Credit Transactions Memo Aid

182 2005 CENTRALIZED BAR OPERATIONS
CREDIT TRANSACTIONS
CREDIT TRANSACTIONS LOAN (Articles 1933 – 1961)
 All transactions involving the
purchase or loan of goods, services,  A contract wherein one of the
or money in the present with a parties delivers to another, either
promise to pay or deliver in the something not consumable so that
future the latter may use the same for a
certain time and return it or money
Contracts of security or other consumable thing, upon the
Types: condition that the same amount of
1. Secured transactions or contracts of the same kind and quality shall be
real security - supported by a paid. (Art 1933)
collateral or an encumbrance of
property Characteristics:
2. Unsecured transactions or contracts 1. Real Contract – delivery of the thing
of personal security - supported only loaned is necessary for the
by a promise or personal perfection of the contract
commitment of another such as a NOTE: An accepted promise to make
guarantor or surety a future loan is a consensual
contract, and therefore binding upon
Security the parties but it is only after
 Something given, deposited, or delivery, will the real contract of
serving as a means to ensure loan arise. (Art 1934)
fulfilment or enforcement of an
obligation or of protecting some 2. Unilateral Contract - once the
interest in property subject matter has been delivered,
 Types of Security it creates obligations on the part of
a. personal – when an individual only one of the parties (i.e.
becomes surety or guarantor borrower).
b. real or property – when a
mortgage, pledge, antichresis,  Kinds:
charge or lien or other device 1. Commodatum – when the bailor
used to have property held, out (lender) delivers to the bailee
of which the person to be made (borrower) a non-consumable thing
secure can be compensated for so that the latter may use it for a
loss certain time and return the identical
thing.
Bailment  Kinds of commodatum:
 The delivery of property of one a. Ordinary Commodatum – use by
person to another in trust for a the borrower of the thing is for a
specific purpose, with a contract, certain period of time
express or implied, that the trust b. Precarium - one whereby the
shall be faithfully executed and the bailor may demand the thing
property returned or duly accounted loaned at will and it exists in the
for when the special purpose is following cases:
accomplished or kept until the bailor i. neither the duration nor
claims it. purpose of the contract is
stipulated
 Parties: ii. the use of the thing is
1. bailor - the giver; one who delivers merely tolerated by the
property owner
2. bailee- the recipient; one who
receives the custody or possession of
the thing thus delivered
2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT CHAIRPERSONS

Maricel Abarentos (Over-all Chairperson), Ronald Jalmanzar (Over-all Vice Chair), Yolanda Tolentino(VC-Acads), Jennifer
Ang(VC- Secretariat), Joy Inductivo (VC-Finance), Elaine Masukat (VC-EDP), Anna Margarita Eres (VC-Logistics). Jonathan
Mangundayao (Political Law), Francis Benedict Reotutar (Labor Law), Romuald Padilla (Civil Law), Charmaine Torres (Taxation Law),
Mark David Martinez (Criminal Law), Garny Luisa Alegre (Commercial Law), Jinky Ann Uy (Remedial Law), Jackie Lou Bautista (Legal
Ethics)
San Beda College of Law 183
MEMORY AID IN CIVIL LAW
2. Simple loan or mutuum – where the COMMODATUM (Articles 1935 – 1952)

lender delivers to the borrower  Nature:
money or other consumable thing
upon the condition that the latter 1. PURPOSE: Bailee in commodatum
shall pay the same amount of the acquires the temporary use of the
same kind and quality. thing but not its fruits (unless
stipulated as an incidental part of
Commodatum Mutuum the contract).(Art 1935)
Key: COPS-LOTR  Use must be temporary,
1. Object otherwise the contract may be a
Non-consumable Consumable deposit.
2. Cause
Gratuitous May or may not be 2. CAUSE: Essentially gratuitous; it
gratuitous ceases to be a commodatum if any
3. Purpose compensation is to be paid by the
Use or temporary Consumption borrower who acquires the use, in
possession such case there arises a lease
4. Subject Matter contract.
Real or personal Only personal  Similar to a donation in that it
property property
confers a benefit to the
5. Ownership of the thing
recipient. The presumption is
Retained by the Passes to the debtor
bailor
that the bailor has loaned the
6. Thing to be returned thing for having no need
Exact thing loaned Equal amount of the therefor.
same kind and
quality 3. SUBJECT MATTER: Generally non-
7. Who bears risk of loss consumable whether real or personal
Bailor Debtor but if the consumable goods are not
8. When to return for consumption as when they are
In case of urgent Only after the merely for exhibition, consumable
need, even before expiration of the goods may be the subject of the
the expiration of the term commodatum. (Art 1936)
term
4. Bailor need not be the owner of the
thing owned (Art. 1938) since by the
Loan Credit loan, ownership does not pass to the
Delivery by one party Ability of a person to borrower.
and the receipt of borrow money or  A mere lessee or usufructuary
other party of a things by virtue of
may lend but the borrower or
given sum of money the trust or
or other consumable confidence reposed bailee himself may not lend nor
thing upon an by the lender that he lease the thing loaned to him to
agreement, express will pay what he a third person (Art 1932[2])
or implied, to repay promised.
the same. 5. Purely Personal (Art 1939):
 Death of either party terminates
the contract unless by
Loan Credit stipulation, the commodatum is
1. Interest taken at Interest is taken in transmitted to the heirs of either
the expiration of the advance or both parties.
credit  Bailee can neither lend nor lease
2. Always on a Always on a single the object of the contract to a
double name paper name paper (i.e.
third person.
(two signatures promissory note with
appear with both no indorse-ment
parties held liable other than the
for payment) maker)
CIVIL LAW COMMITTEE

CHAIRPERSON: Romuald Padilla ASST.CHAIRPERSON: Vida Bocar, Joyce Vidad EDP: Alnaiza Hassiman, Dorothy Gayon
 SUBJECT HEADS: Christopher Rey Marasigan (Persons and Family Relations), Alejandro Casabar(Property), Ma. Rhodora
Ferrer(Wills and Succession), Ian Dominic Pua(Obligations and Contracts), Sha Elijah Dumama(Sales and Lease), John Stephen
Quiambao(PAT), Christopher Cabigao(Credit Transactions), Ligaya Alipao(Torts and Damages), Anthony Purganan(LTD),
Ma. Ricasion Tugadi (Conflicts of Law)
NOTE:Use of the thing loaned NOTES:

may extend to members of the  However, the bailee’s right
bailee’s household except: extends no further than
a. contrary stipulation; retention of the thing loaned
b. nature of the thing until he is reimbursed for the
forbids such use damages suffered by him.
 He cannot lawfully sell the
Obligations of the Bailee: (Arts 1941 – thing to satisfy such damages
1945) without court’s approval.
1. To pay for the ordinary expenses for  In case there are two or
the use and preservation of the thing more bailees, their
loaned. (Art 1941) obligation shall be solidary.
2. To be liable for the loss of the thing
even if it should be through a Obligations of the bailor (Art 1946 – Art
fortuitous event in the following 1952):
cases: (KLAS D) 1. To respect the duration of the loan
a. when he keeps it longer than the GENERAL RULE: Allow the bailee
period stipulated, or after the the use of the thing loaned for the
accomplishment of its use duration of the period stipulated or
b. when he lends or leases it to until the accomplishment of the
third persons who are not purpose for which the commodatum
members of his household was instituted.
c. when the thing loaned has been EXCEPTIONS:
delivered with appraisal of its a. In case of urgent need in
value which case bailee may demand
d. when, being able to save either its return or temporary use;
of the thing borrowed or his own b. The bailor may demand
things, he chose to save the immediate return of the thing if
latter; or the bailee commits any act of
e. when the bailee devoted the ingratitude specified in Art. 765.
thing for any purpose different
from that for which it has been 2. To refund to the bailee
loaned (Art 1942) extraordinary expenses for the
3. To be liable for the deterioration of preservation of the thing loaned,
thing loaned (a) if expressly provided the bailee brings the same
stipulated; (b) if guilty of fault or to the knowledge of the bailor
negligence; or (c) if he devotes the before incurring them, except when
thing to any purpose different from they are so urgent that the reply to
that for which it has been loaned the notification cannot be awaited
4. To pay for extraordinary expenses without danger.
arising from the actual use of the
thing by the bailee, which shall be 3. To be liable to the bailee for
borne equally by both the bailor and damages for known hidden flaws.
the bailee, even though the bailee  Requisites:
acted without fault, unless there is a a. There is flaw or defect in the
stipulation to the contrary (Art 1949 thing loaned;
par 2) b. The flaw or defect is hidden;
5. To return the thing loaned c. The bailor is aware thereof;
 The bailee has no right to retain d. He does not advise the bailee of
the thing loaned as security for the same; and
claims he has against the bailor e. The bailee suffers damages by
even for extraordinary expenses reason of said flaw or defect
except for a claim for damages
suffered because of the flaws of
the thing loaned.

Ethics)
NOTES:
 If the above requisites concur, 3. Relationship Relationship is that
the bailee has the right of between the parties of a landlord and
is that of obligor- tenant
retention for damages.
obligee
 The bailor cannot exempt
himself from the payment of 4. Creditor receives Owner of the
expenses or damages by payment for his loan property rented
abandoning the thing to the receives
bailee. compensation or
price either in
SIMPLE LOAN OR MUTUUM (Art 1953 – money, provisions,
chattels, or labor
1961)
 A contract whereby one party from the occupant
delivers to another, money or other thereof in return for
consumable thing with the its use (Tolentino vs
understanding that the same amount Gonzales, 50 Phil 558
of the same kind and quality shall be 1927)
paid. (Art. 1953)
Loan Sale
NOTES:
 The mere issuance of the checks 1. Real contract Consensual contract
does not result in the perfection of
the contract of loan. The Civil Code 2. Generally Bilateral and
unilateral because reciprocal
provides that the delivery of bills of
only borrower has
exchange and mercantile obligations
documents, such as checks, shall
produce the effect of payment only NOTE: If the property is “sold”, but the
when they have been encashed real intent is only to give the object as
(Gerales vs. CA 218 SCRA 638). It is security for a debt – as when the “price”
only after the checks have produced is comparatively small – there really is a
the effect of payment that the contract of loan with an “equitable
contract of loan may be deemed mortgage.”
perfected.
 The obligation is “to pay” and not to Commodatum/
return because the consumption of Barter
Mutuum
the thing loaned is the distinguishing
character of the contract of mutuum 1. Subject matter is Subject matter is
from that of commodatum. money or fungible non-fungible, (non
 No estafa is committed by a person things consumable) things
who refuses to pay his debt or denies
its existence. 2. In commodatum, The thing with
the bailee is bound equivalent value is
to return the given in return for
Simple Loan/Mutuum Rent identical thing what has been
borrowed when the received
1. Delivery of money Delivery of some time has expired or
or some consumable non-consumable purpose served
thing with a promise thing in order that
to pay an equivalent the other may use it 3. Mutuum may be Onerous, actually a
of the same kind and during a certain gratuitous and mutual sale
quality period and return it commodatum is
to the former. always gratuitous
2. There is a transfer There is no transfer

of ownership of the of ownership of the
thing delivered thing delivered
CIVIL LAW COMMITTEE

 Form of Payment (Art 1955): b) With regard particularly to an

1. If the thing loaned is money - award of interest in the concept
payment must be made in the of actual and compensatory
currency stipulated, if it is possible; damages, the rate of interest, as
otherwise it is payable in the well as the accrual thereof, is
currency which is legal tender in the imposed, as follows:
Philippines and in case of i. When the obligation
extraordinary inflation or deflation, breached consists of
the basisi of payment shall be the payment of a sum of money
value of the currency at the time of (loan or forbearance of
the creation of the obligation money), the interest shall be
2. If what was loaned is a fungible that which is stipulated or
thing other than money - the agreed upon by the parties.
borrower is under obligation to pay In absence of an agreement,
the lender another thing of the same the rate shall be the legal
kind, quality and quantity. In case it rate (i.e. 12% per annum)
is impossible to do so, the borrower computed from default.
shall pay its value at the time of the NOTE: The interest due shall
perfection of the loan. itself earn legal interest
from the time it is judicially
Interest demanded
 The compensation allowed by law or ii. In other cases, the rate of
fixed by the parties for the loan or interest shall be six percent
forbearance of money, goods or (6%) per annum.
credits NOTE: No interest, however,
 Requisites for Demandability: (ELI) shall be adjudged on
1. must be expressly stipulated unliquidated claims or
Exceptions: damages except when or
a. indemnity for damages until the demand can be
b. interest accruing from established with reasonable
unpaid interest certainty. When the demand
2. must be lawful cannot be established, the
3. must be in writing interest shall begin to run
only from the date of the
Compound Interest judgment of the court is
GENERAL RULE: Unpaid interest shall made.
not earn interest. iii. When the judgment of the
EXCEPTIONS: court awarding a sum of
1. when judicially demanded money becomes final and
2. when there is an express executory, the rate of legal
stipulation (must be in writing in interest, whether the case
view of Art. 1956) falls under paragraph i or ii
above, shall be 12% per
Guidelines for the application of annum from such finality
proper interest rates until its satisfaction, this
1. If there is stipulation: that rate shall interim period being deemed
be applied to be by then an equivalent
2. The following are the rules of thumb to a forbearance of credit.
for the application/imposition of (Eastern Shipping Lines vs.
interest rates: CA, July 12, 1994)
a) When an obligation, regardless
of its source, i.e., law, NOTES:
contracts, quasi-contracts,  Central Bank Circular No. 416 fixing
delicts or quasi-delicts is the rate of interest at 12% per
breached, the contravenor can annum deals with loans, forbearance
be held liable for damages. of any money, goods or credits and

Ethics)
judgments involving such loans, or 2. Unilateral (gratutitous deposit) -

forbearance in the absence of only the depositary has an
express agreement to such rate obligation.
 Interest as indemnity for damages is 3. Bilateral (onerous deposit) -
payable only in case of default or gives rise to obligations on the
non-performance of the contract. As part of both the depositary and
they are distinct claims, they may be depositor.
demanded separately. (Sentinel
Insurance Co., Inc. vs CA, 182 SCRA Deposit Mutuum
517) 1. Purpose
 Central Bank Circular No. 905 (Dec. Principal purpose is Principal purpose is
10, 1982) removed the Usury Law safekeeping or consumption
custody
ceiling on interest rates for secured
2. When to Return
and unsecured loans, regardless of Depositor can The lender must wait
maturity. demand the return of until the expiration
the subject matter at of the period granted
Validity of unconscionable interest rate will to the debtor
in a loan 3. Subject Matter
Supreme Court in Sps. Solangon Subject matter may Subject matter is
vs. Jose Salazar, G.R. No. 125944, June be movable or only money or other
29, 2001, said that since the usury law immovable property fungible thing
had been repealed by CB Cir. No. 905 4. Relationship
there is no more maximum rate of Relationship is that Relationship is that
of lender (creditor) of depositor and
interest and the rate will just depend on
and borrower depositary.
the mutual agreement of the parties (debtor).
(citing Lim Law vs. Olympic Sawmill Co.,
129 SCRA 439). But the Supreme Court 5. Compensation
said that nothing in said circular grants There can be NO compensation of
lenders carta blanche authority to raise compensation of things deposited with
interest rates to level which will either credits. each other (except
enslave their borrowers or lead to a by mutual
hemorrhaging of their assets (citing agreement).
Almeda vs. CA, 256 SCRS 292). In Medel
vs. CA, 299 SCRA 481, it was ruled that Deposit Commodatum
while stipulated interest of 5.5% per
month on a loan is usurious pursuant to 1. Purpose is 1. Purpose is the
Safekeeping transfer of the use
CB Circular No. 905, the same must be
equitably reduced for being iniquitous,
2. May be gratuitous 2. Essentially and
unconscionable and exorbitant. It is always gratuitous
contrary to morals, (contra bonos
mores). It was reduced to 12% per 3. Movable/corporeal 3. Both movable and
annum in consonant with justice and fair things only in case of immovable may be
play. extrajudicial deposit the object
DEPOSIT (Articles 1962 – 2009)  Kinds of Deposit:

1. Judicial (Sequestration) –takes place
 A contract constituted from the when an attachment or seizure of
moment a person receives a thing property in litigation is ordered.
belonging to another, with the
obligation of safely keeping it and of 2. Extra-judicial
returning the same. a. Voluntary – one wherein the
delivery is made by the will of
Characteristics: the depositor or by two or more
1. Real Contract - contract is persons each of whom believes
perfected by the delivery of the himself entitled to the thing
subject matter. deposited. (Arts 1968 – 1995)
CIVIL LAW COMMITTEE

b. Necessary – one made in NOTES:

compliance with a legal  Article 1966 does not embrace
obligation, or on the occasion of incorporeal property, such as rights
any calamity, or by travellers in and actions, for it follows the person
hotels and inns (Arts 1996 - of the owner, wherever he goes.
2004), or by travellers with  A contract for the rent of safety
common carriers (Art 1734 – deposit boxes is not an ordinary
1735). contract of lease of things but a
NOTE: The chief difference special kind of deposit; hence, it is
between a voluntary deposit and a not to be strictly governed by the
necessary deposit is that in the provisions on deposit. The relation
former, the depositor has a between a bank and its customer is
complete freedom in choosing the that of a bailor and bailee. (CA Agro
depositary, whereas in the latter, vs CA, 219 SCRA 426)
there is lack of free choice in the
depositor. Obligations of the Depositary (Art 1972
–1991):
Judicial Extra-judicial 1. To keep the thing safely (Art 1972)
1. Creation  Exercise over the thing
Will of the court Will of the parties deposited the same diligence as
or contract he would exercise over his
2. Purpose property
Security or to insure Custody and 2. To return the thing (Art 1972)
the right of a party safekeeping  Person to whom the thing must
to property or to be returned:
recover in case of a. Depositor, to his heirs and
favorable judgment
successors, or the person who
3. Subject Matter may have been designated in the
Movables or Movables only contract
immovables, b. If the depositary is capacitated -
but generally he is subject to all the
immovables obligations of a depositary
4. Cause whether or not the depositor is
Always onerous May be compen- capacitated. If the depositor is
sated or not, but incapacitated, the depositary
generally gratuitous must return the property to the
legal representative of the
5. When must the thing be returned incapacitated or to the depositor
Upon order of the Upon demand of himself if he should acquire
court or when depositor capacity (Art 1970).
litigation is ended c. If the depositor is capacitated
and the depositary is
6. In whose behalf it is held
incapacitated - the latter does
Person who has a Depositor or third
right person designated not incur the obligation of a
depositary but he is liable:
i..to return the thing
GENERAL RULE: Contract of deposit is deposited while still in his
gratuitous (Art 1965) possession;
EXCEPTIONS: ii.to pay the depositor the
1. when there is contrary amount which he may have
stipulation benefited himself with the
2. depositary is engaged in business thing or its price subject to
of storing goods the right of any third person
3. property saved from destruction who acquired the thing in
without knowledge of the owner good faith (Art 1971)

Ethics)
 Time of return: 5. Not to commingle things deposited if

a. Upon demand even though a so stipulated (Art 1976)
specified period or time for such 6. Not to make use of the thing
return may have been fixed deposited unless authorized (Art
except when the thing is 1977)
judicially attached while in the GENERAL RULE: Deposit is for
depositary’s possession or should safekeeping of the subject matter
he have been notified of the and not for use. The unauthorized
opposition of a third person to use by the depositary would make
the return or the removal of the him liable for damages.
thing deposited. (Art 1998) EXCEPTIONS:
b. If deposit gratuitous, the 1. When the preservation of the
depositary may return the thing thing deposited requires its use
deposited notwithstanding that a 2. When authorized by the
period has been fixed for the depositor
deposit if justifiable reasons
exists for its return. NOTE: The permission to use is NOT
c. If the deposit is for a presumed except when such use is
valuable consideration, the necessary for the preservation of the
depositary has no right to return thing deposited.
the thing deposited before the
expiration of the time Effect if permission to use is given
designated even if he should (Art 1978):
suffer inconvenience as a 1. If thing deposited is
consequence.(Art 1989) non-consumable, the contract
loses the character of a deposit
 What to return: product, and acquires that of a
accessories, and accessions of commodatum despite the fact
the thing deposited (Art 1983) that the parties may have
3. Not to deposit the thing with a third denominated it as a deposit,
person unless authorized by express unless safekeeping is still the
stipulation (Art 1973) principal purpose.
 The depositor is liable for the 2. If thing deposited consists of
loss of the thing deposited under money/consumable things, the
Article 1973 if: contract is converted into a
a. he transfers the deposit simple loan or mutuum unless
with a third person without safekeeping is still the principal
authority although there is no purpose in which case it is called
negligence on his part and the an irregular deposit. Example:
third person; bank deposits are irregular
b. he deposits the thing deposits in nature but governed
with a third person who is by law on loans.
manifestly careless or unfit 7. When the thing deposited is
although authorized even in the delivered sealed and closed :
absence of negligence; or a. to return the thing deposited in
c. the thing is lost through the same condition
the negligence of his employees b. to pay for damages should the
whether the latter are seal or lock be broken through
manifestly careless or not. his fault, which is presumed
4. If the thing deposited should earn unless proved otherwise
interest (Art 1975): c. to keep the secret of the deposit
a. to collect interest and the when the seal or lock is broken
capital itself as it fall due with or without his fault (Art
b. to take steps to preserve its 1981)
value and rights corresponding to NOTE: The depositary is
it authorized to open the thing
CIVIL LAW COMMITTEE

deposited which is closed and that which accrues the transaction is

sealed when (Art 1982): to the depositor the necessity of the
i. there is presumed authority borrower
(i.e. when the key has been
delivered to him or the 3. The irregular 3. Common creditors
depositor has a enjoy no preference
instructions of the depositor preference over in the distribution of
cannot be done without other creditors with the debtor’s
opening it) respect to the thing property
ii. necessity deposited
8. To change the way of the deposit if
under the circumstances, the
depositary may reasonably presume Rule when there are two or more
that the depositor would consent to depositors (Art 1985):
the change if he knew of the facts of 1. If thing deposited is divisible and
the situation, provided, that the depositors are not solidary: Each
former notifies the depositor thereof depositor can demand only his
and wait for his decision, unless proportionate share thereto.
delay would cause danger 2. If obligation is solidary or if thing is
9. To pay interest on sums converted to not divisible: Rules on active
personal use if the deposit consists solidarity shall apply, i.e. each one
of money (Art 1983) of the solidary depositors may do
10. To be liable for loss through whatever may be useful to the
fortuitous event (SUDA): (Art 1979): others but not anything which may
a. if stipulated be prejudicial to the latter, (Art.
b. if he uses the thing without the 1212) and the depositary may return
depositor's permission the thing to anyone of the solidary
c. if he delays its return depositors unless a demand, judicial
d. if he allows others to use it, or extrajudicial, for its return has
even though he himself may been made by one of them in which
have been authorized to use the case, delivery should be made to him
same (Art. 1214).
3. Return to one of depositors
NOTES: stipulated. The depositary is bound
 Fixed, savings, and current deposits to return it only to the person
of money in banks and similar designated although he has not made
institutions shall be governed by the any demand for its return.
provisions concerning simple loan.
(Art 1980) NOTES:
 The general rule is that a bank can  The depositary may retain the thing
compensate or set off the deposit in in pledge until full payment of what
its hands for the payment of any may be due him by reason of the
indebtedness to it on the part of the deposit (Art 1994).
depositor. In true deposit,  The depositor’s heir who in good
compensation is not allowed. faith may have sold the thing which
he did not know was deposited, shall
Irregular deposit Mutuum only be bound to return the price he
may have received or to assign his
1. The consumable 1. Lender is bound right of action against the buyer in
thing deposited may by the provisions of case the price has not been paid him
be demanded at will the contract and
(Art 1991).
by the depositor cannot demand
restitution until the
time for payment, as Obligations of the Depositor (Art 1992 –
provided in the 1995):
contract, has arisen 1. To pay expenses for preservation
2. The only benefit is 2. Essential cause for

Ethics)
a. If the deposit is gratuitous, the Deposit by Travellers in hotels and

depositor is obliged to inns:
reimburse the depositary for  The keepers of hotels or inns shall be
expenses incurred for the responsible as depositaries for the
preservation of the thing deposit of effects made by travellers
deposited (Art 1992) provided:
b. If the deposit is for valuable a. Notice was given to them or to
consideration, expenses for their employees of the effects
preservation are borne by the brought by the guest; and
depositary unless there is a b. The guests take the precautions
contrary stipulation which said hotel-keepers or their
2. To pay loses incurred by the substitutes advised relative to
depositary due to the character of the care and vigilance of their
the thing deposited effects.
NOTES:
GENERAL RULE: The depositor shall  Liability extends to vehicles, animals
reimburse the depositary for any loss and articles which have been
arising from the character of the thing introduced or placed in the annexes
deposited. of the hotel.
EXCEPTIONS:  Liability shall EXCLUDE losses which
1. at the time of the deposit, the proceed from force majeure. The act
depositor was not aware of the of a thief or robber is not deemed
dangerous character of the thing force majeure unless done with the
2. when depositor was not expected use of arms or irresistible force.
to know the dangerous character  The hotel-keeper cannot free
of the thing himself from the responsibility by
3. when the depositor notified the posting notices to the effect that he
depository of the same is not liable for the articles brought
4. the depositary was aware of it by the guest. Any stipulation to such
without advice from the depositor effect shall be void.
 Notice is necessary only for suing
Extinguishment of Voluntary Deposit
civil liability but not in criminal
(Art 1995)
liability.
1. Loss or destruction of the thing
deposited
GUARANTY (Articles 2047 – 2084)
2. In case of gratuitous deposit, upon
the death of either the depositor or
 A contract whereby a person
the depositary
(guarantor) binds himself to the
3. Other causes, such as return of the
creditor to fulfil the obligation of
thing, novation, merger, expiration
the principal debtor in case the
of the term fulfilment of the
latter fail to do so.
resolutory condition, etc (Art 1231)
 Classification of Guaranty:
Necessary Deposits
1. In the Broad sense:
1. Made in compliance with a legal
a. Personal - the guaranty is the
obligation
credit given by the person who
2. Made on the occasion of any
guarantees the fulfilment of the
calamity such as fire, storm, flood,
principal obligation.
pillage, shipwreck or other similar
b. Real - the guaranty is the
events (deposito miserable)
property, movable or
3. Made by travellers in hotels and inns
immovable.
or by travellers with common carrier
CIVIL LAW COMMITTEE

2. As to its Origin guaranty. A surety is almost the

a. Conventional - agreed upon by same as a solidary debtor, except
the parties. that he himself is a principal debtor.
b. Legal - one imposed by virtue of  In suretyship, there is but one
a provision of a law. contract, and the surety is bound by
c. Judicial - one which is required the same agreement which binds the
by a court to guarantee the principal. A surety is usually bound
eventual right of one of the with the principal by the same
parties in a case. instrument, executed at the same
3. As to Consideration time and upon the same
a. Gratuitous - the guarantor does consideration (Palmares vs CA, 288
not receive any price or SCRA 422)
remuneration for acting as such.  It is not for the obligee to see to it
b. Onerous - the guarantor that the principal debtor pays the
receives valuable consideration. debt or fulfill the contract, but for
4. As to the Person guaranteed the surety to see to it that the
a. Single - one constituted solely principal debtor pays or performs
to guarantee or secure (Paramount Insurance Corp vs CA,
performance by the debtor of 310 SCRA 377)
the principal obligation.
b. Double or sub-guaranty - one Nature of Surety’s undertaking:
constituted to secure the 1. Liability is contractual and accessory
fulfilment by the guarantor of a but direct
prior guaranty. NOTE: He directly, primarily and
5. As to Scope and Extent equally binds himself with the
a. Definite - the guaranty is principal as original promisor,
limited to the principal although he possesses no direct or
obligation only, or to a specific personal interest over the latter’s
portion thereof. obligation, nor does he receive any
b. Indefinite or simple - one which benefits therefrom. (PNB vs CA, 198
not only includes the principal SCRA 767)
obligation but also all its 2. Liability limited by the terms of the
accessories including judicial contract.
costs NOTE: It cannot be extended by
implication beyond the terms of the
SURETYSHIP contract (PNB vs CA, 198 SCRA 767)
3. Liability arises only if principal
 A contract whereby a person (surety) debtor is held liable.
binds himself solidarily with the NOTES:
principal debtor  The creditor may sue separately
 A relation which exists where one or together the principal debtor
person (principal) has undertaken an and the surety. Where there are
obligation and another person several sureties, the obligee may
(surety) is also under a direct and proceed against any one of
primary obligation or other duty to them.
the obligee, who is entitled to but
 In the absence of collusion, the
one performance, and as between
surety is bound by a judgment
the two who are bound, the second
against the principal even
rather than the first should perform
though he was not a party to the
(Agro Conglomerates, Inc. vs. CA,
proceedings. The nature of its
348 SCRA 450)
undertaking makes it privy to all
NOTES:
proceedings against its principal
 The reference in Article 2047 to (Finman General Assurance
solidary obligations does not mean Corp. vs. Salik, 188 SCRA 740)
that suretyship is withdrawn from
the applicable provisions governing

Ethics)
4. Surety is not entitled to the benefit does, his liability shall be

of exhaustion reduced to the limits of that of
NOTE: He assumes a solidary liability the debtor.
for the fulfilment of the principal 2. Subsidiary and Conditional - takes
obligation (Towers Assurance Corp effect only in case the principal
vs. Ororama Supermart, 80 SCRA debtor fails in his obligation.
262) as an original promissory and
debtor from the beginning. NOTES:
5. Undertaking is to creditor and not to  The guarantor cannot bind
debtor. himself for more than the
NOTE: The surety makes no principal debtor and even if he
covenant or agreement with the does, his liability shall be
principal that it will fulfil the reduced to the limits of that of
obligation guaranteed for the benefit the debtor. But a guarantor may
of the principal. Such a promise is bind himself for less than that of
not implied by law either; and this is the principal (Art 2054)
true even where under the contract  A guaranty may be given as
the creditor is given the right to sue security for future debts, the
the principal, or the latter and the amount of which is not yet
surety at the same time. (Arranz vs. known; there can be no claim
Manila Fidelity & Surety Co., Inc., against the guarantor until the
101 Phil. 272) debt is liquidated. A conditional
6. Surety is not entitled to notice of obligation may also be secured.
principal’s default (Art 2053)
NOTE: The creditor owes no duty of 3. Unilateral - may be entered even
active diligence to take care of the w/o the intervention of the principal
interest of the surety and the surety debtor, in which case Art. 1236 and
is bound to take notice of the 1237 shall apply and it gives rise only
principal’s default and to perform to a duty on the part of the
the obligation. He cannot complain guarantor in relation to the creditor
that the creditor has not notified and not vice versa.
him in the absence of a special 4. Nominate
agreement to that effect. (Palmares 5. Consensual
vs CA, 288 SCRA 422) 6. It is a contract between the
7. Prior demand by the creditor upon guarantor/surety and creditor.
principal is not required
NOTE: As soon as the principal is in NOTES:
default, the surety likewise is in  Acceptance of guaranty by
default. creditor and notice thereof to
8. Surety is not exonerated by neglect guarantor:
of creditor to sue principal
 In declaring that guaranty
must be express, the law
Characteristics of Guaranty and
refers solely and exclusively
Suretyship:
to the obligation of the
1. Accessory - It is indispensable
guarantor because it is he
condition for its existence that there
alone who binds himself by
must be a principal obligation.
his acceptance. With respect
NOTES:
to the creditor, no such
 Guaranty may be constituted to requirement is needed
guarantee the performance of a because he binds himself to
voidable or unenforceable nothing.
contract. It may also guarantee
 However, when there is
a natural obligation. (Art 2052)
merely an offer of a
 The guarantor cannot bind guaranty, or merely a
himself for more than the conditional guaranty, in the
principal debtor and even if he
CIVIL LAW COMMITTEE

sense that it requires action that the contract is one of

by the creditor before the suretyship or guaranty. It cannot
obligation becomes fixed, it be used as an aid in determining
does not become binding whether a party’s undertaking is
until it is accepted and until that of a surety or guarantor.
notice of such acceptance by (Palmares vs CA, 288 SCRA 292)
the creditor is given to, or  It does not apply in case of
acquired by, the guarantor, compensated sureties.
or until he has notice or 10. It is a contract which requires that
knowledge that the creditor the guarantor must be a person
has performed the condition distinct form the debtor because a
and intends to act upon the person cannot be the personal
guaranty. guarantor of himself.
 But in any case, the creditor NOTE: However, in a real guaranty,
is not precluded from like pledge and mortgage, a person
waiving the requirement of may guarantee his own obligation
notice. with his personal or real properties.
 The consideration of the
guaranty is the same as the Guaranty Suretyship
consideration of the principal
obligation. 1. Liability depends 1. Surety assumes
 The creditor may proceed upon an independent liability as regular
agreement to pay the party to the
against the guarantor although obligation if primary undertaking
he has no right of action against debtor fails to do so
the principal debtor.
7. Not presumed. It must be expressed 2. Collateral under- 2. Surety is an
and reduced in writing. taking original promisor
NOTE: A power of attorney to loan
money does not authorize the agent 3. Guarantor is 3. Surety is
to make the principal liable as a secondarily liable primarily liable
surety for the payment of the debt
of a third person. (BPI vs. Coster, 47 4. Guarantor binds 4. Surety undertakes
Phil. 594) himself to pay if to pay if the principal
the principal DOES NOT PAY
8. Falls under the Statute of Frauds CANNOT PAY
since it is a “special promise to
answer for the debt, default or 5. Insurer of 5. Insurer of the
miscarriage of another”. solvency of debtor debt
9. Strictly interpreted against the
creditor and in favor of the 6. Guarantor can 6. Surety cannot
guarantor/surety and is not to be avail of the benefit avail of the benefit
extended beyond its terms or of excussion and of excussion and
specified limits. (Magdalena Estates, division in case division
Inc. vs Rodriguez, 18 SCRA 967) The creditor proceeds
against him
rule of strictissimi juris commonly
pertains to an accommodation surety
because the latter acts without Indorsement Guaranty
motive of pecuniary gain and hence,
1. Primarily of 1. Contract of
should be protected against unjust transfer security
pecuniary impoverishment by
imposing on the principal, duties 2. Unless the note is 2. Failure in either or
akin to those of a fiduciary. promptly presented both of these
for payment at particulars does not
NOTES: maturity and due generally work as an
 The rule will apply only after it notice of dishonor absolute discharge of
given to the indorser a guarantor’s
has been definitely ascertained
within a reasonable liability, but his is

Ethics)
time he will be discharged only to Double or sub-guaranty (Art 2051 2nd

discharged abso- the extent of the loss par)
lutely from all which he may have  One constituted to guarantee the
liability thereon, suffered in obligation of a guarantor
whether he has consequence thereof
suffered any actual
damage or not Continuing guaranty (Art 2053)
 One which is not limited to a single
3. Indorser does not 3. Guarantor transaction but which contemplates
warrant the solvency. warrants the solvency a future course of dealings, covering
He is answerable on a of the promisor a series of transactions generally for
strict compliance an indefinite time or until revoked.
with the law by the
holder, whether the NOTES:
promisor is solvent or
not
 Prospective in operation (Diño vs CA,
216 SCRA 9)
4. Indorser can be 4. Guarantor cannot  Construed as continuing when by the
sued as promisor be sued as promisor terms thereof it is evident that the
object is to give a standing credit to
Guaranty Warranty the principal debtor to be used from
A contract by which a An undertaking that time to time either indefinitely or
person is bound to the title, quality, or until a certain period, especially if
another for the quantity of the the right to recall the guaranty is
fulfilment of a subject matter of the expressly reserved (Diño vs CA, 216
promise or contract is what it
SCRA 9)
engagement of a has been represented
third party to be, and relates to  “Future debts” may also refer to
some agreement debts existing at the time of the
made ordinarily by constitution of the guaranty but the
the party who makes amount thereof is unknown and not
the warranty to debts not yet incurred and
existing at that time.
NOTES:  Exception to the concept of
 A guaranty is gratuitous, unless there continuing guaranty is chattel
is a stipulation to the contrary. The mortgage. A chattel mortgage can
cause of the contract is the same only cover obligations existing at the
cause which supports the obligation time the mortgage is constituted and
as to the principal debtor. not those contracted subsequent to
 The peculiar nature of a guaranty or the execution thereof (The Belgian
surety agreement is that is is Catholic Missionaries, Inc. vs.
regarded as valid despite the Magallanes Press, Inc., 49 Phil 647).
absence of any direct consideration An exception to this is in case of
received by the guarantor or surety stocks in department stores, drug
either from the principal debtor or stores, etc. (Torres vs. Limjap, 56
from the creditor; a consideration Phil 141).
moving to the principal alone will
suffice. Extent of Guarantor’s liability: (Art
 It is never necessary that the 2055)
guarantor or surety should receive 1. Where the guaranty definite: It is
any part or benefit, if such there be, limited in whole or in part to the
accruing to the principal. (Willex principal debt, to the exclusion of
Plastic Industries Corp. vs. CA, 256 accessories.
SCRA 478) 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
CIVIL LAW COMMITTEE

latter, that the guarantor shall only  Not necessary that the debtor be
be liable for those costs incurred judicially declared insolvent or
after he has been judicially required bankrupt
to pay. 2. When he has absconded, or cannot
be sued within the Philippines unless
Qualifications of a guarantor: (Arts he has left a manager or
2056-2057) representative
1. possesses integrity 3. In case of insolvency of the debtor
2. capacity to bind himself  Must be actual
3. has sufficient property to answer 4. If the guarantor has expressly
for the obligation which he renounced it
guarantees 5. If he has bound himself solidarily
with the debtor
NOTES:
 The qualifications need only be Other grounds: (BIPS)
present at the time of the perfection 6. If he is a judicial bondsman or sub-
of the contract. surety
 The subsequent loss of the integrity 7. If he fails to interpose it as a
or property or supervening defense before judgment is rendered
incapacity of the guarantor would against him
not operate to exonerate the 8. If the guarantor does not set up the
guarantor or the eventual liability he benefit against the creditor upon the
has contracted, and the contract of latter’s demand for payment from
guaranty continues. him, and point out to the creditor
 However, the creditor may demand available property to the debtor
another guarantor with the proper within Philippine territory, sufficient
qualifications. But he may waive it if to cover the amount of the debt (Art
he chooses and hold the guarantor to 2060)
his bargain.  Demand can be made only after
judgment on the debt
Benefit of Excussion (Art 2058)  Demand must be actual; joining
 The right by which the guarantor the guarantor in the suit against
cannot be compelled to pay the the principal debtor is not the
creditor unless the latter has demand intended by law
exhausted all the properties of the 9. Where the pledge or mortgage has
principal debtor, and has resorted to been given by him as special security
all of the legal remedies against such
debtor. Benefit of Division (Art 2065)
 Should there be several guarantors
NOTE: of only one debtor and for the same
 Not applicable to a contract of debt, the obligation to answer for
suretyship (Arts 2047, par. 2; the same is divided among all.
2059[2])  Liability: Joint
 Cannot even begin to take place
before judgment has been obtained NOTES:
against the debtor (Baylon vs CA,  The creditor can claim from the
312 SCRA 502) guarantors only the shares they are
respectively bound to pay except
When Guarantor is not entitled to the when solidarity is stipulated or if
benefit of excussion: (PAIRS) any of the circumstances
1. If it may be presumed that an enumerated in Article 2059 should
execution on the property of the take place.
principal debtor would not result in  The right of contribution of
the satisfaction of the obligation guarantors who pays requires that
the payment must have been made

Ethics)
(a) in virtue of a judicial demand, or 2. A guarantor is entitled to be heard

(b) because the principal debtor is before and execution can be issued
insolvent (Art 2073). against him where he is not a party
 If any of the guarantors should be in the case involving his principal
insolvent, his share shall be borne by (procedural due process).
the others including the paying
guarantor in the same joint Guarantor’s Right of Indemnity or
proportion following the rule in Reimbursement (Art 2066)
solidary obligations. GENERAL RULE: Guaranty is a contract
 The above rule shall not be of indemnity. The guarantor who makes
applicable unless the payment has payment is entitled to be reimbursed by
been made in virtue of a judicial the principal debtor.
demand or unless the principal
debtor is insolvent. NOTE: The indemnity consists of: (DIED)
 The right to contribution or 1. Total amount of the debt – no
reimbursement from his co- right to demand reimbursement
guarantors is acquired ipso jure by until he has actually paid the
virtue of said payment without the debt, unless by the terms of the
need of obtaining from the creditor contract, he is given the right
any prior cession of rights to such before making payment. He
guarantor. cannot collect more than what
he has paid.
 The co-guarantors may set up
2. Legal interest thereon from the
against the one who paid, the same
time the payment was made
defenses which have pertained to
known (notice of payment in
the principal debtor against the
effect a demand so that if the
creditor and which are not purely
debtor does not pay
personal to the debtor. (Art 2074)
immediately, he incurs in delay)
to the debtor, even though it did
Procedure when creditor sues: (Art.
not earn interest for the
2062)
creditor. Guarantor’s right to
 The creditor must sue the principal
legal interest is granted by law
alone; the guarantor cannot be sued
by virtue of the payment he has
with his principal, much less alone
made.
except in Art. 2059.
3. Expenses incurred by the
guarantor after having notified
1. Notice to guarantor of the action
the debtor that payment has
 The guarantor must be NOTIFIED been demanded of him by the
so that he may appear, if he so creditor; only those expenses
desires, and set up defenses he that the guarantor has to satisfy
may want to offer. in accordance with law as a
 If the guarantor appears, he is consequence of the guaranty
still given the benefit of (Art. 2055) not those which
exhaustion even if judgment depend upon his will or own acts
should be rendered against him or his fault for these are his
and principal debtor. His exclusive personal responsibility
voluntary appearance does not and it is not just that they be
constitute a renunciation of his shouldered by the debtor.
right to excussion (see Art. 4. Damages if they are due in
2059(1)). accordance
 Guarantor cannot set up the with law. General rules on
defenses if he does not appear damages apply.
and it may no longer be possible
for him to question the validity EXCEPTIONS:
of the judgment rendered 1. Where the guaranty is
against the debtor. constituted without the
CIVIL LAW COMMITTEE

knowledge or against the will of  The debtor may interpose

the principal debtor, the against the guarantor those
guarantor can recover only defenses which he could have
insofar as the payment had been set up against the creditor at the
beneficial to the debtor (Art. time the payment was made,
2050). e.g. the debtor can set up
2. Payment by a third person who against the guarantor the
does not intend to be reimbursed defense of previous
by the debtor is deemed to be a extinguishment of the obligation
donation, which, however, by payment.
requires the debtor’s consent.
But the payment is in any case 2. Before Maturity (Art 2069)
valid as to the creditor who has  Not entitled to reimbursement
accepted it (Art. 1238). unless the payment was made
3. Waiver of the right to demand with the consent or has been
reimbursement. ratified by the debtor
Guarantor’s right to Subrogation Effect of Repeat Payment by debtor:

(ART.2067) (Art 2070)
 Subrogation transfers to the person GENERAL RULE: Before guarantor pays
subrogated, the credit with all the the creditor, he must first notify the
rights thereto appertaining either debtor (Art. 2068). If he fails to give
against the debtor or against third such notice and the debtor repeats
persons, be they guarantors or payment, the guarantor can only collect
possessors of mortgages, subject to from the creditor and guarantor has no
stipulation in conventional cause of action against the debtor for
subrogation. the return of the amount paid by
guarantor even if the creditor should
NOTE: This right of subrogation is become insolvent.
necessary to enable the guarantor to
enforce the indemnity given in Art. EXCEPTION: The guarantor can still
2066. claim reimbursement from the debtor in
 It arises by operation of law upon spite of lack of notice if the following
payment by the guarantor. It is not conditions are present: (PIG)
necessary that the creditor cede to a. guarantor was prevented by
the guarantor the former’s rights fortuitous event to advise the
against the debtor. debtor of the payment; and
 It is not a contractual right. The b. the creditor becomes insolvent;
right of guarantor who has paid a c. the guaranty is gratuitous.
debt to subrogation does not stand
upon contract but upon the Right of Guarantor to proceed against
principles of natural justice. debtor before payment
 The guarantor is subrogated by GENERAL RULE: Guarantor has no
virtue of the payment to the rights cause of action against debtor until after
of the creditor, not those of the the former has paid the obligation
debtor. EXCEPTION: Article 2071
 Guarantor cannot exercise the
right of redemption of his NOTES:
principal (Urrutia & Co vs  Article 2071 is applicable and
Morena and Reyes, 28 Phil 261) available to the surety. (Manila
Surety & Fidelity Co., Inc. vs Batu
Effect of Payment by Guarantor Construction & Co., 101 Phil 494)
1. Without notice to debtor: (Art  Remedy of guarantor:
2068) (a) obtain release from the
guaranty; or

Ethics)
(b) demand a security that shall  Judicial bonds constitute merely a

protect him from any special class of contracts of guaranty
proceedings by the creditor, and by the fact that they are given “in
against the danger of insolvency virtue… of a judicial order.”
of the debtor  If the person required to give a legal
or judicial bond should not be able
Art. 2066 Art. 2071 to do so, a pledge or mortgage
Provides for the Provides for his sufficient to cover the obligation
enforcement of the protection before he shall admitted in lieu thereof (Art
rights of the has paid but after he
2083)
guarantor/surety has become liable
against the debtor  A judicial bondsman and the sub-
after he has paid the surety are NOT entitled to the
debt benefit of excussion because they
Gives a right of Protective remedy are not mere guarantors, but
action after payment before payment. sureties whose liability is primary
Substantive right Preliminary remedy and solidary. (Art 2084)
Extinguishment of guaranty: (RA2CE2) PLEDGE, MORTGAGE AND ANTICHRESIS

1. Release in favor of one of the I. Common Elements of Pledge,
guarantors, without the consent of Mortgage, and Antichresis (Articles
the others, benefits all to the extent 2085 – 2092)
of the share of the guarantor to
whom it has been granted (Art A. Essential Requisites (SOD) (Art
2078); 2085)
2. If the creditor voluntarily accepts 1. Secures the fulfillment of a principal
immovable or other properties in obligation;
payment of the debt, even if he 2. Pledgor, mortgagor, antichretic
should afterwards lose the same debtor must be the absolute owner
through eviction or conveyance of of the thing pledged or mortgaged;
property (Art 2077); and
3. Whenever by some act of the  The reason being that in
creditor, the guarantors even though anticipation of a possible
they are solidarily liable cannot be foreclosure sale in case of
subrogated to the rights, mortgages default which is still a sale, the
and preferences of the former (Art rule is that the seller must be
2080); the owner of the thing sold
4. For the same causes as all other (Cavite Development Bank vs.
obligations (Art 1231); Lim, 324 SCRA 346)
5. When the principal obligation is 3. Pledgor, mortgagor, antichretic
extinguished; debtor must have free disposal of
6. Extension granted to the debtor by their property, or be legally
the creditor without the consent of authorized for such purpose.
the guarantor (Art 2079)
NOTES:
BOND  Third persons can pledge or
 An undertaking that is sufficiently mortgage their own property to
secured, and not cash or currency secure the principal obligation.
 It is not necessarily void simply
Bondsman (Art 2082) because the accommodation pledgor
 A surety offered in virtue of a or mortgagor did not benefit from
provision of law or a judicial order. the same. So long as valid consent
He must have the qualifications was given, the fact that the loan was
required of a guarantor and in given solely for the benefit of the
special laws like the Rules of Court. principal debtor would not invalidate
NOTES:
CIVIL LAW COMMITTEE

the mortgage (GSIS vs CA, 170 SCRA NOTE: The security contract remains
533) valid; only the prohibited stipulation is
 The accommodation pledgor or void.
mortgagor, without expressly C. Capability to secure all kinds of
assuming personal liability for such obligations, i.e. pure or
debt, is not liable for the payment of conditional (Art 2091)
any deficiency, should the property
not be sufficient to cover the debt D. Indivisibility (Art 2089)
(Bank of America vs. American GENERAL RULE: A pledge, mortgage, or
Realty Corporation, 321 SCRA 659). antichresis is indivisible, even though
 The accommodation pledgor or the debt may be divided among the
mortgagor is not solidarily bound successors in interest of the debtor or of
with the principal obligor but his the creditor.
liability extents only to the property  Their indivisibility is not affected by
pledged or mortgaged. Should there the fact that the debtors are jointly
be any deficiency, the creditor has or not solidarily liable.
recourse on the principal debtor who
remains to be primarily bound. Consequences of indivisibility:
 The law grants to the 1. Single thing – Every portion of the
accommodation pledgor or property pledged or mortgaged is
mortgagor the same rights as a answerable for the whole obligation
guarantor and he cannot be 2. Several things – All of the several
prejudiced by any waiver of defense things pledged or mortgaged are
by the principal debtor. liable for the totality of the debt
3. Debtor’s heir/creditor’s heir -
B. Prohibition against Pactum Neither the debtor’s heir who has
Commissorium (Art 2088; 2137) paid part of the debt cannot ask for
proportionate extinguishment, nor
Pactum Commissorium creditor’s heir who received his
 Stipulation whereby the thing share of the debt return the pledge
pledged or mortgaged, or under or cancel the mortgage as long as
antichresis shall automatically the debt is not completely satisfied.
become the property of the creditor
in the event of non-payment of the
debt within the term fixed. 1. Where each one of several things
guarantees a determinate
Requisites: portion of the credit
1. There should be a pledge, mortgage, 2. Where only a portion of the loan
or antichresis of property by way of was released
security for the payment of the 3. Where there was failure of
principal obligation; and consideration.
2. There should be a stipulation for an 4. Where there is no debtor-
automatic appropriation by the creditor relationship
creditor of the property in event of
nonpayment of the obligation within NOTES:
the stipulated period.  The mere embodiment of a real
estate mortgage and a chattel
GENERAL RULE: Pactum Commissorium mortgage in one document does not
is forbidden by law and is declared null have the effect of fusing both
and void. securities into an indivisible whole.
EXCEPTION: The pledgee may  The mortgagee, therefore, may
appropriate the thing pledged if after legally foreclose the real estate
the first and second auctions, the thing mortgage extrajudicially and waive
is not sold. (Art 2112) the chattel mortgage foreclosure,
and maintain instead a personal
action for the recovery of the unpaid

Ethics)
balance of the credit (Phil. Bank of public instrument to bind third

Commerce vs. Macadaeg, 109 Phil persons, but not for the validity of
981) the contract (Art 2096).
E. When the principal obligation  Kinds:

becomes due, the things in which 1. Conventional /Voluntary – created
the pledge, mortgage, or by contract
antichresis consists may be 2. Legal – created by operation of law
alienated for the payment to the (examples: Art. 546, 1731 and 1914
creditor. (Art. 2087) NCC)
NOTES: NOTES:
 If the debtor fails to comply with the  The provisions of possession, care
obligation at the time it falls due, and sale of the thing as well as on
the creditor is merely entitled to the termination of the pledge
move for the sale of the thing governing conventional pledges are
pledged or mortgaged in order to applicable to pledges created by
collect the amount of his claim from operation of law (Art 2121)
the proceeds.  Unlike, however, in conventional
 If he wishes to secure a title to the pledge where the debtor is not
mortgaged property, he can buy it in entitled to the excess unless it is
the foreclosure sale (Montevirgin vs. otherwise agreed, in legal pledge,
CA, 112 SCRA 641) the remainder of the price of the
sale after payment of the debt and
F. Pledgor, mortgagor, antichretic expenses, shall be delivered to the
debtor retains ownership of the debtor.
thing given as a security  In legal pledge, there is no definite
period for the payment of the
PLEDGE (Arts 2093 – 2123) principal obligation. The pledgee
must make a demand for the
 A contract wherein the debtor payment of the amount due him;
delivers to the creditor or to a third otherwise he cannot exercise the
person a movable or document right of sale at public auction (Art
evidencing incorporeal rights for the 2122)
purpose of securing fulfilment of a
principal obligation with the Characteristics:
understanding that when the 1. Real contract – it is perfected by
obligation is fulfilled, the thing the delivery of the thing pledged by
delivered shall be returned with all the debtor who is called the
its fruits and accessions. pledgor to the creditor who is
called the pledgee, or to a third
 Special Requisites (in addition to person by common agreement;
the common essential requisites): 2. Accessory contract – it has no
1. Possession of the thing pledged must independent existence of its own;
be transferred to the creditor or a 3. Unilateral contract – it creates an
third person by agreement (Art obligation solely on the part of the
2093); creditor to return the thing subject
2. It can only cover movable property thereof upon the fulfilment of the
and incorporeal rights evidenced by principal obligation; and
documents of title and the 4. Subsidiary contract – the obligation
instruments proving the right incurred does not arise until the
pledged shall be delivered to the fulfilment of the principal
creditor, and if negotiable must be obligation which is secured.
endorsed (Art 2094); and
3. The description of the thing pledged Consideration in pledge:
and the date must appear in a
CIVIL LAW COMMITTEE

 Insofar as the pledgor is concerned, 9. To retain the thing until after full
the cause is the principal obligation. payment of the debt (Art 2098)
 If the pledgor is not the debtor, the 10. To be reimbursed for the expenses
cause is the compensation stipulated made for the preservation of the thing
for the pledge or the mere liberality pledged (Art 2099)
of the pledgor. 11. To object to the alienation of the
thing
Extent of pledge: Unless stipulated 12. To possess the thing (Art 2098)
otherwise, pledge extends to the fruits, 13. To sell at public auction in case of
interests or earnings of the thing. non-payment of debt at maturity (Art
2112)
Rights and Obligations of a Pledgor To choose which of the several things
Rights Obligations pledged shall be sold (Art 2119)
1. To demand return in 1. To advise the 14. Option to demand replacement or
case of reasonable pledgee of the immediate payment of the debt in case
grounds to fear flaws of the thing of deception as to substance or quality
destruction or (Art 2101) (Art 2109)
impairment of the thing 2. Not to demand 15. To sell at public auction in case of
without the pledgee’s the return of the reasonable grounds to fear destruction
fault, subject to the thing until after or impairment of the thing without his
duty of replacement full payment of
fault (Art 2108)
(Art 2107) the debt,
2. To bid and be including interest 16. To bring actions pertaining to the
preferred at the public due thereon and owner (Art 2103)
auction (Art 2113) expenses incurred 17. To choose which of several things
3. To alienate the thing for its pledged shall be sold
pledged provided the preservation (Art 18. To bid at the public auction (Art
pledgee consents to the 2105) 2113)
sale (Art 2097) 19. To appropriate the thing in case of
4. To ask that the thing failure of the 2nd public auction (Art
pledged be deposited
2112)
(Arts 2104 & 2106)
20. To apply said fruits, interests or
earnings to the interest, if any, then to
Rights of the Pledgee
the principal of the credit (Art 2102)
KEY: D SBC BA2R2OPS2
21. To retain excess value received
1. Option to demand replacement or
in the public sale (Art 2115)
immediate payment of the debt in case
22. To retain the thing until after full
of deception as to substance or quality
payment of the debt (Art 2098)
(Art 2109)
23. To be reimbursed for the expenses
2. To sell at public auction in case of
made for the preservation of the thing
reasonable grounds to fear destruction
pledged (Art 2099)
or impairment of the thing without his
24. To object to the alienation of the
fault (Art 2108)
thing
3. To bring actions pertaining to the
25. To possess the thing (Art 2098)
owner (Art 2103)
26. To sell at public auction in case of
4. To choose which of several things
non-payment of debt at maturity (Art
pledged shall be sold
2112)
5. To bid at the public auction (Art
27. To choose which of the several
2113)
things pledged shall be sold (Art 2119)
6. To appropriate the thing in case of
failure of the 2nd public auction (Art
Obligations of the Pledgee
2112)
KEY: CUDA3
7. To apply said fruits, interests or
1. Take care of the thing with the
earnings to the interest, if any, then to
diligence of a good father of a family
the principal of the credit (Art 2102)
(Art 2099)
8. To retain excess value received in
the public sale (Art 2115)

Ethics)
2. Not to use thing unless authorized or NOTE: The possession by the debtor or
by the owner or its preservation requires owner of the thing pledged subsequent
its use (Art 2104) to the perfection of the pledge gives rise
3. Not to deposit the thing with a 3rd to a prima facie presumption that the
person unless so stipulated (Art 2100) thing has been returned and, therefore,
4. Responsibility for acts of agents and that the pledge has been extinguished
employees as regards the thing (Art but not the principal obligation itself.
2100) (Art 2110)
5. To advise pledgor of danger to the
thing (Art 2107) Requirements for sale of thing pledged
6. To advise pledgor of the result of the at public auction: (Art 2112)
public auction (Art 2116) 1. The debt is due and unpaid
2. Sale must be at a public auction
RIGHT OF PLEDGOR TO SUBSTITUTE 3. there must be notice to the pledgor
THING PLEDGED (ART.2107) and owner, stating the amount due
 Requisites: 4. Sale must be with the intervention of
1. The pledgor has reasonable a notary public
grounds to fear the destruction
or impairment of the thin Effect of sale of the thing pledged: (Art
pledged 2115)
2. There is no fault on the part of 1. The sale of the thing pledged shall
the pledgee extinguish the principal obligation,
3. The pledgor is offering in place whether or not the proceeds of the
of the thing, another thing in sale are equal to the amount of the
pledge which is of the same kind principal obligation, interest and
and quality as the former expenses in a proper case
4. The pledge does not choose to 2. If the price of the sale is more than
exercise his right to cause the the amount due the creditor, the
thing pledged to be sold at debtor is not entitled to the excess
public auction unless the contrary is provided
NOTE: The pledgee’s right to have the 3. If the price of the sale is less, the
thing pledged sold at public sale granted creditor is not entitled to recover
under the Article 2108 is superior to that the deficiency even if there is a
given to the pledgor to substitute the stipulation to that effect
thing pledged under Article 2107.
REAL ESTATE MORTGAGE (Articles
Prohibition against double pledge 2124-2131)
 Property which has been lawfully
pledged to one creditor cannot be  A contract whereby the debtor
pledged to another as long as the secures to the creditor the
first one subsists. fulfilment of a principal obligation,
NOTE: Possession of a creditor of the specially subjecting to such security
thing pledged is an essential requisite of immovable property or real rights
pledge. over immovable property in case the
principal obligation is not complied
Extinguishment of Pledge (CRAPS) with at the time stipulated.
1. For the same causes as all other
obligations (Art 1231) Characteristics of the contract:
2. Return of the thing pledged by the 1. Real
pledgee to the pledgor (Art 2110) 2. Accessory
3. Statement in writing by the 3. Subsidiary
pledgee that he renounces or 4. Unilateral – it creates only an
abandons the pledge (Art 2111) obligation on the part of the
4. Payment of the debt (Art 2105) creditor who must free the
5. Sale of thing pledged at public property from the encumbrance
auction (Art 2115) once the obligation is fulfilled.
CIVIL LAW COMMITTEE

the mortgage had not been

registered provided no innocent
third parties are involved.
NOTES: NOTE: Where a mortgage is not valid or
 As an accessory contract, its false, the principal obligation which it
consideration is that of the principal guarantees is not rendered null and void.
contract from which it receives life. What is lost only is the right to foreclose
 A mortgage does not involve a the mortgage as a special remedy for
transfer, cession or conveyance of satisfying or settling the indebtedness
property but only constitutes a lien which is the principal obligation but the
thereon. Until discharged, it follows mortgage deed remains as evidence or
the property wherever it goes and proof of a personal obligation of the
subsists notwithstanding changes of debtor and the amount due to the
ownership. creditor may be enforced in an ordinary
 A mortgage gives the mortgagee no personal action.
right or claim to the possession of
the property, and therefore, a mere  Kinds:
mortgagee has no right to eject an 1. Voluntary – agreed to by the parties
occupant of the property mortgaged or constituted by the will of the
unless the mortgage should contain owner of the property on which it is
some provision to that effect. The created
only right of a mortgagee in case of 2. Legal – one required by law to be
non-payment of a debt secured by executed in favour of certain persons
mortgage would be to foreclose the  The persons in whose favour the
mortgage and have the encumbered law establishes a mortgage have
property sold to satisfy the no other right than to demand
outstanding indebtedness. If the the execution and the recording
possession is transferred to the of the document in which the
mortgagee, it must not expressly be mortgage is formalized (Art 2125
for purpose of applying the fruits to par 2)
the interest then to the principal of 3. Equitable – one which, although
the credit, for then it would be an lacking the formalities of a
antichresis. mortgage, shows the intention of the
parties to make the property a
 It is not an essential requisite that security for a debt
the principal of the mortgage credit
bears interest, or that the interest
PLEDGE REAL MORTGAGE
as compensation for the use of the
1. Constituted on 1. Constituted on
principal and enjoyment of its fruits
movables immovables
be in the form of a certain percent 2. Property is 2. Delivery is not
thereof. delivered to pledgee necessary
or by common
 Special Requisites (in addition to consent to a third
the common essential requisites): person
1. It can cover only immovable 3. Not valid against 3. Not valid against
property and alienable real rights third persons unless a third persons unless
imposed upon immovables (Art description of the registered
2124); thing pledged and
date of pledge
2. It must appear in a public instrument appear in a public
(Art. 2125); and instrument
3. Registration in the registry of
property is necessary to bind third Extent of Mortgage:
persons, but not for the validity of  Absent express stipulation to the
the contract (Art 2125). contrary, the mortgage includes the
 An order for foreclosure cannot accessions, improvements, growing
be refused on the ground that fruits and income of the property not

Ethics)
yet received when the obligation  It denotes the procedure adopted by

becomes due and to the amount of the mortgagee to terminate the
the indemnity granted or owing to rights of the mortgagor on the
the proprietor from the insurers of property and includes the sale itself
the property mortgaged, or in virtue (DBP vs Zaragoza, 84 SCRA 668)
of expropriation for public use (Art  Foreclosure is valid where the debtor
2127) is in default in the payment of his
obligation (Gobonseng, Jr. vs CA,
Object of Mortgage: 246 SCRA 472)
 Future property cannot be an object
of a contract of mortgage (Art  Kinds:
2085[2]) However, a stipulation 1. Judicial – ordinary action for
subjecting to the mortgage lien, foreclosure under Rule 68 of the
properties (improvements) which the Rules of Court
mortgagor may subsequently acquire 2. Extrajudicial – when mortgagee is
install, or use in connection with given a special power of attorney to
real property already mortgaged sell the mortgaged property by
belonging to the mortgagor is valid public auction, under Act No. 3135
(People’s Bank and Trust Co. vs.
Dahican Lumber Co., 20 SCRA 84) Judicial Extrajudicial
foreclosure foreclosure
Special Rights: 1. There is court 1. No court
1. Mortgagor - To alienate the intervention intervention
mortgaged property but the 2. Decisions are 2. Not appealable
mortgage shall remain attached to appealable because it is
the property. immediately
executory
NOTE: A stipulation forbidding the 3. Order of court 3. Foreclosure does
owner from alienating the immovable cuts off all rights of not cut off right of
the parties all parties involved
mortgage shall be void (Art 2130) being
impleaded
contrary to public policy inasmuch as the 4. There is equity 4. There is right of
transmission of property should not be of redemption redemption
unduly impeded. except on banks
which provides for
2. Mortgagee - To claim from a 3rd a right of
person in possession of the redemption
mortgaged property the payment of 5. Period of 5. Period to redeem
the part of the credit secured by the redemption starts start from date of
which said third person possesses from the finality of registration of
the judgment until certificate of sale
(Art 2129) order of
NOTE: It is necessary that prior demand confirmation
for payment must have been made on 6. No need for a 6. Special power of
the debtor and the latter failed to pay special power of attorney in favor of
(BPI vs Concepcion & Hijos, Inc., 53 Phil attorney in the mortgagee is
906) contract of needed in the
mortgage contract
Foreclosure
 The remedy available to the NOTES:
mortgagee by which he subjects the  A foreclosure sale retroacts to the
mortgaged property to the date of registration of the mortgage
satisfaction of the obligation to and that a person who takes a
secure that for which the mortgage mortgage in good faith and for
was given valuable consideration, the record
showing clear title to the mortgagor,
NOTES: will be protected against equitable
claims on the title in favor of third
CIVIL LAW COMMITTEE

persons, of which he had no actual  The authority to sell is not

or constructive notice (St. Dominic extinguished by the death of the
Corporation vs. IAC 151 SCRA 577). mortgagor (or mortgagee) as it is an
 Where there is a right to redeem, essential and inseparable part of a
inadequacy of price is not material bilateral agreement (Perez vs PNB,
because the judgment debtor may 17 SCRA 833).
reacquire the property or else sell  No sale can be legally made outside
his right to redeem and thus recover the province in which the property
any loss he claims to have suffered sold is situated; and in case the
by reason of the price obtained at place within said province in which
the auction sale and consequently the sale is to be made is the subject
not sufficient to set aside the sale. of stipulation, such sale shall be
Mere inadequacy of the price made in the said place in the
obtained at the sheriff’s sale will not municipal building of the
be sufficient to set aside the sale municipality in which the property or
unless “the price is so inadequate as part thereof is situated.
to shock the conscience of the
court” taking into consideration the Procedure for extrajudicial foreclosure
peculiar circumstances attendant of both real estate mortgage under Act
thereto. (Sulit vs. CA, 268 SCRA 441) No. 3135 and chattel mortgage under
 Should there remain a balance due Act No. 1508 (A.M. No. 99-10-05-0,
to the mortgagee after applying the January 15, 2000)
proceeds of the sale, the mortgagee 1. Filing of application before the
is entitled to recover the deficiency. Executive Judge through the Clerk of
This rule applies both to judicial and Court
extra-judicial foreclosure real 2. Clerk of Court will examine whether
mortgage. the requirement of the law have
 The action to recover a deficiency been complied with, that is, whether
after foreclosure prescribes after 10 the notice of sale has been posted
years from the time the right of for not less than 20 days in at least
action accrues (Arts 1142 & 1144). three (3) public places of the
municipality or city where the
Stipulation of upset price or “tipo” property is situated, and if the same
 It is a stipulation in a mortgage of is worth more than P400.00, that
real property of minimum price at such notice has been published once
which the property shall be sold, to a week for at least three (3)
become operative in the event of a consecutive weeks in a newspaper of
foreclosure sale at public auction. It general circulation in the city of
is null and void for the property must municipality
be sold to the highest bidder. Parties 3. The certificate of sale must be
cannot, by agreement, contravene approved by the Executive Judge
the law and interfere with the lawful 4. Where the application concerns
procedure of the courts (BPI vs Yulo, extrajudicial foreclosure of real
31 Phil 476) mortgages in different locations
covering one indebtedness, only one
Extrajudicial foreclosure real property filing fee corresponding to such debt
(Act No. 3135) shall be collected
 The law covers only real estate 5. The Clerk of Court shall issue
mortgages. It is intended merely to certificate of payment indicating the
regulate the extrajudicial sale of the amount of indebtedness, the filing
property mortgaged if and when the fees collected, the mortgages sought
mortgagee is given a special power to be foreclosed, the description of
of express authority to do so in the the real estates and their respective
deed itself or in a document locations
annexed thereto.

Ethics)
6. The notice of sale shall be published posting is not required, much less
in a newspaper of general circulation considered indispensable, for the
pursuant to Section 1, PD No. 1079 validity of a foreclosure sale.
7. The application of shall be raffled
among all sheriffs
8. After the redemption period has Redemption
expired, the Clerk of Court shall  It is the transaction by which the
archive the records. mortgagor reacquires or buys back
9. No auction sale shall be held unless the property which may have passed
there are at least two (2) under the mortgage, or divests the
participating bidders, otherwise the property of the lien which the
sale shall be postponed to another mortgage may have created.
date. If on the new date set forth
for the sale there shall not be at NOTES:
least two bidders, the sale shall then  A sale by the mortgagor to a third
proceed. The names of the bidders party of the mortgaged property
shall be reported to the Sheriff of during the period for redemption
the Notary Public, who conducted transfers only the right to redeem
the sale to the Clerk of Court before the property and the right to
the issuance of the certificate of possess, use and enjoy the same
sale. during said period.
 Where sale with assumption of
NOTES: mortgage not registered and made
 The Mortgagor and Mortgagee have without the consent of the
no right to waive the posting and mortgagee, the buyer, thereof, was
publication requirements under Act. not validly substituted as debtor
No. 3135. Notices are given to secure and, hence, had no right to redeem
bidders and prevent a sacrifice of (Bonnevie vs. CA, 125 SCRA 122).
the property. Clearly, the statutory
requirements of posting and  Kinds:
publication are mandated, not for 1. Equity of Redemption – right of
the mortgagor’s benefit, but for the mortgagor to redeem the mortgaged
public or third persons. Failure to property after his default in the
comply with the statutory performance of the conditions of the
requirements as to publication of mortgage within the 90-day period
notice of auction sale constitutes a from the date of the service of the
jurisdictional defect which order of foreclosure or even
invalidates the sale.Lack of thereafter but before the
republication of notice of confirmation of the sale. Applies to
foreclosure sale made subsequently judicial foreclosure of real mortgage
after the original date renders such and chattel mortgage foreclosure.
sale void (PNB vs. Nepomuceno
Productions Inc., G.R. No. 139479. NOTE: Redemption of the banking
December 27, 2002). institutions is allowed within one year
 Sec 3 of Act 3135 does not require from confirmation of sale.
personal or any particular notice on
the mortgagor much less on his 2. Right of Redemption – right of
successors-in-interest where there is mortgagor to redeem the mortgaged
no contractual stipulation therefor. property within one year from the
Hence, unless required in the date of registration of the certificate
mortgage contract, the lack of such of sale. Applies only to extrajudicial
notice is not a ground to set aside a foreclosure of real mortgage.
foreclosure sale.
 Neither does Sec 3 require posting of NOTE: The right of redemption, as long
notice of sale on the mortgage as within the period prescribed, may be
property and the certificate of exercised irrespective of whether or not
CIVIL LAW COMMITTEE

the mortgagee has subsequently

conveyed the property to some other
party (Sta. Ignacia Rural Bank, Inc. vs.
CA, 230 SCRA 513)
Period of Redemption ANTICHRESIS (Articles 2132 -2139)

1. Extra-judicial (Act #3135)
a. natural person – one year from  A contract whereby the creditor
registration of the certificate of acquires the right to receive the
sale with Registry of Deeds fruits of an immovable of the
b. juridical person – same rule as debtor, with the obligation to apply
natural person them to the payment of the interest,
c. juridical person (mortgagee is if owing, and thereafter to the
bank) - three months after principal of his credit (Art 2132)
foreclosure or before
registration of certificate of Characteristics
foreclosure which ever is earlier 1. Accessory contract – it secures the
(sec. 47, of General Banking performance of a principal obligation
Law) 2. Formal contract – it must be in a
2. Judicial – before confirmation of the specified form to be valid, i.e., “in
sale by the court writing.” (Art 2134)
NOTE: Allowing a redemption after the  Special Requisites (in addition to

lapse of the statutory period, when the the common essential requisites):
buyer at the foreclosure sale does not 1. It can cover only the fruits of an
object but even consents to the immovable property; (Art 2132)
redemption, will uphold the policy of the 2. Delivery of the immovable is
law which is to aid rather than defeat necessary for the creditor to receive
the right of redemption. There is nothing the fruits and not that the contract
in the law which prevents a waiver of shall be binding;
the statutory period for redemption 3. Amount of principal and interest
(Ramirez vs CA, 219 SCRA 598). must be specified in writing (Art.
2134); and
Amount of the redemption price: 4. Express agreement that debtor will
1. Mortgagee is not a bank (Act No. give possession of the property to
3135, in relation to Sec. 28, Rule 39 creditor and that the latter will
of Rules of Court) apply the fruits to the interest, if
a. purchase price of the property any, then to the principal of his
b. 1% interest per month on the credit. (Art 2132)
purchase price
c. taxes paid and amount of NOTE: The obligation to pay interest is
purchaser’s prior lien, if any, not of the essence of the contract of
with the same rate of interest antichresis, there being nothing in the
computed from the date of Code to show that antichresis is only
registration of sale, up to the applicable to securing the payment of
time of redemption interest-bearing loans. On the contrary,
2. Mortgagee is a bank (GBL 2000) antichresis is susceptible of guaranteeing
a. amount due under the mortgage all kinds of obligations, pure or
deed conditional
b. interest
c. cost and expenses Antichresis Pledge
NOTE: Redemption price in this 1. Refers to real 1. Refers to personal
case is reduced by the income property property
received from the property 2. Perfected by mere 2. Perfected by
consent delivery of the thing
pledged

Ethics)
3. Consensual contract 3. Real Contract 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)
Antichresis Real Mortgage NOTES:

1. Property is 1. Debtor usually  The parties, however, may agree on
delivered to creditor retains possession of an extrajudicial foreclosure in the
the property same manner as they are allowed in
2. Creditor acquires 2. Creditor does not contracts of mortgage and pledge
only the right to have any right to
receive the fruits of receive the fruits;
(Tavera vs. El Hogar Filipino, Inc.,
the property, hence, but the mortgage 68 Phil 712).
it does not produce a creates a real right  A stipulation authorizing the
real right over the property antichretic creditor to appropriate
3. The creditor, 3. The creditor has the property upon the non-payment
unless there is no such obligation of the debt within the agreed period
stipulation to the is void (Art 2088).
contrary, is obliged
to pay the taxes and
CHATTEL MORTGAGE (Articles 2140-
charges upon the
estate 2141)
4. It is expressly 4. There is no such
stipulated that the obligation on part of  A contract by virtue of which
creditor given mortgagee personal property is recorded in the
possession of the Chattel Mortgage Register as a
property shall apply security for the performance of an
all the fruits thereof obligation (Art 2140).
to the payment of
interest, if owing,
Characteristics
and thereafter to the
principal
1. Accessory contract – it is for the
Subject matter of both is real property purpose of securing the performance
of a principal obligation
Obligations of antichretic creditor: 2. Formal contract – registration in the
1 To pay taxes and charges on the Chattel Mortgage Register is
estate, including necessary expenses indispensable for its validity
NOTE: Creditor may avoid said 3. Unilateral contract – it produces only
obligation by: obligations on the part of the
a. compelling debtor to creditor to free the thing from the
reacquire enjoyment of the encumbrance on fulfilment of the
property or obligation.
b. by stipulation to the
contrary  Special Requisites (in addition to
2 To apply all the fruits, after the common essential requisites):
receiving them, to the payment of 1. It can cover only personal or
interest, if owing, and thereafter to movable property in general;
the principal however, the parties may treat as
3 To render an account of the fruits to personal property that which by its
the debtor nature would be real property;
4 To bear the expenses necessary for 2. Registration of the mortgage with
its preservation and repair the Chattel Mortgage Register where
the mortgagor resides; if property is
Remedies of creditor in case of non- located in a different province,
payment of debt registration in both provinces
required;
1. Bring an action for specific 3. Description of the property as would
performance; or enable the parties or other persons
CIVIL LAW COMMITTEE

to identify the same after reasonable excess over the unless otherwise
investigation and inquiry; and amount due goes to agreed or except in
4. Accompanied by an affidavit of good the debtor case of legal
faith to bind third persons, but not pledge
for the validity of the contract. 4. If there is 4. If there is
5. It can cover only obligations existing deficiency after deficiency,
at the time the mortgage is foreclosure, creditor is not
constituted. creditor is entitled entitled to recover
NOTE: A mortgage containing a to recover the notwithstanding
stipulation in regard to future deficiency from the any stipulation to
advances in the credit will take debtor, except the contrary
effect only from the date the same under Art. 1484
are made and not from the date of Subject matter of both is movable
the mortgage (Jaca vs Davao Lumber property
Co., 113 SCRA 107)
Affidavit of Good Faith
Effect of registration: Creates a real  Oath in a contract of chattel
right mortgage wherein the parties
 The registration of the chattel "severally swear that the mortgage is
mortgage is an effective and binding made for the purpose of securing the
notice to other creditors of its obligation specified in the conditions
existence and creates a real right or thereof and for no other purposes
a lien which, being recorded, follows and that the same is a just and valid
the chattel wherever it goes. The obligation and one not entered into
registration gives the mortgagee for the purpose of fraud.” (Sec. 5,
symbolical possession (Northern Chattel Mortgage Law)
Motors, Inc. vs. Coquia, 68 SCRA
374). Effect of absence
The special affidavit is required only
Effect of failure to register chattel for the purpose of transforming an
mortgage in the chattel mortgage already valid mortgage into
registry “preferred mortgage.” Thus, it is
 Article 2140 makes the recording in not necessary for the validity of the
the Chattel Mortgage Register an chattel mortgage itself but only to
essential requisite but if the give it a preferred status. In other
instrument is not recorded, the words, its absence vitiates the
mortgage is nevertheless binding mortgage only as against third
between the parties. But the person persons without notice like creditors
in whose favour the law establishes a and subsequent encumbrancers.
mortgage has no other right than to
demand the execution and the Foreclosure of Chattel Mortgage
recording of the document. NOTES:
 Foreclosure sale in chattel mortgage
is by public auction under Act No.
Chattel Mortgage Pledge 1508, but the parties may stipulate
1. Delivery of the 1. Delivery of the that it be by private sale.
personal property thing pledged is  The mortgagee may, after thirty (30)
to the mortgage is necessary days from the time of the condition
not necessary broken, cause the mortgaged
2. registration in 2. registration not property to be sold at public auction
the Chattel necessary to be by a public officer. The 30-day
Mortgage Registry valid period is also a grace period for the
is necessary for its mortgagor to discharge the mortgage
validity obligation. After the sale of the
3. If property is 3. Debtor is not chattel at public auction, the right
foreclosed, the entitled to excess

Ethics)
of redemption is no longer available property

to the mortgagor (Cabral vs. 1. Real mortgage – After the
Evangelista, 28 SCRA 1000). redemption period has expired, the
purchaser of the property has the
Application of proceed of sale: right to a conveyance and to be
1. Costs and expenses of keeping placed in possession thereof.
and sale
2. Payment of the obligation NOTES:
secured by the mortgage  Purchaser is not obliged to bring
3. Claims of persons holding a separate suit for possession.
subsequent mortgages in their He must invoke the aid of the
order courts and ask for a WRIT OF
4. The balance, if any, shall be POSSESSION.
paid to the mortgagor or person  Section 7 of Act No. 3135 allows
holding under him the purchaser to take possession
of the foreclosed property during
NOTES: the period of redemption upon
 The creditor may maintain an action filing of an ex parte application
for the deficiency, except if the and approval of a bond.
chattel mortgage is constituted as
security for the purchase of personal 2. Chattel mortgage – When default
property payable in instalments (Art. occurs and the creditor desires to
1484). foreclose, the creditor has the right
 The action for deficiency may be to take the property as a preliminary
brought within ten (10) years from step for its sale.
the time the cause of action accrues NOTE: Where the debtor refuses to
(Arts 1141 and 1142). yield the property, the creditor’s
 Only equity of redemption is remedy is to institute an action
available to the mortgagor; the either to effect judicial foreclosure
latter can no longer redeem after directly or to secure possession
the confirmation of the foreclosure (REPLEVIN) as a preliminary to the
sale. sale contemplated in Section 14 or
Act. No. 1508
Right of redemption
 When the condition of a chattel CONCURRENCE AND PREFERENCE OF
mortgage is broken the following CREDITS (Articles 2236 – 2251)
may redeem:
a) mortgagor; Concurrence of Credits
b) person holding a subsequent  Possession by two or more creditors
mortgage; or of equal rights or privileges over the
c) subsequent attaching creditor. same property or all of the property
 An attaching creditor who so of the debtor
redeems shall be subrogated to the
rights of the mortgagee and entitled Preference of Credits
to foreclose the mortgage in the  Right held by a creditor to be
same manner that the mortgagee preferred in the payment of his
could foreclose it. claim above others out of the
debtor’s assets.
 The redemption is made by paying or
delivering to the mortgagee the
NOTES:
amount due on such mortgage and
the costs, and expenses incurred by  The rules on preference of credits
such breach of condition before the apply only when two or more
sale thereof (Sec 13, Act No. 1508). creditors have separate and distinct
claims against the same debtor who
Right to possession of foreclosed has insufficient property.
CIVIL LAW COMMITTEE

 Preference creates no lien on real or personal property or liens (Art.

property, and, therefore, gives no 2243). Hence, they are not included in
interest in property, specific or the insolvent debtor's assets.
general, to the preferred creditor
but a preference in application of NOTES:
the proceeds after the sale. (Molina  Arts. 2241 and 2242 do not give the
vs. Somes, 31 Phil. 76) order of preference or priority of
 The preferential right of credit payment. They merely enumerate
attains significance only after the the credits which enjoy preference
properties of the debtor have been with respect to specific movables or
inventoried and liquidated, and the immovables. With respect to the
claims held by his various creditors same specific movables or
have been established. (DBP vs. immovables, creditors, with the
NLRC, 183 SCRA 328) exception of the State (No. 1),
merely concur.
Preference of Lien  They only find application when
Credit there is a concurrence of credits,
Applies only to Creates a charge i.e., when the same specific
claims which do on a particular property of the debtor is subjected
not attach to property to the claims of several creditors and
specific the value of such property is
properties insufficient to pay in full all the
creditors. In such a situation, the
Liability of debtor’s property for his question of preference will arise.
obligations  Article 2242 makes no distinction
GENERAL RULE: Debtor is liable with between registered and unregistered
all his property, present and future, for vendor’s lien (No. 2). Hence, any
the fulfilment of his obligations. (Art lien of that kind enjoys the
2236) preferred credit status. Unlike the
unpaid price of real property sold,
EXEMPT PROPERTY: mortgage credits (No. 5), in order to
1. Present property – those be given preference, should be
provided under Arts. 155 and 205 recorded in the Registry of Property.
of the Family Code, Sec. 13, But a recorded mortgage credit is
Rule 39 of the Rules of Court, superior to an unrecorded unpaid
and Sec. 118 of the Public Land vendor’s lien (De Barretto vs.
Act Villanueva, 1 SCRA 288)
2. Future property – a debtor who
obtains a discharge from his
 The priority rule applies to credits
annotated in the Registry of
debts on account of his
Property. As to credits mentioned in
insolvency, is not liable for the
No. 7 of Article 2242, there is
unsatisfied claims of his
preference among the attachments
creditors with said property
or executions according to the order
subject to certain exceptions
of the time they were levied upon
expressly provided by law. (Secs.
the property. The pro rata rule in
68, 69, The Insolvency Law [Act
Article 2249 does not apply;
No. 1956])
otherwise, the result would be
3. Property under legal custody and
absurd. The preference of a credit
those owned by municipal
annotated by an attachment or
corporations necessary for
execution could be defeated by
governmental purposes
simply obtaining a writ of
attachment or execution, no matter
General Categories of Credit:
how much later (Manabat vs Laguna
1. Special Preferred Credits - those
Federation of Facomas, Inc., 19
listed in Arts. 2241 and 2242 shall be
SCRA 621).
considered as mortgages and pledges of

Ethics)
 The last paragraph of Article 2241 established by Art. 2244

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 NOTES:
therein, as where he has sold the  In case of bankruptcy or liquidation
property (Peña vs. Mitchell, 9 Phil of the employer’s business, the
587) unpaid wages and other monetary
claims of the employees shall be
2. Ordinary Preferred Credits - those given first preference and shall be
listed in Art. 2244 as amended by paid in full before the claims of the
Art. 110 of the Labor Code. government and other creditors may
NOTES: be paid. The terms, “declaration”
 The provision not only enumerates of bankruptcy, or “judicial”
the preferred credits with respect to liquidation have been eliminated,
other property, real and personal, of nevertheless, according to the SC,
the debtor, but also gives their order bankruptcy or liquidation
of preference “in the order named”. proceedings are still necessary for
 In contrast with Articles 2241 and the operation of the preference
2242, Article 2244 creates no liens accorded to workers under Art. 110
on determinate property which of the Labor Code. (DBP vs. NLRC
follow such property. What Article 183 SCRA 328; RA No. 6715 Sec 10)
2244 creates are simply rights in  In case of rehabilitation, the
favour of certain creditors to have preference of credit granted to
the cash and other assets of the employees under Art 110 of the
insolvent applied in a certain Labor Code is not applicable
sequence or order of priority. (Rubberworld [Phils.] vs CA, 305
 Article 2244, particularly par (14) SCRA 722).
item (1) thereof, is not applicable to
obligations of the State as it is a Refectionary Credit
recognized doctrine that the State is  Indebtedness incurred in the repair
always solvent. It is inconceivable or reconstruction of something
for the State to voluntarily initiate previously made, such repair or
insolvency or general liquidation reconstruction being made necessary
proceedings or to be subjected to by the deterioration or destruction
such proceedings under its own laws. of the thing as it formerly existed.
3. Common Credits – those listed ORDER OF PREFERENCE OF CREDITS

under Art. 2245, which shall be paid
pro rata regardless of dates.  Arts. 2241 and 2242, jointly with
NOTE: Ordinary Preferred and Common Arts. 2246 to 2249 establish a two-
Credits cover only “free property” of the tier order of preference:
debtor, or those not subjected to Special 1. First tier – includes taxes, duties
Preferred Credit. and fees due on specific movable or
immovable property;
Effects of Article 110 of Labor Code to 2. Second tier – all other special
Art 2244: preferred (non-tax) credits shall be
1. Removed the one-year limitation satisfied pro-rata, out of any
found in No. 2 of Art. 2244 residual value of the specific
2. Moving up the claims for unpaid property to which such credits
wages (and other monetary claims) relate.
of laborers or workers of insolvent
from second priority to first priority NOTES:
in the order of preference  The pro-rata rule does not apply to
credits annotated in the Registry of
CIVIL LAW COMMITTEE

Property by virtue of a judicial
order, by attachments and  Credits which do not enjoy any

executions, which are preferred as preference with respect to specific
to “later credits”. In satisfying property because they are not
several credits annotated by among those mentioned in Arts. 2241
attachments or executions, the rule and 2242 and those while included in
is still preference according to the said articles are unpaid because the
priority of the credits in the order of value of the property to which the
time. preference refers is less than the
 In order to make the pro rating preferred credit or credits, shall be
provided in Art 2249 fully effective, satisfied in the order established in
the preferred creditors enumerated Art. 2244 with reference to other
in Nos. 2 to 14 of Art 2242 must real and/or personal property.
necessarily be convened, and the  Common credits or those which do
import of their claims ascertained. not fall under Arts. 2241, 2242, and
There must be first some proceeding 2244 do not enjoy any preference
where the claims of all the preferred and shall be paid pro rata regardless
creditors may be bindingly of dates.
adjudicated, e.g. insolvency,
settlement of decedent’s estate, or
other liquidation proceedings except
where there are not more than one
creditor.

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182 2005 CENTRALIZED BAR OPERATIONS

2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT CHAIRPERSONS

MEMORY AID IN CIVIL LAW

2. Simple loan or mutuum – where the COMMODATUM (Articles 1935 – 1952)

CIVIL LAW COMMITTEE

NOTE:Use of the thing loaned NOTES:

2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT CHAIRPERSONS

MEMORY AID IN CIVIL LAW

2. There is a transfer There is no transfer

CIVIL LAW COMMITTEE

 Form of Payment (Art 1955): b) With regard particularly to an

2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT CHAIRPERSONS

MEMORY AID IN CIVIL LAW

judgments involving such loans, or 2. Unilateral (gratutitous deposit) -

DEPOSIT (Articles 1962 – 2009)  Kinds of Deposit:

CIVIL LAW COMMITTEE

b. Necessary – one made in NOTES:

2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT CHAIRPERSONS

MEMORY AID IN CIVIL LAW

 Time of return: 5. Not to commingle things deposited if

CIVIL LAW COMMITTEE

deposited which is closed and that which accrues the transaction is

2. The only benefit is 2. Essential cause for

2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT CHAIRPERSONS

MEMORY AID IN CIVIL LAW

a. If the deposit is gratuitous, the Deposit by Travellers in hotels and

CIVIL LAW COMMITTEE

2. As to its Origin guaranty. A surety is almost the

2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT CHAIRPERSONS

MEMORY AID IN CIVIL LAW

4. Surety is not entitled to the benefit does, his liability shall be

CIVIL LAW COMMITTEE

sense that it requires action that the contract is one of

2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT CHAIRPERSONS

MEMORY AID IN CIVIL LAW

time he will be discharged only to Double or sub-guaranty (Art 2051 2nd

CIVIL LAW COMMITTEE

2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT CHAIRPERSONS

MEMORY AID IN CIVIL LAW

(a) in virtue of a judicial demand, or 2. A guarantor is entitled to be heard

CIVIL LAW COMMITTEE

knowledge or against the will of  The debtor may interpose

Guarantor’s right to Subrogation Effect of Repeat Payment by debtor:

2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT CHAIRPERSONS

MEMORY AID IN CIVIL LAW

(b) demand a security that shall  Judicial bonds constitute merely a

Extinguishment of guaranty: (RA2CE2) PLEDGE, MORTGAGE AND ANTICHRESIS

CIVIL LAW COMMITTEE

2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT CHAIRPERSONS

MEMORY AID IN CIVIL LAW

balance of the credit (Phil. Bank of public instrument to bind third

E. When the principal obligation  Kinds:

CIVIL LAW COMMITTEE

2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT CHAIRPERSONS

MEMORY AID IN CIVIL LAW

CIVIL LAW COMMITTEE

the mortgage had not been

2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT CHAIRPERSONS

MEMORY AID IN CIVIL LAW

yet received when the obligation  It denotes the procedure adopted by

CIVIL LAW COMMITTEE

persons, of which he had no actual  The authority to sell is not

2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT CHAIRPERSONS

MEMORY AID IN CIVIL LAW