San Beda Reviewer

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

CHAIRPERSON: Romuald Padilla ASST.CHAIRPERSON: Vida Bocar, Joyce Vidad EDP: Alnaiza Hassiman, Dorothy Gayon
 SUBJECT HEADS: Christopher Rey Marasigan (Persons and Family Relations), Alejandro Casabar(Property), Ma. Rhodora
Ferrer(Wills and Succession), Ian Dominic Pua(Obligations and Contracts), Sha Elijah Dumama(Sales and Lease), John Stephen
Quiambao(PAT), Christopher Cabigao(Credit Transactions), Ligaya Alipao(Torts and Damages), Anthony Purganan(LTD),
Ma. Ricasion Tugadi (Conflicts of Law)
shall pay the same amount of the 1. PURPOSE: Bailee in commodatum

same kind and quality. acquires the temporary use of the
thing but not its fruits (unless
Commodatum Mutuum stipulated as an incidental part of the
Key: COPS-LOTR contract).(Art 1935)
1. Object  Use must be temporary,
Non-consumable Consumable otherwise the contract may be a
2. Cause deposit.
Gratuitous May or may not be
gratuitous 2. CAUSE: Essentially gratuitous; it
3. Purpose ceases to be a commodatum if any
Use or temporary Consumption compensation is to be paid by the
possession borrower who acquires the use, in
4. Subject Matter such case there arises a lease
Real or personal Only personal contract.
property property
 Similar to a donation in that it
5. Ownership of the thing
confers a benefit to the
Retained by the Passes to the debtor
bailor
recipient. The presumption is
6. Thing to be returned that the bailor has loaned the
Exact thing loaned Equal amount of the thing for having no need therefor.
same kind and
quality
7. Who bears risk of loss 3. SUBJECT MATTER: Generally non-
Bailor Debtor consumable whether real or personal
8. When to return but if the consumable goods are not
In case of urgent Only after the for consumption as when they are
need, even before expiration of the merely for exhibition, consumable
the expiration of the term goods may be the subject of the
term commodatum. (Art 1936)
4. Bailor need not be the owner of the

Loan Credit thing owned (Art. 1938) since by the
Delivery by one party Ability of a person to loan, ownership does not pass to the
and the receipt of borrow money or borrower.
other party of a given things by virtue of the
 A mere lessee or usufructuary
sum of money or trust or confidence
other consumable reposed by the lender may lend but the borrower or
thing upon an that he will pay what bailee himself may not lend nor
agreement, express he promised. lease the thing loaned to him to a
or implied, to repay third person (Art 1932[2])
the same.
5. Purely Personal (Art 1939):
 Death of either party terminates
Loan Credit the contract unless by
1. Interest taken at Interest is taken in stipulation, the commodatum is
the expiration of the advance transmitted to the heirs of either
credit or both parties.
2. Always on a double Always on a single  Bailee can neither lend nor lease
name paper (two name paper (i.e.
the object of the contract to a
signatures appear promissory note with
with both parties held no indorse-ment
third person.
liable for payment) other than the
maker)
COMMODATUM (Articles 1935 – 1952) NOTE:Use of the thing loaned

 Nature: may extend to members of the
bailee’s household except:
a. contrary stipulation;
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b. nature of the thing until he is reimbursed for the

forbids such use damages suffered by him.
 He cannot lawfully sell the
Obligations of the Bailee: (Arts 1941 – thing to satisfy such damages
1945) without court’s approval.
1. To pay for the ordinary expenses for  In case there are two or more
the use and preservation of the thing bailees, their obligation shall
loaned. (Art 1941) be solidary.
2. To be liable for the loss of the thing
even if it should be through a Obligations of the bailor (Art 1946 – Art
fortuitous event in the following 1952):
cases: (KLAS D) 1. To respect the duration of the loan
a. when he keeps it longer than the GENERAL RULE: Allow the bailee
period stipulated, or after the the use of the thing loaned for the
accomplishment of its use duration of the period stipulated or
b. when he lends or leases it to third until the accomplishment of the
persons who are not members of purpose for which the commodatum
his household was instituted.
c. when the thing loaned has been EXCEPTIONS:
delivered with appraisal of its a. In case of urgent need in
value which case bailee may demand its
d. when, being able to save either of return or temporary use;
the thing borrowed or his own b. The bailor may demand
things, he chose to save the immediate return of the thing if
latter; or the bailee commits any act of
e. when the bailee devoted the ingratitude specified in Art. 765.
thing for any purpose different
from that for which it has been 2. To refund to the bailee extraordinary
loaned (Art 1942) expenses for the preservation of the
3. To be liable for the deterioration of thing loaned, provided the bailee
thing loaned (a) if expressly brings the same to the knowledge of
stipulated; (b) if guilty of fault or the bailor before incurring them,
negligence; or (c) if he devotes the except when they are so urgent that
thing to any purpose different from the reply to the notification cannot
that for which it has been loaned be awaited without danger.
4. To pay for extraordinary expenses
arising from the actual use of the 3. To be liable to the bailee for damages
thing by the bailee, which shall be for known hidden flaws.
borne equally by both the bailor and  Requisites:
the bailee, even though the bailee a. There is flaw or defect in the
acted without fault, unless there is a thing loaned;
stipulation to the contrary (Art 1949 b. The flaw or defect is hidden;
par 2) c. The bailor is aware thereof;
5. To return the thing loaned d. He does not advise the bailee of
 The bailee has no right to retain the same; and
the thing loaned as security for e. The bailee suffers damages by
claims he has against the bailor reason of said flaw or defect
even for extraordinary expenses
except for a claim for damages
suffered because of the flaws of
the thing loaned.
NOTES:
NOTES:  If the above requisites concur,
 However, the bailee’s right the bailee has the right of
extends no further than
retention of the thing loaned
CIVIL LAW COMMITTEE

retention for damages.

 The bailor cannot exempt himself 4. Creditor receives Owner of the
from the payment of expenses or payment for his loan property rented
receives
damages by abandoning the thing
compensation or
to the bailee. price either in
money, provisions,
SIMPLE LOAN OR MUTUUM (Art 1953 – chattels, or labor
1961)
 A contract whereby one party from the occupant
delivers to another, money or other thereof in return for
consumable thing with the its use (Tolentino vs
understanding that the same amount Gonzales, 50 Phil 558
1927)
of the same kind and quality shall be
paid. (Art. 1953)
Loan Sale
NOTES:
1. Real contract Consensual contract
 The mere issuance of the checks does
not result in the perfection of the 2. Generally Bilateral and
contract of loan. The Civil Code unilateral because reciprocal
provides that the delivery of bills of only borrower has
exchange and mercantile documents, obligations
such as checks, shall produce the
effect of payment only when they NOTE: If the property is “sold”, but the
have been encashed (Gerales vs. CA real intent is only to give the object as
218 SCRA 638). It is only after the security for a debt – as when the “price”
checks have produced the effect of is comparatively small – there really is a
payment that the contract of loan contract of loan with an “equitable
may be deemed perfected. mortgage.”
 The obligation is “to pay” and not to
return because the consumption of Commodatum/
Barter
the thing loaned is the distinguishing Mutuum
character of the contract of mutuum
from that of commodatum. 1. Subject matter is Subject matter is
money or fungible non-fungible, (non
 No estafa is committed by a person things consumable) things
who refuses to pay his debt or denies
its existence. 2. In commodatum, The thing with
the bailee is bound equivalent value is
Simple Loan/Mutuum Rent to return the given in return for
identical thing what has been
1. Delivery of money Delivery of some borrowed when the received
or some consumable non-consumable time has expired or
thing with a promise thing in order that purpose served
to pay an equivalent the other may use it
of the same kind and during a certain 3. Mutuum may be Onerous, actually a
quality period and return it gratuitous and mutual sale
to the former. commodatum is
always gratuitous
2. There is a transfer There is no transfer
of ownership of the of ownership of the
thing delivered thing delivered
3. Relationship Relationship is that

between the parties of a landlord and
 Form of Payment (Art 1955):
is that of obligor- tenant 1. If the thing loaned is money -
obligee payment must be made in the
currency stipulated, if it is possible;
CIVIL LAW COMMITTEE

otherwise it is payable in the well as the accrual thereof, is

currency which is legal tender in the imposed, as follows:
Philippines and in case of i. When the obligation
extraordinary inflation or deflation, breached consists of payment
the basisi of payment shall be the of a sum of money (loan or
value of the currency at the time of forbearance of money), the
the creation of the obligation interest shall be that which is
2. If what was loaned is a fungible thing stipulated or agreed upon by
other than money - the borrower is the parties. In absence of an
under obligation to pay the lender agreement, the rate shall be
another thing of the same kind, the legal rate (i.e. 12% per
quality and quantity. In case it is annum) computed from
impossible to do so, the borrower default.
shall pay its value at the time of the NOTE: The interest due shall
perfection of the loan. itself earn legal interest from
the time it is judicially
Interest demanded
 The compensation allowed by law or ii. In other cases, the rate of
fixed by the parties for the loan or interest shall be six percent
forbearance of money, goods or (6%) per annum.
credits NOTE: No interest, however,
 Requisites for Demandability: (ELI) shall be adjudged on
1. must be expressly stipulated unliquidated claims or
Exceptions: damages except when or
a. indemnity for damages until the demand can be
b. interest accruing from unpaid established with reasonable
interest certainty. When the demand
2. must be lawful cannot be established, the
3. must be in writing interest shall begin to run
only from the date of the
Compound Interest judgment of the court is
GENERAL RULE: Unpaid interest shall made.
not earn interest. iii. When the judgment of the
EXCEPTIONS: court awarding a sum of
1. when judicially demanded money becomes final and
2. when there is an express executory, the rate of legal
stipulation (must be in writing in interest, whether the case
view of Art. 1956) falls under paragraph i or ii
above, shall be 12% per
Guidelines for the application of proper annum from such finality
interest rates until its satisfaction, this
1. If there is stipulation: that rate shall interim period being deemed
be applied to be by then an equivalent
2. The following are the rules of thumb to a forbearance of credit.
for the application/imposition of (Eastern Shipping Lines vs.
interest rates: CA, July 12, 1994)
a) When an obligation, regardless of
its source, i.e., law, contracts, NOTES:
quasi-contracts, delicts or quasi-  Central Bank Circular No. 416 fixing
delicts is breached, the the rate of interest at 12% per annum
contravenor can be held liable for deals with loans, forbearance of any
damages. money, goods or credits and
b) With regard particularly to an judgments involving such loans, or
award of interest in the concept forbearance in the absence of express
of actual and compensatory agreement to such rate
damages, the rate of interest, as
CIVIL LAW COMMITTEE

 Interest as indemnity for damages is 3. Bilateral (onerous deposit) -

payable only in case of default or gives rise to obligations on the
non-performance of the contract. As part of both the depositary and
they are distinct claims, they may be depositor.
demanded separately. (Sentinel
Insurance Co., Inc. vs CA, 182 SCRA Deposit Mutuum
517) 1. Purpose
 Central Bank Circular No. 905 (Dec. Principal purpose is Principal purpose is
10, 1982) removed the Usury Law safekeeping or consumption
custody
ceiling on interest rates for secured
2. When to Return
and unsecured loans, regardless of Depositor can The lender must wait
maturity. demand the return of until the expiration
the subject matter at of the period granted
Validity of unconscionable interest rate will to the debtor
in a loan 3. Subject Matter
Supreme Court in Sps. Solangon Subject matter may Subject matter is
vs. Jose Salazar, G.R. No. 125944, June be movable or only money or other
29, 2001, said that since the usury law immovable property fungible thing
had been repealed by CB Cir. No. 905 4. Relationship
there is no more maximum rate of Relationship is that Relationship is that
of lender (creditor) of depositor and
interest and the rate will just depend on
and borrower depositary.
the mutual agreement of the parties (debtor).
(citing Lim Law vs. Olympic Sawmill Co.,
129 SCRA 439). But the Supreme Court 5. Compensation
said that nothing in said circular grants There can be NO compensation of
lenders carta blanche authority to raise compensation of things deposited with
interest rates to level which will either credits. each other (except
enslave their borrowers or lead to a by mutual
hemorrhaging of their assets (citing agreement).
Almeda vs. CA, 256 SCRS 292). In Medel
vs. CA, 299 SCRA 481, it was ruled that Deposit Commodatum
while stipulated interest of 5.5% per
month on a loan is usurious pursuant to CB 1. Purpose is 1. Purpose is the
Safekeeping transfer of the use
Circular No. 905, the same must be
equitably reduced for being iniquitous,
2. May be gratuitous 2. Essentially and
unconscionable and exorbitant. It is always gratuitous
contrary to morals, (contra bonos mores).
It was reduced to 12% per annum in 3. Movable/corporeal 3. Both movable and
consonant with justice and fair play. things only in case of immovable may be
extrajudicial deposit the object
DEPOSIT (Articles 1962 – 2009)
 Kinds of Deposit:
 A contract constituted from the 1. Judicial (Sequestration) –takes place
moment a person receives a thing when an attachment or seizure of
belonging to another, with the property in litigation is ordered.
obligation of safely keeping it and of
returning the same. 2. Extra-judicial
a. Voluntary – one wherein the
Characteristics: delivery is made by the will of the
1. Real Contract - contract is depositor or by two or more
perfected by the delivery of the persons each of whom believes
subject matter. himself entitled to the thing
2. Unilateral (gratutitous deposit) - deposited. (Arts 1968 – 1995)
only the depositary has an b. Necessary – one made in
obligation. compliance with a legal
obligation, or on the occasion of
CIVIL LAW COMMITTEE

any calamity, or by travellers in  A contract for the rent of safety

hotels and inns (Arts 1996 - 2004), deposit boxes is not an ordinary
or by travellers with common contract of lease of things but a
carriers (Art 1734 – 1735). special kind of deposit; hence, it is
NOTE: The chief difference between not to be strictly governed by the
a voluntary deposit and a necessary provisions on deposit. The relation
deposit is that in the former, the between a bank and its customer is
depositor has a complete freedom in that of a bailor and bailee. (CA Agro
choosing the depositary, whereas in vs CA, 219 SCRA 426)
the latter, there is lack of free
choice in the depositor. Obligations of the Depositary (Art 1972
–1991):
Judicial Extra-judicial 1. To keep the thing safely (Art 1972)
1. Creation  Exercise over the thing deposited
Will of the court Will of the parties the same diligence as he would
or contract exercise over his property
2. Purpose 2. To return the thing (Art 1972)
Security or to insure Custody and  Person to whom the thing must
the right of a party safekeeping be returned:
to property or to a. Depositor, to his heirs and
recover in case of successors, or the person who
favorable judgment may have been designated in the
3. Subject Matter contract
Movables or Movables only b. If the depositary is capacitated -
immovables, he is subject to all the obligations
but generally of a depositary whether or not
immovables the depositor is capacitated. If
4. Cause the depositor is incapacitated,
Always onerous May be compen- the depositary must return the
sated or not, but property to the legal
generally gratuitous representative of the
incapacitated or to the depositor
himself if he should acquire
5. When must the thing be returned
capacity (Art 1970).
Upon order of the Upon demand of
court or when depositor c. If the depositor is capacitated
litigation is ended and the depositary is
incapacitated - the latter does
6. In whose behalf it is held
not incur the obligation of a
Person who has a Depositor or third
depositary but he is liable:
right person designated
i..to return the thing deposited
while still in his possession;
GENERAL RULE: Contract of deposit is ii.to pay the depositor the
gratuitous (Art 1965) amount which he may have
EXCEPTIONS: benefited himself with the
1. when there is contrary stipulation thing or its price subject to
2. depositary is engaged in business the right of any third person
of storing goods who acquired the thing in
3. property saved from destruction good faith (Art 1971)
without knowledge of the owner
 Time of return:
NOTES: a. Upon demand even though a
 Article 1966 does not embrace specified period or time for such
incorporeal property, such as rights return may have been fixed
and actions, for it follows the person except when the thing is
of the owner, wherever he goes. judicially attached while in the
depositary’s possession or should
CIVIL LAW COMMITTEE

he have been notified of the by the depositary would make him

opposition of a third person to the liable for damages.
return or the removal of the thing EXCEPTIONS:
deposited. (Art 1998) 1. When the preservation of the
b. If deposit gratuitous, the thing deposited requires its use
depositary may return the thing 2. When authorized by the depositor
deposited notwithstanding that a
period has been fixed for the NOTE: The permission to use is NOT
deposit if justifiable reasons presumed except when such use is
exists for its return. necessary for the preservation of the
c. If the deposit is for a thing deposited.
valuable consideration, the
depositary has no right to return Effect if permission to use is given
the thing deposited before the (Art 1978):
expiration of the time designated 1. If thing deposited is non-
even if he should suffer consumable, the contract loses
inconvenience as a the character of a deposit and
consequence.(Art 1989) acquires that of a commodatum
despite the fact that the parties
 What to return: product, may have denominated it as a
accessories, and accessions of the deposit, unless safekeeping is still
thing deposited (Art 1983) the principal purpose.
3. Not to deposit the thing with a third 2. If thing deposited consists of
person unless authorized by express money/consumable things, the
stipulation (Art 1973) contract is converted into a
 The depositor is liable for the loss simple loan or mutuum unless
of the thing deposited under safekeeping is still the principal
Article 1973 if: purpose in which case it is called
a. he transfers the deposit an irregular deposit. Example:
with a third person without bank deposits are irregular
authority although there is no deposits in nature but governed
negligence on his part and the by law on loans.
third person; 7. When the thing deposited is delivered
b. he deposits the thing sealed and closed :
with a third person who is a. to return the thing deposited in
manifestly careless or unfit the same condition
although authorized even in the b. to pay for damages should the
absence of negligence; or seal or lock be broken through his
c. the thing is lost through fault, which is presumed unless
the negligence of his employees proved otherwise
whether the latter are manifestly c. to keep the secret of the deposit
careless or not. when the seal or lock is broken
4. If the thing deposited should earn with or without his fault (Art
interest (Art 1975): 1981)
a. to collect interest and the capital NOTE: The depositary is
itself as it fall due authorized to open the thing
b. to take steps to preserve its value deposited which is closed and
and rights corresponding to it sealed when (Art 1982):
5. Not to commingle things deposited if i. there is presumed authority
so stipulated (Art 1976) (i.e. when the key has been
6. Not to make use of the thing delivered to him or the
deposited unless authorized (Art instructions of the depositor
1977) cannot be done without
GENERAL RULE: Deposit is for opening it)
safekeeping of the subject matter ii. necessity
and not for use. The unauthorized use
CIVIL LAW COMMITTEE

8. To change the way of the deposit if

under the circumstances, the Rule when there are two or more
depositary may reasonably presume depositors (Art 1985):
that the depositor would consent to 1. If thing deposited is divisible and
the change if he knew of the facts of depositors are not solidary: Each
the situation, provided, that the depositor can demand only his
former notifies the depositor thereof proportionate share thereto.
and wait for his decision, unless delay 2. If obligation is solidary or if thing is
would cause danger not divisible: Rules on active
9. To pay interest on sums converted to solidarity shall apply, i.e. each one of
personal use if the deposit consists of the solidary depositors may do
money (Art 1983) whatever may be useful to the others
10. To be liable for loss through fortuitous but not anything which may be
event (SUDA): (Art 1979): prejudicial to the latter, (Art. 1212)
a. if stipulated and the depositary may return the
b. if he uses the thing without the thing to anyone of the solidary
depositor's permission depositors unless a demand, judicial
c. if he delays its return or extrajudicial, for its return has
d. if he allows others to use it, even been made by one of them in which
though he himself may have been case, delivery should be made to him
authorized to use the same (Art. 1214).
3. Return to one of depositors
NOTES: stipulated. The depositary is bound
 Fixed, savings, and current deposits to return it only to the person
of money in banks and similar designated although he has not made
institutions shall be governed by the any demand for its return.
provisions concerning simple loan.
(Art 1980) NOTES:
 The general rule is that a bank can  The depositary may retain the thing
compensate or set off the deposit in in pledge until full payment of what
its hands for the payment of any may be due him by reason of the
indebtedness to it on the part of the deposit (Art 1994).
depositor. In true deposit,  The depositor’s heir who in good faith
compensation is not allowed. may have sold the thing which he did
not know was deposited, shall only be
Irregular deposit Mutuum bound to return the price he may
have received or to assign his right of
1. The consumable 1. Lender is bound action against the buyer in case the
thing deposited may by the provisions of price has not been paid him (Art
be demanded at will the contract and 1991).
by the depositor cannot demand
restitution until the
time for payment, as
Obligations of the Depositor (Art 1992 –
provided in the 1995):
contract, has arisen 1. To pay expenses for preservation
a. If the deposit is gratuitous, the
2. The only benefit is 2. Essential cause for depositor is obliged to reimburse
that which accrues the transaction is the depositary for expenses
to the depositor the necessity of the incurred for the preservation of
borrower the thing deposited (Art 1992)
b. If the deposit is for valuable
3. The irregular 3. Common creditors
consideration, expenses for
depositor has a enjoy no preference
preference over in the distribution of
preservation are borne by the
other creditors with the debtor’s depositary unless there is a
respect to the thing property contrary stipulation
deposited
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2. To pay loses incurred by the the care and vigilance of their

depositary due to the character of effects.
the thing deposited NOTES:
 Liability extends to vehicles, animals
GENERAL RULE: The depositor shall and articles which have been
reimburse the depositary for any loss introduced or placed in the annexes
arising from the character of the thing of the hotel.
deposited.  Liability shall EXCLUDE losses which
EXCEPTIONS: proceed from force majeure. The act
1. at the time of the deposit, the of a thief or robber is not deemed
depositor was not aware of the force majeure unless done with the
dangerous character of the thing use of arms or irresistible force.
2. when depositor was not expected  The hotel-keeper cannot free himself
to know the dangerous character of from the responsibility by posting
the thing notices to the effect that he is not
3. when the depositor notified the liable for the articles brought by the
depository of the same guest. Any stipulation to such effect
4. the depositary was aware of it shall be void.
without advice from the depositor
 Notice is necessary only for suing civil
liability but not in criminal liability.
Extinguishment of Voluntary Deposit
(Art 1995)
GUARANTY (Articles 2047 – 2084)
1. Loss or destruction of the thing
deposited
 A contract whereby a person
2. In case of gratuitous deposit, upon
(guarantor) binds himself to the
the death of either the depositor or
creditor to fulfil the obligation of the
the depositary
principal debtor in case the latter fail
3. Other causes, such as return of the
to do so.
thing, novation, merger, expiration
of the term fulfilment of the
 Classification of Guaranty:
resolutory condition, etc (Art 1231)
1. In the Broad sense:
a. Personal - the guaranty is the
Necessary Deposits
credit given by the person who
1. Made in compliance with a legal
guarantees the fulfilment of the
obligation
principal obligation.
2. Made on the occasion of any calamity
b. Real - the guaranty is the
such as fire, storm, flood, pillage,
property, movable or
shipwreck or other similar events
immovable.
(deposito miserable)
3. Made by travellers in hotels and inns
or by travellers with common carrier
2. As to its Origin
a. Conventional - agreed upon by
the parties.
Deposit by Travellers in hotels and inns:
b. Legal - one imposed by virtue of
 The keepers of hotels or inns shall be
a provision of a law.
responsible as depositaries for the
c. Judicial - one which is required
deposit of effects made by travellers
by a court to guarantee the
provided:
eventual right of one of the
a. Notice was given to them or to
parties in a case.
their employees of the effects
3. As to Consideration
brought by the guest; and
a. Gratuitous - the guarantor does
b. The guests take the precautions
not receive any price or
which said hotel-keepers or their
remuneration for acting as such.
substitutes advised relative to
CIVIL LAW COMMITTEE

b. Onerous - the guarantor receives debt or fulfill the contract, but for
valuable consideration. the surety to see to it that the
4. As to the Person guaranteed principal debtor pays or performs
a. Single - one constituted solely to (Paramount Insurance Corp vs CA,
guarantee or secure performance 310 SCRA 377)
by the debtor of the principal
obligation. Nature of Surety’s undertaking:
b. Double or sub-guaranty - one 1. Liability is contractual and accessory
constituted to secure the but direct
fulfilment by the guarantor of a NOTE: He directly, primarily and
prior guaranty. equally binds himself with the
5. As to Scope and Extent principal as original promisor,
a. Definite - the guaranty is limited although he possesses no direct or
to the principal obligation only, personal interest over the latter’s
or to a specific portion thereof. obligation, nor does he receive any
b. Indefinite or simple - one which benefits therefrom. (PNB vs CA, 198
not only includes the principal SCRA 767)
obligation but also all its 2. Liability limited by the terms of the
accessories including judicial contract.
costs NOTE: It cannot be extended by
implication beyond the terms of the
SURETYSHIP contract (PNB vs CA, 198 SCRA 767)
3. Liability arises only if principal
 A contract whereby a person (surety) debtor is held liable.
binds himself solidarily with the NOTES:
principal debtor  The creditor may sue separately
 A relation which exists where one or together the principal debtor
person (principal) has undertaken an and the surety. Where there are
obligation and another person several sureties, the obligee may
(surety) is also under a direct and proceed against any one of them.
primary obligation or other duty to  In the absence of collusion, the
the obligee, who is entitled to but surety is bound by a judgment
one performance, and as between the against the principal even though
two who are bound, the second rather he was not a party to the
than the first should perform (Agro proceedings. The nature of its
Conglomerates, Inc. vs. CA, 348 SCRA undertaking makes it privy to all
450) proceedings against its principal
NOTES: (Finman General Assurance Corp.
 The reference in Article 2047 to vs. Salik, 188 SCRA 740)
solidary obligations does not mean
that suretyship is withdrawn from the 4. Surety is not entitled to the benefit
applicable provisions governing of exhaustion
guaranty. A surety is almost the same NOTE: He assumes a solidary liability
as a solidary debtor, except that he for the fulfilment of the principal
himself is a principal debtor. obligation (Towers Assurance Corp vs.
 In suretyship, there is but one Ororama Supermart, 80 SCRA 262) as
contract, and the surety is bound by an original promissory and debtor
the same agreement which binds the from the beginning.
principal. A surety is usually bound 5. Undertaking is to creditor and not to
with the principal by the same debtor.
instrument, executed at the same NOTE: The surety makes no covenant
time and upon the same or agreement with the principal that
consideration (Palmares vs CA, 288 it will fulfil the obligation guaranteed
SCRA 422) for the benefit of the principal. Such
 It is not for the obligee to see to it a promise is not implied by law
that the principal debtor pays the either; and this is true even where
CIVIL LAW COMMITTEE

under the contract the creditor is  A guaranty may be given as

given the right to sue the principal, or security for future debts, the
the latter and the surety at the same amount of which is not yet
time. (Arranz vs. Manila Fidelity & known; there can be no claim
Surety Co., Inc., 101 Phil. 272) against the guarantor until the
6. Surety is not entitled to notice of debt is liquidated. A conditional
principal’s default obligation may also be secured.
NOTE: The creditor owes no duty of (Art 2053)
active diligence to take care of the 3. Unilateral - may be entered even w/o
interest of the surety and the surety the intervention of the principal
is bound to take notice of the debtor, in which case Art. 1236 and
principal’s default and to perform the 1237 shall apply and it gives rise only
obligation. He cannot complain that to a duty on the part of the guarantor
the creditor has not notified him in in relation to the creditor and not
the absence of a special agreement to vice versa.
that effect. (Palmares vs CA, 288 4. Nominate
SCRA 422) 5. Consensual
7. Prior demand by the creditor upon 6. It is a contract between the
principal is not required guarantor/surety and creditor.
NOTE: As soon as the principal is in
default, the surety likewise is in NOTES:
default.  Acceptance of guaranty by
8. Surety is not exonerated by neglect creditor and notice thereof to
of creditor to sue principal guarantor:
 In declaring that guaranty
Characteristics of Guaranty and must be express, the law
Suretyship: refers solely and exclusively
1. Accessory - It is indispensable to the obligation of the
condition for its existence that there guarantor because it is he
must be a principal obligation. alone who binds himself by
NOTES: his acceptance. With respect
 Guaranty may be constituted to to the creditor, no such
guarantee the performance of a requirement is needed
voidable or unenforceable because he binds himself to
contract. It may also guarantee a nothing.
natural obligation. (Art 2052)  However, when there is
 The guarantor cannot bind merely an offer of a
himself for more than the guaranty, or merely a
principal debtor and even if he conditional guaranty, in the
does, his liability shall be reduced sense that it requires action
to the limits of that of the by the creditor before the
debtor. obligation becomes fixed, it
2. Subsidiary and Conditional - takes does not become binding
effect only in case the principal until it is accepted and until
debtor fails in his obligation. notice of such acceptance by
the creditor is given to, or
NOTES: acquired by, the guarantor,
 The guarantor cannot bind or until he has notice or
himself for more than the knowledge that the creditor
principal debtor and even if he has performed the condition
does, his liability shall be reduced and intends to act upon the
to the limits of that of the guaranty.
debtor. But a guarantor may bind  But in any case, the creditor
himself for less than that of the is not precluded from waiving
principal (Art 2054) the requirement of notice.
CIVIL LAW COMMITTEE

 The consideration of the guaranty Guaranty Suretyship

is the same as the consideration
of the principal obligation. 1. Liability depends 1. Surety assumes
upon an independent liability as regular
 The creditor may proceed against agreement to pay the party to the
the guarantor although he has no obligation if primary undertaking
right of action against the debtor fails to do so
principal debtor.
7. Not presumed. It must be expressed 2. Collateral under- 2. Surety is an original
and reduced in writing. taking promisor
NOTE: A power of attorney to loan
money does not authorize the agent 3. Guarantor is 3. Surety is primarily
to make the principal liable as a secondarily liable liable
surety for the payment of the debt of
a third person. (BPI vs. Coster, 47 4. Guarantor binds 4. Surety undertakes
himself to pay if the to pay if the principal
Phil. 594)
principal CANNOT DOES NOT PAY
8. Falls under the Statute of Frauds PAY
since it is a “special promise to
answer for the debt, default or 5. Insurer of solvency 5. Insurer of the debt
miscarriage of another”. of debtor
9. Strictly interpreted against the
creditor and in favor of the 6. Guarantor can 6. Surety cannot avail
guarantor/surety and is not to be avail of the benefit of of the benefit of
extended beyond its terms or excussion and division excussion and division
specified limits. (Magdalena Estates, in case creditor
Inc. vs Rodriguez, 18 SCRA 967) The proceeds against him
rule of strictissimi juris commonly
pertains to an accommodation surety Indorsement Guaranty
because the latter acts without
1. Primarily of 1. Contract of
motive of pecuniary gain and hence,
transfer security
should be protected against unjust
pecuniary impoverishment by 2. Unless the note is 2. Failure in either or
imposing on the principal, duties akin promptly presented both of these
to those of a fiduciary. for payment at particulars does not
maturity and due generally work as an
NOTES: notice of dishonor absolute discharge of
 The rule will apply only after it given to the indorser a guarantor’s
has been definitely ascertained within a reasonable liability, but his is
time he will be discharged only to the
that the contract is one of discharged abso- extent of the loss
suretyship or guaranty. It cannot lutely from all which he may have
be used as an aid in determining liability thereon, suffered in
whether a party’s undertaking is whether he has consequence thereof
that of a surety or guarantor. suffered any actual
(Palmares vs CA, 288 SCRA 292) damage or not
 It does not apply in case of
compensated sureties. 3. Indorser does not 3. Guarantor warrants
warrant the solvency. the solvency of the
10. It is a contract which requires that
He is answerable on a promisor
the guarantor must be a person strict compliance
distinct form the debtor because a with the law by the
person cannot be the personal holder, whether the
guarantor of himself. promisor is solvent or
NOTE: However, in a real guaranty, not
like pledge and mortgage, a person
may guarantee his own obligation 4. Indorser can be sued 4. Guarantor cannot be
as promisor sued as promisor
with his personal or real properties.
Guaranty Warranty
CIVIL LAW COMMITTEE

A contract by which a An undertaking that until a certain period, especially if

person is bound to the title, quality, or the right to recall the guaranty is
another for the quantity of the expressly reserved (Diño vs CA, 216
fulfilment of a subject matter of the SCRA 9)
promise or contract is what it
engagement of a has been represented  “Future debts” may also refer to
third party to be, and relates to debts existing at the time of the
some agreement constitution of the guaranty but the
made ordinarily by amount thereof is unknown and not to
the party who makes debts not yet incurred and existing at
the warranty that time.
 Exception to the concept of
NOTES: continuing guaranty is chattel
 A guaranty is gratuitous, unless there mortgage. A chattel mortgage can
is a stipulation to the contrary. The only cover obligations existing at the
cause of the contract is the same time the mortgage is constituted and
cause which supports the obligation not those contracted subsequent to
as to the principal debtor. the execution thereof (The Belgian
 The peculiar nature of a guaranty or Catholic Missionaries, Inc. vs.
surety agreement is that is is Magallanes Press, Inc., 49 Phil 647).
regarded as valid despite the absence An exception to this is in case of
of any direct consideration received stocks in department stores, drug
by the guarantor or surety either from stores, etc. (Torres vs. Limjap, 56
the principal debtor or from the Phil 141).
creditor; a consideration moving to
the principal alone will suffice. Extent of Guarantor’s liability: (Art
 It is never necessary that the 2055)
guarantor or surety should receive 1. Where the guaranty definite: It is
any part or benefit, if such there be, limited in whole or in part to the
accruing to the principal. (Willex principal debt, to the exclusion of
Plastic Industries Corp. vs. CA, 256 accessories.
SCRA 478) 2. Where guaranty indefinite or simple:
It shall comprise not only the
principal obligation, but also all its
accessories, including the judicial
costs, provided with respect to the
Double or sub-guaranty (Art 2051 2nd latter, that the guarantor shall only
par) be liable for those costs incurred
 One constituted to guarantee the after he has been judicially required
obligation of a guarantor to pay.
Continuing guaranty (Art 2053) Qualifications of a guarantor: (Arts

 One which is not limited to a single 2056-2057)
transaction but which contemplates a 1. possesses integrity
future course of dealings, covering a 2. capacity to bind himself
series of transactions generally for an 3. has sufficient property to answer
indefinite time or until revoked. for the obligation which he
guarantees
NOTES:
 Prospective in operation (Diño vs CA, NOTES:
216 SCRA 9)  The qualifications need only be
 Construed as continuing when by the present at the time of the perfection
terms thereof it is evident that the of the contract.
object is to give a standing credit to  The subsequent loss of the integrity
the principal debtor to be used from or property or supervening incapacity
time to time either indefinitely or of the guarantor would not operate to
CIVIL LAW COMMITTEE

exonerate the guarantor or the him, and point out to the creditor
eventual liability he has contracted, available property to the debtor
and the contract of guaranty within Philippine territory, sufficient
continues. to cover the amount of the debt (Art
 However, the creditor may demand 2060)
another guarantor with the proper  Demand can be made only after
qualifications. But he may waive it if judgment on the debt
he chooses and hold the guarantor to  Demand must be actual; joining
his bargain. the guarantor in the suit against
the principal debtor is not the
Benefit of Excussion (Art 2058) demand intended by law
 The right by which the guarantor 9. Where the pledge or mortgage has
cannot be compelled to pay the been given by him as special security
creditor unless the latter has
exhausted all the properties of the Benefit of Division (Art 2065)
principal debtor, and has resorted to  Should there be several guarantors of
all of the legal remedies against such only one debtor and for the same
debtor. debt, the obligation to answer for the
same is divided among all.
NOTE:  Liability: Joint
 Not applicable to a contract of
suretyship (Arts 2047, par. 2; 2059[2]) NOTES:
 Cannot even begin to take place  The creditor can claim from the
before judgment has been obtained guarantors only the shares they are
against the debtor (Baylon vs CA, 312 respectively bound to pay except
SCRA 502) when solidarity is stipulated or if any
of the circumstances enumerated in
When Guarantor is not entitled to the Article 2059 should take place.
benefit of excussion: (PAIRS)  The right of contribution of
1. If it may be presumed that an guarantors who pays requires that the
execution on the property of the payment must have been made (a) in
principal debtor would not result in virtue of a judicial demand, or (b)
the satisfaction of the obligation because the principal debtor is
 Not necessary that the debtor be insolvent (Art 2073).
judicially declared insolvent or  If any of the guarantors should be
bankrupt insolvent, his share shall be borne by
2. When he has absconded, or cannot be the others including the paying
sued within the Philippines unless he guarantor in the same joint
has left a manager or representative proportion following the rule in
3. In case of insolvency of the debtor solidary obligations.
 Must be actual  The above rule shall not be applicable
4. If the guarantor has expressly unless the payment has been made in
renounced it virtue of a judicial demand or unless
5. If he has bound himself solidarily with the principal debtor is insolvent.
the debtor  The right to contribution or
reimbursement from his co-
Other grounds: (BIPS) guarantors is acquired ipso jure by
6. If he is a judicial bondsman or sub- virtue of said payment without the
surety need of obtaining from the creditor
7. If he fails to interpose it as a defense any prior cession of rights to such
before judgment is rendered against guarantor.
him  The co-guarantors may set up against
8. If the guarantor does not set up the the one who paid, the same defenses
benefit against the creditor upon the which have pertained to the principal
latter’s demand for payment from debtor against the creditor and which
CIVIL LAW COMMITTEE

are not purely personal to the debtor. debtor does not pay immediately,
(Art 2074) he incurs in delay) to the debtor,
even though it did not earn
Procedure when creditor sues: (Art. interest for the creditor.
2062) Guarantor’s right to legal interest
 The creditor must sue the principal is granted by law by virtue of the
alone; the guarantor cannot be sued payment he has made.
with his principal, much less alone 3. Expenses incurred by the
except in Art. 2059. guarantor after having notified
the debtor that payment has
1. Notice to guarantor of the action been demanded of him by the
 The guarantor must be NOTIFIED creditor; only those expenses
so that he may appear, if he so that the guarantor has to satisfy
desires, and set up defenses he in accordance with law as a
may want to offer. consequence of the guaranty
 If the guarantor appears, he is (Art. 2055) not those which
still given the benefit of depend upon his will or own acts
exhaustion even if judgment or his fault for these are his
should be rendered against him exclusive personal responsibility
and principal debtor. His and it is not just that they be
voluntary appearance does not shouldered by the debtor.
constitute a renunciation of his 4. Damages if they are due in
right to excussion (see Art. accordance
2059(1)). with law. General rules on
 Guarantor cannot set up the damages apply.
defenses if he does not appear
and it may no longer be possible EXCEPTIONS:
for him to question the validity of 1. Where the guaranty is constituted
the judgment rendered against without the knowledge or against
the debtor. the will of the principal debtor,
2. A guarantor is entitled to be heard the guarantor can recover only
before and execution can be issued insofar as the payment had been
against him where he is not a party in beneficial to the debtor (Art.
the case involving his principal 2050).
(procedural due process). 2. Payment by a third person who
does not intend to be reimbursed
Guarantor’s Right of Indemnity or by the debtor is deemed to be a
Reimbursement (Art 2066) donation, which, however,
GENERAL RULE: Guaranty is a contract requires the debtor’s consent.
of indemnity. The guarantor who makes But the payment is in any case
payment is entitled to be reimbursed by valid as to the creditor who has
the principal debtor. accepted it (Art. 1238).
3. Waiver of the right to demand
NOTE: The indemnity consists of: (DIED) reimbursement.
1. Total amount of the debt – no
right to demand reimbursement Guarantor’s right to Subrogation
until he has actually paid the (ART.2067)
debt, unless by the terms of the  Subrogation transfers to the person
contract, he is given the right subrogated, the credit with all the
before making payment. He rights thereto appertaining either
cannot collect more than what he against the debtor or against third
has paid. persons, be they guarantors or
2. Legal interest thereon from the possessors of mortgages, subject to
time the payment was made stipulation in conventional
known (notice of payment in subrogation.
effect a demand so that if the
CIVIL LAW COMMITTEE

NOTE: This right of subrogation is a. guarantor was prevented by

necessary to enable the guarantor to fortuitous event to advise the
enforce the indemnity given in Art. 2066. debtor of the payment; and
 It arises by operation of law upon b. the creditor becomes insolvent;
payment by the guarantor. It is not c. the guaranty is gratuitous.
necessary that the creditor cede to
the guarantor the former’s rights Right of Guarantor to proceed against
against the debtor. debtor before payment
 It is not a contractual right. The right GENERAL RULE: Guarantor has no cause
of guarantor who has paid a debt to of action against debtor until after the
subrogation does not stand upon former has paid the obligation
contract but upon the principles of EXCEPTION: Article 2071
natural justice.
 The guarantor is subrogated by virtue NOTES:
of the payment to the rights of the  Article 2071 is applicable and
creditor, not those of the debtor. available to the surety. (Manila
 Guarantor cannot exercise the Surety & Fidelity Co., Inc. vs Batu
right of redemption of his Construction & Co., 101 Phil 494)
principal (Urrutia & Co vs Morena  Remedy of guarantor:
and Reyes, 28 Phil 261) (a) obtain release from the guaranty;
or
Effect of Payment by Guarantor (b) demand a security that shall
1. Without notice to debtor: (Art 2068) protect him from any proceedings
 The debtor may interpose against by the creditor, and against the
the guarantor those defenses danger of insolvency of the
which he could have set up debtor
against the creditor at the time
the payment was made, e.g. the Art. 2066 Art. 2071
debtor can set up against the Provides for the Provides for his
enforcement of the protection before he
guarantor the defense of previous
rights of the has paid but after he
extinguishment of the obligation guarantor/surety has become liable
by payment. against the debtor
after he has paid the
2. Before Maturity (Art 2069) debt
 Not entitled to reimbursement Gives a right of Protective remedy
unless the payment was made action after payment before payment.
with the consent or has been Substantive right Preliminary remedy
ratified by the debtor
Extinguishment of guaranty: (RA2CE2)
Effect of Repeat Payment by debtor: 1. Release in favor of one of the
(Art 2070) guarantors, without the consent of
GENERAL RULE: Before guarantor pays the others, benefits all to the extent
the creditor, he must first notify the of the share of the guarantor to whom
debtor (Art. 2068). If he fails to give such it has been granted (Art 2078);
notice and the debtor repeats payment, 2. If the creditor voluntarily accepts
the guarantor can only collect from the immovable or other properties in
creditor and guarantor has no cause of payment of the debt, even if he
action against the debtor for the return of should afterwards lose the same
the amount paid by guarantor even if the through eviction or conveyance of
creditor should become insolvent. property (Art 2077);
3. Whenever by some act of the
EXCEPTION: The guarantor can still creditor, the guarantors even though
claim reimbursement from the debtor in they are solidarily liable cannot be
spite of lack of notice if the following subrogated to the rights, mortgages
conditions are present: (PIG)
CIVIL LAW COMMITTEE

and preferences of the former (Art Development Bank vs. Lim, 324
2080); SCRA 346)
4. For the same causes as all other 3. Pledgor, mortgagor, antichretic
obligations (Art 1231); debtor must have free disposal of
5. When the principal obligation is their property, or be legally
extinguished; authorized for such purpose.
6. Extension granted to the debtor by
the creditor without the consent of NOTES:
the guarantor (Art 2079)  Third persons can pledge or mortgage
their own property to secure the
BOND principal obligation.
 An undertaking that is sufficiently  It is not necessarily void simply
secured, and not cash or currency because the accommodation pledgor
or mortgagor did not benefit from the
Bondsman (Art 2082) same. So long as valid consent was
 A surety offered in virtue of a given, the fact that the loan was
provision of law or a judicial order. given solely for the benefit of the
He must have the qualifications principal debtor would not invalidate
required of a guarantor and in special the mortgage (GSIS vs CA, 170 SCRA
laws like the Rules of Court. 533)
 The accommodation pledgor or
NOTES: mortgagor, without expressly
 Judicial bonds constitute merely a assuming personal liability for such
special class of contracts of guaranty debt, is not liable for the payment of
by the fact that they are given “in any deficiency, should the property
virtue… of a judicial order.” not be sufficient to cover the debt
 If the person required to give a legal (Bank of America vs. American Realty
or judicial bond should not be able to Corporation, 321 SCRA 659).
do so, a pledge or mortgage sufficient  The accommodation pledgor or
to cover the obligation shall admitted mortgagor is not solidarily bound with
in lieu thereof (Art 2083) the principal obligor but his liability
 A judicial bondsman and the sub- extents only to the property pledged
surety are NOT entitled to the benefit or mortgaged. Should there be any
of excussion because they are not deficiency, the creditor has recourse
mere guarantors, but sureties whose on the principal debtor who remains
liability is primary and solidary. (Art to be primarily bound.
2084)  The law grants to the accommodation
pledgor or mortgagor the same rights
PLEDGE, MORTGAGE AND ANTICHRESIS as a guarantor and he cannot be
I. Common Elements of Pledge, prejudiced by any waiver of defense
Mortgage, and Antichresis (Articles by the principal debtor.
2085 – 2092)
B. Prohibition against Pactum
A. Essential Requisites (SOD) (Art Commissorium (Art 2088; 2137)
2085)
1. Secures the fulfillment of a principal Pactum Commissorium
obligation;  Stipulation whereby the thing
2. Pledgor, mortgagor, antichretic pledged or mortgaged, or under
debtor must be the absolute owner of antichresis shall automatically
the thing pledged or mortgaged; and become the property of the creditor
 The reason being that in in the event of non-payment of the
anticipation of a possible debt within the term fixed.
foreclosure sale in case of default
which is still a sale, the rule is Requisites:
that the seller must be the owner
of the thing sold (Cavite
CIVIL LAW COMMITTEE

1. There should be a pledge, mortgage, 2. Where only a portion of the loan

or antichresis of property by way of was released
security for the payment of the 3. Where there was failure of
principal obligation; and consideration.
2. There should be a stipulation for an 4. Where there is no debtor-creditor
automatic appropriation by the relationship
creditor of the property in event of
nonpayment of the obligation within NOTES:
the stipulated period.  The mere embodiment of a real
estate mortgage and a chattel
GENERAL RULE: Pactum Commissorium mortgage in one document does not
is forbidden by law and is declared null have the effect of fusing both
and void. securities into an indivisible whole.
EXCEPTION: The pledgee may  The mortgagee, therefore, may
appropriate the thing pledged if after the legally foreclose the real estate
first and second auctions, the thing is not mortgage extrajudicially and waive
sold. (Art 2112) the chattel mortgage foreclosure,
and maintain instead a personal
NOTE: The security contract remains action for the recovery of the unpaid
valid; only the prohibited stipulation is balance of the credit (Phil. Bank of
void. Commerce vs. Macadaeg, 109 Phil
C. Capability to secure all kinds of 981)
obligations, i.e. pure or conditional
(Art 2091) E. When the principal obligation
becomes due, the things in which
D. Indivisibility (Art 2089) the pledge, mortgage, or
GENERAL RULE: A pledge, mortgage, or antichresis consists may be
antichresis is indivisible, even though alienated for the payment to the
the debt may be divided among the creditor. (Art. 2087)
successors in interest of the debtor or of
the creditor. NOTES:
 Their indivisibility is not affected by  If the debtor fails to comply with the
the fact that the debtors are jointly obligation at the time it falls due, the
or not solidarily liable. creditor is merely entitled to move
for the sale of the thing pledged or
Consequences of indivisibility: mortgaged in order to collect the
1. Single thing – Every portion of the amount of his claim from the
property pledged or mortgaged is proceeds.
answerable for the whole obligation
 If he wishes to secure a title to the
2. Several things – All of the several
mortgaged property, he can buy it in
things pledged or mortgaged are
the foreclosure sale (Montevirgin vs.
liable for the totality of the debt
CA, 112 SCRA 641)
3. Debtor’s heir/creditor’s heir -
Neither the debtor’s heir who has
F. Pledgor, mortgagor, antichretic
paid part of the debt cannot ask for
debtor retains ownership of the
proportionate extinguishment, nor
thing given as a security
creditor’s heir who received his share
of the debt return the pledge or
PLEDGE (Arts 2093 – 2123)
cancel the mortgage as long as the
debt is not completely satisfied.
 A contract wherein the debtor
delivers to the creditor or to a third
EXCEPTIONS:
person a movable or document
1. Where each one of several things
evidencing incorporeal rights for the
guarantees a determinate portion
purpose of securing fulfillment of a
of the credit
principal obligation with the
CIVIL LAW COMMITTEE

understanding that when the debtor who is called the pledgor to

obligation is fulfilled, the thing the creditor who is called the
delivered shall be returned with all pledgee, or to a third person by
its fruits and accessions. common agreement;
2. Accessory contract – it has no
 Special Requisites (in addition to independent existence of its own;
the common essential requisites): 3. Unilateral contract – it creates an
1. Possession of the thing pledged must obligation solely on the part of the
be transferred to the creditor or a creditor to return the thing subject
third person by agreement (Art 2093); thereof upon the fulfilment of the
2. It can only cover movable property principal obligation; and
and incorporeal rights evidenced by 4. Subsidiary contract – the obligation
documents of title and the incurred does not arise until the
instruments proving the right pledged fulfilment of the principal obligation
shall be delivered to the creditor, and which is secured.
if negotiable must be endorsed (Art
2094); and Consideration in pledge:
3. The description of the thing pledged  Insofar as the pledgor is concerned,
and the date must appear in a public the cause is the principal obligation.
instrument to bind third persons, but  If the pledgor is not the debtor, the
not for the validity of the contract cause is the compensation stipulated
(Art 2096). for the pledge or the mere liberality
of the pledgor.
 Kinds:
1. Conventional /Voluntary – created by Extent of pledge: Unless stipulated
contract otherwise, pledge extends to the fruits,
2. Legal – created by operation of law interests or earnings of the thing.
(examples: Art. 546, 1731 and 1914
NCC) Rights and Obligations of a Pledgor
Rights Obligations
NOTES: 1. To demand return in 1. To advise the
 The provisions of possession, care and case of reasonable pledgee of the
sale of the thing as well as on the grounds to fear flaws of the thing
termination of the pledge governing destruction or (Art 2101)
conventional pledges are applicable impairment of the thing 2. Not to demand
to pledges created by operation of without the pledgee’s the return of the
fault, subject to the thing until after
law (Art 2121)
duty of replacement full payment of
 Unlike, however, in conventional (Art 2107) the debt,
pledge where the debtor is not 2. To bid and be including interest
entitled to the excess unless it is preferred at the public due thereon and
otherwise agreed, in legal pledge, the auction (Art 2113) expenses incurred
remainder of the price of the sale 3. To alienate the thing for its
after payment of the debt and pledged provided the preservation (Art
expenses, shall be delivered to the pledgee consents to the 2105)
sale (Art 2097)
debtor. 4. To ask that the thing
 In legal pledge, there is no definite pledged be deposited
period for the payment of the (Arts 2104 & 2106)
principal obligation. The pledgee
must make a demand for the payment Rights of the Pledgee
of the amount due him; otherwise he KEY: D SBC BA2R2OPS2
cannot exercise the right of sale at 1. Option to demand replacement or
public auction (Art 2122) immediate payment of the debt in case of
deception as to substance or quality (Art
Characteristics: 2109)
1. Real contract – it is perfected by the
delivery of the thing pledged by the
CIVIL LAW COMMITTEE

2. To sell at public auction in case of 25. To possess the thing (Art 2098)
reasonable grounds to fear destruction or 26. To sell at public auction in case of
impairment of the thing without his fault non-payment of debt at maturity (Art
(Art 2108) 2112)
3. To bring actions pertaining to the 27. To choose which of the several things
owner (Art 2103) pledged shall be sold (Art 2119)
4. To choose which of several things
pledged shall be sold Obligations of the Pledgee
5. To bid at the public auction (Art 2113) KEY: CUDA3
6. To appropriate the thing in case of 1. Take care of the thing with the
failure of the 2nd public auction (Art 2112) diligence of a good father of a family (Art
7. To apply said fruits, interests or 2099)
earnings to the interest, if any, then to 2. Not to use thing unless authorized or
the principal of the credit (Art 2102) by the owner or its preservation requires
8. To retain excess value received in its use (Art 2104)
the public sale (Art 2115) 3. Not to deposit the thing with a 3rd
9. To retain the thing until after full person unless so stipulated (Art 2100)
payment of the debt (Art 2098) 4. Responsibility for acts of agents and
10. To be reimbursed for the expenses employees as regards the thing (Art 2100)
made for the preservation of the thing 5. To advise pledgor of danger to the
pledged (Art 2099) thing (Art 2107)
11. To object to the alienation of the 6. To advise pledgor of the result of the
thing public auction (Art 2116)
12. To possess the thing (Art 2098)
13. To sell at public auction in case of RIGHT OF PLEDGOR TO SUBSTITUTE
non-payment of debt at maturity (Art THING PLEDGED (ART.2107)
2112)  Requisites:
To choose which of the several things 1. The pledgor has reasonable
pledged shall be sold (Art 2119) grounds to fear the destruction or
14. Option to demand replacement or impairment of the thin pledged
immediate payment of the debt in case of 2. There is no fault on the part of
deception as to substance or quality (Art the pledgee
2109) 3. The pledgor is offering in place of
15. To sell at public auction in case of the thing, another thing in pledge
reasonable grounds to fear destruction or which is of the same kind and
impairment of the thing without his fault quality as the former
(Art 2108) 4. The pledge does not choose to
16. To bring actions pertaining to the exercise his right to cause the
owner (Art 2103) thing pledged to be sold at public
17. To choose which of several things auction
pledged shall be sold NOTE: The pledgee’s right to have the
18. To bid at the public auction (Art 2113) thing pledged sold at public sale granted
19. To appropriate the thing in case of under the Article 2108 is superior to that
failure of the 2nd public auction (Art 2112) given to the pledgor to substitute the
20. To apply said fruits, interests or thing pledged under Article 2107.
earnings to the interest, if any, then to
the principal of the credit (Art 2102) Prohibition against double pledge
21. To retain excess value received  Property which has been lawfully
in the public sale (Art 2115) pledged to one creditor cannot be
22. To retain the thing until after full pledged to another as long as the first
payment of the debt (Art 2098) one subsists.
23. To be reimbursed for the expenses NOTE: Possession of a creditor of the
made for the preservation of the thing thing pledged is an essential requisite of
pledged (Art 2099) pledge.
24. To object to the alienation of the
thing Extinguishment of Pledge (CRAPS)
CIVIL LAW COMMITTEE

1. For the same causes as all other Characteristics of the contract:

obligations (Art 1231) 1. Real
2. Return of the thing pledged by the 2. Accessory
pledgee to the pledgor (Art 2110) 3. Subsidiary
3. Statement in writing by the pledgee 4. Unilateral – it creates only an
that he renounces or abandons the obligation on the part of the
pledge (Art 2111) creditor who must free the
4. Payment of the debt (Art 2105) property from the encumbrance
5. Sale of thing pledged at public once the obligation is fulfilled.
auction (Art 2115)
NOTE: The possession by the debtor or
owner of the thing pledged subsequent to
the perfection of the pledge gives rise to NOTES:
a prima facie presumption that the thing  As an accessory contract, its
has been returned and, therefore, that consideration is that of the principal
the pledge has been extinguished but not contract from which it receives life.
the principal obligation itself. (Art 2110)  A mortgage does not involve a
transfer, cession or conveyance of
Requirements for sale of thing pledged property but only constitutes a lien
at public auction: (Art 2112) thereon. Until discharged, it follows
1. The debt is due and unpaid the property wherever it goes and
2. Sale must be at a public auction subsists notwithstanding changes of
3. there must be notice to the pledgor ownership.
and owner, stating the amount due  A mortgage gives the mortgagee no
4. Sale must be with the intervention of right or claim to the possession of the
a notary public property, and therefore, a mere
mortgagee has no right to eject an
Effect of sale of the thing pledged: (Art occupant of the property mortgaged
2115) unless the mortgage should contain
1. The sale of the thing pledged shall some provision to that effect. The
extinguish the principal obligation, only right of a mortgagee in case of
whether or not the proceeds of the non-payment of a debt secured by
sale are equal to the amount of the mortgage would be to foreclose the
principal obligation, interest and mortgage and have the encumbered
expenses in a proper case property sold to satisfy the
2. If the price of the sale is more than outstanding indebtedness. If the
the amount due the creditor, the possession is transferred to the
debtor is not entitled to the excess mortgagee, it must not expressly be
unless the contrary is provided for purpose of applying the fruits to
3. If the price of the sale is less, the the interest then to the principal of
creditor is not entitled to recover the the credit, for then it would be an
deficiency even if there is a antichresis.
stipulation to that effect
 It is not an essential requisite that the
principal of the mortgage credit bears
REAL ESTATE MORTGAGE (Articles
interest, or that the interest as
2124-2131)
compensation for the use of the
principal and enjoyment of its fruits
 A contract whereby the debtor
be in the form of a certain percent
secures to the creditor the fulfilment
thereof.
of a principal obligation, specially
subjecting to such security
 Special Requisites (in addition to
immovable property or real rights
the common essential requisites):
over immovable property in case the
1. It can cover only immovable property
principal obligation is not complied
and alienable real rights imposed
with at the time stipulated.
upon immovables (Art 2124);
CIVIL LAW COMMITTEE

2. It must appear in a public instrument date of pledge

(Art. 2125); and appear in a public
3. Registration in the registry of instrument
property is necessary to bind third
persons, but not for the validity of Extent of Mortgage:
the contract (Art 2125).  Absent express stipulation to the
 An order for foreclosure cannot contrary, the mortgage includes the
be refused on the ground that the accessions, improvements, growing
mortgage had not been registered fruits and income of the property not
provided no innocent third yet received when the obligation
parties are involved. becomes due and to the amount of
NOTE: Where a mortgage is not valid or the indemnity granted or owing to the
false, the principal obligation which it proprietor from the insurers of the
guarantees is not rendered null and void. property mortgaged, or in virtue of
What is lost only is the right to foreclose expropriation for public use (Art
the mortgage as a special remedy for 2127)
satisfying or settling the indebtedness
which is the principal obligation but the Object of Mortgage:
mortgage deed remains as evidence or  Future property cannot be an object
proof of a personal obligation of the of a contract of mortgage (Art
debtor and the amount due to the 2085[2]) However, a stipulation
creditor may be enforced in an ordinary subjecting to the mortgage lien,
personal action. properties (improvements) which the
mortgagor may subsequently acquire
 Kinds: install, or use in connection with real
1. Voluntary – agreed to by the parties property already mortgaged
or constituted by the will of the belonging to the mortgagor is valid
owner of the property on which it is (People’s Bank and Trust Co. vs.
created Dahican Lumber Co., 20 SCRA 84)
2. Legal – one required by law to be
executed in favour of certain persons Special Rights:
 The persons in whose favour the 1. Mortgagor - To alienate the
law establishes a mortgage have mortgaged property but the mortgage
no other right than to demand the shall remain attached to the
execution and the recording of property.
the document in which the
mortgage is formalized (Art 2125 NOTE: A stipulation forbidding the owner
par 2) from alienating the immovable mortgage
3. Equitable – one which, although shall be void (Art 2130) being contrary to
lacking the formalities of a mortgage, public policy inasmuch as the
shows the intention of the parties to transmission of property should not be
make the property a security for a unduly impeded.
debt
2. Mortgagee - To claim from a 3rd
PLEDGE REAL MORTGAGE person in possession of the mortgaged
1. Constituted on 1. Constituted on property the payment of the part of
movables immovables the credit secured by the which said
2. Property is 2. Delivery is not third person possesses (Art 2129)
delivered to pledgee necessary NOTE: It is necessary that prior demand
or by common for payment must have been made on the
consent to a third debtor and the latter failed to pay (BPI vs
person Concepcion & Hijos, Inc., 53 Phil 906)
3. Not valid against 3. Not valid against
third persons unless a third persons unless
description of the registered
Foreclosure
thing pledged and  The remedy available to the
mortgagee by which he subjects the
CIVIL LAW COMMITTEE

mortgaged property to the and that a person who takes a

satisfaction of the obligation to mortgage in good faith and for
secure that for which the mortgage valuable consideration, the record
was given showing clear title to the mortgagor,
will be protected against equitable
NOTES: claims on the title in favor of third
 It denotes the procedure adopted by persons, of which he had no actual or
the mortgagee to terminate the rights constructive notice (St. Dominic
of the mortgagor on the property and Corporation vs. IAC 151 SCRA 577).
includes the sale itself (DBP vs  Where there is a right to redeem,
Zaragoza, 84 SCRA 668) inadequacy of price is not material
 Foreclosure is valid where the debtor because the judgment debtor may
is in default in the payment of his reacquire the property or else sell his
obligation (Gobonseng, Jr. vs CA, 246 right to redeem and thus recover any
SCRA 472) loss he claims to have suffered by
reason of the price obtained at the
 Kinds: auction sale and consequently not
1. Judicial – ordinary action for sufficient to set aside the sale. Mere
foreclosure under Rule 68 of the Rules inadequacy of the price obtained at
of Court the sheriff’s sale will not be sufficient
2. Extrajudicial – when mortgagee is to set aside the sale unless “the price
given a special power of attorney to is so inadequate as to shock the
sell the mortgaged property by public conscience of the court” taking into
auction, under Act No. 3135 consideration the peculiar
circumstances attendant thereto.
Judicial Extrajudicial (Sulit vs. CA, 268 SCRA 441)
foreclosure foreclosure  Should there remain a balance due to
1. There is court 1. No court the mortgagee after applying the
intervention intervention proceeds of the sale, the mortgagee
2. Decisions are 2. Not appealable is entitled to recover the deficiency.
appealable because it is This rule applies both to judicial and
immediately extra-judicial foreclosure real
executory
mortgage.
3. Order of court 3. Foreclosure does
cuts off all rights of not cut off right of  The action to recover a deficiency
the parties all parties involved after foreclosure prescribes after 10
impleaded years from the time the right of
4. There is equity 4. There is right of action accrues (Arts 1142 & 1144).
of redemption redemption
except on banks Stipulation of upset price or “tipo”
which provides for  It is a stipulation in a mortgage of real
a right of property of minimum price at which
redemption
the property shall be sold, to become
5. Period of 5. Period to redeem
redemption starts start from date of operative in the event of a
from the finality of registration of foreclosure sale at public auction. It
the judgment until certificate of sale is null and void for the property must
order of be sold to the highest bidder. Parties
confirmation cannot, by agreement, contravene
6. No need for a 6. Special power of the law and interfere with the lawful
special power of attorney in favor of procedure of the courts (BPI vs Yulo,
attorney in the mortgagee is 31 Phil 476)
contract of needed in the
mortgage contract
Extrajudicial foreclosure real property
(Act No. 3135)
NOTES:
 The law covers only real estate
 A foreclosure sale retroacts to the mortgages. It is intended merely to
date of registration of the mortgage regulate the extrajudicial sale of the
CIVIL LAW COMMITTEE

property mortgaged if and when the the real estates and their respective
mortgagee is given a special power of locations
express authority to do so in the deed 6. The notice of sale shall be published
itself or in a document annexed in a newspaper of general circulation
thereto. pursuant to Section 1, PD No. 1079
 The authority to sell is not 7. The application of shall be raffled
extinguished by the death of the among all sheriffs
mortgagor (or mortgagee) as it is an 8. After the redemption period has
essential and inseparable part of a expired, the Clerk of Court shall
bilateral agreement (Perez vs PNB, 17 archive the records.
SCRA 833). 9. No auction sale shall be held unless
 No sale can be legally made outside there are at least two (2)
the province in which the property participating bidders, otherwise the
sold is situated; and in case the place sale shall be postponed to another
within said province in which the sale date. If on the new date set forth for
is to be made is the subject of the sale there shall not be at least
stipulation, such sale shall be made in two bidders, the sale shall then
the said place in the municipal proceed. The names of the bidders
building of the municipality in which shall be reported to the Sheriff of the
the property or part thereof is Notary Public, who conducted the
situated. sale to the Clerk of Court before the
issuance of the certificate of sale.
Procedure for extrajudicial foreclosure
of both real estate mortgage under Act NOTES:
No. 3135 and chattel mortgage under  The Mortgagor and Mortgagee have no
Act No. 1508 (A.M. No. 99-10-05-0, right to waive the posting and
January 15, 2000) publication requirements under Act.
1. Filing of application before the No. 3135. Notices are given to secure
Executive Judge through the Clerk of bidders and prevent a sacrifice of the
Court property. Clearly, the statutory
2. Clerk of Court will examine whether requirements of posting and
the requirement of the law have been publication are mandated, not for the
complied with, that is, whether the mortgagor’s benefit, but for the
notice of sale has been posted for not public or third persons. Failure to
less than 20 days in at least three (3) comply with the statutory
public places of the municipality or requirements as to publication of
city where the property is situated, notice of auction sale constitutes a
and if the same is worth more than jurisdictional defect which
P400.00, that such notice has been invalidates the sale.Lack of
published once a week for at least republication of notice of foreclosure
three (3) consecutive weeks in a sale made subsequently after the
newspaper of general circulation in original date renders such sale void
the city of municipality (PNB vs. Nepomuceno Productions
3. The certificate of sale must be Inc., G.R. No. 139479. December 27,
approved by the Executive Judge 2002).
4. Where the application concerns  Sec 3 of Act 3135 does not require
extrajudicial foreclosure of real personal or any particular notice on
mortgages in different locations the mortgagor much less on his
covering one indebtedness, only one successors-in-interest where there is
filing fee corresponding to such debt no contractual stipulation therefor.
shall be collected Hence, unless required in the
5. The Clerk of Court shall issue mortgage contract, the lack of such
certificate of payment indicating the notice is not a ground to set aside a
amount of indebtedness, the filing foreclosure sale.
fees collected, the mortgages sought  Neither does Sec 3 require posting of
to be foreclosed, the description of notice of sale on the mortgage
CIVIL LAW COMMITTEE

property and the certificate of exercised irrespective of whether or not

posting is not required, much less the mortgagee has subsequently
considered indispensable, for the conveyed the property to some other
validity of a foreclosure sale. party (Sta. Ignacia Rural Bank, Inc. vs.
CA, 230 SCRA 513)
Redemption Period of Redemption

 It is the transaction by which the 1. Extra-judicial (Act #3135)
mortgagor reacquires or buys back a. natural person – one year from
the property which may have passed registration of the certificate of
under the mortgage, or divests the sale with Registry of Deeds
property of the lien which the b. juridical person – same rule as
mortgage may have created. natural person
c. juridical person (mortgagee is
NOTES: bank) - three months after
 A sale by the mortgagor to a third foreclosure or before
party of the mortgaged property registration of certificate of
during the period for redemption foreclosure which ever is earlier
transfers only the right to redeem the (sec. 47, of General Banking Law)
property and the right to possess, use 2. Judicial – before confirmation of the
and enjoy the same during said sale by the court
period.
 Where sale with assumption of NOTE: Allowing a redemption after the
mortgage not registered and made lapse of the statutory period, when the
without the consent of the buyer at the foreclosure sale does not
mortgagee, the buyer, thereof, was object but even consents to the
not validly substituted as debtor and, redemption, will uphold the policy of the
hence, had no right to redeem law which is to aid rather than defeat the
(Bonnevie vs. CA, 125 SCRA 122). right of redemption. There is nothing in
the law which prevents a waiver of the
 Kinds: statutory period for redemption (Ramirez
1. Equity of Redemption – right of vs CA, 219 SCRA 598).
mortgagor to redeem the mortgaged
property after his default in the Amount of the redemption price:
performance of the conditions of the 1. Mortgagee is not a bank (Act No.
mortgage within the 90-day period 3135, in relation to Sec. 28, Rule 39
from the date of the service of the of Rules of Court)
order of foreclosure or even a. purchase price of the property
thereafter but before the b. 1% interest per month on the
confirmation of the sale. Applies to purchase price
judicial foreclosure of real mortgage c. taxes paid and amount of
and chattel mortgage foreclosure. purchaser’s prior lien, if any,
with the same rate of interest
NOTE: Redemption of the banking computed from the date of
institutions is allowed within one year registration of sale, up to the
from confirmation of sale. time of redemption
2. Mortgagee is a bank (GBL 2000)
2. Right of Redemption – right of a. amount due under the mortgage
mortgagor to redeem the mortgaged deed
property within one year from the b. interest
date of registration of the certificate c. cost and expenses
of sale. Applies only to extrajudicial NOTE: Redemption price in this case
foreclosure of real mortgage. is reduced by the income received
from the property
NOTE: The right of redemption, as long as
within the period prescribed, may be
CIVIL LAW COMMITTEE

3. Consensual contract 3. Real Contract
ANTICHRESIS (Articles 2132 -2139) Antichresis Real Mortgage

1. Property is 1. Debtor usually
 A contract whereby the creditor delivered to creditor retains possession of
acquires the right to receive the the property
fruits of an immovable of the debtor, 2. Creditor acquires 2. Creditor does not
with the obligation to apply them to only the right to have any right to
receive the fruits of receive the fruits;
the payment of the interest, if owing,
the property, hence, but the mortgage
and thereafter to the principal of his it does not produce a creates a real right
credit (Art 2132) real right over the property
3. The creditor, 3. The creditor has
Characteristics unless there is no such obligation
1. Accessory contract – it secures the stipulation to the
performance of a principal obligation contrary, is obliged
2. Formal contract – it must be in a to pay the taxes and
specified form to be valid, i.e., “in charges upon the
estate
writing.” (Art 2134)
4. It is expressly 4. There is no such
stipulated that the obligation on part of
 Special Requisites (in addition to creditor given mortgagee
the common essential requisites): possession of the
1. It can cover only the fruits of an property shall apply
immovable property; (Art 2132) all the fruits thereof
2. Delivery of the immovable is to the payment of
necessary for the creditor to receive interest, if owing,
the fruits and not that the contract and thereafter to the
shall be binding; principal
Subject matter of both is real property
3. Amount of principal and interest must
be specified in writing (Art. 2134);
and Obligations of antichretic creditor:
4. Express agreement that debtor will 1 To pay taxes and charges on the
give possession of the property to estate, including necessary expenses
creditor and that the latter will apply NOTE: Creditor may avoid said
the fruits to the interest, if any, then obligation by:
to the principal of his credit. (Art a. compelling debtor to
2132) reacquire enjoyment of the
property or
NOTE: The obligation to pay interest is b. by stipulation to the contrary
not of the essence of the contract of 2 To apply all the fruits, after receiving
antichresis, there being nothing in the them, to the payment of interest, if
Code to show that antichresis is only owing, and thereafter to the principal
applicable to securing the payment of 3 To render an account of the fruits to
interest-bearing loans. On the contrary, the debtor
antichresis is susceptible of guaranteeing 4 To bear the expenses necessary for its
all kinds of obligations, pure or preservation and repair
conditional
Remedies of creditor in case of non-
payment of debt
Antichresis Pledge
1. Refers to real 1. Refers to personal
property property 1. Bring an action for specific
2. Perfected by mere 2. Perfected by performance; or
consent delivery of the thing 2. Petition for the sale of the real
pledged property as in a foreclosure of
CIVIL LAW COMMITTEE

mortgages under Rule 68 of the Rules 4. Accompanied by an affidavit of good

of Court.(Art 2137) faith to bind third persons, but not
for the validity of the contract.
NOTES: 5. It can cover only obligations existing
 The parties, however, may agree on at the time the mortgage is
an extrajudicial foreclosure in the constituted.
same manner as they are allowed in NOTE: A mortgage containing a
contracts of mortgage and pledge stipulation in regard to future
(Tavera vs. El Hogar Filipino, Inc., 68 advances in the credit will take effect
Phil 712). only from the date the same are made
 A stipulation authorizing the and not from the date of the
antichretic creditor to appropriate mortgage (Jaca vs Davao Lumber Co.,
the property upon the non-payment 113 SCRA 107)
of the debt within the agreed period
is void (Art 2088). Effect of registration: Creates a real
right
CHATTEL MORTGAGE (Articles 2140-  The registration of the chattel
2141) mortgage is an effective and binding
notice to other creditors of its
 A contract by virtue of which personal existence and creates a real right or
property is recorded in the Chattel a lien which, being recorded, follows
Mortgage Register as a security for the chattel wherever it goes. The
the performance of an obligation (Art registration gives the mortgagee
2140). symbolical possession (Northern
Motors, Inc. vs. Coquia, 68 SCRA 374).
Characteristics
1. Accessory contract – it is for the Effect of failure to register chattel
purpose of securing the performance mortgage in the chattel mortgage
of a principal obligation registry
2. Formal contract – registration in the  Article 2140 makes the recording in
Chattel Mortgage Register is the Chattel Mortgage Register an
indispensable for its validity essential requisite but if the
3. Unilateral contract – it produces only instrument is not recorded, the
obligations on the part of the creditor mortgage is nevertheless binding
to free the thing from the between the parties. But the person
encumbrance on fulfilment of the in whose favour the law establishes a
obligation. mortgage has no other right than to
demand the execution and the
 Special Requisites (in addition to recording of the document.
the common essential requisites):
1. It can cover only personal or movable
property in general; however, the Chattel Mortgage Pledge
parties may treat as personal 1. Delivery of the 1. Delivery of the
property that which by its nature personal property thing pledged is
would be real property; to the mortgage is necessary
2. Registration of the mortgage with the not necessary
Chattel Mortgage Register where the 2. registration in 2. registration not
mortgagor resides; if property is the Chattel necessary to be
located in a different province, Mortgage Registry valid
registration in both provinces is necessary for its
required; validity
3. Description of the property as would 3. If property is 3. Debtor is not
enable the parties or other persons to foreclosed, the entitled to excess
identify the same after reasonable excess over the unless otherwise
investigation and inquiry; and amount due goes to agreed or except in
the debtor
CIVIL LAW COMMITTEE

case of legal the mortgagor (Cabral vs.

pledge Evangelista, 28 SCRA 1000).
4. If there is 4. If there is
deficiency after deficiency, Application of proceed of sale:
foreclosure, creditor is not 1. Costs and expenses of keeping
creditor is entitled entitled to recover and sale
to recover the notwithstanding 2. Payment of the obligation
deficiency from the any stipulation to secured by the mortgage
debtor, except the contrary 3. Claims of persons holding
under Art. 1484 subsequent mortgages in their
Subject matter of both is movable order
property 4. The balance, if any, shall be paid
to the mortgagor or person
Affidavit of Good Faith holding under him
 Oath in a contract of chattel
mortgage wherein the parties NOTES:
"severally swear that the mortgage is  The creditor may maintain an action
made for the purpose of securing the for the deficiency, except if the
obligation specified in the conditions chattel mortgage is constituted as
thereof and for no other purposes and security for the purchase of personal
that the same is a just and valid property payable in instalments (Art.
obligation and one not entered into 1484).
for the purpose of fraud.” (Sec. 5,  The action for deficiency may be
Chattel Mortgage Law) brought within ten (10) years from
the time the cause of action accrues
Effect of absence (Arts 1141 and 1142).
The special affidavit is required only  Only equity of redemption is available
for the purpose of transforming an to the mortgagor; the latter can no
already valid mortgage into longer redeem after the confirmation
“preferred mortgage.” Thus, it is not of the foreclosure sale.
necessary for the validity of the
chattel mortgage itself but only to Right of redemption
give it a preferred status. In other  When the condition of a chattel
words, its absence vitiates the mortgage is broken the following may
mortgage only as against third redeem:
persons without notice like creditors a) mortgagor;
and subsequent encumbrancers. b) person holding a subsequent
mortgage; or
Foreclosure of Chattel Mortgage c) subsequent attaching creditor.
NOTES:
 An attaching creditor who so redeems
 Foreclosure sale in chattel mortgage shall be subrogated to the rights of
is by public auction under Act No. the mortgagee and entitled to
1508, but the parties may stipulate foreclose the mortgage in the same
that it be by private sale. manner that the mortgagee could
 The mortgagee may, after thirty (30) foreclose it.
days from the time of the condition  The redemption is made by paying or
broken, cause the mortgaged delivering to the mortgagee the
property to be sold at public auction amount due on such mortgage and the
by a public officer. The 30-day period costs, and expenses incurred by such
is also a grace period for the breach of condition before the sale
mortgagor to discharge the mortgage thereof (Sec 13, Act No. 1508).
obligation. After the sale of the
chattel at public auction, the right of Right to possession of foreclosed
redemption is no longer available to property
CIVIL LAW COMMITTEE

1. Real mortgage – After the redemption  Preference creates no lien on

period has expired, the purchaser of property, and, therefore, gives no
the property has the right to a interest in property, specific or
conveyance and to be placed in general, to the preferred creditor but
possession thereof. a preference in application of the
proceeds after the sale. (Molina vs.
NOTES: Somes, 31 Phil. 76)
 Purchaser is not obliged to bring  The preferential right of credit
a separate suit for possession. He attains significance only after the
must invoke the aid of the courts properties of the debtor have been
and ask for a WRIT OF inventoried and liquidated, and the
POSSESSION. claims held by his various creditors
 Section 7 of Act No. 3135 allows have been established. (DBP vs.
the purchaser to take possession NLRC, 183 SCRA 328)
of the foreclosed property during
the period of redemption upon Preference of Lien
filing of an ex parte application Credit
and approval of a bond. Applies only to Creates a charge
claims which do on a particular
2. Chattel mortgage – When default not attach to property
occurs and the creditor desires to specific
foreclose, the creditor has the right properties
to take the property as a preliminary
step for its sale. Liability of debtor’s property for his
NOTE: Where the debtor refuses to obligations
yield the property, the creditor’s GENERAL RULE: Debtor is liable with all
remedy is to institute an action either his property, present and future, for the
to effect judicial foreclosure directly fulfilment of his obligations. (Art 2236)
or to secure possession (REPLEVIN) as
a preliminary to the sale EXEMPT PROPERTY:
contemplated in Section 14 or Act. 1. Present property – those provided
No. 1508 under Arts. 155 and 205 of the
Family Code, Sec. 13, Rule 39 of
CONCURRENCE AND PREFERENCE OF the Rules of Court, and Sec. 118
CREDITS (Articles 2236 – 2251) of the Public Land Act
2. Future property – a debtor who
Concurrence of Credits obtains a discharge from his debts
 Possession by two or more creditors on account of his insolvency, is
of equal rights or privileges over the not liable for the unsatisfied
same property or all of the property claims of his creditors with said
of the debtor property subject to certain
exceptions expressly provided by
Preference of Credits law. (Secs. 68, 69, The Insolvency
 Right held by a creditor to be Law [Act No. 1956])
preferred in the payment of his claim 3. Property under legal custody and
above others out of the debtor’s those owned by municipal
assets. corporations necessary for
governmental purposes
NOTES:
 The rules on preference of credits General Categories of Credit:
apply only when two or more 1. Special Preferred Credits - those
creditors have separate and distinct listed in Arts. 2241 and 2242 shall be
claims against the same debtor who considered as mortgages and pledges of
has insufficient property. real or personal property or liens (Art.
2243). Hence, they are not included in
the insolvent debtor's assets.
CIVIL LAW COMMITTEE

therein, as where he has sold the

NOTES: property (Peña vs. Mitchell, 9 Phil
 Arts. 2241 and 2242 do not give the 587)
order of preference or priority of
payment. They merely enumerate 2. Ordinary Preferred Credits - those
the credits which enjoy preference listed in Art. 2244 as amended by
with respect to specific movables or Art. 110 of the Labor Code.
immovables. With respect to the NOTES:
same specific movables or  The provision not only enumerates
immovables, creditors, with the the preferred credits with respect to
exception of the State (No. 1), other property, real and personal, of
merely concur. the debtor, but also gives their order
 They only find application when there of preference “in the order named”.
is a concurrence of credits, i.e., when  In contrast with Articles 2241 and
the same specific property of the 2242, Article 2244 creates no liens on
debtor is subjected to the claims of determinate property which follow
several creditors and the value of such property. What Article 2244
such property is insufficient to pay in creates are simply rights in favour of
full all the creditors. In such a certain creditors to have the cash and
situation, the question of preference other assets of the insolvent applied
will arise. in a certain sequence or order of
 Article 2242 makes no distinction priority.
between registered and unregistered  Article 2244, particularly par (14)
vendor’s lien (No. 2). Hence, any lien item (1) thereof, is not applicable to
of that kind enjoys the preferred obligations of the State as it is a
credit status. Unlike the unpaid price recognized doctrine that the State is
of real property sold, mortgage always solvent. It is inconceivable for
credits (No. 5), in order to be given the State to voluntarily initiate
preference, should be recorded in the insolvency or general liquidation
Registry of Property. But a recorded proceedings or to be subjected to
mortgage credit is superior to an such proceedings under its own laws.
unrecorded unpaid vendor’s lien (De
Barretto vs. Villanueva, 1 SCRA 288) 3. Common Credits – those listed under
 The priority rule applies to credits Art. 2245, which shall be paid pro
annotated in the Registry of Property. rata regardless of dates.
As to credits mentioned in No. 7 of NOTE: Ordinary Preferred and Common
Article 2242, there is preference Credits cover only “free property” of the
among the attachments or executions debtor, or those not subjected to Special
according to the order of the time Preferred Credit.
they were levied upon the property.
The pro rata rule in Article 2249 does Effects of Article 110 of Labor Code to
not apply; otherwise, the result Art 2244:
would be absurd. The preference of a 1. Removed the one-year limitation
credit annotated by an attachment or found in No. 2 of Art. 2244
execution could be defeated by 2. Moving up the claims for unpaid
simply obtaining a writ of attachment wages (and other monetary claims) of
or execution, no matter how much laborers or workers of insolvent from
later (Manabat vs Laguna Federation second priority to first priority in the
of Facomas, Inc., 19 SCRA 621). order of preference established by
 The last paragraph of Article 2241 Art. 2244
applies only when the right of
ownership in such property continues
in the debtor, and, therefore, it is not
applicable to cases where the debtor
has parted with his ownership NOTES:
CIVIL LAW COMMITTEE

 In case of bankruptcy or liquidation of executions, the rule is still

the employer’s business, the unpaid preference according to the priority
wages and other monetary claims of of the credits in the order of time.
the employees shall be given first  In order to make the pro rating
preference and shall be paid in full provided in Art 2249 fully effective,
before the claims of the government the preferred creditors enumerated
and other creditors may be paid. The in Nos. 2 to 14 of Art 2242 must
terms, “declaration” of bankruptcy, necessarily be convened, and the
or “judicial” liquidation have been import of their claims ascertained.
eliminated, nevertheless, according There must be first some proceeding
to the SC, bankruptcy or liquidation where the claims of all the preferred
proceedings are still necessary for the creditors may be bindingly
operation of the preference accorded adjudicated, e.g. insolvency,
to workers under Art. 110 of the settlement of decedent’s estate, or
Labor Code. (DBP vs. NLRC 183 SCRA other liquidation proceedings except
328; RA No. 6715 Sec 10) where there are not more than one
 In case of rehabilitation, the creditor.
preference of credit granted to
employees under Art 110 of the Labor
Code is not applicable (Rubberworld
[Phils.] vs CA, 305 SCRA 722).
Refectionary Credit
 Indebtedness incurred in the repair or
reconstruction of something
previously made, such repair or
reconstruction being made necessary
by the deterioration or destruction of
the thing as it formerly existed.
ORDER OF PREFERENCE OF CREDITS
 Arts. 2241 and 2242, jointly with Arts.

2246 to 2249 establish a two-tier
order of preference:
1. First tier – includes taxes, duties and
fees due on specific movable or
immovable property;
2. Second tier – all other special
preferred (non-tax) credits shall be
satisfied pro-rata, out of any residual
value of the specific property to
which such credits relate.
NOTES:
 The pro-rata rule does not apply to
credits annotated in the Registry of
Property by virtue of a judicial
 Credits which do not enjoy any

order, by attachments and preference with respect to specific
executions, which are preferred as to property because they are not among
“later credits”. In satisfying several those mentioned in Arts. 2241 and
credits annotated by attachments or 2242 and those while included in said
CIVIL LAW COMMITTEE

articles are unpaid because the value

of the property to which the
preference refers is less than the
preferred credit or credits, shall be
satisfied in the order established in
Art. 2244 with reference to other real
and/or personal property.
 Common credits or those which do
not fall under Arts. 2241, 2242, and
2244 do not enjoy any preference and
shall be paid pro rata regardless of
dates.
CIVIL LAW COMMITTEE


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San Beda College of Law 182

MEMORY AID IN CIVIL LAW

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MEMORY AID IN CIVIL LAW

shall pay the same amount of the 1. PURPOSE: Bailee in commodatum

4. Bailor need not be the owner of the

COMMODATUM (Articles 1935 – 1952) NOTE:Use of the thing loaned

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MEMORY AID IN CIVIL LAW

b. nature of the thing until he is reimbursed for the

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

retention for damages.

3. Relationship Relationship is that

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

otherwise it is payable in the well as the accrual thereof, is

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

 Interest as indemnity for damages is 3. Bilateral (onerous deposit) -

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

any calamity, or by travellers in  A contract for the rent of safety

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

he have been notified of the by the depositary would make him

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

8. To change the way of the deposit if

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

2. To pay loses incurred by the the care and vigilance of their

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

under the contract the creditor is  A guaranty may be given as

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

 The consideration of the guaranty Guaranty Suretyship

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

A contract by which a An undertaking that until a certain period, especially if

Continuing guaranty (Art 2053) Qualifications of a guarantor: (Arts

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MEMORY AID IN CIVIL LAW

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

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MEMORY AID IN CIVIL LAW

NOTE: This right of subrogation is a. guarantor was prevented by

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

1. There should be a pledge, mortgage, 2. Where only a portion of the loan

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

understanding that when the debtor who is called the pledgor to

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW

CIVIL LAW COMMITTEE

MEMORY AID IN CIVIL LAW