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LOAN

Precarium – Precarium is a kind of commodatum where the lender may demand the thing
at will. Precarium exists in the following cases:

a. If there is no stipulation as to the duration of the contract or to the use to which the
thing loaned should be devoted
b. If the use of the thing is merely tolerated by the lender

Liability for damages for known hidden flaws - Requisites: (F-HADD)


a. There is a flaw or defect in the thing loaned;
b. The flaw or defect is hidden
c. The lender is aware of the flaw
d. The lender does not advise the borrower of the flaw
e. The borrower suffers damages by reason of the flaw or defect

INTEREST
Requisites for Recovery of Interest:
1. The payment of interest must be expressly stipulated.
2. in writing
[3. And the interest must be lawful (but since there is no Usury Law anymore, then there is no
such thing as unlawful interest, so I don’t think this requisite is still included )]

Stipulation of interest
1. The interest rate stipulated by the parties, not the legal rate of interest, is applicable.
2. Default rule: If the parties do not stipulate an interest rate, the legal rate for loans and
forbearances of money is 12%.

For other sources of obligations, such as sale, and damages arising from injury to persons and
loss of property which do not involve a loan, the legal rate of interest is 6%.
3. Increases in interest must also be expressly stipulated.
4. It is only in contracts of loan, with or without security, that interest may be stipulated and
demanded.
5. Stipulation of interest must be mutually agreed upon by the parties and may not be
unilaterally increased by only one of the parties. This would violate consensuality and
mutuality of contract (PNB v. CA). But the parties can agree upon a formula for determining
the interest rate, over which neither party has control (ex: interest will be adjusted quarterly
at a rate of 3% plus the prevailing 91-day T-bill rate, etc.). But if the formula says “interest
will be based on T-bill rates and other interest-setting policies as the bank may determine,”
this is not valid.

Indemnity for damages – The debtor in delay is liable to pay legal interest as indemnity for
damages even without a stipulation for the payment of interest.
Where to base the rate of damages:
a. Rate in the penalty clause agreed upon by the parties
b. If there is no penalty clause, additional interest based on the regular interest rate of
the loan
c. If there is no regular interest, additional interest is equivalent to the legal interest rate
(12%)
GUARANTY AND SURETYSHIP
Characteristics of the Contract of Guaranty (A-SC-U-D)
1. Accessory: It is dependent for its existence upon the principal obligation guaranteed by it.
2. Subsidiary and Conditional: It takes effect only when the principal debtor fails in his
obligation.
3. Unilateral:
a. It gives rise to obligations on the part of the guarantor in relation to the creditor and
not vice-versa. (Although after its fulfillment, the principal debtor should indemnify
the guarantor, but this obligation is only incidental)

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b. It may be entered into even without the intervention of the principal debtor.
4. Distinct Person: It requires that the person of the guarantor must be distinct from the
person of the principal debtor (you cannot guaranty your own debt). However, in a real
guaranty, a person may guarantee his own obligation with his own properties

Classification of Guaranty

1. In the broad sense:


a. personal: the guaranty is the credit given by the person who guarantees the
fulfillment of the principal obligation (guarantor)
b. real: the guaranty is property. If the guaranty is immovable property: real mortgage
or antichresis; If the guaranty is movable property: pledge or chatter mortgage

2. As to origin:
a. conventional: by agreement of the parties
b. legal: imposed by law
c. judicial: required by a court to guarantee the eventual right of one of the parties in a
Case

3. As to consideration:
a. gratuitous: the guarantor does not receive anything for acting as guarantor
b. onerous: the guarantor receives valuable consideration for acting as guarantor

4. As to the person guaranteed:


a. single: constituted solely to guarantee or secure performance of the principal
Obligation

b. double or sub-guaranty: constituted to secure fulfillment of a prior guaranty;


guarantees the obligation of a guarantor

5. As to scope and extent:


a. definite: limited to the principal obligation only or to a specific portion thereof
b. indefinite or simple: includes not only the principal obligation but also all its
accessories, including judicial costs.

1. Contractual and Accessory BUT Direct: The contractual obligation of the surety is merely
an accessory or collateral to the obligation contracted by the principal. BUT, his liability to the
creditor is direct, primary, and absolute.
2. Liability is limited by the terms of the contract : The extent of a surety’s liability is
determined only by the terms of the contract and cannot be extended by implication.
3. Liability arises only if principal debtor is held liable : If the principal debtor and the
surety are held liable, their liability to pay the creditor would be solidary. But, the surety does
not incur liability unless and until the principal debtor is held liable.

a. A surety is bound by a judgment against the principal even though the party was not a
party to the proceedings.
b. The creditor may sue, separately or together, the principal debtor and the surety
(since they are solidarily bound).
c. Generally, a demand or notice of default is not required to fix the surety’s liability.
d. An accommodation party (one who signs an instrument as maker, drawer, acceptor, or
indorser without consideration and only for the purpose of lending his name) is, in
effect, a surety. He is thus liable to pay the holder of the instrument, subject to
reimbursement from the accommodated party.
e. A surety bond is void where there is no principal debtor.

4. Surety is not entitled to exhaustion: A surety is not entitled to the exhaustion of the
properties of the principal debtor since the surety assumes a solidary liability for the
fulfillment of the principal obligation.

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5. The undertaking is to the CREDITOR, not to the principal debtor : The debtor cannot
claim that the surety breached its obligation to pay for the principal obligation because there
is no obligation as between the surety and the debtor. If the surety does not pay, the
principal debtor is still not relieved of his obligation.

However, if the contract of guaranty is entered into without the knowledge or consent or
against the will of the principal debtor, the effect is like payment by a 3rd person:

1. The guarantor can only recover insofar as the payment has been beneficial to the debtor.
2. The guarantor cannot compel the creditor to subrogate him in the creditor’s rights such as
those arising from a mortgage, guaranty or penalty

BUT, a guraranty may be constituted to guarantee the following defective contracts and
natural obligations:
1. Voidable: because the contract is binding unless it is annulled
2. Unenforceable: because an unenforceable contract is not void.
3. Natural obligations: even if the principal obligation is not civilly enforceable, the creditor may
still go after the guarantor

1. Common example given by JPSP is the credit line – The bank allows you to borrow up to
a certain ceiling, but there is no release of funds yet. If you have an obligation with a third
person and you default, the third person just needs to inform the bank, and the bank will
release the money. The money released will be considered as a loan from the bank to you.
The bank will allow the release of the money so long as it doesn’t exceed the ceiling.

2. To secure payment of any debt to be subsequently incurred – If the contract states that
the guaranty is to secure advances made “from time to time,” “now in force or hereafter
made,” or uses the words “any debt,” “any indebtedness,” “any sum,” “any
transaction,” the guaranty is a continuing guaranty.

3. To secure existing unliquidated debts – Future debts may also mean debts that already
exist but whose amount is still unknown.

CONTINUING GUARANTEE:
Example: G guarantees the 10K loan that B owes L and any other indebtedness that B may
incur against L. This is a valid guaranty because there is already an existing obligation (the
10K loan).

G guarantees the loan that B and L will enter into tomorrow. This is not valid. Although it is
for a future debt, it is not valid under Article 2053 because there is no principal obligation yet.
There is nothing to guarantee.

2nd Paragraph of Art. 2055: Extent of Guarantor’s Liability


1. Definite guaranty – The liability of the guarantor is limited to the principal debt, to the
exclusion of accessories.
2. Indefinite or simple guaranty – If the agreement does not specify that the liability of the
guarantor is limited to the principal obligation, it extends not only to the principal but also
to all its accessories.

GR: It is not necessary for the creditor to expressly accept the contract of guaranty since the contract is
unilateral; only the guarantor binds himself to do something.
EXCEPTION: If the guarantor merely offfers to become a guaranty, it does not become a binding obligation
unless the creditor accepts and notice of acceptance is given to the guarantor.

Ideally, the qualifications of a guarantor are the ff:


1. Integrity
2. Capacity to bind himself
3. Sufficient property to answer for the obligation which he guarantees

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When may the creditor demand another guarantor?
1. In case the guarantor is convicted in the first instance of a crime involving dishonesty (since
he loses integrity)
2. In case the guarantor becomes insolvent (since he loses sufficient property to answer for the
obligation which he guarantees) 􀃆 there is no need for a judicial declaration of insolvency

The liability of the guarantor is only accessory and subsidiary. Thus, in order for the creditor to
collect
from the guarantor, the ff. conditions must be fulfilled:
1. The creditor should have exhausted all the property of the debtor; and
2. The creditor has resorted to all legal remedies against the debtor (ex. Accion pauliana/
rescission of fraudulent alienations)

Art. 2059. This excussion shall not take place:


1. If the guarantor has expressly renounced it;
2. If he has bound himself solidarily with the debtor;
3. In case of insolvency of the debtor;
4. When he has absconded, or cannot be sued within the Philippines unless he has left a manager or
representative;
5. If it may be presumed that an execution on the property of the principal debtor would not result in the
satisfaction of the obligation.

EXCEPTIONS UNDER ART. 2059 (RUSIA)


1. When the right is Renounced or waived.
• The waiver must be made in express terms.
2. When the liability assumed by the guarantor is Solidary.
• In this case, he becomes a surety with primary liability.
3. When the principal debtor is Insolvent.
4. When the principal debtor Absconds or cannot be locally sued
5. 5. When resort to all legal remedies would be a Useless formality.

In order to demand that the creditor exhaust the properties of the principal debtor, the
guarantor must:

1. Set up the benefit of excussion against the creditor upon demand for payment by the creditor
from him; and
2. Point out to the creditor available property of the debtor within Philippine territory
sufficient to cover the amount of debt. (Therefore, property located abroad or which is not
easily available is not included among those that the guarantor can point out to the creditor.)

GR: A compromise binds only the parties thereto and not third persons. Thus, it cannot prejudice the
guarantor or debtor who was not a party to the compromise.
Exception: If the compromise has a benefit in the nature of a stipulation in favor of a third person,
the compromise may bind that third person.

The following conditions must concur in order that several guarantors may claim the benefit of
division:
1. There should be several guarantors
2. Of only one debtor
3. For the same debt

Art. 2066. The guarantor who pays the debtor must be indemnified by the latter.
The indemnity comprises:
(1) The total amount of the debt;
(2) The legal interests thereon from the time the payment was made known to the creditor, even
though it did not earn interest for the creditor;
(3) The expenses incurred by the guarantor after having notified the debtor that payment had been
demanded of him;

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(4) Damages, if they are due.

Exceptions to the right to indemnity of the guarantor


1. Where the guaranty is constituted without the knowledge or against the will of the debtor, the
guarantor can only recover insofar as the payment had been beneficial to the debtor
2. Payment by a third person who does not intend to be reimbursed by the debtor is deemed to
be a donation, which requires the debtor’s consent. But the payment is valid with respect to
the creditor.
3. Waiver

Art. 2071. The guarantor, even before having paid, may proceed against the principal debtor:
(1) When he is sued for payment;
(2) In case of insolvency of the principal debtor;
(3) When the debtor has bound himself to relieve him from the guaranty within a specified period,
and this period has expired;
(4) When the debt has become demandable, by reason of the expiration of the period for payment;
(5) After the lapse of 10 years, when the principal obligation has no fixed period for its maturity
unless it be of such nature that it cannot be extinguished except within a period longer than 10
years;
(6) If there are reasonable grounds to fear that the principal debtor intends to abscond;
(7) If the principal debtor is in imminent danger of becoming insolvent.
PLEDGE AND MORTGAGE
What are the kinds of pledge?
Pledge may be either:
1. Voluntary or conventional (created by agreement of the parties);
2. Legal (by operation of law).

What are the characteristics of pledge? [RAUS]


Pledge is:
1. Real, because it is perfected by delivery of the thing pledged.
2. Acessory, because it has no independent existence.
3. Unilateral, because it creates an obligation solely on the part of the creditor to return the
thing pledged upon fulfillment of the principal obligation.
4. Subsidiary, because the obligation of the creditor does not arise until fulfillment of the
principal obligation.

WHAT ARE THE ESSENTIAL REQUISITES OF PLEDGE AND MORTGAGE? [PRADO]


1. Purpose - To secure fulfillment of principal obligation;
2. Real – There must be delivery of the thing.
3. Alienation – when the principal obligation becomes due and the debtor defaults, the thing
may be alienated to satisfy the former.
4. Disposal – Pledgor/mortgagor must have free disposal of the thing or capacity to dispose.
5. Ownership – Pledgor/mortgagor must be the absolute owner of the thing;

WHAT ARE THE REQUISITES FOR PACTUM COMMISSORIUM TO EXIST?


1. There should be a pledge/mortgage;
2. There should be a stipulation for AUTOMATIC appropriation or the thing in case of default by
the debtor.

HOW CAN YOU OPT OUT OF THE PROHIBITION ON PACTO COMMISSORIO?


1. You can enter into another contract subsequent to the pledge/mortgage. The prohibition
applies only to stipulations made in the contract of pledge/mortgage.
2. The debtor can voluntarily cede the property to the creditor. This would in effect be a novation
of the pledge/mortgage.
3. There can be a stipulation where the debtor merely promises to sell; non-compliance would
give the creditor, not a right to the property, but an action for damages.
4. There can be a stipulation granting the creditor authority to take possession and not
ownership of the property upon foreclosure.

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WHAT ARE THE EXCEPTIONS TO INDIVISIBILITY:
1. Where each one of several thing guarantees a determinate portion of credit.
Ex: If you have 100 mortgages securing corresponding portion of the loan, then when the
corresponding portion is paid, the corresponding pledge/mortgage is extinguished. All 100 mortgages may
be in the same document. Or, if the parties agree to allow partial discharge of the pledge/mortgage. How?
Cancel pledge/mortgage and constitute a new pledge/mortgage.The downside is that you must again pay
doc. stamps and reg. fees, unlike in the document with 100 mortgages, where the fees are only paid once.
2. If there was only partial release of the loan. CB v. CA. The bank only released a portion of the loan;
the court ordered a corresponding portion of the REM to be released.
3. Where there was failure of consideration. Creditor took over management but the business failed.

WHAT ARE THE FORMALITIES REQUIRED FOR THE NOTARIAL SALE?


(1) the debt is due and unpaid;
(2) the sale must be at a public auction;
(3) there must be notice to the pledgor and owner, stating the amount due; and
(4) the sale must be with the intervention of a notary public.

HOW DO YOU GUARD AGAINST THE SITUATION OF NOT BEING ABLE TO RECOVER THE
DEFICIENCY IF YOU ARE THE PLEDGEE?
1) Set a minimum bid (if this is actually allowed; JPSP says yes, book says no)
2) Instead of selling the thing, just sue for the entire obligation.
3) Stipulate that if the value of the pledge goes under a certain amount, then the debtor shall be obliged to
pledge additional securities.

The third party pledgor is entitled to:


1. Indemnity;
2. Subrogation;
3. Pledgor is released if creditor accepts property in payment of debt;
4. Release in favor of one pledgor benefits all;
5. Extension granted to debtor extinguishes pledge;
6. Pledgors are released from obligation if by some act of the creditor, there can be no subrogation;
7. Pledgor may set up defenses inherent in the debt.

The foregoing articles govern the following pledges by operation of law; BUT after sale, the
excess, if any, is returned to the pledgor:
• Possessor in good faith may retain the thing on which he spent for necessary expenses until
he is reimbursed.
• He who works on a movable may retain the same until paid for the work.
• Depositary may retain thing until paid for the deposit.
• Agent may retain objects of agency until reimbursed by principal.
• Laborer’s wages are considered a lien on goods manufactured or work done.

What is the subject matter of real mortgage


1. Immovables
2. Alienable rights imposed upon immovables

What are the requisites of real mortgage?


1. It must be constituted to secure a principal obligation.
2. The mortgagor must be the absolute owner of the thing mortgaged.
3. He must have free disposal of the thing or otherwise be authorized to do so.
4. When the principal obligation becomes due, the property mortgaged may be alienated
for the payment to the creditor.
5. To prejudice third persons, the mortgage must be recorded in the Registry of Property.

If the first four requisites are present, there is already a valid mortgage between the parties –
mortgagor and mortgagee.

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But to affect third persons, there is a need to comply with the fifth requisite: The document of mortgage
must be recorded in the Registry of Property. This is because recording the document in the Registry of
Property serves as notice to 3rd persons. This is similar to the requirement in pledge that the pledge be in a
public document.

Procedure: What happens when you enter into a contract of


mortgage?
Step 1: Execute the document of mortgage
Step 2: Go to a notary public, who will notarize the document.
Step 3: Pay the documentary stamp tax within the first five days of the succeeding month. The docstamp
tax is a percentage of the value of the property mortgaged.
Step 4: Go to the Office of the Register of Deeds and pay the registration fees. Before you pay the
registration fees, the government will require you to update payment of realty taxes on the property. After
payment of the registration fees, the mortgage will be annotated on the title.

This article 2073 applies only if there are two or more guarantors of the same debtor for the
same debt and one of them has paid:
1. by virtue of a judicial demand; or
2. when the principal debtor is insolvent.

General Rule: A debtor is liable with ALL his property, present and future, for the fulfillment of his
obligations.

When confronted with foreclosure problem things to know:


First, check if there’s a stipulation saying that there will be a private sale. If there is such a stipulation, the
property can be sold at a private sale. If there is no such stipulation, then there will be either judicial or
extra-judicial foreclosure.

Second, look for the following tell-tale signs:


1. Is the mortgagee a foreigner? If it’s a foreigner, it’s automatically judicial foreclosure
(Act 133).
2. If the mortgagee is not a foreigner, look for a stipulation in the mortgage agreement
which gives the mortgagee the special power of attorney to carry out the extrajudicial
foreclosure in accordance with Act 3135. If you find this stipulation, it is an extra-judicial foreclosure.
3. If there is no stipulation for extra-judicial foreclosure under Act 3135, it is a judicial
foreclosure governed by Rule 68 of the Rules of Court.

Third, if it’s an extra-judicial foreclosure, look at the parties. Who is foreclosing?


1. If it is a bank, the governing law is Act 3135, but there will be certain exceptions
applicable only to banking institutions, provided in Section 47 of the General Banking
Act.
2. If the mortgagee is not a bank, the extra-judicial foreclosure will be governed by Act
3135.

PROCESS:

JUDICIAL FORECLOSURE UNDER RULE 68, RULES OF COURT


STEP 1: The mortgagee should file a petition for judicial foreclosure in the court which has jurisdiction over
the area where the property is situated
STEP 2: The court will conduct a trial. If, after trial, the court finds merit in the petition, it will render
judgment ordering the mortgagor/debtor to pay the obligation within a period not less than 90 nor more
than 120 days from the finality of judgment.
STEP 3: Within this 90 to 120 day period, the mortgagor has the chance to pay the obligation to prevent
his property from being sold. This is called the EQUITY OF REDEMPTION PERIOD.
STEP 4: If mortgagor fails to pay within the 90-120 days given to him by the court, the property
shall be sold to the highest bidder at public auction to satisfy the judgment.
STEP 5: There will be a judicial confirmation of the sale.

After the confirmation of the sale, the purchaser shall be entitled to the possession of the

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property, and all the rights of the mortgagor with respect to the property are severed or
terminated. The equity of redemption period actually extends until the sale is confirmed. Even after the
lapse of the 90 to 120 day period, the mortgagor can still redeem the property, so long as there
has been no confirmation of the sale yet. Therefore, the equity of redemption can be
considered as the right of the mortgagor to redeem the property
BEFORE the confirmation of the sale.

IMPORTANT: After the confirmation of the sale, the mortgagor does not have a
right to redeem the property anymore. This is the general rule in judicial foreclosures – there is no
right of redemption after the sale is confirmed.

The exception to this rule is when the judicial foreclosure is done by a BANK. In
such a case, there is still a right of redemption within one year from the
registration of the sale.
STEP 6: The proceeds of the sale of the property will be disposed as follows:

1. First, the costs of the sale will be deducted from the price at which the
property was sold
2. The amount of the principal obligation and interest will be deducted
3. The junior encumbrances will be satisfied
4. If there is still an excess, the excess will go back to the mortgagor. In mortgage,
the mortgagee DOES NOT get the excess (unlike in pledge).

If there is a deficiency, the mortgagee can ask for a DEFICIENCY JUDGMENT


which can be imposed on other property of the mortgagor. This is unlike the
rule in pledge, where the pledgee cannot collect any deficiency. This is also
unlike the rule in extra-judicial foreclosure where the mortgagee must go to
court and file another action for the collection of the deficiency. In this case,
there is no need to file an action. The mortgagee just has to file a motion in
court for the deficiency judgment.

EXTRA JUDICIAL FORECLOSURE PROCESS:

What is the procedure?


STEP 1: File a complaint for extra-judicial foreclosure with the
Executive Judge
STEP 2: Notice of the sale
There are two kinds of notices required:
1. Posting in at least 3 public places 20 days before the sale – usually in the Sheriff’s
office, the Assessor’s office, and the Register of Deeds.
2. Publication in a newspaper of general circulation, once a week for at least three
consecutive weeks if the value of the property exceeds P400

This need not be done within a span of 21 days. For example, you can publish on
August 30, which is a Friday, then on September 2, which is a Monday, and then on
September 9, which is also a Monday. In this case, publication for three consecutive
weeks is completed within 11 days.

There is no need for personal notice to the mortgagor, unlike in a guaranty. This is because the
mortgagor, having defaulted in the principal obligation, should expect that a foreclosure is forthcoming. This
is because the mortgagor, having defaulted in the principal obligation, should expect that a foreclosure is
forthcoming. If you’re the mortgagee, you would want to surprise the mortgagor so the he cannot employ
dilatory tactics such as getting an injunction in order to delay the foreclosure. If you’re nasty, you should
publish it in Abante, which is a newspaper of general circulation, but which nobody consults for the purpose
of checking if their mortgaged property is about to be foreclosed.

STEP 3: Public Auction


Time for conducting the public sale: Between 9 am to 4 pm
Manner of conducting the sale: The sale should be under the direction of the sheriff of the province, the

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justice or auxiliary justice of the peace of the municipality, or of a notary public of the municipality, who
shall be compensated with FIVE PESOS for each day of actual work performed (wow $$$).

Who may bid: Anyone may bid at the sale, unless there are exceptions stipulated in the
mortgage deed. Even the mortgagee/creditor may bid. And unlike in pledge, even if the
mortgagee/creditor is the sole bidder, the sale is still valid. This is because there is a right to
redeem in extra-judicial foreclosure. Therefore, the lower the price at which it is sold, the better the chances
of the mortgagor/debtor to redeem the property.

Can the parties stipulate a minimum price at which the property


shall be sold?

No, because the property must be sold to the highest bidder. Parties cannot, by agreement, contravene the
law. However, this rule may not apply where the purchaser happens to be the creditor or mortgagee
himself. The mortgagor can argue that the stipulation should be binding on the mortgagee on the principle
of estoppel.

What is the effect of inadequacy of the price at which the property is sold at auction?
If there is a right to redeem, inadequacy of price is not material because the debtor may
reacquire the property. It will even make it easier for him to redeem it if it is sold at a low price.

Mere inadequacy of price will not be sufficient to set aside the sale unless the price is so
inadequate as to shock the conscience.

What happens if there is an excess?


The excess should first be applied to satisfy the junior liens and encumbrances on the property. If there is
still an excess, it goes to the mortgagor.

What happens if there is a deficiency?


The mortgagee must go to court and file an action to collect the deficiency. He may file an
action for a deficiency judgment even during the period of redemption.
STEP 4: Possession of the Property
Upon foreclosure, if the mortgagor is in possession of the property, he will retain possession during the
redemption period (one year from the date of the sale).
However, if the winning bidder already wants possession of the property, he may file a petition in court to
gain possession. He must give a bond equivalent to the rent for the use of the property for 12 months. The
bond will answer for any loss to the mortgagor if it is later found that he was not in default in the mortgage
obligation or that the conduct of the sale violated Act 3135. Upon approval of the bond, the court will issue
a writ of possession in favor of the purchaser.

Exception to this rule: If the party foreclosing is a BANK, Sec 47 of the General Banking
Law provides that the purchaser shall immediately have the right to take possession of the property
upon confirmation of the sale.

STEP 5: Redemption

The debtor has the right to redeem the property sold within one year from the date of the sale,
reckoned from date of execution of the certificate of sale since it is only from that date that the sale
takes effect as a conveyance.

Exception: If the mortgagee foreclosing is a BANK and the mortgagor is a JURIDICAL


PERSON, the juridical person shall have the right to redeem the property BEFORE the
registration of the certificate of sale but NOT EXCEEDING 90 DAYS FROM THE DATE OF THE
FORECLOSURE.

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CHATTEL MORTGAGE

What are the characteristics of the contract of chattel mortgage?


1. It is an accessory contract because it secures performance of a principal
obligation
2. It is a formal contract because it requires registration in the Chattel Mortgage
Register for its validity (but only against third persons)
3. It is a unilateral contract because it produces only obligations on the part of
the creditor to free the thing from the encumbrance on fulfillment of the
Obligation.

The subject matter of chattel mortgage is personal or movable property.


What are the requisites for a valid chattel mortgage?
1. It must be constituted to secure a principal obligation.
2. The mortgagor must be the absolute owner of the thing mortgaged.
3. He must have free disposal of the thing or otherwise be authorized to do so.
4. When the principal obligation becomes due, the property mortgaged may be alienated
for the payment to the creditor.
5. To prejudice third persons, the mortgage must be recorded in the Chattel Mortgage
Registry

If the first four requisites are present, there is already a valid mortgage between the parties –
mortgagor and mortgagee.

But to affect third persons, there is a need to comply with the fifth requisite: The document of mortgage
must be recorded in the Chattel Mortgage Registry. This is because recording the document in the
Chattel Mortgage Registry serves as notice to 3rd persons. This is similar to the requirement in pledge that
the pledge be in a public document and the requirement in Real Estate Mortgage that it must be recorded in
the Registry of Property.

What happens when the mortgagor defaults on the obligation?


1. Right of Redemption

In case of default, the following persons may redeem the property before it
is sold, by paying the amount of the obligation plus costs and expenses
incurred from the breach:
a. the mortgagor
b. a subsequent mortgagee
c. a subsequent attaching creditor

If an attaching creditor redeems, he is subrogated to the rights of the


mortgagor. He can foreclose the mortgage.

But once the property is sold at auction, there can be no redemption


Anymore.

2. Right of Mortgagee to Possession


If the creditor/mortgagee wants to foreclose upon default, he has the
implied right to take the mortgaged property. If the debtor/mortgagor
refuses to surrender the property, the creditor should file an action for
replevin to take possession or for judicial foreclosure.

3. Foreclosure
The parties can stipulate for a private sale upon default.
If there is no stipulation, the applicable rule is Section 14 of the Chattel

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Mortgage Law.

According to Section 14, the creditor/mortgagee can cause the property to


be sold at public auction thirty days after default. This is a minimum grace
period given to the mortgagor to redeem the property before it is sold at
auction. There is no maximum time period for holding the sale.
The procedure is the same as that for extra-judicial foreclosure of a real
estate mortgage, except for the notice requirements. In chattel mortgage,
the only notice requirement is posting at two or more public places in the
municipality and personal notice to the mortgagor and junior mortgagees at
least ten days before the date of the sale (no publication).

The proceeds of the sale will be applied as follows:

a. Costs and expenses of the sale


b. Payment of the obligation secured by the mortgage
c. Claims of persons holding subsequent mortgages in their order;
and
d. The balance, if any, shall be given to the mortgagor

ANTICHRESIS

What are the characteristics of antichresis?


1. Accessory – It secures the performance of a principal obligation. Manresa, however,
believes that it is an independent contract.
2. Formal Contract – It must be in specified form to be valid (in writing).

What are the obligations of the creditor under the contract of antichresis?

1. Pay the taxes and charges upon the estate –


If the creditor does not pay the taxes, he is required by law to pay indemnity for damages to the debtor. If
the debtor pays the taxes on the property which the creditor should have paid, the amount is to be applied
to the payment of the debt. If the amount of taxes paid by the debtor is enough to satisfy the principal
obligation, then the loan and the antichresis are extinguished; the creditor must return the property to the
debtor.
What if the creditor does not want to pay the taxes and charges? They must so stipulate in their agreement.

2. Apply the fruits


The creditor must apply the fruits of the property to the payment of interest, if
owing, and thereafter to the principal.

When can the debtor get back the property subject of the antichresis?
GR: The debtor can get it back only when he has totally paid the principal obligation. This is because the
property stands as a security for the payment of the principal obligation.
EXCEPTION: if the creditor does not want to pay the taxes and charges
upon the estate. In such a case, the creditor may compel the debtor to get the property back,

UNLESS there is a contrary stipulation (exception to the exception).


But this has the effect of extinguishing the contract of antichresis

The creditor in antichresis since he has no ownership over the property here are the remedies
in case of deafault:

1. Bring an action for specific performance.


2. Petition for the sale of the real property in judicial foreclosure proceedings under Rule
68 of the Rules of Court.

Can the parties stipulate on an extra-judicial foreclosure? Yes, in the same manner that

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they are allowed in pledge and mortgage.

CONCURRENCE OF PREFERENCE

Nature and Effect of Preference


1. Exception to the general rule – Because, generally, you have to pay your creditors
when the debt becomes due. There should be no rules as to who should be paid first.
Preference applies only when there are two or more creditors with separate claims
against a debtor who has insufficient property. Since it is an exception to the general
rule, the law as to preferences is strictly construed.

2. Does not create an interest in property – Preference simply creates a right to be paid first from the
proceeds of the sale of property of the debtor. It does not create a lien on the property itself, but merely a
preference in the application of the proceeds of the
property after it is sold.

The creditor does not have the right to TAKE the property or SELL it as against
another creditor – Preference is not a question as to who may take and sell property
belonging to the debtor. Preference applies after a sale, and it is a question of
application of the proceeds of the sale to satisfy the debt.

4. It must be asserted – If the right claimed is not asserted and maintained, it is lost. If
property has not been seized, it is open to seizure by another.

5. It must be maintained – Where a creditor released his levy, leaving the property in
possession of the debtor, thereby indicating that he did not intend to press his claim
further as to that specific property, he is deemed to have abandoned his claim of
Preference.

When are the rules on preference of credits applicable?


The rules apply only where:
1. there are two or more creditors
2. with separate and distinct claims
3. against the same debtor
4. who has insufficient property.

There must be a proceeding such as an insolvency proceeding wherein the creditors can file their claims.
The right becomes significant only after the properties of the debtor have been inventoried and liquidated.

The title on Concurrence and Preference of Credits refers only to credits which are already due.

If one of the spouses is insolvent, the assets of the CPG or AC do not pass to the assignee in insolvency
elected by the creditors or appointed by the court. The reason for this is that the CPG or AC is distinct
from the individual spouses. The exemption applies provided that:
1. The CPG or AC subsists; and
2. The obligations of the insolvent spouse have not redounded to the benefit of the
Family.

The insolvency of the husband does not dissolve the CPG or AC.

The Civil Code classifies credits against a particular insolvent into three general categories:

1. special preferred credits listed in 2241 and 2242


2. ordinary preferred credits listed in 2244
3. common credits under 2245

GR: With respect to the same specific movable or immovable, creditors merely concur. There is no

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preference among them.

EXCEPTION: except that the State always gets paid the taxes imposed on the property first.

ART. 2241 -- movables


(1) Taxes
The tax must be due on the movable itself.

(2) Misappropriation, breach of trust, malfeasance of public officers


The acquisition must have been in the performance of official functions.
Also, the property must still be in the hands of the public official. If it is sold to a purchaser for value and in
good faith, there can be no more claim on the movable.

(4) Guaranteed with a pledge or chattel mortgage

To be a preferred credit:
If it’s a pledge, it must be in a public instrument.
If it’s a chattel mortgage, it must be registered in the chattel mortgage registry.

ART 2242 -- immovables


(1) Taxes
Capital gains tax is NOT a preferred credit because it is really a tax on income and not on the property itself.
This provision covers real property taxes.

(2) Unpaid Seller


There is no need to register the sale in order for the unpaid seller to have a preferred claim against the
immovable.

(5) Mortgage
The mortgage must be registered in the Registry of Property in order for the credit to be a
preferred claim against the immovable.

(7) Credits annotated in the Registry of Property in virtue of judicial order, attachment, or
execution
The credits must also be registered in order to be preferred.

The preference is only with respect to LATER CREDITS.


The credit is preferred only with respect to other attachments, not to other kinds of credit.
Therefore, this does not share equally with the other claims. It merely provides that a credit by virtue of
judicial order, attachment, or execution that is first registered in the Registry of Property is preferred over
other credits of the same nature, which are registered at a later date.

Unlike the other special preferred credits, these credits do not share
proportionately in the property upon which they are imposed. To determine the order of
priority among several credits of this kind, their dates should be the basis. The first one to be
registered will be prioritized over the others.

ART. 2244 – ordinary preferred


Once the special preferred claims under 2241 and 2242 have been satisfied, the property remaining
constitute the debtor’s free property. The debtor’s free property will then be used to pay ordinary
preferred claims in the order established in 2244. Unlike 2241 and 2242, 2244 is not merely an
enumeration; it establishes the order of priority. Also, unlike 2241 and 2242, 2244 does not establish a
preference with respect to specific property of the debtor.
The preference is with respect to the mass of properties of the debtor remaining after the special preferred
claims have been satisfied.

Important Items
(2) Labor Claims

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Art. 110 of the Labor Code has modified 2244 by moving labor claims to number (1), ahead of funeral
expenses. Labor claims are still not in the level of special preferred claims under 2241 and 2242. The Labor
Code merely moved it up to the top of the list of ordinary preferred claims. Also, Art. 110 of the Labor Code
has removed the one-year limitation.

(9), (10), (11) Taxes


Note that this is unlike special preferred claims where a tax is imposed upon a specific movable or
immovable property. Special preferred claims, as provided by 2243, enjoy first preference with
respect to the property upon which they are imposed.

Under 2244, on the other hand, taxes of other kinds are only ordinary preferred credits and are only 9th,
10th, and 11th priorities with respect to the free portion of the property of the debtor.

Examplesare income tax, license fees, and capital gains tax. These are not imposed on specific property of
the debtor, so they are ordinary preferred claims, which can be collected against the debtor’s free property.

Taxes owing the national government should be satisfied first, followed by the provincial government, then
the city or municipal government.

(14) Credits appearing in a public instrument or in a final judgment


This paragraph contains the rule of preference when you have several credits appearing in public
instruments or in a final judgment. To determine the order of preference among them, just consider the
date. First in time, priority in right, sabi nga ni CLV.

This does not include those registered credits which fall under 2241 and 2242, such as those arising from a
pledge or mortgage, or an attachment of specific real property.

APPLYING THE RULES (ORDER OF PREFERENCE)

APPLYING THE RULES


STEP 1: MAKE AN INVENTORY OF ASSETS
List down all the assets of the debtor.
Group these assets into two: the Preferred Group and the Free Property Group.
Those assets with special preferred claims under 2241 and 2242 imposed upon them belong to the
Preferred Group.

Those without special preferred claims will constitute the debtor’s Free Property. Remember to take out
property held by the debtor only in the capacity of trustee. He may have legal
title to it, but the beneficial title and ownership actually belong to another person. Since the property does
not belong to the debtor, they should not be included in the proceedings. The same goes for property of the
AC of CPG, property held as lessee or usufructuary, etc

STEP 2: GROUP THE CLAIMS


Make four groups – (1) special preferred credits on movables, (2) special preferred credits on
immovables, (3) ordinary preferred credits, and (4) common credits.

For the special preferred claims, look out for the following because they are the most common:

1. For movables:
a. import duties/other taxes imposed directly on the movable
b. an obligation secured by a pledge (in a public instrument) or a chattel mortgage
(registered)
c. claim of unpaid seller for the price of the movable

2. For immovables:
a. real estate taxes
b. an obligation secured by a real estate mortgage (registered)
c. claim of unpaid seller for the price of the immovable

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d. credits annotated in the Registry of Property by attachment or execution upon the
Immovable. Put the ordinary preferred claims under 2244 together. List them down according to the order
under 2244, since 2244 already gives the order of preference. Remember, though, that labor claims are on
top.

The most common are:


1. labor claims
2. taxes other than those imposed directly upon a movable or an immovable, such as income
taxes and license fees (In the following order: national government, provincial
government, city or municipal government).
3. credits in a final judgment or in a public document, such as notarized promissory notes
Put the other credits not falling under these three together. These are the common claims. The usual
example is a promissory note in a private instrument.

STEP 3: SATISFY THE SPECIAL PREFERRED CLAIMS


First: Take the value of the specific movable/immovable upon which the preferred claim is imposed.
Second: Pay the taxes due on the property.
Third: Pay the preferred claim of the creditor.

What if you have more than one preferred creditor over the same property?
Ex: The claims against a car are: import duties, chattel mortgage, and unpaid seller.
􀃆 In this case, pay the taxes first. Since the mortgage creditor and the unpaid seller are both
special preferred creditors, they will share the balance proportionately. There will only be
proportionate sharing in case the value of the thing after payment of taxes is not enough to satisfy all of the
special preferred claims against it. If the value of the thing is sufficient, then
all the special preferred claims must be paid in full.

Fourth: If, after paying the taxes and other special preferred claims, there is an excess, take the value of
the excess and add it to the debtor’s Free Property.
Fifth: If the value of the specific property is not enough to satisfy the taxes and other special preferred
claims, and there is a deficiency, follows these rules:

a. If the deficiency is in a credit arising from a pledge, real mortgage, or chattel mortgage,
put the deficiency in the ordinary preferred credits group. Why do we know right away
that it is an ordinary preferred credit? It is a credit in a public instrument, so it is an
ordinary preferred credit under (14) of 2244. You know it’s in a public instrument because
it was treated at first as a special preferred credit, and the requirement under 2241 and
2242 is that these transactions be registered (for real and chattel mortgage) or be in a
public document (for pledge).

b. If the deficiency is in a credit arising from a transaction that is not in a public document or
is not contained in a final judgment (ex: unrecorded sale), put the deficiency in the
common credits group.

STEP 4: UPDATE THE INVENTORY AND LIST OF CREDITS

After you have satisfied all of the special preferred claims, update the following:

1. The inventory of assets

You may have to add to the Free Property Group if, after satisfying the special preferred
claims, you have an excess. Make sure that you add the excess to the Free Property Group.

Add up the entire value of the Free Property Group because this is what you will use to settle
the ordinary preferred claims and the common claims.

2. The list of ordinary preferred claims

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If there was a deficiency in satisfying the special preferred claims, the deficiency will be an ordinary
preferred credit if it is notarized or is contained in a final judgment.

3. The list of common claims

If there was a deficiency in satisfying the special preferred claims, the credit will be a common
credit if it is not notarized or contained in a final judgment.

STEP 5: SATISFY THE ORDINARY PREFERRED CLAIMS


List down all the ordinary preferred claims in the order in which they are listed in 2244. This is the
order of preference among them. Most probably, there will be several credits in public instruments and final
judgments. Arrange these by date. Those falling on the same date will enjoy equal preference and will share
the balance of the free property proportionately.

STEP 6: SATISFY THE COMMON CLAIMS


Whatever is remaining of the debtor’s free property will be used to satisfy the common claims. Since these
will not be enough to cover the debtor’s remaining liabilities (he’s insolvent), the common creditors will
share the balance in proportion to the amount of their credit, regardless of the date.

DEPOSIT

What are the characteristics of the contract of deposit?


1. Real contract – Deposit is perfected by the delivery of the subject matter
2. Unilateral if the deposit is gratuitous – because only the depositary has an obligation

Bilateral if the deposit is for compensation – gives rise to obligations on the part of both
the depositary and the depositor.

PRINCIPAL PURPOSE = Safekeeping of the thing delivered.


SUBJECT MATTER OF DEPOSIT = Movables

Kinds of Deposit
1. Judicial – takes place when an attachment or seizure of property in litigation is ordered
2. Extra-judicial
(a) Voluntary – delivery is made by the will of the depositor or by two or more
persons each of whom believes himself entitled to the thing deposited; or
(b) Necessary – made in compliance with a legal obligation, or on the occasion
of any calamity, or by travelers in hotels and inns, or by travelers with common
Carriers.

Primary obligations of the depositary:


1. Safekeeping
2. Return of the thing, but only when required

ARTICLE 1971 EXAMPLE:

This is the rule that applies if you deposit with a minor or other incapacitated person.
If the depositary is incapacitated, while the depositor is capacitated, the incapacitated does not incur the
obligations of a depositary.

The incapacitated is liable only:


(1) to return the thing deposited if it is still in his possession; or
(2) to pay the depositor the amount by which he may have benefited through the thing or its price if
the incapacitated is no longer in possession

What happens if the depositary deposits the thing with a third person, and it is lost?
1. If there is no stipulation allowing him to deposit with a third person, he is liable
for the loss, whether it was through his or the third person’s fault or through

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fortuitous event.

2. Generally, if the thing is deposited with a third person with permission of the
depositor, and the thing is lost through fortuitous event, the depositary is
not liable for the loss.

However, if he deposits it with a person who is manifestly careless or unfit,


even if there is no negligence or even if the loss was through fortuitous
event, the depositary is liable for the loss.

3. If the thing is lost through the negligence of the depositary’s employees, the depositary is
liable for the loss (The employee is the agent of the depositary;
principal bears the loss resulting from the negligence of his agent) . Here, it
is not necessary that the employees be manifestly careless or unfit, but it is
necessary that the loss be through negligence.

What are the obligations of the depositary if the thing earns interest?
1. Collect the interest, as well as the capital, as it becomes due; and
2. Take such steps as may be necessary to preserve its value and the rights
corresponding to it.

Ex: Depositary of a negotiable instrument should give notice of dishonor to


all parties secondarily liable, or else these parties would be discharged.

GENERAL RULE: The depositary may commingle grain or other articles of the same kind and quality.
EXCEPTION: If there is a contrary stipulation

De Leon example:
A, depositary, received the following:
from B: 30 cavans of rice
from C: 20 cavans of rice
from D: 10 cavans of rice
The rice was of the same kind and quality.
Can A put all of the rice together?

Yes, since there is no stipulation forbidding it. B will own 30/60 or ½ of the whole pile; C will
own 20/60 or 1/3; and D will own 10/60 or 1/6.

But if the articles deposited by different depositors are not of the same kind and quality, or if
there is a stipulation forbidding it, the depositary must keep them separate or at least
identifiable, since he must return to each depositor the very same thing deposited.

The depositary can only open the box without incurring liability:
1. When there is presumed authority – authority is presumed if the key has been
delivered to him; or
2. When there is necessity for opening the box in order to execute the
instructions of the depositor as regards the deposit

Where to return the thing deposited:


1. First, follow the stipulation of the parties. The expenses for transportation
shall be borne by the depositor since the deposit was constituted for his
benefit.
2. If there is no stipulation, follow 1987 – the thing should be returned at the
place where the thing deposited may be, even if it was not the same place
where the deposit was constituted.
However, there must be no malice on the part of the depositary. For
example, the depositary, not wanting to return the thing anymore, moves it
to the Cordillera mountains, so that the depositor would have a hard time
claiming it. In this case, the depositary would be liable for damages.

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ART. 1995 Causes for extinguishment of deposit:
1. loss or destruction of the thing deposited
2. In case of gratuitous deposit, upon the death of either the depositor or the
Depositary

But if the deposit is for compensation, it is not extinguished by the death of


either party since it is not personal in nature. Hence, the rights and
obligations of the parties are transmissible to their heirs.
3. return of the thing
4. novation
5. merger
6. expiration of the term
7. fulfillment of resolutory condition

There are FOUR instances/ examples of necessary deposit:


1. Deposit made in compliance with a legal obligation
2. Deposit that takes place on the occasion of any calamity
3. Deposit of effects made by travelers in hotels or inns
4. Deposit of goods with common carriers

When is the hotel liable for the loss of the effects of its guests?

1. When the loss is caused by the employees of the hotel or by strangers,


provided the guest followed the two requisites under Art. 1998 (notice and
precaution).
2. When the loss is caused by the act of a thief or a robber done without the
use of arms and irresistible force.

When is the hotel NOT liable?


1. When the loss or injury is caused by force majeure, like flood, fire, theft or
robbery by a stranger with the use of arms or irresistible force, UNLESS the
hotel-keeper is guilty of fault or negligence in failing to provide against the
loss or injury from this cause.

So as a general rule, if armed men enter the hotel and steal your things, the
hotel is excused from liability because it is considered a fortuitous event.
However, if the hotel failed to take reasonable precautions (ex: secluded
island with only one security guard stationed near the shore and lots of
foreigners checked in), it will still be liable for its negligence.

2. When the loss is due to the acts of the guest (who is the owner of the thing),
his family, servants, or visitors; and

3. When the loss arises from the character of the things brought into the hotel

Example of thing where the loss arises from the character of the thing: If
you bring a Dalmatian, or a snake, or Cyrus’ pet hamster into the hotel, by
the very nature of these pets, they could easily get lost in the premises.

What is judicial deposit?


Judicial deposit is a deposit pursuant to a court order – when an attachment or
seizure of property in litigation is ordered by a court.

Examples:
1. attachment of properties by sheriff upon the filing of a complaint
2. garnishment of money

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3. receiver may be appointed by the court to administer and preserve the
property in litigation
4. personal property may be seized by the sheriff in suits of replevin

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