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CONTRACTS OF SECURITY
Basis and Rationale
• Security is something given, deposited, or serves as a
means to ensure the fulfillment or enforcement of an
obligation or of protecting some interest or property.
Kinds of Security Contracts
A. Of Personal Security
a. Ordinary Guaranty – a contract whereby a guarantor
binds himself to the creditor to fulfil the obligation of the
principal debtor in case the latter fails to do so.
b. Suretyship – a contract whereby a surety binds himself
solidarily with the principal debtor.
The third persons undertaking these obligations are called the
guarantor and surety.
Note: The reference in Art. 2047 to solidary obligations does
not mean that suretyship is withdrawn from the applicable
provisions governing guaranty.
Guarantor Surety
Subsidiary liability Direct and primary
liability
Pays if the debtor cannot Pays if the debtor does not
pay pay
Insurer of the debtor’s Insurer of the debt
solvency
Characteristics of Guaranty and Suretyship:
1. Accessory - It is indispensable condition for its existence
that there must be a principal obligation.
2. The guarantor cannot bind himself for more than the
principal debtor and even if he does, his liability shall be
reduced to the limits of that of the debtor
3. Subsidiary and Conditional - takes effect only in case
the principal debtor fails in his obligation.
4. Unilateral - may be entered even w/o the intervention of
the principal debtor and it gives rise only to a duty on the
part of the guarantor in relation to the creditor and not
vice versa.
5. Nominate
6. Consensual
7. It is a contract between the guarantor/surety and
creditor.
Comments:
• With respect to the creditor, no such requirement is
needed because he binds himself to nothing. However,
when there is merely an offer of a guaranty, or merely
a conditional guaranty, in that it requires action by the
creditor before the obligation becomes fixed, it does not
become binding until it is accepted and notice of such
acceptance by the creditor is given to the guarantor.
• But in any case, the creditor is not precluded from waiving
the requirement of notice. The consideration of the
guaranty is the same as the consideration of the principal
obligation.
• Not presumed. It must be expressed and reduced in
writing.
• Falls under the Statute of Frauds since it is a “special
promise to answer for the debt, default or miscarriage of
another”.
• Strictly interpreted against the creditor and in favor of the
guarantor/surety and is not to be extended beyond its
terms or specified limits. The rule of strictissimi juris
commonly pertains to an accommodation surety because
the latter should be protected against unjust pecuniary
impoverishment by imposing on the principal, duties akin
to those of a fiduciary.
Pacific Banking Corporation vs. IAC (not in syllabus)
• The wife applied for a credit card. The bank required that
a person secure her obligation as a credit cardholder.
• Her husband signed a “Guarantor’s Undertaking” but
binding himself jointly and severally.
Supreme Court Ruling
• The undertaking signed by the husband, although
denominated "Guarantor's Undertaking," was in
substance a contract of surety.
• As distinguished from a contract of guaranty where the
guarantor binds himself to the creditor to fulfill the
obligation of the principal debtor only in case the latter
should fail to do so, in a contract of suretyship, the
surety binds himself solidarily with the principal
debtor.
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
• It is true that under Article 2054 of the Civil Code, a
guarantor may bind himself for less, but not for more than
the principal debtor, both as regards the amount and the
onerous nature of the conditions. The credit limit granted
to Celia Regala was P2,000.00 per month.
• However, the husband’s liability should not be limited
to that extent. As surety of his wife, he expressly
bound himself up to the extent of the wife’s
indebtedness, likewise expressly waiving any "discharge
in case of any change or novation of the terms and
conditions in connection with the issuance of the Pacificard
credit card.
• The husband in fact, made his commitment as a surety
a continuing one, binding upon himself until all the
liabilities of Celia Regala have been fully paid.
E Zobel Inc. vs. CA
• Spouses obtained a loan from a bank. The loan was
secured by both a personal and real security – a
Continuing Guaranty and Chattel Mortgage.
"For and in consideration of any existing indebtedness
to you of AGRO BROKERS, a single proprietorship
owned by MR. RAUL P. CLAVERIA, of legal age,
married and with business address x x x (hereinafter
called the Borrower), for the payment of which the
undersigned is now obligated to you as surety
and in order to induce you...”
• When the spouses defaulted, the bank went after the
guarantor, Zobel.
• The guarantor refused to pay, arguing that he was already
released from his obligation when the bank failed to
register the chattel mortgage which deprived him to be
subrogated to the rights of the bank should he pay the
obligation.
Supreme Court Ruling
• The contract executed by the petitioner in favor of the
bank albeit denominated as a "Continuing
Guaranty," is a contract of surety.
• Thus, the non-registration of the chattel mortgage
did not release him from his obligation.
• The terms of the contract categorically obligate
petitioner as "surety" to induce the bank to extend
credit to the spouses.
• The use of the term "guarantee" does not ipso facto mean
that the contract is one of guaranty. The interpretation
of a contract is not limited to the title alone but to
the contents and intention of the parties.
• A contract of surety is an accessory promise by which a
person binds himself for another already bound, and
agrees with the creditor to satisfy the obligation if the
debtor does not.
• A contract of guaranty, on the other hand, is a collateral
undertaking to pay the debt of another in case the latter
does not pay the debt.
• Simply put, a surety is distinguished from a guaranty in
that a guarantor is the insurer of the solvency of the debtor
and thus binds himself to pay if the principal is unable to
pay while a surety is the insurer of the debt, and he
obligates himself to pay if the principal does not pay.
Comment:
• Take note of the title of the document in both cases, the
word “guaranty” is found, yet in both case the court found
that it was in fact a surety, not an ordinary guaranty.
Kinds of real security
• Pledge – A contract wherein the debtor delivers to the
creditor or to a third person a movable or document for the
purpose of securing fulfilment of a principal obligation with
the understanding that when the obligation is fulfilled, the
thing delivered shall be returned with all its fruits and
accessions.
• Real estate 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.
• 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.
• Antichresis – A contract whereby the creditor acquires the
right to receive the fruits of an immovable 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.
1|Page
Comments:
• In contracts of real security, property is put up as security
of the obligation.
• This does not mean that the property is given for the
payment of the obligation, for that would be a dacion en
pago.
• Here, in case of default, you will sell the property and apply
the proceeds to the obligation.
• You do not become automatically the owner of the
property in case of default because that is prohibited, that
is called, pactum commissorium, which is not valid.
What is the cause in these contracts of security?
• Since this is a security undertaking, there is no need for
a separate consideration to be given.
• The same consideration that supports the principal
obligation supports the undertaking of the security
obligation.
GUARANTY
Chapter 1 – Nature and Effect of Guaranty
Art. 2047. By guaranty a person, called the guarantor, binds
himself to the creditor to fulfill the obligation of the principal
debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor,
the provisions of Section 4, Chapter 3, Title I of this Book shall
be observed. In such case the contract is called a suretyship.
Art. 2048. A guaranty is gratuitous, unless there is a
stipulation to the contrary.
What are the characteristics of guaranty?
1. It is a subsidiary contract
2. It is a consensual contract
3. It is a unilateral contract
4. It is generally a gratuitous contract
5. It is a contract between the guarantor and the creditor
Subsidiary Contract of Guaranty
• It takes effect only when the principal debtor fails in his
obligation.
Comments:
• Guaranty is an accessory contract because it cannot
exist without the validity of the principal obligation.
It is one which relies its existence on the validity of another
contract or obligation.
• Guaranty is also characterized as a subsidiary contract.
The guarantor becomes liable only if the principal
debtor fails to pay and, generally, the creditor still has
to prove that the debtor cannot pay before he can go
after the guarantor.
• But even if the guarantor binds himself solidarily with the
principal debtor, suretyship is still subsidiary in the sense
that while the surety is bound principally, ultimately, the
party liable on the obligation is still the principal debtor
because even if the surety pays, he can still recover from
the principal debtor.
Case: Guaranty vs. suretyship
Ong vs. PCIB
• Baliwag Mahogany Corporation (BMC) is a domestic
corporation engaged in the manufacture and export of
finished wood products. Petitioner-spouses Alfredo and
Susana Ong are its President and Treasurer, respectively.
• On April 20, 1992, respondent Philippine Commercial
International Bank (now Equitable-Philippine Commercial
International Bank or E-PCIB) filed a case for collection of
a sum of money against petitioners-spouses.
• The complaint alleged that in 1991, BMC needed additional
capital for its business and applied for various loans,
amounting to a total of P5,000,000, with PCIB.
• Petitioners-spouses acted as sureties for these loans and
issued three (3) promissory notes for the purpose.
• Under the terms of the notes, it was stipulated that
respondent bank may consider debtor BMC in default
and demand payment of the remaining balance of the loan
upon the levy, attachment or garnishment of any of its
properties, or upon BMC’s insolvency, or if it is
declared to be in a state of suspension of payments.
Respondent bank granted BMC’s loan applications.
• On November 22, 1991, BMC filed a petition for
rehabilitation and suspension of payments with the
Securities and Exchange Commission (SEC) after its
properties were attached by creditors.
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
• Respondent bank considered debtor BMC in default
of its obligations and sought to collect payment
thereof from petitioners-spouses as sureties.
• On October 13, 1992, a Memorandum of Agreement (MOA)
was executed by debtor BMC, the petitioners-spouses as
President and Treasurer of BMC, and the consortium of
creditor banks of BMC (of which respondent bank is
included). The MOA took effect upon its approval by the
SEC on November 27, 1992.
• Thereafter, petitioners-spouses moved to dismiss the
complaint. They argued that as the SEC declared the
principal debtor BMC in a state of suspension of payments
and, under the MOA, the creditor banks, including
respondent bank, agreed to temporarily suspend
any p ending civil action against the debtor BMC, the
benefits of the MOA should be extended to
petitioners-spouses who acted as BMC’s sureties in
their contracts of loan with respondent bank.
• Petitioners-spouses averred that respondent bank is
barred from pursuing its collection case filed against them.
• It would prejudice them if the principal debtor BMC
would enjoy the suspension of payment of its debts
while petitioners, who acted only as sureties for
some of BMC’s debts, would be compelled to make
the payment.
• They add that compelling them to pay is contrary to
Article 2063 of the Civil Code which provides that a
compromise between the creditor and principal debtor
benefits the guarantor and should not prejudice the
latter.
• Lastly, petitioners rely on Article 2081 of the Civil Code
which provides that: "the guarantor may set up against
the creditor all the defenses which pertain to the principal
debtor and are inherent in the debt; but not those which
are purely personal to the debtor."
• Petitioners aver that if the principal debtor BMC can set up
the defense of suspension of payment of debts and filing
of collection suits against respondent bank, petitioners as
sureties should likewise be allowed to avail of these
defenses.
Supreme Court Ruling
• We find no merit in petitioners’ contentions.
• Reliance of petitioners-spouses on Articles 2063 and
2081 of the Civil Code is misplaced as these
provisions refer to contracts of guaranty. They do
not apply to suretyship contracts.
• Petitioners-spouses are not guarantors but sureties of
BMC’s debts. There is a sea of difference in the rights and
liabilities of a guarantor and a surety.
• A guarantor insures the solvency of the debtor while
a surety is an insurer of the debt itself. A contract of
guaranty gives rise to a subsidiary obligation on the
part of the guarantor.
• It is only after the creditor has proceeded against the
properties of the principal debtor and the debt
remains unsatisfied that a guarantor can be held
liable to answer for any unpaid amount. This is the
principle of excussion.
• In a suretyship contract, however, the benefit of
excussion is not available to the surety as he is
principally liable for the payment of the debt.
• Thus, a creditor can go directly against the surety although
the principal debtor is solvent and is able to pay or no prior
demand is made on the principal debtor. A surety is
directly, equally and absolutely bound with the
principal debtor for the payment of the debt and is
deemed as an original promisor and debtor from the
beginning.
• Under the suretyship contract entered into by petitioners-
spouses with respondent bank, the former obligated
themselves to be solidarily bound with the principal debtor
BMC for the payment of its debts to respondent bank
amounting to P5,000,000.
• Under Article 1216 of the Civil Code, respondent bank
as creditor may proceed against petitioners-spouses
as sureties despite the execution of the MOA which
provided for the suspension of payment and filing of
collection suits against BMC.
• Respondent bank’s right to collect payment from the
surety exists independently of its right to proceed
directly against the principal debtor. In fact, the
creditor bank may go against the surety alone without
prior demand for payment on the principal debtor.
2|Page
Case: Guarantor vs. surety
Castellvi vs. Sellner
• The basis of plaintiff's action is a letter written by
defendant Sellner to John T. Macleod, agent for Mrs.
Horace L. Higgins, of the following tenor:
DEAR SIR: I hereby obligate and bind myself, my
heirs, successors and assigns that if the promissory
note executed the 29th day of May, 1915 by the
Keystone Mining Co., W.H. Clarke, and John Maye,
jointly and severally, in your favor and due six
months after date for Pesos 10,000 is not fully paid
at maturity with interest, I will, within fifteen
days after notice of such default, pay you in cash
the sum of P10,000 and interest upon your
surrendering to me the three thousand shares of stock
of the Keystone Mining Co. held by you as security for
the payment of said note.
Respectfully, (Sgd.) GEO. C. SELLNER.
Supreme Court Ruling
• Sellner is a guarantor.
• A surety and a guarantor are alike in that each
promises to answer for the debt or default of
another.
• However, they are unlike in that the surety assumes
liability as a regular party to the undertaking, while
the liability of the guarantor depends upon an
independent agreement to pay the obligation if the
primary payor fails to do so.
• A surety is charged as an original promissory; the
engagement of the guarantor is a collateral undertaking.
The obligation of the surety is primary; the
obligation of the guarantor is secondary.
• It is perfectly clear that the obligation assumed by
defendant was simply that of a guarantor, or, to be
more precise, of the fiador whose responsibility is fixed
in the Civil Code.
• The letter of Mr. Sellner recites that if the promissory
note is not paid at maturity, then, within fifteen days
after notice of such default and upon surrender to
him of the three thousand shares of Keystone Mining
Company stock, he will assume responsibility.
• Sellner is not bound with the principals by the same
instrument executed at the same time and on the same
consideration, but his responsibility is a secondary one
found in an independent collateral agreement,
neither is Sellner jointly and severally liable with the
principal debtors.
Comments:
• It does not mean that if the undertaking is contained
in the SAME document containing the principal
obligation, the undertaking is that of a surety.
• There can be instances when you have a principal
obligation secured by an ordinary guarantee only.
• Usually, if you find a signature of a co-maker, then the
undertaking of the co-maker is that of a surety.
• Example ani kana note sa mga teachers and court
employees: Gi-entice sa mga lending companies, so each
teacher would be co-maker of the other. So nahitabo
namatay ang usa ka co-maker, reklamo usa na wala man
koi nadawat ana na utang. WRONG. As a co-maker, you
are solidary liable.
• It does not mean that if it is an ordinary undertaking of
guaranty that it must be contained in the same document
containing the provisions of the principal obligation.
• What is important is that the undertaking is
CLEARLY SPECIFIED whether it is of an ordinary
guarantor or that of a surety.
What was the nature of Sellner’s liability? Is it primary
or subsidiary?
• Subsidiary because he only bound himself as a guarantor
and not as a surety. Here, he was sued for the fulfillment
of the obligation without the principal debtor being sued.
Why do we say that his undertaking is a mere subsidiary
undertaking and not a primary or principal undertaking?
• There was a notice of default.
• If you bind yourself principally/primarily with the principal
debtor, there is no notice of default needed. The creditor
can immediately go after you for the payment of the
obligation.
• That’s why the court held that the obligation of Sellner is
that of a guarantor and not of a surety.
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
Case: Solidary guarantor vs. solidary co-debtor
Escano vs. Ortigas
• On April 28, 1980, Private Development Corporation of the
Philippines (PDCP) entered into a loan agreement with
Falcon Minerals, Inc. (Falcon) amounting to $320,000.00
subject to terms and conditions.
• Respondent Rafael Ortigas, Jr., et al., stockholder officers
of Falcon, executed an Assumption of Solidary
Liability whereby they agreed to assume in their
individual capacity, solidary liability with Falcon for
the due and punctual payment of the loan contracted by
Falcon with PDCP.
• Two separate guaranties were executed to guarantee the
payment of the same loan by other stockholders and
officers of Falcon, acting in their personal and individual
capacities. One Guaranty was executed by petitioner
Salvador Escaño, while the other by petitioners Mario M.
Silos, Ricardo C. Silverio, et al.
• Two years later, an agreement was developed to cede
control of Falcon to Escaño, Silos and Matti. Part of the
consideration that induced the sale of stock was a
desire by Ortigas, et al., to relieve themselves of all
liability arising from their previous joint and several
undertakings with Falcon, including those related to the
loan with PDCP.
• An Undertaking dated June 11, 1982 was executed
by the concerned parties, namely: with Escaño, Silos
and Matti as “sureties” and Ortigas, Inductivo and
Scholeys as “obligors.”
• Falcon eventually availed of the sum of $178,655.59 from
the credit line extended by PDCP. However, Falcon
subsequently defaulted in its payments. After PDCP
foreclosed on the chattel mortgage, there remained a
subsisting deficiency of P5,031,004.07 which falcon did not
satisfy despite demands.
• Settlements were made between the parties and PDCP.
• In the meantime, after having settled with PDCP, Ortigas
pursued his claims against Escaño, Silos and Matti,
on the basis of the 1982 Undertaking. He initiated a
third-party complaint against Matti and Silos, while he
maintained his cross-claim against Escaño.
• RTC issued the Summary Judgment, ordering Escaño,
Silos and Matti to pay Ortigas, jointly and severally, the
amount of P1.3M, as well as P20K in attorney’s fees.
• The trial court ratiocinated that none of the third-party
defendants disputed the 1982 Undertaking.
Supreme Court Ruling
• Petitioners are not solidarily liable to respondent Ortigas.
In case there is a concurrence of two or more creditors or
of two or more debtors in one and the same obligation,
Article 1207 of the Civil Code states that among them,
there is a solidary liability only when the obligation
expressly so states, or when the law or the nature of
the obligation requires solidarity.”
• Article 1210 supplies further that the indivisibility of an
obligation does not necessarily give rise to
solidarity. Nor does solidarity of itself imply
indivisibility. Thus, the presumption is that the obligation
is only joint.
• It thus becomes incumbent upon the party alleging that
the obligation is indeed solidary in character to prove such
fact with a preponderance of evidence.
• The Undertaking does not contain any express
stipulation that the petitioners agreed “to bind
themselves jointly and severally” in their obligations
to the Ortigas group, or any such terms to that
effect. Hence, such obligation established in the
Undertaking is presumed only to be joint.
• Ortigas, as the party alleging that the obligation is in fact
solidary, bears the burden to overcome the presumption
of jointness of obligations. He has failed to discharge such
burden. The term “surety” has a specific meaning
under our Civil Code. As provided in Article 2047 in a
surety agreement the surety undertakes to be bound
solidarily with the principal debtor.
• Thus, a surety agreement is an ancillary contract as
it presupposes the existence of a principal contract.
It appears that Ortigas’ argument rests solely on the
solidary nature of the obligation of the surety under
Article 2047.
• However, a significant distinction still lies between a
joint and several debtor, on one hand, and a surety
on the other. Solidarity signifies that the creditor can
compel any one of the joint and several debtors or the
surety alone to answer for the entirety of the principal
debt.
3|Page
• The difference lies in the respective faculties of the joint
and several debtor and the surety to seek reimbursement
for the sums they paid out to the creditor.
• In the case of joint and several debtors, Article 1217
makes plain that the solidary debtor who effected the
payment to the creditor “may claim from his co-debtors
only the share which corresponds to each, with the interest
for the payment already made.” Such solidary debtor
will not be able to recover from the co-debtors the
full amount already paid to the creditor, because the
right to recovery extends only to the proportional
share of the other co-debtors, and not as to the
particular proportional share of the solidary debtor who
already paid.
• In contrast, even as the surety is solidarily bound with the
principal debtor to the creditor, the surety who does pay
the creditor has the right to recover the full amount
paid, and not just any proportional share, from the
principal debtor or debtors.
• Such right to full reimbursement falls within the other
rights, actions and benefits which pertain to the surety by
reason of the subsidiary obligation assumed by the surety.
Solidary guarantor Solidary co-debtor
May recover the entire Can recover only the co-
payment from the debtor debtor’s share
Released by extension of Not released by extension
the period
Has action for counterbond No action except for
and reimbursement, contribution
besides subrogation
Obligation is accessory Bound under a principal
obligation
Comments:
• Even if a person binds himself solidary with the principal
debtor, and therefore governed by the rules of solidary
obligation, it does not erase the fact that he is a guarantor.
• If you are a surety and you pay the obligation, you can
recover the entire amount from the debtor.
• Unlike in the rules of solidary obligation where a solidary
debtor can recover only the portion paid which is the share
of the co-debtor. In here, the solidary guarantor (surety)
can recover the entire amount from the debtor, in the
sense that he was not obligated in the original obligation.
He is just a solidary guarantor.
• But we are more interested in this statement: “The
solidary guarantor has an action for counter bond
while a solidary debtor is limited only to an action
contribution by the other co-debtor”
Example: X owes you 1M. I bind myself with X as a solidary
guarantor. What is my right?
• To recover the full amount if ever I am made to pay the
obligation.
How will I be assured that I will be reimbursed?
• I will require X to put up another security that I can go
after in case I will not be reimbursed.
• So, you have a main guaranty which I made in favor
of X, and a sub-guaranty made by another in my
favor, in case I will not be reimbursed. This is a counter
bond or indemnity agreement.
Sub-guaranty
• Exists when, before one consents to be a surety, he
demands that an indemnity bond be put up in his favor.
• If the surety pays the creditor, he can go after the
indemnity bond without going after the debtor himself.
• The indemnity bond can be put up by other persons.
This can also be put up by the debtor by way of property
bond.
Case: Liability where company president signed as
guarantor
Piczon vs. Piczon
• The actionable document of appellants which is the basis
of this case reads: AGREEMENT OF LOAN
KNOW YE ALL MEN BY THESE PRESENTS:
That I, ESTEBAN PICZON, of legal age, married,
Filipino, and resident of and with postal address in the
municipality of Catbalogan, Province of Samar,
Philippines, in my capacity as the President of the
corporation known as the "SOSING-LOBOS and CO.,
INC.," as controlling stockholder, and at the
same time as guarantor for the same, do by these
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
presents contract a loan of Twelve Thousand Five
Hundred Pesos (P12,500.00), Philippine Currency, the
receipt of which is hereby acknowledged, from the
"Piczon and Co., Inc." another corporation, the main
offices of the two corporations being in Catbalogan,
Samar, for which I undertake, bind and agree to use
the loan as surety cash deposit for registration with
the Securities and Exchange Commission of the
incorporation papers relative to the "Sosing-Lobos
and Co., Inc.," and to return or pay the same amount
with Twelve Per Cent (12%) interest per annum,
commencing from the date of execution hereof, to the
"Piczon and Co., Inc., as soon as the said
incorporation papers are duly registered and the
Certificate of Incorporation issued by the aforesaid
Commission.
IN WITNESS WHEREOF, I hereunto signed my name
in Catbalogan, Samar, Philippines, this 28th day of
September, 1956. (Sgd.) ESTEBAN PICZON
Supreme Court Ruling
• Under the terms of the contract, Esteban Piczon
expressly bound himself only as guarantor, and
there are no circumstances in the record from which
it can be deduced that his liability could be that of a
surety.
• A guaranty must be express, (Article 2055, Civil Code)
and it would be violative of the law to consider a party to
be bound as a surety when the very word used in the
agreement is "guarantor."
• Moreover, as well pointed out in appellees' brief, under the
terms of the pre-trial order, appellants accepted the
express assumption of liability by Sosing- Lobos & Co., Inc.
for the payment of the obligation in question, thereby
modifying their original posture that inasmuch as that
corporation did not exist yet at the time of the agreement,
Piczon necessarily must have bound himself as insurer.
Comments:
• The mere fact that you are the President and at the same
time a majority stockholder, does not automatically make
you a surety, if you merely signed as a guarantor.
• Also, there is this principle in corporation law called
Doctrine of Separate Corporate Entity which means
that the debt of the corporation is not the debt of its
officers or stockholders.
Liability where company president signed as guarantor
• Now, even if you are the president of the corporation and
you own 99% of the outstanding capital stock of the
corporation, if you secure the corporation’s obligation
as a guarantor, the mere fact that you own
practically the majority capital stock does not make
you solidarily liable with the corporation. Your liability
as a guarantor remains to be subsidiary.
Can you practically own shares of stock or practically
own a corporation? Can you own 99% of the outstanding
capital stocks of the corporation?
• Yes, under the present corporation code, what is required
is that there must be at least 5 incorporators (not
anymore true with the Revised Corporation Code of
2019).
• Because there must be at least 5 members of the Board of
Directors (BOD), and it is required that the BODs must be
a stockholder. But it is not required that all the 5
stockholders have equal shares.
You are a President of a corporation that obtained a loan
from the bank, signed as a guarantor and also signed as
the President, in a separate undertaking. If the
corporation defaults on its obligation, can the President
be held liable as a SURETY? Total murag imo naman na
ang corporation kay kaw man majority stockholder, it is
as if you and the corporation are one, can the creditor
do that?
• No. The mere fact that you are the president and at the
same time the majority stockholder, does not
automatically make you a surety if you merely signed as a
guarantor.
• Moreover, there is a doctrine in corporation law called the
Doctrine of Separate Entity, which states that the debt
of the corporation is not the debt of its officers or
stockholders even if majority stockholder.
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Case: Solidary guarantor does not lose his character as
such vis-à-vis the debtor
Palmares vs. CA
• Pursuant to a promissory note, private respondent M.B.
Lending Corporation extended a loan to the spouses
Osmeña and Merlyn Azarraga, together with petitioner
Estrella Palmares, in the amount of P30,000.00 payable on
or before May 12, 1990, with compounded interest at the
rate of 6% per annum to be computed every 30 days from
the date thereof.
• On four occasions after the execution of the promissory
note and even after the loan matured, petitioner and the
Azarraga spouses were able to pay a total of P16,300.00,
thereby leaving a balance of P13,700.00.
• No payments were made after the last payment on
September 26, 1991.
• The basis of petitioner Palmares' liability under the
promissory note is expressed in this wise:
ATTENTION TO CO-MAKERS: PLEASE READ WELL
I, Mrs. Estrella Palmares, as the Co-maker of the
above-quoted loan, have fully understood the
contents of this Promissory Note for Short-Term Loan:
That as Co-maker, I am fully aware that I shall be
jointly and severally or solidarily liable with the
above principal maker of this note;
That in fact, I hereby agree that M.B. LENDING
CORPORATION may demand payment of the above
loan from me in case the principal maker, Mrs.
Merlyn Azarraga defaults in the payment of the
note subject to the same conditions above-
contained.
• On the basis of petitioner's solidary liability under the
promissory note, respondent corporation filed a complaint
against petitioner Palmares as the lone party-defendant,
to the exclusion of the principal debtors, allegedly by
reason of the insolvency of the latter.
Supreme Court Ruling
• A surety is an insurer of the debt, whereas a guarantor is
an insurer of the solvency of the debtor. A suretyship is
an undertaking that the debt shall be paid; a guaranty,
an undertaking that the debtor shall pay.
• Stated differently, a surety promises to pay the principal's
debt if the principal will not pay, while a guarantor agrees
that the creditor, after proceeding against the principal,
may proceed against the guarantor if the principal is
unable to pay.
• A surety binds himself to perform if the principal
does not, without regard to his ability to do so. A
guarantor, on the other hand, does not contract that
the principal will pay, but simply that he is able to
do so.
• In other words, a surety undertakes directly for the
payment and is so responsible at once if the principal
debtor makes default, while a guarantor contracts to pay
if, by the use of due diligence, the debt cannot be made
out of the principal debtor.
• Quintessentially, the undertaking to pay upon default of
the principal debtor does not automatically remove it from
the ambit of a contract of suretyship.
• The second and third paragraphs of the aforequoted
portion of the promissory note do not contain any other
condition for the enforcement of respondent corporation's
right against petitioner. It has not been shown, either
in the contract or the pleadings, that respondent
corporation agreed to proceed against herein
petitioner only if and when the defaulting principal
has become insolvent.
• A contract of suretyship, to repeat, is that wherein one
lends his credit by joining in the principal debtor's
obligation, so as to render himself directly and primarily
responsible with him, and without reference to the
solvency of the principal.
• The stipulation contained in the third paragraph of the
controverted suretyship contract merely elucidated on and
made more specific the obligation of petitioner as generally
defined in the second paragraph thereof.
• Resultantly, the theory advanced by petitioner, that she is
merely a guarantor because her liability attaches only
upon default of the principal debtor, must necessarily fail
for being incongruent with the judicial pronouncements
adverted to above.
• It is a well-entrenched rule that in order to judge the
intention of the contracting parties, their
contemporaneous and subsequent acts shall also be
principally considered. Several attendant factors in that
genre lend support to our finding that petitioner is a
surety.
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
• For one, when petitioner was informed about the
failure of the principal debtor to pay the loan, she
immediately offered to settle the account with
respondent corporation. Obviously, in her mind, she knew
that she was directly and primarily liable upon default of
her principal.
• For another, and this is most revealing, petitioner
presented the receipts of the payments already made,
from the time of initial payment up to the last, which were
all issued in her name and of the Azarraga spouses. This
can only be construed to mean that the payments made
by the principal debtors were considered by respondent
corporation as creditable directly upon the account and
inuring to the benefit of petitioner.
• The concomitant and simultaneous compliance of
petitioner's obligation with that of her principals
only goes to show that, from the very start,
petitioner considered herself equally bound by the
contract of the principal makers.
• A surety is bound equally and absolutely with the principal,
and as such is deemed an original promisor and debtor
from the beginning. This is because in suretyship there is
but one contract, and the surety is bound by the same
agreement which binds the principal. In essence, the
contract of a surety starts with the agreement.
Consensual Contract
• A guaranty is a consensual contract and therefore
perfected upon mere consent and agreement of the
parties.
Debtor’s consent is not required
• The contract is between the creditor and the
guarantor, and therefore the debtor’s consent is not
required to constitute a guaranty.
Comments:
• Now, a guaranty is a consensual contract just like a
contract of sale, not like a loan or deposit, which are real
contracts.
• It is therefore perfected the moment there is an
agreement between the guarantor and the creditor.
• The debtor’s consent is not required to constitute a
guaranty, bahalag mag wild pana dra ang debtor dra. It
does not affect the validity of the contract.
Illustration:
You owe X P100,000 and it required you to put up a security.
So, you approached me and said “Ma’am can you be my
guarantor?” then I said, “Okay. When is the obligation
payable?” You: “after one year.” And then I called up X and
informed X that I will be the guarantor of your obligation and
then X approved. After 1 year, you failed to pay the obligation.
Because you failed to pay the obligation, X comes up to me and
demands payment. But I refused to pay X. Can X compel me
to pay? Is the undertaking valid? Am I bound by my
verbal promise to secure your obligation to X?
• Yes, because the promise was valid, but I can invoke the
unenforceability of my undertaking because this is a
special promise to answer for the default of another
person, and under the Statute of Frauds, it must be in
writing for it to be enforceable.
BAR 2009
True or False: An oral promise of guaranty is valid and binding.
• True. It is valid and binding although it is not
enforceable.
• The mere fact that the undertaking in unenforceable does
not mean that it cannot be enforced, because the
guarantor may not invoke unenforceability as a
defense.
• It can be waived.
Gratuitous Contract, Presumption
• The presumption is that a guaranty is gratuitous, unless
there is a stipulation to the contrary. (Art. 2048)
• Gratuitous contract – the guarantor does not receive
any price or remuneration for acting as such.
• Onerous contract – the guarantor receives a valuable
consideration for his guaranty.
Comment:
• The guarantor cannot claim that he was not paid by the
agreed compensation, and therefore he is not bound by
the guaranty. (see Phil. Pryce Assurance case)
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Can there be a valid contract of guaranty even if no
valuable compensation or consideration is given to the
guarantor?
• Yes. But the law requires that there must be a
consideration for guaranty, otherwise it is as if there is no
contract at all because you know that a contract must have
the 3 essential elements.
What is the cause in these contracts of security?
• Since this is a security undertaking, there is no need for
a separate consideration to be given.
• The same consideration that supports the principal
obligation supports the undertaking of the security
obligation.
Case: Dismissal of complaint by virtue of compromise
agreement where payment of balance was guaranteed
Severino vs. Severino
• The plaintiff Fabiola Severino is the recognized natural
daughter of Melecio Severino, deceased, former resident
of Occidental Negros.
• Upon the death of Melecio Severino a number of years ago,
he left considerable property and litigation ensued
between his widow, Felicitas Villanueva, and Fabiola
Severino, on the one part, and other heirs of the deceased
on the other part.
• In order to make an end of this litigation, a compromise
was effected by which Guillermo Severino, a son of Melecio
Severino, took over the property pertaining to the estate
of his father at the same time agreeing to pay P100,000
to Felicitas Villanueva and Fabiola Severino.
• This sum of money was made payable in installment, first,
P40,000 in cash upon the execution of the document of
compromise, and the balance in three several payments of
P20,000 at the end of one year; two years, and three years
respectively. To this contract the appellant Enrique
Echaus affixed his name as guarantor.
• The first payment of P40,000 was made on July 11, 1924,
the date when the contract of compromise was executed;
and of this amount the plaintiff Fabiola Severino received
the sum of P10,000. Of the remaining P60,000, all as yet
unpaid, Fabiola Severino is entitled to the sum of P20,000.
• It appears that at the time of the compromise agreement
abovementioned was executed, Fabiola Severino had not
yet been judicially recognized as the natural daughter of
Melecio Severino, and it was stipulated that the last
P20,000 corresponding to Fabiola and the last P5,000
corresponding to Felicitas Villanueva should be retained on
deposit until the definite status of Fabiola Severino as
natural daughter of Melecio Severino should be
established.
• The judicial decree to this effect was entered in the Court
of First Instance of Occidental Negros on June 16, 1925,
and as the money which was contemplated to be held in
suspense has never in fact been paid to the parties entitled
thereto; and the only defense worth noting in this
decision is the assertion on the part of Enrique
Echaus that he received nothing for affixing his
signature as guarantor to the contract which is the
subject of suit and that in effect the contract was lacking
in consideration as to him.
Supreme Court Ruling
• The point is not well taken. A guarantor or surety is
bound by the same consideration that makes the
contract effective between the principal parties
thereto.
• The compromise and dismissal of a lawsuit is
recognized in law as a valuable consideration; and
the dismissal of the action which Felicitas Villanueva and
Fabiola Severino had instituted against Guillermo Severino
was an adequate consideration to support the promise on
the part of Guillermo Severino to pay the sum stipulated
in the contract which is the subject of this action.
• The promise of the appellant Echaus as guarantor
therefore binding. It is never necessary that the
guarantor or surety should receive any part of the
benefit, if such there be, accruing to his principal.
• But the true consideration of this contract was the
detriment suffered by the plaintiffs in the former action in
dismissing that proceeding, and it is immaterial that no
benefit may have accrued either to the principal or his
guarantor.
Comments:
• The obligation secured here is the obligation of Guillermo
to pay his half-sister and stepmother and this was also
secured by Echaus.
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
• When Severino failed to pay the last installment, the sister
sued Echaus, and the latter said he did not receive any
compensation for his undertaking, so he is not bound.
• SC held: There is no requirement that you must be paid a
valuable consideration, you are bound because the cause
that supports a principal obligation was supported,
which was obligation of Severino.
Kinds of Guaranty
Art. 2049. A married woman may guarantee an obligation
without the husband’s consent, but shall not thereby bind the
conjugal partnership, except in cases provided by law.
Art. 2051. A guaranty may be conventional, legal or judicial,
gratuitous, or by onerous title. It may also be constituted, not
only in favor of the principal debtor, but also in favor of the
other guarantor, with the latter’s consent, or without his
knowledge, or even over his objection.
Art. 2054. A guarantor may bind himself for less, but not for
more than the principal debtor, both as regards the amount
and the onerous nature of the conditions. Should he have
bound himself for more, his obligations shall be reduced to the
limits of that of the debtor.
Kinds of Guaranty by its origin
1. Conventional – constituted by contract
2. Legal – required by substantive or procedural law
3. Judicial – required by a court from a litigant
Kinds of Guaranty by its extent
1. Unlimited
• One that covers the principal obligation, accessories,
and costs incurred after the guarantor has been
judicially asked to pay.
• If the guaranty is given without the knowledge
or consent of the debtor, Articles 1236 and 1237
apply. Beneficial reimbursement: A guarantor can
recover from the debtor what the former had to pay
the creditor, even if the guaranty was without the
debtor’s consent or against his will, but the recovery
will only be to the extent that the debtor had been
benefited.
2. Limited – excluding accessory obligation.
Case: Suit to recover from principal debtor who did not
consent to the guaranty
De Guzman vs. Santos
• A mercantile partnership, Phil-Am Constructions Co., with
Toole, Abad and Santos as co-partners, was formed with
P10,000 of its capital secured by way of a loan from
Paulino Candelaria.
• The partnership and the co-partnership bound
themselves solidarily to pay said indebtedness.
• Having violated the conditions of the contract, Candelaria
filed an action against PACC and the co-partners for the
recovery of the loan.
• Candelaria obtained a writ of attachment against the
co-partners by virtue of which the sheriff attached the
co-partnership properties.
• No property of the PACC was attached.
• To discharge the attachment, PACC as principal and
Santiago Lucero and Meliton Carlos as guarantors
executed a bond in favor of Candelaria.
• Defendant Santos neither intervened nor signed
individually in the bond. Attachment was discharged
and attached properties were returned to their owners.
• Trial court rendered judgment ordering the co-partners to
pay the judgment creditor the amount of the loan.
• Writ of execution having been returned unsatisfied,
said writ was issued against the guarantors upon the
motion of Candelaria.
• Lucero and Carlos, as guarantors, paid P5,000. Plaintiff de
Guzman as, in her capacity as judicial administrator of the
estate of the deceased Lucero, sought to recover from
Santos what the estate had paid to Candelaria from
defendant. The trial court decided for plaintiff.
• Defendant Santos appealed contending that he is not liable
because he neither applied for nor intervened in the bond
any capacity.
Supreme Court Ruling
• A guarantor can recover from the debtor what the
former had to pay the creditor, even if the guaranty
was without the debtor’s consent or against his will,
but the recovery will only be to the extent that the
debtor had been benefited.
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• According to this legal provision, it is evident that the
Santos is bound to pay to the plaintiff what the latter
had advanced to Candelaria, and this is more so
because it appears that although Lucero executed the
bond without his, knowledge, nevertheless he did not
object thereto or repudiate the same at any time.
• And it cannot be logically deduced that the defendant did
not have knowledge of the bond, firstly, because his
properties were attached and attachment could not have
been levied without his knowledge, and secondly, because
said properties were returned to him and in receiving
them, he was necessarily apprised of the fact that a bond
had been filed to discharge the attachment.
• Any person who makes a payment for the account of
another may recover from the debtor the amount
payment, unless it was made against the express will of
the latter. In the latter case, he can only recover from the
debtor in so far as the payment has been beneficial to the
latter
If the principal debtor did not give his consent to the
guaranty and the guarantor is entitled to recover from
him, what provisions in the Civil Code do we apply?
• It is found in the general provisions in the Civil Code.
• In Obligations and Contracts, a third person may pay the
obligations of a debtor. The third person may even pay
the debtor without the consent and upon objection
by the debtor, but if the third person pays, he is
entitled only to the beneficial reimbursement. He can
recover only to the extent that the principal debtor was
benefited.
Comments:
• RULE IF DEBTOR DOES NOT GIVE CONSENT: The
guarantor can only recover to the extent that the debtor is
benefited. Cannot compel the creditor to subrogate.
• RULE IF DEBTOR GIVES CONSENT: The guarantor is
subrogated to the rights of the creditor.
• This same rule applies to suretyship.
Kinds of Guaranty by the person guaranteed
• Guaranty proper – the principal obligation secured by the
guarantor
• Sub-guaranty – to guarantee the guarantor’s solvency
Kinds of Guaranty by the liability of the guarantor
• Normal or ordinary – simple guaranty, guaranty proper;
subsidiary
• Solidary – suretyship
Cases: Normal vs. solidary
Machetti, vs. Hospicio De San Jose and Fidelity &
Surety Company of the Philippine Islands
• It appears from the evidence that Romulo Machetti, by a
written agreement, undertook to construct a building for
the Hospicio de San Jose, the contract price being
P64,000.
• One of the conditions of the agreement was that the
contractor should obtain the "guarantee" of the
Fidelity and Surety Company of the Philippine
Islands to the amount of P128,800 and the following
endorsement in appears upon the contract:
For value received we hereby guarantee compliance
with the terms and conditions as outlined in the above
contract. FIDELITY AND SURETY COMPANY OF THE
PHILIPPINE ISLANDS.
(Sgd) OTTO VORSTER, Vice-President.
• Machetti constructed the building under the supervision of
architects representing the Hospicio de San Jose and, as
the work progressed, payments were made to him from
time to time upon the recommendation of the architects,
until the entire contract price, with the exception of the
sum of the P4,978.08, was paid.
• Subsequently it was found that the work had not been
carried out in accordance with the specifications which
formed part of the contract and that the workmanship was
not of the standard required, and the Hospicio de San Jose
therefore answered the complaint and presented a
counterclaim for damages for the partial non-compliance
with the terms of the agreement abovementioned, in the
total sum of P71,350.
• After issue was thus joined, Machetti, on petition of his
creditors, was declared insolvent and an order was
entered suspending the proceeding in the present case
in accordance with section 60 of the Insolvency Law, Act
No. 1956.
• The Hospicio de San Jose filed a motion asking that
the Fidelity and Surety Company be made cross-
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
defendant to the exclusion of Machetti and that the
proceedings be continued as to said company, but
still remain suspended as to Machetti.
• This motion was granted and the Hospicio filed a complaint
against the Fidelity and Surety Company asking for a
judgement for P12,800 against the company upon its
guaranty.
• The CFI rendered judgment against the Fidelity and Surety
Company for P12,800 in accordance with the complaint.
Supreme Court Ruling
• In English, the term "guarantor" implies an undertaking of
guaranty, as distinguished from suretyship. It is very true
that notwithstanding the use of the words "guarantee" or
"guaranty" circumstances may be shown which convert
the contract into one of suretyship, but such circumstances
do not exist in the present case.
• On the contrary it appears affirmatively that the contract
is the guarantor's separate undertaking in which the
principal does not join, that it rests on a separate
consideration moving from the principal and that
although it is written in continuation of the contract
for the construction of the building, it is a collateral
undertaking separate and distinct from the latter. All
of these circumstances are distinguishing features
of contracts of guaranty.
• Now, while a surety undertakes to pay if the principal
does not pay, the guarantor only binds himself to pay
if the principal cannot pay. The one is the insurer of the
debt, the other an insurer of the solvency of the debtor.
• This latter liability is what the Fidelity and Surety Company
assumed in the present case. The Fidelity and Surety
Company having bound itself to pay only the event its
principal, Machetti, cannot pay it follows that it
cannot be compelled to pay until it is shown that
Machetti is unable to pay.
• Such ability may be proven by the return of a writ of
execution unsatisfied or by other means, but is not
sufficiently established by the mere fact that he has
been declared insolvent in insolvency proceedings
under our statutes, in which the extent of the insolvent's
inability to pay is not determined until the final liquidation
of his estate.
What is the best proof of the principal debtor’s inability
to pay?
• A return of a writ of execution unsatisfied.
If a debtor has a collectible from another debtor,
meaning, he is also a creditor of another debtor, and fails
to collect. What is the remedy of the creditor?
• Accion subrogatoria
What if the debtor incurs additional obligation? Can the
creditor object? Can the creditor say that “you cannot
incur additional obligations, you cannot obtain
additional debts or loans because I will be prejudiced
because the assets will be spread out to more liabilities
than what you already have now.” Can the creditor
prevent the debtor from incurring additional obligation?
• No. He cannot prevent the debtor from incurring additional
obligation. There is no fraud in incurring additional
obligation.
• But to assure the creditor that he can collect when his
credit becomes due and demandable, then he can demand
that the debtor puts up a security for the fulfillment of his
obligation. The security can either be personal or real
security.
PNB vs. Luzon Surety Co., Inc.
• Defendant Augusto R. Villarosa, a sugar planter adhered
to the Lopez Sugar Central Milling company, Inc. applied
for a crop loan with the plaintiff, Philippine National Bank,
which application was approved on March 6, 1952 in the
amount of P32,400. Villarosa executed a Chattel Mortgage
on standing crop to guaranty the crop loan.
• As of September 27, 1953, as shown in the accounts, there
was a balance of P63,222.78 but as of the date when the
complaint was filed on June 8, 1960, because of the
interest accrued, it has reached a much higher sum.
• For failure to pay, the bank sought to collect against
Villarosa and the 3 bondsmen, Luzon Surety being one of
them.
• There was a question as to the liability of Luzon Surety for
the increases to the credit line of Villarosa and the interests
sought.
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Supreme Court Ruling
• The surety bond executed by and between the PNB on one
hand and Augusto Villarosa and respondent Luzon Surety
Company, Inc., on the other is hereby reproduced, viz:
“That we Augusto Villarosa, as principal and Luzon
Surety Company, Inc., as surety, are held and firmly
bound unto Philippine National Bank, Bacolod City,
Philippines, in the sum of P10,000, for the payment of
which sum, well and truly to be made, we bind
ourselves, our heirs, executors, administrators,
successors and assigns jointly and severally, firmly by
these presents:”
• The foregoing evidences, clearly, the liability of Luzon
Surety to petitioner PNB not merely as a guarantor
but as a surety liable as a regular party to the
undertaking.
• A surety bond filed for the release of the seized
importations during the pendency of the case guarantees
not the legality of the importation but merely the payment
of the appraised value of the goods released. The surety
has no right to question the legality of the seizure
and certain CB circulars.
• The next question to take up is the liability of Luzon Surety
Co. for interest which, it contends, would increase its
liability to more than P10,000 which is the maximum if its
bond. We cannot agree to this reasoning. In the case of
Tawaga vs. Aldanes, Plaridel Surety Insurance Co. vs. P.L
Galang Machinery Co., it was held: “If a surety upon
demand fails to pay, he can be held liable for
interest, even if in thus paying, the liability becomes
more than that in the principal obligation. The
increased liability is not because of the contract, but
because of the default and the necessity of judicial
collection. It should be noted, however, that the interest
runs from the time the complaint is filed, not from
the time the debt becomes due and demandable.”
Ong vs. PCIB (see above)
• A contract of guaranty gives rise to a subsidiary obligation
on the part of the guarantor. It is only after the creditor
has proceeded against the properties of the principal
debtor and the debt remains unsatisfied that a
guarantor can be held liable to answer for any unpaid
amount. This is the principle of excussion.
• In a suretyship contract, however, the benefit of
excussion is not available as the surety is principally
liable for the payment of the debt. As the surety insures
the debt itself, he obligates himself to pay the debt if the
principal debtor will not pay, regardless of whether or not
the latter is financially capable to fulfill his obligation.
• Thus, a creditor can go directly against the surety although
the principal debtor is solvent and is able to pay or no prior
demand is made on the principal debtor.
• A surety is directly, equally and absolutely bound with the
principal debtor for the payment of the debt and is deemed
as an original promisor and debtor from the beginning.
• Thus, respondent bank as creditor may proceed against
the sureties despite the execution of the MOA which
provided for the suspension of payment and filing of
collection suits against BMC.
• Respondent bank’s right to collect payment from the
surety exists independently of its right to proceed directly
against the principal debtor. In fact, the creditor bank may
go against the surety alone without prior demand for
payment on the principal debtor.
What if the debtor is declared in a state of suspension of
payments because it is a distressed corporation that no
cases can be filed against it, can the creditor collect from
the debtor?
• No. The proceedings on these cases are suspended. So, if
the cases against the debtor are suspended, the creditor
cannot collect.
If the obligation is secured by a guaranty, can the
creditor go after the guarantor since it cannot proceed
against the principal debtor since there is a suspension
of payment?
• No, the creditor cannot, because we still apply the basic
rule that the creditor has to collect from the principal
debtor before it can go after the guarantor.
What if the obligation is secured by a suretyship
undertaking. Can the creditor go against the surety?
• Yes, the creditor can go against the surety. Going
back to the principle that the surety is the insurer of the
debt, so for as long as the debt is not paid, the surety is
liable.
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
• So, if the debtor is put in a state of suspension of
payments, by all means, the creditor can go after the
surety.
Remember that a guaranty is an accessory contract.
What happens if the principal obligation is extinguished?
X owes you 1M. I secure his obligation. Then you
condone his obligation, can you collect from me?
• No, because the principal obligation is extinguished.
What if I secured the obligation as a surety? Can you go
after me?
• No, because the principal obligation is extinguished.
International Finance Corporation vs. Imperial Textile
Mills, Inc.
• On December 17, 1974, International Finance Corporation
(IFC) and Philippine Polyamide Industrial Corporation
(PPIC) entered into a loan agreement wherein IFC
extended to PPIC a loan of US$7,000,000.00, payable in
16 semi-annual installments of US$437,500.00 with
interest at the rate of 10%.
• On December 17, 1974, a ‘Guarantee Agreement’ was
executed where Imperial Textile Mills, Inc. (ITM),
Grand Textile Manufacturing Corporation
(Grandtex) agreed to guarantee PPIC’s obligations.
• PPIC paid the installments due on June 1, 1977, December
1, 1977 and June 1, 1978. The payments due on December
1, 1978, June 1, 1979 and December 1, 1979 were
rescheduled as requested by PPIC.
• Despite the rescheduling of the installment payments,
however, PPIC defaulted.
• With PPIC’s failure to pay, IFC, together with DBP, applied
for the extrajudicial foreclosure of mortgages on the real
properties owned by PPIC at Calamba, Laguna.
• On July 30, 1985, the deputy sheriff of Calamba, Laguna
issued a notice of extrajudicial sale. IFC and DBP were the
only bidders during the auction sale.
• IFC’s bid was for P99,269,100.00 which was equivalent to
US$5,250,000.00. The outstanding loan, however,
amounted to US$8,083,967.00 thus leaving a balance of
US$2,833,967.00. PPIC failed to pay the remaining
balance.
• Consequently, IFC demanded ITM and Grandtex, as
guarantors of PPIC, to pay the outstanding balance.
However, despite the demand made by IFC, the
outstanding balance remained unpaid.
• IFC filed a complaint with the RTC Manila which held PPIC
liable for the payment of the outstanding loan plus
interests. It also ordered PPIC to pay IFC its claimed
attorney’s fees.
• However, the RTC relieved ITM of its obligation as
guarantor. Hence, the trial court dismissed IFC’s complaint
against ITM.
• CA reversed the decision stating ITM as guarantor.
Supreme Court Ruling
• While referring to ITM as a guarantor, the Agreement
specifically stated that the corporation was “jointly
and severally” liable. To put emphasis on the nature of
that liability, the Contract further stated that ITM was
a primary obligor, not a mere surety. Those
stipulations meant only one thing: that at bottom, and to
all legal intents and purposes, it was a surety.
• When qualified by the term “jointly and severally,”
the use of the word “guarantor” to refer to a
“surety” does not violate the law.
• As Article 2047 provides, a suretyship is created when a
guarantor binds itself solidarily with the principal obligor.
Likewise, the phrase in the Agreement -- “as primary
obligor and not merely as surety” -- stresses that
ITM is being placed on the same level as PPIC. Those
words emphasize the nature of their liability, which the law
characterizes as a suretyship.
• Pursuant to this provision, petitioner (as creditor) was
justified in taking action directly against respondent.
• The Court stresses that a suretyship is merely an
accessory or a collateral to a principal obligation.
Although a surety contract is secondary to the principal
obligation, the liability of the surety is direct, primary and
absolute; or equivalent to that of a regular party to the
undertaking. A surety becomes liable to the debt and duty
of the principal obligor even without possessing a direct or
personal interest in the obligations constituted by the
latter.
8|Page
X obtains several of jewelries from you to be sold, and
the proceeds to be turned over to you less commission.
I secure X’s obligation as a surety. Your contract with X
is agency. And X fails to account the proceeds of the sale.
You filed a case against X for estafa. The question is, if I
bound myself as a surety, can you also sue me for
estafa?
• In a case, the court said no. In other words, the liability
of the surety is purely civil. The surety cannot be
criminally held liable.
Comments:
• A surety's liability is only civil, even if a person binds
himself as a surety in a performance of an obligations
under agency and the agent fails to comply with his
undertaking.
• The surety cannot be held liable with the agent because
what he secured was only the payment of the proceeds.
Elements of Guaranty
1. Parties
2. Subject matter and conditions
3. Form
4. Cause
Art. 2056. One who is obliged to furnish a guarantor shall
present a person who possesses integrity, capacity to bind
himself, and sufficient property to answer for the obligation
which he guarantees. The guarantor shall be subject to the
jurisdiction of the court of the place where this obligation is to
be complied with.
Art. 2057. If the guarantor should be convicted in first
instance of a crime involving dishonesty or should become
insolvent, the creditor may demand another who has all the
qualifications required in the preceding article. The case is
excepted where the creditor has required and stipulated that a
specified person should be the guarantor.
Parties to a Guaranty
1. Guarantor
2. Creditor
Requisites if the guarantor was proposed by the debtor:
1. He must be capable of contracting obligations.
2. He must have sufficient property to answer for the debt
guaranteed.
3. He must possess integrity.
Comments:
• The guaranty is for the benefit of the creditor.
• If the guarantor is chosen by the creditor, no more
need for the qualifications.
• But if the guarantor is chosen by the debtor, he must prove
that he has all the qualifications required.
Can the guarantor be proposed by the creditor?
• Yes, but it is usually the guarantor who proposes to the
creditor.
When must the qualification of “sufficient property” be
present?
• Throughout the effectivity of the contract of guaranty, not
just the time of the constitution of the guaranty.
When is solvency of the guarantor required?
• At the point that the contract is constituted.
Can a law student act as guarantor?
• Yes. If the law student possesses sufficient property not
exempt from execution.
• If the law student only has his law library as property, he
does not possess sufficient property because a person’s
personal library is exempt from execution.
What happens if he becomes insolvent after the
constitution of the guaranty and before of the
extinguishment of the principal obligation of the
guaranty?
• The creditor can require that another guaranty be
constituted. He can require the debtor to provide another
guaranty.
• Otherwise, the obligation becomes due and demandable.
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
An obligation secured by a guaranty is an obligation with
a period. What is the remedy of the creditor if the debtor
fails to provide another guarantor?
• He can consider the principal obligation to be demandable
at once. The effect if the debtor fails to provide another
security is that the debtor loses the right to enjoy the
benefit of the period, therefore the obligation becomes
due and demandable.
When does the debtor lose the right to the period?
(IFIDVAS)
• I – insolvency
• F – fails to furnish the guaranties or securities
• I – Impairs the guarantees or securities by his own acts or
• D – Disappears through fortuitous event
• V – Violates the undertaking in consideration of which the
creditor agreed to the period
• A – Attempts to abscond
• S – Stipulation
What if the guarantor loses capacity? Is it possible?
• Yes. The effect of the contract would be that creditor can
demand now, demandable at once.
• The creditor may require that another guarantor be
provided by the debtor.
What if the debtor defaults and the guarantor is
incapacitated?
• The creditor cannot collect from the incapacitated
guarantor. The creditor cannot compel performance by an
incapacitated debtor.
He must possess integrity
• Integrity is a matter of opinion and is required only at
the time of the perfection of the contract.
• Its subsequent disappearance makes it optional for
the creditor to demand another guarantor.
When must this integrity be possessed by the
guarantor? I am the guarantor. If after the constitution
of the guaranty, I am convicted of estafa. What will the
creditor do?
• The creditor can demand for another security. Because
conviction of the guarantor of a crime involving dishonesty
has the same effect as insolvency.
If the guarantor, during the pendency of the obligation
was convicted of less serious physical injuries, can the
creditor demand that the debtor provide another
guarantor?
• No. Conviction of just any crime does not entitle the
creditor to demand another guarantor.
• The conviction must involve crimes involving dishonesty
(i.e. estafa, perjury, etc.)`
What are crimes involving moral turpitude?
• Everything which is done contrary to justice, modesty or
good morals; an act of baseness, vileness or depravity in
the private and social duties which a man owes his
fellowmen, or to society in general, contrary to justice,
honesty, modesty or good morals.
• Jurisprudence has categorized the following acts as crimes
involving moral turpitude: abduction with consent,
bigamy, concubinage, smuggling, rape, attempted
bribery, profiteering, robbery, murder, estafa, theft, illicit
sexual relations with a fellow worker, violation of Batas
Pambansa Blg. 22, intriguing against honor, violation of
the Anti-Fencing Law, violation of the Dangerous Drugs
Act, perjury, forgery, direct bribery, frustrated homicide,
adultery, arson, evasion of income tax, barratry,
blackmail, bribery, duelling, embezzlement, extortion,
forgery, libel, making fraudulent proof of loss on insurance
contract, mutilation of public records, fabrication of
evidence, offenses against pension laws, perjury,
seduction under the promise of marriage, estafa,
falsification of public document, estafa thru falsification of
public document, and malversation, among others.
What if the guarantor was proposed by the creditor?
What are the qualifications?
• If the guarantor was chosen by the creditor, he can
dispense with the qualifications. After all, the guaranty is
provided for his benefit.
• Note: The consent of the creditor is required before
the guarantor may be bound.
9|Page
Case: Rule where there is merely an offer of guaranty
Texas Co. v. Alonzo
• Leonor Bantug was sued for her agency contract with
Texas Co. where Texas Co. filed a collection case against
her and Alonso.
• It appears that to ensure faithful compliance of Bantug’s
obligations as agent to Texas. Co , Alonso bound herself
solidarily to answer for Bantug’s liability up to
P2000 bond evidenced in a document.
• Bantug failed in the performance of her obligations and
declared in default.
• Alonso averred that he merely acted as co-security
of one Palanca and that no acceptance was made by
Texas Co. of the bond thus not binding on him.
• The bond in question was executed at the request of the
petitioner by virtue of the following clause of the agency
contract:
"Additional Security. — The Agent shall whenever
requested by the Company in addition to the guaranty
herewith provided, furnish further guaranty or bond,
conditioned upon the Agent's faithful performance of
this contract, in such form and amount and with such
bank as surety or with such individuals or firms as
joint and several sureties as shall be satisfactory
to the company."
• The trial court ordered Bantug and Alonso liable in solidum.
CA reversed trial court’s findings holding Alonso absolved
of the guaranty undertaking.
Supreme Court Ruling
• There was no proof of acceptance by the creditor of
the guarantor.
• Though requested by creditor of the execution of the bond,
from the foregoing Additional security clause, it is apparent
that before a bond is accepted by the petitioner, it
has to be in such form and amount and with such
sureties as shall be satisfactory hereto. Hence, must
be approved by creditor Texas.
• A request for bond is not inference of approval
thereto.
• Where there is merely an offer of, or proposition for,
a guaranty, or merely a conditional guaranty in the
sense that it requires action by the creditor before
the obligation becomes fixed, it does not become a
binding obligation until it is accepted and, unless
there is a waiver of notice of such acceptance is given to,
or acquired by, the guarantor, or until he has notice or
knowledge that the creditor has performed the conditions
and intends to act upon the guaranty.
• The acceptance need not necessarily be express or
in writing, but may be indicated by acts amounting
to acceptance.
• Where, upon the other hand, the transaction is not
merely an offer of guaranty, but amounts to direct
or unconditional promise of guaranty, unless notice
of acceptance is made a condition of the guaranty,
all that is necessary to make the promise binding is
that the promise should act upon it, and notice of
acceptance is not necessary, the reason being that the
contract of guaranty is unilateral. Appealed decision
affirmed.
Comments:
• If a security is requested by the creditor, the latter’s
consent is necessary before the guarantor or surety
may be bound.
• Here, the execution of the bond was requested by Texas
Co. by virtue of the Additional Security Clause in the
agency contract. In such clause, it is apparent that before
a bond is accepted by Texas, it has to be in such form and
amount and with such sureties as shall be satisfactory
hereto. Hence, must be approved by the creditor. A
request for bond is not inference of approval thereto.
Why was Alonzo absolved from his undertaking as a
surety?
• Because there was no acceptance by Texas of the guaranty
made by Alonzo for the contract.
Can it not be inferred that when Alonzo signed the
undertaking that the contract of suretyship was already
perfected?
• No, acceptance should not be inferred but must be made
in a specified form.
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
What is the effect on the suretyship as a contract if
Texas did not manifest its satisfaction of Alonzo offer to
the undertaking?
• The contract of suretyship will not be valid because there
was no consent.
• Even if Alonzo consented to act as a surety, Texas did not
however manifest its consent to the offer of Alonzo.
• Thus, there is no consensual contract of surety that was
constituted.
Case: Effect if principal has not paid the premium
Phil. Pryce Assurance vs. CA
• Phil. Pryce Assurance Corp. (Pryce for brevity) was sued
by Gegroco, Inc. for the two surety bonds Pryce executed
in behalf of its principal Sagum General Merchandise.
• Pryce averred in its defense that the checks (of Sagum
General Mechandise) which were to pay for the
premiums bounced and were dishonored hence there
is no contract to speak of.
• The trial Court rendered judgement in favour of Gegroco
and against Pryce.
Supreme Court Ruling
• Irrespective of payment or non-payment of the
premium for the bond executed by surety accepted
by creditor, such bond is enforceable against such
surety.
• The Insurance Code states that: Sec. 177. The surety is
entitled to payment of the premium as soon as the contract
of suretyship or bond is perfected and del ivered to the
obligor. No contract of suretyship or bonding shall be valid
and binding unless and until the premium therefor has
been paid, except where the obligee has accepted the
bond, in which case the bond becomes valid and
enforceable irrespective of whether or not the premium
has been paid by the obligor to the surety. . . .
Comments:
• Usually, in the case of a surety company who puts up a
bond in favor of a debtor, it will require the debtor to pay
a premium.
• Here, the checks issued by the debtor to the surety for the
premium payments were dishonored. Thus, the surety
claims that it is not bound as a surety.
Illustration:
X owes you 1M, but you required X to put up a security
for the payment of the obligation. X approaches me to
act as the surety. I agreed provided he pays me a
consideration for acting as his surety. So, X agreed to
pay me a tiny compensation of 50K. I signed the
suretyship agreement and I sent it to you, and you
accepted. The check was then dishonored. Plus, X
defaulted. So, you now demanded payment of the
obligation from me. Was the surety valid considering
that I was not paid?
• Yes, it is still valid. Payment of valuable consideration
to the guarantor to act as one is not essential to the
validity of the guaranty for as long as the creditor
accepted the surety.
• The cause in a security undertaking is the same cause that
supports the principal obligation.
• It is not essential of the security undertaking in a contract
of guaranty that a guarantor must receive the agreed
compensation before he is bound, as long as there is
consent already between the guarantor and the creditor.
• The contract is already perfected, and the surety is already
bound in his undertaking.
Subject Matter and Conditions of a Guaranty
• The principal obligation must be valid as guaranty cannot
exist without a valid obligation.
• Thus, when the principal obligation was not perfected, the
guaranty is void.
• Voidable, unenforceable or natural obligations may
be guaranteed, as they are initially considered as
valid obligations.
• Defective contracts can be secured by a guaranty. Thus,
loans to unemancipated minors are susceptible of
guaranty.
• Future Debts of unknown amount may be guaranteed; but
there can be no action against the guarantor until the debt
is liquidated.
Art. 2052. A guaranty cannot exist without a valid obligation.
Nevertheless, a guaranty may be constituted to guarantee the
performance of a voidable or an unenforceable contract. It may
also guarantee a natural obligation.
10 | P a g e
Art. 2053. A guaranty may also be given as security for future
debts, the amount of which is not yet known; there can be no
claim against the guarantor until the debt is liquidated. A
conditional obligation may also be secured.
Re: Debts may be guaranteed
Municipality of Gasan vs. Marasigna
• The Municipality of Gasan, Marinduque auctioned the
privilege to gather whitefish spawn (bangus) in its
jurisdictional waters for a period of one year. Two bidders
appeared, Graciano Napa and Miguel Marasigan. The
Municipality awarded the privilege to Marasigan.
• To secure his compliance with the terms of the contract
Marasigan filed a bond, subscribed by the
defendants-appellants Angel R. Sevilla and Gonzalo
L. Luna, who bound themselves in said document to
pay to the plaintiff if Marasigan failed to deposit in
advance in the municipal treasury of Gasan. Said
defendants-appellants became sureties in the contract
between Marasigan and the Municipilality.
• Before the plaintiff municipality and Miguel Marasigan
entered into their contract, and also before the latter's
sureties executed the above-stated bond, Graciano Napa,
forwarded a protest to the provincial board, which protest
was later indorsed by said provincial board to the Chief of
the Executive Bureau. The Bureau declared the
contract illegal. Graciano however failed to pay deposit
and yielded the privilege to Marasigan.
• The municipality told Marasigan that the contract was to
be effective, so the municipality sought to recover from
Marasigan and two other appellants the amount
representing the license fee.
Supreme Court Ruling
• It is a fact that, said contract ceased to have life or
force to bind each of the contracting parties.
• It ceased to be valid from the time it was cancelled
and this being so, neither Marasigan nor his sureties
were bound to comply with the terms of their
respective contracts of fishing privilege and
suretyship.
• This is so, particularly with respect to sureties, because
suretyship cannot exist without a valid obligation,
the obligation arising from a cancelled contract not being
a valid obligation.
• Therefore, after eliminating the obligation for which said
sureties-appellants desired to answer with their bond, the
bond necessarily ceased, and it ceases to have effects.
In this case, Sevilla and Luna were the sureties for
Marasigan. And yet, the court said they are not liable as
sureties. Why?
• They were not liable because the municipal counsel voided
its previous resolution that awarded Marasigan the
concession to harvest the bangus, and it was in this
concession that there was a surety.
• When the contract was voided, it follows that the
surety was also voided.
But didn’t the municipality reinstate the contract?
• Yes, but reinstatement does not carry with it the
revival of the guaranty.
• Sevilla and Luna are no longer bound in the reinstated
contract. When the municipality cancelled the first
contract, their undertaking was also automatically
cancelled.
• Thus, when the contract was cancelled, the surety’s life
ended. The revival of the principal obligation does not
mean revival of the accessory obligation.
• To revive the accessory, it must be express.
Can an accessory contract survive the death of the
principal contract?
• No, because the accessory contract is dependent on the
principal contract.
• Guaranty is an accessory contract, it is dependent on the
existence and validity of the principle contract or
obligation. If it (principal contract) is extinguished,
accessory is also extinguished.
Is this absolute? Isn’t there an instance that the
accessory survives the death of the principal contract?
• Yes. There is no other instance that the accessory
survives. It is absolute that accessory depends on the
principal.
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
Isn’t it that in ObliCon, the extinguishment of the
principal carries with it the accessory, so therefore can
we not infer that revival of the principal carries with it
the revival of the accessory?
• No. There must be an express act of reviving the
accessory.
What if the original contract is revived? Is the accessory
is revived?
• No.
Future Debts
Can future debts be secured by a guaranty?
• Yes, as long as the debts are valid and liquidated.
• A debt is liquidated when the amount is known or
determinable by inspection of the terms and conditions
of the relevant promissory notes and related
documentation.
How do you know that guaranties support future
obligations? What kind of clause do you usually see?
• It may be referred to as a Comprehensive Guaranty or
Surety Agreement or Continuing Suretyship or
Guaranty Undertaking.
Illustration:
In the first promissory note signed by Archie in favor of
Veronica, there’s a guarantor’s undertaking, where Jughead,
the guarantor, undertook to secure payment of the first
promissory note amounting to P500,000 and also such other
obligations that Archie may owe Veronica in the future.
The first promissory note was paid and subsequently, Archie
obtained another loan from Veronica for P1,000,000. In the
second promissory note, Archie failed to pay the obligation and
defaulted.
Is the second promissory note secured by Jughead’s
guaranty?
• Yes.
If this is secured by Jughead’s guaranty, must Jughead
also sign the second promissory note?
• Not anymore.
If Jughead did not sign the promissory note as guarantor
and Archie defaults under the second promissory note,
can Veronica go after Jughead?
• Yes, even if Jughead did not sign, the continuing
guaranty was not yet terminated during the
institution of the second promissory note so Jughead
is still bound as guarantor even if he did not sign the
promissory note.
• Jughead cannot later on evade liability by saying that since
he did not sign the second promissory note, he should not
be liable. The basis of his obligation is the continuing
guarantor’s undertaking that he signed under the first
promissory note.
• This is essentially the RCBC v. ARRO case.
Case: When debt is considered liquidated
Selegna Management and Development Corporation vs.
UCPB
• Petitioners Selegna Management and Development
Corporation and Spouses Edgardo and Zenaida Angeles
were granted a credit facility in the amount of P70 million
by United Coconut Planters Bank.
• As security for this credit facility, petitioners executed real
estate mortgages over several parcels of land and over
several condominium units.
• Petitioners were likewise required to execute a promissory
note in favor of respondent every time they availed of the
credit facility. As required in these notes, they paid the
interest in monthly amortizations.
• The parties stipulated in their Credit Agreement dated that
failure to pay "any availment of the accommodation or
interest, or any sum due" shall constitute an event of
default, which shall consequently allow respondent bank
to "declare [as immediately due and payable] all
outstanding availments of the accommodation together
with accrued interest and any other sum payable."
• In need of further business capital, petitioners obtained
from UCPB an increase in their credit facility. For this
purpose, they executed a Promissory Note for
P103,909,710.82, which was to mature on March 26,
1999. In the same note, they agreed to an interest rate of
21.75 percent per annum, payable by monthly
amortizations.
11 | P a g e
• Respondent later sent petitioners a formal demand letter,
and decided to invoke the acceleration provision in their
Credit Agreement. Respondent sent another letter of
demand and a final demand on petitioners "to settle in full
past due obligation to [UCPB] within five days from receipt
of letter."
• In response, petitioners paid respondent the amount of
P10,199,473.96 as partial payment of the accrued
interests. Apparently unsatisfied, UCPB applied for
extrajudicial foreclosure of petitioners’ mortgaged
properties.
• When petitioners received the Notice of Extra Judicial
Foreclosure Sale on May 18, 1999, they requested UCPB
to give them a period of sixty (60) days to update their
accrued interest charges; and to restructure or, in the
alternative, to negotiate for a takeout of their account.
• On May 25, 1999, the Bank denied petitioners’ request. In
order to forestall the extrajudicial foreclosure scheduled
for May 31, 1999, petitioners filed a Complaint for
"Damages, Annulment of Interest, Penalty Increase and
Accounting with Prayer for Temporary Restraining
Order/Preliminary Injunction."
Supreme Court Ruling
• It is a settled rule of law that foreclosure is proper when
the debtors are in default of the payment of their
obligation.
• In fact, the parties stipulated in their credit agreements,
mortgage contracts and promissory notes that respondent
was authorized to foreclose on the mortgages, in case of a
default by petitioners.
• Mora solvendi, or debtor’s default, is defined as a delay in
the fulfillment of an obligation, by reason of a cause
imputable to the debtor. There are three requisites
necessary for a finding of default. First, the obligation is
demandable and liquidated; second, the debtor delays
performance; third, the creditor judicially or extrajudicially
requires the debtor’s performance.
• The Promissory Note expressly states that petitioners had
an obligation to pay monthly interest on the principal
obligation. From respondent’s demand letter, it is clear
and undisputed by petitioners that they failed to
meet those monthly payments since May 30, 1998.
• Their nonpayment is defined as an "event of default" in the
parties’ Credit Agreement. Considering that the contract
is the law between the parties, respondent is
justified in invoking the acceleration clause
declaring the entire obligation immediately due and
payable.
Petitioners’ Debt Considered Liquidated Despite the
Alleged Lack of Accounting
• Petitioners assert, though, that they have a right to a
detailed accounting before they can be declared in default.
• As regards the three requisites of default, they say that
the first requisite -- liquidated debt -- is absent.
• Continuing with foreclosure on the basis of an unliquidated
obligation allegedly violates their right to due process.
They also maintain that their partial payment of P10
million averted the maturity of their obligation.
• A debt is liquidated when the amount is known or is
determinable by inspection of the terms and
conditions of the relevant promissory notes and
related documentation.
• Failure to furnish a debtor a detailed statement of
account does not ipso facto result in an unliquidated
obligation.
• Petitioners executed a Promissory Note, in which they
stated that their principal obligation was in the amount of
P103,909,710.82, subject to an interest rate of 21.75
percent per annum. Pursuant to the parties’ Credit
Agreement, petitioners likewise know that any delay in the
payment of the principal obligation will subject them to a
penalty charge of one percent per month, computed from
the due date until the obligation is paid in full.
• It is in fact clear from the agreement of the parties that
when the payment is accelerated due to an event of
default, the penalty charge shall be based on the total
principal amount outstanding, to be computed from the
date of acceleration until the obligation is paid in full.
• Their Credit Agreement even provides for the application
of payments. It appears from the agreements that the
amount of total obligation is known or, at the very
least, determinable.
• Moreover, when they made their partial payment,
petitioners did not question the principal, interest or
penalties demanded from them. They only sought
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
additional time to update their interest payments or to
negotiate a possible restructuring of their account.
• Hence, there is no basis for their allegation that a
statement of account was necessary for them to
know their obligation.
• To be sure, their partial payment did not extinguish the
obligation. Besides, a late partial payment could not have
possibly forestalled a long-expired maturity date.
Case: Comprehensive Surety Agreement to over existing
and future debts
RCBC vs. ARRO
• In October 19, 1976 Residoro Chua and Enrique Go, Sr.
executed a comprehensive surety agreement to
guaranty among others, any existing indebtedness
of Davao Agricultural Industries Corporation (DAICOR),
and/or to induce the bank at any time or from time to time
thereafter, to make loans or advances, or to extend credit
in any other matter to, or at the request, or for the account
of DAICOR, provided that the liability shall not exceed
at any one time the aggregate principal sum of
P100,000.00.
• On May 29, 1977 a promissory note in the amount of
P100,000.00 was issued in favor of petitioner bank
payable on June 13, 1977. Said note was signed by
Enrique Go, Sr. in his personal capacity and in behalf of
DIACOR.
• The promissory note was not fully paid despite repeated
demands. Hence, petitioner bank filed a complaint for a
sum of money against DIACOR, Enrique Go, Sr. and
Residoro Chua.
• A motion to dismiss was filed by Chua on the ground that
the complaint states no cause of action against him as he
cannot be held liable under the promissory note because
he did not sign the same.
Supreme Court Ruling
• The comprehensive surety agreement was jointly executed
by Residoro Chua and Enrique Go, Sr., president and
general manager, respectively of DIACOR to cover
existing as well as future obligations which DIACOR
may incur with the petitioner bank, subject only to
the proviso that their liability shall not exceed at any
one time the aggregate principal sum of
P100,000.00.
• The agreement was obviously executed to induce
petitioner to grant any application for a loan DIACOR may
desire to obtain from petitioner bank. The guaranty is a
continuing one which shall remain in full force and
effect until the bank is notified of its termination.
• At the time the loan of P100,000.00 was obtained from
petitioner bank by DIACOR, the comprehensive surety
agreement was admittedly in full force and effect.
• The loan was therefore covered by the said
agreement, and private respondent Chua, even if he did
not sign the promissory note is liable by virtue of the
surety agreement.
• By the terms of the agreement, it can be clearly seen that
the surety agreement was executed to guarantee future
debts which DIACOR may incur with the petitioner bank,
as is legally allowed under the Civil Code.
Case: When guaranty is construed as continuing
Diño vs. CA
• In 1977, Uy Tiam Enterprises and Freight Services, thru its
representative Uy Tiam, applied for and obtained credit
accommodations from METROBANK in the sum of
P700,000.
• To secure the aforementioned credit accommodations,
Norberto Uy and Jacinto Uy Diño executed separate
Continuing Suretyships in favor of the latter.
• Having paid the obligation under the above letter of credit
in 1977, UTEFS, through Uy Tiam, obtained another credit
accommodation from METROBANK in 1979. It was applied
for and obtained by UTEFS without the participation
of Norberto Uy and Jacinto Uy Diño as they did not
sign the document denominated as 'Commercial Letter
of Credit and Application.' Also, they were not asked to
execute any suretyship to guarantee its payment.
• Neither did METROBANK nor UTEFS inform them that the
1979 Letter of Credit has been opened and that the
Continuing Suretyships separately executed in February,
1977 shall guarantee its payment.
• The 1979 letter of credit was negotiated. UTEFS executed
and delivered to METROBANK a Trust Receipt. However,
UTEFS did not acquiesce to the obligatory stipulations in
the trust receipt.
12 | P a g e
• As a consequence, METROBANK sent letters to the said
principal obligor and its sureties, Norberto Uy and Jacinto
Uy Diño, demanding payment of the amount due.
Informed of the amount due, UTEFS made partial
payments to the Bank which were accepted by the latter.
• Diño, thru counsel, denied his liability for the amount
demanded and requested METROBANK to send him copies
of documents showing the source of his liability.
• The bank informed him that the source of his liability is
the Continuing Suretyship which he in 1977.
• As a rejoinder, Diño maintained that he cannot be held
liable for the 1979 credit accommodation because it
is a new obligation contracted without his
participation. Besides, the 1977 credit
accommodation which he guaranteed has been fully
paid.
• METROBANK filed a complaint for collection of a sum of
money and impleaded Diño and Uy as parties-defendants.
• Norberto Uy and Jacinto Uy Diño filed a motion to dismiss
the complaint on the ground of lack of cause of action.
They maintained that the obligation which they
guaranteed in 1977 has been extinguished since it has
already been paid in the same year.
• Accordingly, the Continuing Suretyships executed in 1977
cannot be availed of to secure Uy Tiam's Letter of Credit
obtained in 1979 because a guaranty cannot exist without
a valid obligation.
• It was further argued that they cannot be held liable
for the obligation contracted in 1979 because they
are not privies thereto as it was contracted without
their participation.
• METROBANK filed its opposition to the motion to dismiss.
It relied on Article 2053 of the Civil Code which provides:
'A guaranty may also be given as security for future debts,
the amount of which is not yet known; . . . .' It was further
asserted that the agreement was in full force and effect at
the time the letter of credit was obtained in 1979 as
sureties-defendants did not exercise their right to revoke
it by giving notice to the bank.
Supreme Court Ruling
• When Uy and Diño executed the continuing suretyships in
1977, Uy Tiam was obligated to the Metrobank in the
amount of P700,000.00 — and this was the obligation
which both defendants guaranteed to pay. Uy Tiam paid
this 1977 obligation — and such payment
extinguished the obligation they assumed as
guarantors/sureties.
• The 1979 Letter of Credit is different from the 1977
Letter of Credit which covered the 1977 account of
Uy Tiam. Thus, the obligation under either is apart and
distinct from the obligation created in the other, as
evidenced by the fact that Uy Tiam had to apply
anew for the 1979 transaction. And Diño and Uy,
being strangers thereto, cannot be answerable
thereunder.
• Metrobank did not serve notice to Diño and Uy when
it extended to Uy Tiam the 1979 Letter of Credit at
least to inform them that the continuing suretyships
they executed in 1977 will be considered by the
plaintiff to secure the 1979 transaction of Uy Tiam.
• There is no sufficient and credible showing that Diño
and Uy were fully informed of the import of the
Continuing Suretyships when they affixed their
signatures thereon; that they are thereby securing all
future obligations which Uy Tiam may contract with the
plaintiff.
• On the contrary, Diño and Uy categorically testified that
they signed the blank forms in the office of Uy Tiam at 623
Asuncion Street, Binondo, Manila, in obedience to the
instruction of Uy Tiam, their former employer.
• They denied having gone to the office of the plaintiff to
subscribe to the documents.
When a guaranty is construed to be continuing
• A continuing guaranty is one which is not limited to
a single transaction, but which contemplates a
future course of dealing, covering a series of
transactions, generally for an indefinite time or until
revoked.
• It is prospective in its operation and is generally
intended to provide security with respect to future
transactions within certain limits, and contemplates a
succession of liabilities, for which, as they accrue, the
guarantor becomes liable.
• Otherwise stated, a continuing guaranty is one which
covers all transactions, including those arising in the
future, which are within the description or contemplation
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
of the contract, of guaranty, until the expiration or
termination thereof.
• A guaranty shall be construed as continuing when by
the terms thereof it is evident that the object is to
give a standing credit to the principal debtor to be
used from time to time either indefinitely or until a
certain period, especially if the right to recall the
guaranty is expressly reserved.
• Hence, where the contract of guaranty states that the
same is to secure advances to be made "from time to
time," the guaranty will be construed to be a
continuing one.
• In other jurisdictions, it has been held that the use of
particular words and expressions such as payment of "any
debt," "any indebtedness," "any deficiency," or "any
sum," or the guaranty of "any transaction" or money
to be furnished the principal debtor "at any time," or
"on such time" that the principal debtor may require,
have been construed to indicate a continuing guaranty.
Bank of Commerce vs. Sps. Flores
• A mortgage given to secure advancements is a continuing
security and is not discharged by repayment of the amount
named in the mortgage until the full amounts of the
advancements are paid.
• Respondents’ full payment of the loans annotated on
the title of the property shall not effect the release
of the mortgage because, by the express terms of
the mortgage, it was meant to secure all future
debts of the spouses and such debts had been obtained
and remain unpaid.
• Unless full payment is made by the spouses of all the
amounts that they have incurred from petitioner bank, the
property is burdened by the mortgage.
Case: Retrospective Application of Guaranty
Willex Plastic Industries Corp. vs. CA
• Sometime in 1978, Inter-Resin Industrial Corporation
(IRIC) opened a letter of credit with the Manila Banking
Corporation.
• To secure payment of the credit accommodation, IRIC and
the Investment and Underwriting Corporation of the
Philippines (IUCP) executed two "Continuing Surety
Agreements" whereby they bound themselves
solidarily to pay Manilabank "obligations of every
kind. In 1979, IRIC and Willex executed a
"Continuing Guaranty" in favor of IUCP.
• Subsequently, IUCP paid to Manilabank the sum owed by
IRIC.
• Atrium Capital Corp., which succeeded IUCP and, later on
succeeded by respondent, demanded from IRIC and Willex
Plastic the payment of what it had paid to Manilabank.
• IRIC admitted that the "Continuing Guaranty" was
intended to secure the payment which the IUCP had paid
to Manilabank.
• It claimed, however, that it had already fully paid its
obligation to Atrium Capital.
• In denying liability to Interbank for the amount, Willex
argues that under the "Continuing Guaranty," its liability
is for sums obtained by IRIC from Interbank, not for sums
paid by the latter to Manilabank for the account of Inter-
Resin Industrial.
Supreme Court Ruling
• WPIC, as guarantee, is bound by the same consideration
that makes the contract effective between principal parties
thereto.
• In this case, the “continuing guaranty” would cover
sums obtained and/or to be obtained by IRI from
Interbank. Hence, the contract of suretyship in this
case has both retrospective and prospective
application.
• Furthermore, since the “continuing guaranty” embodies an
express remuneration of the right of excussion, WPIC can
be proceeded against without first exhausting all the
properties of IRI.
Olbes vs. China Banking Corporation (not in syllabus)
• To secure the payment of the [PNs], [petitioners] Ramon
Olbes and Ricardo Olbes executed on November 12, 1990
in favor of Chinabank a suretyship agreement whereby
they jointly and severally undertook to pay upon
maturity any and all obligations for which the borrower
corporation maythenorthereafter be indebted to
Creditor (Chinabank) to the extent of one million pesos
(P1,000,000) plus interests and attorney’s fees.
• The last PN was executed by OO&M on January 23, 1990.
13 | P a g e
Supreme Court Ruling
• Olbes can be held liable for obligations obtained before the
execution of the suretyship agreement.
• The rule on the retrospective application of a
suretyship agreement admits of exceptions. The
Court referred to one in Willex Plastic Industries, Corp.
vs. CA. There, we held that no liability attaches under
a contract of suretyship for defaults occurring
before it is entered into, unless an intent to be so
liable is indicated.
• Indeed, as we said in an old but still very much applicable
case of Bank of the Philippine Islands vs.
Foerster, although a contract of suretyship is
ordinarily not to be construed as retrospective, in
the end the intention of the parties, as revealed by
the evidence, is controlling.
• Put in another way, the rule that bonds or other
contracts of suretyship are ordinarily not to be
construed as retrospective must yield to the
intention of the contracting parties as revealed by
the evidence, and does not interfere with the use of
ordinary tests and canons of interpretation which apply in
regard to other contracts.
Can a guaranty have a retroactive effect?
• Yes, if stipulated by the parties being their intention.
Form
• Form is not required for its validity, only for its
enforceability.
• Guaranty is governed by the Statute of Frauds (Art. 1403),
since it is a “special promise to answer for the debt,
default, or miscarriage of another.”
• Although guaranty is a consensual contract, it must be
evidenced by a written document or at least a
memorandum because it is under the Statute of Frauds.
In what form must it be to be enforceable?
• It should be in writing to be enforceable.
What particular written document must it be in?
• There is no particular form required.
• However, for it to be enforceable, it must be in writing.
Case: Written undertaking to guarantee payment of
another person’s obligation
Macondray & Co., Inc. vs. Pinon
• On 11 May 1955, the plaintiff Macondray & Co. filed a
complaint against defendant Pinon, et al. in the CFI of
Manila alleging that upon representation and undertaking
made by Ruperto K. Kangleon, then a member of the
Senate, in a letter addressed to the plaintiff dated 30
January 1954, that he would guarantee payment of his
co-defendants’ obligations, should they fail to pay
on the due date.
• The letter stated:
TO: The Manager, Macondray & Company, China
Bank Building, Manila
Sir: This will introduce to you the bearers, Messrs.
Conrado Piring and Perfecto Piñon, both well-known
theater characters under the names of "Pugak" and
"Tugak", respectively.
I have been made to understand by them in their
representations to me that they wish to place an
order for the following items: 10 rolls Negative at
P157.00 each, and 100 rolls positive at P55.00 each
of Dupont Release Positives Safety Basis for use of
their firm called "All Stars Productions" under the
management and control of Pugak and Tugak
payable within three (3) months time ending April,
1954 and for which by their guaranty I pledge
payment.
Sincerely (Sgd.)
RUPERTO KANGLEON, Senator
• On February 2 and 9, 1954, the plaintiff sold on credit and
delivered to the defendants Perfecto Pinon and Conrado
Piring, known in the theater and entertainment business
as Tugak and Pugak, respectively and transacting business
under a common name known as “All Stars Productions”
127 rolls of cinematographic films, for the total sum of
P6,985 payable on or before May 9, 1954, 12% interest
thereon from the date of maturity and 20% thereof for
attorney’s fees in case of suit for collection.
Supreme Court Ruling
• Appellant Kangleon’s very letter constitutes his
undertaking of guaranty.
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
• “Contracts shall be obligatory in whatever form they
may have been entered into, provided all the essential
elements for their validity is present”.
• A contract of guaranty is not a formal contract and shall
be valid in whatever form it may be, provided that it
complies with the Statute of Frauds.
• Kangleon states that assuming that the letter constitutes
a contract of guaranty, the films actually sold to the
principal debtors were 127 rolls of F.G, release positive
type 825B, 35mm. x 1,000 ft at P 55 a roll, payable May
9, 1954, while what he undertook to guarantee payment
was 10 rolls negative at 157 each and 100 rolls positive at
55 each, payable within three months ending April 1954.
• Citing Art. 2055 of the Civil Code that a guarantee cannot
extend to more than what is stipulated therein, the
appellant contends that he cannot be held liable for the
contract in view of the variation in his undertaking.
• The total cost of what was actually sold to and bought by
the principal debtors is P6,985, which is less that the total
cost of what was originally intended to be bought by them
amounting to P7,070.
• The variation was merely in kind and not in subject
matter-cinematographic films – which did not
render the appellants obligation more burdensome.
Instead his obligation was rendered less onerous by the
reduction in the original price of P7,070 to P6,985.
Can they go after the senator based on this letter?
• Yes, a contract of guaranty is not a formal contract and
shall be valid in whatever form it may be, provided that it
complies with the statute of frauds.
• Kangleon’s very letter constitutes his undertaking of
guaranty.
• Contracts shall be obligatory in whatever form they may
have been entered into, provided all the essential elements
for their validity is present.
Comments:
• There is no particular form required for as long as you can
determine from the gist of the letter that the person
signing it undertakes to secure the obligation of the
principal debtors.
• Here, Kangleon was held liable even if he did not promise
to pay in case of failure of payment but due to the letter
having the paragraph “I pledge payment” which the SC
considers as sufficient guarantor's undertaking on his part.
Art. 2055. A guaranty is not presumed. It must be express
and cannot extend to more than what is stipulated therein.
Case: Guaranty and Suretyship must be expressed and
not presumed
Wise & Co. vs. Tanglao
• Plaintiff WCI obtained a preliminary attachment of Cornelio
David’s property. To avoid execution of said attachment,
Cornelio David obtained a special power of attorney from
his lawyer Dionisio Tanglao, authorizing him to sign for his
lawyer as guarantor for himself in his indebtedness to
plaintiff and to mortgage his lawyer’s lot to guarantee said
obligation to plaintiff.
• Cornelio David confessed judgement for P640 payable
monthly and secured by a pledge to plaintiff of a house,
apartment and a parcel of land recorded in the name of
Dionisio Tanglao.
• David made only partial payment of said judgment debt.
Plaintiff brought an action to recover the balance.
Supreme Court Ruling
• Under the SPA, Tanglao empowered David to enter into a
contract of suretyship and a contract of mortgage of the
property described in the document.
• David, however, used said SPA only to mortgage the
property and did not enter into a contract of suretyship.
• Nothing is stated in the compromise agreement to
the effect that Tanglao became David’s surety for
the payment of the judgment debt.
• Neither is this inferable from any of the clauses thereof,
even if this inference might be made, it would be
insufficient to create an obligation of suretyship
which under the law must be expressed and cannot
be presumed.
Comments:
• By virtue of the SPA that Tanglao signed, David constituted
a mortgage over Tanglao’s property to secure David’s
obligation to Wise.
• The rule is when you mortgage property to secure
somebody else’s obligation, only the property will answer
14 | P a g e
 for the obligation. The mortgagor is NOT personally liable,
unless the mortgagor also bound himself as a guarantor or
surety.
• While the law says that there is no particular form
required, it must nevertheless be expressly
constituted and not presumed.
• That’s why in the case of Wise & Co. v. Tanglao, while
Tanglao executed an SPA to David to bind himself, as
surety and to mortgage property to secure David’s
obligation, what David did was simply to constitute a
mortgage binding Tangalo’s property as security for Daid’s
obligation with Wise & Co. He did not bind Tanglao as a
surety or as a guarantor because he did not sign a
suretyship or guarantor’s undertaking for and in
behalf of Tanglao.
• Therefore, it is wrong for Wise to go after Tanglao in
his personal capacity as surety or as guarantor
because there was no such undertaking signed by
David.
• The only undertaking signed by David was the mortgage
undertaking binding Tanglao’s property. Therefore, if at
all, Tanglao’s liability is limited only to his property.
• He cannot be bound personally as a guarantor or as a
surety because suretyship or guaranty was not expressly
constituted.
Case: The terms of the contract of suretyship determine
the surety’s liability and cannot extend to more than
what is stipulated therein.
Solon vs. Solon
• When Eugenio Solon bound himself as surety to Andres
Montalban for the payment of Macleod and Company of
the amount of P5,000 which Montalban owed to the latter,
he limited himself to giving as security, by way of
mortgage, the land and no other, belonging to him
and described as lot No. 892 of the Banilad Friar Lands
Estate in case No. 5988 of the Court of Land Registration
and in the transfer Certificate of Title No. 2499 of the
registry of property of the Province of Cebu.
• It is not possible that creditor Macleod Company could
have ever contemplated bringing an action against
Eugenio Solon to obtain possession not only of the land
expressly mortgaged to it, but also of any other land
belonging to for the purpose of collecting its credit against
the debtor.
• The contract of suretyship does not admit of the
interpretation that could make Solon liable for the
amount greater than P5,000.
• Thus, the creditor cannot require him to pay the
principal debtor’s indebtedness, should the latter
fail to do, with the land other than that he had
mortgaged.
Comments:
• Solon undertook to be the guarantor but mentioned as
surety to a debtor.
• There was a suretyship undertaking which was also
in the form of a mortgage over a property.
• What the creditor did was to try to foreclose the property
owned by the mortgagor.
• When the debtor defaulted, the creditor wanted to include
another lot which was not mentioned in the undertaking.
• SC said that you cannot do that. The terms and
conditions of the contract of suretyship determine
the surety’s liability and cannot extend to more than
what is stipulated therein.
• And so, if in the suretyship undertaking, there is a
particular property offered as security, then only
this particular property must be subject to
foreclosure. It cannot include another property which is
not specifically stated in the undertaking.
Chapter 2 – Effects of Guaranty
Effects of Guaranty Between the GUARANTOR and the
CREDITOR
A. OBLIGATION OF THE CREDITOR
• To pay the guarantor the compensation stipulated.
Comments:
• In a contract of guaranty, the guarantor may not receive
valuable consideration for his undertaking, because the
consideration for guaranty is the same consideration as
the principal obligation.
• But if guaranty is compensated, then the guarantor is
entitled to the same valuable consideration.
• General Rule: The creditor does NOT pay the
compensation.
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
• Exception: The creditor pays the guarantor only if he
bound himself to pay the compensation for the
guarantor.
• In fact, a contract of guaranty is essentially a gratuitous
contract.
B. OBLIGATION OF THE GUARANTOR
• To pay or perform the obligation (in money or in species)
if the debtor fails to do so.
What is the main obligation of the guarantor?
• To pay or perform the obligation if the debtor fails or is
unable to pay.
• This does not only entail payment of a sum of money.
• Payment may be the performance in any manner of
an obligation.
• Generally, the guarantor cannot be liable for more than
the obligation of the debtor.
a. What is to be paid
• The guarantor can bind himself for less, but not bind
himself to more, than the debtor. If he does it shall be
reduced to the limits of the debtor’s obligation (Art. 2054)
Can the guarantor bind himself to pay less than the
principal amount of the obligation?
• Yes.
• How about for the full amount? Yes.
Can the guarantor bind himself to pay more than the
principal amount of the obligation?
• Generally, no.
• But what if he does?
➢ The undertaking is NOT entirely invalid.
➢ It is valid to the extent of the amount of the principal
obligation. But as to the excess, it is invalid.
Example:
I owe X P100,000. You are my guarantor, and you say that you
bind yourself to secure my obligation for P200,000 because you
just want to. Then, I defaulted in my payment. Will you pay
P200,000 to X?
• No. Because your obligation cannot be more than the
obligation of the principal debtor.
• You can bind yourself for less, but you cannot bind yourself
for more.
In what instance can a guarantor be liable for more than
the obligation of the debtor?
• If the guaranty is penal in nature (General Insurance
and Surety Corp. v. Republic).
• In Republic vs. Court of Appeals and R&B Surety and
Insurance Company, Inc., the SC sustained the
principle that, if a surety upon demand fails to pay (in
default), he can be held liable for interest, even if in
thus paying, his liability becomes more than the
principal obligation.
• The increased liability is not because of the contract,
but because of the default and the necessity of judicial
collection.
Comments:
• In ObliCon, when the debtor fails to pay upon demand,
there is default. And the consequence for default is liability
for damages.
• In case the obligation is to pay for a sum of money, the
damages will be in the form of moratory interest.
Case: Extent of liability when the bond is penal in nature
General Insurance and Surety Corp. vs. Republic
• Central Luzon Educational Foundation, Inc. and the
General Insurance and Surety Corporation posted in favor
of the Department of Education a bond.
• By the terms of the bond, the surety guaranteed to the
government “compliance by the Central Luzon
Educational Foundation with all obligations, including
the payment of the salaries of its teachers and employees,
past, present and future and the payment of all other
obligations incurred by, or in behalf of said school in the
sum of P10,000.”
• It appears that on the date of execution of the bond,
the Foundation was indebted to two of its teachers
for salaries, to wit: to Remedios Laoag, in the sum
of P685.64, and to H.B. Arandia, in the sum of
P820.00, or a total of P1,505.64.
• The surety contends that the bond is void for being
contrary to public policy insofar as it requires the surety to
15 | P a g e
 pay P10,000.00 regardless of the amount of the salaries
of the teachers.
• It is claimed that to enforce forfeiture of the bond for
the full amount would be to allow the Government
to enrich itself since the unpaid salaries of the
teachers amount to P1,318.84 only.
• It claims that it that it cannot be made to answer for more
than the unpaid salaries of H. B. Arandia, which it claimed
amounted to P720.00 only, because Article 2054 states
that "A guarantor may bind himself for less, but not for
more than the principal debtor, both as regards the
amount and the onerous nature of the conditions. Should
he have bound himself for more, his obligations shall be
reduced to the limits of that of the debtor.”
Supreme Court Ruling
• It must be remembered that, by the terms of the bond,
the surety guaranteed to the Government "compliance (by
the Foundation) with all obligations, including the payment
of the salaries of its teachers and employees, past, present
and future, and the payment of all other obligations
incurred by, or in behalf of said school."
• There is nothing against public policy in forfeiting the
bond for the full amount. The bond is penal in
nature.
• Art. 1226 of the Code states that in obligations with a penal
clause, the penalty shall substitute for the indemnity for
damages and the payment of interest in case of
noncompliance, it there is no stipulation to the contrary,
and the party to whom payment is to be made is entitled
to recover the sum stipulated without need of proving
damages because one of the primary purposes of penalty
clause is to avoid such necessity.
• What we said about the penal nature of the bond would
suffice to dispose of this claim.
• For whatever may be the amount of salaries due the
teachers, the fact remains that the condition of the
bond was violated and so the surety became liable
for the penalty provided for therein.
Comments:
• The government collected P10,000 from the bonding
company when the debtor’s obligation was only around
P1,000++.
• When the bond was put up, the school already owed two
of its employees their salaries.
• Here, the amount paid by the guarantor is more than
the debtor’s obligation because the bond put up by
him is penal in nature.
When the obligation of the surety earns interest
Example:
X owes you 1M, I am the guarantor of his obligation and
in the undertaking, I bound myself to pay X 2M in case X
fails to pay his obligation of 1M. You accepted it. Have
we entered to a perfected contract of guaranty?
• Yes, it is valid, but the amount to be recovered is reduced.
• If X defaults in the obligation, you can recover from me 1M
only, not 2M.
X defaults in his obligation of 1M to you, in ObliCon once
there is default, compensatory interest kicks in. The
legal interest of 6% will come in. Then, you demand
from me as surety or guarantor. Can the creditor
demand from the guarantor the interest on top of the
1M?
• No, because the guarantor is not yet in default.
Now, when you demand payment of the loan and X
defaulted, we agreed that interest started to run. Who is
liable to pay that interest?
• The principal debtor.
So, if the surety paid the interest in addition to the 1M,
did the surety become liable for more than the liability
of X the debtor?
• No, because X is still liable for the interest because it was
his own default.
So, what interest are we talking about when you say that
the “surety is liable for more than the liability of the
debtor”?
• Legal interest of the default of the surety, not of the
principal debtor.
When X’s debt matured, you demanded from the surety
payment, because I am surety, you can immediately
collect from me. But when the debt matured, the liability
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
of X was just 1M. I failed to pay immediately. Am I liable
to pay interest?
• Yes, the surety is liable for his own default.
Can the surety collect that from Debtor?
• No, because the fault that led to the running of the
interest is that of the surety’s.
• So, this is an instance that the surety is liable for more
than the principal obligation because the surety himself is
in default.
Case: When surety is liable for interest
PNB vs. Luzon Surety Co., Inc.
• Defendant Augusto R. Villarosa, a sugar planter adhered
to the Lopez Sugar Central Milling Company Inc. applied
for a crop loan with the plaintiff, Philippine National Bank,
which application was approved on March 6, 1952 in the
amount of P 32,400. Villarosa executed a chattel mortgage
on standing crop to guarantee the crop loan.
• As of September 27, 1953, as shown in the accounts, there
was a balance of P 63,222.78 but as of the date when the
complaint was filed on June 8, 1960, because of the
interest accrued, it had reached much higher sum.
• Due to its non-payment, plaintiff filed this complaint which
sought relief not only against the planter but also against
the three bondsmen, Luzon Surety, Central Surety, and
Associated Surety.
Supreme Court Ruling
• The question to be taken up is the liability of Luzon Surety
Co. for interest which it contends would increase its liability
to more than P10,000, which is the maximum of its bond.
• We cannot agree to this reasoning. If a surety upon
demand fails to pay, he can be held liable for the
interest, even if in thus paying, the liability becomes
more than that in the principal obligation.
• The increased liability is not because of the contract, but
because of the default and the necessity of judicial
collection.
• It should be noted, however, that the interest runs from
the time the debt becomes due and demandable.
Comments:
• This is especially true in suretyship undertakings.
• In suretyship undertakings, the surety is bound principally
with the principal debtor and the nature of liability is
similar to that of solidary debtor.
• From the moment demand is made by the creditor from
the surety, the surety is already in default (through judicial
or extrajudicial demand).
• Upon default, the consequence is the liability to pay
interest.
• Example: If the obligation is P100,000 and demand is
made upon the surety to pay, and the surety fails to pay,
he is considered in default. He may be held liable to pay
more than the amount of principal obligation because of
his own default.
Commonwealth Insurance Corporation vs. CA
• In 1984, Rizal Commercial Banking Corporation (RCBC)
granted two export loan lines, one, for P2,500,000.00 to
Jigs Manufacturing Corporation (JIGS) and, the other, for
P1,000,000.00 to Elba Industries, Inc. (ELBA).
• JIGS and ELBA, which are sister corporations, both drew
from their respective credit lines, the former in the amount
of P2,499,992.00 and the latter for P998,033.37 plus
P478,985.05 from the case-to-case basis and trust
receipts.
• These loans were evidenced by promissory notes and
secured by surety executed by defendant-appellee
Commonwealth Insurance Company (CIC).
• JIGS and ELBA defaulted in the payment of their respective
loans. RCBC made written demands to CIC to pay JIGS and
ELBA’s account to the full extent of the suretyship.
• In response to those demands, CIC made several
payments from February 25, 1985 to February 10, 1988 in
the total amount of P2,000,000.00.
• There having been a substantial balance unpaid, RCBC
made a final demand for payment on July 7, 1988 upon
CIC but the latter ignored it. Thus, RCBC filed the
Complaint for a Sum of Money on September 19, 1988
against appellee CIC.
Supreme Court Ruling
• Petitioner argues that it should not be made to pay interest
because its issuance of the surety bonds was made on the
condition that its liability shall in no case exceed the
amount of the said bonds. We are not persuaded.
16 | P a g e
• Jurisprudence is clear on this matter. We have sustained
the principle that if a surety upon demand fails to pay,
he can be held liable for interest, even if in thus
paying, its liability becomes more than the principal
obligation.
• The increased liability is not because of the contract but
because of the default and the necessity of judicial
collection.
• Petitioner’s liability under the suretyship contract is
different from its liability under the law.
• There is no question that as a surety, petitioner should not
be made to pay more than its assumed obligation under
the surety bonds.
• However, it is clear that petitioner’s liability for the
payment of interest is not by reason of the suretyship
agreement itself but because of the delay in the
payment of its obligation under the said agreement.
• The issue of petitioner’s payment of interest is a
matter that is totally different from its obligation to
pay the principal amount covered by the surety
bonds it issued.
• Petitioner offered no valid excuse for not paying the
balance of its principal obligation when demanded by
RCBC. Its failure to pay is, therefore, unreasonable.
b. When to pay
• Ideally, the guarantor pays when the obligation is due.
• If the guarantor pays before the date, he cannot proceed
against the debtor until that date arrives, unless the debtor
ratified the payment.
Art. 2069. If the debt was for a period and the guarantor paid
it before it became due, he cannot demand reimbursement
from the debtor, until the expiration of the period, unless the
payment has been ratified by the debtor.
If an obligation with a period which is secured by a
guaranty, when is the guarantor liable to pay?
• On or after the expiration of the period.
Is the guarantor liable prior to the due date?
• No, because the debtor is also not liable prior to the due
date.
• The obligation of the guarantor arises or becomes
demandable only when the debtor’s obligation becomes
demandable also.
Can the surety pay prior to the maturity of the
obligation?
• Yes, the surety can pay the creditor.
• But, if the surety pays before it becomes due and
demandable, he cannot yet demand reimbursement from
the debtor because the obligation has not yet matured.
• Exception: Unless, if the debtor ratifies the payment.
Can the creditor refuse the payment of the surety?
• Yes. Because the obligation is not yet due. ObliCon.
But if the creditor accepts the payment even if the
principal obligations is not yet due, what are the rights
of the surety who paid before the debt is due, as against
the debtor? Can he seek reimbursement already?
• No, he cannot yet seek for reimbursement as against the
debtor because as far as the debtor is concerned, his
obligation is not yet due and demandable.
• But, if the debtor ratifies the payment, then he is liable
now to reimburse the guarantor.
c. Duty to notify of the payment
• The guarantor has to notify the debtor of the payment,
otherwise, the debtor may set up against the guarantor all
defenses available against the creditor.
• If the debtor pays, not knowing that the guarantor already
paid, the guarantor must recover from the creditor (not
the debtor).
➢ This is an exception to the rule of solution indebiti.
➢ If the guaranty is gratuitous and notice to the debtor
is prevented by fortuitous event, the debtor must
reimburse the guarantor, if the creditor is insolvent.
When does guarantor notify the debtor?
• Before payment.
Why does the guarantor need to notify the debtor before
payment?
• If notice is given after payment, the debtor may set up
defenses against the guarantor to avoid paying or
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
reimbursing him of the payment that the guarantor made
to the creditor.
• Examples of defenses by debtor:
➢ The debtor has already paid.
➢ The debtor’s obligation has been extinguished by
prescription.
➢ The creditor has already condoned the debtor’s
obligation.
➢ The debtor was given an extension by the creditor.
✓ Note that extension and payment without the
consent of the guarantor releases him of his
undertaking.
• So, ideally, the guarantor must notify the debtor prior to
payment because the debtor may set up defenses against
him, and the guarantor cannot seek reimbursement from
him anymore.
• Whereas if the guarantor notifies the debtor before
payment, the scenario would be:
➢ The debtor would say “I have already been pardoned
by the creditor. My obligation has already been
condoned” or “
➢ You know, the creditor also owes me the same amount
of money (legal compensation).”
➢ So, when the creditor demands payment from
the guarantor, the guarantor can also raise
these defenses against the creditor.
• It will then be TOO LATE to notify the debtor AFTER
payment has been made because the guarantor can no
longer raise the defenses available to the debtor because
he has already paid the creditor.
Creditor collected both from the debtor and guarantor
• If the guarantor paid and did not notify the debtor of
the fact of payment, and because the debtor did not
know that the guarantor paid, he also paid the creditor.
• The creditor is happy because he is paid twice and of
course, that is unjust enrichment.
• Can the guarantor recover from the debtor?
➢ No. The guarantor must recover only from the
creditor, not the debtor.
Rule if notice is prevented by fortuitous event
• If the guaranty is gratuitous and notice to the debtor is
prevented by fortuitous event, the debtor must reimburse
the guarantor, if the creditor is insolvent.
C. PRIVILEGES OF THE GUARANTOR
a. Benefit of exhaustion (excussion)
b. Benefit of division
a. Benefit of exhaustion (excussion)
• It is the right available to the guarantor to demand that
the creditor first exhaust the properties of the
debtor, which are within the Philippines and which
are not exempt from execution.
• And if still, the creditor cannot collect, that’s the time that
guarantor is liable.
• Hence, the creditor should do the following:
1. He must first exhaust the properties of the debtor.
2. He must resort to all legal remedies against the
debtor.
3. He must prove that the debtor is unable to pay.
4. He must notify the guarantor of the debtor’s inability
to pay. Otherwise, if the guarantor is prejudiced due
to lack of notice, he cannot be made to pay, unless
there is a waiver on the part of the guarantor.
Procedure:
• The creditor must file a case against the debtor alone
• The creditor shall then ask the court to notify the guarantor
of the action
• However, under the 1997 Rules of Court, it should be the
defendant or the debtor who is allowed by law to implead
a third party which is the guarantor here.
• But, the practice now, is to implead both debtor and
guarantor, and when there is a judgment the
execution must first be satisfied against the debtor
before the guarantor
• If the guarantor is impleaded, it is not enough that he is
heard. The law requires the benefit of exhaustion.
• The guarantor must point to the creditor all leviable
properties of the debtor located within the Philippines only.
• Leviable Properties in the Philippines
➢ These are properties not exempt form execution.
• So, it is not enough that he invokes the privilege of
exhaustion, he must point to the creditor all leviable
properties of the creditor here in the Philippines.
17 | P a g e
What is the first step as discussed in your ObliCon?
• File a case.
• Not necessarily for collection because the obligation might
not be for a sum of money. It might be specific
performance of an obligation.
To whom is the case filed?
• The law says that it is brought against the principal debtor
alone. And then the law says that the creditor will ask the
court to notify the guarantor of the pending action.
Comments:
• But the law says that the suit must be filed by the creditor
against the debtor alone.
• Once he files the case against the debtor alone, he must
ask the court to notify the guarantor.
• When the creditor files a case against the debtor, then he
should later on ask for the amendment of the pleading in
order to implead the guarantor as additional defendant.
• That is why what is actually practiced is to file a case
against both the principal debtor and the guarantor jointly
in the same case.
What if the Creditor does not amend the complaint and
impleads only the principal debtor?
• The defendant debtor will ask to file a third party
complaint to bring in the guarantor as party defendant if
the plaintiff does not amend the complaint and implead the
guarantor as another party to the case.
• That’s how you bring in a party, you do not ask the court
to just notify. Because if you just notify only the person,
the court does not acquire jurisdiction over his person
What must the guarantor do if he is impleaded?
• The guarantor may appear, waive his appearance to file
his answer, and if he invokes the “Privilege of Exhaustion,”
it is his obligation to point to the creditor again exhaust
first the properties of the debtor within the Philippines
which are not exempt from execution.
If the case is decided against both the debtor and the
guarantor, will the judgment be executed
simultaneously against both? Is the guarantor’s
privilege of exhaustion lost if a judgment is rendered
against both of them?
• No, the privilege remains unimpaired.
• Execution shall be first effected against the debtor.
• Judgment against the guarantor will be suspended. It will
not be enforced or executed yet, until and unless all of the
debtor’s properties are exhausted.
• The court said that the best proof that the debtor cannot
pay is the return of the execution unsatisfied.
Rule 39, Sec. 13, ROC
Except as otherwise expressly provided by law, the following
property, and no other, shall be exempt from execution:
a. The judgment obligor's family home as provided by law, or
the homestead in which he resides, and land necessarily
used in connection therewith;
b. Ordinary tools and implements personally used by him in
his trade, employment, or livelihood;
c. Three horses, or three cows, or three carabaos, or other
beasts of burden, such as the judgment obligor may select
necessarily used by him in his ordinary occupation;
d. His necessary clothing and articles for ordinary personal
use, excluding jewelry;
e. Household furniture and utensils necessary for
housekeeping, and used for that purpose by the judgment
obligor and his family, such as the judgment obligor may
select, of a value not exceeding one hundred thousand
pesos;
f. Provisions for individual or family use sufficient for four
months;
g. The professional libraries and equipment of judges,
lawyers, physicians, pharmacists, dentists, engineers,
surveyors, clergymen, teachers, and other professionals,
not exceeding three hundred thousand pesos in value;
h. One fishing boat and accessories not exceeding the total
value of one hundred thousand pesos owned by a
fisherman and by the lawful use of which he earns his
livelihood;
i. So much of the salaries, wages, or earnings of the
judgment obligor for his personal services within the four
months preceding the levy as are necessary for the
support of his family;
j. Lettered gravestones;
k. Monies, benefits, privileges, or annuities accruing or in any
manner growing out of any life insurance;
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
l. The right to receive legal support, or money or property
obtained as such support, or any pension or gratuity from
the Government;
m. Properties specially exempted by law.
Case: how inability to pay is proved.
Machetti vs. Hospicio de San Jose (see above)
• While a surety undertakes to pay if the principal does not
pay, a guarantor only binds himself to pay if the principal
cannot pay.
• A surety is insurer of the debt; the guarantor is the insurer
of the solvency of the debtor. The latter liability is what
Fidelity & Surety Co. assumed in the present case.
• Fidelity & Surety Co., having bound itself to pay only in the
event its principal, Machetti, cannot pay, it follows that it
cannot be compelled to pay until it is shown that Machetti
is unable to pay.
• Such inability to pay may be proven by the return of a writ
of execution unsatisfied or by other means, but it is not
sufficiently established by the mere fact that Machetti has
been declared insolvent in an insolvency proceeding in
which the extent of the insolvent’s liability to pay is not
determined until the final liquidation of his estate.
Comments:
• For the benefit of exhaustion, the court is saying here that
one way of proving the inability to pay by the debtor
is by the return of the writ of execution which is
unsatisfied or by other means.
• Of course, prior to that, he must already point to the
creditor leviable properties of the debtor.
• Here you cannot even obtain a writ of execution because
there is no judgment against the principal debtor
that can be executed because again here Machetti
was dropped for being insolvent, but the case
continued against the guarantor.
• The court here said that you cannot execute the
judgment here against the guarantor. You must
prove first that you cannot collect from the debtor,
and one way of proving is the return of the writ of
execution unsatisfied, which was impossible in this case.
• Fidelity & Surety Co. having bound itself to pay only in the
event its principal, Machetti cannot pay, it follows that it
cannot be compelled to pay until it is shown that
Machetti is unable to pay.
• Such inability to pay may be proven by the return of a writ
of execution unsatisfied or by other means, but it is not
sufficiently established by the mere fact that
Machetti has been declared insolvent in an
insolvency proceeding in which the extent of the
insolvent’s liability to pay is not determined until the
final liquidation of his estate.
The guarantor pointed out to the creditor leviable
properties of the debtor, but the creditor failed to levy.
Subsequently, the debtor became insolvent, can the
creditor collect the entire amount from the guarantor?
• No. The guarantor’s obligation would be
extinguished to the extent of the value of the
property which was not levied upon by the creditor
due to his fault.
Is it required that the surety or guarantor be afforded
with the right to be heard before he may be held liable?
• Yes, whether the undertaking is an ordinary guaranty or
suretyship, due process should be accorded to the
guarantor, especially the surety.
Case: Effect of a writ of execution against surety who
was not impleaded
Towers Assurance Corporation vs. Ororama Supermart
• On February 17, 1976 See Hong, the proprietor of
Ororama Supermart in Cagayan de Oro City, sued the
spouses Ernosto Ong and Conching Ong in the CFI of
Misamis Oriental for the collection of P 58,400 plus
litigation expenses and attorney’s fees.
• See Hong asked for a writ of preliminary attachment.
• On March 5, 1976, the lower court issued an order of
attachment. The deputy sheriff attached the properties of
the Ong spouses and Towers Assurance Corporation as
surety.
• In that undertaking, the Ong spouses and Towers
assurance Corporation bound themselves to pay solidarily
to See Hong the sum of P58,400.
Supreme Court Ruling
• We hold that the lower court acted with grave abuse of
discretion in issuing a writ of execution against the surety
18 | P a g e
 without first giving it an opportunity to be heard as
required in Rule 57, Sec. 17 of the Rules of Court.
• Under Sec. 17, in order that the judgment creditor might
recover from the surety on the counterbond, it is
necessary:
1) that the execution be first issued against the principal
debtor and that such execution was returned
unsatisfied in whole or in part;
2) that the creditor made demand upon the surety for
the satisfaction of the judgment; and
3) that the surety be given notice and a summary
hearing in the same action as to his liability for the
judgment under his counterbond.
• The first requisite mentioned above is not applicable to this
case because Towers Assurance Corporation assumed a
solidary liability for the fulfillment of the judgment. A
surety is not entitled to the exhaustion of the
properties of the principal debtor.
• But certainly, the surety is entitled to be heard before
an execution can be issued against him since he is
not a party in the case involving his principal.
• Notice and hearing constitute the essence of procedural
due process. The order and writ of execution insofar as
they concern Towers Assurance Corporation, are set aside.
• The lower court is directed to conduct a summary hearing
on the surety’s liability on its counterbond.
Comments:
• A case was filed for collection against the debtor who failed
to pay. The trial court ordered the surety to pay.
• The SC said that you cannot immediately hold the
surety liable. The surety must go to court and must
be afforded the opportunity to be heard.
• But this ruling was modified a year after in the case
of Finman General Assurance vs. Salik.
Case: Where surety was impleaded but declared in
default.
Finman General Assurance Corp. vs. Salik
• Abdulgani Salik, et.al private respondents allegedly
applied with Pan Pacific Overseas Recruiting Services, Inc.
on April 22, 1987 and were assured employment abroad
by a certain Mrs. Normita Egil.
• In consideration thereof, they allegedly paid fees totaling
P30,000, but despite numerous assurances of employment
abroad given by Celia Arandia and Mrs. Egil, they were not
employed.
• Accordingly, they filed a joint complaint with the Philippine
Overseas Employment Administration against Pan Pacific
for violation of Articles 32 and 34 of the Labor Code, as
amended with claim or refund of a total amount of
P30,000.00.
• The POEA motu proprio impleaded and summoned
herein petitioner surety Finman General Assurance
Corp. in the latter’s capacity as Pan Pacific’s bonding
company.
• On October 9, 1987, a hearing was called, but only the
private respondents appeared.
• Despite being deemed in default or failing to answer,
both Finman and Pan Pacific were still notified of the
scheduled hearing. Again, they failed to appear.
• Thus, an ex-parte proceeding ensued.
Supreme Court Ruling
• The nature of Finman’s obligation under the
Suretyship agreement makes it privy to the
proceeding against the principal.
• As such Finman is bound, in the absence of collusion,
by a judgment against the principal even though it
was not a party to the proceedings.
• In some cases, the court ruled that where the surety
bound itself solidarily with the principal obligor, the
former is so dependent on the principal debtor “that
the surety is considered in law as being the same
party as the debtor in relation to whatever is
adjudged touching the obligation of the latter.”
• Applying the foregoing principles to the case at bar, it can
be very well said that even if herein Finman was not
impleaded in the instant case, still it can be held
jointly and severally liable for all claims arising from
the recruitment violation of Pan Pacific.
• Moreover, as correctly stated by the Solicitor General,
private respondents have a legal claim against Pan Pacific
and its insurer for the placement and processing fees they
paid, so much so that in order to provide a complete relief
to private respondents, petitioner have to be impleaded in
the case.
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
Comments:
• The court said here that there is no requirement to be
afforded with the opportunity to be heard because
its relationship with the debtor is such that it is
charged with the knowledge of the liability of the
debtor.
• So, there is no need to implead the surety because of the
nature of his relationship with the debtor. Therefore, by
impleading the debtor, it already means that the surety is
also charged with knowledge of such case.
• However, in this case, the surety was actually
impleaded, only that he did not file an answer and
was declared in default. That is why it seemed that it
didn’t have the opportunity to be heard.
• The surety was actually afforded the right to be heard, the
problem is that it did not file an answer together with the
principal debtor, hence they were declared in default.
• Gi-summons jud ni sya pero it failed to file an answer. So,
kung gi-summon ka nya wa ka ni file ug responsive
pleading, and so you were in default. You, in fact, denied
yourself the opportunity to be heard.
• Judge Adviento: To be safe, i-implead gud ang
guarantor or surety as form of notice.
When should the benefit of excussion be invoked?
• It should be invoked the moment demand to pay is made
upon the guarantor, even if it is an extrajudicial demand.
• He must point to the creditor to levy the properties of the
debtor. Otherwise, he cannot anymore invoke the
privilege. (Bitanga vs. Pyramid Construction)
• If a case is filed, the guarantor must invoke the privilege
before the judgment is rendered by the trial court.
• If invoked on appeal, then it is too late already. ☹☹
When benefit of excussion available:
• To avail of it, the guarantor must:
1. Interpose it as soon as the creditor makes a
demand upon the guarantor for payment
➢ But the creditor may sue the debtor and
guarantor jointly when there is no guarantor’s
right to exhaustion under 2059. Otherwise, the
creditor shall ask the court to notify the
guarantor.
➢ The interposition of the benefit of exhaustion
must be made before the judgment is
rendered against the guarantor.
➢ The benefit of exhaustion cannot be claimed for
the first time on appeal.
2. Point out to the creditor leviable property of the debtor
within the Philippines sufficient to cover the debt.
Case: Effect when the debtor invokes non-exhaustion of
the guarantor
JN Development Corporation vs. Philippine Export and
Foreign Loan Guarantee Corporation
• On 13 December 1979, petitioner JN Development
Corporation (“JN”) and Traders Royal Bank (TRB) entered
into an agreement whereby TRB would extend to JN an
Export Packing Credit Line for P2,000,000.
• The loan was covered by several securities, including a real
estate mortgage and a letter of guarantee from
respondent Philippine Export and Foreign Loan Guarantee
Corporation (“PhilGuarantee”), now Trade and Investment
Development Corporation of the Philippines, covering
seventy percent (70%) of the credit line.
• With PhilGuarantee issuing a guarantee in favor of TRB,
JN, petitioner spouses Rodrigo and Leonor Sta. Ana and
petitioner Narciso Cruz executed a Deed of Undertaking
(Undertaking) to assure repayment to PhilGuarantee.
• It appears that JN failed to pay the loan to TRB upon its
maturity; thus, on 8 October 1980 TRB requested
PhilGuarantee to make good its guarantee.
• PhilGuarantee informed JN about the call made by TRB and
inquired about the action of JN to settle the loan.
• Having received no response from JN, on 10 March 1981
PhilGuarantee paid TRB P934,824.34.
• Subsequently, PhilGuarantee made several demands on
JN, but the latter failed to pay.
• On 30 May 1983, JN, through Rodrigo Sta. Ana, proposed
to settle the obligation “by way of development and sale”
of the mortgaged property.
• PhilGuarantee, however, rejected the proposal.
• PhilGuarantee thus filed a Complaint or collection of money
and damages against herein petitioners.
Supreme Court Ruling
• PhilGuarantee maintains that the date of default, not the
actual date of payment, determines the liability of the
19 | P a g e
 guarantor and that having paid TRB when the loan became
due, it should be indemnified by petitioners.
• It argues that, contrary to petitioners’ claim, there could
be no waiver of its right to excussion more explicit than its
act of payment to TRB very directly. Besides, the right to
excussion is for the benefit of the guarantor and is not a
defense for the debtor to raise and use to evade liability.
• Finally, PhilGuarantee maintains that there is no sufficient
evidence proving the alleged forgery of Cruz’s signature on
the Undertaking, which is a notarized document and as
such must be accorded the presumption of regularity.
• The Court finds for PhilGuarantee. Under a contract of
guarantee, the guarantor binds himself to the creditor to
fulfill the obligation of the principal debtor in case the latter
should fail to do so. The guarantor who pays for a debtor,
in turn, must be indemnified by the latter.
• However, the guarantor cannot be compelled to pay
the creditor unless the latter has exhausted all the
property of the debtor and resorted to all the legal
remedies against the debtor. This is what is otherwise
known as the benefit of excussion.
• It is clear that excussion may only be invoked after
legal remedies against the principal debtor have
been expanded.
• Thus, it was held that the creditor must first obtain a
judgment against the principal debtor before
assuming to run after the alleged guarantor, “for
obviously the ‘exhaustion of the principal’s property’
cannot even begin to take place before judgment
has been obtained.”
• The law imposes conditions precedent for the invocation of
the defense. Thus, in order that the guarantor may
make use of the benefit of excussion, he must set it
up against the creditor upon the latter’s demand for
payment and point out to the creditor available
property of the debtor within the Philippines
sufficient to cover the amount of the debt.
• While a guarantor enjoys the benefit of excussion,
nothing prevents him from paying the obligation
once demand is made on him.
• Excussion, after all, is a right granted to him by law
and as such he may opt to make use of it or waive it.
• PhilGuarantee’s waiver of the right of excussion
cannot prevent it from demanding reimbursement
from petitioners. The law clearly requires the debtor to
indemnify the guarantor what the latter has paid.
• Petitioners’ claim that PhilGuarantee had no more
obligation to pay TRB because of the alleged expiration of
the contract of guarantee is untenable. The guarantee,
dated 17 December 1979, states: In the event of default
by JNDC and as a consequence thereof, PHILGUARANTEE
is made to pay its obligation arising under the aforesaid
guarantee PHILGUARANTEE shall pay the BANK the
amount of P1.4 million or 70% of the total obligation
unpaid…
This guarantee shall be valid for a period of one (1) year
from date hereof but may be renewed upon payment by
JNDC of the guarantee fee at the same rate of 1.5% per
annum.
• The guarantee was only up to 17 December 1980.
JN’s obligation with TRB fell due on 30 June 1980,
and demand on PhilGuarantee was made by TRB on
08 October 1980.
• That payment was actually made only on 10 March
1981 does not take it out of the terms of the
guarantee. What is controlling is that default and
demand on PhilGuarantee had taken place while the
guarantee was still in force.
• The benefit of excussion, as well as the requirement of
consent to extensions of payment, is a protective device
pertaining to and conferred on the guarantor.
• These may be invoked by the guarantor against the
creditor as defenses to bar the unwarranted enforcement
of the guarantee.
• However, PhilGuarantee did not avail of these defenses
when it paid its obligation according to the tenor of the
guarantee once demand was made on it.
• What is peculiar in the instant case is that petitioners, the
principal debtors themselves, are muddling the
issues and raising the same defenses against the
guarantor, which only the guarantor may invoke
against the creditor, to avoid payment of their own
obligation to the guarantor.
• The Court cannot countenance their self-seeking desire to
be exonerated from the duty to reimburse PhilGuarantee
after it had paid TRB on their behalf and to unjustly enrich
themselves at the expense of PhilGuarantee.
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
Comments:
• It is like this, X owes C 1M. G guaranteed the payment.
When X defaulted, G paid. Then, G sought reimbursement
from X. X then said “you did not invoke the priv. of
exhaustion” and because of that, X is not liable to
reimburse.
• SC said that the privilege of exhaustion is given to the
guarantor. Since it is a privilege, it can be waived.
• The best way of showing it was waived is that the act of
the guarantor of paying without invoking it.
• That is why the debtor cannot invoke this to avoid
reimbursing the guarantor.
Case: No execution until writ is returned unsatisfied
Machetti vs. Hospicio de San Jose (see above)
Case: No execution if no judgment against principal
debtor
Baylon vs. CA
• Baylon introduced Luanzon to Tomacruz, the co-manager
of her husband at PLDT. Baylon facilitated the loan of
Luanzon from Tomacruz at a monthly interest rate of 5%
for the former’s business.
• Luanzon issued and signed a promissory note
acknowledging receipt of the P150,000 from Tomacruz and
obliging herself to pay the former the said amount on or
before August 22, 1987
• Baylon signed the promissory note, affixing her
signature under the word "guarantor." Luanzon also
issued a postdated Solidbank check no. CA418437 dated
August 22, 1987 payable to Tomacruz in the amount of
P150,000.
• Subsequently, Luanzon replaced this check with another
postdated Solidbank check no. 432945 dated December
22, 1987, in favor of the same payee and covering the
same amount.
• Several checks in the amount of P7,500 each were also
issued by Luanzon and made payable to Tomacruz.
• When Luanzon defaulted, Tomacruz filed a case for specific
performance against Luanzon, the debtor, and Baylon, the
guarantor, and impleading Baylon’s husband.
• However, summons was never served upon Luanzon.
Summons was served only upon Baylon, the guarantor.
• Trial proceeded only against the guarantor and a decision
was rendered against her.
Supreme Court Ruling
• The decision of the court be cannot executed against
Baylon, the guarantor.
• It is axiomatic that the liability of the guarantor is only
subsidiary. The property of the debtor must first all
be exhausted before his own is levied upon.
Comments:
• So, all this time, the case went up to the Supreme Court,
the creditor is holding a paper victory.
• Mao lagi unta nidaog ka sa kaso, but you cannot execute,
because the debtor was not summoned. The debtor was
impleaded but there was no summons that was
served (no JD over the person).
When the Benefit of Exhaustion is Not Available
1. Waiver by the guarantor
• See JN Development Corp. case
2. Waiver by agreeing that liability is direct and
immediate
• See Tupaz case where Tupaz waived the privilege
when he agreed that his liability in the guaranty is
direct and immediate, without the need for the
creditor to take any steps to exhaust or legal remedies
of execution.
3. Guarantor binds himself solidary (as surety)
• A surety cannot invoke exhaustion of the debtor
because in a suretyship, the creditor may go
immediately against the surety.
4. Debtor is insolvent
• The insolvency or inability to pay must be actual, and
it may be proven by the return of a writ of
execution unsatisfied or by other means when
there is proof that you cannot collect form the debtor.
• There is no need for judicial declaration of
insolvency. It is not sufficiently established by the
mere fact that the debtor has been declared insolvent
in insolvency proceedings, in which the extent of the
insolvent’s inability to pay is not determined until the
final liquidation of his estate. (Machete case)
5. Debtor cannot be sued in the Philippines because he
has absconded
20 | P a g e
6. When it is presumed that execution would not result
in the satisfaction of the judgment credit
• This is presumed when other previous writs of
execution were not satisfied, so you cannot expect na
ma satisfy pa na nimo.
7. When the guarantor, upon the creditor’s demand for
payment from him, fails to set up such benefit
against the creditor and to point out to the latter
available properties of the debtor to cover the debt.
(Art 2060)
8. If he is a judicial bondsman and sub-surety. (Art
2084)
• Because a judicial bondsman is a surety.
9. If he fails to interpose it as a defense before
judgment is rendered against him. (Saavedra vs.
Price, 68 Phil. 699 [1939].)
10. When the guaranty is in the form of a mortgage of
the guarantor’s property. Where a pledge or
mortgage has been given by him as a special
security. Guarantees without any such pledge or
mortgage are governed by Title XV of the Civil Code,
whereas pledges and mortgages fall under Title XVII
thereof
Case: When the benefit of exhaustion is not available/
Waiver of the benefit of excussion
Tupaz vs. CA
• Petitioners Jose C. Tupaz IV and Petronila C. Tupaz were
officers of El Oro Engraver which had a contract with the
Philippine Army to supply the latter with survival bolos.
• To finance the purchase of the raw materials for the
survival bolos, petitioners, on behalf of El Oro Corporation,
applied with the Bank of the Philippine Islands (BPI) for
two (2) commercial letters of credit. The letters of credit
were in favor of El Oro Corporation’s suppliers, Tanchaoco
Manufacturing Incorporated and Maresco Rubber and
Retreading Corporation.
• BPI granted petitioners’ application and issued Letter of
Credit No. 2-00896-3for P564,871.05 to Tanchaoco
and Letter of Credit No. 2-00914-5 for P294,000 to
Maresco.
• In line with this, Tupaz signed trust receipts in favor
of BPI. Jose C. Tupaz IV signed in his personal
capacity a trust receipt corresponding to Letter of
Credit No. 2-00896-3 (for P564,871.05) while he
and Petronilia signed in their official capacities the
trust receipt corresponding to Letter of Credit No. 2-
00914-5 (for P294,000).
• Petitioners failed to comply with their undertaking under
the trust receipts. Hence, BPI charged them with estafa
under Section 13, PD No. 115 (Trust Receipts Law).
• The trial court acquitted the petitioners of the crime of
estafa but held them civilly liable to BPI.
Supreme Court Ruling
• Jose Tupaz is liable as guarantor of El Oro Corporation’s
debt under the trust receipt corresponding to Letter of
Credit No. 2-00896-3 (for P564,871.05) but the he
and Petronilia are not personally liable with respect to the
debt under the trust receipt corresponding to Letter of
Credit No. 2-00914-5 (for P294,000).
• In the trust receipt corresponding to Letter of Credit
No. 2-00914-5 (for P294,000), petitioners signed as
officers of El Oro Corporation. Thus, under Petronila
Tupaz’ signature are the words “Vice-Pres Treasurer” and
under petitioner Jose Tupaz’ signature are the words “Vice-
Pres Operations.”
• By so signing that trust receipt, petitioners did not bind
themselves personally liable for El Oro Corporations
obligation. Hence, for the said trust receipt, they are not
personally liable for El Oro Corporations obligation.
• For the trust receipt corresponding to Letter of Credit
No. 2-00896-3 (for P564,871.05) the dorsal portion of
which Jose Tupaz signed alone, we find that he did so in
his personal capacity. Hence, he bound himself
personally for El Oro Corporation’s debts. Not being a party
to the said trust receipt, Petronila Tupaz is not liable under
the same.
• Tupaz here waived the benefit of exhaustion when
he agreed that his liability in the guaranty shall be
“direct and immediate without any need whatsoever
on the part of the bank to take any steps to exhaust
any legal remedies.”
• The clear import of this stipulation is that petitioner
Jose Tupaz waived the benefit of excussion under
his guarantee.
• The creditor may not prove that it cannot collect
from the debtor before it can go after the guarantor.
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
Case: When the benefit of exhaustion is not available/
Guarantor failed to point the leviable properties of the
debtor
Bitanga vs. Pyramid Construction Engineering Corp.
• Pyramid entered into an agreement with Macrogen Realty,
of which Bitanga is the President, to Shoppers Gold
Building located in Parañaque City.
• It commenced civil, structural, and architectural works on
the construction project. However, Macrogen failed to
settle respondent’s progress billings.
• Bitanga, through his representatives and agents, assured
respondent that the outstanding account of Macrogen
would be paid and relying on the assurances made by
petitioner, respondent continued the construction project.
• Later, respondent suspended work and an arbitration case
with the Construction Industry Arbitration Commission
(CIAC) was instituted.
• However, Pyramid and Macrogen entered into a
Compromise Agreement, with Bitanga acting as
signatory for and in behalf of Macrogen Realty.
• Under the Compromise Agreement, Macrogen Realty
agreed to pay respondent the total amount of P6,000,000
by installments. Petitioner Bitanga guaranteed the
obligations of Macrogen Realty under the
Compromise Agreement by executing a Contract of
Guaranty in favor of respondent, by virtue of which he
irrevocably and unconditionally guaranteed the full
and complete payment of the principal amount of
liability of Macrogen.
• Macrogen Realty failed and refused to pay all the monthly
installments agreed upon in the Compromise Agreement.
Hence respondent moved for the issuance of a writ of
execution against Macrogen, which CIAC granted.
• The sheriff filed a return stating that he was unable to
locate any property of Macrogen Realty, except its bank
deposit of P20,242.33, with the Planters Bank, Buendia
Branch.
• Respondent then made a written demand on
petitioner, as guarantor of Macrogen to pay the
liability or to point out available properties of the
Macrogen within the Philippines sufficient to cover
the obligation guaranteed. It also made verbal
demands on petitioner. Yet, respondent’s demands were
left unheeded.
• Petitioner filed with the RTC his Answer to respondent’s
Complaint. As a special and affirmative defense, he
argued that the benefit of excussion was still
available to him as a guarantor since he had set it up
prior to any judgment against him.
• According to petitioner, respondent failed to exhaust all
legal remedies to collect from Macrogen the amount due
under the Compromise Agreement, considering that
Macrogen Realty still had uncollected credits which were
more than enough to pay for the same. Given these
premises, petitioner could not be held liable as guarantor.
Supreme Court Ruling
• Under a contract of guarantee, the guarantor binds himself
to the creditor to fulfill the obligation of the principal debtor
in case the latter should fail to do so.
• The guarantor who pays for a debtor, in turn, must be
indemnified by the latter.
• However, the guarantor cannot be compelled to pay
the creditor unless the latter has exhausted all the
property of the debtor and resorted to all the legal
remedies against the debtor. This is what is otherwise
known as the benefit of excussion.
• It must be stressed that despite having been served a
demand letter at his office, petitioner still failed to
point out to the respondent properties of Macrogen
Realty sufficient to cover its debt.
• Such failure on petitioner’s part forecloses his right
to set up the defense of excussion.
Comments:
• This emphasizes the requirement that it is not enough
for the guarantor to invoke the benefit of excussion.
• He must point out to the creditor the leviable
properties of the debtor.
• Here, since the guarantor failed to point leviable properties
of the debtor, he is prevented from invoking the privilege
of exhaustion.
b. Benefit of division
• When there are several guarantors for one and the
same debtor and debt, the obligation to answer for
the same is divided among all of them.
21 | P a g e
• The creditor may only claim from each guarantor his
corresponding share, unless solidarity has been
expressly stipulated.
Comments:
• This is available only if there are several Guarantors
securing the “same obligation” applying the parallel rule
in ObliCon on joint obligations.
• We have learned in ObliCon that mere plurality of the
debtors or the creditors or both the creditors and debtors
result only in joint obligations because solidarity is not
presumed.
• Solidarity exists only when it is:
➢ Provided by law
➢ Agreed by the parties
➢ Nature of the obligations required solidarily.
• Again, several guarantors securing the same obligation.
Each guarantor is liable only in paying his share in the
obligation secured. He cannot be made to pay the entire
obligation.
• See De Guzman vs. Santos where there were two
guarantors, and in fact one of the guarantor here died
while the case was pending, and the administratix of his
estate paid one half of the judgment debt.
Requisites for the benefit of division:
1. There are several guarantors
2. They guaranteed only one debtor
3. There is only one debt
Case: Effect if one of the two guarantors paid half of
judgment debt
De Guzman vs. Santos
• A mercantile partnership, Phil-Am Constructions Co.
(PACC), with Toole, Abad and Santos as co-partners, was
formed with P10,000 of its capital secured by way of a loan
from Paulino Candelaria.
• The partnership and the co-partners bound
themselves solidarily to pay said indebtedness.
• Having violated the conditions of the contract, Candelaria
filed an action against PACC and the co-partners for the
recovery of the loan.
• Candelaria obtained a writ of attachment against the co-
partners by virtue of which the sheriff attached the co-
partners’ properties. No property of the PACC was
attached.
• To discharge the attachment, PACC, as principal, and
Santiago Lucero and Meliton Carlos, as guarantors,
executed a bond in favor of Candelaria. Defendant Santos
neither intervened nor signed individually in the bond.
• Attachment was discharged and attached properties were
returned to their owners.
• The trial court rendered judgment ordering the co-partners
to pay the judgment creditor the amount of the loan.
• The writ of execution having been returned unsatisfied,
said writ was issued against the guarantors upon the
motion of Candelaria.
• Lucero and Carlos, as guarantors, paid P5,000 plus.
• Plaintiff de Guzman, in her capacity as judicial
administrator of the estate of the deceased Lucero, sought
to recover from Santos what the estate had paid to
Candelaria.
• The trial court decided for plaintiff.
• Defendant Santos appealed contending that he is not liable
because he neither applied for nor intervened in the bond
any capacity.
Supreme Court Ruling
• Under Article 1822 of the Civil Code, by guaranty one
person binds himself to pay or perform for a third person
in case the latter should failed to do so, and Article 1838
of the Civil Code provides that any guarantor who pays
for the debtor shall be indemnified by the latter even
if the guaranty have been undertaken without the
debtor’s knowledge.
• Applying the cited provisions, it is obvious that Santos
is legally bound to pay the plaintiff what he has
advanced to Candelaria upon judgment,
notwithstanding the fact that the bond was given
without his knowledge.
• Defendant’s obligation to pay what the plaintiff had
advanced is further sanctioned by the general provisions
of the Civil Code regarding obligations.
• Article 1158 of the Civil Code provides that the payment
made by any person whether he has an interest in the
performance of the obligation or not, and whether the
payment is known and approved by the debtor or whether
he is unaware of it, may be recovered from said debtor.
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
• Any person who makes a payment for the account of
another may recover from the debtor the amount
payment, unless it was made against the express will of
the latter. In the latter case, he can only recover from the
debtor in so far as the payment has been beneficial to the
latter.
• According to this legal provision, it is evident that the
defendant is bound to pay to the plaintiff what the
latter had advanced to Candelaria, and this is more
so because it appears that although Lucero executed
the bond without his knowledge, nevertheless he did
not object thereto or repudiate the same at any time.
• And it cannot be logically deduced that the defendant did
not have knowledge of the bond, firstly, because his
properties were attached and attachment could not have
been levied without his knowledge, and secondly, because
said properties were returned to him and in receiving them
he was necessarily apprised of the fact that a bond had
been filed to discharge the attachment.
When is division not available?
• It’s not available for the same reason that the benefit of
exhaustion is not available. (see above, page 20)
When should the benefit of division be invoked?
• The same as for the benefit of exhaustion.
What is the rule if each and all guarantors secure the
entire debt?
• The benefit of division applies if each and all guarantors
secure the entire debt; but not if each guarantor
answers for a separate portion.
Case: Benefit of division; when rule applies
Mira Hermanos vs. Manila Tobacconists
• By virtue of a written contract entered into between Mira
Hermanos, Inc., and Manila Tobacconists, Inc., the former
agreed to deliver to the latter merchandise for sale on
consignment under certain specified terms and the latter
agreed to pay to the former on or before the 20th day of
each month the invoice value of all the merchandise sold
during the preceding month.
• Mira Hermanos, Inc., required of the Manila Tobacconists,
Inc., a bond of P3,000, which was executed by the
Provident Insurance Co., on September 2, 1939, to
secure the fulfillment of the obligation of the Tobacconists
under the contract up to the sum of P3,000.
• In the month of October, 1940, the volume of the business
of the Tobacconists has increased that the merchandise
received by it on consignment from Mira Hermanos
exceeded P3,000 in value, thus Mira Hermanos required
of the Tobacconist an additional bond of P2,000, and
in compliance with that requirement the defendant
Manila Compañia de Seguros, on October 16, 1940,
executed a bond of P2,000 with the same terms and
conditions (except as to the amount) as the bond of the
Provident Insurance Co.
• On June 1, 1941, a final and complete liquidation was
made of the transactions between Mira Hermanos and the
Tobacconists, as a result of which there was found a
balance due from the latter to the former of P2,272.79,
which indebtedness the Tobacconists recognized but was
unable to pay.
• Thereupon Mira Hermanos made a demand upon the two
surety companies for the payment of said sum.
• Provident Insurance Co. paid only the sum of
P1,363.67, which is 60% of the amount owned by
the Tobacconists to Mira Hermanos, alleging that the
remaining 40% should be paid by the other surety,
Manila Compañia de Seguros, in accordance with article
1837 of the Civil Code.
• The Manila Compañia de Seguros refused to pay the
balance, contending that so long as the liability of
the Tobacconists did not exceed P3,000, it was not
bound to pay anything because its bond referred
only to the obligation of the Tobacconists in excess
of P3,000 and up to P5,000.
Supreme Court Ruling
• The "benefit of division" provided in article 1837 of the Civil
Code reads as follows: Art. 1837. Should there be several
sureties of only one debtor for the same debt, the liability
therefor shall be divided among them all. The creditor can
claim from each surety only his proportional part unless
liability in solidum has been expressly stipulated.
• The statement of the trial court to the effect that the bond
of P3,000 responded for the obligation of the Tobacconists
up to the sum of P3,000 and the bond of P2,000 responded
22 | P a g e
 for the obligation of the Tobacconists only insofar as it
might exceed P3,000 and up to P5,000, is a finding of fact
based upon the undisputed testimony of the witnesses
called by the defendant Manila Compañia de Seguros in
support of its special defense hereinbefore quoted.
• While on its face the bond given by the Manila
Compañia de Seguros contains the same terms and
conditions (except as to the amount) as those of the
bond given by the Provident Insurance Co.,
nevertheless, it was pleaded by the Manila
Compañia de Seguros and found proven by the trial
court.
• The evidence upon which that finding is based is not only
undisputed but perfectly reasonable and convincing.
For, as the trial court observed, there would have
been no need for the additional bond of P2,000 if its
purpose were to cover the first P2,000 already
covered by the P3,000 bond of the Provident
Insurance Co.
• Indeed, we might add, if the purpose of the additional
bond of P2,000 were to cover not the excess over
and above P3,000 but the first P2,000 of the
obligation of the principal debtor like the bond of
P3,000 which covered only the first P3,000 of said
obligation, then it would result that had the
obligation of the Tobacconists exceeded P3,000,
neither of the two bonds would have responded for
the excess, and that was precisely the event against
which Mira Hermanos wanted to protect itself by
demanding the additional bond of P2,000.
• When the Provident gave its bond and fixed the premiums
thereon, it assumed an obligation of P3,000 in solidum
with the Tobacconists without any expectation of any
benefit of division with any other surety.
• The additional bond of P2,000 was, more than a year later,
required by the creditor of the principal debtor for the
protection of said creditor and certainly not for the benefit
of the original surety, which was not entitled to expect any
such benefit.
• The foregoing considerations, which fortify the trial
court's conclusion as to the real intent and
agreement of the parties with regard to the bond of
P2,000 given by the Manila Compañia de Seguros,
destroys at the same time the theory of the
appellant regarding the applicability of article 1837
of the Civil Code.
• That article refers to several sureties of only one
debtor for the same debt.
• In the instant case, although the two bonds on their
face appear to guarantee the same debt co-
extensively up to P2,000 — that of the Provident
Insurance Co. alone extending beyond that sum up
to P3,000 — it was pleaded and conclusively proven
that in reality said bonds, or the two sureties, do not
guarantee the same debt because the Provident
Insurance Co. guarantees only the first P3,000 and
the Manila Compañia de Seguros, only the excess
over and above said amount up to P5,000. Article
1837 does not apply to this factual situation.
Comments:
• The court said Provident and Manila Compania should not
share 60-40, because both companies secured different
obligations (same debtor, but different debts)
• Since the total amount of the obligation of the debtor did
not exceed the amount of P3,000, only Provident is liable.
It cannot invoke the benefit of division.
• So, the first question that we should ask ourselves is Do
we have several guarantor? Yes. Did the two
guarantors secure the SAME obligation? No, they did
not. What was secured by Provident was the first 3,000
and the succeeding 2,000 was secured by Manila
Compania.
• Is the unpaid obligation covered by the security
provided by provident? YES. So only Provident is liable
here. No benefit of division.
Defenses of the Guarantor
a. Defenses which pertain to the debtor:
• The guarantor may set up against the creditor all defenses
which pertains to the principal debtor and are inherent in
the debt; but not those purely personal to the debtor.
• The surety may invoke fraud, violence, prior payment, res
judicata, prescription and others of the same class.
• Defenses purely personal:
➢ Minority, incapacity, and other vices of consent which
the principal debtor may waive; unless the guarantor
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
was ignorant of the vice as he could not the waive the
defect.
b. Defenses peculiar to guaranty:
• Merger, novation, extension of time, etc., which
invalidates the contract between the creditor and the
surety. (See Extinguishment of Guaranty)
Effects of Guaranty Between the DEBTOR and the
GUARANTOR
A. BEFORE PAYMENT BY THE GUARANTOR
a. To receive compensation agreed upon by the parties, if any
b. To demand relief from the guaranty against the action of
the creditor or security against the danger of the debtor’s
insolvency, in certain instances.
c. To demand security against the danger of the debtor’s
insolvency
d. Prejudice to the creditor’s rights
e. Object of action for relief
If it is the guarantor’s right to be paid by the agreed
compensation. Can he therefore refuse to pay the
secured obligation if he is not paid the compensation?
• No. See Pryce vs CA above. Pryce agreed to put up a
surety bond on the conditions that premium should be
paid, but the premiums weren’t paid because the checks
issued were dishonored.
• So, the guarantor here or surety, was not paid the agreed
compensation. The Supreme Court said that for as long
as there is consent, the bond is accepted by the
creditor, then the guarantor/surety is bound.
• So, the mere fact that the guarantor/surety was not paid
by the agreed compensation WILL NOT ABSOLVE him from
the obligation.
Before payment, what is the right of the guarantor?
• The right to be paid by the agreed compensation.
• He can also demand relief from the guaranty. When?
➢ When he sued for payment in case of insolvency of the
debtor in the instances in Art. 2071 (see below).
How can the guarantor seek relief for security?
• By an action in court for either relief or additional security
• Directed against the principal debtor
Instances when the guarantor may proceed against the
principal debtor, even before payment (Art. 2071)
1. When he is sued for payment
2. In case of insolvency of the principal debtor
3. When the debtor has bound himself to relieve him from
the guaranty within a specified period and the period has
expired
4. When the debt has become demandable by reason of the
expiration of the period of payment
5. After the lapse of 10 years, when the principal obligation
has no fixed period for its maturity
6. If there are reasonable grounds to fear that the principal
debtor intends to abscond
7. If the principal debtor is in imminent danger of becoming
insolvent
In all these cases, the action of the guarantor is to obtain
release from the guaranty, or to demand a security that
shall protect him from any proceedings by the creditor
and from the danger of insolvency of the debtor.
Example: The guarantor learned that the debtor is in danger
of becoming insolvent. So, the guarantor filed a case against
the debtor to be released from the guaranty. Now, the creditor
would be prejudiced if the guarantor would be released from
the guaranty because the debtor is about to become insolvent.
What is the more equitable action to file so as to not
prejudice the rights of the creditor?
• Normally, mu file ug motion to be released si guarantor,
then mu file pud ug motion to intervene si creditor.
• The guarantor can demand from the debtor a sub-
guaranty or indemnity agreement.
If you are the creditor, would you consent to relieve the
guarantor of his undertaking?
• No, you would not agree because you agreed to extend the
loan to the debtor because of his security.
• The law says that the rights of the creditor should not be
prejudiced.
• What’s the middle ground?
➢ If you are the guarantor, ask for an indemnity
contract from the debtor, which is also asking for
23 | P a g e
 another guarantor, and that is already a sub-
guaranty.
➢ To assure the guarantor that if he pays, then he can
go after the sub-guarantor or against the indemnity
bond.
Can the surety also invoke this right?
• Yes. This is also available to the surety despite being
solidarily liable. See Manila Surety & Fidelity Co. vs.
Batu Construction Co.
Comments:
• The guarantor can ask to be relieved BUT the court also
said that the rights of the creditor must NOT be prejudiced.
• So, definitely, the creditor will ask the court not t allow the
release the guarantor, because that was one of the
reasons why he agreed to extend credit to begin with.
• If you allow relief of the guarantor from his
undertaking. Is the creditors’ right prejudiced?
➢ Yes, because he is now holding an unsecured credit.
If the debtor cannot pay, then he cannot collect.
➢ He cannot demand performance from the guarantor
who has been previously released by the court.
➢ So, if the creditor opposes or objects to the
release of the guarantor from his undertaking,
the guarantor who has reasonable ground to
believe that he may not be able to collect from
the debtor will ask for sub-guaranty or
indemnity.
➢ This indemnity is actually a sub-guaranty.
Case: When guarantor may proceed against the principal
debtor, even before payment (Art. 2071)
Manila Surety & Fidelity Co. vs. Batu Construction Co.
• Manila Surety alleges that Batu Construction requested it
to post, as it did, a surety bond f or P8,812 in favor of the
Government of the Philippines to secure the faithful
Performance of the construction of the Bacarra Bridge,
Project PR-72 (3), in Ilocos Norte, undertaken by the
partnership.
• On 30 May 1951, because of the unsatisfactory
progress of the work on the bridge, the Director of
Public Works, with the approval of the Secretary of Public
Works and Communications, annulled the construction
contract referred to and notified Manila Surety that
the Government would hold it liable for any amount
incurred by the Government for the completion of
the bridge, in excess of the contract price.
• On 19 December 1951 (should be 23 November 1951),
Ricardo Fernandez and 105 other persons brought an
action in the Justice of the Peace Court of Laoag, Ilocos
Norte, against the partnership, the individual partners and
the herein plaintiff Company for the collection of unpaid
wages amounting to P5,960.10, lawful interests thereon
and costs.
• Bat Construction is in imminent danger of becoming
insolvent, and are removing and disposing, or about
to remove and dispose, of their properties with
intent to defraud their creditors, and that Manila
Surety has no other sufficient security to protect its rights
against the defendants.
• Upon these allegations, Manila Surety prays that, upon the
approval of a bond and on the strength of the allegations
of the verified complaint, a writ attachment be issued
and levied upon the properties of Batu; and that after
hearing, judgment be rendered ordering the defendants to
deliver to the plaintiff such sufficient security as shall
protect plaintiff from the any proceedings by the creditors
on the Surety Bond aforementioned and from the danger
of insolvency of the defendants.."
• Batu is assailing that the benefit under Art 2071 cannot be
availed of by a surety.
Supreme Court Ruling
• In suretyship, the surety becomes liable to the creditor
without the benefit of the principal debtor's exclusion of
his properties, for he may be sued independently. So, he
is an insurer of the debt and as such, he has assumed or
undertaken a responsibility or obligation greater or more
onerous than that of guarantor.
• Such being the case, the provisions of article 2071, under
guaranty, are applicable and available to a surety.
• The reference in article 2047 to, the provisions of Section
4, Chapter 3, Title 1, Book IV of the new Civil Code, on
solidary or several obligations, does not mean that
suretyship which is a solidary obligation is
withdrawn from the applicable provisions governing
guaranty.
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
• The plaintiff's cause of action does not fall under paragraph
2 of article 2071 of the new Civil Code, because there is
no proof of the defendants' insolvency. The fact that the
contract was annulled because of lack of progress in the
construction of the bridge is no proof of such insolvency.
• It does not fall under paragraph 3, because the defendants
have not bound themselves to relieve the plaintiff from the
guaranty within a specified period which already has
expired, because the surety bond does not fix any period
of time and the indemnity agreement stipulates one year
extendible or renewable until the bond be completely
cancelled by the person or entity in whose behalf the bond
was executed or by a Court of competent jurisdiction.
• It does not come under paragraph 4, because the debt has
not become demandable by reason of the expiration of the
period for payment.
• It does not come under paragraph 5 because of the lapse
of 10 years, when the principal obligation has no period for
its maturity, etc., for 10 years have not yet elapsed.
• It does not fall under paragraph 6, because there is no
proof that "there are reasonable grounds to fear that the
pr incipal debtor intends to abscond."
• It does not come under paragraph 7, because the
defendants, as principal debtors, are not in imminent
danger of becoming insolvent, there being no proof to that
effect.
• But the plaintiff's cause of action comes under
paragraph 1 of article 2071 of the new Civil Code,
because the action brought by Ricardo Fernandez and 105
persons for the collection of unpaid wages amounting to
P5,960.10, is in connection with the construction of the
Bacarra Bridge, and one of the defendants therein is Manila
Surety, and paragraph 1 provides that the guarantor,
even before having paid, may proceed against the
principal debtor when he (the guarantor) is sued for
payment.
• It does not provide that the guarantor be sued by
the creditor for the payment of the debt.
• It simply provides that the guarantor or surety be
sued for the payment of an amount for which the
surety bond was put up to secure the fulfillment of
the obligation undertaken by the principal debtor.
B. RIGHTS OF THE GUARANTOR AFTER PAYMENT
a. Personal Action for reimbursement
• The guarantor who pays for a debtor must be
indemnified by the latter.
• If the guarantor seeks reimbursement, what can
he recover? (TIED)
➢ The amount he paid
➢ Legal interest from the time the payment was
made known to the debtor, even though it did
not earn interest for the creditor
➢ Expenses incurred after having notified the
debtor that payment had been demanded of him
➢ Damages when circumstances show
b. Action in subrogation of the creditor
• The guarantor who pays is subrogated by virtue
thereof to all the rights which the creditor had against
the debtor.
• If the guarantor has compromised with the creditor,
he cannot demand of the debtor more than what he
has really paid.
After payment, what are the rights of the Guarantor?
• Seek action for Reimbursement or Exercise action in
subrogation.
Action in Subrogation
• Subrogation transfers to the person subrogated, the
credit with all rights thereto appertaining, either against
the debtor or third persons, be they guarantors or
possessors of mortgages, subject to stipulation in a
conventional agreement.
• The guarantor who pays is subrogated by virtue thereof to
all the rights which the creditor had against the debtor.
• Note that if the guarantor has compromised with the
creditor, he cannot demand of the debtor more than what
he has really paid.
Situation: D borrows from C P1,000,000, secured by a
mortgage, and guaranteed by G. D was unable to pay, and the
mortgage was foreclosed and P500,000 was paid to C. Since
the amount was not enough, G also paid C P500,000. Now, D
has a right to redeem the mortgage within 1 year from the date
of sale. If G exercise the right of subrogation, can G be
the one to redeem the mortgaged property from the
highest bidder in the sale?
24 | P a g e
• No. The right to redemption pertains to D, the debtor-
mortgagor.
• Subrogation puts G in the shoes of C, not D!
When can the guarantor exercise the action in
subrogation of the creditor?
• The guarantor can exercise the right to subrogation
(step into the creditor’s shoes) if:
➢ the principal obligation is also secured by
another security undertaking such as mortgage,
and
➢ the guaranty was constituted with the consent
of the debtor.
• This results by operation of law from the act of
payment and there is no necessity for the guarantor
to ask the creditor to expressly assign his rights of
action.
Can the guarantor be subrogated to the creditor in his
rights if the guaranty was constituted without the
consent of the debtor?
• Yes, he may, but only if the creditor consents.
• If the guaranty was constituted without the consent
of the debtor, the guarantor cannot compel the
creditor to subrogate him with his rights, and the
guarantor is entitled only to beneficial
reimbursement (Remember the rules in ObliCon when a
3rd person pays the obligation without the consent of the
debtor).
• Thus, if the guaranty was constituted without the
consent of the debtor, it is the prerogative of the
creditor on whether to subrogate the guarantor or not.
But granting both the right to seek reimbursement and
right to subrogation are present. If you are the
guarantor, which action would you take? Would you
seek reimbursement, or would you go for subrogatory
action, meaning foreclose mortgage, sell the property
pledged to pay the obligation?
• It actually depends on the solvency or liquidity of the
debtor. Because the guarantor can pay even if the debtor
is not insolvent, right? Just like what happened in JN.
• If the debtor is solvent, seek reimbursement.
• If the debtor is insolvent, and you step into rights of
the creditor as a mortgagee, by all means foreclose
the mortgage.
Why is it more advantageous to the debtor to seek
subrogatory rights rather than seek reimbursement
when the debtor is insolvent?
• If you seek for reimbursement, you cannot recover
since the debtor is insolvent, you are only an
ordinary creditor, and since the debtor is insolvent, it is
not guaranteed you will be paid with the full amount as
preferred creditors will prevail over you.
• However, under subrogation, you step into the shoes
of the creditor and, thus, you can go after the
mortgage and foreclose the mortgage, BUT YOU
CANNOT go after the mortgagor personally.
• With respect to the mortgage, the mortgagee’s right is
only to foreclose the mortgage, unless the third
party mortgagor likewise personally binds himself to
pay the obligation. Thus, it is more advantageous for the
guarantor to foreclose the mortgage rather than seek
reimbursement if the debtor is insolvent.
• If there is a mortgage, which make you a mortgagee over
a certain property, you are considered a preferred
creditor over that property. If there are other preferred
creditors with respect to this particular property, you
divide the proceeds from the sale proportionately, and
then the rest to ordinary creditors.
• But if you are the only preferred creditor, then you can be
assured of full reimbursement of the amount that you paid.
• Thus, when the debtor is insolvent, it is better for the
guarantor to exercise subragatory action rather than ask
for reimbursement.
Comments:
• Solvency vs. Liquidity. Liquidity is different from solvency.
Liquidity is having sufficient assets but in the form of non-
cash assets or fixed assets like real property, so way
kwarta and di ka deretcho makacollect.
• Solvency, generally, is when you have more liabilities than
assets, meaning, your assets are not sufficient to pay your
liabilities.
• So, if the debtor does not have liquidity or solvency
problems, then by all means go for reimbursement.
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
• But if the debtor is insolvent, then exercise your
right of subrogation. Why?
➢ If a mortgage is likewise constituted to secure the
obligation that you paid as the guarantor, there are
two securities; guaranty and Real Estate Mortgage
(REM).
➢ You paid, so the mortgage was not foreclosed by the
creditor. So, you step into the shoes of the Creditor
with respect to the REM. You are the new Creditor now.
➢ The property subject of the REM is subject to a
preferred right of the mortgagee.
➢ So, if you are the only preferred creditor over that
particular property and that property’s value is more
than the amount of your claim, then you will be paid
the full amount of your claim.
➢ Remember that the debtor is insolvent. If you are an
Ordinary Creditor, an unsecured creditor, then you
cannot be paid the full amount of your claim.
➢ But if you are the only preferred creditor, then you will
be paid the full amount because when this property is
sold, you will be paid first the remaining balance will
be paid to the unsecured creditors.
Now, from whom does the guarantor seek
reimbursement if the guaranty was constituted upon the
request another person other than the debtor?
• The guarantor can seek reimbursement from this person.
C. GUARANTY GIVEN WITHOUT CONSENT OR AGAINST
THE WILL OF THE DEBTOR
Rules:
1. If the guarantor should pay without notifying the
debtor, the latter may enforce against him all the
defenses which he could have set up against the
creditor at the time the payment was made.
• Reason: The liability of the guarantor being merely
subsidiary, he should really wait until after the debtor
has tried to comply.
• The guarantor should not, through his own fault or
negligence, be allowed to jeopardize the rights of the
debtor. By paying without notifying the debtor,
the guarantor deprives the debtor of the
opportunity to set up defenses against the
creditor.
2. If the guarantor has paid without notifying the
debtor, and the latter not being aware of the
payment, repeats the payment, the former has no
remedy whatever against the debtor, but only
against the creditor. Nevertheless, in case of a
gratuitous guaranty, if the guarantor was prevented
by a fortuitous event from advising the debtor of the
payment, and the creditor becomes insolvent, the
debtor shall reimburse the guarantor for the amount
paid.
• Example: A owes B P100, 000 with C as guarantor. C
paid the debt to B when it fell due, but C did this
without notifying A. Not being aware of the payment
by C, A repeated the payment.
➢ Can C recover from A?
✓ No. C cannot recover from A.
✓ C has no remedy whatever against A, the
debtor. C’s only remedy is to recover from B,
the creditor.
➢ Supposing the guaranty was gratuitous, and
supposed the only reason C was not able to
notify A was because of a fortuitous event,
what are C’s rights?
✓ C must still recover from B. But if B, the
creditor, is insolvent, then A, the debtor,
shall reimburse C for the amount paid.
3. If one, at the request of another, becomes a
guarantor for the debt of a third person who is not
present, the guarantor who satisfies the debt may
sue either the person so requesting or the debtor for
reimbursement.
Effects of Guaranty as Between Co-Guarantors
Rule in case a co-guarantor pays the entire obligation
• General Rule: If one guarantor pays the entire
obligation, he cannot seek reimbursement from the other
co-guarantors because he waives the right of division.
• Exceptions:
1. If payment was made by virtue of a judicial demand
2. If the principal debtor is insolvent
• Also, insolvency of one of the co-guarantors does not
result in any of the remaining guarantors shouldering the
entire share of that particular insolvent guarantor, it must
be divided among the remaining solvent guarantors.
25 | P a g e
A. CONTRIBUTION
• When there are two or more guarantors of the same
debtor and for the same debt, the one among them who
has paid may demand of each of the others the share
which is proportionally owing from him.
• Provided, the payment has been made by virtue of a
judicial demand or unless the principal debtor is insolvent.
Example: A, B and C are D’s guarantors. D was insolvent and
A had to pay the whole debt. Later, A can demand from B and
C 1/3 of the debt from each. This is so because A’s share is
supposed to be also 1/3. Of course, each of them can demand
proportional reimbursement from the principal debtor.
In what instance may a co-guarantor seek
reimbursement from others?
• If he paid the entire obligation by virtue of a court order
• If the principal debtor has become insolvent
• If a co-guarantor voluntarily pays the entire
obligation even without a court order or without the
principal debtor being insolvent, he cannot seek
reimbursement form the other co-guarantors.
• That means he waived the benefit of division. Just like
the benefit of excussion or exhaustion, the benefit of
division is waivable.
B. IN CASE OF INSOLVENCY OF ONE CO-GUARANTOR
• If any of the guarantors should be insolvent, his share
shall be borne by the other co-guarantors, including the
payer, in the same proportion.
Example: A, B and C are D’s guarantors of a debt of P300,000
in favor of E. Since D was insolvent, A paid P300,000 to E.
What if B is insolvent, how much can A demand from C?
• P150,000. A cannot demand the extra P100,000 (share of
B) from C because in that way, C would have a greater
burden.
• The law provides that the insolvent guarantor’s share
must be borne by the others (including the payor A)
proportionally.
C. DEFENSES OF CO-GUARANTORS
• The co-guarantors may set up against the one who paid,
the same defenses which would have pertained to the
principal debtor against the creditor, and which are not
purely personal to the debtor.
Example: You several guarantors securing the same
obligations, so you have A, B, C, and D – all co-guarantors
securing a P1 Million obligation.
A pays the entire obligation of 1M, can he seek
reimbursement from B, C, and D?
• No. Because there is a waiver of the Benefit of Division by
A paying the entire debt.
A was ordered by the court to pay the entire debt. (Now,
you cannot defy the order of the court, that is
contemptuous) Can A seek reimbursement from B, C and
D? Must A seek reimbursement from B, C and D?
• He “can” seek reimbursement from the debtor.
• But he “may” also seek reimbursement from B, C and D
Example: Y is a debtor (guaranteed by A) who becomes
insolvent and because X, the creditor, cannot collect from Y
because Y is already insolvent, A paid the entire obligation.
Can A seek contribution or reimbursement from B, C and
D?
• Yes. In these two instances (when the court orders the
payment of the entire obligation OR if the debtor is
insolvent), and 1 of the several guarantors pay the entire
obligation, he can seek either contribution or
reimbursement from the other co-guarantors.
• But if there are several guarantors, and one of the several
guarantors VOLUNTARY pay the obligation (without a court
order and without debtor being insolvent), he cannot seek
reimbursement from the co-guarantors. That’s a WAIVER
of the right of division.
Example: A, B, C and D secures Y’s obligation to X in the
amount of P1,500,000. Y (debtor) becomes insolvent. A pays
the obligation. D is insolvent.
Can A seek reimbursement from the other co-
guarantors?
• YES. Because the debtor is insolvent.
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
How much can A recover from B and C (excludes D
because he is insolvent)?
• P500,000 each, because the remaining guarantors will
shoulder the share of the insolvent guarantor which is D.
Comments:
• If you have the benefit of division because you have
several creditors securing the same obligation, we said
that this privilege can be waived which is manifested by
one of the co-guarantors paying the entire obligation.
• So, if one guarantor does that, he cannot seek
reimbursement from his co-guarantors because he waived
the benefit.
• Is there an instance where a co-guarantor pays the
entire obligation and yet entitled to seek
reimbursement from the other co-guarantors?
➢ Yes. When one of the co-guarantors pays the entire
obligation due to judicial demand.
Another example:
• Total debt: P150,000
• There are 3 guarantors – G1, G2, and G3.
Scenario 1: Without judicial demand by court or
insolvency
• G1 paid the creditor P150,000
• G1 cannot recover from G2 & G3. This is a waiver of the
right of division
Scenario 2: With judicial demand by the court or
insolvency of debtor
• G1 paid the creditor P150,000
• G1 can ask G2 and G3 to pay him P50,000 each
Scenario 3: With judicial demand by the court or
insolvency of debtor, and G3 became insolvent
• G1 paid the creditor P150,000
• G1 can ask G2 to pay him P75,000 (G2’s share of P50,000
plus G2’s share in G3’s insolvency of P25,000)
• Thus, G3’s share of P50,000 will be shared by G2 and G3
at P25,000 each.
Chapter 3 – Extinguishment of Guaranty
Extinction of Guaranty
How may a guaranty be extinguished?
a. Negligence of the creditor
b. Extension of payment without the guarantor’s consent
c. Payment of the principal debt by the debtor
d. Accidental loss of the thing due before default
e. Remission of debt
f. Merger
g. Compensation
h. Novation
i. Death
j. Failure to send notice of default
a. Negligence of the creditor
There are two instances of negligence by the creditor which
releases the guaranty from the obligation:
1. The creditor who is negligent in exhausting the
property pointed out by the guarantor, shall suffer the
loss, to the extent of said property, for the insolvency of
the debtor resulting from such negligence.
• Here, the guarantor invokes the benefit of excussion
and pointed to the creditor the alienable properties of
the debtor which are not exempt from execution.
• However, through negligence, the creditor did not
exhaust the debtor’s properties to apply to the
payment of the debtor.
• Later on, the debtor becomes insolvent and therefore
the creditor could not recover the full credit owing to
each to the extent the value of the property which he
did not levy.
• The guarantor is released from the guaranty to the
extent of the value of said property.
• If the creditor failed to levy upon the property, the
value of which is more than enough to recover the
entire obligation, the guaranty is totally extinguished.
2. The guarantors, even though they be solidary, are
released from their obligation whenever by some act of
the creditor, they cannot be subrogated to the
rights, mortgages, and preference of the latter. (Art.
2080)
• If the guarantor cannot be subrogated to the rights of
the creditor because of the creditor’s negligence.
26 | P a g e
 • For example, if there are two securities for an
obligation – a mortgage and a guaranty (a real and
personal guaranty). See E. Zobel vs. CA. The bank
failed to register the mortgage, thus, the guarantor
cannot be subrogated with the rights of the creditor.
Is the guarantor here released from its
undertaking?
➢ Yes, but only if the contract is one of
guaranty.
➢ If the contract is one of suretyship, the
surety cannot be released because the
undertaking was solidary.
Case: Effect if there is impossibility of Subrogation
E. Zobel vs. CA
• Respondent spouses Claveria, doing business under the
name "Agro Brokers," applied for a loan with respondent
Consolidated Bank and Trust Corporation (now
SOLIDBANK) in the amount of P2,875,000 to finance the
purchase of 2 maritime barges and 1 tugboat which would
be used in their molasses business.
• The loan was granted subject to the condition that
respondent spouses execute a chattel mortgage over the
3 vessels to be acquired and that a continuing
guarantee be executed by Ayala International Philippines,
Inc., now E. Zobel, Inc. in favor of SOLIDBANK.
• The respondent spouses agreed to the arrangement.
Consequently, a chattel mortgage and a Continuing
Guaranty were executed.
• However, respondent spouses defaulted in the payment of
the entire obligation upon maturity.
• Hence, on January 31,1991, SOLIDBANK filed a complaint
for sum of money with a prayer for a writ of preliminary
attachment, against respondent spouses and petitioner.
• Petitioner moved to dismiss the complaint on the ground
that its liability as guarantor of the loan was extinguished
pursuant to Article 2080 of the Civil Code of the
Philippines.
• It argued that it has lost its right to be subrogated
to the first chattel mortgage in view of SOLIDBANK's
failure to register the chattel mortgage with the
appropriate government agency.
• SOLIDBANK opposed the motion contending that Article
2080 is not applicable because petitioner is not a guarantor
but a surety.
Supreme Court Ruling
• A contract of surety is an accessory promise by which a
person binds himself for another already bound, and
agrees with the creditor to satisfy the obligation if the
debtor does not.
• A contract of guaranty, on the other hand, is a collateral
undertaking to pay the debt of another in case the latter
does not pay the debt.
• Strictly speaking, guaranty and surety are nearly related
but under our civil law, they may be distinguished thus: A
surety is distinguished from a guaranty in that a
guarantor is the insurer of the solvency of the debtor
and thus binds himself to pay if the principal is
unable to pay while a surety is the insurer of the
debt, and he obligates himself to pay if the principal
does not pay.
• Based on the aforementioned definitions, it appears that
the contract executed by petitioner in favor of SOLIDBANK,
albeit denominated as a "Continuing Guaranty," is a
contract of surety. The terms of the contract
categorically obligate petitioner as "surety" to induce
SOLIDBANK to extend credit to respondent spouses. This
can be seen in the following stipulations: "…undersigned
is now obligated to you as surety and in order to
induce you…the undersigned agrees to guarantee,
and does hereby guarantee, the punctual payment,
at maturity or upon demand, to you of any and all
such instruments, loans, advances, credits and/or
other obligations herein before referred to, and also
any and all other indebtedness of every kind which
is now or may hereafter become due or owing to you
by the Borrower.”
• The use of the term "guarantee" does not ipso facto
mean that the contract is one of guaranty. Authorities
recognize that the word "guarantee" is frequently
employed in business transactions to describe not the
security of the debt but an intention to be bound by a
primary or independent obligation.
• As aptly observed by the trial court, the interpretation of
a contract is not limited to the title alone but to the
contents and intention of the parties.
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
• Having thus established that petitioner is a surety,
Article 2080 of the Civil Code, relied upon by
petitioner, finds no application to the case at bar.
• In Bicol Savings and Loan Association vs. Guinhawa, we
have ruled that Article 2080 of the New Civil Code
does not apply where the liability is as a surety, not
as a guarantor.
• But even assuming that Article 2080 is applicable,
SOLIDBANK's failure to register the chattel mortgage did
not release petitioner from the obligation.
• In the Continuing Guaranty executed in favor of
SOLIDBANK, petitioner bound itself to the contract
irrespective of the existence of any collateral.
• It even released SOLIDBANK from any fault or negligence
that may impair the contract. The pertinent portions of the
contract so provides: “… who hereby agrees to be and
remain bound upon this guaranty, irrespective of the
existence, value or condition of any collateral…No
act or omission of any kind on your part in the
premises shall in any event affect or impair this
guaranty.”
Comments:
• If the obligation is secured by a chattel mortgage and
guaranty. You have both personal guaranty and real
guaranty. What is the right of the creditor with
respect to the chattel mortgage?
➢ In case of the default on the part of the debtor, the
creditor can foreclose the mortgage by selling the
property on a public sale and apply the proceeds to
the payment of the principal obligation.
• But in the chattel mortgage, it is required that the
mortgage must be registered in the register of deeds.
➢ If it is not registered, then it is not a valid mortgage
and you cannot validly foreclose it.
➢ If the mortgage is not registered, then the one who is
interested in registering the mortgage is the creditor,
not the debtor-mortgagor, because the mortgage is
constituted for the benefit of the creditor, so that he
can collect in the event that the debtor defaults.
➢ If the creditor fails to foreclose the mortgage, the
guarantor cannot be subrogated to the rights of
the creditor because the creditor has no right to
foreclose.
• So, under Article 2080 of the NCC, if the guarantor cannot
be subrogated with the rights of the creditor because of
the creditor’s fault then, the guarantor is released from his
undertaking to instances of mortgages.
• This only applies to guaranty, not a suretyship
agreement!
b. Extension of payment without the guarantor’s consent
Art. 2079. An extension granted to the debtor by the creditor
without the consent of the guarantor extinguishes the
guaranty. The mere failure on the part of the creditor to
demand payment after the debt has become due does not of
itself constitute any extension of time referred to herein.
Requisites:
1. The debt has become due.
2. The extension must be express.
• Mere forbearance or delay of the creditor in collecting
or suing for the credit does not release the guarantor.
3. The extension must be granted by the creditor.
• If the contract stipulates for an automatic extension,
the same does not release the guarantor.
• The extension of the term must be based on some
new agreement between the creditor and the
principal debtor by virtue of which the creditor
deprives himself of his claim.
4. The extension must be without the guarantor’s
consent, express or implied.
What if the debt is to be paid on installments?
• General Rule: Each installment is considered as a
separate and distinct obligation, such that an extension
in one installment does not result to an extension of
all installments.
• Exception: Acceleration Clause.
What if the payment of installment is extended? Is the
guarantor released from his undertaking to secure the
entire obligation?
• No. Remember ObliCOn (If the obligation consists in the
payment of installments, default of payment on one
installment does not result in the default of payment of all
installments). The same also finds application here.
27 | P a g e
• If the period for payment of one installment is extended
by the creditor without the consent of the guarantor, then
the guarantor is released from his undertaking only
for this particular installment. He is not released from
his obligation as regards the other installments.
What is the effect if there is an acceleration clause?
• If the debtor fails to pay 1 installment, the entire obligation
becomes due and demandable.
Comments:
• Remember that only obligations with a period are
secured either by guaranty or suretyship, or by a
real security like a mortgage.
• If it is a simple, pure and demandable obligation,
there’s no requirement of security because you can
always demand immediately.
• If the creditor extends the period of performance or
payment without the consent of the guarantor, the
guarantor is released.
• The problem arises when the debt is to be paid on
installments. Each installment is considered as a separate
and distinct obligation such that default in one installment
does not result to a default in the subsequent installment.
• An exception is when there is an acceleration clause.
Case: Effect of extension of one installment
Villa vs. Garcia Bosque
• Garcia Bosque is indebted to Villa.
• For the amount payable, Bosque executed a promissory
note payable in three installments, with France and
Goulette obligating themselves as sureties.
• The first installment was paid on time. The second
installment was paid partially, and promissory notes were
executed for the remaining balance.
• France and Goulette contended that they are released
from liability as sureties because of the extension of time
of the second installment due.
Supreme Court Ruling
• The execution of these new promissory notes undoubtedly
constituted an extension of time as to the obligation
included therein, such as would release a surety, even
though of the solidary type, under article 1851 of the Civil
Code.
• Nevertheless, it is to be borne in mind that said
extension and novation related only to the second
installment of the original obligation and interest
accrued up to that time.
• Furthermore, the total amount of these notes was
afterwards paid in full, and they are not now the subject
of controversy.
• It results that the extension thus effected could not
discharge the sureties from their liability as to other
installments upon which alone they have been sued
in this action.
• The rule that an extension of time granted to the debtor
by the creditor, without the consent of the sureties,
extinguishes the latter's liability is common both to
Spanish jurisprudence and the common law; and it is well
settled in English and American jurisprudence that where
a surety is liable for different payments, such as
installments of rent, or upon a series of promissory
notes, an extension of time as to one or more will
not affect the liability of the surety for the others.
• If the debts are several, or consist of separate
installments, the extension of one does not release
the guaranty for the others, unless default in the
extended one automatically makes all the rest due
and payable.
Comments:
• In Villa vs. Garcia, payment of an installment was
extended, but it was subsequently paid. It was the later
installment that was not paid
• The court said that the surety cannot invoke extension of
period in order to relieve him from the obligation
pertaining to other installments.
Case: Effect of acceleration clause
Radio Corp vs. Roa
• Defendant Roa owed Philippine Theatrical Enterprise (PTE)
the sum of P28,400.
• PTE assigned all its rights and interest in the contract to
plaintiff RCPI subject to the condition that in case the
mortgagor defendant fails to make any of the
installments, the whole amount remaining unpaid
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
shall immediately become due and demandable and
the mortgaged property may be foreclosed.
• Defendant requested an extension for the payment of one
installment, which was granted.
• In an action to recover the unpaid loan, the court ordered
defendant and the guarantors to pay plaintiff solidarily the
sum of P10,000.
• Defendant guarantors appealed contending that the court
erred in not finding that the extension of time given to the
defendant served as a release of defendant guarantors
from liability on all subsequent installments.
Supreme Court Ruling
• The stipulation in the contract under consideration, is to
the effect that upon failure to pay any installment when
due, the other installments ipso facto become due and
payable.
• In view of the fact that under the express provision of the
contract, the whole unpaid balance automatically becomes
due and payable upon failure to pay one installment, the
act of the plaintiff in extending the payment of the
installment, without the consent of the guarantors,
constituted in fact an extension of the payment of
the whole amount of the indebtedness, as by that
extension the plaintiff could not have filed an action for the
collection of the whole amount until after the expiration of
the period of extension.
• Therefore, appellants' contention that after default of the
payment of one installment the act of the herein creditor
in extending the time of payment discharges them as
guarantors in conformity with articles 1851 and 1852 of
the Civil Code is correct.
• It is a familiar rule that if a creditor, by positive
contract with the principal debtor, and without the
consent of the surety, extends the time of payment,
he thereby discharges the surety.
• The time of payment may be quite as important a
consideration to the surety as the amount he has
promised conditionally to pay.
• Again, a surety has the right, on payment of the debt, to
be subrogated to all the rights of the creditor, and to
proceed at once to collect it from the principal; but if the
creditor has tied own hands from proceeding
promptly, by extending the time of collection, the
hands of the surety will equally be bound; and
before they are loosed, by the expiration of the
extended credit, the principal debtor may have
become insolvent and the right of subrogation
rendered worthless.
• It should be observed, however, that it is really
unimportant whether the extension given has actually
proved prejudicial to the surety or not. The rule stated is
quite independent of the event, and the fact that the
principal is insolvent or that the extension granted
promised to be beneficial to the surety would give
no right to the creditor to change the terms of the
contract without the knowledge or consent of the
surety. Nor does it matter for how short a period the time
of payment may be extended. The principle is the same
whether the time is long or short.
• The creditor must be in such a situation that when the
surety comes to be substituted in his place by paying the
debt, he may have an immediate right of action against
the principal.
• The suspension of the right to sue for a month, or
even a day, is as effectual to release the surety as a
year or two years.
• An extension of time given by the creditor to the debtor to
make payment without the consent of the guarantor
extinguishes the guaranty.
Comments:
• The contract contained an acceleration clause to the effect
that upon failure to pay any installment when due, the
other installments ipso facto become due and payable.
• Thus, the whole unpaid balance automatically becomes
due and payable upon failure to pay one installment.
• In which case, the act of the plaintiff in extending the
payment of the installment (with an acceleration
clause), without the consent of the guarantors,
constituted in fact an extension of the payment of
the whole amount of the indebtedness.
Case: Effect of consenting to the extension of time of
payment
PhilAm Gen. Insurance Co. vs. Mutuc
• In a surety bond, the sureties bound themselves to be
liable in case of extension or renewal of the bond, without
28 | P a g e
 the necessity of executing another indemnity agreement
for the purpose and without the necessity of their being
notified of such extension or renewal.
• PhilAm Gen. Insurance claims that the agreement is null
and void being contrary to law, morals, good customs,
public order or public policy.
Supreme Court Ruling
• The agreement is valid; there is nothing in it that militates
against the law, good customs, good morals, public order,
or public policy.
• There was no other valid conclusion that could be reached
by the lower court. Even appellant must have seen that,
so it ought to be.
• That would account for the contention in his brief that the
stipulation as to "any extension" without the need for his
being notified was "null and void being contrary to law,
morals, good customs, public order or public policy."
• That is a pretty tall order. There is more than just a hint
of hyperbole in such a sweeping allegation. Appellant
though ought to have realized that assertion is not the
equivalent of proof.
• A little more objectivity on his part should bring the
realization that no offense to law or morals could be
imputed to such a contractual provision.
• As to good customs, that category requires something to
substantiate it. A mere denunciatory characterization
certainly cannot suffice.
• That leaves public order or public policy. It is difficult to
follow appellant's train of reasoning. He would premise it
on the indemnity agreement being a contract of adhesion.
He was not at all compelled to agree to it. He was free
to act either way. He had a choice.
• It may be more offensive to public policy, let alone
morals or good customs, if thereafter he would be
allowed to go back on his word.
• Besides, the policy underlying such a stipulation in
this litigation is clear. What was guaranteed was the
faithful performance of defendant Mutuc of his
employment as a member of the crew of a vessel plying
overseas.
• What was more logical considering the difficulty of
contacting him then for the party concerned, here
appellant, to agree in advance to any extension without
the need for notification. So, the parties agreed.
• There could be thus nothing that did offend public
policy or public order when such an arrangement
was explicitly provided for. Appellant, clearly, has
not made out a case for reversal.
Comments:
• In the case of Mutuc. we’re actually talking here of the
indemnity bond, we’re not talking here of the
principal security.
• Because the bond here was put up by PhilAmGen and
PhilAmGen demanded that an indemnity contract also be
constituted so that if it should be made to pay, the
manning agent, then it can go after the indemnitors.
• And the indemnitors expressly consented to the
renewal of the contract and extension of the bond.
• So, when the contract of the Mariner (seaman man ni,
performance bond of a seaman) was renewed several
times, automatically, the indemnity bond will also renew.
• When the seaman jumped ship, PhilAmGen now was
compelled to pay the amount of the bond. So, PhilAmGen
now wants to recover from the indemnitors.
• And the indemnitors said, “well, we we’re not notified, we
did not give our consent to the extension and the renewal
of the contract.”
• The court said “NO! you expressly consented to the
renewal and in effect consenting to the extension of
the period of the obligation.” So that’s a waiver of the
part of the indemnitors here.
• Here, the sureties are still bound even if the time of
payment was extended thrice, because of the simple fact
that they consented to the extension.
What about mere failure to demand payment? Is that
extension of period?
• No. Extension must be expressly granted by the
creditor.
What about undertaking of the part of the creditor to
hold in abeyance any action against the debtor for
collection or for specific performance, is that an
extension of payment?
• No. Extension must be expressly granted by the
creditor.
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
Case: Effect on accommodation party
Prudencio vs CA
• Appellants Prudencio, et al. are accommodation parties
who signed on December 23, 1955 the “Amendment of
Real Estate Mortgage.” Mortgaging their property to the
PNB to guaranty the loan of P10,000 extended to the
Concepcion Construction Company.
• On the same date Jose Toribio, in the same capacity as
attorney-in-fact of the Company, executed also the “Deed
of Assignment” assigning all payments to be made by the
Bureau of Public Works to the Concepcion Construction
Company on account of the contract for the construction
of the Puerto Princesa building in favor of the PNB.
• This assignment of credit to the contrary notwithstanding,
the Bureau, with approval, of the PNB made three
payments to the Company on account of the contract price
totaling P11,234.40.
• On November 14, 1958, appellants Prudencio wrote the
PNB contending that since the PNB authorized
payments to the Company instead of to PNB on
account of the loan guaranteed by the mortgage,
there was a change in the conditions of the contract
without the knowledge of appellants, which entitled
the latter to a cancellation of their mortgage
contract.
• Failing in their bid to have the real estate mortgage
cancelled, appellants filed on June 27, 1959 this action
against the PNB, the latter’s attorney in fact Jose Toribio,
and the District Engineer of Puerto Princesa, Palawan,
seeking the cancellation of their real estate mortgage.
Supreme Court Ruling
• The Deed of Assignment notwithstanding, PNB approved
the Bureau’s release of three payments directly to the
Company instead of paying the same to the Bank. This
approval was in violation of the Deed of Assignment and
without any notice to the petitioners who stood to lose
their property once the promissory note falls due without
the same having been paid because of the PNB, in effect,
waived payments of the first three releases.
• The third payment to the Company in the amount of
P4,293.60 was approved by PNB although the promissory
note was almost a month overdue, an act which is
clearly detrimental to the petitioner’s sureties.
• The PNB, in authorizing the third payment to the
Company after the promissory note became due, in
effect, extended the term of the payment of the note
without the consent of the accommodation makers
who stand as sureties to the accommodated party
and to all other parties who are not holders in due
course or who do not derive their right from the
same, including PNB.
• True, if the Bank had not been the assignee, then the
petitioners would be obliged to pay the Bank as their
creditor on the promissory note, irrespective of whether or
not the deed of assignment had been violated.
• However, the assignee and the creditor in this case are one
and the same-the Bank itself. When the Bank violated
the deed of assignment, it prejudiced itself because
its very violation was the reason why it was not paid
on time in its capacity as creditor in the promissory
note. It would be unfair to make the petitioners now
answer for the debt or to foreclose on their property.
• The petitioners who are the accommodation
parties/sureties are absolved from liability on the
promissory note and under the mortgage contract.
• The PNB is ordered to release the real estate mortgage
constituted on the property of the petitioners.
• Where the creditor bank is the payee of a note and
assignee of a deed of assignment, its extension of
the period of payment would release the
accommodation party (a surety or guarantor).
Who is an accommodation party (NIL)?
• An accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the purpose
of lending his name to some other person.
• Essentially, they stand as sureties of the party
primarily liable or of the party accommodated.
Comments:
• Another illustration of an extension of a period. The
Prudencio spouses here did not need the money; they
were just requested by a friend/relative who was an atty-
in-fact for a partnership; that wanted to get a loan from
the PNB but the PNB would not grant the loan.
29 | P a g e
• The Prudencios signed the promissory note on the
condition that the principal debtor would assign
receivables from the government in favor of the PNB that
could sufficiently cover the loan.
• But what PNB did was to allow the principal debtor to
collect, instead of government paying directly to the PNB.
• Even if the loan already matured, PNB still allowed the
government (debtor) to pay the principal debtor, instead
of directly to PNB.
• SC said that PNB, in effect, extended the period of the
note. Note that under the NIL (to those who took it in their
undergrad😊), an accommodation party is considered
as a surety of the party primarily liable or of the
party accommodated.
• The essence of the accommodation party is that the
accommodation party does not receive any valuable
consideration for signing as such.
• It is given under NIL that the defense of “no valuable
consideration received” cannot be invoked by the
accommodation party.
• But what made PNB not a holder in due course
(because he is an immediate party) is that through
its own act, it could not collect from the principal
debtor.
• So, personal defenses can be raised against the PNB. And
the spouses are then released from their obligation.
Case: Mere failure to demand
Shannon vs. Phil. Lumber & Trans Co. (PLTC)
• Defendant PLTC obtained a loan from plaintiff JWS and
executed a note promising to pay said loan. Said obligation
was secured solidarily by Walter Jones and E. Elser.
• Upon non-payment of the principal obligation on due date,
plaintiff recovered part of the obligation from Jones’
estate. Plaintiff then brought suit against defendant and
Elser for the remaining unpaid debt with interest.
• PLTC was declared in default and ordered to pay P12,000
to the plaintiff, and Elser was likewise required to pay to
the plaintiff one-half of all aforesaid sum which PLTC
should fail to pay.
• Elser appeared contending that the court erred in not
holding that plaintiff was guilty of unreasonable delay in
bringing his action thereby causing him damages.
Supreme Court Ruling
• The plaintiff let pass some years from the maturity of the
note before bringing the action for the recovery of its
amount, but the delay does not constitute laches in
the sense that it had the effect of releasing both the
principal debtor and its sureties from their
obligations, nor did it occasion loss of rights and
privileges of such moment as to give rise to the
discharge of the obligation contracted by Elser
• It is a recognized doctrine in the matter of suretyship that
with respect to the surety, the creditor is under no
obligation to display any diligence in the enforcement of
his rights as a creditor. His mere inaction, indulgence,
passiveness, or delay in proceeding against the principal
debtor, or the fact that he did not enforce the guaranty or
apply on the payment of such funds as were available,
constitute no defense at all for the su rety, unless the
contract expressly requires diligence and promptness on
the part of the creditor.
• The mere circumstance that the creditor does not
demand the compliance with the obligation
immediately upon the same becoming due, and that
he more or less delays his action, does not mean or
reveal an intention to grant an extension to the
debtor, and hence, does not itself discharge the
guaranty.
• Deferring the filing of the action does not imply a change
in the efficacy of the contract or liability of any kind on the
part of the debtor. It is merely, without demonstration or
proof to the contrary, respite, waiting, courtesy, leniency,
passivity, inaction.
• It does not constitute novation, because this must
be express. It does not engender liability, because on the
part of the creditor such cannot arise except from delay.
Case: Undertaking to hold in abeyance any action
Cochingyan Jr. vs R&B Surety and Ins. Co., Inc.
• Pacific Agricultural Suppliers (PAGRICO) was granted a
P400,000 increase in its line of credit with PNB.
• It had to secure a bond worth that amount which was
issued by R&B Surety and Insurance Co. Inc., who bound
themselves jointly and severally to comply with the
terms and conditions of the advance line.
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
• Subsequently, two identical indemnity agreements were
entered into by respondent with (1) Catholic Church Mart
(Cochingyan) and (2) PAGRICO (Villanueva) and PACOCO
(Liv). The indemnitors bound themselves to pay
Respondent an annual premium of P5,000.
• When PAGRICO failed to comply, PNB demanded from
respondent the P400,000, which it paid a total of P70,000.
• Respondent sent a formal letter to indemnitors
(petitioners) for reimbursement and for discharge of its
liability to PNB.
• The trust agreement contained a stipulation "to hold in
abeyance any action to enforce its claims."
Supreme Court
• PNB's undertaking under the Trust Agreement "to
hold in abeyance any action to enforce its claims"
against R&B Surety did not extend the maturity of
R&B Surety's obligation under the Surety Bond.
• The Principal Obligation had in fact already matured,
along with that of R&B Surety, by the time the Trust
Agreement was entered into.
• Thus, the situation was that precisely envisaged in Article
2079: “the 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 the referred to herein.”
• The theory behind Article 2079 is that an extension of time
given to the principal debtor by the creditor without the
surety of his right to pay the creditor and to be
immediately subrogated to the creditor's remedies against
the principal debtor upon the original maturity date. The
surety is said to be entitled to protect himself against the
contingency of the principal debtor or the indemnitors
becoming insolvent during the extended period.
• The underlying rationale is not present in the instant
case. As this Court has held, “mere delay or negligence
in proceeding against the principal will not
discharge a surety unless there is between the
creditor and the principal debtor a valid and binding
agreement therefor, one which tends to prejudice
[the surety] or to deprive it of the power of
obtaining indemnity by presenting a legal objection
for the time, to the prosecution of an action on the
original security.”
• In the instant case, there was nothing to prevent the
petitioners from tendering payment, if they were so
minded, to PNB of the matured obligation on behalf of R&B
Surety and thereupon becoming subrogated to such
remedies as R&B Surety may have against PAGRICO.
c. Payment of the principal debt by the debtor
• Where, in a bond, the debtor and surety have solidarily
bound themselves, but have limited the liability of
the surety to a lesser amount than that due from the
principal debtor, any payment as the latter may have
made on account of such obligation must be applied
first to the unsecured portion of the debt, for, as
regards the principal debtor, the obligation is more
onerous as to the amount not secured.
• If the creditor accepts another thing in payment (dacion
en pago) the guaranty is extinguished and does not revive
even if the thing is subsequently lost by eviction, unless
the obligation is facultative (Art. 2077)
• In case of consignation, the guarantor is released by the
consent of the creditor to the withdrawal of the
consignation (Art.1261)
What are the other modes of extinguishment of
guaranty?
• Payment of the principal obligation because guaranty is an
accessory contract.
Dacion en pago
• When payment of a sum money is paid by giving a thing,
you cannot anymore go after the guarantor, because there
was an extinguishment of principal obligation.
• It does not revive even if the thing is subsequently
lost by eviction, unless the obligation is facultative.
• Facultative - One principal prestation but with one or
more substitutes, choice belongs to DEBTOR ONLY.
• Absent indication that it is facultative, the presumption is
that the obligation is alternative, because the creditor
would be at a disadvantage if facultative.
• Facultative is never presumed.
Consignation
• In case of consignation, the guarantor is released by
the consent of the creditor to the withdrawal of the
consignation.
30 | P a g e
If the creditor accepts a determinate thing as payment
for the obligation (dacion en pago), and later on the
thing is lost by fortuitous event, can the creditor collect
from the guarantor?
• No, from the moment the creditor accepted the thing, the
obligation was extinguished because the moment he
accepted the thing, he became owner of the thing (res
perit domino – owner bears the risk of loss).
Case: Payment of the principal debt by the debtor
Hongkong Shanghai Bank vs. Aldanese
• The principal debtor having paid an amount on
account of the debt, the surety is under obligation to
pay the balance up to the amount secured by the
bond executed by him.
• Where, in a bond, the debtor and surety have solidarily
bound themselves, but have limited the liability of
the surety to a lesser amount than that due from the
principal debtor, any payment as the latter may have
made on account of such obligation must be applied
first to the unsecured portion of the debt, for, as
regards the principal debtor, the obligation is more
onerous as to the amount not secured.
d. Accidental loss of the thing before default
(taken from CTNegado ObliCon notes)
Art 1262 In order to extinguish obligation, it must be lost or
destroyed:
1. Without the fault of the debtor
2. Before the debtor incurs in delay
3. After the obligation is constituted
Presumption
Art. 1265 Whenever the thing is lost in the possession of the
debtor, it shall be presumed that the loss was due to his fault,
unless there is proof to the contrary, and without prejudice to
the provisions of Article 1165. This presumption does not apply
in case of earthquake, flood, storm, or other natural calamity.
• The burden of explaining the loss of a thing in the
possession of the debtor belongs to him.
• The debtor must show that he is free from negligence, for
negligence is presumed from the mere fact of loss.
(Tolentino)
• Except: In case of natural calamities (earthquake, flood,
storm), where lack of fault of the debtor is likely and it is
unjust to presume negligence on his part. (Tolentino)
Effects
1. In obligation to give a specific thing
Art. 1262 An obligation which consists in the delivery of a
determinate thing shall be extinguished if it should be lost or
destroyed without the fault of the debtor, and before he has
incurred in delay.
When by law or stipulation, the obligor is liable even for
fortuitous events, the loss of the thing does not extinguish the
obligation, and he shall be responsible for damages. The same
rule applies when the nature of the obligation requires the
assumption of risk.
• In the absence of law or stipulation to the contrary,
impossibility of performance, without the negligence of the
parties, prevents enforcement of an obligation. (Tolentino)
• The extinguishment of the obligation due to loss of the
thing or impossibility or performance after perfection:
➢ View 1: The entire juridical relationship is
extinguished, so that if the creditor has himself
an obligation, this is likewise extinguished. The
debtor is released from liability; but he cannot
demand the prestation which has been
stipulated for his benefit. (Tolentino)
➢ View 2: The seller (debtor) can still collect
because the loss of the thing, notwithstanding,
the other party still has to comply with his
undertaking (JBL Reyes)
• Exceptions to the law (consistent with View 1):
➢ The law expressly provides that the debtor shall be
liable even if the loss is due to fortuitous events. (Art.
1174)
➢ Express stipulation of the parties.
➢ The nature of the obligation requires the assumption
of risk.
➢ Concurrent fault or negligence of the debtor.
➢ Loss occurs after the debtor has incurred in delay.
➢ Promise to deliver the same thing to two or more
different parties.
➢ Art. 1268 below.
Art. 1268. When the debt of a thing certain and determinate
proceeds from a criminal offense, the debtor shall not be
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
exempted from the payment of its price, whatever may be the
cause for the loss, unless the thing having been offered by him
to the person who should receive it, the latter refused without
justification to accept it.
Two alternatives open to the debtor in case of unjust
refusal to receive:
• To consign the thing and thereby relieve himself from any
responsibility for such thing, or
• To just keep the thing in his possession, with the obligation
to use due diligence, subject to the general rules of
obligations, but no longer the special liability imposed by
this article. (Tolentino)
2. In obligation to give a generic thing
• Art. 1263. In an obligation to deliver a generic thing, the
loss or destruction of anything of the same kind does not
extinguish the obligation.
• As long as there are things of the kind stipulated, whether
or not they are possessed by the obligor, the obligation
subsists, because generic things are not considered lost.
(Tolentino)
• Food for thought: The maxim “genus never perishes” is
not actually true. When all the things of the kind disappear
or perish, the obligation to deliver a generic object is
extinguished. (Tolentino)
• Delimited generic obligations - When there is a
limitation of the generic object to a particular existing
mass or group of things, the obligation is extinguished by
the loss of the particular mass or group or limited quantity
from which the prestation has to be taken, or by the
impossibility of getting from it the things for the
prestation. (Tolentino)
3. In case of partial loss
• Art. 1264. The courts shall determine, whether under the
circumstances, the partial loss of the object of the
obligation is so important as to extinguish the obligation.
• This article is based on the presumption that the partial
loss is not imputable to the fault or negligence of the
debtor. (Tolentino)
• General rule: The obligation subsists, and the debtor
must deliver the impaired object to the creditor; the debtor
is not liable for damages. (Tolentino)
• Exception: When the portion that is lost is of such an
extent or nature that the obligation would not have been
constituted without it, then the obligation is extinguished.
(Tolentino)
• In any case, the intention of the parties is the controlling
factor in the solution of each case of partial loss.
(Tolentino)
4. Action against third person
• Art. 1269. The obligation having been extinguished by the
loss of the thing, the creditor shall have all the rights of
action which the debtor may have against third persons by
reason of the loss.
• This refers not only to the rights and actions which the
debtor may have against third persons, but also to any
indemnity which the debtor may have already received.
(Tolentino)
• This article is applicable to the money obtained from the
insurance of the thing lost or destroyed.
If the obligation consists in delivery of a determinate
thing and it was secured by a guarantee, and it is lost
due to fortuitous event, before the period arrives for the
debtor to perform, what happens to the obligation? Is
the obligation of the debtor converted to a monetary
obligation to pay the thing?
• No, the obligation is extinguished by a fortuitous event.
• Therefore, if the obligation of the debtor is extinguished,
the guaranty is also extinguished.
e. Remission of debt
(taken from CTNegado ObliCon notes)
Concept
• Condonation is an act of liberality, by virtue of which,
without receiving any equivalent, the creditor renounces
the enforcement of the obligation which is extinguished in
its entirety or in that part or aspect of the same to which
the condonation refers.
• It is an essential characteristic of remission that it be
gratuitous, that there is no equivalent received for the
benefit given; once such equivalent exists, the nature of
the act changes
1. Dation in payment - receive a thing different from that
stipulated
31 | P a g e
 2. Novation - object or principal conditions of the
obligation should be changed
3. Compromise - when the matter renounced is in
litigation or dispute and in exchange of some
concession which the creditor receives
• An offer of a donation which must be accepted in the
proper form depending on the law.
• Failure to demand payment is not a condonation, there
must be intention to donate, unless you can prove
intentional failure to demand and prescriptive period has
ended.
Kinds of Condonation
1. As to extent
• TOTAL
• PARTIAL - refer to the amount of indebtedness, or to an
accessory obligation (such as pledge or interest) or to
some other aspect of the obligation (such as solidarity)
2. As to form
• Art 1270 Par 1 Condonation or remission is essentially
gratuitous and requires the acceptance by the obligor.
It may be expressly or impliedly.
• EXPRESS - when made formally, accordance with the
forms of ordinary donations
• IMPLIED - inferred from the acts of parties; Arts. 1271
and 1272
3. As to date of delivery
• INTER VIVOS - takes effect during lifetime of the donor
• MORTIS CAUSA - takes effect upon the death of the
donor and must comply with the formalities of wills
Requisites of Condonation
1. Debts must be existing and demandable at the time
remission is made
2. The renunciation of the debt must be gratuitous or without
any equivalent or consideration
3. Debtor must accept the remission
• Unilateral renunciation is possible under Art. 6 and
nothing prevents him from abandoning his rights.
• Parties must be capacitated and must consent;
requires acceptance by the obligor, implied in mortis
causa (effective upon the death of the creditor) and
express inter vivos (effective during the lifetime of the
creditor)
a. When formalities required
• Art. 1270 par. 2 One and the other kind shall be subject
to the rules which govern in officious donations. Express
condonation shall, furthermore, comply with the forms of
donation.
• If the donation involves movable (personal) property
and the value is P5,000 or more, it must be made in
writing.
• For donation of an immovable (real) property, it should
be executed in a public document → one that is sworn
and subscribed to before a notary public.
• It is a bilateral act which requires acceptance by the debtor
• Subject to the rules on donations with respect to
acceptance, amount and revocation
• Formalities of a donation are required in the case of an
express remission
• Revocable
➢ Subject to the rule on inofficious donations
(excessive, legitime is impaired). The heirs will have
to prove that the condonation was excessive such that
their legitime is impaired.
➢ Legitime → the portion of your estate that you cannot
alienate gratuitously as it’s reserved for your
compulsory heirs.
Q: After condonation, can the creditor change his mind?
• Resort to the rules on donation. In donations mortis causa,
it is generally revocable at will. In donations inter vivos,
generally, it cannot be revoked, except if the removal is
based on specific grounds:
1. Birth of a child, Appearance of a child, Adoption of a
child
2. Acts of ingratitude
3. Noncompliance of condition
Yam v. CA
• Petitioners entered into a Loan Agreement with
Assumption of Solidary Liability whereby they were given
P500,000 by private respondent.
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
• Denominated the first Industrial Guarantee and Loan Fund
(IGLF), the loan was secured by a chattel mortgage on the
printing machinery in petitioners' establishment.
• Petitioners subsequently obtained a second IGLF loan of
P300,000. They made a partial payment of P50,000 on
their second loan.
• They wrote to private respondent on their proposal to
settle their obligation, to which it replied with a counter-
offer, namely, that it would reduce the penalty charges up
to P1.4M, provided that petitioners can pay their obligation
on or before July 30, 1986.
• On July 31, 1986, petitioners paid P410,854.47, receipt of
which was acknowledged by Destajo. There was still a
balance of P266,146.88 left, respondent filed a case for
the collection.
• Petitioners contended that after receiving respondent's
letter of conditional offer to reduce their penalty charges,
they met with Sobrepenas, president of respondent
corporation.
• The latter agreed to waive the penalties and service
charges, provided that petitioners paid the principal and
interest, less the earlier payment of P50,000. This is why
they only paid P410,854.47, with the voucher having the
notation "full payment of IGLF loan."
Supreme Court Ruling
• Express condonation must comply with the forms of
donation. Art. 748, par. 3 provides that the donation and
acceptance of a movable, the value of which exceeds
P5,000, must be made in writing, otherwise the same shall
be void.
• Additionally, under Art. 417, par. 1, obligations, actually
referring to credits, are considered movable property.
• In this case, it's undisputed that the alleged agreement
to condone P266,146.88 of the second IGLF loan
was never made in writing.
• The notation "full payment of IGLF loan" also doesn't bind
private respondent. It merely states petitioners' intention
in making the payment.
• If private respondent really condoned the amount in
question, petitioners should've asked for a certificate
of full payment from respondent corporation, just
like what they did when they paid off their first loan.
• The countersigning of the voucher by Destajo did no
more than acknowledge the receipt of payment as
she had no authority to condone any indebtedness
as her duties were limited to "issuing official receipts,
preparing check vouchers and documentation."
Presumptions in Condonation
1. Art 1271 The DELIVERY of a private document evidencing
a credit, made voluntarily by a creditor to the debtor, IMPLIES
the renunciation of the action which the former had against the
latter.
• Not applicable to public documents because there is
always a copy in the archives which can be used to
prove the credit.
• Surrender of weapon of enforcement of his rights
2. Art 1272 Whenever the private document in which the debt
appears is found in the POSSESSION of the debtor, it shall be
presumed that the creditor delivered it voluntarily, unless the
contrary is proved.
• Only prima facie and may be overcome by contrary
evidence to show that, notwithstanding the
possession by the debtor of the private document of
credit, it has not been paid.
3. Art 1274 It is presumed that the accessory obligations of
pledge has been REMITTED when the thing pledged, after its
delivery to the creditor, is found in the possession of the
debtor, or a third person who owns the thing.
Effects of Condonation
1. In general – extinguishes either totally or partially
2. In case of joint or solidary obligations – affects the share
corresponding to the debtor in whose benefit the remission
was given.
Joint Co-Debtors
Only applies to the share of the joint
co-debtor to whom the benefit of
remission was given
Joint Creditors Only applies to the amount due to the
creditor condoning the obligation
Solidary Creditors
Applies to the entire obligation
Solidary Debtors
32 | P a g e
Governing Rules in Condonation
• Art. 1270. Condonation or remission is essentially
gratuitous and requires the acceptance by the obligor. It
may be made expressly or impliedly.
One and the other kind shall be subject to the rules which
govern inofficious donations. Express condonation shall,
furthermore, comply with the forms of donation.
• Condonation is an offer of a donation which must be
accepted in the proper form depending on the law.
Renunciation of Principal or Accessory Obligations
• Effect: Art. 1273 The renunciation of the principal debt
shall extinguish the accessory obligations; but the waiver
of the accessory obligations shall leave the former in force.
• Rationale: The accessory follows the principal, not the
other way around.
A. If there is a condonation of a joint obligation, the guaranty
discharged is only up to that specific condoned obligation
B. If in favor of the debtor, it releases the guarantor
C. If in favor of one co-guarantor, without the consent of the
others, it benefits the latter to the extent of the share of
the one released. If they consent, they are not released.
Example 1: The creditor condones the entire obligation.
Debtor owes the creditor P100,000, ingon ang creditor
nidaog man ko lotto jackpot so I will forgive the
obligation. 1 week later kay nahurot na niya sa Casino
ang iyang daug, so niadto sya sa guarantor. Can he
Collect from the Guarantor?
• No, because the guarantor benefits from the
condonation of the principal obligation.
What if creditor tells guarantor that he condones his
obligation to guarantee the debt? Can creditor collect
from the debtor?
• Yes, because only the guaranty is extinguished, not the
Principal Obligation.
Example 2: P1 million obligation, and the creditor
condones P400,000. The balance would be P600,000.
And when the debtor fails to pay on the due date, can
the creditor collect P1 million from the guarantor?
• No, because the remission benefits the guarantor.
If the guarantor obtained a remission of the debt up to
the extent of P400,000, how much can the guarantor
obtain from the debtor as reimbursement?
• The guarantor cannot ask P1 million from the debtor, only
up to P600,000, because through his own effort the
obligation was condoned up to P400,000.
• The guarantor never imparted with any amount to get the
remission so he can’t ask for the entire P1 million from the
debtor. All he paid was P600,000 pesos and only that can
he get from the debtor as reimbursement.
• Distinguish what was condoned, whether it was the
guaranty or the principal obligation.
f. Merger of parties
Confusion in Principal or Accessory Obligation
• Art. 1276. Merger which takes place in the person of the
principal debtor or creditor benefits the guarantors.
Confusion which takes place in the person of any of the
latter does not extinguish the obligation.
• Merger releases the guarantor because their obligation is
merely accessory.
• When guarantor acquires the credit, his obligation as
guarantor is extinguished, but the principal obligation
subsists which he can enforce against the debtor and other
co-guarantors.
• When mortgaged property belongs to a third person, and
mortgagee acquires a part of the property, the same is
released from the encumbrance. Credit is not
extinguished, even in part.
• When mortgagee acquires ownership of the entire
mortgaged property, mortgage is extinguished; but
obligation secured thereby is not necessarily extinguished;
may become an unsecured obligation.
Between creditor and debtor
• Extinguishes accessory obligation of guaranty because the
principal obligation is extinguished.
• He is now the creditor of his own obligation, and he cannot
collect guaranty from the guarantor if he is the debtor. He
does not pay himself as a creditor.
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
Between creditor and guarantor
• Does not extinguish principal obligation, but the guaranty
is extinguished.
• The guarantor is now the creditor, the guaranty is
extinguished since if the debtor cannot pay, he cannot
demand payment from himself as guarantor.
Between debtor and guarantor
• The guaranty is extinguished, because the debtor cannot
be his own guarantor.
• But the sub-guarantor if any, is not released.
• Other securities, pledges, mortgages are not affected.
g. Compensation
• Compensation takes place when two persons, in their own
right, are creditors and debtors of each other.
• Legal compensation takes place by operation of law.
If the debtor has an obligation of P100,000 and the
creditor has an obligation to the debtor for P50,000, and
then debtor fails to pay on demand, can the guarantor
claim compensation?
• Compensation between the creditor and the debtor
benefits the guarantor. Thus, the guarantor can invoke
compensation, but only to the extent of P50,000. Hence,
the guarantor is only bound to pay P50,000 to the creditor.
• In which case, the guarantor can only collect P50,000 from
the debtor as reimbursement.
Has legal compensation taken place, even without the
debtor and creditor agreeing over it?
• Yes, we have learned in ObliCon again that legal
compensation takes place by operation of law.
If the debtor owes creditor P1 million, creditor owes
guarantor P400,000, and debtor defaults payment of the
obligation. Can the guarantor invoke legal
compensation?
• Yes, the guarantor may invoke compensation between
himself and creditor.
• Here, however, the guarantor can collect from the debtor
the entire P1 million as reimbursement.
The debtor owes the creditor P100,000 secured by
guarantor. The creditor owes the guarantor P70,000.
Both debts consist in payment of sum of money and are
due and demandable and both are liquidated. The
creditor demands payment from debtor, debtor fails to
pay so creditor demands payment from the guarantor.
The guarantor pays P30,000. The creditor refuses to
accept it. Can guarantor compel the creditor to accept
only P30,000 instead of P100,000?
• Yes, guarantor can compel creditor to accept the P30,000
because the guarantor can invoke legal compensation.
• However, the guarantor can collect P100,000 from the
debtor.
Requisites for Legal Compensation
Art 1279 In order that compensation may be proper it is
necessary that:
1. Each one of the obligors be bound principally and that at
the same time a principal creditor of the other
• A guarantor or surety is not a principal; principal
debtor cannot set up by way of compensation what his
creditor owes to his surety
• Exception: A guarantor may set up compensation as
regards what the creditor may owe the principal
debtor (Art. 1280)
➢ If the principal debtor has a credit against the
creditor, which can be compensated, it would
mean the extinguishment of the guaranteed
debt; either totally or partially
• Solidary debtor cannot set up the obligation of the
creditor in favor of a co-debtor, except as regards the
share of the latter
2. That both debts consist in a sum of money, or if the things
due are consumable, they be of the same kind and also of
the same quality if the latter has been stated
3. That the two debts are due
4. That they be liquidated and demandable
• "Liquidated debts” - when its existence and amount
are determined
• "Demandable” - enforceable in court
• What are not subject to compensation
➢ Period which has not yet arrived
➢ Suspensive condition that has not yet happened
➢ Obligation that cannot be sued upon (e.g. natural
obligation)
33 | P a g e
5. That over neither of them there be any retention or
controversy, commenced by third persons and
communicated in due time to the debtor
• Retention - credit of one of the parties is subject to
the satisfaction of the claim of a third person
• Controversy - third person claims he is the creditor
of one of the parties
• Retention or controversy must be communicated "in
due time" → period before legal compensation takes
place
h. Novation
(taken from CTNegado ObliCon notes)
Concept
• Novation is the extinguishment of an obligation by the
substitution or change of the obligation by a subsequent
one which extinguishes or modifies the first either by:
1. Changing the object or principal conditions
2. Substituting the person of the debtor
3. Subrogating a third person in the rights of the creditor
• Unlike other acts of extinguishing obligation, novation is a
juridical act of dual function in that at the time it
extinguishes an obligation, it creates a new one in lieu of
the old.
• Doesn’t operate as absolute but only a relative extinction.
Art 1292 In order that obligation may be extinguished by
another which substitutes the same, it is imperative that
1. It be so declared in unequivocal terms (express)
2. Old and the new obligations be on every point incompatible
with each other (implied)
Requisites of Novation
1. Previous valid obligation → not only valid, but has not been
extinguished by any cause
2. The agreement of all parties to the new contract → consent
of all parties to the substitution
3. Extinguishment of the old contract → either express or
implied
4. Validity of the new one
5. Animus novandi or intent to novate (especially for implied
novation and substitution of debtors)
Comments:
• Novation is not presumed. There is no novation in the
absence of a new contract executed by the parties.
• It must be established that the old and new contracts are
incompatible in all points, or that the will to novate appear
by express agreement of the parties or in acts of
equivalent import (IMPLIED NOVATION).
• Novation is not a mode of extinguishing criminal
liability. It may prevent the rise of criminal liability as long
as it occurs prior to the filing of the criminal information in
court
• Express novation: expressly disclose that their object in
making the new contract is to extinguish the old contract
• Implied novation: no specific form is required, all that is
needed is incompatibility between original and subsequent
contracts
• Test of incompatibility: If the two contracts can stand
together and each one having independent existence
• The change must refer to the object, the cause or the
principal conditions of the obligations. Accidental
changes do not produce novation.
Basic Principle in Novation
• Novation is not presumed.
• However, there can be implied novation if it can be
established that the old and new contracts are
incompatible in all points.
Examples based on jurisprudence (whether there is
extinctive novation):
• Change to installment – no extinctive novation
• Giving of additional security – no extinctive novation
• Addition of a penal clause – no extinctive novation
• Change of place, manner of payment – no extinctive
novation
• Change in terms of payment (like extension of time) – no
extinctive novation
• Shorten the time for payment– It is extinctive novation
based on jurisprudence. See Ynchausti vs. Yulo.
Atty’s Gravador:
• Final judgments in civil cases (stating that your utang is
10M), if there is no agreement as to how you will pay, it is
immediately subject to execution by the sheriff.
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
• Assuming that the debtor was able to convince the creditor
to pay in 3 years’ time. Are you allowed to do it? Yes. It is
allowed, because any court judgment in your favor is a
right which you can waive.
• See Magbanua vs. Uy, May 6, 2005
• Fua Cam Lu v. Yap Fauco, G.R. No. 48797 74 Phil 287 vs.
Mead v. McCullough, G.R. No. 6217, 21 Phil 124
(Conflicting)
Two types of novation:
1. Extinctive - Extinguishes the principal obligation
2. Modificatory - Modifies the principal obligation
a. If less burdensome – guaranty subsists
b. If more burdensome and guarantor did not consent-
guaranty extinguished
When the principal obligation is extinguished
• The original obligation is extinguished, so the guaranty will
be also be extinguished.
When the principal obligation is modified
• If less burdensome, the guaranty subsists.
• If more burdensome, the guaranty is extinguished, if the
guarantor did not consent.
• If the debt is merely increased, the guarantor is liable for
the original debt only.
Does novation extinguish guaranty?
• If the principal obligation is extinguished and a new one is
entered into between the parties, then the guaranty is
extinguished.
• But if it’s only modificatory in that the new obligation
results in a less burdensome obligation on the part of the
debtor, then the guaranty is NOT extinguished. But if the
new obligation results in a more burdensome obligation on
the part of the debtor, then the guaranty is extinguished.
i. Death
Death of the guarantor
• Does not extinguish the guaranty (See De Guzman v.
Santos – where the estate of the deceased guarantor was
made to pay the obligation)
Death of the debtor
• Does not extinguish the guaranty
Case: Death of debtor does not extinguish the suretyship
Stronghold Insurance vs. Republic Asahi
• Republic Asahi contracted with JDS for construction of
roads in its compound, with Stronghold Insurance as
surety.
• JDS failed to perform its obligation, so there was a claim
for damages and to forfeit the performance bond.
• Stronghold refused to pay. Stronghold’s main defense is
that the principal debtor JDS died, so the accessory
obligation of surety is also extinguished.
Supreme Court Ruling
• As a general rule, the death of either the creditor or
the debtor does not extinguish the obligation.
Obligations are transmissible to the heirs, except
when the transmission is prevented by the law, the
stipulations of the parties, or the nature of the
obligation.
• Only obligations that are personal or are identified with the
persons themselves are extinguished by death.
• In the present case, whatever monetary liabilities or
obligations Santos had under his contracts with
respondent were not intransmissible by their nature,
by stipulation, or by provision of law. Hence, his
death did not result in the extinguishment of those
obligations or liabilities, which merely passed on to his
estate.
• Death is not a defense that he or his estate can set up to
wipe out the obligations under the performance bond.
Consequently, petitioner as surety cannot use his death to
escape its monetary obligation under its performance
bond.
• The surety’s obligation is not an original and direct
one for the performance of his own act, but merely
accessory or collateral to the obligation contracted by the
principal.
• Nevertheless, although the contract of a surety is in
essence secondary only to a valid principal obligation, his
liability to the creditor or promisee of the principal
is said to be direct, primary and absolute; in other
words, he is directly and equally bound with the
principal.
34 | P a g e
• Under the law and jurisprudence, respondent may sue,
separately or together, the principal debtor and the
petitioner herein, in view of the solidary nature of
their liability.
• The death of the principal debtor will not work to
convert, decrease or nullify the substantive right of
the solidary creditor (surety).
• Evidently, despite the death of the principal debtor,
respondent may still sue petitioner alone, in accordance
with the solidary nature of the latter’s liability under the
performance bond.
j. Failure to send notice of default
General Insurance and Surety Corp. vs. Republic
• A stipulation in the bond expressly states that "when the
bond expires on a certain date, it will be cancelled 10 days
after the expiration, unless the surety is notified of any
existing obligation thereunder, or unless the surety renews
or extends it in writing for another term."
• The giving notice of existing obligation was a
condition precedent to further liability of the surety
and that in default of such notice, liability on the
bond automatically ceased.
Chapter 4 – Legal and Judicial Bonds
Art. 2082. The bondsman who is to be offered in virtue of a
provision of law or of a judicial order shall have the
qualifications prescribed in Article 2056 and in special laws.
Art. 2083. If the person bound to give a bond in the cases of
the preceding article, should not be able to do so, a pledge or
mortgage considered sufficient to cover his obligation shall be
admitted in lieu thereof.
Art. 2084. A judicial bondsman cannot demand the exhaustion
of the property of the principal debtor.
A sub-surety in the same case, cannot demand the exhaustion
of the property of the debtor of the surety.
I. Judicial Guaranty
• Judicial bondsman cannot invoke benefit of exhaustion of
the property of the principal debtor
• The judicial guarantor must have capacity, integrity, and
sufficient property.
• Pledge or mortgage is admissible in lieu of personal
guaranty
• There is no benefit of exhaustion, either for guarantors or
sub-guarantors (Art. 2084)
• The claim against the Sureties must be proved in the same
action as against the Principal and included in the final
Judgment (see Rules of Court)
• Where payment on the bond was premised upon the non-
compliance of the contract by the principal debtor, the
liability of the guarantor is subsidiary and not solidary; nor
can he be held responsible if the complaint against the
debtor is dismissed.
TITLE XVI - PLEDGE, MORTAGE AND ANTICHRESIS
CHAPTER I - PROVISIONS COMMON TO PLEDGE AND
MORTGAGE
A. They must be constituted to secure fulfillment of a
principal obligation
B. Constituted only by the absolute owner of the thing
pledged or mortgaged
C. 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
D. Thing pledged or mortgaged may be alienated at the
instance of the creditor
E. Pledge or mortgage are indivisible
F. A promise to constitute pledge or mortgage gives rise to
personal action only
Pledge
• An accessory obligation whereby personal property of the
debtor or a third person is delivered to the creditor or to a
third person by common agreement, to secure the
performance of a principal obligation, usually a loan.
Real mortgage
• A contract in which the debtor (or a third person)
guarantees to the creditor the fulfillment of a principal
obligation, subjecting for the faithful compliance therewith
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
a real property in case of non-fulfillment of said obligation
at the time stipulated.
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. (2140)
Comments:
• Both pledge and mortgage are real security undertakings
unlike guaranty and suretyship which are personal security
undertakings.
• In pledge, unlike in suretyship and guaranty wherein a
third person other than the debtor secures the debt,
property is put up or offered as security for the security of
obligation. In real estate mortgage, real property is offered
as security.
• In chattel mortgage, personal property or chattel remains
with the mortgager property. Unlike pledge wherein the
personal property is delivered to the creditor or the third
person.
Case: Common characteristics
Flancia vs. Court of Appeals
• This is an action to declare null and void the mortgage
executed by defendant Oakland Development Resources
Corp. in favor of defendant William Ong Genato over the
house and lot plaintiff spouses Godofredo and Dominica
Flancia purchased from defendant corporation.
• The plaintiffs allege that they purchased from defendant
corporation; that by virtue of the contract of sale,
defendant corporation authorized plaintiffs to transport all
their personal belongings to their house at the aforesaid
lot; that on 24 December 1992, plaintiffs received a copy
of the execution foreclosing the mortgage several lots
formerly owned by defendant corporation including subject
lot of plaintiffs; that the alleged mortgage of subject lot is
null and void as it is not authorized by plaintiffs pursuant
to Article 2085 of the Civil Code which requires that the
mortgagor must be the absolute owner of the mortgaged
property; that as a consequence of the nullity of said
mortgage, the execution foreclosing the mortgage is
likewise null and void; that plaintiffs advised defendants to
exclude subject lot from the auction sale but the latter
refused.
• Defendant Genato, on the other hand, averred that co-
defendant Oakland Development Resources Corporation
mortgaged to Genato two parcels of land covered as
security and guaranty for the payment of a loan in the sum
of P2M; that said real estate mortgage has been duly
annotated at the back of its Transfer Certificate of Title;
that for nonpayment of the loan of 2M defendant Genato
filed an action for foreclosure of real estate mortgage
against co-defendant corporation; that after trial, decision
was granted to foreclose the said mortgage; that the
alleged plaintiffs’ Contract to Sell does not appear to
have been registered with the Register of Deeds to
affect defendant Genato and the latter is thus not
bound by the plaintiffs’ Contract to Sell.
Supreme Court Ruling
• In the contract between petitioners and Oakland, aside
from the fact that it was denominated as a contract
to sell, the intention of Oakland not to transfer
ownership to petitioners until full payment of the
purchase price was very clear.
• Acts of ownership over the property were expressly
withheld by Oakland from petitioner. All that was
granted to them by the “occupancy permit” was the
right to possess it.
• Clearly, when the property was mortgaged to Genato
in May 1989, what was in effect between Oakland
and petitioners was a contract to sell, not a contract
of sale.
• Oakland retained absolute ownership over the property.
Hence, it was entitled to mortgage the same to Genato.
• Genato’s registered mortgage was superior to
petitioner’s contract to sell, subject to any liabilities
Oakland may have incurred in favor of petitioners by
irresponsibly mortgaging the property to Genato
despite its commitments to petitioners under their contract
to sell.
• A mortgagee has the right to rely on what appears in the
title presented to him. In the absence of anything to
arouse suspicion, he is under no obligation to look beyond
the certificate and investigate the title of the mortgagor
appearing on the face of the said certificate.
35 | P a g e
Comments:
• The spouses here objected to the foreclosure of the
mortgage, claiming that a portion of the property being
mortgaged was already sold to them.
• SC here distinguished the contract of sale and contract to
sell. It said they only had a contract to sell which
means that the seller here is still the absolute of
owner of the property. Hence, mortgage was valid.
• If the property was already sold under the contract of sale,
then there is nothing more to mortgage.
• In their contract with the seller, the contract states that
while the sps are allowed to take possession of the
property, but the ownership (title) of the property remains
with Oakland (the seller).
A. They must be constituted to secure fulfillment of a
principal obligation
• They may secure all kinds of obligations, pure or
conditional.
• The principal obligation may be future (except for
chattel mortgage), but the security obligation does not
come into existence until the principal does.
• The principal obligation may be natural. Voidable or
unenforceable, provided the fact is known to the pledgor
or mortgagor.
You owe A 1M loan, I secured the obligation by
executing mortgage in A’s favor over my property. I am
the absolute owner of a parcel of land. And I executed a
mortgage in your obligation to A. When you defaulted in
the payment of the obligation, A sent a demand letter to
me. Who is liable for the payment of the obligation? Can
I be held personally liable over your obligation?
• As far as I am concerned, the action that A can file against
me is the foreclosure of the mortgage.
• A cannot hold me personally liable like a guarantor or a
surety, because I am a mortgagor.
• A third-party mortgagor cannot be held personally
liable to pay the principal obligation. It is only his
property which will be affected; which will be sold on
a public sale to answer to the principal obligation.
• Unless the third-party pledger or third-party mortgagor
personally undertakes or likewise undertakes to pay the
principal obligation, then he/she cannot be liable for the
principal obligation.
NOTE: Dragnet clause/blanket mortgage is not included
in the 2nd exam. This is part of the finals coverage. I
included it here for a holistic understanding of the
introduction to real securities.
What do you call that stipulation in the contract of
guaranty where the guarantor undertakes to secure not
only the current obligation but also such other
obligations that maybe incurred by the debtor?
• Continuing Guaranty or Comprehensive Guaranty
• The equivalent of that in mortgage is the dragnet clause
or the blanket mortgage clause.
What is the dragnet clause or the blanket mortgage
clause?
• Mortgage which 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.
Example: You have a dragnet clause and subsequently,
an obligation is incurred by the debtor, and that
particular obligation is secured by another distinct
security undertaking. Can he immediately go after the
property subject of the dragnet clause in case of default?
• Notwithstanding the presence of a prior dragnet clause,
the creditor must first go after the security undertaking to
satisfy this particular obligation.
• The mortgage with such a clause will not secure a loan that
expresses that it is secured by another security.
• When the mortgagor takes a loan for which another
security was given, it could not be inferred that such
loan was made in reliance solely on the original
security with the dragnet clause but rather on the
new security given.
• There is a need to respect the existence of the other
securities given for other loans. This is called the reliance
on security test. (Prudential Bank vs. Alviar, et al., G.R.
No. 150197, July 28, 2005).
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
Case: Mortgage given to secure future advancements
Mojica vs. CA
• Plaintiff Leonardo Mojica (deceased) contracted a loan of
P20,000.00 from defendant Rural Bank of Kawit, Inc. (now
respondent). This loan was secured by a real estate
mortgage executed on the same date by the plaintiff
spouses Leonardo Mojica and Marina Rufido.
• The real estate mortgage contract states among others:
... agreement for the payment of the loan of P20,000.00
and such other loans or other advances already obtained
or still to be obtained by the mortgagors ...
2. ... but if the mortgagors shall well and truly fulfill the
obligation above stated according to the terms thereof
then this mortgage shall become null and void.
• The loan of P20,000.00 by the plaintiff spouses was fully
and completely paid. A new loan in the amount of
P18,000.00 was obtained by plaintiff spouses from the
defendant Rural Bank which loan matured.
• No formal deed of real mortgage was constituted
over any property of the borrowers, although the top
of the promissory note dated March 5, 1974, contained the
following notation. “This promissory note is secured by a
Real Estate Mortgage executed before the Notary Public of
the Municipality of Kawit, Mrs. Felisa Senti”
• The Real Estate Mortgage mentioned above is the
registered mortgage which guaranteed the already
paid loan of P20,000.00 granted on February.
• Spouses Leonardo Mojica and Marina Rufido failed to pay
their obligation after its maturity, which prompted the
bank to extrajudicially foreclose the real estate mortgage
on the justification that it was adopted as a mortgage for
the new loan of P18,000.00.
• The proceeds from the sale of the piece of land of plaintiff
spouses were applied to their outstanding obligation with
defendant bank
• Meanwhile, the son of petitioners-spouses, attempted to
pay the debt of P18,000.00 which the defendant rural bank
received and accepted with the issuance of the defendant's
official receipt.
• Upon inquiry by Dionisio Mojica on the unpaid balance of
the loan, the respondent rural bank issued a 'Computation
Slip’ indicating therein, that as of August 14, 1981, the
outstanding balance plus interest computed from March 5,
1975 was P21,272.50 (Ibid.).
• However, the bank executed an affidavit of consolidation
of ownership, which it subsequently filed with the Register
of Deeds of Cavite.
• As a result, a TCT was issued in its favor by the
Register of Deeds. The bank then refused to allow
Dionisio Mojica to pay the unpaid balance of the loan which
resulted in the filing of a complaint.
Supreme Court Ruling
• It has long been settled by a long line of decisions that
mortgages given to secure future advancements are
valid and legal contracts; that the amounts named
as consideration in said contract do not limit the
amount for which the mortgage may stand as
security if from the four corners of the instrument
the intent to secure future and other indebtedness
can be gathered.
• A mortgage given to secure advancements is a
continuing security and is not discharged by
repayment of the amount named in the mortgage,
until the full amount of the advancements are paid
(Lim Julian v. Lutero, 49 Phil. 704-705 [1926]).
• In fact, it has also been held that where the annotation
on the back of a certificate of title about a first
mortgage states “that the mortgage secured the
payment of a certain amount of money plus interest
plus other obligations arising there under,” there
was no necessity for any notation of the later loans
on the mortgagors' title.
• It was incumbent upon any subsequent mortgagee or
encumbrances of the property in question to examine the
books and records of the bank, as first mortgagee,
regarding the credit standing of the debtors.
• The evidence on record shows that the amounts of
P4,700.00 and P9,958.00 were accepted by the bank on
July 19 and August 11, 1980 as deposits for conventional
redemption after the property covered by real estate
mortgage became the acquired asset of the bank and
priced at P85,000.00 and after petitioner had lost all rights
of legal redemption because more than one year had
already elapsed from June 29, 1979, the date the
certificate of sale was registered in the office of the
Registry of Deeds of Cavite.
36 | P a g e
• Indeed, the conventional redemption was subject to be
exercised up to March 3, 1982 and was extended up to
April 19, 1982 for a fixed amount of P85,000.00.
• The respondent bank even favored the petitioner by giving
them the first preference to repurchase the property, but
they failed to avail of this opportunity, although the bank
"is certainly disposed to release at anytime" the deposits.
• The evidence on record also shows that the mortgage
property was auctioned on June 27, 1979. The only bidder
was the respondent bank which bid for P26,387.04. As the
highest bidder, the respondent bank can rightfully
consolidate its title over the property.
• As aptly stated by respondent Court: these contracts can
be constituted only by the absolute owner of the thing
pledged or mortgaged.
➢ but the pledgor or mortgagor need not be a party to
the principal obligation.
➢ a mortgage of property not owned by the mortgagor
is void. Even when such mortgagor is registered and
the creditor buys the mortgaged property upon its
foreclosure, the creditor cannot be deemed to acquire
a valid title as a bona fide purchaser, sin ce the
creditor could not acquire no better right as purchaser
than those it had as mortgagee.
B. Constituted only by the absolute owner of the thing
pledged or mortgaged
• A pledge or mortgage must be constituted by the absolute
owner of the thing pledged mortgaged because of the
possibility that it will be sold to satisfy payment of
the principal obligation. You cannot dispose of
something you never own.
• But the pledgor or mortgagor need not be a party to
the principal obligation (2085, last par.)
• A mortgage of property not owned by the mortgagor
is void. Even when such mortgage is registered and the
creditor buys the mortgaged property upon its foreclosure,
the creditor cannot be deemed to acquire a valid title as a
bona fide purchaser, since the creditor could acquire no
better rights a purchaser than those it had as mortgagee.
• Even if you register the mortgage (this is a
requirement for mortgages), that is still void if the
mortgagor is not the absolute owner of the property
mortgaged.
• You cannot ratify a void contract.
Case: Mortgage constituted only before issuance of
patent to the mortgagor
Vda. De Bautista vs. Brigida Marcos, et al
• Defendant Brigida Marcos obtained a loan in the amount
of P2,000 from plaintiff Cristina Marcel Vda. de Bautista
and to secure payment thereof conveyed to the latter by
way of mortgage a two (2)-hectare portion of an
unregistered parcel of land.
• Subsequently, mortgagor Brigida Marcos filed in behalf of
the heirs of her deceased mother Victoriana an application
for the issuance of a free patent over the land in question.
• As a result, a Free Patent was issued to the applicants and
was registered in their names.
• Defendant Brigida Marcos' indebtedness of P2,000 to
plaintiff having remained unpaid, plaintiff filed the present
action against Brigida and her husband for the payment or
in default of the debtors to pay, for the foreclosure of her
mortgage on the land give as security.
• Defendants moved to dismiss the action, pointing out that
the land in question is covered by a free patent and could
not, therefore, under the Public Land Law, be taken within
five years from the issuance of the patent for the payment
of any debts of the patentees contracted prior to the
expiration of said five-year period.
Supreme Court Ruling
• The right of plaintiff-appellee to foreclose her mortgage on
the land in question depends not so much on whether she
could take said land within the prohibitive period of five
years from the issuance of defendants' patent for the
satisfaction of the indebtedness in question, but on
whether the deed of mortgage is at all valid and
enforceable, since the land mortgaged was
apparently still part of the public domain when the
deed of mortgage was constituted.
• As it is an essential requisite for the validity of a mortgage
that the mortgagor be the absolute owner of the thing
mortgaged (Art. 2085), the mortgage here in question
is void and ineffective because at the time it was
constituted, the mortgagor was not yet the owner of
the land mortgaged and could not, for that reason,
encumber the same to the plaintiff-appellee.
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
• Thus, a mortgage executed before the issuance of a
patent to the mortgagor is void and ineffective.
Comments:
• Under CA 141, if I constitute a mortgage over a property
within 5 years from the draft of the patent, the mortgage
is void because the grantee mortgaging a property which
is still considered public land.
• The mortgagor here was not the registered owner because
the property was mortgaged prior to the issuance of a free
patent in her name.
• Therefore, the court did not consider her to be the absolute
owner of the property at the time she mortgaged the
property. Even if she had it registered after, it will not
validate a void contract.
Cases: Mortgage by Surviving Spouse of Conjugal
Property
PNB vs. CA
• The property in question originally belonged to the spouses
Iñigo Bitanga and Rosa Ver as their conjugal property.
• Before the issuance of the Original Certificate of Title
however, Iñigo Bitanga died leaving Rosa Ver and his
children.
• Rosa then afterwards mortgaged the entire property in
favor of PNB for P500.
Supreme Court Ruling
• The subject lots belonged to the conjugal
partnership of the spouses, when Iñigo Bitanga died,
his one-half share in said lot was transmitted to his heirs
and a co-ownership was established between them.
• Hence, Rosa Ver alone, could not have validly
mortgaged the whole lot to PNB.
• Under Art. 2085, one of the essential requisites to a
contract of pledge and mortgage is that the pledgor or
mortgagor be the absolute owner of the thing
pledged or mortgaged.
• Each co-owner shall have the full ownership of his part of
the fruits and benefits pertaining thereto, and he may
therefore, alienate, assign or mortgage it, and even
substitute another person in its enjoyment, except when
personal rights are involved.
• Thus, PNB had only acquired ½ of the entire property
for this was all she had in her power to convey.
• The other half being as it still is, the willful share of the
plaintiffs’ inheritance from their father.
Comments:
• The surviving spouse mortgaged the entire property even
if the other heirs are still alive. Therefore, the mortgage
is void to the extent of the shares of the heirs.
• Conjugal property and the husband died but survived by a
wife and two children. The wife obtained a loan from the
land bank and constituted a mortgage over the loan. Is
the mortgage valid?
➢ Only to the extent of the share of the wife of the
estate.
• Is the wife the owner?
➢ She is the owner of the property to the extent (1/2
share) and the share as heir. To that extent, the
mortgage is valid, but to the extent to the share of the
share of the two children, it is void.
➢ The mortgage cannot totally be declared void, it is
valid only to the extent of the share of the wife.
• What is the effect if the wife mortgages the
property? Can the mortgage be foreclosed?
➢ Yes, the mortgage can still be foreclosed, but only to
the extent of the property of the wife.
➢ If it includes the share of the children, it is void as to
the extent of the share of the children.
➢ Whoever is the highest bidder in the foreclosure share
would not acquire it, the sale is valid only to the extent
of the valid mortgage.
• That is the effect of the nullity of a mortgage because the
mortgagor is not the absolute owner of the property.
Case: Property not owned by mortgagor at time of
mortgage
DBP vs. CA
• DBP granted a loan to Sps. Olidiana secured by several
real estate mortgage.
• At the time of the mortgage, the properties were still
the subject of a free patent application.
• Subsequently, Sps. Olidiana filed with Bureau of Lands to
relinquish and waive all their rights and interests over the
properties in favor of Jesusa Chupuico and Mylo Quinto.
37 | P a g e
• DBP also granted additional loan to the spouses with the
same collateral.
• For failure of the spouses to comply with the terms and
conditions of their promissory note and mortgage contract,
DBP extrajudicially foreclosed all the mortgaged
properties.
• However, when DBP tried to register the sale, it discovered
that the lots were in the names of Chupuico and Quinto.
• DBP then filed a quieting of title but the court ruled against
DBP and was affirmed by the CA.
Supreme Court Ruling
• Art. 2085 par.2 specifically requires that the pledgor or
mortgagor be the absolute owner of the thing pledged or
mortgaged.
• Thus, since the disputed property was not owned by
the Spouses when they mortgaged it with DBP, the
contract of mortgage and all the subsequent legal
consequences as regards the lots are null and void.
• For, the law explicitly requires as imperative for the
validity of a mortgage that the mortgagor be the absolute
owner of what is mortgaged.
Comments:
• Here, the property was not owned by the mortgagor at the
time of the constitution of the mortgage. They only had
an approved free patent application from the
government, so they were not awarded a title yet.
• The court said, the mortgage is not valid because the
mortgagor is not the absolute owner of the property
mortgaged.
• But there are properties which are not yet covered by the
Torrens system, but are only evidenced by the tax
declarations, etc. If the bank forecloses the mortgage,
can the mortgagor question the mortgage? Or is it
valid?
➢ In Land Titles, tax declarations are not conclusive
evidence or absolute proof of ownership.
➢ In practice, okay ra siguro if wala’y moreklamo.
But the NCC requires absolute ownership
and the tax declaration is not the proof of
absolute ownership.
• If the mortgagor is not the absolute owner of the
property mortgaged, and subsequently the property was
foreclosed, then the foreclosure will be declared void.
• If the foreclosure was already concluded, and the property
awarded to the buyer will not be transferred. He cannot
invoke good faith. You cannot ratify a void contract.
National Investment and Development Corporation vs.
Bautista
• Kiko and Lisa were the owners of a property with an area
of 6,368 sqm. covered by TCT No 35084.
• On July 26, 1963, the spouses sold a portion of said lot
with an area of 822 sqm. to Cely, a widow.
• Cely succeeded in obtaining a new TCT covering not just
the 822 sqm. portion sold to her, but the entire 6,368 sqm.
Another new TCT (No. 70813) was also issued in the
names of the spouses and Cely covering the entire area.
• Subsequently, Cely mortgaged the whole 6,368 sqm. lot
and not just the 822 sqm. portion thereof in favor of a
bank (PCIB) to secure a loan she obtained from it.
• When Cely failed to pay her obligation, the bank foreclosed
the mortgage extrajudicially at a public auction sale where
it emerged as the highest bidder.
• The bank thereafter assigned its rights over the aforesaid
land to a GOCC (NIDC). So, the Certificate of Sale and the
Assignment was annotated at the back of TCT No. 70813.
• Meanwhile, Cely failed to complete payment of the lots she
purchased from the spouses. So, the spouses filed an
action for the rescission of the Contract of Sale and the
cancellation of the mortgage constituted thereon in favor
of the bank before the then Court of First Instance (CFI).
• After trial the CFI rendered a decision in favor of the
spouses and ordered the rescission of the Contract of Sale
without prejudice however to the rights of PCIB as
mortgagee of the same. This decision became final when
the appeal thereon was filed out of time.
• But when the CFI ordered the execution of said decision
by cancelling TCT No. 70813 and replacing it with TCT No.
139925 in the name solely of the spouses, NIDC
questioned the said order before the Supreme Court.
• While the said case was pending, the spouses mortgaged
TCT No. 139925 with another bank (BF) to secure their
loan of P400,000. When the spouses defaulted on their
loan, BF foreclosed TCT No. 139925 and a Certificate of
Sale was issued in BF’s name as highest bidder.
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
• Meantime the SC case filed by NIDC was decided in favor
of the latter. The SC found that PCIB was a mortgagee
in good faith and its subsequent assignment to NIDC
of its rights as such and as the highest bidder in the
foreclosure sale of said land was valid.
• So, the SC declared the order of the CFI replacing TCT
70813 with TCT 139925 null and void.
• When this decision also became final, NIDC informed BF
that pursuant to said SC decision, it is declared the rightful
owner of the land covered by TCT No. 13995.
• But instead of litigating with BF, NIDC just proposed
to exercise its right of redemption. To which BF
agreed.
• So, NIDC was able to secure TCT 186147 cancelling TCT
139925 covering the entire 6,368 sq. meter lot.
• When the spouses learned about this, they sued
both NIDC and BF for recovery of 5,546 sq. meters
of the land in question plus damages.
• The spouses contended that NIDC had no right to
said 5,546 sqm. because the same was neither sold
to Cely nor mortgaged to PCIB from whom NIDC
acquired its rights.
Supreme Court Ruling
• While the spouses are already barred from questioning the
validity of the real estate mortgage between Cely and PCIB
and the assignment of rights between PCIB and NIDC
under the principle of res judicata, they are only barred
in so far as they pertain to the real property actually
sold by the spouses to Cely.
• The issue of whether Cely could have mortgaged to PCIB
the 5,546 sq. meter portion of the 6, 638 sq. meter lot
which was never sold by the spouses to her can still be
raised and resolved.
• In this case, only 882 sq. meters of the land was the
subject of the contract of sale between the spouses
and Cely, so the 5,546 sq. meters of said land was
still owned by said spouses.
• Not being the owner of the 5,546 sq. meter lot, Cely
could not have constituted a mortgage of the same
in favor of PCIB as security for her loan.
• There being no valid mortgage of the said portion to
PCIB, it could not be subjected to foreclosure; it could
not be sold at public auction; it could not be bought by
PCIB as the highest bidder at the public auction; and it
could not be assigned by PCIB to NIDC. The 5, 546 sq.
meter portion remained the property of the spouses.
• But considering that: the spouses subsequently
mortgaged the same land to BF under TCT No. 13995
including the 5,546 sqm. portion; that BF already
foreclosed the property and acquired it as highest
bidder, that NIDC subsequently purchased it from BF
supposedly in the exercise of its right of redemption
although it was actually an ordinary purchase, then
NIDC also became the owner of the 6,368 sq. meter
of land.
• Essentially, NIDC twice became the owner of the 882 sqm.
portion of said land having acquired them by assignment
from PCIB and having purchased the same from BF.
C. 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.
• If the property is encumbered, there can be no “free
disposal.” Thus, it must not be encumbered.
• Thus, even if one is absolute owner, he cannot
constitute a pledge or mortgage over said property.
• A third person can constitute a mortgage as long as he is
duly authorized by the absolute owner thereof.
• If the mortgagor was legally authorized that the properties
that would be subjected to the mortgaged was listed in
the SPA, and the property mortgaged was not
among those in the list, that person is not legally
authorized in that particular property. The mortgage
is void. If there is a foreclosure, the same is void. If the
property was already awarded to the highest bidder, he
cannot acquire title over the property.
D. Thing pledged or mortgaged may be alienated at the
instance of the creditor
• Pledge = may be in a private sale; Mortgage = must be in
a public sale.
• A mortgagor is not entitled to the exhaustion of the
property of the principal debtor. The benefit applied only
to personal guaranty and not to real guaranty.
38 | P a g e
• The creditor may not appropriate or dispose of the
security. A stipulation to the contrary (pactum
commissorium) is VOID (Art. 2088)
• Pactum commmissorium is a stipulation in pledge,
mortgage or antichresis that the creditor can automatically
appropriate without foreclosure the things given as
security if the debt is not paid. Void, against public policy.
• The creditor is not entitled to possess and enjoy the
security (Art. 2140). He must apply the fruits of the
pledge to the interest or principal of the debt (Art. 2120)
(as in antichresis).
• In cases of obligations secured by a mortgage or pledge,
the non-payment of the debtor authorizes the creditor to
alienate the thing mortgaged or pledged to satisfy the
principal obligation. Ownership is transferred to the
highest bidder, and the proceeds of the sale will be used
to satisfy the payment of the obligation.
If the property pledged or mortgaged may be alienated
if the principal debtor defaults, can a third party
pledgor/mortgagor invoke benefit of exhaustion?
• No, the benefit of exhaustion only pertains to guarantors.
Must the mortgagor of pledgor or the mortgagor be the
principal debtor?
• No, 3rd party can be a pledgor or mortgagor to secure the
fulfillment of the principal obligation
• If the 3rd person subjects his own property, the creditor
cannot go after the pledgor or mortgagor in his
personal capacity.
• In case of the default, only the property shall be
alienated to satisfy the principal obligation.
• The creditor cannot go after the mortgagor or pledgor to
satisfy the obligation, but the pledgor or mortgagor
may pay obligation to creditor to pay the obligation
because he has the interest to the obligation,
because of the risk of property may be sold in the
foreclosure of sale.
Example: I borrowed money from BPI bank and their
requirement for application loan is to have security. So I
constituted a property which is owned by my sister, which the
bank accepted. And the mortgage was duly registered.
Can the Register of Deeds refuse to register the
mortgage?
• No. It is the ministerial duty of the ROD to register, they
cannot refuse.
Is the mortgage valid because it is already registered?
• Registration does not validate the mortgage.
• Note that the mortgage is constituted by one who is not
the absolute owner of the property or one authorized by
the owner the constitute the mortgage.
Case: Exhaustion applies only to personal guaranty
Southern Motors, Inc. vs. Barbosa
• Plaintiff, Southern Motors, Inc., brought this action against
Eliseo Barbosa, to foreclose a real estate mortgage,
constituted by the latter in favor of the former, as security
for the payment of the sum of P2,889.53 due to said
Plaintiff from one Alfredo Brillantes, who had failed to
settle his obligation in accordance with the terms and
conditions of the corresponding deed of mortgage.
• Defendant argues that he has executed the deed of
mortgage for the only purpose of guaranteeing — as
surety and/or guarantor — the payment of the above
mentioned debt of Mr. Alfredo Brillantes in favor of
the Plaintiff.
• And that the Plaintiff has no right action against the
herein Defendant on the ground that said plaintiff did
not intend to exhaust all recourses to collect from
the true debtor Mr. Alfredo Brillantes and did not
resort nor intends to resort all the legal remedies
against Brillantes, notwithstanding the fact that said
Mr. Alfredo Brillantes is solvent and has many
properties within the Province of Iloilo.
Supreme Court Ruling
• The right of guarantors, under Article 2058 of the
Civil Code of the Philippines, to demand exhaustion
of the property of the principal debtor, exists only
when a pledge or a mortgage has not been given as
special security for the payment of the principal
obligation.
• Guarantees, without any such pledge or mortgage, are
governed by Title XV of said Code, whereas pledges and
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
mortgages fall under Title XVI of the same Code, in which
the following provisions, among others, are found.
• It has been held already (Saavedra vs. Price, 68 Phil.,
688), that a mortgagor is not entitled to the
exhaustion of the property of the principal debtor.
• Although an ordinary personal guarantor — not a
mortgagor or pledgor — may demand the aforementioned
exhaustion, the creditor may, prior thereto, secure a
judgment against said guarantor, who shall be entitled,
however, to a deferment of the execution of said judgment
against him until after the properties of the principal
debtor shall have been exhausted to satisfy the obligation
involved in the case.
Cases: Pactum Commisorium – Stipulation of Automatic
Transfer of Ownership
Francisco and Development Corp. vs. CA
• Francisco Realty granted a loan of 7.5 million to
respondents, sps. Rumolo Erlinda Javillonar, in
consideration of which the latter executed a promissory
note, a deed of mortgage an undated deed of sale of the
mortgaged property.
• The promissory note provided that “upon failure of the
mortgagor to pay the interest without prior agreement
with the mortgagee, full possession of the property will be
transmitted, and the deed of sale will be registered.”
• When private respondents failed to pay the interest,
petitioner registered the sale.
• Private respondents refused to vacate when the petitioner
demanded possession claiming that the undated deed of
sale was merely an additional security for the payment of
the loan.
• The trial court ruled in favor of Francisco Realty.
• The CA reversed the decision and ruled that the sale was
void being a pactum commissorium
Supreme Court Ruling
• The stipulation in the promissory notes providing that,
upon failure of respondent spouse to pay interest,
ownership of the property would be automatically
transferred to petitioner Francisco Realty and the deed of
sale in its favor would be registered, are in substance a
pactum commisarium.
1. They embody the two elements of pactum
commisarium. 1. that there should be a pledge or
mortgage wherein a property is pledged or mortgaged
by way of security for the payment of the principal
obligation
2. That there should be a stipulation for an automatic
appropriation by the creditor of the thing
pledged or mortgaged in the event of non-payment
of the principal obligation within the stipulated period.
• The subject transaction being void, the registration
of the deed of sale by virtue of which petitioner
Francisco Realty was able to obtain a TCT must also
be declared void.
Comments:
• Pactum commmissorium, a stipulation that in case of
default, the property immediately becomes property of the
creditor, is prohibited for being against public policy.
• Take note, however, that only said provision is void. It
does not invalidate the entire pledge or mortgage
contract.
Sps. Edralin vs. Phil. Veterans bank
• On February 5, 1976, Veterans Bank granted petitioner
spouses Edralin a loan in the amount of P270,000.
• As security thereof, petitioners executed a Real Estate
Mortgage in favor of Veterans Bank over a real property
situated in the Municipality of Parañaque and registered in
the name of petitioner Fernando Edralin.
• The REM was registered with the Registry of Deeds of the
Province of Rizal and its subsequent amendments were all
duly annotated at the back of TCT No. 204889.
• The Edralins failed to pay their obligation to Veterans
Bank. Thus, on June 28, 1983, Veterans Bank filed a
Petition for Extrajudicial Foreclosure of the REM.
• In due course, it was foreclosed, and a sale was held in
which the Ex-Officio Sheriff of Rizal sold the mortgaged
property at public auction. Veterans Bank emerged as the
highest bidder at the said foreclosure sale and was issued
the corresponding Certificate of Sale.
• The Edralins failed to redeem the property during the one-
year period, thus Veterans Bank acquired absolute
ownership of the subject property. It caused the
consolidation of ownership of the subject property in its
name on January 19, 1994.
39 | P a g e
• Despite the foregoing, the Edralins failed to vacate and • Roban, in effect, automatically acquires ownership
surrender possession of the subject property to Veterans of the properties upon Sps. Ongs failure to pay their
Bank. Thus, on May 24, 1996, Veterans Bank filed an Ex- debt within the stipulated period.
Parte Petition for the Issuance of a Writ of Possession. The • In the case at bar, the alienation of the properties was by
same, however, was dismissed for Veterans Bank’s failure way of security, and not by way of satisfying the debt. The
to prosecute. Dacion in Payment did not extinguish Sps. Ongs obligation
• Veterans Bank again filed an Ex-Parte Petition for Issuance to Roban.
of Writ of Possession before the RTC of Parañaque City. • MOA and DPA null and void for being a pactum
Veterans Bank divulged in its Certification against Forum- commissorium.
Shopping that the earlier case, LRC No. 96-060, involving
the same subject matter and parties, was dismissed. Instances of pactum commissorium
• The Edralins moved to dismiss the petition on the ground 1. A provision that states “in case the mortgagor fails to
that the dismissal of LRC No. 96-060 constituted res redeem the mortgage, the principal obligation secured
judicata. shall be considered payment of the land”.
• The trial court denied the motion to dismiss explaining that 2. A stipulation in the promissory note which provides that
the ground of failure to present evidence is not a “upon failure of the makers of the note to pay interest,
determination of the merits of the case hence does not ownership of the property will be automatically transferred
constitute res judicata on the petition for issuance of a writ to the creditor and the deed of sale in its favor will be
of possession. registered”.
3. Stipulation in a memorandum of agreement with dacion en
Supreme Court Ruling pago that “failure of the debtor to pay the debt will give
• We have held before that the purchaser's right "to the creditor the right to enforce the dacion en pago
request for the issuance of the writ of possession of transferring to him ownership of the property.”
the land never prescribes."
• The right to possess a property merely follows the right of How do you determine if it is a pactum commissorium?
ownership, and it would be illogical to hold that a person • If there is no other act to be performed by the
having ownership of a parcel of land is barred from seeking pledgor/mortgagor and the creditor to transfer the
possession thereof. property to the creditor/mortgagee/pledgee.
• Moreover, the provisions cited by petitioners refer to • Determine to the tenor of their agreement whether there
prescription of actions. An action is "defined as an ordinary is an act that is still to be performed by the mortgagor to
suit in a court of justice, by which one party prosecutes determine whether that particular stipulation is a pactum
another for the enforcement or protection of a right, or the commisorium.
prevention or redress of a wrong."
• On the other hand, "a petition for the issuance of the writ, Common Stipulations
under Section 7 of Act No. 3135, as amended, is not an Situation Pactum commisorium
ordinary action filed in court, by which one party sues or not?
another for the enforcement or protection of a right, or Stipulation that: “if the YES. This is a pactum
prevention or redress of a wrong. mortgagor defaults, the commissorium, no other
• It is in the nature of an ex parte motion [in] which the property should be act to be performed by the
court hears only one side. It is taken or granted at the considered as payment of mortgagor.
instance and for the benefit of one party, and without the loan”
notice to or consent by any party adversely affected. In case of default, the deed of YES. Simultaneous to the
• Accordingly, upon the filing of a proper motion by the sale that is executed by the signing to the institution of
purchaser in a foreclosure sale, and the approval of the mortgagor simultaneous to the loan, mortgagor signs
corresponding bond, the writ of possession issues as a the execution of the the deed of sale. No other
matter of course and the trial court has no discretion on promissory note will be act to be performed by the
this matter. registered in favor of the mortgagor in order to
mortgagee. effect the transfer of
Ong vs. Roban Lending Corporation TN: Remember that ownership ownership in favor of the
• Sps. Ong obtained several loans from Roban Lending on is not transferred by mere mortgagee.
different dates in total amount of 4M. The loans were registration of the property.
secured by a REM on Sps. Ong’s property (property).
I owe you1M but we have a YES. No other act to be
• The loans were later consolidated thru and amendment to
contract which stipulates on performed by the
the REM, a Dacion in Payment Agreement (DPA) was also
the MOA that in case of mortgagor.
executed wherein Sps. Ong assigned the property to
default, the creditor will
Roban.
enforce the dation en pago,
• Under their MOA, in case Sps. Ong fails to pay their loan
which was executed
in total within one year, Roban will enforce the DPA.
simultaneous to the
• Sps. Ong filed a comlaint with the RTC claiming that the
execution of the promissory
MOA and DPA were void for being pactum commissorium,
note
and that the interest, charges and the attorney’s fees were
I borrowed 1M from you and I No. Because the
unconscionable.
secured a mortgage and one of mortgagor has to convey
• Roban Lending countered that the voluntary execution of
the stipulation is “if I fail to and transfer ownership.
MOA and DPA novated the REM, hence the allegation of
pay, I will transfer and There is still an act to be
pactum commissorium has no leg to stand on, and that the
convey ownership to you performed by the
interest, charges are valid considering the principal
the property subject of the mortgagor.
amount of 4M.
mortgage.”
• RTC: No pactum commissorium, complaint dismissed.
I borrowed 1M from you and I No. You may even opt not
• CA: RTC affirmed, MR denied.
secured a mortgage and one of to purchase. So, there is
the stipulations is “if I fail to still an act to be performed
Supreme Court Ruling
pay, you are authorized to to convey or transfer the
• Pactum commissorium is prohibited under Article 2088 of
purchase the property” property.
the Civil Code.
• The elements of pactum commissorium, which enables the I borrowed 1M from you and I No. The sale will still have
mortgagee to acquire ownership of the mortgaged secured a mortgage and one of to happen. No automatic
property without the need of any foreclosure proceedings, the stipulations is “if I fail to aprropriation.
are: (1) there should be a property mortgaged by way of pay, you are entitled to the
security for the payment of the principal obligation, and sale of the house of land
(2) there should be a stipulation for automatic subject of the mortgage.”
appropriation by the creditor of the thing mortgaged in I borrowed 1M from you and I No. Because there is still
case of non-payment of the principal obligation within the secured a mortgage and one of an act to assign. No
stipulated period. the stipulations is “if I fail to automatic aprropriation.
• In the case at bar, the MOA and DPA contain no pay, I promise to assign to
provisions for foreclosure proceedings nor you the properties subject
redemption. Under the MOA, the failure of Sps. Ong to of the mortgage”
pay their debt within the one-year period gives Roban the
right to enforce the Dacion in Payment transferring to it
ownership of the property.

CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019 40 | P a g e
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
Instances that it is not a pactum commissorium
1. If in the stipulation, the mortgagor still has to transfer
ownership.
2. A stipulation that the creditor still has to buy the subject
property mortgaged. That is not automatic appropriation.
3. A stipulation where failure entitles the lender to the sale of
the house, not to make effect the deed of sale that they
signed. There is still a subsequent act to be performed on
the part of the mortgagor.
4. A promise to assign. Still has to assign the property
mortgaged.
Reason:
• In all these cases, there is still some other act to be
performed by the pledgor/mortgagor and the
creditor. Thus, not considered automatic appropriation.
E. Pledge or mortgage are indivisible
• Partial payment does not entitle the debtor to partial
discharge of the pledge or mortgage. Except when the
pledge or mortgage covers several things, each
guaranteeing only a determinate portion of the credit.
(2089)
• The security is indivisible even if the several debtors are
not solidarily bound (2090). The creditor may enforce the
obligation of each debtor against the whole security
Art. 2089. A pledge or mortgage is indivisible, even though
the debt may be divided among the successors in interest of
the debtor or of the creditor.
A P5M loan was secured by a mortgage over four parcels
of land. P3M was paid. The value of each parcel of land
is about P1M. Can the debtor who is also the mortgagor
demand that the mortgage be partially released as
regards the 2 parcels of land because the remaining
parcels are enough to satisfy for the balance of the
obligation?
• No, because that mortgage, although covering several
parcels of land, was delivered indivisible. It cannot be
released for as long as the entire obligation is not paid.
If the debtor dies, survived by heirs, so heir 1 pays a
share in a debt to the creditor, can he ask the creditor
for release on the part of the mortgage in so far as the
share of the party is concerned?
• No, because of the indivisibility of the mortgage.
Creditor dies and is survived by heirs 1, 2 and 3. Heir 1
receives his share in the credit because he was paid
partial payment from the debtor. Can the debtor compel
for the partial release of the mortgage?
• No. The entire mortgage subsists for as long as the entire
obligation is not paid
Exception to indivisibility:
What is the consideration as to the mortgagee?
• The same consideration that supports to the principal
obligation.
You borrowed money from a bank. To secure the loan,
you mortgaged your property and the agreed amount of
the loan is 1M. Now, the approved amount of the loan by
the bank was only P500,000. In case of a forclosure sale,
can you sell the entire mortgaged property, considering
that what was approved was only P500,000 and not 1M?
• No, you cannot. 50% only.
• Remember that the consideration to the mortgagee or
creditor is the same consideration that supports to the
principal obligation, and the principal obligation is only for
P500,000.
Case: Rule where debt is divisible or debtors are not
solidarily liable
Dayrit vs. CA
• The issue in the case is whether or not respondents Court
of First Instance and the CA erred in refusing to allow the
alleged proposed deposit of a sum equivalent to 1/3 of the
loan agreed upon, and in refusing to release forever the
collaterals owned by Dayrit, although the other 2/3 portion
of the loan obligation had been satisfied due to insolvency
of the other co-defendants.
Supreme Court Ruling
• While it is true that the obligation is merely joint and each
of the defendants is obliged to pay only his/her 1/3 share
of the joint obligation, the undisputed fact remains that
the intent and purpose of the loan and mortgage
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
agreement was to secure the entire loan of 150,000
that the respondent mobil extended to the
defendants.
• The court found that the defendants had violated the loan
and mortgage agreement, they having paid but only one
installment.
• As a rule, a mortgage is directly and immediately
subject to the property upon which it is imposed, the
same being indivisible even though the debt may be
divided, and such indivisibility is unaffected by the
fact that the debtors are not solidarily liable.
• When several things are mortgaged or pledged, each
thing for a determinate portion of a debt, the
pledges or mortgages are con considered separate
from each other.
• But when several things are given to secure the same
debt in its entirety, all of them are liable for the debt,
and the creditor does not have to divide his actions
by distributing the debt among the various things
pledged or mortgaged.
• Even when only a part of the debt remains unpaid, all
the things are still liable for such balance.
• Hence, a mortgage voluntarily constituted by the
debtor on two or more parcels of land is one and
indivisible, and the mortgagee has the right to have
either or both parcels, jointly or singly, sold to satisfy his
claim.
• In case the mortgaged properties are a house and lot,
it cannot be claimed that the lot and the house
should be sold separately and not together.
Case: Separate Foreclosure of Mortgaged Properties
Yu vs. PCI bank
• Under a Real Estate Mortgage spouses Vicente Yu and
Demetria Lee-Yu mortgaged their title, interest, and
participation over several parcels of land in favor of the
Philippine Commercial International Bank (respondent) as
security for the payment of a loan in the amount of
P9,000,000.00.
• As the petitioners failed to pay the loan, the interest, and
the penalties due thereon, the bank Extrajudicially
Foreclosed the Real Estate Mortgage.
• At the auction sale respondent emerged as the highest
bidder. The sale was registered with the Registry of Deeds.
• About two months before the expiration of the redemption
period, respondent filed an Ex-Parte Petition for Writ of
Possession before the Regional Trial Court of Dagupan
City.
• Petitioners filed a Motion to Dismiss stating that the
Certificate of Sale is void because respondent violated
Article 2089 of the Civil Code on the indivisibility of the
mortgaged by conducting two separate foreclosure
proceedings on the mortgage properties in Dagupan City
and Quezon City and indicating in the two notices of extra-
judicial sale.
• RTC denied petitioners’ Motion to Dismiss, ruling that the
filing of a motion to dismiss is not allowed in petitions for
issuance of writ of possession under Section 7 of Act No.
3135.
• On June 1, 2000, petitioners filed a Petition for Certiorari
with the CA. but was dismissed Hence, the present Petition
for Review on Certiorari.
Supreme Court Ruling
• The Court finds that petitioners have a mistaken
notion that the indivisibility of a real estate
mortgage relates to the venue of extra-judicial
foreclosure proceedings.
• The rule on indivisibility of a real estate mortgage is
provided for in Article 2089 of the Civil Code. Therefore,
the debtor’s heir who has paid a part of the debt
cannot ask for the proportionate extinguishment of
the pledge or mortgage as the debt is not completely
satisfied.
• Neither can the creditor’s heir who received his
share of the debt return the pledge or cancel the
mortgage, to the prejudice of the other heirs who
have not been paid.
• From these provisions is excepted the case in which,
there being several things given in mortgage or
pledge, each one of them guarantees only a
determinate portion of the credit.
• The debtor, in this case, shall have a right to the
extinguishment of the pledge or mortgage as the
portion of the debt for which each thing is especially
answerable is satisfied.
• This rule presupposes several heirs of the debtor or
creditor and therefore not applicable to the present case.
41 | P a g e
 The debtor cannot ask for the release of any portion of the
mortgaged property or of one or some of the several lots
mortgaged unless and until the loan thus secured has been
fully paid, notwithstanding the fact that there has been
partial fulfillment of the obligation.
• Hence, it is provided that the debtor who has paid a
part of the debt cannot ask for the proportionate
extinguishment of the mortgage as long as the debt
is not completely satisfied.
• In essence, indivisibility means that the mortgage
obligation cannot be divided among the different
lots, that is, each and every parcel under mortgage
answers for the totality of the debt.
• The indivisibility of the real estate mortgage is not
violated by conducting two separate foreclosure
proceedings on mortgaged properties located in
different provinces as long as each parcel of land is
answerable for the entire debt.
• Considering the indivisibility of a real estate mortgage, the
mortgaged properties in Dagupan City and Quezon City are
made to answer for the entire debt of P10,437,015.29, the
Court holds that the rule on indivisibility of the real
estate mortgage cannot be equated with the venue
of foreclosure proceedings on mortgaged properties
located in different provinces since these are two
unrelated concepts.
Effect of partial payment
• General Rule: Partial payment does not entitle the debtor
to partial discharge.
• Exception: When the pledge or mortgage covers several
things, each guaranteeing only a determinate portion of
the credit.
When indivisibility of mortgage does not apply
• Indivisibility of the mortgage does not apply if
properties are specifically assigned to a certain
portion of the obligation.
• Example: This particular parcel of land secures 100k,
another land secures 100k, etc.
F. A promise to constitute pledge or mortgage gives rise
to personal action only
Is a promise to constitute a pledge or mortgage valid?
• Yes, but the same gives rise to a personal action only.
• In other words, there is no right to foreclose, but only
the right to compel the constitution of the pledge or
mortgage.
Example: Debtor promised to deliver a thing to the
creditor in pledge to secure payment of his P20,000
debt, but has not delivered the thing promised. Debtor
failed to pay upon maturity. Can the creditor sell the
thing?
• No. Creditor cannot sell the thing in a public sale as a
pledge because pledge is a real contract. The delivery of
the thing perfects the contract of pledge. Here, there was
no contract of pledge. In which case, the only action
available to the creditor is a personal action to compel the
constitution of the pledge.
CHAPTER II – PLEDGE
Concept
• Pledge is an accessory, real, unilateral contract by virtue
of which the debtor delivers to the creditor or a third
person movable property as security for the performance
of a specific obligation.
• Upon the fulfillment of which the thing must be returned
with its accessions and accessories.
• This can secure all kinds of obligations, even future
obligations.
Comments:
• This definition talks of a voluntary pledge, so there must
be delivery of the thing either to the creditor or to a third
person by common agreement.
• A contract of pledge is a real contract not a consensual
contract, thus delivery is a necessary requisite.
Requisites
Common to pledge and mortgage:
A. It must be constituted to secure the fulfillment of a
principal obligation – accessory contracts
B. The pledgor must be the absolute owner of the thing
pledged
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
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C. The person constituting the pledge must have free disposal
of the property, or in the absence thereof, be legally
authorized for the purpose
D. The possession of the thing pledged (movable) is delivered
to the pledgee
• It must be actual delivery, not merely symbolic.
• However, it may include constructive delivery (e.g.
keys of a warehouse where the goods are stored-
depending on the peculiar circumstances).
To affect third persons:
E. Pledge must be in a public instrument
F. Description of the thing pledged
G. Date of the pledge
Example:
• I borrowed P20K from you. To secure the payment of my
obligation, I delivered to you this computer to you in a
pledge.
• Personal property is delivered to the creditor or to a third
person authorized as a security for the payment of a
principal obligation.
How does a pledge differ from chattel mortgage?
• Both pledge and chattel mortgage cover personal
property.
• In chattel mortgage, the property remains in the
possession in the mortgagor.
• In a pledge, the property is delivered to the creditor
or a third person movable property as security for
the performance of a specific obligation. Upon the
fulfillment of which, the thing must be returned with its
accessions and accessories.
• Pledge can secure all kinds of obligations, even a future
obligation, while a chattel mortgage cannot be
constituted on a future obligation.
Case: Requisites of Pledge
Calibo vs. CA
• A tractor owned by private respondent was offered by Mike
Abella, his son, as security in the payment of his rents in
arrears with petitioner who took possession thereof.
• This tractor became the subject of a suit for replevin with
private respondent alleging that the pledge was made
without his knowledge and consent.
• Petitioner, on the other hand, alleged that the tractor was
validly pledged to him by respondent’s son to answer for
his financial obligations.
• In the alternative, petitioner asserted that the tractor was
left with him in the concept of an innkeeper, on deposit.
• The trial court rendered judgment in favor of private
respondent. The same was affirmed on appeal by the CA,
hence, this recourse.
Supreme Court Ruling
• In a contract of pledge, the creditor is given the right to
retain his debtor’s movable property in his possession, or
that of a third person to whom it has been delivered.
• It does not apply where, as in this case, the lessee is
not the owner of the property.
• In deposit, a person receives an object belonging to
another with the obligation of safely keeping it and of
returning the same.
• There is no deposit where the principal purpose for
receiving the object is not for safekeeping.
• In a contract of pledge, the creditor is given the right to
retain his debtor’s movable property in his possession, or
in that of a third person to whom it has been delivered,
until the debt is paid. For the contract to be valid, it is
necessary that:
1. The pledge is constituted to secure the fulfillment of a
principal obligation
2. The pledgor be the absolute owner of the thing
pledged
3. The person constituting the pledge has the free
disposal of his property, and in the absence thereof,
that he be legally authorized for the purpose.
• In this case, the second requisite is absent. Thus, the
pledge is void.
Comments:
• This case involves a Cebuano and a Boholano. Mike here
is a tenant of Atty. Calibo in Bohol who was not able to pay
the rentals of the dwelling place that he was renting.
• To secure his payment of the unpaid rentals, he delivered
a tractor owned by his father by way of pledge.
• Was there a valid pledge?
42 | P a g e
 ➢ No, because the tractor did not belong to Mike, it
belongs to his father, Pablo Abella.
• But since there was delivery of the tractor to Atty.
Calibo, was deposit constituted?
➢ No contract of deposit, the delivery was to secure the
payment of the obligation, the delivery was not for
purposes of safekeeping.
Elements of a Pledge
A. Parties
B. Object
C. Consideration
D. Form
A. Parties
• The parties to a contract of pledge are the pledgee and the
pledgor.
• If the pledgor is a third person and not principal debtor, he
has the rights of a guarantor:
➢ Reimbursement
➢ Subrogated to the rights of the creditor
➢ BUT, the benefit of excussion is NOT available to
him/her.
Comments:
• If the property pledged is subsequently sold in a public sale
to satisfy the principal obligation, then the third-party
pledgor has the right to seek reimbursement from the
principal debtor.
• Just like a guarantor, the third party pledgor is also
subrogated to the rights of the creditor which he can
exercise against the debtor.
A third person can be a pledgee in a contract of pledge.
Is there a particular capacity required to be able to enter
into the contract?
• In commodatum, we learned that there is no special
capacity required because it does not transfer ownership.
• In mutuum, we learned that there is a capacity required
on the part of the lender because there is a necessity to
transfer ownership.
• In a deposit, the depositor need not be the owner.
• In case of a pledge, the requirement is that the pledgor
must not only the absolute owner, he also must have
the free disposal of the thing pledged.
B. Object
• The object must be:
a. Movable property
b. Within the commerce of man
c. Susceptible of possession
• It may be money, goods or credits and includes their fruits,
interest, and earnings.
• The object of pledge is movable because there is a
need to transfer possession from the pledgor to either
the creditor or to a third person.
• But not all movables are subject to pledge, it must be
within the commerce of man and susceptible of
possession. So, shabu is a movable but it cannot be an
object of pledge.
• The object of pledge must be also be susceptible of
possession because there is a need to transfer
possession.
• See Betita vs. Ganzon where there was no valid pledge
because there was no transfer of possession from Betita
as the carabaos where actually in possession of Tiburcio.
If a warehouse receipt is pledged
• The pledgor retains ownership and bears the risk of
the loss of the goods represented by the receipt.
Case: Effect where carabaos pledged not actually
delivered to the creditor
Betita vs. Guanzon
• This action is brought to recover the possession of four
carabaos with damages.
• Defendant Alejo de la Flor recovered a judgment against
Tiburcia Buhayan.
• Under this judgment the defendant Ganzon, as sheriff
levied execution on the carabaos in question which were
found in the possession of one Simon Jacinto but
registered in the name of Tiburcia Buhayan.
• The plaintiff, Eulogio Betita, a third party claimant
(terceria) alleges that the carabaos had been
mortgaged to him and as evidence thereof
presented a document, but the sheriff proceeded with
the sale of the animals at public auction where they were
purchased by the defendant Clemente Perdena, and this
action was thereupon brought.
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
Supreme Court Ruling
• The alleged pledge is ineffective, because the plaintiff
pledgee never had actual possession of the property
within the meaning the Civil Code.
• But it is argued that at the time of the levy, the animals in
question were in the possession of one Simon Jacinto; that
Jacinto was the plaintiff's tenant; and that the tenant's
possession was the possession of his landlord.
• In order to constitute the contract of pledge, that
the pledge be placed in the possession of the
creditor or of a third person appointed by common
consent.
• In his commentary on this article Manresa says: This
requisite is most essential and is characteristic of a pledge
without which the contract cannot be regarded as entered
into or completed, because, precisely, in this delivery
lies the security of the pledge. Therefore, in order that
the contract of pledge may be complete, it is
indispensable that the aforesaid delivery take place.
• It is, of course, evident that the delivery of possession
implies a change in the actual possession of the
property pledged and that a mere symbolic delivery
is not sufficient.
• In the present case, the animals in question were in the
possession of Tiburcia Buhayan and Simon Jacinto before
the alleged pledge was entered into, and apparently
remained with them until the execution was levied, and
there was no actual delivery of possession to the plaintiff
himself.
• There was, therefore, in reality no change in
possession.
Incorporeal rights
• Incorporeal Rights may be pledged if presented by
documents which must be delivered or indorsed if
negotiable, to the creditor.
• Examples of incorporeal rights are stocks. You cannot see
stocks, but ownership thereof is evidenced by a stock
certificate.
• Another example is the right to collect a credit evidenced
by a promissory note or a warehouse receipt.
Comments:
• Ordinarily, if you indorse a negotiable PN and deliver it to
the transferee, there is transfer of rights.
• BUT here, you deliver the PN only by way of pledge,
it is not a payment of an obligation, otherwise that
would have been dacion en pago.
• This is pledge only where the pledgee does not
acquire any title over the thing pledged. He only has
the right to sell in case of default in the payment of
the principal obligation.
Cases: Incorporeal rights; effect of stock assignment
Lopez vs. CA
• Benito H. Lopez obtained a loan in the amount of P20,000
from the Prudential Bank and Trust Company.
• He executed a promissory note for the same amount, in
favor of the said Bank, binding himself to repay the said
sum one year after the said date, with interest at the rate
of 10% per annum.
• In addition to said promissory note, he executed Surety
Bond No. 14164 in which he, as principal, and Philippine
American General Insurance Co., Inc. (PHILAMGEN) as
surety, bound themselves jointly and severally in favor of
Prudential Bank for the payment of the sum of P20,000.00.
• Lopez also executed in favor of Philamgen an
indemnity agreement whereby he agreed "to indemnify
the Company and keep it indemnified and hold the same
harmless from and against any and all damages, losses,
costs, stamps, taxes, penalties, charges and expenses of
whatever kind and nature which the Company shall or may
at any time sustain or incur in consequence of having
become surety upon the bond."
• At the same time, Lopez executed a deed of
assignment of 4,000 shares of the Baguio Military
Institution entitled "Stock Assignment Separate from
Certificate."
• With the execution of this deed of assignment, Lopez
endorsed the stock certificate and delivered it to
Philamgen.
• It appears from the evidence on record that the loan of
P20,000 was approved conditioned upon the posting of a
surety bond of a bonding company acceptable to the bank.
Thus, Lopez persuaded Emilio Abello, Assistant Executive
Vice-President of Philamgen and member of the Bond
Under writing Committee to request Atty. Timoteo J.
Sumawang, Assistant Vice- President and Manager of the
Bonding Department, to accommodate him in putting
43 | P a g e
 up the bond against the security of his shares of
stock with the Baguio Military Institute, Inc.
• It was their understanding that if he could not pay the
loan, Vice-President Abello and Pio Pedrosa of the
Prudential Bank would buy the shares of stocks and
out of the proceeds thereof, the loan would be paid
to the Prudential Bank.
• On June 2, 1960, Lopez' obligation matured without it
being settled.
Supreme Court Ruling
• The stock assignment is in truth and in fact, a pledge.
• On its face, it is neither pledge nor dation in
payment. The transfer appears to have been an
absolute conveyance of the stocks to Philamgen
whether or not Lopez defaults in the payment of
P20,000 to Prudential Bank.
• But this is not the case here because aside from the
obligations undertaken by Philamgen under the
surety bond, the stock assignment had other
considerations referred to therein as "value
received." Hence, based on the manifest terms thereof,
it is an absolute transfer.
• Notwithstanding the express terms of the "Stock
Assignment Separate from Certificate," however, We hold
and rule that the transaction should not be regarded
as an absolute conveyance in view of the
circumstances obtaining at the time of the execution
thereof.
• It should be remembered that on June 2, 1959, the day
Lopez obtained a loan of P20,000 from Prudential Bank,
Lopez executed a promissory note for P20,000, plus
interest at the rate of 10% per annum, in favor of said
Bank. He likewise posted a surety bond to secure his full
and faithful performance of his obligation under the
promissory note with Philamgen as his surety.
• In return for the undertaking of Philamgen under
the surety bond, Lopez executed on the same day
not only an indemnity agreement but also a stock
assignment.
• The indemnity agreement and the stock assignment
must be considered together as related transactions
because in order to judge the intention of the
contracting parties, their contemporaneous and
subsequent acts shall be principally considered.
• Thus, considering that the indemnity agreement
connotes a continuing obligation of Lopez towards
Philamgen, while the stock assignment indicates a
complete discharge of the same obligation, the existence
of the indemnity agreement whereby Lopez had to pay a
premium for a period of one year and agreed at all times
to indemnify Philamgen of any and all kinds of losses which
the latter might sustain by reason of it becoming a surety,
is inconsistent with the theory of an absolute sale for
and in consideration of the same undertaking of
Philamgen.
• There would have been no necessity for the execution
of the indemnity agreement if the stock assignment
was really intended as an absolute conveyance.
Hence, there are strong and cogent reasons to
conclude that the parties intended said stock
assignment to complement the indemnity
agreement and thereby sufficiently guarantee the
indemnification of Philamgen should it be required to pay
Lopez' loan to Prudential Bank.
• The following requirements of a contract of pledge have
been satisfied:
1) That it be constituted to secure the fulfillment of a
principal obligation
2) That the pledgor be the absolute owner of the thing
pledged
3) That the person constituting the pledge has the free
disposal of the property and in the absence thereof
that he be legally authorized for the purpose.
• In case of doubt as to whether a transaction is a
pledge or a dation in payment, the presumption is in
favor of pledge, the latter being the lesser
transmission of rights and interests.
Paray vs. Rodriguez
• Respondents were the owners, in their respective personal
capacities, of shares of stock in a corporation known as the
Quirino-Leonor-Rodriguez Realty Inc.
• Sometime during the years 1979 to 1980, respondents
secured by way of pledge of some of their shares of
stock to petitioners Bonifacio and Faustina Paray
("Parays") the payment of certain loan obligations.
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
• When the Parays attempted to foreclose the pledges on
account of respondents’ failure to pay their loans,
respondents filed complaints with the Regional Trial Court
of Cebu City.
• The actions, which were consolidated and tried before RTC
Branch 14, Cebu City, sought the declaration of nullity of
the pledge agreements, among others.
• However, the RTC dismissed the complaint and gave "due
course to the foreclosure and sale at public auction of the
various pledges subject of these two cases."
• This decision attained finality after it was affirmed by the
Court of Appeals and the Supreme Court.
• Respondents then received Notices of Sale which indicated
that the pledged shares were to be sold at public auction.
• However, before the scheduled date of auction, all of
respondents caused the consignation with the RTC
Clerk of Court of various amounts. It was claimed that
respondents had attempted to tender these payments to
the Parays,but had been rebuffed.
• Notwithstanding the consignations, the public auction took
place as scheduled, with petitioner Vidal Espeleta
successfully bidding the amount of P6,200,000.00 for all
of the pledged shares.
• None of respondents participated or appeared at the
auction. Respondents instead filed a complaint seeking the
declaration of nullity of the concluded public auction.
Supreme Court Ruling
• The subject sale of pledged shares was an extrajudicial
sale, specifically a notarial sale, as distinguished
from a judicial sale as typified by an execution sale.
• Under the Civil Code, the foreclosure of a pledge occurs
extrajudicially, without intervention by the courts. All the
creditor needs to do, if the credit has not been
satisfied in due time, is to proceed before a Notary
Public to the sale of the thing pledged.
• The decision to proceed with the sale by public
auction remains in the sole discretion of the Parays,
who could very well choose not to hold the sale
without violating the final judgments in the
aforementioned civil cases.
• If the sale were truly in compliance with a final
judgment or order, the Parays would have no choice
but to stage the sale for then the order directing the
sale arises from judicial compulsion.
• But nothing in the dispositive portion directed the
sale at public auction as a mandatory recourse, and
properly so since the sale of pledged property in public
auction is, by virtue of the Civil Code, extrajudicial in
character.
• The right to redeem property sold as security for the
satisfaction of an unpaid obligation does not exist
preternaturally. Neither is it predicated on proprietary
right, which, after the sale of property on execution, leaves
the judgment debtor and vests in the purchaser. Instead,
it is a bare statutory privilege to be exercised only by
the persons named in the statute.
• The right of redemption over mortgaged real property sold
extrajudicially is established by Act No. 3135, as amended.
The said law does not extend the same benefit to
personal property. In fact, there is no law in our
statute books which vests the right of redemption
over personal property.
• And Section 39 of the 1997 Rules of Civil Procedure
starkly utters that the right of redemption applies to
real properties, not personal properties, sold on
execution.
• Under the Civil Code, it is the pledgee, and not the
pledgor, who is given the right to choose which of
the items should be sold if two or more things are
pledged. No similar option is given to pledgors under the
Civil Code.
• Moreover, there is nothing in the Civil Code provisions
governing the extrajudicial sale of pledged
properties that prohibits the pledgee of several
different pledge contracts from auctioning all of the
pledged properties on a single occasion, or from the
buyer at the auction sale in purchasing all the pledged
properties with a single purchase price.
• The relative insignificance of ascertaining the definite
apportionments of the sale price to the individual shares
lies in the fact that once a pledged item is sold at auction,
neither the pledgee nor the pledgor can recover whatever
deficiency or excess there may be between the purchase
price and the amount of the principal obligation.
• There is no doubt that if the principal obligation is satisfied,
the pledges should be terminated as well. Article 2098 of
the Civil Code provides that the right of the creditor to
44 | P a g e
 retain possession of the pledged item exists only until the
debt is paid.
• Article 2105 of the Civil Code further clarifies that the
debtor cannot ask for the return of the thing pledged
against the will of the creditor, unless and until he
has paid the debt and its interest. At the same time,
the right of the pledgee to foreclose the pledge is also
established under the Civil Code.
• When the credit has not been satisfied in due time, the
creditor may proceed with the sale by public auction under
the procedure provided under Article 2112 of the Code.
If incorporeal rights are the subject of pledge, what is
delivered to the pledgee?
• Documents of title, warehouse receipt, stock certificates,
etc.
How do you obtain delivery of goods covered by a
negotiable warehouse receipt?
• Surrendering the receipt to the warehouse man.
• And you cannot compel the warehouse man to surrender
the goods to you if you are holding a negotiable receipt
which is not duly negotiated, because it’s a negotiable
receipt that’s only delivered but not endorsed.
Is it enough that the pledgor delivers the warehouse
receipt to the pledgee? (NO) Remember that one of the
characteristics of pledge and mortgage is that the property may
be alienated to satisfy the obligation. Suppose in a
negotiable warehouse receipt - the pledgor has a
warehouse receipt, and delivers the receipt to the
pledgee, can the pledgee demand that the pledgor
endorses the order warehouse receipt? (YES) Remember
that this is not negotiation, this is pledge.
• Imagine a scenario where the pledgor delivers an order
warehouse receipt to the pledgee, and the debtor defaults
in the payment of the obligation. The pledgee sells the
goods covered in the warehouse receipt. Do you think
the buyer can compel the warehouse man to
surrender the goods to him, considering that the
receipt is not endorsed?
➢ No, he cannot. That’s why it is required that even if
the receipt is merely delivered to the pledgee as
a security, it must be endorsed in his favor, then
it must be duly endorsed, to facilitate the sale
later on in case of default, not necessarily to
transfer ownership.
➢ The indorsement by the pledgor does not
transfer any right or any type of title of the
goods in favor of the pledgee. Because ownership
is not transferred by delivery of the receipt. The
indorsement is only to facilitate the possible
sale of the goods
➢ Because even if the pledgor signs the warehouse
receipt, if the goods are lost or destroyed in the
warehouse, the pledgor bears the risk of loss, not
the pledgee, because the pledgor remains the
owner of the goods.
➢ Because ordinarily if you indorse a warehouse receipt,
you transfer whatever rights you have over the goods
in favor of the transferee, BUT here, you deliver the
warehouse receipt only by way of pledge, it is
not a payment of an obligation otherwise that
would have been dacion en pago.
➢ This is a pledge only where the pledgee does not
acquire any title over the thing pledged. He only
has the right to sell only in case of default in the
payment of the principal obligation.
The court said that there must actual and physical
transfer of possession and that symbolical delivery is not
recognized, is there an exception to this pronouncement
by the court?
• Yes. For goods covered by warehouse receipt; goods
delivered in a warehouse, the keys to the warehouse may
be delivered to the pledgee instead of the goods physically
delivered.
• The court has recognized that delivery of the keys is valid.
C. Consideration
• As to the pledgor
➢ If there is no valuable consideration – liberality
➢ If there is a valuable consideration – the agreed
compensation
• As to the pledgee
➢ The consideration of the principal credit supports the
pledge.
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
Must the third party pledgee receive a valuable
consideration for delivering his property to the pledgee
by way of pledge? Or can the pledge be constituted
gratuitously, even if the pledgor is a third party pledgor?
• Yes. But there still has to be a consideration, because
consideration is the third essential element to a contract.
• As to the pledgor, the consideration may be liberality.
• As to the pledgee, the same consideration that supports to
the principal obligation.
D. Form
• No particular form is required as between the parties, for
as long as there is a delivery of the thing to the pledgee or
to a third person.
• However, in order to bind third persons:
➢ The pledge must be a public instrument
(notarized) giving the description of the thing
pledged and the date of the pledge.
How is pledge perfected?
• By delivery of the thing to the pledgee.
• In other words, it is a real contract.
If it’s a real contract, is form required for its validity?
• No. Form is not required for its validity.
• To bind the parties, what is required is delivery.
• But to bind third persons, then it must be evidenced
by a public document enumerating two essential items:
➢ description of the property, and
➢ date of the pledge.
What form is required of the pledge in order to bind the
pledgor and the pledgee?
• No particular form or a particular document to be executed
by both parties, for as long as there is a delivery of the
thing to the pledgee or to a third person.
Is there a particular form required in order to bind third
persons?
• Yes, it must be made in a public instrument. Notarized.
• What must be indicated in the public document?
➢ the description of the thing pledged, and
➢ the date of the pledge.
Cases: Effect of pledge in a public instrument
Betita vs. Guanzon (see above)
• Flor obtained a judgment against Tiburcia Buhayan.
• Under this judgment, the sheriff levied on execution the
carabaos in question which were found in the possession
of one Simon Jacinto but registered in the name of Tiburcia
Buhayan.
• The plaintiff, Betita, a third party, alleges that the carabaos
had been mortgaged to him and as evidence thereof
presented a private document with the sheriff after the
levy of execution can create a lien of pledge superior to
the attachment.
Supreme Court Ruling
• Even granting that there was delivery or transfer of
possession of the carabaos, the same would not bind
Betita because the same was embodied in a private
document, and not in a public instrument which the law
requires to affect third persons.
• So that does not bind third persons.
Union Bank vs. Juniat
• Union Bank filed with the RTC of Makati a complaint
against Juniat, Winwood and Wingyan, and the person in
possession of the mortgaged motorized sewing machines
and equipment.
• UPB alleged that Juniat acting for and in behalf of Winwood
and Wingyan, executed a promissory note and a Chattel
mortgage over several motorized sewing machines and
other equipment to secure their obligation arising from
export transactions; that the loans remain unpaid and that
the mortgaged properties are insufficient to answer for the
obligation.
• RTC issued writs of preliminary attachment and replevin in
favor of UPB. The writ was served upon Nonwoven as it
was in possession of the motorized sewing machines and
equipment.
• Although Nonwoven was not impleaded in the complaint,
the RTC likewise served summons upon Nonwoven since it
was in possession of the mortgage properties.
• Nonwoven contended that the unnotarized Chattel
Mortgage executed in favor of petitioner has no
binding effect on Nonwoven and that is has a better
title over the motorized sewing machines and equipment
45 | P a g e
 because these were assigned to it by Juniat pursuant to
their Agreement.
• RTC ruled in favor of UPB. It ruled that both the Chattel
Mortgage and the Agreement in favor of Nonwoven have
no obligatory effect on third persons because the
documents were not notarized. However, since the Chattel
Mortgage in favor of UPB was executed earlier, UPB has a
better right over the motorized sewing machines and
equipment under the doctrine of ‘first in time, stronger in
right”.
• On Appeal, the CA reversed the RTC, holding that the
contract of pledge entered into between Juniat and
Nonwoven is valid and binding, and that the motorized
sewing machines and equipment were ceded to Nonwoven
by Juniat by virtue of a dacion en pago.
Supreme Court Ruling
• UPB has a better right than Nonwoven over the mortgaged
properties.
• The fact that the Chattel Mortgage executed in favor
of UPB was not notarized does not affect UPB’s
cause of action. UPB only needed to show that the loan
of Juniat, Wingyan, and Winwood remains unpaid and that
it is entitled to the issuance of the writs of attachment and
replevin.
• Considering that the writs were issued by the RTC,
Nonwoven had to prove that is has a better right of
possession or ownership over the attached properties.
• However, under Article 2096 of the NCC: “a pledge shall
not take effect against third persons if a description of the
thing pledged and the date of the pledge do not appear in
a public instrument.”
• Hence, just like the chattel mortgage executed in
favor of petitioner, the pledge executed by Juniat in
favor of Nonwoven cannot bind petitioner.
• A pledge shall not take effect against third persons
if a description of the thing pledged and the date of
the pledge do not appear in a public instrument.
CLASSES OF PLEDGE
1. Voluntary pledge – created by will of the parties
2. Legal pledge – created by operation of law
Comments:
• Remember contract of deposit? What is the right of the
depositary if he has a claim against the depositor?
➢ He has the right to retain the thing until he is paid of
his claim.
• Remember necessary deposit? The right of the hotel
keeper if the guest fails to pay for the accommodation.
What is the right of the hotel keeper?
➢ He can sequester the personal effects of the guest
with the right to sell the effects within 30 days from
demand.
• Just like the warehouseman where he can retain the thing
if he has an unsatisfied warehouseman’s claim.
• These acts of retention are actually legal pledges.
• There is no voluntary delivery of the thing to secure
of an obligation, but the thing is already in the
possession of the creditor; with respect to the
depositary, the thing is in the possession of the depositary
as a deposit. The thing is already in the possession of the
hotel keeper because the personal effects are already in
the premises of the hotel.
• So, there is no delivery from the debtor in order to
constitute the pledge, rather there is sequestration
with the creditor of the movable; so that these
movables can be sold to satisfy the claim of the
creditor.
EFFECTS AS TO THE PLEDGEE
Rights of the Pledgee
1. To the retention of the thing in his possession or in that of
the third person to whom it has been delivered, until the
debt is paid (2098)
➢ Use of the thing: He may use the thing pledged only
if authorized or if its preservation so requires.
➢ Deposit of the thing: Otherwise, the pledgor may
ask for the deposit of the thing. (2104) The pledgee
cannot deposit the thing pledged with a third
person, unless authorized (2100)
2. To the reimbursement of the expenses for the preservation
(2099)
➢ He has the right to seek reimbursement from the
pledgor for the necessary expenses for preservation
of the thing pledged; or
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
➢ If he suffers damages because of the defective nature
of the thing which was not communicated to him by
the pledgor.
3. To compensate fruits, income, dividends or interest earned
or produced by the thing pledged with those due the
creditor (2102)
➢ If none are owing, or if there is an excess, they shall
be applied to the principal of the debt (2102, par.1)
➢ Offspring of animals pledged belong to the pledgor but
are subject to the pledge if there is no contrary
stipulation.
4. To institute actions of recovery and defense. The creditor
may bring actions belonging to the owner in order to
defend and recover the thing pledged.
➢ Stolen but not returned, he can file an action for the
recovery.
➢ If there is a case of eviction, if there is danger of him
being deprived of possession because there is another
person claiming ownership, he can exercise his rights
which pertain to the pledgor.
5. To preference of credit (2241, No.4)
6. To cause the sale of the security in case of the risk of
destruction, or default on the principal debtor
➢ Grounds (Two kinds of sale in pledge):
a. Precautionary Sale: If, without fault of the
pledgee, the thing runs the risk of destruction,
impairment or diminution in value, he may cause
it to be sold in a public sale; unless the pledgor
demands its return, offering another in its stead,
of the same kind and not of inferior value (2107)
✓ If sold, the price is substituted for the
security (2108)
✓ This happens even without default
b. Foreclosure Sale: if the credit is not paid in due
time (2112)
➢ Foreclosure sale may be:
a. Judicial (by court action), or
b. Extrajudicial (before a Notary Public or Clerk of
Court)
✓ At public auction (no publication required)
✓ With notice to the debtor and pledgor, stating
the amount for which the thing will be sold
✓ The pledgor or owner may bid at the sale
and must be preferred if he offers the same
as the highest bidder; but he cannot insist
that the thing be awarded to him if his bid is
not equivalent to that of the highest bidder.
✓ The pledgee may bid, but if he is the only
bidder, he cannot bid; this offer is void. If
there are no other buyers except the
pledgee, the pledgee should not return
the thing yet to the pledgor, he can set
for a second sale.
✓ The bids must be for payment at once
(installment not allowed) (2114); if not,
a bid accepted operates as payment to the
pledge, in so far as the debtor or owner is
concerned (2114) (risk of collection is on the
pledge)
✓ If at the first auction, the thing is not sold,
another auction must be held with the same
formalities; if there is still no sale, the
creditor may appropriate the thing,
issuing acquittance in full (2112, second
part)
✓ The sale extinguishes the obligation,
regardless of the proceeds. There can be no
reimbursement for excess, unless otherwise
agreed; and no recovery of deficiency
notwithstanding any stipulation to the
contrary
➢ Rule If Two Or More Things Are Pledged: If two
or more things are pledged, the pledgee may choose
which will be sold, unless the contrary is stipulated.
But he can sell only as many things as are needed for
the payment of the debt.
➢ Options of the Pledgee: To collect credit pledged if
the y fall due before redemption.
7. To collect credits pledged if they fall due before redemption
(2118)
➢ But he must apply the proceeds to the credit and pay
the surplus to the pledgor
Comments:
• In a foreclosure sale, if there was a successful public
sale conducted and the claim of the pledgee is P100k
and the proceeds of the sale is only P75k; remember
that the thing delivered was only a security, it is not
46 | P a g e
 delivered as a payment of the obligation, can the pledgee
recover the deficiency?
➢ No recovery of the deficiency, regardless of the
stipulation
• If the claim of the pledgee is P200k, the proceeds are
P280k, more than the claim. Can the pledgor demand
for the return of the excess?
➢ There can be no reimbursement for the excess,
unless otherwise stipulated
➢ Only if there is an express stipulation that in case of
excess or surplus of the sale, the pledgee must return
the excess.
• We are taking here of a foreclosure sale. It is only in
foreclosure sale where there is no obligation to
return the surplus nor right to collect the obligation.
But there can be recovery of the excess if there is an
express stipulation, but never a recovery of the deficiency.
• In a precautionary sale, you can recover the
deficiency or the surplus.
• Example of a precautionary sale: If the thing pledged
is a promissory note, and it matures before the maturity
of the obligation, so he must collect the PN (obligation, not
a right). If he collects the promissory note, apply the
proceeds and pay the surplus to the pledgor.
• If he should collect a credit before maturity (in a
precautionary sale) and he applies the proceeds to
the payment of the principal obligation and there is
a surplus, he is obligated to return the surplus
because it is only in the case of foreclosure sale that there
is no obligation to return the surplus, unless otherwise
provided.
• What if he collects the amount in a precautionary
sale, but the principal obligation is not yet due, what
will happen to the proceeds in the mean time?
➢ The proceeds of the auction shall be a security for the
principal obligation in the same manner as the thing
originally pledged (2108).
• If two or more things are pledged, the pledgee may
choose which he will cause to be sold; and he can only sell
so much or as many as are sufficient to cover the principal
obligation.
• This can be dangerous, remember there is no obligation to
return the excess of the proceeds of the foreclosure sale
(unless expressly stipulated).
• So, if you are the lawyer for the pledgor, tell your client to
include in the document a provision that in case of sale,
the pledgee or the creditor is obliged to return to the
pledgor the excess. Include that! Advise that to your client.
• If at the time of the maturity of the obligation, the
value has already depreciated, that if you sell, you
can never acquire the price to cover the entire
obligation, if you are the lawyer for the pledgee,
what would you advise to your client?
➢ Sue for a specific performance, not a public sale of the
thing pledged.
➢ You just extinguish the pledge, sue for specific
performance, and attach the thing pledged, in
addition to other assets of the debtor.
Obligations of the Pledgee
1. Preservation
a. Degree of diligence: The creditor shall take care of
the thing pledged with the diligence of a bonus pater
familias; and is liable for its loss or deterioration
(2099); ordinary diligence.
b. Use of the thing pledged: In relation to his
obligation to preserve the thing, can he use the thing?
➢ Generally, no. Two instances where he can use
the thing pledged:
✓ When he is authorized to use the thing.
✓ For preservation purposes. The use is
necessary for the preservation of the thing.
➢ He must not use the thing pledged unless
authorized or its preservation so requires;
otherwise the pledgor may ask that it be
deposited (2104)
➢ The pledgee of pawn tickets must renew them
when necessary
c. Liability of acts of agents/employees: The
pledgee is responsible for acts of his agents or
employees (2100)
d. Deposit of the thing pledged: The pledgee cannot
deposit the thing pledged with a third person, unless
there is a stipulation authorizing it (2100)
e. In case of danger to the thing pledged: The
pledgee must advise the pledgor without delay of any
danger to the thing pledged (2107, par.2)
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
f. Danger of loss through negligence of pledgee: If
through negligence or willful act of the pledgee, the
thing is in danger of loss or impairment, the pledgor
may require its deposit with a third person (2106)
g. In case of fear of destruction or impairment of
the thing: If there are reasonable grounds to fear the
destruction or impairment of the thing pledged
without fault of the pledge, the pledgor may demand
its return, upon offering another thing in pledge, of
the same kind and not of inferior quality (2107) unless
the pledge causes same to be publicly sold under 2108
Comments:
• In relation to the obligation to preserve the thing, if what
is delivered in pledge is a pawn ticket, (but there is
period to redeem the pawned item and if there is default,
the pawned item will be auctioned), is it your obligation
as a pledgee to renew the pawn?
➢ Yes. If you renew the pawn, you have to pay in
advance the interest, right? So that is an expense that
you can claim from the pledgor.
• The pledgee is bound by the acts of his agent especially if
damage is caused to the thing caused by the negligence of
the agent.
• Just like the contract of deposit, can the pledgee
deposit the thing with another person?
➢ No, unless he is authorized.
• In case of reasonable ground to fear of diminution of the
value of the thing, or danger to the thing, the obligation of
the pledgee is to notify the pledgor of such fact, and if the
danger of the loss or diminution in value of the thing is
without the fault of the pledgee; the pledgor has the right
to demand to recover the thing, of course with the
corresponding obligation to deliver another thing, by way
of replacement.
2. Restitution
➢ The contract of pledge gives a right to the creditor to
retain the thing in his possession or in that of a third
person to whom it has been delivered, until the debt
is paid.
➢ The pledge must return the pledge when the debt
is paid (2098)
➢ The return of the thing pledged to the pledgor or
owner extinguishes the pledge (not the principal debt)
(2100)
✓ A stipulation to the contrary shall be void
✓ Presumption: If subsequent to the perfection of
the pledge, the pledgor, or another person who
derives title from him, is in possession of the
thing pledged, it is presumed prima facie that
the pledgee returned it (2110) – A disputable
presumption.
Comments:
• When must he return the thing? On the termination of the
principal obligation, and if he does not return the thing
after the extinguishment of the principal obligation, then
he is now holding the thing now as a depositary for and
behalf of the pledgor. And he has now the obligations of
the depositary.
• And if prior to the extinguishment of the principal
obligation, the thing finds its way to the pledgor, the
presumption is that only the pledge is extinguished,
not the principal obligation; that the pledgee
voluntarily returned the thing to the pledgor.
• The same presumptions apply if the thing is found in the
possession of a third person after the constitution of the
pledge.
Case: When restitution must be made
Sarmiento and Villaseñor vs. Javellana
• Defendant loaned the plaintiffs the sum of P1,500 with
interest at the rate of 25 per cent per annum for the term
of one year.
• To guarantee this loan, the plaintiffs pledged a large medal
with a diamond in the center and surrounded with ten
diamonds, a pair of diamond earrings, a small comb with
twenty-two diamonds, and two diamond rings, which the
contracting parties appraised at P4,000.
• At the maturity of this loan the plaintiff Eusebio M.
Villaseñor, was unable to pay the loan, but he was able to
obtian from the defendant an extension, with the condition
that the loan was to continue.
• Days passed, the plaintiff Eusebio M. Villaseñor, in
company with Carlos M. Dreyfus, went to the house of the
defendant and offered to pay the loan and redeem the
jewels, taking with him, for this purpose, the sum of
47 | P a g e
 P11,000, but the defendant then informed them that the
time for the redemption had already elapsed.
• The plaintiffs now bring this action to compel the
defendant to return the jewels pledged, or their value,
upon the payment by them of the sum they owe the
defendant, with the interest thereon.
Supreme Court Ruling
• Without deciding whether or not the action to recover the
thing pledged may prescribe in any case, it not being
necessary for the purposes of this opinion, but supposing
that it may, still the defendant's contention is untenable.
• In the document evidencing the loan in question there is
stated: "I transfer by way of pledge the following jewels."
• That this is a valid contract of pledge there can be no
question. As a matter of fact, the defendant does not
question it, but takes it for granted.
• However, it is contended that the obligation of the
defendant to return the jewels pledged must be considered
as not stated in writing, for this obligation is not expressly
mentioned in the document.
• But if this contract of pledge is in writing, it must
necessarily be admitted that the action to enforce the
right, which constitutes the essence of this contract, is
covered by a written contract.
• The duty of the creditor to return the thing pledged
in case the principal obligation is fulfilled is essential
in all contracts of pledge.
• This constitutes, precisely, the consideration of the
debtor in this accessory contract, so that if this
obligation of the creditor to return to thing pledged,
and the right of the debtor to demand the return
thereof, are eliminated, the contract would not be a
contract of pledge. It would be a donation.
• If the right of the plaintiffs to recover the thing pledged is
covered by a written contract, the time for the
prescription of this action is ten years, according to
section 43 of the Code of Civil Procedure.
• Computing the time from that date to that of the filing of
the complaint in this cause, October 9, 1920, it appears
that the ten years fixed by the law for the prescription of
the action have not yet elapsed.
• On the other hand, the contract of loan with pledge is in
writing and the action of the defendant for the recovery of
the loan does not prescribe until after ten years.
• It is unjust to hold that the action of the plaintiffs for the
recovery of the thing pledged, after the payment of the
loan, has already prescribed while the action of the
defendant for the recovery of the loan has not yet
prescribed. The result of this would be that the defendant
might have collected the loan and at the same time kept
the thing pledged.
EFFECTS AS TO THE PLEDGOR
Rights of the pledgor
1. The pledgor remains the owner of the thing pledged, until
its sale, unless the thing is expropriated (2103)
➢ The pledgor may alienate the security with the
consent of the pledgee, subject to the pledge. The
ownership of the thing pledged is transmitted to the
vendee or transferee as soon as the pledgee consents
to the alienation, but the latter shall continue in
possession. (2097)
➢ Note that if the pledgor sells it, it does not transfer
ownership. Remember that it is the delivery that
transfer ownership, not the sale.
2. He may demand the deposit of the thing, if endangered by
fault or negligence of the pledge (2106) or used by the
pledge (2104)
3. He may substitute another thing if endangered without the
fault of pledgee (2107) provided it is of the same kind and
not of inferior quality
4. The pledgor is entitled to bid and to preference at the
foreclosure sale, as long as his bid is the same as that of
the highestbidder (2113)
5. He has the right to the return of the thing pledged upon
extinction of the principal obligation (2098)
Comments:
• Rights of the pledgor. He is still the owner of the thing
pledged. Because he still owns the thing, he bears
the risk of loss.
• If the pledgee uses the thing without the authority and not
necessary for the preservation of the thing, then the
pledgor can demand that the thing be deposited with
another person.
• If there is reasonable ground to fear a loss, or destruction
of diminution of the value of the thing, the pledgor has the
CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon
right to demand the return of the thing but with the
corresponding obligation to deliver another thing; but
there is also a corresponding right on the part of the
pledgee which is to sell the thing pledge (precautionary
sale). There are two conflicting rights here!
• Both rights cannot be reconciled. If one demands
return, then one cannot sell. If you sell, then you
cannot return. So, both cannot exercise their
respective rights at the same time.
• Now, whose right is now preferred?
➢ The pledgee’s right to precautionary sale (to
sell) is preferred.
• In case of foreclosure sale, the pledgor has the right to bid
and in fact, his bid would be preferred if his bid is equal to
that of the highest bidder.
• Right to return the thing upon the extinguishment of the
obligation.
• The pledgor, who is a third-party pledgor has the rights of
a guarantor. So, he can seek for reimbursement from the
principal debtor and he is likewise subrogated to the rights
of the creditor.
Obligations of the pledgor
1. He must notify the pledgee of flaws of the thing known to
him otherwise he answers for damages, like the bailor in
commodatum (2101)
Comments:
• Obligation to notify the pledgee of a defect of a thing
delivered by way of pledge. Why this obligation?
➢ Because if the pledgee suffers damage because of the
defective nature of the thing, the pledgor can be held
liable for the damage caused.
➢ But the pledgor must know of the defect of the
thing (that’s why you have to notify).
➢ This is different from the contract of the sale, which
knowledge of the defect is immaterial.
EXTINGUISHMENT OF THE PLEDGE
1. By extinction of the principal obligation
2. By destruction or loss of the thing pledged
• What if the thing is lost through the fault of the
pledgor, will this still extinguish the pledge?
➢ Yes, it will still extinguish the pledge. However,
the pledgor would be held accountable for
damages.
3. By return of the thing pledged
4. By renunciation by the pledgee or abandonment of the
pledge in writing, even without return, or consent of the
pledgor
5. By redemption of the party having any right in or to the
thing pledged (2117)
6. By other causes of extinguishments of ordinary obligations
LEGAL PLEDGE (Right of Retention)
• These pledges are governed by the rules of conventional
pledge as to:
➢ Possession
➢ Care and preservation
➢ Sale of the thing pledged (2121)
✓ The sale may be made only after demand of the
sum due (2122)
✓ Within 30 days after such demand
❖ If no sale takes place within such period, the
debtor may require the return of the thing
retained, unless delay is justified
✓ The excess of the price over the debt must be
returned to the debtor
Cases of Retention: The following are examples of legal
pledges:
1. Possessor in good faith – the possessor in good faith,
for necessary and useful expenses (546)
2. Usufructuary – for taxes and extraordinary expenses
3. Agent – for expenses advanced and damages caused by
the agency (1914)
4. Mechanic’s lien – the person who executes work on a
movable for the payment thereof (1731)
5. Depositary – for expenses by reason of the deposit
(1994)
6. Hotelkeeper – for credits for lodging and supplies
furnished to travelers (2123)
Comments:
• Pledge is extinguished with the extinguishment of the
principal obligation because pledge is an accessory
contract.
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• Destruction or the loss of the thing subject of the pledge,
regardless of who is the author of the loss.
• If the loss is because of the fault of the pledgee, the pledge “Learning is NOT a spectator sport.”
is still extinguished; but liable for damages. – D. Blocher
• Renunciation by the pledgee. When you renounce a
right, do you receive something in return?
➢ This is similar to condonation. “Education is what survives when what
➢ Condonation is a gratuitous abandonment by the
creditor of his claim against the debtor. has been learned has been forgotten.”
➢ Because it is gratuitous, it is similar to that of a – B. F. Skinner
donation and because it is considered as a donation,
it must comply with the formal requirements of a
donation, then there must be acceptance. No valid “The purpose of learning is growth, and
donation when there is no acceptance. Does this our minds, unlike our bodies, can continue
apply in pledge? NO!
• What is required in order to effect renunciation? growing as long as we live.”
➢ Notify the pledgor in writing. Acceptance is not – Mortimer Adler
required.
➢ Unlike condonation which requires acceptance,
renunciation of a pledge as special provision of
a law, there is no requirement of acceptance.
• Is there a need to return the thing upon renunciation
to the pledgor? PLEASE DO NOT POST THIS ON SCRIBD,
➢ No. It is not required that the pledgee return the thing COURSEHERO, ACADEMIA, OR ANY OTHER NOTE-
to the pledgor. SHARING PLATFORM ONLINE!!!
➢ So, if he does not return, and the thing remains in his
possession, after notifying the pledgor of his
renunciation of the thing and then the obligation
matures, and the debtor fails to pay the obligation.
Can he sell the thing?
✓ No, because after he renounces the pledge,
but prior to return of the thing to the
pledgor, he holds the thing as a depositary
for the pledgor not as a pledgee anymore.
• There is no right of redemption in case of a
foreclosure sale in case of pledge. There is only right
of redemption in case of mortgage of real property (REM).
• What is redemption here in pledge?
➢ Redemption here is paying the principal obligation so
that the thing should not be sold in a public sale in
case of default.
• It is not enough that in legal pledge the creditor retains
possession of the thing, because there is no transfer of
ownership. So, what does the creditor do to demand
the debtor to pay the obligation?
➢ In case of hotel keeper, send a demand to the guest.
• Note that the sale must be made within 30 days, not
after. So, don’t confuse this with the rule in deposit, where
the depositary knows that the thing is stolen and knows
who the owner is, and there is a suspension of delivery
within 30 days, and return is made after 30 days if there
is no demand to return from the owner. Here in pledge,
the sale has to be made within 30 days.
• What happens when there is no sale made within 30
days?
➢ The creditor must return the movable to the
respective owner.
• If the movables previously sequestered are returned
to the debtor, does the creditor still have the cause
of action against the creditor?
➢ Example, you live in Marco Polo Hotel and you haven’t
paid the room rates and the hotel sequestered your
personal effects, sends a notice to you at USC Law,
through registered mail.
✓ The hotel can retain your personal effects to cover
for your outstanding balance.
✓ The hotel may sell the personal effects within 30
days if you do not pay.
✓ After the 30 days and no sale was made, the
obligation of the hotel is to return the
personal effects to you.
➢ Now, can the hotel still can go after you?
✓ Yes. Only the securities are terminated, but your
liability to the hotel remains.
✓ Only the legal pledge is extinguished.
✓ The principal obligation to pay the room rates is
not extinguished.
• Assume instead that a sale happens, and the
proceeds are more than the amount that you owe
the hotel. Is the guest (debtor) entitled to the
excess?
➢ Yes. The hotel is obliged to return the excess to the
guest (debtor).
• What if the proceeds are less than the amount that
you owe the hotel? Can the hotel recover the
deficiency from the guest?
➢ Yes. The hotel can still recover the deficiency from the
guest (debtor).

CTNegado | Credit Transactions | Judge Adviento | EH403 | USC Law | 2 nd Sem., A.Y. 2018-2019 49 | P a g e
Sources: Judge’s Discussion, Tanya 2016, EH403 2016 Notes, Unnamed 2013 Credit Notes, UST Golden Notes, De Leon