MIDTERMS COVERAGE As to origin: a.

Conventional - by stipulation of
the parties
b. Legal - by operation of law
December 10, 2015 (1st Hour) c. Judicial - required by order of
court
Transcribed by: Florienne Melendrez
As to a. Gratuitous: guarantor does not
GUARANTY AND SURETYSHIP
consideration: receive any price or
remuneration for acting as a
Article 2047. By guaranty a person, called the guarantor,
guaranty; no consideration
binds himself to the creditor to fulfill the obligation of the
involved; the guarantor
principal debtor in case the latter should fail to do so.
undertakes the fulfilment of the
obligation and he does not
If a person binds himself solidarily with the principal debtor,
receive anything in return
the provisions of Section 4, Chapter 3, Title I of this Book
b. Onerous: gurantor receives a
shall be observed. In such case the contract is called a
valuable consideration for his
suretyship. (1822a)
acting as gurantor

When you talk about guaranty, you can classify it into two. You have: As to the person a. Single: constituted solely to
guaranteed: guarantee the performance by
1. Personal guaranty also known as unsecured the debtor of the principal
When you talk about contract of personal guaranty or obligation. Only one obligation
security, there is no object involved. It is just a person is guaranteed.
considered as a guarantor and the creditor merely takes b. Double or sub-guaranty: we
into consideration the reputation, credit and standing of this already have an existing
guarantor without reference to any other object. So it is guaranty, a guarantor who
merely supported by the promise to pay or the personal secures the payment of the
commitment of a guarantor or surety. principal obligation. However,
there is a sub-guarantor
2. Real contract of security/Real security constituted to secure the
Here, there is an object which secures the performance or fulfillment by the guarantor of
payment of the obligation. a prior guaranty.
A contract of guaranty or suretyship is a personal
guaranty to be distinguished from contracts of pledge, As to its scope a. Definite: limited to the principal
mortgages and antichresis because in those instances you and content: obligation only or to a specific
have a real property which acts as a security for the portion thereof
principal obligation. b. Indefinite or simple: includes
not only the principal obligation
but also all its accessories
Now, two kinds of contracts under Art. 2047: including penalties, judicial
costs and even continuing and
1. Contract of Guaranty future obligation.
2. Contract of Suretyship

Parties involved:
1. Principal creditor
2. Principal debtor
3. Guarantor or surety
Characteristics of a contract of GUARANTY:
1. Accessory: cannot stand on its own; dependent for its existence
upon the principal obligation
2. Subsidiary and conditional: takes effect only when the principal
debtor fails in his obligation subject to limitation. It is not primary and
the principal condition is when the principal debtor fails to pay—only
when this condition is fulfilled will the obligation of the guarantor
arise.
3. Unilateral: as there is no obligation imposed upon the creditor.
The creditor just has to wait if the principal [debtor] cannot pay then
that’s the time he can go after the guarantor. This gives rise only to a
duty on the part of the guarantor in relation to the creditor; it may be
entered into even without the intervention of the principal debtor.
4. It requires that the guarantor must be a person distinct from
the debtor because a debtor cannot be the personal guarantor for
himself .
Under Article 2047, the first paragraph deals with a contract of
guaranty, while the second paragraph deals with suretyship.
Other classifications we should take into consideration:
With regard to contract of sureyship, if you say suretyship, you are
talking about the contract. If you are referring about the person, it is
the surety.
Suretyship- one person has undertaken an obligation and another
person is under the direct and primary obligation or other duty to a
third person who entitled to bondman performance. And as between
the two who are bound, the one rather than the other should perform.
The surety engages to be answerable to a third person for the debt,
the fault or miscarriage of another known as the principal. It is a
contracts whereby a person binds himself to be solidarily liable with
the principal debtor.
However, you must be able to distinguish between solidary debtor
and the solidary liability of a surety.
Q1: what is the difference between these two—surtety and that of a
co-debtor?
A1: surety can pay for the whole amount of the obligation while a
solidary co-debtor can only be asked to reimburse as to the portion of
his liability.
ESCAÑO & SILOS V. ORTIGAS, JR.
FACTS: On April 28, 1980, Private Development
Corporation of the Philippines (PDCP) entered into a loan
agreement with Falcon Minerals, Inc. (Falcon) amounting to
$320,000.00 subject to terms and conditions.

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On the same day, three (3) stockholder-officers of Falcon:
Ortigas Jr., George A. Scholey, and George T. Scholey
executed an Assumption of Solidary Liability “to assume in
their individual capacity, solidary liability with Falcon for due
and punctual payment” of the loan contracted by Falcon
with PDCP. Two (2) separate guaranties were executed to
guarantee payment of the same loan by other stockholders
and officers of Falcon, acting in their personal and
individual capacities.
One guaranty was executed by Escaño, Silos, Silverio,
Inductivo and Rodriguez. Two years later, an agreement
was developed to cede control of Falcon to Escaño, Silos
and Matti. Contracts were executed whereby Ortigas,
George A. Scholey, Inductivo and the heirs of then already
deceased George T. Scholey assigned their shares of
stock in Falcon to Escaño, Silos and Matti.
An Undertaking dated June 11, 1982 was executed by the
concerned parties, namely: with Escaño, Silos and Matti as
“sureties” and Ortigas, Inductivo and Scholeys as
“obligors”. Falcon eventually availed of the sum of
$178,655.59 from the credit line extended by PDCP. It
would also execute a Deed of Chattel Mortgage over its
personal properties to further secure the loan. However,
Falcon subsequently defaulted in its payments. After PDCP
foreclosed on the chattel mortgage, there remained a
subsisting deficiency of Php 5,031,004.07 which falcon did
not satisfy despite demands.
ISSUE: Whether the obligation to repay is solidary, as
contended by respondent and the lower courts, or merely
joint as argued by petitioners.
HELD: The obligation to repay is only jointly as declared by
the Court. In case there is a concurrence of two or more
creditors or of two or more debtors in one and the same
obligation, Article 1207 of the Civil Code states that among
them, “there is a solidary liability only when the obligation
expressly so states, or when the law or the nature of the
obligation requires solidarity.” Article 1210 supplies further
caution against the broad interpretation of solidarity by
providing: “The indivisibility of an obligation does not
necessarily give rise to solidarity. Nor does solidarity of
itself imply indivisibility.” These Civil Code provisions
establish that in case of concurrence of two or more
creditors or of two or more debtors in one and the same
obligation, and in the absence of express and indubitable
terms characterizing the obligation as solidary, the
presumption is that the obligation is only joint. It thus
becomes incumbent upon the party alleging that the
obligation is indeed solidary in character to prove such fact
with a preponderance of evidence. Note that Article 2047
itself specifically calls for the application of the provisions
on joint and solidary obligations to surety ship contracts.
Article 1217 of the Civil Code thus comes into play,
recognizing the right of reimbursement from a co-debtor
(the principal debtor, in case of suretyship) in favor of the
one who paid (i.e. the surety).
However, a significant distinction still lies between a joint
and several debtor, on one hand, and a surety on the other.
Solidarity signifies that the creditor can compel any one of
the joint and several debtors or the surety alone to answer
for the entirety of the principal debt. The difference lies in
the respective faculties of the joint and several debtor and
the surety to seek reimbursement for the sums they paid
out to the creditor. In the case of joint and several debtors,
Article1217 makes plain that the solidary debtor who
effected the payment to the creditor “may claim from his co-
debtors only the share which corresponds to each, with the
interest for the payment already made.” Such solidary
debtor will not be able to recover from the co-debtors the
full amount already paid to the creditor, because the right to
recovery extends only to the proportional share of the other
co-debtors, and not as to the particular proportional share
of the solidary debtor who already paid. In contrast, even
as the surety is solidarily bound with the principal debtor to
the creditor, the surety who does pay the creditor has the
right to recover the full amount paid, and not just any
proportional share, from the principal debtor or debtors.
Such right to full reimbursement falls within the other rights,
actions and benefits which pertain to the surety by reason
of the subsidiary obligation assumed by the surety.
SURETY SOLIDARY CO-DEBTOR
Outside of the liability Solidarity signifies that the
he assumes to pay the creditor can compel any one
debt before the property of the joint and several
of the principal debtor debtors or the surety alone
has been exhausted to answer for the entirety of
the principal debt.
Has the right to recover “May claim from his co-
the full amount paid, debtors only the share
and not just any which corresponds to
proportional share, from each, with the interest for
the principal debtor or the payment already made.”
debtors.
Subsidiary Solidary
Q2: isn’t it that in the contract the ortigas group were referred to as
sureties?
A2: yes. However, in the contract, although it was denominated as
surety, the stipulations provide xxx
Q3: what was taken into consideration by the SC in saying that the
liability here involves not that of as surety but that of a solidary co-
debtor? Without relying on the terms ‘jointly and severally’?
A3: there was nothing indicated therein that between these 2 groups,
they are jointly and severally liable.
Recall you Obli, when is it considered solidary liability? Only three
instances: by stipulation of the parties, bylaw and nature of the
contract. None of which are present in this case. But take a look at
the contact they executed, the second agreement, you have the
“undertaking executed on july 11 1982”--- eto yung dinispute.
You have there the first group: escano, silos and Matti identified as
sureties. On the other we have the ortigas group as obligors.
Indicating that: “sureties hereby irrevocably agree and undertake to
assume all the obligors’ said guaranties to PDCP.
So the issue here is whether the obligation is solidary in nature and
whether the Escano group could be considered as surety as covered
under 2047.
The SC took into consideration the terms and conditions in the said
undertaking.
First, upon receipt by any of the obligors - in thiscase theOrtigas
group- of any demand from PDCP, they mustinform the sureties in
order that they can timely takeappropriate measures.
Second, should any and/or all obligors be impleaded by PDCP, the
sureties agree to defend the obligors on their own expense without
prejudice to any and/or all obligors impleading sureties therein (?) for
confusion, indemnity, subrogation, and other relief.
Third, if any of the obligors is for any reason made to pay any
amount, the sureties would reimburse obligors for the said amount.
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Now, the clear intent of the undertaking was for petitioners matti and
escano to relieve the burden of origas and his fellow obligors as soon
as possible. There is no argument that the import of the stipulation
“made to pay” in the undertaking other an unduly XX reading that is
unduly inconsistent with the thrust of the document.
although petitioners claim that Ortigas was not made to pay, but
rather paid voluntarily, again it was not the intention here of the
parties that they would only pay if the Ortigas was not made to pay.
That was not the intention of the parties and they were already
benefited by Ortigas in the act of paying PDCP. The clear intent of
the undertaking was for the petitioners to relieve the burden on
Ortigas with the execution of the undertaking and not only when
Ortigas has been subjected to a final and executory adverse
judgment.
Second, even if the undertaking refer to the escano group as
sureties, they could not be considered as sureties in contemplation of
Art. 2047 because again there was no principal obligation wherein
they would act as a surety. The mere utilization of the term “surety”
could not work such effect especially as it does not appear who
exactly is the principal debtor whose obligation is assured or
guaranteed by the surety.
With that, take note of the distinction and take note of the nature of
the obligation of a surety’s undertaking.
1. It is contractual and accessory but direct. Immediate, primary and
absolute.
How do you reconcile this?

Now, on the other hand, Ortigas here alleged that petitioners here
are solidarily liable – jointly and severally liable. It points out that it
uses the word “sureties” all over the document. However, take note,
the obligation here in the undertaking is presumed only to be joint.
The undertaking does not contain any express stipulation that
the petitioners agreed to bind themselves jointly and severally.
So they are considered only as joint debtors.
Likewise, there was no suretyship agreement here because a
suretyship agreement requires a principal debtor to whom the surety
is solidarily bound by way of an ancillary the obligation of segregate
entity from the obligation between the principal debtor and the
creditor.
ASSET BUILDERS VS STRONGHOLD
Asset Builders Corp (ABC) – obligee, petitioner
Lucky Star Drilling & Construction Corporation (Lucky Star)
- obligor
Stronghold Insurance Company (Stronghold) – surety,
respondent
FACTS: ABC entered into an agreement with Lucky Star
as part of the completion of its project to construct the ACG
Commercial Complex. Lucky Star was to supply labor,
materials, tools, and equipment..

The suretyship binds himself to the creditor in as much as the latter is To guarantee faithful compliance with their agreement,
vested with the right to proceed against the former to collect the Lucky Star engaged respondent Stronghold which issued
payment in lieu of the principal debtor for the same obligation. two (2) bonds in favor of petitioner ABC.

However, distinction must be made between a solidary co-debtor and ABC paid Lucky Star P575,000.00 as advance payment,
a solidary liability of a surety. representing 50% of the contract price. Lucky Star,
thereafter, commenced the drilling work.
On agreed completion date, Lucky Star managed to
SURETY SOLIDARY CO-DEBTOR accomplish only 10% of the drilling work.

Despite notice, ABC did not receive any reply either from
In a SURETY, outside of The solidary co-debtor has Lucky Star or Stronghold, prompting it to file its Complaint
the liability he assumes to no other rights than those for Rescission with Damages against both before the RTC.
undertake the obligation bestowed upon him under
before the property of the Section 4, Chapter 3, Title I
principal debtor is of the Civil Code. ISSUE: Whether or not respondent insurance company, as
exhausted, xxx all the other surety, can be held liable under its bonds.
rights, actions and benefits
which pertain to him by HELD: Yes. As provided in Article 2047, the surety
reason of the fianza or the undertakes to be bound solidarily with the principal obligor.
suretyship agreement. That undertaking makes a surety agreement an ancillary
Even as the surety is Solidary co-debtor who contract as it presupposes the existence of a principal
solidarily bound with the effected the payment form contract. Although the contract of a surety is in essence
principal debtor to the his creditor may claim from secondary only to a valid principal obligation, the surety
creditor, the surety who his co-debtors for becomes liable for the debt or duty of another although it
does pay the creditor has reimbursement only the possesses no direct or personal interest over the
the right to recover the full share which pertains to obligations nor does it receive any benefit therefrom. Let it
amount paid, and not just each with interest. Such be stressed that notwithstanding the fact that the surety
any proportional share, from solidary co-debtor will not contract is secondary to the principal obligation, the surety
the principal debtor or be able to recover from the assumes liability as a regular party to the undertaking.
debtors co-debtor the full amount
because his right extends Suretyship, in essence, contains two types of relationship –
only to the proportional the principal relationship between the obligee (petitioner)
share of the other co- and the obligor (Lucky Star), and the accessory surety
debtors. relationship between the principal (Lucky Star) and the
surety (respondent). In this arrangement, the obligee
accepts the surety’s solidary undertaking to pay if the
Solidarity signifies that the creditor can compel any one of the joint obligor does not pay. Such acceptance, however, does not
and several debtors or the surety alone to answer for the entirety of change in any material way the obligee’s relationship with
the principal debt. the principal obligor. Neither does it make the surety an
active party to the principal obligee-obligor relationship.
In this case there is no solidary liability between and among the Thus, the acceptance does not give the surety the right to
parties referred to as sureties and obligors. They are only jointly intervene in the principal contract. The surety’s role arises
liable. only upon the obligor’s default, at which time, it can be
directly held liable by the obligee for payment as a solidary

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obligor.
In the case at bench, when Lucky Star failed to finish the
drilling work within the agreed time frame despite
petitioner’s demand for completion, it was already in delay.
Due to this default, Lucky Star’s liability attached and, as a
necessary consequence, respondent’s liability under the
surety agreement arose.
Undeniably, when Lucky Star reneged on its undertaking
with the petitioner and further failed to return the
P575,000.00 downpayment that was already advanced to
it, respondent, as surety, became solidarily bound with
Lucky Star for the repayment of the said amount to
petitioner.
Contrary to the trial court’s ruling, respondent insurance
company was not automatically released from any liability
when petitioner resorted to the rescission of the principal
contract for failure of the other party to perform its
undertaking. Precisely, the liability of the surety arising
from the surety contracts comes to life upon the solidary
obligor’s default. It should be emphasized that petitioner
had to choose rescission in order to prevent further loss
that may arise from the delay of the progress of the project.
Without a doubt, Lucky Star’s unsatisfactory progress in
the drilling work and its failure to complete it in due time
amount to non-performance of its obligation.
In fine, respondent should be answerable to petitioner on
account of Lucky Star’s non-performance of its obligation
as guaranteed by the performance bond.
Finally, Article 1217 of the New Civil Code acknowledges
the right of reimbursement from a co-debtor (the principal
co-debtor, in case of suretyship) in favor of the one who
paid (the surety). Thus, respondent is entitled to
reimbursement from Lucky Star for the amount it may be
required to pay petitioner arising from its bonds.
Q1: Was Stronghold liable as a surety?
A1: yes
Q2: what is the basis?
Q3: when will stronghold be liable to ABC?
A3: if lucky star will not be able to complete the construction
Q4: what is the defense of Stronghold that they are not liable?
A4: the ABC rescinded the contract
Q5: isn’t it that since it is rescinded, it is being used as a ground by
stronghold to say that their obligation is likewise rescinded?
A5: no ma’am. The liability of the surety arises when the obligor,
lucky star, is in default.
In this case, failed to perform its obligation. So that bond executed by
stronghold should answer in case lucky star should fail to perform its
obligation or non-performance which happened in this case.
Even if the action was for recission, it does not mean that it will now
automatically cancel the obligation of stronghold. Otherwise, what’s
the purpose of the surety bond?
Under art. 2047, provides that ‘if the person binds himself solidarily
with the principal debtor. The surety agreement ancillary contract
because it presupposes that there is already a principal contract in
exixtence. Now, a surety becomes liable for the debt or duty of
another although it presents no direct or personal interest over the
obligation nor does it receive any benefit therefrom. Nevertheless, he
assumes the liability as a regular party to the undertaking . pwede
singilin agad ng creditor.
While it is true that its obligation is merely accessory, in the sense
that stronghold is not the principal debtor, his liabilityis considered to
be direct, primary and absolute because its liability is considered
solidary in nature; Directly and equally bound with the principal.
The acceptance does not give the surety the right to intervene in the
principal contract. The surety’s role arises only upon the obligor’s
default, at which time, it can be directly held liable by the obligee for
payment as a solidary obligor.
The allegation here with regard to the rescission: Stronghold was
automatically released from his liabilitybecause precisely the liability
of the surety from the surety contract comes to light upon the solidary
obligor’s default. It should be emphasized that petitioner chose
rescission to prevent further loss. Lucky Star’s unsatisfactory
progress in the drilling work and its failure to complete it in due time
amount to non-performance of its obligation.
(Continuation of nature of the obligation of a surety’s
undertaking)
2. the liability of a surety is limited by the terms of the contract. His
liability ordinarily restricted to the obligation expressly assumed
therein A contract of surety cannot be presumed; it cannot extend to
more than what is stipulated.
3. Liability only arises if principal debtor is held liable. The creditor
may sue separately or together, the principal debtor and the surety.
Where there are several sureties, the creditor may proceed even as
against only one of them. Also, since it is an accessory contract, if
the principal obligation is void, then the surety agreement is likewise
considered void.
4. a surety is not entitled to the principle of exhaustion unlike that of a
guarantor. For a surety assumes a solidary liability for the fulfillment
of the principal obligation.
5. Do remember that a surety’s undertaking is to the creditor, not to
the debtor. The principal cannot claim that there has been a breach
of the surety’s obligation to him under the suretyship contract when
the surety fails or refuses to pay the debt for the principal’s account.
6. A surety is not entitled, as matter of right, to notice of the principal
debtor’s default. Pwede siya directly singilin. Demand on the surety is
not necessary before bringing suit against them, since the
commencement of the suit is a sufficient demand. A surety is not
even entitled, as a matter of right, to be given notice of the principal’s
default in the absence of an agreement to that effect in the contract
of suretyship.
7. Prior demand by the creditor upon the principal is not required.
Because again, here, demand may be made judicial or extrajudicial
and would still result to default on the part of the principal debtor.
8. A surety is not exonerated by neglect of creditor to sue upon
principal.
Now, you will notice that a guaranty and suretyship promise to
answer for the neglect, default, or miscarriage of another. But of
course there are several distinctions between these two contracts.
Another distinction is between contract of guaranty and contract of
suretyship:
What are the disctinctions between the two?
What happened in the case of Castelvi?
CASTELLVI DE HIGGINS VS SELLNER
FACTS: Higgins filed an action to recover against Sellner
the sum of P10,000. The basis of the action is a letter
written by defendant George C. Sellner to John T.
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Macleod, agent for Mrs. Horace L. Higgins, on May 31,
1915, of the following tenor:
DEAR SIR: I hereby obligate and bind myself, my
heirs, successors and assigns that if the
promissory note executed the 29th day of May,
1915 by the Keystone Mining Co., W.H. Clarke,
and John Maye, jointly and severally, in your
favor and due six months after date for Pesos
10,000 is not fully paid at maturity with interest, I
will, within fifteen days after notice of such
default, pay you in cash the sum of P10,000 and
interest upon your surrendering to me the three
thousand shares of stock of the Keystone Mining
Co. held by you as security for the payment of
said note.
Respectfully,
(Sgd.) GEO. C. SELLNER.
Higgins contends that he is a surety while Sellner contends
that he is a guarantor.
ISSUE: What is the status of the transaction? GUARANTY.
HELD: In the original Spanish of the Civil Code now in
force in the Philippine Islands, Title XIV of Book IV is
entitled "De la Fianza." The Spanish word "fianza" is
translated in the Washington and Walton editions of the
Civil Code as "security." "Fianza" appears in the Fisher
translation as"suretyship." The Spanish word "fiador" is
found in all of the English translations of the Civil Code as
"surety." The law of guaranty is not related of by that name
in the Civil Code, although indirect reference to the same is
made in the Code of Commerce. In terminology at least, no
distinction is made in the Civil Code between the obligation
of a surety and that of a guarantor.
A surety and a guarantor are alike in that each
promises to answer for the debt or default of another.
A surety and a guarantor are unlike in that the surety
assumes liability as a regular party to the undertaking,
while the liability as a regular party to upon an
independent agreement to pay the obligation if the
primary pay or fails to do so. A surety is charged as an
original promissory; the engagement of the guarantor
is a collateral undertaking. The obligation of the surety
is primary; the obligation of the guarantor is
secondary.
Turning back again to our Civil Code, we first note that
according to article 1822 "By fianza (security or suretyship)
one person binds himself to pay or perform for a third
person in case the latter should fail to do so." But "If the
surety binds himself in solidum with the principal debtor,
the provisions of Section fourth, Chapter third, Title first,
shall be applicable." What the first portion of the cited
article provides is, consequently, seen to be somewhat
akin to the contract of guaranty, while what is last provided
is practically equivalent to the contract of suretyship. When
in subsequent articles found in section 1 of Chapter II of
the title concerning fianza, the Code speaks of the effects
of suretyship between surety and creditor, it has, in
comparison with the common law, the effect of guaranty
between guarantor and creditor. The civil law suretyship is,
accordingly, nearly synonymous with the common law
guaranty; and the civil law relationship existing between
codebtors liable in solidum is similar to the common law
suretyship.
It is perfectly clear that the obligation assumed by
SELLNER was simply that of a guarantor, or, to be more
precise, of the fiador whose responsibility is fixed in the
Civil Code. The letter of Mr. Sellner recites that if the
promissory note is not paid at maturity, then, within fifteen
days after notice of such default and upon surrender to him
of the three thousand shares of Keystone Mining Company
stock, he will assume responsibility. Sellner is not bound
with the principals by the same instrument executed at the
same time and on the same consideration, but his
responsibility is a secondary one found in an independent
collateral agreement. Neither is Sellner jointly and severally
liable with the principal debtors.
With particular reference, therefore, to assignments of
error, Sellner is a guarantor within the meaning of the
provisions of the Civil Code.
Sellner, consequently, through the laches of plaintiff, has
lost possible chance to recoup, through the sale of the
stock, any amount which he might be compelled to pay as
a surety or guarantor. The "indulgence," as this word is
used in the law of guaranty, of the creditors of the principal,
as evidenced by the acceptance of interest, and by failure
promptly to notify the guarantor, may thus have served to
discharge the guarantor.
Q1: was Sellner a surety of merely a guarantor?
A1: Sellner was merely a guarantor ma’am.
Q2: why not a surety?
A2: in the letter, there was a phrase of joint and solidary obligation
but it refers to the principal debtors.
Take a look again at the promissory note there: “DEAR SIR: I hereby
obligate and bind myself, my heirs, successors and assigns that if the
promissory note executed the 29th day of May, 1915 by the
Keystone Mining Co., W.H. Clarke, and John Maye, jointly and
severally, in your favor and due six months after date for Pesos
10,000 is not fully paid at maturity with interest, I will, within fifteen
days after notice of such default, pay you in cash the sum of P10,000
and interest upon your surrendering to me the three thousand shares
of stock of the Keystone Mining Co. held by you as security for the
payment of said note.
Notice that this is a 1920 case also referred to Spanish words such
as fianza and fiador. Fianza is suretyship while fiador refers to surety.
However since this was still in the old civil code, the use of these
words at that time, there was still no distinction whether they were
used as surety or a guarantor.
However, the similarities between these contracts is that the surety
and guarantor are alike in that each promises(?) to answer for the
debt or default of another. However the distinction is that again
the surety assumes liability as a regular party to the undertaking
while the guarantor’s liability depends upon an independent
agreement to pay the obligation if the primary payor fails to do so.
A surety is charged as a original promissor A surety is charged as an
original promisor while the engagement of the guarantor is a
collateral undertaking. The obligation of the surety is primary while
the obligation of the guarantor is secondary.
The obligation here of sellner is simply that of a guarantor or to be
more precise, of that of a fiador. So again the emphasis here is that
the use of the term fiador is surety during the time of Old Civil Code
refers to either surety or guarantor. However here his liability is that
of a guarantor in the sense that his promise is that if the promissory
note executed by the principal debtor Keystone is not paid at
maturity, then after 15 days after notice of such default upon
surrender to him of the 3,000 shares of Keystone mining he will
assume responsibility.
Here his responsibility is solely a secondary one. Why? Because it is
independent. It is an independent collateral agreement from the
promissory note executed by the principal debtors. So Sellner is not
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bound with the principals by the same instrument executed on the in accordance with the specifications provided in the
same time and on the same consideration. But his responsibility is a agreement.
secondary one bound by an independent collateral agreement.
Neither is Sellner jointly and severally liable with the principal debtor. Machetti was thereafter declared as insolvent and the
proceeding was suspended.
So again take note of the similarity between guaranty and suretyship:
Hospicio filed a motion asking that Fidelity be made a
Each promise to answer for the debt, default or miscarriage of cross defendant and that the proceeding continue as
another. against such company. The Court granted the motion
and Hospicio sought to recover from Fidelity the amount
The main distinctions between these two contracts is that:
of P12, 800 as guaranty. The Court ruled in favor of
The obligation of the guarantor is not solidary with the principal Hospicio hence this present appeal.
debtor; it’s only when the principal debtor can not pay when the
principal creditor has exhausted the properties of the principal debtor ISSUE: WON recourse can be had against Fidelity as
and there is no more property left to answer for the obligation of the guaranty? NO (not yet)
debtor. It is only at that time that the principal debtor may proceed
against the guarantor. HELD: (Discussion centered on the difference of surety
and guaranty)
Unlike that of a surety, his obligation is solidary. The creditor can
proceed against the principal debtor or against the surety; there is no It appear that the contract is the guarantor's separate
benefit of excussion or exhaustion. No need to exhaust the assets of undertaking in which the principal does not join, that its
the principal debtor before he can go after the surety. rests on a separate consideration moving from the
principal and that although it is written in continuation of
Other distinctions: the contract for the construction of the building, it is a
collateral undertaking separate and distinct from the
SURETY GUARANTOR latter. All of these circumstances are distinguishing
The surety assumes liability liability of the guarantor features of contracts of guaranty.
as a regular party to the depends upon an
undertaking independent agreement to Now, while a surety undertakes to pay if the principal
pay the obligation if the does not pay, the guarantor only binds himself to pay if
primary debtor fails to do so the principal cannot pay. The one is the insurer of the
debt, the other an insurer of the solvency of the debtor.
charged as an original engagement of the This latter liability is what the Fidelity and Surety
promisor guarantor is a collateral Company assumed in the present case. The
undertaking undertaking is perhaps not exactly that of a fianza under
the Civil Code, but is a perfectly valid contract and must
Primarily liable is secondarily or subsidiarily be given the legal effect if ordinarily carries. The
liable Fidelity and Surety Company having bound itself to
ordinarily held to know not bound to take notice of pay only the event its principal, Machetti, cannot
every default of his principal the non-performance of his pay it follows that it cannot be compelled to pay
principal until it is shown that Machetti is unable to pay. Such
ability may be proven by the return of a writ of execution
will not be discharged either often discharged by the unsatisfied or by other means, but is not sufficiently
by the mere indulgence of mere indulgence of the established by the mere fact that he has been declared
the creditor of the principal creditor of the principal, and insolvent in insolvency proceedings under our statutes,
or by want of notice of the is usually not liable unless in which the extent of the insolvent's inability to pay is
default of the principal, no notified of the default of the not determined until the final liquidation of his estate.
matter how much he may principal
be injured thereby Therefore, Hospicio much first exhaust all its remedy
against Machetti.

We also have the case of Macheti vs Hospicio de San Jose:

Q: what do you mean by insolvency?

Q: Does it mean that you do not have assets anymore?

A: When you liabilities are greater than your asset.

December 10, 2015 (2nd hour)
Transcribed by: Peter Quiel E. Vega
MACHETTI VS HOSPICIO DE SAN JOSE
FACTS: Machetti undertook to construct a building for
Hospicio de San Jose. In such written agreement,
Macheti obtained the ‘guarantee’ of Fidelity and Surety
Company of the Philippine Islands.
Machetti undertook the construction with the supervision
of the Hospicio architect. Machetti was paid for the work
with the exception of P4, 978 to which the former filed a
complaint. A counterclaim with damages was field by
Hospicio alleging that the work has not been carried out
That is why to reconcile, to say that Fidelity cannot be held liable
because the agreement is that it cannot be compelled to pay until it is
shown that Machetti is unable to pay, and we reconcile it to the
established fact that Machetti was already deemed insolvent.
Mere insolvency does not mean inability to pay, it just means that
there is not sufficient asset to pay the liabilities that is due.
Distinction: While a surety undertakes to pay when if he principal
does not pay, the guarantor shall only binds himself when to pay if
the principal cannot pay. The one (surety) is the insurer of the debt,
the other (guaranty) an insurer of the solvency of the debtor.
Fidelity having bound itself to be only in the event when its principal,
Machetti, cannot pay it follows that it cannot be compelled to pay until
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it is shown that Machetti is unable to pay. Such ability may be proven
by the return of a writ of execution unsatisfied (kung wala juy
pampayad si Machetti or the debtor in that instance) or by other
means, but is not sufficiently established by the mere fact that he has
been declared insolvent.
Because what happens when there is insolvency? Again, there may
be assets but the assets are insufficient to pay off the obligations and
liability that matures. So kailangan pa e.lliquidate. First is to preferred
creditors and then kung may maiwan, to ordinary creditors and share
pro rata. Hanggang wala nang maiwan. So in other words, depende
kung meron pang maiwan dito in favor of Machetti with regard to his
obligation to Hospicio de san jose. Kung meron pa, kahit na
insolvent, then Fidelity will not be liable or if ever Fidelity will not be
held to be liable for the obligation depending on what will happen in
the insolvency proceeding or the final liquidation of the properties of
the principal debtor. So take note of the distinctions here.
Another distinction is that under the statute of frauds, recall, the
promise of a surety or original promisor must be in writing to be
enforceable. It only refers to a contract of guaranty, not to a contract
of surety. Because essentially contract of guaranty is a promise to
answer for a debt, default, or miscarriage of another. But if you think
into consideration the nature of a surety, surety is primarily liable as
to the obligation. It is not a collateral promise or undertaking to
answer the debt or miscarriage of another person.
Other distinctions: Guaranty from indorsement. Guaranty is a
contract of security. Indorsement, when do you need indorsement in
a negotiable instrument? To transfer title. In Guaranty, the liability is
more than that of an indorser, a guarantor warrants the solvency of a
promisor, an indorser does not necessarily warrants such solvency.
Indorsement of negotiable instrument, you will notice, 65 and 66,
walay warranty of solvency of parties liable to an instrument.
Guarantor cannot be sued as a promissor, but an indorser may be
sued as such.
Guaranty v. Warrranty
Both are undertakings from one party to another to indemnify or
make good the xx against some possible default or defect. Warranty
is concerned with the quality or character of the subject matter. So if
guaranty is a contract by which a person is bound to another for a
fulfillment of a promise or engagement to a 3rd party. Warranty, on
the other hand is an undertaking that the title, quality, and quantity of
the subject matter of a contract is what has been resented to be and
relates to some agreement made ordinary by the parties who makes
the warranty.
PALMARES VS CA
FACTS: Pursuant to a promissory note dated March 13,
1990, private respondent M.B. Lending Corporation
extended a loan to the spouses Osmeña and Merlyn
Azarraga, together with petitioner Estrella Palmares, in
the amount of P30,000.00 payable on or before May 12,
1990, with compounded interest at the rate of 6% per
annum to be computed every 30 days from the date
thereof. On four occasions after the execution of the
promissory note and even after the loan matured,
petitioner and the Azarraga spouses were able to pay a
total of P16,300.00, thereby leaving a balance of
P13,700.00. No payments were made after the last
payment on September 26, 1991.
Consequently, on the basis of petitioner's solidary
liability under the promissory note, Respondent
Corporation filed a complaint against petitioner
Palmares as the lone party defendant, to the exclusion
of the principal debtors, allegedly by reason of the
insolvency of the latter.
In her Amended Answer with Counterclaim, petitioner
alleged that sometime in August 1990, immediately after
the loan matured, she offered to settle the obligation
with respondent corporation but the latter informed her
that they would try to collect from the spouses Azarraga
and that she need not worry about it; that there has
already been a partial payment in the amount of
P17,010.00; that the interest of 6% per month
compounded at the same rate per month, as well as the
penalty charges of 3% per month, are usurious and
unconscionable; and that while she agrees to be liable
on the note but only upon default of the principal debtor,
respondent corporation acted in bad faith in suing her
alone without including the Azarragas when they were
the only ones who benefited from the proceeds of the
loan.
ISSUE: Where a party signs a promissory note as a co-
maker and binds herself to be jointly and severally liable
with the principal debtor in case the latter defaults in the
payment of the loan, is such undertaking of the former
deemed to be that of a surety as an insurer of the debt,
or of a guarantor who warrants the solvency of the
debtor? SURETY
HELD: The Civil Code pertinently provides:
Art. 2047. By guaranty, a person called the guarantor
binds himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal
debtor, the provisions of Section 4, Chapter 3, Title I of
this Book shall be observed. In such case the contract is
called a suretyship.
It is a cardinal rule in the interpretation of contracts that
if the terms of a contract are clear and leave no doubt
upon the intention of the contracting parties, the literal
meaning of its stipulation shall control. In the case at
bar, petitioner expressly bound herself to be jointly
and severally or solidarily liable with the principal
maker of the note. The terms of the contract are
clear, explicit and unequivocal that petitioner's
liability is that of a surety
Q: By the term “co-maker” will it consider the person signed as a
guarantor? Or surety?
A: Surety
Q: Why is she treated as “surety”?
Q: Can she not be considered as a solidary co-debtor rather than a
surety?
A: It was stated in the loan “In case there is default.”
Here, take note that one of the defense here alleged by Palmares
was that the promissory note is one of a contract of adhesion.
Remember how contracts of adhesion are interpreted, they are not
invalid per se and its binding effects are already upheld. In this case,
even if because the contract of adhesion, the Supreme Court took
into consideration the several circumstances that indeed Palmares
fully understood the contents thereof and that she was fully aware of
the solidary liability being a principal maker. Petitioner admits that
she voluntarily affix her signature thereto so she cannot now be
made to claim otherwise.
Also take note that she is deemed to be a surety. Again, a surety is
the insurer of the debt. Suretyship is an undertaking that the debt
shall be paid. A surety promises to pay the principals debt in case the
principal will not pay, unlike with the guarantor which should xx that
the creditor after proceeding to the principal may proceed against the
guarantor if the principal is unable to pay. A surety binds himself to
perform in case the principal does not pay, without regard to his
ability to do so. A surety undertakes directly for the payment being so
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responsible at once if the principal debtor makes default. Undertaking
would be upon default of the principal debtor does not automatically
hold it from the ambit of the contract of suretyship. The promissory
note does not contain any other condition for the enforcement of the
respondent corporation right against petitioner. It was not even
shown in the contract or the pleadings that corporation agreed to
proceed against petitioner only, if and when the defaulting principal
has become insolvent.
A contract of suretyship is that one has his credit joining in the
principal debtor’s obligation as making him directly and primarily
responsible to him without reference to the solvency of the principal.
Another defense raised here by Palmares is that contracts of
guaranty xx suretyship are strictly construed (rule on xxx juris). The
liability xx to a contract to indemnity or guaranty was once judicialy
determined under the rule of reasonable construction applicable to all
written contracts, the liability of the surety as interpreted and
construed is not be extended beyond its ordinary meaning. However,
such rule will apply only after it already been ascertained that the
contract is one of suretyship and not a contract of guaranty. It cannot
be used as an aid to determine whether the undertaking is that of a
surety or guaranty.
Again, the surety is bound equally and absolutely with the principal
and as such is deemed as an original xx and a debtor from the
beginning. In suretyship there is that one contract where the surety is
bound to the same agreement which binds the principal. A surety is
usually bound with its principal with the same instrument executed at
the time and upon the same consideration. Demand by the creditor is
no longer necessary in order that it may exist since the contract itself
expressly so declares. The surety (petitioner) is equally bounds by
such waiver.
A surety is not even entitle as a matter of right to be given notice of
principal’s default as the surety is bound to take notice of the
principal’s default and to perform the obligation. He cannot complain
that the creditor has not notified him in the absence of the special
agreement to that effect in the contract of suretyship.
With regard to leniency, leniency shown to a debtor in default by xx
by the creditor does not constitute as extension of the time that it
should release the surety. Unlike that of the guarantor which we will
discuss in succeeding articles.
Furthermore, take not with regard to parties, the creditor can go after
the surety alone, without going after the principal debtor. Because
again, the liability of a surety is solidary in nature.
GILAT SATELLITE NETWORKS LTD. v. UNITED
COCONUT PLANTERS BANK GENERAL
INSURANCE CO., INC.
FACTS: One Virtual obtained a loan from Gilat, which
was secured under a surety agreement with UCPB.
Gilat now wanted to recover from the surety bond.
UCPB contends that there should be an arbitration.
RULING:
UCPB was held liable. A suretyship is an accessory
contract, but the acceptance of the creditor of the
suretyship does not give the surety the right to intervene
in the principal contract. Arbitration clause in a nature of
a contractual obligation which is only binding between
the parties, Gilat and One Virtual. UCPB not being the
party into the contract, it cannot invoke the arbitration
clause.
UCPB is also liable to interest. If the surety upon
demand fails to pay, it should be liable for interest.
Here, the nature of surety agreement. The surety agreement here
states that respondent UCPB be held liable at the mere failure of the
principal to make such payment.
Petitioner should not be made entitled to a separate claim against
one virtual via arbitration before proceeding against respondent.
Again it should be joint and solidarily liable to that of the principal
debtor. Contract of a surety being secondary to the principal
obligation, its liability to the creditor is said to be direct, primary, and
absolute. So a surety is directly and equally bound to the principal
even without possessing a direct or personal interest in the obligation
constituted by the debtor. A surety is not entitled to a separate notice
of default or the benefit of exhaustion and may be sued separately
together with the principal debtor.
UCPB alleged here the arbitration clause that before UCPB can be
held liable to Gilat it must first go through arbitration. However, the
acceptance of surety agreement does not change in any material
way the creditor’s relationship with principal debtor. Nor does it make
the surety an active party to the principal creditor-debtor relationship.
The acceptance does not give the surety a right to intervene in the
principal contract as the surety’s obligation arises only upon the
debtor’s default. Of which time, it can be held directly liable to the
creditor for payment as a solidary debtor.
So the Surety, UCPB, remains its xx to the purchase agreement
UCPB cannot invoke in its favor the arbitration agreement because it
is not a party to the contract. Therefore, the creditor is granted the
right to directly proceed against either the principal debtor or the
surety, that is the reason why the exhaustion cannot be invoke.
Having held that the surety upon demand fails to pay, it can be held
liable for the interest. Even if does paying make his liability more than
the principal obligation. The increase in liability is not because of the
contract but because of the default and the necessity of judicial
collection. So for the xx to merit interest, it must be reasonable in
nature. So again take note of the distinctions between a contract of
guaranty and suretyship.
Article 2048. A guaranty is gratuitous, unless there is a
stipulation to the contrary.
General Rule: A contract of guaranty is gratuitous in nature.
Exception: (onerous) by stipulation of the parties.
Remember that a surety is never the less a contract wherein it must
have all the essential elements of Consent, Object, and
consideration.
What is the consideration in a contract of guaranty? Is it required that
a contract of guaranty or suretyship must have a consideration?
WILLEX PLASTIC, INC. V. CA, INTERNATIONAL
CORPORATE BANK (1996)
Doctrine: It is never necessary that a guarantor or surety
should receive any part or benefit, if such there be,
accruing to his principal
FACTS: 1978: Inter-Resin took out a loan from Manila
Bank. As additional security, Inter-Resin and Investment
Underwriting (IUCP) executed a Continuing Surety
Agreement stating that they are liable to Manila Bank
solidarily for the loan taken out by Inter-Resin.
1979: Inter-Resin and Willex Plastic executed a
Continuing Guarantee for the loan which Inter-Resin
obtained from Investment Underwriting to the extent of
P5M.
1981: Investment Underwriting (IUCP) paid Manila
Bank P4M to satisfy Inter-Resin’s 1978 Obligation.
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Investment Underwriting (IUCP) then demanded
payment of the P4M from both Inter-Resin and Willex.
Inter-Resin paid IUCP P600K from the proceeds of its
fire insurance
Willex denied obligation, it alleged that it is only a
guarantor of the principal, hence its liability was only
secondary to the principal and that it did not receive
consideration nor benefit from the contract between the
bank and Inter-Resin.
Willex insisted that IUCP should pursue Inter-Resin
and apply to the loan the assets of the latter first before
going after it.
Willex further alleged that it is guarantor of a loan to
Manila Bank and not to Interbank, hence the Continuing
Guaranty cannot be retroactive applied as contracts of
suretyship contemplates future dealing.
ISSUE: WON Willex is liable as guarantor for the loans
obtained by Inter-Resin to IUCP? – Yes
HELD: Intent is controlling: clear from the evidence that
the Continuing Guarantee executed by Willex with Inter-
Resin would cover sums obtained (in the past–
retroactive) and/or to be obtained by Inter-Resin
Industrial from Interbank.
Although a contract of suretyship is ordinarily not to be
construed as retrospective, in the end the intention
of the parties as revealed by the evidence is controlling–
apply it to the 1978 loan.
Guarantor or surety is bound by the same consideration
that makes the contract effective between the principal
parties thereto. . . . It is never necessary that a
guarantor or surety should receive any part or benefit, if
such there be, accruing to his principal.
Q: is willex a guarantor or surety?
A: Surety
Q: when did it execute the suretyship agreement?
Q: this deed of execution, why was it made as a defense on the part
of willex?
Q: What is the principal obligation?
Q: Who is the debtor?
A: Interesin
Q: Creditor?
A: Manila bank
Q: and willex has the surety. What are the contentions of willex?
A: Absence of principal contract at the time it executed the guaranty
agreement.
Q: What was the consideration of the contract of suretyship?
Q: To answer the obligation of resin, in exchange for what? Was
there a separate consideration?
It was held in the case of Willex, the consideration necessary to
support a surety obligation need not pass to directly to the surety, a
consideration moving to the principal alone being sufficient. So kung
ano yung consideration sa principal obligation that the same
consideration in a suretyship or guaranty.
Take note that there must be consideration since it is an essential
element of a contract. So here, for a guarantor or surety is bound by
the same consideration makes the contract effective between the
principal parties thereto.
Take note we also have here the concept of continuing guaranty. It
covers obligations depending on the stipulation therein, usually future
obligations or any of all obligations with specific creditor. In this case,
the continuing guaranty clearly provided that it covers sums obtained
(past tense), or to be obtained (future), by inter-resin from interbank.
In other words, even if the obligation that being demanded from
willex arose from a prior obligation, obligation before the execution of
the continuing guaranty on April 1979, willex is still liable because it
is clear that the continuing guaranty agreement covers sums
obtained as well as to be obtained by inter resin from interbank.
By no means, however, it was meant that in all instances a contract
of guaranty or suretyship be prospective in application. Although that
is the general rule. A contract of suretyship ordinarily is not to be
construed as retrospective, but in the end we go over the intention of
the parties, as in this case, as provided in the continuing guaranty
agreement.
Further, the stipulation without first proceeding against exhausting
debtor’s properties embodies an express renunciation of the right of
exhaustion therefore make Willex solidarily liable with Inter-resin as a
surety.
Again, in you obligation and contracts, there must be a consideration.
It is an essential element of a contract. If the parties did not agree as
to the consideration, the sanction is that the consideration exist (Art
1254). However, can you say that the contract of surety or guaranty
is void for absence of consideration? No. because again a contract of
guaranty and suretyship for that matter is an accessory contract. Its
existence is dependent upon the principal contract and in the
absence of specific or separate consideration agreed upon by the
party then the cause/consideration of the contract of guaranty is the
same cause/consideration with principal contract and of course, if the
principal obligation has no consideration at all, the principal
obligation/contract is void, then it will also result that there’s no valid
contract of guaranty or suretyship at all.
Article 2049. A married woman may guarantee an
obligation without the husband's consent, but shall not
thereby bind the conjugal partnership, except in cases
provided by law.
Right of the married woman to enter into a contract of guaranty. In
your person and family relations that the general rule properties
absolute community or conjugal partnership of gain depending on
when they become married as well as their marriage settlement or
prenuptial agreement.
Also take note in your persons and sales, a contract entered into for
an alienation of property, without the written consent of the other
spouse or authorization of the court will be void.
How about with regard to contracts of guaranty, still in Article 2049,
that the married woman can enter into a contract of guaranty with
regard to her separate property. If the married woman has a separate
property then the contract of guaranty may refer to the separate
property or paraphernal property of the woman. If she has no
separate property but nevertheless agrees to be a guarantor or
surety, it depends on whether the contract redounded to the benefit
of the family. If it is shown, then it will be enforceable against the
absolute community of property of the family.
So how about the husband? There is no express prohibition in the
New Civil Code. In your persons, contracts entered into by the
husband is valid and in case of disagreement the husband’s decision
shall prevail but without prejudice to the wife to seek relief or redress
from the courts. So if the wife does not agree with the contract
entered into by the husband then she can go to court.
Article 2050. If a guaranty is entered into without the
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knowledge or consent, or against the will of the principal
debtor, the provisions of articles 1236 and 1237 shall
apply.
Remember that in a contract of a guaranty, is still a contract and you
must have the essential element of consent. Consent of whom?
Principal creditor and the guarantor or surety.
The contract of guaranty is solely between the guarantor and
principal creditor and therefor the consent of the principal debtor is
not necessary for the validity of the contract of guaranty. The consent
of the guarantor and creditor will be required because the contract of
guaranty is for the benefit of the creditor. That in case the principal
debtor fails to fulfill his obligation the guarantor shall be answerable
to principal creditor.
However, take note, in your obligation and contracts, that the third
person may pay the obligation of the principal debtor. Of course the
general rule is that the creditor cannot be compelled to accept a
payment from a person who is not obliged or the proper party in the
instrument. So sino yung pwede mag force ng payment? Principal
debtor, his heirs and successors, transferees, as well as persons
duly authorized or designated by the parties. How about a concerned
citizen? Not among those provided under the law who can compel
payment.
Take note that a contract of guarantor and surety does not require
consent of the debtor for its validity. But we have to take into
consideration the effect if the guarantor/surety pays the obligation of
the principal debtor. That is why you recall Article 1236 and 1237.
Article 1236. The creditor is not bound to accept
payment or performance by a third person who has no
interest in the fulfillment of the obligation, unless there is
a stipulation to the contrary. Whoever pays for another
may demand from the debtor what he has paid, except
that if he paid without the knowledge or against the will
of the debtor, he can recover only insofar as the
payment has been beneficial to the debtor. (1158a)
So recall your beneficial reimbursement. So you have a third person
here, agrees to be a guarantor, accepted by the creditor without
consent or knowledge of the debtor, he now pays the obligation of
the principal debtor, can he seek reimbursement from the principal
debtor? Yes. Only to the extent that the principal debtor has been
benefited. Because it is possible that there had been partial payment.
So kung may partial payment, dun lang sa remaining balance siya
pwede mag seek ng reimbursement. It is also possible that the
obligation had prescribed or extinguished due to compensation or
setoff. What does it mean? The obligation is extinguished and the
payment made by the third person never benefitted the principal
debtor. So what does that mean? The person who paid the obligation
cannot seek the reimbursement from the principal debtor.
In addition, we have Article 1237.
Article 1237. Whoever pays on behalf of the debtor
without the knowledge or against the will of the latter,
cannot compel the creditor to subrogate him in his
rights, such as those arising from a mortgage, guaranty,
or penalty. (1159a)
So again, this is the same example in you obligations and contracts.
You have the principal debtor and then you have the creditor, at the
same time you also executed a mortgage. Then you have the third
person who pays the creditor. If this third person pays the creditor
without the knowledge or consent of the debtor against the will of the
debtor, then he can seek for beneficiary reimbursement.
However, is such payment was made with the consent and
knowledge of the debtor, hindi lang beneficial reimbursement, but
actually subrogation. So what does it mean? He can seek
reimbursement from the debtor and he can also proceed against the
mortgage executed by the debtor. If the debtor fails to reimburse the
third person, he can have the mortgage foreclosed. Unlike when he
pays without the consent or against the will of the debtor.
Take note, beneficial reimbursement only if payment was made
without knowledge or against the will of principal debtor. Otherwise, if
such is made with the knowledge or consent with the debtor, there is
subrogation.
Article 2051. A guaranty may be conventional, legal or
judicial, gratuitous, or by onerous title. It may also be
constituted, not only in favor of the principal debtor, but
also in favor of the other guarantor, with the latter's
consent, or without his knowledge, or even over his
objection. (1823)
The first paragraph deals with the classification of guaranty I
mentioned earlier. The second paragraph also deals with what I
mentioned earlier with double guaranty and sub guaranty constituted
not only in favor of the principal debtor but also in favor of other
guarantor.
Article 2052. A guaranty cannot exist without a valid
obligation. Nevertheless, a guaranty may be constituted
to guarantee the performance of a voidable or an
unenforceable contract. It may also guarantee a natural
obligation. (1824a)
Take note that a contract of guaranty is an accessory contract. It
cannot exist without a valid principal obligation. What kind of
obligation does it guaranty? Valid. So in other words it can also
secure defective contracts which are also considered valid. Example
voidable contracts, valid until annulled, it can be subjected into a
contract of guaranty/suretyship as long as it has not been annulled.
Rescissible contracts, valid until rescinded. Unenforceable contracts,
valid but unenforceable. All these defective contracts are valid
subject of a contract of guaranty.
Likewise, a natural obligation may be a subject of a contract of
guaranty. The obligation is valid. It is an obligation based on equity
and not on law. It does not grant a right of action to enforce
performance, but after the voluntary fulfillment by the obligor, they
authorized the retention of what has been delivered or rendered by
reason thereof.
Although in the ordinary course of law, natural obligation cannot be
enforce, but it may still be the object of the guaranty. In an action for
obligation, you cannot enforce it but once there is performance the
debtor cannot demand to take back what was given or has paid.
Creditor may 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 to guaranty his natural obligation, he
impliedly recognize his liability and therefore transform from natural
into a civil obligation.
December 16, 2015
Transcribed by: April Pareño
So we have already discussed few provisions about contracts and
guaranty and suretyship.
Under Article 2047, very important to take note the nature of the
contracts of guaranty, as well as the distinctions between guaranty
and suretyship, as well as the distinctions as to other contracts,
contracts to guaranty and other concept such as endorsement and
guaranty.
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We also discussed under Article 2047 the distinctions between
solidary co-debtor and that of surety.
Article 2047. By guaranty a person, called the guarantor, binds
himself to the creditor to fulfill the obligation of the principal debtor in
case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the
provisions of Section 4, Chapter 3, Title I of this Book shall be
observed. In such case the contract is called a suretyship. (1822a)
Article 2048, we have discussed the nature of guaranty that it is
gratuitous unless otherwise stipulated by the parties and considering
that a guaranty is an accessory contract, it is not necessary that it
has a specific or separate consideration from the principal obligation.
In the absence of a specific consideration agreed upon, the cause or
consideration of the guaranty is the same cause as that of the
principal obligation.
Article 2048. A guaranty is gratuitous, unless there is a stipulation to
the contrary. (n)
Article 2049. A married woman may guarantee an obligation without
the husband's consent, but shall not thereby bind the conjugal
partnership, except in cases provided by law. (n)
Article 2050. If a guaranty is entered into without the knowledge or
consent, or against the will of the principal debtor, the provisions of
articles 1236 and 1237 shall apply. (n)
Article 2051. A guaranty may be conventional, legal or judicial,
gratuitous, or by onerous title.
It may also be constituted, not only in favor of the principal debtor,
but also in favor of the other guarantor, with the latter's consent, or
without his knowledge, or even over his objection. (1823)
Under 2052, it emphasizes the nature of a guaranty and accessory
contract. As long as the principal obligation is valid, then the contract
of guaranty is still considered as valid. Even if the principal contract is
defective, as long as at the time the contract of guaranty was
entered into, the principal obligation is valid then it will not affect the
validity of the contract of guaranty.
Article 2052. A guaranty cannot exist without a valid obligation.
Nevertheless, a guaranty may be constituted to guarantee the
performance of a voidable or an unenforceable contract. It may also
guarantee a natural obligation. (1824a)
Article 2053. A guaranty may also be given as security for future
debts, the amount of which is not yet known; there can be no claim
against the guarantor until the debt is liquidated. A conditional
obligation may also be secured. (1825a)
Under 2053, we have here the concept of continuing guaranty or
suretyship.
Q1: What is this arrangement?
A1: A continuing guaranty or suretyship is an agreemnet made by the
parties wherein a surety is bound unconditionally whether or not
there is a present or future obligation.
Dino vs. CA
FACTS:
In 1977, Uy Tiam Enterprises and Freight Services applied for and
obtained credit accommodations from the METROBANK in the sum
of 700K and executed separate Continuing Suretyships dated 25
February 1977, in favor of the latter.
Under the aforesaid agreements, Norberto Uy agreed to pay
METROBANK any indebtedness of UTEFS up to the aggregate sum
of P300,000.00 while Jacinto Uy Diño agreed to be bound up to the
aggregate sum of P800,000.00.
METROBANK demanded payment of the amount due from Dino and
UY.
Diño maintained that he cannot be held liable for the 1979 credit
accommodation because it is a new obligation contracted without his
participation. Besides, the 1977 credit accommodation which he
guaranteed has been fully paid.:
ISSUE: WON Diño and Uy are solidarily liable for the obligation of
defendant Uy tiam with Metrobank under and by virtue of the
continuing suretyships they executed on february 25, 1977.
RULING: YES
In the case at bar, the pertinent portion of paragraph I of the
suretyship agreement executed by petitioner Uy unequivocally
reveal that the suretyship agreement in the case at bar are
continuing in nature.
Undoubtedly, the purpose of the execution of the Continuing
Suretyships was to induce appellant to grant any application for
credit accommodation UTEFS may desire to obtain from appellant
bank. force and effect until the bank is notified of its revocation.
Q1: What are the defenses of the defendants in this case?
A1: That they did not agree, ma’am.
Q2: What was the principal obligation demanded from the sureties?
When was the contract entered into?
Q3: What obligation was being demanded? Obligation incurred
when?
A3: 1979
Q4:When was the continuing suretyship agreement executed?
A4: 1977
Q5: What was their defense? Are the petitioners here liable as
sureties or the obligation incurred in 1979?
Q5:Yes ma’am.
Q6: Even if the suretyship agreement was executed in 1977? Why?
Q7:What makes it a continuing suretyship agreement?
A7:They are bound to answer series of transactions.
Q8:What are the specific provisions/stipulations in that continuing
suretyship agreement that would make them liable for obligations
incurred in 1979?
A8: in the case at bar ma’am, Par 1 & 4 of their agreement reveals
that the suretyship is continuing in nature and that both Norberto and
Jacinto did not deny this.
Q9: What does this paragraph stipulate? The specific terms used so
that we can determine if it’s really a suretyship agreement. What is
that phrase?
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So what we have here is that a guaranty may be given as security for
future debts, the amount of which is not yet known at the time
guaranty is executed. That is called a continuing guaranty. It is not
limited by a single transaction but which contemplates a future
course of dealing covering a series of transactions generally for an
indefinite time or until certain period. 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. It must be within the contemplation of contract of guaranty
until the termination or expiration thereof.
A guaranty shall be construed as continuing when by the terms
thereof it is evident that the object is to give a standing credit to the
principal debtor to be used from time to time either indefinitely or until
a certain period, especially if the right to recall the guaranty is
expressly reserved. Hence, where the contract 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.
It has been held that the use of particular words and expressions
such as payment of "any debt," "any indebtedness," "any deficiency,"
or "any sum," or the guaranty of "any transaction" or money to be
furnished the principal debtor "at any time," or "on such time" that the
principal debtor may require, have been construed to indicate a
continuing guaranty.
In this case, the phrase says “at any time”, “from time to time
hereafter”, and guaranty the punctual payment at maturity to the
bank of any and all such instruments, loans, advances and credit.
We have also therein: “this is a continuing guaranty and shall remain
in full force and effect until either notice shall have been received by
the bank that it has been revoked by the surety”.
So with this, it is a continuing guaranty even if it was executed in
1977, it covers all debts, even future debts in favor of the bank as the
creditor. So here the defense that the 1977 obligation was already
paid was not upheld by the court because of the nature of this
continuing suretyship agreement. Suretyship for all obligations
incurred by the principal debtor in favor of the bank.
So take note of nature of this continuing guaranty or continuing
suretyship.
What is the purpose, why do parties enter into this kind of contract?
ATOK VS. CA
FACTS: Sanyu Chemical corporation, along with individual private
stockholders of Sanyu Chemical, executed in the continuing
Suretyship Agreement in favor of Atok Finance as creditor.
Atok Finance commenced action against Sanyu Chemical,et al. to
collect the sum of money.
Sanyu contended that contended that the Continuing Suretyship
Agreement, being an accessory contract,was null and void since, at
the time of its execution,Sanyu Chemical had no pre-existing
obligation due to Atok Finance.
ISSUE: WON the Continuing Suretyship Agreement is null and void
on the ground that it has no pre-existing obligation to Atok at the time
of its Execution?
RULING: NO.
Article 2053 provides that the "future debts" relate to "debts already
existing at the time of the constitution of the agreement but the
amount of which is unknown," and not to debts not yet incurred and
existing at that time.
Take a look at this case at the discussion of the SC and in the
succeeding cases dealing with continuing suretyship or guarantee
agreements. These comprehensive or continuing guaranty
agreements are in fact quite common in present financial and
commercial practice. Diba? Ang financing company which anticipates
entering into a series of credit transactions with a particular company
commonly requires the projected principal debtor to execute a
continuing suretyship agreement along with its sureties. By
executing such agreement, the principal places itself in the position
to enter into a projected series of transactions with its creditor with
such suretyship agreement; there will be no need of separate
contracts of surety every time the principal debtor borrows from the
creditor.
So in other words, there’s a credit accommodation that may be given
to the debtor and as long as the continuing suretyship agreement
provides that the obligation of the principal debtor in favor of the
creditor is covered by that continuing suretyship agreement, then that
would be considered as valid.
Again, notice the terms: “any and all indebtedness in favor of the
creditor”. Sometimes they will put an amount, like in the earlier case
of Dino, one surety up to 300k, another surety for 800k, for others for
specific time. So yun yung limitation but what is clear here, why do
people enter into these contracts of continuing surety?
Less expense, less effort to execute surety or guaranty contracts
every time a debtor will borrow money from the creditor.
So what happened in the case of Atok vs. CA, with regard to the
defense at the time the suretyship agreement was executed, it is
without consideration and without a pre-existing principal obligation,
and therefore held null and void. Obviously such agreement is valid.
That is again covered under Article 2053. It may secure future debts.
So at the time that it is executed, it is not necessary that the principal
obligation exists at that time. Because of the nature that it covers
future debts and that it is clearly provided by law under Article 2053.
As long as subsequently there is a true valid obligation and there’s
default on the part of the principal debtor, the surety can be held
liable. And if it’s a continuing surety or agreement, the guarantor can
be held liable after exhausting all the assets of the debtor.
RCBC vs. JUDGE ARRO
FACTS: Residoro Chua and Enrique Go, Sr. executed a
comprehensive surety agreements to guarantee among others, any
existing indebtedness of Davao Agricultural Industries Corporation.
A promissory note was issued in favor of petitioner.Said note was
signed by Enrique Go, Sr. in behalf of Daicor.
The amount represented by the note, however, was not satisfied,
prompting RCBC to file a complaint for sum of money against Daicor,
et al.
Chua alleged that he did not sign the promissory note.
ISSUE: WON Chua can be held liable for non payment of the
promissory note.
RULING: YES.
The comprehensive surety agreement was jointly executed by
Residoro Chua and Enrique Go, Sr., on October 19, 196 to cover
existing as well as future obligations which Daicor may incur with the
petitioner bank.
The agreement was executed obviously to induce petitioner to grant
any application for a loan Daicor may desire to obtain from petitioner
bank. The guaranty is a continuing one which shall remain in full
force and effect until the bank is notified of its termination.
Q1:what’s the condition here for the sureties to be held liable?
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A1: the only condition of the sureties to be held liable is that the
borrower may become liable as maker, endorser, acceptor or
otherwise.
Q2: When was this promissory note executed? A2:1977
What we have here is a continuing or comprehensive surety
agreement. Chua guaranteed as a surety solidariliy liable to any
existing indebtedness of Davao Agricultural Industries Corporation or
DAICOR and to induce the bank anytime or time to time thereafter to
make loans or advances or to the extent crediting other at the
request or per the account of the borrower. Provided that it shall not
exceed at any one time the aggregate principal sum of 100k. The
guaranty is a continuing one which shall remain in full force and
effect until the bank is notified of its termination. The loan, as
evidenced by promissory note, was covered by the said payment
even if the sureties here did not sign the promissory note. The only
condition what would make him liable is that the borrower is or may
become liable as maker, endorser, acceptor or otherwise. By issuing
that promissory note, DAICOR was liable as a maker evidencing
such indebtedness. The surety agreement, earlier signed by Go and
Chua is an accessory obligation, it being dependent to a principal
one. In this case, the loan obtained by DAICOR and what obviously
induced bank to grant the loan was the surety agreement - to
guarantee future debts which DAICOR may incur with petitioner as
specifically allowable under the Civil Code.
FORTUNE MOTORS VS. CA
FACTS:
On 1981, Chua and Petitioner Rodrigueza each executed an undated
Surety Undertaking whereunder they absolutely, unconditionally and
solidarily guarantee(d) to Respondent Filinvest Credit Corporation
and its affiliated and subsidiary companies the full, faithful and
prompt performance, payment and discharge of any and all
obligations and agreements of Fortune Motors.
Fortune, Respondent Filinvest and CARCO entered into an
agreement. Fortune did not comply.Thus, Filinvest filed a complaint
for a sum of money with preliminary attachment against Fortune,
Chua and Rodrigueza.
Petitioners argue that:
a) future debts which can be guaranteed under Article 2053
of the Civil Code refer only to debts existing at the time of
the constitution of the guaranty but the amount thereof is
unknown;
b) the Financing Agreement would effect a novation of the
surety contracts since it changed the principal terms of
the surety contracts and imposed additional and onerous
obligations upon the sureties.
ISSUE: WON petitioners were jointly and solidarily liable to Filinvest.
RULING: YES.
a) Surety May Secure Future Obligations = (Article 2053)
b) No Novation : The allegation of novation by petitioners is,
therefore, misplaced. There is no incompatibility of obligations to
speak of in the two contracts (surety undertakinfs & Financing
Agreement).
Q1:Who is the principal debtor here?
A1: Fortune Motors
Q2:Creditor?
A2:Filinvest
Q3: What was the specific stipulation in the surety agreement?
Q4: the specific provision because again, it is not enough that it is
stipulated as a continuing surety agreement. What makes it a surety
and not a guarantee?
A4: the statements in their agreement that xxx whereunder they
absolutely, unconditionally and solidarily guarantee(d) to Respondent
Filinvest Credit Corporation and its affiliated and subsidiary
companies the full, faithful and prompt performance, payment and
discharge of “any and all obligations and agreements” of Fortune
Motors xxx
(Ma’am kept on repeating to take note of the specific stipulations in
the contract/agreement)
Q5: Why is this arrangement entered into by the parties? What’s the
purpose? What is the nature of Fortune Motors business?
We have here a continuing surety agreement. It’s very clear in the
contract executed by Chua, the value stipulation absolutely,
unconditionally and solidarily guarantee to respondent Filinvest the
whole faithful performance, payment and discharge of any and all
obligations and agreements of petitioner Fortune under or with
respect with any and such all contracts, and any and all other
agreements, whether by way of guaranty or otherwise of the latter
Fortune Motors to Filinvest and its affiliated and subsidiary
companies now enforced. By such stipulations, what was entered
into was a continuing suretyship agreement.
Again the defense that there was no principal obligation at the time
this contract was executed is not valid because by virtue of its
continuing nature, it is allowed under Article 2053, a contract of
guaranty or suretyship may be entered to secure future obligations.
In this case, surety contracts enabled Fortune to acquire credit facility
from Filinvest to procure cars which was the business of Fortune. For
its part, Filinvest relied on the surety contracts when it agreed to be
the assignee of *** with respect to liabilities of Fortune.
Petitioners cannot now impugn the validity of surety contracts on the
ground that there was no pre-existing obligation to be guaranteed at
the time the said surety contracts were executed. They cannot resort
to equity to escape liability for their voluntary act.
Neither is there merit with regard to the averment of petitioners that
the financing agreement contained obligations not contemplated in
the undertaking. In other words, there was also no novation to speak
of.
SOUTH CITY HOMES vs. BA FINANCE
FACTS: Fortune Motors Corporation has been availing of the credit
facilities of plaintiff-appellant BA Finance Corporation. Chua,
President of Fortune Motors Corporation, executed in favor of
plaintiff-appellant a Continuing Suretyship Agreement, in which he
jointly and severally unconditionally guaranteed the full, faithful and
prompt payment and discharge of any and all indebtedness of
Fortune Motors Corporation to BA Finance Corporation
South City Homes, Inc. represented by Edgar C. Rodrigueza and
Aurelio F. Tablante, likewise executed a Continuing Suretyship
Agreement in which said corporation jointly and severally
unconditionally guaranteed the full, faithful and prompt payment and
discharge of any and all indebtedness of Fortune Motors Corporation
to BA Finance Corporation.
Upon failure of the Fortune Motors Corporation to pay the amounts
due, BA Finance Corporation filed a complaint for a sum of money
with prayer for preliminary attachment
ISSUES:
(1) whether the suretyship agreement is valid;
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(2) whether there was a novation of the obligation so as to extinguish
the liability of the sureties; and
(3) whether respondent BAFC has a valid cause of action for a sum
of money following the drafts and trust receipts transactions.
RULING:
(1) Yes. The Civil Code, however, allows a suretyship
agreement to secure future loans even if the amount is not
yet known as provided in Article 2053 of the Civil Code.
(2) No novation, but assignment of credit. (case merely
defined what an assignment of credit is)
(3) In the event of default by the entrustee on his obligations
under the trust receipt agreement, it is not absolutely
necessary that the entruster cancel the trust and take
possession of the goods to be able to enforce his rights
thereunder.
Q1:How about the issue on novation?
A1: The South City here contended that there was a novation as a
result of the assignment to BA Finance. The court here held that
there was no novation, that an assignment of credit is an agreement
by virtue of which the owner of the credit known as the assignor, by
legal cause and without the consent of the debtor, transfers his credit
and accessory rights to another which is known as the assignee and
acquires the power to enforce it to the same extent as the assignor.
Q2: In an assignment of credit, is the consent of the debtor required?
A2:NO ma’am.
Q3:However what’s the effect of the absence of notice on the part of
the debtor with regard to this assignment of creditors, subrogation of
the rights of creditor to a third person.
A3: The law requires not the consent of the debtor but merely notice
to him. So a creditor may validly assign his credit without the debtor’s
consent and the purpose of notice is only to inform the debtor that
the payment should be made to the assignee and not to the original
credit.
Q4: In other words, the assignment of credit affects the validity of
suretyship agreement?
A4: No, it does not affect the validity.
Again, it’s very clear Article 2053 of Civil Code allows surety
agreement to secure future debts even if the amount is not yet
known.
A surety is not bound under any particular principal obligation until
that principal obligation is born but there is no theoretical or doctrinal
difficulty inherent in saying that the suretyship agreement itself is
valid and binding even before the principal obligation intended to
secure thereby is born. Any more that there would be in saying that
obligations which are subject to a condition precedent are valid and
binding before the occurrence of the condition precedent.
In executing such continuing surety agreement, the principal places
himself in a position to enter into the projected series of transactions
with its creditor. In such suretyship agreement there will be no need
again to execute a separate surety contract or one where each
financing or credit accommodation extended to the principal debtor.
In this case, the assignment of credit did not result to a novation
even if without the consent of debtor. In other words, there was no
extinguishment of the liability of the debtor. As a consequence of
assignment of credit, the third party steps into the shoes of the
original creditor as subrogee of the latter but it does not extinguish
the obligation.
The defense here that the assignment made without the consent of
the debtor extinguished the obligation is not upheld by the court as
consent is not necessary in order that assignment introduce legal
effect. The duty to pay does not depend on the consent of the debtor.
What the law requires in assignment of credit is not the consent of
debtor but merely the notice to him. In what sense? Recall again
your Obligations and Contracts, to effect payment or performance.
To extinguish the obligation, payment must be made to the creditor at
the time of payment. In other words, it is not necessary that the
payment be made to that creditor at the time the obligation was
constituted. Because again, this might happen, the assignment of
credit, so creditor at the time the payment is made.
What is the effect if the debtor has no knowledge of the assignment
of credit and he pays to the principal/original creditor? That payment
will extinguish the obligation in the absence of notice that there has
already been an assignment of credit. So by paying the
principal/original creditor, the subrogation is extinguished.
If we have already notice of that assignment of credit, but
nevertheless pay to the creditor, his obligation is not extinguished but
in fact, the third person who subrogated the rights of the creditor can
still demand payment because the obligation was not extinguished.
Again the absence of notice will not affect the validity of the
assignment of credit, it will only affect with regard to the debtor as to
whom he makes the payment.
Again, take note of Article 2053 in relation to this concept of
continuing guaranty and suretyship. Very common especially for
corporations who enter into contracts of loan, such as financial
institutions, banks, they would be given a credit line or
accommodation for them to borrow money.
Also, we have noticed that usually sino yung mga sureties dito?
Officers of the bank. Why? Because a corporation is a juridical entity.
Stockholders of that corporation cannot be personally liable beyond
their subscription or their contribution to that corporation. So on the
part of the creditor, pahiramin nila ng malaking pera yung corporation
pero just in case this incorporation will become insolvent, meron
silang security. So we have these individuals: presidents, CEOs,
officers of the corporation, wherein they can be held liable in case of
default of the principal debtors.
Here they alleged the defense of absence of consideration. Again,
not valid because of this nature of the continuing suretyship.
Things you should take note of continuing suretyship or guaranty
agreements are:
 Take note of the consideration if the act is a guaranty or
surety.
Because again, solidarily liable ang surety, ang guarantor
may use the defense of exhaustion of properties;
 What are limitations? Who are the person who signed as
sureties or guarantors? What is the extent of their liability?
Up to what amount? What kinds of loans? What are the
conditions? Periods? Is it limited by a period or for
example, we have also a case wherein the suretyship or
continuing suretyship agreement will continue until there is
a notice of cancellation. Always take that into a
consideration because again, if the limit has already been
reached, if the obligation was incurred after the period
stipulated, even if it is a continuing suretyship agreement,
di ka na makahabol sa sureties. So take note of these
stipulations. What is the nature of the stipulation provided
in a continuing guarantee or suretyship agreement.
Under Article 2053, we have there the term “liquidated”. What
happens if the amount is not yet liquidated? In other words, amounts
which are not yet determined. So you already know there is a liability
but no fixed amount yet. You can wait until the amount is liquidated.
After that, you can enforce, as a creditor, against the surety or
guarantor the payment of the amount that has been determined.
14 | P a g e
Also under Article 2053, conditional obligation may be secured. What
happens if the condition is not yet fulfilled? Obviously, the guaranty
or suretyship cannot be enforced. Once the condition is fulfilled, the
obligation of the guarantor can now be enforced.
Remember the contract of guaranty is again dependent upon the
principal obligation. So if a condition is attached to a principal
obligation, that must be observed. The condition in the principal
obligation must happen first before you can seek for the enforcement
of the liability of the guaranty or the surety.
Now take note, as a general rule, continuing suretyship or guaranty
agreement are prospective in nature. However, we already discussed
in Willex vs. CA that it may be retrospective. Again, look at the
intention of the parties.
In the case of Willex, it was held that in no case that in all instances
that a contract of guaranty or suretyship should be prospective in
application. While prospective is the general rule, it may be
retrospective between the parties.
We end there. Merry Christmas! 
January 6, 2016
Transcribed by: Jennifer Lim
Part I Review of 2015 Lectures
1. Definition of Guaranty – first paragraph of Article 2047
2. Definition of Suretyship – last paragraph same article
Art. 2047. By guaranty a person, called the guarantor,
binds himself to the creditor to fulfill the obligation of
the principal debtor in case the latter should fail to do
so.
If a person binds himself solidarily with the principal
debtor, the provisions of Section 4, Chapter 3, Title I
of this Book shall be observed. In such case the
contract is called a suretyship. (1822a)
3. A guaranty is gratuitous under Article 2048
Art. 2048. A guaranty is gratuitous, unless there is a
stipulation to the contrary.
4. A woman may guaranty an obligation Article 2049
Art. 2049. A married woman may guarantee an obligation
without the husband's consent, but shall not thereby bind the
conjugal partnership, except in cases provided by law.
5. Article 2050 - relate it with Obligations and Contracts, in
relation to subrogation and reimbursement of payment. A
third person takes the place of a person in a principal
obligation.
Art. 2050. If a guaranty is entered into without the knowledge or
consent, or against the will of the principal debtor, the provisions
of Articles 1236 and 1237 shall apply. (n)
6. Article 2051 - review of the different kinds of guarantee
Art. 2051. A guaranty may be conventional, legal or
judicial, gratuitous, or by onerous title.
It may also be constituted, not only in favor of the principal
debtor, but also in favor of the other guarantor, with the
latter's consent, or without his knowledge, or even over his
objection. (1823)
7. Article 2052 - the accessory nature of a contract of
guaranty
Art. 2052. A guaranty cannot exist without a valid obligation.
Nevertheless, a guaranty may be constituted to guarantee the
performance of a voidable or an unenforceable contract. It may
also guarantee a natural obligation. (1824a)
8. Article 2053 - continuing guaranty of suretyship agreement.
Take note of what is the purpose and nature of these
contracts.
a. If the amount is not yet liquidated, then, wait for the
debt to be liquidated. After that, one can now enforce
the obligation to the guarantor
b. A conditional obligation can also be subject of a
contract of guarantee. If the obligation is not yet
fulfilled, the guaranty cannot be enforced.
c. If it is the principal obligation subject to the condition,
then a condition to the principal obligation must
happen and should be observed in a contract of
guaranty.
Art. 2053. A guaranty may also be given as security for
future debts, the amount of which is not yet known; there
can be no claim against the guarantor until the debt is
liquidated. A conditional obligation may also be secured.
(1825a)
Part II. Lecture
Now, let’s have Article 2054
Art. 2054. A guarantor may bind himself for less, but not for more
than the principal debtor, both as regards the amount and the
onerous nature of the conditions.
Should he have bound himself for more, his obligations shall be
reduced to the limits of that of the debtor. (1826)
This is a consequence of a guaranty contract. The
obligation of the guarantor must not be more onerous than that of the
principal creditor. While a contract of guaranty may secure the
principal obligation of which the guaranty is less than the principal
amount, the guarantor cannot be held liable for more than the
principal obligation. The guaranty may constitute an amount which is
less than the principal obligation, but not more than the principal
obligation
Examples:
1. The principal obligation may be 100K, the guaranty may be
50K. Valid
2. The principal obligation may be 100K, the guaranty may be
30K. you cannot pay the full amount of 100K
3. The principal obligation is 100K, guaranty is 150k.
obviously, you can only claim 100k from the guarantor.
4. The principal obligation is 150K, the guaranty is only 100k
plus partial payment by principal debtor 100k. 50k balance,
despite demand or refusal to pay of debtor and after
exhausting efforts to claim from the principal debtor, wala
na talagang makuha.
So the creditor now will go after the guarantor. If the guarantor
will use the defense, I only secured 100k and it is the portion already
paid by the principal debtor, therefore I cannot be held liable the
balance of 50k.
Under this circumstance, we apply the rule on application
of payments. With regard to the debtor who made the payment, we
first apply it to that specified by the debtor. In the absence thereof, as
15 | P a g e
to the creditor. In the absence of such specifications by the debtor
and the creditor, the obligation which is onerous.
With regard to the debtor who made the payment of 100k,
it will comprise the payment of the 50k which is unsecured, the
remaining 50k will refer to the remaining portion of the secured
obligation. As to the debtor who made the payment, mas onerous sa
kanya yung 50k na unsecured kasi meron man siyang other person,
guarantor na mag secure sa remaining obligation
Applying the application of payment, what is the effect to
the 50k remaining balance refers to the remaining portion that is still
covered by the guaranty of said guarantor. Therefore, he can be
liable. In this instance, when the debtor made the payment, apply first
to the remaining portion as the debtor who made the payment, that is
most onerous, then the excess will be applied to the secured portion.
With regard to interest, judicial cost and attorney’s fees, in
this instance in relation to the principal obligation, it is an additional
burden on the party of the guarantor. Recall the case of Dino vs. CA,
these additional fees, interest, judicial costs and attorney’s fees, were
incurred and demandable by reason of failure of the guarantor to pay
the obligation when demanded and the failure of the creditor to resort
to courts to demand payment.
In other words, the additional payment of these fees,
interest, judicial costs, is not prohibited by 2054. It does not make the
amount more onerous than the principal obligation because these
fees and charges arose from the fact of failure to pay when in fact the
guarantor is already liable to pay. Therefore, the creditor was
compelled to file an action in court making the guarantor liable for not
only the interest and delay, but as well as judicial costs and attorney’
s fees.
Case #1 PACIFIC BANKING V IAC
FACTS:
Celia Regala, applied for and obtained from Pacific Banking the
issuance and use of Pacificard credit card. Robert Regala, Jr.,
spouse of Celia, executed a "Guarantor's Undertaking" in favor of the
Bank, whereby the latter agreed jointly and severally of Celia, to pay
the bank upon demand, any and all indebtedness etc due and
incurred by her with the use of the Pacificard, or renewals thereof,
issued in her favor by the bank.
Celia had purchased goods and/or services on credit for which the
bank advanced the cost amounting to P92,803.98 at the time of the
filing of the complaint. In view of Celia's failure to settle her account,
a written demand was sent to the latter and also to the Roberto
Regala, Jr. under his "Guarantor's Undertaking."
A complaint was filed in Court for repeated failure to settle their
obligation. Celia was declared in default for her failure to file her
answer within the reglementary period. Roberto Regala, Jr. filed his
Answer with Counterclaim admitting his execution of the "Guarantor's
Understanding", "but with the understanding that his liability would be
limited to P2,000.00 per month."
ISSUE # 1: WON the undertaking is guaranty or surety? SURETY
The undertaking signed by Roberto although denominated
"Guarantor's Undertaking," was in substance a contract of surety. As
distinguished from a contract of guaranty where the guarantor binds
himself to the creditor to fulfill the obligation of the principal debtor
only in case the latter should fail to do so, in a contract of suretyship,
the surety binds himself solidarily with the principal debtor (Art.
2047). As a surety, Roberto bound himself jointly and severally with
Celia Regala "to pay the bank upon demand, any indebtedness etc
due and incurred by said Celia Regala with the use of Pacificard. . "
This undertaking was also provided as a condition in the issuance of
the Pacificard to Celia Regala.
ISSUE # 2: What is the extent of liability of Roberto Regala?
As a surety, Roberto bound himself jointly and severally with Celia
Regala to pay the bank upon demand, any indebtedness etc due and
incurred by said Celia Regala with the use of Pacificard. The court
does not agree however, that Roberto Jr.'s liability should be limited
to that extent (P2,000.00 a month).
Roberto Regala, Jr., as surety of his wife, expressly bound himself up
to the extent of Celia's indebtedness likewise expressly waiving any
"discharge in case of any change or novation of the terms and
conditions in connection with the issuance of the Pacificard credit
card." Roberto, in fact, made his commitment as a surety a
continuing one, binding upon himself until all the liabilities of Celia
Regala have been fully paid. All these were clear under the
"Guarantor's Undertaking" Roberto signed.
Private respondent Roberto Regala, Jr. had been made aware by the
terms of the undertaking of future changes in the terms and
conditions governing the issuance of the credit card to his wife and
that, notwithstanding, he voluntarily agreed to be bound as a surety.
As in guaranty, a surety may secure additional and future debts of
the principal debtor the amount of which is not yet known (see Article
2053).
When does a guarantor/surety incur liability?
A guarantor or surety does not incur liability unless the principal
debtor is held liable. It is in this sense that a surety, although
solidarily liable with the principal debtor, is different from the debtor. It
does not mean, however, that the surety cannot be held liable to the
same extent as the principal debtor. The nature and extent of the
liabilities of a guarantor or a surety is determined by the clauses in
the contract of suretyship.
Okay. So here, while it may be true that the credit limit was
up to 2000 per month, it is a reasonable credit limit. So 2k per month
and the effectivity of the card in the case in 1976 for one year, it does
not mean that the spouse or husband is not liable for the any
obligation beyond the 2000 limit and beyond the 1976 or 1 year
period.
As a surety, he bound himself jointly and severally with the
debtor Celia Regala "to pay the Pacific Banking Corporation upon
demand, any and all indebtedness, obligations, charges or liabilities
due and incurred by said Celia Syjuco Regala with the use of
Pacificard or renewals thereof issued in (her) favor by Pacific
Banking Corporation.". Roberto bound himself expressedly waiving
any change in the terms or connections in connection to the issuance
of the credit card. Roberto made his commitment as a surety a
continuing one.
By stipulation of the agreement, he bound himself to pay
the Pacific Banking Corporation upon demand, any and all
indebtedness, obligations, charges or liabilities due and incurred by
said Celia Syjuco Regala are paid.
Case #2 Molino vs. Security Diners
FACTS:
The Security Diners International Corporation ("SDIC') operates a
credit card system under the name of Diners Club through which it
extends credit accommodation to its cardholders for the purchase of
goods and payment of services from its member establishments to
be reimbursed later on by the cardholder upon proper billing.
There are two types of credit cards issued: one, the Regular (Local)
Card which entitles the cardholder to purchase goods and pay
services from member establishments in an amount not exceeding
P10,000.00; and two, the Diamond (Edition) Card which entitles the
cardholder to purchase goods and pay services from member
establishments in unlimited amounts. One of the requirements for the
issuance of either of these cards is that an applicant should have a
surety.
16 | P a g e
On July 24, 1987, Danilo A. Alto applied for a Regular (Local) Card
with SDIC. He got as his surety his own sister-in-law Jeanette Molino
Alto. Thus, Danilo signed the printed application and Jeanette signed
the Surety Agreement.
On the basis of the completed and signed Application Form and
Surety Undertaking, the SDIC issued to Danilo Diners Card No.
36510293216-0006. The latter used this card and initially paid his
obligations to SDIC. On February 8, 1988, Danilo wrote SDIC a letter
(Exhibit "B") requesting it to upgrade his Regular (Local) Diners Club
Card to a Diamond (Edition) one. As a requirement of SDIC, Danilo
secured from Jeanette her approval. The latter obliged and so on
March 2, 1988, she signed a Note (Exhibit 'C')
Danilo's request was granted and he was issued a Diamond (Edition)
Diners Club Card. He used this card and made purchases (Exhibits
"D", "D-1" to "D-7") from member establishments. On October 1,
1988 Danilo had incurred credit charged plus appropriate interest
and service charges in the aggregate amount of P166,408.31. He
defaulted in the payment of this obligation.
ISSUE: W/N Janette is liable as a surety for Danilo under the
Diamond Edition Card?
HELD:
Yes, the resolution of whether petitioner is liable as surety under the
Diamond card revolves around the effect of the upgrading by Danilo
Alto of his card. Was the upgrading a novation of the original
agreement governing the use of Danilo Alto's first credit card, as to
extinguish that obligation and the Surety Undertaking which was
simply accessory to it?
Novation, as a mode of extinguishing obligations, may be done in two
ways: by explicit declaration, or by material incompatibility (implied
novation)
There is no doubt that the upgrading was a novation of the original
agreement covering the first credit card issued to Danilo Alto,
basically since it was committed with the intent of canceling and
replacing the said card. However, the novation did not serve to
release petitioner from her surety obligations because in the Surety
Undertaking she expressly waived discharge in case of change or
novation in the agreement governing the use of the first credit card.
As a last-ditch measure, petitioner asseverates that, being merely a
surety, a pronouncement should first be made declaring the principal
debtor liable before she herself can be proceeded against. The
argument, which is hinged upon the dropping of Danilo as defendant
in the complaint, is bereft of merit.
The Surety Undertaking expressly provides that petitioner's liability is
solidary. A surety is considered in law as being the same party as the
debtor in relation to whatever is adjudged touching the obligation of
the latter, and their liabilities are interwoven as to be
inseparable.Although the contract of a surety is in essence
secondary only to a valid principal obligation, his liability to the
creditor is direct, primary and absolute; he becomes liable for the
debt and duty of another although he possesses no direct or
personal interest over the obligations nor does he receive any benefit
therefrom.
There being no question that Danilo Alto incurred debts of
P166,408.31 in credit card advances, an obligation shared solidarily
by petitioner, respondent was certainly within its rights to proceed
singly against petitioner, as surety and solidary debtor, without
prejudice to any action it may later file against Danilo Alto, until the
obligation is fully satisfied. This is so provided under Article 1216 of
the Civil Code.
Petitioner is a graduate of business administration, and possesses
considerable work experience in several banks. She knew the full
import and consequence of the Surety Undertaking that she
executed. She had the option to withdraw her suretyship when Danilo
upgraded his card to one that permitted unlimited purchases, but
instead she approved the upgrading.
At the same time, it bears articulating that although courts in
appropriate cases may equitably reduce the award for penalty as
provided under such suretyship agreements if the same is iniquitous
or unconscionable, we are unable to give relief to petitioner by way of
reducing the amount of the principal liability as surety under the
circumstances of this case.
Q: Did Jeanette sign any document?
A: In this case maam, she only signed a note. Such document
certified that she certified that credit card to be upgraded. There was
an express consent or approval of her to obtain the card and thus
giving her liability.
Q: There was novation but she was not liable because?
A: She is liable maam.
Q: There was a novation but she was not liable for the reason?
A: Because, in the surety undertaking, there was an express waiver
Q: what is the advice of the SC to persons who act as surety or
guarantors of credit cards?
A: In this case maam, she SC took notice of the background of
Jeannette as she was a graduate of business administration. She
should have been more careful in scrutinizing the provisions of the
contract. When one transacts, applicants are well-advised to study
the terms and agreements of the companies before giving their
consent.
The advice of the SC is to study the terms of the
agreement and read the stipulations that could lead to onerous
effect. Again, it is not only in this instance wherein you can act as a
surety, but in any instance wherein you sign a contract or an
agreement. In any case, read the stipulations.
In fact, as law students and future lawyers, you cannot
raise the defense that you did not understand or did not read or it
was a contract of adhesion, because your education will be taken
against you because you know very well you should ready and study
carefully the provisions in a contract.
Pacific and Molina are similar to the topic of novation.
Nevertheless, the sureties were deemed liable wherein in such
cases, you did not extinguish your respective liabilities but they
expressedly waived with regard to any change, in that of the original
contact.
Take note here that Janette is considered as a surety
because it is clearly provided in the agreement that she will be bound
jointly and severally and also it indicated in the Undertaking “Any
change or novation in the agreement or any extension of time
granted by SECURITY DINERS to pay such obligations, charges and
fees, shall not release me/us from this Surety Undertaking, it being
understood that said undertaking is a continuing one and shall
subsist and bind me/us until all such obligations, charges and fees
have been fully paid and satisfied.” Further, the indication of a credit
limit will not discharge her of any liability for charges and any other
amount.
*Im not sure that if you apply now for a credit card,
kailangan ng surety or guarantee. Ang kailangan ngayon is
wala, basta meron kang payslip, meron kang employment,
dba kahit saan mag lakad sa mall. May credit card ka na
maam? Meron na. Now mas madali na kumuha ng credit
card but persistent na sila in claiming payment. I’m not
against credit cards but once you have one make sure that
you pay full amount upon due date. Kasi jan kayo mag talo
sa interest rate. Now, it is better to acquire a credit card
while you are still a law student kasi pag lawyers na kayo,
parang may implied or unwritten rule na mas strict ang
rules on application sa inyo. Best time to secure is now.
Story2x na si maam about lawyers applying for credit
cards*
17 | P a g e
 Case #3 GATEWAY ELECTRONICS CORPORATION and
GERONIMO B. DELOS REYES, JR., V. Asianbank
Facts:
Petitioner Gateway Electronics Corporation (Gateway) is a domestic
corporation that used to be engaged in the semi-conductor business.
During the period material, petitioner Geronimo B. delos Reyes, Jr.
was its president and one Andrew delos Reyes its executive vice-
president.
On July 23, 1996, Geronimo and Andrew executed separate but
almost identical deeds of suretyship for Gateway in favor of
respondent Asianbank Corporation (Asianbank) pertinently providing:
I/We Geronimo B. de los Reyes, Jr. x x x warrant to the ASIANBANK
CORPORATION, x x x due and punctual payment by the following
individuals/companies/firms, hereinafter called the DEBTOR(S), of
such amounts whether due or not, as indicated opposite their
respective names, to wit:
NAME OF DEBTOR(S) AMOUNT OF OBLIGATION
GATEWAY ELECTRONICS *P10,000,000.00*DOMESTIC BILLS
CORPORATION
OMNIBUS CREDIT LINE: *US$3,000,000.00*OMNIBUS
owing to the said ASIANBANK CORPORATION, hereafter called the
CREDITOR, as evidenced by all notes, drafts, overdrafts and other
[credit] obligations of every kind and nature contracted/incurred by
said DEBTOR(S) in favor of said CREDITOR.
In case of default by any and/or all of the DEBTOR(S) to pay the
whole part of said indebtedness herein secured at maturity, I/WE
jointly and severally agree and engage to the CREDITOR, its
successors and assigns, the prompt payment, x x x of such notes,
drafts, overdrafts and other credit obligations on which the
DEBTOR(S) may now be indebted or may hereafter become
indebted to the CREDITOR, together with all interests, penalty and
other bank charges as may accrue thereon x x x.
Later developments saw Asianbank extending to Gateway several
export packing loans in the total aggregate amount of USD
1,700,883.48. This loan package was later consolidated with Dollar
Promissory Note (PN) No. FCD-0599-2749[4] for the amount of USD
1,700,883.48 and secured by a chattel mortgage over Gateway’s
equipment for USD 2 million.
Gateway initially made payments on its loan obligations, but
eventually defaulted. Upon Gateway’s request, Asian bank extended
the maturity dates of the loan several times.
Thus, on December 15, 1999, Asian bank filed with the Regional
Trial Court (RTC) in Makati City a complaint for a sum of money
against Gateway, Geronimo, and Andrew.
Issues: WON Geronimo is discharged from performing his
obligations as a surety because Gateway has been declared
insolvent.
Held:
NO. Geronimo argues that his liability as a surety cannot be
separated from Gateway’s liability. As surety, he continues, he is
entitled to avail himself of all the defenses pertaining to Gateway,
including its insolvency, suggesting that if Gateway is eventually
released from what it owes Asianbank, he, too, should also be so
relieved.
Geronimo’s above contention is untenable. Suretyship is covered by
Article 2047 of the Civil Code, which states:
By guaranty a person, called the guarantor, binds himself to the
creditor to fulfill the obligation of the principal debtor in case the latter
should fail to do so.
If a person binds himself solidarily with the principal debtor, the
provisions of Section 4, Chapter 3, Title I of this Book shall be
observed. In such case the contract is called a suretyship.
The Court’s disquisition in Palmares v. Court of Appeals on
suretyship is instructive, thus:
A surety is an insurer of the debt, whereas a guarantor is an insurer
of the solvency of the debtor. A suretyship is an undertaking that the
debt shall be paid x x x. Stated differently, a surety promises to pay
the principal’s debt if the principal will not pay, while a guarantor
agrees that the creditor, after proceeding against the principal, may
proceed against the guarantor if the principal is unable to pay. A
surety binds himself to perform if the principal does not, without
regard to his ability to do so. x x x In other words, a surety
undertakes directly for the payment and is so responsible at once if
the principal debtor makes default x x x.
Creditor’s right to proceed against the surety exists independently of
his right to proceed against the principal. Under Article 1216 of the
Civil Code, the creditor may proceed against any one of the solidary
debtors or some or all of them simultaneously. The rule, therefore, is
that if the obligation is joint and several, the creditor has the right to
proceed even against the surety alone.
Since, generally, it is not necessary for the creditor to proceed
against a principal in order to hold the surety liable, where, by the
terms of the contract, the obligation of the surety is the same as that
of the principal, then soon as the principal is in default, the surety is
likewise in default, and may be sued immediately and before any
proceedings are had against the principal.
Clearly, Asianbank’s right to collect payment for the full amount from
Geronimo, as surety, exists independently of its right against
Gateway as principal debtor;[13] it could thus proceed against one of
them or file separate actions against them to recover the principal
debt covered by the deed on suretyship, subject to the rule
prohibiting double recovery from the same cause.[14] This legal
postulate becomes all the more cogent in case of an insolvency
situation where, as here, the insolvency court is bereft of jurisdiction
over the sureties of the principal debtor.
As Asianbank aptly points out, a suit against the surety, insofar as
the surety’s solidary liability is concerned, is not affected by an
insolvency proceeding instituted by or against the principal debtor.
The same principle holds true with respect to the surety of a
corporation in distress which is subject of a rehabilitation proceeding
before the Securities and Exchange Commission (SEC). As we held
in Commercial Banking Corporation v. CA, a surety of the distressed
corporation can be sued separately to enforce his liability as such,
notwithstanding an SEC order declaring the former under a state of
suspension of payment.
Q: How about the contention of Geronimo that the suretyship
agreement was not within its scope?
A:The court here ruled that It will still not relieve him from any liability.
Q: What was the contention of Geronimo regarding the scope of the
suretyship agreement? What obligations were supposed to be
covered? Specifically what?
A: It alleged that it only covers the 10 million purchased covers and
the 3 million dollars omnibus credit line. The basis of the obligation
was the default of payment of the 1.7 million based on the export
packing loans. The promissory note executed by gateway as it was
not really the scope of the omnibus credit line. In this case, the Court
ruled that Aqua surety is liable as it was a continuing surety
agreement. As a continuing surety, he is liable for the future
obligations, debts, and transactions which will be incurred by
Gateway including the promissory notes.
So here, the deed of suretyship signed by Geronimo was a
continuing suretyship. By the expressed terms of the deed it requires
payment of the 10 million domestic bills purchased and the 3 million
dollar omnibus credit line. Omnibus Credit line is a credit facility
wherein the borrower can avail of various credits within that amount.
With that, the deed of suretyship executed by Geronimo,
undertook to secure all the things covered under the domestic
18 | P a g e
purchase line and the omnibus credit line without any specification as
to the period of the loan.
The suretyship itself was not a specific loan document such
as in this case, a promissory note, to the extent of exclusion by
another. The suretyship agreement merely mentioned that the
document the domestic purchase line and omnibus credit line as
evidenced by all those drafts contracted by Gateway in favor of Asia
Bank making the promissory note subject of the demanded by
Geronimo in this case.
As to the other defense, The SC held here that there was
no violation of Article 2054, just because Gateway. The principal
debtor, has already been declared insolvent, it does not mean the
surety Geronimo will also be not held liable as against Asia Bank.
While it is true that such insolvency automatically states the civil
action filed by Asia Bank against Gateway, it does not have the same
effect as to the surety.
A creditor’s right to proceed against a surety is
independent of his right to proceed against the principal. The
obligation in this case is joint and several, the creditor has a right to
proceed against the surety alone. The surety cannot, in absence of
any agreement on a security, require the creditor to proceed against
him before the principal because again the obligation of the surety is
primary.
The surety Geronimo tired to apply Article 2054 in his
circumstance since Gateway was already declared insolvent, bakit
pa siya magbayad, but the SC ruled that he cannot apply Article
2054 here. Article 2054 enunciates the rule that the obligation of the
guarantor may be less but it cannot be more than the obligation of
the principal debtor, but such cannot possibly be stretched to mean
that the guarantor or surety is freed from liability in the event the
principal debtor becomes insolvent or unable to pay the obligation,
why? Because it would defeat the very purpose of entering into the
contract of guaranty and suretyship. It presumes when the surety
engages to answer for the debt, default and miscarriage of another.
Case #4 SECURITY BANK VS CUENCA
FACTS:
Sta. Ines is a corporation engaged in logging operations. In 1980, it
was granted by Security Bank a credit line in the amount of Php 8M.
To secure payment, it executed a chattel mortgage over some of its
machineries and equipments. As an additional security, its President
and Chairman of the Board of Directors Rodolfo Cuenca, executed
an Indemnity agreement in favor of Security Bank whereby he bound
himself jointly and severally with Sta. Ines. After Cuenca resigned,
Sta. Ines obtained a Php 6M loan. Because of its difficulty in making
the amortization payments, in 1989 it requested Security Bank a
complete restructure of its indebtedness, which was approved
without prior notice to, or prior consent of Cuenca. Still it was unable
to pay.
Security Bank insists that the 1989 Loan Agreement was a mere
renewal or extension of the Php 8M original accommodation, that
Cuenca waived his right to be notified of and to give consent to any
substitution, renewal, extension, increase,amendment, conversion or
revival of the same, and that it was a continuing surety. On the other
hand Cuenca argues that the 1989 agreement extinguished the
obligation under the 1980 credit accommodation by novation
ISSUE: WON the 1989 Loan Agreement novated the original
credit accommodation and therefore extinguished Cuenca’s
liability under the Indemnity Agreement.
Held:
Yes. An obligation may be extinguished by novation, pursuant to
Article 1292 of the Civil Code, which reads as follows:
“ART. 1292. In order that an obligation may be extinguished by
another which substitute the same, it is imperative that it be so
declared in unequivocal terms, or that the old and the new
obligations be on every point incompatible with each other.”
Novation of a contract is never presumed. It has been held that in the
absence of an express agreement, novation takes place only when
the old and the new obligations are incompatible on every point.]
Indeed, the following requisites must be established: (1) there is a
previous valid obligation; (2) the parties concerned agree to a new
contract; (3) the old contract is extinguished; and (4) there is a valid
new contract.
Security bank contends that there was no absolute incompatibility
between the old and the new obligations, and that the latter did not
extinguish the earlier one. It further argues that the 1989 Agreement
did not change the original loan in respect to the parties involved or
the obligations incurred. It adds that the terms of the 1989 Contract
were “not more onerous.” Since the original credit accommodation
was not extinguished, it concludes that Cuenca is still liable under the
Indemnity Agreement.
Supreme Court rejects these contentions of Security bank. Clearly,
the requisites of novation are present in this case. The 1989 Loan
Agreement extinguished by novation the obligation under the 1980
P8 million credit accommodation. It is essential in the law of
suretyship that any agreement between the creditor and the principal
debtor that essentially varies the terms of the principal contract
without the consent of the surety, will release the surety from liability.
The 1989 Loan Agreement expressly stipulated that its purpose was
to liquidate, not to renew or extend, the outstanding indebtedness.
Moreover, respondent did not sign or consent to the 1989 Loan
Agreement, which had allegedly extended the original P8 million
credit facility.
Indeed, the stipulation in the 1989 Loan Agreement providing for the
surety of respondent, without even informing him, smacks of
negligence on the part of the bank and bad faith on that of the
principal debtor. Since that Loan Agreement constituted a new
indebtedness, the old loan having been already liquidated, the spirit
of fair play should have impelled Sta. Ines to ask somebody else to
act as surety for the new loan
Q: Now what was the limitation of the obligation here of Cuenca as a
surety?
A: the loan agreement in 1981 and beyond the limitation in the
agreement
Q: How about the ruling of the court that Cuenca here was no longer
an employee. Can he use such defense wherein the surety at the
time he acted as such executed the agreement was still the
president, officer, or major stock holder of the corporation. But
subsequently he was no longer a stockholder, will there be a release
of the liability as a surety?
A: No, maam. The obligation of the surety while he was an officer
subsists even if he is no longer an officer.
Q: So in this case, why did the SC rule that Cuenca was no longer
liable as he was not an officer anymore? SC held “there was no logic
for the bank to assume that he would still agree to act as a surety in
the 1989 indebtedness because at that time, he was no longer an
officer or stockholder of the debtor-corporation.”
A: Because again you go back to the stipulations in the indemnity
agreement. Least likely his obligations last up until 1981. In the
execution of the 1989 agreement, it was said that the 1981
agreement was extinguished.
In other words, hindi porke’t hindi na sya stockholder sa
corporation, he would be immediately released of his obligation. We
have to take that in the light of the circumstances in this case. When
you sign a document, you sign as a surety, not because you are a
stockholder or officer of the corporation
So here unlike in other agreements that there was an
expressed waiver in the obligation, nothing indicated that there was
19 | P a g e
any waiver to any change or any modification of said principal
obligation. It was emphasized in this case that the surety agreement
is strictly construed or any doubt would be resolved in favor of the
solidary debtor.
The fundamental rules of fair play require the creditor to
obtain the consent of the surety to any material application in the
loan agreement or notify him thereof. The Bank here cannot hold
Cuenca liable for loans obtained in excess of the amount or beyond
the period stipulated in the agreement absent of any stipulation that
Cuenca will be notified or gave consent thereto.
This is especially true here wherein respondent was no
longer an officer or major stock holder. Parang additional fact or
circumstance considered so that Cuenca was not held liable
anymore. The 1989 loan agreement extinguished the 1981 credit
accommodation. This is clear from the explicit provision of to
liquidate the principal and the interest the earlier indebtedness.
The 1989 loan agreement expressedly stated that is
purpose was to liquidate not to renew or extend the outstanding
indebtedness. Respondent did not sign the 1989 document which
prejudice extended to the original 10million credit. It’s not really any
extension but merely a posting was merely to the old obligation na
naextinguish.
It is fundamental in the law of suretyship that any
agreement between the debtor and principal creditor, which
essentially varies from the terms used in the first contract without the
consent the surety will release the surety from liability. While
respondent made himself liable to the credit accommodation. Such
clause would be understood to be in the context of the 8 million limit
and the 1981 term. It did not give respondent any license to modify
the nature and scope of the original credit accommodation without
informing or getting the consent of Cuenca.
A contract of surety can not extend to more than what was
stipulated. It is strictly construed against the creditor, every doubt
resolved against enlarging the obligation of the surety.
Here, the surety agreement contained an equivocal
stipulation, no express stipulation compare this to another case
which was the case of PhilAmGen. In that case, there was a clear
stipulation that there was no stipulation as to the waiver.
But in the present case, there was an expressed
stipulation. At most, the alleged basis of the respondent is deemed
uncertain and confers no clear obligation to Sta. Ines to notify the
Bank of its indebtedness in the original obligation.
A continuing guaranty is one which covers all transaction,
including those arising in the future, as long as it is within the
description or contemplation of the contract of guaranty until the
expiration or termination thereof but still subject to the stipulations of
the loan agreement as held in this case. Further, just because you
are not a stockholder, it does not exonerate you from any liabilities
because if you sign as a surety, you do so in your own personal
capacity not because you are the officer or major stock holder. In this
case, hindi siya liable dahil beyond the limitation yung obligation that
is being demanded.
January 7, 2016 (1st hour)
Transcribed by: Diane Ngeo
So we are already finished with article 2054,
Art. 2054. A guarantor may bind himself for less, but not for more
than the principal debtor, both as regards the amount and the
onerous nature of the conditions.
Should he have bound himself for more, his obligations shall be
reduced to the limits of that of the debtor.
So in the cases of Pacific Banking and Molino that we already
discussed, again, if there is an express waiver for any novation or
change in the principal contract and to which the surety agreed to
such novation, then you cannot subsequently question any change.
For example in those cases, nag exceed sa limit noh, credit limit in
the credit cards that were issued. Nevertheless, the securities in
those cases were still held to be liable. Also, take note that with
regard to contracts of securities, it must be strictly interpreted against
the creditor and to which we have also discussed the case of Cuenca
wherein in that case, it was stipulated that the 1989 loan agreement
extinguished the previous obligation to which the surety secured and
also we have taken into consideration the limits for each contracts of
security, for example its only up to 8 million or its only for a limited
period, then that should also be taken into consideration.
Now, let's proceed to Article 2055.
Article 2055. A guaranty is not presumed; it must be express and
cannot extend to more than what
is stipulated therein.
If it be simple or indefinite, it shall comprise not only the principal
obligation, but also all its accessories, including the judicial costs,
provided with respect to the latter, that the guarantor shall only be
liable for those costs incurred after he has been judicially required to
pay.
Alright, 2055 is very clear that the contract of guaranty is not
presumed. In other words, it must be expressed and cannot extend
to more than what is stipulated. So, we have here the case of Piczon
vs Piczon.
CONSUELO P. PICZON, RUBEN O. PICZON and AIDA P.
ALCANTARA, , vs. ESTEBAN PICZON and SOSING-LOBOS &
CO., INC.,
(G.R. No. L-29139, November 15, 1974)
FACTS:This an appeal from the decision of the Court of First
Instance of Samar in its Civil Case No. 5156, entitled Consuelo P.
Piczon, et al. vs. Esteban Piczon, et al., sentencing defendants-
appellees, Sosing Lobos and Co., Inc., as principal, and Esteban
Piczon, as guarantor, to pay CONSUELO P. PICZON, RUBEN O.
PICZON and AIDA P. ALCANTARA "the sum of P12,500.00 with
12% interest from August 6, 1964 until said principal amount of
P12,500.00 shall have been duly paid, and the costs." Annex "A", the
actionable document of appellants reads thus:
AGREEMENT OF LOAN KNOW YE ALL MEN BY THESE
PRESENTS: That I, ESTEBAN PICZON, of legal age, married,
Filipino, and resident of and with postal address in the municipality of
Catbalogan, Province of Samar, Philippines, in my capacity as the
President of the corporation known as the "SOSINGLOBOS and CO.,
INC.," as controlling stockholder, and at the same time as guarantor
for the same, do by these presents contract a loan of Twelve
Thousand Five Hundred Pesos (P12,500.00), Philippine Currency,
the receipt of which is hereby acknowledged, from the "Piczon and
Co., Inc." another corporation, the main offices of the two
corporations being in Catbalogan, Samar, for which I undertake, bind
and agree to use the loan as surety cash deposit for registration with
the Securities and Exchange Commission of the incorporation papers
relative to the "Sosing-Lobos and Co., Inc.," and to return or pay the
same amount with Twelve Per Cent (12%) interest per annum,
commencing from the date of execution hereof, to the "Piczon and
Co., Inc., as soon as the said incorporation papers are duly
registered and the Certificate of Incorporation issued by the aforesaid
Commission.
IN WITNESS WHEREOF, I hereunto signed my name in Catbalogan,
Samar, Philippines, this 28th day of September, 1956.
(signed)Esteban Piczon.
20 | P a g e

ISSUES:
(a) SHOULD THE PAYMENT OF 12% INTEREST ON THE
PRINCIPAL OF P12,500.00 FROM AUGUST 6, 1964, ONLY, OR
FROM SEPTEMBER 28, 1956, WHEN ANNEX "A" WAS DULY
EXECUTED? SEPTEMBER 28, 1956
(b) Is Esteban Piczon liable a guarantor or a surety?
GUARANTOR
HELD:
(a.) Instead of requiring appellees to pay interest at 12% only from
August 6, 1964, the trial court should have adhered to the terms of
the agreement which plainly provides that Esteban Piczon had
obligated Sosing-Lobos and Co.,Inc. and himself to "return or pay (to
Piczon and Co., Inc.)the same amount (P12,500.00) with Twelve Per
Cent(12%) interest per annum commencing from the date ofthe
execution hereof", Annex A, which was on September 28, 1956.
Under Article 2209 of the Civil Code
"(i)f the obligation consists in the payment of a sum of money, and
the debtor incurs in delay, the indemnity for damages, there being no
stipulation to the contrary, shall be the payment of the interest agreed
upon, and in the absence of stipulation, the legal interest, which is six
per cent per annum."
In the case at bar, the "interest agreed upon" by the parties in Annex
A was to commence from the execution of said document.
(b.) Under the terms of the contract, Annex A, Esteban Piczon
expressly bound himself only as guarantor, and there are no
circumstances in the record from which it can be deduced that his
liability could be that of a surety. A guaranty must be express, (Article
2055, Civil Code) and it would be violative of the law to consider a
party to be bound as a surety when the very word used in the
agreement is "guarantor."
Moreover, as well pointed out in appellees' brief, under the terms of
the pre-trial order, appellants accepted the express assumption of
liability by Sosing-Lobos & Co., Inc. for the payment of the obligation
in question, thereby modifying their original posture that inasmuch as
that corporation did not exist yet at the time of the agreement, Piczon
necessarily must have bound himself as insurer.
As already explained earlier, appellants' prayer for payment of legal
interest upon interest due from the filing of the complaint can no
longer be entertained, the same not having been made an issue in
the pleadings in the court below. We do not believe that such a
substantial matter can be deemed included in a general prayer for
"any other relief just and equitable in the premises", especially when,
as in this case, the pre-trial order does not mention it in the
enumeration of the issues to be resolved by the court.
Be it remembered that rules of procedure are but mere tools
designed to facilitate the attainment of justice. Their strict and rigid
application, which would result in technicalities that tend to frustrate
rather than promote substantial justice, must always be avoided.
Time and again, this Court has suspended its own rules and
excepted a particular case from their operation whenever the higher
interests of justice so require.
While the High Court is not ordinarily a trier of facts, it has the
prerogative to review and reverse the factual findings of the courts
below if it should find that these do not conform to the evidence on
record. Furthermore, in the case of Heirs of Juan Dacasan vs. Court
of Appeals, we held that factual findings of the Appellate Court are
binding on the SC, and the exception to this rule is when such
findings conflict with those of the trial court.
This Court, in the exercise of its authority to re-weigh and reevaluate
factual findings, have found from the maze of evidence on record that
the investment worth P65,944 representing 17,400 shares of stocks
in Piczon and Co. , Inc. is indeed owned in common by the 4
brothers.
Despite the assertions of the widow of Esteban that the subject
investment is exclusively owned by her late husband, documents
signed by Esteban himself are on record which would render these
assertions nugatory, technically admitting that the subject investment
is commonly owned with his 3 brothers.
From Esteban Piczon’s own admissions of his brothers’ rights over
the investment as found in the records and from the findings of the
lower court who was in a better position to examine real evidence as
well as observe the deportment of the witnesses while they testified
in the case, we rule for the petitioners and grant the writ prayed for.
Q: So who is the principal debtor here?
A: Sosing-Lobos and Co., Inc.
Q: Why could he (Esteban Piczon) be considered as a surety?
A: He is not considered as a surety here because under the terms of
the contract, he expressly bound himself only as a guarantor.
Q: So, when would it happen that a person is liable as a surety even
if he is referred as a guarantor in an agreement?
A: If he binds himself jointly and severally liable.
Q:Alright, together with the principal debtor. But in this case, that
circumstance is not present.
Here Piczon expressly bound himself only as guarantor and there are
no circumstances in the record from which it can deduce that his
liability could be that of a surety. Under 2055, a guaranty must be
expressed and it would be violative of the law to consider a party to
be bound as a surety when the (??? noisy) used in the agreement is
the guarantor. But again, the mere use of the word guarantor or
guaranty does not necessarily mean that the person only bound
himself only as a guarantor and not as a surety, if there are
circumstances that would point out that he bound himself solidarily
liable with the principal debtor.
So here, with regard to a contract of guaranty, there is no
presumption as to its existence. The terms of the contract must be
stipulated in such a way that there's no doubt that there exist a
contract of a guaranty and that he promised or undertakes to answer
for the obligation of another. In addition, with regards to the existence
of a surety, if a person bound himself only to be a guarantor then he
could not expressly bound himself to be a guarantor, it could not be
interpreted that he bound himself solidarily liable with the principal
debtor.
Now with respect to the guarantor, he shall be obliged to pay for the
costs only from the time when the guaranty was made and cannot be
faulted for the delay of the debtor. As we have mentioned last time, if
upon demand to the guarantor and he did not pay then he will be
liable for all costs from the time the demand was made upon the
guarantor. The guarantor could not be held liable for other costs
incurred or interests incurred from the time the principal debtor was
in delay, otherwise, that would be unfair to the said guarantor.
So again, the guarantor shall answer only for such judicial costs as
have been incurred after he has been judicially required to pay
otherwise here, you would have a harsh necessity wherein the
guarantor would be paying another's debt without any benefit
whatsoever for himself.
21 | P a g e
We also have the case of BA Finance.
BA FINANCE vs. CA
FACTS: Renato Gaytano, doing business under the name Gebbs
International, applied for and was granted a loan with respondent
Traders Royal Bank in the amount of P60,000.00. As security for the
payment of said loan, the Gaytano spouses executed a deed of
suretyship whereby they agreed to pay jointly and severally to
Traders Royal Bank bank the amount of the loan including interests,
penalty and other bank charges.
In a letter addressed to Traders Royal Bank, Philip Wong as credit
administrator of BA Finance Corporation for and in behalf of the
latter, undertook to guarantee the loan of the Gaytano spouses.
Partial payments were made on the loan leaving an unpaid balance
in the amount of P85,807.25. Since the Gaytano spouses refused to
pay their obligation, Traders Royal Bank filed with the trial court
complaint for sum of money against the Gaytano spouses and
petitioner BA Finance Corporation as alternative defendant. The
Gaytano spouses did not present evidence for their defense. BA
Finance Corporation corporation, on the other hand, raised the
defense of lack of authority of its credit administrator to bind the
corporation.
The trial court rendered a decision in favor of plaintiff and against
defendants Gaytano spouses, ordering the latter to jointly and
severally pay the plaintiff. Not satisfied with the decision, Traders
Royal Bank appealed with the Court of Appeals. Respondent
appellate court rendered judgment modifying the decision of the trial
court. Hence, this petition.
ISSUE: WON the letter of guaranty is ultra vires and thus invalid
and/or unenforceable. YES
HELD: It is a settled rule that persons dealing with an assumed
agent, whether the assumed agency be a general or special one are
bound at their peril, if they would hold the principal liable, to ascertain
not only the fact of agency but also the nature and extent of authority,
and in case either is controverted, the burden of proof is upon them
to establish it (Harry Keeler v. Rodriguez, 4 Phil. 19).
Hence, the burden is on Traders Royal Bank to satisfactorily prove
that the credit administrator with whom they transacted acted within
the authority given to him by his principal, BA Finance Corporation.
The only evidence presented by Traders Royal Bank was the
testimony of Philip Wong, credit administrator, w ho testified that he
had authority to issue guarantees as can be deduced from the
wording of the memorandum given to him by BA Finance Corporation
on his lending authority. The said memorandum allegedly authorized
Wong not only to approve and grant loans but also to enter into
contracts of guaranty in behalf of the corporation.
Although Wong was clearly authorized to approve loans even up to
P350,000.00 without any security requirement, which is far above the
amount subject of the guaranty in the amount of P60,000.00, nothing
in the said memorandum expressly vests on the credit administrator
power to issue guarantees. We cannot agree with respondent's
contention that the phrase "contingent commitment" set forth in the
memorandum means guarantees.
It has been held that a power of attorney or authority of an agent
should not be inferred from the use of vague or general words.
Guaranty is not presumed, it must be expressed and cannot be
extended beyond its specified limits (Director v. Sing Juco, 53 Phil.
205). In one case, where it appears that a wife gave her husband
power of attorney to loan money, this Court ruled that such fact did
not authorize him to make her liable as a surety for the payment of
the debt of a third person (Bank of Philippine Islands v. Coster,
47Phil. 594).
The sole allegation of the credit administrator in the absence of
any other proof that he is authorized to bind BA Finance
Corporation in a contract of guaranty with third persons should
not be given weight. The representation of one who acts as agent
cannot by itself serve as proof of his authority to act as agent or of
the extent of his authority as agent (Velasco v. La Urbana, 58Phil.
681). Wong's testimony that he had entered into similar transactions
of guaranty in the past for and in behalf of the BA Finance
Corporation, lacks credence due to his failure to show documents or
records of the alleged past transactions.
The actuation of Wong in claiming and testifying that he has the
authority is understandable. He would naturally take steps to save
himself from personal liability for damages to respondent bank
considering that he had exceeded his authority. The rule is clear that
an agent who exceeds his authority is personally liable for damages.
Anent the conclusion of respondent appellate court that BA Finance
Corporation is estopped from alleging lack of authority due to its
failure to cancel or disallow the guaranty, the Court rules that said
conclusion has no basis in fact. Respondent bank had not shown any
evidence aside from the testimony of the credit administrator that the
disputed transaction of guaranty was in fact entered into the official
records or files of petitioner corporation, which will show notice or
knowledge on the latter's part and its consequent ratification of the
said transaction. In the absence of clear proof, it would be unfair to
hold BA Finance Corporation guilty of estoppel in allowing its credit
administrator to act as though the latter had power to guarantee.
Q: What was the principal obligation here?
A: Payment of the loan ma'am.
Q: Who entered into that contract of loan? What was the document
entered into by the Gaytano spouses?
A: A deed of suretyship.
Q: So, it's an accessory contract. What would be the principal
obligation? Who entered into that contract of loan?
A: Gebbs International ma'am.
Q: Alright, Gaytano doing business under Gebbs International to
which the Gaytano spouses executed a deed of suretyship. now
under the facts of this case, can we say that there was a double
guaranty or a double suretyship?
A: No ma'am.
Q: Why not? Supposedly, what was the transaction or document
executed here by Philip Wong?
A: A contract of guaranty ma'am.
Q: Specifically, it was alleged that Philip Wong, as credit
administrator of BA Finance, guaranteed the loan, in this instance,
the obligation of Gaytano spouses when they executed that deed of
suretyship. But again here, was BA Finance liable?
A: No, BA Finance was not liable ma'am because the letter of
guaranty was invalid because it was beyond the authority of Philip
Wong to issue guaranties.
Alright, so here, although Wong was authorized to approve loans
even up to P350,000 without any security requirement, nothing in the
said memorandum expressly vests upon him as credit administrator
22 | P a g e
the power to issue guaranties. The contention that there was this
phrase contingent commitment does not mean that he had the
authority to enter as a guarantor for and in behalf of BA Finance.
Remember here, again applying 2055, guaranty is not presumed, it
must be expressed and cannot be extended beyond its specified
limits. Okay, is there a requirement that the acceptance here be
made express or in writing? Now recall in your Obligations and
Contracts that as to the creditor, the acceptance of a payment need
not be express or in writing. But what about in the existence of a
contract of guaranty? Is it required that the creditor accepts the
contract of guaranty or the promise of guaranty by the guarantor? We
have the case of Texas.
TEXAS COMPANY vs ALONZO
FACTS:On November 5, 1935 Leonor S. Bantug and Tomas Alonso
were sued by the Texas Company (P.I.), Inc. for the recovery of the
sum of P629, unpaid balance of the account of Leonora S. Bantug in
connection with the agency contract with the Texas Company for the
faithful performance of which Tomas Alonso signed the following:
For value received, we jointly and severally do hereby bind ourselves
and each of us, in solidum, with Leonor S. Bantug the agent named
in the within and foregoing agreement, for full and complete
performance of same hereby waiving notice of non-performance by
or demand upon said agent, and the consent to any and all
extensions of time for performance. Liability under this undertaking,
however, shall not exceed the sum of P2,000, Philippine currency.
Witness the hand and seal of the undersigned affixed in the presence
of two witness, this 12th day of August, 1929.
Leonor S. Bantug was declared in default as a result of her failure to
appear or answer, but Tomas Alonso filed an answer setting up a
general denial and the special defenses that Leonor S. Bantug made
him believe that he was merely a co-security of one Vicente Palanca
and he was never notified of the acceptance of his bond by the
Texas Company.
The CFI of Cebu sentenced Leonor S. Bantug and Tomas Alonso to
pay jointly and severally to the Texas Company the sum of P629,
with interest at the rate of six per cent (6%) from the date of filing of
the complaint, and with proportional costs. The CA modified the
judgment; Leonor S. Bantug was held solely liable for the payment of
the aforesaid sum of P629 to the Texas Company, with the
consequent absolution of Tomas Alonso.
According to the petitioner, the CA erred in holding that there was
merely an offer of guaranty on the part of the respondent, Tomas
Alonso, and that the latter cannot be held liable thereunder because
he was never notified by the Texas Company of its acceptance.
ISSUE: WON there was merely an offer of guaranty on the part of
Alonso? YES
HELD: The CA has placed reliance upon our decision in National
Bank vs. Garcia (47 Phil., 662), while the petitioner invokes the case
of National Bank vs. Escueta, (50 Phil., 991). In the first case, it was
held that there was merely an offer to give bond and, as there was no
acceptance of the offer, this court refused to give effect to the bond.
In the second case, the sureties were held liable under their surety
agreement which was found to have been accepted by the creditor,
and it was therein ruled that an acceptance need not always be
express or in writing.
The Court of Appeals found as a fact, and that the bond in question
was executed at the request of the petitioner by virtue of the following
clause of the agency contract:
Additional Security. — The Agent shall whenever requested by the
Company in addition to the guaranty herewith provided, furnish
further guaranty or bond, conditioned upon the Agent's faithful
performance of this contract, in such individuals of firms as joint and
several sureties as shall be satisfactory to the Company.
In view of the foregoing clause which should be the law between the
parties, it is obvious that, before a bond is accepted by the petitioner,
it has to be in such form and amount and with such sureties as shall
be satisfactory hereto; in other words, the bond is subject to
petitioner's approval. The logical implication arising from this
requirement is that, if the petitioner is satisfied with any such bond,
notice of its acceptance or approval should necessarily be given to
the proper party in interest, namely, the surety or guarantor. There is
no evidence in this case tending to show that the respondent, Tomas
Alonso, ever had knowledge of any act on the part of petitioner
amounting to an implied acceptance, so as to justify the application
of our decision in National Bank vs. Escueta.
The decision appealed of CA is affirmed.
POLICY: Where there is merely an offer of, or proposition for, a
guaranty, or merely a conditional guaranty in the sense that it
requires action by the creditor before the obligation becomes fixed, it
does not become a binding obligation until it is accepted and, unless
there is a waiver of notice of such acceptance is given to, or acquired
by, the guarantor, or until he has notice or knowledge that the
creditor has performed the conditions and intends to act upon the
guaranty. The acceptance need not necessarily be express or in
writing, but may be indicated by acts amounting to acceptance.
Where, upon the other hand, the transaction is not merely an offer of
guaranty but amounts to direct or unconditional promise of guaranty,
unless notice of acceptance is made a condition of the guaranty, all
that is necessary to make the promise binding is that the promise
should act upon it, and notice of acceptance is not necessary, the
reason being that the contract of guaranty is unilateral.
Q: Does it mean that for the perfection of the validity of a contract of
a guaranty, there must be acceptance or notice of acceptance by the
creditor?
A: Yes ma'am.
Q: Now, take note there must be a distinction from a offer of guaranty
and from a - ?
A: Acceptance?
Q: No, because if it is an offer, notice of acceptance is required,.
However, if what we have is an unconditional promise of guaranty,
notice of acceptance is not required anymore. In this instance, why is
it considered merely an offer of guaranty, and not an unconditional
promise of guaranty?
A: Because it required a further action ma'am from the creditor
before the obligation becomes fixed.
Q: What is your basis?
A: The bond in question was executed at the request of the
petitioner, and -
Q: So would that be sufficient that it is merely an offer and not an
unconditional promise of guaranty? What is the clause that you're
referring to as the basis that this is merely an offer. Please read.
A: Additional Security. — The Agent shall whenever requested by the
Company in addition to the guaranty herewith provided, furnish
further guaranty or bond, conditioned upon the Agent's faithful
23 | P a g e
performance of this contract, in such individuals of firms as joint and
several sureties as shall be satisfactory to the Company.
Alright, so in other words, by virtue of that provision it is clear here
that what you have is merely an offer which requires acceptance for
the guarantor to be liable as well on the obligation. Otherwise, if this
was an unconditional promise of guaranty such notice of acceptance
would not have been necessary.
So here, the bond was subject to the petitioner's approval and this is
clear in the additional security clause. Nakalagay diyan, the agent
shall whenever requested by the Company in addition to the
guaranty herewith provided, furnish further guaranty or bond,
conditioned upon the Agent's faithful performance of this contract, in
such individuals of firms as joint and several sureties as shall be
satisfactory to the Company.
So, the bond will be still be subject to the approval of the petitioner
here. If the petitioner is satisfied of such bond, notice of its
acceptance or approval should necessarily given to the proper party
in interest, namely the surety or the guarantor. So what we have here
is merely an offer of proposition for a guaranty. Where there is a
merely an offer or proposition for a guaranty, or merely a conditional
guaranty in the sense that it requires action by the creditor before the
obligation becomes fixed, it does not become a binding obligation
until it is accepted and unless there is a waiver of notice, until notice
of such acceptance is given to or acquired by the guarantor or until
he has notice or knowledge that the creditor has performed the
condition and intends to act upon the guaranty. The acceptance need
not necessarily be express or in writing but be may be indicated by
acts amounting to acceptance.
On the other hand, if the transaction is not merely an offer of
guaranty but amounts to a direct or unconditional promise of
guaranty, unless notice of acceptance is made a condition of a
guaranty, all that is necessary to make the promise binding is that the
promisor should act upon it and notice of acceptance is not
necessary., The reason being that a contract of guaranty is unilateral
in nature. So take note, if it is merely an offer and there is no waiver,
there must be notice of acceptance. Otherwise, if it is an
unconditional promise, notice of acceptance is not necessary
because a contract of guaranty is unilateral.
What happened in the case of Visayan?
VISAYAN SURETY vs CA
FACTS:On February 1993, the spouses Danilo Ibajan and
Mila Ambe Ibajan (plantiffs) filed with the RTC a complaint
against spouses Jun and Susan Bartolome
(defendants), for replevin to recover from them the
possession of an Isuzu jeepney, with damages. Spouses
Ibajan alleged that they were the owners of an Isuzu
jeepney which was forcibly and unlawfully taken by
Spouses Bartolome on December 1992, while parked at
their residence.
Spouses Ibajan filed a replevin bond through petitioner
Visayan Surety & Insurance Corporation. The contract of
surety provided thus: "WHEREFORE, we, sps. Danilo
Ibajan and Mila Ibajan and the VISAYAN SURETY &
INSURANCE CORP., jointly and severally bind ourselves
in the sum of P300,000 for the return of the property to the
defendant, if the return thereof be adjudged, and for the
payment to the defendant of such sum as he/she may
recover from the plaintiff in the action."
RTC granted issuance of a writ of replevin and as such, the
sheriff seized the subject vehicle and turned over the same
to spouses Ibajan. However on May 1993, Dominador
Ibajan, father of Danilo Ibajan, filed a motion for leave of
court to intervene, stating that he has a right superior to
the spouses Ibajan over the ownership and possession of
the subject vehicle.
RTC granted the motion to intervene. Then later, RTC
issued an order granting the motion to quash the writ of
replevin and ordered Mila Ibajan to return the subject
jeepney to the intervenor Dominador Ibajan.
RTC thereafter ordered the issuance of a writ of replevin in
favor of the intervenor Dominador who was the registered
owner. This writ of replevin in favor of intervenor
Dominador was however returned unsatisfied. Thus, in
March 1994, intervenor Dominador filed with RTC a
motion/application for judgment against spouses Ibajan’s
bond.
RTC ruled in favor of Dominador and ordered spouses
Ibajan and Visayan Surety and Insurance Corporation to
pay the former jointly and severally the value of the
jeepney in the amount of P150,000 and other damages.
CA affirmed RTC decision.
ISSUE: WON the surety is liable to an intervenor on a
replevin bond posted by Visayan Surety in favor of
defendants. NO
HELD: Who is an intervenor?
An intervenor is a person, not originally impleaded in a
proceeding, who has legal interest in the matter in litigation,
or in the success of either of the parties, or an interest
against both, or is so situated as to be adversely affected
by a distribution or other disposition of property in the
custody of the court or of an officer thereof.
An intervenor is not a party to a contract of surety which he
did not sign and which was executed by plaintiffs and
defendants. It is a basic principle in law that contracts can
bind only the parties who had entered into it; it cannot favor
or prejudice a third person. Contracts take effect between
the parties, their assigns, and heirs, except in cases where
the rights and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by
provision of law.
A contract of surety is an agreement where a party called
the surety guarantees the performance by another party
called the principal or obligor of an obligation or
undertaking in favor of a third person called the obligee.
Specifically, suretyship is a contractual relation resulting
from an agreement whereby one person, the surety,
engages to be answerable for the debt, default or
miscarriage of another, known as the principal.
The obligation of a surety cannot be extended by
implication beyond its specified limits. "When a surety
executes a bond, it does not guarantee that the plaintiff’s
cause of action is meritorious, and that it will be
responsible for all the costs that may be adjudicated
against its principal in case the action fails. The extent of a
surety’s liability is determined only by the clause of the
contract of suretyship." A contract of surety is not
presumed; it cannot extend to more than what is stipulated.
Since the obligation of the surety cannot be extended by
implication, IT FOLLOWS THAT THE SURETY CANNOT
BE HELD LIABLE TO THE INTERVENOR WHEN THE
RELATIONSHIP AND OBLIGATION OF THE SURETY IS
LIMITED TO THE DEFENDANTS SPECIFIED IN THE
CONTRACT OF SURETY. Here, the defendants are the
spouses Bartolome.
SC ruled that Visayan Surety is not liable under the
replevin bond to the intervenor Dominador.
POLICY: Recall in your OBLICON: Stipulations in the
24 | P a g e
contract govern. Thus, you cannot extend the obligations of
a party beyond what is stipulated in the contract.
Q: What do you mean by intervenor?
A: An intervenor is a person, not originally impleaded in a
proceeding, who has legal interest in the matter in litigation, or in the
success of either of the parties, or an interest against both, or is so
situated as to be adversely affected by a distribution or other
disposition of property in the custody of the court or of an officer
thereof.
Q: What is the basis that the RTC ordered the delivery of said
jeepneys?
A: The basis is that Dominador Ibajan was the registered owner of
said jeepneys.
Q: So with the surety, to whom can Visayan Surety be made liable?
A: To the defendant since the surety was filed by the plaintiff in this
case. So if the plaintiff would lose in this case, then the defendant
can invoke as to the bond filed by the plaintiff.
Alright, so what we have here, you have complainants who filed an
action for replevin to recover the possession of a jeepney and the
plaintiffs here, the Spouses Ibajan, filed a replevin bond, so that they
can acquire possession of the property. Now the replevin bond will
answer for damages in case it is found that the spouses are not
really entitled to the possession of this property but rather it would
still be spouses Bartolome that would be entitled thereto. However, it
turns out that the registered owner is Dominador Ibajan, the father of
the plaintiff Danilo, and therefore he has superior right to possess the
property. He intervened in the said case and he is considered an
intervenor because he is a person not originally impleaded as a party
in the proceeding and nevertheless he has legal interest in the matter
in litigation or in the success of either the parties or an interest
against both, or is so situated as to be adversely affected by a
distribution or other disposition of property in the custody of the court
or of an officer thereof.
Remember that with regard to the construction or interpretation of a
contract of guaranty or suretyship, it is strictly interpreted against the
creditor and in favor of the guarantor or surety and it is not to be
extended beyond its terms or specified limits. So here, the surety
agreement is an agreement where a party called the "surety"
guaranties the performance with another party called the "principal or
obligor" of an obligation undertaking in favor of a third person called
the "obligee". The obligation here of Visayan surety cannot be
extended by implication beyond its specified limits. The extent of a
surety's liabilities is determined only by the clause of the contract of
suretyship. In this case, it did not include to be answerable to
Dominador Ibajan or to any other third person. A contract of surety,
just like that of a guaranty, is not presumed and it cannot extend to
more than what is stipulated. The surety cannot be held liable to the
intervenor in this case when the relationship and obligation of the
surety is limited to the defendants spouses Bartolome as specified in
the contract of surety.
Now, let's have Article 2056.
Art. 2056. One who is obliged to furnish a guarantor shall
present a person who possesses integrity, capacity to bind
himself, and sufficient property to answer for the obligation
which he guarantees. The guarantor shall be subject to the
jurisdiction of the court of the place where this obligation is
to be complied with. (1828a)
Alright, so what we have here are the qualifications for a person to
become a guarantor. So ask yourself, do you have integrity? Are you
a person of good reputation? Are you believable? So that's the first
qualification to be a guarantor. Second, do you have the capacity to
bind yourself? Are you of legal age? Are you not convicted of a crime
that carries with it the penalty of civil interdiction? And third, do you
have sufficient property to answer for the obligation which you
guaranteed? So you must at least the amount equal to the principal
obligation or to the amount of debt that is involved.
However, take note that the qualifications enumerated by Article
2056 can be waived by the creditor. What do you mean by that?
Even if not all the three requisites are present, you could still be a
guarantor or a surety for a principal obligation. So even if you have
integrity or you have the capacity to bind yourself in a contract, but
you do not have sufficient properties, if the creditor accepts your offer
of guaranty or your unilateral promise to pay, then it means that the
creditor has waived the qualification of sufficient property. However,
you cannot force a creditor to accept that you will be the guarantor of
a principal obligation if not all of these qualifications are present. But
again if it is accepted, the contract is considered valid because again
the creditor can waive these qualifications. Now, these qualifications
are not the same as those considered as essential elements in a
contract. Because unlike essential elements, you cannot just waive it
and say that there is a valid contract. The essential elements of
consent, object, and consideration must exist in a contract,
otherwise, you will not have a valid contract.
Now, the second sentence in 2056 refers to jurisdiction - the place of
performance, and that is the court which has jurisdiction of the case if
in case a litigation will commence in relation to the contract of
guaranty.
Article 2057. If the guarantor should be convicted in first
instance of a crime involving dishonesty or should become
insolvent, the creditor may demand another who has all the
qualifications required in the preceding article. The case is
excepted where the creditor has required and stipulated
that a specified person should be the guarantor. (1829a)
Alright, so with that, what would happen if all these three requisites
were present at the time the contract was executed but
subsequently, let us say the guarantor was caught to be dishonest?
Mawala na yung qualification of integrity. What is the effect with
regard to the contract of guaranty? Would it still be considered valid?
A: Yes, however, the creditor may demand another guarantor to take
the place of the guarantor who was declared as dishonest.
Okay, what happened in the case of Estate of Hemady?
ESTATE OF HEMADY VS. LUZON SURETY
FACTS: The Luzon Surety Co. had filed a claim against
the Estate based on twenty different indemnity
agreements, or counter bonds, each subscribed by a
distinct principal and by the deceased K. H. Hemady, a
surety solidary guarantor) in all of them, in consideration of
the Luzon Surety Co.’s of having guaranteed, the various
principals in favor of different creditors.
The Luzon Surety Co., prayed for allowance, as a
contingent claim, of the value of the twenty bonds it had
executed in consideration of the counterbonds, and further
asked for judgment for the unpaid premiums and
documentary stamps affixed to the bonds, with 12 per cent
interest thereon.
Before answer was filed, and upon motion of the
administratrix of Hemady’s estate, the lower court, by order
of September 23, 1953, dismissed the claims of Luzon
Surety Co., on two grounds: (1) that the premiums due and
cost of documentary stamps were not contemplated under
the indemnity agreements to be a part of the undertaking of
25 | P a g e
the guarantor (Hemady), since they were not liabilities
incurred after the execution of the counterbonds; and (2)
that “whatever losses may occur after Hemady’s death, are
not chargeable to his estate, because upon his death he
ceased to be guarantor.”
ISSUE: WON the liability of Hemady as guarantor
terminated upon his death. NO
HELD: We find this reasoning untenable. Under the
present Civil Code (Article 1311), as well as under the Civil
Code of 1889 (Article 1257), the rule is that —
“Contracts take effect only as between the parties, their
assigns and heirs, except in the case where the rights and
obligations arising from the contract are not transmissible
by their nature, or by stipulation or by provision of law.”
In Mojica vs. Fernandez, 9 Phil. 403, this Supreme Court
ruled:“Under the Civil Code the heirs, by virtue of the rights
of succession are subrogated to all the rights and
obligations of the deceased (Article 661) and cannot be
regarded as third parties with respect to a contract to which
the deceased was a party, touching the estate of the
deceased (Barrios vs. Dolor, 2 Phil. 44).
Of the three exceptions fixed by Article 1311, the nature of
the obligation of the surety or guarantor does not warrant
the conclusion that his peculiar individual qualities are
contemplated as a principal inducement for the contract.
What did the creditor Luzon Surety Co. expect of K. H.
Hemady when it accepted the latter as surety in the
counterbonds? Nothing but the reimbursement of the
moneys that the Luzon Surety Co. might have to disburse
on account of the obligations of the principal debtors. This
reimbursement is a payment of a sum of money, resulting
from an obligation to give; and to the Luzon Surety Co., it
was indifferent that the reimbursement should be made by
Hemady himself or by someone else in his behalf, so long
as the money was paid to it.
The second exception of Article 1311, p. 1, is
intransmissibility by stipulation of the parties. Being
exceptional and contrary to the general rule, this
intransmissibility should not be easily implied, but must be
expressly established, or at the very least, clearly inferable
from the provisions of the contract itself, and the text of the
agreements sued upon nowhere indicate that they are
nontransferable.
Because under the law (Article 1311), a person who enters
into a contract is deemed to have contracted for himself
and his heirs and assigns, it is unnecessary for him to
expressly stipulate to that effect; hence, his failure to do so
is no sign that he intended his bargain to terminate upon
his death.
The third exception to the transmissibility of obligations
under Article 1311 exists when they are “not transmissible
by operation of law”. The provision makes reference to
those cases where the law expresses that the rights or
obligations are extinguished by death, as is the case in
legal support (Article 300), parental authority (Article 327),
usufruct (Article 603), contracts for a piece of work (Article
1726), partnership (Article 1830 and agency (Article 1919).
By contract, the articles of the Civil Code that regulate
guaranty or suretyship (Articles 2047 to 2084) contain no
provision that the guaranty is extinguished upon the death
of the guarantor or the surety. The lower court sought to
infer such a limitation from Art. 2056, to the effect that “one
who is obliged to furnish a guarantor must present a
person who possesses integrity, capacity to bind himself,
and sufficient property to answer for the obligation which
he guarantees”. It will be noted, however, that the law
requires these qualities to be present only at the time of the
perfection of the contract of guaranty. It is self-evident that
once the contract has become perfected and binding, the
supervening incapacity of the guarantor would not operate
to exonerate him of the eventual liability he has contracted;
and if that be true of his capacity to bind himself, it should
also be true of his integrity, which is a quality mentioned in
the article alongside the capacity.
The foregoing concept is confirmed by the next Article
2057, that runs as follows: “ART. 2057. — If the guarantor
should be convicted in first instance of a crime involving
dishonesty or should become insolvent, the creditor may
demand another who has all the qualifications required in
the preceding article. The case is excepted where the
creditor has required and stipulated that a specified person
should be guarantor.” From this article it should be
immediately apparent that the supervening dishonesty of
the guarantor (that is to say, the disappearance of his
integrity after he has become bound) does not terminate
the contract but merely entitles the creditor to demand a
replacement of the guarantor. But the step remains
optional in the creditor: it is his right, not his duty; he may
waive it if he chooses, and hold the guarantor to his
bargain. Hence Article 2057 of the present Civil Code is
incompatible with the trial court’s stand that the
requirement of integrity in the guarantor or surety makes
the latter’s undertaking strictly personal, so linked to his
individuality that the guaranty automatically terminates
upon his death.
Our conclusion is that the solidary guarantor’s liability is not
extinguished by his death, and that in such event, the
Luzon Surety Co., had the right to file against the estate a
contingent claim for reimbursement.
NOTE: The liability of the solidary guarantor is not
terminated by his death.
Alright, in this case the SC also referred to Article 1311 under your
ObliCon which is the principle of relativity, “Contracts take effect only
as between the parties, their assigns and heirs, except in the case
where the rights and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by provision of law.”
Here, Hemady was found to be a surety. Now by virtue of his death,
it does not mean that his obligation as surety was already extinguish
because this is an obligation which can be transmitted to his heirs but
only to the extent of his estate in existence at the time of his death.
Here, under Article 1311, a person who enters into a contract is
deemed to be contracted for himself and his heirs and his assigns, it
is unnecessary for him to expressly stipulate to that effect. Hence,
his failure to do so is no sign that he intended his bargain to
terminate upon his debt.
Now in relation to the qualifications of a guarantor, now once the
contract of guaranty or in this case suretyship, has become perfected
and binding, the supervening incapacity of the guarantor would not
operate to exonerate him of the eventual liability he has contracted,
and if that be true of his capacity to bind himself, it should also be
true of his integrity which is a quality mentioned in the article
alongside capacity.
So even if Hemady already died, and in effect, wala na siya so wala
na yung qualification na integrity, it does not mean that his obligation
is already extinguished. The supervening dishonesty of a guarantor,
in this case, the disappearance of his integrity after he has become
bound, does not terminate this contract but merely entitles the
creditor to demand a replacement of the guarantor but the step
remains optional to the creditor as to his right, not to his duty, he may
waive it if he chooses to. The contracts of suretyship entered into by
Hemady in favor of Luzon Surety, not being rendered intransmissible
due to the nature of the undertaking nor by the stipulations of the
contracts themselves, nor by provision of law, his eventual liability
thereunder necessarily passed upon his death to his heirs. However,
26 | P a g e
the heirs could not be held liable more than the inheritance that they
received in relation to the remaining estate. So, the solidary
guarantor's liability or the surety's liability is not extinguished by his
death.
So again, under 2057, the requirements in 2056 are required
although may be waived at the inception of the contract of guaranty.
It is not required that the qualifications in 2056 must continue to
subsist afterwards. So again, what happens if the guarantor loses
one of the qualifications enumerated in 2056? It would not operate to
exonerate the guarantor of the eventual liability he has contracted.
The creditor may just demand for another guarantor but again this is
an option available to the creditor.
Now, is it required here that there is a final judgment for the
conviction for dishonesty or for crime involving dishonesty? Yes, if
that is the reason. How about insolvency? It is not required that the
guarantor be judicially declared as insolvent. As long as the
guarantor is incapable in meeting his obligations when they become
due, then he is already considered as insolvent. And if such
happens, the creditor can demand another who has all qualifications
as required in 2056.
So those are the provisions with regard to the nature and extent of a
contract of guaranty as well as suretyship. Now lets proceed to
effects of guaranty. First lets have the effects of guaranty between
the guarantor and the creditor. So Article 2058.
Article 2058. The guarantor cannot be compelled to pay the
creditor unless the latter has exhausted all the property of
the debtor, and has resorted to all the legal remedies
against the debtor.
Okay, so this is the benefit of excussion which we have mentioined
before. This is one of a distinguishing feature of a contract of
guaranty which is not present in a contract of suretyship.
What is the nature of this benefit of excussion?
A: It refers to a situation wherein the person who has first availed of
the legal remedies before he can ask or make the guarantor liable
ma'am
Q: What happened in the case of Wise Co?
WISE CO. VS. TANGLAO
FACTS: In the CFI of Manila, Wise & Co filed a civil case
against Cornelio C. David for the recovery of a certain sum
of money. David was an agent of Wise & Co. and the
amount claimed from him was the result of a liquidation of
accounts showing that he was indebted in said amount.
In said case Wise & Co. asked and obtained a preliminary
attachment of David's property. To avoid the execution of
said attachment, David succeeded in having the defendant
Atty. Tanglao sign a power of attorney in his favor, with a
clause (considered a special POA to David) “ To sign as
guarantor for himself in his indebtedness to Wise &
Company of Manila, and to mortgage the Attorney’s lot”
Subsequently, David made a compromise agreement with
the petitioner Wise&Co. to pay for the sum of P640,
payable at the rate of P80 per month and he pledged the
lot owned by the Atty. Dionisio Tanglao as a guaranty for
the balance.
David paid the sum of P343.47 to Wise & Co., on account
of the P640 which he bound himself to pay leaving an
unpaid balance of P296.53.
Wise & Co. now institutes this case against Tanglao for the
recovery of said balance of P296.53.
ISSUE: WON Atty. Dionisio Tanglao is liable for the unpaid
balance. NO.
HELD:NOTE: Exhibit A – power of attorney; Exhibit B-
Compromise agreement.
There is no doubt that under Exhibit A, Tanglao
empowered David, in his name, to enter into a contract of
suretyship and a contract of mortgage of the property
described in the document, with Wise & Co. However,
David used said power of attorney only to mortgage the
property and did not enter into contract of suretyship.
Nothing is stated in Exhibit B to the effect that Tanglao
became David's surety for the payment of the sum in
question. Neither is this inferable from any of the clauses
thereof, and even if this inference might be made, it would
be insufficient to create an obligation of suretyship which,
under the law, must be express and cannot be presumed.
It appears from the foregoing that defendant, Tanglao
could not have contracted any personal responsibility for
the payment of the sum of P640. The only obligation which
Exhibit B, in connection with Exhibit A, has created on the
part of Tanglao, is that resulting from the mortgage of a
property belonging to him to secure the payment of said
P640. However, a foreclosure suit is not instituted in this
case against Tanglao, but a purely personal action for the
recovery of the amount still owed by David. At any rate,
even granting that defendant Tanglao may be considered
as a surety under Exhibit B, the action does not yet lie
against him on the ground that all the legal remedies
against the debtor have not previously been exhausted
(art. 1830 of the Civil Code, and decision of the Supreme
Court of Spain of March 2, 1891).
The plaintiff has in its favor a judgment against debtor
David for the payment of debt. It does not appear that the
execution of this judgment has been asked for and Exhibit
B, on the other hand, shows that David has two pieces of
property the value of which is in excess of the balance of
the debt the payment of which is sought of Tanglao in his
alleged capacity as surety.
Q: Isn't it that there was a term guarantor in that document executed
by Tanglao?
A: Yes ma'am. However as provided in the law, without the express
stipulation that Atty. Tanglao is liable as a guarantor or surety, then it
cannot be presumed that he is a guarantor or surety.
Q: Now assuming that Tanglao here is a guarantor, can he be forced
to pay the obligation of David?
A: Still no maa'm. As I have answered earlier, there must first be the
foreclosure of the mortgage before Wise company may make Atty.
Tanglao liable ma'am.
Alright, so here, there was a power of attorney executed by Tanglao.
Even if there was a phrase there or the word "guarantor" was used
there, if you look at the intention in executing that power of attorney,
it was merely a power of attorney of authority to mortgage the
property of Tanglao. And Tanglao did not enter into a contract of
guaranty or suretyship.
Now take note this is a 1936 case, so it refers to a suretyship and a
contract of guaranty synonymously. Again, we had a previous case
before, that the term surety also referred to a contract of guaranty
because the distinction was made when the New Civil Code was
already in effect. So here, even if in the decision of the SC, we use
the term of suretyship, it really refers to a contract of guaranty to
which a guarantor is entitled to the benefit of excussion. So in this
27 | P a g e
case, the SC held that even if Tanglao be considered as a surety,
again surety here means guarantor because this is a 1936 case, the
action does not yet lie against him on the ground that all the legal
remedies against the debtor have not been previously exhausted.
So with that, what is the nature of the benefit of excussion. This
benefit is clearly in favor of the guarantor. Remember the obligation
of the guarantor is merely accessory, it cannot exist on its own. Its
validity and existence depends upon a principal obligation. The
obligation of the guarantor is likewise subsidiarily made sure for his
obligation cannot be enforced before the obligation of the principal
debtor is enforced. So with that, before you go after the guarantor,
proceed first against the principal debtor. As the obligation of the
guarantor is merely secondary and subsidiary in nature. So exhaust
first the properties of the principal debtors. Only when the principal
debtor fails to pay shall the guarantor be liable. If the principal debtor
fulfills the obligation guaranteed, then the guarantor may be
discharged from any responsibility. So, the general rule here is the
benefit of excussion - that is the right or benefit in favor of the
guarantor. Before you proceed against the guarantor, proceed first
against the principal debtor.
January 7, 2016 (2nd Hour)
Transcribed by: Earvin Alparaque
Now what happened in the case of PBCOM vs. CA?
PHILIPPINE BANK OF COMMUNICATIONS VS. COURT
OF APPEALS, JOSEPH L.G. CHUA AND JALECO
DEV’T, INC.
FACTS: On April 14, 1976, Fortune Motors (Phils.), Inc.
executed a Surety Agreement in favor of Philippine Bank of
Communications (PBCOM for short) with Joseph L.G.
Chua, as one of the sureties.
On March 6, 1981, Forte Merchant Finance, Inc., executed
a Surety Agreement in favor of PBCOM with Joseph L.G.
Chua as one of the sureties
On October 24, 1983 Chua executed a Deed of Exchange
transferring a parcel of land with improvements thereon
covered by TCT No. S-52808 (343721) to JALECO
Development, Inc. As a result, TCT No. 126573 of the
Register of Deeds of Rizal covering the aforementioned
parcel of land was issued in the name of JALECO
Development, Inc., on November 24, 1983.
On November 2, 1983, Chua sold 6,000 shares of JALECO
Development, Inc., to Mr. Chua Tiong King for P600,000.00
and another 6,000 shares of JALECO Development, Inc. to
Guillermo Jose, Jr. also for P600,000.00 and Caw Le Ja
Chua, wife of Chua sold the 6,000 share of JALECO
Development, Inc., to Chua Tiong King for P200,000.00
In the meanwhile, for failure of both Fortune Motors
(Phils.), Inc. and Forte Merchant Finance, Inc. to meet their
respective financial obligations with PBCOM, the latter filed
Civil Case No. 84-25159 against Fortune Motors (Phils.),
Inc., Joseph L. G. Chua et. al. and Civil Case No. 84-25160
against Forte Merchant Finance, Inc., Joseph L. G. Chua
et. al. with the Regional Trial Court of Manila, both for Sum
of Money with Writ of Preliminary Attachment where
PBCOM was able to obtain a notice of levy on the
properties of Fortune Motors (Phils.)
When plaintiff was able to locate Chua's former property
situated in Dasmariñas, Makati, Metro Manila, covered by
TCT No. S-52808 containing an area of 1,541 square
meters which was already transferred to JALECO
Development, Inc., under TCT No. 126573 by virtue of the
Deed of Exchange dated October 24, 1983, PBCOM filed
Civil Case No. 7889 for annulment of Deed of Exchange
with the Regional Trial Court of Makati, Metro Manila.
Chua admitted the Deed of Exchange in favor of JALECO
and contended that it was done in good faith and in
accordance with law.
ISSUE: WON the Deed of Exchange should be cancelled.
YES
HELD: For failure of both Fortune Motors (Phils), Inc. and
Forte Merchant Finance, Inc. to pay their obligations with
the petitioner, the latter filed the two civil cases against
Fortune Motors (Phils.), Inc. and Forte Merchant Finance,
Inc. and respondent Chua, among others with the Regional
Trial Court of Manila. The petitioner was granted a writ of
attachment as a result of which properties belonging to
Fortune Motors (Phils.) were attached. It turned out,
however, that the attached properties of Fortune Motors
(Phils.), Inc. were already previously attached/mortgaged
to prior lien holders in the amount of about
P70,000,000.00. As regards Forte Merchant Finance, Inc.,
it appears that it has no property to satisfy the debts it
incurred with PBCOM. The record further shows that as
regards Chua, the property subject of the Deed of
Exchange between him and JALECO was his only
property. Under these circumstances, the petitioner's
petition for annulment of the deed of exchange on the
ground that the deed was executed in fraud of creditors,
despite the pendency of the two (2) other civil cases is
well-taken.
As surety for the financial obligations of Fortune Motors
(Phils.), Inc. and the Forte Merchant Finance, Inc., with the
petitioner, respondent Chua bound himself solidarily liable
with the two (2) principal debtors. (Article 2047, Civil Code)
The petitioner may therefore demand payment of the whole
financial obligations of Fortune Motors (Phils.), Inc. and
Forte Finance, Inc., from Chua, if the petitioner chooses to
go directly after him. Hence, since the only property of
Chua was sold to JALECO after the debts became due, the
petitioner has the right to file an annulment of the deed of
exchange between Chua and JALECO whereinChua sold
his only property to JALECO to protect his interests and so
as not to make the judgments in the two (2) cases illusory.
Parenthetically, the appellate court's observation that the
petitioner's interests are sufficiently protected by a writ of
attachment on the properties of Fortune Finance (Phils.),
Inc. has neither legal nor factual basis.
Q1: What do you call that kind of action questioning the contract
entered into by Chua and JALECO? What kind of action is that?
A1: Action for annulment mam.
Q2: What do you call that under obligations and contracts?
A2: Accion pauliana mam.
Ok, accion pauliana noh. To file an action for the rescission
of a contract that was entered into to defraud third persons. In this
case to defraud the third person creditor. Again, when the contract or
the transfer was made in favor of JALECO, that was only the
property of Chua and at that time he was already obligated to
PBCOM.
28 | P a g e
 Why did I include this case? because take a look at article
2058, particularly the phrase "has resorted to all the legal remedies
against the debtor"-
Article 2058. The guarantor cannot be compelled to
pay the creditor unless the latter has exhausted all the
property of the debtor, and has resorted to all the legal
remedies against the debtor. (1830a)
So for example, it is not sufficient that we just declare that
the debtor is insolvent for you to go after the guarantor. In fact, in the
earlier case of Machetti, it is not sufficient to allege insolvency
because what happens in an insolvency proceeding? It may happen
that there are still assets owned by the principal debtor wherein
liquidation can take place. Upon the liquidation, baka meron pang
ibang property mapunta doon sa creditor so of course taking into
consideration concurrence and preference of credits. But it does not
necessarily mean that if the debtor is insolvent wala na siyang
properties to pay off his creditors so here it is not sufficient that he is
insolvent before you can go after the guarantor.
You must resort to all legal remedies against the debtor
and one of the legal remedies available is accion pauliana. This
action, again if you recall your obligations and contracts is intended
to rescind or impugn the contract or alienation made by the debtor to
defraud the creditor. So here if it appears that the debtor has no
property of his own, logically you can say that you could not proceed
against the debtor because he has no property to proceed against.
Walang cash, walang property. But after the obligation was incurred,
it appears that the debtor made an alienation of his property and
such alienation was proven to defraud the creditor. So the creditor
here still has the remedy accion pauliana and the creditor must refer
to this kind of action first before he can actually proceed against the
guarantor.
In the case of PBCOM while Chua was deemed as surety,
if he was deemed to be a guarantor then this action of filing the
rescission of contract or filing that accion pauliana is necessary
before he can demand payment from the guarantor. So again, it is
not sufficient that you only go against debtor himself but also resort
to all legal remedies against the debtor.
Now with regard to parties in an action involving a
guarantor is it required that you implead the guarantor together with
the principal debtor? Can you file an action against the principal
debtor only? or can you file an action against the guarantor only?
Let see what happened in the case of Prudential-
PRUDENTIAL BANKvs.INTERMEDIATE APPELLATE
COURT, PHILIPPINE RAYON MILLS, INC. and
ANACLETO R. CHI
FACTS:This case involves an action for the recovery of
sum of money representing the amount paid by Prudential
Bank to Nissho Company Ltd. of Japan for textile
machinery imported by Philippine Rayon Mills Inc.
On August 8, 1962, Philippine Rayon Mills Inc. entered into
a contract with Nissho Co., Ltd. of Japan for the importation
of textile machineries under a five-year deferred payment
plan. Philippine Rayon applied for a commercial letter of
credit with the Prudential Bank and Trust Company in favor
of Nissho in the amount of $128,548,78. Nissho withdrew
twelve drafts against the letter of credit which Prudential
Bank paid to the Bank of Tokyo but only two of these drafts
were accepted by Anacleto Chi, the president of Philippine
Rayon.
Upon the arrival of the machineries, the Prudential Bank
indorsed the shipping documents to the defendant-
appellant which accepted delivery of the same. They
executed, by prior arrangenment, a trust receipt which was
signed by Anacleto Chi to enable Philippine Rayon Mills to
take delivery of the machines.
At the back of the trust receipt is a printed form to be
accomplished by two sureties who, by the very terms and
conditions thereof, were to be jointly and severally liable to
the Prudential Bank should the defendant-appellant fail to
pay the total amount or any portion of the drafts issued by
Nissho and paid for by Prudential Bank. The defendant-
appellant was able to take delivery of the textile
machineries and installed the same at its factory site at 69
Obudan Street, Quezon City.
Sometime in 1967, the defendant-appellant ceased
business operation. On December 29, 1969, defendant-
appellant's factory was leased by Yupangco Cotton Mills
for an annual rental of P200,000.00. The lease was
renewed on January 3, 1973. On January 5, 1974, all the
textile machineries in the defendant-appellant's factory
were sold to AIC Development Corporation for
P300,000.00.
The obligation of the defendant-appellant arising from the
letter of credit and the trust receipt remained unpaid and
unliquidated.
Repeated formal demands for the payment of the said trust
receipt yielded no result Hence, the present action for the
collection of the principal amount of P956,384.95 was filed
on October 3, 1974 against the defendant-appellant and
Anacleto R. Chi. In their respective answers, the
defendants interposed identical special defenses, viz., the
complaint states no cause of action; if there is, the same
has prescribed; and the plaintiff is guilty of laches.
The trial court rendered judgment holding Philippine Rayon
Mills Inc. liable for the sum of P153,645.22 which
represented the two drafts accepted by Anacleto. The case
against Anacleto Chi was dismissed.
Petitioner appealed the decision to the then Intermediate
Appellate Court. In urging the said court to reverse or
modify the decision, petitioner alleged in its Brief that the
trial court erred in (a) disregarding its right to
reimbursement from the private respondents for the entire
unpaid balance of the imported machines, the total amount
of which was paid to the Nissho Company Ltd., thereby
violating the principle of the third party payor's right to
reimbursement provided for in the second paragraph of
Article 1236 of the Civil Code and under the rule against
unjust enrichment; (b) refusing to hold Anacleto R. Chi, as
the responsible officer of defendant corporation, liable
under Section 13 of P.D No 115 for the entire unpaid
balance of the imported machines covered by the bank's
trust receipt (c) finding that the solidary guaranty clause
signed by Anacleto R. Chi is not a guaranty at all; (d)
controverting the judicial admissions of Anacleto R. Chi
that he is at least a simple guarantor of the said trust
receipt obligation; (e) contravening, based on the
assumption that Chi is a simple guarantor, Articles 2059,
2060 and 2062 of the Civil Code and the related evidence
and jurisprudence which provide that such liability had
already attached; (f) contravening the judicial admissions of
Philippine Rayon with respect to its liability to pay the
petitioner the amounts involved in the draft; and (g)
interpreting "sight" drafts as requiring acceptance by
Philippine Rayon before the latter could be held liable
thereon.
ISSUES: Whether private respondent Chi is jointly and
severally liable with Philippine Rayon for the obligation
sought to be enforced -NO and if not, whether he may be
considered a guarantor -YES; in the latter situation,
whether the case should have been dismissed on the
ground of lack of cause of action as there was no prior
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exhaustion of Philippine Rayon's properties. -NO
HELD:
We also conclude, for the reason hereinafter
discussed, and not for that adduced by the public
respondent, that private respondent Chi's signature in the
dorsal portion of the trust receipt did not bind him solidarily
with Philippine Rayon. The statement at the dorsal portion
of the said trust receipt, which petitioner describes as a
"solidary guaranty clause", reads:
In consideration of the PRUDENTIAL BANK AND TRUST
COMPANY complying with the foregoing, we jointly and
severally agree and undertake to pay on demand to the
PRUDENTIAL BANK AND TRUST COMPANY all sums of
money which the said PRUDENTIAL BANK AND TRUST
COMPANY may call upon us to pay arising out of or
pertaining to, and/or in any event connected with the
default of and/or non-fulfillment in any respect of the
undertaking of the aforesaid:
PHILIPPINE RAYON MILLS, INC.
We further agree that the PRUDENTIAL BANK AND
TRUST COMPANY does not have to take any steps or
exhaust its remedy against aforesaid:
before making demand on me/us.
(Sgd.) Anacleto R. Chi
ANACLETO R. CHI
Our own reading of the questioned solidary guaranty
clause yields no other conclusion than that the obligation of
Chi is only that of a guarantor. This is further bolstered by
the last sentence which speaks of waiver of exhaustion,
which, nevertheless, is ineffective in this case because the
space therein for the party whose property may not be
exhausted was not filled up. Under Article 2058 of the
Civil Code, the defense of exhaustion (excussion) may be
raised by a guarantor before he may be held liable for the
obligation. Petitioner likewise admits that the questioned
provision is a solidary guaranty clause, thereby clearly
distinguishing it from a contract of surety.
It, however, described the guaranty as solidary between
the guarantors; this would have been correct if two (2)
guarantors had signed it. The clause "we jointly and
severally agree and undertake" refers to the undertaking of
the two (2) parties who are to sign it or to the liability
existing between themselves. It does not refer to the
undertaking between either one or both of them on the one
hand and the petitioner on the other with respect to the
liability described under the trust receipt. Elsewise stated,
their liability is not divisible as between them, i.e., it can be
enforced to its full extent against any one of them.
Furthermore, any doubt as to the import, or true intent of
the solidary guaranty clause should be resolved against the
petitioner. The trust receipt, together with the questioned
solidary guaranty clause, is on a form drafted and prepared
solely by the petitioner; Chi's participation therein is limited
to the affixing of his signature thereon. It is, therefore, a
contract of adhesion; as such, it must be strictly construed
against the party responsible for its preparation.
Neither can We agree with the reasoning of the public
respondent that this solidary guaranty clause was
effectively disregarded simply because it was not signed
and witnessed by two (2) persons and acknowledged
before a notary public. While indeed, the clause ought to
have been signed by two (2) guarantors, the fact that it was
only Chi who signed the same did not make his act an idle
ceremony or render the clause totally meaningless. By his
signing, Chi became the sole guarantor.
The attestation by witnesses and the acknowledgement
before a notary public are not required by law to make a
party liable on the instrument. The rule is that contracts
shall be obligatory in whatever form they may have been
entered into, provided all the essential requisites for their
validity are present; however, when the law requires that a
contract be in some form in order that it may be valid or
enforceable, or that it be proved in a certain way, that
requirement is absolute and indispensable. With respect to
a guaranty,which is a promise to answer for the debt or
default of another, the law merely requires that it, or some
note or memorandum thereof, be in writing. Otherwise, it
would be unenforceable unless ratified.While the
acknowledgement of a surety before a notary public is
required to make the same a public document, under
Article 1358 of the Civil Code, a contract of guaranty does
not have to appear in a public document.
The remaining issue to be resolved concerns the propriety
of the dismissal of the case against private respondent Chi.
The trial court based the dismissal, and the respondent
Court its affirmance thereof, on the theory that Chi is not
liable on the trust receipt in any capacity — either as surety
or as guarantor — because his signature at the dorsal
portion thereof was useless; and even if he could be bound
by such signature as a simple guarantor, he cannot,
pursuant to Article 2058 of the Civil Code, be compelled to
pay until
after petitioner has exhausted and resorted to all legal
remedies against the principal debtor, Philippine Rayon.
The records fail to show that petitioner had done so.
Reliance is thus placed on Article 2058 of the Civil Code
which provides:
Art. 2058. The guarantor cannot be compelled to pay the
credit unless the latter has exhausted all the property of the
debtor, and has resorted to all the legal remedies against
the debtor.
Simply stated, there is as yet no cause of action against
Chi.
Excussion is not a condition sine qua non for the institution
of an action against a guarantor. In Southern Motors,
Inc. vs. Barbosa, this Court stated:
Although an ordinary personal guarantor — not a
mortgagor or pledgor — may demand the aforementioned
exhaustion, the creditor may, prior thereto, secure a
judgment against said 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 obligation involved
in the case.
However, Chi's liability is limited to the principal obligation
in the trust receipt plus all the accessories thereof including
judicial costs; with respect to the latter, he shall only be
liable for those costs incurred after being judicially required
to pay. Interest and damages, being accessories of the
principal obligation, should also be paid; these, however,
shall run only from the date of the filing of the complaint.
Attorney's fees may even be allowed in appropriate cases.
Now remember here this is in relation to our previous
discussion on letters of credit and trust receipts so you have here
Philippine Rayon Mills,
Q1: Who issued the letter of credit?
A1: Prudential Bank mam.
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Q2: In favor of?
A2: Nissho Company Ltd. of Japan.
Q3: Through what bank?
A3: Bank of Tokyo.
This is an example of what we have discussed earlier in
relation to letters of credit and trust receipts so this is an international
transaction.
Q4: What is the issue here?
A4: Whether or not Chi here should be jointly and severally liable
with Philippine Rayon Mills for the obligation if enforced. The Court
here said that, No.
Q5: Is Chi here liable as a guarantor or surety?
A5: Chi here was liable as a guarantor.
Q6: Why not a surety?
A6: He was not liable as a surety because the document that he
signed contained a solidary guarantor clause.
Q7: But isn't it in that contract that he executed there is that phrase
there- "We jointly and severally agree and undertake..." Wouldn't that
mean that he solidarily bound himself thereof together with the
principal debtor, Philippine Rayon Mills?
A7: The "We" here would only pertain to those who will be signing as
guarantors and they will be solidarily liable with each other to pay the
(obligation).
Q8: Why was he considered merely as a guarantor and not as a
surety?
A8: He was merely considered as a guarantor because....
Q9: Isn't it that there was that provision in the contract that there is a
waiver of excussion?
A9: This waiver of excussion even bolstered the fact...
Q10: Why would it bolster? Isn't it that it would mean that he will not
be liable as a guarantor but more of as a surety?
A10: He will be liable as a guarantor as provided by Article 2058
which provides for the benefit of excussion. But it remained
unsigned....
Article 2058. The guarantor cannot be compelled to pay
the creditor unless the latter has exhausted all the
property of the debtor, and has resorted to all the legal
remedies against the debtor. (1830a)
Q11: What remained unsigned?
A11: The part of the clause on the....
Q12: What is unsigned or what is blank?
A12: It was blank mam.
Q13: And what would that mean? So if it is blank, what would that
phrase waiver of excussion mean?
A13: The bank cannot, it would be (recording is not clear) against the
bank....
Q14: So since Chi here is merely considered as a guarantor, is it
necessary that he be impleaded together with the principal debtor?
A14: It is not necessary mam but although it is allowed.
Q15: If you are the creditor and you will file a case, which would be
the best option, to file a case against the principal debtor only or to
file the case together with the guarantor or to file the case only as
against the guarantor? Why?
A15: Both mam. If in case the debtor cannot pay, the guarantor will
be held liable.
Q16: So with that, is it necessary that before you implead the
guarantor the properties of the principal debtor must be exhausted
first?
A16: No mam, he is merely made a co-defendant but we cannot
collect yet from the guarantor if you have not exhausted the legal
remedies against the principal debtor.
Now first let us take into consideration here the contract
that was signed by Chi. The SC held here that the signature of Chi in
the trust receipt did not bind him solidarily with Philippine Rayon
Mills. The statement at the dorsal portion of the said trust receipt
which petitioner describes as solidary guaranty clause with the
phrase- "jointly and severally agree and undertake Prudential Bank
and Trust Co. does not have to take any steps or exhaust its
remedies against the aforesaid obligation". Here, the solidary
guaranty clause yields no other conclusion that the obligation of Chi
is that only of a guarantor.
Why is that? Be very careful here because here the words
"We jointly and severally agree" refers to those who will affix their
signature with regard to the clause and when asked among
themselves these persons acting as guarantors will be solidarily
bound. So for example, you have here the obligation of Philippine
Rayon Mills as the principal obligation so Philippine Rayon Mills will
be the principal debtor. With that solidary guaranty clause the
intention was that those parties who will sign therein, ito si Chi and
let's say some other parties, X and Y would be solidarily bound. So in
other words, if Philippine Rayon Mills defaulted on its obligation and
you have these parties as guarantors, after the properties of
Philippine Rayon Mills will be exhausted, then you can claim against
these guarantors the full amount of the obligation. Otherwise if you
have several guarantors, the presumption obviously is that you apply
the general rule, joint lang sila. So after the exhaustion of the
properties of the principal debtor, the respective liabilities of these
guarantors will be pro-rata. The creditor cannot demand from them
the full obligation
Now in this case of Prudential, the intention was that you
have several guarantors act to be jointly and severally liable as such
for the principal obligation of Philippine Rayon Mills not to be
solidarily bound together with Philippine Rayon Mills. The phrase
here "jointly and severally" agree among themselves as solidary
guarantors. Now here the phrase "waiver of excussion" is ineffective.
Why? because the space provided for the party whose property may
not be exhausted was not filled up. So under Article 2058(refer
above), the defense of excussion may be raised by a guarantor
before he may be held liable for the obligation. Petitioner here
likewise admits that the questioned provision is a solidary guaranty
clause distinguishing it from a contract of surety. It described the
guaranty as solidary with the guarantors. The clause, "we jointly and
severally agree and undertake" refers to the undertaking of the two
parties who are to sign or to the liability existing between themselves.
Now take note here and in doubt as to the import or to the intent of
this clause should be resolved against the bank as it was formed and
drafted solely by the petitioner. So what we have here is a contract
of adhesion and you very well know it is strictly construed against
the party who prepared such contract.
Now neither can we agree with the reasoning that this
solidary guaranty clause was effectively disregarded simply because
it was not signed and witnessed by two persons before a notary
public. The fact that it was only Chi who signed his name did not
make his act an idle ceremony or render the clause totally
meaningless. By his signing kahit siya lang isa, he became the sole
guarantor and it does not detract the fact that it was intended to be
signed by several guarantors agreed to be solidarily liable, still Chi is
considered as a guarantor and not as a surety. With respect to a
31 | P a g e
guaranteed paid note, take note that the excussion is not a
condition sine qua non for the institution of an action against a
guarantor.
Now if you are the creditors mentioned earlier, the best
option or the best course of action is to file the case as against the
debtor and the guarantor at the same time. But of course, you cannot
enforce yet the obligation against the guarantor unless you have
exhausted the properties of the principal debtor. The guarantor can
be impleaded as a party because again excussion is not a requisite
for the institution of an action against the guarantor. This is based on
trial convenience and to permit the joinder of plaintiffs or defendants
whenever there is a common question of law or fact. I presume that
you are already finished with that portion of Civil Procedure.
However, Chi's liability is limited to the principal obligation
in the trust receipt plus all the accessories including judicial costs.
With respect to judicial costs, he shall only be liable for those costs
incurred after he is judicially required to pay as we have discussed
earlier. Interests and damages, being accessories of the principal
obligation, should also be paid. However they shall run only from the
date of the filing of the complaint.
So it is actually permitted that you go after the guarantor or
you file a case against the guarantor as a co-defendant of the debtor.
Even if you make the guarantor as a co-defendant, you as the
creditor however, could not yet collect from the guarantor. There has
to be first a judgment rendered against the principal debtor that he is
indeed liable to you for the principal obligation. Remember that the
guarantor is subsidiarily liable. There shall be first a execution, so if
there is already a judgment making the debtor liable there should be
first an execution issued against the debtor who will be ordered to
pay his debt. If the debtor cannot pay, then there would be
attachment or execution on whatever property of the debtor can be
found. If the debtor has no property, only at that time can the creditor
proceed against the guarantor. So even if a judgment is already
rendered, there still has to be an execution first against the properties
of the principal debtor because again the guarantor enjoys the
benefit of excussion. You can implead him in the case but you cannot
yet collect against him. You can only collect from the guarantor if the
properties of the principal debtor has already been exhausted. The
creditor can secure a judgment against the guarantor who shall be
entitled to a deferment of the execution of the judgment against him
until after the properties of the principal debtor have exhausted to
satisfy the latter's obligation.
And we have the case of Aglibot
FIDELIZA J. AGLIBOTvs.INGERSOL L. SANTIA
G.R. No. 185945 (December 05, 2012)
FACTS:Engr. Ingersol L.Santia loaned P2,500,000 to
Pacific Lending and Capital Corporation, through its
manager Fideliza J. Aglibot. The loan was evidence by a
promisorry note date July 1, 2003 and payable in one year
subject to interest at 24% per annum. Aglibot then issued
and delivered to Santia eleven post-dated personal checks
drawn from her own demand account as a guaranty or
security for the payment of the note.
Upon presentation of the checks, they were dishonored by
the bank for having been drawn against insufficient funds
or closed account. Santia then demanded payment from
PLCC and Aglibot of the face value of the checks, but
neither of them heeded his demand. As a result, eleven
Informations for violation of BP 22 were filed against
Aglibot.
Aglibot, in her defense, admitted that she did obtain the
loan from Santia, but claimed that she did so in behalf of
PLCC; that before granting the loan, Santia demanded and
obtained from her a security for the repayment thereof, but
with the understanding that upon remittance in case of the
face amount of the checks, Santia would correspondingly
return to her each check so paid. Aglibot also mainted that
she was a mere guarantor of the PLCC's debt and Santia
failed to exhaust all means to collect the debt from PLCC
and therefore she is not subsidiary liable.
ISSUE:Whether or not Aglibot is a guarantor and thus, can
invoke the benefit of excussion - NO, Aglibot is an
accommodation party
HELD:The RTC in its decision held that Aglibot signed the
promissory note on behalf of PLCC as manager and
nowhere does it appear that she signed as a
accommodation party. The RTC further ruled that what
Aglibot agreed to do by issuing her personal checks was
merely to guarantee the indebtedness of PLCC, and thus
she must be accorded the benefit of excussion- prior
exhaustion of the property of the debtor- as provided under
Article 2058 of the Civil Code-
Art. 2058. The guarantor cannot be compelled to pay the
creditor unless the latter has exhausted all the property of
the debtor, and has resorted to all the legal remedies
against the debtor.
However, in the present case, Aglibot's claim as a mere
guarantor is bereft of merit for want of proof as provided
under Article 1403(2) of the Civil Code, embodying the
Statute of Frauds which provides-
Art. 1403. The following contracts are unenforceable,
unless they are ratified:
(2) Those that do not comply with the Statute of Frauds as
set forth in this number. In the following cases an
agreement hereafter made 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 its contents:
a) An agreement that by its terms is not to be performed
within a year from the making thereof;
b) A special promise to answer for the debt, default, or
miscarriage of another;
c) An agreement made in consideration of marriage, other
than a mutual promise to marry;
d) An agreement for the sale of goods, chattels or things in
action, at a price not less than five hundred pesos, unless
the buyer accept and receive part of such goods and
chattels, or the evidences, or some of them, or such things
in action, or pay at the time some part of the purchase
money; but when a sale is made by auction and entry is
made by the auctioneer in his sales book, at the time of the
sale, of the amount and kind of property sold, terms of sale,
price, names of purchasers and person on whose account
the sale is made, it is a sufficient memorandum;
e) An agreement for the leasing of a longer period than one
year, or for the sale of real property or of an interest
therein;
f) A representation to the credit of a third person.
Under the above provision, concerning a guaranty
agreement, which is a promise to answer for the debt or
default of another, the law clearly requires that it, or some
note or memorandum thereof, be in writing. Otherwise, it
would be unenforceable unless ratified,although under
Article 1358of the Civil Code, a contract of guaranty does
not have to appear in a public document.
Under Article 2055 of the Civil Code, it is provided that a
guaranty is not presumed, but must be express and cannot
extend to more than what is stipulated therein. This is the
obvious rationale why a contract of guaranty is
unenforceable unless made in writing or evidenced by
32 | P a g e
some writing. For as pointed out by Santia, Aglibot has not
shown any proof, such as a contract, a secretary’s
certificate or a board resolution, nor even a note or
memorandum thereof, whereby it was agreed that she
would issue her personal checks in behalf of the company
to guarantee the payment of its debt to Santia. Certainly,
there is nothing shown in the Promissory Note signed by
Aglibot herself remotely containing an agreement between
her and PLCC resembling her guaranteeing its debt to
Santia. And neither is there a showing that PLCC thereafter
ratified her act of "guaranteeing" its indebtedness by
issuing her own checks to Santia.
N.B.: Why Aglibot is an accommodation party
The appellate court ruled that by issuing her own post-
dated checks, Aglibot thereby bound herself personally and
solidarily to pay Santia, and dismissed her claim that she
issued her said checks in her official capacity as PLCC’s
manager merely to guarantee the investment of Santia. It
noted that she could have issued PLCC’s checks, but
instead she chose to issue her own checks, drawn against
her personal account with Metrobank. It concluded that
Aglibot intended to personally assume the repayment of
the loan, pointing out that in her Counter-Affidavit, she
even admitted that she was personally indebted to Santia,
and only raised payment as her defense, a clear admission
of her liability for the said loan.
The facts below present a clear situation where Aglibot, as
the manager of PLCC, agreed to accommodate its loan to
Santia by issuing her own post-dated checks in payment
thereof. She is what the Negotiable Instruments Law calls
an accommodation party.
Q1: What is an accommodation party?
A1: An accommodation party mam is a person who for example in
this case, a person who issues a check in his name or on his account
but in reality such issuance is in favor of another person.
Q2: Is it necessary to be a in writing? What is the purpose for it to be
in writing? In order to be valid?
A2: It is because a contract of guaranty is not presumed.
Q3: If you look at article 2055, it does not require that the contract of
guaranty must be in writing. It just tells us that it must be expressed,
so we can discern from it that it must be expressed in order to be
valid. But as I mentioned earlier it is required to be in writing, for what
purposes?
A3: The SC held that a contract of guaranty is unenforceable unless
made in writing because a contract of guaranty is not presumed but
must be expressed and cannot extend to beyond what is stipulated
therein.
Article 2055. A guaranty is not presumed; it must be
express and cannot extend to more than what is
stipulated therein.
If it be simple or indefinite, it shall compromise not only
the principal obligation, but also all its accessories,
including the judicial costs, provided with respect to the
latter, that the guarantor shall only be liable for those
costs incurred after he has been judicially required to
pay. (1827a)
Q4: So again, a contract of guaranty must be in writing in order to
be?
A4: Enforceable.
Ok, in order to be enforceable based on the Statute of
Frauds.
Q5: In this case, was there any writing showing that Aglibot is simply
a guarantor?
A5: No mam. The SC said that there was no proof that there was a
secretary's certificate or board resolution showing or proving that
Aglibot is merely a guarantor. And neither does the promissory note
indicate that the loan that PLCC borrowed shows that there was a
contract of guaranty entered into with Aglibot.
So again take note of the facts of this case. Here, you have
Aglibot as manager of PLCC issuing several checks for the payment
of the obligation of PLCC to Santia. Now the SC held here that the
liability of a guarantor is only subsidiary and all the properties of the
principal debtor, in this case PLCC, must first be exhausted before
the guarantor may be held answerable for the debt. So we have to
determine whether indeed Aglibot here is a guarantor or surety when
he issued personal checks for the payment of the obligation of PLCC.
The Court here rejected Aglibot's claim that she is a mere guarantor
of the indebtedness of PLCC for want of proof. Under the Statute of
Frauds concerning a guaranty agreement, a promise to answer for
the debt or default of another requires that such promise must be in
some note or memorandum or that it must be in writing for it to be
enforceable. Article 2055(refer above) as we have discussed before
provides that a contract of guaranty is not presumed but must be
expressed and cannot extend to more than what is stipulated herein.
This is the obvious rationale why a contract of guaranty is
unenforceable unless it is made in writing or is evidenced by some
writing. Here there is nothing shown in the promissory note signed by
Aglibot herself that would contain an agreement between her and
PLCC that it would guaranty its debt to Santia. Neither is there
showing that PLCC ratified her act of guaranty to its indebtedness by
issuing her own checks to Santia. By issuing her own post-dated
checks, Aglibot bound herself personally and solidarily to pay Santia.
The facts present Aglibot as manager of PLCC agreeing to
accommodate its loan to Santia by issuing here post-dated checks in
payment thereof and therefore Section 29 of the Negotiable
Instruments Law refering to an accommodation party was applied.
Sec. 29. Liability of accommodation party. – An
accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the purpose of
lending his name to some other person. Such a person
is liable on the instrument to a holder for value,
notwithstanding such holder, at the time of taking the
instrument, knew him to be only an accommodation
party.
So you will see in Section 29 that an accommodation party
is a person who signs an instrument as a maker, acceptor, indorser
or drawer without receiving any consideration therefor and for the
purpose of lending his name to some other person. And in that
Section 29 it is also provided therein that it is not a defense that the
person who demands the obligation has knowledge that the
accommodation party signs as such. So you will also see in Section
29 that if you would sign as an accommodation party, your liability
will be the same as that of the surety. You are solidarily bound with
the principal debtor. And in fact it is not covered by the Statute of
Frauds. Your obligation as a surety is not covered by the Statute of
Frauds. On the face of the instrument, ikaw na yung party primarily
liable and of course you're entitled to the remedy to seek
reimbursement from the principal debtor. With a requirement that the
agreement between the accommodation and accommodated party
be in writing. So take note of this in relation to Section 29 of the NIL.
33 | P a g e
Now let's have Article 2059-
Article 2059. The excussion shall not take place:
(1) If the guarantor has expressly renounced So
it; Article
2059
(2) If he has bound himself solidarily with the provides
debtor; for the
exceptio
(3) In case of insolvency of the debtor; ns to
the
benefit
(4) When he has absconded, or cannot be of
sued within the Philippines unless he has left excussi
a manager or representative; on.
Under
(5) If it may be presumed that an execution on the
the property of the principal debtor would not circumst
result in the satisfaction of the obligation. ance
(1831a) provide
d under 2059, if you are the creditor you need not exhaust first the
principal debtor before you can proceed against the guarantor. So
what are these exceptions?
(1) If the guarantor has expressly renounced the benefit of
excussion.
Remember that this benefit is a privilege or right granted by
law upon the guarantor. So like any other right, this can be waived
and the waiver must be expressed. The guarantor can waive this
right and it is only the guarantor who has such right to waive this
benefit of excussion. It cannot be waived by the creditor or the debtor
in behalf of the guarantor because this is a personal right of the
guarantor.
(2) Bound himself solidarily with the debtor
This means that his obligation as a guarantor ceases as he
is now considered as a surety. When you say solidarily, this means
that you are now primarily liable as to the obligation so with that the
creditor can now proceed against the debtor or the guarantor. Again
a guarantor who is now deemed a surety without the benefit of
exhaustion.
(3) In case of insolvency of the debtor
Under this exception, it is not required that the debtor is
judicially declared insolvent or bankrupt. It is sufficient that the his
assets are less than his liabilities or that he cannot anymore pay off
his obligations when they fall due. So for this exception to apply,
there is no need for a judicial decree or declaration of bankruptcy.
However take note here that the insolvency be actual. However also
take note again recall the case of Machetti vs Hospico, mere
declaration of insolvency is not sufficient to demand the obligation
from the guarantor because you still have to wait for the final
liquidation.
(4) When the debtor has absconded(naglayas na) or cannot be sued
within the Philippines, unless he has left a manager or representative
In this exception, it is not expected that the creditor should
first proceed against the principal debtor since it could now be
impossible to enforce a court decision if the principal debtor has
already left the country. Court processes are jurisdictional. They
cannot be enforced outside of Philippine territory unless what is
involved are properties here in the Philippines. You may file a case
but if the debtor has no properties in the Philippines, then it will be
useless because he cannot fulfill his obligation. Remember under
your Civ Pro, you cannot acquire jurisdiction against a person or
defendant unless his property is still in the Philippines. You can
acquire jurisdiction over the thing or the res. Under the fourth
exception, unless he has left manager or representative then you can
sue the manager or the representative.
(5) When it can be presumed that execution would not result in the
satisfaction of the obligation
Here it clearly appears that the principal debtor has no
more property. So you don't have to wait to exhaust the properties of
the principal debtor before you can proceed against the guarantor
because obviously it would be useless to proceed first against the
principal debtor. Utang 1 million, then nakita mo ung principal debtor
wala nang bahay, naglimos na diyan sa tabi, o kasuhan pa? Ok?
In addition to the exceptions here in 2059, we also take into
consideration other articles before you can avail of the benefit of
excussion. Other exceptions, if there is no compliance with the
requirement under Article 2060. If there is a judicial bondsman and
subsurety under Art. 2085. If the pledge or mortgage is given by him
as a security or if the guarantor fails to interpose the benefit of
excussion as a defense.
So we have here Article 2060-
Article 2060. In order that the guarantor may make
use of the benefit of exclusion, he must set it up
against the creditor upon the latter's demand for
payment from him, and point out to the creditor
available property of the debtor within Philippine
territory, sufficient to cover the amount of the debt.
(1832)
Ok, so under Article 2059, we have discussed in the
circumstances therein the benefit of excussion is not available as
against the guarantor. The principal creditor is not required to pursue
all remedies against the principal debtor under 2059. Now under Art.
2060, as a prerequisite before you can avail of the benefit of
excussion, you must set this defense against the creditor. Allege it in
your answer. If you are impleaded in the complaint. Let us say a
demand was made to the guarantor by the creditor, the guarantor
must set this benefit of excussion. If he fails to set up this benefit of
excussion, then he is deemed to have waive this benefit. Or, if he
fails to point out to the creditor properties of the debtor available in
the Philippines sufficient to cover the amount of the debt, then he
cannot also avail of this benefit of excussion. So under 2060, you
have two prerequisites for the guarantor to set up the benefit of
excussion. First, he must allege this benefit if a demand is made by
the creditor against him. He must set this as a defense that there is
no cause of action against him being the guarantor since he is
entitled to the benefit of excussion if the creditor has not shown that
he has proceeded first against the principal debtor, and he failed to
satisfy whatever obligation he may have against his property.
Second prerequisite, the guarantor should be able to point
out specific properties of the principal debtor in the Philippines. If the
property is outside of the Philippines, then it is not covered under
2060 because it could be legally impossible for the creditor to
proceed against the property of the debtor which are located outside
the Philippines. So very specific, inside or within the Philippine
territory. Now if the creditor should decide to proceed against these
properties outside of the jurisdiction of the Philippines, chances are
mas mahal pa siguro yung ibayad niya na judicial cost than the
obligation itself. So rendering his right as a creditor nugatory. Now
here, the properties pointed out must be sufficient to cover the
amount of the debt. So even if the guarantor is able to set up the
defense of exhaustion of properties, if he fails to point out the
properties available in the Philippines then wala din or for example if
he sets up his defense, he points out properties in the Philippines but
such properties are not sufficient to cover the amount of the debt,
then it still does not fall within what is required under Art. 2060.
Remember here, not just properties of the debtor, but
properties which is available. In other words, it is not covered by liens
or encumbrances, not subject to any a litigation or encumbrance.
So we have here the case of Bitanga-
34 | P a g e
 BENJAMIN BITANGA vs PYRAMID CONSTRUCTION
ENGINEERING CORPORATION
G.R. No. 173526 (August 28, 2008)
FACTS:On March 26, 1997, Pyramid Construction
Engineering Corporation entered into an agreement with
Macrogen Realty, of which Benjamin Bitanga is the
president, to construct in favor of the latter, the Shoppers
Gold Building. Pyramid commenced the construction
project on May 1997. However, Macrogen Realty failed to
settle Pyramid's progress billings, which resulted to the
suspension of the work.
In August 1998, Pyramid once again suspended the
construction work because the conditions that is imposed
for its continuation, including payment of the unsettled
accounts had not been complied with by Macrogen Realty.
Pyramid then instituted a case with the Construction
Industry Association Commission against Macrogen Realty
seeking payment from the latter for the unpaid billings and
project costs.
On April 17, 2000, before the arbitration case could be set
for trial, both parties entered into a compromise agreement
whereby Macrogen Realty agreed to pay the total amount
of P6,000,000 in six equal monthly installments. Bitanga
guaranteed the obligations of Macrogen Realty under the
compromise agreement by executing a Contract of
Guaranty in favor of Pyramid, by virtue of which he
irrevocably and unconditionally guaranteed the full and
complete payment of the principal liability of Macrogen
Realty.
However, contrary to petitioner’s assurances, Macrogen
Realty failed and refused to pay all the monthly
installments agreed upon in the Compromise Agreement.
Hence, on 7 September 2000, respondent moved for the
issuance of a writ of execution8 against Macrogen Realty,
which CIAC granted.
On 29 November 2000, the sheriff9 filed a return stating
that he was unable to locate any property of Macrogen
Realty, except its bank deposit of P20,242.33, with the
Planters Bank, Buendia Branch.
Respondent then made, on 3 January 2001, a written
demand on petitioner, as guarantor of Macrogen Realty, to
pay the P6,000,000.00, or to point out available properties
of the Macrogen Realty within the Philippines sufficient to
cover the obligation guaranteed. It also made verbal
demands on petitioner. Yet, respondent’s demands were
left unheeded.
As a special and affirmative defense, petitioner argued that
the benefit of excussion was still available to him as a
guarantor since he had set it up prior to any judgment
against him. According to petitioner, respondent failed to
exhaust all legal remedies to collect from Macrogen Realty
the amount due under the Compromise Agreement,
considering that Macrogen Realty still had uncollected
credits which were more than enough to pay for the same.
Given these premise, petitioner could not be held liable as
guarantor.
ISSUE: Whether or not Benjamin Bitanga can avail himself
of the benefit of excussion - NO
HELD: Under a contract of guarantee, the guarantor binds
himself to the creditor to fulfill the obligation of the principal
debtor in case the latter should fail to do so. The guarantor
who pays for a debtor, in turn, must be indemnified by the
latter. However, 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. This is what is otherwise known as the benefit
of excussion.
Article 2060 of the Civil Code reads:
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, and point
out to the creditor available property of the debtor within
Philippine territory, sufficient to cover the amount of the
debt.
The afore-quoted provision imposes a condition for the
invocation of the defense of excussion. Article 2060 of the
Civil Code clearly requires that in order for the guarantor to
make use of the benefit of excussion, he must set it up
against the creditor upon the latter’s demand for payment
and point out to the creditor available property of the debtor
within the Philippines sufficient to cover the amount of the
debt.
It must be stressed that despite having been served a
demand letter at his office, petitioner still failed to point out
to the respondent properties of Macrogen Realty sufficient
to cover its debt as required under Article 2060 of the Civil
Code. Such failure on petitioner’s part forecloses his right
to set up the defense of excussion.
Worthy of note as well is the Sheriff’s return stating that the
only property of Macrogen Realty which he found was its
deposit of P20,242.23 with the Planters Bank.
Article 2059(5) of the Civil Code thus finds application
and precludes petitioner from interposing the defense of
excussion. We quote:
Art. 2059. This excussion shall not take place:
xxxx
(5) If it may be presumed that an execution on
the property of the principal debtor would not
result in the satisfaction of the obligation.
Benjamin Bitanga had not genuinely controverted the
return made by Sheriff Joseph F. Bisnar, who affirmed that,
after exerting diligent efforts, he was not able to locate any
property belonging to the Macrogen Realty, except for a
bank deposit with the Planter’s Bank at Buendia, in the
amount of P20,242.23. It is axiomatic that the liability of the
guarantor arises when the insolvency or inability of the
debtor to pay the amount of debt is proven by the return of
the writ of execution that had not been unsatisfied.
Q1: So here is Bitanga a surety or a guarantor?
A1: A guarantor mam.
Q2: As a guarantor, is he entitled to the benefit of excussion>
A2: Yes mam.
Q3: So was his defense that he could not be still be yet liable for the
obligation because there was no exhaustion of the properties of the
debtor upheld by the SC?
A3: No mam because the SC held in this case that Bitanga had failed
to point out the respondent's properties and such failure forecloses
the right of Bitanga to setup the defense of excussion.
Q4: Now when must the guarantor setup this defense of excussion
as well as point out the properties of the debtor? When must he do
so?
A4: During the pendency of the case mam.
35 | P a g e
Q5: So hintayin niya before umabot sa Court of Appeals before he
can set it up? When must he do it?
A5: When upon demand or upon filing his Answer with regard to the
case filed against him.
Q6: So in this case, what is the effect of the failure of Bitanga to
setup this defense against Pyramid?
A6: It has foreclosed his right and also the Court applied here Art.
2059 par. 5 of the Civil Code which stated that an excussion shall not
take place if it is presumed an execution of the property of the
principal debtor would not result to a satisfaction of the obligation.
So here it was stated that Bitanga was a guarantor
however, he cannot avail himself of the benefit of excussion. While it
is true that the guarantor cannot be compelled to pay the creditor
unless the latter has exhausted all the properties of the debtor and
resorted to all the legal remedies against the debtor, again referring
to as the benefit of excussion, the same could not be raised as a
defense by Bitanga. The gurantor must set this defense against the
creditor upon the latter's demand for payment and point out to the
creditor available properties of the debtor within the Philippines
sufficient to cover the amount of the debt. Despite having been
served a demand letter, petitioner still failed to point out to
respondent properties of Macrogen Realty sufficient to cover its
debts. Such failure forecloses the right of the guarantor to set up the
benefit of excussion.
It is worthy to take note that the sheriff's return only stated
that the only property left of Macrogen was that account or deposit
with Planter's Bank amounting to P20,000. So with that we also apply
par. 5 under Article 2059 wherein, it may be presumed that the
execution on the property of the principal debtor would not result to
the satisfaction of the obligation and therefor no need to resort to
exhaustion of the properties of the principal debtor. He also failed to
point out any impropriety in the rendition of the summary judgment in
favor of the respodent so Bitanga was held liable.
January 13, 2016
Transcribed by: Raphael Rivas
So we have already discussed the benefit of excussion as
mentioned in Art 2058. It is not just merely exhausting all the
properties of the debtor but the creditor can also resort or avail of all
legal remedies available against the debtor. One of which is
accionpaulianawhich is an action to rescind a contract that is entered
to fraud a creditor which we have discussed in the case of PBCOM
vs CA.
The liability of the guarantor cannot yet be enforced unless
the debtor is found liable to the creditor and after all the remedies
available have been resorted to.
Art. 2059. The excussion shall not take place:
(1) If the guarantor has expressly renounced it;
(2) If he has bound himself solidarily with the debtor;
(3) In case of insolvency of the debtor;
(4) When he has absconded, or cannot be sued within the
Philippines unless he has left a manager or representative;
(5) If it may be presumed that an execution on the property of
the principal debtor would not result in the satisfaction of the
obligation.
The provision provides for the exceptions of the benefit of
excussion. In addition to these exceptions, in order for the guarantor
to make use of the benefit of excussion are two pre-requisites. First,
he must allege such benefit or he must set it up as a defense.
Second, he should be able to point out the specific properties of the
principal debtor that are available in the Philippines.
In the case of Bitanga vs Pyramid, while we had therein a
guarantor and while generally he would have been entitled to the
benefit of excussion but for failing to conform or follow the pre-
requisites provided in 2060 that is, for failing to point out sufficient
properties of the principal debtor in the Philippines, then he cannot
avail the benefit of excussion anymore. Likewise applying 2059
considering that the principal debtor was presumed that the
execution of the property of the principal debtor would not satisfy the
obligation, then there is no need to resort to excussion. As in this
case, the principal debtor only has (₱) 20,000 remaining in his
account.
JN Development vs. Phil Export (468 SCRA 554, G.R. No.
151060, August 31, 2005) JN DEVELOPMENT CORPORATION,
and SPS. RODRIGO and LEONOR STA. ANA, petitioners, vs.
PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE
CORPORATION, respondent.
FACTS:
Petitioner JN Development Corporation (“JN”) and Traders Royal
Bank (TRB) entered into an agreement whereby TRB would extend
to JN an Export Packing Credit Line for P2M. The loan was covered
by several securities, including a real estate mortgage and a letter of
guarantee from respondent “PhilGuarantee”. With PhilGuarantee
issuing a guarantee in favor of TRB, JN, petitioner spouses Sta. Ana
and petitioner Narciso Cruz executed a Deed of Undertaking
(Undertaking) to assure repayment to PhilGuarantee.
However, JN failed to pay the loan to TRB upon maturity; thus, on
Oct. 7, 1980, TRB requested PhilGuarantee to make good its
guarantee. Having received no response from JN after inquiring from
the latter of its action to settle of the loan, on March 10, 1981,
PhilGuarantee paid TRB P934,824.34. Subsequently, PhilGuarantee
made several demands on JN, but the latter failed to pay. On 30
May 1983, JN, through Rodrigo Sta. Ana, proposed to settle the
obligation “by way of development and sale” of the mortgaged
property. PhilGuarantee, however, rejected the proposal.
PhilGuarantee thus filed a Complaint for collection of money and
damages against herein petitioners.
ISSUE: WON petitioners are liable to reimburse PhilGuarantee
despite its payment after the expiration of its contract of guarantee
and the lack of the latter’s consent to the extensions granted by TRB
to JN. YES.
HELD:
Under a contract of guarantee, the guarantor binds himself to the
creditor to fulfill the obligation of the principal debtor in case the latter
should fail to do so. The guarantor who pays for a debtor, in turn,
must be indemnified by the latter. However, 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. This is what is otherwise known as the benefit of
excussion.
It is clear that excussion may only be invoked after legal remedies
against the principal debtor have been expanded. Thus, it was held
that the creditor must first obtain a judgment against the principal
debtor before assuming to run after the alleged guarantor, “for
obviously the ‘exhaustion of the principal’s property’ cannot even
begin to take place before judgment has been obtained.” The law
imposes conditions precedent for the invocation of the defense.
Thus, 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 and point out to the creditor available property
of the debtor within the Philippines sufficient to cover the amount of
the debt.
While a guarantor enjoys the benefit of excussion, nothing prevents
him from paying the obligation once demand is made on him.
Excussion, after all, is a right granted to him by law and as such he
may opt to make use of it or waive it. PhilGuarantee’s waiver of the
right of excussion cannot prevent it from demanding reimbursement
from petitioners. The law clearly requires the debtor to indemnify the
guarantor what the latter has paid.
36 | P a g e
Petitioners’ claim that PhilGuarantee had no more obligation to pay
TRB because of the alleged expiration of the contract of guarantee is
untenable. The guarantee was only up to 17 December 1980. JN’s
obligation with TRB fell due on 30 June 1980, and demand on
PhilGuarantee was made by TRB on 08 October 1980. That
payment was actually made only on 10 March 1981 does not take it
out of the terms of the guarantee. What is controlling is that default
and demand on PhilGuarantee had taken place while the guarantee
was still in force.
There is likewise no merit in petitioners’ claim that PhilGuarantee’s
failure to give its express consent to the alleged extensions granted
by TRB to JN had extinguished the guarantee. The requirement that
the guarantor should consent to any extension granted by the
creditor to the debtor under Art. 2079 is for the benefit of the
guarantor. As such, it is likewise waivable by the guarantor. Thus,
even assuming that extensions were indeed granted by TRB to JN,
PhilGuarantee could have opted to waive the need for consent to
such extensions. Indeed, a guarantor is not precluded from waiving
his right to be notified of or to give his consent to extensions obtained
by the debtor. Such waiver is not contrary to public policy as it is
purely personal and does not affect public interest. In the instant
case, PhilGuarantee’s waiver can be inferred from its actual payment
to TRB after the latter’s demand, despite JN’s failure to pay the
renewal/guarantee fee as indicated in the guarantee.
For the above reasons, there is no basis for petitioner’s claim that
PhilGuarantee was a mere volunteer payor and had no legal
obligation to pay TRB. The law does not prohibit the payment by a
guarantor on his own volition, heedless of the benefit of excussion.
In fact, it recognizes the right of a guarantor to recover what it has
paid, even if payment was made before the debt becomes due, or if
made without notice to the debtor, subject of course to some
conditions.
** Add’l info: As to petitioners’ invocation of the ruling in Willex Plastic
Industries, Corp. v. CA, where the guarantor claimed that it could not
be proceeded against without first exhausting all of the properties of
the debtor. The Court, finding that there was an express
renunciation of the benefit of excussion in the contract of guarantee,
ruled against the guarantor.
SC: The cited case finds no application in the case a quo.
PhilGuarantee is not invoking the benefit of excussion. It cannot be
overemphasized that excussion is a right granted to the guarantor
and, therefore, only he may invoke it at his discretion.
The benefit of excussion, as well as the requirement of consent to
extensions of payment, is a protective device pertaining to and
conferred on the guarantor. These may be invoked by the guarantor
against the creditor as defenses to bar the unwarranted enforcement
of the guarantee. However, PhilGuarantee did not avail of these
defenses when it paid its obligation according to the tenor of the
guarantee once demand was made on it. What is peculiar in the
instant case is that petitioners, the principal debtors themselves, are
muddling the issues and raising the same defenses against the
guarantor, which only the guarantor may invoke against the creditor,
to avoid payment of their own obligation to the guarantor. The Court
cannot countenance their self-seeking desire to be exonerated from
the duty to reimburse PhilGuarantee after it had paid TRB on their
behalf and to unjustly enrich themselves at the expense of
PhilGuarantee.
Q: Is PhilGuarantee a Surety or Guarantor?
A: Guarantor
Q: What was the defense of principal debtor in refusing to
reimburse PhilGuarantee?
A: The principal debtor contended that PhilGuaranty
voluntarily paid the amount.
Q: How about the scope of guaranty. It appears that
PhilGuarantee paid the creditor beyond the scope of the debt. What
was the scope of the guaranty?
A: Until only Dec 17, 1988.
Q: When was payment made?
A: 1981
Q: When did the demand and default took place?
A: 1980. It is still within the scope of the guaranty.
Q: What is the issue with regard to foreclosure?
A: The principal debtor said that since there was already a
foreclosure happened because they were already aware that their
obligations have been paid. In case of double payment, the principal
debtor can run after the creditor.
The benefit of excussion is again granted in favor of the
guarantor. It can only be invoked after the legal remedies against the
principal debtor have been resorted to. Creditor must first obtain a
judgment against the principal debtor before he can run against the
guarantor. The defense must be set-up against the creditor upon
demand for payment and the properties of the principal debtor within
the Philippines are pointed out to the creditor. However, nothing
prevents the guarantor from paying the obligation once demand is
made upon him because excussion can be waived. In this case,
PhilGuarantee waived its right to excussion and it cannot be
prevented from demanding reimbursement from the petitioners in this
case. The law clearly requires that the debtor indemnify the
guarantor once the latter has paid. The obligation here was incurred
while the guaranty was still in effect. Default and demand are still
within the period covered by the guaranty. Although payment took
place thereafter, on 1981, it does not take it out from the scope of
guaranty. What is guaranty was still in force. Also with regard to
extension in relation to succeeding chapter that we will discuss in
2079, a guarantor is not precluded from waiving his right to be
notified or to give his consent to extensions made by the debtor.
Here, PhilGuarantee never invoked the benefit of excussion. Only
PhilGuarantee may invoke or waive it. With regard to the foreclosure
of properties of JN, it is said that the bank already foreclosed the
properties of JN; however, it must be noted that at the time of the
foreclosure, they were already aware that PhilGuarantee paid the
creditor and there was a pending case filed by PhilGuarantee against
JN.
Art. 2061. The guarantor having fulfilled all the conditions
required in the preceding article, the creditor who is negligent in
exhausting the property pointed out shall suffer the loss, to the
extent of said property, for the insolvency of the debtor
resulting from such negligence.
The provision applies if the creditor through negligence or
fault did not execute the properties already pointed out and
subsequently the principal debtor becomes insolvent. When he is
insolvent, he cannot anymore the pay the creditor and the creditor in
this case cannot anymore proceed in the properties of the principal
debtor. In this instance, all these creditors are listed. Preferred
creditorsangunangmabayaran. What if ang guarantor iis not among
the preferred creditors or even if preferred, there are no sufficient
assets to pay the creditor. Can the creditor go against the guarantor?
Not anymore. Having duly complied with the requisites in 2060, it
appears under the circumstances, it was the creditor who is
negligent. Upon receiving the information that the debtor has these
properties before insolvency, the creditor should have taken steps to
take after these properties. But when he does not do so, he will suffer
the loss.
Art. 2062. In every action by the creditor, which must be against
the principal debtor alone, except in the cases mentioned in
Article 2059, the former shall ask the court to notify the
guarantor of the action. The guarantor may appear so that he
may, if he so desire, set up such defenses as are granted him by
law. The benefit of excussion mentioned in Article 2058 shall
always be unimpaired, even if judgment should be rendered
against the principal debtor and the guarantor in case of
appearance by the latter.
If a creditor files an action for collection, it must be filed
against the principal debtor. But there is no legal impediment to
implead the guarantor. Even if the guarantor is made a co-defendant,
the benefit of excussion is not yet waived. If it is only the principal
debtor who is impleaded as a defendant, the court shall notify the
guarantor of the action. The creditor can ask the court. What is
required is notification. Upon notice, the guarantor may appear in the
cases and can set-up the defenses available to the debtor such as
payment, prescription, or nullity of the obligation. Is it required that si
guarantor appear as a party? NO. But despite notice and he did not
appear, he cannot subsequently set-up the defenses which are
allowed to him by law. It will no longer be possible for him to question
37 | P a g e
the validity of judgment against the debtor. The guarantor cannot be
sued alone unless there is already a final judgment against the
principal debtor and the latter failed to pay. How is this different from
a suret? Ang surety pwedemaging sole-defendant sa case or
pwedengsabaysa principal debtor.
Art. 2063. A compromise between the creditor and the principal
debtor benefits the guarantor but does not prejudice him. That
which is entered into between the guarantor and the creditor
benefits but does not prejudice the principal debtor.
What happens when there is compromise agreement? It
will only bind the guarantor to the extent that it may be credited. Let
us say that the obligation is 100,000 and the debtor entered into a
compromise agreement that the debtor will pay 70, 000 to be paid.
What is the effect with regard to the guarantor? For failure of the
debtor to pay, the guarantor should not be held liable only up to the
extent of 70, 000. If the debtor pays 70,000, the creditor cannot go
against the guarantor for the difference of 30,000. What if the
obligation is 100,000, and compromise agreement was entered into
for a period of one year and the debtor will pay 120,000. Despite the
execution of the compromise agreement, the debtor fails to pay. Can
the creditor go after the guarantor? Yes, but not to the extent of
120,000. The guarantor can only be held liable to 100,000, without
prejudice to reimbursement.
Art. 2064. The guarantor of a guarantor shall enjoy the benefit of
excussion, both with respect to the guarantor and to the
principal debtor.
We have here the concept of sub-guaranty. You have a
debtor, creditor, guarantor, and the guarantor who guaranteed the
obligation of guarantors. The sub-guarantor who guarantees the
obligation of a guarantor also enjoy the benefit of excussion not only
as to the principal debtor but also as to the first guarantor.
Mira Hermanos vs. Manila (G.R. No. 48979, September 29, 1943)
MIRA HERMANOS, INC., plaintiff-appellee, vs. MANILA
TOBACCONISTS, INC., ET AL., defendants. PROVIDENT
INSURANCE CO., defendant-appellant.
FACTS:
By virtue of a written contract entered into between Mira Hermanos,
Inc., and Manila Tobacconists, Inc., the former agreed to deliver to
the latter merchandise for sale on consignment under certain
specified terms and the latter agreed to pay to the former on or
before the 20th day of each month the invoice value of all the
merchandise sold during the preceding month. Mira Hermanos,
Inc., required of the Manila Tobacconists, Inc., a bond of P3,000,
which was executed by the Provident Insurance Co., on September
2, 1939, to secure the fulfillment of the obligation of the Tobacconists
under the contract up to the sum of P3,000.
In October, 1940, the volume of the business of the
Tobacconists having increased so that the merchandise received by
it on consignment from Mira Hermanos exceeded P3,000 in value,
Mira Hermanos required of the Tobacconist an additional bond of
P2,000, and in compliance with that requirement the defendant
Manila Compañia de Seguros, on October 16, 1940, executed a
bond of P2,000 with the same terms and conditions (except as to the
amount) as the bond of the Provident Insurance Co. On June 1,
1941, a final and complete liquidation was made of the transactions
between Mira Hermanos and the Tobacconists, as a result of which
there was found a balance due from the latter to the former of
P2,272.79, which indebtedness the Tobacconists recognized but was
unable to pay. Thereupon Mira Hermanos made a demand upon the
two surety companies for the payment of said sum. The Provident
Insurance Co., paid only the sum of P1,363.67, which is 60% of the
amount owned by the Tobacconists to Mira Hermanos, alleging that
the remaining 40% should be paid by the other surety, Manila
Compañia de Seguros, in accordance with article 8137 of the Civil
Code. The Manila Compañia de Seguros refused to pay the
balance, contending that so long as the liability of the Tobacconists
did not exceed P3,000, it was not bound to pay anything because its
bond referred only to the obligation of the Tobacconists in excess of
P3,000 and up to P5,000. Hence Mira Hermanos, Inc., brought this
to recover from them jointly and severally the sum of P909.12 with
legal interest thereon from the date of the complaint.
ISSUE: WON Provident Insurance Co. is entitled to the "benefit of
division" provided in article 1837 of the Civil Code
HELD: Article 1837 of the [Old] Civil Code reads as follows:
Art. 1837. Should there be several sureties of only one debtor for the
same debt, the liability therefor shall be divided among them all. The
creditor can claim from each surety only his proportional part unless
liabilityinsolidum has been expressly stipulated.
The right to the benefit of division against the co-sureties for their
respective shares ceases in the same cases and for the same
reason as that to an exhaustion of property against the principal
debtor.
While on its face the bond given by the Manila Compañia de Seguros
contains the same terms and conditions (except as to the amount) as
those of the bond given by the Provident Insurance Co., nevertheless
it was pleaded by the Manila Compañia de Seguros and found
proven by the trial court. As the trial court observed, there would
have been no need for the additional bond of P2,000 if its purpose
were to cover the first P2,000 already covered by the P3,000 bond of
the Provident Insurance Co. Indeed, if the purpose of the additional
bond of P2,000 were to cover not the excess over and above P3,000
but the first P2,000 of the obligation of the principal debtor like the
bond of P3,000 which covered only the first P3,000 of said obligation,
then it would result that had the obligation of the Tobacconists
exceeded P3,000, neither of the two bonds would have responded
for the excess, and that was precisely the event against which Mira
Hermanos wanted to protect itself by demanding the additional bond
of P2,000. For instance, suppose that the obligation of the principal
debtor, the Tobacconists, amounted to P5,000; if both bonds were
co-extensive up to P2,000 — as would logically follow if appellant's
contention were correct — the result would be that the first P2,000 of
the obligation would have to be divided between and paid equally by
the two surety companies, which should pay P1,000 each, and of the
balance of P3,000 the Provident Insurance Co. would have to pay
only P1,000 more because its liability is limited to the first P3,000,
thus leaving the plaintiff in the lurch as to the excess of P2,000.
That was manifestly not the intention of the parties. As a matter of
fact, when the Provident gave its bond and fixed the premiums
thereon it assumed an obligation of P3,000 in solidum with the
Tobacconists without any expectation of any benefit of division with
any other surety. The additional bond of P2,000 was, more than a
year later, required by the creditor of the principal debtor for the
protection of said creditor and certainly not for the benefit of the
original surety, which was not entitled to expect any such benefit.
The foregoing considerations, which fortify the trial court's conclusion
as to the real intent and agreement of the parties with regard to the
bond of P2,000 given by the Manila Compañia de Seguros, destroys
at the same time the theory of the appellant regarding the
applicability of article 1837 of the Civil Code. That article refers to
several sureties of only one debtor for the same debt. In the instant
case, altho the two bonds on their face appear to guarantee the
same debt coextensively up to P2,000 — that of the Provident
Insurance Co. alone extending beyond that sum up to P3,000 — it
was pleaded and conclusively proven that in reality said bonds, or
the two sureties, do not guarantee the same debt because the
Provident Insurance Co. guarantees only the first P3,000 and the
Manila Compañia de Seguros, only the excess over and above said
amount up to P5,000. Article 1837 does not apply to this factual
situation.
Q: What is the basis of the 60-40 defense of Provident
Insurance?
A: In the year 1939, Manila Tobacconists had a bond given
to Hermanos amounting to ₱3000 which was the first bond executed
by Provident. Whereas in the year 1940, there was a second bond
given to Mira Hermanos amounting to 2000 from another surety
which was Manila Compania.
Q: How did they arrive at the 60%?
A: 3000 of the total 5000 obligation. This is the basis of
Provident’s claim that it is only liable for the remaining balance which
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is 60% thereof. In other words, here, Provident Insurance raised the
benefit of division pro rata as to the obligation.
Q: Is Provident really entitled to the benefit of division?
A: No. In this case, it involves two different bonds
pertaining to two different sureties.
Q: What are the two different obligations here?
A: As to Provident, only up to 3000 bond. The second is
2000 from the surety Manila Compania.
Here, there would have been no need for the additional
bond of 2000 in which purpose is to cover the first 2000 already
covered by the 3000 bond of Provident Insurance. Such was not the
intention of the parties. When Provident Insurance gave its bonds, it
assumed the obligation of 3000 in solidum without expecting benefit
of division. Article 1837 refers to several sureties of only one debtor
for the same debt. Here, although there are two sureties, they did not
guarantee the same obligation. Provident Insurance guaranteed only
the first 3000, while Manila Compania guaranteed the the 2000 or the
excess of 3000. Up to the extent of 5000. Article 1837 now Art 2065
does not apply because it only applies when there are several
guarantors of one debtor and only one obligation. In this instance, we
have several guarantors of one debtor but different obligations.
When we talk of benefit of division, we have several
guarantors of one debtor of one debt and the guarantors enjoy the
benefit of division. Sounds familiar? Last meeting we had the
solidary-guaranty clause discussed in the case of Prudential. In the
absence of the solidary liability, the guarantors who signed therein
would only be jointly liable. Here, if you have the debtor who
promised to or entered into an obligation, and the obligation of the
debtor is guaranteed by several persons. Let us say three
guarantors. Then let us say that the obligation is 9000, the guarantor
will be entitled to the benefit of division. If the debtor fails to pay
9000, the creditor can only demand from the guarantors pro-rata, that
is 3000 each. Unless it is stipulated that they are soloidarily liable
such as in the case of Prudential. The solidarity is between the
guarantors and not between the guarantor/s and the principal debtor
because in such case, the creditor can proceed against the guarantor
even without the benefit of excussion.
The benefit of division under the second paragaraph of
2065 ceases in the same manner as the benefit of excussion ceases.
This benefit will not apply if there are several debts, debtors, or
several creditors. It cannot also be availed when there are tow or
more debtors of one debt even if solidarily liable each with different
guarantors. It will not be the same if for example we have two
debtors that is A and B. As a general rule they will only be jointly
liable unless expressly stipul;ated to be solidary or by law they are
solidarily liable. If A for example has guarantor 1 and 2, B has
guarantor 3 and 4 and 10000 yung obligation. Joint ang presumption
doon, 5000 for each debtor. For the benefit of division, 25000 each
guarantor. If they are joint debtors and each debtor has only one
guarantor, then you cannot allege the benefit of division because
there is only one guarantor for each debtor.
What if A & B are solidarily bound? Of course, the whole
obligation can be demanded from them and if they have several
guarntors, the while obligation can be demanded from the said
guarantor since he guarantees the obligation of his principal debtor.
Again, sa benefit of division is that there is one obligation,
one debtor, and one creditor, and several guarantors. Take note, the
benefit of division cannot be expressly renounced and the benefit of
excussion cannot be raised by a guarantor against his co-guarantor.
Is it possible that we could have several sureties? Surety 1
and Surety 2 so pwedebayan? For example, obligation ni debtor A
and we have sureties. In this case, they are solidarily bound with the
obligation together with the principal debtor. The benefit of division as
regard the sureties do not apply. Therefore, the creditor can demand
the full obligation.
Art. 2066. The guarantor who pays for a debtor must be
indemnified by the latter.
The indemnity comprises:
(1) The total amount of the debt;
(2) The legal interests thereon from the time the payment was
made known to the debtor, even though it did not earn interest
for the creditor;
(3) The expenses incurred by the guarantor after having notified
the debtor that payment had been demanded of him;
(4) Damages, if they are due.
These rights are only available to the guarantor who paid
because a contract of guaranty is a contract of indemnity to which the
guarantor can recover if he is the one who paid the creditor.
What can he collect from the principal debtor? Obviously
the total amount of the obligation because this is the amount paid to
the creditor. Also include legal interest from the time payment made
was known to the debtor even though it did not earn interest for the
creditor. Even if the guarantor did not pay interest to the creditor, the
guarantor can still collect legal interest from the principal debtor if the
latter defaulted in paying the former.
Assuming that the guarantor borrowed money to pay the
creditor which earns interest. Thereafter, he notified the debtor to pay
him since he only borrowed money subject to interest. Such interest
will aslo be reimbursed by the debtor.
Tuason vs. Machuca (G.R. No. L-22177, December 2, 1924)
TUASON, TUASON, INC., plaintiff-appellee, vs. ANTONIO
MACHUCA, defendant-appellant.
FACTS:
"Manila Compañia de Seguros" obtained from the Universal Trading
Company and Tuason, Tuason& Co., a solidary note for the sum of
P9,663 executed by said companies in its favor. Before signing said
note, Tuason, Tuason& Co., in turn, caused the Universal Trading
Company and its president Antonio Machuca, personally, to sign a
document (Exhibit B), wherein they bound themselves solidarily to
pay, reimburse, and refund to the company all such sums or amounts
of money as it, or its representative, may pay or become bound to
pay, upon its obligation with "Manila Compañia de Seguros," whether
or not it shall have actually paid such sum or sums or any part
thereof. The Universal Trading Company having been declared
insolvent, "Manila Compañia de Seguros" brought an action in the
lower court against Tuason, Tuason& Co. to recover the value of the
note for P9,663 and obtained final judgment therein, which was
affirmed by this court on appeal, for the total sum of P12,197.27,
which includes the value of the note with interest thereon.
Subsequently, all the rights of Tuason, Tuason& Co. were transferred
to the plaintiff Tuason, Tuason, Inc.
Later on Tuason, Tuason, Inc., brought this action to recover of
Antonio Machuca the sum of P12,197.27 which it was sentenced to
pay in the case filed against it by "Manila Compañia de Seguros,"
plus P3,000 attorney's fees, and P155.92 court's costs and sheriff's
fees, that is, a total of P15,353.19.
ISSUES:
a) WON Tuason, Tuason Inc. Is entitled to the relief sought in view
of the above facts?
b) WON Tuason, Tuason Inc. has the right to recover from Machuca
more than the value of the note executed by Tuason, Tuason, Inc. in
favor of Manila Compania de Seguros?
HELD:
The plaintiff company argues that, at all events, it is entitled to bring
this action under article 1843 of the Civil Code, which provides that
the surety may, even before making payment, bring action against
the principal debtor.
This contention of the plaintiff is untenable. The present action,
according to the terms of the complaint, is clearly based on the fact
of payment. It is true that, under article 1843, an action lies against
the principal debtor even before the surety pays the debt, but it
clearly appears in the complaint that this is not the action brought by
the plaintiff. Moreover this article 1843 provided several cumulative
remedies in favor of the surety, at his election, and the surety who
brings an action under this article must choose the remedy and apply
39 | P a g e
for it specifically. At any rate this article does not provide for the
reimbursement of any amount, as is sought by the plaintiff.
But although the plaintiff has not as yet paid "Manila Compañia de
Seguros" the amount of the judgment against it, and even
considering that this action cannot be held to come under article
1843 of the Civil Code, yet the plaintiff is entitled to the relief sought
in view of the facts established by the evidence. The plaintiff became
bound, by virtue of a final judgment, to pay the value of the note
executed by it in favor of "Manila Compañia de Seguros." According
to the document executed solidarily by the defendant and the
Universal Trading Company, the defendant bound himself to pay the
plaintiff as soon as the latter may have become bound and liable,
whether or not it shall have actually paid. It is indisputable that the
plaintiff became bound and liable by a final judgment to pay the value
of the note to "Manila Compañia de Seguros."
The defendant also contends that the document executed by Albina
Tuason in favor of "Manila Compañia de Seguros" assuming and
making hers the obligation of Tuason, Tuason& Co., was a novation
of the contract by substitution of the debtor, and relieved Tuason,
Tuason& Co. from all obligation in favor of "Manila Compañia de
Seguros." As to this, it is enough to say that if this was what Albina
Tuason contemplated in signing the document, evidently it was not
what "Manila Compañia de Seguros" accepted. As above stated,
"Manila Compañia de Seguros" accepted this document only as
additional security for its credit and not as a novation of the contract.
Our conclusion is that the plaintiff has the right to recover of the
defendant the sum of P9,663, the value of the note executed by the
plaintiff in favor of "Manila Compañia de Seguros" which the plaintiff
is under obligation to pay by virtue of final judgment. We do not
believe, however, that the defendant must pay the plaintiff the
expenses incurred by it in the litigation between it and "Manila
Compañia de Seguros." That litigation was originated by the plaintiff
having failed to fulfill its obligation with "Manila Compañia de
Seguros," and it cannot charge the defendant with expenses which it
was compelled to make by reason of its own fault. It is entitled,
however, to the expenses incurred by it in this action brought against
the defendant, which are fixed at P1,653.65 as attorney's fees.
Q: Isn’t it thjat the surety has not yet paid the creditor?
A: The surety here has not yet paid the creditor but it is
stipulated in their surety contract. The surety can therefore demand
to the debtor even before paying the creditor.
What is emphasized here is again, a contract of guaranty
or suretyship is a contract of indemnity where the guarantor or surety
can seek reimbursement from the principal debtor if they have paid to
the creditor. In this case however while it is true that there was no
payment yet made by the surety, still the surety is entitled to recover
from the principal debtor, the plaintiff became bound by virtue of a
final judgment to pay the value of the note executed by himin favor of
Manila Compania de Seguros. The defendant bound himself to pay
the plaintiff as soon as the latter may have become bound and liable
whether or not he shall have actually paid. So it is very clear in their
agreement. It is indisputable that the plaintiff became bound and
liable by a final judgment to pay the value of the note even if Manila
Compania has not yet paid. As to the expenses, plaintiff has the right
to recover from the defendant the sum of 9663 which is tha value of
the note which the plaintiff is under obligation to pay by virtue of a
final judgment even if there was no actual payment yet by virtue of
express stipulation. However, the defendant is not required to pay
the plaintiff the expenses incurred by it in the litigation between
Manila Compania de Seguros. The litigation is originated by the
plaintiff having failed to fulfill its obligation. It cannot charge the
defendant with expenses which was compelled to make by reason of
its own fault.
January 20, 2016
Transcribed by: Isay Abad
Let us have Article 2067.
Art. 2067. The guarantor who pays is subrogated by virtue thereof to
all the rights which the creditor had against the debtor.
If the guarantor has compromised with the creditor, he cannot
demand of the debtor more than what he has really paid.
Take note, this is in connection with beneficial reimbursement and
subrogation. The guarantor who pays does so with the knowledge
and consent of the principal debtor, then he is entitled to subrogation
not just reimbursement.
The benefit of subrogation is what is emphasized in Article 2067
paragraph 1 to which all the rights which the creditor had against the
debtor, those rights would be subrogated to the guarantor. For
example, a mortage executed by the principal debtor or a pledge, by
virtue of paying with the consent of the debtor, the guarantor can go
after the property that was pledged or subject of the mortgage.
How about the second paragraph? Very clear, the guarantor cannot
demand more than what he actually paid to the creditor. Again, the
debtor here should not be prejudiced by virtue of the compromise
between the guarantor and the creditor. This is also to prevent
collusion between the creditor and the guarantor.
Article 2068
Art. 2068. If the guarantor should pay without notifying the debtor, the
latter may enforce against him all the defences which he could have
set up against the creditor at the time the payment was made.
The debtor who was not notified of the payment made by the
guarantor. What is the effect? The debtor can set up the defences in
case the guarantor will seek reimbursement from him. He can set up
defences which he could have enforced against the creditor, such as
defences of payment, prescription, nullity of the principal obligation.
The guarantor who may have acted as the guarantor, nevertheless,
when he paid he did not notify the debtor so that is the effect. So
essentially here, one of the obligations of the guarantor is he has to
notify the debtor if when he is going to pay. Why? Because if he
going to notify the debtor, the debtor can advise him na “Ay wag na
kasi nagprescribe na or wag na kasi nabayaran ko na, or wag full
kasi meron ng partial payment.” The flaw here was the debtor was
not notified by the guarantor before the guarantor paid the creditor.
Article 2069
Art. 2069. If the debt was for a period and the guarantor paid it before
it became due, he cannot demand reimbursement of the debtor until
the expiration of the period unless the payment has been ratified by
the debtor.
What do we have here? A guarantor who is excited to pay even if the
obligation is not yet due and demandable. It is okay as long as the
creditor accepts, however, you cannot force him to accept it if not yet
due and demandable. But what if the principal creditor accepts it,
then the guarantor cannot yet seek reimbursement from the principal
debtor for it is not yet due. So the guarantor has to wait for the arrival
of that period or for the maturity of the obligation so that he could
seek reimbursement. Unless of course such payment has been
ratified by the debtor or such advance payment was made with the
consent of the principal debtor.
Article 2070
Art. 2070. If the guarantor has paid without notifying the debtor, and
the latter not being aware of the payment, repeats the payment, the
former has no remedy whatever against the debtor, but only against
the creditor. Nevertheless, in case of a gratuitous guaranty, if the
guarantor was prevented by a fortuitous event from advising the
debtor of the payment, and the creditor becomes insolvent, the
debtor shall reimburse the guarantor for the amount paid.
This is another effect is the guarantor fails to notify the debtor that he
will not pay the obligation, aside from 2068. The guarantor here will
have no remedy against the debtor in case of double payment. He
should first notify so that the debtor can properly advise, for example,
that he has already paid.
40 | P a g e
Now, we can still apply 2070 even if it was the guarantor who first
paid. What is then his remedy? He cannot go after the debtor but he
can go after the creditor.
What is the effect again for failure to notify? The guarantor cannot
seek reimbursement from the debtor because of the absence of the
advice and that he should now proceed against the creditor. That is
the general rule.
But Article 2070 provides for exception. When could the guarantor
recover from the debtor in case of double payment. Three requisites
must all be present.
1. It has to be a gratuitous guaranty. That the guarantor acted
as such without receiving onerous cause of consideration,
just out of his liberality.
2. If the guarantor was prevented by a fortuitous event from
advising the debtor of the payment. Meaning, calamity,
naputol ang communication.. here, as much as we wanted
to notify the debtor prior to payment, the fortuitous event
prevented him from doing such. Even if there is a fortuitous
event, preventing the notice, the 3rd requisite must also be
present.
3. That the creditor becomes insolvent. The creditor here
must be insolvent such that he cannot anymore reimburse
the guarantor for what he paid.
All three must be present. So if only the first 2 requisites are present,
and remedy ng guarantor is still against the creditor, not against the
debtor.
Article 2071
The guarantor , even before having paid, may proceed against the
principal debtor:
1. When he is sued for the payment;
2. In case of insolvency of the principal debtor;
3. When the debtor has bound himself to relieve him from the
guaranty within a specified period, and this period has
expired;
4. When the debt has become demandable, by reason of the
expiration of the period of payment;
5. After the lapse of ten years, when the principal obligation
has no fixed period for its maturity, unless it be of such
nature that it cannot be extinguished except within a period
longer than ten years;
6. If there are reasonable grounds to fear that the principal
debtor intends to abscond;
7. If the principal debtor is in imminent danger of becoming
insolvent.
In all these cases, the action of the guarantor is to obtain release
from the guaranty, or to demand a security that shall protect him from
any proceedings by the creditor and from the danger of insolvency of
the debtor.
Remember that a contract of guaranty is a contract of indemnity,
wherein after payment to the creditor, the guarantor can seek
reimbursement from the debtor. So the rule is that it is only when the
guarantor pays to the creditor can he proceed and collect against the
principal debtor.
But Article 2071 provides for a circumstance wherein the guarantor
did not yet pay the creditor but nevertheless, he can proceed and go
after the principal debtor. When is it possible? Isn’t it that a contract
of guaranty is a contract of indemnity? Correct but Article 2071 is not
about reimbursement, the action here is that the guarantor is not
seeking for reimbursement because there is still no payment. The
proceeding here may be instituted by the guarantor after he has
already been made liable, or under the circumstances enumerated in
2071.
So what is the purpose of the remedy here in 2071? To enable the
guarantor to take measures for the protection of his interest in view of
the probability that he will be called upon fail. So what are these
circumstances?
1. When he is sued for the payment;
- If he is sued for payment
2. In case of insolvency of the principal debtor;
- In case of insolvency, in this instance the benefit of
excussion would not already apply.
3. When the debtor has bound himself to relieve him from the
guaranty within a specified period, and this period has
expired;
- Debtor has bound himself within a specific period.
Here, the debtor is now in breach of his obligation,
wherein they had an agreement that the guaranty will
only be for a specific period, this instance
presupposes that within the period the debtor will pay
the obligation. However, the period has lapsed, the
debtor did not pay his obligation so the guarantor can
now proceed against the principal debtor under article
2071.
4. When the debt has become demandable, by reason of the
expiration of the period of payment;
- Obligation has already become due and demandable.
5. After the lapse of ten years, when the principal obligation
has no fixed period for its maturity, unless it be of such
nature that it cannot be extinguished except within a period
longer than ten years;
- As to number 5, the general rule here is that after 10
years, the obligation has no fixed period. Suppose the
obligation has a fixed period, then no problem.
Assuming the parties forgot to specify, so after 10
years, if the obligation could not be performed until
after 10 years, here, it cannot be enforced anymore,
however, against number 5, after the lapse of 10
years when the principal obligation has no fixed
period, pwede na rin xang magfile under 2071. It
cannot be extinguished except, within the period
longer than 10 years.
6. If there are reasonable grounds to fear that the principal
debtor intends to abscond;
- Remedy of the guarantor to proceed against the
principal debtor. He has reasonable grounds to
believe that the principal debtor will abscond so he will
now be allowed to pursue his remedies against the
debtor.
7. If the principal debtor is in imminent danger of becoming
insolvent.
- No requirement here that the guarantor should first
wait that the debtor should become insolvent. As long
as there is an imminent danger that the debtor would
become insolvent. When will there be an imminent
danger? Example, when several creditors are now
attaching there claims on the properties of the debtor
for payment. So there will now be a probability that the
debtor will now soon become insolvent.
So these are the circumstances wherein the guarantor can proceed
against the principal debtor even if he has not yet paid the principal
creditor. Since the creditor here is not asking for reimbursement,
what is he seeking under 2071? It is either for him to be released
from the contract of guaranty or to demand another security to
protect him from the proceedings.
Remember that a contract of guaranty is essentially between the
guarantor and the creditor, so if the action is filed to release him from
the contract of guaranty, there must be consent from the creditor. In
the absence of the consent, the remaining remedy is for the
guarantor to demand another security to protect him from the
proceedings.
If you take a look at Article 2071, it applied for a contract of guaranty,
can we apply 2071 for a contract of suretyship?
Answer: Yes, basis: Manila surety vs. Batu
MANILA SURETY v BATU CONSTRUCTION
41 | P a g e

FACTS: Batu Construction as principal and the Manila Surety, as
surety, executed a surety bond to insure faithful performance of the
former's obligation as contractor for the construction of the Bacarra
Bridge Project. On the same date, the Batu and the defendants
Baquiran and Amboy executed an indemnity agreement to protect
the Manila Surety against damage, loss or expenses which it may
sustain as a consequence of the surety bond executed by it jointly
with Batu Construction & Company.
Plaintiff received a notice from the Director of Public Works annulling
its contract with the Government for the construction of the Bridge
because of its failure to make satisfactory progress in the execution
of the works, with the warning that ,any amount spent by the
Government in the continuation of the work, in excess of the contract
price, will be charged against the surety bond furnished by the
plaintiff. It also appears that a complaint by the laborers in said
project of Batu was filed against it and the Manila Surety for unpaid
wages.
RTC dismissed the case holding that provisions of article 2071 of the
new Civil Code may be availed of by a guarantor only and not by a
surety the complaint, with costs against the plaintiff.
ISSUE: Whether the last paragraph of article 2071 of the new Civil
Code may be a vailed of by a surety.
HELD: YES. Provision of law under guaranty available to surety
In suretyship the surety becomes liable to the creditor without the
benefit of the principal debtor's exclusion of his properties, for he (the
surety) maybe sued independently. So, he is an insurer of the debt
and as such he has assumed or undertaken a responsibility or
obligation greater or more onerous than that of guarantor. Such
being the case, the provisions of article 2071, under guaranty, are
applicable and available to a surety. Hence, a surety, even before
having paid, may proceed against the principal debtor to obtain
release from the surety, or to demand a security that shall protect
him from any proceedings by the creditor or from the danger of
insolvency of the debtor, when the surety is sued for payment.
Question: So there is no question here that the contract was a
contract of suretyship and the SC held that we can apply 2071 to a
surety. Can we apply 2071 in this case? What specific paragraph?
Answer: Yes ma’am, paragraph 1 – when he is sued for payment.
Question: Who sued Manila surety for payment? Batu here was the
principal debtor.
Answer: The workers or the creditors in this case.
Alright, while paragraph 2-7 are not applicable in this case, Manila
Surety was sued by the workers for unpaid wages. So that could be a
ground for Manila Surety to seek of the remedy available under
Article 2071.
Again, 2071 is applicable and available to a contract of suretyship . In
this case, can we apply 2071 in Manila Surety?
- Paragraph 1 applicable.
- Paragraph 2 for insolvency is not applicable. There
mere fact that the contract was annulled because lack
of progress is not proof for such insolvency.
- Paragraph 3 is also not applicable because the
defendants have not bound themselves to relieve the
plaintiff from the guaranty within a specified period
which already expired, because the surety bond did
not mention of specific periods of time and the
indemnity agreement is extendible until the bond be
completely cancelled.
- Paragraph 4 also not applicable because the debt has
not become demandable by reason of the expiration
of the period of payment.
- Paragraph 5 also not applicable because 10 years has
not yet elapsed.
- Paragraph 6 is not applicable because there are no
reasonable grounds to fear that the debtor would tend
to abscond.
- Also not paragraph 7 because the debtors are not in
imminent danger to be insolvent.
-
However, it is clear here that Paragraph 1 is applicable because you
have as several employees drawing an action against Batu and its
surety in connection with the construction of the bridge. Paragraph 1
of 2071 provides that the guarantor, even before having paid, may
proceed against the principal debtor to obtain release or to demand a
security that would protect him against any proceedings by the
creditor or from the danger of the insolvency of the debtor when, he,
the guarantor is sued for payment.
It does not provide that the guarantor be sued by the creditor, it
simply provides that the guarantor or surety be sued for the payment
of an amount for which the surety bond was put up to secure the
fulfilment of an obligation. Here he was sued for the payment for an
amount that was put up as a bond to secure the fulfilment of the
obligation undertaken by the principal debtors in favour of the
creditor.
Also, it is important to distinguish 2071 from Article 2066. What
happened in the case of Kuenzle vs. Sunco?
KUENZLE & STREIFF VS. TAN SUNCO
FACTS: Kuenzle & Streiff instituted an action against Chung Chu
Sing for the recovery of indebtedness. Before Kuenzle & Streiff could
secure judgment, Tan Sunco brought an action against Chung Chu
Sing for the payment of another obligation for which Tan Sunco acted
as guarantor. Chung Chu Sing confessed judgment in favor of Tan
Sunco. Immediately after obtaining judgment, Tan Sunco caused to
be levied upon under execution all the properties of Chung Chu Sing.
Kuenzle & Streiff commenced an action to set aside the judgment,
claiming it was obtained by the fraud and collusion, and that Tan
Sunco had not paid the debt for which as guarantor he obtained the
judgment.
ISSUE: WON a guarantor who sues his principal debtor before
paying the debt himself entitled to recover judgment for the debt?
HELD: No, while the surety has the right to obtain judgment against
his principal debtor, he will not be permitted to realize on said
judgment to the point of actual collection until he has satisfied, or
caused to be satisfied, the obligation the payment of the obligation of
which he assures. A guarantor who obtains judgment against his
principal cannot execute said judgment against the latter’s property
until he has paid the debt for which he stands as guarantor.
Question: When is he entitled to execute on the judgements that
were already issued by the court?
Answer: Only if he has paid ma’am because reimbursement is only
made if there is already payment.
Take note here that Sungco filed several actions as against the
debtor, and he cause to levy on all the property of the debtor which
were not sufficient to satisfy the judgement. The SC said these were
actually valid even if he has not yet paid. So the issue here is
whether or not Sungco is entitle for the execution of this properties
even if he has not yet paid to the principal debtor. That is why the SC
here made a distinction between 2066 and 2071.
Art. 2066. The guarantor who pays for a debtor must be indemnified
by the latter.
The indemnity comprises:
(1) The total amount of the debt;
(2) The legal interests thereon from the time the payment was made
known to the debtor, even though it did not earn interest for the
creditor;
(3) The expenses incurred by the guarantor after having notified the
debtor that payment had been demanded of him;
(4) Damages, if they are due.
Article 2066 Article 2071
contract of indemnity, a demand for not reimbursement but
42 | P a g e
reimbursement for the release from the
guaranty or security of
the performance to
protect he surety from
obligations
available as a remedy after the guarantor before the guarantor
has paid has paid but after he
has become liable
a right of action after payment preventive remedy
before payment
substantive right preliminary remedy
a right of action, which without the seeks to obtain for the
provisions of the other, might be guarantor release from
worthless the guarantee or the
security to protect him
from any proceedings
by the creditor and from
the danger of insolvency
by the debtor
Art 2071 provides the surety a remedy in anticipation of payment of
the debt which being due can be called upon to pay at any time. In
this connection, the only procedure is to enforce the right by action.
Sunco availed himself of that right against the debtor by going after
the properties of the latter and such action is not considered
fraudulent. But while the surety has the right to obtain, as in this case
a favorable judgment against the principal debtor, he ought not to be
allowed to realize such judgment.
In other words, he cannot yet execute to the point of actual collection
until he has satisfied or caused to satisfy the payment of the
obligation to which he assures. Otherwise, it will bring an opportunity
for collusion between the surety and his principal which might result
to the prejudice of other creditors.
Sunco should not execute the said judgment until he has paid the
debt to which he stands as a surety.
Now article 2072
Article 2072. If one, at the request of another, becomes a guarantor
for the debt of a third person who is not present, the guarantor who
satisfies the debt may sue either the person so requesting or the
debtor for reimbursement.
So, what do we have here?
A person who is not party to the contract but, could nevertheless be
held liable. That is the express provision of this 2072.
So let us say that Alona is the creditor, Kelvin will be the debtor.
However, Alona would want somebody to act as a guarantor for
Kelvin, say Peter a concerned citizen. Yet Peter has no enough
assets to help Kelvin so maghanap siya ng iba. He will now approach
his friend to help Kelvin which is Yen. If Yen agrees and then later on
she will be held liable to the obligation of Alona, Yen has a cause of
action against Peter even if he is not a party to the principal
obligation or not a party to the guaranty. Hindi siya debtor, hindi siya
creditor, hindi siya guarantor or a surety.
Now, to apply 2072, the debtor, the debt of the 3rd person here, the
debtor here must not be present. Parang lisensya niya o kasi siya
yung nagintroduce or nag request na pwede ba ikaw ang mag
guarantor sa debtor na ito. And thenif later on the guarantor satisfies
the debt, the guarantor in that instance can fo after the debtor himself
or the person who made such request. So this is an exception no that
the parties who are parties to a contract cannot be held liable therein.
This is 1 of the exceptions clearly and expressly provided under
2072. Take note ha, the debtor who is not present. Because if he is
present, then you cannot apply 2072 and the one who requested,
here which is Peter, cannot be held liable.
So Section 3 - Effects of Guaranty as Between Co-guarantors
Article 2073
Article 2073. When there are two or more guarantors of the same
debtor and for the same debt, the one among them who has paid
may demand of each of the others the share which is proportionately
owing from him.
If any of the guarantors should be insolvent, his share shall be borne
by the others, including the payer, in the same proportion.
The provisions of this article shall not be applicable, unless the
payment has been made in virtue of a judicial demand or unless the
principal debtor is insolvent.
Alright, so this is in relation to the benefit of division. We have 1
obligation, 1 creditor, 1 debtor and several guarantors. Let us say the
debtor borrowed money from the creditor for 120, 000 pesos and the
same is guaranteed by several guarantors, say G1, G2, G3 and G4.
Applying the benefit of division, the guarantors cannot be compelled
to pay more than their respective shares. So in this example, 30T
each. However, they can voluntarily pay for the full amount if they
wanted to do so. Let us say, G1 voluntarily pays for the whole 120T
obligation, so he can seek reimbursement to his co-guarantors again,
only to their respective shares. So, 30 T each not 40T because he
also has his share.
Now, what is the effect if 1 of them becomes insolvent. What if G4
became insolvent? Who will now shoulder his share? Can his co-
guarantor shoulder? Anong nakalagay sa second paragraph? His
share shall be borne by the others, including the payer, in the same
proportion. What is the effect? Here, maging 40T each na sila.
Because the 30T share of the guarantor who became insolvent will
now be borne proportionately by the remaining guarantor. However,
take note when to apply 2073. It must be that this article shall not be
applicable unless the payment has been made in virtue of the judicial
demand, so there is a court action, or unless the principal debtor is
insolvent. This action for reimbursement is only available if payment
is in virtue of a judicial demand or when the debtor has already
become insolvent.
Article 2074
Article 2074. In case of the preceding article, the co-guarantors may
set up against the one who paid, the same defences which would
have pertained to the principal debtor against the creditor, and which
are not purely personal to the debtor.
Again, G1 who paid 120T to the creditor can seek reimbursement
from the co-guarantors. However, the co-guarantors can raise
defences pertaining to the obligation. In other words, if there has
already been payment, they can refuse to pay. The defences that
they can raise is only in relation to the obligation, they cannot raise
defences which are personal to the principal debtor. Example, a
defence that is personal to the principal debtor is minority, the
creditor will demand from the debtor, the debtor can refuse to pay
based on minority. But what if here comes a guarantor who pays the
whole obligation of 120T, even if the principal debtor is a minor. He
will now proceed reimbursement from his co-guarantors. But the co-
guarantors cannot raise this defence of minority because this is a
personal one.
Article 2075
Article 2075. A sub-guarantor, in case of the insolvency of the
guarantor for whom he bound himself, is responsible to the co-
guarantors in the same terms as the guarantor.
Again, another instance of a sub-guarantee or double guarantee. It is
possible here that G1 has a sub-guarantor. If G1 is insolvent, then
his subguarantor, isave niya si G1. Same obligation lang.
January 21, 2016 (1st Hour)
Transcribed by: Mia Balbas
Okay so let’s try to finish guaranty tonight. So second to the last topic
for guaranty is extinguishment. That would be Chapter 3
Extinguishment of Guaranty.
43 | P a g e
Art. 2076. The obligation of the guarantor is extinguished at the
same time as that of the debtor, and for the same causes as all
other obligations.
So recall again obligations and contracts. What are the different
modes of extinguishment of obligations?
1. Payment or performance;
2. Loss of the thing due;
3. Condonation or remission of the debt;
4. Confusion or merger of the rights of creditor and debtor;
5. Compensation; and
6. Novation.
So those modes along with the other modes of extinguishment of
obligation such as happening of a resolutory condition, prescription,
those are also applicable here to a contract of guaranty.
Now how about death? If the principal debtor dies, will the obligation
be extinguished? In the case of Stronghold vs. Asahi-Republic, you
have there a debtor who died. Was the obligation of the surety
extinguished? No ma’am.
Stronghold vs Republic
Facts: Republic Asahi Glass contracts with JDS for the construction
of roadways and drainage systems in RAG's compound. JDS does
so and files the required compliance bond with Stronghold Insurance
acting as surety. The contract is 5.3M the bond is 795k. JDS falls
woefully behind schedule, prompting RAG to rescind the contract and
demand the compliance bond. The owner of JDS dies and JDS
disappears. SHI refuses to pay the bond claiming that the death of
JDS owner extinguishes the obligation.
Issue: Whether or not petitioner’s liability under the performance
bond was automatically extinguished by the death of Santos, the
principal. NO
Held: As a general rule, the death of either the creditor or the debtor
does not extinguish the obligation. Obligations are transmissible to
the heirs, except when the transmission is prevented by the law, the
stipulations of the parties, or the nature of the obligation. Only
obligations that are personal or are identified with the persons
themselves are extinguished by death. Furthermore, The liability of
petitioner is contractual in nature, because it executed a performance
bond, As a surety, petitioner is solidarily liable with Santos in
accordance with the Civil Code.
So applying what you have learned under obligations and contracts
the general rule is that obligations are transmissible. Even the death
of the debtor creditor will not extinguish the obligation unless it is not
transmissible if it is by the stipulation of law, by nature of the
obligation or by stipulation of the parties. Also as mentioned, of
course the obligation is extinguished if it is personal in nature. Under
the facts of this case the monetary obligation of Santos does not fall
under those instances wherein the obligation is deemed extinguished
by virtue of his death.
His obligations were not intransmissible, in other words,
transmissible, by their nature, by stipulation or by provision of law.
His death did not result in the extinguishment of those obligations or
liabilities, which merely passed on to his estate. Therefore, the surety
here cannot --- in case his monetary obligation under the
performance bond because the principal obligation still exists.
Remember that the surety’s obligation does not, although not
original, it is a direct one. Although it is merely accessory or
collateral, the promise here of the surety is direct, primary and
absolute. In other words, he is directly and equally bound with the
principal.
As mentioned, the creditor can go against between the two, against
the petitioner being a surety; his liabilities are solidary together with
that of the principal debtor. In this case, under the performance bond.
Now also take note that novation as mentioned earlier, is a mode of
extinguishment of obligation which we could also apply to the
contract of guaranty. If you recall, novation is a mode of
extinguishment of obligation wherein there is a change in the major
terms and conditions of the obligation. Change in the subject matter
or conditions, change in the person of the debtor, or change in the
person of the creditor. So remember that for there to be a novation,
we should also apply here those obligations that must be
extinguished and that new ones are created.
Here, the old obligation is extinguished and as a general rule, it will
also extinguish the accessory contract of the guaranty or surety
wherein there is a novation.
Art. 2077. If the creditor voluntarily accepts immovable or other
property in payment of the debt, even if he should afterwards
lose the same through eviction, the guarantor is released.
Alright so what is that? Creditor voluntary accepts immovable or
other property in payment of the debt. That is dation in payment or
dacion en pago Article 1245.
Article 1245. Dation in payment, whereby property is alienated
to the creditor in satisfaction of a debt in money, shall be
governed by the law of sales.
It is a special form of payment wherein the debtor offers property in
payment of a monetary obligation and the creditor consents and
voluntary accepts it resulting to the extinguishment of the obligation.
So if dacion en pago was entered into between the debtor and the
creditor, then necessarily, the principal obligation is extinguished and
of course the accessory contract of guaranty or suretyship is also
extinguished.
But what happens if the property that was delivered by virtue of that
dacion en pago was not actually owned by the debtor and the
creditor was evicted by the owner of the property? Of course in this
case the creditor has a remedy and can go after the principal debtor.
Remember with regards to dacion en pago we apply the law on sales
wherein there is an implied warranty against eviction. However, how
about the guarantor? Can the creditor still go after the guarantor? Not
anymore. The liability of the guarantor is not revived by virtue of the
eviction of the creditor in the property which was delivered by virtue
of the dacion en pago.
So if you are the creditor, you also have to take this into
consideration that if you agree to accept a property as a form of
payment, then take note that an effect thereof is also an
extinguishment of the accessory obligation of guaranty or suretyship
and it cannot be revived in case the creditor will be subsequently
evicted.
Now also take note that the concept of dacion en pago is different
from pactum commissorium. I believe you already have an idea of
that and we will discuss that when we reach 2088. As you know,
pactum commissorium is automatic appropriation of the property by
the creditor in case of default on the part of the debtor which is
different from dacion en pago. Dacion en pago is a valid special form
of payment which extinguishes the obligation. Pactum commissorium
arrangement is considered void as it is against law and public policy.
Art. 2078. A release made by the creditor in favor of one of the
guarantors, without the consent of the others, benefits all to the
extent of the share of the guarantor to whom it has been
granted.
Alright so let’s have the same illustration we had last night: the debtor
borrowed money from the creditor 120k and then you have 4 co-
guarantors. So as we all know, benefit of division, is 30k sa kanilang
share. Now what if the creditor will release one of the guarantors
from the said obligation? What is the effect to the obligation of the
other guarantors? If the release of one guarantor was made without
the consent of the co-guarantors, then the co-guarantors who did not
44 | P a g e
give their consent should not be prejudiced by virtue of this release.
Their liability should only be up to 30k each.
However, if they gave their consent, the creditor releases one
guarantor from the obligation, then what is the effect? Then they
have to shoulder the liability which is 30k each because they gave
their consent. If not all of them gave their consent, only those who
gave his or her consent will shoulder the share of the guarantor who
has been released from the obligation.
Take note, we are not talking about here the relief of the principal
debtor. Because if the principal debtor is released from the
obligation, then what is the effect? The principal obligation is
extinguished and the accessory obligation of the guarantor is likewise
extinguished.
Art. 2079. An extension granted to the debtor by the creditor
without the consent of the guarantor extinguishes the guaranty.
The mere failure on the part of the creditor to demand payment
after the debt has become due does not of itself constitute any
extention of time referred to herein.
If an extension is given to the debtor without the consent of the
guarantor, what is the effect? The guarantee is deemed
extinguished. Because here, what is taken into consideration is that
by virtue of the extension, the debtor may become insolvent wherein
it is not within the terms of the guarantor when he agreed to be as
such. If the debtor becomes insolvent by virtue of that extension
without the consent of the guarantor, then the guarantor obviously
cannot go after the debtor anymore. And then again when he agreed,
hindi niya naman ito na consider unless it is expressly stipulated in
the contract of guaranty.
Such extension given without the consent of the guarantor will be
prejudicial to the said guarantor and therefore will release him from
his obligation. However, if the guarantor consented to such
extension, then it is implied that he agreed to such extension and
therefore shoulders the risk that the eventually the debtor may
become insolvent.
It is clear under Article 2079 that such extinguishment of the
accessory obligation is not applicable if there is only a mere failure
on the part of the creditor to demand payment after the debt has
become due. Because here, there is only failure to demand but it is
not necessarily an extension as what is contemplated under Article
2079. Mere default on the part of the debtor does not mean that the
obligation is extinguished. Mere lapse of time from the maturity date
before the creditor made a demand against the debtor does equate
to the extension resulting to the extinguishment of the obligation of
the principal debtor.
When we say extension here, it must be duly agreed by the debtor
and the creditor. Due date is December 31, 2016. Okay, debtor said:
creditor can you give me another year? And then the creditor will
agree. That is the kind of extension contemplated here releasing the
guarantor if such is made without his consent.
Pero kung nakalimutan lang ni creditor na maningil, nag lampas na
ng one year. That is mere failure to demand but will not result to the
extinguishment of the liability of the guarantor. The creditor will
demand payment anytime as long as the extension was not given to
the debtor and to which the guaranty will not be deemed
extinguished.
Not what if the obligation is payable in installments? Extension of
time as to one installment will not necessarily affect the liability of the
guarantor. However, if the whole unpaid balance that becomes
automatically due such as when there is an existence of an
acceleration clause – so, failure to pay 2 or more installments and
then the obligation becomes demandable – the act of the creditor
extending the payment without the guarantor’s consent will discharge
the obligation of the guarantor.
However, this extension under Article 2079 is the right of the
guarantor that can be waived in advance. As mentioned earlier,
unless otherwise stipulated, Article 2079 is applicable. Pero kung
nakalagay naman thereby waives if there is any extension, that is
valid and the guarantor cannot be released from his obligation.
Take note here Article 2079, one thing you have to take into
consideration whether the extension actually prejudiced the
guarantor or surety. The mere granting of the extension without the
consent of the guarantor or the surety will extinguish their liability. So
in relation to this article, we have this case of Spouses Toh vs. Solid
Bank.
Spouses Toh vs. Solid Bank
Facts: RESPONDENT SOLID BANK extended an "omnibus line"
credit facility worth P10 million in favor of respondent First Business
Paper Corporation (FBPC). Spouses Toh and spouses Li signed the
required Continuing Guaranty, which defined the contract arising
therefrom as a surety agreement and provided for the solidary liability
of the signatories.
The surety also contained a de facto acceleration clause if "default
be made in the payment of any of the instruments, indebtedness, or
other obligation" guaranteed by petitioners and respondents. So as to
strengthen this security, the Continuing Guaranty waived rights of the
sureties against delay or absence of notice or demand on the part of
respondent Bank, and gave future consent to the Bank's action to
"extend or change the time payment, and/or the manner, place or
terms of payment," including renewal, of the credit facility in such
manner and upon such terms as the Bank without notice to or further
assent from the sureties.
ISSUE: WON the spouses Toh are liable as sureties to Solidbank.
NO
HELD: The Continuing Guaranty is a valid and binding contract of
petitioner-spouses as it is a public document that enjoys the
presumption of authenticity and due execution. We are bound by the
consistent finding of the courts a quo that petitioner-spouses Toh
"voluntarily affixed their signature[s]" on the surety agreement and
were thus "at some given point in time willing to be liable under those
forms." In the absence of clear, convincing and more than
preponderant evidence to the contrary, our ruling cannot be
otherwise.
Similarly, there is no basis for petitioners to limit their responsibility
so long as they were corporate officers and stockholders of FBPC.
Nothing in the Continuing Guaranty restricts their contractual
undertaking to such condition or eventuality. In fact the obligations
assumed by them therein subsist "upon the undersigned, the heirs,
executors, administrators, successors and assigns of the
undersigned, and shall inure to the benefit of, and be enforceable by
you, your successors, transferees and assigns," and that their
commitment "shall remain in full force and effect until written notice
shall have been received by [the Bank] that it has been revoked by
the undersigned."
Verily, if petitioners intended not to be charged as sureties after their
withdrawal from FBPC, they could have simply terminated the
agreement by serving the required notice of revocation upon the
Bank as expressly allowed therein.
In other words, the authority of the Bank to defer collection
contemplates only authorized extensions, that is, those that meet the
terms of the "letter-advise." Certainly, while the Bank may extend the
due date at its discretion pursuant to the Continuing Guaranty, it
should nonetheless comply with the requirements that domestic
letters of credit be supported by fifteen percent (15%) marginal
deposit extendible three (3) times for a period of thirty (30) days for
each extension, subject to twenty-five percent (25%) partial payment
per extension. Any doubt on the terms and conditions of the surety
agreement should be resolved in favor of the surety.
Stated otherwise, an extension of the period for enforcing the
indebtedness does not by itself bring about the discharge of the
45 | P a g e
sureties unless the extra time is not permitted within the terms of the
waiver, i.e., where there is no payment or there is deficient
settlement of the marginal deposit and the twenty-five percent (25%)
consideration, in which case the illicit extension releases the sureties.
Q1: When the demand was made, were Spouses Toh still officers of
the corporation?
A1: No
Q2: So they are sureties but they were not held liable. Why not?
A2: Extensions granted were considered illicit extensions which is
prohibited under Article 2079 of the Civil Code
Take note here that in the continuing guaranty, the SC held that it is
valid and binding and that the petitioner spouses are considered
sureties as they voluntarily affixed their signatures to the said
agreement. Recall our discussion in the case of Cuenca wherein the
SC said that one of the things that they take into consideration was
that Cuenca could not be held liable as a surety because he was not
a stockholder anymore. But as we have mentioned, that was not the
main point of the SC.
Because again, there refer to the surety agreement. But here, it is a
general rule, if you agreed to be a surety or guarantor that is a
personal liability on your part. Unless otherwise stipulated that you
could only be held liable until you are still a present stockholder, then
in the absence of that stipulation, you can be personally held liable
even if you are not a stockholder anymore or an officer of the
corporation. So here there was no stipulation to limit their
responsibility so long as they were corporate officers and
stockholders of FBPC.
Nothing was stated in the continuing guaranty for such restriction.
Furthermore, if it was really their intention to not act as a surety
anymore, klaro naman sa surety agreement that they will just simply
give a written notice to the bank that they will now revoke the surety
agreement or their obligations as a surety.
Now, can they be held liable for the extension given? Take a look at
the provisions of the said continuing guaranty. They waived their
rights of the sureties against delay or absence of notice or demand
on the part of respondent Bank, and gave future consent to the
Banks action to extend or change the time payment, and/or the
manner, place or terms of payment, including renewal, of the credit
facility or any part thereof in such manner and upon such terms as
the Bank may deem proper without notice to or further assent from
the sureties.
So again, if you take a look. If there was a waiver if this extension
and voluntarily agreed to act as a surety to give future consent to act
as such to any extension. If you look at that provision, they will still be
held liable by virtue of the waiver. But the SC said that no they could
not be held liable because there were conditions attached for the
extension for the said obligation. Here it was stipulated which should
be complied as a requirement that --- 15% marginal deposit
extendible three (3) times for a period of thirty (30) days for each
extension, subject to 25% partial payment per extension. Here it was
evident that this was not complied with.
An extension of the period for enforcing the indebtedness does not
by itself bring about the discharge of the sureties unless the extra
time is not permitted within the terms of the waiver, where there is no
payment or there is deficient settlement of the marginal deposit and
the 25% consideration.
By virtue of which, the extension granted by the bank to the debtor
was considered illicit and the sureties were released from their
obligation. The foregoing extensions of the letters of credit made by
respondent Bank without observing the rigid restrictions for
exercising the privilege are not covered by the extension. Being illicit
extensions, the petitioner spouses were released from their
obligation as sureties.
Again, Article 2079 extension granted without the consent
extinguishes the guaranty. Mere failure is not tantamount to
extension. Waiver is valid. However in good faith, there were
conditions attached to such waiver and the extensions were
considered illicit extensions. Therefore, the sureties were not held
liable.
Art. 2080. The guarantors, even though they be solidary, are
released from their obligation whenever by some act of the
creditor they cannot be subrogated to the rights, mortgages,
and preference of the latter.
Here is an instance wherein the guarantor or even sureties are
released from their obligation. Article 2080 deals with subrogation.
The guarantor or surety paid the obligation with the consent or
knowledge of the principal debtor and by virtue thereof does not only
entitle him to reimbursement but also condonation. If there are
mortgages, pledges, you can also execute on this accessory
contract.
However, if it turns out that the guarantor after paying the principal
debtor, can now be subrogated to the rights and preferences of the
latter by virtue of the fault or negligence of the creditor, what is the
effect here? The guarantor can be released from the obligation. The
guarantors acted as such with the knowledge and consent of the
principal debtor; they can be subrogated.
However, because the creditor was negligent, hindi maka mortage or
hindi maka forclose sa property for example. Bakit hindi ma foreclose
ang property? For example what are the requirements of
foreclosure? It must be in a public instrument but in the absence
thereof, hindi maka foreclose na si guarantor. So in that instance, by
virtue of the negligence and the fault of the creditor, the guarantor
cannot be subrogated and therefore must be released from his
obligation. Again what is the reason behind this Article 2080? So that
it will avoid opportunity for collusion between the creditor and debtor
or some other persons. Article 2080 does not apply when the
guarantor or surety merely entitled to beneficial reimbursement.
PNB vs. Manila Surety
Facts: PNB was negligent in its duty under the power of attorney to
collect sums due to debtor from the latter’s debtor, thereby allowing
such funds to be exhausted by other creditors.
Issue: Whether or not Manila Surety is exonerated from liability to
PNB?
Held: Yes. Even if the assignment with the power of attorney from the
principal debtor was considered as a mere additional security, still, by
allowing the assigned funds to be exhausted without notifying Manila
Surety, PNB deprived the former of the possibility of taking recourse
against the security. PNB thereby exonerated Manila Surety,
pursuant to Art. 2080.
Q1: So we can apply here Article 2080?
A1: Yes
Q2: What is the negligence or fault here on the part of the creditor?
A2: The negligence on the part of PNB was that it failed to collect
from the bureau money due to Ataco
Q3: What is the right of the creditor-bank to go after the Bureau of
Public Works? Who is the debtor here?
A3: Ataco
Q4: Okay. So what is the basis here or the right of the creditor-bank
to go after the Bureau of Public Works?
A4: The basis was the assignment of Ataco
Q5: Essentially by virtue of that assignment, it had the duty to collect
from the Bureau of Public Works and to apply the payment of the
Bureau to obligation of Ataco to PNB. However what happened?
A5: PNB failed to collect, so there was negligence on the part of
PNB.
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Q6: Is the obligation of Manila Surety extinguished by virtue of that
negligence on the part of PNB?
A6: Here, the surety was released from the obligation. The surety
here was also prejudiced.
Here, Article 2080 is applicable. It so happens that there was a deed
of assignment executed by Ataco in favor of PNB. So PNB can
collect the receivables from Bureau of Public Works which is a debtor
or Ataco. Now, normally, being the creditor, it had to obligation to go
after the debtor of Ataco. But by virtue of that assignment, it was
already given the right to go after the Bureau of Public Works and to
apply the collection or proceeds to the obligation of the principal
debtor.
However, it was found that the bank was negligent in the collection of
the sums from the Bureau. So while it is true that the deed was
considered as a security, still, by allowing the assigned funds to be
exhausted without notifying the surety, so what is the effect? We
apply Article 2080 wherein the bank deprived the former of any
possibility of recoursing against that security.
Remember, the letter of demand was sent to the Public Works office
however it does not appear that any reply was made. It’s just that
PNB did not do anything even if it already had the right to demand
payment from the Bureau. The fact remains that because of the
Bank's inactivity the other creditors were enabled to collect P173k,
when the balance due to appellant Bank was only P158k. If the bank
was not negligent, the payment should have been made and the
obligation extinguished.
However, due to the neglect here on the part of the creditor, the
guarantor cannot be subrogated to the rights of the creditor. And
therefore the surety is released from his obligation.
Art. 2081. The guarantor may set up against the creditor all the
defenses which pertain to the principal debtor and are inherent
in the debt; but not those that are personal to the debtor.
We already mentioned this. The debtor’s defenses against the
creditor are also available to the guarantor. If the debt has already
prescribed, again the guarantor cannot be forced to pay on the
ground that the debt has already prescribed.
Article 2068 you have there the defenses of the guarantor.
Article 2074 in relation to Article 2071, defenses available to co-
guarantors.
Now the last topic that we have under guaranty is Legal and Judical
Bonds
Art. 2082. The bondsman who is to be offered in virtue of a
provision of law or of a judicial order shall have the
qualifications prescribed in Article 2056 and in special laws.
The bond here is an undertaking that will sufficiently secure and not
cash or currency. The bondsman on the other hand is considered as
a surety offered in virtue of a provision of the law or of a judicial
order. So the qualifications of a bondsman are similar to those in
Article 2056.
All bonds including judicial bonds are contractual in nature. Judicial
bonds are merely special class of contracts of guaranty given by
under a judicial order.
So bonds that are necessary. For example, if you file an action for
writ of attachment, and by applying for the issuance of a writ of
attachment, the court will require you to furnish a bond given to a
bondsman. What are the instances in relation to the example? Bonds
in relation to criminal liability.
Art. 2083. If the person bound to give a bond in the cases of the
preceding article, should not be able to do so, a pledge or
mortgage considered sufficient to cover his obligation shall be
admitted in lieu thereof.
Now a guaranty or suretyship is a form of personal security while
pledge and mortgage are real securities. The pledge or mortgage
must be sufficient in lieu of a legal or judicial bond.
Art. 2084. A judicial bondsman cannot demand the exhaustion
of the property of the principal debtor.
A sub-surety in the same case, cannot demand the exhaustion
of the property of the debtor of the surety.
The judicial bondsman and the sub-surety are not entitled to the
benefit of excussion because their liability is considered primary.
January 21, 2016 (2nd Hour)
Transcribed by: Mabelle Acosta
PLEDGE
Articles 2085-2123; these are provisions that are common
to pledge and mortgage. Remember our early discussions in credit
transactions, we made distinction as to the different kinds of security
; we have personal security and real security. The contracts of
guaranty and surety as we have discussed; these are considered as
personal securities as they involved merely a person who promise to
answer the obligation of another person, no other property is
involved. However, as we have mentioned, the surety, guarantor or
bondsman must have sufficient property as a qualification but again
this may be waive by the creditor. But remember, the sufficient
property in those instances are merely qualifications but not the
security itself. It is contracts of personal security it is the undertaking
or the promise of the guarantor to pay when the debtor cannot pay is
consider however with regard to pledge what is the subject of
security is the property itself not the mere promise. So a contract of
pledge is a real security. Pledge is a contract where the debtor
delivers to the creditor or a third person a movable or document
evidencing incorporeal rights for purpose of securing the fulfillment of
a principal obligation with the understanding that when the obligation
is fulfilled, the thing delivered shall be return all its accessories and
accessions. a personal property a movable property or a document
evidencing incorporeal rights may be deemed security for the
fulfillment of the obligation of the principal debtor. In case the
obligation is not fulfilled the creditor may against the movable or
incorporeal right. If the obligation is paid, then the property subject of
pledge as well as its accessions and accessories must be returned to
the owner. Now what are the kinds of pledge, you have voluntary or
conventional pledge again that is by agreement of parties and then
you have legal pledge which is created by operation of law. Who are
the parties in a pledge, you have the pledger and pledgee.
Now what are the characteristic of pledge, remember it is a
real contract. It is perfected by the delivery of the thing pledge by the
pledgor to the creditor. It is also an accessory contract. As a security
contract, it has no independent existence as again its validity
depends upon the validity of the principal obligation. But it is also
unilateral since it creates an obligation solely on the part of the
creditor to return the thing subject thereof upon the fulfillment of the
principal obligation. And lastly pledge is a subsidiary contract. As the
obligation incurred does not arise until the fulfillment of the principal
obligation which is secured.
Now being an accessory contract, what is the cause or
consideration of the pledge? In the absence of any stipulation, we
have the same cause as that of the original obligation. However, in
some instances we have a pledgor wherein the cost is compensated.
and in the absence of such compensation, just mere liberality on the
part of the creditor is sufficient cause or consideration. Now what are
the valid subject matter of a contract of pledge? Of course movables,
personal properties such as cars jewelries. Now how about
securities, they are called incorporeal rights so they are intangible. In
this instance your right as a stockholder is not in physical existence
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but that is considered as a property. Now that can be subject of a
contract of pledge, although it is true that its something of no physical
existence what is contemplated here with respect to pledge of
intangible right is the document evidencing you right. For example
you are a stockholder, you have a stock certificate, so what you will
deliver is the stock certificate as the object or evidencing you
incorporeal right. So here still valid subject of pledge. Remember
what is subject of the pledge is you intangible right but you just since
pledge is real contract, you have to deliver something. So what is
delivered in such instance is the document evidencing your right.
Now do remember that pledge as well as subsequent contracts
mortgage, antichresis; these are securities intended to secure the
performance of the principal or pre-existing obligation by subjecting
such security, the property and the fruits thereof. Please take note
the distinction between a pledge and mortgage. Mortgage, the same
concept we have a property acting as a collateral or security of the
principal obligation. But the subject in mortgage or real estate
mortgage, is a real or immovable property.
Pledge involves movables, real estate mortgage real
properties. Pledge is a real contract wherein movable must be
delivered to the creditor. When we get to mortgage delivery is not
required because in the first place, how do you deliver a parcel of
land. What is contemplated in pledge as a real contract perfected by
delivery ; there must be actual delivery. Pledge is not valid against
third persons unless a description of the thing pledged and the date
of the pledge appear in a public instrument however, mortgage is not
valid against third persons if not registered.
With that we have article 2085, again this is a provision, applicable to
both contract of pledge and mortgage.
Art. 2085. The following requisites are essential to the contracts
of pledge and mortgage:
(1) That they be constituted to secure the fulfillment of a principal
obligation;
(2) That the pledgor or mortgagor be the absolute owner of the
thing pledged or mortgaged;
(3) That the persons constituting the pledge or mortgage
have the free disposal of their property, and in the absence
thereof, that they be legally authorized for the purpose.
Third persons who are not parties to the principal obligation
may secure the latter by pledging or mortgaging their own property.
Remember that contract of pledge and mortgage is accessory
contract, that the principal contract being void, then there is no valid
contract of pledge or mortgage. Again these contracts derive their
existence from the principal obligations so what is emphasize in the
first requisite in 2085 is that these are accessory contracts. 2nd
requisite also very important, that the pledgor or mortgagor must
be the absolute owner of the thing pledged or mortgaged. Its very
clear absolute owner, if you are the lessee of a parcel of land you
cannot be a valid mortgagor thereof, if you’re just a friend who
borrowed your friend’s laptop, you cannot use that to secure your
own obligation in behalf of the pledger because again pledgor
mortgagor must be the absolute owner of the thing pledged or
mortgaged. Failure to comply with this requisite, again there is no
valid contract of pledge or mortgage to speak of. Now, why is it that
absolute ownership is required? Because a pledge or mortgage
requires an act of disposition for this to be done you have to have
dominion over the property as these are incidents of ownership. So
with that we have to consider whether you have possession in the
concept of an owner because when you become the owner of
property by delivery , so delivery to transfer ownership, because
even if the thing is in your possession again it does not necessarily
mean that you are the owner thereof, so recall the case of Calibo vs
CA, you have there Mike who deliver a tractor to secure his
obligation to his lessor it turned out that it was owned by his father so
we already know that when we discuss that in deposit there was no
valid deposit, why because the purpose was not for safekeeping. So
what is the purpose thereof, act as security for the obligation of Mike
to Calibo for his unpaid obligation but it cannot act as a contract of
pledge why because although it involves delivery of a movable
property, it does not constitute a pledge for its failure to conform to
the requirement , as Mike was not the absolute owner of the property
as it was his father who own the said tractor, so therefore there is no
valid pledge. And also if you recall the SC also held in that case that
there is no contract of agency, there was no showing that mike acted
as an agent of his father.
Now, can future property be pledge or mortgage? The
general rule is no why? Unlike in a contract of sale where future
property can be a valid subject matter, it is not applicable to contracts
of pledge or mortgage, why/? Because of this requisite of absolute
ownership. You cannot own something that is not yet in existence.
So again future properties cannot be pledge or mortgage. A pledge
or a mortgage executed by one not the owner of the property pledge
or mortgaged is without legal existence even if such mortgaged is
registered. Now 3rd requisite, That the persons constituting the
pledge or mortgage have the free disposal of their property,
and in the absence thereof, that they be legally authorized for the
purpose. Remember it is contracts of pledge and mortgage this
involves act of straight ownership, involves alienation or transmission
of real rights in property. So the pledgor or mortgagor must have the
capacity to dispose the property , so free disposal of property, the
property must not be subject of a claim of any third person. Even if
the first requisite is present, must not be encumbered or subject to a
lien to which , the mortgagor or pledgor cannot have a free disposal
therof. Also recall in your Revised Penal Code if you mortgage your
property representing it to be not encumbered when it is, then you
can be held liable for estafa for swindling. Another instance when you
do not have the free disposal of property is when the property is held
in custodia legis, in the custody of the court, or such that the property
has been attached in relation to a case in court, also the pledgor or
mortgagor has the capacity to make a disposition of the property,
legally authorized for the purpose, it can be that as such can be
subject to the jurisdiction of the court, or when it is attached. Now
whenever you can have this encumbered if the court will authorize it
if permissible. Even if the first requisite is present, again if you do not
have free disposal teherof it would still not have a valid mortgage.
Now we have here the case of Development Bank vs prudential.
DEVELOPMENT BANK OF THE PHILIPPINES, vs.
PRUDENTIAL
BANK
Facts: In 1973, Lirag Textile Mills, Inc. (Litex) opened an irrevocable
commercial letter of credit with Prudential Bank for US$498,000. This
was in connection with its importation of 5,000 spindles for spinning
machinery with drawing frame, simplex fly frame, ring spinning frame
and various accessories, spare parts and tool gauge. These were
released to Litex under covering "trust receipts" it executed in favor
of Prudential Bank. Litex installed and used the items in its textile
mill.
On October 10, 1980, DBP granted a foreign currency loan in the
amount of US$4,807,551 to Litex. To secure the loan, Litex executed
real estate and chattel mortgages on its plant site, including
machineries and equipments covered by the "trust receipts."
Prudential Bank learned about DBP’s plan for the overall
rehabilitation of Litex and it notified DBP of its claim over the various
items covered by the "trust receipts" which had been installed and
used by Litex in the textile mill. Prudential Bank informed DBP that it
was the absolute and juridical owner of the said items and they were
thus not part of the mortgaged assets that could be legally ceded to
DBP.
For the failure of Litex to pay its obligation, DBP extra-judicially
foreclosed on the real estate and chattel mortgages, including the
articles claimed by Prudential Bank. DBP acquired the foreclosed
properties as the highest bidder.
Subsequently, DBP published an invitation to bid for the auction sale
of the textile mill formerly owned by Litex, the land which it was built,
as well as the machineries and equipments therein. Learning of the
intended public auction, Prudential Bank wrote DBP reasserting its
claim over the items covered by "trust receipts" in its name and
advising DBP not to include them in the auction. It also demanded
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the turnover of the articles or alternatively, the payment of their value.
Since its demands remained unheeded, Prudential Bank filed a
complaint for a sum of money with damages against DBP. RTC
decidedin favor of Prudential Bank, on appeal with CA, it affirmed the
decision of the trial court in toto.
Issue/s:
1.) WON the the agreement between Litex and
Prudential Bank over the machineries and equipments
denominated as “trust receipts” were valid under PD 115 of
the Trust Receipts Law. Yes
2.) WON Litex had authority to dispose the machineries
and equipment, which was the subject of the trust receipt
agreement, to conditional sale, pledge or any other means.
No.
Held: 1.) DBP contended that the contested articles were excluded
from goods that could be covered by a trust receipt, that the chattels
in controversy were procured by DBP’s mortgagor LITEX for the
exclusive use of its textile mills. They were not procured (a) to sell or
otherwise procure their sale; (b) to manufacture or process the goods
with the purpose of ultimate sale.(emphasis supplied)
Hence, the transactions between Litex and Prudential Bank were
allegedly not trust receipt transactions within the meaning of PD 115.
It follows that, the transactions were not governed by the Trust
Receipts Law. We disagree.
The various agreements between Prudential Bank and Litex
commonly denominated as "trust receipts" were valid. As the Court of
Appeals correctly ruled, their provisions did not contravene the law,
morals, good customs, public order or public policy.
Trust receipt transactions are governed by the provisions of Sec. 4,
PD 115, the Trust Receipts Law. In a trust receipt transaction, the
goods are released by the entruster (who owns or holds absolute title
or security interests over the said goods) to the entrustee on the
latter’s execution and delivery to the entruster of a trust receipt. The
trust receipt evidences the absolute title or security interest of the
entruster over the goods. As a consequence of the release of the
goods and the execution of the trust receipt, a two-fold obligation is
imposed on the entrustee, namely:
(1) to hold the designated goods, documents or instruments in trust
for the purpose of selling or otherwise disposing of them and (2) to
turn over to the entruster either the proceeds thereof to the extent of
the amount owing to the entruster or as appears in the trust receipt,
or the goods, documents or instruments themselves if they are
unsold or not otherwise disposed of, in accordance with the terms
and conditions specified in the trust receipt.
In the case of goods, they may also be released for other purposes
substantially equivalent to (a) their sale or the procurement of their
sale; or (b) their manufacture or processing with the purpose of
ultimate sale, in which case the entruster retains his title over the
said goods whether in their original or processed form until the
entrustee has complied fully with his obligation under the trust
receipt; or (c) the loading, unloading, shipment or transshipment or
otherwise dealing with them in a manner preliminary or necessary to
their sale. Thus, in a trust receipt transaction, the release of the
goods to the entrustee, on his execution of a trust receipt, is
essentially for the purpose of their sale or is necessarily connected
with their ultimate or subsequent sale.
2.) The articles were owned by Prudential Bank and they were only
held by Litex in trust. While it was allowed to sell the items, Litex had
no authority to dispose of them or any part thereof or their proceeds
through conditional sale, pledge or any other means.
Article 2085 (2) of the Civil Code requires that, in a contract of pledge
or mortgage, it is essential that the pledgor or mortgagor should be
the absolute owner of the thing pledged or mortgaged. Article 2085
(3) further mandates that the person constituting the pledge or
mortgage must have the free disposal of his property, and in the
absence thereof, that he be legally authorized for the purpose.
Litex had neither absolute ownership, free disposal nor the authority
to freely dispose of the articles. Litex could not have subjected them
to a chattel mortgage. Their inclusion in the mortgage was voidand
had no legal effect. There being no valid mortgage, there could also
be no valid foreclosure or valid auction sale.
No one can transfer a right to another greater than what he himself
has.Nemodat quod non habet. Hence, Litex could not transfer a right
that it did not have over the disputed items. Corollarily, DBP could
not acquire a right greater than what its predecessor-in-interest had.
The spring cannot rise higher than its source. DBP merely stepped
into the shoes of Litex as trustee of the imported articles with an
obligation to pay their value or to return them on Prudential Bank’s
demand. By its failure to pay or return them despite Prudential
Bank’s repeated demands and by selling them to Lyon without
Prudential Bank’s knowledge and conformity, DBP became a trustee
ex maleficio.
Recall our discussion before regarding trust receipts
transactions, goods are released by the entrustor to the trustee, on
the the latter’s execution of delivery of a trust receipt two-fold
obligation to hold the goods in trust for the purpose of selling the
goods and to turn over to the entrustor either the proceed or the
unsold goods. Now, by virtue of that trust receipt, Litex, although in
possession of those machineries, was not the owner of the subject
property, the articles were owned by Prudential bank, and they are
only held by Litex in trust, while it was allowed to sell the items, Litex
had no authority to dispose them or any part thereof, through sale
pledge or any other means, and take note of the second requisite in
2085. That the pledgor mortgagor should be the absolute owner of
the thing and that paragraph 3 thereof that the pledgor constituting
the pledge must have the free disposal of his property and in the
absence thereof, he be legally authorize for the purpose .Litex had
neither absolute ownership it did not have free disposal or authority
go freely dispose of the articles.Litex could not have subjected them
to mortgage their inclusion in the mortgage was therefore void and
no legal effect, no valid mortgage no vaild foreclosure in an auction
sale so, DBP was not a purchaser in good faith because the
Prudential already informed DBP of its rights by virtue of the trust
receipts nevertheless, DBP still proceeded with the foreclosure sale
of the properties covered by the trust receipts, so again, not in good
faith, this is also in relation to the principle nemo dat quod non habet.
CAVITE DEVELOPMENT BANK and FAR EAST BANK AND
TRUST COMPANY, vs. SPOUSES CYRUS LIM and LOLITA
CHAN LIM and COURT OF APPEALS
Facts: Rodolfo Guansing obtained a loan in the amount of
P90,000.00 from CDB, to secure which he mortgaged a parcel of
land situated at No. 63 Calavite Street, La Loma, Quezon City and
covered by TCT No. 300809 registered in his name. As Guansing
defaulted in the payment of his loan, CDB foreclosed the mortgage.
At the foreclosure sale held on March 15, 1984, the mortgaged
property was sold to CDB as the highest bidder. Guansing failed to
redeem, and on March 2, 1987, CDB consolidated title to the
property in its name. TCT No. 300809 in the name of Guansing was
cancelled and, in lieu thereof, TCT No. 355588 was issued in the
name of CDB.1âwphi1.nêt
On June 16, 1988, private respondent Lolita Chan Lim, assisted by a
broker named Remedios Gatpandan, offered to purchase the
property from CDB.
Pursuant to the foregoing terms and conditions of the offer, Lim paid
CDB P30,000.00 as Option Money, for which she was issued Official
Receipt No. 3160, dated June 17, 1988, by CDB. However, after
some time following up the sale, Lim discovered that the subject
property was originally registered in the name of Perfecto Guansing,
father of mortgagor Rodolfo Guansing, under TCT No. 91148.
49 | P a g e
Aggrieved by what she considered a serious misrepresentation by
CDB and its mother-company, FEBTC, on their ability to sell the
subject property, Lim, joined by her husband, filed on August 29,
1989 an action for specific performance and damages against
petitioners in the Regional Trial Court.
On March 10, 1993, the trial court rendered a decision in favor of the
Lim spouses. Petitioners brought the matter to the Court of Appeals,
which, on October 14, 1997, affirmed in toto the decision of the
Regional Trial Court.
Issue: WON there was a valid sale.
Held: NO.
In this case, the sale by CDB to Lim of the property mortgaged in
1983 by Rodolfo Guansing must, therefore, be deemed a nullity for
CDB did not have a valid title to the said property. To be sure, CDB
never acquired a valid title to the property because the foreclosure
sale, by virtue of which, the property had been awarded to CDB as
highest bidder, is likewise void since the mortgagor was not the
owner of the property foreclosed.
A foreclosure sale, though essentially a "forced sale," is still a sale in
accordance with Art. 1458 of the Civil Code, under which the
mortgagor in default, the forced seller, becomes obliged to transfer
the ownership of the thing sold to the highest bidder who, in turn, is
obliged to pay therefor the bid price in money or its equivalent. Being
a sale, the rule that the seller must be the owner of the thing sold
also applies in a foreclosure sale. This is the reason Art. 2085 of the
Civil Code, in providing for the essential requisites of the contract of
mortgage and pledge, requires, among other things, that the
mortgagor or pledgor be the absolute owner of the thing pledged or
mortgaged, in anticipation of a possible foreclosure sale should the
mortgagor default in the payment of the loan.
There is, however, a situation where, despite the fact that the
mortgagor is not the owner of the mortgaged property, his title being
fraudulent, the mortgage contract and any foreclosure sale arising
therefrom are given effect by reason of public policy. This is the
doctrine of "the mortgagee in good faith" based on the rule that all
persons dealing with property covered by a Torrens Certificate of
Title, as buyers or mortgagees, are not required to go beyond what
appears on the face of the title. The public interest in upholding the
indefeasibility of a certificate of title, as evidence of the lawful
ownership of the land or of any encumbrance thereon, protects a
buyer or mortgagee who, in good faith, relied upon what appears on
the face of the certificate of title.
This principle is cited by petitioners in claiming that, as a mortgagee
bank, it is not required to make a detailed investigation of the history
of the title of the property given as security before accepting a
mortgage.
However, that under the circumstances of this case, CDB can be
considered a mortgagee in good faith. While petitioners are not
expected to conduct an exhaustive investigation on the history of the
mortgagor's title, they cannot be excused from the duty of exercising
the due diligence required of banking institutions. In Tomas v.
Tomas, we noted that it is standard practice for banks, before
approving a loan, to send representatives to the premises of the land
offered as collateral and to investigate who are real owners thereof,
noting that banks are expected to exercise more care and prudence
than private individuals in their dealings, even those involving
registered lands, for their business is affected with public interest.
So again we have emphasized in 2085, mortgagor or
pledgor must be the absolute owner of the thing pledged or
mortgaged. In anticipation of a possible foreclosure of the sale due to
failure of mortgagor to pay the loan, now here what we have is that
the mortgagor was not the owner of the mortgaged property as it
was discovered to be fraudulent, so what is the effect? The mortgage
contract and any foreclosure sale cannot be given effect. However if
what we have is a mortgagee in good faith then the subsequent
foreclosure could still be considered as valid again, whose
considered a mortgagee in good faith- one who relies upon what
appears in the certificate of title and need not have to inquire further,
an innocent purchaser for value is therefore protected, now this
doctrine of mortgagee in good faith is based on the rule that all
person who is dealing with property covered by a TCT as buyers of
mortgages are not required to go beyond what appears in the face of
the title. The public interest in upholding he indefeasibility Of a title as
evidence of a lawful of the land or any acquisition thereof protects a
buyer or mortgagee who in good faith relies upon what appears in
the face ot the certificate of title, so here in the face of the certificate
of title, it was clear who was the registered owner however, the bank
here cannot be considered as a mortgagee in good faith, Cavite
development bank cannot be considered as a mortgagee in good
faith, what petitioners are expected to exhaustive investigation on
the history of mortgagors title, cannot be excused by the duty of
exercising the due diligence of bank institutions, under practice, that
before a loan is approved, representatives of the banks are sent to
the premises of the land offered as collaterals and investigate as to
who really are the owners of the subject property. Noting that banks
are expected to exercise more care and prudence in their dealings.
In this case, there is no evidence that Cavite development bank
observe its duty to observe diligence in ascertaining the validity of
Rodolfo’s title. Again they were aware, it appears that the land was
occupied by people other than Rodolfo and that said persons are
occupying the said property were the heirs of perfecto. So with that
there was no valid mortgage, CDB was not a mortgagee in good faith
and therefore there was no valid transfer of title to lim. So therefore
Lim has a cause of action against CDB. Of course, CDB here can go
over Rodolfo because of the fraud that was committed.
Vda de. Jayme vs. CA
Facts:Sps. Graciano and Mamerta Jayme are the registered owners
of the subject lot in Mandaue City, Cebu. On Jan. 8, 1973, Sps.
Jayme entered into a Contract of Lease with George Neri, president
of Airland Motors Corp. (now Cebu Asiancars, Inc.). The terms and
conditions of the lease contract provides that Asiancars may use the
leased premises as a collateral to secure payment of loan which
Asiancars may obtain from any bank.
In Oct. 1977, Asiancars obtained a loan of P6M from the
Metropolitan Bank and Trust Company (MBTC). The subject lot was
one of the collaterals for the loan. As mortgagors, Sps. Jayme signed
a Deed of Real Estate Mortgage (REM) in favor of MBTC.
Asiancars failed to pay the loan and eventually, MBTC
extrajudicially foreclosed the mortgage. As a result of the foreclosure,
herein petitioners, heirs of Graciano Jayme, filed a civil complaint.
Petitioners claim that the Sps. Jayme are illiterate and were deceived
into signing the Deed of REM. Their intention, as well as consent was
only to be bound as guarantors. MBTC denied the said allegations.
Issue: WON the Deed of REM should be annulled on the ground of
vitiated consent.
Held: NO
The Deed of REM entered into by Sps. Jayme partake of a Third
Party Mortgage under Art. 2085 (3) of the Civil Code which reads:
The following requisites are essential to the contracts of pledge and
mortgage: (3) that the persons constituting the pledge or mortgage
have the free disposal of their property, and in the absence thereof
that they be legally authorized for the purpose.
In the case at bar, it has been shown that the Sps. Jayme
affixed their signature on the Deed of REM, in the presence of 2
instrumental witnesses, and duly notarized by Atty. Cabrera. As a
notarized document, it has in its favor the resumption of regularity,
and to overcome this presumption, there must be evidence that is
clear, convincing and more than merely preponderant that there was
irregularity in its execution; otherwise, the document should be
upheld.
Sps. Jayme, therefore, should not be allowed to disclaim
the validity of a transaction they voluntarily and knowingly entered
into for the simple reason that such transaction turned out prejudicial
to them later on.
50 | P a g e

So again note of the last paragraph of 2085, it is very clear,
that 3rd persons were not parties to the principal obligation may
secure the latter by pledging their own property. So it is possible that
the pledgor mortgagor is not the principal debtor of the obligation. In
the 3rd paragraph, again another person may actually own the
property , so in other words even if third persons here acting as
pledgor mortgagor still required as the absolute owner of the property
and has free disposal of the said property. Another person may
actually own the property as long as the contract of mortgage is
entered into as long as the contract is entered into between that of
the owner and the creditor. In other words the parties to that real
estate mortgage is the owner , the owner himself must be the
mortgagor with the creditor as the mortgagee you cannot have an
instance wherein the real estate mortgage is signed as a mortgagor
by the principal debtor involving the property of a third person. Its
also possible however that the debtor have been authorize by the
owner of the property pero ang nakalagay sa mortgage you have for
example juan acting as a agent of pedro the mortgagor , the contract
itself must still be must clearly show that the mortgagor when
principal debtor sign the contract he did not sign to his personal
capacity but he must sign it again as an agent of the principal debtor.
In relation to this scenario, you have to take into consideration what
we learned, I n a contract of agency, you must show you’re
authorize, in a contract of mortgage , that the principal debtor must
be authorize to pledge or mortgage the property but when the
contract of the real estate in mortgage was signed by the principal
debtor in in his personal capacity, then what is the effect ? sino ang ?
and principal debtor, and what is the effect the principal debtor is not
the owner of the mortgaged property so therefore there will be no
valid mortgage . so again, 3rd persons can act as pledgor mortgagor
however it must be clear that in the contract of pledge or mortgage
the said owner is the party thereto, if he authorizes the principal
debtor to pledge or mortgage his property , he must have a separate
special power of attorney nevertheless, in the contract of pledge and
mortgage it must be signed by the principal debtor in his
representative capacity, not in his personal capacity, he signs it as an
agent of the mortgagor pledgor who is the owner of the property so
you relate that to a circumstance again to what we learned in
contract of agency. So here there can ba a valid contract of mortgage
even if we have 3rd person who act as such, the law clearly recognize
that there are instances where the persons not directly party in a loan
agreement may give a security of their property to secure principal
transaction. Now it is not necessary here no, you cannot see as a
defense for example ikaw nag act as amortaggor as in the case of
Vda. Jayme, you cannot allege na wala man koy nadawat sa loan,
here as long as nay consent was given by the pledgor or mortgagor
the fact the loan was solely for the debtor not binding the pledgor, but
take note on the part of the creditor to be considered in good faith he
must exercise due care in ascertaining whether indeed the principal
debtor acting as an agent of the mortgagor or pledgor, If really his
authorize to enter such contract, and relies only on the
representations made by the debtor. So you can relate that to what
happen in the case of cavite development bank. Now also take note
in real estate , when it comes to pledgor mortgagor you take into
consideration as to who will be liable for deficiency, because in
mortgage and pledge there is no automatic appropriation or default
or transfer na yung ownership sa creditor or mortgagee. A creditor
will just have the right to sell the property subject of the pledge or
mortgage and apply the proceeds if sold he can go after the debtor of
the remaining deficiency, now if what we have is a third person
mortgagor pledgor then such person should not be made liable for
the deficiency because his obligation really is to that extent of the
property, they are not considered as principal debtors; their obligation
is different from that of a guarantor or a surety. Yung property lang,
kung kulang yung property, to answer for the principal obligation the
pledgo and mortgagor cannot be held liable for the deficiency unless
otherwise stipulated by the parties.
Article 2086. The provisions of article 2052 are applicable to a pledge
or mortgage.
ART. 2052. A guaranty cannot exist without a valid obligation.
Nevertheless, a guaranty may be constituted to guarantee the
performance of a voidable or an unenforceable contract. It may also
guarantee a natural obligation.
So here being an accessory contract, the pledge and mortgage , the
principal contract must be valid .it also includes natural obligation as
well as obligations which are voidable, bakit? Voidable- valid until
annulled. As long as the mortgage or pledge is perfected or executed
when the voidable contract is still valid, not yet annulled, we could
still have a valid mortgage or pledge.
Article 2087. It is also of the essence of these contracts that when
the principal obligation becomes due, the things in which the pledge
or mortgage consists may be alienated for the payment to the
creditor.
Alright so you cannot appropriate the thing pledge or mortgaged if
the debtor does not pay, again what is the remedy of the creditor, to
sell the thing to payment of the obligation and then apply the
proceeds of the sale to the principal obligation as that is the proper
procedure.
Art. 2088. “The creditor cannot appropriate the things given by way of
pledge or mortgage, or dispose of them. Any stipulation to the
contrary is null and void
So what we have here-pactum commisorium.
Hechanova and Masavs.Hon. MidpantaoAdil
Facts:The case under review is for the annulment of a deed of sale
dated March 11, 1978, executed by Jose Y. Servando in favor of
Hechanova and Masa, covering three parcels of land situated in Iloilo
City. Claiming that the said parcels of land were mortgaged to him
(PioServando)in 1970 by the vendor, who is his cousin(Jose Y.
Servando), to secure a loan of P20,000.00, the plaintiff PioServando
impugned the validity of the sale as being fraudulent, and prayed that
it be declared null and void and the transfer certificates of title issued
to the vendees be cancelled, or alternatively, if the sale is not
annulled, to order the defendant Jose Servando to pay the amount of
P20,000.00, plus interests, and to order defendants to pay damages.
Attached to the complaint was a copy of the private document
evidencing the alleged mortgage (Annex A),which is quoted
hereunder:
August 20, 1970
This is to certify that I, Jose YusayServando, the sole owner of three
parcel of land under Tax Declaration No. 28905, 44123 and 31591 at
Lot No. 1, 1863-Portion of 1863 & 1860 situated at Sto. Nino St.,
Arevalo, Compania St. &Compania St., Interior Molo, respectively,
have this date mortgaged the said property to my cousin
PioServando, in the amount of TWENTY THOUSAND PESOS
(P20,000.00), redeemable for a period not exceeding ten (10) years,
the mortgage amount bearing an interest of 10% per annum.
I further certify that in case I fail to redeem the said properties within
the period stated above, my cousin PioServando, shall become the
sole owner thereof.
The defendants (Petitioners herein Hechanova and Masa)moved to
dismiss the complaint on the grounds that it did not state a cause of
action, the alleged mortgage being invalid and unenforceable since it
was a mere private document and was not recorded in the Registry
of Deeds; and that the plaintiff was not the real party in interest and,
as a mere mortgagee, had no standing to question the validity of the
sale. The motion was denied by the respondent Judge, in its order
dated June 20, 1978, "on the ground that this action is actually one
for collection."
Issue: Whether PioServando has a cause of action to annul the deed
of sale executed by the Jose Servando in favor of Hechanova and
Masa.
51 | P a g e

Held:No,It is clear from the records of this case that PioServando has
no cause of action. PioServando has no standing to question the
validity of the deed of sale executed by the deceased defendant Jose
Servando in favor of his co-defendants Hechanova and Masa. No
valid mortgage has been constituted PioServando's favor, the alleged
deed of mortgage being a mere private document and not registered;
moreover, it contains a stipulation (pactum comisorium) which is null
and void under Article 2088 of the Civil Code. Even assuming that
the property was validly mortgaged to the PioServando, his recourse
was to foreclose the mortgage, not to seek annulment of the sale.
So here in pactum commisorium it is only the stipulation that
is considered void. So here, article 2088 is in relation to 2087
wherein what we have here is a stipulation for automatic
appropriation of the thing pledged or mortgaged so this is pactum
commisorium. Now stipulations for pactum commsorium is null and
void because it is contrary to law, public policy and order? Why
because normally the value of the property here is less than actually
normal ang disparity sa value ng property sa obligation usually ang
value ng obligation is less than the value of the property itself, of
course normally hindi man magpayag ang creditor na security is less
than the principal obligation pag wala ng iba ang tatanggapin nya yan
but more often than not, hindi. So the law does not allow such
arrangement of pactum commisorium, what is the effect? Kaya nga
naghiram kasi gipit, so cge paningkamutan na lang nako na
magbayad so mahirap man, so default, if may automatic
appropriation, it would be very prejudicial on the part of the debtor
who was only forced to due to circumstances to borrow money with
property as a collateral. So here what is considered null and void is
only the stipulation for pactum commisorium, the obligation shall still
exist and not extinguish. What is regarded as null and void is the
stipulation you cannot just take the property pledged or mortgaged as
what is proper thing is to sell the property and apply the proceeds
thereof. So you have to observe the remedies provided by law
because again this is to protect the debtor who was already
constrained due to circumstances and by virtue of the default of the
principal debtor, again the remedy of the creditor, mortgagee,
pledgee is not to have ownership over the property transferred to him
because that is pactum commisorium but to sell the property and the
proceeds will apply. But we will learn later on that he can be one of
the purchasers in the said foreclosure proceeding for example in the
case of cavite.but still you have to follow the process for the
foreclosure sale to be considered as valid.
January 27, 2016
Transcribed by: Alona Suzell B. Ruyeras
So, Mortgage and Pledge. We have discussed the
essential requisites under Article 2085.
1. To secure a principal obligation;
2. Absolute ownership; and
3. Free disposal of the subject matter.
Article 2085. The following requisites are essential to the
contracts of pledge and mortgage:
(1) That they be constituted to secure the fulfilment
of a principal obligation;
(2) That the pledgor or mortgagor be the absolute
owner of the thing pledged or mortgaged;
(3) That the persons constituting the pledge or
mortgage have the free disposal of their property,
and in the absence thereof, that they be legally
authorized for the purpose.
Third persons who are not parties to the principal
obligation may secure the latter by pledging or mortgaging
their own property.
So again, these three (3) requisites must exist for a valid
contract of pledge and mortgage.
Now, under Article 2086:
Article 2086. The provisions of Article 2052 are applicable
to pledge and mortgage.
Article 2052. A guaranty cannot exist without a valid
obligation.
Nevertheless, a guaranty may be constituted to
guarantee the performance of a voidable or an
unenforceable contract. It may also guarantee a natural
obligation.
So, it emphasizes the accessory nature of a contract of
pledge and mortgage and that it may be constituted to guarantee the
performance of a voidable or an unenforceable contract, as long as it
is valid.
Article 2087:
Article 2087. It is also of the essence of these contracts
that when the principal obligation becomes due, the things
in which the pledge or mortgage consists may be alienated
for the payment to the creditor.
However, you must relate Article 2087 to Article 2088:
Article 2088. The creditor cannot appropriate the things
given by way of pledge or mortgage, or dispose of them.
Any stipulation to the contrary is null and void.
So last time we have emphasized that a Pactum
Commissorium is a stipulation for the automatic appropriation of the
thing pledged or mortgaged. Article 2088 is clear that it is null and
void, clearly against law, public policy and public order. Why?
Because usually, the amount loaned is less than the value of the
thing pledged or mortgaged.
~Nag brownout kadali (Random Chikka)~
Okay, let’s go back to Pactum Commissorium it is a
stipulation for the automatic appropriation of the thing pledged or
mortgaged.
So, what would happen here? Of course, the debtor agrees
to this pledge or mortgage because he is in dire need of money. So
what would happen? In Pactum Commissorium, the creditor, in
essence, takes advantage of the predicament of the debtor.
So, what should happen if the debtor fails to pay? Then the
property pledged or mortgaged should be sold and the proceeds will
be applied to the principal obligation. Now when we say that it should
be sold, and subsequently the creditor appropriates the thing for
himself, that is NOT Pactum Commissorium because there is no
automatic appropriation because you have to go through the
process.
Now this concept of Pactum Commissorium should be
distinguished from other engagements provided under Obligations
and Contracts or under the Civil Code. We have to distinguish it from
Assignment of Credit.
Q1: What do you mean by Assignment of Credit?
A1: There is an agreement Ma’am by virtue of which the owner of the
credit known as the assignor, by legal cause such as sale, dation in
payment, exchange or donation, without need of the consent of the
52 | P a g e
debtor, transfers his credit and its accessory rights to another person
known as the assignee, who acquires the power to enforce it to the
same extent as the assignor could enforce it against the debtor.
Q2: Alright, in the case of Manila Banking vs. Teodoro, do we have
Pactum Commissorium or Assignment of Credit?
A2: There is an Assignment of Credit, Ma’am.
Q3: What happened here?
A3:
Manila Banking vs. Teodoro
Facts:
The Teodoros executed in favour of Manila
Banking, promissory notes.
The promissory notes contain a stipulation that
the interest due, if not paid, shall be added to the amount
due.
It appears, however, that one of the Teodoros
executed in favour of Manila Banking a Deed of
Assignment of Receivables.
For failure of the Teodoros to pay, an action was
instituted against them. The Teodoros, however, contend
that the assignment had the effect of extinguishing their
obligation.
Issue:
W/N the Assignment of Receivables had the effect
of payment of all the loans contracted by the Teodoros
from Manila Banking
Ruling: NO
The Assignment of the Receivables served as
collateral security. Ownership was not transferred to Manila
Banking upon assignment. To be specific, it was treated as
a Pledge as it is the contract of collateral security with the
least transmission of rights.
Q4: What do you call that kind of interest? (Ma’am referring to the
stipulation that the interest due, if not paid, shall be added to the
amount due)
A4: Compound interest.
Q5: What is the effect of the Assignment of Credit?
A5: The Court said Ma’am that it was executed only as a security.
Q6: What do you mean by that? What was the intention of the
Assignment of Receivables or Assignment of Credit?
A6: Only to secure the obligation, Ma’am.
Q7: You said that another issue is W/N there can be the benefit of
excussion? Can it be exercised here?
A7: In this case Ma’am, it cannot. The Supreme Court said that
Article 2058 cannot apply.
Q8: You said it is a security, what kind of security, real or personal?
Surety or guaranty?
A8: Personal Ma’am? Guaranty Ma’am??
Q9: But you said it is not entitled to the benefit of excussion?? What
was the interpretation here? That the Assignment is to be treated as
what?
A9: Collateral Security.
Q10: Correct! But What kind of collateral security??
A10: Pledge, Ma’am.
Q11: Why was it considered as a Pledge and not as a Contract of
Guaranty?
A11: (Ma’am answers her own question and goes further) We have it
there, noh. Interpretation of Contracts. Lesser transmission of rights
and interests. What is the subject here in the Deed of Assignment?
Assigned receivables which should act as security. What are
receivables? These can be valid subject matter in a contract of
Pledge. Alright, take your seat.
What is the effect of this assignment of credit? An
Assignment of Credit does not amount to Pactum Commissorium,
there is no automatic appropriation. The agreement, here, is that by
virtue of which the owner of the credit by legal cause, without need of
the consent of the debtor, transfers his credit and its accessory rights
to another known as the assignee, who acquires the power to
enforce it to the same extent as the assignor could enforce it against
the debtor.
Now, take note that in this assignment executed by the
parties, it was shown that there was NO TRANSFER OF
OWNERSHIP of these receivables to the bank and appellants were
not released from the loans they incurred under the promissory
notes. It is clear that the Deed of Assignment was executed merely
as a security. So here, the assignment of receivables did not result
from a sale transaction. So again, although it is entitled as an
Assignment of Credit, also take into consideration what was the
intention of the parties.
It cannot be considered as being constituted as a dation in
payment on behalf of the appellant’s loans. At the time of the deed of
assignment was executed, the loans were non-existent yet. At most,
it can be a dation in payment for the existing amount of P10,000 only.
Now, what is clear here is that the assignment was
intended as a collateral security for the loans of the appellant as a
continuing guaranty for whatever sums the defendant will be owing to
the plaintiff.
However, as there is a doubt as to whether this will be
considered a pledge or a dation in payment, presumption is in favour
of pledge, being the lesser transmission of rights and interests.
Here, appellants remain as principal debtors; the deed of assignment
clearly guarantees the obligation in the concept of a pledge and not
as a guarantor.
It is, of course, the essence of a pledge or mortgage, that
when the principal obligation becomes due, the things in which the
pledge or mortgage consists may be alienated for the payment to the
creditor. Appellants are both the principal debtors and pledgors-
mortgagors. So resort to one is therefore resort to the other.
So we also have the case here of Alcantara vs. Alinea:
Alcantara vs. Alinea
Facts:
This involves an agreement between Alcantara
and Alinea such that if Alinea will not be able to pay his
loan to Alcantara, a house and lot will be transferred to the
name Alcantara.
Alinea contends that the agreement between
them was a Pactum Commissorium and hence, null and
void.
Issue:
W/N the agreement between them providing for
an alleged automatic appropriation of the property
constitutes Pactum Commissorium
Ruling: NO
What really existed between them is a promise of
53 | P a g e
sale such that if Alinea will not be able to pay the loan, then
the promise of sale would push through.
Q1: Was there really automatic appropriation?
A1: There was really no automatic appropriation, Ma’am. What really
existed between them is a promise of sale such that if Alinea will not
be able to pay the loan, then the promise of sale would push through
and the consideration of the loan will be deemed paid, Ma’am.
Alright, Thank you. So here, there is no Pactum
Commissorium. What we have here is a principal obligation of a
contract of loan and a promise of a sale of a house and lot the price
of which is equal to the amount loaned. And if within a fixed period of
time, such amount will not be paid by the debtor, such property will
be sold. The Supreme Court held that such contract is legal if the
promise of sale is not vitiated. Because according to the agreement
between the parties, the price of the sale is to be the amount of the
loan to be paid. Neither will the loan be null or illegal since the
agreement provides that in the event of failure of payment, the sale
of the consideration will take effect and the amount of loan will be
paid.
Now, it does not appear that the property here, subject of
the promise of sale, was mortgaged in favour of the creditor. In order
to constitute a valid mortgage, it is indispensable that the instrument
be registered.
The property could not be pledged since it is not a personal
property and despite the contract, the debtor continued in possession
thereof.
Neither was there an antichresis in the said contract of loan
in as much as the creditor has never been in possession thereof.
Now here, the property belonging to the defendants and
described in the contract should be sold for the aforesaid sum if the
agreement is to be complied with.
What is emphasized in this case of Alcantara vs. Alinea?
What is prohibited in Pactum Commissorium is AUTOMATIC
APPROPRIATION. Now, looking at the facts here in Alcantara, it
seems that there may be an appropriation but it is not automatic in
the sense that what you have is only a promise of a sale.
However, be cautious, noh, in applying the principle in
Alcantara vs. Alinea because if it can be shown that this
arrangement of a contract of loan with a promise of a sale is
(intended) to circumvent Article 2088, then the effect thereof is that it
can be considered as a Pactum Commissorium.
Now, also take note here that the general rule, as applied
in Article 2088 is that what is prohibited or not allowed is automatic
appropriation. If an act is still required to consummate the
transfer of the property from the debtor to the creditor, then,
there is no Pactum Commissorium, and therefore, it is allowed.
That was what was applied in the case of Alcantara vs. Alinea.
Now, however, we also have to consider, the two (2)
elements for Pactum Commissorium.
Q1: What are these (two (2) elements for Pactum Commissorium)?
A1: The two (2) elements, Ma’am, are:
1. There must be a pledge, mortgage or antichresis wherein
the property is pledged or mortgaged by way of security for
the payment of the principal obligation;
2. There is a stipulation for automatic appropriation in case of
non-payment within a fixed period.
Q2: Now, are these two (2) requisites present in the case of Uy Tong
vs. CA?
A2: No Ma’am.
Q3: Okay, what happened in this case?
A3:
Uy Tong vs. CA
Facts:
Spouses Uy Tong were the owners of an
apartment located in the land and building owned by
Ligaya Investments, Inc.
The Spouses purchased motorized vehicles from
Bayanihan Automotive. The contract provided for a
stipulation that in case of non-payment of the obligation,
Spouses Uy Tong will execute a Deed of Sale transferring
the apartment to Bayanihan Automotive.
Later on, the Spouses Uy Tong failed to pay their
obligation.
Issue:
W/N there was a Pactum Commissorium.
Ruling: NO
The two (2) elements of Pactum Commissorium
are:
1. There must be a pledge, mortgage or antichresis
wherein the property is pledged or mortgaged by
way of security for the payment of the principal
obligation;
2. There is a stipulation for automatic appropriation
in case of non-payment within a fixed period.
In this case, both requisites were absent.
Q4: Isn’t it that there was a stipulation in their agreement that it
(Bayanihan Automotive) shall “automatically” become the owner of
the apartment?
A4: Yes Ma’am. But the requisites of a Pactum Commissorium were
not fulfilled, Ma’am. First Ma’am, there was no mortgage in this case.
And second Ma’am, there was no automatic appropriation because
RTC had a hand in the decision Ma’am.
Q5: How was the title vested to Bayanihan?
A5: By the decision of the court Ma’am.
Q6: So, not by automatic appropriation?
A6: Yes Ma’am.
Alright, Take note of the two (2) requisites for there to be a
Pactum Commissorium:
1. There must be a pledge, mortgage or antichresis wherein
the property is pledged or mortgaged by way of security for
the payment of the principal obligation;
2. There is a stipulation for automatic appropriation in case of
non-payment within a fixed period.
In the absence of any of these requirements, we cannot say that
the stipulation is Pactum Commissorium.
Here, there is no indication of any mortgage entered into by
the parties as what was entered into was a sale and purchase of
trucks.
Second, there was no automatic appropriation in favour of
Bayanihan. Take note that Bayanihan filed an action in court for
specific performance and the Spouses elected to execute the Deed
of Assignment pursuant to a judgment in that case. So there was no
54 | P a g e
automatic vesting of title in favour of Bayanihan because it took
the intervention of the trial court to exact fulfilment of the
obligation. By its very nature, it is anathema to the concept of
Pactum Commissorium which is automatic appropriation.
Take note of these requisites.
However, for those familiar with Pactum Commissorium,
what they usually do is not provide for automatic appropriation. But
instead of requiring the debtor to execute a Deed of Mortgage, what
they require is the execution of a Deed of Sale. So what is the effect
of the execution of that Deed of Sale as a security for the principal
obligation? What do you call that? EQUITABLE MORTGAGE.
So if you cannot question that (arrangement) based on
Article 2088 on Pactum Commissorium since the requisites are not
present, you can still apply what we learned in Sales on Equitable
Mortgage. Being an equitable mortgage, there is no transfer of
ownership. If the intention was to subject the property to a mortgage
and not to a sale - no transfer of ownership, foreclose the property
and apply the proceeds to the principal obligation.
Now, another thing that you should take note of is to
differentiate Pactum Commissorium from Dacion en Pago.
Q1: What is the difference between these two arrangements?
A1: In Dacion en Pago, Ma’am, it is a special mode of payment
wherein the property is given in exchange for an existing monetary
debt. While in Pactum Commissorium, there is a stipulation which
grants the automatic acquisition by the creditor of the property of the
debtor.
Q2: What else?
A2: In Pactum Commissorium, there is a mortgage or pledge of a
property as a security for the principal obligation while in Dacion en
Pago, it extinguishes an existing obligation or an existing monetary
debt.
Q3: Alright, what happened in the case of Spouses Ong vs. Roban
Lending?
A3:
Spouses Ong vs. Roban Lending
Facts:
Spouses Ong obtained several loans from Roban
Lending. As a security for the loans, they executed a Real
Estate Mortgage over their properties in Tarlac.
Later on, they executed an amendment to the
Real Estate Mortgage as well as a Dation in Payment
Agreement wherein it was stipulated that the Spouses Ong
will assign the properties to Roban Lending as a settlement
for their obligation.
Moreover, they executed a Memorandum of
Agreement (MOA) wherein it was stipulated that they shall
settle their obligations within one (1) year and if they fail to
do so, then they will have to enforce the Dation in Payment
Agreement they entered into.
Later on, the Spouses Ong filed an action for the
Declaration of Nullity of the mortgage contract they entered
into with Roban Lending saying that it constitutes Pactum
Commissorium.
Issue:
W/N there was Pactum Commissorium
Ruling: YES
The agreements entered into constitute Pactum
Commissorium and are deemed void.
To reiterate the two (2) elements of Pactum
Commissorium are:
1. There must be a pledge, mortgage or antichresis
wherein the property is pledged or mortgaged by
way of security for the payment of the principal
obligation;
2. There is a stipulation for automatic appropriation
in favour of the creditor in case of non-payment
within a fixed period by the debtor.
In this case, these elements are present.
Q4: So was there a valid mortgage executed?
A4: Yes Ma’am xxx.
Q5: So what is the effect of that judgment that it is Pactum
Commissorium?
A5: The stipulation shall be considered void. The Supreme Court
also held Ma’am that it is of no moment that the Spouses freely
entered into the agreement since it is prohibited by law.
Q6: How will it affect the principal obligation?
A6: However, the principal obligation will still stand.
Alright, Thank You. So again, take note that Pactum
Commissorium is considered null and void even if expressly waived,
(see) Article 2088, even if it is voluntarily agreed upon by the
parties, again, Pactum Commissorium is still not allowed. Very
clear - any stipulation to the contrary shall be null and void even if
there was no vitiation of consent.
Now, under the facts of this case, the Memorandum of
Agreement and Dation in Payment constitute Pactum
Commissorium. While it is true that it must have the two (2) requisites
we mentioned earlier, that there must be a mortgage and there must
be automatic appropriation, it is evident here that they initially
executed a Real Estate Mortgage which was amended and on the
same day, executed a Dation in Payment Agreement. Although the
Memorandum of Agreement and Dation in Payment do not contain
provisions for the foreclosure proceedings and redemption, it
appears that they entered into it in the Amended Real Estate
Mortgage.
Failure of petitioners to pay their debt within the one (1)
year period gives respondent the right to enforce the Dation in
Payment. But, is it really a Dation in Payment as provided in Article
1245 of the Civil Code? No, because Dation in Payment is a special
form of payment where an object is given for the monetary obligation
of the debtor which the creditor accepts to extinguish the obligation.
But, it does not contemplate automatic appropriation.
In this case, while it was denominated as a Dation in
Payment, respondent here, in effect automatically acquires
ownership of the properties upon failure to pay the obligation within
the stipulated period. The alienation of the properties was by way
of security and not by satisfying the debt. So the Dation in
Payment did not extinguish petitioner’s obligation to respondent.
Being Pactum Commissorium, it is considered void for being
prohibited by law.
So again, distinctions between Pactum Commissorium and
Dation in Payment:
Pactum Commissorium Dation in Payment
Void (Article 2088) Valid
A stipulation providing for A special form of payment
automatic appropriation in whereby property is
favour of the creditor in alienated to the creditor in
case of non-payment within payment of a debt.
a fixed period by the debtor.
There is an original contract There is a simple obligation
55 | P a g e
of pledge, mortgage or
antichresis.
The property upon non-
payment is automatically
transferred to the creditor.
of a contract of loan and not
necessarily pledge,
mortgage or antichresis.
No automatic transfer.
So take note of the indivisibility of a pledge and mortgage.
That is also what is emphasized in Article 2090:
Article 2090. The indivisibility of a pledge or mortgage is
not affected by the fact that the debtors are not solidarily
liable.

Remember in Dacion en Pago, you have to get the consent
of the creditor. The creditor CANNOT be forced to agree to that
Dacion en Pago arrangement as he has other remedies available
under the law. In Dacion en Pago, we apply the Law on Sales. While
Pactum Commissorium, by itself, is considered not valid.
Now, Article 2089:
Again, recall your Obligations and Contracts. Solidarity is
different from indivisibility. Indivisibility refers to the subject matter
while solidarity refers to the juridical tie between and among the
debtors or creditors. It does not mean that if an obligation is
solidary that it is already indivisible. Or just because we have joint
debtors, the obligation is divisible. Do not confuse indivisibility with
solidarity and joint with divisibility.

Article 2089. A pledge or mortgage is indivisible even
though the debt may be divided among the successors in
interest of the debtor or of the creditor.
Therefore, the debtor’s heir who has paid a part
of the debt cannot ask for the proportionate extinguishment
of the pledge or mortgage as long as the debt is not
completely satisfied.
Neither can the creditor’s heir who received his
share of the debt return the pledge or cancel the mortgage,
to the prejudice of the other heirs who have not been paid.
From these provisions is excepted the case in
which, there being several things given in mortgage or
pledge, each one of them guarantees only a determinate
portion of the credit.
The debtor, in this case, shall have a right to the
extinguishment of the pledge or mortgage as the portion of
the debt for which each thing is specially answerable is
satisfied.
Alright. Take note, pledge and mortgage are indivisible
contracts. So even if the debtor has partially paid his obligation, he
cannot ask for a partial release of the pledge or mortgage.
In fact, even if the debtor dies, and let us say, meron syang
apat (4) na heirs, and the obligation is P100,000 subject to a pledge
or mortgage, if one of the heirs will pay his proportionate share, he
will pay P25,000 to the creditor, even if the creditor accepts it, he (the
heir who paid) cannot seek for the release of the property subject of
the pledge or mortgage.
Ganun din, noh, on the part of the creditor. If for example
the creditor dies, and let us say, he has two (2) heirs, so P50,000
each ang share nila dun sa receivable from the debtor, if the debtor
pays P50,000 to one of the heirs of the creditor, again, the heir of the
creditor cannot be compelled to release half of the pledge or the
mortgage.
So for example, you have an obligation of P100,000. You
have four (4) debtors. As a general rule, they are considered as joint
debtors, in the absence of stipulation. If one of the debtors pays his
proportionate share of P25,000 to the creditor, he cannot seek for the
release of the security of the obligation, whether it is a pledge or
mortgage. The creditor gets to hold the property. But of course,
considering that there is already partial payment, what is the effect?
If he sells it beyond the remaining balance of P75,000, then he must
return the proceeds to the debtors. So yun lang yun. Kaya lang
andyan pa rin yung property to answer for any remaining balance of
the obligation. Just because there’s partial payment does not mean
that the mortgage or pledge is already released. Again, these
contracts are indivisible.
So Article 2091:
Article 2091. The contract of pledge or mortgage may
secure all kinds of obligations, be they pure or subject to a
suspensive or resolutory condition.
So essentially, the same thing that we have discussed in
guaranty, these are accessory contracts. They are valid as long as,
number one requirement, they secure valid obligations. Illegal, void,
non-existent or fictitious obligations are not valid and therefore,
any pledge or mortgage securing such obligation will also not
be considered as valid.
Now the principal obligation may be a pure obligation – not
subject to any condition, or it may be subject to a suspensive or
resolutory condition. As long as it is valid, it can be secured by a
pledge or mortgage. In fact, as we have discussed before, it can
even secure a natural obligation.
Now, Article 2092:
Article 2092. A promise to constitute a pledge or mortgage
gives rise only to a personal action between the contracting
parties, without prejudice to the criminal responsibility
incurred by him who defrauds another, by offering in
pledge or mortgage as unencumbered, things which he
knew were subject to some burden, or by misrepresenting
himself to be the owner of the same.

Also, just because you have several things subject to a

pledge or mortgage, it does not mean that if you have partially paid it,
one of the things can already be released. So what do you mean by
that? (For example), the debtor borrowed P100,000. Let us say,
magkano ba ang MacBoook? Sabihin nalang natin P80,000, then a
diamond ring worth P20,000, to secure the obligation worth
P100,000. Just because you paid P20,000, you cannot seek for the
release of the diamond ring only.
Now, it’s different if you borrow P80,000 and you have that
MacBook as a security. And then you have another obligation, you
borrowed another P20,000 and you have that diamond ring as a
security for that obligation. Because in that instance, we have two (2)
separate contracts of pledge. So if you will be able to pay the
P20,000, the obligation secured by the diamond ring will be
extinguished. You can demand for the return of the said ring.
Alright. Remember, pledge is a real contract perfected by
delivery. But what is the effect if the thing subject of the contract has
not yet been delivered but you already agreed with the pledgor?
What you have is only a promise to constitute a pledge or even a
mortgage. A consensual contract - valid, perfected. What is the
effect? It is still enforceable. But the effect is that it will only be a
personal action not a real action compared to that of a pledge or
mortgage.
If it is a real contract of pledge or mortgage, the thing is, as
against the property itself, and not against the pledgor-mortgagor. So
a real action is an action against the real property, as compared
to an action against a person, which is considered as a personal
action.
So a promise to constitute pledge or mortgage is valid if
accepted by the other party but it will only give rise to a personal right
56 | P a g e
binding upon the parties themselves only. And no real right is created
over the property. When we say real right, it is a right that attaches to
the property. You can assert your right as a pledgee or mortgagee
not just against a debtor or mortgagor but as against third parties
also.
What exists in a promise is only a right of action to compel
the fulfilment of the promise, but again, no pledge or mortgage yet in
the absence of the essential requisites for their perfection.
Now, also in Article 2092, refers to your provision in the
Revised Penal Code wherein the crime of estafa is committed by the
person who pretends to be the owner of the property and sells,
conveys or encumbers the same knowing that the real property is
encumbered and shall dispose of the same as unencumbered.
So those are the provisions that are common to Pledge
and Mortgage. Take note of these provisions as we will still apply
them to Mortgage.
January 28, 2016 (1st Hour)
Transcribed by: Zarah Donna S. Domingo
So we are already done with the provisions that are common to
pledge and mortgage. Those are 2085-2092.
How about the provisions thatare specific to pledge only? We
have Article 2093:
Article 2093: In addition to the requisites prescribed in
Article 2085, it is necessary, in order to constitute the
contract of pledge, that the thing pledged be placed in the
possession of the creditor, or of a third person by common
agreement.
So in addition to the requisites in 2085, it must have a principal
obligation, that the pledgor is the absolute owner thereof, that it has
been (word not audible) of subject matter.
You have this requisite in 2093 which is delivery, placed in the
possession of the creditor. This means that as we’ve mentioned
before, pledge is a real contract which requires delivery for its
perfection. When we say delivery, what is delivered is generally the
property itself and placed in the possession of the creditor. In the
absence of delivery, there could be no valid contract of pledge.
Do you have a valid pledge in the case of McMikingvs Martinez? No,
there is no valid pledge in this case.
MCMIKING VS MARTINEZ
FACTS: Martinez obtained a judgment against Aniversario.
Subsequently, sheriff levied upon the paileboat owned by
the latter. Go Juna intervened claiming that said boat had
been pledged to him even before the judgment. Said
pledge was evidenced by a public instrument. The
paileboat, however, was not delivered to Go Juna.
ISSUE: Is there a pledge in this case? No
RULING: A pledge of personal property to secure an
indebtedness is without force and effect unless the
property pledged is delivered to the pledgee or to some
third person. While the pledge was ineffective against
Martinez, it still serves as an evidence of indebtness.
Q1: What is the evidence of Go Juna that the boat was pledge in his
favor?
A1: A public instrument bearing a date, February 1907,that they
entered into a contract with Maria Del Aniversario with the movable
property
Q2: Who was favored by the Supreme Court, Juna or Martinez?
A2: Martinez because there was no valid pledge between Maria
Aniversarioand Go Juna. The pledge here was void because there
was failure to deliver to the creditor or to third person agreed upon of
the property that was pledged. So the said movable property was not
delivered, the pledge was not valid.
Q3: What is the value of that contract of pledge in the public
instrument if there was no perfected pledge at all? No value at all, it
cannot be used anywhere? Can it be used?
A3: That can be used as an evidence of indebtedness. It is not
enough to show that there is pledge by virtue of public instrument
because again, a pledge is a real contract, however that document
can still have a value because it can be used as an admission of
indebtedness. But in this case, the SC cannot rule on that because
the debtor is not a party. Second, it could also be used with regard to
preference of credit since it is an obligation in a public instrument.
While it is true that there was a pledge, contract, evidence in a public
instrument, that pledge was ineffective. The document of pledge in a
public instrument contains an admission of debt. It is in a public
instrument but again there could be no valid contract of pledge.
A pledge of personal property to secure an indebtedness is without
force or effect unless the property pledged is delivered to the pledgee
or to some third person agreed upon as provided in Article 2093.
Now where a pledge is in the form of a public instrument, as in the
case of McMiking, duly executed as such, contains an admission of
the indebtedness in a specified amount to secure which debt said
pledge was made, while the pledge is void for failure of delivery,
nevertheless it could be considered as an evidence of indebtedness
and appearing in a public instrument, it would take preference over
other creditors of Maria Aniversario, but not with regard to that
specific property, just an evidence of indebtedness.
The general rule here is that the kind of property involved is personal
property that can actually be delivered, actual possession can be
transferred to the pledgee. The creditor himself will take possession
of the thing or a third person by common agreement, or as agreed by
the creditor and debtor.
Is it possible here that we have here symbolic or constructive
delivery? Yes it is possible as an exception in relation to documents
evidencing incorporeal rights for example, if what you have is
warehouse receipt law wherein the goods delivered for storage in the
warehouse receipt is evidence by that warehouse receipt, what you
would deliver to secure your obligation is the warehouse receipt, then
that constitutes valid delivery, giving rights to a perfected contract of
pledge.
So if it is delivered in a warehouse covered by a warehouse receipt,
no need to redeliver, yungkuninmolahat for example yung stocks or
merchandise sa warehouse, physically transfer, deliver it to the
creditor. The creditor will just again put it back to storage. So in
warehouse receipts law, you can deliver the document evidencing
possession over the goods in storage. R there would be an instance,
kahitwalang warehouse receipt, the goods are kept in a warehouse
but not covered by warehouse receipt, pero let us say merongsusi,
instead of getting out the goods then ibaliklang din ng creditor-
pledgee, you just deliver instead the key to the warehouse or storage
room. So that is symbolic delivery. Still you can have a valid contract
of pledge. But you could not have a constructive delivery here by
virtueof an execution of a public instrument.
Section 8 could apply, symbolic or constructive delivery, if the
circumstances of the situation make it difficult or not reasonable for
actual delivery or it would be redundant, then symbolic or
57 | P a g e
constructive delivery may be allowed as an exception. But again, this
is only an exception, it is not applicable in all instances. It is
applicable if what you have is an incorporeal right as what is provided
in 2095.
Article 2095: Incorporeal rights, evidenced by negotiable
instruments, bills of lading, shares of stock, bonds,
warehouse receipts and similar documents may also be
pledged. The instrument proving the right pledged shall be
delivered to the creditor, and if negotiable, must be
indorsed.
So this is what I referred to earlier on warehouse receipts, what is
delivered is not actually the goods but the documents evidencing the
possession or incorporeal rights over the goods. Warehouse receipts
and similar documents, may be pledged, not necessarily the thing but
merely the documents evidencing the right to (word not audible).
Incorporeal rights evidence by documents whether negotiable or not,
may also be pledged, the document must be delivered to the
pledgee. If negotiable, it must be endorsed in favor of the creditor.
Now 2094, what are the subject matter in the pledge:
Article 2094: All movables which are within commerce
may be pledged, provided they are susceptible of
possession.
All movable which are within commerce, may be pledged, provided
they are susceptible of possession. So a pledge or chattel mortgage
is confined and limited to personal property. It cannot be extended
and made to apply to real properties. These are the valid subject
matters or things subject of pledge. It must be within commerce of
man and susceptible of possession.
We must take not of this because there are things which are within
the commerce of men but which are not susceptible of possession or
movable properties which are not within the commerce of men. Now
Article 2096:
Article 2096: A pledge shall not take effect against third
persons if a description of the thing pledged and the date of
the pledge do not appear in a public instrument.
Alright, the requirements in 2096 are not necessary for the validity of
the pledge. But these are necessary to bind third persons. What are
these?
1.) Description of the thing pledged;
2.)Date of the pledge;
3.)This must appear in a public instrument.
Why is it necessary that the thing pledged and the date must be
included in the public instrument to bind third person. So that it would
not be easy for the pledger to pledge the thing several times if the
contract of pledge actually disclosed the description as well as the
date of the pledge. So again, it must be duly notarized, may notary
public.
What is the effect if it is not duly notarized? It does not bind the
holder.
What about with regard to validity of the pledge? It is valid as regards
the parties, the pledger and the pledgee, but not with regard to third
persons.
CALTEX VS CA
FACTS: Security Bank (SEBTC) issued Certificate of Time
Deposit (CTDs) in favor of depositor Angel dela Cruz who
was himself the depositor of the amount subject of the
CTDs. The CTDs indicated that they were payable to
bearer. Dela Cruz delivered the CTDs to Caltex as
“security” for purchases made with the latter. Dela Cruz
then obtained a loan from SEBTC and thereafter executed
a Deed of Assignment authorizing the bank to apply the
said time deposits to the payment of the loan. Caltex
presented the CTDs to SEBTC but the latter rejected the
former’s claim for failure to show a copy of the requested
documents evidencing the guarantee payment.
ISSUE: Who has better right over the CTDs? SEBTC
RULING: Art 2095 provides that incorporeal rights
evidenced by negotiable instruments, may also be pledged.
It also provides that the instrument proving the right
pledged shall be delivered to the creditor, and if
negotiable, must be indorsed.Art 2096 requires that for a
pledge to take effect against third persons, the following
must appear in a public instrument: (1) description of the
thing pledged; and (2) date of the pledge. The CTDs in this
case not having been indorsed to Caltex and there being
no document evidenci ng contract of pledge or guarantee,
Caltex cannot claim through the CTDs.
Q1: Do you have a valid contract of pledge? Are all the essential
requisites for the perfection of pledge not present in this case in favor
of Caltex?
A1: There was a contract of pledge in favor of Caltex. All the
requisites in 2085 are present at the time it was delivered to Caltex
and by virtue of that delivery, there was a valid contract of pledge.
Q2: Between the bank and Caltex, who has a better right over these
certificates of time deposit?
A2: The Bank because the loan obtained by Angel from the Bank
was in apublic instrument. However, Caltex cannot show any proof of
indebtedness or whether there was a contract of pledge between
them so therefore, PNB has a better right.
Take note here that in this case of Caltex vs CA, there was also a
reference to the provisions in your negotiable instruments law. Notice
here that it was emphasized that the negotiable instrument, in this
case, the certificate of time deposit, is a bearer instrument. So it can
be negotiated by delivery. While it can be negotiated by delivery,
technically, it was not negotiated in favor of Caltex as it was delivered
to Caltex to guarantee the purchases of fuel products by Mr. Dela
Cruz. So here, although the CTTs are bearer instruments, a valid
negotiation for the true purpose and agreement between Caltex and
Dela Cruz requires both delivery and indorsement in the sense that it
was delivered for the security for the purchases of fuel products.
So it can be said that there was no negotiation in the sense of a
transfer of legal title to the certificate of time deposit. It is only needed
as security.
We can still consider Caltex here as a holder for value by reason of
the lien. Have you reached Section 27 sa NIL? What you have there
is a holder for value constituting or by reason of the lien where the
holder is a mere pledgee. As such holder of collateral security, in this
case Caltex being pledgee, but the requirements therefore and the
effects therefore not provided in the NIL shall be governed by the
provisions of pledge under the Civil Code.
This is an application of the law. While it is true that during your
exams, compartmentalize siya, itolangyung topic, even sa Bar exam,
Civil Law, Commercial Law, in real life, you cannot compartmentalize
whatever knowledge that you have or whatever knowledge you
should apply.
So in this case, there was reference to NIL, but NIL does not tell us
whether there was a valid contract of pledge or whether the pledge is
binding to third persons.
In this case, while it is true that the certificate of time deposits were
delivered to Caltex, Caltex failed to produce any document
58 | P a g e
evidencing any contract of pledge or guarantee between it, Caltex
and Dela Cruz. Mere delivery of the CTT did not legally vest in Caltex
any right effective against and binding upon respondent bank, third
person. The requirement under 2096 is not a mere adjective law
prescribing the mode whereby proof may be made of the date of a
pledge contract, but a rule of substantive law prescribing a condition
without which the execution of a pledge contract cannot affect third
persons adversely.
So even if there was a valid contract of pledge between DelaCruz
and Caltex, that is not binding in favor of pnb in the absence of
compliance with the requirements under 2096. The bank definitely
has the better right over the CTDs in question.
So again, first, only delivery sufficient for validity. To bind third
person, three requisites must be present, description, date ina public
instrument. Even if the pledge is in writing, if it is not notarized, sill
cannot bind third persons. Although again it is valid between parties.
What is the object of this requirement? To forestall fraud because the
debtor may attempt to conceal this property from his creditors when
he sees this in danger of execution by simulating a pledge para di
makuhang other creditors wherein the creditor-pledgee will be
considered as an accomplice. That is why it must be in a public
instrument because if it is in a public instrument, duly attest to the
truthfulness that indeed there was a valid contract of pledge. In case
it is not, you will be held criminally liable for perjury and not just as to
the civil liability of your obligation. Article 2097:
Article 2097: With the consent of the pledgee, the thing
pledged may be alienated by the pledgor or owner, subject
to the pledge. The ownershipof the thing pledged is
transmitted to the vendee or transferee as soon as the
pledgee consents to the alienation, but the latter shall
continue in possession.
Remember, there is no transfer of ownership even if the
thing was delivered in the contract of pledge because a pledge
merely creates a lien over the thing, merely an encumbrance. It does
not dispossess the owner of his ownership of the thing, there is no
transfer of ownership in pledge, pledgor remains the owner thereof.
However, being the owner, he can sell the property to third person
but 2097 provides a condition, that the pledgee-creditor must consent
to the alienation. Even if the thing has already been pledged but the
owner-pledgor wants to sell the thing, he can do so but subject to the
pledge. That is why there is a need for the pledgee creditor to give
his consent. Again the thing still remains in the possession of the
pledgee creditor because of that delivery perfecting the pledge. Only
the rights pertaining to the subsequent buyer will be transferred. If
the debtor cannot pay, the pledgee may still proceed against the
thing pledged, even if it was sold to third persons. So if the debtor
cannot pay, the pledgee may still proceed against the thing pledged
provided there is conformity with the requirements under 2096 to
bind third persons. We have here the case of Estate of Litton vs
Mendoza.
ESTATE OF LITTON VS MENDOZA
FACTS: Mendoza issued 2 checks in favor of Tan but the
bank did not release amounts in the check because
Mendoza order “stop payment.” Tan brought an action
against Mendoza. While the action was pending, Tan
assigned his credit to Litton. A compromise agreement was
allegedly entered into by Tan and Mendoza absolving
Mendoza of liability. Tan claimed that the compromise was
void because the deed of assignment in favor of Litton
meant there was no more right which he may alienate in
favor of Mendoza.
ISSUE: Will previous knowledge of Mendoza of the
assignment made by Tan estop him from invoking the
compromise agreement as ground for dismissal? Yes
RULING: The deed of assignment shows that it fulfills the
requisite of a pledge or mortgage. Although the pledgee or
the assignee Litton did not ipso facto become the creditor
of Mendoza, the pledge being valid, the incorporeal right
assigned by Tan in favor of Litton can only be alienated by
the Tan with due notice and consent of Litton. To allow the
assignor to dispose of or alienate the security without
notice and consent of the assignee will render nugatory the
very purpose of a pledge or an assignment of credit.
Q1: Who is the pledger and who is the pledgee in this case?
A1: Tan is the pledger-assignor, George Litton is the assignee
pledgee.
Q2: In this case, did Mendoza already know that there was this
pledge in favor of Litton?
A2: Yes he was aware because he was already notified of that and
during the pendency of the civil actions between Tan and Mendoza,
he was already aware of the Deed of Assignment. The SC also noted
that such deed of assignment between Tan and Mendoza could have
been a collusion between the parties to defraud Litton.
Here, the fact that the deed of assignment was done by way of
securing or guaranteeing Tan’s obligation in favor of Litton, will not
change the prior decision of the lower courts. The validity of the
guaranty or pledge in favor of Litton has not been questioned, there
was a valid pledge. The deed of assignment shows that it fulfills the
requisites of a valid ledge or mortgage.
Now, 2097 is referred to in this case. Although the pledgee or
assignee, in this case, Litton, did not ipso facto become the creditor
of Mendoza, the pledge being valid, the incorporeal right assigned by
Tan in that assignment in form of pledge in favor of Litton, can only
be alienated by Tan with due notice and consent of Litton or his duly
authorized representative. To allow the assignor, in this case, Tan, to
dispose or alienate the security without notice and consent of the
assignee, will render nugatory the very purpose of a pledge or
assignment of credit. The records of this case reveal that private
respondent, had from the very beginning, was fully aware of the deed
of assignment between Tan and Litton. Having such knowledge,
Mendoza is estopped from entering into a compromise agreement
involving the same litigated credit that incorporeal right subject of
pledge in favor of Litton. Without notice to and consent of the
assignee. So, here, the compromise agreement is not valid and
cannot be used as against the Estate of Litton and therefore,
Mendoza is still liable.
Article 2098: The contract of pledge gives a right to the
creditor to retain the thing in his possession or in that of a
third person to whom it has been delivered, until the debt is
paid.
So as long as the obligation has not been paid, the pledgee has the
right to retain possession of the thing.
Distinguish this from our contract of commodatum and deposit. In
pledge, once the debt has been paid, the thing pledge should be
retained to the pledgor, notwithstanding that the debtor has another
debt in favor of the same creditor because again, the pledge is
constituted for a specific principal obligation.
So let us say, what was delivered was an i-phone to secure a
P30,000 obligation and then you were already paid the P30,000
obligation peromeronka pang ibangutangkasi subsequently you
borrowed P20,000. The creditor cannot say ditomunasa akin ang
phone mokasimeronka pang utangna P20,000. Hindi, because that
property was delivered to secure a specific obligation. Again, it must
be in relation to the debt. Right of retention here is limited only to the
fulfillment of the principal obligation for which the pledge was
created. Unless of course the debtor also agrees that it would
59 | P a g e
subsequently act as a collateral or security for the second obligation.
Now, Article 2099.
Article 2099: The creditor shall take care of the thing
pledged with the diligence of a good father of a family he
has a right to the reimbursement of the expenses made for
its preservation, and is liable for its loss or deterioration, in
conformity with the provisions of this Code.
Alright, so obligation of the creditor pledgee, if the thing pledged was
delivered to you. As the pledgee, you have to take care of it with the
standard diligence of a good father of the family.
Remember, here, the delivery does not transfer ownership to the
creditor. However the creditor will still return the property back to the
debtor pledger, if the obligation is paid. Therefore, the thing requires
preservation. For the thing to be preserved, diligence must be
exercised, with that, if there are expenses to be incurred to preserve
the subject matter, it shall be advanced by the pledgee to the debtor
but the pledgee is entitled to reimbursement.
Article 2100: The pledgee cannot deposit the thing
pledged with a third person, unless there is a stipulation
authorizing him to do so.
The pledgee is responsible for the acts of his agents or
employees with respect to the thing pledged.
Another obligation of the pledgee. The general rule is that he cannot
deposit the thing to a third person. Exception, stipulation. The
pledgee is also responsible for the acts of his agents and employees
with respect to the thing pledged because the acts of these persons
are also deemed as his acts.
Article 2101: The pledger has the same responsibility as a
bailor in commodatum in the case under Article 1951.
Article 1951, you recall is the exception, the only instance wherein
there is retention of the subject matter.
Article 1951: The bailor who, knowing the flaws of the
thing loaned, does not advise the bailee of the same, shall
be liable to the latter for the damages which he may suffer
by reason thereof.
So the bailee can’t retain the thing unless the bailor answers for the
damages suffered by reason of the hidden flaws.
Same thing here sa pledge. If the pledgor who knows of the flaws of
the thing pledged, did not advise the pledgee of the said flaws, and
subsequently, the pledgee suffers damages by reason of the said
flaws, the pledgor shall be liable for damages.
Remember, here, it’s highly possible for the pledgee to suffer
damages by reason of the flaws because there is transfer of
possession. Now, if there are hidden flaws and the pledgor was
aware thereof, he must advise the pledgee of the same.
Let us say what was delivered is a refrigerator, yung common
yungmakuryentehanka. Datidiba, yung mag-round kasa handle. I
don’t know kungmeron pang ganyanna refrigerator ngayon, pero may
ganunnalumangrefrigerator.
That can be a subject of a pledge if for example the pledgor had
knowledge thereof but did not inform the pledgee of the same and
then hahawakanyunng pledgee, nakuryentehansiya suffered
damages and in relation thereto, again, he can make the pledgor
liable as provided under Article 1951, similar to that of commodatum.
Article 2102: If the pledge earns or produces fruits,
income, dividends, or interests, the creditor shall
compensate what he receives with those which are owing
him; but if none are owing him, or insofar as the amount
may exceed that which is due, he shall apply it to the
principal. Unless there is a stipulation to the contrary, the
pledge shall extend to the interest and earnings of the right
pledged.
In case of a pledge of animals, their offspring shall pertain
to the pledgor or owner of the animals pledged, but shall be
subject to the pledge, if there is no stipulation to the
contrary.
Alright, so who will be entitled to the interest, dividends, shares of
stocks or other fruits from the thing pledged? It will still be the
pledgor, being the owner of the property. Frudendidiba, the right to
the fruits of the property. To the owner of thing belongs the fruits,
accessions and accessories.
If there are these fruits, pledgee may nevertheless apply the interest
or dividends as payment of the loan or obligation. Still the interest
should redound to the benefit of the owner wherein his debt will be
reduced or eventually extinguished to the extent of the interest
applied to the principal obligation. Remember, this is the rule
because there is no transfer of ownership in pledge.
Now with respect to animals, animals are considered personal or
movable properties therefore they can be a valid subject matter in a
contract of pledge. Nevertheless, the ownership is retained by the
pledgor but the animals shall be subject to the pledge. What happens
if later on they will have their offspring, they will still pertain to the
pledgor owner of the animals if there is no stipulation to the contrary.
So if they agree that if there would be offspring of the said animals,
then it can be applied to the principal obligation.
Article 2103: Unless the thing pledged is expropriated, the
debtor continues to be the owner thereof.
Nevertheless, the creditor may bring the actions which
pertain to the owner of the thing pledged in order to recover
it from, or defend it against a third person.
So again, ownership is retained by the pledgor. No transfer of
ownership in pledge however, what is the effect if the property is
expropriated? It’s not that common for personal or movable
properties to be expropriated but it is possible.
Now let us say that the property subject to expropriation, then, what
is the effect? The pledgorwill not be the owner of the subject matter.
The right of a pledge is a real right enforceable against third persons
but you cannot use this right as against the State which is just
exercising its right to eminent domain, yung expropriation. So what is
the effect? Here, if the thing pledged is expropriated, then the debtor
will not be the owner thereof, anymore.
Remember that a pledge is a real right enforceable against third
persons but it must be embodied in a public instrument. The creditor
therefore may bring actions which pertain to owner to recover or
defend it as against third persons. That is in the second paragraph of
2103. So again, in conformity with the requirement under 2096, to
recover or defend the property from a third person.
Article 2104: The creditor cannot use the thing pledged
without the authority of the owner, and if he should do so,
or should misuse the thing in any other way, the owner
may ask that it be judicially or extrajudicially deposited.
When the preservation of the thing pledged requires its
use, it must be used by the creditor but only for that
purpose.
Alright, in pledge, what is entrusted to the pledgee is mere
possession of the thing. So the general rule is therefore the pledgee
cannot use the thing without the consent or permission of the
pledgor. So this is the same rule in a contract of deposit including its
fruits. Or if the use of the thing be allowed in a certain way, and he
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should use the thing in any other way, then here, note that the debtor
may ask that it be judicially or extrajudicially deposited. So if the
pledgee uses the thing, or uses it in any other way different from
what they have agreed upon, the remedy of the debtor is to have the
thing deposited judicially or extrajudicially. He cannot demand for the
return of the thing. When the preservation of the thing pledged
requires its use, of course it must be used by the creditor but only for
that purpose. If it is used different for the purpose of its preservation,
again, the remedy of the pledgor is to have the thing deposited. If
from the use of the property, profits are derived, the pledgee must
account to the pledgor and again apply the net proceeds to pay the
principal obligation.
Here 2103 points out the instances wherein the owner may ask that
the thing pledged be deposited whether judicially or extrajudicially.
So sa 2104, if the creditor uses the thing without authority or misuses
the thing in any other way. The third instance is provided in Article
2106, wherein if the thing is in danger of being lost or impaired
because of the negligence or the willful act of the pledgee. Before we
go to 2106, let’s have 2105 first.
Article 2105: The debtor cannot ask for the return of the
thing pledged against the will of the creditor, unless and
until he has paid the debt and its interest, with expenses in
a proper case.
Very clear, the debtor cannot ask for the return of the thing unless
the debt has already been paid. The only instance wherein the
pledgor or debtor may ask for the return of the thing is when he
already paid the debt or obligation plus of course, the necessary
interest and expenses incurred for its preservation. In any other
circumstance, we will see in 2107, can ask for the return but merely
to substitute it with another thing. So it is not really in the concept of a
return. The only reason for the return of the thing is the
extinguishment of the obligation because as you will see in the
subsequent articles, if the thing pledged is found in the possession of
the pledgor after the constitution of the pledge, there is a
presumption that the pledge has already been extinguished.
Article 2106: If through the negligence or willful act of the
pledgee, the thing pledged is in danger of being lost or
impaired, the pledgor may require that it be deposited with
a third person.
Alright, so 2106 is what I mentioned earlier. Pledgor may require the
thing pledged be deposited to a third person and not that it be
returned. So this is 2106, in danger of being lost or impaired. This is
in relation of the duty of the pledgee to preserve the thing with the
diligence of a good father of a family.
Article 2107: If there are reasonable grounds to fear the
destruction or impairment of the thing pledged without the
fault of the pledgee, the pledgor may demand the return of
the thing, upon offering another thing in pledge, provided
the latter is of the same kind as the former and not of
inferior quality, and without prejudice to the right of the
pledgee under the provisions of the following article.
The pledgee is bound to advise the pledgor, without delay,
of any danger to the thing pledged.
So here, the pledgor has reasonable grounds to believe or to fear the
destruction or impairment of the thing pledged. Remember here that
destruction or impairment is without the fault of the pledgee. If here,
the destruction is with the fault of the pledgee, the remedy is as
provided in 2106, to deposit the thing to a third person.
In 2107, the pledgor may demand the return of the thing but he has
to offer something in return. He has to substitute it and the
substitution must be of the same kind and not of an inferior quality.
So either of the same kind or of superior quality. If there is any
danger of the thing, the obligation of the pledgee is to advise the
pledgor, again this is in consonance with the obligation to observe
due diligence of a good father of the family.
So requisites to apply 2107:
1.) That the pledgor has reasonable grounds to fear the destruction
or impairment of the thing pledged;
2.) There is no fault on the part of the pledgee;
3.) The pledgor is offering in place of the thing, another thing in
pledge which is of the same kind and quality;
4.)The pledgee does not choose to exercise his right to cause the
thing pledged to be sold at a public auction.
Where is that? In 2108. Take a look at 2108.
Article 2108: If, without the fault of the pledgee, there is
danger of destruction, impairment, or diminution in value of
the thing pledged, he may cause the same to be sold at a
public sale. The proceeds of the auction shall be a security
for the principal obligation in the same manner as the thing
originally pledge.
If you look at the grounds in 2107 and 2108, they are more or less
similar. 2108, without the fault of the pledgee, there is danger of
destruction, impairment or diminution in value. 2107, if there are
reasonable grounds to fear the destruction or impairment of the thing
pledged without the fault of the pledgee. But if you be very technical
about that, danger taposyungisa fear of the destruction or
impairment. So the pledgor in 2107 may demand the return of the
thing, subject to the condition that the pledgor must give something in
substitute. In 2108, the pledgee may have the right to sell the thing at
a public auction. So how do we reconcile 2107 and 2108. The right of
the pledgee in 2108 is superior to that in 2107. What’s the basis?
Balik kayo sa 2107, without prejudice to the right of the pledgee
under the provisions of the following article, the following article being
2108.
January 28, 2016 (2nd hour)
Transcribed by: Glorybelle C. Resurreccion
Article 2107. If there are reasonable grounds to fear the
destruction or impairment of the thing pledged, without the
fault of the pledgee, the pledgor may demand the return of
the thing, upon offering another thing in pledge, provided
the latter is of the same kind as the former and not of
inferior quality, and without prejudice to the right of the
pledgee under the provisions of the following article.
The pledgee is bound to advise the pledgor, without delay,
of any danger to the thing pledged. (n)
Article 2108. If, without the fault of the pledgee, there is danger of
destruction, impairment, or diminution in value of the thing pledged,
he may cause the same to be sold at a public sale. The proceeds of
the auction shall be a security for the principal obligation in the same
manner as the thing originally pledged. (n)
In 2108, the pledgee will have the right to sell the thing at the public
auction. How do we reconcile this Arts. 2107 and 2108? The right of
the pledgee in Art. 2108 is superior to that in Art. 2107. The basis is
the provision in Art. 2107, “xxx without prejudice to the right of the
pledgee under the provisions of the following article.” [which is Art.
2108].
So if the thing is danger of destruction, impairment, or diminution in
value of the thing pledged WITHOUT THE FAULT of the pledgee, he
may choose to sell the thing at a public auction. And the proceeds
61 | P a g e
therein will be considered as a security but not yet as payment of
obligation. So in the meantime he sells it, the proceeds would be
considered as a security. So he will just hold the proceeds as a
security but he cannot apply it yet to the principal obligation.
Now if the pledgee does not want to exercise his right under Art.
2108, then the pledger may ought to demand the return of the thing
as provided in Art. 2107 but he must offer something in substitution
of the same kind and not of inferior quality.
Article 2109. If the creditor is deceived on the substance or quality of
the thing pledged, he may either claim another thing in its stead, or
demand immediate payment of the principal obligation. (n)
In Art. 2109, for example, what was delivered was a diamond ring,
although it turned out not to be a diamond at all but just a piece of
glass. So here, the pledgee is clearly prejudiced as he was deceived
as to the substance or quality of the thing pledged. The remedy of
the pledgee is he may claim another thing in its stead or demand
immediate payment of [mutual] obligation. So the obligation becomes
due and demandable. Refer to:
Article 1198. The debtor shall lose every right to make use of the
period:
xxx
(2) When he does not furnish to the creditor the guaranties or
securities which he has promised;
xxx
In this provision, the obligation becomes immediately due and
demandable.
Now remember the remedies in Art. 2109 are alternative. It is “either
claim another thing in its stead, or demand immediate payment of the
principal obligation”. They are not cumulative and therefore the
creditor cannot exercise both. He cannot claim another thing and at
the same time declare the obligation due and demandable.
Article 2110. If the thing pledged is returned by the pledgee to the
pledgor or owner, the pledge is extinguished. Any stipulation to the
contrary shall be void.
If subsequent to the perfection of the pledge, the thing is in the
possession of the pledgor or owner, there is a prima facie
presumption that the same has been returned by the pledgee. This
same presumption exists if the thing pledged is in the possession of
a third person who has received it from the pledgor or owner after the
constitution of the pledge. (n)
In this article, the thing is returned by the pledgee himself to the
debtor. The effect is that the pledged is deemed extinguished. Once
the thing is delivered by the pledgee to the pledger, there is a
presumption that the obligation is already extinguished. The
presumption in Art. 2110 is merely prima facie not conclusive and
evidence to the contrary may be presented.
Example, ninakaw [the thing pledged] ng pledger/owner. Pwede ba
niyang nakawin ang kanyang sariling gamit? Here, he took
possession [of the thing] surreptitiously. That would be another thing
wherein you could not apply the presumption.
Take note here, it is also very clear that “Any stipulation to the
contrary shall be void.” Can it be agreed by the parties that the
pledgee would say, “I will return this but the thing is still pledged. This
property is still subject to a pledge.”? NO, under Art. 2110. So,
despite any stipulation, if the pledgee returns the thing pledged, the
pledge is deemed extinguished. Although in some circumstances, a
temporary return of the thing will not extinguish the pledge.
Yuliongsiu vs. Philippine National Bank (1968)
Diosdado Yuliongsiu was the owner of two (2) vessels. He obtained a
loan and pledged the two to the PNB, as evidenced by the pledge
contract. Subsequently, the remaining balance of his loan was
renewed by the execution of two (2) promissory notes in the bank's
favor. These two notes however, were never paid. Yuliongsu
continued to possess the things pledged even after the execution of
the contract.
ISSUE: WON there is pledge. YES
HELD: While it is true that plaintiff continued operating the vessels
after the pledge contract was entered into, his possession was
expressly made "subject to the order of the pledgee." The provision
of Art. 2110 of the present Civil Code 11being new — cannot apply to
the pledge contract here which was entered into on June 30, 1947.
On the other hand, there is an 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.
Q1: Aside from the fact that the pledge took place before the
effectivity of NCC, what was the other reason taken into
consideration by the court in saying that there was still a valid pledge
even if possession remained in the pledger?
A1: PNB gave Yuliongsiu the authority to keep the properties
Q2: In what capacity was Yuliongsiu in possession of the properties
pledged?
A2: As a trustee
Here, the defendant bank was the actual pledgee; therefore, it was
entitled to the actual possession of the vessels subject of the pledge.
The possession of Yuliongsiu who is the pledger, was expressly
made subject to the order of the pledgee.
Art. 2110 of the present Civil Code being new — cannot apply to the
pledge contract here which was entered into on June 30, 1947. On
the other hand, there is an 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.
Again, the SC took into consideration the delivery of the keys in a
warehouse. For purposes of showing the transfer of control to the
pledgee, delivery to him of the keys to the warehouse sufficed. In
other words, the type of delivery will depend upon the nature and the
peculiar circumstances of each case.
Take note of this exception although it is very rare that this will be
applied because of the clear provision in Art. 2110. But is it possible
for temporary return which will not extinguish the obligation? Yes.
Example, the subject of a pledge is cellphone. You want to delete the
pictures. So, hiramin mo muna. In this instance, it’s only a temporary
return of the thing which will not necessarily extinguish the contract of
pledge.
The pledger and pledgee may stipulate the thing pledge shall be in
the possession of a third person but it cannot be back to the pledger.
Although take note of what we have discussed on constructive and
symbolic delivery as also mentioned in Yuliongsiu case; as also in
the instance of a warehouse receipt, covering the deposit of certain
articles or inventories of a warehouse. The one who possesses the
receipt itself is deemed to be the one in possession of the thing
delivered. If what is pledged is a warehouse receipt, it does not mean
that the subject of the pledge is the subject of the warehouse receipt.
It is just that it is covered by the warehouse receipt.
The evidence of the goods may be the warehouse receipt itself. If
what you have pledged is share of stock, what you deliver is the
certificate of share. Now take note that only the accessory obligation
of pledge is presumed to be remitted, not the principal obligation
itself. Art. 2010 says the pledge is extinguished.
Article 2111. A statement in writing by the pledgee that he
renounces or abandons the pledge is sufficient to extinguish the
62 | P a g e
pledge. For this purpose, neither the acceptance by the pledgor or
owner, nor the return of the thing pledged is necessary, the pledgee
becoming a depositary. (n)
Here, the thing was not returned by the pledgee to the pledgor.
Nevertheless, the pledge is deemed extinguished where there is a
statement in writing by the pledgee that he renounces or abandons
the pledge. Remember that the statement here must be in writing
NOT oral or verbal. The statement, however, need not be under oath
or in a public instrument. What is required by Art. 2111 is that it be in
writing. It is not even required that the pledgor must accept or be
notified of that statement as long as there is a statement in writing
that the pledgor renounces or abandons the pledge, the latter is
extinguished even if the pledgee remains in possession of the thing
pledged.
What could now happen? What you now have here is a contract of
deposit where the pledgee is deemed to be a depositary subject to
obligations of a depositary under the law. Again, take note here that
what is deemed extinguished is only the pledge. That the principal
debt is not affected by the waiver of the pledge. But if ang i-waive
naman ng creditor is the principal obligation, then necessarily, the
pledge is also waived and therefore extinguished.
Article 2112. The creditor to whom the credit has not been satisfied
in due time, may proceed before a Notary Public to the sale of the
thing pledged. This sale shall be made at a public auction, and with
notification to the debtor and the owner of the thing pledged in a
proper case, stating the amount for which the public sale is to be
held. If at the first auction the thing is not sold, a second one with the
same formalities shall be held; and if at the second auction there is
no sale either, the creditor may appropriate the thing pledged. In this
case he shall be obliged to give an acquittance for his entire claim.
(1872a)
TAKE NOTE of Art. 2112. This is the procedure to be observed by
the creditor in case the obligation is already due and demandable
and the debtor still fails to fulfil his obligation.
[Requisites] for Art. 2112 to apply:
1. The obligation is already due and demandable
2. The debtors still fails to pay
So, the creditor can now sell the thing pledged at a public auction.
However, it is clear that there is a requirement for him to notify the
debtor as the owner of the thing pledged. The sale must be in a
public auction and not a private sale wherein [the public auction]
there are bidders and the highest bidder will win.
Who is allowed to conduct the sale? Here, you have the notary
public. So the sale here, is extrajudicial in nature. So people may
thereafter bid from the amount of the obligation being the least
amount of the bid. The highest bidder will be given the thing pledged.
The proceeds will now be applied to the principal obligation. And this
time, it is not a security anymore unlike that in Art. 2108 wherein the
proceeds, in case the pledgee decides to sell the thing if there is
danger of destruction or impairment the proceeds will only be
deemed as [inaudible]. But this time, it will now be used to pay the
obligation.
Now take note if at the first public auction the thing is not sold,
meaning, ang nag-bid lang ay yung creditor/pledgee, then there will
be a second public auction. And if again the thing is not sold as it is
only the creditor/pledgee who made a bid on the said auction, the
creditor may now appropriate the thing in payment of the obligation.
Such appropriation is not considered as pactum comisorium because
it is not automatic appropriation.
If at first instance you appropriate it, then that is automatic
appropriation. In the first public auction, even if you’re the only bidder
as creditor/pledgee, that is the time that if you appropriate it, that
would constitute as pactum comisorium.
So the formalities required in Art. 2112:
1. The debt is already due and demandable and remains
unpaid
2. The sale must be at a public auction
3. There must be notice to pledgor/owners stating the amount
due
4. The sale must be made with the intervention of a notary
public
Take note in Art. 2112, it does not require posting of the notice of
sale and publication. The notice that is required here is the notice to
pledgor and the owner of the thing pledged and that is sufficient.
Lim Tay vs. CA (1998)
Sy Guiok and Alfonso Sy Lim each secured a loan from Lim Tay in
the amount of P40,000 payable within six (6) months. To secure the
payment of the loan, Guiok and Sy Lim individually executed a
Contract of Pledge in favor of Tay whereby they each pledged their
300 shares of stock in the Go Fay & Company Inc.
Guiok and Sy Lim covenanted, inter alia, that:
 “3. In the event of the failure of the PLEDGOR to pay the
amount within a period of six (6) months from the date
hereof, the PLEDGEE is hereby authorized to foreclose the
pledge upon the said shares of stock hereby created by
selling the same at public or private sale with or without
notice to the PLEDGOR, at which sale the PLEDGEE may
be the purchaser at his option; x x x”

Guiok and Sy Lim failed to pay their respective loans. Tay filed a
Petition for Mandamus against Go Fay & Co. Corporation with the
Securities and Exchange Commission and prayed that an order be
issued directing the corporate secretary of Go Fay & Co., Inc. to
register the stock transfers and issue new certificates in favour.
Go Fay & Co., Inc. argued that under par. 3 of the contract, pledgee
is authorized to foreclose the pledge and thereafter, to sell the same
to satisfy the loan. [H]owever, to this point in time, Tay has not
performed any operative act of foreclosing the shares of stocks of
Guiok and Sy Lim in accordance with the Chattel Mortgage law,
[n]either was there any sale of stocks -- by way of public or private
auction -- made after foreclosure in favor of the Tay to speak about,
and therefore, the respondent company could not be force[d] to by
way of mandamus, to transfer the subject shares of stocks from the
name Guiok and Sy Lim to Tay’s favour
ISSUE: WON the ownership of the shares of stock was transferred to
Tay despite lack of foreclosure of the thing pledged. NO
HELD: At the outset, it must be underscored that Tay did not acquire
ownership of the shares by virtue of the contracts of pledge under
Article 2112 of the Civil Code. Furthermore, the contracts of pledge
contained a common proviso contained in par. 3.
There is no showing that petitioner made any attempt to foreclose or
sell the shares through public or private auction, as stipulated in the
contracts of pledge and as required by Article 2112 of the Civil Code.
Therefore, ownership of the shares could not have passed to
him. The pledgor remains the owner during the pendency of the
pledge and prior to foreclosure and sale, as explicitly provided by
Article 2103 of the same Code:
 Unless the thing pledged is expropriated, the debtor
continues to be the owner thereof.
Nevertheless, the creditor may bring the actions which pertain to the
owner of the thing pledged in order to recover it from, or defend it
against a third person.
Q1: Why was it necessary to determine WON Lim Tay is the owner
of shares of stocks? What was the reason Tay’s petition was
dismissed by SEC?
A1: Because he failed to prove the legal basis of his ownership
Q2: Why was it necessary to prove?
63 | P a g e
A2: SEC only has jurisdiction over intra-corporate controversis. But
Tay had no cause of action for mandamus against the Respondent
Corporation because the right of ownership of Tay over the 300
shares of stock pledged by Guiok and Sy Lim not having been as yet
established
Take note here, the action that was filed was a petition for
mandamus against the corporation for the corporation to register the
stock and transfer and issue new certificates in favour of petitioner.
Tay here [filed] the complaint in SEC allegedly thinking it was an
intra-corporate dispute. This is very important with regard jurisdiction.
SEC previously had jurisdiction over intra-corporate issues. But now
there is already a designated court to handle this kind of issues.
It appears that SEC really had no jurisdiction over the case for failure
of Tay to show that he owns the shares. What is clear was that there
was a contract of pledge executed in favour of Lim Tay. But he was
clearly authorized to foreclose the pledge upon maturity of the loans
and not to own the shares. Nowhere in his Complaint mention that
Tay had in fact foreclosed the pledge and purchased the shares after
such foreclosure. In effect, there was no transfer of ownership in his
favour.
His status as a mere pledgee does not, under civil law, entitle him to
ownership of the subject shares. The Complaint by itself did not
contain any prima facie showing that petitioner was the owner of the
shares of stocks. Quite the contrary, it demonstrated that he was
merely a pledgee, not an owner. Accordingly, it failed to lay down a
sufficient basis for the SEC to exercise jurisdiction over the
controversy. The mere perfection of the contract of pledge does not
make him the owner of shares pledged. Ownership of the shares
could not have passed to him as the pledgor remains the owner
during the pendency of the pledge and prior to foreclosure and sale.
The prescriptive period within which to demand the return of the thing
pledged should begin to run only after the payment of the loan and a
demand for the thing has been made, because it is only then that
respondents acquire a cause of action for the return of the thing
pledged.
By virtue of prescription, laches or lapse of time, still, Tay could not
be considered as the owner of the shares of stock. It is in fact Lim
Tay who may be guilty of laches. He had all the time to demand
payment of the debt. More important, under the contracts of pledge,
petitioner could have foreclosed the pledges as soon as the loans
became due. But for still unknown or unexplained reasons, he failed
to do so, preferring instead to pursue his baseless claim to
ownership.
Insular Life vs. Young (2002)
Robert Young and Insular Life entered into a Credit Agreement. To
secure the loan, Young, acting in his behalf and as attorney-in-fact of
the other stockholders, executed on the same day a Deed of
Pledge over 1,324,864 shares which represented 99.82% of the
outstanding capital stock of the Insular Savings Bank. Young failed to
pay his loan.
Forthwith, Insular Life instructed its counsel to foreclose the pledge
constituted upon the shares. The latter then sent Young a notice
informing him of the sale of the shares in a public auction scheduled
on October 28, 1991, and in the event that the shares are not sold, a
second auction sale shall be held the next day, October 29.
Young then filed a complaint alleging that the notarial sale conducted
by petitioner Atty. Jacinto Jimenez of Insular Life is void as it does
not comply with the requirement of notice of the second auction sale
ISSUE: WON the foreclosure sale is valid. YES
HELD: SC cited Art. 2112. Clearly, there is no prohibition contained
in the law against the sending of one notice for the first and second
public auction as was done here by petitioner Insular Life.
The purpose of the law in requiring notice is to sufficiently apprise the
debtor and the pledgor that the thing pledged to secure payment of
the loan will be sold in a public auction and the proceeds thereof
shall be applied to satisfy the debt. When petitioner Insular Life sent
a notice to Young informing him of the public auction scheduled on
October 28, 1991, and a second auction on the next day, October 29,
in the event that the shares are not sold on the first auction, the
purpose of the law was achieved.
We thus reject respondents' argument that the term "second one"
refers to a separate notice which requires the same formalities as the
first notice.
Q1: When did the sale take place?
A1: Oct. 28 and 29, 1991
Q2: Why was the validity of the foreclosure sale is being questioned?
What was the issue of Young here with regards to the notice of the
sale?
A2: Young alleges that it did not comply with the notice requirement
of the second auction sale
Q3: When did the auction sale take place? Kailan yung first at
second? Because in Art. 2112, it is clear that there must be a notice
to the pledgor/owner of the sale. Was there a notice here?
A3: The second auction sale took place the day after the date of first
auction sale
Q4: In other words, was there a sufficient notice that the sale will take
place on Oct. 28, 1991 and the second sale will take place on the
subsequent day on Oct. 29? Was Insular required to send a separate
notice for the second auction?
A4: Yes, the notice of sale was sufficient. No, Insular is not required
to send a separate notice for the second auction
Q5: In the notice to Young, did it contain the scheduled sale on Oct.
28 and Oct. 29?
A5: Yes.
In this case, there was a deed of pledge executed over a million
shares representing 99.82% of the outstanding capital stock. It was
the execution of Young of a promissory note in favour of Insular Life
of the same amount. However, it turned out that there were
irregularities in the Bank's "kiting operations " where Young, who was
then the Bank's President.
Kiting Operations – wherein a check is deposited in the bank which is
not yet cleared but you allow it to be withdrawn. What would happen?
Makulangan talaga ng funds because there will be checks that would
bounce or will not have sufficient funds.
Here, it was admitted, yung irregularities. Therefore, the obligation
became due and demandable. Insular Life instructed its counsel to
foreclose the pledge constituted upon the shares. The latter then
sent Young a notice informing him of the sale of the shares in a
public auction scheduled on October 28, 1991, and in the event that
the shares are not sold, a second auction sale shall be held the next
day, October 29.
Here, obviously there was a contract of pledge where the shares are
to be delivered to Insular Life under the credit agreement. When the
loan became due and demandable, the pledge can now be
foreclosed in satisfaction of the loan. The Court of Appeals erred in
declaring that the auction sale is void since petitioners failed to send
a separate notice for the second auction.
There is no prohibition contained in the law against the sending of
one notice for the first and second public auction as was done here
by petitioner Insular Life. The purpose of the law in requiring notice is
to sufficiently apprise the debtor and the pledgor that the thing
pledged to secure payment of the loan will be sold in a public auction
and the proceeds thereof shall be applied to satisfy the debt. When
petitioner Insular Life sent a notice to Young informing him of the
public auction scheduled on October 28, 1991, and a second auction
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on the next day, October 29, in the event that the shares are not sold
on the first auction, the purpose of the law was achieved.
So even if Insular Life is the highest bidder and there was conformity
with Art. 2112, no separate notice is required for the first and second
auction. But of course, if the first notice only contains the first auction,
you have to give another notice for the second scheduled auction.
Again take note of the purpose of the notice. As long as
pledgor/debtor is apprised of the said auction, that is sufficient. Why
is the notice required? So that they can still take steps whether they
will pay their obligation before it is pledged or whether they
participate in the foreclosure sale of said pledge.
Article 2113. At the public auction, the pledgor or owner may bid. He
shall, moreover, have a better right if he should offer the same terms
as the highest bidder.
The pledgee may also bid, but his offer shall not be valid if he is the
only bidder. (n)
Who can bid? Anybody. The public, pledgee, the pledgor. Although
the pledgor should have the better right if he should offer the same
terms as the highest bidder. Take note of the term “same terms”
because it is possible that the third person will bid for example P
100k, the same bid will be made by the pledgor. But if the third
person will offer it in instalment while the pledgor offers it in cash,
then he will have preference. Or for example, if it is the other way
around, you do not have the same terms in that scenario. So the third
person will have the better right.
Again, the pledgee, if he’s the only bidder, his offer shall not be valid.
That is why there is the first auction, kung sya lang ang bidder, you
must have a second auction. Kung sya lang pa rin, then he can
appropriate the thing for himself. So that is not pactum
commissorium because there is not automatic appropriation.
To avoid fraud, the pledgee is not allowed appropriate the thing
pledge if he is the only bidder [sa first auction].
Article 2114. All bids at the public auction shall offer to pay the
purchase price at once. If any other bid is accepted, the pledgee is
deemed to have been received the purchase price, as far as the
pledgor or owner is concerned. (n)
So if you bid, you should also already have the amount with you
because as required, you pay at once. Although it is possible for the
pledgee to accept the highest bid in installment. But as far as to the
principal obligation, it is already extinguished. As far as the debtor
and pledgor are concerned, the principal obligation is already
extinguished as well as the accessory contract of pledge because it
is deemed that there has already been full payment.
Take note of Art. 2115 in relation to Art. 2114:
Article 2115. The sale of the thing pledged shall extinguish the
principal obligation, whether or not the proceeds of the sale are equal
to the amount of the principal obligation, interest and expenses in a
proper case. If the price of the sale is more than said amount, the
debtor shall not be entitled to the excess, unless it is otherwise
agreed. If the price of the sale is less, neither shall the creditor be
entitled to recover the deficiency, notwithstanding any stipulation to
the contrary. (n)
This is another important provision in Pledge. The effect of the sale is
that extinguish the principal obligation whether or not the proceeds of
the sale are equal to the amount due. In relation to Art. 2114,
whether it was accepted by the pledgee to be paid in instalment,
again obligation is extinguished. Kung di man makabayad, problema
na yan ng pledgee.
Now, what is the effect if the proceeds of the sale were more than the
amount of the principal obligation? or less than the amount of the
principal obligation?
Example, the principal obligation is P 100k, the highest bid was P
120k. To whom will the excess of P 20k go? Art. 2115 is clear. The
debtor shall not be entitled to the excess. It will go to the creditor. But
the exception is unless it is otherwise agreed. It will only go to the
debtor if there is a stipulation to the contrary. In other words, as a
pledgor, you ask for that kind of stipulation.
But what if there is deficiency? Principal is P 100k, but the highest
bid is only P 70k. Can the creditor still go after the debtor for the
deficiency of P 30k? Art. 2115 says neither shall the creditor be
entitled to recover the deficiency, notwithstanding any stipulation to
the contrary. So hindi pwede ang stipulation. The law is absolute.
Any stipulation to the contrary is void. Why? To compel the creditor
to hold an honest public sale.
Manila Surety vs. Velayo (1967)
Manila Surety & Fidelity Co., upon request of Rodolfo Velayo,
executed a bond for P2,800.00 for the dissolution of a writ of
attachment obtained by one Jovita Granados in a suit against
Rodolfo Velayo. As "collateral security and by way of pledge" Velayo
delivered four pieces of jewelry to the Surety Company "for the
latter's further protection", with power to sell the same in case the
surety paid or become obligated to pay any amount of money in
connection with said bond, applying the proceeds to the payment of
any amounts it paid or will be liable to pay, and turning the balance, if
any, to the persons entitled thereto, after deducting legal expenses
and costs.
Later, the surety company was forced to pay P2,800.00 that it later
sought to recoup from Velayo; and upon the latter's failure to do so,
the surety caused the pledged jewelry to be sold, realizing therefrom
a net product of P235.00 only. Thereafter and upon Velayo's failure
to pay the balance, the surety company brought suit in the Municipal
Court. Velayo countered with a claim that the sale of the pledged
jewelry extinguished any further liability on his part under Article
2115.
ISSUE: WON Velayo is obliged to pay the deficiency. NO
HELD: Article 2115, in its last portion, clearly establishes that the
extinction of the principal obligation supervenes by operation of
imperative law that the parties cannot override:
If the price of the sale is less, neither shall the creditor be
entitled to recover the deficiency notwithstanding any
stipulation to the contrary.
The provision is clear and unmistakable, and its effect can not be
evaded. By electing to sell the articles pledged, instead of suing on
the principal obligation, the creditor has waived any other remedy,
and must abide by the results of the sale. No deficiency is
recoverable.
It is well to note that the rule of Article 2115 is by no means unique. It
is but an extension of the legal prescription contained in Article
1484(3) of the same Code, concerning the effect of a foreclosure of a
chattel mortgage constituted to secure the price of the personal
property sold in instalments.
Q1: What if there is a stipulation voluntary agreed between the
pledgee and the debtor that the latter will be liable for any deficiency?
A1: It will still be invalid
Q2: What is the effect if it is invalid?
A2: There is extinguishment of obligation regardless of the
deficiency. In other words, the pledgor cannot anymore collect form
the debtor.
Again, accessory character is the essence of a pledge and mortgage.
In Art. 2115 it is clear that if the price of the sale is less, neither shall
the creditor be entitled to recover the deficiency notwithstanding any
stipulation to the contrary. By electing to sell the articles pledged,
instead of suing on the principal obligation, the creditor has waived
any other remedy, and must abide by the results of the sale. No
deficiency is recoverable.
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It is well to note that the rule of Article 2115 is by no means unique. It
is but an extension of the legal prescription contained in Article
1484(3) of the same Code, concerning the effect of a foreclosure of a
chattel mortgage constituted to secure the price of the personal
property sold in installments. In Sales, what law is that, sale of
personal property in instalment? Recto Law di ba? If you recall Recto
Law, when you decided to foreclose the chattel mortgage, you
cannot recover anymore the deficiency.
Essentially, that’s the same thing here, with regards to a contract of
pledge. So in other words, if you are the debtor/pledgor, make sure
that you stipulate that there is a provision or a stipulation that you will
be entitled to the excess.
Now if you are the creditor/pledgee, before exercising a foreclosure
of the properties pledged, you must weigh and analyse the situation if
you can sell the thing beyond the amount of the principal obligation.
Kahit pa sabihin mo na may stipulation na entitled si debtor sa
excess, at least hindi ka malugi kasi bayad ka sa obligation. Pero
kung alanganin ka that the sale will result to a bid where the
proceeds will be at the very least equivalent to the principal
obligation, then do not proceed with the foreclosure sale.
You have other remedies under the law. You can file an action for
collection of sum of money wherein you could really collect the whole
amount that is due. And what happens to the thing pledged? You can
attach it as long as you have the grounds for attachment. Or even if
you do not want to attach, subsequently, you can subject the
properties the things pledged to a writ of execution. Pero at least
kung ganoon yung ginawa mo, although it may take longer than
following the procedure in Art. 2112, you can assure that you can
collect the whole amount of the obligation. Again, weigh the pros and
cons whether you’d want to avail of the remedy in Art. 2112 in selling
the property subject of the pledge.
Article 2116. After the public auction, the pledgee shall promptly
advise the pledgor or owner of the result thereof. (n)
What does this mean? Two-notice requirement: before the sale and
after the sale. So there is an obligation on the part of the pledgee to
promptly advise the pledgor or owner of the result of the public
auction to let the pledgor/owner that the pledge was done in
accordance with the law. This is to enable the pledgor to take steps
for the protection of his right if he has reasonable grounds to believe
that the sale was not an honest one.
Article 2117. Any third person who has any right in or to the thing
pledged may satisfy the principal obligation as soon as the latter
becomes due and demandable. (n)
Again, recall ObliCon – a third person cannot demand for the third
person to accept payment. Who can force the creditor to accept
payment? The debtor, heirs or assignees, or persons designated or
stipulated by them as well as a person who has an interest in the
obligation.
Who can discharge the obligation? It is the principal debtor who may
pay but if a third person who pays the obligation, then the obligation
will be extinguished. Now in this case (Art. 2117), you have a third
person who has a right in the obligation being the pledgor.
Kasi sabi natin sa Art. 2085, pwede hindi debtor yung pledgor. So, he
can satisfy the principal obligation as soon as the latter becomes due
and demandable so that the thing subject of the pledge will not be
sold or subsequently sold by the creditor/pledgee anymore. So in
fact, ibalik na yung bagay kasi nabayaran na yung principal.
Article 2118. If a credit which has been pledged becomes due
before it is redeemed, the pledgee may collect and receive the
amount due. He shall apply the same to the payment of his claim,
and deliver the surplus, should there be any, to the pledgor. (n)
Here, what is pledged is credit. I think we have discussed that this
can be a subject matter in a pledge, for example, receivables. Ang i-
assign mo, ay yung receivable. If the credit has become due and
demandable (yung account receivable), ang mag-collect ay yung
pledgee. The pledgee “may collect and receive the amount due”.
Take note of this phrase because here, it is not obligatory on the part
of the pledgee to really collect on the amount that is already due
subject of the pledge. It does not impose the obligation upon the
pledgee/creditor to really collect and apply the amount.
Distinguish this from contract of guaranty where the creditor fails to
exercise, the effect is guaranty would be deemed extinguished. Pero
dito, if hindi naka-collect si creditor of the credit subject to a pledge,
okay lang. That could not be a defense to the extinguishment of the
pledge because what he has is merely a right to collect and not an
obligation. Now if he chooses that the credit be collected or he
receives the amount, he shall return the surplus to the debtor. Unlike
in a public auction, the surplus here shall be returned to the debtor.
But if what we have is a public auction, the surplus will not be
returned to the debtor except if there is a stipulation to the contrary.
FEBRUARY 03, 2016
Transcribed by:
Ray Mark C. Gingco
So let us finish pledge first, the last article we discussed
was Article 2118, so let’s have Article 2119:
Article 2119. If two or more things are pledged, the pledgee may
choose which he will cause to be sold, unless there is a
stipulation to the contrary. He may demand the sale of only as
many of the things as are necessary for the payment of the debt.
(n)
Two or more things are pledged in relation to one
obligation, the pledgee-creditor has the right to choose which among
those pledged may be covered to satisfy the obligation.
Example:
50T yung utang. Then you have a 30T worth na I-phone
and 20 T worth na jewelry. It is upon the creditor to choose whether
he will sell the I-phone first or the ring. As soon as the debt is
satisfied by selling of one of the things the creditor cannot anymore
proceed to sell the other things.
For example what if meron ng partial payment of 20T and
30T nalang ang balance, as we have discussed before pledge is
indivisible so the debtor-pledgor cannot demand na ibalik sa kanya
yung isa sa mga properties pledged.
However, if the creditor decides to sell one of the things
and that is already sufficient to pay off the remaining obligation, he
will now have the obligation to return the thing that was pledged. He
has no more right to proceed to sell the other thing.
If there are several things offered in pledge and the value
of these things are more than the amount of the obligation, the
pledgee shall only sell such property as to equal the amount of the
obligation.
The remaining things, he has the obligation to return it to
the debtor pledgor.
Article 2120. If a third person secures an obligation by pledging
his own movable property under the provisions of Article 2085
he shall have the same rights as a guarantor under Articles 2066
to 2070, and Articles 2077 to 2081. He is not prejudiced by any
waiver of defense to the principal obligor.
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 So you already know that the pledgor can be a third
person. He is not necessarily the debtor of the obligation. So he shall
have the same rights as that of the guarantor however, if you take a
look at the Articles 2066-2070, 2077-2081 it does not include the
benefit of excussion. So the third party pledgor is not entitled to
benefit of excussion.
He is ALSO NOT entitled to the benefit of division. If you
take a look at the Articles mentioned, in Article 2120 this refers to the
rights of indemnity and whatever remedies that the principal debtor
can present against the creditor, the pledgor may also interpose
those defenses.
Now remember there are two kinds of pledges voluntary or
conventional pledge and the other is legal pledge or pledge by
operation of law.
Artcile 2121. Pledges created by operations of law, such as
those referred to in Article 546, 1731, and 1994, are governed by
the foregoing aticles on the possession, care and sale of the
thing as well as on the termination of the pledge. However, after
payment of the debt and expenses, the remainder of the price of
the sale shall be delivered to the obligor.
So these are the pledges by operation of law and not by
the agreement of the parties. These are legal pledges.
What are the obligations of the pledgee required to the
thing pledge in relation to article 546, 1731 and 1994. The legal
pledge, the (?) of the thing will be article 2122 and the last sentence
of 2121.
Recall in conventional pledge, the remainder belongs to the
pledgee or the creditor unless there is a stipulation to the contrary.
But if what you have is a legal pledge or a pledge by operation of law
the excess of the proceeds shall be returned to the debtor-owner.
That is the last sentence of 2121. So what are these pledges by
operation of law.
Article 546. Necessary expenses shall be refunded to every
possessor; but only the possessor in good faith may retain the
thing until he has been reimbursed therefor.
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 of
which the thing he may have acquired by reason thereof.
So here in Article 546 there is an actual owner of the thing
or property but there is a possessor of property in good faith. Such
possessor incurred expenses for the impairment and the owner has
the obligation to reimburse the possessor in good faith. Kung wala ka
na reimburse, the possessor in good faith may retain the property
take note only for the necessary and useful expenses by the owner
of the property.
So (it) (dapat siguro he or she kasi tao man ang involved)
is not obliged under the law to return the thing to the owner unless he
is reimbursed with the necessary expense incurred. So the right of
the possessor of good faith here is the right of the pledgee wherein
he may sell the thing at a public auction if he is not paid the useful
and necessary expense.
Article 1731. He who has executed work upon a movable has a
right to retain it by way of pledge until he is paid.
For example you have your portrait and you want it framed
however it turns out that you do not have enough money for the
frame. So the one who executed work on your portrait has the right to
retain the thing by way of pledge until he is paid. The one who
performed until he is paid of the fee of making the picture frame. If
you failed to pay then one who did the work can sell the picture with
a frame at a public auction. kung merong magbili.
Article 1994. The depositary may retain the thing in pledge until
the full payment of what may be due him by reason of deposit.
So these are the articles mentioned in Article 2121.
There are also other provisions providing for legal pledge.
In property you have Article 612 in relation to usufruct. In
Agency, Articles 1912-1914 wherein the agent is given the right to
retain the thing of principal subject of the agency.
You also have Article 1944 in relation to Article 1951
commodatum the right to retain through hidden clause (?).
Article 2004 refers to the right of retention by hotelkeepers.
Just remember general rule: The rights and obligations
pertaining to a pledgee in a conventional pledge to be different from
pledge by operation of law is that dito the excess of the proceeds
should be returned to the debtor.
In a conventional pledge as a general rule the creditor
pledgee is entitled to the excess unless otherwise stipulated.
Now another distinction to take note of is provided under
Article 2122.
Article 2122. A thing under pledge by operation of law may be
sold only after demand of the amount for which the thing is
retained. The public auction shall take place within one month
after such demand. If, without just grounds, the creditor does
not cause the public sale to be held within such period, the
debtor may require the return of the thing.
Know the difference in Article 2122 pertaining to the sale in
public auction of the thing pledge in legal pledge.
First there has to be a demand of the amount of which the
thing is to be obtained.
Q: Why is demand required?
A: Unlike in conventional pledge there is already period
agreed upon by the parties for the payment of the obligation. But
here In pledges by operation of law there is no period provided for
the party. So here there must be demand to fix a period until when
can he wait for the owner if you have possessor in good faith or
owner of movable to pay the amount that is due.
Unlike in a conventional pledge, in pledge by operation of
law there has to be demand first to fix the period of payment. After
the demand and the period is not fixed, one month after such
demand then he can now have a public auction.
If without just cause the creditor pledgee does not cause
the public sale at such period within a one month period then the
debtor may require the return of the thing.
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 This is different from a conventional pledge. So take note
between the distinction between legal and conventional pledge.
Legal pledge are covered under Articles 2121 and 2222.

Of course when the debtor requires the return of the thing if

the thing was not sold within the one month period, it does not mean
that the obligation is already extinguished.

Again if without just cause the creditor does not cause the
public sale the debtor may require the return of the thing but the
obligation may still be in existence. Again this is one of the
distinctions between conditional pledge and legal pledge.

Article 2123. With regard to pawnshops and other

establishments, which are engaged in making loans secured by
pledges, the special laws and regulations concerning them shall
be observed, and subsidiarily, the provisions of this Title.

“When pursuing your dreams, there will be times when you feel
like giving up.

That’s when you tell yourself – ‘It is days like these that will
separate champions from ordinary people...’ ”

~Peng Joon 

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