credit transactions reviewer 789876

7/28/2019 Credit Transactions Reviewer 789876

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Sectrans with Notes and Cases. Atty. Lerma. 2C. By Butch Ramiro

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LOAN

Art 1933: Definition of Contract of Loan

Contract of Loan:

It is a real contract, meaning it REQUIRES DELIVERY forPERFECTION It is a unilateral contract, meaning upon delivery, it only creates

obligations on the part of the bailee/borrower

Commodatum: B delivers to C something not consumable ORsomething consumable but intended to be non-consumablewherein C can use it for a certain time and return it

o Commodatum is gratuitouso Ownership is retained by the bailor

Commodatum is either an ordinary commodatumor a precarium (wherein the bailor may demand

the thing loaned at will)

Simple Loan/Mutuum: B delivers to C money or otherconsumable thing, with the condition that C will pay the same

amount of the same kind and quality

o Ownership passes to the bailee/borrowerEx: A tells B that he will lend him his cell phone. B agrees. There is NO

contract of commodatum because there was NO DELIVERY. Same goes forsimple loan or mutuum.

Art 1934: An accepted promise to deliver something by way ofcommodatum or simple loan is binding upon the parties as a CONSENSUALCONTRACT, but not as a PERFECTED CONTRACT of LOAN until delivery ofthe object is effected

Art 1935: Gratuitous nature of Commodatum

The bailee acquires the USE of the thingo The bailee must not be required to give ANY compensation

for its use (it may be considered a lease IF there is anycompensation)

Art 1936: Consumable goods may be the subject of commodatum if the

purpose of the contract is merely for exhibition

General Rule: Object of commodatum is non-consumable

o Exception: Consumable goods may be the subject ofcommodatum IF it is intended merely for exhibition

Producers Bank v CA: Vives gratuitously deposited money inSterela Corps account so that it can show that it has sufficientcapital to incorporate. Court ruled that this was a contract of

commodatum because the money/consumable was deposited for

purposes of exhibition (to the SEC)o Lerma dissent: Its technically wrong because its not like

the same exact bills have to be returned

Art 1937: Movable or immovable property may be the object ofcommodatum

Mina v Pascual: When a person is allowed to build a structure onanothers land so that the former may use the property for a

certain period without payment of rentals, it can be considered acontract of commodatum involving real/immovable property

Art 1938: Bailor/Lender in commodatum does not have to be the owner

It is sufficient that the lender has possessory interest or right to itsuse which he may assert against the bailee and third persons

Art 1939: Personal character of Commodatum; Effects

Death of bailor or bailee/lender or borrower EXTINGUISHES thecontract

o EXCEPTION: unless there is a stipulation that transmitsthe commodatum to the heirs of either

Borrower may not LEND or LEASE the object of the contract toa third person

oEXCEPTION: a stipulation that the borrower may lend orlease to third persons

o EXCEPTION: the members of the borrowers householdmay make use of the thing

EXCEPTION to EXCEPTION: a stipulation thatthe members of the household that cannot use ORif the nature of the thing forbids such use

Ex: A lends to B, a dentist, a dentists chair by way of commodatum. Themembers of Bs household may not just use it because of its nature

Art 1940: Bailee/Borrower may make use of the fruits of the thingloaned but it must be expressly stipulated. It cannot be presumed


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Art 1941: Bailee is obliged to pay for the ordinary expenses for the

use and preservation of the thing loaned

Borrower must observe ordinary diligence (good father of a family)unless a higher degree of diligence is stipulated

Ex: A lends to B his car. B must pay for gas, motor oil, tune up, etc.

Art 1942: Liability of borrower for loss of the thing borrowed

General Rule: Borrower is not liable for loss or damage to thething due to a fortuitous event

1. *Fortuitous event: An event that cannot be foreseen, orwhich, though foreseen, is inevitable. It is independent ofthe will of the borrower and when it happens, it makes the

normal fulfillment of the obligation impossible (meaning hecant return it anymore if its lost OR he cannot return it in

its normal state if it has been damaged)

EXCEPTIONS: Borrower is still liable for the loss or damage (dueto fortuitous event) in the following instances

1. If borrower devotes the thing to a different purpose(from that for which it has been loaned)

Ex: A lent to B his car so B can go out of town. Buses it to drag race. B is l iable even if lightning hitsthe car

2. If he keeps it longer than the period stipulated3. If he keeps it after the accomplishment of the purpose

Ex: A lent to B his motorcycle so B can take hischildren to school. When Bs children graduate, he

must return it. Otherwise, he is liable for theloss/damage even due to fortuitous event

4. If the thing loaned has been delivered with appraisal ofvalue UNLESS there is a stipulation exempting theborrower from liability in case of fortuitous event

Ex: Republic v. Bagtas: Government delivered toBagtas the bulls with appraisal of its value so

Bagtas cant disclaim liability even if the bulls werekilled due to Huks

5. Ifhe lends or leases the thing to a third personwho isnot a member of his household

IF the borrower lends the thing to a member of hishousehold but the nature of the thing forbids such

use and the thing is destroyed/damaged through a

fortuitous event: the borrower is still liable!6. Ifbeing able to save the thing borrowed or his own

thing, he chose to save his own thing

Art 1943: Borrower does not answer for the wear and tear (due to normal

use) of the thing loaned

Borrower must prove that the deterioration was due to normalwear and tear and that he was not at fault or he was not negligent

There can be a stipulation making borrower liable even for wearand tear

Art 1944: Borrower has no right of retention on the ground that thelender owes him something even if it is by reason of extraordinary

expenses. Borrower can only retain if lender was aware of flaws in thething lent and he did not inform the borrower (1951!)

Ex. A lent his car to B for a week. A borrowed 10k from B. At theend of the week, B still has to return the car notwithstanding Asloan.

Ex. In Art 1951, if the lender has knowledge of a hidden flaw anddefect in the thing loaned and he does not advise the borrower,

and subsequently the borrower suffers damages by the flaw, the

lender is liable for such damages the borrower incurred.

o In addition, borrower can retain the thing loaned until hehas been indemnified/reimbursed for the damages hesuffered

The mere failure of the borrower to return the object ofcommodatum does not constitute adverse possession that canripen into title

Art 1945: When there are 2 or more borrowers to whom a thing is loanedin the same contract, they are liable solidarily

Liable for damages solidarily!Art 1946: Obligations of the Bailor/Lender

General Rule: Bailor/Lender cannot demand the thing loanedBEFORE:

o Expiration of the period stipulatedo The purpose of the commodatum has been served


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EXCEPTION: (meaning the lender may demandthe immediate return of the thing loaned even ifthe period has not yet expired or the purpose hasnot yet been served)

1. When the bailor has an urgent need2. When the bailee commits acts of

ingratitude3. When it is precarium (naturally, precariumallows immediate return)

The immediate demand of return may be permanent ortemporary

o If the return is temporary, the rights and duties of thebailor and bailee are suspended while the thing is inpossession of the bailor/lender (meaning it will be the

bailor who will pay for the gas, etc while it is in hispossession)

o If the return is permanent, then the contract ofcommodatum is extinguished

Art 1947: Precarium

Precarium: a kind of commodatum where the bailor may demandthe thing at will

o If there is no duration in the contracto If there is no purpose stipulatedo Ifuse is merely tolerated

In precarium, the borrower has no right to retain until expiration ofthe period OR until the purpose has been accomplished

Quintos v. Beck: Lessor gratuitously granted to lessee the use ofthe furniture in the leased promises subject to the condition thatthe lessee would return the furniture upon demand. This is aprecarium.

Art 1948: Bailor may demand immediate return of thing (IN ORDINARYCOMMODATUM) if bailee commits acts of ingratitude

If the bailee commits offenses against the bailor, his honor,property, his wife and children under his parental authority

If the bailee imputes to the bailor any criminal offense or any actinvolving moral turpitude, even though he should prove it UNLESSthe act or crime has been committed against the bailee, his wife orchildren under his authority

o So if the borrower imputes a crime/act on the lender, andthe lender did such act to the borrower, wife or children,then the lender cannot demand immediate return

If the bailee/borrower unduly refuses the bailor support when thebailee is legally or morally bound to give support

Art 1949: Obligation of bailor to refund extraordinary expenses

Extraordinary expenses: expenses that were made due to afortuitous event in preservation of the thing loaned

o Ex: A borrowed Bs house. The house was damaged by atyphoon. The expenses for the repairs are extraordinary

expenses

General Rule: Bailor/Lender must refund to the borrower theextraordinary expenses incurred by the borrower to preserve the

thing loaned

o BUT, the borrower must notify the lender before actuallyincurring them

However, there is an exception: if the expensesto be incurred are so urgent that the reply to thenotification cannot be awaited without danger

o Application: If the borrower does not notify the lender ofthe extraordinary expenses he will incur, then he will notbe entitled to reimbursement/refund

As regards extraordinary expenses arising from actualuse ofthe thing loaned incurred by the borrower, the borrower andlender will split the expenses EVEN IF the borrower was not atfault

o Unless there is a stipulation to the contrary: If stipulatedwho will bear the extraordinary expenses arising fromactual use

Art 1950: Borrower is not entitled to reimbursement forextra/unnecessary expenses that is not required for the use andpreservation of the thing

Art 1951: Liability of bailor if bailee suffers damage from hidden flaw ordefect

Bailor liable to bailee for damages if the following concur:o There is a flaw/defect in the thing loanedo The flaw/defect is hiddeno Bailor is aware of the flaw/defecto Bailor does not advise bailee of the flaw/defect


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o Bailee suffers damage by reason of said flaw Bailee is given right of retention However, if the defect was so patent/obvious that the borrower

should have seen the defect after inspection OR if the lender wasNOT aware of the defect, then the borrower is not entitled to

damages

Art 1952: Bailor cannot exempt himself from the payment of expenses or

damages by abandoning the thing to the bailee

Lender cant just abandon the thing to escape payingexpenses/damages

o If he abandons, he still liableArt 1953: Definition of simple loan or mutuum

Simple loan: contract where one of the parties delivers toanother money or other consumable thing with the understandingthat the same amount of the same kind and quality shall be paid

o Obligation on the borrower to return the equivalent onlyo Ownership is transferred to the borrower

Art 1954: Barter: Contract: ownership of non-fungible thing is transferred

to another with the obligation of the latter to give thing of the SAME kind,

quantity and quality

Art 1955: Form of payment

Person who borrows money must:o 1249: pay in currency stipulated (legal tender)o 1250: in case of extraordinary inflation/deflation, basis

ofpayment shall be the value of the currency at theestablishment of the obligation (unless there is anagreement to the contrary)

o Ex: A borrowed from C 2k payable after 5 years. On thematurity, the value of the 2k dropped to 1k because of

inflation. A is liable to pay C 4k because basis of paymentis the value of the currency at the time of the perfection of

the loan.

o Ex: A borrowed from C 2k payable after 5 years. On thematurity, the value of the 2k increased to 4k because ofdeflation. A is liable to pay C 1k because basis of paymentis the value of the currency at the time of the perfection of

the loan.

Person who borrows a fungible/consumable thing:o Borrower is under obligation to pay the same kind,

quantity and quality

If it is impossible to do so, the borrower shallpay the value at the time of the PERFECTION

ofthe loan (when it was delivered)

Ex: A borrowed from B 2 sacks of rice of a certainkind and quality. One sack cost 200 pesos each at

the time of perfection. A must return to C the 2sacks of rice of the same kind and quality even ifat the time payment, the price had increased to400.

However, if on the due date, the samekind of rice could not be delivered by A,

then A must pay 400 instead, the value ofthe rice at the time of the perfection of theloan.

Art 1956: No interest shall be due unless it has been stipulated in writing

Requirements for interest to be due:o Payment of interest must be expressly stipulatedo Agreement must be in writingo The interest must be lawful

Exception to 1956:o Debtor in delay is liable for legal interest as indemnity for

damages even in the absence of stipulation

o Interest may be compounded (interest due will earninterest)

Lirag v SSS: Interest can come by way of cumulative dividends ifit can be shown that the stock purchase agreement was meant tobe a debt instrument and that if the cumulative dividend was fixed

at a certain rate and was not made to depend or fluctuate with theamount of profits realized

OBM v CA: Banks are not required to pay interest when they areprohibited by the CB from doing so

It is ONLY IN CONTRACTS OF LOAN that interest can be stipulatedArt 1957: Contracts and stipulations, under any cloak or devicewhatsoever, intended to circumvent the laws on usury shall be void.

This provision applies only if usury law is deemed to be effectiveagain


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An usurious contract is not void in its entirety but only as to theinterest involved

o If the stipulation to pay the principal date is legal, then itstill stands notwithstanding the usurious interest

The usurious interest paid may be recovered bythe borrower

Angel Jose v. Chelda: In a loan of 1k with an interest of 20% perannum (200 per year), the whole 200 is the usurious interest, not

just the part thereof in excess of the interest allowed by law.

Art 1958: Determination of interest payable in kind: value of interestappraised at the current price of the products or goods at the time and

place of payment

Differentiate from 1955: In 1955, what is loaned is the fungibleitself while in 1958, what is paid in kind is the interest!

Ex: A borrowed from B 10k payable in palay in 1 year (the palaywill be appraised at the current market price at the time

and place of payment). When the contract was entered into, the

price per cavan of palay was 2k. On the due date of the loan, theprice per cavan increased to 4k.

o In this case, the value of palay shall be appraised at 4k percavan and not at 2k.

Art 1959: Compound Interest

General Rule: accrued interest (interest due and unpaid) shall notearn interest)

o EXCEPTION: When judicially demanded Express stipulation on compound interest

Penalty charges can be made in case of default and this can alsobe compounded

Compound interest must be in writing

Art 1960: Solutio Indebiti/Natural Obligation principles apply if borrowerpays interest when there is no stipulation

SOLUTIO INDEBITI: If unstipulated interest is paid by mistake,then the debtor may recover the mistakenly paid interest

NATURAL OBLIGATIONS: However, if there is unstipulatedinterest or interest stipulated not in writing, and the debtor pays it

VOLUNTARILY because he feels morally obliged to do so, then

there can be no recovery

Art 1961: Usurious contracts governed by Usury law


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USURY LAW

Certain notes on Usury Law:

Usury Law has NOT YET BEEN REPEALEDo It is still in effect BUT there are no ceilings right now set

by the Monetary Board

Elements of Usury:1. A loan or forbearance2. An understanding between the parties that the loan shall

or may be returned3. An unlawful intent to take more than the legal rate for

the use of money or its equivalent4. The taking or agreeing to take the use of the loan of

something in excess of what is allowed by law

Usury applies to two transactions only: When there is NO LOAN ORFORBEARANCE, there is NO USURY

A loan (more specifically a MUTUUM and NOTcommodatum)

A forbearance: giving a period of time to someone to pay adebt

Requisites of a valid escalation clause:1. It must not be solely potestative on the part of the creditor2. A corresponding de-escalation clause or a stipulation that

the rate of interest agreed upon shall be reduced in theevent the maximum interest is reduced by law or the MB

Eastern Shipping Summary of Rules (Interests!)1. Once an obligation is breached: DAMAGES are DUE2. If obligation consists in the payment of a sum of money

(e.g. loan, forbearance of money, judgment money)

Interest due is the STIPULATED INTEREST The interest shall learn legal interest from the time

of judicial demand (filing of complaint) OR due toa stipulation to compound

If theres no stipulation, the rate is 12% fromdefault (due to extrajudicial or judicial demand)

3. If obligation is not a loan or forbearance of money No interest on unliquidated claims or damages,

except when or until the amount can beestablished with reasonable certainty

If demand established with reasonable certainty:6% from time of extrajudicial/judicial demand

If demand NOT established with reasonablecertainty: only 6% from judgment until finality

Case Notes:

1. Reformina v. Tomola. In an action for damages stemming from injury to persons and

property, the legal interest to be paid, once there is judgment,is 6% since it is NOT a loan or forbearance of money

b. Any other kind of monetary judgment which has nothing to dowith loans or forbearance of any money goods or credits doesnot fall within the coverage of the usury law

2. First Metro Investment v. Este Del Sola. An apparently lawful loan is usurious when it is intended that

additional compensation for the loan be disguised by anostensibly unrelated contract providing for payment by theborrower for the lenders services which are of little value or

which are in fact to be rendered3. Mendoza v. CA

a. Banks cannot unilaterally increase the interest on itsborrowers promissory note because it is violative of theprinciple of mutuality

Lerma Rules:

1. If interest/compound interest is stipulated, interest stipulated ispayable from day 1

2. If interest is not stipulated, then its 12% from delay which is triggeredby extrajudicial or judicial demand

3. Interest due shall earn legal interest ONLY when theres judicialdemand (or when its stipulated by the parties)

4. When theres interest agreed upon but theres no rate, its 12% fromthe start, then compound from judicial demand

5. Its ALWAYS 12% from finality until payment (even if not loan orforbearance)

6. Penalty interest shall be triggered by default, and interest will earnlegal interest from the time of judicial demand

7. When itsnot a loan or forbearance and its unliquidated, its 6% fromthe time of the decision, then 12% from finality until payment

8. But if its liquidated (demand can be established with reasonablecertainty), then its 6% either from demand letter or from judic ialdemand


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GUARANTY

Art 2047: Contract of guaranty: A guarantor binds himself to the creditor

to fulfill the obligation of the principal debtor IN CASE THE PRINCIPAL

DEBTOR FAILS TO DO SO

Characteristics of Guarantyo Accessory: dependent on a principal obligationo Subsidiary and conditional: it takes effect only when the

principal debtor fails to pay

o Unilateral: it only gives rise to an obligation on the partof the guarantor to the creditor

o Guarantor must be distinct from the guarantor Characteristics of Suretyship:

o If a person solidarily binds himself with the principaldebtor, it is called a contract of suretyship

o Suretys liability to the creditor is direct, immediate,primary and absolute

However, surety is ONLY liable to the creditor if theprincipal debtor is held liable

o The surety may be sued separately or together with theprincipal debtor

The creditor may even sue the surety first as soonas the principal debtor is held to be indelay/default because the debtors default is alsothe suretys default

o Surety is not entitled to the benefit of excussionDIFFERENCE OF GUARANTY AND SURETYSHIP

Guaranty SuretyshipLiability of guarantor depends upon

an independent agreement to paythe obligation

Surety assumed liability as a

regular party to the undertaking (Asurety is usually bound with hisprincipal in the same instrument)

Guarantor is subsidiarily liable: hebasically insures the solvency of the

principal debtor

Surety is primarily liable: he is theinsurer of the debt/obligation itself

Guarantors engagement iscollateral

Suretys engagement is to the effectthat he is an original promissory

Manila Surety: a guarantor

assures that that the he will pay if

Lirag: essence of the suretys

obligation is to pay the creditor

the principal debtor cannot or isunable to pay

without qualification if the principaldebtor does not pay

Art 2048: Guaranty GENERALLY gratuitous unless there is a stipulation tothe contrary

It is not necessary to prove any consideration between theguarantor/surety and the creditoro BECAUSE: a guarantor/surety is bound by the same

consideration that makes the contract effective between

the principal parties Consideration does not have to directly pass to the guarantor or

surety

It also never necessary that the guarantor should receive any partor benefit, if there be, accruing to the principal

Severino v. Severino: compromise to end litigation was deemedto be sufficient consideration to support a contract of guaranty

Art 2049: A married woman may guarantee an obligation without the

husbands consent but it shall only bind the conjugal partnership when forexample, the guaranty redounded to the benefit of the family

General Rule: A married woman who acts as guarantor ordinarilyjust binds her separate property

o Exception: She can bind the conjugal property with herhusbands consent or if it redounds to the benefit of thefamily

A married woman may act as a guarantor for her husbandArt 2050: Guaranty entered into without knowledge of principal debtor

A guaranty can be constituted without the knowledge or evenagainst the will of the principal debtor

IF PERSON PAYS WITHOUT KNOWLEDGE or AGAINST THEWILL of the debtor:

o That person (no-consent guarantor) can recover onlyinsofar has the payment has been beneficial to the debtor

o That person cannot compel the creditor to subrogate himin his rights, such as those arising from a mortgage,

guaranty or penalty

Ex: A owes B 20k. Without knowledge of A, Gagrees to guarantee As obligation. If A has alreadypaid 15k, but G still pays 20k, then G can onlyrecover 5k from A because it is only that amount


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that A has benefitted. G can recover the 15k from

B, who must return it based on unjust enrichment.

If the obligation is secured by a mortgage on aland owned by A, Gs payment without theknowledge of A will not grant him the right to

foreclose the mortgage because he has no right tosubrogation

IF PERSON PAYS WITH THE KNOWLEDGE OR CONSENT ofthe debtor:

o That person is subrogated (by virtue of the payment) to allthe rights which the creditor had against the debtor(basically, he steps into the shoes of the creditor)

Art 2051: Different kinds of guaranty

Conventional: by agreement of the parties Legal: constituted by law Judicial: required y court to guarantee the eventual right of the

parties

Gratuitous: guaranty due to the pure liberality of guarantor Onerous: guarantor receives valuable consideration Sub-guaranty: a guaranty constituted to guarantee the obligation

of the guarantor

Art 2052: Valid obligation required for guaranty

Guaranty may be constituted to guarantee a:o Valid obligation

IMPORTANT: it doesnt have to depend on anexisting/current obligation because it can evenapply to future debts

o Voidable contract Ex. A guaranty may support an obligation procured

through vitiated consent because a voidablecontract is valid until anulled

o Unenforceable contracto Natural obligation

When the debtor himself offers a guaranty for hisnatural obligation, he impliedly recognizes hisliability, therefore transforming his obligation to acivil one

Municipality of Gasan v. Marasigan: a contract deemed voidcannot be a basis of suretyship/contract of guaranty

Art 2053: Guaranty of future debts and conditional obligations

A guaranty for future debts is a continuing guaranty/suretyshipo It contemplates a future course of dealings, covering a

series of transactions generally for an indefinite time until

revoked

oIt is intended to provide security with respect to futuretransactions

o It covers transactions which are within the description orcontemplation of the contract of guaranty until theexpiration of the guaranty

o IMPORTANT: Future debts, even if the amount is not yetknown, may be guaranteed BUT there can be no claimagainst the guarantor UNTIL the amount of the debt isascertained or fixed and demandable.

o Smith Bell and Co v. PNB: A guarantor may only beliable if the debt is liquidated/fixed/ascertainable

A guaranty may be for a conditional obligationo If the principal obligation is subject to a suspensive

condition, the guarantor is only liable only after thefulfillment of the condition

o If the principal obligation is subject to a resolutorycondition, the happening of the condition extinguishesboth the principal obligation and the guaranty

Art 2054: Guarantors liability cannot exceed principal obligation

A guarantor may bind himself for lesso Ex. A borrows 20k from B. G guarantees 15k only. If A

was only able to pay 10k, B can still collect the balance(10k) from G

A guarantor may not bind himself for more and in case he does,his obligation shall be reduced to the limits of that of the debtor

Exception: Creditors suing on a suretyship bond may recoverfrom the surety as part of their damages; interest at the legalrate, judicial costs and attorneys fees when appropriate EVEN

without stipulation and even if the surety would thereby becomeliable to pay more than the total amount stipulated in the bond

o Note: Its not really that the guarantor/surety is held liablefor more than what he guaranteed because he is made topay by reason of his failure to pay when demanded (NextProvision!)


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o In this case, interest runs from the time of the filing of thecomplaint OR from the time demand was made on thesurety

Art 2055: Guaranty is not presumed

What encompasses the rule that guaranty is NOT PRESUMED:

o It must be EXPRESSo It cannot extend to more than what is stipulated in the

contract

o If it be simple or indefinite, it shall comprise also itsaccessories, including the judicial costs

With respect to costs, the guarantor is only liablefor costs incurred after he has been judiciallyrequired (ordered) to pay

o It must be in writing (covered by the Statute of Frauds)o It is strictly interpreted against the creditor and in favor of

the guarantor

Ex. In a Special Power of Attorney (SPA), thepower to bind the principal in a contract ofguaranty must be expressly stipulated because

guaranty is not presumed

Exception:: Compensated sureties are NOTentitled to strict interpretation because they arebusiness organizations organized for the purpose

of assuming classified risks SOCONY v. Cho Siong: Surety is only liable as regards the

obligation he secured and it is not to be extended beyond its terms

Plaridel v. PL Galang: Surety may be made liable to pay beyondthe terms of his undertaking like payment of interest at the legalrate if the surety fails to pay upon demand by the creditor

Other rules:o Guarantor cannot be held liable for debts contracted prior

to the guaranty without his consent

o General rule: a demand or notice of default (of principaldebtor) is not required the fix suretys liability

Exception: When there is a stipulation thatrequires a notice of default

If there is a stipulation to that effect andthe surety is not given notice, recovery

from the surety is prevented

To reiterate:o When a guaranty is definite, it excludes the accessories

o When a guaranty is simple or indefinite, it comprises theaccessories

Lesson learned here: In a contract of guaranty, stipulate thatyou are not liable for interests, accessories, judicial costs and thelike!

Art 2056: Qualifications of a guarantor

Art 2057: Selection/substitution of guarantor

Qualifications of a guarantor:o Integrityo Capacity to bind himselfo Have sufficient property to answer for the obligation which

he guarantees

Note: the creditor can still waive these requirements! These qualifications are required to only be present at the time of

the perfection of the contract

o Result of subsequent loss of integrity (for committing acrime), insolvency or supervening capacity:

Guaranty still continues and guarantor will not beexonerated

o HOWEVER, the creditor may demand another guarantorwith the proper qualifications BUT he may waive it and still

hold the guarantor (who lost his integrity, property or

capacity) to the contract

HOWEVER, substitution of the guarantor may notbe demanded (by the creditor) when the creditorhas stipulated that a specified person should bethe guarantor (creditor is bound by his choice)

Estate of Hemady v. Luzon Surety: The supervening incapacityof a guarantor does not terminate the guaranty for it merely gives

the creditor the OPTION to demand another guarantor. He is notbound to substitute the guarantor


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EFFECTS OF GUARANTY BETWEEN GUARANTOR AND CREDITOR

Art 2058: Benefit of Excussion

IMPORTANT NOTE: Excussion is not applicable to suretyship

Benefit of Excussion: The guarantor cannot be compelled to paythe creditor UNLESS:

o The creditor has exhausted all the property of thedebtor

o The creditor has resorted to all the legal remediesagainst the debtor

Remedies contemplated: 1380 (3): Action for rescission based on

contracts undertaken in fraud of creditors:

accion pauliana

1387: when debtor alienates property bydonation and he did not reserve sufficient

property to pay all debts contracted before

the donation, it is presumed to have beenentered into to defraud creditors

Southern Motors v. Barbosa: the creditor may secure ajudgment against the guarantor but the guarantor is entitled to adeferment of execution of said judgment until after the propertiesof the principal debtor shall have been exhausted

o Therefore, a guarantor may be impleaded as a co-defendant

Art 2059: Exceptions to the benefit of excussion

When the guarantor is NOT entitled to the benefit of excussion (I-SAW-U):

1. In case of the insolvency of the debtor2. If the guarantor has bound himself solidarily with the

debtor3. When the debtor has absconded, or cannot be sued

within the Philippines, unless he left a manager4. When the guarantor has expressly waived (renounced) it5. If it may be presumed that an execution on the property of

the principal debtor would NOT result in the satisfaction ofthe obligation (uselessformality)

Additionally, guarantor is also not entitled to excussion when:1. If guarantor fails to set up excussion when creditor

demands payment from him AND if he fails to point out to

the creditor available property of the debtor within

Philippine territory (Art2060)2. If the guarantor is ajudicial-bondsman or sub-surety3. Where a pledge or mortgage has been given by him as a

special security

4. If the guarantor fails to interpose it as a defense beforejudgment is rendered against him

Machetti v. HSJ: In case of insolvency of the principal debtor, itmust be ACTUAL and the insolvency is NOT sufficientlyestablished by the mere fact that the debtor has beendeclared insolvent in insolvency proceedings, in which the

extent of the insolvents inability to pay is not determined until thefinal liquidation of his estate

What happens when the guarantor is not entitled toexcussion?

It simply means that the guarantor can now be compelledto pay the creditor and/or the guarantor can be sued withthe principal

Art 2060: Duty of creditor to make prior demand for payment fromguarantor + duty of guarantor to set up excussion and point out available

property of debtor

Art 2061: Effect of negligence of creditor

When can the creditor demand payment from theguarantor?

o The creditor can only demand payment from the guarantoronly after judgment on the debt against the principal

debtor (this is for obvious reasons; the exhaustion ofdebtors property cannot begin to take place before

judgment has been obtained)

o Furthermore, creditor must make an actual demand on theguarantor

Once demand has been made, the guarantor must set up thebenefit of excussion and point out to the creditor sufficient

property of the debtor within Philippine territory

o Arroyo v. Jungsay: Property not easily available (inpossession of third persons under a claim of ownership) isin the same category as property not within Philippineterritory


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Once the guarantor has set up the benefit of excussion, thecreditor is duty-bound to exhaust all the property of the debtorpointed out by the guarantor and to resort to all legal remediesagainst the debtor

o IF creditor fails to do so, he shall suffer the loss due to theinsolvency of the debtor

BUT only to the extent of the value of saidproperty

SUMMARY:

A owes B 20k. G guarantees this loan. A fails to pay. B makesdemands and thereafter sues A for collection of sum of money

Court then rules in favor of B, who now has a money judgmentagainst A based on the debt

Now, B demands G for payment What must G do? He must set up the benefit of excussion and

point out all available property of A

B must now resort to all legal remedies against A and exhaust hisproperties

If after that, his debt is still unsatisfied, it is then that he cancompel G to pay

Art2062: Procedure when creditor sues principal debtor

In every action by the creditor, he must sue the principal debtoralone

o UNLESS the guarantor is not entitled to excussion (2059,2061)

The guarantor must be notified so that he may appear and set upthe defenses he may want to offer

o IF guarantor APPEARS: Guarantor is still given the benefit of exhaustion

even if judgment is rendered against him and the

debtor

Note: voluntary appearance is not awaiver to right to excussion

o IF guarantor DOES NOT APPEAR: Guarantor cannot set up the defenses and it may

no longer be possible for him to question the

validity of the judgment rendered against the

debtor

Art 2063: Effects of a compromise

A compromise between the CREDITOR and the PRINCIPAL DEBTORbenefits the guarantor

o BUT it does not prejudice himo When is a compromise beneficial to the guarantor?

Ex. A owes B 20k. G guarantees this debt. If A andB agree that the debt be reduced 15k, then the

guarantor is only liable for 15k because it benefitshim

o When is a compromise prejudicial to the guarantor? Ex. Same facts. If the debt is increased to 25k due

to A and Bs compromise, G is still only liable for20k

A compromise between the CREDITOR and the GUARANTORbenefits the debtor

o BUT it does not prejudice himo When is a compromise beneficial to the debtor?

Ex. Same facts. If by B and Gs agreement, A(debtor) is given an extension of time to pay, thenit benefits A of course

o When is a compromise prejudicial to the debtor? Ex. Same facts. If by B and Gs agreement, As

(debtor) time to pay is shortened, A cannot bebound by this because it prejudices him

Art 2064: Sub-guarantors right to excussion

A sub-guarantor enjoys the benefit of excussion with:o The guarantoro The principal debtor

This means that the properties of the guarantor and principaldebtor must be exhausted first and all legal remedies must bepursued against them before he (the sub-guarantor) can be heldliable

Art 2065: Benefit of division among several guarantors (one debtor +same debt)

Benefit of Division: (among the guarantors as against the creditor)

If there are several guarantors of only one debtor and for thesame debt

o The obligation to answer for them is DIVIDED among all


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The creditor can only claim from the guarantors the shares whichthey are respectively bound to pay

Basically, their liability is joint

EXCEPTIONS:o When solidarity is expressly stipulatedo Benefit of division also ceases when 2059 takes place to

wit:

When the principal debtor is insolvent, etc What is the effect if benefit of division

is lost?

o Each guarantor may be held liablefor the entire debt of the principaldebtor

Note: The guarantor is not required to point out the property ofhis co-guarantors in order to set up the benefit of division


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EFFECTS OF GUARANTY BETWEEN THE DEBTOR AND THE GUARANTOR

Art 2066: The indemnity that must be paid to the guarantor

The guarantor who pays for a debtor must be indemnified by thedebtor. Indemnity comprises of (TIED):

1.

The total amount of the debt2. The legal interests thereon from the time guarantor tellsdebtor that he has already paid, even though it did not

earn interest for the creditor3. The expenses incurred by the guarantor AFTER having

notified the debtor that payment was demanded of him

4. Damages, IF THEY ARE DUE Tuason v. Machuca: Generally, the guarantor has no right to

demand reimbursement until he has actually paid debt. However,

if the contract grants him the right to reimbursement before heactually does, then he is entitled to reimbursement

Saenz v. Yapchan: The guarantor CANNOT collect more than hehas paid

When the guarantor tells the debtor that he has already paid thedebt, it is in effect, a demand

o This is why the debtor is held to be liable for legal interest(12%)

EXCEPTIONSto guarantors right to indemnity:o When guaranty is constituted without the knowledge or

against the will of the debtor, guarantor can onlyrecover insofar as the payment was beneficial to thedebtor

o Payment made by a third person who does not intend tobe reimbursed

o Right to demand reimbursement is subject to waiverArt 2067: Guarantors right to subrogation

Basically, if the guarantor pays, he is subrogated to the rights ofthe creditor as against the debtor

o The subrogation is by operation of law (automatic)o Guarantor steps into the creditors shoes as regards the

principal debtor

o Ex. A owes B 20k. G guaranteed this debt. A is unable topay so G pays. G is now As creditor and he now has all the

rights which B previously had against A.

Right to subrogation cannot be invoked when guarantor has noright to be reimbursed!

Art 2068: Effect of payment by guarantor without notice to debtor

If guarantor pays without notifying the debtoro

the debtor may enforce against him ALL the defenseswhich he could have set up against the creditor at the time

the payment was made

o Ex. If guarantor pays but debtor has already paid, debtormay interpose the defense of the previous extinguishmentof his obligation by payment

Art2069: When payment made by guarantor before/after maturity of theprincipal obligation

If the principal debtors obligation is for a period and the guarantorpays BEFORE maturity

o The guarantor cannot demand reimbursement from thedebtor UNTIL the expiration of the period

UNLESS payment has been ratified by theprincipal debtor

Art 2070: Effect of repeat payment by the debtor

General Rule: Before the guarantor pays the creditor, he mustfirst notify the debtor

o If the guarantor fails to give such notice and the debtorrepeats payment, the guarantors only remedy is to collectfrom the creditor

o Exceptions: (when guarantor may still claimreimbursement from the debtor despite lack of notice tothe debtor)

When the creditor becomes insolvent When the guarantor was prevented by a

fortuitous event to notify the debtor of thepayment

When the guaranty is gratuitousArt 2071: Preliminary Remedies available to the guarantor

The guarantor, even BEFORE HAVING PAID, may proceedagainst the principal debtor: (SIIEMA-10)

1. When the guarantor is sued for payment


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2. When the principal debtor is insolvent3. When the principal debtor is in imminent danger of

becoming insolvent4. When the period of guaranty has expired5. When the debt matures6. When there are reasonable grounds to fear that the

principal debtor intends to abscond7. After10 years, when the principal obligation has no fixed

period of maturity, unless it be of such a nature that theobligation will need more than 10 years to be extinguished

In all these cases, the action of the guarantor is to either: theseremedies are alternative: he may choose what action to bring

1. Obtain release from the guaranty This release is against the principal debtor

2. Demand a security that shall protect him from anyproceedings by the creditor and from the danger of thedebtors insolvency

Manila Surety v Batu: 2071 remedies available to a suretybecause a suretys obligation is more onerous

Art 2072: Guarantor of a third person at request of another

The guarantor who guarantees the debt of an absentee at therequest of another has a right to claim reimbursement (aftersatisfying the debt) FROM:

o The person who requested him to be a guarantoro The debtor


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EFFECTS OF GUARANTY AS BETWEEN CO-GUARANTORS

Art 2073: Right to contribution of guarantor who pays

Right of Contribution: This is between the guarantors as betweenthemselves

When there are two or more guarantors of the same debtor andthe same debt

o The one among them who has paid may demand fromeach of the others the share which is proportionately owingfrom him

If any of the guarantors should be insolvent, his share shall beborne by the others, including the payer, in the same proportion

TRIGGER OF RIGHT TO CONTRIBUTION: (either)o Payment must be made in virtue of a judicial demando Principal debtor is insolvent

Ex. D owes C 10k. G and H are guarantors of D s obligation. If Dfails to pay and G is required to pay by virtue of a judicial demand

by C or if D is insolvent, and G subsequently pays, G can seekreimbursement of 5k from H, his share in the guaranty

Ex2. D owes C 15k. G,H and I are guarantors of the debt. If Dbecomes insolvent, then G, H and Is benefit of division ceases. Ccan then proceed against any of them for the whole amount of15k. If G pays the whole debt, he can demand 5k each from H and

I. However, if H is insolvent, his share shall be borne by G and Iproportionately (7.5k each)

o However, if the benefit of division ceases for reasons otherthan the insolvency of the principal debtor, THEN the right

to reimbursement granted to G against H and I may onlybe exercised if G makes payment in virtue of Cs judicialdemand

Art 2074: Defenses available to co-guarantors

The guarantors may set up against the one who paid, the samedefenses which would have pertained to the principal debtoragainst the creditor

o The defenses should also not be purely personal to thedebtor

Ex: Fraud through vitiated consent and minority ispurely personal to the debtor so it cannot be used

by the co-guarantors against the guarantor whopaid

o BUT, fraud inherent in the obligation, prescription, illegalitymay be set up by the other guarantors because they aredefenses inherent in the obligation

Art 2075: Liability of sub-guarantor in case of insolvency of the guarantor

In case of the insolvency of the guarantor for whom he boundhimself

o A sub-guarantor is liable to the co-guarantors in the samemanner as the guarantor whom he guarantees

EXTINGUISHMENT OF GUARANTY

Art 2076: Obligation of guarantor is extinguished at the same time asthat of the debtor and for the same causes as all other obligations

Rule: Guaranty is terminated when the principal obligation isextinguished

o Causes of Extinguishment: Payment or performance Loss of the thing due Condonation of the debt Confusion or Merger Compensation Novation Annulment Recission Prescription When guarantor is released

What is the effect of material alteration of the principalcontract on the contract of guaranty/suretyship IF the

alteration is without the consent of the guarantor/surety?

o First, it would be helpful to define what constitutes amaterial alteration on the contract.

It is anything which essentially varies the terms ofthe principal contract

It makes the obligation more onerous The leg Legal effect of the original contract is

changed

o If there is indeed a material alteration, then theguarantor/surety is released!

Art 2077: Rule when creditor voluntary accepts immovable property or

other property in payment of the debt


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When the creditor VOLUNTARILY accepts immovable or otherproperty in payment of the debt

o The guarantor is released EVEN IF the creditor should lose the same

through eviction

Effect of eviction: it revives only the principalobligation (between debtor and creditor) and not

the guaranty

Art 2078: Release of guarantor without the consent of the other co-guarantors

General Rule: Several guarantors of the same debt of the sameperson enjoy the benefit of division and if any of them are

insolvent, all the other guarantors will bear his (insolvents share)

o Therefore, if one of the guarantors is released WITHOUTthe consent of the other co-guarantors, they may be

prejudiced should another guarantor be held

insolvent They are prejudiced because they would have to

pay more

Therefore, the law provides that the release of one guarantorby the creditor made WITHOUT the consent of other co-guarantors will benefit all to the extent of the share of the

released guarantor

o Conversely, if the release is made with the consent ofthe co-guarantors, then they remain liable for the released

guarantors share

Ex: D owes C 15k. G, H and I are the guarantors of Ds debt. If Gis released without the consent of H and I, then H and I will onlybe liable for 5k each

o Not 7.5k each because they are benefited to the extent of5k

If G is released with the consent of H and I, then H and I will nowbe liable for 7.5k each

If G is released with only the consent of H and not of I, then H willbe the one burdened, he will have to bear Gs share alone (H: 10k

and I: 5k) Rule of Thumb: If you dont consent, you benefit from the

release but if you consent, you have to bear the burden of the

released guarantor

Art. 2079: Guarantor is released by the extension of time granted by

creditor or debtor

If the creditor grants the principal debtor an extension of time (topay) with the consent of the guarantor, then the guaranty is not

extinguished If the creditor grants the principal debtor an extension of time (to

pay) without the consent of the guarantor,

o The guarantor is DISCHARGED from his undertaking Why? Because the debtor may become insolvent

during the extension, thus depriving the guarantorthe right to demand reimbursement

o What does not constitute extension? The law provides that the mere failure on the part

of the creditor to demand payment after the debt

has become due does not, BY ITSELF, constitutethe extension contemplated

Radio Corp v. Roa: If the debt is payable in installments and it isstipulated that failure to pay one installment makes the whole debt

automatically due (basically, an acceleration clause), an extensionof the creditor for payment of one installment, without the

guarantors consent, discharges the guarantor.

o Why? Because the extension constitutes an extension ofthe payment of the whole amount

Villa v. Garcia Bosque: If the debt is payable in installments (noacceleration clause), an extension of time for one installmentwithout the consent of the guarantor will not extinguish the wholeguaranty. It will only extinguish the guaranty as to that

installment!

Machetti v. HSJ: If the contract covered by the guaranty DIDNOT have a PERIOD, then an extension of time to perform thatcontract will not release the guarantor

Notes: It is immaterial whether the extension given has actually proved

prejudicial or not to the guarantor or surety because the law doesnot require it

Art 2080: Guarantor is released when guarantor cannot be subrogatedthe creditors rights by the act of the creditor

Art 2067 provides that the guarantor is entitled to be subrogatedto the rights of the creditor once he (guarantor) makes payment


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o If there can be no subrogation to the creditors rights,mortgages and preferences because of the creditors act

then the guarantors are released Ex. D loans 10k from C. G guarantees the loan. D also pledges

shares of stock to C as security. If before payment, the creditor

gives back the shares to D, the guarantor is released because bythe creditors act of returning the shares, the guarantor (G) cannotbe fully subrogated to the creditors rights

Art 2081: Defenses available to guarantor as against the creditor

The defenses available to the guarantor against the creditor arealso the defenses which

o The debtor has against the creditor BUT IT MUST NOT BE PURELY PERSONAL

o The defenses inherent in the debt/obligationLEGAL AND JUDICIAL BONDS

Art 2082: Bonds, Bondsmen

Bond: an undertaking that is sufficiently secured Bondsman: He is a surety offered in virtue of a

o Provision of lawo Judicial order

Qualifications: integrity, capacity and sufficientproperty

Additional: must be resident owner of realestate in the Philippines and if he is only

one, then his real estate must be worth atleast the amount of the undertaking

Art 2083: Pledge or mortgage in lieu of bond

If a person bound to give a legal or judicial bond is not able to doso

o A pledge or mortgage sufficient to cover the obligationmay be given

Note: Requisites of Pledge/Mortgage as the casemay be must also be present!

Art 2084: Bondsman not entitled to excussion

A judicial bondsman is not entitled to the benefit of excussion

o BECAUSE their liability is primary and solidary It follows that the sub-surety is also not entitled to

the benefit of excussion


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PROVISIONS COMMON TO PLEDGE AND MORTGAGE

Art 2085: Essential Requisites of Mortgage/Pledge

Art 2086: Mortgage/Pledge may secure a valid, unenforceable, voidable,

natural obligation

Art 2087: When the principal obligation becomes due, the things in whichthe pledge or mortgage consists may be alienated for the payment to thecreditor

Pledge: A contract by which the debtor delivers to the creditor orto a third person a movable OR document evidencing incorporeal

rights for the purpose of securing the fulfillment of a principalobligation with the understanding that when the obligation is

fulfilled, the thing delivered shall be returned with all its fruits andaccessions. It is:

o Real: perfected by the delivery of the pledgor to thecreditor/pledgee OR to a third person by commonagreement

o Accessory: needs a valid obligation to existo Unilateral: obligation is solely on the part of the creditor

to return the thing upon the fulfillment of the principalobligation

o Subsidiary: obligation to return arises only upon theprincipal obligations fulfillment

Cause/Consideration in pledge: It depends:o Cause (as to pledgor-debtor): the principal obligationo Cause (pledgor but not debtor): either liberality or

compensation stipulated for the pledge Requisites common to pledge and mortgage

1. It be constituted to secure the fulfillment of a principalobligation

2. That the pledgor or mortgagor be the absolute owner ofthe thing pledged or mortgaged

3. That the persons constituting the pledge or mortgage havethe free disposal of their property (and in the absencethereof), legally authorized for that purpose

Third persons not parties to the principal obligationmay secure the principal obligation by pledging or

mortgaging their own property

Free disposal: property must not be subject toany claim of a third person

Capacity to dispose: pledgor or mortgagor hasthe capacity or authority to make a disposition ofthe property

o During the existence of the mortgage/pledge, themortgagor/pledgor retains ownership of the thingmortgaged/pledged (until it is of course, foreclose and

soldd)o A pledge or mortgage constituted by an impostor is voido Future property cannot be pledged or mortgagedo Mortgagee in good faith: if the mortgagee relied on

good faith based on the Torres title that the mortgagor had

the free disposal/authority to mortgage it, then he isprotected

Conversely, creditor is required to exercise duecare and prudence when the circumstances showhim that he should inquire further

Delivery is necessary to perfect pledgeo

However, in mortgage, the mortgagor generally retainspossession of the thing pledged

Arenas v. Raymundo: There can no be valid pledge if the pledgorwas not the absolute owner of the thing pledged (VOID)

Rural Bank of Caloocan v. CA:o If the creditor is a bank, it has the duty to inquire as to the

circumstances especially when the debtor borrows moneyand mortgages another persons property to secure his

loan without the latters consent

Bank is guilty of negligence when it relied solely onthe debtors representations

Cavite Development Bank v. Lim: A foreclosure is void if theforced seller is NOT the owner of the thing that is the subject ofthe foreclosure sale

Pledge and Mortgage Distinguished

Pledge Mortgage

Object Movables/Incorporeal

Rights

Immovables (Art 415)

Delivery? Delivery required forperfection; either to

the creditor or to athird person by

Delivery is notnecessary


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common agreement

To bind third persons There must be adescription of the thing

pledged and the dateof the pledge mustappear in a public

instrument

Mortgage is not validagainst third persons

unless registered withthe RD

Art 2088: Pactum Commisorium

The creditor CANNOTo Appropriate the things given by way of

mortgage/pledge

o Dispose of the things given by way of mortgage/pledge Note: Adding an SPA to sell and apply proceeds to

the loan in the mortgage/pledge contract is VOIDbecause it is pactum commissorium (it authorizes

disposal)

However, after default, this is allowed Any stipulation granting the creditor that right is null and void What are the rights of the creditor/mortgagee/pledgee if

the debtor fails to pay?

o The creditor is merely entitled to move for the sale of thething pledged or mortgaged

This must conform to the formalities required bylaw in order to collect the amount of his claim from

the proceeds If the mortgagee really wants the property,

he must buy it at the foreclosure sale

The pledgor/mortgagors default does not vest inthe pledgee/mortgagee the ownership of the things

pledged/mortgaged

The debtor-owner bears the loss of the propertybecause he remains the owner and the principalobligation is not extinguished by the loss of thepledged/mortgaged property

Pactum Commissorium: a stipulation whereby the thing pledgedor mortgaged or under antichresis shall automatically become the

property of the creditor in the event of non-payment of debt within

the term fixed

o Requisites:

1. There should be an existing pledge, mortgage orantichresis of property by way of security for thepayment of the principal obligation

2. Stipulation for automatic appropriation by thecreditor of the property in the event of non-

payment of the obligation within the stipulatedperiod

Mahoney v. Tuason: The PC stipulation does not automaticallyinvalidate a contract of pledge, mortgage or antichresis. Thesecurity remains valid, only the prohibited stipulation is void. It isas if the parties have not agreed as to the manner the creditor can

recover his credit in case the debtor fails to comply with hisobligation

Bustamante v. Rosel: When the debtor is obliged to dispose ofcollateral (in favor of the creditor) at a value amounting topractically the same loan, there is an intent on the part of thecreditor to appropriate the thing given by way of mortgage

Alcantara v. Alinea: PC requires that the property sought to beautomatically appropriated be mortgaged/pledged/given by way ofantichresis to the creditor

Lanuza v. de Leon: A stipulation in a purported pacto de retrosale that the ownership over the property sold would automaticallypass to the buyer in case no redemption was effected within thestipulated period is a pactum comissorium

Art 2089: Indivisibility of mortgage/pledge

Art 2090: Indivisibility of pledge or mortgage is not affected by the factthat the debtors are jointly liable (as to the principal obligation)

Rule: A pledge or mortgage is one and indivisible as to thecontracting parties, even if the principal (and secured) obligation isjoint and not solidary

o Ex.A and B jointly owe C 200k. A mortgages his houseand B mortgages his land (in the same deed, of course). If

A and B fail to pay, C does not have to foreclose on thehouse separately or on the lot separately, he may

foreclose both at the same time to satisfy the obligationEVEN IF A and Bs liability is joint.

PNB v. Agudelo: Although it is true that a mortgage is indivisibleas to the contracting parties, it is not indivisible with respect tothird persons who did not take part in the constitution of the

mortgage


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o Every portion of the property pledged or mortgaged isanswerable for the whole obligation as soon as it falls due

o When several things are pledged or mortgaged tosecure the same debt in its entirety,

All the things are liable for the totality of the debtand the creditor does not have to divide his actionby distributing the debt among the various things

pledged or mortgage Consequences of Indivisibility:

o The debtor/debtors heir who has paid a part of the debtcannot ask for the proportionate extinction of the pledge ormortgage

o The creditor/creditors heir who has received his share ofthe debt cannot return the pledge or cancel the mortgage

if the debt is not completely satisfied

Exceptions:o If several things are given in pledge or mortgage and each

one of them guarantees only a determinate portion of the

creditor Ex. A borrowed from B 30k. As security, hepledged his diamond ring worth 20k and his

bracelet worth 10k. If A pays 20k, he cant ask forthe diamond ring back because of the indivisibilityof the pledge

This remains true even if A dies, leaves Dand E as his heirs, and D pays 20k to B.

However, if it was agreed that the ring was givento secure 20k and the earrings for the balance of10k and A pays 20k, then A can demand the returnof the ring

o Central Bank v. CA: 2089 presupposes several heirs ofthe debtor or creditor (?)

80k loan agreement entered into by the borrowerand the lender, and borrower mortgaged his 100h

hectare property. Lender only released 40k of theloan (because of CB restrictions)

In this case, in case of borrowers default,bank can only foreclose on 50% or 50

hectares of the borrowers property

Art 2091: All kinds of obligations may be secured by a pledge or

mortgage whether they be pure or conditional

Art 2092: A promise to constitute a pledge or mortgage, if accepted, only

gives rise to a personal action between the parties and it grants no realright

A promise to constitute a pledge or mortgage, if accepted, gives apersonal right between the parties

o What exists is only a right of action to compel thefulfillment of the promise BUT there is no pledge or

mortgage yet

This is of course without prejudice to the criminal responsibilityincurred by one who defrauds another, by offering in pledge ormortgage as unencumbered, things which he knew were subject to

some burden OR by misrepresenting himself to be the owner ofthe same

o Fraud and deceit must be employed upon the buyer


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PROVISIONS APPLICABLE ONLY TO PLEDGE

Art 2093: Transfer of Possession is ESSENTIAL in pledge

Rule: To constitute a VALID pledge, the thing pledged must BE:o Placed in the possession of the creditoro Placed in the possession of a third person by common

agreement

The pledgee/third person must be placed in ACTUAL possessiono EXCEPTION:

Symbolical transfer: Delivery of keys to thewarehouse where the goods were stored

Yuliongsiu v. PNB: Pledge is still effective if thereis constructive delivery because sufficientdelivery depends on the particular nature of the

thing pledged (In this case, a boat)

Art 2094: Subject Matter of Pledge: MOVABLES

Art 2095: Incorporeal Rights:

What may be pledged?o Movables susceptible of possessiono Incorporeal rights evidenced by negotiable instruments,

bills of lading, shares of stock, bonds, warehouse receipts

Here, the instrument evidencing the right shall bedelivered to the creditor AND if negotiable,

indorsed

Art 2096: Necessity of Public Instrument: Date + Description

Reminder: Contract of pledge still valid between pledgor/pledgeeas long as 2085 and 2093 requirements are present:

o HOWEVER, in order to bind/prejudice 3rd persons: it mustbe in a

Public Instrument containing: Date of the pledge Description of the thing pledged

o Ex; A pledged his ring to B but 2096 was not followed. Asells the ring to C, who was in good faith and for value. Chas a better right over the ring because it was not in apublic instrument

Art 2097: Pledgor may alienate the thing pledged

Reminder: Pledgor remains owner even if he pledges the thingtherefore he can still sell the thing

o BUT pledgor needs the pledgees CONSENT In this case, the ownership of the thing pledged

passes to the vendee as soon as the pledgee

consents

HOWEVER, the pledgee remains inpossession

o The vendee is subject to the rights of the pledgee namely: Pledgee may sell the thing to satisfy the obligation Pledgee must be respected in his possession

Important: Keep in mind the public instrument rule to bind thirdpersons

o When the law talks of third persons, its ANYONE not aparty to the pledge

Art 2098: Right of the pledgee to retain until he is paid

Right of retention:o Pledgee/Third person to whom thing was delivered is given

the right to retain the pledged thing UNTIL the debt is

PAID

HOWEVER it is limited only to the fulfillment ofthe principal obligation for which the pledge wascreated

Ex: A owes B 1k. As security, A pledged his medal. Later on, heborrowed another 20k. In this case, B has a right to retain theMEDAL until he is fully paid 1k. B cannot retain if hes unpaid for

20k.

Art 2099: Obligation of pledgee to take care of the thing pledged

Diligence required from the PLEDGEE: Ordinary Diligenceo Pledgee can get reimbursement for:

Expenses necessary for preservationo Pledgee is liable for

Loss/deterioration Cruz v. Chua: Pledgee must renew the pawn ticket (in his

possession) by paying interest on the loan in order to prevent thepledge from being lost. Failure to do that will make him liable


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Art 2100:Pledgee cant deposit the thing pledged with another

The pledgee cannot deposit the pledged thing with anothero Exception: contrary stipulation allowing him

The pledgee is also responsible for the acts of his agents/employeewith respect to the thing pledged

Art 2101: Pledgor liable for hidden flaws (see 1951)

Art 2102: Right of pledgee to compensate earnings of pledge with thedebt

Rules for compensation of earnings of pledge:o Apply the interest/dividends/income to the interest due (to

pledgee)

o If no interest, apply it to principal General Rule; Pledge shall extend to the interest and earnings of

the right pledged

o Exception: contrary stipulation In a pledge of animals, the owner retains ownership of the

offspring

o BUT they are also subject to the pledge IF there is no stipulation to the contrary

Ex: A borrowed from C 10,000 at 12% interest. He pledged hiscertificate of stocks as security. If the stocks earn dividends, theyare subject to the pledge if there is no stipulation to the contrary.

C shall apply the dividends to the interest, if any. If none areowing, then C must apply the dividends to the 10,000

Art 2103: Pledgee versus third persons

Pledgee is authorized to bring such actions which pertain to theowner of thing pledged in order to recover it from or defend it fromthird persons

o HOWEVER, in order to enforce it, the 2096 formalitiesmust be met (PI + date + description)

Art 2104: Obligation of pledgee not to use

General Rule: The pledgee cannot use the thing pledgedo Exceptions:

When there is a stipulation allowing him to do so

When for the pledged things preservation, it mustbe used (like an aircon/automatic watch)

Pledgee CANNOT lend the pledged thing to his household memberso REMEDY (of pledgor if the pledgee misuses OR uses w/o

authority)

Ask the thing pledged to be depositedArt 2105: Right of pledgor to demand return of the thing pledged

Obviously, pledgor can only ask for the pledged things return oncehe has fully paid his debt plus interest/expenses to the creditor-pledgee

o When is another instance when he can demand itsreturn?

When he is allowed to substitute the thing pledged(2108)

Art 2106: Right of the debtor to ask for the deposit of the thing pledged

When can the pledgor ask the thing to be deposited?o When by the negligence OR willful act of the pledgee

The thing pledged is in danger of being: Lost Impaired

o When the pledgee uses the thing without authorityo When he misuses the thing in any way

Art 2107/2108: Right of pledgor to substitute VS. Right of pledgee tocause sale of thing pledged

Right of pledgor to substitute: REQUISITES1. Reasonable grounds to fear the destruction/impairment

of thing pledged2. No fault on part of pledgee3. Pledgor is offering in place of the thing, another thing

in pledge with the same kind/quality4. The pledgee waived his 2108 right

What is his 2108 right? If pledgee has reasonable grounds to fear

that there is danger of destruction, etc, hemay have thing pledged sold at a public

auctiono Result: The proceeds (cash) will

be his security


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Art 2109: Right of pledgee to demand substitute/immediate payment

REMEDIES ofPLEDGEE if he is deceived on the quality/substanceof thing pledged: alternative: choice of one precludes the other

o Claim another thing in pledgeo Demand immediate payment

Art 2110: Effects of RETURN of thing PLEDGD

Remember: Creditors possession is ESSENTIAL in order toconstitute a valid pledge

Rule: The pledged is extinguished if the thing pledged is returnedby the pledgee to the pledgor/owner

o Contrary stipulation is VOID Presumption:

o There is prima facie presumption of EXTINGUSHMENT ofPLEDGE

if subsequent to the perfection of the pledge, thething pledged is in the possession of the

pledgor/owner if the thing pledged is in the possession of a third

person who has received it from the pledgor/owner

Remember: This talks of the PLEDGE or the SECURITY and not ofthe debt which is secured!

Art 2111: Extinguishment of pledge by renunciation/abandonment OF thepledgee

For renunciation to be effective, it must be in WRITINGo Once the pledgee waives, he is considered a depositary

because he remains in possession

Other causes of pledges extinguishment:o Prescription, loss, merger, etc

Art 2112-2116: Public Sale!

Remember: Object of pledge may be alienated for the payment tothe creditor when the principal obligation becomes due

REQUISITES: (when can the pledgee cause the thing to be sold)1. Debt is due and unpaid2. Public auction3. Notice to the pledgor/owner, stating amount due4. Made with the intervention of a notary public (notary

public must be doing business where the thing is pledged)

Rule: Pledgee may appropriate the thing pledged if after twoauctions, the thing pledged remains unsold (its automatically his)and it shall be considered as full payment for his claim

BIDS:o Both pledgor and pledgee may bid at the auctiono If PLEDGOR has same bid as highest bidder, he winso If PLEDGEE is the only bidder, he cant acquire the thingo All bids must be for cash and if the pledgee accepts a bid

other than cash, the pledgor/owner has the right toconsider that the pledgee has received the price in cash

o After the auction, the pledgee shall advise the owner of theresult

Effect of Sale:o Sale of thing pledged EXTINGUISHES the principal

obligation

Debtor not entitled to EXCESS unless theres astipulation

Creditor not entitled to deficiency, any provisionentitling him to deficiency is VOID

Art 2117: Third person may satisfy the principal obligation

General Rule: Creditor is NOT bound to accept payment by athird person who has no interest in the obligation

o Exception: Any person who has a right in the thingpledged may pay the principal obligation as soon as itbecomes due (like the vendee in a contract to sell)

Art 2118: Right of pledgee to collect and receive amount due on creditpledged

If a credit that is pledged becomes due before it is redeemed, thepledgee shall collect and receive the amount due

o He shall apply the same to the payment of his claim anddeliver the surplus to the pledgor-debtor

Ex: A owes B 10k. As security, he pledged a receivable, a PNworth 5k with A as payee. When the PN becomes due, B mustcollect the note from the maker of the PN. Assuming he got 10k,

he must apply the amount to the loan owing him. The excess mustbe returned to A.

Art 2119: Right of pledgee to choose which of several things pledgedshall be sold


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General Rule: When there are two or more things pledged, thepledgee may choose which one will be sold

o He may demand the sale of only as many of the things asare necessary for the payment of the debt

o Exception: contrary stipulationArt 2120: Right of third person who pledged his own property

If a third person secures an obligation by pledging his ownmovable property, he shall have the same rights as a guarantorand he cannot be prejudiced by any waiver of defense by theprincipal debtor

o See notes on 2066-2070, 2077-2081Art 2121-2122: Pledges by operation of law

546: Right to retain of every possessor in GF (property) 1731: one who executes work on a movable has a right to retain it

until he is paid

1914: Agent may retain in pledge which are the object of agencyuntil he is reimbursed for his advances When can a thing under a legal pledge be sold??

o Pledgee must demand the amount for which the thing isretained

o Auction within 1 month from demand If the sale is unjustly delayed (more than 1

month), the debtor may ask for its return

Art 2123: Law hates pawnshops

Summary of PLEDGEEs Rights

To retain thing pledged in his possession UNTIL he has been paid To not give consentto pledgors sale of the pledged thing To be entitled to indemnity if he suffers damages due to

hidden flaws in the thing pledged

To compensate earnings with the thing pledged with interestowing him and if none, to the principal debt

To bring actions which pertain to the owner of the thingpledged in order to recover it from OR defend it against a thirdperson

To cause the public sale of the thing pledged IF without hisfault, there is danger of destruction, impairment, or

diminution in value of the thing pledged (SUPERIOR to RIGHT

OF PLEDGOR to SUBSTITUTE) To demand substitution or immediate payment of the

principal obligation if he is deceived on the substance/quality ofthe pledged thing

To cause the sale at public auction, with notice topledgor/owner, upon default of the pledgor/owner

To appropriate the thing pledged if after two auctions, thething pledged is still not sold

To collect and receive on the amount due on the credit thathas been pledged

To choose what to sell if more than two or more things arepledged

Summary of PLEDGEEs Obligations

To take care of thing with ordinary diligence Not to deposit is with another Not to use the thing unless required by its nature OR allowed

Return the thing once the debt is paid Advise owner/pledgor of the sales result

Summary of Pledgors Rights

To have the pledged thing deposited IFo Pledgee misuseso Pledgee uses without authorityo Pledgee is negligent/executes acts which puts the thing

pledge in danger of being lost

To demand the things return upon his full payment To have the thing pledged substituted (subordinate to pledgees

right to cause the sale) To bid in the auction sale and to be preferred if he has the same

bid as the highest bidder

To the excess of the auction sale if theres a stipulation entitlinghim to it


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REAL MORTGAGE

Art 2124: Real Mortgage

Real Mortgage (REM/RM): A contract whereby the debtorsecures to the creditor the fulfillment of a principal obligation,specially subjecting to such security immovable property or realrights over immovable property which obligation shall be satisfied

with the proceeds of the sale of said property/rights in case thesaid obligation is not complied with at the time stipulated

o Otherwise put, it is a contract where the debtorsecures the performance of his obligation by giving

his real property as security to the creditor.Additionally, the creditor is given the right to foreclose onthe mortgaged immovable to satisfy his credit upon the

debtor defaults

What may be the subject of a real mortgage? Land, buildings (415) Leasehold rights

Characteristics:

o Real: delivery is required (public instrument) BUT debtorgenerally remains in possession because mortgagor merelysubjects the property to a lien but ownership thereofremains with mortgagor

o Accessory: cannot exist without a valid principal ob As long as the secured principal obligation is

VALID, the mortgage remains valid

Its consideration is the same as theprincipal contract

o Subsidiary: foreclosure if principal obligation remainsunpaid

o Unilateral: obligation on part of the creditor-mortgagee tofree the property from the mortgage once principalobligation is paid

Cases:o Prudential Bank v. Panis:

General Rule: A mortgage of land necessarilyincludes, in the absence of stipulation, the

improvements thereon

Exception: A building by itself may be mortgagedapart from the land on which it is built

o PBCOM v. Macadaeg: The mere embodiment of a REMand a CM in one document DOES NOT fuse the securities

into an indivisible whole because both are distinct

agreements with different governing laws

o Dilag v. Heirs/PBTC v. Dahican: FUTURE PROPERTY General Rule: 2085(2) provides that future

property CANNOT be mortgaged

Exception: A stipulation subjecting to themortgage, improvements which the mortgagor

may subsequently acquire, install or use inconnection with real property already belonging tothe mortgagor is VALID

IMPORTANT: Lerma: The reason why thisis valid is because the after-acquired

properties are understood to bereplacements (because the original

machines are subject to wear and tear) Stipulation for AFTER-ACQUIRED PROPERTIES: All property

of every nature and description taken in exchange or replacement,as well as all buildings, machineries, x x x, that the mortgagormay acquire, construct, install shall immediately be and become

subject to the lien of this mortgage in the same manner andextent as if now included therein

Art 2125: Registration of REM; effects

Mortgage in private document: VALID between the partiesand the MORTGAGEE may compel the MORTGAGOR to executethe mortgage in a PUBLIC INSTRUMENT

Unregistered Mortgage: VALID between the parties but it isnot binding on THIRD PERSONS

o Mobil Oil v. Diocares: As between two parties in anunregistered mortgage, the mortgagee may STILLforeclose (in this case, third parties were not involved)

Registered Mortgage in a Public Instrument (in the properRegistry of Property): VALID and BINDING on THIRDPERSONS

Unregistered Mortgage v. Unregistered Pacto de Retro:Unregistered pacto de retro wins because of without prejudice tothe better right of third personsprovision of Act 3344

Registered Mortgage v. Unregistered Sale: Unregistered salewins because registration is without prejudice to the better rightof third parties (land titles!)

Note: By executing a mortgage, the mortgagor is understood tohave given his consent to its registration, and he cannot bepermitted to revoke it unilaterally


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Note: If mortgage is void, the principal obligation that itguarantees subsists (because its an accessory contract!)

o What is lost is the RIGHT TO FORECLOSE to settle theobligation

o The mortgage remains as an evidence of debtorsobligation

Art 2126: Effect of Mortgage

What is the effect of mortgage?o It directly and immediately subjects the property upon

which it is imposed whoever the possessor may beto the

fulfillment of the obligation

o It is a lien inseparable from the property mortgaged,which is enforceable against the whole world

o Subsequent purchasers (of mortgaged property) mustrespect the mortgage

o A mortgage does NOT give a mortgagee a right to thepossession of the property UNLESS there is a stipulation

to that effecto Principles on Pactum Commisorium apply in mortgage as

well: no stipulation for automatic appropriation allowed

o McCullough v. Veloso: Mortgagor remains the owner of the

mortgaged property and he can sell it if he

wants Why? Because it is ONLY an encumbrance

upon the property

The original debtor-mortgagor can be substitutedby the purchaser as regards the mortgage and theprincipal debt IF the mortgagee-creditorCONSENTS (novation: creditor must always

consent)

Art 2127: Extent of Mortgage

What does the mortgage extend to? (meaning, the followingare included in the mortgage as security: when mortgagee

forecloses, these are included)

o Natural Accessionso Growing Fruitso Rents/Income not yet received when the principal

obligation becomes due

o Amount of indemnity owing to the mortgagor from theinsurers of the mortgaged property

o Amount of indemnity owing to the mortgagor-owner due toexpropriation

o Accrued and unpaid rents when the credit remainsunsatisfied (Afable v. Belando)

o Buildings, machinery, accessories belonging to the debtorinstalled on a mortgaged sugar central (immovable bydestination)

o All objects permanently attached to a mortgaged land orbuilding

PSED v. Camps:Although the cinema was erectedAFTER the execution of the mortgage deeds, therewas no stipulation EXCLUDING it from the

mortgage. It is understood to be a substitute ofthe building that was torn down: In this case thereplacement building was considered to be asubstitute: Another exception to the no futureproperty rule

General Rule: An action to foreclose a mortgage must be limitedto the amount mentioned in the mortgage

o Exception: Dragnet Clause: It is specifically phrased to secure past and future

debts

o Tady-Y v. PNB: Future amounts that may be borrowed by the

mortgagor-debtor may included in the mortgage

the amounts named as consideration in a contractof mortgage DO NOT LIMIT the amount for whichthe mortgaged property may stand as security ifthe intent to secure future debts can be

gathered (like a continuing guaranty) In this case, the TCT stated that the mortgaged

property secured the payment of 840 plus

interest and other obligations arisingthereunder

True/False: Mortgage can cover future debts: TRUE (dragnetclause/intent to secure future debt present)

True/False: Mortgage extends to future property: DEPENDS (ifstipulated and for substitution OR if it is anaccession/improvement)

Art 2128: Alienation/Assignment of Mortgage Credit


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Rule: Mortgagee can sell/assign his mortgage credit to a thirdperson, in whole or in part even without the consent of themortgagor-debtor

Art 2129: Right of creditor to collect from the transferee of themortgaged property

General Rule: Even if the mortgagor sells the mortgagedproperty, his obligation to pay the principal obligation subsists

o Exception: If there has been novationo BPI v. Concepcion:

The mortgage credit being a real right whichfollows the property, the creditor may demandfrom the possessor-vendee the payment ONLY of

the part of the credit secured by the property

However, prior demand must have been made onthe original debtor-mortgagor and he subsequently

failed to payo

Ex: A mortgaged his land worth 500k to B to secure a1M loan. A thereafter sold the land to C. A failed topay the loan when B made a demand. B mayforeclose the mortgage. B also has a right to claimpayment of 500k from C. Cs right of recourse is

against A.

Art 2130: Stipulation forbidding alienation of mortgaged property: VOID

Litonjua v. L&R:o Stipulation that states that mortgagor needs consent of

mortgagee before he can sell the mortgaged property is

VOID (impe

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