EH 403 S.Y.
2016 2018 CREDIT PRE-FINALS
Feb. 12 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
a. Guaranty a contract whereby a guarantor binds himself to
the creditor to fulfil the obligation of the principal debtor in
case the latter fails to do so.
b. Suretyship a contract whereby a surety binds himself
solidarily with the principal debtor.
The third persons undertaking these
obligations are called Guaranty and Surety.
TN: The reference in Art. 2047 to solidary obligations does not
mean that suretyship is withdrawn from the applicable
provisions governing guaranty.
Guarantor Surety
Subsidiary liability Primary liability
Pays if the debtor cannot pay Pays if the debtor does not pay
Insurer of the debtors solvency Insurer of the debt
Pacific Banking Corporation
Re: Nature of Undertaking denominated as Guarantors
Undertaking agreeing to be bound jointly and severally
Facts: The wife applied for a credit card. The bank required that
a person secure her obligation as a credit card holder. Her
husband signed a Guarantors Undertaking, but binding
himself jointly and severally.
Held: The undertaking signed by the husband, 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.
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. The credit limit granted to Celia Regala was P2,
000.00 per month.
However, the husbands liability should not be limited to that
extent. As surety of his wife, he expressly bound himself up to
the extent of the wifes 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. The husband 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.
E Zobel Inc. v. CA
Re: Nature of Continuing Guaranty obligation as surety
Facts: Spouses obtained a loan from a bank. The loan was
secured by both a personal and real security a Continuing
Guaranty and Chattel Mortgage. When the spouses defaulted,
the bank went after the guarantor. The guarantor refused to
pay, arguing that he was already released from his obligation
when the bank failed to register the chattel mortgage which
deprived him to be subrogated to the rights of the bank should
he pay the obligation.
Held: The contract executed by the petitioner in favor of the
bank albeit denominated as a "Continuing Guaranty," is a
contract of surety. Thus, the non-registration of the chattel
mortgage did not release him from his obligation.
The terms of the contract categorically obligates petitioner as
"surety" to induce the bank to extend credit to the spouses.
The use of the term "guarantee" does not ipso facto mean that
the contract is one of guaranty. The interpretation of a contract
is not limited to the title alone but to the contents and
intention of the parties.
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.
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.
Machetti v. Hospicio
Re: Guaranty and suretyship, distinction between the two
Facts: Machetti undertook to construct a building for Hospicio
de San Jose. In accordance with the latters requirement, a
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surety company guaranteed compliance with the terms and
conditions of the contract. Hospicio sued Machetti for failure to
meet the standard required in the construction. Machetti was
declared insolvent. Hospicio now goes after the surety
company alone.
Held: 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.
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 EH 403 S.Y. 2016 2018 CREDIT PRE-FINALS
It appears
Feb. 12 affirmatively that the contract is the guarantor's
separate undertaking in which the principal does not join, that
its rests on a separate consideration 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.
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.
What is the best proof of the principal debtors inability to
pay?
A return of a writ of execution unsatisfied.
COMMENT:
Q: If a debtor has a collectible from another debtor, meaning
he is also a creditor of another debtor, and fails to collect.
What is the remedy of the creditor?
A: Accion Subrogatoria
Q: What if the debtor incurs additional obligation? Can the
creditor object? Can the creditor say that you cannot incur
additional obligation. You cannot obtain additional debts or
loans because I will be prejudiced because the assets will be
spread out to more liabilities than what you already have
now. Can the creditor do that? Can the creditor prevent the
debtor from incurring additional obligation?
A: No. He cannot prevent the debtor from incurring additional
obligation. There is no fraud in incurring additional obligation.
But to assure the creditor that he can collect when his credit
becomes due and demandable, then he can demand that the
debtor puts up a security for the fulfillment of his obligation.
The security can either be personal or real security.
B. Of Real Security
REAL SECURITY
Secured transactions, or supported by a collateral or
an encumbrance of property.
COMMENT:
When we talk about mortgage, it is where real
property or personal property is offered not to pay but to
secure the payment of the obligation. The difference between
pledge and chattel mortgage is that in pledge, the personal
property is delivered to the creditor or to a third person agreed
by the parties; while in chattel mortgage, the property remains
in the possession of the creditor because the mortgagor may
not be the debtor. The mortgagor can be a third party.
This does not mean that the property is given for the payment
of the obligation, because then, that would be a dacion en
pago. Here, in case of default, the creditor can sell the property
and apply the proceeds to the obligation. The creditor does not
automatically become the owner of the property in case of
default because that is prohibited pactum commissorium.
Kinds of real security
A. Pledge A contract wherein the debtor delivers to the
creditor or to a third person a movable or document 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.
B. 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.
C. 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.
D. 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.
TITLE XV- GUARANTY
CHAPTER 1- NATURE AND EXTENT OF
GUARANTY
Arts. 2047-2048
I. CONCEPT
Art. 2047. By guaranty a person, called the guarantor, binds
himself to the creditor to fulll the obligation of the principal
debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the
provisions of Section 4, Chapter 3, Title I of this Book shall be
observed. In such case the contract is called a suretyship.
Art. 2048. A guaranty is gratuitous, unless there is a stipulation
to the contrary.
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II. CHARACTERISTIC FEATURES
Q. What are the characteristics of guaranty?
A. It is a subsidiary contract
B. It is a consensual contract
C. It is a unilateral contract
D. It is a generally gratuitous contract
E. It is a contract between the guarantor and the
creditor
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 EH 403 S.Y. 2016 2018 CREDIT PRE-FINALS
Feb. 12 SUBSIDIARY CONTRACT
It takes effect only when the principal debtor fails in his
obligation.
COMMENT:
Guaranty is an accessory contract because it cannot exist
without the validity of the principal obligation. It is one which
relies its existence on the validity of another contract or
obligation.
Guaranty is also characterized as a subsidiary contract. The
guarantor becomes liable only if the principal debtor fails to
pay and generally, the creditor still has to prove that the debtor
cannot pay before he can go after the guarantor.
But even if the guarantor binds himself solidarily with the
principal debtor, suretyship is still subsidiary in the sense that
while the surety is bound principally, ultimately, the party liable
on the obligation is still the principal debtor because even if the
surety pays, he can still recover from the principal debtor.
Ong v. PCIB
Re: Guaranty v. Suretyship
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.
Castellvi v. Sellner
Re: Difference between guarantor and surety
A surety and a guarantor are alike in that each promises to
answer for the debt or default of another. However, they 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
while the engagement of the guarantor is a collateral
undertaking. The obligation of the surety is primary, while the
obligation of the guarantor is secondary.
It is perfectly clear that the obligation assumed by defendant
was simply that of a guarantor. 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.
COMMENT:
Q: What was the nature of Sellners liability? Is it primary or
subsidiary?
A: Subsidiary because he only bound himself as a guarantor
and not as a surety and the problem here was that he was sued
for the fulfillment of the obligation without the principal debtor
being sued also.
Q: Why do we say that his undertaking is a mere subsidiary
undertaking and not a primary or principal undertaking?
A: There was a notice of default. If you bind yourself
principally/primarily with the principal debtor, there is no
notice of default needed. The creditor can immediately go after
you for the payment of the obligation. Thats why the court
held that the obligation of Sellner is that of a guarantor and not
of a surety.
Now, even if you are the president of the corporation and you
own 99% of the outstanding capital stocks of the corporation. If
you secure the corporations obligation as a guarantor, the
mere fact that you own practically the majority capital stock
does not make you solidarily liable with the corporation. Your
liability as a guarantor remains to be subsidiary.
Q: Can you practically own shares of stock or practically own a
corporation? Can you own 99% of the outstanding capital
stocks of the corporation?
A: Yes. Under the present corporation code, what is required is
that there must be at least 5 stockholders. Because there must
be at least 5 members of the Board of Directors (BOD) and it is
required that the BODs must be a stockholder. But it is not
required that all the 5 stockholders have equal shares.
Judge: However, take note that it does not mean that if the
undertaking is contained in the same document containing the
principal obligation, that the undertaking is automatically that
of a surety. There can be instances when you have a principal
obligation secured by an ordinary guaranty only. What is
important is that the undertaking is clearly specified whether it
is of an ordinary guarantor or that of a surety.
Escano v. Ortigas
Re: Solidary guarantor v. solidary co-debtor
Judge: Even if a person binds himself solidary with the principal
debtor, and therefore governed by the rules of solidary
obligation, it does not erase the fact that he is a guarantor.
If you are a surety and you pay the obligation, you can recover
the entire amount from the debtor. Unlike in the rules of
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solidary obligation where a solidary debtor can recover only the
portion paid which is the share of the co-debtor. In here, the
solidary guarantor can recover the entire amount from the
debtor, in the sense that he was not obligated in the original
obligation. He is just a solidary guarantor.
But we are more interested in this statement: The solidary
guarantor has an action for counter bond while a solidary
debtor is limited only to an action contribution by the other co-
debtor
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 EH 403 S.Y. 2016 2018 CREDIT PRE-FINALS
Ex.12
Feb. X owes you 1M. I bind myself solidary with X as a solidary
guarantor. Take note that I am not a principal debtor, it is X
who is the principal debtor. I am just a solidary guarantor.
What is my right? To recover the full amount that if ever I am to
be made to pay the obligation.
How will I be assured that I will be reimbursed?
I will require X to put up another security that I can go after in
case I will not be reimbursed. So you have a main guaranty
which I made in favor of X, and a sub-guaranty made by X in my
favor, in case I will not be reimbursed. This is a counter bond or
indemnity agreement.
Sub-guaranty is when before one consents to be a surety, he
demands that an indemnity bond be put up in his favor. If he
pays the creditor, he can go after the indemnity bond without
going after the debtor himself. The indemnity bond can be put
up by other persons. This can also be put up by the debtor by
way of property bond.
Illustration:
You owe X 100,000 and it required you to put up a
security. So you approached me and said Maam can you be
my guarantor? then I said, Okay. When is the obligation
payable? You: after one year. And then I called up X and
informed X that I will be the guarantor of your obligation and
then X approved. After 1 year, you failed to pay the obligation.
Because you failed to pay the obligation, X comes up to me and
demands payment. But I refused to pay X. Can X compel me to
pay? Am I bound by my verbal promise to secure your
obligation to X?
Yes you are bound because the promise was valid, but you can
invoke the unenforceability of my undertaking because this is a
special promise to answer for the default of another person.
And under the Statute of Frauds, it must be in writing for it to
be enforceable.
2009 Bar Question:
True or False: An oral promise of guaranty is valid and
binding.
True. It is valid and binding although it is not enforceable. The
mere fact that the undertaking in unenforceable does not mean
that it cannot be enforced because the debtor may not invoke
unenforceability as a defense. It can be waived.
Piczon v. Piczon
Re: Liability where company president signed as guarantor
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."
Judge: The mere fact that you are the President and at the
same time a majority stockholder, does not automatically make
you a surety, if you merely signed as a guarantor. Also, there is
this principle in corporation law called Doctrine of Separate
Entity which means that the debt of the corporation is not the
debt of its officers or stockholders.
Palmares v. CA
Re: Solidary guarantor does not lose his character as such vis--vis
the debtor
The undertaking to pay upon default of the principal
debtor does not automatically remove it from the ambit of a
contract of suretyship. It has not been shown, that respondent
corporation agreed to proceed against 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.
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.
GRATUITOUS CONTRACT
A guaranty is gratuitous, unless there is a stipulation to the
contrary. (Art. 2048)
A. Gratuitous contract the guarantor does not receive any
price or remuneration for acting as such.
B. Onerous the guarantor receives a valuable consideration
for his guaranty.
Q: Can there be a valid contract of guaranty even if no
valuable compensation or consideration is given to the
guarantor?
A: Yes. But the law requires that there must be a consideration
for guaranty otherwise it is as if there is no contract at all
because you knew that a contract must have the 3 essential
elements.
Severino v. Severino
Re: Dismissal of complaint by virtue of a compromise agreement
where payment of balance was guaranteed
Solidary guarantor Solidary co-debtor
May recover the entire Can recover only the co-
payment from the debtor debtors share
Released by extension of the Not released by extension
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period
Has action for counterbond No action except for
and reimbursement, besides contribution
subrogation
Obligation is accessory Bound under a principal
obligation
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 4
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lawsuit
Feb. 12 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 is
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.
CONSENSUAL CONTRACT
A guaranty is a consensual contract and therefore
perfected upon mere consent and agreement of the parties.
Debtors consent is not required
The contract is between the creditor and the
guarantor, and therefore the debtors consent is not required
to constitute a guaranty.
ART. 2049 - 2057
I. KINDS OF GUARANTY
Arts. 2049- 2057
Art. 2049. A married woman may guarantee an
obligation without the husbands consent, but shall not
thereby bind the conjugal partnership, except in cases
provided by law.
Art. 2051. A guaranty may be conventional, legal or
judicial, gratuitous, or by onerous title. It may also be
constituted, not only in favor of the principal debtor,
but also in favor of the other guarantor, with the
latters consent, or without his knowledge, or even over
his objection.
Art. 2054. A guarantor may bind himself for less, but
not for more than the principal debtor, both as regards
the amount and the onerous nature of the conditions.
Should he have bound himself for more, his obligations
shall be reduced to the limits of that of the debtor.
A.) By its origin:
A. Conventional constituted by contract
B. Legal required by substantive or procedural law
C. Judicial required by a court from a litigant
B.) By its extent:
A. Indefinite or Unlimited or Simple cover the principal
obligation, accessories and cost incurred after the
guarantor has been judicially asked to pay.
Rule if without knowledge or consent of debtor: 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.
B. Limited excluding accessory obligation
De Guzman v. Santos
Re: Suit to recover from principal debtor who did not consent to
the guaranty; Consent of the principal debtor not required
Facts:
The principal debtor refused to reimburse the
guarantor of the amount paid by the latter because he never
gave his consent to the undertaking.
Held:
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.
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.
COMMENT:
If the principal debtor did not give his consent to the
guaranty and the guarantor is entitled to recover from him,
what provisions in the Civil Code do we apply?
It is found in the general provisions in the Civil Code.
In obligations and Contracts, a third person may pay the
obligations of a debtor. The third person may even pay the
debtor without the consent and upon objection by the debtor.
But if the third person thus pay he is entitled only to the
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beneficial reimbursement. He can recover only to the extent
that the principal debtor was benefited.
C.) By the person guaranteed
A. Guaranty proper
B. Sub-guaranty to guarantee the guarantors solvency
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 EH 403 S.Y. 2016 2018 CREDIT PRE-FINALS
Feb. 12 D.) By the liability of the guarantor
A. Normal or ordinary simple guaranty, guaranty
proper; subsidiary
B. Solidary suretyship
Machetti v. Hospicio
Supra. See discussion above.
SC Ruling: the guarantor is the insurer of the solvency of the
debtor while Surety is the insurer of the debt.
Q: What does surety is the insurer of the debt mean?
A: Whether or not the principal debtor can pay or not, for as
long as the debt is not paid, the surety is liable. Because the
suretys liability is that of a solidary debtor.
When the guarantor binds himself jointly and severally with the
principal debtor, the nature of the undertaking is Suretyship
and he is bound solidarily with the principal debtor.
PNB v. Luzon Surety
Re: Alteration as a ground for release
Facts: Villarosa applied for a crop loan from PNB. A chattel
mortgage was executed to guarantee said loan. For failure to
pay, the bank sought to collect against Villarosa and 3
bondsmen, Luzon Surety being one of them. There was a
question as to the liability of Luzon Surety for the increases to
the credit line of Villarosa and the interests sought.
As a surety, said bonding company is charged as an
original promissory and is an insurer of the debt. While it is an
accepted rule in our jurisdiction that an alteration of the
contract is a ground for release, this alteration must be
material. A cursory examination of the record shows that the
alterations in the form of increases were made with the full
consent of Luzon Surety Co., Inc. Paragraph 4 of the Chattel
Mortgage explicitly provided for this increase(s), viz:
The Mortgagee may increase or decrease the amount of
the loan as well as the installment as it may deem convenient and
this contract, Exhibit "B", was precisely referred to and mentioned
in the Surety Bond itself.
Ong v. PCIB
Re: Principle of excussion applicable only to guaranty
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 as the surety 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.
Thus, respondent bank as creditor may proceed
against the 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.
COMMENT:
Q. What if the debtor is declared in a state of suspension of
payments because it is a distressed corporation that no cases
can be filed against him. Can the creditor collect from the
debtor?
No. The proceedings on these cases are suspended.
So, if the cases against the debtor are suspended, the creditor
cannot collect.
Q. If the obligation is secured by a guaranty, can the creditor
go after the guarantor since it cannot proceed against the
principal debtor since there is a suspension of payment?
No, the creditor cannot because we still apply the
basic rule that the creditor has to collect from the principal
debtor before it can go after the guarantor.
Q. What if the obligation is secured by a suretyship
undertaking. Can the creditor go against the surety?
Yes, the creditor can go against the surety. Going
back to the principle that the surety is the insurer of the debt,
so for as long as the debt is not paid, the surety is liable. So, if
the debtor is put in a state of suspension of payments, by all
means the creditor can go after the surety.
International Finance v. Imperial
Re: A guarantor bound jointly and severally
When qualified by the term jointly and severally,
the use of the word guarantor actually refers to a surety.
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.
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
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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.
COMMENT:
If a person finds himself solidarily liable with the
principal debtor or if a person secures as a surety the
obligations of an agent to sell certain jewelries and turn over
the proceeds to the principal and the agent fails to account for
the proceeds or return the item to the principal (the agent can
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be 12
Feb. held liable for estafa). Can the surety be held liable
criminally as well?
No. Surety's liability is only civil, even if a person binds himself
as a surety in a performance of an obligations under agency
and the agent fails to comply with his undertaking. The surety is
merely civilly liable.
Illustration:
A obliged himself to sell a diamond ring owned by B. Then, X, a
surety, secured his obligation to remit the proceeds and A was
not able to remit the proceeds, and so, B filed a case against
him for Estafa. Can the surety be also held criminally liable for
Estafa?
No. the surety cannot be held liable with the agent because
what he only secured was the payment of the proceeds.
II. ELEMENTS OF GUARANTY
A. Parties
B. Subject matter and conditions
C. Form
D. Cause
Art. 2056. One who is obliged to furnish a guarantor
shall present a person who possesses integrity, capacity
to bind himself, and sufcient property to answer for the
obligation which he guarantees. The guarantor shall be
subject to the jurisdiction of the court of the place where
this obligation is to be complied with.
Art. 2057. If the guarantor should be convicted in rst
instance of a crime involving dishonesty or should
become insolvent, the creditor may demand another
who has all the qualications required in the preceding
article. The case is excepted where the creditor has
required and stipulated that a specied person should be
the guarantor.
A.) PARTIES TO A GUARANTY
If proposed by the debtor:
1. He must be capable of contracting obligations.
2. He must have sufficient property to answer for the debt
guaranteed.
3. He must possess integrity.
TN: The guaranty is for the benefit of the creditor that is why if
the guarantor is chosen by the debtor, he must prove that he
has all the qualifications required.
He must have sufficient property to answer for the debt
guaranteed
Q: Can the guarantor be proposed by the creditor?
A: It is usually the guarantor who proposes to the creditor.
Q: If the debtor proposes to the creditor, what must the
guarantor possess?
A: The guarantor must have the legal capacity to enter into an
obligation.
Q: when must the qualification of sufficient property be
present?
A: throughout the effectivity of the contract of guaranty. Not
just the time of the constitution of the guaranty.
Q. When is solvency of the guarantor required?
At the point that the contract is constituted.
Q. Can a law student act as guarantor?
Yes. If the law student possesses sufficient property not exempt
from execution. If the law student only has his law library as
property, he does not possess sufficient property because a
persons personal library is exempt from execution.
Q. What happens if he becomes insolvent after the
constitution of the guaranty and before of the extinguishment
of the principal obligation of the guaranty?
The creditor can require that another guaranty be
constituted. He can require the debtor to provide another
guaranty.
Q. In relation to an obligation with a period, what is the
remedy of the creditor if the debtor fails to provide another
guarantor?
He can consider the principal obligation to be
demandable at once. Because the effect if the debtor fails to
provide a security in relation to that obligation with a period
the debtor loses the right to enjoy the benefit of the use of the
period, therefore the obligation becomes due and demandable.
Q: What if he loses capacity? Is it possible?
A: Yes. The effect of the contract would be that creditor can
demand now, demandable at one. The creditor may require
that another guarantor be provided by the debtor.
Q: If the debtor defaults?
A: the creditor cannot collect from the incapacitated guarantor.
The creditor cannot performance by an incapacitated debtor.
Q: What if the guarantor becomes insolvent?
A: The creditor can require the debtor to give another
guarantor. And if the fails to provided another security, the
defect is it would be demandable at once directly to the debtor.
We will survive! <3
(Obligation with a period
He must possess integrity
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 for the creditor to demand another guarantor.
7
 EH 403 S.Y. 2016 2018 CREDIT PRE-FINALS
Q. 12
Feb. When must this integrity be possessed by the guarantor? I
am the guarantor. If after the constitution of the guaranty, I
am convicted of estafa. What will the creditor do?
The creditor can demand for another security.
Because conviction of the guarantor of a crime involving
dishonesty has the same effect as insolvency.
Q. If the guarantor, during the pendency of the obligation was
convicted of less physical injuries, can the creditor demand
that the debtor provide another guarantor?
No. Conviction of just any crime does not entitle the
creditor to demand another guarantor. The conviction must
involve crimes involving dishonesty (i.e. estafa, perjury, etc.)`
If proposed by the creditor:
If the guarantor was chosen by the creditor, he can dispense
with the qualifications. After all, the guaranty is provided for his
benefit.
TN: The consent of the creditor is required before the
guarantor may be bound.
Texas Co. v. Alonzo
Re: Rule where there is merely an offer of guaranty
If a security is requested by the creditor, the latters
consent is necessarybefore the guarantor or surety may be
bound.
Here, the execution of the bond was requested by
Texas Co. by virtue of the Additional Security Clause in the
agency contract. In such clause, it is apparent that before a
bond is accepted by Texas, it has to be in such form and
amount and with such sureties as shall be satisfactory hereto.
Hence, must be approved by the creditor. A request for bond is
not inference of approval thereto.
Where there is merely an offer of, or proposition for a
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 given to the guarantor.
COMMENT:
Q. Why was Alonzo absolved from his undertaking as a
surety?
Because there was no acceptance by Texas of the guaranty
made by Alonzo for the contract.
Q. Cant it be inferred that when Alonzo signed the
undertaking that the contract of suretyship was already
perfected?
No. acceptance should not be inferred but must be made in a
specified form.
Q. What is the effect on the suretyship as a contract if Texas
did not manifest its satisfaction of Alonzo offer to the
undertaking?
The contract of suretyship will not be valid because
there was no consent. So even if Alonzo consented to act as a
surety, Texas did not however manifest its consent to the offer
of Alonzo. Thus, there is no consensual contract of surety that
was constituted.
Phil. Pryce Assurance v. CA
Re: Effect if principal has not paid the premium
Facts: Phil. Pryce Assurance Corp. 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.
Judge: Usually in the case of a surety company who puts up a
bond in favor of a debtor, it will require the debtor to pay a
premium. Here, the checks issued by the debtor to the surety
for the premium payments were dishonored. Thus, the surety
claims that it is not bound as a surety.
Issue: Whether 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.
Held: Irrespective of payment or non-payment of the premium
for the bond executed by surety and accepted the creditor,
such bond is enforceable against such surety.
The Insurance Code states that 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 creditor 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 debtor to the surety.
COMMENT:
Q. X owes you 1M but you required X to put up a security for
the payment of the obligation. X approaches me to act as the
surety. I said I will agree provided he pays me a consideration
for acting as his surety. So X agreed to pay me a tiny
compensation of 50K. So I signed the suretyship agreement and
I sent it to you and you accepted. The check was then
dishonored. Plus, X defaulted. So you now demanded payment
of the obligation from me. Was the surety valid considering
that I was not paid?
We will survive! <3
A. Yes it is still valid. Payment of valuable consideration to the
guarantor to act as one is not essential to the validity of the
guaranty for as long as the creditor accepted the surety. The
causa in a security undertaking is the same causa that supports
the principal obligation. It is not essential of the security
undertaking in a contract of guaranty that a guarantor must
receive the agreed compensation before he is bound as long as
there is consent already between the guarantor and the
creditor. The contract is already perfected and the surety is
already bound in his undertaking. 8
 EH 403 S.Y. 2016 2018 CREDIT PRE-FINALS
Feb. 12
B.) SUBJECT MATTER AND CONDITIONS
The principal obligation must be valid as guaranty
cannot exist without a valid obligation. Thus, when the principal
obligation was not perfected, the guaranty is void.
TN: Voidable, unenforceable or natural obligations may be
guaranteed, as they are considered valid obligations.
Relevant provisions
Art. 2052. A guaranty cannot exist without a valid
obligation. Nevertheless, a guaranty may be constituted
to guarantee the performance of a voidable or an
unenforceable contract. It may also guarantee a natural
obligation.
Art. 2053. A guaranty may also be given as security for
future debts, the amount of which is not yet known;
there can be no claim against the guarantor until the
debt is liquidated. A conditional obligation may also be
secured.
Municipality of Gasan v. Marasigna
Re: Debts may be guaranteed
The fishing privilege contract entered into by the
plaintiff Municipality and Marasigan was cancelled. This being
so, neither Marasigan nor his sureties were bound to comply
with the terms of their respective contracts of fishing privilege
and suretyship. This is so, particularly with respect to sureties,
because suretyship cannot exist without a valid obligation, the
obligation arising from a cancelled contract not being a valid
obligation
Q: But didnt the municipality reinstate the contract?
Yes, but reinstatement does not carry with it the revival of the
guaranty. Thus, when the contract was cancelled, the suretys
life ended. The revival of the principal obligation does not mean
revival of the accessory obligation. To revive the accessory, it
must be express.
Q: Can an accessory contract survive the death of the principal
contract?
No, because the accessory contract is dependent on the
principal contract. Guaranty is an accessory contract, it is
dependent on the existence and validity of the principle
contract or obligation. If it (principal contract) is extinguished,
accessory is also extinguished.
Q: What if the original contract is revived? Is the accessory is
revived?
A: No. Sevilla and Luna is no longer bound in the reinstated
contract. When the municipality cancelled the first contract
their undertaking was also automatically cancelled.
FUTURE DEBTS
Can future debts be secured by a guaranty?
Yes. As long as the debts are valid and liquidated. A
debt is liquidated when the amount is known or determinable
by inspection of the terms and conditions of the relevant
promissory notes and related documentation.
How do you know that guaranties support future obligations?
What kind of clause do you usually see?
It may be referred to as a Comprehensive
Guaranty/Surety Agreement or Continuing Suretyship/Guaranty
Undertaking.
Illustration:
In the first promissory note signed by Archie in favor of
Veronica (creditor), theres a guarantors undertaking, where
Jughead, the guarantor, undertook to secure payment of the
first promissory note (500k) but also such other obligations that
Archie may owe Veronica in the future. The first promissory
note was paid and subsequently, Archie obtained another loan
from Veronica. In the second promissory note (1M), Archie
failed to pay the obligation and defaulted.
Is the second promissory note secured by Jugheads guaranty?
Yes.
If this is secured by Jugheads guaranty, must Jughead also
sign the second promissory note?
Not anymore.
If Jughead did not sign the promissory note as guarantor and
Archie defaults under the second promissory note, can
Veronica go after Jughead?
Yes, even if Jughead did not sign. The continuing guaranty was
not yet terminated during the institution of the second
promissory note so Jughead is still bound as guarantor even if
he did not sign the promissory note. So Jughead cannot later on
evade liability by saying that since he did not sign the second
promissory note, thus he should not be liable. The basis of his
obligation is the continuing guarantors undertaking that he
signed under the first promissory note. This is essentially the
RCBC v. ARRO case.
Selegna Management v. UCPB
Re: When debt is considered liquidated
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
We will survive! <3
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 9
 EH 403 S.Y. 2016 2018 CREDIT PRE-FINALS
Agreement
Feb. 12 even provides for the application of payments.
Thus, it appears from the agreements that the amount of total
obligation is known or, at the very least, determinable.
RCBC v. ARRO
Re: Comprehensive Surety Agreement to over existing and future
debts
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.
Dino v. CA
Re: When guaranty is construed as continuing
Under the Civil Code, a guaranty may be given to
secure even future debts, the amount of which may not be
known at the time the guaranty is executed. This is the basis for
contracts denominated as continuing guaranty or suretyship.
A continuing guaranty is one which is not limited to a single
transaction, but which contemplates a future course of dealing,
covering a series of transactions, generally for an indefinite
time or until revoked. It is prospective in its operation and is
generally intended to provide security with respect to future
transactions within certain limits, and contemplates a
succession of liabilities, for which, as they accrue, the guarantor
becomes liable. Otherwise stated, a continuing guaranty is one
which covers all transactions, including those arising in the
future, which are within the description or contemplation of
the contract, of guaranty, until the expiration or termination
thereof.
A guaranty shall be construed as continuing when by
the terms thereof it is evident that the object is to give a
standing credit to the principal debtor to be used from time to
time either indefinitely or until a certain period, especially if the
right to recall the guaranty is expressly reserved. Hence, where
the contract of guaranty states that the same is to secure
advances to be made "from time to time" the guaranty will be
construed to be a continuing one.
In other jurisdictions, it has been held that the use of
particular words and expressions such as payment of "any
debt," "any indebtedness," "any deficiency," or "any sum," or
the guaranty of "any transaction" or money to be furnished the
principal debtor "at any time," or "on such time" that the
principal debtor may require, have been construed to indicate a
continuing guaranty.
Bank of Commerce v. Flores
Re: When guaranty is construed as continuing
Willex Plastic Industries v. CA
Re: Retrospective application of guaranty
Facts:
Inter-Resin Industrial (IRI) and Willex Plastic
Industries Corp. (WPIC) executed a continuing guaranty in
favor of Investment & Underwriting Corp. of the Phils. (IUCP),
jointly and severally guaranteeing payment of sums obtained
and to be obtained from IRI from IUCP. For failure of IRI and
WPIC to pay what IUCP had paid to Manila bank under IUCP
and IRIs continuing surety agreements, IUCP, thru its
successor Atrium Capital Corp. (ACC), led a case against them
before the Manila RTC.
Held:
WPIC, as guarantee, is bound by the same
consideration that makes the contract effective between
principal parties thereto. In this case, the continuing guaranty
would cover sums obtained and/or to be obtained by IRI from
Interbank. Hence, the contract of suretyship in this case has
both retrospective and prospective application. Furthermore,
since the continuing guaranty embodies an express
remuneration of the right of excussion, WPIC can be proceeded
against without rst exhausting all the properties of IRI.
Judge: Can a guaranty have a retroactive effect?
Yes, if stipulated by the parties being their intention.
C.) FORM
We said that guaranty is a consensual contract and
must be evidenced by a written document or at least a
memorandum because it is under the Statute of Frauds since it
is a special promise to answer for the debt, default or
miscarriage of another.
In what form must it be to be enforceable?
It should be in writing to be enforceable.
What particular written document must it be in?
There is no particular form required. However, for it
to be enforceable, it must be in writing.
We will survive! <3
Macondray and Co. v. Pinon
Re: Written undertaking to guarantee payment of another
persons obligation
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.
10
 EH 403 S.Y. 2016 2018 CREDIT PRE-FINALS

COMMENT
Feb. 12 Tanglaos property. Therefore, if at all, Tanglaos liability is
There is no particular form required for as long as limited only to his property. He cannot be bound personally as
you can determine from the gist of the letter that the person a guarantor or as a surety because suretyship or guaranty was
signing it undertakes to secure the obligation of the principal not expressly constituted.
debtors. Here, Kang Leon was held liable even if he did not
promise to pay in case of failure of payment but due to the
Solon v. Solon
letter having the paragraph I pledge payment which the SC Re: The terms of the contract of suretyship determine the
considers as sufficient guarantor's undertaking on his part. suretys
liability and cannot extend to more than what is stipulated therein.
Wise & Co. v. Tanglao
Re: Guaranty and suretyship must be expressed and not When Solon bound himself as surety, he limited himself to
presumed giving as security, by way of mortgage, a specific land and no
other. It is not possible that the creditor could have ever
Facts:
contemplated bringing an action against Solon to obtain
PWCI obtained a preliminary attachment of Davids
possession not only of the land expressly mortgaged to it, but
property. To avoid execution of said attachment, David
also of any other land belonging to for the purpose of collecting
obtained an SPA from his lawyer Tanglao, authorizing him to
its credit against the debtor.
sign for his lawyer as guarantor for himself in his indebtedness
to plaintiff and to mortgage his lawyers lot to guarantee said The contract of suretyship does not admit of the interpretation
obligation. that could make Solon liable for the amount greater than P5,
000. Thus, the creditor cannot require him to pay the principal
Held:
debtors indebtedness, should the latter fail to do, with the
Under the SPA, Tanglao empowered David to enter
land other than that he had mortgaged.
into a contract of suretyship and a contract of mortgage of the
property described in the document. David, however, used said This is so because the clauses of a contract of suretyship
SPA only to mortgage the property and did not enter into a determine the extent of the liability of the surety because said
contract of suretyship. liability should not be extended farther than the clear terms of
the contract of guarantee by mere implications.
Nothing is stated in the compromise agreement to
the effect that Tanglao became Davids surety for the payment
COMMENT:
of the judgment debt. Neither is this inferable from any of the
There was a suretyship undertaking which was also in
clauses thereof, even if this inference might be made, it would
the form of a mortgage over a property. What the creditor did
be insufficient to create an obligation of suretyship which under
was to try to foreclose the property owned by the mortgagor.
the law must be expressed and cannot be presumed. Even if
SC said that you cannot do that. The terms and conditions of
there is no particular form required for a guaranty to be
the contract of suretyship determine the suretys liability and
effective, it must be expressly entered into. It cannot be merely
cannot extend to more than what is stipulated therein. And so,
presumed by the mere fact of offering an SPA.
if in the suretyship undertaking, there is a particular property is
offered as security, then only this particular property must be
COMMENT:
subject to foreclosure.
By virtue of the SPA that Tanglao signed, David
constituted a mortgage over Tanglaos property to secure
Relevant provision
Davids obligation to Wise. The rule is when you mortgage
property to secure somebody elses obligation, only the Art. 2055. A guaranty is not presumed. It must be
property will answer for the obligation. The mortgagor is NOT express and cannot extend to more than what is
stipulated therein.
personally liable unless the mortgagor also bound himself as a
guarantor or surety.

While the law says that there is no particular form

required, it must nevertheless be expressly constituted and not
presumed. Thats why in the case of Wise & Co. v. Tanglao,
while Tanglao executed an SPA to David to bind himself, as
We will survive! <3
surety and to mortgage property to secure Davids obligation.
What David did was simply to constitute a mortgage binding
Tangalos property as security for Daids obligation with Wise &
Co. He did not bind Tanglao as a surety or as a guarantor
because he did not sign a suretyhip or guarantors undertaking
for and in behalf of Tanglao.

Therefore, it is wrong for Wise to go after Tanglao in

his personal capacity as surety or as guarantor because there
was no such undertaking signed by David. The only undertaking
signed by David was the mortgage undertaking binding 11
 EH 403 S.Y. 2016 2018 CREDIT PRE-FINALS
Feb. 12 CHAPTER 2- EFFECTS OF
GUARANTY
ART. 2058 2065
I. Effects of Guaranty Between
the Guarantor and the Creditor
A.) OBLIGATION OF THE CREDITOR
To pay the guarantor the compensation stipulated.
Judge:
GR: The creditor does NOT pay the compensation
XPN: Creditor pays the guarantor only if he bound himself to
pay the compensation for the guarantor
In fact, we have said that a contract of guaranty is essentially
a gratuitous contract.
B.) OBLIGATION OF THE GUARANTOR
To pay or perform the obligation if the debtor fails
to do so
Judge:
What is the main obligation of the guarantor?
To pay the obligation. This does not only entail
payment of a sum of money. Payment may be the performance
in any manner of an obligation. To pay or perform the
obligation if the debtor fails or is unable to pay.
Can the guarantor bind himself to pay less than the principal
amount of the obligation?
Yes. Full amount? Yes.
Can the guarantor bind himself to pay more than the principal
amount of the obligation? No. But what if he does?
The undertaking is NOT invalid. It is valid to the extent
of the amount of the principal obligation. But as to the excess,
it is invalid. So it is not automatically invalid.
But there are instances when the guarantor is liable
for more than the amount of the principal obligation. For
example, if the guaranty is penal in nature. Like what happened
in General Insurance and Surety Corp. v. Republic.
The other instance when the guarantor is liable for
more than the principal obligation is when the guarantor,
himself, is in default.
Remember in ObliCon, when the debtor fails to pay
upon demand, there is default. And the consequence for
default is liability for damages. In case the obligation is to pay
for a sum of money, the damages will be in the form of
moratory interest.
WHAT IS TO BE PAID
Q. Can the guarantor secure or bind himself to pay more than
the obligation of a debtor?
GR: The guarantor can bind himself for less, but not for more
than the principal debtor.
Example.
I owe X 100,000. You act as my guarantor. And you
say that you bind yourself to secure my obligation for 200,000
because you just want to.
Then, I defaulted in my payment. Will you pay 200,000 to X?
No. Because your obligation cannot be more than the
obligation of the principal debtor. You can bind yourself for
less, but you cannot bind yourself for more.
XPNs:
Instances where the obligation of the guarantor is more
than the obligation of the principal debtor:
1. When the guaranty is penal in nature
2. When the guarantor is in default
Relevant provision
Art. 2054. A guarantor may bind himself for less, but
not for more than the principal debtor, both as
regards the amount and the onerous nature of the
conditions. Should he have bound himself for more,
his obligations shall be reduced to the limits of that of
the debtor.
General Insurance and Surety Corp. vs. Republic
Re: When the guaranty is penal in nature
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 P10,000.00.
Held:
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.
Judge:
What was secured by the bond?
We will survive! <3
(1) Compliance by the school of its obligations and (2)
efficient administration of the school. Observance of all the
regulations prescribed by DOE. That includes payment of the
salaries of its employees.
Amount of the Bond?
10k
Violation of the School?
The school failed to pay two of its employees in the
amount of around 2k. And yet, the amount of the bond that 12
 EH 403 S.Y. 2016 2018 CREDIT PRE-FINALS
was12forfeited in favor of the government was 10k- more than
Feb.
the amount of the schools obligation.
Is this legitimate?
Yes, because the bond was penal in nature.
PNB v. Luzon Surety
Re: When surety is liable for interest
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.
COMMENT:
This is especially true in suretyship undertakings. In
suretyship undertakings, the surety is bound principally with
the principal debtor and the nature of liability is similar to that
of solidary debtor. From the moment demand is made by the
creditor from the surety, the surety is already in default.
(Default- judicial or extrajudicial demand). Upon default, the
consequence is the liability to pay interest.
Ex. If the obligation is 100,000 and demand is made
upon the surety to pay and the surety fails to pay, he is
considered in default. He may be held liable to pay more than
the amount of principal obligation because of his own default.
Commonwealth Insurance Corp. v. CA
Re: When surety is liable for interest
WHEN TO PAY
Ideally, the guarantor pays when the obligation is due.
Relevant provision
Art. 2069. If the debt was for a period and the
guarantor paid it before it became due, he cannot
demand reimbursement from the debtor, until the
expiration of the period, unless the payment has
been ratified by the debtor.
When does the guarantor usually pay?
The obligation of the guarantor arises or becomes demandable
only when the debtors obligation becomes demandable also.
What if the obligation has not yet matured and the guarantor
wants to pay? Can he do that?
Yes.
Can the creditor refuse the payment?
Yes. Because the obligation is not yet due. Ayaw ko pugsa
daghan ko ug kwarta lolzz
But if the creditor accepts the payment even if the principal
obligations is not yet due, what are the rights of the
guarantor, who paid before the debt is due, as against the
debtor? Can he seek reimbursement already?
No, he cannot yet seek for reimbursement as against the
debtor because as far as the debtor is concerned, his obligation
is not yet due and demandable. But if the debtor ratifies the
payment, then he is liable now to reimburse the guarantor.
DUTY TO NOTIFY PAYMENT
The guarantor has to notify the debtor of the payment,
otherwise the debtor may set up against the guarantor all
defenses available against the creditor.
Q. When does guarantor notify the debtor?
Before payment. Otherwise, if after, the debtor may set up
defenses.
Reason to notify: because the debtor may raise defenses
against the guarantor to avoid paying or reimbursing him of the
payment that the guarantor made to the creditor.
Examples of defenses by debtor: I have paid. My obligation has
been extinguished by prescription or I was given an extension,
but of course you know that extension and payment without
the consent of the guarantor releases him of his undertaking.
So, ideally, guarantor must notify the debtor prior to payment
because the debtor may set up defenses against him.
Therefore, the guarantor cannot seek reimbursement from him
anymore.
If the guarantor pays and does not notify the debtor and later
on debtor pays without knowing that the guarantor has paid,
the guarantor should seek reimbursement from the creditor.
If the guarantor notifies the debtor AFTER he pays, this will be
the possible scenario: Guarantor pays the creditor then
afterwards, goes to the debtor to seek reimbursement. Then
the debtor says the creditor has already condoned my
obligation. I have no more obligation to him. Can the
guarantor still recover from the debtor? No, because the
debtor has raised a defense against him.
Whereas if he (guarantor) notifies the debtor BEFORE payment,
the scenario would be: The debtor would say I have already
been pardoned by the creditor. My obligation has already been
condoned. Or You know, the creditor also owes me the same
amount of money (legal compensation). So when the creditor
demands payment from the guarantor, the guarantor can also
raise these defenses against the creditor.
It will then be TOO LATE to notify the debtor of payment AFTER
We will survive! <3
payment has been made because the guarantor can no longer
raise the defenses available to the debtor because he has
already paid the creditor.
If the guarantor paid and did not notify the debtor of the fact of
payment and because the debtor did not know that the
guarantor paid, he also pays the creditor. The creditor is happy
because he is paid twice and of course, that is unjust
enrichment. Can the guarantor recover from the debtor? No.
The guarantor must recover only from the creditor, not the
debtor. 13
 EH 403 S.Y. 2016 2018 CREDIT PRE-FINALS
Feb. 12
Rule if notice is prevented by fortuitous event
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.
C. PRIVILEGES GIVEN TO THE GUARANTOR
PRIVILEGES
A.) Benefit of exhaustion/excusion
B.) Benefit of division
BENEFIT OF EXHAUSTION
It is the right available to the guarantor to demand
that the creditor first exhaust the properties of the debtor,
which are within the Philippines and which are not exempt
from execution. And if still, the creditor cannot collect, thats
the time that guarantor is liable.
Hence, creditor should:
A. First exhaust the properties of the debtor
B. Resort to all legal remedies against the debtor
C. Notify the guarantor of the debtors inability to pay.
Extrajudicial Demand
What is the first step as discussed in your ObliCon?
File a case.
What case?
Not necessarily collection because the obligation might not be
for a sum of money. It might be specific performance of an
obligation.
To whom is the case filed?
The law says that it is brought against the Principal Debtor
alone. And then the law says that the Creditor will ask the court
to notify the guarantor of the pending action.
COMMENT:
But the law says that the suit must be filed by the
creditor against the debtor alone. Once he files the case against
the debtor alone, he must ask the court to notify the guarantor.
When the creditor files a case against the debtor, then he
should later on ask for the amendment of the pleading in order
to implead the guarantor as additional defendant. That is why
what is actually practiced is to file a case against both the
principal debtor and the guarantor jointly in the same case.
Q: What if the Creditor does not amend the complaint and
impleads only the principal debtor?
A: The defendant will ask to file a third party complaint to bring
in the guarantor as party defendant if the plaintiff does not
amend the complaint and implead the guarantor as another
party to the case. Thats how you bring in a party, you do not
ask the court to just notify. Because if you just notify only the
person, the court does not acquire jurisdiction over his person.
The guarantor may appear, waive his appearance to
file his answer and if he invokes the Privilege of Exhaustion it
is his obligation to point to the creditor again exhaust first the
properties.
What must the guarantor do if he is impleaded?
Invoke the benefit of exhaustion and he must point to the
creditor properties of the debtor within the Philippines which
are not exempt from execution.
Q: Now what if judgment is rendered to both the debtor and
guarantor? If the judgment becomes final and executor will It
then be executed against the guarantor? Meaning is the
privilege of exhaustion lost if a judgment is rendered against
both?
A: No it is not. The privilege remains unimpaired. Meaning,
execiution shall be ffected against the debtor. It is only that no
execution can be have that the guarantor can be compelled to
obey. And thats the ruling in Machete vs. Juspicio de San Jose.
The court said that the best proof that the debtor can not pay is
the return of the execution unsatisfied.
Machetti vs Hospicio de San Jose
Re: How inability to pay is proved
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.
COMMENT:
One way of proving the inability to pay by the debtor is by the
return of the writ of execution which is unsatisfied or by other
means. Of course, prior to that, he must already point to the
creditor leviable properties of the debtor.
Q. The guarantor pointed out to the creditor leviable
properties of the debtor but the creditor failed to levy.
Subsequently, the debtor became insolvent, can the creditor
collect the entire amount from the guarantor?
A: No. The guarantors obligation would be extinguished to the
extent of the value of the property which was not levied upon
by the creditor due to his fault. We will survive! <3
Q. Is it required that the surety or guarantor be afforded with
the right to be heard before he may be held liable?
A: Yes. Whether the undertaking is an ordinary guaranty or
suretyship, the Court said that due process should be accorded
to the guarantor, especially the surety.
In the case of Towers Assurance. Who are from
Cagayan De Oro here? This is the famous Ora Supermarket. The
court said that the Surety is entitled to be heard before an
execution be issued against him since he is not a party in the
14
 EH 403 S.Y. 2016 2018 CREDIT PRE-FINALS
case
Feb. 12involving the Principal, notice and hearing is one of the
essential requisites of a procedural due process.
But if you look at Finman vs. General Assurance
Corporation, the law says that where the surety bounds itself
solidary with the principal debtor. The former is so dependent
with the principal debtor. That he is considered in law as the
same party with the debtor. Whatever is adjudged that should
also be the obligation of the latter. But notwithstanding this
pronouncement by the court, if you really look at the case. The
surerity was actually impleaded in the case but he did not file
an answer. He was clearly default.
Towers Assurance Corp. v. Ororama Supermarket
Re: Effect of a writ of execution against surety who was not
impleaded
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 wholeor 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 li ability 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.
COMMENT:
A case was filed for collection against the debtor who
failed to pay. The trial court ordered the surety to pay. The SC
said, you cannot immediately hold the surety liable. The surety
must go to court and must be afforded the opportunity to be
heard. But this ruling was modified a year after in the case of
Finman.
Finman General Assurance Corp vs Salik
Re: Where surety was impleaded but declared in default
The court effectively ruled that theres no need to implead the
surety because of the nature of his relationship with the
debtor. Therefore, by impleading the debtor, it already means
that the surety is also charged with knowledge of such case.
Q: When does the Guarantor invoke the privilege?
A: The moment demand is made upon him to pay. And by that
moment he must, even if it is extrajudicial demand. He must
point to the creditor to levy the properties of the debtor.
Otherwise he can not anymore invoke the privilege. Thats
what happened in Bitanga vs. Pyramid Construction.
When the benefit of exhaustion is not available:
1. If it is waived by the guarantor
2. If the guarantor solidarily binds himself to the debtor
because his obligation is direct and primary
3. If the debtor is insolvent, there is no need for
declaration of insolvency
4. When the debtor cannot be sued because he has
absconded
5. When it may be presumed that execution will not
result in the satisfaction of the judgment credit
6. If guarantor failed to point out leviable properties of
the debtor
Bitanga v. Pyramid
Re: Effect if guarantor failed to point the leviable properties of the
debtor
Petitioner still failed to point out to the properties of the debtor
sufficient to cover its debt. Such failure on petitioners part
forecloses his right to set up the defense of excussion.
Judge: This emphasizes the requirement that it is not enough
for the guarantor to invoke the benefit of excussion. He must
point out to the creditor the leviable properties of the debtor.
Here, since the guarantor failed to point leviable properties of
the debtor, he is prevented from invoking the privilege of
exhaustion.
Tupaz v. CA
Re: Waiver of the benefit of excussion
Petitioner Tupaz here waived the benefit of exhaustion when
he agreed that his liability in the guaranty shall be direct and
immediate without any need whatsoever on the part of the
bank to take any steps to exhaust any legal remedies. That is
a waiver of the benefit of exhaustion. The creditor may not
prove that it cannot collect from the debtor before it can go
after the guarantor.
Q: Now, what happened in Baylon? What was the principal
contract that was secured here? Was Bylon assigned? (No,
hehe)
A: So, there was a Contract of Loan pbtained by Juanzon from
Tomacruz. All women (gimention jud nya ba haha girl power!)
So Rocita Juanzon borrowed money by Tomacruz, this was
secured by (Lisora pod sa mga ngalan ani oi, ayg nganli inyong
mga anak ani ha!) HAHA haaay judge. Si Nacionara Baylon who
signed the promissory note as a guarantor. So when the
borrower Juanzon faulted in paying the loan, Tomacruz the
creditor filed a case for specific performance Juanzon the
debtor and Baylon the Guarantor. In your civil procedure, how
does the Court acquired Jurisdiction over the defendant? Di ba,
Service of Summon right? Summons was served only upon
Baylon the guarantor. Juanzon the debtor wasnt served one.
So Trial proceeded only against the guarantor. And decision
was rendered against the Guarantor. Question, Can the We will survive! <3
decision of the court be executed against Baylon (guarantor)?
The court said NO, it is axiomatic that the liability of the
Guarantor is only subsidiary. The property of the debtor must
first all be exhausted before his own is levied upon. So all this
time, the case went up to the Supreme Court, the Creditor is
holding a paper victory. Mao lagi unta nidaog kas Kaso but you
cannot execute, because the debtor was not summoned. The
debtor was impleaded but there was no summon that was
served.
15
 EH 403 S.Y. 2016 2018 CREDIT PRE-FINALS
J.N.12
Feb. Devt Corp v. Phil Export and Foreign Loan Guarantee Corp
Re: Effect when debtor invokes non-exhaustion by the guarantor
The benefit is a right or privilege granted to the guarantor
which he can waive and this is an example of the exercise of
his right. So the debtor cannot fault the guarantor by paying
the obligation.,
Facts: JN obtained a loan from PRB. It was secured by Phil
Guarantee. When JN failed to pay the obligation, Phil
Guarantee was notified by PRB. Then, Phil Guarantee notified
JN. No action was taken by JN. Phil Guarantee voluntarily paid
the obligation and then sought reimbursement from JN.
JNs defense: Why did you not invoke the benefit of
exhaustion? Since you did not invoke, we are not liable to
reimburse you.
Held: The benefit of exhaustion is a benefit granted to the
guarantor which the guarantor can waive. Payment by the
guarantor without invoking the privilege is a manifestation of
his waiver. It should be the guarantor who invokes the privilege
and not the debtor in order to avoid reimbursement.
COMMENT: The privilege of exhaustion is for the benefit of the
guarantor. Being a mere privilege therefore, it is waivable. The
debtor cannot invoke the same for the purpose of evading
liability.
So whats the other right of the guarantor is the benefit of
division
BENEFIT OF DIVISION
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.
COMMENT: This is available only if there are several
Guarantors securing the same obligations So what parallel
rule in ObliCon do we apply here?
Joint Obligation, because we have learned in Oblicon that mere
plurality of the debtors or the creditors or both the creditors
and debtors results only in Joint Obligations because Solidarity
is not presumed. Solidarity exists only when (*croo croo*, huy
wa pa mo nanga abogado, wa pa moy right malimot ani)
SOLIDARY LIABILITY EXISTS WHEN:
A. Provided by law
B. Agreed by the parties
C. Nature of the obligations required solidarily.
(kahinumdom pgud ko nya kamo last 2 sems ago pa, mao na
kinon ninyog betsin. HAHA)
Again, several guarantors securing the same obligation. Each
guarantor is liable only in paying his share in the obligation
secured. He cannot be made to pay the entire obligation. What
is the example? The assigned case of De Guzman vs. Santos.
Where there were two guarantors and in fact one of the
guarantor here died while the case was pending and the
administratix of his Estate paid one half of the judgment debt.
Requisites:
1. There are several guarantors
2. They guaranteed only one debtor
3. There is only one debt
When is division not available?
Its not available for the same reason that the benefit of
exhaustion is not available.
1. If it is waived by the guarantor
2. If the guarantor solidarily binds himself to the debtor
because his obligation is direct and primary
3. If the debtor is insolvent, there is no need for
declaration of
insolvency
4. When the debtor cannot be sued because he has
absconded
5. When it may be presumed that execution will not
result in the satisfaction of the judgment credit
Mira Hermanos vs Manila Tobacconists
Re: Benefit of division; when rule applies
Facts: Both bonding companies (Provident and Manila
Compania) secured different amounts of the obligation of
Manila Tobacconists. First, P3,000 for Provident. The second
was P2,000 for Manila Compania. The obligation of Manila
Tobacconists was around P2,000+.
The court said Provident and Manila Compania should not
share 60-40, because both companies secured different
obligations. Since the total amount of the obligation of the
debtor did not exceed the amount of P3,000, only Provident is
liable. It cannot invoke the benefit of division.
COMMENT:
So the first question that we should ask ourselves is, Do we
have several guarantor? Yes. Did the two guarantors secure the
SAME obligation?
NO. They did NOT. What was secured by Provident was the first
3,000 and the succeeding 2,000 was secured by Manila
Compania. Is the unpaid obligation covered by the security
provided by provident? YES. So only Provident is liable here. No
benefit of division.
D. DEFENSES OF THE GUARANTOR
Defenses which pertain to the debtor
The guarantor may set up against the creditor all defenses
We will survive! <3
which pertain to the principal debtor and are inherent in the
debt; but not those purely personal to the debtor.
Defenses purely personal:
Minority, incapacity and other vices of consent which the
principal debtor may waive; unless the guarantor was ignorant
of the vice.
The surety may invoke fraud, violence, prior payment, res
judicata, prescription and others of the same class.
Defenses peculiar to guaranty 16
 EH 403 S.Y. 2016 2018 CREDIT PRE-FINALS
Feb. 12 novation, extension of time, etc., which invalidates the
Merger,
contract between the creditor and the surety.
II. EFFECTS OF GUARANTY
BETWEEN THE DEBTOR AND THE
GUARANTOR
ART. 2066-2071
A.) BEFORE PAYMENT BY THE GUARANTOR
1. To receive compensation, unless no compensation is
agreed upon by the parties
2. To demand relief from the guaranty against the action
of the creditor
3. To demand security against the danger of the debtors
insolvency
Instances when the guarantor may proceed against the
principal debtor, even before payment
1. When he is sued for payment
2. In case of insolvency of the principal debtor
3. When the debtor has bound himself to relieve him
from the guaranty within a specified period and the
period has expired
4. When the debt has become demandable by reason
of the expiration of the period of payment
5. After the lapse of 10 years, when the principal
obligation has no fixed period for its maturity
6. If there are reasonable grounds to fear that the
principal debtor intends to abscond
7. If the principal debtor is in imminent danger of
becoming insolvent
In all these cases, the action of the guarantor is to obtain
release from the guaranty, or to demand a security that shall
protect him from any proceedings by the creditor and from the
danger of insolvency of the debtor.
COMMENT:
Q: Before payment, what is the right of the guarantor?
A:The right to be paid by the agreed compensation.
Q: If it is his right to be paid by the agreed compensation. Can
he therefore refuse to pay the secured obligation if he is not
paid by the compensation?
A: (Case of Pryce) Pryce agreed to be put up a surety bond on
the conditions that premium should be paid. But premium
wasnt paid because the checks issued were dishonored. So the
guarantor here or surety, was not paid the agreed
compensation. What did the Supreme Court say? for as long as
there is consent, the bond is accepted by the creditor then the
guarantor/surety is bound. So, the mere fact that the
guarantor/surety was not paid by the agreed compensation
WILL NOT ABSOLVED him from the obligation.
But there are instances that the Court allows the guarantor to
seek relief from gauaranty. But wait a minute, is it not that the
very reason that the Creditor granted the Credit agreed to the
debtor is because there is a Security put up under way of
guaranty or suretyship undertaking, and now the law allows the
guaranty to seek relief from guaranty if demand is made upon
him to pay.
Q: What other instances?
A: If the debtor promised to release him from the guaranty
after a certain period. After 10 years if the period of payment is
not beyond payment.
Q: What else?
A: Insolvency of the debtor. But the court also said that the
rights of the creditor must NOT be prejudice.
Q: If you allow relief of the guarantor from his undertaking. Is
the Creditors right prejudice?
A: Yes, because he is now holding an unsecured credit. If the
debtor cannot pay then he cannot collect. He cannot demand
performance from the guarantor who has been previously
released by the court.
So, if the Creditor opposes or objects to the release of the
guarantor from his undertaking, the guarantor who has
reasonable ground to believe that he may not be able to collect
from the debtor will ask for sub-guaranty or indemnity.
Indemnity is actually sub-guaranty. If you want to read an
example of an indemnity contract, you read the Motuc case
Comment:
Before payment by the guarantor, he is entitled to receive
compensation and he can also demand relief from the
guaranty. When? When he sued for payment in case of
insolvency of the debtor in the instances enumerated above.
Q. If you are the creditor, would you consent to relieve the
guarantor of his undertaking? No, you would not agree
because you agreed to extend the loan to the debtor because
of his security. The law says that the rights of the creditor
should not be prejudiced. Whats the middle ground?
A: If you are the guarantor, ask for an indemnity contract from
the debtor, which is also asking for another guarantor, and that
is already a sub-guaranty. To assure the guarantor that if he
pays, then you can go after the sub-guarantor or against the
indemnity bond.
Q. Can the surety also invoke this right?
A: Yes. This is also available to the surety despite being
solidarily liable.
B. AFTER PAYMENT
1. To seek reimbursement from the principal debtor
We will survive! <3
2. To be subrogated to the rights of the creditor
Personal action for Reimbursement
The guarantor must be indemnified of the following:
a. The amount he paid
b. Legal interest from the time the payment
was made known to the debtor
c. Expenses incurred after having notified the
debtor that payment had been demanded
of him
d. Damages when circumstances show
17
 EH 403 S.Y. 2016 2018 CREDIT PRE-FINALS
Feb. 12
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.
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.
TN: If the guarantor has compromised with the creditor, he
cannot demand of the debtor more than what he has really
paid.
COMMENT:
Q: After payment, what are the rights of the Guarantor?
A: Seek action for Reimbursement or Exercise action in
subrogation
But we know that if guaranty was constituted without the
consent of the debtor, the guarantor cannot compel the
creditor to subrogate him with his rights. It is the prerogative of
the Creditor to whether to subrogate him or not.
Q: But granting both the right to seek reimbursement and
right to subrogation are both present. If you are the
guarantor, which action would you take?
A: Would you seek reimbursement or would you go for
Subrogatory action, meaning foreclose mortgaged, sell the
property pledge to pay the obligation. It actually depends on
the solvency or liquidity of the debtor. Because the guarantor
can pay even if the debtor is not insolvent right? Just like what
happened in JN.
So, if the debtor does not have liquidity problems,
(liquidity is different from solvency. Liquidity is just sufficient
assets but these are Solid assets,( so way kwarta, sufficient in
assets but maybe in a form of fixed assets like real property so
di ka deretcho makacollect) Solvency, generally is you have
more liabilities than assets, your assets are not sufficient to pay
your liabilities. So if the debtor does not have liquidity
problems then by all means go for reimbursement. But if the
debtor is insolvent then exercise your of subrogation.
Why? If a mortgage is likewise constituted to secure
the obligation that you paid, you are the guarantor. There are
two securities; guaranty and REM Real Estate Mortgage. You
paid, so the mortgage was not foreclosed by the creditor. So
you step into the shoes of the Creditor with respect to the REM.
You are the new Creditor now. The property subject
of the REM is subject to a preferred right of the mortgagee. So,
if you are the only preferred Creditor over that particular
property and that propertys value is more than the amount of
your claim then you will be paid the full amount of your claim.
Remember that the debtor is insolvent. If you are an Ordinary
Creditor, an unsecured creditor then you cannot be paid the full
amount of your claim. But if you are the only creditor then like
what Ive said you will be paid the full amount as preferred
creditor because when this property is sold, you will be paid
first the remaining balance will be paid to the unsecured
creditors.
Q: Now, from whom does the GUARANTOR seek
reimbursement if the guaranty was constituted upon the
request another person other than the debtor?
A: then the person can seek reimbursement from this person.
C. GUARANTY GIVEN WITHOUT CONSENT OR
AGAINTS THE WILL OF THE DEBTOR
RULES
1. 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, the
guarantor deprives the debtor of the opportunity to set up
defenses against the creditor.
2. 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 suppose 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.
We will survive! <3
3. If one, at the request of another, becomes a guarantor for
the debtof 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.
18
 EH 403 S.Y. 2016 2018 CREDIT PRE-FINALS
SEC.
Feb. 12 3 EFFECTS OF GUARANTY AS
CO-GUARANTORS
ART. 2073 - 2075
Rule in case a co-guarantor pays the entire obligation
GR: If one guarantor pays the entire obligation, he cannot seek
reimbursement from the other co-guarantors because he
waives the right of division.
XPNs:
1. If payment was made by virtue of a judicial demand
2. If the principal debtor is insolvent
A.) CONTRIBUTION
When there are two or more guarantors of the same debtor
and for the same debt, 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 D's 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 A's share is supposed to be
also 1/3. Of course, each of them can demand proportional
reimbursement from the principal debtor.
Q: In what instance may a co-guarantor seek reimbursement
from others?
a) If he paid the entire obligation by virtue of a court order
b) If the principal debtor has become insolvent
If a co-guarantor voluntarily pays the entire obligation even
without a court order or without the principal debtor being
insolvent, he cannot seek reimbursement form the other co-
guarantors. That means he waived the benefit of division. Just
like the benefit of excussion or exhaustion, the benefit of
division is waivable.
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, includi ng the payer, in the same
proportion.
Example:
A, B and C are D's 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 guarantor's 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.
Q: You several guarantors securing the same obligations, so
you have A,B,C and D Co-guarantors securing a 1 Million
Peso obligation, A pays the entire obligation of 1M, can he
seek reimbursement from B,C and D?
A: NO. Because there is a waiver of the Benefit of Division by A
paying the entire debt.
Q: A was ordered by the court to pay the entire debt. (Now,
you cannot defy the order of the court. That is contemptuous)
Can you seek reimbursement from B, C and D? Must A seek
reimbursement from B, C and D?
A: NO. He can seek reimbursement from the debtor. But he
may seek reimbursement from B, C and D
Q: Debtor is Y. Who becomes insolvent and because X the
creditor cannot collect, A from Y because Y is already
insolvent lage. A paid the entire obligation. Can A seek
contribution or reimbursement from B, C and D?
A: YES. In these two instances, when the court orders the
payment of the entire obligation OR if the debtor is insolvent
and 1 of the several guarantors pay the entire obligation. He
can seek either contribution or reimbursement from the other
co-guarantors.
TN: But if there are several guarantors and one of the several
guarantors VOLUNTARY pay the obligation he cannot seek
reimbursement from the co-guarantors. Thats a WAIVER of
the right of division.
Q: A, B, C and D secures Ys obligation to X in the amount of
P1,500,000. Y (debtor) becomes insolvent. A pays the
obligation. D is insolvent. Can A seek reimbursement from the
other co-guarantors?
A: YES. Because the debtor is insolvent.
Q: How much can A recover from B and C. (Wa apil D kay
insolvent)
A: 500,000 each, because the remaining guarantors will
shoulder the share of the insolvent guarantor which is D.
CHAPTER 3 EXTINGUISHMENT OF
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GUARANTY
ART. 2073 - 2075
I. EXTINCTION OF GUARANTY
Q. How may a guaranty be extinguished?
a.) Negligence of the creditor
b.) Extension of payment 19
 EH 403 S.Y. 2016 2018 CREDIT PRE-FINALS
c.) Payment of the principal debt by the debtor
Feb. 12
d.) Accidental loss of the thing due before default
e.) Remission of debt
f.) Merger
g.) Compensation
h.) Novation
i.) Death
j.) Failure to send notice of default
A. NEGLIGENCE OF THE CREDITOR
Two instances of negligence by the creditor which releases
the guaranty from the obligation
1. 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.
Comment:
Here, the guarantor invokes the benefit of excussion and
pointed to the creditor the alienable properties of the debtor
which are not exempt from execution. However, through
negligence, the creditor did not exhaust the debtors properties
to apply to the payment of the debtor.
Later on the debtor becomes insolvent and therefore the
creditor could not recover the full credit owing to each to the
extent the value of the property which he did not levy. The
guarantor is released from the guaranty. If he failed to levy
upon the property, the value of which is more than enough to
recover the entire obligation, the guaranty is totally
extinguished.
2. 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. (Art. 2080)
COMMENT:
Remember that, If the guarantor invokes the privilege of
exhaustion and the creditor fails to exhaust the property of the
debtor which are not exempt from execution then the
guarantor is released from his or her or its undertaking to the
extent of its value of the property of the debtor.
Second instance of negligence is, The guarantor cannot be
subrogated to the rights of the creditor because of the
creditors negligence. For example, If there are two securities
for an obligation. 1 a mortgage, another a guaranty. Just like
what happened in E.Zobel vs. CA. (Lets twist the case) Because
of the failure of the bank to register the mortgage then
guarantor cannot be subrogated with the rights of the creditor.
Q: Is the guarantor here released from its undertaking?
A: Yes. Because in the real case the court said No the guarantor
cannot be released because the undertaking was solidary. If it
was an ordinary guarantor then ART 2080 would have applied.
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.
Requisites
A. Debt has become due
B. Creditor grants an extension of time to the debtor
C. 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.
Rule if debt is to be paid on installments
GR: Each installment is considered as a separate and distinct
obligation such that an extension in one installment does not
result to an extension of all installments.
COMMENT:
The creditor expressly extends the period of
payment.
Okay rna kung ang obligation is a simple obligation.
Meaning, that it is to be performed at one time. The problem
arises if the obligation is to be performed on installments.
Q: What if the payment of installment is extended? Is the
guarantor released from his undertaking to secure the entire
obligation?
A: No. just like in ObliCon diba? (If the obligation consists in the
payment of installments, default of payment on one installment
does not result in the default of payment of all installmenst)
That applies here also! If the period for payment of one
installment is extended by the creditor without the consent of
the guarantor then the guarantor is released from his
undertaking only from this particular installment. He is not
release from his obligation to the other installment.
Exception: Acceleration Clause.
Q: What is the effect if there is an acceleration clause?
A: If the debtor fails to pay 1 installment, the entire obligation
becomes due and demandable.
Radio Corp v. Roa
Re: Effect of acceleration clause
The contract contained an acceleration clause to the effect that
upon failure to pay any installment when due, the other
installments ipso facto become due and payable. Thus, the
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whole unpaid balance automatically becomes due and payable
upon failure to pay one installment. In which case, 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.
Q: What if the guarantor CONSENTS to this extension of
period of payment? And the period of payment or the
obligation secured is renewed? (just like what happened in
Motuc)
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 EH 403 S.Y. 2016 2018 CREDIT PRE-FINALS
A:In12the case of Motuc. Were actually talking here of the
Feb.
indemnity bond, were not talking here of the principal security.
Because the bond here was put up by PhilAmGen and
PhilAmGen demanded that an indemnity contract also be
constituted so that if it should be made to pay, the manning
agent, then it can go after the indemnitors. And the
indemnitors expressly consented to the renewal of the contract
and extension of the bond. So when the contract of the
Mariner (seaman mani, performance bond of a seaman) when
the contract was renewed several times, automatically the
indemnity bond will also renew.
When the seaman jump ship, PhilAmgen now was
compelled to pay the amount of the bond. So, Philamgen now
wants to recover from the indemnitors.And the indemnitors
said, well, we were not notified, we did not give our consent
to the extension and the renewal of the contract. The court
said NO! you expressly consented to the renewal and in effect
consenting to the extension of the period of the obligation. So
thats a waiver of the part of the indemnitors here.
Phil. Gen Insurance v. Mutuc
Re: Effect of consenting to the extension of time of payment
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.
Here, the sureties are still bound even if the time of payment
was extended thrice, because of the simple fact that they
consented to the extension.
COMMENT:
Q: What about mere failure to demand payment? Is that
extension of period?
A: No. Extension must be expressly granted by the creditor.
Q What about undertaking of the part of the creditor to hold
in abeyance any action against the debtor for collection or for
specific performance, is that an extension of payment?
A:No. Extension must be expressly granted by the creditor.
C. PAYMENT OF THE PRINCIPAL DEBT BY
THE DEBTOR
Q: What are the other modes of extinguishment of guaranty?
A: Payment of the principal obligation because guaranty is an
accessory contract.
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.
Cosignation In case of consignation, the guarantor is released
by the consent of the creditor to the withdrawal of the
consignation
Q: If the creditor accepts a determinate thing as payment for
the obligation (dacion en pago), and later on the thing is lost
by fortuitous event, can the creditor collect from the
guarantor?
A: No, from the moment the creditor accepted the thing,
the obligation was extinguished because the moment he
accepted the thing he became owner of the thing (res perit
domino owner bears the risk of loss)
Hongkong Shanghai Bank v. Aldanese
Re: Payment of the principal debt by the debtor
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 BEFORE DEFAULT
Review Arts 1262 1269
The principal obligation consists in the delivery of the
determinate thing, and before the debtor incurs delay, the
thing is lost without his fault, without anybodys fault. But
nawala sya because of the, hmmm unsay bagyo ron? Wala?
*class said, LPA ra* Judge: Ako mana si LPA
So, the thing is lost due to fortuitous event, we know that lost is
the another mode of extinguishing an obligation. So the
Principal obligation is extinguished because of the lost of the
thing which is to be delivered by the debtor. Then automatically
the obligation of the guarantor is likewise extinguished.
E. REMISSION OF DEBT
Review Arts 1270 1274
A. If there is a condonation of a joint obligation, the guaranty
discharged is only up to that specific condoned obligation
B. If in favor of the debtor, it releases the guarantor
C. 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
We will survive! <3
one released. If they consent, they are not released.
COMMENT:
Q:: Condonation. The creditor condones the entire obligation.
Debtor owes the creditor P100,000, ingon ang creditor nidaog
man ko lotto jackpot so I will forgive the obligation. 1 week
later kay nahurot na niya sa Casio ang iyang daug, so niadto
sya sa guarantor.Can he Collect from the Guarantor?
A: NO. Because the guarantor benefits from the condonation of
the principal obligation.
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 EH 403 S.Y. 2016 2018 CREDIT PRE-FINALS
Q: 12
Feb. What if creditor tells guarantor that he condones his
obligation. Can creditor collect from the debtor?
A: Yes, Because only guaranty is extinguished. Not the Principal
Obligation.
F. MERGER OF PARTIES
Between creditor and debtor
Extinguishes accessory obligation of guaranty because the
principal obligation is extinguished.
Judge: He is now the creditor of his own obligation and he
cannot collect guaranty from the guarantor if he is the debtor.
He does not pay himself as a creditor.
Between creditor and guarantor
Does not extinguish principal obligation, but the guaranty
is extinguished.
Judge: The guarantor is now the creditor, the guaranty is
extinguished since if the debtor cannot pay, he cannot demand
payment from himself as guarantor.
Between debtor and guarantor
The guaranty is extinguished, because the debtor cannot be his
own guarantor.
Judge: But the sub-guarantor if any, is not released. Other
securities, pledges, mortgages are not affected.
G. COMPENSATION
Compensation takes place when two persons, in their
own right, are creditors and debtors of each other. Legal
compensation takes place by operation of law.
COMMENT:
Q: What about COMPENSATION? Does it extinguish guaranty?
Debtor owes creditor P100,000. Creditor owes likewise debtor
P70,000. Both debts consists in payment of sum of money and
liquidated. Debtor fails to pay the obligation. So Creditor
demand payment from the guarantor. How much may the
guarantor be compelled to pay? Can the guarantor be
compelled to pay P100,000?.
A:He cannot be compelled to pay the entire P100,000. Because,
compensation between the creditor and debtor benefits the
guarantor.
Q: Has the legal compensation taken place, without the
debtor and creditor agreeing over it?
A: Yes, we have learned in ObliCon again that Legal
Compensation takes place by operation of law. So if Legal
Compensation has taken place then the remaining obligation of
the debtor is only P30,000. So if the debtor fails to pay creditor
can only demand P30,000 from the guarantor. If the guarantor
invokes legal compensation.
Q: Debtor owes creditor P100,000 secured by guarantor.
Creditor owes guarantor P70,000. Both debts consist in
payment of sum of money, both are due and demandable and
both are liquidated. Creditor demands payment from debtor,
debtor fails to pay so creditor demands payment from the
guarantor. Guarantor pays P30,000. Creditor refuses to
accept. Can guarantor compel the creditor to accept only
P30,000 instead of P100,000?
A: Yes, guarantor can compel creditor to accept the P30,000
because guarantor can invoke legal compensation.
Q: How much can guarantor collect from the debtor?
A: P100,000
H. NOVATION
Two types of novation:
1. Extinguishes the principal obligation
2. Modifies the principal obligation
a) If less burdensome guaranty subsists
b) If more burdensome and guarantor did not consent-
guaranty extinguished
When the principal obligation is extinguished
The original obligation is extinguished, so the guaranty will be
also be extinguished.
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.
COMMENT:
Q: Does NOVATION extinguish guaranty?
A: If the principal obligation is extinguished and a new one is
entered into between the parties then ofcourse guaranty is
extinguished but if its only modificatory; if the new obligation
results in a less burdensome obligation on the part of the
debtor then the guaranty is NOT extinguished. But if the new
obligation results in a more burdensome obligation on the part
of the debtor then guaranty is extinguished.
I. DEATH
A. Death of the guarantor does not extinguish the guaranty
(See De Guzman v. Santos where the estate of the deceased
guarantor was made to pay the obligation)
B. Death of the debtor does not extinguish the guaranty
Stronghold Insurance v. Republic Asahi
Re: Death of debtor does not extinguish the suretyship
We will survive! <3
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.
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 22
 EH 403 S.Y. 2016 2018 CREDIT PRE-FINALS
absolute;
Feb. 12 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 v. Republic
A stipulation in the bond expressly states that "when the bond
expires on a certain date, it will be cancelled 10 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."
The 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
TITLE XVI - PLEDGE, MORTAGE
AND ANTICHRESIS
CHAPTER V. PROVISIONS
COMMON TO PLEDGE AND
MORTGAGE
A. They must be constituted to secure fulfillment of a
principal obligation
B. Constituted only by the absolute owner of the thing
pledged or mortgaged
C. That the persons constituting the pledge or mortgage have
the free disposal of their property, and in the absence
thereof, that they be
D. legally authorized for the purpose.
E. Thing pledged or mortgaged may be alienated at the
instance of the creditor
F. Pledge or mortgage are indivisible
G. A promise to constitute pledge or mortgage gives rise to
personal action only
COMMENT:
Both pledge and mortgage are real security
undertakings unlike guaranty and suretyship which are personal
security undertakings. In pledge, unlike in suretyship and
guaranty wherein a third person other than the debtor secures
the
or the third person.
A.) THEY MUST BE CONSTITUTED TO SECURE
FULFILLMENT OF A PRINCIPAL OBLIGATION
A. They may secure all kinds of obligations, pure or
conditional.
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.
Mojica v. CA
Re: Mortgage given to secure future advancements
Mortgages given to secure future advancements are valid and
legal contracts. The amounts named 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.
B.)CONSTITUTED ONLY BY THE ABSOLUTE
OWNER OF THE THING PLEDGED OR
MORTGAGED
A pledge or mortgage must be constituted by the absolute
owner of the thing pledged mortgaged because of the
possibility that it will be sold to satisfy payment of the principal
obligation. You cannot dispose of something you never own.
Vda de Bautista v. Marcos
Re: Mortgage constituted before issuance of patent to the
mortgagor
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.
Held: No. It is an essential requisite for the validity of a
mortgage that the mortgagor be the absolute owner of the
thing mortgaged. Thus, a mortgage executed before the
issuance of a patent to the mortgagor is void and ineffective,
since the land was still part of the public domain when the deed
of mortgage was constituted. The mortgagor was not yet the
owner of the land mortgaged and could not, for that reason,
encumber the same.
Judge: The mortgagor here was not the registered owner
because the property was mortgaged prior to the issuance of a
free patent in her name. Therefore, the court did not consider
her to be the absolute owner of the property at the time she
mortgaged the property. Even if she had it registered after, it
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will not validate a void contract.
PNB v. CA
Re: Mortgage by surviving spouse of conjugal property
The subject lots belonged to the conjugal partnership of the
spouses. When the husband died, his one-half share in said lot
was transmitted to his heirs and a co-ownership was
established between them. Hence, the wife, could not have
validly mortgage the whole lot to PNB.
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 EH 403 S.Y. 2016 2018 CREDIT PRE-FINALS
Under
Feb. 12 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 the wife had in her power to convey. The other half
being as it still is, the willful share of the plaintiffs inheritance
from their father.
Judge: Surviving spouse mortgage the entire property even if
the other heirs are still alive. Therefore, the mortgage is void to
the extent of the shares of the heirs.
Discussion: CA 141, if I constitute a mortgage over a property
within 5 years from the draft of the patent, the mortgage is
void because the grantee mortgaging a property which is still
considered public land
Conjugal property and husband died, but survived by a wife and
two children. The wife obtained a loan from the land bank, and
constituted a mortgage over the loan. Is the mortgage valid?
A: Only to the extent of the share of the wife of the estate.
Q: Is the wife the owner?
A: she is the owner of the property to the extent (1/2 share)
and the share as heir. To that extent, the mortgage is valid. But
to the extent to the share of the share of the two children, it is
void. The mortgage cannot totally be declared void, it is valid
only to the extent of the share of the wife.
Q: What is the effect if the wife mortgages the property? Can
the mortgage be foreclosed?
A: Yes, the mortgage can still be foreclosed, but only to the
extent of the property of the wife. If it includes the share of the
children, it is void as to the extent of the share of the children.
Whoever is the highest bidder in the foreclosure share would
not acquire it, the sale is valid only to the extent of the valid
mortgage. That is the effect of the nullity of a mortgage
because the mortgagor is not the absolute owner of the
property.
DBP v. CA
Re: Property not owned by mortgagor at the time of the
mortgage
Facts: Spouses obtained a loan from DBP, secured by several
real estate mortgage. At the time of the mortgage, the
properties were still the subject of a free patent application.
Held: The law 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.
C. FREE DISPOSAL OR LEGAL AUTHORITY OF
PERSON CONSTITUTING THE PLEDGE OR
MORTGAGE
A. If the property is encumbered there can be no free
disposal.
Thus, even if absolute owner, he cannot constitute a pledge or
mortgage over said property.
B. A third person can constitute a mortgage as long as he is
duly authorized by the absolute owner thereof.
Judge: If the mortgagor was legally authorized that the
properties that would be subjected to the mortgaged was listed
in the SPA and the property mortgaged was not among those in
the list, that person is not legally authorized in that particular
property. The mortgage is void. If there is a foreclosure, the
same is void. If the property was already awarded to the
highest bidder, he cannot acquire title over the property.
D.)_ THINGS PLEDGED OR MORTGAGED MAY
BE ALIENATED AT THE INSTANCE OF THE
CREDITOR
In cases of obligations secured by a mortgage or pledge, the
non- payment of the debtor authorizes the creditor to alienate
the thing mortgaged or pledged to satisfy the principal
obligation. Ownership is transferred to the highest bidder, and
the proceeds of the sale will be used to satisfy the payment of
the obligation.
Q. If the property pledged or mortgaged may be alienated if the
principal debtor defaults, can a third party pledger/mortgagor
invoke benefit of exhaustion?
No, the benefit of exhaustion only pertains to guarantors.
Judge:
Must the mortgagor of pledgor or the mortgagor be the
principal debtor?
No, 3rd party can be a pledgor or mortgagor to secure the
fulfillment of the principal obligation
rd
If the 3 person subjects his own property, the creditor cannot
go after the pledgor or mortgagor in his personal capacity.
Meaning in case of the default, only the property shall be
alienated to satisfy the principal obligation. The creditor cannot
go after the mortgagor or pledgor to satisfy the obligation, but
the pledgor or mortgagor may pay obligation to creditor to pay
the obligation because he has the interest to the obligation, We will survive! <3
because of the risk of property may be sold in the foreclosure
of sale,
TN: the creditor cannot hold the mortgagor or plegor (3rd party)
personally liable to the principal obligation, only the property
shall be alienated order to satisfy the principal.
Situation: I borrowed money from BPI bank and their
requirement for application loan is to have security. So I
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 EH 403 S.Y. 2016 2018 CREDIT PRE-FINALS
constituted
Feb. 12 a property which is owned by my sister, which the
bank accepted. And the mortgage was duly registered.
Can the Register of Deeds refuse to register the mortgage?
No.It is the ministerial duty of the ROD to register, they cannot
refuse.
Q:Is the mortgage valid because it is already registered?
A: Registration does not validate the mortgage. Remember the
mortgage is constituted by one who is not the absolute owner
of the property or one authorized by the owner the constitute
the mortgage.
Southern motors v. Barbosa
Re: Exhaustion applies only to personal guaranty
The right of guarantors, under Article 2058 of the Civil Code 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.
Pactum commissorium
Automatic appropriation of the property secured to the
creditor without foreclosure during default of the debtor.
Judge: A stipulation that in case of default, the property
immediately becomes property of the creditor. This is
prohibited for being against public policy. Take note however,
that only said provision is void. It does not invalidate the entire
pledge or mortgage contract.
Francisco Dev t Corp v. CA
Facts: Francisco Realty granted a loan of 7.5 million to
respondent spouses, in consideration of which the latter
executed a promissory note, a deed of mortgage and 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.
Held: 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 commissorium.
They embody the two elements of pactum commissorium.
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.
Instances of pactum commissorium
1. A provision that states in case the mortgagor fails
to redeem the mortgage, the principal obligation
secured shall be considered payment of the land.
2. A stipulation in the promissory note which
provides that upon failure of the makers of the note
to pay interest, ownership of the property will be
automatically transferred to the creditor and the
deed of sale in its favor will be registered.
3. Stipulation in a memorandum of agreement with
dacion en pago that failure of the debtor to pay the
debt will give the creditor the right to enforce the
dacion en pago transferring to him ownership of the
property.
Judge: How to determine if pactum commissorium? If there is
no other act to be performed by the pledger/mortgagor and
the creditor to transfer the property to the creditor.
Not pactum commissorium
1. If in the stipulation, the mortgagor still has to transfer
ownership.
2. A stipulation that the creditor still has to buy the
subject property mortgaged. That is not automatic
appropriation.
3. A stipulation where failure entitles the lender to the
sale of the house, not to make effect the deed of sale that
they signed. There is still a subsequent act to be
performed on the part of the mortgagor.
4. A promise to assign. Still has to assign the property
mortgaged.
TN: In all these cases, there is still some other act to be
performed by the pledger/mortgagor and the creditor. Thus,
not considered automatic appropriation.
PACTUM COMMISORIUM:
Q: What is the test whether one is a pactum commissorium?
What is automatic appropriation?
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A: When there is no other act to be performed by the
mortgagor or pledgor in order to transfer ownership to the
creditor/mortgagee/pledgee.
Determine to the tenor of their agreement whether there is an
act that is still to be performed by the mortgagor to determine
whether that particular stipulation is a pactum commisorium.
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Feb. SITUATION:
12
Stipulation that: if the
mortgagor defaults, the
property should be considered
as payment of the loan
In case of default the deed of
sale that is executed by the
mortgagor will be registered in
favor of the mortgagee.
TN: Remember that ownership
is not transferred by mere
registration of the property.
I owe you one million but we
have a contract which
stipulates on the
Memorandum of Agreement
that in case of default, the
creditor will enforce the dation
en pago. Which was executed
simultaneous to the execution
of the promissory note
I borrowed 1M from you and I
secured a mortgage and one of
the stipulation is if I fail to pay,
I will transfer and convey
ownership to you the property
subject of the mortgage.
I borrowed 1M from you and I
secured a mortgage and one of
the stipulation is if I fail to pay,
you are authorized to purchase
the property
I borrowed 1M from you and I
secured a mortgage and one of
the stipulation is if I fail to pay,
you are entitled to the sale of
the house of land subject of
the mortgage
I borrowed 1M from you and I
secured a mortgage and one of
the stipulation is if I fail to pay,
I promise to assign to you the
properties subject of the
mortgage
E. PLEDGE OR MORTGAGE ARE INDIVISIBLE
The pledge and mortgage are indivisible even if the
principal debt is divided.
EH 403 S.Y. 2016 2018 CREDIT PRE-FINALS
PACTUM COMMISORIUM
OR NOT?
YES. Pactum
Commissorium, no act to
be performed by the
mortgagor.
YES. Simultaneous to the
signing to the institution of
the promissory, mortgagor
signs the deed of sale. No
other act to be performed
by the mortgagor in order
to effect the transfer of
ownership in favor of the
mortgagee.
YES. No other act to be
performed by the
mortgagor.
No. Because the mortgagor
has to convey and transfer
ownership. There is still an
act to be performed by the
mortgagor.
No. You may even opt not
to purchase. So there is still
an act to be performed to
convey or transfer the
property.
NO.
No. Because there is still an
act to assign.
Relevant provision
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.
Q. A P5M loan was secured by a mortgage over four parcels of
land. P3M was paid. The value of each parcel of land is about
1m. Can the debtor who is also the mortgagor demand that
the mortgage be partially released as regards the 2 parcels of
land because the remaining parcels are enough to satisfy for
the balance of the obligation?
No, because that mortgage, although covering several parcels
of land, was delivered indivisible. It cannot be released for as
long as the entire obligation is not paid.
Q. If the debtor dies, survived by heirs, so heir 1 pays a share
in a debt to the creditor, can he ask the creditor for release on
the part of the mortgage in so far as the share of the party is
concerned?
No, because of the indivisibility of the mortgage.
Q. Creditor dies and is survived by heirs 1, 2 and 3 and heir 1
receives his share in the credit because he was paid partial
payment from the debtor. Can the debtor compel for the
partial release of the mortgage?
No. The entire mortgage subsists for as long as the entire
obligation is not paid.
Dayrit v. CA
Re: Rule where debt is divisible or debtors are not solidarily liable
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 to
secure the entire loan of
150,000 that the respondent extended to the defendants.
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
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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.
Yu v. PCI Bank
Re: Separate foreclosure of mortgaged properties
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 EH 403 S.Y. 2016 2018 CREDIT PRE-FINALS
Issue:
Feb. 12 Whether or not a real estate mortgage over several
properties located in different locality can be separately
foreclosed in different places.
Held: 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.
Besides, 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.
The rule on indivisibility of a real estate mortgage is provided
for in Article 2089 of the Civil Code, which provides that 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.
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.
Effect of partial payment
GR: Partial payment does not entitle the debtor to partial
discharge. XPN: When the pledge or mortgage covers
several things, each guaranteeing only a determinate portion
of the credit.
When indivisibility of mortgage does not apply
Indivisibility of the mortgage does not apply if properties are
specifically assigned to a certain portion of the obligation. Like
this particular parcel
of land secures 100k, another land secures 100k.
F. PROMISE TO CONSTITUTE PLEDGE OR
MORTGAGE GIVES RISE TO PERSONAL ACTION
ONLY
Personal action only
Is a promise to constitute a pledge or mortgage valid?
Yes, but the same gives rise to a personal action only. In other
words, there is no right to foreclose, but only the right to
compel the constitution of the pledge or mortgage.
Example: Debtor promised to deliver a thing to the creditor in
pledge to secure payment of his 20k debt, but has not delivered
the thing promised. Debtor failed to pay upon maturity. Can the
creditor sell the thing?
No. Creditor cannot sell the thing in a public sale as a pledge
because pledge is a real contract. The delivery of the thing
perfects the contract of pledge. Here, there was no contract of
pledge. In which case, the only action available to the creditor
is a personal action to compel the constitution of the pledge.
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 EH 403 S.Y. 2016 2018 CREDIT PRE-FINALS

Feb. 12
Review Questions
These are questions from the Seatworks of Judge A.

January 5, 2017
1. What are the two kinds of security contracts? Briefly describe each.
2. How does ordinary guaranty differ from suretyship?
3. In Pacific Banking Corp. v. IAC, why did the Court rule that Roberto Reala, Jr.s liability under the Guarantors Undertaking is that of a
surety and not that of a guarantor?
4. How does a solidary guarantor differ from a solidary debtor?
5. In Severino v. Severino, what was the principal obligation secured by Guillermo Echaus?
6. What are the qualifications of a guarantor who is proposed by the debtor?
7. Why is a guarantor the insurer of the insolvency of the debtor, while a surety is the insurer od the debt?
8. In Municipality of Gasan v. Marasigan, why did the Court rule that Angel Sevilla and Gonzalo Luna were not liable as sureties?
9. What is the benefit of exhaustion?
10. What is the benefit of division?

January 30, 2017

1. What are the common requisites of pledge and mortgage?
2. In Flancia v. CA, why can property subject to a Contract to Sell still be pledged by the seller?
3. In Vda. De Bautista v. Marcos, why cant Brigida Marcos mortgage the land prior to issuance of a Free Patent?
4. What is pactum commisorium?
5. Why are pledge and mortgage indivisible?

REMINDER:
EXAM: FEB 12, 2017
9:00 AM
Good luck and God bless!

Prepared by 403 Credit Team with TLC

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