72446130 secured san beda reviewer 2
TRANSCRIPT
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CREDIT TRANSACTIONS
CREDIT TRANSACTIONS
All transactions involving the purchase
or loan of goods, services, or money in
the present with a promise to pay or
deliver in the future
Contracts of security
Types:
1. Secured transactions or contracts of real
security- supported by a collateral or an
encumbrance of property
2. Unsecured transactions or contracts of
personal security - supported only by a
promise or personal commitment of
another such as a guarantor or surety
Security Something given, deposited, or serving
as a means to ensure fulfilment or
enforcement of an obligation or of
protecting some interest in property
Types of Security
a. personal when an individual
becomes surety or guarantor
b. real or property when a
mortgage, pledge, antichresis,
charge or lien or other device used
to have property held, out of which
the person to be made secure canbe compensated for loss
Bailment
The delivery of property of one person to
another in trust for a specific purpose,
with a contract, express or implied, that
the trust shall be faithfully executed and
the property returned or duly accounted
for when the special purpose is
accomplished or kept until the bailor
claims it.
Parties:
1. bailor - the giver; one who delivers
property
2. bailee- the recipient; one who receives
the custody or possession of the thing
thus delivered
LOAN (Articles 19331961)
A contract wherein one of the parties
delivers to another, either something not
consumable so that the latter may use
the same for a certain time and return it
or money or other consumable thing,
upon the condition that the same
amount of the same kind and quality
shall be paid. (Art 1933)
Characteristics:
1. Real Contract delivery of the thing
loaned is necessary for the perfection of
the contract
NOTE: An accepted promise to make a
future loan is a consensual contract, and
therefore binding upon the parties but it
is only after delivery, will the real
contract of loan arise. (Art 1934)
2. Unilateral Contract - once the subjectmatter has been delivered, it creates
obligations on the part of only one of the
parties (i.e. borrower).
Kinds:
1. Commodatumwhen the bailor (lender)
delivers to the bailee (borrower) a non-
consumable thing so that the latter may
use it for a certain time and return the
identical thing.
Kinds of commodatum:
a.
Ordinary Commodatumuse by theborrower of the thing is for a certain
period of time
b. Precarium - one whereby the bailor
may demand the thing loaned at will
and it exists in the following cases:
i. neither the duration nor
purpose of the contract is
stipulated
ii. the use of the thing is merely
tolerated by the owner
2. Simple loan or mutuum where the
lender delivers to the borrower money
or other consumable thing upon the
condition that the latter shall pay the
same amount of the same kind and
quality.
Commodatum Mutuum
Key: COPS-LOTR
1. Object
Non-consumable Consumable
2. Cause
Gratuitous May or may not be
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gratuitous
3. Purpose
Use or temporary
possession
Consumption
4. Subject MatterReal or personal
property
Only personal property
5. Ownership of the thing
Retained by the bailor Passes to the debtor
6. Thing to be returned
Exact thing loaned Equal amount of the
same kind and quality
7. Who bears risk of loss
Bailor Debtor
8. When to return
In case of urgent need,
even before the
expiration of the term
Only after the
expiration of the term
Loan Credit
Delivery by one party
and the receipt of other
party of a given sum of
money or other
consumable thing upon
an agreement, express
or implied, to repay the
same.
Ability of a person to
borrow money or
things by virtue of the
trust or confidence
reposed by the lender
that he will pay what
he promised.
Loan Credit
1. Interest taken at the
expiration of the credit
Interest is taken in
advance
2. Always on a double
name paper (two
signatures appear with
both parties held liable
for payment)
Always on a single
name paper (i.e.
promissory note with
no indorse-ment other
than the maker)
COMMODATUM (Articles 19351952)
Nature:
1. PURPOSE: Bailee in commodatum
acquires the temporary use of the thing
but not its fruits (unless stipulated as an
incidental part of the contract).(Art
1935)
Use must be temporary, otherwise
the contract may be a deposit.
2. CAUSE: Essentially gratuitous; it ceases
to be a commodatum if any
compensation is to be paid by the
borrower who acquires the use, in such
case there arises a lease contract.
Similar to a donation in that it
confers a benefit to the recipient.
The presumption is that the bailorhas loaned the thing for having no
need therefor.
3. SUBJECT MATTER: Generally non-
consumable whether real or personal
but if the consumable goods are not for
consumption as when they are merely
for exhibition, consumable goods may be
the subject of the commodatum. (Art
1936)
4. Bailor need not be the owner of thething owned (Art. 1938) since by the
loan, ownership does not pass to the
borrower.
A mere lessee or usufructuary may
lend but the borrower or bailee
himself may not lend nor lease the
thing loaned to him to a third person
(Art 1932[2])
5. Purely Personal (Art 1939):
Death of either party terminates the
contract unless by stipulation, thecommodatum is transmitted to the
heirs of either or both parties.
Bailee can neither lend nor lease the
object of the contract to a third
person.
NOTE:Use of the thing loaned may
extend to members of the bailees
household except:
a. contrary stipulation;
b. nature of the thing forbids
such use
Obligations of the Bailee: (Arts 19411945)
1. To pay for the ordinary expenses for the
use and preservation of the thing loaned.
(Art 1941)
2. To be liable for the loss of the thing even
if it should be through a fortuitous event
in the following cases: (KLAS D)
a. when he keeps it longer than the
period stipulated, or after the
accomplishment of its use
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b. when he lends or leases it to third
persons who are not members of his
household
c. when the thing loaned has been
delivered with appraisal of its valued. when, being able to save either of
the thing borrowed or his own
things, he chose to save the latter;
or
e. when the bailee devoted the thing
for any purpose different from that
for which it has been loaned (Art
1942)
3. To be liable for the deterioration of thing
loaned (a) if expressly stipulated; (b) if
guilty of fault or negligence; or (c) if he
devotes the thing to any purposedifferent from that for which it has been
loaned
4. To pay for extraordinary expenses arising
from the actual use of the thing by the
bailee, which shall be borne equally by
both the bailor and the bailee, even
though the bailee acted without fault,
unless there is a stipulation to the
contrary (Art 1949 par 2)
5. To return the thing loaned
The bailee has no right to retain the
thing loaned as security for claimshe has against the bailor even for
extraordinary expenses except for a
claim for damages suffered because
of the flaws of the thing loaned.
NOTES:
However, the bailees right
extends no further than
retention of the thing loaned
until he is reimbursed for the
damages suffered by him.
He cannot lawfully sell the thingto satisfy such damages without
courts approval.
In case there are two or more
bailees, their obligation shall be
solidary.
Obligations of the bailor (Art 1946 Art
1952):
1. To respect the duration of the loan
GENERAL RULE: Allow the bailee the
use of the thing loaned for the duration
of the period stipulated or until the
accomplishment of the purpose for
which the commodatum was instituted.
EXCEPTIONS:
a. In case of urgent need in
which case bailee may demand itsreturn or temporary use;
b. The bailor may demand
immediate return of the thing if the
bailee commits any act of
ingratitude specified in Art. 765.
2. To refund to the bailee extraordinary
expenses for the preservation of the
thing loaned, provided the bailee brings
the same to the knowledge of the bailor
before incurring them, except when they
are so urgent that the reply to thenotification cannot be awaited without
danger.
3. To be liable to the bailee for damages for
known hidden flaws.
Requisites:
a. There is flaw or defect in the thing
loaned;
b. The flaw or defect is hidden;
c. The bailor is aware thereof;
d. He does not advise the bailee of the
same; ande. The bailee suffers damages by
reason of said flaw or defect
NOTES:
If the above requisites concur, the
bailee has the right of retention for
damages.
The bailor cannot exempt himself
from the payment of expenses ordamages by abandoning the thing to
the bailee.
SIMPLE LOAN OR MUTUUM (Art 1953
1961)
A contract whereby one party delivers to
another, money or other consumable
thing with the understanding that the
same amount of the same kind and
quality shall be paid. (Art. 1953)
NOTES:
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The mere issuance of the checks does
not result in the perfection of the
contract of loan. The Civil Code provides
that the delivery of bills of exchange and
mercantile documents, such as checks,shall produce the effect of payment only
when they have been encashed (Gerales
vs. CA 218 SCRA 638). It is only after the
checks have produced the effect of
payment that the contract of loan may
be deemed perfected.
The obligation is to pay and not to
return because the consumption of the
thing loaned is the distinguishing
character of the contract of mutuum
from that of commodatum.
No estafa is committed by a person whorefuses to pay his debt or denies its
existence.
Simple Loan/Mutuum Rent
1. Delivery of money or
some consumable thing
with a promise to pay
an equivalent of the
same kind and quality
Delivery of some non-
consumable thing in
order that the other
may use it during a
certain period and
return it to the former.
2. There is a transfer ofownership of the thing
delivered
There is no transfer ofownership of the thing
delivered
3. Relationship
between the parties is
that of obligor-obligee
Relationship is that of
a landlord and tenant
4. Creditor receives
payment for his loan
Owner of the property
rented receives
compensation or price
either in money,
provisions, chattels, orlabor
from the occupant
thereof in return for its
use (Tolentino vs
Gonzales, 50 Phil 558
1927)
Loan Sale
1. Real contract Consensual contract
2.
Generally Bilateral and reciprocal
unilateral because only
borrower has
obligations
NOTE: If the property is sold, but the realintent is only to give the object as securityfor
a debtas when the price is comparatively
smallthere really is a contract of loanwith
an equitable mortgage.
Commodatum/
MutuumBarter
1. Subject matter is
money or fungible
things
Subject matter is non-
fungible, (non
consumable) things
2. In commodatum, thebailee is bound to
return the identical
thing borrowed when
the time has expired or
purpose served
The thing withequivalent value is
given in return for what
has been received
3. Mutuum may be
gratuitous and
commodatum is always
gratuitous
Onerous, actually a
mutual sale
Form of Payment (Art 1955):
1. If the thing loaned is money - payment
must be made in the currency stipulated,
if it is possible; otherwise it is payable in
the currency which is legal tender in the
Philippines and in case of extraordinary
inflation or deflation, the basisi of
payment shall be the value of the
currency at the time of the creation of
the obligation2. If what was loaned is a fungible thing
other than money - the borrower is
under obligation to pay the lender
another thing of the same kind, quality
and quantity. In case it is impossible to
do so, the borrower shall pay its value at
the time of the perfection of the loan.
Interest
The compensation allowed by law or
fixed by the parties for the loan or
forbearance of money, goods or credits
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said that nothing in said circular grants
lenders carta blanche authority to raise
interest rates to level which will either
enslave their borrowers or lead to a
hemorrhaging of their assets (citing Almedavs. CA, 256 SCRS 292). In Medel vs. CA, 299
SCRA 481, it was ruled that while stipulated
interest of 5.5% per month on a loan is
usurious pursuant to CB Circular No. 905, the
same must be equitably reduced for being
iniquitous, unconscionable and exorbitant. It
is contrary to morals, (contra bonos mores). It
was reduced to 12% per annum in consonant
with justice and fair play.
DEPOSIT (Articles 19622009)
A contract constituted from the moment
a person receives a thing belonging to
another, with the obligation of safely
keeping it and of returning the same.
Characteristics:
1. Real Contract - contract is perfected
by the delivery of the subject
matter.
2. Unilateral (gratutitous deposit) -
only the depositary has an
obligation.3. Bilateral (onerous deposit) - gives
rise to obligations on the part of
both the depositary and depositor.
Deposit Mutuum
1. Purpose
Principal purpose is
safekeeping or custody
Principal purpose is
consumption
2. When to Return
Depositor can demand
the return of the
subject matter at will
The lender must wait
until the expiration of
the period granted to
the debtor3. Subject Matter
Subject matter may be
movable or immovable
property
Subject matter is only
money or other
fungible thing
4. Relationship
Relationship is that of
lender (creditor) and
borrower (debtor).
Relationship is that of
depositor and
depositary.
5. Compensation
There can be
compensation of
credits.
NO compensation of
things deposited with
each other (except by
mutual agreement).
Deposit Commodatum
1. Purpose isSafekeeping
1. Purpose is thetransfer of the use
2. May be gratuitous 2. Essentially and
always gratuitous
3. Movable/corporeal
things only in case of
extrajudicial deposit
3. Both movable and
immovable may be the
object
Kinds of Deposit:
1. Judicial (Sequestration) takes place
when an attachment or seizure of
property in litigation is ordered.
2. Extra-judicial
a. Voluntary one wherein the
delivery is made by the will of the
depositor or by two or more persons
each of whom believes himself
entitled to the thing deposited. (Arts
19681995)
b. Necessary one made in
compliance with a legal obligation,
or on the occasion of any calamity,
or by travellers in hotels and inns(Arts 1996 - 2004), or by travellers
with common carriers (Art 1734
1735).
NOTE: The chief difference between a
voluntary deposit and a necessary
deposit is that in the former, the
depositor has a complete freedom in
choosing the depositary, whereas in the
latter, there is lack of free choice in the
depositor.
Judicial Extra-judicial1. Creation
Will of the court Will of the parties or
contract
2. Purpose
Security or to insure
the right of a party to
property or to recover
in case of favorable
judgment
Custody and
safekeeping
3. Subject Matter
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Movables or
immovables,
but generally
immovable
Movables only
4. CauseAlways onerous May be compen-sated
or not, but generally
gratuitous
5. When must the thing be returned
Upon order of the
court or when
litigation is ended
Upon demand of
depositor
6. In whose behalf it is held
Person who has a right Depositor or third
person designated
GENERAL RULE: Contract of deposit is
gratuitous (Art 1965)
EXCEPTIONS:
1. when there is contrary stipulation
2. depositary is engaged in business of
storing goods
3. property saved from destruction
without knowledge of the owner
NOTES:
Article 1966 does not embrace
incorporeal property, such as rights and
actions, for it follows the person of the
owner, wherever he goes.
A contract for the rent of safety deposit
boxesis not an ordinary contract of lease
of things but a special kind of deposit;
hence, it is not to be strictly governed by
the provisions on deposit. The relation
between a bank and its customer is that
of a bailor and bailee. (CA Agro vs CA,
219 SCRA 426)
Obligations of the Depositary (Art 1972
1991):
1. To keep the thing safely (Art 1972)
Exercise over the thing deposited
the same diligence as he would
exercise over his property
2. To return the thing (Art 1972)
Person to whom the thing must be
returned:
a. Depositor, to his heirs and successors,
or the person who may have been
designated in the contract
b. If the depositary is capacitated- he is
subject to all the obligations of a
depositary whether or not the
depositor is capacitated. If the
depositor is incapacitated, thedepositary must return the property
to the legal representative of the
incapacitated or to the depositor
himself if he should acquire capacity
(Art 1970).
c. If the depositor is capacitated and
the depositary is incapacitated- the
latter does not incur the obligation
of a depositary but he is liable:
i..to return the thing deposited
while still in his possession;
ii.to pay the depositor the amountwhich he may have benefited
himself with the thing or its
price subject to the right of any
third person who acquired the
thing in good faith (Art 1971)
Time of return:
a. Upon demand even though a
specified period or time for such
return may have been fixed except
when the thing is judicially attached
while in the depositarys possessionor should he have been notified of
the opposition of a third person to
the return or the removal of the
thing deposited. (Art 1998)
b. If deposit gratuitous, the
depositary may return the thing
deposited notwithstanding that a
period has been fixed for the
deposit if justifiable reasons exists
for its return.
c. If the deposit is for a
valuable consideration, the
depositary has no right to return the
thing deposited before the
expiration of the time designated
even if he should suffer
inconvenience as a
consequence.(Art 1989)
What to return: product,
accessories, and accessions of the
thing deposited (Art 1983)
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3. Not to deposit the thing with a third
person unless authorized by express
stipulation (Art 1973)
The depositor is liable for the loss of
the thing deposited under Article1973 if:
a. he transfers the deposit
with a third person without
authority although there is no
negligence on his part and the third
person;
b. he deposits the thing with a
third person who is manifestly
careless or unfit although authorized
even in the absence of negligence;
or
c. the thing is lost through thenegligence of his employees
whether the latter are manifestly
careless or not.
4. If the thing deposited should earn
interest (Art 1975):
a. to collect interest and the capital
itself as it fall due
b. to take steps to preserve its value
and rights corresponding to it
5. Not to commingle things deposited if so
stipulated (Art 1976)
6. Not to make use of the thing depositedunless authorized (Art 1977)
GENERAL RULE: Deposit is for
safekeeping of the subject matter and
not for use. The unauthorized use by the
depositary would make him liable for
damages.
EXCEPTIONS:
1. When the preservation of the thing
deposited requires its use
2. When authorized by the depositor
NOTE: The permission to use is NOT
presumed except when such use is
necessary for the preservation of the
thing deposited.
Effect if permission to use is given (Art
1978):
1. If thing deposited is non-
consumable, the contract loses the
character of a deposit and acquires
that of a commodatum despite the
fact that the parties may have
denominated it as a deposit, unless
safekeeping is still the principal
purpose.
2. If thing deposited consists of
money/consumable things, the
contract is converted into a simpleloan or mutuum unless safekeeping
is still the principal purpose in which
case it is called an irregular deposit.
Example: bank deposits are irregular
deposits in nature but governed by
law on loans.
7. When the thing deposited is delivered
sealed and closed :
a. to return the thing deposited in the
same condition
b. to pay for damages should the seal
or lock be broken through his fault,which is presumed unless proved
otherwise
c. to keep the secret of the deposit
when the seal or lock is broken with
or without his fault (Art 1981)
NOTE: The depositary is authorized
to open the thing deposited which is
closed and sealed when (Art 1982):
i. there is presumed authority (i.e.
when the key has been
delivered to him or the
instructions of the depositorcannot be done without
opening it)
ii. necessity
8. To change the way of the deposit if
under the circumstances, the depositary
may reasonably presume that the
depositor would consent to the change if
he knew of the facts of the situation,
provided, that the former notifies the
depositor thereof and wait for his
decision, unless delay would cause
danger
9. To pay interest on sums converted to
personal use if the deposit consists of
money (Art 1983)
10. To be liable for loss through fortuitous
event (SUDA): (Art 1979):
a. if stipulated
b. if he uses the thing without the
depositor's permission
c. if he delays its return
d. if he allows others to use it, even
though he himself may have been
authorized to use the same
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NOTES:
Fixed, savings, and current deposits of
money in banks and similar institutions
shall be governed by the provisionsconcerning simple loan.(Art 1980)
The general rule is that a bank can
compensate or set off the deposit in its
hands for the payment of any
indebtedness to it on the part of the
depositor. In true deposit,
compensation is not allowed.
Irregular deposit Mutuum
1. The consumablething deposited may be
demanded at will by
the depositor
1. Lender is bound bythe provisions of the
contract and cannot
demand restitution
until the time for
payment, as provided
in the contract, has
arisen
2. The only benefit is
that which accrues to
the depositor
2. Essential cause for
the transaction is the
necessity of the
borrower
3. The irregular
depositor has a
preference over other
creditors with respect
to the thing deposited
3. Common creditors
enjoy no preference in
the distribution of the
debtors property
Rule when there are two or more depositors
(Art 1985):
1. If thing deposited is divisible and
depositors are not solidary: Each
depositor can demand only his
proportionate share thereto.2. If obligation is solidary or if thing is not
divisible: Rules on active solidarity shall
apply, i.e. each one of the solidary
depositors may do whatever may be
useful to the others but not anything
which may be prejudicial to the latter,
(Art. 1212) and the depositary may
return the thing to anyone of the
solidary depositors unless a demand,
judicial or extrajudicial, for its return has
been made by one of them in which
case, delivery should be made to him
(Art. 1214).
3. Return to one of depositors stipulated.
The depositary is bound to return it only
to the person designated although hehas not made any demand for its return.
NOTES:
The depositary may retain the thing in
pledge until full payment of what may be
due him by reason of the deposit (Art
1994).
The depositors heir who in good faith
may have sold the thing which he did not
know was deposited, shall only be bound
to return the price he may have received
or to assign his right of action against thebuyer in case the price has not been paid
him (Art 1991).
Obligations of the Depositor (Art 1992
1995):
1. To pay expenses for preservation
a. If the deposit is gratuitous, the
depositor is obliged to reimburse
the depositary for expenses
incurred for the preservation of the
thing deposited (Art 1992)
b. If the deposit is for valuableconsideration, expenses for
preservation are borne by the
depositary unless there is a contrary
stipulation
2. To pay loses incurred by the depositary
due to the character of the thing
deposited
GENERAL RULE: The depositor shall
reimburse the depositary for any loss arising
from the character of the thing deposited.
EXCEPTIONS:1. at the time of the deposit, the
depositor was not aware of the
dangerous character of the thing
2. when depositor was not expected to
know the dangerous character of the
thing
3. when the depositor notified the
depository of the same
4. the depositary was awareof it without
advicefrom the depositor
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Extinguishment of Voluntary Deposit (Art
1995)
1. Loss or destruction of the thing
deposited
2. In case of gratuitous deposit, upon thedeath of either the depositor or the
depositary
3. Other causes, such as return of the thing,
novation, merger, expiration of the term
fulfilment of the resolutory condition,
etc (Art 1231)
Necessary Deposits
1. Made in compliance with a legal
obligation
2. Made on the occasion of any calamity
such as fire, storm, flood, pillage,shipwreck or other similar events
(deposito miserable)
3. Made by travellers in hotels and inns or
by travellers with common carrier
Deposit by Travellers in hotels and inns:
The keepers of hotels or inns shall be
responsible as depositaries for the
deposit of effects made by travellers
provided:
a. Notice was given to them or to their
employees of the effects brought bythe guest; and
b. The guests take the precautions
which said hotel-keepers or their
substitutes advised relative to the
care and vigilance of their effects.
NOTES:
Liability extends to vehicles, animals and
articles which have been introduced or
placed in the annexes of the hotel.
Liability shall EXCLUDE losses which
proceed from force majeure. The act of a
thief or robber is not deemed forcemajeure unless done with the use of
arms or irresistible force.
The hotel-keeper cannot free himself
from the responsibility by posting
notices to the effect that he is not liable
for the articles brought by the guest. Any
stipulation to such effect shall be void.
Notice is necessary only for suing civil
liability but not in criminal liability.
GUARANTY (Articles 20472084)
A contract whereby a person (guarantor)
binds himself to the creditor to fulfil the
obligation of the principal debtor in case
the latter fail to do so.
Classification of Guaranty:
1. In the Broad sense:
a. Personal - the guaranty is the credit
given by the person who guarantees
the fulfilment of the principal
obligation.
b. Real - the guaranty is the property,
movable or immovable.
2. As to its Origin
a. Conventional - agreed upon by the
parties.
b. Legal - one imposed by virtue of a
provision of a law.
c. Judicial - one which is 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 any price or remuneration
for acting as such.b. Onerous - the guarantor receives
valuable consideration.
4. As to the Person guaranteed
a. Single - one constituted solely to
guarantee or secure performance
by the debtor of the principal
obligation.
b. Double or sub-guaranty - one
constituted to secure the fulfilment
by the guarantor of a prior
guaranty.
5. As to Scope and Extent
a. Definite - the guaranty is limited to
the principal obligation only, or to a
specific portion thereof.
b. Indefinite or simple - one which not
only includes the principal
obligation but also all its accessories
including judicial costs
SURETYSHIP
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A contract whereby a person (surety)
binds himself solidarilywith the principal
debtor
A relation which exists where one person
(principal) has undertaken an obligationand another person (surety) is also under
a direct and primary obligation or other
duty to the obligee, who is entitled to
but one performance, and as between
the two who are bound, the second
rather than the first should perform
(Agro Conglomerates, Inc. vs. CA, 348
SCRA 450)
NOTES:
The reference in Article 2047 to solidary
obligations does not mean that
suretyship is withdrawn from theapplicable provisions governing
guaranty. A surety is almost the same as
a solidary debtor, except that he himself
is a principal debtor.
In suretyship, there is but one contract,
and the surety is bound by the same
agreement which binds the principal. A
surety is usually bound with the principal
by the same instrument, executed at the
same time and upon the same
consideration (Palmares vs CA, 288 SCRA
422) It is not for the obligee to see to it that
the principal debtor pays the debt or
fulfill the contract, but for the surety to
see to it that the principal debtor pays or
performs (Paramount Insurance Corp vs
CA, 310 SCRA 377)
Nature of Suretys undertaking:
1. Liability is contractual and accessory but
direct
NOTE: He directly, primarily and equally
binds himself with the principal asoriginal promisor, although he possesses
no direct or personal interest over the
latters obligation, nor does he receive
any benefits therefrom. (PNB vs CA, 198
SCRA 767)
2. Liability limited by the terms of the
contract.
NOTE: It cannot be extended by
implication beyond the terms of the
contract (PNB vs CA, 198 SCRA 767)
3. Liability arises only if principal debtor is
held liable.
NOTES:
The creditor may sue separately or
together the principal debtor and
the surety. Where there are several
sureties, the obligee may proceedagainst any one of them.
In the absence of collusion, the
surety is bound by a judgment
against the principal even though he
was not a party to the proceedings.
The nature of its undertaking makes
it privy to all proceedings against its
principal (Finman General Assurance
Corp. vs. Salik, 188 SCRA 740)
4. Surety is not entitled to the benefit of
exhaustionNOTE:He assumes a solidary liability for
the fulfilment of the principal obligation
(Towers Assurance Corp vs. Ororama
Supermart, 80 SCRA 262) as an original
promissory and debtor from the
beginning.
5. Undertaking is to creditor and not to
debtor.
NOTE: The surety makes no covenant or
agreement with the principal that it will
fulfil the obligation guaranteed for the
benefit of the principal. Such a promise isnot implied by law either; and this is true
even where under the contract the
creditor is given the right to sue the
principal, or the latter and the surety at
the same time. (Arranz vs. Manila
Fidelity & Surety Co., Inc., 101 Phil. 272)
6. Surety is not entitled to notice of
principals default
NOTE: The creditor owes no duty of
active diligence to take care of the
interest of the surety and the surety is
bound to take notice of the principalsdefault and to perform the obligation. He
cannot complain that the creditor has
not notified him in the absence of a
special agreement to that effect.
(Palmares vs CA, 288 SCRA 422)
7. Prior demand by the creditor upon
principal is not required
NOTE: As soon as the principal is in
default, the surety likewise is in default.
8. Surety is not exonerated by neglect of
creditor to sue principal
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Characteristics of Guaranty and Suretyship:
1. Accessory - It is indispensable condition
for its existence that there must be a
principal obligation.
NOTES: Guaranty may be constituted to
guarantee the performance of a
voidable or unenforceable contract.
It may also guarantee a natural
obligation. (Art 2052)
The guarantor cannot bind himself
for more than the principal debtor
and even if he does, his liability shall
be reduced to the limits of that of
the debtor.
2. Subsidiary and Conditional - takes effect
only in case the principal debtor fails inhis obligation.
NOTES:
The guarantor cannot bind himself
for more than the principal debtor
and even if he does, his liability shall
be reduced to the limits of that of
the debtor. But a guarantor may
bind himself for less than that of the
principal (Art 2054)
A guaranty may be given as security
for future debts, the amount ofwhich is not yet known; there can be
no claim against the guarantor until
the debt is liquidated. A conditional
obligation may also be secured. (Art
2053)
3. Unilateral - may be entered even w/o
the intervention of the principal debtor,
in which case Art. 1236 and 1237 shall
apply and it gives rise only to a duty on
the part of the guarantor in relation to
the creditor and not vice versa.
4. Nominate5. Consensual
6. It is a contract between the
guarantor/surety and creditor.
NOTES:
Acceptance of guaranty by creditor
and notice thereof to guarantor:
In declaring that guaranty must
be express, the law refers solely
and exclusively to the obligation
of the guarantor because it is he
alone who binds himself by his
acceptance. With respect to the
creditor, no such requirement is
needed because he binds
himself to nothing. However, when there is merely
an offer of a guaranty, or
merely a conditional guaranty,
in the sense that it requires
action by the creditor before
the obligation becomes fixed, it
does not become binding until it
is accepted and until notice of
such acceptance by the creditor
is given to, or acquired by, the
guarantor, or until he has notice
or knowledge that the creditorhas performed the condition
and intends to act upon the
guaranty.
But in any case, the creditor is
not precluded from waiving the
requirement of notice.
The consideration of the guaranty is
the same as the consideration of the
principal obligation.
The creditor may proceed against
the guarantor although he has no
right of action against the principaldebtor.
7. Not presumed. It must be expressed and
reduced in writing.
NOTE: A power of attorney to loan
money does not authorize the agent to
make the principal liable as a surety for
the payment of the debt of a third
person. (BPI vs. Coster, 47 Phil. 594)
8. Falls under the Statute of Frauds since it
is a special promise to answer for the
debt, default or miscarriage of another.
9. Strictly interpreted against the creditorand in favor of the guarantor/surety and
is not to be extended beyond its terms or
specified limits. (Magdalena Estates, Inc.
vs Rodriguez, 18 SCRA 967) The rule of
strictissimi juris commonly pertains to an
accommodation surety because the
latter acts without motive of pecuniary
gain and hence, should be protected
against unjust pecuniary
impoverishment by imposing on the
principal, duties akin to those of a
fiduciary.
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NOTES:
The rule will apply only after it has
been definitely ascertained that the
contract is one of suretyship orguaranty. It cannot be used as an aid
in determining whether a partys
undertaking is that of a surety or
guarantor. (Palmares vs CA, 288
SCRA 292)
It does not apply in case of
compensated sureties.
10. It is a contract which requires that the
guarantor must be a person distinct form
the debtor because a person cannot be
thepersonal guarantor of himself.
NOTE: However, in a real guaranty, likepledge and mortgage, a person may
guarantee his own obligation with his
personal or real properties.
Guaranty Suretyship
1. Liability depends
upon an independent
agreement to pay the
obligation if primary
debtor fails to do so
1. Surety assumes
liability as regular party
to the undertaking
2. Collateral under-
taking
2. Surety is an original
promisor
3. Guarantor is
secondarily liable
3. Surety is primarily
liable
4. Guarantor binds
himself to pay if the
principal CANNOT
PAY
4. Surety undertakes to
pay if the principal
DOES NOT PAY
5. Insurer of solvency
of debtor
5. Insurer of the debt
6. Guarantor can avail
of the benefit of
excussion and division
in case creditor
proceeds against him
6. Surety cannot avail
of the benefit of
excussion and division
Indorsement Guaranty
1. Primarily of transfer 1. Contract of security
2. Unless the note is
promptly presented for
2. Failure in either or
both of these
payment at maturity
and due notice of
dishonor given to the
indorser within a
reasonable time he will
be discharged abso-
lutely from all liability
thereon, whether he
has suffered any actual
damage or not
particulars does not
generally work as an
absolute discharge of a
guarantors liability, but
his is discharged only to
the extent of the loss
which he may have
suffered in
consequence thereof
3. Indorser does not
warrant the solvency.
He is answerable on a
strict compliance with
the law by the holder,
whether the promisor is
solvent or not
3. Guarantor warrants
the solvency of the
promisor
4. Indorser can be sued
as promisor
4. Guarantor cannot be
sued as promisor
Guaranty Warranty
A contract by which a
person is bound to
another for the
fulfilment of a promise
or engagement of a
third party
An undertaking that the
title, quality, or
quantity of the subject
matter of the contract
is what it has been
represented to be, and
relates to someagreement made
ordinarily by the party
who makes the
warranty
NOTES:
A guaranty is gratuitous, unless there is a
stipulation to the contrary. The cause of
the contract is the same cause which
supports the obligation as to the
principal debtor.
The peculiar nature of a guaranty orsurety agreement is that is is regarded as
valid despite the absence of any direct
consideration received by the guarantor
or surety either from the principal
debtor or from the creditor; a
consideration moving to the principal
alone will suffice.
It is never necessary that the guarantor
or surety should receive any part or
benefit, if such there be, accruing to the
principal. (Willex Plastic Industries Corp.
vs. CA, 256 SCRA 478)
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Double or sub-guaranty (Art 2051 2nd par) One constituted to guarantee the
obligation of a guarantor
Continuing guaranty (Art 2053)
One which is not limited to a single
transaction but which contemplates a
future course of dealings, covering a
series of transactions generally for an
indefinite time or until revoked.
NOTES:
Prospective in operation (Dio vs CA, 216SCRA 9)
Construed as continuing when by the
terms thereof it is evident that the
object is to give a standing credit to the
principal debtor to be used from time to
time either indefinitely or until a certain
period, especially if the right to recall the
guaranty is expressly reserved (Dio vs
CA, 216 SCRA 9)
Future debts may also refer to debts
existing at the time of the constitution of
the guaranty but the amount thereof isunknown and not to debts not yet
incurred and existing at that time.
Exception to the concept of continuing
guaranty is chattel mortgage. A chattel
mortgage can only cover obligations
existing at the time the mortgage is
constituted and not those contracted
subsequent to the execution thereof
(The Belgian Catholic Missionaries, Inc.
vs. Magallanes Press, Inc., 49 Phil 647).
An exception to this is in case of stocks in
department stores, drug stores, etc.(Torres vs. Limjap, 56 Phil 141).
Extent of Guarantors liability: (Art 2055)
1. Where the guaranty definite: It is limited
in whole or in part to the principal debt,
to the exclusion of accessories.
2. Where guaranty indefinite or simple: It
shall comprise not only the principal
obligation, but also all its accessories,
including the judicial costs, provided with
respect to the latter, that the guarantor
shall only be liable for those costs
incurred after he has been judicially
required to pay.
Qualifications of a guarantor: (Arts 2056-
2057)1. possesses integrity
2. capacity to bind himself
3. has sufficient property to answer for
the obligation which he guarantees
NOTES:
The qualifications need only be present
at the time of the perfection of the
contract.
The subsequent loss of the integrity or
property or supervening incapacity of
the guarantor would not operate toexonerate the guarantor or the eventual
liability he has contracted, and the
contract of guaranty continues.
However, the creditor may demand
another guarantor with the proper
qualifications. But he may waive it if he
chooses and hold the guarantor to his
bargain.
Benefit of Excussion (Art 2058)
The right by which the guarantor cannot
be compelled to pay the creditor unlessthe latter has exhausted all the
properties of the principal debtor, and
has resorted to all of the legal remedies
against such debtor.
NOTE:
Not applicable to a contract of suretyship
(Arts 2047, par. 2; 2059[2])
Cannot even begin to take place before
judgment has been obtained against the
debtor (Baylon vs CA, 312 SCRA 502)
When Guarantor is not entitled to the
benefit of excussion: (PAIRS)
1. If it may be presumed that an execution
on the property of the principal debtor
would not result in the satisfaction of the
obligation
Not necessary that the debtor be
judicially declared insolvent or
bankrupt
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2. When he has absconded, or cannot be
sued within the Philippines unless he has
left a manager or representative
3. In case of insolvency of the debtor
Must be actual4. If the guarantor has expressly renounced
it
5. If he has bound himself solidarily with
the debtor
Other grounds: (BIPS)
6. If he is a judicial bondsman or sub-surety
7. If he fails to interpose it as a defense
before judgment is rendered against him
8. If the guarantor does not set up the
benefit against the creditor upon the
latters demand for payment from him,and point out to the creditor available
property to the debtor within Philippine
territory, sufficient to cover the amount
of the debt (Art 2060)
Demand can be made only after
judgment on the debt
Demand must be actual; joining the
guarantor in the suit against the
principal debtor is not the demand
intended by law
9. Where the pledge or mortgage has been
given by him as special security
Benefit of Division (Art 2065)
Should there be several guarantors of
only one debtor and for the same debt,
the obligation to answer for the same is
divided among all.
Liability: Joint
NOTES:
The creditor can claim from the
guarantors only the shares they are
respectively bound to pay except whensolidarity is stipulated or if any of the
circumstances enumerated in Article
2059 should take place.
The right of contribution of guarantors
who pays requires that the payment
must have been made (a) in virtue of a
judicial demand, or (b) because the
principal debtor is insolvent (Art 2073).
If any of the guarantors should be
insolvent, his share shall be borne by the
others including the paying guarantor in
the same joint proportion following the
rule in solidary obligations.
The above rule shall not be applicable
unless the payment has been made in
virtue of a judicial demand or unless theprincipal debtor is insolvent.
The right to contribution or
reimbursement from his co-guarantors is
acquired ipso jure by virtue of said
payment without the need of obtaining
from the creditor any prior cession of
rights to such guarantor.
The co-guarantors may set up against
the one who paid, the same defenses
which have pertained to the principal
debtor against the creditor and which
are not purely personal to the debtor.(Art 2074)
Procedure when creditor sues: (Art. 2062)
The creditor must sue the principal
alone; the guarantor cannot be sued
with his principal, much less alone
except in Art. 2059.
1. Notice to guarantor of the action
The guarantor must be NOTIFIED so
that he may appear, if he so desires,
and set up defenses he may want tooffer.
If the guarantor appears, he is still
given the benefit of exhaustion even
if judgment should be rendered
against him and principal debtor. His
voluntary appearance does not
constitute a renunciation of his right
to excussion (see Art. 2059(1)).
Guarantor cannot set up the
defenses if he does not appear and
it may no longer be possible for him
to question the validity of thejudgment rendered against the
debtor.
2. A guarantor is entitled to be heard
before and execution can be issued
against him where he is not a party in
the case involving his principal
(procedural due process).
Guarantors Right of Indemnity or
Reimbursement (Art 2066)
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GENERAL RULE: Guaranty is a contract of
indemnity. The guarantor who makes
payment is entitled to be reimbursed by the
principal debtor.
NOTE:The indemnity consists of: (DIED)
1. Total amount of the debt no right
to demand reimbursement until he
has actually paid the debt, unless by
the terms of the contract, he is given
the right before making payment.
He cannot collect more than what
he has paid.
2. Legal interest thereon from the time
the payment was made known
(notice of payment in effect a
demand so that if the debtor doesnot pay immediately, he incurs in
delay) to the debtor, even though it
did not earn interest for the
creditor. Guarantors right to legal
interest is granted by law by virtue
of the payment he has made.
3. Expenses incurred by the guarantor
after having notified the debtor that
payment has been demanded of him
by the creditor; only those expenses
that the guarantor has to satisfy in
accordance with law as aconsequence of the guaranty (Art.
2055) not those which depend upon
his will or own acts or his fault for
these are his exclusive personal
responsibility and it is not just that
they be shouldered by the debtor.
4. Damages if they are due in
accordance
with law. General rules on damages
apply.
EXCEPTIONS:
1. Where the guaranty is constituted
without the knowledge or against
the will of the principal debtor, the
guarantor can recover only insofar
as the payment had been beneficial
to the debtor (Art. 2050).
2. Payment by a third person who does
not intend to be reimbursed by the
debtor is deemed to be a donation,
which, however, requires the
debtors consent. But the payment
is in any case valid as to the creditor
who has accepted it (Art. 1238).
3. Waiver of the right to demand
reimbursement.
Guarantors right to Subrogation (ART.2067) Subrogation transfers to the person
subrogated, the credit with all the rights
thereto appertaining either against the
debtor or against third persons, be they
guarantors or possessors of mortgages,
subject to stipulation in conventional
subrogation.
NOTE: This right of subrogation is necessary
to enable the guarantor to enforce the
indemnity given in Art. 2066.
It arises by operation of law uponpayment by the guarantor. It is not
necessary that the creditor cede to the
guarantor the formers rights against the
debtor.
It is not a contractual right. The right of
guarantor who has paid a debt to
subrogation does not stand upon
contract but upon the principles of
natural justice.
The guarantor is subrogated by virtue of
the payment to the rights of the creditor,
not those of the debtor. Guarantor cannot exercise the right
of redemption of his principal
(Urrutia & Co vs Morena and Reyes,
28 Phil 261)
Effect of Payment by Guarantor
1. Without notice to debtor: (Art 2068)
The debtor may interpose against
the guarantor those defenses which
he could have set up against the
creditor at the time the payment
was made, e.g. the debtor can set upagainst the guarantor the defense of
previous extinguishment of the
obligation by payment.
2.
Before Maturity (Art 2069)
Not entitled to reimbursement
unless the payment was made with
the consent or has been ratified by
the debtor
Effect of Repeat Payment by debtor: (Art
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2070)
GENERAL RULE:Before guarantor pays the
creditor, he must first notify the debtor (Art.
2068). If he fails to give such notice and the
debtor repeats payment, the guarantor canonly collect from the creditor and guarantor
has no cause of action against the debtor for
the return of the amount paid by guarantor
even if the creditor should become insolvent.
EXCEPTION: The guarantor can still claim
reimbursement from the debtor in spite of
lack of notice if the following conditions are
present: (PIG)
a. guarantor was prevented by
fortuitous event to advise the
debtor of the payment; andb. the creditor becomes insolvent;
c. the guaranty is gratuitous.
Right of Guarantor to proceed against
debtor beforepayment
GENERAL RULE: Guarantor has no cause of
action against debtor until after the former
has paid the obligation
EXCEPTION: Article 2071
NOTES:
Article 2071 is applicable and available tothe surety. (Manila Surety & Fidelity Co.,
Inc. vs Batu Construction & Co., 101 Phil
494)
Remedy of guarantor:
(a) obtain release from the guaranty; or
(b) demand a security that shall protect
him from any proceedings by the
creditor, and against the danger of
insolvency of the debtor
Art. 2066 Art. 2071
Provides for theenforcement of the
rights of the
guarantor/surety
against the debtor after
he has paid the debt
Provides for hisprotection beforehe
has paid but after he
has become liable
Gives a right of action
afterpayment
Protective remedy
beforepayment.
Substantive right Preliminary remedy
Extinguishment of guaranty: (RA2CE
2)
1. Release in favor of one of the
guarantors, without the consent of the
others, benefits all to the extent of the
share of the guarantor to whom it has
been granted (Art 2078);
2. If the creditor voluntarily accepts
immovable or other properties in
payment of the debt, even if he shouldafterwards lose the same through
eviction or conveyance of property (Art
2077);
3. Whenever by some act of the creditor,
the guarantors even though they are
solidarily liable cannot be subrogated to
the rights, mortgages and preferences of
the former (Art 2080);
4. For the same causes as all other
obligations (Art 1231);
5. When the principal obligation is
extinguished;6. Extension granted to the debtor by the
creditor without the consent of the
guarantor (Art 2079)
BOND
An undertaking that is sufficiently
secured, and not cash or currency
Bondsman (Art 2082)
A surety offered in virtue of a provision
of law or a judicial order. He must have
the qualifications required of a guarantorand in special laws like the Rules of
Court.
NOTES:
Judicial bonds constitute merely a special
class of contracts of guaranty by the fact
that they are given in virtue of a
judicial order.
If the person required to give a legal or
judicial bond should not be able to do so,
a pledge or mortgage sufficient to cover
the obligation shall admitted in lieuthereof (Art 2083)
A judicial bondsman and the sub-surety
are NOT entitled to the benefit of
excussion because they are not mere
guarantors, but sureties whose liability is
primary and solidary. (Art 2084)
PLEDGE, MORTGAGE AND ANTICHRESIS
I. Common Elements of Pledge, Mortgage,
and Antichresis (Articles 20852092)
A.
Essential Requisites (SOD) (Art 2085)
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1. Secures the fulfillment of a principal
obligation;
2. Pledgor, mortgagor, antichretic debtor
must be the absolute owner of the thing
pledged or mortgaged; and The reason being that in anticipation
of a possible foreclosure sale in case
of default which is still a sale, the
rule is that the seller must be the
owner of the thing sold (Cavite
Development Bank vs. Lim, 324
SCRA 346)
3. Pledgor, mortgagor, antichretic debtor
must have free disposal of their
property, or be legally authorized for
such purpose.
NOTES:
Third persons can pledge or mortgage
their own property to secure the
principal obligation.
It is not necessarily void simply because
the accommodation pledgor or
mortgagor did not benefit from the
same. So long as valid consent was given,
the fact that the loan was given solely for
the benefit of the principal debtor would
not invalidate the mortgage (GSIS vs CA,
170 SCRA 533) The accommodation pledgor or
mortgagor, without expressly assuming
personal liability for such debt, is not
liable for the payment of any deficiency,
should the property not be sufficient to
cover the debt (Bank of America vs.
American Realty Corporation, 321 SCRA
659).
The accommodation pledgor or
mortgagor is not solidarily bound with
the principal obligor but his liability
extents only to the property pledged ormortgaged. Should there be any
deficiency, the creditor has recourse on
the principal debtor who remains to be
primarily bound.
The law grants to the accommodation
pledgor or mortgagor the same rights as
a guarantor and he cannot be prejudiced
by any waiver of defense by the principal
debtor.
B. Prohibition against Pactum
Commissorium (Art 2088; 2137)
Pactum Commissorium
Stipulation whereby the thing pledgedor
mortgaged, or under antichresis shall
automatically become the property ofthe creditor in the event of non-payment
of the debt within the term fixed.
Requisites:
1. There should be a pledge, mortgage, or
antichresis of property by way of security
for the payment of the principal
obligation; and
2. There should be a stipulation for an
automatic appropriation by the creditor
of the property in event of nonpayment
of the obligation within the stipulatedperiod.
GENERAL RULE: Pactum Commissorium is
forbidden by law and is declared null and
void.
EXCEPTION: The pledgee may appropriate
the thing pledged if after the first and second
auctions, the thing is not sold. (Art 2112)
NOTE: The security contract remains valid;
only the prohibited stipulation is void.
C.
Capability to secure all kinds ofobligations, i.e. pure or conditional (Art
2091)
D. Indivisibility (Art 2089)
GENERAL RULE: A pledge, mortgage, or
antichresis is indivisible, even though the
debt may be divided among the successors in
interest of the debtor or of the creditor.
Their indivisibility is not affected by the
fact that the debtors are jointly or not
solidarily liable.
Consequences of indivisibility:
1. Single thing Every portion of the
property pledged or mortgaged is
answerable for the whole obligation
2. Several thingsAll of the several things
pledged or mortgaged are liable for the
totality of the debt
3. Debtors heir/creditors heir- Neither the
debtors heir who has paid part of the
debt cannot ask for proportionate
extinguishment, nor creditors heir who
received his share of the debt return the
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pledge or cancel the mortgage as long as
the debt is not completelysatisfied.
CEPTIONS:
1. Where each one of several thingsguarantees a determinate portion of
the credit
2. Where only a portion of the loan
was released
3. Where there was failure of
consideration.
4. Where there is no debtor-creditor
relationship
NOTES:
The mere embodiment of a real estate
mortgage and a chattel mortgage in onedocument does not have the effect of
fusing both securities into an indivisible
whole.
The mortgagee, therefore, may legally
foreclose the real estate mortgage
extrajudicially and waive the chattel
mortgage foreclosure, and maintain
instead a personal action for the
recovery of the unpaid balance of the
credit (Phil. Bank of Commerce vs.
Macadaeg, 109 Phil 981)
E. When the principal obligation becomes
due, the things in which the pledge,
mortgage, or antichresis consists may
be alienated for the payment to the
creditor. (Art. 2087)
NOTES:
If the debtor fails to comply with the
obligation at the time it falls due, the
creditor is merely entitled to move for
the sale of the thing pledged or
mortgaged in order to collect theamount of his claim from the proceeds.
If he wishes to secure a title to the
mortgaged property, he can buy it in the
foreclosure sale (Montevirgin vs. CA, 112
SCRA 641)
F. Pledgor, mortgagor, antichretic debtor
retains ownership of the thing given as
a security
PLEDGE (Arts 20932123)
A contract wherein the debtor delivers
to the creditor or to a third person a
movable or document evidencing
incorporeal rights for the purpose of
securing fulfillment of a principalobligation with the understanding that
when the obligation is fulfilled, the thing
delivered shall be returned with all its
fruits and accessions.
Special Requisites (in addition to the
common essential requisites):
1. Possession of the thing pledged must be
transferred to the creditor or a third
person by agreement (Art 2093);
2. It can only cover movable property and
incorporeal rights evidenced bydocuments of title and the instruments
proving the right pledged shall be
delivered to the creditor, and if
negotiable must be endorsed (Art 2094);
and
3. The descriptionof the thing pledged and
the date must appear in a public
instrument to bind third persons, but not
for the validity of the contract (Art 2096).
Kinds:
1.
Conventional /Voluntary created bycontract
2. Legal created by operation of law
(examples: Art. 546, 1731 and 1914 NCC)
NOTES:
The provisions of possession, care and
sale of the thing as well as on the
termination of the pledge governing
conventional pledges are applicable to
pledges created by operation of law (Art
2121)
Unlike, however, in conventional pledgewhere the debtor is not entitled to the
excess unless it is otherwise agreed, in
legal pledge, the remainder of the price
of the sale after payment of the debt and
expenses, shall be delivered to the
debtor.
In legal pledge, there is no definite
period for the payment of the principal
obligation. The pledgee must make a
demand for the payment of the amount
due him; otherwise he cannot exercise
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the right of sale at public auction (Art
2122)
Characteristics:
1. Real contract it is perfected by thedelivery of the thing pledged by the
debtor who is called the pledgor to the
creditor who is called the pledgee, or to
a third person by common agreement;
2. Accessory contract it has no
independent existence of its own;
3. Unilateral contract it creates an
obligation solely on the part of the
creditor to return the thing subject
thereof upon the fulfilment of the
principal obligation; and
4. Subsidiary contract the obligationincurred does not arise until the
fulfilment of the principal obligation
which is secured.
Consideration in pledge:
Insofar as the pledgor is concerned, the
cause is the principal obligation.
If the pledgor is not the debtor, the
cause is the compensation stipulated for
the pledge or the mere liberality of the
pledgor.
Extent of pledge: Unless stipulated
otherwise, pledge extends to the fruits,
interests or earnings of the thing.
Rights and Obligations of a Pledgor
Rights Obligations
1. To demand return in
case of reasonable grounds
to fear destruction or
impairment of the thing
without the pledgees fault,
subject to the duty of
replacement (Art 2107)2. To bid and be preferred
at the public auction (Art
2113)
3. To alienate the thing
pledged provided the
pledgee consents to the
sale (Art 2097)
4. To ask that the thing
pledged be deposited (Arts
2104 & 2106)
1. To advise the
pledgee of the flaws
of the thing (Art
2101)
2. Not to demand
the return of the
thing until after fullpayment of the
debt, including
interest due
thereon and
expenses incurred
for its preservation
(Art 2105)
Rights of the Pledgee
KEY: D SBC BA2R
2OPS
2
1. Option to demand replacement or
immediate payment of the debt in case of
deception as to substance or quality (Art
2109)2. To sell at public auction in case of
reasonable grounds to fear destruction or
impairment of the thing without his fault (Art
2108)
3. To bring actions pertaining to the owner
(Art 2103)
4. To choose which of several things
pledged shall be sold
5. To bid at the public auction (Art 2113)
6. To appropriate the thing in case of
failure of the 2nd
public auction (Art 2112)
7. To apply said fruits, interests or earningsto the interest, if any, then to the principal of
the credit (Art 2102)
8. To retain excess value received in the
public sale (Art 2115)
9. To retain the thing until after full
payment of the debt (Art 2098)
10. To be reimbursed for the expenses made
for the preservation of the thing pledged (Art
2099)
11. To object to the alienation of the thing
12. To possess the thing (Art 2098)
13.
To sell at public auction in case of non-payment of debt at maturity (Art 2112)
To choose which of the several things
pledged shall be sold (Art 2119)
14. Option to demand replacement or
immediate payment of the debt in case of
deception as to substance or quality (Art
2109)
15. To sell at public auction in case of
reasonable grounds to fear destruction or
impairment of the thing without his fault (Art
2108)
16. To bring actions pertaining to the owner
(Art 2103)
17. To choose which of several things
pledged shall be sold
18. To bid at the public auction (Art 2113)
19. To appropriate the thing in case of
failure of the 2nd
public auction (Art 2112)
20. To apply said fruits, interests or earnings
to the interest, if any, then to the principal of
the credit (Art 2102)
21. To retain excess value received
in the public sale (Art 2115)
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22. To retain the thing until after full
payment of the debt (Art 2098)
23. To be reimbursed for the expenses made
for the preservation of the thing pledged (Art
2099)24. To object to the alienation of the thing
25. To possess the thing (Art 2098)
26. To sell at public auction in case of non-
payment of debt at maturity (Art 2112)
27. To choose which of the several things
pledged shall be sold (Art 2119)
Obligations of the Pledgee
KEY: CUDA3
1. Take care of the thing with the diligence of
a good father of a family (Art 2099)
2. Not to use thing unless authorized or bythe owner or its preservation requires its use
(Art 2104)
3. Notto deposit the thing with a 3rd
person
unless so stipulated (Art 2100)
4. Responsibility for acts of agents and
employees as regards the thing (Art 2100)
5. To advise pledgor of danger to the thing
(Art 2107)
6. To advise pledgor of the result of the
public auction (Art 2116)
RIGHT OF PLEDGOR TO SUBSTITUTE THINGPLEDGED (ART.2107)
Requisites:
1. The pledgor has reasonable grounds
to fear the destruction or
impairment of the thin pledged
2. There is no fault on the part of the
pledgee
3. The pledgor is offering in place of
the thing, another thing in pledge
which is of the same kind and
quality as the former
4. The pledge does not choose to
exercise his right to cause the thing
pledged to be sold at public auction
NOTE: The pledgees right to have the thing
pledged sold at public sale granted under the
Article 2108 is superior to that given to the
pledgor to substitute the thing pledged under
Article 2107.
Prohibition against double pledge
Property which has been lawfully
pledged to one creditor cannot be
pledged to another as long as the first
one subsists.
NOTE: Possession of a creditor of the thing
pledged is an essential requisite of pledge.
Extinguishment of Pledge (CRAPS)
1. For the same causes as all other
obligations (Art 1231)
2. Return of the thing pledged by the
pledgee to the pledgor (Art 2110)
3. Statement in writing by the pledgee
that he renounces or abandons the
pledge (Art 2111)
4. Payment of the debt (Art 2105)
5. Sale of thing pledged at public auction
(Art 2115)
NOTE: The possession by the debtor orowner of the thing pledged subsequent to
the perfection of the pledge gives rise to a
prima facie presumption that the thing has
been returned and, therefore, that the
pledge has been extinguished but not the
principal obligation itself. (Art 2110)
Requirements for sale of thing pledged at
public auction: (Art 2112)
1. The debt is due and unpaid
2. Sale must be at a public auction
3.
there must be notice to the pledgor andowner, stating the amount due
4. Sale must be with the intervention of a
notary public
Effect of sale of the thing pledged: (Art
2115)
1. The sale of the thing pledged shall
extinguish the principal obligation,
whether or not the proceeds of the sale
are equal to the amount of the principal
obligation, interest and expenses in a
proper case
2. If the price of the sale is more than the
amount due the creditor, the debtor is
not entitled to the excess unless the
contrary is provided
3. If the price of the sale is less, the creditor
is not entitled to recover the deficiency
even if there is a stipulation to that
effect
REAL ESTATE MORTGAGE (Articles 2124-
2131)
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A contract whereby the debtor secures
to the creditor the fulfilment of a
principal obligation, specially subjecting
to such security immovable property or
real rights over immovable property incase the principal obligation is not
complied with at the time stipulated.
Characteristics of the contract:
1. Real
2. Accessory
3. Subsidiary
4. Unilateral it creates only an
obligation on the part of the creditor
who must free the property from
the encumbrance once the
obligation is fulfilled.
NOTES:
As an accessory contract, its
consideration is that of the principal
contract from which it receives life.
A mortgage does not involve a transfer,
cession or conveyance of property but
only constitutes a lien thereon. Until
discharged, it follows the property
wherever it goes and subsistsnotwithstanding changes of ownership.
A mortgage gives the mortgagee no right
or claim to the possession of the
property, and therefore, a mere
mortgagee has no right to eject an
occupant of the property mortgaged
unless the mortgage should contain
some provision to that effect. The only
right of a mortgagee in case of non-
payment of a debt secured by mortgage
would be to foreclose the mortgage and
have the encumbered property sold tosatisfy the outstanding indebtedness. If
the possession is transferred to the
mortgagee, it must not expressly be for
purpose of applying the fruits to the
interest then to the principal of the
credit, for then it would be an
antichresis.
It is not an essential requisite that the
principal of the mortgage credit bears
interest, or that the interest as
compensation for the use of the principal
and enjoyment of its fruits be in the form
of a certain percent thereof.
Special Requisites (in addition to the
common essential requisites):1. It can cover only immovable property
and alienable real rights imposed upon
immovables (Art 2124);
2. It must appear in a public instrument
(Art. 2125); and
3. Registration in the registry of property is
necessary to bind third persons, but not
for the validity of the contract (Art 2125).
An order for foreclosure cannot be
refused on the ground that the
mortgage had not been registered
provided no innocent third partiesare involved.
NOTE: Where a mortgage is not valid or false,
the principal obligation which it guarantees is
not rendered null and void. What is lost only
is the right to foreclose the mortgage as a
special remedy for satisfying or settling the
indebtedness which is the principal obligation
but the mortgage deed remains as evidence
or proof of a personal obligation of the
debtor and the amount due to the creditor
may be enforced in an ordinary personal
action.
Kinds:
1. Voluntary agreed to by the parties or
constituted by the will of the owner of
the property on which it is created
2. Legal one required by law to be
executed in favour of certain persons
The persons in whose favour the law
establishes a mortgage have no
other right than to demand the
execution and the recording of the
document in which the mortgage is
formalized (Art 2125 par 2)
3. Equitable one which, although lacking
the formalities of a mortgage, shows the
intention of the parties to make the
property a security for a debt
PLEDGE REAL MORTGAGE
1. Constituted on
movables
1. Constituted on
immovables
2. Property is delivered
to pledgee or by
common consent to a
third person
2. Delivery is not
necessary
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3. Not valid against
third persons unless a
description of the thing
pledged and date of
pledge appear in a
public instrument
3. Not valid against
third persons unless
registered
Extent of Mortgage:
Absent express stipulation to the
contrary, the mortgage includes the
accessions, improvements, growing fruits
and income of the property not yet
received when the obligation becomes
due and to the amount of the indemnity
granted or owing to the proprietor from
the insurers of the property mortgaged,
or in virtue of expropriation for public
use (Art 2127)
Object of Mortgage:
Future property cannot be an object of a
contract of mortgage (Art 2085[2])
However, a stipulation subjecting to the
mortgage lien, properties
(improvements) which the mortgagor
may subsequently acquire install, or use
in connection with real property already
mortgaged belonging to the mortgagor is
valid (Peoples Bank and Trust Co. vs.
Dahican Lumber Co., 20 SCRA 84)
Special Rights:
1. Mortgagor - To alienate the mortgaged
property but the mortgage shall remain
attached to the property.
NOTE: A stipulation forbidding the owner
from alienating the immovable mortgage
shall be void (Art 2130) being contrary to
public policy inasmuch as the transmission of
property should not be unduly impeded.
2. Mortgagee - To claim from a 3rd
person
in possession of the mortgaged property
the payment of the part of the credit
secured by the which said third person
possesses (Art 2129)
NOTE: It is necessary that prior demand for
payment must have been made on the
debtor and the latter failed to pay (BPI vs
Concepcion & Hijos, Inc., 53 Phil 906)
Foreclosure
The remedy available to the mortgagee
by which he subjects the mortgaged
property to the satisfaction of the
obligation to secure that for which the
mortgage was given
NOTES:
It denotes the procedure adopted by the
mortgagee to terminate the rights of the
mortgagor on the property and includes
the sale itself (DBP vs Zaragoza, 84 SCRA
668)
Foreclosure is valid where the debtor is
in default in the payment of his
obligation (Gobonseng, Jr. vs CA, 246
SCRA 472)
Kinds:
1. Judicial ordinary action for foreclosure
under Rule 68 of the Rules of Court
2. Extrajudicialwhen mortgagee is given a
special power of attorney to sell the
mortgaged property by public auction,
under Act No. 3135
Judicial foreclosure Extrajudicial
foreclosure
1. There is court
intervention
1. No court
intervention2. Decisions are
appealable
2. Not appealable
because it is
immediately
executory
3. Order of court cuts
off all rights of the
parties impleaded
3. Foreclosure does
not cut off right of all
parties involved
4. There is equity of
redemption except on
banks which provides
for a right of
redemption
4. There is right of
redemption
5. Period of
redemption starts
from the finality of
the judgment until
order of confirmation
5. Period to redeem
start from date of
registration of
certificate of sale
6. No need for a
special power of
attorney in the
contract of mortgage
6. Special power of
attorney in favor of
mortgagee is needed
in the contract
NOTES:
A foreclosure sale retroacts to the date
of registration of the mortgage and that
a person who takes a mortgage in good
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faith and for valuable consideration, the
record showing clear title to the
mortgagor, will be protected against
equitable claims on the title in favor of
third persons, of which he had no actualor constructive notice (St. Dominic
Corporation vs. IAC 151 SCRA 577).
Where there is a right to redeem,
inadequacy of price is not material
because the judgment debtor may
reacquire the property or else sell his
right to redeem and thus recover any
loss he claims to have suffered by reason
of the price obtained at the auction sale
and consequently not sufficient to set
aside the sale. Mere inadequacy of the
price obtained at the sheriffs sale willnot be sufficient to set aside the sale
unless the price is so inadequate as to
shock the conscience of the court taking
into consideration the peculiar
circumstances attendant thereto. (Sulit
vs. CA, 268 SCRA 441)
Should there remain a balance due to
the mortgagee after applying the
proceeds of the sale, the mortgagee is
entitled to recover the deficiency. This
rule applies both to judicial and extra-
judicial foreclosure real mortgage. The action to recover a deficiency after
foreclosure prescribes after 10 years
from the time the right of action accrues
(Arts 1142 & 1144).
Stipulation of upset price or tipo
It is a stipulation in a mortgage of real
property of minimum price at which the
property shall be sold, to become
operative in the event of a foreclosure
sale at public auction. It is null and void
for the property must be sold to thehighest bidder. Parties cannot, by
agreement, contravene the law and
interfere with the lawful procedure of
the courts (BPI vs Yulo, 31 Phil 476)
Extrajudicial foreclosure real property (Act
No. 3135)
The law covers only real estate
mortgages. It is intended merely to
regulate the extrajudicial sale of the
property mortgaged if and when the
mortgagee is given a special power of
express authority to do so in the deed
itself or in a document annexed thereto.
The authority to sell is not extinguished
by the death of the mortgagor (or
mortgagee) as it is an essential andinseparable part of a bilateral agreement
(Perez vs PNB, 17 SCRA 833).
No sale can be legally made outside the
province in which the property sold is
situated; and in case the place within
said province in which the sale is to be
made is the subject of stipulation, such
sale shall be made in the said place in
the municipal building of the
municipality in which the property or
part thereof is situated.
Procedure for extrajudicial foreclosure of
both real estate mortgage under Act No.
3135 and chattel mortgage under Act No.
1508 (A.M. No. 99-10-05-0, January 15, 2000)
1. Filing of application before the Executive
Judge through the Clerk of Court
2. Clerk of Court will examine whether the
requirement of the law have been
complied with, that is, whether the
notice of sale has been posted for not
less than 20 days in at least three (3)
public places of the municipality or citywhere the property is situated, and if the
same is worth more than P400.00, that
such notice has been published once a
week for at least three (3) consecutive
weeks in a newspaper of general
circulation in the city of municipality
3. The certificate of sale must be approved
by the Executive Judge
4. Where the application concerns
extrajudicial foreclosure of real
mortgages in different locations covering
one indebtedness, only one filing fee
corresponding to such debt shall be
collected
5. The Clerk of Court shall issue certificate
of payment indicating the amount of
indebtedness, the filing fees collected,
the mortgages sought to be foreclosed,
the description of the real estates and
their respective locations
6. The notice of sale shall be published in a
newspaper of general circulation
pursuant to Section 1, PD No. 1079
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7. The application of shall be raffled among
all sheriffs
8. After the redemption period has expired,
the Clerk of Court shall archive the
records.9. No auction sale shall be held unless
there are at least two (2) participating
bidders, otherwise the sale shall be
postponed to another date. If on the
new date set forth for the sale there
shall not be at least two bidders, the sale
shall then proceed. The names of the
bidders shall be reported to the Sheriff
of the Notary Public, who conducted the
sale to the Clerk of Court before the
issuance of the certificate of sale.
NOTES:
The Mortgagor and Mortgagee have no
right to waive the posting and
publication requirements under Act. No.
3135. Notices are given to secure bidders
and prevent a sacrifice of the property.
Clearly, the statutory requirements of
posting and publication are mandated,
not for the mortgagors benefit, but for
the public or third persons. Failure to
comply with the statutory requirements
as to publication of notice of auction saleconstitutes a jurisdictional defect which
invalidates the sale.Lack of republication
of notice of foreclosure sale made
subsequently after the original date
renders such sale void (PNB vs.
Nepomuceno Productions Inc., G.R. No.
139479. December 27, 2002).
Sec 3 of Act 3135 does not require
personal or any particular notice on the