only to use the thing loan and not
its fruits. (Art. 1940)
• Exception: Unless otherwise agreed upon by the parties.
3. Cause of the obligation.
§ Essentially gratuitous – mere liberality of the bailor.
§ It ceases to be a commodatum if any compensation is to be paid by the
borrower.

Ø Parties to the contract:
1. Bailor – lender.
§ Need not be the owner of the thing loaned (Art. 1938). It is sufficient
that the bailor has the right to allow the use of the thing by the bailee.
2. Bailee – borrower.
§ Estopped from asserting ownership of the thing received as against the
bailor (Art. 1436) – because by the contract he acknowledges that the
ownership belongs to someone else.
Ø It is essential that the use of the property of another shall be “for a certain time.” (Art. 1933,
par. 2)
Ø Extinguished by the following causes:
1. Expiration of the stipulated period or accomplishment of the use for which the
thing was given;
2. Return by the bailee of the thing after demand by the bailor, in the event that the
latter is in urgent need of the thing;
3. Return of the thing, in case of precarium (indefinite period) or in the event that
the bailee comments any act of ingratitude;
4. Loss of the thing; and
5. Death of either bailor or bailee.
Ø Case Doctrine/s:
Republic v. Bagtas (1962) : Under article 1671 of the Civil Code the lessee would be subject
to the responsibilities of a possessor in bad faith, because she had continued possession of the
bull after the expiry of the contract.
Pajuyo v. CA (2004) : While the Kasunduan did not require Guevarra to pay rent, it obligated
him to maintain the property in good condition. The imposition of this obligation makes the
Kasunduan a contract different from a commodatum.
ART. 1936. CONSUMABLE GOODS MAY BE THE SUBJECT OF COMMODATUM IF THE PURPOSE OF
THE CONTRACT IS NOT THE CONSUMPTION OF THE OBJECT , AS WHEN IT IS MERELY FOR
EXHIBITION.
Ø Case Doctrine/s:
Producers Bank v. CA (2003) : There are some instances where a commodatum may have for
its object a consumable thing, such as when it is merely for exhibition.
o Here, Vivez agreed to deposit his money in the savings account of Sterela specifically
“for the purpose of making it appear that said firm had sufficient capitalization for
incorporation,” with the promise that the amount shall be returned within thirty (30)
days.
ART. 1937. MOVABLE OR IMMOVABLE PROPERTY MAY BE THE OBJECT OF COMMODATUM.
Ø General rule: The subject matter of commodatum is a non-consumable thing.
o Exception: When the purpose of the contract is not consumption of a
consumable, but as when it is merely for exhibition.
4 YAP, K. | ATENEO LAW
ART. 1938. THE BAILOR IN COMMODATUM NEED NOT BE THE OWNER OF THE THING LOANED.
Ø It is sufficient that the bailor has such possessory interest in the subject matter or right to
its use which he may assert against the bailee and the third persons although not against
the rightful owner. (Ex. Lessee, usufructuary)
ART. 1939. COMMODATUM IS PURELY PERSONAL IN CHARACTER. CONSEQUENTLY:
(1) THE DEATH OF EITHER THE BAILOR OR THE BAILEE EXTINGUISHES THE CONTRACT;
(2) THE BAILEE CAN NEITHER LEND NOR LEASE THE OBJECT OF THE CONTRACT TO A THIRD
PERSON. HOWEVER, THE MEMBERS OF THE BAILEE'S HOUSEHOLD MAY MAKE USE OF THE
THING LOANED, UNLESS THERE IS A STIPULATION TO THE CONTRARY , OR UNLESS THE NATURE
OF THE THING FORBIDS SUCH USE .
Ø Commodatum is a purely personal contract, with the lender taking into account the
character, credit, and conduct of the borrower.
o General rule: The death of either party terminates the contract; it is not
transmissible.
§ Exceptions:
1. When by stipulation, the commodatum is transmitted to the
heirs of either or both parties.
2. When there are two or more borrowers, death of one does
not terminate the contract.
o Exception to this exception: Stipulation to the
contrary.
o General rule: The lendee cannot lend nor lease the object to a third person.
§ Exceptions:
1. Stipulation to the contrary; or
2. Members of the bailee’s household.
o Exceptions to this exception:
1. Stipulation to the contrary; or
2. Nature of the thing forbids such use.
(Ex. Dentist chair – Atty. Lerma’s
favorite example)
ART. 1940. A STIPULATION THAT THE BAILEE MAY MAKE USE OF THE FRUITS OF THE THING
LOANED IS VALID.
Ø The fruits contemplated by this article are non-consumable things. (Ex. A carabao’s
offspring which will be used for farm work)
Ø The bailee does not have jus fruendi – right to the fruits.
o The fruits pertain to the owner of the thing producing the fruits. (Art. 441)
o The enjoyment of the fruits must only be incidental to the thing itself. If it is the
main cause, the contract may be one of usufruct. (Art. 562)

SECTION TWO: OBLIGATIONS OF THE BAILEE ART. 1942. THE BAILEE IS LIABLE FOR THE LOSS OF THE THING, EVEN IF IT SHOULD BE
THROUGH A FORTUITOUS EVENT:
ART. 1941. THE BAILEE IS OBLIGED TO PAY FOR THE ORDINARY EXPENSES FOR THE USE AND
PRESERVATION OF THE THING LOANED. (1) IF HE DEVOTES THE THING TO ANY PURPOSE DIFFERENT FROM THAT FOR WHICH IT HAS
BEEN LOANED;
(2) IF HE KEEPS IT LONGER THAN THE PERIOD STIPULATED, OR AFTER THE ACCOMPLISHMENT
Ø Ordinary expense – day-to-day expenses expected to confront the owner of the thing OF THE USE FOR WHICH THE COMMODATUM HAS BEEN CONSTITUTED;
borrowed. (Ex. Car fuel) (3) IF THE THING LOANED HAS BEEN DELIVERED WITH APPRAISAL OF ITS VALUE, UNLESS
Ø Extraordinary expense – expenses not expected to confront the owner of the thing THERE IS A STIPULATION EXEMPTING THE BAILEE FROM RESPONSIBILITY IN CASE OF A
borrowed. (Ex. Car’s extra tire, car’s deterioration due to flood) FORTUITOUS EVENT;
o ALWAYS depends on the nature of the thing loaned. There is no exact definition (4) IF HE LENDS OR LEASES THE THING TO A THIRD PERSON, WHO IS NOT A MEMBER OF HIS
of what is ordinary and extraordinary expense. HOUSEHOLD;
Ø Principal obligations of the bailee: (5) IF, BEING ABLE TO SAVE EITHER THE THING BORROWED OR HIS OWN THING, HE CHOSE TO
1. Take good care of the thing with the diligence of a good father of a family; SAVE THE LATTER.
§ The bailee will be liable for the loss or deterioration of the thing if there
was fault or negligence on his part or his representatives.
2. Use the thing loaned only for the purpose for which it was loaned and for no Fig. 4
other purpose; Loss of the Thing Loaned; Liability of Bailee
§ The bailee does not answer for the deterioration of the thing loaned due
only to the use thereof and without his fault. General rule: The bailor bears the risk of loss or damage due to the thing borrowed as a
3. Pay ordinary expenses for the use and preservation of the thing and a portion of result of a fortuitous event (because the bailor retains ownership of the thing loaned).
extraordinary expenses arising from the actual use of the thing; and Exceptions Notes
§ This is because he acquires the use of the thing, and he is supposed to
return the same exact thing to the lender. (1) If bailee devotes the Ø Because the bailee acts in bad faith.
4. Return and to not retain the thing loaned, except under certain circumstances. thing to any purpose
§ Misappropriation – if the bailee did not return the thing because the different from that for
bailee misappropriated the thing, he can be held criminally liable for which it has been loaned.
swindling (estafa). (2) If he keeps it longer Ø Because the bailee incurs in delay.
§ Retention of the thing – if the bailee did not return the thing because than the period stipulated,
he wants to use it beyond the agreed period, the bailee breaches the or after the accomplishment
contract and becomes liable even when there is fortuitous event. of the use for which the
§ Loss of the thing – General rule: If the thing was lost without his fault, commodatum has been
he is not liable. constituted.
• Exception: When the thing loaned was delivered with an
(3) If the thing loaned has Ø The law presumes that the parties intended that the
appraisal of its value, the bailee is liable.
been delivered with bailee shall be liable for the loss of the thing even if it is
o Exception to the exception: Stipulation to the
appraisal of its value, due to a fortuitous event for otherwise they would not
contrary.
unless there is a stipulation have appraised the thing.
§ Return; how made:
exempting the bailee from Ø The only circumstance where the bailee is liable for the
1. Time – General rule: After expiration of the period or
responsibility in case of a loss of a thing through a fortuitous event even without
accomplishment of the purpose for which it was loaned.
fortuitous event. the fault of the bailee.
o Exceptions (bailor may demand return):
1. Urgent need; (4) If he lends or leases the Ø Because a contract of commodatum is purely personal.
2. Precarium; or thing to a third person, who
3. Act of ingratitude. is not a member of his
2. Place – In absence of stipulation on the place where the thing household.
shall be returned, it must be returned at the place where the
(5) If, being able to save Ø Because the bailee committed an act of ingratitude.
thing was delivered by the bailor to the bailee.
either the thing borrowed
or his own thing, he chose
to save the latter.
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ART. 1943. THE BAILEE DOES NOT ANSWER FOR THE DETERIORATION OF THE THING LOANED
DUE ONLY TO THE USE THEREOF AND WITHOUT HIS FAULT.
Ø Due to ordinary wear and tear - the parties know that the thing borrowed cannot be used
without deterioration due to ordinary wear and tear.
o General rule: Depreciation caused by the reasonable and natural use of the thing
is borne by the bailor.
§ Exception: Stipulation to the contrary.
Ø Due to bailee’s fault or negligence – the bailee is liable if he is guilty of fault or negligence,
or if he devotes the thing to any purpose different from that for which it has been loaned.
ART. 1944. THE BAILEE CANNOT RETAIN THE THING LOANED ON THE GROUND THAT THE
BAILOR OWES HIM SOMETHING, EVEN THOUGH IT MAY BE BY REASON OF EXPENSES.
HOWEVER, THE BAILEE HAS A RIGHT OF RETENTION FOR DAMAGES MENTIONED IN ARTICLE
1951.
Ø General rule: The bailee has no right to retain the thing loaned as security for claims he has
against the lender.
o Exception: When the bailor claims for damages suffered because of flaws in the
thing loaned, he may retain it until he is reimbursed for the damages suffered.
§ The right extends no further than to the retention of the thing loaned
until he his reimbursed for the damages suffered. He cannot sell the
thing to satisfy the damages.
ART. 1945. WHEN THERE ARE TWO OR MORE BAILEES TO WHOM A THING IS LOANED IN THE
SAME CONTRACT, THEY ARE LIABLE SOLIDARILY.
Ø The reason for imposing solidary liability is to safeguard effectively the rights of the lender.
Ø The law presumes that the bailor takes into account the personal integrity and responsibility
of all the bailees.
Ø General rule: The concurrence of 2 or more parties in the same obligation gives rise only
to a joint obligation. (Arts. 1207, 1208)
o Exception: When there are 2 or more bailees to whom a thing is loaned in the
same contract, they are liable solidarily. (Art. 1945)
SECTION THREE: OBLIGATIONS OF THE BAILOR
ART. 1946. THE BAILOR CANNOT DEMAND THE RETURN OF THE THING LOANED TILL AFTER
THE EXPIRATION OF THE PERIOD STIPULATED, OR AFTER THE ACCOMPLISHMENT OF THE USE
FOR WHICH THE COMMODATUM HAS BEEN CONSTITUTED. HOWEVER, IF IN THE MEANTIME, HE
SHOULD HAVE URGENT NEED OF THE THING, HE MAY DEMAND ITS RETURN OR TEMPORARY
USE.
IN CASE OF TEMPORARY USE BY THE BAILOR, THE CONTRACT OF COMMODATUM IS SUSPENDED
WHILE THE THING IS IN THE POSSESSION OF THE BAILOR.
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Ø A contract of commodatum has the following terms of duration:
1. Period stipulated;
2. Period necessary for the accomplishment of the use for which it has been
constituted;
3. Indefinite (Precarium).
§ Here, the bailor may demand the return of the thing at any time.
Ø The bailor is bound by the terms of the contract of commodatum which is “for a certain
time.”
o In cases of urgent need, the return may only be temporary or it may be permanent
because the law uses “its return” or “temporary use.”
§ In the case of temporary use, the rights and duties of the parties arising
from the contract are temporarily suspended.
ART. 1947. THE BAILOR MAY DEMAND THE THING AT WILL, AND THE CONTRACTUAL
RELATION IS CALLED A PRECARIUM, IN THE FOLLOWING CASES :
(1) IF NEITHER THE DURATION OF THE CONTRACT NOR THE USE TO WHICH THE THING LOANED
SHOULD BE DEVOTED, HAS BEEN STIPULATED; OR
(2) IF THE USE OF THE THING IS MERELY TOLERATED BY THE OWNER.
Ø Precarium – a kind of commodatum where the bailor, upon request by the bailee, gives the
latter the thing for use as long as the owner shall please. Hence he bailor may demand the
thing at will.
Ø Cases of Precarium:
1. If neither the duration of the contract nor the use to which the thing loaned should
be devoted, has been stipulated; or
2. When the use of the thing is merely tolerated by the bailor.
Ø Case Doctrine/s:
Mina v. Pascual (1913) : An essential feature of the commodatum that the use of the thing
belonging to another shall for a certain period.
Quintos v. Beck (1939) : The obligation voluntarily assumed by the defendant to return the
furniture upon the plaintiff's demand, means that he should return all of them to the plaintiff at
the latter's residence or house.
ART. 1948. THE BAILOR MAY DEMAND THE IMMEDIATE RETURN OF THE THING IF THE BAILEE
COMMITS ANY ACT OF INGRATITUDE SPECIFIED IN ARTICLE 765.
Ø Acts of ingratitude: (Art. 765)
1. When the bailee should commit some offense against the person, the honor or
the property of the bailor, or of his wife or children under his parental authority;
2. General rule: When the bailee imputes to the bailor any criminal offense, or any
act involving moral turpitude, even though he should prove it.
o Exception: When the crime or the act has been committed against the
bailee himself, his wife or children under his parental authority.

3. When the bailee unduly refuses to support the bailor when the bailee is legally ART. 1951. THE BAILOR WHO, KNOWING THE FLAWS OF THE THING LOANED, DOES NOT
or morally bound to give support to the bailor. ADVISE THE BAILEE OF THE SAME, SHALL BE LIABLE TO THE LATTER FOR THE DAMAGES WHICH
Ø The bailee violates the trust reposed in him by the bailor in these cases. HE MAY SUFFER BY REASON THEREOF.

ART. 1949. THE BAILOR SHALL REFUND THE EXTRAORDINARY EXPENSES DURING THE
CONTRACT FOR THE PRESERVATION OF THE THING LOANED, PROVIDED THE BAILEE BRINGS
Ø Requisites for liability to pay damages for hidden flaws:
THE SAME TO THE KNOWLEDGE OF THE BAILOR BEFORE INCURRING THEM, EXCEPT WHEN THEY
1. There is a flaw or defect in the thing loaned;
ARE SO URGENT THAT THE REPLY TO THE NOTIFICATION CANNOT BE AWAITED WITHOUT
2. Flaw or defect is hidden;
DANGER.
3. Bailor is aware thereof;
4. Bailor does not advise the bailee of the same; and
IF THE EXTRAORDINARY EXPENSES ARISE ON THE OCCASION OF THE ACTUAL USE OF THE 5. Bailee suffers damages by reason of said flaw or defect.
THING BY THE BAILEE, EVEN THOUGH HE ACTED WITHOUT FAULT, THEY SHALL BE BORNE
Ø The bailee is given the right to retention until he is paid damages.
EQUALLY BY BOTH THE BAILOR AND THE BAILEE, UNLESS THERE IS A STIPULATION TO THE
CONTRARY . ART. 1952. THE BAILOR CANNOT EXEMPT HIMSELF FROM THE PAYMENT OF EXPENSES OR
DAMAGES BY ABANDONING THE THING TO THE BAILEE.

ART. 1950. IF, FOR THE PURPOSE OF MAKING USE OF THE THING, THE BAILEE INCURS
EXPENSES OTHER THAN THOSE REFERRED TO IN ARTICLES 1941 AND 1949, HE IS NOT
Ø The expenses and/or damages may exceed the value of the thing loaned, and it would,
ENTITLED TO REIMBURSEMENT.
therefore, be unfair to allow the bailor to just abandon the thing instead of paying for said
expenses and/or damages.

Ø Obligations of the bailor:

1. To refund extraordinary expenses for the preservation of the thing loaned; and
2. To pay damages for known hidden flaws.

Fig. 5
Summary of General Rules on Expenses
Expense/s From Liable
(1) Ordinary expenses Use of the thing. Bailee
(2) Ordinary expenses Preservation of the thing. Bailee
(3) Extraordinary expenses Preservation of the thing. Bailor
Equally the bailor and
(4) Extraordinary expenses Actual use of the thing.
the bailee
(5) Other expenses Use of the thing. Bailee
Exception
The parties may, by stipulation, provide for different apportionment of expenses, or that
they shall be born by the bailee or the bailor only.

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CHAPTER TWO: SIMPLE LOAN OR MUTUUM
ART. 1953. A PERSON WHO RECEIVES A LOAN OF MONEY OR ANY OTHER FUNGIBLE THING
ACQUIRES THE OWNERSHIP THEREOF, AND IS BOUND TO PAY TO THE CREDITOR AN EQUAL
AMOUNT OF THE SAME KIND AND QUALITY.
Ø Mutuum – simple loan – a contract whereby one of the parties delivers money or other
consumable thing to another who acquires ownership thereof with the understanding or on
condition that the same amount of the same kind and quality shall be paid.
o Involves the return of the “equivalent” only and not the exact identical thing
loaned because the borrower has acquired ownership of the latter.
o Here, the borrower becomes the owner of the thing borrowed upon its delivery.
Ø Characteristics of mutuum:
1. Real contract – because the delivery of the thing is necessary for the perfection
of the contract.
2. Unilateral contract – because once the subject matter has been delivered, it
creates obligations only on the part of the borrower.
§ A contract of loan is a unilateral contract, while a contract to loan is a
bilateral contract.
3. Nominate contract – because it has been given a specific name by the Civil Code.
4. Principal contract – because its existence does not depend on another contract;
5. Informal contract – because no particular form is generally required for the
contract.
§ General rule: May be made orally or in writing.
• Exceptions:
1. If the amount involved exceeds Php500, it must
appear in writing.
2. An agent needs a special power of attorney from
his principal to “loan or borrow money.”
o Exception: When the latter act is urgent
and indispensable for the preservation of
the things which are
administration.
6. As to cause, either:
a. Gratuitous contract – when there is no stipulation to pay interest; or
b. Onerous contract – when there is a stipulation to pay interest.
Ø Essential requisites of mutuum:
1. Consent of the contracting parties;
§ Must be given by parties who have capacity to consent. Remember that
when both parties do not have capacity to consent, ie. minors, the
contract reached is unenforceable.
2. Object which is the thing to be loaned; and
§ Either:
1. Money; or
2. Any other consumable/fungible thing.
o Must be (1) within the commerce of men and (2)
determinate.
o Fungible – capable of being replaced – dealt with
by quantity, so that any given unit or portion is
treated as the equivalent of any other unit or
portion.
3. Cause of the obligation.
§ Either:
1. Gratuitous – the cause is mere liberality of the lender.
2. Onerous – when there is a stipulation to pay interest.
Ø Parties to the contract:
1. Borrower; and
§ Obligations:
1. To pay the lender an equal amount of the same kind and
quality; and
o In the currency stipulated. In absence thereof, in
the same currency in which it was delivered. If not
possible, in any currency which is legal tender in
the Philippines.
o When – upon the end of the period. If no period,
the court may fix it.
§ If gratuitous – may be paid/returned
before end of the period.
§ If onerous – cannot be paid/returned
before the end of the period because the
period is established for the benefit of
both creditor and borrower.
o Where – in absence of stipulation for place of
payment, the domicile of the debtor.
2. To pay interest if expressly stipulated.
o When there is a stipulation to pay interest, and the
money or thing loaned is returned before the end
of the period, the borrower is still liable to pay for
the whole interest remaining.
under 2. Creditor.
§ Here, the creditor must be the owner of the thing loaned because
ownership is transferred to the borrower.
Ø Extinguished by the following causes:
1. Expiration of the stipulated period or accomplishment of the use for which the
thing was given;
2. General principles for extinction of obligations:
§ Confusion, novation, etc.
Ø If the borrower loses the money or goods, this does not affect his obligation to repay the
creditor.
o This is because the borrower is already the owner of the thing. The doctrine of
res perit domino applies.
o Furthermore, because in obligations, the loss of a fungible thing does not
extinguish the obligation because it can be replaced.
8 YAP, K. | ATENEO LAW

Ø Case Doctrine/s: o If loan of fungible thing – Rules:
1. The borrower is under the obligation to pay the lender another thing of
Republic v. Grijaldo (1965) : The obligation of the appellant under the five promissory notes the same kind, quality, and quantity.
is to pay the value thereof; that is, to deliver a sum of money – a generic thing. Art. 1263 provides 2. If impossible, the borrower shall pay its value at the time of the
that loss or destruction of anything of the same kind does not extinguish the obligation. perfection of the loan.

Martinez v. Ramos (1914) : It is well established in jurisprudence that a person may be ART. 1956. NO INTEREST SHALL BE DUE UNLESS IT HAS BEEN EXPRESSLY STIPULATED IN
convicted of both illegal recruitment and estafa. The reason, therefore, is not hard to discern: WRITING.
illegal recruitment is malum prohibitum, while estafa is malum in se. In the first, the criminal
intent of the accused is not necessary for conviction. In the second, such an intent is imperative.
Fig. 7
ART. 1954. A CONTRACT WHEREBY ONE PERSON TRANSFERS THE OWNERSHIP OF NON- Kinds of Interest
FUNGIBLE THINGS TO ANOTHER WITH THE OBLIGATION ON THE PART OF THE LATTER TO GIVE (1) Simple interest Ø That which is paid for the principal at a certain rate fixed
THINGS OF THE SAME KIND, QUANTITY, AND QUALITY SHALL BE CONSIDERED A BARTER. or stipulated by the parties.
(2) Compound interest Ø That which his imposed upon interest due and unpaid.
Ø Barter – exchange – whereby one person transfers the ownership of non-fungible things to The accrued interest is added to the principal sum and
another with the latter’s obligation to give things of the same kind, quantity and quality. the whole (principal and accrued interest) is treated as a
new principal upon which the interest for the net period
Fig. 6 is calculated.
Mutuum Commodatum Barter (3) Legal interest Ø That which the law directs to be charged in the absent
Involves money or any Generally Involves non- Involves non-fungible (non- of any agreement between the parties as to the rate of
other fungible thing. consumable things. consumable) things. interest due.
Ø Currently, the legal rate is 6% per annum.
Bailee is bound to return the
identical thing borrowed Equivalent thing is given in (4) Lawful interest Ø That which the law allows or does not prohibit.
Equivalent amount or thing
when the time has expired return for what has been Ø Rate within the maximum prescribed by law.
is returned.
or the purpose has been received. (5) Unlawful interest Ø Also known as usurious interest.
served. Ø That which is paid or stipulated to be paid beyond the
May be gratuitous or maximum fixed by law.
Essentially gratuitous. Essentially onerous. o The Usury Law has been rendered ineffective,
onerous.
and the Courts now decide the usurious nature
of interest on a case-to-case basis.
ART. 1955. THE OBLIGATION OF A PERSON WHO BORROWS MONEY SHALL BE GOVERNED BY
THE PROVISIONS OF ARTICLES 1249 AND 1250 OF THIS CODE.
Ø Requisites for collection of interest:
1. Must be expressly stipulated;
IF WHAT WAS LOANED IS A FUNGIBLE THING OTHER THAN MONEY, THE DEBTOR OWES 2. Must be in writing; and
ANOTHER THING OF THE SAME KIND, QUANTITY AND QUALITY, EVEN IF IT SHOULD CHANGE IN
3. Must be lawful rate.
VALUE. IN CASE IT IS IMPOSSIBLE TO DELIVER THE SAME KIND, ITS VALUE AT THE TIME OF THE
Ø Unilateral impositions of interest do not suffice as proof of agreement to pay interest. (Phil.
PERFECTION OF THE LOAN SHALL BE PAID.
Phosphate Fertilizer Corp. v. Kamalig Resources, Inc., 2007)
Ø General rule: No interest shall be due unless it has been expressly stipulated in writing.
o Exceptions (liability for interest even in the absence of stipulation):
Ø Form of payment: 1. Indemnity for damages – imposed by the courts in their decisions, 6%.
o If loan of money – Rules: 2. Interest accruing from unpaid interest – interest due shall earn interest
1. Payment should be made in the currency stipulated. from the time it is judicially demanded although the obligation may be
2. If none, payment must be made in the currency in which the money silent on this point.
was delivered. Ø Escalation clause – a stipulation allowing an increase in the interest rate originally agreed
3. If not possible, payment must be made in the currency which is legal upon by the parties.
tender in the Philippines.
9 YAP, K. | ATENEO LAW

o A stipulation that the interest rate will be increased if the BSP raises its
rediscounting rates is valid. (Concepcion v. CA, 1997)
Ø De-escalation clause – a stipulation allowing a decrease in the interest rate originally agreed
upon by the parties.
Ø Case Doctrine/s:
Tan v. Valdehueza (1975) : Equitable mortgages cannot be foreclosed if they are unregistered,
and no interest thereon cannot be awarded unless they are stipulated.
Jardenil v. Solas (1942) : Payment of interest cannot be implied. No interest shall be due unless
it has been expressly stipulated in writing (Article 1956, Civil Code).
Soncuya v. Azarraga (1938) : It is only in contracts of loan, with or without guaranty, that
inrerest may be demanded.
o There was what may be considered the resolutory condition of 5 years – was converted
into a simple loan by the decisive circumstance that plaintiff chose to collect
thereafter, and the obligors agreed to pay him 12% annual interest.
Royal Shirt v. Co Bon Tic (1954) : Had the defendant signed Exhibit A, which he did not, he
would have been bound by it and would be liable to 20$ of any amount due from him, but
because of the absence of stipulation as to the rate of interest he would be paying only the legal
rate of 6% per annum.
Arwood Industries v. D.M. Consunji (2002) : From the moment a party gave its consent, it
was bound not only to fulfill what was expressly stipulated in the Agreement but also all the
consequences which, according to their nature, may be in keeping with good faith, usage and
law.
Overseas Bank v. Cordero (1982) : A bank is not liable for interests accruing to depositors
during the period when it is not operative.
Ramos v. Central Bank (1985) : The obligation to pay interest on the deposit ceases the
moment the operation of the bank is completely suspended by the duly constituted authority, the
Central Bank.
Lirag v. SSS (1987) : Article 1956: No interest shall be due unless it has been expressly
stipulated in writing.
o Dividends stipulated by the parties served evidently as interests.
ART. 1957. CONTRACTS AND STIPULATIONS, UNDER ANY CLOAK OR DEVICE WHATEVER,
INTENDED TO CIRCUMVENT THE LAWS AGAINST USURY SHALL BE VOID . THE BORROWER MAY
RECOVER IN ACCORDANCE WITH THE LAWS ON USURY .
Ø The form of the contract is not conclusive. Parol evidence is admissible to show that a
written document, though legal in form, was in fact a cloak or device to cover usury if from
a construction of the whole transaction it becomes apparent there exists a corrupt intention
to violate the laws on usury.
10
o Ex. Pretended lease by borrower at usurious rental; price of sale with right to
repurchase clearly inadequate; payment by borrower for lender’s services as
additional compensation.
Ø A usurious contract should not be considered void in its entirety but only as to the interest
involved.
Ø The debtor has the right to recover the amount paid as interest under a usurious agreement
on the theory that it has been made under restraint rather than voluntarily.
Ø Case Doctrine/s:
Angel Jose v. Chelda Enterprises (1968) : In a contract of loan with a stipulation on interest,
being a divisible contract, the illegality of the usurious interest (accessory) shall not render null
the principal loan.
ART. 1958. IN THE DETERMINATION OF THE INTEREST, IF IT IS PAYABLE IN KIND, ITS VALUE
SHALL BE APPRAISED AT THE CURRENT PRICE OF THE PRODUCTS OR GOODS AT THE TIME AND
PLACE OF PAYMENT.
Ø Ex. B borrowed Php10,000 from A payable in 1 year which shall be appraised at the current
market price at the time and place of payment. When the contract was entered into, the
price per cavan of palay was Php1,000. On due date of the loan, the price increased to
Php1,500.
o In this case, the value of the palay shall be appraised at Php1,500 per cavan.
ART. 1959. WITHOUT PREJUDICE TO THE PROVISIONS OF ARTICLE 2212, INTEREST DUE AND
UNPAID SHALL NOT EARN INTEREST. HOWEVER, THE CONTRACTING PARTIES MAY BY
STIPULATION CAPITALIZE THE INTEREST DUE AND UNPAID, WHICH AS ADDED PRINCIPAL,
SHALL EARN NEW INTEREST.
Ø General rule: Accrued interest shall not earn interest.
o Exceptions:
1. When judicially demanded; or
2. When there is an express stipulation that the interest due and unpaid
shall be added to the principal obligation and the resulting total amount
shall earn interest.
Ø Case Doctrine/s:
Cu Unjieng v. Mabalacat (1930) : Under the Civil Code, the parties may stipulate compound
interests. But in its absence, no interest as to the debt can be collected until it is judicially
claimed, with interest pegged at 6% per annum.
ART. 1960. IF THE BORROWER PAYS INTEREST WHEN THERE HAS BEEN NO STIPULATION
THEREFOR, THE PROVISIONS OF THIS CODE CONCERNING SOLUTIO INDEBITI, OR NATURAL
OBLIGATIONS, SHALL BE APPLIED, AS THE CASE MAY BE.
Ø If unstipulated interest is paid by mistake, the debtor may recover as this would be a case
of solutio indebiti or undue payment.
YAP, K. | ATENEO LAW

Ø Case Doctrine/s:
Velez v. Balzarra (1942) : No interest is due unless otherwise stipulated by the parties, and
undeclared payments must be applied to the principal.
o Usury cannot be presumed.
ART. 1961. USURIOUS CONTRACTS SHALL BE GOVERNED BY THE USURY LAW AND OTHER
SPECIAL LAWS , SO FAR AS THEY ARE NOT INCONSISTENT WITH THIS CODE.
Ø The interest legally chargeable now depends upon the agreement between the lender and
the borrower.
o When the agreed rate is found to be excessive, iniquitous, unconscionable or
exorbitant, the courts may declare the rate illegal and reduce the same as reason
and equity demand. (Ex. 5.5% per month or 66% per annum in the case of Medel
v. Cruz)
Ø Voluntariness does not make the stipulation on an unconscionable interest valid. Hence,
estoppel cannot apply.
11
THE USURY LAW
ACT NO. 2655, AS AMENDED | MAY 1, 1916
Ø Usury – contracting for or receiving something in excess of the amount allowed by law for
the loan or forbearance of money, goods or chattels.
o Elements:
1. Loan or forbearance;
2. Understanding between the parties that the loan shall or may be
returned;
3. Unlawful intent to take more than the legal rate; and
4. Agreeing to take for the use of the loan of something in excess of what
is allowed by law.
o Purely a statutory creation; in the absence of any statute, any rate of interest may
be charged.
o Applies to:
1. Loans – mutuum – a contract whereby one of the parties delivers
money or other consumable thing to another who acquires ownership
thereof with the understanding that the same amount of the same kind
and quality shall be paid.
2. Forbearances – a contractual obligation of the creditor to forbear
during a given period to require the debtor, payment of an existing debt
then due and payable.
Ø In the construction of usury statutes, it is the duty of the court to ascertain the intent and
purpose of the legislature.
o Act No. 2655 was enacted for the protection of the borrower.
o May be construed liberally, except provisions which are penal in their nature
which are to be strictly construed.
• Hence, in strict construction, any doubt shall be resolved in favor of
him who is sought to be penalized.
o General rule: Usury statutes will be construed to be prospective only.
• Exception: When there is a clear legislative intent to apply
retrospectively.
Ø Central Bank Circular No. 905 (C.B. No. 905) – removed the ceilings on interest rate on
loans or forbearances of money, goods, or credit.
o The Circular did not repeal nor amend the Usury Law, but simply suspended its
effectivity. However, it effected a virtual repeal of interest rate ceilings.
o C.B. No. 905 emanated from the power of the Monetary Board to prescribe the
maximum rate or rates of interest for the loan or renewal thereof or the
forbearance of any money, goods or credits and to change such rate or rates
whenever warranted by prevailing economic and social conditions.
Ø Stipulations authorizing iniquitous or unconscionable interests have been invariably struck
down for being contrary to morals, if not against the law.
SEC. 1. THE RATE OF INTEREST FOR THE LOAN OR FORBEARANCE OF ANY MONEY GOODS, OR
CREDITS AND THE RATE ALLOWED IN JUDGMENTS, IN THE ABSENCE OF EXPRESS CONTRACT AS
TO SUCH RATE OF INTEREST, SHALL BE SIX PER CENTUM PER ANNUM OR SUCH RATE AS MAY BE
PRESCRIBED BY THE MONETARY BOARD OF THE CENTRAL B ANK OF THE PHILIPPINES FOR
THAT PURPOSE IN ACCORDANCE WITH THE AUTHORITY HEREBY GRANTED.
YAP, K. | ATENEO LAW

SEC. 2. NO PERSON OR CORPORATION SHALL DIRECTLY OR INDIRECTLY TAKE OR RECEIVE IN
Ø Interest – the compensation allowed by law or fixed by the parties for the loan or MONEY OR OTHER PROPERTY, REAL OR PERSONAL , OR CHOSES IN ACTION, A HIGHER RATE OF
forbearance of money, goods, or credits. INTEREST OR GREATER SUM OR VALUE, INCLUDING COMMISSIONS , PREMIUMS, FINES AND
Ø Forbearance – a contractual obligation of a lender or creditor to refrain during a certain PENALTIES, FOR THE LOAN OR RENEWAL THEREOF OR FORBEARANCE OF MONEY, GOODS, OR
period of time from requiring the borrower or debtor to repay a loan or debt then due and CREDITS, WHERE SUCH LOAN OR RENEWAL OR FORBEARANCE IS SECURED IN WHOLE OR IN
payable. PART BY A MORTGAGE UPON REAL ESTATE THE TITLE TO WHICH IS DULY REGISTERED, OR BY
Ø Kinds of interest: ANY DOCUMENT CONVEYING SUCH REAL ESTATE OR AN INTEREST THEREIN, THAN TWELVE PER
1. Monetary interest – interest agreed upon by the parties for the use of money CENTUM PER ANNUM OR THE MAXIMUM RATE PRESCRIBED BY THE MONETARY BOARD AND IN
called. FORCE AT THE TIME THE LOAN OR RENEWAL THEREOF OR FORBEARANCE IS GRANTED:
2. Compensatory interest – interest imposed by law or by the courts as a penalty or PROVIDED, THAT THE RATE OF INTEREST UNDER THIS SECTION OR THE MAXIMUM RATE OF
indemnity for damages. INTEREST THAT MAY BE PRESCRIBED BY THE MONETARY BOARD UNDER THIS SECTION MAY
3. Simple interest LIKEWISE APPLY TO LOANS SECURED BY OTHER TYPES OF SECURITY AS MAY BE SPECIFIED BY
4. Compound interest – interest already accrued is considered as principal upon THE MONETARY BOARD.
which another interest is to be added.
5. Lawful interest –every interest stipulated is prima facie lawful.
6. Unlawful (usurious) interest – if the court would consider it unconscionable. Ø Interest rates under the Usury Law:
o Legal rate – 6% per annum.
SEC. 1-A. THE MONETARY BOARD IS HEREBY AUTHORIZED TO PRESCRIBE THE MAXIMUM o Maximum rates:
RATE OR RATES OF INTEREST FOR THE LOAN OR RENEWAL THEREOF OR THE FORBEARANCE OF
§ 12% per annum – when loan is secured in whole or in part by a
ANY MONEY, GOODS OR CREDITS, AND TO CHANGE SUCH RATE OR RATES WHENEVER
mortgage upon real estate with a Torrens title; or any agreement
WARRANTED BY PREVAILING ECONOMIC AND SOCIAL CONDITIONS.
conveying such real estate (also registered) or any interest therein.
§ 14% per annum – if the loan is not secured as above-stated.
IN THE EXERCISE OF THE AUTHORITY HEREIN GRANTED, THE MONETARY BOARD MAY § That prescribed by the Monetary Board – allows more flexible interest
PRESCRIBE HIGHER MAXIMUM RATES FOR LOANS OF LOW PRIORITY, SUCH AS CONSUMER
rate ceilings.
LOANS OR RENEWALS THEREOF AS WELL AS SUCH LOANS MADE BY PAWNSHOPS FINANCE
Ø BSP Circular No. 799, series of 2013 – in the absence of express contract as to such rate of
COMPANIES AND OTHER SIMILAR CREDIT INSTITUTIONS ALTHOUGH THE RATES PRESCRIBED
interest, the rate shall be 6% per annum.
FOR THESE INSTITUTIONS NEED NOT NECESSARILY BE UNIFORM. THE MONETARY BOARD IS
ALSO AUTHORIZED TO PRESCRIBE DIFFERENT MAXIMUM RATE OR RATES FOR DIFFERENT TYPES SEC. 3. NO PERSON OR CORPORATION SHALL DIRECTLY OR INDIRECTLY DEMAND, TAKE,
OF BORROWINGS, INCLUDING DEPOSITS AND DEPOSIT SUBSTITUTES, OR LOANS OF FINANCIAL RECEIVE OR AGREE TO CHARGE IN MONEY OR OTHER PROPERTY, REAL OR PERSONAL, A
INTERMEDIARIES. HIGHER RATE OR GREATER SUM OR VALUE FOR THE LOAN OR FORBEARANCE OF MONEY ,
GOODS, OR CREDITS WHERE SUCH LOAN OR FORBEARANCE IS NOT SECURED AS PROVIDED IN
SECTION TWO HEREOF, THAN FOURTEEN PER CENTUM PER ANNUM OR THE MAXIMUM RATE OR
Ø This section authorizes the Monetary Board: RATES PRESCRIBED BY THE MONETARY BOARD AND IN FORCE AT THE TIME THE LOAN OR
1. To prescribe higher maximum rates of interest for loans of low priority than those FORBEARANCE IS GRANTED.
loans used for productive purposes; and
2. To prescribe different maximum rate or rates for different types of borrowings, Fig. 8
including deposits and deposit substitutes, or loans of financial intermediaries. Sec. 2 Sec. 3
Taking or receiving (not mere agreeing) of Mere demanding or agreeing to charge
usurious interest is the act penalized. excessive interest is also punishable.
Loan or forbearance is secured by a Not secured by such, or there may be no
registered real estate. security at all.
Maximum rate of interest allowed is 12% Maximum rate of interest allowed is 14%
per annum. per annum.
Commissions, premiums, fines, and
Not considered in the computation of
penalties are included in the computation of
interest.
interest.
It is only the creditor who is criminally liable.
12 YAP, K. | ATENEO LAW

Ø Interest rates as penalty:
o When a borrower has agreed to pay a rate of interest not forbidden by law, but
has stipulated that in the event defaults in payment, the obligation shall bear a
higher interest rate, the increased rate is generally regarded as a penalty and is
thus valid.
§ Such penalty does not include interest, hence both interest and penalty
may be demanded separately.
§ Such higher interest rate is valid because it is not imposed on the use
of the money, but as a penalty for non-performance of the contract.
o This is only applicable, in Sec. 3, because Sec. 2 takes penalties into
consideration in the computation of interest.
Ø Attorney’s fees to cover costs of collection is not considered interest because the purpose
is not to give the lender a larger compensation for the loan than the law allows, but to
safeguard the lender against future loss or damage by being compelled to retain counsel to
institute judicial proceedings for the collection of his credit.
o However, if the amount of attorney’s fees stipulated is excessive, the same is
subject to equitable reduction.
Ø To determine the existence of usury, it is necessary to prove that there was intent knowingly
to contract for or take usurious interest – the real intention of the parties must be ascertained
from the circumstances surrounding the transaction and from the language of the document
itself.
o Where consideration of loan is property or services of uncertain value, it is
usurious when the excess is so palpable as to show a corrupt intent to violate or
evade the Usury Law.
§ Except where the contract upon its face imports usury, as by an express
stipulation not more than the lawful rate.
o The form of contract is not conclusive.
§ Parol evidence is admissible to show that a written document though
legal in form was in fact a device to cover usury.
o Test: Whether the parties resorted to the transaction for the purpose of disguising
usury in violation of law.
Ø When the Usury Law is not applicable:
1. Rental in contracts of lease where the relation between the contractors is that of
landlord and tenant and not that of lender and borrower.
§ Except where the lease provided for the imposition of an additional
usurious rate upon unpaid rent in the form of liquidated damages –
mere cover for the payment of usurious interest.
2. Bona fide sales – because a person has a right to sell his property at such price
and at such terms as to the time and mode of payment as he may see fit.
3. Bona fide pacto de retro sale – because if the parties act in good faith, such a
transaction is not within the purview of the Usury Law.
4. Time-price differential – increase in price of thing sold as a result of a sale on
credit, over its cash sales price.
§ Except where a stipulation in a contract of sale made on a cash basis
and for a cash price whereby the vendor forbears to require the cash
payment agreed upon in consideration of the vendee’s promise to pay
at a future day a sum greater than such agreed cash value with lawful
interest, such is usurious.
13
5. When the principal amount is not absolutely payable:
a. When the lender incurs risk of losing in whole or in part the principal
sum lent; or
b. When the payment of the amount is contingent upon conditions beyond
the control of the parties. (Ex. Loan on bottomry and Loan on
respondentia).
• Loan on bottomry – a contract in the nature of a mortgage by
which the owner of a ship borrows money for the use of the
ship which is pledged as security, it being stipulated that if
the ship be lost, the lender shall also lose his money.
o Payable only if the ship given as security for the
loan completes in safety the contemplated voyage.
• Loan on respondentia – when the loan is constituted on the
cargo.
o Taken on security of the cargo payable upon the
safe arrival of the cargo at its destination.
SEC. 4. NO PAWNBROKER OR PAWNBROKER’S AGENT SHALL DIRECTLY OR INDIRECTLY
STIPULATE, CHARGE, DEMAND, TAKE OR RECEIVE ANY HIGHER RATE OR GREATER SUM OR
VALUE FOR ANY LOAN OR FORBEARANCE THAN TWO AND ONE -HALF PER CENTUM PER MONTH
WHEN THE SUM LENT IS LESS THAN ONE HUNDRED PESOS; TWO PER CENTUM PER MONTH WHEN
THE SUM LENT IS ONE HUNDRED PESOS OR MORE, BUT NOT EXCEEDING FIVE HUNDRED PESOS;
AND FOURTEEN PER CENTUM PER ANNUM WHEN IT IS MORE THAN THE AMOUNT LAST
MENTIONED; OR THE MAXIMUM RATE OR RATES PRESCRIBED BY THE M ONETARY BOARD AND
IN FORCE AT THE TIME THE LOAN OR FORBEARANCE IS GRANTED. A PAWNBROKER OR
PAWNBROKER’S AGENT SHALL BE CONSIDERED SUCH, FOR THE BENEFITS OF THIS A CT, ONLY
IF HE BE DULY LICENSED AND HAS AN ESTABLISHMENT OPEN TO THE PUBLIC.
IT SHALL BE UNLAWFUL FOR A PAWNBROKER OR PAWNBROKER’S AGENT TO DIVIDE THE PAWN
OFFERED BY A PERSON INTO TWO OR MORE FRACTIONS IN ORDER TO COLLECT GREATER
INTEREST THAN THE PERMITTED BY THIS SECTION.
IT SHALL ALSO BE UNLAWFUL FOR A PAWNBROKER OR PAWNBROKER’S AGENT TO REQUIRE
THE PAWNER TO PAY AN ADDITIONAL CHARGE AS INSURANCE PREMIUM FOR THE SAFEKEEPING
AND CONSERVATION OF THE ARTICLE PAWNED .
Ø Interest rates for pawnshops:
o 2 ½ % per month – when the sum lent is not more than Php2,000.
o 18% per annum – when the sum lent is more than Php2,000.
o In addition to interest charges, pawnshops may impose a maximum service
charge of Php5, but in no case is to exceed 1% of the principal loan.
Ø Pawnbrokers are permitted to charge relatively high interest rates for otherwise they will
not make profits considering that loans applied for are usually very small and they have to
maintain offices, keep books, pay taxes, etc.
Ø Pawnbrokers are not allowed to divide the pawned object into several fractions in order to
collect grater interest than that permitted nor to require additional charge as insurance
premium for safekeeping of the pawned object.
YAP, K. | ATENEO LAW

SEC. 4-A. THE MONETARY BOARD MAY ELIMINATE, EXEMPT FROM, OR SUSPEND THE
EFFECTIVITY OF, INTEREST RATE CEILINGS ON CERTAIN TYPES OF LOANS OR RENEWALS
THEREOF OR FORBEARANCES OF MONEY , GOODS , OR CREDIT, WHENEVER WARRANTED BY
PREVAILING ECONOMIC AND SOCIAL CONDITIONS.
SEC. 4-B. IN THE EXERCISE OF ITS AUTHORITY TO FIX THE MAXIMUM RATE OR RATES OF
INTEREST UNDER THIS ACT , THE MONETARY BOARD SHALL BE GUIDED BY THE FOLLOWING:
1. THE EXISTING ECONOMIC CONDITIONS IN THE COUNTRY AND THE GENERAL REQUIREMENTS
OF THE NATIONAL ECONOMY;
2. THE SUPPLY OF AND DEMAND FOR CREDIT;
3. THE RATE OF INCREASE IN THE PRICE LEVELS; AND
4. SUCH OTHER RELEVANT CRITERIA AS THE MONETARY BOARD MAY ADOPT.
SEC. 5. IN COMPUTING THE INTEREST ON ANY OBLIGATION, PROMISSORY NOTE OR OTHER
INSTRUMENT OR CONTRACT , COMPOUND INTEREST SHALL NOT BE RECKONED, EXCEPT BY
AGREEMENT: PROVIDED, THAT WHENEVER COMPOUND INTEREST IS AGREED UPON, THE
EFFECTIVE RATE OF INTEREST CHARGED BY THE CREDITOR SHALL NOT EXCEED THE
EQUIVALENT OF THE MAXIMUM RATE PRESCRIBED BY THE MONETARY BOARD, OR, IN
DEFAULT THEREOF, WHENEVER THE DEBT IS JUDICIALLY CLAIMED, IN WHICH LAST CASE IT
SHALL DRAW SIX PER CENTUM PER ANNUM INTEREST OR SUCH RATE AS MAY BE PRESCRIBED
BY THE MONETARY BOARD . NO PERSON OR CORPORATION SHALL REQUIRE INTEREST TO BE
PAID IN ADVANCE FOR A PERIOD OF MORE THAN ONE YEAR: PROVIDED, HOWEVER, THAT
WHENEVER INTEREST IS PAID IN ADVANCE, THE EFFECTIVE RATE OF INTEREST CHARGED BY
THE CREDITOR SHALL NOT EXCEED THE EQUIVALENT OF THE MAXIMUM RATE PRESCRIBED BY
THE MONETARY BOARD.
Ø Compound interest is allowed:
1. When there is an express written stipulation on interest rate; and
2. Upon judicial demand.
Ø The compounding of interest may be annually, semi-annually, or monthly depending on
the agreement.
Ø Compound interest should not be taken into consideration in determining whether the
stipulated interest exceeds the limits prescribed by the Usury Law because the compound
interest is not considered interest upon the principal/original amount, but on a new
principal.
o Except when a contact stipulates for the payment of the maximum rate of interest
on the principal sum, and of compound interest accruing monthly upon such sum,
such is usurious.
Ø Sec. 5 of the Usury Law and Art. 2212 of the Civil Code contemplate the presence of
stipulated or conventional interest which had accrued when demand was judicially made.
o Hence, both are inapplicable where no interest is stipulated in the contract.
Ø Rules when creditor charges interest in advance:
1. A person found guilty of usury is exempted under Sec. 5 from the obligation to
return the interest and commissions collected by him in advance when:
14
a. Said interest and commissions are not for a period of more than 1 year;
and
b. The rate of interest does not exceed the maximum limit fixed by law.
2. Interest may be taken in advance for more than 1 year when:
§ The effective rate of interest charged by the creditor shall not exceed
the equivalent of the maximum rate prescribed by the Monetary Board.
§ Test: Whether the amount taken or deducted as interest exceeds the
lawful maximum rate upon the money actually received and retained
by the borrower, being the difference between the face amount of the
amount and the amount so deducted.
SEC. 6. ANY PERSON OR CORPORATION WHO, FOR ANY SUCH LOAN OR RENEWAL THEREOF OR
FORBEARANCE, SHALL HAVE PAID OR DELIVERED A HIGHER RATE OR GREATER SUM OR VALUE
THAN IS HEREINBEFORE ALLOWED TO BE TAKEN OR RECEIVED, MAY RECOVER THE WHOLE
INTEREST, COMMISSIONS, PREMIUMS PENALTIES AND SURCHARGES PAID OR DELIVERED WITH
COSTS AND ATTORNEYS’ FEES IN SUCH SUM AS MAY BE ALLOWED BY THE COURT IN AN
ACTION AGAINST THE PERSON OR CORPORATION WHO TOOK OR RECEIVED THEM IF SUCH
ACTION IS BROUGHT WITHIN TWO YEARS AFTER SUCH PAYMENT OR DELIVERY: PROVIDED,
HOWEVER, THAT THE CREDITOR SHALL NOT BE OBLIGED TO RETURN THE INTEREST,
COMMISSIONS AND PREMIUMS FOR A PERIOD OF NOT MORE THAN ONE YEAR COLLECTED BY
HIM IN ADVANCE WHEN THE DEBTOR SHALL HAVE PAID THE OBLIGATION BEFORE IT IS DUE,
PROVIDED SUCH INTEREST, AND COMMISSIONS AND PREMIUMS DO NOT EXCEED THE RATES
FIXED IN THIS ACT.
Ø Did Art. 1413 of the Civil Code amend Sec. 6 of the Usury Law?
o Sec. 6 provides that a borrower who has paid or delivered usurious interest may
recover the entire interest he paid with costs and attorney’s fees.
o Art. 1413 of the Civil Code provides that interest paid in excess of the interest
allowed by the Usury Law may be recovered by the debtor, with interest thereon
from the date of payment.
o The only change effected by Art. 1413 is that it added that the excess interest
paid may be recovered “with interest thereon from the date of payment.”
Ø In pare delicto does not apply in cases of usurious interest because it is based on the theory
that the payment of the same has not been made voluntarily.
o The lender is regarded as the criminal and the borrower as the injured party.
Ø The right to institute civil actions to recover usurious interest paid prescribes in 2 years
after the payment or delivery of such usurious interest.
Ø Usurious interest not actually paid but simply added to the capital from time to time cannot
be regarded as “taken or received” by the lender.
Ø Sec. 6 gives the right to recover costs and attorney’s fees because the purpose of the Usury
Law is to encourage persons who have suffered from contracts of this character to come to
court and vindicate their rights and at the same time to serve as a wholesome deterrent to
the taking of usurious interest.
YAP, K. | ATENEO LAW

SEC. 7. ALL COVENANTS AND STIPULATIONS CONTAINED IN CONVEYANCES, MORTGAGES,
BONDS, BILLS, NOTES, AND OTHER CONTRACTS OR EVIDENCES OF DEBTS, AND ALL DEPOSITS
OF GOODS OR OTHER THINGS, WHEREUPON OR WHEREBY THERE SHALL BE STIPULATED,
CHARGED, DEMANDED, RESERVED, SECURED , TAKEN, OR RECEIVED, DIRECTLY OR
INDIRECTLY, A HIGHER RATE OR GREATER SUM OR VALUE FOR THE LOAN OR RENEWAL OR
FORBEARANCE OF MONEY, GOODS, OR CREDITS THAN IS HEREINBEFORE ALLOWED, SHALL BE
VOID: PROVIDED, HOWEVER, THAT NO MERELY CLERICAL ERROR IN THE COMPUTATION OF
INTEREST, MADE WITHOUT INTENT TO EVADE ANY OF THE PROVISIONS OF THIS ACT, SHALL
RENDER A CONTRACT VOID: P ROVIDED, FURTHER, THAT PARTIES TO A LOAN AGREEMENT, THE
PROCEEDS OF WHICH MAY BE AVAILED OF PARTIALLY OR FULLY AT SOME FUTURE TIME, MAY
STIPULATE THAT THE RATE OF INTEREST AGREED UPON AT THE TIME THE LOAN AGREEMENT IS
ENTERED INTO, WHICH RATE SHALL NOT EXCEED THE MAXIMUM ALLOWED BY LAW, SHALL
PREVAIL NOTWITHSTANDING SUBSEQUENT CHANGES IN THE MAXIMUM RATES THAT MAY BE
MADE BY THE MONETARY BOARD: AND PROVIDED, FINALLY, THAT NOTHING HEREIN
CONTAINED SHALL BE CONSTRUED TO PREVENT THE PURCHASE BY AN INNOCENT PURCHASER
OF A NEGOTIABLE MERCANTILE PAPER, USURIOUS OR OTHERWISE, FOR VALUABLE
CONSIDERATION BEFORE MATURITY, WHEN THERE HAS BEEN NO INTENTION ON THE PART OF
SAID PURCHASER TO EVADE THE PROVISIONS OF THIS A CT AND SAID PURCHASE WAS NOT A
PART OF THE ORIGINAL USURIOUS TRANSACTION. IN ANY CASE, HOWEVER, THE MAKER OF
SAID NOTE SHALL HAVE THE RIGHT TO RECOVER FROM SAID ORIGINAL HOLDER THE WHOLE
INTEREST PAID BY HIM THEREON AND, IN CASE OF LITIGATION, ALSO THE COSTS AND SUCH
ATTORNEY’S FEES AS MAY BE ALLOWED BY THE COURT.
Ø Usurious loans void only with respect to interest:
o Sec. 7 recognizes the validity of usurious negotiable instruments whenever
acquired in good faith by a third person so that the usurious contract which is
void is not absolutely void, but perfectly valid under certain circumstances.
o General rule: Sec. 8 makes void and of no effect whatever loans which are
payable in agricultural products, etc.
§ Exception: When the price of the products is fixed by referring to the
current price thereof at the time of the performance of the obligation.
o Sec. 10 provides that the lender violating the Usury Law should be compelled to
return to the borrower an amount equivalent only to what he may have received
as interest.
o “Void in the Usury Law” – does not intent complete nullity but merely a nullity
with respect to the agreed interest.
Ø Merely clerical error (mistake in computation) shall not render a contract void when made
without intent to evade any of the provisions of the Usury Law.
Ø Since the stipulation to pay usurious interest is an accessory provision in a divisible
contract, the contract of loan remains valid.
Ø The Usury Law, as it stands now, does not provide for the forfeiture of the capital in favor
of the debtor in usurious contracts.
Ø Compensatory interest is due to the general provision of law that in obligations to pay
money where the debtor incurs delay, he has to pay interest by way of damages. (Art. 1169
of the Civil Code)
15
SEC. 7-A. PARTIES TO AN AGREEMENT PERTAINING TO A LOAN OR FORBEARANCE OF MONEY,
GOODS OR CREDITS MAY STIPULATE THAT THE RATE OF INTEREST AGREED UPON MAY BE
INCREASED IN THE EVENT THAT THE APPLICABLE MAXIMUM RATE OF INTEREST IS INCREASED
BY LAW OR BY THE MONETARY BOARD; P ROVIDED, THAT SUCH STIPULATION SHALL BE VALID
ONLY IF THERE IS ALSO A STIPULATION IN THE AGREEMENT THAT THE RATE OF INTEREST
AGREED UPON SHALL BE REDUCED IN THE EVENT THAT THE APPLICABLE MAXIMUM RATE OF
INTEREST IS REDUCED BY LAW OR BY THE MONETARY BOARD; PROVIDED, FURTHER, THAT
THE ADJUSTMENT IN THE RATE OF INTEREST AGREED UPON SHALL TAKE EFFECT ON OR AFTER
THE EFFECTIVITY OF THE INCREASE OR DECREASE IN THE MAXIMUM RATE OR INTEREST.
Ø An escalation clause can be valid only if it also includes a de-escalation clause or a
stipulation that the rate of interest agreed upon shall be reduced in the event that the
maximum rate of interest is reduced by law or by the Monetary Board.
o The purpose is to prevent one-sidedness in favor of the lender which is
considered repugnant to the principle of mutuality of contracts.
Ø This, however, does not include a Central Bank Circular, because administrative rules and
regulations adopted pursuant to law have the force and effect of law but they do not fall
within the term “law.”
SEC. 8. ALL LOANS UNDER WHICH PAYMENT IS TO BE MADE IN AGRICULTURAL PRODUCTS OR
SEED OR IN ANY OTHER KIND OF COMMODITIES SHALL ALSO BE NULL AND VOID UNLESS THEY
PROVIDE THAT SUCH PRODUCTS OR SEED OR OTHER COMMODITIES SHALL BE APPRAISED AT
THE TIME WHEN THE OBLIGATION FALLS DUE AT THE CURRENT LOCAL MARKET PRICE:
PROVIDED, THAT UNLESS OTHERWISE STATED IN A DOCUMENT WRITTEN IN A LANGUAGE OR
DIALECT INTELLIGIBLE TO THE DEBTOR AND SUBSCRIBED IN THE PRESENCE OF NOT LESS THAN
TWO WITNESSES, ANY CONTRACT ADVANCING MONEY TO BE REPAID LATER IN AGRICULTURAL
PRODUCTS OR SEED OR ANY OTHER KIND OF COMMODITIES SHALL BE UNDERSTOOD TO BE A
LOAN, AND ANY PERSON OR CORPORATION HAVING PAID OTHERWISE SHALL BE ENTITLED IN
CASE ACTION IS BROUGHT WITHIN TWO YEARS AFTER SUCH PAYMENT OR DELIVERY TO
RECOVER ALL THE PRODUCTS OR SEED DELIVERED AS INTEREST, OR THE VALUE THEREOF,
TOGETHER WITH THE COSTS AND ATTORNEY ’S FEES IN SUCH SUM AS MAY BE ALLOWED BY THE
COURT. NOTHING CONTAINED IN THIS SECTION SHALL BE CONSTRUED TO PREVENT THE
LENDER FROM TAKING INTEREST FOR THE MONEY LENT, PROVIDED SUCH INTEREST BE NOT IN
EXCESS OF THE RATES HEREIN FIXED.
Ø The means of ascertaining whether the payment exceeds the rate allowed by law is to
reduce the medium of payment to its equivalent in pesos “at the time the obligation falls
due at the current local market price.”
o It is usurious when the value of the medium when so ascertained is more than the
lawful rate upon the debt upon which the interest is paid.
§ Except when the money equivalent of the goods delivered in payment
does not exceed lawful interest on the principal sum.
YAP, K. | ATENEO LAW

SEC. 9. THE PERSON OR CORPORATION SUED SHALL FILE ITS ANSWER IN WRITING UNDER OATH
TO ANY COMPLAINT BROUGHT OR FILED AGAINST SAID PERSON OR CORPORATION BEFORE A
COMPETENT COURT TO RECOVER THE MONEY OR OTHER PERSONAL OR REAL PROPERTY, SEEDS
OR AGRICULTURAL PRODUCTS, CHARGED OR RECEIVED IN VIOLATION OF THE PROVISIONS OF
THIS ACT. THE LACK OF TAKING AN OATH TO AN ANSWER TO A COMPLAINT WILL MEAN THE
ADMISSION OF THE FACTS CONTAINED IN THE LATTER.
SEC. 9-A. THE MONETARY BOARD SHALL PROMULGATE SUCH RULES AND REGULATIONS AS
MAY BE NECESSARY TO IMPLEMENT EFFECTIVELY THE PROVISIONS OF THIS ACT.
Ø If allegations of usury are not denied specifically and under oath, they are deemed admitted.
o But the only thing admitted is the allegation that the interest charged is usurious,
not that the contract entered into is a loan which is something that must be proved
independently of the admission.
o Subject to waiver.
o Purpose is because when the Usury Law was enacted, the evil sought to be
eradicated was so widespread that legislators felt justified in presuming that it
existed whenever its existence was alleged.
Ø General rule: Usury will not be presumed and the party who alleges or asserts that a
transaction is usurious has the burden of proving such assertion.
o Exception: Usurious intent will be presumed where the instrument or transaction
is usurious on its face, or where there was an intentional doing of what was
forbidden by the Act.
SEC. 10. WITHOUT PREJUDICE TO THE PROPER CIVIL ACTION VIOLATION OF THIS A CT AND THE
IMPLEMENTING RULES AND REGULATIONS PROMULGATED BY THE M ONETARY BOARD SHALL
BE SUBJECT TO CRIMINAL PROSECUTION AND THE GUILTY PERSON SHALL, UPON CONVICTION,
BE SENTENCED TO A FINE OF NOT LESS THAN FIFTY PESOS NOR MORE THAN FIVE HUNDRED
PESOS, OR TO IMPRISONMENT FOR NOT LESS THAN THIRTY DAYS NOR MORE THAN ONE YEAR,
OR BOTH , IN THE DISCRETION OF THE COURT, AND TO RETURN THE ENTIRE SUM RECEIVED AS
INTEREST FROM THE PARTY AGGRIEVED, AND IN THE CASE OF NON-PAYMENT, TO SUFFER
SUBSIDIARY IMPRISONMENT AT THE RATE OF ONE DAY FOR EVERY TWO PESOS: PROVIDED,
THAT IN CASE OF CORPORATIONS, ASSOCIATIONS, SOCIETIES, OR COMPANIES THE MANAGER,
ADMINISTRATOR OR GERENT OR THE PERSON WHO HAS CHARGE OF THE MANAGEMENT OR
ADMINISTRATION OF THE BUSINESS SHALL BE CRIMINALLY RESPONSIBLE FOR ANY VIOLATION
OF THIS ACT.
Ø The crime of usury prescribes 4 years from its commission.
o When the accused receives annual usurious interest every year for n years, the
period is to be counted from the date of the last payment of usurious interest.
Ø When usurious interest has been paid but the action to recover has already prescribed, such
interest cannot be credited against and deducted from the principal.
Ø In a series of usurious transactions, it cannot be said that the transactions are linked
together, the period of prescription must begin from the last transaction.
16
SEC. 11. ALL ACTS AND PARTS OF ACTS INCONSISTENT WITH THE PROVISIONS OF THIS A CT
ARE HEREBY REPEALED.
SEC. 12. THIS A CT SHALL TAKE EFFECT ON THE FIRST DAY OF MAY, NINETEEN HUNDRED AND
SIXTEEN.
Ø Case Doctrine/s:
Reformina v. Tomol (1985) : The “judgment” referred to in the CB Circular imposing a 12%
legal interest only includes judgments in litigations involving loans or forbearance of any
money, goods or credits. Any other kind of monetary judgment which has nothing to do with,
nor involving loans or forbearance of any money, goods or credits does not fall within the
coverage of the said law for it is not within the ambit of the authority granted to the Central
Bank.
First Metro Investment v. Este del Sol (2000) : Art. 1957. Contracts and stipulations, under
any cloak or device whatsoever, intended to circumvent the laws against usury shall be void.
David v. CA (1999) : Art. 2212 contemplates the presence of stipulated or conventional interest
which has accrued when demand was judicially made. In cases where no interest had been
stipulated by the parties, no accrued conventional interest could further earn interest upon
judicial demand.
Investors v. Autoworld (2000) : The law would never hesitate to strike down a usurious loan
purporting to be a contract in a purely legal form.
Mendoza v. CA (2001) : A party claiming promissory estoppel against another bears the burden
of establishing: (1) a promise reasonably expected to induce action or forbearance; (2) such
promise did in fact induce such action or forbearance; and, (3) the party suffered detriment as a
result.
o The unilateral determination and imposition of increased interest rates violates the
principle of mutuality of contracts. The interest rate is a vital component of a loan
contract because in can make or break a capital venture.
o A stipulation in the mortgage, extending its scope and effect to after-acquired property
is valid and binding where the after-acquired property is in renewal of, or in
submission for, goods on hand when the mortgage was executed, or is purchased with
the proceeds of the sale of such goods. Mortgage executed over immovables include
buildings, machinery and accessories installed at the time the mortgage was
constituted, and even after the constitution thereof.
Solangon v. Salazar (2001) : The Usury Law is now legally inexistent, and interest can now be
charged as lender and borrower may agree upon. However, it does not mean that lenders are
granted carte blanche authority to raise interest rates to levels which will either enslave their
borrowers or lead to a hemorrhaging of their assets. The CB Circular did not and cannot repeal
a law.
o The courts shall reduce equitably liquidated damages, whether intended as an
indemnity or a penalty if they are iniquitous or unconscionable.
YAP, K. | ATENEO LAW

o Interest rate of 6% per month or 72% per annum is iniquitous and unconscionable.
Spouses Pascual v. Ramos (2002) : With the suspension of the Usury Law and the removal of
interest ceiling, the parties are free to stipulate the interest to be imposed on loans. Absent any
evidence of fraud, undue influence, or any vice of consent exercised by the lender to the
borrower, the interest agreed upon is binding upon them. The Court is not in a position to impose
upon the parties contractual stipulations different from what they have agreed upon.
Eastern Shipping v. CA (1994) : 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:
1. When the obligation is breached, and it consists in the payment of a sum of money,
i.e., a loan or forbearance of money, the interest due should be that which may have
been stipulated in writing. Furthermore, the interest due shall itself earn legal interest
from the time it is judicially demanded. In the absence of stipulation, the rate of
interest shall be 12% per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of Article 1169 of the Civil
Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an
interest on the amount of damages awarded may be imposed at the discretion of the
court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand can be established
with reasonable certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made
17
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be
so reasonably established at the time the demand is made, the interest shall begin to
run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The
actual base for the computation of legal interest shall, in any case, be on the amount
finally adjudged.
3. 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 1 or
paragraph 2, 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 Assurance v. CA (2000) : Despite the case of Eastern Shipping v. CA being of “future
guidance,” it did not lay down new rules, it is merely a comprehensive summary of rules already
existing. Hence, its application in this case is not considered a retroactive application of the
decision therein.
RCBC v. Alfa RTW Manufacturing (2001) : A Letter of Credit-Trust Receipt transaction is
an obligation to pay a sum of money; and the liabilities should be computed following the
guidelines in Eastern Shipping Lines, Inc.
Nacar v. Gallery Frames (2013) : The rate of legal interest shall be 6% per annum from finality
until satisfaction. Judgments that have become final and executory prior to July 1, 2013 shall
not be disturbed and shall continue to be implemented applying the rate of interest therein.
YAP, K. | ATENEO LAW


RULES ON COMPUTATION OF INTEREST

Based on (1) Eastern Shipping v. CA; and (2) Nacar v. Gallery Frames

Fig. 9
Monetary Interest Compensatory Interest Compound Interest
Nature of obligation BREACHED
(MI) (CE) (CO)
Stipulated interest percentage
FROM EXECUTION
Legal interest (6% per annum) on accrued
Payment of sum of money (ie, loan or Legal interest (6% per annum) if no Legal interest (6% per annum)
interest.
forbearance of money) percentage stipulated. FROM FINALITY OF JUDGMENT
FROM JUDICIAL DEMAND
FROM JUDICIAL/EXTRAJUDICIAL
DEMAND

Rules on Computation
Where demand is established with reasonable
certainty.
Compensatory Interest (6% per annum – FROM JUDICIAL OR EXTRA-JUDICIAL
based on Art. 2209) on the amount of DEMAND
No loan or forbearance of money – damages awarded Where such cannot be reasonably established
at the time demand is made.
FROM DATE OF JUDGMENT OF RTC

Legal interest (6% per annum) FROM FINALITY OF JUDGMENT

- ARTICLE 2209. IF THE OBLIGATION CONSISTS IN THE PAYMENT OF A SUM OF MONEY, AND THE DEBTOR INCURS IN DELAY, THE INDEMNITY FOR DAMAGES, THERE BEING NO STIPULATION TO THE CONTRARY,
SHALL BE THE PAYMENT OF THE INTEREST AGREED UPON, AND IN THE ABSENCE OF STIPULATION, THE LEGAL INTEREST, WHICH IS SIX PER CENT PER ANNUM.
- NACAR V. GALLERY FRAMES – (12% per annum) was changed to (6% per annum) pursuant to BSP Circular No. 905.

18 YAP, K. | ATENEO LAW


TITLE XII Fig. 10
DEPOSIT Deposit Mutuum Commodatum

CHAPTER ONE: DEPOSIT IN GENERAL AND ITS DIFFERENT KINDS Principal Purpose Safekeeping Consumption Use
(1) Expiration of
ART. 1962. A DEPOSIT IS CONSTITUTED FROM THE MOMENT A PERSON RECEIVES A THING Expiration of the period; or
Return Will of the parties.
BELONGING TO ANOTHER, WITH THE OBLIGATION OF SAFELY KEEPING IT AND OF RETURNING period. (2) Accomplishment
THE SAME. IF THE SAFEKEEPING OF THE THING DELIVERED IS NOT THE PRINCIPAL PURPOSE OF of purpose.
THE CONTRACT , THERE IS NO DEPOSIT BUT SOME OTHER CONTRACT. Movable and
Movable immovable
Subject Matter Moveable/Corporeal
Ø Deposit – constituted from the moment a person receives a thing belonging to another, with (Consumable) (Generally non-
the obligation of safely keeping it and of returning the same. consumable)
o The safekeeping of the thing must be the principal purpose of the contract. Onerous or Essentially
Otherwise, it would be some other contract. (Ex. Lease, commodatum, agency) Consideration Onerous
gratuitous gratuitous
o It is a credit transaction because it is a contract of confidence – the depositor
places full faith and confidence in the depositary’s probity and zeal, he takes into Ø Case Doctrine/s:
account the personal qualities of the depositary.
Ø Characteristics of deposit: Calibo v. CA (2001) : In a contract of deposit, a person receives an object belonging to another
1. Real contract – because it is perfected by the delivery of the thing. with the obligation of safely keeping it and of returning the same. There is no deposit where the
2. Unilateral contract – gives rise to the principal obligation of the depositary to principal purpose for receiving the object is not safekeeping.
safely keep the thing and to return it.
o Becomes a bilateral and onerous contract when the depositor agrees to
pay remuneration to the depositary. ART. 1963. AN AGREEMENT TO CONSTITUTE A DEPOSIT IS BINDING, BUT THE DEPOSIT ITSELF
3. Nominate contract – because it has been given a specific name by the Civil Code. IS NOT PERFECTED UNTIL THE DELIVERY OF THE THING.
4. Principal contract – because its existence is not dependent on another contract.
5. Informal contract – because no particular form is required for the contract. Ø A contract of deposit is a real contract, thus perfected only upon delivery of the subject
6. Gratuitous contract – when the depositor does not pay remuneration for the matter to the depositary.
safekeeping. o A mere agreement to deposit is still binding and enforceable upon the parties.
o Becomes a bilateral and onerous contract when the depositor agrees to o A contract of future deposit is consensual.
pay remuneration to the depositary.
Ø Parties to the contract:
1. Depositor – the person who owns the thing. ART. 1964. A DEPOSIT MAY BE CONSTITUTED JUDICIALLY OR EXTRAJUDICIALLY.
o Need not be the owner of the thing deposited – because there is no
transfer of ownership in deposit. Ø A deposit may be created by:
2. Depositary – the person who takes the thing for safekeeping. 1. Virtue of a court order or by law; or
o General rule: Cannot use the thing deposited. 2. Will of the parties.
• Exceptions: Fig. 11
1. Express permission; or
Kinds of Deposit
2. Necessary for preservation.
Ø Extinguishment of deposit: Ø Takes place when an attachment or seizure of property in
(1) Judicial Deposit
1. Return of the thing by the depositary; litigation is ordered.
2. Loss or destruction of the thing deposited;
Ø When the delivery is made by
3. Death of either depositor or depositary;
(a) Voluntary Deposit the will of the depositor or by
o Applies only to gratuitous deposit.
(2) Extrajudicial Deposit two or more persons.
o If for compensation, transmissible, but either of the heirs can terminate.
4. Conversion of a deposit to another contract; or Ø Made in compliance with a
(b) Necessary Deposit
5. Depositary acquires the right to possess the thing deposited. legal obligation, or by calamity.

19 YAP, K. | ATENEO LAW


ART. 1965. A DEPOSIT IS A GRATUITOUS CONTRACT, EXCEPT WHEN THERE IS AN AGREEMENT
TO THE CONTRARY, OR UNLESS THE DEPOSITARY IS ENGAGED IN THE BUSINESS OF STORING
GOODS.
Fig. 12
Consideration of Deposit
General rule: A contract of deposit is essentially gratuitous.
Exceptions Notes
(1) Stipulation to the Ø The parties may establish any stipulation they may deem
contrary convenient, provided it is not contrary to law, morals, good
customs, public order or public policy.
(2) Depositary is Ø The depositary stores goods for compensation and not out
engaged in the business of pure generosity. (Ex. Warehouseman)
of storing goods
(3) Property saved from Ø In voluntary deposit, where property is saved from
destruction without destruction during a calamity by another person without the
knowledge of the owner knowledge of the owner, the latter is bound to pay the
former just compensation.
ART. 1966. ONLY MOVABLE THINGS MAY BE THE OBJECT OF A DEPOSIT.
Ø Objects of deposit:
o Extrajudicial deposit – movable or personal property.
§ Because the purpose of deposit is the safekeeping of a thing.
o Judicial deposit – movable as well as immovable property.
§ To protect the rights of parties to the suit.
Ø Only corporeal things are contemplated.
o Incorporeal things (ex. rights and actions) follow the person of the owner,
wherever he goes, and is not susceptible of custody in the tangible sense.
ART. 1967. AN EXTRAJUDICIAL DEPOSIT IS EITHER VOLUNTARY OR NECESSARY .
Ø Kinds of extrajudicial deposit:
1. Voluntary - when the delivery is made by the will of the depositor or by two or
more persons who themselves claim title to the thing deposited.
2. Necessary:
a. Made in compliance with a legal obligation;
b. Takes place on the occasion of any calamity; or
c. Effects deposited by travelers in hotels or inns.
20
CHAPTER TWO: VOLUNTARY DEPOSIT
SECTION ONE: GENERAL PROVISIONS
ART. 1968. A VOLUNTARY DEPOSIT IS THAT WHEREIN THE DELIVERY IS MADE BY THE WILL OF
THE DEPOSITOR. A DEPOSIT MAY ALSO BE MADE BY TWO OR MORE PERSONS EACH OF WHOM
BELIEVES HIMSELF ENTITLED TO THE THING DEPOSITED WITH A THIRD PERSON, WHO SHALL
DELIVER IT IN A PROPER CASE TO THE ONE TO WHOM IT BELONGS.
Ø Voluntary deposit – one wherein the delivery is made by the will of the depositor.
o As distinguished from necessary deposit where there is lack of free choice in the
depositor.
Ø Two or more persons claiming title to a thing may deposit the same with a third person.
o The third person assumes the obligation to deliver to the one to whom it belongs.
ART. 1969. A CONTRACT OF DEPOSIT MAY BE ENTERED INTO ORALLY OR IN WRITING.
Ø Generally, contracts are obligatory in whatever form they have been entered into, provided
all the essential requisites for their validity are present.
o Hence, there is no required form for a deposit.
Ø Since deposit is a real contract, delivery of the thing perfects the contract. Prior to delivery,
there may be an agreement to constitute a deposit, which is nevertheless binding upon the
parties.
ART. 1970. IF A PERSON HAVING CAPACITY TO CONTRACT ACCEPTS A DEPOSIT MADE BY ONE
WHO IS INCAPACITATED, THE FORMER SHALL BE SUBJECT TO ALL THE OBLIGATIONS OF A
DEPOSITARY, AND MAY BE COMPELLED TO RETURN THE THING BY THE GUARDIAN, OR
ADMINISTRATOR, OF THE PERSON WHO MADE THE DEPOSIT, OR BY THE LATTER HIMSELF IF HE
SHOULD ACQUIRE CAPACITY.
ART. 1971. IF THE DEPOSIT HAS BEEN MADE BY A CAPACITATED PERSON WITH ANOTHER WHO
IS NOT, THE DEPOSITOR SHALL ONLY HAVE AN ACTION TO RECOVER THE THING DEPOSITED
WHILE IT IS STILL IN THE POSSESSION OF THE DEPOSITARY, OR TO COMPEL THE LATTER TO PAY
HIM THE AMOUNT BY WHICH HE MAY HAVE ENRICHED OR BENEFITED HIMSELF WITH THE
THING OR ITS PRICE. HOWEVER, IF A THIRD PERSON WHO ACQUIRED THE THING ACTED IN BAD
FAITH, THE DEPOSITOR MAY BRING AN ACTION AGAINST HIM FOR ITS RECOVERY.
Ø Rules to remember:
1. If the depositary is capacitated, he is subject to all the obligations of a depositary
whether or not the depositor is capacitated.
o In case the depositor is incapacitated, the depositary may be compelled
to return the thing by:
1. Guardian; 3. Depositor himself, if already
2. Administrator; or capacitated
o Persons who are capable cannot allege the incapacity of those with
whom they contract with.
2. If the depositary incapacitated, and the depositor is capacitated –
o Depositor shall only have the following actions:
YAP, K. | ATENEO LAW

1. To recover the thing deposited while it is still in possession
of the depositary; or
2. To compel the depositary to pay him the amount by which
the depositary may be enriched or benefited with the thing
or its price.
3. If a third person has acquired the thing deposited in bad faith,
the depositor may bring an action against him for recovery.
SECTION TWO: OBLIGATIONS OF THE DEPOSITARY
Ø Rules on return of the thing deposited:
ART. 1972. THE DEPOSITARY IS OBLIGED TO KEEP THE THING SAFELY AND TO RETURN IT,
WHEN REQUIRED , TO THE DEPOSITOR, OR TO HIS HEIRS AND SUCCESSORS, OR TO THE PERSON
WHO MAY HAVE BEEN DESIGNATED IN THE CONTRACT . HIS RESPONSIBILITY, WITH REGARD TO
THE SAFEKEEPING AND THE LOSS OF THE THING, SHALL BE GOVERNED BY THE PROVISIONS OF
TITLE I OF THIS BOOK.
IF THE DEPOSIT IS GRATUITOUS, THIS FACT SHALL BE TAKEN INTO ACCOUNT IN DETERMINING
THE DEGREE OF CARE THAT THE DEPOSITARY MUST OBSERVE.
Ø Summary of obligations of the depositary:
1. To keep the thing;
a. To keep the thing safely;
b. Not to deposit the thing with a third person;
c. Not to change the way of the deposit;
d. To collect interest on certificates when they become due and preserve
the value of securities; and
e. Not to commingle grain and other articles of the same kind and quality.
2. Not to use the thing; and
3. To return the thing.
a. To return the thing with all its products, accessions and accessories;
and
b. To return the thing closed and sealed if delivered in such condition.
Ø The diligence required of the depositary is that agreed upon by the parties.
o Generally, the depositary must exercise over the thing deposited the same
diligence as he would exercise over his property.
§ Because of the essential requisite of the judicial relation which
involves the depositor’s confidence in the depositary’s good faith and
trustworthiness.
§ Because of the presumption that the depositor has taken into account
the diligence which the depositary is accustomed with respect to his
own property.
o In absence of agreement, the degree of diligence required is lower (diligence of
a good father of a family) if gratuitous; higher (extraordinary diligence) if for
compensation.
o The depositary cannot excuse himself from liability in the event of loss by
claiming that he exercised the same amount of care toward the thing deposited
as he would toward his own, if such care is less than that required by the
circumstances.
Ø Rules on safekeeping, loss and diligence:
1. If the loss or deterioration of the thing occurs through the depositary’s fault or
negligence, he is liable even if the thing was insured. (Art. 2207)
21
2. The loss of the thing while in his possession raises a presumption of fault on his
part. (Art. 1265)
3. If the contract does not state the diligence required, that which is expected of a
good father of a family is required. (Art. 1173)
4. The required degree of care is greater (extraordinary diligence) if the deposit is
for compensation than when it is gratuitous.
5. General rule: The depositary, when the deposit is gratuitous, is not obligated to
obtain insurance for the thing deposited.
o Exception: Stipulation to the contrary.
1. What – General rule: The depositary must return the thing received, together with
all its products, accessories and accessions.
o Exceptions:
1. If the depositary was not prohibited from comingling grains
and other articles of the same kind and quality – the
depositary must return an article of the same kind and
quality.
2. If the depositary by force majeure loses the thing and
receives money or another thing in its place – he must deliver
to the depositor the sum or other thing received.
3. If the depositary’s heir sells the thing sold in good faith (not
knowing the thing was merely deposited), he is only bound
to return the price he may have received.
4. If the thing deteriorates while in the custody of the
depositary, the depositary will return the thing to the
depositor in the deteriorated state.
o In the absence of fault on the part of the depositary,
the depositary cannot be held liable for the
deterioration suffered by the thing.
2. To whom – As a rule, the depositor must return the thing to the (1) depositor; or
(2) heirs and successors; or (3) person who may have been designated in the
contract.
o As to priority, if the assignee did not intervene at all in the contract,
but was just appointed to receive the deposit, the thing must be
delivered to the heir.
1. If the deposit was made for the benefit of the assignee, the
assignee acquires the right to require delivery of the thing
deposited.
2. If the clause was made for the benefit of the depositor, the
depositor can terminate the designation.
3. If the clause was made for the benefit of the party named, the
depositor cannot terminate the designation.
o If the depositor was incapacitated at the time of making the deposit, it
must be returned to (1) guardian; or (2) administrator; or (3) depositor
himself when he acquires capacity.
o Where there are two or more depositors:
1. If they are solidary or the thing is indivisible, the depositary
may deliver the thing to any one of the solidary depositors.
If any demand, judicial or extrajudicial, delivery should be
made to him.
2. If not solidary and the thing is divisible, each depositor can
only demand his respective share.
YAP, K. | ATENEO LAW

3. When – At any time it is demanded.
4. Where – At the place designated for its return.
o In absence of stipulation, at the place where the thing deposited might
be found, even if it is not the same place where it was originally
deposited, provided the transfer was accomplished without malice on
the part of the depositary.
Ø If the depository fails to return the thing, his liability will be governed by the general
provisions on obligations.
o In cases of mistake – applies to depositary’s heir who in good faith may have
sold the thing which he did not know was deposited.
§ The heir will not be liable for damages but shall be bound:
1. To return the price he may have received; or
2. To assign his right of action against the buyer in case the
price has not been paid to him.
o In cases of force majeure – if the depository loses the thing by force majeure,
and he does not receive money or another thing in its place, the depositary is not
bound to return the thing.
§ If the depositary receives money or another thing in place of the thing
deposited, the depositary must deliver the sum or other thing to the
depositor.
Ø Case Doctrine/s:
Bishop of Jaro v. Dela Peña (1913) : Although the Civil Code states that "a person obliged to
give something is also bound to preserve it with the diligence pertaining to a good father of a
family, it also provides that “no one shall be liable for events which could not be foreseen were
inevitable with the exception of the cases expressly mentioned in the law or those in which the
obligation so declares.
o Dissenting Opinion: Trustees are only bound to exercise the same care and solicitude
with regard to the trust property which they would exercise with regard to their own.
xxx They are not liable for a loss without their fault. But this exemption ceases when
they mix the trust- money with their won, whereby it loses its identity, and they
become mere debtors.
ART. 1973. UNLESS THERE IS A STIPULATION TO THE CONTRARY, THE DEPOSITARY CANNOT
DEPOSIT THE THING WITH A THIRD PERSON. IF DEPOSIT WITH A THIRD PERSON IS ALLOWED ,
THE DEPOSITARY IS LIABLE FOR THE LOSS IF HE DEPOSITED THE THING WITH A PERSON WHO IS
MANIFESTLY CARELESS OR UNFIT. THE DEPOSITARY IS RESPONSIBLE FOR THE NEGLIGENCE OF
HIS EMPLOYEES.
Ø General rule: The depositary is not allowed to deposit the thing with a third person.
o Exception: Stipulation to the contrary.
Ø Liability for loss in relation to third parties:
o The depositary is liable for loss if:
1. He transfers the deposit with a third person without authority, even
though there is no negligence on his part and the third person;
2. He deposits the thing with a third person who is manifestly careless or
unfit, although authorized; or
3. The thing is lost through negligence of his employees, whether the
latter are manifestly careless or not. (Art. 2180 – vicarious liability)
22
o The depositary is not liable when the thing is lost without negligence of the third
person with whom he was allowed to deposit the thing, provided such third
person is not manifestly careless or unfit.
Ø In urgent cases, the depositary may deposit the thing with a third person when necessary
for the preservation of the thing.
o After transferring, the depositary should inform the depositor of the transfer of
the deposit.
ART. 1974. THE DEPOSITARY MAY CHANGE THE WAY OF THE DEPOSIT IF UNDER THE
CIRCUMSTANCES HE MAY REASONABLY PRESUME THAT THE DEPOSITOR WOULD CONSENT TO
THE CHANGE IF HE KNEW OF THE FACTS OF THE SITUATION. HOWEVER, BEFORE THE
DEPOSITARY MAY MAKE SUCH CHANGE, HE SHALL NOTIFY THE DEPOSITOR THEREOF AND WAIT
FOR HIS DECISION, UNLESS DELAY WOULD CAUSE DANGER.
Ø If there are circumstances indicating that the depositor would consent to the change, the
depositary may change the way or manner of the deposit. (Ex. When the warehouse will
undergo renovation)
o General rule: The depositary should first notify the depositor and wait for his
decision.
§ Exception: When delay would cause danger.
ART. 1975. THE DEPOSITARY HOLDING CERTIFICATES, BONDS, SECURITIES OR INSTRUMENTS
WHICH EARN INTEREST SHALL BE BOUND TO COLLECT THE LATTER WHEN IT BECOMES DUE,
AND TO TAKE SUCH STEPS AS MAY BE NECESSARY IN ORDER THAT THE SECURITIES MAY
PRESERVE THEIR VALUE AND THE RIGHTS CORRESPONDING TO THEM ACCORDING TO LAW.
THE ABOVE PROVISION SHALL NOT APPLY TO CONTRACTS FOR THE RENT OF SAFETY DEPOSIT
BOXES.
Ø If the thing deposited should earn interest, the depositary is under obligation:
1. To collect the interest as it becomes due; and
2. To take such steps as may be necessary to preserve its value and the rights
corresponding to it.
Ø A contract for rent of safety deposit boxes is a special kind of deposit, not strictly governed
by the provisions herein.
o In safety deposit boxes, the box and the contents thereof are in the manual
possession of the lessor. However, neither the lessor nor the renter can be given
access to the contents of the box without the consent and cooperation of the other.
§ Where a safe-deposit company leases a safety deposit box and the
lessee takes possession of the box or safe and places therein his
securities or other valuables – a bailor-bailee relationship is created
between the parties.
• The safety deposit box can be accessed only by the use of a
key retained by the lessee does not alter the foregoing rule.
§ As possession must be either n the depositor or in the company, it
should be considered as in the company since the company is, by
nature of the contract, given absolute control of access to the property,
and the depositor cannot gain access thereto without the consent and
active participation of the company.
YAP, K. | ATENEO LAW

Ø Case Doctrine/s: Ø If the thing deposited is non-consumable and the depositary has permission to use the thing,
it acquires the character of a commodatum. However, it may still be a deposit if safekeeping
CA Agro v. CA (1993) : The contract for the rent of the safety deposit box is not an ordinary is still the principal purpose of the contract.
contract of lease as defined in Article 1643 of the Civil Code. However, we do not fully Ø If the thing deposited is money or a consumable thing, the permission to use it will
subscribe to its view that the same is a contract of deposit that is to be strictly governed by the characterize the contract to a simple loan or mutuum. However, it may still be a deposit if
provisions in the Civil Code on deposit; the contract in the case at bar is a special kind of deposit. safekeeping is still the principal purpose of the contract. It would be called an irregular
o Any stipulation exempting the depositary from any liability arising from the loss of deposit. (Ex. Bank deposits)
the thing deposited on account of fraud, negligence or delay would be void for being
contrary to law and public policy – because it is governed by Title I, Book IV of the Fig. 13
Civil Code. Irregular Deposit Loan (Mutuum)
Consumable thing deposited may be Lender is bound by the provisions of the
ART. 1976. UNLESS THERE IS A STIPULATION TO THE CONTRARY, THE DEPOSITARY MAY demanded at will by the irregular depositor contract and cannot seek restitution until
COMMINGLE GRAIN OR OTHER ARTICLES OF THE SAME KIND AND QUALITY, IN WHICH CASE
for whose benefit the deposit has been the time for payment, as provided in the
THE VARIOUS DEPOSITORS SHALL OWN OR HAVE A PROPORTIONATE INTEREST IN THE MASS.
constituted. contract.
The essential cause for the transaction is the
Ø General rule: The depositary is permitted to commingle grain or other articles of the same The only benefit is that which accrues to
necessity of the borrower. A loan with
kind and quality. the depositor.
interest is for the benefit of both parties.
o Exception: Stipulation to the contrary.
The depositor has preference over other
Common creditors enjoy no preference in
creditors with respect to the thing
ART. 1977. THE DEPOSITARY CANNOT MAKE USE OF THE THING DEPOSITED WITHOUT THE the distribution of the debtor’s property.
deposited.
EXPRESS PERMISSION OF THE DEPOSITOR.

OTHERWISE, HE SHALL BE LIABLE FOR DAMAGES. Ø Case Doctrine/s:

HOWEVER, WHEN THE PRESERVATION OF THE THING DEPOSITED REQUIRES ITS USE, IT MUST BE Gavieres v. Tavera (1901) : The obligation of the depositary to pay interest suffices to cause
USED BUT ONLY FOR THAT PURPOSE.
the obligation to be considered a loan.

Ø Deposit is for safekeeping of the subject matter, not for its use.
o General rule: The unauthorized use by the depositary would make him liable for
damages.
§ Exception: When such use is necessary for its preservation, but in such
case should be limited for that purpose only. (Ex. Turning on the car’s
engine from time to time to maintain good running condition)
Ø Case Doctrine/s:
Javellana v. Lim (1908) : The nomenclature of the instrument is not binding upon the Courts.
The nature of the transaction, supplemented by the parties’ subsequent acts determine the kind
of contract the instrument purports to be.
Baron v. David (1927) : Under article 1768 of the Civil Code, when the depository has
permission to make use of the thing deposited, the contract loses the character of mere deposit
and becomes a loan or a commodatum; and of course by appropriating the thing, the bailee
becomes responsible for its value.
U.S. v. Igpuara (1913) : Failure to claim at once or delay for some time in demanding restitution
of the things deposited does not imply permission to use the thing deposited as would convert
into a loan.
o Art. 1978 CC: When the depositary has permission to use the thing deposited, the
contract loses the concept of a deposit and becomes a loan or commodatum, except
where safekeeping is still the principal purpose of the contract. The permission shall
not be presumed, and its existence must be proved.

ART. 1978. WHEN THE DEPOSITARY HAS PERMISSION TO USE THE THING DEPOSITED, THE ART. 1979. THE DEPOSITARY IS LIABLE FOR THE LOSS OF THE THING THROUGH A FORTUITOUS
CONTRACT LOSES THE CONCEPT OF A DEPOSIT AND BECOMES A LOAN OR COMMODATUM, EVENT:
EXCEPT WHERE SAFEKEEPING IS STILL THE PRINCIPAL PURPOSE OF THE CONTRACT .
(1) IF IT IS SO STIPULATED;
THE PERMISSION SHALL NOT BE PRESUMED, AND ITS EXISTENCE MUST BE PROVED . (2) IF HE USES THE THING WITHOUT THE DEPOSITOR'S PERMISSION ;
(3) IF HE DELAYS ITS RETURN;
(4) IF HE ALLOWS OTHERS TO USE IT, EVEN THOUGH HE HIMSELF MAY HAVE BEEN
Ø General rule: In deposit, the permission to use is not presumed. AUTHORIZED TO USE THE SAME.
o Exception: When such use is necessary for the preservation of the thing
deposited.
o The burden to prove such permission is on the depositary.
23 YAP, K. | ATENEO LAW

Ø Res perit domino – the thing is lost as to the owner – General rule: The owner of the thing
deposited generally suffers the risk of loss through a fortuitous event.
o Exceptions:
1. Stipulation to the contrary;
2. Depositary uses the thing without permission;
3. Depositary delays its return;
4. Depositor allows others to use it, even though he himself may have
been authorized to use the same.
Ø Case Doctrine/s:
Palacio v. Sudario (1907) : When cattle taken for pasturage are claimed to have perished, the
burden of explaining the loss rests upon the person pasturing them.
ART. 1980. FIXED, SAVINGS, AND CURRENT DEPOSITS OF MONEY IN BANKS AND SIMILAR
INSTITUTIONS SHALL BE GOVERNED BY THE PROVISIONS CONCERNING SIMPLE LOAN.
Ø Bank deposits are really loans to a bank because the bank can use the same for its ordinary
transactions and for the banking business in which it is engaged.
o Such deposits are governed by the provisions on mutuum, and the rules on the
imposition of legal interest.
o The relation between a depositor and a bank is that of debtor-creditor – the
depositor (creditor) lends the bank (debtor) money and the bank agrees to pay
the depositor on demand.
Ø A bank’s failure to honor a deposit is failure to pay its obligation as a debtor, not a breach
of trust arising from a depositary’s failure to return the subject matter of deposit.
Ø Payment by a bank of the amount of depositor’s check is not a loan to the latter by the
former which may be satisfied by a subsequent deposit.
o It is a payment by the bank as debtor to the depositor as creditor.
Ø The banking business is impressed with public interest, hence it must exercise
extraordinary diligence in its duty to protect its many clients and depositors.
Ø Case Doctrine/s:
Gullas v. PNB (1935) : A bank has a right of set off of the deposits in its hands for the payment
of any indebtedness to it on the part of a depositor. However, notice to the depositor is an
indispensable requirement, in order for the latter to protect his finances and interests.
Serrano v. Central Bank (1980) : All kinds of bank deposits are to be treated as loans and are
covered by the law on loans because the bank can use the same. Hence, no crime estafa may be
committed when the bank fails to return the deposits because there is no breach of trust or
confidence placed in the bank. The relationship between the depositor and the bank is only a
debtor-creditor relationship.
24
ART. 1981. WHEN THE THING DEPOSITED IS DELIVERED CLOSED AND SEALED, THE
DEPOSITARY MUST RETURN IT IN THE SAME CONDITION, AND HE SHALL BE LIABLE FOR
DAMAGES SHOULD THE SEAL OR LOCK BE BROKEN THROUGH HIS FAULT.
FAULT ON THE PART OF THE DEPOSITARY IS PRESUMED, UNLESS THERE IS PROOF TO THE
CONTRARY .
AS REGARDS THE VALUE OF THE THING DEPOSITED, THE STATEMENT OF THE DEPOSITOR
SHALL BE ACCEPTED, WHEN THE FORCIBLE OPENING IS IMPUTABLE TO THE DEPOSITARY,
SHOULD THERE BE NO PROOF TO THE CONTRARY. HOWEVER, THE COURTS MAY PASS UPON THE
CREDIBILITY OF THE DEPOSITOR WITH RESPECT TO THE VALUE CLAIMED BY HIM.
WHEN THE SEAL OR LOCK IS BROKEN, WITH OR WITHOUT THE DEPOSITARY'S FAULT, HE SHALL
KEEP THE SECRET OF THE DEPOSIT.
ART. 1982. WHEN IT BECOMES NECESSARY TO OPEN A LOCKED BOX OR RECEPTACLE, THE
DEPOSITARY IS PRESUMED AUTHORIZED TO DO SO, IF THE KEY HAS BEEN DELIVERED TO HIM;
OR WHEN THE INSTRUCTIONS OF THE DEPOSITOR AS REGARDS THE DEPOSIT CANNOT BE
EXECUTED WITHOUT OPENING THE BOX OR RECEPTACLE.
Ø In cases where the thing deposited is sealed or locked, the depositary has the obligation to:
1. Return the thing deposited still closed and sealed;
2. General rule: Pay for damages should the seal or lock be broken through his fault
(presumed unless otherwise proven); and
o Exception: When there is (1) presumed authority; or (2) necessity.
3. Keep the secret of the deposit when the seal or lock is broken.
o Even if later the depositary finds that the thing deposited is illegal, the
depositary should still keep its “secret” to himself. (No exact
rule/jurisprudence on this)
ART. 1983. THE THING DEPOSITED SHALL BE RETURNED WITH ALL ITS PRODUCTS,
ACCESSORIES AND ACCESSIONS .
SHOULD THE DEPOSIT CONSIST OF MONEY, THE PROVISIONS RELATIVE TO AGENTS IN ARTICLE
1896 SHALL BE APPLIED TO THE DEPOSITARY.
Ø The depositary must return the thing deposited with all its products, accessions and
accessories – a consequence of ownership (although the depositor may or may not be the
owner of the thing).
Ø General rule: If the thing deposited is money, the depositary has no right to make use
thereof, hence he is not liable to pay interest.
o Exception: If the depositary delays or uses the money without permission, he
shall be liable for interest as indemnity.
YAP, K. | ATENEO LAW

ART. 1984. THE DEPOSITARY CANNOT DEMAND THAT THE DEPOSITOR PROVE HIS OWNERSHIP
OF THE THING DEPOSITED.
NEVERTHELESS, SHOULD HE DISCOVER THAT THE THING HAS BEEN STOLEN AND WHO ITS TRUE
OWNER IS, HE MUST ADVISE THE LATTER OF THE DEPOSIT.
IF THE OWNER, IN SPITE OF SUCH INFORMATION, DOES NOT CLAIM IT WITHIN THE PERIOD OF
ONE MONTH, THE DEPOSITARY SHALL BE RELIEVED OF ALL RESPONSIBILITY BY RETURNING
THE THING DEPOSITED TO THE DEPOSITOR.
IF THE DEPOSITARY HAS REASONABLE GROUNDS TO BELIEVE THAT THE THING HAS NOT BEEN
LAWFULLY ACQUIRED BY THE DEPOSITOR, THE FORMER MAY RETURN THE SAME.
Ø The depositary who receives the thing in deposit cannot require that the depositor prove
his ownership over the thing.
o Because ownership is not essential in deposit. To require such would open the
door to fraud and bad faith, for the depository, on the pretense of requiring proof
of ownership, may be able to retain the thing.
Ø Rules when a third person appears to be the owner of the thing deposited:
1. The depositary must advise the true owner, of the deposit.
o Requisites:
1. The thing deposited is stolen; and
2. Depositary knows who its true owner is.
2. If the owner does not claim it within 30 days, the depositary shall be relieved of
all responsibility by returning the thing deposited to the depositor.
o If the true owner does not recover within 30 days, and the thing is
returned to the depositor, the true owner may still recover it through
other legal processes.
o If the depositor demands the return of the thing before the 30-day
period for the true owner to claim ownership, the depositor must still
return the thing to the depositor. Otherwise, the depositary would be
liable for conversion.
3. If the depositary has reasonable ground to believe that the thing has not been
lawfully acquired by the depositor, the depositary may return the same.
ART. 1985. WHEN THERE ARE TWO OR MORE DEPOSITORS, IF THEY ARE NOT SOLIDARY, AND
THE THING ADMITS OF DIVISION, EACH ONE CANNOT DEMAND MORE THAN HIS SHARE .
WHEN THERE IS SOLIDARITY OR THE THING DOES NOT ADMIT OF DIVISION, THE PROVISIONS OF
ARTICLES 1212 AND 1214 SHALL GOVERN. HOWEVER, IF THERE IS A STIPULATION THAT THE
THING SHOULD BE RETURNED TO ONE OF THE DEPOSITORS , THE DEPOSITARY SHALL RETURN IT
ONLY TO THE PERSON DESIGNATED.
Ø Rules to remember:
1. If the thing deposited is divisible and there are two or more depositors – each one
can demand only his share proportionate thereto.
2. If the obligation is solidary, or if the thing is not divisible, the rules on solidarity
among creditors shall apply:
a. Each one of the solidary depositors may do whatever may be useful to
the others, but not anything prejudicial to the latter; and
25
b. General rule: Depositary may return the thing to any one of the solidary
depositors.
• Exceptions:
1. When one has made a judicial or extrajudicial
demand for its return, it shall be returned to such
solidary depositor.
2. Stipulation that the thing should be returned to one
of the depositors.
ART. 1986. IF THE DEPOSITOR SHOULD LOSE HIS CAPACITY TO CONTRACT AFTER HAVING
MADE THE DEPOSIT, THE THING CANNOT BE RETURNED EXCEPT TO THE PERSONS WHO MAY
HAVE THE ADMINISTRATION OF HIS PROPERTY AND RIGHTS.
Ø Rules to remember:
1. Depositary should return the thing deposited to the (1) depositor; (2) his heirs
and successors; or (3) person who may have been designated in the contract.
2. If the depositor was incapacitated at the time of making the deposit – the thing
must be returned to (1) guardian; or (2) administrator; or (3) depositor when he
acquires capacity.
3. Even if the depositor had capacity at the time of making the deposit, but
subsequently loses his capacity – the thing must be returned to his legal
representative.
ART. 1987. IF AT THE TIME THE DEPOSIT WAS MADE A PLACE WAS DESIGNATED FOR THE
RETURN OF THE THING, THE DEPOSITARY MUST TAKE THE THING DEPOSITED TO SUCH PLACE ;
BUT THE EXPENSES FOR TRANSPORTATION SHALL BE BORNE BY THE DEPOSITOR.
IF NO PLACE HAS BEEN DESIGNATED FOR THE RETURN, IT SHALL BE MADE WHERE THE THING
DEPOSITED MAY BE, EVEN IF IT SHOULD NOT BE THE SAME PLACE WHERE THE DEPOSIT WAS
MADE, PROVIDED THAT THERE WAS NO MALICE ON THE PART OF THE DEPOSITARY.
Ø Rules to remember:
1. The thing must be returned at the place agreed upon by the parties;
o Expenses for transportation shall be borne by the depositor because the
deposit is constituted for his benefit.
2. In absence of stipulation, at the place where the thing deposited might be, even
though different from the place where the original deposit was made, provided
the transfer was accomplished without malice on the part of the depositary.
ART. 1988. THE THING DEPOSITED MUST BE RETURNED TO THE DEPOSITOR UPON DEMAND,
EVEN THOUGH A SPECIFIED PERIOD OR TIME FOR SUCH RETURN MAY HAVE BEEN FIXED.
THIS PROVISION SHALL NOT APPLY WHEN THE THING IS JUDICIALLY ATTACHED WHILE IN THE
DEPOSITARY'S POSSESSION, OR SHOULD HE HAVE BEEN NOTIFIED OF THE OPPOSITION OF A
THIRD PERSON TO THE RETURN OR THE REMOVAL OF THE THING DEPOSITED. IN THESE CASES,
THE DEPOSITARY MUST IMMEDIATELY INFORM THE DEPOSITOR OF THE ATTACHMENT OR
OPPOSITION.
YAP, K. | ATENEO LAW

Ø Rules to remember:
1. General rule: The depositor can demand the return of the thing deposited at will,
even when a period has been stipulated.
o Exceptions:
1. The depositor cannot demand its return at an inopportune
time; or
2. When the depositary, with the consent of the depositor,
placed the thing with an establishment for greater security,
and such establishment is closed to the public.
o It is sufficient that the depositary returns the thing in the most
immediate time possible.
2. If the deposit is for compensation – the depositary is entitled to the compensation
corresponding to the entire period.
3. The depositary may retain the thing until full payment of what may be due him
by reason of the deposit.
Ø Case Doctrine/s:
Aboitiz v. Oquiñena (1919) : When according to the document evidencing deposit, there is no
fixed time for withdrawal, the deposit can be withdrawn at any time.
ART. 1989. UNLESS THE DEPOSIT IS FOR A VALUABLE CONSIDERATION, THE DEPOSITARY WHO
MAY HAVE JUSTIFIABLE REASONS FOR NOT KEEPING THE THING DEPOSITED MAY, EVEN
BEFORE THE TIME DESIGNATED, RETURN IT TO THE DEPOSITOR; AND IF THE LATTER SHOULD
REFUSE TO RECEIVE IT, THE DEPOSITARY MAY SECURE ITS CONSIGNATION FROM THE COURT .
Ø Rules to remember:
1. The depositary may return the thing regardless of the period, when:
a. Deposit is gratuitous; and for
b. Justifiable reasons. (Ex. Going abroad)
o Depends on the facts and circumstances of the case.
2. If the deposit is for 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.
Ø If the depositor refuses to receive the thing – the depositary may deposit the thing at the
disposal of judicial authority (consignment).
ART. 1990. IF THE DEPOSITARY BY FORCE MAJEURE OR GOVERNMENT ORDER LOSES THE
THING AND RECEIVES MONEY OR ANOTHER THING IN ITS PLACE , HE SHALL DELIVER THE SUM
OR OTHER THING TO THE DEPOSITOR.
Ø General rule: The depositary is liable for loss of the thing (fault is presumed).
o Exceptions:
1. Force majeure; or
2. Government order.
o If in the above situations, the depositary receives money or another thing as a
replacement, he has the obligation to deliver the replacement to the depositor.
26
ART. 1991. THE DEPOSITARY'S 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.
Ø When the depositary dies and the deposit is left with his heir who, in good faith (no
knowledge that it has been deposited), sells it – the heir is obliged to:
1. Return the price received; or
2. Assign the right to collect the same if it has not been paid or not the real value of
the thing.
Ø If the heir acts in bad faith – he is liable for damages.
o The sale or appropriation of the thing constitutes estafa.
Ø If a third party buyer bought it in good faith, title would pass to the third party buyer. If he
was in bad faith, the depositor may bring an action against him for recovery.
SECTION THREE: OBLIGATIONS OF THE DEPOSITOR
ART. 1992. IF THE DEPOSIT IS GRATUITOUS, THE DEPOSITOR IS OBLIGED TO REIMBURSE THE
DEPOSITARY FOR THE EXPENSES HE MAY HAVE INCURRED FOR THE PRESERVATION OF THE
THING DEPOSITED.
Ø Applies only when the deposit is gratuitous.
Ø As the law makes no distinction, the right to reimbursement covers all expenses for
preservation, whether ordinary or extraordinary.
o Useful expenses (without consent) and expenses for pure luxury/pleasure are not
covered.
Ø General rule: If the deposit is for valuable consideration – expenses of preservation are
borne by the depositary because they are deemed included in the compensation.
o Exception: Stipulation to the contrary.
ART. 1993. THE DEPOSITOR SHALL REIMBURSE THE DEPOSITARY FOR ANY LOSS ARISING FROM
THE CHARACTER OF THE THING DEPOSITED, UNLESS AT THE TIME OF THE CONSTITUTION OF
THE DEPOSIT THE FORMER WAS NOT AWARE OF , OR WAS NOT EXPECTED TO KNOW THE
DANGEROUS CHARACTER OF THE THING, OR UNLESS HE NOTIFIED THE DEPOSITARY OF THE
SAME, OR THE LATTER WAS AWARE OF IT WITHOUT ADVICE FROM THE DEPOSITOR.
Ø General rule: The depositary must be reimbursed for loss suffered by him because of the
character of the thing deposited. (Ex. Flammable things)
o Exceptions:
1. At the time of the constitution of the deposit, the depositor was not
aware of;
2. At the time of the constitution of the deposit, the depositor was not
expected to know the dangerous character of the thing;
3. Depositor notified the depositary of the same; or
4. Depositary was aware of it without advice from the depositor.
ART. 1994. THE DEPOSITARY MAY RETAIN THE THING IN PLEDGE UNTIL THE FULL PAYMENT
OF WHAT MAY BE DUE HIM BY REASON OF THE DEPOSIT.
YAP, K. | ATENEO LAW
Ø The thing retained serves as security of what may be due to the depositary by reason of the
deposit.
o “What may be due him” includes expenses incurred under Art. 1992.
ART. 1995. A DEPOSIT IS EXTINGUISHED:
(1) UPON THE LOSS OR DESTRUCTION OF THE THING DEPOSITED;
(2) IN CASE OF A GRATUITOUS DEPOSIT, UPON THE DEATH OF EITHER THE DEPOSITOR OR THE
DEPOSITARY.
Ø Extinguishment of deposit:
1. Return of the thing by the depositary;
2. Loss or destruction of the thing deposited;
3. Death of either depositor or depositary;
o Applies only to gratuitous deposit.
o If for compensation, transmissible because not personal in nature, but
the heirs of either party have a right to terminate the deposit even
before expiration of the term.
4. Conversion of a deposit to another contract; or
5. Depositary acquires the right to possess the thing deposited.
Ø Compensation as a mode of extinguishment does not apply to a deposit – because one of
the debts arises from a deposit or from the obligations of a depositary or of a bailee in
commodatum.
CHAPTER THREE: NECESSARY DEPOSIT
ART. 1996. A DEPOSIT IS NECESSARY:
(1) WHEN IT IS MADE IN COMPLIANCE WITH A LEGAL OBLIGATION;
(2) WHEN IT TAKES PLACE ON THE OCCASION OF ANY CALAMITY, SUCH AS FIRE, STORM ,
FLOOD, PILLAGE, SHIPWRECK, OR OTHER SIMILAR EVENTS.
ART. 1997. THE DEPOSIT REFERRED TO IN NO. 1 OF THE PRECEDING ARTICLE SHALL BE
GOVERNED BY THE PROVISIONS OF THE LAW ESTABLISHING IT, AND IN CASE OF ITS
DEFICIENCY, BY THE RULES ON VOLUNTARY DEPOSIT.
THE DEPOSIT MENTIONED IN NO. 2 OF THE PRECEDING ARTICLE SHALL BE REGULATED BY THE
PROVISIONS CONCERNING VOLUNTARY DEPOSIT AND BY ARTICLE 2168.
Ø Kinds of necessary deposit:
1. Legal deposit;
o Ex. Judicial deposit of a thing in litigation, deposit with bank of public
bonds or instruments, etc.
2. Miserable deposit – possession of movable property passes from one person to
another by accident and which the law imposes on the recipient the obligations
of a bailee;
3. Made by travelers in hotels or inns; and
4. Made by passengers with common carriers.

ART. 1998. THE DEPOSIT OF EFFECTS MADE BY TRAVELERS IN HOTELS OR INNS SHALL ALSO
BE REGARDED AS NECESSARY . THE KEEPERS OF HOTELS OR INNS SHALL BE RESPONSIBLE FOR
THEM AS DEPOSITARIES, PROVIDED THAT NOTICE WAS GIVEN TO THEM, OR TO THEIR
EMPLOYEES, OF THE EFFECTS BROUGHT BY THE GUESTS AND THAT, ON THE PART OF THE
LATTER, THEY TAKE THE PRECAUTIONS WHICH SAID HOTEL-KEEPERS OR THEIR SUBSTITUTES
ADVISED RELATIVE TO THE CARE AND VIGILANCE OF THEIR EFFECTS.

ART. 1999. THE HOTEL-KEEPER IS LIABLE FOR THE VEHICLES, ANIMALS AND ARTICLES WHICH
HAVE BEEN INTRODUCED OR PLACED IN THE ANNEXES OF THE HOTEL.

Ø Keepers of hotels and inns are liable for the loss of the effects of their guests.
o Elements:
1. Previously informed about the effects brought by the guests; and
2. Guests have taken precautions prescribed regarding their safekeeping.
Ø Applies to transients who enter hotels, inns, and the like – contemplates temporary stay.
Hence, does not apply to dormitories, lease and lodging houses.
Ø Case Doctrine/s:

Delos Santos v. Tan Khey (1962) : It is necessary in order to hold an innkeeper liable that the
effects of the guest be actually delivered to him or his employees; it is enough that they are
within the inn.
o Art 1998: The deposit of effects made by travelers in hotels or inns shall also be
regarded as necessary. The keepers of hotels/inns shall be responsible for them as
27 YAP, K. | ATENEO LAW
depositaries, provided that notice was given to them, or to their employees, of effects
brought by the guests and that, on the part of the latter; they take precautions which
said hotel-keepers advised relative to the care and vigilance of their effects
YHT Realty Corp. v. CA (2005) : A depositary is not responsible for the loss of goods by theft,
unless his actionable (concurrent) negligence contributes to the loss.
o Stipulations exempting hotel managers/owners from liability for loss of belongings
deposited in their establishments is null and void for being contrary to law, public
order or public policy.
ART. 2003. THE HOTEL-KEEPER CANNOT FREE HIMSELF FROM RESPONSIBILITY BY POSTING
NOTICES TO THE EFFECT THAT HE IS NOT LIABLE FOR THE ARTICLES BROUGHT BY THE GUEST.
ANY STIPULATION BETWEEN THE HOTEL- KEEPER AND THE GUEST WHEREBY THE
RESPONSIBILITY OF THE FORMER AS SET FORTH IN ARTICLES 1998 TO 2001 IS SUPPRESSED OR
DIMINISHED SHALL BE VOID.
Ø Dispensing or limiting liability of hotel-keepers and common carriers by stipulations or by
posting of notices is deemed contrary to law, morals and public policy.

ART. 2000. THE RESPONSIBILITY REFERRED TO IN THE TWO PRECEDING ARTICLES SHALL ART. 2004. THE HOTEL-KEEPER HAS A RIGHT TO RETAIN THE THINGS BROUGHT INTO THE
INCLUDE THE LOSS OF, OR INJURY TO THE PERSONAL PROPERTY OF THE GUESTS CAUSED BY HOTEL BY THE GUEST, AS A SECURITY FOR CREDITS ON ACCOUNT OF LODGING, AND SUPPLIES
THE SERVANTS OR EMPLOYEES OF THE KEEPERS OF HOTELS OR INNS AS WELL AS STRANGERS; USUALLY FURNISHED TO HOTEL GUESTS.
BUT NOT THAT WHICH MAY PROCEED FROM ANY FORCE MAJEURE. THE FACT THAT
TRAVELLERS ARE CONSTRAINED TO RELY ON THE VIGILANCE OF THE KEEPER OF THE HOTELS
OR INNS SHALL BE CONSIDERED IN DETERMINING THE DEGREE OF CARE REQUIRED OF HIM.
Ø Hotel-keepers have the right to retain the thing deposited to compensate them for the
liabilities imposed upon them by law.

ART. 2001. THE ACT OF A THIEF OR ROBBER, WHO HAS ENTERED THE HOTEL IS NOT DEEMED
FORCE MAJEURE, UNLESS IT IS DONE WITH THE USE OF ARMS OR THROUGH AN IRRESISTIBLE
FORCE.

ART. 2002. THE HOTEL-KEEPER IS NOT LIABLE FOR COMPENSATION IF THE LOSS IS DUE TO THE
ACTS OF THE GUEST, HIS FAMILY, SERVANTS OR VISITORS, OR IF THE LOSS ARISES FROM THE
CHARACTER OF THE THINGS BROUGHT INTO THE HOTEL.

Ø Two-fold duties of hotels (because they are imbued with public interest):
1. Lodging for their guests; and
2. Security to the persons and belongings of their guests.

Fig. 14
Liability of Hotel-keeper
1. Loss or injury to personal property is caused by his servants
or employees, as well as by strangers, when notice has been
given and proper precautions taken; and
2. General rule: Loss is caused by the act of a thief or robber.
When liable
o Exception: When thief or robber uses arms and
irresistible force.
§ Exception to the exception:
Contributory negligence.
1. General rule: Force majeure;
o Exception: Contributory negligence.
2. Theft or robbery by a stranger with the use of arms and
When not liable irresistible force;
o Exception: Contributory negligence.
3. Loss arises from the character of the things brought into the
hotel.

28 YAP, K. | ATENEO LAW


CHAPTER FOUR: SEQUESTRATION OR JUDICIAL DEPOSIT TITLE XV
GUARANTY
ART. 2005. A JUDICIAL DEPOSIT OR SEQUESTRATION TAKES PLACE WHEN AN ATTACHMENT OR
SEIZURE OF PROPERTY IN LITIGATION IS ORDERED . CHAPTER ONE: NATURE AND EXTENT OF GUARANTY

ART. 2047. BY GUARANTY A PERSON, CALLED THE GUARANTOR, BINDS HIMSELF TO THE
ART. 2006. MOVABLE AS WELL AS IMMOVABLE PROPERTY MAY BE THE OBJECT OF CREDITOR TO FULFILL THE OBLIGATION OF THE PRINCIPAL DEBTOR IN CASE THE LATTER
SEQUESTRATION. SHOULD FAIL TO DO SO.

IF A PERSON BINDS HIMSELF SOLIDARILY WITH THE PRINCIPAL DEBTOR, THE PROVISIONS OF
ART. 2007. THE DEPOSITARY OF PROPERTY OR OBJECTS SEQUESTRATED CANNOT BE RELIEVED SECTION 4, CHAPTER 3, TITLE I OF THIS BOOK SHALL BE OBSERVED. IN SUCH CASE THE
OF HIS RESPONSIBILITY UNTIL THE CONTROVERSY WHICH GAVE RISE THERETO HAS COME TO CONTRACT IS CALLED A SURETYSHIP.
AN END, UNLESS THE COURT SO ORDERS.

Ø Guaranty – when the guarantor binds himself to the creditor to fulfill the obligation of the
ART. 2008. THE DEPOSITARY OF PROPERTY SEQUESTRATED IS BOUND TO COMPLY, WITH principal debtor in case the latter should fail to do so.
RESPECT TO THE SAME , WITH ALL THE OBLIGATIONS OF A GOOD FATHER OF A FAMILY. Ø Benefit of excussion – creditor must first exhaust all assets of the principal debtor.

Fig. 15
Ø Judicial deposit – sequestration – when an attachment or seizure of property in litigation is Classifications of Guaranty
ordered by a court.
o Judicial because it is auxiliary to a case pending in court. Ø Guaranty is the credit given by
o Purpose – to maintain the status quo during the pendency of the litigation or to the person who guarantees the
Personal
insure the right of the parties to the property in case of favorable judgment. fulfillment of the principal
Ø Custodia legis – when the thing is shown that it has been and is subject to the official obligation.
custody of a judicial or executive officer in pursuance of his execution of a legal writ. In the broad sense
Ø Guaranty is property. If
o Requisites: movable, pledge or chattel
1. Lawfully seized; Real
mortgage. If immovable, real
2. Taken by virtue of legal process and authority; and mortgage or antichresis.
3. Placed in the possession of a public officer empowered to hold it. (Ex.
Sheriff) Ø Constituted by agreement of
Conventional
Ø The depositary must exercise diligence of a good father of a family. the parties.
Ø Obligations of the depositary in a judicial deposit remain until: Ø Imposed by virtue of a
1. Litigation is ended; or Legal
As to origin provision of law.
2. Court orders.
Ø Required by a court to
Judicial guarantee the eventual right of
ART. 2009. AS TO MATTERS NOT PROVIDED FOR IN THIS CODE, JUDICIAL SEQUESTRATION one of the parties in a case.
SHALL BE GOVERNED BY THE RULES OF COURT.
Ø Guarantor does not receive
Gratuitous any price or remuneration for
Ø The law on judicial deposit is remedial in nature. Hence, the Rules of Court are applicable. As to consideration acting as such.
Ø Guarantor receives valuable
Onerous
consideration for his guaranty.
Ø Constituted solely to guarantee
or secure performance by the
Single
debtor of the principal
As to person guaranteed obligation.
Ø Constituted to secure the
Double or sub-guaranty fulfillment by the guarantor of
a prior guaranty

29 YAP, K. | ATENEO LAW


Ø Guaranty is limited to the o Whenever applicable, the provisions on guaranty also apply to suretyship.
Definite/Limited principal obligation only, or to o Not presumed; cannot extend to more than what is stipulated.
a specific portion thereof. o The creditor may sue the principal debtor and the surety separately or together.
o General rule: A demand or notice of default is not required to fix the surety’s
As to scope and extent Ø Guaranty includes not only the liability.
principal obligation but also its o Exception: Stipulation to the contrary.
Indefinite/Unlimited
accessories, including judicial o MAIN DIFFERENCE from guaranty: Guaranty insures the solvency of the
costs. principal debtor, while surety insures the debt itself.
o The relationship here is between the creditor and the surety, not the surety and
Ø Characteristics of guaranty: the principal debtor.
1. Consensual contract – because it is perfected by mere consent, subject to the o Parties can agree that the surety will be liable for debts incurred after execution
Statute of Frauds. of the suretyship agreement.
2. Generally unilateral – gives rise only to a duty on the part of the guarantor in Ø A guarantor may bind himself solidarily with the principal, and this would not necessarily
relation to the creditor, and may be entered into even without intervention of the characterize the contract as one of suretyship.
principal debtor. o Action may be brought against him outright, but he retains his character as a
o Bilateral if compensation is paid to the guarantor. guarantor and all the rights inherent in a guarantor by reason of payment to him.
3. Nominate contract – because it has been given a specific name by the Civil Code. Ø The term “guarantee” or “guarantor” is not conclusive of the contract.
4. Accessory contract – because it is dependent for its existence upon the principal o In case of conflict between printed and written words, the written words prevail.
obligation guaranteed by it.
o Subsidiary and conditional because it takes effect only when the Fig. 16
principal debtor fails in his obligation. Guaranty Surety
5. Formal contract – because it is governed by the Statute of Frauds and must be in
writing. Insures the solvency of the principal debtor. Insures the debt of the principal debtor.
6. Generally gratuitous – mere liberality. Depends upon an independent agreement to
o Onerous when guarantor is to be compensated. Assumes liability as a regular party to the
pay the obligation if the primary debtor
Ø Elements of guaranty: undertaking.
fails to do so.
1. Consent;
2. Object – obligation guaranteed by it; and Original promisor and debtor from the
Collateral undertaking.
3. Consideration – liberality or compensation. beginning.
Ø Sources of guarantor’s obligations: Secondarily/subsidiarily liable. Directly, primarily, and absolutely liable.
1. Arise from the contract entered into by the creditor and the guarantor.
2. Arise from a contract entered into by the debtor and the guarantor. Not bound to take notice of the non- Presumed to know every default of his
3. Arise from a stipulation in favor of a third party – where the creditor may demand performance of his principal. principal.
its fulfillment provided the creditor communicated his acceptance to the Not discharged either by mere indulgence
Often discharged by mere indulgence of the
guarantor before its revocation. of the creditor of the principal or by want of
creditor of the principal, and is usually not
Ø Scope of guaranty: notice of the default of the principal, no
1. Principal obligations; liable unless notified of the default of the
matter how much he may be injured
2. Accessory obligations; principal.
thereby.
3. Obligations that arise as a matter of law; and
Exonerated when, by some act of the
4. Obligation to pay judicial costs. Not exonerated because he is primarily
creditor, he cannot be subrogated to the
Ø Rules on payment: liable as well.
rights and remedies of the creditor.
1. General rule: In the manner provided in the principal contract.
o Exception: Stipulation to the contrary.
2. Place of payment – in the absence of place of payment, must be made at the
domicile of the debtor. Ø Case Doctrine/s:
3. Time of payment – as soon as the creditor unsuccessfully exhausted debtor.
Ø Suretyship – where the principal has undertaken an obligation and the surety is also under Machetti v. Hospicio de San Jose (1922) : A surety insures the debt of the principal debtor; a
a direct and primary obligation or other duty to the obligee, who is entitled to but one guarantor insures the solvency of the principal debtor.
performance, and as between the two who are bound, the one rather than the other should
perform. Lirag Textile v. SSS (1987) : Article 1956: No interest shall be due unless it has been expressly
o Involves two relationships: obligee-obligor and obligor-surety, obligor is the stipulated in writing.
principal. o Dividends stipulated by the parties served evidently as interests.

30 YAP, K. | ATENEO LAW


ART. 2048. A GUARANTY IS GRATUITOUS, UNLESS THERE IS A STIPULATION TO THE
CONTRARY .
Ø General rule: Guaranty is gratuitous.
o Exception: Stipulation to the contrary.
Ø The consideration of the contract of guaranty is the same consideration which supports the
obligation as to the principal debtor.
o It is never necessary that the guarantor should receive any part or benefit, if such
there be, accruing to the principal debtor. (Ex. Loan goes to the principal debtor
only, none to the guarantor)
§ Cannot be used as a defense upon collection.
Ø Case Doctrine/s:
Severino v. Severino (1931) : Art. 2048. A guaranty is gratuitous, unless there is a stipulation
to the contrary.
o It is never necessary that a guarantor or surety should receive any part of the benefit,
if such there be, accruing to his principal. A guarantor or surety is bound by the same
consideration that makes the contract effective between the principal parties thereto.
Willex v. CA (1996) : The consideration necessary to support a surety obligation need not pass
directly to the surety, a consideration moving to the principal alone being sufficient. For a
guarantor or surety is bound by the same consideration that makes the contract effective between
the principal parties thereto. It is never necessary that a guarantor or surety should receive any
part or benefit, if such there be, accruing to his principal.
ART. 2049. A MARRIED WOMAN MAY GUARANTEE AN OBLIGATION WITHOUT THE HUSBAND'S
CONSENT, BUT SHALL NOT THEREBY BIND THE CONJUGAL PARTNERSHIP, EXCEPT IN CASES
PROVIDED BY LAW.
Ø General rule: A married woman who acts as a guarantor ordinarily binds only her separate
property.
o Exception: She binds the community or conjugal property with her husband’s
consent, or when in cases provided by law. (Ex. When redounded to the benefit
of the family)
Ø There is no prohibition against a married woman acting as guarantor for her husband.
ART. 2050. IF A GUARANTY IS ENTERED INTO WITHOUT THE KNOWLEDGE OR CONSENT, OR
AGAINST THE WILL OF THE PRINCIPAL DEBTOR, THE PROVISIONS OF ARTICLES 1236 AND 1237
SHALL APPLY.
Ø The creditor has every right to take all possible measures to secure the payment of his
credit. Hence, it can be constituted without the knowledge and even against the will of the
principal debtor.
Ø Rights of third person who pays:
1. A person who pays without the knowledge or against the will of the debtor can
recover only insofar as the payment has been beneficial to the debtor.
o He cannot compel the creditor to subrogate him in his (creditor’s)
rights.
31
2. If he became a guarantor with the knowledge or consent of the debtor, he is
subrogated by virtue of the payment to all the rights which the creditor had
against the debtor.
Ø Case Doctrine/s:
De Guzman v. Santos (1939) : Provisions of Guaranty applied herein:
o Art. 1822 (Old Civil Code) – by guaranty one person binds himself to pay or perform
for a third person in case the latter should fail to do so.
o Art. 1838 (Old Civil Code) – any guarantor who pays for the debtor shall be
indemnified by the latter even should the guaranty have been undertaken without the
knowledge of the debtor.
o Art. 1158 (Old Civil Code) – payment may be made by any person, whether he has an
interest in the performance of the obligation or not, and whether the payment is known
and approved by the debtor or whether he is unaware of it. Any person who makes a
payment for the account of another may recover from the debtor the amount of the
payment, unless it was made against the express will of the latter. In the latter case he
can only recover from the debtor in so far as the payment has been beneficial to the
latter.
ART. 2051. A GUARANTY MAY BE CONVENTIONAL, LEGAL OR JUDICIAL, GRATUITOUS, OR BY
ONEROUS TITLE.
IT MAY ALSO BE CONSTITUTED, NOT ONLY IN FAVOR OF THE PRINCIPAL DEBTOR, BUT ALSO IN
FAVOR OF THE OTHER GUARANTOR, WITH THE LATTER'S CONSENT, OR WITHOUT HIS
KNOWLEDGE, OR EVEN OVER HIS OBJECTION.
Ø Conventional guaranty – constituted by virtue of an agreement of the parties.
Ø Legal guaranty – imposed by law to secure the compliance of certain obligations.
Ø Judicial guaranty – constituted by decree of court.
Ø Double or sub-guaranty – constituted to guarantee the obligation of a guarantor.
ART. 2052. A GUARANTY CANNOT EXIST WITHOUT A VALID OBLIGATION.
NEVERTHELESS, A GUARANTY MAY BE CONSTITUTED TO GUARANTEE THE PERFORMANCE OF A
VOIDABLE OR AN UNENFORCEABLE CONTRACT. IT MAY ALSO GUARANTEE A NATURAL
OBLIGATION.
Ø Guaranty is an accessory contract. Hence, there must be a principal obligation.
Ø Guaranty may secure the performance of:
1. Voidable contract – inasmuch as such contract is binding, unless annulled by a
proper court;
2. Unenforceable contract;
3. Natural obligation – authorizes the retention of what has been delivered by reason
thereof; must be voluntary; or
4. Conditional obligation.
Ø General rule: For voidable and unenforceable contracts, the guarantor may set up against
the creditor all the defenses which pertain to the principal debtor and are inherent in the
debt.
o Exception: Those personal to the principal debtor.
YAP, K. | ATENEO LAW

Ø Case Doctrine/s:
Municipality of Gasan v. Marasigan (1956) : A suretyship is an accessory obligation; it needs
a valid and existing principal obligation to support it.
ART. 2053. A GUARANTY MAY ALSO 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.
Ø Continuing guaranty/suretyship – one which is not limited to a single transaction but which
contemplates future course of dealings, covering a series of transactions generally for an
indefinite time or until revoked.
o There can be no claim against the guarantor until the amount of the debt is
ascertained/fixed/liquidated and demandable.
Ø Case Doctrine/s:
Smith Bell v. PNB (1922) : A debt for the price of goods to be delivered at a futures time must
be considered liquidated within the meaning of Art. 1825 NCC for the purposes of maintaining
an action against a guarantor of such debt when the price of goods to be delivered is fixed by
the contract and the seller offers to deliver within the time stipulated and according to the terms
of the contract.
Wise & Co. v. Kelly (1918) : According to Art. 2053, a conditional obligation may also be
secured. However, in obligations subject to a suspensive condition, the guarantor is liable only
after the fulfillment of the condition.
Rizal Commercial Bank v. Arro (1982) : The surety agreement which was earlier signed by
Go. and Chua, is an accessory obligation, it being dependent upon a principal one which, in this
case is the loan obtained by Daicor as evidenced by a promissory note. What obviously induced
RCBC to grant the loan was the surety agreement whereby Go and Chua bound themselves
solidarily to guaranty the punctual payment of the loan at maturity. By terms that are
unequivocal, it can be clearly seen that the surety agreement was executed to guarantee future
debts which Daicor may incur with petitioner RCBC, as is legally allowable under the Civil
Code.
ART. 2054. A GUARANTOR MAY BIND HIMSELF FOR LESS, BUT NOT FOR MORE THAN THE
PRINCIPAL DEBTOR, BOTH AS REGARDS THE AMOUNT AND THE ONEROUS NATURE OF THE
CONDITIONS.
SHOULD HE HAVE BOUND HIMSELF FOR MORE, HIS OBLIGATIONS SHALL BE REDUCED TO THE
LIMITS OF THAT OF THE DEBTOR.
Ø Rules to remember:
1. The guarantor cannot bind himself for more than the principal debtor.
§ If he does, his liability shall be reduced to the limits of that of the
debtor.
2. The guarantor may bind himself for less than that of the principal.
Ø The amount specified in a surety bond as the surety’s obligation does not limit the extent
of the damages that may be recovered from the principal, the latter’s liability being
governed by the obligation he assumed under his contract.
32
ART. 2055. A GUARANTY IS NOT PRESUMED; IT MUST BE EXPRESS AND CANNOT EXTEND TO
MORE THAN WHAT IS STIPULATED THEREIN.
IF IT BE SIMPLE OR INDEFINITE, IT SHALL COMPROMISE NOT ONLY THE PRINCIPAL OBLIGATION,
BUT ALSO ALL ITS ACCESSORIES, INCLUDING THE JUDICIAL COSTS, PROVIDED WITH RESPECT
TO THE LATTER, THAT THE GUARANTOR SHALL ONLY BE LIABLE FOR THOSE COSTS INCURRED
AFTER HE HAS BEEN JUDICIALLY REQUIRED TO PAY .
Ø As a contract, guaranty requires the expression of consent on the part of the guarantor to
be bound; it cannot be presumed.
Ø Strictissimi juris rule – applies to accommodation surety – when in doubt, a guaranty has
to be strictly interpreted against the creditor and in favor of the guarantor and is not to be
extended beyond its terms or specified limits.
o Accommodated surety – acts without motive of pecuniary gain and hence, should
be protected against unjust pecuniary impoverishment by imposing on the
principal, duties akin to those of a fiduciary.
o Does not apply to compensated sureties – business associations organized for the
purpose of assuming classified risks in large numbers, for profit and on an
impersonal basis.
Ø Definite guaranty – the obligation of the guarantor under the terms of the contract is limited
in whole or in part to the principal debt, to the exclusion of accessories.
Ø Indefinite or simple guaranty – the principal obligation and its accessories, including
judicial costs are included, provided with respect to the latter, the guarantor shall only be
liable for costs incurred after he has been judicially required to pay.
Ø Case Doctrine/s:
SOCONY v. Cho Siong (1928) : •A contract of suretyship is to be strictly interpreted and is not
to be extended beyond its terms.
Plaridel v. Galang Machinery (1957) : Creditors suing on a suretyship bond may recover from
the surety as part of their damages, interest at the legal rate if the surety would thereby become
liable to pay more than the total amount stipulated in the bond.
Republic v. Pal-Fox Lumber (1972) : The liability of a guarantor or surety for legal interest on
the amount due does not violate the provisions of Art. 2055 NCC, the interest being considered
an accessory of the obligation.
NAMARCO v. Marquez (1969) : According to Art. 2055, if a guaranty be simple or indefinite,
it shall comprise not only the principal obligation, but also its accessories. There being no
stipulation of exclusion of interests, the surety is liable for the same. Compensated sureties are
not entitled to have their contracts interrupted strictissimi juris (strictest letter of the law) in their
favor.
Vizconde v. IAC (1987) : As the Solicitor General correctly puts it, the joint and several
undertaking assumed by Vizconde in a separate writing below the main body of the receipt,
Exhibit "A", merely guaranteed the civil obligation of Pagulayan to pay Perlas the value of the
ring in the event of her (Pagulayan's) failure to return said article. It cannot, in any sense, be
construed as assuming any criminal responsibility consequent upon the failure of Pagulayan to
return the ring or deliver its value.
YAP, K. | ATENEO LAW

ART. 2056. ONE WHO IS OBLIGED TO FURNISH A GUARANTOR SHALL PRESENT A PERSON WHO
POSSESSES INTEGRITY, CAPACITY TO BIND HIMSELF, AND SUFFICIENT PROPERTY TO ANSWER
FOR THE OBLIGATION WHICH HE GUARANTEES. THE GUARANTOR SHALL BE SUBJECT TO THE
JURISDICTION OF THE COURT OF THE PLACE WHERE THIS OBLIGATION IS TO BE COMPLIED
WITH.
ART. 2057. IF THE GUARANTOR SHOULD BE CONVICTED IN FIRST INSTANCE OF A CRIME
INVOLVING DISHONESTY OR SHOULD BECOME INSOLVENT, THE CREDITOR MAY DEMAND
ANOTHER WHO HAS ALL THE QUALIFICATIONS REQUIRED IN THE PRECEDING ARTICLE. THE
CASE IS EXCEPTED WHERE THE CREDITOR HAS REQUIRED AND STIPULATED THAT A SPECIFIED
PERSON SHOULD BE THE GUARANTOR.
Ø Qualifications guarantor:
1. Integrity;
2. Capacity to bind himself; and
3. Sufficient property to answer for the obligation which he guarantees.
Ø The qualifications need only be present at the time of perfection of the contract.
o When subsequently lost, the creditor may demand another guarantor with the
proper qualifications.
o For Art. 2057, conviction in the first instance of a crime involving dishonesty is
required. However, for insolvency, a judicial declaration is not necessary.
Ø Selection of guarantor:
1. Where the creditor has required and stipulated that a specified person should be
a guarantor – substitution may not be demanded because in such case the
selection is a condition of the agreement, to which the creditor is bound.
2. Where the guarantor is selected by the principal debtor – latter answers for the
integrity, capacity and solvency of the former.
3. Where the guarantor is personally designated by the creditor, responsibility
should fall upon the creditor.
Ø Case Doctrine/s:
Estate of Hemady v. Luzon Surety (1956) : The qualification of integrity in the guarantor or
surety is required to be present only at the time of the perfection of the contract of guaranty.
o Once the contract of guaranty has become perfected and binding, the supervening
dishonesty of the guarantor (that is to say, the disappearance of his integrity after he
has become bound) does not terminate the contract but merely entitles the creditor to
demand a replacement of the guarantor.
o The step remains optional in the creditor; it is his right, not his duty, he may waive it
if he chooses, and hold the guarantor to his bargain.
33
CHAPTER TWO: EFFECTS OF GUARANTY
SECTION ONE: EFFECTS OF GUARANTY BETWEEN THE GUARANTOR AND THE CREDITOR
ART. 2058. THE GUARANTOR CANNOT BE COMPELLED TO PAY THE CREDITOR UNLESS THE
LATTER HAS EXHAUSTED ALL THE PROPERTY OF THE DEBTOR, AND HAS RESORTED TO ALL THE
LEGAL REMEDIES AGAINST THE DEBTOR.
Ø The guarantor is only secondarily liable.
Ø Benefit of excussion – the creditor must first exhaust all the property of the debtor and all
legal remedies against the debtor before going after the guarantor.
o Nothing prevents the guarantor from paying the obligation once demand is made
on him. He may waive the benefit of excussion.
ART. 2059. THE EXCUSSION SHALL NOT TAKE PLACE:
(1) IF THE GUARANTOR HAS EXPRESSLY RENOUNCED IT;
(2) IF HE HAS BOUND HIMSELF SOLIDARILY WITH THE DEBTOR;
(3) IN CASE OF INSOLVENCY OF THE DEBTOR;
(4) WHEN HE HAS ABSCONDED, OR CANNOT BE SUED WITHIN THE PHILIPPINES UNLESS HE HAS
LEFT A MANAGER OR REPRESENTATIVE;
(5) IF IT MAY BE PRESUMED THAT AN EXECUTION ON THE PROPERTY OF THE PRINCIPAL
DEBTOR WOULD NOT RESULT IN THE SATISFACTION OF THE OBLIGATION.
Ø General rule: The guarantor enjoys the benefit of excussion:
o Exceptions:
1. Guarantor expressly renounced it;
2. Guarantor bound himself solidarily with the debtor;
3. In case of insolvency of the debtor;
4. When debtor has absconded, or cannot be sued within the Philippines
unless he left a manager or representative;
5. If it may be presumed that an execution on the property of the principal
debtor would not result in the satisfaction of the obligation;
6. If the guarantor fails to set up the benefit and point out available
properties of the debtor within Philippine territory, sufficient to cover
the amount;
7. If he is a judicial bondsman and sub-surety;
8. Where a pledge or mortgage has been given by him as a special
security; or
9. If guarantor fails to impose it as a defense before judgment is rendered
against him.
Ø Case Doctrine/s:
Imperial Insurance v. De Los Angeles (1982) : In accordance with Article 2059, par. 2 of the
Civil Code of the Philippines, excussion (previous exhaustion of the property of the debtor) shall
not take place "if he (the guarantor) has bound himself solidarily with the debtor.'' Section 17,
Rule 57 of the Rules of Court cannot be construed that an execution against the debtor be first
returned unsatisfied even if the bond were a solidary one, for a procedural rule may not amend
the substantive law expressed in the Civil Code, and further would nullify the express stipulation
of the parties that the surety's obligation should be solidary with that of the defendant.
YAP, K. | ATENEO LAW

ART. 2060. IN ORDER THAT THE GUARANTOR MAY MAKE USE OF THE BENEFIT OF EXCUSSION,
HE MUST SET IT UP AGAINST THE CREDITOR UPON THE LATTER'S DEMAND FOR PAYMENT FROM
HIM, AND POINT OUT TO THE CREDITOR AVAILABLE PROPERTY OF THE DEBTOR WITHIN
PHILIPPINE TERRITORY, SUFFICIENT TO COVER THE AMOUNT OF THE DEBT.
ART. 2061. THE GUARANTOR HAVING FULFILLED ALL THE CONDITIONS REQUIRED IN THE
PRECEDING ARTICLE, THE CREDITOR WHO IS NEGLIGENT IN EXHAUSTING THE PROPERTY
POINTED OUT SHALL SUFFER THE LOSS, TO THE EXTENT OF SAID PROPERTY, FOR THE
INSOLVENCY OF THE DEBTOR RESULTING FROM SUCH NEGLIGENCE.
Ø Demand on the guarantor must be made only after judgment on the debt for obviously the
exhaustion of the principal’s property cannot begin to take place before judgment has been
obtained.
o The guarantor may invoke the benefit of excussion if the creditor sues for
payment judicially or extrajudicially.
Ø Requisites for invoking benefit of excussion:
1. He must set it up upon creditor’s demand; and
2. Point out specific property of the debtor within Philippine territory, sufficient to
cover the amount of the debt.
o If after the debtor points out, but by negligence the creditor fails to
exhaust – he shall suffer the loss up to the extent of the value of the
property.
Ø Case Doctrine/s:
Luzon Steel v. Sia (1969) : Art. 2059 – excussion (previous exhaustion of the property of the
debtor) shall not take place "if he (the guarantor) has bound himself solidarily with the debtor.”
o Art. 2060 – In order that the guarantor may make use of the benefit of excussion, he
must set it up against the creditor upon the latter's demand for payment from him, and
point out to the creditor available property of the debtor within Philippine territory,
sufficient to cover the amount of the debt."
o Where under the rule and the bond the undertaking is to pay the judgment, the liability
of the surety or sureties attaches upon the rendition of the judgment, and the issue of
an execution and its return nulla bona is not, and should not be, a condition to the right
to resort to the bond.
o Take note of the difference between counter-bonds posted to obtain the lifting of a
writ of attachment and injunction counter-bonds.
Arroyo v. Jungsay (1916) : Before a guarantor may avail excussion, he must first point out the
properties of the principal which are sufficient for the satisfaction of the debt, and realizable.
Absent this, no excussion will be had.
ART. 2062. IN EVERY ACTION BY THE CREDITOR, WHICH MUST BE AGAINST THE PRINCIPAL
DEBTOR ALONE, EXCEPT IN THE CASES MENTIONED IN ARTICLE 2059, THE FORMER SHALL ASK
THE COURT TO NOTIFY THE GUARANTOR OF THE ACTION. THE GUARANTOR MAY APPEAR SO
THAT HE MAY, IF HE SO DESIRE, SET UP SUCH DEFENSES AS ARE GRANTED HIM BY LAW. THE
BENEFIT OF EXCUSSION MENTIONED IN ARTICLE 2058 SHALL ALWAYS BE UNIMPAIRED, EVEN
IF JUDGMENT SHOULD BE RENDERED AGAINST THE PRINCIPAL DEBTOR AND THE GUARANTOR
IN CASE OF APPEARANCE BY THE LATTER.
34
Ø General rule: Guarantor cannot be sued with his principal.
o Exception: When it would serve merely to delay the ultimate accounting of the
guarantor.
ART. 2063. A COMPROMISE BETWEEN THE CREDITOR AND THE PRINCIPAL DEBTOR BENEFITS
THE GUARANTOR BUT DOES NOT PREJUDICE HIM. THAT WHICH IS ENTERED INTO BETWEEN THE
GUARANTOR AND THE CREDITOR BENEFITS BUT DOES NOT PREJUDICE THE PRINCIPAL DEBTOR.
Ø Compromise – a contract whereby the parties, by making reciprocal concessions, avoid a
litigation or put an end to one already commenced.
o Cannot prejudice the guarantor of the debtor when he is not a party to such
compromise. However, he may be benefited provided he accepts before it is
revoked.
ART. 2064. THE GUARANTOR OF A GUARANTOR SHALL ENJOY THE BENEFIT OF EXCUSSION,
BOTH WITH RESPECT TO THE GUARANTOR AND TO THE PRINCIPAL DEBTOR.
Ø A sub-guarantor enjoys the benefit of excussion not only with respect to the principal
debtor, but also with respect to the guarantor.
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. THE
CREDITOR CANNOT CLAIM FROM THE GUARANTORS EXCEPT THE SHARES WHICH THEY ARE
RESPECTIVELY BOUND TO PAY, UNLESS SOLIDARITY HAS BEEN EXPRESSLY STIPULATED.
THE BENEFIT OF DIVISION AGAINST THE CO-GUARANTORS CEASES IN THE SAME CASES AND
FOR THE SAME REASONS AS THE BENEFIT OF EXCUSSION AGAINST THE PRINCIPAL DEBTOR.
Ø Requisites for benefit of division:
1. Several guarantors of only one debtor for the same debt;
2. Claimed in a timely manner; and
3. Solidarity has not been expressly stipulated.
Ø Afterwards, if one of them should turn out to be insolvent, his share has to be borne by the
others.
Ø Where a creditor claims the share of a guarantor from the others on the ground of
insolvency – the latter can set up against the creditor the existence f the property of the
supposed insolvent, possessing the same conditions as required by Art. 2060.
Ø Case Doctrine/s:
Cacho v. Valles (1932) : Guarantors, who have not made themselves solidarily liable with either
the principal or other sureties, are entitled to the right of division and should only be made liable
for their proportionate share of the debt absent any of the conditions provided for in Art. 1837
in relation to Art. 1831. In such instance, the mere insolvency of one of the guarantors does not
make the others responsible for the portion that should have been paid by the insolvent.
Mira Hermanos v. Manila Tobacconists : Article 2065 refers to several sureties of only one
debtor for the same debt. When two sureties do not guarantee the same debt, neither of the two
or more sureties can avail of the benefit of division provided in this provision.
YAP, K. | ATENEO LAW

SECTION TWO: EFFECTS OF GUARANTY BETWEEN THE DEBTOR AND GUARANTOR
ART. 2066. THE GUARANTOR WHO PAYS FOR A DEBTOR MUST BE INDEMNIFIED BY THE
LATTER. THE INDEMNITY COMPRISES:
(1) THE TOTAL AMOUNT OF THE DEBT;
(2) THE LEGAL INTERESTS THEREON FROM THE TIME THE PAYMENT WAS MADE KNOWN TO THE
DEBTOR, EVEN THOUGH IT DID NOT EARN INTEREST FOR THE CREDITOR;
(3) THE EXPENSES INCURRED BY THE GUARANTOR AFTER HAVING NOTIFIED THE DEBTOR THAT
PAYMENT HAD BEEN DEMANDED OF HIM;
(4) DAMAGES, IF THEY ARE DUE.
Ø General rule: The guarantor who makes payment must be indemnified by the creditor of
the following:
1. Total amount of the debt;
2. Legal interest thereon from the time payment was made known to the debtor,
even without interest for the creditor;
3. Expenses incurred by the guarantor after having notified the debtor that payment
had been demanded of him; and
4. Damages, if due.
Ø Exceptions:
1. Guaranty is constituted without the knowledge or against the will of the principal
debtor – guarantor who paid can only recover insofar as debtor benefited.
2. Payment made by a third person who does not intend to be reimbursed by the
debtor is deemed to be a donation, if consented by the debtor.
o Valid as to the creditor who accepted it. If debtor does not consent, he
can pay the guarantor.
3. Right to demand is subject to waiver.
Ø Case Doctrine/s:
Tuason v. Machuca (1924) : The survey may, even before paying the principal obligation,
institute proceeding against the debtor under the provisions of article 1843 (2066 NCC) of the
Civil Code; but then he must choose one among the remedies granted by said article, and
specifically apply for it. And if he does not do so, but brings an action for the recovery of the
amount of the principal obligation, which can be maintained only on the fact of the payment of
said obligation by the surety, the action is groundless and must fail unless the fact of the payment
is proven.
o While the action brought by the surety against the principal debtor does not come
under the provisions of article 1843 (2066), because the surety has applied for the
reimbursement of a certain amount, which remedy is not authorized by said article,
yet it having been proven by the evidence that the principal debtor has executed a
document in favor of the surety, wherein he bound himself to pay the latter any such
amount as he may have paid or become bound to pay by virtue of the principal
obligation, and it having been shown that the surety has become bound to pay the
obligation because a final judgment had been rendered against him to that effect, the
remedy applied for by the surety may be granted in this particular case, although he
may not yet have paid said judgment.
PNB v. Luzon Surety (1975) : The strictissimi juris rule does not apply to compensated
guarantors.
35
o If a surety upon demand fails to pay, he can be held liable for interest, even if in thus
paying, the liability becomes more than that in the principal obligation.
ART. 2067. THE GUARANTOR WHO PAYS IS SUBROGATED BY VIRTUE THEREOF TO ALL THE
RIGHTS WHICH THE CREDITOR HAD AGAINST THE DEBTOR.
IF THE GUARANTOR HAS COMPROMISED WITH THE CREDITOR, HE CANNOT DEMAND OF THE
DEBTOR MORE THAN WHAT HE HAS REALLY PAID.
Ø Subrogation – transfers to the person subrogated the creditor with all the rights thereto
appertaining either against the debtor or against third persons.
o Arises by operation of law upon payment by the guarantor.
o If the guarantor paid a smaller amount to the creditor by virtue of a compromise,
he cannot demand more than what he actually paid.
o Cannot be invoked in cases where the guarantor has no right to be reimbursed.
(Ex. Solidary guarantor)
o When payment is without knowledge of or against the will of the creditor, no
subrogation arises.
o A creditor to whom partial payment has been made may exercise his right for the
remainder, and he shall be preferred to the person who has been subrogated in
his place in virtue of the partial payment of the same credit.
Ø Case Doctrine/s:
Saenz v. Yap Chuangco (1910) : The bond of a debtor to protect his surety is not a subbond
nor a second bond with respect to the original creditor; it is not the same as the first bond in
favor of the debtor with respect to such creditor. It is nothing but a substitute of the obligation
of the debtor with respect to his surety, and is necessarily by the legal provisions which regulate
the right of action of the surety against the party for whom he gave the bond, that it, an action
of subrogation which lies with the surety to compel the debtor to comply with the obligation to
reimburse.
ART. 2068. IF THE GUARANTOR SHOULD PAY WITHOUT NOTIFYING THE DEBTOR, THE LATTER
MAY ENFORCE AGAINST HIM ALL THE DEFENSES WHICH HE COULD HAVE SET UP AGAINST THE
CREDITOR AT THE TIME THE PAYMENT WAS MADE.
Ø The guarantor may pay the creditor without any notification to the debtor.
o The debtor may interpose against the guarantor those defenses which he could
have set up against the creditor at the time of payment by the guarantor.
ART. 2069. IF THE DEBT WAS FOR A PERIOD AND THE GUARANTOR PAID IT BEFORE IT BECAME
DUE, HE CANNOT DEMAND REIMBURSEMENT OF THE DEBTOR UNTIL THE EXPIRATION OF THE
PERIOD UNLESS THE PAYMENT HAS BEEN RATIFIED BY THE DEBTOR.
Ø If the debtor’s obligation is with a period – it becomes demandable only when the day fixed
comes.
o General rule: Guarantor who pays before maturity is not entitled to
reimbursement since there is no necessity for accelerating payment.
YAP, K. | ATENEO LAW

o Exceptions:
1. With debtor’s consent; or
2. When ratified.
Ø Where demand on the guarantor was made during the term of the guarantee, the fact that
payment was made after the term is not material.
o What controls is that default and demand on guarantor had taken place while the
guarantee was still in force.
ART. 2070. IF THE GUARANTOR HAS PAID WITHOUT NOTIFYING THE DEBTOR, AND THE LATTER
NOT BEING AWARE OF THE PAYMENT, REPEATS THE PAYMENT, THE FORMER HAS NO REMEDY
WHATEVER AGAINST THE DEBTOR, BUT ONLY AGAINST THE CREDITOR. NEVERTHELESS, IN
CASE OF A GRATUITOUS GUARANTY, IF THE GUARANTOR WAS PREVENTED BY A FORTUITOUS
EVENT FROM ADVISING THE DEBTOR OF THE PAYMENT, AND THE CREDITOR BECOMES
INSOLVENT, THE DEBTOR SHALL REIMBURSE THE GUARANTOR FOR THE AMOUNT PAID.
Ø General rule: Before the guarantor pays the creditor, he must first notify the debtor. If he
fails to notify the debtor and the debtor repeats payment, the guarantor’s only remedy is to
collect from the creditor.
o Exceptions:
1. Creditor becomes insolvent;
2. Guarantor was prevented by fortuitous event to advise the debtor of
payment; or
3. Guaranty is gratuitous.
ART. 2071. THE GUARANTOR, EVEN BEFORE HAVING PAID, MAY PROCEED AGAINST THE
PRINCIPAL DEBTOR:
(1) WHEN HE IS SUED FOR THE PAYMENT;
(2) IN CASE OF INSOLVENCY OF THE PRINCIPAL DEBTOR;
(3) WHEN THE DEBTOR HAS BOUND HIMSELF TO RELIEVE HIM FROM THE GUARANTY WITHIN A
SPECIFIED PERIOD, AND THIS PERIOD HAS EXPIRED;
(4) WHEN THE DEBT HAS BECOME DEMANDABLE, BY REASON OF THE EXPIRATION OF THE
PERIOD FOR PAYMENT;
(5) AFTER THE LAPSE OF TEN YEARS, WHEN THE PRINCIPAL OBLIGATION HAS NO FIXED PERIOD
FOR ITS MATURITY, UNLESS IT BE OF SUCH NATURE THAT IT CANNOT BE EXTINGUISHED
EXCEPT WITHIN A PERIOD LONGER THAN TEN YEARS;
(6) IF THERE ARE REASONABLE GROUNDS TO FEAR THAT THE PRINCIPAL DEBTOR INTENDS TO
ABSCOND ;
(7) IF THE PRINCIPAL DEBTOR IS IN IMMINENT DANGER OF BECOMING INSOLVENT.
IN ALL THESE CASES, THE ACTION OF THE GUARANTOR IS TO OBTAIN RELEASE FROM THE
GUARANTY, OR TO DEMAND A SECURITY THAT SHALL PROTECT HIM FROM ANY PROCEEDINGS
BY THE CREDITOR AND FROM THE DANGER OF INSOLVENCY OF THE DEBTOR.
Ø General rule: Guarantor has no cause of action against the debtor until after the former has
paid the obligation.
o Exceptions: In these cases, the guarantor may proceed against the principal
debtor “even before having paid.”
1. When sued for payment;
2. Insolvency of principal debtor;
36
3. Debtor bound himself to relieve him from the guaranty within a
specified period, and such has expired;
4. Debt has become demandable, by reason of the expiration of the period
for payment;
5. Lapse of 10 years, when the principal obligation has no fixed period
for its maturity, unless it cannot be extinguished except within a period
longer than 10 years;
6. Reasonable grounds to fear that the debtor intends to abscond;
7. Principal debtor is in imminent danger of becoming insolvent.
Ø The guarantor may ask for:
1. Release from the guaranty; or
2. Security that shall protect him from any proceedings by the creditor arising from
the insolvency of the debtor.
Ø These remedies are alternative, he has the right to choose which action to bring.
Ø This provision is likewise applicable to sureties.
Ø Case Doctrine/s:
Manila Surety v. Batu Construction (1957) : Sureties are not entitled to the right of
exhaustion, and they may be sued independently by the creditor. However, the provisions of
Art. 2071 NCC are applicable and available to the surety, and a surety may, even before having
paid, may proceed against the principal debtor to obtain release from the surety or to demand a
security that shall protect him from any proceedings by the creditor or from the danger of
insolvency of the debtor, when the surety is sued for payment.
Gen. Indemnity v. Alvarez (1957) : The last paragraph of Article 2071 provides that in
instances when the guarantor may proceed against the principal debtor even before having paid,
the only action the guarantor can file against the debtor is "to obtain release from the guaranty,
or to demand a security that shall protect him from any proceeding by the creditor and from the
danger of insolvency of the debtor." An action by the guarantor against the principal debtor for
payment, before the former has paid the creditor, is premature.
ART. 2072. IF ONE, AT THE REQUEST OF ANOTHER, BECOMES A GUARANTOR FOR THE DEBT OF
A THIRD PERSON WHO IS NOT PRESENT, THE GUARANTOR WHO SATISFIES THE DEBT MAY SUE
EITHER THE PERSON SO REQUESTING OR THE DEBTOR FOR REIMBURSEMENT.
Ø The guarantor who guarantees the debt of an absentee at the request of another has right to
claim reimbursement, after satisfying the debt, from:
1. Person who requested him to be a guarantor; or
2. Debtor.
YAP, K. | ATENEO LAW

SECTION THREE: EFFECTS OF GUARANTY AS BETWEEN CO-GUARANTORS
ART. 2073. WHEN THERE ARE TWO OR MORE GUARANTORS OF THE SAME DEBTOR AND FOR
THE SAME DEBT, THE ONE AMONG THEM WHO HAS PAID MAY DEMAND OF EACH OF THE
OTHERS THE SHARE WHICH IS PROPORTIONALLY OWING FROM HIM.
IF ANY OF THE GUARANTORS SHOULD BE INSOLVENT, HIS SHARE SHALL BE BORNE BY THE
OTHERS, INCLUDING THE PAYER, IN THE SAME PROPORTION.
THE PROVISIONS OF THIS ARTICLE SHALL NOT BE APPLICABLE, UNLESS THE PAYMENT HAS
BEEN MADE BY VIRTUE OF A JUDICIAL DEMAND OR UNLESS THE PRINCIPAL DEBTOR IS
INSOLVENT.
Ø When one guarantor has paid the debt to the creditor and is seeking reimbursement from
each of his co-guarantors the share which is proportionately owing him; requisites:
1. Payment was made by virtue of a judicial demand; or
2. Principal debtor is insolvent.
Ø If any of the co-guarantor should be insolvent – his share shall be borne by the others
including the paying guarantor in the same joint proportion.
ART. 2074. IN THE CASE OF THE PRECEDING ARTICLE, THE CO-GUARANTORS MAY SET UP
AGAINST THE ONE WHO PAID, THE SAME DEFENSES WHICH WOULD HAVE PERTAINED TO THE
PRINCIPAL DEBTOR AGAINST THE CREDITOR, AND WHICH ARE NOT PURELY PERSONAL TO THE
DEBTOR. (1845) ARTICLE 2075. A SUB- GUARANTOR, IN CASE OF THE INSOLVENCY OF THE
GUARANTOR FOR WHOM HE BOUND HIMSELF , IS RESPONSIBLE TO THE CO-GUARANTORS IN THE
SAME TERMS AS THE GUARANTOR.
Ø General rule: In the action filed by the paying guarantor against his co-guarantors for their
proportionate shares in the obligation, the latter may avail themselves of all defenses which
the debtor would have interposed against the creditor.
o Exception: Not those purely personal to the debtor.
ART. 2074. A SUB-GUARANTOR, IN CASE OF THE INSOLVENCY OF THE GUARANTOR FOR WHOM
HE BOUND HIMSELF, IS RESPONSIBLE TO THE CO-GUARANTORS IN THE SAME TERMS AS THE
GUARANTOR.
Ø In case of insolvency of the guarantor for whom he bound himself, a sub-guarantor is liable
to the co-guarantors in the same manner as the guarantor whom he guaranteed.
37
CHAPTER THREE: EXTINGUISHMENT OF GUARANTY
ART. 2076. THE OBLIGATION OF THE GUARANTOR IS EXTINGUISHED AT THE SAME TIME AS
THAT OF THE DEBTOR, AND FOR THE SAME CAUSES AS ALL OTHER OBLIGATIONS.
Ø Obligations of guarantor are extinguished by:
1. Causes of extinguishment under the general contract law;
o Payment or performance, dacion en pago, loss of the thing due, service
becomes impossible, consignation, condonation, merger or confusion,
compensation, novation, extension, failure of subrogation, release,
rescission, fulfillment of a resolutory condition, and prescription.
2. Extinguishment of the principal obligation; or
3. Certain causes peculiar to the extinguishment of guaranty.
4. General rule: Material alteration without the consent of the surety.
o Exception: When such change does not have the effect of making the
obligation more onerous.
Ø The guaranty itself may be extinguished although the principal obligation still remains.
ART. 2077. IF THE CREDITOR VOLUNTARILY ACCEPTS IMMOVABLE OR OTHER PROPERTY IN
PAYMENT OF THE DEBT, EVEN IF HE SHOULD AFTERWARDS LOSE THE SAME THROUGH
EVICTION, THE GUARANTOR IS RELEASED.
Ø Any substitute paid in lieu of money which is accepted by the creditor extinguishes the
obligation and in consequence, the guaranty.
o This is a case of Dacion en pago (Dation in payment).
ART. 2078. A RELEASE MADE BY THE CREDITOR 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.
Ø Guarantors enjoy the benefit of division.
o Hence, if any of them should be insolvent, all other guarantors must bear his
share.
o A release made by the creditor in favor of the one of the guarantors, without the
consent of the others, may thus prejudice the latter should the guarantor become
insolvent.
Ø The release benefits all to the extent of the share of the guarantor released.
ART. 2079. AN EXTENSION GRANTED TO THE DEBTOR BY THE CREDITOR WITHOUT THE
CONSENT OF THE GUARANTOR EXTINGUISHES THE GUARANTY . THE MERE FAILURE ON THE
PART OF THE CREDITOR TO DEMAND PAYMENT AFTER THE DEBT HAS BECOME DUE DOES NOT
OF ITSELF CONSTITUTE ANY EXTENSION OF TIME REFERRED TO HEREIN.
Ø If the creditor grants an extension of time to the debtor, without the consent of the
guarantor, the latter is discharged from his undertaking.
o Because the debtor may become insolvent during the extension, thus depriving
the guarantor of his right to reimbursement.
YAP, K. | ATENEO LAW
Ø Mere failure on the part of the creditor to demand payment after the debt has become due
does not constitute an extension of the term of the obligation.
o Novation must be expressed.
Ø General rule: Where a guarantor is liable for different payments, such as installments, an
extension of time as to one or more will not affect the liability for the others.
o Exception: If the whole unpaid balance has become automatically due (under an
acceleration clause) for failure to pay an installment, the act of the creditor of
extending the payment of said installment, without the guarantor’s consent,
discharges the guarantor.
§ Extension herein constitutes an extension of the payment of the whole
amount of indebtedness.
Ø Any extension of time granted by the creditor to any of the first-tier obligors (principal
debtor and surety) cannot prejudice the second-tier parties (indemnitors).
Ø General rule: Where the creditor had done any act whereby the guaranty was impaired;
such an act would have wholly or partially released the guarantor.
o Exception: With respect to the surety, the creditor is under no obligation to
display any diligence in the enforcements of his rights as a creditor.
§ Exception to the exception: Unless the contract expressly requires
diligence and promptness on the part of the creditor.
Ø In order to constitute an extension discharging the surety, it should appear that such was
for an indefinite period, pursuant to an enforceable agreement between the principal and
the creditor, and that it was made without the consent of the surety, or with a reservation
of rights with respect to him.
Ø Case Doctrine/s:
Ø Case Doctrine/s:
PNB v. Manila Surety (1965) : By allowing the assigned funds to be exhausted without
notifying the surety, the creditor deprives the surety of any possibility of recording against that
security, and therefore the surety is released.
ART. 2081. THE GUARANTOR MAY SET UP AGAINST THE CREDITOR ALL THE DEFENSES WHICH
PERTAIN TO THE PRINCIPAL DEBTOR AND ARE INHERENT IN THE DEBT; BUT NOT THOSE THAT
ARE PERSONAL TO THE DEBTOR.
Ø Defenses available to guarantor against creditor:
1. Defenses derived from the principal obligation;
2. Defenses derived from the contract of guarantee; and
3. Defenses derived from the conduct of the creditor.
Ø Defenses purely personal to the debtor include those on incapacity, or limited capacity to
act of the debtor.
o It does not include vitiation of consent by mistake, violence, intimidation, undue
influence or fraud – these are inherent in the debt.

Radio Corp. v. Roa (1935) : Mere delay in suing for the collection of the debt does not release
the sureties.
o After default of the payment of one installment the act of the herein creditor in
extending the time of payment discharges them as guarantors in conformity with
articles 1851 and 1852.

Villa v. Garcia Bosque (1926) : An extension of time granted to the debtor by the creditor,
without the consent of the sureties extinguishes the latter's liability, subject to exceptions.

Hospicio de San Jose v. Fidelity (1929) : A guarantor binding himself to a contract with an
indefinite or unspecified period cannot claim release from the agreement by reason of an
extension of time granted by the creditor to the principal without its consent.

ART. 2080. THE GUARANTORS, EVEN THOUGH THEY BE SOLIDARY , ARE RELEASED FROM
THEIR OBLIGATION WHENEVER BY SOME ACT OF THE CREDITOR THEY CANNOT BE
SUBROGATED TO THE RIGHTS, MORTGAGES, AND PREFERENCE OF THE LATTER.

Ø The guarantor who pays is entitled to be subrogated to all the rights of the creditor.
o If there is no subrogation because of the fault of the creditor, the guarantors are
released, even though solidary.
Ø The act of the creditor must be personal, direct and of a positive character.

38 YAP, K. | ATENEO LAW


CHAPTER FOUR: LEGAL AND JUDICIAL BONDS
(He skipped this)
ART. 2082. THE BONDSMAN WHO IS TO BE OFFERED IN VIRTUE OF A PROVISION OF LAW OR OF
A JUDICIAL ORDER SHALL HAVE THE QUALIFICATIONS PRESCRIBED IN ARTICLE 2056 AND IN
SPECIAL LAWS .
Ø Bond – an undertaking that is sufficiently secured, and not cash or currency.
Ø Bondsman – a surety offered by virtue of a provision of law or a judicial order.
o Qualifications:
1. Integrity;
2. Capacity to bind himself;
3. Sufficient property.
Ø All bonds are contractual in nature. Judicial bonds constitute merely a class of contracts of
guaranty, characterized by the fact that they are given in virtue of a judicial order.
ART. 2083. IF THE PERSON BOUND TO GIVE A BOND IN THE CASES OF THE PRECEDING ARTICLE,
SHOULD NOT BE ABLE TO DO SO, A PLEDGE OR MORTGAGE CONSIDERED SUFFICIENT TO COVER
HIS OBLIGATION SHALL BE ADMITTED IN LIEU THEREOF.
Ø Guaranty or suretyship is a personal security. Pledge or mortgage is a property or real
security.
o 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 be admitted in lieu
thereof.
ART. 2084. A JUDICIAL BONDSMAN CANNOT DEMAND THE EXHAUSTION OF THE PROPERTY OF
THE PRINCIPAL DEBTOR.
A SUB-SURETY IN THE SAME CASE , CANNOT DEMAND THE EXHAUSTION OF THE PROPERTY OF
THE DEBTOR OR OF THE SURETY.
Ø A judicial bondsman and the sub-surety are not entitled to the benefit of excussion.
o This is because they are not mere guarantors, but sureties whose liability is
primary and solidary.
Ø Mere negligence on the part of the creditor in collecting from the debtor will not relieve
the surety from liability.
39
TITLE XVI
PLEDGE, MORTGAGE AND ANTICHRESIS
CHAPTER ONE: PROVISIONS COMMON TO PLEDGE AND MORTGAGE
ART. 2085. THE FOLLOWING REQUISITES ARE ESSENTIAL TO THE CONTRACTS OF PLEDGE AND
MORTGAGE:
(1) THAT THEY BE CONSTITUTED TO SECURE THE FULFILLMENT OF A PRINCIPAL OBLIGATION;
(2) THAT THE PLEDGOR OR MORTGAGOR BE THE ABSOLUTE OWNER OF THE THING PLEDGED OR
MORTGAGED;
(3) THAT THE PERSONS CONSTITUTING THE PLEDGE OR MORTGAGE HAVE THE FREE DISPOSAL
OF THEIR PROPERTY, AND IN THE ABSENCE THEREOF, THAT THEY BE LEGALLY AUTHORIZED
FOR THE PURPOSE.
THIRD PERSONS WHO ARE NOT PARTIES TO THE PRINCIPAL OBLIGATION MAY SECURE THE
LATTER BY PLEDGING OR MORTGAGING THEIR OWN PROPERTY.
Ø Case Doctrine/s:
Arenas v. Raymundo (1911) : Article 1857 of the Civil Code prescribes as one of the essential
requisites of the contracts of pledge and of mortgage, that the thing pledged or mortgaged must
belong to the person who pledges or mortgages it. Absent this essential requisite, the contract is
devoid of value and force as if it had not been made. Moreover, when the contract has been
executed with marked violation of an express provision of law, it cannot confer any rights in the
pledged property, nor impose any obligation on the owner since the owner was deprived of
possession by means of illegal pledging, a criminal act.
Rural Bank of Caloocan v. CA (1981) : It is demanded of petitioners to exercise the highest
order of care and prudence in its Business dealings with the Valencias considering that it is
engaged in a banking business-a business affected with public interests. It should have
ascertained Castro's awareness of what she was signing or made her understand what obligations
she was assuming, considering that she was giving accommodation to, without any
consideration from, the Valencia spouses.
Cavite Development Bank v. Sps. Lim (2000) : A foreclosure sale, though essentially a "forced
sale," is still a sale in accordance with Art. 1458 of the Civil Code, under which the mortgagor
in default, the forced seller, becomes obliged to transfer the ownership of the thing sold to the
highest bidder who, in turn, is obliged to pay therefor the bid price in money or its equivalent.
o Being a sale, the rule that the seller must be the owner of the thing sold also applies
in a foreclosure sale.
ART. 2086. THE PROVISIONS OF ARTICLE 2052 ARE APPLICABLE TO A PLEDGE OR MORTGAGE.
ART. 2087. IT IS ALSO OF THE ESSENCE OF THESE CONTRACTS THAT WHEN THE PRINCIPAL
OBLIGATION BECOMES DUE, THE THINGS IN WHICH THE PLEDGE OR MORTGAGE CONSISTS MAY
BE ALIENATED FOR THE PAYMENT TO THE CREDITOR.
YAP, K. | ATENEO LAW

Ø Pledge, mortgage, chattel mortgage and antichresis are different species of that kind of
contract which are all intended to secure the performance of a principal obligation by
specially subjecting the property or the fruits thereof to such security.
Ø Common requisites:
1. Constituted to secure fulfillment of a principal obligation;
o Art. 2052 – a guaranty cannot exist without a valid obligation.
Nevertheless, a guaranty may be constituted to guarantee the
performance of a voidable or an unenforceable contract. It may also
guarantee a natural obligation.
2. Pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;
o General rule: A pledge constituted by an impostor/defrauder is void
and the pledgee or mortgagee in such a case acquires no right
whatsoever in the property.
• Exception: Does not apply to a mortgagee in good faith with
respect to property covered by a Torrens Certificate of Title.
3. Persons constituting the pledge or mortgage have the free disposal of their
property, and in the absence thereof, that they be legally authorized for the
purpose.
o Free disposal of the property – the property must not be subject to any
claim (not mere encumbrance) of a third person; there is no claim that
can stop the owner from disposing of his property.
o Capacity to dispose of property – the pledgor or mortgagor has the
capacity or the authority to make a disposition of the property.
Ø Third persons may secure the principal obligation of another by pledging or mortgaging
their own property.
Ø What properties may or may not be pledged:
1. Future property – General rule: Future property cannot be pledged or mortgaged.
o Exception: Parties can agree that future properties of the pledgor or
mortgagor will form part of the pledge or mortgage, however a new
instrument (pledge supplement) must be executed to cover such
property and such property must be delivered to the pledgee.
2. Property subsequently acquired – a pledge or mortgage executed by one who is
not the owner of the property pledged or mortgaged is without legal existence
and registration cannot validate it.
3. Transfer of motor vehicles registered subsequently – does not render the
mortgage invalid because the registration of the transfer of motor vehicles merely
constitutes an administrative proceeding which does not bear any essential
relation to the contract entered into between the parties.
4. Share in a co-ownership – a co-owner’s mortgage shall be limited to the portion
which may be allotted to him in the division upon the termination of the co-
ownership.
5. Property covered by Torrens title – a mortgagee is considered in good faith when
he relies on the Torrens Certificate of Title, and is thus protected.
ART. 2088. THE CREDITOR CANNOT APPROPRIATE THE THINGS GIVEN BY WAY OF PLEDGE OR
MORTGAGE, OR DISPOSE OF THEM. ANY STIPULATION TO THE CONTRARY IS NULL AND VOID.
Ø General rule: The creditor cannot appropriate the things given by way of pledge or
mortgage, or dispose of them. Any stipulation to the contrary is null and void. The
creditor’s remedy is to foreclose and move for the sale of the thing and then be paid from
the proceeds of such sale.
40
o Exception: Art. 2112 – when after 2 auction sales, the thing is not sold, the
creditor may now be allowed to appropriate it.
Ø Permissible stipulations:
1. Modification of the original contract by subsequent agreement such as the parties
may see fit to adopt.
2. Subsequent voluntary act of the debtor making cession (assignment) of the
property mortgaged to the creditor in payment of the debt, which is in effect a
novation of the original contract.
3. A promise by the debtor to assign or sell the property in payment of the obligation
– the promise is merely a personal obligation of the mortgagor and does not in
any way bind the property.
4. Authority to take possession (not ownership) of property upon foreclosure.
Ø Under the maxim, res perit domino suo, the debtor-owner bears the loss of the property in
pledge or mortgage, and the principal obligation is not extinguished by the loss of the
pledged or mortgaged property.
Case Doctrine/s:
Bustamante v. Rosel (1999) : The automatic appropriation feature in security agreements is
expressly prohibited by law, and regarded as against public policy.
Alcantara v. Alinea (1907) : The fact of having entered into a contract covering a loan, and at
the same time agreeing to sell a piece of property, the value of which is fixed as the amount of
money loaned, if , within a fixed time, such amount loaned be not paid, does not produce any
change in the nature and legal terms of either of the contracts, inasmuch as the property is not
thereby mortgaged, nor has it been delivered by virtue of a contract of antichresis, or of pledge,
which is made with respect to and covers movable or personal property only.
Mahoney v. Tuason (1919) : If the creditor could not appropriate to himself the jewels and
merchandise which he had in his custody, by way of pledge — an act expressly prohibited by
law — it does not follow that the contract of pledge or mortgage of the jewels and the other
merchandise which was duly executed is also null.
Reyes v. de Leon (1967) : Between an unrecorded sale of a prior date and a recorded mortgage
of a later date, the former is preferred to the latter for the reason that if the original owner had
parted with his ownership of thing sold then he no longer had the ownership and free disposal
of that thing so as to be able to mortgage it again. Registration of the mortgage under Act No.
3344 would, in such case, be of no moment since it is understood to be without prejudice to the
better right of third parties. Nor would it avail the mortgagee for the execution of the conveyance
in a public instrument earlier was equivalent to the delivery of the thing sold to the vendee.
YAP, K. | ATENEO LAW

ART. 2089. A PLEDGE OR MORTGAGE IS INDIVISIBLE, EVEN THOUGH THE DEBT MAY BE
DIVIDED AMONG THE SUCCESSORS IN INTEREST OF THE DEBTOR OR OF THE CREDITOR.
THEREFORE, THE DEBTOR'S HEIR WHO HAS PAID A PART OF THE DEBT CANNOT ASK FOR THE
PROPORTIONATE EXTINGUISHMENT OF THE PLEDGE OR MORTGAGE AS LONG AS THE DEBT IS
NOT COMPLETELY SATISFIED.
NEITHER CAN THE CREDITOR'S HEIR WHO RECEIVED HIS SHARE OF THE DEBT RETURN THE
PLEDGE OR CANCEL THE MORTGAGE, TO THE PREJUDICE OF THE OTHER HEIRS WHO HAVE NOT
BEEN PAID.
FROM THESE PROVISIONS IS EXCEPTED THE CASE IN WHICH, THERE BEING SEVERAL THINGS
GIVEN IN MORTGAGE OR PLEDGE, EACH ONE OF THEM GUARANTEES ONLY A DETERMINATE
PORTION OF THE CREDIT.
THE DEBTOR, IN THIS CASE, SHALL HAVE A RIGHT TO THE EXTINGUISHMENT OF THE PLEDGE
OR MORTGAGE AS THE PORTION OF THE DEBT FOR WHICH EACH THING IS SPECIALLY
ANSWERABLE IS SATISFIED.
Ø Case Doctrine/s:
PNB v. Agudelo (1933) : Although it is true that a mortgage is indivisible as to the contracting
parties and as to their successors in interest (Art. 1860, Civil Code), it is not so with respect to
a third person who did not take part in the constitution thereof either personally or through an
agent, inasmuch as he can make the acknowledgment thereof in the form and to the extent he
may deem convenient, on the ground that he is not in duty bound to acknowledge the said
mortgage.
Central Bank v. CA (1985) : The rule of indivisibility of the mortgage as outlined by Article
2089 presupposes several heirs of the debtor or creditor which does not obtain in this case.
Hence, the rule of indivisibility of a mortgage cannot apply.
ART. 2090. THE INDIVISIBILITY OF A PLEDGE OR MORTGAGE IS NOT AFFECTED BY THE FACT
THAT THE DEBTORS ARE NOT SOLIDARILY LIABLE.
Ø General rules: A pledge or mortgage is indivisible, even though the debt may be divided
among the successors-in-interest of the debtor or creditor.
1. The debtor’s heir who pays part of the debt cannot ask for the proportionate
extinguishment of the pledge or mortgage as long as the debt is not completely
satisfied.
2. The creditor’s heir who has received his share of the debt cannot return the pledge
or cancel the mortgage to the prejudice of the other heirs who have not been paid.
o Exception: When there are several things given in mortgage or pledge, each one
of them guarantees only a determinate portion of the credit.
§ Hence, the debtor shall have a right to extinguishment of the pledge or
mortgage as the portion of the debt for which each thing is specially
answerable is satisfied.
41
Ø Case Doctrine/s:
Dayrit v. CA (1970) : A mortgage directly and immediately subjects the property upon which
it is imposed, the same being indivisible even though the debt may be divided, and such
indivisibility likewise being unaffected by the fact that the debtors are not solidary.
ART. 2091. THE CONTRACT OF PLEDGE OR MORTGAGE MAY SECURE ALL KINDS OF
OBLIGATIONS, BE THEY PURE OR SUBJECT TO A SUSPENSIVE OR RESOLUTORY CONDITION
Ø Any kind of obligation, whether pure or conditional, may be secured by a contract of pledge
or mortgage.
Ø The pledge agreement may stipulate that the pledge will also stand as security for any future
advancements or renewals thereof that the pledgor may procure from the pledgee.
o In short, a stipulation for future debts may be made.
ART. 2092. A PROMISE TO CONSTITUTE A PLEDGE OR MORTGAGE GIVES RISE ONLY TO A
PERSONAL ACTION BETWEEN THE CONTRACTING PARTIES, WITHOUT PREJUDICE TO THE
CRIMINAL RESPONSIBILITY INCURRED BY HIM WHO DEFRAUDS ANOTHER, BY OFFERING IN
PLEDGE OR MORTGAGE AS UNENCUMBERED, THINGS WHICH HE KNEW WERE SUBJECT TO SOME
BURDEN, OR BY MISREPRESENTING HIMSELF TO BE THE OWNER OF THE SAME.
Ø A promise to constitute a pledge or mortgage, if accepted, gives rise only to a personal right
binding upon the parties and creates no real right in the property.
o What exists is only a right of action to compel the fulfillment of the promise but
there is no pledge or mortgage yet.
o The creditor can enforce an agreement to constitute a mortgage together with the
right to recover the indebtedness – they are not inconsistent with each other.
Ø Estafa is committed by a person who pretending to be the owner of any real property, shall
convey or encumber or mortgage the same, or a person knowing that the real property is
encumbered, shall dispose of the same as unencumbered.
o It is essential that fraud or deceit be practiced upon the vendee at the time of the
sale.
CHAPTER TWO: PROVISIONS APPLICABLE ONLY TO PLEDGE
ART. 2093. IN ADDITION TO THE REQUISITES PRESCRIBED IN ARTICLE 2085, IT IS NECESSARY,
IN ORDER TO CONSTITUTE THE CONTRACT OF PLEDGE, THAT THE THING PLEDGED BE PLACED
IN THE POSSESSION OF THE CREDITOR, OR OF A THIRD PERSON BY COMMON AGREEMENT.
Ø Pledge – a contract by virtue of which the debtor delivers to the creditor (or third person
by common agreement) a movable property susceptible of appropriation or a document
evidencing incorporeal rights for the purpose of securing the fulfillment 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 in appropriate cases).
Ø Requisites:
1. Essential requisites of a contract: consent, object and consideration.
2. Constituted to secure the fulfillment of an obligation;
3. Pledgor must be the absolute owner of the thing pledged;
YAP, K. | ATENEO LAW

4. Person constituting the pledge has the free disposal of their property, and in
absence thereof, be legally authorized for that purpose.
5. Thing pledged be placed in the possession of the creditor, or of a third person by
common agreement.
Ø Kinds of Pledge:
1. Voluntary/Conventional pledge – one which is created by agreement of the
parties.
2. Legal – one which is created by operation of law. (Art. 2121)
Ø Parties of Pledge:
1. Pledgor
2. Pledgee
Ø Case Doctrine/s:
Yuliongsiu v. PNB (1968) : There is authority supporting the proposition that the pledgee can
temporarily entrust me physical possession of the chattels pledged to the pledgor without
invalidating the pledge. In such a case, the pledgor is regarded as holding the pledged property
merely as trustee for the pledgee.
o The type of delivery will depend upon the nature and the peculiar circumstances of
each case.
ART. 2094. ALL MOVABLES WHICH ARE WITHIN COMMERCE MAY BE PLEDGED, PROVIDED
THEY ARE SUSCEPTIBLE OF POSSESSION.
ART. 2095. INCORPOREAL RIGHTS, EVIDENCED BY NEGOTIABLE INSTRUMENTS, BILLS OF
LADING, SHARES OF STOCK, BONDS, WAREHOUSE RECEIPTS AND SIMILAR DOCUMENTS MAY
ALSO BE PLEDGED. THE INSTRUMENT PROVING THE RIGHT PLEDGED SHALL BE DELIVERED TO
THE CREDITOR, AND IF NEGOTIABLE, MUST BE INDORSED.
Ø What may be the subject matter of pledge:
1. Personal/Movable property – must be within the commerce of men.
2. Incorporeal rights evidenced by documents – document must be delivered to the
creditor.
§ If negotiable – document must be properly indorsed to the creditor.
o Cash/money deposited in a bank may also be the object of a contract of pledge
(such as time deposits) as it was not illegal for the creditor to encash the time
deposit certificates to pay the debtor’s overdue obligations, with the latter’s
consent. (Yau Chu v. CA, 1989)
Ø Case Doctrine/s:
PNB v. Atendido (1954) : The Court holds that where a warehouse receipt or quedan is
transferred or endorsed to a creditor only to secure the payment of a loan or debt, the transferee
or endorsee does not automatically become the owner of the goods covered by the warehouse
receipt or quedan but he merely retains the right to keep and with the consent of the owner to
sell them so as to satisfy the obligation from the proceeds of the sale, this for the simple reason
that the transaction involved is not a sale but only a mortgage or pledge, and that if the property
covered by the quedans or warehouse receipts is lost without the fault or negligence of the
mortgagee or pledgee or the transferee or endorsee of the warehouse receipt or quedan, then
said goods are to be regarded as lost on account of the real owner, mortgagor or pledger.
42
ART. 2096. A PLEDGE SHALL NOT TAKE EFFECT AGAINST THIRD PERSONS IF A DESCRIPTION OF
THE THING PLEDGED AND THE DATE OF THE PLEDGE DO NOT APPEAR IN A PUBLIC INSTRUMENT.
Ø For a pledge to bind third persons:
1. Must be embodied in a public instrument;
2. Contains a description of the thing pledged;
3. Contains the date of the pledge; and
4. Object is delivered to the pledgee.
Ø Purpose is to forestall fraud, because a debtor may attempt to conceal his property from his
creditors when he sees it in danger of execution by simulating a pledge thereof with an
accomplice.
Ø Effect of non-compliance – the pledge is nevertheless valid and binding upon the parties
so long as the essential requisites are met. However, it shall not bind third persons thereto.
Ø Case Doctrine/s:
Ocejo Perez v. International Bank (1918) : When the contract of pledge is not recorded in a
public instrument, it is void as against third persons; that the seller of the thing pledged, seeking
to recover the purchase price thereof, is a third person within the meaning of the article cited;
and that the fact that the person claiming as pledge has taken actual physical possession of the
thing sold will not prevent the pledge from being declared void as against the seller.
ART. 2097. WITH THE CONSENT OF THE PLEDGEE, THE THING PLEDGED MAY BE ALIENATED BY
THE PLEDGOR OR OWNER, SUBJECT TO THE PLEDGE. THE OWNERSHIP OF THE THING PLEDGED
IS TRANSMITTED TO THE VENDEE OR TRANSFEREE AS SOON AS THE PLEDGEE CONSENTS TO THE
ALIENATION, BUT THE LATTER SHALL CONTINUE IN POSSESSION.
Ø Rule to remember:
1. The pledgor/owner may alienate the thing pledged as long as it is with the consent
of the pledgee.
2. General rule: Upon consent of the pledgee, the vendee acquires ownership of or
title to the thing pledged.
o Exception: When consent was given prior to the actual sale of the thing
pledged, the ownership is transferred only when the contract of sale is
executed.
3. However, the pledgee shall remain in possession of the thing pledged for as long
as the contract of pledge exists.
ART. 2098. THE CONTRACT OF PLEDGE GIVES A RIGHT TO THE CREDITOR TO RETAIN THE
THING IN HIS POSSESSION OR IN THAT OF A THIRD PERSON TO WHOM IT HAS BEEN DELIVERED,
UNTIL THE DEBT IS PAID.
Ø Rights of the pledgee over the thing pledged:
1. Jus retinendi – right to retain the thing; and
2. Jus distrahendi – right to proceed before a notary public to the sale of the thing
pledged.
Ø Being a security for the fulfillment of an obligation, the debtor/owner/pledgor cannot
demand for its return until the debt secured is paid.
YAP, K. | ATENEO LAW

ART. 2099. THE CREDITOR SHALL TAKE CARE OF THE THING PLEDGED WITH THE DILIGENCE OF
A GOOD FATHER OF A FAMILY; HE HAS A RIGHT TO THE REIMBURSEMENT OF THE EXPENSES
MADE FOR ITS PRESERVATION, AND IS LIABLE FOR ITS LOSS OR DETERIORATION, IN
CONFORMITY WITH THE PROVISIONS OF THIS CODE .
Ø In case of loss or deterioration of the thing pledged due to fortuitous event, the pledgee
cannot be held responsible.
o Pledgee is liable if such loss or deterioration is through his fraud, negligence,
delay or violation of the terms of the contract.
Ø Case Doctrine/s:
Cruz v. Lee (1929) : One who takes a pawn ticket in pledge acquires domination over the
pledge; and it is the holder who must renew the pledge, if it is to be kept alive.
ART. 2100. THE PLEDGEE CANNOT DEPOSIT THE THING PLEDGED WITH A THIRD PERSON,
UNLESS THERE IS A STIPULATION AUTHORIZING HIM TO DO SO.
THE PLEDGEE IS RESPONSIBLE FOR THE ACTS OF HIS AGENTS OR EMPLOYEES WITH RESPECT TO
THE THING PLEDGED.
Ø General rule: Pledgee cannot deposit the thing pledged with a third person.
o Exception: Stipulation authorizing him to do so.
Ø Pledgee is responsible for the acts of his agents or employees with respect to the thing
pledged because their acts are, in legal effect, deemed his own.
ART. 2101. THE PLEDGOR HAS THE SAME RESPONSIBILITY AS A BAILOR IN COMMODATUM IN
THE CASE UNDER ARTICLE 1951.
Ø Requisites for liability to pay damages for hidden flaws:
1. There is a flaw or defect in the thing loaned;
2. Flaw or defect is hidden;
3. Bailor is aware thereof;
4. Bailor does not advise the bailee of the same; and
5. Bailee suffers damages by reason of said flaw or defect.
Ø The pledgee is given the right to retention until he is paid damages.
ART. 2102. IF THE PLEDGE EARNS OR PRODUCES FRUITS, INCOME , DIVIDENDS, OR INTERESTS,
THE CREDITOR SHALL COMPENSATE WHAT HE RECEIVES WITH THOSE WHICH ARE OWING HIM;
BUT IF NONE ARE OWING HIM , OR INSOFAR AS THE AMOUNT MAY EXCEED THAT WHICH IS DUE,
HE SHALL APPLY IT TO THE PRINCIPAL. U NLESS THERE IS A STIPULATION TO THE CONTRARY,
THE PLEDGE SHALL EXTEND TO THE INTEREST AND EARNINGS OF THE RIGHT PLEDGED.
IN CASE OF A PLEDGE OF ANIMALS, THEIR OFFSPRING SHALL PERTAIN TO THE PLEDGOR OR
OWNER OF ANIMALS PLEDGED, BUT SHALL BE SUBJECT TO THE PLEDGE, IF THERE IS NO
STIPULATION TO THE CONTRARY .
Ø General rule: Interest and earnings of the thing pledged, and in case of animals – their
offspring – are included in the pledge.
43
o Exception: Stipulation to the contrary.
Ø The pledgee has no right to use the thing pledged or to appropriate the fruits thereof without
the authority of the owner.
o However, the pledgee can apply the fruits, income, etc. earned by the thing
pledged to:
1. Payment of interest, if owing; and
2. Thereafter to the principal.
ART. 2103. UNLESS THE THING PLEDGED IS EXPROPRIATED, THE DEBTOR CONTINUES TO BE
THE OWNER THEREOF .
NEVERTHELESS, THE CREDITOR MAY BRING THE ACTIONS WHICH PERTAIN TO THE OWNER OF
THE THING PLEDGED IN ORDER TO RECOVER IT FROM , OR DEFEND IT AGAINST A THIRD PERSON.
Ø Rules to remember:
1. General rule: During the contract of pledge, ownership of the thing pledged
remains with the debtor/pledgor.
§ Exception: When expropriated by the government.
2. The creditor/pledgee may bring actions pertaining to the owner of the thing
pledged for the purpose of recovering it or defending it against third persons.
§ Requisites for this rule to apply:
1. Must be embodied in a public instrument;
2. Contains a description of the thing pledged;
3. Contains the date of the pledge; and
4. Thing is delivered to the pledgee.
ART. 2104. THE CREDITOR CANNOT USE THE THING PLEDGED, WITHOUT THE AUTHORITY OF
THE OWNER, AND IF HE SHOULD DO SO, OR SHOULD MISUSE THE THING IN ANY OTHER WAY,
THE OWNER MAY ASK THAT IT BE JUDICIALLY OR EXTRAJUDICIALLY DEPOSITED. WHEN THE
PRESERVATION OF THE THING PLEDGED REQUIRES ITS USE, IT MUST BE USED BY THE CREDITOR
BUT ONLY FOR THAT PURPOSE.
Ø General rule: Creditor/pledgee cannot use the thing pledged.
o Exceptions:
1. When authorized by the owner; or
2. Preservation requires its use, but must be used only for that purpose.
Ø Cases when the owner may ask that the thing pledged be deposited with a third person
judicially or extrajudicially:
1. When the creditor uses the thing without authority;
2. When the creditor misuses the thing in any other way; or
3. When the thing is danger of being lost or impaired because of the negligence or
willful act of the pledgee.
ART. 2105. THE DEBTOR CANNOT ASK FOR THE RETURN OF THE THING PLEDGED AGAINST THE
WILL OF THE CREDITOR, UNLESS AND UNTIL HE HAS PAID THE DEBT AND ITS INTEREST, WITH
EXPENSES IN A PROPER CASE.
Ø General rule: The debtor/pledgor/owner cannot ask for the return of the thing pledged
against the will of the creditor.
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o Exceptions: ART. 2108. IF, WITHOUT THE FAULT OF THE PLEDGEE, THERE IS DANGER OF DESTRUCTION,
1. Until he has paid the debt and its interest, with expenses in a proper IMPAIRMENT, OR DIMINUTION IN VALUE OF THE THING PLEDGED, HE MAY CAUSE THE SAME TO
case. BE SOLD AT A PUBLIC SALE. THE PROCEEDS OF THE AUCTION SHALL BE A SECURITY FOR THE
2. Art. 2107 – pledgor is allowed to substitute the thing pledged which is PRINCIPAL OBLIGATION IN THE SAME MANNER AS THE THING ORIGINALLY PLEDGED.
in danger of destruction or impairment with another thing of the same
kind and quality.
Ø If the pledgor is not the debtor, the pledgor likewise does not have the right to demand the Ø Pledgee’s right under Art. 2108 to have the thing pledged sold at public sale is superior to
return of the thing until the debt is paid. the pledgor’s right under Art. 2107 to substitute the thing pledged.
Ø General rule: After payment of the debt, the thing pledged must be returned to the pledgor-
owner, not the debtor. ART. 2109. IF THE CREDITOR IS DECEIVED ON THE SUBSTANCE OR QUALITY OF THE THING
o Exception: Stipulation to the contrary. PLEDGED, HE MAY EITHER CLAIM ANOTHER THING IN ITS STEAD, OR DEMAND IMMEDIATE
o If both the debtor and pledgor-owner claim the right to the return of the thing PAYMENT OF THE PRINCIPAL OBLIGATION.
pledged, the creditor may consign the thing.
Ø Case Doctrine/s:
Ø Remedies of the pledgee in case he is deceived as to the substance or quality of the thing
Sarmiento v. Javellana (1922) : The duty of the creditor to return the thing pledge in case the pledged:
principal obligation is fulfilled is essential in all contracts of pledge. 1. Claim another thing in pledge; and
2. Demand immediate payment of the principal obligation.
Ø These remedies are alternative, hence the pledgee may choose only one to the exclusion of
ART. 2106. IF THROUGH THE NEGLIGENCE OR WILLFUL ACT OF THE PLEDGEE, THE THING
the other.
PLEDGED IS IN DANGER OF BEING LOST OR IMPAIRED, THE PLEDGOR MAY REQUIRE THAT IT BE
DEPOSITED WITH A THIRD PERSON.
Fig. 17
Remedies in Pledge
Ø If the thing should be exposed to loss or impairment through the negligence or willful act
of the pledgee, or should the pledgee misuse the thing – the pledgor may demand that it be Remedy Pertains to Requisites
deposited with a third person. Art. 2103. Actions which Need to recover or defend it from a
Ø This is one of those cases when the owner may ask that the thing pledged be deposited with Pledgee
pertain to the pledgor third person
a third person judicially or extrajudicially.
Art. 2104. Judicially or
Pledgee’s misuse of the thing
extrajudicially deposit the Pledgor
ART. 2107. IF THERE ARE REASONABLE GROUNDS TO FEAR THE DESTRUCTION OR IMPAIRMENT pledged
thing pledged
OF THE THING PLEDGED, WITHOUT THE FAULT OF THE PLEDGEE, THE PLEDGOR MAY DEMAND
THE RETURN OF THE THING , UPON OFFERING ANOTHER THING IN PLEDGE, PROVIDED THE Art. 2105. Return of the Payment of the debt with interest
Pledgor
LATTER IS OF THE SAME KIND AS THE FORMER AND NOT OF INFERIOR QUALITY, AND WITHOUT thing pledged and expenses, if any
PREJUDICE TO THE RIGHT OF THE PLEDGEE UNDER THE PROVISIONS OF THE FOLLOWING Pledge is in danger of being lost or
ARTICLE. Art. 2106. Deposit with a
Pledgor impaired due to pledgee’s
third person
negligence or willful act
THE PLEDGEE IS BOUND TO ADVISE THE PLEDGOR, WITHOUT DELAY, OF ANY DANGER TO THE
THING PLEDGED.
(1) Reasonable grounds to fear
Art. 2107. Substitute the
destruction or impairment
thing pledged with a thing
Pledgor (2) Without fault of the pledgee
of the same kind and
Ø “Without prejudice to the right of the pledgee under the provision of the following article” (3) Pledgee does not exercise right
quality
means that the pledgee’s right to the sale of the thing is superior to pledgor’s right herein. to sale under Art. 2108
Ø Requisites for the application of this article:
Art. 2108. Sold at public (1) Danger of destruction,
1. Pledgor has reasonable grounds to fear the destruction or impairment of the thing
sale, then proceeds used as Pledgee impairment or diminution of value
pledged;
security (2) Without fault of pledgee
2. No fault on the part of the pledgee;
3. Pledgor is offering in place of the thing, another thing in pledge which is of the Art. 2109. Claim another
same kind and quality as the former. thing or demand immediate Deceit as to the substance or
Pledgee
4. Pledgee does not choose to exercise his right to cause the thing pledged to be payment of the principal quality of the thing pledged
sold at public auction. obligation

44 YAP, K. | ATENEO LAW


Art. 2112. Appropriate the After 2 public auctions wherein the
Pledgee
thing pledged thing pledged is not sold
ART. 2110. IF THE THING PLEDGED IS RETURNED BY THE PLEDGEE TO THE PLEDGOR OR
OWNER, THE PLEDGE IS EXTINGUISHED. ANY STIPULATION TO THE CONTRARY SHALL BE VOID.
IF SUBSEQUENT TO THE PERFECTION OF THE PLEDGE, THE THING IS IN THE POSSESSION OF THE
PLEDGOR OR OWNER, THERE IS A PRIMA FACIE PRESUMPTION THAT THE SAME HAS BEEN
RETURNED BY THE PLEDGEE. THIS SAME PRESUMPTION EXISTS IF THE THING PLEDGED IS IN
THE POSSESSION OF A THIRD PERSON WHO HAS RECEIVED IT FROM THE PLEDGOR OR OWNER
AFTER THE CONSTITUTION OF THE PLEDGE.
ART. 2111. A STATEMENT IN WRITING BY THE PLEDGEE THAT HE RENOUNCES OR ABANDONS
THE PLEDGE IS SUFFICIENT TO EXTINGUISH THE PLEDGE. FOR THIS PURPOSE, NEITHER THE
ACCEPTANCE BY THE PLEDGOR OR OWNER, NOR THE RETURN OF THE THING PLEDGED IS
NECESSARY , THE PLEDGEE BECOMING A DEPOSITARY .
Ø A pledge is extinguished by:
1. Art. 2105 – payment of the debt;
2. Art. 2111 – renunciation or abandonment of the pledge;
o Requisites:
1. In writing; and
2. Must be absolute – not conditioned upon the acceptance by
the pledgor or owner nor upon the return of the thing
pledged.
o In this situation, the pledgee becomes a depositary.
3. Art. 2115 – sale of the thing pledged at public auction.
4. Art. 1231 – prescription, loss of the thing, merger, compensation, novation, etc.
Ø A pledge is presumed extinguished when:
1. The thing pledged is possessed by the debtor or owner of the thing pledged
subsequent to the perfection of the pledge; or
2. The thing pledged is possessed by a third person to whom the pledgor gave the
thing after constitution of the pledge. (Ex. pledged iPad is in the hands of the
owner’s wife/child)
Ø The presumption of extinguishment of a pledge may be rebutted by evidence to the
contrary. (Ex. the thing pledged was substituted or stolen)
Ø Waiver of the pledge does not extinguish the principal obligation, but waiver of the
principal obligation extinguishes the debt.
o This is because the pledge is an accessory contract of the principal obligation.
ART. 2112. THE CREDITOR TO WHOM THE CREDIT HAS NOT BEEN SATISFIED IN DUE TIME, MAY
PROCEED BEFORE A NOTARY PUBLIC TO THE SALE OF THE THING PLEDGED. THIS SALE SHALL
BE MADE AT A PUBLIC AUCTION, AND WITH NOTIFICATION TO THE DEBTOR AND THE OWNER OF
THE THING PLEDGED IN A PROPER CASE, STATING THE AMOUNT FOR WHICH THE PUBLIC SALE IS
TO BE HELD. IF AT THE FIRST AUCTION THE THING IS NOT SOLD, A SECOND ONE WITH THE SAME
FORMALITIES SHALL BE HELD; AND IF AT THE SECOND AUCTION THERE IS NO SALE EITHER, THE
CREDITOR MAY APPROPRIATE THE THING PLEDGED. IN THIS CASE HE SHALL BE OBLIGED TO
GIVE AN ACQUITTANCE FOR HIS ENTIRE CLAIM.
45
Ø Formal requisites of the sale:
1. Debt is due and unpaid;
2. Sale is a public auction;
3. Notice to the pledgor and owner, stating the amount due; and
4. Intervention of a notary public.
Ø The creditor may pursue other legal remedies without abandoning his rights under the
pledge. (Ex. the creditor may initially foreclose a mortgage and then subsequently cause
the sale of the thing pledged)
o This is because the sale at public auction is a right, not a privilege.
Ø After 2 public auctions where the thing pledged is not sold, the pledgee may appropriate
the thing pledged and is obliged to give an aquittance for his entire claim.
o This is because the thing pledged is a security for the fulfillment of the principal
obligation.
o If the value is in excess, the debtor is not entitled thereto because “it is his fault
in the first place that the thing was pledged.”
ART. 2113. AT THE PUBLIC AUCTION, THE PLEDGOR OR OWNER MAY BID. HE SHALL,
MOREOVER, HAVE A BETTER RIGHT IF HE SHOULD OFFER THE SAME TERMS AS THE HIGHEST
BIDDER.
THE PLEDGEE MAY ALSO BID, BUT HIS OFFER SHALL NOT BE VALID IF HE IS THE ONLY BIDDER.
Ø Rules to remember:
1. The pledgor or owner may bid at the public auction, and if he offers the same
terms as the highest bidder, he shall be preferred.
2. The pledgee may bid only if there are other bidders.
ART. 2114. ALL BIDS AT THE PUBLIC AUCTION SHALL OFFER TO PAY THE PURCHASE PRICE AT
ONCE. IF ANY OTHER BID IS ACCEPTED, THE PLEDGEE IS DEEMED TO HAVE BEEN RECEIVED THE
PURCHASE PRICE , AS FAR AS THE PLEDGOR OR OWNER IS CONCERNED .
Ø All bids, including that of the pledgor, must be for cash.
Ø If the pledgee accepts a bid other than for cash, the pledgor or owner has the right to
consider that the pledgee has received the purchase price in cash.
ART. 2115. 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. IF THE PRICE OF THE
SALE IS MORE THAN SAID AMOUNT, THE DEBTOR SHALL NOT BE ENTITLED TO THE EXCESS,
UNLESS IT IS OTHERWISE AGREED. IF THE PRICE OF THE SALE IS LESS, NEITHER SHALL THE
CREDITOR BE ENTITLED TO RECOVER THE DEFICIENCY, NOTWITHSTANDING ANY STIPULATION
TO THE CONTRARY.
Ø General rule: After the sale, the debtor is not entitled to the excess, and the creditor is not
entitled to the deficiency.
o Exceptions:
1. Stipulation to the contrary.
2. Legal pledges under Arts. 2121.
YAP, K. | ATENEO LAW

Ø Reasons:
1. To compel the creditor to hold an honest public sale;
2. So the creditor sees to it that he lends only as much as he is likely to realize at a
public sale.
Ø There is no right of redemption for execution sales over personal property.
Ø Case Doctrine/s:
Manila Surety v. Velayo (1967) : The extinctive effect of the sale of the pledged chattels is not
derived from stipulation. Article 2115, in its last portion, clearly establishes that the extinction
of the principal obligation supervenes by operation of imperative law that the parties cannot
override: "If the price of the sale is less, neither shall the creditor be entitled to recover the
deficiency notwithstanding any stipulation to the contrary." The provision is clear and
unmistakable, and its effect cannot be evaded. By electing to sell the articles pledged, instead of
suing on the principal obligation, the creditor has waived any other remedy, and must abide by
the results of the sale. No deficiency is recoverable.
ART. 2116. AFTER THE PUBLIC AUCTION, THE PLEDGEE SHALL PROMPTLY ADVISE THE
PLEDGOR OR OWNER OF THE RESULT THEREOF.
Ø The purpose of this article is to enable the pledgor or owner to take steps for the protection
of his rights where he has reasonable grounds to believe that the sale was not an honest
one.
ART. 2117. ANY THIRD PERSON WHO HAS ANY RIGHT IN OR TO THE THING PLEDGED MAY
SATISFY THE PRINCIPAL OBLIGATION AS SOON AS THE LATTER BECOMES DUE AND
DEMANDABLE.
Ø Art. 1236 of the Civil Code provides that the creditor is not bound to accept payment or
performance by a third person who has no interest in the fulfillment of the obligation.
Ø Here, the third party who may satisfy the principal obligation has a right or interest in the
thing pledged, hence, the creditor cannot refuse to accept payment.
ART. 2118. IF A CREDIT WHICH HAS BEEN PLEDGED BECOMES DUE BEFORE IT IS REDEEMED,
THE PLEDGEE MAY COLLECT AND RECEIVE THE AMOUNT DUE. HE SHALL APPLY THE SAME TO
THE PAYMENT OF HIS CLAIM, AND DELIVER THE SURPLUS , SHOULD THERE BE ANY , TO THE
PLEDGOR.
Ø This article applies to a situation where incorporeal rights embodied in a public instrument
are pledged.
Ø The pledgee is given a “right,” not an obligation because of the word “may.”
o However, since Art. 2009 imposes upon the pledgee the obligation to take care
of the thing pledged with the diligence of a good father of a family, he has the
duty to collect a credit that becomes due if delay would endanger the recovery of
the credit.
Ø Atty. Lerma – does not apply anymore because everything is automated; technology.
46
ART. 2119. IF TWO OR MORE THINGS ARE PLEDGED, THE PLEDGEE MAY CHOOSE WHICH HE
WILL CAUSE TO BE SOLD, UNLESS THERE IS A STIPULATION TO THE CONTRARY. HE MAY
DEMAND THE SALE OF ONLY AS MANY OF THE THINGS AS ARE NECESSARY FOR THE PAYMENT
OF THE DEBT.
Ø General rule: If two or more things are pledged, the pledgee may choose which he will
cause to be sold.
o Exception: Unless there is a stipulation to the contrary.
Ø The creditor may demand the sale of only as many of the things as are necessary for the
payment of the debt.
ART. 2120. IF A THIRD PARTY SECURES AN OBLIGATION BY PLEDGING HIS OWN MOVABLE
PROPERTY UNDER THE PROVISIONS OF ARTICLE 2085 HE SHALL HAVE THE SAME RIGHTS AS A
GUARANTOR UNDER ARTICLES 2066 TO 2070, AND ARTICLES 2077 TO 2081. HE IS NOT
PREJUDICED BY ANY WAIVER OF DEFENSE BY THE PRINCIPAL OBLIGOR.
Ø Rights of third party who secures an obligation by pledging his own movable property is
the same as the following rights of a guarantor:
o Art. 2066 – right to be indemnified by the debtor guaranteed.
o Art. 2067 – right to be subrogated to all the rights which the creditor had against
the debtor.
o Art. 2068 – if guarantor pays without notifying the debtor, the debtor may
enforce rights that pertain to the creditor against the guarantor.
o Art. 2069 – General rule: If the debt was for a period and the guarantor pays
before it is due, the guarantor cannot demand reimbursement.
§ Exception: Payment is ratified by the debtor.
o Art. 2070 – General rule: If the uninformed debtor repeats payment to the
creditor, the guarantor has no right against the debtor but only against the
creditor.
§ Exception: Guarantor was prevented from informing the debtor by
fortuitous event and the creditor becomes insolvent.
o Art. 2077 – guarantor is released if the creditor voluntarily accepts immovable
or other property in payment of the debt, even if the same is lost thereafter.
o Art. 2078 – release by the creditor of one guarantor benefits all other guarantors
to the extent of the share of the released guarantor.
o Art. 2079 – extension granted by the creditor to the creditor, without the
knowledge of the guarantor, extinguishes the guaranty.
§ Mere failure to demand does not constitute extension.
o Art. 2080 – guarantors are released whenever by some act of the creditor they
cannot be subrogated to the rights of the latter.
o Art. 2081 – General rule: Guarantor may set up against the creditor all defenses
pertaining to the principal debtor.
§ Exception: Rights which are personal to the debtor.
ART. 2121. PLEDGES CREATED BY OPERATION OF LAW, SUCH AS THOSE REFERRED TO IN
ARTICLES 546, 1731, AND 1994, ARE GOVERNED BY THE FOREGOING ARTICLES ON THE
POSSESSION, CARE AND SALE OF THE THING AS WELL AS ON THE TERMINATION OF THE
PLEDGE. HOWEVER, AFTER PAYMENT OF THE DEBT AND EXPENSES, THE REMAINDER OF THE
PRICE OF THE SALE SHALL BE DELIVERED TO THE OBLIGOR.
YAP, K. | ATENEO LAW

ART. 2122. A THING UNDER A PLEDGE BY OPERATION OF LAW MAY BE SOLD ONLY AFTER
DEMAND OF THE AMOUNT FOR WHICH THE THING IS RETAINED. THE PUBLIC AUCTION SHALL
TAKE PLACE WITHIN ONE MONTH AFTER SUCH DEMAND. IF , WITHOUT JUST GROUNDS , THE
CREDITOR DOES NOT CAUSE THE PUBLIC SALE TO BE HELD WITHIN SUCH PERIOD, THE DEBTOR
MAY REQUIRE THE RETURN OF THE THING .
Ø Legal pledges – pledges created by operation of law.
1. Art. 546 – retention of the thing until reimbursement for necessary and useful
expenses.
2. Art. 1731 – retention of movable upon which work was executed until payment.
3. Art. 1914 – retention of things object of agency until the principal effects the
reimbursement and the payment of indemnity.
4. Art. 1701 – retention of goods manufactured or work done until payment of
laborer’s wages.
5. Art. 1994 – retention by depositary until full payment of what may be due by
reason of the deposit.
6. Art. 2004 – retention of things brought into the hotel as security.
Ø Rules to remember:
1. For public sale in legal pledge, after payment of the debt and expenses, the
remainder of the price of the sale shall be delivered to the debtor.
2. Thing under legal pledge may be sold only after demand of the amount for which
the thing is retained.
3. Public auction must take place within 1 month from demand.
4. If the debtor does not cause the sale, without just grounds, the debtor may require
the return of the thing.
ART. 2123. WITH REGARD TO PAWNSHOPS AND OTHER ESTABLISHMENTS, WHICH ARE
ENGAGED IN MAKING LOANS SECURED BY PLEDGES, THE SPECIAL LAWS AND REGULATIONS
CONCERNING THEM SHALL BE OBSERVED, AND SUBSIDIARILY, THE PROVISIONS OF THIS TITLE.
Ø For pawnshops and other establishments engaged in making loans secured by pledges, they
shall be primarily governed by special laws (PD 114), and Title XVI of the Civil Code shall
apply suppletorily.
47
CHAPTER THREE: MORTGAGE
Ø Mortgage – a contract whereby the debtor secures to the creditor the fulfillment of a
principal obligation, specially subjecting to such security immovable property or real rights
over immovable property which obligation shall be satisfied with the proceeds of the sale
of said property or rights in case the said obligation is not complied with at the time
stipulated.
o Here, property has been set apart from the mass of property of the debtor as
security for the fulfillment of his obligations.
Ø Kinds of mortgage:
1. Voluntary – agreed to between the parties or constituted by the will of the owner
of the property on which it is created.
2. Legal – required by law to be executed in favor of certain persons.
3. Equitable – lacks proper formalities, words, or other requisites, but nevertheless
reveals the intention of the parties to burden real property as a security for an
existing debt, and contains nothing impossible or contrary to law.
Ø Parties to the contract:
1. Mortgagor
2. Mortgagee
ART. 2124. ONLY THE FOLLOWING PROPERTY MAY BE THE OBJECT OF A CONTRACT OF
MORTGAGE:
(1) IMMOVABLES;
(2) ALIENABLE REAL RIGHTS IN ACCORDANCE WITH THE LAWS, IMPOSED UPON IMMOVABLES.
NEVERTHELESS, MOVABLES MAY BE THE OBJECT OF A CHATTEL MORTGAGE.
Ø Subject matter of real estate mortgage:
1. Immovables
2. Alienable real rights imposed upon immovables.
Ø What may or may not be the object of mortgage:
1. Future property – General rule: Future property cannot be object of a contract of
mortgage.
o Exception: Parties may agree that the mortgage will extend to future
properties of the mortgagor but such will only constitute an agreement
to mortgage the future properties.
o Remember that future debts, however, may be stipulated to be covered
by the mortgage.
2. Improvements on properties already mortgaged – a stipulation subjecting
improvements which the mortgagor may subsequently acquire, install, or use in
connection with real property already mortgaged in favor of the creditor is valid.
3. Co-owned property – a co-owner is limited to the portion which may be allotted
to him in the division upon the termination of the co-ownership. Hence, he may
mortgage only such portion.
4. Interest – it is not essential 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.
o The interest may be in the form of fruits of the mortgaged property,
without the contract losing its character as a mortgage contract.
YAP, K. | ATENEO LAW

Ø Case Doctrine/s:
Dilag v. Heirs of Ressureccion (1946) : Future property cannot be the object of a contract of
mortgage since ownership is an essential requisite of mortgage.
PBCom v. Judge Macadaeg (1960) : The mere embodiment of the real estate and the chattel
mortgage in one document does not fuse both securities into an indivisible whole. Both remain
distinct agreements, differing not only in the subject- matter of the contract but also in the
governing legal provisions.
People’s Bank v. Dahican Lumber (1967) : Movables form part of the immovable property
when the machinery, receptacles, instruments or replacements intended by owner of the
tenement for an industry or works which may be carried on in a building or on a piece of land,
shall tend directly to meet the needs of the said industry or works. Hence, it need not be recorded
under the Chattel Mortgage Law.
Prudential Bank v. Panis (1987) : REM over a building would still be considered immovable
property.
ART. 2125. IN ADDITION TO THE REQUISITES STATED IN ARTICLE 2085, IT IS INDISPENSABLE,
IN ORDER THAT A MORTGAGE MAY BE VALIDLY CONSTITUTED, THAT THE DOCUMENT IN
WHICH IT APPEARS BE RECORDED IN THE REGISTRY OF P ROPERTY. IF THE INSTRUMENT IS NOT
RECORDED , THE MORTGAGE IS NEVERTHELESS BINDING BETWEEN THE PARTIES.
THE PERSONS IN WHOSE FAVOR 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.
Ø Requisites:
1. Essential requisites of a contract: consent, object and consideration.
2. Constituted to secure the fulfillment of an obligation;
3. Mortgagor must be the absolute owner of the property mortgaged;
4. Mortgagor has the free disposal of their property, and in absence thereof, be
legally authorized for that purpose.
5. In a public document and recorded in the Registry of Property in order to bind
third persons.
o The failure to observe the proper form does not render the acts or
contracts invalid. The remedy is to demand the proper execution and
recording of the document.
o If made in a purely private instrument, the creditor may recover the
loan or to compel the debtor to execute a contract of mortgage in a
public instrument.
o Registration in the Registry of Property only operates as a notice of the
mortgage to others but neither adds to its validity nor converts an
invalid mortgage into a valid one.
Ø Unlike a pledge, a mortgage is not a real contract. Hence, the delivery of the property to
the mortgagee is not required for the perfection of the contract.
Ø A duly executed mortgage is presumed to be valid until the contrary is shown.
o The burden of proving fraud, duress or illegality rests on the party attacking the
mortgage.
48
o The right to attack its validity may be lost by a waiver of defects and objections,
or by unreasonable delay to act amounting to ratification.
Ø Mortgagee in good faith – General rule: the mortgagee has a right to rely in good faith on
what appears on the certificate of title of the mortgagor to the property given as security.
o Exceptions:
1. When there is something on the title that excites suspicion;
2. When the mortgagee has prior knowledge of irregularity in the title;
3. Mortgagee is dealing with a person other than the owner;
4. Mortgagee is a bank or financing institution.
o Based on the rule that all persons dealing with a Torrens title are not required to
go beyond what appears on the face of the title – to preserve the Torrens system.
o The lien of an mortgagee in good faith is retained, and the remedy of the person
prejudiced is to bring an action for damages against the person who caused the
fraud.
§ If the person who caused the fraud is insolvent, the person prejudiced
has an action against the Treasurer of the Philippines for damages
against the Assurance Fund.
Ø Preference of lien:
o A registered mortgage right over property previously sold is inferior to the
buyer’s unregistered right – because mortgagor had no ownership anymore.
o A real mortgage is superior to a contract to sell – because ownership has not
transferred to the buyer yet.
o A prior registration of a lien creates a preference, hence the subsequent
annotation of an adverse claim cannot defeat the rights of the mortgagee or the
purchaser at the auction sale whose rights were derived from a prior mortgage
validly registered.
Ø Invalidity of the mortgage does not affect the principal obligation. What is lost is only the
right to foreclose the mortgage as a special remedy.
o The mortgage deed remains as evidence of a personal obligation of the debtor
and the amount due. The creditor may then file an ordinary personal action.
Ø Case Doctrine/s:
Samanilla v. Cajucom (1960) : A mortgage, whether registered or not, is binding between the
parties, registration being necessary only to make the same valid against third persons (Art.
2125, NCC). Registration only operates as a notice of the mortgage to others, but neither adds
to its validity nor convert an invalid mortgage into a valid one between the parties.
o If the purpose of registration is merely to give notice, the questions regarding the effect
or invalidity of registration are expected to be decided after, not before registration.
Mobil Philippines v. Diocares (1969) : The conclusion of the lower court denying the
foreclosure sought by plaintiff and holding that no real estate mortgage was established because
the document in which it appears was not recorded in the Registry of Property, does not
commend itself for approval. The codal provision is clear and explicit. Even if the instrument
were not recorded, "the mortgage is nevertheless binding between the parties." The law cannot
be any clearer. Effect must be given to it as written. The mortgage subsists; the parties are bound.
As between them, the mere fact that there is as yet no compliance with the requirement that it
be recorded cannot be a bar to foreclosure.
ART. 2126. THE MORTGAGE DIRECTLY AND IMMEDIATELY SUBJECTS THE PROPERTY UPON
WHICH IT IS IMPOSED , WHOEVER THE POSSESSOR MAY BE , TO THE FULFILLMENT OF THE
OBLIGATION FOR WHOSE SECURITY IT WAS CONSTITUTED.
YAP, K. | ATENEO LAW

Ø General rule: In a contract of mortgage, the mortgagor retains possession of the property
mortgaged as security for the payment of the sum borrowed from the mortgagee-creditor.
o Exception: Mortgagor delivers said property to the mortgagee – as long as the
mortgagee is not claiming any other title to it other than his right as mortgagee.
Ø Mortgagee in possession – one who has lawfully acquired actual or constructive possession
of the premises mortgaged to him, standing upon his rights as mortgagee and not claiming
under another title, for the purpose of enforcing his security upon such property or making
its income help to pay its debt.
o He is entitled to retain such possession until the indebtedness is satisfied and the
property is redeemed.
Ø A registered mortgage creates a right in rem, which is enforceable against the whole world.
o Even if the mortgagor sells the mortgaged property, the property remains subject
to the fulfillment of the obligation secured by the mortgage.
Ø Ownership rights of mortgagor:
1. Right to sell the mortgaged property;
2. Right of possession; and
3. Right to mortgage again.
o Subsequent mortgagees are called junior encumbrancers/mortgagees.
o The first mortgagee has superior rights over junior mortgagees.
Ø Case Doctrine/s:
McCullough v. Veloso (1924) : The fact that the mortgagor has transferred the mortgaged
property to a third person does not relieve him from his obligation to pay the debt to the creditor,
although the person to whom he has transferred the property has assumed the obligation to pay
said debt, and the creditor accepted payments from said transferee on account of the debt; for,
said transfer having been made without the consent of the creditor, the contract was not thereby
novated.
Santiago v. Dionisio (1953) : In multiple mortgages over the same property, the vendee of the
most junior mortgage would be the one who can register the property, subject to redemption by
the senior mortgagee.
ART. 2127. THE MORTGAGE EXTENDS TO THE NATURAL ACCESSIONS, TO THE IMPROVEMENTS,
GROWING FRUITS, AND THE RENTS OR INCOME NOT YET RECEIVED WHEN THE OBLIGATION
BECOMES DUE, AND TO THE AMOUNT OF THE INDEMNITY GRANTED OR OWING TO THE
PROPRIETOR FROM THE INSURERS OF THE PROPERTY MORTGAGED, OR IN VIRTUE OF
EXPROPRIATION FOR PUBLIC USE, WITH THE DECLARATIONS, AMPLIFICATIONS AND
LIMITATIONS ESTABLISHED BY LAW, WHETHER THE ESTATE REMAINS IN THE POSSESSION OF
THE MORTGAGOR, OR IT PASSES INTO THE HANDS OF A THIRD PERSON.
Ø General rule: A real estate mortgage constituted on immovable property extends to:
Accessions, improvements, growing fruits, rents or income, proceeds of insurance, or
expropriation value.
o Exception: Stipulation to the contrary.
o This is based on the presumption that the ownership of accessions and
accessories also belongs to the mortgagor as the owner of the principal. Hence,
what the mortgagor has mortgaged includes its accessions and accessories.
Ø A stipulation may be made that “all property of every nature and description taken in
exchange or replacement…shall immediately become subject to the lien of this mortgage
in the same manner and to the extent as if now included therein” is valid.
49
o Contemplates a situation where the properties mortgaged are perishable or
subject to inevitable wear and tear or were intended to be sold or used but with
the understanding that they shall be replaced with others to be thereafter acquired
by the mortgagor.
o Such lien vests at the time of registration of the deed of mortgage, not on the date
said improvements are constructed.
Ø General rule: An action to foreclose a mortgage must be limited to the amount mentioned
in the mortgage.
o Exception: Dragnet clause (blanket mortgage clause) – a mortgage given to
secure “future advancements or loans” enables the parties to provide continuous
dealings, the nature or extent of which may not be known or anticipated at the
time, and they avoid the expense and inconvenience of executing a new security
on each new transaction.
o A mortgage with a dragnet clause is not discharged by the repayment of the
amount named in the mortgage, but until the full amount of all the loans or
advancements obtained are paid.
Ø Case Doctrine/s:
Phil. Sugar Estate v. Camps (1917) : Where a parcel of land, together with the building thereon
erected has been mortgaged, and where after execution of the mortgage, but before the
expiration of the mortgage period, the debtor tears down the building and erects another and
more costly one in its place, no stipulation whatever being contained in the mortgage deed that
the new building should be expressly excluded from the mortgage encumbering the land and the
construction thereon; it is unquestionable that the mortgage actually includes the new building,
which forms one indivisible whole with the land or lot on which it was erected.
Afable v. Belando (1930) : When a suit for foreclosure over a property has already been
instituted and decided with finality, such property cannot be validly subjected to a subsequent
preliminary attachment.
o Every mortgage includes the rents.
Tady-Y v. PNB (1964) : The provision in the first mortgage deed, including as part of the
obligation future amounts that may be borrowed by the mortgagor- debtors from the PNB, is
proper. There was no necessity for any notation of the later loans on the mortgagors' title as it
already appears in said title that aside from the amount (P840) first borrowed by the mortgagors,
other obligations would also be secured by the mortgage. It was incumbent upon any subsequent
mortgage or encumbrancer of the property in question to have examined the books and records
of the PNB, as first mortgagee, regarding the credit standing of the debtors. Being thus charged
with notice of the other obligations with the PNB, the second mortgagee is only entitled to
whatever proceeds there is, if any, from the proceeds of the auction sale, after covering the
mortgagors' obligation to the PNB
Velasco v. CA (1980) : Art. 2127. The mortgage extends to the natural accessions, to the
improvements, growing fruits, and the rents or income not yet received when the obligation
becomes due, and to the amount of the indemnity granted or owing to the proprietor from the
insurers of the property mortgaged, or in virtue of expropriation for public use, with the
declarations, amplifications and limitations established by law, whether the estate remains in the
possession of the mortgagor, or it passes into the hands of a third person.
ART. 2128. THE MORTGAGE CREDIT MAY BE ALIENATED OR ASSIGNED TO A THIRD PERSON, IN
WHOLE OR IN PART, WITH THE FORMALITIES REQUIRED BY LAW.
YAP, K. | ATENEO LAW

Ø Mortgage credit – right of the mortgagee – a real right and directly and immediately
subjects the mortgaged property to the fulfillment of the principal obligation.
Ø The alienation or assignment is valid even if it is not registered. Registration is necessary
only to affect third persons.
Ø Case Doctrine/s:
Lopez v. Alvarez (1907) : Although the lack of such registration will not invalidate the
assignment or transfer of the credit in favor of the assignee. The assignment of the credit referred
to was effected by means of a public instrument; therefore, it is evidence, even against a third
person, of the facts which gave rise to its execution and of the date of the latter.
o Grindrod, the personal creditor, cannot be considered as a third person nor invoke in
support of his right the provisions of article 27 of the Mortgage Law.
o On the other hand, Lopez is not a mere personal creditor, but the exclusive owner of
a credit secured by a mortgage which was lawfully transferred to him by the original
owner thereof.
ART. 2129. THE CREDITOR MAY CLAIM FROM A THIRD PERSON IN POSSESSION OF THE
MORTGAGED PROPERTY, THE PAYMENT OF THE PART OF THE CREDIT SECURED BY THE
PROPERTY WHICH SAID THIRD PERSON POSSESSES , IN THE TERMS AND WITH THE FORMALITIES
WHICH THE LAW ESTABLISHES.
Ø The mortgage credit being a real right which follows the property, the creditor may demand
from any possessor the payment only of the part of the credit secured by said property.
o The creditor needs to comply with the terms and formalities established by law.
(Ex. When the mortgaged property is with a third person who has died, the
creditor must file its claim with the committee in the testate/intestate proceedings
of the deceased)
Ø It is necessary that prior demand for payment must have been made on the debtor and the
latter failed to pay.
Ø Case Doctrine/s:
BPI v. Concepcion (1920) : The mortgagee has the election of one out of three courses: (1) He
may abandon his security and share in the general distribution of the assets of the estate, or (2)
he may foreclose, secure a deficiency judgment and prove his deficiency judgment before the
committee, or (3) he may rely upon his security alone, in which case he can receive no share in
the distribution of the assets of the estate.
o Since BPI chose to rely on its security alone, BPI had to file his claim with the
Committee on Claims of the estate proceeding of the deceased. However, he cannot
do so anymore because the 1 year prescriptive period has elapsed.
ART. 2130. A STIPULATION FORBIDDING THE OWNER FROM ALIENATING THE IMMOVABLE
MORTGAGED SHALL BE VOID.
Ø A stipulation forbidding the owner from alienating the immovable mortgaged shall be viod
because it would be contrary to the public good inasmuch as the transmission of property
should not be unduly impeded.
50
Ø Case Doctrine/s:
Litonjua v. L&R Corporation (1999) : A stipulation, which provides that the written consent
of the mortgagee is required before the mortgagor can sell the mortgaged property, is a
circumvention of Article 2130 and is therefore void. Whereas, a stipulation granting the
mortgagee a right of first refusal is perfectly valid.
ART. 2131. THE FORM , EXTENT AND CONSEQUENCES OF A MORTGAGE, BOTH AS TO ITS
CONSTITUTION, MODIFICATION AND EXTINGUISHMENT, AND AS TO OTHER MATTERS NOT
INCLUDED IN THIS CHAPTER, SHALL BE GOVERNED BY THE PROVISIONS OF THE MORTGAGE
LAW AND OF THE LAND REGISTRATION LAW.
Ø As to matters not included in Chapter 3 of the Civil Code, the Property Registration Decree
and the Administrative Code govern the form, extent, and consequences of a mortgage.
Ø Case Doctrine/s:
Lucena v. CA (1999) : Foreclosure and public auction sale of a parcel of land foreclosed by a
rural bank were null and void when there was failure to post notices of auction sale in the barrio
where the subject property was located.
Cristobal v. CA (2000) : Foreclosure proceedings have in their favor the presumption of
regularity and the burden of evidence to rebut the same is on the petitioners.
o Non-presentation of a certificate of posting does not affect the intrinsic validity of the
questioned foreclosure sale.
Metrobank v. Peñafiel (2009) : To be a newspaper of general circulation, it is enough that it is
published for the dissemination of local news and general information, that it has a bona fide
subscription list of paying subscribers, and that it is published at regular intervals. Over and
above all these, the newspaper must be available to the public in general, and not just to a select
few chosen by the publisher.
PNB v. Nepomuceno (2002) : What Act No. 3135 requires is: (1) the posting of notices of sale
in three public places; and, (2) the publication of the same in a newspaper of general circulation.
Failure to publish the notice of sale constitutes a jurisdictional defect, which invalidates the sale.
DBP v. Aguirre (2001) : The publication of the notice of sale in the newspaper of general
circulation alone is more than sufficient compliance with the notice-posting requirement of the
law. When a foreclosure sale that was published has been rescheduled, a subsequent publication
is required. Otherwise, the sale is void due to a jurisdictional defect.
Piano v. Canayong (1963) : No judgment rendered in an action for foreclosure of mortgage can
be executed otherwise than in the manner prescribed by the law on mortgages, because parties
to an action are not authorized to change the procedure which it prescribes
Union Bank v. CA (1999) : Upon failure to redeem foreclosed realty, consolidation of title
becomes a matter of right on the part of the auction buyer, and the issuance of a certificate of
title in favor of the purchaser becomes ministerial upon the register of deeds.
Cometa v. CA (2001) : Inadequacy of the price generally does not invalidate a forced sale,
however, when the inadequacy is so low as to shock the conscience of the court, it can be
rendered void or at least voidable.
YAP, K. | ATENEO LAW

FORECLOSURE

Ø Foreclosure – the remedy available to the mortgagee by which he subjects the mortgaged
property to the satisfaction of the obligation secured by the mortgage, where the mortgagor
is in default in the payment of said obligation.
Ø General rule: A demand before foreclosure is essential.
o Exception: Acceleration clause – failure of the mortgagor to pay any installment
will give the mortgagee the right to foreclose the mortgage against the contention
of prematurity.
Ø General rule: Once the proceeds have been applied to the payment of the obligation, the
debtor cannot anymore be required to pay.
o Exception: When there is a deficiency between the amount of the loan and the
proceeds of the foreclosure sale.
Ø Invalidity of the foreclosure sale is a necessary consequence of the invalidity of the
mortgage.
Ø If there is a deficiency after sale, action for deficiency should be against the debtor.

Ø Governed by Rule 68 of the Rules of Court.
Ø Grace period of 90-120 days from the entry of judgment on foreclosure.
(1) Judicial action for the
purpose
(2) Order to mortgagor to
pay mortgage debt
(3) Sale to highest bidder at
public auction
(4) Confirmation of sale
(5) Execution of judgment
(6) Application of proceeds
of sale
(7) Execution of sheriff’s
certificate
Fig. 18
Judicial Foreclosure
Process
Ø Filed with the court which has jurisdiction over the area
wherein the real property involved or a portion thereof is
situated.
Ø If the court finds the complaint to be well-founded, it shall
order the mortgagor to pay the amount due upon the
mortgage debt or obligation with interest and other charges
within a period of 90-120 days from the entry of judgment.
Ø If the mortgagor fails to pay at the time directed in the order,
the court, upon motion, shall order the property to be sold to
the highest bidder at public auction.
Ø Upon motion, the sale shall be confirmed by the court, and
this shall operate to divest the rights of all parties to the action
and to vest their rights in the purchaser subject to such right
of redemption as may be allowed by law.
Ø The proper remedy to seek reversal of judgment in an action
for foreclosure of real estate mortgage is an appeal from:
1. The judgment itself; or
2. The order confirming the sale of the foreclosed real
estate.
Ø The proceeds shall be applied as follows:
1. Costs of the sale;
2. Amount due on the mortgage;
3. Claims of junior encumbrancers or persons holding
subsequent mortgages in the order of their priority;
and
4. Balance, if any, shall be paid to the mortgagor or
his duly authorized agent, or the person entitled to
it.
Ø In the absence of a Certificate of Sale, no title passes by the
foreclosure proceedings to the vendee.
Extrajudicial Foreclosure
Ø Governed by Act 3135 (An Act To Regulate The Sale Of Property Under Special Powers
Inserted In Or Annexed To Real-Estate Mortgages)
Process
(1) Express authority to sell (foreclose Ø Extrajudicial foreclosure may be done only
extrajudicially) is given to mortgagee when the mortgagee is given such express
authority to do so in the mortgage deed.
(2) Publication of notice of auction sale Ø Publication is required to give the foreclosure
a) Notice of sale in 3 public places sale a reasonably wide publicity such that those
b) Publication in newspaper of gen. circ. interested might attend the public sale.
1) dissemination of news and info Ø General rule: Personal notice to mortgagor or
2) bona fide subscription list successor not required.
3) available to general public o Exception: Stipulation to the contrary.
4) not devoted to specific interest Ø Publication is more than sufficient notice.
(3) Public sale after proper notice Ø The public sale must be made in the province in
which the property is situated.
Ø Public – exposed to general view.
Ø If sale is postponed, republication is necessary.
(4) Payment of cash by the highest Ø The law does not mention any minimum bid.
bidder Ø General rule: Inadequacy of price is immaterial.
o Exception: Fraud.
Except if highest bidder is the Ø For surplus money after payment of mortgage,
mortgagee, may not be cash paid to junior encumbrancers then to debtor.
(5) Redemption of property sold
Ø Any question regarding the validity of the sale
(6) Remedy of party aggrieved by
and issuance of writ of possession shall be in a
foreclosure sale
petition to set aside sale or cancel writ.

51 YAP, K. | ATENEO LAW


CHAPTER FOUR: ANTICHRESIS
ART. 2132. BY THE CONTRACT OF ANTICHRESIS THE CREDITOR ACQUIRES THE RIGHT TO
RECEIVE THE FRUITS OF AN IMMOVABLE OF HIS DEBTOR, WITH THE OBLIGATION TO APPLY
THEM TO THE PAYMENT OF THE INTEREST, IF OWING, AND THEREAFTER TO THE PRINCIPAL OF
HIS CREDIT.
Ø Antichresis – a contract whereby the creditor acquires the right to receive the fruits of an
immovable of his debtor, with the obligation to apply them to the payment of the interest,
if owing, then to the principal of his credit.
Ø Parties:
1. Debtor
2. Creditor
Ø Requisites of antichresis:
1. Consent;
2. Object; and
o General rule: Includes all the fruits of the encumbered property.
• Exception: Stipulation to the contrary.
3. Cause.
Ø Delivery is not necessary to bind the parties to the contract of antichresis, but is only for
the purpose that the creditor may receive the fruits of the property.
Ø Payment is applied as follows:
1. Interest, if owing; then
2. Principal obligation.
Ø Case Doctrine/s:
Dela Vega v. Ballilos (1916) : A contract should be classified as one of antichresis, by means
of which the creditor acquires the right to collect the fruits of the real property turned over to
him by his debtor, but with the obligation to apply them to the payment of whatever interest is
due, and the contracting parties may stipulate that the interest of the debt be paid by the fruits of
the property given in antichresis.
Barretto v. Barretto (1917) : The creditor in antichresis cannot by mere possession of the real
property which he received by virtue of an antichresis acquire ownership over the same for
failure of the debtor to pay the debt within the stipulated time, any agreement to the contrary
being void; and the debtor on his part cannot recover the enjoyment and use of the real property
given in antichresis to the creditor, without having previously paid to the latter all his debt and
interests thereon, the creditor being entitled to ask the courts that the said real property be sold
to satisfy his credit
Legazpi & Salcedo v. Celestial (1938) : When a contracts of loan with security does not
stipulate the payment of interest but provides for the delivery to the creditor by the debtor of the
real property constituted as security for the payment thereof, in order that the creditor may
administer the same and avail himself of its fruits, without stating that said fruits are to be
applied to the payment of interest, if any, and afterwards to that of the principal of the credit,
the contract shall be considered to be one of mortgage and not of antichresis.
ART. 2133. THE ACTUAL MARKET VALUE OF THE FRUITS AT THE TIME OF THE APPLICATION
THEREOF TO THE INTEREST AND PRINCIPAL SHALL BE THE MEASURE OF SUCH APPLICATION.
52
Ø The fruits of the immovable which is the object of the antichresis must be appraised at their
actual market value at the time of the application.
Ø Purpose is to forestall the use of antichresis for purposes of usury.
ART. 2134. THE AMOUNT OF THE PRINCIPAL AND OF THE INTEREST SHALL BE SPECIFIED IN
WRITING; OTHERWISE, THE CONTRACT OF ANTICHRESIS SHALL BE VOID .
Ø Art. 2134 makes the contract of antichresis a formal/solemn contract.
Ø However, even if the antichresis is void, the principal obligation is still valid.
ART. 2135. THE CREDITOR, UNLESS THERE IS A STIPULATION TO THE CONTRARY, IS OBLIGED
TO PAY THE TAXES AND CHARGES UPON THE ESTATE.
HE IS ALSO BOUND TO BEAR THE EXPENSES NECESSARY FOR ITS PRESERVATION AND REPAIR.
THE SUMS SPENT FOR THE PURPOSES STATED IN THIS ARTICLE SHALL BE DEDUCTED FROM THE
FRUITS.
Ø General rule: The creditor is obliged to pay the taxes and charges upon the estate covered
by the contract of antichresis.
o Exception: Stipulation to the contrary.
Ø The sums spent by the creditor in fulfillment of the obligations under this article shall be
charged against the fruits of the property.
Ø Case Doctrine/s:
Pando v. Gimenez (1930) : The administration of the property in question taken over by the
petitioner is antichretic in character, and therefore justice and equity demand that the provisions
of the Civil Code relating to the obligations of a creditor in antichresis be applied to the case.
o One obligation is to pay the taxes and charges which burden the estate (Art. 1882,
Civil Code)
ART. 2136. THE DEBTOR CANNOT REACQUIRE THE ENJOYMENT OF THE IMMOVABLE WITHOUT
FIRST HAVING TOTALLY PAID WHAT HE OWES THE CREDITOR.
BUT THE LATTER, IN ORDER TO EXEMPT HIMSELF FROM THE OBLIGATIONS IMPOSED UPON HIM
BY THE PRECEDING ARTICLE, MAY ALWAYS COMPEL THE DEBTOR TO ENTER AGAIN UPON THE
ENJOYMENT OF THE PROPERTY, EXCEPT WHEN THERE IS A STIPULATION TO THE CONTRARY.
Ø General rule: The debtor cannot demand the return of the property until the debt is totally
paid.
o Exception: The creditor may compel the debtor to reacquire the property if the
creditor does not want to pay the taxes and incur expenses for the preservation
and repair thereof.
o Exception to the exception: Stipulation to the contrary.
YAP, K. | ATENEO LAW

ART. 2137. THE CREDITOR DOES NOT ACQUIRE THE OWNERSHIP OF THE REAL ESTATE FOR
NON-PAYMENT OF THE DEBT WITHIN THE PERIOD AGREED UPON.
EVERY STIPULATION TO THE CONTRARY SHALL BE VOID. BUT THE CREDITOR MAY PETITION
THE COURT FOR THE PAYMENT OF THE DEBT OR THE SALE OF THE REAL PROPERTY. IN THIS
CASE, THE RULES OF COURT ON THE FORECLOSURE OF MORTGAGES SHALL APPLY.
Ø If the debt remains unpaid, the remedies of the creditor are:
1. Bring an action for specific performance;
2. Petition for the sale of the real property; or
3. Foreclose extrajudicially, if expressly granted.
Ø General rule: A stipulation authorizing the antichretic creditor to appropriate the property
upon nonpayment of the debt within the period of the antichresis is void.
o Exception: Stipulation for the creditor to merely take actual or constructive
possession, but not title or ownership, is valid.
Ø Prescription does not run during the period of antichresis because the antichretic creditor
is holding the property merely in the concept of a holder, not an owner.
Ø Case Doctrine/s:
Peralta v. Quimpo (1954) : In a contract of antichresis the subject matter must be immovable
and the creditor must have the obligation to apply its fruits first to the payment of the interest,
if any, and afterwards to the principal of his credit. As it is known, the creditor does not acquire
the ownership of the immovable by non-payment of the debt within the term agreed upon, and
the only right of the creditor is to hold the property until with its fruits, the interest, if any is
stipulated, and afterwards the principal credit, is paid or in the event that he does not get fruits
from the property and the debt is not paid otherwise, the creditor may bring an action for
payment of the loan and have the property sold on execution to realize payment.
ART. 2138. THE CONTRACTING PARTIES MAY STIPULATE THAT THE INTEREST UPON THE DEBT
BE COMPENSATED WITH THE FRUITS OF THE PROPERTY WHICH IS THE OBJECT OF THE
ANTICHRESIS, PROVIDED THAT IF THE VALUE OF THE FRUITS SHOULD EXCEED THE AMOUNT OF
INTEREST ALLOWED BY THE LAWS AGAINST USURY , THE EXCESS SHALL BE APPLIED TO THE
PRINCIPAL.
Ø Application of payment:
1. Interest, if owing; then
2. Principal obligation.
Ø The fruits may be appraised on the basis of their actual market value at the time of the
application. If their value should exceed the amount of interest allowed by the Usury Law
(inoperative), the excess shall be applied to the principal.
ART. 2139. THE LAST PARAGRAPH OF ARTICLE 2085, AND ARTICLES 2089 TO 2091 ARE
APPLICABLE TO THIS CONTRACT.
Ø Art. 2085 (3) – third persons who are not parties to the principal obligation may secure the
latter by pledging or mortgaging their own property.
53
Ø Case Doctrine/s:
Villanueva v. Ipondo (1947) : If the words should appear to conflict with the evident intent of
the contracting parties, the intent shall prevail.
CHAPTER FIVE: CHATTEL MORTGAGE
ART. 2140. BY A CHATTEL MORTGAGE, PERSONAL PROPERTY IS RECORDED IN THE CHATTEL
MORTGAGE REGISTER AS A SECURITY FOR THE PERFORMANCE OF AN OBLIGATION. IF THE
MOVABLE, INSTEAD OF BEING RECORDED, IS DELIVERED TO THE CREDITOR OR A THIRD
PERSON, THE CONTRACT IS A PLEDGE AND NOT A CHATTEL MORTGAGE.
Ø Chattel mortgage – contract whereby the creditor acquires the right to receive the fruits of
an immovable of his debtor, with the obligation to apply them to the payment of the interest,
if owing, then to the principal of his credit.
Ø Parties to the contract:
1. Mortgagor
2. Mortgagee
Ø Essential requisites of a contract: consent, object and consideration.
1. Constituted to secure the fulfillment of an obligation;
2. Mortgagor must be the absolute owner of the property mortgaged;
3. Mortgagor has the free disposal of their property, and in absence thereof, be
legally authorized for that purpose.
4. In a public document and recorded in the Chattel Mortgage Register.
Ø Case Doctrine/s:
Aleman v. Catera (1961) : A mortgage in order to affect third persons should not only be
registered in the Chattel Mortgage Registry, but the same should also be recorded in the Motor
Vehicles Office as required by Section 5(e) of the Revised Motor Vehicles Law.”
Montano v. Lim (1963) : The registry of the transfer of automobiles and of the certificates of
license for their use in the Bureau of Public Works (now Motor Vehicles Office) merely
constitutes an administrative proceeding which does not bear any essential relation to the
contract of sale entered into between the parties.
Makati Leasing v. Wearever Textiles (1983) : General rule: The parties to a contract may by
agreement treat as personal property that which by nature would be real property.
o Exception: When an interest of third parties would be prejudiced thereby.
ART. 2141. THE PROVISIONS OF THIS C ODE ON PLEDGE, INSOFAR AS THEY ARE NOT IN
CONFLICT WITH THE CHATTEL MORTGAGE LAW SHALL BE APPLICABLE TO CHATTEL
MORTGAGES.
Ø Governed by the:
1. Chattel Mortgage Law (Act 1508);
2. Civil Code;
3. Administrative Code;
4. Revised Penal Code; and
o Offenses:
YAP, K. | ATENEO LAW

1. Knowingly removing any personal property mortgaged
without the consent of the mortgagee;
2. Selling or pledging personal property already mortgaged
without the consent of the mortgagee written on the back of
the mortgage and duly recorded in the Chattel Mortgage
Register.
5. Ship Mortgage Decree (P.D. 1521) – for vessels of domestic ownership.
Ø Registration of Chattel Mortgage
o If the property is situated in a different province from that in which the mortgagor
resides, the registration must be in both registers. Otherwise, the chattel mortgage
is void.
o Registration may be made any time before the mortgagor has complied with his
principal obligation and no right of innocent third parties is prejudiced.
o Registration creates a real right enforceable against other creditors.
Ø Subject Matter of Chattel Mortgage
o Examples of personal property that may be the object of chattel mortgage:
1. Shares of stock
2. Interest in business
3. Machinery treated as personal property
4. Motor vehicles – mortgaged must be registered with the LTO
5. House of mixed materials
6. House intended to be demolished
7. House built on rented land
o Sec. 7 (4) of the Chattel Mortgage Law – A chattel mortgage shall be deemed to
cover only the property described therein and not like or substituted property
thereafter acquired by the mortgagor and placed in the same depositary as the
property originally mortgaged, anything in the mortgage to the contrary
notwithstanding.
§ This provision does not apply to stores open to the public for retail
business where the goods are constantly sold and substituted with new
stocks. (Ex. Drugstores)
§ A stipulation extending its scope and effect to after-acquired property
is valid and binding if the after-acquired property is in renewal of, or a
substitution for, goods on hand when the mortgage was executed, or is
purchased with the proceeds of the sale of such goods.
§ The same may be through a mortgage supplement likewise registered
with the Register of Deeds.
Ø Assignment of Chattel Mortgage
o A chattel mortgage may be alienated or assigned to a third person without the
need of registration.
o The debtor is protected if he pays his creditor without actual knowledge that the
debt has been assigned.
§ Remember that actual knowledge is contemplated herein, not
constructive knowledge from the registration of the assignment.
Ø Affidavit of good faith – an 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.
o Required for the purpose of transforming an already valid mortgage into
preferred mortgage.
o Absence of this affidavit vitiates a mortgage only as against third persons without
notice like creditors and subsequent encumbrancers.
54
Ø 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.
Ø Foreclosure of chattel mortgage
o Public sale – the creditor is permitted only to recover his credit from the proceeds
of the sale of the property at public auction through a public officer under Sec.
14 of Act 1508.
§ 30 days from the time the condition of the mortgage is broken –
includes the 10-day notice to the mortgagor and the posting
requirements.
o Private sale – stipulation may be made for the private sale of the personal
properties covered by the chattel mortgage. Mortgagor is estopped from assailing
such private sale.
§ Exception: Fraud or duress.
Ø Redemption of foreclosed property
o Equity of redemption – the right of the mortgagor to redeem the mortgaged
property after his default in the performance of the conditions of the mortgage
but before the sale of the property, to clear it from the encumbrance of the
mortgage.
o Right of redemption – the right of the mortgagor to redeem the mortgaged
property after registration of the foreclosure sale and even after the confirmation
of the sale.
Fig. 19
Redemption of Property in Foreclosure Sales
Ø Remedy of Replevin
o Replevin – the action to regain the possession of personal chattels being
wrongfully detained from the petitioner by another; or provisional remedy that
would allow the petitioner to retain the thing during the pendency of the action
and hold it pendente lite.
o If right of possession is not disputed, the action need only be maintained against
him who possesses the property. Otherwise, it might be essential to have other
persons involved and accordingly impleaded for a complete determination of the
controversy.
YAP, K. | ATENEO LAW

Ø General rule: In chattel mortgage, the creditor may bring an action for the deficiency
(specific performance) within 10 years from the time the cause of action accrues, even if it
is not upon a written contract because the obligation of the mortgagor to pay the deficiency
is one created by law.
o Exception: When the chattel mortgage is constituted as security for the purchase
of personal property payable in installments.
Ø Case Doctrine/s:

Macondray v. Ruiz (1938) : Obligations are modified by altering their object or principal
conditions, by substituting another in place of the debtor, or by subrogating a third person to the
rights of the creditor; and article 1204 provides that in order that an obligation may be
extinguished by another which substitutes it, it shall be necessary that it be so declared expressly,
or that the old and new obligations be incompatible in every respect.

Ablaza v. Ignacio (1958) : The chattels included in the chattel mortgage are only given as
security and not as a payment of the debt, in case of a failure of payment.

Servicewide v. CA (1999) : Debtor-mortgagor who has knowledge of the assignment of credit

by the creditor to another should obtain the consent of the assignee before they alienate the
mortgaged property. When the debtor-mortgagor fails to do this, the alienation is not binding on
the assignee and they (debtor- mortgagor) will stand on record as still the debtor.

55 YAP, K. | ATENEO LAW


Pledge
A contract by virtue of which the debtor
delivers to the creditor (or third person by
common agreement) a movable property
susceptible of appropriation or a document
evidencing incorporeal rights for the purpose
of securing the fulfillment 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 in appropriate cases)
Constituted on movables
Property is delivered to the pledgee for, or
by common consent to a third person for
perfection of the contract
Not valid against third persons unless a
description of the thing pledged and the
date of the pledge appear in a public
instrument
Pledgor can sell the thing pledged with the
consent of the pledgee
Pledgee has the right to sell (foreclose) the
thing received in pledge in the event the
principal obligation is not fulfilled
Art. 2112 – but if after 2 auction sales, the
thing is not sold, the creditor may now be
allowed to appropriate it.
Application of payment:
1) Principal obligation
2) Interest
3) no surplus, no deficiency
Title XVI: Pledge, Mortgage and Antichresis
Fig. 20
Real Estate Mortgage
A contract whereby the debtor secures to the
creditor the fulfillment of a principal
obligation, specially subjecting to such
security immovable property or real rights
over immovable property which obligation
shall be satisfied with the proceeds of the
sale of said property or rights in case the said
obligation is not complied with at the time
stipulated.
Constituted on:
(1) Immovables
(2) Alienable real rights upon immovables
Delivery is not necessary. Perfected by
mere consent.
Not valid against third persons if not
property registered
Mortgagor can sell the property mortgaged
even without the consent of the mortgagee
Mortgagee has the right to sell (foreclose)
the thing received in mortgage in the event
the principal obligation is not fulfilled
Application of payment:
1) Costs of the sale;
2) Amount due on the mortgage;
3) Claims of junior encumbrancers or
persons holding subsequent mortgages in
the order of their priority; and
4) Balance, if any, shall be paid to the
mortgagor or his duly authorized agent, or
the person entitled to it.
56
Chattel Mortgage
A contract whereby personal property of the
debtor is recorded in the Chattel Mortgage
Register as a security for the performance of
an obligation in favor of the creditor.
Constituted on movables
(but remember that certain movables may
be considered as immovable with respect to
rules on Property under the Civil Code)
Delivery is not necessary. Perfected by
mere consent.
Not valid against third persons if not
property registered in the Chattel Mortgage
Register
Mortgagor can sell the property mortgaged
even without the consent of the mortgagee
Mortgagee has the right to sell (foreclose)
the thing received in mortgage in the event
the principal obligation is not fulfilled
Application of payment:
1) Costs of the sale;
2) Amount due on the mortgage;
3) Claims of junior encumbrancers or
persons holding subsequent mortgages in
the order of their priority; and
4) Balance, if any, shall be paid to the
mortgagor or his duly authorized agent, or
the person entitled to it.
Antichresis
A contract whereby the creditor acquires the
right to receive the fruits of an immovable of
his debtor, with the obligation to apply them
to the payment of the interest, if owing, then
to the principal of his credit.
Constituted on fruits of real property
Delivery is only for the purpose that the
creditor may receive the fruits of the
property. Perfected by mere consent.
Not valid against third persons if not
property registered
Mortgagor can sell the property mortgaged
even without the consent of the mortgagee
Mortgagee has the right to sell (foreclose)
the thing received in mortgage in the event
the principal obligation is not fulfilled
Application of payment:
1) Interest, if owing
2) Principal obligation
3) Sums advanced to pay taxes and real
estate charges
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TITLE XII
CONCURRENCE AND PREFERENCE OF CREDITS
CHAPTER ONE: GENERAL PROVISIONS
Ø Elements:
1. 2 or more creditors have separate and distinct claims against the same debtor;
2. Debtor must be insolvent;
3. Debtor’s properties liquidated; and
4. Creditor’s claims established and due.
Ø Concurrence of credits – implies the possession by two or more creditors of equal rights
or privileges over the same specific property or all of the properties of a debtor.
Ø Preference of credit – the right held by a creditor to be preferred in the payment of his
claim above others out of the debtor’s assets.
o Preference applies only to claims which do not attach to specific properties.
(Art. 2244)
ART. 2236. THE DEBTOR IS LIABLE WITH ALL HIS PROPERTY, PRESENT AND FUTURE, FOR THE
FULFILLMENT OF HIS OBLIGATIONS, SUBJECT TO THE EXEMPTIONS PROVIDED BY LAW.
Ø General rule: Creditors are given the right to exercise all the rights of the debtor and bring
actions for the purpose of exercising such rights.
o Exception: Personal rights of the debtor.
Ø General rule: A debtor is liable with all his property, present and future, for the fulfillment
of his obligations.
o Exceptions:
1. Family home
2. Ordinary tools and implements used in trade, employment or
livelihood
3. 3 horses/cows/carabaos/beasts of burden used in occupation
4. Necessary clothing and articles for personal use.
• Exception to the exception: Jewelry
5. Household furniture and utensils
• Exception to the exception: Above Php1,000
6. Provisions for individual or family use sufficient for 4 months
7. Professional libraries of lawyers, physicians, engineers, etc.
• Exception to the exception: Above Php3,000
8. 1 fishing boat and accessories
• Exception to the exception: Above Php100,000
9. Salaries/Wages within 4 months preceding the levy
10. Lettered gravestones
11. Money ground out of life insurance
12. Right to receive legal support or property obtained as such support
13. Properties exempted by law
14. Property in custodia legis and of public dominion
15. Assets of ACP or CPG (Art. 2238)
16. Property held in trust
o Exception does not apply to execution issued upon a judgment recovered for its
price or upon a judgment of foreclosure of a mortgage thereon.
57
ART. 2237. INSOLVENCY SHALL BE GOVERNED BY SPECIAL LAWS INSOFAR AS THEY ARE NOT
INCONSISTENT WITH THIS CODE.
Ø General rule: The Civil Code prevails in case of conflict with special laws on insolvency.
o Exception: Unless otherwise provided in the special law.
Ø Under the Labor Code, in the event of insolvency of employer’s business, his workers shall
enjoy first preference as regards unpaid wages and other monetary claims, any provision
of law to the contrary notwithstanding.
Ø Case Doctrine/s:
De Barretto v. Villanueva (1961/1962) : The full application of Articles 2249 and 2242
demands that there must be first some proceeding where the claims of all the preferred creditors
may be bindingly adjudicated, such as insolvency, the settlement of a decedent's estate under
Rule 87 of the Rules of Court, or other liquidation proceedings of similar import.
ART. 2238. SO LONG AS THE CONJUGAL PARTNERSHIP OR ABSOLUTE COMMUNITY SUBSISTS,
ITS PROPERTY SHALL NOT BE AMONG THE ASSETS TO BE TAKEN POSSESSION OF BY THE
ASSIGNEE FOR THE PAYMENT OF THE INSOLVENT DEBTOR'S OBLIGATIONS, EXCEPT INSOFAR AS
THE LATTER HAVE REDOUNDED TO THE BENEFIT OF THE FAMILY. IF IT IS THE HUSBAND WHO IS
INSOLVENT, THE ADMINISTRATION OF THE CONJUGAL PARTNERSHIP OR ABSOLUTE
COMMUNITY MAY, BY ORDER OF THE COURT, BE TRANSFERRED TO THE WIFE OR TO A THIRD
PERSON OTHER THAN THE ASSIGNEE.
Ø The assets of the ACP or CPG are not transferred to the assignee in insolvency, provided:
1. ACP or CPG subsists; and
2. Obligations of the insolvent spouse have not redounded to the benefit of the
family.
ART. 2239. IF THERE IS PROPERTY , OTHER THAN THAT MENTIONED IN THE PRECEDING
ARTICLE, OWNED BY TWO OR MORE PERSONS , ONE OF WHOM IS THE INSOLVENT DEBTOR, HIS
UNDIVIDED SHARE OR INTEREST THEREIN SHALL BE AMONG THE ASSETS TO BE TAKEN
POSSESSION OF BY THE ASSIGNEE FOR THE PAYMENT OF THE INSOLVENT DEBTOR'S
OBLIGATIONS.
Ø If one of the co-owners is the insolvent debtor, his undivided share or interest in the
property shall be possessed by the assignee in insolvency proceedings.
o The share of other co-owners cannot be taken possession of by the assignee.
ART. 2240. PROPERTY HELD BY THE INSOLVENT DEBTOR AS A TRUSTEE OF AN EXPRESS OR
IMPLIED TRUST, SHALL BE EXCLUDED FROM THE INSOLVENCY PROCEEDINGS.
Ø Property held in trust by the insolvent debtor cannot be transferred to the assignee in
insolvency.
YAP, K. | ATENEO LAW

CHAPTER TWO: CLASSIFICATION OF CREDITS
ART. 2241. WITH REFERENCE TO SPECIFIC MOVABLE PROPERTY OF THE DEBTOR, THE
FOLLOWING CLAIMS OR LIENS SHALL BE PREFERRED:
(1) DUTIES, TAXES AND FEES DUE THEREON TO THE STATE OR ANY SUBDIVISION THEREOF;
(2) CLAIMS ARISING FROM MISAPPROPRIATION, BREACH OF TRUST, OR MALFEASANCE BY
PUBLIC OFFICIALS COMMITTED IN THE PERFORMANCE OF THEIR DUTIES , ON THE MOVABLES,
MONEY OR SECURITIES OBTAINED BY THEM;
(3) CLAIMS FOR THE UNPAID PRICE OF MOVABLES SOLD, ON SAID MOVABLES, SO LONG AS
THEY ARE IN THE POSSESSION OF THE DEBTOR, UP TO THE VALUE OF THE SAME; AND IF THE
MOVABLE HAS BEEN RESOLD BY THE DEBTOR AND THE PRICE IS STILL UNPAID, THE LIEN MAY
BE ENFORCED ON THE PRICE; THIS RIGHT IS NOT LOST BY THE IMMOBILIZATION OF THE THING
BY DESTINATION, PROVIDED IT HAS NOT LOST ITS FORM , SUBSTANCE AND IDENTITY; NEITHER
IS THE RIGHT LOST BY THE SALE OF THE THING TOGETHER WITH OTHER PROPERTY FOR A LUMP
SUM, WHEN THE PRICE THEREOF CAN BE DETERMINED PROPORTIONALLY;
(4) CREDITS GUARANTEED WITH A PLEDGE SO LONG AS THE THINGS PLEDGED ARE IN THE
HANDS OF THE CREDITOR, OR THOSE GUARANTEED BY A CHATTEL MORTGAGE, UPON THE
THINGS PLEDGED OR MORTGAGED, UP TO THE VALUE THEREOF ;
(5) CREDITS FOR THE MAKING, REPAIR, SAFEKEEPING OR PRESERVATION OF PERSONAL
PROPERTY, ON THE MOVABLE THUS MADE, REPAIRED , KEPT OR POSSESSED;
(6) CLAIMS FOR LABORERS' WAGES, ON THE GOODS MANUFACTURED OR THE WORK DONE ;
(7) FOR EXPENSES OF SALVAGE, UPON THE GOODS SALVAGED;
(8) CREDITS BETWEEN THE LANDLORD AND THE TENANT, ARISING FROM THE CONTRACT OF
TENANCY ON SHARES, ON THE SHARE OF EACH IN THE FRUITS OR HARVEST;
(9) CREDITS FOR TRANSPORTATION, UPON THE GOODS CARRIED, FOR THE PRICE OF THE
CONTRACT AND INCIDENTAL EXPENSES, UNTIL THEIR DELIVERY AND FOR THIRTY DAYS
THEREAFTER;
(10) CREDITS FOR LODGING AND SUPPLIES USUALLY FURNISHED TO TRAVELLERS BY HOTEL
KEEPERS, ON THE MOVABLES BELONGING TO THE GUEST AS LONG AS SUCH MOVABLES ARE IN
THE HOTEL, BUT NOT FOR MONEY LOANED TO THE GUESTS;
(11) CREDITS FOR SEEDS AND EXPENSES FOR CULTIVATION AND HARVEST ADVANCED TO THE
DEBTOR, UPON THE FRUITS HARVESTED ;
(12) CREDITS FOR RENT FOR ONE YEAR, UPON THE PERSONAL PROPERTY OF THE LESSEE
EXISTING ON THE IMMOVABLE LEASED AND ON THE FRUITS OF THE SAME, BUT NOT ON MONEY
OR INSTRUMENTS OF CREDIT;
(13) CLAIMS IN FAVOR OF THE DEPOSITOR IF THE DEPOSITARY HAS WRONGFULLY SOLD THE
THING DEPOSITED, UPON THE PRICE OF THE SALE.
IN THE FOREGOING CASES, IF THE MOVABLES TO WHICH THE LIEN OR PREFERENCE ATTACHES
HAVE BEEN WRONGFULLY TAKEN, THE CREDITOR MAY DEMAND THEM FROM ANY POSSESSOR,
WITHIN THIRTY DAYS FROM THE UNLAWFUL SEIZURE.
Ø General rule: Does not create a preference of credit, but merely a concurrence of credits
imposed on specific movable property of the debtor.
o Exception: State (remember that it must be specifically imposed on the property)
Ø Case Doctrine/s:
Sampaguita Pictures v. Jalwindor (1979) : Execution sales affect the rights of judgment debtor
only, and the purchaser in the auction sale acquires only the right as the debtor has at the time
of sale.
58
Uy v. Zamora (1965) : A mortgage of motor vehicles, in order to affect third persons, should
not only be registered in the Chattel Mortgage Registry, but the same should also be recorded
in the Motor Vehicles Office (now the Land Transportation Commission), as required in Section
5 (e) of the then Revised Motor Vehicles Law.
ARTICLE 2242. WITH REFERENCE TO SPECIFIC IMMOVABLE PROPERTY AND REAL RIGHTS OF
THE DEBTOR, THE FOLLOWING CLAIMS, MORTGAGES AND LIENS SHALL BE PREFERRED, AND
SHALL CONSTITUTE AN ENCUMBRANCE ON THE IMMOVABLE OR REAL RIGHT:
(1) TAXES DUE UPON THE LAND OR BUILDING;
(2) FOR THE UNPAID PRICE OF REAL PROPERTY SOLD, UPON THE IMMOVABLE SOLD;
(3) CLAIMS OF LABORERS, MASONS, MECHANICS AND OTHER WORKMEN, AS WELL AS OF
ARCHITECTS, ENGINEERS AND CONTRACTORS, ENGAGED IN THE CONSTRUCTION,
RECONSTRUCTION OR REPAIR OF BUILDINGS, CANALS OR OTHER WORKS, UPON SAID
BUILDINGS, CANALS OR OTHER WORKS ;
(4) CLAIMS OF FURNISHERS OF MATERIALS USED IN THE CONSTRUCTION, RECONSTRUCTION,
OR REPAIR OF BUILDINGS, CANALS OR OTHER WORKS, UPON SAID BUILDINGS, CANALS OR
OTHER WORKS;
(5) MORTGAGE CREDITS RECORDED IN THE REGISTRY OF P ROPERTY, UPON THE REAL ESTATE
MORTGAGED;
(6) EXPENSES FOR THE PRESERVATION OR IMPROVEMENT OF REAL PROPERTY WHEN THE LAW
AUTHORIZES REIMBURSEMENT, UPON THE IMMOVABLE PRESERVED OR IMPROVED;
(7) CREDITS ANNOTATED IN THE REGISTRY OF P ROPERTY, IN VIRTUE OF A JUDICIAL ORDER,
BY ATTACHMENTS OR EXECUTIONS, UPON THE PROPERTY AFFECTED, AND ONLY AS TO LATER
CREDITS;
(8) CLAIMS OF CO-HEIRS FOR WARRANTY IN THE PARTITION OF AN IMMOVABLE AMONG THEM,
UPON THE REAL PROPERTY THUS DIVIDED;
(9) CLAIMS OF DONORS OR REAL PROPERTY FOR PECUNIARY CHARGES OR OTHER CONDITIONS
IMPOSED UPON THE DONEE, UPON THE IMMOVABLE DONATED ;
(10) CREDITS OF INSURERS, UPON THE PROPERTY INSURED, FOR THE INSURANCE PREMIUM FOR
TWO YEARS .
Ø General rule: Does not create a preference of credit, but merely a concurrence of credits
imposed on specific immovable property of the debtor.
o Exception: State (remember that it must be specifically imposed on the property)
Ø Refectionary credit – an indebtedness incurred in the repair or reconstruction of something
previously made, such repair or construction being made necessary by the deterioration or
destruction of the thing as it formerly existed.
Ø The pro rata rule does not apply to (7) credits annotated in the Registry of Property, in
virtue of a judicial order, by attachments or executions, upon the property affected, “and
only as to later credits.”
Ø Case Doctrine/s:
Phil. Savings Bank v. Judge Lantin (1983) : The proceeding that declares the debtor’s asset/s
liable to pro-rata division among preferred creditors must be a proceeding in rem in order to fall
within the ambit of “a liquidation of similar import” or “other equivalent general liquidation,”
and so that all interested persons whether known to the parties or not may be bound by such
proceeding.
YAP, K. | ATENEO LAW

Manabat v. Laguna Federation (1967) : Article 2242 (7) expressly provides that credits
annotated in the Registry of Property shall be preferred only as to later credits. It follows that
the same limitation applies as to their preference among themselves, i.e., for purposes of
satisfying several credits annotated by attachments or executions, the rule is still preference
according to priority of the credits in the order of time.
ART. 2243. THE CLAIMS OR CREDITS ENUMERATED IN THE TWO PRECEDING ARTICLES SHALL
BE CONSIDERED AS MORTGAGES OR PLEDGES OF REAL OR PERSONAL PROPERTY, OR LIENS
WITHIN THE PURVIEW OF LEGAL PROVISIONS GOVERNING INSOLVENCY. TAXES MENTIONED IN
NO. 1, ARTICLE 2241, AND NO. 1, ARTICLE 2242, SHALL FIRST BE SATISFIED.
ART. 2244. WITH REFERENCE TO OTHER PROPERTY, REAL AND PERSONAL, OF THE DEBTOR,
THE FOLLOWING CLAIMS OR CREDITS SHALL BE PREFERRED IN THE ORDER NAMED:
(1) PROPER FUNERAL EXPENSES FOR THE DEBTOR, OR CHILDREN UNDER HIS OR HER PARENTAL
AUTHORITY WHO HAVE NO PROPERTY OF THEIR OWN, WHEN APPROVED BY THE COURT;
(2) CREDITS FOR SERVICES RENDERED THE INSOLVENT BY EMPLOYEES, LABORERS, OR
HOUSEHOLD HELPERS FOR ONE YEAR PRECEDING THE COMMENCEMENT OF THE PROCEEDINGS
IN INSOLVENCY;
(3) EXPENSES DURING THE LAST ILLNESS OF THE DEBTOR OR OF HIS OR HER SPOUSE AND
CHILDREN UNDER HIS OR HER PARENTAL AUTHORITY, IF THEY HAVE NO PROPERTY OF THEIR
OWN;
(4) COMPENSATION DUE THE LABORERS OR THEIR DEPENDENTS UNDER LAWS PROVIDING FOR
INDEMNITY FOR DAMAGES IN CASES OF LABOR ACCIDENT, OR ILLNESS RESULTING FROM THE
NATURE OF THE EMPLOYMENT;
(5) CREDITS AND ADVANCEMENTS MADE TO THE DEBTOR FOR SUPPORT OF HIMSELF OR
HERSELF, AND FAMILY, DURING THE LAST YEAR PRECEDING THE INSOLVENCY;
(6) SUPPORT DURING THE INSOLVENCY PROCEEDINGS, AND FOR THREE MONTHS THEREAFTER;
(7) FINES AND CIVIL INDEMNIFICATION ARISING FROM A CRIMINAL OFFENSE;
(8) LEGAL EXPENSES, AND EXPENSES INCURRED IN THE ADMINISTRATION OF THE INSOLVENT'S
ESTATE FOR THE COMMON INTEREST OF THE CREDITORS , WHEN PROPERLY AUTHORIZED AND
APPROVED BY THE COURT;
(9) TAXES AND ASSESSMENTS DUE THE NATIONAL GOVERNMENT, OTHER THAN THOSE
MENTIONED IN ARTICLES 2241, NO. 1, AND 2242, NO. 1;
(10) TAXES AND ASSESSMENTS DUE ANY PROVINCE, OTHER THAN THOSE REFERRED TO IN
ARTICLES 2241, NO. 1, AND 2242, NO. 1;
(11) TAXES AND ASSESSMENTS DUE ANY CITY OR MUNICIPALITY, OTHER THAN THOSE
INDICATED IN ARTICLES 2241, NO. 1, AND 2242, NO. 1;
(12) DAMAGES FOR DEATH OR PERSONAL INJURIES CAUSED BY A QUASI-DELICT;
(13) GIFTS DUE TO PUBLIC AND PRIVATE INSTITUTIONS OF CHARITY OR BENEFICENCE;
(14) CREDITS WHICH, WITHOUT SPECIAL PRIVILEGE, APPEAR IN (A) A PUBLIC INSTRUMENT; OR
(B) IN A FINAL JUDGMENT, IF THEY HAVE BEEN THE SUBJECT OF LITIGATION. THESE CREDITS
SHALL HAVE PREFERENCE AMONG THEMSELVES IN THE ORDER OF PRIORITY OF THE DATES OF
THE INSTRUMENTS AND OF THE JUDGMENTS, RESPECTIVELY.
Ø The claims herein are preferred in order and are paid from the “free property” of the
insolvent debtor after the creditors under Arts. 2241 and 2242 are paid.
Ø Remember that litigated credits without special privilege that appear in a (a) public
instrument or (b) final judgment have preference among themselves in the order of priority
of the dates of the instruments of the judgments.
59
Ø Case Doctrine/s:
PCIB v. National Mines (1982) : The law gives preference to claims of labor in the liquidation
of a business. The right of the Union members over the properties or assets of PIM became
vested from the date the Minister of Labor approved PIM's application for clearance on May 7,
1975.
ART. 2245. CREDITS OF ANY OTHER KIND OR CLASS, OR BY ANY OTHER RIGHT OR TITLE NOT
COMPRISED IN THE FOUR PRECEDING ARTICLES, SHALL ENJOY NO PREFERENCE.
Ø The credits herein shall be paid pro rata between the creditors.
Ø Case Doctrine/s:
Central Bank v. Morfe (1975) : Article 2244 (14)(b) of the Civil Code on preferred credits
does not apply to judgments for the payment of the deposits in an insolvent savings bank which
obtained after the declaration of insolvency.
o The effect of a judgment obtained against it by a creditor is only to fix the amount of
debt. He can acquire no lien which will give him any preference or advantage over
other general creditors.
CHAPTER THREE: ORDER OF PREFERENCE OF CREDITS
ART. 2246. THOSE CREDITS WHICH ENJOY PREFERENCE WITH RESPECT TO SPECIFIC
MOVABLES, EXCLUDE ALL OTHERS TO THE EXTENT OF THE VALUE OF THE PERSONAL
PROPERTY TO WHICH THE PREFERENCE REFERS.
ART. 2247. IF THERE ARE TWO OR MORE CREDITS WITH RESPECT TO THE SAME SPECIFIC
MOVABLE PROPERTY, THEY SHALL BE SATISFIED PRO RATA, AFTER THE PAYMENT OF DUTIES,
TAXES AND FEES DUE THE STATE OR ANY SUBDIVISION THEREOF.
ART. 2248. THOSE CREDITS WHICH ENJOY PREFERENCE IN RELATION TO SPECIFIC REAL
PROPERTY OR REAL RIGHTS, EXCLUDE ALL OTHERS TO THE EXTENT OF THE VALUE OF THE
IMMOVABLE OR REAL RIGHT TO WHICH THE PREFERENCE REFERS .
ART. 2249. IF THERE ARE TWO OR MORE CREDITS WITH RESPECT TO THE SAME SPECIFIC REAL
PROPERTY OR REAL RIGHTS, THEY SHALL BE SATISFIED PRO RATA, AFTER THE PAYMENT OF
THE TAXES AND ASSESSMENTS UPON THE IMMOVABLE PROPERTY OR REAL RIGHT.
ART. 2250. THE EXCESS, IF ANY, AFTER THE PAYMENT OF THE CREDITS WHICH ENJOY
PREFERENCE WITH RESPECT TO SPECIFIC PROPERTY , REAL OR PERSONAL, SHALL BE ADDED TO
THE FREE PROPERTY WHICH THE DEBTOR MAY HAVE , FOR THE PAYMENT OF THE OTHER
CREDITS.
Ø Two-tier order of preference:
1. First tier – taxes, duties and fees due on a specific movable or immovable
property.
YAP, K. | ATENEO LAW

2. Second tier – all other special preferred (non-tax) credits – satisfied pro rata out Example:
of any residual value of the specific property to which such other credits relate.
Ø Pro rata rule – claim of creditor divided by the total amount of all claims of concurring Properties of the Debtor Debts
creditors multiplied to the balance of the debtor’s assets.
o Payment pro rata shall be made in a proceeding where the claims of all the 1) 1989 Toyota Corolla – Php100,000 1) Toyota Shaw – car mortgage – Php200,000
preferred creditors may be bindingly adjudicated. (Ex. Insolvency, settlement of 2) Land – Php2,000,000 2) Province/State – real estate tax – Php750,000
decedent’s estate, or other liquidation proceedings) 3) Flat-screen TV – Php500,000 3) Bank 1 – loan, land registered mortgage –
Php250,000 – Jan. 1, 2000
4) Bank 2 – loan, land registered mortgaged –
ART. 2251. THOSE CREDITS WHICH DO NOT ENJOY ANY PREFERENCE WITH RESPECT TO Php250,000 – Feb. 2, 1999
SPECIFIC PROPERTY , AND THOSE WHICH ENJOY PREFERENCE, AS TO THE AMOUNT NOT PAID,
5) Funeral expenses – Php500,000
SHALL BE SATISFIED ACCORDING TO THE FOLLOWING RULES:
6) BIR – income tax – Php450,000
7) Cory – unsecured loan in 1998 – Php100,000
(1) IN THE ORDER ESTABLISHED IN ARTICLE 2244; 8) Eddie – unsecured loan in 2005 – Php100,000
(2) COMMON CREDITS REFERRED TO IN ARTICLE 2245 SHALL BE PAID PRO RATA REGARDLESS 9) Laborers – debtor is majority stockholder
OF DATES.
in corporation – Php3,000,000

Fig. 21 Step 1. Apply Arts. 2241 and 2242

Application of Payment
1989 Toyota Corolla – Php100,000
1. Pay Toyota Shaw for mortgage – Php100,000 | Art. 2241 (4)
2. The deficiency of Php100,000 will go to Art. 2245 as credit without preference.

Land – Php2,000,000
1. Pay Province/State for real estate tax – Php750,000 | Art. 2242 (1)
2. Pay Bank 2 for loan because it was made earlier – Php250,000 | Art. 2242 (7)
3. Pay Bank 1 for loan – Php250,000 | Art. 2242 (7)
4. The excess of Php750,000 will go to free property.

Step 2. Free Property

1. Php750,000 excess from the land.

2. Php500,000 TV
3. Total of Php1,250,000

Step 3. Apply Art. 2244

1. Pay funeral expenses – Php500,000 | Art. 2244 (1)

2. Pay BIR for income tax – Php450,000 | Art. 2244 (9)

Step 4. Apply Art. 2245

1. Prorate the claims of Cory, Eddie and Toyota Shaw.

2. Compute: The 3 of them fortunately have the same computation.
100,000 300,000 = Php100,000
300,000 x
3. Laborers have no claim against the debtor because the corporation and/or its officers are
the ones indebted to them, not the debtor who is merely a majority stockholder.
4. All the creditors were paid. Hence, the debtor was not insolvent at all!

60 YAP, K. | ATENEO LAW


R.A. 10142 b. Out of Court Restructuring Agreement – an rehabilitation plan agreed
FINANCIAL REHABILITATION AND INSOLVENCY ACT OF 2010 upon by the debtor and the required number of creditors. It is not
(Atty. Lerma chooses only certain topics in the law) submitted for court approval.
2. Liquidation
Things to remember: a. Voluntary
b. Involuntary
Ø Definition of terms: 3. Petition for Suspension of Payment
o Commencement Order – declares that the debtor is under rehabilitation;
appoints a rehabilitation receiver; prohibits the debtor’s suppliers of goods or Ø Know the different proceedings under the law:
services from withholding supply in the ordinary course of business for as long o If corporate entity with a particular situation, what can you file? What can be
as the debtor makes payments; authorizes the payment of administrative filed against you?
expenses as they become due; and sets the case for initial hearing within 40 days o Rights of creditors under each type of proceeding
form the filing of the petition. o What can and can’t be done by the corporation/creditor during the proceeding?
o Fair valuation – what a willing owner, not compelled to sell, would take, and a o Can you still continue business under rehabilitation? Yes.
willing purchaser would pay, when not compelled to buy. o Can you sell properties? It depends. If ordinary course of business, yes.
o Insolvency – the financial incapacity of the debtor to pay their liabilities as they o What is necessary to initiate the proceeding? Vote thresholds.
fall due in the ordinary course of business or whenever their liabilities are greater
than their assets. Ø What is a stay/suspension order?
o Rehabilitation – The plan by which the financial well-being and viability of an 1. Suspends all actions or proceedings, whether in court or not, for the enforcement
insolvent debtor can be restored using various means. of claims against the debtor;
o Standstill Period – period agreed upon by the debtor and its creditors to enable 2. Suspends all actions to enforce any judgment, attachment or other provisional
them to negotiate and enter into an OCRA. remedies against the debtor; and
o Suspension of Payment – remedy available to an individual debtor who seeks 3. General rule: Prohibits the debtor from making any payment of its liabilities
to suspend the payments outside of the necessary or legitimate expenses of his outstanding as of the commencement date.
business while the proceedings are pending. o Exceptions:
1. Cases already pending appeal in the SC as of
Ø Proceedings are in rem and summary, not adversarial. commencement;
o NEW FEATURE: You are allowed to consolidate liquidation proceedings 2. Cases pending at a specialized court or quasi-judicial
between companies with common properties. agency;
3. Enforcement of claims against sureties and other persons
Ø Purpose of FRIA: solidarily liable with the debtor, and accommodation
1. Liquidation mortgagors;
2. Rehabilitation § Unless property subject of accommodation
mortgage is necessary for the rehabilitation of the
Ø Debtors covered under FRIA: debtor.
1. Sole proprietorship registered with the DTI 4. Actions of customers or clients of a securities market
2. Partnership registered with the SEC participant;
3. Corporation organized under Philippine laws 5. Actions of a licensed broker or dealer to sell pledged
o Government financial institutions other than banks and GOCC’s are securities of a debtor;
covered by the FRIA unless their specific charter provides otherwise. 6. Clearing and settlement of financial transactions through
4. Individual debtor facilities of a clearing agency or similar entities; and
7. Criminal action against the individual debtor/owner/officer.
Ø General rule: FRIA governs all petitions filed after it has taken effect, and those pending
at the time it became effective. Ø Commencement Order
o Exception: If the court deems that the application of FRIA would not be feasible o Effects of the commencement order?
or would work injustice. 1. Vests the rehabilitation receiver with all the powers and functions
provided for in the FRIA;
Ø Remedies under FRIA: 2. Consolidates all legal proceedings by and against the debtor to the
1. Rehabilitation court.
a. Pre-negotiated – the debtor and the required number of creditors agree 3. Renders null and void the results of any extrajudicial activity or
in the rehabilitation plan before the filing of a petition with the process to seize property;
rehabilitation court.
61 YAP, K. | ATENEO LAW

4. Renders null and void any set-off after the commencement date of any
debt owed to the debtor by any of the debtor’s creditors; and
5. Renders null and void the perfection of any lien against the debtor’s
property after the commencement date.
o What are excluded therefrom?
1. Upon commencement, taxes and fees due to the national or local
government units are considered waived.
2. Debtor’s suppliers of goods or services are prohibited from
withholding supply in the ordinary course of business for as long as the
debtor makes payments after the issuance of the commencement order.
o General rule: Effectivity is for the whole duration of the rehabilitation
proceeding.
§ Exceptions:
1. Earlier lifted by the court;
2. Rehabilitation plan is seasonably confirmed or approved; or
3. Rehabilitation proceedings are ordered terminated by the
court.

Ø Cram-down Power/Effect – the power to approve or implement the Rehabilitation Plan

despite the lack of approval, or objection from the owners, partners or stockholders of the
insolvent debtor, provided that the terms thereof are necessary to restore the financial well-
being and viability of the insolvent debtor.
o Requisites:
1. Rehabilitation plan complies with the requirements of FRIA;
2. Rehabilitation receiver recommends the confirmation of the
Rehabilitation plan;
3. Shareholders, owners or partners of the juridical debtor lose at least
their controlling interest as a result of the Rehabilitation plan; and
4. Rehabilitation plan would likely provide the objecting class of
creditors with compensation which has a net present value greater than
that which they would have received if the debtor were under
liquidation.

Ø Standstill Period
o Requirements:
1. Approved by the creditors representing more than 50% of the total
liabilities of the debtor;
2. Notice thereof is published in a newspaper of general circulation once
a week for 2 consecutive weeks; and
3. Must not exceed 120 days from effectivity.
o Expires:
1. Upon 120 days from lapse of standstill agreement;
2. Upon effectivity of the OCRA;
3. Upon termination of the negotiations for OCRA as declared by
creditors representing more than 50% of the total liabilities of the
debtor, whichever comes first.

62 YAP, K. | ATENEO LAW


Fig. 22
Remedies Under FRIA
Petition for Suspension of
Rehabilitation Liquidation
Payment
Definition The plan by which the financial well-being and viability of an insolvent debtor can be restored using various means. (Ex. debt The selling of the assets of the insolvent Remedy available to an individual
forgiveness, debt rescheduling, reorganization or quasi-reorganization, dacion en pago, debt-equity conversion, and sale of debtor, paying bills and dividing the debtor who seeks to suspend the
business. remainder among shareholders, partners payments outside of the necessary
or other investors. or legitimate expenses of his
business while the proceedings are
Court-Supervised Out of Court Restructuring
Pre-Negotiated Voluntary Involuntary pending.
Voluntary Involuntary Agreement (OCRA)

Who May Debtor or group of Creditor / group of Individual debtor, by itself or 1. Debtor must agree to the OCRA Individual debtor Creditor with a
File debtors with creditors with total claims jointly with any of its creditors 2. Approved by creditors whose liabilities claim of at least
of at least:
approval from: 1. Php1,000,000; or representing at least 67% (2/3) of exceed his assets Php500,000 –
2. 25% capital or Endorsed by creditors with a the secured obligations of the and whose debts RTC of province
1. sole prop. – partner’s total claim of at least 2/3 of the debtor exceed or city where the
owner contribution, total liabilities of the debtor, 3. Approved by creditors Php500,000 – debtor resides
whichever is Individual debtor only
2. partnership – higher
including secured creditors representing at least 75% (3/4) of RTC of province
majority holding more than 50% of the the unsecured obligations of the or city where he
3. corporation – Requisites: 1) No genuine total secured claims debtor resides 6 months
issue of fact or law and
majority vote due payments not made
4. Approval by creditors holding at prior to filing Creditor with a
of stockholder for at least 60 days AND least 85% of the total liabilities, claim at least
2/3 cap. stock Debtor failed to meet secured and unsecured. Insolvent Php1,000,000 or
liabilities; OR 2) Creditor juridical debtor – 25% of
Where RTC which has other than petitioners RTC which has jurisdiction in the
RTC where its outstanding
To File jurisdiction over initiated foreclosure RTC which has jurisdiction province or city where the debtor
proceedings against principal office is capital stock -
principal office of over the principal office of the Not filed in court has resided for 6 months prior to
debtor that will prevent situated. same
debtor alleged to be debtor from paying debts debtor alleged to be insolvent filing
insolvent; same > as they become due.

Process 1. Filing of petition 1. Filing of petition 1. OCRA between debtor and 1. Filing of petition 1. Filing of petition
2. Issuance of Commencement Order 2. Issuance of court order – required number of creditors 2. Issuance of court order 2. Action on petition – court
3. Publication of Order and delivery of within 5 working days. a. Standstill Period 3. Publication of petition and may issue a suspension order.
notices – once a week for 2 consecutive 3. Publication of order and b. Court Assistance – notification of parties 3. Notification through
weeks; 1st publication within 7 days notification of creditors for standstill 4. Filing of comments – filed by publication and notices
from issuance of Order. 4. Verified objection to the agreement only. debtors or creditors who are not 4. Holding of creditor’s
4. Creditor’s claims – if fails to file, not petition or 2. Publication of OCRA – once a petitioners – within 15 days from meeting and voting by
allowed to participate in the Rehabilitation plan – any week for at least 3 consecutive last publication. creditors – must be with the
proceedings. creditor or interested party weeks in a newspaper of general 5. Hearing on the petition or presence of creditors claiming
5. Rehabilitation receiver’s report – may submit within 8 days circulation in the Philippines motion a total of at least 3/5 of the
within 40 days form initial hearing from the date of the 2nd 3. Effective 15 days after date of 6. Issuance of liquidation order liabilities of the insolvent
6. Court action – a) give due course; b) publication of the Order. last publication 7. Publication of liquidation order debtor
dismiss; c) convert to liquidation 5. Comments 4. Cram-down Effect 8. Hearing 5. Objections to proposal –
7. Formation of creditor’s committee 6. Hearing on the 5. Amendment or Modification – 9. Appointment of liquidator – by filed by any creditor who
8. Rehabilitation plan – a) approved; b) objections – within 20-30 approved by the debtor and creditors or by court attended the meeting and
rejected days from the date of the required number of creditors and 10. Registry of claims protested against the vote of
9. Termination of proceedings – a) court 2nd publication of the takes effect after 15 days from the 11. Opposition or challenge to the majority – within 10 days
dismisses; b) debtor fails to submit Plan Order. date of last publication of required claims from the last meeting.
c) no substantial likelihood that debtor 7. Approval of the plan – notice. 12. Submission of disputed claims 6. Hearing and issuance of
can be rehabilitated = convert to within 10 days from the 2nd 6. Petition for Annulment 13. Submission of liquidation plan corut order – if debtor does
liquidation; d) plan approved but debtor publication of the Order; a. Non-compliance with 14. Implementation of liquidation not comply with the
fails to comply or 20 days therefrom if standstill agreement plan agreement in the meeting,
with hearing on the b. Vitiated consent of 15. Complete implementation of the then the creditors will regain
comments. number of creditors plan all the rights they had against
required for standstill 16. Termination of proceedings the debtor. Liquidation
agreement 17. Discharge of liquidator proceedings will then occur.

63 YAP, K. | ATENEO LAW



64 YAP, K. | ATENEO LAW