BLL NOTES =)

February 2011 - Midterm Coverage

Guaranty , Surety and Pledge

GUARANTY > is gratuitous unless there is stipulation to the contrary.

 May be conventional (by agreement), legal ( as required by law), Judicial (as required by
court), or by onerous title.

 Cannot exist without a valid obligation. Because it is by nature an accessory contract, so if

 But may be constituted to guarantee the performance of a voidable or an unenforceable

 Must be expressed, and not presumed. And cannot extend to more than what is stipulated.

 Is strictly construed against the creditor and in favor of the guarantor or surety.

 Has prospective, and not retroactive effect unless otherwise stated in the contract.

 If a contract is novated w/o the guarantor’s consent, or credit is increased w/o his consent,
the guaranty ends.

Characteristics of the Contract of Guaranty

1.It is a contract between the guarantor and the creditor.

> When a person acts merely as a guarantor of the obligation assumed by another to a 3 rd person
for a return of such 3rd person’s right or the delivery of its value, whatever liability was incurred by the
principal obligor for defaulting on such obligation, that of the guarantor consequent upon such default is
merely CIVIL, not criminal.

2. Generally, there must be MEETING of the MINDS between said parties. Therefore, the creditor must
notify the guarantor that the former is accepting the guaranty.

3. It is consensual, nominate, accessory and unilateral in a sense that only the guarantor is obligated to
the creditor.

4. As to form, it is governed by the Statute of Frauds – must be in writing. BUT this can be waived.

Guarantor distinguished from Surety.

Guarantor Surety

a. SUBSIDIARY (secondary) Liability a. PRIMARY Liability

b. Pays if debtor CANNOT b. Pays if debtor DOES NOT

c. Insurer of the debtors solvency c. Insurer of the debt

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*A surety is almost the same as a solidary debtor except in the latter is himself the principal debtor.
Whereas, a guarantor is a person separate and distinct from the debtor. While a guarantor is subsidiarily
liable, the debtor is principally liable.

Procedure for the Enforcement of Surety’s Liability under a bond for delivery of personal property.

(Rule 57, Sec. 20 and Rule 58, Sec. 8)

 The ff. requisites must be complied with in order to recover on a REPLEVIN (recovery of personal
property) bond.

1. The application for damages must be filed before court or before entry of trial judgment.

2. Due notice must be given to the other party and his surety.

3. There must be a proper hearing, and the award of damages (if any) must be included in the
final judgment.

*A guarantor can recover from the debtor what the former had to pay the creditor, even if the guaranty
was without the debtors consent or against his will, but the recovery will only be to the extent that the
debtor had been benefited (Art. 1236) and said guarantor CANNOT COMPEL the creditor to subrogate
him in his rights, such as those arising from a mortgage, guaranty or penalty (Art. 1237).

*A guarantor may bind himself for less, but not for more than the principal debtor both as regards the
amount and the onerous nature of the conditions.

* One who mortgages his property to guarantee another’s debt WITHOUT EXPRESSLY assuming personal
liability for such debt, CANNOT be compelled to pay the deficiency remaining after the mortgage has
been foreclosed.

*SC repeatedly stated that “Where in a bond the debtor and surety have bound themselves solidarily,
but limiting the liability of the surety to a lesser amount than that due from the principal debtor , any
such payment as the latter may have on account of such obligation, must be applied first to the
unsecured portion of the debt, for, as regards the principal debtor, the obligation is more onerous as to
the amount not secured.”

*If the indebtedness is increased w/o the guarantor’s consent, he is completely released from the
obligation as guarantor or surety.

Reason why guarantor is liable for interest

 If a guarantor UPON DEMAND fails to pay, he can be held liable for the interest, even if in thus
paying, the liability becomes more than that in the principal obligation. Not because of the
contract BUT because of the default and the necessity ofr judicial collection. Note: The interest
runs from the time the complaint is filed, not from the time the debt becomes due and
demandable.

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*If the guaranty is simple or indefinite (no period specified; no amount fixed), it shall comprise not only
the principal obligation but also ALL its accessories.

* If a guarantor dies, his heirs are still liable, to the extent of the value of the inheritance because the
obligation is not purely personal, and is therefore transmissible.

* The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property
of the debtor, and resorted to all the legal remedies against the debtor. (Art. 2058)

* Benefit of Excussion means the right of the guarantor to have all the properties of the debtor and all
legal remedies against him first exhausted before he can be compelled to pay the creditor.

*A mortgagor is NOT entitled to the benefit of excussion of the property of the principal debtor.

Effects of Guaranty between GUARANTOR and CREDITOR

1. The guarantor is entitled to the benefit of excussion (benefit of exhaustion) of the debtor’s
properties EXCEPT when :

a. Renunciation of the guarantor.

b. Useless because execution on property will not result in the satisfaction of the debt.

c. Solidarily liability of the guarantor.

d. Insolvency of the debtor.

e. Absconded, or cannot be sued w/n the Philippines unless debtor has left a manager .

f. Others like when the guaranty is in a judicial bond, or guarantor failed to set up ‘benefit
of excussion’ upon creditor’s demand, and/or if the principal debt is natural, voidable,
or unenforceable obligation.

2. A compromise between the creditor and the principal debtor benefits but does not prejudice the
guarantor.

3. If there should be several guarantors, they are in general entitled to the benefit of division pro-
rata (proportionate liability).

Duties of the Creditor in order to hold the guarantor liable

1. Exhaust ALL the property of the debtor unless the guarantor is not entitled to such benefit.

2. Resort to ALL the legal remedies against the debtor including filing suit.

3. Prove that debtor is STILL unable to pay. Insolvency of the debtor is not enough, better prove it
through an UNSATISFIED writ of execution that has been returned.

4. Notify the guarantor of the debtor’s inability to pay unless the former waived such notification.
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Requisites before guarantor can make use of Excussion

1. Must SET IT UP as defense when the creditor demands payment.

2. Must point out AVAILABLE property of debtor within the Philippines.

*It is clear that NO writ of execution could issue against the guarantor’s properties, unless the principal
debtor was unable to pay.

Effects of guaranty between GUARANTOR and DEBTOR

 (Art. 2066 – AFTER PAYMENT) The guarantor who pays for the debtor must be indemnified by
the latter which comprises of :

a. Total amount of the debt.

b. Interest (legal)

c. Expenses

d. Damages, if due

*The guarantor who pays is SUBROGATED by virtue thereof to all the rights which the creditor had
against the debtor provided the guarantor became such with the knowledge and consent of the debtor.

*Subrogated rights ONLY with respect to the rights of the creditor, but not to the rights of the debtor.

* In case of a GRATUITOUS GUARANTY, if the guarantor was prevented by a fortuitous event from
advising the debtor of the payment, and the creditor became insolvent, the debtor shall reimburse the
guarantor for the amount paid.

Remedies of the guarantor against the debtor BEFORE PAYMENT (Art. 2071)

1. When he is sued for payment.

2. In case of insolvency of the debtor.

3. When the debtor has bound himself to relieve him from the guaranty w/n a specified period,
and this period has expired.

4. When the debt has become demandable, by reason for payment.

5. After the lapse of 10 years, when the principal debt has no fixed period for its maturity, unless it
be of such nature that it cannot be extinguished except w/n a period longer than 10 years.

6. If they are reasonable grounds to fear that the principal debtor intends to abscond.

7. If the principal debtor is in imminent danger of becoming insolvent.

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*Purpose : To obtain RELEASE from the guaranty and to demand SECURITY.

*When there are 2 or more guarantors of the same debtor and for the same debt, the one among them
who has paid may demand of each of the others the share which is proportionally owing from him. If any
of the guarantors should be insolvent, his share shall be borne by the others, including the payer, in the
same proportion. > applicable when there has been payment by virtue of a JUDICIAL DEMAND or
because the PRINCIPAL DEBTOR is INSOLVENT.

Extinguishment of Guaranty

1. By novation. > must be express.

2. By Dacio En Pago > *Eviction revives the principal obligation but not the guaranty.

3. By extension of payment > * An extension granted to the debtor by the creditor w/o the consent
of the guarantor extinguishes the guaranty.

4. Whenever by some act of the creditor they cannot be subrogated to the rights, mortgages, and
preference of the latter. > Available to guarantor ONLY DURING the proceeding against him for
payment, not before nor after rendition of judgment.

5. Extinguishment of the principal obligation wither thru compensation, remission, or merger

Nothing Follows…

February 11, 2011 @ 01:14am

Bllnemehotatse =)

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PLEDGE or MORTGAGE > is constituted to secure the fulfillment of an obligation.

 The pledgor or mortgagor must be the absolute owner, otherwise it is VOID.

 Thing pledge must be placed in the possession of the creditor, or of a 3 rd person by common
agreement. > Mere taking of possession is NOT sufficient NOR mere symbolical delivery. The
pledgee must continue in said possession, and there must be ACTUAL delivery of possession (it
admits exception like traditio brevi manu).

 is indivisible, even though the debt may be divided among the successors in interest of the
debtor or of the creditor.

*Exception: There being SEVERAL THINGS GIVEN in mortgage or pledge, each one of
them guarantees only a determinate portion of the credit. The debtor in this case shall
have a right to the EXTINGUISHMENT of the pledge or mortgage as the portion of the
debt for which each thing is specially answerable is satisfied.

 The pledgor or mortgagor must be the absolute owner, otherwise it is VOID.

 Shall not take effect against 3rd persons if a description of the thing pledged and the date of the
pledge do not appear in a public instrument. > VERY IMPORTANT to be valid, otherwise VOID w/
respect to 3rd persons.

 Only movables can be pledged, including incorporeal rights like certification of stock.

 Pledgor has the same responsibility as a bailor in commodatum.

 If the thing pledge is RETURNED by the pledgee to the pledgor or owner, the pledge is
EXTINGUISHED. Any stipulation to the contrary shall be void. (Art. 2010)

 A statement in WRITING by the pledgee that he renounces or abandons the pledge is sufficient
to extinguished the pledge. For this purpose, neither the acceptance by the pledgor or owner,
nor the return of the thing pledged is necessary, the pledgee becoming a depositary. (Art 2011).

*An Agent cannot pledge or mortgage in his own name. BUT an agent can do so IN THE NAME of the
principal.

* If a forger pledges or mortgages another’s property, the pledge or mortgage is VOID unless the land
concerned was already registered in the forger’s name in w/c case innocent 3 rd parties should not be
prejudiced.

* Even if the pledge or mortgage is VOID, the principal obligation may still be valid. Therefore, the debt
may still be recovered in an ordinary action.

* One who mortgages his property to guaranty another’s debt, WITHOUT EXPRESSLY assuming personal
liability for such debt CANNOT be compelled to pay the deficiency remaining after the mortgage has
been foreclosed.

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*A mortgage made to secure advances is a continuing security and is not discharged by repayment of the
amount named in the mortgage, until the full amount of the advances are paid.

* As stated by the SC, the power of the mortgagee to sell the mortgaged property to satisfy his credit
SURVIVES after the death of the mortgagor. Property which is however in CUSTODIA LEGIS cannot be
extrajudicially foreclosed.

* The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them.
Any stipulation to the contrary is null and void. (Art. 2088) > REMEDY would be to move for the sale of
the things pledged in order to collect the amount of the claim from the proceeds.

* SC held that “The stipulation in the mortgage that the land covered thereby shall become the property
of the mortgagee upon failure to pay the debt w/n the period agreed upon constitutes a PACTUM
COMMISSORIUM, and is therefore null and void.” It is against good morals and public policy.

* If a mortgagor PROMISES to sell the property to the mortgagee upon default, this is merely a personal
obligation, and does not bind the land. Hence, he can still sell the land to a stranger BUT he would be
liable for damages.

*It is true that the law allows an assignment in favor of creditor for the payment of a debt BUT this
assignment is made only AFTERWARDS, not at the time the obligation is constituted.

*Mortgagee cannot sell during the existence of principal obligation.

* Property which has been lawfully pledged to a creditor cannot be pledged to another as long as the
first one subsists.

* The creditor shall take care of the thing pledged with the diligence of a good father of a family; he has
a right to the reimbursement of the expenses made for its preservation, and is liable for its loss or
deterioration in conformity with the provisions of this code (Art. 2099).

* The law CONTEMPLATES that the pledge may have to undergo expenses in order to prevent the pledge
from being lost, and these expenses the pledge is entitled to recover from the pledgor.

* The duty to use the diligence of a good father of a family in caring for the pledge subsists as long as the
pledged article remains in the power of the pledgee.

*Fruits and interests may COMPENSATE for those which the pledgee himself is entitled or may be
applied to the principal. It extends to offspring of animals, but there can be a contrary stipulation.

*In an obligation with a TERM, there can be no demand of the property pledged till after the term had
arrived. The prescriptive period for recovery of the property begins from the time the debt is
EXTINGUISHED by payment and a DEMAND for the return of the property is made.

*When destruction or impairment is feared WITHOUT FAULT of the pledgee (creditor), there are 2
remedies granted:

1. For the pledgor – demand the return of the thing pledge but there must be a substitute w/c is
of the same kind and and not of inferior quality w/o prejudice to the pledgee’s right.

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 2. For the pledgee – he may cause the same to be sold at a public sale, and the proceeds of the
auction shall be a security for the principal obligation in the same manner as the thing orig. pledged.

Formalities required to the sale of the thing pledged when credit is NOT SATISFIED

1. The debt is already due.

2. There must be an intervention of a notary public.

3. There must be a public auction (if not sold in 1 st sale, a 2nd auction sale must be held w/ the same
formalities). If not sold at 2nd auction, pledgee is OBLIGED to give an acquittance for his entire
claim.

4. Notice to the debtor or owner stating the amount due, that is, the amount for w/c the public
sale is to be held.

*At the public auction, the pledgor or owner may bid. He shall, however, have a better right if he should
offer the same terms as the highest bidder. The pledgee may also bid but his offer shall not be valid if he
is the only bidder.

*If the price at sale is MORE – excess goes to the creditor unless the contrary is provided.

* If the price at sale is LESS – creditor DOES NOT get the deficiency. A contrary stipulation is VOID.

*Any 3rd person who has any right in or to the thing pledged may satisfy the principal obligation as soon
as the latter becomes due and demandable.

*In a legal pledge (by operation of law) – i.e, right of retention, >>> if price at sale is MORE – excess shall
be given to the debtor. >>> only ONE public auction is needed.

Nothing follows…

February 11, 2011 @ 03:05am

Bllnemehotatse =)

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