credit transactions notes (fsd)

Fides Damasco | UP Law C2013

CREDIT TRANSACTIONS | Atty. Stephanie Gomez-Somera

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Contents

Weeks 1 to 4 ........................................................................ 2

1. Concept of Credit and Debt .......................................... 2

2. Issues and Problems Relating to Credit ....................... 2

3. Concept of Credit Transactions .................................... 2

4. General Provisions on Loan ......................................... 2

5. Commodatum .............................................................. 3

6. Simple Loan ................................................................. 4

7. Interest ......................................................................... 6

8. Concept of Deposit....................................................... 9

9. Voluntary Deposit ......................................................... 9

10. Necessary Deposit ................................................... 13

11. Judicial Deposit ........................................................ 14

Weeks 5 to 6 (Special Reports) ....................................... 15

12. Merchants and Commercial Transactions ................ 15

13. Letters of Credit ....................................................... 15

14. Trust Receipts Law .................................................. 15

15. Truth in Lending Act ................................................. 17

16. The Usury Law ......................................................... 18

17. The Warehouse Receipts Law and the General

Bonded Warehouse Act ................................................. 21

Weeks 7 to 12 .................................................................... 30

18. Concept of Security Transactions ............................ 30

19. Guaranty .................................................................. 30

20. Surety ....................................................................... 36

21. Pledge and Mortgage, Common Provisions ............. 38

22. Pledge ...................................................................... 40

23. Real Estate Mortgage .............................................. 43

24. Chattel Mortgage...................................................... 50

25. Antichresis ............................................................... 55

Weeks 13 to 16 .................................................................. 56

26. Concurrence and Preference of Credits ................... 56

27. Rehabilitation and Insolvency .................................. 59



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Weeks 1 to 4

1. Concept of Credit and Debt Credit – sum credited on the books of a company to a person who appears to be entitled to it; presupposes a creditor-debtor relationship and may be said to imply ability to make a promised payment.

Debt – money, goods or services which a creditor owes.

2. Issues and Problems Relating to

Credit

3. Concept of Credit Transactions Credit Transactions include 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.

Secured transactions or contracts of real security – supported by collateral or an encumbrance of property.

Unsecured transactions or contracts of personal security – fulfillment by the principal debtor is secured or supported only by a promise to pay or the personal commitment of another such as a guarantor or surety.

Credit transactions are made up of:

1. Bailment contracts 2. Usury 3. Guaranty and Suretyship 4. Mortgage 5. Antichresis 6. Concurrence and Preference of Credits

Security – something given, deposited, or serving as a means to ensure the fulfillment or enforcement of an obligation or of protecting some interest in property.

Bailment (Fr. bailer, to deliver) – 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 reclaims it.

Parties to a bailment

1. Bailor (Sp. Comodatario) 2. Bailee (Sp. Comodante)

Kinds of Contractual Bailment

A. Gratuitous Bailments 1. For the sole benefit of the bailor;

a. Gratuitous deposit (Art. 1965) b. Mandatum – where the mandatory undertakes to do

some act with respect to the property; as simply to carry it, or keep it, or otherwise to do something with respect to it gratuitously.

2. For the sole benefit of the bailee; and a. Commodatum b. Gratuitous simple loan or mutuum (Art. 1933)

B. Mutual-Benefit Bailments 3. For the benefit of both parties

a. Deposit for a compensation (Art. 1965) i. involuntary deposit (Arts. 1996[2], 1997 par. 2) ii. Pledge (Arts. 2085, 2903) iii. Bailments for hire (locatio et conductio) –

goods are left with the bailee for some use or service by him and always for some compensation 1. Hire of things – temporary use 2. Hire of service – delivered for some work

or labor 3. Hire for carriage of goods – purpose is to

carry from place to place 4. Hire of custody – delivered for storage

Case:

People v. Concepcion, 44 Phil 126.

The credit of an individual means his ability to borrow money by virtue of the confidence or trust reposed by a lender that he will pay what he may promise.

The concession of a ―credit‖ necessarily involves the granting of ―loans‖ up to the limit of the amount fixed in the ―credit.‖

Loan Discount

Generally on single name paper; interest is taken at the expiration

of the period

Generally on double name paper; interest is deducted in

advance

4. General Provisions on Loan, Articles 1156, 1305, 1306, 1933 and 1934, Civil Code

Art. 1156. An obligation is a juridical necessity to give, to do or not to do. (n)

Art. 1305. A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service. (1254a)

Art. 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. (1255a)

Loan is governed by the rules as to the requisites and validity of contracts in general.

Art. 1933. By the contract of loan, 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, in which case the contract is called a commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply called a loan or mutuum.

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation to pay interest.

In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the borrower. (1740a)

Characteristics

1. Real – delivery of the thing loaned is necessary for the perfection of the contract

2. Unilateral – once the subject matter is delivered, it creates obligations on the part of only the borrower

Cause or consideration

1. As to the borrower, acquisition of the thing 2. As to the lender, the right to demand its return or its

equivalent

Kinds of Loan

1. Commodatum – bailor delivers to the bailee a non-consumable thing so that the latter may use it for a certain time and return the identical thing

2. Simple loan or mutuum – 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.

Consumable – a thing is consumed when used in a manner appropriate to its purpose or nature (Art. 418)

Commodatum Mutuum

Subject Matter

Ordinarily not consumable

Money or other consumable thing

Ownership Retained by the lender Transferred to the borrower

Nature Purely personal - Essentially gratuitous May be gratuitous or

onerous Return or Payment

Return the same thing loaned

Pay the same amount of the same kind and

quality Nature of Property

Real or personal property

Personal property

Purpose of Use or temporary Consumption



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Loan possession Demand Before the expiration of

the term in case of urgent need

Lender may not demand before the expiration of

the term Loss of the

Thing Borne by the bailor Borne by the bailee

Liability Criminal (Estafa) Civil liability only

Kinds of Commodatum

1. Ordinary commodatum (Art. 1933) 2. Precarium – where the bailor may demand the thing

loaned at will (Art. 1947)

Art. 1934. An accepted promise to deliver something by way of commodatum or simple loan is binding upon parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract. (n)

A contract to loan is a consensual contract subject to rules on delay (Art. 1169) and liability for damages.

5. Commodatum, Articles 1935 to 1952, Civil Code

CHAPTER 1 COMMODATUM

SECTION 1 - Nature of Commodatum

Art. 1935. The bailee in commodatum acquires the use of the thing loaned but not its fruits; if any compensation is to be paid by him who acquires the use, the contract ceases to be a commodatum. (1941a)

Compensation

Similar to a donation in that it confers a benefit to the recipient; the presumption is that the bailor has no need for the thing loaned. Commodatum is essentially gratuitous. Any compensation converts it to a lease (Arts. 1642-44).

Purpose

The purpose in a commodatum is use for a certain time. If the bailee is not entitled to the use of the thing, the contract may be a deposit (Art. 1962)

Art. 1936. Consumable goods may be the subject of commodatum if the purpose of the contract is not the consumption of the object, as when it is merely for exhibition. (n)

Art. 1937. Movable or immovable property may be the object of commodatum. (n)

Subject matter

Generally non-consumable things, whether real or personal. If the intention of the parties is to have the consumable goods loaned returned at the end of the period, the loan is a commodatum and not a mutuum.

Art. 1938. The bailor in commodatum need not be the owner of the

thing loaned. (n)

Since ownership is not transferred in a commodatum, it is sufficient that the bailor has such possessory interest in the subject matter or right to its use. (eg. Lessee, usufructuary)

Art. 1939. Commodatum is purely personal in character. Consequently:

(1) The death of either the bailor or the bailee extinguishes the contract; (2) The bailee can neither lend nor lease the object of the contract to a third person. However, the members of the bailee's household may make use of the thing loaned, unless there is a stipulation to the contrary, or unless the nature of the thing forbids such use. (n)

The bailor in commodatum has in view the character, credit and conduct of the bailee.

Death

Parties may stipulate that commodatum is transmitted to the heirs of either or both parties (Art. 1306). In case of two or more bailees, the death of one does not extinguish the contract in the absence of a stipulation to the contrary.

Use of thing by bailee’s household allowed except

1. Contrary stipulation 2. Nature of the thing forbids such use

Art. 1940. A stipulation that the bailee may make use of the fruits of

the thing loaned is valid. (n)

Extent of right of use

Right to use is limited to the thing loaned but not to its fruits unless there is a stipulation.

Enjoyment of fruits must be incidental to the use of the thing. Otherwise, the contract may be a usufruct (Art. 562).

SECTION 2. - Obligations of the Bailee

Art. 1941. The bailee is obliged to pay for the ordinary expenses for the use and preservation of the thing loaned. (1743a)

Logical for the bailee acquires the use of the thing and is obliged to return the same thing (Art. 1933). The bailee must take good care of the thing with the diligence of a good father of a family (Art. 1163).

See Art. 1949 for extraordinary expenses.

Art. 1942. The bailee is liable for the loss of the thing, even if it should be through a fortuitous event:

(1) If he devotes the thing to any purpose different from that for which it has been loaned; (2) If he keeps it longer than the period stipulated, or after the accomplishment of the use for which the commodatum has been constituted; (3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exemption the bailee from responsibility in case of a fortuitous event; (4) If he lends or leases the thing to a third person, who is not a member of his household; (5) If, being able to save either the thing borrowed or his own thing, he chose to save the latter. (1744a and 1745)

The bailee is not liable for loss or damage due to a fortuitous event because the ownership is retained by the bailor.

This provision punishes the bailee for improper acts although they may not have been the proximate cause of the delay:

1. Bad faith 2. Delay 3. Appraisal gives rise to the presumption that the parties

intended the bailee to be liable for the loss of the thing 4. Purely personal nature of a commodatum 5. Ingratitude

Art. 1943. The bailee does not answer for the deterioration of the

thing loaned due only to the use thereof and without his fault. (1746)

Use entails ordinary wear and tear. Hence, in the absence of a contrary stipulation, the depreciation caused by the reasonable and natural use of the thing is borne by the bailor.

When bailee is liable

1. Guilty of fault or negligence (Art. 1170) 2. Devotes the thing to any purpose different from that for

which it has been loaned (Art. 1942[1]).

Art. 1944. The bailee cannot retain the thing loaned on the ground that the bailor owes him something, even though it may be by reason of expenses. However, the bailee has a right of retention for damages mentioned in Art. 1951. (1747a)

The bailee has no right to retain the thing loaned as security for claims by reason of expenses (ordinary or extraordinary) because the ownership remained with the bailor and the bailee was only granted temporary use.



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Compensation shall not be proper when one of the debts arises from a depositum or from the obligations of a depositary or of a bailee in commodatum. (Art. 1287)

Effect of adverse possession

In adverse possession of this kind, the bailee is considered to hold the same in trust does not have the effect of ripening into title as in ordinary acquisitive prescription.

Right recognized

Retention until reimbursement, the bailee cannot sell the thing loaned to satisfy said damages.

Art. 1945. When there are two or more bailees to whom a thing is

loaned in the same contract, they are liable solidarily. (1748a)

The presumption is that the bailor takes into account the personal integrity and responsibility of all the bailees and would not have constituted the commodatum if there were only one bailee. This is an exception to the general rule that concurrence of parties in the same obligation gives rise only to a joint obligation (Arts.1207-8).

SECTION 3. - Obligations of the Bailor

Art. 1946. The bailor cannot demand the return of the thing loaned till after the expiration of the period stipulated, or after the accomplishment of the use for which the commodatum has been constituted. However, if in the meantime, he should have urgent need of the thing, he may demand its return or temporary use.

In case of temporary use by the bailor, the contract of commodatum is suspended while the thing is in the possession of the bailor. (1749a)

Obligation to respect duration of loan

The primary obligation of a bailor is to allow the bailee the use of the thing loaned:

1. For the duration of the period stipulated, or 2. Until the accomplishment of the purpose for which the

commodatum was constituted (Art. 1933)

Return may be temporary or permanent, and based on these grounds:

1. Urgent need of the thing 2. Ingratitude (Art. 1948)

Art. 1947. The bailor may demand the thing at will, and the contractual relation is called a precarium, in the following cases:

(1) If neither the duration of the contract nor the use to which the thing loaned should be devoted, has been stipulated; or (2) If the use of the thing is merely tolerated by the owner. (1750a)

Precarium – a contract by which the owner of the thing, at the request of another person, gives the latter the thing for use as long as the owner shall please.

The use of the term ―owner‖ is inaccurate, since the bailor need not be the owner of the thing loaned (Art. 1938).

Art. 1948. The bailor may demand the immediate return of the thing

if the bailee commits any act of ingratitude specified in Art. 765. (n)

Art. 765 under donation is applicable because commodatum is essentially gratuitous. Acts of ingratitude make the bailee unworthy of the trust reposed upon him by the bailor:

1. Commit an offense against the person, the honor, or the property of the bailor, his wife or children under his parental authority

2. Imputes to the bailor any criminal offense or moral turpitude unless the crime or act has been committed against the bailee, his wife or children under his parental authority

3. Unduly refuses the bailor support when the bailee is legally or morally bound to give support

This applies to ordinary commodatum. For precarium, the return of the thing loaned may be demanded at will.

Art. 1949. The bailor shall refund the extraordinary expenses during the contract 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 the notification cannot be awaited without danger.

If the extraordinary expenses arise on the occasion of the actual use of the thing by the bailee, even though he acted without fault, they shall be borne equally by both the bailor and the bailee, unless there is a stipulation to the contrary. (1751a)

Obligation to refund extraordinary expenses

1. Extraordinary expenses for the preservation of the thing loaned – borne by the bailor as he profits by said expenses. Notice is required unless they are so urgent.

2. Extraordinary expenses arising from actual use of the thing loaned – borne by bailor and bailee alike on a 50-50 basis as an equitable solution

The parties may stipulate for a different apportionment or that they shall be borne by bailor or bailee only.

Art. 1950. If, for the purpose of making use of the thing, the bailee incurs expenses other than those referred to in Articles 1941 and 1949, he is not entitled to reimbursement. (n)

No obligation to assume all other expenses

Expenses not necessary for the use and preservation of the thing (eg. ostentation) are borne by the bailee. Ordinary expenses for the use and preservation of the thing are borne by the bailee (Art. 1941, 1949).

Art. 1951. The bailor who, knowing the flaws of the thing loaned, does not advise the bailee of the same, shall be liable to the latter for the damages which he may suffer by reason thereof. (1752)

Liability to pay damages for known hidden flaws

Requisites:

1. Flaw or defect in the thing loaned 2. Flaw or defect is hidden 3. Bailor is aware thereof 4. Bailor does not advise the bailee of the same 5. Bailee suffers damages by reason of the said flaw

Liability arises from bad faith. The bailee is given the right of retention until he is paid damages (Art. 1944). Where flaw is unknown to the bailor, he is not liable because commodatum is gratuitous.

Art. 1952. The bailor cannot exempt himself from the payment of

expenses or damages by abandoning the thing to the bailee. (n)

No right of abandonment for expenses and damages

It would be unfair to allow the bailor to just abandon the thing because expenses or damages may exceed the value of the thing loaned.

6. Simple Loan, Articles 1953 to 1955, 1980

CHAPTER 2 SIMPLE LOAN OR MUTUUM

Art. 1953. A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and quality. (1753a)

Loan involves the return of the equivalent only and not the identical thing because the borrower acquires ownership (Art. 1978) although a loan of money may be payable in kind (Art. 1958).

Obligation to pay

May include the accessory duty to pay interest (Art. 1956). This is the consideration for the obligation of the lender to furnish the loan.

Fungible things – usually dealt with by number, weight, or measure so that any given unit or portion is treated an equivalent to any other unit or portion.



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Distinction between consumability and fungibility

Consumability depends on the nature of the thing; fungibility, on the intention of the parties. The New Civil Code uses the classification of movable property into consumable and non-consumable (Art. 418), discarding the old classification of fungible and non-fungible.

Art. 1954. A contract whereby one person transfers the ownership of non-fungible things to another with the obligation on the part of the latter to give things of the same kind, quantity, and quality shall be considered a barter. (n)

Commodatum Mutuum Barter

Subject Matter

Non-consumable

thing

Money or other fungible thing

Non-fungible (non-

consumable) thing

Return Identical thing borrowed

Same amount of the same kind

and quality

Equivalent thing to what has

been received Nature Gratuitous May be

gratuitous Onerous

Art. 1955. The obligation of a person who borrows money shall be governed by the provisions of Articles 1249 and 1250 of this Code.

If what was loaned is a fungible thing other than money, the debtor owes another thing of the same kind, quantity and quality, even if it should change in value. In case it is impossible to deliver the same kind, its value at the time of the perfection of the loan shall be paid. (1754a)

Form of payment

1. Loan of money – in the currency stipulated, legal tender in the Philippines (Art. 1249) and in case of extraordinary inflation or deflation, value based at the time of the creation of the obligation (Art. 1250). a. Notes and coins issued by CB b. Check is not legal tender; cannot constitute valid

tender of payment 2. Loan of a fungible thing – another thing of the same

kind, quality, and quantity. If impossible, the value of the thing at the time of the perfection of the contract.

Art. 1980. Fixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan. (n)

Relation between bank and depositor

1. Contract of loan – Deposits of money in banks are really loans to the bank because it can use the same for its ordinary transactions and the banking business. a. Deposits earn interest; b. There is an obligation to return the amount

deposited; not the same money that was deposited. 2. Creditor-debtor relationship – The bank agrees to pay

the depositor on demand a. Failure to honor a deposit is breach of bank’s

obligation as debtor and not breach of trust punishable under Art. 315 of the RPC. (Guingona, Jr. v. City Fiscal)

b. Payment of a bank of the amount of a deposit’s check is not a loan but payment by the bank.

c. A bank can compensate the deposit in its hands for the payment of any indebtedness to it by the depositor (Gullas v. PNB). In a real deposit, compensation is not allowed (Art. 1287).

d. Impressed with public interest, banks are charged with the highest degree of case, more than that of a good father of a family. A bank should exercise extraordinary diligence to negate its liability to its depositors (Solid Bank v. Tan).

e. Suspension of a bank by order of the Central Bank cannot excuse it from its obligations to depositors (Overseas Bank v. CA) but it shall not be liable to pay interest in the period of suspension (Integrated Realty v. PNB).

Cases:

Republic v. Bagtas, 6 SCRA 262.

A contract of commodatum is essentially gratuitous. If the breeding fee is to be considered compensation, then the contract would be lease of the bull. Under Art. 1671, the lessee would be subject to the responsibilities of a possessor in bad faith, because she had continued possession after the expiry of the contract. And even if the contract be commodatum, the appellant is still liable, because under Art. 1942, a bailee in commodatum is liable for loss, though it be due to fortuitous events, under several conditions.

Producers Bank of the Philippines v. Court of Appeals, G.R. No. 115324, February 19, 2003.

Art. 1933 seems to imply that if the subject of the contract is a consumable thing, such as money, the contract would be mutuum. However, this is subject to Art. 1936. Thus, if consumable goods are loaned only for purposes of exhibition, or when the intention of the parties is to lend consumable goods and to have the very same goods returned at the end of the period agreed upon, the loan is commodatum and not a mutuum.

The rule is that the intention of the parties thereto shall be accorded primordial consideration in determining the actual character of a contract. In case of doubt, the contemporaneous and subsequent acts of the parties shall be considered in such determination.

Garcia v. Thio, G.R. No. 154878, March 16, 2007.

A loan is a real contract, not consensual, and as such is perfected only upon the delivery of the object of the contract. Upon delivery of the object of the contract of loan, the debtor acquires ownership of such money or loan proceeds and is bound to pay the creditor an equal amount.

While there can be no stipulated interest due to the agreement as to interest being verbal, there can be legal interest pursuant to Art. 2209.

Pajuyo v. Court of Appeals, G.R. No. 146364, June 3, 2004.

The bailor cannot demand the return of the thing loaned until after the expiration of the period stipulated, or after accomplishment of the use for which the commodatum is constituted. If the bailor should have urgent need of the thing, he may demand its return for temporary use. If the use of the thing is merely tolerated by the bailor, he can demand the return of the thing at will, in which case, the contractual relation is called a precarium. Under the Civil Code, precarium is a kind of commodatum. The accommodation accorded came with the obligation to keep the property in good condition. It is not essentially gratuitous, and different from commodatum. This relationship based on tolerance is one akin to a landlord-tenant relationship where the withdrawal of permission would result in the termination of the lease.

Even in commodatum, the bailee still has the duty to turn over possession of the property to the bailor. The obligation to deliver or to return the thing attaches to contracts for safekeeping, commission, administration and commodatum. These contracts certainly involve the obligation to deliver or return the thing received.

Quintos v. Beck, 69 Phil. 108.

The contract entered into between the parties is one of commodatum, because under it the plaintiff gratuitously granted the use of the furniture to the defendant, reserving for herself the ownership thereof; by this contract the defendant bound himself to return the furniture to the plaintiff, upon the latter’s demand. The obligation voluntarily assumed by the defendant to return upon demand means that he should return all of them to the plaintiff at the latter’s residence or house. The defendant did not comply with this obligation when he merely placed them at the disposal of the plaintiff, retaining for his benefit the three gas heaters and the four electric lamps.

The bailee was not entitled to place the furniture on deposit; nor was the bailor under a duty to accept the offer of return, because the defendant wanted to retain part of the thing loaned.

Saura Import & Export Co., Inc. v. Development Bank of the Philippines, 44 SCRA 445.



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There was a perfected consensual contract to loan, as recognized in Art. 1934, where there is undoubtedly offer and acceptance: the application of Saura for a loan approved by resolution and the corresponding mortgage was executed and registered.

However, the mutual desistance or ―mutuo disenso‖ by both parties precludes the recovery of damages for the breach of the promise to loan. Since mutual agreement can create a contract, mutual disagreement by the parties can cause its extinguishment.

BPI Investment Corporation v. Court of Appeals & ALS Management & Development Corporation, G.R. No. 133632, February 15, 2002.

A loan contract is not a consensual contract but a real contract. It is perfected only upon the delivery of the object of the contract. The contract in Bonnevie is a perfected consensual contract under Art. 1934, which is an accepted promise to deliver something by way of a simple loan. A contract of loan involves a reciprocal obligation, wherein the obligation or promise of each part is the consideration for that of the other.

A perfected consensual contract can give rise to an action for damages. However, said contract does not constitute the real contract of loan which requires the delivery of the object of the contract for its perfection and which gives rise to obligations only on the part of the borrower.

People v. Puig & Porras, G.R. No. 173654-765, August 28, 2008.

Cashiers, bookkeepers and other employees of a bank who come into possession of the monies deposited therein enjoy the confidence reposed in them by their employer. Banks, on the other hand, where monies are deposited, are considered owners thereof. The relationship between banks and depositors has been held to be that of creditor and debtor.

Banks acquire ownership of the money deposited by its clients and the employees who are entrusted with the possession of the money of the bank due to the confidence reposed on them occupy positions of confidence. So even without particular reference to the bank as owner of the deposits, as long as there is an allegation of grave abuse of confidence to the damage and prejudice of the bank is sufficient to make out a case of qualified theft.

BPI Family Bank v. Franco & Court of Appeals, G.R. No. 123498, November 23, 2007.

The deposit of money in banks is governed by the Civil Code provisions on simple loan or mutuum. As there is a debtor-creditor relationship between a bank and its depositor, the bank ultimately acquired ownership of the deposits, but such ownership is coupled with a corresponding obligation to pay him an equal amount on demand.

Money bears no earmarks of peculiar ownership; its primary function is to pass from hand to hand as a medium of exchange without other evidence of its title. Money which has passed through various transactions in the general course of banking business, even if of traceable origin, is no exception. Art. 559 which allows recovery of the possession by one who has lost a movable or has been unlawfully deprived, as it pertains to a specific or determinate thing, is inapplicable to cases of money deposits.

Pantaleon v. American Express International, Inc., G.R. No. 174269, August 25, 2010.

The relationship between a credit card provider and its card holders is that of creditor-debtor, with the card company as the creditor extending loans and credit to the card holder, who as debtor is obliged to repay the debtor. This relationship takes exception to the general rule that as between a bank and its depositors, the bank is deemed the debtor while the depositor is considered the creditor.

The requisites of mora solvendi are (1) obligation is demandable and liquidated; (2) debtor delays performance and (3) the creditor judicially or extrajudicially requires the debtor’s performance. The requisites of mora accipiendi on the other hand are (1) offer of performance by the debtor, (2) the offer must be to comply with the prestation as it should be performed and (3) the creditor refuses the performance without just cause.

7. Interest, Articles 1956 to 1961, 2209, 2212, 2213, 1169 Civil Code, Central Bank Circular No. 416

Art. 1956. No interest shall be due unless it has been expressly

stipulated in writing. (1755a)

Requisites for recovery of interest

1. Payment of interest must be expressly stipulated (Tan v. Valduhueza)

2. In writing 3. Interest must be lawful (Arts. 1957, 1961)

Interest may be paid either as compensation for the use of money (monetary interest) referred to in Art. 1956 or imposed by law or by courts as penalty or indemnity for damages (compensatory interest) under Arts. 2209, 2212 for breach of contractual obligations (Garcia v. Thio).

Existence of stipulation to pay interest

1. If rate is stipulated, that interest, not the legal rate of interest, shall be applied.

2. If no exact rate is mentioned, the legal rate of 12% shall be payable.

3. No increase in interest shall be due unless stipulated. 4. Sales invoices or slips without the signature of the obligor

do not constitute the express stipulation required by Art. 1956. In case of delay, no interest except legal interest (6%) under Art. 2209

5. It is only in contracts of loan where interest may be stipulated or demanded (Soncuya v. Azarraga).

6. Receipt of interest payment for the loan that has already matured does not ipso facto result in the renewal or extension of the loan.

7. Purchase through installment payment system is in effect payment of interest on the cash price, whether the fact and rate of such interest payment are disclosed in the contract or not.

Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum. (1108)

Art. 2212. Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point. (1109a)

Art. 2213. Interest cannot be recovered upon unliquidated claims or damages, except when the demand can be established with reasonably certainty.

Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation.

However, the demand by the creditor shall not be necessary in order that delay may exist:

(1) When the obligation or the law expressly so declare; or (2) When from the nature and the circumstances of the obligation it appears that the designation of the time when the thing is to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract; or (3) When demand would be useless, as when the obligor has rendered it beyond his power to perform.

In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. From the moment one of the parties fulfills his obligation, delay by the other begins. (1100a)

CBP CIRCULAR NO. 416-74 July 29, 1974

By virtue of the authority granted to it under Section 1 of Act No. 2655, as amended, otherwise known as the "Usury Law", the Monetary Board, in its Resolution No. 1622 dated July 29, 1974, has prescribed that the rate of interest for the loan or forbearance of any money, goods or credits and the rate allowed in judgments, in the absence of express contract as to such rate of interest, shall be twelve per cent (12%) per annum. This Circular shall take effect immediately.

(SGD.) G. S. LICAROS Governor



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Liability for interest even in the absence of stipulation

Art. 1956 is subject to two exceptions:

1. Indemnity for damages – debtor in delay is liable to pay legal interest (6%/12%) even in the absence of stipulation. a. Art. 2209 –

i. payment of penalty interest at the rate agreed upon,

ii. if there is no stipulation for penalty, at the rate equal to the regular monetary interest

iii. if there is no stipulation for monetary interest, then payment of legal interest 1. 6% annually 2. 12% per annum in case of loans or

forbearances of money under CB Circular No. 416

b. Art. 2213 – interest cannot be recovered upon unliquidated claims or damages except when the demand can be established with reasonable certainty. Interest is at the rate of 6% per annum should be from the date the judgment of the court is made.

c. CB Circular No. 416 rate of 12% per annum applies to 1) loans, 2) forbearance of any money, goods or credits, and 3) judgments involving such loans or forbearance. If it arises from other sources, Art. 2209 rate of 6% annually applies.

d. When the judgment of the court awarding the sum of money becomes final and executory, the rate of legal interest regardless of whether or not the obligation involves a loan or forbearance of money shall be 12% per annum from such finality until its satisfaction—the interim period being deemed an equivalent to a forbearance of credit (Prudential Guarantee and Assurance v. CA)

e. Interest that forms part of the consideration and interest as indemnity for damages are distinct claims and may be demanded separately. Interest as indemnity for damages is payable only in case of default or non-performance. Under 1169, the rate of interest is 12% per annum computed from date of default (i.e. from judicial or extrajudicial demand).

2. Interest accruing from unpaid interest – Art. 2212 and Sec. 5 of the Usury law provide that interest shall earn interest from the time it is judicially demanded although the obligation may be silent on this point apply only where interest has been stipulated by the parties. Where no interest had been stipulated by the parties, no accrued conventional interest could further earn interest upon judicial demand.

Liability for surcharges and penalties

Surcharges and penalties paid in case of default are in the nature of liquidated damages. These shall be equitably reduced if they are iniquitous or unconscionable (Art. 2227)

The essence for the payment of the interest often referred to as cost of money is separate and distinct from that of surcharges and penalties. A penalty is not necessary preclusive of interest.

Art. 1957. Contracts and stipulations, under any cloak or device whatever, intended to circumvent the laws against usury shall be void. The borrower may recover in accordance with the laws on usury. (n)

Usurious contracts declared void

1. Form of contract not conclusive – parol evidence is admissible to show that a written document, though legal in form was in fact a cloak to cover usury

2. Contract void only as to interest involved – It is only the stipulation on usurious interest which should be treated void so that the loan becomes without stipulation as to interest. The nullity of the stipulation does not affect the lender’s right to receive back the principal amount.

3. Right of debtor – the amount paid as interest under a usurious agreement is recoverable as payment is deemed to have been made under restraint, rather than voluntarily (First Metro v. Este Del Sol)

Interest rates are no longer subject to any ceiling. (CB Circular No. 905)

Contracts disguised to cover usurious loans

1. Credit sale of property at exorbitant price to loan applicant 2. Purchase of lender’s property at an exorbitant price to be

taken from loan 3. Price of sale with right to repurchase clearly inadequate 4. Pretended lease by borrower at usurious rental 5. Rent free by lender of borrower’s property in addition to

interest on loans 6. Date for repayment of loan with interest antedates actual

transaction 7. Payment by borrower for lender’s services as additional

compensation for loan.

Art. 1958. In the determination of the interest, if it is payable in kind, its value shall be appraised at the current price of the products or goods at the time and place of payment. (n)

Intended to make usury harder to perpetrate.

Art. 1959. Without prejudice to the provisions of Art. 2212, interest due and unpaid shall not earn interest. However, the contracting parties may by stipulation capitalize the interest due and unpaid, which as added principal, shall earn new interest. (n)

Accrued interest shall not earn interest except

1. When judicially demanded (Art. 2212) 2. When there is express stipulation that interest due shall be

added to principal obligation and the resulting amount shall earn interest (compounding interest allowed by Usury Law) (Mambulao Lumber v. PNB)

Compounding of monetary interest, and penalty charge (also called penalty or compensatory interest) is allowed. In view of Art. 1956, the stipulation to compound interest must be in writing.

Art. 1960. If the borrower pays interest when there has been no stipulation therefor, the provisions of this Code concerning solutio indebiti, or natural obligations, shall be applied, as the case may be. (n)

Recovery of unstipulated interest paid

1. Unstipulated, paid by mistake – may be recovered as in solutio indebiti (Art. 2154)

2. Unstipulated or stipulated but not in writing, voluntarily paid – cannot be recovered as in natural obligations (Art. 1423)

Art. 1961. Usurious contracts shall be governed by the Usury Law and other special laws, so far as they are not inconsistent with this Code. (n)

Usury is now legally non-existent. The rate of interest now depends upon the agreement of the parties. CB Circular 905 removed the interest ceiling provided by the Usury Law. However, it does not grant lenders carte blanche authority to raise interest rates to levels which will enslave borrowers. When the agreed rate is found to be iniquitous and unconscionable, the courts may reduce the same as reason and equity demand (Imperial v. Juacian).

Cases:

Frias v. San Diego-Sison, G.R. No. 155223, April 4, 2007.

A simple loan may be gratuitous or with a stipulation to pay interest. The payment of regular interest constitutes the price or cost of the use of money and thus, until the principal sum due is returned to the creditor, regular interest continues to accrue since the debtor continues to use such principal amount. In State Investment v. CA, it was held that for a debtor to continue in possession of the principal of the loan and to continue to use the same after maturity of the loan without payment of the monetary interest would constitute unjust enrichment on the part of the debtor at the expense of the creditor.

Ligutan v. Court of Appeals, G.R. No. 138677, February 12, 2002.

Interest must commence not on the date of filing of the complaint but on the date when the obligation became due. Default generally begins from the moment the creditor demands the performance of the obligation. However, demand is not necessary to



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render the obligor in default when the obligation or the law so provides.

A penalty clause is an accessory undertaking to assume greater liability on the part of an obligor in case of breach of an obligation. It functions to strengthen the coercive force of the obligation and to provide for what could be the liquidated damages resulting from such a breach. The obligor would then be bound to pay the stipulated indemnity without the necessity of proof on the existence and on the measure of damages caused by the breach. Although a court may not at liberty ignore the freedom of the parties to agree on such terms and conditions as they see fit that contravene neither law nor morals, good customs, public order or public policy, a stipulated penalty, nevertheless, may be equitably reduced by the courts if it is iniquitous or unconscionable or if the principal obligation has been partly or irregularly complied with. The question of whether a penalty is reasonable or iniquitous would depend on such factors as, but not necessarily confined to, the type, extent and purpose of the penalty, the nature of the obligation, the mode of breach and its consequences, the supervening realities, the standing and relationship of the parties, and the like, the application of which, by and large, is addressed to the sound discretion of the court. The stipulated penalty might likewise be reduced when a partial or irregular performance is made by the debtor. The stipulated penalty might even be deleted such as when there has been substantial performance in good faith by the obligor, when the penalty clause itself suffers from fatal infirmity, or when exceptional circumstances so exist as to warrant it.

Government Service Insurance System v. Court of Appeals, G.R. No. L-52478, October 30, 1986.

The Usury Law applies only to interest by way of compensation for the use or forbearance of money. It would be contrary to human experience and to ordinary practice for the mortgagee to impose less onerous conditions on an increased loan by the deletion of compound interest exacted on a lesser loan.

In the Bachrach case, the Supreme Court ruled that the Civil Code permits the agreement upon a penalty apart from the interest. Should there be such an agreement, the penalty does not include the interest, and as such the two are different and distinct things which may be demanded separately. Reiterating the same principle in the later case of Equitable Banking Corp., where it was held that the stipulation about payment of such additional rate partakes of the nature of a penalty clause, which is sanctioned by law.

Eastern Shipping Lines v. Court of Appeals, G.R. No. 97412, July 12, 1994.

The judgments spoken of and referred to are judgments in litigations involving loans or forbearance of any money, goods or credits. Any other kind of monetary judgment which has nothing to do with, nor involving loans or forbearance of any money, goods or credits does not fall within the coverage of the said law for it is not within the ambit of the authority granted to the Central Bank Circular No. 416.

TWO CONCEPTS ON PAYMENT OF INTEREST

1 Interest for the use or loan or forbearance of money, goods or credit

If no stipulation on payment of interest

No interest for use or forbearance

* No interest shall be due unless it has been expressly stipulated in

writing (CC1956)

If there is express stipulation (which must be in writing to be valid CC1956) for payment of

interests, but no rate mentioned

Interest shall be 12% per annum (Sec. 2, Monetary Board Circular

905, 10 Dec 1982)

If there is stipulation in writing and rate of interest is agreed upon (including commissions,

premiums, fees and other charges)

Such interest stipulated shall not be subject to ceiling prescribed

under the Usury Law (Sec. 1, Monetary Board Circular 905, 10

Dec 1982)

2 Interest as damages for breach or default in payment of loan or forbearance of money, goods, credit

No stipulation as to interest for use of money

In case of DEFAULT, loan or forbearance shall earn legal interest, at rate of 12% per

annum from date of judicial or extrajudicial demand, subject to

Art 1169 (delay/mora)

If rate of interest stipulated, e.g. 24% per annum

Loan + stipulated interest, shall earn 12% per annum from date of

judicial demand

* Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point (Art

2212)

3 If obligation NOT consisting of a loan or forbearance of money, goods or credit is breached, e.g. obligation to give, to do, not to do

o Interest may be imposed at the discretion of court at the rate of 6% per annum.

o No interest adjudged on unliquidated claims or damages, until demand can be established with reasonable certainty.

o After thus established with reasonable certainty, interest of 6% per annum shall begin to run from the date of judicial or extrajudicial demand.

But if obligation cannot be established with reasonable certainty at time of demand, 6% per annum interest shall begin to run only from date of judgment – on amount finally adjudged by court.

When judgment of court awarding money becomes final and executory, money judgment is A, B and C (above) shall earn 12% per annum from finality of judgment until full payment – money judgment shall be considered as forbearance of credit.

Siga-an v. Villanueva, G.R. No. 173227, January 20, 2009.

Interest is a compensation fixed by the parties for the use or forbearance of money (monetary interest). Interest may also be imposed by law or by courts as penalty or indemnity for damages (compensatory interest). The right to interest arises only by virtue of a contract or by virtue of damages for delay or failure to pay the principal loan on which interest is demanded.

Art. 1956 referring to monetary interest, specifically mandates that no interest shall be due unless it has been expressly stipulated in writing. As can be gleaned from the foregoing provision, payment of monetary interest is allowed only if: (1) there was an express stipulation for the payment of interest; and (2) the agreement for the payment of interest was reduced in writing. The concurrence of the two conditions is required for the payment of monetary interest. Thus, the collection of interest without any stipulation therefor in writing is prohibited by law. However, there are instances in which an interest may be imposed even in the absence of express stipulation, verbal or written, regarding payment of interest. Art. 2209 states that if the obligation consists in the payment of a sum of money, and the debtor incurs delay, a legal interest of 12% per annum may be imposed as indemnity for damages if no stipulation on the payment of interest was agreed upon. Likewise, Art. 2212 provides that interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent on this point. The interest under these two instances may be imposed only as a penalty or damages for breach of contractual obligations. It cannot be charged as a compensation for the use or forbearance of money. Arts. 2209 and 2212 apply only to compensatory interest and not to monetary interest.

The principle of solutio indebiti applies in case of erroneous payment of undue interest. Under Art. 1960, if the borrower of loan pays interest when there has been no stipulation therefor, the provisions concerning solutio indebiti shall be applied. Art. 2154 provides that if something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises. In such a case, a creditor-debtor relationship is created under a quasi-contract whereby the payor becomes the creditor who then has the right to demand the return of payment made by mistake, and the person who has no right to receive such payment becomes obligated to return the same. The



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quasi-contract of solutio indebiti harks back to the ancient principle that no one shall enrich himself unjustly at the expense of another. It applies where (1) a payment is made when there exists no binding relation between the payor, who has no duty to pay, and the person who received the payment; and (2) the payment is made through mistake, and not through liberality or some other cause.

8. Concept of Deposit, Articles 1962 to 1967, Civil Code

Title XII. - DEPOSIT

CHAPTER 1 DEPOSIT IN GENERAL AND ITS DIFFERENT KINDS

Art. 1962. A deposit is constituted from the moment a person receives a thing belonging to another, with the obligation of safely keeping it and of returning the same. If the safekeeping of the thing delivered is not the principal purpose of the contract, there is no deposit but some other contract. (1758a)

Deposit (Ro. depositum) whether civil or commercial is regulated by Title XII, Book IV. It is essential that the depositary is not the owner of the thing deposited.

Commodatum Mutuum Deposit

Principal Purpose

Transfer of the use

Consumption Mere safekeeping or custody

Return Bailor must wait until expiration or accomplishment. In precarium, at

will.

Lender must wait until the expiration of the period granted

Depositor may demand for the return

at will

Subject Matter

Non-consumable thing

Money or other

consumable thing

Movable or immovable

property

Compensation

Essentially gratuitous

May be gratuitous

May be gratuitous

Art. 1963. An agreement to constitute a deposit is binding, but the

deposit itself is not perfected until the delivery of the thing. (n)

Where there has been no delivery, there is merely an agreement to deposit. Analogous to Art. 1934, a contract of future deposit is consensual.

Art. 1964. A deposit may be constituted judicially or extrajudicially.

(1759)

Creation of deposit - A deposit may be constituted by

1. virtue of a court order or 2. by law or 3. by the will of the parties.

Kinds of deposit

1. Judicial – attachment or seizure of property in litigation is ordered (Art. 2005-2008)

2. Extrajudicial (Art. 1967) a. Voluntary – delivery is made by the will of the

depositor or by two or more persons each of whom believes himself entitled to the thing deposited (Arts. 1965-1995)

b. Necessary i. Made in compliance with a legal obligation or ii. On occasion of any calamity or iii. By travelers in hotels and inns (Arts. 1996-2004)

or iv. By travelers with common carriers (Arts. 1734-

1735)

Art. 1965. A deposit is a gratuitous contract, except when there is an agreement to the contrary, or unless the depositary is engaged in the business of storing goods. (1760a)

Deposit generally gratuitous except:

1. Where there is contrary stipulation (Art. 1306) 2. Where depositary engaged in business of storing goods

3. Where property saved from destruction without knowledge of the owner (Art. 1996[2], 1997 par. 2)

Art. 1966. Only movable things may be the object of a deposit.

(1761)

Refers to extrajudicial deposit, whether voluntary or necessary. Judicial deposit may cover movable or immovable property, its purpose being to protect the rights of parties to a suit.

Rights and actions, being incorporeal, are not susceptible of custody in the tangible sense that deposit is understood. Only the deeds and documents in which those rights are contained can be the object of deposit.

Art. 1967. An extrajudicial deposit is either voluntary or necessary.

(1762)

9. Voluntary Deposit, Articles 1968 to 1995, Civil Code

CHAPTER 2 VOLUNTARY DEPOSIT

SECTION 1. - General Provisions

Art. 1968. A voluntary deposit is that wherein the delivery is made by the will of the depositor. A deposit may also be made by two or more persons each of whom believes himself entitled to the thing deposited with a third person, who shall deliver it in a proper case to the one to whom it belongs. (1763)

Ordinarily there are only two persons involved. Sometimes, the depositary may be a third person with the obligation to deliver to the one to which it belongs (as in an interpleader).

Voluntary – free choice of depositary. Necessary – lack of free choice in the depositor

Art. 1969. A contract of deposit may be entered into orally or in

writing. (n)

Except for the delivery of the thing, there are no formalities required for the existence of the contract following the general rule that contract are obligatory in whatever form they may have been entered into provided all the essential requisites for their validity are present (Art. 1356).

Art. 1970. If a person having capacity to contract accepts a deposit made by one who is incapacitated, the former shall be subject to all the obligations of a depositary, and may be compelled to return the thing by the guardian, or administrator, of the person who made the deposit, or by the latter himself if he should acquire capacity. (1764)

Persons who are capable cannot allege the incapacity of those with whom they contract (Art. 1397)

Art. 1971. If the deposit has been made by a capacitated person with another who is not, the depositor shall only have an action to recover the thing deposited while it is still in the possession of the depositary, or to compel the latter to pay him the amount by which he may have enriched or benefited himself with the thing or its price. However, if a third person who acquired the thing acted in bad faith, the depositor may bring an action against him for its recovery. (1765a)

The incapacitated depositary does not incur the obligation of a depositary. He is liable to:

1. Return the thing deposited while still in his possession 2. Pay the depositor the amount by which 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.

SECTION 2. - Obligations of the Depositary

Art. 1972. The depositary is obliged to keep the thing safely and to return it, when required, to the depositor, or to his heirs and successors, or to the person who may have been designated in the contract. His responsibility, with regard to the safekeeping and the loss of the thing, shall be governed by the provisions of Title I of this Book.



10

If the deposit is gratuitous, this fact shall be taken into account in determining the degree of care that the depositary must observe. (1766a)

Obligation to keep the thing deposited and return it

1. Degree of care – the depositary must exercise over the thing deposited the same diligence as he would over his own property. But he cannot excuse himself from liability if such care is less than that required by the circumstances.

2. Rules applicable – care and delivery is governed by the rules on obligations (Art. 1163) a. Liable for loss through his fault or negligence (Art.

1170) even if the thing is insured (Art. 2207) b. Loss of thing while in his possession raises a

presumption of fault on his part (Art. 1265) c. The required degree of care is greater if the deposit

is for compensation. 3. Return before specified term – Thing must be returned to

depositor upon demand despite a stipulated term.

Art. 1973. Unless there is a stipulation to the contrary, the depositary cannot deposit the thing with a third person. If deposit with a third person is allowed, the depositary is liable for the loss if he deposited the thing with a person who is manifestly careless or unfit. The depositary is responsible for the negligence of his employees. (n)

Obligation not to transfer deposit

1. Liability for loss – Depositary is liable if he transfers the deposit: a. with a third person without authority although there is

no negligence b. with a third person who is manifestly careless or unfit

although authorized, even without negligence c. the thing is lost through the negligence of his

employees whether the latter are manifestly careless or not

2. Exemption from liability – If the loss is without negligence of the third person with whom he was allowed to deposit the thing if such third person is not ―manifestly careless or unfit.‖

Art. 1974. The depositary may change the way of the deposit if under the circumstances he may reasonably presume that the depositor would consent to the change if he knew of the facts of the situation. However, before the depositary may make such change, he shall notify the depositor thereof and wait for his decision, unless delay would cause danger. (n)

Obligation not to change the way of deposit

Unless the depositor is notified and agrees to the change except when delay would cause danger.

Art. 1975. The depositary holding certificates, bonds, securities or instruments which earn interest shall be bound to collect the latter when it becomes due, and to take such steps as may be necessary in order that the securities may preserve their value and the rights corresponding to them according to law.

The above provision shall not apply to contracts for the rent of safety deposit boxes. (n)

Obligation to collect interest on choses in action deposited

If the thing should earn interest, the depositary must:

1. Collect the interest as it becomes due 2. Take necessary steps to preserve its value and the rights

corresponding to it.

The depositary is bound to collect not only the interest but also the capital itself when it is due.

Contract for rent of safety deposit boxes is 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 banks perform the service of accepting in custody funds, documents and other valuable objects and renting safety deposit boxes as depositaries or as agents (Sec. 72, General Banking Act).

Art. 1976. Unless there is a stipulation to the contrary, the depositary may commingle grain or other articles of the same kind and quality, in which case the various depositors shall own or have a proportionate interest in the mass. (n)

Obligation not to commingle things deposited if so stipulated

Depositary is permitted to commingle grain and other articles of the same kind and quality and depositors shall own the entire mass in common (Sec. 23, Warehouse Receipt Law).

Art. 1977. The depositary cannot make use of the thing deposited without the express permission of the depositor.

Otherwise, he shall be liable for damages.

However, when the preservation of the thing deposited requires its use, it must be used but only for that purpose. (1767a)

Obligation not to use unless authorized

Unauthorized use makes the depositary liable for damages. But when the use is necessary for preservation, use may be made even without the express permission of the depositor.

Art. 1978. When the depositary has permission to use the thing deposited, the contract loses the concept of a deposit and becomes a loan or commodatum, except where safekeeping is still the principal purpose of the contract.

The permission shall not be presumed, and its existence must be proved. (1768a)

Effect if permission to use is given

1. Thing deposited, non-consumable – commodatum unless the principal purpose is safekeeping

2. Thing deposited, money or other consumable thing – simple loan or mutuum, but if safekeeping is still the principal purpose, it is an irregular deposit.

Irregular deposit Mutuum

Return Consumable thing may be demanded at will

Cannot be demanded until the time for payment

Benefit Benefit accrues to depositor only

Loan with interest is for the benefit of both

parties

Preference Irregular depositor has preference over other creditor with respect to the thing deposited (Art.

2241[13])

Common creditors enjoy no preference in the

distribution (Art. 2245)

Permission to use not presumed

The burden is on the depositary to prove that permission has been given.

Art. 1979. The depositary is liable for the loss of the thing through a fortuitous event:

(1) If it is so stipulated; (2) If he uses the thing without the depositor's permission; (3) If he delays its return; (4) If he allows others to use it, even though he himself may have been authorized to use the same. (n)

Similar to Art. 1942, qualifying the general rule that the depositary is not liable for loss through a fortuitous event without his fault.

Art. 1980. Fixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan. (n)

Relation between bank and depositor

1. Contract of loan – Deposits of money in banks are really loans to the bank because it can use the same for its ordinary transactions and the banking business. a. Deposits earn interest; b. There is an obligation to return the amount

deposited; not the same money that was deposited. 2. Creditor-debtor relationship – The bank agrees to pay

the depositor on demand



11

a. Failure to honor a deposit is breach of bank’s obligation as debtor and not breach of trust punishable under Art. 315 of the RPC. (Guingona, Jr. v. City Fiscal)

b. Payment of a bank of the amount of a deposit’s check is not a loan but payment by the bank.

c. A bank can compensate the deposit in its hands for the payment of any indebtedness to it by the depositor (Gullas v. PNB). In a real deposit, compensation is not allowed (Art. 1287).

d. Impressed with public interest, banks are charged with the highest degree of case, more than that of a good father of a family. A bank should exercise extraordinary diligence to negate its liability to its depositors (Solid Bank v. Tan).

e. Suspension of a bank by order of the Central Bank cannot excuse it from its obligations to depositors (Overseas Bank v. CA) but it shall not be liable to pay interest in the period of suspension (Integrated Realty v. PNB).

Art. 1981. When the thing deposited is delivered closed and sealed, the depositary must return it in the same condition, and he shall be liable for damages should the seal or lock be broken through his fault.

Fault on the part of the depositary is presumed, unless there is proof to the contrary.

As regards the value of the thing deposited, the statement of the depositor shall be accepted, when the forcible opening is imputable to the depositary, should there be no proof to the contrary. However, the courts may pass upon the credibility of the depositor with respect to the value claimed by him.

When the seal or lock is broken, with or without the depositary's fault, he shall keep the secret of the deposit. (1769a)

Art. 1982. When it becomes necessary to open a locked box or receptacle, the depositary is presumed authorized to do so, if the key has been delivered to him; or when the instructions of the depositor as regards the deposit cannot be executed without opening the box or receptacle. (n)

Where the thing delivered is locked and sealed

1. Obligations of depositary a. Return the thing deposited in the same condition b. Pay the damages should the seal or lock be broken

through his fault (which is presumed unless proved otherwise)

c. Keep the secret of the deposit when the seal or lock is broken, with or without his fault

2. Reason for rule – the depositor having constituted the deposit in reliance upon the depositary’s fidelity, the most elementary sense of delicacy should move the depositary to respect the secrets which the depositor decides to keep and guard. Statement of the depositor as to the value is prima facie evidence only.

3. When depositary justified to open a. Presumed authority b. Necessity

Art. 1983. The thing deposited shall be returned with all its products, accessories and accessions.

Should the deposit consist of money, the provisions relative to agents in Art. 1896 shall be applied to the depositary. (1770)

Obligation to return products, accessories and accessions

Depositary must return the thing itself, products, accessories and accessions, which are a consequence of ownership.

Obligation to pay interest on sums converted to personal use

If what is deposited is money without the right to use, there is no liability to pay interest. However, in case of delay or unauthorized use, the depositary is liable to pay interest as indemnity.

Art. 1984. The depositary cannot demand that the depositor prove his ownership of the thing deposited.

Nevertheless, should he discover that the thing has been stolen and who its true owner is, he must advise the latter of the deposit.

If the owner, in spite of such information, does not claim it within the period of one month, the depositary shall be relieved of all responsibility by returning the thing deposited to the depositor.

If the depositary has reasonable grounds to believe that the thing has not been lawfully acquired by the depositor, the former may return the same. (1771a)

Where third person appears to be owner

To be relieved of liability, the depositary must:

1. If discovered that thing is stolen, notify the true owner 2. If the owner does not claim it within one month, return the

thing to the deposit 3. If there are reasonable grounds to believe that the thing

has not been lawfully acquired, return the thing.

For paragraph 2, two conditions must exist:

1. The thing deposited must have been stolen; 2. The depositary knows who its true owner is.

Effect of failure of owner to claim within one month

The period for one month is for the protection of the depositary. If within 30 days the depositor demands its return, Art. 1984 is not clear whether the depositary will be held liable for conversion if he refuses to return the thing to the depositor.

Art. 1985. When there are two or more depositors, if they are not solidary, and the thing admits of division, each one cannot demand more than his share.

When there is solidarity or the thing does not admit of division, the provisions of Articles 1212 and 1214 shall govern. However, if there is a stipulation that the thing should be returned to one of the depositors, the depositary shall return it only to the person designated. (1772a)

Right of two or more depositors

1. Thing deposited divisible and depositors not solidary – each one can demand only his share

2. Obligation solidary or thing deposited not indivisible – 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 to any one of the solidary depositors; but if any demand, judicial or extrajudicial, has been made by one of them, return should be made to him (Art.1214).

3. Return to one of depositors stipulated – return should be made only to the person designated although he has not made a demand for its return.

Art. 1986. If the depositor should lose his capacity to contract after having made the deposit, the thing cannot be returned except to the persons who may have the administration of his property and rights. (1773)

Person to whom return must be made

1. Return when required must be made to the depositor, his heir or successors or to the person designated in the contract (Art. 1972).

2. If depositor becomes incapacitated, to his guardian or administrator, legal representative (Art. 1986), the person who made the deposit or the depositor himself should he acquire capacity (Art. 1970).

Art. 1987. If at the time the deposit was made a place was designated for the return of the thing, the depositary must take the thing deposited to such place; but the expenses for transportation shall be borne by the depositor.

If no place has been designated for the return, it shall be made where the thing deposited may be, even if it should not be the same place where the deposit was made, provided that there was no malice on the part of the depositary. (1774)

Place of return

1. At the place agreed upon by the parties (expenses borne by depositor); or

2. In the absence of stipulation, at the place where the thing deposited might be.



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This follows the general rule of law regarding the place of payment (Art. 1251).

Art. 1988. The thing deposited must be returned to the depositor upon demand, even though a specified period or time for such return may have been fixed.

This provision shall not apply when the thing is judicially attached while in the depositary's possession, or should he have been notified of the opposition of a third person to the return or the removal of the thing deposited. In these cases, the depositary must immediately inform the depositor of the attachment or opposition. (1775)

Time of return

Depositor can demand at will, even when a period is stipulated because this period is for the benefit of the depositor and can be waived.

If the deposit is for compensation, the depositary is entitled to compensation corresponding to the entire period.

When depositary not obliged to return thing deposited

1. Disobeying the judicial order of attachment 2. Refusal to return upon opposition of another is prone to

abuse and mischief. The depositor should consign the thing in court through an action of interpleaded (JBL Reyes).

Art. 1989. Unless the deposit is for a valuable consideration, the depositary who may have justifiable reasons for not keeping the thing deposited may, even before the time designated, return it to the depositor; and if the latter should refuse to receive it, the depositary may secure its consignation from the court. (1776a)

Right of depositary to return thing deposited

1. Deposit gratuitous – May return even if period is fixed if (a) deposit is gratuitous, and (b) justifiable reason. If depositor refuses, depositary can consign to the court.

2. Deposit for a valuable consideration – depositary is bound by the period designated and has no right to return before; restitution before expiration constitutes a breach of obligation.

Art. 1990. If the depositary by force majeure or government order loses the thing and receives money or another thing in its place, he shall deliver the sum or other thing to the depositor. (1777a)

Liability for loss by force majeure or government order

Not liable but if in place of the thing he receives money or another thing, he has the duty to deliver. Else, unjust enrichment.

Art. 1991. The depositary's 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 the buyer in case the price has not been paid him. (1778)

Alienation in good faith by depositary’s heir

If sold by depositary’s heir in good faith, the obligation is to return the price received or assign the right to collect the same.

If sold by depositary’s heir in bad faith, he is liable for damages and constitutes estafa.

SECTION 3. - Obligations of the Depositor

Art. 1992. If the deposit is gratuitous, the depositor is obliged to reimburse the depositary for the expenses he may have incurred for the preservation of the thing deposited. (1779a)

Obligation to pay expenses of preservation

1. Deposit gratuitous – based on equity. Otherwise, depositor would be unjustly enriching himself at the expense of the depositary. Different rule from commodatum, Reimbursement covers ordinary or extraordinary (necessary expenses) Useful expenses or for luxury not covered.

2. Deposit for compensation – expenses of preservation are borne by depositary because they are deemed included in the compensation.

Art. 1993. The depositor shall reimburse the depositary for any loss arising from the character of the thing deposited, unless at the time of the constitution of the deposit the former was not aware of, or was not expected to know the dangerous character of the thing, or unless he notified the depositary of the same, or the latter was aware of it without advice from the depositor. (n)

Obligation to pay losses incurred due to character of thing deposited

Depositor must reimburse for loss except:

1. The depositor was not aware of the dangerous character of the thing

2. The depositor was not expected to know the dangerous character of the thing

3. Unless the depositor notified the depositary 4. The depositary was aware of it without advice from the

depositor.

Art. 1994. The depositary may retain the thing in pledge until the full

payment of what may be due him by reason of the deposit. (1780)

Depositary’s right of retention

This is a pledge created by law (Art. 2121) and the thing serves as security for payment of what may be due (Art. 1965, 1992, 1993), similar to that granted to an agent (Art. 1914)

Compare to commodatum (Art. 1944, 1951).

Art. 1995. A deposit is extinguished:

(1) Upon the loss or destruction of the thing deposited; (2) In case of a gratuitous deposit, upon the death of either the depositor or the depositary. (n)

Causes for extinguishment

Not exclusive, includes:

1. Return of the thing 2. Novation 3. Merger 4. Expiration of the term 5. Fulfillment of a resolutory condition, etc. (Art. 1231)

Effect of death or depositor or depositary

1. Deposit gratuitous – death of either extinguishes the deposit in the sense that depositary is not obliged to continue with the contract

2. Deposit for compensation – death of either does not extinguish the deposit because it is not personal in nature (art. 1411). Rights are transmissible to heirs (Art. 1178)

Cases:

Bank of the Philippine Islands v. Intermediate Appellate Court, 164 SCRA 630.

The document and the subsequent acts of the parties show that they intended the bank to safekeep the foreign exchange, and return it later to Zshornack, who alleged in his complaint that he is a Philippine resident. The parties did not intend to sell the US dollars to the Central Bank within one business day from receipt. Otherwise, the contract of depositum would never have been entered into at all.

Since the mere safekeeping of the greenbacks, without selling them to the Central Bank within one business day from receipt, is a transaction which is not authorized by CB Circular No. 20, it must be considered as one which falls under the general class of prohibited transactions. Hence, pursuant to Art. 5, it is void, having been executed against the provisions of a mandatory/prohibitory law. More importantly, it affords neither of the parties a cause of action against the other. "When the nullity proceeds from the illegality of the cause or object of the contract, and the act constitutes a criminal offense, both parties being in pari delicto, they shall have no cause of action against each other..." (Art. 1411) The only remedy is one on behalf of the State to prosecute the parties for violating the law.

Bishop of Jaro v. De la Pena, 26 Phil. 144.

Although the Civil Code states that "a person obliged to give something is also bound to preserve it with the diligence pertaining



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to a good father of a family" (Art. 1094), it also provides, following the principle of the Roman law, major casus est, cui humana infirmitas resistere non potest, that "no one shall be liable for events which could not be foreseen, or which having been foreseen were inevitable, with the exception of the cases expressly mentioned in the law or those in which the obligation so declares." (Art. 1105.)

United State vs. Thomas (82 U. S., 337), said: "Trustees are only bound to exercise the same care and solicitude with regard to the trust property which they would exercise with regard to their own. Equity will not exact more of them. They are not liable for a loss by theft without their fault. But this exemption ceases when they mix the trust-money with their own, whereby it loses its identity, and they become mere debtors."

Trent, dissent. This money was then clothed with all the immunities and protection with which the law seeks to invest trust funds. But when De la Peña mixed this trust fund with his own and deposited the whole in the bank to his personal account or credit, he by this act stamped on the said fund his own private marks and unclothed it of all the protection it had.

Triple-V Food Services, Inc. v. Filipino Merchants Insurance Company, Inc., G.R. No. 160544, February 21, 2005.

In a contract of deposit, a person receives an object belonging to another with the obligation of safely keeping it and returning the same. A deposit may be constituted even without any consideration. It is not necessary that the depositary receives a fee before it becomes obligated to keep the item entrusted for safekeeping ant to return it later to the depositor.

The parking claim stub’s exclusionary stipulation as a shield from any responsibility for any loss or damage to vehicles or to valuables contained therein. It is essentially a contract of adhesion that the Court will set aside when proved to be one-sided.

Valet parking is a restaurant’s enticement to its customers and is an added attraction to the business because customers are somehow assured that their vehicles are kept in safely in a space, instead of parking elsewhere at their own risk.

CA Agro-Industrial Development Corporation v. Court of Appeals, 219 SCRA 426.

A contract for the rental of a bank safety deposit box in consideration of a fixed amount at stated periods is a bailment for hire. The contract for the rent of the safety deposit box is not an ordinary contract of lease as defined in Art. 1643. However, it is not the same as a contract of deposit that is to be strictly governed by the provisions in the Civil Code on deposit; the contract in the case at bar is a special kind of deposit. It cannot be characterized as an ordinary contract of lease under Art. 1643 because the full and absolute possession and control of the safety deposit box was not given to the joint renters. The guard key of the box remained with the respondent Bank; without this key, neither of the renters could open the box. On the other hand, the respondent Bank could not likewise open the box without the renter's key. In this case, the said key had a duplicate which was made so that both renters could have access to the box.

There is some support for the view that the relationship in question might be more properly characterized as that of landlord and tenant, or lessor and lessee. It has also been suggested that it should be characterized as that of licensor and licensee. The relation between a bank, safe-deposit company, or storage company, and the renter of a safe-deposit box therein, is often described as contractual, express or implied, oral or written, in whole or in part. But there is apparently no jurisdiction in which any rule other than that applicable to bailments governs questions of the liability and rights of the parties in respect of loss of the contents of safe-deposit boxes.

Sec. 72. In addition to the operations specifically authorized elsewhere in this Act, banking institutions other than building and loan associations may perform the following services:

(a) Receive in custody funds, documents, and valuable objects, and rent safety deposit boxes for the safeguarding of such effects.

The banks shall perform the services permitted under subsections (a), (b) and (c) of this section as depositories or as agents. . . .

The primary function is still found within the parameters of a contract of deposit, i.e., the receiving in custody of funds,

documents and other valuable objects for safekeeping. The renting out of the safety deposit boxes is not independent from, but related to or in conjunction with, this principal function. A contract of deposit may be entered into orally or in writing and, pursuant to Art. 1306, the parties thereto may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order or public policy. Accordingly, the depositary would be liable if, in performing its obligation, it is found guilty of fraud, negligence, delay or contravention of the tenor of the agreement. In the absence of any stipulation prescribing the degree of diligence required, that of a good father of a family is to be observed. Hence, any stipulation exempting the depositary from any liability arising from the loss of the thing deposited on account of fraud, negligence or delay would be void for being contrary to law and public policy.

10. Necessary Deposit, Art. 1996 to 2004, Civil Code

CHAPTER 3 NECESSARY DEPOSIT

Art. 1996. A deposit is necessary:

(1) When it is made in compliance with a legal obligation; (2) When it takes place on the occasion of any calamity, such as fire, storm, flood, pillage, shipwreck, or other similar events. (1781a)

Art. 1997. The deposit referred to in No. 1 of the preceding Art. shall be governed by the provisions of the law establishing it, and in case of its deficiency, by the rules on voluntary deposit.

The deposit mentioned in No. 2 of the preceding Art. shall be regulated by the provisions concerning voluntary deposit and by Art. 2168. (1782)

When deposit is necessary

1. When free choice of the depositor is absent 2. Travellers in hotels or inns 3. Passengers with common carriers

Necessary deposit in compliance with a legal obligation

1. Judicial deposit of a thing the possession of which is disputed in a litigation by two or more persons (Art. 538)

2. Deposit with a bank of public bonds given in usufructuary when the usufructuary does not give proper security for their conservation (Art. 586)

3. Deposit of a pledge where the creditor uses or misuses the thing without authority (Art. 2104)

4. Required in suits by the Rules of Court 5. Deposits constituted to guarantee contracts with

government.

These are governed primarily by provisions for such law, and in default thereof, by the rules of voluntary deposit.

Necessary deposit made on the occasion of any calamity

1. Deposit created by accident or fortuitous event a. The law imposes on the recipient the obligations of a

bailee. b. The more immediate object is to save the property

rather than safekeeping. c. This quasi-bailment is called involuntary bailment or

involuntary deposit, ―deposito miserable.‖ d. There must be a causal relation between the calamity

and the constitution of the deposit. 2. Governing rules

a. Provisions of voluntary deposit b. Art. 2168 on the payment of just compensation

(quasi-contract)

Art. 1998. The deposit of effects made by the travelers in hotels or inns shall also be regarded as necessary. The keepers of hotels or inns shall be responsible for them as depositaries, provided that notice was given to them, or to their employees, of the effects brought by the guests and that, on the part of the latter, they take the precautions which said hotel-keepers or their substitutes advised relative to the care and vigilance of their effects. (1783)

Art. 1999. The hotel-keeper is liable for the vehicles, animals and articles which have been introduced or placed in the annexes of the hotel. (n)



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Deposit by travelers in hotels and inns

Elements:

1. The hotel or inn had been previously informed about the effects

2. The guest has taken precautions prescribed regarding their safekeeping

Extent of liability of keepers of hotels and inns

Not limited to ―baggage‖ but include those lost and damaged in hotel annexes such as vehicles in the hotels garage.

The responsibility extends to all those who offer lodging for a compensation of whatever character (Manresa).

Terms explained

1. Travellers and guests are synonymous. Non-transients are governed by the rules on lease

2. Hotel-keeper and inn-keeper are synonymous. a. Hotel – a building of many rooms chiefly for overnight

accommodation of transients b. Inn – a public house for the lodging of travelers for

compensation and until capacity is reached c. Motel - an establishment which provides lodging and

parking and in which rooms are usually accessible from an outdoor parking area

Art. 2000. The responsibility referred to in the two preceding articles shall include the loss of, or injury to the personal property of the guests caused by the servants or employees of the keepers of hotels or inns as well as strangers; but not that which may proceed from any force majeure. The fact that travelers are constrained to rely on the vigilance of the keeper of the hotels or inns shall be considered in determining the degree of care required of him. (1784a)

Art. 2001. The act of a thief or robber, who has entered the hotel is not deemed force majeure, unless it is done with the use of arms or through an irresistible force. (n)

Art. 2002. The hotel-keeper is not liable for compensation if the loss is due to the acts of the guest, his family, servants or visitors, or if the loss arises from the character of the things brought into the hotel. (n)

When hotelkeeper liable regardless of amount of care exercised, when the loss or injury is caused by:

1. Servants and employees as well as strangers (Art. 2000) provided that notice was given and precautions were taken (Art. 1998)

2. The act of thief or robber done without use of arms or irresistible force. Hotel-keeper is apparently negligent.

When hotelkeeper not liable when the loss or injury is caused by:

1. Force majeure (Art. 2000), theft or robbery by a stranger with the use of arms or irresistible force (Art. 2001) unless guilty of fault or negligence (Art. 1170, 1174)

2. Acts of guests, his family, servants or visitors (Art. 2202) 3. Character of the things brought into the hotel

Art. 2003. The hotel-keeper cannot free himself from responsibility by posting notices to the effect that he is not liable for the articles brought by the guest. Any stipulation between the hotel-keeper and the guest whereby the responsibility of the former as set forth in articles 1998 to 2001 is suppressed or diminished shall be void. (n)

Exemption or dimunition of liability

Similar to common carriers (Art. 1760), stipulation is deemed contrary to law, morals and public policy (Art. 1306)

1. Practically volunteer as depositaries and should be subject to extraordinary degree of responsibility

2. Supervision and control of their inns and the premises thereof.

3. It is not necessary that the effects be delivered to employees; it is enough that they are within the inn (De los Santos v. Tan Khey).

Art. 2004. The hotel-keeper has a right to retain the things brought into the hotel by the guest, as a security for credits on account of lodging, and supplies usually furnished to hotel guests. (n)

Hotelkeeper’s right to retain

Pledge created by operation of law (Art. 2121-2122). Also, obtaining food or accommodation without paying constitutes estafa (Art. 315, Sec. 2e).

Case:

YHT Realty Corporation v. Court of Appeals, G.R. No. 126780, February 17, 2005.

In case of loss of any item deposited in the safety deposit box, it is inevitable to conclude that the management had at least a hand in the consummation of the taking, unless the reason for the loss is force majeure. The New Civil Code is explicit that the responsibility of the hotel-keeper shall extend to loss of, or injury to, the personal property of the guests even if caused by servants or employees of the keepers of hotels or inns as well as by strangers, except as it may proceed from any force majeure.

It is the loss through force

majeure that may spare the hotel-keeper from liability.

Mere close companionship and intimacy are not enough to warrant such conclusion considering that what is involved in the instant case is the very safety of McLoughlin's deposit. Petitioners would have exercised due diligence required of them. Failure to do so warrants the conclusion that the management had been remiss in complying with the obligations imposed upon hotel-keepers under the law.

The hotel business like the common carrier's business is imbued with public interest. Catering to the public, hotelkeepers are bound to provide not only lodging for hotel guests and security to their persons and belongings. The twin duty constitutes the essence of the business. The law in turn does not allow such duty to the public to be negated or diluted by any contrary stipulation in so-called "undertakings" that ordinarily appear in prepared forms imposed by hotel keepers on guests for their signature.

Art. 2002 presupposes that the hotel-keeper is not guilty of concurrent negligence or has not contributed in any degree to the occurrence of the loss. A depositary is not responsible for the loss of goods by theft, unless his actionable negligence contributes to the loss.

11. Judicial Deposit, Articles 2005 to 2009, Civil Code

CHAPTER 4 SEQUESTRATION OR JUDICIAL DEPOSIT

Art. 2005. A judicial deposit or sequestration takes place when an attachment or seizure of property in litigation is ordered. (1785)

Art. 2006. Movable as well as immovable property may be the object of sequestration. (1786)

Art. 2007. The depositary of property or objects sequestrated cannot be relieved of his responsibility until the controversy which gave rise thereto has come to an end, unless the court so orders. (1787a)

Art. 2008. The depositary of property sequestrated is bound to comply, with respect to the same, with all the obligations of a good father of a family. (1788)

When judicial deposit takes place

1. Attachment by sheriff (Rule 57) 2. Receivership (Rule 59) 3. Replevin or manual delivery (Rule 60)

Nature and purpose of judicial deposit

It is auxiliary to a case pending in court. Its purpose is to maintain status quo and to insure the rights of the parties to the property in case of a favorable judgment.

Obligation of depositary of sequestered property

Depositary is appointed by the court; has to take care of the property with the diligence of a good father of a family.

Judicial and extrajudicial deposits distinguished

Judicial Extrajudicial



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Cause or origin Will of the court Will of the parties

Purpose Security and to secure the right of a

party to recover

Custody and safekeeping of the

thing

Subject Matter Movable or immovable

Movable

Remuneration Always onerous May be onerous but generally gratuitous

In whose behalf it is held

Person who, by judgment, has a

right

Depositor of third person designated

Art. 2009. As to matters not provided for in this Code, judicial

sequestration shall be governed by the Rules of Court. (1789)

Applicable law

Law on judicial deposit is remedial in nature:

1. Preliminary attachment (Rule 57) 2. Receivership (Rule 59) 3. Replevin (Rule 60) 4. Attachment in criminal cases (Rule 127)

Weeks 5 to 6 (Special Reports)

12. Merchants and Commercial Transactions, Articles 1-63, Code of Commerce

13. Letters of Credit, Articles 567-572, Code of Commerce Case:

Transfield Philippines, Inc. v. Luzon Hydro Corporation Australia, et al., G.R. No. 446717, November 22, 2004.

The principle of independent contract in letters of credit can be invoked by the issuing banks and beneficiaries. The banks were mere custodians of the funds and as such, they were obligated to transfer the same to the beneficiary for as long as the latter could submit the required certification of its claims.

The credit itself is independent of the underlying transaction and that as long as the beneficiary complied with the credit, it was of no moment that he had not complied with the underlying contract.

14. Trust Receipts Law

PRESIDENTIAL DECREE No. 115 January 29, 1973 PROVIDING FOR THE REGULATION OF TRUST RECEIPTS

TRANSACTIONS

WHEREAS, the utilization of trust receipts, as a convenient business device to assist importers and merchants solve their financing problems, had gained popular acceptance in international and domestic business practices, particularly in commercial banking transactions;

WHEREAS, there is no specific law in the Philippines that governs trust receipt transactions, especially the rights and obligations of the parties involved therein and the enforcement of the said rights in case of default or violation of the terms of the trust receipt agreement;

WHEREAS, the recommendations contained in the report on the financial system which have been accepted, with certain modifications by the monetary authorities included, among others, the enactment of a law regulating the trust receipt transactions;

NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the powers vested in me by the Constitution, as Commander-in-Chief of all the Armed Forces of the Philippines, and pursuant to Proclamation No. 1081, dated September 21, 1972, and General Order No. 1, dated September 22, 1972, as amended, and in order to effect the desired changes and reforms in the social, economic, and political structure of our society, do hereby order and decree and make as part of the law of the land the following:

Section 1. Short Title. This Decree shall be known as the Trust Receipts Law.

Section 2. Declaration of Policy. It is hereby declared to be the policy of the state (a) to encourage and promote the use of trust receipts as an additional and convenient aid to commerce and trade; (b) to provide for the regulation of trust receipts transactions in order to assure the protection of the rights and enforcement of obligations of the parties involved therein; and (c) to declare the misuse and/or misappropriation of goods or proceeds realized from the sale of goods, documents or instruments released under trust receipts as a criminal offense punishable under Art. Three hundred and fifteen of the Revised Penal Code.

Section 3. Definition of terms. As used in this Decree, unless the context otherwise requires, the term

(a) "Document" shall mean written or printed evidence of title to goods. (b) "Entrustee" shall refer to the person having or taking possession of goods, documents or instruments under a trust receipt transaction, and any successor in interest of such person for the purpose or purposes specified in the trust receipt agreement. (c) "Entruster" shall refer to the person holding title over the goods, documents, or instruments subject of a trust receipt transaction, and any successor in interest of such person. (d) "Goods" shall include chattels and personal property other than: money, things in action, or things so affixed to land as to become a part thereof. (e) "Instrument" means any negotiable instrument as defined in the Negotiable Instrument Law; any certificate of stock, or bond or debenture for the payment of money issued by a public or private corporation, or any certificate of deposit, participation certificate or receipt, any credit or investment instrument of a sort marketed in the ordinary course of business or finance, whereby the entrustee, after the issuance of the trust receipt, appears by virtue of possession and the face of the instrument to be the owner. "Instrument" shall not include a document as defined in this Decree. (f) "Purchase" means taking by sale, conditional sale, lease, mortgage, or pledge, legal or equitable. (g) "Purchaser" means any person taking by purchase. (h) "Security Interest" means a property interest in goods, documents or instruments to secure performance of some obligations of the entrustee or of some third persons to the entruster and includes title, whether or not expressed to be absolute, whenever such title is in substance taken or retained for security only. (i) "Person" means, as the case may be, an individual, trustee, receiver, or other fiduciary, partnership, corporation, business trust or other association, and two more persons having a joint or common interest. (j) "Trust Receipt" shall refer to the written or printed document signed by the entrustee in favor of the entruster containing terms and conditions substantially complying with the provisions of this Decree. No further formality of execution or authentication shall be necessary to the validity of a trust receipt. (k) "Value" means any consideration sufficient to support a simple contract.

Section 4. What constitutes a trust receipt transaction. A trust receipt transaction, within the meaning of this Decree, is any transaction by and between a person referred to in this Decree as the entruster, and another person referred to in this Decree as entrustee, whereby the entruster, who owns or holds absolute title or security interests over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latter's execution and delivery to the entruster of a signed document called a "trust receipt" wherein the entrustee binds himself to hold the designated goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, documents or instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt, or for other purposes substantially equivalent to any of the following:

1. In the case of goods or documents, (a) to sell the goods or procure their sale; or (b) to manufacture or process the goods with the purpose of ultimate sale: Provided, That, in the case of goods delivered under trust receipt for the purpose of manufacturing or processing before its ultimate sale, the entruster shall retain its title over the goods whether in its original or processed form until the



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entrustee has complied fully with his obligation under the trust receipt; or (c) to load, unload, ship or tranship or otherwise deal with them in a manner preliminary or necessary to their sale; or

2. In the case of instruments,

a) to sell or procure their sale or exchange; or b) to deliver them to a principal; or c) to effect the consummation of some transactions involving delivery to a depository or register; or d) to effect their presentation, collection or renewal

The sale of goods, documents or instruments by a person in the business of selling goods, documents or instruments for profit who, at the outset of the transaction, has, as against the buyer, general property rights in such goods, documents or instruments, or who sells the same to the buyer on credit, retaining title or other interest as security for the payment of the purchase price, does not constitute a trust receipt transaction and is outside the purview and coverage of this Decree.

Section 5. Form of trust receipts; contents. A trust receipt need not be in any particular form, but every such receipt must substantially contain (a) a description of the goods, documents or instruments subject of the trust receipt; (2) the total invoice value of the goods and the amount of the draft to be paid by the entrustee; (3) an undertaking or a commitment of the entrustee (a) to hold in trust for the entruster the goods, documents or instruments therein described; (b) to dispose of them in the manner provided for in the trust receipt; and (c) to turn over the proceeds of the sale of the goods, documents or instruments to the entruster to the extent of the amount owing to the entruster or as appears in the trust receipt or to return the goods, documents or instruments in the event of their non-sale within the period specified therein.

The trust receipt may contain other terms and conditions agreed upon by the parties in addition to those hereinabove enumerated provided that such terms and conditions shall not be contrary to the provisions of this Decree, any existing laws, public policy or morals, public order or good customs.

Section 6. Currency in which a trust receipt may be denominated. A trust receipt may be denominated in the Philippine currency or any foreign currency acceptable and eligible as part of international reserves of the Philippines, the provisions of existing law, executive orders, rules and regulations to the contrary notwithstanding: Provided, however, That in the case of trust receipts denominated in foreign currency, payment shall be made in its equivalent in Philippine currency computed at the prevailing exchange rate on the date the proceeds of sale of the goods, documents or instruments held in trust by the entrustee are turned over to the entruster or on such other date as may be stipulated in the trust receipt or other agreements executed between the entruster and the entrustee.

Section 7. Rights of the entruster. The entruster shall be entitled to the proceeds from the sale of the goods, documents or instruments released under a trust receipt to the entrustee to the extent of the amount owing to the entruster or as appears in the trust receipt, or to the return of the goods, documents or instruments in case of non-sale, and to the enforcement of all other rights conferred on him in the trust receipt provided such are not contrary to the provisions of this Decree.

The entruster may cancel the trust and take possession of the goods, documents or instruments subject of the trust or of the proceeds realized therefrom at any time upon default or failure of the entrustee to comply with any of the terms and conditions of the trust receipt or any other agreement between the entruster and the entrustee, and the entruster in possession of the goods, documents or instruments may, on or after default, give notice to the entrustee of the intention to sell, and may, not less than five days after serving or sending of such notice, sell the goods, documents or instruments at public or private sale, and the entruster may, at a public sale, become a purchaser. The proceeds of any such sale, whether public or private, shall be applied (a) to the payment of the expenses thereof; (b) to the payment of the expenses of re-taking, keeping and storing the goods, documents or instruments; (c) to the satisfaction of the entrustee's indebtedness to the entruster. The entrustee shall receive any surplus but shall be liable to the entruster for any deficiency. Notice of sale shall be deemed sufficiently given if in writing, and either personally served on the entrustee or sent by post-paid ordinary mail to the entrustee's last known business address.

Section 8. Entruster not responsible on sale by entrustee. The entruster holding a security interest shall not, merely by virtue of such interest or having given the entrustee liberty of sale or other disposition of the goods, documents or instruments under the terms of the trust receipt transaction be responsible as principal or as vendor under any sale or contract to sell made by the entrustee.

Section 9. Obligations of the entrustee. The entrustee shall (1) hold the goods, documents or instruments in trust for the entruster and shall dispose of them strictly in accordance with the terms and conditions of the trust receipt; (2) receive the proceeds in trust for the entruster and turn over the same to the entruster to the extent of the amount owing to the entruster or as appears on the trust receipt; (3) insure the goods for their total value against loss from fire, theft, pilferage or other casualties; (4) keep said goods or proceeds thereof whether in money or whatever form, separate and capable of identification as property of the entruster; (5) return the goods, documents or instruments in the event of non-sale or upon demand of the entruster; and (6) observe all other terms and conditions of the trust receipt not contrary to the provisions of this Decree.

Section 10. Liability of entrustee for loss. The risk of loss shall be borne by the entrustee. Loss of goods, documents or instruments which are the subject of a trust receipt, pending their disposition, irrespective of whether or not it was due to the fault or negligence of the entrustee, shall not extinguish his obligation to the entruster for the value thereof.

Section 11. Rights of purchaser for value and in good faith. Any purchaser of goods from an entrustee with right to sell, or of documents or instruments through their customary form of transfer, who buys the goods, documents, or instruments for value and in good faith from the entrustee, acquires said goods, documents or instruments free from the entruster's security interest.

Section 12. Validity of entruster's security interest as against creditors. The entruster's security interest in goods, documents, or instruments pursuant to the written terms of a trust receipt shall be valid as against all creditors of the entrustee for the duration of the trust receipt agreement.

Section 13. Penalty clause. The failure of an entrustee to turn over the proceeds of the sale of the goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Art. Three hundred and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal Code. If the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense.

Section 14. Cases not covered by this Decree. Cases not provided for in this Decree shall be governed by the applicable provisions of existing laws.

Section 15. Separability clause. If any provision or section of this Decree or the application thereof to any person or circumstance is held invalid, the other provisions or sections hereof and the application of such provisions or sections to other persons or circumstances shall not be affected thereby.

Section 16. Repealing clause. All Acts inconsistent with this Decree are hereby repealed.

Section 17. This Decree shall take effect immediately.

Done in the City of Manila, this 29th day of January, in the year of Our Lord, nineteen hundred and seventy-three.

Case:

Colinares & Veloso v. Court of Appeals, G.R. No. 90828, September 5, 2000.

Section 4, P.D. No. 115, the Trust Receipts Law, defines a trust receipt transaction as any transaction by and between a person referred to as the entruster, and another person referred to as the entrustee, whereby the entruster who owns or holds absolute title or security interest over certain specified goods, documents or instruments, releases the same to the



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possession of the entrustee upon the latter’s execution and delivery to the entruster of a signed document called a ―trust receipt‖ wherein the entrustee binds himself to hold the designated goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, documents or instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt.

There are two possible situations in a trust receipt transaction. The first is covered by the provision which refers to money received under the obligation involving the duty to deliver it (entregarla) to the owner of the merchandise sold. The second is covered by the provision which refers to merchandise received under the obligation to ―return‖ it (devolvera) to the owner.

The bank acquires a ―security interest‖ in the goods as holder of a security title for the advances it had made to the entrustee. The ownership of the merchandise continues to be vested in the person who had advanced payment until he has been paid in full, or if the merchandise has already been sold, the proceeds of the sale should be turned over to him by the importer or by his representative or successor in interest. To secure that the bank shall be paid, it takes full title to the goods at the very beginning and continues to hold that title as his indispensable security until the goods are sold and the vendee is called upon to pay for them; hence, the importer has never owned the goods and is not able to deliver possession. In a certain manner, trust receipts partake of the nature of a conditional sale where the importer becomes absolute owner of the imported merchandise as soon as he has paid its price. Failure of the entrustee to turn over the proceeds of the sale of the goods, covered by the trust receipt to the entruster or to return said goods if they were not disposed of in accordance with the terms of the trust receipt shall be punishable as estafa under Art. 315 (1) of the Revised Penal Code, without need of proving intent to defraud.

The Trust Receipts Law does not seek to enforce payment of the loan; rather it punishes the dishonesty and abuse of confidence in the handling of money or goods to the prejudice of another regardless of whether the latter is the owner.

15. Truth in Lending Act

REPUBLIC ACT NO. 9474 AN ACT GOVERNING THE ESTABLISHMENT, OPERATION AND

REGULATION OF LENDING COMPANIES

Section 1. Title. - This Act shall be known as the ""Lending Company Regulation Act of 2007"".

Sec. 2. Declaration of Policy. - It is hereby declared the policy of the State to regulate the establishment of lending companies and to place their operation on a sound, efficient and stable condition to derive the optimum advantages from them as an additional source of credit; to prevent and mitigate, as far as practicable, practices prejudicial to public interest; and to lay down the minimum requirements and standards under which they may be established and do business.

Sec. 3. Definition of Terms. - For purposes of implementing this Act, the following definitions shall apply:

(a) Lending Company shall refer to a corporation engaged in granting loans from its own capital funds or from funds sourced from not more than nineteen (19) persons. It shall not be deemed to include banking institutions, investment houses, savings and loan associations, financing companies, pawnshops, insurance companies, cooperatives and other credit institutions already regulated by law. The term shall be synonymous with lending investors. (b) Debtor shall refer to a borrower or person granted a loan by the lending company. (c) Quasi-Bank shall refer to a non-bank financial institution authorized by the BSP to engage in quasi-banking functions and to borrow funds from more than nineteen (19) lenders through the issuance, endorsement or assignment with recourse or acceptance of deposit substitutes as defined in Sec. 95 of Republic Act No. 7653 (the "New Central Bank Act":) for purposes of relending or purchasing of receivables and other obligations. (d) Subsidiary shall refer to a corporation more than fifty percent (50%) of the voting stock of which is owned by a bank or quasi-bank. (e) Affiliate shall refer to a corporation, the voting stock of which, to the extent of fifty percent (50%) or less, is owned by a bank or quasi-

bank which is related or linked to such institution through common stockholders or such other factors as may be determined by the Monetary Board of the BSP. (f) SEC shall refer to the Securities and Exchange Commission. (g) BSP shall refer to the Bangko Sentral ng Pilipinas.

Sec. 4. Form of Organization. - A lending company shall be established only as a corporation: Provided That existing lending investors organized as single proprietorships or partnerships shall be disallowed from engaging in the business of granting loans to the public one year after the date of effectivity of this Act.

No lending company shall conduct business unless granted an authority to operate by the Sec.

Sec. 5. Capital. - The minimum paid in capital of any lending company which may be established after the effectivity of this Act shall be One million pesos (P1,000,000.00): Provided, however, That lending companies established and in operation prior thereto shall comply with the minimum capitalization required under the provisions of this Sec. within such time as may be prescribed by the SEC which time shall, in no case, be less than three years from the date of effectivity of this Act and: Provided, further, That the SEC may prescribe a higher minimum capitalization if warranted by circumstances.

Sec. 6. Citizenship Requirements. - Upon the effectivity of this Act, at least a majority of the voting capital stock shall be owned by citizens of the Philippines.

The percentage of foreign-owned voting stock in any lending company existing prior to the effectivity of this Act, if such percentage is in excess of forty-nine percent (49%) of the voting stock, shall not be increased but may be reduced and, once reduced, shall not be increased thereafter beyond forty-nine percent (49%) of the voting stock of the lending company. The percentage of foreign-owned voting stocks in any lending company shall be determined by the citizenship of the individual stockholders. In the case of corporations owning shares in a lending company, the citizenship of the individual owners of voting stock in such corporations shall be the basis in the computation of the percentage.

No foreign national may be allowed to own stock unless the country of which he is a national accords reciprocal rights to Filipinos.

Sec. 7. Amount and Charges on Loans. - A lending company may grant loans in such amounts and reasonable interest rates and charges as may be agreed upon between the lending company and the debtor: Provided, That the agreement shall be in compliance with the provisions of Republic Act No. 3765, otherwise known as the "Truth in Lending Act" and Republic Act 7394, otherwise known as the "Consumer Act of the Philippines": Provided, further, That the Monetary Board, in consultation with the SEC and the industry, may prescribe such interest rate as may be warranted by prevailing economic and social conditions.

Sec. 8. Maintenance of Books of Accounts and Records. - Every lending company shall maintain books of accounts and records as may be required by the SEC and prescribed by the Bureau of Internal Revenue and other government agencies. In case a lending company engages in other businesses, it shall maintain separate books of accounts for these businesses.

The Manual of Accounts prescribed by the BSP for lending investors shall continue to be adopted by lending companies for uniform recording and reporting of their operations, until a new Manual of Accounts shall have been prescribed by the Sec.

It shall issue the appropriate instruments and documents to the parties concerned to evidence its lending and borrowing transactions.

Sec. 9. Authority of the SEC. - The SEC is hereby authorized to:

(a) Create a new division or bureau within its control to regulate and supervise the operations and activities of lending companies in the country; (b) Issue rules and regulations to implement the provisions contained herein; (c) Issue rules and regulations on, among other things, minimum capitalization, uses of funds received, method of marketing and distribution, maturity of funds received, restrictions or outright prohibition of purchases or sales of receivables with or without recourse basis; (d) Require from lending companies reports of condition and such other reports necessary to determine compliance with the provisions of this Act;



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(e) Exercise visitorial powers whenever deemed necessary; and (f) Impose such administrative sanctions including suspension or revocation of the lending company's authority to operate and the imposition of fines for violations of this Act and regulations issued by the SEC in pursuance thereto.

Sec. 10. Implementing Rules and Regulations. Within three months after the approval of this Act, the SEC shall promulgate the necessary rules and regulations implementing the provisions of this Act.

Sec. 11. Delineation of Authority between SEC and the BSP. - Lending companies shall be under the supervision and regulation of the SEC: Provided, however, That lending companies which are subsidiaries and affiliates of banks and quasi-banks shall be subject to BSP supervision and examination in accordance with Republic Act No. 7653: Provider further, That the Monetary Board, after being satisfied that there is reasonable ground to believe that a lending company is being used as a conduit by a bank, quasi-bank or their subsidiary/affiliate to circumvent or violate BSP rules and regulations, may order an examination of the lending company's books and accounts.

Sec. 12. Penalty. - A fine of not less than Ten Thousand Pesos (P10,000.00) and not more than Fifty thousand pesos(P50,000.00) or imprisonment of not less than six months but not more than ten (10) years or both, at the discretion of the court, shall be imposed upon:

1. Any person who shall engage in the business of a lending company without a validly subsisting authority to operate from the Sec.

2. The president, treasurer and other officers of the corporation, including the managing officer thereof, who shall knowingly and willingly:

a. Engage in the business of a lending company without a validly subsisting authority to operate from the SEC; b. Hold themselves out to be a lending company, either through advertisement in whatever form, whether in its stationery, commercial paper, or other document, or through other representations without authority; c. Make use of a trade or firm name containing the words "lending company" or "lending investor" or any other designation that would give the public the impression that it is engaged in the business of a lending company as defined in this Act without authority; and d. Violate the provisions of this Act.

3. Any officer, employee, or agent of a lending company who shall:

a. Knowingly and willingly make any statement in any application, report, or document required to be filed under this Act, which statement is false or misleading with respect to any material fact; and b. Overvalue or aid in overvaluing any security for the purpose of influencing in any way the action of the company in any loan, or discounting line.

4. Any officer, employee or examiner of the SEC directly charged with the implementation of this Act or of other government agencies who shall commit, connive, aid, or assist in the commission of acts enumerated under Subsections 1 and 2 of this Sec. .

Sec. 13. Matters not Covered by this Act. The provisions of Republic Act No. 3765, otherwise known as the "Truth in Lending Act", Republic Act No. 7394 or the "Consumer Act of the Philippines" and other existing laws, insofar as they are not in conflict with any provision of this Act, shall apply in matters not otherwise specifically provided in this Act.

Sec. 14. Repealing Clause. - All laws, executive orders, letters of instruction, rules and regulations, or provisions thereof which are inconsistent with the provisions of this Act are hereby repealed, amended or modified accordingly.

Sec. 15. Separability Clause. - If any portion hereof shall be held invalid or unconstitutional, such invalidity or unconstitutionality shall not affect the other provisions which shall remain in full force and effect.

Sec. 16. Effectivity. - This Act shall take effect fifteen (15) days after its publication in at least two national newspapers of general circulation. May 22, 2007

Case:

United Coconut Planters Bank v. Samuel & Beluso, G.R. No. 159912, August 17, 2007.

The interest rate provisions are illegal not only because of the CC provision on mutuality of contracts but also because it’s violative of the Truth in Lending Act. Not disclosing the true finance charges in connection with the extensions of credit is a form of deception which We cannot countenance.

As to failure of Beluso to explicitly allege violation of Truth in Lending Act and prescription of 1 year: Allegations in complaint are much more controlling than its title. It can be inferred from the allegation of ―unilateral imposition of increased interest rates‖

Truth in Lending gives rise to both criminal and civil liabilities.

Rationale for requiring the disclosure statement to be given prior to consummation: Protect users of credit from a lack of awareness of the true cost thereof, proceeding from the experience that banks are able to conceal such true cost by hidden charges, uncertainty of interest rates, deduction of interests from the loaned amount and the like. Fully appreciate the true cost of loan, give full consent to the contract, and properly evaluate their options in arriving at business decisions.

16. The Usury Law Rate of interest no longer subject to any ceiling prescribed under the Usury Law

Rate of interest shall not be subject to any ceiling prescribed under the Usury Law (Sec. 1, Resolution No. 224 of the Monetary Board of CB). In the absence of stipulation, 12% interest per annum (Sec.2).

Legality of Central Bank Circular No. 905

CBCN 905 is of doubtful legality for being in excess of authority. The Usury Law authorizes the Monetary Board to ―prescribe maximum rate,‖ not to abolish ceilings.

Usury – contracting for or receiving something in excess of the amount allowed by law for the loan or forbearance of money, goods and credits.

Usury, purely a statutory creation

In the absence of statute, any rate of interest may be charged.

Elements of usury

1. A loan or forbearance 2. An understanding between the parties that the loan shall

or may be returned 3. An unlawful intent to take more than the legal rate for the

use of money or its equivalent 4. The taking or agreeing to take for the use of the loan of

something in excess of what is allowed by law

The court will disregard the form and look only to its substance.

Usury Law applies to loans and forbearances of money.

Loan within the purview of the Usury Law is mutuum. Forbearance – the contractual relation of creditor to forbear during a given period to require the debtor, payment if an existing debt then due and payable.

Where there is no loan or forbearance, there can be no usury.

Purpose, theory and nature of the Usury Law

1. For the protection of borrowers from the imposition of unscrupulous lenders

2. Puts lenders in the same category with persons under legal disability to contract (based on the inequality of the relations that the borrower’s necessities deprive him of the freedom in contracting)

3. Both remedial and penal.

Construction of the law

1. In general – duty of the court to ascertain the purpose and intent of legislature (protection of borrowers)

2. Liberal or strict construction – laws that guard against unreasonable rates of interest are liberally construed, but penal provisions are strictly construed and any doubt is resolved in favor of the person sought to be penalized



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3. Prospective or retroactive operation – in the absence of clear legislative intent for retroactivity, then prospective only. a. Contracts previously non-usurious – cannot be

rendered usurious by a subsequent law. b. Contracts previously usurious – legislature has the

power to validate any and all parts of pre-existing usurious contracts.

ACT NO. 2655 - AN ACT FIXING RATES OF INTEREST UPON LOANS AND DECLARING THE EFFECT OF RECEIVING OR TAKING USURIOUS RATES AND FOR OTHER PURPOSES

Section 1. The rate of interest for the loan or forbearance of any money goods, or credits and the rate allowed in judgments, in the absence of express contract as to such rate of interest, shall be six per centum per annum or such rate as may be prescribed by the Monetary Board of the Central Bank of the Philippines for that purpose in accordance with the authority hereby granted.

Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of interest for the loan or renewal thereof or the forbearance of any money, goods or credits, and to change such rate or rates whenever warranted by prevailing economic and social conditions.

In the exercise of the authority herein granted, the Monetary Board may prescribe higher maximum rates for loans of low priority, such as consumer loans or renewals thereof as well as such loans made by pawnshops finance companies and other similar credit institutions although the rates prescribed for these institutions need not necessarily be uniform. The Monetary Board is also authorized to prescribe different maximum rate or rates for different types of borrowings, including deposits and deposit substitutes, or loans of financial intermediaries.

Sec. 2. No person or corporation shall directly or indirectly take or receive in money or other property, real or personal, or choses in action, a higher rate of interest or greater sum or value, including commissions, premiums, fines and penalties, for the loan or renewal thereof or forbearance of money, goods, or credits, where such loan or renewal or forbearance is secured in whole or in part by a mortgage upon real estate the title to which is duly registered, or by any document conveying such real estate or an interest therein, than twelve per centum per annum or the maximum rate prescribed by the Monetary Board and in force at the time the loan or renewal thereof or forbearance is granted: Provided, That the rate of interest under this section or the maximum rate of interest that may be prescribed by the Monetary Board under this section may likewise apply to loans secured by other types of security as may be specified by the Monetary Board.

Sec. 3. No person or corporation shall directly or indirectly demand, take, receive or agree to charge in money or other property, real or personal, a higher rate or greater sum or value for the loan or forbearance of money, goods, or credits where such loan or forbearance is not secured as provided in Section two hereof, than fourteen per centum per annum or the maximum rate or rates prescribed by the Monetary Board and in force at the time the loan or forbearance is granted.

Interest – compensation allowed by law or fixed by the parties for the loan or forbearance of money, goods or credits.

Kinds of interest

1. Simple interest – paid for the principal at a certain rate fixed or stipulated by the parties (Art. 2209)

2. Compound interest – imposed upon interest due and unpaid (Art. 1959, 2212)

3. Legal interest – that which the law directs to be charged in the absence of any agreement as to the rate between the parties (Art. 2209)

4. Lawful interest – that which the law allows and does not prohibit; rate of interest within maximum prescribed (Secs. 2, 3)

5. Unlawful or usurious interest - paid or stipulated to be paid beyond the maximum prescribed by law

Interest rates

1. Legal rate – 12% per annum 2. Maximum rate

a. Loans secured in whole or in part by a mortgage – 12% per annum

b. Unsecured loan – 14% per annum c. Prescribed by Monetary Board

Multi-tiered interest rates

MB allowed to prescribe higher maximum rates for loans of low priority.

Section 2 and Section 3 distinguished

Section 2 Section 3

The taking or receiving of usurious interest penalized

Mere demanding or agreeing to charge excessive interest

punishable Loan secured by a registered

real estate Loan not so secured or

unsecured 12% per annum 14% per annum

Commissions, premiums, fines and penalties included as

interest

These are not considered

Validity of stipulation to pay penalty in case obligation not fulfilled

A stipulation to pay lawful interest with stipulation that the obligation shall bear a higher rate interest upon default is valid and is regarded as penalty. These are distinct and separately demandable.

Attorney’s fees to cover costs of collection not interest

Valid because it is not compensation for the use of money, but to safeguard the lender against future loss or damage by being compelled to retain counsel. But whether a creditor can enforce payment of attorney’s fees not actually incurred is questionable (Andreas v. Green).

Where attorney’s fees stipulated excessive

Conformably to Arts. 1227 and 1229, the courts have the power to determine the reasonableness based on quantum meruit and to reduce the amount thereof if excessive or unconscionable (New Sampaguita v. PNB).

Determination of existence of usury

1. Corrupt agreement must be present – If usurious on its face, res ipsa loquitur. If not, then there must be an intention to knowingly contract for or take usurious interest

2. Where consideration of loan is property or services of uncertain value – Valid unless contract on its face is usurious

3. Form of contract not conclusive – The law will not permit a usurious loan to hide itself behind a legal form. Parol evidence is admissible

Usury Law not applicable in ordinary contracts when entered into in good faith. It only applies to contracts of loan, forbearance to collect money due.

Effect where principal not absolutely payable

It is essential to constitute usury that the principal sum be payable absolutely and at all events.

Sec. 4. No pawnbroker or pawnbroker's agent shall directly or indirectly stipulate, charge, demand, take or receive any higher rate or greater sum or value for any loan or forbearance than two and one-half per centum per month when the sum lent is less than one hundred pesos; two per centum per month when the sum lent is one hundred pesos or more, but not exceeding five hundred pesos; and fourteen per centum per annum when it is more than the amount last mentioned; or the maximum rate or rates prescribed by the Monetary Board and in force at the time the loan or forbearance is granted. A pawnbroker or pawnbroker's agent shall be considered such, for the benefits of this Act, only if he be duly licensed and has an establishment open to the public.

It shall be unlawful for a pawnbroker or pawnbroker's agent to divide the pawn offered by a person into two or more fractions in order to collect greater interest than the permitted by this section.

It shall also be unlawful for a pawnbroker or pawnbroker's agent to require the pawner to pay an additional charge as insurance premium for the safekeeping and conservation of the Art. pawned.

Interest that can be charged by a pawnshop

1. 2½% per month on sum lent not more than P2,000.00



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2. 18% per annum on sum lent more than P2,000.00 (CBCN 722)

3. Maximum service charge of P5.00, in no case to exceed 1%of the principal loan (Sec. 10, PD 114)

Pawnbrokers are allowed to impose higher rates to allow the generation of profits.

Dividing pawn in several fractions not allowed in order to earn higher interest.

Sec. 4-a. The Monetary Board may eliminate, exempt from, or suspend the effectivity of, interest rate ceilings on certain types of loans or renewals thereof or forbearances of money, goods, or credit, whenever warranted by prevailing economic and social conditions.

Sec. 4-b. In the exercise of its authority to fix the maximum rate or rates of interest under this Act, the Monetary Board shall be guided by the following:

1. The existing economic conditions in the country and the general requirements of the national economy; 2. The supply of and demand for credit; 3. The rate of increase in the price levels; and 4. Such other relevant criteria as the Monetary Board may adopt.

Sec. 5. In computing the interest on any obligation, promissory note or other instrument or contract, compound interest shall not be reckoned, except by agreement: Provided, That whenever compound interest is agreed upon, the effective rate of interest charged by the creditor shall not exceed the equivalent of the maximum rate prescribed by the Monetary Board, or, in default thereof, whenever the debt is judicially claimed, in which last case it shall draw six per centum per annum interest or such rate as may be prescribed by the Monetary Board. No person or corporation shall require interest to be paid in advance for a period of more than one year: Provided, however, That whenever interest is paid in advance, the effective rate of interest charged by the creditor shall not exceed the equivalent of the maximum rate prescribed by the Monetary Board.

When compound interest allowed

1. There is an express written stipulation to that effect (Art. 1959)

2. In default thereof, upon judicial demand though the obligation is silent thereon (Art. 2212).

Demandability of compound interest

1. Agreement to charge interest on interest – accrued interest is not considered interest upon the original debt but on a new principal

2. Judicial demand to pay debt with interest stipulated in contract – not applicable where no interest is stipulated in the contract

Right of creditor to charge advance interest

1. One year or less – permissible under Sec. 5 2. More than one year – apparently prohibited under Sec. 5

Sec. 6. Any person or corporation who, for any such loan or renewal thereof or forbearance, shall have paid or delivered a higher rate or greater sum or value than is hereinbefore allowed to be taken or received, may recover the whole interest, commissions, premiums penalties and surcharges paid or delivered with costs and attorneys' fees in such sum as may be allowed by the court in an action against the person or corporation who took or received them if such action is brought within two years after such payment or delivery: Provided, however, That the creditor shall not be obliged to return the interest, commissions and premiums for a period of not more than one year collected by him in advance when the debtor shall have paid the obligation before it is due, provided such interest, and commissions and premiums do not exceed the rates fixed in this Act.

Borrower’s right to recover usurious interest paid Borrower’s right to recover costs and attorney’s fees

Borrower can recover usurious interest paid with costs and attorney’s fees.

The court has discretion to fix the amount of fees, but it has no discretion to deny the allowance. When the action to recover interest

is established, reasonable attorney’s fees and costs are awarded as a matter of course.

Right under the Civil Code

Art. 1413 provides for recovery of interest in excess of that allowed by the Usury law, Sec. 6 allows recovery of the whole interest. In Angel Jose Merchandising v. Chelda Enterprises, the Court allowed recovery of the entire interest with interest thereon from date of payment.

Pari delicto not applicable in usury cases

Lender considered criminal, borrower considered the injured party. The application of pari delicto would run counter to the avowed public policy to discourage usury.

Action to recover must be brought within 2 years of payment.

Where interest added to principal but not paid

1. Right of recovery of interest only for borrowed who shall have paid or delivered

2. Right of recovery of attorney’s fees only if interest has actually been taken or received

Sec. 7. All covenants and stipulations contained in conveyances, mortgages, bonds, bills, notes, and other contracts or evidences of debts, and all deposits of goods or other things, whereupon or whereby there shall be stipulated, charged, demanded, reserved, secured, taken, or received, directly or indirectly, a higher rate or greater sum or value for the loan or renewal or forbearance of money, goods, or credits than is hereinbefore allowed, shall be void: Provided, however, That no merely clerical error in the computation of interest, made without intent to evade any of the provisions of this Act, shall render a contract void: Provided, further, That parties to a loan agreement, the proceeds of which may be availed of partially or fully at some future time, may stipulate that the rate of interest agreed upon at the time the loan agreement is entered into, which rate shall not exceed the maximum allowed by law, shall prevail notwithstanding subsequent changes in the maximum rates that may be made by the Monetary Board: And Provided, finally, That nothing herein contained shall be construed to prevent the purchase by an innocent purchaser of a negotiable mercantile paper, usurious or otherwise, for valuable consideration before maturity, when there has been no intention on the part of said purchaser to evade the provisions of this Act and said purchase was not a part of the original usurious transaction. In any case, however, the maker of said note shall have the right to recover from said original holder the whole interest paid by him thereon and, in case of litigation, also the costs and such attorney's fees as may be allowed by the court.

Usurious loan void only with respect to interest

It results from the very context of the law that the use of the word ―void‖ did not intend complete nullity but merely a nullity with respect to the agreed interest (Lopez v. El Hogar Filipino).

Mere clerical error in computation of interest shall not render a contract void.

Usurer’s right to recover principal loaned

A usurious loan is void but the usurer can recover the principal by judicial action (Go Chioco v. Martinez). Otherwise, the borrower will be unjustly enriched at the expense of the lender.

1. Nullity of the accessory obligation does not carry with it that of the principal obligation

2. In a contract of loan, the cause is the right to demand the return or its equivalent. If at all, payment of interest may be considered a motive that is separable from its causa

3. The prestation to pay interest is separable from that to pay the principal debt

4. Unjust enrichment.

The creditor has no right to legal interest or damages (PCIB v. Grino)

Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods, or credits may stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased by law or by the Monetary Board; Provided, That such stipulation shall be valid only if there is also a stipulation in the agreement that the rate of interest agreed upon shall be reduced in the event that the applicable



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maximum rate of interest is reduced by law or by the Monetary Board; Provided, further, That the adjustment in the rate of interest agreed upon shall take effect on or after the effectivity of the increase or decrease in the maximum rate of interest.

Escalation clause in a loan agreement

1. Escalation clause must not be solely potestative a. Valid but must be based on reasonable and valid

grounds (Almeda v. CA) b. Must be agreed upon by the parties, else violative of

principle of mutuality of contracts (Art. 1308) 2. De-escalation clause also stipulated – Escalation clause

can only be valid if it also includes a de-escalation clause 3. Increase or reduction of interest effected by law or by MB

– ―a law‖ in the escalation clause does not include CBC because it is not strictly a statute or the law

Interest to be based on the prevailing market rate valid as long as there is a reference rate upon which to peg such variable interest rates.

Sec. 8. All loans under which payment is to be made in agricultural products or seed or in any other kind of commodities shall also be null and void unless they provide that such products or seed or other commodities shall 6e appraised at the time when the obligation falls due at the current local market price: Provided, That unless otherwise stated in a document written in a language or dialect intelligible to the debtor and subscribed in the presence of not less than two witnesses, any contract advancing money to be repaid later in agricultural products or seed or any other kind of commodities shall be understood to be a loan, and any person or corporation having paid otherwise shall be entitled in case action is brought within two years after such payment or delivery to recover all the products or seed delivered as interest, or the value thereof, together with the costs and attorney's fees in such sum as may be allowed by the court. Nothing contained in this section shall be construed to prevent the lender from taking interest for the money lent, provided such interest be not in excess of the rates herein fixed.

Determination of interest where loan of money is payable in kind

The means of ascertaining whether the payment exceeds the rate allowed by law is to reduce the medium of payment to its equivalent in pesos ―at the time the obligation fall due at the current local market price.‖

Sec. 9. The person or corporation sued shall file its answer in writing under oath to any complaint brought or filed against said person or corporation before a competent court to recover the money or other personal or real property, seeds or agricultural products, charged or received in violation of the provisions of this Act. The lack of taking an oath to an answer to a complaint will mean the admission of the facts contained in the latter.

Sec. 9-a. The Monetary Board shall promulgate such rules and regulations as may be necessary to implement effectively the provisions of this Act.

Effect of failure of defendant to make denial of usury under oath is that usury is deemed admitted (Sec. 1, Rule 9). But that the contract is indeed of a loan has to proved. This is applicable only to actions brought to recover money charged or received in violation of the Usury Law.

This is in the nature of a procedural rule subject to waiver.

Presumptions and burden of proof

1. Generally, usury is not presumed. But the same will be presumed if the contract is usurious on its face.

2. Lender’s evidence may be sufficiently establish usury so as to relieve the borrower of the burden of proof

3. Where there is no allegation or evidence to exact usurious interest, the contract of loan cannot be considered a usurious contract.

Sec. 10. Without prejudice to the proper civil action violation of this Act and the implementing rules and regulations promulgated by the Monetary Board shall be subject to criminal prosecution and the guilty person shall, upon conviction, be sentenced to a fine of not less than fifty pesos nor more than five hundred pesos, or to imprisonment for not less than thirty days nor more than one year, or

both, in the discretion of the court, and to return the entire sum received as interest from the party aggrieved, and in the case of non-payment, to suffer subsidiary imprisonment at the rate of one day for every two pesos: Provided, That in case of corporations, associations, societies, or companies the manager, administrator or gerent or the person who has charge of the management or administration of the business shall be criminally responsible for any violation of this Act.

Prescription of criminal action 4 years after its commission (Ramos v. Buyson Lampa). In a series of crimes, the prescription runs from the occurrence of each offense (People v. Fuentes).

Sec. 11. All Acts and parts of Acts inconsistent with the provisions of this Act are hereby repealed.

Sec. 12. This Act shall take effect on the first day of May, nineteen hundred and sixteen.

ENACTED, February 24,1916

Case:

Carpo v. Chua & Dy Ng, G.R. Nos. 150773 & 153599, September 30, 2005.

There is no need to unsettle the principle affirmed in Medel and like cases. From that perspective, it is apparent that the stipulated interest in the subject loan is excessive, iniquitous, unconscionable and exorbitant. Pursuant to the freedom of contract principle embodied in Art. 1306 of the Civil Code, contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. In the ordinary course, the codal provision may be invoked to annul the excessive stipulated interest.

The obligations in the loan contract are divisible in the sense that the former can still stand without the latter. Art. 1273 attests to this: "The renunciation of the principal debt shall extinguish the accessory obligations; but the waiver of the latter shall leave the former in force." Art. 1420 of the New Civil Code provides in this regard: "In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced." In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the principal debt, which is the cause of the contract (Art. 1350), is not illegal. The illegality lies only as to the prestation to pay the stipulated interest; hence, being separable, the latter only should be deemed void, since it is the only one that is illegal.

17. The Warehouse Receipts Law

and the General Bonded Warehouse

Act Scope of the law

It covers all warehouses, whether public or private, bonded or not.

Purpose of the law

1. Regulate the status, rights and liabilities of a warehousing contract

2. Protect those who acquire negotiable warehouse receipts by negotiation

3. Render title, possession of property in warehouses more easily convertible

4. Facilitate use of warehouse receipts as documents of title 5. Place a greater responsibility on the warehouseman

ACT NO. 2137 - THE WAREHOUSE RECEIPTS LAW I — THE ISSUE OF WAREHOUSE RECEIPTS

Section 1. Persons who may issue receipts. — Warehouse

receipts may be issued by any warehouseman.

Who may issue warehouse receipt

Only a warehouseman and his duly authorized officer can issue warehouse receipts, receipt not issued by a warehouseman is not a warehouse receipt even though in the form of a warehouse receipt.

Warehouse – the building or place where goods are deposited and stored for profit.



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Sec. 2. Form of receipts; essential terms. — Warehouse receipts need not be in any particular form but every such receipt must embody within its written or printed terms:

(a) The location of the warehouse where the goods are stored, (b) The date of the issue of the receipt, (c) The consecutive number of the receipt, (d) A statement whether the goods received will be delivered to the bearer, to a specified person or to a specified person or his order, (e) The rate of storage charges, (f) A description of the goods or of the packages containing them, (g) The signature of the warehouseman which may be made by his authorized agent, (h) If the receipt is issued for goods of which the warehouseman is owner, either solely or jointly or in common with others, the fact of such ownership, and (i) A statement of the amount of advances made and of liabilities incurred for which the warehouseman claims a lien. If the precise amount of such advances made or of such liabilities incurred is, at the time of the issue of, unknown to the warehouseman or to his agent who issues it, a statement of the fact that advances have been made or liabilities incurred and the purpose thereof is sufficient.

A warehouseman shall be liable to any person injured thereby for all damages caused by the omission from a negotiable receipt of any of the terms herein required.

Warehouse receipt

1. A written acknowledgement by a warehouseman that he has received and holds certain goods therein described in store for the person to whom it is issued

2. A simple written contract between the owner of the goods and the warehouseman to pay the compensation for that service

3. Bilateral contract; symbolical representation of the property

4. Not negotiable within the meaning of the Negotiable Instruments Law

Form and contents of the receipt

No special form, but these are required:

1. Location of warehouse – for the benefit of holders especially in case of warehouseman with more than one warehouse

2. Date of issue of receipt - prima facie date of when the contract of deposit was perfected

3. Consecutive number of receipt – to identify each receipt with the goods for which it was issued

4. Person to whom goods are deliverable – prima facie evidence of lawful entitlement to the possession of the goods

5. Rate of storage charges – consideration for the contract. In default, customary or reasonable compensation for services

6. Description of goods or packages – identification so that the identical thing delivered be returned upon the return of the warehouse receipt

7. Signature of warehouseman – best evidence of the receipt of goods

8. Warehouseman’s ownership or interest in goods – to prevent abuse where warehouseman issues receipts for his own goods

9. Statement of advances made and liabilities incurred – preserve the lien of the warehouseman over the goods

Effect or omission of any of the essential terms

1. Validity of receipt not affected 2. Warehouseman liable for damages (to those injured by his

omission (Wordson v. Davenport) 3. Negotiability of receipt not affected 4. Contract converted to ordinary deposit – law permissive

and directory (Gonzales v. Go Tiong and Luzon Surety)

Sec. 3. Form of receipts. — What terms may be inserted. — A warehouseman may insert in a receipt issued by him any other terms and conditions provided that such terms and conditions shall not:

(a) Be contrary to the provisions of this Act. (b) In any wise impair his obligation to exercise that degree of care

in the safe-keeping of the goods entrusted to him which is reasonably careful man would exercise in regard to similar goods of his own.

Terms that cannot be included in a warehouse receipt

1. Cannot contravene Art. 1306 2. Exemption from liability from misdelivery 3. Exemption from liability for negligence

Sec. 4. Definition of non-negotiable receipt. — A receipt in which it is stated that the goods received will be delivered to the depositor or to any other specified person, is a non-negotiable receipt.

Sec. 5. Definition of negotiable receipt. — A receipt in which it is stated that the goods received will be delivered to the bearer or to the order of any person named in such receipt is a negotiable receipt.

No provision shall be inserted in a negotiable receipt that it is non-negotiable. Such provision, if inserted shall be void.

Meaning if ―negotiable‖ under the Act

Only in the sense that in the passage of warehouse receipts through the channels of commerce, the law regards the property which they describe as following them (Vanett v. Reilly-Hertz Automobile Co).

Sec. 6. Duplicate receipts must be so marked. — When more than one negotiable receipt is issued for the same goods, the word "duplicate" shall be plainly placed upon the face of every such receipt, except the first one issued. A warehouseman shall be liable for all damages caused by his failure so to do to anyone who purchased the subsequent receipt for value supposing it to be an original, even though the purchase be after the delivery of the goods by the warehouseman to the holder of the original receipt.

Sec. 7. Failure to mark "non-negotiable." — A non-negotiable receipt shall have plainly placed upon its face by the warehouseman issuing it "non-negotiable," or "not negotiable." In case of the warehouseman's failure so to do, a holder of the receipt who purchased it for value supposing it to be negotiable, may, at his option, treat such receipt as imposing upon the warehouseman the same liabilities he would have incurred had the receipt been negotiable.

This section shall not apply, however, to letters, memoranda, or written acknowledgment of an informal character.

Application

Sec. 6 refers only to negotiable receipts; Sec. 7 refers only to non-negotiable receipts.

Effect of failure to mark ―negotiable‖ or ―non-negotiable‖

1. Negotiable – Failure to mark it does not render it non-negotiable if it contains words of negotiability

2. Non-negotiable – will be considered negotiable provided the holder purchased it for value believing it to be negotiable

Negotiability of warehouse receipts enlarged

Any receipt not marked non-negotiable will be considered negotiable provided the holder purchased it for value believing it to be negotiable.

Construction of warehouse receipts

Tendency is towards a liberal construction of the law in favor of bona fide holders of such receipts. But the rule does not apply to actions against any party to the transactions other than a warehouseman.

II — OBLIGATIONS AND RIGHTS OF WAREHOUSEMEN UPON THEIR RECEIPTS

Sec. 8. Obligation of warehousemen to deliver. — A warehouseman, in the absence of some lawful excuse provided by this Act, is bound to deliver the goods upon a demand made either by the holder of a receipt for the goods or by the depositor; if such demand is accompanied with:

(a) An offer to satisfy the warehouseman's lien; (b) An offer to surrender the receipt, if negotiable, with such indorsements as would be necessary for the negotiation of the receipt; and



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(c) A readiness and willingness to sign, when the goods are delivered, an acknowledgment that they have been delivered, if such signature is requested by the warehouseman.

In case the warehouseman refuses or fails to deliver the goods in compliance with a demand by the holder or depositor so accompanied, the burden shall be upon the warehouseman to establish the existence of a lawful excuse for such refusal.

Principal obligations of the warehouseman

Essentially a depositary with respect to the goods received and stored by him

1. Take care of the goods entrusted to his safekeeping (Sec. 21)

2. Deliver them to the holder of the receipt or the depositor provided Sec. 8 is complied with

Necessity of demand

Demand required unless evidently useless (Art. 1169[3]), in which case it can be dispensed with.

Offer to satisfy warehouseman’s lien

Warehouseman can refuse to deliver to enforce lien (Sec. 31) which is lost upon surrender of the goods (Sec. 29[a]). Offer to satisfy is required, but formal tender is not required when vain or useless.

Offer to surrender and sign negotiable receipt required for the protection of the warehouseman because the receipt represents the property (Sec. 11). Warehouseman is criminally liable if he delivers without receipt (Sec. 54).

1. Negotiable – demand to deliver be accompanied by offer to surrender

2. Non-negotiable – may be entitled to delivery without surrender of the receipt

Lawful excuses for refusal to deliver goods (Sec. 10, 16, 18, 21, 31, 36) But existence of a lawful excuse is an affirmative defense which the warehouseman must prove.

Sec. 9. Justification of warehouseman in delivering. — A warehouseman is justified in delivering the goods, subject to the provisions of the three following sections, to one who is:

(a) The person lawfully entitled to the possession of the goods, or his agent; (b) A person who is either himself entitled to delivery by the terms of a non-negotiable receipt issued for the goods, or who has written authority from the person so entitled either indorsed upon the receipt or written upon another paper; or (c) A person in possession of a negotiable receipt by the terms of which the goods are deliverable to him or order, or to bearer, or which has been indorsed to him or in blank by the person to whom delivery was promised by the terms of the receipt or by his mediate or immediate indorser.

Persons to whom goods must be delivered

1. Person lawfully entitled to possession of goods or his agent

2. Person entitled to delivery under a non-negotiable receipt or with written authority

3. Person in possession of a negotiable receipt

Sec. 10. Warehouseman's liability for misdelivery. — Where a warehouseman delivers the goods to one who is not in fact lawfully entitled to the possession of them, the warehouseman shall be liable as for conversion to all having a right of property or possession in the goods if he delivered the goods otherwise than as authorized by subdivisions (b) and (c) of the preceding section, and though he delivered the goods as authorized by said subdivisions, he shall be so liable, if prior to such delivery he had either:

(a) Been requested, by or on behalf of the person lawfully entitled to a right of property or possession in the goods, not to make such deliver; or (b) Had information that the delivery about to be made was to one not lawfully entitled to the possession of the goods.

Warehouseman’s liability for misdelivery

1. Liability similar to a bank paying for a forged check – the duty rests on the warehouseman to devise means by which deception can be avoided

2. Liability as for conversion –unauthorized assumption or exercise of right of ownership over goods belonging to another

Sec. 11. Negotiable receipt must be cancelled when goods delivered. — Except as provided in section thirty-six, where a warehouseman delivers goods for which he had issued a negotiable receipt, the negotiation of which would transfer the right to the possession of the goods, and fails to take up and cancel the receipt, he shall be liable to anyone who purchases for value in good faith such receipt, for failure to deliver the goods to him, whether such purchaser acquired title to the receipt before or after the delivery of the goods by the warehouseman.

Sec. 12. Negotiable receipts must be cancelled or marked when part of goods delivered. — Except as provided in section thirty-six, where a warehouseman delivers part of the goods for which he had issued a negotiable receipt and fails either to take up and cancel such receipt or to place plainly upon it a statement of what goods or packages have been delivered, he shall be liable to anyone who purchases for value in good faith such receipt, for failure to deliver all the goods specified in the receipt, whether such purchaser acquired title to the receipt before or after the delivery of any portion of the goods by the warehouseman.

Cancellation of receipts on delivery of goods

Not applicable to non-negotiable receipts because there is no necessity for surrender or cancellation prior to delivery.

Sec. 13. Altered receipts. — The alteration of a receipt shall not excuse the warehouseman who issued it from any liability if such alteration was:

(a) Immaterial, (b) Authorized, or (c) Made without fraudulent intent.

If the alteration was authorized, the warehouseman shall be liable according to the terms of the receipt as altered. If the alteration was unauthorized but made without fraudulent intent, the warehouseman shall be liable according to the terms of the receipt as they were before alteration.

Material and fraudulent alteration of a receipt shall not excuse the warehouseman who issued it from liability to deliver according to the terms of the receipt as originally issued, the goods for which it was issued but shall excuse him from any other liability to the person who made the alteration and to any person who took with notice of the alteration. Any purchaser of the receipt for value without notice of the alteration shall acquire the same rights against the warehouseman which such purchaser would have acquired if the receipt had not been altered at the time of purchase.

Effects of alteration on liability of warehouseman

1. Alteration immaterial – warehouseman liable on the altered receipt according to its original tenor

2. Alteration material – if authorized, warehouseman liable according to terms of the receipt altered

3. Material alteration innocently made – though unauthorized, warehouseman liable according to its original tenor

4. Material alteration fraudulently made – liable according to original tenor to purchaser for value without notice, and even to the alterer and subsequent purchasers with notice (as regards the last two, liability limited to delivery)

Bona fide owner acquires no right to the goods under a negotiable receipt which has been lost, stolen or endorsement forged

Sec. 14. Lost or destroyed receipts. — Where a negotiable receipt has been lost or destroyed, a court of competent jurisdiction may order the delivery of the goods upon satisfactory proof of such loss or destruction and upon the giving of a bond with sufficient sureties to be approved by the court to protect the warehouseman from any liability or expense, which he or any person injured by such delivery may incur by reason of the original receipt remaining outstanding. The court may also in its discretion order the payment of the warehouseman's reasonable costs and counsel fees.



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The delivery of the goods under an order of the court as provided in this section, shall not relieve the warehouseman from liability to a person to whom the negotiable receipt has been or shall be negotiated for value without notice of the proceedings or of the delivery of the goods.

Liability of warehouseman in case of lost or destroyed receipts

Under Sec. 8 and 11, the warehouseman is not liable for non-delivery without the surrender of the receipt.

Court may order delivery only:

1. Upon proof of the loss or destruction of the receipt 2. Upon the giving of a bond with sufficient sureties to be

approved by the court.

Sec. 15. Effect of duplicate receipts. — A receipt upon the face of which the word "duplicate" is plainly placed is a representation and warranty by the warehouseman that such receipt is an accurate copy of an original receipt properly issued and uncancelled at the date of the issue of the duplicate, but shall impose upon him no other liability.

Liability of warehouseman as to duplicate is only as to breach of this warranty

Warehouseman warrants:

1. Duplicate is an accurate copy 2. Original receipt is uncancelled at the date of the issue of

the duplicate

Sec. 16. Warehouseman cannot set up title in himself. — No title or right to the possession of the goods, on the part of the warehouseman, unless such title or right is derived directly or indirectly from a transfer made by the depositor at the time of or subsequent to the deposit for storage, or from the warehouseman's lien, shall excuse the warehouseman from liability for refusing to deliver the goods according to the terms of the receipt.

Ownership not a defense for refusal to deliver

Based on the doctrine of estoppel

1. Directly or indirectly from a transfer made by depositor at the time of the deposit for storage or subsequent thereto

2. From the warehouseman’s lien

Sec. 17. Interpleader of adverse claimants. — If more than one person claims the title or possession of the goods, the warehouseman may, either as a defense to an action brought against him for non-delivery of the goods or as an original suit, whichever is appropriate, require all known claimants to interplead.

Sec. 18. Warehouseman has reasonable time to determine validity of claims. — If someone other than the depositor or person claiming under him has a claim to the title or possession of goods, and the warehouseman has information of such claim, the warehouseman shall be excused from liability for refusing to deliver the goods, either to the depositor or person claiming under him or to the adverse claimant until the warehouseman has had a reasonable time to ascertain the validity of the adverse claim or to bring legal proceedings to compel claimants to interplead.

Duty of warehouseman where there are several claimants

1. Warehouseman must determine within a reasonable time the validity of the conflicting claims (Sec. 18) and

2. Deliver to the person entitled to the possession

But he is not excused from liability in case he makes a mistake (Sec. 10), so instead, he should file an interpleader (Rule 62) so he would be relieved from liability in delivering the goods to the person the court finds to be with a better right.

Liability of warehouseman to rightful claimant

1. No interpleader – liable for refusal to deliver 2. No interpleader and no investigation – at the lapse of a

reasonable time, warehouseman is guilty of conversion

Not applicable to cases where warehouseman makes a claim to the goods.

Sec. 19. Adverse title is no defense except as above provided. — Except as provided in the two preceding sections and in sections nine and thirty-six, no right or title of a third person shall be a defense to an action brought by the depositor or person claiming under him against the warehouseman for failure to deliver the goods according to the terms of the receipt.

Adverse title of third person not a defense for refusal to deliver

1. Cannot set up title in himself (Sec. 16) 2. Cannot set up an adverse title in another for failure to

deliver on demand

Sec. 20. Liability for non-existence or misdescription of goods. — A warehouseman shall be liable to the holder of a receipt for damages caused by the non-existence of the goods or by the failure of the goods to correspond with the description thereof in the receipt at the time of its issue. If, however, the goods are described in a receipt merely by a statement of marks or labels upon them or upon packages containing them or by a statement that the goods are said to be goods of a certain kind or that the packages containing the goods are said to contain goods of a certain kind or by words of like purport, such statements, if true, shall not make liable the warehouseman issuing the receipt, although the goods are not of the kind which the marks or labels upon them indicate or of the kind they were said to be by the depositor.

Liability of warehouseman for non-existence or misdescription of goods

Warehouseman under obligation to return the identical thing, estopped against holder.

Anyone at all familiar with the business of a warehouseman knows that he could not transact business if he were required to examine the contents of each package, barrel or box of merchandise which was delivered and so packed at to cover and conceal the real nature of the goods (Dean v. Driggs).

Sec. 21. Liability for care of goods. — A warehouseman shall be liable for any loss or injury to the goods caused by his failure to exercise such care in regard to them as reasonably careful owner of similar goods would exercise, but he shall not be liable, in the absence of an agreement to the contrary, for any loss or injury to the goods which could not have been avoided by the exercise of such care.

Liability of warehouseman for loss due to lack of care

Diligence of a good father of a family (Art. 1163) – care a reasonably careful owner would exercise over similar goods of his own.

1. Warehouseman not liable for loss or injury to the goods which could not have been avoided by the exercise of such care

2. Ordinary or reasonable care depends upon the circumstances a. Character or value of the property b. Character and location of warehouse

3. Liability may be limited to an agreed value in case of loss, but not for negligence (Sec. 3)

Sec. 22. Goods must be kept separate. — Except as provided in the following section, a warehouseman shall keep the goods so far separate from goods of other depositors and from other goods of the same depositor for which a separate receipt has been issued, as to permit at all times the identification and redelivery of the goods deposited.

Sec. 23. Fungible goods may be commingled if warehouseman authorized. — If authorized by agreement or by custom, a warehouseman may mingle fungible goods with other goods of the same kind and grade. In such case, the various depositors of the mingled goods shall own the entire mass in common and each depositor shall be entitled to such portion thereof as the amount deposited by him bears to the whole.

Sec. 24. Liability of warehouseman to depositors of commingled goods. — The warehouseman shall be severally liable to each depositor for the care and redelivery of his share of such mass to the same extent and under the same circumstances as if the goods had been kept separate.



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Commingling of deposited goods

Intended for the benefit of holders of the receipts. Under Art. 1976, unless there is stipulation to the contrary, the depositary may commingle grain or other articles of the same kind and quality.

1. General rule is not to commingle (Sec. 22) 2. In fungible goods (Sec. 58), warehouseman may

commingle if authorized by agreement or custom (Sec. 23) 3. Different owners become co-owners of the whole mass

(Sec. 24)

Sec. 25. Attachment or levy upon goods for which a negotiable receipt has been issued. — If goods are delivered to a warehouseman by the owner or by a person whose act in conveying the title to them to a purchaser in good faith for value would bind the owner, and a negotiable receipt is issued for them, they cannot thereafter, while in the possession of the warehouseman, be attached by garnishment or otherwise, or be levied upon under an execution unless the receipt be first surrendered to the warehouseman or its negotiation enjoined. The warehouseman shall in no case be compelled to deliver up the actual possession of the goods until the receipt is surrendered to him or impounded by the court.

Attachment or levy of negotiable receipt only if:

1. Document be first surrendered 2. Negotiation is enjoined 3. Document is impounded by the court

Delivery of goods covered by an outstanding negotiable receipt cannot be done without surrender of receipt or impounding by the court – to protect warehouseman who could be made liable to purchasers for value (Art. 1519, Sec. 25).

Sec. 25 does not apply when depositor not owner. The rights of attaching creditors cannot be defeated by the issuance of a negotiable receipt of title thereafter.

Sec. 26. Creditor's remedies to reach negotiable receipts. — A creditor whose debtor is the owner of a negotiable receipt shall be entitled to such aid from courts of appropriate jurisdiction, by injunction and otherwise, in attaching such receipt or in satisfying the claim by means thereof as is allowed at law or in equity in these islands in regard to property which can not readily be attached or levied upon by ordinary legal process.

Remedies of creditor or owner of negotiable receipt is to attach the negotiable receipt and not the property (Art. 1520, Sec. 26, 32, 35). This gives courts full power to aid by injunction.

Sec. 27. What claims are included in the warehouseman's lien. — Subject to the provisions of section thirty, a warehouseman shall have a lien on goods deposited or on the proceeds thereof in his hands, for all lawful charges for storage and preservation of the goods; also for all lawful claims for money advanced, interest, insurance, transportation, labor, weighing, coopering and other charges and expenses in relation to such goods, also for all reasonable charges and expenses for notice, and advertisements of sale, and for sale of the goods where default had been made in satisfying the warehouseman's lien.

Extent of warehouseman’s lien

Security for payment and exists for the benefit of warehouseman (Sec. 58, not for casual bailee).

Sec. 28. Against what property the lien may be enforced. — Subject to the provisions of section thirty, a warehouseman's lien may be enforced:

(a) Against all goods, whenever deposited, belonging to the person who is liable as debtor for the claims in regard to which the lien is asserted, and (b) Against all goods belonging to others which have been deposited at any time by the person who is liable as debtor for the claims in regard to which the lien is asserted if such person had been so entrusted with the possession of goods that a pledge of the same by him at the time of the deposit to one who took the goods in good faith for value would have been valid.

Goods subject to lien

1. Goods belonging to depositor or his principal – subject a. Goods of depositor b. Against goods of other persons stored by depositor

2. Goods stored in fraud of true owner’s rights – not subject

Sec. 29. How the lien may be lost. — A warehouseman loses his lien upon goods:

(a) By surrendering possession thereof, or (b) By refusing to deliver the goods when a demand is made with which he is bound to comply under the provisions of this Act.

Loss and waiver of lien upon goods

1. By surrendering – presumed that the lien has been waived or abandoned where the warehouseman permits a depositor to remove the goods a. Involuntarily parting with possession does not result

in loss of lien b. After surrender, lien cannot be enforced on goods

covered by another receipt 2. Wrongfully refusing to deliver goods upon demand under

Sec. 8

Note that the obligation to pay the warehousing fees and charges which continues to be a personal liability.

Valid reasons for refusing to deliver goods

1. Holder of the receipt does not satisfy the conditions of Sec. 8

2. Warehouseman has legal title under Sec. 18 a. Title or right being derived directly or indirectly from a

transfer made by the depositor at the time of or subsequent to the deposit for storage

b. From a warehouseman’s lien 3. Warehouseman has legally set up the title or right of third

persons as lawful defense a. Third person has requested warehouseman not to

make delivery (Sec. 10) file interpleader instead (Sec. 17)

b. Information that return would be made to one not lawfully entitled, reasonable time to ascertain (Sec. 18)

c. Goods have been sold to third persons to satisfy a warehouseman’s lien or perishable or hazardous nature

4. Warehouseman’s lien (Sec. 31) 5. Failure was not due to fault of the warehouseman (prior to

demand and refusal) a. Stolen b. Destroyed by fire, flood, etc. without any negligence

on his part c. Taken by mistake by a third person without the

knowledge or implied assent of the warehouseman

Sec. 30. Negotiable receipt must state charges for which the lien is claimed. — If a negotiable receipt is issued for goods, the warehouseman shall have no lien thereon except for charges for storage of goods subsequent to the date of the receipt unless the receipt expressly enumerated other charges for which a lien is claimed. In such case, there shall be a lien for the charges enumerated so far as they are within the terms of section twenty-seven although the amount of the charges so enumerated is not stated in the receipt.

Lien where receipt negotiable

Lien exists only for charges for storage and preservation and other charges enumerated in the receipt as long as written with the terms of Sec. 27. As to claims not specified, warehouseman shares pro rata after deducting the charges for storage.

Sec. 31. Warehouseman need not deliver until lien is satisfied. — A warehouseman having a lien valid against the person demanding the goods may refuse to deliver the goods to him until the lien is satisfied.

Sec. 32. Warehouseman's lien does not preclude other remedies. — Whether a warehouseman has or has not a lien upon the goods, he is entitled to all remedies allowed by law to a creditor against a debtor for the collection from the depositor of all charges



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and advances which the depositor has expressly or impliedly contracted with the warehouseman to pay.

Sec. 33. Satisfaction of lien by sale. — A warehouseman's lien for a claim which has become due may be satisfied as follows:

(a) An itemized statement of the warehouseman's claim, showing the sum due at the time of the notice and the date or dates when it becomes due, (b) A brief description of the goods against which the lien exists, (c) A demand that the amount of the claim as stated in the notice of such further claim as shall accrue, shall be paid on or before a day mentioned, not less than ten days from the delivery of the notice if it is personally delivered, or from the time when the notice shall reach its destination, according to the due course of post, if the notice is sent by mail, (d) A statement that unless the claim is paid within the time specified, the goods will be advertised for sale and sold by auction at a specified time and place.

In accordance with the terms of a notice so given, a sale of the goods by auction may be had to satisfy any valid claim of the warehouseman for which he has a lien on the goods. The sale shall be had in the place where the lien was acquired, or, if such place is manifestly unsuitable for the purpose of the claim specified in the notice to the depositor has elapsed, and advertisement of the sale, describing the goods to be sold, and stating the name of the owner or person on whose account the goods are held, and the time and place of the sale, shall be published once a week for two consecutive weeks in a newspaper published in the place where such sale is to be held. The sale shall not be held less than fifteen days from the time of the first publication. If there is no newspaper published in such place, the advertisement shall be posted at least ten days before such sale in not less than six conspicuous places therein.

From the proceeds of such sale, the warehouseman shall satisfy his lien including the reasonable charges of notice, advertisement and sale. The balance, if any, of such proceeds shall be held by the warehouseman and delivered on demand to the person to whom he would have been bound to deliver or justified in delivering goods.

At any time before the goods are so sold, any person claiming a right of property or possession therein may pay the warehouseman the amount necessary to satisfy his lien and to pay the reasonable expenses and liabilities incurred in serving notices and advertising and preparing for the sale up to the time of such payment. The warehouseman shall deliver the goods to the person making payment if he is a person entitled, under the provision of this Act, to the possession of the goods on payment of charges thereon. Otherwise, the warehouseman shall retain the possession of the goods according to the terms of the original contract of deposit.

Sec. 34. Perishable and hazardous goods. — If goods are of a perishable nature, or by keeping will deteriorate greatly in value, or, by their order, leakage, inflammability, or explosive nature, will be liable to injure other property , the warehouseman may give such notice to the owner or to the person in whose names the goods are stored, as is reasonable and possible under the circumstances, to satisfy the lien upon such goods and to remove them from the warehouse and in the event of the failure of such person to satisfy the lien and to receive the goods within the time so specified, the warehouseman may sell the goods at public or private sale without advertising. If the warehouseman, after a reasonable effort, is unable to sell such goods, he may dispose of them in any lawful manner and shall incur no liability by reason thereof.

The proceeds of any sale made under the terms of this section shall be disposed of in the same way as the proceeds of sales made under the terms of the preceding section.

Sec. 35. Other methods of enforcing lien. — The remedy for enforcing a lien herein provided does not preclude any other remedies allowed by law for the enforcement of a lien against personal property nor bar the right to recover so much of the warehouseman's claim as shall not be paid by the proceeds of the sale of the property.

Sec. 36. Effect of sale. — After goods have been lawfully sold to satisfy a warehouseman's lien, or have been lawfully sold or disposed of because of their perishable or hazardous nature, the warehouseman shall not thereafter be liable for failure to deliver the goods to the depositor or owner of the goods or to a holder of the receipt given for the goods when they were deposited, even if such receipt be negotiable.

Enforcement of warehouseman’s lien

1. Refusing to deliver until lien is satisfied 2. Causing the extrajudicial sale and applying the proceeds 3. Filing a civil action for the collection of unpaid charges or

by way of counterclaim

Effect of sale of goods

1. Warehouseman not liable for non-delivery even if receipt be negotiated (Sec. 36)

2. Where sale made without publication and before time specified, sale is void and purchases acquires no title (Eastern Paper Mills v. Republic Warehousing)

Acts for which warehouseman is liable

1. Failure to stamp duplicate on a negotiable receipt (Sec. 6) 2. Failure to place non-negotiable or not negotiable in a non-

negotiable receipt (Sec. 7) 3. Misdelivery of goods (Sec. 10) 4. Failure to effect cancellation of a negotiable receipt upon

delivery of goods (Sec. 11) 5. Issuing receipt for non-existing goods or misdescribed

goods (Sec. 20) 6. Failure to take care of goods (Sec. 21) 7. Failure to give notice in case of sale of goods to satisfy his

lien (Sec. 33) or because the goods are perishable or hazardous (Sec. 34)

III — NEGOTIATION AND TRANSFER OF RECEIPTS

Sec. 37. Negotiation of negotiable receipt of delivery. — A negotiable receipt may be negotiated by delivery:

(a) Where, by terms of the receipt, the warehouseman undertakes to deliver the goods to the bearer, or (b) Where, by the terms of the receipt, the warehouseman undertakes to deliver the goods to the order of a specified person, and such person or a subsequent indorsee of the receipt has indorsed it in blank or to bearer.

Where, by the terms of a negotiable receipt, the goods are deliverable to bearer or where a negotiable receipt has been indorsed in blank or to bearer, any holder may indorse the same to himself or to any other specified person, and, in such case, the receipt shall thereafter be negotiated only by the indorsement of such indorsee.

Negotiation of negotiable receipt same as negotiation of promissory notes and bills of exchange under the Negotiable Instruments Law.

1. Negotiable by delivery of the goods are deliverable to bearer are indorsed in blank or to the bearer by the person to whose order the goods are deliverable

2. If specially indorsed, it becomes an order receipt and negotiation can only be effected by indorsement of the indorsee

Sec. 38. Negotiation of negotiable receipt by indorsement. — A negotiable receipt may be negotiated by the indorsement of the person to whose order the goods are, by the terms of the receipt, deliverable. Such indorsement may be in blank, to bearer or to a specified person. If indorsed to a specified person, it may be again negotiated by the indorsement of such person in blank, to bearer or to another specified person. Subsequent negotiation may be made in like manner.

Negotiation of negotiable receipt by indorsement

1. If indorsed in blank or to bearer, document becomes negotiable by delivery

2. If indorsed to a specified person, may be negotiated again by such person in blank, to bearer or to another specified person

Sec. 39. Transfer of receipt. — A receipt which is not in such form that it can be negotiated by delivery may be transferred by the holder by delivery to a purchaser or donee.

A non-negotiable receipt cannot be negotiated, and the indorsement of such a receipt gives the transferee no additional right.



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Transfer of non-negotiable receipt See Secs 42, 43 for the right of a person to whom an order receipt is transferred by delivery without indorsement.

Although not negotiable, receipt can be transferred or assigned by delivery.

Advantages of a negotiable warehouse receipt

1. Protects a purchaser for value and in good faith (Sec. 41) 2. Goods cannot be garnished or levied upon without

surrender, impounding or enjoinment (Sec. 25) 3. Holder acquires direct obligation of warehouseman to hold

possession of goods without notice (Sec. 41) 4. Goods covered not subject to seller’s lien or stoppage in

transitu (Sec. 49)

Sec. 40. Who may negotiate a receipt. — A negotiable receipt may be negotiated:

(a) By the owner thereof, or (b) By any person to whom the possession or custody of the receipt has been entrusted by the owner, if, by the terms of the receipt, the warehouseman undertakes to deliver the goods to the order of the person to whom the possession or custody of the receipt has been entrusted, or if, at the time of such entrusting, the receipt is in such form that it may be negotiated by delivery.

Sec. 41. Rights of person to whom a receipt has been negotiated. — A person to whom a negotiable receipt has been duly negotiated acquires thereby:

(a) Such title to the goods as the person negotiating the receipt to him had or had ability to convey to a purchaser in good faith for value, and also such title to the goods as the depositor or person to whose order the goods were to be delivered by the terms of the receipt had or had ability to convey to a purchaser in good faith for value, and (b) The direct obligation of the warehouseman to hold possession of the goods for him according to the terms of the receipt as fully as if the warehouseman and contracted directly with him.

Rights of person to whom receipt has been negotiated

Applies to (1) delivery in case of receipt to bearer, or (2) indorsement and delivery in case of receipt to order.

1. Title of the person negotiating the receipt over the goods covered

2. Title of the person to whose order by terms of the receipt to goods were to be delivered

3. Direct obligation of the warehouseman to hold possession of the goods for him.

One who purchases from thief acquires no title for thief had no title over goods, but he acquires good title if owner is estopped. (Art. 1513)

Sec. 42. Rights of person to whom receipt has been transferred. — A person to whom a receipt has been transferred but not negotiated acquires thereby, as against the transferor, the title of the goods subject to the terms of any agreement with the transferor.

If the receipt is non-negotiable, such person also acquires the right to notify the warehouseman of the transfer to him of such receipt and thereby to acquire the direct obligation of the warehouseman to hold possession of the goods for him according to the terms of the receipt.

Prior to the notification of the warehouseman by the transferor or transferee of a non-negotiable receipt, the title of the transferee to the goods and the right to acquire the obligation of the warehouseman may be defeated by the levy of an attachment or execution upon the goods by a creditor of the transferor or by a notification to the warehouseman by the transferor or a subsequent purchaser from the transferor of a subsequent sale of the goods by the transferor.

Rights of person to whom receipt has been transferred

1. Title to the goods as against the transferor 2. Right to notify warehouseman of the transfer 3. Right to acquire the obligation of the warehouseman to

hold the goods for him.

Attachment of goods covered by receipt

1. Receipt non-negotiable – Transfer does not effect the delivery of goods

2. Receipt negotiable – cannot be attached or levied until surrender, impounding, or enjoinment

Sec. 43. Transfer of negotiable receipt without indorsement. — Where a negotiable receipt is transferred for value by delivery and the indorsement of the transferor is essential for negotiation, the transferee acquires a right against the transferor to compel him to indorse the receipt unless a contrary intention appears. The negotiation shall take effect as of the time when the indorsement is actually made.

Rights of transferee of a negotiable receipt when an order receipt was delivered without indorsement

1. Right to the goods as against the transferor (Sec. 42) 2. Right to compel transferor to indorse the receipt except if

intention is merely to transfer

Rule where receipt subsequently indorsed

Negotiation is complete only at the time of indorsement. So if purchaser was aware of the defect at such time, he cannot be considered in good faith even when he had no notice at the time he bought the receipt (Art. 1515, Sec. 43).

Ownership of goods covered by receipt negotiated or transferred

1. Indorsee or transferee – should be regarded as owner of the goods covered thereof

2. Indorser or transferor – when transaction is not sale but mortgage or pledge, ownership is retained

3. Innocent third persons – indorsee-pledgee of a warehouse receipt is considered the owner of the goods covered by it whenever necessary for their protection

Sec. 44. Warranties of a sale of receipt. — A person who, for value, negotiates or transfers a receipt by indorsement or delivery, including one who assigns for value a claim secured by a receipt, unless a contrary intention appears, warrants:

(a) That the receipt is genuine, (b) That he has a legal right to negotiate or transfer it, (c) That he has knowledge of no fact which would impair the validity or worth of the receipt, and (d) That he has a right to transfer the title to the goods and that the goods are merchantable or fit for a particular purpose whenever such warranties would have been implied, if the contract of the parties had been to transfer without a receipt of the goods represented thereby.

Warranties on sale of receipt

It is the duty of every indorsee to know that all previous indorsements are genuine, otherwise, he will acquire a valid title to the instruments.

Sec. 45. Indorser not a guarantor. — The indorsement of a receipt shall not make the indorser liable for any failure on the part of the warehouseman or previous indorsers of the receipt to fulfill their respective obligations.

Liability of person negotiating or transferring receipt

Indorsement of negotiable instrument has double effect: (1) conveyance of the instrument and (2) contract of guaranty. Indorsement of warehouse receipt has only conveyance as an effect.

Sec. 46. No warranty implied from accepting payment of a debt. — A mortgagee, pledgee, or holder for security of a receipt who, in good faith, demands or receives payment of the debt for which such receipt is security, whether from a party to a draft drawn for such debt or from any other person, shall not, by so doing, be deemed to represent or to warrant the genuineness of such receipt or the quantity or quality of the goods therein described.

Sec. 47. When negotiation not impaired by fraud, mistake or duress. — The validity of the negotiation of a receipt is not impaired by the fact that such negotiation was a breach of duty on the part of the person making the negotiation or by the fact that the owner of the receipt was induced by fraud, mistake or duress or to entrust the



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possession or custody of the receipt to such person, if the person to whom the receipt was negotiated or a person to whom the receipt was subsequently negotiated paid value therefor, without notice of the breach of duty, or fraud, mistake or duress.

Validity of negotiation as against real owner

1. Receipt acquired from owner’s agent – bona fide purchaser acquires title when purchased from agent within actual or apparent scope of his authority

2. Lost or stolen receipt – bona fide transferee acquires no title from the thief or finder

Sec. 48. Subsequent negotiation. — Where a person having sold, mortgaged, or pledged goods which are in warehouse and for which a negotiable receipt has been issued, or having sold, mortgaged, or pledged the negotiable receipt representing such goods, continues in possession of the negotiable receipt, the subsequent negotiation thereof by the person under any sale or other disposition thereof to any person receiving the same in good faith, for value and without notice of the previous sale, mortgage or pledge, shall have the same effect as if the first purchaser of the goods or receipt had expressly authorized the subsequent negotiation.

Effect of subsequent negotiation by seller

Subsequent purchaser must have taken the receipt in good faith and for value in order to acquire a better right.

Sec. 49. Negotiation defeats vendor's lien. — Where a negotiable receipt has been issued for goods, no seller's lien or right of stoppage in transitu shall defeat the rights of any purchaser for value in good faith to whom such receipt has been negotiated, whether such negotiation be prior or subsequent to the notification to the warehouseman who issued such receipt of the seller's claim to a lien or right of stoppage in transitu. Nor shall the warehouseman be obliged to deliver or justified in delivering the goods to an unpaid seller unless the receipt is first surrendered for cancellation.

Indorsee’s right superior to vendor’s lien

Warehouseman not obliged to deliver goods to an unpaid seller without surrender of receipt (sec. 49, 54).

IV — CRIMINAL OFFENSES

Sec. 50. Issue of receipt for goods not received. — A warehouseman, or an officer, agent, or servant of a warehouseman who issues or aids in issuing a receipt knowing that the goods for which such receipt is issued have not been actually received by such warehouseman, or are not under his actual control at the time of issuing such receipt, shall be guilty of a crime, and, upon conviction, shall be punished for each offense by imprisonment not exceeding five years, or by a fine not exceeding ten thousand pesos, or both.

Possession of goods by warehouseman

It is an offense to issue receipt unless the property is actually in storage – in warehouseman’s possession, stored in his warehouse, under his care and control at the time the receipt is issued.

Sec. 51. Issue of receipt containing false statement. — A warehouseman, or any officer, agent or servant of a warehouseman who fraudulently issues or aids in fraudulently issuing a receipt for goods knowing that it contains any false statement, shall be guilty of a crime, and upon conviction, shall be punished for each offense by imprisonment not exceeding one year, or by a fine not exceeding two thousand pesos, or by both.

Sec. 52. Issue of duplicate receipt not so marked. — A warehouse, or any officer, agent, or servant of a warehouseman who issues or aids in issuing a duplicate or additional negotiable receipt for goods knowing that a former negotiable receipt for the same goods or any part of them is outstanding and uncancelled, without plainly placing upon the face thereof the word "duplicate" except in the case of a lost or destroyed receipt after proceedings are provided for in section fourteen, shall be guilty of a crime, and, upon conviction, shall be punished for each offense by imprisonment not exceeding five years, or by a fine not exceeding ten thousand pesos, or by both.

Sec. 53. Issue for warehouseman's goods or receipts which do not state that fact. — Where they are deposited with or held by a

warehouseman goods of which he is owner, either solely or jointly or in common with others, such warehouseman, or any of his officers, agents, or servants who, knowing this ownership, issues or aids in issuing a negotiable receipt for such goods which does not state such ownership, shall be guilty of a crime, and, upon conviction, shall be punished for each offense by imprisonment not exceeding one year, or by a fine not exceeding two thousand pesos, or by both.

Sec. 54. Delivery of goods without obtaining negotiable receipt. — A warehouseman, or any officer, agent, or servant of a warehouseman, who delivers goods out of the possession of such warehouseman, knowing that a negotiable receipt the negotiation of which would transfer the right to the possession of such goods is outstanding and uncancelled, without obtaining the possession of such receipt at or before the time of such delivery, shall, except in the cases provided for in sections fourteen and thirty-six, be found guilty of a crime, and, upon conviction, shall be punished for each offense by imprisonment not exceeding one year, or by a fine not exceeding two thousand pesos, or by both.

Sec. 55. Negotiation of receipt for mortgaged goods. — Any person who deposits goods to which he has no title, or upon which there is a lien or mortgage, and who takes for such goods a negotiable receipt which he afterwards negotiates for value with intent to deceive and without disclosing his want of title or the existence of the lien or mortgage, shall be guilty of a crime, and, upon conviction, shall be punished for each offense by imprisonment not exceeding one year, or by a fine not exceeding two thousand pesos, or by both.

Offenses criminally punishable by the Act Secs. 50-55

Ingredients of offense punished by Section 54

1. Delivery of goods out of the possession of the warehouseman

2. Person causing delivery has knowledge that a negotiable receipt for goods is outstanding and uncancelled

3. Person causing the delivery does so without obtaining possession of the receipt at or before the time of delivery

Nature of criminal responsibility under Section 54

1. Violation by the warehouseman himself – no violation if accused had nothing to do with the withdrawal of goods in question

2. Violation by some other person – persons other than the warehouseman may be held liable for violations thereof (individual, not attributive)

3. Possibility that right to goods sold has been transferred to a third person – not necessary that the right of possession to such stored goods has been transferred to a third person

V — INTERPRETATION

Sec. 56. Case not provided for in Act. — Any case not provided for in this Act shall be governed by the provisions of existing legislation, or in default thereof, by the rule of the law merchant.

History and meaning of law merchant

Originated in the unwritten customs of merchants in different commercial countries and consists of usages of trade in different departments of commerce proved in court and ratified by legal decisions.

Sec. 57. Name of Act. — This Act may be cited as the Warehouse Receipts Act.

Sec. 58. Definitions. — (a) In this Act, unless the content or subject matter otherwise requires:

"Action" includes counterclaim, set-off, and suits in equity as provided by law in these islands. "Delivery" means voluntary transfer of possession from one person to another. "Fungible goods" means goods of which any unit is, from its nature by mercantile custom, treated as the equivalent of any other unit. "Goods" means chattels or merchandise in storage or which has been or is about to be stored. "Holder" of a receipt means a person who has both actual possession of such receipt and a right of property therein. "Order" means an order by indorsement on the receipt. "Owner" does not include mortgagee. "Person" includes a corporation or partnership or two or more



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persons having a joint or common interest. To "purchase" includes to take as mortgagee or as pledgee. "Receipt" means a warehouse receipt. "Value" is any consideration sufficient to support a simple contract. An antecedent or pre-existing obligation, whether for money or not, constitutes value where a receipt is taken either in satisfaction thereof or as security therefor. "Warehouseman" means a person lawfully engaged in the business of storing goods for profit.

(b) A thing is done "in good faith" within the meaning of this Act when it is in fact done honestly, whether it be done negligently or not.

Sec. 59. Application of Act. — The provisions of this Act do not apply to receipts made and delivered prior to the taking effect hereof.

Sec. 60. Repeals. — All acts and laws and parts thereof inconsistent with this Act are hereby repealed.

Sec. 61. Time when Act takes effect. — This Act shall take effect ninety days after its publication in the Official Gazette of the Philippines shall have been completed.

Enacted: February 5, 1912

Case:

Philippine National Bank v. Se, et al., G.R. No. 119231, April 18, 1996.

The unconditional presentment of the receipts for payment carried with it the admissions of the existence and validity of the terms, conditions and stipulations written on the face of the warehouse receipts, including the unqualified recognition of the payment of the warehouseman’s lien for storage fees and preservation expenses. Petitioner is in estoppel in disclaiming liability for the payment of storage fees due the private respondents as warehouseman while claiming to be entitled to the sugar stocks covered by the subject Warehouse Receipts on the basis of which it anchors its claim for payment or delivery of the sugar stocks.

While the PNB is entitled to the stocks of sugar as the endorsee of the quedans, delivery to it shall be effected only upon payment of the storage fees. Imperative is the right of the warehouseman to demand payment of his lien at this juncture, because, in accordance with Section 29 of the Warehouse Receipts Law, the warehouseman loses his lien upon goods by surrendering possession thereof. In other words, the lien may be lost where the warehouseman surrenders the possession of the goods without requiring payment of his lien, because a warehouseman’s lien is possessory in nature.

ACT NO. 3893 - AN ACT TO REGULATE THE BUSINESS OF RECEIVING RICE FOR STORAGE, GIVING THE DIRECTOR OF

COMMERCE AND INDUSTRY THE DUTY TO ENFORCE IF, PROVIDING PENALTIES FOR VIOLATION OF THE PROVISIONS, EXEMPTING COOPERATIVE MARKETING ASSOCIATIONS OF

RICE PRODUCERS FROM APPLICATION THEREOF, REPEALING ACT NUMBERED THIRTY-FOUR HUNDRED AND

SIXTY-NINE AND FOR OTHER PURPOSES

Section 1. This Act shall be known by the short title of "BONDED WAREHOUSE ACT."

Sec. 2. As used in this Act, the term "warehouse" shall be deemed to mean every building, structure, or other protected enclosure in which rice is kept for storage. The term "rice" shall be deemed to mean either palay in bundles, or in grains, or clean rice, or both. "Person" including corporation or partnership or two or more persons having joint or common interest; "warehouseman" means a person engaged in the business receiving rice for storage; and "receipt" means any receipt issued by a warehouseman for rice delivered to him. For the purpose of this Act, the business of receiving rice for storage shall include (1) any contract or transaction wherein the warehouseman is obligated to return the very same rice delivered to him or pay its value;(2) any contract or transaction wherein the rice delivered is to be milled for and on account of the owner thereof; (3) any contract or transaction wherein the rice delivered is commingled with the rice delivered by or belonging to other persons and the warehouseman is obligated to return the rice of the same kind or pay its value.

Sec. 3. No person shall engage in the business of receiving rice for storage without first securing a license therefore from the Director of

the Bureau of Commerce and Industry. Said license shall be annual and shall expire on the thirty-first day of December.

Sec. 4. Any person applying for a license to engage in the business of receiving rice for storage shall set forth in the application the place or places where the business and warehouse are to be established or located and the maximum quantity of rice to be received. The application shall be accompanied by a cash bond or a bond secured by real estate or signed by a duly authorized bonding company, the amount of which shall be fixed by the Director of the Bureau of Commerce and Industry at not less than thirty-three and one third percent of the market value of the maximum quantity or rice to be received. Said bond shall be so conditioned as to respond for the market value of the rice actually delivered and received at any time the warehouseman is unable to return the rice or to pay its value. The bond shall be approved by the Director of the Bureau of Commerce and Industry before issuing a license under this Act, to satisfy himself concerning the sufficiency of such bond, and to determine whether the warehouse for which such license is applied for is suitable for the proper storage of rice.

Sec. 5. Whenever the Director of the Bureau of Commerce and Industry shall determine that a bond approved by him, is or any cause, has become insufficient, he may require an additional bond or bonds to be given by the warehouseman concerned, conforming with the requirements of the preceding section, and unless the same be given within the time fixed by a written demand therefor the license of such warehouse may be suspended or revoked.

Sec. 6. Every person licensed under this Act to engage in the business of receiving rice for storage shall insure the rice so received and stored against fire.

Sec. 7. Any person injured by the breach of any obligation to secure which a bond is given, under the provisions of this Act, shall be entitled to sue on the bond in his own name in any court of competent jurisdiction to recover the damages he may have sustained by such breach. Nothing contained herein shall except any property of assets of any warehouseman from being sued on in case the bond given is not sufficient to respond for the full market value of the rice received by such warehouseman.

Sec. 8. Every warehouseman licensed under this Act shall receive for storage, so far as his license and the capacity of his warehouse permit, any rice, of the kind customarily stored therein by him, which may be tendered to him in a suitable condition for warehousing, in the usual manner and in the ordinary and usual course of business, without making any discrimination between persons desiring to avail themselves of warehouse facilities.

Sec. 9. Every warehouseman licensed under this Act shall keep a complete record of the rice received by him, of the receipts issued therefor of the withdrawals, of the liquidations and of all receipts returned to and cancelled by him. He shall make reports to the Director of Bureau of Commerce and Industry concerning his warehouse and the conditions, contents, operations, and business thereof in such form and at such time as the said Director may require, and shall conduct said warehouse in all other respects in compliance with this Act and the rules and regulations made in accordance therewith.

Sec. 10. The Director of Bureau of Commerce and Industry shall from time to time make such rules and regulations as he may deem necessary for the efficient execution of the provisions of this Act.

Sec. 11. Any person engaging in the business of receiving rice for storage in violation of Section three of this Act shall be deemed guilty of misdemeanor, and upon conviction thereof shall be punished by imprisonment of not less than one month or by a fine of not more than five thousand pesos, or both, in the discretion of the court.

Sec. 12. Any warehouseman licensed under this Act receiving a quantity of rice greater than that specified in his application and license, shall, upon conviction, be fined double the market value of the rice so received in excess of the quantity of rice he is authorized to receive.

Sec. 13. Any person entering into connivance or combination with any warehouseman that is not licensed under this Act, with the purpose of evading the provisions of section three of this Act, shall be deemed guilty of misdemeanor, and upon conviction thereof, shall be fined not more than two hundred pesos or imprisonment for not more than one months, or both, in the discretion of the court.



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Sec. 14. The Director of the Bureau of Commerce and Industry may, after opportunity for hearing has been afforded to the license concerned, suspend or revoke any license issued to any warehouseman, conducting a warehouse under this Act, for any violation or failure to comply with any provision of this Act or of the rules and regulations made by virtue thereof.

Sec. 15. This Act shall not be applicable to cooperative marketing associations of rice producers organized under Act Numbered Three Thousand Four Hundred and Twenty-five known as the "Cooperative Marketing Law," provided such associations shall not receive, for storage, rice from non-members which is greater in quantity than one-half of the total quantity of rice received from members, at any time.

Sec. 16. If any clause, sentence, or paragraph, or part of this Act shall, for any reason, be adjusted by any court of competent jurisdiction to be invalid, such judgment shall not affect, impair, or invalidate the remainder thereof, but shall be confined in his operation to the clause, sentence, paragraph or part thereof directly involved in the controversy in which such judgment shall have been rendered.

Sec. 17. This Act shall take effect on January First, nineteen

hundred and thirty-two.

REPUBLIC ACT NO. 247 - AN ACT TO AMEND ACT NUMBERED THIRTY-EIGHT HUNDRED AND NINETY-THREE, ENTITLED

"BONDED WAREHOUSE ACT," EXTENDING THE SCOPE AND PURVIEW THEREOF, PROVIDING ANNUAL LICENSE FEE,

LIMITING THE USE OF THE WORD "BONDED," PROVIDING PENALTIES FOR VIOLATION THEREOF, AND APPROPRIATING

FUNDS NEEDED THEREFOR, AND FOR OTHER PURPOSES

Section 1. Act Numbered Thirty-eight hundred and ninety-three, known as the "Bonded Warehouse Act," is hereby amended by substituting the word "rice," in each and every section or provision thereof, with the word "commodity," so as to include within the scope and purview of said Act all that is embraced by this word according to the following definition:

As used in this Act and for the purposes hereof, the word "commodity" shall mean any farm, agricultural or horticultural product; animal and animal husbandry or livestock, dairy or poultry product; water, marine or fish product; mineral, chemical, drug or medicinal product; forestry product; and any raw, processed, manufactured or finished product or by-product, good, article, or merchandise, either of domestic or of foreign production or origin, which may be traded or dealt in openly and legally.

The said Act Numbered Thirty-eight hundred and ninety-three, as hereby amended, shall henceforth be known and cited as the "General Bonded Warehouse Act," and it shall be referred to hereunder as "this Act."

Section 2. Every person engaged in the business of receiving commodity for storage defined in section two of the said Act Numbered Thirty-eight hundred and ninety-three, as amended, shall pay an annual license fee of fifty pesos for the first one thousand square meters of protected enclosure or one thousand cubic meters of storage space, or any fraction of such enclosure or space, and two and one-half centavos for each additional square meter or cubic meter.

Section 3. The word "bonded" shall not be used, partly or wholly, as trade name or business name of any person, firm, corporation, partnership, joint-stock company, or association owning, maintaining or operating any warehouse which is neither licensed under this Act nor established under Chapter thirty-nine, Art. XIII, sections thirteen hundred and two and thirteen hundred and four, of the Administrative Code of 1917 as amended or to name, designate, or advertise such warehouse.

Any person violating the provision of this section shall, upon conviction, be punished with imprisonment for not more than five years or with a fine of not more than five thousand pesos, or with both such fine and imprisonment, in the discretion of the court.

Section 4. For salaries and expenses, during the fiscal year 1948-1949, of additional personnel of the Bureau of Commerce needed in the proper execution and enforcement of this Act, there is hereby appropriated, out of any funds in the National Treasury not otherwise appropriated, the amount of ten thousand pesos which, in the

succeeding fiscal year and thereafter, shall be included in the regular budget.

Section 5. This Act shall take effect upon its approval.

Approved: June 12, 1948

Weeks 7 to 12

18. Concept of Security

Transactions Classification of security transactions

1. Security in the broad sense a. Personal – guaranty in the strict sense; credit is given

by person who guarantees the fulfillment of the principal obligation

b. Real – guaranty is property, movable (chattel mortgage, Art. 2140 or pledge, Art. 2093) or immovable (real mortgage, Art. 2124 or antichresis Art. 2132) property

2. As to origin a. Conventional – by agreement of the parties (Art.

2051, par. 1) b. Legal – by provision of law c. Judicial – one required by a court to guarantee the

eventual right of one of the parties in a case 3. As to consideration

a. Gratuitous – no price or remuneration for acting as such (Art. 2048)

b. Onerous – guarantor receives valuable consideration for his guaranty

c. Single – solely to guarantee or secure performance by the debtor of the principal obligation

d. Double or sub-guaranty – to secure the fulfillment by the guarantor of a prior guaranty

e. Definite – limited to principal obligation only or to a specific portion thereof

f. Indefinite or simple – includes not only the principal obligation but also all its accessories including judicial costs

19. Guaranty, Articles 2047 to 2081, Civil Code

Title XV. – GUARANTY CHAPTER 1

NATURE AND EXTENT OF GUARANTY

Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called a suretyship. (1822a)

Definition of guaranty

1. Contract between guarantor and creditor 2. In the broad sense includes pledge and mortgage

because the purpose of guaranty maybe accomplished by securing the fulfillment of an obligation through personal guaranty of a third person but also by furnishing to the creditor for his security, property with authority to collect the debt (Manresa)

Governing Law

Classification of guaranty for commercial and civil abolished; now governed primarily by Title XV, Book IV

Characteristics of the contract

1. Accessory – dependent on a principal obligation 2. Subsidiary and conditional – takes effect only when the

debtor fails in his obligation (Art. 2053, 2058, 2063, 2065) 3. Unilateral

a. Duty only on the part of the guarantor in relation to creditor



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b. May be entered into without intervention of the debtor (Art. 2050)

4. Requires that guarantor must be a person distinct from the debtor – consistent with the purpose which is for the guarantor to proceed against the third party if debtor defaults (Velasquez v. Solidbank Corp.)

Law applicable to contract of suretyship

1. A relation which exists where one person has undertaken an obligation and another person is also under a direct and primary obligation of or other duty to a third person who is entitled to but one performance

2. Contractual relation resulting from an agreement whereby one person engages to be answerable for the debt, default or miscarriage of another a. Art. 2047 points to Art. 1207 to 1222 on joint and

solidary obligations b. Provisions of the Civil Code on guaranty, other than

the benefit of excussion, are applicable and available to the surety (Autocorp. Group v. Intra Strata Assurance Corp.).

Common law guaranty and suretyship

Civil law surety = common law guaranty Civil law co-debtors in solidum = common law suretyship

Where party binds himself solidarily with principal debtor

It is possible to bind himself solidarily without affecting the nature of the contract, in which case action can be brought outright against the guarantor.

But it has been held that where a party signs a promissory note as a co-maker and binds herself solidarily, the undertaking is deemed to be that of a surety as an insurer of the debt, not a guarantor who warrants the insolvency of the debtor (Palmares v. CA).

Nature of surety’s undertaking

1. Liability is contractual and accessory but direct – direct, immediate, primary, absolute regardless whether or not the principal debtor is financially capable to fulfill his obligations. Surety is considered as being the same party as the debtor and their liabilities are interwoven as to be inseparable (usually bound by same agreement, same instrument).

2. Liability is limited by the terms of the contract – contractual in nature and ordinarily restricted to the obligation expressly assumed therein. Surety not presumed and cannot be extended by implication beyond the terms of the contract.

3. Liability arises only if principal debtor is held liable a. In the absence of collusion, surety is bound by a

judgment against the principal even though he was not a party to the proceedings.

b. Principal debtor and surety may be sued separately or together.

c. Unless required by surety contract, demand or notice of default is not required to fix the surety’s liability.

d. Accommodation party liable on the instrument to a holder for value although he has the right to reimbursement, the relation between them, is in effect, that of principal and surety (People v. Maniego).

e. A surety bond is void where there is no principal debtor, undertaking requires that obligation be enforceable against someone else besides the surety (Manila Railroad Co. v. Alvendia)

4. Surety not entitled to exhaustion – surely assumes solidary liability

5. Undertaking is to creditor, not to debtor – unless otherwise expressly provided, surety makes no covenant with the principal debtor. Promise is not implied by law.

6. Surety is not entitled to notice of principal’s default – Commencement of suit is sufficient demand; surety is bound to take notice of the principal’s default and to perform the obligation.

7. Prior demand by the creditor upon principal not required – Right to proceed against surety exists independently of his right to proceed against the principal where both are equally bound (Art. 1216). Proper remedy is to pay and then ask for reimbursement.

8. Surety is not exonerated by neglect of creditor to sue principal – There is nothing to prevent the creditor from

proceeding against the principal at any time. He may pay and be subrogated in all his rights.

Guaranty Suretyship

Independent agreement to pay the obligation if primary debtor

fails to do so

Regular party to the undertaking

Collateral undertaking Original promissor Secondarily or subsidiarily liable Primarily liable Not bound to take notice of the

non-performance of his principal Held to know every default of his

principal Discharged by the mere

indulgence of the principal; not liable unless notified of default

Undertakes to pay if the principal cannot or is unable to

pay Insurer of the solvency of the

debtor

Not discharged by either mere indulgence or neglect and want

of notice Undertakes to pay if the principal does not pay Insurer of debt itself

Terminology used by the parties – not conclusive that the contract of one of guaranty. If the promissor says ―I guarantee payment,‖ ―I will see you paid,‖ or ―I will pay if he does not pay,‖ the promise standing alone is collateral or subsidiary yet may be adjudged original or an independent one (Reiss v. Memije).

Guaranty Indorsement

Security Transfer Liability more extensive,

discharged only up to the extent of the loss suffered in

consequence

If not promptly presented and no due notice within reasonable time, completely discharged

Warrants solvency of debtor Does not warrant solvency Cannot be sued as promissor Can be sued as promissor

Guaranty Warranty

Contract by which a person is bound to another for the fulfillment of a promise or

engagement of a third party

Undertaking that the title, quality, or quantity of the subject

matter of a contract is what it has been presented to be

Art. 2048. A guaranty is gratuitous, unless there is a stipulation to

the contrary. (n)

Guaranty generally gratuitous – Onerous only when there is a stipulation to the contrary (Art. 1933, 1956, 1965).

Cause of contract of guaranty

1. Presence of cause which supports principal obligation – same cause, sufficient that there is a consideration for the principal debtor (Pyle v. Johnson)

2. Absence of direct obligation or benefit to guarantor – valid; consideration need not pass directly to surety or guarantor; sufficient to move principal.

Art. 2049. A married woman may guarantee an obligation without the husband's consent, but shall not thereby bind the conjugal partnership, except in cases provided by law. (n)

Married woman as guarantor – ordinarily binds only her personal property (Art. 145, FC); binds conjugal partnership:

1. With husband’s consent 2. Without husband’s consent in cases provided by law

Art. 2050. If a guaranty is entered into without the knowledge or consent, or against the will of the principal debtor, the provisions of Articles 1236 and 1237 shall apply. (n)

Guaranty undertaken without knowledge of debtor – unilateral for the benefit of the creditor, not the principal debtor.

1. If payment without knowledge of debtor, a. Recovery to the extent beneficial to debtor (Art.

1236) b. Guarantor cannot compel creditor to subrogate him in

his rights (mortgage, guaranty or penalty) (Art. 1237). 2. If payment is made with knowledge and consent of the

debtor, he is subrogated by virtue of the payment to all rights of the creditor against the debtor (Art. 2067)



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Art. 2051. A guaranty may be conventional, legal or judicial, gratuitous, or by onerous title.

It may also be constituted, not only in favor of the principal debtor, but also in favor of the other guarantor, with the latter's consent, or without his knowledge, or even over his objection. (1823)

Guaranty by reason of origin

Judicial – constituted by decree of court Legal – by virtue of a provision of law Conventional – by virtue of the will of the parties

Double or sub-guaranty – constituted to guarantee the obligation of a guarantor

Art. 2052. A guaranty cannot exist without a valid obligation.

Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or an unenforceable contract. It may also guarantee a natural obligation. (1824a)

Necessity of valid principal obligation

Accessory, requires a principal obligation. If principal obligation is void, guaranty is void.

Guaranty of voidable, unenforceable and natural obligations

1. Voidable – inasmuch as contract is binding unless annulled (Art. 1390)

2. Unenforceable – because it is not void (Art. 1403) 3. Natural – when guaranteed, implied recognition of liability

transforming the obligation to civil (Art. 1423)

Art. 2053. A guaranty may also be given as security for future debts, the amount of which is not yet known; there can be no claim against the guarantor until the debt is liquidated. A conditional obligation may also be secured. (1825a)

Guaranty of future debts

Continuing guaranty or suretyship - contemplates a future course of dealings, covering a series of transactions generally for an indefinite time or until revoked. Subsidiary so no claim until debt liquidated.

1. Secure payment of loan at maturity – loan maturity and all other obligations which may become due or be owing

2. Secure payment of any debt subsequently incurred – prospective in operation. Contract continuing when object is to give a standing credit (Dino v. CA)

3. Secure existing unliquidated claims – Future debts may also refer to debts existing at the time of the constitution of the guaranty of the amount is not known. a. No theoretical or doctrinal difficulty in saying that

surety itself is valid and binding even before the principal obligation to be secured is thereby born (Atok Finance Corp. v. CA)

Guaranty of conditional obligations

Suspensive condition – guarantor liable after the fulfillment of condition Resolutory condition – fulfillment extinguishes principal obligation and the guaranty

Art. 2054. A guarantor may bind himself for less, but not for more than the principal debtor, both as regards the amount and the onerous nature of the conditions.

Should he have bound himself for more, his obligations shall be reduced to the limits of that of the debtor. (1826)

Guarantor’s liability cannot exceed principal obligation

1. Subsidiary and accessory 2. Surety may pay as part of damages, interest at the legal

rate, judicial costs (Art. 2055) and attorney’s fees (Art. 2088) even without stipulation and even if he becomes liable for an amount higher than the total in the bond.

3. Surety may be made to pay penalty

Principal’s liability may exceed guarantor’s obligation

Amount specified in the bond does not limit the extent of damages that may be recovered from principal (Visayan Distributors v. Flores)

Art. 2055. A guaranty is not presumed; it must be express and cannot extend to more than what is stipulated therein.

If it be simple or indefinite, it shall compromise 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. (1827a)

Guaranty not presumed; requires the expression of consent on the part of the guarantor to be bound and cannot be presumed because of the existence of a contract or principal obligation.

Reason for rule – assurance that the guarantor intended to bind himself and he proceeded with consciousness

Guaranty covered by the Statute of Frauds – must be reduced to writing, being ―a special promise to answer for the debt, default or miscarriage of another.‖ (Art. 1403[2]) But need not be in a public document to be valid (Art. 1358).

Guaranty strictly construed – against the creditor and in favor of the debtor. Any doubt must be resolved in favor of the guarantor (PNB v. CA)

1. Liability for obligation stipulated – not for prior debts unless intent to be liable shown

2. Guaranty to render accounting – does not guarantee that money due will be paid

3. Guaranty with a term subsequently cancelled – not liable for obligations subsequently entered into

4. Liability of surety limited to a fixed period – cannot be bound for a longer time unless renewed. Renewal valid (Art. 1306)

5. Liability of surety to expire on maturity of principal obligation – unfair, nullifies the purpose of contract. Liability attaches to surety as soon as the principal defaults

6. Liability of surety to pay in case of forfeiture of imported goods –guarantees payment of appraised value and not legality of import

7. Bond requires lessor to report to surety any violation of lessee – does not cover defaults prior. Only prospective unless intention to the contrary clearly shown.

8. Bond issued to secure defendant from possible damages as a result of injunction – cannot be issued to satisfy any other claim of the parties

9. Bond issued in favor of a plaintiff who filed a case for collection – does not guarantee that the plaintiff’s cause of action is meritorious

10. Contract requires that notice of principal’s default be given to surety – where contract stipulates, failure to comply will prevent recovery from surety

Strictissimi juris applicable only to accommodation surety

Without motive of pecuniary gain and should be protected against unjust pecuniary impoverishment. Applicable only where the contract has been ascertained a surety or guaranty.

Rule of strict construction not applicable to compensated sureties

1. Business associations organized for the purpose of assuming classified risks in large numbers for profit and on an impersonal basis

2. Secured from all possible loss by adequate counterbonds or indemnity agreements

3. They are in fact insurers

Extent of guarantor’s liability

1. Where guaranty definite – limited in whole or in part to the principal debt, to the exclusion of accessories

2. Where guaranty indefinite – comprises the principal obligation, all its accessories, (including the judicial costs after being judicially required to pay) a. Guarantor could have limited his liability and if he did

not, it is presumed that he wanted to be bound to the extent established.

Acceptance of guaranty by creditor and notice thereof to guarantor

Creditor not required because he binds himself to nothing.



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1. When necessary – conditional guaranty does not become fixed until it is accepted by creditor a. Need not be express or in writing, may be acts

amounting to acceptance b. Guarantor entitled to notice to know the nature and

extent of his liability 2. When not necessary – direct or unconditional promise of

guaranty, all that is necessary is for the promisee (guarantor) to act upon it

Art. 2056. One who is obliged to furnish a guarantor shall present a person who possesses integrity, capacity to bind himself, and sufficient property to answer for the obligation which he guarantees. The guarantor shall be subject to the jurisdiction of the court of the place where this obligation is to be complied with. (1828a)

Art. 2057. If the guarantor should be convicted in first instance of a crime involving dishonesty or should become insolvent, the creditor may demand another who has all the qualifications required in the preceding article. The case is excepted where the creditor has required and stipulated that a specified person should be the guarantor. (1829a)

Qualifications of guarantor

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

guarantees

Jurisdiction follows principle that the accessory follows the principal.

Effect of subsequent loss of required qualifications

Qualifications need only be present at the time of the perfection of the contract. Subsequently, the creditor can:

1. Demand another guarantor with proper qualification a. Dishonesty – conviction required b. Insolvency – judicial declaration not required

2. Waive and hold the guarantor to his bargain

Selection of guarantor

1. Specified person stipulated as guarantor – substitution may not be demanded

2. Guarantor selected by the principal debtor – debtor answers for the integrity, capacity and solvency until extinguishment of debt

3. Guarantor personally designated by the creditor – responsibility of the selection borne by the creditor

CHAPTER 2 EFFECTS OF GUARANTY

SECTION 1. - Effects of Guaranty Between the Guarantor and the Creditor

Art. 2058. The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor, and has resorted to all the legal remedies against the debtor. (1830a)

Right of guarantor to benefit of excussion or exhaustion

1. Guarantor only secondarily liable – accessory and subsidiary; distinguished guaranty from suretyship

2. All legal remedies against debtor to be first exhausted – benefit of excussion; not sufficient that debtor appears insolvent

Right of creditor to secure judgment against guarantor prior to exhaustion

Creditor may secure a judgment against the guarantor, who shall be entitled to a deferment of execution until properties of the creditor shall have been exhausted (Tupaz v. CA). There is nothing procedurally objectionable in impleading guarantor as a co-defendant.

Art. 2059. The excussion shall not take place:

(1) If the guarantor has expressly renounced it; (2) If he has bound himself solidarily with the debtor; (3) In case of insolvency of the debtor; (4) When he has absconded, or cannot be sued within the Philippines unless he has left a manager or representative;

(5) If it may be presumed that an execution on the property of the principal debtor would not result in the satisfaction of the obligation. (1831a)

Exceptions to benefit of excussion

1. Art. 2059 2. Art. 2060 3. Judicial bondsman or sub-surety 4. Pledge or mortgage has been given as a special security 5. Fails to interpose it as a defense before judgment is

rendered against him

Exceptions provided in Art. 2059

1. Right waived – personal right recognized, waiver must be made in express terms

2. Liability assumed that of surety – becomes surety with primary liability as a solidary co-debtor

3. Insolvency of debtor proven by unsatisfied writ of execution – guarantor guarantees solvency; insolvency must be actual and may be proven by the return of writ unsatisfied

4. Debtor absconds or cannot be locally sued – creditor not required to go after the debtor who is hiding and to incur the delays and expenses incident thereto

5. Resort to all legal remedies, a useless formality

Art. 2060. In order that the guarantor may make use of the benefit of exclusion, he must set it up against the creditor upon the latter's demand for payment from him, and point out to the creditor available property of the debtor within Philippine territory, sufficient to cover the amount of the debt. (1832)

Art. 2061. The guarantor having fulfilled all the conditions required in the preceding article, the creditor who is negligent in exhausting the property pointed out shall suffer the loss, to the extent of said property, for the insolvency of the debtor resulting from such negligence. (1833a)

Duty of creditor to make prior demand for payment from guarantor

1. When demand made – can only be made after judgment on the debt

2. Actual demand to be made – not mere joining of guarantor as co-defendant

Duty of guarantor to set up benefit of excussion

Set it up, point it out – failure to do so forecloses his right to set up the defense of excussion

1. Property located abroad – would not conform with the purpose of guaranty

2. Property not easily available – guarantor should facilitate its realization and the payment of the debt

Duty or creditor to resort to all legal remedies

Neglect of not exhausting, guarantor bears the loss to the extent of value of said property.

Joinder of guarantor and principal as parties defendant

1. General Rule – not a joint contractor, cannot be sued 2. Exception – rule not required where it would merely delay

ultimate accounting of the guarantor

Art. 2062. In every action by the creditor, which must be against the principal debtor alone, except in the cases mentioned in Art. 2059, the former shall ask the court to notify the guarantor of the action. The guarantor may appear so that he may, if he so desire, set up such defenses as are granted him by law. The benefit of excussion mentioned in Art. 2058 shall always be unimpaired, even if judgment should be rendered against the principal debtor and the guarantor in case of appearance by the latter. (1834a)

Procedure when creditor sues

1. Sent against principal – creditor must sue principal alone; guarantor only after judgment has been obtained against principal debtor

2. Notice to guarantor of action – must be notified so that he may appear a. Guarantor appears – given benefit of excussion



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b. Guarantor does not appear – cannot set up excussion

3. Hearing before execution can be issued against guarantor – entitled to be heard before an execution can be issued against him where he is not a party

Art. 2063. A compromise between the creditor and the principal debtor benefits the guarantor but does not prejudice him. That which is entered into between the guarantor and the creditor benefits but does not prejudice the principal debtor. (1835a)

Effects of compromise

Compromise – contract whereby the parties, by making reciprocal concessions, avoid litigation or put an end to one already commenced (Art. 2028).

1. Where prejudicial – binds parties only (Art. 1311); cannot prejudice the guarantor or debtor when not party to compromise

2. Where in the nature of a stipulation in favor of a third person – if in the nature of stipulation pour autrui, guarantor and debtor though not parties can benefit from a compromise

Art. 2064. The guarantor of a guarantor shall enjoy the benefit of excussion, both with respect to the guarantor and to the principal debtor. (1836)

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. The creditor cannot claim from the guarantors except the shares which they are respectively bound to pay, unless solidarity has been expressly stipulated.

The benefit of division against the co-guarantors ceases in the same cases and for the same reasons as the benefit of excussion against the principal debtor. (1837)

Benefit of division among several guarantors

1. In whose favor applicable – several guarantors for one debtor for one debt, not applicable to guarantors of several debtors of one debt

2. Extent of liability of several guarantors – joint (Art. 1208), not liable to creditors beyond their respective shares

3. Exceptions – conditions under Art. 2059 and when solidary expressly stipulated (Art. 2047[2])

Benefit of excussion among several guarantors

For exhaustion, co-guarantors need not point out available property of co-guarantors. But when creditor claims an insolvent co-guarantor’s share, other co-guarantors can point out the former’s available property.

SECTION 2. - Effects of Guaranty Between the Debtor and the Guarantor

Art. 2066. The guarantor who pays for a debtor must be indemnified by the latter.

The indemnity comprises:

(1) The total amount of the debt; (2) The legal interests thereon from the time the payment was made known to the debtor, even though it did not earn interest for the creditor; (3) The expenses incurred by the guarantor after having notified the debtor that payment had been demanded of him; (4) Damages, if they are due. (1838a)

Guaranty, a contract of indemnity – guarantor has the right to reimbursement of

1. Total amount of the debt – no right until guarantor actually paid unless right is given to contract

2. Legal interest thereon – guarantor entitled from the time of notice of payment to the debtor which is in effect a demand, whether or not it earns interest

3. Expenses incurred by the guarantor – only those that the guarantor has to satisfy in accordance with law as a consequence of the guaranty (Art. 2055[2])

4. Damages, if they are due – in accordance with law; general rules on damages (Arts. 2195-2235) apply

Exceptions to right to indemnity or reimbursement

1. Constituted without the knowledge or against the will of the debtor – only insofar as had been beneficial (Art. 2050)

2. No intention to be reimbursed (Art. 1238) 3. Waiver

Art. 2067. The guarantor who pays is subrogated by virtue thereof to all the rights which the creditor had against the debtor.

If the guarantor has compromised with the creditor, he cannot demand of the debtor more than what he has really paid. (1839)

Guarantor’s right to subrogation

1. Effect of subrogation – right to indemnification and subrogation granted to guarantor applies also to surety (Art. 2047)

2. Accrual, basis and nature of right – subrogation necessary to enable guarantor to enforce the indemnity a. Arises from operation of law upon payment b. Stands not upon contract, but upon natural justice c. Not a contractual right d. Cannot demand more than what he has paid for

3. When right not available – when there is no right to be reimbursed

Art. 2068. If the guarantor should pay without notifying the debtor, the latter may enforce against him all the defenses which he could have set up against the creditor at the time the payment was made. (1840)

Art. 2069. If the debt was for a period and the guarantor paid it before it became due, he cannot demand reimbursement of the debtor until the expiration of the period unless the payment has been ratified by the debtor. (1841a)

Effect of payment by guarantor before/after maturity

1. Obligation with a period demandable only when the day comes, guarantor who paid before maturity not entitled to reimbursement because there is no need to accelerate payment

2. When demand made on guarantor during term of guarantee, immaterial if payment is made after the term

Art. 2070. If the guarantor has paid without notifying the debtor, and the latter not being aware of the payment, repeats the payment, the former has no remedy whatever against the debtor, but only against the creditor. Nevertheless, in case of a gratuitous guaranty, if the guarantor was prevented by a fortuitous event from advising the debtor of the payment, and the creditor becomes insolvent, the debtor shall reimburse the guarantor for the amount paid. (1842a)

Effect of repeat payment by debtor

1. General rule – Notice to debtor before payment. If without notice, remedy is to collect from creditor but no cause of action for the return even when it becomes insolvent

2. Exception – may still claim even in spite of lack of notice a. Creditor becomes insolvent b. Guarantor prevented from fortuitous event from

notifying debtor c. Guaranty is gratuitous

Art. 2071. The guarantor, even before having paid, may proceed against the principal debtor:

(1) When he is sued for the payment; (2) In case of insolvency of the principal debtor; (3) When the debtor has bound himself to relieve him from the guaranty within a specified period, and this period has expired; (4) When the debt has become demandable, by reason of the expiration of the period for payment; (5) After the lapse of ten years, when the principal obligation has no fixed period for its maturity, unless it be of such nature that it cannot be extinguished except within a period longer than ten years; (6) If there are reasonable grounds to fear that the principal debtor intends to abscond; (7) If the principal debtor is in imminent danger of becoming insolvent.



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In all these cases, the action of the guarantor is to obtain release from the guaranty, or to demand a security that shall protect him from any proceedings by the creditor and from the danger of insolvency of the debtor. (1834a)

Right of guarantor to proceed against debtor before payment

Applicable to surety, purpose is to enable the guarantor to take measures for the protection of his interest in view of the probability that he would be called upon to pay the debt.

Remedy to which guarantor entitled – Guarantor cannot ask for payment unless he as actually paid. The alternative remedies are:

1. Obtain a release form guaranty 2. Demand or security

Art. 2066 and 2071 distinguished

Art. 2066 Art. 2071

Enforcement of rights of guarantor against debtor after

he paid Right of action before payment

Before he has paid but after he becomes liable

Protective remedy before payment

Substantive right Preliminary remedy No such person Release or security

Recovery by surety against indemnitor even before payment

1. Indemnity agreement for benefit of surety – if debtor agrees to terms, obligations of the contract have the force of law

2. Indemnity agreement may be against actual loss as well as liability – if against loss, indemnitor liable to person only when paid; if against liability, indemnitor liable to person upon attachment of liability

3. Such agreement valid

Art. 2072. If one, at the request of another, becomes a guarantor for the debt of a third person who is not present, the guarantor who satisfies the debt may sue either the person so requesting or the debtor for reimbursement. (n)

Guarantor of a third person at request of another has a right to claim reimbursement after satisfying the debt either from:

1. Person who requested him to be a guarantor 2. Debtor.

SECTION 3. - Effects of Guaranty as Between Co-Guarantors

Art. 2073. When there are two or more guarantors of the same debtor and for the same debt, the one among them who has paid may demand of each of the others the share which is proportionally owing from him.

If any of the guarantors should be insolvent, his share shall be borne by the others, including the payer, in the same proportion.

The provisions of this Art. shall not be applicable, unless the payment has been made by virtue of a judicial demand or unless the principal debtor is insolvent. (1844a)

Right to contribution of guarantor who pays

1. Restrictions – applicable when a. In virtue of a judicial demand b. Because the principal debtor is insolvent

2. Effect of insolvency of any guarantor – follows Art. 1217[2])

3. Accrual and basis of right – Guarantor who paid becomes ipso jure entitled to proportionate contribution or reimbursement without need of cession from creditor

Art. 2074. In the case of the preceding article, the co-guarantors may set up against the one who paid, the same defenses which would have pertained to the principal debtor against the creditor, and which are not purely personal to the debtor. (1845)

Defense available to co-guarantors: all defenses the debtor would have against creditor but not those which are purely personal

Art. 2075. A sub-guarantor, in case of the insolvency of the guarantor for whom he bound himself, is responsible to the co-guarantors in the same terms as the guarantor. (1846)

CHAPTER 3 EXTINGUISHMENT OF GUARANTY

Art. 2076. The obligation of the guarantor is extinguished at the same time as that of the debtor, and for the same causes as all other obligations. (1847)

Causes of extinguishment of guaranty

1. Accessory and subsidiary – extinguishes when the principal obligation is extinguished: a. Payment or performance, loss of the thing due,

condonation or remission of the debt, confusion or merger of rights of the creditor and debtor, compensation and novation (Art. 1231)

2. Other causes: annulment, rescission, fulfillment of a resolutory condition, and prescription (Art. 1231)

3. Release of guarantor made by creditor (Art. 2078)

Material alteration of principal contract

1. Effect of material alteration – constitutes novation and surety cannot be held to a new contract without its consent

2. When alteration material – surety or guaranty will not be released where such change does not make the obligation more onerous (Visayan Distributors v. Flores)

Art. 2077. If the creditor voluntarily accepts immovable or other property in payment of the debt, even if he should afterwards lose the same through eviction, the guarantor is released. (1849)

Release by conveyance of property

Eviction revives the principal obligation but not the guaranty. The cause of action is against the debtor for eviction which is not part of the guaranty.

Art. 2078. A release made by the creditor 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. (1850)

Release of guarantor without consent of others

Others will be prejudiced if one of the guarantors becomes insolvent. The release benefits all to the extent of the share of the guarantor released.

Art. 2079. An extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty. The mere failure on the part of the creditor to demand payment after the debt has become due does not of itself constitute any extension of time referred to herein. (1851a)

Release by extension of term granted by creditor to debtor

1. Where release without consent of guarantor – extinguishes guaranty a. Payments due to debtor from third persons assigned

to creditor - extinguishes b. Where obligation payable in installments – extension

as to one will not affect surety/guaranty’s liability as to others

c. Consent to extension waived in advance by guarantor – valid, not contrary to law or public policy

d. Payment by guarantor after creditor’s demand e. Extension not granted by creditor on the bond – does

not extinguish f. Extension granted to first-tier obligors – will not

extinguish liability of second-tier obligors 2. Prejudice to guarantor and period of extension immaterial 3. Extension must be based on a new agreement – mere

failure or neglect to demand payment not deemed a suspension

4. Diligence on the part of creditor to enforce his claim generally not required – this is for surety. For guaranty, if the creditor has done any act whereby the guaranty was impaired in value, or discharged that act would have wholly or partially released the guarantor



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5. No cause of action against creditor for delay

Art. 2080. The guarantors, even though they be solidary, are released from their obligation whenever by some act of the creditor they cannot be subrogated to the rights, mortgages, and preference of the latter. (1852)

Release by guarantor cannot be subrogated

1. Fault of creditor for non-subrogation – act of one cannot prejudice another

2. Duty of the creditor to account for his lien on principal’s property – to retain and maintain security; impairment will discharge the surety to the extent of lien released. This is a trust relation with the creditor as trustee bound to account to the surety the value of the security.

Art. 2081. The guarantor may set up against the creditor all the defenses which pertain to the principal debtor and are inherent in the debt; but not those that are personal to the debtor. (1853)

20. Surety, Articles 1207 to 1222, 2082 to 2084, Civil Code

SECTION 4. - Joint and Solidary Obligations

Art. 1207. The concurrence of two or more creditors or of two or more debtors in one and the same obligation does not imply that each one of the former has a right to demand, or that each one of the latter is bound to render, entire compliance with the prestation. There is a solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity. (1137a)

Art. 1208. If from the law, or the nature or the wording of the obligations to which the preceding Art. refers the contrary does not appear, the credit or debt shall be presumed to be divided into as many shares as there are creditors or debtors, the credits or debts being considered distinct from one another, subject to the Rules of Court governing the multiplicity of suits. (1138a)

Art. 1209. If the division is impossible, the right of the creditors may be prejudiced only by their collective acts, and the debt can be enforced only by proceeding against all the debtors. If one of the latter should be insolvent, the others shall not be liable for his share. (1139)

Art. 1210. The indivisibility of an obligation does not necessarily give rise to solidarity. Nor does solidarity of itself imply indivisibility. (n)

Art. 1211. Solidarity may exist although the creditors and the debtors may not be bound in the same manner and by the same periods and conditions. (1140)

Art. 1212. Each one of the solidary creditors may do whatever may be useful to the others, but not anything which may be prejudicial to the latter. (1141a)

Art. 1213. A solidary creditor cannot assign his rights without the consent of the others. (n)

Art. 1214. The debtor may pay any one of the solidary creditors; but if any demand, judicial or extrajudicial, has been made by one of them, payment should be made to him. (1142a)

Art. 1215. Novation, compensation, confusion or remission of the debt, made by any of the solidary creditors or with any of the solidary debtors, shall extinguish the obligation, without prejudice to the provisions of Art. 1219.

The creditor who may have executed any of these acts, as well as he who collects the debt, shall be liable to the others for the share in the obligation corresponding to them. (1143)

Art. 1216. The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected. (1144a)

Art. 1217. Payment made by one of the solidary debtors extinguishes the obligation. If two or more solidary debtors offer to pay, the creditor may choose which offer to accept.

He who made the payment may claim from his co-debtors only the share which corresponds to each, with the interest for the payment already made. If the payment is made before the debt is due, no interest for the intervening period may be demanded.

When one of the solidary debtors cannot, because of his insolvency, reimburse his share to the debtor paying the obligation, such share shall be borne by all his co-debtors, in proportion to the debt of each. (1145a)

Art. 1218. Payment by a solidary debtor shall not entitle him to reimbursement from his co-debtors if such payment is made after the obligation has prescribed or become illegal. (n)

Art. 1219. The remission made by the creditor of the share which affects one of the solidary debtors does not release the latter from his responsibility towards the co-debtors, in case the debt had been totally paid by anyone of them before the remission was effected. (1146a)

Art. 1220. The remission of the whole obligation, obtained by one of the solidary debtors, does not entitle him to reimbursement from his co-debtors. (n)

Art. 1221. If the thing has been lost or if the prestation has become impossible without the fault of the solidary debtors, the obligation shall be extinguished.

If there was fault on the part of any one of them, all shall be responsible to the creditor, for the price and the payment of damages and interest, without prejudice to their action against the guilty or negligent debtor.

If through a fortuitous event, the thing is lost or the performance has become impossible after one of the solidary debtors has incurred in delay through the judicial or extrajudicial demand upon him by the creditor, the provisions of the preceding paragraph shall apply. (1147a)

Art. 1222. A solidary debtor may, in actions filed by the creditor, avail himself of all defenses which are derived from the nature of the obligation and of those which are personal to him, or pertain to his own share. With respect to those which personally belong to the others, he may avail himself thereof only as regards that part of the debt for which the latter are responsible. (1148a)

CHAPTER 4 LEGAL AND JUDICIAL BONDS

Art. 2082. The bondsman who is to be offered in virtue of a provision of law or of a judicial order shall have the qualifications prescribed in Art. 2056 and in special laws. (1854a)

Art. 2056. One who is obliged to furnish a guarantor shall present a person who possesses integrity, capacity to bind himself, and sufficient property to answer for the obligation which he guarantees. The guarantor shall be subject to the jurisdiction of the court of the place where this obligation is to be complied with. (1828a)

Bond – undertaking that is sufficiently secured and not cash or currency

Bondsman – a surety (Art. 2047[2]) offered in virtue of a provision of law or a judicial order.

Qualifications of personal bondsman – same as a guarantor under Art. 2056

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

guarantees

Jurisdiction follows principle that the accessory follows the principal.

Nature of bonds

1. Contractual in nature – only in consequence of a meeting of minds under the conditions essential to a contract (Art. 1305)

2. Special class of guaranty, in virtue of a judicial or court order

Art. 2083. If the person bound to give a bond in the cases of the preceding article, should not be able to do so, a pledge or mortgage



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considered sufficient to cover his obligation shall be admitted in lieu thereof. (1855)

Pledge or mortgage in lieu of bond

Art. 2084. A judicial bondsman cannot demand the exhaustion of the property of the principal debtor.

A sub-surety in the same case, cannot demand the exhaustion of the property of the debtor of the surety.

Bondsman and sub-surety not entitled to excussion because they are not mere guarantors, but sureties whose liability is primary and solidary

Negligence of creditor will not release surety. It is his obligation to see that the debtor pays or performs, not the creditor’s.

Cases:

E. Zobel, Inc. v. Court of Appeals, G.R. No. 113931, May 6, 1998.

Continuing guaranty is a surety! Petitioner assumed liability to SOLIDBANK, as a regular party to the undertaking and obligated itself as an original promissor. It bound itself jointly and severally to the obligation with the respondent spouses. In fact, SOLIDBANK need not resort to all other legal remedies or exhaust respondent spouses' properties before it can hold petitioner liable for the obligation.

Art. 2080 does not apply where the liability is as a surety, not as a guarantor. Even assuming that 2080 is applicable, SOLIDBANK's failure to register the chattel mortgage did not release petitioner from the obligation. In the Continuing Guaranty executed in favor of SOLIDBANK, petitioner bound itself to the contract irrespective of the existence of any collateral.

Surety Guaranty

Accessory promise by which a person binds himself for another already bound, and agrees with

the creditor to satisfy the obligation if the debtor does not

Collateral undertaking to pay the debt of another in case the latter

does not pay the debt

bound with his principal by the same instrument, executed at

the same time, and on the same consideration

guarantor's own separate undertaking, in which the

principal does not join

original promissor and debtor from the beginning, and is held, ordinarily, to know every default

of his principal

- usually entered into before or after that of the principal, and is often supported on a separate

consideration from that supporting the contract of the

principal - original contract of his principal is not his contract, and he is not bound to take notice of its non-

performance not discharged, either by the

mere indulgence of the creditor to the principal, or by want of

notice of the default of the principal, no matter how much

he may be injured thereby

often discharged by the mere indulgence of the creditor to the

principal, and is usually not liable unless notified of the

default of the principal

insurer of the debt, and he obligates himself to pay if the

principal does not pay

insurer of the solvency of the debtor and thus binds himself to pay if the principal is unable to

pay

International Finance Corporation v. Imperial Textile Mills, Inc., G.R. No. 160324, November 15, 2005.

The Agreement uses ―guarantee and guarantors,‖ prompting ITM to base its argument on those words but the use of the two words limits the contract to a mere guaranty. The specific stipulations in the contract show otherwise.

While referring to ITM as a guarantor, the agreement specifically stated that the corporation was 'jointly and severally liable. To put emphasis on the nature of that liability, the contract further stated that ITM was a primary obligor, not a mere surety. Those stipulations meant only one thing: that at bottom, and to all legal intents and purposes, it was a surety.

IFC was justified in taking action directly against respondent. The use of the word guarantee does not ipso facto make the contract one of guaranty. The word is frequently employed in business transactions to describe the intention to be bound by a primary or an independent obligation. The very terms of a contract govern the obligations of the parties or the extent of the obligor's liability. Thus, the Court has ruled in favor of suretyship, even though contracts were denominated as a 'Guarantor's Undertaking or a 'Continuing Guaranty.

Philippine Blooming Mills, Inc. v. Court of Appeals, G.R. No. 142381, October 15, 2003.

Ching is liable for credit obligations contracted by PBM against TRB before and after the execution of the 21 July 1977 Deed of Suretyship. This is evident from the tenor of the deed itself, referring to amounts PBM ―may now be indebted or may hereafter become indebted‖ to TRB.

The law expressly allows a suretyship for "future debts". 2053 provides: ―A guaranty may also be given as security for future debts, the amount of which is not yet known; there can be no claim against the guarantor until the debt is liquidated.xxx‖

Diño v. Court of Appeals: A guaranty may be given to secure even future debts, the amount of which may not be known at the time the guaranty is executed. This is the basis for contracts denominated as continuing guaranty or suretyship. A continuing guaranty is one which is not limited to a single transaction, but which contemplates a future course of dealing, covering a series of transactions, generally for an indefinite time or until revoked. It is prospective in its operation and is generally intended to provide security with respect to future transactions within certain limits, and contemplates a succession of liabilities, for which, as they accrue, the guarantor becomes liable.

Continuing guaranty covers all transactions, including those arising in the future, which are within the description or contemplation of the contract of guaranty, until the expiration or termination thereof. A guaranty shall be construed as continuing when by the terms thereof it is evident that the object is to give a standing credit to the principal debtor to be used from time to time either indefinitely or until a certain period; especially if the right to recall the guaranty is expressly reserved. Hence, where the contract states that the guaranty is to secure advances to be made "from time to time," it will be construed to be a continuing one.

In other jurisdictions, it has been held that the use of particular words and expressions such as payment of "any debt," "any indebtedness," or "any sum," or the guaranty of "any transaction," or money to be furnished the principal debtor "at any time," or "on such time" that the principal debtor may require, have been construed to indicate a continuing guaranty.

Escano & Silos v. Ortigas, JR., G. R. No. 151953, June 29, 2007.

There is a difference between a solidary co-debtor and a fiador in solidum (surety). The latter, outside of the liability he assumes to pay the debt before the property of the principal debtor has been exhausted, retains all the other rights, actions and benefits which pertain to him by reason of the fiansa; while a solidary co-debtor has no other rights than those bestowed upon him in Section 4, Chapter 3, Title I, Book IV of the Civil Code.

The Undertaking does not contain any express stipulation that the petitioners agreed ―to bind themselves jointly and severally‖ in their obligations to the Ortigas group, or any such terms to that effect. Hence, such obligation established in the Undertaking is presumed only to be joint. Ortigas, as the party alleging that the obligation is in fact solidary, bears the burden to overcome the presumption of jointness of obligations. We rule and so hold that he failed to discharge such burden.

Right of reimbursement by surety: Under Art. 2066 of the Civil Code, which assures that ―[t]he guarantor who pays for a debtor must be indemnified by the latter,‖ such indemnity comprising of, among others, ―the total amount of the debt.‖ Further, Art. 2067 of the Civil Code likewise establishes that ―[t]he guarantor who pays is subrogated by virtue thereof to all the rights which the creditor had against the debtor.‖

Articles 2066 and 2067 explicitly pertain to guarantors, and it is Dr. Tolentino’s observation that ―[t]he reference in the second paragraph of [Art. 2047] to the provisions of Section 4, Chapter 3, Title I, Book IV, on solidary or several obligations, however,



38

does not mean that suretyship is withdrawn from the applicable provisions governing guaranty.‖ For if that were not the implication, there would be no material difference between the surety as defined under Art. 2047 and the joint and several debtors, for both classes of obligors would be governed by exactly the same rules and limitations.

Accordingly, the rights to indemnification and subrogation as established and granted to the guarantor by Articles 2066 and 2067 extend as well to sureties as defined under Art. 2047. These rights granted to the surety who pays materially differ from those granted under Art. 1217 to the solidary debtor who pays, since the ―indemnification‖ that pertains to the latter extends ―only [to] the share which corresponds to each [co-debtor].‖

Tupaz IV & Tupaz, v. Court of Appeals and Bank of the Philippine Islands, G.R. No. 145578, November 18, 2005.

Any doubt as to the import or true intent of the solidary guaranty clause should be resolved against the drafter. The trust receipt, together with the questioned solidary guaranty clause, is on a form drafted and prepared solely by the petitioner; Chi’s participation therein is limited to the affixing of his signature thereon. It is, therefore, a contract of adhesion; as such, it must be strictly construed against the party responsible for its preparation.

In Prudential Bank v. CA, it was held that had there been more than one signatories to the trust receipt, the solidary liability would exist between the guarantors. The clause ―we jointly and severally agree and undertake‖ refers to the undertaking of the two (2) parties who are to sign it or to the liability existing between themselves. It does not refer to the undertaking between either one or both of them on the one hand and the petitioner on the other with respect to the liability described under the trust receipt.

Excussion is not a pre-requisite to secure judgment against a guarantor. The guarantor can still demand deferment of the execution of the judgment against him until after the assets of the principal debtor shall have been exhausted.

21. Pledge and Mortgage, Common Provisions, Articles 2085 to 2092, Civil Code

CHAPTER 1 PROVISIONS COMMON TO PLEDGE AND MORTGAGE

Art. 2085. The following requisites are essential to the contracts of pledge and mortgage:

(1) That they be constituted to secure the fulfillment of a principal obligation; (2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged; (3) That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose.

Third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own property. (1857)

Art. 2086. The provisions of Art. 2052 are applicable to a pledge or mortgage. (n)

Art. 2052. A guaranty cannot exist without a valid obligation.

Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or an unenforceable contract. It may also guarantee a natural obligation. (1824a)

Necessity of valid principal obligation

Accessory, requires a principal obligation. If principal obligation is void, guaranty is void.

Guaranty of voidable, unenforceable and natural obligations

1. Voidable – inasmuch as contract is binding unless annulled (Art. 1390)

2. Unenforceable – because it is not void (Art. 1403)

Natural – when guaranteed, implied recognition of liability transforming the obligation to civil (Art. 1423)

Art. 2087. It is also of the essence of these contracts that when the principal obligation becomes due, the things in which the pledge or mortgage consists may be alienated for the payment to the creditor. (1858)

Pledge - contract by which the debtor delivers to the creditor or to a third person a movable (Art. 2094) or document evidencing incorporeal rights (Art. 2095) for the purpose of securing a principal obligation with the understanding that when the obligation is fulfilled, the thing will be returned with all its fruits and accessions

Kinds of pledge

1. Voluntary or conventional – created by agreement of the parties

2. Legal – created by operation of law (Art. 2121)


1. Real – requires delivery for perfection 2. Accessory – no independent existence 3. Unilateral – obligation solely on the part of the creditor to

return upon fulfillment 4. Subsidiary – does not arise until fulfillment of the principal

obligation

Cause or consideration in pledge

1. Same person pledgor – same causa as the principal obligation

2. Third person pledgor – compensation or mere liberality

Essential requirements of pledge and mortgage

1. Common requisites – Arts. 2085, 2087 2. Necessity of delivery – must be delivered to the creditor or

third person by common agreement

Pledge and mortgage are purely accessory contracts and must be constituted to secure fulfillment of a principal obligation. They cannot exist without a valid obligation (voidable, unenforceable or natural).

Constituted by the absolute owner. Otherwise, pledge or mortgage is void.

Property pledged or mortgaged

1. Future property – cannot be pledged or mortgaged 2. Property acquired subsequently – void and ineffective;

registration cannot cure it 3. Transfer of motor vehicles registered subsequently – if

pledged or mortgaged after ownership but before registration valid, for registration constitutes merely an administrative proceeding

4. Share in a co-ownership – limited only to the portion allotted to him in the division upon the termination of the co-ownership

5. Property covered by a Torrens title – mortgagee in good faith relying on a Torrens title is protected (not applicable to banks)

Pledgor or mortgagor has free disposal of the property or has legal authority

1. Free disposal of the property – not subject to any claim of a third person

2. Capacity to dispose of property – capacity or the authority to make a disposition of the property

Thing pledged or mortgaged may be alienated is an inherent element of mortgage and pledge. If the principal obligation is not complied with, the property will be sold to satisfy the principal obligation.

Pledgor or mortgagor may be a third person

1. Accommodation pledge or mortgage – as long as valid consent was given, the fact that the loan was solely for the benefit of the debtor would not invalidate the pledge or mortgage

2. Duty of mortgagee to make proper inquiry – creditor is required to exercise due care and prudence by making proper inquiry where the debtor borrows money and mortgages another person’s property to secure the loan without the consent of the latter.



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3. Where mortgage gratuitous – strictly construed; interpreted as to effect the least transmission of right or interest (Art. 1378)

4. Liability for deficiency – where third person pledged or mortgaged his property to secure the debt of another, the liability does not extend beyond the value of the property so pledged of mortgaged.

Pledge Real Mortgage

Movables (Art. 2094) Immovables (Art. 2124) Delivered to the creditor or to a

third person by common consent Delivery not necessary

Not valid against third person unless a description of the thing

pledged and the date of the pledge in private instrument

Not valid against third persons if not registered

Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void. (1859a)

Right of creditor where debtor fails to comply with his obligation

1. Sale of subject property with formalities required by law – If debtor fails to comply, creditor is entitled to move for the sale of the thing pledged or mortgaged (Art. 2087) with the formalities required by law

2. Prohibition against appropriation of property – pledgor or mortgagor’s default does not operate to vent in the pledgee or mortgagee the ownership of the property (pactum commissorium; against public policy – the amount of the loan is usually much less than the value of the property pledged or mortgaged)

Exception to pactum commissorium Art. 2112

Prohibition against pactum commissorium

1. Stipulation null and void – forbidden by law and declared null and void in contracts of pledge, mortgage and antichresis

2. Requisites a. There should be a pledge, mortgage or antichresis by

way of security for the payment of the principal obligation

b. There should be a stipulation for an automatic appropriation by the creditor of the property in the event of nonpayment of the principal obligation within the stipulated period

3. Stipulation presupposes existence of a security contract (Art. 2088, 2137)

4. Effect on security contract – the nullity which vitiates the stipulation does not affect substantially the principal contract of pledge, mortgage or antichresis (Mahoney v. Tuason)

Prohibition refers to stipulation authorizing automatic appropriation

1. Pledged or mortgaged property shall be considered in full payment without further action in court.

2. Pacto de recto where ownership would automatically pass to the vendee in case no redemption was effected within the stipulated period

Permissible stipulations

1. Subsequent modification of original contract 2. Subsequent voluntary cession of the property 3. Promise to assign or sell 4. Authority to take possession of property upon foreclosure

Risk of loss of property pledged or mortgaged is borne by the debtor-owner (res perit domino suo). The principal obligation is not extinguished by the loss of the property.

Art. 2089. A pledge or mortgage is indivisible, even though the debt may be divided among the successors in interest of the debtor or of the creditor.

Therefore, the debtor's heir who has paid a part of the debt cannot ask for the proportionate extinguishment of the pledge or mortgage as long as the debt is not completely satisfied.

Neither can the creditor's heir who received his share of the debt return the pledge or cancel the mortgage, to the prejudice of the other heirs who have not been paid.

From these provisions is excepted the case in which, there being several things given in mortgage or pledge, each one of them guarantees only a determinate portion of the credit.

The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as the portion of the debt for which each thing is specially answerable is satisfied. (1860)

Art. 2090. The indivisibility of a pledge or mortgage is not affected by the fact that the debtors are not solidarily liable. (n)

Pledge or mortgage indivisible

1. Single thing – answerable for the whole obligation as soon as it falls due

2. Several things – all of them are liable for the totality of the debt; debtor cannot ask for the proportionate extinguishment of the pledge or mortgage until the debt secured had been fully paid

3. Debtor’s heir/Creditor’s heir – neither can ask for extinguishment until the debt is completely satisfied

Exceptions to rule of indivisibility

1. Where each one of several things guarantees determinate portion of credit – there are as many pledges and mortgages as there are things given in pledge or mortgage

2. Where only a portion of loan was released – where part of a loan is released, the pledge or mortgage became unenforceable as to the extent of release (Central Bank v. CA)

3. Where there was failure of consideration – when mortgagee defeats the purpose of the loan; as if the loan was never delivered (Rose Packing Co . v. CA)

4. Where there is no debtor-creditor relationship – indivisibility of the pledge or mortgage only as to contracting parties, but not to third persons who did not take part in the constitution thereof (PNB v. Agudelo)

Foreclosure of mortgage constituted on several properties

Separate sales apply to sales on execution and not to foreclosure:

1. A mortgage is one and indivisible even if constituted on two or more properties. The mortgagee has the right to have the properties jointly or singly sold to satisfy his claim.

2. Sale will not be set aside in the absence of evidence that a better price could have been obtained if they were sold separately.

Where real mortgage and chattel mortgage in one instrument – does not have the effect of fusing them into an indivisible whole; they differ in subject matter and applicable legal provisions.

Art. 2091. The contract of pledge or mortgage may secure all kinds of obligations, be they pure or subject to a suspensive or resolutory condition. (1861)

All kinds of obligations can be secured by pledge or mortgage

Same applies to guaranty (Art. 2052, 2053, 2086). The pledge agreement may stipulate that it will secure future advancements or renewals (China Banking Corp v. CA)

Art. 2092. A promise to constitute a pledge or mortgage gives rise only to a personal action between the contracting parties, without prejudice to the criminal responsibility incurred by him who defrauds another, by offering in pledge or mortgage as unencumbered, things which he knew were subject to some burden, or by misrepresenting himself to be the owner of the same. (1862)

Promise to constitute pledge or mortgage creates no real right; only a personal right. There is a right of action to compel the fulfillment of the promise, but there is no pledge or mortgage yet.

Criminal responsibility of pledgor or mortgagor – estafa (Art. 316[1,2], RPC); essential that fraud and deceit be practiced upon the vendee at the time of the sale.

Cases:



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Development Bank of the Philippines v. Court of Appeals, G.R. No. 118367 & 118342, January 5, 1998.

Although what was involved there was specific immovable property, the ruling therein should equally apply in this case where specific movable property is involved. As the extra-judicial foreclosure instituted by the PNB and DBP is not the liquidation proceeding contemplated by the CC, Remington cannot claim its pro rata share from DBP.

Bustamante v. Rosel, G. R. No. 126800, November 29, 1999.

The elements of pactum commissorium are:

1. There should be a property mortgaged by way of security for the payment of the principal obligation;

2. There should be a stipulation for automatic appropriation by the creditor of the thing mortgaged in case of non-payment of the principal obligation within the specified period.

The sale of the collateral is an obligation with a suspensive condition. It is dependent on the happening of an event, without which the obligation to sell does not arise.

All persons in need of money are liable to enter into contractual relationships whatever the conditions if only to alleviate their financial burden albeit temporarily. Hence, the courts are duty bound to exercise caution in the interpretation and resolution of contracts lest the lenders devour the borrowers like vultures do with prey.

Ong v. Roban Lending Corporation, G.R. No.172592, July 9, 2008.

Dacion en pago agreement is in the nature of pactum commissorium. The agreements contain no provisions for foreclosure proceedings nor redemption. Under the memorandum of agreement, the failure by the petitioners to pay their debt within the one-year period gives respondent the right to enforce the Dacion en pago agreement transferring to it ownership of the properties. Roban, in effect, automatically acquires ownership of the properties upon petitioners failure to pay their debt within the stipulated period.

In a true dacion en pago, the assignment of the property extinguishes the monetary debt. In the case at bar, the alienation of the properties was by way of security, and not by way of satisfying the debt.

The Dacion in Payment did not extinguish petitioners

obligation to respondent. On the contrary, under the Memorandum of Agreement executed on the same day as the Dacion in Payment, petitioners had to execute a promissory note for P5,916,117.50 which they were to pay within one year.

Manila Banking Corp. v. Teodoro & Teodoro, G.R. No. L-53955, January 13, 1989.

An assignment of rights, receivables, titles or interest under a contract to guarantee an obligation is in effect, a pledge or mortgage contract to guarantee an obligation is, in effect, a pledge or mortgage and NOT an absolute conveyance of title which confers ownership on the assignee. In case of doubt as to whether a transaction is a pledge (or mortgage), or a dation in payment, the presumption is in favor of pledge, the latter being the lesser transmission of rights and interests.

22. Pledge, Articles 2093 to 2123, Civil Code

CHAPTER 2 PLEDGE

Art. 2093. In addition to the requisites prescribed in Art. 2085, it is necessary, in order to constitute the contract of pledge, that the thing pledged be placed in the possession of the creditor, or of a third person by common agreement. (1863)

Transfer of possession essential in pledge

1. To constitute contract – unless delivered, there is only a personal right because pledge is merely a lien and possession is indispensable to the right of lien.

2. To affect third persons – Art. 2096, apart from being in a public instrument possession must be delivered to the pledgee.

Type of delivery depends upon nature of thing pledged

1. Actual delivery – mere symbolic delivery not sufficient (Betita v. Ganzon [1926])

2. Constructive delivery – symbolical delivery deemed sufficient (Banco Espanol-Filipino v. Peterson [1910]); ultimately depends on the peculiar nature of the thing pledged

Art. 2094. All movables which are within commerce may be pledged, provided they are susceptible of possession. (1864)

Art. 2095. Incorporeal rights, evidenced by negotiable instruments, bills of lading, shares of stock, bonds, warehouse receipts and similar documents may also be pledged. The instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be indorsed. (n)

Subject matter of pledge

1. Limited to personal property (Art. 416, 417) within commerce of man and susceptible of possession

2. Incorporeal rights evidenced by document whether or not negotiable a. Non-negotiable – delivered to creditor b. Negotiable – endorsed to creditor

Art. 2096. A pledge shall not take effect against third persons if a description of the thing pledged and the date of the pledge do not appear in a public instrument. (1865a)

Public instrument necessary to bind third persons

1. Contents of public instrument – Even if Arts. 2085, 2093 are complied with, not effective against third persons: a. Contained in a public instrument b. Description of the thing pledged c. Date of the pledge

2. Object of the requirement – to forestall fraud (i.e. concealing property in danger of execution by simulating a pledge)

Art. 2097. With the consent of the pledgee, the thing pledged may be alienated by the pledgor or owner, subject to the pledge. The ownership of the thing pledged is transmitted to the vendee or transferee as soon as the pledgee consents to the alienation, but the latter shall continue in possession. (n)

Alienation by the pledgor of thing pledged allowed as long as the pledgee consent to the same. This furnishes one of the cases where ownership is transferred without actual delivery of the thing alienated.

Art. 2098. The contract of pledge gives a right to the creditor to retain the thing in his possession or in that of a third person to whom it has been delivered, until the debt is paid. (1866a)

Right of pledgee to retain thing pledged – possession of the pledge constitutes his security, but limited only to the fulfillment of the principal obligation

Art. 2099. The creditor shall take care of the thing pledged with the diligence of a good father of a family; he has a right to the reimbursement of the expenses made for its preservation, and is liable for its loss or deterioration, in conformity with the provisions of this Code. (1867)

Obligation of pledgee to take due care of thing pledged

Note that the pledgee is held responsible for loss or deterioration only by reason of fraud, negligence, or delay or violations of the terms of the contract and not when by fortuitous event (Arts. 1170, 1174).

Art. 2100. The pledgee cannot deposit the thing pledged with a third person, unless there is a stipulation authorizing him to do so.

The pledgee is responsible for the acts of his agents or employees with respect to the thing pledged. (n)

Obligation of pledgee not to deposit thing pledged with another is necessary to protect the pledgor or owner of the thing pledged.

Responsibility of pledgee for acts of his agents or employees because their acts are in legal effect, deemed his.



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Art. 2101. The pledgor has the same responsibility as a bailor in commodatum in the case under Art. 1951. (n)

Art. 1951. The bailor who, knowing the flaws of the thing loaned, does not advise the bailee of the same, shall be liable to the latter for the damages which he may suffer by reason thereof. (1752)

Responsibility of pledgee for loss of thing pledged (Liability to pay damages for known hidden flaws)

Requisites:

1. Flaw or defect in the thing loaned 2. Flaw or defect is hidden 3. Bailor is aware thereof 4. Bailor does not advise the bailee of the same 5. Bailee suffers damages by reason of the said flaw

Liability arises from bad faith. The bailee is given the right of retention until he is paid damages (Art. 1944). Where flaw is unknown to the bailor, he is not liable because commodatum is gratuitous.

Art. 2102. If the pledge earns or produces fruits, income, dividends, or interests, the creditor shall compensate what he receives with those which are owing him; but if none are owing him, or insofar as the amount may exceed that which is due, he shall apply it to the principal. Unless there is a stipulation to the contrary, the pledge shall extend to the interest and earnings of the right pledged.

In case of a pledge of animals, their offspring shall pertain to the pledgor or owner of animals pledged, but shall be subject to the pledge, if there is no stipulation to the contrary. (1868a)

Right of pledgee to compensate earnings of pledge with debt

No right to use the thing pledged or to appropriate the fruits without the authority of the owner (Art. 2104, 1977). But pledgee can apply fruits, income, dividends, or interest earned or produced of the ting pledged to the payment of interest if owing and thereafter to the principal (Art. 2132)

Art. 2103. Unless the thing pledged is expropriated, the debtor continues to be the owner thereof.

Nevertheless, the creditor may bring the actions which pertain to the owner of the thing pledged in order to recover it from, or defend it against a third person. (1869)

Right of pledgee against third persons

Creditor can defend; right of a pledgee is a real right enforceable against third persons if Art. 2096 has been complied with.

Art. 2104. The creditor cannot use the thing pledged, without the authority of the owner, and if he should do so, or should misuse the thing in any other way, the owner may ask that it be judicially or extrajudicially deposited. When the preservation of the thing pledged requires its use, it must be used by the creditor but only for that purpose. (1870a)

Obligation of pledgee not to use thing pledged – similar to rule on deposit (Art. 1977), since pledgor parts with possession only and not ownership. If use earns profits, the pledgee must account.

Right of pledgor to ask that thing pledged be deposited judicially or extrajudicially

1. Unauthorized use 2. Misuse in any other way 3. Thing is in danger of being lost or impaired because of

negligence or willful act of the pledgee

Art. 2105. The debtor cannot ask for the return of the thing pledged against the will of the creditor, unless and until he has paid the debt and its interest, with expenses in a proper case. (1871)

Exception – pledgor is allowed to substitute the thing pledged if in danger of destruction or impairment (Art. 2107)

Art. 2106. If through the negligence or wilful act of the pledgee, the thing pledged is in danger of being lost or impaired, the pledgor may require that it be deposited with a third person. (n)

Art. 2107. If there are reasonable grounds to fear the destruction or impairment of the thing pledged, without the fault of the pledgee, the pledgor may demand the return of the thing, upon offering another thing in pledge, provided the latter is of the same kind as the former and not of inferior quality, and without prejudice to the right of the pledgee under the provisions of the following article.

The pledgee is bound to advise the pledgor, without delay, of any danger to the thing pledged. (n)

Right of pledgor to substitute thing pledged

Remedies available:

1. To the pledgor – demand the return of the thing pledged upon offering another thing in pledge

2. To the pledgee – right to cause the same to be sold at public sale (Art. 2108)

Requisites for application of Art. 2107:

1. Reasonable grounds to fear the destruction or impairment of thing pledged

2. No fault on the part of the pledgee 3. Pledgor is offering in place of the thing, another thing in

pledge which is of a kind and quality as the former 4. Pledgee does not choose to exercise his right to cause the

thing pledged to be sold at public auction

Art. 2108. If, without the fault of the pledgee, there is danger of destruction, impairment, or diminution in value of the thing pledged, he may cause the same to be sold at a public sale. The proceeds of the auction shall be a security for the principal obligation in the same manner as the thing originally pledged. (n)

Right of pledgee to cause sale of thing pledged – superior to the right of the pledgor granted in Art. 2107 ―without prejudice to the right of the pledgee.‖

Art. 2109. If the creditor is deceived on the substance or quality of the thing pledged, he may either claim another thing in its stead, or demand immediate payment of the principal obligation. (n)

Right of pledgee to demand substitute or immediate payment – alternative remedies (of evident fairness to both parties)

1. Claim another thing in pledge 2. Demand immediate payment of the principal obligation

Art. 2110. If the thing pledged is returned by the pledgee to the pledgor or owner, the pledge is extinguished. Any stipulation to the contrary shall be void.

If subsequent to the perfection of the pledge, the thing is in the possession of the pledgor or owner, there is a prima facie presumption that the same has been returned by the pledgee. This same presumption exists if the thing pledged is in the possession of a third person who has received it from the pledgor or owner after the constitution of the pledge. (n)

Extinguishment of pledge by return of thing pledged

1. Return of thing pledged (Art. 2110) 2. Payment of the debt (Art. 2105) 3. Renunciation or abandonment of the pledge (Art. 2111) 4. Sale of the thing pledged at public auction (Art. 2115)

Presumption of extinguishment of pledge

Prima facie, may be rebutted by evidence that:

1. Return was merely for substitution (Art. 2105) 2. Temporarily entrusted to the pledgor – where the pledgor

holds the property as a trustee for the pledgee (Yuliongsui v. PNB)

Extinguishment of the accessory obligation of pledge does not affect the existence of the principal obligation (Art. 1274).

Art. 2111. A statement in writing by the pledgee that he renounces or abandons the pledge is sufficient to extinguish the pledge. For this purpose, neither the acceptance by the pledgor or owner, nor the return of the thing pledged is necessary, the pledgee becoming a depositary. (n)



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Other causes under Art. 1231 – prescription, loss of the thing, merger, compensation, novation, etc.

Art. 2112. The creditor to whom the credit has not been satisfied in due time, may proceed before a Notary Public to the sale of the thing pledged. This sale shall be made at a public auction, and with notification to the debtor and the owner of the thing pledged in a proper case, stating the amount for which the public sale is to be held. If at the first auction the thing is not sold, a second one with the same formalities shall be held; and if at the second auction there is no sale either, the creditor may appropriate the thing pledged. In this case he shall be obliged to give an acquittance for his entire claim. (1872a)

Right of pledgee to cause sale of thing pledged

Formalities required:

1. Debt is due and unpaid 2. Sale must be made at a public auction 3. Notice to the pledgor and owner stating the amount due 4. Sale must be made with the intervention of a notary public

No posting of notice of sale and publication required. Extrajudicial in character without intervention by the courts.

Right of pledgee to appropriate thing pledged - exception to the prohibition against pacto commisorio (Art. 2088); considered full payment of claim, not entitled to deficiency

Art. 2113. At the public auction, the pledgor or owner may bid. He shall, moreover, have a better right if he should offer the same terms as the highest bidder.

The pledgee may also bid, but his offer shall not be valid if he is the only bidder. (n)

Right of pledgor and pledgee to bid at public sale

1. Pledgee not allowed to acquire thing pledged if he is sole bidder

2. Pledgor preferred if he matches highest bid

Art. 2114. All bids at the public auction shall offer to pay the purchase price at once. If any other bid is accepted, the pledgee is deemed to have been received the purchase price, as far as the pledgor or owner is concerned. (n)

Art. 2115. 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. If the price of the sale is more than said amount, the debtor shall not be entitled to the excess, unless it is otherwise agreed. If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency, notwithstanding any stipulation to the contrary. (n)

Effects of sale of thing pledged

1. Price of sale is more than the amount due a. Debtor not entitled b. Unless the contrary is provided

2. Price of sale is less than the amount due a. Creditor is not entitled b. Contrary stipulation is void

To compel the creditor to hold an honest sale; and to encourage creditors to lends only as much as he can realize in a public sale.

Right of debtor to excess

Under the Chattel Mortgage Law, the debtor is entitled to recover the excess of the proceeds of the sale (Sec. 14, Act 1508)

Right of creditor to recover deficiency

If pledgee chose to cause the sale, not entitled to deficiency. He may instead sue on the principal obligation so that he may recover the deficiency from the debtor (Manila Surety and Fidelity Co. v. Velayo).

Art. 2116. After the public auction, the pledgee shall promptly advise

the pledgor or owner of the result thereof. (n)

Obligation of pledgee to advise pledgor or owner of result of sale – to enable pledgor or owner to take steps to protect rights if sale was not an honest one

Art. 2117. Any third person who has any right in or to the thing pledged may satisfy the principal obligation as soon as the latter becomes due and demandable.(n)

Right of third persons to satisfy obligation if he has any right, the pledgor cannot refuse to accept payment

The general rule is that the creditor is not bound to accept payment or performance from a third person who has no interest in the fulfillment of the obligation (Art. 1236)

Art. 2118. If a credit which has been pledged becomes due before it is redeemed, the pledgee may collect and receive the amount due. He shall apply the same to the payment of his claim, and deliver the surplus, should there be any, to the pledgor. (n)

Right of pledgee to collect and receive amount due on credit pledged

Not obligatory, but in view of Art. 2009, pledgee has duty to collect if delay would endanger recovery of the credit.

Art. 2119. If two or more things are pledged, the pledgee may choose which he will cause to be sold, unless there is a stipulation to the contrary. He may demand the sale of only as many of the things as are necessary for the payment of the debt. (n)

Right of pledgee to choose which of several things shall be sold

After sufficient property has been sold to satisfy the obligation plus interests and expenses (Art. 2115), no more shall be sold.

Art. 2120. If a third party secures an obligation by pledging his own movable property under the provisions of Art. 2085 he shall have the same rights as a guarantor under Articles 2066 to 2070, and Articles 2077 to 2081. He is not prejudiced by any waiver of defense by the principal obligor. (n)

Right of third person who pledged his own property

See Arts. 2066-2070, 2077-2081; he cannot be prejudiced by any waiver of defense by principal debtor.

Art. 2121. Pledges created by operation of law, such as those referred to in Articles 546, 1731, and 1994, are governed by the foregoing articles on the possession, care and sale of the thing as well as on the termination of the pledge. However, after payment of the debt and expenses, the remainder of the price of the sale shall be delivered to the obligor. (n)

Art. 2122. A thing under a pledge by operation of law may be sold only after demand of the amount for which the thing is retained. The public auction shall take place within one month after such demand. If, without just grounds, the creditor does not cause the public sale to be held within such period, the debtor may require the return of the thing. (n)

Instances of pledges by operation of law legal pledges

1. Right of retention by possessor in good faith prior to reimbursement for necessary and useful expenses (Art. 546)

2. Workman’s lien on movable (Art. 1731) 3. Agent’s right of retention of things object of the agency

prior to reimbursement (Art. 1914) 4. Laborer’s lien on goods manufactured or work done (Art.

1717) 5. Depositary for expenses by reason of deposit (Art. 1994) 6. Hotelkeeper’s security on account of lodging and supplies

(art. 2004)

Rules cases of pledge by operation of law

1. Rules of possession, care, sale of thing pledged, and extinguishment governing conventional pledges apply to legal pledges a. But debtor is entitled to excess in legal pledges

2. There is no definite period for payment



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a. Demand should be made by pledgee or else no right to sell

b. Sale within one month or else pledgor can demand the return

Art. 2123. With regard to pawnshops and other establishments, which are engaged in making loans secured by pledges, the special laws and regulations concerning them shall be observed, and subsidiarily, the provisions of this Title. (1873a)

Rules as to pawnshops and other establishments – PD 114

Case:

Paray & Espeleta v. Rodriguez, et al., G.R. No. 132287, January 24, 2006.

No right of redemption over pledged properties. Foreclosure of pledge is always extrajudicial. Does the right of redemption exist over personal property? No law or jurisprudence establishes or affirms such right. Indeed, no such right exists.

The right to redeem property sold as security for the satisfaction of an unpaid obligation does not exist preternaturally. Neither is it predicated on proprietary right, which, after the sale of property on execution, leaves the judgment debtor and vests in the purchaser. Instead, it is a bare statutory privilege to be exercised only by the persons named in the statute.

The right of redemption over mortgaged real property sold extrajudicially is established by Act No. 3135, as amended. The said law does not extend the same benefit to personal property.

Sibal v Valdez: Personal property is not subject to redemption.

Can pledged properties be sold together? There is nothing in the Civil Code governing the extrajudicial sale of pledged properties that prohibits the pledgee of several different pledge contracts from auctioning all of the pledged properties on a single occasion, or from the buyer at the auction sale in purchasing all the pledged properties with a single purchase price. The relative insignificance of ascertaining the definite apportionments of the sale price to the individual shares lies in the fact that once a pledged item is sold at auction, neither the pledgee nor the pledgor can recover whatever deficiency or excess there may be between the purchase price and the amount of the principal obligation.

Termination of pledge by consignation of the obligation price: If the principal obligation is satisfied, the pledges should be terminated as well. 2098 provides that the right of the creditor to retain possession of the pledged item exists only until the debt is paid. 2105 further clarifies that the debtor cannot ask for the return of the thing pledged against the will of the creditor, unless and until he has paid the debt and its interest. At the same time, the right of the pledgee to foreclose the pledge is also established under the Civil Code. When the credit has not been satisfied in due time, the creditor may proceed with the sale by public auction under the procedure provided under 2112.

23. Real Estate Mortgage, Articles 2124 to 2131, Civil Code, Rule 68, Rules of Court, Act No. 3135, as amended

CHAPTER 3 MORTGAGE

Art. 2124. Only the following property may be the object of a contract of mortgage:

(1) Immovables; (2) Alienable real rights in accordance with the laws, imposed upon immovables.

Nevertheless, movables may be the object of a chattel mortgage. (1874a)

Mortgage – contract whereby the debtor secures to the creditor the fulfillment of a principal obligation, specially subjecting to such security immovable property which obligation shall be satisfied with the proceeds of the sale of said property or rights in case the said obligation is not complied with at the time stipulated

Characteristics of mortgage

1. Real 2. Accessory

3. Subsidiary 4. Unilateral – obligation only on the part of the creditor who

must free the property from the encumbrance once the obligation is fulfilled

Mortgagor-debtor generally retains possession of property mortgaged. But it is not an essential requisite of a mortgage so a mortgagor can deliver the property to the mortgagee, without altering the nature of the contract.

Payment of interest on mortgage credit

Mortgage may or may not earn interest. Interest may be in the form of fruits of the mortgaged property without altering the character of the mortgage (Legaspi v. Celestial). In such case, mortgage shall be subject to the obligation of an antichretic creditor (Macapinlac v. Gutierrez Repide).

Cause or consideration in mortgage – same as of the principal contract.

Kinds of mortgage

1. Voluntary – agreed to between the parties 2. Legal – required by law to be executed in favor of certain

persons 3. Equitable – lacks the proper formalities but reveals the

intention to burden real property as security for a debt

Subject matter of mortgage

1. Immovable (Art. 415) 2. Alienable real rights imposed upon immovable (Art. 2124)

Mortgage of building distinct from land on which it is built (Prudential Bank v. Panis).

Future property cannot be object of mortgage – but inclusion of future improvements on the property already belonging to the mortgagor valid (People’s Bank and Trust v. Dahican Lumber Co.)

Art. 2125. In addition to the requisites stated in Art. 2085, it is indispensable, in order that a mortgage may be validly constituted, that the document in which it appears be recorded in the Registry of Property. If the instrument is not recorded, the mortgage is nevertheless binding between the parties.

The persons in whose favor 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. (1875a)

Essential requisites of mortgage

Registered mortgage presumed valid; burden of proof on the person attacking its validity:

1. Where mortgage in a private document – no valid mortgage is constituted

2. Where mortgage not registered – binding on the parties. Registration only operates as a notice of the mortgage to others but neither adds to its validity nor converts an invalid mortgage into a valid one between the parties (Samanilla v. Cajucom)

3. Where mortgage registered under Act 3344 – is without prejudice to the better right of third parties.

Doctrine of mortgagee in good faith

1. Reliance in good faith on certificate of title of mortgagor – all persons dealing with property covered by a Torrens title are not required to go beyond what appears on the face of the title

2. Title in name of mortgagor, not rightful owner – the doctrine does not apply to a mortgagor merely pretending to be the rightful owner but the title is under the name of another person

3. Duty of mortgagee to look beyond certificate of title – where there is nothing on the certificate of title to indicate any cloud or vice in the ownership of the property. Exceptions: a. Purchaser or mortgagor has knowledge of a defect or

lack of title of the vendor or mortgagor b. Mortgagee does not deal directly with the registered

owner of property or c. was aware of sufficient facts to induce a reasonably

prudent man to inquire into the status of a property in litigation



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4. Greater care and diligence required of mortgagee banks – because their business is impressed with public interest. It extends to persons regularly engaged in business of lending money secured by real estate mortgages (PNB v. Militar)

Right in case of legal mortgages to compel each other to observe the form required by law provided that the contract between them is valid and enforceable (Arts. 1357, 1358)

Registration of mortgage

1. Mortgagee entitled to registration of mortgage as a matter of right – once a mortgage has been signed in due form, the mortgagee is entitled to its registration. It is the execution, not the registration that is voluntary (Gonzales v. Basa)

2. Proceedings for registration do not determine validity of mortgage or its effect - registration mere ministerial act, not a declaration by the state that the instrument is valid

3. Registration without prejudice to better right of third parties –A registered mortgage is inferior to a buyer’s unregistered right but superior to a contract to sell

4. Registrability of encumbrance acquired subsequent to mortgage – when duly registered, the mortgage deed forms part of the records for the registration of the property mortgaged. There is no need to present the deed itself.

5. Registrability of mortgage by surviving spouse of undivided share of conjugal property – Mortgage of undivided share valid but registration will not affect the deceased spouse’s creditors or the debts of the conjugal partnership.

6. Subsequent registration of an adverse claim – prior registration of a lien creates a preference; the subsequent annotation of an adverse claim cannot defeat the rights of the mortgagee or the purchase at the auction sale whose rights were derived from a prior mortgage.

Effect of invalidity of mortgage on principal obligation

1. Principal obligation remains valid – the only thing lost is the right to foreclose the mortgage as a special remedy for satisfying or settling the indebtedness which is the principal obligation

2. Mortgage deed remains as evidence of a personal obligation – amount due to the creditor may be enforced in an ordinary personal action.

Art. 2126. The mortgage directly and immediately subjects the property upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted. (1876)

Effect of mortgage

1. Creates a real right – a registered mortgage creates a right in rem, a real right, a lien inseparable from the property mortgaged, which is enforceable against the whole world a. All subsequent purchasers must respect the

mortgage whether or not there is a consent by the mortgagee but it has to be registered or the buyer must know of its existence (PNB v. Mallorca)

b. The right or lien of an innocent mortgagee for value must be respected even if the mortgagor obtained his title through fraud.

c. Owner can mortgage property during the pendency of an expropriation.

d. Banking institutions must exercise a greater degree of diligence before entering into a mortgage contract

e. If property is sold in an auction sale by a second mortgagee, the only thing left for the first mortgagee is to collect his mortgage credit.

f. In actions for cancellation of TCT, mortgagee must be joined as a party since it will lead to the cancellation of the mortgage annotation also.

g. BP 877 – no lessor shall be entitled to eject lessee upon the ground that the premises has been sold or mortgaged to a third person except when the object is to effect construction by the new owner.

2. Creates merely an encumbrance – does not extinguish the title of the debtor who does not lose his principal attribute as owner, that is, the right to dispose

a. A mortgage does not involve a transfer, cession or conveyance of property but merely constitutes a lien thereon.

b. What is delimited is not the mortgagor’s jus disponendi, as an attribute of ownership, but merely the rights conferred by such act of disposal (Medida v. CA)

c. The first mortgagee has superior right over junior mortgagees or attaching creditors (RCBC v. CA)

d. Failure to redeem does not automatically vest ownership of the property to the mortgagee.

e. Debtor remains owner during the redemption period and may constitute another mortgage on the property.

f. An assignee cannot acquire a greater right that that pertaining to assignor (Casabuena v. CA).

g. Upon payment of the mortgage debt, the mortgagee cannot refuse to return TCT to the mortgagor (De los Santos v. CA)

h. In a sale with assumption of mortgage, the assumption is a condition to the seller’s consent and cannot be perfected without the approval of the mortgagee (Ramos v. CA)

Art. 2127. The mortgage extends to the natural accessions, to the improvements, growing fruits, and the rents or income 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, with the declarations, amplifications and limitations established by law, whether the estate remains in the possession of the mortgagor, or it passes into the hands of a third person. (1877)

Extent of mortgage – ownership of such accessions and accessories and improvements subsequently introduced also belongs to the mortgagor is the owner of the principal (Castro Jr. v. CA)

1. Natural accessions, 2. Improvements 3. Growing fruits 4. Rents or income not yet received when the obligation

becomes due 5. Insurance proceeds 6. Expropriation value.

To exclude them, there has to be an express stipulation to that effect.

Stipulation in mortgage contract including after-acquired properties-

1. Stipulation valid; purpose - common and logical in all cases where the properties are perishable or subject to inevitable wear or tear or were intended to be sold or to be used but with understanding, express or implied, that they shall be replaced with others to be thereafter acquired by the mortgagor (PBTC v. Dahican Lumber)

2. Attachment of lien retroactive – attaches and vests not at the time said improvements are constructed but on the date of the recording and registration of deed of mortgage (Luzon Lumber v, Quiambao)

Mortgage with ―dragnet‖ clauses to secure future advancements

1. Stipulation necessary to secure future advancements – The general rule is that an action to foreclose a mortgage must be limited to the amount mentioned in the mortgage.

2. Usefulness of mortgage with a dragnet clause – convenience and accommodation to the borrowers as it makes available additional funds without their having to execute additional security documents

3. Construction of mortgage with a dragnet clause – specifically phrased to subsume all debts of past or future origin a. Carefully scrutinized and strictly construed

particularly when it is one of adhesion b. Where the plain terms of the mortgage evidence the

intention of the mortgagor to secure a larger amount, the action to foreclose may be for the larger amount (Lim Julian v. Lutero).



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4. Mortgage, a continuing security is not discharged by the repayment of the amount named in the mortgage, until the full amount of the advancement is paid.

Art. 2128. The mortgage credit may be alienated or assigned to a third person, in whole or in part, with the formalities required by law. (1878)

Alienation or assignment of mortgage credit – valid even if not registered. Registration required only to affect third persons.

Art. 2129. The creditor may claim from a third person in possession of the mortgaged property, the payment of the part of the credit secured by the property which said third person possesses, in the terms and with the formalities which the law establishes. (1879)

Right of creditor against transferee of mortgaged property – transfer does not relieve the debtor of the obligation to pay the debt to the mortgage creditor in the absence of novation.

1. Demand the payment of the part of the credit secured by the said property

2. Prior demand for payment must have been made on the debtor and the latter failed to pay.

Art. 2130. A stipulation forbidding the owner from alienating the

immovable mortgaged shall be void. (n)

Stipulation forbidding alienation of mortgaged property (pacto de non aleinado), contrary to public good inasmuch as transmission of property should not be unduly impeded.

Stipulation granting right of first refusal valid and consideration for the loan-mortgage may be said to include the consideration for the right of first refusal. Sale in violation of right of first refusal is rescissible.

Art. 2131. The form, extent and consequences of a mortgage, both as to its constitution, modification and extinguishment, and as to other matters not included in this Chapter, shall be governed by the provisions of the Mortgage Law and of the Land Registration Law. (1880a)

Laws governing mortgage

1. Mortgage Law 2. Land Registration Law

Foreclosure – remedy available to the mortgagee by which he subjects the mortgaged property to the satisfaction of the obligation to secure which the mortgage was given; presupposes more than mere demand.

Validity and effect of foreclosure

Foreclosure is the necessary consequence of non-payment of mortgage indebtedness, can be effected only when the debt remains unpaid at the time it is due.

1. Limited to the amount mentioned in the mortgage document

2. May contain an acceleration clause that on occasion of the mortgagor’s default, the whole sum remaining unpaid automatically becomes due and payable.

3. The essence of mortgage is that a property has been identified or set apart from the mass of property of the debtor as security for the payment of money or the fulfillment of an obligation.

4. Once the proceeds are applied, the debtor can no longer be compelled to pay except if there is a deficiency.

5. Statutory provisions governing public notice in foreclosure sales must be strictly complied with; slight deviations will invalidate sale or render it voidable (Tambunting v. CA)

6. The only right the mortgagor can transfer after foreclosure is the right to redeem and the use, possession and enjoyment of the same during the period of redemption (GSIS v. CA).

7. Mortgagee may take steps to recover mortgaged property. 8. Foreclosure proceedings have in their favor the

presumption of regularity, burden of proof on the person attacking its validity.

Right of mortgagee to recover deficiency

1. Mortgage merely a security, not a satisfaction of an obligation – in judicial foreclosure, Sec. 6 grants the right to claim for deficiency, applied also to extrajudicial foreclosure.

2. Action for recovery of deficiency – if the deficiency is embodied in a judgment, it is called a deficiency judgment (Art. 2115), an independent action may also be filed for the deficiency even during the period of redemption

3. Prescriptive period of action – within 10 years from the time the right of action accrues as provided in Art. 1144(2) upon an obligation created by law. This is applicable to both real and chattel mortgage.

Nature of judicial foreclosure proceeding

1. Action quasi in rem – based on a personal claim against a specific property of the defendant

2. Result or incident of failure to pay indebtedness – the principal obligation is the money indebtedness and the subjection of property only resorted to upon failure to pay the debt.

3. Survives death of mortgagor – action to foreclose survives death because it is not a pure money claim but an action to enforce a mortgage lien

Stipulation of upset price in mortgage contract void

―Tipo‖ or upset price is the minimum price at which the property shall be sold is null and void for the property must be sold to the highest bidder.

Effect of inadequacy of price in foreclosure sale

1. General rule; exception – where there is a right to redeem, inadequacy of price is immaterial. Inadequacy must be so great as to shock the conscience of the court

2. At a nominal cost – reason for the grant of right to redeem because mortgagee ordinarily bids no more than the mortgage credit

3. Less than its fair market value – redemption price is equivalent to the amount of the purchase price with 1% interest per month up to the time of redemption

4. Bid price at the public auction – value of the mortgaged property has no bearing on the bid price as long as regularly and honestly conducted

Waiver of security by mortgagee

1. Personal action to recover indebtedness a. Personal action for the debt b. Real action to foreclose mortgage

2. Remedy alternative, not cumulative or successive 3. Options in case of death of debtor

a. Waive mortgage and claim entire debt from the estate as an ordinary claim

b. Foreclose the mortgage judicially and prove deficiency as an ordinary claim

c. Rely on the mortgage exclusively without right to file a claim for deficiency

Foreclosure retroacts to the date of registration of mortgage

The character of being an innocent mortgagee continues up to the date of actual foreclosure and sale at public auction.

Redemption – transaction by which the mortgagor requires or buys back the property which may have passed under the mortgage or divests the property of the lien which the mortgage may have been created

Kinds of redemption

1. Equity of redemption – in case of judicial foreclosure to redeem foreclosed property after his default but before the confirmation of sale

2. Right of redemption – in case of extrajudicial foreclosure to redeem the mortgaged property within a certain period from and after it was sold for the satisfaction of the mortgage debt.

Equity of redemption

1. Exercised before confirmation sale – right of the defendant mortgagor to extinguish the mortgage and retain ownership of the property paying the secured debt within which the 90-day period after the judgment becomes final in accordance to Rule 68



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2. Acquired by second mortgagee – strictly subordinate to the superior lien of the first mortgagee

3. Taking physical possession not necessary for levy – because the value of equity of redemption can neither be quantified nor equated with the actual value of the property upon which it may be exercised (Top-Rate v. IAC)

4. Levy by means of a writ of execution – this interest will pass to the purchaser in the auction sale

5. Remedy of mortgagee to obtain possession (1) obtain judicial foreclosure or (2) recover possession preliminary to the sale

Right of redemption

1. Period within which to exercise right – one year from and after the date of registration of the certificate of sale with the Registry of Deeds

2. Effect of failure to exercise right – The right of purchaser is merely inchoate until after the period of redemption has expired without the right being exercised (Medida v. CA) a. If no redemption is made, purchaser becomes owner b. One-year period directory can be extended subject to

two requisites (voluntary agreement to extend; debtor’s commitment to pay the redemption price on a fixed date) (DBP v. West Negros College).

3. Effect of exercise of right a. Defeats inchoate right of the purchaser and restores

the property to the same condition as if no sale had been made

b. Implied admission of the regularity of the foreclosure sale and estops mortgagor from impugning validity of sale

4. Where mortgaged property sold to a third party – Even though the mortgagor has possession during the period of redemption, he may not make a conveyance of the property as said ownership belongs to the purchaser at the foreclosure sale (Dizon v. Gaborro).

5. Where sale not registered and made without consent of mortgagee – No consent having been secured from the bank, the title remained in the name of the mortgagor and the buyer was not validly constituted as debtor and had no right to redeem

6. Where extrajudicial foreclosure effected with fraud – consolidation of ownership to the mortgagee as highest bidder is of no legal force and effect

RULE 68 FORECLOSURE OF REAL ESTATE MORTGAGE

Section 1. Complaint in action for foreclosure. In an action for the foreclosure of a mortgage or other encumbrance upon real estate, the complaint shall set forth the date and due execution of the mortgage; its assignments, if any; the names and residences of the mortgagor and the mortgagee; a description of the mortgaged property; a statement of the date of the note or other documentary evidence of the obligation secured by the mortgage, the amount claimed to be unpaid thereon; and the names and residences of all persons having or claiming an interest in the property subordinate in right to that of the holder of the mortgage, all of whom shall be made defendants in the action.

Sec. 2. Judgment on foreclosure for payment or sale. If upon the trial in such action the court shall find the facts set forth in the complaint to be true, it shall ascertain the amount due to the plaintiff upon the mortgage debt or obligation, including interest and other charges as approved by the court, and costs, and shall render judgment for the sum so found due and order that the same be paid to the court or to the judgment obligee within a period of not less than ninety (90) days nor more than one hundred twenty (120) days from the entry of judgment, and that in default of such payment the property shall be sold at public auction to satisfy the judgment.

Sec. 3. Sale of mortgaged property; effect. When the defendant, after being directed to do so as provided in the next preceding section, fails to pay the amount of the judgment within the period specified therein, the court, upon motion, shall order the property to be sold in the manner and under the provisions of Rule 39 and other regulations governing sales of real estate under execution. Such sale shall not affect the rights of persons holding prior encumbrances upon the property or a part thereof, and when confirmed by an order of the court, also upon motion, it shall operate to divest the rights in the property of all the parties to the action and

to vest their rights in the purchaser, subject to such rights of redemption as may be allowed by law.

Upon the finality of the order of confirmation or upon the expiration of the period of redemption when allowed by law, the purchaser at the auction sale or last redemptioner, if any, shall be entitled to the possession of the property unless a third party is actually holding the same adversely to the judgment obligor. The said purchaser or last redemptioner may secure a writ of possession, upon motion, from the court which ordered the foreclosure.

Sec. 4. Disposition of proceeds of sale. The amount realized from the foreclosure sale of the mortgaged property shall, after deducting the costs of the sale, be paid to the person foreclosing the mortgage, and when there shall be any balance or residue, after paying off the mortgage debt due, the same shall be paid to junior encumbrancers in the order of their priority, to be ascertained by the court, or if there be no such encumbrancers or there be a balance or residue after payment to them, then to the mortgagor or his duly authorized agent, or to the person entitled to it.

Sec. 5. How sale to proceed in case the debt is not all due. If the debt for which the mortgage or encumbrance was held is not all due as provided in the judgment, as soon as a sufficient portion of the property has been sold to pay the total amount and the costs due, the sale shall terminate; and afterwards, as often as more becomes due for principal or interest and other valid charges, the court may, on motion, order more to be sold. But if the property cannot be sold in portions without prejudice to the parties, the whole shall be ordered to be sold in the first instance, and the entire debt and costs shall be paid, if the proceeds of the sale be sufficient therefor, there being a rebate of interest where such rebate is proper.

Sec. 6. Deficiency judgment. If upon the sale of any real property as provided in the next preceding section there be a balance due to the plaintiff after applying the proceeds of the sale, the court, upon motion, shall render judgment against the defendant for any such balance for which, by the record of the case, he may be personally liable to the plaintiff, upon which execution may issue immediately if the balance is all due at the time of the rendition of the judgment; otherwise, the plaintiff shall be entitled to execution at such time as the balance remaining becomes due under the terms of the original contract, which time shall be stated in the judgment.

Sec. 7. Registration. A certified copy of the final order of the court confirming the sale shall be registered in the registry of deeds. If no right of redemption exists, the certificate of title in the name of the mortgagor shall be cancelled, and a new one issued in the name of the purchaser.

Where a right of redemption exists, the certificate of title in the name of the mortgagor shall not be cancelled, but the certificate of sale and the order confirming the sale shall be registered and a brief memorandum thereof made by the registrar of deeds upon the certificate of title. In the event the property is redeemed, the deed of redemption shall be registered with the registry of deeds, and a brief memorandum thereof shall be made by the registrar of deeds on said certificate of title.

If the property is not redeemed, the final deed of sale executed by the sheriff in favor of the purchaser at the foreclosure sale shall be registered with the registry of deeds; whereupon the certificate of title in the name of the mortgagor shall be cancelled and a new one issued in the name of the purchaser.

Sec. 8. Applicability of other provisions. The provisions of sections 31, 32 and 34 of Rule 39 shall be applicable to the judicial foreclosure of real estate mortgages under this Rule insofar as the former are not inconsistent with or may serve to supplement the provisions of the latter.

Sec. 31. Manner of using premises pending redemption; waste restrained. Until the expiration of the time allowed for redemption, the court may, as in other proper cases, restrain the commission of waste on the property by injunction, on the application of the purchaser or the judgment obligee, with or without notice; but it is not waste for a person in possession of the property at the time of the sale, or entitled to possession afterwards, during the period allowed for redemption, to continue to use it in the same manner in which it was previously used; or to use it in the ordinary course of husbandry; or to make the necessary repairs to buildings thereon while he occupies the property.



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Sec. 32. Rents, earnings and income of property pending redemption. The purchaser or a redemptioner shall not be entitled to receive the rents, earnings and income of the property sold on execution, or the value of the use and occupation thereof when such property is in the possession of a tenant. All rents, earnings and income derived from the property pending redemption shall belong to the judgment obligor until the expiration of his period of redemption.

Sec. 34. Recovery of price if sale not effective; revival of judgment. If the purchaser of real property sold on execution, or his successor in interest, fails to recover the possession thereof, or is evicted therefrom, in consequence of irregularities in the proceedings concerning the sale, or because the judgment has been reversed or set aside, or because the property sold was exempt from execution, or because a third person has vindicated his claim to the property, he may on motion in the same action or in a separate action recover from the judgment obligee the price paid, with interest, or so much thereof as has not been delivered to the judgment obligor; or he may, on motion, have the original judgment revived in his name for the whole price with interest, or so much thereof as has been delivered to the judgment obligor. The judgment so revived shall have the same force and effect as an original judgment would have as of the date of the revival and no more.

Judicial foreclosure under the Rules of Court

1. Judicial action for the purpose – by bringing an action for the purpose in the court with jurisdiction over the area wherein the real property involved or a portion thereof is situated (Sec. 1, Rule 4)

2. Order to mortgagor to pay mortgage debt – Court will order the payment of the mortgage debt, interest and other charges not less than 90 day nor more than 120 days from entry of judgment

3. Sale to highest bidder at public auction – debtor fails to exercise equity of redemption

4. Confirmation of sale – divests the rights of all parties to the action and vest their rights in the purchaser

5. Execution of judgment – parties to an action are not allowed to change the procedure which it prescribed (Piano v. Cayanong). Proper remedy is not annulment of judgment, but an appeal from the order and confirmation.

6. Application of proceeds of the sale a. Costs of the sale b. Amount due to mortgagee c. Claims of junior encumbrancers or persons holding

subsequent mortgages d. Balance to be paid to the debtor

7. Execution of sheriff’s certificate – in the absence of a certificate of sale, no title passes by the foreclosure proceedings to the vendee. A sheriff’s report on the auction sale enjoys the presumption of regularity (Sayson v. Luna).

Equity of redemption in judicial foreclosure

1. Period for exercise – 90-day period from order of foreclosure

2. Reckoning of ninety-day period – from the date of service of such order/ from the date of entry of judgment (better interpretation)

3. Where period never began to run – when order to pay is held in abeyance, the period never begins to run

4. Period given, a substantive right – last opportunity to pay the debt and save the property

Confirmation by court of auction sale in judicial foreclosure

1. Equity of redemption – no right of redemption except in judicial foreclosures by bank and credit institutions

2. Procedure – right of the mortgagor to extinguish the mortgage and retain ownership of the property by paying the secured debt within the 120-day period from the entry of judgment.

3. Effect and nature – Confirmation of sale cuts off all the rights and interests of the mortgagor or mortgagee

4. Control of court over proceedings before confirmation 5. Requirement of notice and hearing – before valid

confirmation, it is necessary that a hearing be given the interested parties at which they may have an opportunity to show cause why the sale should not be confirmed.

ACT NO. 3135 – AN ACT TO REGULATE THE SALE OF PROPERTY UNDER SPECIAL POWERS INSERTED IN OR ANNEXED TO REAL-ESTATE MORTGAGES

SECTION 1. When a sale is made under a special power inserted in or attached to any real-estate mortgage hereafter made as security for the payment of money or the fulfillment of any other obligation, the provisions of the following election shall govern as to the manner in which the sale and redemption shall be effected, whether or not provision for the same is made in the power.

SECTION 2. Said sale cannot be made legally outside of 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 subject to stipulation, such sale shall be made in said place or in the municipal building of the municipality in which the property or part thereof is situated.

SECTION 3. Notice shall be given by posting notices of the sale for not less than twenty days in at least three public places of the municipality or city where the property is situated, and if such property is worth more than four hundred pesos, such notice shall also be published once a week for at least three consecutive weeks in a newspaper of general circulation in the municipality or city.

SECTION 4. The sale shall be made at public auction, between the hours or nine in the morning and four in the afternoon; and shall be under the direction of the sheriff of the province, the justice or auxiliary justice of the peace of the municipality in which such sale has to be made, or a notary public of said municipality, who shall be entitled to collect a fee of five pesos each day of actual work performed, in addition to his expenses.

SECTION 5. At any sale, the creditor, trustee, or other persons authorized to act for the creditor, may participate in the bidding and purchase under the same conditions as any other bidder, unless the contrary has been expressly provided in the mortgage or trust deed under which the sale is made.

SECTION 6. In all cases in which an extrajudicial sale is made under the special power hereinbefore referred to, the debtor, his successors in interest or any judicial creditor or judgment creditor of said debtor, or any person having a lien on the property subsequent to the mortgage or deed of trust under which the property is sold, may redeem the same at any time within the term of one year from and after the date of the sale; and such redemption shall be governed by the provisions of sections four hundred and sixty-four to four hundred and sixty-six, inclusive, of the Code of Civil Procedure, in so far as these are not inconsistent with the provisions of this Act.

SECTION 7. In any sale made under the provisions of this Act, the purchaser may petition the Court of First Instance of the province or place where the property or any part thereof is situated, to give him possession thereof during the redemption period, furnishing bond in an amount equivalent to the use of the property for a period of twelve months, to indemnify the debtor in case it be shown that the sale was made without violating the mortgage or without complying with the requirements of this Act. Such petition shall be made under oath and filed in form of an ex parte motion in the registration or cadastral proceedings if the property is registered, or in special proceedings in the case of property registered under the Mortgage Law or under section one hundred and ninety-four of the Administrative Code, or of any other real property encumbered with a mortgage duly registered in the office of any register of deeds in accordance with any existing law, and in each case the clerk of the court shall, upon the filing of such petition, collect the fees specified in paragraph eleven of section one hundred and fourteen of Act Numbered Four hundred and ninety-six, as amended by Act Numbered Twenty-eight hundred and sixty-six, and the court shall, upon approval of the bond, order that a writ of possession issue, addressed to the sheriff of the province in which the property is situated, who shall execute said order immediately.

SECTION 8. The debtor may, in the proceedings in which possession was requested, but not later than thirty days after the purchaser was given possession, petition that the sale be set aside and the writ of possession cancelled, specifying the damages suffered by him, because the mortgage was not violated or the sale was not made in accordance with the provisions hereof, and the court shall take cognizance of this petition in accordance with the summary procedure provided for in section one hundred and twelve of Act Numbered Four hundred and ninety-six; and if it finds the complaint of the debtor justified, it shall dispose in his favor of all or part of the bond furnished by the person who obtained possession. Either of the parties may appeal from the order of the judge in



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accordance with section fourteen of Act Numbered Four hundred and ninety-six; but the order of possession shall continue in effect during the pendency of the appeal.

SECTION 9. When the property is redeemed after the purchaser has been given possession, the redeemer shall be entitled to deduct from the price of redemption any rentals that said purchaser may have collected in case the property or any part thereof was rented; if the purchaser occupied the property as his own dwelling, it being town property, or used it gainfully, it being rural property, the redeemer may deduct from the price the interest of one per centum per month provided for in section four hundred and sixty-five of the Code of Civil Procedure.

SECTION 10. This Act shall take effect on its approval.

Approved: March 6, 1924

Nature of power of foreclosure by extrajudicial sale

1. Conferred for mortgagee’s protection – not an ordinary agency that exclusively contemplates representation

2. Ancillary stipulation – foreclosure proper when power is inserted or attached to the mortgage contract; determination devolves upon clerk of court

3. Prerogative of the mortgagee – to foreclose or not to foreclose

Requisites for valid redemption

1. One year within the date of the registration of the certificate of sale

2. Payment of purchase price of the money plus 1% interest per month together with taxes

3. Written notice of the redemption must be served on the officer who made the sale and a duplicate filed with the proper Register of Deeds

4. In judicial foreclosure, no more right of redemption after the sale is confirmed

5. Mortgagor or his assignee required to tender payment within the prescribed period to make redemption valid or to preserve it for future enforcement

Payment of redemption money

1. To whom made – purchaser, redemptioner or officer who made the sale (Sec. 29, Rule 39) or sheriff (Reyes v. Chavoso)

2. Medium of payment – check or lawful money, sheriff is liable to purchaser in case of check

Amount payable

1. Purchase price – no linger the judgment debt, but the purchase price at the auction sale

2. Amount fixed by the court – if bank forecloses, General Banking Law applies ― the amount fixed by the court in order of execution, or the amount of the mortgage deed, as the case may be, plus interest, costs and expenses, less the income received from the property.

3. 1% interest per month 4. Necessary expenses incurred by the purchaser/ taxes –

reasonable cost of improvement made by him to preserve the property

5. Rentals received by purchaser 6. In case of surplus in the purchase price – not controlling if

the purchase price is unjustifiably higher that the real amount of the mortgage obligation

Rights of persons with subordinate interest

1. Mortgagor’s equity of redemption before foreclosure – acquires only the equity of redemption

2. Mortgagor’s right of redemption after foreclosure – passes to second mortgagee

3. Payment of his credit from excess of proceeds of auction sale – second mortgage entitled besides right of repurchase to the payment of his credit from the excess of the proceeds after covering the mortgagor’s obligation to the first mortgagee. If there is deficiency, the purchaser acquires the property free of the second mortgage

4. Where persons with subordinate interest not made defendants – failure to join will not invalidate foreclosure proceedings, provision merely directory

5. Where irregularities attended foreclosure – failure to give notice to inferior lien holders will not invalidate the

foreclosure proceedings, but their unforeclosed equity of redemption will remain.

6. Unpaid seller of property – Foreclosure of the unpaid property does not make the mortgagee an obligor of the unpaid seller for the purchase price (PNB v. CA)

Extrajudicial foreclosure under Act No. 3135

Construction must be equally and mutually beneficial to both parties (PNB v. Cabatingan)

1. Express authority to sell given to mortgagee – covers only real estate mortgages

a. PNB covered, now a private bank 2. Authority not extinguished by death of mortgagor or

mortgagee – essential and inseparable part of a bilateral agreement (Perez v. PNB)

3. Public sale after notice – must be strictly complied with; purpose is to inform all interested parties of the date, time and place of the foreclosure sale

4. Public sale at different places/on different dates – the indivisibility of a real estate mortgage is not violated by conducting two separate foreclosure proceedings on mortgaged properties located in different cities

5. Publication of notice of auction sale – required to give a reasonably wide publicity so that those interested can attend a. Publication mandatory – failure to comply constitutes

a jurisdictional defect which invalidates the sale or at least renders it voidable

b. Contents of notice i. Correct number of TCT ii. Correct technical description of the real

property sold iii. The validity of a notice of sale is not affected by

immaterial errors not calculated to deter or mislead bidders (K-Phil v. MBTC)

c. Object of notice – to secure bidders and to prevent sacrifice of property; reasonably wide publicity

d. Personal notice to mortgagor not generally required – unless there is a contrary stipulation. Lack of notice to the mortgagor is not a ground to set aside a foreclosure sale.

e. Notice to executing mortgagee-creditor not provided by law – because he initiated it

f. Posting of notice on mortgaged property not required – what is required is posting in at least 3 public places in the city or municipality where the property is situated

g. Certificate of posting nor required – significant only when it becomes necessary to prove compliance with the required notice of posting

h. Burden of proving non-compliance with notice posting requirement upon mortgagor

i. Publication of notice of sale in news paper of general circulation sufficient compliance – mandated not for mortgagor’s benefit, but for the public or third persons. Posting and publication requirements cannot be waived

j. When newspaper of general circulation – published for the dissemination of local news and general information, bona fide subscription list of paying subscribers and published at regular intervals. Most important is that it is open to the public in general.

k. Formalities of levy not required l. Notice to bidder of all bids offered at auction sale not

required m. Sec. 4 requires that the sale must take place

between 9 am to 4 pm 6. Payment of cash by highest bidder – there is no need to

pay cash when bid is equivalent to the mortgage debt 7. Surplus proceeds from foreclosure sale – stands in the

same place of the land itself with respect to liens and vested right thereon a. Should be applied to junior encumbrances in the

order of priority b. Senior mortgagee holding surplus is deemed a

trustee of the mortgagor 8. Redemption of property sold –

a. Natural persons - one year from or after the date of the sale (Sec. 6) reckoned from the registration of certificate of sale.



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b. Juridical persons – right to redeem the property until, but not after the registration of the certificate of foreclosure sale which in no case shall be more than 3 months after foreclosure, whichever is earlier (Sec. 47, General Banking Law)

9. Remedy of party aggrieved by foreclosure – if mortgage was not violated or the sale was not made in accordance to the provisions (GSIS v. CA) a. Fraud, collusion, accident, mutual mistake, breach of

trust or misconduct by purchaser b. Sale not fairly or regularly conducted c. Price inadequate and inadequacy so great as to

shock the conscience of the court (UCPB v. Beluso). 10. Republication – necessary for the validity of a postponed

extrajudicial foreclosure sale. No right to waive republication requirement (DBP v. CA).

Nature of mortgagor’s right of redemption

1. Absolute privilege – exercise of which is entirely dependent upon the will and discretion of the redemptioner a. No legal obligation to exercise the right of redemption b. Filing of judicial action equivalent to formal offer;

formal offer to redeem and bona fide tender of purchase price required only to preserve the right of redemption for future enforcement.

2. Mere statutory privilege – must be exercised in the mode and within the period prescribed by the statute a. Offer must be accompanied by tender of payment b. Right of redemption liberally construed in favor of

original owner i. To aid rather than to defeat him ii. To look upon redemption with favor

c. Dacion en pago = waiver of right of redemption 3. Involves title to foreclosed property – if redemption is

seasonably made, it seeks to erase from the title of the judgment or mortgage debtor the lien created by registration of the mortgage and sale

Persons entitled to exercise right of redemption

1. Mortgagor or one in privity of title with mortgagor 2. Successor-in-interest – person to whom mortgagor

a. Transferred right of redemption b. Conveyed interest in property for purpose of

redemption c. Succeeds to the interest of debtor by operation of law d. Joint debtors who were joint owners of the property

sold e. Joint interest in the property, spouse or heirs

3. Under the Rules of Court a. Judgment debtor, successor-in-interest in whole or in

part of the property b. Creditor having a lien by attachment, judgment or

mortgage on the property sold or some part thereof subsequent to the judgment under which the property was sold (redemptioner)

Registration of transfer or right of redemption not required

1. Where redemption is proper, the purchaser cannot refuse to allow the same

2. Public policy demands that the original debtor-mortgagor or his successors-in-interest should as much as possible be allowed to redeem the foreclosed property.

Rights and obligations of mortgagee in possession – one who has lawfully acquired actual or constructive possession of the premises mortgaged to him, standing upon his rights as mortgagee and not claiming under another title, for the purpose of enforcing his security upon such property or making its income help to pay his debt

1. Similar to those of an antichretic creditor – retain possession until indebtedness is satisfied

2. Without right to reimbursement for useful expenses – no other right than to demand execution and the recording of the document in which the mortgage is formalized (Art. 2125[2]).

Vendee’s right to possession of mortgaged property sold

1. Contingent – before the expiration of the period to redeem, contingent on the failure of the mortgagor to redeem

2. Final – after the redemption period is terminated and the right to redeem barred

Right of purchaser to writ of possession – order by a court whereby the sheriff is commanded to place in possession of real or personal property the person entitled thereto such as when property is judicially foreclosed

1. Ministerial function in extrajudicial foreclosure 2. Question of validity of mortgage or foreclosure not a legal

ground for refusing the issuance of writ 3. Order of possession continues even during the pendency

of a proceeding to determine the validity of sale 4. Right to request issuance of writ of possession never

prescribes

Right before lapse of redemption period

1. Sec. 7 of Act 3135 allows the purchaser to take possession during redemption period upon filing of ex parte application and approval of bond

2. Question of legality of writ shall be determined under Sec. 8 and cannot be raised to oppose issuance.

3. Bond is required to protect the rights of the mortgagor so that he may be indemnified if it be shown that foreclosure was not justified

Right after lapse of redemption period

1. Nature of petition/motion for issuance of writ – summary and non-litigious, merely an incident of the transfer of title in the name of the purchaser-petitioner

2. Right of purchaser to a conveyance and to possession – right to possession is based simply on the purchaser’s ownership of property especially after the redemption period has expired

3. Right of purchaser to aid of court – in effecting its delivery because upon expiration of the period to redeem, ownership is transferred to him a. Upon proper application and proof of title, issuance

ministerial b. Purchaser not obliged to bring a separate suit for

possession c. Pendency of action questioning validity cannot bar

issuance d. Motion for issuance of the writ can proceed

independently. e. No bond is required of the purchaser after the

redemption period if the property is not redeemed. 4. Suspension of implementation of writ – Sheriff can only

enforce, not give a grace period or suspend writ of possession

5. Where mortgaged property under lease – Purchaser can be granted writ of possession even if the property is in the possession of a lessee unless lease is registered

6. Where mortgagor refuses to surrender property sold – file an ordinary action for recovery of possession. Due process consideration – to give the mortgagor an opportunity to be heard

7. Where third party in actual possession – issuance of writ of possession not the judicial process required. Sec. 35, Rule 39 suppletory to Act 3135 requires an ejectment suit or reivindicatory action so that claims can be properly heard and adjudicated.

Issuance of writ before lapse of redemption period

1. Where bond filed by purchaser – consequence of the inchoate character of the right of the purchaser during the redemption period

2. Remedy of mortgagor – Sec. 8 grounds

Where rights of third persons involved

1. Claimants with interest adverse to mortgagor – third party claim or separate reivindicatory action

2. Successor-in-interest of mortgagor – no separate action required

3. Lessee of agricultural land - Sec. 11, 12 of Code of Agrarian Reform, superior to mortgagee of land

4. Buyer of condominium unit – Sec. 25, PD 957, annul mortgage sale and issue condominium certificate of title to the highest bidder.

Cases:



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Medida v. Court of Appeals, 208 SCRA 887.

A subsequent mortgage could nevertheless be legally constituted after extrajudicial foreclosure with the subsequent mortgagee becoming and acquiring the rights of a redemptioner, aside from his right against the mortgagor.

Since the mortgagor remains as the absolute owner of the property during the redemption period and has the free disposal of his property, there would be compliance with the requisites of 2085 for the constitution of another mortgage on the property. To hold otherwise would create the inequitable situation wherein the mortgagor would be deprived of the opportunity, which may be his last recourse, to raise funds wherewith to timely redeem his property through another mortgage thereon.

It is only upon the expiration of the redemption period, without the judgment debtor having made use of his right of redemption, that the ownership of the land sold becomes consolidated in the purchaser.

What actually is effected where redemption is seasonably exercised by the judgment or mortgage debtor is not the recovery of ownership of his land, which ownership he never lost, but the elimination from his title thereto of the lien created by the levy on attachment or judgment or the registration of a mortgage thereon.

Huerta Alba Resort, Inc. v. Court of Appeals, G.R. No. 128567, September 1, 2000.

What petitioner has been adjudged to have was only the equity of redemption over subject properties.

The right of redemption in relation to a mortgage – understood in the sense of a prerogative to re-acquire mortgaged property after registration of the foreclosure sale – exists only in the case of the extrajudicial foreclosure of the mortgage. No such right is recognized in a judicial foreclosure except only where the mortgagee is the PNB or a bank or banking institution.

Where a mortgage is foreclosed extrajudicially, Act 3135 grants to the mortgagor the right of redemption within 1 year from the registration of the sheriff's certificate of foreclosure sale.

Where the foreclosure is judicially effected, however, no equivalent right of redemption exists. The law declares that a judicial foreclosure sale 'when confirmed be an order of the court. . . . shall operate to divest the rights of all the parties to the action and to vest their rights in the purchaser, subject to such rights of redemption as may be allowed by law.' Such rights exceptionally 'allowed by law' (i.e., even after confirmation by an order of the court) are those granted by the charter of the PNB (Acts No. 2747 and 2938), and the General Banking Act (R.A. 337). These laws confer on the mortgagor, his successors in interest or any judgment creditor of the mortgagor, the right to redeem the property sold on foreclosure — after confirmation by the court of the foreclosure sale — which right may be exercised within a period of 1 year, counted from the date of registration of the certificate of sale in the Registry of Property.

But, to repeat, no such right of redemption exists in case of judicial foreclosure of a mortgage if the mortgagee is not the PNB or a bank or banking institution. In such a case, the foreclosure sale, 'when confirmed by an order of the court… shall operate to divest the rights of all the parties to the action and to vest their rights in the purchaser.' There then exists only what is known as the equity of redemption. This is simply the right of the defendant mortgagor to extinguish the mortgage and retain ownership of the property by paying the secured debt within the 90-day period after the judgment becomes final, in accordance with Rule 68, or even after the foreclosure sale but prior to its confirmation.

Suico v. Philippine National Bank, G.R. No. 170215, August 28, 2007.

Notice of sale is valid. Notices are given for the purpose of securing bidders and to prevent a sacrifice of the property. If these objects are attained, immaterial errors and mistakes will not affect the sufficiency of the notice; but if mistakes or omissions occur in the notices of sale, which are calculated to deter or mislead bidders, to depreciate the value of the property, or to prevent it from bringing a fair price, such mistakes or omissions will be fatal to the validity of the notice, and also to the sale made pursuant thereto.

Effect of PNB’s non-payment of cash to Sheriff. Under Section 21 of Rule 39 is that if the amount of the loan is equal to the amount of the bid, there is no need to pay the amount in cash. Same

provision mandates that in the absence of a third-party claim, the purchaser in an execution sale need not pay his bid if it does not exceed the amount of the judgment; otherwise, he shall pay only the excess.

The raison de etre is that it would obviously be senseless for the Sheriff or the Notary Public conducting the foreclosure sale to go through the idle ceremony of receiving the money and paying it back to the creditor, under the truism that the lawmaking body did not contemplate such a pointless application of the law in requiring that the creditor must bid under the same conditions as any other bidder. It bears stressing that the rule holds true only where the amount of the bid represents the total amount of the mortgage debt.

24. Chattel Mortgage, Articles 2140 to 2141,

CHAPTER 5 CHATTEL MORTGAGE

Art. 2140. By a chattel mortgage, personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation. If the movable, instead of being recorded, is delivered to the creditor or a third person, the contract is a pledge and not a chattel mortgage. (n)

Definition of chattel mortgage – contract by virtue of which personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation

Characteristics

1. Accessory – secures the performance of a principal obligation

2. Formal – for validity, registration in the Chattel Mortgage Register is indispensable

3. Unilateral – obligation only o n the part of the creditor to free the thing from the encumbrance upon fulfillment of the obligation

Chattel Mortgage Pledge

Delivery is not necessary Delivery necessary

Registration in the Chattel Mortgage Register is required by

law

Registration in the Registry of Property is not required by law

Procedure in Sec. 14 of Act. 1508

Procedure in Art. 2112

Foreclosure, excess goes to debtor

Public sale, debtor not entitled unless agreed upon

Creditor allowed to recover deficiency

Creditor not allowed to recover deficiency

Similarities between chattel mortgage and pledge

1. Both are executed to secure a principal obligation 2. Constituted only on personal property 3. Indivisible 4. Constitutes a lien on the property 5. Creditor cannot appropriate the property to himself in

payment of the debt 6. In case of default, property must be sold for the payment

of the creditor 7. Extinguished by fulfillment of the principal obligation or by

the destruction of property pledged or mortgaged

Art. 2141. The provisions of this Code on pledge, insofar as they are not in conflict with the Chattel Mortgage Law shall be applicable to chattel mortgages. (n)

Offenses involving chattel mortgage

1. Knowingly removing any personal property mortgaged without written consent of the mortgagee

2. Selling or pledging personal property already mortgaged without the consent of the mortgagee (Art. 319, RPC)

Essential element: property removed or repledged be the identical property pledged or mortgaged

Sale is valid although no written consent was obtained, but the mortgagor lays himself open to criminal prosecution (Servicewide Specialists v. IAC).



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Applicability of provisions on pledge only insofar as they are not in conflict with the Chattel Mortgage Law. Debtor may maintain action for deficiency (PNB v. Manila Investment and Construction Co.).

Subject matter of chattel mortgage

Certain deviations have been allowed. These are mortgageable under the Chattel Mortgage Law:

1. Shares of stock (but if owner and corporation have different domiciles, registration required in both places)

2. Interest in business 3. Machinery treated by the parties as personal property –

based on estoppel (Davao Sawmill v. Castillo) 4. Vessels – essential to be recorded in the Philippine

Coast Guard 5. Motor vehicles – but must be registered with the LTO 6. House of mixed materials – by its very nature 7. House intended to be demolished – what is mortgaged

is actually the materials 8. House built on rented land 9. House of strong materials (Makati Leasing and Finance

v. Weaver Textiles)

Mortgage of improvements on land

1. Chattel mortgage – no conflict; Art. 416[2] personal property includes real property which by any provision of law is considered personalty

2. Real estate mortgage – insofar as the public is concerned, property falling under Art. 415 are immovable and susceptible of being registered as real estate mortgage

No absolute criterion between personal and real property

Art. 415 and 416 not an absolute criterion

1. Property may have character different from that imputed to it by Arts. 415 and 416

2. Parties to a contract may by agreement treat as personal property that which by nature would be real property

3. Classification into real or personal may be said to be doubtful

Subject matter to be described and identified

Description required is not minute but that which will enable the parties to the mortgage or any other person to identify the same after a reasonable investigation or inquiry (Saldana v. Phil. Guaranty), otherwise, the mortgage is invalid.

Extent of chattel mortgage

1. Coverage extends only to property described therein – does not apply to ―stores open to the public for retail business where the goods are constantly sold and substituted with new stock, such as drugstores, grocery stores, dry goods, etc.‖

2. Stipulation including after-acquired property – valid and binding where the after-acquired property is in renewal of, or in substitution for, goods on hand when the mortgage was executed.

Chattel mortgage of after-incurred obligations

Chattel mortgage and its foreclosure can only cover obligations existing at the time the mortgage was constituted. Although a promise may be compelled upon, the security itself does not come into existence or arise until after a chattel mortgage agreement covering the newly contracted debt is executed either by a fresh chattel mortgage or by amending the old contract.

Creation of chattel mortgage

Registration required for validity; however, it has been held that although the chattel mortgage was not registered, it is binding upon the parties (Filipinas Marble v. IAC).

Period within which registration should be made – no specific time. In Ledesma v. Perez, it was held that ― the law is substantially sufficiently complied with where the registration is made by the mortgagee before the mortgagor has complied with his principal obligation and no right of third persons is prejudiced.‖

Effect of registration

1. Creates real right – effective and binding notice to other creditors of its existence (symbolical possession) a. Gives the mortgagee preferential right to have

physical possession inferable from Art. 319, RPC b. Lien of a chattel mortgagee over the property is

superior to the levy made on the same by the assignee of the unsecured judgment creditor

c. Right to rely in good faith on the certificate of title may also be applied by analogy to personal property

2. Adds nothing to mortgage

Registration of assignment of mortgage not required

By analogy, Art. 2128 chattel mortgage credit may be alienated or assigned to a third person, and need not be recorded.

Duty of Register of Deeds ministerial

There is no provision of law which confers upon the Register of Deeds any judicial or quasi-judicial power to determine the nature of any document sought to be registered as a chattel mortgage (Standard Oil v. Jaramillo).

Affidavit of good faith – oath in a contract of chattel mortgage wherein the parties severally swear that the mortgage is made for the purpose of securing the obligation specified in the conditions thereof and for no other purposes and that the same is a just and valid obligation not entered into for the purpose of fraud (Sec. 5)

1. Effect of absence – vitiates the mortgage only as to third persons without notice (Lilius v. Manila Railroad); required only for the purpose of transforming a valid mortgage into a preferred mortgage (Cebu International Finance Corp v. CA)

2. Where mortgage includes debt thereafter to be contracted – will take effect only from the date the same are made and not from the date of the mortgage (Jaca v. Davao Lumber Co.) There can be no foreclosure on new loans contracted after the execution of the chattel mortgage.

Right of redemption

1. When condition is broken, the following may redeem: a. Mortgagor b. Person holding subsequent mortgage c. Subsequent attaching creditor

2. The person who redeems shall be subrogated to the rights of the mortgagee and may foreclose

3. Redemption is made by paying or delivering to the mortgagee the amount due on such mortgage and the costs and expenses (sec. 13)

4. There is no right to redeem personal property after foreclosure (Lee v. Trocino)

Right acquired by second mortgagee and subsequent purchaser

1. Before payment of debt – after execution of the mortgage, only right of redemption remains and passes to second mortgagee

2. After payment of debt – holder of right of redemption is not entitled to the actual possession and delivery of the property without first paying the mortgage debt.

Right of mortgagee to possession

1. After default – implied from right to sell 2. Before default – not entitled to possession, otherwise it is

a pledge 3. Where mortgagor refuses to surrender possession –

the remedy is either (1) effect a judicial foreclosure or (2) secure possession preliminary to the sale a. Mortgagee’s right of possession conditioned upon the

fact of default – creditor cannot take possession against the will of the debtor

b. Sheriff mere agent of mortgagee – sheriff cannot seize if the creditor cannot

c. Sheriff without authority to seize mortgaged property in the first instance – file action for replevin first; not necessary to ask the sheriff to seize, exercise in futility (Northern Motors, Inc, v. Herrera)

d. Recoverable expenses against mortgagor – Necessary expenses incurred in the prosecution; incurred in effecting seizure of the chattel and reasonable attorney’s fees for replevin suit (Agustin v. CA)



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4. Where right of mortgagee conceded/disputed – mortgagor may maintain an action to recover possession of the mortgaged chattels from the mortgagor or from any person in whose hands he may find them. That the defendant is not privy to the chatter mortgage is inconsequential.

5. Where claimant is an unpaid seller – Failure of mortgagor to pay for the goods does not revest ownership on the seller, the mortgagee who forecloses on the unpaid goods does not become an obligor of the seller for the purchase price of the unpaid goods. This obligation remains with the mortgagor vendee (PNB v. CA).

Foreclosure of chattel mortgage

1. Public sale – public auction through a public officer under Sec. 14 a. Almost the same as the procedure in Act 3135 for

extrajudicial foreclosure of real estate mortgage (notice and registration required).

b. Mortgagee sole bidder does not warrant conclusion that sale attended with fraud (Pameca Wood v. CA).

2. Private sale – nothing illegal, immoral or against public order to agree to a private sale of chattel mortgaged (Art. 1306).

Period to foreclose mortgage

1. Chattel mortgage – after 30 days from the time of the condition broken, cause the sale through public auction (Sec. 14) After the sale of the chattel, the right of redemption is no longer available to the mortgagor (Cabral v. Evangelista).

2. Real estate mortgage – for judicial foreclosure, the grace period is not less than 90 nor more than 120 days from the entry of judgment. In default, the property shall be sold at public auction.

Civil action to recover credit

1. Independent action for enforcement of credit not required – would amount to nullification of mortgagee’s claim

2. Mortgage lien deemed abandoned by obtaining a personal judgment – A mortgagee who sues and obtains a personal judgment against a mortgagor upon his credit waives thereby his right to enforce the mortgage (Movido v. RFC), for he manifests his lack of desire to go after the mortgaged property as security (Cerna v. CA)

Ordinary action to recover possession of chattel

In case of refusal of the mortgagor to surrender the possession of the chattel sold by the sheriff, the remedy is an ordinary action for recovery of possession and not writ of possession (Luna v. Encarnaction) to give the mortgagor an opportunity to be heard.

Sec. 39 on execution sales is applicable to redemption in extrajudicial foreclosure of real estate mortgage (IFC Service Leasing v. Nera)

Action for replevin as a remedy

1. Nature of remedy – both principal and provisional; partly in rem and partly in personam

2. Where right of possession is not disputed – action need only be maintained against him who so possesses the property

3. Where right of possession disputed – essential to have other person involved and accordingly impleaded for a complete determination and resolution of the controversy.

4. Matters to be established – existence of mortgage and default by debtor; burden of proof is on the plaintiff

Right of mortgagee to recover deficiency

1. Where mortgage foreclosed – may maintain an action for deficiency because a chattel mortgage is only given as a security and not as payment for the debt in case of failure of payment (Bicol Savings b. Guinhawa)

2. Where mortgage constituted as security for purchase of property payable in installments – no deficiency judgment can be asked; stipulation to the contrary void (Art. 1484 alternative not cumulative)

3. Where mortgaged property subsequently attached and sold – specific performance

Application of proceeds of sale

1. Costs and expenses of keeping and sale 2. Payment of obligation secured 3. Claims of subsequent mortgages 4. Balance paid to mortgagor (Sec. 14)

The Chattel Mortgage Law (Act No. 1508, as amended)

ACT NO. 1508 - AN ACT PROVIDING FOR THE MORTGAGING OF PERSONAL PROPERTY AND FOR THE REGISTRATION OF

THE MORTGAGES SO EXECUTED

Section 1. The short title of this Act shall be "The Chattel Mortgage Law."

Sec. 2. All personal property shall be subject to mortgage, agreeably to the provisions of this Act, and a mortgage executed in pursuance thereof shall be termed chattel mortgage.

Sec. 3. Chattel mortgage defined. — A chattel mortgage is a conditional sale of personal property as security for the payment of a debt, or the performance of some other obligation specified therein, the condition being that the sale shall be void upon the seller paying to the purchaser a sum of money or doing some other act named. If the condition is performed according to its terms the mortgage and sale immediately become void, and the mortgagee is thereby divested of his title.

Sec. 4. Validity. — A chattel mortgage shall not be valid against any person except the mortgagor, his executors or administrators, unless the possession of the property is delivered to and retained by the mortgagee or unless the mortgage is recorded in the office of the register of deeds of the province in which the mortgagor resides at the time of making the same, or, if he resides without the Philippine Islands, in the province in which the property is situated: Provided, however, That if the property is situated in a different province from that in which the mortgagor resides, the mortgage shall be recorded in the office of the register of deeds of both the province in which the mortgagor resides and that in which the property is situated, and for the purposes of this Act the city of Manila shall be deemed to be a province.

Sec. 5. Form. — A chattel mortgage shall be deemed to be sufficient when made substantially in accordance with the following form, and shall be signed by the person or persons executing the same, in the presence of two witnesses, who shall sign the mortgage as witnesses to the execution thereof, and each mortgagor and mortgagee, or, in the absence of the mortgagee, his agent or attorney, shall make and subscribe an affidavit in substance as hereinafter set forth, which affidavit, signed by the parties to the mortgage as above stated, and the certificate of the oath signed by the authority administering the same, shall be appended to such mortgage and recorded therewith.

FORM OF CHATTEL MORTGAGE AND AFFIDAVIT.

"This mortgage made this ____ day of ______19____ by _______________, a resident of the municipality of ______________, Province of ____________, Philippine Islands mortgagor, to ____________, a resident of the municipality of ___________, Province of ______________, Philippine Islands, mortgagee, witnesseth:

"That the said mortgagor hereby conveys and mortgages to the said mortgagee all of the following-described personal property situated in the municipality of ______________, Province of ____________ and now in the possession of said mortgagor, to wit:

(Here insert specific description of the property mortgaged.)

"This mortgage is given as security for the payment to the said ______, mortgagee, of promissory notes for the sum of ____________ pesos, with (or without, as the case may be) interest thereon at the rate of ___________ per

centum per annum, according to the terms of __________, certain promissory notes, dated _________, and in the words and figures following (here insert copy of the note or notes secured).

"(If the mortgage is given for the performance of some other obligation aside from the payment of promissory notes, describe correctly but concisely the obligation to be performed.)

"The conditions of this obligation are such that if the mortgagor, his heirs, executors, or administrators shall well and truly perform the full obligation (or obligations) above stated according to the terms thereof, then this obligation shall be null and void.

"Executed at the municipality of _________, in the Province of ________, this _____ day of 19_____

____________________

(Signature of mortgagor.)



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"In the presence of

"_________________ "_________________ (Two witnesses sign here.)

FORM OF OATH. "We severally swear that the foregoing mortgage is made for the purpose of securing the obligation specified in the conditions thereof, and for no other purpose, and that the same is a just and valid obligation, and one not entered into for the purpose of fraud."

FORM OF CERTIFICATE OF OATH. "At ___________, in the Province of _________, personally appeared ____________, the parties who signed the foregoing affidavit and made oath to the truth thereof before me.

"_____________________________" (Notary public, justice of the peace, 1 or other officer, as the case may be.)

Sec. 6. Corporations. — When a corporation is a party to such mortgage the affidavit required may be made and subscribed by a director, trustee, cashier, treasurer, or manager thereof, or by a person authorized on the part of such corporation to make or to receive such mortgage. When a partnership is a party to the mortgage the affidavit may be made and subscribed by one member thereof.

Sec. 7. Descriptions of property. — The description of the mortgaged property shall be such as to enable the parties to the mortgage, or any other person, after reasonable inquiry and investigation, to identify the same.

If the property mortgaged be large cattle," as defined by section one of Act Numbered Eleven and forty-seven, 2 and the amendments thereof, the description of said property in the mortgage shall contain the brands, class, sex, age, knots of radiated hair commonly known as remolinos, or cowlicks, and other marks of ownership as described and set forth in the certificate of ownership of said animal or animals, together with the number and place of issue of such certificates of ownership.

If growing crops be mortgaged the mortgage may contain an agreement stipulating that the mortgagor binds himself properly to tend, care for and protect the crop while growing, and faithfully and without delay to harvest the same, and that in default of the performance of such duties the mortgage may enter upon the premises, take all the necessary measures for the protection of said crop, and retain possession thereof and sell the same, and from the proceeds of such sale pay all expenses incurred in caring for, harvesting, and selling the crop and the amount of the indebtedness or obligation secured by the mortgage, and the surplus thereof, if any shall be paid to the mortgagor or those entitled to the same.

A chattel mortgage shall be deemed to cover only the property described therein and not like or substituted property thereafter acquired by the mortgagor and placed in the same depository as the property originally mortgaged, anything in the mortgage to the contrary notwithstanding.

Sec. 8. Failure of mortgagee to discharge the mortgage. — If the mortgagee, assign, administrator, executor, or either of them, after performance of the condition before or after the breach thereof, or after tender of the performance of the condition, at or after the time fixed for the performance, does not within ten days after being requested thereto by any person entitled to redeem, discharge the mortgage in the manner provided by law, the person entitled to redeem may recover of the person whose duty it is to discharge the same twenty pesos for his neglect and all damages occasioned thereby in an action in any court having jurisdiction of the subject-matter thereof.

Sec. 9-12. (inclusive) 3

Sec. 13. When the condition of a chattel mortgage is broken, a mortgagor or person holding a subsequent mortgage, or a subsequent attaching creditor may redeem the same by paying or delivering to the mortgagee the amount due on such mortgage and the reasonable costs and expenses incurred by such breach of condition before the sale thereof. An attaching creditor who so redeems shall be subrogated to the rights of the mortgagee and entitled to foreclose the mortgage in the same manner that the mortgagee could foreclose it by the terms of this Act.

Sec. 14. Sale of property at public auction; Officer's return; Fees; Disposition of proceeds. — The mortgagee, his executor, administrator, or assign, may, after thirty days from the time of condition broken, cause the mortgaged property, or any part thereof,

to be sold at public auction by a public officer at a public place in the municipality where the mortgagor resides, or where the property is situated, provided at least ten days' notice of the time, place, and purpose of such sale has been posted at two or more public places in such municipality, and the mortgagee, his executor, administrator, or assign, shall notify the mortgagor or person holding under him and the persons holding subsequent mortgages of the time and place of sale, either by notice in writing directed to him or left at his abode, if within the municipality, or sent by mail if he does not reside in such municipality, at least ten days previous to the sale.

The officer making the sale shall, within thirty days thereafter, make in writing a return of his doings and file the same in the office of the register of deeds where the mortgage is recorded, and the register of deeds shall record the same. The fees of the officer for selling the property shall be the same as in the case of sale on execution as provided in Act Numbered One hundred and ninety, 4 and the amendments thereto, and the fees of the register of deeds for registering the officer's return shall be taxed as a part of the costs of sale, which the officer shall pay to the register of deeds. The return shall particularly describe the articles sold, and state the amount received for each article, and shall operate as a discharge of the lien thereon created by the mortgage. The proceeds of such sale shall be applied to the payment, first, of the costs and expenses of keeping and sale, and then to the payment of the demand or obligation secured by such mortgage, and the residue shall be paid to persons holding subsequent mortgages in their order, and the balance, after paying the mortgages, shall be paid to the mortgagor or person holding under him on demand.

If the sale includes any "large cattle," a certificate of transfer as required by section sixteen of Act Numbered Eleven hundred and forty-seven 5 shall be issued by the treasurer of the municipality where the sale was held to the purchaser thereof.

Sec. 15. 6, 6a

Sec. 16. This Act shall take effect on August first, nineteen hundred and six.

Enacted, July 2, 1906.

1. Now Municipal judge. 2. Now section 511 of the Administrative Code. 3. Repealed by Act 3815, Art. 367 approved December 8, 1930. 4. Now Rule 141, section 7 of the Rules of Court. 5. Now Section 523 of the Administrative Code. 6. Superseded by section 198 of the Administrative Code. The following is the present text of section 198 as amended by RA 2711, approved June 18, 1960.

"SECTION 198. Registration of chattel mortgages and fees collectible in connection therewith. — Every register of deeds shall keep a primary entry book and a registration book for the chattel mortgages; shall certify on each mortgage filed for record, as well as on its duplicate, the date, hour, and minute when the same was by him received; and shall record in such books any chattel mortgage, assignment, or discharge thereof, and any other instruments relating to a recorded mortgage, and all such instruments shall be presented to him in duplicate, the original to be filed and the duplicate to be returned to the person concerned.

"The recording of a mortgage shall be effected by making an entry, which shall be given a correlative number, setting forth the names of the mortgagee, and the mortgagor, the sum or obligation guaranteed, date of the instrument, name of the notary before whom it was sworn to or acknowledged, and a note that the property mortgaged, as well as the terms and conditions of the mortgage, is mentioned in detail in the instrument filed, giving the proper file number thereof. The recording of other instruments relating to a recorded mortgage shall be effected by way of annotations on the space provided therefor in the registration book, after the same shall have been entered in the primary entry book.

"The register of deeds shall also certify the officer's return of sale upon any mortgage, making reference upon the record of such officer's return to the volume and page of the record of the mortgage, and a reference of such return on the record of the mortgage itself, and give a certified copy thereof, when requested, upon payment of the lawful fees for such copy; and certify upon each mortgage officer's return of sale or discharge of mortgage; and upon any other instrument relating to such a recorded mortgage, both on the original and on the duplicate, the date, hour, and minute when the same is received for record and record such certificate with the return itself and keep an alphabetical index of mortgagors and mortgagees, which record and index shall be open to public inspection.

"Duly certified copies of such records and of filed instruments shall be receivable as evidence in any court.

"The register of deeds shall collect the following fees for services rendered by him under this section:

"(a) For entry or presentation of any document in the primary entry book, one peso. Supporting papers presented together with the principal document need not be charged any entry or presentation fee unless the party in interest



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desires that they be likewise entered. "(b) For filing and recording each chattel mortgage, including the necessary certificates and affidavits, the fees established in the following schedule shall be collected:

"1. When the amount of the mortgage does not exceed six thousand pesos, three pesos and fifty centavos for the first five hundred pesos or fractional part thereof, and one peso and fifty centavos for each additional five hundred pesos or fractional part thereof.

"2. When the amount of the mortgage is more than six thousand pesos but does not exceed thirty thousand pesos, twenty-four pesos for the initial amount not exceeding eight thousand pesos, and four pesos for each additional two thousand pesos or fractional part thereof.

"3. When the amount of the mortgage is more than thirty thousand pesos but does not exceed one hundred thousand pesos, seventy-five pesos for the initial amount not exceeding thirty-five thousand pesos, and seven pesos for each additional five thousand pesos or fractional part thereof.

"4. When the amount of the mortgage is more than one hundred thousand pesos but does not exceed five hundred thousand pesos, one hundred and seventy-six pesos for the initial amount not exceeding one hundred ten thousand pesos, and ten pesos for each additional ten thousand pesos or fractional part thereof.

"5. When the amount of the mortgage is more than five hundred thousand pesos, five hundred eighty-one pesos for the initial amount not exceeding five hundred twenty thousand pesos, and fifteen pesos for each additional twenty thousand pesos or fractional part thereof: Provided, however, That registration of the mortgage in the province where the property is situated shall be sufficient registration: And provided, further, That if the mortgage is to be registered in more than one city or province, the register of deeds of the city or province where the instrument is first presented for registration shall collect the full amount of the fees due in accordance with the schedule prescribed above, and the register of deeds of the other city or province where the same instrument is also to be registered shall collect only a sum equivalent to twenty per centum of the amount of fees due and paid in the first city or province, but in no case shall the fees payable in any registry be less than the minimum fixed in said schedule. "(c) For recording each instrument of sale, conveyance, or transfer of the property which is subject of a recorded mortgage, or of the assignment of mortgage credit, the fees established in the preceding schedule shall be collected on the basis of ten per centum of the amount of the mortgage or unpaid balance thereof: Provided, That the latter is stated in the instrument. "(d) For recording each notice of attachment, including the necessary index and annotations, four pesos. "(e) For recording each release of mortgage, including the necessary index and references, the fees established in the schedule under paragraph (b) above shall be collected on the basis of five per centum of the amount of the mortgage. "(f) For recording each release of attachment, including the proper annotations, two pesos. "(g) For recording each sheriff's return of sale, including the index and

references, three pesos. "(h) For recording a power of attorney, appointment of judicial guardian, administrator, or trustee, or any other instrument in which a person is given power to act in behalf of another in connection with a mortgage, three pesos. "(i) For recording each instrument or order relating to a recorded mortgage, including the necessary index and references, for which no specific fee is provided above, two pesos. "(j) For certified copies of records, such fees as are allowed by law for copies kept by the register of deeds. "(k) For issuing a certificate relative to, or showing the existence or non-existence of, an entry in the registration book, or a document on file, for each such certificate containing not more than two hundred words, three pesos; if it exceeds that number, an additional fee of fifty centavos shall be collected for every one hundred words or fractional part thereof, in excess of the first two hundred words."

Cases:

Acme Shoe Rubber & Plastic Corp. v. Court of Appeals, 260 SCRA 714.

Chattel mortgage must comply substantially with the prescribed form. The execution of the oath means that the debt/obligation secured must be current and not that is yet merely contemplated.

While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred obligations so long as these future debts are accurately described,

a chattel mortgage, however,

can only cover obligations existing at the time the mortgage is constituted. Although a promise expressed in a chattel mortgage to include debts that are yet to be contracted can be a binding commitment that can be compelled upon, the security itself, however, does not come into existence or arise until after a chattel mortgage agreement covering the newly contracted debt is executed either by concluding a fresh chattel mortgage OR by amending the old contract conformably with the form prescribed by the Chattel Mortgage Law. Refusal on the part of the borrower to execute the agreement so as to cover the after-incurred obligation can constitute an act of default on the part of the borrower of the

financing agreement whereon the promise is written but, of course, the remedy of foreclosure can only cover the debts extant at the time of constitution and during the life of the chattel mortgage sought to be foreclosed.

People's Bank & Trust Company v. Dahican Lumber Company, 20 SCRA 84.

Even if contract was entered into under the old Civil Code, the pertinent provisions were reproduced into New Civil Code in Art. 2127. The "after acquired properties" were purchased by DALCO in connection with, and for use in the development of its lumber concession and that they were purchased in addition to, or in replacement of those already existing in the premises on July 13, 1950. In law, therefore, they must be deemed to have been immobilized, with the result that the real estate mortgages involved herein — which were registered as such — did not have to be registered a second time as chattel mortgages in order to bind the "after acquired properties" and affect third parties.

Makati Leasing & Finance Corporation v. Wearever Textile Mills, Inc., 122 SCRA 296.

If a house of strong materials, like what was involved in the above Tumalad case, may be considered as personal property for purposes of executing a chattel mortgage thereon as long as the parties to the contract so agree and no innocent third party will be prejudiced thereby, there is absolutely no reason why a machinery, which is movable in its nature and becomes immobilized only by destination or purpose, may not be likewise treated as such. This is really because one who has so agreed is estopped from denying the existence of the chattel mortgage.

It must be pointed out that the characterization of the subject machinery as chattel by the private respondent is indicative of intention and impresses upon the property the character determined by the parties. As stated in Standard Oil Co. of New York v. Jaramillo, it is undeniable that the parties to a contract may by agreement treat as personal property that which by nature would be real property, as long as no interest of third parties would be prejudiced thereby.

Dy v. Court of Appeals, 198 SCRA 26.

The mortgagor who gave the property as security under a chattel mortgage did not part with the ownership over the same. He had the right to sell it although he was under the obligation to secure the written consent of the mortgagee or he lays himself open to criminal prosecution under the provision of Art. 319 par. 2 of the RPC. Even if no consent was obtained from the Libra, the validity of the sale would still not be affected.

Where a third person purchases the mortgaged property, he automatically steps into the shoes of the original mortgagor. His right of ownership shall be subject to the mortgage of the thing sold to him. In the case at bar, Perfecto was fully aware of the existing mortgage of the subject tractor to Libra. In fact, when he was obtaining Libra's consent to the sale, he volunteered to assume the remaining balance of the mortgage debt of Wilfredo Dy which Libra undeniably agreed to.

Servicewide Specialist Inc. v. Court of Appeals, 320 SCRA 478.

Only notice to the debtor (Ponce) of the assignment of credit is required. His consent is not required. In contrast, consent of the creditor-mortgagee (Servicewide) to the alienation of the mortgaged property is necessary in order to bind said creditor.

Art. 2141, on the other hand, states that the provisions concerning a contract of pledge shall be applicable to a chattel mortgage, such as the one at bar, insofar as there is no conflict with Act No. 1508, the Chattel Mortgage Law. As provided in 2097 in relation to 2141, a thing pledged may be alienated by the pledgor or owner with the consent of the pledgee. This provision is in accordance with Act No. 1508 which provides that a mortgagor of personal property shall not sell or pledge such property, or any part thereof, mortgaged by him without the consent of the mortgagee in writing on the back of the mortgage and on the margin of the record thereof in the office where such mortgage is recorded. Although this provision in the chattel mortgage has been expressly repealed by Art. 367 of the Revised Penal Code, yet under Art. 319 (2) of the same Code, the sale of the thing mortgaged may be made provided that the



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mortgagee gives his consent and that the same is recorded. In any case, applying by analogy 2128 to a chattel mortgage, it appears that a mortgage credit may be alienated or assigned to a third person. Since the assignee of the credit steps into the shoes of the creditor-mortgagee to whom the chattel was mortgaged, it follows that the assignees consent is necessary in order to bind him of the alienation of the mortgaged thing by the debtor-mortgagor. This is tantamount to a novation. As the new assignee, petitioners consent is necessary before respondent spouses alienation of the vehicle can be considered as binding against third persons. Servicewide is considered a third person with respect to the sale with mortgage between respondent spouses and third party defendant Conrado Tecson.

Pameca Wood Treatment Plant v. Court of Appeals, 310 SCRA 281.

Whereas, in pledge, the sale of the thing pledged extinguishes the entire principal obligation, such that the pledgor may no longer recover proceeds of the sale in excess of the amount of the principal obligation, S14 of Chattel Mortgage Law expressly entitles the mortgagor to the balance of the proceeds, upon satisfaction of the principal obligation and costs.

Since the Chattel Mortgage Law bars the creditor-mortgagee from retaining the excess of the sale proceeds there is a corollary obligation on the part of the debtor-mortgagee to pay the deficiency in case of a reduction in the price at public auction.

Art. 1484 does not apply here because it is specifically applicable to sale on installments.

RCBC v. Royal Cargo Corp., G.R. No. 179756, October 2, 2009.

Section 13 of the Chattel Mortgage Law allows the would-be redemptioner thereunder to redeem the mortgaged property only before its sale. Consider the following pronouncement in Paray:

[T]here is no law in our statute books which vests the right of redemption over personal property. Act No. 1508, or the Chattel Mortgage Law, ostensibly could have served as the vehicle for any legislative intent to bestow a right of redemption over personal property, since that law governs the extrajudicial sale of mortgaged personal property, but the statute is definitely silent on the point. And Section 39 of the 1997 Rules of Civil Procedure, extensively relied upon by the Court of Appeals, starkly utters that the right of redemption applies to real properties, not personal properties, sold on execution. (Emphasis, italics and underscoring supplied)

Unmistakably, the redemption cited in Section 13 partakes of an equity of redemption, which is the right of the mortgagor to redeem the mortgaged property after his default in the performance of the conditions of the mortgage but before the sale of the property to clear it from the encumbrance of the mortgage.

It is not the same as right of redemption which is the right

of the mortgagor to redeem the mortgaged property after registration of the foreclosure sale and even after confirmation of the sale.

What was actually attached by respondents was Consolidated Mines’ right or equity of redemption, an incorporeal and intangible right, the value of which can neither be quantified nor equated with the actual value of the properties upon which it may be exercised. This entitles the second mortgagee to notice. The right of those who acquire said properties should not and cannot be superior to that of the creditor who has in his favor an instrument of mortgage executed with the formalities of the law, in good faith, and without the least indication of fraud.

25. Antichresis, Articles 2132 to 2139, Civil Code

CHAPTER 4 ANTICHRESIS

Art. 2132. By the contract of antichresis the creditor acquires the right to receive the fruits of an immovable of his debtor, with the obligation to apply them to the payment of the interest, if owing, and thereafter to the principal of his credit. (1881)


1. Accessory – secures the performances of a principal obligation

2. Formal – must be in writing to be valid (Art. 2134)

Delivery of property required only so that the creditor may receive the fruits.

Right of creditor to the fruits – normally covers all fruits, but the parties may stipulate otherwise (Art. 1306)

Obligation to pay interest not essential

The principal obligation may or may not earn interest. Antichresis is susceptible to guaranteeing all kinds of obligations, pure of conditional

Antichresis, real mortgage and pledge compared

Antichresis Pledge Real Mortgage

Real property Personal property Perfected by mere

consent Perfected by the delivery of thing

pledged

Right to receive fruits

Creates real right

Express stipulation to apply fruits to

principal

No such stipulation No such stipulation

Creditor to pay taxes No obligation to pay taxes

Real Consensual Debtor loses possession

Debtor loses possession

Debtor retains possession

Art. 2133. The actual market value of the fruits at the time of the application thereof to the interest and principal shall be the measure of such application. (n)

Measure of application of fruits to interest and principal to forestall usury.

Art. 2134. The amount of the principal and of the interest shall be specified in writing; otherwise, the contract of antichresis shall be void. (n)

Form of the contract

Even if the antichresis is void, the principal obligation remains valid.

Art. 2135. The creditor, unless there is a stipulation to the contrary, is obliged to pay the taxes and charges upon the estate.

He is also bound to bear the expenses necessary for its preservation and repair.

The sums spent for the purposes stated in this Art. shall be deducted from the fruits. (1882)

Obligations of the antichretic creditor are necessary consequences of the contract because they arise from its very nature. The sums spent will be charged against the fruits of the property.

1. Payment of taxes and charges upon the estate – unless there is a contrary stipulation, otherwise, will be liable to pay indemnity for damages (Art. 1170). Any payment by the debtor will be applied to the debt.

2. Application of the fruits of the estate – after receiving them, to the interest if owing and thereafter the principal. He also has to account.

Art. 2136. The debtor cannot reacquire the enjoyment of the immovable without first having totally paid what he owes the creditor.

But the latter, in order to exempt himself from the obligations imposed upon him by the preceding article, may always compel the debtor to enter again upon the enjoyment of the property, except when there is a stipulation to the contrary. (1883)

Right of antichretic debtor to reacquire enjoyment of property

1. Only upon full payment of the debt or 2. If the creditor does not want to pay taxes and expenses

for preservation and repair

Art. 2137. The creditor does not acquire the ownership of the real

estate for non-payment of the debt within the period agreed upon.



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Every stipulation to the contrary shall be void. But the creditor may petition the court for the payment of the debt or the sale of the real property. In this case, the Rules of Court on the foreclosure of mortgages shall apply. (1884a)

Remedy of creditor in case of nonpayment of debt

1. Cannot automatically appropriate (Art. 2088) 2. Action for specific performance 3. Petition for the sale of real property as foreclosure under

Rule 68 4. Parties may agree to extrajudicial foreclosure

Acquisition by creditor of property by prescription any agreement to this effect is void. Possession of an antichretic creditor is not in the concept of an owner.

Art. 2138. The contracting parties may stipulate that the interest upon the debt be compensated with the fruits of the property which is the object of the antichresis, provided that if the value of the fruits should exceed the amount of interest allowed by the laws against usury, the excess shall be applied to the principal. (1885a)

Interest in antichresis subject to the Usury Law

This is no longer subject to any ceiling.

Art. 2139. The last paragraph of Art. 2085, and Articles 2089 to

2091 are applicable to this contract. (1886a)

Applicability of certain articles

Pledge and mortgage provisions applicable to antichresis:

Art. 2085. The following requisites are essential to the contracts of pledge and mortgage:

(1) That they be constituted to secure the fulfillment of a principal obligation; (2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged; (3) That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose.

Third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own property. (1857)

Art. 2089. A pledge or mortgage is indivisible, even though the debt may be divided among the successors in interest of the debtor or of the creditor.

Therefore, the debtor's heir who has paid a part of the debt cannot ask for the proportionate extinguishment of the pledge or mortgage as long as the debt is not completely satisfied.

Neither can the creditor's heir who received his share of the debt return the pledge or cancel the mortgage, to the prejudice of the other heirs who have not been paid.

From these provisions is expected the case in which, there being several things given in mortgage or pledge, each one of them guarantees only a determinate portion of the credit.

The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as the portion of the debt for which each thing is specially answerable is satisfied. (1860)

Art. 2090. The indivisibility of a pledge or mortgage is not affected by the fact that the debtors are not solidarily liable. (n)

Art. 2091. The contract of pledge or mortgage may secure all kinds of obligations, be they pure or subject to a suspensive or resolutory condition. (1861)

Weeks 13 to 16

26. Concurrence and Preference of

Credits, Articles 2241 to 2251, Civil Code

Features of Title XIX of the Civil Code

1. Liens and mortgages with respect to specific movable and immovable property have been increased

2. Civil Code and Insolvency Law harmonized 3. Preferred claims as to the free property have also been

augmented

Scope

Applies to all other creditor-debtor relationships

Meaning of concurrence of credit – possession of two or more creditor of equal rights and privileges over the same property of the debtor.

Meaning of preference of credit – right held by a creditor to be preferred in the payment of his claim above others out of the debtor’s assets.

Nature and effect of preference

1. Exception to the general rule; strictly construed (Roman v. Herridge)

2. Does not create an interest in property. It simply creates a right to be paid first; it is not a question of who takes or sells, it is one of the application of the proceeds after the sale. (Molina v. Somes)

3. Preference can only be made effective by being asserted and maintained; can be lost for failure to assert and maintain

4. Where a creditor released his levy, he cannot thereafter assert his preference.

When rules on preference of credits applicable

1. Only where two or more creditors have separate and distinct claims against the same debtor who has insufficient property

2. Debtor has insufficient property to cover his debts

Preference of credit and lien distinguished

A preference applies only to claims which do not attach to specific properties. A lien creates a charge on a particular property.

Credits must be due concurrence and preference does not take place except when the obligations are already demandable (Jacinto v. de Leon)

CHAPTER 1 GENERAL PROVISIONS

Art. 2236. The debtor is liable with all his property, present and future, for the fulfillment of his obligations, subject to the exemptions provided by law. (1911a)

Liability of debtor’s property for his obligations

This is a form of social contract; basis for attachments and executions and applicable to obligations secured or not secured.

Exempt property

1. Present property a. Family home (Art. 152-155) b. Support (Art. 205) c. Rules of Court (Sec 13, Rule 39)

i. Family home or homestead ii. Ordinary tools or implements used in trade,

employment or livelihood (for natural person only)

iii. Three horses, cows or carabaos or other beasts of burden for ordinary occupation

iv. Necessary clothing and articles for personal use (includes jewelry)

v. Household furniture and utensils necessary for housekeeping (not more than P100,000)

vi. Provisions for individual or family sufficient for four months

vii. Professional libraries of judges, lawyers, physicians, pharmacists, dentists, engineers, surveyors, (not more than P300,000)

viii. One fishing boat and accessories (not more than P100,000)

ix. Salaries, wages and earnings within four months necessary for the support of family



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x. Lettered gravestones xi. Life insurance proceeds xii. Right to receive legal support or pension or

gratuity from government xiii. Properties specially exempted by law

d. Free patent or homestead 2. Future property – excluded when the debtor obtains a

discharge on account of insolvency 3. Property in custodial legis and of public dominion

Art. 2237. Insolvency shall be governed by special laws insofar as

they are not inconsistent with this Code. (n)

Insolvency governed by special laws

Insolvency Law has been repealed by the FRIA. Insolvency and liquidation proceedings have only one aim – to conserve all the remaining assets of the insolvent/liquidated person/corporation for distribution to the creditors, after payment of taxes.

Art. 2238. So long as the conjugal partnership or absolute community subsists, its property shall not be among the assets to be taken possession of by the assignee for the payment of the insolvent debtor's obligations, except insofar as the latter have redounded to the benefit of the family. If it is the husband who is insolvent, the administration of the conjugal partnership of absolute community may, by order of the court, be transferred to the wife or to a third person other than the assignee. (n)

Exemption of conjugal partnership or absolute community property because they do not belong to the individual spouses, but to a distinct entity:

1. Partnership or community subsists 2. Obligations of the insolvent spouse have not redounded to

the benefit of the family.

The insolvency of the husband does not have effect of dissolving the conjugal partnership.

Art. 2239. If there is property, other than that mentioned in the preceding article, owned by two or more persons, one of whom is the insolvent debtor, his undivided share or interest therein shall be among the assets to be taken possession of by the assignee for the payment of the insolvent debtor's obligations. (n)

Art. 2240. Property held by the insolvent debtor as a trustee of an express or implied trust, shall be excluded from the insolvency proceedings. (n)

Rule involving property held in trust

Trustee is not the owner of the trust property although he has legal title thereto.

CHAPTER 2 CLASSIFICATION OF CREDITS

Art. 2241. With reference to specific movable property of the debtor, the following claims or liens shall be preferred:

(1) Duties, taxes and fees due thereon to the State or any subdivision thereof; (2) Claims arising from misappropriation, breach of trust, or malfeasance by public officials committed in the performance of their duties, on the movables, money or securities obtained by them; (3) Claims for the unpaid price of movables sold, on said movables, so long as they are in the possession of the debtor, up to the value of the same; and if the movable has been resold by the debtor and the price is still unpaid, the lien may be enforced on the price; this right is not lost by the immobilization of the thing by destination, provided it has not lost its form, substance and identity; neither is the right lost by the sale of the thing together with other property for a lump sum, when the price thereof can be determined proportionally; (4) Credits guaranteed with a pledge so long as the things pledged are in the hands of the creditor, or those guaranteed by a chattel mortgage, upon the things pledged or mortgaged, up to the value thereof; (5) Credits for the making, repair, safekeeping or preservation of personal property, on the movable thus made, repaired, kept or possessed; (6) Claims for laborers' wages, on the goods manufactured or the work done;

(7) For expenses of salvage, upon the goods salvaged; (8) Credits between the landlord and the tenant, arising from the contract of tenancy on shares, on the share of each in the fruits or harvest; (9) Credits for transportation, upon the goods carried, for the price of the contract and incidental expenses, until their delivery and for thirty days thereafter; (10) Credits for lodging and supplies usually furnished to travelers by hotel keepers, on the movables belonging to the guest as long as such movables are in the hotel, but not for money loaned to the guests; (11) Credits for seeds and expenses for cultivation and harvest advanced to the debtor, upon the fruits harvested; (12) Credits for rent for one year, upon the personal property of the lessee existing on the immovable leased and on the fruits of the same, but not on money or instruments of credit; (13) Claims in favor of the depositor if the depositary has wrongfully sold the thing deposited, upon the price of the sale.

In the foregoing cases, if the movables to which the lien or preference attaches have been wrongfully taken, the creditor may demand them from any possessor, within thirty days from the unlawful seizure. (1922a)

General categories of credit

1. Special preferred credits (Arts. 2241, 2242) 2. Ordinary preferred credits (Art. 2244) 3. Common credits (Art. 2245)

Preferred credits with respect to specific movable property

Arts. 2241 and 2242 do not give the order of preference, only concurrence. With the exception of the State, these credits merely concur.

Wrongful taking of movables to which lien attaches

Last par. of 2242 applies only when the right of ownership continues in the debtor.

Art. 2242. With reference to specific immovable property and real rights of the debtor, the following claims, mortgages and liens shall be preferred, and shall constitute an encumbrance on the immovable or real right:

(1) Taxes due upon the land or building; (2) For the unpaid price of real property sold, upon the immovable sold; (3) Claims of laborers, masons, mechanics and other workmen, as well as of architects, engineers and contractors, engaged in the construction, reconstruction or repair of buildings, canals or other works, upon said buildings, canals or other works; (4) Claims of furnishers of materials used in the construction, reconstruction, or repair of buildings, canals or other works, upon said buildings, canals or other works; (5) Mortgage credits recorded in the Registry of Property, upon the real estate mortgaged; (6) Expenses for the preservation or improvement of real property when the law authorizes reimbursement, upon the immovable preserved or improved; (7) Credits annotated in the Registry of Property, in virtue of a judicial order, by attachments or executions, upon the property affected, and only as to later credits; (8) Claims of co-heirs for warranty in the partition of an immovable among them, upon the real property thus divided; (9) Claims of donors or real property for pecuniary charges or other conditions imposed upon the donee, upon the immovable donated; (10) Credits of insurers, upon the property insured, for the

insurance premium for two years. (1923a)

Preferred credits with respect to specific immovable property

Arts. 2241 and 2242 do not give the order of preference, only concurrence. With the exception of the State, these credits merely concur.

Unpaid price of real property sold – no distinction between registered and unregistered vendor’s lien.

Credits annotated in virtue of judicial order Art. 2259 pro rata rule does not apply to attachments or executions, the preference is according to the order of the time they were levied upon the property.



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Refectionary credit – indebtedness incurred in the repair or reconstruction of something previously made, such as those made necessary by the deterioration or destruction of the thing as it formerly existed. SC has sanctioned the inclusion of new construction to refectionary credit (Luzon Lumber v. Quiambao).

Art. 2243. The claims or credits enumerated in the two preceding articles shall be considered as mortgages or pledges of real or personal property, or liens within the purview of legal provisions governing insolvency. Taxes mentioned in No. 1, Art. 2241, and No. 1, Art. 2242, shall first be satisfied. (n)

Nature of claims or credits in Arts. 2241 and 2242 considered mortgages or pledges of real or personal property

Art. 2244. With reference to other property, real and personal, of the debtor, the following claims or credits shall be preferred in the order named:

(1) Proper funeral expenses for the debtor, or children under his or her parental authority who have no property of their own, when approved by the court; (2) Credits for services rendered the insolvent by employees, laborers, or household helpers for one year preceding the commencement of the proceedings in insolvency; (3) Expenses during the last illness of the debtor or of his or her spouse and children under his or her parental authority, if they have no property of their own; (4) Compensation due the laborers or their dependents under laws providing for indemnity for damages in cases of labor accident, or illness resulting from the nature of the employment; (5) Credits and advancements made to the debtor for support of himself or herself, and family, during the last year preceding the insolvency; (6) Support during the insolvency proceedings, and for three months thereafter; (7) Fines and civil indemnification arising from a criminal offense; (8) Legal expenses, and expenses incurred in the administration of the insolvent's estate for the common interest of the creditors, when properly authorized and approved by the court; (9) Taxes and assessments due the national government, other than those mentioned in Articles 2241, No. 1, and 2242, No. 1; (10) Taxes and assessments due any province, other than those referred to in Articles 2241, No. 1, and 2242, No. 1; (11) Taxes and assessments due any city or municipality, other than those indicated in Articles 2241, No. 1, and 2242, No. 1; (12) Damages for death or personal injuries caused by a quasi-delict; (13) Gifts due to public and private institutions of charity or beneficence; (14) Credits which, without special privilege, appear in (a) a public instrument; or (b) in a final judgment, if they have been the subject of litigation. These credits shall have preference among themselves in the order of priority of the dates of the instruments and of the judgments, respectively. (1924a)

Order of preference with respect to other properties of the debtor – these do not attach to specific properties, but simply rights in favor of certain creditors to have cash or other assets of the insolvent applied in a certain sequence or order of priority (Republic v. Peralta).

Order of priority only with respect to insolvent’s ―free property‖

1. Special preferred credits – constitute liens which take precedence insofar as they concern the property to which the liens attach a. Specific property involved of greater value – residual

value will form free property b. Specific property involved of lesser value –

unsatisfied balance are treated ordinary preferred credits

2. Ordinary preferred credits – only applicable to free property; but taxes do not have the same overriding preference (Art. 2241, 2242)

Preference of claims for unpaid wages and other monetary claims

1. Category of ordinary preferred credits – Art. 110 did not upgrade worker’s claim as absolutely preferred credits; it did not alter Art. 2241 and 2242 a. One-year limitation removed b. Priority moved to No. 1 of Art. 2244

2. Necessity of bankruptcy and liquidation proceedings – must be present before the worker’s preference may be enforced (DBP v. Santos) a. Civil Code scheme preserved b. Judicial proceedings in rem required – Art. 110

requires adjudication of creditor’s claims against the debtor’s assets to become operative

c. Reason for requirement – to bind all interested parties

d. Invoked only upon the institution of insolvency or liquidation proceedings

e. Liability for improper application of debtor’s assets – where held in bad faith, directly liable for moral and exemplary damages based on the provisions Art. 19, 21, 2219[10] and 2229.

Preference of credits evidenced by public instruments and final judgments in the order of time of execution and not necessarily the date of registration (Uy v. Zamora)

Statutory preference not applicable to Government

1. Object of rules on classification and priority – designed to meet the situation where the value of a debtor’s assets is not sufficient to enable him to meet all his maturing obligations.

2. Art. 2244 not applicable to State – State is always solvent a. State not subject to insolvency proceedings b. State regarded as always solvent – inherent power of

the State to impose taxes c. Debtor-State going out of existence with liability for

international transaction - would arise only in State succession consequent upon conquest or annexation

3. Immaterial whether obligations of State those of borrower or guarantor – because they do not apply at all to State obligations

Art. 2245. Credits of any other kind or class, or by any other right or title not comprised in the four preceding articles, shall enjoy no preference. (1925)

Non-preferred or common credits paid pro rata regardless of dates.

Insolvency proceedings involving banks

1. Remedy against actions of Monetary Board – final and executory; may not be set aside or enjoined by courts except upon convincing proof that the action plainly arbitrary and made in bad faith (Central Bank v. De la Cruz)

2. Remedy of depositor or creditor to recover claims – intervene in the judicial proceedings for liquidation instituted by the Board thru the Solicitor General a. Separate suits will deplete bank assets to the

prejudice of other creditors b. Burdensome on the part of the liquidator if he were to

appear before several courts 3. Deviation from required procedure – may be allowed as in

the case of plaintiffs who are admittedly living in poverty and to refile and relitigate in liquidation court will be an exercise in futility (Valenzuela v. Central Bank).

CHAPTER 3 ORDER OF PREFERENCE OF CREDITS

Art. 2246. Those credits which enjoy preference with respect to specific movables, exclude all others to the extent of the value of the personal property to which the preference refers.

Art. 2247. If there are two or more credits with respect to the same specific movable property, they shall be satisfied pro rata, after the payment of duties, taxes and fees due the State or any subdivision thereof. (1926a)

Art. 2248. Those credits which enjoy preference in relation to specific real property or real rights, exclude all others to the extent of the value of the immovable or real right to which the preference refers.

Art. 2249. If there are two or more credits with respect to the same specific real property or real rights, they shall be satisfied pro rata, after the payment of the taxes and assessments upon the immovable property or real right. (1927a)



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Art. 2250. The excess, if any, after the payment of the credits which enjoy preference with respect to specific property, real or personal, shall be added to the free property which the debtor may have, for the payment of the other credits. (1928a)

Concurrence of credits with respect to same specific property

Only taxes and assessments upon specific movable and immovable property enjoy absolute preference. All the remaining classes of preferred creditors under Arts. 2241 and 2242 shall be paid concurrently and pro rata (Barretto v. Villanueva).

Two-tier order of preference

1. Taxes, duties and fees due on movable or immovable property

2. All others are satisfied pari passu and pro rata out of any residual value of the specific property

3. This rule does not apply to execution and attachments which are referred to as ―later credits.‖ – priority in the order of time.

Proceeding for payment pro rata of preferred creditors

1. Proceeding required for adjudication of claims of preferred creditors – preferred creditors must necessarily be convened and the import of their claims ascertained

2. Pro rata rule contemplates more than one creditor – should not be enforced where there are not more than one creditor (Carried Lumber Co. v. ACCFA)

Art. 2251. Those credits which do not enjoy any preference with respect to specific property, and those which enjoy preference, as to the amount not paid, shall be satisfied according to the following rules:

(1) In the order established in Art. 2244; (2) Common credits referred to in Art. 2245 shall be paid pro rata regardless of dates. (1929a)

Satisfaction of other credits

1. With order of preference – those not in Arts. 2241 and 2242 shall be satisfied secondarily under Art. 2244.

2. Without any order of preference – paid pro rata

Cases:

De Barretto v. Villanueva, 1 SCRA 288.

A recorded mortgage credit is superior to an unrecorded unpaid vendor’s lien. On reconsideration: Nothing in the Civil code indicates that the provisions on concurrence and preference of credits are applicable only to the insolvent debtor. If those provisions are intended only for insolvency case, then other creditor-debtor relationships would be left without governing rules.

Concurrence and preference of credits attain significance only after the properties of the debtor have been inventoried and liquidated and the claims held by his various creditors have been established.

J.L. Bernardo Construction v. Court of Appeals, G.R. No. 105827, January 31, 2000.

Fundamental tenets of due process will dictate that this statutory lien should then only be enforced in the context of some kind of a proceeding where the claims of all the preferred creditors may be bindingly adjudicated, such as insolvency proceedings.

Development Bank of the Philippines v. Court of Appeals, G.R. No. 126200, August 16, 2001.

A preferred creditor’s third-party claim to the proceeds of a foreclosure sale by the mortgagee is not the proceeding contemplated by law for the enforcement of preferences under Art. 2241 and 2242 unless the claimant is enforcing a credit for taxes that enjoy absolute priority. The extrajudicial foreclosure is not the liquidation proceeding contemplated in Art. 2243.

Cordova v. Reyes et al., G.R. No. 146555, July 3, 2007.

When shares of stockholders have been sold and the proceeds commingled with the other assets of the debtor, the stockholders’ status was converted into that of an ordinary creditor for the value of the shares.

Shares were specific or determinate movable properties, but after they were sold the money raised from the sale became generic and commingled with the cash and other assets. Unlike shares of stock, money is a generic thing that cannot be pinpointed when commingled with a mass. The only remedy in this case is to file a claim on the whole mass as an ordinary creditor.

27. Rehabilitation and Insolvency, Republic Act No. 10142

Cases:

Ruby Industrial Corporation v. Court of Appeals, G.R. No. 124185-87, January 20, 1998.

Rehabilitation contemplates the continuance of corporate life and activities in an effort to restore and reinstate the corporation to its former position of successful operation and solvency. When a distressed company is placed under rehabilitation, the appointment of management committee follows to avoid collusion between the previous management and creditors it might favor, to the prejudice of the other creditors.

All assets of the corporation under rehabilitation receivership are held in trust for the equal benefit of all creditors to preclude one from obtaining an advantage or preference over another by the expediency of attachment, execution or otherwise.

As between the creditors, the key phrase is equality in equity.

Once the corporation threatened by bankruptcy is taken over by a receiver, all the creditors ought to stand on equal footing. Not any one of them should be paid ahead of the others.

Rizal Commercial Banking Corporation v. Intermediate Appellate Court, G.R. No. 74851, December 9, 1999.

Whenever a distressed corporation asks the SEC for rehabilitation and suspension of payments, preferred creditors may no longer assert such preference, but . . . stand on equal footing with other creditors. Foreclosure shall be disallowed so as not to prejudice other creditors, or cause discrimination among them. If foreclosure is undertaken despite the fact that a petition, for rehabilitation has been filed, the certificate of sale shall not be delivered pending rehabilitation. Likewise, if this has also been done, no transfer of title shall be effected also, within the period of rehabilitation. The rationale behind PD 902-A, as amended to effect a feasible and viable rehabilitation. This cannot be achieved if one creditor is preferred over the others.

In this connection, the prohibition against foreclosure attaches as soon as a petition for rehabilitation is filed. Were it otherwise, what is to prevent the petitioner from delaying the creation of a Management Committee and in the meantime dissipate all its assets? The sooner the SEC takes over and imposes a freeze on all the assets, the better for all concerned.

Petition for rehabilitation does not always result in the appointment of a receiver or the creation of a management committee. The SEC has to initially determine whether such appointment is appropriate and necessary under the circumstances. Under Paragraph (d), Section 6 of Presidential Decree No. 902-A, certain situations must be shown to exist before a management committee may be created or appointed, such as;

1. When there is imminent danger of dissipation, loss, wastage or destruction of assets or other properties; or 2. when there is paralyzation of business operations of such corporations or entities which may be prejudicial to the interest of minority stockholders, parties-litigants or to the general public.

On the other hand, receivers may be appointed whenever:

1. necessary in order to preserve the rights of the parties-litigants; and/or 2. protect the interest of the investing public and creditors. (Section 6 (c), P.D. 902-A.)

MWSS v. Daway

The letter of credit is not covered by the stay order (hence, MWSS can enforce its claim) because it is solidary and primary undertaking. As such, claims against them can be pursued separately from and independently of the rehabilitation case (PBM v CA).



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The stay order issued in favor of the principal debtor cannot be invoked by its surety when called upon to satisfy the solidary obligation.

Metrobank v. ASB

The dacion en pago program and the intent of ASB to ask creditors to waive the interests, penalties and related charges are not compulsory in nature. They are merely proposals for the creditors to accept. There was even an initial discussion on these proposals and the majority of the secured creditors showed their desire to complete dacion en pago transactions, but they must be based on ―mutually agreed upon terms.‖

The purpose of rehabilitation proceedings is to enable the company to gain a new lease on life and thereby allows creditors to be paid their claims from its earnings.

Sobrejuanite v. ASB

The purpose of suspension of the proceedings is to prevent a creditor from obtaining an advantage or preference over another and to protect and preserve the rights of party litigants as well as the interest of the investing public or creditors. It is intended to give enough breathing space for the management committee or rehabilitation receiver to make business viable again, without having to divert attention and resources to litigations in various fora. It would enable the management committee/rehab receiver to effectively exercise powers free from any judicial/extrajudicial interference that might unduly hinder or prevent the ―rescue‖ of the debtor company.

Definitions of claim:

Finasia v CA: debts/demands pecuniary in nature Arranza v BF Homes: actions involving monetary considerations Interim rules: All claims or demands, of whatever nature or character against a debtor or its property , whether for money or otherwise. No distinctions or exemptions.

The FRIA has expanded the definition of claims to include all claims and demands of whatever nature, whether for money or otherwise.

credit transactions notes (fsd)

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