Credit Transaction Reviewer New Man

CREDIT TRANSACTIONS All transactions involving the

purchase or loan of goods, services,or money in the present with apromise to pay or deliver in thefuture

Contracts of securityTypes:1. Secured transactions or contracts of

real security - supported by acollateral or an encumbrance ofproperty

2. Unsecured transactions or contractsof personal security - supported onlyby a promise or personalcommitment of another such as aguarantor or surety

Security Something given, deposited, or

serving as a means to ensurefulfilment or enforcement of anobligation or of protecting someinterest in property

Types of Securitya. personal when an individual

becomes surety or guarantor b. real or property when a

mortgage, pledge, antichresis,charge or lien or other deviceused to have property held, outof which the person to be madesecure can be compensated forloss

Bailment The delivery of property of one

person to another in trust for aspecific purpose, with a contract,express or implied, that the trustshall be faithfully executed and theproperty returned or duly accountedfor when the special purpose isaccomplished or kept until the bailorclaims it.

Parties:1. bailor - the giver; one who delivers

property2. bailee- the recipient; one who

receives the custody or possession ofthe thing thus delivered

LOAN (Articles 1933 1961) A contract wherein one of the

parties delivers to another, eithersomething not consumable so thatthe latter may use the same for acertain time and return it or moneyor other consumable thing, upon the

condition that the same amount ofthe same kind and quality shall bepaid. (Art 1933)

Characteristics:1. Real Contract delivery of the thing

loaned is necessary for theperfection of the contractNOTE: An accepted promise to makea future loan is a consensualcontract, and therefore binding uponthe parties but it is only afterdelivery, will the real contract ofloan arise. (Art 1934)

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

Kinds: 1. Commodatum when the bailor

(lender) delivers to the bailee(borrower) a non-consumable thingso that the latter may use it for acertain time and return the identicalthing. Kinds of commodatum:a. Ordinary Commodatum use by

the borrower of the thing is for acertain period of time

b. Precarium - one whereby thebailor may demand the thingloaned at will and it exists in thefollowing cases:i. neither the duration nor

purpose of the contract isstipulated

ii. the use of the thing ismerely tolerated by theowner

2. Simple loan or mutuum where thelender delivers to the borrowermoney or other consumable thingupon the condition that the lattershall pay the same amount of thesame kind and quality.

Commodatum MutuumKey: COPS-LOTR

1. ObjectNon-consumable Consumable

2. CauseGratuitous May or may not be

gratuitous3. Purpose

Use or temporarypossession

Consumption

4. Subject MatterReal or personal

propertyOnly personalproperty

5. Ownership of the thingRetained by the

bailorPasses to the debtor

CREDIT TRANSACTIONS

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6. Thing to be returnedExact thing loaned Equal amount of the

same kind andquality

7. Who bears risk of lossBailor Debtor

8. When to returnIn case of urgentneed, even beforethe expiration of theterm

Only after theexpiration of theterm

Loan CreditDelivery by one partyand the receipt ofother party of agiven sum of moneyor other consumablething upon anagreement, expressor implied, to repaythe same.

Ability of a person toborrow money orthings by virtue ofthe trust orconfidence reposedby the lender that hewill pay what hepromised.

Loan Credit1. Interest taken atthe expiration of thecredit

Interest is taken inadvance

2. Always on adouble name paper(two signaturesappear with bothparties held liablefor payment)

Always on a singlename paper (i.e.promissory note withno indorse-mentother than themaker)

COMMODATUM (Articles 1935 1952) Nature:

1. PURPOSE: Bailee in commodatumacquires the temporary use of thething but not its fruits (unlessstipulated as an incidental part ofthe contract).(Art 1935) Use must be temporary,

otherwise the contract may be adeposit.

2. CAUSE: Essentially gratuitous; itceases to be a commodatum if anycompensation is to be paid by theborrower who acquires the use, insuch case there arises a leasecontract. Similar to a donation in that it

confers a benefit to therecipient. The presumption isthat the bailor has loaned thething for having no needtherefor.

3. SUBJECT MATTER: Generally non-consumable whether real or personalbut if the consumable goods are notfor consumption as when they aremerely for exhibition, consumablegoods may be the subject of thecommodatum. (Art 1936)

4. Bailor need not be the owner of thething owned (Art. 1938) since by theloan, ownership does not pass to theborrower. A mere lessee or usufructuary

may lend but the borrower orbailee himself may not lend norlease the thing loaned to him toa third person (Art 1932[2])

5. Purely Personal (Art 1939): Death of either party terminates

the contract unless bystipulation, the commodatum istransmitted to the heirs of eitheror both parties.

Bailee can neither lend nor leasethe object of the contract to athird person.

NOTE:Use of the thing loanedmay extend to members of thebailees household except:

a. contrary stipulation;b. nature of the thing

forbids such use

Obligations of the Bailee: (Arts 1941 1945)1. To pay for the ordinary expenses for

the use and preservation of the thingloaned. (Art 1941)

2. To be liable for the loss of the thingeven if it should be through afortuitous event in the followingcases: (KLAS D)a. when he keeps it longer than the

period stipulated, or after theaccomplishment of its use

b. when he lends or leases it tothird persons who are notmembers of his household

c. when the thing loaned has beendelivered with appraisal of itsvalue

d. when, being able to save eitherof the thing borrowed or his ownthings, he chose to save thelatter; or

e. when the bailee devoted thething for any purpose differentfrom that for which it has beenloaned (Art 1942)

3. To be liable for the deterioration ofthing loaned (a) if expresslystipulated; (b) if guilty of fault ornegligence; or (c) if he devotes thething to any purpose different fromthat for which it has been loaned

4. To pay for extraordinary expensesarising from the actual use of thething by the bailee, which shall beborne equally by both the bailor andthe bailee, even though the baileeacted without fault, unless there is a

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stipulation to the contrary (Art 1949par 2)

5. To return the thing loaned The bailee has no right to retain

the thing loaned as security forclaims he has against the bailoreven for extraordinary expensesexcept for a claim for damagessuffered because of the flaws ofthe thing loaned.

NOTES: However, the bailees right

extends no further thanretention of the thing loaneduntil he is reimbursed for thedamages suffered by him.

He cannot lawfully sell thething to satisfy such damageswithout courts approval.

In case there are two ormore bailees, theirobligation shall be solidary.

Obligations of the bailor (Art 1946 Art1952):1. To respect the duration of the loan

GENERAL RULE: Allow the baileethe use of the thing loaned for theduration of the period stipulated oruntil the accomplishment of thepurpose for which the commodatumwas instituted.EXCEPTIONS:

a. In case of urgent need inwhich case bailee may demandits return or temporary use;b. The bailor may demandimmediate return of the thing ifthe bailee commits any act ofingratitude specified in Art. 765.

2. To refund to the baileeextraordinary expenses for thepreservation of the thing loaned,provided the bailee brings the sameto the knowledge of the bailorbefore incurring them, except whenthey are so urgent that the reply tothe notification cannot be awaitedwithout danger.

3. To be liable to the bailee fordamages for known hidden flaws. Requisites:a. There is flaw or defect in the

thing loaned;b. The flaw or defect is hidden;c. The bailor is aware thereof;d. He does not advise the bailee of

the same; ande. The bailee suffers damages by

reason of said flaw or defect

NOTES:Article I. If the above requisitesconcur, the bailee has the right ofretention for damages. The bailor cannot exempt

himself from the payment ofexpenses or damages byabandoning the thing to thebailee.

SIMPLE LOAN OR MUTUUM (Art 1953 1961) A contract whereby one party

delivers to another, money or otherconsumable thing with theunderstanding that the same amountof the same kind and quality shall bepaid. (Art. 1953)

NOTES: The mere issuance of the checks

does not result in the perfection ofthe contract of loan. The Civil Codeprovides that the delivery of bills ofexchange and mercantiledocuments, such as checks, shallproduce the effect of payment onlywhen they have been encashed(Gerales vs. CA 218 SCRA 638). It isonly after the checks have producedthe effect of payment that thecontract of loan may be deemedperfected.

The obligation is to pay and not toreturn because the consumption ofthe thing loaned is the distinguishingcharacter of the contract of mutuumfrom that of commodatum.

No estafa is committed by a personwho refuses to pay his debt or deniesits existence.

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Simple Loan/Mutuum Rent

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

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

2. There is a transferof ownership of the thing delivered

There is no transfer of ownership of the thing delivered

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

Relationship is that of a landlord and tenant

4. Creditor receives payment for his loan

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

from the occupant thereof in return for its use (Tolentino vs Gonzales, 50 Phil 5581927)

Loan Sale

1. Real contract Consensual contract

2.Generally unilateral because only borrower has obligations

Bilateral and reciprocal

NOTE: If the property is sold, but thereal intent is only to give the object assecurity for a debt as when the priceis comparatively small there really is acontract of loan with an equitablemortgage.

Commodatum/Mutuum Barter

1. Subject matter is money or fungible things

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

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

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

3. Mutuum may be gratuitous and commodatum is always gratuitous

Onerous, actually a mutual sale

Form of Payment (Art 1955):1. If the thing loaned is money -

payment must be made in thecurrency stipulated, if it is possible;otherwise it is payable in thecurrency which is legal tender in thePhilippines and in case ofextraordinary inflation or deflation,the basisi of payment shall be thevalue of the currency at the time ofthe creation of the obligation

2. If what was loaned is a fungiblething other than money - theborrower is under obligation to paythe lender another thing of the samekind, quality and quantity. In case itis impossible to do so, the borrowershall pay its value at the time of theperfection of the loan.

Interest The compensation allowed by law or

fixed by the parties for the loan orforbearance of money, goods orcredits

Requisites for Demandability: (ELI)1. must be expressly stipulated

Exceptions: a. indemnity for damagesb. interest accruing from

unpaid interest2. must be lawful 3. must be in writing

Compound InterestGENERAL RULE: Unpaid interest shallnot earn interest.EXCEPTIONS:

1. when judicially demanded 2. when there is an express

stipulation (must be in writing inview of Art. 1956)

Guidelines for the application ofproper interest rates1. If there is stipulation: that rate shall

be applied2. The following are the rules of thumb

for the application/imposition ofinterest rates: a) When an obligation, regardless

of its source, i.e., law,contracts, quasi-contracts,delicts or quasi-delicts isbreached, the contravenor canbe held liable for damages.

b) With regard particularly to anaward of interest in the conceptof actual and compensatorydamages, the rate of interest, aswell as the accrual thereof, isimposed, as follows: i. When the obligation

breached consists ofpayment of a sum of money

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(loan or forbearance ofmoney), the interest shall bethat which is stipulated oragreed upon by the parties.In absence of an agreement,the rate shall be the legalrate (i.e. 12% per annum)computed from default. NOTE: The interest due shallitself earn legal interestfrom the time it is judiciallydemanded

ii. In other cases, the rate ofinterest shall be six percent(6%) per annum.NOTE: No interest, however,shall be adjudged onunliquidated claims ordamages except when oruntil the demand can beestablished with reasonablecertainty. When the demandcannot be established, theinterest shall begin to runonly from the date of thejudgment of the court ismade.

iii. When the judgment of thecourt awarding a sum ofmoney becomes final andexecutory, the rate of legalinterest, whether the casefalls under paragraph i or iiabove, shall be 12% perannum from such finalityuntil its satisfaction, thisinterim period being deemedto be by then an equivalentto a forbearance of credit.(Eastern Shipping Lines vs.CA, July 12, 1994)

NOTES: Central Bank Circular No. 416 fixing

the rate of interest at 12% perannum deals with loans, forbearanceof any money, goods or credits andjudgments involving such loans, orforbearance in the absence ofexpress agreement to such rate

Interest as indemnity for damages ispayable only in case of default ornon-performance of the contract. Asthey are distinct claims, they may bedemanded separately. (SentinelInsurance Co., Inc. vs CA, 182 SCRA517)

Central Bank Circular No. 905 (Dec.10, 1982) removed the Usury Lawceiling on interest rates for securedand unsecured loans, regardless ofmaturity.

Validity of unconscionable interest ratein a loan

Supreme Court in Sps. Solangonvs. Jose Salazar, G.R. No. 125944, June

29, 2001, said that since the usury lawhad been repealed by CB Cir. No. 905there is no more maximum rate ofinterest and the rate will just depend onthe mutual agreement of the parties(citing Lim Law vs. Olympic Sawmill Co.,129 SCRA 439). But the Supreme Courtsaid that nothing in said circular grantslenders carta blanche authority to raiseinterest rates to level which will eitherenslave their borrowers or lead to ahemorrhaging of their assets (citingAlmeda vs. CA, 256 SCRS 292). In Medelvs. CA, 299 SCRA 481, it was ruled thatwhile stipulated interest of 5.5% permonth on a loan is usurious pursuant toCB Circular No. 905, the same must beequitably reduced for being iniquitous,unconscionable and exorbitant. It iscontrary to morals, (contra bonosmores). It was reduced to 12% perannum in consonant with justice and fairplay.

DEPOSIT (Articles 1962 2009)

A contract constituted from themoment a person receives a thingbelonging to another, with theobligation of safely keeping it and ofreturning the same.

Characteristics: 1. Real Contract - contract is

perfected by the delivery of thesubject matter.

2. Unilateral (gratutitous deposit) -only the depositary has anobligation.

3. Bilateral (onerous deposit) -gives rise to obligations on thepart of both the depositary anddepositor.

Deposit Mutuum1. Purpose

Principal purpose is safekeeping or custody

Principal purpose is consumption

2. When to ReturnDepositor can demand the return ofthe subject matter atwill

The lender must waituntil the expiration of the period grantedto the debtor

3. Subject MatterSubject matter may be movable or immovable property

Subject matter is only money or other fungible thing

4. RelationshipRelationship is that of lender (creditor) and borrower (debtor).

Relationship is that of depositor and depositary.

5. CompensationThere can be compensation of credits.

NO compensation of things deposited witheach other (except by mutual

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agreement).

Deposit Commodatum

1. Purpose is Safekeeping

1. Purpose is the transfer of the use

2. May be gratuitous 2. Essentially and always gratuitous

3. Movable/corporealthings only in case of extrajudicial deposit

3. Both movable and immovable may be the object

Kinds of Deposit:1. Judicial (Sequestration) takes place

when an attachment or seizure ofproperty in litigation is ordered.

2. Extra-judicial a. Voluntary one wherein the

delivery is made by the will ofthe depositor or by two or morepersons each of whom believeshimself entitled to the thingdeposited. (Arts 1968 1995)

b. Necessary one made incompliance with a legalobligation, or on the occasion ofany calamity, or by travellers inhotels and inns (Arts 1996 -2004), or by travellers withcommon carriers (Art 1734 1735).

NOTE: The chief differencebetween a voluntary deposit and anecessary deposit is that in theformer, the depositor has acomplete freedom in choosing thedepositary, whereas in the latter,there is lack of free choice in thedepositor.

Judicial Extra-judicial1. Creation

Will of the court Will of the parties or contract

2. PurposeSecurity or to insure the right of a party to property or to recover in case of favorable judgment

Custody and safekeeping

3. Subject MatterMovables or immovables, but generally immovables

Movables only

4. CauseAlways onerous May be compen-

sated or not, but generally gratuitous

5. When must the thing be returnedUpon order of the court or when litigation is ended

Upon demand of depositor

6. In whose behalf it is held

Person who has a right

Depositor or third person designated

GENERAL RULE: Contract of deposit isgratuitous (Art 1965)EXCEPTIONS:

1. when there is contrarystipulation

2. depositary is engaged in businessof storing goods

3. property saved from destructionwithout knowledge of the owner

NOTES: Article 1966 does not embrace

incorporeal property, such as rightsand actions, for it follows the personof the owner, wherever he goes.

A contract for the rent of safetydeposit boxes is not an ordinarycontract of lease of things but aspecial kind of deposit; hence, it isnot to be strictly governed by theprovisions on deposit. The relationbetween a bank and its customer isthat of a bailor and bailee. (CA Agrovs CA, 219 SCRA 426)

Obligations of the Depositary (Art 19721991):1. To keep the thing safely (Art 1972)

Exercise over the thingdeposited the same diligence ashe would exercise over hisproperty

2. To return the thing (Art 1972) Person to whom the thing must

be returned:a. Depositor, to his heirs and

successors, or the person whomay have been designated in thecontract

b. If the depositary is capacitated -he is subject to all theobligations of a depositarywhether or not the depositor iscapacitated. If the depositor isincapacitated, the depositarymust return the property to thelegal representative of theincapacitated or to the depositorhimself if he should acquirecapacity (Art 1970).

c. If the depositor is capacitatedand the depositary isincapacitated - the latter doesnot incur the obligation of adepositary but he is liable:

i..to return the thingdeposited while still in hispossession;

ii.to pay the depositor theamount which he may havebenefited himself with thething or its price subject tothe right of any third person

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who acquired the thing ingood faith (Art 1971)

Time of return: a. Upon demand even though aspecified period or time for suchreturn may have been fixedexcept when the thing isjudicially attached while in thedepositarys possession or shouldhe have been notified of theopposition of a third person tothe return or the removal of thething deposited. (Art 1998)b. If deposit gratuitous, thedepositary may return the thingdeposited notwithstanding that aperiod has been fixed for thedeposit if justifiable reasonsexists for its return.c. If the deposit is for avaluable consideration, thedepositary has no right to returnthe thing deposited before theexpiration of the timedesignated even if he shouldsuffer inconvenience as aconsequence.(Art 1989)

What to return: product,accessories, and accessions ofthe thing deposited (Art 1983)

3. Not to deposit the thing with a thirdperson unless authorized by expressstipulation (Art 1973) The depositor is liable for the

loss of the thing deposited underArticle 1973 if:a. hetransfers the deposit with a thirdperson without authorityalthough there is no negligenceon his part and the third person;b. hedeposits the thing with a thirdperson who is manifestly carelessor unfit although authorizedeven in the absence ofnegligence; orc. the thingis lost through the negligence ofhis employees whether the latterare manifestly careless or not.

4. If the thing deposited should earninterest (Art 1975):a. to collect interest and the

capital itself as it fall dueb. to take steps to preserve its

value and rights corresponding toit

5. Not to commingle things deposited ifso stipulated (Art 1976)

6. Not to make use of the thingdeposited unless authorized (Art1977) GENERAL RULE: Deposit is forsafekeeping of the subject matter

and not for use. The unauthorizeduse by the depositary would makehim liable for damages. EXCEPTIONS:1. When the preservation of the

thing deposited requires its use2. When authorized by the

depositor

NOTE: The permission to use is NOTpresumed except when such use isnecessary for the preservation of thething deposited.

Effect if permission to use is given(Art 1978):1. If thing deposited is

non-consumable, the contractloses the character of a depositand acquires that of acommodatum despite the factthat the parties may havedenominated it as a deposit,unless safekeeping is still theprincipal purpose.

2. If thing deposited consists ofmoney/consumable things, thecontract is converted into asimple loan or mutuum unlesssafekeeping is still the principalpurpose in which case it is calledan irregular deposit. Example:bank deposits are irregulardeposits in nature but governedby law on loans.

7. When the thing deposited isdelivered sealed and closed :a. to return the thing deposited in

the same conditionb. to pay for damages should the

seal or lock be broken throughhis fault, which is presumedunless proved otherwise

c. to keep the secret of the depositwhen the seal or lock is brokenwith or without his fault (Art1981)NOTE: The depositary isauthorized to open the thingdeposited which is closed andsealed when (Art 1982):i. there is presumed authority

(i.e. when the key has beendelivered to him or theinstructions of the depositorcannot be done withoutopening it)

ii. necessity 8. To change the way of the deposit if

under the circumstances, thedepositary may reasonably presumethat the depositor would consent tothe change if he knew of the facts ofthe situation, provided, that theformer notifies the depositor thereofand wait for his decision, unlessdelay would cause danger

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9. To pay interest on sums converted topersonal use if the deposit consistsof money (Art 1983)

10. To be liable for loss throughfortuitous event (SUDA): (Art 1979): a. if stipulatedb. if he uses the thing without the

depositor's permissionc. if he delays its returnd. if he allows others to use it,

even though he himself mayhave been authorized to use thesame

NOTES: Fixed, savings, and current deposits

of money in banks and similarinstitutions shall be governed by theprovisions concerning simple loan.(Art 1980)

The general rule is that a bank cancompensate or set off the deposit inits hands for the payment of anyindebtedness to it on the part of thedepositor. In true deposit,compensation is not allowed.

Irregular deposit Mutuum

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

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

2. The only benefit isthat which accrues to the depositor

2. Essential cause forthe transaction is thenecessity of the borrower

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

3. Common creditorsenjoy no preference in the distribution of the debtors property

Rule when there are two or moredepositors (Art 1985):1. If thing deposited is divisible and

depositors are not solidary: Eachdepositor can demand only hisproportionate share thereto.

2. If obligation is solidary or if thing isnot divisible: Rules on activesolidarity shall apply, i.e. each oneof the solidary depositors may dowhatever may be useful to theothers but not anything which maybe prejudicial to the latter, (Art.1212) and the depositary may returnthe thing to anyone of the solidarydepositors unless a demand, judicialor extrajudicial, for its return hasbeen made by one of them in which

case, delivery should be made to him(Art. 1214).

3. Return to one of depositorsstipulated. The depositary is boundto return it only to the persondesignated although he has not madeany demand for its return.

NOTES: The depositary may retain the thing

in pledge until full payment of whatmay be due him by reason of thedeposit (Art 1994).

The depositors heir who in goodfaith may have sold the thing whichhe did not know was deposited, shallonly be bound to return the price hemay have received or to assign hisright of action against the buyer incase the price has not been paid him(Art 1991).

Obligations of the Depositor (Art 1992 1995):1. To pay expenses for preservation

a. If the deposit is gratuitous, thedepositor is obliged toreimburse the depositary forexpenses incurred for thepreservation of the thingdeposited (Art 1992)

b. If the deposit is for valuableconsideration, expenses forpreservation are borne by thedepositary unless there is acontrary stipulation

2. To pay loses incurred by thedepositary due to the character ofthe thing deposited

GENERAL RULE: The depositor shallreimburse the depositary for any lossarising from the character of the thingdeposited.EXCEPTIONS:

1. at the time of the deposit, thedepositor was not aware of thedangerous character of the thing

2. when depositor was not expectedto know the dangerous characterof the thing

3. when the depositor notified thedepository of the same

4. the depositary was aware of itwithout advice from the depositor

Extinguishment of Voluntary Deposit(Art 1995)1. Loss or destruction of the thing

deposited2. In case of gratuitous deposit, upon

the death of either the depositor orthe depositary

3. Other causes, such as return of thething, novation, merger, expirationof the term fulfilment of theresolutory condition, etc (Art 1231)

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Necessary Deposits1. Made in compliance with a legal

obligation2. Made on the occasion of any

calamity such as fire, storm, flood,pillage, shipwreck or other similarevents (deposito miserable)

3. Made by travellers in hotels and innsor by travellers with common carrier

Deposit by Travellers in hotels andinns: The keepers of hotels or inns shall be

responsible as depositaries for thedeposit of effects made by travellersprovided:a. Notice was given to them or to

their employees of the effectsbrought by the guest; and

b. The guests take the precautionswhich said hotel-keepers or theirsubstitutes advised relative tothe care and vigilance of theireffects.

NOTES: Liability extends to vehicles, animals

and articles which have beenintroduced or placed in the annexesof the hotel.

Liability shall EXCLUDE losses whichproceed from force majeure. The actof a thief or robber is not deemedforce majeure unless done with theuse of arms or irresistible force.

The hotel-keeper cannot freehimself from the responsibility byposting notices to the effect that heis not liable for the articles broughtby the guest. Any stipulation to sucheffect shall be void.

Notice is necessary only for suingcivil liability but not in criminalliability.

GUARANTY (Articles 2047 2084)

A contract whereby a person(guarantor) binds himself to thecreditor to fulfil the obligation ofthe principal debtor in case thelatter fail to do so.

Classification of Guaranty: 1. In the Broad sense:

a. Personal - the guaranty is thecredit given by the person whoguarantees the fulfilment of theprincipal obligation.

b. Real - the guaranty is theproperty, movable orimmovable.

2. As to its Origina. Conventional - agreed upon by

the parties.b. Legal - one imposed by virtue of

a provision of a law.c. Judicial - one which is required

by a court to guarantee theeventual right of one of theparties in a case.

3. As to Considerationa. Gratuitous - the guarantor does

not receive any price orremuneration for acting as such.

b. Onerous - the guarantor receivesvaluable consideration.

4. As to the Person guaranteeda. Single - one constituted solely to

guarantee or secureperformance by the debtor ofthe principal obligation.

b. Double or sub-guaranty - oneconstituted to secure thefulfilment by the guarantor of aprior guaranty.

5. As to Scope and Extenta. Definite - the guaranty is limited

to the principal obligation only,or to a specific portion thereof.

b. Indefinite or simple - one whichnot only includes the principalobligation but also all itsaccessories including judicialcosts

SURETYSHIP

A contract whereby a person (surety)binds himself solidarily with theprincipal debtor

A relation which exists where oneperson (principal) has undertaken anobligation and another person(surety) is also under a direct andprimary obligation or other duty tothe obligee, who is entitled to butone performance, and as betweenthe two who are bound, the secondrather than the first should perform(Agro Conglomerates, Inc. vs. CA,348 SCRA 450)

NOTES: The reference in Article 2047 to

solidary obligations does not meanthat suretyship is withdrawn fromthe applicable provisions governingguaranty. A surety is almost thesame as a solidary debtor, exceptthat he himself is a principal debtor.

In suretyship, there is but onecontract, and the surety is bound bythe same agreement which binds theprincipal. A surety is usually boundwith the principal by the sameinstrument, executed at the sametime and upon the same

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consideration (Palmares vs CA, 288SCRA 422)

It is not for the obligee to see to itthat the principal debtor pays thedebt or fulfill the contract, but forthe surety to see to it that theprincipal debtor pays or performs(Paramount Insurance Corp vs CA,310 SCRA 377)

Nature of Suretys undertaking:1. Liability is contractual and

accessory but directNOTE: He directly, primarily andequally binds himself with theprincipal as original promisor,although he possesses no direct orpersonal interest over the lattersobligation, nor does he receive anybenefits therefrom. (PNB vs CA, 198SCRA 767)

2. Liability limited by the terms of thecontract.NOTE: It cannot be extended byimplication beyond the terms of thecontract (PNB vs CA, 198 SCRA 767)

3. Liability arises only if principaldebtor is held liable.NOTES: The creditor may sue separately

or together the principal debtorand the surety. Where there areseveral sureties, the obligee mayproceed against any one ofthem.

In the absence of collusion, thesurety is bound by a judgmentagainst the principal eventhough he was not a party to theproceedings. The nature of itsundertaking makes it privy to allproceedings against its principal(Finman General AssuranceCorp. vs. Salik, 188 SCRA 740)

4. Surety is not entitled to the benefitof exhaustion NOTE: He assumes a solidary liabilityfor the fulfilment of the principalobligation (Towers Assurance Corpvs. Ororama Supermart, 80 SCRA262) as an original promissory anddebtor from the beginning.

5. Undertaking is to creditor and notto debtor.NOTE: The surety makes nocovenant or agreement with theprincipal that it will fulfil theobligation guaranteed for the benefitof the principal. Such a promise isnot implied by law either; and this istrue even where under the contractthe creditor is given the right to suethe principal, or the latter and thesurety at the same time. (Arranz vs.Manila Fidelity & Surety Co., Inc.,101 Phil. 272)

6. Surety is not entitled to notice ofprincipals defaultNOTE: The creditor owes no duty ofactive diligence to take care of theinterest of the surety and the suretyis bound to take notice of theprincipals default and to performthe obligation. He cannot complainthat the creditor has not notifiedhim in the absence of a specialagreement to that effect. (Palmaresvs CA, 288 SCRA 422)

7. Prior demand by the creditor uponprincipal is not requiredNOTE: As soon as the principal is indefault, the surety likewise is indefault.

8. Surety is not exonerated by neglectof creditor to sue principal

Characteristics of Guaranty andSuretyship: 1. Accessory - It is indispensable

condition for its existence that theremust be a principal obligation.NOTES: Guaranty may be constituted to

guarantee the performance of avoidable or unenforceablecontract. It may also guaranteea natural obligation. (Art 2052)

The guarantor cannot bindhimself for more than theprincipal debtor and even if hedoes, his liability shall bereduced to the limits of that ofthe debtor.

2. Subsidiary and Conditional - takeseffect only in case the principaldebtor fails in his obligation.

NOTES: The guarantor cannot bind

himself for more than theprincipal debtor and even if hedoes, his liability shall bereduced to the limits of that ofthe debtor. But a guarantor maybind himself for less than that ofthe principal (Art 2054)

A guaranty may be given assecurity for future debts, theamount of which is not yetknown; there can be no claimagainst the guarantor until thedebt is liquidated. A conditionalobligation may also be secured.(Art 2053)

3. Unilateral - may be entered evenw/o the intervention of the principaldebtor, in which case Art. 1236 and1237 shall apply and it gives rise onlyto a duty on the part of theguarantor in relation to the creditorand not vice versa.

4. Nominate 5. Consensual

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6. It is a contract between theguarantor/surety and creditor.

NOTES: Acceptance of guaranty by

creditor and notice thereof toguarantor: In declaring that guaranty

must be express, the lawrefers solely and exclusivelyto the obligation of theguarantor because it is healone who binds himself byhis acceptance. With respectto the creditor, no suchrequirement is neededbecause he binds himself tonothing.

However, when there ismerely an offer of aguaranty, or merely aconditional guaranty, in thesense that it requires actionby the creditor before theobligation becomes fixed, itdoes not become bindinguntil it is accepted and untilnotice of such acceptance bythe creditor is given to, oracquired by, the guarantor,or until he has notice orknowledge that the creditorhas performed the conditionand intends to act upon theguaranty.

But in any case, the creditoris not precluded fromwaiving the requirement ofnotice.

The consideration of theguaranty is the same as theconsideration of the principalobligation.

The creditor may proceedagainst the guarantor althoughhe has no right of action againstthe principal debtor.

7. Not presumed. It must be expressedand reduced in writing. NOTE: A power of attorney to loanmoney does not authorize the agentto make the principal liable as asurety for the payment of the debtof a third person. (BPI vs. Coster, 47Phil. 594)

8. Falls under the Statute of Fraudssince it is a special promise toanswer for the debt, default ormiscarriage of another.

9. Strictly interpreted against thecreditor and in favor of theguarantor/surety and is not to beextended beyond its terms orspecified limits. (Magdalena Estates,Inc. vs Rodriguez, 18 SCRA 967) Therule of strictissimi juris commonly

pertains to an accommodation suretybecause the latter acts withoutmotive of pecuniary gain and hence,should be protected against unjustpecuniary impoverishment byimposing on the principal, dutiesakin to those of a fiduciary.

NOTES: The rule will apply only after it

has been definitely ascertainedthat the contract is one ofsuretyship or guaranty. It cannotbe used as an aid in determiningwhether a partys undertaking isthat of a surety or guarantor.(Palmares vs CA, 288 SCRA 292)

It does not apply in case ofcompensated sureties.

10. It is a contract which requires thatthe guarantor must be a persondistinct form the debtor because aperson cannot be the personalguarantor of himself.NOTE: However, in a real guaranty,like pledge and mortgage, a personmay guarantee his own obligationwith his personal or real properties.

Guaranty Suretyship

1. Liability dependsupon an independentagreement to pay theobligation if primarydebtor fails to do so

1. Surety assumesliability as regularparty to theundertaking

2. Collateral under-taking

2. Surety is anoriginal promisor

3. Guarantor issecondarily liable

3. Surety isprimarily liable

4. Guarantor bindshimself to pay ifthe principalCANNOT PAY

4. Surety undertakesto pay if the principalDOES NOT PAY

5. Insurer ofsolvency of debtor

5. Insurer of thedebt

6. Guarantor canavail of the benefitof excussion anddivision in casecreditor proceedsagainst him

6. Surety cannotavail of the benefit ofexcussion and division

Indorsement Guaranty

1. Primarily oftransfer

1. Contract ofsecurity

2. Unless the note ispromptly presentedfor payment atmaturity and duenotice of dishonorgiven to the indorserwithin a reasonable

2. Failure in either orboth of theseparticulars does notgenerally work as anabsolute discharge ofa guarantorsliability, but his is

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time he will bedischarged abso-lutely from allliability thereon,whether he hassuffered any actualdamage or not

discharged only tothe extent of the losswhich he may havesuffered inconsequence thereof

3. Indorser does notwarrant the solvency.He is answerable on astrict compliancewith the law by theholder, whether thepromisor is solvent ornot

3. Guarantorwarrants the solvencyof the promisor

4. Indorser can besued as promisor

4. Guarantor cannot besued as promisor

Guaranty WarrantyA contract by which aperson is bound to another for the fulfilment of a promise or engagement of a third party

An undertaking that the title, quality, or quantity of the subject matter of thecontract is what it has been representedto be, and relates to some agreement made ordinarily by the party who makes the warranty

NOTES: A guaranty is gratuitous, unless there

is a stipulation to the contrary. Thecause of the contract is the samecause which supports the obligationas to the principal debtor.

The peculiar nature of a guaranty orsurety agreement is that is isregarded as valid despite theabsence of any direct considerationreceived by the guarantor or suretyeither from the principal debtor orfrom the creditor; a considerationmoving to the principal alone willsuffice.

It is never necessary that theguarantor or surety should receiveany part or benefit, if such there be,accruing to the principal. (WillexPlastic Industries Corp. vs. CA, 256SCRA 478)

Double or sub-guaranty (Art 2051 2ndpar) One constituted to guarantee the

obligation of a guarantor

Continuing guaranty (Art 2053) One which is not limited to a single

transaction but which contemplatesa future course of dealings, coveringa series of transactions generally foran indefinite time or until revoked.

NOTES: Prospective in operation (Dio vs CA,

216 SCRA 9) Construed as continuing when by the

terms thereof it is evident that theobject is to give a standing credit tothe principal debtor to be used fromtime to time either indefinitely oruntil a certain period, especially ifthe right to recall the guaranty isexpressly reserved (Dio vs CA, 216SCRA 9)

Future debts may also refer todebts existing at the time of theconstitution of the guaranty but theamount thereof is unknown and notto debts not yet incurred andexisting at that time.

Exception to the concept ofcontinuing guaranty is chattelmortgage. A chattel mortgage canonly cover obligations existing at thetime the mortgage is constituted andnot those contracted subsequent tothe execution thereof (The BelgianCatholic Missionaries, Inc. vs.Magallanes Press, Inc., 49 Phil 647).An exception to this is in case ofstocks in department stores, drugstores, etc. (Torres vs. Limjap, 56Phil 141).

Extent of Guarantors liability: (Art2055)1. Where the guaranty definite: It is

limited in whole or in part to theprincipal debt, to the exclusion ofaccessories.

2. Where guaranty indefinite or simple:It shall comprise not only theprincipal obligation, but also all itsaccessories, including the judicialcosts, provided with respect to thelatter, that the guarantor shall onlybe liable for those costs incurredafter he has been judicially requiredto pay.

Qualifications of a guarantor: (Arts2056-2057)

1. possesses integrity2. capacity to bind himself3. has sufficient property to answer

for the obligation which heguarantees

NOTES: The qualifications need only be

present at the time of the perfectionof the contract.

The subsequent loss of the integrityor property or superveningincapacity of the guarantor wouldnot operate to exonerate theguarantor or the eventual liability he

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has contracted, and the contract ofguaranty continues.

However, the creditor may demandanother guarantor with the properqualifications. But he may waive it ifhe chooses and hold the guarantor tohis bargain.

Benefit of Excussion (Art 2058) The right by which the guarantor

cannot be compelled to pay thecreditor unless the latter hasexhausted all the properties of theprincipal debtor, and has resorted toall of the legal remedies against suchdebtor.

NOTE: Not applicable to a contract of

suretyship (Arts 2047, par. 2;2059[2])

Cannot even begin to take placebefore judgment has been obtainedagainst the debtor (Baylon vs CA,312 SCRA 502)

When Guarantor is not entitled to thebenefit of excussion: (PAIRS)1. If it may be presumed that an

execution on the property of theprincipal debtor would not result inthe satisfaction of the obligation Not necessary that the debtor be

judicially declared insolvent orbankrupt

2. When he has absconded, or cannotbe sued within the Philippines unlesshe has left a manager orrepresentative

3. In case of insolvency of the debtor Must be actual

4. If the guarantor has expresslyrenounced it

5. If he has bound himself solidarilywith the debtor

Other grounds: (BIPS)6. If he is a judicial bondsman or sub-

surety7. If he fails to interpose it as a

defense before judgment is renderedagainst him

8. If the guarantor does not set up thebenefit against the creditor upon thelatters demand for payment fromhim, and point out to the creditoravailable property to the debtorwithin Philippine territory, sufficientto cover the amount of the debt (Art2060) Demand can be made only after

judgment on the debt Demand must be actual; joining

the guarantor in the suit againstthe principal debtor is not thedemand intended by law

9. Where the pledge or mortgage hasbeen given by him as special security

Benefit of Division (Art 2065) Should there be several guarantors

of only one debtor and for the samedebt, the obligation to answer forthe same is divided among all.

Liability: Joint

NOTES: The creditor can claim from the

guarantors only the shares they arerespectively bound to pay exceptwhen solidarity is stipulated or ifany of the circumstancesenumerated in Article 2059 shouldtake place.

The right of contribution ofguarantors who pays requires thatthe payment must have been made(a) in virtue of a judicial demand, or(b) because the principal debtor isinsolvent (Art 2073).

If any of the guarantors should beinsolvent, his share shall be borne bythe others including the payingguarantor in the same jointproportion following the rule insolidary obligations.

The above rule shall not beapplicable unless the payment hasbeen made in virtue of a judicialdemand or unless the principaldebtor is insolvent.

The right to contribution orreimbursement from his co-guarantors is acquired ipso jure byvirtue of said payment without theneed of obtaining from the creditorany prior cession of rights to suchguarantor.

The co-guarantors may set upagainst the one who paid, the samedefenses which have pertained tothe principal debtor against thecreditor and which are not purelypersonal to the debtor. (Art 2074)

Procedure when creditor sues: (Art.2062) The creditor must sue the principal

alone; the guarantor cannot be suedwith his principal, much less aloneexcept in Art. 2059.

1. Notice to guarantor of the action The guarantor must be NOTIFIED

so that he may appear, if he sodesires, and set up defenses hemay want to offer.

If the guarantor appears, he isstill given the benefit ofexhaustion even if judgmentshould be rendered against himand principal debtor. His

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voluntary appearance does notconstitute a renunciation of hisright to excussion (see Art.2059(1)).

Guarantor cannot set up thedefenses if he does not appearand it may no longer be possiblefor him to question the validityof the judgment renderedagainst the debtor.

2. A guarantor is entitled to be heardbefore and execution can be issuedagainst him where he is not a partyin the case involving his principal(procedural due process).

Guarantors Right of Indemnity orReimbursement (Art 2066)GENERAL RULE: Guaranty is a contractof indemnity. The guarantor who makespayment is entitled to be reimbursed bythe principal debtor.

NOTE: The indemnity consists of: (DIED)1. Total amount of the debt no

right to demand reimbursementuntil he has actually paid thedebt, unless by the terms of thecontract, he is given the rightbefore making payment. Hecannot collect more than whathe has paid.

2. Legal interest thereon from thetime the payment was madeknown (notice of payment ineffect a demand so that if thedebtor does not payimmediately, he incurs in delay)to the debtor, even though it didnot earn interest for thecreditor. Guarantors right tolegal interest is granted by lawby virtue of the payment he hasmade.

3. Expenses incurred by theguarantor after having notifiedthe debtor that payment hasbeen demanded of him by thecreditor; only those expensesthat the guarantor has to satisfyin accordance with law as aconsequence of the guaranty(Art. 2055) not those whichdepend upon his will or own actsor his fault for these are hisexclusive personal responsibilityand it is not just that they beshouldered by the debtor.

4. Damages if they are due inaccordance with law. General rules ondamages apply.

EXCEPTIONS:1. Where the guaranty is

constituted without theknowledge or against the will of

the principal debtor, theguarantor can recover onlyinsofar as the payment had beenbeneficial to the debtor (Art.2050).

2. Payment by a third person whodoes not intend to be reimbursedby the debtor is deemed to be adonation, which, however,requires the debtors consent.But the payment is in any casevalid as to the creditor who hasaccepted it (Art. 1238).

3. Waiver of the right to demandreimbursement.

Guarantors right to Subrogation(ART.2067) Subrogation transfers to the person

subrogated, the credit with all therights thereto appertaining eitheragainst the debtor or against thirdpersons, be they guarantors orpossessors of mortgages, subject tostipulation in conventionalsubrogation.

NOTE: This right of subrogation isnecessary to enable the guarantor toenforce the indemnity given in Art.2066. It arises by operation of law upon

payment by the guarantor. It is notnecessary that the creditor cede tothe guarantor the formers rightsagainst the debtor.

It is not a contractual right. Theright of guarantor who has paid adebt to subrogation does not standupon contract but upon theprinciples of natural justice.

The guarantor is subrogated byvirtue of the payment to the rightsof the creditor, not those of thedebtor. Guarantor cannot exercise the

right of redemption of hisprincipal (Urrutia & Co vsMorena and Reyes, 28 Phil 261)

Effect of Payment by Guarantor 1. Without notice to debtor: (Art

2068) The debtor may interpose

against the guarantor thosedefenses which he could haveset up against the creditor at thetime the payment was made,e.g. the debtor can set upagainst the guarantor thedefense of previousextinguishment of the obligationby payment.

2. Before Maturity (Art 2069)

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Not entitled to reimbursementunless the payment was madewith the consent or has beenratified by the debtor

Effect of Repeat Payment by debtor:(Art 2070)GENERAL RULE: Before guarantor paysthe creditor, he must first notify thedebtor (Art. 2068). If he fails to givesuch notice and the debtor repeatspayment, the guarantor can only collectfrom the creditor and guarantor has nocause of action against the debtor forthe return of the amount paid byguarantor even if the creditor shouldbecome insolvent.

EXCEPTION: The guarantor can stillclaim reimbursement from the debtor inspite of lack of notice if the followingconditions are present: (PIG)

a. guarantor was prevented byfortuitous event to advise thedebtor of the payment; and

b. the creditor becomes insolvent; c. the guaranty is gratuitous.

Right of Guarantor to proceed againstdebtor before paymentGENERAL RULE: Guarantor has nocause of action against debtor until afterthe former has paid the obligationEXCEPTION: Article 2071

NOTES: Article 2071 is applicable and

available to the surety. (ManilaSurety & Fidelity Co., Inc. vs BatuConstruction & Co., 101 Phil 494)

Remedy of guarantor: (a) obtain release from the

guaranty; or(b) demand a security that shall

protect him from anyproceedings by the creditor, andagainst the danger of insolvencyof the debtor

Art. 2066 Art. 2071Provides for the enforcement of the rights of the guarantor/surety against the debtor after he has paid thedebt

Provides for his protection before he has paid but after he has become liable

Gives a right of action after payment

Protective remedy before payment.

Substantive right Preliminary remedy

Extinguishment of guaranty: (RA2CE2)1. Release in favor of one of the

guarantors, without the consent ofthe others, benefits all to the extentof the share of the guarantor to

whom it has been granted (Art2078);

2. If the creditor voluntarily acceptsimmovable or other properties inpayment of the debt, even if heshould afterwards lose the samethrough eviction or conveyance ofproperty (Art 2077);

3. Whenever by some act of thecreditor, the guarantors even thoughthey are solidarily liable cannot besubrogated to the rights, mortgagesand preferences of the former (Art2080);

4. For the same causes as all otherobligations (Art 1231);

5. When the principal obligation isextinguished;

6. Extension granted to the debtor bythe creditor without the consent ofthe guarantor (Art 2079)

BOND An undertaking that is sufficiently

secured, and not cash or currency

Bondsman (Art 2082) A surety offered in virtue of a

provision of law or a judicial order.He must have the qualificationsrequired of a guarantor and inspecial laws like the Rules of Court.

NOTES: Judicial bonds constitute merely a

special class of contracts of guarantyby the fact that they are given invirtue of a judicial order.

If the person required to give a legalor judicial bond should not be ableto do so, a pledge or mortgagesufficient to cover the obligationshall admitted in lieu thereof (Art2083)

A judicial bondsman and the sub-surety are NOT entitled to thebenefit of excussion because theyare not mere guarantors, butsureties whose liability is primaryand solidary. (Art 2084)

PLEDGE, MORTGAGE AND ANTICHRESISI. Common Elements of Pledge,Mortgage, and Antichresis (Articles2085 2092)

A. Essential Requisites (SOD) (Art2085)

1. Secures the fulfillment of a principalobligation;

2. Pledgor, mortgagor, antichreticdebtor must be the absolute ownerof the thing pledged or mortgaged;and The reason being that in

anticipation of a possibleforeclosure sale in case of

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default which is still a sale, therule is that the seller must bethe owner of the thing sold(Cavite Development Bank vs.Lim, 324 SCRA 346)

3. Pledgor, mortgagor, antichreticdebtor must have free disposal oftheir property, or be legallyauthorized for such purpose.

NOTES: Third persons can pledge or

mortgage their own property tosecure the principal obligation.

It is not necessarily void simplybecause the accommodation pledgoror mortgagor did not benefit fromthe same. So long as valid consentwas given, the fact that the loan wasgiven solely for the benefit of theprincipal debtor would not invalidatethe mortgage (GSIS vs CA, 170 SCRA533)

The accommodation pledgor ormortgagor, without expresslyassuming personal liability for suchdebt, is not liable for the payment ofany deficiency, should the propertynot be sufficient to cover the debt(Bank of America vs. AmericanRealty Corporation, 321 SCRA 659).

The accommodation pledgor ormortgagor is not solidarily boundwith the principal obligor but hisliability extents only to the propertypledged or mortgaged. Should therebe any deficiency, the creditor hasrecourse on the principal debtor whoremains to be primarily bound.

The law grants to theaccommodation pledgor ormortgagor the same rights as aguarantor and he cannot beprejudiced by any waiver of defenseby the principal debtor.

B. Prohibition against PactumCommissorium (Art 2088; 2137)

Pactum Commissorium Stipulation whereby the thing

pledged or mortgaged, or underantichresis shall automaticallybecome the property of the creditorin the event of non-payment of thedebt within the term fixed.

Requisites:1. There should be a pledge, mortgage,

or antichresis of property by way ofsecurity for the payment of theprincipal obligation; and

2. There should be a stipulation for anautomatic appropriation by thecreditor of the property in event of

nonpayment of the obligation withinthe stipulated period.

GENERAL RULE: Pactum Commissoriumis forbidden by law and is declared nulland void.EXCEPTION: The pledgee mayappropriate the thing pledged if afterthe first and second auctions, the thingis not sold. (Art 2112)

NOTE: The security contract remainsvalid; only the prohibited stipulation isvoid.

C. Capability to secure all kinds ofobligations, i.e. pure orconditional (Art 2091)

D. Indivisibility (Art 2089)GENERAL RULE: A pledge, mortgage,or antichresis is indivisible, even thoughthe debt may be divided among thesuccessors in interest of the debtor or ofthe creditor. Their indivisibility is not affected by

the fact that the debtors are jointlyor not solidarily liable.

Consequences of indivisibility:1. Single thing Every portion of the

property pledged or mortgaged isanswerable for the whole obligation

2. Several things All of the severalthings pledged or mortgaged areliable for the totality of the debt

3. Debtors heir/creditors heir -Neither the debtors heir who haspaid part of the debt cannot ask forproportionate extinguishment, norcreditors heir who received hisshare of the debt return the pledgeor cancel the mortgage as long asthe debt is not completely satisfied.

EXCEPTIONS:1. Where each one of several things

guarantees a determinateportion of the credit

2. Where only a portion of the loanwas released

3. Where there was failure ofconsideration.

4. Where there is no debtor-creditor relationship

NOTES: The mere embodiment of a real

estate mortgage and a chattelmortgage in one document does nothave the effect of fusing bothsecurities into an indivisible whole.

The mortgagee, therefore, maylegally foreclose the real estatemortgage extrajudicially and waivethe chattel mortgage foreclosure,and maintain instead a personalaction for the recovery of the unpaid

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balance of the credit (Phil. Bank ofCommerce vs. Macadaeg, 109 Phil981)

E. When the principal obligationbecomes due, the things in whichthe pledge, mortgage, orantichresis consists may bealienated for the payment to thecreditor. (Art. 2087)

NOTES: If the debtor fails to comply with the

obligation at the time it falls due,the creditor is merely entitled tomove for the sale of the thingpledged or mortgaged in order tocollect the amount of his claim fromthe proceeds.

If he wishes to secure a title to themortgaged property, he can buy it inthe foreclosure sale (Montevirgin vs.CA, 112 SCRA 641)

F. Pledgor, mortgagor, antichreticdebtor retains ownership of thething given as a security

PLEDGE (Arts 2093 2123)

A contract wherein the debtordelivers to the creditor or to a thirdperson a movable or documentevidencing incorporeal rights for thepurpose of securing fulfilment of aprincipal obligation with theunderstanding that when theobligation is fulfilled, the thingdelivered shall be returned with allits fruits and accessions.

Special Requisites (in addition tothe common essential requisites):

1. Possession of the thing pledged mustbe transferred to the creditor or athird person by agreement (Art2093);

2. It can only cover movable propertyand incorporeal rights evidenced bydocuments of title and theinstruments proving the rightpledged shall be delivered to thecreditor, and if negotiable must beendorsed (Art 2094); and

3. The description of the thing pledgedand the date must appear in a publicinstrument to bind third persons, butnot for the validity of the contract(Art 2096).

Kinds:1. Conventional /Voluntary created

by contract2. Legal created by operation of law

(examples: Art. 546, 1731 and 1914NCC)

NOTES: The provisions of possession, care

and sale of the thing as well as onthe termination of the pledgegoverning conventional pledges areapplicable to pledges created byoperation of law (Art 2121)

Unlike, however, in conventionalpledge where the debtor is notentitled to the excess unless it isotherwise agreed, in legal pledge,the remainder of the price of thesale after payment of the debt andexpenses, shall be delivered to thedebtor.

In legal pledge, there is no definiteperiod for the payment of theprincipal obligation. The pledgeemust make a demand for thepayment of the amount due him;otherwise he cannot exercise theright of sale at public auction (Art2122)

Characteristics:1. Real

contract it is perfected by thedelivery of the thing pledged by thedebtor who is called the pledgor tothe creditor who is called thepledgee, or to a third person bycommon agreement;

2. Accessory contract it has no independentexistence of its own;

3. Unilateral contract it creates an obligationsolely on the part of the creditor toreturn the thing subject thereofupon the fulfilment of the principalobligation; and

4. Subsidiary contract the obligation incurreddoes not arise until the fulfilmentof the principal obligation which issecured.

Consideration in pledge: Insofar as the pledgor is concerned,

the cause is the principal obligation. If the pledgor is not the debtor, the

cause is the compensation stipulatedfor the pledge or the mere liberalityof the pledgor.

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

Rights and Obligations of a PledgorRights Obligations

1. To demand return in caseof

1. To adv

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reasonable grounds to fear destruction or impairment of the thing without the pledgees fault, subjectto the duty ofreplacement (Art 2107)

2. To bid and be preferred at the public auction(Art 2113)

3. To alienate the thing pledged provided the pledgee consents to the sale (Art 2097)

4. To ask that the thing pledged be deposited (Arts 2104 &2106)

ise the pledgee of the flaws of the thing (Art 2101)

2. Not to demand the retu

rn of the thing untilafter fullpayment of the debt, including interest due

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thereon and expenses incurred for its preservation (Art 2105)

Rights of the Pledgee KEY: D SBC BA2R2OPS2

1. Option to demandreplacement orimmediate payment ofthe debt in case ofdeception as tosubstance or quality (Art2109)

2. To sell at public auctionin case of reasonablegrounds to feardestruction orimpairment of the thingwithout his fault (Art2108)

3. To bring actionspertaining to the owner(Art 2103)

4. To choose which ofseveral things pledgedshall be sold

5. To bid at the publicauction (Art 2113)

6. To appropriate the thingin case of failure of the2nd public auction (Art2112)

7. To apply said fruits,interests or earnings tothe interest, if any, thento the principal of thecredit (Art 2102)

8. To retain excess value received in the public sale (Art 2115)

9. To retain the thing until after full payment of thedebt (Art 2098)

10. To be reimbursed for theexpenses made for the preservation of the thingpledged (Art 2099)

11. To object to thealienation of the thing

12. To possess the thing (Art2098)

13. To sell at public auctionin case of non-paymentof debt at maturity (Art2112)

To choose which of the several thingspledged shall be sold (Art 2119)

14. Option to demandreplacement orimmediate payment ofthe debt in case ofdeception as tosubstance or quality (Art2109)

15. To sell at public auctionin case of reasonablegrounds to feardestruction orimpairment of the thingwithout his fault (Art2108)

16. To bring actionspertaining to the owner(Art 2103)

17. To choose which ofseveral things pledgedshall be sold

18. To bid at the publicauction (Art 2113)

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19. To appropriate the thingin case of failure of the2nd public auction (Art2112)

20. To apply said fruits,interests or earnings tothe interest, if any, thento the principal of thecredit (Art 2102)

21. To retain excess valuereceived

in the public sale (Art 2115)22. To retain the thing until

after full payment of thedebt (Art 2098)

23. To be reimbursed for theexpenses made for thepreservation of the thingpledged (Art 2099)

24. To object to thealienation of the thing

25. To possess the thing (Art2098)

26. To sell at public auctionin case of non-paymentof debt at maturity (Art2112)

27. To choose which of theseveral things pledgedshall be sold (Art 2119)

Obligations of the PledgeeKEY: CUDA3

1. Take care of the thingwith the diligence of agood father of a family(Art 2099)

2. Not to use thing unlessauthorized or by theowner or its preservationrequires its use (Art2104)

3. Not to deposit the thingwith a 3rd person unlessso stipulated (Art 2100)

4. Responsibility for acts ofagents and employees asregards the thing (Art2100)

5. To advise pledgor ofdanger to the thing (Art2107)

6. To advise pledgor of theresult of the publicauction (Art 2116)

RIGHT OF PLEDGOR TO SUBSTITUTETHING PLEDGED (ART.2107) Requisites:

1. The pledgor has reasonablegrounds to fear the destructionor impairment of the thinpledged

2. There is no fault on the part ofthe pledgee

3. The pledgor is offering in placeof the thing, another thing in

pledge which is of the same kindand quality as the former

4. The pledge does not choose toexercise his right to cause thething pledged to be sold atpublic auction

NOTE: The pledgees right to have thething pledged sold at public sale grantedunder the Article 2108 is superior to thatgiven to the pledgor to substitute thething pledged under Article 2107.

Prohibition against double pledge Property which has been lawfully

pledged to one creditor cannot bepledged to another as long as thefirst one subsists.

NOTE: Possession of a creditor of thething pledged is an essential requisite ofpledge. Extinguishment of Pledge (CRAPS)1. For the same causes as all other

obligations (Art 1231)2. Return of the thing pledged by the

pledgee to the pledgor (Art 2110)3. Statement in writing by the

pledgee that he renounces orabandons the pledge (Art 2111)

4. Payment of the debt (Art 2105)5. Sale of thing pledged at public

auction (Art 2115)NOTE: The possession by the debtor orowner of the thing pledged subsequentto the perfection of the pledge gives riseto a prima facie presumption that thething has been returned and, therefore,that the pledge has been extinguishedbut not the principal obligation itself.(Art 2110)

Requirements for sale of thing pledgedat public auction: (Art 2112)1. The debt is due and unpaid2. Sale must be at a public auction3. there must be notice to the pledgor

and owner, stating the amount due4. Sale must be with the intervention

of a notary public

Effect of sale of the thing pledged: (Art2115)1. The sale of the thing pledged shall

extinguish the principal obligation,whether or not the proceeds of thesale are equal to the amount of theprincipal obligation, interest andexpenses in a proper case

2. If the price of the sale is more thanthe amount due the creditor, thedebtor is not entitled to the excessunless the contrary is provided

3. If the price of the sale is less, thecreditor is not entitled to recoverthe deficiency even if there is astipulation to that effect

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REAL ESTATE MORTGAGE(Articles 2124-2131)

A contract whereby the debtorsecures to the creditor thefulfilment of a principal obligation,specially subjecting to such securityimmovable property or real rightsover immovable property in case theprincipal obligation is not compliedwith at the time stipulated.

Characteristics of the contract:1. Real 2. Accessory3. Subsidiary4. Unilateral it creates only an

obligation on the part of thecreditor who must free theproperty from the encumbranceonce the obligation is fulfilled.

NOTES: As an accessory contract, its

consideration is that of the principalcontract from which it receives life.

A mortgage does not involve atransfer, cession or conveyance ofproperty but only constitutes a lienthereon. Until discharged, it followsthe property wherever it goes andsubsists notwithstanding changes ofownership.

A mortgage gives the mortgagee noright or claim to the possession ofthe property, and therefore, a meremortgagee has no right to eject anoccupant of the property mortgagedunless the mortgage should containsome provision to that effect. Theonly right of a mortgagee in case ofnon-payment of a debt secured bymortgage would be to foreclose themortgage and have the encumberedproperty sold to satisfy theoutstanding indebtedness. If thepossession is transferred to themortgagee, it must not expressly befor purpose of applying the fruits tothe interest then to the principal ofthe credit, for then it would be anantichresis.

It is not an essential requisite thatthe principal of the mortgage creditbears interest, or that the interestas compensation for the use of theprincipal and enjoyment of its fruitsbe in the form of a certain percentthereof.

Special Requisites (in addition tothe common essential requisites):

1. It can cover only immovableproperty and alienable real rights

imposed upon immovables (Art2124);

2. It must appear in a public instrument(Art. 2125); and

3. Registration in the registry ofproperty is necessary to bind thirdpersons, but not for the validity ofthe contract (Art 2125). An order for foreclosure cannot

be refused on the ground thatthe mortgage had not beenregistered provided no innocentthird parties are involved.

NOTE: Where a mortgage is not valid orfalse, the principal obligation which itguarantees is not rendered null and void.What is lost only is the right to foreclosethe mortgage as a special remedy forsatisfying or settling the indebtednesswhich is the principal obligation but themortgage deed remains as evidence orproof of a personal obligation of thedebtor and the amount due to thecreditor may be enforced in an ordinarypersonal action.

Kinds: 1. Voluntary agreed to by the parties

or constituted by the will of theowner of the property on which it iscreated

2. Legal one required by law to beexecuted in favour of certainpersons The persons in whose favour the

law establishes a mortgage haveno other right than to demandthe execution and the recordingof the document in which themortgage is formalized (Art 2125par 2)

3. Equitable one which, althoughlacking the formalities of amortgage, shows the intention of theparties to make the property asecurity for a debt

PLEDGE REAL MORTGAGE1. Constituted on movables

1. Constituted on immovables

2. Property is delivered to pledgee or by common consent to a third person

2. Delivery is not necessary

3. Not valid against third persons unless adescription of the thing pledged and date of pledge appear in a public instrument

3. Not valid against third persons unless registered

Extent of Mortgage: Absent express stipulation to the

contrary, the mortgage includes theaccessions, improvements, growingfruits and income of the property

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not yet received when the obligationbecomes due and to the amount ofthe indemnity granted or owing tothe proprietor from the insurers ofthe property mortgaged, or in virtueof expropriation for public use (Art2127)

Object of Mortgage: Future property cannot be an object

of a contract of mortgage (Art2085[2]) However, a stipulationsubjecting to the mortgage lien,properties (improvements) which themortgagor may subsequently acquireinstall, or use in connection withreal property already mortgagedbelonging to the mortgagor is valid(Peoples Bank and Trust Co. vs.Dahican Lumber Co., 20 SCRA 84)

Special Rights: 1. Mortgagor - To alienate the

mortgaged property but themortgage shall remain attached tothe property.

NOTE: A stipulation forbidding theowner from alienating the immovablemortgage shall be void (Art 2130) beingcontrary to public policy inasmuch as thetransmission of property should not beunduly impeded.

2. Mortgagee - To claim from a 3rdperson in possession of themortgaged property the payment ofthe part of the credit secured by thewhich said third person possesses(Art 2129)

NOTE: It is necessary that prior demandfor payment must have been made onthe debtor and the latter failed to pay(BPI vs Concepcion & Hijos, Inc., 53 Phil906)

Foreclosure The remedy available to the

mortgagee by which he subjects themortgaged property to thesatisfaction of the obligation tosecure that for which the mortgagewas given

NOTES: It denotes the procedure adopted by

the mortgagee to terminate therights of the mortgagor on theproperty and includes the sale itself(DBP vs Zaragoza, 84 SCRA 668)

Foreclosure is valid where the debtoris in default in the payment of hisobligation (Gobonseng, Jr. vs CA,246 SCRA 472)

Kinds:

1. Judicial ordinary action forforeclosure under Rule 68 of theRules of Court

2. Extrajudicial when mortgagee isgiven a special power of attorney tosell the mortgaged property bypublic auction, under Act No. 3135

Judicialforeclosure

Extrajudicialforeclosure

1. There is court intervention

1. No court intervention

2. Decisions are appealable

2. Not appealable because it is immediately executory

3. Order of court cuts off all rights ofthe parties impleaded

3. Foreclosure does not cut off right of all parties involved

4. There is equity of redemption except on banks which provides for a right of redemption

4. There is right of redemption

5. Period of redemption starts from the finality of the judgment until order of confirmation

5. Period to redeemstart from date of registration of certificate of sale

6. No need for a special power of attorney in the contract of mortgage

6. Special power of attorney in favor of mortgagee is needed in the contract

NOTES: A foreclosure sale retroacts to the

date of registration of the mortgageand that a person who takes amortgage in good faith and forvaluable consideration, the recordshowing clear title to the mortgagor,will be protected against equitableclaims on the title in favor of thirdpersons, of which he had no actualor constructive notice (St. DominicCorporation vs. IAC 151 SCRA 577).

Where there is a right to redeem,inadequacy of price is not materialbecause the judgment debtor mayreacquire the property or else sellhis right to redeem and thus recoverany loss he claims to have sufferedby reason of the price obtained atthe auction sale and consequentlynot sufficient to set aside the sale.Mere inadequacy of the priceobtained at the sheriffs sale will notbe sufficient to set aside the saleunless the price is so inadequate asto shock the conscience of thecourt taking into consideration thepeculiar circumstances attendantthereto. (Sulit vs. CA, 268 SCRA 441)

Should there remain a balance dueto the mortgagee after applying the

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proceeds of the sale, the mortgageeis entitled to recover the deficiency.This rule applies both to judicial andextra-judicial foreclosure realmortgage.

The action to recover a deficiencyafter foreclosure prescribes after 10years from the time the right ofaction accrues (Arts 1142 & 1144).

Stipulation of upset price or tipo It is a stipulation in a mortgage of

real property of minimum price atwhich the property shall be sold, tobecome operative in the event of aforeclosure sale at public auction. Itis null and void for the property mustbe sold to the highest bidder. Partiescannot, by agreement, contravenethe law and interfere with the lawfulprocedure of the courts (BPI vs Yulo,31 Phil 476)

Extrajudicial foreclosure real property(Act No. 3135) The law covers only real estate

mortgages. It is intended merely toregulate the extrajudicial sale of theproperty mortgaged if and when themortgagee is given a special powerof express authority to do so in thedeed itself or in a documentannexed thereto.

The authority to sell is notextinguished by the death of themortgagor (or mortgagee) as it is anessential and inseparable part of abilateral agreement (Perez vs PNB,17 SCRA 833).

No sale can be legally made outsidethe province in which the propertysold is situated; and in case theplace within said province in whichthe sale is to be made is the subjectof stipulation, such sale shall bemade in the said place in themunicipal building of themunicipality in which the property orpart thereof is situated.

Procedure for extrajudicial foreclosureof both real estate mortgage under ActNo. 3135 and chattel mortgage underAct No. 1508 (A.M. No. 99-10-05-0,January 15, 2000)1. Filing of application before the

Executive Judge through the Clerk ofCourt

2. Clerk of Court will examine whetherthe requirement of the law havebeen complied with, that is, whetherthe notice of sale has been postedfor not less than 20 days in at leastthree (3) public places of themunicipality or city where theproperty is situated, and if the sameis worth more than P400.00, that

such notice has been published oncea week for at least three (3)consecutive weeks in a newspaper ofgeneral circulation in the city ofmunicipality

3. The certificate of sale must beapproved by the Executive Judge

4. Where the application concernsextrajudicial foreclosure of realmortgages in different locationscovering one indebtedness, only onefiling fee corresponding to such debtshall be collected

5. The Clerk of Court shall issuecertificate of payment indicating theamount of indebtedness, the filingfees collected, the mortgages soughtto be foreclosed, the description ofthe real estates and their respectivelocations

6. The notice of sale shall be publishedin a newspaper of general circulationpursuant to Section 1, PD No. 1079

7. The application of shall be raffledamong all sheriffs

8. After the redemption period hasexpired, the Clerk of Court shallarchive the records.

9. No auction sale shall be held unlessthere are at least two (2)participating bidders, otherwise thesale shall be postponed to anotherdate. If on the new date set forthfor the sale there shall not be atleast two bidders, the sale shall thenproceed. The names of the biddersshall be reported to the Sheriff ofthe Notary Public, who conductedthe sale to the Clerk of Court beforethe issuance of the certificate ofsale.

NOTES: The Mortgagor and Mortgagee have

no right to waive the posting andpublication requirements under Act.No. 3135. Notices are given tosecure bidders and prevent asacrifice of the property. Clearly, thestatutory requirements of postingand publication are mandated, notfor the mortgagors benefit, but forthe public or third persons. Failureto comply with the statutoryrequirements as to publication ofnotice of auction sale constitutes ajurisdictional defect whichinvalidates the sale.Lack ofrepublication of notice offoreclosure sale made subsequentlyafter the original date renders suchsale void (PNB vs. NepomucenoProductions Inc., G.R. No. 139479.December 27, 2002).

Sec 3 of Act 3135 does not requirepersonal or any particular notice onthe mortgagor much less on his

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successors-in-interest where there isno contractual stipulation therefor.Hence, unless required in themortgage contract, the lack of suchnotice is not a ground to set aside aforeclosure sale.

Neither does Sec 3 require posting ofnotice of sale on the mortgageproperty and the certificate ofposting is not required, much lessconsidered indispensable, for thevalidity of a foreclosure sale.

Redemption It is the transaction by which the

mortgagor reacquires or buys backthe property which may have passedunder the mortgage, or divests theproperty of the lien which themortgage may have created.

NOTES: A sale by the mortgagor to a third

party of the mortgaged propertyduring the period for redemptiontransfers only the right to redeemthe property and the right topossess, use and enjoy the sameduring said period.

Where sale with assumption ofmortgage not registered and madewithout the consent of themortgagee, the buyer, thereof, wasnot validly substituted as debtorand, hence, had no right to redeem(Bonnevie vs. CA, 125 SCRA 122).

Kinds:1. Equity of Redemption right of

mortgagor to redeem the mortgagedproperty after his default in theperformance of the conditions of themortgage within the 90-day periodfrom the date of the service of theorder of foreclosure or eventhereafter but before theconfirmation of the sale. Applies tojudicial foreclosure of real mortgageand chattel mortgage foreclosure.

NOTE: Redemption of the bankinginstitutions is allowed within one yearfrom confirmation of sale.

2. Right of Redemption right ofmortgagor to redeem the mortgagedproperty within one year from thedate of registration of the certificateof sale. Applies only to extrajudicialforeclosure of real mortgage.

NOTE: The right of redemption, as longas within the period prescribed, may beexercised irrespective of whether or notthe mortgagee has subsequentlyconveyed the property to some other

party (Sta. Ignacia Rural Bank, Inc. vs.CA, 230 SCRA 513)

Period of Redemption1. Extra-judicial (Act #3135)

a. natural person one year fromregistration of the certificate ofsale with Registry of Deeds

b. juridical person same rule asnatural person

c. juridical person (mortgagee isbank) - three months afterforeclosure or beforeregistration of certificate offoreclosure which ever is earlier(sec. 47, of General BankingLaw)

2. Judicial before confirmation of thesale by the court

NOTE: Allowing a redemption after thelapse of the statutory period, when thebuyer at the foreclosure sale does notobject but even consents to theredemption, will uphold the policy of thelaw which is to aid rather than defeatthe right of redemption. There is nothingin the law which prevents a waiver ofthe statutory period for redemption(Ramirez vs CA, 219 SCRA 598).

Amount of the redemption price:1. Mortgagee is not a bank (Act No.

3135, in relation to Sec. 28, Rule 39of Rules of Court)a. purchase price of the propertyb. 1% interest per month on the

purchase price c. taxes paid and amount of

purchasers prior lien, if any,with the same rate of interestcomputed from the date ofregistration of sale, up to thetime of redemption

2. Mortgagee is a bank (GBL 2000)a. amount due under the mortgage

deedb. interestc. cost and expensesNOTE: Redemption price in thiscase is reduced by the incomereceived from the property

ANTICHRESIS (Articles2132 -2139)

A contract whereby the creditoracquires the right to receive thefruits of an immovable of thedebtor, with the obligation to applythem to the payment of the interest,

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if owing, and thereafter to theprincipal of his credit (Art 2132)

Characteristics1. Accessory contract it secures the

performance of a principal obligation2. Formal contract it must be in a

specified form to be valid, i.e., inwriting. (Art 2134)

Special Requisites (in addition tothe common essential requisites):

1. It can cover only the fruits of animmovable property; (Art 2132)

2. Delivery of the immovable isnecessary for the creditor to receivethe fruits and not that the contractshall be binding;

3. Amount of principal and interestmust be specified in writing (Art.2134); and

4. Express agreement that debtor willgive possession of the property tocreditor and that the latter willapply the fruits to the interest, ifany, then to the principal