LAW ON

CREDIT TRANSACTIONS

4th YEAR
REVIEW CLASS

ST. THOMAS MORE

SCHOOL OF LAW
Concept - Include all transactions involving the
purchase or loan of goods, services or money in
the present with a promise to pay or deliver in
the future

Parties:
1) BAILOR – the one who lends a thing;
 Need not be the owner but must have
possessory interest in the SM
 The bailor is not required to be the owner but
he must have legal possession.

2) BAILEE – the one who borrows the thing

2007 BQ: The parties to a bailment are:

A. bailor
B. bailee
C. comodatario
D. all of the above
E. letters a and B
 Obligations of the Bailee (Arts. 1941-1945)
1. Pay for the ordinary expenses for the use and
preservation of the thing loaned
2. Liable for the loss of the thing even if:
a. Devoted the thing to a different purpose
b. Kept it longer than a stipulated time/use
c. Appraised value of the thing was made known
upon delivery
Exception: stipulation exempting the bailee from
loss due to FE
d. Lent/leased the thing to a 3rd person not a
household member
e. Chooses to save his own property instead of the
thing when both are exposed to danger
3. Not liable for the deterioration of the thing
loaned due to the use thereof and without
bailee’s fault

4. No right of retention on the ground that the

bailor owes his something, even though it
maybe by reason of expenses

Exception: Damages incurred by the bailee for

bailor’s failure to inform of the flaws of the
thing loaned
Effect of Retention: Not deemed adverse
possession against the owner
 Obligations of the Bailor (Arts. 1946-1952)

1. Can demand the return of the thing loaned only

after the stipulated time or accomplishment of the
use
Exceptions:
a. Urgent Need
 Bailor may demand the return/temporary use of
the thing
 Effect: Contract is temporarily suspended
b. Precarium
 Duration/use is not stipulated
 Use is merely tolerated
c. Bailor can demand immediate return of the thing
from the Bailee due to latter’s ingratitude

i. If 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
ii. if the bailee impute to the bailor any criminal
offense,, or any act involving moral turpitude,
even though he should prove it, unless the
crime or the act has been committed against
the bailee himself, his wife or children under
his authority;
iii. If he unduly refuses him support when the
bailee is legally or morally bound to give
support to the bailor.
2. Reimburse bailee for expenses for the preservation of
the thing

a. Extraordinary expenses
IF: Bailor is notified by the bailee before incurring
them
EXCEPT: If it is so urgent that reply to notification
cannot be awaited without danger

b. Equal sharing with bailee for extraordinary expenses

incurred on the occasion of the actual use by the
bailee even if the latter acted without fault
EXC: Stipulation to the contrary
3. Not liable to reimburse bailee for expenses
other than ordinary and extraordinary

4. Liable for damages to bailee if the latter

suffers such because of failure to inform
(the bailee) of the flaws of the thing

5. Cannot exempt himself from expenses or

damages by abandoning the thing to the
bailee
BAR 2005. Before he left for Riyadh to work as a mechanic,
Pedro left his Adventure van with Tito, with the
understanding that the latter could use it for one year
for his personal or family use while Pedro works in
Riyadh. He did not tell Tito that the brakes of the van
were faulty. Tito had the van tuned up and the brakes
repaired. He spent a total amount of P15,000.00. After
using the vehicle for two weeks, Tito discovered that it
consumed too much fuel. To make up for the expenses,
he leased it to Annabelle. Two months later, Pedro
returned to the Philippines and asked Tito to return the
van. Unfortunately, while being driven by Tito, the van
was accidentally damaged by a cargo truck without his
fault.
 a) Who shall bear the P15,000.00 spent for the repair of the
van? Explain. (2%)

b) Who shall bear the costs for the van’s fuel, oil and other
materials while it was with Tito? Explain. (2%)

c) Does Pedro have the right to retrieve the van even before
the lapse of one year? Explain. (2%)

d) Who shall bear the expenses for the accidental damage

caused by the cargo truck, granting that the truck driver
and truck owner are insolvent? Explain. (2%)

7/27/2018
2013 BQ: IV. Cruz lent Jose his car until Jose finished his
Bar exams. Soon after Cruz delivered the car, Jose
brought it to Mitsubishi Cubao for maintenance check
up and incurred costs of P8,000. Seeing the car's
peeling and faded paint, Jose also had the car
repainted for P10,000. Answer the two questions
below based on these common facts.

IV. (1) After the bar exams, Cruz asked for the return of
his car. Jose said he would return it as soon as Cruz
has reimbursed him for the car maintenance and
repainting costs of P 18,000.

Is Jose's refusal justified? (1%)

(A) No, Jose's refusal is not justified. In this kind of contract,
Jose is obliged to pay for all the expenses incurred for the
preservation of the thing loaned.

(B) Yes, Jose's refusal is justified. He is obliged to pay forall the

ordinary and extraordinary expenses, but subject to
reimbursement from Cruz.

(C) Yes, Jose's refusal is justified. The principle of unjust

enrichment warrants the reimbursement of Jose's
expenses.

(D) No, Jose's refusal is not justified. The expenses he

incurred are useful for the preservation of the thing
loaned. It is Jose's obligation to shoulder these useful
expenses.
IV. (2) During the bar exam month, Jose lent
the car to his girlfriend, Jolie, who parked
the car at the Mall of Asia's open parking
lot, with the ignition key inside the car. Car
thieves broke into and took the car.

Is Jose liable to Cruz for the loss of the car

due to Jolie's negligence? (1%)
(A) No, Jose is not liable to Cruz as the loss was not due
to his fault or negligence.

(B) No, Jose is not liable to Cruz. In the absence of any

prohibition, Jose could lend the car to Jolie. Since the
loss was due to force majeure, neither Jose nor Jolie
is liable.

(C) Yes, Jose is liable to Cruz. Since Jose lent the car to
Jolie without Cruz's consent, Jose must bear the
consequent loss of the car.

(D) Yes, Jose is liable to Cruz. The contract between them

is personal in nature. Jose can neither lend nor lease
the car to a third person.
LOAN. Concept – 1933

By the contract of loan, one of the parties delivers to

another, either:

something not consumable so that the latter may

use the same for a certain time and return it, in
which case the contract is called a commodatum; or

money or other consumable thing, upon the

condition that the same kind and quality shall be
paid, in which case the contract is simply called a
loan or mutuum.
Loan: As a Contract

1. Real contract
 Not perfected until the delivery of the object (Art.
1934)
2. Not among those enumerated under the SOF (Art.
1403 (2))
3. All contracts involving an amount exceeding 5k
must appear in writing, even private ones (Art.
1358)
 Take Note: Purpose is for greater efficacy only
and not for validity
COMMODATUM

Concept - Contract where bailor delivers to bailee a

non-consumable thing so that bailee may use it
for a certain time and return the identical thing

What if there is a consideration in money?

If there is consideration in money for the use of the

SM - contract is NOT commodatum but is a
contract of lease
ARTICLE 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.
SIMPLE LOAN

Concept - Lender delivers to borrower money or

other consumable upon the condition that the
latter shall pay the same amount of the same
kind and quality

The Debtor
 Has ownership of money received or other
fungible thing
 Must pay the creditor an equal amount of the
same kind and quality
 Is liable for loss of money or thing
INTERESTS: Nacar vs. Gallery Frames and Bordey Jr., G.R. No. 189871,
Aug. 13, 2013

A. Interest for the use or loan or forbearance of money, goods or

credit
a.1. If no stipulation re: payment of interest:
 No interest for use or forbearance
 No interest shall be due unless it has been expressly
stipulated in writing (Art 1956)
a.2. If there is express stipulation (which must be in writing to be
valid) for payment of interests, but no rate mentioned
 Interest shall be 6% per annum
a.3. If there is stipulation in writing and rate of interest is agreed
upon (including commissions, premiums, fees and other charges)
 Such interest shall not be subject to ceiling prescribed under
the Usury Law (Sec. 1, Monetary Board Circular 905, 10 Dec
1982))
B. Interest as damages for breach or default in payment of loan
or forbearance of money, goods, credit

b.1. No stipulation as to interest for use of money

 In case of DEFAULT, loan or forbearance shall earn legal
interest, at rate of 6% per annum from date of judicial
or extrajudicial demand, subject to Art 1169
(delay/mora)

b.2. If rate of interest stipulated, e.g. 24% per annum

 Loan + stipulated interest, shall earn 6% per annum
from date of judicial demand * Interest due shall earn
legal interest from the time it is judicially demanded,
although the obligation may be silent upon this point
(Art 2212)
C. If obligation NOT consisting of a loan or forbearance of money, goods or
credit is breached, e.g. obligation to give, to do, not to do
 Interest may be imposed at the discretion of court at the rate of 6%
per annum.
 No interest adjudged on unliquidated claims or damages, until
demand can be established with reasonable certainty.
 After thus established with reasonable certainty , interest of 6% per
annum shall begin to run from the date of judicial or extrajudicial
demand.
 But if obligation cannot be established with reasonable certainty at
time of demand, 6% per annum interest shall begin to run only from
date of judgment – on amount finally adjudged by court.

D. When judgment of court awarding money becomes final and executory,

money judgment is A, B and C (above) shall earn 6% per annum from
finality of judgment until full payment – money judgment shall be
considered as forbearance of credit
Guidelines: Implementation of New Legal Rate of Interest

 in the absence of an express stipulation as to the rate of interest

that would govern the parties, the rate of legal interest for loans
or forbearance of any money, goods or credits and the rate
allowed in judgments shall no longer be twelve percent (12%) per
annum − as reflected in the case of Eastern Shipping Lines x x x
 the rate of legal interest for loans or forbearance of any money,
goods or credits and the rate allowed in judgments shall will now
be six percent (6%) per annum effective July 1, 2013.
 It should be noted, nonetheless, that the new rate could only be
applied prospectively and not retroactively.
 Consequently, the twelve percent (12%) per annum legal interest
shall apply only until June 30, 2013.
 Come July 1, 2013 the new rate of six percent (6%) per annum
shall be the prevailing rate of interest when applicable.
Authority of the BSP-MB to prescribe rates of interest
 the BSP-MB may prescribe the maximum rate or rates of
interest for all loans or renewals thereof or the
forbearance of any money, goods or credits, including
those
 For loans of low priority such as consumer loans,
 as well as such loans made by
 Pawnshops,
 finance companies and
 similar credit institutions.
 It even authorizes the BSP-MB to prescribe different
maximum rate or rates for different types of borrowings,
including
 deposits and deposit substitutes, or
 loans of financial intermediaries.
BAR 2002
Carlo sues Dino for
(a) collection on a promissory note for a loan,
with NO agreement on interest on which
Dino defaulted
(b) damages caused by Dino on Carlos’ priceless
painting on which Dino accidentally spilled
acid while transporting it.

The court finds Dino liable for both obligations.

What rates of interests may the court impose?
BAR 2001
A obtained a P300,000 housing loan from X
Bank at 18% per annum interest. The
promissory note provides that X reserves the
right to increase the interest within the limits
allowed by law. X Bank increased the interest
to 48% per annum. When A questioned the
increase in court, X argued that the usury law
is already legally suspended.

Will the action prosper? Why?

BQ 2013

VI. Lito obtained a loan of P1,000,000 from

Ferdie, payable within one year.

(A) Would it be legally significant - from the

point of view of validity and enforceability -
if the loan was in public or private
instruments? (6%)
BASIS COMMODATUM MUTUUM

SUBJECT MATTER Non-consumable Money or consumable

NATURE Essentially gratuitous Gratuitous or onerous

PURPOSE Use or temporary For consumption

possession
KIND OF Real or personal Personal property
PROPERTY
INVOLVED
RISK OF LOSS Lender or bailor retains Transfer of ownership to
ownership borrower
TIME OF End of period unless End of period
PAYMENT urgent need, acts of
ingratitude or precarium

CHARACTER OF Purely personal Not personal

THE CONTRACT
2 Kinds of Unsecured Loans
 guaranty
 suretyship

Guaranty
 By guaranty, a person called the guarantor, binds himself to the creditor
to fulfill the obligation of the principal debtor in case the latter should
fail to do so (2047)

Suretyship
 Relationship where one person undertakes to ensure the performance of
an obligation of another person

SIMILARITY between guaranty and suretyship

 Both promise or undertake to answer for a debt, default or miscarriage
of another person
 Both are accessory contracts.
 Guaranty Surety

Liability depends on He assumes liability as a

independent agreement to pay regular party to the contract
the principal’s obligation
should he fail to do so

Obligation is secondary Obligation is primary

Undertaking is to pay if Undertaking is to pay if

principal debtor cannot pay principal debtor does not pay

An insurer of the solvency of Insurer of a debt

the debtor

Entitled to excussion No excussion

There can be a guaranty of:
 A voidable contract
 An unenforceable contract
 A natural obligation
 Future debts
 Conditional obligations

Qualifications of a guarantor
 Person who possesses integrity
 Has the capacity to bind himself
 Has sufficient property to answer for the
obligation he guarantees (2056)
Grounds for disqualification
 Insolvency OR
 Conviction of a crime involving dishonesty

NOTE: If creditor did not choose the guarantor, he

may demand a replacement guarantor (2056)

If guaranty is without the knowledge or consent or

against the will of the debtor (2050), the
Guarantor:
 can only recover in so far as payment was
beneficial to the debtor (1236)
 cannot compel subrogation to the creditor’s
rights (1237)
Effects of guaranty

1.Between the creditor and guarantor

2.Between the debtor and guarantor
3.Between the co-guarantors
1. Between Creditor and Guarantor: BENEFIT
OF EXCUSSION

 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 legal remedies against the
debtor (2058)
 The guarantor of a guarantor shall enjoy
the benefit of excussion, both with respect
to the guarantor and to the principal
debtor (2064)
CREDITOR DEBTOR

Excussion

Guarantor

Excussion

Sub-
Guarantor
How excussion is used

 When the debtor is sued, the guarantor must be

notified of the action so that he may set up
excussion as a defense (2062)
 Guarantor points out to the creditor available
property of the debtor within the Philippines
(2060)
 After guarantor points to debtor's property and
creditor neglects to exhaust the properties he
shall suffer the loss to the extent of the value of
the properties (2061)
Excussion shall not take place in the ff:

1. Guarantor has expressly renounced it

2. Guarantor has bound himself solidarily with
the debtor
3. Insolvency by the debtor
4. Debtor 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
BQ 2013 III. Amador obtained a loan of
P300,000 from Basilio payable on March25,
2012. As security for the payment of his
loan, Amador constituted a mortgage on
his residential house and lot in Basilio's
favor. Cacho, a good friend of Amador,
guaranteed and obligated himself to pay
Basilio, in case Amador fails to pay his loan
at maturity.

(1) If Amador fails to pay Basilio his loan on

March 25, 2012, can Basilio compel Cacho
to pay? (1%)
(A) No, Basilio cannot compel Cacho to pay because as
guarantor, Cacho can invoke the principle of
excussion, i.e., all the assets of Basilio must first be
exhausted.

(B) No, Basilio cannot compel Cacho to pay because

Basilio has not exhausted the available remedies
against Amador.

(C) Yes, Basilio can compel Cacho to pay because the

nature of Cacho's undertaking indicates that he has
bound himself solidarily with Amador.

(D) Yes, Basilio can compel Cacho who bound himself to

unconditionally pay in case Amador fails to pay; thus
the benefit of excussion will not apply.
2. Between the debtor and guarantor: INDEMNITY

 total amount of the debt

 legal interests from time payment was
demanded till payment
 expenses by guarantor after demanding
payment from debtor
 damages, if they are due
Rights of the Guarantor who paid
 Subrogated to all rights of the creditor
 In case of compromise, guarantor cannot
collect more than what he paid
 If he pays before due date, cannot collect
earlier than due date unless payment was
ratified by the debtor

Guarantor pays without notice to the debtor

 Debtor may set up all defenses debtor can set
up against the creditor
 Defenses – minority, extinguishment etc.
Repeat Payment Rule
 Guarantor pays without notifying debtor
 Debtor repeats payment

GEN. RULE: guarantor has no remedy against

the debtor but only against the creditor

EXCEPTION: debtor must reimburse if

 gratuitous guaranty;
 guarantor was prevented by fortuitous
event from notifying debtor; and
 creditor becomes insolvent
Guarantor of an absent 3rd person (2072)

 A person requests another to guarantee

a debt
 Debt belongs to an absent third person
 Guarantor pays the debt
 Guarantor may collect either from
 the person requesting or
 the absent debtor
Guarantor may ask for release or additional security
(2071)
 when guarantor is sued for payment
 principal debtor is insolvent
 debtor bound himself to relieve him from the
guaranty and the period has expired
 debt has become demandable due to expiration of
period for payment
 principal obligation has no fixed period and after
the lapse of 10 years
 reasonable grounds to fear absconding of debtor
 when the debtor is in imminent danger of being
insolvent
3. Among co-guarantors (2073)

 There are 2 or more guarantors of the

same debtor
 same debt
 one of the co-guarantors pays
 payment is made by judicial demand OR
 principal debtor is insolvent
 Insolvent co-guarantor

• G1 pays
• G2 is insolvent
• G1 and G3 pay P300,000 each
 Insolvent guarantor has a sub-guarantor

• G1 pays
• G2 is insolvent
• G1, SG2 and G3 pay P200,000 each
Effects: Co-guarantor is released by creditor
 If WITH consent of co-guarantors, they will bear
the share of released guarantor
 If WITHOUT the consent of co-guarantors, they
will NOT bear the share of the released co-
guarantor

EXTINGUISHMENT OF GUARANTEE

 Payment of principal obligation

 Novation without guarantor’s consent which
materially affects the obligation
 Extension of period to pay without guarantor’s
consent (2079)
 PLEDGE

 It is a contract by virtue of which the debtor

delivers to the creditor or to a third person a
movable or 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 shall
be returned with all its fruits and accessions.
ESSENTIAL REQUISITES, 2085
 constituted to secure the fulfillment of a principal
obligation
 pledgor is the absolute owner of the thing (Cavite v. Lim)
 pledgor has the free disposal of their property or are
legally authorized to do so
 the property must be placed in the possession of the
creditor (2093)
 the description of the thing and the date of the pledge
must be in a public instrument to bind 3rd persons (2096)

No Double Pledge
 A property already pledged cannot be pledged again while
the first pledge is still subsisting (Mission de San Vicente v.
Reyes, 19 Phil 524)
PARTIES
 PLEDGOR – the debtor or a third person who
pledges the subject matter to secure the loan
of the debtor; he must be the owner and must
have free disposal of the property or at least
must be authorized to dispose
 PLEDGEE – creditor

NOTE: The pledgor may or may not be the debtor

(2083, 2nd paragraph)

 A pledge executed before a person becomes the

owner of the object is VOID (Vda. De Bautista v.
Marcos, 3 SCRA 434)
SUBJECT MATTER
- all movables which are within the commerce of man provided
they are susceptible of possession (2094 )
- incorporeal rights, evidenced by negotiable instruments, bills of
lading, shares of stocks, bonds, warehouse receipts and similar
documents. The instrument must be delivered to the pledgee
and properly indorsed. (2095 )

 Future property cannot be pledged (Gen. Insurance v.

Masakayan, 54 SCRA 120)
 A mortgagee has the right to rely upon the title and does not
have to inquire further, unless mortgagee is a banking
institution (GSIS v. CA, 287 SCRA 204)
 But in case of banking institutions, it is not enough that it relies
upon the title. It must conduct credit investigations.
 A co-owner may pledge his portion of the thing (PNB v. CA, 98
SCRA 207)
NATURE (2089)

GENERAL RULE: Indivisible

 Debtor who pays part of the debt cannot
ask for proportionate extinguishment of
the pledge

EXCEPTION: where several things are given in

pledge and each thing guarantees only a
determinate portion of the credit
PLEDGEE

Obligations
1. To appropriate fruits, income, dividends
or interest of thing with those which are
owing him, and if none, to apply it to the
principal (2102)
2. Take care of the thing with the diligence
of a good father of a family, subject to
reimbursement (2099)
3. Cannot deposit the thing with a 3rd
person and is bound by his agents’ acts
(2100)
4. Liable for loss and deterioration (2099)
Rights
1. Cannot deposit the thing with a 3rd person and is bound by
his agents’ acts (2100)
2. Liable for loss and deterioration (2099)
3. To use the thing to preserve it (2099)
4. To retain possession of the thing until fulfillment of the
obligation (2098)
5. Reimbursement for expenses to preserve the thing (2099)
6. May file actions to recover it from or defend it against 3rd
persons (2103)
7. In case of fear of destruction or impairment without the
fault of the pledgee, may cause the sale in a public auction
(2108)
8. If he is deceived as to substance or quality of the thing may
ask for replacement OR demand immediate payment (2109)
PLEDGOR: Rights and Obligations

1. May dispose of the thing, with the

consent of the pledgee and with the thing
still subject to the pledge and in the
possession of the pledgee (2097)
2. Must advise the pledgee of hidden flaws
of the thing otherwise shall be liable for
damages (2101)
3. In case of unauthorized use or misuse by
pledgee, may ask judicial or extrajudicial
deposit of thing (2104)
Loss or Impairment
 If the pledgee is negligent - may ask for
deposit with 3rd person (2106)
 If without fault of pledgee - may demand
return of thing and offer a replacement
(inferior to right to sell by pledgee) (2107)

Extinguishment of Pledge
 If the thing pledged is returned by pledgee
to the pledgor (2110)
 A statement in writing by the pledgee that
he renounces or abandons his pledge
(2111)
When the debtor defaults: Steps by Pledgee

 Obligation is due and unpaid

 Sale of thing at a public auction
 Notice to the pledgor and owner stating
the amount for which the sale is to be held
 Sale must be conducted by a notary public
 After the sale, pledgee must advise the
pledgor of the results
Public Auction

1. Pledgor - may bid and if he offers the same

terms as highest bidder, he is preferred (2113)
2. Pledgee - may bid but not if he is the only
bidder (2113, 2nd par.)
3. all bids shall offer to pay the purchase price at
once (2114)
4. Deficiency - pledgee cannot collect the balance
(2115)
5. Excess - debtor is not entitled to the excess
unless the contrary is provided (2115)
Can the creditor automatically appropriate the thing to
himself in case of non-payment?

 NO. Creditor cannot appropriate the thing pledged to

himself or dispose of them. Any stipulation to the
contrary is VOID (2088).
 Such stipulation is called pactum commissorium

Elements of Pactum
 There should be a pledge, mortgage, or antichresis of
property by way of security for the payment of the
principal obligation;
 There should be stipulation for an automatic
appropriation by the creditor of the property in the
event of non-payment of the obligation
There is pactum
 Stipulation that the thing shall be considered in full
payment of the debt without further action
(Northern Motors v. Herrera)
 Stipulation in a pacto de retro sale that ownership
over the thing will automatically pass to the vendee
in case there is no redemption (Lanuza v. De Leon)

Exception to Pactum
 After 2 auction sales and there are no bidders,
pledgee may appropriate the thing to himself BUT he
must give an acquittance of the entire claim (2112)
 Appropriation is by virtue of a judicial order
Legal Pledges

 Provisions on possession, care and sale of the thing

pledged cover legal pledges (2121)
 Art. 546 – right of possessor in good faith to refund
of necessary expenses before he returns the thing
 Art. 1707 – lien on goods manufactured or work
done by laborer until his wages are paid
 Art. 1731 – right to retain by a worker who executed
work on a movable
 Art. 1914 – right of an agent to retain the thing until
he is reimbursed advances and damages
 Art. 1994 – right of retention of a depositary until he
is paid his fees
 Art. 2004 – right of a hotelkeeper to retain properties
of the guest until his bills are paid
BAR 2004

ABC loaned to MNO P40,000 for which the latter

pledged 400 shares of stocks in XYZ Corp. The parties
agreed that if pledgor failed to pay the loan with 10%
yearly interest within four years, the pledgee is
authorized to foreclose on the shares. MNO
delivered possession of shares to ABC with
understanding that the shares will be returned to
MNO upon payment of loan. However, the loan was
not paid on time.

A month after 4 years, may the shares be deemed

owned by ABC?
BQ 2001
To secure a loan from a rural bank, A assigned her
leasehold rights over a public market stall in favor of
the bank. The deed of assignment provides that in
case of default in the loan payment, the bank shall
have the right to sell Purita’s rights over the stall as
her attorney in fact and to apply the proceeds to the
payment of the loan.

Was the assignment of rights a mortgage or cession?

Assuming it is a mortgage, does the provision giving
the bank the power to sell the stall constitute pactum
commissorium?
BAR 1999

X borrowed money from Y and gave a piece of land

as security by way of mortgage. It was expressly
agreed in the mortgage contract that upon non-
payment of the loan, the land will already belong
to Y. If X defaulted in the payment of loan, will Y
now own the land? Why?
BAR 1999

Suppose in the preceeding question, the agreement

is that if X failed to pay the loan, the debt shall be
paid with the land mortgaged by X to Y. Would
your answer be the same? Explain.
BQ 1997

In order to secure a bank loan, XYZ

Corporation surrendered its deposit
certificate, with a maturity date of 01
September 1997 to the bank. The
corporation defaulted on the due
repayment of the loan, prompting the bank
to encash the deposit certificate.

XYZ Corporation questioned the above action

taken by the bank as being a case of
pactum commissorium. The bank disagrees.
What is your opinion?
2010 BQ: Rosario obtained a loan of P100,000.00 from
Jennifer, and pledged her diamond ring. The contract
signed by the parties stipulated that if Rosario is
unable to redeem the ring on due date, she will
execute a document in favor of Jennifer providing
that the ring shall automatically be considered full
payment of the loan.

[a] Is the contract valid? Explain. (3%)

[b] Will your answer to [a] be the same if the

contract stipulates that upon failure of Rosario to
redeem the ring on due date, Jennifer may
immediately sell the ring and appropriate the entire
proceeds thereof for herself as full payment of the
loan? Reasons. (3%)
7/27/2018
 Pawnshop Regulation Act

 Capitalization – P100,000
 Citizenship – 70% Filipino
 Amount of loan – not less than 30% of the property’s
value unless pawner manifests in writing desire to loan a
smaller amount
 Redemption – within 90 days from maturity of obligation
 Notify owner of sale on or before end of 90-day period
 Public auction in place of business or public place within
territorial limits where the pawnshop operates
 Under control of licensed auctioneer
 Notice once in at least two daily newspapers in the city of
operation
 CHATTEL MORTGAGE

Concept – by a chattel mortgage, personal property is

recorded in the Chattel Mortgage Register as a
security for the performance of an obligation.
(2140 )

 If the movable, instead of being recorded is

delivered to the creditor or a third person, the
contract is a pledge, not a chattel mortgage.
Essential Requisites - Art. 2085

1. constituted to secure the fulfillment of a principal

obligation

2. mortgagor is the absolute owner of the thing

3. persons constituting the pledge have the free

disposal of their property or are legally authorized
to do so

4. personal property must be recorded in the chattel

mortgage registry (2140)
Effect of Registration

 Registration is binding notice to other

creditors of its existence and creates a real
right or a lien which follows the chattel
whenever it goes

 The lien of a chattel mortgagee over the

property is superior to the levy made by an
assignee of the unsecured judgment
creditor of the chattel mortgagor (Northern
v. Coquia, 68 SCRA 374)
BAR 2003

X constructed a house on Y’s land. X

executed a CM over the house in favor of Y.
X purchased the lot from Y. X then
executed a real mortgage over the
property in favor of A bank. When A was
able to foreclose the mortgage, Y
demanded that A satisfy the debt of X and
to honor the CM between X and Y. Is this
demand against A valid and sustainable?
Why?
Mortgage of Motor Vehicle

 Under the Revised Motor Vehicle Law,

when the subject matter of a chattel
mortgage is a vehicle,
 the CM must not only be registered with
the CM registry
 but must also with the Land
Transportation Office or LTFRB in cases of
public utility vehicles in order to BIND
THIRD PERSONS (Borlough v. Fortune)
Subject Matter

1. Always personal or movable property

2. Covers only property described in the CM and not like or
substituted property thereafter acquired by the
mortgagor and placed in the same depositary as the
property originally mortgaged (Sec. 7, par 4 Act 1508)
3. Description of the property must be such to enable
parties to identify the same after a reasonable
investigation and inquiry (Saldana v. Phil Guaranty, 106
Phil 919)
4. Interest in business
5. Shares of stocks in a corporation
6. Machinery installed in a leased land treated by the
parties as personal property
7. House intended to be demolished
Affidavit of Good Faith
 An oath in a contract of CM 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
not one entered into for the purpose of fraud
(Section 5, Chattel Mortgage Law)

Absence of Affidavit of Good Faith: Effect

 Absence only vitiates the mortgage as to 3rd persons
without notice like creditors and subsequent
encumbrances (PRC v. Jarque, 61 Phil 229)
Period to foreclose the CM

 After 30 days from the time the condition

is broken

 The 30-day period is the minimum period

with at least 10 days’ notice to the
mortgagor and posting of public notice of
time, place and purpose of the sale (Cabral
v. Evangelista, 28 SCRA 1000)
Extrajudicial Foreclosure: Steps
Proceeds of the Sale
 Costs and expenses of keeping and sale
 demand or obligation secured by the CM
 subsequent mortgagees
 mortgagor

Right of Redemption
 Available in extrajudicial foreclosure
 Done by paying the mortgagee the amount due on such mortgage
and the costs and expenses incurred by such breach of condition
before the sale thereof OR
 If after the sale, done by paying the winning bidder the purchase
price and all costs within one year from date of registration of
certificate of sale

Who Can Redeem

 Mortgagor
 Person holding subsequent mortgage
 Subsequent attaching creditor
 Rights of Parties

CM in
favor of A
dated June
1, 2000 CM in
favor of B
dated July
1, 2000

Attachment by judgment creditor C on July 15, 2000

Creditor A – foreclose the chattel mortgage in case of default

Creditor B – redeem the property by paying A the mortgage debt. He can
now appropriate the property to himself
Creditor C - he can redeem the property by paying A the mortgage debt.
- He acquires the right to foreclose and not the right to own the
property

Note: Debtor can also redeem the property by paying the mortgage debt
and get the property back
Right to Deficiency
 Mortgagee can recover deficiency
Exception: when the chattel mortgage was
instituted to secure the purchase of a
property on installment (Recto Law)

Right to Excess
 Since there is no express prohibition under
the law, the chattel mortgagor is presumed
to have the right to the excess of the
purchase price over the debt
Criminal Cases in Chattel Mortgage: Article
319 of the RPC

 knowingly removing any personal property

mortgage under the Chattel Mortgage Law to
any province or city other than the one where
it was located at the time of execution of
mortgage without the WRITTEN consent of the
mortgagee

 selling or pledging personal property already
mortgaged without the consent of the
mortgagee written at the back of the mortgage
and duly recorded with the Chattel Mortgage
Registry
 CM Pledge
Registration is Registration is not
required for validity required for validity

Delivery is not Delivery is essential for

essential for validity validity
Act No. 1508 rules Article 2112 governs the
the sale sale
Creditor can sue for Creditor cannot sue for
balance, except if balance
sale on installment
(Recto Law)
Debtor gets excess Debtor does not get
excess unless there is a
stipulation to the contrary
 REAL MORTGAGE

CONCEPT - 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 said obligation is not
complied with at the time stipulated.
SUBJECT MATTER

 Immovables
 Alienable real rights in accordance with the laws
imposed upon immovables
 Includes natural accessions, improvements,
growing fruits, rents or income not yet received
when the obligation becomes due
 Includes insurance proceeds or proceeds of
expropriation for public use WHETHER THE SM IS
IN THE HANDS OF THE OWNER OR A 3RD PERSON
 May include AFTER-ACQUIRED PROPERTIES
Coverage: Dragnet Clause

 A clause which subsumes all debts of past or

future origin.

 The mortgage may secure future loans or

advancements.
 e.g. for the payment of loan of P20,000 and
such other loans or advances already
obtained or still to be obtained (Quintanilla v.
CA, 279 SCRA 397 [1997])
Essential Requisites (2085)

1. Constituted to secure the fulfillment of a

principal obligation
2. The mortgagor is the absolute owner of the
thing mortgaged
3. That the persons constituting the mortgage
have the free disposal of the property or are
legally authorized to do so
4. Mortgage must be in a public document.
 No valid mortgage is constituted where the
deed of mortgage is in a mere private
document (Hechanova v. Adil, 144 SCRA 450)
Minimum Requirement for Validity: Public
Document

 If mortgage is in a public document but is

not recorded:
 mortgage is nonetheless binding on the
parties (2125)
 If the mortgage is in a private document:
 the mortgage is void and the mortgagee
may demand reduction of mortgage in a
public instrument (notarized)
Effect of Non-Registration
 Registration only operates as a notice of
the mortgage to others but does NOT add
to the validity of the mortgage or convert
an invalid mortgage into a valid one
(Samanilla v. Cajucom, 107 Phil 432)

Effect of Registration
 Registration is merely ministerial and does
not validate an invalid RM (Agriculture v.
Yusay, 107 Phil 791)
Unregistered Sale vs. Recorded Mortgage

 If prior to the mortgage, the SM was sold to

another person, the sale prevails (even if it is
unregistered) over the registered mortgage.

Reason: The original owner has parted with

ownership and at the time of mortgage he no
longer had ownership and free disposal of the
thing (State Investment v. CA, 254 SCRA 368
[1996])
2013 BQ. Lito obtained a loan of P1,000,000
from Ferdie, payable within one year. To
secure payment, Lito executed a chattel
mortgage on a Toyota Avanza and a real
estate mortgage on a 200-square meter
piece of property.

(A) Would it be legally significant - from the

point of view of validity and enforceability –
if the mortgages were in public or private
instruments? (6%)
Kinds of Real Mortgage

 Voluntary – one which is agreed to between the

parties or constituted by will of the owner of the
property

 Equitable – one which, although it lacks the

formalities of a mortgage shows the intention of the
parties to make the property as security for the debt

 Legal – one required by law to be executed in favor of

certain persons
 E.g. a person bound to give a bond but can’t
execute a bond may execute a real mortgage
over his property covering his obligation
Effects of Mortgage

 Creates a real right- until discharged, it

follows the property wherever it goes and
subsists notwithstanding change of
ownership. If the mortgagor sells the
property , the SM remains subject to the
fulfillment of the obligation secured by it
(Bonnevie v. CA, 125 SCRA 122)
 Real mortgage in Sale in favor of B
favor of A on June 1, 2000,
May 1, 2000 with A’s consent

Auction sale foreclosing

the RM of A, with C as the
highest bidder

Who has a preferential right?

- The buyer who buys the property from
debtor/owner after the mortgage OR the winning
bidder during foreclosure?
- The winning bidder has a preferential right but
subject to the new owner’s equitable right of
redemption (Santiago v. Dionisio, 92 Phil 485)
Effects of an Invalid Mortgage
 The principal obligation subsists
 What is lost is merely the right to foreclose
 The mortgage deed remains as evidence of personal
obligation of the debtor (DBP v. CA, 249 SCRA 331)

When the principal obligation is not fulfilled

 Mortgagee chooses between filing a collection case or
foreclosing the mortgage
 Foreclosure may either be extrajudicial OR judicial

Redemption
 Equity of Redemption
 Right of Redemption
 EQUITY OF REDEMPTION

Right of the mortgagor to redeem the

property after his default in the
performance of the conditions of the
mortgage BUT before the confirmation of
the auction sale of the mortgaged property
Equity of Redemption; When available

General Rule: Only in judicial foreclosure

: 90-120 days from receipt of judgment in

favor of the creditor OR before the
confirmation of the sale at the discretion of
the court
 Judicial Foreclosure
File an action with RTC which has jurisdiction over location of SM
Court shall order payment of debt within 90-120 days from entry of
judgment (debtor’s receipt of judgment, (Herrera v. Arellano, 97 Phil
776)
Equity of Redemption Equity of Redemption
If no payment, the court orders sale of SM to the Highest bidder in a
public auction
The court calls parties for confirmation of sale

Equity of Redemption Equity of Redemption

Execution of judgment

Application of proceeds

Execution of sheriffs’ certificate

Registration of certified true copy of the final order of

the court confirming the sale
Equity of Redemption; When available

Exception: in extrajudicial foreclosure where

the mortgagor is a juridical entity

: until but not after the registration of

certificate of foreclosure sale which shall
not be more than 3 months after
foreclosure, WHICHEVER IS EARLIER (RA
8791)
 EXTRAJUDICIAL FORECLOSURE
File application with executive judge who has jurisdiction over the
property, through Clerk of Court

Post notice of sale or publish notice of sale once a week for at

least 3 consecutive weeks in a newspaper of general circulation

Clerk of Court issues receipt and certificate of payment

Application is raffled among sheriffs

Sale must have at least 2 bidders, if not, sale is postponed. If

still no 2 bidders, proceed.

Certificate of sale is approved by Exec Judge or Vice Exec Judge

in former’s absence. Cert is issued to winning bidder
3 mos.-Equity of Redemption
If redemption period expires, Clerk archives records
 RIGHT OF REDEMPTION

The right of the mortgagor to redeem the

mortgaged property within a certain period
after it was sold for the satisfaction of the
debt

GENERAL RULE: extrajudicial foreclosure

within one year (365 days) from
registration of certificate of sale
 EXTRAJUDICIAL FORECLOSURE
File application with executive judge who has jurisdiction over the
property, through Clerk of Court

Post notice of sale or publish notice of sale once a week for at

least 3 consecutive weeks in a newspaper of general circulation

Clerk of Court issues receipt and certificate of payment

Application is raffled among sheriffs

Sale must have at least 2 bidders, if not, sale is postponed. If

still no 2 bidders, proceed.

Certificate of sale is approved by Exec Judge or Vice Exec Judge

in former’s absence. Cert is issued to winning bidder
1yr.- Right of Redemption
If redemption period expires, Clerk archives records
 RIGHT OF REDEMPTION

EXCEPTION: in judicial foreclosure where the

mortgagee is PNB or a banking institution –
within one year from registration of the
foreclosure sale
 Judicial Foreclosure
File an action with RTC which has jurisdiction over location of SM
Court shall order payment of debt within 90-120 days from entry of
judgment (debtor’s receipt of judgment, (Herrera v. Arellano, 97 Phil
776)
If no payment, the court orders sale of SM to the Highest bidder in a
public auction
The court calls parties for confirmation of sale
Execution of judgment

Application of proceeds

Execution of sheriffs’ certificate

Registration of certified true copy of the final order of

the court confirming the sale

If mortgagee is PNB or a banking institution,

1-yr right of redemption starts

(For ordinary mortgagees title shall now be

consolidated in winning bidder’s name)
 Redemption in Extrajudicial Foreclosure

If mortgagor is NOT a juridical entity - Right

of Redemption – Within 1 year from date
of registration of certificate of sale

If mortgagor is a juridical entity - Equity of

Redemption – until but not after the
registration of certificate of foreclosure
sale which shall not be more than 3
months after foreclosure, WHICHEVER IS
EARLIER (RA 8791)
 EXTRAJUDICIAL FORECLOSURE
File application with executive judge who has jurisdiction over the
property, through Clerk of Court

Post notice of sale or publish notice of sale once a week for at

least 3 consecutive weeks in a newspaper of general circulation

Clerk of Court issues receipt and certificate of payment

Application is raffled among sheriffs

Sale must have at least 2 bidders, if not, sale is postponed. If

still no 2 bidders, proceed.

Certificate of sale is approved by Exec Judge or Vice Exec Judge

in former’s absence. Cert is issued to winning bidder

3 mos.-Equity of Red. 1yr.- Right of Red.

If redemption period expires, Clerk archives records
How to Validly Redeem

1. Must be made within the period

2. Payment of purchase price plus 1%
interest per month with taxes thereon
from date of registration of sale until date
of redemption. Payment is to
redemptioner or sale officer
3. Written notice of redemption must be
served on officer who made the sale and
a duplicate with Register of Deeds
(Rosales v. Yboa, 120 SCRA 869)
 Redemption in Judicial Foreclosure

Equity of redemption – 90-120 days from

entry of judgment or at any time before
the sale is confirmed upon the discretion of
the court (Salazar v. De Torres, 108 Phil 209)

Right of Redemption – 1 year from

registration of order confirming the sale if
the mortgagee is PNB or a banking
institution
 Judicial Foreclosure
File an action with RTC which has jurisdiction over location of SM
Court shall order payment of debt within 90-120 days from entry of
judgment (debtor’s receipt of judgment, (Herrera v. Arellano, 97 Phil
776)

Equity of Redemption Equity of Redemption

If no payment, the court orders sale of SM to the Highest bidder in a
public auction
The court calls parties for confirmation of sale
Equity of Redemption Equity of Redemption
Execution of judgment

Application of proceeds

Execution of sheriffs’ certificate

Registration of certified true copy of the final order of
the court confirming the sale
If mortgagee is PNB or For ordinary mortgagees,
a banking institution, 1-yr title shall now be
right of redemption starts consolidated in winning
bidder’s name
Who Can Redeem?

 Mortgagor or one who is in privity of title with

mortgagor
 Successor-in-interest
 One to whom debtor has transferred his right
 One to whom debtor has conveyed his interest
in the SM
 One who succeeds to the interest of the debtor
 One or more joint debtors who were joint
owners of the SM
 Wife as regards her husband’s homestead
 Compulsory heir
In Case of Deficiency:

 Can recover within 10 years from time the

right of action accrues

 May recover even during period of

redemption

 Incorporated in deficiency judgment in a

judicial foreclosure
2011 BQ: 86. The right of a mortgagor in a
judicial foreclosure to redeem the
mortgaged property after his default in the
performance of the conditions of the
mortgage but before the sale of the
mortgaged property or confirmation of the
sale by the court, is known as

A. accion publiciana.
B. equity of redemption.
C. pacto de retro.
D. right of redemption.
 ANTICHRESIS

Concept
 2132- by the contract of antichresis the creditor
acquires the right to receive fruits of an
immovable of his debtor, with the obligation to
apply them to the payment of interest, if owing
and thereafter to the principal of his credit

Role of Delivery
 Delivery is only required in order that the creditor
may receive the fruits and not for validity of the
antichresis.
Obligations of the Antichretic Creditor
 Must pay taxes and charges upon the
estate
 Bound to pay expenses necessary for
preservation and repair
 Sums spent for these purposes are
deducted from the fruits

How to avoid obligation to pay taxes, charges,

and necessary expenses
 Compel the debtor to enter again upon
enjoyment of the property except when
there is a stipulation to the contrary
Requirement for Validity (in addition to Article 2085)
 The amount of the principal and interest shall be
specified in writing; otherwise the contract of
antichresis shall be VOID (2134).

Effect of Antichresis
 No transfer of ownership upon debtor’s default
 Debtor cannot reacquire the enjoyment of the
immovable without first having totally paid what he
owes the creditor
 In case of non-payment, creditor may petition the
court for payment of debt and foreclosure (under the
Rules of Court)
BAR 2007. A contract of antichresis is always:

(a) a written contract

(b) a contract with a stipulation that debt
will be paid through receipt of the fruits
of an immovable
(c) involves the payment of interest, if
owing
(d) all of the above;
(e) letters a and b
1995 BQ: Olivia owns a vast mango plantation which she can no
longer properly manage due to a lingering illness. Since she is
indebted to Peter in the amount of P500.000.00 she asks
Peter to manage the plantation and apply the harvest to the
payment of her obligation to him, principal and interest, until
her indebtedness shall have been fully paid. Peter agrees.

1) What kind of contract is entered into between Olivia and

Peter? Explain.
2) What specific obligations are imposed by law on Peter as a
consequence of their contract?
3) Does the law require any specific form for the validity of their
contract? Explain
4) May Olivia re-acquire the plantation before her entire
indebtedness shall have been fully paid? Explain.
 ANTICHRESIS PLEDGE

Real property Movable property

Perfected by mere Perfected by

consent delivery

Consensual contract Real contract

 Antichresis REM
SM is delivered to the creditor Debtor usually retains
possession over SM

Creditor has right to receive Creditor has real right over the
fruits but does not have real SM but does not have the right
right over the fruits

Creditor has obligation to pay No obligation to pay taxes

taxes
Creditor has obligation to get No obligation to apply fruits
fruits and apply them to the
interest then to the principal

Real property Real property

 Pledge Chattel Real Estate Antichresis
Mortgage Mortgage

Subject Matter Movables Movables Immovables Fruits of real

Incorporeal Incorporeal Alienable real property
rights rights rights

Added Delivery of Registration in Public Principal and

Requisite for M to pledgee CM Registry Instrument interest must be
Validity in writing

Pactum YES YES YES YES

applicable

Essence Pledgee retains CM follows the RM creates a Creditor enjoys

possession property real right and fruits until
until payment encumbrance payment of debt
and interest

Default Art. 2112 Act 1508 Act 1508 or Rules of Court

options Rules of Court
1996 BQW: In the province, a farmer couple
borrowed money from the local
merchant. To guarantee payment, they
left the Torrens Title of their land with the
merchant, for him to hold until they pay
the loan.

Is there a :

a) contract of pledge,
b) contract of mortgage,
c) contract of antichresis, or
d) none of the above? Explain.
DEPOSIT
Concept - A deposit is constituted from the
moment a person receives a thing
belonging to another, with the obligation
of safely keeping it and returning the same
(1962)

 If the safekeeping of the thing is not the

principal purpose of the contract, there is
NO deposit but some other contract. The
contract may either be lease,
commodatum or agency.

Role of Delivery
1963 – An agreement to constitute a deposit
is binding but the deposit is NOT perfected
until the delivery of the thing
Subject Matter
General Rule - Only movable things may be the object of a
deposit (1966)

Judicial deposit – may cover immovable or movable

Nature of Deposit
 Essentially gratuitous – except when there is an
agreement to the contrary OR unless the depositary is
engaged in the business of storing goods (1965)
Form
 1969 – A contract of deposit may be entered into orally
or in writing
CA-Agro vs. CA, G.R. No. 90027. March 3, 1993

What is the nature of the safety deposit box rented out

by banks?
 the contract for the rent of the safety deposit box is
not an ordinary contract of lease as defined in Article
1643 of the Civil Code
 the contract is a special kind of deposit.
 It cannot be characterized as an ordinary contract of
lease under Article 1643
 the relation between a bank renting out safe-deposit
boxes and its customer with respect to the contents
of the box is that of a bailor and bailee, the bailment
being for hire and mutual benefit.
 Section 72 of the General Banking Act pertinently
provides: "SEC. 72. In addition to the operations
specifically authorized elsewhere in this Act, banking
institutions other than building and loan associations
may perform the following services: (a) Receive in
custody funds, documents, and valuable objects, and
rent safety deposit boxes for the safeguarding of such
effects. . . . The banks shall perform the services
permitted under subsections (a), (b) and (c) of this
section as depositories or as agents. . . ."
 Note that the primary function is still found within
the parameters of a contract of deposit, i.e., the
receiving in custody of funds, documents and other
valuable objects for safekeeping.
 The renting out of the safety deposit boxes is not
independent from, but related to or in conjunction
with, this principal function.
Basis Deposit Commodatum Mutuum

PURPOSE Safekeeping Use of thing Consumption

NATURE Gratuitous or Gratuitous Gratuitous or

onerous onerous

OBJECT Extra-judicial: Movables and Money or fungible

movables immovables thing

DEMANDABILITY Depositor can Return only after Pay within period

demand thing at period
will
 JUDICIAL DEPOSIT 2005-2008

2005 – takes place when an attachment or

seizure of property in litigation is ordered
by the court

2006 – movable or immovable may be the

SM of sequestration

Primary purpose: to maintain status quo

during the pendency of litigation or to
insure the rights of parties to property.
Examples of Judicial Deposit
 Rule 57 (Preliminary attachment) –
attachment by sheriff upon filing of
complaint

 Rule 59 (Receivership) - a receiver may be

appointed by the court to administer and
preserve the property in litigation

 Rule 60 (Replevin) - personal property may

be seized by sheriffs in suits of replevin or
manual delivery of personal property

 Rule 127 – attachment in criminal cases

Judicial Deposit

 2008 – depositary must comply with the

obligations of a good father of family

 2007- obligation of depositary subsists

until the end of controversy which gave
rise to the sequestration, unless the court
orders.
 EXTRAJUDICIAL DEPOSIT
(VOLUNTARY DEPOSIT)

Concept
1968 - One wherein the delivery is made by
the will of the depositor or by two or more
persons each of whom believes himself
entitled to the thing deposited

Compared with NECESSARY DEPOSIT:

Depositor has complete freedom in
choosing the depositary.
Obligations of the Depositary
 To keep the thing safely and to return it,
when required, to the depositor or to his
heirs or successors or to the person who
may have been designated in the contract
(1972) (safekeeping)
 Degree of care required – degree of care
one would exercise over his own property
 Must return the SM together with all
accessions, accessories and products.
(1983)
 Cannot deposit the SM with a 3rd person .
 If deposit with 3rd person is allowed,
depositary is liable for loss if deposited with
3rd person who is manifestly careless or unfit.
(1973)
 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 the facts of the situation.
 Before change he must notify the depositor
and wait for his decision, unless delay would
cause danger (1974)

 Depositary holding certificates, bonds, securities

or instruments which earn interest:
 must collect interest when they become due
 take steps so that value of securities is
preserved (1975)
 If SM delivered closed and sealed:
 must return it in the same condition
 liable for damages should the seal be
broken through his fault.
 fault on the part of the depositary is
presumed unless there is proof to the
contrary (1981)
Obligations of the Depositary: Loss by Fortuitous Event
(1979)

GENERAL RULE: Not liable

EXCEPTIONS:
 Stipulated
 Uses without owner’s permission
 Delays in return
 Allows others to use it even though he himself is
authorized

Obligations of the Depositary: Loss by Force Majeure (1990)

 Loss by force majeure or government order and receives
a thing or money in lieu of the thing, he must deliver to
the depositary the thing or money he received (1990)
Rights of the Depositary

 1984 – cannot demand that depositor

proves his ownership BUT
 If he discovers that the SM was stolen and
who the true owner is, he must inform the
true owner of the deposit
 If owner does not claim within 1 month
from notice, depositor may return SM to
depositary without incurring liability
 May retain the SM in pledge until full
payment of what may be due him by
reason of deposit (1994)
Depositor’s Incapacity
 Depositary shall be subject to all obligations of a
depositary and may be compelled to return the
thing BY the guardian or administrator of the
incapacitated person (1970)

Incapacity of Depositary
 Depositor shall only have an action to recover the
SM while in possession of the depositary or to
compel payment of amount that depositary was
enriched.(1971)
 If property is in the hands of a 3rd person who
acquired SM in good faith, depositor may sue
the 3rd person
Obligations of the Depositor

 Must reimburse depositary for expenses he

may have incurred for the preservation of the
thing if gratuitous deposit (1992)

 Must reimburse depositary for any loss arising

from the character of the SM, unless the
depositor was not aware of or was not
expected to know the dangerous character of
the SM or unless he notified the depositary of
the same or depositary was aware of it (1993)
Extinguishment of Voluntary Deposit

 Death of depositary extinguishes the deposit in

gratuitous deposit but not in deposit for
compensation
 1995
 Upon loss or destruction of the thing deposited
 In case of gratuitous deposit, upon the death
of either the depositor or the depositary
 Other causes (novation, merger, expiration of
the term, fulfillment of resolutory condition)
NECESSARY DEPOSIT

Concept
 A deposit is necessary when:
 It is made in compliance with a legal obligation
(1996)
 It takes place on the occasion of any calamity,
such as fire, storm, flood, pillage, shipwreck or
other similar events (1996)
 Travellers in hotels or inns deposit effects
(1998)
 Made by passengers of common carriers (1745)
Necessary Deposit – To comply with a legal obligation
 Judicial deposit of SM the possession of which is
disputed by two or more persons under Art. 538

 If the two possessors are identical as to dates

of possession and both can present title
 Thing must be placed in judicial deposit

 Deposit of SM of pledge when there is unauthorized

use by the pledge

 When constituted to guarantee contracts with the

government arising from an obligation which is
administrative in character.
BAR 2007. A deposit made in compliance
with a legal obligation is:

(a) an extrajudicial deposit

(b) a voluntary deposit
(c) a necessary deposit
(d) a deposit with a warehouseman
(e) letters a and b
Necessary Deposit – On the occasion of
calamity

 When during a fire, flood, storm, or other

calamity a property is saved from
destruction by another person without the
knowledge of the owner, the latter is
bound to pay the former just
compensation (2168)

 Possession passes by accident from one

person to another and the law imposes on
the recipient the obligations of a bailee

 Primary purpose: to save the property

Deposit – Travellers

 The keepers of hotels on inns shall be responsible

as depositaries for effects deposited by guests
provided:
 Notice was given to them about the effects
 Guests have taken precautions prescribed
regarding their safekeeping (1998)

 Liable for vehicles, animals and articles placed in

the annexes of the hotel (1999)
 Liable for loss or injury through:
 Acts of servants or employees of the keeper
 Acts of strangers
 Acts of robbers UNATTENDED by use of arms
or irresistible force

 NOT liable for loss or injury through:

 Force majeure
 Acts of robbers with arms or using irresistible
force
 Acts of guests, his family, servants or visitors
 Character of the SM
 2003 – hotel-keeper cannot free himself
from responsibility by posting notices to
the effect that he is not liable for articles
brought in by guests

 Void stipulations – stipulations which

diminish or suppress liability of keepers

 2004 – may validly retain articles as

security for credits of guests
 Judicial Deposit vs. Extrajudicial Deposit
ORIGIN: will of the ORIGIN: will of the
court parties
PURPOSE: to secure the PURPOSE: safekeeping
right of a party to
recover
Movable or immovable Movable

Always remunerated May be gratuitous or

onerous
Held in behalf of the Held in behalf of
prevailing party depositor
 CONCURRENCE AND
PREFERENCE OF CREDITS

PRINCIPLES
 Assets of a debtor can be used to satisfy obligations
with creditors.

 However, there are certain properties which are

exempted from satisfying liabilities.

 Note, however, that even if these properties are

deemed exempted, these assets shall NOT be
exempt from execution issued upon a judgment
recovered for its price or upon a judgment of
foreclosure of a mortgage thereon
Exempted Properties

 Art. 153 - Family Home – generally exempted unless for:

 Non-payment of taxes
 Debts incurred prior to the constitution of family home
 Debts secured by mortgages on the premise before or
after such constitution; and
 Debts due to laborers, mechanics, architects, builders,
material men and others who have rendered service or
furnished material for the construction of the building
(155)
 Art. 205 – Right to receive support as well as any money
or property obtained as such support shall not be levied
upon on attachment or execution
Section 13 – Exempted Properties

 Judgment obligor’s family home or the homestead in which he resides

 Ordinary tools and implements personally used by him in his trade, employment or
livelihood;
 3 horses or 3 cows or 3 carabaos or other beasts of burden necessarily used by him in
his ordinary occupation;
 His necessary clothing and articles for ordinary personal use, EXCLUDING jewelry;
 Household furnitures and utensils necessary for housekeeping with a value not
exceeding P100,000;
 Provisions for individual or family use sufficient for 4 months
 Professional libraries of judges, lawyers, physicians, pharmacists, dentists, engineers,
surveyors, clergymen, teachers and other professionals not exceeding P300,000 in value;
 1 fishing boat and accessories not exceeding the total value of P100,000 owned by a
fisherman and by the lawful use of which he earns his livelihood;
 Salaries, wages, earnings of the debtor for his personal services within the 4 months
preceeding the levy necessary to support his family;
 Lettered gravestones;
 Moneys, benefits, privileges, or annuities accruing or growing out of life insurance;
(except endowment)
 Right to receive legal support or money or property obtained as such support or any
pension or gratuity from the government;
 Properties especially exempted by law;
 Properties belonging to the absolute community or conjugal partnership except insofar
as the debt has redounded to the benefit of the family (2238);
 Property held by debtor as trustee of an express or implied trust (2239)
Concurrence vs. Preference

Concurrence – implies the possession of two or more

creditors of equal rights or privileges over the SAME
property or all of the property of the debtor

Preference – right held by creditor to be preferred in

the payment of his claim above others out of the
debtor’s assets

 The provisions on concurrence and preference will

only apply if the liabilities of the debtor are more
than his assets
 General Categories of Credit

 Special Preferred – 2241 & 2242

 Ordinary Preferred – 2244

 Common Credits - 2245

SPECIAL PREFERRED

 Envisions a situation where a particular property

which is either movable or immovable is subject to
certain obligations

 These special preferred credits or obligations have to

be satisfied using the proceeds from the sale of said
property

 Special Preferred Credits must be paid from the value

of the movable or immovable. Taxes enjoy priority
while the rest of the credits are paid proportionally.
Special Preferred Credits on Movables 2241
1. Duties, taxes and fees due on the movable
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
4. Credits guaranteed with a pledge of the movables
5. Credits for repairs, safekeeping, preservation of the property
6. Claims for laborer’s wages on the goods manufactured or work done
7. Expenses of salvage
8. Credits between the landlord and tenant
9. Credits for transportation upon goods carried
10. Credits for lodging and supplies usually furnished to travellers by
hotelkeepers on movables belonging to the guests
11. Credits for seeds and expenses for cultivation and harvest
12. Credits for rent for 1 year upon personal property of the lessee
13. Claims in favor of the depositor if depositary has wrongfully sold the
thing deposited
 Value of Car: 2M
 Liabilities:
 Taxes - 500k
 Repairs - 500k
 Pledge - 500k
 Mortgage - 500k
 Safekeeping - 500k
 Total 2.5M – in excess of the car’s value (2M)
 Pay taxes first before anything else
 2M-500k = 1.5M
 Get ratio for each liability (value for repairs/value of car x
remaining assets after deducting taxes)
 500k/2Mx1.5M = 375k (amount to be paid for repairs
instead of 500k)
Special Preferred Credits on Immovables, 2242

1. Taxes due upon the land or building

2. Unpaid price of immovable
3. Claims of laborers, masons and other workmen
engaged in construction
4. Claims of furnishers of materials used in
construction
5. Mortgage credits recorded in Registry of Property
6. Expenses for preservation, improvement
7. Credits annotated in the Registry of Property
8. Claims of co-heirs for warranty in the partition
9. Claims of donors
10. Credits of insurers upon property insured
 Value of House and Lot: 3M
 Liabilities:
 Taxes - 500k
 Unpaid price - 2M
 Engr’s Fee - 500k
 Improvements - 500k
 Total 3.5M – in excess of the
property’s value (3M)
 Pay taxes first before anything else
 3M-500k = 2.5M
 Get ratio for each liability (value for UP/value of prop x
remaining assets after deducting taxes)
 2M/3Mx2.5M = 1,666,667 (amount to be paid for UP
instead of 2M)
ORDINARY PREFERRED

 Envisions a situation where a particular credit is not

secured by any particular movable or immovable.

 HOWEVER, this credit happens to be one of those

enumerated as ordinary preferred. Hence, the credit will
enjoy preference over properties which are not
encumbered, including the free portion of the debtor's
property.

 Ordinary Preferred Credits are then paid in the order of

priority as they are enumerated. The assets used to pay
ordinary preferred credits are those which are free from
encumbrances under 2241 and 2242 and the free portion
under 2241 and 2242.
Ordinary Preferred, 2244: Hierarchical Application

1. Credits for services rendered the insolvent by employees, laborers, household

helpers
2. Proper funeral expenses for the debtor, children under his parental authority
3. Expenses during last illness of debtor, spouse and children under his parental
authority
4. Compensation due to laborers or dependents under laws providing for indemnity for
damages in cases of labor accident or illness arising from nature of employment
5. Ordinary Preferred, 2244
6. Credits and advancements made to debtor for support of himself and family
7. Support during insolvency proceedings and for 3 months thereafter
8. Fines and civil indemnification arising from criminal offense
9. Legal expenses for administration of insolvent’s estate
10. Taxes due the national government
11. Taxes due any province
12. Taxes due any city or municipality
13. Damages for death or personal injuries caused by quasi-delict
14. Gifts due to private and public institutions of charity
15. Credits without privilege which appear in a public instrument or by final judgment if
they have been the subject if litigation
 DBP vs. NLRC 186 SCRA 841

 A recorded mortgage credit is a special

preferred credit under Art. 2242 (5)
 The preference given by Art. 110 of the LC
when not falling under Art. 2241 (6) and Art.
2242 (3) of the NCC and not attached to any
property, is an ordinary preferred credit
 Impact: move it from the second priority to
the first priority in accordance with Art. 2244
of the NCC
 INSOLVENCY LAW

 Insolvency generally denotes the state of a

person whose liabilities are more than his
assets.
 Used interchangeably with bankruptcy.
 Insolvency law deals
 Voluntary insolvency
 Involuntary insolvency
 Suspension of payments.
Suspension of Payments

Sec. 2 – The debtor who, possessing sufficient

property to cover all his debts, be it an
individual person, sociedad or corporation
foresees the impossibility of meeting them
when they respectively fall due, may petition
that he be declared in the state of
SUSPENSION OF PAYMENTS by the court or
the judge thereof in vacation, of the province
or city in which he has resided for 6 months
next preceeding the filing of his petition.
Voluntary Insolvency
 Debtor files petition for voluntary insolvency with the
RTC (debt must be >P1,000)
 Court issues an order declaring debtor insolvent
 Order is published
 Creditors meet to elect the assignee in insolvency
 Debtor’s properties are conveyed by the clerk of
court to the assignee
 Debtor’s assets are liquidated and debts are paid
 Composition, or an agreement where creditors agree
to receive less than the amount due them
 Discharge of the debtor on his application
 Objection, if any to the discharge
 Appeal to the Supreme Court in extreme cases
Effects of Order Declaring Insolvency

 All the assets of the debtor not exempt from execution

are taken possession by the sheriff or until the
appointment of a receiver or assignee
 Forbids the payment of the debtor of any debts due to
him and the delivery to the debtor or to any person for
him of any property belonging to him and the transfer of
any property by him
 All civil proceedings pending against the insolvent debtor
shall be stayed
 Mortgages or pledges, attachments or executions on
property of the debtor duly recorded and not dissolved
are NOT affected by the order
Involuntary Insolvency

 Initiated by a petition filed by at least 3

creditors whose credits accrue in the
Philippines with an aggregate amount of
not less than P1,000.

 The petition must set forth one or more

acts of insolvency.
Acts of Insolvency

 Such person is about to depart or has

departed from the country with intent to
defraud his creditors;
 That being absent from the country, he
remains absent;
 That he conceals himself to avoid the service
of legal process to delay or defraud creditors;
 He conceals or is removing any of his property
to avoid its being attached or taken on legal
process;
 He has suffered his property to remain under
attachment or legal process for 3 days for the
purpose of hindering or delaying or defrauding his
creditors;
 He has confessed or offered to allow judgment in
favor of any creditor or claimant for the purpose of
hindering or delaying or defrauding any creditor or
claimant;
 He has willfully suffered judgment to be taken against
him for default for the purpose of hindering or
delaying or defrauding his creditors;
 He has suffered or procured his property to be taken
or legal process with intent to give a preference to
one or more of his creditors and thereby hinder,
delay or defraud any of his creditors;
 He has made any assignment, gift, sale, conveyance or transfer
of his estate, property, rights or credits with intent to delay,
defraud or hinder his creditors;
 He has, in contemplation of insolvency, made any payment,
grant, sale, conveyance or transfer of his estate, property,
rights or credits with intent to delay, defraud or hinder his
creditors;
 That being a merchant or tradesman he has generally
defaulted in the payment of his current obligations for a period
of 30 days;
 That for a period of 30 days he has failed after demand, to pay
any moneys deposited with him or received by him in a
fiduciary capacity; and
 An execution having been issued against him on final judgment
for money, he was found to be without sufficient property
subject to execution to satisfy judgment.
 Voluntary Insolvency vs. Involuntary Insolvency

One creditor is sufficient At least 3 creditors must file the

petition
Insolvent debtor files the petition Three or more creditors who meet
the requirements file the petition

Debtor must not be guilty of any act Debtor must be guilty of any act of
of insolvency insolvency

Debt must be > P 1,000 Debt must be P 1,000 or above

Bond is not required Bond is required

An adjudication of insolvency may Adjudication of insolvency granted

be granted ex parte only after hearing

Petition is filed with RTC of province Length of residence is immaterial

or city where debtor had resided for
6 months
Declaration of insolvency is made
Declaration of insolvency is made after hearing
upon filing of voluntary insolvency
 Suspension of Payment vs. Insolvency

Purpose is to suspend Purpose is to discharge

or delay payment in debts debtor from payment of
debts

Debtor has sufficient Debtor does not have

property to pay his debts sufficient property to pay his
debts

Amount of indebtedness Creditors receive less than

is not affected their credits OR may not
receive anything at all in
case of preferred credits

Number of creditors In voluntary: 1 creditor

is immaterial In involuntary: 3 or more
creditors
BAR 2007. An assignee in a proceeding under the
Insolvency Law does not have the duty of:

1. suing to recover the properties of the estate

of the insolvent debtor
2. selling the property of the insolvent debtor
3. ensuring that a debtor corporation operates
the business effectively and efficiently while
proceedings are pending
4. collecting and discharging debts owed to
the insolvent debtor
thank you 