CREDIT PRE-FI  The same consideration that supports the principal
obligation supports the undertaking of the security
Contracts of Security
Basis & Rationale
Q: I am the debtor you are the creditor, at the same time I am a
creditor of X who owes me 500 pesos, If I cannot collect from X, what
are the remedies of the creditor?
A: exercise subragatory rights. (wako kasabot, absent ko ani, pero
dini mugawas intro rani.)
Q: I owe you 1M and in order to avoid paying my obligation, I
fraudulently alienate some of my properties. What are your remedy
as creditor?
A: accion pauliana. because my action of fraudulently alienating my
property is prohibited by the civil code. A recissible contract entered
to defraud a creditor. You can ask here the recission of the contract.
Q: what if I incur an additional obligation not from you, can you
prevent me from incurring an additional obligation?
A: you cannot.
Q: what if validly alienate some properties? Can you still prevent
me? As a creditor what will you do?
A: Ask a security from me.
Kinds of Security contracts
1. Personal Security
 Ordinary Guarantee - When another person
binds himself to pay an obligation, in case I
cannot pay.
 Suretyship - If a third person bind himself
SOLIDARY WITH ME in the obligation (person is
called a SURETY).
i. Considered as a Solidary debtor and so
you can go after the surety for the
entire payment.
2. Real Security
 property put up as security of the obligation
 this does not mean that the property is given for
the payment of the obligation for that would be
a DATION in pago.
 Here in case of default you will SELL and apply
the proceeds to the obligation.
 You do not become automatically the owner of
the property in case of default because that is
prohibited, that is called, PACTUM
COMMISSORIUM.
Cause
 Since this is a security undertaking there is no need for a
separate consideration be given.
obligation.
CASES:
PACIFIC BAKING vs IAC
- here, roselia here applied for a credit card, at the time it was
required that a person secure’s the obligation of the credit
card holder.
- Then who better to support the obligation but the loving and
supporting husband. So he signed the guarantors undertaking.
- But in the undertaking he bound himself JOINTLY &
SEVERALLY, cause if you read the title the contract which is
“guarantors undertaking” you would think that he bound
himself subsidiary only as a guarantor but in fact the terms say
it was solidary.
- SC RULED: You are not bound as a guarantor but as a SURETY.
You are principally liable.
ZOBEL vs CA
- spouses here obtained a loan from SOLIDBANK, to purchase a
barge, the loan were both secured by a personal and real
security.
- You have a CONTINUING GUARANTEE & CHATTEL MORTGAGE
- Upon default solidbank went after zobel who secured by zobel.
ZObel argued you cannot claim from us because we cannot be
subrogated to the bank because of the bank’s fault of failure to
register the mortgage. The mortgage therefore is not effected.
- SC RULED: Well you are right. You would have been released
from your obligation If you were a GUARANTOR. BUT when
you signed a CONTINUING GUARANTEE you are actually to be
bound as a surety. The terms are
- "For and in consideration of any existing indebtedness to you of
AGRO BROKERS, a single proprietorship owned by MR. RAUL P.
CLAVERIA, of legal age, married and with business address x x x
(hereinafter called the Borrower), for the payment of which the
undersigned is now obligated to you as surety and in order to
induce you,..”
- take note of the title of the document in both cases the word
guaranty is found but yet in both case the court found that it
was in fact a surety not as ordinary guarantors.
MACHETTI CASE
- SC RULED: there are instances when a person signs in a
guarantor’s undertaking but really undertaking of that as a
surety. But that is not found in the case because here the
undertaking was PURELY OF THAT OF A GUARANTOR not a
surety.
- “the guarantor only binds himself to pay if the principal cannot
pay. The one is the insurer of the debt, the other an insurer of
the solvency of the debtor. This latter liability is what the
Fidelity and Surety Company assumed in the present case. The
undertaking is perhaps not exactly that of a fianza under the
Civil Code, but is a perfectly valid contract and must be given
FOR EH 405 ’13-’14 1
 the legal effect if ordinarily carries. The Fidelity and Surety
Company having bound itself to pay only the event its principal,
Machetti, cannot pay it follows that it cannot be compelled to
pay until it is shown that Machetti is unable to pay.”
GUARANTY
- is a accessory, subsidiary, consensual and either gratuitous or
onerous contract.
- Accessory – because it cannot exist without a prior VALID
obligation secured by the guaranty.
Q. what if there is a recissible contract, can it be secured by a
guarantee?
A. YES. It is a valid contract although defective. Valid until
rescinded.
- Subsidiary – because the guarantor is liable only if the debtor
cannot pay unless the guarantor binds himself as a surety.
Guaranty vs Surety
CASTELLVI vs SELLNER
- SC RULED: 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, his obligation is that
simply of a guarantor.
- It does not mean that if the undertaking is contained in the
SAME document containing the principal obligation that the
undertaking is that of a surety.
- There can be instances when you have a principal obligation
secured by a ordinary guarantee only.
- Usually, if you find a signature of a co-maker, then the
undertaking of the co-maker is that of a surety.
Example ani kana note sa mga teacers: teachers gi seduce sa
mga lending companies, so each teacher would be co-maker of
the other. So nahitabo na matay ang us aka co-maker reclamo
usa na wala mankoi nadawat ana na utang. WRONG. as a co-
maker you are solidary liable.
- SO THE POINT HERE IS THAT: it does not mean that if it is an
ordinary undertaking of guaranty that it must be contained in
the same document containing the provisions of the principal
obligation. WHAT IS IMPT. That the undertaking is CLEARLY
SPECIFIED whether it is of an ordinary guarantor or that of a
surety.
Liability where company president signed as guarantor
Q. Now if you are a President of a corporation that obtained a loan
from the bank, undersigned as a guarantor and also signed as the
president, separate undertaking para dili libog. If the corporation
defaults on its obligation, can the president be held liable as a
SURETY? If you are the president and at the same time a majority
stockholder of the corporation and you signed as guarantor, can you
be held as a surety? Total murag imo naman na ang corp kay kaw
man maj. Holder, it is as if you and the corporation are one, can the
creditor do that?
- SC: NO. there mere fact that you are the president and at the
same time the majority stockholder, does not automatically
make you a surety if you merely signed as a guarantor.
Moreover, there is a doctrine in corporation law called the
DOCTRINE OF SEPARATE ENTITY, which states that the debt of
the corp is not the debt of its officers or stockholders even if
majority stockholder.
SOLIDARY DEBTOR vs SOLIDARY GUARANTOR
Now even if a person binds himself solidary with the principal
debtor, and therefore he is govern by the rules of solidary
obligation, it does not erase the fact that he is a guarantor.
If you are a surety and you pay the obligation you can recover the
entire amount from the debtor. Unlike the rules of solidary
obligation where a solidary debtor can recover only the portion paid
which is the share of the co-debtor. In here, the solidary guarantor
can recover the ENTIRE amount from the debtor, in the sense that
he was not obligated in the original obligation. He is just a solidary
guarantor.
But we are more interested in this statement:
“the solidary guarantor has an action for counter bond while a
solidary debtor is limited only to an action contribution by the other
co-debtor”
WTH is a counter bond??
Ex. X owes you 1M, I bind myself solidary with X, I am here a solidary
guarantor, take note I am not a principal debtor, it is X who is the
principal debtor. Im just a solidary guarantor.
What is my right? TO RECOVER THE FULL AMOUNT THAT I PAID if
ever I am to be made to pay the obligation.
How will I be assured that I will be reimbursed?
I will require X to put up another security that I can go after in case I
will not be reimbursed. So you have a MAIN guaranty which I make
in favor of X, and a SUB-guaranty in my favor in case I will not be
reimbursed. This is a COUNTER BOND or INDEMNITY AGREEMENT.
Not essential to the surety ship, may be made before or during the
surety/guaranty.
PHIL. GEN vs MUTUC
This is a case about a seaman, Phil gen. the guarantor in favor of the
seaman is going after the indemnity debtors, because guarantor
syah dri and there was a indemnity agreement in his favor, and phil
gen was forced to pay the guaranty because the seaman jumped
shipped. So philgen tried to recover from the indemnitors, this is
actually an example of a COUNTER BOND.
CONSENSUAL
Now, guaranty is a consensual contract just like a contract of sale,
not like a loan or deposit, which is a real. It is therefore perfected
the moment there is an agreement between the guarantor and the
creditor. Debtor’s consent is not required to constitute a guaranty,
bahalag mag wild pana dra ang debtor dra. It does not affect the
validity of the contract.
So X owes you 1M. I secure his obligation, as a guarantor. I called
you over the phone “ ayaw ka balaka, akoi mu guarantiya ana” ana
pud ka “ cge ha, lawyer’s oath”. So wala manka bayad, so you call
me and ask me to pay. Ana pud ka na joke rman to dko oi! Wjud koi
ndawat adto. Can you compel me to pay?
2
 1. is the undertaking valid? YES. Valid & Binding BUT
unenforceable usa sya sa Statute of Fraud. It must be in
writing for there to be enforceability.
2009 BAR QUESTION:
Q. TRUE or FALES.
An oral promise of guaranty is VALID and BINDING.
A. TRUE.
GRATUITOUS or ONEROUS
The presumption is that if there is no mention of any particular
consideration to the guarantor then it is gratuitous.
The guarantor cannot claim that he was not paid by the agreed
compensation therefore he is not bound. This is in the case of PHIL.
PRYCE ASSURANCE CORP. vs CA.
SEVERINO vs SEVERINO
The obligation secured here is the obligation of Guillermo to pay his
half sister and stepmother and this was also secured by mr. chaos.
When mr. severino failed to pay the last installment, the sister sued
mr. chaos. So mr. chaos said I did not receive any compensation for
my undertaking so im not bound.
SC held: There is no requirement that you must be paid a valuable
consideration, you are bound because causa that supports a
principal obligation was supported, which was obligation of mr.
severino.
KINDS
A. By its origin
CONVENTIONAL- constituted by contract
LEGAL- required by substantive or procedural law
JUDICIAL- required by a court from a litigant
B. By its extent
INDEFINITE or UNLIMITED or SIMPLE- cover the principal
obligation, accessories and cost incurred after the
guarantor has been judicially asked to pay.
 If the guaranty is given without the knowledge or
consent of the debtor, Articles 1236 and 1237
apply.
A guarantor can recover from the
debtor what the former had to pay the creditor,
even if the guaranty was without the debtor’s
consent or against his will, but the recovery will
only be to the extent that the debtor had been
benefited.
LIMITED- guaranty that excludes the accessory obligation
Again, Guaranty can be constitute even without the consent of the
principal debtor because in the case of…
DE GUZMAN vs SANTOS
The principal debtor here refused to reimburse the guarantor of the
amount paid by the guarantor because he never gave his consent to
the undertaking.
SC HELD: NO. You were benefited. Even if the debtor did not consent
the debtor is still liable to the guarantor.
RULE IF DEBTOR DOES NOT GIVE CONSENT: The guarantor can only
recover to the extent that the debtor is benefited.
OBLICON: 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 stipulation to the contrary.
Whoever pays for another MAY DEMAND from the DEBTOR WHAT
HE HAS PAID, except 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.
IF WITH CONSENT: then he is subrogated to the rights of the
creditor.
This same rule applies to guaranty.
By the person guaranteed
 Guaranty proper
 Sub-guaranty (to guarantee the guarantor’s
solvency)
By the liability of the guarantor
NORMAL or ORDINARY- simple guarantee; guarantee
proper; subsidiary
SOLIDARY- suretyship
A guarantor is the insurer of the solvency of the debtor;
binds himself to pay if the principal is unable to pay.
A surety is the insurer of the debt; he undertakes to pay if
the principal does not pay.
MACHETTI vs HOSPICIO
Court said the guarantor is the insurer of the debtor’s solvency.
Whereas a surety is the insurer of the debt. Meaning the liability of
the guarantor only arises when the debtor cannot pay.
The surety is the insurer of the debt. He is liable as long as the debt
is not paid. Regardless if the debtor can pay or cannot. Liability is
primary. For as long as the debt is not paid he is liable.
In guaranty the guarantor will only pay if the debtor is unable to pay.
That is why he is called the insurer of the insolvency of the debtor.
FOR EH 405 ’13-’14 3
PNB vs LUZON
Court said where the surety bond appears that it states that the
surety binds itself jointly and severally with the obiligor the liability
is that of suretyship.
Q. X obtains several of jewelries from you, to be sold and the
proceeds to be turned over to you less commission. I secure X
obligation as a surety. Your contract with X is agency. And X fails to
account the proceeds of the sale. File kag case against X ug estafa.
The question is, if I bound myself as a surety can you also sue me for
estafa?
A. in a case the court said NO. in other words, the liability of the
surety is purely civil. The surety cannot be criminally held liable.
Q. X owes you 1M, I guaranteed the obligation as an ordinary
guarantor. X is declared in a state of suspension of payments. The
effect all action against X is suspended. The question is, can the
creditor go after me the guarantor?
A. NO he cannot. The guarantor becomes liable only if the debtor
cannot pay. He can pay but the payment is just suspended.
Q. change a bit of the previous, I am now a surety not a guarantor.
Can you sue me?
A. Yes. Because my liability is primary.
Q.Remember that a guaranty is an accessory contract. What
happens if the principal obligation is extinguished? X owes you 1M. I
secure his obligation. Then you condone his obligation. Can you
collect from me?
A. NO. because the principal obligation is extinguished.
Q. what if I secured the obligation as a security. Same facts. Can you
go after me?
A. NO. because the principal obligation is extinguished.
ORALS:
Q. is there any particular qualification required of a guarantor? Is
there any Minimum requirement to be a guarantor?
A.
1. He must be capable of contracting obligations
2. He must have sufficient property to answer for the debt
guaranteed. Must not be insolvent.
a. When is solvency of the guarantor required?
i. At the point that the contract of
guaranty is constituted.
b. Now what happens if he becomes insolvent after
the constitution of the guaranty and before of
the extinguishment of the principal obligation of
the guaranty?
i. The creditor can require that another
guaranty be constituted. Require the
debtor to provide another guaranty.
c. What if the debtor fails to provide another
guarantor? You have an obligation with a period
secured by a guaranty then the guarantor
becomes insolvent, the creditor may demand
from the debtor to give another security. In
relation to that obligation with a period, what is
the remedy of the creditor if the debtor fails to
provide with another guarantor?
i. He can consider the principal
obligation to be demandable at once.
Because the effect if the debtor fails to
provide a security in relation to that
obligation with a period, THE DEBTOR
LOSES THE RIGHT TO ENJOY THE
BENEFIT OF THE USE OF THE PERIOD,
therefore the obligation becomes
DEMANDABLE and DUE.
3. He must possess integrity (honesty):
a. When must this integrity be possessed by the
guarantor? I am the guarantor, you are the
creditor, X is the debtor, and after the
constitution of the guaranty, I am convicted of
estafa. What will you do?
i. You can demand for another security.
Because
Conviction of the guarantor of a crime
involving dishonesty has the same effect
as insolvency
Integrity is a matter of opinion and is
required only at the time of the
perfection of the contract. Its subsequent
disappearance makes it optional in the
creditor to demand another guarantor
Q. If the guarantor is chosen by the creditor, must the guarantor
possess all qualification of a guarantor?
A. the guaranty is for the benefit of the creditor that is why if the
guarantor is chosen by the debtor he must prove that he has all the
qualification required. If chose or proposed by the creditor himself,
he may waive the special qualifications.
Now since guaranty is a contract, then the 3 essential elements of
contract must be present. Consent, in a contract of guaranty the
consent of the creditor & the guarantors is required.
TEXAS vs ALONZO
Q. Why was alonzo absolved from his undertaking as a surety?
A. there was no acceptance by TEXAS of the guaranty made by
Alonzo for the contract.
Q. Can’t it be inferred that when Alonzo signed the undertaking that
the contract of suretyship was already perfected?
A. No. acceptance should not be inferred but must be made in a
specified form.
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 form and amount and with
4
such bank as surety or with such individuals or 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 thereto; 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.
So in this case Texas must have notified the acceptance which they
did not therefor Alonzo was not held liable of the obligation of
bantog the debtor.
Q.What is the effect on the suretyship as a contract if texas did not
manifest its satisfaction of Alonzo offer to the undertaking?
A. the surety on the contract will not be valid because there was no
consent. So even if Alonzo consented to act as a surety, texas did not
manifest its consent to the offer of Alonzo to act as surety so then
there is no consensual contract of surety that was constituted.
EFFECT OF PRINCIPAL HAS NOT PAID THE PREMIUM
Q. X owes you 1M but your require X to put up a security for the
payment of the obligation to pay 1M. X approaches me to act as the
surety. I said I will agree provided you pay me a consideration for
acting as your surety. So X agreed to pay a tiny compensation of 50K.
so X issues me a check. So I signed the suretyship agreement and I
sent it to you and you accepted. The check was then dishonored.
Plus ni default pajud si X. so ni demand naka sa ako for the
obligation. Was the surety valid considering that I was not paid?
A. Yes it is still valid. Payment of valuable consideration to the
guarantor to act as one is not essential to the validity of the
guaranty for as long as the creditor accepted the surety. The causa in
a security undertaking is the same causa that supports the principal
obligation. It is not essential of the security undertaking in a contract
of guaranty that a guarantor must receive the agreed compensation
before he is bound as long as there is consent already between the
guarantor and the creditor. The contract is already perfected and
the surety is already bound in his undertaking. (Pryce vs CA)
DEBTS THAT MAY BE GUARANTEED
Q: Can a voidable contract be secured by a guarantee?
A: Yes. Because a voidable contract is valid until it is vooiiideed. So
all valid contracts even if defective can be secured by a guarantee.
Municipality of Gasan vs Marasigan
Q: in this case, sevilla and luna were the sureties for marasigan. And
yet, the court said they are not liable as sureties. Why?
A: they were not liable because the municipal counsel voided its
previous resolution that awarded marasigan the concession to
harvest the bangus and it was in this concession that there was a
surety. So when the contract was avoided it follows that the surety
was avoided.
Q: but the municipal reinstated the contract?
A: yes. But reinstatement does not carry with it the revival of the
guaranty so by declaring it void the surety’s life ended but what was
revived was the original contract.
Q: Can an accessory contract survive the death of the principal
contract?
A: No because the accessory contract is dependent on the principal
contract.
Q: is this absolute? Isn’t there an instance that the accessory
survives the death of the principal contract?
A: YES. NO other instance that accessory survives. It is absolute that
accessory depends on the principal.
Q: isn’t it that in Oblicon that extinguishment of the principal carries
with it the accessory, so therefore can we not infer that revival of
the principal carries with it the revival of the accessory?
A: No. there must have been an express act of reviving the
accessory.
The fishing privilege contract entered into by the plaintiff and the
appellant M.M. on December 11, 1930, not only was not
consummated but was cancelled. This being so, neither the
appellant M.M. nor his sureties or the other appellants were bound
to comply with the terms of their respective contracts of fishing
privilege and suretyship. This is so, particularly with respect to the
sureties-appellants, because suretyship cannot exist without a valid
obligation (art. 1824 of the Civil Code), the obligation arising from a
cancelled contract not being a valid obligation.
The obligation whose compliance by the appellant M.M. was
guaranteed by the sureties-appellants A.S. and G.L., was exclusively
which should begin on January 1, 1931, not on the 14th of said
month and year, subsequent contract which the plaintiff and M.M.
might have entered into on or after January 14, 1931. Guaranty is
not presumed; it must be express and cannot be extended beyond
its specified limits
Q: Must the debts be secured by the guaranty be existing at the time
of constitution of the guaranty?
A: Not necessary. The guaranty maybe instituted for a future debt.
Q: So when can the guarantor be held liable if guaranty maybe
constituted on a future debt?
A: he will only be liable once the debt is LIQUIDATED.
Q: so when is the debt considered liquidated?
A: A debt is liquidated when the amount is known or is
determinable by inspection of the terms and conditions of the
relevant promissory notes and related documentation. Failure to
FOR EH 405 ’13-’14 5
furnish a debtor a detailed statement of account does not ipso facto
result in an unliquidated obligation.
Q: what is that provision in the guaranty or the suretyship
undertaking that tells you that this particular undertaking secures
future obligation?
A: when there are such words such as any indebtedness, or from
time to time, which could mean they securing future obligation
which is nominated in sign by the word “CONTINUING SURETYSHIP
AGREEMENT or COMPREHENSIVE SURETYSHIP/Guarantee
AGREEMENT”
Q: when you have a comprehensive agreement, does it cover
present and future obligation? Can it apply also previous incurred
obligations?
A: Yes. Especially if it is stated in the suretyship agreement.
FORM
Now we said that guaranty is a consensual contract, therefore
agreement by the creditor and guarantor already perfects the
contract because a verbal agreement to constitute a guaranty is
valid and binding. However, while it is valid and binding it is
unenforceable because it is a special promise to answer for the
default of another person and therefore it is covered by the statute
of frauds.
MACONDRAY vs PINON
You have here, an honorable member of the phil. Senate.
Nakadawat ni sya ug suwat from the senator na nakasuwat:
TO: The Manager
Macondray & Company
China Bank Building

Manila
Sir: This will introduce to you the bearers, Messrs. Conrado
Piring and Perfecto Piñ;on, both well known theater characters
under the names of "Pugak" and 
"Tugak", respectively.
I have been made to understand by them in their
representations to me that they wish to place an order for the
following items: 10 rolls Negative at P157.00 each, and 100 rolls
positive at P55.00 each of Dupont Release Positives Safety Basis
for use of their firm called "All Stars Productions" under the
management and control of Pugak and Tugak payable within
three (3) months time ending April, 1954 and for which by their
guaranty I pledge payment.
Sincerely(Sgd.)RUPERTO KANGLEON
Senator
then tugak and pugak failed to pay. Can they go after the senator
based on these letter?
SC here said YES. A contract of guaranty is not a formal contract and
shall be valid in whatever form it may be, provided that it complies
with the statute of frauds. So court here considered the letter of
senator kangleon as a sufficient guarantor undertaking the basis of
which macondray extended credit to pugak.
GUARANTY & SURETY MUST BE EXPRESS AND CANNOT BE
PRESUMED
But even if guaranty need not be in a particular form to be valid.
Guaranty must be expressly agreed by the parties and cannot be
presumed.
WISE CO. vs TANGLAO
David here was indebted to wise, and in order to avoid attachment
of his properties his lawyer gave a special power of attorney
authorizing david to sign for him as guarantor & to constitute a
mortgage over properties owned by atty tanglao. So two authorities
granted to sign as guarantor to and in behalf of tanglao to bind
tanglao as guarantor and to bind him also as mortgagor over
properties owned by the lawyer.
But david actually signed ONLY A MORTGAGE document. So he
defaulted in his obligation to wise. Now wise want to hold tanglao
liable on his SPA.
SC said NO. the SPA is not the guarantor’s undertaking. The SPA
merely authorize david to sign the undertaking and the mortgage
pero ang na pirma kay ang mortgage raman wala man apil ang
guaranty. THEREFORE tanglao cannot be held personally liable as a
guarantor. Court ruled here that guaranty must be EXPRESS and
cannot be presumed.
TERMS OF A CONTRACT OF SURETYSHIP DETERMINE THE SURETY’S
LIABILITY AND CANNOT EXTEND TO MORE THAN WHAT IS
STIPULATED THEREIN.
SOLON vs SOLON
Solon undertook to be the guarantor but mentioned as surety to a
debtor. To secure his undertaking as a surety but actually a
guarantor he mortgaged this particular lot. When defaulted the
creditor wanted to include another lot which was not mention in the
undertaking.
SC said NO you cannot do that. The terms of a contract of suretyship
determines the surety’s liability and cannot extend to what is
stipulated therein. Therefore, if the creditor should foreclose the
mortgage then the property included in the mortgage in only that
property and cannot include another property which is not
specifically stated in the guarantor’s undertaking.
EFFECTS OF GUARANTY
GENERALLY the guarantor cannot be liable for more than the
obligation of the debtor.
Q: So in what instance can a guarantor be liable for more than the
obligation of the debtor?
A: Guaranty is Penal in nature & when surety is liable for interest.
EXTENT OF LIABILTY WHEN THE BOND IS PENAL IN NATURE
Q: give an example of guarantor’s undertaking, which is penal in
nature.
A: GENERAL INSURANCE VS REPUBLIC
FACTS: Central Luzon Educational Foundation, Inc. and the General
Insurance and Surety Corporation posted in favor of the Department
of Education a bond. On the same day, the Central Luzon
6
Educational Foundation, Inc., Teofilo Sison and Jose M. Aruego
executed an indemnity agreement binding themselves jointly and
severally to indemnify the surety of "any damages, prejudices, loss,
costs, payments, advances and expenses of whatever kind and
nature, including attorney's fees and legal costs, which the
COMPANY may, at any time sustain or incur, as well as to reimburse
to said COMPANY all sums and amounts of money which the
COMPANY or its representatives shall or may pay or cause to be paid
or become liable to pay, on account of or arising from the execution
of the above mentioned Bond." the surety was withdrawing and
cancelling its bond.
It appears that on the date of execution of the bond, the Foundation
was indebted to two of its teachers for salaries, to wit: to Remedios
Laoag, in the sum of P685.64, and to H.B. Arandia, in the sum of
P820.00, or a total of P1,505.64.
the surety contends: That the bond is void for being contrary to
public policy insofar as it requires the surety to pay P10,000.00
regardless of the amount of the salaries of the teachers. 3 It is
claimed that to enforce forfeiture of the bond for the full amount
would be to allow the Government to enrich itself since the unpaid
salaries of the teachers amount to P1,318.84 only. MOREOVER, that
it cannot be made to answer for more than the unpaid salaries of H.
B. Arandia, which it claimed amounted to P720.00 only, because
Article 2054 states that —
"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."
SC HELD:
We agree with this contention of the Government.
It must be remembered that, by the terms of the bond, the surety
guaranteed to the Government "compliance (by the Foundation)
with all obligations, including the payment of the salaries of its
teachers and employees, past, present and future, and the payment
of all other obligations incurred by, or in behalf of said school."
Now, it is not disputed that even before the execution of the bond,
the Foundation was already indebted to two of its teachers for past
salaries. From the moment, therefore, the bond was executed, the
right of the Government to proceed against the bond accrued
because since then, there has been violation of the terms of the
bond regarding payment of past salaries of teachers at the Sison and
Aruego Colleges. the right of the Government to collect on the bond
arose while the bond was in force, because, as earlier noted, even
before the execution of the bond, the principal had already been in
debt to its teachers.
There is nothing against public policy in forfeiting the bond for the
full amount. The bond is penal in nature. Article 1226 of the Code
states that in obligation with a penal clause, the penalty shall
substitute the indemnity for damages and the payment of interests
in case of non-compliance, if there is no stipulation to the contrary,
and the party to whom payment is to be made is entitled to recover
the sum stipulated without need of proving damages because one of
the primary purposes of a penalty clause is to avoid such necessity.
What We said about the penal nature of the bond would suffice to
dispose of this claim. For whatever may be the amount of salaries
due the teachers, the fact remains that the condition of the bond
was violated and so the surety became liable for the penalty
provided for therein.
OBLIGATION OF THE SURETY EARNS INTEREST
Q: X owes you 1M, I am the guarantor of his obligation, and in the
undertaking I bind myself to pay X 2M incase X fails to pay his
obligation of 1M. you accepted it. Have we entered to a perfected
contract of guaranty?
A: it is valid but the amount to be recovered is reduced. if X defaults
in the obligation you can recover from me 1M only not 2M.
Q: X defaults in his obligation of 1M to you, in oblicon once default
interest kicks in. legal interest of 6% will come in. then you demand
from me as surety or guarantor. Can the creditor demand from the
guarantor the interest on top of the 1M?
A: yes because it is one of the exceptions.
Q: Now when you demand payment of the loan and he defaulted,
we agreed that interest started to run. Who is liable to pay that
interest?
A.: the principal debtor.
Q: so when the surety paid the interest + the 1M did the surety
become liable for more than the liability of X the debtor?
A: NO. because X is still liable for the interest because it was his own
default.
Q: so what interest are we talking about when you say that the
surety is liable for more than the liability of the debtor?
A: LEGAL INTEREST of default of SURETY not of the principal.
Q: when X debt matured you demanded from the surety payment,
because I am surety you can immediately collect from me. But when
the debt matured the liability of X is 1M. but surety failed to
immediately pay. Am I liable to pay interest?
A: Yes the surety is liable
Q: Can the surety collect that from Debtor?
A: NO. because the fault of the running of the interest is that of the
surety. So this is an instance that the surety is liable for more than
the principal obligation because the surety himself is in default.
WHEN TO PAY
Q: so when must the guarantor pay? Remember we are talking here
of an obligation with a period which is secured by a guaranty. So
when am I liable as a guarantor?
A: On or after the expiration of the period.
FOR EH 405 ’13-’14 7
Q: am I liable prior to the due date?
A: NO. because the debtor is also not liable to the date certain.
Q: Can I pay prior to the maturity of the obligation (surety sya)? The
obligation is on ore before may 1. Today is only jan. 9. No agreement
for interest. Surety pay now. Can I?
A: yes. The surety can pay the creditor. BUT if I pay prior it becomes
due and demandable I cannot yet demand reimbursement from the
debtor. Because the obligation has not yet matured. Unless, if the
debtor ratifies the payment.
DUTY TO NOTIFY OF THE PAYMENT
Q: The Law Requires that I should inform X of the payment
otherwise can raise defenses and refuse to reimburse me. The
question is, WHEN MUST I NOTIFY THE DEBTOR? Before I pay or
After I pay?
A: logically, I should NOTIFY X before I pay. Kay kung after muana
palang si X nah na condone naman ang obligation. You cannot
recover from X but from the creditor.
PRIVILEGES OF THE GUARANTOR
There are two privileges:
1. Benefit of Exhaustion/Excusion
2. Benefit of Division
Benefit of Exhaustion/Excusion
- is simply the right granted to the guarantor to demand that the
creditor first exhaust all properties of the debtor before the
creditor can go after him for payment. After all this is not the
guarantor’s obligation he merely secured the payment of the
obligation. He is not principally obligated.
- According to paras, the creditor must:
o exhaust all the property of the debtor,
o he must resort to all the legal remedies against
the debtor,
o he must prove that the debtor is unable to pay,
o and he must notify the guarantor of the debtor’s
inability to pay otherwise if the guarantor is
prejudiced due to lack of notice he cannot be
made to pay unless there is a waiver on the part
of the guarantor.
PROCEDURE:
- the creditor must file a case against the debtor alone
- the creditor then shall ask the court to notify the guarantor of
the action
- but under the 1997 rules of court it should be the defendant or
the debtor who is allowed by law to implead a third party
which is the guarantor here.
- BUT the practice now, is to implead both debtor and
guarantor, and when there is a judgment the execution must
first be satisfied against the debtor before the guarantor
If the guarantor is impleaded, it is not enough that he is heard. The
law requires the benefit of exhaustion. He must point to the creditor
all levy able properties of the debtor located within the Philippines
only.
Levy able Properties in the Philippines – this are properties not
exempt form execution. (those exempt are: libraries of lawyers,
family home and other mentioned in rule 39 (preview sa pinka taas
na rule sa civpro))
So it is not enough that he invokes the privilege of exhaustion, he
must point to the creditor all levy able properties of the creditor
here in the Philippines.
HOW INABILITY TO PAY IS PROVED
MACHETTI VS HOSPICIO
Court said that one-way of proving the inability to pay by the debtor
is by the return of the writ of execution which is unsatisfied or by
other means.
Fidelity became liable as guarantor for Machetti in this case because
machetti was dropped as a party because he was declared as
insolvent. And by being dropped from the case no judgement can be
rendered against him. gi declare pud si machetti na ug insolvent.
For the benefit of discussion for benefit of exhaustion, the court is
saying here that one way of proving that the debtor cannot pay is
the return of the writ of execution unsatisfied. Here you cannot even
obtain a writ of execution because there is now judgment against
the principal debtor that can be executed because again here
machetti was dropped for being insolvent but the case continued as
the guarantor.
The court here said NO YOU CANNOT EXECUTE THE JUDGMENT
HERE AGAINST THE GUARANTOR. You must prove first that you
cannot collect from the debtor, and one way of proving is the return
of the writ of execution unsatisfied, which was impossible in this
case.
Fidelity & Surety Co. having bound itself to pay only in the event it’s
principal, Machetti cannot pay, it follows that it cannot be
compelled to pay until it is shown that Machetti is unable to pay.
Such inability to pay may be proven by the return of a writ of
execution unsatisfied or by other means, but it is not sufficiently
established by the mere fact that Machetti has been declared
insolvent in an insolvency proceeding in which the extent of the
insolvent’s liability to pay is not determined until the final
liquidation of his estate.
Q: now is it required that the surety or the guarantor be afforded
with the right to be heard before he held liable?
A: Yes, Even if it is a surety or a guarantor.
EFFECT OF WRIT OF EXECUTION AGAINST SURETY WHO WAS NOT
IMPLEADED
TOWER ASSURANCE vs ORORAMA
8
The court here said that even if he bound itself principally with the
principal debtor, he still must be afforded with the opportunity to be
heard.
BUT a year after in the case of…
FINMAN GENERAL ASSURANCE vs SALIK
The court said here that there is no requirement to be afforded with
the opportunity to be heard because its relationship with the debtor
is such that it is charged with the knowledge of the liability of the
debtor. So there is no need to implead the surety.
But HOWEVER in this case the surety WAS ACTUALLY IMPLEADED
only that it defaulted that why it seemed that it didn’t have the
opportunity to be heard. Gi summons jud ni sya pero failed to file an
answer. So kung gi summon ka nya waka ni file og responsive
pleading, and so you were defaulted. You in fact denied yourself the
opportunity to be heard.
*SO bali pasabaot jud ni Judge ani i implead jud ang guarantor or
surety as form of notice.
WHEN IS THE BENEFIT OF EXHAUSTION AVAILABLE
- It should be invoked the moment demand is made upon him
to pay.
- If a case is filed her must invoke the privilege before the
judgment is rendered by the trial court.
- If invoked ON APPEAL then it is too LATE already.
BAYLON vs CA
Not assign but it goes like this, X owes you 1M, G guaranteed the
obligation. When defaulted C creditor, filed a case of collection
against X and G. but X could not be found so X could not be served
with summon. But G was served with summon. So G filed an answer.
The case proceeded against G only. Judgment was renderd against G
(murag sa machetti case). So G invoked the benefit of exhaustion.
SC said that the judgment cannot be executed against G. this is
because the judgment was rendered against the principal debtor
who was not summoned in the case. So how can the creditor prove
that the creditor cannot pay therefore no judgment against the
principal debtor.
JN DEVT CORP vs PHIL
It is like this, X owes C 1M. G guaranteed the payment. When X
defaulted. G paid. Then sought reimbursement from X. then X said,
you did not invoke the priv. of exhaustion. Because of that daw X is
not liable to reimburse.
SC said that the privilege of exhaustion is given to the guarantor.
Since it is privilege, it is waive able. Best way of showing it was
waived is that the act of the guarantor of paying without invoking it.
That is why the debtor cannot invoke this to avoid reimbursing the
guarantor.
WHEN THE BENEFIT OF EXHAUSTION NOT AVAILABLE
1. waiver – JN CASE
2. waiver by agreeing that liability is direct and immediate -
also in the TUPAZ case where topaz waive the privilege
when he agreed that his liability in the guaranty is direct
and immediate. Without the creditor to take any steps to
exhaust or legal remedies of execution.
3. Guarantor binds himself solidary – a surety cannot invoke
exhaustion of the debtor because creditor in surety ship
the creditor may go immediately against the surety.
4. Debtor is declared judicially insolvent - there is proof
that you cannot collect form the debtor
5. Debtor cannot be sued in the Philippines because he has
absconded
6. Presumed that execution would not result in the
satisfaction of the judgment credit. – this is presumed
when other previous writ of execution were not satisfied
so you cannot expect na ma satisfy pana imo.
BITANGA vs PYRAMID
Court said 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.
This emphasizes that requirement that it is not enough for the
guarantor to invoke the benefit of excusion he must point out the
creditor properties of the debtor. After pointing out then kuwang
pa. then he is liable to pay under his undertaking as a guarantor.
Benefit of Division
General rule: when there are several guarantors for one and the
same debtor and debt, the obligation to answer for the same is
divided among all of them. The creditor may only claim from each
debtor his corresponding share, unless solidarity has been expressly
stipulated.
Effect if one of the two guarantors paid half of judgment debt.
De Guzman vs. Santos 63 Phil. 371 June 30, 1939
Under Article 1822 of the Civil Code, by guaranty one
person binds himself to pay or perform for a third person in
case the latter should failed to do so, and Article 1838 of the Civil
Code provides that any guarantor who pays for the debtor
shall be indemnified by the latter even if the guaranty have been
undertaken without the debtor’s knowledge. Applying the
citedprovisions, it is obvious that Santos is legally bound to pay the
plaintiff what he has advanced to Candelaria upon judgment,
notwithstanding the fact that the bond was given without his
knowledge.
Defendant’s obligation to pay what the plaintiff had
advanced is further sanctioned by the general provisions of the Civil
Code regarding obligations. Article 1158 of the Civil Code provides
that the payment made by any person whether he has an interest in
the performance of the obligation or not, and whether the payment
is known and approved by the debtor or whether he is unaware of it,
may be recovered from said debtor.
FOR EH 405 ’13-’14 9
 Any person who makes a payment for the account of
another may recover from the debtor the amount payment, unless it
was made against the express will of the latter. In the latter case, he
can only recover from the debtor in so far as the payment has been
beneficial to the latter. According to this legal provision, it is evident
that the defendant is bound to pay to the plaintiff what the latter
had advanced to Candelaria, and this is more so because it appears
that although Lucero executed the bond without his, knowledge,
nevertheless he did not object thereto or repudiate the same at any
time.
And it cannot be logically deduced that the defendant did not
have knowledge of the bond, firstly, because his properties were
attached and attachment could not have been levied without his
knowledge, and secondly, because said properties were returned to
him and in receiving them he was necessarily apprised of the fact
that a bond had been filed to discharge the attachment. Judgment
affirmed.
When division is not available
- the benefit of division ceases in the same cases and for the
same causes as that of exhaustion.
Time to invoke benefit
- same as for the benefit of exhaustion.
Rule if each and all guarantors secure the entire debt
- Division applies if each and all guarantors secure the entire
debt; but not if each guarantors answers for a separate
portion.
Mira Hermanos vs. Manila Tobacconists
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 the month of 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 1837 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.
Issue:
- Whether or not Provident Insurance Co is entitled to the
"benefit of division" provided in article 1837 of the Civil Code
SC Ruling:
- The "benefit of division" provided in article 1837 of the 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 liability in solidum 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.
- The statement of the trial court to the effect that the bond of
P3,000 responded for the obligation of the Tobacconists up to
the sum of P3,000 and the bond of P2,000 responded for the
obligation of the Tobacconists only insofar as it might exceed
P3,000 and up to P5,000, is a finding of fact based upon the
undisputed testimony of the witnesses called by the defendant
Manila Compañia de Seguros in support of its special defense
hereinbefore quoted. 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 .
- The evidence upon which that finding is based is not only
undisputed but perfectly reasonable and convincing. For, 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, we might add, 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. 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.
10
 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 co-extensively 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.
Defenses of the Guarantor
Defenses which pertain to the debtor:
The guarantor may set up against the creditor all
defenses which pertains to the principal debtor and are inherent in
the debt; but not those purely personal to the debtor.
The surety may invoke fraud, violence, prior
payment, res judicata, prescription and others of the same class.
Defenses purely personal; minority, incapacity and
other vices of consent which the principal debtor may waive; unless
the guarantor was ignorant of the vice as he could not the waive the
defect.
Defenses peculiar to guaranty:
Merger, novation, extension of time, etc., which
invalidates the contract between the creditor and the surety.
EFFECT OF GUARANTY BETWEEN THE DEBTOR AND THE
GUARANTOR
RIGHTS OF THE GUARANTOR: Before payment by the guarantor
1. to receive compensation unless no compensation si agreed
upon by the parties.
2. To seek relief for security in certain instances
a. How?
i. By an action in court by either relief or
additional security
ii. Directed against the principal debtor
Q: G guarantor, X debtor, C creditor. G learned that X the debtor is
endanger of becoming insolvent. So G files a case against X to be
released from the guaranty. Now C would be prejudiced if G would
be released from the guaranty because X is becoming insolvent and
G is being released the undertaking. What is the more equitable
action to file so as to not prejudice the rights of C? kay if mu file ug
motion to be released si G mu file pud ug motion to intervene si C.
A: demand from the debtor a sub-guaranty or indemnity agreement.
Just like subject of PHILGEN vs MUTUUC.
Instances when the guarantor can file an action to be released from
the guaranty or to demand for a security to be demanded:
1. the debtor is endanger of becoming insolvent
2. the debtor would try to abscond
3. when a period to which guarantor is bound by the contract
he may seek relief if the period has already expired
4. if the obligation does not state a maturity and after 10
years the guarantor may seek to be relieved from the
obligation. Prescriptive period for written obligations is 10
years to action has by then already prescribed.
Q: can the surety also invoke this right?
A: YES. This is also available to the surety despite being solidary
liable.
RIGHTS OF THE GUARANTOR: After payment by the guarantor
1. to seek reimbursement from the principal debtor
2. subrogated to the rights of the creditor
Q: if he seeks reimbursement, what can he recover?
A:
1. he can recover the amount he paid
2. legal interest
3. expenses incurred
4. damages when circumstance shows.
Q: from what point in time is he entitled to interest?
A: from the time notice of payment is given to the debtor
*BASIG MUGAWAS Ning next topic.
Q: when is it more advantageous to the debtor to seek subrogatory
rights rather than seek reimbursement?
A: when the debtor is already insolvent. Because, under subrogation
the person subrogated with the rights of the creditor can go after
the mortgage and foreclose the mortgage. BUT YOU CANNOT go
after the mortgagor personally.
With respect to the mortgage the mortgagee’s right is only to
foreclose the mortgage unless the third party mortgagor likewise
personally binds himself to pay the obligation.
Even so, it is more advantageous for the guarantor to foreclose the
mortgage rather than seek reimbursement if the debtor is insolvent.
BUT THE ULTIMATE REASON is that if you seek reimbursement you
are only an ORDINARY creditor, and since this is an insolvency it is
FOR EH 405 ’13-’14 11
not guaranteed you will be paid with the full amount PREFERRED
creditors will prevail over you. Huwat rka unsa salin. BUT if you step
in the shoes of the creditor and there is a mortgage which make you
a mortgagee over a certain property you are considered a
PREFERRED CREDITOR OVER THAT PROPERTY. When the particular
property is sold you will be paid first, ang sobra other preferred
creditors and then pinaka salin I pa royal rumble sa mga ordinary.
Thus when insolvent and debtor exercise subragatory action rather
than reimbursement. (Basig mu gawas ni, spider sense is tingling)
EFFECTS OF GUARANTY AS BETWEEN CO-GUARANTORS
Q: If you have the benefit of division because you have several
creditors securing the same obligation. We said that this privilege
can be waived which is manifested by one of the co-guarantors
paying the entire obligation. So if one does that he cannot seek
reimbursement from his co-guarantors because he waived the
benefit. Is there an instance where a co-guarantor pays the entire
obligation and yet entitled to seek reimbursement from the other
co-guarantors?
A: Yes. When one of the co-guarantors pays the entire obligation
due to judicial demand.
When several guarantors securing the same debt.
GR: Insolvency of one of the co-guarantors does not result in the
remaining guarantors shouldering the particular share of that
particular guarantor.
Also if one guarantor pays the entire obligation he cannot seek
reimbursement from the other co-guarantors because he waives the
right of division.
EX:
1. one of the guarantor is ORDERED BY THE COURT PAY THE
OBLIGATION or
2. INSOLVENCY OF THE DEBTOR
then that co-guarantor cannot invoke the benefit of division and
therefore he must pay. So, although he paid he can still recover his
share from the other guarantors.
Moreover if after paying one of the Co-guarantors becomes
insolvent the rest of the co-guarantors will bear the insolvency of his
co-guarantor.
Ex.
G1 – 50k
G2 – 50K
G3 - 50K
Total debt: 150K
Scenario 1: w/o judicial demand by court or insolvency
 G1 Pays 150K
 CANNOT RECOVER FROM G2 & G3.
Scenario 2: w/ judicial demand by court or insolvency of debtor
 G1 Pays 150K
 G2 pays G1 50K
 G3 pays G1 50K
Scenario 3: w/ judicial demand by court or insolvency of debtor + NA
INSOLVENT SI G3
 G1 pays 150K
 G2 pays 75K
 Bali gi tunga nlng nila ni G1 ug G2 kay way silbi nman si G3
EXTINGUISHMENT OF GUARANTY
 One of the modes of extinguishing guaranty is the
negligence on the part of the creditor. First instance is, if
through negligence the creditor fails to expose the
property of the debtor. The scenario here is that the
guarantor invokes the benefit of exhaustion. Remember
that such benefit can be waived. In this instance the
guarantor did not claim the benefit.
o He invokes the benefit and pointed to the
creditor the alienable properties of the debtor
which are not exempt from execution but
through negligence, the creditor did not exhaust
the debtor’s properties to apply to the payment
of the debtor.
o Later on the debtor becomes insolvent and
therefore the creditor could not recover the full
credit owing to each to the extent the value of
the property which he did not levy. The
guarantor is released from the guaranty.
o If he failed to levy upon the property, the value
of which is more than enough to recover the
entire obligation, the guaranty is totally
extinguished.
 The second instance of negligence on the part of the
creditor is where there are other securities other than the
guaranty.
o If the obligation is secured by a chattel mortgage
and guaranty. You have both personal guaranty
and real guaranty. What is the right of the
creditor with respect to the chattel mortgage?
o In case of the default on the part of the debtor,
the creditor can foreclose the mortgage by
selling the property on a public sale and apply
the proceeds to the payment of the principal
obligation.
o But in chattel mortgage, it is required that the
mortgage must be registered in the register of
deeds. If it is not registered then it is not a valid
mortgage then you cannot validly foreclose it.
o If the mortgage is not registered then the one
who Is interested in registering the mortgage is
the creditor, not the debtor and the mortgagor
because mortgage is constituted for the benefit
of the creditor. So that he can collect in the
event that the debtor defaults.
If the creditor fails to foreclose the mortgage,
the guarantor cannot be subrogated to the rights
of the creditor because the creditor has no right
to foreclose.
12
 o So under Article 2080 of the NCC, if the
guarantor cannot be subrogated with the rights
of the creditor because of the creditor’s fault
then, the guarantor is released from his
undertaking to instances of mortgages.
 The other mode of extinguishing guaranty is if the period
of the principal obligation expires. Remember that only
obligations with a period are secured either by guaranty or
suretyship or by real security. Because if it is a simple, pure
and demandable obligation there’s no requirement of
security because you can always claim money
immediately.
o So, obligations that are secured are obligations
with a period.
o If the creditor extends the period of
performance or payment without the consent of
the guarantor, the guarantor is released.
 The problem arises when the debt is to be paid on
installments.
o Rule: Each installment is considered as a
separate and distinct obligation such that default
in one installment does not result to a default in
the subsequent installment.
o In Villa vs Garcia case, payment of an installment
was extended but it was subsequently paid. It
was the later installment that was not paid.
o Bosque is indebted to Villa. For the amount
payable, Bosque executed a promissory note
payable in three installments, with France and
Goulette as sureties. The first installment was
paid on time. The second installment was paid
partially, and promissory notes were executed
for the remaining balance. France and Goulette
contended that they are released from liability as
sureties because of the extension of time of the
second installment due.
o And the court said, you were released from your
undertaking on that particular installment that
was extended but that’s academic because that
was already paid but you were not released from
your obligation over the subsequent
installments.
o You cannot invoke extension of period in order
to relieve you from the obligation.
 When can the guarantors be released from their
undertaking?
o If the obligations is paid on installments. If you
have an acceleration clause.
o If one installment is extended, you are in effect
extending the entire obligation.
o If one installment is extended without the
consent of the guarantor, then the guarantor is
released from the entire obligation.
o But if the guarantor consents to the extension of
the period, he is not released.
 In the case of Mutuc, Mutuc here is a seaman, when he
signed a contract, he was required to put up a something
like a performance ba by PhilamGen. And then he jumped
ship.
o The risk of PhilamGen to pay the bond is high
because of the seamen who would “jump ship”.
So Mutuc was required to make a indemnity
bond. And the indemnity bond cannot be put up
by Mutuc because he is the debtor; he had no
property to offer to cover the indemnity bond so
here comes these two friends who signed the
indemnity bond with Mutuc as co-makers (mao
ba? Sakto ba? Mao ni ako nadungog) and then
Mutuc jumped from the ship so PhilamGen was
obligated to pay the bond. So PhilamGen is now
seeking reimbursement because that is the right
of the guarantor to seek reimbursement from
the debtor. The other debtors refused to pay and
there was also violation of the agreement and
they extended the contract three times. So they
are released from the obligation.
 You read into the contract the extension of the period in
the contract without you signing the contract; you are in
effect consenting to the extension. Hence you are still
bound.
 Another illustration of an extension of a period is in the
case of Prudencio Spouses vs CA. The Prudencio sps here
did not need the money; they were just requested by a
friend/relative who was an atty-in-fact for a partnership;
that wanted to get a loan from the PNB but the PNB would
not grant the loan. The Prudencio sps signed the
promissory note on the condition that the principal debtor
would assign receivables from the government in favor of
the PNB that could sufficiently cover the loan. But what
PNB did was to allow the principal debtor to collect,
instead of government paying directly to the PNB, can be
allowed to pay the debtor.
o Even if the loan already matured PNB still
allowed the government to pay the creditor of
the principal debtor (sorry wa nako kasabot
hahaha)
o SC said, PNB in effect extended the period of the
note. The question here is that remember under
the NIL, accommodation party is considered as a
surety of the party primarily liable or of the party
accommodated.
o The essence of the accommodation party is that
the accommodation party does not receive any
valuable consideration for signing as such.
o It is given under NIL that the defense of no
valuable consideration cannot be invoked by the
accommodation party.
o But what made PNB not a holder in due course
because he is an immediate party and it is
through its own act that it could not collect from
FOR EH 405 ’13-’14 13
 the principal debtor. So personal defenses can
be raised against the PNB. And the spouses are
then released from their obligation.
PLEDGE
The second kind of security undertaking is what you call real security
undertaking and this includes pledge, mortgage and antichresis.
 Pledge
o I borrowed 20K from you to secure the payment
of my obligation I delivered to you this computer
to you in a pledge.
o Personal property is delivered to the creditor or
to a third person authorized as a security for the
payment of a principal obligation.
 How does pledge differ from chattel mortgage?
o Both pledge and mortgage covers personal
property; in chattel mortgage the property
remains in the possession in the mortgagor not
necessarily that the mortgagor owns the
property because a mortgagor can be a third
person(not sure sa last part! sorry tabi-an kaayu
ko nasapawan sakung tingog ang tingog ni
ma’am sa recording hahahaha!); and the pledger
need not be the debtor himself, he can be
another person. And the property mortgaged is
recorded in the chattel mortgage registry.
 If it involves real property then it is called real mortgage or
real estate mortgage. The real property is subjected as a
security for the fulfillment of the principal obligation.
 Characteristics common to pledge, chattel mortgage and
real mortgage:
o 1st. Constituted to secure the fulfillment of a
principal obligation; they are accessory
contracts.
o 2nd. Constituted by the absolute owner of the
thing mortgaged or pledge because of the
possibility that it will be sold to satisfy payment
of its principal obligation (Under the law on
sales, the seller must be the owner of the
property being sold because the contract of sale
transfers ownership to be buyer) unlike in
commodatum where the bailor need not be the
absolute owner of the thing bailed. If the
property subject of the pledge or mortgage is
sold to satisfy the principal obligation
necessarily, ownership is transferred to the
highest bidder. Remember during foreclosure, it
is the property that is being alienated and the
proceeds of the property is used to satisfy the
principal obligation. If the whole property itself is
transferred to the creditor, that is voyed.
 In a case, the sps here objected to the foreclosure of the
mortgage, claiming that a portion of the property being
mortgaged was already sold to them.
o Court here distinguished the contract of sale and
contract to sell. Court said you only have a
contract to sell which means your seller here is
still the absolute of owner of the property.
Hence, mortgage was valid. If the property was
already sold under the contract of sale, then
there is nothing more to mortgage.
o In their contract with the seller, the contract
states that while the sps are allowed to take
possession of the property, still the ownership
(title) of the property remains with Oakland (the
seller) .
 The 1st requisite/characteristic of pledge, mortgage is that
it is constituted to secure the fulfillment of a principal
obligation. Not just like guaranty, there need not be a
separate consideration paid to the mortgagor to constitute
the mortgage. Because the same causa that supported the
mortgage is the same causa that supported the principal
obligation.
 In one case, the court said that a chattel mortgage can be
an accessory contract but that fact alone does not make
the a third-party mortgagor bound for the principal
(debtor? Obligation? Wa ko kaklarooooo).
 So A sues you 1m, I secured the obligation by executing
mortgage in A’s favor over my property. I am the absolute
owner of a parcel of land. And I executed a mortgage in X’s
obligation to A. When X defaulted in the payment of the
obligation, A sent a demand letter to me. Who is liable for
the payment of the obligation? Can you be held personally
liable over X’s obligation?
o As far as I am concerned, the action you can file
is the foreclosure of the mortgage and you
cannot hold me personally liable like a guarantor
or a surety.
o A third-party mortgagor cannot be held
personally liable to pay the principal obligation.
It is only his property which will be affected;
which will be sold on a public sale to answer to
the principal obligation.
 But you have to qualify future obligation; chattel mortgage
cannot secure future obligations.
 Can mortgage be constituted to secure obligations?
o Real mortgage can secure future obligations. Just
like guaranty.
 What do you call that stipulation in the contract of
guaranty where the guarantor undertakes to secure not
only the current obligation but also such other obligations
that maybe incurred by the debtor?
o Continuing Guaranty or Comprehensive
Guaranty
14
 o The equivalent in mortgage or real estate
mortgage is the dragnet clause or the blanket
mortgage clause.
 Even if you have a dragnet clause and subsequently, an
obligation is incurred by the debtor and that particular
obligation is secured by a distinct security undertaking and
even if you have a prior dragnet clause then you go after
the security undertaking first to satisfy this particular
obligation. This is the reliance on security test. (Take note,
wala pa gawas sa bar in relation to the dragnet clause.)
 The 1st requisite/characteristic of pledge, mortgage is that
it is constituted by the absolute owner. In DBP vs CA the
property was not owned by the mortgagor at the time of
the constitution of the mortgage. They only had an
approved sales application from the government so they
were awarded a title yet. The court said, the mortgage is
not valid because the mortgagor is not the absolute owner
of the property mortgaged.
 But there are properties which are not yet covered by the
Torrens system, but are only evidenced by the tax
declarations, etc. If the bank forecloses the mortgage, can
the mortgagor question the mortgage? Or is it valid?
o In Land Titles, tax declarations are not conclusive
evidence or absolute proof of ownership. (does
not prove ownership diba?)
o Ma’am: Okay ra siguro if wala’y moreklamo?
But the NCC requires absolute ownership and the
tax declaration is not the proof of absolute
ownership.
o If the mortgagor is not the absolute owner of the
property mortgaged, and subsequently the
property was foreclosed, then the foreclosure
will be declared void. If the foreclosure was
already concluded, and the property awarded to
the buyer will not be transferred. He cannot
invoke good faith.
 Constituted by the person having predisposal or personally
legally authorized to constitute pledge or mortgage. In this
case, yes, the mortgagor was legally authorized that the
properties that would be subjected to the mortgaged was
listed in the SPA and the property mortgaged was not
among those in the list, that person is not legally
authorized in that particular property. The mortgage is
void. If there is a foreclosure, the same is void. If the
property was already awarded to the highest bidder, he
cannot acquire title over the property.
 If you have a third-party pledger or third-party mortgagor,
unless he personally undertakes or likewise undertakes to
pay the principal obligation then this third-party pledger or
third-party mortgagor cannot be liable for the principal
obligation.
 Even if you register the mortgage (this is a requirement for
mortgages), that is still void if the mortgagor is not the
absolute owner of the property mortgaged.
 The pledge and mortgage are indivisible even if the
principal debt is divided.
 Secured by a mortgage over four parcels of land and you
have a little dragnet clause here,; first debtor obtained a
loan from a creditor 500k and because you have a dragnet
clause, you obtained another obligation of 250k; and then
another loan of 500k. 500k was paid and the value of each
parcel is about 1m. Can debtor who is also the mortgagor,
demand that the mortgage be partially released, one of
the parcels of the land because the remaining parcels of
land are enough to satisfy for the balance of the
obligation?
o No because that mortgage although covering
several parcels of land, it was delivered
indivisible. It cannot be released for as long as
the entire obligation is not paid.
 If the debtor dies, survived by heirs, so heir 1 pays a share
in a debt to the creditor, can he ask the creditor to release
on part of the mortgage in so far as the share of the party
as concerned?
o No, because of the indivisibility of the mortgage.
 Creditor dies and is survived by heirs 1, 2 and 3 and heir 1
receives his share in the credit because he was paid partial
payment from the debtor. Can the debtor compel for the
partial release of the mortgage?
o No. The entire mortgage subsists for as long as
the entire obligation is not paid.
 Remember that in guaranty there is a benefit of
exhaustion. Can the mortgagor invoke that benefit?
o No.
 In pledge and mortgage the property is subjected as a
security for the payment of the principal obligation. Can
the parties agree that in case of default, the creditor
becomes the owner of the property. No, pactum
commissorium is prohibited.
o Automatic appropriation of the property secured
to the creditor without foreclosure during
default of the debtor.– Pactum Commissorium
 What happened in number two? (ha?) A mortgage
contract is signed and at the same time, a deed of sale is
signed at the time of the constitution of the mortgage. And
the provision of the mortgage stipulates that in case the
obligation is not paid, deed of sale becomes effective. No
other act on the part of the mortgagor to transfer
ownership. This is Pactum Commissorium.
 Granting the creditor to enforce dacion en pago, it was
previously agreed at the time of the constitution of the
mortgage, and at the time of the default, there is no other
act of the pledger or mortgagor, to transfer or to effect the
dacion en pago. This is Pactum Commissorium.
 But if the stipulation, the mortgagor, still has to transfer
ownership, NOT Pactum Commissorium.
 Stipulation that the creditor still has to buy the subject
property mortgage. That is not automatic appropriation.
FOR EH 405 ’13-’14 15
  A stipulation failure entitles the lender to the sale of the
house, not to make effect the deed of sale that they
signed. There is still a subsequent act to be perfomed on
the part of the mortgagor. NOT Pactum Commissorium.
 A promise to assign, still has to assign the property
mortgaged, NOT Pactum Commissorium.
 Indivisibility of the mortgage does not apply if properties
are specifically assigned to a certain portion of the
obligation. Like this particular parcel of land secures 100k,
another land secures 100m.
 Is a promise to constitute the pledge or mortgage (what?).
I promise to deliver this thing to you in pledge to secure
payment of my loan to you for 20k but I have not delivered
the thing but I promise. Ni-mature nalang wala pa ko ka-
pay. You cannot sell the thing in a public sale as a pledgee
because pledge is a real contract. The delivery of the thing
perfects the contract of pledge. Hence, there was no
contract of pledge. You action is a personal action to
constitute the pledge (ah like specific performance? –er) if
you only have a promise to constitute the
pledge/mortgage.
o Your right as a creditor is only a personal right to
compel the debtor to constitute the pledge or
the mortgage because no mortgage or pledge
has in fact been constituted.
January 29, 2014
 In a contract of pledge we are talking here of voluntary
pledge, so there must be delivery of the thing either to the
creditor or to a third person by common agreement.
Contract of pledge is a real contract not a consensual
contract. Although there can be a consensual contract to
constitute pledge but if that’s the only contract that you
perfected you cannot effect the foreclosure sale later on
should the debtor default on the payment of the principal
obligation. You must have perfected contract of pledge.
 Rights of the pledgee in a consensual contract to
constitute the pledge:
o Right to specific performance that is to compel
the pledgor to deliver the thing and once
delivery is made the real contract of pledge is
perfected.
 If it is constituted by the absolute owner of the property,
what if it is the stand of the owner who delivers the
movable to the creditor, is the pledge perfected?
o No, unless he is authorized that’s why in this
case involving a Cebuano and a Boholano. Mike
here is a tenant of Atty. Calibo in Bohol who was
not able to pay the rentals and utilities of the
dwelling place that he was renting and to secure
his payment of the utang, he delivered a tractor
by way of pledge. Was there a valid pledge?
o No, because the tractor did not belong to Mike,
it belongs to his father, Pablo Abella. But since
there was delivery of the tractor to Atty. Calibo,
was deposit constituted?
o No contract of deposit, the delivery was to
secure the payment of the obligation, the
delivery was not for purposes of safekeeping.
 Parties to a contract of pledge: Pledgee and Pledgor.
 If the pledgor is a third person not the principal debtor, he
has the rights of a guarantor, meaning if the property
pledged is subsequently sold in a public sale to satisfy the
principal obligation, then the third-party pledgor has the
right to seek reimbursement from the principal debtor.
 Just like a guarantor (third party pledgor), he is also
subrogated to the rights of the creditor which he can
exercise against the debtor.
 The object of pledge is movable because there is a need to
transfer possession from the pledgor to either the creditor
or to a third person.
o But not all movables are subject to pledge, it
must be within the commerce of man and
susceptible of possession.
o So a shabu is a movable but cannot be an object
of pledge.
 The object of pledge must be also be susceptible of
possession because there is a need to transfer possession,
that’s why in the case of Betita vs Ganzon, there was no
valid pledge because there was no transfer of possession
from Betita. Because the carabaos where actually in
possession of Tiburcio.
 What are examples of incorporeal rights? Stocks, you
cannot see stocks but ownership of stocks is evidenced by
stocks certificate; or the right to collect a credit. Kita ka’g
utang? Evidenced by a PN.
o The stocks certificate and the promissory note
can be delivered by way of pledge.
 If you have a negotiable PN it is required that it must be
duly indorsed, if it is payable to order; bearer instrument,
there is no need to indorse.
 What is the effect ordinarily if you indorse a negotiable PN
and deliver it to the transferee?
o It transfers rights which the indorser has to the
transferee.
 But if the PN was delivered only as a security by way of
pledge, the act of indorsement does NOT transfer
whatever title or right the indorser has in favor of the
pledgee. The indorsement is merely required to facilitate
the sale of the PN later on.
 Ikaw kuno maker sa PN bi, unya ikaw kunoy holder sa PN
and you use that PN as a security for the payment of your
obligation. So you delivered that negotiable PN to your
creditor and the you defaulted in the payment of the
principal obligation, your creditor cannot sell the note
without being duly indorsed. Would you as the pledgor
voluntarily indorse the note?
o Normally you would not. That is the reason why
upon delivery, a negotiable document or
instrument, must be properly indorsed or for
instance a warehouse receipt is delivered to the
16
 creditor by way of pledge, and since it is a
negotiable warehouse receipt, the pledgor
indorses the receipt. The indorsement by the
pledgor does not transfer any right or any type
of title of the goods in favor of the pledgee.
 Effect: The pledgor still bears the risk
of loss because he remains the owner
of the goods.
 Because ordinarily if you indorse a
warehouse receipt, you transfer
whatever rights you have over the
goods in favor of the transferee, BUT
here, you deliver the warehouse
receipt only by way of pledge, it is not
a payment of an obligation otherwise
that would have been dacion en pago.
This is pledge only where the pledgee
does not acquire any title over the
thing pledged. He only has the right to
sell only in case of default in the
payment of the principal obligation.
 Another element of the contract of pledge is consideration
as far as the pledgor is concerned.
o Liberality if there is no valuable consideration
paid, or the agreed compensation.
o On the part of the pledgee, consideration of the
principal credit supports the pledge.
 What form is required of the pledge in order to bind the
pledgor and the pledgee?
o No particular form or a particular document to
be executed by both parties, for as long as there
is a delivery of the thing to the pledgee or to a
third person.
 Is there a particular form required in order to bind third
persons?
o Yes, it must be made in a public instrument.
Notarized.
o What must be indicated in the public document?
 There must be a public instrument
giving the description of the thing
pledged and the date.
 Even granting that there was delivery or transfer of
possession would not bind Betita because the document of
the pledge was a private document.
 Two kinds of pledge:
o Voluntary Pledge – contractual pledge
o Legal Pledge – created by provision of law
 Remember contract of deposit? What is the right of the
depositary if he has a claim against the depositor? He has
the right to retain the thing until he is paid of his claim.
Just like the warehouseman where he can retain the thing
if he has an unsatisfied warehouseman’s claim. That act of
retention is actually legal pledge.
 Remember necessary deposit? The right of the hotel
keeper if the guest fails to pay for the accommodation?
What is the right of the hotel keeper?
o He can sequester the personal effects of the
guest with the right to sell the effects within 30
days from demand. That is legal pledge.
 There is no voluntary delivery of the thing to secure of an
obligation but the thing is already in the possession of the
creditor with respect to the depositary the thing is in the
possession of the depositary as a deposit in case of the
mechanic scene (???), but the thing is in the possession of
the creditor because he has rendered work on that
particular thing. The thing is already in the possession of
the hotel keeper because the personal effects are already
in the premises of the hotel. So there is no delivery from
the debtor in order to constitute the pledge, rather there
is sequestration with the creditor of the movable; so that
these movables can be sold to satisfy the claim of the
creditor.
 What are the rights of the pledgee?
o In relation to his right to retain the thing, he has
no right to use.
 He can only use when the right to use
the thing is expressly granted and for
preservation purposes.
o Can he deposit the thing to another person for
safekeeping?
 Generally no. He can only deposit if he
is authorized.
o He has the right to seek reimbursement from the
pledgor for the necessary expenses for
preservation of the thing pledged; or if he suffers
damages because of the defective nature of the
thing which was not communicated to him by
the pledgor.
o If the thing bears fruits or generates income, he
can compensate this against the pledgor (we are
taking about antichresis already) if not, (what is
this right to institute actions for recovery)...
doesn’t need file an action to recover it from the
pledgor you just demand that thing otherwise, it
is as if there is no prosperity (ambot oi mao jud
ako madungog haha) of the principal obligation
and he can just invoke Art 1198 of NCC.
o So another scenario, stolen but not returned, he
can file an action for the recovery.
o If there is a case of eviction, if there is danger of
him being deprived of possession because there
is another person claiming ownership he can
exercise his rights which pertain to the pledgor.
o To cause the sale, the essence of the pledge, in
case of default on the principal debtor. Two
kinds of sale in pledge:
FOR EH 405 ’13-’14 17
  Precautionary Sale – happens before
the principal debtor has defaulted the
principal obligation
 Foreclosure Sale - happens after the
principal debtor has defaulted the
principal obligation
o To collect credit’s pledge. These are incorporeal
rights, intangible assets like dividends.
 If the PN matures before the maturity
of the obligation, he may collect.
(obligation, not a right).
 If he collects the credit, apply the
proceeds and pay the surplus to the
pledgor.
 If he should collect a credit before
maturity and he applies the proceeds
to the payment of the principal
obligation and there is a surplus, he is
obligated to return the surplus because
in case of foreclosure sale there is no
obligation to return the surplus, unless
otherwise provided.
 It is only in foreclosure sale where
there is no obligation to return the
surplus nor right to collect the
obligation.
 In precautionary sale you can recover
the deficiency of the surplus.
 So precautionary sale is the sale of the thing if there is a
reasonable ground to fear a destruction or diminution of
the thing’s value without the fault of the pledgee. So the
pledgee can sell the thing. The proceeds will be applied to
the principal debt and the excess will be returned to the
pledgor.
 If precautionary sale is made before or prior the default
foreclosure sale happens after default. It can be either
judicial or extra-judicial.
 The law provides that in judicial foreclosure of a pledge,
the pledgee may proceed to a notary public. Does it mean
to say that the parties may also agree that in case of
default that the pledgee needs not to go to the notary
public to cause the sale of the thing pledged?
o There is this Cebu case, pledge on shares of stock
of a corporation.
 So the sale, if you proceed to the notary public, it is a
public sale. Notice is required to be sent to the debtor and
if there is a third party pledgor, then the third party
pledgor.
 The pledgor can bid, in fact if his bid is equal to that of the
highest bidder, he is preferred; but he cannot insist that
the thing be awarded to him if his bid is not equivalent to
that of the highest bidder.
 The pledgee can bid; if he is the only bidder, he cannot bid.
If there are no other buyers except the pledgee, the
pledgee should not return the thing yet to the pledgor, he
can set for a second sale.
 To return of the thing – He has the right to the return of
the thing pledged upon extinction of the principal
obligation.
(Art. 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.)
 If the pledgee appropriates the thing pledge for himself,
charge the obligation, not only the pledge but also the
principal obligation, regardless of the value of the thing.
 If there was a successful public sale conducted and the
claim of the pledgee is 100k and the proceeds of the sale is
only 75k; remember that the thing delivered was only a
security, it is not delivered as a payment of the obligation,
can the pledgee recover the deficiency?
o No recovery regardless of the stipulation (that
the pledgor will pay in case of deficiency) to the
contrary.
 If the claim of the pledgee is 200k, the proceeds, 280k,
more than the claim. Can the pledgor demand for the
return of the excess? There is an express stipulation that in
case of excess or surplus of the sale, the pledgee must
return the excess.
o In case of deficiency, NO recovery regardless of
the stipulation; in case of excess, NO return of
the excess unless there is a stipulation.
o There can be recovery of the excess if there is an
express stipulation, but never a recovery in
deficiency.
o We are taking here of a foreclosure sale.
 If two or more things are pledged, the pledgee may choose
which he will cause to be sold; and he can only sell so
much or as many as are sufficient to cover the principal
obligation.
o This can be dangerous, remember there is no
obligation to return the excess of the proceeds
of the foreclosure sale (unless expressly
stipulated).
o So if you are the lawyer for the pledgor, would it
be advisable to tell your client to include if there
is a document drawn to induce the pledgee
include this on the provision that in case of sale
the pledgee or the creditor is obliged to return
to the pledgor the excess. Include that! Advise
that to your client. (wa nako kasabot saku gi-
type haha).
o If at the time of the maturity of the obligation,
the value has already depreciated, that if you sell
you can never acquire the price to cover the
entire obligation, if you are the lawyer for the
pledgee, what would you advise to your client?
 Sue for a specific performance nalang¸
not a public sale. You just extinguish
18
 the pledge and sue for specific
performance and attach this (the thing
pledged?) in addition to other assets of
the debtor.
January 30, 2014
 So what is the degree of diligence required of the pledgee?
o Ordinary Diligence. Diligence of a good father of
a family.
 In relation to his obligation to preserve the thing, can he
use the thing?
o Generally no. Two instances where he can use
the thing:
 When he is authorized to use the thing.
 For preservation purposes. The use is
necessary for the preservation of the
thing.
 In relation to the obligation to preserve the thing, if what
is delivered in pledge is a pawn ticket, but there is period
to redeem the pawned item, (if in default, the pawned
item will be auctioned), it is your obligation as a pledgee to
renew the pawn. If you renew the pawn, you have to pay
in advance the interest right? So that is an expense that
you can claim from the pledgor.
 The pledgee is bound by the acts of his agent especially if
damage is caused to the thing caused by the negligence of
the agent.
 Just like the contract of deposit, can the pledgee deposit
the thing with another person?
o No, unless he is authorized.
o So in answering the exam, avoid the use of “if”
and “it depends” (gosh gi-hunt kos election, puro
it depends ako answer mao gamay score
HUHUHU).
 In case of reasonable ground to fear of diminution of the
value of the thing, or danger to the thing is the obligation
of the pledgee to notify the pledgor of such fact and if the
danger of the loss or diminution in value of the thing is
without the fault of the pledgee; the pledgor even if has
the right to demand to recover the thing of course with
the corresponding obligation to deliver the thing, by way
of replacement.
 The second general obligation of the pledgee is to return
the thing.
o When must he return the thing? On the
termination of the principal obligation and if he
does not return the thing after the
extinguishment of the principal obligation, then
he is now holding the thing now as a depositary
for and behalf of the pledgor. And he has now
the obligations of the depositary.
o And if prior to the extinguishment of the
principal obligation, the thing finds its way to the
pledgor, presumption is that only the pledge is
extinguished, not the principal obligation; that
the pledgee voluntarily returned the thing to the
pledgor.
 The same presumptions apply if the
thing is found in the possession of a
third person after the constitution of
the pledge.
 What are the rights of the pledgor?
o He is still the owner of the thing pledged.
Because he still owns the thing, he bears the risk
of loss. If the pledgee uses the thing without the
authority and not necessary for the preservation
of the thing then the pledgor can demand that
the thing be deposited with another person.
o If there is reasonable ground to fear a loss, or
destruction of diminution of the value of the
thing, the pledgor has the right to demand the
return of the thing but with the corresponding
obligation to deliver another thing; but there is
also a corresponding right on the part of the
pledgee which is to sell the thing pledge
(precautionary sale). There are two rights.
 So there are two conflicting rights
here! Both rights cannot be reconciled.
If one demands return, then one
cannot sell. If you sell then you cannot
return. So both cannot exercise their
respective rights at the same time.
 The question is whose right is now
preferred?
 Pledgee’s right to
precautionary sale (to sell) is
preferred.
 In case of foreclosure sale, the pledgor has the right to bid
and in fact, his bid would be preferred if his bid is equal to
that of the highest bidder.
 Right to return the thing upon the extinguishment of the
obligation.
 The pledgor, who is a third-party pledgor has the rights of
a guarantor. So he can seek for reimbursement from the
principal debtor and he is likewise subrogated to the rights
of the creditor.
 What is his obligation to notify the pledgee of a defect of a
thing delivered by way of pledge? Why? If the pledgee
suffers damage because of the defected nature of the
thing, pledgor can be held liable for the damage caused.
The pledgor must know of the defect of the thing. This is
different from the contract of the sale, which knowledge
of the defect is immaterial.
 Extinguishment of pledge:
o With the extinguishment of the principal
obligation because pledge is an accessory
contract.
o Destruction or the loss of the thing subject of the
pledge regardless of who is the author of the
FOR EH 405 ’13-’14 19
 loss. If the loss is because of the fault of the
pledgee, the pledge is still extinguished; but
liable for damages.
o Renunciation by the pledgee.
 When you renounce a right, do you
receive something in return? This is
similar to condonation.
 Condonation is a gratuitous
abandonment by the creditor of his
claim against the debtor.
 Because it is gratuitous, it is similar to
that of a donation and because it is
considered as a donation it must
comply with the formal requirements
of a donation, then there must be
acceptance.
 No valid donation when is there is no
acceptance.
 What is required in order to effect
renunciation?
 Notify the pledgor in writing.
Acceptance is not required.
 Unlike condonation which requires
acceptance, renunciation of a
pledge as special provision of a
law, there is no requirement of
acceptance.
 Is there a need to return the thing
upon renunciation to the pledgor?
 No. It is not required that the pledgee
returns the thing to the pledgor. So if
he does not return, and the thing
remains in his possession, after
notifying the pledgor of his
renunciation of the thing and then
the obligation matures and the
debtor fails to pay the obligation. Can
he sell the thing?
o No, because after he
renounces the pledge, but
prior to return of the thing to
the pledgor, he holds the
thing as a depositary for the
pledgor not as a pledgee
anymore.
 There is no right of redemption in case of a foreclosure
sale in case of pledge, after the foreclosure sale. There is
only right of redemption in case of mortgage of real
property (REM).
 What is redemption here (in pledge)?
o Redemption here is paying the principal
obligation so that the thing should not be sold in
a public sale in case of default.
 It is not enough that in legal pledge the creditor retains
possession of the thing, because there is no transfer of
ownership. So what does the creditor do to demand the
debtor to pay the obligation?
o In case of hotel keeper, sends a demand to the
guest.
o Depositary to depositor.
o In case of a “wakokasabotnaword” lien, send the
demand to the owner of the thing.
 Note that the sale must be made within 30 days, not after.
So don’t confuse this with the rule in deposit, where the
depositary knows that the thing is stolen and know who
the owner is and there is a suspension of delivery within
30 days and return is made after 30 days if there is no
demand to return from the owner. Here in pledge, the sale
has to be made within 30 days.
 What happens when there is no sale made within 30 days?
o The creditor must return the movable to the
respective owner.
o The question: If the movables previously
sequestered are returned to the debtor, does
the creditor still have the cause of action against
the creditor?
o Example, you live in Golden Valley hotel and you
haven’t paid the room rates and the hotel
sequestered your personal effects, sends a
notice to you care of USC Law in a registered
mail.
 So the hotel must sell the personal
effects within 30 days if you do not
pay.
 After the 30 days no sale was made,
the obligation of the hotel is to return
the personal effects to you.
o The question is can the hotel still can go after
you?
 Yes. Only the securities (are
terminated?!) but your credit to the
hotel remains.
 Only the legal pledge is extinguished,
not the principal obligation to pay the
room rates is not extinguished.
Good luck and God bless! :D
REMINDER:
FEB 9 EXAM SUN. 9:00 AM MOOT COURT
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