UP 2010 Civil Law Credit Transactions
UP 2010 Civil Law Credit Transactions
CREDIT TRANSACTIONS
Table of Contents
CREDIT TRANSACTIONS
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
CREDIT TRANSACTIONS
Prof. Roberto N. Dio I. TYPES OF CREDIT TRANSACTIONS
Faculty Editor
II. SECURITY
Katrina Elena Guerrero III. BAILMENT
Lead Writer
Diana Gervacio CREDIT TRANSACTIONS - include all
Patricia Andrea Hernandez transactions involving the purchase or loan of
Mark Luciano
Ixara Maroto
goods, services or money in the present with a
Writers promise to pay or deliver in the future (contract
of security)
CIVIL LAW
Kristine Bongcaron I. Types of Credit Transactions
Patricia Tobias
Subject Editors
Secured transactions or contracts of real
ACADEMICS COMMITTEE security – Those supported by collateral or an
Kristine Bongcaron encumbrance of property
Michelle Dy
Patrich Leccio Unsecured transactions or contracts of
Editors-in-Chief personal security – Those the fulfillment of
PRINTING & DISTRIBUTION which by the principal debtor is secured or
supported only by a promise to pay or the
Kae Guerrero personal commitment of another such as a
DESIGN & LAYOUT guarantor or surety
307
Pat Hernandez
CREDIT TRANSACTIONS
Viktor Fontanilla
Rusell Aragones II. Security
Romualdo Menzon Jr.
Rania Joya SECURITY - something given, deposited or
LECTURES COMMITTEE serving as a means to ensure the fulfillment or
enforcement of an obligation or of protecting
Michelle Arias some interest in property.
Camille Maranan
Angela Sandalo
Heads 2 TYPES OF SECURITY
1. Personal Security – as when an individual
Katz Manzano Mary Rose Beley
Sam Nuñez Krizel Malabanan becomes a surety or a guarantor
Arianne Cerezo Marcrese Banaag 2. Real Security - as when a mortgage,
Volunteers pledge, antichresis, charge or lien or other
device used to have property held, out of
MOCK BAR COMMITTEE which the person to be made secure can be
Lilibeth Perez compensated for loss. Thus, a secured
creditor is one who holds a security from his
BAR CANDIDATES WELFARE debtor for payment of the latter’s debts.
Dahlia Salamat
LOGISTICS
III. Bailment
Charisse Mendoza
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
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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)
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(Art 418)
Unilateral contract
1. creates obligations on only one party, i.e., IV. Commodatum
the borrower
2. In a contract of loan, the cause is, as to the 2 KINDS OF COMMODATUM
borrower, the acquisition of the thing, and as 1. Ordinary commodatum - See Art.1933
to the lender, the right to demand its return 2. Precarium – one whereby the bailor may
or its equivalent. (Monte de Piedad v. Javier)
demand the thing loaned at will; exists in
cases where:
III. Kinds of Loan: In General a. neither the duration of the contract nor
the use to which the thing loaned should
Commodatum Mutuum be devoted has been stipulated
Ordinarily involves Involves money or b. if the use of the thing is merely tolerated
something not other consumable thing by the owner (Art 1947)
consumable*
(Art.1936) GENERAL RULE: In a commodatum, the right
to use is limited to the thing loaned, and not to
Ownership of the thing Ownership is
its fruits
loaned is retained by transferred to the
lender (Art.1933) borrower
Essentially gratuitous Maybe gratuitous or it EXCEPTION: When there is stipulation to the
(Art.1933) maybe onerous, i.e. contrary (Art.1940). In cases where there is
with stipulated interest such a stipulation, enjoyment of the fruits must
CIVIL LAW REVIEWER Chapter II. LOAN
be incidental to the use of the thing itself. 6. Solidary obligation where there are 2 or
Otherwise, if the use of the fruits is the main more bailees to whom a thing was loaned in
cause, the contract may be one of usufruct. the same contract (Art.1945)
(Art.562) _______
What is the effect of an accepted promise to GENERAL RULE: Bailee is not liable for loss or
deliver by way of commodatum or mutuum? damage due to a fortuitous event (Art.1174),
It is binding upon the parties, but the since the bailor retains ownership of the thing
contract of loan shall not be perfected until
delivery of the contract. (Art.1934) EXCEPTION: Bailee is liable even for loss due
to a fortuitous event when: (Art 1942)
Who may be bailor in commodatum? 1. He devotes the thing to any purpose
1. Anyone. The bailor in commodatum need different from that for which it was loaned
not be the owner of the thing loaned. 2. He keeps it longer than the period
(Art.1938) stipulated, or after the accomplishment of
2. But the bailee himself may not lend nor the use for which the commodatum has
lease the thing loaned to him to a third been constituted
person (Art 1939(2)) 3. The thing loaned has been delivered with
_______ appraisal of its value, unless there is
stipulation exempting the bailee from
GENERAL RULE: Commodatum is purely responsibility in case of a fortuitous event
personal in character (Art.1939) such that: 4. He lends or leases the thing to a third
1. Death of either party extinguishes the person who is a not a member of his
contract household
2. Bailee can neither lend nor lease the thing 5. Being able to save either the thing borrowed 310
lent to him to a third person or his own thing, he chose to save the latter.
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_______
EXCEPTION: Members of the bailee’s
household may make use of the thing loaned GENERAL RULE: Bailee is liable for
deterioration of thing loaned.
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turpitude, even though he should (non-consumable) things.
prove it, unless the crime or the act 2. In commodatum, the bailee is bound to
has been committed against the return the identical thing borrowed when the
bailee himself, his wife, or children time has expired or the purpose has been
under his authority served. In barter, the equivalent thing is
Undue refusal to give the bailor given in return for what has been received.
support when the bailee is legally or 3. Mutuum may be gratuitous and
morally bound to commodatum is always gratuitous. Barter
on the other hand is an onerous contract. It
[NOTE: Article 765 is applicable, because is really a mutual sale.
like donation, commodatum is essentially
gratuitous. (Art.1933, par.2)] [NOTE: BARTER – contract where by one of the
parties binds himself to give one thing in
2. To refund extraordinary expenses for the consideration of the other’s promise to give
preservation of the thing loaned provided another thing. (Art.1968)]
bailor is notified before the expenses were
incurred. (Art.1949) CONSUMABLE AND FUNGIBLE
EXCEPTION: Urgent need hence no DISTINGUISHED
notice is necessary. Whether a thing is consumable or not
depends on its nature and whether it is
3. To refund 50% of the extraordinary fungible or not depends on the intention of
the parties.
Example: Wine is consumable by nature, but
expenses arising from actual use of bailee of
the thing loaned (Art.1949)
EXCEPTION: Contrary stipulation it may be non-fungible if the intention is
merely for display or exhibition.
4. To pay damages to bailee for known hidden
flaws in the thing loaned. [NOTE: Fixed, savings, and current deposits of
money in banks and similar institutions shall be
[NOTE: Bailor has no right of abandonment; governed by the provisions concerning simple
he cannot exempt himself from payment of loan. (Art.1980)]
expenses to bailee by abandoning the thing to
the latter. (art. 1952)]
CIVIL LAW REVIEWER Chapter II. LOAN
CREDIT TRANSACTIONS
to have been reasonably ascertained). The
2. Upon judicial demand. HOWEVER, debtor
actual base for the computation of legal
is not liable to pay compound interest even
interest shall, in any case, be on the amount
after judicial demand when there is no
finally adjudged.
stipulation for payment of interest. (Art.2212)
3. When the judgment of the court awarding a
REQUISITES FOR INTEREST TO BE
sum of money becomes final and executory,
CHARGEABLE
the rate of legal interest, whether the case
1. Must be expressly stipulated
falls under paragraph 1 or paragraph 2,
2. Agreement must be in writing (Art.1956)
above, shall be 12% per annum from such
3. Must be lawful
finality until its satisfaction, this interim
period being deemed to be by then an
EXCEPTIONS TO REQUISITE OF EXPRESS
equivalent to a forbearance of credit.
STIPULATION
1. The debtor in delay is liable to pay legal
interest (6% or 12%) as indemnity for IX. The Usury Law
damages (Art.2209)
2. Interest accruing from unpaid interest – THE USURY LAW (Act No.2566) is an act fixing
Interest demanded shall earn interest from rates of interests upon loans and declaring the
the time it is judicially demanded (Art.2212) effect of receiving or taking usurious rates and
or where there is an express stipulation for other purposes. (Arevalo v. Dimayuga 49
(Art.1959) Phil 894)
RULES FOR AWARD OF INTEREST IN THE CB Circular No. 905 – abolished interest rate
CONCEPT OF ACTUAL & COMPENSATORY ceilings. Conversely, with the promulgation of
DAMAGES (Eastern Shipping Lines v. CA, 234 such circular, usury has become “legally
SCRA 78) inexistent” as the parties can now legally agree
1. When obligation is breached consists in on any interest that may be charged on the loan.
the payment of a sum of money, i.e., a
loan or forbearance of money, the interest ELEMENTS OF USURY
due should be that which may have been 1. A loan or forbearance of money
stipulated in writing. Furthermore, the 2. An understanding between parties that the
interest due shall itself earn legal interest loan shall and may be returned
CIVIL LAW REVIEWER Chapter II. LOAN
CREDIT TRANSACTIONS
borrowers or lead to a hemorrhaging of their
assets.”
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Judicial – takes place when an attachment or subject matter
seizure of property in litigation is ordered Depositor can demand Lender must wait until
(Arts.2005-2008) return of subject matter expiration of the period
at will granted to the debtor
Extrajudicial (Art. 1967) Both movable and Only money or any
1. Voluntary- delivery is made by the will of immovable may be the other fungible thing
the depositor or by two or more persons object may be the object
each of whom believes himself entitled to
the thing deposited; DEPOSIT AND COMMODATUM
2. Necessary- made in compliance with a legal DISTINGUISHED
obligation, or on the occasion of any
calamity, or by travelers in hotels and inns DEPOSIT COMMODATUM
(Arts.1996-2004) or by travelers with Principal purpose is Principal purpose is
common carriers (Arts.1734-1735) safekeeping transfer of use
May be gratuitous Always and essentially
gratuitous
III. Characteristics of Deposit In extrajudicial deposit, Both movable and
only movable immovable may be the
Characteristics— (corporeal) things may object.
1. Real Contract because it is perfected by the be the object. But for
judicial deposits, object
delivery of the subject matter. may be movable or
2. Principal purpose of the contract of deposit immovable.
is the safekeeping of the thing delivered.
3. If gratuitous, it is unilateral because only the
depository has an obligation. If onerous, it is V. Obligations of the Depositary
bilateral.
OBLIGATIONS
The principal purpose is safekeeping of the 1. Depositary is obliged to keep the thing
thing delivered, so that if it is only an accessory safely and to return it when required, even
or secondary obligation, deposit is not though a specified term may have been
constituted but some other contract. stipulated in the contract. (Art.1972)
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is not responsible for loss of thing without use the same (Art.1979)
negligence of the third person with whom he
was allowed to deposit the thing if such third 9. Where thing deposited is delivered
person is not “manifestly careless or unfit.” closed and sealed, depositary has
obligation to:
4. Depositary is obliged not to change way a. Return the thing deposited when
of deposit. He may change the way or delivered closed and sealed
manner of deposit only if there are b. Pay for damages should seal or lock be
circumstances indicating that the depositor broken through his fault, which is
would consent to the change and notice is presumed unless proven otherwise
given to depositor. HOWEVER, notice is not c. Keep secret of the deposit when the
required if delay will cause danger. seal or lock is broken, with or without his
(Art.1974) fault (Art.1982)
5. If thing deposited should earn interest, the 10. Depositary is obliged to return the
depositary is under obligation (1) to collect products, accessories and accessions of
the interest as it becomes due and (2) to the thing deposited. (Art.1983)
take such steps as may be necessary to
preserve its value and the rights 11. Depositary is obliged to pay interest on
corresponding to it. The depositary is bound sums converted to personal use.
to collect not only the interest but also the (Art.1983)
capital itself when due. (Art.1975)
12. Depositary who receives the thing in
6. Depositary has the obligation not to deposit cannot require that the depositor
commingle things deposited if so prove his ownership over the thing (Art.
stipulated, even if they are of the same kind 1984)
and quality. (Article 1976)
13. Where the thing appears to be stolen and
GENERAL RULE: The depositary is the depositary knows the true owner, he
permitted to commingle grain or other must advise the true owner about the
articles of the same kind and quality. deposit. If the owner, in spite of such
EXCEPTION: When there is a stipulation to information, does not claim it within the
the contrary period of one month, the depositary is
CIVIL LAW REVIEWER Chapter III. DEPOSIT
relieved from liability. (Art.1984, pars.2 and there was no malice on the part of the
3) If the depositary has reasonable grounds depositary
to believe that the thing has not been
lawfully acquired by the depositor, he may TIME OF RETURN (Art.1988)
return the same. (Art.1984, par.4) 1. GENERAL RULE: The thing deposited must
be returned to the depositor upon demand,
RIGHT OF TWO OR MORE DEPOSITORS even though a specified period or time for
(Art.1985) such return may have been fixed.
1. Where the thing is divisible and depositors 2. EXCEPTIONS:
not solidary – each one of the depositors a. When the thing is judicially attached
can demand only his share proportionate while in the depositary’s possession
thereto. b. When notified of the opposition of a third
2. Where the thing is not divisible or the person to the return or the removal of
obligation is solidary – rules on active the thing deposited
solidarity must apply
a. Each one of the depositors may do RIGHT OF THE DEPOSITARY TO RETURN
whatever may be useful to the others THE THING (Art.1989)
but not anything which may be 1. GENERAL RULE: The depositary may
prejudicial to the latter. (Art.1212) return the thing deposited notwithstanding
b. The depositary may return the thing to that a period has been fixed for the deposit
any one of the solidary depositors if:
UNLESS a demand for its return has a. The deposit is gratuitous;
been made by one of them in which b. The reason is justifiable.
case delivery should be made to him.
(Art. 1214) [NOTE: If the depositor refuses to receive 316
3. Where there is a stipulation of return to one the thing, the depositary may deposit the
CREDIT TRANSACTIONS
of the depositors, the depositary is bound to thing at the disposal of the judicial authority.]
return it only to the person designated
although he has not made any demand for 2. EXCEPTION: When the deposit is for a
its return. valuable consideration, the depositary has
no right to return the thing before the
PERSONS TO WHOM RETURN MUST BE expiration of the time designated even if he
MADE should suffer inconvenience as a
1. The depositary is obliged to return the thing consequence.
deposited, when required, to:
a. The depositor; Is the depositary liable for loss by force
b. To his heirs or successors; or majeure or government order?
c. To the person who may have been The depositary is not liable in cases of loss
designated in the contract. (Art.1972) by force majeure or by government order.
2. If the depositor was incapacitated at the time HOWEVER, he has the duty to deliver to the
of making the deposit, the property must be depositor money or another thing he
returned to: receives in place of the thing. (Art.1990)
a. His guardian or administrator;
b. To the person who made the deposit; ALIENATION IN GOOD FAITH BY
c. To the depositor himself should he DEPOSITARY’S HEIR
acquire capacity. (Art.1970) When alienation is done in GOOD FAITH, the
3. Even if the depositor had capacity at the heir is obliged to:
time of making the deposit but he 1. Return the value of the thing deposited
subsequently loses his capacity during the 2. Assign the right to collect from the buyer.
deposit, the thing must be returned to his
legal representative. (Art.1986) NOTE: The heir does not need to pay the
actual price of the thing deposited.
PLACE OF RETURN (Art.1987)
1. At the place agreed upon by the parties When alienation is done in BAD FAITH, the heir
2. In the absence of stipulation, at the place must:
where the thing deposited might be even if it 1. Be liable for damages;
should not be the same place where the 2. Pay the actual price of the thing deposited.
original deposit was made, provided that
CIVIL LAW REVIEWER Chapter III. DEPOSIT
CREDIT TRANSACTIONS
the term “baggage” or articles such as
dangerous character;
clothing as are ordinarily used by travelers
4. Depositary was aware of the danger without
2. Include those lost or damages in hotel
advice from the depositor.
annexes such as vehicles in the hotel’s
garage.
VII. Extinguishment of Deposit (Art. 1995) 2. In the following cases, the hotel- keeper is
liable
A deposit is extinguished:
1. Upon the loss or deterioration of the thing WHEN HOTEL-KEEPER LIABLE
deposited; Regardless of the amount of care exercised -
2. Upon the death of the depositary, ONLY in 1. The loss or injury to personal property is
gratuitous deposits; caused by his servants or employees as well
3. By other modes provided in the Civil Code, as by strangers (Art. 2000).
e.g. novation, merger, etc. (See Art.1231) 2. The loss is caused by the act of a thief or
robber done without the use of arms and
EFFECT OF DEATH OF DEPOSITOR OR irresistible force. (Art. 2001)
DEPOSITARY (Art. 1995)
1. Where deposit gratuitous – death of either of WHEN HOTEL-KEEPER NOT LIABLE
the depositor or depositary extinguishes the 1. The loss or injury is cause by force majeure,
deposit (personal in nature). By the word like flood, fire, (Art.2000) theft or robbery by
“extinguished,” the law really means that the a stranger - not the hotel-keeper’s servant or
depositary is not obliged to continue with the employee with the use of firearms or
contract of deposit. irresistible force (Art.2001)
2. (2) Where deposit for compensation – not
extinguished by the death of either party. EXCEPTION: Hotel- keeper is guilty of fault
or negligence in failing to provide against the
VIII. Necessary Deposit loss or injury from his cause. (Arts.1170 and
1174)
KINDS OF NECESSARY DEPOSITS 2. The loss is due to the acts of the guests, his
1. It is made in compliance with a legal family, servants, visitors (Art.2002)
obligation, in which case it is governed by 3. The loss arises from the character of the
the law establishing it, and in case of things brought into the hotel (Ibid.)
CIVIL LAW REVIEWER Chapter III. DEPOSIT
CREDIT TRANSACTIONS
IX. Judicial Deposit
EXTRAJUDICIAL JUDICIAL
(Voluntary) deposit made Constituted by virtue of a
by free will of the court order
depositor.
of law
Chapter IV. Guaranty c. Judicial – required by a court to
guarantee the eventual right of one of
I. DEFINITION the parties in a case.
II. CHARACTERISTICS 3. As to consideration:
III. CLASSIFICATION
a. Gratuitous – guarantor does not receive
IV. RULES GOVERNING GUARANTY
V. GUARANTY DISTIGUISHED FROM OTHERS any price or remuneration for acting as
VI. THE GUARANTOR such (2048)
VII. EFFECTS OF GUARANTY b. Onerous – one where the guarantor
VIII. EXTINGUISHMENT OF GUARANTY receives valuable consideration for his
guaranty
I. Definition 4. As to person guaranteed:
a. Single – constituted solely to guarantee
or secure performance by the debtor of
GUARANTY is a contract whereby a person, the principal obligation;
called the guarantor, binds himself to the creditor b. Double or sub-guaranty – constituted to
to fulfill the obligation of the principal debtor in secure the fulfillment by the guarantor of
case the latter should fail to do so. (Art. 2047) a prior guaranty
5. As to its scope and extent:
While a surety undertakes to pay if the principal a. Definite – where the guaranty is limited
does not pay, the guarantor only binds himself to the principal obligation only, or to a
to pay if the principal cannot pay (See benefit of specific portion thereof;
excussion, 2058). b. Indefinite or simple – where the
guaranty included all the accessory
II. Characteristics obligations of the principal, e.g. costs, 319
1. Accessory – dependent for its existence including judicial costs.
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upon the principal obligation guaranteed by
it; IV. Rules Governing Guaranty
2. Subsidiary and conditional – takes effect
only when the principal debtor fails in his 1. A guaranty is generally gratuitous (2048)
obligation a. General Rule: Guaranty is gratuitous
3. Unilateral – b. Exception: When there is a stipulation to
a. It gives rise only to a duty on the part of the contrary
the guarantor in relation to the creditor 2. On the cause of a guaranty contract
and not vice versa
b. It may be entered into even without the
SEVERINO v SEVERINO: “A guarantor or
intervention of the principal debtor.
surety is bound by the same consideration that
4. Guarantor must be a person distinct from
makes the contract effective between the
the debtor – a person cannot be the
principal parties thereto.”
personal guarantor of himself
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third person:
and demandable
a. Payment without the knowledge or
against the will of the debtor:
Guarantor can recover only insofar
Rationale: A contract of guaranty is
subsidiary.
as the payment has been beneficial
to the debtor
Guarantor cannot compel the
a. To secure the payment of a loan at
maturity – surety binds himself to
creditor to subrogate him in his
guarantee the punctual payment of a
rights
loan at maturity and all other obligations
b. Payment with knowledge or consent of
of indebtedness which may become due
the debtor: Subrogated to all the rights or owing to the principal by the
which the creditor had against the borrower.
debtor
b. To secure payment of any debt to be
subsequently incurred – a guaranty shall
5. The guaranty must be founded on a valid
be construed as continuing when by the
principal obligation (2052[1])
Guaranty is an accessory contract: It is
terms thereof it is evident that the object
is to give a standing credit to the
an indispensable condition for its
principal debtor to be used from time to
existence that there must be a principal
time either indefinitely or until a certain
obligation. Hence, if the principal
period, especially if the right to recall the
obligation is void, it is also void.
guaranty is expressly reserved.
c. To secure existing unliquidated debts –
6. A guaranty may secure the performance
refers to debts existing at the time of the
of a voidable, unenforceable, and natural
constitution of the guaranty but the
obligation (2052[2])
amount thereof is unknown and not to
A guaranty may secure the performance of
debts not yet incurred and existing at
a:
that time.
a. Voidable contract – such contract is d. The surety agreement itself is valid and
binding, unless it is annulled by a proper binding even before the principal
court action
obligation intended to be secured
b. Unenforceable contract – because such
thereby is born, any more than there
contract is not void
would be in saying that obligations
c. Natural obligation – the creditor may
which are subject to a condition
CIVIL LAW REVIEWER Chapter IV. GUARANTY
precedent are valid and binding before more than the total amount stipulated in
the occurrence of the condition the bond.
precedent.
Interest runs from:
A continuing guaranty is one which is not limited to a Filing of the complaint (upon judicial
single transaction, but which contemplates a future demand); or
course of dealing, covering a series of transactions, The time demand was made upon
generally for an indefinite time or until revoked. It is the surety until the principal
prospective in its operation and is generally intended obligation is fully paid (upon extra-
to provide security with respect to future transactions
judicial demand)
within certain limits, and contemplates a succession of
liabilities, for which, as they accrue, the guarantor
becomes liable. Rationale: Surety is made to pay, not by
reason of the contract, but by reason of
A continuing guaranty is one which covers all his failure to pay when demanded and for
transactions, including those arising in the future, having compelled the creditor to resort to
which are within the description or contemplation of the courts to obtain payment.
the contract, of guaranty, until the expiration or
termination thereof. A guaranty shall be construed as b. Penalty may be provided – a surety may
continuing when by the terms thereof it is evident that
be held liable for the penalty provided
the object is to give a standing credit to the principal
debtor to be used from time to time either indefinitely for in a bond for violation of the condition
or until a certain period, especially if the right to recall therein.
the guaranty is expressly reserved.
Principal’s liability may exceed
Where the contract of guaranty states that the same is guarantor’s obligations
to secure advances to be made "from time to time" 321
the guaranty will be construed to be a continuing one.” The amount specified in a surety bond
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as the surety’s obligation does not limit
8. A guaranty may secure the performance the extent of the damages that may be
of a conditional obligation (2053) recovered from the principal, the latter’s
a. Principal obligation subject to a liability being governed by theobligations
suspensive condition – the guarantor is he assumed under his contract
liable only after the fulfillment of the
condition. 10. The existence of a guaranty is not
b. Principal obligation subject to a presumed (2055)
resolutory condition – the happening of
the condition extinguishes both the Guaranty requires the expression of consent
principal obligation and the guaranty on the part of the guarantor to be bound. It
cannot be presumed because of the
9. A guarantor’s liability cannot exceed the existence of a contract or principal
principal obligation (2054) obligation.
its contents. However, It need not The subsequent loss of integrity or property or
appear in a public document supervening incapacity of the guarantor would
not operate to exonerate the guarantor of the
V. Guaranty Distinguished from Others eventual liability he has contracted, and the
contract of guaranty continues. The creditor can
merely demand another guarantor with the
GUARANTY DISTINGUISHED FROM
proper qualifications except that the creditor may
WARRANTY
waive such remedy if he chooses and hold the
guarantor to his bargain.
Guaranty Warranty
Guaranty is a contract Warranty is an
Selection of Guarantor:
by which a person is undertaking that the title,
bound to another for the quality, or quantity of the 1. Specified person stipulated as guarantor:
fulfillment of a promise subject matter of a Substitution of guarantor may not be
or engagement of a third contract is what is has demanded
party been represented to be,
and relates to some Reason: The selection of the guarantor is:
agreement made a. Term of the agreement;
ordinarily by the party b. As a party, the creditor is, therefore,
who makes the warranty bound thereby.
GUARANTY DISTINGUISHED FROM 2. Guarantor selected by the principal debtor:
SURETYSHIP Debtor answers for the integrity, capacity,
and solvency of the guarantor.
Guaranty Suretyship
Guarantor’s liability Surety assumes liability
depends upon an as a regular party to the
3. Guarantor personally designated by the 322
creditor: Responsibility of the selection
independent agreement undertaking
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to pay the obligation should fall upon the creditor because he
Guarantor’s engagement Surety is an original considered the guarantor to have the
is a collateral promissor qualifications for the purpose.
undertaking
Guarantor is subsidiarily Surety is primarily liable
liable i.e. only obliged to i.e. bound to pay if the VII. Effects of Guaranty
pay if the principal principal does not pay
cannot pay
EFFECTS OF GUARANTY BETWEEN THE
Guarantor not bound to Surety ordinarily held to
take notice of default of know every default of his GUARANTOR AND THE CREDITOR
his principal principal 1. The guarantor has the right to benefit
from excussion/ exhaustion (2058)
Guarantor often Surety not discharged
discharged by the mere either by the mere
indulgence of the indulgence of the Exceptions to the benefit of excussion
creditor and is usually creditor or by want of (2059)
a. As provided in Art. 2059:
If the guarantor has expressly
not liable unless notified notice of default of the
of the principal’s default principal
renounced it; waiver is valid but it
must be made in express terms.
VI. The Guarantor (Arts. 2056-2057) If he has bound himself solidarily
with the debtor, the liability assumed
is that of a surety. The guarantor
Qualifications:
becomes primarily liable as a
1. He possesses integrity;
solidary co- debtor. In effect, he
2. He has capacity to bind himself;
renounces in the contract itself the
3. He has sufficient property to answer for the
benefit of exhaustion.
In case of insolvency of the debtor –
obligation which he guarantees.
guarantor guarantees the solvency
Exception: The creditor waives the
of the debtor. If the debtor becomes
requirements
insolvent, the liability of the
guarantor as the debtor cannot fulfill
The qualifications above need only be present at
his obligation
When he (debtor) has absconded,
the time of the perfection of the contract.
CIVIL LAW REVIEWER Chapter IV. GUARANTY
CREDIT TRANSACTIONS
given as special security for the payment of the
principal obligation.” 3. The creditor has the duty to make prior
demand for payment from the guarantor
(2060)
LUZON STEEL CORP. v SIA: “The surety in the a. The demand is to be made only after
present case bound itself "jointly and severally" judgment on the debt
(in solidum) with the defendant; and excussion b. Joining the guarantor in the suit against
(previous exhaustion of the property of the the principal debtor is not the demand
debtor) shall not take place "if he (the guarantor) intended by law. Actual demand has to
has bound himself solidarily with the debtor".” be made.
b. If he does not comply with Art. 2060: In 4. The guarantor has the duty to set up the
order that the guarantor may make use benefit of excussion (2060)
of the benefit of excussion, he must: As soon as he is required to pay,
Set it up against the creditor upon guarantor must also point out to the
the latter’s demand for payment creditor available property (not in
from him;
Point out to the creditor:
litigation or encumbered) of the debtor
within the Philippines.
o Available property of the debtor
– the guarantor should facilitate 5. The creditor has the duty to resort to all
the realization of the excussion legal remedies (2061)
since he is the most interested a. After the guarantor has fulfilled the
in its benefit. conditions required for making use of
o Within the Philippine territory – the benefit of exhaustion, it becomes the
excussion of property located duty of the creditor to:
abroad would be a lengthy and b. Exhaust all the property of the debtor
extremely difficult proceeding pointed out by the guarantor;
and would not conform with the c. If he fails to do so, he shall suffer the
purpose of the guaranty to loss but only to the extent of the value of
provide the creditor with the the said property, for the insolvency of
means of obtaining the the debtor
fulfillment of the obligation.
o Sufficient to cover the amount of
CIVIL LAW REVIEWER Chapter IV. GUARANTY
6. The creditor has the duty to notify the the subrogation clause of Article 2067. The
guarantor in the action against the debtor assumption, however, is that the guarantor
(2062) who is subrogated to the rights of the
creditor, has the right to be reimbursed for
Under this article, notice to the guarantor is his answering for the obligation of the
mandatory in the action against the principal debtor. Absent this right of reimbursement,
debtor. The guarantor, however, is not duty subrogation will not be proper.
bound to appear in the case, and his non-
appearance shall not constitute default, w/ 2. The guarantor has the duty to notify the
its consequential effect. debtor before paying the creditor (2068).
CREDIT TRANSACTIONS
8. Co-guarantors are entitled to the benefit General rule: Since a contract of guaranty is
of division (2065) only subsidiary, the guarantor cannot be
The benefit of division applies only when liable for the obligation before the period on
there are several guarantors and one which the debtor’s liability will accrue. Any
debtor for a single debt. Except when payment made by the guarantor before the
solidarity has been stipulated among the obligation is due cannot be indemnified by
co-guarantors, a co- guarantor is liable the debtor.
only to the extent of his share in the
obligation as divided among all the co- Exception: Prior consent or subsequent
guarantors. ratification by the debtor
EFFECTS OF GUARANTY BETWEEN THE 4. The guarantor may proceed against the
DEBTOR AND THE GUARANTOR debtor even before payment has been made
(2071)
1. The guarantor has the right to be
subrogated to the rights of the creditor General rule: Guarantor has no cause of
(2067) action against the debtor until after the
A guarantor who pays the debt is entitled to former has paid the obligation.
every remedy which the creditor has against
the principal debtor, to enforce every Exceptions:
security and all means of payments; to stand a. When he is sued for the payment;
in the place of the creditor not only through b. In case of insolvency of the principal
the medium of the contract, but even by debtor;
means of the securities entered into w/out c. When the debtor has bound himself to
the knowledge of the surety; having the right relieve him from the guaranty within a
to have those securities transferred to him specified period, and this period has
though there was no stipulation for it, and to expired;
avail himself of all securities against the d. When the debt has become
debtor demandable, by reason of the expiration
of the period for payment;
The need to enforce the provisions on e. After the lapse of 10 years, when the
indemnity in Article 2066 forms the basis for principal obligation has no fixed period
CIVIL LAW REVIEWER Chapter IV. GUARANTY
CREDIT TRANSACTIONS
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.
CREDIT TRANSACTIONS
BONDSMAN NOT ENTITLED TO
EXCUSSION (2084)
SURETYSHIP is a relation which exists where 5. Prior demand by the creditor upon
one person (principal) has undertaken an principal not required. Surety is not
obligation and another person (surety) is also exonerated by neglect of creditor to sue
under a direct and primary obligation or other principal.
duty to the obligee, who is entitled to but one
performance, and as between the two who are STRICTISSIMI JURIS RULE APPLICABLE
bound, the second, rather than the first should ONLY TO ACCOMMODATION SURETY
perform.
Reason: An accommodation surety acts
If a person binds himself solidarily with the without motive of pecuniary gain and hence,
principal debtor, the contract is called suretyship should be protected against unjust
and the guarantor is called a surety. pecuniary impoverishment by imposing on
the principal, duties akin to those of a
fiduciary. This rule will apply only after it has
NATURE OF SURETY’S UNDERTAKING been definitely ascertained that the contract
1. Liability is contractual and accessory but is one of suretyship or guaranty.
direct
2. Liability is limited by terms of contract
3. Liability arises only if principal debtor is STRICTISSIMI JURIS RULE NOT
held liable APPLICABLE TO COMPENSATED SURETIES
a. In the absence of collusion, the surety is Reasons:
bound by a judgment against the 1. Compensated corporate sureties are 327
principal event though he was not a business association organized for the
CREDIT TRANSACTIONS
party to the proceedings; purpose of assuming classified risks in large
b. The creditor may sue, separately or numbers, for profit and on an impersonal
together, the principal debtor and the basis.
surety; 2. They are secured from all possible loss by
c. A demand or notice of default is not adequate counter-bonds or indemnity
required to fix the surety’s liability agreements.
d. Exception: Where required by the 3. Such corporations are in fact insurers and in
provisions of the contract of suretyship determining their rights and liabilities, the
e. A surety bond is void where there is not rules peculiar to suretyship do not apply.
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.
collect.
Chapter VII. Pledge, Mortgage,
Antichresis
MANILA SURETY V VELAYO: The accessory
character is of the essence of pledge and
I. ESSENTIAL REQUISITES COMMON TO mortgage. As stated in Art 2085 CC, an
PLEDGE AND MORTGAGE
essential requisite of these contracts is that they
II. PLEDGE
III. MORTGAGE be constituted to secure the fulfillment of a
IV. FORECLOSURE OF MORTGAGE principal obligation
V. ANTICHRESIS
VI. CHATTEL MORTGAGE 2. Creditor cannot appropriate to himself the
thing nor can he dispose of the same as
I. Essential Requisites Common to owner.
Pledge and Mortgage (Art. 2085)
PROHIBITION AGAINST PACTUM
COMMISSORIUM (Art. 2088)
ESSENTIAL REQUISITES COMMON TO
1. Stipulation is null and void: Stipulation where
PLEDGE AND MORTGAGE (Art. 2085)
thing or mortgaged shall automatically
1. Constituted to secure the fulfillment of a
become the property of the creditor in the
principal obligation.
event of nonpayment of the debt within the
2. Pledgor or mortgagor must be the absolute
term fixed.
owner of the thing pledged or mortgaged.
2. Requisites of pactum commissorium:
3. The persons constituting the pledge or
a. Pledge or mortgage.
mortgage have the free disposal of their
b. A stipulation for an automatic
property, and in the absence thereof, that
appropriation by the creditor of the
they be legally authorized for the purpose.
property in the event of nonpayment. 328
4. Cannot exist without a valid obligation.
3. Effect on security contract: Nullity of the
CREDIT TRANSACTIONS
5. Debtor retains the ownership of the thing
stipulation does not affect validity and
given as a security.
efficacy of the principal contract.
6. When the principal obligation becomes due,
the thing pledged or mortgaged may be
IMPORTANT POINTS
alienated for the payment to the creditor.
1. Debtor-owner bears the risk of loss of the
property.
IMPORTANT POINTS
2. Pledge or mortgage is indivisible (2089,
1. Future property cannot be pledged or
2090).
mortgaged.
Exceptions:
2. Pledge or mortgage executed by one who is
a. Where each of several things
not the owner of the property pledged or
guarantees a determinate portion of the
mortgaged is without legal existence and
credit.
registration cannot validate it.
b. Where only a portion of loan was
3. Mortgage of a conjugal property by one of
released.
the spouses is valid only as to ½ of the
c. Where there was failure of
entire property.
consideration.
4. In case of property covered by Torrens title,
a mortgagee has the right to rely upon what
3. Rule that real property, consisting of several
appears in the certificate of title and does
lots should be sold separately, applies to
not have to inquire further.
sales in execution, and not to foreclosure of
5. Pledgor or mortgagor has free disposal of
mortgages.
property.
4. The mere embodiment of a real estate
6. Thing pledged or mortgaged may be
mortgage and a chattel mortgage in one
alienated.
document does not have the effect of fusing
7. Creditor not required to sue to enforce his
both securities into an indivisible whole.
credit.
8. Pledgor or mortgagor may be a third person.
UY TONG v CA: The 2 elements for pactum
RIGHT OF CREDITOR WHERE DEBTOR commissorium to exist:
FAILS TO COMPLY WITH HIS OBLIGATION (1) that there should be a pledge or mortgage
1. Creditor is merely entitled to move for the wherein a property is pledged or mortgaged by
sale of the thing pledged or mortgaged with way of security for the payment of the principal
the formalities required by law in order to obligation; (2) that there should be a stipulation
CIVIL LAW REVIEWER Chapter VII. PLEDGE, MORTGAGE, ANTICHRESIS
for an automatic appropriation by the creditor of mortgage becomes unenforceable to the extent
the thing pledged or mortgaged in the event of of such failure. Where the indebtedness actually
non-payment of the principal obligation within owing to the holder of the mortgage is less than
the stipulated period. the sum named in the mortgage, the mortgage
cannot be enforced for more than the actual sum
5. Pledge or mortgage may secure all kinds of due.
obligation, be they pure or subject to
suspensive or resolutory conditions (2091). The rule of indivisibility of the mortgage as
6. A promise to constitute pledge or mortgage outlined by Article 2089 above-quoted
creates no real right, only a personal right presupposes several heirs of the debtor or
binding upon the parties, only right of action creditor which does not obtain in this case.
to compel the fulfillment of the promise but Hence, the rule of indivisibility of a mortgage
there is no pledge or mortgage yet (2092). cannot apply.
7. Under the RPC, estafa is committed by a
person who, pretending to be the owner of BELO vs. PNB: From Art. 2089 is excepted the
any real property, shall convey, sell, case in w/c, there being several things given in
encumber or mortgage the same knowing mortgage or pledge, each one of them
that the real property is encumbered and guarantees only a determinate portion of the
shall dispose of the same as credit. The debtor, in this case, shall have a right
unencumbered. It is essential that fraud or to the extinguishment of the pledge or mortgage
deceit be practiced upon the vendee at the as the portion of the debt for w/c each thing is
time of the sale. specially answerable is satisfied. From the
wordings of the law, indivisibility arises only
II. Pledge when there is a debt, that is, there is a debtor-
creditor relationship. 329
PLEDGE is a contract by virtue of which the
CREDIT TRANSACTIONS
debtor delivers to the creditor or to a third person CHARACTERISTICS
a movable or document evidencing incorporeal 1. Real – Perfected by delivery.
rights for the purpose of securing the fulfillment 2. Accessory – Has no independent existence
of a principal obligation with the understanding of its own.
that when the obligation is fulfilled, the thing 3. Unilateral – Creates obligation solely on the
delivered shall be returned with all its fruits and part of the creditor to return the thing subject
accessions. (Art.2085 in rel to 2093) upon the fulfillment of the principal
obligation.
KINDS 4. Subsidiary – Obligation incurred does not
1. Voluntary or conventional – Created by arise until the fulfillment of the principal
agreement of parties. obligation.
2. Legal – Created by operation of law.
CAUSE OR CONSIDERATION
CENTRAL BANK vs. CA: The consideration of 1. Principal obligation – In so far as the pledgor
the accessory contract of real estate mortgage is is concerned.
the same as that of the principal contract. For 2. Compensation stipulated for the pledge or
the debtor, the consideration of his obligation to mere liberality of the pledgor – If pledgor is
pay is the existence of a debt. Thus, in the not the debtor.
accessory contract of real estate mortgage, the
consideration of the debtor in furnishing the PROVISIONS APPLICABLE ONLY TO
mortgage is the existence of a valid, voidable, or PLEDGE
unenforceable debt (Art. 2086, in relation to Art. 1. Transfer of possession to the creditor or to
2052, of the Civil Code). third person by common agreement is
essential in pledge (2093).
It is not necessary that any consideration should a. Actual delivery is important.
pass at the time of the execution of the contract b. Constructive or symbolic delivery of the
of real mortgage. It may either be a prior or key to the warehouse is sufficient to
subsequent matter. But when the consideration show that the depositary appointed by
is subsequent to the mortgage, the mortgage common consent of the parties was
can take effect only when the debt secured by it legally placed in possession.
is created as a binding contract to pay. And, 2. All movables within the commerce of man
when there is partial failure of consideration, the may be pledged as long as they are
CIVIL LAW REVIEWER Chapter VII. PLEDGE, MORTGAGE, ANTICHRESIS
CREDIT TRANSACTIONS
type of delivery will depend upon the nature and
RIGHTS AND DUTIES OF CREDITOR IN A the peculiar circumstances of each case.
PLEDGE
1. Shall take care of the thing pledged with the
diligence of a good father of a family (2099). PNB vs. ATENDIDO: according to law, a
2. Has right to reimbursement of the expenses pledgee cannot become the owner of, nor
made for preserving the thing. Shall be liable appropriate to himself, the thing given in pledge.
for loss or deterioration of the thing by If by the contract of pledge the pledgor continues
reason of fraud, negligence, delay or to be the owner of the thing pledged during the
violation of the terms of the contract, but not pendency of the obligation, it stands to reason
for fortuitous events (2099). that in case of loss of the property, the loss
3. May bring actions pertaining to the owner of should be borne by the pledgor.
the thing in order to recover it from, or
defend it against, a 3rd person (2103). 3. Subject to the right of the pledge under article
4. Cannot use the thing without the authority of 2108, pledgor is allowed to substitute the
the owner. If he uses the thing without thing which is in danger of destruction or
authority, or if he misuses the thing when he impairment without any fault on the part of
was authorized to use it, the owner may ask the pledgee with another thing of the same
that it be judicially or extrajudicially kind and quality (2107).
deposited (2104). 4. May require that the thing be deposited with
5. May use the thing if necessary for its a 3rd person, if through the negligence or
preservation (2104). willful act of the pledgee the thing is in danger
6. May either claim another thing in pledge or of being lost or impaired (2106).
demand immediate payment of the principal
obligation if he is deceived on the substance EXTINGUISHMENT OF A PLEDGE
or quality of the thing (2109). 1. Ways to extinguish a pledge:
a. Payment of the debt.
THE PLEDGEE b. Sale of the thing pledged at public
1. Cannot deposit the thing pledged with a 3rd auction.
person, unless there is a contrary stipulation c. Thing pledged is returned by the
(2100). pledgee to the pledgor or owner (2110).
2. Is responsible for the acts of his agents or d. Written statement by the pledgee that he
employees with respect to the thing pledged renounces or abandons the pledge.For
CIVIL LAW REVIEWER Chapter VII. PLEDGE, MORTGAGE, ANTICHRESIS
this purpose, neither the acceptance by Useful expenses shall be refunded only to
the pledgor or owner nor the return of the possessor in good faith with the
the thing pledged is necessary, and the same right of retention, the person who
pledgee becomes a depositary (2111). has defeated him in the possession
2. Presumptions: having the option of refunding the
a. If, subsequent to the perfection of the amount of the expenses or of paying the
pledge, the thing is found in the increase in value which the thing may
possession of the pledgor or owner, have acquired and by reason thereof
there is prima facie presumption that the (Art. 546)
thing has been returned by the pledge 2. He who has executed work upon a movable
(2110). has a right to retain it by way of pledge until
b. If the thing is in the possession of a 3rd he is paid. This is called the mechanic’s
person who received it from the pledgor lien. (Art. 1731)
or owner after the constitution of the 3. 3) The agent may retain the things which are
pledge, there is prima facie presumption the objects of agency until the principal
that the thing has been returned by the effects the reimbursement and pays the
pledge (2110). indemnity. This is called the agent’s lien.
(Art. 1914)
REQUIREMENTS IN SALE OF THE THING 4. 4) The laborer’s wages shall be a lien on the
PLEDGED BY A CREDITOR, IF CREDIT IS goods manufactured or the work done.
NOT PAID ON TIME (Art 2112) 5. (Art. 1707)
1. Debt is due and unpaid.
2. Sale must be at a public auction. NOTE:
3. Notice to the pledgor and owner, stating the 1. In legal pledges, the remainder of the price
amount due. of the sale shall be delivered to the obligor. 331
4. Sale must be made with the intervention of a 2. Public auction of legal pledges may only be
CREDIT TRANSACTIONS
notary public. executed after demand of the amount for
5. If at the first auction the thing is not sold, a which the thing is retained. It shall take
second one with the same formalities shall place within one month after the demand,
be held. otherwise the pledgor may demand the
6. If at the second auction, there is no sale return of the thing pledged, provided s/he is
either, the creditor may appropriate the thing able to show that the creditor did not cause
pledged but he shall give an acquittance the public sale without justifiable grounds.
(release) for his entire claim. (Article 2122)
OBJECTS OF REAL MORTGAGE (Art. 2124) Central Bank v CA: Where only a portion of the
1. Immovables loan is released, the mortgage becomes
2. Alienable real rights over immovables. enforceable only as to the proportionate value of
332
the loan
Future property cannot be object of mortgage;
CREDIT TRANSACTIONS
however, a stipulation subjecting to the Indivisibility applies only as to
mortgage improvements which the mortgagor pledgors/mortgagors who are themselves
may subsequently acquire, install or use in debtors in the principal obligation, and not to
connection with real property already mortgaged accommodation pledgors / mortgagors
belonging to the mortgagor is valid.
"When several things are pledged or mortgaged,
KINDS each thing for a determinate portion of the debt,
1. Voluntary – constituted by the will of the the pledges or mortgage, are considered
owner of the property on which it is created separate from each other. But when the several
2. Legal – required by law to be executed in things are given to secure the same debt in its
favor of certain persons: entirety, all of them are liable for the debt, and
a. Persons in whose favor the law the creditor does not have to divide his action by
establishes a mortgage have no other distributing the debt among the various things
right than to demand the execution and pledged or mortgaged. Even when only a part of
recording of the document in which the the debt remains unpaid, all the things are still
mortgage is formalized (Article 2125) liable for such balance." (Tolentino)
b. The bondsman who is to be offered in
virtue of a provision of law or of a judicial ESSENTIAL REQUISITES
order shall have the qualifications 1. Constituted to secure the fulfillment of a
prescribed in Art 2056 (integrity, principal obligation.
capacity to bind himself, and sufficient 2. Mortgagor must be the absolute owner of
property to answer the obligation), an in the thing mortgaged.
other laws (Article 2082) 3. The persons constituting the mortgage have
c. If the person bound to give a bond free disposal of the property; in the absence
should not be able to do so, a pledge or thereof, they should be legally authorized for
mortgage considered sufficient to the purpose. (Article 2085)
recover his obligation shall be admitted 4. Cannot exist without a valid obligation. (Art.
in lieu thereof (Article 2083) 2086 cf 2052)
5. When the principal obligation becomes due,
3. Equitable – One which, although lacking the the thing in which the mortgage consists
proper formalities of a mortgage, shows the may be alienated for payment to the
intention of the parties to make the property creditor. (Art. 2087)
CIVIL LAW REVIEWER Chapter VII. PLEDGE, MORTGAGE, ANTICHRESIS
6. Must appear in a public document duly when the obligation becomes DUE,
recorded in the Registry of Property, to be including indemnity from insurance, and / or
validly constituted. (Art. 2125) amount received from expropriation for
In a legal mortgage, the persons in whose public use (Art. 2127)
favor the law establishes a mortgage a. Applies only when the accessions and
have the right to demand the execution accessories subsequently introduced
and recording of a document formalizing belongs to the mortgagor.
the mortgage. (Art. 2125, par. 2) b. To exclude them, there must be an
express stipulation, or the fruits must be
EFFECTS collected before the obligation becomes
1. Creates real rights, a lien inseparable from due.
the property mortgaged, enforceable against c. Third persons who introduce
the whole world. improvements upon the mortgaged
2. Creates merely an encumbrance. property may remove them at any time
CREDIT TRANSACTIONS
1. It creates a real right, a lien inseparable from 2125, CC).
the property mortgaged
2. If a person is the first mortgagee over a Registration only operates as a notice of the
property sold in an auction sale by the mortgage to others, but neither adds to its
second mortgagee, the only right left to him validity nor convert an invalid mortgage into a
is to collect his mortgage credit from the valid one between the parties. In Gurbax Singh
proceeds of the sale (by virtue of merger of Pabla vs. Reyes, SC ruled that "if the purpose of
rights, Art 1275). registration is merely to give notice, the
3. The first mortgagee has superior rights over questions regarding the effect or invalidity of
junior mortgagees / attaching creditors instruments are expected to be decided after,
not before, registration. It must follow as a
IMPORTANT POINTS necessary consequence that registration must
1. As a general rule, the mortgagor retains first be allowed and validity or effect litigated
possession of the property. He may deliver afterwards".
said property to the mortgagee without
altering the nature of the contract of INCIDENTS OF REGISTRATION OF
mortgage. MORTGAGE
2. It is not an essential requisite that the
1. Mortgagee is entitled to registration of
principal of the credit bears interest, or that
mortgage as a matter of right.
the interest as compensation for the use of
2. Proceedings for registration do not
the principal and the enjoyment of its fruits
determine validity of the mortgage or its
be in the form of a certain percentage effect
thereof. 3. Registration is without prejudice to better
3. Mortgage creates an encumbrance over the
rights of third parties.
property, but ownership of the property is
4. Mortgage deed, once duly registered, forms
not parted with. It merely restricts the
part of the records for the registration of the
mortgagor’s jus disponendi over the
mortgaged property.
property. The mortgagor may still sell the 5. Mortgage by a surviving spouse of his/her
property, and any stipulation to the contrary undivided share in the conjugal property can
is void (Art. 2130)
be registered.
4. Mortgage extends to the natural accessions,
to the improvements of growing fruits and
the rents or income NOT YET RECEIVED
CIVIL LAW REVIEWER Chapter VII. PLEDGE, MORTGAGE, ANTICHRESIS
CREDIT TRANSACTIONS
satisfaction of the obligation secured by the the payment of the:
mortgage. a. Costs of the sale;
b. Amount due the mortgagee;
In General: An action for foreclosure of a c. Claims of junior encumbrancers or
mortgage is limited to the amount mentioned persons holding subsequent mortgages
in the mortgage, EXCEPT when the in the order of their priority; and
mortgage contract intends to secure future d. Balance, if any shall be paid to the
loans or advancements mortgagor.
BLANKET mortgage / DRAGNET–
mortgage that subsumes all debts of past or NATURE OF JUDICIAL FORECLOSURE
future origin PROCEEDINGS:
Mortgage may be used as a “continuing 1. Quasi in rem action. Hence, jurisdiction may
security” which secures future be acquired through publication.
advancements and is not discharged by the 2. Foreclosure is only the result or incident of
repayment of the amount in the mortgage the failure to pay debt.
Alienation or assignment of mortgage credit 3. Survives death of mortgagor.
is valid even if it is not registered
EXTRAJUDICIAL FORECLOSURE(Act No.
ACCELERATION CLAUSE, or the stipulation 3135)
stating that on the occasion of the mortgagor’s 1. Applies to mortgages where the authority to
default, the whole sum remaining unpaid foreclose is granted to the mortgagee.
automatically becomes due and demandable, is 2. Authority is not extinguished by death of
ALLOWED mortgagor or mortgagee. This is an agency
coupled with interest.
KINDS OF FORECLOSURE 3. Public sale should be made after proper
1. Judicial Foreclosure notice to the public, otherwise it is a
2. Extrajudicial Foreclosure jurisdictional defect which could render the
sale voidable.
JUDICIAL FORECLOSURE 4. There is no need to notify the mortgagor.
Rule 68, ROC: Proper notice consists of:
May be availed of by bringing an action in a. posting notice in three public places
the proper court which has jurisdiction over and / or
the area wherein the real or personal (in b. publication in newspaper of general
CIVIL LAW REVIEWER Chapter VII. PLEDGE, MORTGAGE, ANTICHRESIS
CREDIT TRANSACTIONS
required to post a bond equal to the value of WAIVER OF SECURITY BY CREDITOR
the mortgagee’s claim. 1. Mortgagee may waive right to foreclose his
8. Republication is of the notice of sale mortgage and maintain a personal action for
necessary for validity of postponed recovery of the indebtedness.
extrajudicial sale 2. Mortgagee cannot have both remedies.
9. In foreclosure of real estate mortgage under
Act 3135, the buyer at auction may petition REDEMPTION
the land registration court for a writ of 1. It is a transaction by which the mortgagor
possession pending the one-year period of reacquires the property which may have
redemption of the foreclosedproperty. passed under the mortgage or divests the
property of the lien which the mortgage may
Nature of power of foreclosure by have created
extrajudicial sale: 2. Kinds:
1. Conferred for mortgagee’s protection. a. Equity of redemption: in judicial
2. An ancillary stipulation. foreclosure of real estate mortgage
3. A prerogative of the mortgagee. under the ROC, it is the right of the
mortgagor to redeem the mortgaged
Note: property by paying the secured debt
a. Both should be distinguished from within the 120 day period from entry of
execution sale governed by Rule 39, judgment or after the foreclosure sale,
ROC. but before the sale of the mortgaged
b. Foreclosure retroacts to the date of property or confirmation of sale
registration of mortgage. formal offer to redeem preserves the
c. A stipulation of upset price, or the right of redemption, e.g., by filing an
minimum price at which the property action to enforce the right to redeem
shall be sold to become operative in the
event of a foreclosure sale at public b. Right of redemption: in extrajudicial
auction, is null and void. foreclosure of real estate mortgage, the
right of the mortgagor to redeem the
RIGHT OF MORTGAGEE TO RECOVER property within a certain period after it
DEFICIENCY was sold for the satisfaction of the debt.
1. Mortgagee is entitled to recover deficiency. For natural persons – one year from
2. If the deficiency is embodied in a judgment, the registration of the TCT
CIVIL LAW REVIEWER Chapter VII. PLEDGE, MORTGAGE, ANTICHRESIS
CREDIT TRANSACTIONS
to apply then to the payment of the interest, if b. A stipulation authorizing the antichretic
owing, and thereafter to the principal of the creditor to appropriate the property upon
credit (Art 2132) the non-payment of the debt within the
agreed period is void (Art. 2088)
CHARACTERISTICS
1. Accessory contract – it secures the VI. Chattel Mortgage
performance of a principal obligation
2. formal contract – it must be in a specified
CHATTEL MORTGAGE is a contract by virtue
form to be valid (Art. 2134)
of which a personal property is recorded in the
SPECIAL REQUISITES: Chattel Mortgage Register as security for the
performance of an obligation.
1. it can cover only the fruits of an immovable
property
If the movable, instead of being recorded, is
2. delivery of the immovable is necessary for
delivered to the creditor, it is pledge and not
the creditor to receive the fruits and not that
chattel mortgage.
the contract shall be binding
3. amount of principal and interest must be
LAWS GOVERNING CHATTEL MORTGAGE
specified in writing
4. express agreement that debtor will give 1. Chattel Mortgage Law (Act.1508, as
possession of the property to creditor and amended).
2. New Civil Code.
that the latter will apply the fruits to the
3. Revised Administrative Code.
interest, if any, then to the principal of his
4. Revised Penal Code.
credit
5. Ship Mortgage Decree of 1978 (PD 1521)
5. NOTE: The obligation to pay interest is not
of the essence of the contract of antichresis; governs mortgage of vessels of domestic
there being nothing in the Code to show that ownership.
antichresis is only applicable to securing the
AFFIDAVIT OF GOOD FAITH
An oath in a contract of chattel mortgage
payment of interest-bearing loans. On the
contrary, antichresis is susceptible of
guaranteeing all kinds of obligations, pure or wherein the parties "severally swear that the
conditional mortgage is made for the purpose of
securing the obligation specified in the
conditions thereof and for no other purposes
CIVIL LAW REVIEWER Chapter VII. PLEDGE, MORTGAGE, ANTICHRESIS
and that the same is a just and valid RIGHT OF MORTGAGEE TO RECOVER
obligation and one not entered into for the DEFICIENCY
purpose of fraud. 1. Where mortgage foreclosed: Creditor may
maintain action for deficiency although the
EFFECT OF REGISTRATION Chattel Mortgage Law is silent on this point,
1. Creates real rights. because a chattel mortgage is given only as
2. Adds nothing to mortgage. a security and not as payment of the debt.
2. Where mortgage constituted as security for
Note: Registration of assignment of mortgage is purchase of personal property payable in
not required. installments: No deficiency judgment can be
asked and any contrary agreement shall be
RIGHT OF REDEMPTION OF MORTGAGE void.
1. When the condition of a chattel mortgage is 3. Where mortgaged property subsequently
broken, the following may exercise attached and sold: Mortgagee is entitled to
redemption: deficiency judgment in an action for specific
a. Mortgagor. performance.
b. Person holding a subsequent mortgage.
c. Subsequent attaching creditor. APPLICATION OF PROCEEDS OF SALE
2. An attaching creditor who so redeems shall 1. Costs and expenses of keeping and sale.
be subrogated to the rights of the mortgagee 2. Payment of the obligation.
and entitled to foreclose the mortgage in the 3. Claims of persons holding subsequent
same manner as a mortgagee. mortgages in their order.
3. Redemption is made by paying or delivering 4. Balance, if any, shall be paid to the
to the mortgagee the amount due on such mortgagor, or person holding rights under
mortgage and the costs and expenses him. 337
incurred by such breach of condition before
CREDIT TRANSACTIONS
the sale.
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.
CREDIT TRANSACTIONS
property to which the preference refers.
155, CC)
Right to receive support, as well as
2. If there are 2 or more credits with respect to
the same specific movable property, they
money or property obtained by such shall be satisfied pro rata, after the payment
support, shall not be levied upon on of duties, taxes and fees due the State or
attachment or execution. (Art. 205, any subdivision thereof
CC)
Sec. 13, Rule 39, ROC.
3. Those credits which enjoy preference in