Credit Transactions Memory Aid

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

 CHAIRPERSON: Romuald Padilla  ASST.CHAIRPERSON: Vida Bocar, Joyce Vidad  EDP: Alnaiza Hassiman, Dorothy Gayon
 SUBJECT HEADS: Christopher Rey Marasigan (Persons and Family Relations), Alejandro Casabar(Property), Ma.
Rhodora
Ferrer(Wills and Succession), Ian Dominic Pua(Obligations and Contracts), Sha Elijah Dumama(Sales and Lease),
John Stephen
Quiambao(PAT), Christopher Cabigao(Credit Transactions), Ligaya Alipao(Torts and Damages), Anthony
Purganan(LTD),
Ma. Ricasion Tugadi (Conflicts of Law)
183
ii. the use of the thing is the expiration of the advance

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

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

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

NOTES: of ownership of the of ownership of the
 If the above requisites concur, thing delivered thing delivered
the bailee has the right of
retention for damages.
3. Relationship Relationship is that
 The bailor cannot exempt between the parties of a landlord and
himself from the payment of is that of obligor- tenant
expenses or damages by obligee
abandoning the thing to the
bailee. 4. Creditor receives Owner of the
payment for his loan property rented
SIMPLE LOAN OR MUTUUM (Art 1953 – receives
compensation or
1961)
price either in
 A contract whereby one party money, provisions,
delivers to another, money or other chattels, or labor
consumable thing with the
understanding that the same amount from the occupant
of the same kind and quality shall be thereof in return for
paid. (Art. 1953) its use (Tolentino vs
Gonzales, 50 Phil 558
NOTES: 1927)
 The mere issuance of the checks Loan Sale

does not result in the perfection of
the contract of loan. The Civil Code 1. Real contract Consensual contract
provides that the delivery of bills of
exchange and mercantile 2. Generally Bilateral and
documents, such as checks, shall unilateral because reciprocal
produce the effect of payment only only borrower has
when they have been encashed obligations
(Gerales vs. CA 218 SCRA 638). It is
only after the checks have produced NOTE: If the property is “sold”, but the
the effect of payment that the real intent is only to give the object as
contract of loan may be deemed security for a debt – as when the “price”
perfected. is comparatively small – there really is a
 The obligation is “to pay” and not to contract of loan with an “equitable
return because the consumption of mortgage.”
the thing loaned is the distinguishing
Commodatum/ Barter
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Mutuum 3. must be in writing
1. Subject matter is Subject matter is Compound Interest

money or fungible non-fungible, (non GENERAL RULE: Unpaid interest shall
things consumable) things not earn interest.
2. In commodatum, The thing with
EXCEPTIONS:
the bailee is bound equivalent value is 1. when judicially demanded
to return the given in return for 2. when there is an express
identical thing what has been stipulation (must be in writing in
borrowed when the received view of Art. 1956)
time has expired or
purpose served Guidelines for the application of
proper interest rates
3. Mutuum may be Onerous, actually a 1. If there is stipulation: that rate shall
gratuitous and mutual sale
be applied
commodatum is
always gratuitous 2. The following are the rules of thumb
for the application/imposition of
interest rates:
a) When an obligation, regardless
of its source, i.e., law,
contracts, quasi-contracts,
delicts or quasi-delicts is
 Form of Payment (Art 1955):
breached, the contravenor can
1. If the thing loaned is money -
be held liable for damages.
payment must be made in the
b) With regard particularly to an
currency stipulated, if it is possible;
award of interest in the concept
otherwise it is payable in the
of actual and compensatory
currency which is legal tender in the
damages, the rate of interest, as
Philippines and in case of
well as the accrual thereof, is
extraordinary inflation or deflation,
imposed, as follows:
the basisi of payment shall be the
i. When the obligation
value of the currency at the time of
breached consists of
the creation of the obligation
payment of a sum of money
2. If what was loaned is a fungible
(loan or forbearance of
thing other than money - the
money), the interest shall be
borrower is under obligation to pay
that which is stipulated or
the lender another thing of the same
agreed upon by the parties.
kind, quality and quantity. In case it
In absence of an agreement,
is impossible to do so, the borrower
the rate shall be the legal
shall pay its value at the time of the
rate (i.e. 12% per annum)
perfection of the loan.
computed from default.
NOTE: The interest due shall
Interest
itself earn legal interest
 The compensation allowed by law or
from the time it is judicially
fixed by the parties for the loan or
demanded
forbearance of money, goods or
ii. In other cases, the rate of
credits
interest shall be six percent
 Requisites for Demandability: (ELI) (6%) per annum.
1. must be expressly stipulated NOTE: No interest, however,
Exceptions: shall be adjudged on
a. indemnity for damages unliquidated claims or
b. interest accruing from damages except when or
unpaid interest until the demand can be
2. must be lawful established with reasonable
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Purganan(LTD),
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certainty. When the demand said that nothing in said circular grants
cannot be established, the lenders carta blanche authority to raise
interest shall begin to run interest rates to level which will either
only from the date of the enslave their borrowers or lead to a
judgment of the court is hemorrhaging of their assets (citing
made. Almeda vs. CA, 256 SCRS 292). In Medel
iii. When the judgment of the vs. CA, 299 SCRA 481, it was ruled that
court awarding a sum of while stipulated interest of 5.5% per
money becomes final and month on a loan is usurious pursuant to
executory, the rate of legal CB Circular No. 905, the same must be
interest, whether the case equitably reduced for being iniquitous,
falls under paragraph i or ii unconscionable and exorbitant. It is
above, shall be 12% per contrary to morals, (contra bonos
annum from such finality mores). It was reduced to 12% per
until its satisfaction, this annum in consonant with justice and fair
interim period being deemed play.
to be by then an equivalent
to a forbearance of credit. DEPOSIT (Articles 1962 – 2009)
(Eastern Shipping Lines vs.
CA, July 12, 1994)  A contract constituted from the
moment a person receives a thing
NOTES: belonging to another, with the
 Central Bank Circular No. 416 fixing obligation of safely keeping it and of
the rate of interest at 12% per returning the same.
annum deals with loans, forbearance
of any money, goods or credits and Characteristics:
judgments involving such loans, or 1. Real Contract - contract is
forbearance in the absence of perfected by the delivery of the
express agreement to such rate subject matter.
2. Unilateral (gratutitous deposit) -
 Interest as indemnity for damages is
only the depositary has an
payable only in case of default or
obligation.
non-performance of the contract. As
3. Bilateral (onerous deposit) -
they are distinct claims, they may be
gives rise to obligations on the
demanded separately. (Sentinel
part of both the depositary and
Insurance Co., Inc. vs CA, 182 SCRA
depositor.
517)
 Central Bank Circular No. 905 (Dec. Deposit Mutuum
10, 1982) removed the Usury Law 1. Purpose
ceiling on interest rates for secured Principal purpose is Principal purpose is transfer of
and unsecured loans, regardless of safekeeping or consumption
maturity. custody ownership
2. When to Return
Validity of unconscionable interest rate Depositor can The lender must wait
in a loan demand the return of until the expiration
Supreme Court in Sps. Solangon the subject matter at of the period granted
will to the debtor
vs. Jose Salazar, G.R. No. 125944, June
3. Subject Matter
29, 2001, said that since the usury law
Subject matter may Subject matter is
had been repealed by CB Cir. No. 905 be movable or only money or other
there is no more maximum rate of immovable property fungible thing
interest and the rate will just depend on 4. Relationship
the mutual agreement of the parties
(citing Lim Law vs. Olympic Sawmill Co.,
129 SCRA 439). But the Supreme Court
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Purganan(LTD),
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Relationship is that Relationship is that Will of the court Will of the parties
of lender (creditor) of depositor and or contract
and borrower depositary. 2. Purpose
(debtor). Security or to insure Custody and
the right of a party safekeeping
5. Compensation to property or to
There can be NO compensation of recover in case of
compensation of things deposited with favorable judgment
credits. each other (except
by mutual 3. Subject Matter
agreement). Movables or Movables only
immovables,
Deposit Commodatum but generally
immovables
1. Purpose is 1. Purpose is the for free 4. Cause
Safekeeping transfer of the use Always onerous May be compen-
sated or not, but
2. May be gratuitous 2. Essentially and generally gratuitous
xpn depositary accepts business of deposit always gratuitous
5. When must the thing be returned
3. Movable/corporeal 3. Both movable and
Upon order of the Upon demand of
things only in case of immovable may be
court or when depositor
extrajudicial deposit the object
litigation is ended
6. In whose behalf it is held
 Kinds of Deposit:
Person who has a Depositor or third
1. Judicial (Sequestration) –takes place
right person designated
when an attachment or seizure of
property in litigation is ordered.
GENERAL RULE: Contract of deposit is
2. Extra-judicial gratuitous (Art 1965)
a. Voluntary – one wherein the EXCEPTIONS:
delivery is made by the will of 1. when there is contrary
the depositor or by two or more stipulation
persons each of whom believes 2. depositary is engaged in business
himself entitled to the thing of storing goods
deposited. (Arts 1968 – 1995) 3. property saved from destruction
b. Necessary – one made in without knowledge of the owner
compliance with a legal
obligation, or on the occasion of NOTES:
any calamity, or by travellers in  Article 1966 does not embrace
hotels and inns (Arts 1996 - incorporeal property, such as rights
2004), or by travellers with and actions, for it follows the person
common carriers (Art 1734 – of the owner, wherever he goes.
1735).  A contract for the rent of safety
NOTE: The chief difference deposit boxes is not an ordinary
between a voluntary deposit and a contract of lease of things but a
necessary deposit is that in the special kind of deposit; hence, it is
former, the depositor has a not to be strictly governed by the
complete freedom in choosing the provisions on deposit. The relation
depositary, whereas in the latter, between a bank and its customer is
there is lack of free choice in the that of a bailor and bailee. (CA Agro
depositor. vs CA, 219 SCRA 426)
Judicial Extra-judicial Obligations of the Depositary (Art 1972
1. Creation –1991):
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1. To keep the thing safely (Art 1972) deposit if justifiable reasons

 Exercise over the thing exists for its return.
deposited the same diligence as c. If the deposit is for a
he would exercise over his valuable consideration, the
property depositary has no right to return
2. To return the thing (Art 1972) the thing deposited before the
 Person to whom the thing must expiration of the time
be returned: designated even if he should
a. Depositor, to his heirs and suffer inconvenience as a
successors, or the person who consequence.(Art 1989)
may have been designated in the
contract  What to return: product,
b. If the depositary is capacitated - accessories, and accessions of
he is subject to all the the thing deposited (Art 1983)
obligations of a depositary 3. Not to deposit the thing with a third
whether or not the depositor is person unless authorized by express
capacitated. If the depositor is stipulation (Art 1973)
incapacitated, the depositary  The depositor is liable for the
must return the property to the loss of the thing deposited under
legal representative of the Article 1973 if:
incapacitated or to the depositor a. he
himself if he should acquire transfers the deposit with a third
capacity (Art 1970). person without authority
c. If the depositor is capacitated although there is no negligence
and the depositary is on his part and the third person;
incapacitated - the latter does b. he
not incur the obligation of a deposits the thing with a third
depositary but he is liable: person who is manifestly
i..to return the thing careless or unfit although
deposited while still in his authorized even in the absence
possession; of negligence; or
ii.to pay the depositor the c. the thing
amount which he may have is lost through the negligence of
benefited himself with the his employees whether the latter
thing or its price subject to are manifestly careless or not.
the right of any third person 4. If the thing deposited should earn
who acquired the thing in interest (Art 1975):
good faith (Art 1971) a. to collect interest and the
capital itself as it fall due
 Time of return: b. to take steps to preserve its
a. Upon demand even though a value and rights corresponding to
specified period or time for such it
return may have been fixed 5. Not to commingle things deposited if
except when the thing is so stipulated (Art 1976)
judicially attached while in the 6. Not to make use of the thing
depositary’s possession or should deposited unless authorized (Art
he have been notified of the 1977)
opposition of a third person to GENERAL RULE: Deposit is for
the return or the removal of the safekeeping of the subject matter
thing deposited. (Art 1998) and not for use. The unauthorized
b. If deposit gratuitous, the use by the depositary would make
depositary may return the thing him liable for damages.
deposited notwithstanding that a
EXCEPTIONS:
period has been fixed for the
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1. When the preservation of the 8. To change the way of the deposit if

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

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

responsible as depositaries for the 2. As to its Origin
deposit of effects made by travellers a. Conventional - agreed upon by
provided: the parties.
a. Notice was given to them or to b. Legal - one imposed by virtue of
their employees of the effects a provision of a law.
brought by the guest; and c. Judicial - one which is required
b. The guests take the precautions by a court to guarantee the
which said hotel-keepers or their eventual right of one of the
substitutes advised relative to parties in a case.
the care and vigilance of their 3. As to Consideration
effects. a. Gratuitous - the guarantor does
NOTES: not receive any price or
 Liability extends to vehicles, animals remuneration for acting as such.
and articles which have been b. Onerous - the guarantor receives
introduced or placed in the annexes valuable consideration.
of the hotel. 4. As to the Person guaranteed
a. Single - one constituted solely to
 Liability shall EXCLUDE losses which guarantee or secure
proceed from force majeure. The act performance by the debtor of
of a thief or robber is not deemed the principal obligation.
force majeure unless done with the b. Double or sub-guaranty - one
use of arms or irresistible force. constituted to secure the
 The hotel-keeper cannot free fulfilment by the guarantor of a
himself from the responsibility by prior guaranty.
posting notices to the effect that he 5. As to Scope and Extent
is not liable for the articles brought a. Definite - the guaranty is limited
by the guest. Any stipulation to such to the principal obligation only,
effect shall be void. or to a specific portion thereof.
 Notice is necessary only for suing b. Indefinite or simple - one which
civil liability but not in criminal not only includes the principal
liability. obligation but also all its
accessories including judicial
GUARANTY (Articles 2047 – 2084) costs
 A contract whereby a person SURETYSHIP

(guarantor) binds himself to the
creditor to fulfil the obligation of  A contract whereby a person (surety)
the principal debtor in case the binds himself solidarily with the
latter fail to do so. principal debtor
 A relation which exists where one
 Classification of Guaranty: person (principal) has undertaken an
1. In the Broad sense: obligation and another person
a. Personal - the guaranty is the (surety) is also under a direct and
credit given by the person who primary obligation or other duty to
guarantees the fulfilment of the the obligee, who is entitled to but
principal obligation. one performance, and as between
b. Real - the guaranty is the the two who are bound, the second
property, movable or rather than the first should perform
immovable. (Agro Conglomerates, Inc. vs. CA,
348 SCRA 450)
NOTES:
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 The reference in Article 2047 to though he was not a party to the

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

 Guaranty may be constituted to guarantor because it is he
guarantee the performance of a alone who binds himself by
voidable or unenforceable his acceptance. With respect
contract. It may also guarantee to the creditor, no such
a natural obligation. (Art 2052) requirement is needed
because he binds himself to
 The guarantor cannot bind nothing.
himself for more than the
principal debtor and even if he  However, when there is
does, his liability shall be merely an offer of a
reduced to the limits of that of guaranty, or merely a
the debtor. conditional guaranty, in the
2. Subsidiary and Conditional - takes sense that it requires action
effect only in case the principal by the creditor before the
debtor fails in his obligation. obligation becomes fixed, it
does not become binding
NOTES: until it is accepted and until
notice of such acceptance by
 The guarantor cannot bind the creditor is given to, or
himself for more than the
acquired by, the guarantor,
principal debtor and even if he
or until he has notice or
does, his liability shall be
knowledge that the creditor
reduced to the limits of that of
has performed the condition
the debtor. But a guarantor may
and intends to act upon the
bind himself for less than that of
guaranty.
the principal (Art 2054)
 But in any case, the creditor
 A guaranty may be given as is not precluded from
security for future debts, the
waiving the requirement of
amount of which is not yet
notice.
known; there can be no claim
against the guarantor until the  The consideration of the
debt is liquidated. A conditional guaranty is the same as the
obligation may also be secured. consideration of the principal
(Art 2053) obligation.
3. Unilateral - may be entered even  The creditor may proceed
w/o the intervention of the principal against the guarantor although
debtor, in which case Art. 1236 and he has no right of action against
1237 shall apply and it gives rise only the principal debtor.
to a duty on the part of the 7. Not presumed. It must be expressed
guarantor in relation to the creditor and reduced in writing.
and not vice versa. NOTE: A power of attorney to loan
4. Nominate money does not authorize the agent
5. Consensual to make the principal liable as a
6. It is a contract between the surety for the payment of the debt
guarantor/surety and creditor. of a third person. (BPI vs. Coster, 47
Phil. 594)
NOTES: 8. Falls under the Statute of Frauds
 Acceptance of guaranty by since it is a “special promise to
creditor and notice thereof to answer for the debt, default or
guarantor: miscarriage of another”.
9. Strictly interpreted against the
 In declaring that guaranty creditor and in favor of the
must be express, the law
guarantor/surety and is not to be
refers solely and exclusively
extended beyond its terms or
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specified limits. (Magdalena Estates,

Inc. vs Rodriguez, 18 SCRA 967) The 6. Guarantor can 6. Surety cannot
rule of strictissimi juris commonly avail of the benefit avail of the benefit of
pertains to an accommodation surety of excussion and excussion and division
division in case
because the latter acts without
creditor proceeds
motive of pecuniary gain and hence, against him
should be protected against unjust
pecuniary impoverishment by
Indorsement Guaranty
imposing on the principal, duties
akin to those of a fiduciary. 1. Primarily of 1. Contract of
transfer security
NOTES:
 The rule will apply only after it 2. Unless the note is 2. Failure in either or
has been definitely ascertained promptly presented both of these
for payment at particulars does not
that the contract is one of
maturity and due generally work as an
suretyship or guaranty. It cannot notice of dishonor absolute discharge of
be used as an aid in determining given to the indorser a guarantor’s
whether a party’s undertaking is within a reasonable liability, but his is
that of a surety or guarantor. time he will be discharged only to
(Palmares vs CA, 288 SCRA 292) discharged abso- the extent of the loss
 It does not apply in case of lutely from all which he may have
liability thereon, suffered in
compensated sureties.
whether he has consequence thereof
10. It is a contract which requires that suffered any actual
the guarantor must be a person damage or not
distinct form the debtor because a
person cannot be the personal 3. Indorser does not 3. Guarantor
guarantor of himself. warrant the solvency. warrants the solvency
NOTE: However, in a real guaranty, He is answerable on a of the promisor
like pledge and mortgage, a person strict compliance
may guarantee his own obligation with the law by the
holder, whether the
with his personal or real properties.
promisor is solvent or
not
Guaranty Suretyship
4. Indorser can be 4. Guarantor cannot be
1. Liability depends 1. Surety assumes sued as promisor sued as promisor
upon an independent liability as regular
agreement to pay the party to the Guaranty Warranty
obligation if primary undertaking
A contract by which a An undertaking that
debtor fails to do so
person is bound to the title, quality, or
another for the quantity of the
2. Collateral under- 2. Surety is an fulfilment of a subject matter of the
taking original promisor promise or contract is what it
engagement of a has been represented
3. Guarantor is 3. Surety is third party to be, and relates to
secondarily liable primarily liable some agreement
made ordinarily by
4. Guarantor binds 4. Surety undertakes the party who makes
himself to pay if to pay if the principal the warranty
the principal DOES NOT PAY
CANNOT PAY
NOTES:
5. Insurer of 5. Insurer of the  A guaranty is gratuitous, unless there
solvency of debtor debt is a stipulation to the contrary. The
cause of the contract is the same
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cause which supports the obligation  Exception to the concept of

as to the principal debtor. continuing guaranty is chattel
 The peculiar nature of a guaranty or mortgage. A chattel mortgage can
surety agreement is that is is only cover obligations existing at the
regarded as valid despite the time the mortgage is constituted and
absence of any direct consideration not those contracted subsequent to
received by the guarantor or surety the execution thereof (The Belgian
either from the principal debtor or Catholic Missionaries, Inc. vs.
from the creditor; a consideration Magallanes Press, Inc., 49 Phil 647).
moving to the principal alone will An exception to this is in case of
suffice. stocks in department stores, drug
 It is never necessary that the stores, etc. (Torres vs. Limjap, 56
guarantor or surety should receive Phil 141).
any part or benefit, if such there be,
accruing to the principal. (Willex Extent of Guarantor’s liability: (Art
Plastic Industries Corp. vs. CA, 256 2055)
SCRA 478) 1. Where the guaranty definite: It is
limited in whole or in part to the
principal debt, to the exclusion of
accessories.
2. Where guaranty indefinite or simple:
Double or sub-guaranty (Art 2051 2nd It shall comprise not only the
par) principal obligation, but also all its
 One constituted to guarantee the accessories, including the judicial
obligation of a guarantor costs, provided with respect to the
latter, that the guarantor shall only
Continuing guaranty (Art 2053) be liable for those costs incurred
 One which is not limited to a single after he has been judicially required
transaction but which contemplates to pay.
a future course of dealings, covering
a series of transactions generally for Qualifications of a guarantor: (Arts
an indefinite time or until revoked. 2056-2057)
1. possesses integrity
NOTES: 2. capacity to bind himself
3. has sufficient property to answer
 Prospective in operation (Diño vs CA, for the obligation which he
216 SCRA 9) guarantees
 Construed as continuing when by the
terms thereof it is evident that the NOTES:
object is to give a standing credit to  The qualifications need only be
the principal debtor to be used from present at the time of the perfection
time to time either indefinitely or of the contract.
until a certain period, especially if
the right to recall the guaranty is
 The subsequent loss of the integrity
expressly reserved (Diño vs CA, 216 or property or supervening
SCRA 9) incapacity of the guarantor would
not operate to exonerate the
 “Future debts” may also refer to guarantor or the eventual liability he
debts existing at the time of the has contracted, and the contract of
constitution of the guaranty but the guaranty continues.
amount thereof is unknown and not
to debts not yet incurred and
 However, the creditor may demand
another guarantor with the proper
existing at that time.
qualifications. But he may waive it if
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he chooses and hold the guarantor to to cover the amount of the debt (Art
his bargain. 2060)
 Demand can be made only after
Benefit of Excussion (Art 2058) judgment on the debt
 The right by which the guarantor
 Demand must be actual; joining
cannot be compelled to pay the
the guarantor in the suit against
creditor unless the latter has
the principal debtor is not the
exhausted all the properties of the
demand intended by law
principal debtor, and has resorted to
9. Where the pledge or mortgage has
all of the legal remedies against such
been given by him as special security
debtor.
Benefit of Division (Art 2065)
NOTE:
 Should there be several guarantors
 Not applicable to a contract of of only one debtor and for the same
suretyship (Arts 2047, par. 2; debt, the obligation to answer for
2059[2]) the same is divided among all.
 Cannot even begin to take place  Liability: Joint
before judgment has been obtained
against the debtor (Baylon vs CA, NOTES:
312 SCRA 502)  The creditor can claim from the
guarantors only the shares they are
When Guarantor is not entitled to the respectively bound to pay except
benefit of excussion: (PAIRS) when solidarity is stipulated or if
1. If it may be presumed that an any of the circumstances
execution on the property of the enumerated in Article 2059 should
principal debtor would not result in take place.
the satisfaction of the obligation
 The right of contribution of
 Not necessary that the debtor be guarantors who pays requires that
judicially declared insolvent or the payment must have been made
bankrupt (a) in virtue of a judicial demand, or
2. When he has absconded, or cannot (b) because the principal debtor is
be sued within the Philippines unless insolvent (Art 2073).
he has left a manager or
representative  If any of the guarantors should be
3. In case of insolvency of the debtor insolvent, his share shall be borne by
the others including the paying
 Must be actual guarantor in the same joint
4. If the guarantor has expressly proportion following the rule in
renounced it solidary obligations.
5. If he has bound himself solidarily
with the debtor  The above rule shall not be
applicable unless the payment has
Other grounds: (BIPS) been made in virtue of a judicial
6. If he is a judicial bondsman or sub- demand or unless the principal
surety debtor is insolvent.
7. If he fails to interpose it as a  The right to contribution or
defense before judgment is rendered reimbursement from his co-
against him guarantors is acquired ipso jure by
8. If the guarantor does not set up the virtue of said payment without the
benefit against the creditor upon the need of obtaining from the creditor
latter’s demand for payment from any prior cession of rights to such
him, and point out to the creditor guarantor.
available property to the debtor
within Philippine territory, sufficient
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 The co-guarantors may set up before making payment. He

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

(ART.2067) ratified by the debtor
 Subrogation transfers to the person
subrogated, the credit with all the Effect of Repeat Payment by debtor:
rights thereto appertaining either (Art 2070)
against the debtor or against third GENERAL RULE: Before guarantor pays
persons, be they guarantors or the creditor, he must first notify the
possessors of mortgages, subject to debtor (Art. 2068). If he fails to give
stipulation in conventional such notice and the debtor repeats
subrogation. payment, the guarantor can only collect
from the creditor and guarantor has no
NOTE: This right of subrogation is cause of action against the debtor for
necessary to enable the guarantor to the return of the amount paid by
enforce the indemnity given in Art. guarantor even if the creditor should
2066. become insolvent.
 It arises by operation of law upon
payment by the guarantor. It is not EXCEPTION: The guarantor can still
necessary that the creditor cede to claim reimbursement from the debtor in
the guarantor the former’s rights spite of lack of notice if the following
against the debtor. conditions are present: (PIG)
a. guarantor was prevented by
 It is not a contractual right. The
fortuitous event to advise the
right of guarantor who has paid a
debtor of the payment; and
debt to subrogation does not stand
b. the creditor becomes insolvent;
upon contract but upon the
c. the guaranty is gratuitous.
principles of natural justice.
 The guarantor is subrogated by Right of Guarantor to proceed against
virtue of the payment to the rights debtor before payment
of the creditor, not those of the GENERAL RULE: Guarantor has no
debtor. cause of action against debtor until after
 Guarantor cannot exercise the the former has paid the obligation
right of redemption of his EXCEPTION: Article 2071
principal (Urrutia & Co vs
Morena and Reyes, 28 Phil 261) NOTES:
 Article 2071 is applicable and
Effect of Payment by Guarantor available to the surety. (Manila
1. Without notice to debtor: (Art Surety & Fidelity Co., Inc. vs Batu
2068) Construction & Co., 101 Phil 494)
 The debtor may interpose  Remedy of guarantor:
against the guarantor those (a) obtain release from the
defenses which he could have guaranty; or
set up against the creditor at the (b) demand a security that shall
time the payment was made, protect him from any
e.g. the debtor can set up proceedings by the creditor, and
against the guarantor the against the danger of insolvency
defense of previous of the debtor
extinguishment of the obligation
by payment.
Art. 2066 Art. 2071
Provides for the Provides for his
2. Before Maturity (Art 2069) enforcement of the protection before he
 Not entitled to reimbursement rights of the has paid but after he
unless the payment was made guarantor/surety has become liable
against the debtor
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after he has paid the shall admitted in lieu thereof (Art

debt 2083)
Gives a right of Protective remedy
action after payment before payment.
 A judicial bondsman and the sub-
Substantive right Preliminary remedy surety are NOT entitled to the
benefit of excussion because they
Extinguishment of guaranty: (RA2CE2) are not mere guarantors, but
1. Release in favor of one of the sureties whose liability is primary
guarantors, without the consent of and solidary. (Art 2084)
the others, benefits all to the extent
of the share of the guarantor to PLEDGE, MORTGAGE AND ANTICHRESIS
whom it has been granted (Art I. Common Elements of Pledge,
2078); Mortgage, and Antichresis (Articles
2. If the creditor voluntarily accepts 2085 – 2092)
immovable or other properties in
payment of the debt, even if he A. Essential Requisites (SOD) (Art
should afterwards lose the same 2085)
through eviction or conveyance of 1. Secures the fulfillment of a principal
property (Art 2077); obligation;
3. Whenever by some act of the 2. Pledgor, mortgagor, antichretic
creditor, the guarantors even though debtor must be the absolute owner
they are solidarily liable cannot be of the thing pledged or mortgaged;
subrogated to the rights, mortgages and
and preferences of the former (Art  The reason being that in
2080); anticipation of a possible
4. For the same causes as all other foreclosure sale in case of
obligations (Art 1231); default which is still a sale, the
5. When the principal obligation is rule is that the seller must be
extinguished; the owner of the thing sold
6. Extension granted to the debtor by (Cavite Development Bank vs.
the creditor without the consent of Lim, 324 SCRA 346)
the guarantor (Art 2079) 3. Pledgor, mortgagor, antichretic
debtor must have free disposal of
BOND their property, or be legally
 An undertaking that is sufficiently authorized for such purpose.
secured, and not cash or currency
NOTES:
Bondsman (Art 2082)  Third persons can pledge or
 A surety offered in virtue of a mortgage their own property to
provision of law or a judicial order. secure the principal obligation.
He must have the qualifications  It is not necessarily void simply
required of a guarantor and in because the accommodation pledgor
special laws like the Rules of Court. or mortgagor did not benefit from
the same. So long as valid consent
NOTES: was given, the fact that the loan was
 Judicial bonds constitute merely a given solely for the benefit of the
special class of contracts of guaranty principal debtor would not invalidate
by the fact that they are given “in the mortgage (GSIS vs CA, 170 SCRA
virtue… of a judicial order.” 533)
 If the person required to give a legal  The accommodation pledgor or
or judicial bond should not be able mortgagor, without expressly
to do so, a pledge or mortgage assuming personal liability for such
sufficient to cover the obligation debt, is not liable for the payment of
any deficiency, should the property
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not be sufficient to cover the debt C. Capability to secure all kinds of

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

Commerce vs. Macadaeg, 109 Phil endorsed (Art 2094); and
981) 3. The description of the thing pledged
and the date must appear in a public
E. When the principal obligation instrument to bind third persons, but
becomes due, the things in which not for the validity of the contract
the pledge, mortgage, or (Art 2096).
antichresis consists may be
alienated for the payment to the  Kinds:
creditor. (Art. 2087) 1. Conventional /Voluntary – created
by contract
NOTES: 2. Legal – created by operation of law
 If the debtor fails to comply with the (examples: Art. 546, 1731 and 1914
obligation at the time it falls due, NCC)
the creditor is merely entitled to
move for the sale of the thing NOTES:
pledged or mortgaged in order to  The provisions of possession, care
collect the amount of his claim from and sale of the thing as well as on
the proceeds. the termination of the pledge
 If he wishes to secure a title to the governing conventional pledges are
mortgaged property, he can buy it in applicable to pledges created by
the foreclosure sale (Montevirgin vs. operation of law (Art 2121)
CA, 112 SCRA 641)  Unlike, however, in conventional
pledge where the debtor is not
F. Pledgor, mortgagor, antichretic entitled to the excess unless it is
debtor retains ownership of the otherwise agreed, in legal pledge,
thing given as a security the remainder of the price of the
sale after payment of the debt and
PLEDGE (Arts 2093 – 2123) expenses, shall be delivered to the
debtor.
 A contract wherein the debtor  In legal pledge, there is no definite
delivers to the creditor or to a third period for the payment of the
person a movable or document principal obligation. The pledgee
evidencing incorporeal rights for the must make a demand for the
purpose of securing fulfilment of a payment of the amount due him;
principal obligation with the otherwise he cannot exercise the
understanding that when the right of sale at public auction (Art
obligation is fulfilled, the thing 2122)
delivered shall be returned with all
its fruits and accessions. Characteristics:
1. Real
 Special Requisites (in addition to contract – it is perfected by the
the common essential requisites): delivery of the thing pledged by the
1. Possession of the thing pledged must debtor who is called the pledgor to
be transferred to the creditor or a the creditor who is called the
third person by agreement (Art pledgee, or to a third person by
2093); common agreement;
2. It can only cover movable property 2. Accessor
and incorporeal rights evidenced by y contract – it has no independent
documents of title and the existence of its own;
instruments proving the right 3. Unilater
pledged shall be delivered to the al contract – it creates an obligation
solely on the part of the creditor to
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return the thing subject thereof 4. To choose which of several things

upon the fulfilment of the principal pledged shall be sold
obligation; and 5. To bid at the public auction (Art
4. Subsidiar 2113)
y contract – the obligation incurred 6. To appropriate the thing in case of
does not arise until the fulfilment failure of the 2nd public auction (Art
of the principal obligation which is 2112)
secured. 7. To apply said fruits, interests or
earnings to the interest, if any, then to
Consideration in pledge: the principal of the credit (Art 2102)
 Insofar as the pledgor is concerned, 8. To retain excess value received in
the cause is the principal obligation. the public sale (Art 2115)
9. To retain the thing until after full
 If the pledgor is not the debtor, the payment of the debt (Art 2098)
cause is the compensation stipulated
10. To be reimbursed for the expenses
for the pledge or the mere liberality
made for the preservation of the thing
of the pledgor.
pledged (Art 2099)
11. To object to the alienation of the
Extent of pledge: Unless stipulated
thing
otherwise, pledge extends to the fruits,
12. To possess the thing (Art 2098)
interests or earnings of the thing.
13. To sell at public auction in case of
non-payment of debt at maturity (Art
Rights and Obligations of a Pledgor
2112)
Rights Obligations To choose which of the several things
1. To demand return in 1. To advise the
pledged shall be sold (Art 2119)
case of reasonable pledgee of the
grounds to fear flaws of the thing 14. Option to demand replacement or
destruction or (Art 2101) immediate payment of the debt in case
impairment of the thing 2. Not to demand of deception as to substance or quality
without the pledgee’s the return of the (Art 2109)
fault, subject to the thing until after 15. To sell at public auction in case of
duty of replacement full payment of reasonable grounds to fear destruction
(Art 2107) the debt, or impairment of the thing without his
2. To bid and be including interest fault (Art 2108)
preferred at the public due thereon and
16. To bring actions pertaining to the
auction (Art 2113) expenses incurred
3. To alienate the thing for its owner (Art 2103)
pledged provided the preservation (Art 17. To choose which of several things
pledgee consents to the 2105) pledged shall be sold
sale (Art 2097) 18. To bid at the public auction (Art
4. To ask that the thing 2113)
pledged be deposited 19. To appropriate the thing in case of
(Arts 2104 & 2106) failure of the 2nd public auction (Art
2112)
Rights of the Pledgee 20. To apply said fruits, interests or
KEY: D SBC BA2R2OPS2 earnings to the interest, if any, then to
1. Option to demand replacement or the principal of the credit (Art 2102)
immediate payment of the debt in case 21. To retain excess value received
of deception as to substance or quality in the public sale (Art 2115)
(Art 2109) 22. To retain the thing until after full
2. To sell at public auction in case of payment of the debt (Art 2098)
reasonable grounds to fear destruction 23. To be reimbursed for the expenses
or impairment of the thing without his made for the preservation of the thing
fault (Art 2108) pledged (Art 2099)
3. To bring actions pertaining to the 24. To object to the alienation of the
owner (Art 2103) thing
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25. To possess the thing (Art 2098) NOTE: Possession of a creditor of the
26. To sell at public auction in case of thing pledged is an essential requisite of
non-payment of debt at maturity (Art pledge.
2112)
27. To choose which of the several Extinguishment of Pledge (CRAPS)
things pledged shall be sold (Art 2119) 1. For the same causes as all other
obligations (Art 1231)
Obligations of the Pledgee 2. Return of the thing pledged by the
KEY: CUDA3 pledgee to the pledgor (Art 2110)
1. Take care of the thing with the 3. Statement in writing by the
diligence of a good father of a family pledgee that he renounces or
(Art 2099) abandons the pledge (Art 2111)
2. Not to use thing unless authorized or 4. Payment of the debt (Art 2105)
by the owner or its preservation requires 5. Sale of thing pledged at public
its use (Art 2104) auction (Art 2115)
3. Not to deposit the thing with a 3 rd NOTE: The possession by the debtor or
person unless so stipulated (Art 2100) owner of the thing pledged subsequent
4. Responsibility for acts of agents and to the perfection of the pledge gives rise
employees as regards the thing (Art to a prima facie presumption that the
2100) thing has been returned and, therefore,
5. To advise pledgor of danger to the that the pledge has been extinguished
thing (Art 2107) but not the principal obligation itself.
6. To advise pledgor of the result of the (Art 2110)
public auction (Art 2116)
Requirements for sale of thing pledged
RIGHT OF PLEDGOR TO SUBSTITUTE at public auction: (Art 2112)
THING PLEDGED (ART.2107) 1. The debt is due and unpaid
 Requisites: 2. Sale must be at a public auction
1. The pledgor has reasonable 3. there must be notice to the pledgor
grounds to fear the destruction and owner, stating the amount due
or impairment of the thin 4. Sale must be with the intervention
pledged of a notary public
2. There is no fault on the part of
the pledgee Effect of sale of the thing pledged: (Art
3. The pledgor is offering in place 2115)
of the thing, another thing in 1. The sale of the thing pledged shall
pledge which is of the same kind extinguish the principal obligation,
and quality as the former whether or not the proceeds of the
4. The pledge does not choose to sale are equal to the amount of the
exercise his right to cause the principal obligation, interest and
thing pledged to be sold at expenses in a proper case
public auction 2. If the price of the sale is more than
NOTE: The pledgee’s right to have the the amount due the creditor, the
thing pledged sold at public sale granted debtor is not entitled to the excess
under the Article 2108 is superior to that unless the contrary is provided
given to the pledgor to substitute the 3. If the price of the sale is less, the
thing pledged under Article 2107. creditor is not entitled to recover
the deficiency even if there is a
Prohibition against double pledge stipulation to that effect
 Property which has been lawfully
pledged to one creditor cannot be REAL ESTATE MORTGAGE
pledged to another as long as the (Articles 2124-2131)
first one subsists.
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 A contract whereby the debtor bears interest, or that the interest

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

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

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

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

Executive Judge through the Clerk of  The Mortgagor and Mortgagee have
Court no right to waive the posting and
2. Clerk of Court will examine whether publication requirements under Act.
the requirement of the law have No. 3135. Notices are given to
been complied with, that is, whether secure bidders and prevent a
the notice of sale has been posted sacrifice of the property. Clearly, the
for not less than 20 days in at least statutory requirements of posting
three (3) public places of the and publication are mandated, not
municipality or city where the for the mortgagor’s benefit, but for
property is situated, and if the same the public or third persons. Failure
is worth more than P400.00, that to comply with the statutory
such notice has been published once requirements as to publication of
a week for at least three (3) notice of auction sale constitutes a
consecutive weeks in a newspaper of jurisdictional defect which
general circulation in the city of invalidates the sale.Lack of
municipality republication of notice of
3. The certificate of sale must be foreclosure sale made subsequently
approved by the Executive Judge after the original date renders such
4. Where the application concerns sale void (PNB vs. Nepomuceno
extrajudicial foreclosure of real Productions Inc., G.R. No. 139479.
mortgages in different locations December 27, 2002).
covering one indebtedness, only one
filing fee corresponding to such debt
 Sec 3 of Act 3135 does not require
personal or any particular notice on
shall be collected
the mortgagor much less on his
5. The Clerk of Court shall issue
successors-in-interest where there is
certificate of payment indicating the
no contractual stipulation therefor.
amount of indebtedness, the filing
Hence, unless required in the
fees collected, the mortgages sought
mortgage contract, the lack of such
to be foreclosed, the description of
notice is not a ground to set aside a
the real estates and their respective
foreclosure sale.
locations
6. The notice of sale shall be published  Neither does Sec 3 require posting of
in a newspaper of general circulation notice of sale on the mortgage
pursuant to Section 1, PD No. 1079 property and the certificate of
7. The application of shall be raffled posting is not required, much less
among all sheriffs considered indispensable, for the
8. After the redemption period has validity of a foreclosure sale.
expired, the Clerk of Court shall
archive the records.
9. No auction sale shall be held unless Redemption
there are at least two (2)  It is the transaction by which the
participating bidders, otherwise the mortgagor reacquires or buys back
sale shall be postponed to another the property which may have passed
date. If on the new date set forth under the mortgage, or divests the
for the sale there shall not be at property of the lien which the
least two bidders, the sale shall then mortgage may have created.
proceed. The names of the bidders
shall be reported to the Sheriff of NOTES:
the Notary Public, who conducted  A sale by the mortgagor to a third
the sale to the Clerk of Court before party of the mortgaged property
the issuance of the certificate of during the period for redemption
sale. transfers only the right to redeem
the property and the right to
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possess, use and enjoy the same foreclosure which ever is earlier
during said period. (sec. 47, of General Banking
 Where sale with assumption of Law)
mortgage not registered and made 2. Judicial – before confirmation of the
without the consent of the sale by the court
mortgagee, the buyer, thereof, was
not validly substituted as debtor NOTE: Allowing a redemption after the
and, hence, had no right to redeem lapse of the statutory period, when the
(Bonnevie vs. CA, 125 SCRA 122). buyer at the foreclosure sale does not
object but even consents to the
 Kinds: redemption, will uphold the policy of the
1. Equity of Redemption – right of law which is to aid rather than defeat
mortgagor to redeem the mortgaged the right of redemption. There is nothing
property after his default in the in the law which prevents a waiver of
performance of the conditions of the the statutory period for redemption
mortgage within the 90-day period (Ramirez vs CA, 219 SCRA 598).
from the date of the service of the
order of foreclosure or even Amount of the redemption price:
thereafter but before the 1. Mortgagee is not a bank (Act No.
confirmation of the sale. Applies to 3135, in relation to Sec. 28, Rule 39
judicial foreclosure of real mortgage of Rules of Court)
and chattel mortgage foreclosure. a. purchase price of the property
b. 1% interest per month on the
NOTE: Redemption of the banking purchase price
institutions is allowed within one year c. taxes paid and amount of
from confirmation of sale. purchaser’s prior lien, if any,
with the same rate of interest
2. Right of Redemption – right of computed from the date of
mortgagor to redeem the mortgaged registration of sale, up to the
property within one year from the time of redemption
date of registration of the certificate 2. Mortgagee is a bank (GBL 2000)
of sale. Applies only to extrajudicial a. amount due under the mortgage
foreclosure of real mortgage. deed
b. interest
NOTE: The right of redemption, as long c. cost and expenses
as within the period prescribed, may be NOTE: Redemption price in this
exercised irrespective of whether or not case is reduced by the income
the mortgagee has subsequently received from the property
conveyed the property to some other
party (Sta. Ignacia Rural Bank, Inc. vs.
CA, 230 SCRA 513)
Period of Redemption
1. Extra-judicial (Act #3135)
a. natural person – one year from
registration of the certificate of ANTICHRESIS (Articles
sale with Registry of Deeds 2132 -2139)
b. juridical person – same rule as
natural person  A contract whereby the creditor
c. juridical person (mortgagee is acquires the right to receive the
bank) - three months after fruits of an immovable of the
foreclosure or before debtor, with the obligation to apply
registration of certificate of them to the payment of the interest,
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if owing, and thereafter to the only the right to have any right to
principal of his credit (Art 2132) receive the fruits of receive the fruits;
the property, hence, but the mortgage
Characteristics it does not produce a creates a real right
real right over the property
1. Accessory contract – it secures the
3. The creditor, 3. The creditor has
performance of a principal obligation unless there is no such obligation
2. Formal contract – it must be in a stipulation to the
specified form to be valid, i.e., “in contrary, is obliged
writing.” (Art 2134) to pay the taxes and
charges upon the
 Special Requisites (in addition to estate
the common essential requisites): 4. It is expressly 4. There is no such
1. It can cover only the fruits of an stipulated that the obligation on part of
creditor given mortgagee
immovable property; (Art 2132)
possession of the
2. Delivery of the immovable is property shall apply
necessary for the creditor to receive all the fruits thereof
the fruits and not that the contract to the payment of
shall be binding; interest, if owing,
3. Amount of principal and interest and thereafter to the
must be specified in writing (Art. principal
2134); and Subject matter of both is real property
4. Express agreement that debtor will
give possession of the property to Obligations of antichretic creditor:
creditor and that the latter will 1 To pay taxes and charges on the
apply the fruits to the interest, if estate, including necessary expenses
any, then to the principal of his NOTE: Creditor may avoid said
credit. (Art 2132) obligation by:
a. compelling debtor to
NOTE: The obligation to pay interest is reacquire enjoyment of the
not of the essence of the contract of property or
antichresis, there being nothing in the b. by stipulation to the
Code to show that antichresis is only contrary
applicable to securing the payment of 2 To apply all the fruits, after
interest-bearing loans. On the contrary, receiving them, to the payment of
antichresis is susceptible of guaranteeing interest, if owing, and thereafter to
all kinds of obligations, pure or the principal
conditional 3 To render an account of the fruits to
the debtor
Antichresis Pledge 4 To bear the expenses necessary for
1. Refers to real 1. Refers to personal its preservation and repair
property property
2. Perfected by mere 2. Perfected by Remedies of creditor in case of non-
consent delivery of the thing payment of debt
pledged
3. Consensual contract 3. Real Contract 1. Bring an action for specific
performance; or
2. Petition for the sale of the real
property as in a foreclosure of
mortgages under Rule 68 of the
Antichresis Real Mortgage Rules of Court.(Art 2137)
1. Property is 1. Debtor usually
delivered to creditor retains possession of
the property
2. Creditor acquires 2. Creditor does not
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NOTES: 4. Accompanied by an affidavit of good

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

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

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

under Art. 2245, which shall be paid of the thing as it formerly existed.
pro rata regardless of dates.
NOTE: Ordinary Preferred and Common ORDER OF PREFERENCE OF CREDITS
Credits cover only “free property” of the
debtor, or those not subjected to Special  Arts. 2241 and 2242, jointly with
Preferred Credit. Arts. 2246 to 2249 establish a two-
tier order of preference:
Effects of Article 110 of Labor Code to 1. First tier – includes taxes, duties
Art 2244: and fees due on specific movable or
1. Removed the one-year limitation immovable property;
found in No. 2 of Art. 2244 2. Second tier – all other special
2. Moving up the claims for unpaid preferred (non-tax) credits shall be
wages (and other monetary claims) satisfied pro-rata, out of any
of laborers or workers of insolvent residual value of the specific
from second priority to first priority property to which such credits
in the order of preference relate.
established by Art. 2244
NOTES:
 The pro-rata rule does not apply to
credits annotated in the Registry of
Property by virtue of a judicial
NOTES:
 In case of bankruptcy or liquidation
of the employer’s business, the
unpaid wages and other monetary
claims of the employees shall be order, by attachments and
given first preference and shall be executions, which are preferred as
paid in full before the claims of the to “later credits”. In satisfying
government and other creditors may several credits annotated by
be paid. The terms, “declaration” attachments or executions, the rule
of bankruptcy, or “judicial” is still preference according to the
liquidation have been eliminated, priority of the credits in the order of
nevertheless, according to the SC, time.
bankruptcy or liquidation  In order to make the pro rating
proceedings are still necessary for provided in Art 2249 fully effective,
the operation of the preference the preferred creditors enumerated
accorded to workers under Art. 110 in Nos. 2 to 14 of Art 2242 must
of the Labor Code. (DBP vs. NLRC necessarily be convened, and the
183 SCRA 328; RA No. 6715 Sec 10) import of their claims ascertained.
 In case of rehabilitation, the There must be first some proceeding
preference of credit granted to where the claims of all the preferred
employees under Art 110 of the creditors may be bindingly
Labor Code is not applicable adjudicated, e.g. insolvency,
(Rubberworld [Phils.] vs CA, 305 settlement of decedent’s estate, or
SCRA 722). other liquidation proceedings except
where there are not more than one
Refectionary Credit creditor.
 Indebtedness incurred in the repair
or reconstruction of something
previously made, such repair or
reconstruction being made necessary
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216
 Credits which do not enjoy any

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

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

Loan Credit 5. Purely Personal (Art 1939):

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character of the contract of mutuum

2. There is a transfer There is no transfer

 The mere issuance of the checks Loan Sale

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Mutuum 3. must be in writing

1. Subject matter is Subject matter is Compound Interest

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1. To keep the thing safely (Art 1972) deposit if justifiable reasons

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1. When the preservation of the 8. To change the way of the deposit if

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other creditors with the debtor’s preservation of the thing

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 The keepers of hotels or inns shall be

 A contract whereby a person SURETYSHIP

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 The reference in Article 2047 to though he was not a party to the

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NOTES: to the obligation of the

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specified limits. (Magdalena Estates,

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cause which supports the obligation  Exception to the concept of

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

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Guarantor’s right to Subrogation with the consent or has been

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after he has paid the shall admitted in lieu thereof (Art

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not be sufficient to cover the debt C. Capability to secure all kinds of

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balance of the credit (Phil. Bank of creditor, and if negotiable must be

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return the thing subject thereof 4. To choose which of several things

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

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PLEDGE REAL MORTGAGE 2. Mortgagee - To claim from a 3rd

Special Rights: Judicial Extrajudicial

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the parties all parties involved extra-judicial foreclosure real

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1. Filing of application before the NOTES:

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NOTES: 4. Accompanied by an affidavit of good

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foreclosed, the entitled to excess mortgagor to discharge the mortgage

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expressly provided by law. (Secs. preference among the attachments

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3. Common Credits – those listed by the deterioration or destruction