UP 2010 Civil Law (Credit Transactions).pdf

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TABLE of CONTENTS

CREDIT TRANSACTIONS Table of Contents Chapter I. General Principles ......................307 I. Types of Credit Transactions ............307 II. Security .............................................307 III. Bailment ............................................307

Chapter VIII. Concurrence and Preference of Credits........................................................... 338 I. General Provisions............................ 338 II. Classification of Credits .................... 338 III. Preference of Credits ........................ 338

Chapter II. Loan (Arts. 1933-1961, CC).......309 I. Definition ...........................................309 II. Characteristics of a Loan ..................309 III. Kinds of Loan: In General .................309 IV. Commodatum....................................309 V. Obligations of the Bailee in Commodatum ............................................310 VI. Obligations of the Bailor in Commodatum ............................................311 VII. Mutuum or Simple Loan................311 VIII. Interests ........................................312 IX. The Usury Law ..................................312

Chapter IV. Guaranty ...................................319 I. Definition ...........................................319 II. Characteristics ..................................319 III. Classification .....................................319 IV. Rules Governing Guaranty ...............319 V. Guaranty Distinguished from Others.322 VI. The Guarantor (Arts. 2056-2057)......322 VII. Effects of Guaranty .......................322 VIII. Extinguishment of Guaranty .........325 Chapter V. Legal and Judicial Bonds.........326 Chapter VI. Suretyship.................................327 Chapter VII. Pledge, Mortgage, Antichresis .......................................................................328 I. Essential Requisites Common to Pledge and Mortgage (Art. 2085)...........................328 II. Pledge ...............................................329 III. Mortgage ...........................................332 IV. Foreclosure of Mortgage (Art. 2085).334 V. Antichresis.........................................336 VI. Chattel Mortgage...............................336

306 CREDIT TRANSACTIONS

Chapter III. Deposit ......................................314 I. Definition ...........................................314 II. Kinds of Deposit ................................314 III. Characteristics of Deposit .................314 IV. Deposit Distinguished From Mutuum and Commodatum .....................................314 V. Obligations of the Depositary............314 VI. Obligations of the Depositor..............317 VII. Extinguishment of Deposit (Art. 1995) 317 VIII. Necessary Deposit........................317 IX. Judicial Deposit .................................318

Prof. Roberto N. Dio Faculty Editor

Katrina Elena Guerrero Lead Writer Diana Gervacio Patricia Andrea Hernandez Mark Luciano Ixara Maroto Writers

CIVIL LAW Kristine Bongcaron Patricia Tobias Subject Editors

ACADEMICS COMMITTEE Kristine Bongcaron Michelle Dy Patrich Leccio Editors-in-Chief

PRINTING & DISTRIBUTION Kae Guerrero

DESIGN & LAYOUT Pat Hernandez Viktor Fontanilla Rusell Aragones Romualdo Menzon Jr. Rania Joya

LECTURES COMMITTEE Michelle Arias Camille Maranan Angela Sandalo Heads Katz Manzano Mary Rose Beley Sam Nuñez Krizel Malabanan Arianne Cerezo Marcrese Banaag Volunteers

MOCK BAR COMMITTEE Lilibeth Perez

BAR CANDIDATES WELFARE Dahlia Salamat

LOGISTICS Charisse Mendoza

SECRETARIAT COMMITTEE Jill Hernandez Head Loraine Mendoza Faye Celso Mary Mendoza Joie Bajo Members

Chapter I. General Principles I. TYPES OF CREDIT TRANSACTIONS II. SECURITY III. BAILMENT

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 (contract of security)

I.

Types of Credit Transactions

Secured transactions or contracts of real security – Those supported by collateral or an encumbrance of property Unsecured transactions or contracts of personal security – Those the fulfillment of which 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

II. Security 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. 2 TYPES OF SECURITY 1. Personal Security – as when an individual becomes a surety or a guarantor 2. Real Security - as when a mortgage, pledge, antichresis, charge or lien or other device used to have property held, out of which the person to be made secure can be compensated for loss. Thus, a secured creditor is one who holds a security from his debtor for payment of the latter’s debts.

III. Bailment BAILMENT - the delivery of property of one person to another in trust for a specific purpose, with a contract, express or implied, that the trust shall be faithfully executed and the property returned or duly accounted for when the special purpose is accomplished or kept until the bailor reclaims it. [NOTE: The word “bailment” comes from the French word “bailer,” meaning “to deliver”]


CREDIT TRANSACTIONS TEAM

Chapter I. GENERAL PRINCIPLES

CREDIT TRANSACTIONS

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Chapter I. GENERAL PRINCIPLES

PARTIES IN BAILMENT 1. Bailor – the giver, the party who delivers possession/custody of the thing bailed 2. Bailee – the recipient, the party who receives the possession/custody of the thing delivered

Contract where one of the parties (Seller) obligates himself to: 

Transfer ownership of and



to deliver a determinate thing;

and the other (Buyer) to pay a price certain in money or its equivalent.


KINDS OF CONTRACTUAL BAILMENT (With Reference to Compensation) 1. Those for the sole benefit of the bailor, e.g. gratuitous deposit (Art.1965) and mandatum, i.e., where the mandatory or person to whom the property is delivered undertakes to do some act with respect to the same 2. Those for the sole benefit of the bailee, e.g. commodatum and gratuitous simple loan or mutuum (Art.1933) 3. Those for the benefit of both parties, e.g. deposit for a compensation, involuntary deposit, pledge and bailments for hire a. Hire of things – for the temporary use of the hirer (i.e. lease, Arts.1642-1643) b. Hire of service – for work or labor upon the goods delivered (i.e. contract for piece of work, Art.1713) c. Hire for carriage of goods – for goods delivered to be carried from place to place by a common carrier (Art.1732) or private person d. Hire of custody – for storage of goods delivered (Arts.1507-1520, Warehouse Receipts Law)

Chapter II. LOAN

Chapter II. Loan (Arts. 1933-1961, CC) I. II. III. IV. V.

DEFINITION CHARACTERISTICS OF A LOAN KINDS OF LOAN: IN GENERAL COMMODATUM OBLIGATIONS OF THE BAILEE IN COMMODATUM VI. OBLIGATIONS OF THE THE BAILOR IN COMMODATUM VII. MUTUUM OR SIMPLE LOAN VIII. INTERESTS IX. THE USURY LAW

I.

Definition

LOAN - a contract by which 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 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. (Art.1933)

Borrower must return the same thing loaned (Art.1933) May involve real or personal property (Art.1937) Loan for use or temporary possession (Art.1935) Bailor may demand the return of the thing loaned before the expiration of the term in case of urgent need (Art.1946) Bailor suffers the loss of the subject matter since he is the owner (Art.1942; Art.1174)

Not purely personal in character

Borrower need only pay the same amount of the same kind and quality Refers only to personal property Loan for consumption

Lender may not demand its return before the lapse of the term agreed upon

Borrower suffers the loss even if caused exclusively by a fortuitous event and he is not, therefore, discharged from his duty to pay Purely personal in character

A thing is consumable when it is used in a manner appropriate to its purpose or nature. (Art 418)

II. Characteristics of a Loan

GENERAL RULE: If the subject of the contract is a consumable thing, such as money, the contract would be a mutuum.

Real contract 1. delivery is essential for perfection of the contract of loan. 2. An accepted promise to loan, is nevertheless binding on the parties, it being a consensual contract.

EXCEPTION: 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. (Art.1936) [Producer’s v. CA, 397 SCRA 651]

Unilateral contract 1. creates obligations on only one party, i.e., the borrower 2. In a contract of loan, the cause is, as to the borrower, the acquisition of the thing, and as to the lender, the right to demand its return or its equivalent. (Monte de Piedad v. Javier)

III. Kinds of Loan: In General Commodatum Ordinarily involves something not consumable* (Art.1936)

Mutuum Involves money or other consumable thing

Ownership of the thing loaned is retained by lender (Art.1933) Essentially gratuitous (Art.1933)

Ownership is transferred to the borrower Maybe gratuitous or it maybe onerous, i.e. with stipulated interest

IV. Commodatum 2 KINDS OF COMMODATUM 1. Ordinary commodatum - See Art.1933 2. Precarium – one whereby the bailor may demand the thing loaned at will; exists in cases where: a. neither the duration of the contract nor the use to which the thing loaned should be devoted has been stipulated b. if the use of the thing is merely tolerated by the owner (Art 1947) GENERAL RULE: In a commodatum, the right to use is limited to the thing loaned, and not to its fruits EXCEPTION: When there is stipulation to the contrary (Art.1940). In cases where there is such a stipulation, enjoyment of the fruits must


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Chapter II. LOAN

be incidental to the use of the thing itself. Otherwise, if the use of the fruits is the main cause, the contract may be one of usufruct. (Art.562)

6. Solidary obligation where there are 2 or more bailees to whom a thing was loaned in the same contract (Art.1945) _______

What is the effect of an accepted promise to deliver by way of commodatum or mutuum? It is binding upon the parties, but the contract of loan shall not be perfected until delivery of the contract. (Art.1934)

GENERAL RULE: Bailee is not liable for loss or damage due to a fortuitous event (Art.1174), since the bailor retains ownership of the thing

Who may be bailor in commodatum? 1. Anyone. The bailor in commodatum need not be the owner of the thing loaned. (Art.1938) 2. But the bailee himself may not lend nor lease the thing loaned to him to a third person (Art 1939(2)) _______ GENERAL RULE: Commodatum is purely personal in character (Art.1939) such that: 1. Death of either party extinguishes the contract 2. Bailee can neither lend nor lease the thing lent to him to a third person EXCEPTION: Members of the bailee’s household may make use of the thing loaned

EXCEPTION: Bailee is liable even for loss due to a fortuitous event when: (Art 1942) 1. He devotes the thing to any purpose different from that for which it was loaned 2. He keeps it longer than the period stipulated, or after the accomplishment of the use for which the commodatum has been constituted 3. The thing loaned has been delivered with appraisal of its value, unless there is stipulation exempting the bailee from responsibility in case of a fortuitous event 4. He lends or leases the thing to a third person who is a not a member of his household 5. Being able to save either the thing borrowed or his own thing, he chose to save the latter. _______ GENERAL RULE: Bailee deterioration of thing loaned.

is

liable

for

EXCEPTION TO EXCEPTION: Bailee’s household may NOT use it when: 1. There is stipulation to the contrary, or 2. The nature of the thing forbids such use

EXCEPTION: The deterioration of the thing is due only to the use thereof and without his fault (Art.1943) _______

V. Obligations of Commodatum

GENERAL RULE: Bailee has no right of retention of the thing loaned, on the ground that the bailor owes him something.

the

Bailee

in

OBLIGATIONS OF THE BAILEE 1. Obligation to pay for the ordinary expenses for the use and preservation of the thing loaned (Art.1941) 2. Obligation to take good care of the thing with the diligence of a good father of a family (Art.1163) 3. Liability for loss, even if loss through fortuitous event, in certain circumstances (Art.1942) 4. Liability for deterioration of thing loaned, except under certain circumstances (Art.1943) 5. Obligation to return the thing upon expiration of term or upon demand in case of urgent need

EXCEPTION: Bailee has a right of retention for damages for known hidden flaws mentioned in Art 1951. (Art.1944) REQUISITES FOR THE APPLICATION OF ART.1951 1. There is a flaw or defect in the thing loaned 2. The flaw or defect is hidden 3. The bailor is aware thereof 4. He does not advise the bailee of the same 5. The bailee suffers damages by reason of said flaw or defect


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the

Bailor

in

1. To allow the bailee the use of the thing loaned for the duration of period stipulated or until the accomplishment of the purpose for which commodatum was constituted. EXCEPTIONS: a. Urgent need during which time the commodatum is suspended (Art.1946) b. Precarium (Art.1947)  If duration of the contract has not been stipulated  If use or purpose of the thing has not been stipulated  If use of thing is merely tolerated by the bailor c. Bailee commits an act of ingratitude specified in Art. 765 (Art.1948):  Commission of offenses against the person, the honor, or the property of the bailor, or of his wife or children under his parental authority  Imputing to the bailor any criminal offense, or any act involving moral turpitude, even though he should prove it, unless the crime or the act has been committed against the bailee himself, his wife, or children under his authority  Undue refusal to give the bailor support when the bailee is legally or morally bound to [NOTE: Article 765 is applicable, because like donation, commodatum is essentially gratuitous. (Art.1933, par.2)] 2. To refund extraordinary expenses for the preservation of the thing loaned provided bailor is notified before the expenses were incurred. (Art.1949)  EXCEPTION: Urgent need hence no notice is necessary. 3. To refund 50% of the extraordinary expenses arising from actual use of bailee of the thing loaned (Art.1949)  EXCEPTION: Contrary stipulation 4. To pay damages to bailee for known hidden flaws in the thing loaned. [NOTE: Bailor has no right of abandonment; he cannot exempt himself from payment of expenses to bailee by abandoning the thing to the latter. (art. 1952)]

VII. Mutuum or Simple Loan A mutuum or simple loan is a contract by which a person (creditor) delivers to another (debtor) money or other consumable thing with the understanding that the same amount of the same kind and quality shall be paid. (Art.1953) MUTUUM AND LEASE DISTINGUISED MUTUUM Object is money or any consumable (fungible) thing Thing loaned becomes property of debtor Relationship created is that of creditor and debtor

LEASE Object may be any thing, whether movable or immovable, fungible or non-fungible Owner does not lose his right of ownership Relationship created is that of landlord and tenant or lessor and lessee (Tolentino v. Gonzales, 50 Phil 558)

MUTUUM AND COMMODATUM DISTINGUISHED FROM BARTER 1. In mutuum, subject matter is money or any other fungible things; in barter, non-fungible (non-consumable) things. 2. In commodatum, the bailee is bound to return the identical thing borrowed when the time has expired or the purpose has been served. In barter, the equivalent thing is given in return for what has been received. 3. Mutuum may be gratuitous and commodatum is always gratuitous. Barter on the other hand is an onerous contract. It is really a mutual sale. [NOTE: BARTER – contract where by one of the parties binds himself to give one thing in consideration of the other’s promise to give another thing. (Art.1968)] CONSUMABLE AND FUNGIBLE DISTINGUISHED  Whether a thing is consumable or not depends on its nature and whether it is fungible or not depends on the intention of the parties.  Example: Wine is consumable by nature, but it may be non-fungible if the intention is merely for display or exhibition. [NOTE: Fixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan. (Art.1980)]


VI. Obligations of Commodatum

Chapter II. LOAN

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Interests

INTEREST – is the 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. 2. Compound Interest – that which is imposed upon interest due and unpaid. 3. Legal Interest – that which the law directs to be charged in the absence of any agreement as to the rate between the parties. 4. Lawful Interest – that which the laws allow or do not prohibit 5. Unlawful or Usurious Interest – paid or stipulated to be paid beyond the maximum fixed by law. However, by virtue of CB Circular 905, usury has become “legally inexistent.” When is compound interest allowed? 1. When there is an express written stipulation to that effect (Art.1959) 2. Upon judicial demand. HOWEVER, debtor is not liable to pay compound interest even after judicial demand when there is no stipulation for payment of interest. (Art.2212) REQUISITES FOR INTEREST TO BE CHARGEABLE 1. Must be expressly stipulated 2. Agreement must be in writing (Art.1956) 3. Must be lawful EXCEPTIONS TO REQUISITE OF EXPRESS STIPULATION 1. The debtor in delay is liable to pay legal interest (6% or 12%) as indemnity for damages (Art.2209) 2. Interest accruing from unpaid interest – Interest demanded shall earn interest from the time it is judicially demanded (Art.2212) or where there is an express stipulation (Art.1959) RULES FOR AWARD OF INTEREST IN THE CONCEPT OF ACTUAL & COMPENSATORY DAMAGES (Eastern Shipping Lines v. CA, 234 SCRA 78) 1. When obligation is breached consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest

from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Art.1169. 2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged. 3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.

IX. The Usury Law THE USURY LAW (Act No.2566) is an act fixing rates of interests upon loans and declaring the effect of receiving or taking usurious rates and for other purposes. (Arevalo v. Dimayuga 49 Phil 894) CB Circular No. 905 – abolished interest rate ceilings. Conversely, with the promulgation of such circular, usury has become “legally inexistent” as the parties can now legally agree on any interest that may be charged on the loan. ELEMENTS OF USURY 1. A loan or forbearance of money 2. An understanding between parties that the loan shall and may be returned


VIII.

Chapter II. LOAN

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 MACALINAO v BPI (Sept 2009): Regarding the credit card interest rate, “We are of the opinion that the interest rate and penalty charge of 3 percent per month should be equitably reduced to 2 percent per month or 24 percent per annum… we had affirmed in a plethora of cases that stipulated interest rates of 3 percent per month and higher are excessive, iniquitous, unconscionable and exorbitant. Such stipulations are void for being contrary to morals, if not against the law. While the Bangko Sentral ng Pilipinas C.B. Circular No. 905-82 dated Jan. 1, 1983 effectively removed the ceiling on interest rates for both secured and unsecured loans, regardless of maturity, nothing in the said circular could possibly be read as granting carte blanche authority to lenders to raise interest rates to levels which would either enslave their borrowers or lead to a hemorrhaging of their assets.” [NOTE: The case of Chua vs. Timan involving promissory notes NOT credit cards transactions, which stated that the said 3% interest per month is unconscionable, was cited in this case.]

Chapter II. LOAN


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Chapter III. DEPOSIT

I. II. III. IV.

Contract of deposit is generally gratuitous. (Art.1965), subject to the following exceptions: 1. There is a contrary stipulation 2. Depository is in the business of storing goods 3. Property saved from destruction during calamity without owner’s knowledge; just compensation should be given the depository. (Art.1996[2] and Art.1997, par.2)

I.

Only movable things may be the object of a deposit (Art.1966) if the deposit is either voluntary (Art.1968) or necessary (Art.1995). HOWEVER, a judicial deposit may cover movable as well as immovable property, its purpose being to protect the rights of parties to the suit.

DEFINITION KINDS OF DEPOSIT CHARACTERISTICS OF DEPOSIT DEPOSIT DISTINGUISHED FROM MUTUUM AND COMMODATUM V. OBLIGATIONS OF THE DEPOSITARY VI. OBLIGATIONS OF THE DEPOSITOR VII. EXTINGUISHMENT OF DEPOSIT VIII. NECESSARY DEPOSIT IX. JUDICIAL DEPOSIT

Definition

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. (Art.1962)

II. Kinds of Deposit Judicial – takes place when an attachment or seizure of property in litigation is ordered (Arts.2005-2008) Extrajudicial (Art. 1967) 1. 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; 2. Necessary- made in compliance with a legal obligation, or on the occasion of any calamity, or by travelers in hotels and inns (Arts.1996-2004) or by travelers with common carriers (Arts.1734-1735)

III. Characteristics of Deposit Characteristics— 1. Real Contract because it is perfected by the delivery of the subject matter. 2. Principal purpose of the contract of deposit is the safekeeping of the thing delivered. 3. If gratuitous, it is unilateral because only the depository has an obligation. If onerous, it is bilateral. The principal purpose is safekeeping of the thing delivered, so that if it is only an accessory or secondary obligation, deposit is not constituted but some other contract.

IV. Deposit Distinguished From Mutuum and Commodatum DEPOSIT AND MUTUUMDISTINGUISHED DEPOSIT Principal purpose safekeeping

is

Depositor can demand return of subject matter at will Both movable and immovable may be the object

DEPOSIT AND DISTINGUISHED DEPOSIT Principal purpose safekeeping May be gratuitous

is

In extrajudicial deposit, only movable (corporeal) things may be the object. But for judicial deposits, object may be movable or immovable.

MUTUUM Principal purpose is consumption of the subject matter Lender must wait until expiration of the period granted to the debtor Only money or any other fungible thing may be the object

COMMODATUM

COMMODATUM Principal purpose is transfer of use Always and essentially gratuitous Both movable and immovable may be the object.

V. Obligations of the Depositary OBLIGATIONS 1. Depositary is obliged to keep the thing safely and to return it when required, even though a specified term may have been stipulated in the contract. (Art.1972) 2. Depositary is liable if the loss occurs through his fault or negligence. (Art.1972


Chapter III. Deposit

in rel. to Art.1163) Loss of thing while in the depositary’s possession raises a presumption of fault. (Art.1265) Required degree of care is greater if the deposit is for compensation than when it is gratuitous. 3. Depositary is not allowed to deposit the thing with a third person. (Art.1973) EXCEPTION: There is a contrary stipulation NOTE: Depositary is liable for the loss of the thing deposited if: a. He transfers the deposit with a third person without authority although there is no negligence on his part and the third person; b. He deposits the thing with a third person who is manifestly careless or unfit although authorized, even in the absence of negligence; or c. The thing is lost through the negligence of his employees whether the latter are manifestly careless or not. EXEMPTION FROM LIABILITY: Depositary is not responsible for loss of thing 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.” 4. Depositary is obliged not to change way of deposit. He may change the way or manner of deposit only if there are circumstances indicating that the depositor would consent to the change and notice is given to depositor. HOWEVER, notice is not required if delay will cause danger. (Art.1974) 5. If thing deposited should earn interest, the depositary is under obligation (1) to collect the interest as it becomes due and (2) to take such steps as may be necessary 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 due. (Art.1975) 6. Depositary has the obligation not to commingle things deposited if so stipulated, even if they are of the same kind and quality. (Article 1976) GENERAL RULE: The depositary is permitted to commingle grain or other articles of the same kind and quality. EXCEPTION: When there is a stipulation to the contrary


EFFECT OF COMMINGLING: a. The various depositors of the mingled goods shall own the entire mass in common b. Each depositor shall be entitled to such portion of the entire as the amount deposited by him bears the whole. 7. Depositary is under obligation not to make use of the thing deposited; otherwise he shall be liable for damages. (Art.1977) EXCEPTIONS: a. Express permission of the depositor b. Preservation of the thing deposited required its use 8. Depositary is liable for loss of the thing through a fortuitous event: a. If it is so stipulated; b. If he uses the thing without the depositor’s permission; c. If he delays its return; d. If he allows others to use it, even though he himself may have been authorized to use the same (Art.1979) 9. Where thing deposited is delivered closed and sealed, depositary has obligation to: a. Return the thing deposited when delivered closed and sealed b. Pay for damages should seal or lock be broken through his fault, which is presumed unless proven otherwise c. Keep secret of the deposit when the seal or lock is broken, with or without his fault (Art.1982) 10. Depositary is obliged to return the products, accessories and accessions of the thing deposited. (Art.1983) 11. Depositary is obliged to pay interest on sums converted to personal use. (Art.1983) 12. Depositary who receives the thing in deposit cannot require that the depositor prove his ownership over the thing (Art. 1984) 13. Where the thing appears to be stolen and the depositary knows the true owner, he must advise the true owner about the deposit. If the owner, in spite of such information, does not claim it within the period of one month, the depositary is


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relieved from liability. (Art.1984, pars.2 and 3) If the depositary has reasonable grounds to believe that the thing has not been lawfully acquired by the depositor, he may return the same. (Art.1984, par.4) RIGHT OF TWO OR MORE DEPOSITORS (Art.1985) 1. Where the thing is divisible and depositors not solidary – each one of the depositors can demand only his share proportionate thereto. 2. Where the thing is not divisible or the obligation is solidary – rules on active solidarity must apply a. Each one of the depositors may do whatever may be useful to the others but not anything which may be prejudicial to the latter. (Art.1212) b. The depositary may return the thing to any one of the solidary depositors UNLESS a demand for its return has been made by one of them in which case delivery should be made to him. (Art. 1214) 3. Where there is a stipulation of return to one of the depositors, the depositary is bound to return it only to the person designated although he has not made any demand for its return. PERSONS TO WHOM RETURN MUST BE MADE 1. The depositary is obliged to return the thing deposited, when required, to: a. The depositor; b. To his heirs or successors; or c. To the person who may have been designated in the contract. (Art.1972) 2. If the depositor was incapacitated at the time of making the deposit, the property must be returned to: a. His guardian or administrator; b. To the person who made the deposit; c. To the depositor himself should he acquire capacity. (Art.1970) 3. Even if the depositor had capacity at the time of making the deposit but he subsequently loses his capacity during the deposit, the thing must be returned to his legal representative. (Art.1986) PLACE OF RETURN (Art.1987) 1. At the place agreed upon by the parties 2. In the absence of stipulation, at the place where the thing deposited might be even if it should not be the same place where the original deposit was made, provided that


there was no malice on the part of the depositary TIME OF RETURN (Art.1988) 1. GENERAL RULE: 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. 2. EXCEPTIONS: a. When the thing is judicially attached while in the depositary’s possession b. When notified of the opposition of a third person to the return or the removal of the thing deposited RIGHT OF THE DEPOSITARY TO RETURN THE THING (Art.1989) 1. GENERAL RULE: The depositary may return the thing deposited notwithstanding that a period has been fixed for the deposit if: a. The deposit is gratuitous; b. The reason is justifiable. [NOTE: If the depositor refuses to receive the thing, the depositary may deposit the thing at the disposal of the judicial authority.] 2. EXCEPTION: When the deposit is for a valuable consideration, the depositary has no right to return the thing before the expiration of the time designated even if he should suffer inconvenience as a consequence. Is the depositary liable for loss by force majeure or government order?  The depositary is not liable in cases of loss by force majeure or by government order. HOWEVER, he has the duty to deliver to the depositor money or another thing he receives in place of the thing. (Art.1990) ALIENATION IN GOOD FAITH BY DEPOSITARY’S HEIR When alienation is done in GOOD FAITH, the heir is obliged to: 1. Return the value of the thing deposited 2. Assign the right to collect from the buyer. NOTE: The heir does not need to pay the actual price of the thing deposited. When alienation is done in BAD FAITH, the heir must: 1. Be liable for damages; 2. Pay the actual price of the thing deposited.


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DEPOSITARY’S RIGHT OF RETENTION  The depositary may retain the thing in pledge until the full payment of what may be due him by reason of the deposit. (Art.1994)  NOTE: This is an example of a pledge created by operation of law. (Art.2121)

VI. Obligations of the Depositor 1. Depositor is obliged to reimburse the depositary for expenses incurred for preservation – if deposit is gratuitous. (Art.1992) 2. Depositor is obliged to pay losses incurred due to character of thing deposited. (Art. 1993) GENERAL RULE: The depositary must be reimbursed for loss suffered by him because of the character of the thing deposited. EXCEPTIONS: 1. Depositor was not aware of the danger; 2. Depositor was not expected to know the dangerous character of the thing; 3. Depositor notified the depositary of such dangerous character; 4. Depositary was aware of the danger without advice from the depositor.

VII. Extinguishment of Deposit (Art. 1995) A deposit is extinguished: 1. Upon the loss or deterioration of the thing deposited; 2. Upon the death of the depositary, ONLY in gratuitous deposits; 3. By other modes provided in the Civil Code, e.g. novation, merger, etc. (See Art.1231) EFFECT OF DEATH OF DEPOSITOR OR DEPOSITARY (Art. 1995) 1. Where deposit gratuitous – death of either of the depositor or depositary extinguishes the deposit (personal in nature). By the word “extinguished,” the law really means that the depositary is not obliged to continue with the contract of deposit. 2. (2) Where deposit for compensation – not extinguished by the death of either party.

VIII.

Necessary Deposit

KINDS OF NECESSARY DEPOSITS 1. It is made in compliance with a legal obligation, in which case it is governed by the law establishing it, and in case of


deficiency, the rules on voluntary deposit e.g. Arts. 538, 586 and 2104 2. It takes place on the occasion of any calamity, such as fire, storm, flood, pillage, shipwreck, or other similar events. There must be a causal relation between the calamity and the constitution of the deposit. In this case the deposit is governed by the rules on voluntary deposit and Art. 2168 3. Made by passengers with common carriers. (Art.1754) 4. Made by travelers in hotels or inns. (Art. 1998) DEPOSITS BY TRAVELLERS IN HOTELS AND INNS Before keepers of hotels or inns may be held responsible as depositaries with regard to the effects of their guests, the following must concur: 1. They have been previously informed about the effects brought by the guests; and 2. The latter have taken the precautions prescribed regarding their safekeeping. EXTENT OF LIABILITY UNDER ART.1998 1. Liability in hotel rooms which come under the term “baggage” or articles such as clothing as are ordinarily used by travelers 2. Include those lost or damages in hotel annexes such as vehicles in the hotel’s garage. 2. In the following cases, the hotel- keeper is liable WHEN HOTEL-KEEPER LIABLE Regardless of the amount of care exercised 1. The loss or injury to personal property is caused by his servants or employees as well as by strangers (Art. 2000). 2. The loss is caused by the act of a thief or robber done without the use of arms and irresistible force. (Art. 2001) WHEN HOTEL-KEEPER NOT LIABLE 1. The loss or injury is cause by force majeure, like flood, fire, (Art.2000) theft or robbery by a stranger - not the hotel-keeper’s servant or employee with the use of firearms or irresistible force (Art.2001) EXCEPTION: Hotel- keeper is guilty of fault or negligence in failing to provide against the loss or injury from his cause. (Arts.1170 and 1174) 2. The loss is due to the acts of the guests, his family, servants, visitors (Art.2002) 3. The loss arises from the character of the things brought into the hotel (Ibid.)


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[NOTE: 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. Such kind of stipulation shall be VOID. (Art. 2003)] TRIPLE-V FOOD SERVICES v. FILIPINO MERCHANTS INSURANCE COMPANY:  Regarding the legal deposit of a vehicle that was stolen while parked with Saisaki restaurant, “the depositary may not exempt itself from responsibility or loss or damage of the thing deposited with it, by exclusionary stipulation. Such stipulations are void for being contrary to law.” HOTEL-KEEPER’S RIGHT TO RETENTION  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 (a) lodging, and (b) supplies usually furnished to hotel guests.  NOTE: The right of retention recognized in this article is in the nature of a pledge created by operation of law.

IX. Judicial Deposit JUDICIAL DEPOSIT - Judicial deposit takes place when an attachment or seizure of property in litigation is ordered by a court. (Art. 2005) NATURE AND PURPOSE  It is auxiliary to a case pending in court. The purpose is to maintain the status quo during pendency of the litigation or to insure the right of the parties to the property in case of a favorable judgment. EXTRAJUDICIAL AND JUDICIAL DEPOSITS DISTINGUISHED EXTRAJUDICIAL (Voluntary) deposit made by free will of the depositor.

JUDICIAL Constituted by virtue of a court order

Object must be movable property

Object may be either movable or immovable property Purpose is to secure or protect the owner’s right; to maintain status quo during pendency of case Always onerous Thing shall be delivered only upon order of the court

Purpose is safekeeping of the thing deposited

Generally gratuitous Depositary is obliged to return the thing deposited upon demand made by the depositor

DEPOSITARY OF SEQUESTERED PROPERTY A person appointed by the court (Art. 2007) with the obligations: 1. To take care of the property with the diligence of a good father of the family. (Art. 2008) 2. To continue in his responsibility until the litigation is ended or the court so orders. (Art. 2007) APPLICABLE LAW  The law on judicial deposit is remedial or procedural in nature. Hence, the  Rules of Court are applicable. (Art. 2009)


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I. DEFINITION II. CHARACTERISTICS III. CLASSIFICATION IV. RULES GOVERNING GUARANTY V. GUARANTY DISTIGUISHED FROM OTHERS VI. THE GUARANTOR VII. EFFECTS OF GUARANTY VIII. EXTINGUISHMENT OF GUARANTY

I.

Definition

GUARANTY is a contract whereby 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. (Art. 2047) While a surety undertakes to pay if the principal does not pay, the guarantor only binds himself to pay if the principal cannot pay (See benefit of excussion, 2058).

II. Characteristics 1. Accessory – dependent for its existence upon the principal obligation guaranteed by it; 2. Subsidiary and conditional – takes effect only when the principal debtor fails in his obligation 3. Unilateral – a. It gives rise only to a duty on the part of the guarantor in relation to the creditor and not vice versa b. It may be entered into even without the intervention of the principal debtor. 4. Guarantor must be a person distinct from the debtor – a person cannot be the personal guarantor of himself

III. Classification CLASSIFICATION OF GUARANTY 1. Guaranty in the broad sense: a. Personal – guaranty is the credit given by the person who guarantees the fulfillment of the principal obligation; or b. Real – guaranty is property, movable, or immovable  Real mortgage (2124) or antichresis (2132) – guaranty is immovable  Chattel mortgage (2140) or pledge (2093) – guaranty is movable 2. As to its origin: a. Conventional – constituted by agreement of the parties (2051[1]) b. Legal – imposed by virtue of a provision

of law Judicial – required by a court to guarantee the eventual right of one of the parties in a case. 3. As to consideration: a. Gratuitous – guarantor does not receive any price or remuneration for acting as such (2048) b. Onerous – one where the guarantor receives valuable consideration for his guaranty 4. As to person guaranteed: a. Single – constituted solely to guarantee or secure performance by the debtor of the principal obligation; b. Double or sub-guaranty – constituted to secure the fulfillment by the guarantor of a prior guaranty 5. As to its scope and extent: a. Definite – where the guaranty is limited to the principal obligation only, or to a specific portion thereof; b. Indefinite or simple – where the guaranty included all the accessory obligations of the principal, e.g. costs, including judicial costs. c.

IV. Rules Governing Guaranty 1. A guaranty is generally gratuitous (2048) a. General Rule: Guaranty is gratuitous b. Exception: When there is a stipulation to the contrary 2. On the cause of a guaranty contract SEVERINO v SEVERINO: “A guarantor or surety is bound by the same consideration that makes the contract effective between the principal parties thereto.” a. Presence of cause which supports principal obligation: Cause of the contract is the same cause which supports the obligation as to the principal debtor. The consideration which supports the obligation as to the principal debtor is a sufficient consideration to support the obligation of a guarantor or surety. b. Absence of direct consideration or benefit to guarantor: Guaranty or surety agreement is regarded valid despite the absence of any direct consideration received by the guarantor or surety, such consideration need not pass directly to the guarantor or surety; a consideration moving to the principal will suffice.a


Chapter IV. Guaranty

Chapter IV. GUARANTY

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3. A married woman who is a guarantor binds only her separate property, generally (2049) Exceptions: a. With her husband’s consent, bind the community or conjugal partnership property b. Without husband’s consent, in cases provided by law, such as when the guaranty has redounded to the benefit of the family.


proceed against the guarantor although he has no right of action against the principal debtor for the reason that the latter’s obligation is not civilly enforceable. When the debtor himself offers a guaranty for his natural obligation, he impliedly recognizes his liability, thereby transforming the obligation from a natural into a civil one. 7. A guaranty may secure a future debt (2053) Continuing Guaranty or Suretyship:

However, as regards payment made by a third person: a. Payment without the knowledge or against the will of the debtor:  Guarantor can recover only insofar as the payment has been beneficial to the debtor  Guarantor cannot compel the creditor to subrogate him in his rights b. Payment with knowledge or consent of the debtor: Subrogated to all the rights which the creditor had against the debtor 5. The guaranty must be founded on a valid principal obligation (2052[1])  Guaranty is an accessory contract: It is an indispensable condition for its existence that there must be a principal obligation. Hence, if the principal obligation is void, it is also void. 6. A guaranty may secure the performance of a voidable, unenforceable, and natural obligation (2052[2]) A guaranty may secure the performance of a: a. Voidable contract – such contract is binding, unless it is annulled by a proper court action b. Unenforceable contract – because such contract is not void c. Natural obligation – the creditor may

DIÑO v. CA: “Under the Civil Code, a guaranty may be given to secure even future debts, the amount of which may not known at the time the guaranty is executed. This is the basis for contracts denominated as continuing guaranty or suretyship.” Future debts, even if the amount is not yet known, may be guaranteed but there can be no claim against the guarantor until the amount of the debt is ascertained or fixed and demandable Rationale: A subsidiary.

contract

of

guaranty

is

a. To secure the payment of a loan at maturity – surety binds himself to guarantee the punctual payment of a loan at maturity and all other obligations of indebtedness which may become due or owing to the principal by the borrower. b. To secure payment of any debt to be subsequently incurred – 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. c. To secure existing unliquidated debts – refers to debts existing at the time of the constitution of the guaranty but the amount thereof is unknown and not to debts not yet incurred and existing at that time. d. The surety agreement itself is valid and binding even before the principal obligation intended to be secured thereby is born, any more than there would be in saying that obligations which are subject to a condition


4. A guaranty need not be undertaken with the knowledge of the debtor (2050) a. Guaranty is unilateral – exists for the benefit of the creditor and not for the benefit of the principal debtor b. Creditor has every right to take all possible measures to secure payment of his credit – guaranty can be constituted even against the will of the principal debtor

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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. A continuing guaranty is one which 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. Where the contract of guaranty states that the same is to secure advances to be made "from time to time" the guaranty will be construed to be a continuing one.”

8. A guaranty may secure the performance of a conditional obligation (2053) a. Principal obligation subject to a suspensive condition – the guarantor is liable only after the fulfillment of the condition. b. Principal obligation subject to a resolutory condition – the happening of the condition extinguishes both the principal obligation and the guaranty 9. A guarantor’s liability cannot exceed the principal obligation (2054)

more than the total amount stipulated in the bond. Interest runs from:  Filing of the complaint (upon judicial demand); or  The time demand was made upon the surety until the principal obligation is fully paid (upon extrajudicial demand) Rationale: Surety is made to pay, not by reason of the contract, but by reason of his failure to pay when demanded and for having compelled the creditor to resort to the courts to obtain payment. b. Penalty may be provided – a surety may be held liable for the penalty provided for in a bond for violation of the condition therein. Principal’s liability guarantor’s obligations

may

exceed

The amount specified in a surety bond as the surety’s obligation does not limit the extent of the damages that may be recovered from the principal, the latter’s liability being governed by theobligations he assumed under his contract 10. The existence of a guaranty is not presumed (2055) Guaranty requires the expression of consent on the part of the guarantor to be bound. It cannot be presumed because of the existence of a contract or principal obligation.

General Rule: Guaranty is a subsidiary and accessory contract – guarantor cannot bind himself for more than the principal debtor and even if he does, his liability shall be reduced to the limits of that of the debtor. But the guarantor may bind himself for less than that of the principal.

Rationale: a. There be assurance that the guarantor had the true intention to bind himself; b. To make certain that on making it, the guarantor proceeded with consciousness of what he was doing.

Exceptions: a. Interest, judicial costs, and attorney’s fees as part of damages may be recovered – creditors suing on a suretyship bond may recover from the surety as part of their damages, interest at the legal rate, judicial costs, and attorney’s fees when appropriate, even without stipulation and even if the surety would thereby become liable to pay

11. Contract of guaranty is covered by the Statute of Frauds (See Art. 1403(2(a))  Guaranty must not only be expressed but must so be reduced into writing. Hence, it shall be unenforceable by action, unless the same or some note or memorandum thereof be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of


precedent are valid and binding before the occurrence of the condition precedent.


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V. Guaranty Distinguished from Others GUARANTY DISTINGUISHED FROM WARRANTY Guaranty Guaranty is a contract by which a person is bound to another for the fulfillment of a promise or engagement of a third party

Warranty Warranty is an undertaking that the title, quality, or quantity of the subject matter of a contract is what is has been represented to be, and relates to some agreement made ordinarily by the party who makes the warranty

GUARANTY DISTINGUISHED FROM SURETYSHIP

The subsequent loss of integrity or property or supervening incapacity of the guarantor would not operate to exonerate the guarantor of the eventual liability he has contracted, and the contract of guaranty continues. The creditor can merely demand another guarantor with the proper qualifications except that the creditor may waive such remedy if he chooses and hold the guarantor to his bargain. Selection of Guarantor: 1. Specified person stipulated as guarantor: Substitution of guarantor may not be demanded Reason: The selection of the guarantor is: a. Term of the agreement; b. As a party, the creditor is, therefore, bound thereby. 2. Guarantor selected by the principal debtor: Debtor answers for the integrity, capacity, and solvency of the guarantor.

Guaranty Guarantor’s liability depends upon an independent agreement to pay the obligation Guarantor’s engagement is a collateral undertaking

Suretyship Surety assumes liability as a regular party to the undertaking

Guarantor is subsidiarily liable i.e. only obliged to pay if the principal cannot pay Guarantor not bound to take notice of default of his principal

Surety is primarily liable i.e. bound to pay if the principal does not pay

VII. Effects of Guaranty

Surety ordinarily held to know every default of his principal

Guarantor often discharged by the mere indulgence of the creditor and is usually not liable unless notified of the principal’s default

Surety not discharged either by the mere indulgence of the creditor or by want of notice of default of the principal

EFFECTS OF GUARANTY BETWEEN THE GUARANTOR AND THE CREDITOR 1. The guarantor has the right to benefit from excussion/ exhaustion (2058)

Surety is promissor

an

original

VI. The Guarantor (Arts. 2056-2057) Qualifications: 1. He possesses integrity; 2. He has capacity to bind himself; 3. He has sufficient property to answer for the obligation which he guarantees. Exception: requirements

The

creditor

waives

the

The qualifications above need only be present at the time of the perfection of the contract.

3. Guarantor personally designated by the creditor: Responsibility of the selection should fall upon the creditor because he considered the guarantor to have the qualifications for the purpose.

Exceptions to the benefit of excussion (2059) a. As provided in Art. 2059:  If the guarantor has expressly renounced it; waiver is valid but it must be made in express terms.  If he has bound himself solidarily with the debtor, the liability assumed is that of a surety. The guarantor becomes primarily liable as a solidary co- debtor. In effect, he renounces in the contract itself the benefit of exhaustion.  In case of insolvency of the debtor – guarantor guarantees the solvency of the debtor. If the debtor becomes insolvent, the liability of the guarantor as the debtor cannot fulfill his obligation  When he (debtor) has absconded,


its contents. However, It need not appear in a public document

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SOUTHERN MOTORS, INC. v BARBOSA: “The right of guarantors…to demand exhaustion of the property of the principal debtor, exists only when a pledge or a mortgage has not been given as special security for the payment of the principal obligation.” LUZON STEEL CORP. v SIA: “The surety in the present case bound itself "jointly and severally" (in solidum) with the defendant; and excussion (previous exhaustion of the property of the debtor) shall not take place "if he (the guarantor) has bound himself solidarily with the debtor".” b. If he does not comply with Art. 2060: In order that the guarantor may make use of the benefit of excussion, he must:  Set it up against the creditor upon the latter’s demand for payment from him;  Point out to the creditor: o Available property of the debtor – the guarantor should facilitate the realization of the excussion since he is the most interested in its benefit. o Within the Philippine territory – excussion of property located abroad would be a lengthy and extremely difficult proceeding and would not conform with the purpose of the guaranty to provide the creditor with the means of obtaining the fulfillment of the obligation. o Sufficient to cover the amount of

the debt If he is a judicial bondsman and subsurety (2084) d. Where a pledge or mortgage has been given by him as a special security e. If he fails to interpose it as a defense before judgment is rendered against him. c.

2. The creditor has the right to secure a judgment against the guarantor prior to the excussion General rule: An ordinary personal guarantor (NOT a pledgor or mortgagor), may demand exhaustion of all the property of the debtor before he can be compelled to pay. Exception: The creditor may, prior thereto, secure a judgment against the guarantor, who shall be entitled, however, to a deferment of the execution of said judgment against him, until after the properties of the principal debtor shall have been exhausted, to satisfy the latter’s obligation. 3. The creditor has the duty to make prior demand for payment from the guarantor (2060) a. The demand is to be made only after judgment on the debt b. Joining the guarantor in the suit against the principal debtor is not the demand intended by law. Actual demand has to be made. 4. The guarantor has the duty to set up the benefit of excussion (2060)  As soon as he is required to pay, guarantor must also point out to the creditor available property (not in litigation or encumbered) of the debtor within the Philippines. 5. The creditor has the duty to resort to all legal remedies (2061) a. After the guarantor has fulfilled the conditions required for making use of the benefit of exhaustion, it becomes the duty of the creditor to: b. Exhaust all the property of the debtor pointed out by the guarantor; c. If he fails to do so, he shall suffer the loss but only to the extent of the value of the said property, for the insolvency of the debtor




or cannot be sued within the Philippines – the creditor is not required to go after a debtor who is hiding or cannot be sued in our courts, and to incur the delays and expenses incident thereto. The exception is when the debtor has left a manager or representative; If it may be presumed that an execution on the property of the principal debtor would not result in the satisfaction of the obligation – if such judicial action including execution b would not satisfy the obligation, the guarantor can no longer require the creditor to resort to all such remedies against the debtor as the same would be but a useless formality. It is not necessary that the debtor be judicially declared insolvent.


6. The creditor has the duty to notify the guarantor in the action against the debtor (2062) Under this article, notice to the guarantor is mandatory in the action against the principal debtor. The guarantor, however, is not duty bound to appear in the case, and his nonappearance shall not constitute default, w/ its consequential effect. Rationale: The purpose of notification is to give the guarantor the opportunity to allege and substantiate whatever defenses he may have against the principal obligation, and chances to set up such defenses as are afforded him by law if he so desires 7. A compromise shall not prejudice the person not party to it (2063) a. A compromise between creditor and principal debtor benefits the guarantor but does not prejudice him. b. A compromise between guarantor and the creditor benefits but does not prejudice the principal debtor. 8. Co-guarantors are entitled to the benefit of division (2065)  The benefit of division applies only when there are several guarantors and one debtor for a single debt. Except when solidarity has been stipulated among the co-guarantors, a co- guarantor is liable only to the extent of his share in the obligation as divided among all the coguarantors. EFFECTS OF GUARANTY BETWEEN THE DEBTOR AND THE GUARANTOR 1. The guarantor has the right to be subrogated to the rights of the creditor (2067) A guarantor who pays the debt is entitled to every remedy which the creditor has against the principal debtor, to enforce every security and all means of payments; to stand in the place of the creditor not only through the medium of the contract, but even by means of the securities entered into w/out the knowledge of the surety; having the right to have those securities transferred to him though there was no stipulation for it, and to avail himself of all securities against the debtor The need to enforce the provisions on indemnity in Article 2066 forms the basis for


the subrogation clause of Article 2067. The assumption, however, is that the guarantor who is subrogated to the rights of the creditor, has the right to be reimbursed for his answering for the obligation of the debtor. Absent this right of reimbursement, subrogation will not be proper. 2. The guarantor has the duty to notify the debtor before paying the creditor (2068). Should payment be made without notifying the debtor, and supposing the debtor has already made a prior payment, the debtor would be justified in putting up the defense that the obligation has already been extinguished by the time the guarantor made the payment. In this case, the guarantor will lose the right of reimbursement and consequently the right of subrogation as well. 3. The guarantor cannot make payment before the obligation has become due (2069). General rule: Since a contract of guaranty is only subsidiary, the guarantor cannot be liable for the obligation before the period on which the debtor’s liability will accrue. Any payment made by the guarantor before the obligation is due cannot be indemnified by the debtor. Exception: Prior consent or subsequent ratification by the debtor 4. The guarantor may proceed against the debtor even before payment has been made (2071) General rule: Guarantor has no cause of action against the debtor until after the former has paid the obligation. Exceptions: a. When he is sued for the payment; b. In case of insolvency of the principal debtor; c. When the debtor has bound himself to relieve him from the guaranty within a specified period, and this period has expired; d. When the debt has become demandable, by reason of the expiration of the period for payment; e. After the lapse of 10 years, when the principal obligation has no fixed period


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for its maturity, unless it be of such nature that it cannot be extinguished except within a period longer than 10 years; f. If there are reasonable grounds to fear that the principal debtor intends to abscond; g. If the principal debtor is in imminent danger of becoming insolvent. Rationale: 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. As such, he may, in the alternative, obtain release from the guaranty; or demand security that shall protect him from any proceedings by the creditor; and against the insolvency of the debtor. EEFECTS OF GUARANTY AS BETWEEN COGUARANTORS Requisites for the applicability of Art. 2073: 1. Payment has already been made by one guarantor; 2. The payment was made because a. Of the insolvency of the debtor, or b. By judicial demand 3. The paying guarantor seeks to be indemnified only to the extent of his proportionate share in the total obligation. For purposes of proportionate reimbursement, the other guarantors may interpose such defenses against the paying guarantor as are available to the debtor against the creditor, except those that are personal to the debtor.

VIII.

Extinguishment of Guaranty

1. Once the obligation of the debtor is extinguished in any manner provided in the Civil Code, the obligation of the guarantor is also extinguished (2076). However, there may be instances when, after the extinguishment of the guarantor’s obligation (as in the case of a release from the guaranty), the obligation of the debtor still subsists. 2. Although the guarantor generally has to make payment in money, any other thing of value, if accepted by the creditor, is valid payment and therefore releases the guarantor (2077). 3. If one guarantor is released, the release would benefit the co-guarantors to the extent of the proportionate share of the guarantor


released (2078). 4. A guarantor is also released if the creditor, without the guarantor’s consent, extends the time within which the debtor may perform his obligation (2079). This is to protect the interest of the guarantor should the debtor be insolvent during the period of extension and deprive the guarantor of his right to reimbursement. 5. If through the fault of the creditor the guarantors are precluded from being subrogated to the former’s rights, the latter are released from the obligation. (2080)


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Chapter V. LEGAL AND JUDICIAL BONDS

Chapter V. Legal and Judicial Bonds Bond – an undertaking that is sufficiently secured, and not cash or currency. Bondsman – a surety offered in virtue of a provision of law or a judicial order. Qualifications of personal bondsman (2082 in relation to Art. 2056): 1. He possesses integrity; 2. He has capacity to bind himself; 3. He has sufficient property to answer for the obligation which he guarantees.

BONDSMAN NOT ENTITLED TO EXCUSSION (2084) A judicial bondsman and the sub-surety are not entitled to the benefit of excussion. Reason: They are not mere guarantors, but sureties whose liability is primary and solidary. Effect of negligence of creditor: Mere negligence on the part of the creditor in collecting from the debtor will not relieve the surety from liability.


PLEDGE OR MORTGAGE IN LIEU OF BOND (2083)  Guaranty or suretyship is a personal security.  Pledge or mortgage is a property or real security. If the person required to give a legal or judicial bond should not be able to do so, a pledge or mortgage sufficient to cover the obligation shall be admitted in lieu thereof.

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Chapter VI. SURETYSHIP

NOTE: Surety is not entitled to notice of principal’s default

Chapter VI. Suretyship

5. Prior demand by the creditor upon principal not required. Surety is not exonerated by neglect of creditor to sue principal. STRICTISSIMI JURIS RULE APPLICABLE ONLY TO ACCOMMODATION SURETY 

If a person binds himself solidarily with the principal debtor, the contract is called suretyship and the guarantor is called a surety.

NATURE OF SURETY’S UNDERTAKING 1. Liability is contractual and accessory but direct 2. Liability is limited by terms of contract 3. Liability arises only if principal debtor is held liable a. In the absence of collusion, the surety is bound by a judgment against the principal event though he was not a party to the proceedings; b. The creditor may sue, separately or together, the principal debtor and the surety; c. A demand or notice of default is not required to fix the surety’s liability d. Exception: Where required by the provisions of the contract of suretyship e. A surety bond is void where there is not principal debtor because such an undertaking presupposes that the obligation is to be enforceable against someone else besides the surety, and the latter can always claim that it was never his intention to be the sole person obligated thereby. NOTE: Surety is not entitled to exhaustion 4. Undertaking is to creditor, not to debtor The surety makes no covenant or agreement with the principal that it will fulfill the obligation guaranteed for the benefit of the principal. The surety’s undertaking is that the principal shall fulfill his obligation and that the surety shall be relieved of liability when the obligation secured is performed. Exception: provided.

Unless

otherwise

expressly

Reason: An accommodation surety acts without motive of pecuniary gain and hence, should be protected against unjust pecuniary impoverishment by imposing on the principal, duties akin to those of a fiduciary. This rule will apply only after it has been definitely ascertained that the contract is one of suretyship or guaranty.

STRICTISSIMI JURIS RULE NOT APPLICABLE TO COMPENSATED SURETIES Reasons: 1. Compensated corporate sureties are business association organized for the purpose of assuming classified risks in large numbers, for profit and on an impersonal basis. 2. They are secured from all possible loss by adequate counter-bonds or indemnity agreements. 3. Such corporations are in fact insurers and in determining their rights and liabilities, the rules peculiar to suretyship do not apply.


SURETYSHIP is a relation which exists where one person (principal) has undertaken an obligation and another person (surety) is also under a direct and primary obligation or other duty to the obligee, who is entitled to but one performance, and as between the two who are bound, the second, rather than the first should perform.

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Pledge,

Mortgage,

MANILA SURETY V VELAYO: The accessory character is of the essence of pledge and mortgage. As stated in Art 2085 CC, an essential requisite of these contracts is that they be constituted to secure the fulfillment of a principal obligation

I.

ESSENTIAL REQUISITES COMMON TO PLEDGE AND MORTGAGE II. PLEDGE III. MORTGAGE IV. FORECLOSURE OF MORTGAGE V. ANTICHRESIS VI. CHATTEL MORTGAGE

I.

Essential Requisites Common Pledge and Mortgage (Art. 2085)

collect.

to

ESSENTIAL REQUISITES COMMON TO PLEDGE AND MORTGAGE (Art. 2085) 1. Constituted to secure the fulfillment of a principal obligation. 2. Pledgor or mortgagor must be the absolute owner of the thing pledged or mortgaged. 3. 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. 4. Cannot exist without a valid obligation. 5. Debtor retains the ownership of the thing given as a security. 6. When the principal obligation becomes due, the thing pledged or mortgaged may be alienated for the payment to the creditor. IMPORTANT POINTS 1. Future property cannot be pledged or mortgaged. 2. Pledge or mortgage executed by one who is not the owner of the property pledged or mortgaged is without legal existence and registration cannot validate it. 3. Mortgage of a conjugal property by one of the spouses is valid only as to ½ of the entire property. 4. In case of property covered by Torrens title, a mortgagee has the right to rely upon what appears in the certificate of title and does not have to inquire further. 5. Pledgor or mortgagor has free disposal of property. 6. Thing pledged or mortgaged may be alienated. 7. Creditor not required to sue to enforce his credit. 8. Pledgor or mortgagor may be a third person. RIGHT OF CREDITOR WHERE DEBTOR FAILS TO COMPLY WITH HIS OBLIGATION 1. Creditor is merely entitled to move for the sale of the thing pledged or mortgaged with the formalities required by law in order to

2. Creditor cannot appropriate to himself the thing nor can he dispose of the same as owner. PROHIBITION AGAINST PACTUM COMMISSORIUM (Art. 2088) 1. Stipulation is null and void: Stipulation where thing or mortgaged shall automatically become the property of the creditor in the event of nonpayment of the debt within the term fixed. 2. Requisites of pactum commissorium: a. Pledge or mortgage. b. A stipulation for an automatic appropriation by the creditor of the property in the event of nonpayment. 3. Effect on security contract: Nullity of the stipulation does not affect validity and efficacy of the principal contract. IMPORTANT POINTS 1. Debtor-owner bears the risk of loss of the property. 2. Pledge or mortgage is indivisible (2089, 2090). Exceptions: a. Where each of several things guarantees a determinate portion of the credit. b. Where only a portion of loan was released. c. Where there was failure of consideration. 3. Rule that real property, consisting of several lots should be sold separately, applies to sales in execution, and not to foreclosure of mortgages. 4. The mere embodiment of a real estate mortgage and a chattel mortgage in one document does not have the effect of fusing both securities into an indivisible whole. UY TONG v CA: The 2 elements for pactum commissorium to exist: (1) that there should be a pledge or mortgage wherein a property is pledged or mortgaged by way of security for the payment of the principal obligation; (2) that there should be a stipulation


Chapter VII. Antichresis

Chapter VII. PLEDGE, MORTGAGE, ANTICHRESIS

for an automatic appropriation by the creditor of the thing pledged or mortgaged in the event of non-payment of the principal obligation within the stipulated period. 5. Pledge or mortgage may secure all kinds of obligation, be they pure or subject to suspensive or resolutory conditions (2091). 6. A promise to constitute pledge or mortgage creates no real right, only a personal right binding upon the parties, only right of action to compel the fulfillment of the promise but there is no pledge or mortgage yet (2092). 7. Under the RPC, estafa is committed by a person who, pretending to be the owner of any real property, shall convey, sell, encumber or mortgage the same knowing that the real property is encumbered and shall dispose of the same as unencumbered. It is essential that fraud or deceit be practiced upon the vendee at the time of the sale.

II. Pledge PLEDGE is a contract by virtue of which the debtor delivers to the creditor or to a third person a movable or document evidencing incorporeal rights for the purpose of securing the fulfillment of a principal obligation with the understanding that when the obligation is fulfilled, the thing delivered shall be returned with all its fruits and accessions. (Art.2085 in rel to 2093) KINDS 1. Voluntary or conventional – Created by agreement of parties. 2. Legal – Created by operation of law. CENTRAL BANK vs. CA: The consideration of the accessory contract of real estate mortgage is the same as that of the principal contract. For the debtor, the consideration of his obligation to pay is the existence of a debt. Thus, in the accessory contract of real estate mortgage, the consideration of the debtor in furnishing the mortgage is the existence of a valid, voidable, or unenforceable debt (Art. 2086, in relation to Art. 2052, of the Civil Code). It is not necessary that any consideration should pass at the time of the execution of the contract of real mortgage. It may either be a prior or subsequent matter. But when the consideration is subsequent to the mortgage, the mortgage can take effect only when the debt secured by it is created as a binding contract to pay. And, when there is partial failure of consideration, the


mortgage becomes unenforceable to the extent of such failure. Where the indebtedness actually owing to the holder of the mortgage is less than the sum named in the mortgage, the mortgage cannot be enforced for more than the actual sum due. The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted presupposes several heirs of the debtor or creditor which does not obtain in this case. Hence, the rule of indivisibility of a mortgage cannot apply. BELO vs. PNB: From Art. 2089 is excepted the case in w/c, 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 w/c each thing is specially answerable is satisfied. From the wordings of the law, indivisibility arises only when there is a debt, that is, there is a debtorcreditor relationship. CHARACTERISTICS 1. Real – Perfected by delivery. 2. Accessory – Has no independent existence of its own. 3. Unilateral – Creates obligation solely on the part of the creditor to return the thing subject upon the fulfillment of the principal obligation. 4. Subsidiary – Obligation incurred does not arise until the fulfillment of the principal obligation. CAUSE OR CONSIDERATION 1. Principal obligation – In so far as the pledgor is concerned. 2. Compensation stipulated for the pledge or mere liberality of the pledgor – If pledgor is not the debtor. PROVISIONS APPLICABLE ONLY TO PLEDGE 1. Transfer of possession to the creditor or to third person by common agreement is essential in pledge (2093). a. Actual delivery is important. b. Constructive or symbolic delivery of the key to the warehouse is sufficient to show that the depositary appointed by common consent of the parties was legally placed in possession. 2. All movables within the commerce of man may be pledged as long as they are


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susceptible of possession (2094). 3. Incorporeal rights may be pledged. The instruments representing the pledged rights shall be delivered to the creditor; if they be negotiable instruments, they must be indorsed (2095). 4. Pledge shall take effect against 3rd persons only if the following appear in a public instrument: a. Description of the thing pledged. b. Date of the pledge (2096). 5. The thing pledged may be alienated by the pledgor or owner only with the consent of the pledgee. 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 to have possession (2097). 6. Pledge gives the creditor the right 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 (2098). 7. Special Laws apply to pawnshops and establishments engaged in making loans secured by pledges. Provisions of the Civil Code shall apply subsidiarily to them. RIGHTS AND DUTIES OF CREDITOR IN A PLEDGE 1. Shall take care of the thing pledged with the diligence of a good father of a family (2099). 2. Has right to reimbursement of the expenses made for preserving the thing. Shall be liable for loss or deterioration of the thing by reason of fraud, negligence, delay or violation of the terms of the contract, but not for fortuitous events (2099). 3. May bring actions pertaining to the owner of the thing in order to recover it from, or defend it against, a 3rd person (2103). 4. Cannot use the thing without the authority of the owner. If he uses the thing without authority, or if he misuses the thing when he was authorized to use it, the owner may ask that it be judicially or extrajudicially deposited (2104). 5. May use the thing if necessary for its preservation (2104). 6. May either claim another thing in pledge or demand immediate payment of the principal obligation if he is deceived on the substance or quality of the thing (2109). THE PLEDGEE 1. Cannot deposit the thing pledged with a 3rd person, unless there is a contrary stipulation (2100). 2. Is responsible for the acts of his agents or employees with respect to the thing pledged


(2100). 3. Has no right to use the thing or to appropriate its fruits without authority from the owner (2104) 4. May cause the public sale of the thing pledged if, without fault on his part, there is danger of destruction, impairment or dimunition in value of the thing. The proceeds of the auction shall be a security for the principal obligation (2108). RIGHTS AND DUTIES OF THE PLEDGOR 1. Takes responsibility for the flaws of the thing pledged (2101 in relation to Art. 1951). 2. Cannot ask for the return of the thing against the will of the creditor, unless and until he has paid the debt and its interest, with expenses in proper cases (2105). YULIONGSIU vs. PNB: There is authority supporting the proposition that the pledgee can temporarily entrust the physical possession of the chattels pledged to the pledgor without invalidating the pledge. In such a case, the pledgor is regarded as holding the pledged property merely as trustee for the pledgee. The type of delivery will depend upon the nature and the peculiar circumstances of each case. PNB vs. ATENDIDO: according to law, a pledgee cannot become the owner of, nor appropriate to himself, the thing given in pledge. If by the contract of pledge the pledgor continues to be the owner of the thing pledged during the pendency of the obligation, it stands to reason that in case of loss of the property, the loss should be borne by the pledgor. 3. Subject to the right of the pledge under article 2108, pledgor is allowed to substitute the thing which is in danger of destruction or impairment without any fault on the part of the pledgee with another thing of the same kind and quality (2107). 4. May require that the thing be deposited with a 3rd person, if through the negligence or willful act of the pledgee the thing is in danger of being lost or impaired (2106). EXTINGUISHMENT OF A PLEDGE 1. Ways to extinguish a pledge: a. Payment of the debt. b. Sale of the thing pledged at public auction. c. Thing pledged is returned by the pledgee to the pledgor or owner (2110). d. Written statement by the pledgee that he renounces or abandons the pledge.For


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this purpose, neither the acceptance by the pledgor or owner nor the return of the thing pledged is necessary, and the pledgee becomes a depositary (2111). 2. Presumptions: a. If, subsequent to the perfection of the pledge, the thing is found in the possession of the pledgor or owner, there is prima facie presumption that the thing has been returned by the pledge (2110). b. If the thing is in the possession of a 3rd person who received it from the pledgor or owner after the constitution of the pledge, there is prima facie presumption that the thing has been returned by the pledge (2110).


2.

3.

 Useful expenses shall be refunded only to the possessor in good faith with the same right of retention, the person who has defeated him in the possession having the option of refunding the amount of the expenses or of paying the increase in value which the thing may have acquired and by reason thereof (Art. 546) He who has executed work upon a movable has a right to retain it by way of pledge until he is paid. This is called the mechanic’s lien. (Art. 1731) 3) The agent may retain the things which are the objects of agency until the principal effects the reimbursement and pays the indemnity. This is called the agent’s lien. (Art. 1914) 4) The laborer’s wages shall be a lien on the goods manufactured or the work done. (Art. 1707)

REQUIREMENTS IN SALE OF THE THING PLEDGED BY A CREDITOR, IF CREDIT IS NOT PAID ON TIME (Art 2112) 1. Debt is due and unpaid. 2. Sale must be 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. 5. If at the first auction the thing is not sold, a second one with the same formalities shall be held. 6. If at the second auction, there is no sale either, the creditor may appropriate the thing pledged but he shall give an acquittance (release) for his entire claim.

4.

EFFECT OF THE SALE OF THE THING PLEDGED (Art 2115) 1. Extinguishes the principal obligation, whether the price of the sale is more or less than the amount due. 2. if the price is more than amount due, the debtor is not entitled to the excess unless the contrary is provided. 3. If the price of the sale is less, neither is the creditor entitled to recover the deficiency. A contrary stipulation is void.

PAWNSHOP REGULATION ACT PD 114 SEC 9: Loans granted by pawnshops shall not be less than 30% of the value of the security offered, UNLESS the pawner manifests in writing the desire to borrow a lesser amount.

MANILA BANKING v TEODORO: In case of doubt as to whether a transaction is a pledge or a dation in payment, the presumption is in favor of pledge, the latter being the lesser transmission of rights and interests (as earlier established in Lopez v. Court of Appeals) LEGAL PLEDGES (Article 2121) 1. Necessary expenses shall be refunded to every possessor, but only a possessor in good faith may retain the thing until he has been reimbursed.

5.

NOTE: 1. In legal pledges, the remainder of the price of the sale shall be delivered to the obligor. 2. Public auction of legal pledges may only be executed after demand of the amount for which the thing is retained. It shall take place within one month after the demand, otherwise the pledgor may demand the return of the thing pledged, provided s/he is able to show that the creditor did not cause the public sale without justifiable grounds. (Article 2122)

SEC 10: a. Interests not to exceed usury law b. Pawn broker prohibited from dividing the pawn offered to collect greater interest c. Pawn broker prohibited from requiring additional charge for safekeeping / insurance d. Maximum service charge: Php5 to not more than 1% of the principal loan SEC 13: Pawner who fails to pay his obligation on the date it falls due may WITHIN 90 DAYS from the date of the maturity of the obligation, REDEEM the pawn by payment of the principal debt and interest


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SEC 15: Requisites of public auction of pawned articles a. Public auction must be held at the place of business of the pawn shop, or within the municipality or city where it is located b. Must be under the control and direction of a licensed auctioneer c. Prior publication one week before the sale


as a security for a debt. a. lien created through equitable mortgage ought not to be defeated by requiring compliance with formalities necessary to the validity of a voluntary real estate mortgage. Ex.: Pacto de retro b. ovisions governing equitable mortgage: Arts. 1365, 1450, 1454, 1602, 1603, 1604 and 1607.

III. Mortgage

PRINCIPLE OF INDIVISIBILITY OF PLEDGE / MORTGAGE (ART. 2089 TO 2090)

MORTGAGE is a contract whereby the debtor secures to the creditor the fulfillment of a principal obligation, immediately making immovable property or real rights over immovable property answerable to the principal obligation in case it is not complied with at the time stipulated.

DAYRIT v CA: A mortgage directly and immediately subjects the property upon which it is imposed. It is indivisible even though the debt may be divided, and such indivisibility is likewise unaffected by the fact that 'the debtors are not solidarity liable.

OBJECTS OF REAL MORTGAGE (Art. 2124) 1. Immovables 2. Alienable real rights over immovables. Future property cannot be object of mortgage; however, a stipulation subjecting to the mortgage improvements which the mortgagor may subsequently acquire, install or use in connection with real property already mortgaged belonging to the mortgagor is valid. KINDS 1. Voluntary – constituted by the will of the owner of the property on which it is created 2. Legal – required by law to be executed in favor of certain persons: a. Persons in whose favor the law establishes a mortgage have no other right than to demand the execution and recording of the document in which the mortgage is formalized (Article 2125) b. 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 (integrity, capacity to bind himself, and sufficient property to answer the obligation), an in other laws (Article 2082) c. If the person bound to give a bond should not be able to do so, a pledge or mortgage considered sufficient to recover his obligation shall be admitted in lieu thereof (Article 2083) 3. Equitable – One which, although lacking the proper formalities of a mortgage, shows the intention of the parties to make the property

Central Bank v CA: Where only a portion of the loan is released, the mortgage becomes enforceable only as to the proportionate value of the loan Indivisibility applies only as to pledgors/mortgagors who are themselves debtors in the principal obligation, and not to accommodation pledgors / mortgagors "When several things are pledged or mortgaged, each thing for a determinate portion of the debt, the pledges or mortgage, are considered separate from each other. But when the several things are given to secure the same debt in its entirety, all of them are liable for the debt, and the creditor does not have to divide his action by distributing the debt among the various things pledged or mortgaged. Even when only a part of the debt remains unpaid, all the things are still liable for such balance." (Tolentino) ESSENTIAL REQUISITES 1. Constituted to secure the fulfillment of a principal obligation. 2. Mortgagor must be the absolute owner of the thing mortgaged. 3. The persons constituting the mortgage have free disposal of the property; in the absence thereof, they should be legally authorized for the purpose. (Article 2085) 4. Cannot exist without a valid obligation. (Art. 2086 cf 2052) 5. When the principal obligation becomes due, the thing in which the mortgage consists may be alienated for payment to the creditor. (Art. 2087)


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6. Must appear in a public document duly recorded in the Registry of Property, to be validly constituted. (Art. 2125)  In a legal mortgage, the persons in whose favor the law establishes a mortgage have the right to demand the execution and recording of a document formalizing the mortgage. (Art. 2125, par. 2) EFFECTS 1. Creates real rights, a lien inseparable from the property mortgaged, enforceable against the whole world. 2. Creates merely an encumbrance. LAWS GOVERNING MORTGAGE 1. New Civil Code. 2. PD 1952. 3. Revised Administrative Code. 4. RA 4882, regarding aliens mortgagees 5. Act 3135, as amended 6. Property Registration Decree 7. General Banking Act of 2000

becoming

EFFECTS OF A MORTGAGE 1. It creates a real right, a lien inseparable from the property mortgaged 2. If a person is the first mortgagee over a property sold in an auction sale by the second mortgagee, the only right left to him is to collect his mortgage credit from the proceeds of the sale (by virtue of merger of rights, Art 1275). 3. The first mortgagee has superior rights over junior mortgagees / attaching creditors IMPORTANT POINTS 1. As a general rule, the mortgagor retains possession of the property. He may deliver said property to the mortgagee without altering the nature of the contract of mortgage. 2. It is not an essential requisite that the principal of the credit bears interest, or that the interest as compensation for the use of the principal and the enjoyment of its fruits be in the form of a certain percentage thereof. 3. Mortgage creates an encumbrance over the property, but ownership of the property is not parted with. It merely restricts the mortgagor’s jus disponendi over the property. The mortgagor may still sell the property, and any stipulation to the contrary is void (Art. 2130) 4. Mortgage extends to the natural accessions, to the improvements of growing fruits and the rents or income NOT YET RECEIVED

when the obligation becomes DUE, including indemnity from insurance, and / or amount received from expropriation for public use (Art. 2127) a. Applies only when the accessions and accessories subsequently introduced belongs to the mortgagor. b. To exclude them, there must be an express stipulation, or the fruits must be collected before the obligation becomes due. c. Third persons who introduce improvements upon the mortgaged property may remove them at any time Registration – ministerial act by which deed, contract or instrument is sought to be inscribed in the office of the Register of Deeds and annotated at the back of the certificate of title covering the land subject of the deed, title, or contract SAMANILLA v CAJUCOM: A mortgage, whether registered or not, is binding between the parties, registration being necessary only to make the same valid against third persons (Art. 2125, CC). Registration only operates as a notice of the mortgage to others, but neither adds to its validity nor convert an invalid mortgage into a valid one between the parties. In Gurbax Singh Pabla vs. Reyes, SC ruled that "if the purpose of registration is merely to give notice, the questions regarding the effect or invalidity of instruments are expected to be decided after, not before, registration. It must follow as a necessary consequence that registration must first be allowed and validity or effect litigated afterwards". INCIDENTS OF REGISTRATION OF MORTGAGE 1. Mortgagee is entitled to registration of mortgage as a matter of right. 2. Proceedings for registration do not determine validity of the mortgage or its effect 3. Registration is without prejudice to better rights of third parties. 4. Mortgage deed, once duly registered, forms part of the records for the registration of the mortgaged property. 5. Mortgage by a surviving spouse of his/her undivided share in the conjugal property can be registered.


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EFFECT OF INVALIDITY OF MORTGAGE ON THE PRINCIPAL OBLIGATION 1. Principal obligation remains valid. 2. Mortgage deed remains evidence of a personal obligation. MOJICA v CA: Mortgages given to secure future advancements are valid and legal contracts; that the amounts named as consideration in said contract do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered. A mortgage given to secure advancements is a continuing security and is not discharged by repayment of the amount named in the mortgage, until the full amount of the advancements are paid (as established earlier in Lim Julian v. Lutero).

IV. Foreclosure of Mortgage (Art. 2085) FORECLOSURE OF MORTGAGE It is the remedy available to the mortgagee by which he subjects the mortgaged property to the satisfaction of the obligation secured by the mortgage. 

 



In General: An action for foreclosure of a mortgage is limited to the amount mentioned in the mortgage, EXCEPT when the mortgage contract intends to secure future loans or advancements BLANKET mortgage / DRAGNET– mortgage that subsumes all debts of past or future origin Mortgage may be used as a “continuing security” which secures future advancements and is not discharged by the repayment of the amount in the mortgage Alienation or assignment of mortgage credit is valid even if it is not registered

ACCELERATION CLAUSE, or the stipulation stating that on the occasion of the mortgagor’s default, the whole sum remaining unpaid automatically becomes due and demandable, is ALLOWED KINDS OF FORECLOSURE 1. Judicial Foreclosure 2. Extrajudicial Foreclosure JUDICIAL FORECLOSURE Rule 68, ROC:  May be availed of by bringing an action in the proper court which has jurisdiction over the area wherein the real or personal (in






  

case of chattel mortgage) property involved or a portion thereof is situated. If the court finds the complaint to be wellfounded, it shall order the mortgagor to pay the amount due with interest and other charges within a period of not less than 90 days nor more than 120 days from the entry of judgment. If the mortgagor fails to pay at the time directed, the court, upon motion, shall order the property to be sold to the highest bidder at a public auction. Upon confirmation of the sale by the court, also upon motion, it shall operate to divest the rights of all parties to the action and to vest their rights to the purchaser subject to such rights of redemption as may be allowed by law. Before the confirmation, the court retains control of the proceedings Execution of judgment subject to APPEAL but not annulment The foreclosure of the property is completed only when the sheriff’s certificate is executed, acknowledged and recorded

The proceeds of the sale shall be applied to the payment of the: a. Costs of the sale; b. Amount due the mortgagee; c. Claims of junior encumbrancers or persons holding subsequent mortgages in the order of their priority; and d. Balance, if any shall be paid to the mortgagor. NATURE OF JUDICIAL FORECLOSURE PROCEEDINGS: 1. Quasi in rem action. Hence, jurisdiction may be acquired through publication. 2. Foreclosure is only the result or incident of the failure to pay debt. 3. Survives death of mortgagor. EXTRAJUDICIAL FORECLOSURE(Act No. 3135) 1. Applies to mortgages where the authority to foreclose is granted to the mortgagee. 2. Authority is not extinguished by death of mortgagor or mortgagee. This is an agency coupled with interest. 3. Public sale should be made after proper notice to the public, otherwise it is a jurisdictional defect which could render the sale voidable. 4. There is no need to notify the mortgagor. Proper notice consists of: a. posting notice in three public places and / or b. publication in newspaper of general


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circulation purpose of notice is to obtain the best bid for the foreclosed property Surplus proceeds of foreclosure sale belong to the mortgagor. Debtor (who must be a NATURAL PERSON) has the right to redeem the property sold within 1 year from and after the date of sale. a. If the mortgagee is a bank and the debtor is a juridical person, then there is no right of redemption. However, it may redeem the property BEFORE the registration of the TCT to the buyer, which is similar to the equity of redemption. The TCT must be registered within THREE MONTHS after the foreclosure. b. The mortgagor can only legally transfer the right to redeem and the use of the property during the period of redemption. Remedy of party aggrieved by foreclosure is a petition to set aside sale and cancellation of writ of possession. However, if the mortgagee is a bank, the mortgagor is required to post a bond equal to the value of the mortgagee’s claim. Republication is of the notice of sale necessary for validity of postponed extrajudicial sale In foreclosure of real estate mortgage under Act 3135, the buyer at auction may petition the land registration court for a writ of possession pending the one-year period of redemption of the foreclosedproperty. c.

5. 6.

7.

8.

9.

Nature of power of foreclosure extrajudicial sale: 1. Conferred for mortgagee’s protection. 2. An ancillary stipulation. 3. A prerogative of the mortgagee.

by

Note: a. Both should be distinguished from execution sale governed by Rule 39, ROC. b. Foreclosure retroacts to the date of registration of mortgage. c. A stipulation of upset price, or the minimum price at which the property shall be sold to become operative in the event of a foreclosure sale at public auction, is null and void. RIGHT OF MORTGAGEE TO RECOVER DEFICIENCY 1. Mortgagee is entitled to recover deficiency. 2. If the deficiency is embodied in a judgment,

it is referred to as deficiency judgment. 3. Action for recovery of deficiency may be filed even during redemption period. 4. Action to recover prescribes after 10 years from the time the right of action accrues. EFFECT OF INADEQUACY OF PRICE IN FORECLOSURE SALE 1. Where there is right to redeem, inadequacy of price is immaterial because the judgment debtor may redeem the property. Exception: Where the price is so inadequate as to shock the conscience of the court, taking into consideration the peculiar circumstances. 2. Property may be sold for less than its fair market value, upon the theory that the lesser the price the easier it is for the owner to redeem. 3. The value of the mortgaged property has no bearing on the bid price at the public auction, provided that the public auction was regularly and honestly conducted. WAIVER OF SECURITY BY CREDITOR 1. Mortgagee may waive right to foreclose his mortgage and maintain a personal action for recovery of the indebtedness. 2. Mortgagee cannot have both remedies. REDEMPTION 1. It is a transaction by which the mortgagor reacquires the property which may have passed under the mortgage or divests the property of the lien which the mortgage may have created 2. Kinds: a. Equity of redemption: in judicial foreclosure of real estate mortgage under the ROC, it is the right of the mortgagor to redeem the mortgaged property by paying the secured debt within the 120 day period from entry of judgment or after the foreclosure sale, but before the sale of the mortgaged property or confirmation of sale  formal offer to redeem preserves the right of redemption, e.g., by filing an action to enforce the right to redeem b. Right of redemption: in extrajudicial foreclosure of real estate mortgage, the right of the mortgagor to redeem the property within a certain period after it was sold for the satisfaction of the debt.  For natural persons – one year from the registration of the TCT


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 

For juridical persons – three months from the foreclosure Formal offer to redeem must be with tender of redemption price to preserve right of redemption

NOTE: There is no right of redemption in pledge and chattel mortgage. MEDIDA v CA: The rule up to now is that the right of a purchaser at a foreclosure sale is merely inchoate until after the period of redemption has expired without the right being exercised. The title to land sold under mortgage foreclosure remains, in the mortgagor or his grantee until the expiration of the redemption period and conveyance by the master's deed

V. Antichresis ANTICHRESIS is a contract whereby the creditor acquires the right to receive the fruits of an immovable of the debtor, with the obligation to apply then to the payment of the interest, if owing, and thereafter to the principal of the credit (Art 2132) CHARACTERISTICS 1. Accessory contract – it secures the performance of a principal obligation 2. formal contract – it must be in a specified form to be valid (Art. 2134) SPECIAL REQUISITES: 1. it can cover only the fruits of an immovable property 2. delivery of the immovable is necessary for the creditor to receive the fruits and not that the contract shall be binding 3. amount of principal and interest must be specified in writing 4. express agreement that debtor will give possession of the property to creditor and that the latter will apply the fruits to the interest, if any, then to the principal of his credit 5. NOTE: The obligation to pay interest is not of the essence of the contract of antichresis; there being nothing in the Code to show that antichresis is only applicable to securing the payment of interest-bearing loans. On the contrary, antichresis is susceptible of guaranteeing all kinds of obligations, pure or conditional


OBLIGATIONS OF ANTICHRETIC CREDITOR 1. to pay taxes and charges on the estate, including necessary expenses. Creditor may avoid said obligation by: a. compelling debtor to reacquire enjoyment of the property b. by stipulation to the contrary 2. to apply all the fruits, after receiving them, to the payment of interest, if owing, and thereafter to the principal 3. to render an account of the fruits to the debtor 4. to bear the expenses necessary for its preservation and repair REMEDIES OF CREDITOR IN CASE OF NONPAYMENT OF DEBT 1. action for specific performance 2. Petition for the sale of the real property as in a foreclosure of mortgages under Rule 68 of the Rules of Court a. The parties, however, may agree on an extrajudicial foreclosure in the same manner as they are allowed in contracts of mortgage and pledge (Tavera v. El Hogar Filipino, Inc. 68 Phil 712) b. A stipulation authorizing the antichretic creditor to appropriate the property upon the non-payment of the debt within the agreed period is void (Art. 2088)

VI. Chattel Mortgage CHATTEL MORTGAGE is a contract by virtue of which a personal property is recorded in the Chattel Mortgage Register as security for the performance of an obligation. If the movable, instead of being recorded, is delivered to the creditor, it is pledge and not chattel mortgage. LAWS GOVERNING CHATTEL MORTGAGE 1. Chattel Mortgage Law (Act.1508, as amended). 2. New Civil Code. 3. Revised Administrative Code. 4. Revised Penal Code. 5. Ship Mortgage Decree of 1978 (PD 1521) governs mortgage of vessels of domestic ownership. AFFIDAVIT OF GOOD FAITH  An 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


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and that the same is a just and valid obligation and one not entered into for the purpose of fraud. EFFECT OF REGISTRATION 1. Creates real rights. 2. Adds nothing to mortgage. Note: Registration of assignment of mortgage is not required. RIGHT OF REDEMPTION OF MORTGAGE 1. When the condition of a chattel mortgage is broken, the following may exercise redemption: a. Mortgagor. b. Person holding a subsequent mortgage. c. Subsequent attaching creditor. 2. 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 as a mortgagee. 3. Redemption is made by paying or delivering to the mortgagee the amount due on such mortgage and the costs and expenses incurred by such breach of condition before the sale. FORECLOSURE OF CHATTEL MORTGAGE 1. Public sale. 2. Private sale – There is nothing illegal, immoral or against public order in an agreement for the private sale of the personal properties covered by chattel mortgage. PERIOD TO FORECLOSE 1. After 30 days from the time of the condition is broken. 2. The 30-day period is the minimum period after violation of the mortgage condition for the creditor to cause the sale at public auction with at least 10 days notice to the mortgagor and posting of public notice of time, place, and purpose of such sale, and is a period of grace for the mortgagor, to discharge the obligation. 3. After the sale at public auction, the right of redemption is no longer available to the mortgagor. CIVIL ACTION TO RECOVER CREDIT 1. Independent action to recover debt is not required. 2. However, mortgage lien is deemed abandoned by obtaining a personal judgment.


RIGHT OF MORTGAGEE TO RECOVER DEFICIENCY 1. Where mortgage foreclosed: Creditor may maintain action for deficiency although the Chattel Mortgage Law is silent on this point, because a chattel mortgage is given only as a security and not as payment of the debt. 2. Where mortgage constituted as security for purchase of personal property payable in installments: No deficiency judgment can be asked and any contrary agreement shall be void. 3. Where mortgaged property subsequently attached and sold: Mortgagee is entitled to deficiency judgment in an action for specific performance. APPLICATION OF PROCEEDS OF SALE 1. Costs and expenses of keeping and sale. 2. Payment of the obligation. 3. Claims of persons holding subsequent mortgages in their order. 4. Balance, if any, shall be paid to the mortgagor, or person holding rights under him.


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and

I. GENERAL PROVISIONS II. CLASSIFICATION OF CREDITS III. PREFERENCE OF CREDITS

II. Classification of Credits

CONCURRENCE OF CREDIT implies possession by two or more creditors of equal right or privileges over the same property or all of the property of a debtor. PREFERENCE OF CREDIT is the right held by a creditor to be preferred in the payment of his claim above other out of the debtor’s assets.

I.

5. Property held by the insolvent debtor as a trustee of an express or implied trust, shall be excluded from the insolvency proceedings

General Provisions

1. The debtor is liable with all his property, present and future, for the fulfillment of his obligations, subjects to exemptions provided by law. Exempted property: a. Present property:  Family home. (Arts. 152, 153 and 155, CC)  Right to receive support, as well as money or property obtained by such support, shall not be levied upon on attachment or execution. (Art. 205, CC)  Sec. 13, Rule 39, ROC.  Sec 118, Public Land Act. (CA 141, as amended) b. Future property: A debtor who obtains a discharge from his debts on account of insolvency, is not liable for the unsatisfied claims of his creditors with said property. (Sec. 68 and 69, Insolvency Law, Act 1956) c. Property in custodia legis and of public dominion. 2. Insolvency shall be governed by the Insolvency Law. (Act 1956, as amended) 3. Exemption of conjugal property or absolute community or property, provided that: a. Partnership or community subsists. b. Obligations of the insolvent spouse have not redounded to the benefit of the family. 4. If there is co-ownership, and one of the coowners is the insolvent debtor, his undivided share or interest in the property shall be possessed by the assignee in insolvency proceedings because it is part of his assets.

1. Special preferred credits. (Art. 2241 and 2242, CC) a. Considered as mortgages or pledges of real or personal property or liens within the purview of legal provisions governing insolvency. b. Taxes due to the State shall first be satisfied. 2. Ordinary preferred credits (Art. 2244) – Preferred in the order given by law. 3. Common credits (Art. 2245) – Credits of any other kind or class, or by any other right or title not comprised in Arts. 2241- 2244 shall enjoy no preference.

III. Preference of Credits 1. 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. 2. If there are 2 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 3. 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. 4. If there are 2 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 assessment of the taxes and assessments upon the immovable property or real right. 5. 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 other credits. 6. 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: a. Order established by Art 2244 b. Common credits referred to in Art 2245 shall be paid pro rata regardless of dates

-end of Credit Transactions -


Chapter VIII. Concurrence Preference of Credits

Chapter VIII. PHILIPPINE BULK SALES LAW

UP 2010 Civil Law (Credit Transactions).pdf

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