Grace and Clarz Credit Transcription Notes for Feb.
Prefi ‘11
CONTRACTS OF SECURITY
All the properties of the debtor whether personal or
real properties will also answer for his obligation.
Receivable- 200,000
Cash
Land
Buildings
Cars
----------------------------
2,000,000
– 200,000
----------------------------
1,800,000
Loan- 1,000,000
+ 500,000
--------------------
1,500,000
The assets which are supposed to answer for a loan
can be decreased by
a) failure to collect a receivable.
b) fraudulent alienation like I will make it appear
that I am donating this land to you. In order for
me so that my creditors cannot go after my
properties anymore. Total asset can also be
decreased by:
c) non-fraudulent alienation like selling the car,
you get cash but it fastly dissipates, so assets
decreased. Or,
d) increase in the obligation, the possibility of all
the obligation being paid would be lessened
because the assets also did not increase.
If you are the creditor what would you do? If the
debtor cannot recover/collect the receivable, if you are
the creditor, you can exercise subrogatory action. In
case of fraudulent alienation, you can sue for
rescission. If non-fraudulent, you cannot stop the
debtor from disposing his property. You cannot also
prevent him from incurring further loan. You require
your debtor to provide a security.
2 kinds of security undertaking:
1. Personal security undertaking- it is the person
himself who undertakes to pay the obligation if
the principal debtor cannot pay or does not
pay. This is called either guaranty or
suretyship. That person who undertakes to pay
under a suretyship is called a surety. The
person who undertakes to pay an obligation as
an ordinary guarantor is called guarantor but if
solidary guarantor, the undertaking is
suretyship and you are called a surety.
2. Real security undertaking- this does not mean
real property only. Property is subjected as
security for the fulfillment of the obligation, not
the person himself who promises to pay if the
principal debtor cannot pay or does not pay but
property is subjected as security. For example,
I will obtain a loan from you and I will
constitute a mortgage. If there is default, there
is foreclosure of mortgage and the proceeds
will cover payment of the obligation. Examples
are pledge, real and chattel mortgage,
antichresis (you deliver the fruits to creditor as
payment for interest and the excess applies to
the principal obligation).
Personal security contracts
Contract of guaranty
– You have a principal debtor and principal
contract
– It is an accessory contract. The person
undertakes to pay the obligation of the
principal debtor in case the debtor
cannot pay. If this guarantor undertakes
to be bound solidarily with the principal
debtor, it is already called suretyship, he
is bound as solidary debtor. In solidary
obligation, all for one, one for all.
Creditors can go after him alone. He can
be sued independently without suing
first the debtor. (Co-maker is actually
solidary debtor or co-debtor or surety as
far as the maker is concerned; principal
debtor as far as creditor is concerned).
Pacific Banking Corp vs. IAC
Spouses Roberto and Celia Regala applied for a credit
card with the Pacific Banking Corporation but the
husband signed a “Guarantor’s Undertaking” but what
he understood to be bound was that he agreed to be
bound jointly and severally with his wife. When he was
sued for payment of the unpaid credit card obligation
of his wife, he said he is only bound as guaranty. Wife
did not file answer and was declared in default. Regala
contended that you cannot prove insolvency of the
wife because she did not answer. SC said the liability is
not that of a guarantor even if what is signed was
denominated as guarantor’s undertaking because he
undertook to be bound jointly and severally. Don’t rely
on the denomination you are signing, read the fine
print.
E. Zobel Inc. vs CA
Spouses Labella applied for a loan secured by a chattel
mortgage over a vessel they were buying plus there
was a “Continuing Guaranty” undertaking issued by E.
Zobel but the undertaking contains that it obligates
you as surety. There was a chattel mortgage which the
bank failed to register, so they cannot foreclose.
Under the law on guaranty, the guarantor who paid is
subrogated to the rights of creditor. If this were
guaranty, and if E. Zobel paid, he would have been
subrogated to the rights of the bank as mortgagee and
it would have been entitled to foreclose the mortgage.
But since the bank cannot foreclose the mortgage
because of its own fault, the guarantor cannot also
foreclose. The law says that if the guarantor cannot be
subrogated to the rights of the mortgagee, then the
guaranty is invalid. SC said well, you’re right but that
does not apply to surety. That applies only to
guarantors. SC said bound as surety.
Machetti vs. Hospicio de San Jose
SC said notwithstanding the use of the words
“guaranty” or “guarantee”, circumstances may be
shown to convert the contract into suretyship.
GUARANTY
– A contract whereby a third person other
than the debtor (debtor cannot by
himself guaranty) undertakes to pay in
case the principal debtor cannot pay.
– It is an accessory contract or
undertaking; there must be a principal
undertaking (you cannot secure
something that does not exist)
– Security for fulfillment of a principal
obligation. There must be a valid
obligation even if voidable, conditional,
 Grace and Clarz Credit Transcription Notes for Feb.
Prefi ‘11
unenforceable- all these can be secured
by guaranty.
– It is subsidiary obligation- guarantor is
liable only if the principal debtor cannot
pay
– If guarantor binds himself solidarily, he is
not bound subsidiarily anymore but
principally.
Characteristics:
A. Subsidiary- liable only if principal debtor cannot
pay
Castellvi de Higgins vs. Sellner
SC said a surety and a guarantor are alike in
that each promises to answer for the debt of
another A surety and a guarantor are unlike-
surety admits liability as a regular party to the
principal undertaking; guarantor- regular party
to an independent undertaking from the
obligation of the principal debtor. Surety-
charged as original promissor; guarantor-
merely collateral. Surety- obligation is primary;
guarantor- only secondary
Piczon vs. Piczon
If you sign an undertaking for payment of a
corporate obligation and you sign in the
capacity of the president of the corporation,
the principal stockholder of the corporation, it
does not make you a surety even if president.
SC said mere signing as president and principal
stockholder of corporation does not bind the
person as surety. Merely bound as guarantor,
go against corporation first.
Palmares vs. CA
Even if a person binds himself with the
principal debtor as surety, his character as
guarantor is not lost in the sense that he can
still recover from the principal debtor. Surety
really is not the principal debtor, he only binds
himself solidarily; he can still recover but he
must pay first. He cannot insist that the
creditors go to the principal debtors first before
he can be held liable. He can be sued
independently. He can recover otherwise
unjust enrichment.
Solidary guarantor vs. solidary debtor (table in outline)
B. Consensual
As to perfection- guaranty is a consensual
contract. It is covered by the Statute of
Frauds, consensual but cannot be enforced (in
writing to be enforceable) but perfectly valid.
It is a consensual contract but must be in
writing to be enforced or must be covered by
the statute of frauds.
C. Gratuitous or Onerous
A guarantee (just like deposit) can be
gratuitous or onerous.
Severino vs. Severino
They had a dispute over the estate of the
deceased father who was survived by the wife.
Another lady claiming to be recognized natural
daughter. The wife and this woman filed a
case for their shares in the estate against the
other children of the deceased person. In
order to put an end, one of the sons decided to
take over the property of the estate and
promised to pay the surviving wife and this
woman total sum of 100,000. At the time of
the compromise agreement, he paid 40,000 so
there was a remaining balance of 60,000. This
undertaking by the son was secured by the
promise of another person. He guaranteed the
payment. The son did not pay. So the woman
went after the guarantor. The guarantor said
that he was not liable because there was no
consideration. SC said guaranty can be
gratuitous or onerous. There need not be a
valuable consideration received by the
guarantor for his promise because what
supports the contract of guaranty is the same
consideration that supports the principal
obligation. Principal obligation was the promise
of the son to pay the wife and half-sister, the
consideration was the dropping of the case.
Kinds of Guaranty
A. By its origin
a. Conventional- by agreement of the parties
b. Legal- by substantive or procedural law
c. Judicial- required by court order
A. By extent
a. Indefinite or unlimited or simple- covers
principal obligation and accessory
(ObliCon) If a third person pays without the
knowledge or consent of debtor, such
person can recover but only to the extent
that the principal debtor was benefited and
he is not subrogated the rights of the
creditor (same in credit). A third person
can secure the principal obligation of the
debtor without the consent, even against
the will of the principal debtor. But he can
recover only the extent that the debtor is
benefited and he cannot also exercise
subrogatory action.
If on top of the guaranty, the obligation is
secured by a mortgage and he pays the
creditor, he is not substituted as the new
mortgagee, he cannot recover from the
debtor, he cannot foreclose the mortgage
which was previously constituted in favor
of the creditor.
De Guzman vs. Santos
A partnership was sued for sum of money.
There was default, a writ of preliminary
attachment was issued and properties of
the individual partners were being
attached. So to discharge the attachment,
a counter-bond was put up by the partners
guaranteed by two persons as guarantors.
After the case, the partnership was ordered
to pay but they did not pay so the
guarantors paid. Then one of the
guarantors tried to collect from one of the
partners for reimbursement but the partner
said that he did not give his consent for
him to act as guarantor so he said he is not
liable. SC said he is liable to reimburse the
guarantor to the extent that he was
benefited. The partner cannot escape
liability by invoking the defense that he did
not give his consent.
b. Limited
A. By the person guaranteed
Guarantee proper- the one discussed
Sub-guarantee- another person secures the
undertaking of the guarantor; indemnity
agreement- undertaking that secures the
 Grace and Clarz Credit Transcription Notes for Feb.
Prefi ‘11
guarantor in the sense that he can go after the
indemnity contract to reimburse himself.
B. By the liability of the guarantor
a. Normal/ ordinary- one where the guarantor
undertakes to pay in case the principal
debtor cannot pay
b. Solidary- this is suretyship- jointly and
severally- undertaking is as a surety. Or “I
hereby bind myself as surety”
– Guarantor binds himself solidarily with
the debtor. By his undertaking to be
bound solidarily, then he is bound
primarily, as an original promissor.
I hereby guaranty- guarantor
Machetti vs. Hospicio de San Jose
Machetti was a contractor. He entered into a
contract with Hospicio de San Jose. To secure
fulfillment of Machetti’s contract or
undertaking with Hospicio de San Jose, he was
required to put up a performance bond.
Originally, it was Machetti who filed a case
against Hospicio de San Jose for the unpaid
balance of the contract price. But there was a
counter-claim filed by Hospicio claiming that
there were deviations made by Machetti from
the original plan therefore, damage was made.
In the meantime, Machetti was declared
insolvent through a petition filed by his
creditors. And so when he was declared
insolvent, all actions against him were
dropped. All claims were filed in that
insolvency proceedings. In the case that he
filed against Hospicio where there was a
counter-claim, he was also dropped as a party-
defendant. What Hospicio did was to ask the
court for leave for permission to file a counter-
note/third-party claim against Fidelity. The
court allowed the filing of the third-party claim
against Fidelity ince Machetti was already
dropped as principal debtor. The lower court
rendered judgment against Fidelity. In effect,
it was holding Fidelity liable as surety.
Guarantor is only liable when debtor cannot
pay. Here, it cannot be proven that the debtor
cannot pay because he was dropped as a
party-defendant. Fidelity appealed. Can it
(Fidelity) be considered a surety such that it
can be liable even without going after the
principal debtor? SC said no, the undertaking is
merely that of guarantor. Even if a contract is
denominated as a Guarantor’s Undertaking
(guaranyty/guarantee), circumstances may be
shown such that the undertaking is really that
of suretyship and not of guaranty but these
circumstances are not present in the instant
case. If you undertake to secure the fulfillment
of the obligation as a guarantor, then you can
only be held liable if it can be proven that the
principal debtor cannot pay and the best proof
that you cannot collect from principal debtor is
the return of the writ of execution unsatisfied.
Here there can be no writ of execution issued
against Machetti because he was dropped as
defendant. Therefore, there is no way of
proving that he cannot pay. Can Hospicio
collect or it will wait until Machetti is no longer
insolvent? (cannot go after Fidelity because
Fidelity is a guarantor, not a surety) File the
claim in the insolvency proceedings. Hospicio
does not want to file a claim because it will join
with the other creditors, it will not be assured
of recovering the full amount of its claim, only
a fraction of the amount claimed unless they
are preferred creditors (maybe this is the
reason Hospicio filed against Fidelity)
Ong vs. PCIB
What if the undertaking is that of a surety and
you have a corporation which is a distressed
corporation (declared to be in a state of
suspension of payment because it has a filed a
petition for rehabilitation with the special
commercial court)? And the court granted its
petition to be declared in a state of suspension
of payment? And so a stay order is issued by
the court. No monetary actions against the
corporation shall proceed. All actions for
monetary claims only are suspended. In the
same manner that the case against Machetti
was dropped. But here there is no declaration
of insolvency. The corporation is not insolvent,
it is merely a distressed corporation in the
sense that it is not liquid. Issue of liquidity-
cannot meet your current obligation with your
current assets (assets may be in the form of
real property that you cannot dispose of when
the obligations are maturing). Suspension of
payment- all actions suspended. Can the
creditor go after the surety? Creditor can
immediately go after him even without proving
that it cannot collect from the corporation
because of the nature of the undertaking
where he bound himself solidarily as an original
promissor with the debtor corporation. What if
the Ong spouses were guarantors? Would the
suit against them by the creditor prosper if the
debtor corporation is placed under a state of
suspension of payment? NO, you have to prove
that you cannot collect from the debtor before
you can hold the guarantor liable. The
undertaking of the surety is different- similar to
that of solidary debtor- can go after any of the
solidary debtors even without going after the
other solidary debtor. You can go after the one
solidary debtor for the whole amount of the
obligation even if one of the solidary debtors
become insolvent. If one solidary debtor pays
and another becomes insolvent, the share of
the insolvent debtors is shared by all the
solvent solidary debtors among themselves.
Creditor can collect the whole amount from the
solidary debtors. Same here, the corporation is
declared in a state of suspension of payment,
the creditor cannot go after the distressed
corporation, but the creditor can go after the
surety. There is a higher risk assumed by a
surety compared to a guarantor. If the
guarantors bound themselves jointly and
severally with the principal debtor, then the
guarantors are bound as sureties and not just
as guarantors, even if the undertaking is
denominated as guarantor’s undertaking or
guaranty undertaking.
International Finance Corporation vs. Imperial
Textile Mills
Imperial signed a Guarantor’s Undertaking.
The tenor of the undertaking is that it bound
itself together with another corporation
solidarily with the principal debtor. When a
collection case was filed against the principal
debtor and against Imperial Textile Mills, the
lower court dropped the action against Imperial
because only the principal debtor is liable. CA
said Imperial Textile is liable only if the
principal debtor cannot pay, liable as
 Grace and Clarz Credit Transcription Notes for Feb.
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guarantor. SC said the undertaking is that of a
surety not just a guarantor and therefore,
solidarily liable with principal debtor, not just
subsidiarily. The judgment creditor can just go
after any of the parties, principal debtors,
Imperial Textile or the other surety for the
satisfaction of the entire amount of the
judgment credit. Not just for a proportionate
share in the judgment credit but the entire
amount because of the solidary undertaking.
Elements of Guaranty
A. Parties
What are the qualifications before a person can
qualify as a guarantor?
1. He must be legally capacitated to enter
into a contract.
Consequence if he is not legally
capacitated to enter into a contract like if a
minor- voidable but still valid. The minor
can invoke his minority in order to avoid
paying his undertaking. This defeats the
purpose of the security undertaking.
Can a married woman be a guarantor of
another person’s obligation? Yes, as to
exclusive property. Now with the absolute
community, can use the exclusive property
acquired through gratuitous title like
inheritance or donation but cannot bind the
absolute community property; if married
prior to the effectivity of the Family Code,
she cannot bind the conjugal partnership.
2. He must possess sufficient properties to
answer for the obligation. Since this is a
personal undertaking to pay the obligation
of another person, then he must have the
means to pay the obligation. (like if your
income is only 3,000 a month and you do
not have sufficient properties, you cannot
qualify as a guarantor)
3. The guarantor must possess integrity.
Integrity- he must possess honesty. Good
moral character.
These qualifications must be possessed by the
guarantor at the time of the perfection of the
contract of security.
What if later on, the guarantor becomes
insolvent? Guarantor is convicted of a crime
involving dishonesty? What is the remedy of
the creditor?
– Require the debtor to put up another
guarantor. If the debtor fails to produce
another guarantor, the remedy of the
creditor is to demand for the fulfillment
of the obligation now even if not yet due
and demandable- debtor loses the right
to enjoy the period granted to him under
the contract (article 1198)
– Same rule applies also if the guarantor is
convicted of a crime involving
dishonesty
If the guarantor is chosen by the creditor
himself, the guaranty is constituted to the
benefit of the creditor. It is to assure the
creditor that he can collect or that obligation
on his favor will be fulfilled. If he is the one
who chooses the guarantor, then he can waive
these qualifications.
Since this is a contractual guaranty, then there
must be the essential requisites of a contract:
1. Consent- requires the consent of the
guarantor and the creditor. How about the
debtor? Apply similar provisions of Oblicon
that a third person can pay over the
objection, against the will of the debtor.
The consent of the debtor is not required in
order to perfect the guaranty. What is
required is the consent of the creditor.
Must the consent be expressly given by the
creditor? NO.
2. Object
3. consideration
Texas Co. vs. Alonzo
There is an agency agreement between Texas
Co (Phils) and Leonora Bantug. In that agency
agreement, there was this provision that the
company may require additional securities in
such individual, firm, bond as shall be
satisfactory to the company. Note that the
company may demand for additional securities.
At that time that the agency agreement was
signed, a security undertaking was already
signed by Alonzo and upon the termination of
the agency contract, Bantug still owed the
company a certain sum which Bantug failed to
pay. Texas wanted to hold Alonzo liable. The
defense of Alonzo was that his offer of security
was not accepted invoking the provision in the
said agency agreement for additional security
as shall be satisfactory to the company. How
will you know if satisfactory? If it has conveyed
acceptance to the offer of security. But it
refers to additional security. The undertaking
was executed simultaneously with the
execution of the agency agreement. SC agreed
with Alonzo saying that the offer of security
must be accepted, must be shown to be
satisfactory to the company. Proven to be
satisfactory by conveying acceptance. Alonzo
did not receive any notice of acceptance by
Texas Company of is offer then he is not bound
as surety. There must be express acceptance
by the creditor (only if it is required).
Acceptance has to be expressly made if it is a
requisite before the surety undertaking
becomes effective. Security put up by Alonzo
was not additional security, it was constituted
simultaneous with the agency agreement. The
provision should not apply here. (dissenting
opinion)
In our previous discussion a security undertaking such
as guaranty or suretyship is naturally gratuitous in the
sense that it can be constituted without consideration
from the debtor to the guarantor.
Now we have a compensated guaranty, the debtor
undertakes to pay premium to the guarantor. A
bonding company executing a surety bond has an
underlying agreement with the principal debtor to pay
the premium. Because when you ask a bonding
company to act as surety it is not for free. Although it
is better if the client would put up the cash bond
because premium could still be returned. Unlike in
surety bond where the premium would go to the
bonding company.
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Prefi ‘11
Phil. Pryce Assurance Corp. v. CA
Can a creditor-seller go after the bonding company
even if the bonding company wasn’t able to collect the
premium due? Yes. Here, the bonding company tried to
invoke the provision in the insurance code where it
says insurance bond cannot be binding if the insured
has not paid the premium unless the bond is accepted
by the creditor. Here the seller accepted the surety
bond. It released the merchandise to the buyer. SC
said you cannot refuse to pay your undertaking. Even if
you were not paid because the premium paid to you in
check bounced.
Subject matter and conditions:
Q: What debts can be guaranteed?
A: Debts that are valid. Remember that a surety or a
guarantee undertaking is an accessory undertaking to
the principal undertaking. So there must be a valid
undertaking.
Municipality of Gasan v. Marasigan
SC said you cannot hold sureties liable for a contract
they undertook to secure which was voided/ annulled
by the municipality. Since the contract was annulled
the security is likewise annulled. An accessory
undertaking is dependent on the principal undertaking
on the validity of the contract. When it was revived it
did not automatically revive the undertaking. There
must be a new undertaking secured by them. Luna and
sevilla are not liable since it there was no valid
obligation.
Q: Can voidable obligation, unenforceable obligation,
rescissible obligation be secured by guaranty or
suretyship?
A: Yes, because these are valid contract although they
are defective
Q: Can future debts be secured?
A: Yes, but the obligation of the guarantor or surety
takes effect or becomes enforeceable only when the
debt is liquidated.
Q: Like there is an undertaking now, a guaranty
undertaking to secure a payment of a future obligation
which is obtained by the debtor. Can the creditor hold
the guarantor liable now?
A: No, because there is no obligation guaranteed yet
or secured yet. There is no obligation which is
liquidated. Not yet incurred ang principal obligation.
Q: When is the guarantor liable?
A: When the debts are liquidated.
Q: When is the debts considered liquidated?
A: When the amount is known.
Selegna Management and Dev’t Corp. v. UCPB
A debt is liquidated when the amount is known or is
determinable by inspection of the terms and conditions
of the relevant promissory notes and related
documentation. Failure to furnish a debtor a detailed
statement of account does not ipso facto result in an
unliquidated obligation.
RCBC v. Arro
Can the creditor hold the surety liable for debts
incurred by the principal debtor after the execution of
a comprehensive surety agreement yes because the
undertaking was to secure any existing indebtedness,
and/or to induce the bank at anytime or from time to
time thereafter, to make loans or advances, or to
extend credit in any other matter, upon which the
borrower is or may become liable. The liability take
effect only upon the debt becoming liquidated.
Q: What is a continuing guaranty?
A: One which covers all transactions including those
arising in the future which are within the description or
contemplation of the contract of guaranty until
expiration or termination or revocation of such
agreement.
Q: Usually a guaranty is constituted to secure
fulfillment of a present or future debt. Can it be
constituted to secure a past obligation?
A: Yes. For as long as the obligation is not yet fulfilled.
Previously acquired obligation.
Willex Plastic Industries Corp. v. CA
Although a contract of suretyship is ordinarily not to be
construed as retrospective, in the end the intention of
the parties as revealed by the evidence is controlling.
Qualifications of a guarantor:
1. must be legally incapacitated
2. must have sufficient property to
answer for the debt guaranteed
3. must have consent of the debtor
i. if chosen by the debtor
consent not required
Form
Q: In what forms must the guaranty be?
A: For validity, the undertaking must be in writing for it
to be enforceable, but the undertaking does not to be
in writing to be valid.
Macondray & Co., Inc. vs. Pinon
There is no particular form required in order for a
contract of guaranty to be valid. In fact a verbal
contract can be entered into by the parties. What is
required is that it must be in writing for it to be
enforceable.
Wise & Co. v. Tanglao
If a mortgage is executed over a certain part of a land,
can the creditor foreclose the parts not mortgaged?
No, only the part where a mortgage was executed. A
guaranty and suretyship must be express and cannot
be presumed.
Solon v. Solon
The terms of a contract of suretyship determine the
surety’s liability and cannot extend to more than what
is stipulated therein.
EFFECTS OF GUARANTY
Effect of guaranty between creditor and
guarantor.
Q: What is the obligation of the creditor to the
guarantor? Or is the creditor at all obligated to the
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Prefi ‘11
guarantor? Is notification an obligation of the creditor?
Or an exercise of a right by the creditor?
A: Payment of premium. If it is the creditor who
proposes or undertakes to pay the compensation of the
guarantor then he pays the compensation of the
guarantor BUT in most cases it is the debtor who
undertakes to pay the premium because after all it is
the debtor whose obligation is secured by the
guarantor.
The guarantors obligation is to perform the principal
obligation in the event that the principal debtor is
unable to perform.
Q: Can the guarantor bind himself for more than the
principal obligation?
A: He can bind himself for less but not for more.
Q: What if he binds himself for more? Is it valid?
A: Yes. But the amount will be reduced to the amount
of the obligation.
Q: Are there instances where the guarantor is liable for
more than the principal obligation?
A: Yes, in the case of:
Gen Insurance and Surety Corp. v. Republic
The undertaking of central is to comply with all the
laws pertaining to the administration and management
of its school including statement of salaries of teachers
if it violated the rules and regulations it is liable to pay
the government 10,000. The guaranty is penal in
nature. Not for the payment of the salary but payment
for the violation. It is like a performance bond.
Q: When is isurety liable for interest?
A:
PNB v. Luzon surety company and commonwealth
Upon default of the debtor the creditor demands from
the guarantor and the guarantor fails to pay. The
guarantor can be held liable from the time of demand
to pay interest for the unpaid amount. Even if the
obligation of the guarantor is only ten thousand. If he is
adjudged to be liable for interest for default of
performance of undertaking.
Q: When does the guarantor pay?
A: Upon maturity of the obligation.
Q: But can the guarantor pay BEFORE the maturity of
the obligation?
A: Yes, but he cannot yet ask for indemnity from the
principal debtor because the obligation is not yet due
and demandable. He pays it at his own risk.
Q: Why is it the duty of the guarantor to notify the
debtor of the payment?
A: Because the debtor may raise the ??? 1110 against
him the guarantor which he can raise against the
creditor like prior payment, lack or failure of
consideration, simulation of contracts, prescription,
statute of frauds.
Another reason is that if the debtor pays not knowing
that the guarantor had paid, then the guarantor cannot
recover from the debtor.
BUT if failure to notify is because of a fortuitous event,
and the guaranty is gratuitous, and the creditor
become insolvent. He can recover because it is
gratuitous guaranty. ????
The guarantor can be asked to be released from the
guaranty if the debtor becomes insolvent.
Privileges of the guarantor
Benefit of exhaustion
Q: What is the right to exhaustion?
A: Right of the guarantor to demand that the creditor
first exhaust the properties of the debtor before he can
be made liable. Because the law says that guarantor
cannot be held liable unless the creditor exhaust first
the properties of the debtor and exercises all legal
remedies against the debtor. Going after a guarantor
would be a remedy of last recourse.
A: According to paras, it is the duty of the creditor to
exhaust the property of the debtor and to enforce all
legal remedies against the debtor to prove that the
debtor is still unable to pay.
If the debtor is not notified and he is prejudiced
because of the lack of notice he cannot be made to pay
unless there is a waiver on the part of the guarantor.
According to Civil code the suit must be filed against
the creditor alone and then the former must ask the
court to notify the guarantor, but you cannot just do
that. Because you have to amend the complaint
inorder to implead another person (Civ Pro) the
practice is to implead both. If impleaded at the same
time, and judgment is rendered against the debtor
then the judgment would oftentimes provide for
exhaustion of property of the debtor first over the
guarantor.
The guarantor must raise this defense. The right of
exhaustion when demand is made upon him to pay but
not enough to raise the benefit of exhaustion he must
point to the creditor the available properties of the
debtor.
Q: What do you mean available properties of the
debtor?
A: Properties not exempt from execution like the
professional library. Family home is exempted.
Towers assurance corp. v. Ororama Supermarket
Even if the surety cannot invoke the benefit of
exhaustion it still must be notified and be heard before
it can be held liable. His liability is not automatic by the
mere fact that a favorable judgment is obtained by a
creditor against a principal debtor. Because the
undertaking of the surety bond was put up in order to
discharge the writ of preliminary attachment. Towers
assurance was never impleaded, summoned or notified
that it was being held liable for its undertaking. Due
process: Right to be heard.
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FInman General Assurance Corp. v. Salik
Finman was impleaded and notified as a party from the
beginning. Only that they did not file an answer and
did not participate with the proceedings of the case. SC
held that there is no need to notify the surety if its
undertaking is closely intimately related to the
undertaking of the principal.
Adviento: I don’t think it is a correct reasoning of the
court considering the fact that he was really impleaded
and it was afforded the right to be heard only he chose
not to. Between Towers which was an earlier
pronouncement and Finman which was a later
pronouncement, personally I would vote for Towers.
Baylon v. CA GR no. 109901 Aug 17, 1999
A creditor filed a case against the debtor and
guarantor, but the debtor was not served with
summons. Nevertheless the case proceeded against
the guarantor. And the trial court rendered judgment
against the guarantor. Can the guarantor be held liable
when there is no opportunity to exhaust the properties
of the debtor? There was no judgment rendered
against the debtor. And here the guarantor did not
waive his right of exhaustion the guarantor even raised
that defense inability to invoke the benefit of
exhaustion. The court nullified the judgment of the trial
court. Court held that it is axiomatic that the liability of
the guarantor is only subsidiary. All the properties of
the principal debtor must first be exhausted before his
own is levied upon. Thus, the creditor may hold the
guarantor liable only after judgment has been obtained
against the principal debtor and the latter is unable to
pay, "for obviously the 'exhaustion of the principal's
property' — the benefit of which the guarantor claims
— cannot even begin to take place before judgment
has been obtained." This rule is embodied in article
2062 of the Civil Code which provides that the action
brought by the creditor must be filed against the
principal debtor alone, except in some instances when
the action may be brought against both the debtor and
the principal debtor
Q: Now if the guarantor had pointed out to the creditor
the available properties of the debtor and the creditor
FAILS to exhaust the properties and the debtor
becomes insolvent can the guarantor be held liable for
the principal amount because of the failure of the
creditor to exhaust the properties of the debtor?
A: The guarantor cannot be liable for the value of the
property. So the value can be deducted from the total
amount of obligation.
NB: the benefit of exhaustion is a RIGHT. It can be
waived.
JN Dev’t Corp. v. Phil. Export and Foreign Loan
Guarantee Corp.
JN obtained a loan from TRB, which was secured by Phil
Guarantee. When the loan matured JN did not pay and
TRB notified Guarantee. Guarantor paid TRB, so He
asked for reimbursement from JN but the debtor did
not pay. So the guarantor had no choice but to sue in
court to recover the amount that he had paid. The Trial
court faulted the guarantor for paying and not having
the properties of the debtor exhausted. SC held that
exhaustion is a right and therefore can be waived.
What better way to waive than by paying without
demanding that the properties of the debtor be first
exhausted which Phil Guarantee did. But this cannot be
invoked by the debtor in order to escape
reimbursement of the guarantor.
Q: When is the benefit of exhaustion not available?
A:
1. Waiver
2. If the guarantor bound himself solidarily
3. If the debtor is insolvent
4. If the debtor cannot be sued in the Philippines
or absconds
5. if it may be presumed that the execution would
not result in satisfaction of judgment
The act of phil guarantee paying was not an express
renunciation of the benefit of exhaustion. An example
of an express waiver of the benefit of exhaustion is the
provision in the willex case. In the willex case they
were invoking the benefit of exhaustion, but the court
held that there was an express waiver there of the
exhaustion of properties. You cannot invoke that
benefit anymore.
In the JN case, there may not be a stipulation in the
guaranty undertaking but the act of phil guarantee
paying the obli w/o demanding first the exhaustion of
the properties of the debtor first is also a waiver on his
part although there is no express stipulation on the
contract.
Benefit of Division
This happens if there are 2 or more guarantors
securing the same obligation. Similar to the general
rules of ObliCon. Mere plurality of debtor results in joint
obligation not solidary. Because there is no
presumption of solidarity. Solidary only if there is
agreement between the parties, provided by law and
nature of the obligation requires solidarity.
Same general rule, mere plurality of debtor results in
joint obligation not solidary. Therefore if you have 3
guarantors if no stipulation to the amount presumption
is liable in equal shares. So the creditor can only go
after each guarantor for their respective amount.
Unless solidarity is agreed by the guarantors among
themselves for the payment of obligation. In that case
the creditor may go to any of the guarantors for the full
amount. Solidarity among the guarantors does not
mean they bound themselves solidarily with the
principal debtor, because that is suretyship already.
When is the benefit not available, same as benefit of
exhaustion.
1. Waiver on part of guarantor - if one guarantor
pays for the full amount he can no longer ask
to be reimbursed from his fellow guarantors, he
must recover from the debtor)
2. If bound themselves with the principal debtor
NOT among themselves
3. If the debtor is insolvent
 Grace and Clarz Credit Transcription Notes for Feb.
Prefi ‘11
Q: What is the effect if 2059 is present?
A: Creditor can demand for full payment of the entire
obligation to any of the co-guarantors.
Q: When must the guarantor invoke it?
A: Same as the benefit of exhaustion, when demand is
made upon him to pay. Judicial again applies only if the
several guarantors secure the same obligation. It does
not apply if several guarantors secure different
obligations.
Mira Hermanos v. Manila Tabacconists
These two guarantors secured two different obligations
3,000 and 2,000 respectively. Since the balance of
manila tobacconists is only 2000 pesos it is still
covered by the FIRST security. No benefit of division
because they secured two different obligations.
Defenses of the guarantor
Q: What defenses is available to the guarantor if
demand is made upon him by the creditor?
A: The guarantor can raise the defense that can be
raised by the debtor except those personal defenses.
Q: What are these personal defenses?
A: Vitiated consent cannot be invoked by the
guarantor but payment, remission or condonation,
compensation between the creditor and debtor.
Q: Can it be invoked by the guarantor? If all the
requisites for legal compensation between the creditor
and debtor are present can the guarantor invoke it?
A: Under the law legal compensation takes place by
operation of law without the knowledge of the parties
as long as all the elements are present. So the
guarantor can invoke that.
Q: What if there is the element of legal compensation
is present among the guarantor and creditor can the
guarantor invoke that?
A: YES it can. But the debtor cannot invoke that.
Q: If the guarantor invoke legal compensation can he
seek reimbursement from the principal debtor?
A: Yes, because it was his liability that was
extinguished not the debtors. It benefited the debtor.
The guarantor can also invoke novation of the contract.
Extension of time granted by the creditor without his
consent.
EFFECTS OF GUARANTY BETWEEN THE DEBTOR
AND GUARANTOR
Rights before payment by the guarantor
2071 He can demand to be relieved from the guaranty
even before he pays the principal obligation. The law
allows him to be relieved from his obligation even
before paying or to demand that his undertaking be
secured by the debtor in case of insolvency.
Q: In what instances can he ask to be relieved from the
guaranty? (part of the guarantor)
A:
• When sued for payment – that’s just an
exercise of a creditor’s right under guaranty
undertaking but the law gives the guarantor
the right to proceed against the debtor to be
relieved from the guaranty.
• In case of insolvency of the debtor – higher risk
that he will be made liable for his undertaking
• When the debtor has bound himself to release
the guarantor after a certain period and that
period has arrived. So the guarantor can
demand that he be released from the
undertaking.
• After ten years has passed when there is no
stipulation of period for the fulfillment of the
principal obligation, UNLESS the principal
obligation cannot be performed w/in ten years.
Like loans payable for 20 years like housing.
• If there is reasonable ground to believe that
the debtor will abscond. No benefit of
exhaustion. So higher risk that the guarantor
will be held liable to pay the obligation. If there
is reasonable ground to believe that the debtor
will abscond the probability of the guarantor
recovering is minimum also.
• Imminent danger of insolvency.
NOTE: MERE imminent danger not ACTUAL
insolvency affords the guarantor the right to be
relieved from the guaranty.
Q: But this will prejudice the creditor right? Manresa
said that it should not prejudice the creditor. But how
will we reconcile?
A: Go and meet halfway demand that the debtor put
up security that way the creditor will not be prejudiced.
And that is allowed in 2071. AKA “Indemnity
agreement.”
Benefit of exhaustion and division cannot be invoked
by the surety because the benefit of exhaustion is not
available if the guarantor bound himself solidarily with
the principal debtor. Binding themselves solidarily
(between guarantors) is a different thing.
Q: Can a surety ask to be released from the suretyship
undertaking in 2071? Or is it only the guarantor who
can invoke the right just like the benefit of exhaustion
and division. Is it available to the surety?
A: Yes.
Manila Surety & Fidelity Co. v. Batu Construction Co.
The right of the guarantor to proceed against the
principal debtor even before having paid by obtaining a
release from guaranty or demanding a security which
will protect him from any proceedings from the creditor
and from the danger of insolvency of the debtor
applies also to surety. Even if bound solidarily. If any of
the instances in 2071 is present.
Rights of the guarantor after paymeent
To be reimbursed! TIDE! Total amount paid plus
interest. Damages, rarely is the guarantor awarded
this but of course he is also entitled to it. But you
cannot demand this as a matter of right, it is
discretionary upon the court unlike interest.
Expenses, especially when guarantor is compelled to
litigate in order to recover from the principal debtor.
 Grace and Clarz Credit Transcription Notes for Feb.
Prefi ‘11
Q: When is he entitled to interest?
A: From the time he demanded from the debtor that
he be reimbursed. Guarantor is entitled to interest
from time of demand.
The guarantor also has a right of subrogation.
Q: When can the guarantor subrogated?
A: Only when the guaranty is substituted with the
consent of the debtor. If without consent or against the
will of the debtor he cannot compel the creditor to
subrogate him to his rights. So not always available to
the guarantor.
Q: What is the right of subrogation?
A: To exercise the accessory obligation. Like aside
from the guaranty it is likewise secured by mortgage or
pledge.
So if the creditor goes after the guarantor instead of
foreclosing the mortgage, the guarantor has TIDE plus
he is also subrogated to the right of the creditor as
mortgagee or pledgee.
Q: Must he demand from the creditor that the creditor
assign the mortgage to him? Must another document
be executed?
A: No. Subrogation happens by operation of law. So
the creditor need not execute another document.
Obligation is 9,000. The creditor was able to collect
from the guarantor 5,000. So there is an unpaid
balance of 4,000.
Q: And there is a mortgage, Who can foreclose the
mortgage? The guarantor or creditor?
A: Remember that upon payment or after payment,
aside from the right to seek reimbursement from the
debtor, the guarantor is subrogated to the right of the
creditor.
Q: When you have a mortgage lien, who can foreclose
the mortgage?
A: Remember the creditor has still a credit in the
amount of 4,000 the guarantor is subrogated to the
right of the creditor with respect to the 5,000 that he
paid. The creditor has a priority in foreclosing the
mortgage.
Another scenario, the creditor foreclosed the mortgage
but the proceeds from the foreclosure sale is only
5,000 there is a deficiency of 4,000 which was paid by
the guarantor. When you foreclose a mortgage there is
what you call the right of redemption, the mortgagor
can redeem within a period of one year as a general
rule.
Q: Can the guarantor exercise the right of subrogation
by redeeming the property not from the creditor but
from the buyer? Can he redeem it from the creditor or
from the buyer in the foreclosure sale?
A: The rule is if the guarantor pays the 9,000 he is
subrogated to the right of the creditor specially with
respect to mortgage. He cannot seek reimbursement
from the debtor he can foreclose the mortgage but of
course he has to seek reimbursement first before he
can foreclose. Because mortgage is an accessory
undertaking.
Q: When you foreclose you have to sell the property in
a public sale, can the guarantor by invoking the right of
subrogation redeem the property from X? Whose right
is it to redeem?
A: That is a right pertaining to the debtor. He cannot
enterprise the right of the debtor by invoking the right
of subrogation because when you exercise the right of
subrogation you exercise the right of the creditor. You
can foreclose the mortgage but you can’t redeem
because that is a right pertaining to the debtor.The
guarantor is entitled to reimbursement but he cannot
redeem.
While there is no rule that requires the return the
excess to the debtor but the creditor is entitled only to
such amount of the proceeds in order to pay the
obligation he has no right to retain the excess. But
there has never been a bid in excess to the amount of
obligation. Since nobody wants to buy property from a
foreclosure sale other than the creditor because of the
“redemption period.” The risk is that you will not be
the owner of the property.
Q: What is the advantage of subrogation over
reimbursement?
A: Because there is a chance that the debtor might be
insolvent. And if he is insolvent you are a preferred
creditor with respect to the property mortgage in case
of subrogation.
Q: But what is the advantage of reimbursement over
subrogation?
A: If you are the guarantor, it is faster. Not only that
but also entitled to interest.
Q: From when?
A: Remember right of reimbursement, TIDE? Total
amount paid, Interest from the time that he notified
the debtor that he has made a demand for the debtor
to reimburse him. From that moment on he is entitled
to interest. So that is an advantage of resorting to
demanding for reimbursement than of exercising the
right of subrogation.
Q: Remember that guaranty can be constituted even
without consent of the debtor. If guarantor secures
payment of the obligation of the debtor without his
consent from whom can he seek reimbursement?
A: Both. But only beneficial reimbursement from the
debtor because he constituted a guaranty without his
consent.
Beneficial reimbursement – depends how much the
debtor was benefited.
EFFECTS OF GUARANTY AS BETWEEN CO-
GUARANTORS
Remember! If there are two or more guarantors there
is benefit of division. The guarantor can invoke that,
therefore,
 Grace and Clarz Credit Transcription Notes for Feb.
Prefi ‘11
If creditor demands from A payment of obligation, A is
liable only for 3,000 pesos. But the benefit of division is
not available to A if he waives it.
Q: If he waives can he seek reimbursement from A &
C?
A: No. he waived the benefit but he can ask for
reimbursement from the debtor. Because the right of
reimbursement is from the debtor not from a co-
guarantor.
Another instance where there is no right of division is if
the debtor becomes insolvent. So if the debtor
becomes insolvent, and the creditor demands from A
payment of the entire obligation and because A cannot
invoke the benefit of division because the debtor is
insolvent A has to pay 9,000 in this instance, a can
seek contribution from B & C in the amount of 3,000
each but of course there is no preventing A from
recovering 9,000 pesos from the debtor after all if he
recovers from B & C they are entitled to be reimbursed
by the debtor too.
Another instance where A can recover from the other
co-guarantors is if A is ordered by the court to pay the
entire contribution. It is only when there is insolvency
that the creditor can demand from one guarantor pay
the entire obligation and he can seek contribution from
his co-guarantors. In the instances where there is no
right of division, the other co-guarantor who pays
cannot seek contribution, it has to be by court order.
Aside from waiver of course and insolvency, another
instance is when debtor absconds, so creditor files a
case against guarantor A, A cannot invoke the right of
division because the debtor absconded so there is a
court order that A must pay the entire obligation, if
that is the case A can seek from B & C for their
contribution. If A voluntarily pays he cannot seek
contribution from B & C. He can only seek contribution
if the debtor is insolvent and/or ordered by the court to
pay the entire thing.
Q: Now if a co-guarantor pays and one of the other co-
guarantors is insolvent how much can you recover
from B?
A: 4,500 they both share it. One cannot claim to only
be liable for 3,000. But if there is a sub-guarantor, A
can go to the sub-guarantor that undertook the liability
of C.
The co-guarantors can raise the defense that the
principal debtor can raise against the creditor. EXC of
course incapacity, insanity, or vitiated consent.
Q: Now, if A was able to obtain a compromise from
creditor and A paid instead of 9,000 only 6,000. How
much can he recover from the debtor? Is he entitled to
obtain 9,000 the original obligation of the debtor?
A: No, only 6,000. You cannot enrich by asking 9,000.
Whatever benefit he obtained benefit the debtor.
Extinguishment of Guaranty
I. Extinction of Guaranty
A. Negligence of the creditor
Because guaranty is a contract and contract is a source
of obligation, necessarily, the same ground for the
extinguishment of an obligation are the grounds that
extinguishes a guaranty like payment, loss,
condonation, merger, novation.
Some of the causes of extinguishing a guaranty. One
of the rights of the guarantor is to demand that the
creditor first exhaust the properties of the debtor
before he can be held liable, that is exercising the right
of exhaustion or excussion. If after the guarantor has
pointed to the creditor properties of the debtor and yet
the creditor fails to exhaust the properties of the
debtor through his own negligence and after that the
debtor becomes insolvent he can no longer hold the
guarantor liable because of his own negligence.
ImpossibiIity of subrogation? If you have 2 securities of
the contract, one real security of chattel mortgage, the
other is personal security of guaranty. Now chattel
mortgage is the recording of personal property with the
Register of Property as security for the fulfillment of an
obligation.
A. Zobel Inc. vs CA
When E. Zobel was sued of his undertaking his
defense was that he was released from his
undertaking as guarantor because he could not
be subrogated to the rights of the creditor over
the chattel mortgage because of the failure by
the bank to register the mortgage. SC said that
might be true if you are a guarantor but since
you are a surety you cannot invoke that
defense. Let’s change the facts, if E. Zobel was
a guarantor and not just a surety could it
invoke the defense provided under 2080 that it
could not be subrogated to the rights of the
creditor and therefore it was released of its
undertaking as a guarantor? Yes, a guarantor
can invoke that defense of impossibility of
subrogation but in that particular case, could
not invoke the defense because it was not a
guarantor but surety.
2080 said that the guarantor, even if they be solidary,
does it refer to suretyship? How do we interpret that
phrase “even though they be solidary”, does it refer to
surety? But the court has been consistent in its
pronouncement that 2080 applies only to guarantor
even in the later case of Ang vs. Associated Bank, the
court said that 2080 does not apply to contract of
suretyship. It means the guarantors who bound among
themselves solidarily not the guarantors binding
themselves solidarily with the principal debtor because
otherwise that will be suretyship already. But solidarily
there refers to the obligation of the guarantor among
themselves meaning that anyone of them can be held
liable.
A. Extension of Payment
If the creditor grants an extension of payment to the
debtor without the consent of the guarantor, then the
guarantor is relieved. Why? You are extending the risk
of him being liable and you know that this is merely an
accessory subsidiary contract especially if it is a
gratuitous guaranty. The extension, in order to bind
the guarantor, must be with the consent of the
guarantor. Take note that mere failure to collect upon
maturity of the obligation does not mean extension of
the period. Or an undertaking not to file an action is
not an express grant of extension. That is simpler
understood if the obligation is to be fulfilled in one
 Grace and Clarz Credit Transcription Notes for Feb.
Prefi ‘11
time. The problem arises if the obligation contains
payment in installments. What is the rule in
obligations consisting performance by installment?
Each installment is treated as a distinct and separate
obligation and therefore default in one installment
does not mean default in all the other installments.
Unless there is an acceleration clause.
Villa vs. Garcia Bosque
4 installments for the payment of printing
press and bookstore. 1st installment upon
execution of the contract; 2nd installment after
1 year; 3rd installment after 2 years; 4th
installment after 3 years. There was extension
of the period for the payment of the second
installment. There was a restructuring, so to
speak, of the second installment. But it was
eventually paid. And then for the third
installment there was partial payment also.
For the fourth installment, no payment was
made. Only after all the installments became
due and demandable that the seller-creditor
sued for the payment of the balance of the
purchase price and went after the guarantor or
the surety. The defense raised by the surety
was that there were released from their
undertaking because there was an extension
granted to the second installment. SC said
there was no issue anymore with respect to the
second installment because it was already
totally paid. In fact you have no obligation
anymore over the second installment. And
besides, the rule is, extension of payment over
one installment does not necessarily mean that
there is extension of payment for the other
installments. It pertains only to that particular
installment that’s not even an issue because it
has already been paid and no longer liable on
that second installment. You are not released
from your undertaking on the third and fourth
installment by the mere fact that the second
installment was restructured or that there was
an extension for the period of payment for the
second installment.
Radio Corporation vs. Roa
There is a sale but there was a stipulation for
the payment of the price over a period of 71
months but there was an acceleration clause.
There was an extension for the payment of 3
months. There was an acceleration clause
such that if you default in one installment, the
other installment becomes due and
demandable. (illustration on board: If you
extend the payment for like 2 months, here
you are in effect extending the payment for the
other installments. If you default on the first
installment, you can sue for the entire amount
but since granted an extension for example
after 2 months…). If you extend the period for
the payment of just one installment you are in
effect extending the payment for the entire
obligation. That is the reason why the
guarantor is released if he does not give his
consent.
Philippine American General Insurance Co vs.
Mutuc
Seamen in ocean-going vessel are required to
put up a bond for the faithful fulfillment of their
contract because of their experience that many
would jump ship so the shipping company or
the principal would require that the seaman
would put up a bond by a bonding company.
So for Mutuc, the bond was put up by
Philippine American General Insurance
Company but because of the history of seamen
jumping ship and the higher probability of the
bonding company being liable of its
undertaking so they would require an
indemnity agreement. You have the principal
guaranty or suretyship undertaking in favor of
the principal or employer the shipping
company. Phil Am Gen required Mutuc to
execute an indemnity bond. It’s useless to
require Mutuc, by himself, to execute an
indemnity bond so other people were going to
undertake to pay the surety. In the main
contract that was secured by the indemnity
agreement in the suretyship undertaking, there
was a provision for the automatic extension of
the contract if Mutuc’s contract with the
shipping company is renewed. If the
employment contract of Mutuc is renewed,
automatically the surety bond is likewise
extended. Because of that, in the indemnity
agreement there was also a provision for the
automatic extension without prior notice to the
indemnitors Alberto and Mojica. In fact the
contract of Mutuc was renewed a couple of
times. On the 4th year or the 3rd renewal of his
contract, he jumped ship. So Phil Am Gen paid
Maersk the amount of the bond. And Phil Am
Gen is now holding Alberto and Mojica liable on
their indemnity agreement. The defense of
Alberto was that there was an extension of the
period and he did not give his consent
therefore he was released from his
undertaking. SC said you are wrong because
you already gave your consent to the contract
many times. You signed and consented to the
automatic renewal or extension of the period
even without notice to you and therefore you
need not be notified everytime the contract of
Mutuc is renewed and everytime the suretyship
undertaking is renewed. Therefore, the court
held Alberto liable on his indemnity
undertaking even if he did not give his consent
everytime there is a renewal of the contract.
Prudencio vs CA
A holder for value is one who is a holder who
acquired the instrument not from the maker
but from a party other than the maker.
Therefore if you obtain it from the maker you
cannot be a holder in due course. You are a
holder but you cannot be a holder in due
course because of course you are privy to all
the other agreements or the fraud that might
have been committed against the maker.
There was a construction company who wanted
to obtain a loan from PNB. But PNB would not
grant the loan because this construction
company maybe is not well-known, it doesn’t
have a credit line with PNB. So its agent,
Toribio, who was a relative of the Prudencio
spouses, prevailed upon the Prudencio spouses
to mortgage their property. They refused
because they did not need the money and they
are also not connected with the business but
after several weeks of prodding, they were
finally made to agree to subject their property
as security for the loan. On top of that, they
were convinced to sign the promissory note as
makers of the note as accommodation makers.
Of course it was known by the bank. The
reason why they allowed to subject their
property and to sign as makers/borrowers of
the loan was the fact that the principal debtor
had a contract with the government for the
 Grace and Clarz Credit Transcription Notes for Feb.
Prefi ‘11
construction of the Municipyo of Palawan at the
cost of P30,000. As contractor, he has a
receivable from the state. What the principal
debtor did was to assign all its receivable from
the government in favor of PNB. If there is an
assignment there is an assurance that the debt
will be paid because all the payables from the
state will be paid to PNB. The signing of the
promissory note was pro-forma. Maybe that
was the peace of the mind of the Prudencio
spouses that the payment is assured because
whatever is payable from the government will
be paid to PNB. What did PNB do? It allowed
the state, instead of the state paying to PNB, to
pay the principal debtor even after the loan
has matured. And then the principal debtor
wasn’t able to pay it now wants to hold the
Prudencio spouses liable as accommodation
maker. The defense raised by the Prudencio
spouses was that PNB is not a holder in due
course and therefore they can raise the
defense of lack of consideration. As
accommodation party we are sureties and we
can raise the defense of extension of payment.
SC said you are released as surety by the
extension of payment. How was extension of
payment manifested here? By the fact that
PNB allowed the release of money by the
government to the principal even after
maturity of the loan. On the side of NIL, the
court said the spouses were also released of
their undertaking because they can invoke lack
of consideration because PNB was not a holder
in due course.
Mere failure to demand is not an extension of payment.
Cochingyan vs. R&B Surety
– The undertaking of PNB to hold in
abeyance any action to enforce claim did
not amount to an extension granted to
the debtor.
Payment by the debtor of the principal obligation
necessarily extinguishes the guaranty because
extinguishment of the principal obligation extinguishes
the accessory undertaking of guaranty.
What if there is partial payment made by the debtor?
If the obligation of the debtor is 100,000 and the
undertaking of the guarantor is to secure only 50,000.
Debtor paid 50,000 is the guarantor released? What is
the rule in application of payment? It is the debtor who
decides, if not the creditor, if not through the most
onerous. The unsecured is the most onerous. The
secured portion could be absorbed by the guarantor.
50,000 will be applied to the unsecured portion so the
guarantor’s obligation remains.
If the obligation is 100,000 instead of paying the
debtor delivers property also more or less 100,000. Is
the principal obligation extinguished? Yes, by dacion
en pago. If principal obligation is extinguished by
dacion en pago, the guaranty is extinguished. Dacion
en pago is governed by the rules on sales.
The creditor is deprived of possession and ownership of
property, there was a breach of the implied warranty
against eviction. Is the obligation of the debtor
reinstated? Maybe as to the breach of warranty. But if
the debtor cannot perform or cannot pay his obligation
under the breach, can the creditor hold the guarantor
liable? Not anymore, when the principal obligation is
extinguished by dacion en pago, automatically the
obligation of the guarantor is also extinguished. If later
on the creditor is deprived of ownership or possession,
he can no longer hold the guarantor liable.
If the obligation is condoned by the creditor,
automatically the guarantor is released.
If the guarantor has obtained a remission of the debt
because of his special relationship with the creditor can
he recover the amount that he guaranteed? Can he
recover or can he claim from the debtor the amount
that he caused to be remitted? No he cannot.
Merger:
Between debtor and creditor- extinguishes the
guaranty because merger between debtor and creditor
extinguishes the principal obligation
Between creditor and guarantor- does not extinguish
the principal obligation but extinguishes the guaranty
because the guarantor now becomes the creditor
(absurd if the debtor cannot pay he will pay himself)
Between debtor and guarantor- the principal obligation
remains but the guaranty is extinguished because the
guarantor cannot or debtor cannot secure his own
obligation
Compensation:
Between guarantor and creditor
Example: obligation becomes due and demandable
debtor does not pay, creditor goes against the
guarantor, the guarantor invokes compensation
between him and the creditor. If the principal
obligation is 100,000 the creditor also owes the
guarantor 100,000 the same amount of obligation,
both are due and demandable, both for payment of a
sum of money. Can the guarantor recover from the
principal debtor? Yes, because the debtor was
benefited. The money of the guarantor which was
made to pay for the obligation. The guarantor was
supposed to collect from the creditor. He was not able
to collect because he invoked compensation and
therefore he is allowed to recover from the principal
debtor. Unlike condonation because it involves
gratuitous abandonment of the debt. In compensation,
there is merely a set-off. One owes the other, the
other owes the other party. Instead of both collecting
from each other, quits na.
Novation
Extinctive novation- principal obligation is extinguished
and a new one is entered into, the stipulation and
conditions of which are inconsistent with the others
before the first is extinguished. If that’s the case and
there is a security undertaking if the old obligation is
extinguished the entire guaranty is extinguished.
Modificatory novation- does this automatically
extinguish the guaranty? Not necessarily because if
the new obligation because of the modification of the
terms and conditions of the parties becomes less
burdensome then the guarantor is subrogated. But if
by the modification of the stipulations and conditions
of the parties the obligation becomes more
burdensome then the guaranty is extinguished.
What about the death of the guarantor, does this
extinguish guaranty? No, we have seen this in the
case of De Guzman vs. Santos when one of the joint
guarantors died his administratrix paid ½ of the
judgment debt.
Legal and Judicial Bonds
 Grace and Clarz Credit Transcription Notes for Feb.
Prefi ‘11
Bonds or security undertakings put up by virtue of a
judicial order. Now if the party or the litigant who is
bound to put up a bond cannot put up a bond because
bond is a personal security undertaking in lieu of that a
pledge or a mortgage over property can be executed.
Unlike an ordinary guarantor, a bondsman cannot
impose exhaustion of the properties of the principal
debtor. Even the sub-surety of the bondsman cannot
invoke excussion of the property of the debtor or the
principal.
Real Security Undertaking
Pledge- just like guaranty and suretyship, it is an
accessory undertaking whereby personal property of
the debtor or of a third person is delivered to the
creditor or a third person to ensure fulfillment of a
principal obligation.
How does pledge differ from a chattel mortgage?
While in pledge, personal property is delivered to the
creditor or a third person, in chattel mortgage,
personal property is merely recorded in the Registry of
Property. There is no delivery of the personal property
to the creditor or to another person, agreed by both
the debtor and the creditor. That’s the principal
difference between pledge and chattel mortgage. Both
involve personal property.
In pledge, the property is delivered not for
safekeeping, not for use, it’s not commodatum, it’s not
depositum, but it’s pledge. Like commodatum or
depositum, it is a real contract because it is perfected
by the delivery of the object; unlike a chattel mortgage
over which the property is not delivered to the creditor.
But the property is merely recorded in the Registry of
Property.
How does chattel mortgage differ from a real estate
mortgage? Real mortgage involve real property. Like
chattel mortgage, the property is not delivered to the
mortgagee or the creditor or to a third person.
What are the characteristics common to both pledge
and mortgage?
1. It is constituted to secure fulfillment of a
principal obligation.
2. It must be constituted by the owner.
3. The person constituting the pledge or
mortgage must have free disposal of the
property. Free disposal means it must not be
burdened with any legal claim.
I. Common characteristics.
Flancia vs. CA
William Onghinato extended a loan in favor
of Oakland Development Resources
Corporation, housing project. In order to
develop a project, it obtained a loan from
William Onghinato. And to secure
fulfillment of payment of the loan, the
corporation constituted a mortgage over
the property where the project was
developed. Then the corporation entered
into a contract to sell with buyers and the
spouses Godofredo and Dominica Flancia
were buyers under a contract to sell.
Because Oakland was unable to pay the
loan Onghinato instituted proceedings for
the foreclosure of the mortgage. The
spouses Flancia objected saying that
Oakland could not validly constitute the
mortgage because it was not the owner of
the property because it was already sold to
them. The court had the occasion to
discuss the 3 requisites of a valid mortgage
which incidentally are the first 3 requisites
for a valid pledge. First, it must be
constituted to fulfill a principal obligation.
The court said here did they comply with
the first requisite? Was there a principal
obligation that was secured? Yes, there
was a loan extended by Onghinato in favor
of Oakland. Was Oakland the owner of the
property mortgaged? In a contract to sell
ownership is not transferred to the buyer
although the buyer may be allowed
possession of the thing but that possession
is not equivalent to possession as owner.
Unlike in a contract of sale where delivery
of the property transfers ownership to the
buyer. The court said that the contract
entered into was a contract to sell, it is
very clear from the stipulations of the
contract that while they are allowed
possession of the property they are not the
owners because title will be transferred
only upon full payment of the purchase
price. Therefore, if the house and lot
occupied by the Flancia spouses was the
subject of a contract of pledge, until owned
by Oakland, it can validly constitute a
mortgage over the property including the
house and lot. Did Oakland have free
disposal of the thing at the time of the
mortgage? Yes, there was no claim, there
were no annotations on the title of Oakland
at the time it was constituted. There three
elements of a valid mortgage were
present. Therefore, Flancia spouses cannot
object to the foreclosure. They cannot say
that the mortgage was invalid.
A. Constituted to secure fulfillment of a principal
obligation. This is a security undertaking. It
must be a principal obligation.
If it is constituted to secure fulfillment of an obligation
what kind of obligation can be secured by the
mortgage? Can it secure void obligation? NO, because
a void obligation have no cause and effect.
Can it secure rescissible contracts? Yes
Voidable contracts? Yes
Unenforceable contracts? Yes
Future obligations? Yes just like guaranty which can
substitute to secure future obligations but of course
the obligation of the guarantor comes to effect only
upon the liquidation of the principal obligation.
Mortgage and pledge can be constituted to secure
future obligations. But of course the property subject
of the real security undertaking cannot be foreclosed
until that future obligation becomes due and
demandable.
Mojica vs. CA
The Mojica spouses obtained a loan for P20,000
from Rural Bank of Kawit. They secured the
loan with a mortgage. One of the conditions in
the mortgage was that it was constituted for
the payment of the loan of P20,000 and such
other loans and advances already obtained and
to be obtained by the mortgagor. The loan of
P20,000 was paid. After they paid they
obtained another loan of P18,000 and there
was an annotation in the promissory note that
it was also secured by the mortgage
constituted to secure the P20,000 loan. The
 Grace and Clarz Credit Transcription Notes for Feb.
Prefi ‘11
Mojica spouses were not able to pay the
P18,000 loan. The bank foreclosed the
mortgage. The bank was the highest bidder
and title was consolidated in the name of the
bank. The Mojica spouses want to nullify the
foreclosure claiming that the foreclosure was
invalid because the mortgage was not
constituted to secure the P18,000 loan because
there was no real estate mortgage constituted
to secure that particular loan. SC said there
was no need to execute another mortgage
because there was already a drag net clause or
blanket mortgage clause. Similar to continuing
guaranty. If you talk about mortgage it is
called a drag net clause to secure such other
future obligation of the mortgagee. This is to
secure not only this particular loan but such
other loans which may be incurred by the
mortgagee or the debtor.
B. Constituted only by the absolute owner of the
thing pledged or mortgaged. Must be
constituted by the owner.
A pledge or a mortgage can be constituted not
necessarily by the principal debtor. Meaning if I owe
you 100,000 the mortgage can be executed by another
person for as long as he is the owner of the property.
That means that the mortgagor or the pledgor may not
be the debtor himself.
Vda. De Bautista vs. Marcos
The mortgage here was constituted by Brigida
Marcos before the homestead patent was
issued in her name. SC said it was invalid
because at the time when it was constituted
you were not yet the owner because he
homestead patent was issue after the
mortgage was constituted. If the mortgage
was invalid there is no right of the mortgagor
to foreclose the mortgage.
X and Y are spouses. Their children are A B C and D.
X, the husband, died. The wife survived with the 4
children. The wife obtained a loan and secures the
loan by constituting a mortgage over the conjugal
property. Is the mortgage valid considering that upon
the death of the husband the children also inherited
from the estate of the husband half of the conjugal
property? It is valid only with respect to the portion
belonging to the wife. But it is invalid with respect to
the portion belonging to the children.
What about mortgage constituted over property which
is a subject for a pending application for homestead
patent? In Vda. De Bautista vs. Marcos, there was no
pending application yet at the time the mortgage was
constituted. What if there is a pending application and
while the application is still in process and the property
is subjected to a mortgage? Is the mortgage valid?
Whether the applicant is the owner at the time of the
application? Do you consider the applicant as the
owner? If the applicant is not yet the owner at the
time of the application, then he cannot validly
constitute a mortgage over the property.
C. Free disposal or legal authority of person
constituting the pledge or mortgage
The mortgagor must have free disposal of the thing or
must be duly authorized.
Why is it required that the mortgagor or the pledgor
must be the owner of the property? Unlike
commodatum, you need not be the owner of the
property, in depositum also, because there is no
transfer of ownership. In mortgage, you need not
transfer the ownership because it is only constituted to
secure an obligation but why is it necessary that the
mortgagor or pledgor must be the absolute owner and
must have the free disposal of the property? Because
of the possibility that the property might be alienated
to satisfy the principal obligation. If you constitute a
mortgage over a property which you do not own or
over which you are not duly authorized by the owner,
then there can be no valid foreclosure of the mortgage.
D. Things pledged or mortgaged may be alienated
at the instance of the creditor
Since the essence of constituting a pledge or a
mortgage is to secure fulfillment of a principal
obligation, can the parties (debtors, creditors) be
presumed that the debtor is also the pledgor of the
mortgagor just agree to stipulate “cge, if I cannot fulfill
my obligation, imu na ni” NO because that is pactum
commissorium and that is a void stipulation. You
cannot stipulate that.
If there is a stipulation in the mortgage that upon
default of the debtor the creditor can register the sale
over the property we are looking at a scenario where a
mortgage deed was executed and at the same time a
sale was executed. One of the stipulations that if the
debtor defaults, the creditor can register the sale. The
creditor now becomes the absolute owner. Is this a
valid stipulation? NO, it constitutes pactum
commissorium, it is a void stipulation. That’s why many
creditors would require that when they execute a
mortgage deed, they execute a pacto de retro
document.
If one of the stipulations of the mortgage contract is
that upon default the debtor will execute a deed of sale
in favor of the creditor over the property subject of the
mortgage. Do you consider that pactum
commissorium? It is not pactum commissorium
because there is still another act which will be
performed by the debtor before ownership is
transferred to the creditor.
Pactum commissorium- no other act by the debtor in
order to transfer ownership; there is automatic transfer
of ownership. The stipulation provides automatic
transfer and no other intervention on the part of the
debtor. It is a void stipulation.
If a mortgage is an accessory undertaking just like
guaranty and suretyship, is the mortgagor entitle to
exhaustion of the properties of the debtor? Can the
mortgagor invoke the benefit of excussion or
exhaustion? Benefit of excussion is available only in
cases of ordinary guaranty.
E. Pledge and Mortgage are Indivisible
If several parcels of land (3 parcels of land) are the
subject of one real estate mortgage in order to secure
an obligation of 10 million pesos. The debtor has paid
5 million, can the mortgagor ask for partial release of
the mortgage? Can you release 1 parcel? Anyway the
2 parcels are enough? NO, that is the indivisible
nature of pledge and mortgage. You cannot ask for a
partial release unless if a particular property is
subjected as security for payment for this particular
amount- if this property will secure 2 million of the
loan, this one 5 million of the loan, this one 3 million of
the loan. If you have paid 5 million, can you ask for the
release of the parcel designated as security for 5
million? Not necessarily.
 Grace and Clarz Credit Transcription Notes for Feb.
Prefi ‘11
Yu vs. PCIBank
Several properties were mortgaged some
located in Dagupan, some in QC to secure
payment of a loan worth 10 million. The loan
was not paid so the creditor initiated
foreclosure proceedings. Under the law,
foreclosure must be done in the province
where the properties are located. So for
properties located in Dagupan, foreclosure
proceedings were initiated in Pangasinan, for
those properties located in QC, there was also
a scheduled foreclosure sale. There was only
one application filed and only one filing fee but
in the notices of the foreclosure sale in
Dagupan it was stated that properties were
subject as securities for payment of the 10
million loan. There was also notice in QC that
these properties are being sold for the loan of
10 million. It was published in both Dagupan
and QC which means that the debt is 20,000.
You cannot do that. You cannot conduct
foreclosure sale in Dagupan and a separate
foreclosure sale in QC because of the rule of
the indivisibility of the mortgage. SC said
indivisibility refers to the mortgage. Does not
refer to the venue for foreclosure of mortgage
because the law is clear that foreclosure must
be conducted in the province in where the
properties are located. Indivisibility does not
mean that you must conduct the foreclosure
sale only in one place even if the other
properties are located in other provinces
because that would violate the law.
Indivisibility refers to the mortgage itself where
you cannot ask for partial release if there is
partial payment. It does not mean prohibition
against the splitting of the venue if the
properties are located in different provinces.
Is a promise to constitute a pledge or mortgage valid?
Like a promise to constitute guaranty or suretyship is
valid? If I promise to constitute a mortgage over real
property to secure my loan to you and I fail to pay the
loan can you foreclose? Can you sell my property in
public sale? What does it mean when the law says
“give rise to personal action only”? That means you
can compel me to execute the mortgage deed but you
cannot foreclose or sell the property at a public sale
because there is no mortgage constituted yet.
If I promise to constitute a mortgage, make sure that I
execute the proper document so you can foreclose.
That is your right if I merely make a promise then your
remedy is only a personal action to compel me to
execute the proper document.
PLEDGE
Pledge- is an accessory contract which is perfected by
the delivery of the thing (real contract) by virtue of
which the debtor or pledgor delivers to the creditor or
a third person personal property as security for the
performance of a specific obligation, the fulfillment of
which the thing must be returned with its accessions
and accessories.
Requisites:
1. It must be constituted to secure fulfillment of a
principal obligation
2. It must be constituted by the absolute owner
not necessarily the principal debtor for as long
as pledgor is the owner.
3. The pledgor must free disposal of the thing or
he must be duly authorized by the owner.
4. The fourth requisite which is not found in
mortgage is that the property must be
delivered to the creditor or third person as
agreed by the parties.
Kalibo vs. CA
Mr. Abella rented the house of Mr. Kalibo in
Tagbilaran. Because he failed to pay the monthly
rentals, he delivered to Mr. Kalibo a tractor in
pledge as security for payment of the rentals for
the house. It turned out that the tractor was
owned by his father Pablo Abella. And then Pablo
Abella demanded for the return, the delivery to him
of the tractor and Mr. Kalibo objected saying that it
was delivered to him as pledge as security for the
payment of the unpaid rentals. Was there a valid
pledge constituted between Abella and Mr. Kalibo?
SC said NO because one of the pledge to be validly
constituted is that it must be constituted by the
owner and here there was no dispute that the
tractor was owned by the father and not by Mike
Abella. There could be no valid pledge constituted.
So he said if there was no valid pledge then it was
deposited with him. The purpose of deposit is
safekeeping but the tractor was delivered to him as
pledge as security for the unpaid rentals. SC said
return the tractor to Pablo Abella since there was
no valid mortgage constituted
Who are the parties of pledge?
1. Pledgor- the person who delivers
2. Pledgee- the party who receives or to whom
the property is delivered or the creditor
If the pledgor is not the principal debtor and the
principal debtor fails to perform or fulfill the principal
obligation, the result of that is that the thing subject of
the pledge will be sold at public auction to satisfy the
obligation, it is the right of the pledgor to recover from
the principal debtor. He is also entitled to be
subrogated to the rights of the creditor.
What kind of things can be the object of a pledge?
Only movable objects. Is it all kinds of movable? It
does not include those outside the commerce of men
like prohibited drugs or illegal things. It must be
susceptible of possession. The thing must be movable.
Can animals be the objects of a contract of pledge?
Yes, for as long as they are delivered to a pledgee or
third person.
Can incorporeal rights which are invisible be the
objects of a pledge? Can shares of stocks be pledged?
Yes, but what you deliver are the stocks certificates
Or goods stored in a warehouse? Yes, deliver the
warehouse receipt instead of delivering the thing.
If it is stocks certificate or negotiable documents that
are delivered to the pledgee, if these are negotiable
documents then these must be properly indorsed. It
does not mean though that if you indorse the
negotiable document or stocks certificate, the
ownership is already transferred to the pledgee. It is
only to facilitate sale later on. Pledge is an accessory
undertaking to secure fulfillment of a principal
obligation, it is not constituted to pay a principal
obligation. Otherwise that would be novation or if the
obligation consists a sum of money that would be
dacion en pago. Even if you indorse the negotiable
warehouse receipt or the negotiable quedan or the
 Grace and Clarz Credit Transcription Notes for Feb.
Prefi ‘11

stocks certificate, it does not transfer ownership to the If the thing produces income or produces fruits
pledgee. (natural, civil, industrial). He applies the fruits for the
expenses for the preservation.
What is the consideration?
All the essential elements must be present. Cause, What if there are no expenses for the preservation?
consideration, object. Apply it to the interest and to the principal debt.

If there has to be consideration in a pledge, does it
mean to say that the pledgor must receive a valuable
consideration for constituting the pledge? We are
talking of a pledgor who is not the principal debtor.
Must he receive a valuable consideration in order to
validly constitute pledge? No, because the
consideration that supports the principal obligation is
the same consideration that supports pledge.
Form
It is the delivery of the thing that perfects the contract.
Therefore in order for it to be valid between the
pledgor and the pledgee, in what form must it be? No
particular form is required for as long as the thing is
delivered but in order to bind third persons, it must be
in a public document where it sets forth the description
of the property and the date when the pledge was
constituted. Note that you do not indicate the amount
secured. It can be constituted to secure future
obligations.
Betita vs. Guanzon
Tiburcia is a widow. She owns several animals
(carabaos) but she obtained a loan from
Tiburcio. To secure payment of the loan, she
signed a private document saying: I, Tiburcia
Buhayan, of age, widow, and resident of …do
hereby execute this document extrajudicially
that I am indebted to…as security to my
creditor I hereby offer 4 carabaos, 3 females
and 1 male. Daghang utang c lola tiburcia and
she was sued. SC said the 4 carabaos cannot
be mortgaged because the mortgage was
executed in a private document. He said the
carabaos were mortgaged to me because the
carabaos were delivered to my tenant. If
delivered to the agent, it is tantamount to
being delivered to the principal. The tenant
was the live-in partner of Lola Tiburcia. SC said
there was no valid transfer of possession from
Tiburcia to the creditor because
If the object pledged are carabaos (3 females, 1 male),
granting it was a perfectly valid pledge, the female
produces an offspring, is the offspring included in the
pledge? Yes, it can also be sold to satisfy the principal
obligation although it belongs to the pledgor, the
offspring can be sold to satisfy the principal obligation.
c. If there is a danger of eviction or of
deprivation of the thing, it is also a right of
the pledgee to institute actions or to
exercise whatever right the owner of the
thing has in order to defend the possession
or ownership of the thing. He can exercise
whatever right the pledgor may have to
defend any danger or deprivation, he can
exercise the right of the owner of the thing.
d. Preference of credit
When do you consider whether the person is a
preferred creditor or not? If the debtor is insolvent
because if the debtor is not insolvent we don’t think
about preference of credit because he has more than
enough assets to satisfy all his liabilities. But if the
debtor has insufficient assets to pay or to satisfy all his
liabilities then there are creditors who are considered
preferred creditors.
If a movable object, the object of pledge, is delivered
to the pledgee, the pledgee or the creditor is
considered a preferred creditor with respect to that
particular movable not to any other movable or to any
other asset of the debtor. What does it mean? At the
time of liquidation of the assets of the insolvent, the
creditor or the pledgee has the right to be paid first out
of the proceeds of the sale of that movable. If the
proceeds are not enough to satisfy the principal
obligation then he joins with the other ordinary
creditors they will share with whatever assets are left.

Effects as to the Pledgee

A. Rights of the pledgee

a. Retention of the thing

2 instances when he can use:

1. When he is authorized to use
2. When the use of the thing is necessary for its
preservation

Just like a depositary (cannot generally use the thing

unless he is allowed to use and for as long as the
principal purpose is still safekeeping and secondly, if
the use of the thing is necessary for its preservation).
Just like a depositary, can the pledgee deposit the
thing delivered to him in pledge with another person?
General rule: no
Unless he is authorized

a. Another right of the pledgee is to seek

reimbursement
b. he is entitled to be reimbursed for the
expenses in the preservation of the thing.