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GUARANTY (Articles 2047 2084)

A contract whereby a person (guarantor) binds himself to the creditor to fulfil the obligation of the
principal debtor in case the latter fail to do so.

Classification of Guaranty:
1. In the Broad sense:
a. Personal - the guaranty is the credit given by the person who guarantees the fulfilment of the
principal obligation.
b. Real - the guaranty is the property, movable or immovable.




2. As to its Origin
a. Conventional - agreed upon by the parties.
b. Legal - one imposed by virtue of a provision of a law.
c. Judicial - one which is required by a court to guarantee the eventual right of one of the parties
in a case.
3. As to Consideration
a. Gratuitous - the guarantor does not receive any price or remuneration for acting as such.
b. Onerous - the guarantor receives valuable consideration.
4. As to the Person guaranteed
a. Single - one constituted solely to guarantee or secure performance by the debtor of the
principal obligation.
b. Double or sub-guaranty - one constituted to secure the fulfilment by the guarantor of a prior
guaranty.
5. As to Scope and Extent
a. Definite - the guaranty is limited to the principal obligation only, or to a specific portion
thereof.
b. Indefinite or simple - one which not only includes the principal obligation but also all its
accessories including judicial costs

SURETYSHIP

A contract whereby a person (surety) binds himself solidarily with the principal debtor
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 (Agro Conglomerates, Inc. vs. CA, 348 SCRA 450)
NOTES:
The reference in Article 2047 to solidary obligations does not mean that suretyship is withdrawn
from the applicable provisions governing guaranty. A surety is almost the same as a solidary
debtor, except that he himself is a principal debtor.
In suretyship, there is but one contract, and the surety is bound by the same agreement which
binds the principal. A surety is usually bound with the principal by the same instrument, executed
at the same time and upon the same consideration (Palmares vs CA, 288 SCRA 422)
It is not for the obligee to see to it that the principal debtor pays the debt or fulfill the contract,
but for the surety to see to it that the principal debtor pays or performs (Paramount Insurance
Corp vs CA, 310 SCRA 377)

Nature of Suretys undertaking:
1. Liability is contractual and accessory but direct
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NOTE: He directly, primarily and equally binds himself with the principal as original promisor,
although he possesses no direct or personal interest over the latters obligation, nor does he
receive any benefits therefrom. (PNB vs CA, 198 SCRA 767)
2. Liability limited by the terms of the contract.
NOTE: It cannot be extended by implication beyond the terms of the contract (PNB vs CA, 198
SCRA 767)
3. Liability arises only if principal debtor is held liable.
NOTES:
The creditor may sue separately or together the principal debtor and the surety. Where there
are several sureties, the obligee may proceed against any one of them.
In the absence of collusion, the surety is bound by a judgment against the principal even
though he was not a party to the proceedings. The nature of its undertaking makes it privy to
all proceedings against its principal (Finman General Assurance Corp. vs. Salik, 188 SCRA 740)

4. Surety is not entitled to the benefit of exhaustion
NOTE: He assumes a solidary liability for the fulfilment of the principal obligation (Towers
Assurance Corp vs. Ororama Supermart, 80 SCRA 262) as an original promissory and debtor from
the beginning.
5. Undertaking is to creditor and not to debtor.
NOTE: The surety makes no covenant or agreement with the principal that it will fulfil the
obligation guaranteed for the benefit of the principal. Such a promise is not implied by law either;
and this is true even where under the contract the creditor is given the right to sue the principal,
or the latter and the surety at the same time. (Arranz vs. Manila Fidelity & Surety Co., Inc., 101
Phil. 272)
6. Surety is not entitled to notice of principals default
NOTE: The creditor owes no duty of active diligence to take care of the interest of the surety and
the surety is bound to take notice of the principals default and to perform the obligation. He
cannot complain that the creditor has not notified him in the absence of a special agreement to
that effect. (Palmares vs CA, 288 SCRA 422)
7. Prior demand by the creditor upon principal is not required
NOTE: As soon as the principal is in default, the surety likewise is in default.
8. Surety is not exonerated by neglect of creditor to sue principal

Characteristics of Guaranty and Suretyship:
1. Accessory - It is indispensable condition for its existence that there must be a principal obligation.
NOTES:
Guaranty may be constituted to guarantee the performance of a voidable or unenforceable
contract. It may also guarantee a natural obligation. (Art 2052)
The guarantor cannot bind himself for more than the principal debtor and even if he does, his
liability shall be reduced to the limits of that of the debtor.
2. Subsidiary and Conditional - takes effect only in case the principal debtor fails in his obligation.

NOTES:
The guarantor cannot bind himself for more than the principal debtor and even if he does, his
liability shall be reduced to the limits of that of the debtor. But a guarantor may bind himself
for less than that of the principal (Art 2054)
A guaranty may be given as security for future debts, the amount of which is not yet known;
there can be no claim against the guarantor until the debt is liquidated. A conditional
obligation may also be secured. (Art 2053)
3. Unilateral - may be entered even w/o the intervention of the principal debtor, in which case Art.
1236 and 1237 shall apply and it gives rise only to a duty on the part of the guarantor in relation to
the creditor and not vice versa.
4. Nominate
5. Consensual
6. It is a contract between the guarantor/surety and creditor.
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NOTES:
Acceptance of guaranty by creditor and notice thereof to guarantor:
In declaring that guaranty must be express, the law refers solely and exclusively to the
obligation of the guarantor because it is he alone who binds himself by his acceptance.
With respect to the creditor, no such requirement is needed because he binds himself to
nothing.
However, when there is merely an offer of a guaranty, or merely a conditional guaranty, in
the sense that it requires action by the creditor before the obligation becomes fixed, it
does not become binding until it is accepted and until notice of such acceptance by the
creditor is given to, or acquired by, the guarantor, or until he has notice or knowledge that
the creditor has performed the condition and intends to act upon the guaranty.
But in any case, the creditor is not precluded from waiving the requirement of notice.
The consideration of the guaranty is the same as the consideration of the principal obligation.
The creditor may proceed against the guarantor although he has no right of action against the
principal debtor.
7. Not presumed. It must be expressed and reduced in writing.
NOTE: A power of attorney to loan money does not authorize the agent to make the principal liable
as a surety for the payment of the debt of a third person. (BPI vs. Coster, 47 Phil. 594)
8. Falls under the Statute of Frauds since it is a special promise to answer for the debt, default or
miscarriage of another.
9. Strictly interpreted against the creditor and in favor of the guarantor/surety and is not to be
extended beyond its terms or specified limits. (Magdalena Estates, Inc. vs Rodriguez, 18 SCRA 967)
The rule of strictissimi juris commonly pertains to an accommodation surety because the latter
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.

NOTES:
The rule will apply only after it has been definitely ascertained that the contract is one of
suretyship or guaranty. It cannot be used as an aid in determining whether a partys
undertaking is that of a surety or guarantor. (Palmares vs CA, 288 SCRA 292)
It does not apply in case of compensated sureties.
10. It is a contract which requires that the guarantor must be a person distinct form the debtor
because a person cannot be the personal guarantor of himself.
NOTE: However, in a real guaranty, like pledge and mortgage, a person may guarantee his own
obligation with his personal or real properties.

Guaranty Suretyship

1. Liability depends
upon an independent
agreement to pay the
obligation if primary
debtor fails to do so

1. Surety assumes
liability as regular
party to the
undertaking


2. Collateral under-
taking

2. Surety is an
original promisor

3. Guarantor is
secondarily liable

3. Surety is
primarily liable

1. Guarantor binds
himself to pay if
the principal
CANNOT PAY

4. Surety undertakes
to pay if the principal
DOES NOT PAY

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5. Insurer of
solvency of debtor

5. Insurer of the
debt

6. Guarantor can
avail of the benefit
of excussion and
division in case
creditor proceeds
against him

6. Surety cannot
avail of the benefit
of excussion and
division


Indorsement Guaranty

1. Primarily of
transfer

1. Contract of
security

2. Unless the note is
promptly presented
for payment at
maturity and due
notice of dishonor
given to the indorser
within a reasonable
time he will be
discharged abso-
lutely from all
liability thereon,
whether he has
suffered any actual
damage or not

2. Failure in either or
both of these
particulars does not
generally work as an
absolute discharge of
a guarantors
liability, but his is
discharged only to
the extent of the loss
which he may have
suffered in
consequence thereof

3. Indorser does not
warrant the solvency.
He is answerable on a
strict compliance
with the law by the
holder, whether the
promisor is solvent or
not

3. Guarantor
warrants the solvency
of the promisor

4. Indorser can be
sued as promisor

4. Guarantor cannot
be sued as promisor

Guaranty Warranty
A contract by which a
person is bound to
another for the
fulfilment of a
promise or
engagement of a
third party
An undertaking that
the title, quality, or
quantity of the
subject matter of the
contract is what it
has been represented
to be, and relates to
some agreement
made ordinarily by
the party who makes
the warranty

NOTES:
A guaranty is gratuitous, unless there is a stipulation to the contrary. The cause of the contract is
the same cause which supports the obligation as to the principal debtor.
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The peculiar nature of a guaranty or surety agreement is that is is regarded as valid despite the
absence of any direct consideration received by the guarantor or surety either from the principal
debtor or from the creditor; a consideration moving to the principal alone will suffice.
It is never necessary that the guarantor or surety should receive any part or benefit, if such there
be, accruing to the principal. (Willex Plastic Industries Corp. vs. CA, 256 SCRA 478)




Double or sub-guaranty (Art 2051 2nd par)
One constituted to guarantee the obligation of a guarantor

Continuing guaranty (Art 2053)
One which is not limited to a single transaction but which contemplates a future course of
dealings, covering a series of transactions generally for an indefinite time or until revoked.

NOTES:
Prospective in operation (Dio vs CA, 216 SCRA 9)
Construed as continuing when by the terms thereof it is evident that the object is to give a
standing credit to the principal debtor to be used from time to time either indefinitely or until a
certain period, especially if the right to recall the guaranty is expressly reserved (Dio vs CA, 216
SCRA 9)
Future debts may also refer to debts existing at the time of the constitution of the guaranty but
the amount thereof is unknown and not to debts not yet incurred and existing at that time.
Exception to the concept of continuing guaranty is chattel mortgage. A chattel mortgage can only
cover obligations existing at the time the mortgage is constituted and not those contracted
subsequent to the execution thereof (The Belgian Catholic Missionaries, Inc. vs. Magallanes Press,
Inc., 49 Phil 647). An exception to this is in case of stocks in department stores, drug stores, etc.
(Torres vs. Limjap, 56 Phil 141).

Extent of Guarantors liability: (Art 2055)
1. Where the guaranty definite: It is limited in whole or in part to the principal debt, to the exclusion
of accessories.
2. Where guaranty indefinite or simple: It shall comprise not only the principal obligation, but also all
its accessories, including the judicial costs, provided with respect to the latter, that the guarantor
shall only be liable for those costs incurred after he has been judicially required to pay.

Qualifications of a guarantor: (Arts 2056-2057)
1. possesses integrity
2. capacity to bind himself
3. has sufficient property to answer for the obligation which he guarantees

NOTES:
The qualifications need only be present at the time of the perfection of the contract.
The subsequent loss of the integrity or property or supervening incapacity of the guarantor would
not operate to exonerate the guarantor or the eventual liability he has contracted, and the
contract of guaranty continues.
However, the creditor may demand another guarantor with the proper qualifications. But he may
waive it if he chooses and hold the guarantor to his bargain.

Benefit of Excussion (Art 2058)
The right by which the guarantor cannot be compelled to pay the creditor unless the latter has
exhausted all the properties of the principal debtor, and has resorted to all of the legal remedies
against such debtor.
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NOTE:
Not applicable to a contract of suretyship (Arts 2047, par. 2; 2059[2])
Cannot even begin to take place before judgment has been obtained against the debtor (Baylon vs
CA, 312 SCRA 502)

When Guarantor is not entitled to the benefit of excussion: (PAIRS)
1. If it may be presumed that an execution on the property of the principal debtor would not result in
the satisfaction of the obligation
Not necessary that the debtor be judicially declared insolvent or bankrupt
2. When he has absconded, or cannot be sued within the Philippines unless he has left a manager or
representative
3. In case of insolvency of the debtor
Must be actual
4. If the guarantor has expressly renounced it
5. If he has bound himself solidarily with the debtor

Other grounds: (BIPS)
6. If he is a judicial bondsman or sub-surety
7. If he fails to interpose it as a defense before judgment is rendered against him
8. If the guarantor does not set up the benefit against the creditor upon the latters demand for
payment from him, and point out to the creditor available property to the debtor within Philippine
territory, sufficient to cover the amount of the debt (Art 2060)
Demand can be made only after judgment on the debt
Demand must be actual; joining the guarantor in the suit against the principal debtor is not the
demand intended by law
9. Where the pledge or mortgage has been given by him as special security

Benefit of Division (Art 2065)
Should there be several guarantors of only one debtor and for the same debt, the obligation to
answer for the same is divided among all.
Liability: Joint

NOTES:
The creditor can claim from the guarantors only the shares they are respectively bound to pay
except when solidarity is stipulated or if any of the circumstances enumerated in Article 2059
should take place.
The right of contribution of guarantors who pays requires that the payment must have been made
(a) in virtue of a judicial demand, or (b) because the principal debtor is insolvent (Art 2073).
If any of the guarantors should be insolvent, his share shall be borne by the others including the
paying guarantor in the same joint proportion following the rule in solidary obligations.
The above rule shall not be applicable unless the payment has been made in virtue of a judicial
demand or unless the principal debtor is insolvent.
The right to contribution or reimbursement from his co-guarantors is acquired ipso jure by virtue of
said payment without the need of obtaining from the creditor any prior cession of rights to such
guarantor.
The co-guarantors may set up against the one who paid, the same defenses which have pertained
to the principal debtor against the creditor and which are not purely personal to the debtor. (Art
2074)

Procedure when creditor sues: (Art. 2062)
The creditor must sue the principal alone; the guarantor cannot be sued with his principal, much
less alone except in Art. 2059.

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1. Notice to guarantor of the action
The guarantor must be NOTIFIED so that he may appear, if he so desires, and set up defenses
he may want to offer.
If the guarantor appears, he is still given the benefit of exhaustion even if judgment should be
rendered against him and principal debtor. His voluntary appearance does not constitute a
renunciation of his right to excussion (see Art. 2059(1)).
Guarantor cannot set up the defenses if he does not appear and it may no longer be possible
for him to question the validity of the judgment rendered against the debtor.
2. A guarantor is entitled to be heard before and execution can be issued against him where he is not
a party in the case involving his principal (procedural due process).

Guarantors Right of Indemnity or Reimbursement (Art 2066)
GENERAL RULE: Guaranty is a contract of indemnity. The guarantor who makes payment is entitled
to be reimbursed by the principal debtor.

NOTE: The indemnity consists of: (DIED)
1. Total amount of the debt no right to demand reimbursement until he has actually paid the
debt, unless by the terms of the contract, he is given the right before making payment. He
cannot collect more than what he has paid.
2. Legal interest thereon from the time the payment was made known (notice of payment in
effect a demand so that if the debtor does not pay immediately, he incurs in delay) to the
debtor, even though it did not earn interest for the creditor. Guarantors right to legal
interest is granted by law by virtue of the payment he has made.
3. Expenses incurred by the guarantor after having notified the debtor that payment has been
demanded of him by the creditor; only those expenses that the guarantor has to satisfy in
accordance with law as a consequence of the guaranty (Art. 2055) not those which depend
upon his will or own acts or his fault for these are his exclusive personal responsibility and it is
not just that they be shouldered by the debtor.
4. Damages if they are due in accordance
with law. General rules on damages apply.

EXCEPTIONS:
1. Where the guaranty is constituted without the knowledge or against the will of the principal
debtor, the guarantor can recover only insofar as the payment had been beneficial to the
debtor (Art. 2050).
2. Payment by a third person who does not intend to be reimbursed by the debtor is deemed to be
a donation, which, however, requires the debtors consent. But the payment is in any case
valid as to the creditor who has accepted it (Art. 1238).
3. Waiver of the right to demand reimbursement.

Guarantors right to Subrogation (ART.2067)
Subrogation transfers to the person subrogated, the credit with all the rights thereto appertaining
either against the debtor or against third persons, be they guarantors or possessors of mortgages,
subject to stipulation in conventional subrogation.

NOTE: This right of subrogation is necessary to enable the guarantor to enforce the indemnity given in
Art. 2066.
It arises by operation of law upon payment by the guarantor. It is not necessary that the creditor
cede to the guarantor the formers rights against the debtor.
It is not a contractual right. The right of guarantor who has paid a debt to subrogation does not
stand upon contract but upon the principles of natural justice.
The guarantor is subrogated by virtue of the payment to the rights of the creditor, not those of the
debtor.
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Guarantor cannot exercise the right of redemption of his principal (Urrutia & Co vs Morena and
Reyes, 28 Phil 261)

Effect of Payment by Guarantor
1. Without notice to debtor: (Art 2068)
The debtor may interpose against the guarantor those defenses which he could have set up
against the creditor at the time the payment was made, e.g. the debtor can set up against the
guarantor the defense of previous extinguishment of the obligation by payment.

2. Before Maturity (Art 2069)
Not entitled to reimbursement unless the payment was made with the consent or has been
ratified by the debtor

Effect of Repeat Payment by debtor: (Art 2070)
GENERAL RULE: Before guarantor pays the creditor, he must first notify the debtor (Art. 2068). If he
fails to give such notice and the debtor repeats payment, the guarantor can only collect from the
creditor and guarantor has no cause of action against the debtor for the return of the amount paid by
guarantor even if the creditor should become insolvent.

EXCEPTION: The guarantor can still claim reimbursement from the debtor in spite of lack of notice if
the following conditions are present: (PIG)
a. guarantor was prevented by fortuitous event to advise the debtor of the payment; and
b. the creditor becomes insolvent;
c. the guaranty is gratuitous.

Right of Guarantor to proceed against debtor before payment
GENERAL RULE: Guarantor has no cause of action against debtor until after the former has paid the
obligation
EXCEPTION: Article 2071

NOTES:
Article 2071 is applicable and available to the surety. (Manila Surety & Fidelity Co., Inc. vs Batu
Construction & Co., 101 Phil 494)
Remedy of guarantor:
(a) obtain release from the guaranty; or
(b) demand a security that shall protect him from any proceedings by the creditor, and against the
danger of insolvency of the debtor

Art. 2066 Art. 2071
Provides for the
enforcement of the
rights of the
guarantor/surety
against the debtor
after he has paid the
debt
Provides for his
protection before he
has paid but after he
has become liable
Gives a right of
action after payment
Protective remedy
before payment.
Substantive right Preliminary remedy

Extinguishment of guaranty: (RA
2
CE
2
)
1. Release in favor of one of the guarantors, without the consent of the others, benefits all to the
extent of the share of the guarantor to whom it has been granted (Art 2078);
2. If the creditor voluntarily accepts immovable or other properties in payment of the debt, even if
he should afterwards lose the same through eviction or conveyance of property (Art 2077);
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3. Whenever by some act of the creditor, the guarantors even though they are solidarily liable cannot
be subrogated to the rights, mortgages and preferences of the former (Art 2080);
4. For the same causes as all other obligations (Art 1231);
5. When the principal obligation is extinguished;
6. Extension granted to the debtor by the creditor without the consent of the guarantor (Art 2079)

BOND
An undertaking that is sufficiently secured, and not cash or currency

Bondsman (Art 2082)
A surety offered in virtue of a provision of law or a judicial order. He must have the qualifications
required of a guarantor and in special laws like the Rules of Court.

NOTES:
Judicial bonds constitute merely a special class of contracts of guaranty by the fact that they are
given in virtue of a judicial order.
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 admitted in lieu thereof (Art 2083)
A judicial bondsman and the sub-surety are NOT entitled to the benefit of excussion because they
are not mere guarantors, but sureties whose liability is primary and solidary. (Art 2084)

PLEDGE, MORTGAGE AND ANTICHRESIS
I. Common Elements of Pledge, Mortgage, and Antichresis (Articles 2085 2092)

A. Essential Requisites (SOD) (Art 2085)
1. Secures the fulfillment of a principal obligation;
2. Pledgor, mortgagor, antichretic debtor must be the absolute owner of the thing pledged or
mortgaged; and
The reason being that in anticipation of a possible foreclosure sale in case of default which is
still a sale, the rule is that the seller must be the owner of the thing sold (Cavite Development
Bank vs. Lim, 324 SCRA 346)
3. Pledgor, mortgagor, antichretic debtor must have free disposal of their property, or be legally
authorized for such purpose.

NOTES:
Third persons can pledge or mortgage their own property to secure the principal obligation.
It is not necessarily void simply because the accommodation pledgor or mortgagor did not benefit
from the same. So long as valid consent was given, the fact that the loan was given solely for the
benefit of the principal debtor would not invalidate the mortgage (GSIS vs CA, 170 SCRA 533)
The accommodation pledgor or mortgagor, without expressly assuming personal liability for such
debt, is not liable for the payment of any deficiency, should the property not be sufficient to cover
the debt (Bank of America vs. American Realty Corporation, 321 SCRA 659).
The accommodation pledgor or mortgagor is not solidarily bound with the principal obligor but his
liability extents only to the property pledged or mortgaged. Should there be any deficiency, the
creditor has recourse on the principal debtor who remains to be primarily bound.
The law grants to the accommodation pledgor or mortgagor the same rights as a guarantor and he
cannot be prejudiced by any waiver of defense by the principal debtor.

B. Prohibition against Pactum Commissorium (Art 2088; 2137)

Pactum Commissorium
Stipulation whereby the thing pledged or mortgaged, or under antichresis shall automatically
become the property of the creditor in the event of non-payment of the debt within the term
fixed.
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Requisites:
1. There should be a pledge, mortgage, or antichresis of property by way of security for the payment
of the principal obligation; and
2. There should be a stipulation for an automatic appropriation by the creditor of the property in
event of nonpayment of the obligation within the stipulated period.

GENERAL RULE: Pactum Commissorium is forbidden by law and is declared null and void.
EXCEPTION: The pledgee may appropriate the thing pledged if after the first and second auctions,
the thing is not sold. (Art 2112)

NOTE: The security contract remains valid; only the prohibited stipulation is void.
C. Capability to secure all kinds of obligations, i.e. pure or conditional (Art 2091)

D. Indivisibility (Art 2089)
GENERAL RULE: A pledge, mortgage, or antichresis is indivisible, even though the debt may be
divided among the successors in interest of the debtor or of the creditor.
Their indivisibility is not affected by the fact that the debtors are jointly or not solidarily liable.

Consequences of indivisibility:
1. Single thing Every portion of the property pledged or mortgaged is answerable for the whole
obligation
2. Several things All of the several things pledged or mortgaged are liable for the totality of the
debt
3. Debtors heir/creditors heir - Neither the debtors heir who has paid part of the debt cannot ask
for proportionate extinguishment, nor creditors heir who received his share of the debt return the
pledge or cancel the mortgage as long as the debt is not completely satisfied.


1. Where each one of several things guarantees a determinate portion of the credit
2. Where only a portion of the loan was released
3. Where there was failure of consideration.
4. Where there is no debtor-creditor relationship

NOTES:
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.
The mortgagee, therefore, may legally foreclose the real estate mortgage extrajudicially and waive
the chattel mortgage foreclosure, and maintain instead a personal action for the recovery of the
unpaid balance of the credit (Phil. Bank of Commerce vs. Macadaeg, 109 Phil 981)

E. When the principal obligation becomes due, the things in which the pledge, mortgage, or
antichresis consists may be alienated for the payment to the creditor. (Art. 2087)

NOTES:
If the debtor fails to comply with the obligation at the time it falls due, the creditor is merely
entitled to move for the sale of the thing pledged or mortgaged in order to collect the amount of
his claim from the proceeds.
If he wishes to secure a title to the mortgaged property, he can buy it in the foreclosure sale
(Montevirgin vs. CA, 112 SCRA 641)

F. Pledgor, mortgagor, antichretic debtor retains ownership of the thing given as a security

PLEDGE (Arts 2093 2123)

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A contract wherein the debtor delivers to the creditor or to a third person a movable or document
evidencing incorporeal rights for the purpose of securing fulfilment of a principal obligation with
the understanding that when the obligation is fulfilled, the thing delivered shall be returned with
all its fruits and accessions.

Special Requisites (in addition to the common essential requisites):
1. Possession of the thing pledged must be transferred to the creditor or a third person by agreement
(Art 2093);
2. It can only cover movable property and incorporeal rights evidenced by documents of title and the
instruments proving the right pledged shall be delivered to the creditor, and if negotiable must be
endorsed (Art 2094); and
3. The description of the thing pledged and the date must appear in a public instrument to bind third
persons, but not for the validity of the contract (Art 2096).

Kinds:
1. Conventional /Voluntary created by contract
2. Legal created by operation of law (examples: Art. 546, 1731 and 1914 NCC)

NOTES:
The provisions of possession, care and sale of the thing as well as on the termination of the pledge
governing conventional pledges are applicable to pledges created by operation of law (Art 2121)
Unlike, however, in conventional pledge where the debtor is not entitled to the excess unless it is
otherwise agreed, in legal pledge, the remainder of the price of the sale after payment of the debt
and expenses, shall be delivered to the debtor.
In legal pledge, there is no definite period for the payment of the principal obligation. The pledgee
must make a demand for the payment of the amount due him; otherwise he cannot exercise the
right of sale at public auction (Art 2122)

Characteristics:
1. Real contract it is perfected by the delivery of the thing pledged by the debtor who is called the
pledgor to the creditor who is called the pledgee, or to a third person by common agreement;
2. Accessory contract it has no independent existence of its own;
3. Unilateral contract it creates an obligation solely on the part of the creditor to return the thing
subject thereof upon the fulfilment of the principal obligation; and
4. Subsidiary contract the obligation incurred does not arise until the fulfilment of the principal
obligation which is secured.

Consideration in pledge:
Insofar as the pledgor is concerned, the cause is the principal obligation.
If the pledgor is not the debtor, the cause is the compensation stipulated for the pledge or the
mere liberality of the pledgor.

Extent of pledge: Unless stipulated otherwise, pledge extends to the fruits, interests or earnings of the
thing.

Rights and Obligations of a Pledgor
Rights Obligations
1. To demand return in
case of reasonable
grounds to fear
destruction or
impairment of the thing
without the pledgees
fault, subject to the
duty of replacement
1. To advise the
pledgee of the
flaws of the thing
(Art 2101)
2. Not to demand
the return of the
thing until after
full payment of
12

(Art 2107)
2. To bid and be
preferred at the public
auction (Art 2113)
3. To alienate the thing
pledged provided the
pledgee consents to the
sale (Art 2097)
4. To ask that the thing
pledged be deposited
(Arts 2104 & 2106)
the debt,
including interest
due thereon and
expenses incurred
for its
preservation (Art
2105)

Rights of the Pledgee
KEY: D SBC BA
2
R
2
OPS
2

1. Option to demand replacement or immediate payment of the debt in case of deception as to
substance or quality (Art 2109)
2. To sell at public auction in case of reasonable grounds to fear destruction or impairment of the
thing without his fault (Art 2108)
3. To bring actions pertaining to the owner (Art 2103)
4. To choose which of several things pledged shall be sold
5. To bid at the public auction (Art 2113)
6. To appropriate the thing in case of failure of the 2
nd
public auction (Art 2112)
7. To apply said fruits, interests or earnings to the interest, if any, then to the principal of the credit
(Art 2102)
8. To retain excess value received in the public sale (Art 2115)
9. To retain the thing until after full payment of the debt (Art 2098)
10. To be reimbursed for the expenses made for the preservation of the thing pledged (Art 2099)
11. To object to the alienation of the thing
12. To possess the thing (Art 2098)
13. To sell at public auction in case of non-payment of debt at maturity (Art 2112)
To choose which of the several things pledged shall be sold (Art 2119)
14. Option to demand replacement or immediate payment of the debt in case of deception as to
substance or quality (Art 2109)
15. To sell at public auction in case of reasonable grounds to fear destruction or impairment of the
thing without his fault (Art 2108)
16. To bring actions pertaining to the owner (Art 2103)
17. To choose which of several things pledged shall be sold
18. To bid at the public auction (Art 2113)
19. To appropriate the thing in case of failure of the 2
nd
public auction (Art 2112)
20. To apply said fruits, interests or earnings to the interest, if any, then to the principal of the credit
(Art 2102)
21. To retain excess value received
in the public sale (Art 2115)
22. To retain the thing until after full payment of the debt (Art 2098)
23. To be reimbursed for the expenses made for the preservation of the thing pledged (Art 2099)
24. To object to the alienation of the thing
25. To possess the thing (Art 2098)
26. To sell at public auction in case of non-payment of debt at maturity (Art 2112)
27. To choose which of the several things pledged shall be sold (Art 2119)

Obligations of the Pledgee
KEY: CUDA
3
1. Take care of the thing with the diligence of a good father of a family (Art 2099)
2. Not to use thing unless authorized or by the owner or its preservation requires its use (Art 2104)
3. Not to deposit the thing with a 3
rd
person unless so stipulated (Art 2100)
4. Responsibility for acts of agents and employees as regards the thing (Art 2100)
13

5. To advise pledgor of danger to the thing (Art 2107)
6. To advise pledgor of the result of the public auction (Art 2116)

RIGHT OF PLEDGOR TO SUBSTITUTE THING PLEDGED (ART.2107)
Requisites:
1. The pledgor has reasonable grounds to fear the destruction or impairment of the thin pledged
2. There is no fault on the part of the pledgee
3. The pledgor is offering in place of the thing, another thing in pledge which is of the same kind
and quality as the former
4. The pledge does not choose to exercise his right to cause the thing pledged to be sold at public
auction
NOTE: The pledgees right to have the thing pledged sold at public sale granted under the Article 2108
is superior to that given to the pledgor to substitute the thing pledged under Article 2107.

Prohibition against double pledge
Property which has been lawfully pledged to one creditor cannot be pledged to another as long as
the first one subsists.
NOTE: Possession of a creditor of the thing pledged is an essential requisite of pledge.

Extinguishment of Pledge (CRAPS)
1. For the same causes as all other obligations (Art 1231)
2. Return of the thing pledged by the pledgee to the pledgor (Art 2110)
3. Statement in writing by the pledgee that he renounces or abandons the pledge (Art 2111)
4. Payment of the debt (Art 2105)
5. Sale of thing pledged at public auction (Art 2115)
NOTE: The possession by the debtor or owner of the thing pledged subsequent to the perfection of the
pledge gives rise to a prima facie presumption that the thing has been returned and, therefore, that
the pledge has been extinguished but not the principal obligation itself. (Art 2110)

Requirements for sale of thing pledged at public auction: (Art 2112)
1. The debt is due and unpaid
2. Sale must be at a public auction
3. there must be notice to the pledgor and owner, stating the amount due
4. Sale must be with the intervention of a notary public

Effect of sale of the thing pledged: (Art 2115)
1. The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds
of the sale are equal to the amount of the principal obligation, interest and expenses in a proper
case
2. If the price of the sale is more than the amount due the creditor, the debtor is not entitled to the
excess unless the contrary is provided
3. If the price of the sale is less, the creditor is not entitled to recover the deficiency even if there is
a stipulation to that effect

REAL ESTATE MORTGAGE (Articles 2124-2131)

A contract whereby the debtor secures to the creditor the fulfilment 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.

Characteristics of the contract:
1. Real
2. Accessory
3. Subsidiary
14

4. Unilateral it creates only an obligation on the part of the creditor who must free the property
from the encumbrance once the obligation is fulfilled.



NOTES:
As an accessory contract, its consideration is that of the principal contract from which it receives
life.
A mortgage does not involve a transfer, cession or conveyance of property but only constitutes a
lien thereon. Until discharged, it follows the property wherever it goes and subsists
notwithstanding changes of ownership.
A mortgage gives the mortgagee no right or claim to the possession of the property, and therefore,
a mere mortgagee has no right to eject an occupant of the property mortgaged unless the
mortgage should contain some provision to that effect. The only right of a mortgagee in case of
non-payment of a debt secured by mortgage would be to foreclose the mortgage and have the
encumbered property sold to satisfy the outstanding indebtedness. If the possession is transferred
to the mortgagee, it must not expressly be for purpose of applying the fruits to the interest then to
the principal of the credit, for then it would be an antichresis.
It is not an essential requisite that the principal of the mortgage credit bears interest, or that the
interest as compensation for the use of the principal and enjoyment of its fruits be in the form of a
certain percent thereof.

Special Requisites (in addition to the common essential requisites):
1. It can cover only immovable property and alienable real rights imposed upon immovables (Art
2124);
2. It must appear in a public instrument (Art. 2125); and
3. Registration in the registry of property is necessary to bind third persons, but not for the validity of
the contract (Art 2125).
An order for foreclosure cannot be refused on the ground that the mortgage had not been
registered provided no innocent third parties are involved.
NOTE: Where a mortgage is not valid or false, the principal obligation which it guarantees is not
rendered null and void. What is lost only is the right to foreclose the mortgage as a special remedy for
satisfying or settling the indebtedness which is the principal obligation but the mortgage deed remains
as evidence or proof of a personal obligation of the debtor and the amount due to the creditor may be
enforced in an ordinary personal action.

Kinds:
1. Voluntary agreed to by the parties or constituted by the will of the owner of the property on
which it is created
2. Legal one required by law to be executed in favour of certain persons
The persons in whose favour the law establishes a mortgage have no other right than to
demand the execution and the recording of the document in which the mortgage is formalized
(Art 2125 par 2)
3. Equitable one which, although lacking the formalities of a mortgage, shows the intention of the
parties to make the property a security for a debt

PLEDGE REAL MORTGAGE
1. Constituted on
movables
1. Constituted on
immovables
2. Property is
delivered to pledgee
or by common
consent to a third
person
2. Delivery is not
necessary
3. Not valid against
third persons unless a
3. Not valid against
third persons unless
15

description of the
thing pledged and
date of pledge
appear in a public
instrument
registered

Extent of Mortgage:
Absent express stipulation to the contrary, the mortgage includes the accessions, improvements,
growing fruits and income of the property not yet received when the obligation becomes due and
to the amount of the indemnity granted or owing to the proprietor from the insurers of the
property mortgaged, or in virtue of expropriation for public use (Art 2127)

Object of Mortgage:
Future property cannot be an object of a contract of mortgage (Art 2085[2]) However, a stipulation
subjecting to the mortgage lien, properties (improvements) which the mortgagor may subsequently
acquire install, or use in connection with real property already mortgaged belonging to the
mortgagor is valid (Peoples Bank and Trust Co. vs. Dahican Lumber Co., 20 SCRA 84)

Special Rights:
1. Mortgagor - To alienate the mortgaged property but the mortgage shall remain attached to the
property.

NOTE: A stipulation forbidding the owner from alienating the immovable mortgage shall be void (Art
2130) being contrary to public policy inasmuch as the transmission of property should not be unduly
impeded.

2. Mortgagee - To claim from a 3
rd
person in possession of the mortgaged property the payment of the
part of the credit secured by the which said third person possesses (Art 2129)
NOTE: It is necessary that prior demand for payment must have been made on the debtor and the
latter failed to pay (BPI vs Concepcion & Hijos, Inc., 53 Phil 906)

Foreclosure
The remedy available to the mortgagee by which he subjects the mortgaged property to the
satisfaction of the obligation to secure that for which the mortgage was given

NOTES:
It denotes the procedure adopted by the mortgagee to terminate the rights of the mortgagor on
the property and includes the sale itself (DBP vs Zaragoza, 84 SCRA 668)
Foreclosure is valid where the debtor is in default in the payment of his obligation (Gobonseng, Jr.
vs CA, 246 SCRA 472)

Kinds:
1. Judicial ordinary action for foreclosure under Rule 68 of the Rules of Court
2. Extrajudicial when mortgagee is given a special power of attorney to sell the mortgaged property
by public auction, under Act No. 3135

Judicial
foreclosure
Extrajudicial
foreclosure
1. There is court
intervention
1. No court
intervention
2. Decisions are
appealable
2. Not appealable
because it is
immediately
executory
3. Order of court
cuts off all rights of
3. Foreclosure does
not cut off right of
16

the parties
impleaded
all parties involved
4. There is equity
of redemption
except on banks
which provides for
a right of
redemption
4. There is right of
redemption
5. Period of
redemption starts
from the finality of
the judgment until
order of
confirmation
5. Period to redeem
start from date of
registration of
certificate of sale
6. No need for a
special power of
attorney in the
contract of
mortgage
6. Special power of
attorney in favor of
mortgagee is
needed in the
contract

NOTES:
A foreclosure sale retroacts to the date of registration of the mortgage and that a person who takes
a mortgage in good faith and for valuable consideration, the record showing clear title to the
mortgagor, will be protected against equitable claims on the title in favor of third persons, of
which he had no actual or constructive notice (St. Dominic Corporation vs. IAC 151 SCRA 577).
Where there is a right to redeem, inadequacy of price is not material because the judgment debtor
may reacquire the property or else sell his right to redeem and thus recover any loss he claims to
have suffered by reason of the price obtained at the auction sale and consequently not sufficient to
set aside the sale. Mere inadequacy of the price obtained at the sheriffs sale will not be sufficient
to set aside the sale unless the price is so inadequate as to shock the conscience of the court
taking into consideration the peculiar circumstances attendant thereto. (Sulit vs. CA, 268 SCRA
441)
Should there remain a balance due to the mortgagee after applying the proceeds of the sale, the
mortgagee is entitled to recover the deficiency. This rule applies both to judicial and extra-
judicial foreclosure real mortgage.
The action to recover a deficiency after foreclosure prescribes after 10 years from the time the
right of action accrues (Arts 1142 & 1144).

Stipulation of upset price or tipo
It is a stipulation in a mortgage of real property of minimum price at which the property shall be
sold, to become operative in the event of a foreclosure sale at public auction. It is null and void for
the property must be sold to the highest bidder. Parties cannot, by agreement, contravene the law
and interfere with the lawful procedure of the courts (BPI vs Yulo, 31 Phil 476)

Extrajudicial foreclosure real property (Act No. 3135)
The law covers only real estate mortgages. It is intended merely to regulate the extrajudicial sale
of the property mortgaged if and when the mortgagee is given a special power of express authority
to do so in the deed itself or in a document annexed thereto.
The authority to sell is not extinguished by the death of the mortgagor (or mortgagee) as it is an
essential and inseparable part of a bilateral agreement (Perez vs PNB, 17 SCRA 833).
No sale can be legally made outside the province in which the property sold is situated; and in case
the place within said province in which the sale is to be made is the subject of stipulation, such
sale shall be made in the said place in the municipal building of the municipality in which the
property or part thereof is situated.

Procedure for extrajudicial foreclosure of both real estate mortgage under Act No. 3135 and
chattel mortgage under Act No. 1508 (A.M. No. 99-10-05-0, January 15, 2000)
17

1. Filing of application before the Executive Judge through the Clerk of Court
2. Clerk of Court will examine whether the requirement of the law have been complied with, that is,
whether the notice of sale has been posted for not less than 20 days in at least three (3) public
places of the municipality or city where the property is situated, and if the same is worth more
than P400.00, that such notice has been published once a week for at least three (3) consecutive
weeks in a newspaper of general circulation in the city of municipality
3. The certificate of sale must be approved by the Executive Judge
4. Where the application concerns extrajudicial foreclosure of real mortgages in different locations
covering one indebtedness, only one filing fee corresponding to such debt shall be collected
5. The Clerk of Court shall issue certificate of payment indicating the amount of indebtedness, the
filing fees collected, the mortgages sought to be foreclosed, the description of the real estates and
their respective locations
6. The notice of sale shall be published in a newspaper of general circulation pursuant to Section 1,
PD No. 1079
7. The application of shall be raffled among all sheriffs
8. After the redemption period has expired, the Clerk of Court shall archive the records.
9. No auction sale shall be held unless there are at least two (2) participating bidders, otherwise the
sale shall be postponed to another date. If on the new date set forth for the sale there shall not
be at least two bidders, the sale shall then proceed. The names of the bidders shall be reported to
the Sheriff of the Notary Public, who conducted the sale to the Clerk of Court before the issuance
of the certificate of sale.

NOTES:
The Mortgagor and Mortgagee have no right to waive the posting and publication requirements
under Act. No. 3135. Notices are given to secure bidders and prevent a sacrifice of the property.

Clearly, the statutory requirements of posting and publication are mandated, not for the
mortgagors benefit, but for the public or third persons. Failure to comply with the statutory
requirements as to publication of notice of auction sale constitutes a jurisdictional defect which
invalidates the sale.Lack of republication of notice of foreclosure sale made subsequently after the
original date renders such sale void (PNB vs. Nepomuceno Productions Inc., G.R. No. 139479.
December 27, 2002).
Sec 3 of Act 3135 does not require personal or any particular notice on the mortgagor much less on
his successors-in-interest where there is no contractual stipulation therefor. Hence, unless required
in the mortgage contract, the lack of such notice is not a ground to set aside a foreclosure sale.
Neither does Sec 3 require posting of notice of sale on the mortgage property and the certificate of
posting is not required, much less considered indispensable, for the validity of a foreclosure sale.


Redemption
It is the transaction by which the mortgagor reacquires or buys back the property which may have
passed under the mortgage, or divests the property of the lien which the mortgage may have
created.

NOTES:
A sale by the mortgagor to a third party of the mortgaged property during the period for
redemption transfers only the right to redeem the property and the right to possess, use and enjoy
the same during said period.
Where sale with assumption of mortgage not registered and made without the consent of the
mortgagee, the buyer, thereof, was not validly substituted as debtor and, hence, had no right to
redeem (Bonnevie vs. CA, 125 SCRA 122).

Kinds:
1. Equity of Redemption right of mortgagor to redeem the mortgaged property after his default in
the performance of the conditions of the mortgage within the 90-day period from the date of the
18

service of the order of foreclosure or even thereafter but before the confirmation of the sale.
Applies to judicial foreclosure of real mortgage and chattel mortgage foreclosure.

NOTE: Redemption of the banking institutions is allowed within one year from confirmation of sale.

2. Right of Redemption right of mortgagor to redeem the mortgaged property within one year from
the date of registration of the certificate of sale. Applies only to extrajudicial foreclosure of real
mortgage.

NOTE: The right of redemption, as long as within the period prescribed, may be exercised irrespective
of whether or not the mortgagee has subsequently conveyed the property to some other party (Sta.
Ignacia Rural Bank, Inc. vs. CA, 230 SCRA 513)

Period of Redemption
1. Extra-judicial (Act #3135)
a. natural person one year from registration of the certificate of sale with Registry of Deeds
b. juridical person same rule as natural person
c. juridical person (mortgagee is bank) - three months after foreclosure or before registration of
certificate of foreclosure which ever is earlier (sec. 47, of General Banking Law)
2. Judicial before confirmation of the sale by the court

NOTE: Allowing a redemption after the lapse of the statutory period, when the buyer at the
foreclosure sale does not object but even consents to the redemption, will uphold the policy of the law
which is to aid rather than defeat the right of redemption. There is nothing in the law which prevents a
waiver of the statutory period for redemption (Ramirez vs CA, 219 SCRA 598).

Amount of the redemption price:
1. Mortgagee is not a bank (Act No. 3135, in relation to Sec. 28, Rule 39 of Rules of Court)
a. purchase price of the property
b. 1% interest per month on the purchase price
c. taxes paid and amount of purchasers prior lien, if any, with the same rate of interest
computed from the date of registration of sale, up to the time of redemption
2. Mortgagee is a bank (GBL 2000)
a. amount due under the mortgage deed
b. interest
c. cost and expenses
NOTE: Redemption price in this case is reduced by the income received from the property







ANTICHRESIS (Articles 2132 -2139)

A contract whereby the creditor acquires the right to receive the fruits of an immovable of the
debtor, with the obligation to apply them to the payment of the interest, if owing, and thereafter
to the principal of his credit (Art 2132)

Characteristics
1. Accessory contract it secures the performance of a principal obligation
2. Formal contract it must be in a specified form to be valid, i.e., in writing. (Art 2134)

Special Requisites (in addition to the common essential requisites):
19

1. It can cover only the fruits of an immovable property; (Art 2132)
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 (Art. 2134); and
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. (Art 2132)

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

Antichresis Pledge
1. Refers to real
property
1. Refers to personal
property
2. Perfected by mere
consent
2. Perfected by
delivery of the thing
pledged
3. Consensual contract 3. Real Contract




Antichresis Real Mortgage
1. Property is
delivered to creditor
1. Debtor usually
retains possession of
the property
2. Creditor acquires
only the right to
receive the fruits of
the property, hence,
it does not produce a
real right
2. Creditor does not
have any right to
receive the fruits;
but the mortgage
creates a real right
over the property
3. The creditor,
unless there is
stipulation to the
contrary, is obliged
to pay the taxes and
charges upon the
estate
3. The creditor has
no such obligation
4. It is expressly
stipulated that the
creditor given
possession of the
property shall apply
all the fruits thereof
to the payment of
interest, if owing,
and thereafter to the
principal
4. There is no such
obligation on part of
mortgagee
Subject matter of both is real property

Obligations of antichretic creditor:
1 To pay taxes and charges on the estate, including necessary expenses
NOTE: Creditor may avoid said obligation by:
a. compelling debtor to reacquire enjoyment of the property or
b. by stipulation to the contrary
20

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. Bring an action for specific performance; or
2. Petition for the sale of the real property as in a foreclosure of mortgages under Rule 68 of the
Rules of Court.(Art 2137)

NOTES:
The parties, however, may agree on an extrajudicial foreclosure in the same manner as they are
allowed in contracts of mortgage and pledge (Tavera vs. 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 (Articles 2140-2141)

A contract by virtue of which personal property is recorded in the Chattel Mortgage Register as a
security for the performance of an obligation (Art 2140).

Characteristics
1. Accessory contract it is for the purpose of securing the performance of a principal obligation
2. Formal contract registration in the Chattel Mortgage Register is indispensable for its validity
3. Unilateral contract it produces only obligations on the part of the creditor to free the thing from
the encumbrance on fulfilment of the obligation.

Special Requisites (in addition to the common essential requisites):
1. It can cover only personal or movable property in general; however, the parties may treat as
personal property that which by its nature would be real property;
2. Registration of the mortgage with the Chattel Mortgage Register where the mortgagor resides; if
property is located in a different province, registration in both provinces required;
3. Description of the property as would enable the parties or other persons to identify the same after
reasonable investigation and inquiry; and
4. Accompanied by an affidavit of good faith to bind third persons, but not for the validity of the
contract.
5. It can cover only obligations existing at the time the mortgage is constituted.
NOTE: A mortgage containing a stipulation in regard to future advances in the credit will take
effect only from the date the same are made and not from the date of the mortgage (Jaca vs Davao
Lumber Co., 113 SCRA 107)

Effect of registration: Creates a real right
The registration of the chattel mortgage is an effective and binding notice to other creditors of its
existence and creates a real right or a lien which, being recorded, follows the chattel wherever it
goes. The registration gives the mortgagee symbolical possession (Northern Motors, Inc. vs. Coquia,
68 SCRA 374).

Effect of failure to register chattel mortgage in the chattel mortgage registry
Article 2140 makes the recording in the Chattel Mortgage Register an essential requisite but if the
instrument is not recorded, the mortgage is nevertheless binding between the parties. But the
person in whose favour the law establishes a mortgage has no other right than to demand the
execution and the recording of the document.


21

Chattel Mortgage Pledge
1. Delivery of the
personal property
to the mortgage is
not necessary
1. Delivery of the
thing pledged is
necessary
2. registration in
the Chattel
Mortgage Registry
is necessary for its
validity
2. registration not
necessary to be
valid

3. If property is
foreclosed, the
excess over the
amount due goes to
the debtor
3. Debtor is not
entitled to excess
unless otherwise
agreed or except in
case of legal
pledge
4. If there is
deficiency after
foreclosure,
creditor is entitled
to recover the
deficiency from the
debtor, except
under Art. 1484
4. If there is
deficiency,
creditor is not
entitled to recover
notwithstanding
any stipulation to
the contrary
Subject matter of both is movable
property

Affidavit of Good Faith
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. (Sec. 5, Chattel Mortgage Law)

Effect of absence
The special affidavit is required only for the purpose of transforming an already valid mortgage into
preferred mortgage. Thus, it is not necessary for the validity of the chattel mortgage itself but
only to give it a preferred status. In other words, its absence vitiates the mortgage only as against
third persons without notice like creditors and subsequent encumbrancers.

Foreclosure of Chattel Mortgage
NOTES:
Foreclosure sale in chattel mortgage is by public auction under Act No. 1508, but the parties may
stipulate that it be by private sale.
The mortgagee may, after thirty (30) days from the time of the condition broken, cause the
mortgaged property to be sold at public auction by a public officer. The 30-day period is also a
grace period for the mortgagor to discharge the mortgage obligation. After the sale of the chattel
at public auction, the right of redemption is no longer available to the mortgagor (Cabral vs.
Evangelista, 28 SCRA 1000).

Application of proceed of sale:
1. Costs and expenses of keeping and sale
2. Payment of the obligation secured by the mortgage
3. Claims of persons holding subsequent mortgages in their order
4. The balance, if any, shall be paid to the mortgagor or person holding under him

22

NOTES:
The creditor may maintain an action for the deficiency, except if the chattel mortgage is
constituted as security for the purchase of personal property payable in instalments (Art. 1484).
The action for deficiency may be brought within ten (10) years from the time the cause of action
accrues (Arts 1141 and 1142).
Only equity of redemption is available to the mortgagor; the latter can no longer redeem after the
confirmation of the foreclosure sale.

Right of redemption
When the condition of a chattel mortgage is broken the following may redeem:
a) mortgagor;
b) person holding a subsequent mortgage; or
c) subsequent attaching creditor.
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 that the mortgagee could foreclose it.
The redemption is made by paying or delivering to the mortgagee the amount due on such
mortgage and the costs, and expenses incurred by such breach of condition before the sale thereof
(Sec 13, Act No. 1508).

Right to possession of foreclosed property
1. Real mortgage After the redemption period has expired, the purchaser of the property has the
right to a conveyance and to be placed in possession thereof.

NOTES:
Purchaser is not obliged to bring a separate suit for possession. He must invoke the aid of the
courts and ask for a WRIT OF POSSESSION.
Section 7 of Act No. 3135 allows the purchaser to take possession of the foreclosed property
during the period of redemption upon filing of an ex parte application and approval of a bond.

2. Chattel mortgage When default occurs and the creditor desires to foreclose, the creditor has the
right to take the property as a preliminary step for its sale.
NOTE: Where the debtor refuses to yield the property, the creditors remedy is to institute an
action either to effect judicial foreclosure directly or to secure possession (REPLEVIN) as a
preliminary to the sale contemplated in Section 14 or Act. No. 1508

CONCURRENCE AND PREFERENCE OF CREDITS (Articles 2236 2251)

Concurrence of Credits
Possession by two or more creditors of equal rights or privileges over the same property or all of
the property of the debtor

Preference of Credits
Right held by a creditor to be preferred in the payment of his claim above others out of the
debtors assets.

NOTES:
The rules on preference of credits apply only when two or more creditors have separate and
distinct claims against the same debtor who has insufficient property.
Preference creates no lien on property, and, therefore, gives no interest in property, specific or
general, to the preferred creditor but a preference in application of the proceeds after the sale.
(Molina vs. Somes, 31 Phil. 76)
The preferential right of credit attains significance only after the properties of the debtor have
been inventoried and liquidated, and the claims held by his various creditors have been
established. (DBP vs. NLRC, 183 SCRA 328)
23


Preference of
Credit
Lien
Applies only to
claims which do
not attach to
specific
properties
Creates a charge
on a particular
property

Liability of debtors property for his obligations
GENERAL RULE: Debtor is liable with all his property, present and future, for the fulfilment of his
obligations. (Art 2236)

EXEMPT PROPERTY:
1. Present property those provided under Arts. 155 and 205 of the Family Code, Sec. 13, Rule 39
of the Rules of Court, and Sec. 118 of the Public Land Act
2. Future property a debtor who obtains a discharge from his debts on account of his insolvency,
is not liable for the unsatisfied claims of his creditors with said property subject to certain
exceptions expressly provided by law. (Secs. 68, 69, The Insolvency Law [Act No. 1956])
3. Property under legal custody and those owned by municipal corporations necessary for
governmental purposes

General Categories of Credit:
1. Special Preferred Credits - those listed in Arts. 2241 and 2242 shall be considered as mortgages
and pledges of real or personal property or liens (Art. 2243). Hence, they are not included in the
insolvent debtor's assets.

NOTES:
Arts. 2241 and 2242 do not give the order of preference or priority of payment. They merely
enumerate the credits which enjoy preference with respect to specific movables or immovables.
With respect to the same specific movables or immovables, creditors, with the exception of the
State (No. 1), merely concur.
They only find application when there is a concurrence of credits, i.e., when the same specific
property of the debtor is subjected to the claims of several creditors and the value of such
property is insufficient to pay in full all the creditors. In such a situation, the question of
preference will arise.
Article 2242 makes no distinction between registered and unregistered vendors lien (No. 2).
Hence, any lien of that kind enjoys the preferred credit status. Unlike the unpaid price of real
property sold, mortgage credits (No. 5), in order to be given preference, should be recorded in the
Registry of Property. But a recorded mortgage credit is superior to an unrecorded unpaid vendors
lien (De Barretto vs. Villanueva, 1 SCRA 288)
The priority rule applies to credits annotated in the Registry of Property. As to credits mentioned
in No. 7 of Article 2242, there is preference among the attachments or executions according to the
order of the time they were levied upon the property. The pro rata rule in Article 2249 does not
apply; otherwise, the result would be absurd. The preference of a credit annotated by an
attachment or execution could be defeated by simply obtaining a writ of attachment or execution,
no matter how much later (Manabat vs Laguna Federation of Facomas, Inc., 19 SCRA 621).
The last paragraph of Article 2241 applies only when the right of ownership in such property
continues in the debtor, and, therefore, it is not applicable to cases where the debtor has parted
with his ownership therein, as where he has sold the property (Pea vs. Mitchell, 9 Phil 587)

2. Ordinary Preferred Credits - those listed in Art. 2244 as amended by Art. 110 of the Labor Code.
NOTES:
The provision not only enumerates the preferred credits with respect to other property, real and
personal, of the debtor, but also gives their order of preference in the order named.
24

In contrast with Articles 2241 and 2242, Article 2244 creates no liens on determinate property
which follow such property. What Article 2244 creates are simply rights in favour of certain
creditors to have the cash and other assets of the insolvent applied in a certain sequence or order
of priority.
Article 2244, particularly par (14) item (1) thereof, is not applicable to obligations of the State as
it is a recognized doctrine that the State is always solvent. It is inconceivable for the State to
voluntarily initiate insolvency or general liquidation proceedings or to be subjected to such
proceedings under its own laws.

3. Common Credits those listed under Art. 2245, which shall be paid pro rata regardless of dates.
NOTE: Ordinary Preferred and Common Credits cover only free property of the debtor, or those not
subjected to Special Preferred Credit.

Effects of Article 110 of Labor Code to Art 2244:
1. Removed the one-year limitation found in No. 2 of Art. 2244
2. Moving up the claims for unpaid wages (and other monetary claims) of laborers or workers of
insolvent from second priority to first priority in the order of preference established by Art. 2244




NOTES:
In case of bankruptcy or liquidation of the employers business, the unpaid wages and other
monetary claims of the employees shall be given first preference and shall be paid in full before
the claims of the government and other creditors may be paid. The terms, declaration of
bankruptcy, or judicial liquidation have been eliminated, nevertheless, according to the SC,
bankruptcy or liquidation proceedings are still necessary for the operation of the preference
accorded to workers under Art. 110 of the Labor Code. (DBP vs. NLRC 183 SCRA 328; RA No. 6715
Sec 10)
In case of rehabilitation, the preference of credit granted to employees under Art 110 of the Labor
Code is not applicable (Rubberworld [Phils.] vs CA, 305 SCRA 722).

Refectionary Credit
Indebtedness incurred in the repair or reconstruction of something previously made, such repair or
reconstruction being made necessary by the deterioration or destruction of the thing as it formerly
existed.

ORDER OF PREFERENCE OF CREDITS

Arts. 2241 and 2242, jointly with Arts. 2246 to 2249 establish a two-tier order of preference:
1. First tier includes taxes, duties and fees due on specific movable or immovable property;
2. Second tier all other special preferred (non-tax) credits shall be satisfied pro-rata, out of any
residual value of the specific property to which such credits relate.

NOTES:
The pro-rata rule does not apply to credits annotated in the Registry of Property by virtue of a
judicial




order, by attachments and executions, which are preferred as to later credits. In satisfying
several credits annotated by attachments or executions, the rule is still preference according to
the priority of the credits in the order of time.
In order to make the pro rating provided in Art 2249 fully effective, the preferred creditors
25

enumerated in Nos. 2 to 14 of Art 2242 must necessarily be convened, and the import of their
claims ascertained. There must be first some proceeding where the claims of all the preferred
creditors may be bindingly adjudicated, e.g. insolvency, settlement of decedents estate, or other
liquidation proceedings except where there are not more than one creditor.