LAAC 208 CREDTRAN ESPEJO 2013 Review

CREDIT TRANSACTIONS
1
From the lectures of Atty. Espejo [2nd Semester; SY 2013 – 2014]
CREDIT TRANSACTIONS Fourth Year 2. TRUST OR FAITH IN THE

OBLIGOR’S CREDIT OR
First Session ABILITY TO PAY OR
RETURN; and
TOPICS INCLUDED
3. PAYMENT OR RETURN IN
1. SPECIAL CONTRACTS (CIVIL CODE)
THE FUTURE.
 Loan
Characteristics of Credit Transactions
 Deposit
• There are always two parties involved.
 Guaranty and Suretyship
Example 1: Bangs borrows Andi’s book.
 Pledge Andi voluntarily lends it. This is a commodatum.
Two parties are involved.
 Chattel Mortgage
Example 2: Bangs borrows Andi’s book
 Real Mortgage without Andi’s knowledge. This is theft. No trust or
faith is involved.
 Antichresis
• There is a time element (Obligor receives
 Preference and concurrence of something now but he must return the
credits same thing or its equivalent later).
TOPICS • Trust and faith must always attend the
transaction, which may take the form of a
2. SPECIAL LAWS
security or guaranty.
Financial Rehabilitation and Insolvency Law
Types of Contracts in CT
Chattel Mortgage Law
PRINCIPAL CONTRACTS or contracts founded on
Extrajudicial Foreclosure of Real Mortgage trust, belief or credit. They are contracts that can
stand on their own and which do not depend upon
CREDIT TRANSACTIONS the existence of other contracts to themselves be
valid. As distinguished with preparatory contracts,
IN GENERAL
principal contracts are ends in themselves and do
Concept not merely serve as precursors to other contracts.
What makes an act, contract or transaction a credit Examples of preparatory contracts are contracts of
transaction? agency and partnership.
The concurrence of the following: By the contract of agency a person binds himself to
render some service or to do something in
1. RECEIPT OF GOODS OR representation or on behalf of another. A contract
MONEY BY THE OBLIGOR of agency is not an end in itself. It is preparatory to
FROM THE OBLIGEE IN the commencement of another contractual
THE PRESENT; relationship.
Copy of: Carell Ryza Nartatez (4-Manresa)

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By the contract of partnership two or more persons NOTE: Comodatario is the agent to whom
bind themselves to contribute money, property, or property involved in a bailment is delivered.
industry to a common fund, with the intention of
dividing the profits among themselves. The ACCESSORY CONTRACTS – those which
partners contribute money, property or industry to depend upon the existence of PRINCIPAL
a common fund but the intention of dividing profits CONTRACTS and which tend to strengthen the said
cannot be obtained without doing something to belief or trust because of the security given. They
their contributions. The partners must necessarily may be further classified as contracts of:
enter into further contracts to obtain profit.
The PRINCIPAL CONTRACTS/CREDIT TRANSACTIONS

PERSONAL GUARANTY or SECURITY, where a
are LOAN and DEPOSIT. They are also collectively
person’s personal credit is involved as in guaranty
called BAILMENT CONTRACTS.
proper and suretyship;
BAILMENT - Delivery of property of one person to
REAL GUARANTY or SECURITY, where the debtor
another in trust for a specific purpose, with a
reciprocates the trust given to him by the creditor
contract, express or implied, that the trust shall be
by furnishing the latter with security that consists
faithfully executed and the property returned or
in the use of property:
duly accounted for when the special purpose is
accomplished or kept until the bailor claims it. real mortgage and antichresis, if the property given
is real property; and
PARTIES
pledge and chattel mortgage, if the property given
BAILOR – the one who lends a thing;
is personal property.
Need not be the owner but must have possessory
This is the reason why the contracts of guaranty,
interest in the SM
suretyship, pledge, mortgage and antichresis are
Lessee (Article 1643, in relation to Article 1650) also called “SECURITY CONTRACTS”.
Usufructuary (Article 562) LOAN
BAILEE – the one who borrows the thing (Articles 1933-1961)
Bar Question 2007 Definition
The parties to a bailment are: By the contract of loan, one of the parties delivers
to another, either something not consumable so
A. bailor that the latter may use the same for a certain time
and return it, in which case the contract is called a
B. bailee commodatum; or money or other consumable
thing, upon the condition that the same kind and
C. comodatario
quality shall be paid, in which case the contract is
D. all of the above simply called a loan or mutuum (Article 1933).
E. letters A and B TWO KINDS OF LOANS
Answer: E COMMODATUM is a contract of loan whereby one

of the parties delivers to another something not
consumable so that the latter may use the same for

CREDIT TRANSACTIONS
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a certain time and return it, the former retaining Article 1316 is not an exclusive enumeration of
the ownership of the thing loaned. what are real contracts. Note the words “such as”.
MUTUUM is a contract of loan whereby one of the The nature of mutuum as a real contract is revealed
parties delivers to another money or other by Article 1934 which provides that: “Art. 1934. XXX
consumable thing, the ownership of which passes the commodatum or simple loan itself shall not be
to the latter, upon the condition that the same perfected until the delivery of the object of the
amount of the same kind and quality shall be paid. contract.”
COMMON CHARACTERISTICS Take note of the case of Bonnevie versus Court of

Appeals, GR No. 49101, October 24, 1983, where
Nominate – given a particular name by law; the Supreme Court made an aberrant
pronouncement that: “A contract of loan being a
Principal – does not depend on the existence or
consensual contract, the herein contract of loan
validity of other contracts;
was perfected at the same time the contract of
Real – perfected by delivery; mortgage was executed.”
Unilateral - only one of the parties is principally BPI INVESTMENT CORPORATION versus CA
obliged; G.R. No. 133632, February 15, 2002
Gratuitous per se – consideration is liberality; Borrower entered into a contract of loan with
mortgage with BPI. The contract stipulates that the
LEGAL CONSEQUENCES obligation to pay monthly amortizations will begin
after release of the proceeds of the loan to the
Nominate – governed by specific provisions of law
borrower. The loaned amount was released in two
Principal – in contrast to an accessory contract (ex. batches: first part on March 31, 1981 and the
pledge, mortgage and antichresis), loan can stand remainder on September 13, 1982. Borrower was
on its own and does not depend on another not able to faithfully comply with his amortization
contract for its validity or existence; in contrast to a schedule. BPI foreclosed on the mortgage and
preparatory contract (ex. agency and partnership) computed interest beginning May 1, 1981. The
because it is an end in itself not as a means through Court of Appeals ruled that because a simple loan is
which future contracts or transactions may be perfected upon the delivery of the object of the
made. contract, the loan contract in this case was
perfected only on September 13, 1982. BPI claims
Real – perfected only by delivery so the obligations that a contract of loan is a consensual contract, and
of the bailee/borrower do not arise until the a loan contract is perfected at the time the contract
subject matter is delivered. of mortgage is executed conformably with
Bonnevie v. Court of Appeals, 125 SCRA 122.
Art. 1316. Real contracts, such as deposit, pledge
and commodatum, are not perfected until the ISSUE: When was the contract of loan perfected?
delivery of the object of the obligation.
RULING: The loan contract was perfected only on
QUESTION: Only commodatum is mentioned in September 1982, the date of the second release of
Article 1316. Is mutuum also a real contract? the loan. Following the intentions of the parties on
the commencement of the monthly amortization,
ANSWER: Yes, for two reasons: the borrower’s obligation to pay commenced only
on October 13, 1982, a month after the perfection
of the contract.

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A contract of loan involves a reciprocal obligation, ANSWER: YES, but not for breach of contract of
wherein the obligation or promise of each party is commodatum because it was not yet perfected. B
the consideration for that of the other. It is a basic may sue A for breach of the consensual contract to
principle that neither party incurs in delay, if the make a commodatum which is perfected by mere
other does not comply or is not ready to comply in consent (see Article 1934).
a proper manner with what is incumbent upon him.
Only when a party has performed his part of the UNILATERAL - once the subject matter has been
contract can he demand that the other party also delivered, it creates obligations on the part of only
fulfills his own obligation. Consequently, petitioner one of the parties, namely the borrower.
could only demand for the payment of the monthly
GRATUITOUS - Under Article 1933, commodatum is
amortization after September 13, 1982 for it was
essentially gratuitous while simple loan may be
only then when it complied with its obligation
gratuitous or with a stipulation to pay interest. This
under the loan contract. Therefore, in computing
means that mutuum is not gratuitous only when
the amount due as of the date when BPI
the parties agree that, in addition to the return of
extrajudicially caused the foreclosure of the
the money, interest is also to be computed and
mortgage, the starting date is October 13, 1982
paid.
(one month after the loan was delivered in full) and
not May 1, 1981 (one month after the mortgage Consideration
was executed).
A asks B if he could borrow the latter’s fountain
In addition to the three elements, delivery is pen. B agrees and gives his pen to A but tells A to
required in the principal contracts of bailment. return the same within one week.
Why? Because it is only after delivery that a party
can begin fulfilling his obligations. QUESTION: What is the consideration of the
contract insofar as B is concerned?
In commodatum, the borrower is obliged to
exercise due diligence over the thing loaned. This ANSWER: Pure liberality. B receives
obligation cannot be done unless the thing subject nothing.
of the loan is delivered to him.
QUESTION: What if, before B lends his pen to A, B
In mutuum, the borrower is obliged to return the asks him to pay P50 and to return the pen within
money that was borrowed. This obligation does not one week?
arise unless there is a debt in the first place.
ANSWER: No more commodatum because
In deposit, the depositary is obliged to keep the commodatum is essentially gratuitous. Once
object safely. This obligation cannot be done valuable consideration other than liberality is
unless the thing subject of the deposit is delivered imposed, the transaction becomes another
to him. contract. Because of the obligation to return, the
contract is a lease. If there is payment with no
ANOTHER EXAMPLE is contract of carriage, because obligation to return, then the contract is a sale.
unless the carrier is actually used, the carrier Without the obligation to return and without
cannot be said to have already assumed his valuable consideration, the contract is a donation.
obligations.
CONSEQUENCE
QUESTION: A promised to lend B his book
(COMMODATUM) on January 14. On January 14, A Art. 1378. When it is absolutely impossible to settle
refused to deliver the book. May B sue A for doubts by the rules established in the preceding
damages? articles, and the doubts refer to incidental

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circumstances of a gratuitous contract, the least The transaction was a commodatum, not a
transmission of rights and interests shall prevail. If mutuum. Article 1933 implies that if the subject of
the contract is onerous, the doubt shall be settled the contract is a consumable thing, such as money,
in favor of the greatest reciprocity of interests. the contract would be a mutuum. However, there
are instances where a commodatum may have for
DISTINCTIONS - COMMODATUM AND MUTUUM its object a consumable thing. Article 1936 of the
(BAR 2004) Civil Code provides that consumable goods may be
the subject of commodatum if the purpose is not
PRODUCERS BANK versus CA
the consumption of the object, as when it is merely
G.R. No. 115324, Feb 19, 2003
for exhibition. Thus, if consumable goods are
FACTS: Sometime in 1979, Vives was asked by his loaned only for purposes of exhibition, or when the
neighbor and friend Sanchez to help her friend and intention of the parties is to lend consumable
townmate, Doronilla, in incorporating his business, goods and to have the very same goods returned at
Sterela Marketing and Services. Sanchez asked the end of the period agreed upon, the loan is a
Vives to deposit in a bank a certain amount of commodatum.
money in the bank account of Sterela for purposes
The rule is that the intention of the parties shall be
of its incorporation. She assured private
accorded primordial consideration in determining
respondent that he could withdraw his money from
the true character of a contract. The evidence
said account within a month’s time. Relying on the
shows that Vives agreed to deposit his money in
assurances and representations of Sanchez and
the savings account of Sterela specifically for the
Doronilla, Franklin Vives issued a check in the
purpose of making it appear "that said firm had
amount of P200,000.00 in favor of Sterela. When
sufficient capitalization for incorporation, with the
Vives went to the bank to verify if the money was
promise that the amount shall be returned within
still intact, the bank informed them that part of the
thirty (30) days."
money had been withdrawn by Doronilla, and that
only P90,000.00 remained therein. On June 29, Doronilla’s attempts to return to the amount of
1979, Vives received a letter from Doronilla, P200,000.00 together with an additional
assuring him that his money was intact and would P12,000.00, allegedly representing interest on the
be returned to him. On August 13, 1979, Doronilla mutuum, did not convert the transaction from a
issued a postdated check for Two Hundred Twelve commodatum into a mutuum. Article 1935 of the
Thousand Pesos (P212,000.00) in favor of Vives. Civil Code expressly states that "[t]he bailee in
However, upon presentment thereof, the check commodatum acquires the use of the thing loaned
was dishonored. but not its fruits." Hence, it was only proper for
Doronilla to remit to private respondent the
NOTE: Petitioner contends that the transaction
interest accruing to the money deposited.
between private respondent and Doronilla is a
simple loan or mutuum since all the elements of a COMMODATUM
mutuum are present: first, what was delivered was
money, a consumable thing; and second, the Art. 1935. The bailee in commodatum acquires the
transaction was onerous as Doronilla was obliged use of the thing loaned but not its fruits; if any
to pay interest, as evidenced by the check issued by compensation is to be paid by him who acquires the
Doronilla in the amount of P212,000.00, or P12,000 use, the contract ceases to be a commodatum.
more than what was deposited in Sterela’s bank
account. As to fruits, Art. 1940 provides that the parties may
stipulate that the bailee may make use of the fruits
of the thing loaned (See PRODUCERS BANK case)

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If there is compensation, the contract is one of PROHIBITIONS AS TO USE

LEASE.
Homer lends Patty his laptop computer. Patty
Art. 1936. Consumable goods may be the subject of cannot lend or lease this to her boyfriend, Domeng.
commodatum if the purpose of the contract is not But Patty’s children and other members of her
the consumption of the object, as when it is merely household may make use of the thing loaned unless
for exhibition. (ad ostentationem) there is a stipulation to the contrary.
Art. 1939. Commodatum is purely personal in However, the laptop cannot be used by either Patty
character. Consequently: or the members of her household as a pillow,
because the nature of the laptop forbids its use as
(1) The death of either the bailor or the such. Finally, Patty can use the laptop as
bailee extinguishes the contract; paperweight because the nature of the laptop does
not really prohibit its use as such for as long as such
(2) The bailee can neither lend nor lease
use does not lead to possible.
the object of the contract to a third person.
However, the members of the bailee's household Art. 1937. Movable or immovable property may be
may make use of the thing loaned, unless there is a the object of commodatum.
stipulation to the contrary, or unless the nature of
the thing forbids such use. This provision makes commodatum dissimilar to
mutuum but similar to lease.
NOTE: Commodatum is purely personal in

character which means that rights acquired by Art. 1938. The bailor in commodatum need not be
virtue of the same could not be transmitted to the owner of the thing loaned.
another. This makes perfect sense inasmuch as the
bailor relies on the character, credit and conduct of Rationale: There is no transfer of ownership in
the bailee when he contracts with the latter commodatum.
gratuitously.
OBLIGATIONS OF THE BAILEE
Death of the Bailee
1. The bailee is obliged to return the thing
Homer lends Patty his car gratuitously until the end loaned upon the expiration of the period.
of 2012. Should Homer die before the end of 2012,
2. In relation to the obligation to return, the
the commodatum is extinguished and Homer’s
bailee is obliged not to retain the thing
heirs can already demand from Patty to return the
loaned even if the bailor has outstanding
car even before the expiration of the period. In the
liabilities to the bailee;
same vein, should Patty die prior to the end of
2008, Homer can demand immediately the return 3. The bailee is obliged to take care of and
of the car even before the expiration of the period safely keep the thing loaned while in his
agreed upon. This is because the bailor’s trust and possession, exercising the diligence of a
confidence is exclusive to the bailee and does not good father of a family;
extend to the bailee’s heirs or assigns.
4. In relation to the immediately preceding
If there are two or more borrowers, the death of obligation, the bailee is obliged to pay for
one does not extinguish the commodatum as to the the ordinary expenses for the use and
other, unless there is a stipulation to the contrary.

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preservation of the thing loaned (Article (1) If he devotes the thing to any purpose
1941); different from that for which it has been loaned;
Suppose that A borrowed B’s jeep. A is obliged to (2) If he keeps it longer than the period
pay for expenses to have the jeep washed, stipulated, or after the accomplishment of the use
lubricants, oil, gas, etc. for which the commodatum has been constituted;
For extraordinary expenses, Article 1949 is the (3) If the thing loaned has been delivered
governing rule: with appraisal of its value, unless there is a
stipulation exemption the bailee from responsibility
Art. 1949. The bailor shall refund in case of a fortuitous event;
the extraordinary expenses during the contract for
the preservation of the thing loaned, provided the (4) If he lends or leases the thing to a third
bailee brings the same to the knowledge of the person, who is not a member of his household;
bailor before incurring them, except when they are
so urgent that the reply to the notification cannot (5) If, being able to save either the thing
be awaited without danger. borrowed or his own thing, he chose to save the
latter.
If the extraordinary expenses arise
on the occasion of the actual use of the thing by the Art. 1943. The bailee does not answer for the
bailee, even though he acted without fault, they deterioration of the thing loaned due only to the
shall be borne equally by both the bailor and the use thereof and without his fault.
bailee, unless there is a stipulation to the contrary.
Art. 1944. The bailee cannot retain the thing loaned
(1751a)
on the ground that the bailor owes him something,
Using the same example, A can have B reimburse even though it may be by reason of expenses.
expenses of having the engine repaired if required. However, the bailee has a right of retention for
damages mentioned in Article 1951.
But take note of Article 1950 which bars
reimbursement on account of expenses that are not Art. 1951. The bailor who, knowing the flaws of the
covered by either Article 1941 and 1949. Thus: thing loaned, does not advise the bailee of the
same, shall be liable to the latter for the damages
Art. 1950. If, for the purpose of which he may suffer by reason thereof.
making use of the thing, the bailee incurs expenses
other than those referred to in Articles 1941 and Art. 1945. When there are two or more bailees to
1949, he is not entitled to reimbursement. (n) whom a thing is loaned in the same contract, they
are liable solidarily. (1748a)
Thus, if A installs a sound system on the jeep for his
better use, he shall not be entitled to OBLIGATIONS OF THE BAILOR
reimbursement.
Take note that since commodatum is a unilateral
5. The bailee is obliged to pay for damages contract, the obligations of the bailor are mere
under the circumstances provided in incidental ones.
Article 1942 of the Civil Code.
Thus, the “obligations” of the bailor are the
Art. 1942. The bailee is liable for the loss of the following:
thing, even if it should be through a fortuitous
event:

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1. Obligation to respect the duration 4. Right to demand the return of the thing for
of the loan or the period of the acts of ingratitude committed by the bailee
contract; (Article 1948, in relation to Article 765);
2. Obligation to refund extraordinary Article 765 applies to commodatum because both

expenses; and commodatum and donation are gratuitous
contracts.
3. Obligation to pay damages for
hidden flaws. ACTS OF INGRATITUDE IN COMMODATUM. The
bailor may demand the immediate return of the
OBLIGATION TO RESPECT PERIOD thing:
As a rule, the bailor must respect the period and If the bailee should commit some offense against
cannot require the premature return of the thing the person, the honor or the property of the bailor,
loaned. or of his wife or children under his parental
authority;
RATIONALE:
If the bailee imputes to the bailor any criminal
Art. 1196. Whenever in
offense, or any act involving moral turpitude, even
an obligation a period is designated, it is
though he should prove it, unless the crime or the
presumed to have been established for the benefit
act has been committed against the bailee himself,
of both the creditor and the debtor, unless from the
his wife or children under his authority; and
tenor of the same or other circumstances it
should appear that the period has been If the bailee unduly refuses the bailor support when
established in favor of one or of the other. the bailee is legally or morally bound to give
support to the bailor.
Since commodatum is gratuitous, the period is
deemed to have been designated in favor of the COMMODATUM versus DONATION
debtor, who in this case is the bailee.
SUMMARY
RIGHT TO REQUIRE RETURN
INSTANCES WHEN BAILOR MAY DEMAND RETURN
The bailor can demand the return of the thing: IMMEDIATELY
1. Upon expiration of the period or after the Urgent need; (URGENCY)

accomplishment of the use for which the
commodatum has been constituted (Article No stipulation as to duration; (DURATION)
1946);
No stipulation as to purpose for use; (PURPOSE)
2. For temporary use in case of urgent need
but the contract, and, by implication, the Acts of ingratitude; (UNGRATEFULNESS)
performance of the obligations of the
Expiration of period; (TERM) and
bailee, are suspended in the meantime
(Article 1946); Accomplishment of the purpose.
(ACCOMPLISHMENT)
3. Right to demand the return of the thing at
will in the case of precarium (Article 1947); Art. 1952. The bailor cannot exempt himself from
and the payment of expenses or damages by
abandoning the thing to the bailee. (n)

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Bar 2005 Due to the transfer of ownership, the rule in

commodatum that the lender need not be the
A left his adventure van to B before he left to work owner of the thing loaned does not apply. Nemo
abroad. The parties agreed that B can use the van dat quod non habet. No one can give what one
for 1 year. A did not tell B that the van’s brakes are does not have;
faulty. B had the brakes repaired and the van tuned
up, spending P15,000. B discovered that the van As there is transfer of ownership, there can be no
consumed too much fuel. Hence, he leased the van criminal liability on the part of the borrower in case
to C. Two months later, A returned and asked B to he fails to pay, without any circumstance indicating
return the van. However, the van was damaged fraud or other elements that criminalize an act.
while B was using it, without his fault. The liability here is merely civil in nature.
Bar 2005 Art. 1954. A contract whereby one person transfers

the ownership of non-fungible things to another
(a) Who shall bear the P15,000 spent for van with the obligation on the part of the latter to give
repair? things of the same kind, quantity, and quality shall
be considered a barter. (n)
(b) Who shall bear the cost of the van’s fuel?
Art. 1638. By the contract of barter or exchange one
(c) Does A have the right to get the van before
of the parties binds himself to give one thing in
the lapse of one year?
consideration of the other's promise to give another
ANSWER thing. (1538a)
(a) Brakes (extraordinary) – A EXAMPLES
Tuneup (ordinary) – B MUTUUM OF MONEY ===> A loans B P50,000

payable in one month.
(b) Fuel (ordinary) – B
(c) A cannot demand return before the period

unless he has urgent need of the van. MUTUUM OF GOODS ===> A loans B 2 sacks of NFA
rice (fungible, for consumption) for a period of 2
SIMPLE LOAN OR MUTUUM months. After two months, B is obliged to give 2
sacks of rice of the same kind and quality.
Art. 1953. A person who receives a loan of money or
any other fungible thing acquires the ownership ARTICLE 1954 ===> A gives B a Mitsubishi Evolution
thereof, and is bound to pay to the creditor an VIII, an imported Japanese car because B will
equal amount of the same kind and quality. (1753a) participate in a race. However, as a condition, B is
obligated to give A another Mitsubishi Evolution
An essential characteristic of mutuum is that there
VIII car to replace the car of A after the race. (This is
is a transfer of ownership from the lender to the
now considered a barter)
borrower. The legal consequences of this
characteristic are as follows: Art. 1955. The obligation of a person who borrows
money shall be governed by the provisions of
The obligation of the borrower is to PAY and NOT
Articles 1249 and 1250 of this Code.
TO RETURN because the consumption is the object
of mutuum;

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10
If what was loaned is a fungible thing Example

other than money, the debtor owes another thing
of the same kind, quantity and quality, even if it A obtained a P1,000 loan from B payable in 30 days
should change in value. In case it is impossible to
A delayed in paying for one year
deliver the same kind, its value at the time of the
perfection of the loan shall be paid. (1754a) A will be liable for 12% interest since she delayed in
paying the loan
INTEREST
Interest accruing from unpaid interest
GENERAL RULE: Article 1956 – no interest shall be
due unless it has been expressly stipulated in A borrowed P5,000 from B
writing and is lawful
Loan has 12% annual interest
EXCEPTIONS
A fails to pay P5,000 and the interest
Indemnity for damages – debtor in delay must pay
legal interest even if there is no stipulation Interest accruing from unpaid interest
Interest accruing from unpaid interest – interest  One year after due date, there is a judicial
due shall earn interest from the time it is judicially demand for payment of P5,000 and 12%
demanded although the obligation may be silent on annual interest within 30 days from
this point (Article 2212) judgment
Indemnity for Damages  A pays 1 month after the 30-day period
6% per annum – transactions other than

loans/forbearance of money
 The 12% interest will earn 12% annual legal
e.g. Monetary award arising from a contract for a interest (forbearance already) or 1% for
piece of work, unpaid purchase price (Crismina each month of delay
Garments v. CA)
Interest accruing from unpaid interest
Example
ORIGINAL LOAN = P5,000 + 12% (per annum)
A purchased a car from B
= P5,000 + P600
The price shall be paid in 30 days
= P5,600
A delayed paying for one year
FORBEARANCE = 12% per annum or 1% a month of
A will be liable for 6% interest per annum for the delay from judicial order
delay in paying the price
= P5,600 + 1% (P56.00)
Indemnity for Damages
= P6,160
12% per annum – delay in paying loans,
Bar 2002
forbearance of money, judgments involving loans
or forbearance in absence of stipulation computed  Carlo sues Dino for
from date of default (CB Circular 416)

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11
 (a) collection on a promissory interest within the limits allowed by law. X Bank
note for a loan, with NO increased the interest to 48% per annum. When A
agreement on interest on which questioned the increase in court, X argued that the
Dino defaulted usury law is already legally suspended. Will the
action prosper? Why?
 (b) damages caused by Dino on
Carlos’ priceless painting on which Answer
Dino accidentally spilled acid
while transporting it. The action will prosper. While it is true that
interest ceilings set by the Usury law are no longer
in force, the court may still reduce interests which
are unconscionable.
 The court finds Dino liable for both
obligations. What rates of interests may Contracting parties may stipulate freely on any
the court impose? adjustment in the interest rate on a loan or
forbearance of money.
However, the law does not authorize increase of

Answer interest rate by one party without the other party’s
consent.
With respect to the amount covered by a
promissory note, an interest of 12% per annum Any change of interest must be mutually agreed by
may be imposed since it arose from a contract of the parties
loan
INTEREST
With respect to damages, it is 6% from the time of
final demand until finality of judgment and 12% of Article 1960 - If the debtor pays interest when there
the amount from final judgment until the debt is is no stipulation therefor, the provisions on solutio
fully paid indebiti or natural obligations will apply (debtor
may recover)
KINDS OF INTEREST
INTEREST
SIMPLE – paid for the principal at a certain rate
Contracting parties may stipulate freely on any fixed or stipulated by the parties
adjustment in the interest rate on a loan or
forbearance of money. KINDS OF INTEREST
However, the law does not authorize increase of COMPOUND – that which is imposed upon interest
interest rate by one party without the other party’s due and unpaid. The accrued interest is added to
consent. the principal sum and the whole (principal and
interest) is treated as the new principal upon which
Any change of interest must be mutually agreed by the interest for the new period is calculated
the parties
DEPOSIT
Bar 2001
Article 1962. A deposit is constituted from the
A obtained a P300,000 housing loan from X Bank at moment a person receives a thing belonging to
18% per annum interest. The promissory note another, with the obligation of safely keeping it
provides that X reserves the right to increase the and returning the same.

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If the safekeeping of the thing is not the A delivers to B his laptop computer so that B may
principal purpose of the contract, there is NO repair it. While there is an obligation to safely keep
deposit but some other contract. and preserve the thing while B is repairing it, the
principal purpose is repair. The contract therefore is
one for labor or for a piece of work.
Therefore, with respect to deposit, the effect of

Article 1962 (providing that the safekeeping of the
The PARTIES are:
thing loaned must be the principal purpose of the
DEPOSITOR, or the person who turns over contract of deposit; otherwise, there is no deposit
possession and custody of the thing to another; but some other contract) seems to be that deposit
has to be constituted as a principal contract. If it is
DEPOSITARY, or the person who receives the thing constituted as a mere preparatory contract or
under obligations to safely keep and preserve it. accessory contract, custody and preservation would
no longer be the principal end.
CHARACTERISTICS OF DEPOSIT:
Deposit is a real contract
It is a nominate contract;
Article 1963. An agreement to constitute a
It is a real contract;
deposit is binding but the deposit is NOT perfected
It is a principal contract; until the delivery of the thing
It can be gratuitous and, when gratuitous, it is a Nature of Deposit Based on Consideration

unilateral contract; and
Art. 1965. A deposit is a gratuitous contract, except
It can be for compensation and, when for when there is an agreement to the contrary, or
compensation, it is a bilateral contract. unless the depositary is engaged in the business of
storing goods.
SAFEKEEPING MUST BE THE PRIMARY PURPOSE
If gratuitous, it is a unilateral contract because only
Under Article 1962, the safekeeping of the thing one of the parties (the depositary) is principally
loaned is the principal purpose of the contract of obliged.
deposit. If the safekeeping of the thing delivered is
not the principal purpose of the contract, there is If onerous, it is a bilateral contract because the
no deposit but some other contract. undertaking of the depositary to safely keep the
thing is the reason why the depositor pays
If a contract is therefore constituted and deposit is compensation.
made as an accessory or preparatory contract, the
principal purpose would no longer be safe-keeping. Subject Matter
A wants to sell his car. He deposits the car to B so As a general rule, only movable things may be the
that B can sell it to prospective buyers. Here, there object of a deposit (Article 1966).
exists a contract of agency and deposit is simply an
Judicial deposit, however, may cover immovable or
accessory obligation. The act of depositing the car
movable things (Articles 2005-2009)
is merely preparatory to the ultimate contract
which is an agency to sell the car. Form and Constitution

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Art. 1969. A contract of deposit may be entered into NECESSARY DEPOSIT

orally or in writing.
Art. 1996. A deposit is necessary:
Art. 1964. A deposit may be constituted judicially or
extrajudicially. (1) When it is made in compliance with a legal
obligation;
Judicial – by means of an order by the court
(2) When it takes place on the occasion of any
Extrajudicial – necessary or voluntary. calamity, such as fire, storm, flood, pillage,
shipwreck, or other similar events.
JUDICIAL DEPOSIT
OTHER INSTANCES
Also known as sequestration
When travellers deposit effects in hotels or inns
Primary purpose: to maintain status quo during the (Article 1998)
pendency of litigation or to insure the rights of
parties to property. When made by passengers of common carriers
when entering into a contract of carriage of
Judicial Deposit/Sequestration persons.
Art. 2005. A judicial deposit or sequestration takes Deposit is necessary when made in compliance with
place when an attachment or seizure of property in a legal obligation
litigation is ordered. (1785)
Art. 538. Possession as a fact cannot be recognized
Art. 2006. Movable as well as immovable property at the same time in two different personalities
may be the object of sequestration. (1786) except in the cases of co-possession. Should a
question arise regarding the fact of possession, the
Art. 2007. The depositary of property or objects
present possessor shall be preferred; if there are
sequestrated cannot be relieved of his responsibility
two possessors, the one longer in possession; if the
until the controversy which gave rise thereto has
dates of the possession are the same, the one who
come to an end, unless the court so orders. (1787a)
presents a title; and if all these conditions are
Art. 2008. The depositary of property sequestrated equal, the thing shall be placed in judicial deposit
is bound to comply, with respect to the same, with pending determination of its possession or
all the obligations of a good father of a family. ownership through proper proceedings.
Examples of Judicial Deposit Deposit is necessary when made in compliance with

a legal obligation
Rule 57 (Preliminary attachment) – attachment by
sheriff upon filing of complaint. Art. 2104. The creditor cannot use the thing
pledged, without the authority of the owner, and if
Rule 59 (Receivership) - a receiver may be he should do so, or should misuse the thing in any
appointed by the court to administer and preserve other way, the owner may ask that it be judicially
the property in litigation. or extrajudicially deposited. When the preservation
of the thing pledged requires its use, it must be
Rule 60 (Replevin) - personal property may be
used by the creditor but only for that purpose.
seized by sheriffs in suits of replevin or manual
delivery of personal property. On the occasion of a calamity
Rule 127 – attachment in criminal cases.

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When during a fire, flood, storm, or other calamity former as set forth in articles 1998 to 2001 is
a property is saved from destruction by another suppressed or diminished shall be void.
person without the knowledge of the owner, the
latter is bound to pay the former just compensation Art. 2004. The hotel-keeper has a right to retain the
(Article 2168) things brought into the hotel by the guest, as a
security for credits on account of lodging, and
Possession passes by accident from one person to supplies usually furnished to hotel guests.
another and the law imposes on the recipient the
obligations of a bailee VOLUNTARY DEPOSIT
Primary purpose: to save the property CONCEPT
When made by travellers Article 1968 - Delivery of the thing is made by the
will of the depositor or by two or more persons
The keepers of hotels on inns shall be responsible each of whom believes himself entitled to the thing
as depositaries for effects deposited by guests deposited
provided:
DIFFERENCE WITH NECESSARY DEPOSIT: The
Notice was given to them about the effects depositor in voluntary deposit has complete
freedom in choosing the depositary.
Guests have taken precautions prescribed regarding
their safekeeping (Article 1998) Obligations of the Depositary
Art. 1999. The hotel-keeper is liable for the vehicles, A depositary has a LOT of obligations, which can be
animals and articles which have been introduced or grouped into the following:
placed in the annexes of the hotel.
Obligations relative to preservation;
Liable for loss or injury through:
Obligations relative to information or notice; and
Acts of servants or employees of the keeper
Obligations relative to delivery and return.
Acts of strangers
AS TO PRESERVATION
Acts of robbers UNATTENDED by use of arms or
irresistible force The depositary is obliged to keep the thing safely
and to return it, when required, to the depositor, or
NOT liable for loss or injury through: to his heirs and successors, or to the person who
may have been designated in the contract (Art.
Force majeure 1972).
Acts of robbers with arms or using irresistible force When the thing deposited consists in securities, the
depositary is obliged to take such steps in order
Acts of guests, his family, servants or visitors
that the same may preserve their value (Art. 1975).
Character of the thing deposited
The depositary holding certificates, bonds,
Art. 2003. The hotel-keeper cannot free himself securities or instruments which earn interest shall
from responsibility by posting notices to the effect be bound to collect the latter when it becomes due
that he is not liable for the articles brought by the (Art. 1975).
guest. Any stipulation between the hotel-keeper
and the guest whereby the responsibility of the

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The depositary is obliged to use the thing deposited The depositary who, by force majeure or
if its preservation requires its use. It must be used government order, loses the thing and receives
but only for that purpose (Art. 1977). money or another thing in its place, must deliver
the sum or other thing to the depositor (Art. 1990).
AS TO INFORMATION
PROHIBITIONS AND LIMITATIONS
The depositary is obliged to notify the depositor ON THE DEPOSITARY
and wait for the latter’s decision in case the former
changes the way of the deposit (Art. 1974). The depositary cannot deposit the thing with a third
person, unless there is a stipulation to the contrary
When the thing deposited is delivered closed and (Art. 1972).
sealed but its seal or lock is broken, the depositary
shall keep the secret of the deposit (Art. 1981). The depositary cannot make use of the thing
deposited without the express permission of the
The depositary, who discovers that the thing depositor. (Art. 1977).
deposited has been stolen and who its true owner
is, must advise the latter of the deposit (Art. 1984). The depositary cannot demand that the depositor
prove his ownership of the thing deposited (Art.
The depositary is obliged to immediately inform the 1984).
depositor if the thing deposited is judicially
attached or if its return or removal is opposed by a If the depositor becomes incapacitated to contract
third person (Art. 1988). after having made the deposit, the depositary
cannot return the thing except to the
AS TO RETURN administrators of his property and rights (Art.
1986).
When the thing deposited is delivered closed and
sealed, the depositary is obliged to return it in the LIABILITIES
same condition (Art. 1981).
The depositary is liable for acts of third persons in
The depositary is obliged to return the thing the following cases:
deposited with all its products, accessories and
accessions (Art. 1983). If deposit with a third person is allowed, the
depositary is liable for the loss if he deposited the
In a deposit with multiple depositors with thing with a person who is manifestly careless or
stipulation that the thing should be returned to one unfit.
of them, the depositary is obliged to return it only
to the person designated (Art. 1985). The depositary is responsible for the negligence of
his employees (Art. 1973).
The depositary is obliged to take the thing
deposited to the place designated for the return of The depositary makes use of the thing deposited
the thing. If no place has been designated for the without the express permission of the depositor is
return, the depositary is obliged to take the thing liable for damages. (Art. 1977).
deposited to the place where the thing deposited
may be (Art. 1987). The depositary is liable for the loss of the thing
through a fortuitous event:
The depositary is obliged to return the thing
deposited to the depositor upon demand, even if a If it is so stipulated;
specified period for such return had been fixed (Art.
If he uses the thing without the depositor's
1988).
permission;

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If he delays its return; the depositor if the owner does not claim it within
the period of one month (Art. 1984).
If he allows others to use it, even though he himself
may have been authorized to use the same. If the depositary has reasonable grounds to believe
that the thing has not been lawfully acquired by the
When the thing is delivered closed and sealed, the depositor, the former may return the same (Art.
depositary shall be liable for damages should the 1984).
seal or lock be broken through his fault. Fault on
the part of the depositary is presumed, unless there In case of gratuitous deposit, if he has justifiable
is proof to the contrary (Art. 1981). reasons for not keeping the thing may, even before
the time designated, return it to the depositor (Art.
If the deposit consists in sums of money, the 1989).
depositary is liable to pay interest on the sums he
has applied to his own use from the day on which If the depositor refuses to receive the thing, the
he did so, and on those which he still owes after the depositary may secure its consignation from the
extinguishment of the deposit (Arts. 1896 and court (Art. 1989).
1983).
The depositary may retain the thing in pledge until
RIGHTS OF THE DEPOSITARY the full payment of what may be due him by reason
of the deposit (Art. 1994).
If there is a stipulation or if the depositary is
engaged in the business of storing goods, the OBLIGATIONS OF THE DEPOSITOR
depositary is entitled to adequate compensation for
his services (Art. 1965). If at the time the deposit was made a place was
designated for the return of the thing, the
The depositary may change the way of the deposit depositary must take the thing deposited to such
if under the circumstances he may reasonably place but the expenses for transportation shall be
presume that the depositor would consent to the borne by the depositor (Art. 1987).
change if he knew of the facts of the situation (Art.
1974). If the deposit is gratuitous, the depositor is obliged
to reimburse the depositary for the expenses he
Unless there is a stipulation to the contrary, the may have incurred for the preservation of the thing
depositary may commingle grain or other articles of deposited (Art. 1992)
the same kind and quality, in which case the various
depositors shall own or have a proportionate If the deposit is not gratuitous, the depositor is
interest in the mass (Art. 1976). obliged to pay compensation to the depositary.
Should the depositor fail to pay, the depositary may
The depositary may open a locked box or receptacle retain the thing in pledge until the full payment of
if the key has been delivered to him or when the what may be due him by reason of the deposit (Art.
instructions of the depositor as regards the deposit 1994).
cannot be executed without opening the box or
receptacle (Art. 1982). The depositor shall reimburse the depositary for
any loss arising from the character of the thing
The depositary, who discovers that the thing deposited, except in the following cases:
deposited has been stolen and who advises the true
owner of the deposit, shall be relieved of If at the time of the constitution of the deposit the
responsibility by returning the thing deposited to former was not aware of, or was not expected to
know the dangerous character of the thing; or

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If he notified the depositary of the same, or the CREDIT TRANSACTIONS Fourth Year
latter was aware of it without advice from the
depositor (Art. 1993). Second Session
Extinguishment of Voluntary Deposit Guaranty
Art. 1995. A deposit its extinguished: Art. 2047. By guaranty a person, called the
guarantor, binds himself to the creditor to fulfill the
(1) Upon the loss or destruction of the thing obligation of the principal debtor in case the latter
deposited; should fail to do so.
(2) In case of a gratuitous deposit, upon the death If a person binds himself solidarily with the
of either the depositor or the depositary. principal debtor, the provisions of Section 4,
Chapter 3, Title I of this Book shall be observed. In
NOTE: Other causes (novation, merger, expiration
such case the contract is called a suretyship.
of the term, fulfillment of resolutory condition)
(1822a)
Bar 2007
CHARACTERISTICS
A deposit made in compliance with a legal
It is an accessory contract because it is dependent
obligation is:
for its existence upon the principal obligation
(a) an extrajudicial deposit guaranteed by it. It cannot exist without a valid
obligation. However, a guaranty may be
(b) a voluntary deposit constituted to guarantee the performance of a
voidable or an unenforceable contract. It may also
(c) a necessary deposit guarantee a natural obligation. (Article 2052).
(d) a deposit with a warehouseman It is subsidiary and conditional because it takes

effect only when the principal debtor fails in his
(e) letters a and b
obligation.
ANSWER: C
It is unilateral because (a) it gives rise only to a duty
Judicial Deposit vs. Extrajudicial Deposit on the part of the guarantor in relation to the
creditor and not vice versa although after its
fulfillment, the principal debtor becomes liable to
indemnify the guarantor (Art. 2066) and (b) it may
be entered into even without the intervention of
the principal debtor (Art. 2050).
It is requires that the guarantor must be a person

distinct from the debtor because a person cannot
be the personal guarantor of himself.
A guaranty is gratuitous, unless there is a

stipulation to the contrary (Article 2048).
It is a contract between the guarantor and creditor.
Suretyship

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Suretyship is a contractual relation whereby one therefrom. (Garcia, Jr. vs. Court of Appeals, 191
person, the surety, engages to be answerable for SCRA 493 [1990])
the debt, default, or miscarriage of another known
as the principal. In law, a surety is considered as being the same
party as the debtor and their liabilities are
While both suretyship and guaranty are promises interwoven as to be inseparable (Security Pacific
to answer for the debt, default or miscarriage of Assurance Corporation vs. Infante, 468 SCRA 527
another, in suretyship, the surety binds himself [2005]). In other words, if the principal debtor and
solidarily with the principal debtor. In effect, the the surety are held liable, their liability to pay the
surety is himself a principal debtor. creditor would be solidary but the nature of the
surety's undertaking is such that he does not incur
The second paragraph of Article 2047 states the law liability until the principal debtor is held liable.
applicable to the contract of suretyship. It covers
Articles 1207 to 1222, Title I (Obligations), Chapter In a suretyship, there is but one contract, and the
3 (Different Kinds of Obligations), Section 4 (Joint surety is bound by the same agreement which
and Solidary Obligations), Book IV (Obligations and binds the principal. A surety is usually bound with
Contracts) of the Civil Code. If a person binds the principal by the same instrument, executed at
himself solidarily with the principal debtor, the the same time and upon the same consideration.
contract is called suretyship and the guarantor is (Palmares vs. Court of Appeals, 288 SCRA
called a surety. 422[1998])
In a solidary obligation, a solidary debtor is himself A contract of surety is not presumed; it cannot alo
a principal debtor. Hence, a solidary debtor cannot extend to more than what is stipulated. The extent
be considered a guarantor of his co-debtor. of the surety's liability is determined only by the
clause of the contract of suretyship. It cannot be
Whenever applicable, the provisions on guaranty extended by implication beyond the terms of the
also apply to suretyship. contract. (Phil. Commercial and Industrial Bank vs.
Court of Appeals, 159 SCRA 24 [1988])
Can a guarantor bind himself with the principal
debtor without becoming a surety? The surety is bound by a judgment against the
principal even though he was not a party to the
YES. It all depends upon the terms of the contract
proceedings. The nature of its undertaking makes it
or the intention of the third person. If his intention
privy to proceedings against its principal (Finman
is not to convert himself into a principal debtor but
General Assurance vs. Salik, 188 SCRA 740 [1990]).
merely to constitute himself as a guarantor
although binding himself solidarily, action may be The creditor may sue, separately or together the
brought against him outright by reason of the said principal debtor and the surety (Nassco vs.
solidarity but he retains his character as a Torrento, 20 SCRA 427. Where there are several
guarantor and all the rights inherent in a guarantor sureties, the obligee may proceed against anyone
by reason of payment by him. of them. (Art. 1216.)
POINTS TO REMEMBER ABOUT SURETYSHIP Demand on the surety is not necessary before
bringing suit against them, since the
The surety is directly, primarily, and equally bound
commencement of the suit is a sufficient demand.
with the principal as original promisor even if he
A surety is not even entitled, as a matter of right, to
possesses no direct or personal interest over the
be given notice of the principal's default. The surety
debtor's obligations nor does he receive any benefit
is bound to take notice of the principal's default
and to perform the obligation. He cannot complain

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that the creditor has not notified him in the Art. 1236. The creditor is not bound to accept
absence of a special agreement to that effect in the payment or performance by a third person who has
contract of suretyship. no interest in the fulfillment of the obligation,
unless there is a stipulation to the contrary.
As soon as the principal is in default, the surety Whoever pays for another may demand from the
likewise is in default. The proper remedy of the debtor what he has paid, except that if he paid
surety is to pay the debt and pursue the principal without the knowledge or against the will of the
for reimbursement. debtor, he can recover only insofar as the payment
has been beneficial to the debtor.
The neglect of the creditor to sue the principal at
the time the debt falls due does not discharge the Art. 1237. Whoever pays on behalf of the debtor
surety, even if such delay continues until the without the knowledge or against the will of the
principal becomes insolvent. The consequences of latter, cannot compel the creditor to subrogate him
the delay, such as the subsequent insolvency of the in his rights, such as those arising from a mortgage,
principal or the fact that the remedies against the guaranty, or penalty.
principal may be lost by lapse of time, are
immaterial. ILLUSTRATION
A surety is not entitled to the exhaustion of the A owes B P5000. C guarantees the obligation
properties of the principal debtor. The reason is without the consent of A.
that a surety assumes a solidary liability for the
fulfillment of the principal obligation as an original
promissor and debtor from the beginning.
At the onset, A can refuse the guarantee
Qualifications of a Guarantor under Article 1236.
Person who possesses integrity C pays B without the knowledge and consent of A. C
asks reimbursement from A.
Has the capacity to bind himself
C can recover only insofar as the payment has been
Has sufficient property to answer for the obligation beneficial to A. Thus, if A had already made partial
he guarantees (Article 2056) payment to B for 2000, C can get reimbursement
from A in the amount that benefited him. For the
Grounds for disqualification remaining P3000, C can get it from B who should
not have accepted the overpayment. Otherwise,
Art. 2057. If the guarantor should be
there will be unjust enrichment.
convicted in first instance of a crime involving
dishonesty or should become insolvent, the creditor Effects of guaranty
may demand another who has all the qualifications
required in the preceding article. The case is Between the creditor and guarantor
excepted where the creditor has required and
stipulated that a specified person should be the Between the debtor and guarantor
guarantor.
Between the co-guarantors
Art. 2050. If a guaranty is entered into without the
Between Creditor and Guarantor:
knowledge or consent, or against the will of the
BENEFIT OF EXCUSSION
principal debtor, the provisions of Articles 1236 and
1237 shall apply. The guarantor cannot be compelled to pay the
creditor unless the latter has exhausted all the

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property of the debtor and has resorted to all legal Art. 2066. The guarantor who pays for a debtor
remedies against the debtor (Article 2058). must be indemnified by the latter. The indemnity
comprises:
The subguarantor (guarantor of the guarantor)
cannot also be compelled to pay the creditor unless (1) The TOTAL AMOUNT of the debt;
a prior exhaustion is made against the debtor and
then the guarantor (Article 2064) (2) The legal INTERESTS thereon from the time the
payment was made known to the debtor, even
How excussion is made though it did not earn interest for the creditor;
When the debtor is sued, the guarantor must be (3) The EXPENSES incurred by the guarantor after
notified of the action so that he may set up having notified the debtor that payment had been
excussion as a defense. (Article 2062) demanded of him;
The guarantor must set up excussion against the (4) DAMAGES, if they are due. (1838a)
creditor, upon the latter's demand for payment
from him, by pointing out to the creditor available Between the debtor and guarantor:
property of the debtor within the Philippines SUBROGATION
sufficient to cover the amount of the debt. (Article to the extent of the debt actually paid
2060)
Art. 2067. The guarantor who pays is subrogated by
The creditor who is negligent in exhausting the virtue thereof to all the rights which the creditor
property pointed out shall suffer the loss, to the had against the debtor. If the guarantor has
extent of said property, for the insolvency of the compromised with the creditor, he cannot demand
debtor resulting from such negligence. (Art. 2061) of the debtor more than what he has really paid.
Art. 2059. The excussion shall not take place: Guarantor must respect period
(1) If the guarantor has expressly RENOUNCED it; Art. 2069. If the debt was for a period and the
guarantor paid it before it became due, he cannot
(2) If he has BOUND HIMSELF SOLIDARILY with the demand reimbursement of the debtor until the
debtor; expiration of the period unless the payment has
been ratified by the debtor.
(3) In case of INSOLVENCY of the debtor;
If guarantor pays without notifying debtor…
(4) When he has ABSCONDED, or cannot be sued
within the Philippines unless he has left a manager Under Art. 2070, it depends on whether the debtor
or representative; repeats payment. If the debtor repeats payment,
the guarantor has no remedy against the debtor,
(5) If it may be presumed that an execution on the but only against the creditor.
property of the principal debtor would not result in
the satisfaction of the obligation (INSUFFICIENCY EXCEPTION: In case of a gratuitous guaranty, if the
OF DEBTOR’S PROPERTY). guarantor was prevented by a fortuitous event
from advising the debtor of the payment, and the
Between the debtor and guarantor: creditor becomes insolvent, the debtor shall
INDEMNITY reimburse the guarantor for the amount paid.
DEBTOR MUST INDEMNIFY THE GUARANTOR. If guarantor pays without notifying debtor…

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Under Art. 2068. The debtor may enforce against 2. to DEMAND A SECURITY that shall protect
the guarantor all the defenses which he could have him from any proceedings by the creditor
set up against the creditor at the time the payment and from the danger of insolvency of the
was made. debtor.
Examples of defenses are prescription, that the Between the guarantors:

obligation is void or unenforceable, etc. BENEFICIAL REIMBURSEMENT
rd
Guarantor of an absent 3 person Art. 2073. When there are two or more guarantors
of the same debtor and for the same debt, the one
Art. 2072. If one, at the request of another, among them who has paid may demand of each of
becomes a guarantor for the debt of a third person the others the share which is proportionally owing
who is not present, the guarantor who satisfies the from him.
debt may sue either the person so requesting or the
debtor for reimbursement. If any of the guarantors should be insolvent, his
share shall be borne by the others, including the
RIGHT OF ACTION AGAINST DEBTOR payer, in the same proportion.
Art. 2071. The guarantor, even before having paid, The provisions of this article shall not be applicable,
may proceed against the principal debtor: unless the payment has been made by virtue of a
judicial demand or unless the principal debtor is
(1) When he is sued for the payment;
insolvent. (1844a)
(2) In case of insolvency of the principal debtor;
Art. 2074. In the case of the preceding article, the
(3) When the debtor has bound himself to relieve co-guarantors may set up against the one who
him from the guaranty within a specified period, paid, the same defenses which would have
and this period has expired; pertained to the principal debtor against the
creditor, and which are not purely personal to the
(4) When the debt has become demandable, by debtor. (1845)
reason of the expiration of the period for payment;
Art. 2075. A sub-guarantor, in case of the
(5) After the lapse of ten years, when the principal insolvency of the guarantor for whom he bound
obligation has no fixed period for its maturity, himself, is responsible to the co-guarantors in the
unless it be of such nature that it cannot be same terms as the guarantor.
extinguished except within a period longer than ten
years; Concurring v. Sub Guaranty
(6) If there are reasonable grounds to fear that the Insolvent Co-Guarantor
principal debtor intends to abscond;
Co-guarantor is released by creditor
(7) If the principal debtor is in imminent danger of
Art. 2078. A release made by the creditor in favor of
becoming insolvent.
one of the guarantors, without the consent of the
REMEDY UNDER ART. 2071 others, benefits all to the extent of the share of the
guarantor to whom it has been granted.
The action of the guarantor is:
If WITH consent of co-guarantors, they will bear the
1. to OBTAIN RELEASE from the guaranty; or share of released guarantor

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If WITHOUT the consent of co-guarantors, they will Art. 2082. The bondsman who is to be offered in
NOT bear the share of the released co-guarantor virtue of a provision of law or of a judicial order
shall have the qualifications prescribed in Article
EXTINGUISHMENT OF GUARANTY 2056 and in special laws.
IN GENERAL, the obligation of the guarantor is Art. 2083. If the person bound to give a bond in the
extinguished at the same time as that of the cases of the preceding article, should not be able to
debtor, and for the same causes as all other do so, a pledge or mortgage considered sufficient to
obligations. cover his obligation shall be admitted in lieu
thereof.
There are also other grounds specific to guaranty.
Art. 2084. A judicial bondsman cannot demand the
Art. 2077. If the creditor voluntarily accepts
exhaustion of the property of the principal debtor.
immovable or other property in payment of the
A sub-surety in the same case, cannot demand the
debt, even if he should afterwards lose the same
exhaustion of the property of the debtor of the
through eviction, the guarantor is released. (This is,
surety.
in effect, a dation in payment.)
PLEDGE
Art. 2079. An extension granted to the debtor by
the creditor without the consent of the guarantor Concept
extinguishes the guaranty. The mere failure on the
part of the creditor to demand payment after the It is a contract by virtue of which the debtor
debt has become due does not of itself constitute delivers to the creditor or to a third person a
any extension of time referred to herein. (1851a) movable or document evidencing incorporeal rights
for the purpose of securing the fulfillment of a
Art. 2080. The guarantors, even though they be principal obligation with the understanding that
solidary, are released from their obligation when the obligation is fulfilled the thing shall be
whenever by some act of the creditor they cannot returned with all its fruits and accessions.
be subrogated to the rights, mortgages, and
preference of the latter. (1852) How does pledge work?
Illustration A borrows P10,000 from B. A delivers his cellular

phone to B as pledge to secure payment of the
If debtor and creditor agree to increase the interest loan.
rate – extinguishes guaranty since disadvantageous
to the guarantor B continues to have possession over the cellular
phone until A pays P10,000
If debtor and creditor agree to decrease the
interest rate- guaranty subsists since this does not A can have the phone back once he pays B P10,000
affect guarantor’s liability
If A cannot pay, B can sell the phone at auction and
If debtor and creditor agree on an extension of time apply the proceeds to the loan.
to pay- guaranty is extinguished
Essential Requisites (Art. 2085)
If debtor and creditor agree on lower interest but
extended period- extinguishes guaranty constituted to secure the fulfillment of a principal
obligation (usually, but not necessarily, a loan)
LEGAL AND JUDICIAL BONDS
pledgor is the absolute owner of the thing (Cavite v.
Lim)

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23
pledgor has the free disposal of his property or is documents. The instrument must be delivered to
legally authorized to do so the pledgee and properly indorsed.
Essential Requisites Subject Matter
the property must be placed in the possession of Future property cannot be pledged (Gen. Insurance
the creditor (Article 2093) v. Masakayan, 54 SCRA 120)
the description of the thing and the date of the A mortgagee has the right to rely upon the title and
pledge must be in a public instrument to bind third does not have to inquire further, unless mortgagee
persons (Article 2096) is a banking institution (GSIS v. CA, 287 SCRA 204)
No Double Pledge A co-owner may pledge his portion of the thing

(PNB v. CA, 98 SCRA 207)
A property already pledged cannot be pledged
again while the first pledge is still subsisting Nature (Article 2089)
(Mission de San Vicente v. Reyes, 19 Phil 524)
General Rule: INDIVISIBLE
RATIONALE: Delivery is essential for validity. One
cannot deliver a thing twice Debtor who pays part of the debt cannot ask for
proportionate extinguishment of the pledge
Parties
EXCEPTION: where several things are given in
PLEDGOR – the debtor or a third person who pledge and each thing guarantees only a
pledges the subject matter to secure the loan of the determinate portion of the credit
debtor; he must be the owner and must have free
disposal of the property or at least must be Illustration
authorized to dispose.
A pledges his car (P400,000) and his necklace
PLEDGEE - creditor (P100,000) to secure his P500,000 debt. A pays
P400,000
Parties
He cannot say that his car should be released since
The pledgor may be the debtor OR a third person he has paid part of the loan
nd
(Article 2083, 2 paragraph)
The pledge over the car and the necklace is
A pledge executed before a person becomes the INDIVISIBLE.
owner is VOID (Vda de Bautista v. Marcos, 3 SCRA
434) PLEDGEE
Subject Matter OBLIGATIONS
Article 2094 - all movables which are within the To appropriate fruits, income, dividends or interest
commerce of man provided they are susceptible of of thing with those which are owing him, and if
possession none, to apply it to the principal (Article 2102)
Article 2095 - incorporeal rights, evidenced by OBLIGATIONS

negotiable instruments, bills of lading, shares of
Take care of the thing with the diligence of a good
stocks, bonds, warehouse receipts and similar
father of a family, subject to his right to be
reimbursed by the pledgor (Article 2099)

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24
OBLIGATIONS In case of unauthorized use or misuse by pledgee,

may ask judicial or extrajudicial deposit of thing
Cannot deposit the thing with a third person and is (Article 2104)
bound by his agents’ acts (Article 2100).
Loss or impairment
Liable for loss and deterioration (Article 2099).
If through the negligence or wilful act of the
Rights pledgee, the thing pledged is in danger of being lost
or impaired, the pledgor may require that it be
To use the thing to preserve it (Article 2099)
deposited with a third person. (Article 2106)
To retain possession of the thing until fulfillment of
If without fault of pledgee, the pledgor may
the obligation (Article 2098)
demand the return of thing and offer a
Reimbursement for expenses to preserve the thing replacement. However, this right is inferior to the
(Article 2099) right of the pledgee to sell the thing at auction.
(Article 2107)
Rights
Extinguishment of Pledge
He may file actions to recover it from or defend it
against 3rd persons (Art. 2103) If the thing pledged is returned by pledgee to the
pledgor (Article 2110)
In case of fear of destruction or impairment
without the fault of the pledgee, he may cause the If after the perfection of the pledge, the thing is in
sale of the thing pledged in a public auction (Art. the possession of the pledgor or owner, there is a
2108) prima facie presumption that the same has been
returned by the pledgee. This same presumption
Rights exists if the thing pledged is in the possession of a
third person who has received it from the pledgor
Under Article 2109, if he is deceived as to substance
or owner after the constitution of the pledge.
or quality of the thing he may:
A statement in writing by the pledgee that he
may ask for replacement OR
renounces or abandons his pledge is sufficient to
demand immediate payment. extinguish it (Article 2111). The pledgor does not
even have to accept the renunciation. The thing
PLEDGOR pledged does not have to be returned to the owner
to extinguish the pledge.
Rights and Obligations
EFFECT:
May dispose of the thing, with the consent of the
pledgee and with the thing still subject to the The pledgee becomes a mere depositary.
pledge and in the possession of the pledgee (Article
2097) If the debtor defaults….
Must advise the pledgee of hidden flaws of the  This means that the obligation is due and
thing otherwise shall be liable for damages (Article unpaid.
2101)
 The thing will be sold at a public auction
Rights and Obligations with notice to the pledgor and owner

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25
stating the amount for which the sale is to There is pactum

be held.
Stipulation that the thing shall be considered in full
 Sale must be conducted by a notary public payment of the debt without further action
(Northern Motors v. Herrera)
 After the sale, pledgee must advise the
pledgor of the results Stipulation in a pacto de retro sale that ownership
over the thing will automatically pass to the vendee
Public Auction in case there is no redemption (Lanuza v. De Leon)
Pledgor - may bid and if he offers the same terms as Exception to Pactum
highest bidder, he is preferred (Article 2113)
After 2 auction sales and there are no bidders,
Pledgee - may bid but not if he is the only bidder pledgee may appropriate the thing to himself BUT
nd
(Article 2113, 2 par.)
He must give an acquittance of the entire claim
WHY? It may lead to a circumvention of the rule (Article 2112)
against automatic appropriation.
Bar Question 2010
All bids shall offer to pay the purchase price at once
(Article 2114) Rosario obtained a loan of P100,000.00 from
Jennifer, and pledged her diamond ring. The
Public Auction contract signed by the parties stipulated that if
Rosario is unable to redeem the ring on due date,
In case of deficiency, the pledgee cannot collect the
she will execute a document in favor of Jennifer
balance from the pledgor (Article 2115)
providing that the ring shall automatically be
In case of excess, debtor is not entitled to the considered full payment of the loan.
excess unless the contrary is provided (Article 2115)
Is the contract valid? Explain. (3%)
Can the creditor appropriate the thing to himself in
Will your answer to [a] be the same if the contract
case of non-payment?
stipulates that upon failure of Rosario to redeem
NO. Creditor cannot appropriate the thing pledged the ring on due date, Jennifer may immediately sell
to himself or dispose of them. Any stipulation to the ring and appropriate the entire proceeds
the contrary is VOID (Article 2088). thereof for herself as full payment of the loan?
Reasons. (3%)
Such stipulation is called
Suggested Answer
PACTUM COMMISSORIUM
No, the contract is not valid. It is in the nature of
Elements of Pactum Commissorium pactum commissorium.
There should be a pledge, mortgage, or antichresis The elements of pactum commissorium are present
of property by way of security for the payment of here, namely, there was a pledge of a ring and
the principal obligation. there was a stipulation of automatic appropriation
of the thing in favor of the creditor in case the debt
There should be stipulation for an automatic
is not paid.
appropriation by the creditor of the property in the
event of non-payment of the obligation. Suggested Answer

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26
My answer would not be the same. In the second Was the assignment of rights a mortgage or
scenario, there was no automatic appropriation of cession? Assuming it is a mortgage, does the
the pledged thing in favor of the creditor but provision giving the bank the power to sell the stall
merely giving the creditor the right to dispose of constitute pactum commissorium?
the ring and to use the proceeds to pay the
obligation. Answer
CONCLUSION The assignment was a mortgage not a cession of

the leasehold rights. A cession would have
In the second scenario, there is something still to be transferred ownership to the bank. However, the
done by the creditor before the thing is grant of authority to the bank to sell the stall is
appropriated. Appropriation is therefore not proof that no such ownership was transferred and
automatic. that a mere encumbrance was constituted. There
would have been no need for the authority if there
Bar Question 2004 was cession.
ABC loaned to MNO P40,000 for which the latter Answer
pledged 400 shares of stocks in XYZ Corp. The
parties agreed that if pledgor failed to pay the loan No. The clause does not constitute pactum
with 10% yearly interest within four years, the commissorium. It is pactum when non-payment of
pledgee is authorized to foreclose on the shares. loan automatically vests to the bank ownership of
MNO delivered possession of shares to ABC with the encumbered property. In this case, the bank
understanding that the shares will be returned to merely has the right to sell the rights to the stall
MNO upon payment of loan. However, the loan and to apply the proceeds to the loan.
was not paid on time.
Bar Question 1999
A month after 4 years, may the shares be deemed
owned by ABC? X borrowed money from Y and gave a piece of land
as security by way of mortgage. It was expressly
Answer agreed in the mortgage contract that upon non-
payment of the loan, the land will already belong to
NO. The shares of stocks cannot be deemed owned Y. If X defaulted in the payment of loan, will Y now
by ABC. The pledge has to be foreclosed. Under the own the land? Why?
law, the creditor cannot appropriate the things
given by way of pledge. Even if the parties agreed Answer
that ABC will automatically own the shares upon
MNO’s default, that constitutes pactum No. Y would not become the owner of the land.
commissorium, which is a void agreement. The stipulation is in the nature of pactum
commissorium, which is prohibited by law. The
Bar 2001 property should be sold at a public auction and the
proceeds thereof paid to Y.
To secure a loan from a rural bank, A assigned her
leasehold rights over a public market stall in favor Bar Question 1999
of the bank. The deed of assignment provides that
in case of default in the loan payment, the bank Suppose in the preceeding question, the agreement
shall have the right to sell Purita’s rights over the is that if X failed to pay the loan, the debt shall be
stall as her attorney in fact and to apply the paid with the land mortgaged by X to Y. Would your
proceeds to the payment of the loan. answer be the same? Explain.

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27
Answer Amount of loan – not less than 30% of the

property’s value unless pawner manifests in writing
No, my answer would not be the same. This is a desire to loan a smaller amount
valid stipulation and does not constitute pactum
commissorium. In pactum, the acquisition is Redemption – within 90 days from maturity of
automatic without need of further action. In the obligation
second situation, another act is required to be
performed, namely, the conveyance of property as Pawnshop Regulation Act
payment (dacion en pago).
Notify owner of sale on or before end of 90-day
Legal Pledges period
Provisions on possession, care and sale of the thing Public auction in place of business or public place
pledged cover legal pledges (Article 2121) within territorial limits where the pawnshop
operates
Legal Pledges
Under control of licensed auctioneer
 Art. 546 – right of possessor in good faith
to refund of necessary expenses before he Notice once in at least two daily newspapers in the
returns the thing city of operation
 Art. 1707 – lien on goods manufactured or ANTAM PAWNSHOP versus CIR

work done by laborer until his wages are G.R. No. 167962, September 19, 2008
paid
Facts: The CIR assessed Antam with deficiency
 Art. 1731 – right to retain by a worker who documentary stamp tax for pawn tickets. Antam
executed work on a movable protested to the CTA which ruled that pursuant to
Section 3 of Presidential Decree (P.D.) No. 114, a
Legal Pledges pawn ticket is neither security nor a printed
evidence of indebtedness. Consequently, it cannot
Art. 1914 – right of an agent to retain the thing until be considered as a document subject to DST under
he is reimbursed advances and damages Section 195 of the NIRC.
Art. 1994 – right of retention of a depositary until Issue: Is the CIR correct?
he is paid his fees
RULING:
Art. 2004 – right of a hotelkeeper to retain
properties of the guest until his bills are paid No. Section 195 of the NIRC imposes, among others,
a DST on pledge of personal property made as a
Special Law security for the payment of a sum of money.
Presidential Decree No. 114, otherwise known as Section 3 of P.D. No. 114 defines a pawnshop as a
the Pawnshop Regulation Act. person or entity engaged in the business of lending
money on personal property delivered as security
Pawnshop Regulation Act
for loans. Thus, in essence, a pawnshop enters into
Capitalization – P100,000 a contract of pledge with the pawner or the
borrower.
Citizenship – 70% Filipino
At the time of every loan or pledge, the
pawnbroker or the pawnshop is required to deliver

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28
to each person pawning or pledging a ticket signed a complaint against Sicam with the Regional Trial
by the pawnbroker containing, among others: (1) Court of Makati seeking indemnification for the loss
the amount of the loan; (2) the date the loan was of pawned jewelry and payment of actual, moral
granted; (3) rate of interest; and (4) the name and and exemplary damages as well as attorney's fees.
residence of the pawnee. Sicam seeks to be absolved from liability due to
fortuitous event.
Considering that the pawn ticket issued by the
pawnshop should contain the foregoing, the pawn RULING
ticket is evidently a proof of a contract of pledge.
We agree with petitioner that the law does not To constitute a fortuitous event, the following
consider the pawn ticket as a security nor a printed elements must concur: (a) the cause of the
evidence of indebtedness. However, what is subject unforeseen and unexpected occurrence or of the
to DST is not the ticket itself but the privilege of failure of the debtor to comply with obligations
entering into a contract of pledge. must be independent of human will; (b) it must be
impossible to foresee the event that constitutes the
A documentary stamp tax is in the nature of an caso fortuito or, if it can be foreseen, it must be
excise tax. It is not imposed upon the business impossible to avoid; (c) the occurrence must be
transacted but is an excise upon the privilege, such as to render it impossible for the debtor to
opportunity or facility offered at exchanges for the fulfill obligations in a normal manner; and, (d) the
transaction of the business. It is an excise upon the obligor must be free from any participation in the
facilities used in the transaction of the business aggravation of the injury or loss.
separate and apart from the business itself.
Article 2123 of the Civil Code provides that with
In general, documentary stamp taxes are levied on regard to pawnshops and other establishments
the exercise by persons of certain privileges which are engaged in making loans secured by
conferred by law for the creation, revision, or pledges, the special laws and regulations
termination of specific legal relationships through concerning them shall be observed, and
the execution of specific instruments. Examples of subsidiarily, the provisions on pledge, mortgage
such privileges, the exercise of which, as effected and antichresis.
through the issuance of particular documents, are
subject to the payment of documentary stamp The provision on pledge, particularly Article 2099 of
taxes are leases of lands, mortgages, pledges, and the Civil Code, provides that the creditor shall take
trusts and conveyances of real property. care of the thing pledged with the diligence of a
good father of a family. This means that petitioners
DST is not a tax on a “document” but is a tax on the must take care of the pawns the way a prudent
privilege of entering into a transaction such as person would as to his own property.
pledge.
A review of the records clearly shows that
SICAM versus JORGE petitioners failed to exercise reasonable care and
529 SCRA 443 , August 08, 2007 caution that an ordinarily prudent person would
have used in the same situation. Petitioners were
On October 19, 1987, two armed men entered the guilty of negligence in the operation of their
pawnshop and took away whatever cash and pawnshop business. Petitioner Sicam testified,
jewelry were found inside the pawnshop vault. thus:
Petitioner Sicam sent respondent Lulu a letter
dated October 19, 1987 informing her of the loss of Q. Did you come to know how the vault was
her jewelry due to the robbery incident in the opened?
pawnshop. On September 28, 1988, Lulu Jorge, filed

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29
A. When the pawnshop is open your honor the vault personal property must be recorded in the chattel
is partly open. The combination is off. mortgage registry (2140)
Q. No one opened the vault for the robbers? Bar 2003
A. No one your honor it was open at the time of the  X constructed a house on Y’s land. X
robbery. executed a chattel mortgage over the
house in favor of Y. X purchased the lot
Q. It is clear now that at the time of the robbery the from Y. X then executed a real mortgage
vault was open the reason why the robbers were over the property in favor of A Bank.
able to get all the items pawned to you inside the When A Bank was able to foreclose the
vault. mortgage, Y demanded that A Bank satisfy
the debt of X and to honor the chattel
A. Yes sir.
mortgage between X and Y. Is this demand
Sicam's admission that the vault was open at the against A Bank valid and sustainable?
time of robbery is clearly a proof of petitioners' Why?
failure to observe the care, precaution and
Answer
vigilance that the circumstances justly demanded.
Y’s demand is not valid. The chattel mortgage is
CHATTEL MORTGAGE
void because it was not registered with the Chattel
Concept Mortgage Registry. Hence, A Bank does not have
any obligation to Y.
Art. 2140. By a chattel mortgage, personal property
is recorded in the Chattel Mortgage Register as a Effect of Registration
security for the performance of an obligation. If the
Binding notice to other creditors of its existence
movable, instead of being recorded, is delivered to
and creates a real right or a lien which follows the
the creditor or a third person, the contract is a
chattel whenever it goes
pledge and not a chattel mortgage.
The lien of a chattel mortgagee over the property is
Art. 2141. The provisions of this Code on pledge,
superior to the levy made by an assignee of the
insofar as they are not in conflict with the Chattel
unsecured judgment creditor of the chattel
Mortgage Law shall be applicable to chattel
mortgagor (Northern v. Coquia, 68 SCRA 374)
mortgages.
Mortgage of motor vehicle
Essential Requisites
Under the Revised Motor Vehicle Law, when the
Applying Art. 2085 on pledge:
subject matter of a chattel mortgage is a vehicle,
constituted to secure the fulfillment of a principal the CM must not only be registered with the CM
obligation registry must also with the Land Transportation
Office or LTFRB in cases of public utility vehicles in
pledgor is the absolute owner of the thing order to BIND THIRD PERSONS (Borlough v.
Fortune)
Essential Requisites
Subject Matter
persons constituting the pledge have the free
disposal of their property or are legally authorized Always personal or movable property
to do so

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30
Covers only property described in the CM and not principal office. The mortgage on the car was
like or substituted property thereafter acquired by registered in the Office of the Register of Deeds of
the mortgagor and placed in the same depositary as Manila. Armando executed a single Affidavit of
the property originally mortgaged (Sec. 7, par 4 Act Good Faith, covering both mortgages.
1508)
Bar 2009
Subject Matter
Armando defaulted on the payment of his
Description of the property must be such to enable obligation; thus, Bernardo foreclosed on the two
parties to identify the same after a reasonable chattel mortgages. Armando filed suit to nullify the
investigation and inquiry (Saldana v. Phil Guaranty, foreclosure and the mortgages, raising the
106 Phil 919) following issues:
Subject Matter The execution of only one Affidavit of Good Faith

for both mortgages invalidated the two mortgages;
Interest in business (2%)
Shares of stocks in a corporation Suggested Answer
Machinery installed in a leased land treated by the The fact that there was only one affidavit of good
parties as personal property faith covering the two mortgages will not invalidate
the mortgages.
House intended to be demolished
According to jurisprudence, the absence of an
Affidavit of Good Faith
affidavit of good faith will not affect the validity of
An oath in a contract of CM wherein the parties the mortgage between the parties but will only
rd
severally swear that the mortgage is made for the vitiate the mortgage as to 3 persons without
purpose of securing the obligation specified in the notice like creditors and subsequent
conditions thereof and for no other purposes and encumbrancers.
that the same is a just and valid obligation and not
Period to foreclose the CM
one entered into for the purpose of fraud (Section
5, Chattel Mortgage Law) After 30 days from the time the condition is broken
Absence of Affidavit of Good Faith The 30-day period is the minimum period with at
rd least 10 days’ notice to the mortgagor and posting
Absence only vitiates the mortgage as to 3
of public notice of time, place and purpose of the
persons without notice like creditors and
sale (Cabral v. Evangelista, 28 SCRA 1000)
subsequent encumbrancers (PRC v. Jarque, 61 Phil
229) Extrajudicial Foreclosure
Bar 2009 Extrajudicial Foreclosure
Armando, a resident of Manila, borrowed P3- Replevin

million from Bernardo, offering as security his 500
shares of stock worth P1.5-million in Xerxes Action which must be initiated by the creditor if he
Corporation, and his 2007 BMW sedan, valued at cannot obtain possession of the property for
P2-million. The mortgage on the shares of stock purposes of sale on foreclosure (Filinvest v. CA)
was registered in the Office of the Register of Deeds
of Makati City where Xerxes Corporation has its Proceeds of the Sale

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31
Costs and expenses of keeping and sale Mortgagee can recover deficiency
Demand or obligation secured by the CM Exception: when the chattel mortgage was
instituted to secure the purchase of a property on
Subsequent mortgagees installment (Recto Law)
Mortgagor Right to Excess
Right of Redemption Since there is no express prohibition under the law,

the chattel mortgagor is presumed to have the right
Available in extrajudicial foreclosure
to the excess of the purchase price over the debt
Done by paying the mortgagee the amount due on
Bar 2009
such mortgage and the costs and expenses incurred
by such breach of condition before the sale thereof Armando, a resident of Manila, borrowed P3-
OR million from Bernardo, offering as security his 500
shares of stock worth P1.5-million in Xerxes
If after the sale, done by paying the winning bidder
Corporation, and his 2007 BMW sedan, valued at
the purchase price and all costs within one year
P2-million. The mortgage on the shares of stock
from date of registration of certificate of sale
was registered in the Office of the Register of Deeds
Who Can Redeem of Makati City where Xerxes Corporation has its
principal office. The mortgage on the car was
Mortgagor registered in the Office of the Register of Deeds of
Manila. Armando executed a single Affidavit of
Person holding subsequent mortgage
Good Faith, covering both mortgages.
Subsequent attaching creditor
Bar 2009
Rights of Parties
Assume that Bernardo extrajudicially foreclosed on
Rights of Parties the mortgages, and both the car and the shares of
stock were sold at public auction. If the proceeds
1st Mortgagee - Creditor A – he can foreclose the from such public sale should be P1-million short of
chattel mortgage in case of default Armando’s total obligation, can Bernardo recover
nd
the deficiency? Why or why not? (2%)
2 Mortgagee – Creditor B – he can redeem the
property by paying A the mortgage debt. He can Suggested Answer
now appropriate the property to himself
Bernardo can recover the deficiency.
Rights of Parties
Under the Civil Code, in case of chattel mortgage,
Attaching Creditor – Creditor C he can redeem the there is no express prohibition against collecting
property by paying A the mortgage debt. He the balance or deficiency in case the proceeds of
acquires the right to foreclose and not the right to the auction do not satisfy the whole obligation.
own the property The only exception is in case of sale of movables on
installments. This exception is not applicable in the
Debtor can also redeem the property by paying the instant case. Hence, Bernardo can recover the
mortgage debt and get the property back balance or deficiency.
Right to Deficiency Criminal Offenses in Chattel Mortgage

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32
Article 319 of the RPC CREDIT TRANSACTIONS Fourth

knowingly removing any personal property Year
mortgage under the Chattel Mortgage Law to any
Third Session
province or city other than the one where it was
located at the time of execution of mortgage  REAL MORTGAGE
without the WRITTEN consent of the mortgagee
 What is real mortgage?
selling or pledging personal property already
mortgaged without the consent of the mortgagee  A contract whereby the debtor secures to
written at the back of the mortgage and duly the creditor the fulfillment of a principal
recorded with the Chattel Mortgage Registry obligation, specially subjecting to such
security immovable property or real rights
Bar 1999 over immovable property. This obligation
shall be satisfied with the proceeds of the
Distinguish a chattel mortgage from a contract of
sale of said property or rights in case said
pledge
obligation is not complied with at the time
stipulated.
 CHARACTERISTICS
 A real right
 It is enforceable against third

persons if registered or if third
persons have knowledge
 An accessory contract
 If the principal contract is void,

mortgage is void. But the
invalidity of the mortgage will not
affect the validity of the principal
contract.
 CHARACTERISTICS
 Inseparable
 Specially if recorded, the

mortgage adheres to the property
regardless of who its owner may
subsequently be.
 Indivisible
 A and B mortgaged their land to

C. A and B partitioned the land. A
paid C his share of the debt. Is the

CREDIT TRANSACTIONS
33
mortgage over A’s share of the  IS MORTGAGE LIMITED ONLY TO DEBTS

land extinguished? CONSTITUTED AT THE TIME OF EXECUTION?
 ANSWER: NO. Mortgage is  WHAT IS A DRAGNET CLAUSE?

indivisible.
 CUYCO versus CUYCO
 CHARACTERISTICS G.R. No. 168736, April 19, 2006
 Real property  As a general rule, a mortgage liability is

usually limited to the amount mentioned in
 As real property, a mortgage can the contract. However, the amounts
also be mortgaged. named as consideration in a contract of
mortgage do not limit the amount for which
 Limitation on ownership
the mortgage may stand as security if, from
 Mortgage encumbers but does not the four corners of the instrument, the
end ownership. It gives the intent to secure future and other
creditor only the right to foreclose indebtedness can be gathered. This
and not to own. stipulation is valid and binding between the
parties and is known in American
 Subject Matter Jurisprudence as the “blanket mortgage
clause,” also known as a “dragnet clause.”
 Immovables
 A “dragnet clause” operates as a
 Alienable real rights in accordance
convenience and accommodation to the
with the laws imposed upon
borrowers as it makes available additional
immovables
funds without their having to execute
 Includes natural accessions, additional security documents, thereby
improvements, growing fruits, saving time, travel, loan closing costs, costs
rents or income not yet received of extra legal services, recording fees, et
when the obligation becomes due cetera.
 Subject Matter  While a real estate mortgage may

exceptionally secure future loans or
 Includes insurance proceeds or proceeds of advancements, these future debts must be
expropriation for public use WHETHER THE sufficiently described in the mortgage
SM IS IN THE HANDS OF THE OWNER OR A contract. An obligation is not secured by a
RD
3 PERSON mortgage unless it comes fairly within the
terms of the mortgage contract.
 Subject Matter
 Dragnet Clause
 May include:
 Simply, it is a clause which allows a
 AFTER-ACQUIRED PROPERTIES – this is mortgage to subsume all debts of future
allowed when the real property are and even past origin.
perishable or subject to inevitable wear and
tear. The purpose here is to maintain the  The mortgage may secure future loans or
original value of the securities given advancements. e.g. for the payment of loan
(Mendoza v. CA, June 25, 2001) of P20,000 and such other loans or

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34
advances already obtained or still to be  a) contract of pledge;

obtained (Quintanilla v. CA, 279 SCRA 397
[1997])  b) contract of mortgage;
 Essential Requisites under Article 2085  c) contract of antichresis; or
 Constituted to secure the fulfillment of a  d) none of the above? Explain.

principal obligation
 ANSWER:
 The mortgagor is the absolute owner of
 None of the above. There is no pledge
the thing mortgaged
because only movable property may be
 That the persons constituting the pledged (Art. 2094. NCC). If at all, there was
mortgage have the free disposal of the a pledge of the paper or document
property or are legally authorized to do so constituting the Torrens Title, as a movable
by itself, but not of the land which the title
 Mortgage must be in a public document represents.
under Article 2125. In an obiter dictum in
Hechanova v. Adil, 144 SCRA 450, the  There is no mortgage because no deed or
Supreme Court stated that no valid contract was executed in the manner
mortgage is constituted where the deed of required by law for a mortgage (Arts. 2085
mortgage is in a mere private document. to 2092, NCC; 2124 to 2131, NCC).
 Is mortgage required to be in writing in  There is no contract of antichresis because

order to be valid? no right to the fruits of the property was
given to the creditor (Art. 2132 NCC).
 Art. 2125. In addition to the requisites
stated in Article 2085, it is indispensable, in  A contract of simple loan was entered into
order that a mortgage may be validly with a security arrangement agreed upon
constituted, that the document in which it by the parties which is not one of those
appears be recorded in the Registry of mentioned above.
Property. If the instrument is not recorded,
 ALTERNATIVE ANSWER
the mortgage is nevertheless binding
between the parties.  There is a contract of mortgage constituted
over the land. There is no particular form
 The persons in whose favor the law
required for the validity of a mortgage of
establishes a mortgage have no other right
real property. It is not covered by the
than to demand the execution and the
statute of frauds in Art. 1403 and, even
recording of the document in which the
assuming that it is covered, the delivery of
mortgage is formalized.
the title to the creditor has taken it out of
 BAR QUESTION 1996 the coverage thereof. A contract of
mortgage of real property is consensual and
 In the province, a farmer couple borrowed is binding on the parties despite absence of
money from the local merchant. To writing. However, third parties are not
guarantee payment, they left the Torrens bound because of the absence of a written
Title of their land with the merchant, for instrument evidencing the mortgage and,
him to hold until they pay the loan. Is there therefore the absence of registration. But
a: this does not affect the validity of the

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35
mortgage between the parties (Art. 2125,  (3) The power to administer property, or
NCC), The creditor may compel the debtor any other power which has for its object an
to execute the mortgage in a public act appearing or which should appear in a
document in order to allow its registration public document, or should prejudice a
(Art. 1357, in relation to Art. 1358). third person;
 SO, WHAT IS THE ANSWER?  (4) The cession of actions or rights

proceeding from an act appearing in a
 We have to reckon with Articles 1356 to public document.
1358.
 All other contracts where the amount
 Art. 1356. Contracts shall be obligatory, in involved exceeds five hundred pesos must
whatever form they may have been appear in writing, even a private one. But
entered into, provided all the essential sales of goods, chattels or things in action
requisites for their validity are present. are governed by Articles, 1403, No. 2 and
However, when the law requires that a 1405. (1280a)
contract be in some form in order that it
may be valid or enforceable, or that a  NOTE that Articles 1356 to 1358 are
contract be proved in a certain way, that requirements for convenience and not
requirement is absolute and indispensable. validity.
In such cases, the right of the parties
stated in the following article cannot be  Requirement that mortgage be in writing is
exercised. (1278a) only for convenience. A mortgage is not
even covered by the Statute of Frauds.
 Art. 1357. If the law requires a document
or other special form, as in the acts and  Requirement that mortgage be in a public
contracts enumerated in the following instrument is also only for convenience. You
article, the contracting parties may compel cannot register a private document.
each other to observe that form, once the
 Requirement that mortgage be registered is
contract has been perfected. This right may
also for convenience. Registration is only to
be exercised simultaneously with the
affect third persons.
action upon the contract. (1279a)
 Effect of Non-Registration
 Art. 1358. The following must appear in a
public document:  Registration only operates as a notice of the
mortgage to others but does NOT add to
 (1) Acts and contracts which have for their
the validity of the mortgage or convert an
object the creation, transmission,
invalid mortgage into a valid one (Samanilla
modification or extinguishment of real
v. Cajucom, 107 Phil 432)
rights over immovable property; sales of
real property or of an interest therein a  Effect of Registration
governed by Articles 1403, No. 2, and 1405;
 Registration is merely ministerial and does
 (2) The cession, repudiation or renunciation not validate an invalid real mortgage
of hereditary rights or of those of the (Agriculture v. Yusay, 107 Phil 791)
conjugal partnership of gains;
 Unregistered Sale v. Recorded Mortgage

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36
 If prior to the mortgage, the SM was sold to intention of the parties is that the
another person, the sale prevails (even if it transaction shall secure the
is unregistered) over the registered payment of a debt or the
mortgage. The original owner has parted performance of any other
with ownership and at the time of mortgage obligation.
he no longer had ownership and free
disposal of the thing (State Investment v.  In any of the foregoing cases, any
CA, 254 SCRA 368 [1996]) money, fruits, or other benefit to
be received by the vendee as rent
 Kinds of Real Mortgage or otherwise shall be considered as
interest which shall be subject to
 Voluntary – one which is agreed to between the usury laws.
the parties or constituted by will of the
owner of the property  Art. 1603. In case of doubt, a contract
purporting to be a sale with right to
 Kinds of Real Mortgage repurchase shall be construed as an
equitable mortgage.
 Equitable – one which, although it lacks the
formalities of a mortgage shows the  Art. 1604. The provisions of Article 1602
intention of the parties to make the shall also apply to a contract purporting to
property as security for the debt be an absolute sale.
 Art. 1602. The contract shall be presumed  Art. 1605. In the cases referred to in Articles
to be an equitable mortgage, in any of the 1602 and 1604, the apparent vendor may
following cases: ask for the reformation of the instrument.
 (1) When the price of a sale with  Bar Question 2005

right to repurchase is unusually
inadequate;  On July 14, 2004, Pedro executed in favor of
Juan a Deed of Absolute Sale over a parcel
 (2) When the vendor remains in of land covered by TCT No. 6245. It appears
possession as lessee or otherwise; in the Deed of Sale that Pedro received
from Juan P120,000.00 as purchase price.
 (3) When upon or after the
However, Pedro retained the owner's
expiration of the right to
duplicate of said title. Thereafter, Juan, as
repurchase another instrument
lessor, and Pedro, as lessee, executed a
extending the period of
contract of lease over the property for a
redemption or granting a new
period of one (1) year with a monthly rental
period is executed;
of Pl,000.00. Pedro, as lessee, was also
 (4) When the purchaser retains for obligated to pay the realty taxes on the
himself a part of the purchase property during the period of lease.
price;
 Subsequently, Pedro filed a complaint
 (5) When the vendor binds himself against Juan for the reformation of the
to pay the taxes on the thing sold; Deed of Absolute Sale, alleging that the
transaction covered by the deed was an
 (6) In any other case where it may equitable mortgage.
be fairly inferred that the real

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37
 In his verified answer to the complaint, Juan  Creates a real right - until discharged, it
alleged that the property was sold to him follows the property wherever it goes and
under the Deed of Absolute Sale, and subsists notwithstanding change of
interposed counterclaims to recover ownership. If the mortgagor sells the
possession of the property and to compel property , the SM remains subject to the
Pedro to turn over to him the owner's fulfillment of the obligation secured by it
duplicate of title. Resolve the case with (Bonnevie v. CA, 125 SCRA 122)
reasons. (6%)
 Situation
 ANSWER
 Illustration
 The complaint of Pedro against Juan should
be dismissed. The instances when a  Who has a preferential right? The buyer
contract — regardless of its nomenclature who buys the property from debtor/owner
— may be presumed to be an equitable after the mortgage OR the winning bidder
mortgage are enumerated in Article 1602. during foreclosure?
Article 1604 states that "the provisions of
 The winning bidder has a preferential right
article 1602 shall also apply to a contract
but subject to the new owner’s equitable
purporting to be an absolute sale."
right of redemption (Santiago v. Dionisio, 92
 For Articles 1602 and 1604 to apply, two Phil 485)
requisites must concur: 1) the parties
 Effects of Mortgage
entered into a contract denominated as a
contract of sale; and 2) their intention was  Creates merely an encumbrance – it does
to secure an existing debt by way of involve the transfer, cession or conveyance
mortgage. (Heirs of Balite v. Lim, G.R. No. of property but only constitutes a lien.
152168, December 10, 2004) What is lost is the free disposal and sale of
the subject matter (Medida v. CA, 208 SCRA
 In the given case, although Pedro retained
887)
possession of the property as lessee after
the execution of the Deed of Sale, there is  Effects of Mortgage
no showing that the intention of the parties
was to secure an existing debt by way of  Article 2128 – the mortgage credit may be
rd
mortgage. Hence, the complaint of Pedro alienated or assigned to a 3 person in
should be dismissed. whole or in part
 Kinds of Real Mortgage  Article 2130 – a stipulation forbidding the

owner from alienating the SM shall be
 Legal – one required by law to be executed VOID
in favor of certain persons
 Effects of an invalid mortgage
 E.g. a person bound to give a bond
but can’t execute a bond may  The principal obligation subsists
execute a real mortgage over his
 What is lost is merely the right to foreclose
property covering his obligation
 The mortgage deed remains as evidence of
 Effects of Mortgage
personal obligation of the debtor (DBP v.
CA, 249 SCRA 331)

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38
 When the principal obligation is not fulfilled  GENERAL RULE: extrajudicial foreclosure
within one year from registration of
 Mortgagee chooses between filing a certificate of sale
collection case or foreclosing the mortgage
 EXCEPTION: in judicial foreclosure where
 Foreclosure may either be extrajudicial OR the mortgagee is PNB or a banking
judicial institution – within one year from
registration of the foreclosure sale
 REDEMPTION
 Bar Question 1999
 Equity of Redemption
 Are the right of redemption and the equity
 Right of Redemption
of redemption given by law to mortgagor
 EQUITY OF REDEMPTION the same? Explain.
 Right of the mortgagor to redeem the  Answer

property after his default in the
 The equity of redemption is different from
performance of the conditions of the
the right of redemption. EQUITY OF
mortgage BUT before the confirmation of
REDEMPTION is the right of the mortgagor
the auction sale of the mortgaged property
after judgment in a judicial foreclosure to
 EQUITY OF REDEMPTION redeem the property by paying to the court
When available the amount of the judgment debt before
the sale or confirmation of the sale. On the
 General Rule: Only in judicial foreclosure – other hand, RIGHT OF REDEMPTION is the
90-120 days from receipt of judgment in right of the mortgagor to redeem the
favor of the creditor OR before the property sold at an extra-judicial
confirmation of the sale at the discretion of foreclosure by paying to the buyer in the
the court foreclosure sale the amount paid by the
buyer within one year from such sale.
 EQUITY OF REDEMPTION
When available 
Extrajudicial Foreclosure
 Exception: in extrajudicial foreclosure
where the mortgagor is a juridical entity -  Extrajudicial Foreclosure
until but not after the registration of
certificate of foreclosure sale which shall  Redemption in
not be more than 3 months after Extrajudicial Foreclosure
foreclosure, WHICHEVER IS EARLIER (RA
 If mortgagor is NOT a juridical entity - Right
8791)
of Redemption – Within 1 year from date of
 RIGHT OF REDEMPTION registration of certificate of sale
 The right of the mortgagor to redeem the  If mortgagor is a juridical entity - Equity of
mortgaged property within a certain period Redemption – until but not after the
after it was sold for the satisfaction of the registration of certificate of foreclosure sale
debt which shall not be more than 3 months
after foreclosure, WHICHEVER IS EARLIER
 RIGHT OF REDEMPTION: When available (RA 8791)

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39
 How to validly redeem  One or more joint debtors who

were joint owners of the SM
 Must be made within the period
 Wife as regards her husband’s
 Payment of purchase price plus 1% interest homestead
per month with taxes thereon from date of
registration of sale until date of  Compulsory heir
redemption. Payment is to redemptioner or
sale officer  In case of Deficiency
 Written notice of redemption must be  Can recover within 10 years from time the
served on officer who made the sale and a right of action accrues
duplicate with Register of Deeds (Rosales v.
 May recover even during period of
Yboa, 120 SCRA 869)
redemption

 Incorporated in deficiency judgment in a
Judicial Foreclosure
judicial foreclosure
 Judicial Foreclosure
 Rents, Earnings and Income
 Judicial Foreclosure
 Judgment obligor shall be entitled to
 Redemption in receive rents, earnings or income pending
Judicial Foreclosure redemption NOT the purchaser (Section 32,
Rule 39)
 Equity of redemption – 90-120 days from
entry of judgment or at any time before the  ANTICHRESIS
sale is confirmed upon the discretion of the
 CONCEPT
court (Salazar v. De Torres, 108 Phil 209)
 Article 2132- by the contract of antichresis
 Right of Redemption – 1 year from
the creditor acquires the right to receive
registration of order confirming the sale if
fruits if an immovable of his debtor, with
the mortgagee is PNB or a banking
the obligation to apply them to the
institution
payment of interest, if owing and thereafter
 Who can Redeem? to the principal of his credit
 Mortgagor or one who is in privity of title  Role of Delivery

with mortgagor
 Delivery is only required in order that the
 Successor-in-interest creditor may receive the fruits and not for
validity of the antichresis.
 One to whom debtor has
transferred his right  Obligations of the
Antichretic Creditor
 One to whom debtor has conveyed
his interest in the SM  Must pay taxes and charges upon the
estate
 One who succeeds to the interest
of the debtor

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40
 Bound to pay expenses necessary for  Mortgage by using a forged special power
preservation and repair of attorney is VOID
 Sums spent for these purposes are  Mortgage by an impostor is VOID

deducted from the fruits
 QUASI-CONTRACTS
 How to avoid obligation to
pay taxes, charges and necessary expenses  GENERAL PROVISIONS
 Compel the debtor to enter again upon  Art. 2142. Certain lawful, voluntary and
enjoyment of the property except when unilateral acts give rise to the juridical
there is a stipulation to the contrary relation of quasi-contract to the end that no
one shall be unjustly enriched or benefited
 Requirement for Validity at the expense of another.
 The amount of the principal and interest

shall be specified in writing; otherwise the
contract of antichresis shall be VOID (2134).  Art. 2143. The provisions for quasi-
contracts in this Chapter do not exclude
 Effect of Antichresis other quasi-contracts which may come
within the purview of the preceding article.
 No transfer of ownership upon debtor’s
default  OBLIGATION INVOLVED
 In case of non-payment, creditor may  The farm lot of X is being flooded while he
petition the court for payment of debt and was away on vacation. Y, his neighbor, sees
foreclosure (under the Rules of Court) that X’s farm animals are to perish because
of the flood. Which of the following
 Bar 2007 statements is true:
 A contract of antichresis is always: a. Y is obliged to save X’s animals

under the principle of negotiorum
(a) a written contract
gestio;
(b) a contract with a stipulation that debt will be
b. If Y does not save X’s animals, Y
paid through receipt of the fruits of an immovable
can be held liable for damages;
(c) involves the payment of interest, if owing
c. X must offer compensation as a
(d) all of the above; consideration so that Y will save
the animals;
(e) letters a and b
d. None of the above.
ANSWER: D  ANSWER: D
 Pledge Mortgage & Antichresis  What is the obligation involved in a quasi-

contract?
 Innocent mortgagees for value, like
innocent purchasers for value are protected
by law

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41
a. For one, it is a positive obligation of another without being

or one that consists in doing or authorized by the latter,
giving. or unless he has by law a
right to represent him.
b. Also, the obligation is a real
obligation or an obligation to give.  Art. 1403. The following
contracts are
 In the previous example, no quasi-contract unenforceable, unless
has arisen because Y did not do a lawful, they are ratified: (1) Those
voluntary or unilateral act. entered into in the name
of another person by one
 The obligation therefore is not to save X’s
who has been given no
animals but for X to give compensation if Y
authority or legal
actually did something to save the animals.
representation
That is the essence of quasi-contracts.
There is no such thing as a free beer. b. (2) If in fact the manager has been
tacitly authorized by the owner.
 Quasi-contracts can be divided into four:
 WHY? Because this is not
a. Negotiorum gestio
a quasi-contract but a
b. Solution indebiti contract.
c. Other quasi-contracts specifically  A contract of agency.

provided by the Civil Code
 Art. 2145. The officious manager shall
d. Other unenumerated quasi- perform his duties with all the diligence of a
contracts that fall within the good father of a family, and pay the
purview of the definition damages which through his fault or
negligence may be suffered by the owner of
 Negotiorum Gestio the property or business under
management. XXX
 Art. 2144. Whoever voluntarily takes
charge of the agency or management of  Art. 2146. If the officious manager
the business or property of another, delegates to another person all or some of
without any power from the latter, is his duties, he shall be liable for the acts of
obliged to continue the same until the the delegate, without prejudice to the
termination of the affair and its incidents, direct obligation of the latter toward the
or to require the person concerned to owner of the business. The responsibility of
substitute him, if the owner is in a position two or more officious managers shall be
to do so. solidary, unless the management was
assumed to save the thing or business from
 Negotiorium gestio does not arise in either
imminent danger.
of these instances:
 Art. 2147. The officious manager shall be
a. (1) When the property or business
liable for any fortuitous event:
is not neglected or abandoned;
 WHY? Art. 1317. No one

may contract in the name

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42
a. (1) If he undertakes risky and useful expenses and for the damages
operations which the owner was which the latter may have suffered in the
not accustomed to embark upon; performance of his duties.
b. (2) If he has preferred his own  The same obligation shall be incumbent
interest to that of the owner; upon him when the management had for
its purpose the prevention of an imminent
c. (3) If he fails to return the property and manifest loss, although no benefit may
or business after demand by the have been derived.
owner;
 Art. 2151. Even though the owner did not
d. (4) If he assumed the management derive any benefit and there has been no
in bad faith. imminent and manifest danger to the
property or business, the owner is liable as
 Art. 2148. Except when the management
under the first paragraph of the preceding
was assumed to save property or business
article, provided:
from imminent danger, the officious
manager shall be liable for fortuitous  (1) The officious manager has
events: acted in good faith, and
a. (1) If he is manifestly unfit to carry  (2) The property or business is
on the management; intact, ready to be returned to the
owner.
b. (2) If by his intervention he
prevented a more competent  Art. 2153. The management is extinguished:
person from taking up the
management.  (1) When the owner repudiates it or puts an
end thereto;
 Art. 2149. The ratification of the
management by the owner of the business  (2) When the officious manager withdraws
produces the effects of an express agency, from the management, subject to the
even if the business may not have been provisions of Article 2144 (substitution);
successful.
 (3) By the death, civil interdiction, insanity
EFFECT: As a manager, he is or insolvency of the owner or the officious
entitled to just compensation. As an agent, he is manager.
entitled not only to compensation but he also has
the right to retain in pledge the things which are the  BAR QUESTION 1992
object of the management.
 In fear of reprisals from lawless elements
besieging his barangay, X abandoned his
fishpond, fled to Manila and left for Europe.
 Art. 2150. Although the officious Seeking that the fish in the fishpond were
management may not have been expressly ready for harvest, Y, who is in the business
ratified, the owner of the property or of managing fishponds on a commission
business who enjoys the advantages of the basis, took possession of the property,
same shall be liable for obligations harvested the fish and sold the entire
incurred in his interest, and shall reimburse harvest to Z. Thereafter, Y borrowed money
the officious manager for the necessary from W and used the money to buy new

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43
supplies of fish fry and to prepare the his residence along A. Mabini Street. Ermita,
fishpond for the next crop. Manila. B, his immediate neighbor, noticing
the disappearance of A and his family,
 a) What is the Juridical relation closed the doors and windows of his house
between X and Y during X's to prevent it from being burglarized. Years
absence? passed without B hearing from A, B
continued taking care of A's house, even
 b) Upon the return of X to the
causing minor repairs to be done at his
barangay, what are the obligations
house to preserve it. In 1976, C, approached
of Y to X as regards the contract
B and proposed that they build stores at the
with Z?
ground floor of the house and convert its
 c) Upon X's return, what are the second floor into a pension house. B agreed
obligations of X as regards Y's to C’s proposal and together they spent for
contract with W? the construction of stores at the ground
floor and the conversion of the second floor
 d) What legal effects will result if X into a pension house.
expressly ratifies Y's management
and what would be the obligations  While construction was going on, fire
of X in favor of Y? occurred at a nearby house. The houses at
the entire block, including A's were burned.
ANSWERS: After the EDSA revolution in February 1986,
A and his family returned from the United
 (a) The juridical relation is that of the quasi-
States where they took refuge in 1972.
contract of "negotiorum gestio". Y is the
Upon learning of what happened to his
"gestor" or "officious manager" and X is the
house. A sued B for damages, B pleaded as
"owner" (Art. 2144, Civil Code).
a defense that he merely took charge of his
 (b) Y must render an account of his house under the principle of negotiorum
operations and deliver to X the price he gestio. He was not liable as the burning of
received for the sale of the harvested fish the house is a fortuitous event. Is B liable to
(Art, 2145, Civil Code). A for damages under the foregoing
circumstances?
 (c) X must pay the loan obtained by Y from
W because X must answer for obligations  ANSWER
contracted with third persons in the
 No. B is not liable for damages, because he
interest of the owner (Art. 2150, Civil Code),
is a gestor in negotiorum gestio (Art. 2144,
 (d) Express ratification by X provides the Civil Code) Furthermore, B is not liable to A
effects of an express agency and X is liable because Article 2147 of the Civil Code is not
to pay the commissions habitually received applicable.
by the gestor as manager (Art. 2149, Civil
 B did not undertake risky operations which
Code).
the owner was not accustomed to embark
 BAR QUESTION 1993 upon: a) he has not preferred his own
interest to that of the owner; b) he has not
 In September, 1972, upon declaration of failed to return the property or business
martial rule in the Philippines. A, together after demand by the owner; and c) he has
with his wife and children disappeared from not assumed the management in bad faith.

CREDIT TRANSACTIONS
44
 BAR QUESTION 1995 had never been due or had already been
paid was delivered; but he from whom the
 Armando owns a row of residential return is claimed may prove that the
apartments in San Juan, Metro Manila, delivery was made out of liberality or for
which he rents out to tenants. On 1 April any other just cause.
1991 he left for the United States without
appointing any administrator to manage his  Art. 2156. If the payer was in doubt
apartments such that uncollected rentals whether the debt was due, he may recover
accumulated for three (3) years. Amparo, a if he proves that it was not due.
niece of Armando, concerned with the
interest of her uncle, took it upon herself to  Art. 2157. The responsibility of two or more
administer the property. As a consequence, payees, when there has been payment of
she incurred expenses in collecting the what is not due, is SOLIDARY.
rents and in some instances even spent for
 Art. 2158. When the property delivered or
necessary repairs to preserve the property.
money paid belongs to a third person, the
 1. What Juridical relation between Amparo payee shall comply with the provisions of
and Armando, if any, has resulted from article 1984. (INFORM THE OWNER AS IN
Amparo's unilateral act of assuming the DEPOSIT)
administration of Armando's apartments?
 EFFECT OF GOOD/BAD FAITH
Explain.
 Art. 2159. Whoever in bad faith accepts an
 2. What rights and obligations, if any, does
undue payment, shall pay legal interest if a
Amparo have under the circumstances?
sum of money is involved, or shall be liable
Explain.
for fruits received or which should have
 Negotiorum gestio existed between been received if the thing produces fruits.
Amparo and Armando, She voluntarily took
 He shall furthermore be answerable for any
charge of the agency or management of the
loss or impairment of the thing from any
business or property of her uncle without
cause, and for damages to the person who
any power from her uncle whose property
delivered the thing, until it is recovered.
was neglected. She is called the gestor
negotiorum or officious manager, (Art.  Art. 2160. He who in good faith accepts an
2144, NCC) undue payment of a thing certain and
determinate shall only be responsible for
 See Articles 2145 to 2152
the impairment or loss of the same or its
 SOLUTIO INDEBITI accessories and accessions insofar as he has
thereby been benefited. If he has alienated
 Art. 2154. If something is received when it, he shall return the price or assign the
there is no right to demand it, and it was action to collect the sum.
unduly delivered through mistake, the
obligation to return it arises. (1895)  Art. 2162. He shall be exempt from the
obligation to restore who, believing in
 PRESUMPTION OF PAYMENT BY MISTAKE: good faith that the payment was being
made of a legitimate and subsisting claim,
 Art. 2163. It is presumed that there was a destroyed the document, or allowed the
mistake in the payment if something which action to prescribe, or gave up the pledges,

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45
or cancelled the guaranties for his right. He person, should the latter claim
who paid unduly may proceed only against reimbursement.
the true debtor or the guarantors with
regard to whom the action is still effective.  Art. 2166. When the person obliged to
support an orphan, or an insane or other
 BAR QUESTION 2004 indigent person unjustly refuses to give
support to the latter, any third person may
 DPO went to a store to buy a pack of furnish support to the needy individual,
cigarettes worth P225.00 only. He gave the with right of reimbursement from the
vendor, RRA, a P500-peso bill. The vendor person obliged to give support. The
gave him the pack plus P375.00 change. provisions of this article apply when the
father or mother of a child under eighteen
 Was there a discount, an oversight,
years of age unjustly refuses to support
or an error in the amount given?
him.
 What would be DPO’s duty, if any,
 Art. 2167. When through an accident or
in case of an excess in the amount
other cause a person is injured or becomes
of change given by the vendor?
seriously ill, and he is treated or helped
 How is this situational relationship while he is not in a condition to give
between DPO and RRA consent to a contract, he shall be liable to
pay for the services of the physician or
 denominated? Explain. (5%) other person aiding him, unless the service
has been rendered out of pure generosity.
 SUGGESTED ANSWER:
 Art. 2168. When during a fire, flood, storm,
 There was error in the amount of change
or other calamity, property is saved from
given by RRA. This is a case of solutio
destruction by another person without the
indebiti in that DPO received something
knowledge of the owner, the latter is bound
that is not due him. He has the obligation to
to pay the former just compensation.
return the P100.00, otherwise, he will
unjustly enrich himself at the expense of  Art. 2169. When the government, upon the
RRA. (Art. 2154, Civil Code) failure of any person to comply with health
or safety regulations concerning property,
 OTHER QUASI-CONTRACTS
undertakes to do the necessary work, even
 Art. 2164. When, without the knowledge of over his objection, he shall be liable to pay
the person obliged to give support, it is the expenses.
given by a stranger, the latter shall have a
 Art. 2171. The rights and obligations of the
right to claim the same from the former,
finder of lost personal property shall be
unless it appears that he gave it out of piety
governed by Articles 719 and 720.
and without intention of being repaid.
 Art. 720. If the owner should
 Art. 2165. When funeral expenses are
appear in time, he shall be obliged
borne by a third person, without the
to pay, as a reward to the finder,
knowledge of those relatives who were
one-tenth of the sum or of the
obliged to give support to the deceased,
price of the thing found
said relatives shall reimburse the third

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46
 Art. 2173. When a third person, without the  Debts secured by mortgages on
knowledge of the debtor, pays the debt, the the premise before or after such
rights of the former are governed by constitution; and
Articles 1236 and 1237.
 Debts due to laborers, mechanics,
 Art. 2174. When in a small community a architects, builders, material men
nationality of the inhabitants of age decide and others who have rendered
upon a measure for protection against service or furnished material for
lawlessness, fire, flood, storm or other the construction of the building
calamity, any one who objects to the plan (155)
and refuses to contribute to the expenses
but is benefited by the project as executed  Exempted Properties
shall be liable to pay his share of said
 Art. 205 – Right to receive support as well
expenses.
as any money or property obtained as such
 Art. 2175. Any person who is constrained to support shall not be levied upon on
pay the taxes of another shall be entitled to attachment or execution
reimbursement from the latter.
 Rule 39, Sec. 13.
 CONCURRENCE Exempted Properties
AND PREFERENCE
 Judgment obligor’s family home or
OF CREDITS
the homestead in which he resides
 Principles
 Ordinary tools and implements
 Assets of a debtor can be used to satisfy personally used by him in his trade,
obligations with creditors. employment or livelihood;
 However, there are certain properties  3 horses or 3 cows or 3 carabaos or

which are exempted from satisfying other beasts of burden necessarily
liabilities. used by him in his ordinary
occupation;
 Note, however, that even if these
properties are deemed exempted, these  Sec. 13. Exempted Properties
assets shall NOT be exempt from execution
 His necessary clothing and articles
issued upon a judgment recovered for its
for ordinary personal use,
price or upon a judgment of foreclosure of a
EXCLUDING jewelry;
mortgage thereon
 Household furnitures and utensils
 Exempted Properties
necessary for housekeeping with a
 Art. 153 - Family Home – generally value not exceeding P100,000;
exempted unless for:
 Provisions for individual or family
 Non-payment of taxes use sufficient for 4 months
 Debts incurred prior to the  Sec. 13. Exempted Properties

constitution of family home
 Professional libraries of judges,
lawyers, physicians, pharmacists,

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47
dentists, engineers, surveyors, privileges over the SAME property or all of

clergymen, teachers and other the property of the debtor
professionals not exceeding
P300,000 in value;  Concurrence versus Preference
 1 fishing boat and accessories not  Preference – right held by creditor to be

exceeding the total value of preferred in the payment of his claim above
P100,000 owned by a fisherman others out of the debtor’s assets
and by the lawful use of which he
 Concurrence and Preference
earns his livelihood;
 The provisions on concurrence and
 Sec. 13. Exempted Properties
preference will only apply if the liabilities of
 Salaries, wages, earnings of the the debtor are more than his assets.
debtor for his personal services
 General Categories of Credit
within the 4 months preceeding
the levy necessary to support his  Special Preferred:
family;
 Article 2241 for movables
 Lettered gravestones;
 Article 2242 for immovables
 Moneys, benefits, privileges, or
annuities accruing or growing out  Ordinary Preferred – Article 2244
of life insurance;
 Common Credits – Article 2245
 Sec. 13. Exempted Properties
 SPECIAL PREFERRED
 Right to receive legal support or
 Special Preferred
money or property obtained as
such support or any pension or  Envisions a situation where a particular
gratuity from the government; property which is either movable or
immovable is subject to certain obligations
 Properties especially exempted by
law;  These special preferred credits or
obligations have to be satisfied using the
 Properties belonging to the
proceeds from the sale of said property
absolute community or conjugal
partnership except insofar as the  Special Preferred Credits on Movables
debt has redounded to the benefit Article 2241
of the family (2238);
 Duties, taxes and fees due on the movable
 Property held by debtor as trustee
of an express or implied trust  Claims arising from misappropriation,
(2239) breach of trust, or malfeasance by public
officials committed in the performance of
 Concurrence versus Preference their duties on the movables, money or
securities obtained by them
 Concurrence – implies the possession of
two or more creditors of equal rights or

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48
 Claims for the unpaid price of movables  Art. 2246. Those credits which
sold, so long as they are still in the enjoy preference with respect to
possession of the debtor. specific movables, exclude all
others to the extent of the value of
 Special Preferred Credits on Movables the personal property to which the
Article 2241 preference refers. (EXCLUSION)
 Credits guaranteed with a pledge of the  Art. 2247. If there are two or more
movables, so long as they are still in the credits with respect to the same
possession of the creditor. specific movable property, they
shall be satisfied pro rata, after the
 Credits for repairs, safekeeping,
payment of duties, taxes and fees
preservation of the property
due the State or any subdivision
 Claims for laborer’s wages on the goods thereof. (PROPORTIONATE
manufactured or work done SATISFACTION)
 Expenses of salvage  ILLUSTRATION
 Special Preferred Credits on Movables  Bangs owns one car, the taxes on which
Article 2241 have not been paid. The car fell into the sea
and was salvaged and repaired.
 Credits between the landlord and tenant Subsequently, Bangs obtained a loan and
pledged the car as security. She has not
 Credits for transportation upon goods
made any payments on the foregoing.
carried
Bangs became insolvent. Discuss the order
 Credits for lodging and supplies usually by which the foregoing obligations will be
furnished to travellers by hotelkeepers on satisfied.
movables belonging to the guests
 FIRST: IDENTIFY THE DEBTS
 Credits for seeds and expenses for
 Unpaid taxes
cultivation and harvest
 Expenses for salvage
 Special Preferred Credits on Movables
Article 2241  Expenses for repair
 Credits for rent for 1 year upon personal  Loan secured by a pledge on the car
property of the lessee
 ALL DEBTS ARE PREFERRED UNDER ARTICLE
 Claims in favor of the depositor if 2241
depositary has wrongfully sold the thing
deposited  SECOND: APPLY PREFERENCE
 REMEMBER:  All four debts are preferred under Article

2241
 The order in Article 2241 is not important.
What is important is that:  Taxes due to the Government will ALWAYS
have PREFERENCE. Satisfy this first.

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49
 The salvagor, repairman and creditor-  Expenses for preservation, improvement

pledgee will all be paid pro-rata from the
remaining value of the car. Among them,  Credits annotated in the Registry of
there is only CONCURRENCE. Property
 THIRD: COMPUTE  Claims of co-heirs for warranty in the

partition
 Suppose the car has a value of P280,000.
The unpaid taxes amount to P80,000. The  Claims of donors
expenses for salvage amount to P80,000.
 Credits of insurers upon property insured
The repairs amounted to P40,000 and the
unpaid loan is P280,000.  REMEMBER AGAIN:
 QUESTION  The order in Article 2242 is not important.

What is important is that:
 Can the repairman retain the thing if he was
unpaid by Bangs after the repairs were  Art. 2248. Those credits which
made? enjoy preference in relation to
specific real property or real rights,
 NO. Article 2241 creates liens but not
exclude all others to the extent of
possessory liens with right of retention
the value of the immovable or real
(Graño versus Paredes, 50 Phil. 6).
right to which the preference
 Art. 2243. The claims or credits enumerated refers. (EXCLUSION)
in the two preceding articles shall be
 Art. 2249. If there are two or more
considered as mortgages or pledges of real
credits with respect to the same
or personal property, or liens within the
specific real property or real rights,
purview of legal provisions governing
they shall be satisfied pro rata,
insolvency. Taxes mentioned in No. 1,
after the payment of the taxes and
Article 2241, and No. 1, Article 2242, shall
assessments upon the immovable
first be satisfied.
property or real right.
 Special Preferred Credits on Immovables (PROPORTIONATE SATISFACTION)
Article 2242
 Among those enumerated in
 Taxes due upon the land or building Article 2242, there is only
CONCURRENCE not PREFERENCE.
 Unpaid price of immovable
 ORDINARY PREFERRED
 Claims of laborers, masons and other
workmen engaged in construction  Ordinary Preferred
 Claims of furnishers of materials used in  Envisions a situation where a particular

construction credit is not secured by any particular
movable or immovable.
 Mortgage credits recorded in Registry of
Property  HOWEVER, this credit happens to be one of
those enumerated as ordinary preferred.
 Special Preferred Credits on Immovables Hence, the credit will enjoy preference over
Article 2242 properties which are not encumbered,

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50
including the free portion of the debtor's  Gifts due to private and public institutions
property. of charity
 Ordinary Preferred, Article 2244 :  Credits without privilege which appear in a

Hierarchical Application public instrument or by final judgment if
they have been the subject if litigation
 Credits for services rendered the insolvent
by employees, laborers, household helpers  REMEMBER
 Proper funeral expenses for the debtor,  The order of credits here does not refer to
children under his parental authority specific real or personal property. It refers
to other property of the debtor.
 Ordinary Preferred, Article 2244 :
Hierarchical Application  Thus, before applying Article 2244, see if
Articles 2241 and 2242 apply to specific
 Expenses during last illness of debtor, property of the debtor.
spouse and children under his parental
authority  The credits enumerated in Article 2244 do
not concur. The order of preference is VERY
 Compensation due to laborers or IMPORTANT.
dependents under laws providing for
indemnity for damages in cases of labor  WHY?
accident or illness arising from nature of
employment  Art. 2251. Those credits which do not enjoy
any preference with respect to specific
 Ordinary Preferred, Article 2244 property, and those which enjoy
preference, as to the amount not paid,
 Credits and advancements made to debtor shall be satisfied according to the
for support of himself and family following rules:
 Support during insolvency proceedings and  (1) In the order established in
for 3 months thereafter Article 2244;
 Ordinary Preferred, Article 2244  (2) Common credits referred to in

Article 2245 shall be paid pro rata
 Fines and civil indemnification arising from
regardless of dates.
criminal offense
 ILLUSTRATION
 Legal expenses for administration of
insolvent’s estate  Bangs, an insolvent, owes P100,000 in favor
of a funeral parlor, P100,000 for hospital
 Taxes due the national government
expenses during the last illness of her late
 Ordinary Preferred, Article 2244 husband, and P100,000 in favor of a
pedestrian whom she hurt while driving
 Taxes due any province carelessly and for which she was held
criminally and civilly liable. She had the car
 Taxes due any city or municipality
repaired for P40,000. Unfortunately, she
 Damages for death or personal injuries only has P160,000 and an automobile
caused by quasi-delict valued also at P160,000, the purchase price

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51
of which she has not yet paid at all. Give the  STEP 1: Special Preferred Credits must be
order of preference of the various creditors paid from the value of the movable or
involved. immovable. Taxes enjoy priority while the
rest of the credits are paid proportionally.
 FIRST: IDENTIFY THE DEBTS
 SUMMARY
 Funeral expenses
 STEP 2: Ordinary Preferred Credits are then
 Ordinary preferred under Article paid in the order of priority as they are
2244. enumerated. The assets used to pay
ordinary preferred credits are those which
 Hospitalization expenses
are free from encumbrances under Articles
 Ordinary preferred under Article 2241 and 2242. and the free portion under
2244. Article 2250.
 Civil liability to pedestrian  Art. 2250. The excess, if any, after the
payment of the credits which enjoy
 Ordinary preferred under Article preference with respect to specific property,
2244. real or personal, shall be added to the free
property which the debtor may have, for the
 Repair of the car
payment of the other credits.
 Specific preferred under Article
 SUMMARY
2241.
 STEP 3: The non-preferred credits are now
 Unpaid price of the car
paid with whatever free portion remains.
 Specific preferred under Article
 Art. 2245. Credits of any other kind or class,
2241.
or by any other right or title not comprised
 SECOND: APPLY PREFERENCE in the four preceding articles, shall enjoy no
preference.
 Article 2241 prevails over Article 2244
insofar as specific movable property (the  BAR QUESTION 1995
automobile) is concerned.
 Lawrence, a retired air force captain,
 In Article 2241, there is concurrence among decided to go into the air transport
those enumerated business. He purchased an aircraft in cash
except for an outstanding balance of
 Thus, apply the value of the automobile P500,000.00. He incurred an indebtedness
pro-rata among the creditors. of P300,000.00 for repairs with an aircraft
repair company. He also borrowed P1
 Article 2241 (and also Article 2242) has the Million from a bank for additional capital
effect of taking specific property out from and constituted a chattel mortgage on the
the whole estate and segregates it for aircraft to secure the loan. While on a test
specific preferred credits. flight the aircraft crashed causing physical
injuries to a third party who was awarded
 SUMMARY
damages of P200,000.00. Lawrence's
insurance claim for damage to the aircraft

CREDIT TRANSACTIONS
52
was denied thus leaving him nothing else the debtor continues as a going concern
but the aircraft which was then valued only than if it is immediately liquidated.
at P1 Million. Lawrence was declared
insolvent. Assuming that the aircraft was  Definition of Terms
sold for Pl Million, give the order of
 Exclusions. - The term debtor does not
preference of the creditors of Lawrence and
include banks, insurance companies, pre-
distribute the amount of P1 Million.
need companies, and national and local
 SUGGESTED ANSWER government agencies or units.
 Assuming that the aircraft was sold for P1  For purposes of this section:
Million, there is no order of preference. The
 (a) Bank shall refer to any duly licensed
P1 Million will all go to the bank as a chattel
bank or quasi-bank that is potentially or
mortgagee because a chattel mortgage
actually subject to conservatorship,
under Art. 2241 (4) NCC defeats Art. 2244
receivership or liquidation proceedings
(12) and (14). Art. 2241 (3) and (5) are not
under the New Central Bank Act (Republic
applicable because the aircraft is no longer
Act No. 7653) or successor legislation;
in the possession of the creditor.
 Definition of Terms
 Republic Act No. 10142
Financial Rehabilitation and Insolvency Act  (b) Insurance company shall refer to those
of 2010 companies that are potentially or actually
subject to insolvency proceedings under the
 DEFINITION OF INSOLVENCY
Insurance Code (Presidential Decree No.
 It is the financial condition of a debtor that 1460); and
is generally unable to pay its or his
 (c) Pre-need company shall refer to any
liabilities as they fall due in the ordinary
corporation authorized/licensed to sell or
course of business or has liabilities that are
offer to sell pre-need plans.
greater than its or his assets.
 Provided, That government financial
 Definition of Important Terms
institutions other than banks and
 Involuntary proceedings shall refer to government-owned or controlled
proceedings initiated by creditors corporations shall be covered by this Act,
unless their specific charter provides
 Voluntary proceedings shall refer to otherwise.
proceedings initiated by the debtor.
 BACKGROUND
 Definition of Terms
 Previous laws:
 Rehabilitation shall refer to the restoration
of the debtor to a condition of successful  Act No. 1956 (otherwise known as
operation and solvency, if it is shown that the “Insolvency Law”)
its continuance of operation is
 Presidential Decree (P.D.) No. 1758
economically feasible and its creditors can
which amended P.D. No. 902-A.
recover by way of the present value of
For the first time, the concept of
payments projected in the plan, more if

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53
“corporate rehabilitation” was  The FRIA provides for the following

introduced. processes:
 2000 Interim Rules on Corporate  Rehabilitation for sole

Rehabilitation as well as the 2008 proprietorships, partnerships and
Rules on Corporate Rehabilitation corporations
 Securities Regulation Code  Suspension of Payments for

individuals
 PROBLEM UNDER THE OLD SYSTEM
 Insolvency for all types of covered
 Jurisdiction over Petitions to Declare debtors
Suspension of Payments and/or for the
appointment of a Rehabilitation Receiver,  REHABILITATION
particularly applicable to “ILLIQUID”
debtors, was given to the Securities and  While the old rehabilitation regime did not
Exchange Commission. expressly provide for rehabilitation without
court intervention, it did not specifically
 Jurisdiction over Petitions for Insolvency disallow it either.
had to be heard by the Regional Trial Court.
 Thus, a rehabilitation plan entered into by
 Thus, if a debtor subjected initially to the debtor and its creditors partakes of the
rehabilitation proceedings is found nature of a contract and should not be
insolvent, the case will be dismissed. A new invalidated simply on the ground that it was
petition for insolvency must be done without court approval.
commenced.
 Following the general rule however, non-
 UNDER THE FRIA parties cannot be bound by the terms of the
negotiated rehabilitation plan.
 The definition of the term “insolvent” is
broad enough to cover illiquidity.  The FRIA takes it a step further by expressly
providing rules to govern extrajudicial
 No need to file separate cases as in the old rehabilitation. More specifically, there are
law. A rehabilitation case can automatically three (3) processes to resuscitate a
be converted into an insolvency case. financially distressed corporation under the
FRIA, namely:
 The FRIA provides distressed debtors
greater chances for survival by offering a  (i) court supervised rehabilitation,
menu of remedies: (1) court-supervised
rehabilitation (CSR); (2) pre-negotiated  (ii) pre-negotiated rehabilitation
rehabilitation (PNR); and (3) out-of-court or and/or
informal restructuring agreements or
rehabilitation plans (OCIRA). If all fail, the  (iii) out-of court restructuring
court may convert the proceedings into agreements.
insolvency.
 The choice largely depends on whether or
 PROCESSES not the initiating party can accumulate the
necessary number of votes, to wit:

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54
 One of the most significant developments  (b) a creditor, other than the petitioner/s,
under the new law is the statutory has initiated foreclosure proceedings
recognition of out-of-court restructuring against the debtor that will prevent the
agreements and the establishment of the debtor from paying its debts as they
legal vehicle to encourage informal become due or will render it insolvent.
rehabilitation of the debtor.
 Process
 COURT-SUPERVISED REHABILITATION
 Commencement Order
 Voluntary Proceedings
 In court supervised rehabilitation
 Must be approved by the owner in case of a proceedings, the rehabilitation of the
sole proprietorship, or by a majority of the debtor officially commences after the court
partners in case of a partnership, or by a makes the finding that the Petition
majority vote of the board of directors or (whether voluntary or involuntary) is
trustees and authorized by the vote of the sufficient in form or substance. More
stockholders representing at least two- specifically, the rehabilitation proceedings
thirds (2/3) of the outstanding capital stock, are deemed to commence on the date of
or i at least two-thirds (2/3) of the the issuance of the Commencement Order.
members, in a stockholder's or member's
meeting duly called for the purpose  The Commencement Order shall, among
others: (i) declare that the debtor is under
 An insolvent debtor may initiate voluntary rehabilitation, (ii) direct publication of the
proceedings by filing a petition for Order and notice to creditors, (iii) appoint a
rehabilitation with the court and on the rehabilitation receiver, (iv) set the date of
grounds provided by the FRIA. the initial hearing for the determination of
whether or not the debtor can be
 Involuntary Proceedings rehabilitated, (v) direct all creditors to file
their claims at least five (5) days from initial
 Any creditor or group of creditors with a
hearing and (vi) direct the government,
claim of, or the aggregate of whose claims
through the Bureau of Internal Revenue
is, at least One Million Pesos
(BIR) to either file its Comment to the
(Php1,000,000.00) or at least twenty-five
Petition for Rehabilitation or present its
percent (25%) of the subscribed capital
claims against the debtor.
stock or partners' contributions, whichever
is higher, may initiate involuntary  STAY ORDER
proceedings against the debtor by filing a
petition for rehabilitation with the court if:  In addition, the Commencement Order shall
include a Suspension or Stay Order
 Involuntary Proceedings prohibiting the sale or disposition of assets
of the debtor and ordering the suspension
 (a) there is no genuine issue of fact or law
of all actions against the debtor and/or the
on the claim/s of the petitioner/s, and that
debtor’s estate.
the due and demandable payments thereon
have not been made for at least sixty (60)  EFFECTS
days or that the debtor has failed generally
to meet its liabilities as they fall due; or

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55
 The court's issuance of a Commencement That any final and executory

Order shall, in addition to the effects of a judgment arising from such appeal
Stay or Suspension Order: shall be referred to the court for
appropriate action;
 (a) vest the rehabilitation receiver
with powers and functions, such as  (b) subject to the discretion of the
the right to review and obtain court, to cases pending or filed at a
records to which the debtor's specialized court or quasi-judicial
management and directors have agency which, upon determination
access, including bank accounts or by the court is capable of resolving
whatever nature of the debtor the claim more quickly, fairly and
subject to the approval by the efficiently than the court: Provided,
court of the performance bond That any final and executory
filed by the rehabilitation receiver; judgment of such court or agency
shall be referred to the court and
 (b) prohibit or otherwise serve as shall be treated as a non-disputed
the legal basis rendering null and claim;
void the results of any extrajudicial
activity or process to seize  (c) to the enforcement of claims
property, sell encumbered against sureties and other persons
property, or otherwise attempt to solidarily liable with the debtor,
collection or enforce a claim and third party or accommodation
against the debtor after mortgagors as well as issuers of
commencement date; letters of credit, unless the
property subject of the third party
 (c) serve as the legal basis for or accommodation mortgage is
rendering null and void any set-off necessary for the rehabilitation of
after the commencement date of the debtor as determined by the
any debt owed to the debtor by court upon recommendation by
any of the debtor's creditors; the rehabilitation receiver;
 (d) serve as the legal basis for  (d) to any form of action of customers or
rendering null and void the clients of a securities market participant to
perfection of any lien against the recover or otherwise claim moneys and
debtor's property after the securities entrusted to the latter in the
commencement date; and ordinary course of the latter's business as
well as any action of such securities market
 (e) consolidate the resolution of all
participant or the appropriate regulatory
legal proceedings by and against
agency or self-regulatory organization to
the debtor to the court.
pay or settle such claims or liabilities;
 Section 18. Exceptions to the Stay or
 (e) to the actions of a licensed broker or
Suspension Order. - The Stay or Suspension
dealer to sell pledged securities of a debtor
Order shall not apply:
pursuant to a securities pledge or margin
 (a) to cases already pending appeal agreement for the settlement of securities
in the Supreme Court as of transactions in accordance with the
commencement date Provided,

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56
provisions of the Securities Regulation Code the stay order is not compromised, since
and its implementing rules and regulations; the appointed rehabilitation receiver can
still fully discharge his functions as
 (f) the clearing and settlement of financial mandated by law.
transactions through the facilities of a
clearing agency or similar entities duly  It bears to stress that the rehabilitation
authorized, registered and/or recognized by receiver is not charged to defend the
the appropriate regulatory agency like the officers of the corporation. If there is
Bangko Sentral ng Pilipinas (BSP) and the anything that the rehabilitation receiver
SEC as well as any form of actions of such might be remotely interested in is whether
agencies or entities to reimburse the court also rules that petitioners are
themselves for any transactions settled for civilly liable. Such a scenario, however, is
the debtor; and not a reason to suspend the criminal
proceedings. Should the court prosecuting
 (g) any criminal action against individual the officers of the corporation find that an
debtor or owner, partner, director or officer award or indemnification is warranted,
of a debtor shall not be affected by any such award would fall under the category
proceeding commend under this Act. of claims, the execution of which would be
subject to the stay order issued by the
 PANLILIO versus RTC
rehabilitation court.
February 2, 2011
 Note that pursuant to sub-paragraph (c),
 Does the suspension of “all claims” as an
the suspension order does not cover the
incident to a corporate rehabilitation also
enforcement of claims against “persons
contemplate the suspension of criminal
solidarily liable with the debtor” including
charges filed against the corporate officers
“issuers of letters of credit.” This follows the
of the distressed corporation?
rule in MWSS vs. Daway [GR No. 160732, 21
 NO. June 2004] which held that a letter of credit
is excluded from the jurisdiction of the
 The rehabilitation and settlement of claims rehabilitation court.
against the corporation is not a legal
ground for the extinction of criminal  Note that the Stay or Suspension Order
liabilities. There is no reason why criminal applies with equal force to the enforcement
proceedings should be suspended during of both secured and unsecured claims
corporate rehabilitation, more so, since the except that under Section 60 of the FRIA,
prime purpose of the criminal action is to the issuance of the Stay or Suspension
punish the offender. It would be absurd for Order “shall not be deemed in any way to
one who has engaged in criminal conduct diminish or impair the security or lien of a
could escape punishment by the mere filing secured creditor, or the value of his lien or
of a petition for rehabilitation by the security, except that his right to enforce said
corporation of which he is an officer. security or lien may be suspended during
the term of the Stay Order.”
 The prosecution of the officers of the
corporation has no bearing on the pending  TSUNEISHI HEAVY INDUSTRIES vs. NEGROS
rehabilitation of the corporation, as they NAVIGATION
are charged in their individual capacities. GR 166845, 10 December 2008
The purpose of the law for the issuance of

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57
 Upon appointment of a management  Continuous Supply of Goods and Services

committee, rehabilitation receiver, board or
body, all actions for claims against  A commencement order prohibits
corporations, partnerships or associations the debtor’s suppliers of goods or
under management or receivership pending services from withholding the
before any court, tribunal, board or body supply of goods and services in the
shall be suspended. The law does not make ordinary course of business for as
any distinction as to what claims are long as the debtor makes
covered by the suspension of actions for payments for the services or
claims against corporations under goods supplied after the issuance
rehabilitation. of the commencement order.
 The justification for the suspension of  Waiver of Taxes

actions or claims, without distinction,
 Section 19. Waiver of taxes and
pending rehabilitation proceedings is to
Fees Due to the National
enable the management committee or
Government and to Local
rehabilitation receiver to effectively
Government Units (LGUs). - Upon
exercise its/his powers free from any
issuance of the Commencement
judicial or extra-judicial interference that
Order by the court, and until the
might unduly hinder or prevent the
approval of the Rehabilitation
"rescue" of the debtor company. To allow
Plan or dismissal of the petition,
such other actions to continue would only
whichever is earlier, the
add to the burden of the management
imposition of all taxes and fees
committee or rehabilitation receiver, whose
including penalties, interests and
time, effort and resources would be wasted
charges thereof due to the
in defending claims against the corporation
national government or to LGUs
instead of being directed toward its
shall be considered waived, in
restructuring and rehabilitation.
furtherance of the objectives of
 The issuance of the stay order by the rehabilitation.
rehabilitation court does not impair or in
 Duration
any way diminish a preferred status as a
creditor. The enforcement of the claim  Section 21. Effectivity and Duration of
through court action was merely suspended Commencement Order. - Unless lifted by
to give way to the speedy and effective the court, the Commencement Order shall
rehabilitation of the distressed shipping be the effective for the duration of the
company. Upon termination of the rehabilitation proceedings for as long as
rehabilitation proceedings or in the event of there is a substantial likelihood that the
the bankruptcy and consequent dissolution debtor will be successfully rehabilitated.
of the company, the preferred claim may XXX
still be prosecuted.
 The determination of this fact will be
 NOTE: This is the “Equality in based primarily on a report (by the
Equity” principle in corporate Rehabilitation Receiver] either that the
rehabilitation. Rehabilitation Plan is “realistic, feasible
and reasonable” or even if the
 Other Effects of Commencement
Rehabilitation Plan is not feasible, there

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58
still exists “a substantial likelihood for the ordinary course of business or unless
debtor to be rehabilitated.” necessary to pay off the administrative
expenses during the rehabilitation
 MODIFICATION proceedings. These include court-approved
pre-commencement loans and
 The FRIA allows the court to modify the
compensation of employees necessary to
terms of the suspension order or relieve a
carry on the debtor’s business.
claim from its coverage if a creditor does
not have adequate protection over the  EXCEPTION
security, thus:
 The court may, upon application by the
 “Section 61. Lack of Adequate rehabilitation receiver, allow the disposition
Protection. – The court, on motion of the debtors’ encumbered property
or motu proprio, may terminate, subject to the general requirement that the
modify or set conditions for the disposition is necessary for the continued
continuance of suspension of operation of the business. However, the
payment, or relieve a claim from debtor must make an arrangement with the
the coverage thereof, upon secured creditor for a substitute lien. This
showing that: (a) a creditor does applies to the sale of property covered by a
not have adequate protection trust receipt or consignment agreement, in
over property securing its claim; which case the law provides that the
or (b) the value of a claim secured disposition shall “not give rise to any
by a lien on property which is not criminal liability under applicable laws.”
necessary for the rehabilitation of
the debtor exceeds the fair market  Treatment of Contracts
value of the said property.
 The issuance of the Commencement Order
 A creditor shall be deemed to lack marks the start of a cleanup period which
adequate protection if it can be shown requires the debtor and the rehabilitation
that: receiver to chop out those contractual
commitments which are not necessary for
 (a) the debtor fails or refuses to the continued existence of the business
honor a pre-existing agreement and/or the rehabilitation of the debtor.
with the creditor to keep the
property insured;  Section 57 of the law grants the debtor the
power to confirm or cancel pre-existing
 (b) the debtor fails or refuses to contracts within ninety (90) days from the
take commercially reasonable issuance of the Commencement Order in
steps to maintain the property; order to weed out extremely onerous
contracts that may have been the cause of
 (c) the property has depreciated to
the debtor’s predicament. Those not
an extent that the creditor is under
confirmed expressly by the debtor shall be
secured.
deemed terminated but the party whose
 Use, Treatment and Disposition of Assets contract is not confirmed will be allowed to
pursue a claim for damages on account of
 As a general rule, funds or property of the the debtor’s election, which claim shall be
debtor cannot be used except in the

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59
considered a demand existing prior to the  Duties of a

filing of the Petition for Rehabilitation. Rehabilitation Receiver
 PROBLEM  (d) To evaluate the validity, genuineness

and true amount of all the claims against
 Non-impairment clause under the 1987 the debtor;
Constitution
 (e) To take possession, custody and control,
 “New Money” Clause and to preserve the value of all the property
of the debtor;
 The Stay Order notwithstanding, the FRIA
allows the debtor to incur post-  (f) To sue and recover, with the approval of
commencement loans and/or other the court, all amounts owed to, and all
obligations subject to the approval of the properties pertaining to the debtor;
court. Debt payments falling under this
clause will be considered as administrative  Duties of a
expenses during the pendency of the Rehabilitation Receiver
proceedings.
 (g) To have access to all information
 Rehabilitation Receiver necessary, proper or relevant to the
operations and business of the debtor and
 A Rehabilitation Receiver is appointed by for its rehabilitation;
the court to determine claims and
implement a creditor-approved or court-  (h) To sue and recover, with the. approval
confirmed Rehabilitation Plan. of the court, all property or money of the
debtor paid, transferred or disbursed in
 The initial appointment of the fraud of the debtor or its creditors, or which
Rehabilitation Receiver (as one of the constitute undue preference of creditor/s;
elements of the Commencement Order
under Section 16) is subject to the  (i) To monitor the operations and the
discretion of the court, which may retain business of the debtor to ensure that no
the original appointee or choose another payments or transfers of property are made
from the petitioners’ nominees. other than in the ordinary course of
business;
 Duties of a
Rehabilitation Receiver  Duties of a
Rehabilitation Receiver
 (a) To verify the accuracy of the factual
allegations in the petition and its annexes;  (j) With the court's approval, to engage the
services of or to employ persons or entities
 (b) To verify and correct, if necessary, the to assist him in the discharge of his
inventory of all of the assets of the debtor, functions;
and their valuation;
 (k) To determine the manner by which the
 (c) To verify and correct, if necessary, the debtor may be best rehabilitated, to
schedule of debts and liabilities of the review) revise and/or recommend action on
debtor; the Rehabilitation Plan and submit the
same or a new one to the court for
approval;

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60
 (1) To implement the Rehabilitation Plan as  Section 36.Displacement of Existing

approved by the court, if 80 provided under Management by the Rehabilitation Receiver
the Rehabilitation Plan; or Management Committee. – Upon motion
of any interested party, the court may
 Duties of a appoint and direct the rehabilitation
Rehabilitation Receiver receiver to assume the powers of
management of the debtor, or appoint a
 (m) To assume and exercise the powers of
management committee that will
management of the debtor, if directed by
undertake the management of the debtor.
the court pursuant to Section 36 hereof;
upon clear and convincing evidence of any
 (n) To exercise such other powers as may, of the following circumstances:
from time to time, be conferred upon him
 (a) Actual or imminent danger of
by the court; and
dissipation, loss, wastage or destruction of
 Duties of a the debtor’s assets or other properties;
Rehabilitation Receiver
 (b) Paralyzation of the business operations
 To submit a status report on the of the debtor; or
rehabilitation proceedings every quarter or
 (c) Gross mismanagement of the debtor. or
as may be required by the court motu
fraud or other wrongful conduct on the part
proprio. or upon motion of any creditor. or
of, or gross or willful violation of this Act by.
as may be provided, in the Rehabilitation
existing management of the debtor Or the
Plan.
owner, partner, director, officer or
 Unless appointed by the court, pursuant to representative/s in management of the
Section 36 hereof, the rehabilitation debtor.
receiver shall not take over the
 In case the court appoints the rehabilitation
management and control of the debtor but
receiver to assume the powers of
may recommend the appointment of a
management of the debtor, the court may:
management committee over the debtor in
the cases provided by this Act.  (1) require the rehabilitation
receiver to post an additional
 MANAGEMENT QUESTION
bond;
 Generally, management of the debtor
 (2) authorize him to engage the
remains with the existing management, but
services or to employ persona or
the court may direct the Rehabilitation
entities to assist him in the
Receiver to either take over the
discharge of his managerial
management of the debtor or constitute a
functions; and
management committee to assume such
management.  (3) authorize a commensurate
increase in his compensation.
 As a rule, the Rehabilitation Receiver will
not supplant the existing management of  UMALE versus ASB Realty Corporation
the debtor corporation unless otherwise G.R. No. 181126, June 11, 2011
ordered by the court on motion of any
interested party, thus:

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61
ASB Realty Corporation filed an action for  The concept of debtor-in-possession, is

unlawful detainer against Umale before the MTC. At carried out more particularly in the SEC
that time ASB was under rehabilitation and a Rules, the rule that is relevant to the instant
rehabilitation receiver was duly appointed by the case. It states therein that the interim
court. Umale sought the dismissal of the complaint rehabilitation receiver of the debtor
on the ground that, being in rehabilitatation, it is corporation “does not take over the control
only the rehabilitation receiver who has the and management of the debtor
personality to sue for and in behalf of ASB. Umale corporation.” Likewise, the rehabilitation
cited several cases saying that the appointment of a receiver that will replace the interim
receiver suspends the authority of the corporation receiver is tasked only to monitor the
and its officers over its property and effects. successful implementation of the
rehabilitation plan. There is nothing in the
 RULING: concept of corporate rehabilitation that
would ipso facto deprive the Board of
 There is no denying that ASB Realty, as the
Directors and corporate officers of a debtor
owner of the leased premises, is the real
corporation, such as ASB Realty, of control
party-in-interest in the unlawful detainer
such that it can no longer enforce its right
suit. Real party-in-interest is defined as “the
to recover its property from an errant
party who stands to be benefited or injured
lessee.
by the judgment in the suit, or the party
entitled to the avails of the suit.” What  Petitioners cite Villanueva, Yam, and
petitioners argue is that the corporate Abacus Real Estate as authorities for their
officer of ASB Realty is incapacitated to file theory that the corporate officers of a
this suit to recover a corporate property corporation under rehabilitation is
because ASB Realty has a duly-appointed incapacitated to act. In Villanueva, the
rehabilitation receiver. Allegedly, this Court nullified the sale contract entered
rehabilitation receiver is the only one that into by the Philippine Veterans Bank on the
can file the instant suit. ground that the bank’s insolvency restricted
its capacity to act. Yam, on the other hand,
 The intention of the law is “to effect a
nullified the compromise agreement that
feasible and viable rehabilitation by
Manphil Investment Corporation entered
preserving a floundering business as a going
into while it was under receivership by the
concern, because the assets of a business
Central Bank. In Abacus Real Estate, it was
are often more valuable when so
held that Manila Bank’s president had no
maintained than they would be when
authority to execute an “option to
liquidated.” This concept of preserving the
purchase” contract while the bank was
corporation’s business as a going concern
under liquidation.
while it is undergoing rehabilitation is called
DEBTOR-IN-POSSESSION or DEBTOR-IN-  These jurisprudence are inapplicable to the
PLACE. This means that the corporation case at bar because they involve banking
undergoing rehabilitation, through its Board and financial institutions that are governed
of Directors and corporate officers, remains by different laws In the cited cases, the
in control of its business and properties, applicable banking law was Section 29 of
subject only to the monitoring of the the Central Bank Act. In stark contrast to
appointed rehabilitation receiver. rehabilitation where the corporation retains
control and management of its affairs,

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62
Section 29 of the Central Bank Act, as redound to the pro-active creditor to the
amended, expressly forbids the bank or the extent of the value of its credit plus costs.
quasi-bank from doing business in the
Philippines.  Process
 Initial hearing
 SUMMARY  (a) determine the creditors who have made

timely and proper filing of their notice of
 A corporation’s board, during rehabilitation, claims;
cannot dispose of assets, as a general rule,
but it is always empowered to recover  (b) hear and determine any objection to the
assets. qualifications of the appointment of the
rehabilitation receiver and, if necessary
 Moreover, the nullified appoint a new one in accordance with this
transactions in the cited cases Act;
involve dispositions of assets and
claims, which are prohibited  Initial hearing
transactions even for corporate
 (c) direct the creditors to comment on the
rehabilitation because these may
petition and the Rehabilitation Plan, and to
be prejudicial to creditors and
submit the same to the court and to the
contrary to the rehabilitation plan.
rehabilitation receiver within a period of
The instant case, however, involves
not more than twenty (20) days; and
the recovery of assets and
collection of receivables, for which  (d) direct the rehabilitation receiver to
there is no prohibition in PD 902- evaluate the financial condition of the
A.” debtor and to prepare and submit to the
court within forty (40) days from initial
 Actions by the Rehabilitation Receiver
hearing the report provided in Section 24
 As part of its functions, the Rehabilitation hereof.
Receiver retains the authority to file an
 Process
action to annul certain pre-commencement
transactions intended to defraud the  Give Course to the Petition
creditors. This power can be traced back to
the basic authority of the receiver to (1) the debtor is insolvent; and
undertake measures to preserve property
(2) there is a substantial likelihood for the debtor to
under receivership under the Rules of Court
be successfully rehabilitated;
(Salientes versus IAC, G.R. No. 66211, July
14, 1995)  Deny the Petition
 If Receiver does not institute proceedings… (a)debtor is not insolvent;
 Any creditor may institute the action in (b) the petition is a sham filing intended
behalf of the corporation with leave of only to delay the enforcement of the rights of the
court. If successful, Section 59 of the law creditor/s or of any group of creditors;
provides that the fruits of the case will

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63
(c) the petition, the Rehabilitation Plan and  (b) The rehabilitation receiver
the attachments thereto contain any materially false recommends the confirmation of
or misleading statements; or the Rehabilitation Plan;
(d) the debtor has committed acts of  (c) The shareholders, owners or
misrepresentation or in fraud of its creditor/s or a partners of the juridical debtor
group of creditors lose at least their controlling
interest as a result of the
 Convert to Liquidation Rehabilitation Plan; and
(1)the debtor is insolvent; and  (d) The Rehabilitation Plan would

likely provide the objecting class
(2)there is no substantial likelihood for the
of creditors with compensation
debtor to be successfully rehabilitated as
which has a net present value
determined in accordance with the rules to be
greater than that which they
promulgated by the Supreme Court.
would have received if the debtor
 Rehabilitation Process were under liquidation.
 If the Court grants the Petition-  Effects of Approved Plan

Rehabilitation receiver shall be required to
 Shall be binding upon the debtor and all
submit a rehabilitation plan
persons who may be affected by it,
 If the Court dismisses the Petition- it may including the creditors, whether or not such
order award of damages to debtor or persons have participated in the
creditor or whoever was injured by the proceedings or opposed the Rehabilitation
Petition Plan or whether or not their claims have
been scheduled;
 Approval of Rehabilitation Plan
 The debtor shall comply with the provisions
 The receiver must convene the creditors of the Rehabilitation Plan and shall take all
and present the plan to them for approval. actions necessary to carry out the Plan;
Unlike the old procedure, however, the
vote of the debtor is not required for the  Effects of Approved Plan
approval of the plan.
 Payments shall be made to the creditors in
 Approved if creditors holding more than accordance with the provisions of the
fifty percent (50%) of the total claims of the Rehabilitation Plan;
said class vote in favor of the Plan.
 Contracts and other arrangements between
 Approval of Rehabilitation Plan the debtor and its creditors shall be
interpreted as continuing to apply to the
 Court may still approve it, even if creditors extent that they do not conflict with the
rejected it if all of the following provisions of the Rehabilitation Plan;
circumstances are present:
 Effects of Approved Plan
 (a) The Rehabilitation Plan
complies with the requirements  Any compromises on amounts or
specified in this Act. rescheduling of timing of payments by the
debtor shall be binding on creditors

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64
regardless of whether or not the Plan is  Contents of the Order

successfully implement; and
 (a) identify the debtor, its principal business
 Claims arising after approval of the Plan of activity/ies and its principal place of
that are otherwise not treated by the Plan business;
are not subject to any Suspension Order.
 (b) declare that the debtor is under
 MAIN EFFECT rehabilitation;
 CRAM-DOWN  (c) summarize the ground/s for the filing of

the petition;
 It is the involuntary imposition by a court of
a reorganization plan over the objection of  (d) direct the publication of the Order in a
some classes of creditors. newspaper of general circulation in the
Philippines once a week for at least two (2)
 Why “cram down”? The approved consecutive weeks, with the first
rehabilitation plan is figuratively “crammed publication to be made within seven (7)
down” the throats of objecting creditors. days from the time of its issuance;
 PRE-NEGOTIATED REHABILITATION  Contents of the Order
 The concept of a pre-negotiated  (e) direct the service by personal delivery of

rehabilitation was introduced and is a copy of the petition on each creditor who
currently available under the 2008 Rules, is not a petitioner holding at least ten
which the FRIA adopts without substantial percent (10%) of the total liabilities of the
modification. debtor, as determined in the schedule
attached to the petition, within three (3)
 Thus, the debtor, by itself or jointly with the
days;
creditors, may file a petition for the
approval of a pre-negotiated rehabilitation  (f) state that copies of the petition and the
plan provided that it has been endorsed by Rehabilitation Plan are available for
creditors holding at least 2/3 of the total examination and copying by any interested
liabilities of the debtor, including secured party;
creditors holding more than 50 percent of
the total secured claims and unsecured XXX
creditors holding more than 50 percent of
the total unsecured claims.  (h) appoint a rehabilitation receiver, if
provided for in the Plan; and
 However, while the 2008 Rules mandated
the appointment of a Rehabilitation  (i) include a Suspension or Stay Order as
Receiver either by election of the parties or described in this Act.
by order of the court, the FRIA gives the
 OBJECTIONS
parties the freedom to undertake the
proceedings WITHOUT a receiver.  (g) State that creditors and other
interested parties opposing the petition or
 Within five (5) working days, and after
Rehabilitation Plan may file their
determination that the petition is sufficient
objections or comments thereto within a
in form and substance, the court shall issue
an Order which shall:

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65
period of not later than twenty (20) days agree on a standstill period pending the
from the second publication of the Order completion of the plan for up to 120 days,
provided in addition that notice to all
 If, after due hearing, the courts creditors is published in a newspaper of
finds merit to the objection, it will general circulation once a week for two
order the debtor to cure the consecutive weeks.
defect. On the other hand, if it
finds that the petitioners acted in  The said notice must invite the creditors to
bad faith or that the defect is participate in the negotiation of the plan
incurable, it may order the and inform them that the plan will be
conversion of proceedings into one binding on all creditors if the required
for liquidation. votes are obtained
 As in the 2008 Rules, the  Requisites for Approval

Rehabilitation Plan will be deemed
approved if the court fails to act  (a) The debtor must agree to the out-of-
within a period of 120 days. court or informal restructuring/workout
agreement or Rehabilitation Plan;
 OUT OF COURT SETTLEMENT
(Informal Rehabilitation)  (b) It must be approved by creditors
representing at least sixty-seven (67%) of
 One of the most important and potentially the secured obligations of the debtor;
far reaching innovations under the FRIA is
the recognition of out-of-court  (c) It must be approved by creditors
restructuring/workout agreements. representing at least seventy-five percent
Pursuant to Section 89 of the Act, “[t]he (75%) of the unsecured obligations of the
insolvent debtor and creditor may seek debtor; and
court assistance for the execution or
 (d) It must be approved by creditors holding
implementation” of the Rehabilitation Plan,
at least eighty-five percent (85%) of the
provided that it meets the minimum
total liabilities, secured and unsecured, of
requirements of the law. Ultimately, this
the debtor.
type of cooperative endeavor may offer the
best chances of rehabilitation as it  WHAT HAPPENS TO THE
theoretically provides the least amount of OBJECTING CREDITORS?
disruption to the operations of an already
beleaguered company.  Section 86. Cram Down Effect. - A
Restructuring/workout agreement or
 WHAT IS A STANDSTILL? Rehabilitation Plan that is approved
pursuant to an informal workout
 STANDSTILL is an agreement whereby a
framework referred to in this chapter shall
creditor makes no further collection efforts
have the same legal effect as confirmation
on an unpaid obligation. The creditor
of a Plan under Section 69 hereof. The
agrees not to collect but the debtor should
notice of the Rehabilitation Plan or
not also make payments to anyone else.
restructuring agreement or Plan shall be
 To allow the parties to negotiate a feasible published once a week for at least three (3)
workout plan, the debtor and creditors consecutive weeks in a newspaper of
holding more than 50% of the debt may general circulation in the Philippines. The

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66
Rehabilitation Plan or restructuring  (a) there is no genuine issue of fact or law

agreement shall take effect upon the lapse on the claims/s of the petitioner/s, and that
of fifteen (15) days from the date of the the due and demandable payments thereon
last publication of the notice thereof. have not been made for at least one
hundred eighty (180) days or that the
 LIQUIDATION debtor has failed generally to meet its
liabilities as they fall due; and
 Kinds of Liquidation
 (b) there is no substantial likelihood that
 Voluntary
the debtor may be rehabilitated.
 Involuntary
 SUSPENSION OF PAYMENTS
 Voluntary
 Process
 Insolvent debtor files a petition for
 Individual debtor
liquidation with the court. The petition shall
be verified, shall establish the insolvency of  Possessing sufficient property to cover all
the debtor and shall contain, whether as an his debts but foresees the impossibility of
attachment or as part of the body of the meeting them when they respectively fall
petition; due
 (a) a schedule of the debtor's debts and  File a verified petition that he be declared in
liabilities including a list of creditors with the state of suspension of payments by the
their addresses, amounts of claims and court of the province or city in which he has
collaterals, or securities, if any; resides for six (6) months prior to the filing
of his petition.
 (b) an inventory of all its assets including
receivables and claims against third parties;  He shall attach to his petition, as a
and minimum: (a) a schedule of debts and
liabilities; (b) an inventory of assess; and (c)
 (c) the names of at least three (3) nominees
a proposed agreement with his creditors.
to the position of liquidator.
 Court action
 May be filed during the pendency of court-
supervised or pre-negotiated rehabilitation  (a) calling a meeting of all the creditors
proceedings named in the schedule of debts and
liabilities at such time not less than fifteen
 Involuntary
(15) days nor more than forty (40) days
 3 or more creditors the aggregate of whose from the date of such Order and
claims is at least either Php1,000,000,00 or designating the date, time and place of the
at least 25% of the subscribed capital stock meeting;
or partner's contributions of the debtor,
 (b) directing such creditors to prepare and
whichever is higher, may apply for and seek
present written evidence of their claims
the liquidation of an insolvent debtor by
before the scheduled creditors' meeting;
filing a petition for liquidation of the debtor
with the court. The petition shall show that:  (c) directing the publication of the said
order in a newspaper of general circulation

CREDIT TRANSACTIONS
67
published in the province or city in which (60) days immediately prior to the filing of
the petition is filed once a week for two (2) the petition; and
consecutive weeks, with the first
publication to be made within seven (7)  (b) secured creditors.
days from the time of the issuance of the
 “majority in a meeting”
Order;
 (1) that two-thirds (2/3) of the creditors
 (d) directing the clerk of court to cause the
voting unite upon the same proposition;
sending of a copy of the Order by registered
and
mail, postage prepaid, to all creditors
named in the schedule of debts and  (2) that the claims represented by said
liabilities; majority vote amount to at least three-fifths
(3/5) of the total liabilities of the debtor
 (e) forbidding the individual debtor from
mentioned in the petition.
selling, transferring, encumbering or
disposing in any manner of his property,  INSOLVENCY
except those used in the ordinary
operations of commerce or of industry in  Voluntary Liquidation
which the petitioning individual debtor is
 An individual debtor whose properties are
engaged so long as the proceedings relative
not sufficient to cover his liabilities, and
to the suspension of payments are pending;
owing debts exceeding Php500,000.00
 (f) prohibiting the individual debtor from
 File a verified petition with the court of the
making any payment outside of the
province or city in which he has resided for
necessary or legitimate expenses of his
six (6) months prior to the filing of such
business or industry, so long as the
petition.
proceedings relative to the suspension of
payments are pending; and  He shall attach to his petition a schedule of
debts and liabilities and an inventory of
 (g) appointing a commissioner to preside
assets. The filing of such petition shall be an
over the creditors' meeting
act of insolvency.
 Process
 The Court shall issue a Liquidation Order
 Effect on creditors within 5 days
 Cannot sue or institute proceedings to  Effects of Order Declaring Insolvency

collect his claim from the debtor from the
 All the assets of the debtor not exempt
time of the filing of the petition for
from execution are taken possession by the
suspension of payments and for as long as
sheriff or until the appointment of a
proceedings remain pending
receiver or assignee
 Except:
 Forbids the payment of the debtor of any
 (a) those creditors having claims for debts due to him and the delivery to the
personal labor, maintenance, expense of debtor or to any person for him of any
last illness and funeral of the wife or property belonging to him and the transfer
children of the debtor incurred in the sixty of any property by him

CREDIT TRANSACTIONS
68
 Effects of Order Declaring Insolvency delaying or defrauding any creditor or

claimant;
 All civil proceedings pending against the
insolvent debtor shall be stayed  Acts of Insolvency
 Mortgages or pledges, attachments or  He has willfully suffered judgment to be

executions on property of the debtor duly taken against him for default for the
recorded and not dissolved are NOT purpose of hindering or delaying or
affected by the order defrauding his creditors;
 Involuntary Insolvency  He has suffered or procured his property to

be taken or legal process with intent to give
 Any creditor or group of creditors with a a preference to one or more of his creditors
claim of, or with claims aggregating at least and thereby hinder, delay or defraud any of
Php500, 000.00 may file a verified petition his creditors;
for liquidation with the court of the
province or city in which the individual  Acts of Insolvency
debtor resides.
 He has made any assignment, gift, sale,
 The petition must set forth one or more conveyance or transfer of his estate,
acts of insolvency. property, rights or credits with intent to
delay, defraud or hinder his creditors;
 Acts of Insolvency
 He has, in contemplation of insolvency,
 Such person is about to depart or has made any payment, grant, sale, conveyance
departed from the country with intent to or transfer of his estate, property, rights or
defraud his creditors; credits with intent to delay, defraud or
hinder his creditors;
 That being absent from the country, he
remains absent;  Acts of Insolvency
 That he conceals himself to avoid the  That being a merchant or tradesman he has
service of legal process to delay or defraud generally defaulted in the payment of his
creditors; current obligations for a period of 30 days;
 Acts of Insolvency  That for a period of 30 days he has failed

after demand, to pay any moneys deposited
 He conceals or is removing any of his
with him or received by him in a fiduciary
property to avoid its being attached or
capacity; and
taken on legal process;
 An execution having been issued against
 He has suffered his property to remain
him on final judgment for money, he was
under attachment or legal process for 3
found to be without sufficient property
days for the purpose of hindering or
subject to execution to satisfy judgment.
delaying or defrauding his creditors;
 Liquidation Order
 He has confessed or offered to allow
judgment in favor of any creditor or  (a) declare the debtor insolvent;
claimant for the purpose of hindering or

CREDIT TRANSACTIONS
69
 (b) order the liquidation of the debtor and,  (b) legal title to and control of all the assets
in the case of a juridical debtor, declare it as of the debtor, except those that may be
dissolved; exempt from execution, shall be deemed
vested in the liquidator or, pending his
 (c) order the sheriff to take possession and election or appointment, with the court;
control of all the property of the debtor,
except those that may be exempt from  (c) all contracts of the debtor shall be
execution; deemed terminated and/or breached,
unless the liquidator, within ninety (90)
 (d) order the publication of the petition or days from the date of his assumption of
motion in a newspaper of general office, declares otherwise and the
circulation once a week for two (2) contracting party agrees;
consecutive weeks;
 (d) no separate action for the collection of
 (e) direct payments of any claims and an unsecured claim shall be allowed. Such
conveyance of any property due the debtor actions already pending will be transferred
to the liquidator; to the Liquidator for him to accept and
settle or contest. If the liquidator contests
 (f) prohibit payments by the debtor and the
or disputes the claim, the court shall allow,
transfer of any property by the debtor;
hear and resolve such contest except when
 (g) direct all creditors to file their claims the case is already on appeal. In such a
with the liquidator within the period set by case, the suit may proceed to judgment,
the rules of procedure; and any final and executor judgment
therein for a claim against the debtor shall
 Liquidation Order be filed and allowed in court; and
 (h) authorize the payment of administrative  (e) no foreclosure proceeding shall be

expenses as they become due; allowed for a period of one hundred eighty
(180) days.
 (i) state that the debtor and creditors who
are not petitioner/s may submit the names  Rights of Secured Creditors
of other nominees to the position of
liquidator; and  A secured creditor may:
 (j) set the case for hearing for the election  (a) waive his right under the security or lien,
and appointment of the liquidator, which prove his claim in the liquidation
date shall not be less than thirty (30) days proceedings and share in the distribution of
nor more than forty-five (45) days from the the assets of the debtor; or
date of the last publication.
 (b) maintain his rights under the security or
 Effects of Liquidation Order lien:
 (a) the juridical debtor shall be deemed  Suspension of Payment v. Insolvency

dissolved and its corporate or juridical
 Suspension of Payment v. Insolvency
existence terminated;

CREDIT TRANSACTIONS
70
 An assignee in a proceeding under the

Insolvency Law does not have the duty to:
(a) suing to recover the properties of the

estate of the insolvent debtor
(b) selling the property of the insolvent

debtor
(c) ensuring that a debtor corporation

operates the business effectively and efficiently
while proceedings are pending
(d) collecting and discharging debts owed to

the insolvent debtor
ANSWER: C
 In order to obtain approval of the proposed

settlement of the debtor in an insolvency
proceeding:
(a) the court must initiate the proposal
(b) 2/3 of the number of creditors must

agree to the proposal
(c) 3/5 of the number of creditors must

agree to the settlement
(d) 1/3 of the total debts must be

representative of the approving creditors
(e) letters a and b
ANSWER: B

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CREDIT TRANSACTIONS

CREDIT TRANSACTIONS Fourth Year 2. TRUST OR FAITH IN THE

Copy of: Carell Ryza Nartatez (4-Manresa)

The PRINCIPAL CONTRACTS/CREDIT TRANSACTIONS

Usufructuary (Article 562) LOAN

BAILEE – the one who borrows the thing (Articles 1933-1961)

Bar Question 2007 Definition

E. letters A and B TWO KINDS OF LOANS

Answer: E COMMODATUM is a contract of loan whereby one

Copy of: Carell Ryza Nartatez (4-Manresa)

COMMON CHARACTERISTICS Take note of the case of Bonnevie versus Court of

Copy of: Carell Ryza Nartatez (4-Manresa)

Copy of: Carell Ryza Nartatez (4-Manresa)

Copy of: Carell Ryza Nartatez (4-Manresa)

If there is compensation, the contract is one of PROHIBITIONS AS TO USE

NOTE: Commodatum is purely personal in

Copy of: Carell Ryza Nartatez (4-Manresa)

Copy of: Carell Ryza Nartatez (4-Manresa)

2. Obligation to refund extraordinary Article 765 applies to commodatum because both

1. Upon expiration of the period or after the Urgent need; (URGENCY)

Copy of: Carell Ryza Nartatez (4-Manresa)

Bar 2005 Due to the transfer of ownership, the rule in

Bar 2005 Art. 1954. A contract whereby one person transfers

(a) Brakes (extraordinary) – A EXAMPLES

Tuneup (ordinary) – B MUTUUM OF MONEY ===> A loans B P50,000

(c) A cannot demand return before the period

Copy of: Carell Ryza Nartatez (4-Manresa)

If what was loaned is a fungible thing Example

Indemnity for Damages  A pays 1 month after the 30-day period

6% per annum – transactions other than

Copy of: Carell Ryza Nartatez (4-Manresa)

However, the law does not authorize increase of

Copy of: Carell Ryza Nartatez (4-Manresa)

Therefore, with respect to deposit, the effect of

It can be gratuitous and, when gratuitous, it is a Nature of Deposit Based on Consideration

Copy of: Carell Ryza Nartatez (4-Manresa)

Art. 1969. A contract of deposit may be entered into NECESSARY DEPOSIT

Examples of Judicial Deposit Deposit is necessary when made in compliance with

Rule 127 – attachment in criminal cases.

Copy of: Carell Ryza Nartatez (4-Manresa)

Primary purpose: to save the property CONCEPT

Copy of: Carell Ryza Nartatez (4-Manresa)

Copy of: Carell Ryza Nartatez (4-Manresa)

Copy of: Carell Ryza Nartatez (4-Manresa)

Extinguishment of Voluntary Deposit Guaranty

(d) a deposit with a warehouseman It is subsidiary and conditional because it takes

It is requires that the guarantor must be a person

A guaranty is gratuitous, unless there is a

It is a contract between the guarantor and creditor.

Copy of: Carell Ryza Nartatez (4-Manresa)

Copy of: Carell Ryza Nartatez (4-Manresa)

Copy of: Carell Ryza Nartatez (4-Manresa)

Copy of: Carell Ryza Nartatez (4-Manresa)

Examples of defenses are prescription, that the Between the guarantors:

Copy of: Carell Ryza Nartatez (4-Manresa)

Illustration A borrows P10,000 from B. A delivers his cellular

Copy of: Carell Ryza Nartatez (4-Manresa)

Essential Requisites Subject Matter

No Double Pledge A co-owner may pledge his portion of the thing

Subject Matter OBLIGATIONS

Article 2095 - incorporeal rights, evidenced by OBLIGATIONS

Copy of: Carell Ryza Nartatez (4-Manresa)