Credit Transactions (Compiled) (1) 2

CREDIT TRANSACTIONS REVIEWER 1
singco.salva.pagador.omolon.niemes.millan.espina
Title XI - LOAN
General Provisions
(Articles 1933 1934)
Bailment, defined
It is the delivery of property of one person to another in trust for a specific purpose, with a contract,
express or implied, that the trust shall be faithfully executed and the property returned or duly
accounted for when the special purpose is accomplished or kept until the bailor reclaims it.
Generally, a bailment may be said to be a contractual relation.
To be legally enforceable, it must contain the essential elements of a valid contract.
It may also be created by operation of law.

Parties
In COMMODATUM:
1. Bailor the giver
2. Bailee the recipient of the thing bailed
In MUTUUM:
1. Lender - the one who delivers
2. Borrower - the one who receives
Classes
Art. 1933. By the contract of loan, one of the parties delivers to another, either something not
consumable so that the latter may use the same for a certain time and return it, in which case the
contract is called a commodatum; or money or other consumable thing, upon the condition that the
same amount of the same kind and quality shall be paid, in which case the contract is simply called a
loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership
passes to the borrower.
COMMODATUM - loan of use
Something to be returned (subject matter

is non-fungible thing)
Essentially gratuitous (if there is

compensation ceases to be
commodatum)
Ownership retained by lender or bailor
May involve real or personal property
Referred to as loan for use or temporary

possession
Lender bears the risk of loss because of

his ownership
While generally oblige to return object at

end of period, still in some cases the
return can be demanded even before the
end of the period
Personal in character
MUTUUM simple loan or loan of consumption
Equivalent amount to be returned (subject

matter is fungible)
May be gratuitous or onerous (with

interest)
Ownership goes to borrower or baille

Refers to personal property only
Referred to as loan for consumption
Borrower bears the risk of loss, because of

his ownership
Can be generally oblige to pay at the end
of the period
Not personal in character
Characteristics
1. REAL Loan is perfected by delivery of the thing loaned.
Art. 1934. An accepted promise to deliver something by way of commodatum or simple loan is
binding upon parties, but the commodatum or simple loan itself shall not be perfected until the
delivery of the object of the contract.
2. UNILATERAL Loan produces obligations only for the borrower. Obligations of the lender are either
incidental to ownership or consequences of the borrowers rights and duties.
Distinctions
Commodatum
Mutuum
Character
Essentially gratuitous
Naturally gratuitous
Object
Non-fungible object (but may be

consumable)
Object is money or fungible thing
Purpose
Transfer its use
Transfer its ownership
Effect
Restoration of the very thing loaned
Restoration of an equal quantity and

quality (equivalent amount)

Risk
Duration
On the lender (as owner)
On the borrower (as debtor of a generic

thing)
Personal in character
Not personal in character
Referred to as loan for use or temporary

possession
Referred to as loan for consumption
May be claimed before the end of the term if

urgently needed
May not be claimed until the term expires

or is forfeited
CHAPTER I
COMMODATUM
Section I Nature of Commodatum
Contract of Commodatum, Concept
Commodatum is essentially gratuitous. If compensation is present, the contract ceases to be a

Commodatum. In such a case, there arises a lease contract.
The right to use is limited to the thing loaned but not to its fruits unless there is a stipulation to the
contrary.
Purpose: The right to use is limited to the thing loaned for a certain time or period. If bailee not entitled
to the use of the thing, the contract may be a DEPOSIT not a Commodatum.
Subject matter: A Commodatum is generally non-consumable things, whether real or personal.

Consumable goods however may be the subject of a Commodatum but only for purposes of
EXHIBITION!
Bailor need not be the owner: Since ownership is not transferred in a Commodatum, the bailor need
not be the owner of the thing loaned. It is sufficient that the bailor has such possessory interest in the
subject matter or right to its use which he may assert against the bailee and the third persons
although not against the rightful owner.
Commodatum is purely personal: Death of either bailor or bailee extinguishes or terminates the
contract unless, by stipulation the Commodatum is transmitted to the heirs of either or both parties. If
there are two or more borrowers/bailee, the death of one does not extinguish the contract in the
absence of stipulation to the contrary. (Source: De Leon)
Cases:
Commodatum is essentially gratuitous
REPUBLIC vs. BAGTAS
FACTS:
Jose V. Bagtas borrowed from the Republic of the Philippines through the Bureau of Animal Industry three
bulls for a period of one year for breeding purposes subject to a government charge of breeding fee of
10% of the book value of the bulls. Upon the expiration of the contract, the borrower asked for a renewal
for another period of one year. However, the Secretary of Agriculture and Natural Resources approved a
renewal thereof of only one bull for another year and requested the return of the other two. Bagtas wrote
to the Director of Animal Industry that he would pay the value of the three bulls and later reiterated his
desire to buy them at a value with a deduction of yearly depreciation to be approved by the Auditor
General. The Director of Animal Industry advised him that the book value of the three bulls could not be
reduced and that they either be returned or their book value paid not later which Bagtas failed to pay or
to return. An action against him was commenced, praying that he be ordered to return the three bulls
loaned to him or to pay their book value with interests, and costs; and that other just and equitable relief
be granted. Bagtas answered that because of the bad peace and order situation in Cagayan Valley,
particularly in the barrio of Baggao, and of the pending appeal he had taken to the Secretary of
Agriculture and Natural Resources and the President of the Philippines from the refusal by the Director of
Animal Industry to deduct from the book value of the bulls corresponding yearly depreciation of 8% from
the date of acquisition, to which depreciation the Auditor General did not object, he could not return the
animals nor pay their value and prayed for the dismissal of the complaint.
The appellant contends that the Sahiniwal bull was accidentally killed during a raid by the Huks in
November 1953 upon the surrounding barrios of Hacienda Felicidad Intal, Baggao, Cagayan, where the
animal was kept, and that as such death was due to force majeure she is relieved from the duty of the
returning the bull or paying its value to the appellee.
ISSUE:
Whether or not Bagtas is relieved from the duty of returning or paying for the value of the bull.
SC RULING:
Bagtas is not relieved of his obligation. The loan by the appellee to the late defendant Bagtas of the three
bulls for breeding purposes for a period of one year, later on renewed for another year as regards one
bull, was subject to the payment by the borrower of breeding fee of 10% of the book value of the bulls.
The appellant contends that the contract was commodatum and that, for that reason, as the appellee
retained ownership or title to the bull it should suffer its loss due to force majeure. A contract of

commodatum is essentially gratuitous. If the breeding fee be considered a compensation, then the
contract would be a lease of the bull. Under the Civil Code, the lessee would be subject to the
responsibilities of a possessor in bad faith, because she had continued possession of the bull after the
expiry of the contract. And even if the contract be commodatum still the appellant is liable, because the
Civil Code provides that a bailee in a contract of commodatum is liable for loss of the thing, even if it
should be through a fortuitous event:
xxx 2) If he keeps it longer than the period stipulated;
3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation
exempting the bailee from responsibility in case of a fortuitous event.
Commodatum is for a certain period

ALEJANDRA MINA, ET AL., vs. RUPERTA PASCUAL, ET AL.,
FACTS:
Francisco Fontanilla and Andres Fontanilla were brothers. Francisco Fontanilla acquired a property
during his lifetime having purchased a lot a public auction. Andres Fontanilla, with the consent of his
brother, Francisco, erected a warehouse on a part of the lot of his brother.
When Franciso Fontanilla died, the herein plaintiffs, Alejandro Mina, et al., were recognized
without discussion as his heirs. On the other hand, when Andres Fontanilla died, the children of Ruperta
Pascual were recognized as his heirs without discussion and are consequently entitled to the warehouse.
The plaintiffs and the defendants are therefore, virtually, to all appearance, the owners of the warehouse;
while the plaintiffs are undoubtedly, the owners of the part of the lot occupied by that building, as well as
of the remainder thereof.
But on May 6, 1909, Ruperta Pascual, as the guardian of her minor children, the herein
defendants, petitioned the Court of First Instance of Ilocos Norte for authorization to sell "the six-sevenths
of the one-half of the warehouse, of 14 by 11 meters, together with its lot." The plaintiffs, that is
Alejandra Mina, et al., opposed the petition of Ruperta Pascual for the reason that the latter had included
therein the lot occupied by the warehouse, which they claimed was their exclusive property.
The plaintiffs thereofre requested the court to decide the question of ownership first before the it
passes upon the petition for the sale of the warehouse. However, the trial court still ordered the sale of
the warehouse.
So, the warehouse, together with the lot on which it stands, was sold to Cu Joco.
On appeal, commenced by the plaintiffs, the decision of the trial court was reversed. But soon
after a writ of execution was issued and the plaintiffs were given possession of the lot, the trial court
annulled this possession for the reason that it affected Cu Joco, who had not been a party to the suit in
which that writ was served.
The plaintiffs now commenced this present action for the purpose of having the sale of the said
lot declared null and void and of no force and effect.
ISSUE: Whether or not defendant Pascual is the owner of the property so as to give her the right to sell
the warehouse and the lot where it stands.
SC RULING:
No. Defendant Pascual has no right to sell the lot where the warehouse is standing. What is
essentially pertinent to the case is the fact that the defendant agree that the plaintiffs have the
ownership, and they themselves only the use, of the said lot. But while finding the plaintiffs to be the
owners of the lot, we recognized in principle the existence of a commodatum under which the defendants
held the lot.
An essential feature of the commodatum is the use of the thing belonging to another shall for a
certain period. Therefore, it is evident that he who has only the mere use of the thing cannot transfer its
ownership. The sale of a thing effected by one who is not its owner is null and void. The defendants never
were the owners of the lot sold. The sale of it by them is necessarily null and void. On cannot convey to
another what he has never had himself.
The purchaser could not acquire anything more than the interest that might be held by a person
to whom realty in possession of the vendor might be sold, for at a judicial auction nothing else is disposed
of. What the minor children of Ruperta Pascual had in their possession was the ownership of the sixsevenths part of one-half of the warehouse and the use of the lot occupied by his building. This, and
nothing more, could the Chinaman Cu Joco acquire at that sale: not the ownership of the lot; neither the
other half, nor the remaining one-seventh of the said first half, of the warehouse.
The present contention, however, of the plaintiffs that Cu Joco, now in possession of the lot,
should pay rent for it at the rate of P5 a month, would destroy the theory of the commodatum sustained
by them, since, according to the second paragraph of the aforecited article 1740, "commodatum is
essentially gratuitous.
Hence, as the facts show that a building was erected on another's ground, the question should be
decided in accordance with the statutes that, thirty years ago, governed accessions to real estate, and
which were Laws 41 and 42, title 28, of the third Partida, nearly identical with the provisions of articles
361 and 362 of the Civil Code. So, then, pursuant to article 361, the owner of the land on which a building
is erected in good faith has a right to appropriate such edifice to himself, after payment of the indemnity
prescribed in articles 453 and 454, or to oblige the builder to pay him the value of the land. Such, and no
other, is the right to which the plaintiff are entitled.
For these reasons, it is only necessary to annul the sale of the said lot which was made by Ruperta
Pascual, in representation of her minor children, to Cu Joco, and to maintain the latter in the use of the lot
until the plaintiffs shall choose one or the other of the two rights granted them by article 361 of the Civil
Code.

Effect of Adverse Possession for 11 years

CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN PROVINCE vs. COURT OF APPEALS, HEIRS OF
EGMIDIO OCTAVIANO AND JUAN VALDEZ
FACTS:
The whole controversy started when the petitioner Catholic Vicar Apostolic of the Mountain
Province (VICAR for brevity) filed with the Court of First Instance of Baguio Benguet an application for
registration of title over Lots 1, 2, 3, and 4 in Psu-194357, situated at Poblacion Central, La Trinidad,
Benguet. On March 22, 1963 the Heirs of Juan Valdez and the Heirs of Egmidio Octaviano filed their
Answer/Opposition on Lots Nos. 2 and 3, respectively, asserting ownership and title thereto. After trial on
the merits, the land registration court promulgated its Decision, dated November 17, 1965, confirming
the registrable title of VICAR to Lots 1, 2, 3, and 4.
The respondent in this case appealed the decision of the land registration court to the then Court
of Appeals. The Court of Appeals rendered its decision, reversing the decision of the land registration
court and dismissing the VICAR's application as to Lots 2 and 3. VICAR then filed with the Supreme Court
a petition for review on certiorari of the decision of the Court of Appeals dismissing his (its) application for
registration of Lots 2 and 3. The Heirs of Juan Valdez and Pacita Valdez, on likewise filed with the Supreme
Court a petition for review.
The Supreme Court denied in a minute resolution both petitions (of VICAR on the one hand and
the Heirs of Juan Valdez and Pacita Valdez on the other) for lack of merit. Upon the finality of both
Supreme Court resolution. The Heirs of Octaviano filed with the then Court of First Instance of Baguio,
Branch II, a Motion For Execution of Judgment praying that the Heirs of Octaviano be placed in possession
of Lot 3. The Court, presided over by Hon. Salvador J. Valdez, on December 7, 1978, denied the motion on
the ground that the Court of Appeals decision did not grant the Heirs of Octaviano any affirmative relief.
The heirs of Octaviano and the Heirs of Valdez then filed their cases for recovery of possession.
In these two cases , the plaintiffs argue that the defendant Vicar is barred from setting up the
defense of ownership and/or long and continuous possession of the two lots in question since this is
barred by prior judgment of the Court of Appeals under the principle of res judicata. Plaintiffs contend that
the question of possession and ownership have already been determined by the Court of Appeals and
affirmed by the Supreme Court (Exh. 1, Minute Resolution of the Supreme Court). On his part, defendant
Vicar maintains that the principle of res judicata would not prevent them from litigating the issues of long
possession and ownership because the dispositive portion of the prior judgment merely dismissed their
application for registration and titling of lots 2 and 3. Defendant Vicar contends that only the dispositive
portion of the decision, and not its body, is the controlling pronouncement of the Court of Appeals.
ISSUE:
Whether or not the adverse possession of the petitioner of the subject lot for 11 years would
constitute as a valid acquisitive prescription of the lot?
SC RULING:
Petitioner was in possession as borrower in commodatum up to 1951, when it repudiated the trust
by declaring the properties in its name for taxation purposes. When petitioner applied for registration of
Lots 2 and 3 in 1962, it had been in possession in concept of owner only for eleven years. Ordinary
acquisitive prescription requires possession for ten years, but always with just title. Extraordinary
acquisitive prescription requires 30 years. 4
The Court of Appeals found that petitioner did not meet the requirement of 30 years possession
for acquisitive prescription over Lots 2 and 3. Neither did it satisfy the requirement of 10 years possession
for ordinary acquisitive prescription because of the absence of just title. The appellate court did not
believe the findings of the trial court that Lot 2 was acquired from Juan Valdez by purchase and Lot 3 was
acquired also by purchase from Egmidio Octaviano by petitioner Vicar because there was absolutely no
documentary evidence to support the same and the alleged purchases were never mentioned in the
application for registration.
By the very admission of petitioner Vicar, Lots 2 and 3 were owned by Valdez and Octaviano. Both
Valdez and Octaviano had Free Patent Application for those lots since 1906. The predecessors of private
respondents, not petitioner Vicar, were in possession Private respondents were able to prove that their
predecessors' house was borrowed by petitioner Vicar after the church and the convent were destroyed.
They never asked for the return of the house, but when they allowed its free use, they became bailors in
commodatum and the petitioner the bailee. The bailees' failure to return the subject matter of
commodatum to the bailor did not mean adverse possession on the part of the borrower. The
bailee held in trust the property subject matter of commodatum. The adverse claim of petitioner
came only in 1951 when it declared the lots for taxation purposes. The action of petitioner Vicar by such
adverse claim could not ripen into title by way of ordinary acquisitive prescription because of the absence
of just title.
The Court of Appeals found that the predecessors-in-interest and private respondents were
possessors under claim of ownership in good faith from 1906; that petitioner Vicar was only a bailee in
commodatum; and that the adverse claim and repudiation of trust came only in 1951.
We find no reason to disregard or reverse the ruling of the Court of Appeals in CA-G.R. No. 38830R. Its findings of fact have become incontestable. This Court declined to review said decision, thereby in
effect, affirming it. It has become final and executory a long time ago.
Effect of Suspension of Possessory Rights for more than 50 years

REPUBLIC vs. CA
FACTS:
Applicant Baloys claim is anchored on their possessory information title coupled with their
continuous, adverse and public possession over the land in question. An examination of said title shows
that the description and the area of the land stated therein substantially coincides with the land applied
for and that said title had been regularly issued having been acquired by applicants predecessor,
Domingo Baloy, under the provisions of the Spanish Mortgage Law. Applicants presented their tax
declaration on said lands on April 8, 1965.
The Director of Lands opposed the registration alleging that this land had become public land thru
the operation of Act 627 of the Philippine Commission. On November 26, 1902 pursuant to the executive
order of the President of the U.S., the area was declared within the U.S. Naval Reservation.
ISSUE:
Whether or not the possessory rights of Baloy are lost?
SC RULING:
No. The finding of the respondent court that during the interim of 57 years from November 26,
1902 to December 17, 1959 (when the U.S. Navy possessed the area) the possessory rights of Baloy or
the heirs were merely suspended and not lost by prescription, is supported by a communication or letter
No. 1108-63, dated June 24, 1963, which contains an official statement of the position of the Republic of
the Philippines with regard to the status of the land in question.
Clearly, the occupancy of the U.S. Navy was not in the concept of owner. It partakes of the character
of a commodatum. It cannot therefore militate against the title of Domingo Baloy and his successor-ininterest. Ones ownership of a thing may be lost by prescription by reason of anothers possession if such
possession be under claim of ownership, not where the possession is only intended to be transient, as in
the case of the U.S. Navys occupation of the land concerned, in which case the owner is not divested of
his title, although it cannot be exercised in the meantime.
Kinds
1. ORDINARY - has a definite period stipulated. One of the parties delivers to another something not
consumable so that the latter may use the same for a certain time and return it. In the ordinary
commodatum, the possession of the bailee is more secure for he has the right to retain the thing
loaned until the expiration of the period agreed upon, or the accomplishment of the use for which
the commodatum has been constituted.
2. PRECARIUM - no definite time or use stipulated, or merely tolerated. One whereby the bailor may
demand the thing loaned at will (art.1947) if neither the duration of the contract nor the use to
which the thing loaned should be devoted has been stipulated, or if the use of the thing is merely
tolerated by the owner.
Cases:
If neither the duration of the contract nor the use of the thing loaned is stipulated
QUINTOS vs. BECK
FACTS:
Beck was a tenant of Quintos and occupied the latter's house. Upon the novation of the contract of lease
between the plaintiff and the defendant, the former gratuitously granted to the latter the use of the
furniture, subject to the condition that the defendant would return them to the plaintiff upon the latter's
demand. The plaintiff sold the property to Maria Lopez and Rosario Lopez and on notified the defendant of
the conveyance, and asked him to vacate the premises. Also, Quintos required the defendant to return all
the furniture transferred to him for them in the house where they were found.
Beck wrote a letter to the plaintiff informing her that he could not give up the three gas heaters and the
four electric lamps because he would use them until the 15th of the same month when the lease in due to
expire. before vacating the house, the defendant deposited with the Sheriff all the furniture belonging to
the plaintiff and they are now on deposit in the warehouse situated at No. 1521, Rizal Avenue, in the
custody of the said sheriff.
ISSUE:
1. Whether the defendant complied with his obligation to return the furniture upon the plaintiff's
demand;
2. whether the latter is bound to bear the deposit fees thereof,
3. whether she is entitled to the costs of litigation.
SC RULING:
The contract entered into between the parties is one of commadatum, because under it the plaintiff
gratuitously granted the use of the furniture to the defendant, reserving for herself the ownership thereof;
by this contract the defendant bound himself to return the furniture to the plaintiff, upon the latters
demand
Issue 1:
YES, The obligation voluntarily assumed by the defendant to return the furniture upon the plaintiff's
demand, means that he should return all of them to the plaintiff at the latter's residence or house.

As the defendant had voluntarily undertaken to return all the furniture to the plaintiff, upon the latter's
demand, the Court could not legally compel her to bear the expenses occasioned by the deposit of the
furniture at the defendant's behest. The latter, as bailee, was not entitled to place the furniture on
deposit; nor was the plaintiff under a duty to accept the offer to return the furniture, because the
defendant wanted to retain the three gas heaters and the four electric lamps.
Issue 2:
NO, the Court could not legally compel her to bear the expenses
furniture at the defendant's behest. The latter, as bailee, was not
deposit; nor was the plaintiff under a duty to accept the offer to
defendant wanted to retain the three gas heaters and the four electric
occasioned by the deposit of the

entitled to place the furniture on
return the furniture, because the
lamps.
Issue 3:
Yes, the plaintiff is entitled to the payment thereof by the defendant in case of his inability to return some
of the furniture because under paragraph 6 of the stipulation of facts, the defendant has neither agreed
to nor admitted the correctness of the said value.
The costs in both instances should be borne by the defendant because the plaintiff is the prevailing
party. The defendant was the one who breached the contract of commodatum, and without any reason he
refused to return and deliver all the furniture upon the plaintiff's demand. The expenses which may be
occasioned by the delivery to and deposit of the furniture with the Sheriff shall be for the account of the
defendant. the defendant shall pay the costs in both instances
If the use of the thing is merely tolerated

CATHOLIC VICAR vs. CA
FACTS:
Catholic Vicar Apostolic of the Mountain Province filed with the Court of First Instance of Baguio Benguet
on September 5, 1962 an application for registration of title over Lots 1, 2, 3, and 4 in Psu-194357,
situated at Poblacion Central, La Trinidad, Benguet, docketed as LRC N-91, said Lots being the sites of the
Catholic Church building, convents, high school building, school gymnasium, school dormitories, social
hall, stonewalls, etc. On March 22, 1963 the Heirs of Juan Valdez and the Heirs of Egmidio Octaviano filed
their Answer/Opposition on Lots Nos. 2 and 3, respectively, asserting ownership and title thereto. The two
lots were possessed by the predecessors-in-interest of private respondents under claim of ownership in
good faith from 1906 to 1951; petitioner had been in possession of the same lots as bailee in
commodatum up to 1951, when petitioner repudiated the trust and when it applied for registration in
1962; petitioner had been in possession as owner for eleven years.
ISSUE:
Whether or not Catholic Vicar acquired subject lots by way of ordinary acquisitive prescription.
SC RULING:
There is no possibility of acquisitive prescription which requires 10 years possession with just title and 30
years of possession without. Private respondents were able to prove that their predecessors' house was
borrowed by petitioner Vicar after the church and the convent were destroyed. They never asked for the
return of the house, but when they allowed its free use, they became bailors in commodatum and the
petitioner the bailee. The bailees' failure to return the subject matter of commodatum to the bailor did not
mean adverse possession on the part of the borrower. The bailee held in trust the property subject matter
of commodatum. The adverse claim of petitioner came only in 1951 when it declared the lots for taxation
purposes. The action of petitioner Vicar by such adverse claim could not ripen into title by way of ordinary
acquisitive prescription because of the absence of just title.
Pactum de Commodando
An accepted promise to deliver something by way of commodatum.
It is valid but no commodatum is perfected until delivery.

Case:
Effect of approval of loan application
SAURA IMPORT and EXPORT CO., INC. vs. DEVELOPMENT BANK OF THE PHILIPPINES
FACTS:
In July 1953 the plaintiff (hereinafter referred to as Saura, Inc.) applied to the Rehabilitation
Finance Corporation (RFC), before its conversion into DBP, for an industrial loan of P500,000.00, to be
used as follows: P250,000.00 for the construction of a factory building (for the manufacture of jute sacks);
P240,900.00 to pay the balance of the purchase price of the jute mill machinery and equipment; and
P9,100.00 as additional working capital.On January 7, 1954 RFC passed Resolution No. 145 approving the
loan application for P500,000.00, to be secured by a first mortgage on the factory building to be
constructed, the land site thereof, and the machinery and equipment to be installed. Saura, Inc. was
officially notified of the resolution on January 9, 1954. The day before, however, evidently having
otherwise been informed of its approval, Saura, Inc. wrote a letter to RFC, requesting a modification of the
terms laid down by it. On April 13, 1954 the loan documents were executed: the promissory note, with
F.R. Halling, representing China Engineers, Ltd., as one of the co-signers; and the corresponding deed of

mortgage, which was duly registered on the following April 17.the loan was suggested to be reduced from
500,000 to 300,00. In the meantime Saura, Inc. had written RFC requesting that the loan of P500,000.00
be granted. The request was denied by RFC, which added in its letter-reply that it was "constrained to
consider as cancelled the loan of P300,000.00 ... in view of a notification ... from the China Engineers Ltd.,
expressing their desire to consider the loan insofar as they are concerned."
On July 24, 1954 Saura, Inc. took exception to the cancellation of the loan and informed RFC that
China Engineers, Ltd. "will at any time reinstate their signature as co-signer of the note if RFC releases to
us the P500,000.00 originally approved by you." Because of the conflict with regards to the negotiations
within the DBP, Saura, Inc. did not pursue the matter further. Instead, it requested RFC to cancel the
mortgage, and so, on June 17, 1955 RFC executed the corresponding deed of cancellation and delivered it
to Ramon F. Saura himself as president of Saura, Inc.
Almost 9 years after the mortgage in favor of RFC was cancelled at the request of Saura, Inc., the
latter commenced the present suit for damages, alleging failure of RFC (as predecessor of the defendant
DBP) to comply with its obligation to release the proceeds of the loan applied for and approved, thereby
preventing the plaintiff from completing or paying contractual commitments it had entered into, in
connection with its jute mill project.
The trial court rendered judgment for the plaintiff, ruling that there was a perfected contract
between the parties and that the defendant was guilty of breach thereof.
ISSUE:
Whether or not the approval of the loan create an obligation on the part of DBP which it has to
fulfill in favor of Saura Inc.
SC Ruling:
We hold that there was indeed a perfected consensual contract, as recognized in Article 1934 of
the Civil Code, which provides:
ART. 1954. An accepted promise to deliver something, by way of commodatum or simple
loan is binding upon the parties, but the commodatum or simple loan itself shall not be
perferted until the delivery of the object of the contract.
There was undoubtedly offer and acceptance in this case: the application of Saura, Inc. for a loan
of P500,000.00 was approved by resolution of the defendant, and the corresponding mortgage was
executed and registered. But this fact alone falls short of resolving the basic claim that the defendant
failed to fulfill its obligation and the plaintiff is therefore entitled to recover damages.
It should be noted that RFC entertained the loan application of Saura, Inc. on the assumption that
the factory to be constructed would utilize locally grown raw materials, principally kenaf. There is no
serious dispute about this. It was in line with such assumption that when RFC, by Resolution No. 9083
approved on December 17, 1954, restored the loan to the original amount of P500,000.00. it imposed two
conditions, to wit: "(1) that the raw materials needed by the borrower-corporation to carry out its
operation are available in the immediate vicinity; and (2) that there is prospect of increased production
thereof to provide adequately for the requirements of the factory." The imposition of those conditions was
by no means a deviation from the terms of the agreement, but rather a step in its implementation. There
was nothing in said conditions that contradicted the terms laid down in RFC Resolution No. 145, passed on
January 7, 1954, namely "that the proceeds of the loan shall be utilized exclusively for the following
purposes: for construction of factory building P250,000.00; for payment of the balance of purchase
price of machinery and equipment P240,900.00; for working capital P9,100.00." Evidently Saura, Inc.
realized that it could not meet the conditions required by RFC, and so wrote its letter of January 21, 1955,
stating that local jute "will not be able in sufficient quantity this year or probably next year," and asking
that out of the loan agreed upon the sum of P67,586.09 be released "for raw materials and labor." This
was a deviation from the terms laid down in Resolution No. 145 and embodied in the mortgage contract,
implying as it did a diversion of part of the proceeds of the loan to purposes other than those agreed
upon.
The subsequent conduct of Saura, Inc. confirms this desistance. It did not protest against any
alleged breach of contract by RFC, or even point out that the latter's stand was legally unjustified. Its
request for cancellation of the mortgage carried no reservation of whatever rights it believed it might
have against RFC for the latter's non-compliance. As it is there was mutual desistance to the performance
of the obligation.
Requisites
1. CAPACITY - no special capacity. Any person entitled to possession may be the lender so long as his
rights to the thing are not strictly personal. (Lender need not be the owner; a lessee may
constitute a contract of Commodatum; a thief may even be a bailor.)
2. OBJECT - must be non-fungible. If consumable, valid so long as the use agreed upon will not to
consume it (for exhibition purposes). It may be real or personal
3. CONSIDERATION - gratuitous. If not, it ceases to be a Commodatum. (maybe a lease)
4. FORM - no special form is required. Commodatum starts from the moment the thing is delivered.
Section II Obligations of the Bailee
Rights and Obligations of the Bailee
Right of a BAILEE:

1.
A personal right to use the thing, but not to use its fruits unless stipulated by the parties. He can
neither lend nor lease the thing to a stranger who is not a member of his household because the
contract is personal.
Obligations of a BAILEE:
1. To preserve the thing.
2. To incur expenses required by the use and preservation of the thing, without reimbursement.
3. To return the thing at the expiration of the contract.
The bailee cannot retain the thing on account of the bailors obligation or bailors debt.
4. He does not answer for damages not due to his fault, but only due to use
But he is liable for fortuitous events if:

If the thing is devoted to a different use
If return of the thing is delayed
If the thing bailed has been appraised
If the bailee lends it to a stranger
If the bailee did not save it when he could
5. Two or more borrowers are solidarily liable .
Cases:
Effect of failure to return
QUINTOS vs. BECK
FACTS:
The plaintiff brought this action to compel the defendant to return her certain furniture which she
lent him for his use. She appealed from the judgment of the Court of First Instance of Manila which
ordered that the defendant return to her the three has heaters and the four electric lamps found in the
possession of the Sheriff of said city, that she call for the other furniture from the said sheriff of Manila at
her own expense, and that the fees which the Sheriff may charge for the deposit of the furniture be paid
pro rata by both parties, without pronouncement as to the costs.
The defendant was a tenant of the plaintiff and as such occupied the latter's house on M. H. del
Pilar street, No. 1175. On January 14, 1936, upon the novation of the contract of lease between the
plaintiff and the defendant, the former gratuitously granted to the latter the use of the furniture, subject
to the condition that the defendant would return them to the plaintiff upon the latter's demand. The
plaintiff sold the property to Maria Lopez and Rosario Lopez and on September 14, 1936, these three
notified the defendant of the conveyance, giving him sixty days to vacate the premises under one of the
clauses of the contract of lease. There after the plaintiff required the defendant to return all the furniture
transferred to him for them in the house where they were found. On the 7th of the same month, the
defendant wrote another letter to the plaintiff informing her that he could not give up the three gas
heaters and the four electric lamps because he would use them until the 15th of the same month when
the lease in due to expire. The plaintiff refused to get the furniture in view of the fact that the defendant
had declined to make delivery of all of them.
On November 15th, before vacating the house, the defendant deposited with the Sheriff all the furniture
belonging to the plaintiff and they are now on deposit in the warehouse situated at No. 1521, Rizal
Avenue, in the custody of the said sheriff.
ISSUE:
Whether or not the defendant has the obligation to return the furniture upon demand of the
plaintiff?
SC RULING:
The contract entered into between the parties is one of commadatum, because under it the
plaintiff gratuitously granted the use of the furniture to the defendant, reserving for herself the ownership
thereof; by this contract the defendant bound himself to return the furniture to the plaintiff,
upon the latters demand. The obligation voluntarily assumed by the defendant to return the furniture
upon the plaintiff's demand, means that he should return all of them to the plaintiff at the latter's
residence or house. The defendant did not comply with this obligation when he merely placed them at the
disposal of the plaintiff, retaining for his benefit the three gas heaters and the four eletric lamps. The
provisions of article 1169 of the Civil Code cited by counsel for the parties are not squarely applicable.
The trial court, therefore, erred when it came to the legal conclusion that the plaintiff failed to comply
with her obligation to get the furniture when they were offered to her.
The defendant, as bailee, was not entitled to place the furniture on deposit; nor was the plaintiff
under a duty to accept the offer to return the furniture, because the defendant wanted to retain the three
gas heaters and the four electric lamps.
The appealed judgment is modified and the defendant is ordered to return and deliver to the
plaintiff, in the residence to return and deliver to the plaintiff, in the residence or house of the latter, all
the furniture described.
CATHOLIC VICAR vs. CA

FACTS:
Catholic Vicar Apostolic of the Mountain Province (VICAR for brevity) filed an application for
registration of title over Lots 1, 2, 3, and 4 in Psu-194357 located in Benguet. Said Lots being the sites of
the Catholic Church building, convents, high school building, school gymnasium, school dormitories, social
hall, stonewalls, etc. However, the Heirs of Juan Valdez and the Heirs of Egmidio Octaviano filed their

Answer/Opposition on Lots Nos. 2 and 3, respectively, asserting ownership and title thereto. After trial on
the merits, the land registration court promulgated its Decision confirming the registrable title of VICAR to
Lots 1, 2, 3, and 4. However, the Court of Appeals rendered its decision reversing the decision of the land
registration court and dismissing the VICAR's application as to Lots 2 and 3, the lots claimed by the two
sets of oppositors in the land registration case (and two sets of plaintiffs in the two cases now at bar), the
first lot being presently occupied by the convent and the second by the women's dormitory and the
sister's convent.
ISSUE:
Whether or not Vicar can validly claim the lands in question.
SC RULING:
No, Vicar cannot validly acquire the lands especially on the ground of acquisitive prescription.
Private respondents were able to prove that their predecessors' house was borrowed by petitioner Vicar
after the church and the convent were destroyed. They never asked for the return of the house, but when
they allowed its free use, they became bailors in commodatum and the petitioner the bailee. The
bailees' failure to return the subject matter of commodatum to the bailor did not mean
adverse possession on the part of the borrower. The bailee held in trust the property subject matter
of commodatum. The adverse claim of petitioner came only in 1951 when it declared the lots for taxation
purposes. The action of petitioner Vicar by such adverse claim could not ripen into title by way of ordinary
acquisitive prescription because of the absence of just title. Ordinary acquisitive prescription requires
possession for ten years, but always with just title. Extraordinary acquisitive prescription requires 30
years.
DE LOS SANTOS vs. JARRA
The carabaos delivered to be used not being returned by the defendant upon demand, there is no
doubt that she is under obligation to indemnify the owner thereof by paying him their value.
Article 1101 of said code reads:
Those who in fulfilling their obligations are guilty of fraud, negligence, or delay, and those who in
any manner whatsoever act in contravention of the stipulations of the same, shall be subjected to
indemnify for the losses and damages caused thereby.
The obligation of the bailee or of his successors to return either the thing loaned or its value, is
sustained by the supreme tribunal of Sapin. In its decision of March 21, 1895, it sets out with precision the
legal doctrine touching commodatum as follows:
Although it is true that in a contract of commodatum the bailor retains the ownership of the thing
loaned, and at the expiration of the period, or after the use for which it was loaned has been
accomplished, it is the imperative duty of the bailee to return the thing itself to its owner, or to pay him
damages if through the fault of the bailee the thing should have been lost or injured, it is clear that where
public securities are involved, the trial court, in deferring to the claim of the bailor that the amount loaned
be returned him by the bailee in bonds of the same class as those which constituted the contract, thereby
properly applies law 9 of title 11 of partida 5.
Section III Obligations of the Bailor

Rights and Obligations of the Bailor
A. incidental obligation of the bailor - To pay extraordinary expenses of preservation, if notified by the
bailee. The bailee may elect to make such repairs provided he notify the bailor (notice may be
dispense with if such repair is urgently required).
B. Hidden defects- bailor liable to answer for damages to the bailee if due to defects known and not
disclosed. Bailor does not answer for unknown defects. (Source: Cruz)
PRIMARY OBLIGATION OF THE BAILOR:
To allow the bailee the use of the thing loaned for the duration of the period stipulated. (bailor
bound by the terms of the contract of commodatum).
RIGHT OF THE BAILOR TO DEMAND RETURN OF THE THING FOR ACTS OF INGRATITUDE:
Under Art. 1948, bailor may demand the return of thing if the bailee commits acts of ingratitude
specified under Art. 465
1. If the donee should commit some offense against the person, the honor or the property of the
donor, or of his wife or children under his parental authority;
2. If the donee imputes to the donor any criminal offense, or any act involving moral turpitude, even
though he should prove it, unless the crime or the act has been committed against the donee
himself, his wife or children under his authority;
3. If he unduly refuses him support when the donee is legally or morally bound to give support to the
donor. (648a)
OBLIGATION TO REFUND EXTRAORDINARY EXPENSES:
GR: Bailor bears the extra ordinary expenses.
IF: bailee makes such repairs, he must first notify the bailor and bailor must refund the bailee.

The notice is important because it is possible that the bailor may not want to incur the
extraordinary expenses at all. Bailor should be given the discretion as to what must be done with his
property.
EXEPTION: when such repairs are so urgent.
EXTRAORDINARY EXPENSES ARISING FROM THE ACTUAL USE OF THE THING LOANED:
Such expenses (caused by fortuitous event) arising on the occasion of the actual use of the thing
loaned shall be borne by the bailor and bailee alike on a 50-50 (pro rata)
LIABILTY TO PAY DAMAGES FOR KNOWN HIDDEN DEFECTS:
Requisites:
1. There is flaw or defect in the thing loaned
2. That the flaw or defect is hidden
3. The bailor is aware of such flaw
4. He does not notify or advise the bailee of the same and;
5. The bailee suffers damage by reason of such flaw or defect.
IF FLAW IS UNKNOWN TO THE BAILOR:
Bailor is not liable because commodatum is gratuitous. The rule is different in sale (Art, 1547), and
lease (Art. 1653) (Source: De Leon)
Termination
Causes of Extinguishment
1. Expiration of the time or use stipulated
2. Claim of the lender
GENERAL RULE: Allow the bailee the use of the thing loaned for the duration of the period stipulated or
until the accomplishment of the purpose for which the commodatum was instituted.
EXCEPTION: In case of urgent need in which case bailee may demand its return or temporary use.
Reason: The right of the bailor is based on the fact that commodatum is essentially gratuitous.
3. Destruction of the thing
4. Death of the borrower
5. Ingratitude of the bailee
The bailor may demand the return when the bailee commits an act of ingratitude:
If the bailee should commit an offense against the person, the honor or the property of the
bailor, or the wife or children under his parental authority
If the bailee imputes to the bailor any criminal offense, or any act involving moral turpitude,
even though he should prove it, unless the crime or the act has been committed against the
bailee himself, his wife, or children under his authority
If the bailee unduly refuses the bailor support when the bailee is legally and morally bound to
give support to the bailor
Chapter II
SIMPLE LOAN or MUTUUM
Concept
It is a contract whereby one party delivers to another money or fungible thing, on the condition of
returning the same kind, amount and quality. If the object loaned is not fungible but the borrower is to
return another of the same kind and quality, it is barter.
Cases:
Mutuum vs. Commodatum
CHEE KIONG YAM vs. MALIK
FACTS:
This is a petition for certiorari, prohibition, and mandamus with preliminary injunction. Petitioners
alleged that respondent Municipal Judge Nabdar J. Malik of Jolo, Sulu, acted without jurisdiction, in excess
of jurisdiction and with grave abuse of discretion when:
(a) he held in the preliminary investigation of the charges of estafa filed by respondents Rosalinda Amin,
Tan Chu Kao and Augusto Sajor against petitioners that there was a prima facie case against the latter;
(b) he issued warrants of arrest against petitioners after making the above determination; and
(c) he undertook to conduct trial on the merits of the charges which were docketed in his court as
Criminal Cases No. M-111, M-183 and M-208.
In the three criminal cases the respondents charges the petitioner with estaffa through
misappropriation, however in the face of the documents it state that the amount received was in the
nature of a simple loan.
ISSUE:
Whether or not the petitioners in this case can be charged of estaffa when the obligation is said to
be that of simple loan.
SC Ruling:
We agree with the petitioners that the facts alleged in the three criminal complaints do not
constitute estafa through misappropriation.

In order that a person can be convicted of estaffa, it must be proven that he has the obligation to
deliver or return the same money, goods or personal property that he received. Petitioners had no such
obligation to return the same money, i.e., the bills or coins, which they received from private respondents.
This is so because as clearly stated in criminal complaints, the related civil complaints and the supporting
sworn statements, the sums of money that petitioners received were loans.
The nature of simple loan is defined in Articles 1933 and 1953 of the Civil Code.
Art. 1933. By the contract of loan, one of the parties delivers to another, either
something not consumable so that the latter may use the same for a certain time and
return it, in which case the contract is called a commodatum; or money or other
consumable thing upon the condition that the same amount of the same kind and quality
shall be paid, in which case the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum the bailor retains the ownership of the thing loaned, while in simple loam
ownership passes to the borrower.
Art. 1953. A person who receives a loan of money or any other fungible thing acquires
the ownership thereof, and is bound to pay to the creditor an equal amount of the same
kind and quality.
It can be readily noted from the above-quoted provisions that in simple loan (mutuum), as
contrasted to commodatum, the borrower acquires ownership of the money, goods or personal property
borrowed. Being the owner, the borrower can dispose of the thing borrowed (Article 248, Civil Code) and
his act will not be considered misappropriation thereof.
In U.S. vs. Ibaez, 19 Phil. 559, 560 (1911), this Court held that it is not estafa for a person to refuse to
nay his debt or to deny its existence.
We are of the opinion and so decide that when the relation is purely that of debtor and
creditor, the debtor can not be held liable for the crime of estafa, under said article, by
merely refusing to pay or by denying the indebtedness.
It appears that respondent judge failed to appreciate the distinction between the two types of
loan, mutuum and commodatum, when he performed the questioned acts, He mistook the transaction
between petitioners and respondents Rosalinda Amin, Tan Chu Kao and Augusto Sajor to be
commodatum wherein the borrower does not acquire ownership over the thing borrowed and has the
duty to return the same thing to the lender.
Thus the criminal complaints against petitioners are hereby declared null and void; respondent
judge is hereby ordered to dismiss said criminal cases and to recall the warrants of arrest he had issued in
connection therewith.
Mutuum vs. Lease

TOLENTINO vs. GONZALES SY CHIAM
FACTS:
Sometime prior to the 28th day of November, 1922, the appellants (Tolentino and Manio)
purchased of the Luzon Rice Mills, Inc., a piece or parcel of land with the camarin located thereon for the
price of P25,000, promising to pay therefor in three installments. One of the conditions of that contract of
purchase was that on failure of the purchaser (plaintiffs and appellants) to pay the balance of said
purchase price or any of the installments on the date agreed upon, the property bought would revert to
the original owner. For the last installment, upon receiving the letter of the vendor of said property, the
purchasers, the appellants herein, realizing that they would be unable to pay the balance due, began to
make an effort to borrow money with which to pay the balance due, began to make an effort to borrow
money with which to pay the balance of their indebtedness on the purchase price of the property
involved. Finally an application was made to the defendant for a loan for the purpose of satisfying their
indebtedness to the vendor of said property. After some negotiations the defendants agreed to loan the
plaintiffs to loan the plaintiffs the sum of P17,500 upon condition that the plaintiffs execute and deliver to
him a pacto de retro of said property.
ISSUE:
May a tenant charge his landlord with a violation of the Usury Law upon the ground that the
amount of rent he pays, based upon the real value of the property, amounts to a usurious rate of interest?
SC RULING:
No. The value of money, goods or credits is easily ascertained while the amount of rent to be paid
for the use and occupation of the property may depend upon a thousand different conditions. It will thus
be seen that the rent to be paid for the use and occupation of property is not necessarily fixed upon the
value of the property. The amount of rent is fixed, based upon a thousand different conditions and may or
may not have any direct reference to the value of the property rented. To hold that "usury" can be based
upon the comparative actual rental value and the actual value of the property, is to subject every landlord
to an annoyance not contemplated by the law, and would create a very great disturbance in every
business or rural community. We cannot bring ourselves to believe that the Legislature contemplated any
such disturbance in the equilibrium of the business of the country.
Act No. 2655 is "An Act fixing rates of interest upon 'loans' and declaring the effect of receiving or
taking usurious rates." It will be noted that said statute imposes a penalty upon a "loan" or forbearance of
any money, goods, chattels or credits, etc. The central idea of said statute is to prohibit a rate of interest
on "loans." A contract of "loan," is very different contract from that of "rent". A "loan," as that
term is used in the statute, signifies the giving of a sum of money, goods or credits to another, with a

promise to repay, but not a promise to return the same thing. To "loan," in general parlance, is to deliver
to another for temporary use, on condition that the thing or its equivalent be returned; or to deliver for
temporary use on condition that an equivalent in kind shall be returned with a compensation for its use.
The word "loan," however, as used in the statute, has a technical meaning. It never means the return of
the same thing. It means the return of an equivalent only, but never the same thing loaned. A "loan" has
been properly defined as an advance payment of money, goods or credits upon a contract or stipulation
to repay, not to return, the thing loaned at some future day in accordance with the terms of the contract.
Under the contract of "loan," as used in said statute, the moment the contract is completed the money,
goods or chattels given cease to be the property of the former owner and becomes the property of the
obligor to be used according to his own will, unless the contract itself expressly provides for a special or
specific use of the same. At all events, the money, goods or chattels, the moment the contract is
executed, cease to be the property of the former owner and becomes the absolute property of the obligor.
A contract of "loan" differs materially from a contract of "rent." In a contract of "rent" the owner of
the property does not lose his ownership. He simply loses his control over the property rented during the
period of the contract. In a contract of "loan" the thing loaned becomes the property of the obligor. In a
contract of "rent" the thing still remains the property of the lessor. He simply loses control of the same in
a limited way during the period of the contract of "rent" or lease. In a contract of "rent" the relation
between the contractors is that of landlord and tenant. In a contract of "loan" of money, goods, chattels
or credits, the relation between the parties is that of obligor and obligee. "Rent" may be defined as the
compensation either in money, provisions, chattels, or labor, received by the owner of the soil from the
occupant thereof. It is defined as the return or compensation for the possession of some corporeal
inheritance, and is a profit issuing out of lands or tenements, in return for their use. It is that, which is to
paid for the use of land, whether in money, labor or other thing agreed upon. A contract of "rent" is a
contract by which one of the parties delivers to the other some nonconsumable thing, in order that the
latter may use it during a certain period and return it to the former; whereas a contract of "loan", as that
word is used in the statute, signifies the delivery of money or other consumable things upon condition of
returning an equivalent amount of the same kind or quantity, in which cases it is called merely a "loan."
In the case of a contract of "rent," under the civil law, it is called a "commodatum."
In the present case the property in question was sold. It was an absolute sale with the right only
to repurchase. During the period of redemption the purchaser was the absolute owner of the property.
During the period of redemption the vendor was not the owner of the property. During the period of
redemption the vendor was a tenant of the purchaser. During the period of redemption the relation which
existed between the vendor and the vendee was that of landlord and tenant. That relation can only be
terminated by a repurchase of the property by the vendor in accordance with the terms of the said
contract. The contract was one of rent. The contract was not a loan, as that word is used in Act No. 2655.
Mutuum vs. Estafa

LIWANAG vs. CA
When there is no transfer of ownership, it is not a simple loan but estafa.
FACTS:
Rosales constituted Liwanag and Tabligan as her agents in buying and selling cigarettes business. Under
their agreement, Rosales would give the money needed to buy cigarettes while Liwanag and Tabligan
would sell them, with corresponding 40% commission if the goods are sold; otherwise, the money would
be returned to Rosales. Thus Rosales gave several cash advances to Liwanag and Tabligan amounting to
P633,650.00. The two, after a few visits to Rosales to report on the progress of the transactions, never
showed up to remit the proceeds of sale, nor returned the money advanced. Liwanag was charged with
estafa, which she was convicted of. This was affirmed by CA, hence the petition.
SC RULING: Liwanag alleged the contract between her and Rosales was simple loan, hence there was no
estafa. But the court held that the transaction cannot be considered loan since in a contract of loan, once
money is received, ownership over the same is transferred. Being the owner, the borrower can dispose of
it freely. Here, Liwanag could not dispose of the property freely as it was delivered to her for the single
purpose of buying cigarettes, and if this was not possible then to return the money to Rosales. As there
was no transfer of ownership of the money delivered, Liwanag is liable for conversion under Art.315
par.1(b) of the RPC.
Kinds
1. Gratuitous
2. With interest
Requisites
1. Capacity of the parties
No special capacity is required to be a lender except ownership. But an emancipated minor

may not borrow money without the consent of his parent or guardian.
2. Object
Consumable
Muttum involves money or any other fungible things. If not fungible, the contract is barter.
3. Consideration
Gratuitous or onerous.
4. Form
No special form is needed; but there must be delivery, as the contract is real.

An accepted promise to deliver something by way of simple loan may be subject to the Statute
of Frauds if not to be performed within one year. This contract is consensual as distinguished
from loan proper which is real.
Case:
Accepted promise to deliver something by way of simple loan
SAURA IMPORT and EXPORT CO., INC., vs. DEVELOPMENT BANK OF THE PHILIPPINES
FACTS:
Saura, Inc. applied to the Rehabilitation Finance Corporation (RFC), before its conversion into DBP,
for an industrial loan of P500,000.00, to be used as follows: P250,000.00 for the construction of a factory
building for the manufacture of jute sacks; P240,900.00 to pay the balance of the purchase price of the
jute mill machinery and equipment; and P9,100.00 as additional working capital.
After agreeing on the terms of the industrial loan, Mr. & Mrs. Ramon E. Saura, Inocencia Arellano,
Aniceto Caolboy and Gregoria Estabillo and China Engineers, Ltd. shall sign the promissory notes jointly
with the borrower-corporation. On January 7, 1954 RFC passed Resolution No. 145 approving the loan
application for P500,000.00, to be secured by a first mortgage on the factory building to be constructed,
the land site thereof, and the machinery and equipment to be installed. Saura, Inc. was officially notified
of the resolution on January 9, 1954. The day before, however, evidently having otherwise been informed
of its approval, Saura, Inc. wrote a letter to RFC, requesting a modification of the terms laid down by it,
namely: that in lieu of having China Engineers, Ltd. which was willing to assume liability only to the extent
of its stock subscription with Saura, Inc. sign as co-maker on the corresponding promissory notes.
It appears, however, that despite the formal execution of the loan agreement the reexamination
contemplated in Resolution No. 736 proceeded. In a meeting of the RFC Board of Governors on June 10,
1954, at which Ramon Saura, President of Saura, Inc., was present, it was decided to reduce the loan from
P500,000.00 to P300,000.00. But after the reexamination, there ensued several more circumstances that
occurred that resulted to the prolonged the discharged of the loan. Afterwhich, the loan was again
restored to the original amount of P500,000. Yet at one point, the negotiations between the two parties
came to a standstill, and so Saura Inc. did not anymore pursue the matter. Instead, it requested RFC to
cancel the mortgage, and so, on June 17, 1955 RFC executed the corresponding deed of cancellation and
delivered it to Ramon F. Saura himself as president of Saura, Inc.
On January 9, 1964, almost 9 years after the mortgage in favor of RFC was cancelled at the
request of Saura, Inc., the latter commenced the present suit for damages, alleging failure of RFC, as
predecessor of the defendant DBP, to comply with its obligation to release the proceeds of the loan
applied for and approved, thereby preventing the plaintiff from completing or paying contractual
commitments it had entered into, in connection with its jute mill project.
ISSUE: Whether or not the defendant bank is guilty of breach of contract of loan.
SC RULING:
No. DBP is not guilty of breach of contract of loan. The Supreme Court held in this case that
although there was a perfected consensual contract between the parties, such that there was offer and
acceptance: the application of Saura, Inc. for a loan of P500,000.00 was approved by resolution of the
defendant, and the corresponding mortgage was executed and registered. But this fact alone falls short of
resolving the basic claim that the defendant failed to fulfill its obligation and the plaintiff is therefore
entitled to recover damages.
It should be noted that RFC entertained the loan application of Saura, Inc. on the assumption that
the factory to be constructed would utilize locally grown raw materials, principally kenaf. It was in line
with such assumption that when RFC approved and restored the loan to the original amount of
P500,000.00. There was nothing in said conditions that contradicted the terms laid down in RFC
Resolution No. 145, passed on January 7, 1954, namely "that the proceeds of the loan shall be utilized
exclusively for the following purposes: for construction of factory building P250,000.00; for payment of
the balance of purchase price of machinery and equipment P240,900.00; for working capital
P9,100.00." Evidently Saura, Inc. realized that it could not meet the conditions required by RFC, and so
wrote its letter of January 21, 1955, stating that local jute "will not be able in sufficient quantity this year
or probably next year," and asking that out of the loan agreed upon the sum of P67,586.09 be released
"for raw materials and labor." Saura, Inc. obviously was in no position to comply with RFC's conditions. So
instead of doing so and insisting that the loan be released as agreed upon, Saura, Inc. asked that the
mortgage be cancelled, which was done on June 15, 1955. The action thus taken by both parties was in
the nature of mutual desistance, what Manresa terms "mutuo disenso," which is a mode of extinguishing
obligations.
Clearly, the subsequent conduct of Saura Inc. requesting for cancellation of the mortgage carried
no reservation of whatever rights it believed it might have against RFC for the latter's non-compliance
confirms their desistance. All these circumstances demonstrate beyond doubt that the said agreement
had been extinguished by mutual desistance and that on the initiative of the plaintiff-appellee itself.
Effects (Obligation of the Borrower only)

Art. 1955. The obligation of a person who borrows money shall be governed by the provisions of
articles 1249 and 1250 of this Code.
If what was loaned is a fungible thing other than money the debtor owes another thing of the same
kind, quantity and quality, even if it should change in value. In case it is impossible to deliver the same
kind, its value at the time of the perfection of the loan shall be paid.
a.
To return the thing or amount borrowed at the period stipulated or fixed according to general rules.

b.
If the thing borrowed is money;

Art.1249. the payment of debts in money shall be made in the currency
stipulated and if it is not possible to deliver such currency then in the
currency which is the legal tender in the Philippines.
The delivery of promissory notes payable to order or bills of exchange or other
mercantile documents shall produce the effect of payment only when they have
been cashed or when through the fault of the creditor they have been impaired.
Art. 1250. In case of extraordinary inflation or deflation of the currency
stipulated should supervene, the value of the currency at the time of the
establishment of the obligation shall be the basis of payment, unless there is an
agreement to the contrary.
If the thing borrowed is not money, to return the same amount in equal kind and quality,
even if the price has changed or else its value at the time the contract was perfected.
To Pay Interest
When it is expressly agreed in writing (Art. 1956)
When the stipulation to pay is verbal, the volountary payment is valid as a performance of a
natural obligation. (But GR: Verbal void; EXCP: voluntary payment)
Interest paid even if not stipulated, is not recoverable, it being proof of a tacit contract or a natural
obligation.
a. Except where it is proved that the interest was paid by error (solution indebiti)
b. Interest payable in kind, it is appraised at the current price at the time of payment (Art.
1958)
c. Interest due shall not earn interest (no compounding) in the absence of agreement and
without prejudice to Art 2212 (interest after judicial demand) (Art. 1595)
d. The following are not considered interest:
Increase in the price when the sale is on installment
Attorneys fees for cost of collection
Penalty for breach
Bank deposits, whether fixed savings or current are governed by the provisions concerning simple
loan.
Cases:
Payment in Currency Stipulated
RONO vs. GOMEZ
FACTS:
Cristobal Roo received as a loan four thousand pesos in Japanese fiat money from Jose L.
Gomez. He informed the later that he would use the money to purchase a jitney; and he agreed to pay
that debt one year after date in the currency then prevailing. After the liberation, Roo was sued for
payment. His main defense was his liability should not exceed the equivalent of 4,000 pesos "mickey
mouse" money and could not be 4,000 pesos Philippine currency, because the contract would be void
as contrary to law, public order and good morals.
ISSUE:
Whether or not the contract is contrary to the Usury law, because on the basis of calculations by
Government experts Roo only received the equivalent of one hundred Philippine pesos and now he is
required to disgorge four thousand pesos or interest greatly in excess of the lawful rates.
SC RULING:
No, he is not paying interest. The contract says that the money received "will not earn any
interest." Furthermore, he received four thousand pesos; and he is required to pay four thousand pesos
exactly. The increased intrinsic value and purchasing power of the current money is consequence of an
event (change of currency) which at the time of the contract neither party knew would certainly happen
within the period of one year. They both elected to subject their rights and obligations to that
contingency. If within one year another kind of currency became legal tender, Gomez would probably get
more for his money. If the same Japanese currency continued, he would get less, the value of Japanese
money being then on the downgrade.
Stipulation not to pay while war is going on

NEPOMUCENO vs. NARCISO
FACTS:
In 1938, plaintiff executed a mortgage in favor of defendant on a parcel of land to secure the payment of
P24,000 in 7 years at 8% interest per year. By mutual agreement, the term was modified in 1943 by
reducing the interest to 6% per year from December 1941 until the end of the war and by stipulating
that the mortgagor shall not pay and release the mortgage while the war went on. In 1944, the plaintiff
offered to pay which the defendant refused. Plaintiff filed this action to compel the defendant to accept
his tender of payment. The trial court sustained the defense that payment was premature. Plaintiff
appealed alleging that the provision for non-redemption during the war is against public policy and a
restraint on the freedom of commerce.

ISSUE: Whether or not said provision is against public policy as to render said contract void.
SC RULING: There is nothing immoral or violative of public order in the questioned stipulation. The
morgagee apparently did not want to have their pre-war credit paid with Japanese military notes, and the
mortgagor voluntarily agreed not to do so in consideration of the reduction of the rate of interest. It was
a perfectly equitable and valid transaction. Appellants were bound by said contract and appellees were
not obliged to receive payment before it was due. Hence, the latter had reason not to accept the tender
of payment made to them by the former. Judgment affirmed.
Liability for contractual interest after maturity of note

JARDENIL vs. SOLAS
FACTS:
Salas issued a promissory note where it was clearly agreed that he will pay interest only up to the date
of maturity, or until March 31, 1934, and that payment is extendable by one year but without mention of
interest.
ISSUE:
Is defendant-appellee bound to pay the stipulated interest only up to the date of maturity as fixed in the
promissory note, or up to the date payment is effected?
SC RULING:
As the contract is silent as to whether after that date, in the event of non-payment, the debtor would
continue to pay interest, we cannot in law, indulge in any presumption as to such interest; otherwise, we
would be imposing upon the debtor an obligation that the parties have not chosen to agree upon. Article
1755 of the Civil Code provides that "interest shall be due only when it has been expressly stipulated."
There is nothing in the mortgage deed to show that the terms employed by the parties thereto are at
war with their evident intent. On the contrary the act of the mortgage of granting to the mortgagor on
the same date of execution of the deed of mortgage, an extension of one year from the date of maturity
within which to make payment, without making any mention of any interest which the mortgagor should
pay during the additional period, indicates that the true intention of the parties was that no interest
should be paid during the period of grace. Neither has either of the parties shown that, by mutual
mistake, the deed of mortgage fails to express their agreement, for if such mistake existed, plaintiff
would have undoubtedly adduced evidence to establish it and asked that the deed be reformed
accordingly, under the parcel-evidence rule.
As the contract is clear and unmistakable and the terms employed therein have not been shown to belie
or otherwise fail to express the true intention of the parties and that the deed has not been assailed on
the ground of mutual mistake which would require its reformation, same should be given its full force
and effect. When a party sues on a written contract and no attempt is made to show any vice therein, he
cannot be allowed to lay any claim more than what its clear stipulations accord. His omission, to which
the law attaches a definite warning as an in the instant case, cannot by the courts be arbitrarily supplied
by what their own notions of justice or equity may dictate.
Increase in the prince when sale is on installment

MANILA TRADING vs. TAMARAW PLANTATION
FACTS:
On August 23, 1920, the plaintiff sold to the defendant the goods mentioned in Exhibit A of the
defendant for P5,300, if paid in cash, but as it was not so paid, there was added to said amount the sum
of P265, which is 5 per cent thereon, making a total of P5,565. The defendant paid the first six monthly
installments provided in Exhibit A, plus P213.89 on account of the seventh installment, that is, a total of
P2,996.39, and failed to pay the rest, namely, P2,568.61; wherefore said goods were on August 15,
1922, sold by the sheriff of Mindoro at public auction, as provided in Act No. 1508, the proceeds of the
sale having amounted to P2,000, which were paid to the plaintiff.
On December 24, 1920, the plaintiff sold to the defendant the goods mentioned in Exhibit B for
P2,550, if paid in cash. To said amount there was added the sum of P127.50, which is 5 per cent thereon,
making a total of P1,877.50. The defendant paid P800 upon the delivery of the goods, but did not pay
anything more afterwards; wherefore said goods were sold at public auction by the sheriff of Mindoro on
August 15, 1922, for P1,000, as provided in Act No. 1508, said sum of P1,000 having been paid to the
plaintiff.
The trial court, in view of said stipulation of facts, rendered judgment, sentencing the defendant
to pay to the plaintiff company
ISSUE:
Whether or not the increase of the price of an article sold on credit upon its cash sale value constitutes
interest within the meaning of the Usury Law.
SC RULING:
No. The instant case is of a chattel mortgage given to secure payment for the agricultural
implements sold by the plaintiff to the defendant. The transaction was carried out between the parties in
good faith, and there is no proof that the contract of sale of agricultural effects, secured by a mortgage
on the same goods, was executed as a loan of money. This being so, the parties may freely agree upon
the price of the goods sold, and it cannot be said that the credit, greater than the cash, price, constitutes

interest within the meaning of the Usury Law. The increase of the price, when the sale is on credit,
serves not only to cover the expenses generally entailed by such transactions on credit, but also to
encourage cash sales, so useful to commerce. It is up to the purchaser to decide which price he prefers
in making the purchase. If he prefers to purchase for cash, he obtains a 5 per cent reduction of the price;
if, on the contrary, he prefers to buy on credit, he cannot complain of the increase of the price
demanded by the vendor.
"On principle and authority, the owner of property, whether real or personal, has a perfect right
to name the price on which he is willing to sell, and to refuse to accede to any other. He may offer to sell
at a designated price for cash or at a much higher price on credit, and a credit sale will not constitute
usury however great the difference between the two prices, unless the buying and selling was a mere
pretense." It is also established that: "A vendor mat well fix upon the property one price for cash and
another for credit, and the mere fact that the credit price exceeds the costs price by a greater
percentage than is permitted by the usury laws is a matter of concern to the parties but not to the
courts, barring evidence of bad faith. If the parties have acted in good faith such a transaction is not a
loan, and not usurious."
Attorneys fees
ANDREAS vs. GREEN
FACTS:
The defendant and appellant questions the clause in the promissory note sued on reading "and a further
sum equal to 10 per cent of the total amount due as and for expenses of collection for attorney's fees
whether actually incurred or not," as in contravention of the Usury Law.
SC RULING: Stipulations in negotiable instruments for the payment of collection and attorney's fees are
not forbidden by lay in this jurisdiction. The lender may without violating the Usury Law provide in a note
for an attorney's fee to cover the cost of collection. This has been definitely held in a long line of cases
both here and elsewhere. The purpose of a stipulation in a note for reasonable attorney's fees
is not to give the lender a larger compensation for the loan than the law allows, but is to
safeguard the lender against future loss or damage by being compelled to retain counsel to
institute judicial proceedings to collect his debt.
The only difference between the provision of the promissory note here complained of and the provision
of the promissory notes in any of the above-cited cases is that the note before us contains these
additional words: "whether actually incurred or not." But this clause is merely descriptive in nature is
in reality merely surplusage. The idea of the parties was to provide for a penalty to cover expenses of
collection. That such expenses were actually incurred in this case is now before the appellate court for
decision. Whether the creditor could enforce the penalty where expenses of collection and attorney's
fees were not actually incurred, is questionable, but does not affect the result in this case.
Judgment affirmed.
Penalty for Breach

SENTINEL INSURANCE CO. vs. CA
FACTS:
Petitioner Sentinel Insurance Co., Inc., was the surety in a contract of suretyship with Nemesio Azcueta,
Sr., who is doing business under the name and style of 'Malayan Trading both of them bound themselves,
'jointly and severally, to fully and religiously guarantee the compliance with the terms and stipulations of
the credit line granted by private respondent Rose Industries, Inc., in favor of Nemesio Azcueta, Azcueta
made various purchases of tires, batteries and tire tubes from the private respondent but failed to pay
therefor, prompting Rose Industries to demand payment but because Azcueta failed to settle his
accounts, the case was referred to the Insurance Commissioner who invited the attention of the
petitioner on the matter and the latter cancelled the Suretyship Agreement with due notice to the
private respondent.
Meanwhile, private respondent Rose Industries filed with the respondent court of Makati a
complaint for collection of sum of money against herein petitioner and Azcueta.The decision having
become final and executory, the prevailing party moved for its execution which respondent judge
granted and pursuant thereto, a notice of attachment and levy was served upon the petitioner. On the
same day.Contending that the order was issued with grave abuse of discretion, petitioner went to
respondent court on a petition for certiorari and mandamus to compel the court below to clarify
its decision to pay interest at 14% per annum on the principal obligation and damage dues at the rate
of 2% every 45 days commencing from April 30, 1975 up to the time the full amount is fully paid.
ISSUE:
Whether or not respondent court should not have made an award for "damage dues" at such late stage
of the proceeding since said dues were not the subject of the award made by the trial court.
SC RULING:
To clarify an ambiguity or correct a clerical error in the judgment, the court may resort to the pleadings
filed by the parties, the findings of fact and the conclusions of law expressed in the text or body of the

decision. this was what respondent court did in resolving the original petition.
The findings made by respondent court did not actually nullify the judgment of the trial court.
More specifically, the statement that the imposition of 2% interest every 45 days commencing from April
30, 1975 on top of the 14% per annum (as would be the impression from a superficial reading of the
dispositive portion of the trial court's decision) would be usurious is a sound observation. It should,
however, be stressed that such observation was on the theoretical assumption that the rate
of 2% is being imposed as interest, not as damage dues which was the intendment of the
trial court.
Damage dues in this case do not include and are not included in the computation of interest as
the two are of different categories and are distinct claims which may be demanded separately, in the
same manner that commissions, fines and penalties are excluded in the computation of interest where
the loan or forbearance is not secured in whole or in part by real estate or an interest therein.
While interest forms part of the consideration of the contract itself, damage dues (penalties, and so
forth) are usually made payable only in case of default or non-performance of the contract. 11 Also,
although interest is subject to the provisions of the Usury Law, there is no policy or provision in such law
preventing the enforcement of damage dues although the effect may be to increase the sum payable
beyond the prescribed ceiling rates.
The lower court's decision explicitly ordered petitioner to pay private respondent the amount of
P198,602.41 as principal obligation including interest and damage dues, which is a clear and
unequivocal indication of the lower court's intent to award both interest and damage dues.
Bank Deposits
Cases:
Nature of Bank Deposits
GOPOCO GROCERY vs. PACIFIC COAST BISCUIT
FACTS:
The Mercantile Bank of China was declared in liquidation. Creditors and all those who had any claim
against it were required to present the same before the Bank Commissioner within 90 days. Gopoco
presented its claim.
ISSUE:
What is the real nature of current account a savings deposit?
SC RULING:
The current account and savings deposit have lost their character as deposits and are converted into
simple commercial loans because in cases of such deposits, the bank has made use thereof in the
ordinary course of its transactions as an institution engaged in the banking business, not because it so
wishes but precisely because of the authority deemed to have been granted to it by the depositors to
enable him to collect the interest which they had been and they are now collecting, and by virtue further
of the authority granted to it by Section 125 of the Corporation Law and the Banking Law. The deposits
created a juridical relation of creditor and debtor. The back acquired ownership of the money deposited.
CENTRAL BANK OF THE PHIL. vs. MORFE

FACTS:
On February 18, 1969 the Monetary Board found the Fidelity Savings Bank to be insolvent. The
Board directed the Superintendent of Banks to take charge of its assets, forbade it to do business and
instructed the Central Bank Legal Counsel to take legal actions. Central Bank of the Philippines, then
filed the corresponding petition for assistance and supervision in the Court of First Instance of Manila.
Prior to the institution of the liquidation proceeding but after the declaration of insolvency, the
spouses Job Elizes and Marcela P. Elizes filed a complaint in the Court of First Instance of Manila against
the Fidelity Savings Bank for the recovery of the sum of P50, 584 as the balance of their time deposits. In
the judgment rendered, the Fidelity Savings Bank was ordered to pay the Elizes spouses the sum of P50,
584 plus accumulated interest.
In another case, spouses Augusta A. Padilla and Adelaida Padilla secured on April 14, 1972 a
judgment against the Fidelity Savings Bank for the sums of P80,000 as the balance of their time
deposits, plus interests, P70,000 as moral and exemplary damages and P9,600 as attorney's fees.
After the two judgments were rendered and upon motions of the Elizes and Padilla spouses but
over the opposition of the Central Bank, the court directed the latter as liquidator, to pay their time
deposits as preferred judgments, evidenced by final judgments. From the said order, the Central Bank
appealed to this Court by certiorari. It contends that the final judgments secured by the Elizes and
Padilla spouses do not enjoy any preference because (a) they were rendered after the Fidelity Savings
Bank was declared insolvent and (b) under the charter of the Central Bank and the General Banking Law,
no final judgment can be validly obtained against an insolvent bank.
ISSUE: Whether or not a final judgment for the payment of a time deposit in a savings bank
which
judgment was obtained after the bank was declared insolvent, is a preferred claim
against the bank.
SC RULING:

Section 29 of Republic Act No. 265 provides:
Whenever upon examination by the Superintendent or his examiners or agents into the
condition of any banking institution, it shall be disclosed that the condition of the
same is
one of insolvency, or that its continuance in business would involve probable loss to its
depositors or creditors, it shall be the duty of the Superintendent forthwith, in writing to
inform the Monetary Board of the facts, and the Board, upon finding the statements of
the Superintendent to be true, shall forthwith forbid the institution to do business in the
Philippines and shall take charge of its assets and proceeds according to law.
xxx xxx xxx
If the Monetary Board shall determine that the banking institution cannot resume
business with safety to its creditors, it shall, by the Office of the Solicitor General, file a petition
in the Court of First Instance reciting the proceedings which have been taken and praying the
assistance and supervision of the court in the liquidation of the affairs of the same. The
Superintendent shall thereafter, upon order of the Monetary Board and under the supervision of
the court and with all convenient speed, convert the assets of the banking institution to money.
Section 30 of the same law also provides that:
In case of liquidation of a banking institution, after payment of the costs of the
proceedings, including reasonable expenses and fees of the Central Bank to be allowed by the
court, the Central Bank shall pay the debts of such institution, under the order of the court, in
accordance with their legal priority.
The trial court or, to be exact, the liquidation court noted that there is no provision in the charter
of the Central Bank in the General Banking Law (Republic Acts Nos. 265 and 337, respectively) which
suspends or abates civil actions against an insolvent bank pending in courts other than the liquidation
court. It reasoned out that, because such actions are not suspended, judgments against insolvent banks
could be considered as preferred credits under article 2244(14)(b) of the Civil Code. It further noted that,
in contrast with the Central Act, section 18 of the Insolvency Law provides that upon the issuance by the
court of an order declaring a person insolvent "all civil proceedings against the said insolvent shall be
stayed."
On the other hand, the Central Bank argues that after the Monetary Board has declared that a
bank is insolvent and has ordered it to cease operations, the Board becomes the trustee of its assets "for
the equal benefit of all the creditors, including the depositors". The Central Bank cites the ruling that
"the assets of an insolvent banking institution are held in trust for the equal benefit of all creditors, and
after its insolvency, one cannot obtain an advantage or a preference over another by an attachment,
execution or otherwise" it is also the stand of the Central Bank is that all depositors and creditors of the
insolvent bank should file their actions with the liquidation court.
It cites the ruling that "a creditor of an insolvent state bank in the hands of a liquidator who
recovered a judgment against it is not entitled to a preference for (by) the mere fact that he is a
judgment creditor." It should be noted that fixed, savings, and current deposits of money in banks and
similar institutions are not true deposits. They are considered simple loans and, as such, are not
preferred credits
The aforequoted section 29 of the Central Bank's charter explicitly provides that when a bank is
found to be insolvent, the Monetary Board shall forbid it to do business and shall take charge of its
assets. Evidently, one purpose in prohibiting the insolvent bank from doing business is to prevent some
depositors from having an undue or fraudulent preference over other creditors and depositors.
That purpose would be nullified if, as in this case, after the bank is declared insolvent, suits by
some depositors could be maintained and judgments would be rendered for the payment of their
deposits and then such judgments would be considered preferred credits under article 2244 (14) (b) of
the Civil Code.
ARTICLE 2244. With reference to other property, real and personal, of the debtor, the following
claims or credits shall be preferred in the order named:
xxx xxx xxx
(14) Credits which, without special privilege, appear in (a) a public instrument; or (b) in a
final judgment, if they have been the subject of litigation. These credits shall have preference
among themselves in the order of priority of the dates of the instruments and of the judgments,
respectively.
xxx xxx xxx
We are of the opinion that such judgments cannot be considered preferred and that article
2244(14)(b) does not apply to judgments for the payment of the deposits in an insolvent savings bank
which were obtained after the declaration of insolvency. The Rohr case supplies some illumination on the
disposition of the instant case. The Supreme Court of Montana said:
The general principle of equity that the assets of an insolvent are to be
distributed ratably among general creditors applies with full force to the distribution of the
assets of a bank. A general depositor of a bank is merely a general creditor, and, as
such,
is
not entitled to any preference or priority over other general creditors. xxx
The circumstance that the Fidelity Savings Bank, having stopped operations since February 19,
1969, was forbidden to do business, and that ban would include the payment of time deposits, implies
that suits for the payment of such deposits were prohibited.
The trial court's order which contains the Bank Liquidation Rules and Regulations, indicated that,
in Step IV, the court directed the Central Bank, as liquidator, to submit a Project of Distribution which
should include "a list of the preferred credits to be paid in full in the order of priorities established in
Articles 2241, 2242, 2243, 2246 and 2247" of the Civil Code. It is important to note that Article 2244 was
not mentioned. Therefore, there is no cogent reason why the Elizes and Padilla spouses should not

adhere to the procedure outlined in the said rules and regulations.
Liability for failure to return savings deposit

GUINGONA vs. CITY FISCAL OF MANILA
FACTS:
The instant petition seeks to prohibit public respondents from proceeding with the preliminary
investigation of I.S. No. 81-31938, in which petitioners were charged by private respondent Clement
David, with estafa and violation of Central Bank Circular No. 364 and related regulations regarding
foreign exchange transactions principally, on the ground of lack of jurisdiction in that the allegations of
the charged, as well as the testimony of private respondent's principal witness and the evidence through
said witness, showed that petitioners' obligation is civil in nature.
From March 20, 1979 to March, 1981, David invested with the Nation Savings and Loan
Association, (hereinafter called NSLA) the sum of P1,145,546.20 on nine deposits, P13,531.94 on savings
account deposits (jointly with his sister, Denise Kuhne), US$10,000.00 on time deposit, US$15,000.00
under a receipt and guarantee of payment and US$50,000.00 under a receipt dated June 8, 1980 (au
jointly with Denise Kuhne), that David was induced into making the aforestated investments by Robert
Marshall an Australian national who was allegedly a close associate of petitioner Guingona Jr., then NSLA
President, petitioner Martin, then NSLA Executive Vice-President of NSLA and petitioner Santos, then
NSLA General Manager; that on March 21, 1981 N LA was placed under receivership by the Central Bank,
so that David filed claims therewith for his investments and those of his sister; that on July 22, 1981
David received a report from the Central Bank that only P305,821.92 of those investments were entered
in the records of NSLA; that, therefore, the respondents in I.S. No. 81-31938 misappropriated the balance
of the investments, at the same time violating Central Bank Circular No. 364 and related Central Bank
regulations on foreign exchange transactions; that after demands, petitioner Guingona Jr. paid only
P200,000.00, thereby reducing the amounts misappropriated to P959,078.14 and US$75,000.00."
At the inception of the preliminary investigation before respondent Lota, petitioners moved to
dismiss the charges against them for lack of jurisdiction because David's claims allegedly comprised a
purely civil obligation which was itself novated. Fiscal Lota denied the motion to dismiss (Petition, p. 8).
But, after the presentation of David's principal witness, petitioners filed the instant petition
because: (a) the production of the Promisory Notes, Banker's Acceptance, Certificates of Time Deposits
and Savings Account allegedly showed that the transactions between David and NSLA were simple loans,
i.e., civil obligations on the part of NSLA which were novated when Guingona, Jr. and Martin assumed
them; and (b) David's principal witness allegedly testified that the duplicate originals of the aforesaid
instruments of indebtedness were all on file with NSLA, contrary to David's claim that some of his
investments were not record
ISSUE:
Whether or not the petitioner in this case is properly charge of estaffa through misappropriation
of funds deposited in NSLA making them subject to the jurisdiction of the respondents investigation.
SC Ruling:
There is merit in the contention of the petitioners that their liability is civil in nature and
therefore, public respondents have no jurisdiction over the charge of estaffa.
It must be pointed out that when private respondent David invested his money on nine. and
savings deposits with the aforesaid bank, the contract that was perfected was a contract of
simple loan or mutuum and not a contract of deposit. Thus, Article 1980 of the New Civil Code
provides that:
Article 1980. Fixed, savings, and current deposits of-money in banks and similar
institutions shall be governed by the provisions concerning simple loan.
In the case of Central Bank of the Philippines vs. Morfe (63 SCRA 114,119 [1975], We said:
It should be noted that fixed, savings, and current deposits of money in banks and
similar institutions are hat true deposits. are considered simple loans and, as such, are
not preferred credits (Art. 1980 Civil Code; In re Liquidation of Mercantile Batik of China
Tan Tiong Tick vs. American Apothecaries Co., 66 Phil 414; Pacific Coast Biscuit Co. vs.
Chinese Grocers Association 65 Phil. 375; Fletcher American National Bank vs. Ang
Chong UM 66 PWL 385; Pacific Commercial Co. vs. American Apothecaries Co., 65 PhiL
429; Gopoco Grocery vs. Pacific Coast Biscuit CO.,65 Phil. 443)."
This Court also declared in the recent case of Serrano vs. Central Bank of the Philippines (96 SCRA 102
[1980]) that:
Bank deposits are in the nature of irregular deposits. They are really 'loans because they
earn interest. All kinds of bank deposits, whether fixed, savings, or current are to be
treated as loans and are to be covered by the law on loans (Art. 1980 Civil Code Gullas
vs. Phil. National Bank, 62 Phil. 519). Current and saving deposits, are loans to a bank
because it can use the same. The petitioner here in making time deposits that earn
interests will respondent Overseas Bank of Manila was in reality a creditor of the
respondent Bank and not a depositor. The respondent Bank was in turn a debtor of
petitioner. Failure of the respondent Bank to honor the time deposit is failure to pay its
obligation as a debtor and not a breach of trust arising from a depositary's failure to
return the subject matter of the deposit (Emphasis supplied).
Hence, the relationship between the private respondent and the Nation Savings and Loan
Association is that of creditor and debtor; consequently, the ownership of the amount deposited was
transmitted to the Bank upon the perfection of the contract and it can make use of the amount
deposited for its banking operations, such as to pay interests on deposits and to pay withdrawals. While

the Bank has the obligation to return the amount deposited, it has, however, no obligation to return or
deliver the same money that was deposited. And, the failure of the Bank to return the amount deposited
will not constitute estafa through misappropriation punishable under Article 315, par. l(b) of the Revised
Penal Code, but it will only give rise to civil liability over which the public respondents have nojurisdiction.
Title XII - DEPOSIT

Chapter 1
Deposit in General and its Different Kinds
Concept
DEPOSIT is a contract constituted from the moment a person receives a thing belonging to another, with
the obligation of safely keeping it and of returning the same.
If the safekeeping of the thing delivered is not the principal purpose of the contract, there is no deposit
but some other contract.
Degree of care: Exercise over the thing deposited the same diligence as he would exercise over his
property.
Characteristics
o It is a real contract perfected by delivery.
o It is naturally gratuitous, unless the contrary is stipulated or the depositary is engaged in the
business goods.
o The purpose is primarily custody; where the custody is secondary, it is not deposit.
o The contract is either unilateral or bilateral, according to whether it is gratuitous or onerous.
o The depositary cannot make use of the thing deposited without express permission.
(*when the preservation of the thing deposited requires its use, it must be used but only for that
purpose (Art. 1977))
o Only movables can be the object of contractual deposit.
Cases:
Effect if balance of commission retained by agent
US vs. Igpuara
FACTS:
The defendant therein is charged with the crime of estafa, for having swindled Juana Montilla and
Eugenio Veraguth out of P2,498 Philippine currency, which he had take on deposit from the former to be
at the latter's disposal.
The defendant received P2,498 is a fact proven. The defendant drew up a document declaring
that they remained in his possession, which he could not have said had he not received them. They
remained in his possession, surely in no other sense than to take care of them, for they remained has no
other purpose. They remained in the defendant's possession at the disposal of Veraguth; but on August
23 of the same year Veraguth demanded for him through a notarial instrument restitution of them, and to
date he has not restored them.
ISSUE:
Whether or not the contract between the defendant and Montilla and Veraguth are that of
deposit.
SC RULING:
It is erroneous to assert that the certificate of deposit in question is negotiable like any other
commercial instrument: First, because every commercial instrument is not negotiable; and second,
because only instruments payable to order are negotiable. Hence, this instrument not being to order but
to bearer, it is not negotiable.
It is also erroneous to assert that sum of money set forth in said certificate is, according to it, in
the defendant's possession as a loan. In a loan the lender transmits to the borrower the use of the thing
lent, while in a deposit the use of the thing is not transmitted, but merely possession for its custody or
safe-keeping.
In order that the depositary may use or dispose of the things deposited, the depositor's consent is
required, and then:
The rights and obligations of the depositary and of the depositor shall cease, and the rules and
provisions applicable to commercial loans, commission, or contract which took the place of the
deposit shall be observed. (Art. 309, Code of Commerce.)
The defendant has shown no authorization whatsoever or the consent of the depositary for using
or disposing of the P2,498, which the certificate acknowledges, or any contract entered into with the
depositor to convert the deposit into a loan, commission, or other contract.
That demand was not made for restitution of the sum deposited, which could have been claimed
on the same or the next day after the certificate was signed, does not operate against the depositor, or
signify anything except the intention not to press it. Failure to claim at once or delay for sometime in
demanding restitution of the things deposited, which was immediately due, does not imply such
permission to use the thing deposited as would convert the deposit into a loan.
Article 408 of the Code of Commerce of 1829, previous to the one now in force, provided:
The depositary of an amount of money cannot use the amount, and if he makes use of it, he shall
be responsible for all damages that may accrue and shall respond to the depositor for the legal
interest on the amount.

Thus the defendant is liable.
Effect if foreign currency deposited is sold by bank

BPI vs. IAC
[The original parties to this case were Rizaldy T. Zshornack and the Commercial Bank and Trust Company
of the Philippines [hereafter referred to as "COMTRUST."] In 1980, the Bank of the Philippine Islands
(hereafter referred to as BPI absorbed COMTRUST through a corporate merger, and was substituted as
party to the case.]
FACTS:
Rizaldy Zshornack and his wife, Shirley Gorospe, maintained in COMTRUST, Quezon City Branch, a
dollar savings account and a peso current account. The complaint filed with the trial court alleged that on
December 8, 1975, Zshornack entrusted to COMTRUST, thru Garcia, US $3,000.00 cash (popularly known
as greenbacks) for safekeeping, and that the agreement was embodied in a document, a copy of which
was attached to and made part of the complaint. The document reads:
Makati
Philippines
Cable Address:
"COMTRUST"
COMMERCIAL BANK AND TRUST COMPANY
of the Philippines
Quezon City Branch
December 8, 1975
MR. RIZALDY T. ZSHORNACK

&/OR MRS SHIRLEY E. ZSHORNACK
Sir/Madam:
We acknowledged (sic) having received from you today the sum of US DOLLARS:
THREE THOUSAND ONLY (US$3,000.00) for safekeeping.
Received by:
(Sgd.) VIRGILIO V. GARCIA
It was also alleged in the complaint that despite demands, the bank refused to return the money.
In its answer, COMTRUST averred that the US$3,000 was credited to Zshornack's peso current
account at prevailing conversion rates. It must be emphasized that COMTRUST did not deny specifically
under oath the authenticity and due execution of the above instrument. During trial, it was established
that on December 8, 1975 Zshornack indeed delivered to the bank US $3,000 for safekeeping. When he
requested the return of the money on May 10, 1976, COMTRUST explained that the sum was disposed of
in this manner: US$2,000.00 was sold on December 29, 1975 and the peso proceeds amounting to
P14,920.00 were deposited to Zshornack's current account per deposit slip accomplished by Garcia; the
remaining US$1,000.00 was sold on February 3, 1976 and the peso proceeds amounting to P8,350.00
were deposited to his current account per deposit slip also accomplished by Garcia.
Aside from asserting that the US$3,000.00 was properly credited to Zshornack's current account
at prevailing conversion rates, BPI now posits another ground to defeat private respondent's claim. It now
argues that the contract embodied in the document is the contract of depositum (as defined in Article
1962, New Civil Code), which banks do not enter into. The bank alleges that Garcia exceeded his powers
when he entered into the transaction. Hence, it is claimed, the bank cannot be liable under the contract,
and the obligation is purely personal to Garcia.
ISSUE:
Whether or not the contract in question is a contract of depositum.
SC RULING:
It was a contract of depositum.
In this case, no sworn answer denying the due execution of the document in question, or
questioning the authority of Garcia to bind the bank, or denying the bank's capacity to enter into the
contract, was ever filed. Hence, the bank is deemed to have admitted not only Garcia's authority, but also
the bank's power, to enter into the contract in question.
The document which embodies the contract states that the US$3,000.00 was received by the
bank for safekeeping. The subsequent acts of the parties also show that the intent of the parties was
really for the bank to safely keep the dollars and to return it to Zshornack at a later time, Thus, Zshornack
demanded the return of the money on May 10, 1976, or over five months later.
That arrangement is that contract defined under Article 1962, New Civil Code, which reads: Art.
1962. A deposit is constituted from the moment a person receives a thing belonging to another, with the
obligation of safely keeping it and of returning the same. If the safekeeping of the thing delivered is not
the principal purpose of the contract, there is no deposit but some other contract.
It bears to take note that the object of the contract between Zshornack and COMTRUST was
foreign exchange. Hence, the transaction was covered by Central Bank Circular No. 20, Restrictions on
Gold and Foreign Exchange Transactions, promulgated on December 9, 1949, which was in force at the
time the parties entered into the transaction involved in this case. The circular provides:

As earlier stated, the document and the subsequent acts of the parties show that they intended
the bank to safekeep the foreign exchange, and return it later to Zshornack, who alleged in his complaint
that he is a Philippine resident. The parties did not intended to sell the US dollars to the Central Bank
within one business day from receipt. Otherwise, the contract of depositum would never have been
entered into at all.
Since the mere safekeeping of the greenbacks, without selling them to the Central Bank within
one business day from receipt, is a transaction which is not authorized by CB Circular No. 20, it must be
considered as one which falls under the general class of prohibited transactions. Hence, pursuant to
Article 5 of the Civil Code, it is void, having been executed against the provisions of a
mandatory/prohibitory law. More importantly, it affords neither of the parties a cause of action against the
other. The only remedy is one on behalf of the State to prosecute the parties for violating the law. We
thus rule that Zshornack cannot recover.
Nature of rental of safety deposit box

CA Agro-Industrial Devt. Corp. vs. CA
FACTS:
Petitioner and Spouses Pugao entered into agreement for a sale of land. They deposited the certificates of
title in a safety deposit box in SBTC so that it will be given to petitioner upon full payment. The safety
deposit box has a guard key for the bank and 2 keys for petitioner and the Pugaos. Ramos wanted to buy
the land so she wanted to inspect the certificate of title, but upon opening by petitioner and Spouses
Pugao, the certificates of title were not there anymore. Because the reconstitution of title took time,
Ramos withdrew her offer to purchase. So petitioner filed a case against the bank. But it was dismissed by
the RTC and the CA because they said it was covered by their contractual agreement that the bank is not
responsible for the loss and that it is a contract of lease. The position of petitioner is that it is a contract of
deposit.
ISSUE:
Is the contractual relation between a commercial bank and another party in a contract of rent of a safety
deposit box with respect to its contents placed by the latter one of bailor and bailee or one of lessor and
lessee?
SC RULING:
In the context of our laws which authorize banking institutions to rent out safety deposit boxes, it is clear
that in this jurisdiction, the prevailing rule in the United States has been adopted. Section 72 of the
General Banking Act pertinently provides:
Sec. 72. In addition to the operations specifically authorized elsewhere in this Act, banking institutions
other than building and loan associations may perform the following services:
(a) Receive in custody funds, documents, and valuable objects, and rent safety deposit boxes for the
safeguarding of such effects.
xxx xxx xxx
The banks shall perform the services permitted under subsections (a), (b) and (c) of this section as
depositories or as agents. . . .
Note that the primary function is still found within the parameters of a contract of deposit, i.e., the
receiving in custody of funds, documents and other valuable objects for safekeeping. The renting out of
the safety deposit boxes is not independent from, but related to or in conjunction with, this principal
function. A contract of deposit may be entered into orally or in writing and, pursuant to Article 1306 of the
Civil Code, the parties thereto may establish such stipulations, clauses, terms and conditions as they may
deem convenient, provided they are not contrary to law, morals, good customs, public order or public
policy. The depositary's responsibility for the safekeeping of the objects deposited in the case at bar is
governed by Title I, Book IV of the Civil Code. Accordingly, the depositary would be liable if, in performing
its obligation, it is found guilty of fraud, negligence, delay or contravention of the tenor of the agreement.
In the absence of any stipulation prescribing the degree of diligence required, that of a good father of a
family is to be observed. Hence, any stipulation exempting the depositary from any liability arising from
the loss of the thing deposited on account of fraud, negligence or delay would be void for being contrary
to law and public policy.
With respect to property deposited in a safe-deposit box by a customer of a safe-deposit company, the
parties, since the relation is a contractual one, may by special contract define their respective duties or
provide for increasing or limiting the liability of the deposit company, provided such contract is not in
violation of law or public policy. It must clearly appear that there actually was such a special contract,
however, in order to vary the ordinary obligations implied by law from the relationship of the parties;
liability of the deposit company will not be enlarged or restricted by words of doubtful meaning. The
company, in renting
safe-deposit boxes, cannot exempt itself from liability for loss of the contents by its own fraud or
negligence or that of its agents or servants, and if a provision of the contract may be construed as an
attempt to do so, it will be held ineffective for the purpose. Although it has been held that the lessor of a
safe-deposit box cannot limit its liability for loss of the contents thereof through its own negligence, the
view has been taken that such a lessor may limits its liability to some extent by agreement or stipulation.
Thus, we reach the same conclusion which the Court of Appeals arrived at, that is, that the petition should
be dismissed, but on grounds quite different from those relied upon by the Court of Appeals. In the instant
case, the respondent Bank's exoneration cannot, contrary to the holding of the Court of Appeals, be
based on or proceed from a characterization of the impugned contract as a contract of lease, but rather

on the fact that no competent proof was presented to show that respondent Bank was aware of the
agreement between the petitioner and the Pugaos to the effect that the certificates of title were
withdrawable from the safety deposit box only upon both parties' joint signatures, and that no evidence
was submitted to reveal that the loss of the certificates of title was due to the fraud or negligence of the
respondent Bank. This in turn flows from this Court's determination that the contract involved was one of
deposit. Since both the petitioner and the Pugaos agreed that each should have one (1) renter's key, it
was obvious that either of them could ask the Bank for access to the safety deposit box and, with the use
of such key and the Bank's own guard key, could open the said box, without the other renter being
present.
Since, however, the petitioner cannot be blamed for the filing of the complaint and no bad faith on its part
had been established, the trial court erred in condemning the petitioner to pay the respondent Bank
attorney's fees. To this extent, the Decision of public respondent Court of Appeals must be modified.
Effects of agreement to extend payment of money deposited and to pay interest

Javellana vs. Lim
FACTS:
The defendants executed and subscribed a document in favor of the plaintiff reading as follows:
We have received from Angel Javellana, as a deposit without interest, the sum of two thousand six
hundred and eighty-six cents of pesos fuertes, which we will return to the said gentleman, jointly and
severally, on the 20th of January, 1898. Jaro, 26th of May, 1897. Signed Jose Lim. Signed: Ceferino
Domingo Lim.
When the obligation became due, the defendants begged the plaintiff for an extension of time for
one year for the payment thereof, and binding themselves to pay interest at the rate of 15 per cent per
annum to which the plaintiff acceded;
ISSUE:
Whether the contract is a lease or a deposit.
SC RULING:
The contract entered by the parties was a loan of money with interest.
It must be understood that the debtors were lawfully authorized to make use of the
amount deposited, which they have done, as subsequent shown when asking for an extension of the
time for the return thereof. Acknowledging that they were not able to comply with what had been
stipulated, they engaged to pay interest to the creditor. Such conduct on the part of the debtors is
unquestionable evidence that the transaction entered into between the interested parties was not a
deposit, but a real contract of loan.
Because defendant was not able to return the amount deposited, he agreed to pay interest at the
rate of 15 per cent per annum, it was because, as a matter of fact, he did not have in his possession the
amount deposited. By granting them the extension, evidently confirmed the express permission
previously given to use and dispose of the amount stated as having been deposited, which, in accordance
with the loan. As a matter of course, be inferred that there was no renewal of the contract deposited
converted into a loan, because, as has already been stated, the defendants received said amount by
virtue of real loan contract under the name of a deposit.
Kinds
Judicial (Sequestration) takes place when an attachment or seizure of property in litigation is ordered.
Extra-judicial (Art.1967)
a. Voluntary kind where the delivery is made by the will of the depositor or by two or more persons
each of whom believes himself entitled to the thing deposited.
b. Necessary one made in compliance with a legal obligation, or on the occasion of any calamity, or
by travellers in hotels and inns, or by travellers with common carriers.
The main difference between a voluntary deposit and a necessary deposit is that in the former, the
depositor has a complete freedom in choosing the depositary, whereas in the latter, there is lack of free
choice in the depositor.
Judicial
Extra-judicial
1. Creation
Will of the court
Will of the parties or contract
2. Purpose
Security or to insure the right of a party to Custody and safekeeping
property or to recover in case of favorable
judgment
3. Subject Matter
Movables or immovables,
Movables only
but generally immovables
Always onerous
4. Cause
May be compen-sated or not, but generally

gratuitous
5. When must the thing be returned
Upon order of the court or when litigation is Upon demand of depositor
ended
6. In whose behalf it is held
Person who has a right
Depositor or third person designated
When a deposit becomes a loan or commodatum:
If thing deposited is non-consumable, the contract loses the character of a deposit and acquires that of
a commodatum despite the fact that the parties may have denominated it as a deposit, unless safekeeping
is still the principal purpose.
If thing deposited consists of money/consumable things, the contract is converted into a simple loan or
mutuum unless safekeeping is still the principal purpose in which case it is called an irregular deposit.
Example: bank deposits are irregular deposits in nature but governed by law on loans
Irregular Deposit vs. Simple Loan
Irregular Deposit
o The only benefit is that which accrues to the
depositor
o The depositor can the return of the article at
anytime
Simple Loan
The essential cause for the transaction is the
necessity of the buyer
A lender is bound by the provisions of the

contract and cannot seek restitution until the
time for payment, as provided in the contract
arises
(*from the case of Compania Agricola de Ultramar vs. Nepomoceno, 55 Phil. 283)
Cases:
Deposit with interest
Compania Agricola vs. Nepomoceno
FACTS:
It appears from the record that on March 17, 1927, the registered partnerships, Mariano Velasco &
Co., Mariano Velasco, Sons, & Co., and Mariano Velasco & Co., Inc., were, on petition of the creditors,
declared insolvent by the Court of First Instance of Manila.
On the 16th day of April, 1927, the Compania Agricola de Ultramar filed a claim against one of the
insolvents Mariano Velasco & Co., claiming the sum of P10,000, with the agreed interest thereon at the
rate of 6 per cent per annum from April 5, 1918, until its full payment was a deposit with said Mariano
Velasco & Co. and asked the court to declare it a preferred claim.
The assignee of the insolvency answered the claim by interposing a general denial. The claim was
thereupon referred by the court to a Commissioner to receive the evidence, and on September 23, 1929,
the court rendered a decision declaring that the alleged deposit was a preferred claim for the sum
mentioned, with interest at 6 per cent per annum from April 5, 1918, until paid.
ISSUE:
Whether or not the contract entered into by Compania Agricola with Mariano Velasco & Co. is that
of loan or a deposit.
SC Ruling:
In our opinion the court below erred in finding that the claim of the appellee should be considered
a deposit and a preferred claim. In the case of Gavieres vs. De Tavera (1 Phil., 17), very similar to the
present case, this court held that the transaction therein involved was a loan and not a deposit, the court
held;
Although in the document in question a deposit is spoken of, nevertheless from an
examination of the entire document it clearly appears that the contract was a loan and that such
was the intention of the parties. It is unnecessary to recur to the cannons of interpretation to
arrive at this conclusion. The obligation of the depository to pay interest at the rate of 6 per cent
to the depositor suffices to cause the obligation to be considered as a loan and makes it likewise
evident that it was the intention of the parties that the depository should have the right to make
use of the amount deposited, since it was stipulated that the amount could be collected after
notice of two months in advance. Such being the case, the contract lost the character of a deposit
and acquired that of a loan. (Art. 1768, Civil Code.)
Article 1767 of the Civil Code provides that
"The depository cannot make use of the thing deposited without the express
permission of the depositor."
"Otherwise he shall be liable for losses and damages."
Article 1768 also provides that
"When the depository has permission to make use of the thing deposited, the
contract loses the character of a deposit and becomes a loan or bailment."
"The permission not be presumed, and its existence must be proven."
The two cases quoted are sufficient to show that the ten thousand pesos delivered by the
appellee to Mariano Velasco & Co. cannot de regarded as a technical deposit. But the appellee argues
that it is at least an "irregular deposit."
Manresa, in his Commentaries on the Civil Code (vol. 11, p. 664), states that there are three
points of difference between a loan and an irregular deposit. The first difference which he points out
consists in the fact that in an irregular deposit the only benefit is that which accrues to the depositor,

while in a loan the essential cause for the transaction is the necessity of the borrower. The contract in
question does not fulfill this requirement of an irregular deposit.
In the present case the transaction in question was clearly not for the sole benefit of the
Compania Agricola de Ultramar; it was evidently for the benefit of both parties. Neither could the alleged
depositor demand payment until the expiration of the term of three months.
For the reasons stated, the appealed judgment is reversed, and we hold that the transaction in
question must be regarded as a loan.
Deposit of palay with permission to mill

Baron vs. David
FACTS:
These two actions were instituted in the CFI of Pampanga by the plaintiffs, Silvestra Baron and Guillermo
Baron, for the purpose of recovering from the defendant, Pablo David, the value of palay alleged to have
been sold by the plaintiffs to the defendant in the year 1920.
Both the plaintiffs claim that the palay which was delivered by them to the defendant was sold to the
defendant; while the defendant, on the other hand, claims that the palay was deposited subject to future
withdrawal by the depositors or subject to some future sale which was never effected. He therefore
supposes himself to be relieved from all responsibility by virtue of the fire of January 17, 1921 which
allegedly burned the palay.
SC RULING:
It should be stated that the palay in question was placed by the plaintiffs in the defendants mill with the
understanding that the defendant was at liberty to convert it into rice and dispose of it at his pleasure.
The mill was actively running during the entire season, and as palay was daily coming in from many
customers and as rice was being constantly shipped by the defendant to Manila, or other rice markets, it
was impossible to keep the plaintiffs palay segregated. In fact the defendant admits that the plaintiffs
palay was mixed with that of others.
In view of the nature of the defendants activities and the way in which the palay was handled in the
defendants mill, it is quite certain that all of the plaintiffs palay, which was put in before June 1, 1920,
had been milled and disposed of long prior to the fire of January 17, 1921.
Considering the fact that the defendant had thus milled and doubtless sold the plaintiffs palay prior to
the date of the fire, it results that he is bound to account for its value, and his liability was not
extinguished by the occurrence of the fire. Even supposing that the palay may have been delivered in the
character of deposit, subject to future sale or withdrawal at plaintiffs election, nevertheless if it was
understood that the defendant might mill the palay and he has in fact appropriated it to his own use, he is
of course bound to account for its value.
Under Article 1768 (Art 1978, NCC)of the Civil Code, when the depositary has permission to make use of
the thing deposited, the contract loses the character of mere deposit and becomes a loan or a
commodatum; and of course by appropriating the thing, the bailee becomes responsible for its value. In
this connection we wholly reject the defendants pretense that the palay delivered by the plaintiffs or any
part of it was actually consumed in the fire of January 1921.
Chapter 2
Voluntary Deposit
Section 1 General Provisions
Voluntary Deposit
It is wherein the delivery is made by the will of the depositor or by two or more persons each of
whom believes himself to be entitled to the thing deposited
Voluntary deposit vs. necessary deposit: In voluntary deposit the depositor has complete freedom in
choosing the depositary, whereas in necessary deposit there is a lack of choice in the depositor.
Kinds
a. Where the deposit is by the will of the depositor (complete freedom)
b. Where the deposit is by two claimants, and the thing is to be delivered to the one found to be entitled
to it. (conflicting adversarial claims)
Requisites
A. Capacity of the parties: no special capacity is required- the depositor need not be the owner of the
thing and may even be incapacitated.
1. Where the depositor is capable and the depository is incapable
i.
The depositor may recover the thing while in the depositarys possession.
ii.
If the depositary alienates the thing, he must return the price or amount of enrichment.
2. Where the depositor is incapable, and the depositary is capable. T
i.
The depositary may be compelled to return the thing by the guardians or by the depositor
himself if he should acquire capacity. (Capacity is required in the depositor for claiming the
return but not for making a deposit.)

B. Object must be corporeal and movable. (in extrajudicial deposit)- the purpose of the contract is to
insure restoration of the thing that may disappear.
i.
In judicial deposit (receivership)- real or personal property may be included.
C. Formalities: except for delivery, no formalities are required to perfect the agreement.
Section 2 Obligations of Depositary
Rights and Obligations of the Parties
a. To preserve the thing
1. Agreement that the depositary may use the thing deposited
GR: The depositary may not to make use of the thing deposited unless authorized. Deposit is for
safekeeping not for use.
Exceptions:
a. Expressly authorized by the depositor
b. Such use is necessary for its preservation but limited for the purpose only
Effect of unauthorized use: Liability for damages
Effects of authorized use:
Rule if the thing deposited is a non-consumable thing: The contract loses the character of a
deposit and acquires that of a commodatum despite the fact that the parties may have
denominated it as deposit.
Exception: Safekeeping is still the principal purpose of the contract.
Rule if the thing deposited is money or other consumable thing: The contract is converted into
a simple loan or mutuum.
Exception: Safekeeping is still the principal purpose of the contract, but it now becomes an
irregular deposit.
2. Delegation of custody
GR: The depositary is not allowed to deposit the thing with a third person.
Exception: The depositary is authorized by express stipulation.
Liabilities: The depositary is liable for loss of the thing deposited when:
a. He transfers the deposit with a third person without authority although there is no negligence on
his part and the third person
b. He deposits the thing with a third person who is manifestly careless or unfit although authorized,
even in the absence of negligence; or
c. The thing is lost through the negligence of his employees whether the latter are manifestly
careless or not.
Exemption from liability: The thing is lost through the negligence of the third person with whom he was
allowed to deposit the thing if such person is not manifestly careless or unfit.
3. Change of the manner of deposit
GR: The depositary may not change the way/manner of deposit.
Exception: If there are circumstances indicating that the depositor would consent to the change.
Requisites:
a. The depositary must notify the depositor of such change
b. The depositary must wait for the reply of the depositor to such change
Exception: If the delay of the reply would cause danger.
4. Preservation of the value
If the thing deposited should earn interest, the depositary is under obligation to:
a. to collect interest as it fall due
b. to take steps to preserve its value and rights corresponding to it
The depositary is bound to collect the capital, as well as the interest, when due.
5. Secrecy of deposit
The depositary has the obligation to:
a. Return the thing deposited when delivered closed and sealed in the same condition
b. Pay for damages should the seal or lock be broken through his fault, which is presumed unless
proven otherwise
c. Keep the secret of the deposit when the seal or lock is broken with or without his fault.
The depositary is authorized to open the thing deposited which is closed and sealed when there is:
a. Presumed authority (i.e. when the key has been delivered to him or the instructions of the
depositor cannot be done without opening it)
b. Necessity
To return the thing
1. To whom
The depositary is obliged to return the thing deposited, when required to:
The depositor
To his heirs or successors
To the person who may have been designated in the contract

If the depositor was incapacitated at the time of making the deposit, the property must be returned to:
His guardian or administrator
To the person who made the deposit
To the depositor himself should he acquire capacity
Even if the depositor had the capacity at the time of making the deposit but he subsequently loses his
capacity during the deposit, the thing must be returned to his legal representative.
2. What is to be returned
i.
If money
-Obligation to pay interest on sums converted for personal use.
ii.
If specific thing
-Obligation to return products, accessories and accessions.
iii.
If generic thing
Unless there is a stipulation to the contrary, the depositary may commingle grain or other
articles of the same kind and quality, in which case the various depositors shall own or
have a proportionate interest in the mass.
3. Form or manner of return
If thing deposited is divisible and there are joint depositors:
Each depositor can demand only his proportionate share thereto.
If thing is not divisible and the obligation is solidary:
Rules on active solidarity shall apply, i.e. each one of the solidary depositors may do whatever maybe
useful to the others but not anything which may be prejudicial to the latter, and the depositary may
return the thing to anyone of the solidary depositors unless a demand, judicial or extrajudicial, for its
return has been made by one of them in which case, delivery should be made to him.
4. Place of return
GR: At the place agreed upon by the parties, transportation expenses shall be borne by the depositor.
Exception: In the absence of stipulation, at the place where the thing deposited might be even if it
should not be the same place where the original deposit was made.
5. Time of return
GR: The thing deposited must be returned to the depositor upon demand, even though a specified
period or time for such return may have been fixed.
Exceptions:
a. When the thing is judicially attach while in the depositarys possession
b. When notified of the opposition of a third person to the return or the removal of the thing
deposited
6. Set-off
GR: The bank can set-off the deposits in its hands for the payment of any indebtedness to it on the
part of the depositor.
However, if the depositor is a mere indorser of a check which was later dishonoured, the right of action
does not accrue until a notice of dishonour is given to him.
7. Banks failure to return amount
Claims for recovery of time deposits plus interest from an insolvent bank shall be filed before the
liquidation proceedings in the proper court. Failure of bank to honor the time deposit is not a breach of
trust arising from a depositarys failure to return the subject matter but a mere failure to pay its
obligation as a debtor.
8. When bank officials may be guilty of estafa
GR: Failure of bank to return the amount deposited will not constitute estafa through misappropriation.
Exception: (Guingona va City Fiscal of Manila)
9. Earnest money
-If a sale did not materialize, the earnest money is considered to be deposited
Cases:
Commingling of Funds; Obligation for money taken by force majeure
Roman Catholic Bishop of Jaro vs. de la Pena
FACTS:
Appeal from the judgment of the Court of First Instance of Iloilo.
The plaintiff, the Roman Catholic Bishop of Jaro, is the trustee of a charitable donation made for
the construction of a leper hospital. Father Agustin de la Pea was the duly authorized representative of
the plaintiff to receive the legacy. Gregorio de la Pea is the administrator of the estate of Father De la
Pea.
In the year 1898 the books of Father De la Pea, as trustee, showed that he had on hand as such
trustee the sum of P6,641.00, collected by him for the charitable purposes aforesaid. In the same year he
deposited in his personal account P19, 000 in the Hongkong and Shanghai Bank at Iloilo. Shortly
thereafter and during the war of the revolution, Father De la Pea was arrested by the military authorities
as a political prisoner, and while detained, there was an order on said bank in favor of the United States

Army officer for the sum deposited in said bank. The money was taken from the bank by the military
authorities by virtue of such order, was confiscated and turned over to the Government. The trust funds
were a part of the funds deposited and which were removed and confiscated by the military authorities of
the United States.
ISSUE: Whether or not Father de la Pea is responsible for the loss of the money.
SC RULING:
NO. Father de la Pea is not responsible for the loss of the money as it was taken by force
majeure. Although the Civil Code states that "a person obliged to give something is also bound to
preserve it with the diligence pertaining to a good father of a family" (art. 1094), it also provides,
following the principle of the Roman law, major casus est, cui humana infirmitas resistere non potest,
that "no one shall be liable for events which could not be foreseen, or which having been foreseen were
inevitable, with the exception of the cases expressly mentioned in the law or those in which the obligation
so declares." (Art. 1105.)
By placing the money in the bank and mixing it with his personal funds De la Pea did not thereby
assume an obligation different from that under which he would have lain if such deposit had not been
made, nor did he thereby make himself liable to repay the money at all hazards. The fact that he placed
the trust fund in the bank in his personal account does not add to his responsibility. Such deposit did not
make him a debtor who must respond at all hazards.
There was no law prohibiting him from depositing it as he did and there was no law which
changed his responsibility by reason of the deposit. While it may be true that one who is under obligation
to do or give a thing is in duty bound, when he sees events approaching the results of which will be
dangerous to his trust, to take all reasonable means and measures to escape or, if unavoidable, to temper
the effects of those events, we do not feel constrained to hold that, in choosing between two means
equally legal, he is culpably negligent in selecting one whereas he would not have been if he had selected
the other.
The court, therefore, finds and declares that the money which is the subject matter of this action
was deposited by Father De la Pea in the Hongkong and Shanghai Banking Corporation of Iloilo; that said
money was forcibly taken from the bank by the armed forces of the United States during the war of the
insurrection; and that said Father De la Pea was not responsible for its loss.
Right of bank to apply a deposit to the debt of the depositor

Associated Bank (now Westmont Bank) vs. Tan
While banks are granted by law the right to debit the value of a dishonored check from a depositors
account, they must do so with the highest degree of care, so as not to prejudice the depositor unduly.
FACTS:
Vicente Henry Tan (hereafter TAN) is a businessman and a regular depositor-creditor of the
Associated Bank (hereinafter referred to as the BANK). Sometime in September 1990, he deposited a
postdated UCPB check with the said BANK in the amount of P101,000.00 issued to him by a certain Willy
Cheng from Tarlac. The check was duly entered in his bank record thereby making his balance in the
amount of P297,000.00, as of October 1, 1990, from his original deposit of P196,000.00. Allegedly, upon
advice and instruction of the BANK that the P101,000.00 check was already cleared and backed up by
sufficient funds, TAN, on the same date, withdrew the sum of P240,000.00, leaving a balance of
P57,793.45. A day after, TAN deposited the amount of P50,000.00 making his existing balance in the
amount of P107,793.45, because he has issued several checks to his business partners.
However, his suppliers and business partners went back to him alleging that the checks he issued
bounced for insufficiency of funds. Thereafter, TAN, thru his lawyer, informed the BANK to take positive
steps regarding the matter for he has adequate and sufficient funds to pay the amount of the subject
checks. Nonetheless, the BANK did not bother nor offer any apology regarding the incident. Consequently,
TAN, as plaintiff, filed a Complaint for Damages on December 19, 1990, with the Regional Trial Court of
Cabanatuan City.
In his [C]omplaint, [respondent] maintained that he had sufficient funds to pay the subject checks
and alleged that his suppliers decreased in number for lack of trust.
By way of affirmative defense, petitioner averred that respondent had no cause of action against
it and argued that it has all the right to debit the account of the respondent by reason of the dishonor of
the check deposited by the respondent which was withdrawn by him prior to its clearing
ISSUE # 1:
Whether or not the petitioner, which is acting as a collecting bank, has the right to debit the
account of its client for a check deposit which was dishonored by the drawee bank.
SC RULING:
A bank generally has a right of setoff over the deposits therein for the payment of any
withdrawals on the part of a depositor. The right of a collecting bank to debit a clients account for the
value of a dishonored check that has previously been credited has fairly been established by
jurisprudence. To begin with, Article 1980 of the Civil Code provides that fixed, savings, and current
deposits of money in banks and similar institutions shall be governed by the provisions concerning simple
loan."
Hence, the relationship between banks and depositors has been held to be that of creditor and
debtor. Thus, legal compensation under Article 1278 10 of the Civil Code may take place "when all the
requisites mentioned in Article 1279 are present,as follows:

"(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the
same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons
and communicated in due time to the debtor."
ISSUE #2:
Whether or not the right to set off has been properly exercised by the Bank.
SC RULING:
No, the bank did not properly exercise the right accorded to it.
It is undisputed -- nay, even admitted -- that purportedly as an act of accommodation to a valued
client, petitioner allowed the withdrawal of the face value of the deposited check prior to its clearing. That
act certainly disregarded the clearance requirement of the banking system. Such a practice is unusual,
because a check is not legal tender or money; 21 and its value can properly be transferred to a
depositors account only after the check has been cleared by the drawee bank. 22
Under ordinary banking practice, after receiving a check deposit, a bank either immediately credit
the amount to a depositors account; or infuse value to that account only after the drawee bank shall
have paid such amount.23 Before the check shall have been cleared for deposit, the collecting bank can
only "assume" at its own risk -- as herein petitioner did -- that the check would be cleared and paid out.
Further, the reservation made by the bank that it assumes no responsibility beyond carefulness in
selecting correspondents, and until such time as actual payments shall have come to its possession, the
Bank reserves the right to charge back to the Depositors account any amounts previously credited
whether or not the deposited item is returned, this reservation is not enough to insulate the bank from
any liability. It is indeed arguable that "in signing the deposit slip, the depositor does so only to identify
himself and not to agree to the conditions set forth at the back of the deposit slip."
Moreover, by the express terms of the stipulation, petitioner took upon itself certain obligations as
respondents agent, consonant with the well-settled rule that the relationship between the payee or
holder of a commercial paper and the collecting bank is that of principal and agent. As a general rule, a
bank is liable for the wrongful or tortuous acts and declarations of its officers or agents within the course
and scope of their employment. The manager of the banks Cabanatuan branch, Consorcia Santiago,
categorically admitted that she and the employees under her control had breached bank policies. They
admittedly breached those policies when, without clearance from the drawee bank in Baguio, they
allowed respondent to withdraw on October 1, 1990, the amount of the check deposited. Santiago
testified that respondent "was not officially informed about the debiting of the P101,000 from his existing
balance of P170,000 on October 2, 1990 x x x.Being the branch manager, Santiago clearly acted within
the scope of her authority in authorizing the withdrawal and the subsequent debiting without notice.
Aggravating matters, petitioner failed to show that it had immediately and duly informed respondent of
the debiting of his account.
Liability for failure to return bank deposit

Guingona vs. City Fiscal of Manila
FACTS:
From March 20, 1979 to March 1981, Clement David invested with the Nation Savings and Loan
Association P1,145,436.20 on time deposits, P13,531.94 on savings deposits(jointly with his sister, Denise
Kuhne), US $10,000.00 on time deposit, US $15,000.00 under a receipt and guarantee of payment and US
$50,000.00 under a receipt dated June 8,1980 (all jointly with Denise Kuhne).
David was allegedly introduced into making said investments by Robert Marshall, an Australian national,
who was allegedly a close associate of petitioner Teofisto Guingona, Jr., then NSLA President, petitioner
Antonio Martin then NSLA Executive Vice-President and petitioner Teresita Santos, then NSLA General
Manager.
On March 21, 1981 NSLA was placed under receivership by the Central Bank, so that David filed claims
therewith for his investments and those of his sister.
SC RULING:
It must be pointed out that when private respondent David invested his money on time and savings
deposits with the aforesaid bank, the contract that was perfected was a contract of simple loan or
mutuum and not a contract of deposit.
Hence, the relationship between the private respondent and the Nation Savings and Loan Association is
that of creditor and debtor; consequently, the ownership of the amount deposited was transmitted to the
Bank upon the perfection of the contract and it can make use of the amount deposited for its banking
operations, such as to pay interests on deposits and to pay withdrawals.
While the Bank has the obligation to return the amount deposited, it has, however, no obligation to return
or deliver the same money that was deposited. And, the failure of the Bank to return the amount
deposited will not constitute estafa through misappropriation punishable under Article 315, par. l(b) of the
Revised Penal Code, but it will only give rise to civil liability over which the public respondents have nojurisdiction.
Considering that the liability of the petitioners is purely civil in nature and that there is no clear showing
that they engaged in foreign exchange transactions, We hold that the public respondents acted without

jurisdiction when they investigated the charges against the petitioners.
Consequently, public respondents City Fiscal should be restrained from further proceeding with the
criminal case for to allow the case to continue, even if the petitioners could have appealed to the Ministry
of Justice, would work great injustice to petitioners and would render meaningless the proper
administration of justice.
When bank officials may be guilty of estafa

Guingona vs. City Fiscal of Manila, July 18, 1985, Motion for Reconsideration - However, if the bank
entered in its records or books the amount of only P305,821.92 out of the deposits of P1,145,546, the
bank officials may be guilty of estafa through misappropriation.
FACTS:
Respondent Clement David filed a motion for the reconsideration of this Courts decision. He contends
that this Court failed to consider that the petitioners entered in the records and books of the Nation
Savings and Loan Association only P305,821.92 out of his deposits in the amount of P1,145,546.20,
P15,531.93 and $75,000 and that they admitted that they did not deliver the difference when they
assumed in their personal capacities the obligation to pay him.
He argues that the petitioners committed estafa through misappropriation.
SC RULING:
The prohibition petition should be dismissed.
The petitioners have no cause of action for prohibition because the City Fiscal has jurisdiction to conduct
the preliminary investigation. It has not been finished. The filing of this petition is premature. The case
does not fall within any of the exceptions when prohibition lies to stop the preliminary investigation.
Obligation if sale did not materialize

Compania Maritima vs. CA
FACTS:
Fernando A. Froilan purchased from the Shipping Administration a boat for the sum of
P200,000.00, with a down payment of P50,000.00. To secure payment of the unpaid balance of the
purchase price, a mortgage was constituted on the vessel in favor of the Shipping Administration. Froilan
incurred a series of defaults notwithstanding reconsiderations granted, so much so that. The General
Manager of the Shipping Administration directed its officers to take immediate possession of the vessel.
However, the boat was, not only actually repossessed, but the title thereto was registered again in the
name of the Shipping Administration, re-transferring the ownership thereof to the government.
On the other hand, Pan Oriental, offered to charter the vessel for a monthly rent of P3,000.00
which the government accepted Pan Oriental's offer on the condition that the latter shall cause the repair
of the vessel advancing the cost. In accordance with this charter contract, the vessel was delivered to the
possession of Pan Oriental.
In the meantime, Froilan tried to explain his failure to comply with the obligations he assumed
and asked that he be given another extension to file the necessary bond. The Shipping Administration
denied his petition for reconsideration.
The Shipping Administration and Pan Oriental formalized the charter agreement and signed a
bareboat contract with option to purchase.
The formal bareboat charter with option to purchase in favor of the Pan Oriental was returned to
the General Manager of the Shipping Administration without action because of a Cabinet resolution
restoring Froilan to his rights to said boat. But Froilan again failed to comply with these conditions. This
led to the authorization by the Cabinet, that the charter contract with Pan Oriental will continue. The
Cabinet yet again resolved to restore Froilan to his rights under the original contract of sale.
Pan Oriental protested to this restoration of Froilan's rights under the contract of sale. Pan
Oriental refused to surrender possession of the vessel. The court ordered the seizure of the vessel from
Pan Oriental and its delivery to the plaintiff.
The Republic of the Philippines was allowed to intervene in the proceeding, also prayed for the
possession of the vessel in order that the chattel mortgage constituted thereon may be foreclosed .
Defendant Pan Oriental resisted said intervention, claiming to have its right of retention, in view of the
expenses it had incurred for the repair of the said vessel.
Subsequently, Compaia Maritima, as purchaser of the vessel from Froilan, was allowed to
intervene in the proceedings (RTC). The lower court rendered a decision upholding Froilan's and Compaia
Maritima's right to the ownership and possession of the ship.
ISSUE:
Who has a better right to the ship?
SC RULING:
Neither Froilan nor the Pan Oriental holds a valid contract over the vessel. However, since the
intervenor Shipping Administration, representing the government practically ratified its proposed contract
with Froilan by receiving the full consideration of the sale to the latter, for which reason the complaint in
intervention was dismissed as to Froilan, and since Pan Oriental has no capacity to question this actuation
of the Shipping Administration because it had no valid contract in its favor, the of the lower court
adjudicating the vessel to Froilan and its successor Maritima, must be sustained.
Nevertheless, under the already adverted to, Pan Oriental cannot be considered as in bad faith
until after the institution of the case. However, since it is not disputed that said made useful and
necessary expenses on the vessel, appellant is entitled to the refund of such expenses with the light to

retain the vessel until he has been reimbursed therefor (Art. 546, Civil Code).
For clarity, this court ordered to be paid by MARITIMA and the REPUBLIC, jointly and severally, to
PAN-ORIENTAL are: (a) the sum of P6,937.72 a month from February 3, 1951, the date of PAN-ORIENTAL's
dispossession, in the concept of damages for the deprivation of its right to retain the vessel.
RULING ON THE TOPIC (Obligation when sale did not materialize)
There return of Pl5,000.00 ordered by the Trial Court and affirmed by the Appellate Court was but just and
proper. As this Court found, that sum was tendered to REPUBLIC "which together with its (PANORIENTAL's) alleged expenses already made on the vessel, cover 25% of the cost of the vessel, as
provided in the option granted in the bareboat contract (Exhibit "C"). This amount was accepted by the
Administration as deposit ...." Since the purchase did not eventually materialize for reasons attributable to
REPUBLIC, it is but just that the deposit be returned. It is futile to allege that PAN-ORIENTAL did not plead
for the return of that amount since its prayer included other reliefs as may be just under the premises.
Courts may issue such orders of restitution as justice and equity may warrant.
Section 3 Obligations of the Depositor

Rights and Obligations of the Parties
a. Obligations of the Depositor:
i.
To pay the compensation agreed upon
ii.
To reimburse the expenses for the preservation of the thing deposited gratuitously.
This does not include useful expenses or expenses incurred for mere luxury or
pleasure
Article 1992 does not apply when the deposit is onerous.
iii.
To indemnify the depositary for damages he may have suffered by reason of the deposit.
This includes damages due to the defects of the thing and all others due to the
deposit, unless:
The depositor was not aware, or
The depositary was notified, or
The depositary knew without notice.
b. Security of the Depositary: He may retain the thing deposited as pledge until the full payment of what
is owed on account of the deposit, including remuneration stipulated.
(*but see Article 1200, obligations arising from deposit are not extinguished by compensation)
Termination of the Contract
Art. 1995. A deposit is extinguished:
1. Upon the loss or destruction of the thing deposited;
2. In case of gratuitous deposit, upon the death of either the depositor or the depositary.
Extinguishment:
General Causes:
Upon the loss or destruction of the thing deposited.
If gratuitous, upon the death of either the depositor or the depositary.
Other Causes:
By claim of the deposit by the depositor at ant time.
By renunciation of the depositary unless deposit is for consideration.
The depositary who may have just reason for not keeping the deposit may,
even before the term expires, return to the depositor and if the later refuse, he
may obtain its consignation from the court. [Art. 1989]
The reasons must be real and serious: examples; excessive period,
need to go abroad, serious danger of loss.
Reasons known at the time the deposit was accepted and not properly
invoked at that time are unavailing.
Death of either property, if the deposit is gratuitous;
But deposit is not extinguished by compensation [Art.1200]
Chapter 3
Necessary Deposit
Necessary Deposit
A deposit is necessary: (1) When it is made in compliance with a legal obligation; (2) When it takes
place on the occasion of any calamity, such as fire, storm, flood, pillage, shipwreck, or other similar events.
(Article 1996)
Kinds
1. Those made in compliance with legal obligations
It shall be governed by the provisions of the law establishing it, and in case of its deficiency, by the
rules on voluntary deposit.
Example: A borrowed P100,000. 00 from B, and as security thereof, pledged his diamond ring. If B uses
the ring without the authority of A, A may ask that the ring be judicially or extrajudicially deposited.
(Article 2104, Civil Code the creditor cannot use the thing pledged, without the authority of the

2.
3.
4.
owner, and if he should do so, or should misuse the thing in any other way, the owner may ask that it
be judicially or extrajudicially deposited." When the preservation of the thing pledged requires its use,
it must be used by the creditor but only for that purpose.
When it takes place on the occasion of any calamity, such as fire, storm, flood, pillage, shipwreck, or
other similar events.
It shall be regulated by the provisions concerning voluntary deposit and by Article 2168 when
during fire, flood, storm, or other calamity, property is saved from destruction by another person
without the knowledge of the owner; the latter is bound to pay the former just compensation.
Example: In a fire, Jose save Pedros car. Jose is in possession of the car; Jose is supposed to be its
depositary. Deposits made on the occasion of a calamity have been fittingly termed depositos
miserable.
That made by travelers in hotels or inns.
The keepers of hotels or inns shall be responsible for them as depositaries, provided that notice
was given to them, or to their employees, of the effects brought by the guests and that, on the
part of the latter, they take the precautions which said hotel-keepers or their substitutes advised
relative to the care and vigilance of their effects.
Travellers refer to transient and was certainly not meant to include ordinary or regular boarders
in any apartment, house, inn or hotel. Guest is synonymous to travellers. Non-transient are
governed by the rules on lease.
Nature of Precautions to be given to guests may be given directly or orally to the guests, or may
be typed or printed on posters.
The liability or responsibility by the hotel or inn keeper commences as soon there is an evident
intention on the part of the travelers to avail himself of the accommodations of the hotel or inn. It
does not matter whether compensation has already been paid or not, or whether the guest has
already partaken of food and drink or not.
The liability of hotel or inn keeper includes:

o For the vehicles, animals and articles which have been introduced or placed in the annexes
of the hotel;
o Damages to good by their servants or employees as well as strangers but not that which
may proceed from any force majeure or if there has been robbery by intimidation of
persons;
The hotel-keeper cannot free himself from responsibility by posting notices to the effect that he is
not liable for the articles brought by the guest. Any stipulation between the hotel-keeper and the
guest whereby the responsibility of the former as set forth in articles 1998 to 2001 is suppressed
or diminished shall be void.
The hotel-keeper is not liable for compensation if the loss is due to the acts of the guest, his family,
servants or visitors, or if the loss arises from the character of the things brought into the hotel.
The hotel-keeper has a right to retain the things brought into the hotel by the guest, as a security
for credits on account of lodging, and supplies usually furnished to hotel guests.
That made with common carriers.
Chapter 4
Sequestration or Judicial Deposit
(Articles 2005- 2009)
Judicial Deposit
A judicial deposit or sequestration takes place when an attachment or seizure of property in litigation is
ordered. (Art. 2005)
Movable as well as immovable property may be the object of sequestration. (Art. 2006)
The depositary of property or objects sequestrated cannot be relieved of his responsibility until the
controversy which gave rise thereto has come to an end, unless the court so orders. (Art. 2007)
The depositary of property sequestrated is bound to comply, with respect to the same, with all the
obligations of a good father of a family. (Art. 2008)
As to matters not provided for in this Code, judicial sequestration shall be governed by the Rules of
Court. (Art. 2009)
Special Rule
1. Examples of an attachment or seizure of property by judicial order:
a. Under Rule 57, Revised Rules of Court: a proper party may, at the commencement of the action or
at any time thereafter, have the properties of the adverse party attached as security for the
satisfaction of any judgment that may be recovered.
b. Under Rule 60, a sheriff may be ordered to seize personal property in suits for the delivery of
personal property.
c. In PCGG sequestration cases pending before the Sandiganbayan.
Distinguished from extra-judicial deposit
JUDICIAL DEPOSIT
a.
b.
c.
d.
e.
As
As
As
As
As
to
to
to
to
to
source
purpose
object
cause
possession
By Court order
To secure the owners right
May be real or personal property
Remuneratory
For the benefit of the owner/
EXTRA-JUDICIAL DEPOSIT
(VOLOUNTARY)
By the will of the parties
For safe-keeping
Personal property only
Generally gratuitous
Generally for the benefit of
the

winning party to the case
depositor.
Warehouse Receipts Act

(Act No. 2137, as amended)
Concept
The Act does not define a warehouse receipt.
It has been defined as a written acknowledgement by a warehouseman that he has received
and holds certain goods therein described in store for the person to whom it is issued.
It has also been defined as a simple written contract between the owner of the goods and the
warehouseman to pay the compensation for the service.
The law does not define what a warehouse is. As used, however, in the Act, warehouse means the
building or place where the goods are deposited and stored for profit.
A warehouseman is a person lawfully engaged in the business of storing goods for profit.
Receipts not issued by a warehouseman are not warehouse receipts although in the form of
warehouse receipts.
But a duly authorized officer or agent of a warehouseman may validly issue a warehouse
receipt.
Receipts may be issued by any warehouseman.
Form
The Act does not require or specify any particular form for warehouse receipts, provided that it
contains the essential terms, as enumerated in section 2 of the Warehouse Receipts Act, which must be
embodied in every warehouse receipts:
1. Location of the Warehouse
This requirement is for the benefit of the holders of the warehouse receipt to enable them to
determine where the goods are deposited especially when the warehouseman has more than
one warehouse located in different places.
2. Date of the Receipt
The date of issue appearing in the warehouse receipt indicates prima facie the date when the
contract of deposit is perfected and when storage charges shall begin to run against the
depositor.
3. Consecutive number of Receipt
To identify each receipt with the goods for which it was issued.
4. Person to whom good are deliverable
This determines the person or persons who shall prima facie be entitled lawfully to the
possession of the goods deposited. This requirement, however, does not determine the
negotiability of the receipt because notwithstanding the failure to use the words of
negotiability, the receipt may still be considered negotiable.
5. Rate of Storage Charges
This states the consideration for the contract from the view of the warehouseman. In the
absence thereof, the law presumes that the depositor shall pay the customary or reasonable
compensation for the services of the warehouseman.
6. Description of the Goods or Packages
For the identification so that the identical property delivered to the warehouseman may be
delivered back by him upon the return of the warehouse receipt. However, the mere fact that
the goods deposited are incorrectly described does not make ineffective the receipt when the
identity of the goods is fully established by the evidence.
7. Signature of the Warehouseman
The warehousemans signature furnishes the best evidence of the fact that the warehouseman
has received the goods described in the receipt and has bound himself to assume all
obligations in connection therewith.
8. Warehousemans ownership of or interest in the goods
It seems wise that where they issue negotiable instrument in this way, the document should
carry notice of the fact on its face.
9. Statement of the advances made and liabilities incurred
To preserve the lien of the warehouseman over the goods stored or the proceeds thereof in his
hands.
Effect of Omission:
1. The validity of receipt not affected.
The omission of any of the requirements will not affect the validity of the warehouse receipt.
2. Warehouseman liable for damages.
It will only render the warehouseman liable for damages to those injured by his omission.
3. Negotiability of receipt not affected.
Section 2 doen not deal with the negotiuability of the warehouse receipt. Thus, omission of any
terms in section 2 that are required will not affect the negotiability of the warehouse receipt.
4. Contract converted to ordinary deposit.
The issuance of the warehouse receipt in the form provided by the law is merely permissive
and directory and not mandatory in the sense that if the requirements are not observed, then
the goods delivered for storage become ordianry deposits.

Terms that cannot be included in a warehouse receipt:
SECTION 3. Form of receipts. What terms may be inserted. A warehouseman may insert in a
receipt issued by him any other terms and conditions provided that such terms and conditions shall
not:
(a) Be contrary to the provisions of this Act.
(b) In any wise impair his obligation to exercise that degree of care in the safe-keeping of the goods
entrusted to him which is reasonably careful man would exercise in regard to similar goods of his own.
*In addition to those limiations, the stipulations in the receipt must not be contrary to law, morals, good
customs, public order, or public policy.
1.
2.
Exemption from liability for misdelivery.

A warehouseman is not authorized to insert any term exempting him from liability for
misdelivery of goods because such would be against section 10 of the Act or for not giving a
statutory notice in case of sale of goods because such would contrary to section 33 and 34.
Exemption from liablitiy for negligence.
The warehouseman cannot insert any term which would would relieved him from liability for
his own negligence, such as For account and at the risk of the depositor. The warehouseman
is required by law to exercise that degree of care in the safekeeping of the goods entrusted to
him which a reasonable careful man would exercise in regard to similar goods of his own.
Kinds
Non-negotiable receipt
A receipt in which it is stated that the goods received will be delivered to the depositor or to any other
specified person, is a non-negotiable receipt. (Section 4)
Negotiable receipt
A receipt in which it is stated that the goods received will be delivered to the bearer or to the order of
any person named in such receipt is a negotiable receipt. (Section 5)
NOTE:
The word negotiable is not used in the sense in which it is applied to bills of exchange or
promissory notes but only as indicating that in the passage of warehouse receipts through the
channels of commerce, the law regards the property which they describe as following them and gives
their regular transfer by indorsement the effect of manual delivery of the thing specified in them.
[Vannett vs. Reilly Hertz Automobile Co., 173 N.W.466]
a.
Effects of words non-negotiable

..no provision shall be inserted in a negotiable receipt that it is non-negotiable. Such provision if
inserted shall be void.
b.
Rule if more that one receipt is issued.

Sec. 6. Duplicate receipts must be so marked..- when more that one negotiable receipt is
issued for the same goods, the word duplicate shall be plainly placed upon the face of every
such receipt, except on the first one issued. A warehouseman shall be liable for all damages
caused by his failure to do so to anyone who purchased the subsequent receipt for value
supposing it to be original, even though the purchase be after the delivery of the goods by the
warehouseman to the holder of the original receipt.
Obligations of the Warehouseman

1. To take care of the goods
A warehouseman shall be liable for any loss or injury to the goods caused by his failure to exercise
such care in regard to them as reasonably careful owner of similar goods would exercise, but he shall not
be liable, in the absence of an agreement to the contrary, for any loss or injury to the goods which could
not have been avoided by the exercise of such care. (Section 21)
The warehouse man is required to exercise ordinary or reasonable care in the custody of the goods,
that is, the diligence of a good father of a family.
In the absence of any agreement to the contrary, the warehouseman is not liable for any loss or injury
to the goods which could not have been avoided by the exercise of such care. While the warehouseman
may limit his liability to an agreed value of the property received in case of loss, he cannot, however,
stipulate with the depositor that he would not be responsible for any loss even if caused by his negligence.
2.
To deliver the goods

A warehouseman, in the absence of some lawful excuse provided by this Act, is bound to deliver the
goods upon a demand made either by the holder of a receipt for the goods or by the depositor.
In case the warehouseman refuses or fails to deliver the goods in compliance with a demand by the
holder or depositor so accompanied, the burden shall be upon the warehouseman to establish the
existence of a lawful excuse for such refusal. (Section 8).
a. What must accompany the demand (Section 8)
An offer to satisfy the warehouseman's lien;

A warehouseman having a lien valid against the person demanding the goods may refuse
to deliver the goods to him until the lien is satisfied. He loses his lien upon the goods by
surrendering possession thereof.
An offer to surrender the receipt, if negotiable, with such indorsements as would be necessary for
the negotiation of the receipt; and

b.
c.
d.
The offer to surrender the receipt is required for the protection of the warehouseman since
the receipt represents the goods described therein. Furthermore, the warehouseman will be
criminally liable if he delivers the goods without obtaining possession of such receipt. The
warehousemans right to require production of the receipt as a condition precedent to delivery is
subject to waiver, as where he refuses to deliver on other grounds than its production.
A readiness and willingness to sign, when the goods are delivered, an acknowledgment that they
have been delivered, if such signature is requested by the warehouseman.
To whom delivery must be made (Section 9)
The person lawfully entitled to the possession of the goods, or his agent;
A warehouseman is justified in delivering the good to the person to whom a competent
court has ordered the delivery of the goods; or to an attaching creditor; or to the purchaser in case
of sale of the goods by the warehouseman to enforce his lien or where the goods are perishable or
hazardous.
A person who is either himself entitled to delivery by the terms of a non-negotiable receipt issued
for the goods, or who has written authority from the person so entitled either indorsed upon the
receipt or written upon another paper; or
Oral authority is sufficient
A person in possession of a negotiable receipt by the terms of which the goods are deliverable to
him or order, or to bearer, or which has been indorsed to him or in blank by the person to whom
delivery was promised by the terms of the receipt or by his mediate or immediate indorser.
The warehouseman is liable for misdelivery to a mere possessor of a negotiable receipt by
the terms of which the goods covered by it are deliverable to the order of another, not being an
indorsee thereon.
Misdelivery (Section 10)
What it constitutes?
Where a warehouseman delivers the goods to one who is not in fact lawfully entitled to the
possession of them.
Liability for misdelivery:
For conversion to all having a right of property or possession in the goods if he delivered the
goods otherwise than as authorized by subdivisions (b) and (c) of the preceding section (refer to
Section 9)
Warehouseman shall also be liable though he delivered the goods as authorized by said
subdivisions but prior to such delivery he had either: (a) Been requested, by or on behalf of the
person lawfully entitled to a right of property or possession in the goods, not to make such deliver; or
(b)
Had information that the delivery about to be made was to one not lawfully entitled to the
possession of the goods.
Where goods are covered by a negotiable receipt
When the warehouseman must deliver; Attachment or levy upon the goods (Section 25)
If goods are delivered to a warehouseman by the owner or by a person whose act in conveying
the title to them to a purchaser in good faith for value would bind the owner, and a negotiable receipt
is issued for them, they can not thereafter, while in the possession of the warehouseman, be attached
by garnishment or otherwise, or be levied upon under an execution unless the receipt be first
surrendered to the warehouseman or its negotiation enjoined. The warehouseman shall in no case be
compelled to deliver up the actual possession of the goods until the receipt is surrendered to him or
impounded
by
the
court.
Cancellation of receipt (Section 11)
Except as provided in section thirty-six, where a warehouseman delivers goods for which he
had issued a negotiable receipt, the negotiation of which would transfer the right to the possession of
the goods, and fails to take up and cancel the receipt, he shall be liable to any one who purchases for
value in good faith such receipt, for failure to deliver the goods to him, whether such purchaser
acquired title to the receipt before or after the delivery of the goods by the warehouseman.
The negotiable receipt must be one the negotiation of which would transfer the right to the
possession of the goods. So, the warehouseman who delivers the goods to the real owner without
taking up and cancelling the receipt is not liable to the purchaser for value in good faith of such receipt
from a thief for failure to deliver the goods to him as the thief has not title to the goods.
e.
When only part of the goods are delivered (Section 12)

Except as provided in section thirty-six, where a warehouseman delivers part of the goods for
which he had issued a negotiable receipt and fails either to take up and cancel such receipt or to place
plainly upon it a statement of what goods or packages have been delivered, he shall be liable to any
one who purchases for value in good faith such receipt, for failure to deliver all the goods specified in
the receipt, whether such purchaser acquired title to the receipt before or after the delivery of any
portion of the goods by the warehouseman.
Liability for altered receipts (Section 13)
The alteration of a receipt shall not excuse the warehouseman who issued it from any liability if
such alteration was: (a) Immaterial, (b) Authorized, or (c) Made without fraudulent intent.
If the alteration was authorized:

The warehouseman shall be liable according to the terms of the receipt as altered
If the alteration was unauthorized but made without fraudulent intent:

The warehouseman shall be liable according to the terms of the receipt as they were before
alteration.
Material and fraudulent alteration of a receipt:

Shall not excuse the warehouseman who issued it from liability to deliver according to the
terms of the receipt as originally issued, the goods for which it was issued but shall excuse him

f.
g.
h.
i.
from any other liability to the person who made the alteration and to any person who took with
notice of the alteration. Any purchaser of the receipt for value without notice of the alteration
shall acquire the same rights against the warehouseman which such purchaser would have
acquired if the receipt had not been altered at the time of purchase.
Material but innocently made though unauthorized:

The warehouse man is liable on the altered receipt according to its original tenor.
Where negotiable receipt is lost or destroyed (Section 14)
Where a negotiable receipt has been lost or destroyed, a court of competent jurisdiction may
order the delivery of the goods upon satisfactory proof of such loss or destruction and upon the giving
of a bond with sufficient sureties to be approved by the court to protect the warehouseman from any
liability or expense, which he or any person injured by such delivery may incur by reason of the
original receipt remaining outstanding. The court may also in its discretion order the payment of the
warehouseman's reasonable costs and counsel fees.
The delivery of the goods under an order of the court as provided in this section, shall not
relieve the warehouseman from liability to a person to whom the negotiable receipt has been or shall
be negotiated for value without notice of the proceedings or of the delivery of the goods.
Where the warehouseman claims ownership over the goods (Section 16)
No title or right to the possession of the goods, on the part of the warehouseman, unless such
title or right is derived directly or indirectly from a transfer made by the depositor at the time of or
subsequent to the deposit for storage, or from the warehouseman's lien, shall excuse the
warehouseman from liability for refusing to deliver the goods according to the terms of the receipt.
Where there are adverse claimants (Section 17 18)
SECTION 17.
Interpleader of adverse claimants. If more than one person claims the title or
possession of the goods, the warehouseman may, either as a defense to an action brought against him
for non-delivery of the goods or as an original suit, whichever is appropriate, require all known
claimants to interplead.
This is for the protection of the warehouseman. In such case, he will be relieved from liability in
delivering the goods to the person to whom the court finds to have a better right.
SECTION 18. Warehouseman has reasonable time to determine validity of claims. If someone other
than the depositor or person claiming under him has a claim to the title or possession of goods, and
the warehouseman has information of such claim, the warehouseman shall be excused from liability for
refusing to deliver the goods, either to the depositor or person claiming under him or to the adverse
claimant until the warehouseman has had a reasonable time to ascertain the validity of the adverse
claim or to bring legal proceedings to compel claimants to interplead.
Take note: the warehouseman is not excused from liability in case he made a mistake.
Liability for non-existence or misdescription of goods (Section 20)
A warehouseman shall be liable to the holder of a receipt for damages caused by the nonexistence of the goods or by the failure of the goods to correspond with the description thereof in the
receipt at the time of its issue. If, however, the goods are described in a receipt merely by a
statement of marks or labels upon them or upon packages containing them or by a statement that the
goods are said to be goods of a certain kind or that the packages containing the goods are said to
contain goods of a certain kind or by words of like purport, such statements, if true, shall not make
liable the warehouseman issuing the receipt, although the goods are not of the kind which the marks
or labels upon them indicate or of the kind they were said to be by the depositor.
Negotiation of Negotiable Receipt

A. How
a. By delivery
SECTION 37. Negotiation of negotiable receipt of delivery. A negotiable receipt may be negotiated
by delivery:
(a) Where, by terms of the receipt, the warehouseman undertakes to deliver the goods to the bearer,
or
(b) Where, by the terms of the receipt, the warehouseman undertakes to deliver the goods to the
order of a specified person, and such person or a subsequent indorsee of the receipt has indorsed it in
blank or to bearer.
Where, by the terms of a negotiable receipt, the goods are deliverable to bearer or where a
negotiable receipt has been indorsed in blank or to bearer, any holder may indorse the same to himself
or to any other specified person, and, in such case, the receipt shall thereafter be negotiated only by
the indorsement of such indorsee.
b. By indorsement
SECTION 38. Negotiation of negotiable receipt by indorsement. A negotiable receipt may be
negotiated by the indorsement of the person to whose order the goods are, by the terms of the receipt,
deliverable. Such indorsement may be in blank, to bearer or to a specified person. If indorsed to a
specified person, it may be again negotiated by the indorsement of such person in blank, to bearer or
to another specified person. Subsequent negotiation may be made in like manner.
B. Who may negotiate
SECTION 40. Who may negotiate a receipt. A negotiable receipt may be negotiated:
(a) By the owner thereof, or
(b) By any person to whom the possession or custody of the receipt has been entrusted by the owner, if,
by the terms of the receipt, the warehouseman undertakes to deliver the goods to the order of the person
to whom the possession or custody of the receipt has been entrusted, or if, at the time of such entrusting,
the receipt is in such form that it may be negotiated by delivery.

C. Rights of a person to whom a receipt is negotiated
SECTION 41. Rights of person to whom a receipt has been negotiated. A person to whom a negotiable
receipt has been duly negotiated acquires thereby:
(a) Such title to the goods as the person negotiating the receipt to him had or had ability to convey to a
purchaser in good faith for value, and also such title to the goods as the depositor or person to whose
order the goods were to be delivered by the terms of the receipt had or had ability to convey to a
purchaser in good faith for value, and
(b) The direct obligation of the warehouseman to hold possession of the goods for him according to the
terms of the receipt as fully as if the warehouseman and contracted directly with him.
D. Rights of transferee of an order negotioable receipt (not negotiated)
SECTION 42. Rights of person to whom receipt has been transferred. A person to whom a receipt has
been transferred but not negotiated acquires thereby, as against the transferor, the title of the goods
subject to the terms of any agreement with the transferor.
If the receipt is non-negotiable, such person also acquires the right to notify the warehouseman of the
transfer to him of such receipt and thereby to acquire the direct obligation of the warehouseman to hold
possession of the goods for him according to the terms of the receipt.
Prior to the notification of the warehouseman by the transferor or transferee of a non-negotiable
receipt, the title of the transferee to the goods and the right to acquire the obligation of the warehouseman
may be defeated by the levy of an attachment or execution upon the goods by a creditor of the transferor
or by a notification to the warehouseman by the transferor or a subsequent purchaser from the transferor
of a subsequent sale of the goods by the transferor.
SECTION 43. Transfer of negotiable receipt without indorsement. Where a negotiable receipt is
transferred for value by delivery and the indorsement of the transferor is essential for negotiation, the
transferee acquires a right against the transferor to compel him to indorse the receipt unless a contrary
intention appears. The negotiation shall take effect as of the time when the indorsement is actually made.
E. Warranties on sale of receipt
SECTION 44. Warranties of a sale of receipt. A person who, for value, negotiates or transfers a receipt
by indorsement or delivery, including one who assigns for value a claim secured by a receipt, unless a
contrary intention appears, warrants:
(a) That the receipt is genuine,
(b) That he has a legal right to negotiate or transfer it,
(c) That he has knowledge of no fact which would impair the validity or worth of the receipt, and
(d) That he has a right to transfer the title to the goods and that the goods are merchantable or fit for a
particular purpose whenever such warranties would have been implied, if the contract of the parties had
been to transfer without a receipt of the goods represented thereby.
F. Validity of negotiation as against the real owner
SECTION 47. When negotiation not impaired by fraud, mistake or duress. The validity of the
negotiation of a receipt is not impaired by the fact that such negotiation was a breach of duty on the part
of the person making the negotiation or by the fact that the owner of the receipt was induced by fraud,
mistake or duress or to entrust the possession or custody of the receipt to such person, if the person to
whom the receipt was negotiated or a person to whom the receipt was subsequently negotiated paid value
therefor, without notice of the breach of duty, or fraud, mistake or duress.
G. Effect of subsequent negotiation of a previously negotiated/transferred receipt
SECTION 48. Subsequent negotiation. Where a person having sold, mortgaged, or pledged goods
which are in warehouse and for which a negotiable receipt has been issued, or having sold, mortgaged, or
pledged the negotiable receipt representing such goods, continues in possession of the negotiable receipt,
the subsequent negotiation thereof by the person under any sale or other disposition thereof to any person
receiving the same in good faith, for value and without notice of the previous sale, mortgage or pledge,
shall have the same effect as if the first purchaser of the goods or receipt had expressly authorized the
subsequent negotiation.
H. Effect of negotiation on vendors lien negotiation defeats vendors lien. An innocent holder of a
negotiable warehouse receipt has a better right to the goods for which the receipt is given than the vendor
who has a vendors lien upon the goods. So, the warehouseman is not obliged to deliver or justified in
delivering the goods to an unpaid seller unless the receipt is first surrendered for cancellation.
Transfer of Non-Negotiable Receipt
SECTION 39. Transfer of receipt. A receipt which is not in such form that it can be negotiated by delivery
may be transferred by the holder by delivery to a purchaser or donee.
A non-negotiable receipt can not be negotiated, and the indorsement of such a receipt gives the
transferee no additional right.
Transfer of non-negotiable receipt:

A non-negotiable receipt of title cannot be negotiated. Nevertheless, it may be transferred or assigned by
delivery. The transferee or assignee acquires only the rights stated in sec. 42.
If receipt is endorsed, the transferee acquires no additional right.
Criminal Offenses

SECTION 50. Issue of receipt for goods not received. A warehouseman, or an officer, agent, or servant
of a warehouseman who issues or aids in issuing a receipt knowing that the goods for which such receipt is
issued have not been actually received by such warehouseman, or are not under his actual control at the
time of issuing such receipt, shall be guilty of a crime, and, upon conviction, shall be punished for each
offense by imprisonment not exceeding five years, or by a fine not exceeding ten thousand pesos, or both.
SECTION 51. Issue of receipt containing false statement. A warehouseman, or any officer, agent or
servant of a warehouseman who fraudulently issues or aids in fraudulently issuing a receipt for goods
knowing that it contains any false statement, shall be guilty of a crime, and upon conviction, shall be
punished for each offense by imprisonment not exceeding one year, or by a fine not exceeding two
thousand pesos, or by both.
SECTION 52. Issue of duplicate receipt not so marked. A warehouse, or any officer, agent, or servant of
a warehouseman who issues or aids in issuing a duplicate or additional negotiable receipt for goods
knowing that a former negotiable receipt for the same goods or any part of them is outstanding and
uncanceled, without plainly placing upon the face thereof the word "duplicate" except in the case of a lost
or destroyed receipt after proceedings are provided for in section fourteen, shall be guilty of a crime, and,
upon conviction, shall be punished for each offense by imprisonment not exceeding five years, or by a fine
not exceeding ten thousand pesos, or by both.
SECTION 53. Issue for warehouseman's goods or receipts which do not state that fact. Where they are
deposited with or held by a warehouseman goods of which he is owner, either solely or jointly or in
common with others, such warehouseman, or any of his officers, agents, or servants who, knowing this
ownership, issues or aids in issuing a negotiable receipt for such goods which does not state such
ownership, shall be guilty of a crime, and, upon conviction, shall be punished for each offense by
imprisonment not exceeding one year, or by a fine not exceeding two thousand pesos, or by both.
SECTION 54. Delivery of goods without obtaining negotiable receipt. A warehouseman, or any officer,
agent, or servant of a warehouseman, who delivers goods out of the possession of such warehouseman,
knowing that a negotiable receipt the negotiation of which would transfer the right to the possession of
such goods is outstanding and uncanceled, without obtaining the possession of such receipt at or before
the time of such delivery, shall, except in the cases provided for in sections fourteen and thirty-six, be
found guilty of a crime, and, upon conviction, shall be punished for each offense by imprisonment not
exceeding one year, or by a fine not exceeding two thousand pesos, or by both.
SECTION 55. Negotiation of receipt for mortgaged goods. Any person who deposits goods to which he
has no title, or upon which there is a lien or mortgage, and who takes for such goods a negotiable receipt
which he afterwards negotiates for value with intent to deceive and without disclosing his want of title or
the existence of the lien or mortgage, shall be guilty of a crime, and, upon conviction, shall be punished for
each offense by imprisonment not exceeding one year, or by a fine not exceeding two thousand pesos, or
by both.
o
o
In Section 50- the warehouseman is made liable if it issues a receipt knowing that the goods for
which such receipt is issued have not been actually received by such warehouseman.
Warehouse receipts are issued for the goods or merchandise stored with the warehouseman. It is
essential that the goods for which the receipt is issued shall be in the warehousemans possession.
Ingredients of offenses punished by section 54.

1. There is delivery of goods out of the possession of the warehouseman, by the warehouseman himself
or by any officer, agent, or servant of the warehouseman;
2. The person who caused the delivery has knowledge that a negotiable receipt for the goods, which
would transfer the right to the possession thereof, is outstanding and uncanceled; and
3. The person causing the delivery does so without obtaining possession of the receipt at or before the
time of delivery.
Nature of Criminal Responsibility:
1. Violation by the warehouseman himself- under section 54, he may be held criminally liable if he caused
the withdrawal of the goods in question
2. Violation by some other person- section 54 shows that other persons may also be held liable for
violation thereof. the warehouseman OR any other officer, agent or servant of a warehouseman .
o The criminal responsibility punished by the law is individual, not attributive, so that the
warehouseman should not be punished even for violations which some other officer, agent or
servant of the warehouseman may have committed.
3. Possibility that right to goods sold has been transferred to a third person- for a warehouseman not to
be held liable under section 54, for having delivered goods from his warehouse to a person other than
the one entitled thereto. It must be shown that such transfer to said third person was in the course of
the transaction with the depositor in whose name the receipt of the stored goods was issued.

CONTRACTS OF SECURITY
I.
Basis and Rationale

Security is something given, deposited or serving as a means to ensure the fulfillment or enforcement of an
obligation or of protecting some interest or property.
II. Kinds of Security Contracts

A. Of personal security
Unsecured transactions or contracts of personal security - supported only by a promise
1. Guaranty
A contract whereby a person (guarantor) binds himself to the creditor to fulfil the obligation of the
principal debtor in case the latter fail to do so.
2. Suretyship
A contract whereby a person binds himself solidarily with the principal debtor.
The reference in Art. 2047 to solidary obligations does not mean that suretyship is withdrawn from the
applicable provisions governing guaranty. A surety is almost the same as a solidary debtor, except that he
himself is a principal debtor.
Characteristics of Guaranty and Suretyship:
a. Accessory - It is indispensable condition for its existence that there must be a principal obligation.
b. The guarantor cannot bind himself for more than the principal debtor and even if he does, his liability shall be
reduced to the limits of that of the debtor
c. Subsidiary and Conditional - takes effect only in case the principal debtor fails in his obligation.
d. Unilateral - may be entered even w/o the intervention of the principal debtor and it gives rise only to a duty on
the part of the guarantor in relation to the creditor and not vice versa.
e. Nominate
f.
Consensual
g. It is a contract between the guarantor/surety and creditor.
a. With respect to the creditor, no such requirement is needed because he binds himself to nothing.
However, when there is merely an offer of a guaranty, or merely a conditional guaranty, in the sense
that it requires action by the creditor before the obligation becomes fixed, it does not become binding
until it is accepted and notice of such acceptance by the creditor is given to the guarantor. But in any
case, the creditor is not precluded from waiving the requirement of notice. The consideration of the
guaranty is the same as the consideration of the principal obligation.
b. Not presumed. It must be expressed and reduced in writing.
c. Falls under the Statute of Frauds since it is a special promise to answer for the debt, default or
miscarriage of another.
d. Strictly interpreted against the creditor and in favor of the guarantor/surety and is not to be extended
beyond its terms or specified limits. The rule of strictissimi juris commonly pertains to an
accommodation surety because the latter should be protected against unjust pecuniary
impoverishment by imposing on the principal, duties akin to those of a fiduciary.
Case: Nature of undertaking denominated Guarantors Undertaking agreeing to be bound jointly and severally
PACIFIC BANKING CORPORATION vs IAC
Facts:
Celia Syjuco Regala, applied for and obtained from the plaintiff the issuance and use of Pacificard credit card, under the Terms
and Conditions Governing the Issuance and Use of Pacificard, a copy of which was issued to and received by the said defendant on the
date of the application and expressly agreed that the use of the Pacificard is governed by said Terms and Conditions. On the same date,
the defendant-appelant Robert Regala, Jr., spouse of defendant Celia Regala, executed a "Guarantor's Undertaking" in favor of the
appellee Bank, whereby the latter agreed "jointly and severally of Celia Aurora Syjuco Regala, to pay the Pacific Banking Corporation
upon demand, any and all indebtedness, obligations, charges or liabilities due and incurred by said Celia Aurora Syjuco Regala with the
use of the Pacificard, or renewals thereof, issued in her favor by the Pacific Banking Corporation". It was also agreed that "any changes
of or novation in the terms and conditions in connection with the issuance or use of the Pacificard, or any extension of time to pay such
obligations, charges or liabilities shall not in any manner release me/us from responsibility hereunder, it being understood that I fully
agree to such charges, novation or extension, and that this understanding is a continuing one and shall subsist and bind me until the
liabilities of the said Celia Syjuco Regala have been fully satisfied or paid.
Pacific Banking Corporation has contracted with accredited business establishments to honor purchases of goods and/or
services by Pacificard holders and the cost thereof to be advanced by the plaintiff-appellee for the account of the defendant cardholder,
and the latter undertook to pay any statements of account rendered by the plaintiff-appellee for the advances thus made within thirty
(30) days from the date of the statement, provided that any overdue account shall earn interest at the rate of 14% per annum from date
of default.
Celia Regala, as such Pacificard holder, had purchased goods and/or services on credit under her Pacificard, for which the
plaintiff advanced the cost amounting to P92,803.98 at the time of the filing of the complaint. In view of defendant Celia Regala's failure
to settle her account for the purchases made thru the use of the Pacificard, a written demand was sent to the latter and also to the
defendant Roberto Regala, Jr. under his "Guarantor's Undertaking."
Issue:
Whether or not the undertaking was a contract of Guaranty or a Suretyship.
SC Ruling:
The undertaking signed by Roberto Regala, Jr. although denominated "Guarantor's Undertaking," was in substance a contract
of surety. As distinguished from a contract of guaranty where the guarantor binds himself to the creditor to fulfill the obligation of the
principal debtor only in case the latter should fail to do so, in a contract of suretyship, the surety binds himself solidarily with the
principal debtor (Art. 2047, Civil Code of the Philippines).
We need not look elsewhere to determine the nature and extent of private respondent Roberto Regala, Jr.'s undertaking. As a
surety he bound himself jointly and severally with the debtor Celia Regala "to pay the Pacific Banking Corporation upon demand, any
and all indebtedness, obligations, charges or liabilities due and incurred by said Celia Syjuco Regala with the use of Pacificard or
renewals thereof issued in (her) favor by Pacific Banking Corporation." This undertaking was also provided as a condition in the issuance
of the Pacificard to Celia Regala.
It is true that under Article 2054 of the Civil Code, "(A) guarantor may bind himself for less, but not for more than the principal
debtor, both as regards the amount and the onerous nature of the conditions. It is likewise not disputed by the parties that the credit
limit granted to Celia Regala was P2,000.00 per month and that Celia Regala succeeded in using the card beyond the original period of
its effectivity, October 29, 1979. We do not agree however, that Roberto Jr.'s liability should be limited to that extent. Private respondent
Roberto Regala, Jr., as surety of his wife, expressly bound himself up to the extent of the debtor's (Celia) indebtedness likewise
expressly waiving any "discharge in case of any change or novation of the terms and conditions in connection with the issuance of the
Pacificard credit card." Roberto, in fact, made his commitment as a surety a continuing one, binding upon himself until all the liabilities
of Celia Regala have been fully paid.
Roberto Regala, Jr. had been made aware by the terms of the undertaking of future changes in the terms and conditions
governing the issuance of the credit card to his wife and that, notwithstanding, he voluntarily agreed to be bound as a surety. As in
guaranty, a surety may secure additional and future debts of the principal debtor the amount of which is not yet known.

A guarantor or surety does not incur liability unless the principal debtor is held liable. It is in this sense that a surety, although
solidarily liable with the principal debtor, is different from the debtor. It does not mean, however, that the surety cannot be held liable to
the same extent as the principal debtor. The nature and extent of the liabilities of a guarantor or a surety is determined by the clauses in
the contract of suretyship.
Case: Nature of Continuing Guaranty obligating as surety

E ZOBEL INC vs CA
Facts:
Respondent spouses Raul and Elea Claveria, doing business under the name "Agro Brokers," applied for a loan with
respondent Consolidated Bank and Trust Corporation (now SOLIDBANK) in the amount of Two Million Eight Hundred Seventy Five
Thousand Pesos (P2, 875,000.00) to finance the purchase of two (2) maritime barges and one tugboat which would be used in their
molasses business. The loan was granted subject to the condition that respondent spouses execute a chattel mortgage over the three
(3) vessels to be acquired and that a continuing guarantee be executed by Ayala International Philippines, Inc., now herein petitioner E.
Zobel, Inc. in favor of SOLIDBANK. The respondent spouses agreed to the arrangement. Consequently, a chattel mortgage and a
Continuing Guaranty were executed.
Respondents defaulted in the payment of the entire obligation upon maturity. SOLIDBANK filed a complaint for sum of money
with a prayer for a writ of preliminary attachment, against respondents spouses and petitioner. Petitioner moved to dismiss the
complaint on the ground that its liability as guarantor of the loan was extinguished pursuant to Article 2080 of the Civil Code of the
Philippines. It argued that it has lost its right to be subrogated to the first chattel mortgage in view of SOLIDBANK's failure to register the
chattel mortgage with the appropriate government agency. SOLIDBANK opposed the motion contending that Article 2080 is not
applicable because petitioner is not a guarantor but a surety.
Issue:
Whether or not petitioner under the "Continuing Guaranty" obligated itself to SOLIDBANK as a guarantor or a surety.
SC Ruling:
A contract of surety is an accessory promise by which a person binds himself for another already bound, and agrees with the
creditor to satisfy the obligation if the debtor does not. A contract of guaranty, on the other hand, is a collateral undertaking to pay the
debt of another in case the latter does not pay the debt.
Strictly speaking, guaranty and surety are nearly related, and many of the principles are common to both. However, under our civil law,
they may be distinguished thus: A surety is usually bound with his principal by the same instrument, executed at the same time, and on
the same consideration. He is an original promissor and debtor from the beginning, and is held, ordinarily, to know every default of his
principal. Usually, he will not be discharged, either by the mere indulgence of the creditor to the principal, or by want of notice of the
default of the principal, no matter how much he may be injured thereby. On the other hand, the contract of guaranty is the guarantor's
own separate undertaking, in which the principal does not join. It is usually entered into before or after that of the principal, and is often
supported on a separate consideration from that supporting the contract of the principal. The original contract of his principal is not his
contract, and he is not bound to take notice of its non-performance. He is often discharged by the mere indulgence of the creditor to the
principal, and is usually not liable unless notified of the default of the principal.
Simply put, a surety is distinguished from a guaranty in that a guarantor is the insurer of the solvency of the debtor and thus
binds himself to pay if the principal is unable to pay while a surety is the insurer of the debt, and he obligates himself to pay if the
principal does not pay.
Based on the aforementioned definitions, it appears that the contract executed by petitioner in favor of SOLIDBANK, albeit
denominated as a "Continuing Guaranty," is a contract of surety. The terms of the contract categorically obligates petitioner as " surety"
to induce SOLIDBANK to extend credit to respondent spouses. This can be seen in the following stipulations.
"For and in consideration of any existing indebtedness to you of AGRO BROKERS, a single proprietorship owned by MR.
RAUL P. CLAVERIA, of legal age, married and with business address x x x (hereinafter called the Borrower), for the
payment of which the undersigned is now obligated to you as surety and in order to induce you, in your
discretion, at any time or from time to time hereafter, to make loans or advances or to extend credit in any other manner
to, or at the request or for the account of the Borrower, either with or without purchase or discount, or to make any loans
or advances evidenced or secured by any notes, bills receivable, drafts, acceptances, checks or other instruments or
evidences of indebtedness x x upon which the Borrower is or may become liable as maker, endorser, acceptor, or
otherwise, the undersigned agrees to guarantee, and does hereby guarantee, the punctual payment, at
maturity or upon demand, to you of any and all such instruments, loans, advances, credits and/or other
obligations herein before referred to, and also any and all other indebtedness of every kind which is now or
may hereafter become due or owing to you by the Borrower, together with any and all expenses which may be
incurred by you in collecting all or any such instruments or other indebtedness or obligations hereinbefore referred to,
and or in enforcing any rights hereunder, and also to make or cause any and all such payments to be made strictly in
accordance with the terms and provisions of any agreement (g), express or implied, which has (have) been or may
hereafter be made or entered into by the Borrower in reference thereto, regardless of any law, regulation or decree, now
or hereafter in effect which might in any manner affect any of the terms or provisions of any such agreements(s) or your
right with respect thereto as against the Borrower, or cause or permit to be invoked any alteration in the time, amount or
manner of payment by the Borrower of any such instruments, obligations or indebtedness; x x x " (Italics Ours)
The use of the term "guarantee" does not ipso facto mean that the contract is one of guaranty. Authorities recognize that the
word "guarantee" is frequently employed in business transactions to describe not the security of the debt but an intention to be bound
by a primary or independent obligation. As aptly observed by the trial court, the interpretation of a contract is not limited to the title
alone but to the contents and intention of the parties.
Having thus established that petitioner is a surety, Article 2080 of the Civil Code, relied upon by petitioner, finds no
application to the case at bar. In Bicol Savings and Loan Association vs. Guinhawa, we have ruled that Article 2080 of the New Civil Code
does not apply where the liability is as a surety, not as a guarantor. But even assuming that Article 2080 is applicable, SOLIDBANK's
failure to register the chattel mortgage did not release petitioner from the obligation. In the Continuing Guaranty executed in favor of
SOLIDBANK, petitioner bound itself to the contract irrespective of the existence of any collateral. It even released SOLIDBANK from any
fault or negligence that may impair the contract.
Case: Guaranty as actually suretyship; distinction between the two

MACHETTI vs HOSPICIO DE SAN JOSE
Romulo Machetti, by a written agreement undertook to construct a building on Calle Rosario in the city of Manila for the
Hospicio de San Jose, the contract price being P64,000. One of the conditions of the agreement was that the contractor should obtain
the "guarantee" of the Fidelity and Surety Company of the Philippine Islands to the amount of P128,800.
Machetti constructed the building under the supervision of architects representing the Hospicio de San Jose and, as the work
progressed, payments were made to him from time to time upon the recommendation of the architects, until the entire contract price,
with the exception of the sum of the P4,978.08, was paid. Subsequently it was found that the work had not been carried out in
accordance with the specifications which formed part of the contract and that the workmanship was not of the standard required, and
the Hospicio de San Jose therefore answered the complaint and presented a counterclaim for damages for the partial noncompliance
with the terms of the agreement abovementioned, in the total sum of P71,350. Machetti, on petition of his creditors, was later declared
insolvent and an order was entered suspending the proceeding in the present case in accordance with section 60 of the Insolvency Law,
Act No. 1956.
The Hospicio de San Jose filed a motion asking that the Fidelity and Surety Company be made cross-defendant to the
exclusion of Machetti and that the proceedings be continued as to said company, but still remain suspended as to Machetti. This motion
was granted and the Hospicio filed a complaint against the Fidelity and Surety Company asking for a judgement for P12,800 against the
company upon its guaranty.
As will be seen, the original action which Machetti was the plaintiff and the Hospicio de San Jose defendant, has been

converted into an action in which the Hospicio de San Jose is plaintiff and the Fidelity and Surety Company, the original plaintiff's
guarantor, is the defendant, Machetti having been practically eliminated from the case.
But in this instance the guarantor's case is even stronger than that of an ordinary surety. The contract of guaranty is written in
the English language and the terms employed must of course be given the signification which ordinarily attaches to them in that
language. In English the term "guarantor" implies an undertaking of guaranty, as distinguished from suretyship. It is very true that
notwithstanding the use of the words "guarantee" or "guaranty" circumstances may be shown which convert the contract into one of
suretyship but such circumstances do not exist in the present case; on the contrary it appear affirmatively that the contract is the
guarantor's separate undertaking in which the principal does not join, that its rests on a separate consideration moving from the
principal and that although it is written in continuation of the contract for the construction of the building, it is a collateral undertaking
separate and distinct from the latter. All of these circumstances are distinguishing features of contracts of guaranty.
Now, while a surety undertakes to pay if the principal does not pay, the guarantor only binds himself to pay if the principal
cannot pay. The one is the insurer of the debt, the other an insurer of the solvency of the debtor. This latter liability is what the Fidelity
and Surety Company assumed in the present case. The undertaking is perhaps not exactly that of a fianza under the Civil Code, but is a
perfectly valid contract and must be given the legal effect if ordinarily carries. The Fidelity and Surety Company having bound itself to
pay only the event its principal, Machetti, cannot pay it follows that it cannot be compelled to pay until it is shown that Machetti is
unable to pay. Such ability may be proven by the return of a writ of execution unsatisfied or by other means, but is not sufficiently
established by the mere fact that he has been declared insolvent in insolvency proceedings under our statutes, in which the extent of
the insolvent's inability to pay is not determined until the final liquidation of his estate.
B.
Of real security
Secured transactions or contracts of real security - supported by a collateral or an encumbrance of property
1. Pledge
A contract wherein the debtor delivers to the creditor or to a third person a movable or document evidencing
incorporeal rights for the purpose of securing fulfilment of a principal obligation with the understanding that
when the obligation is fulfilled, the thing delivered shall be returned with all its fruits and accessions.
2. Real Estate Mortgage
A contract whereby the debtor secures to the creditor the fulfillment of a principal obligation, specially
subjecting to such security immovable property or real rights over immovable property in case the principal
obligation is not complied with at the time stipulated.
3. Chattel Mortgage
A contract by virtue of which personal property is recorded in the Chattel Mortgage Register as a security for
the performance of an obligation.
4. Antichresis
A contract whereby the creditor acquires the right to receive the fruits of an immovable of the debtor, with the
obligation to apply them to the payment of the interest, if owing, and thereafter to the principal of his credit.
III.
Causa
The causa of guaranty is the same causa that supports the principal obligation.
TITLE XV GUARANTY
CHAPTER 1
Nature and Extent of Guaranty
Articles 2047-2048
I.
Concept
Characteristic features:
A. Subsidiary
-It takes effect only when the principal debtor fails in his obligation subject to limitation.
Case: Difference between guarantor and surety; effect where guarantor is sued first before the principal debtor
CASTELLVI vs. SELLNER
Facts:
The basis of plaintiff's action is a letter written by defendant Sellner to John T. Macleod, agent for Mrs. Horace L. Higgins, of the following
tenor:
DEAR SIR: I hereby obligate and bind myself, my heirs, successors and assigns that if the promissory note executed the
29th day of May, 1915 by the Keystone Mining Co., W.H. Clarke, and John Maye, jointly and severally, in your favor and due six
months after date for Pesos 10,000 is not fully paid at maturity with interest, I will, within fifteen days after notice of such
default, pay you in cash the sum of P10,000 and interest upon your surrendering to me the three thousand shares of stock of
the Keystone Mining Co. held by you as security for the payment of said note.
Respectfully,
(Sgd.) GEO. C. SELLNER.
Issue:
Whether or not the defendant Sellner is a surety or a guarantor.
SC Ruling:
Sellner is a guarantor.
The points of difference between a surety and a guarantor are familiar to American authorities. A surety and a guarantor are alike
in that each promises to answer for the debt or default of another. A surety and a guarantor are unlike in that the surety assumes
liability as a regular party to the undertaking, while the liability as a regular party to upon an independent agreement to pay the
obligation if the primary pay or fails to do so. A surety is charged as an original promissory; the engagement of the guarantor is a
collateral undertaking. The obligation of the surety is primary; the obligation of the guarantor is secondary.
Turning back again to our Civil Code, we first note that according to article 1822 "By fianza (security or suretyship) one person
binds himself to pay or perform for a third person in case the latter should fail to do so." But "If the surety binds himself in solidum with
the principal debtor, the provisions of Section fourth, Chapter third, Title first, shall be applicable." What the first portion of the cited
article provides is, consequently, seen to be somewhat akin to the contract of guaranty, while what is last provided is practically
equivalent to the contract of suretyship. When in subsequent articles found in section 1 of Chapter II of the title concerning fianza, the
Code speaks of the effects of suretyship between surety and creditor, it has, in comparison with the common law, the effect of guaranty
between guarantor and creditor. The civil law suretyship is, accordingly, nearly synonymous with the common law guaranty; and the
civil law relationship existing between codebtors liable in solidum is similar to the common law suretyship.
It is perfectly clear that the obligation assumed by defendant was simply that of a guarantor, or, to be more precise, of the fiador
whose responsibility is fixed in the Civil Code. The letter of Mr. Sellner recites that if the promissory note is not paid at maturity, then,
within fifteen days after notice of such default and upon surrender to him of the three thousand shares of Keystone Mining Company
stock, he will assume responsibility. Sellner is not bound with the principals by the same instrument executed at the same time and on

the same consideration, but his responsibility is a secondary one found in an independent collateral agreement, Neither is Sellner jointly
and severally liable with the principal debtors.
Case: Liability where company president signed as guarantor

PICZON vs. PICZON
Facts:
The actionable document of appellants which is the basis of this case reads:
AGREEMENT OF LOAN
KNOW YE ALL MEN BY THESE PRESENTS:
That I, ESTEBAN PICZON, of legal age, married, Filipino, and resident of and with postal address in the municipality of Catbalogan,
Province of Samar, Philippines, in my capacity as the President of the corporation known as the "SOSING-LOBOS and CO., INC.," as
controlling stockholder, and at the same time as guarantor for the same, do by these presents contract a loan of Twelve Thousand Five
Hundred Pesos (P12,500.00), Philippine Currency, the receipt of which is hereby acknowledged, from the "Piczon and Co., Inc." another
corporation, the main offices of the two corporations being in Catbalogan, Samar, for which I undertake, bind and agree to use the loan
as surety cash deposit for registration with the Securities and Exchange Commission of the incorporation papers relative to the "SosingLobos and Co., Inc.," and to return or pay the same amount with Twelve Per Cent (12%) interest per annum, commencing from the date
of execution hereof, to the "Piczon and Co., Inc., as soon as the said incorporation papers are duly registered and the Certificate of
Incorporation issued by the aforesaid Commission.
IN WITNESS WHEREOF, I hereunto signed my name in Catbalogan, Samar, Philippines, this 28th day of September, 1956.
(Sgd.) ESTEBAN PICZON
Issue:
Whether or not Esteban Piczon is a guarantor or a surety.
SC Ruling:
Under the terms of the contract, Esteban Piczon expressly bound himself only as guarantor, and there are no circumstances in
the record from which it can be deduced that his liability could be that of a surety. A guaranty must be express, (Article 2055, Civil Code)
and it would be violative of the law to consider a party to be bound as a surety when the very word used in the agreement is
"guarantor."
Moreover, as well pointed out in appellees' brief, under the terms of the pre-trial order, appellants accepted the express assumption of
liability by Sosing-Lobos & Co., Inc. for the payment of the obligation in question, thereby modifying their original posture that inasmuch
as that corporation did not exist yet at the time of the agreement, Piczon necessarily must have bound himself as insurer.
a. Solidary guarantor does not lose his character as such vis--vis the debtor
PALMARES vs. CA
Facts:
Pursuant to a promissory note, private respondent M.B. Lending Corporation extended a loan to the spouses Osmea and
Merlyn Azarraga, together with petitioner Estrella Palmares, in the amount of P30,000.00 payable on or before May 12, 1990, with
compounded interest at the rate of 6% per annum to be computed every 30 days from the date thereof. On four occasions after the
execution of the promissory note and even after the loan matured, petitioner and the Azarraga spouses were able to pay a total of
P16,300.00, thereby leaving a balance of P13,700.00. No payments were made after the last payment on September 26, 1991.
The basis of petitioner Palmares' liability under the promissory note is expressed in this wise:
ATTENTION TO CO-MAKERS: PLEASE READ WELL
I, Mrs. Estrella Palmares, as the Co-maker of the above-quoted loan, have fully understood the contents of this Promissory
Note for Short-Term Loan:
That as Co-maker, I am fully aware that I shall be jointly and severally or solidarily liable with the above principal maker of this
note;
That in fact, I hereby agree that M.B. LENDING CORPORATION may demand payment of the above loan from me in case the
principal maker, Mrs. Merlyn Azarraga defaults in the payment of the note subject to the same conditions above-contained.
On the basis of petitioner's solidary liability under the promissory note, respondent corporation filed a complaint against petitioner
Palmares as the lone party-defendant, to the exclusion of the principal debtors, allegedly by reason of the insolvency of the latter.
Issue:
Where a party signs a promissory note as a co-maker and binds herself to be jointly and severally liable with the principal debtor in case
the latter defaults in the payment of the loan, is such undertaking of the former deemed to be that of a surety as an insurer of the debt,
or of a guarantor who warrants the solvency of the debtor?
SC Ruling:
A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the debtor. A suretyship is an
undertaking that the debt shall be paid; a guaranty, an undertaking that the debtor shall pay. Stated differently, a surety promises to
pay the principal's debt if the principal will not pay, while a guarantor agrees that the creditor, after proceeding against the principal,
may proceed against the guarantor if the principal is unable to pay. A surety binds himself to perform if the principal does not, without
regard to his ability to do so. A guarantor, on the other hand, does not contract that the principal will pay, but simply that he is able to
do so. In other words, a surety undertakes directly for the payment and is so responsible at once if the principal debtor makes default,
while a guarantor contracts to pay if, by the use of due diligence, the debt cannot be made out of the principal debtor.
Quintessentially, the undertaking to pay upon default of the principal debtor does not automatically remove it from the ambit
of a contract of suretyship. The second and third paragraphs of the aforequoted portion of the promissory note do not contain any other
condition for the enforcement of respondent corporation's right against petitioner. It has not been shown, either in the contract or the
pleadings, that respondent corporation agreed to proceed against herein petitioner only if and when the defaulting principal has become
insolvent. A contract of suretyship, to repeat, is that wherein one lends his credit by joining in the principal debtor's obligation, so as to
render himself directly and primarily responsible with him, and without reference to the solvency of the principal.
The stipulation contained in the third paragraph of the controverted suretyship contract merely elucidated on and made more
specific the obligation of petitioner as generally defined in the second paragraph thereof. Resultantly, the theory advanced by petitioner,
that she is merely a guarantor because her liability attaches only upon default of the principal debtor, must necessarily fail for being
incongruent with the judicial pronouncements adverted to above.
It is a well-entrenched rule that in order to judge the intention of the contracting parties, their contemporaneous and
subsequent acts shall also be principally considered. Several attendant factors in that genre lend support to our finding that petitioner is
a surety. For one, when petitioner was informed about the failure of the principal debtor to pay the loan, she immediately offered to
settle the account with respondent corporation. Obviously, in her mind, she knew that she was directly and primarily liable upon default
of her principal. For another, and this is most revealing, petitioner presented the receipts of the payments already made, from the time
of initial payment up to the last, which were all issued in her name and of the Azarraga spouses. This can only be construed to mean
that the payments made by the principal debtors were considered by respondent corporation as creditable directly upon the account
and inuring to the benefit of petitioner. The concomitant and simultaneous compliance of petitioner's obligation with that of her
principals only goes to show that, from the very start, petitioner considered herself equally bound by the contract of the principal
makers.
A surety is bound equally and absolutely with the principal, and as such is deemed an original promisor and debtor from the
beginning. This is because in suretyship there is but one contract, and the surety is bound by the same agreement which binds the
principal. In essence, the contract of a surety starts with the agreement.

Solidary Guarantor vs. Solidary Debtor
Solidary Guarantor
May recover the entire payment from the debtor (2066)
Released by extension of the period
Has action for counter-bond and reimbursement, besides
subrogation
His obligation is accessory
Solidary Debtor
Can recover only the co-debtors share
Not released by extension
No action except for contribution
Bound under a principal obligation
B. Consensual
C. Gratuitous or Onerous
a. Gratuitous - the guarantor does not receive any price or remuneration for acting as such (2048).
b. Onerous - the guarantor receives valuable consideration for his guaranty.
Case: Dismissal of complaint by virtue of compromise agreement where payment of balance was guaranteed
SEVERINO vs. SEVERINO
The plaintiff Fabiola Severino is the recognized natural daughter of Melecio Severino, deceased, former resident of Occidental
Negros. Upon the death of Melecio Severino a number of years ago, he left considerable property and litigation ensued between his
widow, Felicitas Villanueva, and Fabiola Severino, on the one part, and other heirs of the deceased on the other part. In order to make an
end of this litigation a compromise was effected by which Guillermo Severino, a son of Melecio Severino, took over the property
pertaining to the estate of his father at the same time agreeing to pay P100,000 to Felicitas Villanueva and Fabiola Severino. This sum of
money was made payable, first, P40,000 in cash upon the execution of the document of compromise, and the balance in three several
payments of P20,000 at the end of one year; two years, and three years respectively. To this contract the appellant Enrique Echaus
affixed his name as guarantor. The first payment of P40,000 was made on July 11, 1924, the date when the contract of compromise was
executed; and of this amount the plaintiff Fabiola Severino received the sum of P10,000. Of the remaining P60,000, all as yet unpaid,
Fabiola Severino is entitled to the sum of P20,000.
It appears that at the time of the compromise agreement above-mentioned was executed Fabiola Severino had not yet been
judicially recognized as the natural daughter of Melecio Severino, and it was stipulated that the last P20,000 corresponding to Fabiola
and the last P5,000 corresponding to Felicitas Villanueva should retained on deposit until the definite status of Fabiola Severino as
natural daughter of Melecio Severino should be established. The judicial decree to this effect was entered in the Court of First Instance of
Occidental Negros on June 16, 1925, and as the money which was contemplated to be held in suspense has never in fact been paid to
the parties entitled thereto, it results that the point respecting the deposit referred to has ceased to be of moment.
The proof shows that the money claimed in this action has never been paid and is still owing to the plaintiff; and the only
defense worth noting in this decision is the assertion on the part of Enrique Echaus that he received nothing for affixing his signature as
guarantor to the contract which is the subject of suit and that in effect the contract was lacking in consideration as to him.
The point is not well taken. A guarantor or surety is bound by the same consideration that makes the contract effective
between the principal parties thereto. The compromise and dismissal of a lawsuit is recognized in law as a valuable consideration; and
the dismissal of the action which Felicitas Villanueva and Fabiola Severino had instituted against Guillermo Severino was an adequate
consideration to support the promise on the part of Guillermo Severino to pay the sum of money stipulated in the contract which is the
subject of this action. The promise of the appellant Echaus as guarantor therefore binding. It is never necessary that the guarantor or
surety should receive any part of the benefit, if such there be, accruing to his principal. But the true consideration of this contract was
the detriment suffered by the plaintiffs in the former action in dismissing that proceeding, and it is immaterial that no benefit may have
accrued either to the principal or his guarantor.
Article 2049-2057
I.
KINDS
A. By its origin
CONVENTIONAL- constituted by contract
LEGAL- required by substantive or procedural law
JUDICIAL- required by a court from a litigant
B.
By its extent
INDEFINITE or UNLIMITED or SIMPLE- cover the principal obligation, accessories and cost incurred after the
guarantor has been judicially asked to pay.
If the guaranty is given without the knowledge or consent of the debtor, Articles 1236 and 1237 apply.
A guarantor can recover from the debtor what the former had to pay the creditor, even if the
guaranty was without the debtors consent or against his will, but the recovery will only be to the extent
that the debtor had been benefited.
LIMITED- excluding accessory obligation

Case: Suit to recover from principal debtor who did not consent to the guaranty
DE GUZMAN VS. SANTOS
Facts:
A mercantile partnership, Phil-Am Constructions Co., with Toole, Abad and Santos as co-partners, was formed with P10,000 of
its capital secured by way of a loan from Paulino Candelaria. The partnership and the co-partnership bound themselves solidarily to pay
said indebtedness. Having violated the conditions of the contract, Candelaria filed an action against PACC and the co-partners for the
recovery of the loan. Candelaria obtained a writ of attachment against the co-partners by virtue of which the sheriif attached the copartnership properties. No property of the PACC was attached. To discharge the attachment, PACC as principal and Santiago Lucero and
Meliton Carlos as guarantors executed a bond in favor of Candelaria. Defendant Santos neither intervened nor signed individually in the
bond. Attachment was discharged and attached properties were returned to their owners.
Trial court rendered judgment ordering the co-partners to pay the judgment creditor the amount of the loan. Writ of execution
having been returned unsatisfied, said writ was issued
against the guarantors upon the motion of Candelaria. Lucero and Carlos,
as guarantors, paid P5,000 plus. Plaintiff de Guzman as, in her capacity as judicial administrator of the estate of the deceased Lucero,
sought to recover from Santos what the estate had paid to Candelaria from defendant. Trial court decided for plaintiff. Defendant Santos
appealed contending that he is not liable because he neither applied for nor intervened in the bond any capacity.
Issue:
Whether or not Santos is legally bound to pay what the plaintiff had advanced to Candelaria even if it was given without his knowledge.
SC Ruling:

Under Article 1822 of the Civil Code, by guaranty one person binds himself to pay or perform for a third person in case the
latter should failed to do so, and Article 1838 of the Civil Code provides that any guarantor who pays for the debtor shall be indemnified
by the latter even if the guaranty have been undertaken without the debtors knowledge. Applying the citedprovisions, it is obvious that
Santos is legally bound to pay the plaintiff what he has advanced to Candelaria upon judgment, notwithstanding the fact that the bond
was given without his knowledge.
Defendants obligation to pay what the plaintiff had advanced is further sanctioned by the general provisions of the Civil Code
regarding obligations. Article 1158 of the Civil Code provides that the payment made by any person whether he has an interest in the
performance of the obligation or not, and whether the payment is known and approved by the debtor or whether he is unaware of it,
may be recovered from said debtor.
Any person who makes a payment for the account of another may recover from the debtor the amount payment, unless it was
made against the express will of the latter. In the latter case, he can only recover from the debtor in so far as the payment has been
beneficial to the latter. According to this legal provision, it is evident that the defendant is bound to pay to the plaintiff what the latter
had advanced to Candelaria, and this is more so because it appears that although Lucero executed the bond without his, knowledge,
nevertheless he did not object thereto or repudiate the same at any time.
And it cannot be logically deduced that the defendant did not have knowledge of the bond, firstly, because his properties
were attached and attachment could not have been levied without his knowledge, and secondly, because said properties were returned
to him and in receiving them he was necessarily apprised of the fact that a bond had been filed to discharge the attachment. Judgment
affirmed.
C.
By the person guaranteed
Guaranty proper
Sub-guaranty (to guarantee the guarantors solvency)
Counter-guarantee (in favor of the guarantor)
D.
By the liability of the guarantor

NORMAL or ORDINARY- simple guarantee; guarantee proper; subsidiary
SOLIDARY- suretyship
A guarantor is the insurer of the solvency of the debtor; binds himself to pay if the principal is unable to pay.
A surety is the insurer of the debt; he undertakes to pay if the principal does not pay.
Cases:
Romulo Machetti, vs. Hospicio De San Jose and Fidelity & Surety Company Of The Philippine Islands
Facts:
It appears from the evidence that Romulo Machetti, by a written agreement undertook to construct a building for the Hospicio
de San Jose, the contract price being P64,000. One of the conditions of the agreement was that the contractor should obtain the
"guarantee" of the Fidelity and Surety Company of the Philippine Islands to the amount of P128,800 and the following endorsement in
appears upon the contract:
For value received we hereby guarantee compliance with the terms and conditions as outlined in the above contract.
FIDELITY AND SURETY COMPANY OF THE PHILIPPINE ISLANDS.
(Sgd) OTTO VORSTER, Vice-President.
Machetti constructed the building under the supervision of architects representing the Hospicio de San Jose and, as the work
progressed, payments were made to him from time to time upon the recommendation of the architects, until the entire contract price,
with the exception of the sum of the P4,978.08, was paid. Subsequently it was found that the work had not been carried out in
accordance with the specifications which formed part of the contract and that the workmanship was not of the standard required, and
the Hospicio de San Jose therefore answered the complaint and presented a counterclaim for damages for the partial noncompliance
with the terms of the agreement abovementioned, in the total sum of P71,350. After issue was thus joined, Machetti, on petition of his
creditors, was declared insolvent and an order was entered suspending the proceeding in the present case in accordance with section 60
of the Insolvency Law, Act No. 1956.
The Hospicio de San Jose filed a motion asking that the Fidelity and Surety Company be made cross-defendant to the
exclusion of Machetti and that the proceedings be continued as to said company, but still remain suspended as to Machetti. This motion
was granted and the Hospicio filed a complaint against the Fidelity and Surety Company asking for a judgement for P12,800 against the
company upon its guaranty. The CFI rendered judgment against the Fidelity and Surety Company for P12,800 in accordance with the
complaint. As will be seen, the original action which Machetti was the plaintiff and the Hospicio de San Jose defendant, has been
converted into an action in which the Hospicio de San Jose is plaintiff and the Fidelity and Surety Company, the original plaintiff's
guarantor, is the defendant, Machetti having been practically eliminated from the case.
Issue:
Whether or not Fidelity and Surety Companys liability is that of a surety or guarantor?
SC Ruling:
In English the term "guarantor" implies an undertaking of guaranty, as distinguished from suretyship. It is very true that
notwithstanding the use of the words "guarantee" or "guaranty" circumstances may be shown which convert the contract into one of
suretyship but such circumstances do not exist in the present case; on the contrary it appears affirmatively that the contract is the
guarantor's separate undertaking in which the principal does not join, that it rests on a separate consideration moving from the principal
and that although it is written in continuation of the contract for the construction of the building, it is a collateral undertaking separate
and distinct from the latter. All of these circumstances are distinguishing features of contracts of guaranty.
Now, while a surety undertakes to pay if the principal does not pay, the guarantor only binds himself to pay if the principal
cannot pay. The one is the insurer of the debt, the other an insurer of the solvency of the debtor. This latter liability is what the Fidelity
and Surety Company assumed in the present case. The undertaking is perhaps not exactly that of a fianza under the Civil Code, but is a
perfectly valid contract and must be given the legal effect if ordinarily carries. The Fidelity and Surety Company having bound itself to
pay only the event its principal, Machetti, cannot pay it follows that it cannot be compelled to pay until it is shown that Machetti is
unable to pay. Such ability may be proven by the return of a writ of execution unsatisfied or by other means, but is not sufficiently
established by the mere fact that he has been declared insolvent in insolvency proceedings under our statutes, in which the extent of
the insolvent's inability to pay is not determined until the final liquidation of his estate. The judgment appealed from is therefore
reversed without costs and without prejudice to such right of action as the cross-complainant, the Hospicio de San Jose, may have after
exhausting its remedy against the plaintiff Machetti.
OoO
PNB VS. LUZON SURETY Co., INC.
Facts:
Defendant Augusto R. Villarosa, a sugar planter adhered to the Lopez Sugar Central Milling company, Inc. applied for a crop
loan with the plaintiff, Philippine National Bank, which application was approved on March 6, 1952 in the amount of P32,400. Villarosa
executed a Chattel Mortgage on standing crop to guaranty the crop loan.
As of September 27, 1953 as shown in the accounts, there was a balance of P63,222.78 but as of the date when the
complaint was filed on June 8, 1960, because of the interest accrued, it has reached a much higher sum. Due to its non-payment,

plaintiff filed this complaint which sought reliefnot only against the planter but also against the 3 bondsmen, Luzon Surety, Central
surety and Associated surety.
Issue:
Whether or not the CA was justified in absolving Luzon Surety Co., Inc. from liability to petitioner PNB.
SC Ruling:
The surety bond executed by and between the PNB on one hand and Augusto Villarosa and respondent Luzon Surety
Company, Inc., on theother is hereby reproduced, viz:
That we Augusto Villarosa, as principal and Luzon Surety Company, Inc.,
as surety, are held and firmly bound unto
Philippine National Bank, Bacolod City , Philippines, in the sum of P10,000,for the payment of which sum, well and truly to be made, we
bind ourselves, our heirs, executors, administrators, successors and assigns jointly and severally, firmly by these presents:
The foregoing evidences clearly the liability of Luzon Surety to petitioner PNB not merely as a guarantor but as a surety-liable
as a regular party to the undertaking.
A surety bond filed for the release of the seized importations during the pendency of the case guarantees not the legality of
the importation but merely the payment of the appraised value of the goods released. The surety has no right to question the legality
of the seizure and certain CB circulars.
The next question to take up is the liability of Luzon Surety Co. for interest which, it contends, would increase its liability to
more than P10,000 which is the maximum if its bond. We cannot agree to this reasoning. In the case of Tawaga vs. Aldanes,
Plaridel Surety Insurance Co. vs. P.L Galang Machinery Co., it was held:
If a surety upon demand fails to pay, he can be held liable for interest, even if in thus paying, the liability becomes more than
that in the principal obligation. The increased liability is not because of the contract but because of the default and the necessity of
judicial collection. It should be noted, however, that the interest runs from the time the complaint is filed, not from the time the debt
becomes due and demandable.
OoO
ONG vs. PHILIPPINE COMMERCIAL INTERNATIONAL BANK
Facts:
Baliwag Mahogany Corporation (BMC) is a domestic corporation engaged in the manufacture and export of finished wood
products. Petitioners-spouses Alfredo and Susana Ong are its President and Treasurer, respectively.
On April 20, 1992, respondent Philippine Commercial International Bank (now Equitable-Philippine Commercial International
Bank or E-PCIB) filed a case for collection of a sum of money against petitioners-spouses. The complaint alleged that in 1991, BMC
needed additional capital for its business and applied for various loans, amounting to a total of five million pesos, with the respondent
bank. Petitioners-spouses acted as sureties for these loans and issued three (3) promissory notes for the purpose. Under the terms of
the notes, it was stipulated that respondent bank may consider debtor BMC in default and demand payment of the remaining balance of
the loan upon the levy, attachment or garnishment of any of its properties, or upon BMCs insolvency, or if it is declared to be in a state
of suspension of payments. Respondent bank granted BMCs loan applications.
On November 22, 1991, BMC filed a petition for rehabilitation and suspension of payments with the Securities and Exchange
Commission (SEC) after its properties were attached by creditors. Respondent bank considered debtor BMC in default of its obligations
and sought to collect payment thereof from petitioners-spouses as sureties. On October 13, 1992, a Memorandum of Agreement (MOA)
was executed by debtor BMC, the petitioners-spouses as President and Treasurer of BMC, and the consortium of creditor banks of BMC
(of which respondent bank is included). The MOA took effect upon its approval by the SEC on November 27, 1992.
Thereafter, petitioners-spouses moved to dismiss the complaint. They argued that as the SEC declared the principal debtor
BMC in a state of suspension of payments and, under the MOA, the creditor banks, including respondent bank, agreed to temporarily
suspend any pending civil action against the debtor BMC, the benefits of the MOA should be extended to petitioners-spouses who acted
as BMCs sureties in their contracts of loan with respondent bank. Petitioners-spouses averred that respondent bank is barred from
pursuing its collection case filed against them.
Spouses Ongs Contention:
Petitioners contend that it would prejudice them if the principal debtor BMC would enjoy the suspension of payment of its
debts while petitioners, who acted only as sureties for some of BMCs debts, would be compelled to make the payment. They add that
compelling them to pay is contrary to Article 2063 of the Civil Code which provides that a compromise between the creditor and
principal debtor benefits the guarantor and should not prejudice the latter. Lastly, petitioners rely on Article 2081 of the Civil Code
which provides that: "the guarantor may set up against the creditor all the defenses which pertain to the principal debtor and are
inherent in the debt; but not those which are purely personal to the debtor." Petitioners aver that if the principal debtor BMC can set up
the defense of suspension of payment of debts and filing of collection suits against respondent bank, petitioners as sureties should
likewise be allowed to avail of these defenses.
SC Ruling:
We find no merit in petitioners contentions.
Reliance of petitioners-spouses on Articles 2063 and 2081 of the Civil Code is misplaced as these provisions
refer to contracts of guaranty. They do not apply to suretyship contracts. Petitioners-spouses are not guarantors but sureties of
BMCs debts. There is a sea of difference in the rights and liabilities of a guarantor and a surety. A guarantor insures the solvency of
the debtor while a surety is an insurer of the debt itself. A contract of guaranty gives rise to a subsidiary obligation on the
part of the guarantor. It is only after the creditor has proceeded against the properties of the principal debtor and the debt remains
unsatisfied that a guarantor can be held liable to answer for any unpaid amount. This is the principle of excussion. In a suretyship
contract, however, the benefit of excussion is not available to the surety as he is principally liable for the payment of the
debt. As the surety insures the debt itself, he obligates himself to pay the debt if the principal debtor will not pay, regardless of whether
or not the latter is financially capable to fulfill his obligation. Thus, a creditor can go directly against the surety although the principal
debtor is solvent and is able to pay or no prior demand is made on the principal debtor. A surety is directly, equally and absolutely
bound with the principal debtor for the payment of the debt and is deemed as an original promissor and debtor from the
beginning.
Under the suretyship contract entered into by petitioners-spouses with respondent bank, the former obligated themselves to
be solidarily bound with the principal debtor BMC for the payment of its debts to respondent bank amounting to five million pesos
(P5,000,000.00). Under Article 1216 of the Civil Code, respondent bank as creditor may proceed against petitioners-spouses as
sureties despite the execution of the MOA which provided for the suspension of payment and filing of collection suits against BMC.
Respondent banks right to collect payment from the surety exists independently of its right to proceed directly against the principal
debtor. In fact, the creditor bank may go against the surety alone without prior demand for payment on the principal debtor.
OoO
INTERNATIONAL FINANCE CORPORATION VS. IMPERIAL TEXTILE MILLS, INC.
Facts:
On December 17, 1974, International Finance Corporation (IFC) and Philippine Polyamide Industrial Corporation (PPIC) entered
into a loan agreement wherein IFC extended to PPIC a loan of US$7,000,000.00, payable in 16 semi-annual installments of
US$437,500.00 with interest at the rate of 10%.
On December 17, 1974, a Guarantee Agreement was executed where Imperial Textile Mills, Inc. (ITM), Grand Textile
Manufacturing Corporation (Grandtex) agreed to guarantee PPICs obligations.
PPIC paid the installments due on June 1, 1977, December 1, 1977 and June 1, 1978. The payments due on December 1, 1978, June 1,
1979 and December 1, 1979 were rescheduled as requested by PPIC. Despite the rescheduling of the installment payments, however,
PPIC defaulted.
With PPICs failure to pay, IFC, together with DBP, applied for the extrajudicial foreclosure of mortgages on the real properties
owned by PPIC at Calamba, Laguna. On July 30, 1985, the deputy sheriff of Calamba, Laguna issued a notice of extrajudicial sale. IFC
and DBP were the only bidders during the auction sale. IFCs bid was for P99,269,100.00 which was equivalent to US$5,250,000.00. The
outstanding loan, however, amounted to US$8,083,967.00 thus leaving a balance of US$2,833,967.00. PPIC failed to pay the remaining

balance.
Consequently, IFC demanded ITM and Grandtex, as guarantors of PPIC, to pay the outstanding balance. However, despite the
demand made by IFC, the outstanding balance remained unpaid.
IFC filed a complaint with the RTC Manila which held PPIC liable for the payment of the outstanding loan plus interests. It also ordered
PPIC to pay IFC its claimed attorneys fees. However, the TC relieved ITM of its obligation as guarantor. Hence, the trial court dismissed
IFCs complaint against ITM. CA reversed the decision stating ITM as guarantor.
Issue:
Whether or not ITM is a surety, and thus solidarily liable with PPIC for the payment of the loan.
SC Ruling:
While referring to ITM as a guarantor, the Agreement specifically stated that the corporation was jointly and severally
liable. To put emphasis on the nature of that liability, the Contract further stated that ITM was a primary obligor, not a mere surety.
Those stipulations meant only one thing: that at bottom, and to all legal intents and purposes, it was a surety.
When qualified by the term jointly and severally, the use of the word guarantor to refer to a surety does not violate the
law. As Article 2047 provides, a suretyship is created when a guarantor binds itself solidarily with the principal obligor. Likewise, the
phrase in the Agreement -- as primary obligor and not merely as surety -- stresses that ITM is being placed on the same level as PPIC.
Those words emphasize the nature of their liability, which the law characterizes as a suretyship.
Indubitably therefore, ITM bound itself to be solidarily liable with PPIC. ITM thereby brought itself to the level of PPIC and
could not be deemed merely secondarily liable. Pursuant to this provision, petitioner (as creditor) was justified in taking action directly
against respondent.
We note that the CA denied solidary liability, on the theory that the parties would not have executed a Guarantee Agreement
if they had intended to name ITM as a primary obligor and that ITMs undertaking was collateral to and distinct from the Loan
Agreement. The Court stresses that a suretyship is merely an accessory or a collateral to a principal obligation. Although a surety
contract is secondary to the principal obligation, the liability of the surety is direct, primary and absolute; or equivalent to that of a
regular party to the undertaking. A surety becomes liable to the debt and duty of the principal obligor even without possessing a direct
or personal interest in the obligations constituted by the latter.
With the present finding that ITM is a surety, it is clear that the CA erred in declaring the former secondarily liable. Evidently,
the dispositive portion of the assailed Decision should be modified to require ITM to pay the amount adjudged in favor of IFC.
WHEREFORE, Petition is GRANTED, and MODIFIED that ITM, is declared a surety and ORDERED to pay International Finance
Corporation the same amounts adjudged against PPIC.
II.
Elements of Guaranty
A. Parties
a. Qualifications of Guarantor: (legal capacity is required)
If proposed by the debtor, the guarantor must possess the following qualifications:
i.
He must be capable of contracting obligations
*includes married woman
ii.
He must have sufficient property to answer for the debt guaranteed.
*the insolvency of the guarantor entitles the creditor to demand another guarantor, unless
the insolvent guarantor was chosen by the creditor
iii.
He must possess integrity (honesty):
Conviction of the guarantor of a crime involving dishonesty has the same effect as
insolvency
*Integrity is a matter of opinion and is required only at the time of the perfection of the
contract. Its subsequent disappearance makes it optional in the creditor to demand another
guarantor
If chosen by the creditor, the latter may waive all the requirements other than the legal capacity to
contract.
Consent (of the guarantor) is required

Case: Rule where there is merely an offer of guaranty
TEXAS CO. VS. ALONZO
Facts:
Leonor Bantug was sued for her agency contract with Texas Co. where Texas Co. filed a collection case against her and Alonso.
It appears that to ensure faithful compliance of Bantugs obligations as agent to Texas.Co , Alonso bound herself solidarily to answer for
Bantugs liability up to P2000 bond evidenced in a document. Bantug failed in the performance of her obligations and declared in
default. Alonso averred that he merely acted as co-security of one Palanca and that no acceptance was made by Texas, Co of the bond
thus not binding on him. It was shown that the execution of the bond was requested by Texas, Co. by virtue of the Additional Security
clause in the agency contract:
Additional Security. The Agent shall whenever requested by the Company in addition to the guaranty herewith
provided, furnish further guaranty or bond, conditioned upon the Agent's faithful performance of this contract, in such
individuals of firms as joint and several sureties as shall be satisfactory to the Company.
Trial court ordered Bantug and Alonso liable in solidum. CA reversed trial courts findings holding Alonso absolved of the
guaranty undertaking.
Issue:
Whether or not there is acceptance by creditor Texas Co to bind guarantor of the undertaking.
SC Ruling:
No acceptance. Though requested by creditor of the execution of the bond, from the foregoing Additional security clause it is
apparent that before a bond is accepted by the petitioner, it has to be in such form and amount and with such sureties as shall be
satisfactory hereto. Hence, must be approved by creditor Texas. A request for bond is not inference of approval thereto.
Where there is merely an offer of, or proposition for, a guaranty, or merely a conditional guaranty in the sense that it requires
action by the creditor before the obligation becomes fixed, it does not become a binding obligation until it is accepted and, unless there
is a waiver of notice of such acceptance is given to, or acquired by, the guarantor, or until he has notice or knowledge that the creditor
has performed the conditions and intends to act upon the guaranty. The acceptance need not necessarily be express or in writing, but
may be indicated by acts amounting to acceptance. Where, upon the other hand, the transaction is not merely an offer of guaranty but
amounts to direct or unconditional promise of guaranty, unless notice of acceptance is made a condition of the guaranty, all that is
necessary to make the promise binding is that the promise should act upon it, and notice of acceptance is not necessary, the reason
being that the contract of guaranty is unilateral. Appealed decision affirmed.
Case: Effect of principal has not paid the premium

PHIL. PRYCE ASSURANCE CORP. VS. CA
Facts:
Phil. Pryce Assurance Corp. (Pryce for brevity) was sued by Gegroco, Inc. for the two surety bonds Pryce executed in behalf of

its principal Sagum General Merchandise. Pryce averred in its defense that the checks ( of Sagum General Mechandise) which were to
pay for the premiums bounced and were dishonored hence there is no contract to speak of. Trial Court rendered judgement in favour of
Gegroco and against Pryce.
Issue:
Whether or not the bond accepted by creditor Gegroco is valid and enforceable against the surety, although the premium has not been
paid by debtor Sagum to surety Pryce
SC Ruling:
Irrespective of payment or non-payment of the premium for the bond executed by surety accepted by creditor, such bond is
enforceable against such surety.
The Insurance Code states that:
Sec. 177. The surety is entitled to payment of the premium as soon as the contract of suretyship or bond is perfected and
delivered to the obligor. No contract of suretyship or bonding shall be valid and binding unless and until the premium therefor has been
paid, except where the obligee has accepted the bond, in which case the bond becomes valid and enforceable irrespective of whether or
not the premium has been paid by the obligor to the surety. . . .
B.
Subject Matter and Conditions

a. Debts that may be guaranteed:
The principal obligation must be valid as guaranty cannot exist without a valid obligation.
1. So, when the principal obligation was not perfected the guaranty is void.
2. But, voidable, unenforceable or natural obligations may be guaranteed.
*hence, loans to emancipated minors are susceptible of guaranty.
b.
Future Debts of unknown amount may be guaranteed; but there can be no action against the guarantor until
the debt is liquidated.
Case: Debts may be guaranteed

MUNICIPALITY OF GASAN VS. MARASIGAN
SC Ruling:
The fishing privilege contract entered into by the plaintiff Municipality and the appellant Marasigan on December 11, 1930,
not only was consummated but was cancelled. This being so, neither Marasigan nor his sureties or the other appellants were bound to
comply with the terms of their respective contracts of fishing privilege and suretyship. This is so, particularly with respect to suretiesappellants, because suretyship cannot exist without a valid obligation, the obligation arising from a cancelled contract not being a valid
obligation.
Case: When debt is considered liquidated

Selegna Management and Development Corporation vs. UCPB
Facts:
Petitioners Selegna Management and Development Corporation and Spouses Edgardo and Zenaida Angeles were granted a
credit facility in the amount of P70 million by United Coconut Planters Bank. As security for this credit facility, petitioners executed real
estate mortgages over several parcels of land and over several condominium units. Petitioners were likewise required to execute a
promissory note in favor of respondent every time they availed of the credit facility. As required in these notes, they paid the interest in
monthly amortizations. The parties stipulated in their Credit Agreement dated that failure to pay "any availment of the accommodation
or interest, or any sum due" shall constitute an event of default, which shall consequently allow respondent bank to "declare [as
immediately due and payable] all outstanding availments of the accommodation together with accrued interest and any other sum
payable."
In need of further business capital, petitioners obtained from UCPB an increase in their credit facility.For this purpose, they
executed a Promissory Note for P103,909,710.82, which was to mature on March 26, 1999. In the same note, they agreed to an interest
rate of 21.75 percent per annum, payable by monthly amortizations.
Respondent later sent petitioners a formal demand letter, and decided to invoke the acceleration provision in their Credit
Agreement. Respondent sent another letter of demand and a final demand on petitioners "to settle in full past due obligation to [UCPB]
within five days from receipt of letter." In response, petitioners paid respondent the amount of P10,199,473.96 as partial payment of the
accrued interests. Apparently unsatisfied, UCPB applied for extrajudicial foreclosure of petitioners mortgaged properties.
When petitioners received the Notice of Extra Judicial Foreclosure Sale on May 18, 1999, they requested UCPB to give them a
period of sixty (60) days to update their accrued interest charges; and to restructure or, in the alternative, to negotiate for a takeout of
their account. On May 25, 1999, the Bank denied petitioners request. In order to forestall the extrajudicial foreclosure scheduled for May
31, 1999, petitioners filed a Complaint for "Damages, Annulment of Interest, Penalty Increase and Accounting with Prayer for Temporary
Restraining Order/Preliminary Injunction."
Issue:
Whether or not petitioners were in default, and whether petitioners debt were considered liquidated
SC Ruling:
It is a settled rule of law that foreclosure is proper when the debtors are in default of the payment of their obligation. In fact,
the parties stipulated in their credit agreements, mortgage contracts and promissory notes that respondent was authorized to foreclose
on the mortgages, in case of a default by petitioners.
Mora solvendi, or debtors default, is defined as a delay in the fulfillment of an obligation, by reason of a cause imputable to
the debtor. There are three requisites necessary for a finding of default. First, the obligation is demandable and liquidated; second, the
debtor delays performance; third, the creditor judicially or extrajudicially requires the debtors performance.
The Promissory Note expressly states that petitioners had an obligation to pay monthly interest on the principal obligation.
From respondents demand letter, it is clear and undisputed by petitioners that they failed to meet those monthly payments since May
30, 1998. Their nonpayment is defined as an "event of default" in the parties Credit Agreement. Considering that the contract is the law
between the parties, respondent is justified in invoking the acceleration clause declaring the entire obligation immediately due and
payable. That clause obliged petitioners to pay the entire loan on January 29, 1999, the date fixed by respondent. UCPB had every right
to apply for extrajudicial foreclosure on the basis of petitioners undisputed and continuing default.
Petitioners Debt Considered Liquidated Despite the Alleged Lack of Accounting
Petitioners do not even attempt to deny the aforementioned matters. They assert, though, that they have a right to a detailed
accounting before they can be declared in default. As regards the three requisites of default, they say that the first requisite -- liquidated
debt -- is absent. Continuing with foreclosure on the basis of an unliquidated obligation allegedly violates their right to due process. They
also maintain that their partial payment of P10 million averted the maturity of their obligation.
A debt is liquidated when the amount is known or is determinable by inspection of the terms and conditions of the relevant
promissory notes and related documentation. Failure to furnish a debtor a detailed statement of account does not ipso facto result in an
unliquidated obligation.
Petitioners executed a Promissory Note, in which they stated that their principal obligation was in the amount of P103,909,710.82,
subject to an interest rate of 21.75 percent per annum. Pursuant to the parties Credit Agreement, petitioners likewise know that any
delay in the payment of the principal obligation will subject them to a penalty charge of one percent per month, computed from the due
date until the obligation is paid in full.

It is in fact clear from the agreement of the parties that when the payment is accelerated due to an event of default, the penalty charge
shall be based on the total principal amount outstanding, to be computed from the date of acceleration until the obligation is paid in full.
Their Credit Agreement even provides for the application of payments. It appears from the agreements that the amount of total
obligation is known or, at the very least, determinable.
Moreover, when they made their partial payment, petitioners did not question the principal, interest or penalties demanded
from them. They only sought additional time to update their interest payments or to negotiate a possible restructuring of their account.
Hence, there is no basis for their allegation that a statement of account was necessary for them to know their obligation.
To be sure, their partial payment did not extinguish the obligation. The Civil Code states that a debt is not paid "unless the thing x x x in
which the obligation consists has been completely delivered x x x." Besides, a late partial payment could not have possibly forestalled a
long-expired maturity date. The only possible legal relevance of the partial payment was to evidence the mortgagees amenability to
granting the mortgagor a grace period. Because the partial payment would constitute a waiver of the mortgagees vested right to
foreclose, the grant of a grace period cannot be casually assumed; the banks agreement must be clearly shown. Without a doubt, no
express agreement was entered into by the parties. When creditors receive partial payment, they are not ipso facto deemed to have
abandoned their prior demand for full payment. Article 1235 of the Civil Code provides:
"When the obligee accepts the performance, knowing its incompleteness or irregularity, and without expressing any protest or
objection, the obligation is deemed fully complied with."
Thus, to imply that creditors accept partial payment as complete performance of their obligation, their acceptance must be
made under circumstances that indicate their intention to consider the performance complete and to renounce their claim arising from
the defect. There are no circumstances that would indicate a renunciation of the right of respondent to foreclose the mortgaged
properties extrajudicially, on the basis of petitioners continuing default. On the contrary, it asserted its right by filing an application for
extrajudicial foreclosure after receiving the partial payment. Clearly, it did not intend to give petitioners more time to meet their
obligation.
Case: Comprehensive Surety Agreement to over existing and future debts

RCBC VS. ARRO
Facts:
In October 19, 1976 Residoro Chua and Enrique Go, Sr. executed a comprehensive surety agreement to guaranty among
others, any existing indebtedness of Davao Agricultural Industries Corporation (DAICOR), and/or to induce the bank at anytime or from
time to time thereafter, to make loans or advances, or to extend credit in any other matter to, or at the request, or for the account of
DAICOR, provided that the liability shall not exceed at any one time the aggregate principal sum of P100,000.00.
On May 29, 1977 a promissory note in the amount of P100,000.00 was issued in favor of petitioner bank payable on June 13,
1977. Said note was signed by Enrique Go, Sr. in his personal capacity and in behalf of DIACOR. The promissory note was not fully paid
despite repeated demands. Hence, petitioner bank filed a complaint for a sum of money against DIACOR, Enrique Go, Sr. and Residoro
Chua. A motion to dismiss was filed by Chua on the ground that the complaint states no cause of action against him as he cannot be
held liable under the promissory note because he did not sign the same.
The respondent court rendered decision granting Chuas motion to dismiss. Petitioner bank filed a motion for reconsideration
which respondent court denied.
Issue:
Whether or not private respondent Chua is liable to pay the obligation evidenced by the promissory note which he did not sign.
SC Ruling:
The comprehensive surety agreement was jointly executed by Residoro Chua and Enrique Go, Sr., president and general
manager, respectively of DIACOR to cover existing as well as future obligations which DIACOR may incur with the petitioner bank,
subject only to the proviso that their liability shall not exceed at any one time the aggregate principal sum of P100,000.00.
The agreement was obviously executed to induce petitioner to grant any application for a loan DIACOR may desire to obtain
from petitioner bank. The guaranty is a continuing one which shall remain in full force and effect until the bank is notified of its
termination. At the time the loan of P100,000.00 was obtained from petitioner bank by DIACOR, the comprehensive surety agreement
was admittedly in full force and effect. The loan was therefore covered by the said agreement, and private respondent Chua, even if he
did not sign the promissory note is liable by virtue of the surety agreement. By the terms of the agreement, it can be clearly seen that
the surety agreement was executed to guarantee future debts which DIACOR may incur with the petitioner bank, as is legally allowed
under the Civil Code.
Wherefore, the decision dismissing the complaint is reversed and set aside. The case is remanded to the court of origin.
Case: When guaranty is construed as continuing

DIO VS. CA
Facts:
In 1977, Uy Tiam Enterprises and Freight Services, thru its representative Uy Tiam, applied for and obtained credit
accommodations from METROBANK in the sum of P700,000.00 To secure the aforementioned credit accommodations, Norberto Uy and
Jacinto Uy Dio executed separate Continuing Suretyships in favor of the latter. Having paid the obligation under the above letter of
credit in 1977, UTEFS, through Uy Tiam, obtained another credit accommodation from METROBANK in 1979. It was applied for and
obtained by UTEFS without the participation of Norberto Uy and Jacinto Uy Dio as they did not sign the document denominated as
'Commercial Letter of Credit and Application.' Also, they were not asked to execute any suretyship to guarantee its payment. Neither did
METROBANK nor UTEFS inform them that the 1979 Letter of Credit has been opened and that the Continuing Suretyships separately
executed in February, 1977 shall guarantee its payment.
The 1979 letter of credit was negotiated. UTEFS executed and delivered to METROBANK a Trust Receipt. However, UTEFS did
not acquiesce to the obligatory stipulations in the trust receipt. As a consequence, METROBANK sent letters to the said principal obligor
and its sureties, Norberto Uy and Jacinto Uy Dio, demanding payment of the amount due. Informed of the amount due, UTEFS made
partial payments to the Bank which were accepted by the latter.
Dio, thru counsel, denied his liability for the amount demanded and requested METROBANK to send him copies of documents
showing the source of his liability. The bank informed him that the source of his liability is the Continuing Suretyship which he in 1977.
As a rejoinder, Dio maintained that he cannot be held liable for the 1979 credit accommodation because it is a new obligation
contracted without his participation. Besides, the 1977 credit accommodation which he guaranteed has been fully paid.
METROBANK filed a complaint for collection of a sum of money and impleaded Dio and Uy as parties-defendants. Norberto
Uy and Jacinto Uy Dio filed a motion to dismiss the complaint on the ground of lack of cause of action. They maintained that the
obligation which they guaranteed in 1977 has been extinguished since it has already been paid in the same year. Accordingly, the
Continuing Suretyships executed in 1977 cannot be availed of to secure Uy Tiam's Letter of Credit obtained in 1979 because a guaranty
cannot exist without a valid obligation. It was further argued that they can not be held liable for the obligation contracted in 1979
because they are not privies thereto as it was contracted without their participation.
METROBANK filed its opposition to the motion to dismiss. It relied on Article 2053 of the Civil Code which provides: 'A
guaranty may also be given as security for future debts, the amount of which is not yet known; . . . .' It was further asserted that the
agreement was in full force and effect at the time the letter of credit was obtained in 1979 as sureties-defendants did not exercise their
right to revoke it by giving notice to the bank.
Issue:
Whether or not defendants Jacinto Uy Dio and Norberto Uy are liable for the obligation contracted by Uy Tiam under the Letter of Credit
issued in 1979 by virtue of the Continuing Suretyships they executed in 1977?
SC Ruling:
When Uy and Dio executed the continuing suretyships in 1977, Uy Tiam was obligated to the Metrobank in the amount of
P700,000.00 and this was the obligation which both defendants guaranteed to pay. Uy Tiam paid this 1977 obligation and such

payment extinguished the obligation they assumed as guarantors/sureties.
The 1979 Letter of Credit is different from the 1977 Letter of Credit which covered the 1977 account of Uy Tiam. Thus, the
obligation under either is apart and distinct from the obligation created in the other, as evidenced by the fact that Uy Tiam had to apply
anew for the 1979 transaction. And Dio and Uy, being strangers thereto, cannot be answerable thereunder.
Metrobank did not serve notice to Dio and Uy when it extended to Uy Tiam the 1979 Letter of Credit at least to inform them
that the continuing suretyships they executed in 1977 will be considered by the plaintiff to secure the 1979 transaction of Uy Tiam.
There is no sufficient and credible showing that Dio and Uy were fully informed of the import of the Continuing Suretyships
when they affixed their signatures thereon; that they are thereby securing all future obligations which Uy Tiam may contract with the
plaintiff. On the contrary, Dio and Uy categorically testified that they signed the blank forms in the office of Uy Tiam at 623 Asuncion
Street, Binondo, Manila, in obedience to the instruction of Uy Tiam, their former employer. They denied having gone to the office of the
plaintiff to subscribe to the documents.
Case: Retrospective Application of Guaranty

WILLEX PLASTIC INDUSTRIES CORP. VS. CA
Facts:
Sometime in 1978, Inter-Resin Industrial Corporation (IRIC)opened a letter of credit with the Manila Banking Corporation. To
secure payment of the credit accommodation, Inter-Resin Industrial and the Investment and Underwriting Corporation of the Philippines
(IUCP) executed two "Continuing Surety Agreement" whereby they bound themselves solidarily to pay Manilabank "obligations of every
kind. In 1979, IRIC and Willex executed a "Continuing Guaranty" in favor of IUCP.
Subsequently, IUCP paid to Manilabank the sum owed by Inter-Resin Industrial. Atrium Capital Corp., which succeeded IUCP
and, later on succeeded by respondent, demanded from Inter-Resin Industrial and Willex Plastic the payment of what it had paid to
Manilabank.
Inter-Resin Industrial admitted that the "Continuing Guaranty" was intended to secure the payment which the IUCP had paid to
Manilabank. It claimed, however, that it had already fully paid its obligation to Atrium Capital.
In denying liability to Interbank for the amount, Willex argues that under the "Continuing Guaranty," its liability is for sums
obtained by Inter-Resin Industrial from Interbank, not for sums paid by the latter to Manilabank for the account of Inter-Resin Industrial.
The case then proceeded to trial. The trial court declared Inter-Resin Industrial to have waived the right to present evidence
for its failure to appear at the hearing despite due notice. On the other hand, Willex Plastic rested its case without presenting any
evidence. The trial court rendered judgment, ordering Inter-Resin Industrial and Willex Plastic jointly and severally to Interbank.
On appeal, the Court of Appeals rendered a decision affirming the ruling of the trial court. Willex filed a motion for
reconsideration praying that it be allowed to present evidence to show that Inter-Resin Industrial had already paid its obligation to
Interbank, but its motion was denied.
Issue:
Whether or not under the "Continuing Guaranty" signed by Willex, it may be held jointly and severally liable with Inter-Resin Industrial
for the amount by Interbank to Manilabank.
SC Ruling:
The contention is untenable. What Willex has overlooked is the fact that evidence aliunde was introduced in the trial court to
explain that it was actually to secure payment to Interbank (formerly IUCP) of amounts paid by the latter to Manilabank that the
"Continuing Guaranty" was executed.
Interbank adduced evidence to show that the "Continuing Guaranty" had been made to guarantee payment of amounts made
by it to Manilabank and not of any sums given by it as loan to Inter-Resin Industrial. Accordingly, the trial court found that it was "to
secure the guarantee made by plaintiff of the credit accommodation granted to defendant IRIC by Manilabank, that the plaintiff required
defendant IRIC to execute a chattel mortgage in its favor and a Continuing Guaranty which was signed by the defendant Willex.
Similarly, the Court of Appeals found it to be an undisputed fact that "to secure the guarantee undertaken by Interbank it
required Willex to sign a Continuing Guaranty." Nor does the record show any other transaction under which Inter-Resin Industrial may
have obtained sums of money from Interbank. It can reasonably be assumed that Inter-Resin Industrial and Willex intended to indemnify
Interbank for amounts which it may have paid Manilabank on behalf of Inter-Resin Industrial.
Willex Plastic argues that the "Continuing Guaranty," being an accessory contract, cannot legally exist because of the absence
of a valid principal obligation. Its contention is based on the fact that it is not a party either to the "Continuing Surety Agreement" or to
the loan agreement between Manilabank and Interbank Industrial.
Put in another way the consideration necessary to support a surety obligation need not pass directly to the surety, a
consideration moving to the principal alone being sufficient. For a "guarantor or surety is bound by the same consideration that makes
the contract effective between the principal parties thereto. . . . It is never necessary that a guarantor or surety should receive any part
or benefit, if such there be, accruing to his principal."
Willex Plastic contends that the "Continuing Guaranty" cannot be retroactively applied so as to secure the payments made by
Interbank under the two "Continuing Surety Agreements." Willex Plastic conteds that a contract of suretyship or guaranty should be
applied prospectively.
C.
Form
a. Guaranty is governed by the Statute of Frauds
Case: Written undertaking to guarantee payment of another persons obligation

Macondray & Co., Inc. vs. Pinon 2 SCRA 1109 August 31, 1961
Facts:
On 11 May 1955 the plaintiff Macondray & Co. filed a complaint aginst defendant Pinon, et. Al. in the CFI of Manila alleging
that upon representation and undertaking made by Ruperto K. Kangleon, then a member of the Senate, in a letter addressed to the
plaintiff dated 30 January 1954, that he would guarantee payment of his vo-defendants obligations, should they fail to pay on the due
date, on February 2 and 9, 1954, the plaintiff sold on credit and delivered to the defendants Perfecto Pinon and Conrado Piring, known in
the theater and entertainment business as Tugak and Pugak, respectively and transacting business under a common name known as All
Stars Productions 127 rolls of cinematographic films, for the total sum of P6,985 payable on or before May 9, 1954, 12% interest
thereon from the date of maturity and 20% thereof for attorneys fees in case of suit for collection.
SC Ruling:
Appellant Kangleons very letter constitutes his undertaking of guaranty. Contracts shall be obligatory in whatever form they
may have been entered into, provided all the essential elements for their validity is present. A contract of guaranty is not a formal
contract and shall be valid in whatever form it may be, provided that it complies with the Statute of Frauds.
Kangleon states that assuming that the letter constitutes a contract of guaranty, the films actually sold to the principal
debtors were 127 rolls of F.G, release positive type825B, 35mm. x 1,000 ft at P 55 a roll, payable May 9, 1954, while what he undertook
to guarantee payment was 10 rolls negative at 157 each and 100 rolls positive at 55 each, payable within three months ending April
1954. Citing Art. 2055 of the Civil Code that a guarantee cannot extend to more than what is stipulated therein, the appellant contends
that he cannot be held liable for the contract in view of the variation in his undertaking. The total cost of what was actually sold to and
bought by the principal debtors is P6,985, which is less that the total cost of what was originally intended to be bought by them
amounting to P7,070. The variation was merely in kind and not in subject matter-cinematographic films which did not render the
appellants obligation more burdensome. Instead his obligation was rendered less onerous by the reduction in the original price of P7,070
to P6, 985.

b.
Guaranty and Suretyship must be expressed and not presumed.
Wise & Co., Inc. vs. Tanglao 63 PHIL. 372 August 29, 1936
Facts:
Plaintiff WCI obtained a preliminary attachment of Cornelio Davids property. To avoid execution of said attachment, Cornelio
David obtained a special power of attorney from his lawyer Dionisio Tanglao, authorizing him to sign for his lawyer as guarantor for
himself in his indebtedness to plaintiff and to mortgage his lawyers lot to guarantee said obligation to plaintiff. Cornelio David
confessed judgement for P640 payable monthly and secured by a pledge to plaintiff of a house, apartment and a parcel of land recorded
in the name of Dionisio Tanglao. David made only partial payment of said judgment debt. Plaintiff brought an action to recover the
balance.
SC Ruling:
Under the power of attorney, tanglao empowered David to enter into a contract of suretyship and a contract of mortgage of
the property described in the document. David, however, used said power of attorney only to mortgage the property and did not enter
into a contract of suretyship.
Nothing is stated in the compromise agreement to the effect that Tanglao became Davids surety for the payment of the
judgment debt. Neither is this inferable from any of the clauses thereof, even if this inference might be made , it would be insufficient to
create an obligation of suretyship which under the law must be expressed and cannot be presumed.
c.
Guaranty is presumed prospective not retrospective.
Case: The terms of the contract of suretyship determine the suretys liability and cannot extend to more than what is
stipulated therein.
Solon vs. Solon 64 Phil. 729 September 9, 1937
SC Ruling:
When Eugenio Solon bound himself as surety to Andres Montalban for the payment of Macleod and Company of the amount of
P5,oo which Montalban owed to the latter, he limited himself to giving as security, by way of mortgage, the land and no other, belonging
to him and described as lot No. 892 of the Banilad Friar Lands Estate in case No. 5988 of the Court of Land Registration and in the
transfer Certificate of Title No. 2499 of the registry of property of the Province of Cebu. It is not possible that Macleod Company could
have ever contemplated bringing an action against Eugenio Solon to obtain possession not only of the land expressly mortgage to it,
which has been said, is lot No. 892 described in the Certificate of title above-mentioned, which is distinct from lot No. 903, but also of
any other land belonging to him or of lot No. 903 itself, for the purpose of collecting its credit against Andres Montalban, because it
would not have failed to know, better than anyone else that the contract of suretyship in its favor does not admit of the interpretation
that it could make Eugenio Solon liable for the amount greater than P5,000 and that it could require him to pay Montalbans
indebtedness, should the latter fail to do, with land other than that he had mortgage.
This is so because the clauses of a contract of suretyship determine the extent of the liability of the surety because said
liability should not be extended farther than the clear terms of the contract of guarantee by mere implications; and because the surety
is liable only in the manner and to the extent, and under the circumstances pointed out in the contract of surety or which may be clearly
deduced therefrom.
CHAPTER 2
EFFECTS OF GUARANTY
Section 1 Effects of Guaranty between the Guarantor and the Creditor
Articles 2058 2065
I.
Effect of guaranty between creditor and guarantor

A. Obligation of the Creditor
To pay the guarantor the compensation stipulated.

B.
Obligation of the Guarantor
To pay or perform the obligation (in money or in species) if the debtor fails to do so.
a.
What is to be paid
The guarantor can bind himself for less but not bind himself to more, than the debtor. If he does it shall be
reduced to the limits of the debtors obligation (Art. 2054)
The guarantor binds himself to more than the debtor in the following cases:
If he guarantees a larger amount.
If he agrees to pay earlier.
If he agrees to pay at the place more favorable to the creditor.
If he changes the principal obligation.
Case: Extent of liability when the bond is penal in nature

General Insurance and Surety Corp. vs. Republic 7 SCRA 4 January 31, 1963
Facts:
By the terms of the bond the surety guaranteed to the government compliance by the Central Luzon Educational Foundation
with all obligations, including the payment of the salaries of its teachers and employees, past, present and future and the payment of all
other obligations incurred by, or in behalf of said school in the sum of P 10,000.00.
SC Ruling:
There is nothing against public policy in forfeiting the bond for the full amount. The bond is penal in nature. Art. 1226 of the
Code states that in obligations with a penal clause, the penalty shall substitute for the indemnity for damages and the payment of
interest in case of noncompliance, it there is no stipulation to the contrary, and the party to whom payment is to be made is entitled to
recover the sum stipulate without need of proving damages because one of the primary purposes of penalty clause is to avoid such
necessity.
The surety contends that it cannot be made to answer for more than the unpaid salaries of H.B. Arandia, which it claimed
amounted to P 720.00 only, because of Art. 2054.
What we said about the penal nature of the bond would suffice to dispose of this claim. For whatever may be the amount of
salaries due to the teachers, the fact remains that the condition of the bond was violated and so the surety became liable for the
penalty provided therein.

Case: When surety is liable for interest.

PNB vs. Luzon Surety Co., Inc. 68 SCRA 207
Facts:
Defendant Augusto R. Villarosa, a sugar planter adhered to the Lopez Sugar Central Milling Company Inc. applied for a crop
loan with the plaimtiff, Philippine National Bank, which application was approved on March 6, 1952 in the amount of P 32,400. Villarosa
executed a chattel mortgage on standing crop to guarantee the crop loan.
As of September 27, 1953 as shown in the accounts, there was a balance of P 63,222.78 but as of the date when the
complaint was filed on June 8, 1960, because of the interest accrued, it had reached much higher sum. Due to its non-payment, plaintiff
filed this complaint which sought relief not only against the planter but also against the three bondsmen, Luzon Surety, Central Surety
and Associated Surety.
SC Ruling:
The question to be taken up is the liability of Luzon Surety Co. for interest which it contends would increase its liability to more
than 10, 000 which is the maximum of its bond. We cannot agree to this reasoning, it was held that, if a surety upon demand fails to
pay, he can be held liable for the interest, even if in thus paying, the liability becomes more than that in the principal obligation. The
increased liability is not because of the contract but because of the default and the necessity of judicial collection. It should be noted,
however, that the interest runs from the time the debt becomes due and demandable.
oOo
COMMONWEALTH INSURANCE CORPORATION vs. CA
Facts:
In 1984, plaintiff-appellant Rizal Commercial Banking Corporation (RCBC) granted two export loan lines, one, for
P2,500,000.00 to Jigs Manufacturing Corporation (JIGS) and, the other, for P1,000,000.00 to Elba Industries, Inc. (ELBA). JIGS and ELBA
which are sister corporations both drew from their respective credit lines, the former in the amount of P2,499,992.00 and the latter for
P998,033.37 plus P478,985.05 from the case-to-case basis and trust receipts. These loans were evidenced by promissory notes (Exhibits
A to L, inclusive JIGS; Exhibits V to BB, inclusive ELBA) and secured by surety bonds (Exhibits M to Q inclusive JIGS; Exhibits
CC to FF, inclusive ELBA) executed by defendant-appellee Commonwealth Insurance Company (CIC).
JIGS and ELBA defaulted in the payment of their respective loans. On October 30, 1984, appellant RCBC made a written
demand (Exhibit N) on appellee CIC to pay JIGs account to the full extend (sic) of the suretyship. A similar demand (Exhibit O) was
made on December 17, 1984 for appellee CIC to pay ELBAs account to the full extend (sic) of the suretyship. In response to those
demands, appellee CIC made several payments from February 25, 1985 to February 10, 1988 in the total amount of P2,000,000.00.
There having been a substantial balance unpaid, appellant RCBC made a final demand for payment (Exhibit P) on July 7, 1988 upon
appellee CIC but the latter ignored it. Thus, appellant RCBC filed the Complaint for a Sum of Money on September 19, 1988 against
appellee CIC.
Issue:
Whether or not petitioner should be held liable to pay legal interest over and above its principal obligation under the surety bonds
issued by it.
SC Ruling:
Petitioner argues that it should not be made to pay interest because its issuance of the surety bonds was made on the
condition that its liability shall in no case exceed the amount of the said bonds.
We are not persuaded. Petitioners argument is misplaced.
Jurisprudence is clear on this matter. As early as Tagawa vs. Aldanese and Union Gurantee Co. and reiterated in Plaridel Surety &
Insurance Co., Inc. vs. P.L. Galang Machinero., Inc. and more recently, in Republic vs. Court of Appeals and R & B Surety and Insurance
Company, Inc., we have sustained the principle that if a surety upon demand fails to pay, he can be held liable for interest, even if in
thus paying, its liability becomes more than the principal obligation. The increased liability is not because of the contract but because of
the default and the necessity of judicial collection]
Petitioners liability under the suretyship contract is different from its liability under the law. There is no question that as a surety,
petitioner should not be made to pay more than its assumed obligation under the surety bonds. However, it is clear from the above-cited
jurisprudence that petitioners liability for the payment of interest is not by reason of the suretyship agreement itself but because of the
delay in the payment of its obligation under the said agreement.
The issue of petitioners payment of interest is a matter that is totally different from its obligation to pay the principal amount
covered by the surety bonds it issued. Petitioner offered no valid excuse for not paying the balance of its principal obligation when
demanded by RCBC. Its failure to pay is, therefore, unreasonable. Thus, we find no error in the appellate courts ruling that petitioner is
liable to pay interest.
b.
When
If the guarantor pays before the date, he cannot proceed against the debtor until that date arrives unless
the debtor ratified the payment.
c.
C.
Duty to notify of the payment, otherwise:

The debtor may set up against the guarantor all defenses available against the creditor.
If the debtor pays, not knowing that the guarantor paid already, the guarantor must recover from
the creditor.
This is an exception to the rule of solution indebiti.
If the guaranty is gratuitous and notice to the debtor is prevented by fortuitous event, the debtor
must reimburse the guarantor, if the creditor is insolvent.
Privileges of the Guarantor
a. Benefit of exhaustion- to demand that all the properties of the debtor be exhausted.
Case: how inability to pay is proved.

Machetti vs. Hospicio de San Jose 43 Phil. 297 April 10, 1922
Facts:
Machetti by a written agreement undertook to construct a building for Hospicio de San Jose. One of the conditions of the
agreement was that the contractor should obtain the guarantee of Fidelity and Surety Co. to the amount of P12, 000. The following
endorsement in the English language appears on the contract; for value received, we hereby guarantee compliance with the terms and
conditions as outlined in the above contract. Machetti constructed the building until a little over P 4, 000 remain unpaid of the entire
contract price.
It was subsequently found that the work had not been carried in accordance with the specifications. Hospicio de San Jose
refused to pay the balance of the contract price. Machetti brought an action to recover said amount. Hospicio de San Jose presented a
counterclaim for damages resulting from the partial non-compliance. On petition of his creditors, Machetti was declared insolvent. Upon
motion of Hospicio de San Jose, Fidelity & Surety Co. was made cross-defendant and proceedings continued as to it, to the exclusion of
Machetti.

SC Ruling:
The contract of guarantee is given in English, and the terms employed must be given the significance which, ordinarily
attaches to them in the language used. In English, the term guarantor implies an undertaking of guaranty as distinguished from
suretyship. It is true that notwithstanding the use of the words guarantee or guaranty circumstances may be shown which convert
the contract into one of suretyship, but such circumstances do not exist in the present case. On the contrary it appears affirmatively that
the contract is the guarantors separate undertaking in which the principal does not join, that it rest on a separate consideration moving
from the principal, and that although it is written in continuation of the contract for the construction of the building, it is collateral
undertaking separate and distinct from the latter. All of these circumstances are distinguishing features of contracts of guaranty.
While a surety undertakes to pay if the principal does not pay, a guarantor only binds himself to pay if the principal cannot
pay. A surety is insurer of the debt; the guarantor is the insurer of the solvency of the debtor. The latter liability is what Fidelity & Surety
Co. assumed in the present case. Fidelity & Surety Co. having bound itself to pay only in the event its principal, Machetti cannot pay, it
follows that it cannot be compelled to pay until it is shown that Machetti is unable to pay. Such inability to pay may be proven by the
return of a writ of execution unsatisfied or by other means, but it is not sufficiently established by the mere fact that Machetti has been
declared insolvent in an insolvency proceeding in which the extent of the insolvents liability to pay is not determined until the final
liquidation of his estate.
Case: Effect of writ of execution against surety who was not impleaded
Towers Assurance Corporation vs. Ororama Supermart 80 SCRA 262 November 9, 1977
Facts:
On February 17, 1976 See Hong, the proprietor of Ororama Supermart in Cagayan de Oro City, sued the spouses Ernosto Ong
and Conching Ong in the CFI of Misamis Oriental for the collection of P 58,400 plus litigation expenses and attorneys fees.
See Hong ask for a writ of preliminary attachment. On March 5, 1976, the lower court issued an order of attachment. The
deputy sheriff attached the properties of the Ong spouses and Towers Assurance Corporation as surety. In that undertaking, the Ong
spouses and Towers assurance Corporation bound themselves to pay solidarily to See Hong the sum of P 58, 400.
SC Ruling:
We hold that the lower court acted with grave abuse of discretion in issuing a writ of execution against the surety without first
giving it an opportunity to be heard as required in Rule 57 of the Rules of Court which provides:
Sec.17. when execution returned unsatisfied, recovery had upon bond.- if the execution be returned unsatisfied in whole or in
part, the surety or sureties on any counterbond given pursuant to the provisions of this rule to secure the payment of the judgment shall
become charged on such counterbond and bond to pay the judgment, which amount may be recovered from such surety or sureties
after notice and summary hearing in the same action.
Under Sec. 17, in order that the judgment creditor might recover from the surety on the counterbond, it is necessary (1) that
the execution be first issued against the principal debtor and that such execution was returned unsatisfied in whole or in part; (2) that
the creditor made demand upon the surety for the satisfaction of the judgment and (3) that the surety be given notice and a summary
hearing in the same action as to his liability for the judgment under his counterbond.
The first requisite mentioned above is not applicable to this case because Towers Assurance Corporation assumed a solidary
liability for the fulfillment of the judgment. A surety is not entitled to the exhaustion of the properties of the principal debtor.
But certainly the surety is entitled to be heard before an execution can be issued against him since he is not a party in the
case involving his principal. Notice and hearing constitute the essence of procedural due process.
Wherefore, the order and the writ of execution insofar as they concern Towers Assurance Corporation, are set aside. The lower
court is directed to conduct a summary hearing on the suretys liability on its counterbond.
Case: Where surety was impleaded but declared in default.

Finman General Assurance Corp. vs. Salik 188 SCRA 740 August 20, 1990
Facts:
Abdulgani Salik, et.al private respondents allegedly applied with Pan Pacific Overseas Recruiting Services, Inc. on April 22,
1987 and were assured employment abroad by a certain Mrs. Normita Egil. In consideration thereof, they allegedly paid fees totaling
P30,000.00. but despite numerous assurances of employment abroad given by Celia Arandia and Mrs. Egil, they were not employed.
Accordingly they filed a joint complaint with the Philippine Overseas Employment Administration against Pan Pacific for
violation of Articles 32 and 34 of the Labor Code, as amended with claim or refund of a total amount of P30,000.00.
The POEA motu proprio impleaded and summoned herein petitioner surety Finman General Assurance Corp. in the latters
capacity as Pan Pacifics bonding company.
On October 9, 1987, a hearing was called, but only the private respondents appeared. Despite being deemed in default or
failing to answer, both Finman and Pan Pacific were still notified of the scheduled hearing. Again they failed to appear. Thus ex-parte
proceeding ensued.
SC Ruling:
The nature of Finmans obligation under the Suretyship agreement makes it privy to the proceeding against the principal. As
such Finman is bound, in the absence of collusion, by a judgment against the principal even though it was not a party to the
proceedings. In some cases the court ruled that were the surety bound itself solidarily with the principal obligor, the former is so
dependent on the principal debtor that the surety is considered in law as being the same party as the debtor in relation to whatever is
adjudged touching the obligation of the latter. Applying the foregoing principles to the case at bar, it can be very well said that even if
herein Finman was not impleaded in the instant case, still it can be held jointly and severally liable for all claims arising from the
recruitment violation of Pan Pacific. Moreover as correctly stated by the Solicitor General, private respondents have a legal claim against
Pan Pacific and its insurer for the placement and processing fees they paid, so much so that in order to provide a complete relief to
private respondents, petitioner have to be impleaded in the case.
1.
When Benefit is Available

When available: to avail of it, if the guarantor must:
Interpose it as soon as the creditor makes a demand upon the guarantor for payment.
But the creditor may sue the debtor and the guarantor jointly when there is no guarantor
right to exhaustion. Otherwise the creditor shall ask the court to notify the guarantor.
The interposition of the benefit of exhaustion must be made before the judgment is
rendered against the guarantor.
The benefit of exhaustion cannot be claimed for the first time on appeal.
Point out to the creditor available property of the debtor within the Philippines sufficient to
cover the debt.
Case: Effect when the debtor invokes non-exhaustion of the guarantor.

JN DEVELOPMENT CORPORATION vs. PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION
Facts:
On 13 December 1979, petitioner JN Development Corporation (JN) and Traders Royal Bank (TRB) entered into an agreement
whereby TRB would extend to JN an Export Packing Credit Line for Two Million Pesos ( P2,000,000.00). The loan was covered by several

securities, including a real estate mortgage [2] and a letter of guarantee from respondent Philippine Export and Foreign Loan Guarantee
Corporation (PhilGuarantee), now Trade and Investment Development Corporation of the Philippines, covering seventy percent (70%)
of the credit line. [3] With PhilGuarantee issuing a guarantee in favor of TRB, [4] JN, petitioner spouses Rodrigo and Leonor Sta. Ana [5] and
petitioner Narciso Cruz[6] executed a Deed of Undertaking[7] (Undertaking) to assure repayment to PhilGuarantee.
It appears that JN failed to pay the loan to TRB upon its maturity; thus, on 8 October 1980 TRB requested PhilGuarantee to make
good its guarantee. [8] PhilGuarantee informed JN about the call made by TRB, and inquired about the action of JN to settle the loan. [9]
Having received no response from JN, on 10 March 1981 PhilGuarantee paid TRB Nine Hundred Thirty Four Thousand Eight Hundred
Twenty Four Pesos and Thirty Four Centavos (P934,824.34).[10] Subsequently, PhilGuarantee made several demands on JN, but the latter
failed to pay. On 30 May 1983, JN, through Rodrigo Sta. Ana, proposed to settle the obligation by way of development and sale of the
mortgaged property.[11] PhilGuarantee, however, rejected the proposal.
PhilGuarantee thus filed a Complaint[12] for collection of money and damages against herein petitioners.
Issue:
Whether or not PhilGuarantee is entitled to reimbursement.
SC Ruling:
PhilGuarantee maintains that the date of default, not the actual date of payment, determines the liability of the guarantor and
that having paid TRB when the loan became due, it should be indemnified by petitioners. [30] It argues that, contrary to petitioners claim,
there could be no waiver of its right to excussion more explicit than its act of payment to TRB very directly. [31] Besides, the right to
excussion is for the benefit of the guarantor and is not a defense for the debtor to raise and use to evade liability. [32] Finally,
PhilGuarantee maintains that there is no sufficient evidence proving the alleged forgery of Cruzs signature on the Undertaking, which is
a notarized document and as such must be accorded the presumption of regularity. [33]
The Court finds for PhilGuarantee.
Under a contract of guarantee, the guarantor binds himself to the creditor to fulfill the obligation of the principal debtor in case
the latter should fail to do so. [34] The guarantor who pays for a debtor, in turn, must be indemnified by the latter. [35] However, the
guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor and resorted to all the
legal remedies against the debtor.[36] This is what is otherwise known as the benefit of excussion.
It is clear that excussion may only be invoked after legal remedies against the principal debtor have been expanded. Thus, it was
held that the creditor must first obtain a judgment against the principal debtor before assuming to run after the alleged guarantor, for
obviously the exhaustion of the principals property cannot even begin to take place before judgment has been obtained. [37] The law
imposes conditions precedent for the invocation of the defense. Thus, in order that the guarantor may make use of the benefit of
excussion, he must set it up against the creditor upon the latters demand for payment and point out to the creditor available property
of the debtor within the Philippines sufficient to cover the amount of the debt. [38]
While a guarantor enjoys the benefit of excussion, nothing prevents him from paying the obligation once demand is made on him.
Excussion, after all, is a right granted to him by law and as such he may opt to make use of it or waive it. PhilGuarantees waiver of the
right of excussion cannot prevent it from demanding reimbursement from petitioners. The law clearly requires the debtor to indemnify
the guarantor what the latter has paid. [39]
Petitioners claim that PhilGuarantee had no more obligation to pay TRB because of the alleged expiration of the contract of
guarantee is untenable. The guarantee, dated17 December 1979, states:
In the event of default by JNDC and as a consequence thereof, PHILGUARANTEE is made to pay its obligation arising under the aforesaid
guarantee PHILGUARANTEE shall pay the BANK the amount of P1.4 million or 70% of the total obligation unpaid
....
This guarantee shall be valid for a period of one (1) year from date hereof but may be renewed upon payment by JNDC of the guarantee
fee at the same rate of 1.5% per annum.[40]
The guarantee was only up to 17 December 1980. JNs obligation with TRB fell due on 30 June 1980, and demand on
PhilGuarantee was made by TRB on 08 October 1980. That payment was actually made only on 10 March 1981 does not take it out of
the terms of the guarantee. What is controlling is that default and demand on PhilGuarantee had taken place while the guarantee was
still in force.
The benefit of excussion, as well as the requirement of consent to extensions of payment, is a protective device pertaining to and
conferred on the guarantor. These may be invoked by the guarantor against the creditor as defenses to bar the unwarranted
enforcement of the guarantee. However, PhilGuarantee did not avail of these defenses when it paid its obligation according to the tenor
of the guarantee once demand was made on it. What is peculiar in the instant case is that petitioners, the principal debtors themselves,
are muddling the issues and raising the same defenses against the guarantor, which only the guarantor may invoke against the creditor,
to avoid payment of their own obligation to the guarantor. The Court cannot countenance their self-seeking desire to be exonerated from
the duty to reimburse PhilGuarantee after it had paid TRB on their behalf and to unjustly enrich themselves at the expense of
PhilGuarantee.
2.
Effect of Benefit
No exhaustion may be enforced against the guarantor until the writ against the debtor is returned
unsatisfied.
The creditor who is negligent in exhausting the property designated is liable for its value, if the debtor
becomes insolvent and cannot pay as a result of such negligence.
Case: No execution until writ is returned unsatisfied

Machetti vs. Hospicio de San Jose 43 Phil. 297 April 10, 1922
Facts:
Machetti by a written agreement undertook to construct a building for Hospicio de San Jose. One of the conditions of the
agreement was that the contractor should obtain the guarantee of Fidelity and Surety Co. to the amount of P12, 000. The following
endorsement in the English language appears on the contract; for value received, we hereby guarantee compliance with the terms and
conditions as outlined in the above contract. Machetti constructed the building until a little over P 4, 000 remain unpaid of the entire
contract price.
It was subsequently found that the work had not been carried in accordance with the specifications. Hospicio de San Jose
refused to pay the balance of the contract price. Machetti brought an action to recover said amount. Hospicio de San Jose presented a
counterclaim for damages resulting from the partial non-compliance. On petition of his creditors, Machetti was declared insolvent. Upon
motion of Hospicio de San Jose, Fidelity & Surety Co. was made cross-defendant and proceedings continued as to it, to the exclusion of
Machetti.
SC Ruling:
The contract of guarantee is given in English, and the terms employed must be given the significance which, ordinarily
attaches to them in the language used. In English, the term guarantor implies an undertaking of guaranty as distinguished from
suretyship. It is true that notwithstanding the use of the words guarantee or guaranty circumstances may be shown which convert
the contract into one of suretyship, but such circumstances do not exist in the present case. On the contrary it appears affirmatively that
the contract is the guarantors separate undertaking in which the principal does not join, that it rest on a separate consideration moving
from the principal, and that although it is written in continuation of the contract for the construction of the building, it is collateral
undertaking separate and distinct from the latter. All of these circumstances are distinguishing features of contracts of guaranty.
While a surety undertakes to pay if the principal does not pay, a guarantor only binds himself to pay if the principal cannot
pay. A surety is insurer of the debt; the guarantor is the insurer of the solvency of the debtor. The latter liability is what Fidelity & Surety
Co. assumed in the present case. Fidelity & Surety Co. having bound itself to pay only in the event its principal, Machetti cannot pay, it
follows that it cannot be compelled to pay until it is shown that Machetti is unable to pay. Such inability to pay may be proven by the
return of a writ of execution unsatisfied or by other means, but it is not sufficiently established by the mere fact that Machetti has been
declared insolvent in an insolvency proceeding in which the extent of the insolvents liability to pay is not determined until the final
liquidation of his estate.

3.
b.
When Benefit of Exhaustion not Available

When the guarantor expressly waived it.
When the guarantor is solidarily bound.
When the debtor is judicially declared insolvent.
When the debtor cannot be sued in the Philippines or absconds.
Where the guaranty is in the form of a mortgage of the guarantors property.
If it may be presumed that the benefit of exhaustion would not result in satisfaction.
When the guarantor upon the creditors demand for payment from him fails to set up such benefit
against the creditor and to point out to the latter available property to cover the debt.
Benefit of Division
a. General rule: when there are several guarantors for one and the same debtor and debt, the obligation to
answer for the same is divided among all of them. The creditor may only claim from each debtor his
corresponding share, unless solidarity has been expressly stipulated.
Case: Effect if one of the two guarantors paid half of judgment debt.
De Guzman vs. Santos 63 Phil. 371 June 30, 1939
Facts:
A mercantile partnership, Phil-Am Constructions Co., with Toole, Abad and Santos as co-partners, was formed with P10,000 of
its capital secured by way of a loan from Paulino Candelaria. The partnership and the co-partnership bound themselves solidarily to pay
said indebtedness. Having violated the conditions of the contract, Candelaria filed an action against PACC and the co-partners for the
recovery of the loan. Candelaria obtained a writ of attachment against the co-partners by virtue of which the sheriif attached the copartnership properties. No property of the PACC was attached. To discharge the attachment, PACC as principal and Santiago Lucero and
Meliton Carlos as guarantors executed a bond in favor of Candelaria. Defendant Santos neither intervened nor signed individually in the
bond. Attachment was discharged and attached properties were returned to their owners.
Trial court rendered judgment ordering the co-partners to pay the judgment creditor the amount of the loan. Writ of execution
having been returned unsatisfied, said writ was issued
against the guarantors upon the motion of Candelaria. Lucero and Carlos,
as guarantors, paid P5,000 plus. Plaintiff de Guzman as, in her capacity as judicial administrator of the estate of the deceased Lucero,
sought to recover from Santos what the estate had paid to Candelaria from defendant. Trial court decided for plaintiff. Defendant Santos
appealed contending that he is not liable because he neither applied for nor intervened in the bond any capacity.
Issue:
W-O-N Santos is legally bound to pay what the plaintiff had advanced to Candelaria even
knowledge.
if
it
was
given
without
his
SC Ruling:
Under Article 1822 of the Civil Code, by guaranty one person binds himself to pay or
perform for a third person in case
the latter should failed to do so, and Article 1838 of the Civil
Code provides that any guarantor who pays for the debtor shall
be indemnified by the latter even if the guaranty have been undertaken without the debtors knowledge. Applying the citedprovisions, it
is obvious that Santos is legally bound to pay the plaintiff what he has advanced to Candelaria upon judgment, notwithstanding the fact
that the bond was given without his knowledge.
Defendants obligation to pay what the plaintiff had advanced is further sanctioned by the general provisions of the Civil
Code regarding obligations. Article 1158 of the Civil Code provides that the payment made by any person whether he has an interest in
the performance of the obligation or not, and whether the payment is known and approved by the debtor or whether he is unaware of it,
may be recovered from said debtor.
Any person who makes a payment for the account of another may recover from the debtor the amount payment, unless it was
made against the express will of the latter. In the latter case, he can only recover from the debtor in so far as the payment has been
beneficial to the latter. According to this legal provision, it is evident that the defendant is bound to pay to the plaintiff what the latter
had advanced to Candelaria, and this is more so because it appears that although Lucero executed the bond without his, knowledge,
nevertheless he did not object thereto or repudiate the same at any time.
And it cannot be logically deduced that the defendant did not have knowledge of the bond, firstly, because his properties were
attached and attachment could not have been levied without his knowledge, and secondly, because said properties were returned to
him and in receiving them he was necessarily apprised of the fact that a bond had been filed to discharge the attachment. Judgment
affirmed.
b. When division is not available

the benefit of division ceases in the same cases and for the same causes as that of exhaustion.
c. Time to invoke benefit
same as for the benefit of exhaustion.
d. Rule if each and all guarantors secure the entire debt
Division applies if each and all guarantors secure the entire debt; but not if each guarantors
answers for a separate portion.
Mira Hermanos vs. Manila Tobacconists

Facts:
By virtue of a written contract entered into between Mira Hermanos, Inc., and Manila Tobacconists, Inc., the former agreed to
deliver to the latter merchandise for sale on consignment under certain specified terms and the latter agreed to pay to the former on or
before the 20th day of each month the invoice value of all the merchandise sold during the preceding month. Mira Hermanos, Inc.,
required of the Manila Tobacconists, Inc., a bond of P3,000, which was executed by the Provident Insurance Co., on September 2, 1939,
to secure the fulfillment of the obligation of the Tobacconists under the contract up to the sum of P3,000.
In the month of October, 1940, the volume of the business of the Tobacconists having increased so that the merchandise
received by it on consignment from Mira Hermanos exceeded P3,000 in value, Mira Hermanos required of the Tobacconist an additional
bond of P2,000, and in compliance with that requirement the defendant Manila Compaia de Seguros, on October 16, 1940, executed a
bond of P2,000 with the same terms and conditions (except as to the amount) as the bond of the Provident Insurance Co.
On June 1, 1941, a final and complete liquidation was made of the transactions between Mira Hermanos and the Tobacconists,
as a result of which there was found a balance due from the latter to the former of P2,272.79, which indebtedness the Tobacconists
recognized but was unable to pay. Thereupon Mira Hermanos made a demand upon the two surety companies for the payment of said
sum.
The Provident Insurance Co., paid only the sum of P1,363.67, which is 60% of the amount owned by the Tobacconists to Mira
Hermanos, alleging that the remaining 40% should be paid by the other surety, Manila Compaia de Seguros, in accordance with article
1837 of the Civil Code. The Manila Compaia de Seguros refused to pay the balance, contending that so long as the liability of the
Tobacconists did not exceed P3,000, it was not bound to pay anything because its bond referred only to the obligation of the
Tobacconists in excess of P3,000 and up to P5,000.

Issue:
Whether or not Provident Insurance Co is entitled to the "benefit of division" provided in article 1837 of the Civil Code
SC Ruling:
The "benefit of division" provided in article 1837 of the Civil Code reads as follows:
Art. 1837. Should there be several sureties of only one debtor for the same debt, the liability therefor shall be divided among
them all. The creditor can claim from each surety only his proportional part unless liability in solidum has been expressly
stipulated.
The right to the benefit of division against the co-sureties for their respective shares ceases in the same cases and for the
same reason as that to an exhaustion of property against the principal debtor.
The statement of the trial court to the effect that the bond of P3,000 responded for the obligation of the Tobacconists up to
the sum of P3,000 and the bond of P2,000 responded for the obligation of the Tobacconists only insofar as it might exceed P3,000 and
up to P5,000, is a finding of fact based upon the undisputed testimony of the witnesses called by the defendant Manila Compaia de
Seguros in support of its special defense hereinbefore quoted. While on its face the bond given by the Manila Compaia de Seguros
contains the same terms and conditions (except as to the amount) as those of the bond given by the Provident Insurance Co.,
nevertheless it was pleaded by the Manila Compaia de Seguros and found proven by the trial court .
The evidence upon which that finding is based is not only undisputed but perfectly reasonable and convincing. For, as the trial
court observed, there would have been no need for the additional bond of P2,000 if its purpose were to cover the first P2,000 already
covered by the P3,000 bond of the Provident Insurance Co. Indeed, we might add, if the purpose of the additional bond of P2,000 were
to cover not the excess over and above P3,000 but the first P2,000 of the obligation of the principal debtor like the bond of P3,000 which
covered only the first P3,000 of said obligation, then it would result that had the obligation of the Tobacconists exceeded P3,000, neither
of the two bonds would have responded for the excess, and that was precisely the event against which Mira Hermanos wanted to
protect itself by demanding the additional bond of P2,000. When the Provident gave its bond and fixed the premiums thereon it
assumed an obligation of P3,000 in solidum with the Tobacconists without any expectation of any benefit of division with any other
surety. The additional bond of P2,000 was, more than a year later, required by the creditor of the principal debtor for the protection of
said creditor and certainly not for the benefit of the original surety, which was not entitled to expect any such benefit.
The foregoing considerations, which fortify the trial court's conclusion as to the real intent and agreement of the parties with
regard to the bond of P2,000 given by the Manila Compaia de Seguros, destroys at the same time the theory of the appellant regarding
the applicability of article 1837 of the Civil Code.
That article refers to several sureties of only one debtor for the same debt. In the instant case, altho the two bonds on their
face appear to guarantee the same debt co-extensively up to P2,000 that of the Provident Insurance Co. alone extending beyond that
sum up to P3,000 it was pleaded and conclusively proven that in reality said bonds, or the two sureties, do not guarantee the same
debt because the Provident Insurance Co. guarantees only the first P3,000 and the Manila Compaia de Seguros, only the excess over
and above said amount up to P5,000. Article 1837 does not apply to this factual situation.
D.
Defenses of the Guarantor

a. Defenses which pertain to the debtor:
The guarantor may set up against the creditor all defenses which pertains to the principal debtor
and are inherent in the debt; but not those purely personal to the debtor.
The surety may invoke fraud, violence, prior payment, res judicata, prescription and
others of the same class.
Defenses purely personal; minority, incapacity and other vices of consent which the
principal debtor may waive; unless the guarantor was ignorant of the vice as he could
not the waive the defect.
b.
Defenses peculiar to guaranty:

Merger, novation, extension of time, etc., which invalidates the contract between the creditor and
the surety.
Section 2 Effects of Guaranty between the Debtor and the Guarantor

Articles 2066 2072
I.
Effects of guaranty between the guarantor and debtor

A. Before the payment by the guarantor
a. To receive the compensation agreed upon
b. To demand relief from the guaranty against the action of the creditor or security against the danger of the
debtors insolvency, in the following instances:
i.
When the guarantor is sued for payment (specially where there is no benefit of exhaustion).
ii.
In case of bankruptcy (judicial insolvency) or insolvency of the debtor (since reimbursement is
endangered).
iii.
When the debt has become demandable, because the period for its payment has been expired (or has
been lost under Article 1198).
iv.
When the debtor bound himself to relieve him from the guaranty within a specified period and the
period has expired.
v.
After 10 years, if the obligation has no fixed term of maturity unless it cannot be extinguished before
the lapse of ten years.
vi.
If there are reasonable grounds to fear that the debtor intends to abscond.
vii.
If the principal debtor is in imminent danger of becoming insolvent.
c. Prejudice to the creditors rights
d. Object of action for relief
B.
Rights of the guarantor after payment

a. Personal Action for reimbursement
The guarantor who pays for a debtor must be indemnified by the latter.
The indemnity comprises:
The total amount of the debt;
The legal interests thereon from the time the payment was made known to the debtor, even though it
did not earn interest for the creditor;
The expenses incurred by the guarantor after having notified the debtor that payment had been
demanded of him;
Damages, if they are due.

b.
Action in subrogation of the creditor

The guarantor who pays is subrogated by virtue thereof to all the rights which the creditor had against the
debtor.
If the guarantor has compromised with the creditor, he cannot demand of the debtor more than what he
has really paid.
Subrogation transfers to the person subrogated, the credit with all rights thereto appertaining, either
against the debtor or third persons, be they guarantors or possessors of mortgages, subject to stipulation in a
conventional agreement.
This result by operation of law from the act of payment and there is no necessity for the guarantor to ask
the creditor to expressly assign his rights of action.
Case: Right of Surety to invoke provisions of Article 2071
MANILA SURETY AND FIDELITY, INC. vs. BATU CONSTRUCTION AND COMPANY
Facts:
The plaintiff, a domestic corporation engaged in the bonding business, hereafter called the company, alleges that the Batu
Construction & Company, a partnership, the members of which are the other three defendants, requested it to post, as it did, a surety
bond for P8,812 in favor of the Government of the Philippines to secure the faithful Performance of the construction of the Bacarra
Bridge, Project PR-72 (3), in Ilocos Norte, undertaken by the partnership.
On 30 May 1951 because of the unsatisfactory progress of the work on the bridge, the Director of Public Works, with the
approval of the Secretary of Public Works and Communications, annulled, the construction contract referred to and notified the plaintiff
Company that the Government would hold it (the Company) liable for any amount incurred by the Government for the completion of the
bridge, in excess of the contract price.
On 19 December 1951 (should be 23 November 1951), Ricardo Fernandez and 105 other persons brought an action in the Justice of the
Peace Court of Laoag, Ilocos Norte, against the partnership, the individual partners and the herein plaintiff Company for the collection of
unpaid wages amounting to P5,960.10, lawful interests thereon and costs.
The defendants are in imminent danger of becoming insolvent, and are removing and disposing, or about to remove and
dispose, of their properties with intent to defraud their creditors, particularly the plaintiff Company; and that the latter has no other
sufficient security to protect its rights against the defendants.
Upon these allegations, the plaintiff prays that, upon the approval of a bond and on the strength of the allegations of the
verified complaint, a writ attachment be issued and levied upon the properties of the defendants; and that after hearing, judgment be
rendered " ordering the defendants to deliver to the plaintiff such sufficient security as shall protect plaintiff from the any proceedings
by the creditors on the Surety Bond aforementioned and from the danger of insolvency of the defendants; and to allow costs to the
herein plaintiff," and " for such other measures of relief as may be proper and just in the premises."
Issue:
Whether the last paragraph of article 2071 of the New Civil Code Code may be availed of by a surety.
SC Ruling:
A guarantor is the insurer of the solvency of the debtor; a surety is an insurer of the debt. A guarantor binds himself to pay if
the principal is unable to pay; a surety undertakes to pay if the principal does not pay.
The reason which could be invoked for the non-availability to a surety of the provisions of the last paragraph of article 2071 of
the new Civil Code would be the fact that guaranty like commodatum is gratuitous. But guaranty could also be for a price or
consideration as provided for in article 2048. So, even if there should be a consideration or price paid to a guarantor for him to insure
the performance of an obligation by the principal debtor, the provisions of article 2071 would still be available to the guarantor.
In suretyship the surety becomes liable to the creditor without the benefit of the principal debtor's exclusion of his properties,
for he (the surety) maybe sued independently. So, he is an insurer of the debt and as such he has assumed or undertaken a
responsibility or obligation greater or more onerous than that of guarantor. Such being the case, the provisions of article 2071, under
guaranty, are applicable and available to a surety. The reference in article 2047 to, the provisions of Section 4, Chapter 3, Title 1, Book
IV of the new Civil Code, on solidary or several obligations, does not mean that suretyship which is a solidary obligation is withdrawn
from the applicable provisions governing guaranty.
The plaintiff's cause of action does not fall under paragraph 2 of article 2071 of the new Civil Code, because there is no proof
of the defendants' insolvency. The fact that the contract was annulled because of lack of progress in the construction of the bridge is no
proof of such insolvency. It does not fall under paragraph 3, because the defendants have not bound themselves to relieve the plaintiff
from the guaranty within a specified period which already has expired, because the surety bond does not fix any period of time and the
indemnity agreement stipulates one year extendible or renewable until the bond be completely cancelled by the person or entity in
whose behalf the bond was executed or by a Court of competent jurisdiction. It does not come under paragraph 4, because the debt has
not become demandable by reason of the expiration of the period for payment. It does not come under paragraph 5 because of the
lapse of 10 years, when the principal obligation has no period for its maturity, etc., for 10 years have not yet elapsed. It does not fall
under paragraph 6, because there is no proof that "there are reasonable grounds to fear that the principal debtor intends to abscond." It
does not come under paragraph 7, because the defendants, as principal debtors, are not in imminent danger of becoming insolvent,
there being no proof to that effect.
But the plaintiff's cause of action comes under paragraph 1 of article 2071 of the new Civil Code, because the action brought
by Ricardo Fernandez and 105 persons in the Justice of the Peace Court of Laoag, province of Ilocos Norte, for the collection of unpaid
wages amounting to P5,960.10, is in connection with the construction of the Bacarra Bridge, Project PR-72 (3), undertaken by the Batu
Construction & Company, and one of the defendants therein is the herein plaintiff, the Manila Surety and Fidelity Co., Inc., and
paragraph 1 of article 2071 of the new Civil Code provides that the guarantor, even before having paid, may proceed against the
principal debtor "to obtain release from the guaranty, or to demand a security that shall protect him from any proceedings by the
creditor or from the danger of insolvency of the debtor, when he (the guarantor) is sued for payment. It does not provide that the
guarantor be sued by the creditor for the payment of the debt. It simply provides that the guarantor of surety be sued for the payment
of an amount for which the surety bond was put up to secure the fulfillment of the obligation undertaken by the principal debtor. So, the
suit filed by Ricardo Fernandez and 105 persons in the Justice of the Peace Court of Laoag, province of Ilocos Norte, for the collection of
unpaid wages earned in connection with the work done by them in the construction of the Bacarra Bridge, Project PR-72(3), is a suit for
the payment of an amount for which the surety bond was put up or posted to secure the faithful performance of the obligation
undertaken by the principal debtors (the defendants) in favor of the creditor, the Government of the Philippines.
C.
Guaranty given without consent or against the will of the debtor
If the guarantor should pay without notifying the debtor, the latter may enforce against him all the defenses
which he could have set up against the creditor at the time the payment was made.
Reason: The liability of the guarantor being merely subsidiary, he should really wait till after the debtor has
tried to comply. The guarantor should not, thru his own fault or negligence, be allowed to jeopardize the rights
of the debtor. By paying guarantor deprives the debtor of the opportunity to set up defenses against the
creditor.
If the guarantor has paid without notifying the debtor, and the latter not being aware of the payment, repeats
the payment, the former has no remedy whatever against the debtor, but only against the creditor.
Nevertheless, in case of a gratuitous guaranty, if the guarantor was prevented by a fortuitous event from
advising the debtor of the payment, and the creditor becomes insolvent, the debtor shall reimburse the
guarantor for the amount paid.

Example:
A owes B P100, 000 with C as guarantor. C paid the debt to B when it fell due but C did this without notifying A.
Not being aware of the payment by C, A repeated the payment.
Q: Can C recover from A?
A: No. C cannot recover from A. C has no remedy whatever against A, the debtor. Cs only remedy is to recover
from B, the creditor.
Q: Supposing the guaranty was gratuitous, and supposed the only reason C was not able to notify A was
because of a fortuitous event, what are Cs rights?
A: C must still recover from B. But if B, the creditor is insolvent, then A, the debtor shall reimburse C for the
amount paid.
If one, at the request of another, becomes a guarantor for the debt of a third person who is not present, the
guarantor who satisfies the debt may sue either the person so requesting or the debtor for reimbursement.
Section 3 Effects of Guaranty as Between Co-Guarantors
Articles 2073 2075

I.
Effects between Co-Guarantors
A. Contribution
When there are two or more guarantors of the same debtor and for the same debt, the one among them who has
paid may demand of each of the others the share which is proportionally owing from him.
Provided, the payment has been made by virtue of a judicial demand or unless the principal debtor is insolvent.
Example:
A, B and C are Ds guarantors. D was insolvent and A had to pay the whole debt. Later, A can demand from B and C
1/3 of the debt from each. This is so because As share is supposed to be also 1/3. Of course, each of them can
demand proportional reimbursement from the principal debtor.
B.
In case of insolvency of one co-guarantor

If any of the guarantors should be insolvent, his share shall be borne by the others, including the payer, in the same
proportion.
Example:
A, B and C are Ds guarantors of a debt of P300, 000 in favor of E. Since D was insolvent, A paid P300, 000 to E.
Q: What if B is insolvent, how much can A demand from C?
A: P150, 000. A cannot demand the extra P100,000 (share of B) from C because in that way, C would have a greater
burden. The law provides that the insolvent guarantors share must be borne by the others (including the payer A)
proportionally.
C.
Defenses of co-guarantors
The co-guarantors may set up against the one who paid, the same defenses which would have pertained to the
principal debtor against the creditor, and which are not purely personal to the debtor.
CHAPTER 3
Extinguishment of Guaranty
Articles 2076 2081
I.
Extinction of Guaranty
A. Negligence of the Creditor
The creditor who is negligent in exhausting the property pointed out shall suffer the loss, to the extent of said
property, for the insolvency of the debtor resulting from such negligence.
The guarantors, even though they be solidary, are released from their obligation whenever by some act of the
creditor they cannot be subrogated to the rights, mortgages, and preference of the latter.
Case: Effect if there is impossibility of Subrogation
E. ZOBEL, INC. vs. CA
Facts:
Respondent spouses Claveria, doing business under the name "Agro Brokers," applied for a loan with respondent Consolidated
Bank and Trust Corporation (now SOLIDBANK) in the amount of P2, 875,000.00 to finance the purchase of two (2) maritime barges and
one tugboat which would be used in their molasses business. The loan was granted subject to the condition that respondent spouses
execute a chattel mortgage over the three (3) vessels to be acquired and that a continuing guarantee be executed by Ayala
International Philippines, Inc., now herein petitioner E. Zobel, Inc. in favor of SOLIDBANK. The respondent spouses agreed to the
arrangement. Consequently, a chattel mortgage and a Continuing Guaranty were executed.
However, respondent spouses defaulted in the payment of the entire obligation upon maturity. Hence, on January 31,1991,
SOLIDBANK filed a complaint for sum of money with a prayer for a writ of preliminary attachment, against respondents spouses and
petitioner.
Petitioner moved to dismiss the complaint on the ground that its liability as guarantor of the loan was extinguished pursuant
to Article 2080 of the Civil Code of the Philippines. It argued that it has lost its right to be subrogated to the first chattel mortgage in
view of SOLIDBANK's failure to register the chattel mortgage with the appropriate government agency. SOLIDBANK opposed the motion
contending that Article 2080 is not applicable because petitioner is not a guarantor but a surety.
Issues:
1.
2.
3.
SC Ruling:
Whether petitioner's obligation to respondent SOLIDBANK under the continuing guaranty is that of a surety;
Whether Article 2080 of the New Civil Code which provides: "The guarantors, even though they be solidary, are released from
their obligation whenever by some act of the creditor they cannot be subrogated to the rights, mortgages, and preferences of
the latter," is not applicable to petitioner;
Whether the failure of respondent SOLIDBANK to register the chattel mortgage did not extinguish petitioner's liability to
respondent SOLIDBANK.
A contract of surety is an accessory promise by which a person binds himself for another already bound, and agrees with the

creditor to satisfy the obligation if the debtor does not. A contract of guaranty, on the other hand, is a collateral undertaking to pay the
debt of another in case the latter does not pay the debt.
Strictly speaking, guaranty and surety are nearly related but under our civil law, they may be distinguished thus:
A surety is distinguished from a guaranty in that a guarantor is the insurer of the solvency of the debtor and thus binds
himself to pay if the principal is unable to pay while a surety is the insurer of the debt, and he obligates himself to pay if the principal
does not pay.
Based on the aforementioned definitions, it appears that the contract executed by petitioner in favor of SOLIDBANK, albeit denominated
as a "Continuing Guaranty," is a contract of surety. The terms of the contract categorically obligates petitioner as " surety" to induce
SOLIDBANK to extend credit to respondent spouses. This can be seen in the following stipulations.
"For and in consideration of any existing indebtedness to you of AGRO BROKERS, a single proprietorship owned by
MR. RAUL P. CLAVERIA, of legal age, married and with business address x x x (hereinafter called the Borrower), for
the payment of which the undersigned is now obligated to you as surety and in order to induce you, in
your discretion, at any time or from time to time hereafter, to make loans or advances or to extend credit in any
other manner to, or at the request or for the account of the Borrower, either with or without purchase or discount, or
to make any loans or advances evidenced or secured by any notes, bills receivable, drafts, acceptances, checks or
other instruments or evidences of indebtedness x x upon which the Borrower is or may become liable as maker,
endorser, acceptor, or otherwise, the undersigned agrees to guarantee, and does hereby guarantee, the
punctual payment, at maturity or upon demand, to you of any and all such instruments , loans,
advances, credits and/or other obligations herein before referred to, and also any and all other
indebtedness of every kind which is now or may hereafter become due or owing to you by the
Borrower, together with any and all expenses which may be incurred by you in collecting all or any such
instruments or other indebtedness or obligations hereinbefore referred to, and or in enforcing any rights
hereunder, and also to make or cause any and all such payments to be made strictly in accordance with the terms
and provisions of any agreement (g), express or implied, which has (have) been or may hereafter be made or
entered into by the Borrower in reference thereto, regardless of any law, regulation or decree, now or hereafter in
effect which might in any manner affect any of the terms or provisions of any such agreements(s) or your right with
respect thereto as against the Borrower, or cause or permit to be invoked any alteration in the time, amount or
manner of payment by the Borrower of any such instruments, obligations or indebtedness; x x x " (Italics Ours)
The use of the term "guarantee" does not ipso facto mean that the contract is one of guaranty. Authorities recognize that the
word "guarantee" is frequently employed in business transactions to describe not the security of the debt but an intention to be bound
by a primary or independent obligation. As aptly observed by the trial court, the interpretation of a contract is not limited to the title
alone but to the contents and intention of the parties.
Having thus established that petitioner is a surety, Article 2080 of the Civil Code, relied upon by petitioner, finds no
application to the case at bar. In Bicol Savings and Loan Association vs. Guinhawa, we have ruled that Article 2080 of the New Civil Code
does not apply where the liability is as a surety, not as a guarantor.
But even assuming that Article 2080 is applicable, SOLIDBANK's failure to register the chattel mortgage did not release
petitioner from the obligation. In the Continuing Guaranty executed in favor of SOLIDBANK, petitioner bound itself to the contract
irrespective of the existence of any collateral. It even released SOLIDBANK from any fault or negligence that may impair the contract.
The pertinent portions of the contract so provides:
"x x x the undersigned (petitioner) who hereby agrees to be and remain bound upon this guaranty,
irrespective of the existence, value or condition of any collateral, and notwithstanding any such change,
exchange, settlement, compromise, surrender, release, sale, application, renewal or extension, and notwithstanding
also that all obligations of the Borrower to you outstanding and unpaid at any time (s) may exceed the aggregate
principal sum herein above prescribed.
'This is a Continuing Guaranty and shall remain in full force and effect until written notice shall have been received
by you that it has been revoked by the undersigned, but any such notice shall not be released the undersigned from
any liability as to any instruments, loans, advances or other obligations hereby guaranteed, which may be held by
you, or in which you may have any interest, at the time of the receipt of such notice. No act or omission of any
kind on your part in the premises shall in any event affect or impair this guaranty, nor shall same be
affected by any change which may arise by reason of the death of the undersigned, of any partner (s) of the
undersigned, or of the Borrower, or of the accession to any such partnership of any one or more new partners."
(Italics supplied)
B.
Extension of Payment
Art. 2079. An extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the
guaranty. The mere failure on the part of the creditor to demand payment after the debt has become due does not
of itself constitute any extension of time referred to herein.
a.
Requisites
Debt has become due
Creditor grants an extension of time to the debtor
The extension is without the consent of guarantor

Note:
The extension must be an express stipulation. The extension of the term must be based on some new
agreement between the creditor and the principal debtor by virtue of which the creditor deprives himself
of his claim.
But if automatic extension is expressly provided in the contract, the discharge by extension is not
applicable.
b.
Who must grant extension

The creditor
c.
Guarantors consent
Case: Effect of extension of one installment

Villa vs Garcia Bosque, 49 Phil 126
If the debts are several, or consist of separate installments, the extension of one does not release the guaranty for the others, unless
default in the extended one automatically makes all the rest due and payable.
Facts:
Bosque is indebted to Villa. For the amount payable, Bosque executed a promissory note payable in three installments, with
France and Goulette as sureties. The first installment was paid on time. The second installment was paid partially, and promissory notes
were executed for the remaining balance. France and Goulette contended that they are released from liability as sureties because of the
extension of time of the second installment due.

SC Ruling:
The execution of these new promissory notes undoubtedly constituted and extension of time as to the obligation included therein,
such as would release a surety, even though of the solidary type, under article 1851 of the Civil Code. Nevertheless it is to be borne in
mind that said extension and novation related only to the second installment of the original obligation and interest accrued up to that
time. Furthermore, the total amount of these notes was afterwards paid in full, and they are not now the subject of controversy. It results
that the extension thus effected could not discharge the sureties from their liability as to other installments upon which alone they have
been sued in this action. The rule that an extension of time granted to the debtor by the creditor, without the consent of the sureties,
extinguishes the latter's liability is common both to Spanish jurisprudence and the common law; and it is well settled in English and
American jurisprudence that where a surety is liable for different payments, such as installments of rent, or upon a series of promissory
notes, an extension of time as to one or more will not affect the liability of the surety for the others.
Case: Effect of Acceleration Clause

Radio Corp. vs Roa, 52 Phil 926
An extension of time given by the creditor to the debtor to make payment without the consent of the guarantor extinguishes the
guaranty.
Facts:
Defendant Roa owed Philippine Theatrical Enterprise the sum of P28,400. PTE assigned all its rights and interest in the
contract to plaintiff RCPI subject to the condition that in case the mortgagor defendant fails to make any of the installments, the whole
amount remaining unpaid shall immediately become due and demandable and the mortgaged property may be foreclosed. Defendant
requested an extension for the payment of one installment, which was granted.
In an action to recover the unpaid loan, the court ordered defendant and the guarantors to pay plaintiff solidarily the sum of
P10,000. Defendant guarantors appealed contending that the court erred in not finding that the extension of time given to the
defendant served as a release of defendant guarantors from liability on all subsequent installments.
SC Ruling:
The stipulation in the contract under consideration, is to the effect that upon failure to pay any installment when due the other
installments ipso facto become due and payable.
In view ofthe fact that under the express provision of the contract, the whole unpaid balance automatically becomes due and
payable upon failure to pay one installment, the act of the plaintiff in extending the payment of the installment, without the consent of
the guarantors, constituted in fact an extension of the payment of the whole amount of the indebtedness, as by that extension the
plaintiff could not have filed an action for the collection of the whole amount until after the expiration of the period of extension.
Therefore appellants' contention that after default of the payment of one installment the act of the herein
creditor in extending the time of payment discharges them as guarantors in conformity with articles 1851 and 1852 of
the Civil Code is correct.
It is a familiar rule that if a creditor, by positive contract with the principal debtor, and without the consent of the surety,
extends the time of payment, he thereby discharges the surety. . . . The time of payment may be quite as important a consideration to
the surety as the amount he has promised conditionally to pay. . . .Again, a surety has the right, on payment of the debt, to be
subrogated to all the rights of the creditor, and to proceed at once to collect it from the principal; but if the creditor has tied own hands
from proceeding promptly, by extending the time of collection, the hands of the surety will equally be bound; and before they are
loosed, by the expiration of the extended credit, the principal debtor may have become insolvent and the right of subrogation rendered
worthless. It should be observed, however, that it is really unimportant whether the extension given has actually proved prejudicial to
the surety or not. The rule stated is quite independent of the event, and the fact that the principal is insolvent or that the extension
granted promised to be beneficial to the surety would give no right to the creditor to change the terms of the contract without the
knowledge or consent of the surety. Nor does it matter for how short a period the time of payment may be extended. The principle is the
same whether the time is long or short. The creditor must be in such a situation that when the surety comes to be substituted in his
place by paying the debt, he may have an immediate right of action against the principal. The suspension of the right to sue for a
month, or even a day, is as effectual to release the surety as a year or two years.
Judgment reversed as to defendant guarantors.
Case: Effect of Extension of Time of Payment

Phil. Gen Insurance Co., vs Mutuc, 61 SCRA 22
Facts:
In a surety bond, the sureties bound themselves to be liable in case of extension or renewal of the bond, without the necessity
of executing another indemnity agreement for the purpose and without the necessity of their being notified of such extension or
renewal. Is this agreement valid?
SC Ruling:
Yes, the agreement is valid; there is nothing in it that militates against the law, good customs, good morals, public order, or
public policy.(personal note salva: ni militate rani siya sa sentido common hehehe)
There was no other valid conclusion that could be reached by the lower court. Even appellant must have seen that so it ought
to be. That would account for the contention in his brief that the stipulation as to "any extension" without the need for his being notified
was "null and void being contrary to law, morals, good customs, public order or public policy." That is a pretty tall order. There is more
than just a hint of hyperbole in such a sweeping allegation. Appellant though ought to have realized that assertion is not the equivalent
of proof. A little more objectivity on his part should bring the realization that no offense to law or morals could be imputed to such a
contractual provision. As to good customs, that category requires something to substantiate it. A mere denunciatory characterization
certainly cannot suffice. That leaves public order or public policy. It is difficult to follow appellant's train of reasoning. He would premise
it on the indemnity agreement being a contract of adhesion. He was not at all compelled to agree to it. He was free to act either way. He
had a choice. It may be more offensive to public policy, let alone morals or good customs, if thereafter he would be allowed to go back
on his word. Besides the policy underlying such a stipulation in this litigation is clear. What was guaranteed was the faithful performance
of defendant Mutuc of his employment as a member of the crew of a vessel plying overseas. What was more logical considering the
difficulty of contacting him then for the party concerned, here appellant, to agree in advance to any extension without the need for
notification. So the parties agreed. There could be thus nothing that did offend public policy or public order when such an arrangement
was explicitly provided for. Appellant, clearly, has not made out a case for reversal.
d.
Effect on Accommodation Party
Prudencio vs CA, 143 SCRA 7, July 14, 1986

Where the creditor bank is the payee of a note and assignee of a deed of assignment, its extension of the period of payment would
release the accommodation party.
Facts:
Appellants Prudencio, et al. are accommodation parties who signed on December 23, 1955 the Amendment of Real Estate
Mortgage. Mortgaging their property to the PNB to guaranty the loan of P10,000 extended to the Concepcion Construction Company.
On the same date Jose Toribio, in the same capacity as attorney-in-fact of the Company, executed also the Deed of
Assignment assigning all payments to be made by the Bureau of Public Works to the Concepcion Construction Company on account of
the contract for the construction of the Puerto Princesa building in favor of the PNB.
This assignment of credit to the contrary notwithstanding, the Bureau, with approval, of the PNB made three payments to the Company
on account of the contract price totaling P11,234.40.
On November 14, 1958, appellants Prudencio wrote the PNB contending that since the PNB authorized payments to the

Company instead of to PNB on account of the loan guaranteed by the mortgage, there was a change in the conditions of the contract
without the knowledge of appellants, which entitled the latter to a cancellation of their mortgage contract.
Failing in their bid to have the real estate mortgage cancelled, appellants filed on June 27, 1959 this action against the PNB,
the latters attorney in fact Jose Toribio, and the District Engineer of Puerto Princesa, Palawan, seeking the cancellation of their real
estate mortgage.
SC Ruling:
The Deed of Assignment notwithstanding, PNB approved the Bureaus release of three payments directly to the Company
instead of paying the same to the Bank. This approval was in violation of the Deed of Assignment and without any notice to the
petitioners who stood to lose their property once the promissory note falls due without the same having been paid because of the PNB,
in effect, waived payments of the first three releases.
The third payment to the Company in the amount of P4,293.60 was approved by PNB although the promissory note was
almost a month overdue, an act which is clearly detrimental to the petitioners sureties.
The PNB, in authorizing the third payment to the Company after the promissory note became due, in effect, extended the
term of the payment of the note without the consent of the accommodation makers who stand as sureties to the accommodated party
and to all other parties who are not holders in due course or who do not derive their right from the same, including PNB.
True, if the Bank had not been the assignee, then the petitioners would be obliged to pay the Bank as their creditor on the
promissory note, irrespective of whether or not the deed of assignment had been violated. However, the assignee and the creditor in
this case are one and the same-the Bank itself. When the Bank violated the deed of assignment, it prejudiced itself because its very
violation was the reason why it was not paid on time in its capacity as creditor in the promissory note. It would be unfair to make the
petitioners now answer for the debt or to foreclose on their property.
The petitioners who are the accommodation parties/sureties are absolved from liability on the promissory note and under the
mortgage contract. The PNB is ordered to release the real estate mortgage constituted on the property of the petitioners.
e.
Mere Failure to Demand
Shannon vs Phil. Lumber & Trans Co., 61 Phil 872

However, the mere failure on the part of the creditor to demand payment after the debt has become due does not itself discharge the
guaranty.
Facts:
Defendant PLTC obtained a loan from plaintiff JWS and executed a note promising to pay said loan. Said obligation was
secured solidarily by Walter Jones and E. Elser. Upon non-payment of the principal obligation on due date, plaintiff recovered part of the
obligation from Jones estate. Plaintiff then brought suit against defendant and Elser for the remaining unpaid debt with interest.
PLTC was declared in default and ordered to pay P12,000 to the plaintiff, and Elser was likewise required to pay to the plaintiff
one-half of all aforesaid sum which PLTC should fail to pay. Elser appeared contending that the court erred in not holding that plaintiff
was guilty of unreasonable delay in bringing his action thereby causing him damages.
SC Ruling:
The plaintiff let pass some years from the maturity of the note before bringing the action for the recovery of its amount, but
the delay does not constitute laches in the sense that it had the effect of releasing both the principal debtor and its sureties from their
obligations, nor did it occasion loss of rights and privileges of such moment as to give rise to the discharge of the obligation contracted
by Elser.
It is a recognized doctrine in the matter of suretyship that with respect to the surety, the creditor is under no obligation to display any
diligence in the enforcement of his rights as a creditor. His mere inaction, indulgence, passiveness, or delay in proceeding against the
principal debtor, or the fact that he did not enforce the guaranty or apply on the payment of such funds as were available, constitute no
defense at all for the surety, unless the contract expressly requires diligence and promptness on the part of the creditor.
The mere circumstance that the creditor does not demand the compliance with the obligation immediately upon the same
becoming due, and that he more or less delays his action, does not mean or reveal an intention to grant an extension to the debtor.
Deferring the filing of the action does not imply a change in the efficacy of the contract or liability of any kind on the part of the debtor.
It is merely, without demonstration or proof to the contrary, respite, waiting, courtesy, leniency, passivity, inaction. It does not constitute
novation, because this must be express. It does not engender liability, because on the part of the creditor such can not arise except
from delay.
Judgment affirmed.
f.
Undertaking to hold in abeyance any action
Cochingyan Jr. vs R&B Surety and Ins. Co., Inc., 151 SCRA 339
The creditors undertaking to hold in abeyance any action to enforce its claims against the principal obligor did not constitute
extension of time that will discharge the guaranty.
SC Ruling:
PNB's undertaking under the Trust Agreement "to hold in abeyance any action to enforce its claims" against R & B Surety did
not extend the maturity of R & B Surety's obligation under the Surety Bond. The Principal Obligation had in fact already matured, along
with that of R &B Surety, by the time the Trust Agreement was entered into.
Thus, the situation was that precisely envisaged in Article 2079: the mere failure on the part of the creditor to demand
payment after the debt has become due does not of itself constitute any extension of the referred to herein.
The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor without the surety of
his right to pay the creditor and to be immediately subrogated to the creditor's remedies against the principal debtor upon the original
maturity date. The surety is said to be entitled to protect himself against the contingency of the principal debtor or the indemnitors
becoming insolvent during the extended period.
The underlying rationale is not present in the instant case. As this Court has held, mere delay or negligence in proceeding
against the principal will not discharge a surety unless there is between the creditor and the principal debtor a valid and binding
agreement therefor, one which tends to prejudice [the surety] or to deprive it of the power of obtaining indemnity by presenting a legal
objection for the time, to the prosecution of an action on the original security.
In the instant case, there was nothing to prevent the petitioners from tendering payment, if they were so minded, to PNB of
the matured obligation on behalf of R & B Surety and thereupon becoming subrogated to such remedies as R & B Surety may have
against PAGRICO.
C.
Payment of the Principal Debt by the Debtor

Note:
Dacion en pago when payment of a sum money, is paid by giving a thing, you cannot anymore go after
the guarantor, because there was an extinguishment of principal obligation, it does not revive even if the
thing is subsequently lost by eviction unless the obligation is facultative (refer to Art. 2077)
In case of consignation, the guarantor is released by the consent of the creditor to the withdrawal of the
consignation (refer to Art.1261)
Hong Kong Shanghai Banking Corp. vs Aldanese, 48 Phil 990

The principal debtor having paid an amount on account of the debt, the surety is under obligation to pay the balance up to the
amount secured by the bond executed by him.

Where in a bond the debtor and surety have bound themselves solidarily, but limiting the liability of the surety to a lesser
amount than that due from the principal debtor, any such payment as the latter may have made on account of such obligation must be
applied first to the unsecured portion of the debt, for, as regards the principal debtor, the obligation is more onerous as to the amount
not secured.
D.
Accidental Loss of the Thing Due before Default

Review 1262-1269
E.
Remission of Debt
Review 1270-1274
Note:
If there is a condonation of a joint obligation, the guaranty discharged is only up to that specific condoned
obligation
If in favor of the debtor, it releases the guarantor
If in favor of one co-guarantor, without the consent of the others, it benefits the latter to the extent of the
share of the one released. If they consent, they are not released.
F.
Merger
Review 1275-1277
a. Between creditor and debtor extinguishes accessory obligation of guaranty because the principal obligation is
extinguished
b. Between creditor and guarantor does not extinguish principal obligation, but the guaranty is extinguished
c. Between debtor and guarantor the guaranty is extinguished, because the debtor cannot be his own guarantor
-but the sub-guarantor if any, is not released
-other securities, pledges, mortgages are not affected
G.
Compensation
Review 1278-1290
Note: Takes place when two persons, in their own right, are creditors and debtors of each other. Legal
compensation takes place by operation of law. (No need to go to court?)
H.
Novation
Review1291-1304
a. When the principal obligation is extinguished The original obligation is extinguished, so the guaranty will be
extinguished.
b. When the principal obligation is modified If less burdensome, the guaranty subsists. If more burdensome, the
guaranty is extinguished, if the guarantor did not consent. If the debt is merely increased, the guarantor is liable for
the original debt only.
I.
Death
a. Of the guarantor does not extinguish the guaranty
b. Of the debtor does not extinguish the guaranty
Stronghold Insurance Company Inc. vs Republic-Asahi Glass Corporation, GR147561, June 22, 2006
A surety companys liability under the performance bond it issues is solidary. The death of the principal obligor does not, as a rule,
extinguish the obligation and the solidary nature of that liability.
Facts:
Republic Asahi contracted with JDS for construction of roads in its compound, with Stronghold Insurance as surety. JDS failed to
perform its obligation, so there was a claim for damages and to forfeit the performance bond. Stronghold refused to pay. Strongholds
main defense is that the principal debtor JDS died, so the accessory obligation of surety is also extinguished.
SC Ruling:
The Supreme Court said, WTF STRONGHOLD? Wa ka nalifong? Wala ba ka nasayod nga as a general rule, the death of either
the creditor or the debtor does not extinguish the obligation. Obligations are transmissible to the heirs, except when the transmission is
prevented by the law, the stipulations of the parties, or the nature of the obligation. Only obligations that are personal or are identified
with the persons themselves are extinguished by death. In the present case, whatever monetary liabilities or obligations Santos had
under his contracts with respondent were not intransmissible by their nature, by stipulation, or by provision of law. Hence, his death did
not result in the extinguishment of those obligations or liabilities, which merely passed on to his estate. Death is not a defense that he
or his estate can set up to wipe out the obligations under the performance bond. Consequently, petitioner as surety cannot use his
death to escape its monetary obligation under its performance bond.
The suretys obligation is not an original and direct one for the performance of his own act, but merely accessory or collateral to the
obligation contracted by the principal. Nevertheless, although the contract of a surety is in essence secondary only to a valid principal
obligation, his liability to the creditor or promisee of the principal is said to be direct, primary and absolute; in other words, he is directly
and equally bound with the principal.
Under the law and jurisprudence, respondent may sue, separately or together, the principal debtor and the petitioner herein, in view of
the solidary nature of their liability. The death of the principal debtor will not work to convert, decrease or nullify the substantive right of
the solidary creditor. Evidently, despite the death of the principal debtor, respondent may still sue petitioner alone, in
accordance with the solidary nature of the latters liability under the performance bond.
J.
Failure to send notice of default

General Insurance and Surety Corp vs Republic GR 13873 January 31, 1963
A stipulation in the bond expressly states that
"When the bond expires on a certain date, it will be cancelled TEN DAYS after the expiration, unless the surety is
notified of any existing obligation thereunder, or unless the surety renews or extends it in writing for another term."
and We held that giving notice of existing obligation was a condition precedent to further liability of the surety and
that in default of such notice, liability on the bond automatically ceased. (care of jesabalahadia)
CHAPTER 4
Legal and Judicial Bonds
Articles 2082 2084

Art. 2082. The bondsman who is to be offered in virtue of a provision of law or of a judicial order shall have the qualifications
prescribed in Article 2056 and in special laws.
Art. 2083. If the person bound to give a bond in the cases of the preceding article, should not be able to do so, a pledge or
mortgage considered sufficient to cover his obligation shall be admitted in lieu thereof.
Art. 2084. A judicial bondsman cannot demand the exhaustion of the property of the principal debtor.
A sub-surety in the same case, cannot demand the exhaustion of the property of the debtor of the surety.
I.
Judicial Guaranty
Note:
-Judicial bondsman cannot invoke benefit of exhaustion of the property of the principal debtor
-The judicial guarantor must have capacity, integrity, and sufficient property.
-Pledge or mortgage is admissible in lieu of personal guaranty
-There is no benefit of exhaustion, either for guarantors or sub-guarantors (Art.2084)
-The claim against the Sureties must be proved in the same action as against the Principal and included in the final
Judgment (see Rules of Court)
-Where payment on the bond was premised upon the non-compliance of the contract by the principal debtor, the
liability of the guarantor is subsidiary and not solidary; nor can he be held responsible if the complaint against the
debtor is dismissed.
TITLE XVI PLEDGE, MORTGAGE AND ANTICHRESIS
CHAPTER 5
Provisions Common to Pledge and Mortgage
Articles 2085 2092

I.
Common Characteristics
A. they must be constituted to secure fulfillment of a principal obligation (accessories) Art. 2085
a. they may secure all kinds of obligations pure or conditional (Art. 2091)
b. the principal obligation may be future but the security obligation does not come into existence until the principal
does.
c. the principal obligation may be natural. Voidable or unenforceable provided the fact is known to the pledgor or
mortgagor.
Case: Mortgage Given to Secure Future Advancements
DIONISIO MOJICA vs. CA, and RURAL BANK OF YAWIT, INC.,
Facts:
Plaintiff Leonardo Mojica (deceased) contracted a loan of P20,000.00 from defendant Rural Bank of Kawit, Inc. (now
respondent). This loan was secured by a real estate mortgage executed on the same date by the plaintiffs spouses Leonardo Mojica and
Marina Rufido
The real estate mortgage contract states among others:
... agreement for the payment of the loan of P20,000.00 and such other loans or other advances already
obtained or still to be obtained by the mortgagors ...
2. ... but if the mortgagors shall well and truly fulfill the obligation above stated according to the terms
thereof then this mortgage shall become null and void.
The loan of P20,000.00 by the plaintiffs spouses was fully and completely paid. A new loan in the amount of P18,000.00 was
obtained by plaintiffs spouses from the defendant Rural Bank which loan matured.
No formal deed of real mortgage was constituted over any property of the borrowers, although the top of the promissory note dated
March 5, 1974, contained the following notation. This promissory note is secured by a Real Estate Mortgage executed before the Notary
Public of the Municipality of Kawit, Mrs. Felisa Senti
The Real Estate Mortgage mentioned above is the registered mortgage which guaranteed the already paid loan of P20,000.00
granted on February spouses Leonardo Mojica and Marina Rufido failed to pay their obligation after its maturity. Which prompt the bank
to extrajudicially foreclosed the real estate mortgage on the justification that it was adopted as a mortgage for the new loan of
P18,000.00. The proceeds from the sale of the piece of land of plaintiffs spouses were applied to their outstanding obligation with
defendant bank
Meanwhile, the son of petitioners-spouses, attempted to pay the debt of P18,000.00 which the defendant rural bank received
and accepted with the issuance of the defendant's official receipt.
Upon inquiry by Dionisio Mojica on the unpaid balance of the loan, the respondent rural bank issued a 'Computation Slip"
indicating therein, that as of August 14, 1981, the outstanding balance plus interest computed from March 5, 1975 was P21,272.50
(Ibid.).
However, the bank executed an affidavit of consolidation of ownership, which it subsequently filed with the Register of Deeds
of Cavite. As a result, a TCT was issued in its favor by the Register of Deeds. The bank then refused to allow Dionisio Mojica to pay the
unpaid balance of the loan which resulted in the filing of a complaint.
Issue:
Whether or not the foreclosure sale had for its basis, a valid and subsisting mortgage contract. Otherwise stated, there is a need to
ascertain the intention of the parties as to the coverage of the mortgage in question with respect to future advancements.
SC Ruling:
It has long been settled by a long line of decisions that mortgages given to secure future advancements are valid and legal
contracts; that the amounts named as consideration in said contract do not limit the amount for which the mortgage may stand as
security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered.
A mortgage given to secure advancements is a continuing security and is not discharged by repayment of the amount named
in the mortgage, until the full amount of the advancements are paid (Lim Julian v. Lutero, 49 Phil. 704-705 [1926]). In fact, it has also
been held that where the annotation on the back of a certificate of title about a first mortgage states "that the mortgage secured the
payment of a certain amount of money plus interest plus other obligations arising there under' there was no necessity for any notation
of the later loans on the mortgagors' title. It was incumbent upon any subsequent mortgagee or encumbrances of the property in
question to e e the books and records of the bank, as first mortgagee, regarding the credit standing of the debtors.
The evidence on record shows that the amounts of P4,700.00 and P9,958.00 were accepted by the bank on July 19 and August
11, 1980 as deposits for conventional redemption after the property covered by real estate mortgage became the acquired asset of the
bank and priced at P85,000.00 and after petitioner had lost all rights of legal redemption because more than one year had already
elapsed from June 29, 1979, the date the certificate of sale was registered in the office of the Registry of Deeds of Cavite. Indeed, the
conventional redemption was subject to be exercised up to March 3, 1982 and was extended up to April 19, 1982 for a fixed amount of
P85,000.00. The respondent bank even favored the petitioner by giving them the first preference to repurchase the property but they
failed to avail of this opportunity, although the bank "is certainly disposed to release at anytime" the deposits.
The evidence on record also shows that the mortgage property was auctioned on June 27, 1979. The only bidder was the
respondent bank which bid for P26,387.04. As the highest bidder, the respondent bank can rightfully consolidate its title over the
property. As aptly stated by respondent Court:
B. these contracts can be constituted only by the absolute owner of the thing pledged or mortgaged.

a. but the pledgor or mortgagor need not be a party to the principal obligation.
b. a mortgage of property not owned by the mortgagor is void. Even when such mortgagor is registered and the
creditor buys the mortgaged property upon its foreclosure, the creditor cannot be deemed to acquire a valid title as
a bona fide purchaser, since the creditor could not acquire no better right as purchaser than those it had as
mortgagee.
B.
Constituted only by the absolute owner of the thing pledged or mortgaged
Case: Mortgage constituted only before issuance of patent to the mortgagor:

VDA. DE BAUTISTA vs. BRIGIDA MARCOS, ET AL
Facts:
Defendant Brigida Marcos obtained a loan in the amount of P2,000 from plaintiff Cristina Marcel Vda. de Bautista and to
secure payment thereof conveyed to the latter by way of mortgage a two (2)-hectare portion of an unregistered parcel of land
Subsequently, mortgagor Brigida Marcos filed in behalf of the heirs of her deceased mother Victoriana an application for the
issuance of a free patent over the land in question.
As a result,ma Free Patent was issued to the applicants and was registered in their names. Defendant Brigida Marcos'
indebtedness of P2,000 to plaintiff having remained unpaid
Plaintiff filed the present action against Brigida and her husband for the payment or in default of the debtors to pay, for the
foreclosure of her mortgage on the land give as security.
Defendants moved to dismiss the action, pointing out that the land in question is covered by a free patent and could not,
therefore, under the Public Land Law, be taken within five years from the issuance of the patent for the payment of any debts of the
patentees contracted prior to the expiration of said five-year period;
Issue:
Whether or not a mortgagee may foreclose a mortgage on a piece of land covered by a free patent where the mortgage was executed
before the patent was issued and is sought to be foreclosed within five years from its issuance.
SC Ruling:
The right of plaintiff-appellee to foreclose her mortgage on the land in question depends not so much on whether she could
take said land within the prohibitive period of five years from the issuance of defendants' patent for the satisfaction of the indebtedness
in question, but on whether the deed of mortgage is at all valid and enforceable, since the land mortgaged was apparently still part of
the public domain when the deed of mortgage was constituted.
As it is an essential requisite for the validity of a mortgage that the mortgagor be the absolute owner of the thing
mortgaged (Art. 2085), the mortgage here in question is void and ineffective because at the time it was constituted, the mortgagor was
not yet the owner of the land mortgaged and could not, for that reason, encumber the same to the plaintiff-appellee.
Thus, a mortgage executed before the issuance of a patent to the mortgagor is void and ineffective.
Case: Mortgage by Surviving Spouse of Conjugal Property

PNB vs CA June 15 1980
Facts:
The property in question originally belonged to the spouses Iigo Bitanga and Rosa Ver as their conjugal property.
Before the issuance of the Original Certificate of Title however, Iigo Bitanga died leaving Rosa Ver and his children. Rosa then
afterwards mortgaged the entire property in favor of PNB for 500 pesos.
SC Ruling:
The subject lots belonged to the conjugal partnership of the spouses, when Iigo Bitanga died, his one-half share in said lot was
transmitted to his heirs and a co-ownership was established between them. Hence, Rosa Ver alone, could not have validly mortgaged
the whole lot to PNB.
Under Art. 2085 one of the essential requisites to a contract of pledge and mortgage is that the pledgor or mortgagor be the
absolute owner of the thing pledged or mortgaged. Each co-owner shall have the full ownership of his part of the fruits and benefits
pertaining thereto, and he may therefore, alienate, assign or mortgage it, and even substitute another person in its enjoyment, except
when personal rights are involved.
Thus, PNB had only acquired of the entire property for this was all she had in her power to convey. The other half being as it
still is, the willful share of the plaintiffs inheritance from their father.
Case: Property not owned by mortgagor at time of mortgage

DBP vs. CA
Facts:
DBP granted a loan to Sps. Olidiana secured by several real estate mortgage. At the time of the mortgage, the properties were
still the subject of a free patent application. Subsequently, Sps. Olidiana filed with Bureau of Lands to relinquish and waive all their rights
and interests over the properties in favor of Jesusa Chupuico and Mylo Quinto.
DBP also granted additional loan to the spouses with the same collateral.
For failure of the spouses to comply with the terms and conditions of their promissory note and mortgage contract, DBP
extrajudicially foreclosed all the mortgaged properties. However when DBP tried to register the sale, it fiscovered that the lots were in
the names of Chupuico and Quinto.
DBP then filed a quieting of title but the court ruled against DBP and was affirmed by the CA.
Issue:
Was the mortgage contract valid?
SC Ruling:
No, Art. 2085 par.2 specifically requires that the pledgor or mortgagor be the absolute owner of the thing pledged or
mortgaged. Thus, since the disputed property was not owned by the Spouses when they mortgaged it with DBP the contract of
mortgage and all the subsequent legal consequences as regards the lots are null and void. For, the law explicitly requires as imperative
for the validity of a mortgage that the mortgagor be the absolute owner of what is mortgaged.
C. the one constituting the pledge or mortgage should have free disposal of the property, or should be legally authorized for
the purpose.
D. the thing pledged or mortgaged may be alienated at the instance of the creditor, for payment if the principal obligation.
a. A mortgagor is not entitled to the exhaustion of the property of the principal debtor. The benefit applies only to
personal guaranty and not to real guaranty.
C.
Free disposal or legal authority of person constituting the pledge or mortgage
D.
Things pledged or mortgaged may be alienated at the instance of the creditor

a. Benefit of Exhaustion

Case: Exhaustion applies only to personal guaranty
Southern Motors, inc. Barbosa
Facts:
Plaintiff, Southern Motors, Inc., brought this action against Eliseo Barbosa, to foreclose a real estate mortgage, constituted by
the latter in favor of the former, as security for the payment of the sum of P2,889.53 due to said Plaintiff from one Alfredo Brillantes,
who had failed to settle his obligation in accordance with the terms and conditions of the corresponding deed of mortgage.
Defendant argues that he has executed the deed of mortgage for the only purpose of guaranteeing as surety and/or
guarantor the payment of the above mentioned debt of Mr. Alfredo Brillantes in favor of the Plaintiff.
And that the Plaintiff has no right action against the herein Defendant on the ground that said Plaintiff, without motive
whatsoever, did not intent or intent to exhaust all recourses to collect from the true debtor Mr. Alfredo Brillantes the debt
contracted by the latter in favor of said Plaintiff, and did not resort nor intends to resort all the legal remedies against the true
debtor Mr. Alfredo Brillantes, notwithstanding the fact that said Mr. Alfredo Brillantes is solvent and has many properties within
the Province of Iloilo.
Thereafter, the Judge rendered the decision, from which the Defendant has appealed.
Issue:
Whether the mortgage in question could be foreclosed although Plaintiff had not exhausted, and did not intend to exhaust, the
properties of his principal debtor, Alfredo Brillantes.
SC Ruling:
The right of guarantors, under Article 2058 of the Civil Code of the Philippines, to demand exhaustion of the property of the principal
debtor, exists only when a pledge or a mortgage has not been given as special security for the payment of the principal
obligation. Guarantees, without any such pledge or mortgage, are governed by Title XV of said Code, whereas pledges and mortgages
fall under Title XVI of the same Code, in which the following provisions, among others, are found.
It has been held already (Saavedra vs. Price, 68 Phil., 688), that a mortgagor is not entitled to the exhaustion of the property of the
principal debtor.
Although an ordinary personal guarantor not a mortgagor or pledgor may demand the aforementioned exhaustion, the creditor
may, prior thereto, secure a judgment against said guarantor, who shall be entitled, however, to a deferment of the execution of said
judgment against him until after the properties of the principal debtor shall have been exhausted to satisfy the obligation involved in the
case.
b.
Pactum Commisorium
Case: Stipulation of Automatic Transfer of Ownership

A. Francisco and Development Corp. vs. CA
Facts:
Francisco Realty granted a loan of 7.5 million to respondents, sps. Rumolo Erlinda Javillonar, in consideration of which the
latter executed a promissory note, a deed of mortgage an an undated deed of sale of the mortgage property. The promissory note
provided that upon failure of the mortgagor to pay the interest without prior agreement with the mortgagee, full possession of the
property will be transmitted and the deed of sale will be registered.
When private respondents failed to pay the interest petitioner registered the sale. Private respondents refused to vacate when
the petitioner demanded possession claiming that the undated deed of sale was merely an additional security for the payment of the
loan.
The trial court ruled in favor of Francisco Realty. The CA reversed the decision and ruled that the sale was void being a pactum
commissorium
Issue:
Was the agreement a pactum commissorium?
SC Ruling:
The stipulation in the promissory notes providing that, upon failure of respondent spouse to pay interest, ownership of the
property would be automatically transferred to petitioner Francisco Realty and the deed of sale in its favor would be registered, are in
substance a pactum commisarium . they embody the two elements of pactum commisarium. 1. that there should be a pledge or
mortgage wherein a property is pledged or mortgaged by way of security for the payment of the principal obligation 2. That there should
be a stipulation for an automatic appropriation by the creditor of the thing pledged or mortgaged in the event of non-payment of the
principal obligation within the stipulated period.
The subject transaction being void, the registration of the deed of sale by virtue of which petitioner Francisco Realty was able
to obtain a TCT must also be declared void.
E.
Pledge and mortgage are indivisible
Case: Rule where debt is divisible or debtors are not solidarily liable
Dayrit vs. CA
Facts:
The issue in the case is whether or not respondents Court of First Instance and the CA erred in refusing to allow the alleged
proposed deposit of a sum equivalent to 1/3 of the loan agreed upon and in refusing to release forever the collaterals owned by Dayrit,
although the other 2/3 portion of the loan obligation had been satisfied due to insolvency of the other co-defendants.
SC Ruling:
While it is true that the obligation is merely joint and each of the defendants is obliged to pay only his/her 1/3 share of the
joint obligation, the undisputed fact remains that the intent and purpose of the loan and mortgage agreement was t o secure the entire
loan of 150,000 that the respondent mobil extended to the defendants. The court found that the defendants had violated the loan and
mortgage agreement, they having paid but only one installment.
As a rule, a mortgage is directly and immediately subject to the property upon which it is imposed, the same being indivisible even
though the debt may be divided, and such indivisibility is unaffected by the fact that the debtors are not solidarily liable.
When several things are mortgaged or pledged, each thing for a determinate portion of a debt, the pledges or mortgages are
considered separate from each other. But when several things are given to secure the same debt it is entirely, all of them are liable for
the debt, and the creditor does not have to divide his actions by distributing the debt among the various things pledged or mortgaged.
Even when only a part of the debt remains unpaid, all the things are still liable for such balance. Hence, a mortgage voluntarily
constituted by the debtor on two or more parcels of land is one and indivisible, and the mortgagee has the right to have either or both
parcels, jointly or singly, sold to satisfy his claim. In case the mortgaged properties are a house and lot, it cannot be claimed that the lot
and the house should be sold separately and not together
Case: Separate Foreclosure of Mortgaged Properties

Yu vs. PCI bank

Facts:
Under a Real Estate Mortgage spouses Vicente Yu and Demetria Lee-Yu mortgaged their title, interest, and participation over
several parcels of land in favor of the Philippine Commercial International Bank (respondent) as security for the payment of a loan in the
amount of P9,000,000.00.
As the petitioners failed to pay the loan, the interest, and the penalties due thereon, the bank Extra-Judicially Foreclosed the
Real Estate Mortgage. At the auction sale respondent emerged as the highest bidder. the sale was registered with the Registry of Deeds
About two months before the expiration of the redemption period, respondent filed an Ex-Parte Petition for Writ of Possession before the
Regional Trial Court of Dagupan City,
Petitioners filed a Motion to Dismiss stating that the Certificate of Sale is void because respondent violated Article 2089 of the
Civil Code on the indivisibility of the mortgaged by conducting two separate foreclosure proceedings on the mortgage properties in
Dagupan City and Quezon City and indicating in the two notices of extra-judicial sale
RTC denied petitioners Motion to Dismiss, ruling that the filing of a motion to dismiss is not allowed in petitions for issuance of
writ of possession under Section 7 of Act No. 3135.
On June 1, 2000, petitioners filed a Petition for Certiorari with the CA. but was dismissed Hence, the present Petition for
Review on Certiorari.
Issue: Whether or not a real estate mortgage over several properties located in different locality can be separately foreclosed in
different places.
SC Ruling:
The Court finds that petitioners have a mistaken notion that the indivisibility of a real estate mortgage relates to the venue of
extra-judicial foreclosure proceedings. The rule on indivisibility of a real estate mortgage is provided for in Article 2089 of the Civil Code,
which provides:
Art. 2089. A pledge or mortgage is indivisible, even though the debt may be divided among the successors in interest of the
debtor or of the creditor.
Therefore, the debtors heir who has paid a part of the debt cannot ask for the proportionate extinguishment of the pledge or
mortgage as the debt is not completely satisfied. Neither can the creditors heir who received his share of the debt return the pledge or
cancel the mortgage, to the prejudice of the other heirs who have not been paid.
From these provisions is excepted the case in which, there being several things given in mortgage or pledge, each one of
them guarantees only a determinate portion of the credit.
The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as the portion of the debt for
which each thing is specially answerable is satisfied.
This rule presupposes several heirs of the debtor or creditor and therefore not applicable to the present case.
the debtor cannot ask for the release of any portion of the mortgaged property or of one or some of the several lots mortgaged unless
and until the loan thus secured has been fully paid, notwithstanding the fact that there has been partial fulfillment of the obligation.
Hence, it is provided that the debtor who has paid a part of the debt cannot ask for the proportionate extinguishment of the mortgage
as long as the debt is not completely satisfied.
In essence, indivisibility means that the mortgage obligation cannot be divided among the different lots, that
is, each and every parcel under mortgage answers for the totality of the debt.
The indivisibility of the real estate mortgage is not violated by conducting two separate foreclosure proceedings on mortgaged
properties located in different provinces as long as each parcel of land is answerable for the entire debt . Considering the indivisibility of
a real estate mortgage, the mortgaged properties in Dagupan City and Quezon City are made to answer for the entire debt of
P10,437,015.29.
the Court holds that the rule on indivisibility of the real estate mortgage cannot be equated with the venue of foreclosure
proceedings on mortgaged properties located in different provinces since these are two unrelated concepts.
a.
Effect of Partial Payment
partial payment does not entitle the debtor to partial discharge.

- EXCEPT when the pledge or mortgage covers several things, each guaranteeing only a
determinate portion of the credit
the security is indivisible even if the several debtors are not solidarily bound. The creditor may enforce the
obligation of each debtor against the whole security.
F.
Promise to constitute pledge or mortgage gives rise to personal action only (Article 2092)

CHAPTER 2
PLEDGE
Art. 2093. In addition to the requisites prescribed in Article 2085, it is necessary, in order
to constitute the contract of pledge, that the thing pledged be placed in the possession of
the creditor, or of a third person by common agreement. (1863)
Art. 2094. All movables which are within commerce may be pledged, provided they are
susceptible of possession. (1864)
Art. 2095. Incorporeal rights, evidenced by negotiable instruments, bills of lading, shares
of stock, bonds, warehouse receipts and similar documents may also be pledged. The
instrument proving the right pledged shall be delivered to the creditor, and if negotiable,
must be indorsed. (n)
Art. 2096. A pledge shall not take effect against third persons if a description of the thing
pledged and the date of the pledge do not appear in a public instrument. (1865a)
Art. 2097. With the consent of the pledgee, the thing pledged may be alienated by the
pledgor or owner, subject to the pledge. The ownership of the thing pledged is transmitted
to the vendee or transferee as soon as the pledgee consents to the alienation, but the
latter shall continue in possession. (n)
Art. 2098. The contract of pledge gives a right to the creditor to retain the thing in his
possession or in that of a third person to whom it has been delivered, until the debt is
paid. (1866a)
Art. 2099. The creditor shall take care of the thing pledged with the diligence of a good
father of a family; he has a right to the reimbursement of the expenses made for its
preservation, and is liable for its loss or deterioration, in conformity with the provisions of
this Code. (1867)
Art. 2100. The pledgee cannot deposit the thing pledged with a third person, unless there
is a stipulation authorizing him to do so.
The pledgee is responsible for the acts of his agents or employees with respect to the
thing pledged. (n)
Art. 2101. The pledgor has the same responsibility as a bailor in commodatum in the case
under Article 1951. (n)
Art. 2102. If the pledge earns or produces fruits, income, dividends, or interests, the
creditor shall compensate what he receives with those which are owing him; but if none
are owing him, or insofar as the amount may exceed that which is due, he shall apply it to
the principal. Unless there is a stipulation to the contrary, the pledge shall extend to the
interest and earnings of the right pledged.
In case of a pledge of animals, their offspring shall pertain to the pledgor or owner of
animals pledged, but shall be subject to the pledge, if there is no stipulation to the
contrary. (1868a)
Art. 2103. Unless the thing pledged is expropriated, the debtor continues to be the owner
thereof.
Nevertheless, the creditor may bring the actions which pertain to the owner of the thing
pledged in order to recover it from, or defend it against a third person. (1869)
Art. 2104. The creditor cannot use the thing pledged, without the authority of the owner,
and if he should do so, or should misuse the thing in any other way, the owner may ask
that it be judicially or extrajudicially deposited. When the preservation of the thing
pledged requires its use, it must be used by the creditor but only for that purpose. (1870a)

Art. 2105. The debtor cannot ask for the return of the thing pledged against the will of the
creditor, unless and until he has paid the debt and its interest, with expenses in a proper
case. (1871)
Art. 2106. If through the negligence or wilful act of the pledgee, the thing pledged is in
danger of being lost or impaired, the pledgor may require that it be deposited with a third
person. (n)
Art. 2107. If there are reasonable grounds to fear the destruction or impairment of the
thing pledged, without the fault of the pledgee, the pledgor may demand the return of the
thing, upon offering another thing in pledge, provided the latter is of the same kind as the
former and not of inferior quality, and without prejudice to the right of the pledgee under
the provisions of the following article.
The pledgee is bound to advise the pledgor, without delay, of any danger to the thing
pledged. (n)
Art. 2108. If, without the fault of the pledgee, there is danger of destruction, impairment,
or diminution in value of the thing pledged, he may cause the same to be sold at a public
sale. The proceeds of the auction shall be a security for the principal obligation in the
same manner as the thing originally pledged. (n)
Art. 2109. If the creditor is deceived on the substance or quality of the thing pledged, he
may either claim another thing in its stead, or demand immediate payment of the
principal obligation. (n)
Art. 2110. If the thing pledged is returned by the pledgee to the pledgor or owner, the
pledge is extinguished. Any stipulation to the contrary shall be void.
If subsequent to the perfection of the pledge, the thing is in the possession of the pledgor
or owner, there is a prima facie presumption that the same has been returned by the
pledgee. This same presumption exists if the thing pledged is in the possession of a third
person who has received it from the pledgor or owner after the constitution of the pledge.
(n)
Art. 2111. A statement in writing by the pledgee that he renounces or abandons the
pledge is sufficient to extinguish the pledge. For this purpose, neither the acceptance by
the pledgor or owner, nor the return of the thing pledged is necessary, the pledgee
becoming a depositary. (n)
Art. 2112. The creditor to whom the credit has not been satisfied in due time, may proceed
before a Notary Public to the sale of the thing pledged. This sale shall be made at a public
auction, and with notification to the debtor and the owner of the thing pledged in a proper
case, stating the amount for which the public sale is to be held. If at the first auction the
thing is not sold, a second one with the same formalities shall be held; and if at the second
auction there is no sale either, the creditor may appropriate the thing pledged. In this case
he shall be obliged to give an acquittance for his entire claim. (1872a)
Art. 2113. At the public auction, the pledgor or owner may bid. He shall, moreover, have a
better right if he should offer the same terms as the highest bidder.
The pledgee may also bid, but his offer shall not be valid if he is the only bidder. (n)
Art. 2114. All bids at the public auction shall offer to pay the purchase price at once. If any
other bid is accepted, the pledgee is deemed to have been received the purchase price, as
far as the pledgor or owner is concerned. (n)
Art. 2115. The sale of the thing pledged shall extinguish the principal obligation, whether
or not the proceeds of the sale are equal to the amount of the principal obligation, interest
and expenses in a proper case. If the price of the sale is more than said amount, the
debtor shall not be entitled to the excess, unless it is otherwise agreed. If the price of the

sale is less, neither shall the creditor be entitled to recover the deficiency, notwithstanding
any stipulation to the contrary. (n)
Art. 2116. After the public auction, the pledgee shall promptly advise the pledgor or owner
of the result thereof. (n)
Art. 2117. Any third person who has any right in or to the thing pledged may satisfy the
principal obligation as soon as the latter becomes due and demandable.(n)
Art. 2118. If a credit which has been pledged becomes due before it is redeemed, the
pledgee may collect and receive the amount due. He shall apply the same to the payment
of his claim, and deliver the surplus, should there be any, to the pledgor. (n)
Art. 2119. If two or more things are pledged, the pledgee may choose which he will cause
to be sold, unless there is a stipulation to the contrary. He may demand the sale of only as
many of the things as are necessary for the payment of the debt. (n)
Art. 2120. If a third party secures an obligation by pledging his own movable property
under the provisions of Article 2085 he shall have the same rights as a guarantor under
Articles 2066 to 2070, and Articles 2077 to 2081. He is not prejudiced by any waiver of
defense by the principal obligor. (n)
Art. 2121. Pledges created by operation of law, such as those referred to in Articles 546,
1731, and 1994, are governed by the foregoing articles on the possession, care and sale of
the thing as well as on the termination of the pledge. However, after payment of the debt
and expenses, the remainder of the price of the sale shall be delivered to the obligor. (n)
Art. 2122. A thing under a pledge by operation of law may be sold only after demand of
the amount for which the thing is retained. The public auction shall take place within one
month after such demand. If, without just grounds, the creditor does not cause the public
sale to be held within such period, the debtor may require the return of the thing. (n)
Art. 2123. With regard to pawnshops and other establishments, which are engaged in
making loans secured by pledges, the special laws and regulations concerning them shall
be observed, and subsidiarily, the provisions of this Title. (1873a)
CHAPTER 3
MORTGAGE
Art. 2124. Only the following property may be the object of a contract of mortgage:
(1) Immovables;
(2) Alienable real rights in accordance with the laws, imposed upon immovables.
Nevertheless, movables may be the object of a chattel mortgage. (1874a)
Art. 2125. In addition to the requisites stated in Article 2085, it is indispensable, in order
that a mortgage may be validly constituted, that the document in which it appears be
recorded in the Registry of Property. If the instrument is not recorded, the mortgage is
nevertheless binding between the parties.
The persons in whose favor the law establishes a mortgage have no other right than to
demand the execution and the recording of the document in which the mortgage is
formalized. (1875a)
Art. 2126. The mortgage directly and immediately subjects the property upon which it is
imposed, whoever the possessor may be, to the fulfillment of the obligation for whose
security it was constituted. (1876)
Art. 2127. The mortgage extends to the natural accessions, to the improvements, growing
fruits, and the rents or income not yet received when the obligation becomes due, and to

the amount of the indemnity granted or owing to the proprietor from the insurers of the
property mortgaged, or in virtue of expropriation for public use, with the declarations,
amplifications and limitations established by law, whether the estate remains in the
possession of the mortgagor, or it passes into the hands of a third person. (1877)
Art. 2128. The mortgage credit may be alienated or assigned to a third person, in whole or
in part, with the formalities required by law. (1878)
Art. 2129. The creditor may claim from a third person in possession of the mortgaged
property, the payment of the part of the credit secured by the property which said third
person possesses, in the terms and with the formalities which the law establishes. (1879)
Art. 2130. A stipulation forbidding the owner from alienating the immovable mortgaged
shall be void. (n)
Art. 2131. The form, extent and consequences of a mortgage, both as to its constitution,
modification and extinguishment, and as to other matters not included in this Chapter,
shall be governed by the provisions of the Mortgage Law and of the Land Registration Law.
(1880a)
CHAPTER 4
ANTICHRESIS
Art. 2132. By the contract of antichresis the creditor acquires the right to receive the fruits
of an immovable of his debtor, with the obligation to apply them to the payment of the
interest, if owing, and thereafter to the principal of his credit. (1881)
Art. 2133. The actual market value of the fruits at the time of the application thereof to the
interest and principal shall be the measure of such application. (n)
Art. 2134. The amount of the principal and of the interest shall be specified in writing;
otherwise, the contract of antichresis shall be void. (n)
Art. 2135. The creditor, unless there is a stipulation to the contrary, is obliged to pay the
taxes and charges upon the estate.
He is also bound to bear the expenses necessary for its preservation and repair.
The sums spent for the purposes stated in this article shall be deducted from the fruits.
(1882)
Art. 2136. The debtor cannot reacquire the enjoyment of the immovable without first
having totally paid what he owes the creditor.
But the latter, in order to exempt himself from the obligations imposed upon him by the
preceding article, may always compel the debtor to enter again upon the enjoyment of the
property, except when there is a stipulation to the contrary. (1883)
Art. 2137. The creditor does not acquire the ownership of the real estate for non-payment
of the debt within the period agreed upon.
Every stipulation to the contrary shall be void. But the creditor may petition the court for
the payment of the debt or the sale of the real property. In this case, the Rules of Court on
the foreclosure of mortgages shall apply. (1884a)
Art. 2138. The contracting parties may stipulate that the interest upon the debt be
compensated with the fruits of the property which is the object of the antichresis, provided
that if the value of the fruits should exceed the amount of interest allowed by the laws
against usury, the excess shall be applied to the principal. (1885a)

Art. 2139. The last paragraph of Article 2085, and Articles 2089 to 2091 are applicable to
this
contract.
(1886a)
CHAPTER 5
CHATTEL MORTGAGE
Art. 2140. By a chattel mortgage, personal property is recorded in the Chattel Mortgage
Register as a security for the performance of an obligation. If the movable, instead of
being recorded, is delivered to the creditor or a third person, the contract is a pledge and
not a chattel mortgage. (n)
Art. 2141. The provisions of this Code on pledge, insofar as they are not in conflict with the
Chattel Mortgage Law shall be applicable to chattel mortgages. (n)
Title XIX. - CONCURRENCE AND PREFERENCE
OF CREDITS
CHAPTER 1
GENERAL PROVISIONS
Art. 2236. The debtor is liable with all his property, present and future, for the fulfillment of
his obligations, subject to the exemptions provided by law. (1911a)
Art. 2237. Insolvency shall be governed by special laws insofar as they are not inconsistent
with this Code. (n)
Art. 2238. So long as the conjugal partnership or absolute community subsists, its property
shall not be among the assets to be taken possession of by the assignee for the payment
of the insolvent debtor's obligations, except insofar as the latter have redounded to the
benefit of the family. If it is the husband who is insolvent, the administration of the
conjugal partnership of absolute community may, by order of the court, be transferred to
the wife or to a third person other than the assignee. (n)
Art. 2239. If there is property, other than that mentioned in the preceding article, owned
by two or more persons, one of whom is the insolvent debtor, his undivided share or
interest therein shall be among the assets to be taken possession of by the assignee for
the payment of the insolvent debtor's obligations. (n)
Art. 2240. Property held by the insolvent debtor as a trustee of an express or implied trust,
shall be excluded from the insolvency proceedings. (n)
CHAPTER 2
CLASSIFICATION OF CREDITS
Art. 2241. With reference to specific movable property of the debtor, the following claims
or liens shall be preferred:
(1) Duties, taxes and fees due thereon to the State or any subdivision thereof;
(2) Claims arising from misappropriation, breach of trust, or malfeasance by public
officials committed in the performance of their duties, on the movables, money or
securities obtained by them;
(3) Claims for the unpaid price of movables sold, on said movables, so long as they
are in the possession of the debtor, up to the value of the same; and if the movable
has been resold by the debtor and the price is still unpaid, the lien may be enforced
on the price; this right is not lost by the immobilization of the thing by destination,
provided it has not lost its form, substance and identity; neither is the right lost by
the sale of the thing together with other property for a lump sum, when the price
thereof can be determined proportionally;

(4) Credits guaranteed with a pledge so long as the things pledged are in the hands
of the creditor, or those guaranteed by a chattel mortgage, upon the things pledged
or mortgaged, up to the value thereof;
(5) Credits for the making, repair, safekeeping or preservation of personal property,
on the movable thus made, repaired, kept or possessed;
(6) Claims for laborers' wages, on the goods manufactured or the work done;
(7) For expenses of salvage, upon the goods salvaged;
(8) Credits between the landlord and the tenant, arising from the contract of
tenancy on shares, on the share of each in the fruits or harvest;
(9) Credits for transportation, upon the goods carried, for the price of the contract
and incidental expenses, until their delivery and for thirty days thereafter;
(10) Credits for lodging and supplies usually furnished to travellers by hotel keepers,
on the movables belonging to the guest as long as such movables are in the hotel,
but not for money loaned to the guests;
(11) Credits for seeds and expenses for cultivation and harvest advanced to the
debtor, upon the fruits harvested;
(12) Credits for rent for one year, upon the personal property of the lessee existing
on the immovable leased and on the fruits of the same, but not on money or
instruments of credit;
(13) Claims in favor of the depositor if the depositary has wrongfully sold the thing
deposited, upon the price of the sale.
In the foregoing cases, if the movables to which the lien or preference attaches
have been wrongfully taken, the creditor may demand them from any possessor,
within thirty days from the unlawful seizure. (1922a)
Art. 2242. With reference to specific immovable property and real rights of the debtor, the
following claims, mortgages and liens shall be preferred, and shall constitute an
encumbrance on the immovable or real right:
(1) Taxes due upon the land or building;
(2) For the unpaid price of real property sold, upon the immovable sold;
(3) Claims of laborers, masons, mechanics and other workmen, as well as of
architects, engineers and contractors, engaged in the construction, reconstruction
or repair of buildings, canals or other works, upon said buildings, canals or other
works;
(4) Claims of furnishers of materials used in the construction, reconstruction, or
repair of buildings, canals or other works, upon said buildings, canals or other
works;
(5) Mortgage credits recorded in the Registry of Property, upon the real estate
mortgaged;
(6) Expenses for the preservation or improvement of real property when the law
authorizes reimbursement, upon the immovable preserved or improved;
(7) Credits annotated in the Registry of Property, in virtue of a judicial order, by
attachments or executions, upon the property affected, and only as to later credits;

(8) Claims of co-heirs for warranty in the partition of an immovable among them,
upon the real property thus divided;
(9) Claims of donors or real property for pecuniary charges or other conditions
imposed upon the donee, upon the immovable donated;
(10) Credits of insurers, upon the property insured, for the insurance premium for
two years. (1923a)
Art. 2243. The claims or credits enumerated in the two preceding articles shall be
considered as mortgages or pledges of real or personal property, or liens within the
purview of legal provisions governing insolvency. Taxes mentioned in No. 1, Article 2241,
and No. 1, Article 2242, shall first be satisfied. (n)
Art. 2244. With reference to other property, real and personal, of the debtor, the following
claims or credits shall be preferred in the order named:
(1) Proper funeral expenses for the debtor, or children under his or her parental
authority who have no property of their own, when approved by the court;
(2) Credits for services rendered the insolvent by employees, laborers, or household
helpers for one year preceding the commencement of the proceedings in
insolvency;
(3) Expenses during the last illness of the debtor or of his or her spouse and children
under his or her parental authority, if they have no property of their own;
(4) Compensation due the laborers or their dependents under laws providing for
indemnity for damages in cases of labor accident, or illness resulting from the
nature of the employment;
(5) Credits and advancements made to the debtor for support of himself or herself,
and family, during the last year preceding the insolvency;
(6) Support during the insolvency proceedings, and for three months thereafter;
(7) Fines and civil indemnification arising from a criminal offense;
(8) Legal expenses, and expenses incurred in the administration of the insolvent's
estate for the common interest of the creditors, when properly authorized and
approved by the court;
(9) Taxes and assessments due the national government, other than those
mentioned in Articles 2241, No. 1, and 2242, No. 1;
(10) Taxes and assessments due any province, other than those referred to in
Articles 2241, No. 1, and 2242, No. 1;
(11) Taxes and assessments due any city or municipality, other than those indicated
in Articles 2241, No. 1, and 2242, No. 1;
(12) Damages for death or personal injuries caused by a quasi-delict;
(13) Gifts due to public and private institutions of charity or beneficence;
(14) Credits which, without special privilege, appear in (a) a public instrument; or
(b) in a final judgment, if they have been the subject of litigation. These credits shall
have preference among themselves in the order of priority of the dates of the
instruments and of the judgments, respectively. (1924a)

Art. 2245. Credits of any other kind or class, or by any other right or title not comprised in
the four preceding articles, shall enjoy no preference. (1925)
CHAPTER 3
ORDER OF PREFERENCE OF CREDITS
Art. 2246. Those credits which enjoy preference with respect to specific movables, exclude
all others to the extent of the value of the personal property to which the preference
refers.
Art. 2247. If there are two or more credits with respect to the same specific movable
property, they shall be satisfied pro rata, after the payment of duties, taxes and fees due
the State or any subdivision thereof. (1926a)
Art. 2248. Those credits which enjoy preference in relation to specific real property or real
rights, exclude all others to the extent of the value of the immovable or real right to which
the preference refers.
Art. 2249. If there are two or more credits with respect to the same specific real property
or real rights, they shall be satisfied pro rata, after the payment of the taxes and
assessments upon the immovable property or real right. (1927a)
Art. 2250. The excess, if any, after the payment of the credits which enjoy preference with
respect to specific property, real or personal, shall be added to the free property which the
debtor may have, for the payment of the other credits. (1928a)
Art. 2251. Those credits which do not enjoy any preference with respect to specific
property, and those which enjoy preference, as to the amount not paid, shall be satisfied
according to the following rules:
(1) In the order established in Article 2244;
(2) Common credits referred to in Article 2245 shall be paid pro rata regardless of dates.
(1929a)

PLEDGE
Articles 2093 - 2096
I. Concept
Pledge is an accessory, real, unilateral contract by virtue of which the debtor
delivers to the creditor or a third person movable property as security for the
performance of a specific obligation upon the fulfillment of which the thing must
be returned with its accessions and accessories.
II. Requisites
(Common to pledge and mortgage Art. 2085 and 2087)
1. constituted to secure the fulfillment of a principal obligation
2. pledgor must be the absolute owner of the thing pledged
3. person constituting the pledge must have free disposal of the property, or in the
absence thereof that they be legally authorized for the purpose
4. possession of the thing pledged (movable) is delivered to the pledgee (actual not
merely symbolic but may include constructive e.g. keys of a warehouse where the
goods are stored-depending on the peculiar circumstances)
To
5.
6.
7.
affect third persons:

public instrument
description of the thing pledged
date of the pledge
III. Elements
A. Parties Capacity
A pledgor who is not the debtor has the rights of a guarantor (Art. 2066 to Art.
2070: reimbursement and subrogation; and Art. 2077 to Art. 2081: release) and
is not prejudicial by any waiver of defenses by the debtor (Art. 2120).
B. Object
The Object (thing given) must be: (a) movable; (b) within the commerce of man;
(c) susceptible of possession (Article 2094). It may be money, goods or credits
and includes their fruits, interest, and earnings (Art. 2102).
If a warehouse receipt is pledged, the pledgor retains ownership and bears the
risk of the loss of the goods represented by the receipt.
Effect where carabaos pledged not actually delivered to the creditor
EULOGIO BETITA vs. SIMEON GANZON, ALEJO DE LA FLOR, and CLEMENTE

PEDRENA
Facts:
This action is brought to recover the possession of four carabaos with damages.
Defendant Alejo de la Flor recovered a judgment against Tiburcia Buhayan. Under this
judgment the defendant Ganzon, as sheriff levied execution on the carabaos in question which
were found in the possession of one Simon Jacinto but registered in the name of Tiburcia
Buhayan.
The plaintiff, Eulogio Betita, a third party claim (terceria) alleges that the carabaos had
been mortgaged to him and as evidence thereof presented a document, but the sheriff proceeded
with the sale of the animals at public auction where they were purchased by the defendant
Clemente Perdena, and this action was thereupon brought.
Issue:
Whether the mere filing of a private document with the sheriff after the levy of execution can
create a lien of pledge superior to the attachment.
SC Ruling:
The alleged pledge is ineffective, because the plaintiff pledgee never had actual

possession of the property within the meaning the Civil Code. But it is argued that at the time of
the levy the animals in question were in the possession of one Simon Jacinto; that Jacinto was
the plaintiff's tenant; and that the tenant's possession was the possession of his landlord.
In order to constitute the contract of pledge, that the pledge be placed in the possession
of the creditor or of a third person appointed by common consent.
In his commentary on this article Manresa says:
This requisite is most essential and is characteristic of a pledge without which the contract
cannot be regarded as entered into or completed, because, precisely, in this delivery lies the
security of the pledge. Therefore, in
It is, of course, evident that the delivery of possession implies a change in the actual
possession of the property pledged and that a mere symbolic delivery is not sufficient.
In the present case the animals in question were in the possession of Tiburcia Buhayan
and Simon Jacinto before the alleged pledge was entered into and apparently remained with
them until the execution was levied, and there was no actual delivery of possession to the
plaintiff himself. There was therefore in reality no change in possession.
From what has been said it follows that the judgment appealed from must be reversed and it is
ordered and adjudged that the plaintiff take nothing by his action. Without costs. So ordered.
a. Incorporeal Rights
Incorporeal Rights may be pledged if presented by documents which must be
delivered or indorsed if negotiable, to the creditor.
Effect of Stock Assignment
LOPEZ vs. CA
Facts:
Benito H. Lopez obtained a loan in the amount of P20,000.00 from the Prudential Bank and Trust Company. He executed a promissory
note for the same amount, in favor of the said Bank, binding himself to repay the said sum one year after the said date, with interest at the rate of 10%
per annum. In addition to said promissory note, he executed Surety Bond No. 14164 in which he, as principal, and Philippine American General
Insurance Co., Inc. (PHILAMGEN) as surety, bound themselves jointly and severally in favor of Prudential Bank for the payment of the sum of
P20,000.00.
Lopez also executed in favor of Philamgen an indemnity agreement whereby he agreed "to indemnify the Company and keep it
indemnified and hold the same harmless from and against any and all damages, losses, costs, stamps, taxes, penalties, charges and expenses of
whatever kind and nature which the Company shall or may at any time sustain or incur in consequence of having become surety upon the bond." At
the same time, Lopez executed a deed of assignment of 4,000 shares of the Baguio Military Institution entitled "Stock Assignment Separate from
Certificate"
With the execution of this deed of assignment, Lopez endorsed the stock certificate and delivered it to Philamgen. It appears from the
evidence on record that the loan of P20,000.00 was approved conditioned upon the posting of a surety bond of a bonding company acceptable to the
bank. Thus, Lopez persuaded Emilio Abello, Assistant Executive Vice-President of Philamgen and member of the Bond Under writing Committee to
request Atty. Timoteo J. Sumawang, Assistant Vice- President and Manager of the Bonding Department, to accommodate him in putting up the bond
against the security of his shares of stock with the Baguio Military Institute, Inc. It was their understanding that if he could not pay the loan, VicePresident Abello and Pio Pedrosa of the Prudential Bank would buy the shares of stocks and out of the proceeds thereof, the loan would be paid to
the Prudential Bank. On June 2, 1960, Lopez' obligation matured without it being settled.
Issue:
a) Where a party "sells, assigns and transfers" and delivers shares of stock to another, duly endorsed in blank, in consideration of a contingent
obligation of the former to the latter, and, the obligations having arisen, the latter causes the shares of stock to be transferred in its name, what is the
juridical nature of the transaction-a dation in payment or a pledge?
b) Where the debtor assigns the shares of stock to the creditor under an agreement between the latter and determinate third persons that the latter
would buy the shares of stock so that the obligations could be paid out of the proceeds, was there a novation of the obligation by substitution of
debtor?
SC Ruling:
a.
The stock assignment is in truth and in fact, a pledge.
Considering the explicit terms of the deed denominated "Stock Assignment Separate from Certificate", hereinbefore copied verbatim,
Lopez sold, assigned and transferred unto Philamgen the stocks involved "for and in consideration of the obligations undertaken" by Philamgen
"under the terms and conditions of the surety bond executed by it in favor of the Prudential Bank" and "for value received". On its face, it is neither
pledge nor dation in payment. The document speaks of an outright sale as there is a complete and unconditional divestiture of the incorporeal
property consisting of stocks from Lopez to Philamgen. The transfer appears to have been an absolute conveyance of the stocks to Philamgen
whether or not Lopez defaults in the payment of P20,000.00 to Prudential Bank. While it is a conveyance in consideration of a contingent obligation, it
is not itself a conditional conveyance.
It is true that if Lopez should "well and truly perform and fulfill all the undertakings, covenants, terms, conditions, and agreements stipulated" in his
promissory note to Prudential Bank, the obligation of Philamgen under the surety bond would become null and void. Corollarily, the stock assignment,
which is predicated on the obligation of Philamgen under the surety bond, would necessarily become null and void likewise, for want of cause or
consideration under Article 1352 of the New Civil Code. But this is not the case here because aside from the obligations undertaken by Philamgen
under the surety bond, the stock assignment had other considerations referred to therein as "value received". Hence, based on the manifest terms
thereof, it is an absolute transfer.
Notwithstanding the express terms of the "Stock Assignment Separate from Certificate", however, We hold and rule that the transaction
should not be regarded as an absolute conveyance in view of the circumstances obtaining at the time of the execution thereof.
It should be remembered that on June 2, 1959, the day Lopez obtained a loan of P20,000.00 from Prudential Bank, Lopez executed a promissory
note for ?20,000.00, plus interest at the rate of ten (10%) per cent per annum, in favor of said Bank. He likewise posted a surety bond to secure his
full and faithful performance of his obligation under the promissory note with Philamgen as his surety. In return for the undertaking of Philamgen under
the surety bond, Lopez executed on the same day not only an indemnity agreement but also a stock assignment.
The indemnity agreement and the stock assignment must be considered together as related transactions because in order to judge the intention of the
contracting parties, their contemporaneous and subsequent acts shall be principally considered. Thus, considering that the indemnity agreement
connotes a continuing obligation of Lopez towards Philamgen while the stock assignment indicates a complete discharge of the same obligation, the
existence of the indemnity agreement whereby Lopez had to pay a premium for a period of one year and agreed at all times to indemnify Philamgen
of any and all kinds of losses which the latter might sustain by reason of it becoming a surety, is inconsistent with the theory of an absolute sale for
and in consideration of the same undertaking of Philamgen. There would have been no necessity for the execution of the indemnity agreement if the
stock assignment was really intended as an absolute conveyance. Hence, there are strong and cogent reasons to conclude that the parties intended

said stock assignment to complement the indemnity agreement and thereby sufficiently guarantee the indemnification of Philamgen should it be
required to pay Lopez' loan to Prudential Bank.
The following requirements of a contract of pledge have been satisfied: (1) that it be constituted to secure the fulfillment of a principal
obligation; (2) that the pledgor be the absolute owner of the thing pledged; and (3) that the person constituting the pledge has the free disposal of the
property, and in the absence thereof, that he be legally authorized for the purpose.
Article 2087 of the New Civil Code providing that it is also the essence of these contracts (pledge, mortgage, and antichresis) that when the principal
obligation becomes due, the things in which the pledge or mortgage consists may be alienated for the payment to the creditor, further supports the
court's ruling.
In case of doubt as to whether a transaction is a pledge or a dation in payment, the presumption is in favor of pledge, the latter being the lesser
transmission of rights and interests.
b.
No novation took place.

Under Article 1291 of the New Civil Code, obligations may be modified by: (1) changing their object or principal condition; (2) substituting
the person of the debtor; (3) subrogating a third person in the rights of the creditor. And in order that an obligation may be extinguished by another
which substitute the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point
incompatible with each other. (Article 1292, N.C.C.) Novation which consists in substituting a new debtor in the place of the original one, may be
made even without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new debtor gives him the
rights mentioned in Articles 1236 and 1237.
In the case at bar, the undertaking of Messrs. Emilio Abello and Pio Pedrosa that they would buy the shares of stock so that Philamgen
could be reimbursed from the proceeds that it paid to Prudential Bank does not necessarily imply the extinguishment of the liability of petitioner Lopez.
Since it was not established nor shown that Lopez would be released from responsibility, the same does not constitute novation and hence,
Philamgen may still enforce the obligation. As the Court of Appeals correctly held that "(t)he representation of Mr. Abello to Atty. Sumawang that he
and Mr. Pedrosa would buy the stocks was a purely private arrangement between them, not an agreement between (Philamgen) and (Lopez)" and
which the Court affirms.
The promise of Abello and Pedrosa to buy the shares from private respondent not having materialized (which promise was given to said
respondent only and not to petitioner) and no action was taken against the two by said respondent who chose instead to sue the petitioner on the
Indemnity Agreement, it is quite clear that this respondent has abandoned its right and interest over the pledged properties and must, therefore,
release or return the same to the petitioner-pledgor upon the latter's satisfaction of his obligation under the Indemnity Agreement.
There is no double payment nor unjust enrichment in this case because the shares of stock were merely pledged.
ooOoo
PARAY vs. RODRIGUEZ
Facts:
Respondents were the owners, in their respective personal capacities, of shares of stock in a corporation known as the Quirino-LeonorRodriguez Realty Inc. Sometime during the years 1979 to 1980, respondents secured by way of pledge of some of their shares of stock to petitioners
Bonifacio and Faustina Paray ("Parays") the payment of certain loan obligations. When the Parays attempted to foreclose the pledges on account of
respondents failure to pay their loans, respondents filed complaints with the Regional Trial Court of Cebu City. The actions, which were consolidated
and tried before RTC Branch 14, Cebu City, sought the declaration of nullity of the pledge agreements, among others.
However the RTC dismissed the complaint and gave "due course to the foreclosure and sale at public auction of the various pledges
subject of these two cases." This decision attained finality after it was affirmed by the Court of Appeals and the Supreme Court. Respondents then
received Notices of Sale which indicated that the pledged shares were to be sold at public auction. However, before the scheduled date of auction, all
of respondents caused the consignation with the RTC Clerk of Court of various amounts. It was claimed that respondents had attempted to tender
these payments to the Parays, but had been rebuffed.
Notwithstanding the consignations, the public auction took place as scheduled, with petitioner Vidal Espeleta successfully bidding the
amount of P6,200,000.00 for all of the pledged shares. None of respondents participated or appeared at the auction. Respondents instead filed a
complaint seeking the declaration of nullity of the concluded public auction.
Issue:
Whether or not pledged shares of stock auctioned off in a notarial sale could still be redeemed by their owners.
SC Ruling:
The subject sale of pledged shares was an extrajudicial sale, specifically a notarial sale, as distinguished from a judicial sale as typified by
an execution sale. Under the Civil Code, the foreclosure of a pledge occurs extrajudicially, without intervention by the courts. All the creditor needs to
do, if the credit has not been satisfied in due time, is to proceed before a Notary Public to the sale of the thing pledged.
The decision to proceed with the sale by public auction remains in the sole discretion of the Parays, who could very well choose not to
hold the sale without violating the final judgments in the aforementioned civil cases. If the sale were truly in compliance with a final judgment or order,
the Parays would have no choice but to stage the sale for then the order directing the sale arises from judicial compulsion. But nothing in the
dispositive portion directed the sale at public auction as a mandatory recourse, and properly so since the sale of pledged property in public auction is,
by virtue of the Civil Code, extrajudicial in character.
The right to redeem property sold as security for the satisfaction of an unpaid obligation does not exist preternaturally. Neither is it
predicated on proprietary right, which, after the sale of property on execution, leaves the judgment debtor and vests in the purchaser. Instead, it is a
bare statutory privilege to be exercised only by the persons named in the statute.
The right of redemption over mortgaged real property sold extrajudicially is established by Act No. 3135, as amended. The said law does not extend
the same benefit to personal property. In fact, there is no law in our statute books which vests the right of redemption over personal property. Act No.
1508, or the Chattel Mortgage Law, ostensibly could have served as the vehicle for any legislative intent to bestow a right of redemption over personal
property, since that law governs the extrajudicial sale of mortgaged personal property, but the statute is definitely silent on the point. And Section 39 of
the 1997 Rules of Civil Procedure starkly utters that the right of redemption applies to real properties, not personal properties, sold on execution.
Under the Civil Code, it is the pledgee, and not the pledgor, who is given the right to choose which of the items should be sold if two or more things
are pledged. No similar option is given to pledgors under the Civil Code. Moreover, there is nothing in the Civil Code provisions governing the
extrajudicial sale of pledged properties that prohibits the pledgee of several different pledge contracts from auctioning all of the pledged properties on
a single occasion, or from the buyer at the auction sale in purchasing all the pledged properties with a single purchase price. The relative
insignificance of ascertaining the definite apportionments of the sale price to the individual shares lies in the fact that once a pledged item is sold at
auction, neither the pledgee nor the pledgor can recover whatever deficiency or excess there may be between the purchase price and the amount of
the principal obligation.
There is no doubt that if the principal obligation is satisfied, the pledges should be terminated as well. Article 2098 of the Civil Code
provides that the right of the creditor to retain possession of the pledged item exists only until the debt is paid. Article 2105 of the Civil Code further
clarifies that the debtor cannot ask for the return of the thing pledged against the will of the creditor, unless and until he has paid the debt and its
interest. At the same time, the right of the pledgee to foreclose the pledge is also established under the Civil Code. When the credit has not been
satisfied in due time, the creditor may proceed with the sale by public auction under the procedure provided under Article 2112 of the Code.
b. Effect if Credit Pledged Becomes Due

If the credit pledged becomes due before redemption. The pledgee may
collect and apply the amount to the credit delivering the surplus to the
pledgor.
C. Consideration
a. As to the debtor
It is either liberality or with a stipulated compensation

b. As to the pledge
The consideration of the principal credit supports the pledge.
D. Form
No particular form is required as between the parties, but the thing must be
delivered to the creditor or to a stranger.
a. To affect third persons
There must be a public instrument giving the description of the thing pledged
and the date.
Effect of pledge in a public instrument
EULOGIO BETITA vs. SIMEON GANZON, ALEJO DE LA FLOR, and CLEMENTE PEDRENA
Facts:
This action is brought to recover the possession of four carabaos with damages.
Defendant Alejo de la Flor recovered a judgment against Tiburcia Buhayan. Under this
judgment the defendant Ganzon, as sheriff levied execution on the carabaos in question which
were found in the possession of one Simon Jacinto but registered in the name of Tiburcia
Buhayan.
The plaintiff, Eulogio Betita, a third party claim (terceria) alleges that the carabaos had
been mortgaged to him and as evidence thereof presented a document, but the sheriff proceeded
with the sale of the animals at public auction where they were purchased by the defendant
Clemente Perdena, and this action was thereupon brought.
Issue:
Effects of pledge not in a public instrument
SC Ruling:
Manresa, in commenting on article 1865, says:
ART. 1865. A pledge will not be valid against a third party if the certainty of
the date is not expressed in a public instrument.
Considering the effects of a contract of pledge, it is easily understood that,
without this warranty demanded by law, the case may happen wherein a debtor in
bad faith from the moment that he sees his movable property in danger of
execution may attempt to withdraw the same from the action of justice and the
reach of his creditors by simulating, through criminal confabulations, anterior and
fraudulent alterations in his possession by means of feigned contracts of this
nature; and, with the object of avoiding or preventing such abuses, almost all the
foreign writers advise that, for the effectiveness of the pledge, it be demanded as a
precise condition that in every case the contract be executed in a public writing,
for, otherwise, the determination of its date will be rendered difficult and its proof
more so, even in cases in which it is executed before witnesses, due to the
difficulty to be encountered in seeking those before whom it was executed.
Our code has not gone so far, for it does not demand in express terms that in
all cases the pledge be constituted or formalized in a public writing, nor even in
private document, but only that the certainty of the date be expressed in the first
of the said class of instruments in order that it may be valid against a third party;
and, in default of any express provision of law, in the cases where no agreement
requiring the execution in a public writing exists, it should be subjected to the
general rule, and especially to that established in the last paragraph of article
1280, according to which all contracts not included in the foregoing cases of the
said article should be made in writing even though it be private, whenever the
amount of the presentation of one or of the two contracting parties exceeds 1,500
pesetas. (Vol. 12, ed., p. 421.)
If the mere filing of a private document with the sheriff after the levy of
execution can create a lien of pledge superior to the attachment, the purpose of
the provisions of article 1865 as explained by Manresa clearly be defeated.
From what has been said it follows that the judgment appealed from must be
reversed and it is ordered and adjudged that the plaintiff take nothing by his action.

Without costs. So ordered.
IV. Classes
A. Voluntary
Created by the will of the parties
B. Legal
Created by operation of law
Articles 2097 2130
I. Effects as to the pledgee
A. Rights of the pledgee
1. RETENTION OF THE THING
to retain the thing in his possession of in that of the third person to whom it has
been delivered. Until the debt is paid. With the corresponding obligation to take
care of it as a good father of a family.
a. USE OF THE THING
He may use the thing pledge only if authorized or if its preservation so
requires. Otherwise, the pledgor may ask for the deposit of the thing.
b. DEPOSIT THE THING
The pledgee cannot deposit the thing pledged with a third person unless so
authorized.
2. REIMBURSEMENT
To receive reimbursement for the expenses incurred for the preservation of the
thing pledged.
3. COMPENSATION OF FRUITS WITH WHAT IS DUE THE CREDITOR
fruits, income dividends or interest earned or produced by the thing pledged
with those due the creditor.
* if none are owing, or if there is an excess they shall be applied to the principal of
the debt.
* offsprings of animals pledged belong to the pledgor but are subject to the pledge
if there is no contrary stipulation.
4. ACTIONS OF RECOVERY AND DEFENSE
the creditor may institute or bring actions belonging to the owner in order to
defend and recover the thing pledged.
5. PREFERENCE OF CREDIT
see Art. 2241 no. 4 ^_^
6. SALE OF THE SECURITY
GROUNDS:
a. PRECAUTIONARY if, without fault of the pledgee, the thing runs the risk of
destruction, impairment or diminution in value, he may cause it to be sold in
public sale. Unless, the pledgor demand its return, offering another in its stead,
of the same kind and not of inferior value. If sold, the price is substituted for the
security.
b. FORECLOSURE- if the credit is not paid in due time
MODES OF FORECLOSURE:
a. JUDICIAL
b. EXTRA JUDICIAL
Procedure:
1. At public auction (the owner may bid)
2. with notice to the debtor and pledgor, stating the amount for which the
thing will be sold.
3. the pledgor or owner may bid at the sale and must be preferred if he
offers the same as that of the highest bidder.
4. the pledgee may bid as well, but his offer is voyed if he is the only bidder.
5. the bids must be for payment at once, if a bid is accepted, it operates as
payment to the pledgee in so far as the debtor or pledgor is concerned.

6. if at the 1st auction the thing is not sold, and a second auction was
conducted and yet still there was no sale, the creditor may appropriate the
thing issuing acquittance in full.
c. RULE IF TWO OR MORE THINGS ARE PLEDGED
If two or more things are pledged, the pledgee may choose which will be sold,
unless the contrary is stipulated. But he can sell only as many things as are
needed for the payment of the debt.
d. OPTIONS OF THE PLEDGEE
To collect credit pledged if the y fall due before redemption.
7. COLLECT CREDIT PLEDGED
But he must apply the proceeds to the credit and pay the surplus to the pledgor.
B. Obligations of the pledgee
1. Preservation
a. degree of diligence
Good father of a family and is liable for its loss or deterioration. He must
not use the thing pledged unless authorized or if its preservation so requires.
Otherwise, the pledgor may ask that it be deposited.
b. liability of acts of agents/employees
Pledgor liable for acts of its agents or employees.
c. deposit of the thing pledged
The pledgor cannot deposit the thing pledged with a third person, unless
there is a stipulation authorizing it.
d. in case of danger to the thing pledged / danger of loss through negligence of
pledge
If through the willful acts or negligence of the pledgee, the thing is in danger
of loss or impairment, the pledgor may require its deposit with a third person
e. in case of fear of destruction or impairment of the thing
If there are reasonable grounds to fear the destruction or impairment of the
thing pledged without the fault of the pledgee the pledgor may demand its
return, upon offering another thing in pledge of the same kind and not of
inferior quality. Unless the pledgee causes the same to be publicly sold.
2. Restitution
a. When
FILOMENA SARMIENTO and her husband EUSEBIO M. VILLASEOR vs. GLICERIO

JAVELLANA
Facts:
Defendant loaned the plaintiffs the sum of P1,500 with interest at the rate of 25 per cent
per annum for the term of one year. To guarantee this loan, the plaintiffs pledged a large medal
with a diamond in the center and surrounded with ten diamonds, a pair of diamond earrings, a
small comb with twenty-two diamonds, and two diamond rings, which the contracting parties
appraised at P4,000.
At the maturity of this loan the plaintiff Eusebio M. Villaseor, was unable to pay the
loan, but he was able to obtian from the defendant an extension, with the condition that the loan
was to continue.
Days past, the plaintiff Eusebio M. Villaseor, in company with Carlos M. Dreyfus, went to the
house of the defendant and offered to pay the loan and redeem the jewels, taking with him, for
this purpose, the sum of P11,000, but the defendant then informed them that the time for the
redemption had already elapsed.
The plaintiffs now bring this action to compel the defendant to return the jewels pledged,
or their value, upon the payment by them of the sum they owe the defendant, with the interest
thereon.
Issue:
WON the plaintiffs' action for the recovery of the jewels pledged has prescribed.
SC Ruling:

Without deciding whether or not the action to recover the thing pledged may prescribe in any
case, it not being necessary for the purposes of this opinion, but supposing that it may, still the
defendant's contention is untenable. In the document evidencing the loan in question there is
stated:
"I transfer by way of pledge the following jewels." That this is a valid contract of pledge there
can be no question. As a matter of fact the defendant does not question it, but take s it for
granted.
However, it is contended that the obligation of the defendant to return the jewels pledged must
be considered as not stated in writing, for this obligation is not expressly mentioned in the
document.
But if this contract of pledge is in writing, it must necessarily be admitted that the action to
enforce the right, which constitutes the essence of this contract, is covered by a written contract.
The duty of the creditor to return the thing pledged in case the principal obligation is fulfilled is
essential in all contracts of pledge. This constitutes, precisely, the consideration of the debtor in
this accessory contract, so that if this obligation of the creditor to return to thing pledged, and
the right of the debtor to demand the return thereof, are eliminated, the contract would not be a
contract of pledge. It would be a donation.
If the right of the plaintiffs to recover the thing pledged is covered by a written contract,
the time for the prescription of this action is ten years, according to section 43 of the Code of
Civil Procedure.
Computing the time from that date to that of the filing of the complaint in this cause,
October 9, 1920, it appears that the ten years fixed by the law for the prescription of the action
have not yet elapsed.
On the other hand, the contract of loan with pledge is in writing and the action of the
defendant for the recovery of the loan does not prescribe until after ten years. It is unjust to hold
that the action of the plaintiffs for the recovery of the thing pledged, after the payment of the
loan, has already prescribed while the action of the defendant for the recovery of the loan has
not yet prescribed. The result of this would be that the defendant might have collected the loan
and at the same time kept the thing pledged.
The motion for reconsideration is denied.
b. Effect of return of the thing to pledgor
The return of the thing pledged to the pledgor or owner extinguishes the
pledge (NOT THE PRINCIPAL OBLIGATION)
1. Effect of contrary stipulation
A stipulation to the contrary is VOYED!!
2. Presumption if thing is in possession of the pledgor
If subsequent to the perfection of the pledge, the pledgor or another
person who derives title from him is in possession of the thing pledged, it
is presumed prima facie that the pledgee returned it.
II. Effects as to the pledgor
A. Rights of the pledgor
a. Remains the owner the pledgor remains the owner of the thing pledged, until
its sale, unless the thing is expropriated.
(Art. 2103. Unless the thing pledged is expropriated, the debtor continues to be
the owner thereof.
Nevertheless, the creditor may bring the actions which pertain to the owner of
the thing pledged in order to recover it from, or defend it against a third person.)
b. May demand deposit of the thing He may demand the deposit of the thing if
endangered by fault or negligence of the pledgee or used by the pledgee.
(Art. 2106. If through the negligence or wilful act of the pledgee, the thing
pledged is in danger of being lost or impaired, the pledgor may require that it be
deposited with a third person.)
(Art. 2104. The creditor cannot use the thing pledged, without the authority of
the owner, and if he should do so, or should misuse the thing in any other way,
the owner may ask that it be judicially or extrajudicially deposited. When the
preservation of the thing pledged requires its use, it must be used by the
creditor but only for that purpose.)

c. May substitute another thing He may substitute another thing if endangered
without the fault of pledgeeprovided it is of the same kind and not of inferior
quality.
(Art. 2107. If there are reasonable grounds to fear the destruction or impairment
of the thing pledged, without the fault of the pledgee, the pledgor may demand
the return of the thing, upon offering another thing in pledge, provided the latter
is of the same kind as the former and not of inferior quality, and without
prejudice to the right of the pledgee under the provisions of the following
article.)
d. To bid and to preference at foreclosure sale The pledgor is entitled to bid and to
preference at the foreclosure sale.
(Art. 2113. At the public auction, the pledgor or owner may bid. He shall,
moreover, have a better right if he should offer the same terms as the highest
bidder.)
e. To return of the thing He has the right to the return of the thing pledged upon
extinction of the principal obligation.
(Art. 2098. The contract of pledge gives a right to the creditor to retain the thing
in his possession or in that of a third person to whom it has been delivered, until
the debt is paid.)
A 1. Rights of pledgor who is not the principal debtor
If the pledgor is not the principal debtor, he has the same rights as a guarantor
under Art.s 2066-70 (reimbursement, subrogation) and 2077 to 2081 (release
by novation, extension, impossibility of subrogation and use of defenses of the
principal debtor). But he is not entitled to the benefit of exhaustion.
Southern Motors, Inc. vs Barbosa, supra
SC Ruling:
The right of guarantors, under Article 2058 of the Civil Code of the Philippines, to
demand exhaustion of the property of the principal debtor, exists only when a
pledge or a mortgage has not been given as special security for the payment of the
principal obligation. Guarantees, without any such pledge or mortgage, are
governed by Title XV of said Code, whereas pledges and mortgages fall under Title
XVI of the same Code, in which the following provisions, among others, are found:
ART. 2087. "It is also of the essence of these contracts that when the principal
obligation becomes due, the things in which the pledge or mortgage consists may
be alienated for the payment to the creditor."
ART. 2126. "The mortgage directly and immediately subjects the property upon
which it is imposed, whoever the possessor may be, to the fulfillment of the
obligation for whose security it was constituted."
It has been held already (Saavedra vs. Price, 68 Phil., 688), that a mortgagor is not
entitled to the exhaustion of the property of the principal debtor.
Although an ordinary personal guarantor - not a mortgagor or pledgor - may
demand the aforementioned exhaustion, the creditor may, prior thereto, secure a
judgment against said guarantor, who shall be entitled, however, to a deferment of
the execution of said judgment against him until after the properties of the
principal debtor shall have been exhausted to satisfy the obligation involved in the
case.
B. Obligations of the pledgor

a. To notify the pledgee of flaws He must notify the pledgee of flaws of the thing
known to him; otherwise he answers for damages like the bailor (borrower) in
commodatum.
(Art. 2101. The pledgor has the same responsibility as a bailor in commodatum
in the case under Article 1951.)

III. Extinguishment of the pledge
A. Extinction of the principal obligation
B. By destruction or loss of the thing pledged (in the possession of the pledgee)
C. By return of the pledge
D. By renunciation by the pledgee or abandonment of the pledge in writing even
without return, or consent of the pledgor (becomes depositary)
E. By redemption of the party having any right in or to the thing pledged (Art. 2117.
Any third person who has any right in or to the thing pledged may satisfy the
principal obligation as soon as the latter becomes due and demandable.)
F. By other causes of extinguishment of ordinary obligations
Articles 2121 2122
Legal Pledges (Right of Retention)
A. Governing rules These pledges are governed by the rules of conventional pledge as
to:
a. Possesssion;
b. Care and preservation;
c. Sale of the thing pledged
1. The sale may be made only after demand of the sum due
2. Within one month after such demand
i. If no sale takes place within such period, the debtor may require the return of
the thing retained, unless delay is justified
3. The excess of the price over the debt MUST be returned to the debtor
B. Cases of retention Examples of legal pledges
a. Possessor in good faith for necessary and useful expenses (art. 546)
b. The usufructuary for taxes and extraordinary expenses (art. 612)
c. The agent, for expenses advanced and damages caused by the agency (art. 1914)
d. The person who executes work on a movable for the payment thereof (mechanics
lien). (art. 1731)
e. The depositary, for expenses by reason of the deposit (art. 1994)
f. The hotel keeper for credits for lodging and supplies furnished to travelers. (art.
2004)
Articles 2123
Laws/Rules governing pawnshops
Art. 2123. With regard to pawnshops and other establishments, which are engaged in
making loans secured by pledges, the special laws and regulations concerning them shall
be observed, and subsidiarily, the provisions of this Title.
ooOoo

REAL ESTATE MORTGAGE
Articles 2124 2131
I. Concept
A. As a right
It is a real right over immovables constituted by the owner to guarantee an
obligation which if not paid is to be satisfied from the proceeds of the sale of
such property.
B. As a contract
It is a contract whereby the debtor guarantees the performance of a principal
obligation subjecting as security therefor real properties or real rights in case
such obligation is not complied with, within the time stipulated.
II. Elements
A. Parties
a. The mortgagor (who need not be the principal debtor) must have free disposal
and be the absolute owner of the security; otherwise he must be properly
authorized.
1. Where a mortgage is a nullity, having been executed by an unauthorized
person, registration under the Land Registration Act will not validate it (how
bout the mortgagee in good faith doctrine bullshit chuva? I think depende ra
sa situation and sa parties involved on the fucking degree of diligence
required. Alien?
ALIEN!)
b. The mortgagee must have capacity to contract.
B. Object which may only be:
a. Immovables
b. Alienable real rights imposed upon immovables in accordance with the law
C.
Consideration same as pledge. (morag katong same cause as the principal

obligation chuva, maya maya na ang trend karon, pag mayo namo mga bayetttt)
D. Form for validity (Art. 2125)

a. Between the parties
1. Under the Real Estate (Spanish Sardines) Mortgage Law To be legally
created in a valid manner it is necessary that the mortgage be constituted by
a public instrument.
2. 2. Under the Land Registration Act Mortgages whether registered or
unregistered shall be sufficient in law and shall be effective to encumber
lands provided that every such instrument shall be signed by the person
executing the same, in the presence of two witnesses, and shall be
acknowledged to be his free act and deed before the judge of a court of
record or clerk of a court of record or a notary public or a justice of peace who
shall certify to such acknowledgement (Sec. 127, Act No. 496) (check PD
1529)
Effect of Unregistered Mortgage Between the Parties
In order that a mortgage may be validly constituted, the document must be
recorded in the registry of peroperty. If not so recorded, the mortgage is
nevertheless binding between the parties. As between the parties, the mere fact
that there is as yet no compliance with the requirement that it be recorded cannot
be a bar to foreclosure.
Mobil Oil Phil. Inc. vs Diocares
29 SCRA 656, Sept. 30, 1969
Facts:
Plaintiff MOBIL extended a P45,000 loan to defendant Diocares payable in monthly
installments and secured by a first mortgage on 2 parcels of land. The defendant
also agreed to buy from the plaintiff their petroleum requirements in an amount not

less than 50,000 liters per month. It was further agreed that in case of defendants
failure to pay any installment due and purchase a minimum of 50,000 liters per
month of petroleum, the plaintiff has the right to foreclose the mortgage or recover
payment of the entire obligation. The defendant paid only P1,901 and failed to buy
on cash basis the agreed minimum amount of petroleum.
Plaintiff filed an action for payment of the balance of the debt and in default of
such payment, mortgaged property be sold and proceeds applied to defendants
obligation. The lower court ordered the defendant to pay the plaintiff said
obligation but did not order foreclosure of the mortgage upon the ground that it
does not appear from the copy of the loan and real estate mortgage that said
mortgage had been registered and therefore, the loan agreement although binding
among the parties merely created a personal obligation but did not establish a real
estate mortgage. Plaintiff appealed.
Issue:
Whether or not a real estate mortgage was created.
SC Ruling:
Art. 2125 of the New Civil Code provides: "In addition to the requisites stated in
article 2085, it is indispensable, in order that a mortgage may be validly
constituted, that the document in which it appears be recorded in the Registry of
Property. If the instrument is not recorded, the mortgage is nevertheless binding
between the parties."
The lower court regarded the categorical nature of it is indispensable but ignored
the succeeding sentence the mortgage is nevertheless binding upon the parties.
The law is clear. The Mortgage subsists. As between the parties, the mere fact that
there is as yet no compliance with the requirement that it be recorded cannot be a
bar to foreclosure. No interpretation of the law is needed, only its application.
In the language of the Report of the Code commission: in Art. 2125 an additional
provision is made that if the instrument of mortgage is not recorded, the mortgage
is nevertheless binding between the parties. This is indicative of the legislative
intent.
Moreover, equity so demands and justice is served. There is thus a full
acknowledgement of the binding effect of a promise, which must be lived up to. It
could be said that to allow foreclosure in the absence of such a formality is to
offend against the demands of jural symmetry. What is indispensable may be
dispensed with. Such an objection is far from fatal. This would not be the first time
when logic yields to what is fair and what is just. To such an overmastering
requirement, law is not immune.
Order affirmed with modifications.
b. As to strangers the document in which the mortgage appears must be recorded

in the Registry of Property of the province where the land is located.
Validity of Private Document evidencing mortgage
No valid mortgage has been constituted in plaintiffs favor, the alleged deed of
mortgage being a mere private document and not registered; moreover, it contains
a stipulation (pacto comisorio) which is null and void under Art. 2088 of the Civil
Code.
Hechanova vs. Adil
GR L49940, Sept. 25, 1986
Facts:
The case under review is for the annulment of a deed of sale dated March 11, 1978,
executed by defendant Jose Y. Servando in favor of his co-defendants, the
petitioners herein, covering three parcels of land situated in Iloilo City. Claiming
that the said parcels of land were mortgaged to him in 1970 by the vendor, who is
his cousin, to secure a loan of P20,000.00, the plaintiff Pio Servando impugned the
validity of the sale as being fraudulent, and prayed that it be declared null and void
and the transfer certificates of title issued to the vendees be cancelled, or

alternatively, if the sale is not annulled, to order the defendant Jose Servando to
pay the amount of P20,000.00, plus interests, and to order defendants to pay
damages. Attached to the complaint was a copy of the private document
evidencing the alleged mortgage (Annex A), which is quoted hereunder:
August 20, 1970
This is to certify that I, Jose Yusay Servando, the sole owner of three parcel of land
under Tax Declaration No. 28905, 44123 and 31591 at Lot No. 1, 1863-Portion of
1863 & 1860 situated at Sto. Nino St., Arevalo, Compania St. & Compania St.,
Interior Molo, respectively, have this date mortgaged the said property to my
cousin Pio Servando, in the amount of TWENTY THOUSAND PESOS (P20,000.00),
redeemable for a period not exceeding ten (10) years, the mortgage amount
bearing an interest of 10% per annum.
I further certify that in case I fail to redeem the said properties within the period
stated above, my cousin Pio Servando, shall become the sole owner thereof.
(SGD.) JOSE YUSAY SERVANDO
WITNESSES:
(Sgd) Ernesto G. Jeruta
(Sgd) Francisco B. Villanueva
SC Ruling:
It is clear from the records of this case that the plaintiff has no cause of action.
Plaintiff has no standing to question the validity of the deed of sale executed by the
deceased defendant Jose Servando in favor of his co-defendants Hechanova and
Masa. No valid mortgage has been constituted plaintiff's favor, the alleged deed of
mortgage being a mere private document and not registered; moreover, it contains
a stipulation (pacto comisorio) which is null and void under Article 2088 of the Civil
Code. Even assuming that the property was validly mortgaged to the plaintiff, his
recourse was to foreclose the mortgage, not to seek annulment of the sale.
The complaint filed by plaintiff dated February 4, 1978 is hereby dismissed.
E. Supplementary law the Real Estate Mortgage Law of 1889 (Ley Hipotecaria de
Filipinas) and the Land Registration Act (Act. No. 496), and also the Property
Registration Decree (PD 1529)
III. Classes
A. Voluntary one which is agreed to between the parties or constituted by the will of
the owner of the property on which it is created. (Contractual Mortgage)
B. Legal one required by law to be executed in favor of certain persons.
C. Equitable Mortgage one which, although it lacks the proper formalities of a
mortgage required by law nevertheless shows the intention of the parties to burden
the property as a security for a debt.
IV. Effects
A. As to the property mortgaged
a. Creation of real right
A registered mortgage creates right in rem, a real right, a lien inseparable
from the property mortgaged, which is enforceable against the whole world,
affording specific security for the satisfaction of a debt. The personality of the
owner is disregarded. Until discharged upon payment of the obligation, it
follows the property wherever it goes and subsists notwithstanding changes
of ownership.
Cancellation of mortgage in lieu of surety bond
Ganzon vs. Inserto
G.R. No. L-56450 July 25, 1983
Facts:
Petitioner Ganzon initiated proceedings to extra-judicially foreclose a real estate
mortgage executed by the private respondents in his favor. The Deed of Real Estate
Mortgage executed between Randolph Tajanlangit and Esteban Tajanlangit as

mortgagors on one hand and Rodolfo Ganzon as mortgagee on the other hand was
to secure the payment by the Tajanlangits of a promissory note amounting to
P40,000.00 in favor of Ganzon.
A day before before the scheduled public auction, private respondents filed a civil
action for specific performance, damages, and phobition with preliminary injunction
against the petitioners with the resapondent court.
The trial court ordered the cancellation of a mortgage lien annotated in Torrens
Certificate of Title to secure the payment of a promissory note and substitutute
such mortage lien with a surety bond approved by the same court to secure the
payment of the promissory note.
Issue:
May the respondent court order that a mortgage on real property be substituted by
a surety bond and direct the Register of Deeds to cancel the mortgage lien
annotated on the Torrens Title since the surety bond already secures the obligation
earlier secured by the cancelled mortgage?
SC Ruling:
NO. Applying the principles underlying the nature of a mortgage, the real estate mortgage can
not be substituted by a surety bond as ordered by the trial court. The mortgage lien in favor of
Petitioner Rodolfo Ganzon is inseparable from the mortgaged property. It is a right in rem, a lien
on the property. To substitute the mortgage with a surety bond would convert such lien from a
right in rem, to a right in personam. This conversion can not be ordered for it would abridge the
rights of the mortgagee under the mortgage contract.
Effect of sale of mortgaged property
Bonnevie vs. CA
G.R. No. L-49101 October 24, 1983

Facts:
It is not disputed that spouses Lozano were the owners of the property which they
mortgaged on December 6, 1966, to secure the payment of the loan of P75,000.00
they were about to obtain from defendant Philippine Bank of Commerce; that on
December 8, 1966, they executed in favor of plaintiff Honesto Bonnevie the Deed
of Sale with Assumption of Mortgage, for an in consideration of the sum of
P100,000.00, P25,000 of which amount being payable to the Lozano spouses upon
the execution of the document, and the balance of P75,000 being payable to
defendant bank.
Defendant applied for the forclosure of the mortgage. Petitioners sought the
annulment of the Deed of Mortgage and alleged among others that the mortgage
was executed by one who was not the owner of the mortgaged property.
Issue:
Whether the real estate mortgage executed by the spouses Lozano in favor of
respondent bank was validly and legally executed.
SC Ruling:
YES. Petitioners admit that they did not secure the consent of respondent Bank to
the sale with assumption of mortgage. Coupled with the fact that the
sale/assignment was not registered so that the title remained in the name of the
Lozano spouses, insofar as respondent Bank was concerned, the Lozano spouses
could rightfully and validly mortgage the property. Respondent bank had every
right to rely on the certificate of title. It was not bound to go behind the same to
look for flaws in the mortgagors title, the doctrine of innocent purchaser for value
being applicable to an innocent purchaser for value.
A mortgage follows the property whoever the possesor may be and subjects the
fulfillment of the obligation for whose security it was constituted.

Effect of death of mortgagor
Jacob vs. CA
184 SCRA 294; April 6, 1990
Facts:
Petitioner contends that the extrajudicial foreclosure proceedings and the sale of
the property mortgaged under the amended real estate mortgage after the
mortgagor died are null and void. It is pointed out that Dr. Jacob died on March 9,
1979 and that the extrajudicial foreclusure proceedings were effected after his
death, that is, the public auction sale was made on May 11, 1979. Petitioner argues
that such extrajudicial foreclosure can only be prosecuted during the lifetime of Dr.
Jacob for the reason that such kind of forclosure under Act No. 3135, as amended,
is authorized only because of the special power fo attorney inserted in the
mortgage deed; and that said special power of attorney cannot extend beyond the
lifetime of the supposed mortgagor.
Issue:
Whether or not an extrajudicial foreclosure of a mortgage may proceed even after
the death of the mortgagor.
SC Ruling:
YES. The power to foreclose a mortgage is not an ordinary agency that
contemplated exclusively the representation of the principal by the agent but is
primarily an authority conferred upon the mortgagee for the latters own
protection. That power survives the death of the mortgagor. The right of the
mortgagee bank to extrajudicially foreclose the mortgage after the death of the
mortgagor, acting through his attorney-in-fact, did not depend on the authority in
the deed of mortgage executed by the latter.
b. Extension to accesions and accessories

Effect of mortgage of hacienda/where mortgagee transferred his credit:
Bischoff vs. Pomar
12 Phil 690; February 2, 1909
Facts:
In July 1900, Lazaro Mota loaned to Romana Ganzon P11, 209 payable in 2 years
and secured by a mortgage consisting of hacienda San Jose. Additional loans were
granted with further stipulations that in case of debtors failure to pay the creditor,
the mortgaged hacienda would be disposed of at public auction to satisfy the said
indebtedness. This last instrument was entered in the registry of property.
In September 1902, Ganzon sold to plaintiff Bischoff the machineries and tramway
in the hacienda under a pacto de retro. In September 1904, Mota transferred said
credit to defendant Cia. General de Tabaco. Ganzon executed a mortgage in favor
of Cia. General de Tabaco on the hacienda as security for the loan of P53, 042. In
1905, the receiver of Ganzon took possesion od said properties. The plaintiff filed a
complaint praying for the delivery of the machineries and tramway sold to him.
The trial court decided for the defendant but with plaintiff having a reserved right
against Ganzon for the sum paid for said properties.
Issue:
Whether or not the machineries and tramway are included in the mortagage.
SC Ruling:
In the instruments of mortgage, executed prior to the sale to the plaintiff with
pacto de retro, the improvements already mounted appear as expressly mortgaged
at the time of executing the first mortgage in 1902 and later on to the transfer of
credit to Cia general de tabaco in 1904. From none of said instruments does it
appear that the contracting parties had expressly agreed to exclude the said
machineries and tramway from the repeated mortgages of said hacienda.

It is a rule that in a mortgage of real estate, the improvements on the same are
included; therefore, all objects permanently attached to a mortgaged building or
land, although they may have been placed there after the mortgaged was
constituted, are also included.
Assuming that the owner of a mortgaged property is entitled to dispose of the
same, such disposal however, does not release it from the mortgage with which it
is encumbered, inasmuch as the right of the creditor curtails that of the said owner
of the mortgaged property, and the purchaser is necessarily bound to acknowledge
and respect the encumbrances which is at the disposition of the creditor in order
that under the terms of the contract, he may recover his credit from the value
thereof.
Bischoff can not acquire any right to indemnity for loss or damages, for the reason
that he purchased goods that were already liable to the mortgage. The sale was
effected long after the property was mortgaged. He therefore did not obtain
possession of the same.
Effect of mortgage of lots
Paderes vs. CA
G.R. No. 147074; July 15, 2005
Facts:
On September 1982, Manila International Construction Corporation (MICC)
executed a real estate mortagage over 21 registered parcels of land including the
improvements thereon in favor of Banco Filipino in order to secure a loan of
P1,885,000.00. The 21 mortgaged properties included two lots, which was
subsequently sold by MICC on August 1983 to petitioners. Neither sale was
registered, however.
For failure of MICC to settle its obligations, Banco Filipino filed a verified petition for
the extra-judicial foreclosure of MICCs mortgage. Thereafter, a writ of possession
was issued ordering the petitioners to vacate the premises within 7 days from
receipt thereof.
Petitioners argued that having purchased their respective properties in good faith
from MICC, they are third parties whose right thereto are superior to that of Banco
Filipino; they are still entitled to redeem the properties and in fact a binding
agreement between them and the bank had been reached; their respective houses
should not have been included in the auction sale of the mortgaged properties.
Held:
Petioners position clashes with precepts well-entrenched in law. By Article 2126 of
the Civil Code, a mortgage directly and immediately subjects the property on
which it is imposed, whoever the possessor may be, to the fulfillment of the
obligation for whose security it was constituted. Sale or transfer cannot affect or
release the mortgage.
A purchaser is necessarily bound to acknowledge and respect the encumbrance to
which is subjected the purchased thing and which is at the disposal of the creditor
in order that he, under the terms of the contract, may recover the amount of his
credit therefrom. For, a recorded real estate mortgage is a right in rem, a lien on
the property whoever its owner may be. Because the personality of the owner is
disregarded; the mortgage subsists notwithstanding changes of ownership; the last
transferee is just as much of a debtor as the first one; and this, independent of
whether the transferee knows or not the person of the mortgagee. So it is, that a
mortgage lien is inseperable from the property mortgaged. All subsequent
purchasers thereof must respect the mortgage, whether the transfer to them be
with or without the consent of the mortgagee. For, the mortgage, until discharge,
follows the property.
c. Pactum de non alienando

Stipulations forbidding the owner from alienating the immovable are void.
(Article 2130)

B. Effects as to the Mortgagee
The mortgage credit may be alienated or assigned to a third person, in whole or
in part, with the formalities required by law. (Article 2128)
A mortgagee in possessionis subject to the rules of antichresis in that he
assumes the obligations of an antichretic creditor.
Where mortgagee transferred his credit: Please refer to the case of Bischoff vs.
Pomar
V. Foreclosure Modes
A. Judicial
RULE 68, Rules of Court: FORECLOSURE OF REAL ESTATE MORTGAGE
Section 1. Complaint in action for foreclosure.
In an action for the foreclosure of a mortgage or other encumbrance upon real estate,
the complaint shall set forth the date and due execution of the mortgage; its
assignments, if any; the names and residences of the mortgagor and the mortgagee; a
description of the mortgaged property; a statement of the date of the note or other
documentary evidence of the obligation secured by the mortgage, the amount claimed
to be unpaid thereon; and the names and residences of all persons having or claiming
an interest in the property subordinate in right to that of the holder of the mortgage, all
of whom shall be made defendants in the action.
Sec. 2. Judgment on foreclosure for payment or sale.
If upon the trial in such action the court shall find the facts set forth in the complaint to
be true, it shall ascertain the amount due to the plaintiff upon the mortgage debt or
obligation, including interest and other charges as approved by the court, and costs,
and shall render judgment for the sum so found due and order that the same be paid to
the court or to the judgment obligee within a period of not less than ninety (90) days
nor more than one hundred twenty (120) days from the entry of judgment, and that in
default of such payment the property shall be sold at public auction to satisfy the
judgment.
Sec. 3. Sale of mortgaged property; effect.
When the defendant, after being directed to do so as provided in the next preceding
section, fails to pay the amount of the judgment within the period specified therein, the
court, upon motion, shall order the property to be sold in the manner and under the
provisions of Rule 39 and other regulations governing sales of real estate under
execution. Such sale shall not affect the rights of persons holding prior encumbrances
upon the property or a part thereof, and when confirmed by an order of the court, also
upon motion, it shall operate to divest the rights in the property of all the parties to the
action and to vest their rights in the purchaser, subject to such rights of redemption as
may be allowed by law.
Upon the finality of the order of confirmation or upon the expiration of the period of
redemption when allowed by law, the purchaser at the auction sale or last
redemptioner, if any, shall be entitled to the possession of the property unless a third
party is actually holding the same adversely to the judgment obligor. The said
purchaser or last redemptioner may secure a writ of possession, upon motion, from the
court which ordered the foreclosure.
Sec. 4. Disposition of proceeds of sale.
The amount realized from the foreclosure sale of the mortgaged property shall, after
deducting the costs of the sale, be paid to the person foreclosing the mortgage, and
when there shall be any balance or residue, after paying off the mortgage debt due,
the same shall be paid to junior encumbrancers in the order of their priority, to be
ascertained by the court, or if there be no such encumbrancers or there be a balance
or residue after payment to them, then to the mortgagor or his duly authorized agent,
or to the person entitled to it.
Sec. 5. How sale to proceed in case the debt is not all due.

If the debt for which the mortgage or encumbrance was held is not all due as provided
in the judgment, as soon as a sufficient portion of the property has been sold to pay
the total amount and the costs due, the sale shall terminate; and afterwards, as often
as more becomes due for principal or interest and other valid charges, the court may,
on motion, order more to be sold. But if the property cannot be sold in portions without
prejudice to the parties, the whole shall be ordered to be sold in the first instance, and
the entire debt and costs shall be paid, if the proceeds of the sale be sufficient therefor,
there being a rebate of interest where such rebate is proper.
Sec. 6. Deficiency judgment.
If upon the sale of any real property as provided in the next preceding section there be
a balance due to the plaintiff after applying the proceeds of the sale, the court, upon
motion, shall render judgment against the defendant for any such balance for which, by
the record of the case, he may be personally liable to the plaintiff, upon which
execution may issue immediately if the balance is all due at the time of the rendition of
the judgment; otherwise, the plaintiff shall be entitled to execution at such time as the
balance remaining becomes due under the terms of the original contract, which time
shall be stated in the judgment.
Sec. 7. Registration.
A certified copy of the final order of the court confirming the sale shall be registered in
the registry of deeds. If no right of redemption exists, the certificate of title in the name
of the mortgagor shall be cancelled, and a new one issued in the name of the
purchaser.
Where a right of redemption exists, the certificate of title in the name of the mortgagor
shall not be cancelled, but the certificate of sale and the order confirming the sale shall
be registered and a brief memorandum thereof made by the registrar of deeds upon
the certificate of title. In the event the property is redeemed, the deed of redemption
shall be registered with the registry of deeds, and a brief memorandum thereof shall be
made by the registrar of deeds on said certificate of title.
If the property is not redeemed, the final deed of sale executed by the sheriff in
favor of the purchaser at the foreclosure sale shall be registered with the registry of
deeds; whereupon the certificate of title in the name of the mortgagor shall be
cancelled and a new one issued in the name of the purchaser.
B. Extrajudicial
Procedure
A.M. No. 99-10-05-0, August 7, 2001: PROCEDURE IN EXTRA-JUDICIAL FORECLOSURE
OF MORTGAGE
The following procedures are hereby prescribed in extrajudicial foreclosure of
mortgages:
1. All applications for extra-judicial foreclosure of mortgage whether under the
direction of the sheriff or a notary public shall be filed with the Executive Judge,
through the Clerk of court who is also the Ex-Officio Sheriff.
2. Upon receipt of an application for extra-judicial foreclosure of mortgage, it shall be
the duty of the Clerk of Court to:
a. receive and docket said application and to stamp thereon the corresponding file
number, date and time of filing;
b. collect the filing fees and issue the corresponding official receipt;
c. examine, in case of real estate mortgage foreclosure, whether the applicant has
complied with all the requirements before the public auction is conducted under
the direction of the sheriff or a notary public
d. sign and issue the certificate of sale, subject to the approval of the Executive
Judge, or in his absence, the Vice-Executive Judge. No certificate of sale shall be
issued in favor of the highest bidder until all fees shall have been paid; Provided,
that in no case shall the amount payable exceed P100,000.00;
e. after the certificate of sale has been issued to the highest bidder, keep the
complete records, while awaiting any redemption within a period of one (1) year
from date of registration of the certificate of sale with the Register of Deeds
concerned, after which, the records shall be archived. Notwithstanding the
foregoing provision, juridical persons whose property is sold pursuant to an

extra-judicial foreclosure, shall have the right to redeem the property until, but
not after, the registration of the certificate of foreclosure sale which in no case
shall be more than three (3) months after foreclosure, whichever is earlier.
Where the application concerns the extrajudicial foreclosure of mortgages of real
estates and/or chattels in different locations covering one indebtedness, only one
filing fee corresponding to such indebtedness shall be collected. The collecting Clerk
of Court shall, apart from the official receipt of the fees, issue a certificate of
payment indicating the amount of indebtedness, the filing fees collected, the
mortgages sought to be foreclosed, the real estates and/or chattels mortgaged and
their respective locations, which certificate shall serve the purpose of having the
application docketed with the Clerks of Court of the places where the other
properties are located and of allowing the extrajudicial foreclosures to proceed
thereat.
3. The notices of auction sale in extrajudicial foreclosure for publication by the sheriff
or by a notary public shall be published in a newspaper of general circulation
4. The Executive Judge shall, with the assistance of the Clerk of Court, raffle
applications for extrajudicial foreclosure of mortgage under the direction of the
sheriff among all sheriffs, including those assigned to the Office of the Clerk of Court
and Sheriffs IV assigned in the branches.
5. The name/s of the bidder/s shall be reported by the sheriff or the notary public who
conducted the sale to the Clerk of Court before the issuance of the certificate of
sale.
Deficiency Rule
DEVELOPMENT BANK OF THE PHILIPPINES vs. ALEJANDRO and ADELAIDA

LICUANAN
G.R. No. 150097, February 26, 2007
Facts:
Respondent spouses Alejandro and Adelaida Licuanan were granted a piggery loan in the
amount of P4,700 by petitioner, evidenced by a promissory note dated September 20, 1974 and
secured by a real estate mortgage over a 980-square meter parcel of land with a two-storey building.
The loans maturity date was September 23, 1979. Petitioner granted respondents an additional loan
of P12,000 evidenced by a promissory note dated May 29, 1975 payable on or before the year 1980.
This was secured by a real estate mortgage over four parcels of land situated in Pangasinan. On
October 2, 1975, petitioner granted respondent spouses another loan of P22,000 evidenced by a
promissory note maturing on October 3, 1985. This was secured by a real estate mortgage executed
in favor of petitioner over another three parcels of land
On July 6, 1981, petitioner sent a letter by registered mail to respondents informing them
that, since the conditions of the mortgage had been breached, petitioner would have the mortgaged
properties sold by the sheriff under Act 3135. The total amount due from the three loans had by then
ballooned to P75,298.32.
On July 20, 1981, petitioner filed an application for extrajudicial foreclosure. The mortgaged
properties were sold in a public auction on December 16, 1981. Petitioner, as the highest bidder,
acquired them for a total of P16,340. The certificate of sale was registered on January 25, 1982.
On February 4, 1983, petitioner consolidated its ownership over the properties. After more
than a year or on October 16, 1984, petitioner wrote respondents by registered mail, informing them
that the properties (now acquired assets of the bank) would be disposed of by public auction. On
November 11, 1984, petitioner published an advertisement stating that on November 14, 1984, the
properties would be sold by oral bidding. On this date, however, there were no bidders.
On November 16, 1984, petitioner sent respondents a letter informing them that the
properties could be reacquired by negotiated sale for cash or installment.Three days later, however,
on November 19, 1984, the properties were sold through negotiated sale to one Emelita A. Peralta.
Respondents were informed of the sale by petitioner through a letter dated December 6, 1984.
On the same day, petitioner executed a deed of conditional sale in favor of Peralta. On
December 11, 1984, respondents offered to repurchase the properties from petitioner but they had
already been sold to Peralta. Respondents then filed a complaint for recovery of real properties and
damages.

Issue:
Whether or not respondents are liable for the deficiency claim of petitioner.
Take Note: The price in which the mortgaged property was sold was P104,000 which was less than
the amount of respondents indebtedness which is P131,642.33.
SC Ruling:
No. the respondents are not responsible for the deficiency claim. While it is true that in
extrajudicial foreclosure of mortgage, the mortgagee has the right to recover the deficiency from the
debtor this presupposes that the foreclosure must first be valid.
But in this case, the foreclosure is invalid. If demand was made and duly received by the
respondents and the latter still did not pay, then they were already in default and foreclosure was
proper. However, if demand was not made, then the loans had not yet become due and demandable.
This meant that respondents had not defaulted in their payments and the foreclosure by petitioner
was premature. Foreclosure is valid only when the debtor is in default in the payment of his
obligation.
V.
Redemption
A. Rules
Judicial Foreclosure and Extrajudicial Foreclosure
Mortgagor
Foreclosure
Judicial Foreclosure
Extrajudicial Foreclosure
No right of redemption; only
Right of Redemption
Natural Person
equity of redemption (not less
(1 year from registration of the
than 90 days nor more than
certificate of sale)
120 days from entry of
judgment)
Equity of Redemption
Juridical Person
(90 days from foreclosure not
later than registration of sale)
Mortgage: Bank
Mortgagor
Judicial Foreclosure
Natural Person
Juridical Person
Foreclosure
Extrajudicial Foreclosure
Right of Redemption
Right of Redemption
Right of Redemption
(90 days from foreclosure not
later than registration of sale)
Right of Redemption vs. Equity of Redemption
HUERTA ALBA RESORT INC. vs. COURT OF APPEALS and SYNDICATED MANAGEMENT
GROUP INC
G.R. No. 128567, September 1, 2000
Facts:
In a complaint for judicial foreclosure of mortgage with preliminary injunction filed on
October 19, 1989, the herein private respondent sought the foreclosure of four (4) parcels of land
mortgaged by petitioner to Intercon Fund Resource, Inc. ("Intercon").
Private respondent instituted the case as mortgagee-assignee of a loan amounting to P8.5
million obtained by petitioner from Intercon, in whose favor petitioner mortgaged the aforesaid
parcels of land as security for the said loan.
In its answer below, petitioner questioned the assignment by Intercon of its mortgage right
thereover to the private respondent, on the ground that the same was ultra vires. Petitioner also
questioned during the trial the correctness of the charges and interest on the mortgage debt in

question.
On April 30, 1992, the trial court, came out with its decision granting herein private
respondent SMGI's complaint for judicial foreclosure of mortgage. Upon appeal, it was dismissed
on the ground of late payment of docket fees. Later, the decision became final and executory.
On July 4, 1994, private respondent filed with the trial court of origin a motion for execution
of the Decision promulgated on April 30, 1992 in Civil Case No. 89-5424. The said motion was
granted on July 15, 1994. Accordingly, on July 15, 1994 a writ of execution issued and, on July 20,
1994, a Notice of Levy and Execution was issued by the Sheriff concerned, who issued on August
1, 1994 a Notice of Sheriff's Sale for the auction of subject properties on September 6, 1994.
On August 23, 1994, petitioner filed with the same trial court an Urgent Motion to Quash
and Set Aside Writ of Execution ascribing to it grave abuse of discretion in issuing the questioned
Writ of Execution. To support its motion, petitioner invited attention and argued that the records of
the case were still with the Court of Appeals and therefore, issuance of the writ of execution was
premature since the 150-day period for petitioner to pay the judgment obligation had not yet lapsed
and petitioner had not yet defaulted in the payment thereof since no demand for its payment was
made by the private respondent. In petitioner's own words, the dispute between the parties was
"principally on the issue as to when the 150-day period within which Huerta Alba may exercise its
equity of redemption should be counted."
Issue:
Whether or not the petitioner has the one-year right of redemption of subject properties
under Section 78 of Republic Act No. 337 otherwise known as the General Banking Act.
SC Ruling:
No. The petitioner can no longer invoke Section 78 of Republic Act No. 337 because it failed to
seasonably invoke the said provision.
On the distinction between the equity of redemption and right of redemption, the case of
Gregorio Y. Limpin vs. Intermediate Appellate Court, comes to the fore. Held the Court in the said
case:
"The equity of redemption is, to be sure, different from and should not be confused with the right of
redemption.
The right of redemption in relation to a mortgage understood in the sense of a prerogative
to re-acquire mortgaged property after registration of the foreclosure sale exists only in the case of
the extrajudicial foreclosure of the mortgage. No such right is recognized in a judicial foreclosure
except only where the mortgagee is the Philippine National Bank or a bank or banking institution.
Where a mortgage is foreclosed extrajudicially, Act 3135 grants to the mortgagor the right of
redemption within one (1) year from the registration of the sheriff's certificate of foreclosure sale.
Where the foreclosure is judicially effected, however, no equivalent right of redemption
exists. The law declares that a judicial foreclosure sale 'when confirmed be an order of the court. . . .
shall operate to divest the rights of all the parties to the action and to vest their rights in the
purchaser, subject to such rights of redemption as may be allowed by law.' Such rights exceptionally
'allowed by law' (i.e., even after confirmation by an order of the court) are those granted by the
charter of the Philippine National Bank (Acts No. 2747 and 2938), and the General Banking Act
(R.A. 337). These laws confer on the mortgagor, his successors in interest or any judgment creditor
of the mortgagor, the right to redeem the property sold on foreclosure after confirmation by the
court of the foreclosure sale which right may be exercised within a period of one (1) year,
counted from the date of registration of the certificate of sale in the Registry of Property.
But, to repeat, no such right of redemption exists in case of judicial foreclosure of a
mortgage if the mortgagee is not the PNB or a bank or banking institution. In such a case, the
foreclosure sale, 'when confirmed by an order of the court. . . shall operate to divest the rights of all
the parties to the action and to vest their rights in the purchaser.' There then exists only what is
known as the equity of redemption. This is simply the right of the defendant mortgagor to
extinguish the mortgage and retain ownership of the property by paying the secured debt within the
90-day period after the judgment becomes final, in accordance with Rule 68, or even after the
foreclosure sale but prior to its confirmation.

Section 2, Rule 68 provides that

'. . If upon the trial . . the court shall find the facts set forth in the complaint to be true, it shall
ascertain the amount due to the plaintiff upon the mortgage debt or obligation, including interest
and costs, and shall render judgment for the sum so found due and order the same to be paid into
court within a period of not less than ninety (90) days from the date of the service of such order, and
that in default of such payment the property be sold to realize the mortgage debt and costs.'
This is the mortgagor's equity (not right) of redemption which, as above stated, may be
exercised by him even beyond the 90-day period 'from the date of service of the order,' and even
after the foreclosure sale itself, provided it be before the order of confirmation of the sale. After
such order of confirmation, no redemption can be effected any longer."(Emphasis supplied)
It is bear stressing that petitioner avers in its petition that the Intercom, predecessor in
interest of the private respondent, is a credit institution, such that Section 78 of Republic Act No.
337 should apply in this case. Stated differently, it is the submission of petitioner that it should be
allowed to redeem subject properties within one year from the date of sale as a result of the
foreclosure of the mortgage constituted thereon.
The pivot of inquiry here therefore, is whether the petitioner seasonably invoked its asserted
right under Section 78 of R.A. No. 337 to redeem subject properties.
The court finds that in light of the aforestated facts, it was too late in the day for petitioner to
invoke a right to redeem under Section 78 of R.A. No. 337. Petitioner failed to assert a right to
redeem in several crucial stages of the proceedings.
Indeed, at the earliest opportunity, when it submitted its answer to the complaint for judicial
foreclosure, petitioner should have alleged that it was entitled to the beneficial provisions of Section
78 of R.A. No. 337 but again, it did not make any allegation in its answer regarding any right
thereunder. It bears stressing that the applicability of Section 78 of R.A. No. 337 hinges on the
factual question of whether or not private respondent's predecessor in interest was a credit
institution. As was held in Limpin, a judicial foreclosure sale, "when confirmed by an order of the
court, . . shall operate to divest the rights of all the parties to the action and to vest their rights in the
purchaser, subject to such rights of redemption as may be allowed by law'," which confer on the
mortgagor, his successors in interest or any judgment creditor of the mortgagor, the right to redeem
the property sold on foreclosure after confirmation by the court of the judicial foreclosure sale.
Thus, the claim that petitioner is entitled to the beneficial provisions of Section 78 of R.A. No. 337
since private respondent's predecessor-in-interest is a credit institution is in the nature of a
compulsory counterclaim which should have been averred in petitioner's answer to the compliant
for judicial foreclosure.
The failure of petitioner to seasonably assert its alleged right under Section 78 of R.A. No.
337 precludes it from so doing at this late stage case. Estoppel may be successfully invoked if the
party fails to raise the question in the early stages of the proceedings. Thus, "a party to a case who
failed to invoked his claim in the main case, while having the opportunity to do so, will be
precluded, subsequently, from invoking his claim, even if it were true, after the decision has become
final, otherwise the judgment may be reduced to a mockery and the administration of justice may be
placed in disrepute."
B. How Done
BANCO FILIPINO SSAVINGS AND MORTGAGE BANK vs. COURT OF APPEALS and
SANTIAGO (Isabela) MEMORIAL PARK, INC.
G.R. No. 143896, July 8, 2005
Facts:
On December 20, 1993, private respondent Santiago (Isabela) Memorial Park, Inc. filed a
complaint for redemption and specific performance with the Regional Trial Court of Santiago,
Isabela, Branch 21, against herein petitioner Banco Filipino Savings & Mortgage Bank., the
material and relevant allegations of which read as follows:
COMPLAINT
Plaintiff, by counsel, to this Honorable Court most respectfully alleges:

1. .
2. .
3. That in February 1981, plaintiff mortgaged the above described property in favor of defendant to
secure a loan of P500,000.00 obtained by plaintiff from defendant;
4. That due to the failure of plaintiff to pay the aforementioned loan, defendant foreclosed the
mortgage and in consequence thereof Sheriff David R. Medina of this Honorable Court issued a
SHERIFF'S CERTIFICATE OF SALE in favor of defendant which is dated October 9, 1990 and
which instrument was inscribed at the back of TCT T-128647 of Isabela on January 21, 1991;
5. That in a letter of the President of plaintiff dated August 6, 1991, plaintiff made manifest its
interest to exercise its right of redemption and made an offer of P700,000.00 as redemption to
defendant through the then Deputy Liquidator, ROSAURO NAPA; this started the negotiation for
the redemption of the above described property;
6. That in a letter of the Deputy Liquidator dated January 23, 1992, plaintiff was given up to the end
of March 1992 to negotiate and make special arrangement for any satisfactory plan of payment for
the redemption;
7. That in a letter of the Deputy Liquidator dated March 12, 1992, plaintiff was directed to remit at
least P50,000.00 to defendant which would manifest the interest and willingness of plaintiff to
redeem the property, and forthwith on March 24, 1992, plaintiff remitted the sum of P50,000.00 to
defendant which was duly receipted by the latter under Official Receipt No. 279968 A dated March
24, 1992;
8. That in a letter of the President of plaintiff dated January 20, 1993, plaintiff amended its first
offer and made an offer of P1,000,000.00 as redemption which offer included a plan of payment;
9. That between January 20, 1993 to November 1993, plaintiff exerted earnest efforts in order to
finally effect the redemption, but defendant dilly dallied on the matter.
10. That in a letter of Atty. ORLANDO O. SAMSON, Senior Vice President of defendant, dated
November 5, 1993, there is a turn-around by defendant and is now demanding P5,830,000.00 as
purchase price of the property, instead of the original agreed redemption;
11. That the delay of the defendant in the finalization of the terms of redemption did not in any
manner alter the right of plaintiff to redeem the property from defendant;
12. That plaintiff is still in actual possession of the property and intend to remain in actual
possession of the property, while defendant was never in actual possession of said property;
13. That plaintiff is ready and willing to pay the redemption money, which is the total bank claim of
P925,448.17 plus lawful interest and other allowable expenses incident to the foreclosure
proceedings:
14. That the latest actuations of defendant are indicative of the refusal of defendant to allow the
exercise of redemption by herein plaintiff, reason for which there is a need for judicial
determination of the rights and obligations of the parties to this case;
15. That on account of the unlawful actuations of defendant in refusing the redemption of the
property by plaintiff, the latter engaged the services of counsel for a fee of P30,000.00 which
defendant should pay to plaintiff.
Issue:
Whether private respondent's complaint for redemption and specific performance states a
cause of action against petitioner.
SC Ruling:
Based on the allegations in the complaint, we find that private respondent has no cause of
action for redemption against petitioner.
Paragraph 4 of the complaint states:
4. That due to the failure of plaintiff to pay the aforementioned loan, defendant foreclosed the
mortgage and in consequence thereof Sheriff David R. Medina of this Honorable Court issued a
SHERIFF'S CERTIFICATE OF SALE in favor of defendant which is dated October 9, 1990 and
which instrument was inscribed at the back of TCT T-128647 of Isabela on January 21, 1991;
The sheriff's certificate of sale was registered on January 21, 1991. Section 6 of Act 3135 provides
for the requisites for a valid redemption, thus:
SEC. 6. In all cases in which an extrajudicial sale is made under the special power hereinbefore

referred to, the debtor, his successors in interest or any judicial creditor or judgment creditor of said
debtor, or any person having a lien on the property subsequent to the mortgage or deed of trust
under which the property is sold, may redeem the same at any time within the term of one year from
and after the date of sale; and such redemption shall be governed by the provisions of sections four
hundred and sixty-four to four hundred and sixty-six, inclusive, of the Code of Civil Procedure,
insofar as these are not inconsistent with the provisions of this Act.
However, considering that petitioner is a banking institution, the determination of the
redemption price is governed by Section 78 of the General Banking Act which provides:
In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real
estate which is security for any loan granted before the passage of this Act or under the provisions
of this Act, the mortgagor or debtor whose real property has been sold at public auction, judicially
or extrajudicially, for the full or partial payment of an obligation to any bank, banking or credit
institution, within the purview of this Act shall have the right, within one year after the sale of the
real estate as a result of the foreclosure of the respective mortgage, to redeem the property by
paying the amount fixed by the court in the order of execution, or the amount due under the
mortgage deed, as the case may be, with interest thereon at the rate specified in the mortgage, and
all the costs, and judicial and other expenses incurred by the bank or institution concerned by reason
of the execution and sale and as a result of the custody of said property less the income received
from the property.
Clearly, the right of redemption should be exercised within the specified time limit, which is
one year from the date of registration of the certificate of sale. The redemptioner should make an
actual tender in good faith of the full amount of the purchase price as provided above, i.e., the
amount fixed by the court in the order of execution or the amount due under the mortgage deed, as
the case may be, with interest thereon at the rate specified in the mortgage, and all the costs, and
judicial and other expenses incurred by the bank or institution concerned by reason of the execution
and sale and as a result of the custody of said property less the income received from the property.
In case of disagreement over the redemption price, the redemptioner may preserve his right
of redemption through judicial action which in every case must be filed within the one-year period
of redemption. The filing of the court action to enforce redemption, being equivalent to a formal
offer to redeem, would have the effect of preserving his redemptive rights and 'freezing the
expiration of the one-year period. In this case, the period of redemption expired on January 21,
1992. The complaint was filed on December 20, 1992.
Moreover, while the complaint alleges that private respondent made an offer to redeem the
subject property on August 6, 1991, which was within the period of redemption, it is not alleged in
the complaint that there was an actual tender of payment of the redemption price as required by the
rules. It was alleged that private respondent merely made an offer of P700,000.00 as redemption
price, which however, as stated under paragraph 13 of the same complaint, the redemption money
was the total bank claim of P925,448.17 plus lawful interest and other allowable expenses incident
to the foreclosure proceedings. Thus, the offer was even very much lower than the price paid by
petitioner as the highest bidder in the auction sale.
In BPI Family Savings Bank, Inc. vs. Veloso , we held that the general rule in redemption is
that it is not sufficient that a person offering to redeem manifests his desire to do so. The statement
of intention must be accompanied by an actual and simultaneous tender of payment. This constitutes
the exercise of the right to repurchase.
C. What is to be paid
CHINA BANKING CORPORATION vs. HON. COURT OF APPEALS, PAULINO ROXAS

CHUA and KIANG MING CHU CHUA
G.R. No. 129644, September 7, 2001
Facts:
By virtue of an adverse decision in a case, entitled "Metropolitan Bank and Trust Company
v. Pacific Multi Commercial Corporation and Alfonso Roxas Chua," the residential land (TCT No.
410603) in the name of spouses Alfonso Roxas Chua and Kiang Ming Chu Chua was levied on
execution. Kiang Ming Chu Chua filed an action questioning the levy on the ground that the land

was conjugal partnership property. This resulted in a compromise agreement to the effect that the
levy shall be valid only to the extent of the share pertaining to Alfonso Roxas Chua. After the
execution sale, a certificate of sale was executed in favor of Metrobank, the judgment creditor, and
the same was annotated on TCT No. 410603 on December 22, 1987.
Meanwhile, China Banking Corporation filed a complaint for sum of money against Pacific
Multi Agro-Industrial Corporation and Alfonso Roxas Chua. On November 7, 1985, judgment was
rendered ordering defendants to pay Chinabank the aggregate amount of P2,500,000.00 plus
interests, penalties and attorneys fees. Defendants appealed to the Court of Appeals but the same
was dismissed for failure to file appellants brief. Thus, notice of levy on execution was issued on
February 4, 1991 against the right and interest of Alfonso Roxas Chua in the residential land (TCT
No. 410603). The same was later sold at public auction and a certificate of sale was executed in
favor of Chinabank, and inscribed on TCT 410603 on May 4, 1992.
Previously, however, on November 21, 1988, Alfonso Roxas Chua executed in favor of his
son, Paulino Roxas Chua, an "Assignment of Right to Redeem," pertaining to his right to redeem
the undivided portion of the land sold to Metrobank. On January 11, 1989, Paulino redeemed the
property from Metrobank. On March 14, 1989, the Assignment of Right to Redeem and the
redemption by Paulino Roxas Chua of the property from Metrobank were annotated on TCT No.
410603.
Private respondents Paulino Roxas Chua and Kiang Ming Chu Chua filed a case, alleging
that Paulino has a prior and better right over Chinabank inasmuch as the assignment to him of the
right to redeem and his redemption of Alfonsos share in the property were inscribed on the title on
an earlier date than the annotation of the notice of levy and certificate of sale in favor of Chinabank.
Both the trial court and the Court of Appeals ruled in favor of private respondents and enjoined
Chinabank, the Sheriff of Manila and the Register of Deeds of San Juan from causing the transfer of
possession, ownership and certificate of title, or otherwise disposing of the property covered by
TCT No. 410603 in favor of Chinabank or any other person.
Issue:
Whether or not the conveyance of the property in question to Paulino Roxas Chua was done
for valuable consideration and in good faith.
SC Ruling:
Yes, it was done for value and in good faith.
Article 1387 of the Civil Code provides that alienations made by a debtor by gratuitous title
are presumed fraudulent when the donor did not reserve sufficient property to pay his outstanding
debts. Likewise, alienations by onerous title are presumed fraudulent when made by persons against
whom some judgment has been rendered or some writ of attachment has been issued. These,
however, are mere presumptions which are in no way conclusive. The presumption of fraud can be
overthrown by evidence showing that the conveyance was made in good faith and for a sufficient
and valuable consideration.
In the case at bar, private respondents sufficiently established that the conveyance was
made in good faith and for valuable consideration. Paulino maintains that he had no knowledge of
his father Alfonsos financial problem with petitioner Chinabank until he was about to cause the
cancellation of TCT No. 410603. Furthermore, he paid the sum of P100,000.00 to Alfonso for the
right to redeem, and paid the redemption amount of P1,463,375.39 to Metrobank.
Expectedly, petitioner refutes these, saying that the amounts paid by Paulino were grossly
disproportionate to the right to redeem the property, which is a residential house and lot located in
North Greenhills, San Juan, Metro Manila. But as correctly pointed out by private respondents, the
amount of P100,000.00 paid by Paulino to Alfonso was not for the property itself, but merely for the
right to redeem the same. As a matter of fact, Paulino still had to pay Metrobank the redemption
price of P1,463,375.39. Whether or not the latter amount was adequate is beyond the scope of this
inquiry. Suffice it to state that Metrobank accepted the same and reconveyed the property to
Paulino. Moreover, only Alfonsos conjugal share in the property was affected, and the
determination of its value was still subject to liquidation of debts and charges against the conjugal
partnership.
Effect of tender of less than purchase price

BPI FAMILY SAVINGS BANK, INC vs. SPS. JANUARIO ANTONIO VELOSO AND NATIVIDAD
VELOSO
G.R. No. 141974, August 9, 2004
Facts:
On January 8, 1983, respondent spouses obtained a loan of P1,300,000 from
petitioners predecessor-in-interest Family Bank and Trust Company. To secure
payment of the loan, respondent spouses executed in favor of the bank a deed of
mortgage over three parcels of land, with improvements, registered in their names
under TCT Nos. 272227, 272228 and 272229 of the Registry of Deeds of Quezon City.
On February 9, 1983, respondents, for value received, executed a promissory
note for P1,300,000. Subsequently, however, respondents defaulted in the monthly
installments due on their loan. When efforts to update the account failed, Family Bank
instituted extra-judicial foreclosure proceedings on the respondents mortgaged
properties.
On July 1, 1985, the properties were sold at public auction with Family Bank as
the highest bidder for P2,782,554.66. On August 5, 1985, Family Bank assigned all its
rights and interests in the foreclosed properties to petitioner BPI Family Bank, Inc.
(BPI). On August 28, 1985, the sheriffs certificate of sale was registered with the
Registry of Deeds of Quezon City.
On July 24, 1986, respondents, through counsel, wrote BPI offering to redeem
the foreclosed properties for P1,872,935. This was, however, rejected by petitioner.
On August 27, 1986, respondents filed in the RTC of Quezon City, Branch 94, a
complaint for annulment of foreclosure, with consignation and prayer for damages. On
motion of respondents, the trial court, in an order dated August 27, 1986, allowed
respondents to deposit with the clerk of court the sum of P1,500,000 representing the
redemption price. Thereafter, trial on the merits ensued.
Issue:
Did respondent spouses comply with all the requirements for the redemption of the
subject properties?
SC Ruling:
We answer in the negative.
The general rule in redemption is that it is not sufficient that a person offering to
redeem manifests his desire to do so. The statement of intention must be
accompanied by an actual and simultaneous tender of payment. This constitutes the
exercise of the right to repurchase.
In several cases decided by the Court where the right to repurchase was held to
have been properly exercised, there was an unequivocal tender of payment for the full
amount of the repurchase price. Otherwise, the offer to redeem is ineffectual. Bona
fide redemption necessarily implies a reasonable and valid tender of the entire
repurchase price, otherwise the rule on the redemption period fixed by law can easily
be circumvented.
Consequently, in this case, the offer by respondents on July 24, 1986 to redeem
the foreclosed properties for P1,872,935 and the subsequent consignation in court of
P1,500,000 on August 27, 1986, while made within the period of redemption, was
ineffective since the amount offered and actually consigned not only did not include
the interest but was in fact also way below the P2,782,554.66 paid by the highest
bidder/purchaser of the properties during the auction sale.
In Bodiongan vs. Court of Appeals, we held:
In order to effect a redemption, the judgment debtor must pay the purchaser
the redemption price composed of the following: (1) the price which the
purchaser paid for the property; (2) interest of 1% per month on the purchase
price; (3) the amount of any assessments or taxes which the purchaser may
have paid on the property after the purchase; and (4) interest of 1% per month
on such assessments and taxes x x x.
Furthermore, Article 1616 of the Civil Code of the Philippines provides:
The vendor cannot avail himself of the right to repurchase without returning to
the vendee the price of the sale x x x.
It is not difficult to understand why the redemption price should either be fully

offered in legal tender or else validly consigned in court. Only by such means can the
auction winner be assured that the offer to redeem is being made in good faith.
D. Effect of Death of Mortgagor

Please refer to Jacob vs. CA (case cited under Effects)
E. Remedies of Mortgagee in Equitable Mortgage
Where a contract purporting to be a pacto de retro sale is in reality a loan with
equitable mortgage, the vendor can defeat the contract by resorting to any of
the following remedies: (1) by bringing an action for reformation of the
instrument into a loan with equitable mortgage; (2) by alleging as a defense that
the real intention of the parties was a loan with equitable mortgage, which in
effect, is for the reformation of the instrument; and (3) by judicial objection or
opposition to the registration of the affidavit or consolidation of ownership on the
ground that the real intention of the parties was a loan with equitable mortgage.
ooOoo

ANTICHRESIS
Articles 2132 2139
I. Concept
It is a real right established to secure the performance of an obligation and whereby the holder acquires the right to
receive the fruit of an immovable with the obligation to apply them to the payment of the interest, if owing and
thereafter to the principal of the credit. [Art. 2132]
A. Similarities and Differences with Real Estate Mortgage

a. Similarities
both are indivisible
they may be constituted by the debtor or a stranger
they must be constituted on immovable (but these must be fruit-bearing in antichresis)
both may secure all kinds of obligation
both are accessory contracts
b. Differences
antichresis gives a right to the fruits
antichresis is perfected even without delivery
II. Elements
A. Parties
-
The contract of antichresis may be established by one having the right to encumber property.
B. Object
-
It may be constituted only on immovable giving fruits.
C. Causa
-
The same with that of the principal obligation.
D. Formalities
-
The amount of the principal and the interest must be specified in writing; otherwise the contract is void.
It must be in a public instrument to affect third persons or recorded if the property involved is registered.
III. Effects
A. Rights of the antichretic creditor
a. To receive the fruits, applying them at their actual value, as of the time of the application to the interest
and the to the capital (art. 2132)
Parties may stipulate that the interest be compensated by the fruits, provided that if the value of the fruits
exceed the interest allowed by the usury law the excess shall apply to the capital.
A provision in the contract that the full amount of the indebtedness must be returned to the lenders before
the borrowers could demand the return of the property is contrary to an antichretic contract wherein the
products of the land should be applied to the interest and then to the principal.
b.
Right of foreclosure:
the creditor does not acquire ownership of the immovable for non-payment of the
debt.
A contrary stipulation is void.
The creditor may ask the court for the sale of the property, subject to the foreclosure of mortgages.
B. Obligations of the antichretic creditor

a. To bear necessary expenses
-
These are deductible from the fruits
b. To pay taxes
1. Reason
-
and charges upon the estate
Otherwise the debtor could deprive the creditor of the security by not paying taxes and causing
forfeiture.
2. Exception
-
When the contrary is stipulated
3. Effect of non-fulfillment
-
The creditor is liable for damages.

These taxes and charges are deductible from the fruits.
Case:
Diego vs. Fernando
109 Phil. 143, August 25, 1960
Facts:
Defendant Fernando executed a deed of mortgage in favor of the plaintiff over two parcels of land to secure a loan of two thousand without
interest payable within four years. The possession of the mortgaged properties was turned over to the mortgagee. The defendant having failed to pay the
loan after four years, the plain tiff made several demands for payment which were unheeded.
Plaintiff filed this action for foreclosure of mortgage. Defendant argues that the true transaction was one of antichresis, and that as plaintiff has
received several cavans of palay, from the mortgaged properties, valued at P5,200, his debt has already been paid. The trial court found the transaction to
be a mortgage, and possession of the mortgagee of the properties did not alter the transaction. Defendant appealed.
Issue:
Whether or not the contract is one of mortgage or antichresis.
SC Ruling:

It is not an essential requisite of a mortgage that possession of the mortgaged premises be retained by the mortgagor. To be an antichresis, it
must be expressly agreed between the creditor and the debtor that the former , having been given possession of the mortgaged propertiesd, is to apply
their fruits to the payment of the interest, if owing, and thereafter to the principal of his credit; so that if a contract of loan with security does not stipulate the
payment of interest but provides for the delivery of the mortgaged property to creditor, in order that the latter may gather its fruits, without stating that said
fruits are to be applied to the payment of interest, if any and afterwards that of the principal, the contract is mortgage and not an antichresis.
The contract, therefore, is true mortgage and not an antichresis. This conclusion however, does not mean that the plaintiff having received the
fruits of said properties, will be allowed to appropriate them for himself and not be required to account for them to the defendant. The true possession of the
plaintiff under the contract is a mortgage in possession or one who has acquired actual or constructive possession of the premises mortgaged to him,
standing upon his rights as a mortgagee and not claiming under another title, for the purpose of enforcing his security upon his property or making its
income help to pay the debt. As such mortgagee in possession his rights and obligations are similar to those of an antichretic creditor.
In the present case, the parties having agreed that the loan was to be without interest and the appellant not having expressly waived hid right to
the fruits of the mortgaged properties during the creditors possession, the latter like an antichretic creditor, must account for the value of the fruits received
by him and deduct it from the loan obtained by the appellant.
ooOoo
CHATTEL MORTGAGE
Articles 2140 2141
I. Concept
Art. 2140: by a chattel mortgage, personal property is recorded in the Chattel Mortgage Register as a security for
the performance of an obligation. If the movable, instead of being recorded, is delivered to the creditor or a third
person, the contract is a pledge and not a chattel mortgage.
II. Nature and Characteristics

A. Obligations that may be secured
They must be constituted to secure fulfillment of a principal obligation.
o
They may secure all kinds of obligation, pure or conditional
o
The principal obligation may be future but the security obligation does not come into existence until the
principal does.
o
The principal obligation may be natural, voidable or unenforceable, provided the fact is known to the
pledgor or mortgagor.
These contracts can be constituted only by the absolute owner of the thing pledged or mortgaged.
The one constituting the pledge or mortgage should have free disposal of the property or should be legally
authorized for the purpose.
Thing pledged or mortgaged may be alienated at the instance of the creditor for payment of the principal
obligation.
Pledge and mortgage are indivisible, even if the principal debt is divided.
Case:
Acme Shoe, Rubber and Plastic Corp. vs. CA
260 SCRA 714, August 22, 1996
Facts:
Petitioner contracted a three million peso loan from Producers Bank secured by a chattel mortgage. A provision of the chattel mortgage
agreement was to the effectIn case the MORTGAGOR executes subsequent promissory note or notes either as a renewal of
the former note, as an extension
thereof, or as a new loan, or is given any other kind of
accommodation such as overdrafts, letters of credit, acceptances and bills of exchange, releases
of import shipments on Trust receipt etc. this mortgage shall also stand as a security for the payment of the said promissory note or notes or
accommodations without the necessity of executing a new contract and this mortgage shall have the same force and effect as if the said
promissory note
or notes accommodations were existing on the date thereof. This mortgage
shall also stand as security for said obligations and any and all other
obligations of the MORTGAGOR to the MORTGAGEE of whatever kind and nature, whether such obligations have been contracted before, during or after
the constitution of this mortgage
Petitioner obtained from the bank additional financial accommodations. These borrowing were on due date also fully paid. Later, the bank yet again
extended to petitioner loan of one million pesos covered by four promissory notes. Due to financial constraints, the loan was not settled at maturity.
Respondent bank thereupon initiated foreclosure proceeding. Ultimately, the court ordered the foreclosure of the chattel mortgage. It held petitioner bound
by the stipulations aforequoted, of the chattel mortgage.
SC Ruling:
Contracts of security are either personal or real. In contracts of personal security, such as guaranty or a suretyship, the faithful performance of
the obligation by the principal debtor is secured by the personal commitment of another. In contracts of real security, such as pledge, mortgage, or
antichresis, that fulfillment is secured by an encumbrance of the property-in pledge, the placing of movable property in the possession of the creditor in
chattel mortgage, by execution of the corresponding deed substantially in the form prescribed by law; in real estate mortgage, by the execution of a public
instrument encumbering the real property covered thereby; and in atechresis, by a written instrument granting to the creditor the right to receive the fruits of
an immovable property with the obligation to apply such fruits to the payment of interest, if owing and thereafter to the principal of his credit-upon the
essential condition that if the principal obligation becomes due and the debtor defaults, then the property encumbered can be alienated for the payment of
the obligation, but that should the obligation be fully paid, then the contract is automatically extinguished proceeding from the accessory character of the
agreement. As the law so puts it, once the obligation is complied with, then the contract of security becomes ipso facto null and void.
While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred obligation so long as these future debts are
accurately described, a chattel mortgage however, can only cover obligations existing at the time the mortgage is constituted. Although a promise
expressed in the chattel mortgage to include debts that are yet to be contracted can be a binding commitment that can be compelled upon, the security
itself, however, does not come into existenceor arise until after a chattel mortgage agreement covering the newly contracted debt is executed either by
concluding a fresh chattel mortgageor by amending the old contract conformably with the form prescribed by the Chattel Mortgage Law. Refusal on the part
of the borrower to execute the agreement so as to cover the after-incurred obligation can constitute as an act of default on the part of the borrower of the
financing agreement wherein the promise is written, but of course the remedy of foreclosure can only cover the debts extant at the time of constitution and
during the life of the chattel mortgage sought to be foreclosed.
The significance of the ruling to the instant problem would be that since the 1978 chattel mortgage has ceased to exist coincidentally with the
full payment of the P3,000,000.00 loan., there no longer was any chattel mortgage that could cover the new loans that were concluded thereafter.
B. Elements
A. Parties
-
The mortgagor must have capacity to encumber the property.
B. Object
-
It may only be constituted on movable property.

o
This may include:

Interest in a business
Ungathered crops
Vessels
Certificates of stocks
Large cattle
Stock in trade
A chattel mortgage over immovables is void.
Exception: if the parties agree on constituting the chattel mortgage over an immovable, but it will
not bind third parties.
Cases:
Manarang vs. Ofilada
99 Phil.108, May 18, 1956
Facts:
Manarang obtained a 200 loan from Esteban and to secure payment she executed a chattel mortagage over a house of mixed materials. For
non-payment of the loan, judgment was rendered against Manarang and execution was issued against the property mortgaged. Before the property could
be sold, Manarang offered to pay the amount of the judgment with interest but refused to pay the publication expenses of the notice of sale in the two
newspapers.
SC Ruling:
There can be no question that a building of mixed materials may be subject of a chattel mortgage, in which case it is considered as between the
parties a personal property. But this does not make this house a personal property for the purpose of the notice to be given for its sale at public auction.
Sales on execution affect the public and third persons. The regulations governing sales on execution are for public officials to follow. The form of the
proceedings prescribed for each kind of property is suited to its character, not to the character which the parties have given to it or desire to give it.
ooOoo
TUMALAD V. VICENCIO
41 SCRA 143
Facts:
Vicencio and Simeon executed a chattel mortgage in favor of plaintiffs Tumalad over their house, which was being rented by
and company.
This was executed to guarantee a loan, payable in one year with a 12% per annum interest.
The mortgage was extrajudicially foreclosed upon failure to pay the loan. The house was sold at a public auction and the plaintiffs were the
highest bidder. A corresponding certificate of sale was issued. Thereafter, the plaintiffs filed an action for ejectment against the defendants,
praying that the latter vacate the house as they were the proper owners.
Madrigal
SC Ruling:
Certain deviations have been allowed from the general doctrine that buildings are immovable property such as when through stipulation,
parties may agree to treat as personal property those by their nature would be real property. This is partly based on the principle of estoppel
wherein the principle is predicated on statements by the owner declaring his house as chattel, a conduct that may conceivably stop him from subsequently
claiming otherwise.
In the case at bar, though there be no specific statement referring to the subject house as personal property, yet by ceding, selling or
transferring a property through chattel mortgage could only have meant that defendant conveys the house as chattel, or at least, intended to treat
the same as such, so that they should not now be allowed to make an inconsistent stand by claiming otherwise.
ooOoo
Makati Leasing and Finance Corp. vs. Wearever Textile Mills, Inc.
122 SCRA 296, May 16, 1983
Facts:
In order to obtain financial accommodations from herein petitioner Makati Leasing and Finance Corporation, the private respondent Wearever
Textile Mills, Inc. discounted and assigned several receivables with the former under a Receivable Purchase Agreement. To secure the collection of the
receivables assigned, private respondent executed a chattel mortgage over certain raw materials inventory as well as machinery described as an Artos
Aero Dryer Stentering Range.
SC Ruling:
If a house of strong materials, like what was involved in Tumald vs. Vicencio 41 SCRA 143, may be considered as personal property for
purposes of executing a chattel mortgage thereon as long as the parties to the contract so agree and no innocent third party will be prejudiced thereby there
is absolutely no reason why a machinery, which is movable in its nature and becomes immobilized only by destination or purpose, may not be likewise
treated as such. This is really because one who has agreed is stopped from denying the existence of the chattel mortgage.
In rejecting petitioners assertion on the applicability of the Tumalad doctrine, the Court of Appeals lay stress on the fact that the house involved
therein was built on a land that did not belong to the owner of such house. But the law makes no distinction with respect to the ownership of the land on
which the house is built and we should not lay down distinction not contemplated by law.
It must be pointed out that the characterization of the subject machinery as chattel by the private respondent is indicative of intention and
impress upon the property the character determined by the parties. As stated in Standard Oil Co. of New York vs. Jaramillo, 44 Phil. 630, it is undeniable
that the parties to a contract may by agreement treat as personal property that which by nature would be real property as long as no interest of third parties
would be prejudiced.
C. Causa
-
Same with the principal obligation.
D. Form
a. To bind the parties
The instrument need only conform substantially to that form contained in section 5 of Act No. 1508. (it
must be in a public document)
SECTION 5. Form. A chattel mortgage shall be deemed to be sufficient when made substantially in
accordance with the following form, and shall be signed by the person or persons executing the same, in the
presence of two witnesses, who shall sign the mortgage as witnesses to the execution thereof, and each
mortgagor and mortgagee, or, in the absence of the mortgagee, his agent or attorney, shall make and
subscribe an affidavit in substance as hereinafter set forth, which affidavit, signed by the parties to the
mortgage as above stated, and the certificate of the oath signed by the authority administering the same, shall
be appended to such mortgage and recorded therewith.
-
b. To bind third persons additional requirements

1. Affidavit of Good Faith
Cases:
GIBERSON VS. JUREIDINI BROS.
Facts:
H.K. Motoomul & Co. was, at the time mentioned in the complaint, a partnership doing business in the cities of Cebu and Iloilo. Sometime prior
to May 24, 1921, the company became financially embarrassed. A.N. Jureidini Bros. Inc., a large creditor of Motoomul $ Co., became aware of the
precarious condition of the latter, because of the diminishing payments on account of debt. Ultimately, Motoomul & Co., delivered to Jureidini
Brothers
on May 24, 1921, one of the debtors Iloilo stores known as Bazar Aguila de Oro. On the same day also, credits receivables belonging to Motoomul & Co.,
passed to Jureidini Bros. The documents evidencing these transfers appear in the record.
Within thirty days after these assignments were made, or to be exact, on June 22, 1921, a number of creditors of the H.K. Motoomul &Co.
initiated successfully involuntary insolvency proceedings against it. Later, action was brought by the receiver Giberson appointed by the court.
Issue:
W-O-N the chattel mortgage was valid.
SC Ruling:
The trial court held, and properly, that Exhibit 1 was invalid because the oath required by law did not appear therein, and because the subjectmatter was not described therein with sufficient particularity. The Chattel Mortgage Law, in its section 5, in describing what shall be deemed sufficient to
constitute a good chattel mortgage, includes the requirement of an affidavit of good faith appended to the mortgage and recorded therewith. It has been
held by reputable courts that the absence of the affidavit vitiates a mortgage as against creditors and subsequent encumbrancers.
ooOoo
JACA VS. DAVAO LUMBER COMPANY
Facts:
Plaintiff Urbano Jaca, a licensee of a logging concession located in Davao City is engaged in a logging business. Defendant Davao Lumber
Company (DLC) is a corporation with which plaintiffs had business dealings covering the sales of his logs.
Sometimes in 1954, the herein parties entered into an agreement whereby plaintiff may secure, by way of advances, either cash or materials,
foodstuffs and/or equipment from the defendants. The payment was to be made either in cash and/or plaintiffs turning over his logs to the defendant, and in
the latter case, the current price, either export or domestic, of the logs at the time of their delivery was to be considered.
While the relationship was subsisting, defendant made plaintiff execute in its favor a chattel mortgage, a copy of which instrument, however,
plaintiff was never furnished.
In November 1963, plaintiff filed with the Davao CFI a complaint for Accounting Return of Price Differentials and Damages against the
defendants.
Issue:
SC Ruling:
The defendants proof of interest in the property is the deed of chattel mortgage executed by the plaintiff in its favor on January 24, 1964. This
deed of chattel mortgage is void because it provides that the security stated therein is for the payment of any and all obligations herein before
contracted and which may hereafter be contracted by the mortgagor in favor of the mortgagee. In the case of Belgian Catholic Missionaries vs.
Magallanes Press (49 PHIL 647) this court held:
A mortgage that contains a stipulation in regard to future advances in the credit will take effect only from the date the same are
made and not from the date of the mortgage. x x x Where the statute provides that a parties to a chattel mortgage must take oath that the debt is a just
debt, honestly due and owing from the mortgagor to the mortgagee, it is obvious that a valid mortgage cannot be made to secure a debt to be thereafter
contracted.
Thus, petition granted.
ooOoo
CEBU INTERNATIONAL FINANCE CORPORATION VS. COURT OF APPEALS
Facts:
JD executed a special power of attorney in favor of AT, authorizing the latter to sell JDs cargo vessel. AT sold the vessel to RO who paid the
purchase price by issuing checks. Since the payment was not made in cash, it was specifically stipulated in the deed of sale that the vessel shall not be
registered to RO until full payment. RO obtained possession of the vessel and obtained copies of the unauthorized deed of sale purportedly to be shown to
the bank for loan purposes. The condition, however, which was handwritten on the original, does not appear in his copies.
RO had his copies notarized and registered the sale in the Philippine Coast Guard without ATs knowledge. RO was issued a Certificate of
Ownership and Certificate of Philippine Registry that enabled him to acquire a loan at CIFC with the vessel as security. The chattel mortgage was duly
registered and annotated. Upon default, CIFC demanded delivery of the vessel, otherwise the mortgage shall be foreclosed or pay the balance. Meanwhile,
the checks he issued to AT bounced. JD and AT sued for rescission and replevin with damages. The trial court ruled that the chattel mortgage was null an
void and ordered CIFC to pay AT damages. The Court of Appeals affirmed the decision, hence this petition for review on certiorari.
Issue:
SC Ruling:
The chattel mortgage is valid and subsisting. It should not be viewed in such a myopic context. The key lies in the certificate of ownership issued
in ROs name. In the deed of absolute sale, it was also indicated that JD was the seller and RO was the buyer of the vessel. Coupled with the fact that
there is no evidence of any transaction between JD or AT and CIFC, it follows that CIFC is a creditor-mortgagee and not owner-seller. The form contract
used for simple loan with chattel mortgage was filled out by mistake. It is not improbable that such an oversight may have been committed negligently but
unintentionally and without malice.
A mortgagee has a right to rely in good faith on the certificate of title of the mortgagor to the property given as security and in the absence of any
sign that might arouse suspicion to undertake further investigation. Hence, even if the mortgagor is not the rightful owner of or does not have a valid title to
the mortgaged property, the mortgagee or the transferee in good faith is nonetheless entitled to the property. Although this rule generally pertains to real
property, particularly registered land, it may also be applied by analogy to personal property, in this case specifically, since shipowners are, likewise required
by law to register their vessel with the Philippine Coast Guard.
The special affidavit of good faith is required only for the purpose transforming an already valid mortgage into a preferred mortgage. It is not
necessary for the validity of the chattel mortgage itself.
2. Description of Property
Cases:
SALDAA VS. PHIL.GUARANTY CO.
Facts:
Eleazar executed in favor of Saldaa, a chattel mortgage, the lat paragraph of which states: and all other furnitures, fixtures, or equipment

found in the said premises. Subsequent to the execution of said mortgage, defendant Hospital de San Juan de Dios obtained a judgment against Eleazar.
Personal properties of Eleazar were levied upon. Saldaa filed a third-party claim asserting that the properties levied are subject to his chattel mortgage.
Issue:
W-O-N there was sufficient description on the properties mortgaged.
SC Ruling:
There is merit in appellants contention. Section 7 of the Chattel Mortgage Law does not demand a minute and specific description of every
chattel mortgaged in the deed of mortgage but only requires that the description of the properties be such as to enable the parties in the mortgage or any
other person, after reasonable inquiry and investigation to identify the same. Gauged by this standard, general descriptions have been held valid by this
court. The specification in the last paragraph of the deed in the instant case is in substantial compliance with the reasonable description rule fixed by the
Chattel Mortgage Law.
The limitation found in Section 7, last paragraph, of the Chattel Mortgage Law on like or substituted properties makes reference to those
thereafter acquired by the mortgagor and placed in the same depositary as the property originally mortgaged not to those already existing and originally
included at the date of the constitution of the chattel mortgage. A contrary view would unduly impose a more rigid condition that the law prescribes which is,
that the description be only such as to enable identification after reasonable inquiry and investigation.
Orders set aside.
3. Registration
i. Place
located.
General Rule: the registries of the place where the mortgagor resides and where the property is
Except that of vessels must be registered in the office of the collector of customs of the port of
entry.
Mortgage of shares of stock must be registered in the province where the corporation has its
principal place of business.
A mortgage over an automobile, in order to affect third persons, should be registered not only in
the Chattel Mortgage Registry but also in the Motor Vehicles Office. The mortgagees failure to
annotate the mortgage in the said office renders it ineffective against a purchaser who registers
the sale in the Motors Vehicles Office.
C. Effect of Mortgage
A. What it covers
-
The mortgage covers only the property described in the contract and excludes like or substituted property
thereafter acquired, anything in the contract to the contrary notwithstanding.
a. Exception
-
In the case of stock contained in stores, drugstores, or similar businesses of a revolving

floating nature.
or
D. Discharge of Mortgage
A. Requisites
-
That there has been performance or tender of performance of the condition;

That there has been a request for the discharge made by the person entitled to redeem.
*(how discharge is made? -- execute an affidavit of discharge to be recorded in the registry of
deeds)
B. Effect of failure to discharge
within ten (10) days the mortgagee is liable to pay twenty pesos (P20.00)
and all damages occasioned thereby
E. Redemption (before foreclosure)

A. Who may redeem
-
The mortgagor;
Subsequent mortgagees;
Subsequent attaching creditors.
B. What must be paid

-
The principal obligation and interest thereon;

Costs and expenses incurred by any breach, before the sale.
C. Effects of Redemption
-
The redemptioner is subrogated to the rights of the mortgagee.

1) He may, therefore, foreclose the mortgage in the same manner.
F. Foreclosure
A. Kinds
a. Judicial
b. Extra-judicial
1.
REQUISITES:
i.
Sale at public auction thirty days after the debtors default (if the debtor refuses to surrender the
chattel, action must be brought for its delivery).
ii. Notice of sale to be posted in two (2) public places ten (10) days before the sale, and notice likewise to
be given to the mortgagor in writing, personally or by mail.
iii. Conducted by a public officer (sheriff).
iv. Conducted in the municipality where the mortgagor resides OR where the property is located.
EXCEPT: when some other place is stipulated.

2.
DISPOSITION OF PROCEEDS:
i.
Application:
a) Costs and expenses of sale;
b) The principal obligation and interest;
c) Claims of subsequent mortgagees;
d) The balance, if any, to the mortgagor.
ii. In case of deficiency:
a) The mortgagee may still recover the deficiency from the mortgagor.
Case:
PAMECA WOOD TREATMENT PLANT, Inc. VS. CA
Facts:
On April 17, 1980, petitioner PAMECA Wood Treatment Plant, Inc. (PAMECA) obtained a loan of US$267,881.67, or the equivalent of
P2,000,000.00 from respondent Bank. By virtue of this loan, petitioner PAMECA, through its President, petitioner Herminio C. Teves, executed a
promissory note for the said amount, promising to pay the loan by installment. As security for the said loan, a chattel mortgage was also executed over
PAMECAs properties in Dumaguete City, consisting of inventories, furniture and equipment, to cover the whole value of the loan.
On January 18, 1984, and upon petitioner PAMECAs failure to pay, respondent bank extrajudicially foreclosed the chattel mortgage, and, as
sole bidder in the public auction, purchased the foreclosed properties for a sum of P322,350.00. On June 29, 1984, respondent bank filed a complaint for
the collection of the balance of P4,366,332.46 with Branch 132 of the Regional Trial Court of Makati City against petitioner PAMECA and private petitioners
herein, as solidary debtors with PAMECA under the promissory note.
RTC of Makati rendered a decision ordering the defendants to pay jointly and severally plaintiff the (1) sum of P4,366,332.46 representing the
deficiency claim of the latter as of March 31, 1984, plus 21% interest per annum and other charges from April 1, 1984 until the whole amount is fully paid
and (2) the costs of the suit.
The Court of Appeals affirmed the RTC decision. Hence, this appeal.
Issue:
W-O-N the mortgagor is liable to the mortgagee for the deficiency.
SC Ruling:
Section 14 of the Chattel Mortgage Law provides that the mortgagor is entitle to the balance of the proceeds, upon satisfaction of the principal
obligation and costs. Section 14 provides that:
x x x The proceeds of such sale shall be applied to the payment, first, of the costs and expenses of keeping and sale, and then to
the payment of the demand or obligation secured by such mortgage, and the residue shall be paid to persons holding subsequent mortgages in
their order, and the balance, after paying the mortgage, shall be paid to the mortgagor or persons holding under him on demand.
Since the Chattel Mortgage Law bars the creditor-mortgagee from retaining the excess of the sale proceeds there is a corollary obligation,
therefore, on the part of the debtor-mortgager to pay the deficiency in case of a reduction in the price at public auction.
As explained in Manila Trading and Supply Co. vs. Tamaraw Plantation Co., cited in Ablaza vs. Ignacio, supra:
While it is true that section 3 of Act No. 1508 provides that a chattel mortgage is a conditional sale, it further provides that it is a
conditional sale of personal property as security for the payment of a debt, or for the performance of some other obligation specified therein.
The lower court overlooked the fact that the chattels included in the chattel mortgage are only given as security and not as a payment of the
debt, in case of a failure of payment.
The theory of the lower court would lead to the absurd conclusion that if the chattels mentioned in the mortgage, given as security,
should sell for more than the amount of the indebtedness secured, that the creditor would be entitled to the full amount for which it might be
sold, even though that amount was greatly in excess of the indebtedness. Such a result certainly was not contemplated by the legislature when
it adopted Act No. 1508. There seems to be no reason supporting that theory under the provision of the law. The value of the chattels changes
greatly from time to time, and sometimes very rapidly. If, for example, the chattels should greatly increase in value and a sale under that
condition should result in largely overpaying the indebtedness, and if the creditor is not permitted to retain the excess, then the same token
would require the debtor to pay the deficiency in case of a reduction in the price of the chattels between the date of the contract and a breach of
the condition.
We find no reason to disturb the ruling in Ablaza vs. Ignacio, and the cases reiterating it. Thus, petition is DENIED.
iii.
In case of sale of personal property on installment.

Art. 1484(NCC). In a contract of sale of personal property the price of which is payable in installments,
the vendor may exercise any of the following remedies:
(1) Exact fulfillment of the obligation, should the vendee fail to pay;
(2) Cancel the sale, should the vendee's failure to pay cover two or more installments;
(3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee's
failure to pay cover two or more installments. In this case, he shall have no further action against the
purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void.
B. Right of Redemption
Case: Please refer to Paray vs. Rodriguez (cited in Pledge)
G. Distinctions
PLEDGE
a.
b.
As to OBJECT
On movables
CHATTEL
MORTGAGE
On movables
As to
POSSESSION
By the creditor
By the debtor
By the debtor
By the creditor
c.
As to
PERFECTION
Real Contract
Formal Contract
Formal Contract
Formal contract
d.
As to FORM to
bind Third
Persons
Public instrument
containing
description of the
thing pledged and
the date thereof
Recorded public
instrument
ooOoo
REAL ESTATE
MORTGAGE
On immovables
On immovables
Recorded public
instrument
ANTICHRESIS
Recorded public
instrument

CONCURRENCE AND PREFERENCE OF CREDITS

Chapter 1 General Provisions
Articles 2236 2240
I. Concept and General Theory
A. Concurrence
-
Possession by two or more creditors of equal rights or privileges over the same property or all of the property of
the debtor.
B. Preference
-
Right held by a creditor to be preferred in the payment of his claim above others out of the debtors assets.
The rules apply when two or more creditors have separate and distinct claims against the same debtor who has
insufficient property.
C. Property not subject to preference and concurrence

Property exempt from liability for fulfilment of obligation:
1. Present property those provided under Arts. 155 and 205 of the Family Code, Sec. 13, Rule 39 of the Rules of
Court, and Sec. 118 of the Public Land Act
2. Future property
3. Property under legal custody and those owned by municipal corporations necessary for governmental purposes
Chapter 2 Classification of Credits

Articles 2241 2245
I.
Classification of Credits
A. General Classification
a.
b.
Absolutely preferred Government enjoys absolute preference over other creditors

Special Preferred Credits - those listed in Arts. 2241 and 2242 shall be considered as mortgages and
pledges of real or personal property or liens (Art. 2243). Hence, they are not included in the insolvent debtor's
assets.
c. Ordinary Preferred Credits - those listed in Art. 2244 as amended by Art. 110 of the Labor Code.
d. Common Credits those listed under Art. 2245, which shall be paid pro rata regardless of dates.
Ordinary Preferred and Common Credits cover only free property of the debtor, or those not subjected to Special
Preferred Credit.
B. As to specific movable property

a.
b.
c.
d.
e.
f.
g.
Duties, taxes and fees due thereon to the State or any subdivision thereof
With reference to specific movable and immovable property of the debtor, the taxes due the State shall first be
satisfied.
Claims arising from misappropriation, breach of trust, or malfeasance by public officials committed
in the performance of their duties, on the movables, money or securities obtained by them
Claims for the unpaid price of movables sold, on said movables, so long as they are in the
possession of the debtor, up to the value of the same; and if the movable has been resold by the
debtor and the price is still unpaid, the lien may be enforced on the price; this right is not lost by
the immobilization of the thing by destination, provided it has not lost its form, substance and
identity; neither is the right lost by the sale of the thing together with other property for a lump
sum, when the price thereof can be determined proportionally
Credits guaranteed with a pledge so long as the things pledged are in the hands of the creditor, or
those guaranteed by a chattel mortgage, upon the things pledged or mortgaged, up to the value
thereof
Reflectionary Credits
Indebtedness incurred in the repair or reconstruction of something previously made, such repair or
reconstruction being made necessary by the deterioration or destruction of the thing as it formerly existed.
Claims for laborers' wages, on the goods manufactured or the work done
WORKER PREFERENCE IN CASE OF BANKRUPTCY. The law protects workers in case of bankruptcy or insolvency
of the employer. This protection is established in Art. 110 of the Labor Code creating a "worker preference" in
such an unlimited period, aid covers not merely unpaid wages, but other monetary claims as well.
Other claims and Credits

-
For expenses of salvage, upon the goods salvaged;

Credits between the landlord and the tenant, arising from the contract of tenancy on shares,
on the share of each in the fruits or harvest;
Credits for transportation, upon the goods carried, for the price of the contract and incidental
expenses, until their delivery and for thirty days thereafter;
Credits for lodging and supplies usually furnished to travellers by hotel keepers, on the
movables belonging to the guest as long as such movables are in the hotel, but not for money
loaned to the guests;
Credits for seeds and expenses for cultivation and harvest advanced to the debtor, upon the
fruits harvested;
Credits for rent for one year, upon the personal property of the lessee existing on the
immovable leased and on the fruits of the same, but not on money or instruments of credit;
Claims in favor of the depositor if the depositary has wrongfully sold the thing deposited, upon
the price of the sale.
C. Rules as to preferred credits on specific movables

-
D.
E.
In the foregoing cases (above), if the movables to which the lien or preference attaches have been wrongfully
taken, the creditor may demand them from any possessor, within thirty days from the unlawful seizure.
The claims or credits enumerated in the articles 2241 and 2241 shall be considered as mortgages or pledges of
real or personal property, or liens within the purview of legal provisions governing insolvency. Taxes mentioned
in No. 1, Article 2241, and No. 1, Article 2242, shall first be satisfied.
As to specific immovable property (Art 2242)
The following claims, mortgages and liens shall be preferred, and shall constitute an encumbrance on the
immovable or real right:
(1) Taxes due upon the land or building;
(2) For the unpaid price of real property sold, upon the immovable sold;
(3) Claims of laborers, masons, mechanics and other workmen, as well as of architects, engineers and contractors,
engaged in the construction, reconstruction or repair of buildings, canals or other works, upon said buildings, canals
or other works;
(4) Claims of furnishers of materials used in the construction, reconstruction, or repair of buildings, canals or other
works, upon said buildings, canals or other works;
(5) Mortgage credits recorded in the Registry of Property, upon the real estate mortgaged;
(6) Expenses for the preservation or improvement of real property when the law authorizes reimbursement, upon
the immovable preserved or improved;
(7) Credits annotated in the Registry of Property, in virtue of a judicial order, by attachments or executions, upon
the property affected, and only as to later credits;
(8) Claims of co-heirs for warranty in the partition of an immovable among them, upon the real property thus
divided;
(9) Claims of donors or real property for pecuniary charges or other conditions imposed upon the donee, upon the
immovable donated;
(10) Credits of insurers, upon the property insured, for the insurance premium for two years.
Ordinary preferred credits (Art 2244)
With reference to other property, real and personal, of the debtor, the following claims or credits shall be preferred
in the order named:
(1) Proper funeral expenses for the debtor, or children under his or her parental authority who have no property of
their own, when approved by the court;

(2) Credits for services rendered the insolvent by employees, laborers, or household helpers for one year preceding
the commencement of the proceedings in insolvency;
(3) Expenses during the last illness of the debtor or of his or her spouse and children under his or her parental
authority, if they have no property of their own;
(4) Compensation due the laborers or their dependents under laws providing for indemnity for damages in cases of
labor accident, or illness resulting from the nature of the employment;
(5) Credits and advancements made to the debtor for support of himself or herself, and family, during the last year
preceding the insolvency;
(6) Support during the insolvency proceedings, and for three months thereafter;
(7) Fines and civil indemnification arising from a criminal offense;
(8) Legal expenses, and expenses incurred in the administration of the insolvent's estate for the common interest of
the creditors, when properly authorized and approved by the court;
(9) Taxes and assessments due the national government, other than those mentioned in Articles 2241, No. 1, and
2242, No. 1;
(10) Taxes and assessments due any province, other than those referred to in Articles 2241, No. 1, and 2242, No. 1;
(11) Taxes and assessments due any city or municipality, other than those indicated in Articles 2241, No. 1, and
2242, No. 1;
(12) Damages for death or personal injuries caused by a quasi-delict;
(13) Gifts due to public and private institutions of charity or beneficence;
(14) Credits which, without special privilege, appear in (a) a public instrument; or (b) in a final judgment, if they
have been the subject of litigation. These credits shall have preference among themselves in the order of priority of
the dates of the instruments and of the judgments, respectively.
Chapter 3 Order of Preference of Credits

I.
Articles 2246 2251

Order of payment
A. Resume:
a. Absolutely preferred credits
Arts. 2241 and 2242, jointly with Arts. 2246 and 2249 establish a two-tier order of preference:
1. First tier includes taxes, duties and fees due the State or any subdivision thereof, on specific movable or
immovable property (Absolutely preferred);
2. Second tier all other special preferred (non-tax) credits shall be satisfied pro-rata, out of any residual
value of the specific property to which such credits relate.
b. Specially preferred credits

1. As to specific chattels
2. As to specific immovables
The pro-rata rule does not apply to credits annotated in the Registry of Property by virtue of a judicial order, by
attachments and executions, which are preferred as to later credits.
c. Ordinary preferred credits
Art. 2250. The excess, if any, after the payment of the credits which enjoy preference with respect to specific
property, real or personal, shall be added to the free property which the debtor may have, for the payment of
the other credits (Ordinary preferred credits).
d. Non-preferred credits
Art. 2251. Those credits which do not enjoy any preference with respect to specific property, and those which
enjoy preference, as to the amount not paid, shall be satisfied according to the following rules:
(1) In the order established in Article 2244;
(2) Common credits referred to in Article 2245 shall be paid pro rata regardless of dates.
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 REVIEWER 1

Generally, a bailment may be said to be a contractual relation.

To be legally enforceable, it must contain the essential elements of a valid contract.

It may also be created by operation of law.

COMMODATUM - loan of use

Something to be returned (subject matter

Essentially gratuitous (if there is

Ownership retained by lender or bailor

May involve real or personal property

Referred to as loan for use or temporary

Lender bears the risk of loss because of

While generally oblige to return object at

MUTUUM simple loan or loan of consumption

Equivalent amount to be returned (subject

May be gratuitous or onerous (with

Ownership goes to borrower or baille

Borrower bears the risk of loss, because of

Not personal in character

Non-fungible object (but may be

Object is money or fungible thing

Transfer its use

Transfer its ownership

Restoration of the very thing loaned

Restoration of an equal quantity and

CREDIT TRANSACTIONS REVIEWER 2

On the lender (as owner)

On the borrower (as debtor of a generic

Not personal in character

Referred to as loan for use or temporary

Referred to as loan for consumption

May be claimed before the end of the term if

May not be claimed until the term expires

Commodatum is essentially gratuitous. If compensation is present, the contract ceases to be a

Subject matter: A Commodatum is generally non-consumable things, whether real or personal.

CREDIT TRANSACTIONS REVIEWER 3

Commodatum is for a certain period

CREDIT TRANSACTIONS REVIEWER 4

Effect of Adverse Possession for 11 years

Effect of Suspension of Possessory Rights for more than 50 years

CREDIT TRANSACTIONS REVIEWER 5

CREDIT TRANSACTIONS REVIEWER 6

occasioned by the deposit of the

If the use of the thing is merely tolerated

An accepted promise to deliver something by way of commodatum.

It is valid but no commodatum is perfected until delivery.

CREDIT TRANSACTIONS REVIEWER 7

CREDIT TRANSACTIONS REVIEWER 8

But he is liable for fortuitous events if:

CATHOLIC VICAR vs. CA

CREDIT TRANSACTIONS REVIEWER 9

Section III Obligations of the Bailor

CREDIT TRANSACTIONS REVIEWER 10

CREDIT TRANSACTIONS REVIEWER 11

Mutuum vs. Lease

CREDIT TRANSACTIONS REVIEWER 12

Mutuum vs. Estafa

No special capacity is required to be a lender except ownership. But an emancipated minor

CREDIT TRANSACTIONS REVIEWER 13

Effects (Obligation of the Borrower only)

CREDIT TRANSACTIONS REVIEWER 14

If the thing borrowed is money;

When it is expressly agreed in writing (Art. 1956)

Stipulation not to pay while war is going on

CREDIT TRANSACTIONS REVIEWER 15