Parties in Bailment:

G ENERAL P RINCIPLES 1. Bailor (Comodatario) – delivers the possession

CREDIT TRANSACTIONS
Contracts of security that include all transactions
involving the purchase or loan of goods, services, or
money with a promise to pay or deliver in the future
(DE LEON, Comments and Cases on Credit
Transactions, (2013), p. 1) [hereinafter, DE LEON,
Credit Transactions]).
See page 539 for the Comparative Analysis of all
Credit Transactions under the CIVIL CODE.
Security
Ensures enforcement of an obligation or protects
some interest in property (Id. at 2).
Types of Contracts of Security:
1. Secured transactions or contracts of real
security – transactions supported by a collateral
or an encumbrance of property; and
2. Unsecured transactions or contracts of personal
security – transactions supported only by a
promise to pay, or commitment of another such
as a guarantor or surety (Id. at 1).
Bailment
The delivery of property of one person to another in
trust for a specific purpose, with a contract, express
or implied, that the trust shall be faithfully executed
and the property returned or duly accounted for
when the special purpose is accomplished or kept
until the bailor claims it (Id. at 2).
Creation of Bailment
It may be created
1. By contract - in which case, it must contain all
the elements of a valid contract to be legally
enforceable; or
2. By operation of law (Id. supra at 3).
or custody of the thing bailed; and
2. Bailee (Comodante) – receives the custody or
possession of the thing thus delivered (Id. at 3).
Kinds of Contractual Bailment:
1. For the sole benefit of bailee
a. Commodatum
b. Gratuitous simple loan/mutuum
2. For the sole benefit of bailor
a. Gratuitous deposit
b. Mandatum
3. For the benefit of both parties (mutual-benefit
bailments)
a. Deposit for compensation
b. Involuntary deposit
c. Pledge or Mortgage
d. Bailments for hire (locatio et conductio) –
arises when goods are left with the bailee for
some use or service by him and is always for
some compensation (Id. at 4).
Kinds of Bailment for Hire:
1. Hire of things (locatio rei) – where goods are
delivered for the temporary use of the hirer.
2. Hire of service (locatio operis faciendi) – where
goods are delivered for some work or labor upon
it by the bailee.
3. Hire for carriage of goods (locatio operis
mercium vehendarum) – where goods are
delivered either to a common carrier or to a
private person for the purpose of being carried
from place to place.
4. Hire for custody (location custodiae) – where
goods are delivered for storage (Id. at 4-5).

EXECUTIVE COMMITTEE SUBJECT COMMITTEE MEMBERS ADVISERS

MARIA REGGIELEENE S. RICHARD ARMAND C. JULIENNE THERESE V. DEAN ED VINCENT S.
DIONISIO over-all chairperson, ANGELES subject chair, SALVACION, MARC LESTER H. ALBANO, ATTY.
LYAN DAVID M. JUANICO REENO E. FEBRERO assistant STA ANA, JIRAH L. JARETA, NICASIO C.
chairperson for academic subject chair, GILBERT S. RUSSEL LUBANGCO, VICSON CABANEIRO, ATTY.
operations, TYRONE LEWIS D. GALVEZ edp, JUN MARR M. A. MABANGLO, JHOANNA JOSEPH FERDINAND
ONG chairperson for hotel DENILA persons and family STEFFANY G. NARAG, JULIA M. DECHAVEZ, ATTY.
operations, DANIEL P. ANG relations, NICA MARSHA V. ANTOINETTE S. UNARCE, EFREN VINCENT M.
vice-chairperson for operations, GASAPO wills and succession, JEEN LIM, DIANNE FERRIOL, DIZON, ATTY.
JEFFERSON B. FERNANDEZ JOHN EMIL F. RECUENCO MA. REINA HABIJAN, ARIAN CHARLITO MARTIN
vice-chairperson for secretariat, sales and lease, REX MARK M. VINA L. SARMIENTO, R. MENDOZA, ATTY.
CLARISA G. BELO vice- CABANSAG credit FEROZZA DELIA C. BRUCE V. RIVERA,
chairperson for finance, EROL transactions, MARISOL P. SIMBULAN, ALEIZEL L. ATTY. FRANCESCA
STEPHEN B. PISEC vice RECUERDO land titles and SANTOS, JENNY JOY LOURDES M. SEÑGA
chairperson for electronic data deeds, RUEL NICO R. MARI GERONIMO, ANN LAURICE
processing, PATRICK STEPHEN property, MARIA MIRELLA M. SALONGA, CHRISTINE V.
M. CUA vice-chairperson for ALVERO and DION CEAZAR INTAL, JIHAN D. LLAMES,
logistics, MAICAH MARIE M. PASCUA obligations and KRISTINE MAE A. CEDIÑO,
PAMFILO vice-chairperson for contracts, LOUGENIA P. AUDRIS BULATAO, CLARISSE
membership CARIÑO partnership, JESUS NICOLE V. SOLIMAN,
CLARO JR. T. CEBRIAN torts MYLEEN JOYCE R.
and damages, EVAN JR. C. FAVOREAL, EILEEN CARLA Y.
DUSABAN conflict of laws CARPIO
 consumable things pay what he may
L OAN upon agreement, promise within a
( A RTS . 1933 – 1961) express or implied, to
repay the same amount
specified period (DE
LEON, supra at 8)
of the same kind and
CONTRACT OF LOAN quality, with or without The concession of
A contract wherein one of the parties delivers to interest (CIVIL CODE, “credit” necessarily
another, either something not consumable so that Art. 1933). involves the granting of
the latter may use the same for a certain time and “loans” up to the limit of
return it; or money, or other consumable things, the amount fixed in the
upon the condition that the same amount of the “credit” (People v.
same kind and quality shall be paid (CIVIL CODE, Concepcion, G.R. No. L-
Art. 1933). 18535, August 15,
1922).
The contract of loan is governed by the rules as to
the requisites and validity of contracts in general Credit in Relation to Debt
(DE LEON, supra at 6). Credit is a sum credited on the books of a company
to a person who appears be entitled to it. It is the
Characteristics: correlative to debt or indebtedness and that which is
1. Real contract – delivery of the thing loaned is due to any person as distinguished from that which
necessary for the perfection of the contract he owes (Republic v. First National City Bank of
because the purpose of the contract is to New York, G.R. No. L-16106, December 30, 1961).
transfer either the use or the ownership of the
thing loaned (CIVIL CODE, Art. 1316). Loan v. Discounting Paper
Loan Discounting of Paper
Note: An accepted promise to make a future As to When Interest is Deducted
loan is a consensual contract, and therefore
binding upon the parties. However, it is only after Interest is taken at the Interest is deducted in
delivery of the subject matter will the real expiration of the credit. advance.
contract of loan arise (CIVIL CODE, Art. 1934). As to Expense
More expensive than
The non-fulfillment of an accepted promise will obtaining loan
give rise to an action for damages only (5 because interest is
TOLENTINO, Civil Code of the Philippines, calculated on the
(1992), p. 443) [hereinafter 5 TOLENTINO]). amount loaned and
Less expensive than not on the amount
Nevertheless, the accepted promise to give, discounting. actually received.
despite giving rise to an action for damages by
reason of its breach, does not constitute the real
contract of loan (Saura Import and Export Co.,
Inc. v. Development Bank of the Philippines,
G.R. No. L-24968, April 27, 1972).

2. Unilateral contract – once the subject matter has As to Whether it is Made on a Double/Single
been delivered, it creates obligations on the part Name Paper
of only one of the parties (i.e. borrower) (DE Always on a double Always on a single
LEON, supra at 7). name paper (one on name paper (one on
which two signatures which no other
Cause or Consideration: appear with both indorsement, other
1. As to borrower – the acquisition of the thing parties liable for than the signature of
2. As to lender – the right to demand its return or its payment). the maker appears.
equivalent (Ibid). As to Repayment of Discount
Loan v. Credit The discount does not
Loan Credit have to be repaid
Contract for the Ability of a person to Loan must be paid (Herrera v. Petrophil
delivery by one party borrow money or things back. Corp., G.R. No. L-
and receipt of other by virtue of the trust or 48349, December 29,
party of a given sum of confidence reposed by 1986).
money, or other the lender so that he will (DE LEON, supra at 8-9)

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3
Kinds of Loan: C OMMODATUM
1. Commodatum – bailor delivers to the bailee a
non-consumable thing so that the latter may use ( A RTS . 1935 – 1952)
it for a certain time and return the identical thing;
and Commodatum v. Other Types of Contracts
2. Simple loan (mutuum) – lender delivers to the Other Type of
Commodatum
borrower money or other consumable thing upon Contracts
the condition that the latter shall return the same Principal purpose is
In DEPOSIT, the
amount of the same kind and quality (Id. at 7). the gratuitous and
principal purpose is the
temporary use of the
safekeeping of the thing
Consumables are those things which cannot be thing by the borrower.
used in a manner appropriate to their nature In LEASE, it is always
without their being consumed (CIVIL CODE, Art. Essentially gratuitous
for a price.
418). Bailee acquires a
mere use of the thing,
Commodatum v. Mutuum but acquires no rights In USUFRUCT, the
Commodatum Mutuum over the fruits thereof usufructuary acquires
As to Object in the absence of the right over the fruits.
General Rule: Non- stipulation to that
consumable/Non- effect.
fungible
Exception: if the Consumable/Fungible Nature
purpose of the contract Correlate with Art. General Rule: Bailee acquires the temporary use of
is not the consumption 418 of the Civil Code the thing but not its fruits since the bailor remains
of the object (e.g. for the owner (CIVIL CODE, Art. 1935).
exhibition) (CIVIL
CODE, Art. 1936) Rationale: The right to use a thing is distinct from
the right to enjoy the fruits (DE LEON, at 17). The
As to Cause
fruits pertain to the owner of the thing producing the
Generally gratuitous fruits (CIVIL CODE, Art. 441).
although it may also
Essentially gratuitous be onerous for there Exception: When there is a stipulation to make use
may be stipulation of of the fruits of the thing loaned (CIVIL CODE, Art.
interest 1940). Provided, that the use of the fruits is merely
As to Purpose incidental; otherwise, it is usufruct (DE LEON, supra
Use or temporary at 19).
Consumption
possession
As to Subject Matter Note: Such stipulation to enjoy the fruits cannot be
Personal property presumed (Ibid.).
Any property
Note: If the bailee is not entitled to the use of the
As to Ownership of the thing thing, the contract is a deposit (CIVIL CODE, Art.
Retained by bailor Passes to the debtor 1962).
As to Return of the thing
Contract Akin to Donation
Equal amount of the
Exact thing loaned Both contracts of commodatum and donation confer
same kind and quality
benefit to the recipient. The presumption is that the
As to Risk of Loss bailor has loaned the thing for having no need
Bailor Debtor or bailee therefore (DE LEON, supra at 15). The cause or
consideration for both is pure liberality (CIVIL
As to Time of Return
CODE, Art. 1350).
In case of urgent need
and commission of any Characteristics of Commodatum
Upon expiration of the
acts of ingratitude, even 1. Real – perfected by delivery;
term only
before the expiration of 2. Principal – it can stand alone by itself;
the term 3. Gratuitous – the cause of which is the mere
(DE LEON, supra at 10-11) liberality of the benefactor (CIVIL CODE, Art.
1350); and

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4. Personal in Nature – because of the trust (5
PARAS, Civil Code of the Philippines Annotated
Book V [2013], p. 884 [hereinafter, 5 PARAS]).
Kinds of Commodatum:
1. Ordinary Commodatum – use of the thing by the
bailee is for a certain period of time (CIVIL
CODE, Art. 1933);
2. Precarium – one whereby the bailor may
demand the thing loaned at will.
A contract is precarium when:
a. The duration and purpose of the contract are
not stipulated; or
b. The use of the thing is merely tolerated by the
owner (CIVIL CODE, Art. 1947).
Cause
The cause is the liberality of the bailor.
Commodatum is essentially gratuitous (CIVIL
CODE, Art. 1933).
In Pajuyo vs CA, the contract was not a
commodatum because the bailee was obligated to
maintain the property in good condition (G.R. No.
146364, June 3, 2004).
Note:
If any compensation is to be paid by the borrower
there arises a lease contract; and
If the consideration is to render some service, an
innominate contract will result (DE LEON, supra at
14).
Subject Matter:
General Rule: Non-consumable goods, whether
movable or immovable property (CIVIL CODE, Arts.
1936-1937).
Exception: Consumable goods may be the subject
matter of commodatum if the purpose of the contract
is not the consumption of the object as when it is
merely for exhibition (CIVIL CODE, Art. 1936).
Illustration:
If consumable goods are loaned only for purposes of
exhibition, or when the intention of the parties is to
lend consumable goods and to have the very same
goods returned at the end of the period agreed
upon, the loan is commodatum and not mutuum
(Producers Bank of the Phils. v. CA, G.R. No.
115324, February 19, 2003).
Bailor need not be the owner of the thing loaned
(CIVIL CODE, Art. 1938)
It is sufficient that the bailor has:
1. Possessory interest; or
2. The right to use which he may assert against the
bailee or third persons but not the rightful owner
(e.g. lessee, usufructuary) (DE LEON, at 17).
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Effects of the Principle that Commodatum is
Purely Personal (CIVIL CODE, Art. 1939)
1. The death of either the bailor or the bailee
extinguishes the contract.
Art. 1939 constitutes an exception to the general
rule under Article 1178 that all rights acquired in
virtue of an obligation are transmissible (DE
LEON, supra at 18).
Exceptions:
a. When there is a contrary stipulation that the
commodatum is transmitted to the heirs of
either or both parties (CIVIL CODE, Art.
1306); and
b. If there are two or more borrowers, the death
of one does not extinguish the contract in the
absence of stipulation to the contrary (DE
LEON, supra at 18).
2. The bailee can neither lend nor lease the object
of the contract to a third person (CIVIL CODE,
Art. 1939 (2)).
Exceptions:
a. Understanding or agreement to the contrary;
and
b. Members of the household may make use of
the thing loaned (DE LEON, supra at 18).
Reason: they are not considered as third
persons (Ibid.).
Exceptions to the exception in (b):
i. If there is a contrary stipulation; and
ii. If the nature of the thing forbids such use
(Ibid.).
OBLIGATIONS OF THE BAILEE (TR-OLDEO)
Principal Obligations: (TR)
1. Take care of the thing with diligence of a good
father of a family (CIVIL CODE, Arts. 1163); and
2. Return the IDENTICAL thing loaned upon
expiration of the term or upon the
accomplishment of the purpose (CIVIL CODE,
Art. 1933).
Other Obligations: (OLDEO)
1. Pay for the Ordinary expenses for the use and
preservation of the thing loaned (CIVIL CODE,
Art. 1941);
Reason: The bailee is supposed to return the
identical thing (CIVIL CODE, Art. 1933).
2. Liability for Loss due to fortuitous event (CIVIL
CODE, Art. 1942);
3
 General Rule: He is not liable because
ownership remains with the bailor (CIVIL CODE,
Art. 1174).
Exceptions: He is liable for loss even if it should
be through a fortuitous event in the following
cases (CIVIL CODE, Art. 1942): (KLAS-D)
a. When he Keeps it longer than the period
stipulated, or after the accomplishment of its
use;
Reason: Delay (CIVIL CODE, Arts. 1165,
1169, and 1170).
b. When he Lends or leases it to third persons
who are not members of his household;
Reason: Commodatum is purely personal
(CIVIL CODE, Art. 1939).
c. When the thing loaned has been delivered
with Appraisal of its value unless there is a
stipulation exempting the bailee from
responsibility in case of fortuitous event.
Reason: The law presumes that the parties
intended that the borrower shall be liable for
the loss of the thing even if it is due to a
fortuitous event for otherwise they would not
have appraised the thing (Republic v. Bagtas,
G.R. No. L-17474, October 25, 1962).
d. When, being able to Save either the thing
borrowed or his own things, he chose to save
the latter.
Reason: The bailee shows his ingratitude
after the thing is gratuitously loaned to him
(DE LEON, supra at 21).
e. When the bailee Devoted the thing for a
different use from that agreed upon.
Reason: The bailee acted in bad faith.
3. Liability for Deterioration due to the use of the
thing (CIVIL CODE, Art. 1943);
General Rule: Bailee is not liable
Exceptions:
a. If expressly stipulated (DE LEON, supra at 21-
22).;
b. If guilty of fault or negligence (CIVIL CODE,
Art. 1170);
c. If he devotes the thing to any purpose
different from that for which it has been
loaned (CIVIL CODE, Art. 1942 (1)); and
d. If he uses the thing beyond the period
stipulated (CIVIL CODE, Art. 1942 (2));.
4. Pay for Extraordinary expenses arising from the
actual use of the thing, even though the bailee
acted without fault. In this case, the bailor and
the bailee shall bear the expenses equally
(CIVIL CODE, Art. 1949 (2)); and
Exception: If there is a stipulation for different
apportionment.
Right of Retention
General Rule: Bailee has no right to retain the
thing loaned as security on the ground that the
bailor owes him something, even though it may
be by reason of expenses (CIVIL CODE, Art.
1944).
Reasons:
a. Ownership remains in the bailor; and
b. Only temporary use is given to the
bailee (DE LEON, supra at 22).
Compensation shall not be proper when one of
the debts arises from a depositum or from the
obligations of a depositary or a bailee in
commodatum (CIVIL CODE, Art. 1287).
Exception: When the bailor, knowing the flaws
of the thing loaned, does not advise the bailee of
the same, the Bailor shall be liable for damages
suffered by the bailee by reason therefor and
right of retention ceases when the bailee is
reimbursed (CIVIL CODE, Art. 1951).
The bailee cannot lawfully sell the thing to satisfy
the damages (DE LEON, supra at 23).
Retention or adverse claim of bailee cannot
ripen into title by ordinary acquisitive prescription
(Catholic Vicar Apostolic of the Mt. Province v.
CA, G.R. No. L-80294-95, September 21, 1988).
This decision was however reversed by the
Supreme Court upon a Motion for
Reconsideration filed. The SC held that the right
of the bailor was defeated when the trust was
repudiated by declaring the property for tax
purposes under the bailee‟s name. From such
time, the bailee was in possession for 11 years
and under Art. 555 of the Civil Code, it is clear
that the real right of possession of bailor over the
property was lost or no longer existing after the
lapse of 10 years that bailee had been in
adverse possession thereof (Catholic Vicar
Apostolic of the Mt. Province v. CA, supra).
5. To pay for the expenses Other than those under
Arts. 1941 and 1949 of the Civil Code for the
purpose of making use of the thing (CIVIL
CODE, Art. 1950).
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 (e.g. ordinary expenses for the preservation and
expenses for ostentation)
Note: In case there are two (2) or more bailees,
their obligation shall be solidary (CIVIL CODE,
Art. 1945). This is an example of a solidary
obligation by operation of law or legal solidarity
where solidarity is imposed by the law.(DE
LEON, Comments and Cases on Obligations
and Contracts (2014), p. 220) [hereinafter, DE
LEON, Obligations and Contracts])
Reason: To effectively safeguard the rights of
the bailor (DE LEON, supra at 23).
OBLIGATIONS OF THE BAILOR (RRL)
1. Respect the duration of the loan (CIVIL CODE,
Art. 1946).
Reason: Bailor is bound by the terms of the
contract of commodatum which is for a certain
time (DE LEON, supra at 25).
General Rule: He cannot demand return before
expiration of the period or accomplishment of the
use (CIVIL CODE, Art. 1946).
Exceptions:
a. In case of urgent need of the thing, he may
demand its return or temporary use (CIVIL
CODE, Art. 1946); and
Reason: Commodatum is essentially
gratuitous (DE LEON, supra at 25)
Effect: If for a temporary use, the contract of
commodatum is suspended while the thing is
in the possession of the bailor (CIVIL CODE,
Art. 1946).
b. If the bailee commits any act of ingratitude
specified in Article 765:
i. Bailee should commit some offenses
against the person, honor or property of the
bailor, or of his wife or children under his
parental authority;
ii. Bailee imputes to the bailor any criminal
offense, or any act involving moral turpitude,
even though he should prove it, unless the
crime or the act has been committed against
the bailee himself, his wife or children under
his authority; and
iii. Bailee unduly refuses the bailor support
when the bailee is legally or morally bound
to give support to the bailor (CIVIL CODE,
Art. 1948).
Reason: Like a donation, commodatum is
essentially gratuitous (DE LEON, supra at 28).
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Note: In case of precarium (Article 1947), the
bailor can always demand the thing loaned at will.
There is no need for the existence of an act of
ingratitude.
Note: If the loan is for an illegal or immoral use
(5 TOLENTINO, supra at 448), the contract is void
(CIVIL CODE, Art. 1409 (1) and (7)).
2. Refund to the bailee extraordinary expenses
incurred for the preservation of the thing,
provided that the bailee brings the same to the
knowledge of the bailor before incurring them,
except when the reply to the notification cannot
be awaited without danger (CIVIL CODE, Art.
1949, par. 1).
Reason: It is the bailor who profits by said
expenses (DE LEON, supra at 29).
Exception: Expenses caused by fortuitous
event on the occasion of the actual use of the
thing by the bailee, even though he acted
without fault, loaned shall be borne by the bailor
and bailee alike on a 50-50 basis (Id.).
Exception to the Exception:
Stipulation providing for a different
apportionment of expenses, or that expenses
shall be borne by the bailee or bailor only (Id. at
30).
Notice is required because it is possible that the
bailor may not want to incur the extraordinary
expenses. An exception lies where they are so
urgent that the reply to the notification cannot be
awaited without danger (Id. at 29).
If the bailee is at fault, he alone should pay.
3. Be Liable to the bailee for damages for known
hidden flaws (CIVIL CODE, Art. 1951).
Requisites: (FHANS)
a. Existence of Flaw or defect;
b. The flaw or defect is Hidden;
c. The bailor is Aware thereof;
d. Bailor does Not advise the bailee of the same;
and
e. The bailee Suffers damages by reason of said
flaw or defect.
If the above requisites concur, the bailee has the
right of retention for damages (CIVIL CODE, Art.
1944).
The bailor is made liable for his bad faith (DE
LEON, supra at 30-31).
3
 If the defect is not known to the bailor, he is not
liable because commodatum is gratuitous (Id. at
31).
No Right of Abandonment
The bailor cannot exempt himself from the payment
of expenses or damages by abandoning the thing to
the bailee (CIVIL CODE, Art. 1952).
Reason: The expenses or damages may exceed
the value of the thing loaned, and it would, therefore,
be unfair to allow the bailor to just abandon the thing
instead of paying for said expenses and/or damages
(DE LEON, supra at 31-32).
M UTUUM
( ARTS . 1953 – 1955)
Illustration:
Borrower X placed his money loaned inside his
cabinet. The night after, his house, together with the
money, was turned into ashes.
X is not excused to pay the thing loaned because he
is not required to return the bills with the same serial
numbers, but the same amount of the loan.
No estafa is committed by a person who refuses to
pay his debt per se as the borrower effectively
acquires ownership and being the owner, he can
dispose of the thing borrowed and his act will not be
considered misappropriation thereof (Id. at 34).
Basis:
A person who receives a loan of money or any other
fungible thing acquires the ownership thereof, and is
bound to pay the creditor an equal amount of the
same kind and quality (CIVIL CODE, Art. 1953).

Note: No person shall be imprisoned for non-

CONTRACT OF MUTUUM payment of debt (CONST. Art. III, Sec. 20)
A bilateral contract whereby one of the parties
delivers to another money or other consumable Mutuum v. Rent
thing with the understanding that the same amount, Mutuum Rent
of the same kind and quality, shall be paid (CIVIL As to Definition
CODE, Art. 1933). The promise to pay of the Delivery of some non-
Delivery of money or
borrower is the consideration for the obligation, consumable thing in
some consumable thing
making the loan a bilateral contract (DE LEON, order that the other
with a promise to repay
supra at 34). may use it during a
an equivalent of the
certain period and
same kind and quality
It involves the return of the equivalent amount only return it to the former
and not the identical thing because the borrower As to Transfer of Ownership
acquires ownership of the money or other There is no transfer of
consumable thing loaned. This obligation “to pay” ownership of the thing
may include the accessory obligation to pay interest delivered. Lessor
(Id. at 33). There is a transfer of simply loses his
ownership of the thing control over the
Subject Matter: Consumable or fungible goods delivered. property during the
period of the contract.

Fungible and Non-Fungible:

1. Fungible – belongs to a common genus which As to Relationship of the Parties
includes several species of the same kind (e.g. Relationship between
grain, wine, oil) (Id. at 37). Relationship is that of
the parties is that of
2. Non-fungible – specifically determined and a landlord and tenant
obligor-obligee
cannot be substituted by others (e.g. specific As to Receipt of Payment
land, building, particular house). Landlord receives
compensation either in
Whether a thing is consumable or not depends upon money, provisions,
its nature and whether it is fungible or not depends Creditor receives chattels, or labor
upon the intention of the parties (Id. at 38). payment for his loan. (Tolentino v.
Gonzales, G.R. No.
The destruction of the thing loaned does not 26085, August 12,
extinguish one‟s obligation to pay because his 1927).
obligation is not to return the thing loaned but to pay (DE LEON, supra at 34).
a generic thing. Genus nunquam perit.(Generic thing
never perishes).

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 Loan v. Sale shall pay its value at the time of the perfection
Loan Sale of the loan (CIVIL CODE, Art. 1955, par. 2).
As to Nature
Real contract. Consensual contract.
As to Obligations
I NTEREST
Generally unilateral ( A RTS . 1956 – 1961)
because only the Bilateral and
borrower has reciprocal.
obligations. Requisites for Demandability of Interest: (WEL)
1. The agreement must be in Writing;
Note: If the property is “sold”, but the real intent is 2. Must be Expressly stipulated (CIVIL CODE, Art.
only to give the object as security for a debt – as 1956); and
when the “price” is comparatively small – there really
is a contract of loan with an “equitable mortgage” Exceptions:
(CIVIL CODE, Art. 1602[6]). a. Indemnity for damages (CIVIL CODE, Art.
2209); and
Barter b. Interest accruing from unpaid interest (CIVIL
A contract whereby one person transfers ownership CODE, Art. 2212)
of non–fungible things to another with the obligation 3. Must be Lawful (DE LEON, supra at 40).
on the part of the latter to give things of the same
kind, quality and quantity (CIVIL CODE, Art. 1954). Interest may be paid either as compensation for the
use of the money (monetary interests) or as
Commodatum/ Mutuum v. Barter damages (compensatory interest). Article 1956 of
Commodatum/ the Civil Code refers to interest for use of money (Id.
Barter at 41).
Mutuum
As to Subject Matter
The right to interest arises only by virtue of a
In mutuum, the subject Subject matter is non- contract or by virtue of damages for delay or failure
matter is money or fungible, (non- to pay principal on which interest is demanded (3
fungible things. consumable) things. PARAS, supra at 901).
As to Return of the Subject Matter
Article 1956 provides that no interest shall be due
The thing with unless it has been expressly stipulated in writing.
In commodatum, the
equivalent value is
bailee is bound to Note: If stipulated, the interest must be paid from
given in return for
return the identical the time it falls due.
what has been
thing borrowed.
received.
As to Cause or Consideration Stipulation of a Particular Interest Rate
If a particular rate of interest has been expressly
Mutuum may be stipulated by the parties, that interest, not the legal
Always onerous, and
gratuitous and rate of interest, shall be applied (Casa Filipina
is actually a mutual
commodatum is Development Corp v. Deputy Executive Secretary,
sale.
essentially gratuitous. G.R. No. 96494, May 28, 1992).
(DE LEON, supra at 38)
Anent the payment of legal interest, the Supreme
Forms of Payment: Court laid down the guidelines regarding the manner
1. If the thing loaned is money, payment must be of computing legal interest in Eastern Shipping
made in the currency stipulated, if it is possible Lines, Inc. v. CA, as follows, among others:
to deliver such currency; otherwise, that which 1. The legal interest on loans or forbearance of
is legal tender in the Philippines. In case of money shall be 12% per annum from judicial or
extraordinary inflation or deflation, payment extrajudicial demand, in the absence of
shall be in the value of the currency at the time stipulation to the contrary;
of the creation of the obligation (CIVIL CODE, 2. For breached obligations not consisting of loans
Arts. 1249, 1250 and 1955 par. 1). or forbearance of money, an interest on
damages may be imposed at the discretion of
2. If the thing loaned is other than money, the the court at the rate of 6% per annum; and
borrower is under obligation to pay the lender 3. Judgment of court awarding sum of money that
another thing of the same kind, quality and becomes final and executory, whether the
quantity even if it should change in value. In judgment falls under 1 or 2 above, the legal rate
case it is impossible to do so, the borrower

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 of interest shall be 12% per annum from finality
to satisfaction. (G.R. No. 97412, July 12, 1994)
The foregoing ruling in Eastern Shipping Lines
has now been modified by Bangko Sentral ng
Pilipinas Monetary Board Circular No. 799,
Series of 2013, which provides that “the rate of
interest for loan or forbearance of any money, goods
or credits and the rate allowed in judgments, in the
absence of an express contract as to such rate of
interest, shall be 6% per annum.” Said circular took
effect on July 1, 2013.
Applying Circular 799, the Supreme Court
summarized in Nacar v. Gallery Frames, G.R. No.
189871, August 13, 2013, the new guidelines on
legal interest, as follows:
1. When an obligation, regardless of its source,
(i.e., law, contracts, quasi-contracts, delicts or
quasi-delicts) is breached, the contravenor can
be held liable for damages and the provisions
under Title XVIII on Damages of the Civil Code
govern in determining the measure of
recoverable damages;
2. For the award of interest in the concept of actual
and compensatory damages, the rate of interest
and its accrual is imposed as follows:
a. For breach of obligations consisting of loan or
forbearance of money, interest due shall be
that stipulated in writing. Interest due shall
itself earn legal interest from the time it is
judicially demanded.
b. In the absence of stipulation, the rate of
interest shall be 6% per annum, computed
from default, (i.e., judicial or extrajudicial
demand) subject to the provisions of Art. 1169
of the Civil Code);
c. For breached obligations not consisting of
loan or forbearance of money, interest on
amount of damages awarded may be
imposed at the discretion of the court at the
rate of 6% per annum. No interest shall be
adjudged on unliquidated claims or damages,
except when or until demand can be
established with reasonable certainty.
i. Where demand is established with
reasonable certainty, interest begins to run
from time claim is made
judicially/extrajudicially;
ii. When certainty cannot be reasonable
established at the time demand is made,
interest runs from date judgment of the court
is made, at which time quantification of
damages may be deemed to have been
reasonable ascertained. The actual base for
computation of legal interest shall be on the
amount finally adjudged.
d. When judgment of court awarding sum of
money becomes final and executory, whether
the case falls on forbearance or non-
forbearance of money, the rate of legal
interest shall be 6% per annum from such
finality until its satisfaction, the interim period
being an equivalent to forbearance of money.
e. Effectivity of new legal rate of interest:
Judgments that have become final and
executory prior to July 1, 2013 shall not be
disturbed. The 12% and 6% per annum legal
interests shall apply until June 30, 2013.
Sta. Maria, however, after the issuance of said
circular, prior to the promulgation of Nacar,
submitted that Circular 799 is invalid in view of the
Supreme Court‟s ruling in Siga-an v. Villanueva,
G.R. No. 173227, January 20, 2009, which Article
2209, providing for legal interest of 12% per annum
as legal interest imposed as indemnity for damages
in the absence of stipulation on interest. Sta. Maria
submits that a circular cannot repeal the 12%
interest and make it 6%.
Factors That he Monetary Board Consider in
Fixing The Maximum Rates or Rates of Interest:
1. The existing economic conditions in the country
and the general requirements of the national
economy;
2. The supply of and demand for credit;
3. The rate of increase in the price levels; and
4. Such other relevant criteria as the Monetary
Board may adopt (P.D. 116, Sec. 6).
Notably, however, it was BSP Circular No. 416, July
29, 1974, which increased the interest to be
imposed on judgments involving forbearance of
credit from 6% under Art. 2209 to 12%. Originally,
Art. 2209 only made mention of a 6% rate and not
12%. The Supreme Court also already took notice of
Circular 799, which revised the interest rate for loan
or forbearance of money, goods or credit, to 6%,
and even applied the same in rulings subsequent to
the circular‟s issuance (S.C. Megaworld
Construction and Development Corporation v.
Parada, G.R. No. 183804, September 11, 2013;
Nacar v. Gallery Frames, supra)
In Advocates for Truth in Lending, Inc., v. Bangko
Sentral Monetary Board, G.R. No. 192986, January
15, 2013, the Supreme Court affirmed the authority
of the BSP Monetary Board (“BSP-MB”) to set
interest rates and to issue and enforce circulars
when it rules that the BSP-MB may prescribe the
maximum rates of interest for all loans or renewals
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therefor or the forbearance of any money, goods or
credits, including those for loans of low priority such
as consumer loans and loans made by pawnshops,
finance companies and similar credit institutions.
The BSP-MB is also authorized to prescribe different
maximum rates for different types of borrowings,
including deposits and deposit substitutes or loans
of financial intermediaries. This ruling was again
affirmed by the Supreme Court in Nacar v. Gallery
Frames, G.R. No. 189871, August 13, 2013.
The Supreme Court modified the interest rate
imposed by the lower courts to 6% per annum in the
absence of any stipulation in writing in accordance
with Article 2209 of the Civil Code. It is to be
imposed from the time of the extrajudicial demand
by respondent (First United Constructors Corp. v.
Bayanihan Automotive Corp., G.R. No. 164985,
January 15, 2014).
In Sps. Andal v. Philippine National Bank (G.R. No.
194201, November 27, 2013), the issue is whether
debtors shall be liable for interest on a loan after the
exorbitant stipulated interest thereon and the
subsequent foreclosure of property that secured
said loan, was nullified in another case that became
final and executory. The Supreme Court ruled that
the fact that the rate of interest was subsequently
declared illegal and unconscionable does not entitle
said debtors to stop payment of interest. Only the
rate of interest was declared void. The debtors are
considered in default from the date of finality of the
other case and not during the time they were unable
to pay the stipulated interest as it was exorbitant and
hence, declared void. The other case became final
and executory on May 20, 2011. Applying Nacar, it
was ruled that the legal rate of interest of 12% per
annum shall apply from May 20, 2011, the date of
default, until June 30, 2013. From July 1, 2013 until
fully paid, the legal rate of 6% per annum shall be
applied.
Instances When Interest Does Not Begin To Run:
1. During the effectivity of the moratorium law,
which has the effect of suspending the collection
of payment of the principal obligation, which
carries the accessory obligation in the payment
of interest;
2. In case of insolvency of the bank, when the
Bangko Sentral prohibits the bank from doing
business; and
3. Despite defective consignation, from the time of
the offer and tender of payment (5 TOLENTINO,
supra at 452).
Exceptions:
1. When judicially demanded (CIVIL CODE, Art.
2212); and
2. When there is an express stipulation that the
interest due shall be added to the principal
obligation and the resulting total amount shall
earn interest (DE LEON, supra at 51-52).
Increase in Interest Rate
No increase in interest shall be due unless such
increase has also been expressly stipulated
(Security Bank & Trust Co., v. RTC Makati, G.R. No.
113926, October 23, 1996; Spouses Toring v.
Ganzon-Olan, G.R. No. 168782, October 10, 2008).
It was held that the unilateral determination and
imposition of increased rates is violative of the
principle of mutuality of contracts ordained in Article
1308 of the Civil Code (NSBCI v. PNB, G.R. No.
148753, July 30, 2004).
Liability for Interest in the Absence of
Stipulation
1. Indemnity for Damages
A debtor in delay is liable to pay legal interest
(DE LEON, supra at 42).
The obligation consisting in the payment of sum
of money referred to in Art. 2209 of the Civil
Code is not confined to a loan or forbearance of
money but also covers cases involving default in
the payment of price or consideration under a
contract of sale, an action for damages for injury
to persons, and loss of property and an action
for damages arising from unpaid insurance
claims (Castelo v. CA, G.R. No. 96372, May 22,
1995).
Interest as indemnity for damages is payable
only in case of default or non-performance of the
contract. As they are distinct claims, they may
be demanded separately (Sentinel Insurance v.
CA, G.R. No. L-52482, February 23, 1990).
2. Interest Accruing From Unpaid Interest
Interest due shall earn interest from the time it is
judicially demanded although the obligation is
silent upon this point. (CIVIL CODE, Art. 2212)
Exception:
Where the court‟s judgment, which did not
provide for the payment of interest has already
become final, no interest may be awarded (Ruiz
v. Caneba, G.R. No. 84884, December 3, 1990).

Rule on Accrued Interest

COMPOUND INTEREST
General Rule: Accrued interest (interest due
General Rule: Without prejudice to the provisions of
and unpaid) will not bear interest (CIVIL CODE,
Article 2212 of the Civil Code, unpaid interest shall
Art. 1959).
not earn interest (CIVIL CODE, Art. 1959).

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 Exceptions:
a. If there is agreement to this effect (CIVIL
CODE, Art. 1959).
Compounding Interest
An express stipulation whereby the interest
due an unpaid shall be added to the principal
obligation and resulting total amount shall
earn interest (DE LEON, supra at 52).
b. When judicially demanded under Article 2212
of the Civil Code.
Formula in Computing Interest for Loan or
Forbearance of Money:
TOTAL AMOUNT DUE = [principal + interest +
interest on interest] – partial payments made
INTEREST = principal x stipulated interest x number
of years from due date until finality of judgment
INTEREST ON INTEREST = Interest computed as
of the filing of the complaint x 6% x no. of years until
finality of judgment
Note: Total amount due as of the date of the finality
of judgment will earn an interest of 6% per annum
until fully paid (Nacar v. Gallery Frames, supra;
Bangko Sentral ng Pilipinas Monetary Board
Circular No. 799, Series of 2013).
Illustrations:
Under a written contract of loan, B obliged himself to
pay A the sum of P20,000 at the end of the year.
If no payment of interest was mentioned, then no
interest is due.
If B incurs in delay, he is liable to pay interest at the
legal rate which is 6% per annum or P1,200 from the
date of delay.
Suppose that A and B stipulated in their contract an
interest of %18 a year which is lawful. In this case,
all the requirements to entitle A to recover interest
are present. If B incurs in delay, he is liable to pay
the interest agreed upon as damages and not for the
use of the money.
B incurred in delay for one year. The indemnity for
damages shall also be the stipulated interest of %18
so that B shall be liable to pay a total of P7,200:
P3,600 as compensatory interest for the first year
and another P3,600 as indemnity for the damages
for the one year delay.
If the interest was judicially demanded six months
after B incurred in delay, the interest due (P3,600 +
P1,800 = P5,400) shall earn a legal interest of %6
from the time until payment is made.
DISCOUNTING
1 Interest is deducted in advance from the
proceeds of the principal obligation.
Illustrations:
The stipulated rate of interest is 6%. If the
principal amount loaned is P10,000, how much
is the interest?
Answer: P10,000 x 0.06 = P600
2 Instead of giving P10,000 as proceeds, only
P9,400 was given. P600 was deducted in
advance but the amount to be returned is
P10,000. What is the interest rate?
Answer: Divide the amount of interest by the
actual amount received by the borrower.
600 / 9400 = 6.38%
Should the vendee opt to purchase a subdivision
lot via the installment payment system, he is, in
effect, paying interest on the cash price, whether
the fact and rate of such interest payment are
disclosed in the contract or not (Relucio v.
Brillante-Garfin, G.R. No. 76518, July 13, 1990).
Liability for Surcharges and Penalties
The essence or rationale for the payment of interest
is separate and distinct from that of surcharges and
penalties (DE LEON, supra at 47).
A penalty stipulation is not necessarily preclusive of
interest, if there is an agreement to that effect, the
two (2) being distinct concepts which may
separately be demanded (Ibid.)
USURY
Usury may be defined as contracting for or receiving
something in excess of the amount allowed by law
for the loan or forbearance of money, goods or
chattels (Id. at 57).
Contracts and stipulations, under any cloak or
device whatever, intended to circumvent the laws
against usury shall be void. The borrower may
recover in accordance with the laws on usury (CIVIL
CODE, Art. 1957).
Pursuant to Central Bank Circular No. 905,
adopted on December 22, 1982, the Supreme Court
declared that the Usury Law is now "legally
inexistent" (Liam Law v. Olympic Sawmill Co., G.R.
No. L-30771, May 28, 1984).
However, C.B. Circular 905 did not repeal nor in
anyway amend the Usury Law but simply
suspended the latter's effectivity (Security Bank and
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Trust Company v. RTC of Makati, Branch 61, G.R.
No. 113926, October 23, 1996).
Usury is now legally non-existent. The interest
chargeable depends upon the agreement between
the lender and the borrower (Liam Law v. Olympic
Sawmill Co., supra).
Validity of Unconscionable Interest Rate in a
Loan
General Rule: Interest stipulated by the contracting
parties is valid.
Exception: If the interest is unconscionable.
The Supreme Court said that nothing in said circular
suspending the Usury Law grants lenders authority
to raise interest rates to levels which will either
enslave their borrowers or lead to a hemorrhaging of
their assets (Sps. Almeda v. CA, G.R. No. 113412,
April 17, 1996).
In Medel v. CA (G.R. No. 131622, November 27,
1998), it was ruled that while a stipulated interest of
5.5% per month on a loan is not usurious pursuant
to C.B. Circular 905, the same must be equitably
reduced for being iniquitous, unconscionable and
exorbitant. It is contrary to morals (contra bonos
mores). It was reduced to 12% per annum in
consonance with justice and fair play.
When the agreed rate is iniquitous and
unconscionable, the courts may reduce the same as
reason and equity demand (Imperial v. Jaucian,
G.R. No. 149004, April 14, 2004). The interest may
also be reduced if the principal obligation has been
partially performed.
Recovery of Unstipulated Interest
If paid by mistake, the debtor may recover as in the
case of solutio indebiti or undue payment (CIVIL
CODE, Art. 1960).
Note: If voluntarily paid, there would be no recovery
as in the case of natural obligations (CIVIL CODE,
Art. 1423).
Escalation Clause must have de-escalation
clause
Escalation clauses refer to stipulations allowing an
increase in the interest rate agreed upon by the
contracting parties (Juico v. China Banking Corp.,
G.R. No. 187678, April 10, 2013).
De-escalation clause is a stipulation that the rate of
interest agreed upon shall be reduced in the event
that the maximum rate of interest is reduced by law
or by the Monetary Board (DE LEON, supra at 95-
96).
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The presence of escalation clause without the
corresponding de-escalation clause in the event of a
reduction of interest as ordered by law makes the
clause one-sided as to make it unreasonable. Any
increase in the interest rate pursuant to an
escalation clause must be the result of an
agreement between the two parties. Increases
unilaterally imposed by a bank are in violation of the
principle of mutuality of contracts (PNB v. CA, G.R.
No. 109563, July 9, 1996; Equitable PCI Bank v. Ng
Sheung Ngor, G.R. No. 171545, December 19,
2007).
D EPOSIT
( A RTS . 1962 – 2009)
CONTRACT OF DEPOSIT
A contract constituted from the moment a person
receives a thing belonging to another, with the
obligation of safely keeping it and of returning the
same (CIVIL CODE, Art. 1962).
Principal Purpose: SAFEKEEPING
If „safekeeping‟ is not the principal purpose it may
be:
1. Commodatum;
2. Lease; or
3. Agency (CIVIL CODE, Art. 1962).
Characteristics: (RUB)
1. Real contract – perfected by the delivery of the
subject matter (CIVIL CODE, Art. 1316).
An agreement to constitute a deposit is binding,
but the deposit itself is not perfected until the
delivery of the thing (CIVIL CODE, Art. 1963).
Where there has been no delivery, there is
merely an agreement to deposit, which however
is binding and enforceable on the parties. Such
agreement is consensual (DE LEON, supra at
112).
2. Unilateral – when gratuitous because only the
depositary has an obligation.
3. Bilateral – if with compensation because it gives
rise to obligations on the part of both the
depositary and depositor (DE LEON, supra at
110).
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 Deposit v. Mutuum Deposit v. Sale and Barter
Deposit Mutuum Deposit Sale and Barter
As to Purpose As to Transfer of Ownership
For safekeeping or Ownership is not Ownership is
Consumption. transferred. transferred upon
custody.
delivery.
As to Subject Matter
As to Nature
Movable/corporeal Real Consensual
things only in case of As to Consideration
extrajudicial deposit. Money or fungible Generally gratuitous Always onerous
things.
Any property in case Kinds of Deposit: (CIVIL CODE, Art.1964)
of judicial deposit. 1. Judicial or Sequestration – takes place when
As to Relationship an attachment or seizure of property in litigation
Depositor and is ordered (CIVIL CODE, Art. 2005-2008)
Lender and borrower.
depositary. 2. Extra-judicial
As to Compensation a. Voluntary – delivery is made by the will of the
Generally gratuitous depositor or by two or more persons each of
(except by mutual whom believes himself entitled to the thing
May be gratuitous, or deposited (CIVIL CODE, Arts. 1968 to 1995).
agreement or
with a stipulation to The depositor has complete freedom in
depositary is
pay interest. choosing the depositary (DE LEON, supra at
engaged in storing
goods). 112).
b. Necessary – made in compliance with:
As to Time of Return
i. A legal obligation;
Depositor can Period must be ii. On occasion of any calamity;
demand return respected by the iii. By travelers in hotels and inns; or
anytime. lender. iv. By travelers with common carriers.
(DE LEON, supra at 111).
Note: There is a lack of free choice in the
Deposit v. Commodatum depositor (Id. at 115).
Deposit Commodatum
As to Purpose Judicial v. Extra-judicial Deposit
Purpose is the Judicial Extra-Judicial
transfer of the use. As to Creation
Purpose is
Will of the parties or
safekeeping. Will of the court.
contract.
As to Purpose
As to Time of Return Insures the right of a
Custody and
The borrower can use party to property or to
safekeeping of the
the thing for the period recover in case of
thing deposited.
stipulated, and can be favorable judgment.
The depositary can As to Subject Matter
required to return only
always be required to Movables only (CIVIL
in case of urgent need
return the thing at any May cover movable CODE, Art.1966)
or when the bailee
time. as well as immovable
has committed any of
the acts of ingratitude property (DE LEON, Reason: Object is
under Art. 765. supra at 114). safekeeping. The
possibility that the
As to Subject Matter
Reason: The purpose thing may disappear
Movable / corporeal of the deposit is to or may be lost or
things only in case of protect the rights of stolen is not present in
Both movable and
extrajudicial deposit. parties to a suit. real property.
immovable may be
the object.
Any property in case As to Cause
of judicial deposit. Always onerous. Generally gratuitous.
As to Compensation As to Time of Return
Essentially and Upon order of the
May be gratuitous. Upon demand of
always gratuitous. court or when litigation
depositor.
is ended.

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 As to In whose behalf it is held
Person who has a
Depositor
right
(DE LEON, supra at 165)
General Rule: A deposit is a gratuitous contract
(CIVIL CODE, Art.1965).
Exceptions: (SES)
1. When there is a Stipulation;
2. Depositary is Engaged in business of storing
goods; and
3. Property is Saved from destruction without
knowledge of the owner (CIVIL CODE, Art.
2169).
Note: When two or more persons, each of whom
believes himself to be entitled to the thing deposited
with a third person, the depositary shall deliver it to
the person to whom it belongs. The remedy of the
depositary is to file an action for interpleader
(RULES OF COURT, Rule 62, Sec. 1).
Note: The depositor need not be the owner of the
thing deposited because the purpose of the contract
is safekeeping and not transfer of ownership. The
depositary cannot dispute the title of the depositor
(CIVIL CODE, Art. 1984, Par. 1). The depositary is
estopped (CIVIL CODE, Art. 1436).
A contract of deposit may be made orally or in
writing (CIVIL CODE, Art. 1969).
Reason: No written form is required because the
contract is real, and thus, the delivery itself
constitutes performance which will evidence the
perfection of the contract.
Effects of The Incapacity of the Depositary or
Depositor:
1. If the depositary is capacitated, he is subject
to all the obligations of a depositary whether the
depositor is capacitated or not (CIVIL CODE,
Art. 1970).
Note: Under the law, “persons who are capable
cannot allege the incapacity of those with whom
they contracted” (CIVIL CODE, Art. 1397).
2. If the depositary is incapacitated, he does not
incur the obligation of a depositary. However, he
is liable to:
a. Return the thing deposited while still in his
possession; or
b. Pay the depositor the amount by which he
may have benefited himself with the thing or
its price subject to the right of any third person
who acquired the thing in good faith, in which
case the depositor may only bring an action
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against him for its recovery (CIVIL CODE, Art.
1971).
Note: A third person is considered to have acted in
bad faith if he has actual knowledge of the
incapacity of the depositary and if he has knowledge
that the thing is subject to the contract of deposit.
OBLIGATIONS OF A DEPOSITARY
Obligation 1: To keep the thing safely (CIVIL
CODE, Art. 1972).
Rules:
He is liable if the loss occurs through his fault or
negligence (CIVIL CODE, Art. 2207), even if the
thing is insured (CIVIL CODE, Art. 1170).
The loss of the thing while in his possession
ordinarily raises the presumption of fault on his part
(CIVIL CODE, Art. 1265).
Degree of Care:
If the contract does not state the diligence which is
to be observed in the performance, that of a good
father of a family shall be required (CIVIL CODE,
Art. 1972, 1173, Par 2.)
Reasons:
1. It is an essential requisite of the judicial relation
which involves the depositor‟s confidence in
good faith and trustworthiness.
2. Presumption that the depositor, in choosing the
depositary, took into account the diligence which
the depositary is accustomed with respect to his
own property (DE LEON, at 120).
Exceptions:
The required degree of care is extraordinary
diligence when:
1. It is the depositary who voluntarily offered to
keep the thing;
2. The deposit is compensated; or
3. The deposit produces benefit to the depositary
(5 TOLENTINO, supra at 460).
Obligation 2: To return the thing (CIVIL CODE,
Art. 1972).
Person to Whom the Thing Must Be Returned:
1. Depositor, his heirs and successors, or the
person who may have been designated in the
contract (CIVIL CODE, Art. 1972);
Note: If there are two or more persons each
claiming to be entitled to a thing, the depositary
can file an action to compel the depositors to
interplead among themselves (RULES OF
COURT, Rule 62, Sec. 1).
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2. Guardian or administrator of the person who
made the deposit if the latter is incapacitated at
the time of deposit or the latter himself should he
acquire capacity (CIVIL CODE, Art. 1970);
3. Legal representative of the depositor should the
latter subsequently lose his capacity during the
deposit (CIVIL CODE, Art. 1986).
Time of Return:
General Rule: Upon demand even though a
specified period or time for such return may have
been fixed (CIVIL CODE, Art.1988).
Reason: The period is for the benefit of the
depositor, but may be validly waived by him
(5 PARAS, supra at 947).
Exceptions:
1. It cannot be returned upon demand when the
thing is judicially attached while in the
depositary‟s possession (CIVIL CODE, Art.
1988, Par. 2);
Reason: The property will be subject to judicial
orders.
2. The deposit cannot be returned upon demand if
the depositary has been notified of the
opposition of a third person to the return or
removal of the thing deposited. The depositor
may claim to be the owner (5 PARAS, supra at
947); and
3. If deposit is gratuitous, the depositary may return
the thing deposited notwithstanding that a period
has been fixed for the deposit if justifiable
reasons exist for its return. If the depositor
refuses to receive it, the depositary may secure
its consignation from the court (CIVIL CODE,
Art. 1989).
If the deposit is for a valuable consideration,
period must be followed even if the depositary
suffers inconvenience as a consequence (CIVIL
CODE, Art 1989).
Note: In cases under (1) and (2), the depositary
must immediately inform the depositor of the
attachment and opposition (CIVIL CODE, Art.
1988, Par. 2).
What to Return:
1. The thing deposited with all its products,
accessories, and accessions (CIVIL CODE, Art.
1983, Par. 1);
2. If by force majeure or government order, the
depositary loses the thing, and receives money
or another thing in its place, he shall deliver the
sum or other thing to the depositor (CIVIL
CODE, Art. 1990).
Where to Return:
1. If there is a stipulation, at the place agreed upon
by the parties but the depositor bears the
expenses for transportation.
2. If there is no stipulation, at the place where the
thing deposited might be even if it should not be
the same place where the deposit was made
provided there was no malice on the part of the
depositary (CIVIL CODE, Art. 1987).
Obligation 3: Not to deposit the thing with a third
person unless authorized by express stipulation
(CIVIL CODE, Art. 1973).
Reason: Deposit is founded on trust and confidence
(DE LEON, supra at 124).
The depositary is liable for the loss under the
following instances:
1. He transfers the deposit with a third person
without authority, although there is no
negligence on his part and the third person;
2. He deposits the thing with a third person who is
manifestly careless or unfit, although authorized,
even in the absence of negligence; and
3. The thing is lost through the negligence of his
employees whether the latter are manifestly
careless or not (CIVIL CODE, Art. 1973).
Exemption from Liability: The depositary is not
responsible in case the thing is lost without
negligence of the third person with whom he was
allowed to deposit the thing if such third person is
not “manifestly careless or unfit” (DE LEON, supra
at 124)
Note: The depositary is responsible for the loss
through the fault of his employees under the
principle of respondeat superior.
Obligation 4: To change the way of the deposit if
under the circumstances, the depositary may
reasonably presume that the depositor would
consent to the change if he knew of the facts of
the situation, provided, that the former notifies
the depositor thereof and wait for his decision,
unless delay would cause danger (CIVIL CODE,
Art. 1974).
Obligation 5: If the thing deposited should earn
interest:
1. To collect interest and the capital itself as
they fall due; and
2. To take steps to preserve its value and rights
with regard to it (CIVIL CODE, Art. 1975).
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If a promissory note has been dishonored by non-
payment, the depository must give notice of
dishonor to the indorsers so that the latter will not be
discharged from liability. (DE LEON, supra at 125)
Article 1975 of the Civil Code cannot apply to a
depositary of certificates, bonds, securities or
instruments, which earn interest if such documents
are kept in a rented safety deposit box (CA Agro
Industrial Development Corp. v. CA, G.R. No.
90027, March 3, 1993).
. 2. If the thing deposited is money or other
A contract for the rent of safety deposit boxes is a
special kind of deposit. It is not to be strictly
governed by the provisions on deposit. It is a
contract of bailment for hire and mutual benefit. The
relation between the bank and its customer is that of
a bailor and bailee. It cannot also be characterized
as an ordinary contract of lease because full and
absolute control of the safety deposit boxes was not
given to the joint renters.
Obligation 6: Not to commingle things of the
same kind and quality deposited if so stipulated
(CIVIL CODE, Art. 1976).
Exception: Depositary can only commingle if the
articles are:
1. Same kind and quality; and
2. There is no contrary stipulation.
If commingling is allowed, each depositor shall be
entitled to each portion of the entire mass as the
amount deposited by him bears to the whole.
If the articles deposited, belonging to different
depositors, are not of the same kind and quality, it is
the duty of the depositary to keep them separate or
at least identifiable (DE LEON, supra at 132).
Obligation 7: Not to make use of the thing
deposited unless authorized (CIVIL CODE, Art.
1977).
General Rule: Deposit is not for the use but for the
safekeeping of the subject matter. Unauthorized use
by the depositary would make him liable for
damages (DE LEON, supra at 133).
Exceptions:
1. Even without the express permission of the
depositor when the preservation of the thing
deposited requires its use; or
Note: It must be used only for that purpose.
2. When expressly permitted by the depositor.
The permission to use is not presumed except when
such use is necessary for the preservation of the
thing deposited and the burden is on the depositary
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to prove that permission has been given (CIVIL
CODE, Art. 1978).
Effect If Permission To Use Is Given:
1. If the thing deposited is non-consumable:
The contract loses the character of a deposit
and acquires that of a commodatum.
Exception: if safekeeping is still the principal
purpose of the contract.
consumables:
The permission to use it will result in its
consumption and converts the contract into a
simple loan or mutuum (DE LEON, supra at
133).
Prescription of Demand to Return
Things received on deposit do not prescribe, for the
depositary cannot claim that ownership of the thing
deposited was transferred to him, but simply the
custody thereof. The possession of the depositary
is not adverse to that of the depositor (Delgado v.
Bonnevie, G.R. No. 7097, October 23, 1912).
Obligation 8: To be liable for loss through
fortuitous event: (SUDA)
1. If Stipulated;
2. If he Uses the thing without the depositor's
permission;
3. If he Delays its return; and
4. If he Allows others to use it, even though he
himself may have been authorized to use the
same (CIVIL CODE, Art. 1979).
Obligation 9: Liability when the thing deposited
is delivered closed and sealed
1. To return the thing deposited in the same
condition;
2. To pay for damages should the seal or lock be
broken through his fault, which is presumed
unless proven otherwise; and
3. To keep the secret of the deposit when the seal
or lock is broken with or without his fault (CIVIL
CODE, Art. 1981).
Reason: Without the rule, irresponsible depositaries
may violate their trusts with impunity.
The depositary is authorized to open the thing
deposited, which is closed and sealed, when there
is:
a. Presumed authority, such as if the key has
been delivered to him; or
b. Necessity to do so as when the instructions
of the depositor as regards the deposit cannot
be executed without opening the box or
receptacle (CIVIL CODE, Art. 1982).
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Obligation 10: Obligation to return products, A bank can compensate or set off the deposit in its
accessories, and accessions (CIVIL CODE, Art hands for the payment of any indebtedness to it on
1983). the part of the depositor (Gullas v. Philippine
National Bank, G.R. No. L-43191, November 13,
Reason: The depositor is the owner or at least 1935). In true deposit, such compensation or set-off
represents the owner of the thing deposited. The is not allowed (CIVIL CODE, Art. 1287).
products, accessions and accessories are
consequences of ownership (DE LEON, supra at Irregular Deposit v. Mutuum
135). Irregular Deposit Mutuum
As to Demand by the Depositor
Obligation 11: To pay interest on sums The lender cannot
The consumable thing
converted to personal use from the day of demand restitution until
deposited may be
conversion if the deposit consists of money the time for payment,
demanded at will by the
(CIVIL CODE, Art. 1983 and 1896). as provided in the
depositor.
contract, has arisen.
Reason: If what has been deposited is money, the As to Accrual of Benefit
depositary has no right to make use of it. Therefore, Essential cause for the
The only benefit is that
he is not liable to pay interest. transaction is the
which accrues to the
necessity of the
depositor.
However, if the depositary be in delay or has used borrower.
the money without permission, he shall be liable for As to Preference of Credit
interest as indemnity. The depositary owes interest The irregular depositor
on the sums he has applied to his own use from the Common creditors
has a preference over
day on which he did so, and those which he still enjoy no preference in
other creditors with
owes after the extinguishment of the deposit (DE the distribution of the
respect to the thing
LEON, supra at 145). debtor‟s property.
deposited.
(DE LEON, supra at 134-135)
Note: Fixed, savings, and current deposits of money
in banks and similar institutions shall be governed Obligation 12: To advise the true owner that a
by the provisions concerning simple loan (CIVIL deposit has been made should he discover that
CODE, Art. 1980). the thing deposited was stolen from the owner
(CIVIL CODE, Art. 1984).
Bank deposits, which are in the nature of a simple
loan or mutuum, must be paid upon demand by the
However, as a general rule, the depositary cannot
depositor (Metropolitan Bank & Trust Company v.
demand that the depositor prove his ownership of
Rosales, G.R. No. 183204, January 13, 2014). the thing deposited (CIVIL CODE, Art. 1984, Par. 1).
Irregular Deposit – if safekeeping is still the Note: If the owner, despite such information, does
principal purpose of the contract although there is a not claim it within the period of one (1) month, the
permission to use the consumable thing (DE LEON,
depositary shall be relieved from all responsibility by
supra at 133). returning the same to the depositor (CIVIL CODE,
Art. 1984, Par. 3).
Bank deposits are in the nature of irregular deposits.
These are really loans because they earn interest. If the depositary has reasonable grounds to believe
They are governed by the law on loans (Bank of the
that the thing has not been lawfully acquired by the
Philippine Islands v. CA, G.R. No. 104612, May 10, depositor, the former may return the same (CIVIL
1994). CODE, Art. 1984, Par. 4).
While the bank has the obligation to return the Rule When There Are Two Or More Depositors:
amount deposited, it has however, no obligation to
Divisibility of Obligation of
return or deliver the same money that was deposited
Thing Two or More Effect
(Guingona, Jr. v. City Fiscal of Manila, G.R. No. L-
Deposited Depositors
60033, April 4, 1984).
Each one can
Divisible Not solidary demand only
The relation between a depositor and a bank is that
his share.
of a creditor and a debtor. The depositor (creditor)
The
lends the bank (debtor) money and the bank agrees
Regardless of Solidary depositary
to pay the depositor on demand (DE LEON, at 139)
divisibility/ can return the
.
Indivisibility thing to any of
the

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 depositors. The law refers to necessary expenses. Useful
expenses or those for pure luxury or mere
Except: pleasure are not covered (DE LEON, supra at
When there 152).
has been a
demand Note: If the deposit is for a valuable
judicial or consideration, expenses for preservation are
extrajudicial, borne by the depositary unless there is a
for its return contrary stipulation.
has been
made by one 2. To pay for losses incurred by the depositary
of them, due to the character of the thing deposited
payment (CIVIL CODE, Art. 1993).
should be
made to him General Rule: The depositor shall reimburse the
(CIVIL CODE, depositary for any loss arising from the character
Art. 1214) of the thing deposited.
The same
rule when the Exceptions:
obligation is a. At the time of the deposit, the depositor was
Solidary/not not aware of the dangerous character of the
Indivisible solidary,
solidary thing;
regardless of
divisibility. b. Depositor was not expected to know the
dangerous character of the thing;
Note: If there is a stipulation that the thing should c. Depositor notified the depositary of the same;
be returned to one of the depositors, the depositary and
shall return it only to the person designated (CIVIL d. The depositary was aware of it without advice
CODE, Art. 1985, Par. 2). from the depositor.

Depositary’s Right of Retention EXTINGUISHMENT OF VOLUNTARY DEPOSIT

The depositary may retain the thing in pledge until The causes are similar to that of the extinguishment
full payment of what may be due him by reason of of obligations in Art. 1231 of the Civil Code:
the deposit (CIVIL CODE, Art. 1994). This article (PRC-RAP-MNLF)
gives an example of pledge created by operation of 1. Payment or Performance;
law. 2. Remission or Condonation;
3. Compensation;
Rule When An Heir Of The Depositor Sold The 4. Rescission;
Thing Deposited 5. Annulment;
The depositor‟s heir who in good faith may have 6. Prescription;
sold the thing which he did not know was deposited, 7. Merger or Confusion;
shall only be bound to return the price he may have 8. Novation;
received or to assign his right of action against the 9. Loss of the thing due; and
buyer in case the price has not been paid to him 10. Fulfillment of a resolutory condition.
(CIVIL CODE, Art. 1991).
A deposit is also extinguished:
Reason: Equity 1. Upon the loss or destruction of the thing
If the heir acts in bad faith, he is liable for damages. deposited; and
The sale or appropriation of the thing deposited 2. In case of gratuitous deposit, upon the death of
constitutes estafa (DE LEON, supra at 142). either the depositor or the depositary (CIVIL
CODE, Art. 1995).
Note: The law meant „depositary‟s,‟ as shown in
Article 1178 of the old Civil Code (5 TOLENTINO, Deposit for Compensation
supra at 468). A deposit for compensation is not extinguished by
the death of either party unless the deposit is
OBLIGATIONS OF THE DEPOSITOR terminated by the heirs of the depositor. This is
1. To pay expenses for preservation if the different from the rule in gratuitous deposits which
deposit is gratuitous (CIVIL CODE, Art. 1992) are personal in nature (5 PARAS, supra at 953).
(contemplates ordinary and extraordinary
necessary expenses).

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NECESSARY DEPOSIT
A deposit is necessary when:
1. It is made in compliance with a legal obligation.
Examples:
a. The judicial deposit of a thing the possession
of which is being disputed in a litigation by two
or more persons (CIVIL CODE, Art. 538).
b. The deposit with a bank or public institution of
public bonds or instruments of credit payable
to order or bearer given in usufruct when the
usufructuary does not give proper security for
their conservation (CIVIL CODE, Art. 586).
c. The deposit of a thing pledged when the
creditor uses the same without the authority of
the owner or misuses it in any other way
(CIVIL CODE, Art. 2104).
d. Those required in suits as provided in the
Rules of Court; and
e. Those constituted to guarantee contracts with
the government (the deposit arises from an
obligation of public or administrative
character) (DE LEON, supra at 156).
Note: A deposit made in compliance with law is
governed by the provisions of such law and, in
default thereof, by the rules on voluntary deposit
(CIVIL CODE, Art. 1997, Par. 1).
2. It is made on the occasion of any calamity such
as fire, storm, flood, pillage, shipwreck or other
similar event. This is referred to as involuntary
bailment or involuntary deposit. Another name
is deposito miserable (DE LEON, supra at 157).
Note: There must be a causal relation between the
calamity and the constitution of the deposit (Id.).
The deposit made on any of the said calamities shall
be regulated by the provisions concerning voluntary
deposit and by Article 2168, i.e., when during a
calamity, property is saved from destruction by
another person without the knowledge of the owner,
the latter is bound to pay the former just
compensation (CIVIL CODE, Art. 1997, Par. 2).
Other Kinds of Necessary Deposits:
1. Deposit by Travelers in Hotels and Inns:
The keepers of hotels or inns shall be
responsible as depositaries for the deposit of
effects made by travelers.
Elements:
a. Notice was given to them or to their
employees of the effects brought by the
guests; and
b. Guests take the precautions which said hotel-
keepers or their substitutes advised relative to
the care and vigilance of their effects (CIVIL
CODE, Art. 1998).
This also applies to the passenger‟s baggage
which is in his personal custody (CIVIL CODE, Art.
1754).
Travelers refer to transients and not to boarders.
Non-transients are governed by the rules on lease
(DE LEON, supra at 158).
Extent of liability: not limited to baggage or
articles ordinarily used by travelers. It also extends
to vehicles, animals and articles which have been
introduced or placed in the annexes of the hotel
(CIVIL CODE, Art. 1999).
A hotel-keeper is liable in the following
instances:
When the loss or injury is caused:
a. By his servants or employees as well as by
strangers provided that the notice has been
given and proper precautions taken; and
b. By the act of a thief or robber done without the
use of arms and irresistible force, for in this
case, the hotel-keeper is apparently negligent
(CIVIL CODE, Arts. 2000 and 2001).
A hotel-keeper is NOT liable in the following
instances:
When the loss or injury is caused by:
a. Force majeure, theft by a stranger with the
use of arms or irresistible force (CIVIL CODE,
Art. 2000), unless he is guilty of fault or
negligence in failing to provide against the
loss or injury from his cause;
b. The acts of guests, his family, servants or
visitors; and
c. The character of the things (e.g. it is
consumable.) brought into the hotel (CIVIL
CODE, Art. 2002)
2. Deposits Made With Common Carriers:
Rule in the occurrence of theft or robbery
The act of a thief or robber, who has entered the
hotel is not deemed force majeure, unless it is
done with the use of arms or through irresistible
force (CIVIL CODE, Art. 2001).
Reason: The innkeeper is bound to keep his
house safe from the intrusion of thieves and if
they are allowed to gain access to the house,
without the use of such force as will show its
marks upon the house, it is fairly presumable
that the innkeeper is at fault (5 PARAS, supra at
959).
Exemption or Diminution of Liability
The hotel-keeper cannot free himself from the
responsibility by posting notices to the effect that
he is not liable for the articles brought by the
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 guest. Any stipulation to such effect shall be void
(CIVIL CODE, Art. 2003).
Reason: Public policy. The hotel business is
imbued with public interest (YHT Realty Corp. v.
CA, G.R. No. 126780, February 17, 2005).
Notice is necessary only for suing civil liability
but not in criminal liability.
Note: It is not necessary in order to hold an inn-
keeper liable that the effects of the guests be
actually delivered to him or his employees. It is
enough that they are within the inn (De Los
Santos v. Tan Khey, 58 O.G. No. 45-53; 29 Am.
Jur. 89-90).
Right of Retention by Hotel-keepers:
The hotel-keeper has a right to retain the things
brought into the hotel by the guest, as a security
for credits on account of lodging, and supplies
usually furnished to hotel guests (CIVIL CODE,
Art. 2004).
Reason: The right is given to hotel-keepers to
compensate them for the liabilities imposed
upon them by law (DE LEON, supra at 161).
Note: A safety deposit box in a hotel is a
contract of necessary deposit. The existing
relationship is one of depositor and depositary
(YHT Realty Corp. vs CA, supra.).
JUDICIAL DEPOSIT
Judicial deposit or sequestration takes place when
an attachment or seizure of property in litigation is
ordered (CIVIL CODE, Art. 2005).
Movable as well as immovable property may be the
object of sequestration (CIVIL CODE, Art. 2006).
The depositary of property or objects sequestrated
cannot be relieved of his responsibility until the
controversy which gave rise thereto has come to an
end, unless the court so orders (CIVIL CODE, Art.
2007).
The depositary of property sequestrated is bound to
comply, with respect to the same, with all the
obligations of a good father of a family (CIVIL
CODE, Art. 2008).
As to matters not provided in the Civil Code, judicial
sequestration shall be governed by the Rules of
Court.
Nature and Purpose of Judicial Deposit
The deposit is judicial because it is auxiliary to a
case pending in court.
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The purpose is to maintain the status quo during the
pendency of the litigation or to insure the right of the
parties to the property in case of favorable judgment
(DE LEON, supra at 164).
Custodia Legis
This occurs when a thing is shown to have been and
is subjected to the official custody of a judicial or
executive officer in pursuance of his execution of a
legal writ (Ibid.)
G UARANTY
( A RTS . 2047-2084)
CONTRACT OF GUARANTY
A contract whereby a person called the guarantor
binds himself to the creditor to fulfill the obligation of
the principal debtor in case the latter should fail to
do so (CIVIL CODE, Art. 2047, Par. 1).
Classifications of Guaranty:
1. In the Broad Sense:
a. Personal – the guaranty is the credit given by
the guarantor; or
b. Real – the guaranty is the property, movable
or immovable
If constituted on real property, it may be:
i. Real Mortgage; or
ii. Antichresis.
If constituted on personal property, it may be:
i. Pledge; or
ii. Chattel Mortgage
2. As to its Origin (CIVIL CODE, Art. 2051, Par. 1)
a. Conventional – agreed upon by the parties;
b. Legal – imposed by virtue of a provision of
law; or
c. Judicial – required by a court to guarantee the
eventual right of one of the parties in a case.
3. As to Consideration (CIVIL CODE, Art. 2048);
a. Gratuitous – the guarantor does not receive
anything for acting as such; or
b. Onerous – the guarantor receives valuable
consideration.
4. As to the Person Guaranteed (CIVIL CODE,
Art. 2051, Par. 2)
a. Single – constituted solely to guarantee or
secure performance by the debtor of the
principal obligation; or
b. Double or sub-guaranty – constituted to
secure the fulfillment by the guarantor of a
prior guaranty.
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5. As to Scope and Extent
a. Definite – limited to the principal obligation
only, or to a specific portion thereof (CIVIL
CODE, Art. 2055, Par. 2)
b. Indefinite or simple – includes not only the
principal obligation but also all its accessories
including judicial costs (CIVIL CODE, Art.
2055, par. 2);
c. Specific – covers a particular obligation ; or
d. Continuing – covers subsequent or additional
obligations. (CIVIL CODE, Art. 2053)
CONTRACT OF SURETYSHIP
A contract whereby one person engages to be
answerable to a third person, for the debt, default or
miscarriage of the principal or obligor (Garcia, Jr. v.
CA, G.R. No. 80201, November 20, 1990; Visayan
Surety & Insurance Corp. v. CA, G.R. No. 127261,
September 7, 2001).
The contract of suretyship must be in writing to be
enforceable (CIVIL CODE, Art. 1403, par. 2(b)).
Note: Suretyship involves two (2) relationships:
1. The principal relationship between the obligee
and the obligor; and
2. The accessory relationship between the principal
debtor (obligor) and the surety (DE LEON, supra
at 229).
Effect when a Party Binds Himself Solidarily
If a person binds himself solidarily with the principal
debtor, the contract is called suretyship and the
guarantor is called a surety.
In a solidary obligation, a solidary debtor is himself a
principal debtor. Hence, a solidary debtor cannot be
considered a guarantor of his co-debtor. Whenever
applicable, the provisions on guaranty (CIVIL
CODE, Arts. 2047 to 2048) shall also apply to
suretyship.
However, it is also possible for a guarantor to bind
himself solidarily with the principal debtor without
affecting the nature of the contract (DE LEON, supra
at 231).
Thus, if the party does not intend to convert himself
into a principal debtor but merely constitute himself
as a guarantor although binding himself solidarily
with him, action may be brought against him outright
by reason of the said solidarity but he retains his
character as a guarantor and all the rights inherent
in a guarantor by reason of payment by him (Ibid.)
Nature of Suretyship’s Undertaking:
1. Liability is contractual and accessory but direct;
He directly, primarily and equally binds himself
with the principal as original promisor, although
he possesses no direct or personal interest over
the latter‟s obligation, nor does he receive any
benefits therefrom (Philippine National Bank v.
CA, G.R. No. 33174, July 4, 1991; Lim v.
Security Bank Corporation, G.R. No. 188539,
March 12, 2014).
2. Liability is limited by terms of contract;
A contract of suretyship is not presumed; it
cannot extend to more than what is stipulated
(Visayan Surety & Insurance Corporation v. CA,
supra.)).
Creditors, however, may recover from the surety
as part of their damages, interest at the legal
rate, even if the surety would thereby become
liable to pay more than the amount stipulated.
Reason: NOT by reason of contract, but by
reason of its failure to pay when demanded, and
for having compelled the plaintiff to resort to the
courts to obtain payment (5 TOLENTINO, supra at
506).
A surety, however, is not released by a change in
the contract which does not have the effect of
making its obligation more onerous (Intra-Strata
Assurance Corp. vs Republic of the Philippines,
G.R. No. 156571, July 9, 2008).
3. Liability arises only if principal debtor is held
liable;
If the principal debtor and surety are held liable,
their liability to pay the creditor would be solidary
but the nature of the surety‟s undertaking is such
that it does not incur liability unless and until the
principal debtor is held liable (Government of the
Philippines v. Tizon, G.R. No. L-22108, August
30, 1967).
Note: The creditor may sue the principal debtor
and any of the sureties separately or together
(NASSCO v. Torrento, G.R. No. L-21109, June
26, 1967).
In the absence of collusion, the surety is bound
by a judgment against the principal debtor even
though he was not a party to the proceedings.
The nature of its undertaking makes it privy to all
proceedings against its principal (Finman
General Assurance Corp. v. Salik, G.R. No.
84084, August 20, 1990).
4. Surety is not entitled to the benefit of exhaustion;
Reason: Surety assumes a solidary liability for
the fulfillment of the principal obligation (Towers
Assurance Corp. v. Ororama Supermart, G.R.
No. L-45848, November 9,1977).
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5. Undertaking is to the creditor and not to debtor;
Unless otherwise expressly provided, the surety
makes no covenant or agreement with the
principal that it will fulfill the obligation
guaranteed for the benefit of the principal (DE
LEON, supra at 236).
6. Surety is not entitled to notice of principal‟s
default;
Reason: The surety is bound to take notice of
the principal‟s default and to perform the
obligation (Ibid.)
7. Prior demand by the creditor upon the principal
is not required; and
Note: As soon as the principal is in default, the
surety is likewise in default (Id. at 237).
8. Surety is not exonerated by neglect of creditor to
sue principal. (Ibid.)
Reason: There is nothing to prevent the creditor
from proceeding against the principal at any time
(Palmares v. CA, G.R. No. 126490, March 31,
1998).
Characteristics of Guaranty and Suretyship:
1. Accessory – it cannot exist by itself. There must
be a valid principal obligation (CIVIL CODE, Art.
2052).
If the principal obligation is void, the guaranty is
also void (DE LEON, supra at 249).
The consideration of the guaranty is the same as
the consideration of the principal obligation.
Note: Guaranty may be constituted to guarantee
the performance of a voidable or unenforceable
contract. It may also guarantee a natural
obligation (CIVIL CODE, Art. 2052). However, it
must be considered binding only if the guarantor
knew the defective character of the principal
obligation (5 TOLENTINO, supra at 504).
2. Subsidiary and conditional – it takes effect only
when the principal debtor fails in his obligation,
subject to a limitation. (DE LEON, supra at 227)
Note: The guarantor cannot bind himself for
more than the principal debtor. Even if he does,
his liability shall be reduced to the limits of that
of the debtor. But a guarantor may bind himself
for less than that of the principal debtor (CIVIL
CODE, Art. 2054).
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Security of a Conditional Obligation
A conditional obligation may also be secured
(Magdalena Estates Inc. v. Rodriguez, G.R. No. L-
18411, December 17, 1966). This is because it is
valid and binding just like a pure one (DE LEON,
supra at 255).
If the principal obligation is subject to a
suspensive condition, the guarantor is liable only
after the fulfillment of the condition. If it is subject
to a resolutory condition, the happening of the
condition extinguishes both the principal obligation
and guaranty (Ibid.).
3. Unilateral because:
a. It only gives rise to a duty 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 (Id. at 227); and
b. It may be entered into even without the
intervention of the principal debtor, in which
case Arts. 1236 and 1237 shall apply (CIVIL
CODE, Art. 2050).
4. Nominate;
5. Consensual;
6. It is a contract between the guarantor/surety and
creditor;
Note: The contract exists for the benefit of the
creditor and not for the benefit of the principal
debtor who is not a party to the contract of
guaranty.
The creditor may proceed against the guarantor
although he has no right of action against the
principal debtor.
7. Falls under the Statute of Frauds;
It is not presumed and must be in writing to be
enforceable (CIVIL CODE, Art. 1403, (2) [b]).
Reason: it is “a special promise to answer for
the debt, default or miscarriage of another.”
8. It requires that the guarantor must be a person
distinct from the debtor because a person
cannot be the personal guarantor of himself (DE
LEON, supra at 227); and
Exception: Real guaranty like pledge (CIVIL
CODE, Art. 2093) and mortgage (CIVIL CODE,
Art. 2124).
9. Gratuitous (CIVIL CODE, Art. 2048)
Exception: If there is a contrary stipulation.
3
Construction of a Guaranty Contract Guaranty Suretyship
General Rule: Strictly interpreted against the As to What is Insured
creditor and in favor of the guarantor or surety. It is Insurer of solvency of
Insurer of the debt.
not to be extended beyond its terms or specified debtor.
limit (Magdalena Estates Inc. v. Rodriguez, supra). As to Availability of Excussion & Division
Guarantor can avail of
Reason: It is a special obligation (DE LEON, Credit Surety cannot avail of
the benefit of
Transactions, supra at 259). the benefit of excussion
excussion and division
and division.
in case creditor
Strictissimi Juris Rule proceeds against him.
Pertains to an accommodation surety because the As to Notice of Principal’s Default
latter acts without motive of pecuniary gain and Not bound to take
hence, should be protected against unjust pecuniary notice of the non- Held to know every
impoverishment by imposing on the principal, duties performance of his default of his principal.
akin to those of a fiduciary (Pacific Tobacco Corp. v. principal.
Lorenzana, G.R. No. L-8086, October 31,1957). As to Extinguishment of Liability
Often discharged by Not discharged by mere
Exception: In case of compensated sureties in the mere indulgence indulgence of the
determining whether or not the undertaking is the of the creditor or want creditor or by want of
act of a surety or guarantor of notice of default notice of default
(DE LEON, supra at 268). (DE LEON, supra at 237-238).

Reasons: Guaranty v. Indorsement

1. Compensated corporate sureties are business Guaranty Indorsement
associations organized to assume classified As to Purpose
risks in large numbers, for profit and on an Contract of security Primarily of transfer
impersonal basis. As to Extinguishment of Liability
2. They are secured from all possible loss by Unless the note is
adequate counterbonds or indemnity promptly presented
agreements (Ibid.) Failure in either or both for payment at
of these particulars does maturity and due
Surety Distinguished from a Solidary Debtor not generally work as an notice of dishonor
A surety is almost the same as a solidary debtor, absolute discharge of a given to the indorser
except that the latter is himself a principal debtor (5 guarantor‟s liability, but within a reasonable
PARAS, supra at 1017). is discharged only to the time, he will be
extent of the loss which discharged absolutely
Guarantor Distinguished from the Debtor he may have suffered in from all liability
While the guarantor is subsidiarily liable, the debtor consequence thereof. thereon whether or
is principally liable (Id. at 1018). not he has suffered
actual damage.
Guaranty v. Suretyship As to Whether Solvency is Warranted
Guaranty Suretyship Indorser does not
As to Liability warrant the solvency.
Liability depends on He is answerable on
Surety assumes liability Guarantor warrants the
an independent a strict compliance
as regular party to the solvency of the
agreement to pay the with the law by the
undertaking. promisor.
obligation if primary holder, whether the
debtor fails to do so. promisor is solvent or
As to Nature of Undertaking not.
Surety is primarily As to Suability as Promisor
Guarantor is liable.
Guarantor cannot be Indorser can be sued
secondarily liable; He is an original
sued as promisor. as promisor.
Collateral undertaking. promisor.
(Id. at 243)
As to Time of Payment
Guarantor binds
himself to pay if the Surety undertakes to
principal CANNOT pay if the principal
PAY. DOES NOT PAY.

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 Guaranty v. Warranty any notice, demand or any other act or deed,
Guaranty Warranty immediately become liable and shall pay “all
Similarity credit accommodations extended by the Bank to
Each is an undertaking by one party to another the Debtor, including increases, renewals, roll-
to indemnify or make good the assured against overs, extensions, restructurings, amendments
some possible default or defect, in the or novations thereof, as well as (i) all obligations
contemplation of the parties of the Debtor presently or hereafter owing to the
Distinction Bank, as appears in the accounts, books and
A guaranty is a contract A warranty is an records of the Bank; whether direct or indirect,
by which a person is undertaking that the and (ii) any and all expenses which the Bank
bound to another for the title, quality, or may incur in enforcing any of its rights, powers
fulfillment of a promise quantity of the subject and remedies under the Credit Instruments as
or engagement of a third matter of the contract defined herein below (Lim v. Security Bank
party. is what it has been Corporation, supra.).
represented to be. Note: There can be no claim against the
(Id. at 244) guarantor until the debt is liquidated (CIVIL
CODE, Art. 2053).
Absence of Consideration to Guarantor
A guaranty or surety agreement is regarded as valid Reason: A contract of guaranty is subsidiary
despite the absence of any direct consideration (DE LEON, supra at 254).
received by the guarantor or surety either from the
With such surety agreement, there would be no
principal debtor or from the creditor; a consideration
need to execute a separate surety contract or
moving to the principal alone will suffice (Id. at 245).
bond for each financing or credit accommodation
extended to the principal debtor (South City
Absence of Direct or Personal Interest of
Homes, Inc. Fortune Motors, Palawan Lumber
Guarantor
Manufacturing Corp v. BA Finance Corp, G.R.
It is never necessary that he should receive any part
135462, December 7, 2001; Lim v. Security
of benefit, if such there be, accruing to the principal
Bank Corporation, supra.).
(Willex Plastic Industries Corp v. CA, G.R.
No.103066, April 25, 1996).
Exception: Chattel mortgage. A chattel mortgage
can only cover obligations existing at the time the
Double or Sub-guaranty
mortgage is constituted and not those contracted
One constituted to guarantee the obligation of a
subsequent thereto (Belgian Catholic
guarantor.
Missionaries, Inc. v. Magallanes Press Inc., G.R.
No. 25729, November 24, 1926).
In case of insolvency of the guarantor for whom he
bound himself, the sub-guarantor is responsible to
2. Securing Unliquidated Debts
the co-guarantors in the same terms as the
“Future debts” also refer to debts existing at the
guarantor (CIVIL CODE, Art. 2075).
time of the constitution of the guaranty but the
amount thereof is unknown, and not to debts not
Guaranty of Future Debts (CIVIL CODE, Art. 2053)
yet incurred and existing at that time (DE LEON,
1. Continuing Guaranty or Suretyship
supra at 254).
Not limited to a single transaction but
contemplates a future course of dealings,
Extent of Guarantor’s Liability:
covering a series of transactions generally for an
1. Where the guaranty is definite: It is limited in
indefinite time or until revoked (DE LEON, supra
whole or in part to the principal debt, to the
at 252).
exclusion of accessories. (Id. at 270); or
2. Where guaranty is indefinite or simple: It shall
A guaranty shall be construed as continuing
comprise not only the principal obligation, but
when by the terms thereof it is evident that the
also all its accessories, including the judicial
object is to give a standing credit to the principal
costs, provided with respect to the latter, that the
debtor to be used from time to time either
guarantor shall only be liable for those costs
indefinitely or until a certain period, especially if
incurred after he has been judicially required to
the right to recall the guaranty is expressly
pay (CIVIL CODE, Art. 2055, Par 2).
reserved (Diño v. CA, G.R. No. 89775,
November 26, 1992).
Effect of Penalty Clause
The penalty may be demanded in the proper case
The terms of the Continuing Suretyship
even if its value is more than the amount of the
executed by petitioner are very clear. It states
principal debt (General Insurance & Surety Corp. v.
that petitioner, as surety, shall, without need for
Republic, G.R. No. L-13873, January 3, 1963).

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3
QUALIFICATIONS OF A GUARANTOR: (PIC)
1. Has sufficient Property to answer for the
obligation which he guarantees;
2. Possesses Integrity; and
3. Capacity to bind himself (CIVIL CODE, Arts.
2056 to 2057).
General Rule: The qualifications need only be
present at the time of the perfection of the contract.
(DE LEON, supra at 276).
Exception: When the guarantor is selected by the
principal debtor because the latter answers for the
solvency of the former. In this case the guarantor
must possess the qualifications prescribed not only
at the moment the guaranty is given but also until
the extinguishment of the debt.
Reason: A guaranty is for the benefit of the creditor
not the debtor.
Effect of Subsequent Loss of Required
Qualifications
The subsequent loss of the integrity (conviction in
first instance of a crime involving dishonesty), or
property (becomes insolvent), or supervening
incapacity of the guarantor would not operate to
exonerate the guarantor of the eventual liability he
has contracted, and the contract of guaranty
continues.
HOWEVER, the creditor may demand from another
guarantor with the proper qualifications. But he may
waive it if he chooses and hold the guarantor to his
bargain (Estate of K.H. Hemady v. Luzon Surety
Co., Inc., G.R. No. L-8437, November 28, 1956).
Note: The creditor can waive the requirements
(Estate of K.H. Hemady v. Luzon Surety Co., Inc.,
Id.).
Capacity of a Married Woman
A married woman may guarantee an obligation
without the husband‟s consent, but shall not thereby
bind the conjugal partnership, except in cases
provided by law (CIVIL CODE, Art. 2049) (i.e. when
the guaranty has redounded to the benefit of the
family).
Liability of Heirs If the Guarantor Dies
If a guarantor dies, his heirs are still liable, to the
extent of the value of the inheritance because the
obligation is not purely personal and is therefore
transmissible (5 PARAS, supra at 1034).
Acceptance of Guaranty and Notice Thereof by
the Creditor
1. When Necessary
When there is merely an offer of a guaranty, or
merely a conditional guaranty requiring an action
by the creditor before the obligation becomes
fixed.
Reason: Being secondarily liable, the guarantor
is entitled to know the nature and extent of his
liability (DE LEON, supra at 272).
2. When Unnecessary
Where the transaction is not merely an offer but
amounts to a direct or unconditional promise of
guaranty.
Exception: Notice of acceptance is made a
condition of the guaranty (Texas v. Alonso, G.R.
No. 47495, August 14, 1941).
Selection of a Guarantor
1. Required and stipulated by creditor –
substitution of guarantor may not be demanded
(CIVIL CODE, Art. 2057).
2. Selected by the principal debtor – the
principal debtor answers for the integrity,
capacity, and solvency of the guarantor selected
(DE LEON, supra at 278).
3. Personally designated by the creditor –
responsibility for the selection shall fall upon the
creditor and not on the debtor (Ibid.).
RIGHTS OF A GUARANTOR
1. Benefit of excussion (CIVIL CODE, Art. 2058);
2. Benefit of division (CIVIL CODE, Art. 2065);
3. Right to contribution of a guarantor who pays if
there is solidary liability (CIVIL CODE, Art.
2073);
4. Right of indemnity or reimbursement (CIVIL
CODE, Art. 2066);
5. Right of guarantor to proceed against debtor
before payment (CIVIL CODE, Art. 2071); and
6. Right to subrogation (CIVIL CODE, Art. 2067).
1. Benefit of Excussion
Right in which the guarantor cannot be
compelled to pay the creditor unless the latter
has exhausted all the properties of the principal
debtor, and has resorted to all of the legal
remedies against such debtor (CIVIL CODE, Art.
2058).
Reason: Character of the contract as accessory
and subsidiary.
How Exercised:
a. Demand for payment upon the guarantor only
after judgment upon the debt; and
b. Point out the available property (not in
litigation or encumbered) of the debtor within
the Philippines, sufficient to cover the amount
of the debt (CIVIL CODE, Art. 2060).
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 The creditor may, prior to exhaustion, secure a
judgment against the guarantor, who shall be
entitled however, to a deferment of the execution
of judgment against him, until after the properties
of the principal debtor shall have been exhausted,
to satisfy the latter‟s obligation (Tupaz v. CA, G.R.
No. 145578, November 18, 2005).
Effect of Failure of the Creditor to Exhaust and
Resort to All Legal Remedies: He shall suffer
the loss but only to the extent of the value of the
said property for the insolvency of the debtor
(CIVIL CODE, Art. 2061).
This is not applicable to a contract of suretyship
(CIVIL CODE, Arts. 2047 Par. 2 and 2059 Par. 2).
This cannot take place before judgment has been
obtained against the debtor (Baylon v. CA, G.R.
No. 109941, August 17, 1999).
When Guarantor is NOT Entitled to the Benefit
of Excussion: (PAIRS N’ BIPS)
a. If it may be Presumed that an execution on
the property of the principal debtor would not
result in the satisfaction of the obligation
(CIVIL CODE, Art. 2059 (5);
Note: It is not necessary, however, that the
debtor be judicially declared insolvent or
bankrupt.
b. When the debtor has Absconded, or cannot
be sued within the Philippines unless he has
left a manager or representative (CIVIL
CODE, Art. 2059 (4));
Note: The creditor is not required to go after a
debtor who is hiding or cannot be sued in our
courts, and to incur the delays and expenses
incident thereto (DE LEON, supra at 282).
c. In case of Insolvency of the debtor (CIVIL
CODE, Art. 2059 (3));
Note: It is not necessary that the debtor be
judicially declared insolvent or bankrupt, but
the insolvency or inability to pay must be
actual (DE LEON, Credit Transactions, supra
at 282).
d. The guarantor has expressly Renounced it
(CIVIL CODE, Art. 2059 (1));
Reason: the benefit of excussion is a
personal right recognized in a guarantor. Its
waiver is valid.
e. If he has bound himself Solidarily with the
debtor (CIVIL CODE Art. 2059 (2));
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Reason: By such, he renounces in the
contract itself the benefit of exhaustion.
f. When the debt is a Natural obligation or an
unenforceable obligation;
Reason: Because in these cases, the creditor
has no action against the principal debtor (5
TOLENTINO, supra at 514).
g. If he is a judicial Bondsman or sub-surety;
h. If he fails to Interpose it as a defense before
judgment is rendered against him (Saavedra
v. Price, G.R. No. L-46702, October 6, 1939);
i. If the guarantor does not set up the benefit
against the creditor upon the latter‟s demand
for Payment from him; and
Note: Demand must be actual. Joining the
guarantor in the suit against the principal
debtor is not the demand intended by law.
j. Where the pledge or mortgage has been
given by him as Special security (DE LEON,
supra at 282).
Note: The guarantor of a guarantor shall enjoy the
benefit of excussion, both with respect to the
guarantor and to the principal debtor (CIVIL
CODE, Art. 2064).
2. Benefit of Division
Should there be several guarantors of only one
debtor and for the same debt, the obligation to
answer for the same is divided among all (CIVIL
CODE, Art. 2065).
General Rule: Joint liability.
Exceptions:
a. When solidarity is expressly stipulated; and
b. If any of the circumstances enumerated in Art.
2059 of the Civil Code should take place (DE
LEON, supra at 288).
Note: The guarantor is not required to point out
the property of his co-guarantors since their
obligation with respect to each other is not
subsidiary but direct. It does not depend as to their
solvency, although if one of them should turn out
to be insolvent, his share has to be borne by the
others (Id. at 290).
3. Right to Contribution of Guarantor Who Pays
if There is a Solidary Liability
General Rule: May demand of each of the
others the share which is proportionally owing
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 from him, provided any of the following
conditions are met:
a. Payment has been made by virtue of a judicial
demand; OR
b. Principal debtor is insolvent (CIVIL CODE,
Art. 2073).
Accrual or Basis of Right: Acquired ipso jure by
virtue of said payment without any prior cession of
rights to such guarantor (DE LEON, Credit supra
at 307).
Exceptions:
a. The insolvent guarantor cannot be made to
pay. In such case, his share shall be borne by
the others including the paying guarantor in
the same joint proportion; or
b. When co-guarantors have defenses against
the one who paid the same which have
pertained to the principal debtor against the
creditor and which are not purely personal to
the debtor (CIVIL CODE, Art. 2074).
Note: A sub-guarantor, in case of the insolvency
of the guarantor for whom he bound himself, is
responsible to the co-guarantors in the same
terms as the guarantor (CIVIL CODE, Art. 2075).
Right to Contribution and Benefit of Division
Distinguished
In the benefit of division (CIVIL CODE, Art. 2065),
there has been no payment. Yet, in the right to
contribution (CIVIL CODE, Art. 2073), the
payment has been made because of judicial
proceedings or insolvency of the principal debtor
(Cacho v. Valles, G.R. No. L-19493, August 27,
1923).
Procedure When Creditor Sues:
a. The creditor must sue the principal debtor
alone. The guarantor cannot be sued with his
principal, much less alone, except in Art. 2059
of the Civil Code.
b. Notice to guarantor of the action.
The guarantor must be NOTIFIED (CIVIL
CODE, Art. 2062). If the guarantor appears,
he is still given the benefit of exhaustion even
if judgment should be rendered against him
and the principal debtor. Voluntary
appearance does not constitute a renunciation
of his right to excussion DE LEON, supra at
286).
The guarantor cannot set up the defenses if
he does not appear. It may no longer be
possible for him to question the validity of the
judgment (Ibid.)
c. A guarantor is entitled to be heard before
execution can be issued against him where he
is not a party in the case involving his
principal since this constitutes procedural due
process (Ibid.).
4. Right of Indemnity or Reimbursement
General Rule: Guaranty is a contract of
indemnity. The guarantor who makes payment is
entitled to be reimbursed by the principal debtor.
Exceptions:
a. Where the guaranty is constituted without the
knowledge or against the will of the principal
debtor, the guarantor can recover only insofar
as the payment had been beneficial to the
debtor (CIVIL CODE, Art. 2050);
b. Payment by a third person who does not
intend to be reimbursed by the debtor is
deemed to be a donation, which, however,
requires the debtor‟s consent. But the
payment is in any case valid as to the creditor
who has accepted it (CIVIL CODE, Art. 1238);
and
c. Waiver of the right to demand reimbursement
(DE LEON, supra at 294).
Under Art. 2066 of the Civil Code, the indemnity
consists of: (DIED)
a. Total amount of the Debt;
b. Legal Interest thereon from the time the
payment was made known to the debtor
(notice of payment is in effect a demand so
that if the debtor does not pay immediately, he
incurs in delay), even though it did not earn
interest for the creditor. Guarantor‟s right to
legal interest is granted by law by virtue of the
payment he has made;
c. Expenses incurred by the guarantor after
having notified the debtor that payment has
been demanded of him by the creditor.
Included only are those expenses that the
guarantor has to satisfy in accordance with
law as a consequence of the guaranty (CIVIL
CODE, Art. 2055) and not those which
depend upon his will or own acts or his fault
for these are his exclusive personal
responsibility and it is not just that they be
shouldered by the debtor; and
d. Damages if they are due in accordance with
law. General rules on damages apply.
Effect of Payment by Guarantor:
a. Without notice to debtor:
The debtor may interpose against the
guarantor those defenses which he could
have set up against the creditor at the time
the payment was made (e.g. the debtor can
set up against the guarantor the defense of
previous extinguishment of the obligation by
payment) (CIVIL CODE, Art. 2068).
b. Before maturity:
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 Not entitled to reimbursement until the
expiration of the period, unless the payment
was made with the consent or has been
ratified by the debtor (CIVIL CODE, Art.
2069).
Note: Ratification may be express or implied.
c. After maturity:
The fact that payment was actually made after
said term is not material. What is controlling
is that default and demand on guarantor had
taken place while the guarantee was still in
force (JN Dev. Corp. v. Phil. Export and
Foreign Loan Guarantee Corp., G.R. No.
151060, August 31, 2005).
Effect of Repeat Payment by Debtor:
General Rule: Before guarantor pays the creditor,
he must first notify the debtor, otherwise the latter
may set up defenses he could have set up against
the creditor (CIVIL CODE, Arts. 2068 and 2070).
If he fails to give such notice and the debtor
repeats payment, the guarantor can only collect
from the creditor and the guarantor has no cause
of action against the debtor for the return of the
amount paid by guarantor even if the creditor
should become insolvent (DE LEON, supra at
299).
Exception: The guarantor can still claim
reimbursement from the debtor in spite of lack of
notice if the following conditions are present: (PIG)
a. Guarantor was Prevented by fortuitous event
to advise the debtor of the payment;
b. The creditor becomes Insolvent; and
c. The guaranty is Gratuitous (Ibid.).
5. Right of Guarantor to Proceed Against
Debtor Before Payment
General Rule: Guarantor has no right to
proceed against the principal debtor until he has
actually paid the debt (Id. at 300).
Exceptions: (SIB-D-TRI)
a. When he is Sued for payment;
b. Insolvency of the principal debtor;
c. Debtor has Bound himself to relieve him from
the guaranty within a specified period, and
this period has expired;
d. Debt becomes demandable by reason of
expiration of period of payment;
e. Lapse of Ten (10) years, when there's no
fixed period for its maturity unless, it cannot
be extinguished except within a period longer
than ten (10) years;
f. Reasonable grounds to fear that the principal
will abscond; and
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g. The debtor is in Imminent danger of becoming
insolvent (CIVIL CODE, Art. 2071).
In all these cases, the action of the guarantor is to:
a. Obtain release from the guaranty; or
b. Demand a security that shall protect him from
any proceedings by the creditor and from the
danger of insolvency of the debtor (CIVIL
CODE, Art. 2071).
These remedies are alternative. He has the right
to choose the action to bring (DE LEON, supra at
301).
Note: The guarantor cannot demand
reimbursement for indemnity because he has not
paid the obligation (Ibid.).
Article 2071 of the Civil Code is applicable and
available to the surety (Manila Surety & Fidelity
Co., Inc. v. Batu Construction & Co., G.R. No. L-
9353, May 21, 1957).
Article 2066 v. Article 2071
Art. 2066 Art. 2071
As to Purpose
Provides for the
enforcement of the Provides for his
rights of the guarantor protection before he
or surety against the has paid but after he
debtor after he has paid has become liable.
the debt.
As to Nature of action
Gives a right of action Protective remedy
after payment which is before payment. This
a substantive right. remedy is preliminary.
(DE LEON, supra at 301-302).
6. Right to Subrogation
Subrogation transfers to the person subrogated
the credit with all the rights thereto appertaining
either against the debtor or against third
persons, be they guarantors or possessors of
mortgages, subject to stipulation in conventional
subrogation (CIVIL CODE, Art. 1303).
Note: This right of subrogation is necessary to
enable the guarantor to enforce the indemnity
given in Art. 2066 of the Civil Code (DE LEON,
supra at 294).
It arises by operation of law upon payment by
the guarantor. It is not necessary that the
creditor cedes to the guarantor the former‟s
rights against the debtor (Ibid.).
It is not a contractual right (5 PARAS, supra at
1043). The right of a guarantor who has paid a
debt pursuant to subrogation does not stand
3
 upon a contract but upon the principles of
natural justice.
The guarantor is subrogated by virtue of the
payment to the rights of the creditor, not those of
the debtor.
A guarantor cannot exercise the right of
redemption of his principal with respect to real
property belonging to the latter which was sold
by virtue of writ of execution issued upon same
payment (Urrutia & Co. v. Moreno, G.R. No. L-
8147, October 26, 1914).
If the guarantor paid a smaller amount by virtue
of a compromise, he cannot demand more than
what he actually paid.
Note: The benefit of subrogation cannot be
invoked in cases where the guarantor has no
right to be reimbursed (DE LEON, supra at 295).
As long as consent to the guaranty was obtained,
right of subrogation is absolute even if the debtor
refuses the subrogation (5 PARAS, supra at
1043).
Guarantor of third person not present at the
request of another
The guarantor who satisfies the debt may demand
payment from:
a. The person who requested him to be a
guarantor; or
b. The debtor (CIVIL CODE, Art. 2072).
Effects of Compromise
A compromise between the creditor and the
principal debtor benefits the guarantor but does not
prejudice him.
That which is entered into between the guarantor
and the creditor benefits but does not prejudice the
principal debtor (CIVIL CODE, Art. 2063).
Reason: A contract binds only the parties thereto
and not third persons, but if the same can benefit
the guarantor or debtor as it is in the nature of a
stipulation in favor of a third person, the guarantor or
debtor may accept unless it has been revoked
before acceptance (CIVIL CODE, Art. 1311)
EXTINGUISHMENT OF GUARANTY
Guaranty being accessory and subsidiary, it is also
terminated when the principal obligation is
extinguished DE LEON, supra at 310).
2 2
Causes: (RA CE )
1. Release in favor of one of the guarantors,
without the consent of the others, benefits all to
the extent of the share of the guarantor to whom
it has been granted (CIVIL CODE, Art. 2078);
2. If the creditor voluntarily Accepts immovable or
other properties in payment of the debt, even if
he should afterwards lose the same through
eviction or conveyance of property (CIVIL
CODE, Art. 2077);
Effect of Eviction: Revival of principal
obligation, not the guaranty (DE LEON, supra at
314).
3. Whenever by some Act of the creditor, the
guarantors, even though they are solidarily
liable, cannot be subrogated to the rights,
mortgages and preferences of the former (CIVIL
CODE, Art. 2080);
Note: “Act” should include “inaction.”
4. For the same Causes as all other obligations
under Art. 1231 (CIVIL CODE, Art. 2076);
a. Payment or Performance;
b. Loss of the thing due;
c. Condonation or Remission of the debt;
d. Confusion or Merger of the rights of the
creditor and debtor;
e. Compensation; and
f. Novation
Other causes: Annulment, Rescission,
Fulfillment of a Resolutory Condition, and
Prescription.
5. When principal obligation is Extinguished; and
6. Extension granted to the debtor by the creditor
without the consent of the guarantor (CIVIL
CODE, Art. 2079).
Note: Mere failure on the part of the creditor to
demand payment after the debt has become due
does not of itself constitute any extension of time
(Hongkong & Shanghai Bank v. Aldecoa & Co,
G.R. No. L-8437, March 23, 1915).
Reason: The guarantor would not be prejudiced
since his recourse would be to avail himself of
the right granted under Article 2071 of the Civil
Code (5 PARAS, supra at 1057).
Such delay, however, extinguishes the
guaranty:
a. When the delay is for such length of time as to
allow prescription of the action to enforce
payment; and
b. When upon maturity, the guarantor requires
the creditor to enforce payment against the
debtor, but the creditor fails to act and the
debtor subsequently becomes insolvent (5
TOLENTINO, supra at 529).
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Guarantor is also Released in the Following
Instances:
1. Creditor did not collect from third persons;
2. Obligations payable in installments (DE LEON,
supra at 316);
General Rule: Extension of time as to one or
more will not affect the liability of the surety for the
others.
Exception: If the whole unpaid balance has
become automatically due (under an acceleration
clause) for failure to pay an installment, the act of
the creditor of extending the payment without the
guarantor‟s consent, discharges the guarantor
(Radio Corp. of the Phil. v. Roa, G.R. No. 42829,
September 30, 1935).
3. Consent to extension is NOT waived in advance
by the guarantor (DE LEON, supra at 315);
4. Extension granted by creditor on bond (Id. at
317);
5. Extension granted to first-tier obligors cannot
prejudice second-tier parties (Id. at 318);
6. Material alterations, which essentially vary the
terms of the contract without consent of the
surety, will release the surety from liability.
Reason: This is tantamount to novation.
Requisites of Material Alterations:
a. Change which imposes new obligation;
b. Added burden on the party promising;
c. Which takes away some obligation already
imposed; and
d. Changing the legal effect of a contract and not
merely the form thereof (Id. at 311).
Diligence Required of Creditor
The creditor is under no obligation to display any
diligence in the enforcement of his rights as a
creditor (Id. at 319).
Reason: Nothing can prevent the creditor from
proceeding against the principal at any time (Ibid.).
Duty of Creditor to Account for Lien on
Principal’s Property
If the creditor has acquired a lien upon the property
of principal, the creditor at once becomes charged
with the duty of retaining such security.
Any release or impairment of the security will
discharge the surety to the extent of the value of the
property or lien (Id. at 321)
Defenses Available to Guarantor Against
Creditor
1. As provided in Article 2068 of the Civil Code;
2. Those available to co-guarantors in Article 2074
of the Civil Code; and
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3. Provided in Article 2081 except those which are
personal to the debtor (Id at 325).
LEGAL AND JUDICIAL BONDS
Bond
An undertaking that is sufficiently secured and not
cash or currency (Commissioner of Customs v.
Alikpala, G.R. No. L-32542, November 26, 1970).
A bond merely stands as a guaranty (solidary
guaranty) for a principal obligation, which exists
independently of said bond, the latter being merely
an accessory obligation (Valencia v. RFC, G.R. No.
L-10749, April 25, 1958).
Nature of Bonds
It is contractual in nature.
Bondsman
A surety offered in virtue of a provision of law or a
judicial order. He must have the qualifications
required of a guarantor (CIVIL CODE, Art. 2056)
and in special laws like the Rules of Court, Rule
114, Secs. 12 and 13.
Qualifications of a Personal Bondsman:
1. He possesses integrity;
2. He has capacity to bind himself; and
3. He has sufficient property to answer for the
obligation, which he guarantees. (CIVIL CODE,
Art. 2082 in relation to Art. 2056)
Note: Judicial bonds constitute merely a special
class of contracts of guaranty by the fact that they
are given “in virtue of a judicial order” (Gerardo v.
Plaridel Surety and Ins., Co., G.R. No. L-7807,
October 31, 1956).
Pledge or Mortgage in lieu of bond
If the person required to give a legal or judicial bond
should not be able to do so, a pledge or mortgage
sufficient to cover the obligation shall be admitted in
lieu thereof (CIVIL CODE, Art. 2083).
No benefit of excussion for a judicial bondsman
A judicial bondsman and the sub-surety are NOT
entitled to the benefit of excussion because they are
sureties whose liability is primary and solidary
(CIVIL CODE, Art. 2084).
Rule When Performance is Rendered Impossible
Even a surety‟s performance of the bond is rendered
impossible by an act of God, an act of the obligee,
or an act of law. It is the surety‟s duty to inform the
court of the happening of the event so that it may
take action or issue a decree in the discharge of the
surety (People v. Otiak Omal, G.R. No. L-14457,
June 30, 1961).
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P LEDGE AND M ORTGAGE
COMMON PROVISIONS OF PLEDGE AND
MORTGAGE
First Commonality: Essential Requisites (CIVIL
CODE, Art. 2085): (SODA)
1. Secures the fulfillment of a principal obligation;
2. Pledgor and mortgagor must be the absolute
Owner of the thing pledged or mortgaged; third
persons can pledge or mortgage their own
property or other person‟s property with authority
and consent of the owner of the property
pledged or mortgaged to secure the principal
obligation.
Pledge or mortgage constituted by impostor
General rule: The pledge or mortgage is void.
Exception: If the certificate of title was already in
the name of the forger or imposter when the land
was sold or mortgaged to an innocent purchaser
or mortgagee, there being nothing to excite
suspicion, the vendee or mortgagee has the
right to rely on what appeared in the certificate of
title of the vendor or mortgagor and acquires an
enforceable right (5 TOLENTINO, supra at 534).
3. Pledgor and mortgagor must have free Disposal
of their property, or be legally authorized for
such purpose.
Reason for 2nd and 3rd requisites: In
anticipation of a foreclosure sale and the act of
pledging or mortgaging is a strict act of
ownership.
4. When the principal obligation becomes due, the
subject matter of the pledge or mortgage may be
Alienated for the payment to the creditor (CIVIL
CODE, Art. 2087).
The creditor does not automatically become the
owner if at the time stipulated the obligation is
still unfulfilled (DE LEON, supra at 338).
Note: If a third person secures an obligation by
pledging his own movable property under the
provisions of Article 2085 of the Civil Code he
shall have the same rights as guarantor under
Articles 2066 to 2070 of the Civil Code, and
Articles 2077 to 2081. He is not prejudiced by
any waiver of defense by the principal obligor
(CIVIL CODE, Art. 2120).
Second Commonality: Prohibition Against
Pactum Commissorium
The creditor cannot appropriate the things given by
way of pledge or mortgage, or dispose of them. Any
stipulation to the contrary is null and void (CIVIL
CODE, Art. 2088).
Pactum Commissorium or Pacto Commissorio
Stipulation whereby the thing used as security shall
automatically become the property of the creditor in
the event of non-payment of the principal obligation
in due time (Id. at 344).
By such a stipulation, the creditor would be able to
acquire ownership of the property given as security
without need of public sale or foreclosure required
by law (Id. at 344).
General Rule: Pactum commissorium is forbidden
by law. Any stipulation to that effect is declared null
and void (Hechanova v. Adil, G.R. No. L-49940,
September 25, 1986).
Reason: The amount of the loan is ordinarily less
than the real value of the thing pledged or
mortgaged.
Exception: The pledgee may appropriate the thing
pledged if after the first and second auctions, the
thing is not sold (CIVIL CODE, Art. 2112). The
creditor shall be obliged to give an acquittance for
his entire claim. This act shall be considered as full
payment of the claim.
Note: Only the prohibited stipulation is void and
shall not affect the validity of the principal obligation.
Requisites:
1. There should be a pledge, mortgage or
antichresis of property; and
2. There is a stipulation for an automatic
appropriation by the creditor of the property in
case of nonpayment of principal obligation (A.
Francisco Realty and Development Corp. v. CA,
G.R. No. 125055, October 30, 1998).
Permissible stipulations:
a. Subsequent modification of original contract;
b. Subsequent voluntary cession of property;
c. Promise to assign or sell;
d. Authority to take possession of property upon
foreclosure (DE LEON, supra at 335).
Note: In the following cases, there is pactum
commissorium even though there is no contract of
pledge, mortgage or antichresis:
1. An agreement whereby property held in trust
was ceded to the trustee upon failure of the
beneficiary to pay his debt to the former as
secured by the said property (Nakpil v. IAC, G.R.
No. 74449 August 20, 1993).
2. In pacto de retro sales but found actually to be
equitable mortgages, stipulation therein that the
ownership of the property would automatically
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 pass to the vendee in case no redemption
was effected within the stipulated period.
3. Mortgagee‟s act of registering the mortgaged
property in his own name upon the mortgagor‟s
failure to redeem the property (Reyes v. Sierra,
G.R. No. L-28658, October 18, 1979).
Third Commonality: Kinds of Obligations that
Can Be Secured
Capability to secure all kinds of obligations (i.e. pure
or conditional, voidable, unenforceable and natural)
(CIVIL CODE, Arts. 2052 and 2091).
Fourth Commonality: Indivisibility
A pledge or mortgage is indivisible, even though the
debt may be divided among the successors in
interest of the debtor or of the creditor (CIVIL CODE,
Art. 2089).
A mortgage directly and immediately subjects the
property upon which it is imposed, the same being
indivisible even though the debt may be divided, and
such indivisibility likewise being unaffected by the
fact that the debtors are not solidarily liable (Dayrit v.
CA, G.R. No. L-29388, December 28, 1970).
It presupposes several heirs.
Consequences of Indivisibility:
1. Single thing – Every portion of the property
pledged or mortgaged is answerable for the
whole obligation as it falls due DE LEON, supra
at 353).
2. Several things – all of them are liable for the
totality of the debt and the creditor does not
have to divide his action by distributing the debt,
among the various things pledge or mortgage.
(Id. at 354).
3. Neither the debtor‟s heir who has paid part of the
debt can ask for proportionate extinguishment,
nor creditor‟s heir who received his share of the
debt return the pledge or cancel the mortgage as
long as the debt is not completely satisfied
(CIVIL CODE, Art. 2089, Pars. 2 and 3).
Exceptions to the Rule of Indivisibility
1. Where each one of several things guarantees a
determinate portion of the credit;
2. Where only a portion of the loan was released;
3. Where there was failure of consideration; and
4. Where there is no debtor-creditor relationship as
when a third party is the pledgor or mortgagor.
5. When piecemeal redemption is allowed after
foreclosure.(DE LEON, supra at 354-356)
Note: Mere embodiment of a real estate mortgage
and a chattel mortgage in one document does not
have the effect of fusing both securities into a
indivisible whole (DE LEON, supra at 357).
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The mortgagee may legally foreclose the real estate
mortgage extrajudicially and waive the chattel
mortgage foreclosure, and maintain instead a
personal action for the recovery of the unpaid
balance of the credit (Philippine Bank of Commerce
v. Macadaeg, G.R. No L-14174, October 31, 1960).
Fifth Commonality: Concept of Possession of
Mortgagee or Pledgee
Possession of a mortgagee or pledgee is not in the
concept of an owner; thus, the subject property
cannot be acquired through acquisitive prescription,
unless, they renounce their status as such.
Sixth Commonality: Retention of Ownership
Pledgor and mortgagor retain ownership of the thing
given as a security.
Seventh Commonality: Promise to Constitute
Pledge or Mortgage
A promise to constitute a pledge or mortgage, if
accepted, gives rise only to a personal right binding
upon the parties and creates no real right in the
property (CIVIL CODE, Art. 2092).
Note: What exists is only a right of action to compel
the fulfillment of the promise but there is no pledge
or mortgage yet.
Criminal Responsibility of Pledgor or Mortgagor
Estafa is committed by a person who, pretending to
be the owner of any real property, shall convey, sell,
encumber or mortgage the same or knowing that the
real property is encumbered shall dispose of the
same as unencumbered (REVISED PENAL CODE,
Art. 316, Pars. 1&2).
The act of the owner of a personal property of
wrongfully taking the same from its lawful
possessor, to the prejudice of the latter or any third
person is punishable.
Rule on Accommodation Pledger or Mortgagor
The accommodation pledgor or mortgagor is not
solidarily bound with the principal obligor but his
liability extends only to the property pledged or
mortgaged. In case of deficiency, the creditor has
recourse on the principal debtor who remains to be
primarily bound.
Note: The invalidity of a pledge or mortgage does
not affect the principal contract of loan. While void, it
can still be considered as an instrument evidencing
an indebtedness (Philippine National Bank v.
Banatao, G.R. No. 149221, April 7, 2009).
Ordinarily, an accommodation mortgagor is not
himself a recipient of the loan, otherwise that would
be contrary to his designation as such (Sps. Ramos
v. Obispo, G.R. No. 193804, February 27, 2013).
3
 Chattel Mortgage v. PledgePledge Pledge Chattel Mortgage
Chattel mortgage Pledge contrary is void.
As to Delivery
Delivery of the personal Delivery of the thing Pledge v. Real Mortgage
property to the pledged is necessary Pledge Real Mortgage
mortgagee is not As to Subject Matter
necessary. Constituted on movable Constituted on
As to Registration immovable
Registration in the Registration not As to Delivery of Property
Chattel Mortgage necessary to be valid Property is delivered to Not necessary
Registry is necessary pledgee or by consent
for its validity. to a third person.
As to Procedure for Sale As to Validity Against Third persons
The procedure for sale The procedure for sale Not valid against third Not valid against third
is found under Section is found under Art. persons without persons without
14 of Act No. 1508, as 2112 of the Civil Code. knowledge, unless a knowledge, unless
amended. description of the thing registered.
As to Excess in Foreclosure Proceeds pledged and date of the
If property is Debtor is not entitled to pledge appear in a
foreclosed, the excess excess unless public instrument.
over the amount due otherwise agreed upon As to Authority to Sell
goes to the debtor. or except in case of Pledgor can sell the Mortgagor can sell the
legal pledge. thing pledged only with property mortgaged
As to Recovery of Deficiency the consent of the even without the
If there is deficiency If there is deficiency, pledgee. consent of the
after foreclosure, creditor is not entitled to mortgagee.
creditor is entitled to recover notwithstanding (Id. at 342-343).
recover the deficiency any stipulation to the
from the debtor, except contrary.
under Art. 1484 of the P LEDGE
Civil Code.

CONTRACT OF PLEDGE
(DE LEON, supra at 506-507) A contract wherein the debtor delivers to the creditor
or to a third person a movable (CIVIL CODE, Art.
Pledge v. Chattel Mortgage under Article 1484 2094) or document evidencing incorporeal rights
Pledge Chattel Mortgage (CIVIL CODE, Art. 2095) for the purpose of securing
As to Subject Matter fulfillment of a principal obligation with the
Pledge may be Chattel mortgage may understanding that when the obligation is fulfilled,
constituted over any be constituted only over the thing delivered shall be returned with all its fruits
personal property. the personal property and accessions (DE LEON, supra at 330).
sold in installments.
As to Remedy in case of Default Nature:
Pledgee may cause the The vendor-mortgagee It is a real contract which requires delivery for its
sale under Article 2112 may foreclose the perfection (CIVIL CODE, Art. 1316).
of the Civil Code when chattel mortgage on the
the pledgor failed to thing sold, if one has An agreement to pledge only gives rise to a
satisfy the principal been constituted, personal action between the contracting parties
obligation. should the vendee‟s (CIVIL CODE, Art. 2092).
failure to pay covers
two (2) or more Special Requisites:
installments. (In addition to the common essential requisites
As to Deficiency of Proceeds under Article 2085 of the Civil Code):
If there is a deficiency, If there is a deficiency, 1. Necessity of Delivery
creditor is not entitled there can be no action Possession of the thing pledged must be
to recover against the purchaser transferred to the creditor or a third person by
notwithstanding any to recover any unpaid agreement (CIVIL CODE, Art. 2093).
stipulation to the balance. Any
contrary. agreement to the Absent delivery, the creditor acquires no right to
the property, because pledge is merely a lien

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 and possession is indispensable to the right of a
lien (DE LEON, Credit Transactions, supra at
359).
Type of Delivery Depends Upon the Peculiar
Nature of the Thing Pledged:
a. Actual delivery – actual possession of the
property pledged. A mere symbolic delivery is
not sufficient, e.g. animal (Id. at 360).
b. Constructive delivery – symbolical transfer of
the goods (e.g. keys to a house, a car, or a
warehouse).
Whether or not a symbolic or constructive
delivery is sufficient to validate a pledge would
depend on the peculiar nature of the thing
pledged (Ibid.).
2. Subject Matter
All movables which are within the commerce of
men, provided they are susceptible of
possession (CIVIL CODE, Art. 2094) and
incorporeal rights evidenced by documents of
title, in which case, the instruments proving the
right pledged shall be delivered to the creditor,
and if negotiable, must be endorsed (CIVIL
CODE, Art. 2095).
3. Effectivity Against Third Persons
The description of the thing pledged and the
date must appear in a public instrument to bind
third persons, but not for the validity of the
contract (CIVIL CODE, Art. 2096).
Object of the Requirement: To forestall fraud
because a debtor might attempt to conceal his
property by simulating a pledge (DE LEON, at
363).
Note: The execution of a public instrument
serves as a deterrent because the pledgor
maybe held criminally liable for perjury
(REVISED PENAL CODE, Art. 182).
Kinds of Pledge
1. Conventional or Voluntary – created by contract
2. Legal – created by operation of law (Examples:
Arts. 546, 612, 1731, 1914, 1994 and 2004 of
the Civil Code) (DE LEON, supra at 330)
Characteristics:
1. Real contract – it is perfected by the delivery of
the thing pledged;
2. Accessory contract – it has no independent
existence of its own. It cannot exist without a
valid contract;
3. Unilateral contract – obligation is solely on the
part of the creditor to return the thing subject
thereof upon the fulfillment of the principal
obligation; and
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4. Subsidiary contract – the obligation incurred
does not arise until the fulfillment of the principal
obligation, which is secured (Ibid.).
Extent of pledge: Unless stipulated otherwise,
pledge extends to the fruits, interests or earnings of
the thing (CIVIL CODE, Art. 2102).
Pledge v. Dacion en Pago
In case of doubt as to whether a transaction is a
pledge or a dation in payment, the presumption is in
favor of a pledge, the latter being the lesser
transmission of rights and interests (The Manila
Banking Corp. v. Teodoro, G.R. No. L-53955,
January 13, 1989).
Rights of the Pledgor: (D-BAA)
1. To Demand return in case of reasonable grounds
to fear destruction or impairment of the thing
without the pledgee‟s fault, subject to the duty of
replacement (CIVIL CODE, Art. 2107);
Two (2) Remedies Granted to the Pledgor:
a. To demand the return of the thing pledged
upon offering another thing in pledge; or
b. Cause the same to be sold at a public sale.
Note: The pledgee‟s right to have the thing sold
at public sale granted under Art. 2108 of the
Civil Code is superior to the right granted under
Art. 2107 of the Civil Code.
Requisites:
i. Pledgor has reasonable grounds to fear the
destruction or impairment of the thing
pledged;
ii. No fault on the part of the pledgee;
iii. Pledgor offers another thing which is of the
same kind and quality as the former;
iv. Pledgee does not choose to exercise his
right to cause the thing to be sold at public
auction (CIVIL CODE, Art. 2108); and
v. Pledgee advised the pledgor without delay.
2. To Bid and be preferred at the public auction
(CIVIL CODE, Art. 2113);
3. To Alienate the thing pledged provided the
pledgee consents to the sale (CIVIL CODE, Art.
2097);
4. To Ask that the thing pledged be deposited in
any of the following cases:
a. If the creditor uses the thing without authority or
misuses the thing, he may deposit the thing
judicially or extrajudicially (CIVIL CODE, Art.
2104); or
b. If the thing is in danger of being lost or impaired
because of negligence or willful act of the
pledgee, he may deposit the thing with a third
person (CIVIL CODE, Art. 2106).
3
Obligations of the Pledgor:
1. To advise the pledgee of the flaws of the thing
(CIVIL CODE, Arts. 2101 and 1951);
Note: Failure to do so, the pledgor may be held
liable for damages.
2. Not to demand the return of the thing until after
full payment of the debt, including interest due
thereon and expenses incurred for its
preservation (CIVIL CODE, Art. 2105);
Exception: Pledgor is allowed to substitute the
thing pledged which is in danger of destruction
or impairment with another thing of the same
kind and quality (CIVIL CODE, Art. 2107).
2 2 3
Rights of the Pledgee (D-SBC -BA R OPS)
1. Option to Demand replacement or immediate
payment of the debt in case of deception as to
substance or quality (CIVIL CODE, Art. 2109);
Note: Remedies are alternative.
2. To Sell at public auction in case of reasonable
grounds to fear destruction or impairment of the
thing without his fault (CIVIL CODE, Art. 2108);
Note: The proceeds shall be a security for the
principal obligation.
3. To Bring actions pertaining to the owner or to
defend it against third persons (CIVIL CODE,
Art. 2103);
4. To Choose which of several things pledged shall
be sold (CIVIL CODE, Art. 2119);
5. To Collect and receive amount due on credit
pledged (CIVIL CODE, Art. 2118);
6. To Bid at the public auction, unless he is the
only bidder (CIVIL CODE, Art. 2113);
7. To Appropriate the thing in case of failure of the
second public auction (CIVIL CODE, Art. 2112);
8. To Apply fruits, interests or earnings of the
pledge to the interest, if any, then to the principal
of the credit (CIVIL CODE, Art. 2102);
Note: Generally, the pledge extends to offspring of
animals but there can be a stipulation to the
contrary (CIVIL CODE, Art, 2102 (2)).
9. To Retain excess value received in the public
sale;
10. To Retain the thing until after full payment of the
debt;
11. To be Reimbursed for the expenses made for
the preservation of the thing pledged (CIVIL
CODE, Art. 2099);
12. To Object to the alienation of the thing ;
13. To Possess the thing (CIVIL CODE, Art. 2098);
and
14. To Sell at public auction in case of non-payment
of debt at maturity (CIVIL CODE, Art. 2112).
3
Obligations of the Pledgee (CUDA R)
1. Take Care of the thing with the diligence of a
good father of a family and be liable for the loss
or deterioration of such (CIVIL CODE, Art.
2099);
2. Not to Use thing unless authorized by the owner
or its preservation requires its use (CIVIL CODE,
Art. 2104);
Note: The deposit referred to here is an instance
of necessary deposit (5 PARAS, supra at 1101).
3. Not to Deposit the thing with a third person
unless so stipulated (CIVIL CODE, Art. 2100);
4. Responsibility for Acts of agents and employees
as regards the thing (CIVIL CODE, Art. 2100);
5. To Advise pledgor of danger to the thing;
6. To Advise pledgor of the result of the public
auction (CIVIL CODE, Art. 2116); and
7. To Return the thing upon payment of debt.
Prohibition Against Double Pledge
Property which has been lawfully pledged to one
creditor cannot be pledged to another as long as the
first one subsists (Mission de San Vicente v. Reyes,
G.R. No. L-5508, August 14, 1911).
Right of Third Person to Satisfy Obligation
A third person who has any right in or interest to the
thing pledged may pay the debt as soon as it
becomes due and demandable. The creditor cannot
refuse to accept payment (CIVIL CODE, Art. 2117;
DE LEON, supra at 378).
Extinguishment of Pledge: (CRAP-SA)
1. The same Causes as all other obligations;
2. Return of the thing pledged by the pledgee to
the pledgor;
Note: It is presumed that the accessory
obligation of pledge has been remitted when the
thing pledged, after its delivery to the creditor, is
found in possession of the debtor, or of a third
person who owns the thing (CIVIL CODE, Art.
1274).
The possession by the debtor or owner of the
thing pledged subsequent to the perfection of
the pledge gives rise to a prima facie
presumption that the thing has been returned
and, therefore, that the pledge has been
extinguished but not the principal obligation itself
(CIVIL CODE, Art. 2110).
3. Statement in writing by the pledgee that he
renounces or Abandons the pledge (CIVIL
CODE, Art. 2111);
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Note: The principal debt however is not affected
by the waiver of the pledge. However, the waiver
of the principal obligation carries with it that of
the pledge (CIVIL CODE, Art. 1273).
Neither is the acceptance by the pledgor or
owner nor the return of the thing pledged is
necessary.
4. Payment of the debt;
5. Sale of thing pledged at public auction; and
6. Appropriation under Article 2112 of the Civil Code.
Requirements for Sale of Thing Pledged at
Public Auction (CIVIL CODE, Art. 2112)
1. The debt is due and unpaid;
2. Sale must be at a public auction;
3. There must be notice to the pledgor and owner,
stating the amount due; and
4. Sale must be with the intervention of a notary
public.
Note: If in the contract of pledge, the pledgee is
authorized to sell upon default, the requirements of
Article 2112 of the Civil Code must be complied
with; if the conditions of the sale are set forth
already in the contract, Article 2112 does not have
to be observed (5 PARAS, supra at 1106).
Nature of the Bids at the Public Auction
The bids must be for CASH – for said bids “shall
offer to pay the purchase price AT ONCE” (CIVIL
CODE, Art. 2114; 5 PARAS, supra at 1107).
Effect of Sale of the Thing Pledged
1. Extinguishment of principal obligation, whether
or not the proceeds of the sale are equal to the
amount of the principal obligation, interest and
expenses in a proper case.
Note: When an obligation is covered by many
securities, for instance a pledge and a mortgage,
foreclosure of the mortgage ahead of the pledge
extinguishes the obligation if the amount of
mortgage fully satisfies the obligation.
Reason: Accessory nature of pledge.
2. If the price of the sale is more than the amount
due the creditor, the debtor is not entitled to the
excess unless the contrary is provided.
3. If the price of the sale is less, the creditor is not
entitled to recover the deficiency in all cases
even if there is a stipulation to that effect (CIVIL
CODE, Art. 2115).
Reason: By electing to sell the thing pledged
instead of suing on the principal obligation, the
creditor waives any other remedy and must
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abide by the results of the sale (DE LEON, supra
at 378).
LEGAL PLEDGE
The provisions on the possession, care, and sale of
the thing pledged governing conventional pledges
are applicable to pledges created by operation of
law (CIVIL CODE, Art. 2121).
A thing under a pledge by operation of law may be
sold only after demand of the amount for which the
thing is retained. The public auction shall take place
within one month after such demand (CIVIL CODE,
Art. 2122).
Note: There is only one public auction here.
R EAL M ORTGAGE
CONTRACT OF REAL MORTGAGE
A contract whereby the debtor secures to the
creditor the fulfillment of a principal obligation,
specially subjecting to such security immovable
property or real rights over immovable property in
case the principal obligation is not complied with at
the time stipulated (DE LEON, supra at 383).
2
Characteristics of Real Mortgage (RA-SUI )
1. Real;
2. Accessory;
Note: As an accessory contract, its
consideration is the same as that of the principal
contract.
3. Subsidiary;
4. Unilateral – it creates only an obligation on the
part of the creditor who must free the property
from the encumbrance once the obligation is
fulfilled (Id. at 383 and 384);
5. Indivisible (5 PARAS, supra at 1113); and
6. Inseparable (Ibid.).
Note: The mortgage adheres to the property,
regardless of who its subsequent owner may be.
A mortgage does not involve a transfer, cession
or conveyance of property but only constitutes a
lien thereon (DE LEON, supra at 402).
Essence of Contract of Mortgage
A property has been identified or set apart from then
mass of the property of the debtor-mortgagor as
security for the fulfillment of his obligation, in case of
default of payment (China Banking Corp. v. CA,
G.R. No. 121158, December 5, 1996).
3
Right to Possession
General Rule: The mortgagee has no right or claim
to the possession of the property. Such possession
is only a security for the payment of the sum
borrowed (DE LEON, supra at 385).
Reason: By the mortgage, the debtor merely
subjects the property to a lien but ownership thereof
is not parted with (Ibid.)
Hence, one‟s status as a mortgagee cannot be the
basis of possession (Recebido v. People, G.R. No.
141931, December 4, 2000).
Exception: If there is a stipulation to the contrary.
Note: It is not an essential requisite of a contract of
mortgage that the property mortgaged remains in
the possession of the mortgagor (DE LEON, supra
at 385).
execute a contract of mortgage in a public
instrument (CIVIL CODE, Arts. 1357 and 1358).
3. It must be recorded in the Registry of Property
(CIVIL CODE, Art. 2125). Registration in the
registry of property is necessary to bind third
persons, but not for the validity of the contract;
Note: The registration of a mortgage over real
property under Act No. 3344 is without prejudice
to the better right of third parties (Lanuza v. De
Leon, G.R. No. L-22331, June 6, 1967).
Right In Case of Legal Mortgages
The persons in whose favor the law establishes a
mortgage has the right to demand the execution
and the recording of the document in which the
mortgage is formalized (CIVIL CODE, Art. 2125,
Par. 2)

Cause or Consideration in Mortgage Order of foreclosure cannot be refused on the

Its consideration is the same as of the principal ground that the mortgage was not registered
contract from which it receives its life, and without provided no innocent third parties are involved
which it cannot exist as an independent contract (DE LEON, Credit Transactions, supra at 391).
(China Banking Corp. v. Lichauco, G.R. No. L-
22001, November 4, 1924). Kinds of Mortgage:
1. Voluntary – agreed to by the parties or
Special Requisites: constituted by the will of the owner of the
1. It can cover only immovable property and property on which it is created(DE LEON, supra
alienable real rights imposed upon immovable at 387);
(CIVIL CODE, Art. 2124); 2. Legal – required by law to be executed in favor
of certain persons (CIVIL CODE, Art. 2125(2);
Note: While a mortgage of land necessarily CIVIL CODE, Arts. 2082 and 2083);
includes, in the absence of a stipulation, the 3. Equitable – although lacking the formalities of a
improvements thereon, a building itself may be mortgage, shows the intention of the parties to
mortgaged apart from the land on which it is built make the property a security for a debt (see
(Prudential Bank v. Panis, G.R. No. L-50008, CIVIL CODE, Art. 1602).
August 31, 1987).
Pledge v. Real Mortgage
Future property cannot be an object of a contract Pledge Real Mortgage
of mortgage (CIVIL CODE, Art. 2085 (2)). As to subject Subject Matter
However, a stipulation subjecting to the Constituted on Constituted on
mortgage lien, properties and improvements movables immovables
(after-acquired properties) added to a property As to Delivery
already mortgaged which the mortgagor may Property is delivered to
subsequently acquire, install, or use in pledgee or by common Delivery is not
connection with real property already mortgaged consent to a third necessary
belonging to the mortgagor is valid (People’s person
Bank and Trust Co. v. Dahican Lumber Co., As to Validity Against Third Persons
G.R. No. L-17500, May 16, 1967). Not valid against third
persons without
2. It must appear in a public instrument (CIVIL Not valid against third
knowledge, unless a
CODE, Art. 2125); persons without
description of the thing
knowledge, unless
pledged and the date of
Effect when mortgage is in a private registered
pledge appear in a
document public instrument
No valid mortgage is constituted (Hechanova v. As to Authority to Sell
Adil, supra.). The creditor may recover the loan Pledgor can sell the Mortgagor can sell the
and has the right to compel the debtor to thing pledged only with property mortgaged
the consent of the even without the

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 Pledge Real Mortgage given as a security, and in the absence of any sign
pledgee. consent of the that might arouse suspicion, has no obligation to
mortgagee. undertake further investigation (DE LEON, supra at
(DE LEON, supra at 342-343). 392).

Real Mortgage v. Pacto de retro sale
Real Mortgage Pacto de Retro
As to Nature of Contract
Made as a security Not a contract of security
As to Transfer of Ownership
There is no transfer of Transfers ownership
ownership provided there is
delivery
As to Transfer of Possession
Generally, there is no Generally, there is
transfer of possession transfer of possession
As to Divisibility
Indivisible Redemption can be
partial (CIVIL CODE,
Arts. 1612 and 1613)
As to Subject Matter
Applies only to real Applies to real and
property personal property
EFFECTS OF MORTGAGE
1. It creates a real right. The mortgage directly and
immediately subjects the property upon which it
is imposed, whoever the possessor may be, to
the fulfillment of the obligation for whose security
it is constituted (CIVIL CODE, Art. 2126).
Until discharged upon payment of the obligation,
it follows the property wherever it goes and
subsists notwithstanding changes of ownership
(DE LEON, supra at 399). If the mortgagor sells
the mortgaged property, the property remains
subject to the fulfillment of the obligation secured
by it (Bonnevie v. CA, G.R. No. L-49101,
October 24, 1983).
2. It creates merely an encumbrance. A mortgage
is merely a security for a debt and an
encumbrance upon the property. It does not
extinguish the title of the debtor who remains the
owner (i.e. his right to dispose) (McCullough v.
Veloso & Serna, G.R. No. L-21455, April 5,
1924).
The only right of a mortgagee in case of non-
payment of a debt secured by a mortgage would
be to foreclose the mortgage and have the
encumbered property sold to satisfy outstanding
indebtedness (Guanzon v. Argel, G.R. No. L-
27706, June 16, 1970).
DOCTRINE OF MORTGAGEE IN GOOD FAITH
A mortgagee has a right to rely in good faith on the
certificate of title of the mortgagor of the property
Basis: Mirror Doctrine – the rule that all persons
dealing with the property covered by a Torrens
Certificate of Title as buyers or mortgagees are not
required to go beyond what appears in the face of
the title.
This doctrine presupposes, however, that the
mortgagor, who is not the rightful owner of the
property, has already succeeded in obtaining a
Torrens Title over the property.
The doctrine does not apply to a situation where the
title is still in the name of the rightful owner and the
mortgagor is different from the person pretending to
be the owner. The mortgagee shall not be
considered an innocent mortgagee for value and the
registered owner will not lose his title (Ereña v.
Querrer-Kauffman, G.R. No. 165853, June 22,
2006).
Diligence Required of a Mortgagee-Bank
If the mortgagee is a bank or a financing institution,
the general rule that a purchaser or mortgagee of
land is not required to look further than what
appears on the face of the Torrens Certificate of
Title does not apply (Premier Development Bank v.
CA, G.R. Nos. 128122, 128184 & 128229, March
18, 2005).
It is settled that banks, their business being
impressed with public interest, are expected to
exercise more care and prudence than private
individuals in their dealings, even those involving
registered lands (Philippine Trust Company v. CA,
G.R. No. 150318, November 22, 2010).
To be considered a mortgagee in good faith, a bank
should diligently conduct an investigation of the land
offered as collateral. This is especially applicable in
cases where the subject land was not mortgaged by
the owner. Failure to exercise such diligence shall
not entitle the bank to protection under the law
(Arguelles v. Malarayat Rural Bank, Inc., G.R. No.
200468, March 19, 2014).
Mortgagee Creditor v. Judgment Creditor
A mortgagee-creditor is not synonymous to a
judgment creditor. While the law expects a
mortgagee-creditor to inquire as a reasonably
prudent man would regarding the encumbrances on
the property in question, no such knowledge is
imputed to a judgment creditor who merely seeks
the satisfaction of the judgment awarded in his favor
(DSM Construction & Development Corp. v. CA,
G.R. No. 166993, December 19, 2005).

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3
EXTENT OF MORTGAGE
General rule
Mortgage extends to the following: (AGRI)
1. Natural Accessions;
2. Growing fruits;
3. Rents or income not yet received when the
obligation becomes due; and
4. Amount of Indemnity granted or owing to the
proprietor from:
a. The insurers of the property managed; or
b. Expropriation for public use (CIVIL CODE, Art.
2127).
Reason: The ownership of such accessions,
accessories, and improvements subsequently
introduced also belongs to the mortgagor who is the
owner of the principal (Castro, Jr. v. CA, G.R. No.
97401, December 6, 1995).
Exceptions:
1. An express stipulation excluding them; and
2. There is evidence sufficiently overthrowing the
presumption that the mortgagor owns the
mortgaged property.
Note: Article 2127 of the Civil Code is irrelevant
and inapplicable to mortgages and their
foreclosures if the mortgagor is later found or
declared to be not the true owners of the
property (Philippine National Bank v. Sps.
Marañon, G.R. No. 189316, July 1, 2013).
REGISTRATION OF MORTGAGE
Once a mortgage has been signed in due form, the
mortgagee is entitled to its registration as a matter of
right.
Note: Registration is not a declaration by the state
that such an instrument is valid and subsisting
interest in the land. It is merely a declaration that
the record of the title appears to be burdened with
the mortgage described (DE LEON, supra at 395).
Effect of Registration as to the Better Right of
Third Parties
A registered mortgage right over property previously
sold is inferior to the buyer‟s unregistered right.
Reason: If the original owner had sold the thing,
then he no longer had ownership and free disposal
of it so as to be able to mortgage it (State
Investment House, Inc. v. CA, G.R. No. 115548,
March 5, 1996).
When there is a Prohibition Against
Encumbrance of Mortgaged Land Without
Mortgagors’ Consent
In this case, rights over the property, which came
into existence after the execution of the deed, and in
violation of the agreement, cannot be annotated as
an adverse claim on the title of the land over the
mortgagee‟s opposition (Rivera v. Peña, G.R. No. L-
11781, March 24, 1961).
Subsequent Registration of an Adverse Claim
A prior registration of a lien creates a preference.
Hence, the subsequent annotation of an adverse
claim cannot defeat the rights of the mortgagee or
the purchaser at the auction sale whose rights are
derived from a prior mortgage validly registered (DE
LEON, supra at 397).
ALIENATION OR ASSIGNMENT OF MORTGAGE
CREDIT
The mortgage credit may be alienated or assigned
to a third person, in whole or in part, with the
formalities required by law (CIVIL CODE, Art. 2128).
In this case, the assignee may foreclose the
mortgage in case of non-payment by the debtor.
Note: Even if the alienation is not registered, it
would still be valid as between the parties (Lopez v.
Alvarez, G.R. No. L-3438, October 12, 1907).
STIPULATIONS ON MORTGAGE CONTRACTS
1. Including After-Acquired Properties
Status: Valid
Purpose: To maintain, to the extent allowed by
the circumstances, the original values of the
property given as a security.
Such stipulation is common where the properties
given as collateral are perishable or subject to
inevitable wear and tear. (DE LEON, supra at
406)
Note: After-acquired properties refer to
improvements or accessions to a property that is
already mortgaged. The term is not the same
with future properties.
2. Blanket or Dragnet Clause
It is specifically phrased to subsume all debts of
past or future origins. Mortgages of this
character enable the parties to provide
continuous dealings, the nature or extent of
which may not be known or anticipated at the
time, and they avoid the expense and
inconvenience of executing a new security on
each new transaction (Id. at 407)
Status: Valid
A mortgage with a dragnet clause is an “offer” by
the mortgagor to the bank to provide the security
of the mortgage for advances of and when they
were made.
Exception: It can be said that the “offer” was not
accepted by the bank when a subsequent
advance was made because of a new security.
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 A mortgage containing a “dragnet clause” will
not be extended to cover future advances unless
the document evidencing the subsequent
advance refers to the mortgage as providing
security therefor. In this case, the security
specifically executed for subsequent loans must
first be exhausted before the mortgaged
property can be resorted to (Prudential Bank v.
Alviar, G.R. No. 150197, July 28, 2005).
Note: The Supreme Court clarified that if there is
no reference in the security agreement for the
new loan or obligation, then do not extend the
application of the dragnet clause.
Purpose: It operates as a convenience and an
accommodation to the borrowers, as it makes
available additional funds without the parties
having to execute additional security documents
(Ibid.).
Construction: Provisions of this nature are
carefully scrutinized and strictly construed
particularly when the mortgage contract is one of
adhesion (Premiere Development Bank v.
Central Security & Insurance Co., Inc., G.R. No.
176246, February 13, 2009).
3. Forbidding Alienation of Mortgaged Property
(Pactum De Non Alienando)
Status: Void (CIVIL CODE, Art. 2130).
Reason: Such a prohibition would be contrary to
the public good inasmuch as the transmission of
property should not be unduly impeded (DE
LEON, supra at 411).
Note: In case of alienation, the transferee is
bound to respect the encumbrance (CIVIL
CODE, Art. 2126) because being a real right, the
property remains subject to the fulfillment of the
obligation for whose guaranty it was constituted
(Ibid.)
4. Stipulation Requiring Mortgagee’s Consent
Before Alienation
Status: Valid and binding but only in the sense
that the mortgagee cannot be compelled to
recognize the sale while the loan is still unpaid
(DE LEON, supra at 411-412).
The sale of the property does not affect the right
of the registered mortgagee to foreclose on the
same even if the ownership has been
transferred to another.
Note: Such stipulation nonetheless contravenes
public policy, being an undue impediment or
interference on the transmission of property (DE
LEON, supra at 412).
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5. Grant of First Refusal
Status: Valid.
The consideration for the loan-mortgage may be
said to include the consideration for the right of
first refusal (Ibid.).
Note: A sale made in violation of the
mortgagee‟s contractual right of first refusal is
rescissible. The buyer is presumed to have
been notified thereof by the registration of the
mortgage deed containing such stipulation,
which equates to notice to the whole world
(Litonjua v. L&R Corporation, G.R. No. 130722,
December 9, 1999).
6. Acceleration Clause
A stipulation stating that on the occasion of the
mortgagor‟s default, the whole sum remaining
unpaid automatically becomes due and payable.
Status: Valid (Luzon Development Bank v.
Conquilla, G.R. No. 163338, September 21,
2005).
7. Stipulation of Upset Price or “TIPO”
An Upset Price or TIPO is the minimum price at
which the property shall be sold at a public
auction.
A stipulation in a mortgage of real property
providing for an Upset Price or Tipo, to become
operative in the event of a foreclosure sale at
public auction, is null and void for property must
be sold to the highest bidder (DE LEON, supra
at 439).
Parties cannot, by agreement, contravene the
law and interfere with the lawful procedure of the
courts (BPI v. Yulo, G.R. No. 9358, September
24, 1915).
Status: Void.
SPECIAL RIGHTS
Right of a Mortgagor:
To alienate the mortgaged property, but the
mortgage shall remain attached to the property
(CIVIL CODE, Art. 2130).
Note: In a sale with assumption of mortgage, the
alienation needs the consent of the mortgagee.
Rights of a Mortgagee:
To claim from a third person in possession of the
mortgaged property the payment of the part of the
credit secured by the property which said third
person possesses (CIVIL CODE, Art. 2129).
Prior demand for payment must have been made on
the debtor and the latter failed to pay (BPI v. V.
3
Concepcion E. Hijos Inc., G.R. No. L-27701, July 21,
1928).
Insurance of the Property
The mortgagee and the mortgagor both have
insurable interest in the property. They may insure
the same (5 PARAS, supra at 1131).
Effect of an Invalid Mortgage
The principal obligation, which it guarantees, is not
rendered null and void. The principal obligation
matures and becomes demandable in accordance
with the stipulation pertaining to it.
What is lost is the right to foreclose the mortgage
(DE LEON, supra at 398).
Aliens as Creditor Mortgagee
A mortgage may be constituted in favor of aliens as
creditor mortgagee because it does not involve a
transfer of property but merely a lien on the
property.
The alien mortgagee may also foreclose the
mortgage and bid in the auction sale. However, if he
is adjudged the buyer, he is mandated to dispose
the property within five (5) years pursuant to
R.A. 4882.
Foreclosure
It is the remedy available to the mortgagee by which
he subjects the mortgaged property to the
satisfaction of the obligation to secure that for which
the mortgage was given (DE LEON, supra at 413).
It is a proceeding to terminate the rights of the
mortgagor on the property.
Note: A mortgage-creditor has a single cause of
action against a mortgage-debtor, which is to
recover the debt, but he has the option of either:
1. Filing a personal action for the collection of a
sum of money; or
2. Instituting a real action to foreclose on the
mortgage security.
If he elects to foreclose, he may yet to file an
independent civil action for recovery of whatever
deficiency may remain (Tanchan v. Allied Banking
Corp., G.R. No. 164510, November 25, 2005).
The 3Ws and 1H of Foreclosure
1W: When to Exercise
When the principal obligation is not paid when due.
(Commodity Financing Co., Inc. v. Jimenez, G.R.
No. L-31384, June 29, 1979).
Foreclosure is also valid when the debtor has
violated the terms and conditions of the mortgage
contract.
Note: A motion for the appointment of independent
commissioners cannot serve as a prejudicial
question. It is not a main action but a mere incident
of the main proceedings; it does not involve an issue
that is intimately related to the foreclosure
proceedings; and lastly, the motion‟s resolution is
not determinative of the foreclosure‟s outcome.
Further, Act No. 3135 has no requirement for the
determination of the mortgaged properties‟ appraisal
value (Sycamore Ventures Corp. v. Metropolitan
Bank & Trust Co., G.R. No. 173183, November 18,
2013).
Effect of Premature Foreclosure
The foreclosure of a mortgage prior to the
mortgagor's default on the principal obligation is
premature, and should be undone for being void and
ineffectual.
The mortgagee who has been meanwhile given
possession of the mortgaged property by virtue of a
writ of possession issued to it as the purchaser at
the foreclosure sale may be required to restore the
possession of the property to the mortgagor and to
pay reasonable rent for the use of the property
during the intervening period (DBP v. Guariña
Agricultural and Realty Development Corp, G.R. No.
160758, January 15, 2014).
2W: Who may Exercise
The right of foreclosure cannot be exercised by any
person other than the creditor-mortgagee or his
assigns (Borromeo v. CA, G.R. No. 169846, March
28, 2008).
3W: What is its Extent
General Rule: Foreclosure must be limited to the
amount mentioned in the mortgage document
(Landrito, Jr., v. CA, G.R. No. 133079, August 9,
2005).
Exception:
If from the four corners of the instrument the intent
to secure future and other indebtedness can be
gathered (Sps. Cuyco v. Sps. Cuyco, G.R. No.
168736, April 19, 2006).
Note: A mortgagee has no right to include in the
foreclosure mortgage any unpaid loan separately
secured by a chattel mortgage, a contract distinct
from the real estate mortgage (Rural Bank of
Toboso, Inc. v. Agtoto, G.R. No. 175697, March 23,
2011).
In case of deficiency, the debtor is required to pay
the same even after foreclosure.
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1H: How to Construe Public Notice of
Foreclosure
Must be strictly complied with, and slight deviations
will invalidate the sale or render it voidable
(Tambunting v. CA, G.R. No. L-48278, November 8,
1988,; Roxas v. Court of Appeals, G.R. No. 100480,
May 1, 1993).
Kinds of Foreclosure:
1. Judicial – ordinary action for foreclosure under
Rule 68 of the Rules of Court.
Nature:
1. A proceeding for judicial foreclosure of
mortgage is an action quasi in rem. It is based
on a personal claim against a specific
property of the defendant (Ocampo v.
Domalanta, G.R. No. L-21011, August 30,
1967);
2. It is a result or incident of failure to pay
indebtedness; and
3. It survives the death of the mortgagor.
Reason: The claim against him is not a pure
money claim but an action to enforce a mortgage
lien (DE LEON, supra at 434).
2. Extrajudicial – when mortgagee is given a
special power of attorney to sell the mortgaged
property by public auction, under Act No. 3135.
Note: This kind of foreclosure is conferred for
the mortgagee‟s protection ((DE LEON, supra at
434). It is not a necessary consequence of non-
payment of mortgage indebtedness. The power
to foreclose or not is the prerogative of the
mortgagee (Rural Bank of San Mateo, Inc. v.
IAC, G.R. No. L-66936, December 12, 1986).
Judicial Foreclosure v. Extrajudicial Foreclosure
Extrajudicial
Judicial Foreclosure
Foreclosure
As to the Governing Rule
Governed by Rule 68 of Governed by Art. 3135
the Rules of Court of the Civil Code.
As to Court Intervention
There is court
No court intervention
intervention
As to the Right of Appeal
Decisions are Not appealable, it is
appealable. immediately executory.
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As to Cutting Off of Rights
The order of the court Foreclosure does not
cuts off all rights of the cut off the rights of all
parties impleaded. parties involved.
As to the Right of Redemption
There is equity of
redemption, except on
There is a right of
banks which provides
redemption.
for a right of
redemption.
As to the Period of redemption
Period of redemption Period to redeem starts
starts from the finality of from the date of
the judgment until order registration of the
of confirmation. certificate of sale.
As to Necessity of a Special Power of Attorney
Special power of
No need for a special
attorney in favor of the
power of attorney in the
mortgagee is needed in
contract of mortgage
the contract.
Note: A foreclosure sale retroacts to the date of
registration of the mortgage. A person who takes a
mortgage in good faith and for valuable
consideration, the record showing clear title to the
mortgagor, will be protected against equitable claims
on the title in favor of third persons, of which he had
no actual or constructive notice (St. Dominic
Corporation v. IAC, G.R. No. 70623, June 30, 1987).
Judicial Foreclosure under the Rules of Court
(Rules of Court, Rule 68) (JOSCEAS)
Step 1: Judicial Action brought to the proper court
having jurisdiction.
Step 2: Order by the Court for Mortgagor to Pay
Mortgage Debt if the court finds the complaint to be
well-founded, within a period of not less than ninety
(90) days nor more than one hundred twenty (120)
days from the entry of judgment.
Step 3: Sale to the highest bidder at public auction
if the mortgagor fails to pay at the time directed in
the court order.
Step 4: Confirmation of Sale, which operates to
divest the rights of all parties to the action and vest
their rights to the purchaser
Note: Before the confirmation of a judicial
foreclosure sale, the court retains control of the
proceedings by exercising a sound discretion in
regard to it, either granting or withholding
confirmation (Salazar v. De Torres, G.R. No. L-
13711, May 25, 1960).
Step 5: Execution of Judgment in the manner
prescribed by the law on mortgages, the parties not
3
being authorized to change the procedure
prescribed (Piano v. Cayanong, G.R. No. L-18603,
February 28, 1963).
Note: The proper remedy to seek reversal of a
judgment in an action for foreclosure is an appeal
from the judgment itself or from the order confirming
the sale of foreclosed real estate (Sps. Agbada v.
Inter-Urban Developers, Inc., G.R. No. 144029,
September 19, 2002).
Step 6: Application of the Proceeds of the Sale
1. Costs of sale;
2. Amount due the mortgagee;
3. Claims of junior encumbrancers or persons
holding subsequent mortgages in the order of
their priority; and
4. The balance, if any, shall be paid to the
mortgagor or his duly authorized agent, or to the
person entitled to it. (DE LEON, supra at 418)
Note: In the absence of any evidence showing
that the mortgage also covers the other
obligations of the mortgagor, the proceeds from
the sale should not be applied to them (Philippine
Bank of Communications v. Yeung, G.R. No.
179691, December 4, 2013).
Step 7: Execution of Sheriff’s Certificate. In the
absence of a Certificate of Sale, no title is passed by
the foreclosure proceedings to the vendee
(DE LEON, supra at 419).
Procedure for Extrajudicial Foreclosure of Both
Real Estate Mortgage Under Act No. 3135 and
Chattel Mortgage Under Act No. 1508 (A.M. No.
99-10-05-0, January 15, 2000, further amended on
August 7, 2001):
Step 1: Filing of an application before the
Executive Judge through the Clerk of Court.
Note: In extrajudicial foreclosure of real mortgages
in different locations covering a single indebtedness,
only one filing fee corresponding to such debt shall
be collected.
Step 2: Clerk of Court will examine whether the
following requirements of the law have been
complied with:
1. Posting of notice
Not less than twenty (20) days in at least three
(3) public places of the municipality or city where
the property is situated.
Notices are given to secure bidders and to
prevent a sacrifice of the property (Sps. Suico v.
Philippine National Bank, G.R. 170215, August
28, 2007).
Contents of notice:
To be valid, the notice of a sheriff‟s sale, must
contain the correct number of the certificate of
title and the correct technical description of the
real property sold (DE LEON, supra at 421).
2. Publication (if property is worth more than
P400)
Once a week for at least three (3) consecutive
weeks in a newspaper of general circulation in
the city or municipality.
The notice of sale shall be published in a
newspaper of general circulation pursuant to
Section 1, P.D. 1079.
Note: Under Section 5 of R.A. 720 (Rural Banks
Act), as amended by R.A. 7939, the posting of a
notice of the foreclosure of the real estate
mortgage in at least three (3) of the most
conspicuous public places not only in the
municipality but also in the barrio where the land
mortgaged is situated during the 60-day period
immediately preceding the public auction is
MANDATORY (Guanco v. Antolo, G.R. No.
150852, July 31, 2006).
Step 3: The application shall be raffled among
different sheriffs.
Step 4: An auction sale may be had even with
just one (1) participating bidder. The name/s of
the bidder/s shall be reported by the Sheriff or the
Notary Public, who conducted the sale to the Clerk
of Court before the issuance of the certificate of sale
(As amended by the January 30, 2001 Resolution,
paragraph 5 of A. M. No. 99-10-05-0; Sps. Certeza
v. Phil. Savings Bank, G. R. No. 190078, March 5,
2010).
The indivisibility of a real estate mortgage is not
violated by conducting two separate foreclosure
proceedings on mortgaged properties located in
different cities or municipalities as long as each
parcel of land is answerable for the entire debt (Sps.
Yu v. Philippine Commercial International Bank,
G.R. No. 147902, March 17, 2006).
No sale can be legally made outside the province in
which the property sold is situated. In case the
place within said province in which the sale is to be
made is stipulated, such sale shall be made in said
place or in the municipal building of the municipality
in which the property or part thereof is situated (Act
No. 3135, Sec.2).
Note: Surplus money arising from a sale of real
property like land under foreclosure stands in the
same place of a land with respect to liens thereon or
vested right therein. They are constructively, at
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least, real property and belong to the mortgagor or
his assigns (DE LEON, supra at 429).
Rule on Deficiency
The plain result of adopting extrajudicial foreclosure
under Act No. 3135 is that the creditor waives his
right to recover any deficiency (Heirs of Sps.
Flaviano v. Manila Banking Corporation, G.R. No.
171206, September 23, 2013).
Step 5: The Clerk of Court shall issue a
certificate of payment indicating the amount of
indebtedness, the filing fees collected, the
mortgages sought to be foreclosed, the description
of the real estates and their respective locations.
Step 6: The certificate of sale must be approved
by the Executive Judge.
Step 7: After the redemption period has expired,
the Clerk of Court shall archive the records.
Note: The law covers only real estate mortgages. It
is intended merely to regulate the extrajudicial sale
of the property mortgaged if and when the
mortgagee is given a special power or express
authority to do so in the deed itself or in a document
annexed thereto (Luna v. Encarnacion, G.R. No. L-
4637, June 30, 1952; Ponce de Leon v.
Rehabilitation Finance Corp., G.R. No. L-24571,
December 18, 1970).
The authority to sell is not extinguished by the death
of the mortgagor (or mortgagee) as it is an essential
and inseparable part of a bilateral agreement (Perez
v. PNB, G.R. No. L-21813, July 30, 1966).
Construction of Act No. 3135
The construction of this law must be equally and
mutually beneficial to both parties (Philippine
National Bank v. Sps. Cabatingan, G.R. No. 167058,
July 9, 2008).
When authority to foreclose is not extinguished
by death of mortgagor or mortgagee
A mortgage may be foreclosed extrajudicially where
there is inserted in the contract a clause giving the
mortgagee the power, upon default of the debtor, to
foreclose the mortgage by an extrajudicial sale of
the mortgaged property (Act No. 3135, as amended
by Act No. 4148, Sec. 1).
Remedy of Debtor Aggrieved by Foreclosure
under Act No. 3135:
1. File a petition that the sale be set aside and that
the writ of possession be cancelled, specifying
the damage to him.
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Causes:
a. The mortgage was not violated; and
b. The sale was not made in accordance with
the provisions thereof (Act No. 3135, Sec. 8).
2. Ask annulment of foreclosure on the following
grounds:
a. Fraud, collusion, accident, mutual mistake,
breach of trust or misconduct by the
purchaser;
b. The sale has not been fairly and regularly
conducted; or
c. The price was inadequate and the inadequacy
was so great as to shock the conscience of
the court (United Coconut Planters Bank v.
Sps. Beluso, G.R. No. 159912, August 17,
2007).
Notes on Posting and Publication Under Act No.
3135:
1. Nature
They are imbued with public policy
considerations. (DE LEON, supra at 425).
The mortgagor and mortgagee have no right to
waive the posting and publication requirements
under Act. No. 3135. Notices are given to secure
bidders and prevent a sacrifice of the property.
Failure to comply with the statutory requirements
as to publication of notice of auction sale
constitutes a jurisdictional defect, which
invalidates the sale. Lack of republication of
notice of foreclosure sale made subsequently
after the original date renders such sale void
(Philippine National Bank v. Nepomuceno
Productions Inc., G.R. No. 139479, December
27, 2002).
The failure to post a notice is not per se a
ground for invalidating a foreclosure sale
provided that the notice thereof is duly published
in a newspaper of general circulation
(Development Bank of the Philippines v. Aguirre,
G.R. No. 144877, September 7, 2001).
As long as the objects of the notice are attained,
the sufficiency or validity of a notice of sale is not
affected by immaterial errors or simple mistakes
or omissions not calculated to deter or mislead
bidders, to depreciate the value of the property,
or to prevent from bringing a fair price (Sps.
Certeza v. Philippine Savings Bank, G.R. No.
190078, March 5, 2010).
Republication
Another publication is required in case the auction
sale is rescheduled, and the absence of such
republication invalidates the foreclosure sale (DE
LEON, supra at 430).
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2. No Requirement of Personal Notice
Sec. 3 of Act No. 3135 does not require personal
or any particular notice on the mortgagor much
less on his successors-in-interest where there is
no contractual stipulation therefor (DE LEON,
supra at 422).
Unless the parties stipulate, personal notice to
the mortgagor in extrajudicial foreclosure
proceedings is not necessary because Section 3
of Act No. 3135 only requires the posting of the
notice of sale in three public places, and the
publication of that notice in a newspaper of
general circulation (Ramirez v. The Manila
Banking Corp, G.R. No. 198800, December 11,
2013).
Neither does Sec. 3 require the posting of a
notice of sale on the mortgaged property.
3. NO Certificate of Posting is Required
General rule: A certificate of posting is not
required, much less considered indispensable
for the validity of a foreclosure sale under Act
No. 3135 (DE LEON, supra at 423).
Exception: Such certificate is significant only
when it becomes necessary to prove compliance
with the required notice of posting.
In Bohanan v. CA, the absence of the affidavit of
publication was considered fatal because no
equally convincing and competent proof of
compliance was offered to compensate for its
non-presentation (G.R. No. 111654, April 18,
1996).
4. Burden of Proving Non-Compliance With
Publication and Posting Requirements
Foreclosure proceedings have in their favor the
presumption of regularity (Union Bank of the
Philippines v. CA, G.R. No. 164910, September
30, 2005).
In the absence of contrary evidence, the
presumption prevails that the sheriff performed
his official duty of posting the notices of sale in
the reglementary period (DE LEON, supra at
424).
Pretermission of Holiday
Section 31 of the Revised Administrative Code
ordains that where the day, or the last day, for doing
any act required or permitted by law falls on a
holiday, the act may be done on the next
succeeding business day.
In Rural Bank of Caloocan, Inc. v. CA it was held
that the pretermission of holiday is not applicable to
auction sales. It does not apply to a day fixed by an
office or officer of the government for an act to be
done. (G.R. No. L-32116, April 21, 1981)
Effect of Inadequacy of Price in a Foreclosure
Sale
General Rule: When there is a right to redeem,
inadequacy of price is immaterial because the
judgment debtor may reacquire the property easier
at a low price or sell his right to redeem (Philippine
National Bank v. CA, G.R. No. 121739, June 14,
1999).
Exception: When the price is so inadequate as to
shock the conscience of the court taking into
consideration the peculiar circumstances attendant
thereto (United Coconut Planters Bank v. Sps.
Beluso, supra.)
Note: The value of the mortgaged property has no
bearing on the bid price at the public auction,
provided that the public auction was regularly and
honestly conducted (DE LEON, supra at 441).
RECOVERY OF DEFICIENCY
Note that the mortgage is but a security and not a
satisfaction of the indebtedness (Philippine Bank of
Commerce v. De Vera, G.R. No. L-18816
December 29, 1962).
1. Judicial Foreclosure under the Rules of
Court
The mortgagee is specifically given the right to
claim for deficiency (RULES OF COURT, Rule
68, Sec. 6).
2. Extra-Judicial Foreclosure under Act No.
3135
Act No. 3135 does not give a mortgagee the
right to recover deficiency after the public
auction sale, neither does it expressly or
impliedly prohibit such recovery (DE LEON,
supra at 431).
A deficiency claim is allowed (Philippine National
Bank v. CA, Supra).
Note: In both judicial and extrajudicial
foreclosure, when a third person is the
mortgagor, he is not liable for any deficiency in
the absence of a contrary stipulation (DE LEON,
supra at 431).
Action for Recovery of Deficiency
A mortgagee may recover any deficiency in the
mortgage account, which is not realized in a
foreclosure sale. An independent civil action for the
recovery of deficiency may be filed even during the
period of redemption (Tarnate v. CA, G.R. No.
100635, February 13, 1995).
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After the auction sale is effected and the resulting
deficiency is ascertained, the mortgagee-creditor is
entitled to secure a deficiency judgment which may
immediately be executed, whether or not the
mortgagor is still entitled to redeem the property sold
(Development Bank of the Philippines v. Vda. De
Moll, G.R. No. L-25802, January 31, 1972).
Deficiency Judgment – If the deficiency is
embodied in a judgment (DE LEON, supra at 432).
Note: The action prescribes after ten (10) years
from the time the right of action accrues (CIVIL
CODE, Art. 1144 (2)).
REDEMPTION
It is the transaction by which the mortgagor
reacquires or buys back the property which may
have passed under the mortgage, or divests the
property of the lien which the mortgage may have
created (DE LEON, supra at 444).
Note: A sale by the mortgagor to a third party of the
mortgaged property during the period for redemption
transfers only to said third person the right to
redeem the property, and the right to possess, use,
and enjoy the same during said period (Id. at 451).
Where the sale with assumption of mortgage was
not registered and made without the consent of the
mortgagee, the buyer thereof was not validly
substituted as debtor, and hence, had no right to
redeem (Bonnevie v. CA, supra.).
Kinds of Redemption:
1. Equity of Redemption – right of the defendant
to extinguish the mortgage and retain ownership
of the property by paying the secured debt within
the period provided by law (DE LEON, supra at
445).
The mortgagor‟s equity of redemption can be
levied upon by means of a writ of execution
(Potenciano v. Mariano, G.R. No. L-30904,
March 6, 1980).
Period to Exercise: within the period of 90-120
days from the date of the service of the order of
foreclosure, or even thereafter but before the
order of confirmation of the sale (RULES OF
COURT, Rule 68, Secs. 2 and 3).
This applies to judicial foreclosure of real
mortgage and chattel mortgage foreclosure.
Exception: There is no right of redemption from
a judicial foreclosure sale after the confirmation
of the sale, except those granted by banks and
financial institution as provided by the General
Banking Act (Now General Banking Law)
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(Government Service Insurance System v. The
CFI of Iloilo, G.R. No. L-45322, July 5, 1989).
If the mortgagee is a bank, the mortgagor may
exercise a right of redemption and this rule
applies even if the foreclosure is judicial in
accordance with Rule 68 of the Rules of Court.
2. Right of Redemption – right of a mortgagor to
redeem the mortgaged property in an
extrajudicial foreclosure of real mortgage.
Period to Exercise: within one year from the
date of registration of the certificate of sale (Act
No. 3135, Sec. 6; RULES OF COURT, Rule 39,
Sec. 28).
The right of redemption, as long as within the
period prescribed, may be exercised regardless
of whether or not the mortgagee has
subsequently conveyed the property to some
other party (Sta. Ignacia Rural Bank, Inc. v. CA,
GR No. 97872, March 1, 1994).
Note: Notwithstanding Act 3135, juridical persons
whose property is being sold pursuant to an
extrajudicial foreclosure, shall have the right to
redeem the property until, but not after, the
registration of the certificate of foreclosure sale
with the applicable Register of Deeds which in no
case shall be more than three (3) months after
foreclosure, whichever is earlier. Owners of
property that has been sold in a foreclosure sale
prior to the effectivity of this General Banking Act
shall retain their redemption rights until their
expiration (General Banking Law of 2000, R.A.
8791, Sec. 47).
Effect of Failure to Redeem
Act No. 3135 provides that if the mortgagor or
successors-in-interest fail to redeem within the
redemption period, the title over the property
consolidates in the purchaser.
The consolidation confirms the purchaser as the
owner entitled to the possession of the property. The
mortgagor, by failing to redeem, loses all interest in
the property (United Coconut Planters Bank v. .
Lumbo, G.R. No. 162757, December 11, 2013).
Nature of the Right of Redemption:
1. Absolute privilege – the exercise of which is
entirely dependent upon the will and discretion
of the redemptioner. There is no legal obligation
to exercise the right of redemption (DE LEON,
supra at 452);
2. A mere statutory privilege – it must be exercised
in the mode and within the period prescribed by
the statute (Id. at 453);
3. Construed in favor of the original owner of the
property (Ibid.); and
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4. Involves title to the foreclosed property – If
seasonably made, it seeks to erase from the title
of the judgment or mortgage debtor the lien
created by registration of the mortgage and sale.
If not seasonably made, it may seek to recover
ownership to the property since the purchaser‟s
inchoate title to the property becomes
consolidated after expiration of the period (Id. at
454).
Requisites of a Valid Exercise of the Right of
Redemption:
1. Must be made within twelve (12) months from
the date of the registration of the sale in the
Office of the Registry of Property;
2. Payment of the purchase price of the property
involved, plus 1% interest per month thereon,
together with the amounts of assessments of
taxes thereon, if any, paid by the purchaser and
the amount of his prior lien, if any, with the same
rate of interest computed from the date of
registration of the sale, up to the time of
redemption;
Note: The offer by respondents to redeem the
foreclosed properties and the subsequent
consignation in court, while made within the
period of redemption was ineffective since the
amount offered and actually consigned not only
did not include the interest, but was in fact also
way below the amount paid by the highest
bidder/purchaser of the properties during the
auction sale (Sps. Hojas v. Philippine Amanah
Bank, G.R. No. 193453, June 5, 2013).
3. Writ of notice of the redemption must be
served on the officer who made the sale, and
a duplicate filed with the Registry of Property
of the province (Sps. Yap v. Sps. Dy, G.R. No.
171868, June 27, 2011); and
4. Tender of payment within the prescribed
period to make the redemption valid or
preserve the right of redemption for future
enforcement (RULES OF COURT, Rule 39,
Sec 8; Act No. 3135, Sec. 26).
Note: The filing of a court action to enforce
redemption, being equivalent to a formal offer to
redeem, would have the effect of “freezing” the
expiration of the one-year period (Heirs of N.J.
Quisumbing v. Philippine National Bank, G.R. No.
178242, January 20, 2009).
Summary of Periods of Redemption:
1. Extrajudicial (Act No. 3135)
a. Natural Person – one (1) year from
registration of the certificate of sale with
Registry of Deeds
Note: The statutory period of redemption is only
directory and can be extended by agreement of
the parties provided:
i. The agreement to extend is voluntary; and
ii. The debtor commits to pay the redemption
price on a fixed date (Gajudo v. Traders
Royal Bank, G.R. No. 151098, March 21,
2006).
b. Juridical Person – same rule as natural
person
c. Juridical Person (mortgagor) and Bank
(mortgagee) – three (3) months after
foreclosure or before registration of certificate
of foreclosure whichever is earlier (R.A. 8791,
Sec. 47).
Note: By an amendment by the General
Banking Law of 2000, juridical mortgagors like
partnerships and corporations are barred from
the right of redemption of mortgaged property
sold pursuant to an extrajudicial foreclosure,
after the registration of the certificate of
foreclosure with the applicable Register of
Deeds (DE LEON, supra at 448).
For purposes of reckoning the one-year
redemption period in case of individual
mortgagors, or the three-month reckoning
period for juridical persons/mortgagors, the
same shall be reckoned from the date of
confirmation of the auction sale which is the
date when the certificate of title is issued (BIR
RMC No. 15-2008, August 15, 2008).
2. Judicial – within the period of ninety (90) to one
hundred twenty (120) days from the date of the
service of the order of foreclosure or even
thereafter, but before the order of confirmation of
the sale (RULES OF COURT, Rule 68, Secs. 2
and 3).
Note: Allowing redemption after the lapse of the
statutory period, when the buyer at the
foreclosure sale does not object but even
consents to the redemption, will uphold the
policy of the law which is to aid rather than
defeat the right of redemption (Ramirez v. CA,
G.R. No. 98147, March 5, 1993).
It is a serious error to make the final redemption
of the foreclosed property dependent on the
financial condition of the redemptioner. After all,
the opportunity to redeem the subject property
was never denied (Hi-Yield Realty, Inc. v. CA,
G.R. No. 138978, September 12, 2002).
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Persons Entitled to Exercise Right of
Redemption:
1. Mortgagor or one in privity of title with the
mortgagor (DE LEON, supra at 468); and
2. Successors-in-interest (RULES OF COURT,
Rule 39, Sec. 29)
Payment of Redemption
To Whom: The purchaser or redemptioner, or for
him to the officer who made the sale (RULES OF
COURT, Rule 39, Sec. 29).
Medium of Payment: It may be made in cash or in
check.
Article 1249 of the Civil Code which expressly
provides for the medium in the “payment of debts” is
not applicable (DE LEON, supra at 457).
Redemption by check is already sanctioned (Co v.
Philippine National Bank, G.R. No. L-51767, June
29, 1982).
Intention to Redeem is NOT Sufficient
It is not sufficient that a person offering to redeem
manifests his desire to do so. An actual and
simultaneous tender of payment must accompany
the statement of intention.
Bona fide redemption necessarily implies a
reasonable and valid tender of the entire repurchase
price, otherwise the rule on the redemption period
fixed by law can easily be circumvented (Sps. Hojas
v. Philippine Amanah Bank, supra.).
Amount of the Redemption Price:
1. When mortgagee is not a bank (Act No. 3135, in
relation to Sec. 28, Rule 39 of Rules of Court)
(PINT)
a. Purchase price of the property;
b. 1% Interest per month on the purchase price
from the date of registration of the certificate
up to the time of redemption;
c. Necessary expenses incurred by the
purchaser for the improvements made by him
to preserve the property during the period of
redemption; and
d. Taxes paid and amount of purchaser‟s prior
lien, if any, with the same rate of interest
computed from the date of registration of sale,
up to the time of redemption
2. When mortgagee is a bank (General Banking
Law of 2000, R.A. 8791) (CMICE)
a. Amount fixed by the Court or amount due
under the Mortgage deed;
b. Interest; and
c. Cost and Expenses
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Redemption price in this case is reduced by the
income received from the property (DE LEON,
supra at 459).
Note: The redemption price for properties
mortgaged to and foreclosed by the Development
Bank of the Philippines is equivalent to the
remaining balance of the loan with interest at the
agreed rate. The charter of DBP (E.O. No. 81
(1986)), as amended by R.A. No. 8523, being a
special and subsequent law, amended Act No.
3135 insofar as redemption price is concerned
(Development Bank of the Philippines v.
Environmental Aquatic, Inc., G.R. No. 174329,
October 20, 2010).
Rentals Received by the Purchaser
The purchaser or redemptioner shall not be entitled
to receive the rents, earnings, and income of the
property sold on execution or the value of the use
and occupation thereof while the property is in the
possession of the tenant. It shall belong to the
judgment obligor until the expiration of the period of
redemption (DE LEON, supra at 461).
Rights of Persons with Subordinate Interest
1. Mortgagor‟s equity of redemption before
foreclosure – a second mortgagee acquires only
the equity of redemption vested in the mortgagor
and his rights are strictly subordinate to the
superior lien of the first mortgagee (Sun Life
Assurance Co. of Canada v. Diez, G.R. No. L-
29027, October 25, 1928).
2. Mortgagor‟s right of redemption after foreclosure
– his remedy is limited to the right to redeem by
paying off the debt secured by the first mortgage
(Tizon v. Valdez, G.R. No. L-24797, March 16,
1926).
3. The second mortgagee is entitled, under the
mortgage constituted in his favor, to the payment
of his credit the excess of the proceeds of the
auction sale, after covering the mortgagor‟s
obligations to the first mortgagee (DE LEON,
supra at 462).
4. To be made defendant in an action for
foreclosure of the mortgage.
Note: The effect of the failure of the mortgagee to
implead a subordinate lien-holder or subsequent
purchaser or both is to render the foreclosure
ineffective as against them.
5. To question the legality of the foreclosure
proceedings or the effect of alleged lack of
notice to them of such foreclosure (G. Puyat &
Sons v. Philippine National Bank, G.R. No. L-
16843, April 30, 1962).
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Right to Possession of Third Persons as
Purchaser:
Both during and after the period of redemption, the
purchaser at the foreclosure sale is entitled as of
right to a writ of possession, regardless of whether
or not there is a pending suit for annulment of the
mortgage or the foreclosure itself (DE LEON, supra
at 454).
Writ of Possession – an order whereby a sheriff is
commanded to place in possession, of real or
personal property, the person entitled thereto such
as when a property is extrajudicially foreclosed (Id.
at 473).
Note: The right of the applicant or subsequent
purchaser for the issuance of a writ of possession
never prescribes (Sps. Ching v. Family Savings
Bank, G.R. No. 167835, November 15, 2010).
1. Before expiration of redemption period –
possession can be availed of as long as an ex
parte motion under oath is filed and a bond in
accordance with Section 7 of Act No. 3135 is
posted (Philippine Bank of Communications v.
Yeung, supra).
2. After lapse of redemption period – purchaser is
not obliged to bring a separate suit for
possession. He must invoke the aid of the courts
and ask a writ of possession (Javelosa v. CA,
G.R. No. 124292, December 10, 1996).
No bond is required of the purchaser after the
redemption period if the property is not
redeemed (DE LEON, supra at 479).
The suspension of the implementation of the writ
of possession is not allowed after the
redemption period (Id. at 480).
Note: After consolidation of title in the
purchaser‟s name for failure of the mortgagor to
redeem the property, the purchaser‟s right to
possession ripens into the absolute right of a
confirmed owner.
At that point, the issuance of writ of possession,
upon proper application and proof of title, to a
purchaser in a extrajudicial sale becomes merely
a ministerial function, unless it appears that the
property is in possession of a third party claiming
a right adverse to that of the mortgagor (Rural
Bank of Sta. Barbara v. Centeno, G.R. No.
200667, March 11, 2013).
When Writ of Possession is NOT Available:
1. Where mortgaged property under lease
previously registered in the Registry of Property
or despite non-registration, the mortgagee has
prior knowledge of the existence and duration of
the lease (Ibasco v. Caguioa, G.R. No. L-62619,
August 19, 1986);
2. Where mortgagor refuses to surrender property
sold, the remedy is to file an ordinary action for
the recovery of possession in order that the
mortgagor may be given opportunity to be heard
(DE LEON, supra at 481); and
3. When third party is in actual possession adverse
to the judgment debtor (RULES OF COURT,
Rule 39, Sec. 35; Act No. 3135 Sec. 6).
Waiver of Security by Mortgagee
The mortgagee may institute either a personal
action for debt or a real action to foreclose the
mortgage. He may waive the right to foreclose his
mortgage and maintain a personal action for
recovery of the indebtedness.
Note: In either case, he is entitled to obtain a
deficiency judgment (DE LEON, supra at 441).
OPTIONS IN CASE OF DEATH OF DEBTOR
General rule: A secured creditor holding a real
estate mortgage has three distinct, independent,
and mutually exclusive remedies that can be
alternatively pursued in case the mortgagor dies:
1. To waive the mortgage and claim the entire debt
from the estate of the mortgagor as an ordinary
claim;
2. To foreclose the mortgage judicially and prove
any deficiency as an ordinary claim; and
3. To rely on the mortgage exclusively, foreclosing
the same at any time before it is barred by
prescription without a right to file a claim for any
deficiency (Perez v. PNB, supra).
Petition for Annulment of Foreclosure
Proceedings
This petition contests the presumed right of
ownership of the buyer in a foreclosure sale and
puts in issue such presumed right of ownership
while an ex parte petition for issuance of a writ of
possession is non-litigous proceeding.
Filing of a petition for nullification of foreclosure
proceedings with motion for consolidation is not
allowed as it will render nugatory the presumed right
of ownership, as well as the right of possession, of a
buyer in a foreclosure sale (DE LEON, supra at
482).
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 contrary, antichresis is susceptible of
guaranteeing all kinds of obligations, whether
A NTICHRESIS pure or conditional in nature (Javier v. Valliser,
CA No. 2648-R, April 29, 1950; Sta. Rosa v.
( A RTS . 2132 – 2139) Noble, 35 O.G. 27241).

Contract of Antichresis Mortgagee in Possession

A contract whereby the creditor acquires the right to
receive the fruits of an immovable property of the
debtor, with the obligation to apply them to the
payment of the interest, if owing, and thereafter to
the principal of his credit (CIVIL CODE, Art. 2132).
Characteristics:
1. Accessory contract – it secures the performance
of a principal obligation.
2. Formal contract – it must be in a specified form
to be valid i.e. in writing (CIVIL CODE, Art.
2134).
Reason: To forestall the use of antichresis for
purposes of usury (DE LEON, supra at 500).
Special Requisites:
1. It can cover only the fruits of an immovable
property but not the immovable itself (Id. at 497);
Note: Article 1306 of the Civil Code gives parties
the freedom to stipulate otherwise. The
reduction of the amount of fruits available to the
creditor does not vary the nature of the contract
(Ibid.).
2. Delivery of the immovable is necessary only for
the creditor to receive the fruits and not for the
contract to be binding (Ibid.);
One who has lawfully acquired actual or constructive
possession of the premises mortgaged to him,
standing upon his rights as mortgagee and not
claiming under another title for the purpose of
enforcing his security upon such property or making
its income to pay his debt (Diego v. Fernando,
supra).
There is also a third-party antichretic.
Provisions Indicative of a Contract of Mortgage:
1. The agreement that the full amount of
indebtedness must be returned to the lenders
before the borrowers could demand the return of
the property, which is contrary to an antichretic
contact wherein the products of the land should
be applied to the interest and then to principal;
2. The use of the term “mortgage” in various parts
of the contract; and
3. The agreement that the lenders are not to pay
rentals on the property in consideration of the
fact that the borrowers do not pay interest on the
sum which they obtained as a loan (DE LEON,
supra at 499-500).
Applicability of Other Articles
The last paragraph of Article 2085, and Articles
2089 to 2091 are applicable to this contract (CIVIL
CODE, Art. 2139).

3. Amount of principal and interest must be An antichresis is also indivisible in nature (CIVIL
specified in writing (CIVIL CODE, Art. 2134); and CODE, Art. 2090).

Note: This is mandatory (5 PARAS, supra at Antichresis v. Pledge

1141). Antichresis Pledge
As to Subject Matter
4. Express agreement that the debtor will give
possession of the property to creditor and that Refers to personal
Refers to real property
the latter will apply the fruits to the interest, if property
any, then to the principal of his credit (CIVIL As to Perfection
CODE, 2132). Perfected by delivery of
Perfected by mere
the thing pledged (Real
In the absence of this requisite, the contract consent (Consensual)
contract)
shall be deemed to be one of mortgage (Legaspi As to Control of Subject Matter
and Salcedo v. Celestial, G.R. Nos. L-43673 and
43674, October 24, 1938; Diego v. Fernando, Debtor loses control of the subject matter of the
G.R. No. L-15128, August 25, 1960). contract.
(DE LEON, supra at 498)
Note: The obligation to pay interest is not the
essence of the contract of antichresis, there
being nothing in the Code to show that
antichresis is only applicable to securing the
payment of interest-bearing loans. On the

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 Antichresis v. Real Mortgage 3. To have the thing sold upon non-payment at
Antichresis Real Mortgage maturity (CIVIL CODE, Art. 2137);
As to Delivery or Non-Delivery of the Property
Debtor usually retains Note: In this case, the Rules of Court on the
Real Property is foreclosure of mortgages shall apply.
possession of the Real
delivered to creditor.
Property.
4. Preference to the proceeds of the sale of the
As to Right to the Fruits thing (5 TOLENTINO, supra at 567); and
Creditor does not have
Creditor acquires only
any right to receive the 5. To be reimbursed for his expense for machinery
the right to receive the
fruits; but the and other improvements on the land, and for the
fruits of the property;
mortgage creates a sums paid as land taxes (5 PARAS, supra at
hence, it does not
real right over the 1143).
produce a real right.
property.
As to the Obligation to Pay Taxes Obligations of Antichretic Creditor:
The creditor, unless 1. To pay taxes and charges on the estate, if there
there is stipulation to has been no stipulation to the contrary, and to
the contrary, is obliged The creditor has no bear the expenses necessary for preservation
to pay the taxes and such obligation. and repair. The sums spent shall be deducted
charges upon the from the fruits (CIVIL CODE, Art. 2136).
estate.
As to the Obligation to Apply Fruits to the Note: The creditor has to pay for the taxes and
Interest charges, even if the fruits be insufficient (5
It is expressly stipulated PARAS, supra at 1142).
that the creditor given
possession of the If he does not pay the taxes, he is, by law,
property shall apply all required to pay indemnity for damages to the
There is no such debtor (Pando v. Gimenez, G.R. No. 31816,
the fruits thereof to the
obligation on part of February 15, 1930).
payment of interest, if
mortgagee.
owing, and thereafter to
the principal. Creditor may avoid said obligation by compelling
debtor to reacquire enjoyment of the property,
unless there is a stipulation to the contrary
(CIVIL CODE, Art. 2136, Par. 2).
As to Subject Matter
The subject matter of both is real property. If the debtor has paid for the taxes, which the
(Id. at 498-499) creditor should have paid, the amount is to be
applied to the payment of the debt, and the
Measure of Application of Fruits to Interest and debtor is entitled to the return of the property
Principal free from all encumbrances if he, in effect, by
The actual market value of the fruits at the time of advancing the taxes, had already discharged the
application thereof to the interest and principal shall debt (Rosales v. Tanseco, G.R. No. L-4135,
be the measure of such application (CIVIL CODE, November 29, 1951).
Art. 2133).
2. To apply all the fruits, after receiving them, to the
Rights of Antichretic Creditor: payment of interest, if owing, and thereafter to
1. The right to the fruits and income of the thing the principal in accordance with the provisions of
(CIVIL CODE, Art. 2132); Article 2133 or 2138 of the Civil Code (CIVIL
CODE, Art. 2132).
2. To retain the thing until the debt is paid (CIVIL
CODE, Art. 2136, Par. 1); 3. To render an account of the fruits to the debtor
(Diaz v. De Mendezona, G.R. No. L-24824,
Note: The property delivered stands as a January 30, 1926).
security for the payment of the obligation of the
debtor in antichresis. Hence, the debtor cannot Remedies of Creditor in Case of Default
demand its return until the indebtedness is If the debt is not paid, the creditor does not acquire
satisfied and the property is redeemed ownership of the real estate, since what was
(Macapinlac v. Repide, G.R. No. 18574, transferred is not the ownership, but merely the right
September 20, 1922). to receive fruits (CIVIL CODE, Art. 2137; DE LEON,
supra at 502)

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The remedies of the antichretic creditor are:
1. Action for specific performance; and
2. Petition for the sale of the real property as in a
foreclosure of mortgages under Rule 68 of the
Rules of Court (CIVIL CODE, Art. 2137).
Note: The parties may agree on an extrajudicial
foreclosure in the same manner as they are allowed
in contracts of mortgage and pledge (Tavera v. El
Hogar Filipino, Inc., G.R. No. L-45963, October 12,
1939).
A stipulation authorizing the antichretic creditor to
appropriate the property, upon the non-payment of
the debt, within the agreed period is void (CIVIL
CODE, Art. 2088).
The creditor in antichresis and his successors-in-
interest cannot ordinarily acquire the property
subject of the antichresis by prescription (Valencia v.
Alcala, 42 Phil. 177, 1921; Bernardo v. Barretto, 37
Phil. 234, 1917).
Exception: He repudiates his status as an
antichretic creditor before he can claim ownership.
(DE LEON, supra at 503)
Possession of the antichretic creditor is not in the
concept of an owner, which is required for the
purpose of acquisitive prescription. He is a mere
holder placed in the possession of the land by the
debtor-owner (Ramirez v. CA, G.R. No. L-38185,
September 24, 1986).
C HATTEL M ORTGAGE
( A RTS . 2140 – 2141)
Contract of Chattel Mortgage
A contract by virtue of which personal property is
recorded in the Chattel Mortgage Register as a
security for the performance of an obligation (CIVIL
CODE, Art. 2140).
It is a conditional sale of personal property as
security for the payment of a debt, or the
performance of some other obligation specified
therein, the condition being that the sale shall be
void upon the seller paying to the purchaser a sum
of money or doing some other act named. (Act No.
1508, Sec. 3)
Note: If the movable, instead of being recorded, is
delivered to the creditor or a third person, the
contract is a pledge and not a chattel mortgage
(CIVIL CODE, Art. 2140).
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Characteristics:
1. Accessory contract – it is for the purpose of
securing the performance of a principal
obligation;
2. Formal contract – registration in the Chattel
Mortgage Register is indispensable for its
validity;
3. Unilateral contract – it produces only obligations
on the part of the creditor to free the thing from
the encumbrance upon fulfillment of the
obligation (DE LEON, supra at 506)
Special Requisites:
1. It can cover only personal or movable property in
general. However, the parties may treat as
personal property that which by its nature would
be real property (CIVIL CODE, Art, 2140; Act
No. 1508, Sec. 2);
Note: A real property may be considered as a
personal property for purposes of executing a
chattel mortgage thereon as long as the parties
to the contract so agree and no innocent third
party will be prejudiced thereby. Once the
parties so agreed, they are already estopped
from claiming otherwise (Makati Leasing and
Financial Corporation v. Wearever Textile Mills,
Inc., G.R. No. L-58469, May 16, 1983).
Laws Governing Chattel Mortgage
1. Chattel Mortgage Law, Act No. 1508, as
amended;
2. Civil Code;
3. Revised Administrative Code;
4. Revised Penal Code; and
5. Ship Mortgage Decree of 1978, P.D. 1521, in
case of mortgage of vessels of domestic
ownership.
Properties Held To Be Mortgageable Under the
Chattel Mortgage Law:
a. Shares of stock in a corporation (Monserrat v.
Ceron, G.R. No. 37078, September 27, 1933);
Note: If the owner of the shares is not
domiciled in the same province where the
corporation is domiciled, the registration must
be made in both provinces (DE LEON, supra
at 509);
b. Interest in the business;
Reason: It is a personal property capable of
appropriation (Strochecker v. Ramirez, G.R.
No. 18700, September 26, 1922);
c. Machinery treated by the parties as personal
property subsequently installed on leased
land (Davao Sawmill Co., Inc. v. Castillo, G.R.
No. L-40411, August 7, 1935);
3
 d. Vessel, but it is essential that the mortgage is
recorded in the office of the Philippine Coast
Guard of the port of documentation of such
vessels (P.D. 1521);
e. Motor vehicles;
Note: The mortgage must also be registered
in the LTO and with respect to vehicles for
public services, the mortgage must be
approved by the LTFRB to make it effective
against the public and the Commission
(Montoya v. Ignacio, G.R. No. L-5868,
December 29, 1953).
f. House of mixed materials (Luna v.
Encarnacion, supra).
g. House intended to be demolished;
Reason: What are really mortgaged are the
materials thereof and they are, therefore,
personal property (DE LEON, Credit
Transactions, supra at 511).
h. House built on rented land;
Reason: It does not form part of the land. An
object placed on land by one who had only a
temporary right to the same does not become
immobilized by attachment (Ibid.)
i. Machinery which is movable in its nature and
becomes immobilized only by destination or
purpose (Makati Leasing and Finance Corp v.
Wearever Textiles Mills, Inc., supra); and
j. House of strong materials.
Note: It may be considered as personal
property for purposes of executing a chattel
mortgage as long as:
i. The parties to the contract agree; and
ii. No innocent third person will be prejudiced
thereby (DE LEON, supra at 512).
2. Registration of the mortgage with the Chattel
Mortgage Register where the mortgagor resides.
If the property is located in a different province,
registration in both provinces is required (Act No.
1508, Sec. 4);
3. Description of the property as would enable the
parties or other persons to identify the same
after reasonable investigation and inquiry
(Saldana v. Phil. Guaranty Co. Inc., G.R. No. L-
13194, January 29, 1960);
4. Accompanied by an affidavit for the purpose of
transforming an already valid mortgage to a
“preferred mortgage” (Cebu International
Finance Corp. v. CA, G.R. No. 107554, February
13, 1997); and
5. It can cover only obligations existing at the time
the mortgage is constituted.
Note: A mortgage containing a stipulation in
regard to future advances in the credit will take
effect only from the date the same are made and
not from the date of the mortgage (Jaca v.
Davao Lumber Co., G.R. No. L-25771, March
29, 1982).
Mortgage of Improvements on Land
For purposes of the Chattel Mortgage Law, both
growing crops and large cattle are personal property
although they are considered as immovable under
Article 415, Nos. (2) and (6) of the Civil Code.
Note: Although the parties to a contract may treat
certain improvements and crops as chattels, insofar
as they are concerned, it is now settled in our
jurisdiction that, in general, and so far as the public
is concerned, such improvements, if falling under
the provisions of Article 415 of the Civil Code, are
immovable property (DE LEON, supra at 513).
As a consequence, a mortgage constituted in the
improvements must be susceptible of:
1. Registration as a real estate mortgage; and
2. Annotation on the certificate of title to the land of
which they form part, although the land itself
may not be subject to said encumberance
(Tolentino v. Baltazar, G.R. No. L-14597, March
27, 1961).
Extent of Chattel Mortgage
A chattel mortgage shall be deemed to cover only
property described therein and not like or substituted
property thereafter acquired by the mortgagor and
placed in the same depositary as the property
originally mortgaged, anything in the mortgage to
the contrary notwithstanding (Act No. 1508, Sec.
7(4)).
Note: The provision does not refer to those already
existing and originally included at the date of the
constitution of the mortgage (DE LEON, supra at
515).
Stipulation Including After-Acquired Property
It is valid and binding where the after-acquired
property is:
1. In renewal of or in substitution for goods on
hand; or
2. Purchased with the proceeds of the sale of such
goods (Torres v. Limjap, G.R. No. 34385,
September 21, 1931).
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 Chattel Mortgage v. Pledge Register as security for the performance of the
Chattel Mortgage Pledge obligation (CIVIL CODE, Art. 2140).
SIMILARITIES
1. Both are executed to secure performance of a Period Within Which Registration Should be
principal obligation; Made
2. Both are constituted only on personal property; There is no specific time. The law is substantially
3. Both are indivisible; and sufficiently complied with where the registration
4. Both constitute a lien on the property; is made by the mortgagee before the mortgagor has
5. In both cases, the creditor cannot appropriate complied with his principal obligation and no right of
the property to himself in payment of the debt; innocent third persons is prejudiced (DE LEON,
6. In both cases, when the debtor defaults, the supra at 517).
property must be sold for the payment of the
creditor; and Venue of Registration:
7. Both are extinguished by the fulfillment of the 1. If he resides in the Philippines – In the office of
principal obligation or by the destruction of the the register of deeds of the province in which the
property pledged or mortgaged. (DE LEON, mortgagor resides at the time of the making of
supra at 507). the chattel mortgage.
DISTINCTIONS 2. If he does not reside in the Philippines – In the
As to necessity of delivery province in which the property is located.
The delivery of the The delivery of the 3. If the property is situated in the province different
personal property to the personal property is from that in which the mortgagor resides – The
mortgagee is not necessary. mortgage shall be recorded in both provinces
necessary. (double registration). (Act 1508, Sec. 4)
As to requirement of registration
The registration of the The registration in the Effects of Registration:
mortgage in the Chattel Registry of Property is 1. Creates a real right – The registration of the
Mortgage Register is not necessary. chattel mortgage is an effective and binding
required by law. notice to other creditors of its existence and
As to the procedure for sale creates a real right or a lien which, being
recorded, follows the chattel wherever it goes.
The procedure is The procedure is
governed by Section 14 governed by Article 2112 The registration gives the mortgagee symbolical
possession (Northern Motors, Inc. v. Coquia,
of Act No. 1508, as of the Civil Code.
G.R. No. L-40018, December 15, 1975).
amended.
2. Adds nothing to the mortgage – Registration
As to who is entitled to the excess over the
adds nothing to the instrument, considered as a
amount due
source of title and affects nobody's rights except
The excess of the The debtor is not entitled
as a specie of notice (Standard Oil Co. of New
amount due goes to the to the excess unless it is
York v. Jaramillo, G.R. No. L-20329, March 16,
debtor (ACT NO. 1508, otherwise agreed upon
1923).
Sec. 14). (CIVIL CODE, Art. 2115)
or in the case of a legal
Effect of Failure to Register Chattel Mortgage in
pledge (CIVIL CODE,
the Chattel Mortgage Registry
Art. 2121).
If the instrument is not recorded, the mortgage is
As to the right of creditor to recover deficiency nevertheless binding between the parties DE LEON,
from debtor
supra at 517). However, the person in whose favor
The creditor is entitled The creditor is not the law establishes a mortgage has no other right
to recover the entitled to recover than to demand the execution and the recording of
deficiency from the deficiency the document.
debtor except if the notwithstanding any
chattel mortgage is a stipulation to the Duty of Register of Deeds Ministerial
security for the contrary (CIVIL CODE, The duties of a register of deeds in respect to the
purchase of personal Art. 2115). registration of chattel mortgages are of a purely
property in installments ministerial character (Id. at 519)
(CIVIL CODE, Art.
1484). Affidavit of Good Faith
(DE LEON, supra at 506-507) It is an oath in a contract of chattel mortgage
wherein the parties "severally swear that the
Creation of A Chattel Mortgage mortgage is made for the purpose of securing the
The law provides only for one way: the registration obligation specified in the conditions thereof and for
of the personal property in the Chattel Mortgage

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no other purposes and that the same is a just and
valid obligation and one not entered into for the
purpose of fraud” (Act No. 1508, Sec. 5).
Note: The debt referred to in the law is current and
not an obligation that is merely contemplated. A
mortgage that contains a stipulation in regard to
future advances in the credit will take effect only
from the date the same are made and not from the
date of the mortgage (Jaca v. Davao Lumber Co.,
supra).
Effect of Absence of an Affidavit of Good Faith
The special affidavit is required only for the purpose
of transforming an already valid mortgage into a
“preferred mortgage.” It is not necessary for the
validity of the chattel mortgage itself but only to give
it a preferred status (Cebu International Finance
Corp. v. CA, supra).
Its absence vitiates the mortgage only as against
third persons without notice, like creditors and
subsequent encumbrances (Lilius v. Manila Railroad
Co., G.R. No. 42551, September 4, 1935).
Registration of Assignment of Mortgage
There is no law expressly requiring the recording of
the assignment of a mortgage (DE LEON, supra at
519).
Note: The assignee is bound by the terms and
conditions of the chattel mortgage executed
between the mortgagor and the mortgagee (BA
Finance Corp v. CA, G.R. No. 82040, August 27,
1991).
Financial Leasing Under the Financing Company
Act of 1998
A finance company purchases on behalf of a cash-
strapped lessee the equipment the latter wants to
buy and then leases the equipment to the lessee in
exchange for the latter‟s periodic payment of a fixed
amount of rental.
General Rule: It is an extension of credit to assist a
buyer in acquiring movable property
Exception: If the movable property already
belonged to the borrower-lessee, the transaction
between the parties is a loan with mortgage in the
guise of a lease (PCI Leasing and Finance Inc.,
G.R. No. 176381, December 15, 2010).
Liability of third person with the debtor
A third person who constitutes chattel mortgage on
his own property as security to another‟s obligation
not solely by reason thereof becomes solidarily
bound with the principal debtor (Cerna v. CA, G.R.
No. L-48359, March 30, 1993).
Foreclosure of Chattel Mortgage
After payment of the debt or the performance of the
condition specified in the Chattel Mortgage (Act No.
1508, Sec. 3), the mortgagee must discharge the
mortgage in the manner provided by law. Otherwise,
he may be held liable for damages by any person
entitled to redeem the mortgage (Act No. 1508, Sec.
8).
1. Public sale
If the mortgagor defaults in the payment of the
secured debt or otherwise fails to comply with
the conditions of the mortgage, the creditor has
no right to appropriate to himself the personal
property (CIVIL CODE, Arts. 2141 and 2088).
He is permitted only to recover his credit from
the proceeds of the sale of the property at a
public auction through a public officer in the
manner prescribed in Sec. 14 of Act No. 1508
(Mahoney v. Tuason, G.R. No. 14129, July 30,
1919).
2. Private Sale
There is nothing illegal, immoral, or against
public order in an agreement for the private sale
of the personal properties covered by the chattel
mortgage (CIVIL CODE, Art. 1306). The
mortgagor is in estoppel to question it except on
the ground of fraud or duress (Philippine
National Bank v. Manila Investment &
Construction Inc., G.R. No. L-27132, April 29,
1971).
Note: Foreclosure suits may be initiated even
during involuntary proceedings as long as leave
is first obtained from the insolvency court (Royal
Commercial Banking Corp. v. Royal Cargo
Corp., G.R. No. 179756, October 2, 2009).
Matters to be Established to Effect Foreclosure
1. The existence of the chattel mortgage; and
2. The mortgagor‟s default on the obligation (DE
LEON, supra at 531).
Civil Action to Recover Credit
The mortgagee is not obligated to file an
independent action for the enforcement of his credit
(Id. at 528).
Note: A mortgagor who sues and obtains a personal
judgment against a mortgagor upon his credit
waives thereby his right to enforce the mortgage
securing it (Id. at 529).
Period to Foreclose Mortgage
The mortgagee may, after thirty (30) days from the
time the condition is broken, cause the mortgaged
property to be sold at public auction by a public
officer (Act No. 1508, Sec. 14).
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The 30-day period is also a grace period for the
mortgagor to discharge the mortgage obligation.
After the sale of the chattel at public auction, the
right of redemption is no longer available to the
mortgagor (Cabral v. Evangelista, G.R. No. L-26860,
July 30, 1969).
Application of Proceeds of the Foreclosure Sale:
1. Costs and expenses of keeping the property and
its sale;
2. Payment of the obligation secured by the
mortgage;
3. Claims of persons holding subsequent
mortgages in their order; and
4. The balance, if any, shall be paid to the
mortgagor or person holding under him (Act No.
1508, Sec. 14).
Right of Mortgagee to Recover Deficiency
1. Where mortgage is foreclosed
The creditor may maintain an action for
deficiency although the Chattel Mortgage Law is
silent on this point (DE LEON, supra at 532).
Reason: The chattel mortgage is only given as a
security and not as payment for the debt in case
of failure of payment (Bicol Savings & Loan
Association v. Guinhawa, G.R. No. L-62415,
August 20, 1990).
The action for deficiency may be brought within
ten (10) years from the time the cause of action
accrues (CIVIL CODE, Art. 1144(1) & (2)).
2. Where mortgage is constituted as security
for purchase of personal property payable in
installments.
No deficiency judgment can be asked and any
agreement to the contrary shall be void (CIVIL
CODE, Art. 1484).
3. Where mortgaged property is subsequently
attached and sold.
The chattel mortgagee is entitled to deficiency
judgment in an action for specific performance
(CIVIL CODE, Art. 1484(1)).
Note: The execution sale in such case is not a
foreclosure sale (Industrial Finance Corp. v.
Ramirez, G.R. No. L-43821, May 26, 1977).
Right of Redemption under Act 1508
Who May Exercise the Right of Redemption:
When the condition of a chattel mortgage is broken,
the following may redeem:
1. Mortgagor;
2. Person holding a subsequent mortgage; or
3. Subsequent attaching creditor (DE LEON, supra
at 521).
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An attaching creditor who so redeems shall be
subrogated to the rights of the mortgagee and is
entitled to foreclose the mortgage (Act No. 1508,
Sec. 13).
How Redemption is Made:
By paying or delivering to the mortgagee the amount
due on such mortgage and the costs and expenses
incurred by such breach of condition before the sale
thereof (Act No. 1508, Sec. 13).
Note: This redemption partakes of an equity of
redemption (DE LEON, supra at 522).
When Redemption is Made:
It must be made after his default but before the
foreclosure sale. After the foreclosure sale, the right
of redemption no longer exists (Ibid.).
Right Acquired by the Second Mortgagee and
the Subsequent Purchaser
1. Before payment of debt
After a chattel mortgage is executed, there
remains in the mortgagor a mere right of
redemption and only this right passes to the
second mortgagee in case of a second
mortgage (Ibid.).
As between the first and second mortgagees,
the latter can only recover the property from the
former by paying him the mortgage debt. Even
when the second mortgagee goes through the
formality of extrajudicial foreclosure, the
purchaser acquires no more than the right of
redemption from the first mortgagee (Tizon v.
Valdez, supra).
2. After payment of debt
If the only leviable interest of a chattel mortgage
in a mortgaged property is his right of
redemption, it follows that the judgment or
attaching creditor who purchased the property at
the execution sale could not acquire anything
except such right of redemption. He is not
entitled to the actual possession and delivery of
the property without first paying the mortgage
debt (Tizon v. Valdez, supra.)
Right of Mortgagee to the Possession of the
Foreclosed Property in Chattel Mortgage
1. After default
The right of the creditor to take the mortgaged
property is implied from the provision (CIVIL
CODE, Art. 2087) which gives him the right to
sell (DE LEON, supra at 523).
2. Before default
He is not entitled to possession. Otherwise, the
contract becomes a pledge (CIVIL CODE, Art.
2093).
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Remedy When Mortgagor Refuses to Yield
Property
Where the debtor refuses to yield the property, the
creditor‟s remedy is to institute an action either to
effect judicial foreclosure directly or to secure
possession (replevin) as a preliminary to the sale
contemplated in Section 14 of Act No. 1508 (DE
LEON, supra at 523).
The necessary expenses incurred in the prosecution
by the mortgagee of the action for replevin should
be borne by the mortgagor (Agustin v. CA, G.R. No.
107846, April 18, 1997).
Note: In case of default and the mortgagor refuses
to surrender the chattel, replevin or judicial
foreclosure does not require the mortgagee to first
ask the sheriff to foreclose the mortgage or take
possession of the property (DE LEON, supra at
524).
Reason: The sheriff has no authority to seize the
mortgaged property. Whenever the sheriff proceeds
under Section 14 of the Chattel Mortgage Law, he
becomes pro hac vice the mere agent of the creditor
(Northern Motors, Inc. v. Herrera, G.R. No. L-32674,
February 22, 1973).
Remedy When the Right of Mortgagee is
Conceded
When the mortgage authorizes the mortgagee to
take possession of the property on default, he may
maintain an action to recover possession of the
mortgaged chattel from the mortgagor or any person
in whose hands he may find them (DE LEON, Credit
Transactions, supra at 525).
OFFENSES INVOLVING CHATTEL MORTGAGE
1. Knowingly removing any personal property
mortgaged under the Chattel Mortgage Law to
any province or city other than the one in which
it was located at the time of the execution of the
mortgage without the written consent of the
mortgagee; and
2. Selling or pledging personal property already
mortgaged, or any part thereof, under the terms
of the Chattel Mortgage Law without the consent
of the mortgagee written on the back of the
mortgage and duly recorded in the Chattel
Mortgage Register (Revised Penal Code, Art.
319).
Effect of Full Payment on Criminal Liability
The mortgagor is not relieved of criminal liability
even if the mortgage indebtedness is thereafter paid
in full (DE LEON, supra at 508) or the mortgagor-
seller informed the purchaser that the thing sold had
been mortgaged (People v. Alvarez, G.R. No. L-
19914, November 27, 1923).
Validity of the Sale Made Without the Consent of
the Mortgagee
The sale is valid although no written consent was
obtained from the mortgagee, but the mortgagor
lays himself open to criminal prosecution (DE LEON,
supra at 508).
C ONCURRENCE AND
P REF ERENCE OF C REDITS
( A RTS . 2236 – 2251)
Concurrence of Credits
This implies the possession by two or more creditors
of equal rights or privileges over the same property
or all of the property of the debtor (Id. at 536).
Preference of Credits
This is the right held by a creditor to be preferred in
the payment of his claim above others out of the
debtor‟s assets. It is the right to be paid first (Ibid.).
Nature and Effect of Preference:
General Rule: A debtor is liable with all his
property, present and future, for the fulfillment of his
obligations (Id. at 539).
The creditors have the right to pursue the property in
possession of the debtor to satisfy their claims (Id.
539).
Exception: There should be no rules as to who
should be paid first. Preference applies ONLY when
there are two (2) or more creditors with separate
claims against a debtor who has insufficient property
to answer for all his obligations. Since it is an
exception to the general rule, the law as to
preferences is strictly construed (Roman v.
Herridge, G.R. No. 22511, December 22, 1924).
1. Does not create an interest in property.
Preference simply creates a right to be paid first
from the proceeds of the sale of property of the
debtor. It does not create a lien on the property
itself, but merely a preference in the application
of the proceeds of the property after it is sold.
2. The creditor does not have the right to take the
property and sell it as against another creditor.
Preference applies after a sale, and it is a
question of application of the proceeds after it is
sold.
3. It must be asserted. If the right claimed is not
asserted and maintained, it is lost. If property
has not been seized, it is open to seizure by
another.
4. It must be maintained. Where a creditor released
his levy, leaving the property in possession of
the debtor, thereby indicating that he did not
intend to press his claim further as to that
specific property, he is deemed to have
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 abandoned his claim of preference (DE LEON,
supra at 536-537).
Rules on Preference Applicable When
1. There are two (2) or more creditors;
2. With separate and distinct claims;
3. Against the same debtor; and
4. Who has insufficient property (Pacific Farms,
Inc. v. Esguerra, G.R. No. L-21783, November
29, 1969).
There must be a proceeding such as an insolvency
proceeding wherein the creditors can file their
claims. The right becomes significant only after the
properties of the debtor have been inventoried and
liquidated, and the claims of the various creditors
have been established (Barretto v. Villanueva, G.R.
No. 14038, December 29, 1962; Philippine Savings
Bank v. Lantin, G.R. No. L-33929, September 2,
1983; Development Bank of the Philippines v.
NLRC, G.R. No. 86932, June 27, 1990).
Reason: Prior to the proceedings, the debtor has no
way of ascertaining who the creditors are, and has
no liquidated property out of which he can pay them.
A preferred creditor's third party claim to the
proceeds of a foreclosure sale by the mortgagee is
not the proceeding contemplated by law for the
enforcement of preferences under Article 2241 and
2244 of the Civil Code unless the claimant is
enforcing a credit for taxes that enjoy absolute
priority (Development Bank of the Philippines v. CA,
G.R. No. 126200, August 16, 2001).
A final judgment obtained by a bank depositor for
the payment of his time deposit in a savings bank
prior to the institution of liquidation proceedings but
after the bank was declared insolvent would not
make the claim a preferred claim against the bank
(Banco Filipino Savings and Mortgage Bank v.
NLRC, G.R. No. 82135, August 20, 1990)
Fixed, savings, and current deposits of money in
banks and similar institutions are considered simple
loans (CIVIL CODE, Art. 1980). As such, they are
not preferred credits.
Preference of Credit v. Lien
Preference of credit applies only to claims which do
not attach to specific properties. Lien, on the other
hand, creates a charge on a particular property.
Lien shall refer to a statutory or contractual claim or
judicial charge on real or personal property that
legally entitles a creditor to resort to said property for
payment of the claim or debt secured by such lien
(FRIA, Sec. 4, Par. t).
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Note: Lien does not, in its general sense import a
right of retention, though this right usually
accompanies the lien when the subject is personal
property in possession of the lien-holder (Graño v.
Paredes, G.R. No. L-27019, March 4, 1927).
Law on Insolvency
Insolvency shall be governed by special laws insofar
as they are not inconsistent with this code (CIVIL
CODE, Art. 2237).
It is clear under Article 2237 of the Civil Code that in
case of conflict, it is the Civil Code that prevails (5
PARAS, Special Contracts, supra at 1369).
The applicable law is R.A. 10142, known as the
Financial Rehabilitation and Insolvency Act of 2010.
The Financial Rehabilitation and Insolvency Act
(FRIA) OF 2010 (R.A. 10142)
The FRIA, an act providing for the rehabilitation or
liquidation of financially distressed enterprises and
individuals, which lapsed into law on July 18, 2010,
superseded the former Insolvency Law or Act No.
1956, as amended.
Excluded debtors from the operation of FRIA
1. Banks;
2. Pre-need companies;
3. Insurance companies; and
4. National and local government agencies or units
(FRIA, Sec. 5).
Insolvent
It refers to the financial condition of a debtor that is
generally unable to pay its or his liabilities as they
fall due in the ordinary course of business or has
liabilities that are greater than its or his assets
(FRIA, Sec. 4, Par. p).
Liquidation Process
This is the proceeding where claims are filed and
the assets of the insolvent debtor are disposed and
the proceeds are divided among the creditors.
Liquidation Plan
It is an enumeration of all the assets of the debtor
and a schedule of liquidation of the assets and
payments of claims (FRIA, Sec. 129).
The rules on concurrence and preference of credits
under the New Civil Code and other relevant laws
shall be observed in the Liquidation Plan unless a
preferred creditor voluntarily waives his preferred
right (FRIA, Sec. 133).
Liquidator
A natural person or juridical entity deemed to be an
officer of the court with the principal duly of
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preserving and maximizing the value and recovering
the assets of the debtor, with the end of liquidating
them and discharging to the extent possible all the
claims against the debtor (FRIA, Sec. 4, Par. w; sec.
119).
Liquidation Order
It is an order which:
1. Declares the debtor insolvent;
2. Orders the liquidation of the debtor and, in the
case of a juridical debtor, declare it as dissolved;
3. Orders the sheriff to take possession and control
of all the property of the debtor, except those
that may be exempt from execution;
4. Orders the publication of the petition or motion in
a newspaper of general circulation once a week
for two (2) consecutive weeks;
5. Directs payments of any claims and conveyance
of any property due the debtor to the liquidator;
6. Prohibits payments by the debtor and the
transfer of any property by the debtor;
7. Directs all creditors to file their claims with the
liquidator within the period set by the rules of
procedure;
8. Authorizes the payment of administrative
expenses as they become due;
9. States that the debtor and creditors who are not
petitioner/s may submit the names of other
nominees to the position of liquidator; and
10. Sets the case for hearing for the election and
appointment of the liquidator, which date shall
not be less than thirty (30) days nor more than
forty-five (45) days from the date of the last
publication (FRIA, Sec. 112).
Tax Clearance NOT Required in Liquidation of
Banks
Section 30 of the New Central Bank Act provides
that debts and liabilities of the bank under liquidation
are to be paid in accordance with the rules on
concurrence and preference of credit under the Civil
Code.
If respondent BIR‟s contention that a tax clearance
be secured first before the project of distribution of
the assets of a bank under liquidation may be
approved, then the tax liabilities will be given
absolute preference in all instances, including those
that do not fall under Articles 224, Par. 1(1) and
2242 (1) of the Civil Code.
In order to secure a tax clearance as proof that the
taxpayer had completely paid off his tax liabilities,
petitioner PDIC will be compelled to settle and pay
first all tax liabilities and deficiencies of the bank,
regardless of the order of preference under the
pertinent provisions of the Civil Code (PDIC v. BIR,
G.R. No. 172892, June 13, 2013).
Rights of Secured Creditors
A secured creditor shall refer to a creditor with
secured claim (FRIA, Sec. 4, Par. kk).
A secured claim shall refer to a claim that is secured
by a lien (FRIA, Sec. 4, Par. jj).
The Liquidation Order shall not affect the right of a
secured creditor to enforce his lien in accordance
with the applicable contract or law. A secured
creditor may:
1. Waive his under the security or lien, prove his
claim in the liquidation proceedings and share in
the distribution of the assets of the debtor; or
2. Maintain his rights under the security or lien. In
which case:
a. The value of the property may be agreed upon
by the creditor and the liquidator:
i. If value of the property less than the claim it
secures = liquidator may convey the property
to the secured creditor and the latter will be
admitted in the liquidation proceedings as
creditor for the balance;
ii. If value of the property exceeds the claim
secured = liquidator may convey the property
to creditor and waive the debtor‟s right of
redemption upon receiving excess from the
creditor.
b. The liquidator may sell the property and satisfy
the secured creditor‟s entire claim from the
proceeds of the sale; or
c. The secured creditor may enforce the lien or
foreclose on the property pursuant to
applicable laws (FRIA, Sec. 114).
Voluntary Liquidation v. Involuntary Liquidation
of Individual Debtor
Voluntary Liquidation Involuntary Liquidation
As to Insolvency of Debtor
Debtor is insolvent. Debtor is insolvent.
As to Proof of Acts of Insolvency
Acts of Insolvency Creditors must prove
under section 105 of acts of insolvency.
the FRIA need not be
alleged.
As to Minimum Amount of Aggregate Debts
The debts must be at The debts must be at
least Five hundred least Five hundred
thousand pesos (P500, thousand pesos
000.00) (P500,000.00)
As to Who Initiates
The individual debtor A creditor or group of
files the petition. creditors files the
petition.
As to Effect of Absence of Debtor
The debtor is not Applies even in the case
absent as he files the of absent debtor under
Petition. Sec. 108 of the FRIA.
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 Voluntary Liquidation Involuntary Liquidation 4. Voluntary liquidation of juridical debtors (FRIA,
As to Posting of Bond Sec. 90); and
Posting of Bond by Posting of Bond by 5. At any other time upon the recommendation of
creditors not required. creditors is required. the rehabilitation receiver that the rehabilitation
As to Issuance of Liquidation Order of the debtor is not feasible. (FRIA, Sec. 92)
Liquidation Order is Liquidation Order is
issued without trial. issued after trial. Claims
Refer to all claims or demands of whatever nature or
Involuntary Liquidation of Individual Debtor v. character against the debtor or its property, whether
Involuntary Liquidation of Business for money or otherwise, liquidated or unliquidated,
Organizations fixed or contingent, matured or unmatured, disputed
Individual Debtor Business or undisputed, including, but not limited to:
Organizations (sole 1. All claims of the government, whether national or
proprietorship, local, including taxes, tariffs and customs duties;
partnership, and and
corporation) 2. Claims against directors and officers of the
As to Number of Creditors debtor arising from acts done in the discharge of
At least three (3) There can be one or their functions falling within the scope of their
creditors are required. more creditors. authority:
As to Minimum Amount of Debt
Note: Inclusion of par. 2 does not prohibit the
The debts must be at The debt or aggregate of
creditors or third parties from filing cases against
least five hundred debts must be at least
the directors or officers acting in their personal
thousand pesos (P one million pesos
capacities (FRIA, Sec. 4, Par. c).
500,000) (P1,000,000) or
equivalent to 25% of the
Liability of Debtor’s Property for His Obligations
subscribed capital or
General Rule: Debtor is liable with all his property,
partners‟ contribution,
present and future, for the fulfillment of his
whichever is higher.
obligations (CIVIL CODE, Art. 2236).
As to Continuation of Business
The individual can The business Exempted properties:
continue the business. organization will be 1. Present property – those provided under Arts.
dissolved. 155 and 205 of the Family Code, Sec. 13, Rule
As to Proof of Act of Insolvency 39 of the Rules of Court, and Sec. 118 of the
There must be an act of Act of insolvency is not Public Land Act.
insolvency. required. 2. Future property – a debtor, who obtains a
discharge from his debts on account of his
Rehabilitation insolvency, is not liable for the unsatisfied claims
It refers to the restoration of the debtor to a condition of his creditors with said property subject to
of successful operation and solvency, if it is shown certain exceptions expressly provided by law
that its continuance of operation is economically (Act No. 1956, Secs. 68 and 69).
feasible and its creditors can recover by way of the 3. Property under legal custody (DE LEON, supra
present value of payments projected in the plan, at 542) and those owned by municipal
more if the debtor continues as a going concern corporations necessary for governmental
than if it is immediately liquidated (FRIA, Sec. 4, purposes (Viuda de Tan Toco v. Municipal
Par. gg). Council of Iloilo, G.R. No. L-24950, March 25,
1926).
Note: During the pendency of rehabilitation
proceedings, the court may order the conversion of Exemption of Conjugal Partnership or Absolute
rehabilitation proceedings to liquidation proceedings Community
in the following cases: If one of the spouses is insolvent, the assets of the
1. Upon a finding that the debtor is insolvent and conjugal partnership of gains (CPG) or absolute
there is no substantial likelihood for the debtor to community (AC) do not pass to the assignee in
be successfully rehabilitated (FRIA, Sec. 25, insolvency elected by the creditors or appointed by
Par. c); the court (CIVIL CODE, Art. 2238).
2. No Rehabilitation Plan was confirmed within one
(1) year from the filing of a petition to confirm a Reason: The conjugal partnership of gains or
rehabilitation plan (FRIA, Sec. 72); absolute community is distinct from the individual
3. Termination of the rehabilitation proceedings spouses.
(see FRIA, Sec. 75);

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3
The exemption applies provided that:
1. The CPG or AC subsists; and
2. The obligations of the insolvent spouse have not
redounded to the benefit of the family.
Note: The insolvency of the husband does not have
the effect of dissolving the conjugal partnership or
the absolute community (CIVIL CODE, Art. 2238).
Rule on Co-Ownership
If there is co-ownership and one of the co-owners is
an insolvent debtor, his undivided share or interest
in the property shall be possessed by the assignee
in insolvency proceedings because it is part of his
assets (DE LEON, supra at 544).
Note: This article refers to co-ownership other than
that of conjugal partnership or absolute community
(CIVIL CODE, Art. 2239).
Duty to set apart exempt properties under the
FRIA:
It shall be the duty of the court, upon petition and
after hearing, to exempt and set apart, for the use
and benefit of the said insolvent, such real and
personal property as is by law exempt from
execution, and also a homestead (FRIA, Sec. 130).
Rule Involving Property Held in Trust
Property held in trust by the insolvent debtor should
be excluded from insolvency proceedings (CIVIL
CODE, Art. 2240).
Reason: The trustee is not the owner of the trust
property (DE LEON, supra at 544).
Three (3) General Categories of Credit
1. Special preferred credits listed in Articles 2241
and 2242;
2. Ordinary preferred credits listed in Article 2244;
and
3. Common credits (non-preferred) under Article
2245 (Republic v. Peralta, G.R. No. L-56568,
May 20, 1987).
First Category: Special Preferred Credits
A. With Reference to Specific Movable Property
Under Art. 2241 of the Civil Code:
1. Duties, taxes and fees due to the government;
Note: The tax must be due on the movable.
2. Claims from misappropriation, breach of trust,
malfeasance of public officer;
Note: The acquisition must have been in
performance of official functions and the
property must still be in the hands of the
public official. If it is sold to a purchaser for
value and in good faith, there can be no more
claim on the said movable.
3. Claims for the unpaid price of movable sold;
Note: Claim is limited to the value of the
movable.
The property must be in the possession of the
debtor.
If debtor has sold the property and the price
has been unpaid, lien may be enforced on the
price.
Instances When Right to Claim is NOT Lost:
a. Immobilization of the thing by destination,
provided that it has not lost its form,
substance and identity.
b. When the thing, together with other property,
was sold for a lump sum, provided that the
price thereof can be determined
proportionally.
4. Credits guaranteed with pledge or mortgage;
Note: If the contract is a pledge, it must be
embodied in a public instrument. If chattel
mortgage, it must be registered with the
Chattel Mortgage Registry.
5. Credits for the making, repairs, safekeeping or
preservation of the property;
6. Claims for laborer‟s wages on the work done
on the property;
This applies only to personal, not to real
property (5 PARAS, supra at 1374).
Note: The laborer must have been employed
by the owner of the goods, not by the
contractor (Bautista v. Auditor General, G.R.
No. L-6799, June 29, 1955).
7. Expenses of salvage upon the goods
salvaged;
8. Credits between the landlord and tenant from
their contract on the share of each in the fruits
or harvest;
9. Price of the contract of transportation and
incidental expenses on the goods carried,
until their delivery and thirty (30) days
thereafter;
10. Credits for lodging and supplies furnished to
travelers by hotel keepers on the movables
belonging to the guest as long as such
movables;
Note: This applies so long as movables are in
the hotel. This does not apply to money
loaned to guests.
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 11. Expenses for cultivation and harvest upon the
fruits harvested;
12. Rent for one (1) year upon the property of the
lessee existing on the immovable leased and
on the fruits of the same, but not on money or
instruments of credit; and
13. Claims of the depositor if depositary has
wrongfully sold the thing deposited, upon the
price of sale.
Wrongful Taking of Movables Under Article
2241 of the Civil Code
The preferred creditor may demand it within
thirty (30) days through an accion subrogatoria,
exercising the right of the debtor granted him
under Art. 559 of the Civil Code to recover
property wrongfully taken from him.
Note: It applies only when the right of ownership
in such property continues in the debtor, and,
therefore it is not applicable to cases where the
debtor has parted with his ownership therein, as
where he has sold his property (Peña v.
Mitchell, G.R. No. L-3764, January 15, 1908).
B. With Reference to Specific Immovable
Property under Art. 2242 of the Civil Code:
1. Taxes due upon land or building;
Note: This pertains to real property taxes.
Thus, capital gains tax is NOT covered
because it is a tax on income and not on the
property itself.
2. Unpaid price of the real property;
Note: The law makes no distinction between
registered and unregistered vendor‟s lien.
Hence, any lien of this kind enjoys the
preference credit status (DE LEON, supra at
549).
3. Claims of laborers and other workmen
engaged in the construction, re-construction
or repair of buildings, canals and other works;
4. Claims of furnishers of materials used in
works mentioned in No. 3;
5. Mortgage credits;
Note: Mortgage MUST have been registered
in the Registry of Property. A recorded
mortgage credit is superior to an unrecorded
unpaid vendor‟s lien (De Barreto v.
Villanueva, GR No. L-14938, January 28,
1961).
6. Expenses for the preservation and
improvement of real property when the law
authorizes reimbursement;
7. Credits annotated in the Registry of Property
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by virtue of judicial order, attachment or
execution;
Note: The preference is according to the
order of time they were levied upon the
property (DE LEON, supra at 552).
8. Claims of co-heirs for warranty in the partition
of the property;
9. Claims of donors for pecuniary charges or
other conditions imposed by him upon the
donee; and
10. Claims of insurers for insurance premium for 2
years.
Second Category: Ordinary Preferred Credits
Ordinary preferred credits under Art. 2244 of the
Civil Code, as amended by Art. 110 of the Labor
Code. They shall be preferred in the order named:
1. Credits for services rendered by laborers;
Note: Art. 110 of the Labor Code removed the
one-year limitation found in No. 2 of Art. 2244
(Id. at 560).
Art. 110 of the Labor Code also moved up the
claims for unpaid wages (and other monetary
claims) of laborers or workers of insolvent to
first priority (Ibid.).
The use of the phrase “first preference” in
Article 110 of the Labor Code indicates that
what it intends to modify is the order of
preference found in Article 2244 of the Civil
Code, which relates to property of the insolvent
that is not burdened with liens or
encumbrances created or recognized by
Articles 2241 and 2242 of the Civil Code (Id.).
Bankruptcy or liquidation proceedings are
necessary for the operation of the preference
accorded to workers under Art. 110 of the
Labor Code (Development Bank of the
Philippines v. NLRC, G.R. Nos. 82763-64,
March 19, 1990).
Reason: The reason behind the necessity for
a judicial proceeding or a proceeding in rem is
to bind all interested parties (DE LEON, supra
at 563).
2. Funeral expenses for the debtor, or his children
under parental authority who have no own
property, upon court approval;
3. Expenses during the last illness of debtor or of
his/her spouse and children under parental
authority, if they have no own property;
4. Compensation due the laborers or their
dependents under laws providing for indemnity;
3
5. Credits and advancements made to the debtor
for support of himself, and his family, during the
last year preceding the insolvency;
6. Support during the insolvency proceedings and
for three (3) months thereafter;
7. Fines and civil indemnifications arising from
criminal offense;
8. Legal expenses and expenses incurred in the
valid administration of the insolvent‟s estate;
9. Taxes and assessments due the national
government other than those mentioned in
Articles 2241(1) and 2242(1) of the Civil Code;
10. Taxes and assessments due any province other
than those referred to in Arts. 2241(1) and
2242(1) of the Civil Code;
11. Taxes and assessments due any city or
municipality other than those indicated in
Articles. 2241(1) and 2242(1) of the Civil Code;
12. Damages for death or physical injuries caused by
quasi-delict;
13. Gifts due to charitable public and private
institutions; and
14. Credits which, without special privilege, appear in
(a) a public instrument; or (b) in a final judgment,
if they have been the subject of litigation.
Note: These credits shall have preference among
them in the order of priority of the dates of the
instruments and of the judgments (DE LEON,
supra at 564).
The order of preference is first, in favor of credits
evidenced by a final judgment (should they have
been the subject of litigation), and secondly, in
favor of credits evidenced by a public instrument,
the preference among the two kinds of credits
being determined by priority of dates (Rizal Surety
and Insurance Co. v. Dela Paz, G.R. No. L-6463,
May 26, 1954).
Statutory Preference NOT Applicable to the
Government
Art. 2244, particularly Par. (14)(a) thereof, is not
applicable to obligations of the State as it is a
recognized doctrine that the State is always
solvent (Araneta v. Hon. Gatmaitan, G.R. Nos. L-
8895 and L-9191, April 30, 1957).
Note: The order of preference in Article 2244 of the
Civil Code is very important. The order of
preference here, however, does not refer to specific
real or personal property. It refers to other property
(5 PARAS, supra at 1381).
Third Category: Common Credits
Any other claims or credits other than those
mentioned in Articles. 2241, 2242 and 2244 of the
Civil Code. There is no order of preference among
common creditors. They share whatever is left in
proportion to their credit, regardless of date (CIVIL
CODE, Art. 2251, Par. 2).
Note: Ordinary Preferred and Common Credits
cover only “free property” of the debtor, or those not
subjected to Special Preferred Credit.
Nature of Claims or Credits in Articles 2241 and
2242 of the Civil Code (Special Preferred Credits)
1. Articles. 2241 and 2242 of the Civil Code shall
be considered as mortgages or pledges of
personal and real property.
Note: In case of insolvency of the debtor, such
claims or credits shall be considered as liens
(DE LEON, supra at 553).
As liens, they are considered charges. Unless
otherwise stated, they are not possessory liens
with the right of retention (5 PARAS, supra at
1374).
2. Articles 2241 and 2242 only find application
when there is concurrence of credits.
3. With the exception of the taxes due to the State
(No. 1), Articles 2241 and 2242 of the Civil Code
merely enumerate the preferred claims on
specific properties. They do not give the order of
preference or priority of payment.
Nature of Claims or Credits in Article 2244 of the
Civil Code (Ordinary Preferred Credits)
In contrast with Articles 2241 and 2242 of the Civil
Code, Article 2244 creates no liens on determinate
property which follow such property. What Article
2244 creates are simply rights in favor of certain
creditors to have the cash and other assets of the
insolvent applied in a certain sequence or order of
priority (Republic v. Peralta, supra).
Refectionary Credit
Indebtedness incurred in the repair or reconstruction
of something previously made, such repair or
reconstruction being made necessary by the
deterioration or destruction of the thing as it formerly
existed (Director of Public works v. Sing Juco, G.R.
No. L-30181, July 12, 1929). They include new
constructions (Luzon Lumber & Hardware Co. v.
Quiambao & RFC, G.R. No. L-5638, March 30,
1954).
Two-Tier Order of Preference
1. First tier – includes only taxes, duties and fees
due on a specific movable or immovable
property; and
2. Second tier – All other special preferred (non-
tax) credits. These credits are to be satisfied
pari passu and pro rata, out of any residual
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 value of the specific property to which such other
credits relate (Republic v. Peralta, supra).
Note: Pro rata rule does not apply to credits
annotated in the Registry of Property in virtue of
a judicial order (DE LEON, Credit Transactions,
supra at 572).
Steps in Applying the Rules in Preference and
Concurrence of Credits:
Step 1:
Categorize the credits accordingly.
Step 2:
Determine or make an inventory of the assets or
properties of the insolvent.
Step 3:
Segregate specific immovables and/or movables
mentioned under Arts. 2241 and 2242 of the Civil
Code, respectively.
Step 4:
1. Sell movables and determine if the proceeds are
sufficient to cover the special preferred credit in
Art. 2241 of the Civil Code; exclude all other
credits to the extent of the value of the movable
to which preference refers.
excess becomes part of the free property of the
debtor, to be added to other assets in order to
satisfy the ordinary preferred credits under Art.
2250 of the Civil Code and then the common
credits under Art. 2245 of the Civil Code (DE
LEON, supra at 559).
Step 6:
With the excess cash sale of assets covered in Art.
2241 and 2242 of the Civil Code, if any, sell other
assets of debtor and satisfy the ordinary preferred
credits by applying proceeds of sale in accordance
with the order of preference of credits established in
Art. 2244 of the Civil Code (CIVIL CODE, Art. 2251,
Par. 1). Rule on preference applies.
Step 7:
After applying the proceeds of sale of all properties
under Step 6, apply any balance of the proceeds of
the sale to common credits in accordance with the
rule provided in Art 2251 of the Civil Code. Rule on
concurrence applies, they are paid pro rata
regardless of dates (CIVIL CODE, Art. 2251, Par. 2).
Illustration:
ASSETS
Immovable Property Value/Amount in Pesos
House and Lot 3,000,000

Pay No. 1 credit in Art. 2241 of the Civil Code, Movable Properties
and if two or more credits in Art. 2241 concur; Mercedes-Benz 3,000,000
apply proceeds of sale pro rata, (pari passu) to Cash 2,000,000
the credits applying Arts. 2246 and 2247 of the Receivables 2,000,000
Civil Code.
Total value of assets 10,000,000
2. For immovables and real rights – Sell
immovable and real right and determine if LIABILITIES
proceeds of sale are sufficient to cover the Real Estate Taxes 2,000,000
special preferred credits in Art. 2242 of the Unpaid purchase price 2,000,000
Civil Code. on the Mercedez-Benz
Exclude all other credits to the extent of the Unpaid wages of 1,000,000
value of immovables and real rights to which Laborers
preference refers. Unpaid duties on car 2,000,000
Funeral expenses of 1,000,000
Pay No. 1 in Art. 2242 of the Civil Code, if two deceased child
or more credits mentioned in Art. 2242 of the Unpaid income tax 1,000,000
Civil Code concur; apply proceeds of sale pro Unsecured credits of X 2,000,000
rata, (pari passu) to the credits applying Arts. and Y (P1,000,000
2248 and 2249 of the Civil Code. each)

Step 5: Total value of liabilities 11,000,000

1. If proceeds of sale from specific movable and
immovable are insufficient, the balance of said
special preferred credits become common
credits under Art. 2245 of the Civil Code.

2. If proceeds of sale from specific movable and

immovables exceed the total special preferred
credits (there is excess in proceeds), such

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Special Preferred Credits Exception: A private sale may be allowed with
Immovable approval of court if:
House and 3,000,000 1. The goods to be sold are of a perishable nature,
Lot or quickly deteriorate in value, or
Real Estate (2,000,000) Paid (Pd.) disproportionately expensive to keep or
Taxes maintain; or
1,000,000 Balance (Bal.) 2. The private sale is for the best interest of the
Add to Free debtor and the creditors (FRIA, Sec. 131).
Properties
Setting-off and Netting under the FRIA
Movable If the debtor and creditor are mutually debtor and
Mercedes- 3,000,000 creditor of each other one debt shall be set off
Benz against the other, and only the balance, if any shall
Unpaid (2,000,000) Pd., Bal. of 1,000,000 be allowed in the liquidation proceedings (FRIA, sec.
duties 124).
Unpaid (2,000,000) Pd.
purchase
price Q UASI – C ONTRACTS
(1,000,000) Bal.
Add to Common ( A RTS . 2142 – 2176)
Credits

Free Properties QUASI-CONTRACT

Cash 2,000,000 It is a juridical relation resulting from a lawful,
Receivables 2,000,000 voluntary, and unilateral act, and which has for its
Excess on 1,000,000 purpose the payment of indemnity to the end that no
House and one shall be unjustly enriched or benefited at the
Lot expense of another (CIVIL CODE, Art. 2142).
Total value 5,000,000
Bases for Quasi-Contracts:
Ordinary Preferred Credits 1. No one must unjustly enrich himself at the
Free 5,000,000 expense of another;
Properties
Unpaid (1,000,000) Pd., Bal. of 4,000,000 Note: Two (2) conditions must generally concur
wages before the rule on unjust enrichment can apply:
Funeral (1,000,000) Pd., Bal. of 3,000,000
expenses a. A person is unjustly benefited; and
Unpaid (1,000,000) Pd. b. Such benefit is derived at another‟s expense
income tax or damage (MC Engineering, Inc., v. CA, G.R.
2,000,000 Bal. No. 104047, April 3, 2002).

Common Credits Ratio is 1:1:1 2. If one benefits, he must reimburse; and

Bal. on 1,000,000 1/3 x 2,000,000 3. Justice and equity (5 PARAS, supra at 1154).
Mercedes- = P666,666.67
Benz Two Principal Kinds:
Unsecured 1,000,000 1/3 x 2,000,000 1. Negotiorum gestio (unauthorized management);
credit of X =P666,666.67 and
Unsecured 1,000,000 1/3 x 2,000,000 2. Solutio indebiti (undue payment).
credit of Y =P666,666.67
Note: The provisions for quasi-contracts do not
exclude other quasi-contracts which may come
Sale of Assets in Liquidation within the purview of Article 2142 of the Civil Code
The liquidator may sell the UNENCUMBERED (CIVIL CODE, Art. 2143).
assets of the debtor and convert the same into
money (FRIA, Sec. 131). NEGOTIORUM GESTIO
It arises when a person, without the express or
General Rule: The sale must be made in a public implied authority of, or opposition from, the owner of
auction. a business or property which is neglected or
abandoned, takes charge of the agency or
management thereof (CIVIL CODE, Art. 2144).

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The ratification of the management by the owner of
the business produces the effects of an express
agency, even if the business may not have been
successful (CIVIL CODE, Art. 2149; 5 PARAS,
supra at 1158).
Requisites of Negotiorum Gestio
1. No meeting of the minds;
2. Taking charge of another‟s business or property;
3. The property or business must have been
abandoned or neglected (otherwise, the rule on
unauthorized contracts would apply);
4. The officious manager must not have been
expressly or implicitly authorized (otherwise, the
rule on agency would apply); and
5. The officious manager (gestor) must have
voluntarily taken charge (that is, there must be
no vitiation of consent, such as error in thinking
that he owned the property or the business) (Id.
at 1156).
Negotiorum Gestio v. Implied Agency
Negotiorum Gestio Implied Agency
As to Necessity of Authorization
The agent is actually
authorized to assume
Gestor should never the agency by virtue of
have been authorized in the acts of the owner or
any manner. by virtue of his silence,
inaction, or his failure to
repudiate the agency.
As to Necessity of Neglect or Abandonment
Business or property Neglect or
should be neglected or abandonment is not
abandoned. necessary.
Note: So long as the owner does not know that
another is acting on his behalf without authority,
negotiorum gestio exists, but once he becomes
aware of such fact and still he does not repudiate
the acts of the agent, the quasi-contract ceases to
exist. It has become an implied agency.
Responsibilities of the Officious Manager:
1. Continue taking charge of the agency or
management until the termination of the affairs
and its incidents, but he may require the owner,
if the latter is in a position to do so, to substitute
the officious manager (CIVIL CODE, Art. 2144);
2. Perform his duties with all the diligence of a
good father of a family, and pay the damages
which through his fault or negligence may be
suffered by the owner of the property or
business under management, but the courts
may however, increase or moderate the
indemnity according to the circumstances of
each case (CIVIL CODE, Art. 2145);
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Note: A gestor is liable for the acts or
negligence of his employees (5 PARAS, supra at
1157).
3. Be liable for the acts of his delegate if he
delegated to another person all or some of his
duties, without prejudice to the direct obligation
of the delegate toward the owner of the business
(CIVIL CODE, Art. 2146, Par. 1);
4. Be personally liable for contracts which he has
entered into with third persons, even though he
acted in the name of the owner, and there shall
be no right of action between the owner and
third persons except:
a. When the owner has expressly or tacitly
ratified the management, or
b. When the contract refers to things pertaining
to the owner of the business (CIVIL CODE,
Art. 2152)
Note: The responsibility of two or more officious
managers shall be solidary, unless the
management was assumed to save the things
or business from imminent danger (CIVIL
CODE, Art. 2146, Par. 2); and
5. The officious manager shall be liable for any
fortuitous event:
a. If he undertakes risky operations which the
owner was not accustomed to embark upon;
b. If he has preferred his own interest to that of
the owner
c. If he fails to return the property or business
after demand by the owner;
d. If he assumed the management in bad faith
(CIVIL CODE, Art. 2147)
e. Except when the management was assumed
to save the property or business from
imminent danger –
i. If he is manifestly unfit to carry the
management;
ii. If by his intervention he prevented a more
competent person from taking up the
management (CIVIL CODE, Art. 2148).
Responsibilities of the Owner:
The owner of the property shall be liable for
obligations incurred in his interest, and shall
reimburse the officious manager for the necessary
and useful expenses and for damages, which the
latter may have suffered in the performance of his
duties in the following instances:
1. When the owner of the property or business
enjoyed the advantages of the officious
management although it may not have been
expressly ratified by him (CIVIL CODE, Art.
2150, Par. 1).
2. When the management has for its purpose the
prevention of an imminent and manifest loss,
3
 although no benefit may have been derived
(CIVIL CODE, Art. 2150, Par. 2).
3. Even if there had been no benefit to the owner
and there has been no imminent and manifest
danger to the property of business provided:
a. The officious manager has acted in good faith;
and
b. The property or business is intact, ready to be
returned to the owner (CIVIL CODE, Art.
2151).
Note: Even if the owner is a minor, he is still liable
under Article 2150 of the Civil Code for he should
not be unjustly enriched at another‟s expense (5
PARAS, supra at 1159).
Liability for Contracts
The owner shall be liable for contracts which the
officious manager has entered into with third
persons when:
1. Such owner has expressly or tacitly ratified the
management; or
2. The contract refers to things pertaining to the
owner of the business (CIVIL CODE, Art. 2152).
When is Management Extinguished:
1. When the owner repudiates it or puts an end
thereto;
2. When the officious manager withdraws from the
management, subject to the provisions of Article
2144 of the Civil Code; and
3. By the death, civil interdiction, insanity or
insolvency of the owner or officious manager
(CIVIL CODE, Art. 2153).
SOLUTIO INDEBITI
This takes place when something is received when
there is no right to demand it, and it was unduly
delivered thru mistake (CIVIL CODE, Art. 2154).
It is presumed that there was a mistake in the
payment if something which had never been due or
had already been paid was delivered; but he from
whom the return is claimed may prove that the
delivery was made out of liberality or for any other
just cause (CIVIL CODE, Art. 2163).
Payment by reason of a mistake in the construction
or application of a doubtful or difficult question of law
may come within the scope of solutio indebiti (CIVIL
CODE, Art. 2155).
Note: Whether the question is “doubtful or difficult”
or not must be determined by the actual knowledge
of law of the person who made the payment. If the
payer was in doubt whether the debt was due, he
may recover if he proves that it was not due (CIVIL
CODE, Art. 2156).
Requisites of Solutio Indebiti:
1. Receipt (not mere acknowledgment) of
something (CIVIL CODE, Art. 2154);
2. There was no right to demand it because the
giver had no obligation (5 PARAS, supra at
1161); and
3. The undue delivery was because of mistake
either of fact or of law, which may be doubtful or
difficult question of law (CIVIL CODE, Art. 2155).
Note: Payment by a joint co-debtor for the benefit of
another co-debtor or co-surety is not solutio indebiti
but a payment by a person interested in the
fulfillment of the obligation under Article 1236 of the
Civil Code (5 PARAS, supra at 1162).
Primary Responsibility of a Payee: To return what
he has received through error or mistake although
there is no right to demand it (Id. at 1161).
Liability of a Payee in Bad Faith:
1. Pay legal interest if the sum of money is
involved; or
2. Liable for fruits received or which should have
been received if the thing produces fruits (CIVIL
CODE, Art. 2159, Par 1).
Reason: The payee assumes all risks having acted
fraudulently though damages may be mitigated
under Art. 2215 of the Civil Code (5 PARAS, supra
at 1165).
3. He shall furthermore be answerable for any loss
or impairment of the thing from any cause and
for damages to the person who delivered the
thing, until it is recovered (CIVIL CODE, Art.
2159, Par. 2).
Liability of Payee in Good Faith:
1. In case of impairment or loss, liability is only to
the extent of benefit; and
2. In case of alienation, price is to be reimbursed,
or in case of credit, the same should be
assigned (CIVIL CODE, Art. 2160).
Note: The responsibility of two or more payees,
when there has been payment of what is not due is
solidary (CIVIL CODE, Art. 2157).
Exemption from Obligation to Restore
This exemption shall apply to a payee, believing
good faith that the payment being made was for a
legitimate and subsisting claim, who:
1. Destroyed the document;
2. Allowed the action to prescribe;
3. Gave up pledges; or
4. Cancelled guaranties for his right (CIVIL CODE,
Art. 2162).
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Note: He who paid unduly may proceed only against
the true debtor or the guarantor with whom the
action is still effective (CIVIL CODE, Art. 2162).
Right of a Third Person:
When the property delivered or money paid belongs
to a third person, the payee shall comply with the
provisions of Article 1984 of the Civil Code (CIVIL
CODE, Art. 2158).
Other Quasi-Contracts
1. When, without the knowledge of the person
obliged to give support, the support was given
by a stranger, unless it appears that he gave it
out of piety and without intention of being repaid
(CIVIL CODE, Art. 2164);
6. When the government, upon failure of any
person to comply with health or safety
regulations concerning property, undertakes to
do the necessary work, even over his objection
(CIVIL CODE, Art. 2169);
7. When by accident or other fortuitous event,
movables separately pertaining to two or more
persons are commingled or confused, the rules
on co-ownership shall apply (CIVIL CODE, Art.
2170);
8. When a person has found a lost personal
property (CIVIL CODE, Arts. 719, 720, and
2171);

Requisites: 9. When a possessor in good faith has incurred

a. Support has been furnished in favor of a
dependent of one bound to give support but
who fails to do so;
b. The support was supplied by a stranger;
c. The same was given without the knowledge of
the person charged with the duty; and
d. It must not have been given without the
expectation of recovering it (Ramirez v.
Redfern, G.R. No. L-26062, December 31,
1926).
2. When funeral expense are borne by a third
person, without the knowledge of the relatives
obliged to give support to the deceased (CIVIL
CODE, Art. 2165);
necessary and useful expenses (CIVIL CODE,
Arts. 546 and 2172);
10. When a third person, without the knowledge of
the debtor, pays the debt (CIVIL CODE, Arts.
1236, 1237 and 2173);
11. When in a small community a majority of the
inhabitants of age decide upon a measure for
protection against unlawlessness, fire, flood,
storm, or other calamity, anyone who objects to
the plan and refuses to contribute to the
expenses but is benefited by the project as
executed shall be liable to pay his share of said
expenses (CIVIL CODE, Art. 2174); and

3. When the person obliged to support an orphan,
or an insane or an indigent person unduly
refuses to give support to the latter, a third
person furnishes the support (CIVIL CODE, Art.
2166);
Note: As distinguished from Article 2164 of the
Civil Code, the obligor in the article unduly
refuses to support the persons referred to
therein (5 PARAS, supra at 1168).
12. When a third person was constrained to pay the
taxes of another (CIVIL CODE, Art. 2175).
Note: The foregoing provisions are mere
illustrations of other specific cases of quasi-
contracts; the enumeration has no preclusive effect
on possible other instances.

4. When through an accident or cause, a person is

injured or becomes seriously ill, and he is
treated or helped while he is not in a condition to
give consent to a contract, he shall be liable to
pay for the services of the physician or other
person aiding him, unless the service has been
rendered out of pure generosity (CIVIL CODE,
Art. 2167);

5. When during a fire, flood, storm, or other

calamity, property is saved from destruction by
another person without the knowledge of the
owner (CIVIL CODE, Art. 2168);

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COMMODATUM SIMPLE EXTRA- JUDICIAL GUARANTY PLEDGE REAL MORTGAGE CHATTEL ANTICHRESIS
LOAN JUDICIAL DEPOSIT MORTGAGE
DEPOSIT
As to Subject Matter
General Rule: Money or Only movable Movable as
Personal All movables Immovables and Movables (DE Immovables
Non-consumable other (corporeal) well guaranty: the susceptible of Alienable real rights LEON, supra (CIVIL CODE,
as
goods consumable things (CIVIL immovable credit given by possession; in accordance with at 509). Art. 2132; DE
goods (CIVIL CODE, property the person incorporeal the laws, imposed LEON, supra at
Exception: CODE, Art. Art.1966; DE (CIVIL CODE,who rights upon immovable 498).
Consumable 1933). LEON, supra Art. 2006; DE
guarantees evidenced by (CIVIL CODE, Art.
goods if purpose at 113 and LEON, supra the fulfillment instruments 2124).
is not the 114). at 114). of the principal may also be
consumption of obligation; pledged (CIVIL
the object CODE, Arts.
Real guaranty: 2094 and
(CIVIL CODE, movable or 2095).
Arts. 1933 and immovable
1936; DE LEON, property (DE
supra at 10, 16). LEON, supra
at 228).
As to Consideration
Essentially Gratuitous or General Rule: Onerous (DE General Rule: Consideration is the same as the consideration of the principal contract
gratuitous (CIVIL onerous, that Gratuitous LEON, supra Gratuitous (DE LEON, supra at 331 and 386).
CODE, Art. 1933; is, with a at 165).
DE LEON, supra stipulation to Exceptions: Exception:
at 11 and 14). pay interest 1.When there When there is
(CIVIL CODE, is an a stipulation to
Art. 1933; DE agreement the contrary
LEON, Credit to the
Transactions, contrary; (CIVIL CODE,
supra at 11). 2.Depositary Art. 2048; DE
is engaged LEON, supra
in the at 228 and
business of 244).
storing
goods;
3.Where
property
saved from
destruction
without

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 knowledge
by the
owner
(CIVIL CODE,
Art. 1965; DE
LEON, supra
at 113).
As to Nature of the Contract
Real contract; Real contract; Not a contract Consensual Real contract Consensual contract Formal Consensual
However, an accepted promise to Nonetheless, (DE LEON, and formal (Actual contract DE and formal
deliver something by way of for voluntary Credit supra contract (an delivery of LEON, supra contract
commodatum or simple loan is a deposit, an at 165). oral promise of possession is at 506). (amount of the
consensual contract (CIVIL agreement to guaranty is necessary) principal and of
CODE, Art. 1934; DE LEON, constitute a unenforceable) (CIVIL CODE, the interest
supra at 7 and 12). deposit is a (DE LEON, Art. 2093; DE must be in
consensual supra at 259). LEON, supra writing)
contract (DE at 360). (CIVIL CODE,
LEON, supra Art. 2134; DE
at 112). LEON, supra at
498 and 500).
As to Purpose
Use or temporary Consumption Custody and To guarantee Contract of Intended to secure the performance of a principal and pre-existing
possession (DE (DE LEON, safekeeping of the right of security (CIVIL obligation by specially subjecting to such security, property, or the fruits
LEON, supra at supra at 11). the thing the plaintiff in CODE, Art. thereof (DE LEON, supra at 331).
11 and 16). deposited for case of a 2047; DE
the benefit of favorable LEON, supra
the depositary judgment (DE at 226).
(DE LEON, LEON, supra
supra at 165). at 165).
As to Ownership of the Thing
Retained by the Transferred to Retained by No transfer of Retained by Retained by mortgagor or owner of the Retained by
bailor (CIVIL the debtor the owner ownership pledgor or thing mortgaged (DE LEON, supra at antichretic
CODE, Art. 1933; (CIVIL CODE, (Generally, owner of the 402). debtor (DE
DE LEON, supra Art. 1933; DE depositor must thing pledged. LEON, supra at
at 10). LEON, supra be the owner, 502 and 503).
at 10). but it may
belong to a
person other
than a
depositor)
(CIVIL CODE,
Art. 1962; DE
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 LEON, supra
at 115).
As to Possession of the Thing
Bailee has possession of the thing Depositary has possession (DE Pledgee, or a Generally, Mortgagor- Antichretic
(DE LEON, supra at 12). LEON, supra at 110). third person by Mortgagor-debtor debtor retains creditor has
common retains possession of possession of possession of
agreement has the thing mortgaged; the thing the property
possession mortgaged (DE LEON,
(CIVIL CODE, However, mortgagor- (DE LEON, supra at 498).
Art. 2093). debtor may elect to supra at 523).
deliver the property
to mortgagee. A
mortgagee in
possession has
rights and obligations
similar to those of an
antichretic creditor
(DE LEON, supra at
385 and 471).
As to Time of Return
General Rule: Upon Upon demand Upon order of General Rule: Upon full
after the expiration of of depositor the court or Upon full payment of the
expiration of the the term (CIVIL CODE, when payment of debt (DE
period stipulated, (CIVIL CODE, Art. 1988). litigation has debtor‟s LEON, supra at
or after the Art. 1946; DE ended (CIVIL obligation 502).
accomplishment LEON, supra CODE, Art. including
of the use for at 11). 2007; DE interest due
which the LEON, supra thereon and
commodatum at 165). expenses
has been incurred for its
constituted; preservation

Exception: Exception:
Bailor may Pledgor may
demand return or demand return
its temporary use when there is
if he should have danger of
urgent need of destruction or
the thing, or if the impairment of
bailee commits the thing,
any acts of without the
fault of the

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 ingratitude. pledgee, upon
substitution of
(CIVIL CODE, another thing
Arts. 1946 and of the same
1948; DE LEON, kind and
supra at 11). quality

(CIVIL CODE,
Arts. 2105 and
2107).
As to Modes of Extinguishment
Upon the death Upon Upon the loss Upon Upon Upon Upon payment of the Upon Upon payment
of either the payment or or destruction termination of extinguishmen fulfillment of principal obligation fulfillment of of the principal
bailee or bailor, performance, of the thing litigation or t of the the principal (CIVIL CODE, Art. the principal obligation
unless by condonation deposited, upon order of obligation of obligation or by 1231). obligation or (CIVIL CODE,
stipulation the or remission, return of the the court the debtor, the destruction by the Art. 1231).
commodatum is merger, thing, (CIVIL CODE, and for the of the thing; destruction of
transmitted to the compensation novation, Art. 2007). same causes upon return of the thing
heirs of either or , merger, as all other the thing (CIVIL CODE,
both parties novation, expiration of obligations; if pledged to the Art. 1231; DE
(CIVIL CODE, annulment, the term, the creditor pledgor or LEON, supra
Art. 1939; DE rescission, fulfillment of voluntarily owner; upon a at 507).
LEON, supra at fulfillment of a the resolutory accepts statement in
18). resolutory condition, immovable or writing by the
condition, annulment, other property pledgee that
prescription rescission in payment of he renounces
(CIVIL CODE, debt; upon or abandons
Art. 1231). In case of release of the the pledge;
gratuitous guarantor by sale of the
deposit, upon the creditor; thing pledged
the death of upon the grant extinguishes
either the of extension to the principal
depositor or the debtor by obligation
depositary the creditor (CIVIL CODE,
(CIVIL CODE, without the Arts. 2110,
Arts. 1995, consent of the 2111, and
and 1231; DE guarantor; 2115; DE
LEON, supra when the LEON, supra
at 153). guarantors, at 373, 374,
through some and 507).
act of the
creditor,

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 cannot be
subrogated to
the latter‟s
rights (CIVIL
CODE, Arts.
2076 to 2080;
DE LEON,
supra at 310).
As to Excess Proceeds in Case of Sale
General Rule: Mortgagor is entitled Excess over Debtor is
debtor is not to balance from the the amount entitled to the
entitled to proceeds of the sale goes to debtor excess in case
excess (DE LEON, supra at (DE LEON, antichretic
418 and 428). supra at 534 creditor files a
Exception: and 506). petition for the
1. When it is sale of the real
agreed property as in a
upon; and foreclosure of
2. in the case mortgages
of a legal under Rule 68
pledge of the Rules of
(CIVIL CODE, Court (DE
Arts. 2115, LEON, supra at
and 2121). 502-503).

As to Right to Recover Deficiency in Case of Sale

Creditor is not Mortgagee is entitled Creditor is Antichretic
entitled to to recover deficiency entitled to creditor is
recover (DE LEON, supra at recover from entitled to
notwithstandin 430-432). debtor recover
g any contrary deficiency (DE
stipulation Exception: If LEON, supra at
(CIVIL CODE, the mortgage 502-503).
Art. 2115). is a security
for the
purchase of
personal
property in
installments
(DE LEON,
supra at 507,
and 532-533).

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 Essential Requisites to Pledge and Mortgage
1. That they be constituted to secure the fulfillment of a
principal obligation;
2. That the pledgor or mortgagor be the absolute owner
of the thing pledged or mortgaged;
3. That the persons constituting the pledge or mortgage
have the free disposal of their property, and in the
absence thereof, that they be legally authorized for
the purpose
(CIVIL CODE, Art. 2085).

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