Credit Transactions

CREDIT
TRANSACTIONS
CREDIT TRANSACTIONS
include all transactions involving the purchase or loan of goods,
services or money in the present with a promise to pay or
deliver in the future (contract of security)
2 TYPES OF CREDIT
TRANSACTIONS
1. SECURED TRANSACTIONS – those supported by a collateral or
an encumbrance of property
2. UNSECURED TRANSACTIONS – those supported only by a
promise to pay or the personal commitment of another such as a
guarantor or surety
SECURITY
is something given, deposited or serving as a means to
ensure the fulfillment or enforcement of an obligation or of
protecting some interest in the property
2 TYPES OF SECURITY
1. personal – when an individual becomes a surety or a
guarantor
2. real or property – when an emcumbrance is made on
property
BAILMENT
is the delivery of property of one person to another in trust
for a specific purpose, with a contract, express or implied,
that the trust shall be faithfully executed and the property
returned or duly accounted for when a special purpose is
accomplished or kept until the bailor reclaims it.
PARTIES IN BAILMENT
1. bailor – the giver, the party who delivers
possession/custody of the thing bailed
2. bailee – the recipient, the party who receives the
possession/custody of the thing delivered
KINDS OF CONTRACTUAL
BAILMENT W/ REFERENCE TO
COMPENSATION
1. for the sole benefit of the bailor (gratuitous) e.g. gratuitous
deposit, mandatum (do some act w/ respect to a thing)
2. for the sole benefit of the bailee (gratuitous) e.g.
commodatum, gratuitous simple loan or mutuum
KINDS OF CONTRACTUAL
BAILMENT W/ REFERENCE TO
COMPENSATION
3. for the benefit of both parties e.g. deposit for compensation,
involuntary deposit, pledge and bailments for hire:
a. hire of things – temporary use
b. hire of service – for work or labor
c. hire of carriage of goods – for carriage
d. hire of custody – for storage
LOAN
is a contract by which one of the parties delivers to another,
either something not consumable so that the latter may use
the same for a certain time and return it, in which case the
contract is called commodaturm; or money or other
consumable thing, upon the condition that the same
amount of the same kind and quality shall be paid, in which
case the contract is simply called a loan or mutuum.(Art
1933)
CHARACTERISTICS OF A LOAN:
1. real contract – delivery is essential for perfection of the loan
(BUT a promise to lend, being consensual, is binding upon the
parties)
2. unilateral contract - only the borrower has the obligation
CAUSE OR CONSIDERATION IN A
CONTRACT OF LOAN:
1. as to the borrower – the acquisition of the thing
2. as to the lender – the right to demand its return or its
equivalent
2 KINDS OF LOAN:
COMMODATUM MUTUUM OR SIMPLE LOAN
Nature bailor delivers to the bailor (creditor) delivers to
bailee a nonconsumable the bailee (debtor) money or
thing so that the latter other consumable thing
may use it for a certain upon the condition that the
time and return the latter will pay the same
identical thing amount of the same kind and
quality
COMMODATUM MUTUUM OR SIMPLE
LOAN
Subject matter Nonconsumable thing (Art Money or other
1936) Except: when purpose of consumable thing
contract is not consumption,
but merely for exhibition the
subject matter may be a
consumable thing. In this case,
the use is exhibition of the
thing, so the consumable thing
is not being used in a manner
appropriate to its purpose, but
for another purpose.
LOAN
Transfer of None, ownership is retained Ownership is transferred to
ownership by bailor (Art 1933) the debtor
Consideration None, essentially gratuitous May be gratuitous or
(Art 1933) onerous, i.e. w/ stipulation
to pay interest
Note that if there is any
compensation, the contract
that arises is a lease
contract (Art. 1643)
LOAN
need to return Bailee must return the same debtor needs only to pay
and what thing loaned (Art 1933) the same amount of the
same kind and quality
Nature of May involve real or personal Only personal property
property involved property (Art 1937)
Purpose of loan Loan for use (Art 1935) If Loan for consumption
the bailee is not entitled to
the use of the thing, the
contract may be a deposit.
(Art 1962)
LOAN
WON return may YES, in case of urgent need NO, creditor may not
be demanded (Art 1946) demand its return before
before end of the lapse of the term
term agreed upon
who suffers the Bailor, since he is the owner Debtor suffers the loss
loss (Art 1942, Art 1174)
A thing is consumable when it is used in a manner appropriate to

its purpose or nature. (Art 418)
COMMODATUM
2 KINDS OF COMMODATUM:
1. ordinary commodatum - use by the bailee of the thing is for a
certain period of time
2. precarium – one whereby the bailor may demand the thing
loaned at will; exists in cases where:
i. neither the duration of the contract nor the use to which the thing
loaned should be devoted has been stipulated
ii. if the use of the thing is merely tolerated by the owner. (Art 1947)
COMMODATUM
General rule: In a commodatum, the right to use is limited to the
thing loaned, and not to its fruits.
Except: There is stipulation to the contrary. (Art 1940) In cases
where there is such a stipulation, enjoyment of the fruits must be
incidental to the use of the thing itself. Otherwise, if the use of
the fruits is the main cause, the contract ma be one of usufruct.
(Art 562)
COMMODATUM
What is the effect of an accepted promise to deliver by way of commodatum
or mutuum?
It is binding upon the parties, but the contract of loan shall not be perfected
until delivery of the contract. (Art 1934)
Who may be bailor in commodatum?

 Anyone. The bailor in commodatum need not be the owner of the thing
loaned. (Art 1938)
But the bailee himself may not lend nor lease the thing loaned to him to a
third person (Art 1939(2))
COMMODATUM
General rule: Commodatum is purely personal in character. (Art 1939)
1. death of either party extinguishes the contract
2. bailee can neither lend nor lease the thing lent to him to a third person
Except: Members of the bailee’s household may make use of the thing
loaned
Except: Bailee’s household may NOT use it when:
1. there is stipulation to the contrary, or
2. the nature of the thing forbids such use.
What are the OBLIGATIONS OF THE
BAILEE in commodatum?
1. obligation to pay for the ordinary expenses for the use and
preservation of the thing loaned (Art 1941)
2. obligation to take good care of the thing with the diligence of a
good father of a family (Art 1163)
3. liability for loss, even if loss through fortuitous event, in certain
circumstances (Art 1942)
4. liability for deterioration of thing loaned, except under certain
circumstances (Art 1943)
5. obligation to return the thing upon expiration of term or upon
demand in case of urgent need
6. solidary obligation where there are 2 or more bailees to whom
a thing was loaned in the same contract (Art 1945)
General rule: Bailee is not liable for loss or damage due to a fortuitous
event (Art 1174), since the bailor retains ownership of the thing
Except: Bailee is liable even for loss due to a fortuitous event when:
(Art 1942)
1. he devotes the thing to any purpose different from that for which it
was loaned
2. he keeps it longer than the period stipulated, or after the
accomplishment of the use for which the commodatum has been
constituted
3. the thing loaned has been delivered with appraisal of its value,
unless there is stipulation exempting the bailee from
responsibility in case of a fortuitous event
4. he lends or leases the thing to a third person who is a not a
member of his household
5. being able to save either the thing borrowed or his own thing,
he chose to save the latter.
General rule: Bailee is liable for deterioration of thing loaned.
Except: The deterioration of the thing is due only to the use
thereof and w
General rule: Bailee has no right of retention of the thing loaned,
on the ground that the bailor owes him something.
Except: Bailee has a right of retention for damages for known
hidden flaws mentioned in Art 1951. (Art 1944)
What are the requisites for the application of Art.
195?
1. There is a flaw or defect in the thing loaned
2. The flaw or defect is hidden
3. The bailor is aware thereof
4. He does not advise the bailee of the same, and
5. The bailee suffers damages by reason of said flaw or defect
BAILOR in a commodatum?
1. obligation to respect the duration of the loan: The bailor cannot
demand the return of the thing loaned till after the expiration of
the period stipulated, or after the accomplishment of the use for
which the commodatum has been constituted.
Except: Bailor may demand return or temporary use before end of
term when:
1. he should have urgent need of the thing (Art 1946)
2. bailee commits an act of ingratitude specified in Art 765 (Art
1948)
What are the OBLIGATIONS OF THE BAILOR in
a commodatum?
The law uses “its return” or “temporary use” because the return
demanded may be temporary or permanent.
In case of temporary use by the bailor, the rights and duties of
the parties are temporarily suspended while the thing is in the
possession of the bailor. (Art 1946, par 2)
Any of the following constitutes acts of ingratitude:
1. bailee commits offenses against the person, the honor, or the
property of the bailor, or of his wife or children under his parental
authority
2. bailee imputes to the bailor any criminal offense, or any act
involving moral turpitude, even though he should prove it, unless
the crime or the act has been committed against the bailee
himself, his wife, or children under his authority, and
3. if the bailee unduly refuses the bailor support when the bailee
is legally or morally bound to give support to the bailor
Article 765 is applicable, because like a donation, a
commodatum is essentially gratuitous. (Art 1933, par 2)
2. obligation to refund extraordinary expenses (Art 1949):
a. extraordinary expenses for the preservation of the thing are
borne by the bailor.
Requisites for liability of bailor to arise:
1. extraordinary expense for preservation
2. bailee gives bailor notice before incurring the expenses, except
when the expense is so urgent that a reply to notice cannot be
awaited without danger to the thing
b. extraordinary expenses on the occasion of actual use by bailee,
even if without fault are borne equally by the bailor and the bailee,
unless there is contrary stipulation
c. ordinary expenses for use and preservation are also borne by
bailor (Art 1950, in rel Art 1941)
Requisites for liability of bailor to arise:
Bailor has no right of abandonment: He cannot exempt himself
from payment of expenses to bailee by abandoning the thing to
the latter. (Art 1952)
MUTUUM OR SIMPLE LOAN
A mutuum or simple loan is a contract by which a person
(creditor) delivers to another (debtor) money or other
consumable thing with the understanding that the same amount
of the same kind and quality shall be paid. (Art 1953)
ELEMENTS OF A MUTUUM:
1. delivery of a money or other consumable thing
2. obligation on the part of debtor to pay (not exactly to return)
When is a contract deemed a barter? (Art 1954)
1. transfer of ownership of non-fungible thing to another
2. obligation on the part of the latter to give things of the same
kind, quantity, and quality
WHAT IS A FUNGIBLE THING?
 Fungibles are those which are dealt with by number, weight, or
measure, such as grain, oil, sugar, etc.
Whether a thing is consumable or not depends on the nature
and whether it is fungible or not depends on the intention of the
parties.
 e.g. Wine is consumable by nature, but it may be non-fungible if
the intention is merely for display or exhibition.
LOAN (BOTH KINDS) BARTER
Subject matter Money or any other Non-fungible things
fungible things
Obligation Obligation to return or to Obligation to give an
pay equivalent or that
received
Consideration Loan may be gratuitous Barter is always onerous
(commodatum)
The object of simple loan may be either money or consumable or
fungible things.
1. loan of money
2. loan of fungible thing
KINDS OF INTEREST:
1. Simple interest – which is paid for the principal at a certain rate
fixed or stipulated by the parties
2. Compound Interest – that which is imposed interest due and
unpaid. The accrued interest is added to the principal sum and the
whole is treated as a new principal upon which the interest for the
next period is calculated
KINDS OF INTEREST:
3. Legal Interest – that which the law directs to be charged in the
absence of any agreement as to the rate between the parties.
4. Lawful Interest – that which the laws allow or do not prohibit
5. Unlawful or Usurious Interest – paid or stipulated to be paid
beyond the maximum fixed by law
KINDS OF INTEREST:
General Rule: If the exact rate of interest is not mentioned, the
legal rate shall be imposed
Except:
a. the debtor is liable to pay legal interest (12%) as indemnity
even in the absence of stipulation for the payment of interest
b. interest due shall earn legal interest from the time it is judicially
demanded although the obligation may be silent upon this
point
KINDS OF INTEREST:
General Rule: Accrued interest shall not earn interest
Except:
a. when judicially demanded as provided in art 2122.
b. when there is an express stipulation made by the parties that
the interest due and unpaid shall be added to the principal
obligation and the resulting total amount shall earn interest
PAYMENT OF UNSTIPULATED INTEREST
1. where unstipulated interest is paid by mistake the debtor may
recover as this would be a case of solution indebiti or undue
payment
2. where the unstipulated interest is paid voluntarily because the
debtor feels morally obliged to do so there can be no recovery as
in the case of natural obligations
USURY
1. Usury is contracting for or receiving something in excess of the
amount allowed by law for the loan or forbearance of money,
goods or chattels
2. Forbearance signifies the contractual obligation of the creditor
to forbear or refrain during a period to require the debtor
payment of an existing debt then due and payable.
3. Where there is no loan or forbearance there is no usury
USURY
4. The usury law has not been repealed, it is just suspended; there
may still be unconscionable interest if the court finds it so
5. Interest is the compensation allowed by law or fixed by the
parties for the loan or forbearance of money, goods or chattels
6. a floating interest rate is not invalid per se but there must be a
reference point
USURY
7. Requirements for a valid escalation clause
a. increase is provided by law/ resolution by the monetary board
b. there is a corresponding deescalation clause
c. the effectivity of the clause is on or after the effect of increase
ordered on the maximum interest
DEPOSIT
is constituted from the moment a person receives a thing
belonging to another, with the obligation of safely keeping it and
of returning the same. If the safekeeping of the thing delivered is
not the principal purpose of the contract, there is no deposit but
some other contract. (Art. 1962)
CHARACTERISTICS OF A DEPOSIT
1. Real – like commodatum & mutuum; bec it’s perfected by the
delivery of the subj matter. Where there is no delivery, there is
merely an agreement to deposit w/c, however, is binding &
enforceable upon the parties. Hence, a contract of future deposit
is consensual (see 1934 CC).
2. Unilateral – if it’s gratuitous; bec only the depositary has an
oblig.
3. Bilateral – if it’s for a compensation; bec it gives rise to obligs on
both the depositary & the depositor.
CHARACTERISTICS OF A DEPOSIT
4. Voluntary as a general rule. It becomes necessary in the 3 cases in
1996 & 1998 CC and in cases of deposit of goods made by
travelers/passengers w/ common carriers, which may also be regarded
as necessary.
5. Gratuitous as a general rule
Exceptions:
1. where there is contrary stipulation
2. where depositary engaged in the business of storing goods
3. where property saved from destruction w/o knowledge of the
owner
PRINCIPAL PURPOSE
Safekeeping of the thing delivered. (This is why if it’s only an
accessory or secondary obligation of the recipient, deposit is not
constituted but some other contract).
PRINCIPAL PURPOSE
1. DEPOSIT VS MUTUUM
PURPOSE Safekeeping or mere Consumption of the subject

custody matter
DEMANDABILITY Depositor can demand the Lender must wait until the
return of the subject expiration of the period
matter at will granted to the debtor
OBJECT May be both movable & Only money and other
immovable property fungible thing
PRINCIPAL PURPOSE
2. DEPOSIT VS COMMODATUM
PURPOSE Safekeeping Transfer of the use

REMUNERATION May be gratuitous Essentially & always
gratuitous
OBJECT In extrajudicial deposit, Both movable & immovable
only movable things may property may be the object
be the object
CREATION OF A DEPOSIT
1. By virtue of a court order; or
2. By law
3. Not by the will of the parties
4. It is essential that the depositary is not the owner of the
property deposited (Art. 1962)
EXTINGUISHMENT OF DEPOSIT
1. A deposit is extinguished:
a. upon the loss or deterioration of the thing deposited;
b. upon the death of the depositary, ONLY in gratuitous deposits;
c. other provisions in the Civil Code (novation, merger, etc.)
KINDS OF DEPOSIT
1. judicial - when an attachment or seizure of property in litigation
is ordered
2. extrajudicial (Art. 1967)
a. voluntary- delivery is made by the will of the depositor or by
two or more persons each of whom believes himself entitled to
the thing deposited;
b. necessary- made in compliance with a legal obligation, or on the
occasion of any calamity, or by travelers in hotels and inns or by
travelers with common carriers
PRINCIPAL PURPOSE
JUDICIAL EXTRAJUDICIAL
Creation Will of the court Will of the contracting

parties
Purpose Security or ensure the right of a Custody and safekeeping
party to property or recover in
case of favorable judgment
Subject Generally immovables
Matter
PRINCIPAL PURPOSE
JUDICIAL EXTRAJUDICIAL
Cause Always onerous Maybe compensated but

generally gratuitous
Return of Upon order of the court/ end Upon demand of depositor
thing of litigation
In whose Person who has a right Depositor or 3rd person
behalf held designated
SUBJECT MATTER OF DEPOSIT
1. Only movable/personal property may be the object of
extrajudicial deposit, whether voluntary or necessary. The
provisions do not embrace incorporeal or intangible property, like
rights & actions.
2. Judicial deposit may cover movable as well as immovable
property, its purpose being to protect the rights of the parties to a
suit.
PARTIES TO A DEPOSIT
1. Ordinarily, there are only 2 persons involved. Sometimes, however,
the depositary may be a 3rd person.
2. The main difference btw a voluntary deposit & a necessary deposit
is that in voluntary deposit, the depositor has complete freedom in
choosing the depositary, whereas in the latter, there is lack of free
choice in the depositor.
PARTIES TO A DEPOSIT
3. As a general rule, the depositor must be the owner of the thing
deposited. However, it may belong to another person than the
depositor. For example, when two or more persons claiming to be
entitled to a thing may deposit the same with a third person. In such
case, the third person assumes the obligation to deliver to the one to
whom it belongs. The depositary may bring an action of interpleader
to compel the depositors to settle their conflicting claims. Here one
of the depositors is not the owner.
DEPOSITARY IS CAPACITATED; DEPOSITORY IS INCAPACITATED;
DEPOSITOR IS INCAPACITATED DEPOSITOR IS CAPACITATED
Depositary is subject to ALL the Depositary does not incur the
obligations of a depositary obligations of a depositary
Depositary must return the property Depositary, however is liable to:
either to: a) Return the thing deposited while
a) The legal representative of the still in his possession;
incapacitated, AND
OR b) Pay the depositor the amount by
b) The depositor himself if he which he may have benefited himself
should acquire capacity with the thing or its price subject to
the right of any 3rd person who
acquires the thing in good faith
OBLIGATIONS OF THE DEPOSITARY
1. Two primary obligations (Art. 1972)
a) safekeeping of the object, using as a degree of care the same
diligence that the depositary would exercise over his property
Exception: The depositary cannot excuse himself from liability in the
event of loss by claiming that he exercised the same amount of care
toward the thing deposited as he would towards his own if such care
is less than that required by the circumstances.
Rationale:
i. Essential requisite of judicial relation which involves the depositor’s
confidence in his good faith and trust worthiness;
ii. The presumption that the depositor took into account the diligence
which the depositary is accustomed with respect to his own property.
b) Return of the thing when required – even though a specified term
or time for such may have been stipulated in the contract.
a) safekeeping of the object, using as a degree of care the same
diligence that the depositary would exercise over his property
Exception: The depositary cannot excuse himself from liability in the
event of loss by claiming that he exercised the same amount of care
toward the thing deposited as he would towards his own if such care
is less than that required by the circumstances.
Rationale:
i. Essential requisite of judicial relation which involves the depositor’s
confidence in his good faith and trust worthiness;
ii. The presumption that the depositor took into account the diligence
which the depositary is accustomed with respect to his own property.
b) Return of the thing when required – even though a specified term
or time for such may have been stipulated in the contract.
2. Obligation not to transfer deposit (Art. 1973) a) General rule the
depositary is not allowed to deposit the thing with a third person.
Rationale
A deposit is founded on trust and confidence and it can be supposed
that the depositor, in choosing the depositary, has taken into
consideration the latter’s qualification.
Exception
The depositary is authorized by express stipulation.
b) General rule: Depositary is liable for loss of the thing deposited
when:
i. He transfers the deposit with a third person without authority
although there is no negligence on his part and the third person;
ii. He deposits the thing with a third person who is manifestly careless
or unfit although authorized, even in the absence of negligence; or
iii. The thing is lost through the negligence of his employees whether
the latter are manifestly careless or not
Exception: There is an exemption from liability when The thing is lost
without the negligence of the third person with whom he was
allowed to deposit the thing if such third person is not “manifestly
careless or unfit.”
3. Obligation not to change the way of deposit (Art. 1974)
General rule:
Depositary may not change the way of the deposit
Exception:
If there are circumstances indicating that the depositor would
consent to the change. This is a situation wherein the depositary
would reasonably presume that the depositor would agree to the
change if he knows of the facts of the situation.
Requisites:
a) The depositary must notify the depositor of such change and
b) Must wait for the reply of the depositor to such change.
Exception: If the delay of the reply would cause danger.
4. Obligation to collect on the choses in action deposited (Art. 1975)
a) If the thing deposited should earn interest, the depositary is under
the obligation to:
i. Collect the capital and interest as they become due;
ii. Take such steps as may be necessary to preserve its value and the
right corresponding to it.
b) A contract for the rent of safety deposit boxes is not an ordinary
contract of lease of things, but a special kind of deposit; hence, it is
not to be strictly governed by the provisions on deposit. The
prevailing rule in the US is that the relation between a bank renting
out safety deposit boxes and its customer with respect to the
contents of the box is that of bailor and bailee.
5. Obligation not to commingle things if stipulated (Art. 1976)
General rule: The depositary is permitted to commingle grain or other
articles of the same kind and quality.
Effects:
a) The various depositors of the mingled goods shall own the entire
mass in common.
b) Each depositor shall be entitled to such portion of the entire as the
amount deposited by him bears the whole.
Exception: When there is a stipulation to the contrary.
6. Obligation not to make use of the thing deposited (Art. 1977)
a) General rule: Deposit is for safekeeping of the subject matter and
not for its use.
Exceptions:
a) Expressly authorized by the depositor;
b) Such use is necessary for its preservation but limited for the
purpose only.
b) Unauthorized use will result in liability for damages. In addition,
unauthorized use will have the following effects:
i. If the thing deposited is nonconsumable:
General rule: The contract loses the character of a deposit and
acquires that of a commodatum despite the fact that the parties may
have denominated it as a deposit.
Exception: Safekeeping is still the principal purpose of the contract.
ii. Thing deposited is money or other consumable thing:
General rule: Converts the contract into a simple loan or mutuum.
Exception: Safekeeping is still the principal purpose of the contract,
but it becomes an irregular deposit. Bank deposits are in the nature
of irregular deposits but they are really loans governed by the law on
loans.
7. Liability for loss through fortuitous events (Art. 1979)
General rule: If the thing deposited is lost without a fortuitous event,
the depositary is presumed at fault. If it was lost through a fortuitous
event, the depositary is not liable without his fault.
Exceptions:
a) If it is so stipulated;
b) If he uses the thing without the depositor’s permission
c) If he delays in its return;
d) If he allows others to use it, even though he himself may have
been authorized to use the same.
8. Relation between bank and depositor (Art. 1980) Fixed, savings,
and current deposits of money in banks and similar institutions shall
be governed by the provisions concerning simple loan.
a) Contract of loan – deposits in banks are really loans because the
bank can use the same for its ordinary transactions
b) Relation of creditor and debtor – the relation between a depositor
and a bank is that of a creditor and a debtor.
9. Obligation when the thing deposited is closed and sealed (Art. 1981)
General rule:
The depositary has the obligation to:
a) return the thing deposited when delivered closed and sealed in the
same condition;
b) pay for damages should the seal or lock be broken through his fault,
which is presumed unless proven otherwise;
c) Keep the secret of the deposit when the seal or lock is broken, with
or without his fault.
9. Obligation when the thing deposited is closed and sealed (Art. 1981)
Exception: The depositary is justified in opening a closed and sealed

subject matter
a) When the depositary is presumed authorized to do so (the
presumption applies if the key has been delivered to him)
b) When the instructions of the depositor as regards the deposit
cannot be executed without opening the box or receptacle. (Necessity)
10.Obligation to return products, accessories and accessions (Art.
1983)
11.Obligation to pay interest on sums converted for personal use (Art.
1983)
12.The depositary who receives the thing in deposit cannot require
that the depositor prove his ownership over the thing (Art. 1984)
13. Where a third person appears to be the owner. (Art. 1984) The
depositary may be relieved from liability when:
a) He advised the true owner of the thing of the deposit.
b) If the owner, is spite of such information, does not claim it within
the period of one month (30 days)
14.Obligation of the depositary when there are two or more
depositors. (Art. 1985)
a) In cases of a divisible thing and joint depositors – each one of the
depositors can demand only his share proportionate thereto.
b) In cases of an Indivisible thing and solidary depositors – rules on
active solidarity
i) General Rule: Each one of the depositors may do whatever may be
useful to the others. (Art. 1212)
Exception: Anything which may be prejudicial to the other depositors.
14.Obligation of the depositary when there are two or more depositors.
(Art. 1985)
ii) General Rule: The depositary may return the thing to any one of the
solidary depositors
Exception: When a demand, judicial or extrajudicial, for its return has
been made by one of them in which case delivery should be made to him.
c) In cases where there is a stipulation of return to one of the depositors –
if by stipulation, the thing should be returned to one of the depositors,
the depositary is bound to return it only to the person designated
although he has not made any demand for its return.
15.Obligation to return to the person to whom return must be made.
(Art. 1986)
a) The depositary is obliged to return the thing deposited, when
required, to:
 The depositor;
To his heirs or successors; or
To the person who may have been designated in the contract.
(Art. 1986)
b) If the depositor was incapacitated at the time of making the
deposit, the property must be returned to:
His guardian or administrator;
To the person who made the deposit;
To the depositor himself should he acquire capacity.
(Art. 1986)
c) Even if the depositor had capacity at the time of making the
deposit but he subsequently loses his capacity during the deposit, the
thing must be returned to his legal representative.
16.Obligation to return at the place of return (Art. 1987)
General rule: At the place agreed upon by the parties, transportation
expenses shall be borne by the depositor.
Exception: (In the absence of stipulation) At the place where the thing
deposited might be even if it should not be the same place where the
original deposit was made.
17.Obligation to return upon the time of return. (Art. 1988)
General rule: The thing deposited must be returned to the depositor
upon demand, even though a specified period or time for such return
may have been fixed.
Exceptions:
a) When the thing is judicially attached while in the depositary’s
possession
b) When notified of the opposition of a third person to the return or
the removal of the thing deposited
18.Right of the depositary to return the thing deposited. (Art. 1989)
(NOTE: in this case, it is the depositary who is returning the deposit
WITH OR WITHOUT THE DEMAND of the depositor)
General rule: The depositary may return the thing deposited
notwithstanding that a period has been fixed for the deposit if:
a) The deposit is gratuitous;
b) The reason is justifiable.
18.Right of the depositary to return the thing deposited. (Art. 1989)
If the depositor refuses to receive the thing, the depositary may
deposit the thing at the disposal of the judicial authority.
Exception: When the deposit is for a valuable consideration, the
depositary has no right to return the thing before the expiration of
the time designated even if he should suffer inconvenience as a
consequence.
19.Depositary’s liability in case of loss by force majeure or
government order. (Art. 1990)
The depositary is not liable in cases of loss by force majeur or by
government order. However, he has the duty to deliver to the
depositor money or another thing he receives in place of the thing.
20.Liability in case of alienation of the depositary’s heir. (Art. 1991)
When alienation is done in GOOD FAITH:
a) Return the value of the thing deposited
b) Assign the right to collect from the buyer.
The heir does not need to pay the actual price of the thing deposited.
When alienation is done in BAD FAITH:
a) Liable for damages;
b) Pay the actual price of the thing deposited.
21.Depositary may retain the thing in pledge until the full payment of
what may be due him by reason of the deposit. (Art. 1994)
The thing retained serves as security for the payment of what may be
due to the depositary by reason of the deposit. (see Art. 1965, 1992,
1993). Note: The debt must be prior to the deposit.
OBLIGATIONS OF THE DEPOSITOR
1. Obligation to pay expenses of preservation. (Art. 1992) 2. Obligation to
pay losses incurred due to character of thing deposited. (Art. 1993)
General rule: The depositary must be reimbursed for loss suffered by him
because of the character of the thing deposited.
Exceptions:
a) Depositor was not aware of the danger;
b) Depositor was not expected to know the dangerous character of the
thing;
c) Depositor notified the depositary of such dangerous character;
d) Depositary was aware of the danger without advice from the depositor.
OBLIGATIONS OF THE DEPOSITOR
3. Effect of death of depositor or depositary. (Art. 1995)
a) Deposit gratuitous – death of either of the depositor or depositary
extinguishes the deposit (personal in nature). By the word
“extinguished,” the law really means that the depositary is not
obliged to continue with the contract of deposit.
b) Deposit for compensation – not extinguished by the death of
either party.
NECESSARY DEPOSITS
A deposit is necessary when:
1. It is made in compliance with a legal obligation, in which case it is
governed by the law establishing it, and in case of deficiency, the
rules on voluntary deposit e.g. Arts. 538, 586 and 2104
2. It takes place on the occasion of any calamity, such as fire, storm,
flood, pillage, shipwreck, or other similar events. There must be a
causal relation between the calamity and the constitution of the
deposit. In this case the deposit is governed by the rules on voluntary
deposit and Art. 2168
3. Made by passengers with common carriers., as to those baggage
the passengers or their agents carry
NECESSARY DEPOSITS
4. Made by travelers in hotels or inns. (Art. 1998)
The hotel-keeper cannot free himself from responsibility by posting notices to
the effect that he is not liable for the articles brought by the guest. (Art. 2003)
Any stipulation between the hotel-keeper and the guest whereby the
responsibility of the former (as set forth in Art. 1998-2001) is suppressed or
diminished shall be VOID.
Before keepers of hotels or inns may be held responsible as depositaries with
regard to the effects of their guests, the following must concur:
Elements:
a) They have been previously informed about the effects brought by the guests;
and
b) The latter have taken the precautions prescribed regarding their safekeeping
NECESSARY DEPOSITS
Extent of liability:
a) Liability in hotel rooms which come under the term “baggage” or
articles such as clothing as are ordinarily used by travelers
b) Include those lost or damages in hotel annexes such as vehicles in
the hotel’s garage.
In the following cases, the hotelkeeper is liable REGARDLESS of the
amount of care exercised:
a) The loss or injury to personal property is caused by his servants or
employees as well as by strangers (Art. 2000).
b) The loss is caused by the act of a thief or robber done without the
use of arms and irresistible force. (Art. 2001)
NECESSARY DEPOSITS
In the following cases, the hotelkeeper is not liable:
a) The loss or injury is cause by force majeure, like flood, fire, theft or
robbery by a stranger (not the hotel-keeper’s servant or employee)
with the use of firearms or irresistible force.
Exception: Unless the hotelkeeper is guilty of fault or negligence in
failing to provide against the loss or injury from his cause.
b) The loss is due to the acts of the guests, his family, servants,
visitors.
c) The loss arises from the character of the things brought into the
hotel.
NECESSARY DEPOSITS
Hotel-keeper’s right to retain
The hotel-keeper has a right to retain the things brought into the
hotel by the guest, as a security for credits on account of:
a) lodging;
b) supplies usually furnished to hotel guests.
Rationale: It is given to hotel-keepers to compensate them for the
liabilities imposed upon them by law. The right of retention
recognized in this article is in the nature of a pledge created by
operation of law.
NECESSARY DEPOSITS
When judicial deposit takes place: Judicial deposit takes place when
an attachment or seizure of property in litigation is ordered by a
court. (Art. 2005)
Nature: Auxiliary to a case pending in court.
Purpose: To maintain the status quo during the pendency of the
litigation or to insure the right of the parties to the property in case of
a favorable judgment.
NECESSARY DEPOSITS
Depositary of sequestered property: person appointed by the court.
(Art. 2007)
Obligations:
a) To take care of the property with the diligence of a good father of
the family. (Art. 2008)
b) He may not be relieved of his responsibility until the litigation is
ended or the court so orders. (Art. 2007)
Applicable law: The law on judicial deposit is remedial or procedural
in nature. Hence, the Rules of Court are applicable. (Art. 2009)
BASIS OF COMPARISON JUDICIAL DEPOSIT EXTRA-JUDICIAL DEPOSIT
Cause or origin By will of the courts By will of the parties.
Hence, there is a contract
Purpose Security; Secure the right of Custody; safekeeping of the
a party to recover in case of thing
favorable judgment.
Subject Matter Either movable or Only movable property
immovable property but
generally, immovable
Remuneration Always remunerated Generally gratuitous, but
(onerous) may be compensated
In whose behalf it is held In behalf of the person who, In behalf of the depositor or
by the judgment, has a right third person designated
GUARANTY
is a contract whereby a person, called the guarantor, binds
himself to the creditor to fulfill the obligation of the principal
debtor in case the latter should fail to do so. (Art. 2047)
CHARACTERISTICS
1. Accessory – dependent for its existence upon the principal obligation
guaranteed by it;
2. Subsidiary and conditional – takes effect only when the principal debtor fails
in his obligation subject to limitation
3. Unilateral –
a. It gives rise only to a duty on the part of the guarantor in relation to the
creditor and not vice versa
b. It may be entered into even without the intervention of the principal debtor.
4. Guarantor must be a person distinct from the debtor – a person cannot be the
personal guarantor of himself
CLASSIFICATION OF GUARANTY
1. Guaranty in the broad sense:
a. Personal – guaranty is the credit given by the person who
guarantees the fulfillment of the principal obligation; or
b. Real – guaranty is property, movable, or immovable
i. Real mortgage (2124) or antichresis (2132) – guaranty is
immovable
ii. Chattel mortgage (2140) or pledge (2093) – guaranty is movable
2. As to its origin:
a. Conventional – constituted by agreement of the parties (2051[1])
b. Legal – imposed by virtue of a provision of law
c. Judicial – required by a court to guarantee the eventual right of one of the
parties in a case.
3. As to consideration:
a. Gratuitous – guarantor does not receive any price or remuneration for acting as
such (2048)
b. Onerous – one where the guarantor receives valuable consideration for his
guaranty
4. As to person guaranteed:
a. Single – constituted solely to guarantee or secure performance by the
debtor of the principal obligation;
b. Double or sub-guaranty – constituted to secure the fulfillment by the
guarantor of a prior guaranty
5. As to its scope and extent:
a. Definite – where the guaranty is limited to the principal obligation only, or
to a specific portion thereof;
b. Indefinite or simple – where the guaranty included all the accessory
obligations of the principal, e.g. costs, including judicial costs.
RULES GOVERNING GUARANTY
1. A guaranty is generally gratuitous (2048)
General Rule: Guaranty is gratuitous
Exception: When there is a stipulation to the contrary
2. On the cause of a guaranty contract
a. Presence of cause which supports principal obligation: Cause of the
contract is the same cause which supports the obligation as to the
principal debtor. The consideration which supports the obligation as
to the principal debtor is a sufficient consideration to support the
obligation of a guarantor or surety.
2. On the cause of a guaranty contract
b. Absence of direct consideration or benefit to guarantor:
Guaranty or surety agreement is regarded valid despite the
absence of any direct consideration received by the guarantor or
surety, such consideration need not pass directly to the guarantor
or surety; a consideration moving to the principal will suffice.
3. A married woman who is a guarantor binds only her separate
property, generally
Exceptions:
1. With her husband’s consent, bind the community or conjugal
partnership property.
2. Without husband’s consent, in cases provided by law, such as
when the guaranty has redounded to the benefit of the family.
4. A guaranty need not be undertaken with the knowledge of the
debtor (2050)
1. Guaranty is unilateral – exists for the benefit of the creditor
and not for the benefit of the principal debtor
2. Creditor has every right to take all possible measures to secure
payment of his credit – guaranty can be constituted even against
the will of the principal debtor
However, as regards payment made by a third person:
1. Payment without the knowledge or against the will of the
debtor:
a. Guarantor can recover only insofar as the payment has been
beneficial to the debtor
b. Guarantor cannot compel the creditor to subrogate him in his
rights
2. Payment with knowledge or consent of the debtor: Subrogated
to all the rights which the creditor had against the debtor
5. The guaranty must be founded on a valid principal obligation
(2052[1])
Guaranty is an accessory contract: It is an indispensable condition
for its existence that there must be a principal obligation. Hence, if
the principal obligation is void, it is also void.
6. A guaranty may secure the performance of a voidable, unenforceable, and
natural obligation (2052[2])
A guaranty may secure the performance of a:
1. Voidable contract – such contract is binding, unless it is annulled by a proper
court action
2. Unenforceable contract – because such contract is not void
3. Natural obligation – the creditor may proceed against the guarantor although
he has not right of action against the principal debtor for the reason that the
latter’s obligation is not civilly enforceable. When the debtor himself offers a
guaranty for his natural obligation, he impliedly recognizes his liability, thereby
transforming the obligation from a natural into a civil one.
7. A guaranty may secure a future debt (2053) Continuing Guaranty or
Suretyship:
1. Future debts, even if the amount is not yet known, may be guaranteed
but there can be no claim against the guarantor until the amount of the
debt is ascertained or fixed and demandable.
Rationale: A contract of guaranty is subsidiary.
a. To secure the payment of a loan at maturity – surety binds himself to
guarantee the punctual payment of a loan at maturity and all other
obligations of indebtedness which may become due or owing to the
principal by the borrower.
b. To secure payment if any debt to be subsequently incurred – a guaranty shall
be construed as continuing when by the terms therof 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.
c. To secure existing unliquidated debts – refer to debts existing at the time of the
constitution of the guaranty but the amount thereof is unknown and not to dents
not yet incurred and existing at that time. The surety agreement itself is valid and
binding even before the principal obligation intended to be secured thereby is
born, any more than there would be in saying that obligations which are subject
to a condition precedent are valid and binding before the occurrence of the
condition precedent
8. A guaranty may secure the performance of a conditional
obligation
1. Principal obligation subject to a suspensive condition – the
guarantor is liable only after the fulfillment of the condition.
2. Principal obligation subject to a resolutory condition – the
happening of the condition extinguishes both the principal
obligation and the guaranty
9. A guarantor’s liability cannot exceed the principal obligation (2054)
General Rule: Guaranty is a subsidiary and accessory contract – 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. But the guarantor may bind
himself for less than that of the principal.
Exceptions:
1. Interest, judicial costs, and attorney’s fees as part of damages may be
recovered – creditors suing on a suretyship bond may recover from the surety as
part of their damages, interest at the legal rate, judicial costs, and attorney’s fees
when appropriate, even without stipulation and even if the surety would thereby
become liable to pay more than the total amount stipulated in the bond.
Interest runs from: a. Filing of the complaint (upon judicial demand); or
b. The time demand was made upon the surety until the principal obligation is
fully paid (upon extra-judicial demand) Rationale Surety is made to pay, not by
reason of the contract, but by reason of his failure to pay when demanded and
for having compelled the creditor to resort to the courts to obtain payment.
2. Penalty may be provided – a surety may be held liable for the penalty
provided for in a bond for violation of the condition therein. Principal’s liability
may exceed guarantor’s obligations The amount specified in a surety bond as
the surety’s obligation does not limit the extent of the damages that may be
recovered from the principal, the latter’s liability being governed by the
obligations he assumed under his contract.
10. The existence of a guaranty is not presumed (2055)
Guaranty requires the expression of consent on the part of the
guarantor to be bound. It cannot be presumed because of the
existence of a contract or principal obligation.
Rationale:
1. There be assurance that the guarantor had the true intention to
bind himself;
2. To make certain that on making it, the guarantor proceeded with
consciousness of what he was doing.
11. A contract of guaranty is covered by the Statute of Frauds
Guaranty must not only be expressed but must so be reduced into
writing. Hence, it shall be unenforceable by action, unless the same
or some note or memorandum thereof be in writing, and
subscribed by the party charged, or by his agent; evidence,
therefore, of the agreement cannot be received without the
writing, or a secondary evidence of its contents. However, It need
not appear in a public document.
GUARANTY DISTINGUISED FROM
WARRANTY
GUARANTY WARRANTY
Contract by which a person is bound An undertaking that the title, quality

to another for the fulfillment of a or quantity of the subject matter of a
promise or engagement of a third contract is what it has been
party represented to be, and relates to some
agreement made ordinarily by the
party who makes the warranty
SURETYSHIP
GUARANTY SURETYSHIP
Liability depends upon an Assumes liability as a regular party to

independent agreement to pay the the undertaking
obligation if the primary debtor fails
to do so
Engagement is a collateral Charged as an original promisor
undertaking
SURETYSHIP
GUARANTY SURETYSHIP
Secondarily liable – he contracts to Primarily liable – undertakes directly
pay if, by the use of due diligence, the for the payment without reference to
dent cannot be paid the solvency of the principal, and is so
responsible at once the latter makes
default, without any demand by the
creditor upon the principal whatsoever
or any notice of default
SURETYSHIP
GUARANTY SURETYSHIP
Only binds himself to pay if the Undertakes to pay if the principal does not
principal cannot or unable to pay pay, without regard to his ability to do so
Insurer of the solvency of the debtor Insurer of the debt
Does not contract that the principal Pay the creditor without qualification if the
will pay, but simply that he is able to principal debtor does not pay. Hence, the
do so responsibility or obligation assumed by the
surety is greater or more onerous than
that of a guarantor
13. On the guarantor (2056-2057)
1. He possesses integrity;
2. He has capacity to bind himself;
3. He has sufficient property to answer for the obligation which he
guarantees.
Exception: The creditor waives the requirements
The qualifications above need only be present at the time of the
perfection of the contract. The subsequent loss of integrity or
property or supervening incapacity of the guarantor would not
operate to exonerate the guarantor of the eventual liability he has
contracted, and the contract of guaranty continues. The creditor can
merely demand another guarantor with the proper qualifications
except that the creditor may waive such remedy if he chooses and
hold the guarantor to his bargain.
Selection of Guarantor:
1. Specified person stipulated as guarantor: Substitution of
guarantor may not be demanded
Reason: The selection of the guarantor is:
a. Term of the agreement;
b. As a party, the creditor is, therefore, bound thereby.
Selection of Guarantor:
2. Guarantor selected by the principal debtor: Debtor answers for
the integrity, capacity, and solvency of the guarantor.
3. Guarantor personally designated by the creditor: Responsibility
of the selection should fall upon the creditor because he
considered the guarantor to have the qualifications for the
purpose.
EFFECTS OF GUARANTY BETWEEN
THE GUARANTOR AND THE
CREDITOR
1. The guarantor has the right to benefit from excussion/ exhaustion
Exceptions to the benefit of excussion (2059)
1. As provided in Art. 2059:
a. If the guarantor has expressly renounced it ;waiver is valid but it
must be made in express terms.
b. If he has bound himself solidarily with the debtor, the liability
assumed is that of a surety. The guarantor becomes primarily liable as
a solidary codebtor. In effect, he renounces in the contract itself the
benefit of exhaustion
CREDITOR
c. In case of insolvency of the debtor – guarantor guarantees the
solvency of the debtor. If the debtor becomes insolvent, the liability
of the guarantor as the debtor cannot fulfill his obligation
d. When he (debtor) has absconded, or cannot be sued within the
Philippines – the creditor is not required to go after a debtor who is
hiding or cannot be sued in our courts, and to incur the delays and
expenses incident thereto. The exception is when the debtor has left
a manager or representative;
CREDITOR
1. The guarantor has the right to benefit from excussion/
exhaustion
e. If it may be presumed that an execution on the property of the
principal debtor would not result in the satisfaction of the
obligation – if such judicial action including execution would not
satisfy the obligation, the guarantor can no longer require the
creditor to resort to all such remedies against the debtor as the
same would be but a useless formality. It is not necessary that the
debtor be judicially declared insolvent.
CREDITOR
2. If he does not comply with Art. 2060: In order that the guarantor may
make use of the benefit of excussion, he must:
a. Set it up against the creditor upon the latter’s demand for payment
from him;
b. Point out to the creditor:
i. Available property of the debtor – the guarantor should facilitate
the realization of the excussion since he is the most interested in its
benefit.
CREDITOR
1. The guarantor has the right to benefit from excussion/
exhaustion
2. If he does not comply with Art. 2060: In order that the guarantor may make
use of the benefit of excussion, he must:
b. Point out to the creditor:
ii. Within the Philippine territory – excussion of property located abroad would
be a lengthy and extremely difficult proceeding and would not conform with
the purpose of the guaranty to provide the creditor with the means of
obtaining the fulfillment of the obligation.
iii. Sufficient to cover the amount of the debt.
CREDITOR
3. If he is a judicial bondsman and subsurety (2084)
4. Where a pledge or mortgage has been given by him as a special
security.
5. If he fails to interpose it as a defense before judgment is rendered
against him.
CREDITOR
2. The creditor has the right to secure a judgment against the guarantor
prior to the excussion
General rule: An ordinary personal guarantor (NOT a pledgor or
mortgagor), may demand exhaustion of all the property of the debtor
before he can be compelled to pay.
Exception: The creditor may, prior thereto, secure a judgment against the
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 latter’s obligation.
CREDITOR
3. The creditor has the duty to make prior demand for payment
from the guarantor (2060)
1. The demand is to be made only after judgment on the debt
2. Joining the guarantor in the suit against the principal debtor is
not the demand intended by law. Actual demand has to be made.
CREDITOR
4. The guarantor has the duty to set up the benefit of excussion
(2060)
As soon as he is required to pay, guarantor must also point out to
the creditor available property (not in litigation or encumbered) of
the debtor within the Philippines.
CREDITOR
5. The creditor has the duty to resort to all legal remedies (2061)
a) After the guarantor has fulfilled the conditions required for
making use of the benefit of exhaustion, it becomes the duty of the
creditor to:
b) Exhaust all the property of the debtor pointed out by the
guarantor;
c) If he fails to do so, he shall suffer the loss but only to the extent of
the value of the said property, for the insolvency of the debtor.
CREDITOR
6. The creditor has the duty to notify the guarantor in the action against
the debtor
Under this article, notice to the guarantor is mandatory in the action
against the principal debtor. The guarantor, however, is not duty bound to
appear in the case, and his nonappearance shall not constitute default, w/
its consequential effect.
Rationale: The purpose of notification is to give the guarantor the
opportunity to allege and substantiate whatever defenses he may have
against the principal obligation, and chances to set up such defenses as are
afforded him by law if he so desires
CREDITOR
7. A compromise shall not prejudice the person not party to it.
1. A compromise between creditor and principal debtor benefits the
guarantor but does not prejudice him.
2. A compromise between guarantor and the creditor benefits but
does not prejudice the principal debtor.
CREDITOR
8. Co-guarantors are entitled to the benefit of division (2065)
The benefit of division applies only when there are several
guarantors and one debtor for a single debt. Except when solidarity
has been stipulated among the co-guarantors, a coguarantor is
liable only to the extent of his share in the obligation as divided
among all the co-guarantors.
THE DEBTOR AND THE
GUARANTOR
1. The guarantor has the right to be subrogated to the rights of the
creditor
A guarantor who pays the debt is entitled to every remedy which the
creditor has against the principal debtor, to enforce every security and
all means of payments; to stand in the place of the creditor not only
through the medium of the contract, but even by means of the
securities entered into w/out the knowledge of the surety; having the
right to have those securities transferred to him though there was no
stipulation for it, and to avail himself of all securities against the debtor.
THE DEBTOR AND THE
GUARANTOR
1. The guarantor has the right to be subrogated to the rights of the
creditor
The need to enforce the provisions on indemnity in Article 2066
forms the basis for the subrogation clause of Article 2067. The
assumption, however, is that the guarantor who is subrogated to
the rights of the creditor, has the right to be reimbursed for his
answering for the obligation of the debtor. Absent this right of
reimbursement, subrogation will not be proper.
THE DEBTOR AND THE
GUARANTOR
2. The guarantor has the duty to notify the debtor before paying
the creditor.
Should payment be made without notifying the debtor, and
supposing the debtor has already made a prior payment, the debtor
would be justified in putting up the defense that the obligation has
already been extinguished by the time the guarantor made the
payment. In this case, the guarantor will lose the right of
reimbursement and consequently the right of subrogation as well.
THE DEBTOR AND THE
GUARANTOR
3. The guarantor cannot make payment before the obligation has
become due.
General rule: Since a contract of guaranty is only subsidiary, the
guarantor cannot be liable for the obligation before the period on
which the debtor’s liability will accrue. Any payment made by the
guarantor before the obligation is due cannot be indemnified by the
debtor.
Exception: Prior consent or subsequent ratification by the debtor
THE DEBTOR AND THE
GUARANTOR
4. The guarantor may proceed against the debtor even before payment has
been made
General rule: Guarantor has no cause of action against the debtor until after
the former has paid the obligation.
Exceptions:
1. When he is sued for the payment;
2. In case of insolvency of the principal debtor;
3. When the debtor has bound himself to relieve him from the guaranty
within a specified period, and this period has expired;
THE DEBTOR AND THE
GUARANTOR
4. The guarantor may proceed against the debtor even before
payment has been made
4. When the debt has become demandable, by reason of the
expiration of the period for payment;
5. After the lapse of 10 years, when the principal obligation has no
fixed period for its maturity, unless it be of such nature that it cannot
be extinguished except within a period longer than 10 years;
6. If there are reasonable grounds to fear that the principal debtor
intends to abscond;
THE DEBTOR AND THE
GUARANTOR
7. If the principal debtor is in imminent danger of becoming insolvent.
Rationale
To enable the guarantor to take measures for the protection of his
interest in view of the probability that he would be called upon to pay
the debt. As such, he may, in the alternative, obtain release from the
guaranty; or demand security that shall protect him from any
proceedings by the creditor; and against the insolvency of the debtor.
THE DEBTOR AND THE
GUARANTOR
7. If the principal debtor is in imminent danger of becoming insolvent.
Rationale
To enable the guarantor to take measures for the protection of his
interest in view of the probability that he would be called upon to pay
the debt. As such, he may, in the alternative, obtain release from the
guaranty; or demand security that shall protect him from any
proceedings by the creditor; and against the insolvency of the debtor.
EFFECTS OF GUARANTY AS
BETWEEN COGUARANTORS
Requisites for the applicability of Art. 2073:
1. Payment has already been made by one guarantor;
2. The payment was made because a. Of the insolvency of the debtor, or
b. By judicial demand
3. The paying guarantor seeks to be indemnified only to the extent of his
proportionate share in the total obligation. For purposes of
proportionate reimbursement, the other guarantors may interpose such
defenses against the paying guarantor as are available to the debtor
against the creditor, except those that are personal to the debtor.
EFFECTS OF GUARANTY
1. Once the obligation of the debtor is extinguished in any manner
provided in the Civil Code, the obligation of the guarantor is also
extinguished. However, there may be instances when, after the
extinguishment of the guarantor’s obligation (as in the case of a release
from the guaranty), the obligation of the debtor still subsists.
2. Although the guarantor generally has to make payment in money, any
other thing of value, if accepted by the creditor, is valid payment and
therefore releases the guarantor.
3. If one guarantor is released, the release would benefit the co-
guarantors to the extent of the proportionate share of the guarantor
released.
EFFECTS OF GUARANTY
4. A guarantor is also released if the creditor, without the
guarantor’s consent, extends the time within which the debtor may
perform his obligation. This is to protect the interest of the
guarantor should the debtor be insolvent during the period of
extension and deprive the guarantor of his right to reimbursement.
5. If through the fault of the creditor the guarantors are precluded
from being subrogated to the former’s rights, the latter are released
from the obligation.
LEGAL AND JUDICIAL BONDS
Bond – an undertaking that is sufficiently secured, and not cash or currency.
Bondsman – a surety offered in virtue of a provision of law or a judicial
order.
Qualifications of personal bondsman:
1. He possesses integrity;
2. He has capacity to bind himself;
3. He has sufficient property to answer for the obligation which he
guarantees
PLEDGE OR MORTGAGE IN LIEU
OF BOND
Guaranty or suretyship is a personal security.
Pledge or mortgage is a property or real security.
If the person required to give a legal or judicial bond should not be
able to do so, a pledge or mortgage sufficient to cover the
obligation shall be admitted in lieu thereof.
BONDSMAN NOT ENTITLED TO
EXCUSSION
A judicial bondsman and the sub-surety are not entitled to the
benefit of excussion.
Reason: They are not mere guarantors, but sureties whose liability
is primary and solidary.
Effect of negligence of creditor: Mere negligence on the part of the
creditor in collecting from the debtor will not relieve the surety
from liability.
SURETYSHIP
is a relation which exists where one person (principal) has
undertaken an obligation and another person (surety) is also under
a direct and primary obligation or other duty to the obligee, who is
entitled to but one performance, and as between the two who are
bound, the second, rather than the first should perform.
If a person binds himself solidarily with the principal debtor, the

contract is called suretyship and the guarantor is called a surety.
NATURE OF SURETY’S
UNDERTAKING
1. Liability is contractual and accessory but direct:
2. Liability is limited by terms of contract
3. Liability arises only if principal debtor is held liable
a. In the absence of collusion, the surety is bound by a judgment
against the principal event though he was not a party to the
proceedings;
b. The creditor may sue, separately or together, the principal debtor
and the surety;
UNDERTAKING
3. Liability arises only if principal debtor is held liable
c. A demand or notice of default is not required to fix the surety’s liability
Exception: Where required by the provisions of the contract of suretyship
d. A surety bond is void where there is not principal debtor because such
an undertaking presupposes that the obligation is to be enforceable
against someone else besides the surety, and the latter can always claim
that it was never his intention to be the sole person obligated thereby.
NOTE: Surety is not entitled to exhaustion
UNDERTAKING
4. Undertaking is to creditor, not to debtor: The surety makes no
covenant or agreement with the principal that it will fulfill the
obligation guaranteed for the benefit of the principal. The surety’s
undertaking is that the principal shall fulfill his obligation and that
the surety shall be relieved of liability when the obligation secured
is performed.
Exception: Unless otherwise expressly provided.
NOTE: Surety is not entitled to notice of principal’s default
UNDERTAKING
5. Prior demand by the creditor upon principal not required Surety
is not exonerated by neglect of creditor to sue principal
STRICTISSIMI JURIS RULE
APPLICABLE ONLY TO
ACCOMMODATION SURETY
Reason: An accommodation surety acts without motive of
pecuniary gain and hence, should be protected against unjust
pecuniary impoverishment by imposing on the principal, duties akin
to those of a fiduciary. This rule will apply only after it has been
definitely ascertained that the contract is one of suretyship or
guaranty.
STRICTISSIMI JURIS RULE NOT
APPLICABLE TO COMPENSATED
SURETIES
Reasons:
1. Compensated corporate sureties are business association
organized for the purpose of assuming classified risks in large
numbers, for profit and on an impersonal basis.
2. They are secured from all possible loss by adequate counter-
bonds or indemnity agreements.
3. Such corporations are in fact insurers and in determining their
rights and liabilities, the rules peculiar to suretyship do not apply.
PLEDGE, MORTGAGE,
ANTICHRESIS
ESSENTIAL REQUISITES COMMON TO PLEDGE AND MORTGAGE
1) Constituted to secure the fulfillment of a principal obligation27 .
2) Pledgor or mortgagor must be the absolute owner of the thing
pledged or mortgaged.
3) 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.
PLEDGE, MORTGAGE,
ANTICHRESIS
ESSENTIAL REQUISITES COMMON TO PLEDGE AND MORTGAGE
4) Cannot exist without a valid obligation.
5) Debtor retains the ownership of the thing given as a security.
6) When the principal obligation becomes due, the thing pledged or
mortgaged may be alienated for the payment to the creditor.
PLEDGE, MORTGAGE,
ANTICHRESIS
IMPORTANT POINTS
1) Future property cannot be pledged or mortgaged.
2) Pledge or mortgage executed by one who is not the owner of the property
pledged or mortgaged is without legal existence and registration cannot validate
it.
3) Mortgage of a conjugal property by one of the spouses is valid only as to ½ of
the entire property.
4) In case of property covered by Torrens title, a mortgagee has the right to rely
upon what appears in the certificate of title and does not have to inquire further.
PLEDGE, MORTGAGE,
ANTICHRESIS
IMPORTANT POINTS
5) Pledgor or mortgagor has free disposal of property.
6) Thing pledged or mortgaged may be alienated.
7) Creditor not required to sue to enforce his credit.
8) Pledgor or mortgagor may be a third person.
PLEDGE, MORTGAGE,
ANTICHRESIS
RIGHT OF CREDITOR WHERE DEBTOR FAILS TO COMPLY WITH HIS
OBLIGATION
1) Creditor is merely entitled to move for the sale of the thing
pledged or mortgaged with the formalities required by law in order
to collect.
2) Creditor cannot appropriate to himself the thing nor can he
dispose of the same as owner.
PLEDGE, MORTGAGE,
ANTICHRESIS
PLEDGE MORTGAGE
Constituted on movables Constituted on immovables
Property is delivered to the Delivery not necessary
pledgee, or by common consent to
a 3rd person
Not valid against 3rd persons unless Not valid against 3rd persons if not
a description of the thing pledged registered
and the date of the pledge appear
in a public instrument
PROHIBITION AGAINST PACTUM
COMMISSORIUM
1. Stipulation is null and void: Stipulation where thing or mortgaged shall
automatically become the property of the creditor in the event of
nonpayment of the debt within the term fixed.
2. Requisites of pactum commissorium28:
a) Pledge or mortgage.
b) A stipulation for an automatic appropriation by the creditor of the
property in the event of nonpayment.
3. Effect on security contract: Nullity of the stipulation does not affect
validity and efficacy of the principal contract.
IMPORTANT POINTS
1) Debtor-owner bears the risk of loss of the property.
2) Pledge or mortgage is indivisible.
Exceptions:
a) Where each of several things guarantees a determinate portion
of the credit.
b) Where only a portion of loan was released.
c) Where there was failure of consideration.
IMPORTANT POINTS
3) Rule that real property, consisting of several lots should be sold
separately, applies to sales in execution, and not to foreclosure of
mortgages.
4) The mere embodiment of a real estate mortgage and a chattel
mortgage in one document does not have the effect of fusing both
securities into an indivisible whole.
5) Pledge or mortgage may secure all kinds of obligation, be they
pure or subject to suspensive or resolutory conditions.
IMPORTANT POINTS
6) A promise to constitute pledge or mortgage creates no real right,
only a personal right binding upon the parties, only right of action to
compel the fulfillment of the promise but there is no pledge or
mortgage yet.
7) Under the RPC, estafa is committed by a person who, pretending to
be the owner of any real property, shall convey, sell, encumber or
mortgage the same knowing that the real property is encumbered
and shall dispose of the same as unencumbered. It is essential that
fraud or deceit be practiced upon the vendee at the time of the sale.
PLEDGE
is a contract by virtue of which the debtor delivers to the creditor or
to a third person a movable or document evidencing incorporeal
rights for the purpose of securing the fulfillment 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. (Art.2085 in rel to 2093)
KINDS
1) Voluntary or conventional – Created by agreement of parties.
2) Legal – Created by operation of law.
CHARACTERISTICS
1) Real – Perfected by delivery.
2) Accessory – Has no independent existence of its own.
3) Unilateral – Creates obligation solely on the part of the creditor
to return the thing subject upon the fulfillment of the principal
obligation.
4) Subsidiary – Obligation incurred does not arise until the
fulfillment of the principal obligation.
CAUSE OR CONSIDERATION
1) Principal obligation – In so far as the pledgor is concerned.
2) Compensation stipulated for the pledge or mere liberality of the
pledgor – If pledgor is not the debtor.
PROVISIONS APPLICABLE ONLY TO
PLEDGE
1) Transfer of possession to the creditor or to third person by
common agreement is essential in pledge.
- Actual delivery is important.
- Constructive or symbolic delivery of the key to the warehouse is
sufficient to show that the depositary appointed by common
consent of the parties was legally placed in possession.
2) All movables within the commerce of man may be pledged as
long as they are susceptible of possession.
PLEDGE
3) Incorporeal rights may be pledged. The instruments representing the
pledged rights shall be delivered to the creditor; if they be negotiable
instruments, they must be indorsed.
4) Pledge shall take effect against 3rd persons only if the following appear
in a public instrument: a) Description of the thing pledged. b) Date of the
pledge.
5) The thing pledged may be alienated by the pledgor or owner only with
the consent of the pledgee. 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 to have possession
PLEDGE
6) Pledge gives the creditor the right 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.
7) Special Laws apply to pawnshops and establishments engaged in
making loans secured by pledges. Provisions of the Civil Code shall
apply subsidiarily to them.
RIGHTS AND DUTIES OF CREDITOR
IN A PLEDGE
1) Shall take care of the thing pledged with the diligence of a good
father of a family.
2) Has right to reimbursement of the expenses made for preserving
the thing. Shall be liable for loss or deterioration of the thing by
reason of fraud, negligence, delay or violation of the terms of the
contract, but not for fortuitous events.
3) May bring actions pertaining to the owner of the thing in order to
recover it from, or defend it against, a 3rd person.
RIGHTS AND DUTIES OF CREDITOR
IN A PLEDGE
4) Cannot use the thing without the authority of the owner. If he
uses the thing without authority, or if he misuses the thing when he
was authorized to use it, the owner may ask that it be judicially or
extrajudicially deposited.
5) May use the thing if necessary for its preservation.
6) May either claim another thing in pledge or demand immediate
payment of the principal obligation if he is deceived on the
substance or quality of the thing.
RIGHTS AND DUTIES OF THE
PLEDGEE
1) Cannot deposit the thing pledged with a 3rd person, unless there is a
contrary stipulation.
2) Is responsible for the acts of his agents or employees with respect to the
thing pledged.
3) Has no right to use the thing or to appropriate its fruits without authority
from the owner
4) May cause the public sale of the thing pledged if, without fault on his part,
there is danger of destruction, impairment or dimunition in value of the thing.
The proceeds of the auction shall be a security for the principal obligation.
PLEDGOR
1) Takes responsibility for the flaws of the thing pledged.
2) Cannot ask for the return of the thing against the will of the creditor, unless
and until he has paid the debt and its interest, with expenses in proper cases.
3) Is allowed to substitute the thing which is in danger of destruction or
impairment without any fault on the part of the pledgee, with another thing
of the same kind and quality.
4) May require that the thing be deposited with a 3rd person, if through the
negligence or willful act of the pledgee the thing is in danger of being lost or
impaired.
EXTINGUISHMENT OF A PLEDGE
1) Ways to extinguish a pledge:
a) Payment of the debt.
b) Sale of the thing pledged at public auction.
c) Thing pledged is returned by the pledgee to the pledgor or owner.
d) Written statement by the pledgee that he renounces or abandons
the pledge. For this purpose, neither the acceptance by the pledgor
or owner nor the return of the thing pledged is necessary, and the
pledgee becomes a depositary.
EXTINGUISHMENT OF A PLEDGE
2) Presumptions:
a) If, subsequent to the perfection of the pledge, the thing is found
in the possession of the pledgor or owner, there is prima facie
presumption that the thing has been returned by the pledgee.
b) If the thing is in the possession of a 3rd person who received it
from the pledgor or owner after the constitution of the pledge,
there is prima facie presumption that the thing has been returned
by the pledgee.
REQUIREMENTS IN SALE OF THE THING
PLEDGED BY A CREDITOR, IF CREDIT IS NOT PAID
ON TIME
1) Debt is due and unpaid.
2) Sale must be at a public auction.
3) Notice to the pledgor and owner, stating the amount due.
4) Sale must be made with the intervention of a notary public.
EFFECT OF THE SALE OF THE
THING PLEDGED
1) Extinguishes the principal obligation, whether the price of the
sale is more or less than the amount due.
2) if the price is more than amount due, the debtor is not entitled to
the excess unless the contrary is provided.
3) If the price of the sale is less, neither is the creditor entitled to
recover the deficiency. A contrary stipulation is void.
LEGAL PLEDGES
1) Necessary expenses shall be refunded to every possessor, but only a
possessor in good faith may retain the thing until he has been reimbursed.
- Useful expenses shall be refunded only to the possessor in good faith
with the same right of retention, the person who has defeated him in the
possession having the option of refunding the amount of the expenses or
of paying the increase in value which the thing may have acquired and by
reason thereof (Art. 546)
2) He who has executed work upon a movable has a right to retain it by
way of pledge until he is paid. (Art. 1731)
LEGAL PLEDGES
3) The agent may retain the things which are the objects of agency
until the principal effects the reimbursement and pays the
indemnity. (Art. 1914)
4) The laborer’s wages shall be a lien on the goods manufactured or
the work done. (Art. 1707)
MORTGAGE
is 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
OBJECTS OF REAL MORTGAGE
1) Immovables.
2) Alienable real rights in accordance with the laws, imposed upon
immovables.
- Future property cannot be object of mortgage.
KINDS
1) Voluntary
2) Legal
3) Equitable – One which, although lacking the proper formalities of
a mortgage, shows the intention of the parties to make the
property as a security for a debt. - Provisions governing equitable
mortgage: Arts. 1365, 1450, 1454, 1602, 1603, 1604 and 1607.
ESSENTIAL REQUISITES
1) Constituted to secure the fulfillment of a principal obligation.
2) Mortgagor must be the absolute owner of the thing mortgaged.
3) The persons constituting the mortgage have free disposal of the
property; in the absence thereof, they should be legally authorized
for the purpose.
4) Cannot exist without a valid obligation.
ESSENTIAL REQUISITES
5) When the principal obligation becomes due, the thing in which
the mortgage consists may be alienated for payment to the creditor.
6) Must appear in a public document duly recorded in the Registry
of Property, to be validly constituted.
- In a legal mortgage, the persons in whose favor the law establishes
a mortgage have the right to demand the execution and recording
of a document formalizing the mortgage.
EFFECTS
1) Creates real rights, a lien inseparable from the property
mortgaged, enforceable against the whole world.
2) Creates merely an encumbrance.
LAWS GOVERNING MORTGAGE
1) New Civil Code.
2) PD 1952.
3) Revised Administrative Code.
4) RA 4882, regarding aliens becoming mortgagees.
IMPORTANT POINTS
1) As a general rule, the mortgagor retains possession of the
property. He may deliver said property to the mortgagee without
altering the nature of the contract of mortgage.
2) It is not an essential requisite that the principal of the credit
bears interest, or that the interest as compensation for the use of
the principal and the enjoyment of its fruits be in the form of a
certain percentage thereof.
INCIDENTS OF REGISTRATION OF
MORTGAGE
1) Mortgagee is entitled to registration of mortgage as a matter of right.
2) Proceedings for registration do not determine validity of the
mortgage or its effect.
3) Registration is without prejudice to better rights of third parties.
4) Mortgage deed, once duly registered, forms part of the records for
the registration of the mortgaged property.
5) Mortgage by a surviving spouse of his/her undivided share in the
conjugal property can be registered.
EFFECTS OF INVALIDITY OF MORTGAGE
ON THE PRINCIPAL OBLIGATION
1) Principal obligation remains valid.
2) Mortgage deed remains evidence of a personal obligation.
FORECLOSURE OF MORTGAGE
It is the remedy available to the mortgagee by which he subjects
the mortgaged property to the satisfaction of the obligation secured
by the mortgage.
KINDS OF FORECLOSURE
1) Judicial.
- Rule 68, ROC:
May be availed of by bringing an action in the proper court which has jurisdiction
over the area wherein the real property involved or a portion thereof is situated.
If the court finds the complaint to be well-founded, it shall order the mortgagor
to pay the amount due with interest and other charges within a period of not
less than 90 days nor more than 120 days from the entry of judgment
If the mortgagor fails to pay at the time directed, the court, upon motion, shall
order the property to be sold to the highest bidder at a public auction.
1) Judicial.
- Rule 68, ROC:
Upon confirmation of the sale by the court, also upon motion, it
shall operate to divest the rights of all parties to the action and to
vest their rights to the purchaser subject to such rights of
redemption as may be allowed by law.
Before the confirmation, the court retains control of the
proceedings
1) Judicial.
The proceeds of the sale shall be applied to the payment of the:
- Costs of the sale;
- Amount due the mortgagee;
- Claims of junior encumbrancers or persons holding subsequent mortgages in
the order of their priority; and
- Balance, if any shall be paid to the mortgagor.
Sheriff’s certificate is executed, acknowledged and recorded to complete the
foreclosure.
NATURE OF JUDICIAL
FORECLOSURE PROCEEDINGS:
a) Quasi in rem action.
b) Foreclosure is only the result or incident of the failure to pay
debt.
c) Survives death of mortgagor.
2) Extrajudicial. - Act No. 3135, as amended:
a) Express authority to sell is given to the mortgagee.
b) Authority is not extinguished by death of mortgagor or mortgagee.
c) Public sale should be made after proper notice.
d) Surplus proceeds of foreclosure sale belong to the mortgagor.
e) Debtor has the right to redeem the property sold within 1 year from and
after the date of sale.
f) Remedy of party aggrieved by foreclosure is a petition to set aside sale and
cancellation of writ of possession.
-Nature of power of foreclosure by extrajudicial sale:
a) Conferred for mortgagee’s protection.
b) An ancillary stipulation.
c) A prerogative of the mortgagee.
- Both should be distinguished from execution sale governed by Rule 39, ROC.
- Foreclosure retroacts to the date of registration of mortgage.
- A stipulation of upset price, or the minimum price at which the property shall
be sold to become operative in the event of a foreclosure sale at public
auction, is null and void.
RIGHT OF MORTGAGEE TO
RECOVER DEFICIENCY
1) Mortgagee is entitled to recover deficiency.
2) If the deficiency is embodied in a judgment, it is referred to as
deficiency judgment.
3) Action for recovery of deficiency may be filed even during redemption
period.
4) Action to recover prescribes after 10 years from the time the right of
action accrues.
EFFECT OF INADEQUACY OF PRICE
IN FORECLOSURE SALE
1) Where there is right to redeem, inadequacy of price is immaterial
because the judgment debtor may redeem the property.
- Exception: Where the price is so inadequate as to shock the conscience
of the court, taking into consideration the peculiar circumstances.
2) Property may be sold for less than its fair market value, upon the
theory that the lesser the price the easier it is for the owner to redeem.
3) The value of the mortgaged property has no bearing on the bid price
at the public auction, provided that the public auction was regularly and
honestly conducted.
WAIVER OF SECURITY BY
CREDITOR
1) Mortgagee may waive right to foreclose his mortgage and
maintain a personal action for recovery of the indebtedness.
2) Mortgagee cannot have both remedies.
REDEMPTION
1) It is a transaction by which the mortgagor reacquires the property
which may have passed under the mortgage or divests the property of
the lien which the mortgage may have created.
2) Kinds:
a) Equity of redemption: Right of the mortgagor to redeem the
mortgaged property after his default in the performance of the
conditions of the mortgage but before the sale of the mortgaged
property or confirmation of sale
b) Right of redemption: Right of the mortgagor to redeem the property
within a certain period after it was sold for the satisfaction of the debt.
ANTICHRESIS
is a contract whereby the creditor acquires the right to receive the fruits
of an immovable of the debtor, with the obligation to apply then to the
payment of the interest, if owing, and thereafter to the principal of the
credit (Art 2132)
CHARACTERISTICS
1. Accessory contract – it secures the performance of a principal
obligation
2. formal contract – it must be in a specified form to be valid (Art. 2134)
SPECIAL REQUISITES:
1. it can cover only the fruits of an immovable property
2. delivery of the immovable is necessary for the creditor to receive
the fruits and not that the contract shall be binding
3. amount of principal and interest must be specified in writing
4. express agreement that debtor will give possession of the
property to creditor and that the latter will apply the fruits to the
interest, if any, then to the principal of his credit
SPECIAL REQUISITES:
5. NOTE: The obligation to pay interest is not of the essence of the
contract of antichresis; there being nothing in the Code to show
that antichresis is only applicable to securing the payment of
interest-bearing loans. On the contrary, antichresis is susceptible of
guaranteeing all kinds of obligations, pure or conditional
SPECIAL REQUISITES:
ANTICHRESIS PLEDGE
Refers to real property Refers to personal property
Perfected by mere consent Perfected by delivery of the thing
pledged
Consensual contract Real contract
SPECIAL REQUISITES:
ANTICHRESIS REAL MORTGAGE
Property is delivered to creditor Debtor usually retains possessions
of the property
Creditor acquires only the right to Creditor does not have any right to
receive the fruits of the property, receive the fruits, but the
hence, it does not produce a real mortgage creates a real right over
right the property
ANTICHRESIS REAL MORTGAGE
The creditor, unless there is stipulation The creditor has no such
to the contrary, is obliged to pay the obligation
taxes and charges upon the estate
It is expressly stipulated that the There is no such obligation on
creditor given possession of the part of mortgagee
property shall apply all the fruits
thereof to the payment of interest, of
owing, and thereafter to the principal
Subject matter of both is real property
OBLIGATIONS OF ANTICHRETIC
CREDITOR
1. to pay taxes and charges on the estate, including necessary
expenses Creditor may avoid said obligation by:
a. compelling debtor to reacquire enjoyment of the property
b. by stipulation to the contrary
2. to apply all the fruits, after receiving them, to the payment of
interest, if owing, and thereafter to the principal
3. to render an account of the fruits to the debtor
4. to bear the expenses necessary for its preservation and repair
REMEDIES OF CREDITOR IN CASE
OF NON-PAYMENT OF DEBT
1. action for specific performance
2. petition for the sale of the real property as in a foreclosure of
mortgages under Rule 68 of the Rules of Court
◦ the parties, however, may agree on an extrajudicial foreclosure in
the same manner as they are allowed in contracts of mortgage and
pledge (Tavera v. El Hogar Filipino, Inc. 68 Phil 712)
◦ a stipulation authorizing the antichretic creditor to appropriate the
property upon the non-payment of the debt within the agreed
period is void (Art. 2088)
CHATTEL MORTGAGE
is a contract by virtue of which a personal property is recorded in
the Chattel Mortgage Register as security for the performance of an
obligation.
IF THE MOVABLE, INSTEAD OF BEING RECORDED,
IS DELIVERED TO THE CREDITOR, IT IS PLEDGE
AND NOT CHATTEL MORTGAGE.
CHATTEL MORTGAGE PLEDGE
Involves movable property. Involved movable property.
Delivery of the personal property is Delivery of the personal property is
NOT necessary. necessary.
Registration is necessary for Registration is NOT necessary for
validity. validity.
Procedure: Sec. 14 of Act 1508, as Procedure: Art. 2112, CC.
amended.
IF THE MOVABLE, INSTEAD OF BEING RECORDED,
IS DELIVERED TO THE CREDITOR, IT IS PLEDGE
AND NOT CHATTEL MORTGAGE.
CHATTEL MORTGAGE PLEDGE
If the property is foreclosed, the If the property is sold, the debtor is
excess over the amount due goes not entitled to the excess UNLESS
to the debtor. it is otherwise agreed or in case of
legal pledge.
Creditor is entitled to deficiency Creditor is not entitled to recover
from the debtor EXCEPT if it is a deficiency notwithstanding any
security for the purchase of stipulation to the contrary.
personal property in installments.
LAWS GOVERNING CHATTEL
MORTGAGE
1) Chattel Mortgage Law (Act.1508, as amended).
2) Civil Code.
3) Revised Administrative Code.
4) Revised Penal Code.
5) Ship Mortgage Decree of 1978 (PD 1521) governs mortgage of
vessels of domestic ownership.
AFFIDAVIT OF GOOD FAITH
An oath in a contract of chattel mortgage wherein the parties
"severally swear that the mortgage is made for the purpose of
securing the obligation specified in the conditions thereof and for no
other purposes and that the same is a just and valid obligation and
one not entered into for the purpose of fraud.
EFFECT OF REGISTRATION
1) Creates real rights.
2) Adds nothing to mortgage.
- Registration of assignment of mortgage is not required.
RIGHT OF REDEMPTION
1. When the condition of a chattel mortgage is broken, the following may
exercise redemption:
a. Mortgagor.
b. Person holding a subsequent mortgage.
c. Subsequent attaching creditor.
2. An attaching creditor who so redeems shall be subrogated to the rights
of the mortgagee and entitled to foreclose the mortgage in the same
manner as a mortgagee.
3. Redemption is made by paying or delivering o the mortgagee the
amount due on such mortgage and the costs and expenses incurred by
such breach of condition before the sale.
FORECLOSURE OF CHATTEL
MORTGAGE
1. Public sale.
2. Private sale – There is nothing illegal, immoral or against public
order in an agreement for the private sale of the personal properties
covered by chattel mortgage.
PERIOD TO FORECLOSURE
1. After 30 days from the time of the condition is broken.
2. The 30-day period is the minimum period after violation of the
mortgage condition for the creditor to cause the sale at public
auction with at least 10 days notice to the mortgagor and posting of
public notice of time, place, and purpose of such sale, and is a
period of grace for the mortgagor, to discharge the obligation.
3. After the sale at public auction, the right of redemption is no
longer available to the mortgagor.
CIVIL ACTION TO RECOVER
CREDIT
1. Independent action not required.
2. Mortgage lien is deemed abandoned by obtaining a personal
judgment.
RIGHT OF MORTGAGEE TO
RECOVER DEFICIENCY
1. Where mortgage foreclosed: Creditor may maintain action for
deficiency although The Chattel Mortgage Law is silent on this point,
because a chattel mortgage is given only as a security and not as
payment of the debt.
2. Where mortgage constituted as security for purchase of personal
property payable in installments: No deficiency judgment can be asked
and any contrary agreement shall be void.
3. Where mortgaged property subsequently attached and sold:
Mortgagee is entitled to deficiency judgment in an action for specific
performance.
APPLICATION OF PROCEEDS OF
SALE
1. Costs and expenses of keeping and sale.
2. Payment of the obligation.
3. Claims of persons holding subsequent mortgages in their order.
4. Balance, if any, shall be paid to the mortgagor, or person holding
rights under him.
CONCURRENCE AND PREFERENCE
OF CREDITS
CONCURRENCE OF CREDIT implies possession by two or more
creditors of equal right or privileges over the same property or all of
the property of a debtor.
PREFERENCE OF CREDIT is the right held by a creditor to be

preferred in the payment of his claim above other out of the
debtor’s assets
GENERAL PROVISIONS
1) The debtor is liable with all his property, present and future, for the
fulfillment of his obligations, subjects to exemptions provided by law.
- Exempt property:
a. Present property:
1. Family home. (Arts. 152, 153 and 155, CC)
2. Right to receive support, as well as money or property obtained by
such support, shall not be levied upon on attachment or execution. (Art.
205, CC)
3. Sec. 13, Rule 39, ROC.
4. Sec 118, Public Land Act. (CA 141, as amended)
GENERAL PROVISIONS
1) The debtor is liable with all his property, present and future, for the
fulfillment of his obligations, subjects to exemptions provided by law.
b. Future property: A debtor who obtains a discharge from his debts on
account of insolvency, is not liable for the unsatisfied claims of his
creditors with said property. (Sec. 68 and 69, Insolvency Law, Act 1956)
c. Property in custodia legis and of public dominion.
2) Insolvency shall be governed by the Insolvency Law. (Act 1956, as

amended)
GENERAL PROVISIONS
3) Exemption of conjugal property or absolute community or property,
provided that:
- Partnership or community subsists.
- Obligations of the insolvent spouse have not redounded to the benefit
of the family.
4) If there is co-ownership, and one of the co-owners is the insolvent
debtor, his undivided share or interest in the property shall be possessed
by the assignee in insolvency proceedings because it is part of his assets.
5) Property held by the insolvent debtor as a trustee of an express or
implied trust, shall be excluded from the insolvency proceedings
CLASSIFICATION OF CREDITS
1) Special preferred credits. (Art. 2241 and 2242, CC)
a) Considered as mortgages or pledges of real or personal property
or liens within the purview of legal provisions governing insolvency.
b) Taxes due to the State shall first be satisfied.
2) Ordinary preferred credits (Art. 2244) – Preferred in the order given
by law.
3) Common credits (Art. 2245) – Credits of any other kind or class, or
by any other right or title not comprised in Arts. 2241- 2244 shall enjoy
no preference.
ORDER OF PREFERENCE OF
CREDIT
1) Credits which enjoy preference with respect to specific movables
exclude all others to the extent of the value of the personal property
to which the preference refers.
2) If there are 2 or more credits with respect to the same specific
movable property, they shall be satisfied pro rata, after the payment
of duties, taxes and fees due the State or any subdivision thereof
3) Those credits which enjoy preference in relation to specific real
property or real rights exclude all others to the extent of the value
of the immovable or real right to which the preference refers.
CREDIT
4) If there are 2 or more credits with respect to the same specific real
property or real rights, they shall be satisfied pro rata, after the payment
of the taxes and assessment of the taxes and assessments upon the
immovable property or real right.
5) The excess, if any, after the payment of the credits which enjoy
preference with respect to specific property, real or personal, shall be
added to the free property which the debtor may have, for the payment
of other credits.
CREDIT
6) Those credits which do not enjoy any preference with respect to
specific property, and those which enjoy preference, as to the amount
not paid, shall be satisfied according to the following rules: - Order
established by Art 2244 - Common credits referred to in Art 2245 shall
be paid pro rata regardless of dates.

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CREDIT

A thing is consumable when it is used in a manner appropriate to

Who may be bailor in commodatum?

PURPOSE Safekeeping or mere Consumption of the subject

PURPOSE Safekeeping Transfer of the use

Creation Will of the court Will of the contracting

Cause Always onerous Maybe compensated but

Exception: The depositary is justified in opening a closed and sealed

Contract by which a person is bound An undertaking that the title, quality

Liability depends upon an Assumes liability as a regular party to

If a person binds himself solidarily with the principal debtor, the

PREFERENCE OF CREDIT is the right held by a creditor to be

2) Insolvency shall be governed by the Insolvency Law. (Act 1956, as

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