CredTrans MemAid p471 p544 Done

Parties in Bailment:
G ENERAL P RINCIPLES 1. Bailor (Comodatario) – delivers the possession

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

MARIA REGGIELEENE S. RICHARD ARMAND C. JULIENNE THERESE V. DEAN ED VINCENT S.
DIONISIO over-all chairperson, ANGELES subject chair, SALVACION, MARC LESTER H. ALBANO, ATTY.
LYAN DAVID M. JUANICO REENO E. FEBRERO assistant STA ANA, JIRAH L. JARETA, NICASIO C.
chairperson for academic subject chair, GILBERT S. RUSSEL LUBANGCO, VICSON CABANEIRO, ATTY.
operations, TYRONE LEWIS D. GALVEZ edp, JUN MARR M. A. MABANGLO, JHOANNA JOSEPH FERDINAND
ONG chairperson for hotel DENILA persons and family STEFFANY G. NARAG, JULIA M. DECHAVEZ, ATTY.
operations, DANIEL P. ANG relations, NICA MARSHA V. ANTOINETTE S. UNARCE, EFREN VINCENT M.
vice-chairperson for operations, GASAPO wills and succession, JEEN LIM, DIANNE FERRIOL, DIZON, ATTY.
JEFFERSON B. FERNANDEZ JOHN EMIL F. RECUENCO MA. REINA HABIJAN, ARIAN CHARLITO MARTIN
vice-chairperson for secretariat, sales and lease, REX MARK M. VINA L. SARMIENTO, R. MENDOZA, ATTY.
CLARISA G. BELO vice- CABANSAG credit FEROZZA DELIA C. BRUCE V. RIVERA,
chairperson for finance, EROL transactions, MARISOL P. SIMBULAN, ALEIZEL L. ATTY. FRANCESCA
STEPHEN B. PISEC vice RECUERDO land titles and SANTOS, JENNY JOY LOURDES M. SEÑGA
chairperson for electronic data deeds, RUEL NICO R. MARI GERONIMO, ANN LAURICE
processing, PATRICK STEPHEN property, MARIA MIRELLA M. SALONGA, CHRISTINE V.
M. CUA vice-chairperson for ALVERO and DION CEAZAR INTAL, JIHAN D. LLAMES,
logistics, MAICAH MARIE M. PASCUA obligations and KRISTINE MAE A. CEDIÑO,
PAMFILO vice-chairperson for contracts, LOUGENIA P. AUDRIS BULATAO, CLARISSE
membership CARIÑO partnership, JESUS NICOLE V. SOLIMAN,
CLARO JR. T. CEBRIAN torts MYLEEN JOYCE R.
and damages, EVAN JR. C. FAVOREAL, EILEEN CARLA Y.
DUSABAN conflict of laws CARPIO
consumable things pay what he may
L OAN upon agreement, promise within a
( A RTS . 1933 – 1961) express or implied, to
repay the same amount
specified period (DE
LEON, supra at 8)
of the same kind and
CONTRACT OF LOAN quality, with or without The concession of
A contract wherein one of the parties delivers to interest (CIVIL CODE, “credit” necessarily
another, either something not consumable so that Art. 1933). involves the granting of
the latter may use the same for a certain time and “loans” up to the limit of
return it; or money, or other consumable things, the amount fixed in the
upon the condition that the same amount of the “credit” (People v.
same kind and quality shall be paid (CIVIL CODE, Concepcion, G.R. No. L-
Art. 1933). 18535, August 15,
1922).
The contract of loan is governed by the rules as to
the requisites and validity of contracts in general Credit in Relation to Debt
(DE LEON, supra at 6). Credit is a sum credited on the books of a company
to a person who appears be entitled to it. It is the
Characteristics: correlative to debt or indebtedness and that which is
1. Real contract – delivery of the thing loaned is due to any person as distinguished from that which
necessary for the perfection of the contract he owes (Republic v. First National City Bank of
because the purpose of the contract is to New York, G.R. No. L-16106, December 30, 1961).
transfer either the use or the ownership of the
thing loaned (CIVIL CODE, Art. 1316). Loan v. Discounting Paper
Loan Discounting of Paper
Note: An accepted promise to make a future As to When Interest is Deducted
loan is a consensual contract, and therefore
binding upon the parties. However, it is only after Interest is taken at the Interest is deducted in
delivery of the subject matter will the real expiration of the credit. advance.
contract of loan arise (CIVIL CODE, Art. 1934). As to Expense
More expensive than
The non-fulfillment of an accepted promise will obtaining loan
give rise to an action for damages only (5 because interest is
TOLENTINO, Civil Code of the Philippines, calculated on the
(1992), p. 443) [hereinafter 5 TOLENTINO]). amount loaned and
Less expensive than not on the amount
Nevertheless, the accepted promise to give, discounting. actually received.
despite giving rise to an action for damages by
reason of its breach, does not constitute the real
contract of loan (Saura Import and Export Co.,
Inc. v. Development Bank of the Philippines,
G.R. No. L-24968, April 27, 1972).
2. Unilateral contract – once the subject matter has As to Whether it is Made on a Double/Single
been delivered, it creates obligations on the part Name Paper
of only one of the parties (i.e. borrower) (DE Always on a double Always on a single
LEON, supra at 7). name paper (one on name paper (one on
which two signatures which no other
Cause or Consideration: appear with both indorsement, other
1. As to borrower – the acquisition of the thing parties liable for than the signature of
2. As to lender – the right to demand its return or its payment). the maker appears.
equivalent (Ibid). As to Repayment of Discount
Loan v. Credit The discount does not
Loan Credit have to be repaid
Contract for the Ability of a person to Loan must be paid (Herrera v. Petrophil
delivery by one party borrow money or things back. Corp., G.R. No. L-
and receipt of other by virtue of the trust or 48349, December 29,
party of a given sum of confidence reposed by 1986).
money, or other the lender so that he will (DE LEON, supra at 8-9)
SAN BEDA COLLEGE OF LAW

472
2016 CENTRALIZED BAR OPERATIONS
3
Kinds of Loan: C OMMODATUM
1. Commodatum – bailor delivers to the bailee a
non-consumable thing so that the latter may use ( A RTS . 1935 – 1952)
it for a certain time and return the identical thing;
and Commodatum v. Other Types of Contracts
2. Simple loan (mutuum) – lender delivers to the Other Type of
Commodatum
borrower money or other consumable thing upon Contracts
the condition that the latter shall return the same Principal purpose is
In DEPOSIT, the
amount of the same kind and quality (Id. at 7). the gratuitous and
principal purpose is the
temporary use of the
safekeeping of the thing
Consumables are those things which cannot be thing by the borrower.
used in a manner appropriate to their nature In LEASE, it is always
without their being consumed (CIVIL CODE, Art. Essentially gratuitous
for a price.
418). Bailee acquires a
mere use of the thing,
Commodatum v. Mutuum but acquires no rights In USUFRUCT, the
Commodatum Mutuum over the fruits thereof usufructuary acquires
As to Object in the absence of the right over the fruits.
General Rule: Non- stipulation to that
consumable/Non- effect.
fungible
Exception: if the Consumable/Fungible Nature
purpose of the contract Correlate with Art. General Rule: Bailee acquires the temporary use of
is not the consumption 418 of the Civil Code the thing but not its fruits since the bailor remains
of the object (e.g. for the owner (CIVIL CODE, Art. 1935).
exhibition) (CIVIL
CODE, Art. 1936) Rationale: The right to use a thing is distinct from
the right to enjoy the fruits (DE LEON, at 17). The
As to Cause
fruits pertain to the owner of the thing producing the
Generally gratuitous fruits (CIVIL CODE, Art. 441).
although it may also
Essentially gratuitous be onerous for there Exception: When there is a stipulation to make use
may be stipulation of of the fruits of the thing loaned (CIVIL CODE, Art.
interest 1940). Provided, that the use of the fruits is merely
As to Purpose incidental; otherwise, it is usufruct (DE LEON, supra
Use or temporary at 19).
Consumption
possession
As to Subject Matter Note: Such stipulation to enjoy the fruits cannot be
Personal property presumed (Ibid.).
Any property
Note: If the bailee is not entitled to the use of the
As to Ownership of the thing thing, the contract is a deposit (CIVIL CODE, Art.
Retained by bailor Passes to the debtor 1962).
As to Return of the thing
Contract Akin to Donation
Equal amount of the
Exact thing loaned Both contracts of commodatum and donation confer
same kind and quality
benefit to the recipient. The presumption is that the
As to Risk of Loss bailor has loaned the thing for having no need
Bailor Debtor or bailee therefore (DE LEON, supra at 15). The cause or
consideration for both is pure liberality (CIVIL
As to Time of Return
CODE, Art. 1350).
In case of urgent need
and commission of any Characteristics of Commodatum
Upon expiration of the
acts of ingratitude, even 1. Real – perfected by delivery;
term only
before the expiration of 2. Principal – it can stand alone by itself;
the term 3. Gratuitous – the cause of which is the mere
(DE LEON, supra at 10-11) liberality of the benefactor (CIVIL CODE, Art.
1350); and

473
4. Personal in Nature – because of the trust (5 Effects of the Principle that Commodatum is
PARAS, Civil Code of the Philippines Annotated Purely Personal (CIVIL CODE, Art. 1939)
Book V [2013], p. 884 [hereinafter, 5 PARAS]). 1. The death of either the bailor or the bailee
extinguishes the contract.
Kinds of Commodatum:
1. Ordinary Commodatum – use of the thing by the Art. 1939 constitutes an exception to the general
bailee is for a certain period of time (CIVIL rule under Article 1178 that all rights acquired in
CODE, Art. 1933); virtue of an obligation are transmissible (DE
2. Precarium – one whereby the bailor may LEON, supra at 18).
demand the thing loaned at will.
A contract is precarium when: Exceptions:
a. The duration and purpose of the contract are a. When there is a contrary stipulation that the
not stipulated; or commodatum is transmitted to the heirs of
b. The use of the thing is merely tolerated by the either or both parties (CIVIL CODE, Art.
owner (CIVIL CODE, Art. 1947). 1306); and
b. If there are two or more borrowers, the death
Cause of one does not extinguish the contract in the
The cause is the liberality of the bailor. absence of stipulation to the contrary (DE
Commodatum is essentially gratuitous (CIVIL LEON, supra at 18).
CODE, Art. 1933).
2. The bailee can neither lend nor lease the object
In Pajuyo vs CA, the contract was not a of the contract to a third person (CIVIL CODE,
commodatum because the bailee was obligated to Art. 1939 (2)).
maintain the property in good condition (G.R. No.
146364, June 3, 2004). Exceptions:
a. Understanding or agreement to the contrary;
Note: and
If any compensation is to be paid by the borrower b. Members of the household may make use of
there arises a lease contract; and the thing loaned (DE LEON, supra at 18).
If the consideration is to render some service, an
innominate contract will result (DE LEON, supra at Reason: they are not considered as third
14). persons (Ibid.).
Subject Matter: Exceptions to the exception in (b):

General Rule: Non-consumable goods, whether i. If there is a contrary stipulation; and
movable or immovable property (CIVIL CODE, Arts. ii. If the nature of the thing forbids such use
1936-1937). (Ibid.).
Exception: Consumable goods may be the subject OBLIGATIONS OF THE BAILEE (TR-OLDEO)
matter of commodatum if the purpose of the contract Principal Obligations: (TR)
is not the consumption of the object as when it is 1. Take care of the thing with diligence of a good
merely for exhibition (CIVIL CODE, Art. 1936). father of a family (CIVIL CODE, Arts. 1163); and
2. Return the IDENTICAL thing loaned upon
Illustration: expiration of the term or upon the
If consumable goods are loaned only for purposes of accomplishment of the purpose (CIVIL CODE,
exhibition, or when the intention of the parties is to Art. 1933).
lend consumable goods and to have the very same
goods returned at the end of the period agreed Other Obligations: (OLDEO)
upon, the loan is commodatum and not mutuum 1. Pay for the Ordinary expenses for the use and
(Producers Bank of the Phils. v. CA, G.R. No. preservation of the thing loaned (CIVIL CODE,
115324, February 19, 2003). Art. 1941);
Bailor need not be the owner of the thing loaned Reason: The bailee is supposed to return the
(CIVIL CODE, Art. 1938) identical thing (CIVIL CODE, Art. 1933).
It is sufficient that the bailor has:
1. Possessory interest; or 2. Liability for Loss due to fortuitous event (CIVIL
2. The right to use which he may assert against the CODE, Art. 1942);
bailee or third persons but not the rightful owner
(e.g. lessee, usufructuary) (DE LEON, at 17).

474
3
General Rule: He is not liable because
ownership remains with the bailor (CIVIL CODE, 4. Pay for Extraordinary expenses arising from the
Art. 1174). actual use of the thing, even though the bailee
acted without fault. In this case, the bailor and
Exceptions: He is liable for loss even if it should the bailee shall bear the expenses equally
be through a fortuitous event in the following (CIVIL CODE, Art. 1949 (2)); and
cases (CIVIL CODE, Art. 1942): (KLAS-D)
a. When he Keeps it longer than the period Exception: If there is a stipulation for different
stipulated, or after the accomplishment of its apportionment.
use;
Right of Retention
Reason: Delay (CIVIL CODE, Arts. 1165, General Rule: Bailee has no right to retain the
1169, and 1170). thing loaned as security on the ground that the
bailor owes him something, even though it may
b. When he Lends or leases it to third persons be by reason of expenses (CIVIL CODE, Art.
who are not members of his household; 1944).
Reason: Commodatum is purely personal Reasons:

(CIVIL CODE, Art. 1939). a. Ownership remains in the bailor; and
b. Only temporary use is given to the
c. When the thing loaned has been delivered bailee (DE LEON, supra at 22).
with Appraisal of its value unless there is a
stipulation exempting the bailee from Compensation shall not be proper when one of
responsibility in case of fortuitous event. the debts arises from a depositum or from the
obligations of a depositary or a bailee in
Reason: The law presumes that the parties commodatum (CIVIL CODE, Art. 1287).
intended that the borrower shall be liable for
the loss of the thing even if it is due to a Exception: When the bailor, knowing the flaws
fortuitous event for otherwise they would not of the thing loaned, does not advise the bailee of
have appraised the thing (Republic v. Bagtas, the same, the Bailor shall be liable for damages
G.R. No. L-17474, October 25, 1962). suffered by the bailee by reason therefor and
right of retention ceases when the bailee is
d. When, being able to Save either the thing reimbursed (CIVIL CODE, Art. 1951).
borrowed or his own things, he chose to save
the latter. The bailee cannot lawfully sell the thing to satisfy
the damages (DE LEON, supra at 23).
Reason: The bailee shows his ingratitude
after the thing is gratuitously loaned to him Retention or adverse claim of bailee cannot
(DE LEON, supra at 21). ripen into title by ordinary acquisitive prescription
(Catholic Vicar Apostolic of the Mt. Province v.
e. When the bailee Devoted the thing for a CA, G.R. No. L-80294-95, September 21, 1988).
different use from that agreed upon. This decision was however reversed by the
Supreme Court upon a Motion for
Reason: The bailee acted in bad faith. Reconsideration filed. The SC held that the right
of the bailor was defeated when the trust was
3. Liability for Deterioration due to the use of the repudiated by declaring the property for tax
thing (CIVIL CODE, Art. 1943); purposes under the bailee‟s name. From such
time, the bailee was in possession for 11 years
General Rule: Bailee is not liable and under Art. 555 of the Civil Code, it is clear
that the real right of possession of bailor over the
Exceptions: property was lost or no longer existing after the
a. If expressly stipulated (DE LEON, supra at 21- lapse of 10 years that bailee had been in
22).; adverse possession thereof (Catholic Vicar
b. If guilty of fault or negligence (CIVIL CODE, Apostolic of the Mt. Province v. CA, supra).
Art. 1170);
c. If he devotes the thing to any purpose 5. To pay for the expenses Other than those under
different from that for which it has been Arts. 1941 and 1949 of the Civil Code for the
loaned (CIVIL CODE, Art. 1942 (1)); and purpose of making use of the thing (CIVIL
d. If he uses the thing beyond the period CODE, Art. 1950).
stipulated (CIVIL CODE, Art. 1942 (2));.

475
(e.g. ordinary expenses for the preservation and Note: In case of precarium (Article 1947), the
expenses for ostentation) bailor can always demand the thing loaned at will.
There is no need for the existence of an act of
Note: In case there are two (2) or more bailees, ingratitude.
their obligation shall be solidary (CIVIL CODE,
Art. 1945). This is an example of a solidary Note: If the loan is for an illegal or immoral use
obligation by operation of law or legal solidarity (5 TOLENTINO, supra at 448), the contract is void
where solidarity is imposed by the law.(DE (CIVIL CODE, Art. 1409 (1) and (7)).
LEON, Comments and Cases on Obligations
and Contracts (2014), p. 220) [hereinafter, DE 2. Refund to the bailee extraordinary expenses
LEON, Obligations and Contracts]) incurred for the preservation of the thing,
provided that the bailee brings the same to the
Reason: To effectively safeguard the rights of knowledge of the bailor before incurring them,
the bailor (DE LEON, supra at 23). except when the reply to the notification cannot
be awaited without danger (CIVIL CODE, Art.
OBLIGATIONS OF THE BAILOR (RRL) 1949, par. 1).
1. Respect the duration of the loan (CIVIL CODE,
Art. 1946). Reason: It is the bailor who profits by said
expenses (DE LEON, supra at 29).
Reason: Bailor is bound by the terms of the
contract of commodatum which is for a certain Exception: Expenses caused by fortuitous
time (DE LEON, supra at 25). event on the occasion of the actual use of the
thing by the bailee, even though he acted
General Rule: He cannot demand return before without fault, loaned shall be borne by the bailor
expiration of the period or accomplishment of the and bailee alike on a 50-50 basis (Id.).
use (CIVIL CODE, Art. 1946).
Exception to the Exception:
Exceptions: Stipulation providing for a different
a. In case of urgent need of the thing, he may apportionment of expenses, or that expenses
demand its return or temporary use (CIVIL shall be borne by the bailee or bailor only (Id. at
CODE, Art. 1946); and 30).
Reason: Commodatum is essentially Notice is required because it is possible that the

gratuitous (DE LEON, supra at 25) bailor may not want to incur the extraordinary
expenses. An exception lies where they are so
Effect: If for a temporary use, the contract of urgent that the reply to the notification cannot be
commodatum is suspended while the thing is awaited without danger (Id. at 29).
in the possession of the bailor (CIVIL CODE,
Art. 1946). If the bailee is at fault, he alone should pay.
b. If the bailee commits any act of ingratitude 3. Be Liable to the bailee for damages for known
specified in Article 765: hidden flaws (CIVIL CODE, Art. 1951).
i. Bailee should commit some offenses
against the person, honor or property of the Requisites: (FHANS)
bailor, or of his wife or children under his a. Existence of Flaw or defect;
parental authority; b. The flaw or defect is Hidden;
ii. Bailee imputes to the bailor any criminal c. The bailor is Aware thereof;
offense, or any act involving moral turpitude, d. Bailor does Not advise the bailee of the same;
even though he should prove it, unless the and
crime or the act has been committed against e. The bailee Suffers damages by reason of said
the bailee himself, his wife or children under flaw or defect.
his authority; and
iii. Bailee unduly refuses the bailor support If the above requisites concur, the bailee has the
when the bailee is legally or morally bound right of retention for damages (CIVIL CODE, Art.
to give support to the bailor (CIVIL CODE, 1944).
Art. 1948).
The bailor is made liable for his bad faith (DE
Reason: Like a donation, commodatum is LEON, supra at 30-31).
essentially gratuitous (DE LEON, supra at 28).

476
3
If the defect is not known to the bailor, he is not Illustration:
liable because commodatum is gratuitous (Id. at Borrower X placed his money loaned inside his
31). cabinet. The night after, his house, together with the
money, was turned into ashes.
No Right of Abandonment X is not excused to pay the thing loaned because he
The bailor cannot exempt himself from the payment is not required to return the bills with the same serial
of expenses or damages by abandoning the thing to numbers, but the same amount of the loan.
the bailee (CIVIL CODE, Art. 1952).
No estafa is committed by a person who refuses to
Reason: The expenses or damages may exceed pay his debt per se as the borrower effectively
the value of the thing loaned, and it would, therefore, acquires ownership and being the owner, he can
be unfair to allow the bailor to just abandon the thing dispose of the thing borrowed and his act will not be
instead of paying for said expenses and/or damages considered misappropriation thereof (Id. at 34).
(DE LEON, supra at 31-32).
Basis:
A person who receives a loan of money or any other
fungible thing acquires the ownership thereof, and is
M UTUUM bound to pay the creditor an equal amount of the
( ARTS . 1953 – 1955) same kind and quality (CIVIL CODE, Art. 1953).
Note: No person shall be imprisoned for non-

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

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

477
Loan v. Sale shall pay its value at the time of the perfection
Loan Sale of the loan (CIVIL CODE, Art. 1955, par. 2).
As to Nature
Real contract. Consensual contract.
As to Obligations
I NTEREST
Generally unilateral ( A RTS . 1956 – 1961)
because only the Bilateral and
borrower has reciprocal.
obligations. Requisites for Demandability of Interest: (WEL)
1. The agreement must be in Writing;
Note: If the property is “sold”, but the real intent is 2. Must be Expressly stipulated (CIVIL CODE, Art.
only to give the object as security for a debt – as 1956); and
when the “price” is comparatively small – there really
is a contract of loan with an “equitable mortgage” Exceptions:
(CIVIL CODE, Art. 1602[6]). a. Indemnity for damages (CIVIL CODE, Art.
2209); and
Barter b. Interest accruing from unpaid interest (CIVIL
A contract whereby one person transfers ownership CODE, Art. 2212)
of non–fungible things to another with the obligation 3. Must be Lawful (DE LEON, supra at 40).
on the part of the latter to give things of the same
kind, quality and quantity (CIVIL CODE, Art. 1954). Interest may be paid either as compensation for the
use of the money (monetary interests) or as
Commodatum/ Mutuum v. Barter damages (compensatory interest). Article 1956 of
Commodatum/ the Civil Code refers to interest for use of money (Id.
Barter at 41).
Mutuum
As to Subject Matter
The right to interest arises only by virtue of a
In mutuum, the subject Subject matter is non- contract or by virtue of damages for delay or failure
matter is money or fungible, (non- to pay principal on which interest is demanded (3
fungible things. consumable) things. PARAS, supra at 901).
As to Return of the Subject Matter
Article 1956 provides that no interest shall be due
The thing with unless it has been expressly stipulated in writing.
In commodatum, the
equivalent value is
bailee is bound to Note: If stipulated, the interest must be paid from
given in return for
return the identical the time it falls due.
what has been
thing borrowed.
received.
As to Cause or Consideration Stipulation of a Particular Interest Rate
If a particular rate of interest has been expressly
Mutuum may be stipulated by the parties, that interest, not the legal
Always onerous, and
gratuitous and rate of interest, shall be applied (Casa Filipina
is actually a mutual
commodatum is Development Corp v. Deputy Executive Secretary,
sale.
essentially gratuitous. G.R. No. 96494, May 28, 1992).
(DE LEON, supra at 38)
Anent the payment of legal interest, the Supreme
Forms of Payment: Court laid down the guidelines regarding the manner
1. If the thing loaned is money, payment must be of computing legal interest in Eastern Shipping
made in the currency stipulated, if it is possible Lines, Inc. v. CA, as follows, among others:
to deliver such currency; otherwise, that which 1. The legal interest on loans or forbearance of
is legal tender in the Philippines. In case of money shall be 12% per annum from judicial or
extraordinary inflation or deflation, payment extrajudicial demand, in the absence of
shall be in the value of the currency at the time stipulation to the contrary;
of the creation of the obligation (CIVIL CODE, 2. For breached obligations not consisting of loans
Arts. 1249, 1250 and 1955 par. 1). or forbearance of money, an interest on
damages may be imposed at the discretion of
2. If the thing loaned is other than money, the the court at the rate of 6% per annum; and
borrower is under obligation to pay the lender 3. Judgment of court awarding sum of money that
another thing of the same kind, quality and becomes final and executory, whether the
quantity even if it should change in value. In judgment falls under 1 or 2 above, the legal rate
case it is impossible to do so, the borrower

478
3
of interest shall be 12% per annum from finality reasonable ascertained. The actual base for
to satisfaction. (G.R. No. 97412, July 12, 1994) computation of legal interest shall be on the
amount finally adjudged.
The foregoing ruling in Eastern Shipping Lines
has now been modified by Bangko Sentral ng d. When judgment of court awarding sum of
Pilipinas Monetary Board Circular No. 799, money becomes final and executory, whether
Series of 2013, which provides that “the rate of the case falls on forbearance or non-
interest for loan or forbearance of any money, goods forbearance of money, the rate of legal
or credits and the rate allowed in judgments, in the interest shall be 6% per annum from such
absence of an express contract as to such rate of finality until its satisfaction, the interim period
interest, shall be 6% per annum.” Said circular took being an equivalent to forbearance of money.
effect on July 1, 2013.
e. Effectivity of new legal rate of interest:
Applying Circular 799, the Supreme Court Judgments that have become final and
summarized in Nacar v. Gallery Frames, G.R. No. executory prior to July 1, 2013 shall not be
189871, August 13, 2013, the new guidelines on disturbed. The 12% and 6% per annum legal
legal interest, as follows: interests shall apply until June 30, 2013.
1. When an obligation, regardless of its source,
(i.e., law, contracts, quasi-contracts, delicts or Sta. Maria, however, after the issuance of said
quasi-delicts) is breached, the contravenor can circular, prior to the promulgation of Nacar,
be held liable for damages and the provisions submitted that Circular 799 is invalid in view of the
under Title XVIII on Damages of the Civil Code Supreme Court‟s ruling in Siga-an v. Villanueva,
govern in determining the measure of G.R. No. 173227, January 20, 2009, which Article
recoverable damages; 2209, providing for legal interest of 12% per annum
as legal interest imposed as indemnity for damages
2. For the award of interest in the concept of actual in the absence of stipulation on interest. Sta. Maria
and compensatory damages, the rate of interest submits that a circular cannot repeal the 12%
and its accrual is imposed as follows: interest and make it 6%.
a. For breach of obligations consisting of loan or Factors That he Monetary Board Consider in
forbearance of money, interest due shall be Fixing The Maximum Rates or Rates of Interest:
that stipulated in writing. Interest due shall 1. The existing economic conditions in the country
itself earn legal interest from the time it is and the general requirements of the national
judicially demanded. economy;
2. The supply of and demand for credit;
b. In the absence of stipulation, the rate of 3. The rate of increase in the price levels; and
interest shall be 6% per annum, computed 4. Such other relevant criteria as the Monetary
from default, (i.e., judicial or extrajudicial Board may adopt (P.D. 116, Sec. 6).
demand) subject to the provisions of Art. 1169
of the Civil Code); Notably, however, it was BSP Circular No. 416, July
29, 1974, which increased the interest to be
c. For breached obligations not consisting of imposed on judgments involving forbearance of
loan or forbearance of money, interest on credit from 6% under Art. 2209 to 12%. Originally,
amount of damages awarded may be Art. 2209 only made mention of a 6% rate and not
imposed at the discretion of the court at the 12%. The Supreme Court also already took notice of
rate of 6% per annum. No interest shall be Circular 799, which revised the interest rate for loan
adjudged on unliquidated claims or damages, or forbearance of money, goods or credit, to 6%,
except when or until demand can be and even applied the same in rulings subsequent to
established with reasonable certainty. the circular‟s issuance (S.C. Megaworld
Construction and Development Corporation v.
i. Where demand is established with Parada, G.R. No. 183804, September 11, 2013;
reasonable certainty, interest begins to run Nacar v. Gallery Frames, supra)
from time claim is made
judicially/extrajudicially; In Advocates for Truth in Lending, Inc., v. Bangko
Sentral Monetary Board, G.R. No. 192986, January
ii. When certainty cannot be reasonable 15, 2013, the Supreme Court affirmed the authority
established at the time demand is made, of the BSP Monetary Board (“BSP-MB”) to set
interest runs from date judgment of the court interest rates and to issue and enforce circulars
is made, at which time quantification of when it rules that the BSP-MB may prescribe the
damages may be deemed to have been maximum rates of interest for all loans or renewals

479
therefor or the forbearance of any money, goods or Exceptions:
credits, including those for loans of low priority such 1. When judicially demanded (CIVIL CODE, Art.
as consumer loans and loans made by pawnshops, 2212); and
finance companies and similar credit institutions. 2. When there is an express stipulation that the
The BSP-MB is also authorized to prescribe different interest due shall be added to the principal
maximum rates for different types of borrowings, obligation and the resulting total amount shall
including deposits and deposit substitutes or loans earn interest (DE LEON, supra at 51-52).
of financial intermediaries. This ruling was again
affirmed by the Supreme Court in Nacar v. Gallery Increase in Interest Rate
Frames, G.R. No. 189871, August 13, 2013. No increase in interest shall be due unless such
increase has also been expressly stipulated
The Supreme Court modified the interest rate (Security Bank & Trust Co., v. RTC Makati, G.R. No.
imposed by the lower courts to 6% per annum in the 113926, October 23, 1996; Spouses Toring v.
absence of any stipulation in writing in accordance Ganzon-Olan, G.R. No. 168782, October 10, 2008).
with Article 2209 of the Civil Code. It is to be
imposed from the time of the extrajudicial demand It was held that the unilateral determination and
by respondent (First United Constructors Corp. v. imposition of increased rates is violative of the
Bayanihan Automotive Corp., G.R. No. 164985, principle of mutuality of contracts ordained in Article
January 15, 2014). 1308 of the Civil Code (NSBCI v. PNB, G.R. No.
148753, July 30, 2004).
In Sps. Andal v. Philippine National Bank (G.R. No.
Liability for Interest in the Absence of
194201, November 27, 2013), the issue is whether
Stipulation
debtors shall be liable for interest on a loan after the
1. Indemnity for Damages
exorbitant stipulated interest thereon and the
subsequent foreclosure of property that secured A debtor in delay is liable to pay legal interest
(DE LEON, supra at 42).
said loan, was nullified in another case that became
final and executory. The Supreme Court ruled that
The obligation consisting in the payment of sum
the fact that the rate of interest was subsequently
of money referred to in Art. 2209 of the Civil
declared illegal and unconscionable does not entitle
Code is not confined to a loan or forbearance of
said debtors to stop payment of interest. Only the
rate of interest was declared void. The debtors are money but also covers cases involving default in
considered in default from the date of finality of the the payment of price or consideration under a
contract of sale, an action for damages for injury
other case and not during the time they were unable
to persons, and loss of property and an action
to pay the stipulated interest as it was exorbitant and
for damages arising from unpaid insurance
hence, declared void. The other case became final
claims (Castelo v. CA, G.R. No. 96372, May 22,
and executory on May 20, 2011. Applying Nacar, it
1995).
was ruled that the legal rate of interest of 12% per
annum shall apply from May 20, 2011, the date of
Interest as indemnity for damages is payable
default, until June 30, 2013. From July 1, 2013 until
only in case of default or non-performance of the
fully paid, the legal rate of 6% per annum shall be
contract. As they are distinct claims, they may
applied.
be demanded separately (Sentinel Insurance v.
Instances When Interest Does Not Begin To Run: CA, G.R. No. L-52482, February 23, 1990).
1. During the effectivity of the moratorium law,
2. Interest Accruing From Unpaid Interest
which has the effect of suspending the collection
Interest due shall earn interest from the time it is
of payment of the principal obligation, which
judicially demanded although the obligation is
carries the accessory obligation in the payment
silent upon this point. (CIVIL CODE, Art. 2212)
of interest;
2. In case of insolvency of the bank, when the
Exception:
Bangko Sentral prohibits the bank from doing
Where the court‟s judgment, which did not
business; and
provide for the payment of interest has already
3. Despite defective consignation, from the time of
become final, no interest may be awarded (Ruiz
the offer and tender of payment (5 TOLENTINO,
supra at 452). v. Caneba, G.R. No. 84884, December 3, 1990).
Rule on Accrued Interest

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

480
3
Exceptions: DISCOUNTING
a. If there is agreement to this effect (CIVIL 1 Interest is deducted in advance from the
CODE, Art. 1959). proceeds of the principal obligation.
Compounding Interest Illustrations:

An express stipulation whereby the interest The stipulated rate of interest is 6%. If the
due an unpaid shall be added to the principal principal amount loaned is P10,000, how much
obligation and resulting total amount shall is the interest?
earn interest (DE LEON, supra at 52).
Answer: P10,000 x 0.06 = P600
b. When judicially demanded under Article 2212
of the Civil Code. 2 Instead of giving P10,000 as proceeds, only
P9,400 was given. P600 was deducted in
Formula in Computing Interest for Loan or advance but the amount to be returned is
Forbearance of Money: P10,000. What is the interest rate?
TOTAL AMOUNT DUE = [principal + interest + Answer: Divide the amount of interest by the
interest on interest] – partial payments made actual amount received by the borrower.
INTEREST = principal x stipulated interest x number 600 / 9400 = 6.38%

of years from due date until finality of judgment
Should the vendee opt to purchase a subdivision
INTEREST ON INTEREST = Interest computed as lot via the installment payment system, he is, in
of the filing of the complaint x 6% x no. of years until effect, paying interest on the cash price, whether
finality of judgment the fact and rate of such interest payment are
disclosed in the contract or not (Relucio v.
Note: Total amount due as of the date of the finality Brillante-Garfin, G.R. No. 76518, July 13, 1990).
of judgment will earn an interest of 6% per annum
until fully paid (Nacar v. Gallery Frames, supra; Liability for Surcharges and Penalties
Bangko Sentral ng Pilipinas Monetary Board The essence or rationale for the payment of interest
Circular No. 799, Series of 2013). is separate and distinct from that of surcharges and
penalties (DE LEON, supra at 47).
Illustrations:
Under a written contract of loan, B obliged himself to A penalty stipulation is not necessarily preclusive of
pay A the sum of P20,000 at the end of the year. interest, if there is an agreement to that effect, the
two (2) being distinct concepts which may
If no payment of interest was mentioned, then no separately be demanded (Ibid.)
interest is due.
If B incurs in delay, he is liable to pay interest at the
legal rate which is 6% per annum or P1,200 from the USURY
date of delay. Usury may be defined as contracting for or receiving
something in excess of the amount allowed by law
Suppose that A and B stipulated in their contract an for the loan or forbearance of money, goods or
interest of %18 a year which is lawful. In this case, chattels (Id. at 57).
all the requirements to entitle A to recover interest
are present. If B incurs in delay, he is liable to pay Contracts and stipulations, under any cloak or
the interest agreed upon as damages and not for the device whatever, intended to circumvent the laws
use of the money. against usury shall be void. The borrower may
recover in accordance with the laws on usury (CIVIL
B incurred in delay for one year. The indemnity for CODE, Art. 1957).
damages shall also be the stipulated interest of %18
so that B shall be liable to pay a total of P7,200: Pursuant to Central Bank Circular No. 905,
P3,600 as compensatory interest for the first year adopted on December 22, 1982, the Supreme Court
and another P3,600 as indemnity for the damages declared that the Usury Law is now "legally
for the one year delay. inexistent" (Liam Law v. Olympic Sawmill Co., G.R.
No. L-30771, May 28, 1984).
If the interest was judicially demanded six months
after B incurred in delay, the interest due (P3,600 + However, C.B. Circular 905 did not repeal nor in
P1,800 = P5,400) shall earn a legal interest of %6 anyway amend the Usury Law but simply
from the time until payment is made. suspended the latter's effectivity (Security Bank and

481
Trust Company v. RTC of Makati, Branch 61, G.R. The presence of escalation clause without the
No. 113926, October 23, 1996). corresponding de-escalation clause in the event of a
reduction of interest as ordered by law makes the
Usury is now legally non-existent. The interest clause one-sided as to make it unreasonable. Any
chargeable depends upon the agreement between increase in the interest rate pursuant to an
the lender and the borrower (Liam Law v. Olympic escalation clause must be the result of an
Sawmill Co., supra). agreement between the two parties. Increases
unilaterally imposed by a bank are in violation of the
Validity of Unconscionable Interest Rate in a principle of mutuality of contracts (PNB v. CA, G.R.
Loan No. 109563, July 9, 1996; Equitable PCI Bank v. Ng
General Rule: Interest stipulated by the contracting Sheung Ngor, G.R. No. 171545, December 19,
parties is valid. 2007).
Exception: If the interest is unconscionable.

D EPOSIT
The Supreme Court said that nothing in said circular
suspending the Usury Law grants lenders authority ( A RTS . 1962 – 2009)
to raise interest rates to levels which will either
enslave their borrowers or lead to a hemorrhaging of
their assets (Sps. Almeda v. CA, G.R. No. 113412, CONTRACT OF DEPOSIT
April 17, 1996). A contract constituted from the moment a person
receives a thing belonging to another, with the
In Medel v. CA (G.R. No. 131622, November 27, obligation of safely keeping it and of returning the
1998), it was ruled that while a stipulated interest of same (CIVIL CODE, Art. 1962).
5.5% per month on a loan is not usurious pursuant
to C.B. Circular 905, the same must be equitably Principal Purpose: SAFEKEEPING
reduced for being iniquitous, unconscionable and
exorbitant. It is contrary to morals (contra bonos If „safekeeping‟ is not the principal purpose it may
mores). It was reduced to 12% per annum in be:
consonance with justice and fair play. 1. Commodatum;
2. Lease; or
When the agreed rate is iniquitous and 3. Agency (CIVIL CODE, Art. 1962).
unconscionable, the courts may reduce the same as
reason and equity demand (Imperial v. Jaucian, Characteristics: (RUB)
G.R. No. 149004, April 14, 2004). The interest may 1. Real contract – perfected by the delivery of the
also be reduced if the principal obligation has been subject matter (CIVIL CODE, Art. 1316).
partially performed.
An agreement to constitute a deposit is binding,
Recovery of Unstipulated Interest but the deposit itself is not perfected until the
If paid by mistake, the debtor may recover as in the delivery of the thing (CIVIL CODE, Art. 1963).
case of solutio indebiti or undue payment (CIVIL
CODE, Art. 1960). Where there has been no delivery, there is
merely an agreement to deposit, which however
Note: If voluntarily paid, there would be no recovery is binding and enforceable on the parties. Such
as in the case of natural obligations (CIVIL CODE, agreement is consensual (DE LEON, supra at
Art. 1423). 112).
Escalation Clause must have de-escalation 2. Unilateral – when gratuitous because only the
clause depositary has an obligation.
Escalation clauses refer to stipulations allowing an 3. Bilateral – if with compensation because it gives
increase in the interest rate agreed upon by the rise to obligations on the part of both the
contracting parties (Juico v. China Banking Corp., depositary and depositor (DE LEON, supra at
G.R. No. 187678, April 10, 2013). 110).
De-escalation clause is a stipulation that the rate of

interest agreed upon shall be reduced in the event
that the maximum rate of interest is reduced by law
or by the Monetary Board (DE LEON, supra at 95-
96).

482
3
Deposit v. Mutuum Deposit v. Sale and Barter
Deposit Mutuum Deposit Sale and Barter
As to Purpose As to Transfer of Ownership
For safekeeping or Ownership is not Ownership is
Consumption. transferred. transferred upon
custody.
delivery.
As to Nature
Movable/corporeal Real Consensual
things only in case of As to Consideration
extrajudicial deposit. Money or fungible Generally gratuitous Always onerous
things.
Any property in case Kinds of Deposit: (CIVIL CODE, Art.1964)
of judicial deposit. 1. Judicial or Sequestration – takes place when
As to Relationship an attachment or seizure of property in litigation
Depositor and is ordered (CIVIL CODE, Art. 2005-2008)
Lender and borrower.
depositary. 2. Extra-judicial
As to Compensation a. Voluntary – delivery is made by the will of the
Generally gratuitous depositor or by two or more persons each of
(except by mutual whom believes himself entitled to the thing
May be gratuitous, or deposited (CIVIL CODE, Arts. 1968 to 1995).
agreement or
with a stipulation to The depositor has complete freedom in
depositary is
pay interest. choosing the depositary (DE LEON, supra at
engaged in storing
goods). 112).
b. Necessary – made in compliance with:
i. A legal obligation;
Depositor can Period must be ii. On occasion of any calamity;
demand return respected by the iii. By travelers in hotels and inns; or
anytime. lender. iv. By travelers with common carriers.
(DE LEON, supra at 111).
Note: There is a lack of free choice in the
Deposit v. Commodatum depositor (Id. at 115).
Deposit Commodatum
As to Purpose Judicial v. Extra-judicial Deposit
Purpose is the Judicial Extra-Judicial
transfer of the use. As to Creation
Purpose is
Will of the parties or
safekeeping. Will of the court.
contract.
As to Purpose
As to Time of Return Insures the right of a
Custody and
The borrower can use party to property or to
safekeeping of the
the thing for the period recover in case of
thing deposited.
stipulated, and can be favorable judgment.
The depositary can As to Subject Matter
required to return only
always be required to Movables only (CIVIL
in case of urgent need
return the thing at any May cover movable CODE, Art.1966)
or when the bailee
time. as well as immovable
has committed any of
the acts of ingratitude property (DE LEON, Reason: Object is
under Art. 765. supra at 114). safekeeping. The
possibility that the
Reason: The purpose thing may disappear
Movable / corporeal of the deposit is to or may be lost or
things only in case of protect the rights of stolen is not present in
Both movable and
extrajudicial deposit. parties to a suit. real property.
immovable may be
the object.
Any property in case As to Cause
of judicial deposit. Always onerous. Generally gratuitous.
As to Compensation As to Time of Return
Essentially and Upon order of the
May be gratuitous. Upon demand of
always gratuitous. court or when litigation
depositor.
is ended.

483
As to In whose behalf it is held against him for its recovery (CIVIL CODE, Art.
Person who has a 1971).
Depositor
right
(DE LEON, supra at 165) Note: A third person is considered to have acted in
bad faith if he has actual knowledge of the
General Rule: A deposit is a gratuitous contract incapacity of the depositary and if he has knowledge
(CIVIL CODE, Art.1965). that the thing is subject to the contract of deposit.
Exceptions: (SES) OBLIGATIONS OF A DEPOSITARY

1. When there is a Stipulation;
2. Depositary is Engaged in business of storing Obligation 1: To keep the thing safely (CIVIL
goods; and CODE, Art. 1972).
3. Property is Saved from destruction without
knowledge of the owner (CIVIL CODE, Art. Rules:
2169). He is liable if the loss occurs through his fault or
negligence (CIVIL CODE, Art. 2207), even if the
Note: When two or more persons, each of whom thing is insured (CIVIL CODE, Art. 1170).
believes himself to be entitled to the thing deposited
with a third person, the depositary shall deliver it to The loss of the thing while in his possession
the person to whom it belongs. The remedy of the ordinarily raises the presumption of fault on his part
depositary is to file an action for interpleader (CIVIL CODE, Art. 1265).
(RULES OF COURT, Rule 62, Sec. 1).
Degree of Care:
Note: The depositor need not be the owner of the If the contract does not state the diligence which is
thing deposited because the purpose of the contract to be observed in the performance, that of a good
is safekeeping and not transfer of ownership. The father of a family shall be required (CIVIL CODE,
depositary cannot dispute the title of the depositor Art. 1972, 1173, Par 2.)
(CIVIL CODE, Art. 1984, Par. 1). The depositary is
estopped (CIVIL CODE, Art. 1436). Reasons:
1. It is an essential requisite of the judicial relation
A contract of deposit may be made orally or in which involves the depositor‟s confidence in
writing (CIVIL CODE, Art. 1969). good faith and trustworthiness.
2. Presumption that the depositor, in choosing the
Reason: No written form is required because the depositary, took into account the diligence which
contract is real, and thus, the delivery itself the depositary is accustomed with respect to his
constitutes performance which will evidence the own property (DE LEON, at 120).
perfection of the contract.
Exceptions:
Effects of The Incapacity of the Depositary or The required degree of care is extraordinary
Depositor: diligence when:
1. If the depositary is capacitated, he is subject 1. It is the depositary who voluntarily offered to
to all the obligations of a depositary whether the keep the thing;
depositor is capacitated or not (CIVIL CODE, 2. The deposit is compensated; or
Art. 1970). 3. The deposit produces benefit to the depositary
(5 TOLENTINO, supra at 460).
Note: Under the law, “persons who are capable
cannot allege the incapacity of those with whom Obligation 2: To return the thing (CIVIL CODE,
they contracted” (CIVIL CODE, Art. 1397). Art. 1972).
2. If the depositary is incapacitated, he does not Person to Whom the Thing Must Be Returned:
incur the obligation of a depositary. However, he 1. Depositor, his heirs and successors, or the
is liable to: person who may have been designated in the
a. Return the thing deposited while still in his contract (CIVIL CODE, Art. 1972);
possession; or
b. Pay the depositor the amount by which he Note: If there are two or more persons each
may have benefited himself with the thing or claiming to be entitled to a thing, the depositary
its price subject to the right of any third person can file an action to compel the depositors to
who acquired the thing in good faith, in which interplead among themselves (RULES OF
case the depositor may only bring an action COURT, Rule 62, Sec. 1).

484
3
2. Guardian or administrator of the person who sum or other thing to the depositor (CIVIL
made the deposit if the latter is incapacitated at CODE, Art. 1990).
the time of deposit or the latter himself should he
acquire capacity (CIVIL CODE, Art. 1970); Where to Return:
1. If there is a stipulation, at the place agreed upon
3. Legal representative of the depositor should the by the parties but the depositor bears the
latter subsequently lose his capacity during the expenses for transportation.
deposit (CIVIL CODE, Art. 1986). 2. If there is no stipulation, at the place where the
thing deposited might be even if it should not be
Time of Return: the same place where the deposit was made
General Rule: Upon demand even though a provided there was no malice on the part of the
specified period or time for such return may have depositary (CIVIL CODE, Art. 1987).
been fixed (CIVIL CODE, Art.1988).
Obligation 3: Not to deposit the thing with a third
Reason: The period is for the benefit of the person unless authorized by express stipulation
depositor, but may be validly waived by him (CIVIL CODE, Art. 1973).
(5 PARAS, supra at 947).
Reason: Deposit is founded on trust and confidence
Exceptions: (DE LEON, supra at 124).
1. It cannot be returned upon demand when the
thing is judicially attached while in the The depositary is liable for the loss under the
depositary‟s possession (CIVIL CODE, Art. following instances:
1988, Par. 2); 1. He transfers the deposit with a third person
without authority, although there is no
Reason: The property will be subject to judicial negligence on his part and the third person;
orders. 2. He deposits the thing with a third person who is
manifestly careless or unfit, although authorized,
2. The deposit cannot be returned upon demand if even in the absence of negligence; and
the depositary has been notified of the 3. The thing is lost through the negligence of his
opposition of a third person to the return or employees whether the latter are manifestly
removal of the thing deposited. The depositor careless or not (CIVIL CODE, Art. 1973).
may claim to be the owner (5 PARAS, supra at
947); and Exemption from Liability: The depositary is not
responsible in case the thing is lost without
3. If deposit is gratuitous, the depositary may return negligence of the third person with whom he was
the thing deposited notwithstanding that a period allowed to deposit the thing if such third person is
has been fixed for the deposit if justifiable not “manifestly careless or unfit” (DE LEON, supra
reasons exist for its return. If the depositor at 124)
refuses to receive it, the depositary may secure
its consignation from the court (CIVIL CODE, Note: The depositary is responsible for the loss
Art. 1989). through the fault of his employees under the
principle of respondeat superior.
If the deposit is for a valuable consideration,
period must be followed even if the depositary Obligation 4: To change the way of the deposit if
suffers inconvenience as a consequence (CIVIL under the circumstances, the depositary may
CODE, Art 1989). reasonably presume that the depositor would
consent to the change if he knew of the facts of
Note: In cases under (1) and (2), the depositary the situation, provided, that the former notifies
must immediately inform the depositor of the the depositor thereof and wait for his decision,
attachment and opposition (CIVIL CODE, Art. unless delay would cause danger (CIVIL CODE,
1988, Par. 2). Art. 1974).
What to Return: Obligation 5: If the thing deposited should earn

1. The thing deposited with all its products, interest:
accessories, and accessions (CIVIL CODE, Art. 1. To collect interest and the capital itself as
1983, Par. 1); they fall due; and
2. If by force majeure or government order, the 2. To take steps to preserve its value and rights
depositary loses the thing, and receives money with regard to it (CIVIL CODE, Art. 1975).
or another thing in its place, he shall deliver the

485
If a promissory note has been dishonored by non- to prove that permission has been given (CIVIL
payment, the depository must give notice of CODE, Art. 1978).
dishonor to the indorsers so that the latter will not be
discharged from liability. (DE LEON, supra at 125) Effect If Permission To Use Is Given:
1. If the thing deposited is non-consumable:
Article 1975 of the Civil Code cannot apply to a The contract loses the character of a deposit
depositary of certificates, bonds, securities or and acquires that of a commodatum.
instruments, which earn interest if such documents
are kept in a rented safety deposit box (CA Agro Exception: if safekeeping is still the principal
Industrial Development Corp. v. CA, G.R. No. purpose of the contract.
90027, March 3, 1993).
. 2. If the thing deposited is money or other
A contract for the rent of safety deposit boxes is a consumables:
special kind of deposit. It is not to be strictly The permission to use it will result in its
governed by the provisions on deposit. It is a consumption and converts the contract into a
contract of bailment for hire and mutual benefit. The simple loan or mutuum (DE LEON, supra at
relation between the bank and its customer is that of 133).
a bailor and bailee. It cannot also be characterized
as an ordinary contract of lease because full and Prescription of Demand to Return
absolute control of the safety deposit boxes was not Things received on deposit do not prescribe, for the
given to the joint renters. depositary cannot claim that ownership of the thing
deposited was transferred to him, but simply the
Obligation 6: Not to commingle things of the custody thereof. The possession of the depositary
same kind and quality deposited if so stipulated is not adverse to that of the depositor (Delgado v.
(CIVIL CODE, Art. 1976). Bonnevie, G.R. No. 7097, October 23, 1912).
Exception: Depositary can only commingle if the Obligation 8: To be liable for loss through
articles are: fortuitous event: (SUDA)
1. Same kind and quality; and 1. If Stipulated;
2. There is no contrary stipulation. 2. If he Uses the thing without the depositor's
permission;
If commingling is allowed, each depositor shall be 3. If he Delays its return; and
entitled to each portion of the entire mass as the 4. If he Allows others to use it, even though he
amount deposited by him bears to the whole. himself may have been authorized to use the
same (CIVIL CODE, Art. 1979).
If the articles deposited, belonging to different
depositors, are not of the same kind and quality, it is Obligation 9: Liability when the thing deposited
the duty of the depositary to keep them separate or is delivered closed and sealed
at least identifiable (DE LEON, supra at 132). 1. To return the thing deposited in the same
condition;
Obligation 7: Not to make use of the thing 2. To pay for damages should the seal or lock be
deposited unless authorized (CIVIL CODE, Art. broken through his fault, which is presumed
1977). unless proven otherwise; and
3. To keep the secret of the deposit when the seal
General Rule: Deposit is not for the use but for the or lock is broken with or without his fault (CIVIL
safekeeping of the subject matter. Unauthorized use CODE, Art. 1981).
by the depositary would make him liable for
damages (DE LEON, supra at 133). Reason: Without the rule, irresponsible depositaries
Exceptions: may violate their trusts with impunity.
1. Even without the express permission of the
depositor when the preservation of the thing The depositary is authorized to open the thing
deposited requires its use; or deposited, which is closed and sealed, when there
is:
Note: It must be used only for that purpose. a. Presumed authority, such as if the key has
been delivered to him; or
2. When expressly permitted by the depositor. b. Necessity to do so as when the instructions
of the depositor as regards the deposit cannot
The permission to use is not presumed except when be executed without opening the box or
such use is necessary for the preservation of the receptacle (CIVIL CODE, Art. 1982).
thing deposited and the burden is on the depositary

486
3
Obligation 10: Obligation to return products, A bank can compensate or set off the deposit in its
accessories, and accessions (CIVIL CODE, Art hands for the payment of any indebtedness to it on
1983). the part of the depositor (Gullas v. Philippine
National Bank, G.R. No. L-43191, November 13,
Reason: The depositor is the owner or at least 1935). In true deposit, such compensation or set-off
represents the owner of the thing deposited. The is not allowed (CIVIL CODE, Art. 1287).
products, accessions and accessories are
consequences of ownership (DE LEON, supra at Irregular Deposit v. Mutuum
135). Irregular Deposit Mutuum
As to Demand by the Depositor
Obligation 11: To pay interest on sums The lender cannot
The consumable thing
converted to personal use from the day of demand restitution until
deposited may be
conversion if the deposit consists of money the time for payment,
demanded at will by the
(CIVIL CODE, Art. 1983 and 1896). as provided in the
depositor.
contract, has arisen.
Reason: If what has been deposited is money, the As to Accrual of Benefit
depositary has no right to make use of it. Therefore, Essential cause for the
The only benefit is that
he is not liable to pay interest. transaction is the
which accrues to the
necessity of the
depositor.
However, if the depositary be in delay or has used borrower.
the money without permission, he shall be liable for As to Preference of Credit
interest as indemnity. The depositary owes interest The irregular depositor
on the sums he has applied to his own use from the Common creditors
has a preference over
day on which he did so, and those which he still enjoy no preference in
other creditors with
owes after the extinguishment of the deposit (DE the distribution of the
respect to the thing
LEON, supra at 145). debtor‟s property.
deposited.
(DE LEON, supra at 134-135)
Note: Fixed, savings, and current deposits of money
in banks and similar institutions shall be governed Obligation 12: To advise the true owner that a
by the provisions concerning simple loan (CIVIL deposit has been made should he discover that
CODE, Art. 1980). the thing deposited was stolen from the owner
(CIVIL CODE, Art. 1984).
Bank deposits, which are in the nature of a simple
loan or mutuum, must be paid upon demand by the
However, as a general rule, the depositary cannot
depositor (Metropolitan Bank & Trust Company v.
demand that the depositor prove his ownership of
Rosales, G.R. No. 183204, January 13, 2014). the thing deposited (CIVIL CODE, Art. 1984, Par. 1).
Irregular Deposit – if safekeeping is still the Note: If the owner, despite such information, does
principal purpose of the contract although there is a not claim it within the period of one (1) month, the
permission to use the consumable thing (DE LEON,
depositary shall be relieved from all responsibility by
supra at 133). returning the same to the depositor (CIVIL CODE,
Art. 1984, Par. 3).
Bank deposits are in the nature of irregular deposits.
These are really loans because they earn interest. If the depositary has reasonable grounds to believe
They are governed by the law on loans (Bank of the
that the thing has not been lawfully acquired by the
Philippine Islands v. CA, G.R. No. 104612, May 10, depositor, the former may return the same (CIVIL
1994). CODE, Art. 1984, Par. 4).
While the bank has the obligation to return the Rule When There Are Two Or More Depositors:
amount deposited, it has however, no obligation to
Divisibility of Obligation of
return or deliver the same money that was deposited
Thing Two or More Effect
(Guingona, Jr. v. City Fiscal of Manila, G.R. No. L-
Deposited Depositors
60033, April 4, 1984).
Each one can
Divisible Not solidary demand only
The relation between a depositor and a bank is that
his share.
of a creditor and a debtor. The depositor (creditor)
The
lends the bank (debtor) money and the bank agrees
Regardless of Solidary depositary
to pay the depositor on demand (DE LEON, at 139)
divisibility/ can return the
.
Indivisibility thing to any of
the

487
depositors. The law refers to necessary expenses. Useful
expenses or those for pure luxury or mere
Except: pleasure are not covered (DE LEON, supra at
When there 152).
has been a
demand Note: If the deposit is for a valuable
judicial or consideration, expenses for preservation are
extrajudicial, borne by the depositary unless there is a
for its return contrary stipulation.
has been
made by one 2. To pay for losses incurred by the depositary
of them, due to the character of the thing deposited
payment (CIVIL CODE, Art. 1993).
should be
made to him General Rule: The depositor shall reimburse the
(CIVIL CODE, depositary for any loss arising from the character
Art. 1214) of the thing deposited.
The same
rule when the Exceptions:
obligation is a. At the time of the deposit, the depositor was
Solidary/not not aware of the dangerous character of the
Indivisible solidary,
solidary thing;
regardless of
divisibility. b. Depositor was not expected to know the
dangerous character of the thing;
Note: If there is a stipulation that the thing should c. Depositor notified the depositary of the same;
be returned to one of the depositors, the depositary and
shall return it only to the person designated (CIVIL d. The depositary was aware of it without advice
CODE, Art. 1985, Par. 2). from the depositor.
Depositary’s Right of Retention EXTINGUISHMENT OF VOLUNTARY DEPOSIT

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

488
3
NECESSARY DEPOSIT
A deposit is necessary when: This also applies to the passenger‟s baggage
1. It is made in compliance with a legal obligation. which is in his personal custody (CIVIL CODE, Art.
1754).
Examples:
a. The judicial deposit of a thing the possession Travelers refer to transients and not to boarders.
of which is being disputed in a litigation by two Non-transients are governed by the rules on lease
or more persons (CIVIL CODE, Art. 538). (DE LEON, supra at 158).
b. The deposit with a bank or public institution of
public bonds or instruments of credit payable Extent of liability: not limited to baggage or
to order or bearer given in usufruct when the articles ordinarily used by travelers. It also extends
usufructuary does not give proper security for to vehicles, animals and articles which have been
their conservation (CIVIL CODE, Art. 586). introduced or placed in the annexes of the hotel
c. The deposit of a thing pledged when the (CIVIL CODE, Art. 1999).
creditor uses the same without the authority of
the owner or misuses it in any other way A hotel-keeper is liable in the following
(CIVIL CODE, Art. 2104). instances:
d. Those required in suits as provided in the When the loss or injury is caused:
Rules of Court; and a. By his servants or employees as well as by
e. Those constituted to guarantee contracts with strangers provided that the notice has been
the government (the deposit arises from an given and proper precautions taken; and
obligation of public or administrative b. By the act of a thief or robber done without the
character) (DE LEON, supra at 156). use of arms and irresistible force, for in this
case, the hotel-keeper is apparently negligent
Note: A deposit made in compliance with law is (CIVIL CODE, Arts. 2000 and 2001).
governed by the provisions of such law and, in
default thereof, by the rules on voluntary deposit A hotel-keeper is NOT liable in the following
(CIVIL CODE, Art. 1997, Par. 1). instances:
When the loss or injury is caused by:
2. It is made on the occasion of any calamity such a. Force majeure, theft by a stranger with the
as fire, storm, flood, pillage, shipwreck or other use of arms or irresistible force (CIVIL CODE,
similar event. This is referred to as involuntary Art. 2000), unless he is guilty of fault or
bailment or involuntary deposit. Another name negligence in failing to provide against the
is deposito miserable (DE LEON, supra at 157). loss or injury from his cause;
b. The acts of guests, his family, servants or
Note: There must be a causal relation between the visitors; and
calamity and the constitution of the deposit (Id.). c. The character of the things (e.g. it is
consumable.) brought into the hotel (CIVIL
The deposit made on any of the said calamities shall CODE, Art. 2002)
be regulated by the provisions concerning voluntary
deposit and by Article 2168, i.e., when during a 2. Deposits Made With Common Carriers:
calamity, property is saved from destruction by
another person without the knowledge of the owner, Rule in the occurrence of theft or robbery
the latter is bound to pay the former just The act of a thief or robber, who has entered the
compensation (CIVIL CODE, Art. 1997, Par. 2). hotel is not deemed force majeure, unless it is
done with the use of arms or through irresistible
Other Kinds of Necessary Deposits: force (CIVIL CODE, Art. 2001).
1. Deposit by Travelers in Hotels and Inns:
The keepers of hotels or inns shall be Reason: The innkeeper is bound to keep his
responsible as depositaries for the deposit of house safe from the intrusion of thieves and if
effects made by travelers. they are allowed to gain access to the house,
without the use of such force as will show its
Elements: marks upon the house, it is fairly presumable
a. Notice was given to them or to their that the innkeeper is at fault (5 PARAS, supra at
employees of the effects brought by the 959).
guests; and
b. Guests take the precautions which said hotel- Exemption or Diminution of Liability
keepers or their substitutes advised relative to The hotel-keeper cannot free himself from the
the care and vigilance of their effects (CIVIL responsibility by posting notices to the effect that
CODE, Art. 1998). he is not liable for the articles brought by the

489
guest. Any stipulation to such effect shall be void The purpose is to maintain the status quo during the
(CIVIL CODE, Art. 2003). pendency of the litigation or to insure the right of the
parties to the property in case of favorable judgment
Reason: Public policy. The hotel business is (DE LEON, supra at 164).
imbued with public interest (YHT Realty Corp. v.
CA, G.R. No. 126780, February 17, 2005). Custodia Legis
This occurs when a thing is shown to have been and
Notice is necessary only for suing civil liability is subjected to the official custody of a judicial or
but not in criminal liability. executive officer in pursuance of his execution of a
legal writ (Ibid.)
Note: It is not necessary in order to hold an inn-
keeper liable that the effects of the guests be
actually delivered to him or his employees. It is G UARANTY
enough that they are within the inn (De Los
Santos v. Tan Khey, 58 O.G. No. 45-53; 29 Am. ( A RTS . 2047-2084)
Jur. 89-90).
CONTRACT OF GUARANTY
Right of Retention by Hotel-keepers: A contract whereby a person called the guarantor
The hotel-keeper has a right to retain the things binds himself to the creditor to fulfill the obligation of
brought into the hotel by the guest, as a security the principal debtor in case the latter should fail to
for credits on account of lodging, and supplies do so (CIVIL CODE, Art. 2047, Par. 1).
usually furnished to hotel guests (CIVIL CODE,
Art. 2004). Classifications of Guaranty:
1. In the Broad Sense:
Reason: The right is given to hotel-keepers to a. Personal – the guaranty is the credit given by
compensate them for the liabilities imposed the guarantor; or
upon them by law (DE LEON, supra at 161). b. Real – the guaranty is the property, movable
or immovable
Note: A safety deposit box in a hotel is a
contract of necessary deposit. The existing If constituted on real property, it may be:
relationship is one of depositor and depositary i. Real Mortgage; or
(YHT Realty Corp. vs CA, supra.). ii. Antichresis.
JUDICIAL DEPOSIT If constituted on personal property, it may be:

Judicial deposit or sequestration takes place when i. Pledge; or
an attachment or seizure of property in litigation is ii. Chattel Mortgage
ordered (CIVIL CODE, Art. 2005).
2. As to its Origin (CIVIL CODE, Art. 2051, Par. 1)
Movable as well as immovable property may be the a. Conventional – agreed upon by the parties;
object of sequestration (CIVIL CODE, Art. 2006). b. Legal – imposed by virtue of a provision of
law; or
The depositary of property or objects sequestrated c. Judicial – required by a court to guarantee the
cannot be relieved of his responsibility until the eventual right of one of the parties in a case.
controversy which gave rise thereto has come to an
end, unless the court so orders (CIVIL CODE, Art. 3. As to Consideration (CIVIL CODE, Art. 2048);
2007). a. Gratuitous – the guarantor does not receive
anything for acting as such; or
The depositary of property sequestrated is bound to b. Onerous – the guarantor receives valuable
comply, with respect to the same, with all the consideration.
obligations of a good father of a family (CIVIL
CODE, Art. 2008). 4. As to the Person Guaranteed (CIVIL CODE,
Art. 2051, Par. 2)
As to matters not provided in the Civil Code, judicial a. Single – constituted solely to guarantee or
sequestration shall be governed by the Rules of secure performance by the debtor of the
Court. principal obligation; or
b. Double or sub-guaranty – constituted to
Nature and Purpose of Judicial Deposit secure the fulfillment by the guarantor of a
The deposit is judicial because it is auxiliary to a prior guaranty.
case pending in court.

490
3
5. As to Scope and Extent the latter‟s obligation, nor does he receive any
a. Definite – limited to the principal obligation benefits therefrom (Philippine National Bank v.
only, or to a specific portion thereof (CIVIL CA, G.R. No. 33174, July 4, 1991; Lim v.
CODE, Art. 2055, Par. 2) Security Bank Corporation, G.R. No. 188539,
b. Indefinite or simple – includes not only the March 12, 2014).
principal obligation but also all its accessories
including judicial costs (CIVIL CODE, Art. 2. Liability is limited by terms of contract;
2055, par. 2); A contract of suretyship is not presumed; it
c. Specific – covers a particular obligation ; or cannot extend to more than what is stipulated
d. Continuing – covers subsequent or additional (Visayan Surety & Insurance Corporation v. CA,
obligations. (CIVIL CODE, Art. 2053) supra.)).
CONTRACT OF SURETYSHIP Creditors, however, may recover from the surety

A contract whereby one person engages to be as part of their damages, interest at the legal
answerable to a third person, for the debt, default or rate, even if the surety would thereby become
miscarriage of the principal or obligor (Garcia, Jr. v. liable to pay more than the amount stipulated.
CA, G.R. No. 80201, November 20, 1990; Visayan
Surety & Insurance Corp. v. CA, G.R. No. 127261, Reason: NOT by reason of contract, but by
September 7, 2001). reason of its failure to pay when demanded, and
for having compelled the plaintiff to resort to the
The contract of suretyship must be in writing to be courts to obtain payment (5 TOLENTINO, supra at
enforceable (CIVIL CODE, Art. 1403, par. 2(b)). 506).
Note: Suretyship involves two (2) relationships: A surety, however, is not released by a change in
1. The principal relationship between the obligee the contract which does not have the effect of
and the obligor; and making its obligation more onerous (Intra-Strata
2. The accessory relationship between the principal Assurance Corp. vs Republic of the Philippines,
debtor (obligor) and the surety (DE LEON, supra G.R. No. 156571, July 9, 2008).
at 229).
Effect when a Party Binds Himself Solidarily 3. Liability arises only if principal debtor is held
If a person binds himself solidarily with the principal liable;
debtor, the contract is called suretyship and the If the principal debtor and surety are held liable,
guarantor is called a surety. their liability to pay the creditor would be solidary
but the nature of the surety‟s undertaking is such
In a solidary obligation, a solidary debtor is himself a that it does not incur liability unless and until the
principal debtor. Hence, a solidary debtor cannot be principal debtor is held liable (Government of the
considered a guarantor of his co-debtor. Whenever Philippines v. Tizon, G.R. No. L-22108, August
applicable, the provisions on guaranty (CIVIL 30, 1967).
CODE, Arts. 2047 to 2048) shall also apply to
suretyship. Note: The creditor may sue the principal debtor
and any of the sureties separately or together
However, it is also possible for a guarantor to bind (NASSCO v. Torrento, G.R. No. L-21109, June
himself solidarily with the principal debtor without 26, 1967).
affecting the nature of the contract (DE LEON, supra
at 231). In the absence of collusion, the surety is bound
by a judgment against the principal debtor even
Thus, if the party does not intend to convert himself though he was not a party to the proceedings.
into a principal debtor but merely constitute himself The nature of its undertaking makes it privy to all
as a guarantor although binding himself solidarily proceedings against its principal (Finman
with him, action may be brought against him outright General Assurance Corp. v. Salik, G.R. No.
by reason of the said solidarity but he retains his 84084, August 20, 1990).
character as a guarantor and all the rights inherent
in a guarantor by reason of payment by him (Ibid.) 4. Surety is not entitled to the benefit of exhaustion;
Nature of Suretyship’s Undertaking: Reason: Surety assumes a solidary liability for

1. Liability is contractual and accessory but direct; the fulfillment of the principal obligation (Towers
He directly, primarily and equally binds himself Assurance Corp. v. Ororama Supermart, G.R.
with the principal as original promisor, although No. L-45848, November 9,1977).
he possesses no direct or personal interest over

491
5. Undertaking is to the creditor and not to debtor; Security of a Conditional Obligation
Unless otherwise expressly provided, the surety A conditional obligation may also be secured
makes no covenant or agreement with the (Magdalena Estates Inc. v. Rodriguez, G.R. No. L-
principal that it will fulfill the obligation 18411, December 17, 1966). This is because it is
guaranteed for the benefit of the principal (DE valid and binding just like a pure one (DE LEON,
LEON, supra at 236). supra at 255).
If the principal obligation is subject to a
6. Surety is not entitled to notice of principal‟s suspensive condition, the guarantor is liable only
default; after the fulfillment of the condition. If it is subject
to a resolutory condition, the happening of the
Reason: The surety is bound to take notice of condition extinguishes both the principal obligation
the principal‟s default and to perform the and guaranty (Ibid.).
obligation (Ibid.)
3. Unilateral because:
7. Prior demand by the creditor upon the principal a. It only gives rise to a duty on the part of the
is not required; and guarantor in relation to the creditor and not
vice versa although after its fulfillment, the
Note: As soon as the principal is in default, the principal debtor becomes liable to indemnify
surety is likewise in default (Id. at 237). the guarantor (Id. at 227); and
b. It may be entered into even without the
8. Surety is not exonerated by neglect of creditor to intervention of the principal debtor, in which
sue principal. (Ibid.) case Arts. 1236 and 1237 shall apply (CIVIL
CODE, Art. 2050).
Reason: There is nothing to prevent the creditor
from proceeding against the principal at any time 4. Nominate;
(Palmares v. CA, G.R. No. 126490, March 31, 5. Consensual;
1998). 6. It is a contract between the guarantor/surety and
creditor;
Characteristics of Guaranty and Suretyship:
1. Accessory – it cannot exist by itself. There must Note: The contract exists for the benefit of the
be a valid principal obligation (CIVIL CODE, Art. creditor and not for the benefit of the principal
2052). debtor who is not a party to the contract of
guaranty.
If the principal obligation is void, the guaranty is
also void (DE LEON, supra at 249). The creditor may proceed against the guarantor
although he has no right of action against the
The consideration of the guaranty is the same as principal debtor.
the consideration of the principal obligation.
7. Falls under the Statute of Frauds;
Note: Guaranty may be constituted to guarantee It is not presumed and must be in writing to be
the performance of a voidable or unenforceable enforceable (CIVIL CODE, Art. 1403, (2) [b]).
contract. It may also guarantee a natural
obligation (CIVIL CODE, Art. 2052). However, it Reason: it is “a special promise to answer for
must be considered binding only if the guarantor the debt, default or miscarriage of another.”
knew the defective character of the principal
obligation (5 TOLENTINO, supra at 504). 8. It requires that the guarantor must be a person
distinct from the debtor because a person
2. Subsidiary and conditional – it takes effect only cannot be the personal guarantor of himself (DE
when the principal debtor fails in his obligation, LEON, supra at 227); and
subject to a limitation. (DE LEON, supra at 227)
Exception: Real guaranty like pledge (CIVIL
Note: The guarantor cannot bind himself for CODE, Art. 2093) and mortgage (CIVIL CODE,
more than the principal debtor. Even if he does, Art. 2124).
his liability shall be reduced to the limits of that
of the debtor. But a guarantor may bind himself 9. Gratuitous (CIVIL CODE, Art. 2048)
for less than that of the principal debtor (CIVIL
CODE, Art. 2054). Exception: If there is a contrary stipulation.

492
3
Construction of a Guaranty Contract Guaranty Suretyship
General Rule: Strictly interpreted against the As to What is Insured
creditor and in favor of the guarantor or surety. It is Insurer of solvency of
Insurer of the debt.
not to be extended beyond its terms or specified debtor.
limit (Magdalena Estates Inc. v. Rodriguez, supra). As to Availability of Excussion & Division
Guarantor can avail of
Reason: It is a special obligation (DE LEON, Credit Surety cannot avail of
the benefit of
Transactions, supra at 259). the benefit of excussion
excussion and division
and division.
in case creditor
Strictissimi Juris Rule proceeds against him.
Pertains to an accommodation surety because the As to Notice of Principal’s Default
latter acts without motive of pecuniary gain and Not bound to take
hence, should be protected against unjust pecuniary notice of the non- Held to know every
impoverishment by imposing on the principal, duties performance of his default of his principal.
akin to those of a fiduciary (Pacific Tobacco Corp. v. principal.
Lorenzana, G.R. No. L-8086, October 31,1957). As to Extinguishment of Liability
Often discharged by Not discharged by mere
Exception: In case of compensated sureties in the mere indulgence indulgence of the
determining whether or not the undertaking is the of the creditor or want creditor or by want of
act of a surety or guarantor of notice of default notice of default
(DE LEON, supra at 268). (DE LEON, supra at 237-238).
Reasons: Guaranty v. Indorsement

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

493
Guaranty v. Warranty any notice, demand or any other act or deed,
Guaranty Warranty immediately become liable and shall pay “all
Similarity credit accommodations extended by the Bank to
Each is an undertaking by one party to another the Debtor, including increases, renewals, roll-
to indemnify or make good the assured against overs, extensions, restructurings, amendments
some possible default or defect, in the or novations thereof, as well as (i) all obligations
contemplation of the parties of the Debtor presently or hereafter owing to the
Distinction Bank, as appears in the accounts, books and
A guaranty is a contract A warranty is an records of the Bank; whether direct or indirect,
by which a person is undertaking that the and (ii) any and all expenses which the Bank
bound to another for the title, quality, or may incur in enforcing any of its rights, powers
fulfillment of a promise quantity of the subject and remedies under the Credit Instruments as
or engagement of a third matter of the contract defined herein below (Lim v. Security Bank
party. is what it has been Corporation, supra.).
represented to be. Note: There can be no claim against the
(Id. at 244) guarantor until the debt is liquidated (CIVIL
CODE, Art. 2053).
Absence of Consideration to Guarantor
A guaranty or surety agreement is regarded as valid Reason: A contract of guaranty is subsidiary
despite the absence of any direct consideration (DE LEON, supra at 254).
received by the guarantor or surety either from the
With such surety agreement, there would be no
principal debtor or from the creditor; a consideration
need to execute a separate surety contract or
moving to the principal alone will suffice (Id. at 245).
bond for each financing or credit accommodation
extended to the principal debtor (South City
Absence of Direct or Personal Interest of
Homes, Inc. Fortune Motors, Palawan Lumber
Guarantor
Manufacturing Corp v. BA Finance Corp, G.R.
It is never necessary that he should receive any part
135462, December 7, 2001; Lim v. Security
of benefit, if such there be, accruing to the principal
Bank Corporation, supra.).
(Willex Plastic Industries Corp v. CA, G.R.
No.103066, April 25, 1996).
Exception: Chattel mortgage. A chattel mortgage
can only cover obligations existing at the time the
Double or Sub-guaranty
mortgage is constituted and not those contracted
One constituted to guarantee the obligation of a
subsequent thereto (Belgian Catholic
guarantor.
Missionaries, Inc. v. Magallanes Press Inc., G.R.
No. 25729, November 24, 1926).
In case of insolvency of the guarantor for whom he
bound himself, the sub-guarantor is responsible to
2. Securing Unliquidated Debts
the co-guarantors in the same terms as the
“Future debts” also refer to debts existing at the
guarantor (CIVIL CODE, Art. 2075).
time of the constitution of the guaranty but the
amount thereof is unknown, and not to debts not
Guaranty of Future Debts (CIVIL CODE, Art. 2053)
yet incurred and existing at that time (DE LEON,
1. Continuing Guaranty or Suretyship
supra at 254).
Not limited to a single transaction but
contemplates a future course of dealings,
Extent of Guarantor’s Liability:
covering a series of transactions generally for an
1. Where the guaranty is definite: It is limited in
indefinite time or until revoked (DE LEON, supra
whole or in part to the principal debt, to the
at 252).
exclusion of accessories. (Id. at 270); or
2. Where guaranty is indefinite or simple: It shall
A guaranty shall be construed as continuing
comprise not only the principal obligation, but
when by the terms thereof it is evident that the
also all its accessories, including the judicial
object is to give a standing credit to the principal
costs, provided with respect to the latter, that the
debtor to be used from time to time either
guarantor shall only be liable for those costs
indefinitely or until a certain period, especially if
incurred after he has been judicially required to
the right to recall the guaranty is expressly
pay (CIVIL CODE, Art. 2055, Par 2).
reserved (Diño v. CA, G.R. No. 89775,
November 26, 1992).
Effect of Penalty Clause
The penalty may be demanded in the proper case
The terms of the Continuing Suretyship
even if its value is more than the amount of the
executed by petitioner are very clear. It states
principal debt (General Insurance & Surety Corp. v.
that petitioner, as surety, shall, without need for
Republic, G.R. No. L-13873, January 3, 1963).

494
3
QUALIFICATIONS OF A GUARANTOR: (PIC) by the creditor before the obligation becomes
1. Has sufficient Property to answer for the fixed.
obligation which he guarantees;
2. Possesses Integrity; and Reason: Being secondarily liable, the guarantor
3. Capacity to bind himself (CIVIL CODE, Arts. is entitled to know the nature and extent of his
2056 to 2057). liability (DE LEON, supra at 272).
General Rule: The qualifications need only be 2. When Unnecessary

present at the time of the perfection of the contract. Where the transaction is not merely an offer but
(DE LEON, supra at 276). amounts to a direct or unconditional promise of
guaranty.
Exception: When the guarantor is selected by the
principal debtor because the latter answers for the Exception: Notice of acceptance is made a
solvency of the former. In this case the guarantor condition of the guaranty (Texas v. Alonso, G.R.
must possess the qualifications prescribed not only No. 47495, August 14, 1941).
at the moment the guaranty is given but also until
the extinguishment of the debt. Selection of a Guarantor
1. Required and stipulated by creditor –
Reason: A guaranty is for the benefit of the creditor substitution of guarantor may not be demanded
not the debtor. (CIVIL CODE, Art. 2057).
2. Selected by the principal debtor – the
Effect of Subsequent Loss of Required principal debtor answers for the integrity,
Qualifications capacity, and solvency of the guarantor selected
The subsequent loss of the integrity (conviction in (DE LEON, supra at 278).
first instance of a crime involving dishonesty), or 3. Personally designated by the creditor –
property (becomes insolvent), or supervening responsibility for the selection shall fall upon the
incapacity of the guarantor would not operate to creditor and not on the debtor (Ibid.).
exonerate the guarantor of the eventual liability he
has contracted, and the contract of guaranty RIGHTS OF A GUARANTOR
continues. 1. Benefit of excussion (CIVIL CODE, Art. 2058);
2. Benefit of division (CIVIL CODE, Art. 2065);
HOWEVER, the creditor may demand from another 3. Right to contribution of a guarantor who pays if
guarantor with the proper qualifications. But he may there is solidary liability (CIVIL CODE, Art.
waive it if he chooses and hold the guarantor to his 2073);
bargain (Estate of K.H. Hemady v. Luzon Surety 4. Right of indemnity or reimbursement (CIVIL
Co., Inc., G.R. No. L-8437, November 28, 1956). CODE, Art. 2066);
5. Right of guarantor to proceed against debtor
Note: The creditor can waive the requirements before payment (CIVIL CODE, Art. 2071); and
(Estate of K.H. Hemady v. Luzon Surety Co., Inc., 6. Right to subrogation (CIVIL CODE, Art. 2067).
Id.).
1. Benefit of Excussion
Capacity of a Married Woman Right in which the guarantor cannot be
A married woman may guarantee an obligation compelled to pay the creditor unless the latter
without the husband‟s consent, but shall not thereby has exhausted all the properties of the principal
bind the conjugal partnership, except in cases debtor, and has resorted to all of the legal
provided by law (CIVIL CODE, Art. 2049) (i.e. when remedies against such debtor (CIVIL CODE, Art.
the guaranty has redounded to the benefit of the 2058).
family).
Reason: Character of the contract as accessory
Liability of Heirs If the Guarantor Dies and subsidiary.
If a guarantor dies, his heirs are still liable, to the
extent of the value of the inheritance because the How Exercised:
obligation is not purely personal and is therefore a. Demand for payment upon the guarantor only
transmissible (5 PARAS, supra at 1034). after judgment upon the debt; and
b. Point out the available property (not in
Acceptance of Guaranty and Notice Thereof by litigation or encumbered) of the debtor within
the Creditor the Philippines, sufficient to cover the amount
1. When Necessary of the debt (CIVIL CODE, Art. 2060).
When there is merely an offer of a guaranty, or
merely a conditional guaranty requiring an action

495
The creditor may, prior to exhaustion, secure a Reason: By such, he renounces in the
judgment against the guarantor, who shall be contract itself the benefit of exhaustion.
entitled however, to a deferment of the execution
of judgment against him, until after the properties f. When the debt is a Natural obligation or an
of the principal debtor shall have been exhausted, unenforceable obligation;
to satisfy the latter‟s obligation (Tupaz v. CA, G.R.
No. 145578, November 18, 2005). Reason: Because in these cases, the creditor
has no action against the principal debtor (5
Effect of Failure of the Creditor to Exhaust and TOLENTINO, supra at 514).
Resort to All Legal Remedies: He shall suffer
the loss but only to the extent of the value of the g. If he is a judicial Bondsman or sub-surety;
said property for the insolvency of the debtor
(CIVIL CODE, Art. 2061). h. If he fails to Interpose it as a defense before
judgment is rendered against him (Saavedra
This is not applicable to a contract of suretyship v. Price, G.R. No. L-46702, October 6, 1939);
(CIVIL CODE, Arts. 2047 Par. 2 and 2059 Par. 2).
i. If the guarantor does not set up the benefit
This cannot take place before judgment has been against the creditor upon the latter‟s demand
obtained against the debtor (Baylon v. CA, G.R. for Payment from him; and
No. 109941, August 17, 1999).
Note: Demand must be actual. Joining the
When Guarantor is NOT Entitled to the Benefit guarantor in the suit against the principal
of Excussion: (PAIRS N’ BIPS) debtor is not the demand intended by law.
a. If it may be Presumed that an execution on
the property of the principal debtor would not j. Where the pledge or mortgage has been
result in the satisfaction of the obligation given by him as Special security (DE LEON,
(CIVIL CODE, Art. 2059 (5); supra at 282).
Note: It is not necessary, however, that the Note: The guarantor of a guarantor shall enjoy the
debtor be judicially declared insolvent or benefit of excussion, both with respect to the
bankrupt. guarantor and to the principal debtor (CIVIL
CODE, Art. 2064).
b. When the debtor has Absconded, or cannot
be sued within the Philippines unless he has 2. Benefit of Division
left a manager or representative (CIVIL Should there be several guarantors of only one
CODE, Art. 2059 (4)); debtor and for the same debt, the obligation to
answer for the same is divided among all (CIVIL
Note: The creditor is not required to go after a CODE, Art. 2065).
debtor who is hiding or cannot be sued in our
courts, and to incur the delays and expenses General Rule: Joint liability.
incident thereto (DE LEON, supra at 282).
Exceptions:
c. In case of Insolvency of the debtor (CIVIL a. When solidarity is expressly stipulated; and
CODE, Art. 2059 (3)); b. If any of the circumstances enumerated in Art.
2059 of the Civil Code should take place (DE
Note: It is not necessary that the debtor be LEON, supra at 288).
judicially declared insolvent or bankrupt, but
the insolvency or inability to pay must be Note: The guarantor is not required to point out
actual (DE LEON, Credit Transactions, supra the property of his co-guarantors since their
at 282). obligation with respect to each other is not
subsidiary but direct. It does not depend as to their
d. The guarantor has expressly Renounced it solvency, although if one of them should turn out
(CIVIL CODE, Art. 2059 (1)); to be insolvent, his share has to be borne by the
others (Id. at 290).
Reason: the benefit of excussion is a
personal right recognized in a guarantor. Its 3. Right to Contribution of Guarantor Who Pays
waiver is valid. if There is a Solidary Liability
General Rule: May demand of each of the
e. If he has bound himself Solidarily with the others the share which is proportionally owing
debtor (CIVIL CODE Art. 2059 (2));

496
3
from him, provided any of the following principal since this constitutes procedural due
conditions are met: process (Ibid.).
a. Payment has been made by virtue of a judicial
demand; OR 4. Right of Indemnity or Reimbursement
b. Principal debtor is insolvent (CIVIL CODE, General Rule: Guaranty is a contract of
Art. 2073). indemnity. The guarantor who makes payment is
entitled to be reimbursed by the principal debtor.
Accrual or Basis of Right: Acquired ipso jure by
virtue of said payment without any prior cession of Exceptions:
rights to such guarantor (DE LEON, Credit supra a. Where the guaranty is constituted without the
at 307). knowledge or against the will of the principal
Exceptions: debtor, the guarantor can recover only insofar
a. The insolvent guarantor cannot be made to as the payment had been beneficial to the
pay. In such case, his share shall be borne by debtor (CIVIL CODE, Art. 2050);
the others including the paying guarantor in b. Payment by a third person who does not
the same joint proportion; or intend to be reimbursed by the debtor is
b. When co-guarantors have defenses against deemed to be a donation, which, however,
the one who paid the same which have requires the debtor‟s consent. But the
pertained to the principal debtor against the payment is in any case valid as to the creditor
creditor and which are not purely personal to who has accepted it (CIVIL CODE, Art. 1238);
the debtor (CIVIL CODE, Art. 2074). and
c. Waiver of the right to demand reimbursement
Note: A sub-guarantor, in case of the insolvency (DE LEON, supra at 294).
of the guarantor for whom he bound himself, is
responsible to the co-guarantors in the same Under Art. 2066 of the Civil Code, the indemnity
terms as the guarantor (CIVIL CODE, Art. 2075). consists of: (DIED)
a. Total amount of the Debt;
Right to Contribution and Benefit of Division b. Legal Interest thereon from the time the
Distinguished payment was made known to the debtor
In the benefit of division (CIVIL CODE, Art. 2065), (notice of payment is in effect a demand so
there has been no payment. Yet, in the right to that if the debtor does not pay immediately, he
contribution (CIVIL CODE, Art. 2073), the incurs in delay), even though it did not earn
payment has been made because of judicial interest for the creditor. Guarantor‟s right to
proceedings or insolvency of the principal debtor legal interest is granted by law by virtue of the
(Cacho v. Valles, G.R. No. L-19493, August 27, payment he has made;
1923). c. Expenses incurred by the guarantor after
having notified the debtor that payment has
Procedure When Creditor Sues: been demanded of him by the creditor.
a. The creditor must sue the principal debtor Included only are those expenses that the
alone. The guarantor cannot be sued with his guarantor has to satisfy in accordance with
principal, much less alone, except in Art. 2059 law as a consequence of the guaranty (CIVIL
of the Civil Code. CODE, Art. 2055) and not those which
b. Notice to guarantor of the action. depend upon his will or own acts or his fault
The guarantor must be NOTIFIED (CIVIL for these are his exclusive personal
CODE, Art. 2062). If the guarantor appears, responsibility and it is not just that they be
he is still given the benefit of exhaustion even shouldered by the debtor; and
if judgment should be rendered against him d. Damages if they are due in accordance with
and the principal debtor. Voluntary law. General rules on damages apply.
appearance does not constitute a renunciation
of his right to excussion DE LEON, supra at Effect of Payment by Guarantor:
286). a. Without notice to debtor:
The debtor may interpose against the
The guarantor cannot set up the defenses if guarantor those defenses which he could
he does not appear. It may no longer be have set up against the creditor at the time
possible for him to question the validity of the the payment was made (e.g. the debtor can
judgment (Ibid.) set up against the guarantor the defense of
previous extinguishment of the obligation by
c. A guarantor is entitled to be heard before payment) (CIVIL CODE, Art. 2068).
execution can be issued against him where he b. Before maturity:
is not a party in the case involving his

497
Not entitled to reimbursement until the g. The debtor is in Imminent danger of becoming
expiration of the period, unless the payment insolvent (CIVIL CODE, Art. 2071).
was made with the consent or has been
ratified by the debtor (CIVIL CODE, Art. In all these cases, the action of the guarantor is to:
2069). a. Obtain release from the guaranty; or
b. Demand a security that shall protect him from
Note: Ratification may be express or implied. any proceedings by the creditor and from the
danger of insolvency of the debtor (CIVIL
c. After maturity: CODE, Art. 2071).
The fact that payment was actually made after
said term is not material. What is controlling These remedies are alternative. He has the right
is that default and demand on guarantor had to choose the action to bring (DE LEON, supra at
taken place while the guarantee was still in 301).
force (JN Dev. Corp. v. Phil. Export and
Foreign Loan Guarantee Corp., G.R. No. Note: The guarantor cannot demand
151060, August 31, 2005). reimbursement for indemnity because he has not
paid the obligation (Ibid.).
Effect of Repeat Payment by Debtor:
General Rule: Before guarantor pays the creditor, Article 2071 of the Civil Code is applicable and
he must first notify the debtor, otherwise the latter available to the surety (Manila Surety & Fidelity
may set up defenses he could have set up against Co., Inc. v. Batu Construction & Co., G.R. No. L-
the creditor (CIVIL CODE, Arts. 2068 and 2070). 9353, May 21, 1957).
If he fails to give such notice and the debtor Article 2066 v. Article 2071
repeats payment, the guarantor can only collect Art. 2066 Art. 2071
from the creditor and the guarantor has no cause As to Purpose
of action against the debtor for the return of the Provides for the
amount paid by guarantor even if the creditor enforcement of the Provides for his
should become insolvent (DE LEON, supra at rights of the guarantor protection before he
299). or surety against the has paid but after he
debtor after he has paid has become liable.
Exception: The guarantor can still claim the debt.
reimbursement from the debtor in spite of lack of
notice if the following conditions are present: (PIG) As to Nature of action
a. Guarantor was Prevented by fortuitous event Gives a right of action Protective remedy
to advise the debtor of the payment; after payment which is before payment. This
b. The creditor becomes Insolvent; and a substantive right. remedy is preliminary.
c. The guaranty is Gratuitous (Ibid.). (DE LEON, supra at 301-302).
5. Right of Guarantor to Proceed Against 6. Right to Subrogation

Debtor Before Payment Subrogation transfers to the person subrogated
General Rule: Guarantor has no right to the credit with all the rights thereto appertaining
proceed against the principal debtor until he has either against the debtor or against third
actually paid the debt (Id. at 300). persons, be they guarantors or possessors of
mortgages, subject to stipulation in conventional
Exceptions: (SIB-D-TRI) subrogation (CIVIL CODE, Art. 1303).
a. When he is Sued for payment;
b. Insolvency of the principal debtor; Note: This right of subrogation is necessary to
c. Debtor has Bound himself to relieve him from enable the guarantor to enforce the indemnity
the guaranty within a specified period, and given in Art. 2066 of the Civil Code (DE LEON,
this period has expired; supra at 294).
d. Debt becomes demandable by reason of
expiration of period of payment; It arises by operation of law upon payment by
e. Lapse of Ten (10) years, when there's no the guarantor. It is not necessary that the
fixed period for its maturity unless, it cannot creditor cedes to the guarantor the former‟s
be extinguished except within a period longer rights against the debtor (Ibid.).
than ten (10) years;
f. Reasonable grounds to fear that the principal It is not a contractual right (5 PARAS, supra at
will abscond; and 1043). The right of a guarantor who has paid a
debt pursuant to subrogation does not stand

498
3
upon a contract but upon the principles of the extent of the share of the guarantor to whom
natural justice. it has been granted (CIVIL CODE, Art. 2078);
The guarantor is subrogated by virtue of the 2. If the creditor voluntarily Accepts immovable or
payment to the rights of the creditor, not those of other properties in payment of the debt, even if
the debtor. he should afterwards lose the same through
eviction or conveyance of property (CIVIL
A guarantor cannot exercise the right of CODE, Art. 2077);
redemption of his principal with respect to real
property belonging to the latter which was sold Effect of Eviction: Revival of principal
by virtue of writ of execution issued upon same obligation, not the guaranty (DE LEON, supra at
payment (Urrutia & Co. v. Moreno, G.R. No. L- 314).
8147, October 26, 1914).
3. Whenever by some Act of the creditor, the
If the guarantor paid a smaller amount by virtue guarantors, even though they are solidarily
of a compromise, he cannot demand more than liable, cannot be subrogated to the rights,
what he actually paid. mortgages and preferences of the former (CIVIL
CODE, Art. 2080);
Note: The benefit of subrogation cannot be
invoked in cases where the guarantor has no Note: “Act” should include “inaction.”
right to be reimbursed (DE LEON, supra at 295).
4. For the same Causes as all other obligations
As long as consent to the guaranty was obtained, under Art. 1231 (CIVIL CODE, Art. 2076);
right of subrogation is absolute even if the debtor a. Payment or Performance;
refuses the subrogation (5 PARAS, supra at b. Loss of the thing due;
1043). c. Condonation or Remission of the debt;
d. Confusion or Merger of the rights of the
Guarantor of third person not present at the creditor and debtor;
request of another e. Compensation; and
The guarantor who satisfies the debt may demand f. Novation
payment from:
a. The person who requested him to be a Other causes: Annulment, Rescission,
guarantor; or Fulfillment of a Resolutory Condition, and
b. The debtor (CIVIL CODE, Art. 2072). Prescription.
5. When principal obligation is Extinguished; and
Effects of Compromise
A compromise between the creditor and the 6. Extension granted to the debtor by the creditor
principal debtor benefits the guarantor but does not without the consent of the guarantor (CIVIL
prejudice him. CODE, Art. 2079).
Note: Mere failure on the part of the creditor to
That which is entered into between the guarantor demand payment after the debt has become due
and the creditor benefits but does not prejudice the does not of itself constitute any extension of time
principal debtor (CIVIL CODE, Art. 2063). (Hongkong & Shanghai Bank v. Aldecoa & Co,
G.R. No. L-8437, March 23, 1915).
Reason: A contract binds only the parties thereto
and not third persons, but if the same can benefit Reason: The guarantor would not be prejudiced
the guarantor or debtor as it is in the nature of a since his recourse would be to avail himself of
stipulation in favor of a third person, the guarantor or the right granted under Article 2071 of the Civil
debtor may accept unless it has been revoked Code (5 PARAS, supra at 1057).
before acceptance (CIVIL CODE, Art. 1311)
Such delay, however, extinguishes the
EXTINGUISHMENT OF GUARANTY guaranty:
Guaranty being accessory and subsidiary, it is also a. When the delay is for such length of time as to
terminated when the principal obligation is allow prescription of the action to enforce
extinguished DE LEON, supra at 310). payment; and
2 2
b. When upon maturity, the guarantor requires
Causes: (RA CE ) the creditor to enforce payment against the
1. Release in favor of one of the guarantors, debtor, but the creditor fails to act and the
without the consent of the others, benefits all to debtor subsequently becomes insolvent (5
TOLENTINO, supra at 529).

499
Guarantor is also Released in the Following 3. Provided in Article 2081 except those which are
Instances: personal to the debtor (Id at 325).
1. Creditor did not collect from third persons;
2. Obligations payable in installments (DE LEON, LEGAL AND JUDICIAL BONDS
supra at 316);
Bond
General Rule: Extension of time as to one or An undertaking that is sufficiently secured and not
more will not affect the liability of the surety for the cash or currency (Commissioner of Customs v.
others. Alikpala, G.R. No. L-32542, November 26, 1970).
Exception: If the whole unpaid balance has A bond merely stands as a guaranty (solidary
become automatically due (under an acceleration guaranty) for a principal obligation, which exists
clause) for failure to pay an installment, the act of independently of said bond, the latter being merely
the creditor of extending the payment without the an accessory obligation (Valencia v. RFC, G.R. No.
guarantor‟s consent, discharges the guarantor L-10749, April 25, 1958).
(Radio Corp. of the Phil. v. Roa, G.R. No. 42829,
September 30, 1935). Nature of Bonds
It is contractual in nature.
3. Consent to extension is NOT waived in advance
by the guarantor (DE LEON, supra at 315); Bondsman
4. Extension granted by creditor on bond (Id. at A surety offered in virtue of a provision of law or a
317); judicial order. He must have the qualifications
5. Extension granted to first-tier obligors cannot required of a guarantor (CIVIL CODE, Art. 2056)
prejudice second-tier parties (Id. at 318); and in special laws like the Rules of Court, Rule
6. Material alterations, which essentially vary the 114, Secs. 12 and 13.
terms of the contract without consent of the
surety, will release the surety from liability. Qualifications of a Personal Bondsman:
Reason: This is tantamount to novation. 1. He possesses integrity;
2. He has capacity to bind himself; and
Requisites of Material Alterations: 3. He has sufficient property to answer for the
a. Change which imposes new obligation; obligation, which he guarantees. (CIVIL CODE,
b. Added burden on the party promising; Art. 2082 in relation to Art. 2056)
c. Which takes away some obligation already
imposed; and Note: Judicial bonds constitute merely a special
d. Changing the legal effect of a contract and not class of contracts of guaranty by the fact that they
merely the form thereof (Id. at 311). are given “in virtue of a judicial order” (Gerardo v.
Diligence Required of Creditor Plaridel Surety and Ins., Co., G.R. No. L-7807,
The creditor is under no obligation to display any October 31, 1956).
diligence in the enforcement of his rights as a
creditor (Id. at 319). Pledge or Mortgage in lieu of bond
If the person required to give a legal or judicial bond
Reason: Nothing can prevent the creditor from should not be able to do so, a pledge or mortgage
proceeding against the principal at any time (Ibid.). sufficient to cover the obligation shall be admitted in
lieu thereof (CIVIL CODE, Art. 2083).
Duty of Creditor to Account for Lien on
Principal’s Property No benefit of excussion for a judicial bondsman
If the creditor has acquired a lien upon the property A judicial bondsman and the sub-surety are NOT
of principal, the creditor at once becomes charged entitled to the benefit of excussion because they are
with the duty of retaining such security. sureties whose liability is primary and solidary
Any release or impairment of the security will
discharge the surety to the extent of the value of the Rule When Performance is Rendered Impossible
property or lien (Id. at 321) Even a surety‟s performance of the bond is rendered
impossible by an act of God, an act of the obligee,
Defenses Available to Guarantor Against or an act of law. It is the surety‟s duty to inform the
Creditor court of the happening of the event so that it may
1. As provided in Article 2068 of the Civil Code; take action or issue a decree in the discharge of the
2. Those available to co-guarantors in Article 2074 surety (People v. Otiak Omal, G.R. No. L-14457,
of the Civil Code; and June 30, 1961).

500
3
stipulation to the contrary is null and void (CIVIL
P LEDGE AND M ORTGAGE CODE, Art. 2088).
Pactum Commissorium or Pacto Commissorio

COMMON PROVISIONS OF PLEDGE AND Stipulation whereby the thing used as security shall
MORTGAGE automatically become the property of the creditor in
First Commonality: Essential Requisites (CIVIL the event of non-payment of the principal obligation
CODE, Art. 2085): (SODA) in due time (Id. at 344).
1. Secures the fulfillment of a principal obligation;
2. Pledgor and mortgagor must be the absolute By such a stipulation, the creditor would be able to
Owner of the thing pledged or mortgaged; third acquire ownership of the property given as security
persons can pledge or mortgage their own without need of public sale or foreclosure required
property or other person‟s property with authority by law (Id. at 344).
and consent of the owner of the property
pledged or mortgaged to secure the principal General Rule: Pactum commissorium is forbidden
obligation. by law. Any stipulation to that effect is declared null
and void (Hechanova v. Adil, G.R. No. L-49940,
Pledge or mortgage constituted by impostor September 25, 1986).
General rule: The pledge or mortgage is void.
Exception: If the certificate of title was already in Reason: The amount of the loan is ordinarily less
the name of the forger or imposter when the land than the real value of the thing pledged or
was sold or mortgaged to an innocent purchaser mortgaged.
or mortgagee, there being nothing to excite
suspicion, the vendee or mortgagee has the Exception: The pledgee may appropriate the thing
right to rely on what appeared in the certificate of pledged if after the first and second auctions, the
title of the vendor or mortgagor and acquires an thing is not sold (CIVIL CODE, Art. 2112). The
enforceable right (5 TOLENTINO, supra at 534). creditor shall be obliged to give an acquittance for
his entire claim. This act shall be considered as full
3. Pledgor and mortgagor must have free Disposal payment of the claim.
of their property, or be legally authorized for
such purpose. Note: Only the prohibited stipulation is void and
shall not affect the validity of the principal obligation.
Reason for 2nd and 3rd requisites: In
anticipation of a foreclosure sale and the act of Requisites:
pledging or mortgaging is a strict act of 1. There should be a pledge, mortgage or
ownership. antichresis of property; and
2. There is a stipulation for an automatic
4. When the principal obligation becomes due, the appropriation by the creditor of the property in
subject matter of the pledge or mortgage may be case of nonpayment of principal obligation (A.
Alienated for the payment to the creditor (CIVIL Francisco Realty and Development Corp. v. CA,
CODE, Art. 2087). G.R. No. 125055, October 30, 1998).
The creditor does not automatically become the Permissible stipulations:

owner if at the time stipulated the obligation is a. Subsequent modification of original contract;
still unfulfilled (DE LEON, supra at 338). b. Subsequent voluntary cession of property;
c. Promise to assign or sell;
Note: If a third person secures an obligation by d. Authority to take possession of property upon
pledging his own movable property under the foreclosure (DE LEON, supra at 335).
provisions of Article 2085 of the Civil Code he
shall have the same rights as guarantor under Note: In the following cases, there is pactum
Articles 2066 to 2070 of the Civil Code, and commissorium even though there is no contract of
Articles 2077 to 2081. He is not prejudiced by pledge, mortgage or antichresis:
any waiver of defense by the principal obligor 1. An agreement whereby property held in trust
(CIVIL CODE, Art. 2120). was ceded to the trustee upon failure of the
beneficiary to pay his debt to the former as
Second Commonality: Prohibition Against secured by the said property (Nakpil v. IAC, G.R.
Pactum Commissorium No. 74449 August 20, 1993).
The creditor cannot appropriate the things given by 2. In pacto de retro sales but found actually to be
way of pledge or mortgage, or dispose of them. Any equitable mortgages, stipulation therein that the
ownership of the property would automatically

501
pass to the vendee in case no redemption The mortgagee may legally foreclose the real estate
was effected within the stipulated period. mortgage extrajudicially and waive the chattel
3. Mortgagee‟s act of registering the mortgaged mortgage foreclosure, and maintain instead a
property in his own name upon the mortgagor‟s personal action for the recovery of the unpaid
failure to redeem the property (Reyes v. Sierra, balance of the credit (Philippine Bank of Commerce
G.R. No. L-28658, October 18, 1979). v. Macadaeg, G.R. No L-14174, October 31, 1960).
Third Commonality: Kinds of Obligations that Fifth Commonality: Concept of Possession of

Can Be Secured Mortgagee or Pledgee
Capability to secure all kinds of obligations (i.e. pure Possession of a mortgagee or pledgee is not in the
or conditional, voidable, unenforceable and natural) concept of an owner; thus, the subject property
(CIVIL CODE, Arts. 2052 and 2091). cannot be acquired through acquisitive prescription,
unless, they renounce their status as such.
Fourth Commonality: Indivisibility
A pledge or mortgage is indivisible, even though the Sixth Commonality: Retention of Ownership
debt may be divided among the successors in Pledgor and mortgagor retain ownership of the thing
interest of the debtor or of the creditor (CIVIL CODE, given as a security.
Art. 2089).
Seventh Commonality: Promise to Constitute
A mortgage directly and immediately subjects the Pledge or Mortgage
property upon which it is imposed, the same being A promise to constitute a pledge or mortgage, if
indivisible even though the debt may be divided, and accepted, gives rise only to a personal right binding
such indivisibility likewise being unaffected by the upon the parties and creates no real right in the
fact that the debtors are not solidarily liable (Dayrit v. property (CIVIL CODE, Art. 2092).
CA, G.R. No. L-29388, December 28, 1970).
Note: What exists is only a right of action to compel
It presupposes several heirs. the fulfillment of the promise but there is no pledge
or mortgage yet.
Consequences of Indivisibility:
1. Single thing – Every portion of the property Criminal Responsibility of Pledgor or Mortgagor
pledged or mortgaged is answerable for the Estafa is committed by a person who, pretending to
whole obligation as it falls due DE LEON, supra be the owner of any real property, shall convey, sell,
at 353). encumber or mortgage the same or knowing that the
2. Several things – all of them are liable for the real property is encumbered shall dispose of the
totality of the debt and the creditor does not same as unencumbered (REVISED PENAL CODE,
have to divide his action by distributing the debt, Art. 316, Pars. 1&2).
among the various things pledge or mortgage.
(Id. at 354). The act of the owner of a personal property of
3. Neither the debtor‟s heir who has paid part of the wrongfully taking the same from its lawful
debt can ask for proportionate extinguishment, possessor, to the prejudice of the latter or any third
nor creditor‟s heir who received his share of the person is punishable.
debt return the pledge or cancel the mortgage as
long as the debt is not completely satisfied Rule on Accommodation Pledger or Mortgagor
(CIVIL CODE, Art. 2089, Pars. 2 and 3). The accommodation pledgor or mortgagor is not
solidarily bound with the principal obligor but his
Exceptions to the Rule of Indivisibility liability extends only to the property pledged or
1. Where each one of several things guarantees a mortgaged. In case of deficiency, the creditor has
determinate portion of the credit; recourse on the principal debtor who remains to be
2. Where only a portion of the loan was released; primarily bound.
3. Where there was failure of consideration; and
4. Where there is no debtor-creditor relationship as Note: The invalidity of a pledge or mortgage does
when a third party is the pledgor or mortgagor. not affect the principal contract of loan. While void, it
5. When piecemeal redemption is allowed after can still be considered as an instrument evidencing
foreclosure.(DE LEON, supra at 354-356) an indebtedness (Philippine National Bank v.
Banatao, G.R. No. 149221, April 7, 2009).
Note: Mere embodiment of a real estate mortgage Ordinarily, an accommodation mortgagor is not
and a chattel mortgage in one document does not himself a recipient of the loan, otherwise that would
have the effect of fusing both securities into a be contrary to his designation as such (Sps. Ramos
indivisible whole (DE LEON, supra at 357). v. Obispo, G.R. No. 193804, February 27, 2013).

502
3
Chattel Mortgage v. PledgePledge Pledge Chattel Mortgage
Chattel mortgage Pledge contrary is void.
As to Delivery
Delivery of the personal Delivery of the thing Pledge v. Real Mortgage
property to the pledged is necessary Pledge Real Mortgage
mortgagee is not As to Subject Matter
necessary. Constituted on movable Constituted on
As to Registration immovable
Registration in the Registration not As to Delivery of Property
Chattel Mortgage necessary to be valid Property is delivered to Not necessary
Registry is necessary pledgee or by consent
for its validity. to a third person.
As to Procedure for Sale As to Validity Against Third persons
The procedure for sale The procedure for sale Not valid against third Not valid against third
is found under Section is found under Art. persons without persons without
14 of Act No. 1508, as 2112 of the Civil Code. knowledge, unless a knowledge, unless
amended. description of the thing registered.
As to Excess in Foreclosure Proceeds pledged and date of the
If property is Debtor is not entitled to pledge appear in a
foreclosed, the excess excess unless public instrument.
over the amount due otherwise agreed upon As to Authority to Sell
goes to the debtor. or except in case of Pledgor can sell the Mortgagor can sell the
legal pledge. thing pledged only with property mortgaged
As to Recovery of Deficiency the consent of the even without the
If there is deficiency If there is deficiency, pledgee. consent of the
after foreclosure, creditor is not entitled to mortgagee.
creditor is entitled to recover notwithstanding (Id. at 342-343).
recover the deficiency any stipulation to the
from the debtor, except contrary.
under Art. 1484 of the P LEDGE
Civil Code.
CONTRACT OF PLEDGE
(DE LEON, supra at 506-507) A contract wherein the debtor delivers to the creditor
or to a third person a movable (CIVIL CODE, Art.
Pledge v. Chattel Mortgage under Article 1484 2094) or document evidencing incorporeal rights
Pledge Chattel Mortgage (CIVIL CODE, Art. 2095) for the purpose of securing
As to Subject Matter fulfillment of a principal obligation with the
Pledge may be Chattel mortgage may understanding that when the obligation is fulfilled,
constituted over any be constituted only over the thing delivered shall be returned with all its fruits
personal property. the personal property and accessions (DE LEON, supra at 330).
sold in installments.
As to Remedy in case of Default Nature:
Pledgee may cause the The vendor-mortgagee It is a real contract which requires delivery for its
sale under Article 2112 may foreclose the perfection (CIVIL CODE, Art. 1316).
of the Civil Code when chattel mortgage on the
the pledgor failed to thing sold, if one has An agreement to pledge only gives rise to a
satisfy the principal been constituted, personal action between the contracting parties
obligation. should the vendee‟s (CIVIL CODE, Art. 2092).
failure to pay covers
two (2) or more Special Requisites:
installments. (In addition to the common essential requisites
As to Deficiency of Proceeds under Article 2085 of the Civil Code):
If there is a deficiency, If there is a deficiency, 1. Necessity of Delivery
creditor is not entitled there can be no action Possession of the thing pledged must be
to recover against the purchaser transferred to the creditor or a third person by
notwithstanding any to recover any unpaid agreement (CIVIL CODE, Art. 2093).
stipulation to the balance. Any
contrary. agreement to the Absent delivery, the creditor acquires no right to
the property, because pledge is merely a lien

503
and possession is indispensable to the right of a 4. Subsidiary contract – the obligation incurred
lien (DE LEON, Credit Transactions, supra at does not arise until the fulfillment of the principal
359). obligation, which is secured (Ibid.).
Type of Delivery Depends Upon the Peculiar Extent of pledge: Unless stipulated otherwise,
Nature of the Thing Pledged: pledge extends to the fruits, interests or earnings of
a. Actual delivery – actual possession of the the thing (CIVIL CODE, Art. 2102).
property pledged. A mere symbolic delivery is
not sufficient, e.g. animal (Id. at 360). Pledge v. Dacion en Pago
b. Constructive delivery – symbolical transfer of In case of doubt as to whether a transaction is a
the goods (e.g. keys to a house, a car, or a pledge or a dation in payment, the presumption is in
warehouse). favor of a pledge, the latter being the lesser
transmission of rights and interests (The Manila
Whether or not a symbolic or constructive Banking Corp. v. Teodoro, G.R. No. L-53955,
delivery is sufficient to validate a pledge would January 13, 1989).
depend on the peculiar nature of the thing
pledged (Ibid.). Rights of the Pledgor: (D-BAA)
1. To Demand return in case of reasonable grounds
2. Subject Matter to fear destruction or impairment of the thing
All movables which are within the commerce of without the pledgee‟s fault, subject to the duty of
men, provided they are susceptible of replacement (CIVIL CODE, Art. 2107);
possession (CIVIL CODE, Art. 2094) and
incorporeal rights evidenced by documents of
title, in which case, the instruments proving the Two (2) Remedies Granted to the Pledgor:
right pledged shall be delivered to the creditor, a. To demand the return of the thing pledged
and if negotiable, must be endorsed (CIVIL upon offering another thing in pledge; or
CODE, Art. 2095). b. Cause the same to be sold at a public sale.
3. Effectivity Against Third Persons Note: The pledgee‟s right to have the thing sold
The description of the thing pledged and the at public sale granted under Art. 2108 of the
date must appear in a public instrument to bind Civil Code is superior to the right granted under
third persons, but not for the validity of the Art. 2107 of the Civil Code.
contract (CIVIL CODE, Art. 2096).
Requisites:
Object of the Requirement: To forestall fraud i. Pledgor has reasonable grounds to fear the
because a debtor might attempt to conceal his destruction or impairment of the thing
property by simulating a pledge (DE LEON, at pledged;
363). ii. No fault on the part of the pledgee;
iii. Pledgor offers another thing which is of the
Note: The execution of a public instrument same kind and quality as the former;
serves as a deterrent because the pledgor iv. Pledgee does not choose to exercise his
maybe held criminally liable for perjury right to cause the thing to be sold at public
(REVISED PENAL CODE, Art. 182). auction (CIVIL CODE, Art. 2108); and
v. Pledgee advised the pledgor without delay.
Kinds of Pledge
1. Conventional or Voluntary – created by contract 2. To Bid and be preferred at the public auction
2. Legal – created by operation of law (Examples: (CIVIL CODE, Art. 2113);
Arts. 546, 612, 1731, 1914, 1994 and 2004 of 3. To Alienate the thing pledged provided the
the Civil Code) (DE LEON, supra at 330) pledgee consents to the sale (CIVIL CODE, Art.
2097);
Characteristics: 4. To Ask that the thing pledged be deposited in
1. Real contract – it is perfected by the delivery of any of the following cases:
the thing pledged; a. If the creditor uses the thing without authority or
2. Accessory contract – it has no independent misuses the thing, he may deposit the thing
existence of its own. It cannot exist without a judicially or extrajudicially (CIVIL CODE, Art.
valid contract; 2104); or
3. Unilateral contract – obligation is solely on the b. If the thing is in danger of being lost or impaired
part of the creditor to return the thing subject because of negligence or willful act of the
thereof upon the fulfillment of the principal pledgee, he may deposit the thing with a third
obligation; and person (CIVIL CODE, Art. 2106).

504
3
Obligations of the Pledgor: 14. To Sell at public auction in case of non-payment
1. To advise the pledgee of the flaws of the thing of debt at maturity (CIVIL CODE, Art. 2112).
(CIVIL CODE, Arts. 2101 and 1951);
3
Obligations of the Pledgee (CUDA R)
Note: Failure to do so, the pledgor may be held 1. Take Care of the thing with the diligence of a
liable for damages. good father of a family and be liable for the loss
or deterioration of such (CIVIL CODE, Art.
2. Not to demand the return of the thing until after 2099);
full payment of the debt, including interest due 2. Not to Use thing unless authorized by the owner
thereon and expenses incurred for its or its preservation requires its use (CIVIL CODE,
preservation (CIVIL CODE, Art. 2105); Art. 2104);
Exception: Pledgor is allowed to substitute the Note: The deposit referred to here is an instance
thing pledged which is in danger of destruction of necessary deposit (5 PARAS, supra at 1101).
or impairment with another thing of the same
kind and quality (CIVIL CODE, Art. 2107). 3. Not to Deposit the thing with a third person
unless so stipulated (CIVIL CODE, Art. 2100);
2 2 3
Rights of the Pledgee (D-SBC -BA R OPS) 4. Responsibility for Acts of agents and employees
1. Option to Demand replacement or immediate as regards the thing (CIVIL CODE, Art. 2100);
payment of the debt in case of deception as to 5. To Advise pledgor of danger to the thing;
substance or quality (CIVIL CODE, Art. 2109); 6. To Advise pledgor of the result of the public
auction (CIVIL CODE, Art. 2116); and
Note: Remedies are alternative. 7. To Return the thing upon payment of debt.
2. To Sell at public auction in case of reasonable Prohibition Against Double Pledge

grounds to fear destruction or impairment of the Property which has been lawfully pledged to one
thing without his fault (CIVIL CODE, Art. 2108); creditor cannot be pledged to another as long as the
first one subsists (Mission de San Vicente v. Reyes,
Note: The proceeds shall be a security for the G.R. No. L-5508, August 14, 1911).
principal obligation.
Right of Third Person to Satisfy Obligation
3. To Bring actions pertaining to the owner or to A third person who has any right in or interest to the
defend it against third persons (CIVIL CODE, thing pledged may pay the debt as soon as it
Art. 2103); becomes due and demandable. The creditor cannot
4. To Choose which of several things pledged shall refuse to accept payment (CIVIL CODE, Art. 2117;
be sold (CIVIL CODE, Art. 2119); DE LEON, supra at 378).
5. To Collect and receive amount due on credit
pledged (CIVIL CODE, Art. 2118); Extinguishment of Pledge: (CRAP-SA)
6. To Bid at the public auction, unless he is the 1. The same Causes as all other obligations;
only bidder (CIVIL CODE, Art. 2113); 2. Return of the thing pledged by the pledgee to
7. To Appropriate the thing in case of failure of the the pledgor;
second public auction (CIVIL CODE, Art. 2112);
8. To Apply fruits, interests or earnings of the Note: It is presumed that the accessory
pledge to the interest, if any, then to the principal obligation of pledge has been remitted when the
of the credit (CIVIL CODE, Art. 2102); thing pledged, after its delivery to the creditor, is
found in possession of the debtor, or of a third
Note: Generally, the pledge extends to offspring of person who owns the thing (CIVIL CODE, Art.
animals but there can be a stipulation to the 1274).
contrary (CIVIL CODE, Art, 2102 (2)).
The possession by the debtor or owner of the
9. To Retain excess value received in the public thing pledged subsequent to the perfection of
sale; the pledge gives rise to a prima facie
10. To Retain the thing until after full payment of the presumption that the thing has been returned
debt; and, therefore, that the pledge has been
11. To be Reimbursed for the expenses made for extinguished but not the principal obligation itself
the preservation of the thing pledged (CIVIL (CIVIL CODE, Art. 2110).
CODE, Art. 2099);
12. To Object to the alienation of the thing ; 3. Statement in writing by the pledgee that he
13. To Possess the thing (CIVIL CODE, Art. 2098); renounces or Abandons the pledge (CIVIL
and CODE, Art. 2111);

505
abide by the results of the sale (DE LEON, supra
Note: The principal debt however is not affected at 378).
by the waiver of the pledge. However, the waiver
of the principal obligation carries with it that of LEGAL PLEDGE
the pledge (CIVIL CODE, Art. 1273). The provisions on the possession, care, and sale of
the thing pledged governing conventional pledges
Neither is the acceptance by the pledgor or are applicable to pledges created by operation of
owner nor the return of the thing pledged is law (CIVIL CODE, Art. 2121).
necessary.
A thing under a pledge by operation of law may be
4. Payment of the debt; sold only after demand of the amount for which the
5. Sale of thing pledged at public auction; and thing is retained. The public auction shall take place
6. Appropriation under Article 2112 of the Civil Code. within one month after such demand (CIVIL CODE,
Art. 2122).
Requirements for Sale of Thing Pledged at
Public Auction (CIVIL CODE, Art. 2112) Note: There is only one public auction here.
1. The debt is due and unpaid;
2. Sale must be at a public auction;
3. There must be notice to the pledgor and owner, R EAL M ORTGAGE
stating the amount due; and
4. Sale must be with the intervention of a notary CONTRACT OF REAL MORTGAGE
public. A contract whereby the debtor secures to the
creditor the fulfillment of a principal obligation,
Note: If in the contract of pledge, the pledgee is specially subjecting to such security immovable
authorized to sell upon default, the requirements of property or real rights over immovable property in
Article 2112 of the Civil Code must be complied case the principal obligation is not complied with at
with; if the conditions of the sale are set forth the time stipulated (DE LEON, supra at 383).
already in the contract, Article 2112 does not have
2
to be observed (5 PARAS, supra at 1106). Characteristics of Real Mortgage (RA-SUI )
1. Real;
Nature of the Bids at the Public Auction 2. Accessory;
The bids must be for CASH – for said bids “shall
offer to pay the purchase price AT ONCE” (CIVIL Note: As an accessory contract, its
CODE, Art. 2114; 5 PARAS, supra at 1107). consideration is the same as that of the principal
contract.
Effect of Sale of the Thing Pledged
1. Extinguishment of principal obligation, whether 3. Subsidiary;
or not the proceeds of the sale are equal to the 4. Unilateral – it creates only an obligation on the
amount of the principal obligation, interest and part of the creditor who must free the property
expenses in a proper case. from the encumbrance once the obligation is
fulfilled (Id. at 383 and 384);
Note: When an obligation is covered by many 5. Indivisible (5 PARAS, supra at 1113); and
securities, for instance a pledge and a mortgage, 6. Inseparable (Ibid.).
foreclosure of the mortgage ahead of the pledge
extinguishes the obligation if the amount of Note: The mortgage adheres to the property,
mortgage fully satisfies the obligation. regardless of who its subsequent owner may be.
Reason: Accessory nature of pledge.
A mortgage does not involve a transfer, cession
2. If the price of the sale is more than the amount or conveyance of property but only constitutes a
due the creditor, the debtor is not entitled to the lien thereon (DE LEON, supra at 402).
excess unless the contrary is provided.
3. If the price of the sale is less, the creditor is not Essence of Contract of Mortgage
entitled to recover the deficiency in all cases A property has been identified or set apart from then
even if there is a stipulation to that effect (CIVIL mass of the property of the debtor-mortgagor as
CODE, Art. 2115). security for the fulfillment of his obligation, in case of
default of payment (China Banking Corp. v. CA,
Reason: By electing to sell the thing pledged G.R. No. 121158, December 5, 1996).
instead of suing on the principal obligation, the
creditor waives any other remedy and must

506
3
Right to Possession execute a contract of mortgage in a public
General Rule: The mortgagee has no right or claim instrument (CIVIL CODE, Arts. 1357 and 1358).
to the possession of the property. Such possession
is only a security for the payment of the sum 3. It must be recorded in the Registry of Property
borrowed (DE LEON, supra at 385). (CIVIL CODE, Art. 2125). Registration in the
registry of property is necessary to bind third
Reason: By the mortgage, the debtor merely persons, but not for the validity of the contract;
subjects the property to a lien but ownership thereof
is not parted with (Ibid.) Note: The registration of a mortgage over real
property under Act No. 3344 is without prejudice
Hence, one‟s status as a mortgagee cannot be the to the better right of third parties (Lanuza v. De
basis of possession (Recebido v. People, G.R. No. Leon, G.R. No. L-22331, June 6, 1967).
141931, December 4, 2000).
Right In Case of Legal Mortgages
Exception: If there is a stipulation to the contrary. The persons in whose favor the law establishes a
Note: It is not an essential requisite of a contract of mortgage has the right to demand the execution
mortgage that the property mortgaged remains in and the recording of the document in which the
the possession of the mortgagor (DE LEON, supra mortgage is formalized (CIVIL CODE, Art. 2125,
at 385). Par. 2)
Cause or Consideration in Mortgage Order of foreclosure cannot be refused on the

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

507
Pledge Real Mortgage given as a security, and in the absence of any sign
pledgee. consent of the that might arouse suspicion, has no obligation to
mortgagee. undertake further investigation (DE LEON, supra at
(DE LEON, supra at 342-343). 392).
Real Mortgage v. Pacto de retro sale Basis: Mirror Doctrine – the rule that all persons
Real Mortgage Pacto de Retro dealing with the property covered by a Torrens
As to Nature of Contract Certificate of Title as buyers or mortgagees are not
Made as a security Not a contract of security required to go beyond what appears in the face of
As to Transfer of Ownership the title.
There is no transfer of Transfers ownership
ownership provided there is This doctrine presupposes, however, that the
delivery mortgagor, who is not the rightful owner of the
As to Transfer of Possession property, has already succeeded in obtaining a
Generally, there is no Generally, there is Torrens Title over the property.
transfer of possession transfer of possession
The doctrine does not apply to a situation where the
title is still in the name of the rightful owner and the
As to Divisibility mortgagor is different from the person pretending to
be the owner. The mortgagee shall not be
Indivisible Redemption can be
considered an innocent mortgagee for value and the
partial (CIVIL CODE,
registered owner will not lose his title (Ereña v.
Arts. 1612 and 1613)
Querrer-Kauffman, G.R. No. 165853, June 22,
2006).
Applies only to real Applies to real and
property personal property Diligence Required of a Mortgagee-Bank
If the mortgagee is a bank or a financing institution,
EFFECTS OF MORTGAGE the general rule that a purchaser or mortgagee of
1. It creates a real right. The mortgage directly and land is not required to look further than what
immediately subjects the property upon which it appears on the face of the Torrens Certificate of
is imposed, whoever the possessor may be, to Title does not apply (Premier Development Bank v.
the fulfillment of the obligation for whose security CA, G.R. Nos. 128122, 128184 & 128229, March
it is constituted (CIVIL CODE, Art. 2126). 18, 2005).
Until discharged upon payment of the obligation, It is settled that banks, their business being
it follows the property wherever it goes and impressed with public interest, are expected to
subsists notwithstanding changes of ownership exercise more care and prudence than private
(DE LEON, supra at 399). If the mortgagor sells individuals in their dealings, even those involving
the mortgaged property, the property remains registered lands (Philippine Trust Company v. CA,
subject to the fulfillment of the obligation secured G.R. No. 150318, November 22, 2010).
by it (Bonnevie v. CA, G.R. No. L-49101,
October 24, 1983). To be considered a mortgagee in good faith, a bank
should diligently conduct an investigation of the land
2. It creates merely an encumbrance. A mortgage offered as collateral. This is especially applicable in
is merely a security for a debt and an cases where the subject land was not mortgaged by
encumbrance upon the property. It does not the owner. Failure to exercise such diligence shall
extinguish the title of the debtor who remains the not entitle the bank to protection under the law
owner (i.e. his right to dispose) (McCullough v. (Arguelles v. Malarayat Rural Bank, Inc., G.R. No.
Veloso & Serna, G.R. No. L-21455, April 5, 200468, March 19, 2014).
1924).
Mortgagee Creditor v. Judgment Creditor
The only right of a mortgagee in case of non- A mortgagee-creditor is not synonymous to a
payment of a debt secured by a mortgage would judgment creditor. While the law expects a
be to foreclose the mortgage and have the mortgagee-creditor to inquire as a reasonably
encumbered property sold to satisfy outstanding prudent man would regarding the encumbrances on
indebtedness (Guanzon v. Argel, G.R. No. L- the property in question, no such knowledge is
27706, June 16, 1970). imputed to a judgment creditor who merely seeks
the satisfaction of the judgment awarded in his favor
DOCTRINE OF MORTGAGEE IN GOOD FAITH (DSM Construction & Development Corp. v. CA,
A mortgagee has a right to rely in good faith on the G.R. No. 166993, December 19, 2005).
certificate of title of the mortgagor of the property

508
3
EXTENT OF MORTGAGE mortgagee‟s opposition (Rivera v. Peña, G.R. No. L-
General rule 11781, March 24, 1961).
Mortgage extends to the following: (AGRI)
1. Natural Accessions; Subsequent Registration of an Adverse Claim
2. Growing fruits; A prior registration of a lien creates a preference.
3. Rents or income not yet received when the Hence, the subsequent annotation of an adverse
obligation becomes due; and claim cannot defeat the rights of the mortgagee or
4. Amount of Indemnity granted or owing to the the purchaser at the auction sale whose rights are
proprietor from: derived from a prior mortgage validly registered (DE
a. The insurers of the property managed; or LEON, supra at 397).
b. Expropriation for public use (CIVIL CODE, Art.
2127). ALIENATION OR ASSIGNMENT OF MORTGAGE
CREDIT
Reason: The ownership of such accessions, The mortgage credit may be alienated or assigned
accessories, and improvements subsequently to a third person, in whole or in part, with the
introduced also belongs to the mortgagor who is the formalities required by law (CIVIL CODE, Art. 2128).
owner of the principal (Castro, Jr. v. CA, G.R. No.
97401, December 6, 1995). In this case, the assignee may foreclose the
mortgage in case of non-payment by the debtor.
Exceptions:
1. An express stipulation excluding them; and Note: Even if the alienation is not registered, it
2. There is evidence sufficiently overthrowing the would still be valid as between the parties (Lopez v.
presumption that the mortgagor owns the Alvarez, G.R. No. L-3438, October 12, 1907).
mortgaged property.
STIPULATIONS ON MORTGAGE CONTRACTS
Note: Article 2127 of the Civil Code is irrelevant 1. Including After-Acquired Properties
and inapplicable to mortgages and their Status: Valid
foreclosures if the mortgagor is later found or Purpose: To maintain, to the extent allowed by
declared to be not the true owners of the the circumstances, the original values of the
property (Philippine National Bank v. Sps. property given as a security.
Marañon, G.R. No. 189316, July 1, 2013).
Such stipulation is common where the properties
given as collateral are perishable or subject to
REGISTRATION OF MORTGAGE
inevitable wear and tear. (DE LEON, supra at
Once a mortgage has been signed in due form, the
406)
mortgagee is entitled to its registration as a matter of
right.
Note: After-acquired properties refer to
improvements or accessions to a property that is
Note: Registration is not a declaration by the state
already mortgaged. The term is not the same
that such an instrument is valid and subsisting
with future properties.
interest in the land. It is merely a declaration that
the record of the title appears to be burdened with
2. Blanket or Dragnet Clause
the mortgage described (DE LEON, supra at 395).
It is specifically phrased to subsume all debts of
past or future origins. Mortgages of this
Effect of Registration as to the Better Right of
character enable the parties to provide
Third Parties
continuous dealings, the nature or extent of
A registered mortgage right over property previously
which may not be known or anticipated at the
sold is inferior to the buyer‟s unregistered right.
time, and they avoid the expense and
Reason: If the original owner had sold the thing,
inconvenience of executing a new security on
then he no longer had ownership and free disposal
each new transaction (Id. at 407)
of it so as to be able to mortgage it (State
Investment House, Inc. v. CA, G.R. No. 115548,
Status: Valid
March 5, 1996).
A mortgage with a dragnet clause is an “offer” by
the mortgagor to the bank to provide the security
When there is a Prohibition Against
of the mortgage for advances of and when they
Encumbrance of Mortgaged Land Without
were made.
Mortgagors’ Consent
In this case, rights over the property, which came
into existence after the execution of the deed, and in Exception: It can be said that the “offer” was not
violation of the agreement, cannot be annotated as accepted by the bank when a subsequent
an adverse claim on the title of the land over the advance was made because of a new security.

509
A mortgage containing a “dragnet clause” will 5. Grant of First Refusal
not be extended to cover future advances unless Status: Valid.
the document evidencing the subsequent
advance refers to the mortgage as providing The consideration for the loan-mortgage may be
security therefor. In this case, the security said to include the consideration for the right of
specifically executed for subsequent loans must first refusal (Ibid.).
first be exhausted before the mortgaged
property can be resorted to (Prudential Bank v. Note: A sale made in violation of the
Alviar, G.R. No. 150197, July 28, 2005). mortgagee‟s contractual right of first refusal is
rescissible. The buyer is presumed to have
Note: The Supreme Court clarified that if there is been notified thereof by the registration of the
no reference in the security agreement for the mortgage deed containing such stipulation,
new loan or obligation, then do not extend the which equates to notice to the whole world
application of the dragnet clause. (Litonjua v. L&R Corporation, G.R. No. 130722,
December 9, 1999).
Purpose: It operates as a convenience and an
accommodation to the borrowers, as it makes 6. Acceleration Clause
available additional funds without the parties A stipulation stating that on the occasion of the
having to execute additional security documents mortgagor‟s default, the whole sum remaining
(Ibid.). unpaid automatically becomes due and payable.
Status: Valid (Luzon Development Bank v.
Construction: Provisions of this nature are Conquilla, G.R. No. 163338, September 21,
carefully scrutinized and strictly construed 2005).
particularly when the mortgage contract is one of
adhesion (Premiere Development Bank v. 7. Stipulation of Upset Price or “TIPO”
Central Security & Insurance Co., Inc., G.R. No. An Upset Price or TIPO is the minimum price at
176246, February 13, 2009). which the property shall be sold at a public
auction.
3. Forbidding Alienation of Mortgaged Property
(Pactum De Non Alienando) A stipulation in a mortgage of real property
Status: Void (CIVIL CODE, Art. 2130). providing for an Upset Price or Tipo, to become
operative in the event of a foreclosure sale at
Reason: Such a prohibition would be contrary to
public auction, is null and void for property must
the public good inasmuch as the transmission of
be sold to the highest bidder (DE LEON, supra
property should not be unduly impeded (DE
at 439).
LEON, supra at 411).
Note: In case of alienation, the transferee is Parties cannot, by agreement, contravene the
bound to respect the encumbrance (CIVIL law and interfere with the lawful procedure of the
CODE, Art. 2126) because being a real right, the courts (BPI v. Yulo, G.R. No. 9358, September
property remains subject to the fulfillment of the 24, 1915).
obligation for whose guaranty it was constituted
(Ibid.) Status: Void.
4. Stipulation Requiring Mortgagee’s Consent SPECIAL RIGHTS

Before Alienation Right of a Mortgagor:
Status: Valid and binding but only in the sense To alienate the mortgaged property, but the
that the mortgagee cannot be compelled to mortgage shall remain attached to the property
recognize the sale while the loan is still unpaid (CIVIL CODE, Art. 2130).
(DE LEON, supra at 411-412).
Note: In a sale with assumption of mortgage, the
The sale of the property does not affect the right alienation needs the consent of the mortgagee.
of the registered mortgagee to foreclose on the
same even if the ownership has been Rights of a Mortgagee:
transferred to another. To claim from a third person in possession of the
mortgaged property the payment of the part of the
Note: Such stipulation nonetheless contravenes credit secured by the property which said third
public policy, being an undue impediment or person possesses (CIVIL CODE, Art. 2129).
interference on the transmission of property (DE
LEON, supra at 412). Prior demand for payment must have been made on
the debtor and the latter failed to pay (BPI v. V.

510
3
Concepcion E. Hijos Inc., G.R. No. L-27701, July 21, Note: A motion for the appointment of independent
1928). commissioners cannot serve as a prejudicial
question. It is not a main action but a mere incident
Insurance of the Property of the main proceedings; it does not involve an issue
The mortgagee and the mortgagor both have that is intimately related to the foreclosure
insurable interest in the property. They may insure proceedings; and lastly, the motion‟s resolution is
the same (5 PARAS, supra at 1131). not determinative of the foreclosure‟s outcome.
Effect of an Invalid Mortgage Further, Act No. 3135 has no requirement for the
The principal obligation, which it guarantees, is not determination of the mortgaged properties‟ appraisal
rendered null and void. The principal obligation value (Sycamore Ventures Corp. v. Metropolitan
matures and becomes demandable in accordance Bank & Trust Co., G.R. No. 173183, November 18,
with the stipulation pertaining to it. 2013).
What is lost is the right to foreclose the mortgage
(DE LEON, supra at 398). Effect of Premature Foreclosure
The foreclosure of a mortgage prior to the
Aliens as Creditor Mortgagee mortgagor's default on the principal obligation is
A mortgage may be constituted in favor of aliens as premature, and should be undone for being void and
creditor mortgagee because it does not involve a ineffectual.
transfer of property but merely a lien on the
property. The mortgagee who has been meanwhile given
possession of the mortgaged property by virtue of a
The alien mortgagee may also foreclose the writ of possession issued to it as the purchaser at
mortgage and bid in the auction sale. However, if he the foreclosure sale may be required to restore the
is adjudged the buyer, he is mandated to dispose possession of the property to the mortgagor and to
the property within five (5) years pursuant to pay reasonable rent for the use of the property
R.A. 4882. during the intervening period (DBP v. Guariña
Agricultural and Realty Development Corp, G.R. No.
Foreclosure 160758, January 15, 2014).
It is the remedy available to the mortgagee by which
he subjects the mortgaged property to the 2W: Who may Exercise
satisfaction of the obligation to secure that for which The right of foreclosure cannot be exercised by any
the mortgage was given (DE LEON, supra at 413). person other than the creditor-mortgagee or his
assigns (Borromeo v. CA, G.R. No. 169846, March
It is a proceeding to terminate the rights of the 28, 2008).
mortgagor on the property.
3W: What is its Extent
Note: A mortgage-creditor has a single cause of General Rule: Foreclosure must be limited to the
action against a mortgage-debtor, which is to amount mentioned in the mortgage document
recover the debt, but he has the option of either: (Landrito, Jr., v. CA, G.R. No. 133079, August 9,
1. Filing a personal action for the collection of a 2005).
sum of money; or
2. Instituting a real action to foreclose on the Exception:
mortgage security. If from the four corners of the instrument the intent
to secure future and other indebtedness can be
If he elects to foreclose, he may yet to file an gathered (Sps. Cuyco v. Sps. Cuyco, G.R. No.
independent civil action for recovery of whatever 168736, April 19, 2006).
deficiency may remain (Tanchan v. Allied Banking
Corp., G.R. No. 164510, November 25, 2005). Note: A mortgagee has no right to include in the
foreclosure mortgage any unpaid loan separately
The 3Ws and 1H of Foreclosure secured by a chattel mortgage, a contract distinct
from the real estate mortgage (Rural Bank of
1W: When to Exercise Toboso, Inc. v. Agtoto, G.R. No. 175697, March 23,
When the principal obligation is not paid when due. 2011).
(Commodity Financing Co., Inc. v. Jimenez, G.R.
No. L-31384, June 29, 1979). In case of deficiency, the debtor is required to pay
the same even after foreclosure.
Foreclosure is also valid when the debtor has
violated the terms and conditions of the mortgage
contract.

511
1H: How to Construe Public Notice of As to Cutting Off of Rights
Foreclosure
Must be strictly complied with, and slight deviations The order of the court Foreclosure does not
will invalidate the sale or render it voidable cuts off all rights of the cut off the rights of all
(Tambunting v. CA, G.R. No. L-48278, November 8, parties impleaded. parties involved.
1988,; Roxas v. Court of Appeals, G.R. No. 100480,
May 1, 1993). As to the Right of Redemption
There is equity of
Kinds of Foreclosure: redemption, except on
1. Judicial – ordinary action for foreclosure under There is a right of
banks which provides
Rule 68 of the Rules of Court. redemption.
for a right of
redemption.
Nature: As to the Period of redemption
1. A proceeding for judicial foreclosure of
Period of redemption Period to redeem starts
mortgage is an action quasi in rem. It is based
starts from the finality of from the date of
on a personal claim against a specific
the judgment until order registration of the
property of the defendant (Ocampo v.
of confirmation. certificate of sale.
Domalanta, G.R. No. L-21011, August 30,
As to Necessity of a Special Power of Attorney
1967);
2. It is a result or incident of failure to pay Special power of
No need for a special
indebtedness; and attorney in favor of the
power of attorney in the
3. It survives the death of the mortgagor. mortgagee is needed in
contract of mortgage
the contract.
Reason: The claim against him is not a pure
money claim but an action to enforce a mortgage Note: A foreclosure sale retroacts to the date of
lien (DE LEON, supra at 434). registration of the mortgage. A person who takes a
mortgage in good faith and for valuable
2. Extrajudicial – when mortgagee is given a consideration, the record showing clear title to the
special power of attorney to sell the mortgaged mortgagor, will be protected against equitable claims
property by public auction, under Act No. 3135. on the title in favor of third persons, of which he had
no actual or constructive notice (St. Dominic
Note: This kind of foreclosure is conferred for Corporation v. IAC, G.R. No. 70623, June 30, 1987).
the mortgagee‟s protection ((DE LEON, supra at
434). It is not a necessary consequence of non- Judicial Foreclosure under the Rules of Court
payment of mortgage indebtedness. The power (Rules of Court, Rule 68) (JOSCEAS)
to foreclose or not is the prerogative of the Step 1: Judicial Action brought to the proper court
mortgagee (Rural Bank of San Mateo, Inc. v. having jurisdiction.
IAC, G.R. No. L-66936, December 12, 1986).
Step 2: Order by the Court for Mortgagor to Pay
Judicial Foreclosure v. Extrajudicial Foreclosure Mortgage Debt if the court finds the complaint to be
well-founded, within a period of not less than ninety
Extrajudicial (90) days nor more than one hundred twenty (120)
Judicial Foreclosure
Foreclosure days from the entry of judgment.
As to the Governing Rule
Step 3: Sale to the highest bidder at public auction
if the mortgagor fails to pay at the time directed in
Governed by Rule 68 of Governed by Art. 3135
the court order.
the Rules of Court of the Civil Code.
Step 4: Confirmation of Sale, which operates to
As to Court Intervention
divest the rights of all parties to the action and vest
their rights to the purchaser
There is court
No court intervention
intervention Note: Before the confirmation of a judicial
foreclosure sale, the court retains control of the
As to the Right of Appeal proceedings by exercising a sound discretion in
regard to it, either granting or withholding
confirmation (Salazar v. De Torres, G.R. No. L-
Decisions are Not appealable, it is 13711, May 25, 1960).
appealable. immediately executory.
Step 5: Execution of Judgment in the manner
prescribed by the law on mortgages, the parties not

512
3
being authorized to change the procedure Contents of notice:
prescribed (Piano v. Cayanong, G.R. No. L-18603, To be valid, the notice of a sheriff‟s sale, must
February 28, 1963). contain the correct number of the certificate of
title and the correct technical description of the
Note: The proper remedy to seek reversal of a real property sold (DE LEON, supra at 421).
judgment in an action for foreclosure is an appeal
from the judgment itself or from the order confirming 2. Publication (if property is worth more than
the sale of foreclosed real estate (Sps. Agbada v. P400)
Inter-Urban Developers, Inc., G.R. No. 144029, Once a week for at least three (3) consecutive
September 19, 2002). weeks in a newspaper of general circulation in
the city or municipality.
Step 6: Application of the Proceeds of the Sale
1. Costs of sale; The notice of sale shall be published in a
2. Amount due the mortgagee; newspaper of general circulation pursuant to
3. Claims of junior encumbrancers or persons Section 1, P.D. 1079.
holding subsequent mortgages in the order of
their priority; and Note: Under Section 5 of R.A. 720 (Rural Banks
4. The balance, if any, shall be paid to the Act), as amended by R.A. 7939, the posting of a
mortgagor or his duly authorized agent, or to the notice of the foreclosure of the real estate
person entitled to it. (DE LEON, supra at 418) mortgage in at least three (3) of the most
conspicuous public places not only in the
Note: In the absence of any evidence showing municipality but also in the barrio where the land
that the mortgage also covers the other mortgaged is situated during the 60-day period
obligations of the mortgagor, the proceeds from immediately preceding the public auction is
the sale should not be applied to them (Philippine MANDATORY (Guanco v. Antolo, G.R. No.
Bank of Communications v. Yeung, G.R. No. 150852, July 31, 2006).
179691, December 4, 2013).
Step 3: The application shall be raffled among
Step 7: Execution of Sheriff’s Certificate. In the different sheriffs.
absence of a Certificate of Sale, no title is passed by
the foreclosure proceedings to the vendee Step 4: An auction sale may be had even with
(DE LEON, supra at 419). just one (1) participating bidder. The name/s of
the bidder/s shall be reported by the Sheriff or the
Procedure for Extrajudicial Foreclosure of Both Notary Public, who conducted the sale to the Clerk
Real Estate Mortgage Under Act No. 3135 and of Court before the issuance of the certificate of sale
Chattel Mortgage Under Act No. 1508 (A.M. No. (As amended by the January 30, 2001 Resolution,
99-10-05-0, January 15, 2000, further amended on paragraph 5 of A. M. No. 99-10-05-0; Sps. Certeza
August 7, 2001): v. Phil. Savings Bank, G. R. No. 190078, March 5,
2010).
Step 1: Filing of an application before the
Executive Judge through the Clerk of Court. The indivisibility of a real estate mortgage is not
violated by conducting two separate foreclosure
Note: In extrajudicial foreclosure of real mortgages proceedings on mortgaged properties located in
in different locations covering a single indebtedness, different cities or municipalities as long as each
only one filing fee corresponding to such debt shall parcel of land is answerable for the entire debt (Sps.
be collected. Yu v. Philippine Commercial International Bank,
G.R. No. 147902, March 17, 2006).
Step 2: Clerk of Court will examine whether the
following requirements of the law have been No sale can be legally made outside the province in
complied with: which the property sold is situated. In case the
place within said province in which the sale is to be
1. Posting of notice made is stipulated, such sale shall be made in said
Not less than twenty (20) days in at least three place or in the municipal building of the municipality
(3) public places of the municipality or city where in which the property or part thereof is situated (Act
the property is situated. No. 3135, Sec.2).
Notices are given to secure bidders and to Note: Surplus money arising from a sale of real
prevent a sacrifice of the property (Sps. Suico v. property like land under foreclosure stands in the
Philippine National Bank, G.R. 170215, August same place of a land with respect to liens thereon or
28, 2007). vested right therein. They are constructively, at

513
least, real property and belong to the mortgagor or Causes:
his assigns (DE LEON, supra at 429). a. The mortgage was not violated; and
b. The sale was not made in accordance with
Rule on Deficiency the provisions thereof (Act No. 3135, Sec. 8).
The plain result of adopting extrajudicial foreclosure
under Act No. 3135 is that the creditor waives his 2. Ask annulment of foreclosure on the following
right to recover any deficiency (Heirs of Sps. grounds:
Flaviano v. Manila Banking Corporation, G.R. No. a. Fraud, collusion, accident, mutual mistake,
171206, September 23, 2013). breach of trust or misconduct by the
purchaser;
Step 5: The Clerk of Court shall issue a b. The sale has not been fairly and regularly
certificate of payment indicating the amount of conducted; or
indebtedness, the filing fees collected, the c. The price was inadequate and the inadequacy
mortgages sought to be foreclosed, the description was so great as to shock the conscience of
of the real estates and their respective locations. the court (United Coconut Planters Bank v.
Sps. Beluso, G.R. No. 159912, August 17,
Step 6: The certificate of sale must be approved 2007).
by the Executive Judge.
Notes on Posting and Publication Under Act No.
Step 7: After the redemption period has expired, 3135:
the Clerk of Court shall archive the records. 1. Nature
They are imbued with public policy
Note: The law covers only real estate mortgages. It considerations. (DE LEON, supra at 425).
is intended merely to regulate the extrajudicial sale
of the property mortgaged if and when the The mortgagor and mortgagee have no right to
mortgagee is given a special power or express waive the posting and publication requirements
authority to do so in the deed itself or in a document under Act. No. 3135. Notices are given to secure
annexed thereto (Luna v. Encarnacion, G.R. No. L- bidders and prevent a sacrifice of the property.
4637, June 30, 1952; Ponce de Leon v.
Rehabilitation Finance Corp., G.R. No. L-24571, Failure to comply with the statutory requirements
December 18, 1970). as to publication of notice of auction sale
constitutes a jurisdictional defect, which
The authority to sell is not extinguished by the death invalidates the sale. Lack of republication of
of the mortgagor (or mortgagee) as it is an essential notice of foreclosure sale made subsequently
and inseparable part of a bilateral agreement (Perez after the original date renders such sale void
v. PNB, G.R. No. L-21813, July 30, 1966). (Philippine National Bank v. Nepomuceno
Productions Inc., G.R. No. 139479, December
Construction of Act No. 3135 27, 2002).
The construction of this law must be equally and
mutually beneficial to both parties (Philippine The failure to post a notice is not per se a
National Bank v. Sps. Cabatingan, G.R. No. 167058, ground for invalidating a foreclosure sale
July 9, 2008). provided that the notice thereof is duly published
in a newspaper of general circulation
When authority to foreclose is not extinguished (Development Bank of the Philippines v. Aguirre,
by death of mortgagor or mortgagee G.R. No. 144877, September 7, 2001).
A mortgage may be foreclosed extrajudicially where
there is inserted in the contract a clause giving the As long as the objects of the notice are attained,
mortgagee the power, upon default of the debtor, to the sufficiency or validity of a notice of sale is not
foreclose the mortgage by an extrajudicial sale of affected by immaterial errors or simple mistakes
the mortgaged property (Act No. 3135, as amended or omissions not calculated to deter or mislead
by Act No. 4148, Sec. 1). bidders, to depreciate the value of the property,
or to prevent from bringing a fair price (Sps.
Remedy of Debtor Aggrieved by Foreclosure Certeza v. Philippine Savings Bank, G.R. No.
under Act No. 3135: 190078, March 5, 2010).
1. File a petition that the sale be set aside and that
the writ of possession be cancelled, specifying Republication
the damage to him. Another publication is required in case the auction
sale is rescheduled, and the absence of such
republication invalidates the foreclosure sale (DE

514
3
2. No Requirement of Personal Notice office or officer of the government for an act to be
Sec. 3 of Act No. 3135 does not require personal done. (G.R. No. L-32116, April 21, 1981)
or any particular notice on the mortgagor much
less on his successors-in-interest where there is Effect of Inadequacy of Price in a Foreclosure
no contractual stipulation therefor (DE LEON, Sale
supra at 422). General Rule: When there is a right to redeem,
inadequacy of price is immaterial because the
Unless the parties stipulate, personal notice to judgment debtor may reacquire the property easier
the mortgagor in extrajudicial foreclosure at a low price or sell his right to redeem (Philippine
proceedings is not necessary because Section 3 National Bank v. CA, G.R. No. 121739, June 14,
of Act No. 3135 only requires the posting of the 1999).
notice of sale in three public places, and the
publication of that notice in a newspaper of Exception: When the price is so inadequate as to
general circulation (Ramirez v. The Manila shock the conscience of the court taking into
Banking Corp, G.R. No. 198800, December 11, consideration the peculiar circumstances attendant
2013). thereto (United Coconut Planters Bank v. Sps.
Beluso, supra.)
Neither does Sec. 3 require the posting of a
notice of sale on the mortgaged property. Note: The value of the mortgaged property has no
bearing on the bid price at the public auction,
3. NO Certificate of Posting is Required provided that the public auction was regularly and
General rule: A certificate of posting is not honestly conducted (DE LEON, supra at 441).
required, much less considered indispensable
for the validity of a foreclosure sale under Act RECOVERY OF DEFICIENCY
No. 3135 (DE LEON, supra at 423). Note that the mortgage is but a security and not a
satisfaction of the indebtedness (Philippine Bank of
Exception: Such certificate is significant only Commerce v. De Vera, G.R. No. L-18816
when it becomes necessary to prove compliance December 29, 1962).
with the required notice of posting.
1. Judicial Foreclosure under the Rules of
In Bohanan v. CA, the absence of the affidavit of Court
publication was considered fatal because no The mortgagee is specifically given the right to
equally convincing and competent proof of claim for deficiency (RULES OF COURT, Rule
compliance was offered to compensate for its 68, Sec. 6).
non-presentation (G.R. No. 111654, April 18,
1996). 2. Extra-Judicial Foreclosure under Act No.
3135
4. Burden of Proving Non-Compliance With Act No. 3135 does not give a mortgagee the
Publication and Posting Requirements right to recover deficiency after the public
Foreclosure proceedings have in their favor the auction sale, neither does it expressly or
presumption of regularity (Union Bank of the impliedly prohibit such recovery (DE LEON,
Philippines v. CA, G.R. No. 164910, September supra at 431).
30, 2005).
A deficiency claim is allowed (Philippine National
In the absence of contrary evidence, the Bank v. CA, Supra).
presumption prevails that the sheriff performed
his official duty of posting the notices of sale in Note: In both judicial and extrajudicial
the reglementary period (DE LEON, supra at foreclosure, when a third person is the
424). mortgagor, he is not liable for any deficiency in
the absence of a contrary stipulation (DE LEON,
Pretermission of Holiday supra at 431).
Section 31 of the Revised Administrative Code
ordains that where the day, or the last day, for doing Action for Recovery of Deficiency
any act required or permitted by law falls on a A mortgagee may recover any deficiency in the
holiday, the act may be done on the next mortgage account, which is not realized in a
succeeding business day. foreclosure sale. An independent civil action for the
recovery of deficiency may be filed even during the
In Rural Bank of Caloocan, Inc. v. CA it was held period of redemption (Tarnate v. CA, G.R. No.
that the pretermission of holiday is not applicable to 100635, February 13, 1995).
auction sales. It does not apply to a day fixed by an

515
After the auction sale is effected and the resulting (Government Service Insurance System v. The
deficiency is ascertained, the mortgagee-creditor is CFI of Iloilo, G.R. No. L-45322, July 5, 1989).
entitled to secure a deficiency judgment which may
immediately be executed, whether or not the If the mortgagee is a bank, the mortgagor may
mortgagor is still entitled to redeem the property sold exercise a right of redemption and this rule
(Development Bank of the Philippines v. Vda. De applies even if the foreclosure is judicial in
Moll, G.R. No. L-25802, January 31, 1972). accordance with Rule 68 of the Rules of Court.
Deficiency Judgment – If the deficiency is 2. Right of Redemption – right of a mortgagor to

embodied in a judgment (DE LEON, supra at 432). redeem the mortgaged property in an
extrajudicial foreclosure of real mortgage.
Note: The action prescribes after ten (10) years
from the time the right of action accrues (CIVIL Period to Exercise: within one year from the
CODE, Art. 1144 (2)). date of registration of the certificate of sale (Act
No. 3135, Sec. 6; RULES OF COURT, Rule 39,
REDEMPTION Sec. 28).
It is the transaction by which the mortgagor The right of redemption, as long as within the
reacquires or buys back the property which may period prescribed, may be exercised regardless
have passed under the mortgage, or divests the of whether or not the mortgagee has
property of the lien which the mortgage may have subsequently conveyed the property to some
created (DE LEON, supra at 444). other party (Sta. Ignacia Rural Bank, Inc. v. CA,
GR No. 97872, March 1, 1994).
Note: A sale by the mortgagor to a third party of the
mortgaged property during the period for redemption Note: Notwithstanding Act 3135, juridical persons
transfers only to said third person the right to whose property is being sold pursuant to an
redeem the property, and the right to possess, use, extrajudicial foreclosure, shall have the right to
and enjoy the same during said period (Id. at 451). redeem the property until, but not after, the
registration of the certificate of foreclosure sale
Where the sale with assumption of mortgage was with the applicable Register of Deeds which in no
not registered and made without the consent of the case shall be more than three (3) months after
mortgagee, the buyer thereof was not validly foreclosure, whichever is earlier. Owners of
substituted as debtor, and hence, had no right to property that has been sold in a foreclosure sale
redeem (Bonnevie v. CA, supra.). prior to the effectivity of this General Banking Act
shall retain their redemption rights until their
Kinds of Redemption: expiration (General Banking Law of 2000, R.A.
1. Equity of Redemption – right of the defendant 8791, Sec. 47).
to extinguish the mortgage and retain ownership
of the property by paying the secured debt within Effect of Failure to Redeem
the period provided by law (DE LEON, supra at Act No. 3135 provides that if the mortgagor or
445). successors-in-interest fail to redeem within the
redemption period, the title over the property
The mortgagor‟s equity of redemption can be consolidates in the purchaser.
levied upon by means of a writ of execution
(Potenciano v. Mariano, G.R. No. L-30904, The consolidation confirms the purchaser as the
March 6, 1980). owner entitled to the possession of the property. The
mortgagor, by failing to redeem, loses all interest in
Period to Exercise: within the period of 90-120 the property (United Coconut Planters Bank v. .
days from the date of the service of the order of Lumbo, G.R. No. 162757, December 11, 2013).
foreclosure, or even thereafter but before the
order of confirmation of the sale (RULES OF Nature of the Right of Redemption:
COURT, Rule 68, Secs. 2 and 3). 1. Absolute privilege – the exercise of which is
entirely dependent upon the will and discretion
This applies to judicial foreclosure of real of the redemptioner. There is no legal obligation
mortgage and chattel mortgage foreclosure. to exercise the right of redemption (DE LEON,
supra at 452);
Exception: There is no right of redemption from 2. A mere statutory privilege – it must be exercised
a judicial foreclosure sale after the confirmation in the mode and within the period prescribed by
of the sale, except those granted by banks and the statute (Id. at 453);
financial institution as provided by the General 3. Construed in favor of the original owner of the
Banking Act (Now General Banking Law) property (Ibid.); and

516
3
4. Involves title to the foreclosed property – If Note: The statutory period of redemption is only
seasonably made, it seeks to erase from the title directory and can be extended by agreement of
of the judgment or mortgage debtor the lien the parties provided:
created by registration of the mortgage and sale. i. The agreement to extend is voluntary; and
If not seasonably made, it may seek to recover ii. The debtor commits to pay the redemption
ownership to the property since the purchaser‟s price on a fixed date (Gajudo v. Traders
inchoate title to the property becomes Royal Bank, G.R. No. 151098, March 21,
consolidated after expiration of the period (Id. at 2006).
454).
b. Juridical Person – same rule as natural
Requisites of a Valid Exercise of the Right of person
Redemption:
1. Must be made within twelve (12) months from c. Juridical Person (mortgagor) and Bank
the date of the registration of the sale in the (mortgagee) – three (3) months after
Office of the Registry of Property; foreclosure or before registration of certificate
2. Payment of the purchase price of the property of foreclosure whichever is earlier (R.A. 8791,
involved, plus 1% interest per month thereon, Sec. 47).
together with the amounts of assessments of
taxes thereon, if any, paid by the purchaser and Note: By an amendment by the General
the amount of his prior lien, if any, with the same Banking Law of 2000, juridical mortgagors like
rate of interest computed from the date of partnerships and corporations are barred from
registration of the sale, up to the time of the right of redemption of mortgaged property
redemption; sold pursuant to an extrajudicial foreclosure,
after the registration of the certificate of
Note: The offer by respondents to redeem the foreclosure with the applicable Register of
foreclosed properties and the subsequent Deeds (DE LEON, supra at 448).
consignation in court, while made within the
period of redemption was ineffective since the For purposes of reckoning the one-year
amount offered and actually consigned not only redemption period in case of individual
did not include the interest, but was in fact also mortgagors, or the three-month reckoning
way below the amount paid by the highest period for juridical persons/mortgagors, the
bidder/purchaser of the properties during the same shall be reckoned from the date of
auction sale (Sps. Hojas v. Philippine Amanah confirmation of the auction sale which is the
Bank, G.R. No. 193453, June 5, 2013). date when the certificate of title is issued (BIR
RMC No. 15-2008, August 15, 2008).
3. Writ of notice of the redemption must be
served on the officer who made the sale, and 2. Judicial – within the period of ninety (90) to one
a duplicate filed with the Registry of Property hundred twenty (120) days from the date of the
of the province (Sps. Yap v. Sps. Dy, G.R. No. service of the order of foreclosure or even
171868, June 27, 2011); and thereafter, but before the order of confirmation of
the sale (RULES OF COURT, Rule 68, Secs. 2
4. Tender of payment within the prescribed and 3).
period to make the redemption valid or
preserve the right of redemption for future Note: Allowing redemption after the lapse of the
enforcement (RULES OF COURT, Rule 39, statutory period, when the buyer at the
Sec 8; Act No. 3135, Sec. 26). foreclosure sale does not object but even
consents to the redemption, will uphold the
Note: The filing of a court action to enforce policy of the law which is to aid rather than
redemption, being equivalent to a formal offer to defeat the right of redemption (Ramirez v. CA,
redeem, would have the effect of “freezing” the G.R. No. 98147, March 5, 1993).
expiration of the one-year period (Heirs of N.J.
Quisumbing v. Philippine National Bank, G.R. No. It is a serious error to make the final redemption
178242, January 20, 2009). of the foreclosed property dependent on the
financial condition of the redemptioner. After all,
Summary of Periods of Redemption: the opportunity to redeem the subject property
1. Extrajudicial (Act No. 3135) was never denied (Hi-Yield Realty, Inc. v. CA,
a. Natural Person – one (1) year from G.R. No. 138978, September 12, 2002).
registration of the certificate of sale with
Registry of Deeds

517
Persons Entitled to Exercise Right of Redemption price in this case is reduced by the
Redemption: income received from the property (DE LEON,
1. Mortgagor or one in privity of title with the supra at 459).
mortgagor (DE LEON, supra at 468); and
2. Successors-in-interest (RULES OF COURT, Note: The redemption price for properties
Rule 39, Sec. 29) mortgaged to and foreclosed by the Development
Bank of the Philippines is equivalent to the
Payment of Redemption remaining balance of the loan with interest at the
To Whom: The purchaser or redemptioner, or for agreed rate. The charter of DBP (E.O. No. 81
him to the officer who made the sale (RULES OF (1986)), as amended by R.A. No. 8523, being a
COURT, Rule 39, Sec. 29). special and subsequent law, amended Act No.
3135 insofar as redemption price is concerned
Medium of Payment: It may be made in cash or in (Development Bank of the Philippines v.
check. Environmental Aquatic, Inc., G.R. No. 174329,
October 20, 2010).
Article 1249 of the Civil Code which expressly
provides for the medium in the “payment of debts” is Rentals Received by the Purchaser
not applicable (DE LEON, supra at 457). The purchaser or redemptioner shall not be entitled
to receive the rents, earnings, and income of the
Redemption by check is already sanctioned (Co v. property sold on execution or the value of the use
Philippine National Bank, G.R. No. L-51767, June and occupation thereof while the property is in the
29, 1982). possession of the tenant. It shall belong to the
judgment obligor until the expiration of the period of
Intention to Redeem is NOT Sufficient redemption (DE LEON, supra at 461).
It is not sufficient that a person offering to redeem
manifests his desire to do so. An actual and Rights of Persons with Subordinate Interest
simultaneous tender of payment must accompany 1. Mortgagor‟s equity of redemption before
the statement of intention. foreclosure – a second mortgagee acquires only
the equity of redemption vested in the mortgagor
Bona fide redemption necessarily implies a and his rights are strictly subordinate to the
reasonable and valid tender of the entire repurchase superior lien of the first mortgagee (Sun Life
price, otherwise the rule on the redemption period Assurance Co. of Canada v. Diez, G.R. No. L-
fixed by law can easily be circumvented (Sps. Hojas 29027, October 25, 1928).
v. Philippine Amanah Bank, supra.).
2. Mortgagor‟s right of redemption after foreclosure
Amount of the Redemption Price: – his remedy is limited to the right to redeem by
1. When mortgagee is not a bank (Act No. 3135, in paying off the debt secured by the first mortgage
relation to Sec. 28, Rule 39 of Rules of Court) (Tizon v. Valdez, G.R. No. L-24797, March 16,
(PINT) 1926).
a. Purchase price of the property;
b. 1% Interest per month on the purchase price 3. The second mortgagee is entitled, under the
from the date of registration of the certificate mortgage constituted in his favor, to the payment
up to the time of redemption; of his credit the excess of the proceeds of the
c. Necessary expenses incurred by the auction sale, after covering the mortgagor‟s
purchaser for the improvements made by him obligations to the first mortgagee (DE LEON,
to preserve the property during the period of supra at 462).
redemption; and
d. Taxes paid and amount of purchaser‟s prior 4. To be made defendant in an action for
lien, if any, with the same rate of interest foreclosure of the mortgage.
computed from the date of registration of sale,
up to the time of redemption Note: The effect of the failure of the mortgagee to
implead a subordinate lien-holder or subsequent
2. When mortgagee is a bank (General Banking purchaser or both is to render the foreclosure
Law of 2000, R.A. 8791) (CMICE) ineffective as against them.
a. Amount fixed by the Court or amount due
under the Mortgage deed; 5. To question the legality of the foreclosure
b. Interest; and proceedings or the effect of alleged lack of
c. Cost and Expenses notice to them of such foreclosure (G. Puyat &
Sons v. Philippine National Bank, G.R. No. L-
16843, April 30, 1962).

518
3
or despite non-registration, the mortgagee has
Right to Possession of Third Persons as prior knowledge of the existence and duration of
Purchaser: the lease (Ibasco v. Caguioa, G.R. No. L-62619,
Both during and after the period of redemption, the August 19, 1986);
purchaser at the foreclosure sale is entitled as of 2. Where mortgagor refuses to surrender property
right to a writ of possession, regardless of whether sold, the remedy is to file an ordinary action for
or not there is a pending suit for annulment of the the recovery of possession in order that the
mortgage or the foreclosure itself (DE LEON, supra mortgagor may be given opportunity to be heard
at 454). (DE LEON, supra at 481); and
3. When third party is in actual possession adverse
Writ of Possession – an order whereby a sheriff is to the judgment debtor (RULES OF COURT,
commanded to place in possession, of real or Rule 39, Sec. 35; Act No. 3135 Sec. 6).
personal property, the person entitled thereto such
as when a property is extrajudicially foreclosed (Id. Waiver of Security by Mortgagee
at 473). The mortgagee may institute either a personal
action for debt or a real action to foreclose the
Note: The right of the applicant or subsequent mortgage. He may waive the right to foreclose his
purchaser for the issuance of a writ of possession mortgage and maintain a personal action for
never prescribes (Sps. Ching v. Family Savings recovery of the indebtedness.
Bank, G.R. No. 167835, November 15, 2010).
Note: In either case, he is entitled to obtain a
1. Before expiration of redemption period – deficiency judgment (DE LEON, supra at 441).
possession can be availed of as long as an ex
parte motion under oath is filed and a bond in OPTIONS IN CASE OF DEATH OF DEBTOR
accordance with Section 7 of Act No. 3135 is General rule: A secured creditor holding a real
posted (Philippine Bank of Communications v. estate mortgage has three distinct, independent,
Yeung, supra). and mutually exclusive remedies that can be
alternatively pursued in case the mortgagor dies:
2. After lapse of redemption period – purchaser is 1. To waive the mortgage and claim the entire debt
not obliged to bring a separate suit for from the estate of the mortgagor as an ordinary
possession. He must invoke the aid of the courts claim;
and ask a writ of possession (Javelosa v. CA, 2. To foreclose the mortgage judicially and prove
G.R. No. 124292, December 10, 1996). any deficiency as an ordinary claim; and
3. To rely on the mortgage exclusively, foreclosing
No bond is required of the purchaser after the the same at any time before it is barred by
redemption period if the property is not prescription without a right to file a claim for any
redeemed (DE LEON, supra at 479). deficiency (Perez v. PNB, supra).
The suspension of the implementation of the writ Petition for Annulment of Foreclosure
of possession is not allowed after the Proceedings
redemption period (Id. at 480). This petition contests the presumed right of
ownership of the buyer in a foreclosure sale and
Note: After consolidation of title in the puts in issue such presumed right of ownership
purchaser‟s name for failure of the mortgagor to while an ex parte petition for issuance of a writ of
redeem the property, the purchaser‟s right to possession is non-litigous proceeding.
possession ripens into the absolute right of a
confirmed owner. Filing of a petition for nullification of foreclosure
proceedings with motion for consolidation is not
At that point, the issuance of writ of possession, allowed as it will render nugatory the presumed right
upon proper application and proof of title, to a of ownership, as well as the right of possession, of a
purchaser in a extrajudicial sale becomes merely buyer in a foreclosure sale (DE LEON, supra at
a ministerial function, unless it appears that the 482).
property is in possession of a third party claiming
a right adverse to that of the mortgagor (Rural
Bank of Sta. Barbara v. Centeno, G.R. No.
200667, March 11, 2013).
When Writ of Possession is NOT Available:

1. Where mortgaged property under lease
previously registered in the Registry of Property

519
contrary, antichresis is susceptible of
guaranteeing all kinds of obligations, whether
A NTICHRESIS pure or conditional in nature (Javier v. Valliser,
CA No. 2648-R, April 29, 1950; Sta. Rosa v.
( A RTS . 2132 – 2139) Noble, 35 O.G. 27241).
Contract of Antichresis Mortgagee in Possession

A contract whereby the creditor acquires the right to One who has lawfully acquired actual or constructive
receive the fruits of an immovable property of the possession of the premises mortgaged to him,
debtor, with the obligation to apply them to the standing upon his rights as mortgagee and not
payment of the interest, if owing, and thereafter to claiming under another title for the purpose of
the principal of his credit (CIVIL CODE, Art. 2132). enforcing his security upon such property or making
its income to pay his debt (Diego v. Fernando,
Characteristics: supra).
1. Accessory contract – it secures the performance
of a principal obligation. There is also a third-party antichretic.
2. Formal contract – it must be in a specified form
to be valid i.e. in writing (CIVIL CODE, Art. Provisions Indicative of a Contract of Mortgage:
2134). 1. The agreement that the full amount of
indebtedness must be returned to the lenders
Reason: To forestall the use of antichresis for before the borrowers could demand the return of
purposes of usury (DE LEON, supra at 500). the property, which is contrary to an antichretic
contact wherein the products of the land should
Special Requisites: be applied to the interest and then to principal;
1. It can cover only the fruits of an immovable 2. The use of the term “mortgage” in various parts
property but not the immovable itself (Id. at 497); of the contract; and
3. The agreement that the lenders are not to pay
Note: Article 1306 of the Civil Code gives parties rentals on the property in consideration of the
the freedom to stipulate otherwise. The fact that the borrowers do not pay interest on the
reduction of the amount of fruits available to the sum which they obtained as a loan (DE LEON,
creditor does not vary the nature of the contract supra at 499-500).
(Ibid.).
Applicability of Other Articles
2. Delivery of the immovable is necessary only for The last paragraph of Article 2085, and Articles
the creditor to receive the fruits and not for the 2089 to 2091 are applicable to this contract (CIVIL
contract to be binding (Ibid.); CODE, Art. 2139).
3. Amount of principal and interest must be An antichresis is also indivisible in nature (CIVIL
specified in writing (CIVIL CODE, Art. 2134); and CODE, Art. 2090).
Note: This is mandatory (5 PARAS, supra at Antichresis v. Pledge

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

520
3
Antichresis v. Real Mortgage 3. To have the thing sold upon non-payment at
Antichresis Real Mortgage maturity (CIVIL CODE, Art. 2137);
As to Delivery or Non-Delivery of the Property
Debtor usually retains Note: In this case, the Rules of Court on the
Real Property is foreclosure of mortgages shall apply.
possession of the Real
delivered to creditor.
Property.
4. Preference to the proceeds of the sale of the
As to Right to the Fruits thing (5 TOLENTINO, supra at 567); and
Creditor does not have
Creditor acquires only
any right to receive the 5. To be reimbursed for his expense for machinery
the right to receive the
fruits; but the and other improvements on the land, and for the
fruits of the property;
mortgage creates a sums paid as land taxes (5 PARAS, supra at
hence, it does not
real right over the 1143).
produce a real right.
property.
As to the Obligation to Pay Taxes Obligations of Antichretic Creditor:
The creditor, unless 1. To pay taxes and charges on the estate, if there
there is stipulation to has been no stipulation to the contrary, and to
the contrary, is obliged The creditor has no bear the expenses necessary for preservation
to pay the taxes and such obligation. and repair. The sums spent shall be deducted
charges upon the from the fruits (CIVIL CODE, Art. 2136).
estate.
As to the Obligation to Apply Fruits to the Note: The creditor has to pay for the taxes and
Interest charges, even if the fruits be insufficient (5
It is expressly stipulated PARAS, supra at 1142).
that the creditor given
possession of the If he does not pay the taxes, he is, by law,
property shall apply all required to pay indemnity for damages to the
There is no such debtor (Pando v. Gimenez, G.R. No. 31816,
the fruits thereof to the
obligation on part of February 15, 1930).
payment of interest, if
mortgagee.
owing, and thereafter to
the principal. Creditor may avoid said obligation by compelling
debtor to reacquire enjoyment of the property,
unless there is a stipulation to the contrary
(CIVIL CODE, Art. 2136, Par. 2).
The subject matter of both is real property. If the debtor has paid for the taxes, which the
(Id. at 498-499) creditor should have paid, the amount is to be
applied to the payment of the debt, and the
Measure of Application of Fruits to Interest and debtor is entitled to the return of the property
Principal free from all encumbrances if he, in effect, by
The actual market value of the fruits at the time of advancing the taxes, had already discharged the
application thereof to the interest and principal shall debt (Rosales v. Tanseco, G.R. No. L-4135,
be the measure of such application (CIVIL CODE, November 29, 1951).
Art. 2133).
2. To apply all the fruits, after receiving them, to the
Rights of Antichretic Creditor: payment of interest, if owing, and thereafter to
1. The right to the fruits and income of the thing the principal in accordance with the provisions of
(CIVIL CODE, Art. 2132); Article 2133 or 2138 of the Civil Code (CIVIL
CODE, Art. 2132).
2. To retain the thing until the debt is paid (CIVIL
CODE, Art. 2136, Par. 1); 3. To render an account of the fruits to the debtor
(Diaz v. De Mendezona, G.R. No. L-24824,
Note: The property delivered stands as a January 30, 1926).
security for the payment of the obligation of the
debtor in antichresis. Hence, the debtor cannot Remedies of Creditor in Case of Default
demand its return until the indebtedness is If the debt is not paid, the creditor does not acquire
satisfied and the property is redeemed ownership of the real estate, since what was
(Macapinlac v. Repide, G.R. No. 18574, transferred is not the ownership, but merely the right
September 20, 1922). to receive fruits (CIVIL CODE, Art. 2137; DE LEON,
supra at 502)

521
The remedies of the antichretic creditor are: Characteristics:
1. Action for specific performance; and 1. Accessory contract – it is for the purpose of
2. Petition for the sale of the real property as in a securing the performance of a principal
foreclosure of mortgages under Rule 68 of the obligation;
Rules of Court (CIVIL CODE, Art. 2137). 2. Formal contract – registration in the Chattel
Mortgage Register is indispensable for its
Note: The parties may agree on an extrajudicial validity;
foreclosure in the same manner as they are allowed 3. Unilateral contract – it produces only obligations
in contracts of mortgage and pledge (Tavera v. El on the part of the creditor to free the thing from
Hogar Filipino, Inc., G.R. No. L-45963, October 12, the encumbrance upon fulfillment of the
1939). obligation (DE LEON, supra at 506)
A stipulation authorizing the antichretic creditor to Special Requisites:
appropriate the property, upon the non-payment of 1. It can cover only personal or movable property in
the debt, within the agreed period is void (CIVIL general. However, the parties may treat as
CODE, Art. 2088). personal property that which by its nature would
be real property (CIVIL CODE, Art, 2140; Act
The creditor in antichresis and his successors-in- No. 1508, Sec. 2);
interest cannot ordinarily acquire the property
subject of the antichresis by prescription (Valencia v. Note: A real property may be considered as a
Alcala, 42 Phil. 177, 1921; Bernardo v. Barretto, 37 personal property for purposes of executing a
Phil. 234, 1917). chattel mortgage thereon as long as the parties
to the contract so agree and no innocent third
Exception: He repudiates his status as an party will be prejudiced thereby. Once the
antichretic creditor before he can claim ownership. parties so agreed, they are already estopped
(DE LEON, supra at 503) from claiming otherwise (Makati Leasing and
Financial Corporation v. Wearever Textile Mills,
Possession of the antichretic creditor is not in the Inc., G.R. No. L-58469, May 16, 1983).
concept of an owner, which is required for the
purpose of acquisitive prescription. He is a mere Laws Governing Chattel Mortgage
holder placed in the possession of the land by the 1. Chattel Mortgage Law, Act No. 1508, as
debtor-owner (Ramirez v. CA, G.R. No. L-38185, amended;
September 24, 1986). 2. Civil Code;
3. Revised Administrative Code;
4. Revised Penal Code; and
5. Ship Mortgage Decree of 1978, P.D. 1521, in
C HATTEL M ORTGAGE case of mortgage of vessels of domestic
( A RTS . 2140 – 2141) ownership.
Properties Held To Be Mortgageable Under the

Contract of Chattel Mortgage Chattel Mortgage Law:
A contract by virtue of which personal property is a. Shares of stock in a corporation (Monserrat v.
recorded in the Chattel Mortgage Register as a Ceron, G.R. No. 37078, September 27, 1933);
security for the performance of an obligation (CIVIL
CODE, Art. 2140). Note: If the owner of the shares is not
domiciled in the same province where the
It is a conditional sale of personal property as corporation is domiciled, the registration must
security for the payment of a debt, or the be made in both provinces (DE LEON, supra
performance of some other obligation specified at 509);
therein, the condition being that the sale shall be
void upon the seller paying to the purchaser a sum b. Interest in the business;
of money or doing some other act named. (Act No.
1508, Sec. 3) Reason: It is a personal property capable of
Note: If the movable, instead of being recorded, is appropriation (Strochecker v. Ramirez, G.R.
delivered to the creditor or a third person, the No. 18700, September 26, 1922);
contract is a pledge and not a chattel mortgage
(CIVIL CODE, Art. 2140). c. Machinery treated by the parties as personal
property subsequently installed on leased
land (Davao Sawmill Co., Inc. v. Castillo, G.R.
No. L-40411, August 7, 1935);

522
3
d. Vessel, but it is essential that the mortgage is Finance Corp. v. CA, G.R. No. 107554, February
recorded in the office of the Philippine Coast 13, 1997); and
Guard of the port of documentation of such
vessels (P.D. 1521); 5. It can cover only obligations existing at the time
the mortgage is constituted.
e. Motor vehicles;
Note: A mortgage containing a stipulation in
Note: The mortgage must also be registered regard to future advances in the credit will take
in the LTO and with respect to vehicles for effect only from the date the same are made and
public services, the mortgage must be not from the date of the mortgage (Jaca v.
approved by the LTFRB to make it effective Davao Lumber Co., G.R. No. L-25771, March
against the public and the Commission 29, 1982).
(Montoya v. Ignacio, G.R. No. L-5868,
December 29, 1953). Mortgage of Improvements on Land
For purposes of the Chattel Mortgage Law, both
f. House of mixed materials (Luna v. growing crops and large cattle are personal property
Encarnacion, supra). although they are considered as immovable under
Article 415, Nos. (2) and (6) of the Civil Code.
g. House intended to be demolished;
Reason: What are really mortgaged are the Note: Although the parties to a contract may treat
materials thereof and they are, therefore, certain improvements and crops as chattels, insofar
personal property (DE LEON, Credit as they are concerned, it is now settled in our
Transactions, supra at 511). jurisdiction that, in general, and so far as the public
is concerned, such improvements, if falling under
h. House built on rented land; the provisions of Article 415 of the Civil Code, are
Reason: It does not form part of the land. An immovable property (DE LEON, supra at 513).
object placed on land by one who had only a
temporary right to the same does not become As a consequence, a mortgage constituted in the
immobilized by attachment (Ibid.) improvements must be susceptible of:
1. Registration as a real estate mortgage; and
i. Machinery which is movable in its nature and 2. Annotation on the certificate of title to the land of
becomes immobilized only by destination or which they form part, although the land itself
purpose (Makati Leasing and Finance Corp v. may not be subject to said encumberance
Wearever Textiles Mills, Inc., supra); and (Tolentino v. Baltazar, G.R. No. L-14597, March
27, 1961).
j. House of strong materials.
Extent of Chattel Mortgage
Note: It may be considered as personal A chattel mortgage shall be deemed to cover only
property for purposes of executing a chattel property described therein and not like or substituted
mortgage as long as: property thereafter acquired by the mortgagor and
i. The parties to the contract agree; and placed in the same depositary as the property
ii. No innocent third person will be prejudiced originally mortgaged, anything in the mortgage to
thereby (DE LEON, supra at 512). the contrary notwithstanding (Act No. 1508, Sec.
7(4)).
2. Registration of the mortgage with the Chattel
Mortgage Register where the mortgagor resides. Note: The provision does not refer to those already
If the property is located in a different province, existing and originally included at the date of the
registration in both provinces is required (Act No. constitution of the mortgage (DE LEON, supra at
1508, Sec. 4); 515).
3. Description of the property as would enable the Stipulation Including After-Acquired Property
parties or other persons to identify the same It is valid and binding where the after-acquired
after reasonable investigation and inquiry property is:
(Saldana v. Phil. Guaranty Co. Inc., G.R. No. L- 1. In renewal of or in substitution for goods on
13194, January 29, 1960); hand; or
2. Purchased with the proceeds of the sale of such
4. Accompanied by an affidavit for the purpose of goods (Torres v. Limjap, G.R. No. 34385,
transforming an already valid mortgage to a September 21, 1931).
“preferred mortgage” (Cebu International

523
Chattel Mortgage v. Pledge Register as security for the performance of the
Chattel Mortgage Pledge obligation (CIVIL CODE, Art. 2140).
SIMILARITIES
1. Both are executed to secure performance of a Period Within Which Registration Should be
principal obligation; Made
2. Both are constituted only on personal property; There is no specific time. The law is substantially
3. Both are indivisible; and sufficiently complied with where the registration
4. Both constitute a lien on the property; is made by the mortgagee before the mortgagor has
5. In both cases, the creditor cannot appropriate complied with his principal obligation and no right of
the property to himself in payment of the debt; innocent third persons is prejudiced (DE LEON,
6. In both cases, when the debtor defaults, the supra at 517).
property must be sold for the payment of the
creditor; and Venue of Registration:
7. Both are extinguished by the fulfillment of the 1. If he resides in the Philippines – In the office of
principal obligation or by the destruction of the the register of deeds of the province in which the
property pledged or mortgaged. (DE LEON, mortgagor resides at the time of the making of
supra at 507). the chattel mortgage.
DISTINCTIONS 2. If he does not reside in the Philippines – In the
As to necessity of delivery province in which the property is located.
The delivery of the The delivery of the 3. If the property is situated in the province different
personal property to the personal property is from that in which the mortgagor resides – The
mortgagee is not necessary. mortgage shall be recorded in both provinces
necessary. (double registration). (Act 1508, Sec. 4)
As to requirement of registration
The registration of the The registration in the Effects of Registration:
mortgage in the Chattel Registry of Property is 1. Creates a real right – The registration of the
Mortgage Register is not necessary. chattel mortgage is an effective and binding
required by law. notice to other creditors of its existence and
As to the procedure for sale creates a real right or a lien which, being
recorded, follows the chattel wherever it goes.
The procedure is The procedure is
governed by Section 14 governed by Article 2112 The registration gives the mortgagee symbolical
possession (Northern Motors, Inc. v. Coquia,
of Act No. 1508, as of the Civil Code.
G.R. No. L-40018, December 15, 1975).
amended.
2. Adds nothing to the mortgage – Registration
As to who is entitled to the excess over the
adds nothing to the instrument, considered as a
amount due
source of title and affects nobody's rights except
The excess of the The debtor is not entitled
as a specie of notice (Standard Oil Co. of New
amount due goes to the to the excess unless it is
York v. Jaramillo, G.R. No. L-20329, March 16,
debtor (ACT NO. 1508, otherwise agreed upon
1923).
Sec. 14). (CIVIL CODE, Art. 2115)
or in the case of a legal
Effect of Failure to Register Chattel Mortgage in
pledge (CIVIL CODE,
the Chattel Mortgage Registry
Art. 2121).
If the instrument is not recorded, the mortgage is
As to the right of creditor to recover deficiency nevertheless binding between the parties DE LEON,
from debtor
supra at 517). However, the person in whose favor
The creditor is entitled The creditor is not the law establishes a mortgage has no other right
to recover the entitled to recover than to demand the execution and the recording of
deficiency from the deficiency the document.
debtor except if the notwithstanding any
chattel mortgage is a stipulation to the Duty of Register of Deeds Ministerial
security for the contrary (CIVIL CODE, The duties of a register of deeds in respect to the
purchase of personal Art. 2115). registration of chattel mortgages are of a purely
property in installments ministerial character (Id. at 519)
(CIVIL CODE, Art.
1484). Affidavit of Good Faith
(DE LEON, supra at 506-507) It is an oath in a contract of chattel mortgage
wherein the parties "severally swear that the
Creation of A Chattel Mortgage mortgage is made for the purpose of securing the
The law provides only for one way: the registration obligation specified in the conditions thereof and for
of the personal property in the Chattel Mortgage

524
3
no other purposes and that the same is a just and Foreclosure of Chattel Mortgage
valid obligation and one not entered into for the After payment of the debt or the performance of the
purpose of fraud” (Act No. 1508, Sec. 5). condition specified in the Chattel Mortgage (Act No.
1508, Sec. 3), the mortgagee must discharge the
Note: The debt referred to in the law is current and mortgage in the manner provided by law. Otherwise,
not an obligation that is merely contemplated. A he may be held liable for damages by any person
mortgage that contains a stipulation in regard to entitled to redeem the mortgage (Act No. 1508, Sec.
future advances in the credit will take effect only 8).
from the date the same are made and not from the
date of the mortgage (Jaca v. Davao Lumber Co., 1. Public sale
supra). If the mortgagor defaults in the payment of the
secured debt or otherwise fails to comply with
Effect of Absence of an Affidavit of Good Faith the conditions of the mortgage, the creditor has
The special affidavit is required only for the purpose no right to appropriate to himself the personal
of transforming an already valid mortgage into a property (CIVIL CODE, Arts. 2141 and 2088).
“preferred mortgage.” It is not necessary for the He is permitted only to recover his credit from
validity of the chattel mortgage itself but only to give the proceeds of the sale of the property at a
it a preferred status (Cebu International Finance public auction through a public officer in the
Corp. v. CA, supra). manner prescribed in Sec. 14 of Act No. 1508
(Mahoney v. Tuason, G.R. No. 14129, July 30,
Its absence vitiates the mortgage only as against 1919).
third persons without notice, like creditors and
subsequent encumbrances (Lilius v. Manila Railroad 2. Private Sale
Co., G.R. No. 42551, September 4, 1935). There is nothing illegal, immoral, or against
public order in an agreement for the private sale
Registration of Assignment of Mortgage of the personal properties covered by the chattel
There is no law expressly requiring the recording of mortgage (CIVIL CODE, Art. 1306). The
the assignment of a mortgage (DE LEON, supra at mortgagor is in estoppel to question it except on
519). the ground of fraud or duress (Philippine
National Bank v. Manila Investment &
Note: The assignee is bound by the terms and Construction Inc., G.R. No. L-27132, April 29,
conditions of the chattel mortgage executed 1971).
between the mortgagor and the mortgagee (BA
Finance Corp v. CA, G.R. No. 82040, August 27, Note: Foreclosure suits may be initiated even
1991). during involuntary proceedings as long as leave
is first obtained from the insolvency court (Royal
Financial Leasing Under the Financing Company Commercial Banking Corp. v. Royal Cargo
Act of 1998 Corp., G.R. No. 179756, October 2, 2009).
A finance company purchases on behalf of a cash-
strapped lessee the equipment the latter wants to Matters to be Established to Effect Foreclosure
buy and then leases the equipment to the lessee in 1. The existence of the chattel mortgage; and
exchange for the latter‟s periodic payment of a fixed 2. The mortgagor‟s default on the obligation (DE
amount of rental. LEON, supra at 531).
General Rule: It is an extension of credit to assist a Civil Action to Recover Credit

buyer in acquiring movable property The mortgagee is not obligated to file an
independent action for the enforcement of his credit
Exception: If the movable property already (Id. at 528).
belonged to the borrower-lessee, the transaction
between the parties is a loan with mortgage in the Note: A mortgagor who sues and obtains a personal
guise of a lease (PCI Leasing and Finance Inc., judgment against a mortgagor upon his credit
G.R. No. 176381, December 15, 2010). waives thereby his right to enforce the mortgage
securing it (Id. at 529).
Liability of third person with the debtor
A third person who constitutes chattel mortgage on Period to Foreclose Mortgage
his own property as security to another‟s obligation The mortgagee may, after thirty (30) days from the
not solely by reason thereof becomes solidarily time the condition is broken, cause the mortgaged
bound with the principal debtor (Cerna v. CA, G.R. property to be sold at public auction by a public
No. L-48359, March 30, 1993). officer (Act No. 1508, Sec. 14).

525
The 30-day period is also a grace period for the An attaching creditor who so redeems shall be
mortgagor to discharge the mortgage obligation. subrogated to the rights of the mortgagee and is
After the sale of the chattel at public auction, the entitled to foreclose the mortgage (Act No. 1508,
right of redemption is no longer available to the Sec. 13).
mortgagor (Cabral v. Evangelista, G.R. No. L-26860,
July 30, 1969). How Redemption is Made:
By paying or delivering to the mortgagee the amount
Application of Proceeds of the Foreclosure Sale: due on such mortgage and the costs and expenses
1. Costs and expenses of keeping the property and incurred by such breach of condition before the sale
its sale; thereof (Act No. 1508, Sec. 13).
2. Payment of the obligation secured by the
mortgage; Note: This redemption partakes of an equity of
3. Claims of persons holding subsequent redemption (DE LEON, supra at 522).
mortgages in their order; and
4. The balance, if any, shall be paid to the When Redemption is Made:
mortgagor or person holding under him (Act No. It must be made after his default but before the
1508, Sec. 14). foreclosure sale. After the foreclosure sale, the right
of redemption no longer exists (Ibid.).
Right of Mortgagee to Recover Deficiency
1. Where mortgage is foreclosed Right Acquired by the Second Mortgagee and
The creditor may maintain an action for the Subsequent Purchaser
deficiency although the Chattel Mortgage Law is 1. Before payment of debt
silent on this point (DE LEON, supra at 532). After a chattel mortgage is executed, there
remains in the mortgagor a mere right of
Reason: The chattel mortgage is only given as a redemption and only this right passes to the
security and not as payment for the debt in case second mortgagee in case of a second
of failure of payment (Bicol Savings & Loan mortgage (Ibid.).
Association v. Guinhawa, G.R. No. L-62415,
August 20, 1990). As between the first and second mortgagees,
the latter can only recover the property from the
The action for deficiency may be brought within former by paying him the mortgage debt. Even
ten (10) years from the time the cause of action when the second mortgagee goes through the
accrues (CIVIL CODE, Art. 1144(1) & (2)). formality of extrajudicial foreclosure, the
purchaser acquires no more than the right of
2. Where mortgage is constituted as security redemption from the first mortgagee (Tizon v.
for purchase of personal property payable in Valdez, supra).
installments.
No deficiency judgment can be asked and any 2. After payment of debt
agreement to the contrary shall be void (CIVIL If the only leviable interest of a chattel mortgage
CODE, Art. 1484). in a mortgaged property is his right of
redemption, it follows that the judgment or
3. Where mortgaged property is subsequently attaching creditor who purchased the property at
attached and sold. the execution sale could not acquire anything
The chattel mortgagee is entitled to deficiency except such right of redemption. He is not
judgment in an action for specific performance entitled to the actual possession and delivery of
(CIVIL CODE, Art. 1484(1)). the property without first paying the mortgage
debt (Tizon v. Valdez, supra.)
Note: The execution sale in such case is not a
foreclosure sale (Industrial Finance Corp. v. Right of Mortgagee to the Possession of the
Ramirez, G.R. No. L-43821, May 26, 1977). Foreclosed Property in Chattel Mortgage
1. After default
Right of Redemption under Act 1508 The right of the creditor to take the mortgaged
Who May Exercise the Right of Redemption: property is implied from the provision (CIVIL
When the condition of a chattel mortgage is broken, CODE, Art. 2087) which gives him the right to
the following may redeem: sell (DE LEON, supra at 523).
1. Mortgagor;
2. Person holding a subsequent mortgage; or 2. Before default
3. Subsequent attaching creditor (DE LEON, supra He is not entitled to possession. Otherwise, the
at 521). contract becomes a pledge (CIVIL CODE, Art.
2093).

526
3
Remedy When Mortgagor Refuses to Yield Validity of the Sale Made Without the Consent of
Property the Mortgagee
Where the debtor refuses to yield the property, the The sale is valid although no written consent was
creditor‟s remedy is to institute an action either to obtained from the mortgagee, but the mortgagor
effect judicial foreclosure directly or to secure lays himself open to criminal prosecution (DE LEON,
possession (replevin) as a preliminary to the sale supra at 508).
contemplated in Section 14 of Act No. 1508 (DE
C ONCURRENCE AND
The necessary expenses incurred in the prosecution
by the mortgagee of the action for replevin should P REF ERENCE OF C REDITS
be borne by the mortgagor (Agustin v. CA, G.R. No. ( A RTS . 2236 – 2251)
107846, April 18, 1997).
Note: In case of default and the mortgagor refuses Concurrence of Credits

to surrender the chattel, replevin or judicial This implies the possession by two or more creditors
foreclosure does not require the mortgagee to first of equal rights or privileges over the same property
ask the sheriff to foreclose the mortgage or take or all of the property of the debtor (Id. at 536).
possession of the property (DE LEON, supra at
524). Preference of Credits
This is the right held by a creditor to be preferred in
Reason: The sheriff has no authority to seize the the payment of his claim above others out of the
mortgaged property. Whenever the sheriff proceeds debtor‟s assets. It is the right to be paid first (Ibid.).
under Section 14 of the Chattel Mortgage Law, he Nature and Effect of Preference:
becomes pro hac vice the mere agent of the creditor General Rule: A debtor is liable with all his
(Northern Motors, Inc. v. Herrera, G.R. No. L-32674, property, present and future, for the fulfillment of his
February 22, 1973). obligations (Id. at 539).
Remedy When the Right of Mortgagee is The creditors have the right to pursue the property in
Conceded possession of the debtor to satisfy their claims (Id.
When the mortgage authorizes the mortgagee to 539).
take possession of the property on default, he may
maintain an action to recover possession of the Exception: There should be no rules as to who
mortgaged chattel from the mortgagor or any person should be paid first. Preference applies ONLY when
in whose hands he may find them (DE LEON, Credit there are two (2) or more creditors with separate
Transactions, supra at 525). claims against a debtor who has insufficient property
to answer for all his obligations. Since it is an
OFFENSES INVOLVING CHATTEL MORTGAGE exception to the general rule, the law as to
1. Knowingly removing any personal property preferences is strictly construed (Roman v.
mortgaged under the Chattel Mortgage Law to Herridge, G.R. No. 22511, December 22, 1924).
any province or city other than the one in which
it was located at the time of the execution of the 1. Does not create an interest in property.
mortgage without the written consent of the Preference simply creates a right to be paid first
mortgagee; and from the proceeds of the sale of property of the
2. Selling or pledging personal property already debtor. It does not create a lien on the property
mortgaged, or any part thereof, under the terms itself, but merely a preference in the application
of the Chattel Mortgage Law without the consent of the proceeds of the property after it is sold.
of the mortgagee written on the back of the 2. The creditor does not have the right to take the
mortgage and duly recorded in the Chattel property and sell it as against another creditor.
Mortgage Register (Revised Penal Code, Art. Preference applies after a sale, and it is a
319). question of application of the proceeds after it is
sold.
Effect of Full Payment on Criminal Liability 3. It must be asserted. If the right claimed is not
The mortgagor is not relieved of criminal liability asserted and maintained, it is lost. If property
even if the mortgage indebtedness is thereafter paid has not been seized, it is open to seizure by
in full (DE LEON, supra at 508) or the mortgagor- another.
seller informed the purchaser that the thing sold had 4. It must be maintained. Where a creditor released
been mortgaged (People v. Alvarez, G.R. No. L- his levy, leaving the property in possession of
19914, November 27, 1923). the debtor, thereby indicating that he did not
intend to press his claim further as to that
specific property, he is deemed to have

527
abandoned his claim of preference (DE LEON, Note: Lien does not, in its general sense import a
supra at 536-537). right of retention, though this right usually
accompanies the lien when the subject is personal
Rules on Preference Applicable When property in possession of the lien-holder (Graño v.
1. There are two (2) or more creditors; Paredes, G.R. No. L-27019, March 4, 1927).
2. With separate and distinct claims;
3. Against the same debtor; and Law on Insolvency
4. Who has insufficient property (Pacific Farms, Insolvency shall be governed by special laws insofar
Inc. v. Esguerra, G.R. No. L-21783, November as they are not inconsistent with this code (CIVIL
29, 1969). CODE, Art. 2237).
There must be a proceeding such as an insolvency It is clear under Article 2237 of the Civil Code that in
proceeding wherein the creditors can file their case of conflict, it is the Civil Code that prevails (5
claims. The right becomes significant only after the PARAS, Special Contracts, supra at 1369).
properties of the debtor have been inventoried and
liquidated, and the claims of the various creditors The applicable law is R.A. 10142, known as the
have been established (Barretto v. Villanueva, G.R. Financial Rehabilitation and Insolvency Act of 2010.
No. 14038, December 29, 1962; Philippine Savings
Bank v. Lantin, G.R. No. L-33929, September 2, The Financial Rehabilitation and Insolvency Act
1983; Development Bank of the Philippines v. (FRIA) OF 2010 (R.A. 10142)
NLRC, G.R. No. 86932, June 27, 1990). The FRIA, an act providing for the rehabilitation or
liquidation of financially distressed enterprises and
Reason: Prior to the proceedings, the debtor has no individuals, which lapsed into law on July 18, 2010,
way of ascertaining who the creditors are, and has superseded the former Insolvency Law or Act No.
no liquidated property out of which he can pay them. 1956, as amended.
A preferred creditor's third party claim to the

proceeds of a foreclosure sale by the mortgagee is Excluded debtors from the operation of FRIA
not the proceeding contemplated by law for the 1. Banks;
enforcement of preferences under Article 2241 and 2. Pre-need companies;
2244 of the Civil Code unless the claimant is 3. Insurance companies; and
enforcing a credit for taxes that enjoy absolute 4. National and local government agencies or units
priority (Development Bank of the Philippines v. CA, (FRIA, Sec. 5).
G.R. No. 126200, August 16, 2001).
Insolvent
A final judgment obtained by a bank depositor for It refers to the financial condition of a debtor that is
the payment of his time deposit in a savings bank generally unable to pay its or his liabilities as they
prior to the institution of liquidation proceedings but fall due in the ordinary course of business or has
after the bank was declared insolvent would not liabilities that are greater than its or his assets
make the claim a preferred claim against the bank (FRIA, Sec. 4, Par. p).
(Banco Filipino Savings and Mortgage Bank v.
NLRC, G.R. No. 82135, August 20, 1990) Liquidation Process
This is the proceeding where claims are filed and
Fixed, savings, and current deposits of money in the assets of the insolvent debtor are disposed and
banks and similar institutions are considered simple the proceeds are divided among the creditors.
loans (CIVIL CODE, Art. 1980). As such, they are
not preferred credits. Liquidation Plan
It is an enumeration of all the assets of the debtor
Preference of Credit v. Lien and a schedule of liquidation of the assets and
Preference of credit applies only to claims which do payments of claims (FRIA, Sec. 129).
not attach to specific properties. Lien, on the other
hand, creates a charge on a particular property. The rules on concurrence and preference of credits
under the New Civil Code and other relevant laws
Lien shall refer to a statutory or contractual claim or shall be observed in the Liquidation Plan unless a
judicial charge on real or personal property that preferred creditor voluntarily waives his preferred
legally entitles a creditor to resort to said property for right (FRIA, Sec. 133).
payment of the claim or debt secured by such lien
(FRIA, Sec. 4, Par. t). Liquidator
A natural person or juridical entity deemed to be an
officer of the court with the principal duly of

528
3
preserving and maximizing the value and recovering Rights of Secured Creditors
the assets of the debtor, with the end of liquidating A secured creditor shall refer to a creditor with
them and discharging to the extent possible all the secured claim (FRIA, Sec. 4, Par. kk).
claims against the debtor (FRIA, Sec. 4, Par. w; sec.
119). A secured claim shall refer to a claim that is secured
by a lien (FRIA, Sec. 4, Par. jj).
Liquidation Order
It is an order which: The Liquidation Order shall not affect the right of a
1. Declares the debtor insolvent; secured creditor to enforce his lien in accordance
2. Orders the liquidation of the debtor and, in the with the applicable contract or law. A secured
case of a juridical debtor, declare it as dissolved; creditor may:
3. Orders the sheriff to take possession and control 1. Waive his under the security or lien, prove his
of all the property of the debtor, except those claim in the liquidation proceedings and share in
that may be exempt from execution; the distribution of the assets of the debtor; or
4. Orders the publication of the petition or motion in
a newspaper of general circulation once a week 2. Maintain his rights under the security or lien. In
for two (2) consecutive weeks; which case:
5. Directs payments of any claims and conveyance a. The value of the property may be agreed upon
of any property due the debtor to the liquidator; by the creditor and the liquidator:
6. Prohibits payments by the debtor and the i. If value of the property less than the claim it
transfer of any property by the debtor; secures = liquidator may convey the property
7. Directs all creditors to file their claims with the to the secured creditor and the latter will be
liquidator within the period set by the rules of admitted in the liquidation proceedings as
procedure; creditor for the balance;
8. Authorizes the payment of administrative ii. If value of the property exceeds the claim
expenses as they become due; secured = liquidator may convey the property
9. States that the debtor and creditors who are not to creditor and waive the debtor‟s right of
petitioner/s may submit the names of other redemption upon receiving excess from the
nominees to the position of liquidator; and creditor.
10. Sets the case for hearing for the election and
appointment of the liquidator, which date shall b. The liquidator may sell the property and satisfy
not be less than thirty (30) days nor more than the secured creditor‟s entire claim from the
forty-five (45) days from the date of the last proceeds of the sale; or
publication (FRIA, Sec. 112). c. The secured creditor may enforce the lien or
foreclose on the property pursuant to
Tax Clearance NOT Required in Liquidation of applicable laws (FRIA, Sec. 114).
Banks
Section 30 of the New Central Bank Act provides Voluntary Liquidation v. Involuntary Liquidation
that debts and liabilities of the bank under liquidation of Individual Debtor
are to be paid in accordance with the rules on Voluntary Liquidation Involuntary Liquidation
concurrence and preference of credit under the Civil As to Insolvency of Debtor
Code. Debtor is insolvent. Debtor is insolvent.
As to Proof of Acts of Insolvency
If respondent BIR‟s contention that a tax clearance Acts of Insolvency Creditors must prove
be secured first before the project of distribution of under section 105 of acts of insolvency.
the assets of a bank under liquidation may be the FRIA need not be
approved, then the tax liabilities will be given alleged.
absolute preference in all instances, including those As to Minimum Amount of Aggregate Debts
that do not fall under Articles 224, Par. 1(1) and The debts must be at The debts must be at
2242 (1) of the Civil Code. least Five hundred least Five hundred
thousand pesos (P500, thousand pesos
In order to secure a tax clearance as proof that the 000.00) (P500,000.00)
taxpayer had completely paid off his tax liabilities, As to Who Initiates
petitioner PDIC will be compelled to settle and pay The individual debtor A creditor or group of
first all tax liabilities and deficiencies of the bank, files the petition. creditors files the
regardless of the order of preference under the petition.
pertinent provisions of the Civil Code (PDIC v. BIR,
As to Effect of Absence of Debtor
G.R. No. 172892, June 13, 2013).
The debtor is not Applies even in the case
absent as he files the of absent debtor under
Petition. Sec. 108 of the FRIA.

529
Voluntary Liquidation Involuntary Liquidation 4. Voluntary liquidation of juridical debtors (FRIA,
As to Posting of Bond Sec. 90); and
Posting of Bond by Posting of Bond by 5. At any other time upon the recommendation of
creditors not required. creditors is required. the rehabilitation receiver that the rehabilitation
As to Issuance of Liquidation Order of the debtor is not feasible. (FRIA, Sec. 92)
Liquidation Order is Liquidation Order is
issued without trial. issued after trial. Claims
Refer to all claims or demands of whatever nature or
Involuntary Liquidation of Individual Debtor v. character against the debtor or its property, whether
Involuntary Liquidation of Business for money or otherwise, liquidated or unliquidated,
Organizations fixed or contingent, matured or unmatured, disputed
Individual Debtor Business or undisputed, including, but not limited to:
Organizations (sole 1. All claims of the government, whether national or
proprietorship, local, including taxes, tariffs and customs duties;
partnership, and and
corporation) 2. Claims against directors and officers of the
As to Number of Creditors debtor arising from acts done in the discharge of
At least three (3) There can be one or their functions falling within the scope of their
creditors are required. more creditors. authority:
As to Minimum Amount of Debt
Note: Inclusion of par. 2 does not prohibit the
The debts must be at The debt or aggregate of
creditors or third parties from filing cases against
least five hundred debts must be at least
the directors or officers acting in their personal
thousand pesos (P one million pesos
capacities (FRIA, Sec. 4, Par. c).
500,000) (P1,000,000) or
equivalent to 25% of the
Liability of Debtor’s Property for His Obligations
subscribed capital or
General Rule: Debtor is liable with all his property,
partners‟ contribution,
present and future, for the fulfillment of his
whichever is higher.
obligations (CIVIL CODE, Art. 2236).
As to Continuation of Business
The individual can The business Exempted properties:
continue the business. organization will be 1. Present property – those provided under Arts.
dissolved. 155 and 205 of the Family Code, Sec. 13, Rule
As to Proof of Act of Insolvency 39 of the Rules of Court, and Sec. 118 of the
There must be an act of Act of insolvency is not Public Land Act.
insolvency. required. 2. Future property – a debtor, who obtains a
discharge from his debts on account of his
Rehabilitation insolvency, is not liable for the unsatisfied claims
It refers to the restoration of the debtor to a condition of his creditors with said property subject to
of successful operation and solvency, if it is shown certain exceptions expressly provided by law
that its continuance of operation is economically (Act No. 1956, Secs. 68 and 69).
feasible and its creditors can recover by way of the 3. Property under legal custody (DE LEON, supra
present value of payments projected in the plan, at 542) and those owned by municipal
more if the debtor continues as a going concern corporations necessary for governmental
than if it is immediately liquidated (FRIA, Sec. 4, purposes (Viuda de Tan Toco v. Municipal
Par. gg). Council of Iloilo, G.R. No. L-24950, March 25,
1926).
Note: During the pendency of rehabilitation
proceedings, the court may order the conversion of Exemption of Conjugal Partnership or Absolute
rehabilitation proceedings to liquidation proceedings Community
in the following cases: If one of the spouses is insolvent, the assets of the
1. Upon a finding that the debtor is insolvent and conjugal partnership of gains (CPG) or absolute
there is no substantial likelihood for the debtor to community (AC) do not pass to the assignee in
be successfully rehabilitated (FRIA, Sec. 25, insolvency elected by the creditors or appointed by
Par. c); the court (CIVIL CODE, Art. 2238).
2. No Rehabilitation Plan was confirmed within one
(1) year from the filing of a petition to confirm a Reason: The conjugal partnership of gains or
rehabilitation plan (FRIA, Sec. 72); absolute community is distinct from the individual
3. Termination of the rehabilitation proceedings spouses.
(see FRIA, Sec. 75);

530
3
The exemption applies provided that: value and in good faith, there can be no more
1. The CPG or AC subsists; and claim on the said movable.
2. The obligations of the insolvent spouse have not
redounded to the benefit of the family. 3. Claims for the unpaid price of movable sold;
Note: The insolvency of the husband does not have Note: Claim is limited to the value of the
the effect of dissolving the conjugal partnership or movable.
the absolute community (CIVIL CODE, Art. 2238).
The property must be in the possession of the
Rule on Co-Ownership debtor.
If there is co-ownership and one of the co-owners is
an insolvent debtor, his undivided share or interest If debtor has sold the property and the price
in the property shall be possessed by the assignee has been unpaid, lien may be enforced on the
in insolvency proceedings because it is part of his price.
assets (DE LEON, supra at 544).
Instances When Right to Claim is NOT Lost:
Note: This article refers to co-ownership other than a. Immobilization of the thing by destination,
that of conjugal partnership or absolute community provided that it has not lost its form,
(CIVIL CODE, Art. 2239). substance and identity.
b. When the thing, together with other property,
Duty to set apart exempt properties under the was sold for a lump sum, provided that the
FRIA: price thereof can be determined
It shall be the duty of the court, upon petition and proportionally.
after hearing, to exempt and set apart, for the use
and benefit of the said insolvent, such real and 4. Credits guaranteed with pledge or mortgage;
personal property as is by law exempt from Note: If the contract is a pledge, it must be
execution, and also a homestead (FRIA, Sec. 130). embodied in a public instrument. If chattel
mortgage, it must be registered with the
Rule Involving Property Held in Trust Chattel Mortgage Registry.
Property held in trust by the insolvent debtor should
be excluded from insolvency proceedings (CIVIL 5. Credits for the making, repairs, safekeeping or
CODE, Art. 2240). preservation of the property;
6. Claims for laborer‟s wages on the work done
Reason: The trustee is not the owner of the trust on the property;
property (DE LEON, supra at 544). This applies only to personal, not to real
property (5 PARAS, supra at 1374).
Three (3) General Categories of Credit
1. Special preferred credits listed in Articles 2241 Note: The laborer must have been employed
and 2242; by the owner of the goods, not by the
2. Ordinary preferred credits listed in Article 2244; contractor (Bautista v. Auditor General, G.R.
and No. L-6799, June 29, 1955).
3. Common credits (non-preferred) under Article
2245 (Republic v. Peralta, G.R. No. L-56568, 7. Expenses of salvage upon the goods
May 20, 1987). salvaged;
8. Credits between the landlord and tenant from
First Category: Special Preferred Credits their contract on the share of each in the fruits
or harvest;
A. With Reference to Specific Movable Property 9. Price of the contract of transportation and
Under Art. 2241 of the Civil Code: incidental expenses on the goods carried,
1. Duties, taxes and fees due to the government; until their delivery and thirty (30) days
thereafter;
Note: The tax must be due on the movable. 10. Credits for lodging and supplies furnished to
travelers by hotel keepers on the movables
2. Claims from misappropriation, breach of trust, belonging to the guest as long as such
malfeasance of public officer; movables;
Note: The acquisition must have been in Note: This applies so long as movables are in
performance of official functions and the the hotel. This does not apply to money
property must still be in the hands of the loaned to guests.
public official. If it is sold to a purchaser for

531
11. Expenses for cultivation and harvest upon the by virtue of judicial order, attachment or
fruits harvested; execution;
12. Rent for one (1) year upon the property of the
lessee existing on the immovable leased and Note: The preference is according to the
on the fruits of the same, but not on money or order of time they were levied upon the
instruments of credit; and property (DE LEON, supra at 552).
13. Claims of the depositor if depositary has
wrongfully sold the thing deposited, upon the 8. Claims of co-heirs for warranty in the partition
price of sale. of the property;
9. Claims of donors for pecuniary charges or
Wrongful Taking of Movables Under Article other conditions imposed by him upon the
2241 of the Civil Code donee; and
The preferred creditor may demand it within 10. Claims of insurers for insurance premium for 2
thirty (30) days through an accion subrogatoria, years.
exercising the right of the debtor granted him
under Art. 559 of the Civil Code to recover Second Category: Ordinary Preferred Credits
property wrongfully taken from him. Ordinary preferred credits under Art. 2244 of the
Civil Code, as amended by Art. 110 of the Labor
Note: It applies only when the right of ownership Code. They shall be preferred in the order named:
in such property continues in the debtor, and, 1. Credits for services rendered by laborers;
therefore it is not applicable to cases where the
debtor has parted with his ownership therein, as Note: Art. 110 of the Labor Code removed the
where he has sold his property (Peña v. one-year limitation found in No. 2 of Art. 2244
Mitchell, G.R. No. L-3764, January 15, 1908). (Id. at 560).
B. With Reference to Specific Immovable Art. 110 of the Labor Code also moved up the
Property under Art. 2242 of the Civil Code: claims for unpaid wages (and other monetary
1. Taxes due upon land or building; claims) of laborers or workers of insolvent to
first priority (Ibid.).
Note: This pertains to real property taxes.
Thus, capital gains tax is NOT covered The use of the phrase “first preference” in
because it is a tax on income and not on the Article 110 of the Labor Code indicates that
property itself. what it intends to modify is the order of
preference found in Article 2244 of the Civil
2. Unpaid price of the real property; Code, which relates to property of the insolvent
that is not burdened with liens or
Note: The law makes no distinction between encumbrances created or recognized by
registered and unregistered vendor‟s lien. Articles 2241 and 2242 of the Civil Code (Id.).
Hence, any lien of this kind enjoys the
preference credit status (DE LEON, supra at Bankruptcy or liquidation proceedings are
549). necessary for the operation of the preference
accorded to workers under Art. 110 of the
3. Claims of laborers and other workmen Labor Code (Development Bank of the
engaged in the construction, re-construction Philippines v. NLRC, G.R. Nos. 82763-64,
or repair of buildings, canals and other works; March 19, 1990).
4. Claims of furnishers of materials used in
works mentioned in No. 3; Reason: The reason behind the necessity for
5. Mortgage credits; a judicial proceeding or a proceeding in rem is
to bind all interested parties (DE LEON, supra
Note: Mortgage MUST have been registered at 563).
in the Registry of Property. A recorded
mortgage credit is superior to an unrecorded 2. Funeral expenses for the debtor, or his children
unpaid vendor‟s lien (De Barreto v. under parental authority who have no own
Villanueva, GR No. L-14938, January 28, property, upon court approval;
1961). 3. Expenses during the last illness of debtor or of
his/her spouse and children under parental
6. Expenses for the preservation and authority, if they have no own property;
improvement of real property when the law 4. Compensation due the laborers or their
authorizes reimbursement; dependents under laws providing for indemnity;
7. Credits annotated in the Registry of Property

532
3
5. Credits and advancements made to the debtor proportion to their credit, regardless of date (CIVIL
for support of himself, and his family, during the CODE, Art. 2251, Par. 2).
last year preceding the insolvency;
6. Support during the insolvency proceedings and Note: Ordinary Preferred and Common Credits
for three (3) months thereafter; cover only “free property” of the debtor, or those not
7. Fines and civil indemnifications arising from subjected to Special Preferred Credit.
criminal offense;
8. Legal expenses and expenses incurred in the Nature of Claims or Credits in Articles 2241 and
valid administration of the insolvent‟s estate; 2242 of the Civil Code (Special Preferred Credits)
9. Taxes and assessments due the national 1. Articles. 2241 and 2242 of the Civil Code shall
government other than those mentioned in be considered as mortgages or pledges of
Articles 2241(1) and 2242(1) of the Civil Code; personal and real property.
10. Taxes and assessments due any province other
than those referred to in Arts. 2241(1) and Note: In case of insolvency of the debtor, such
2242(1) of the Civil Code; claims or credits shall be considered as liens
11. Taxes and assessments due any city or (DE LEON, supra at 553).
municipality other than those indicated in
Articles. 2241(1) and 2242(1) of the Civil Code; As liens, they are considered charges. Unless
12. Damages for death or physical injuries caused by otherwise stated, they are not possessory liens
quasi-delict; with the right of retention (5 PARAS, supra at
13. Gifts due to charitable public and private 1374).
institutions; and
14. Credits which, without special privilege, appear in 2. Articles 2241 and 2242 only find application
(a) a public instrument; or (b) in a final judgment, when there is concurrence of credits.
if they have been the subject of litigation.
3. With the exception of the taxes due to the State
Note: These credits shall have preference among (No. 1), Articles 2241 and 2242 of the Civil Code
them in the order of priority of the dates of the merely enumerate the preferred claims on
instruments and of the judgments (DE LEON, specific properties. They do not give the order of
supra at 564). preference or priority of payment.
The order of preference is first, in favor of credits Nature of Claims or Credits in Article 2244 of the
evidenced by a final judgment (should they have Civil Code (Ordinary Preferred Credits)
been the subject of litigation), and secondly, in In contrast with Articles 2241 and 2242 of the Civil
favor of credits evidenced by a public instrument, Code, Article 2244 creates no liens on determinate
the preference among the two kinds of credits property which follow such property. What Article
being determined by priority of dates (Rizal Surety 2244 creates are simply rights in favor of certain
and Insurance Co. v. Dela Paz, G.R. No. L-6463, creditors to have the cash and other assets of the
May 26, 1954). insolvent applied in a certain sequence or order of
priority (Republic v. Peralta, supra).
Statutory Preference NOT Applicable to the
Government Refectionary Credit
Art. 2244, particularly Par. (14)(a) thereof, is not Indebtedness incurred in the repair or reconstruction
applicable to obligations of the State as it is a of something previously made, such repair or
recognized doctrine that the State is always reconstruction being made necessary by the
solvent (Araneta v. Hon. Gatmaitan, G.R. Nos. L- deterioration or destruction of the thing as it formerly
8895 and L-9191, April 30, 1957). existed (Director of Public works v. Sing Juco, G.R.
No. L-30181, July 12, 1929). They include new
Note: The order of preference in Article 2244 of the constructions (Luzon Lumber & Hardware Co. v.
Civil Code is very important. The order of Quiambao & RFC, G.R. No. L-5638, March 30,
preference here, however, does not refer to specific 1954).
real or personal property. It refers to other property
(5 PARAS, supra at 1381). Two-Tier Order of Preference
1. First tier – includes only taxes, duties and fees
Third Category: Common Credits due on a specific movable or immovable
Any other claims or credits other than those property; and
mentioned in Articles. 2241, 2242 and 2244 of the 2. Second tier – All other special preferred (non-
Civil Code. There is no order of preference among tax) credits. These credits are to be satisfied
common creditors. They share whatever is left in pari passu and pro rata, out of any residual

533
value of the specific property to which such other excess becomes part of the free property of the
credits relate (Republic v. Peralta, supra). debtor, to be added to other assets in order to
satisfy the ordinary preferred credits under Art.
Note: Pro rata rule does not apply to credits 2250 of the Civil Code and then the common
annotated in the Registry of Property in virtue of credits under Art. 2245 of the Civil Code (DE
a judicial order (DE LEON, Credit Transactions, LEON, supra at 559).
supra at 572).
Step 6:
Steps in Applying the Rules in Preference and With the excess cash sale of assets covered in Art.
Concurrence of Credits: 2241 and 2242 of the Civil Code, if any, sell other
assets of debtor and satisfy the ordinary preferred
Step 1: credits by applying proceeds of sale in accordance
Categorize the credits accordingly. with the order of preference of credits established in
Art. 2244 of the Civil Code (CIVIL CODE, Art. 2251,
Step 2: Par. 1). Rule on preference applies.
Determine or make an inventory of the assets or
properties of the insolvent. Step 7:
After applying the proceeds of sale of all properties
Step 3: under Step 6, apply any balance of the proceeds of
Segregate specific immovables and/or movables the sale to common credits in accordance with the
mentioned under Arts. 2241 and 2242 of the Civil rule provided in Art 2251 of the Civil Code. Rule on
Code, respectively. concurrence applies, they are paid pro rata
regardless of dates (CIVIL CODE, Art. 2251, Par. 2).
Step 4:
1. Sell movables and determine if the proceeds are Illustration:
sufficient to cover the special preferred credit in
Art. 2241 of the Civil Code; exclude all other ASSETS
credits to the extent of the value of the movable Immovable Property Value/Amount in Pesos
to which preference refers. House and Lot 3,000,000
Pay No. 1 credit in Art. 2241 of the Civil Code, Movable Properties
and if two or more credits in Art. 2241 concur; Mercedes-Benz 3,000,000
apply proceeds of sale pro rata, (pari passu) to Cash 2,000,000
the credits applying Arts. 2246 and 2247 of the Receivables 2,000,000
Civil Code.
Total value of assets 10,000,000
2. For immovables and real rights – Sell
immovable and real right and determine if LIABILITIES
proceeds of sale are sufficient to cover the Real Estate Taxes 2,000,000
special preferred credits in Art. 2242 of the Unpaid purchase price 2,000,000
Civil Code. on the Mercedez-Benz
Exclude all other credits to the extent of the Unpaid wages of 1,000,000
value of immovables and real rights to which Laborers
preference refers. Unpaid duties on car 2,000,000
Funeral expenses of 1,000,000
Pay No. 1 in Art. 2242 of the Civil Code, if two deceased child
or more credits mentioned in Art. 2242 of the Unpaid income tax 1,000,000
Civil Code concur; apply proceeds of sale pro Unsecured credits of X 2,000,000
rata, (pari passu) to the credits applying Arts. and Y (P1,000,000
2248 and 2249 of the Civil Code. each)
Step 5: Total value of liabilities 11,000,000

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

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

534
3
Special Preferred Credits Exception: A private sale may be allowed with
Immovable approval of court if:
House and 3,000,000 1. The goods to be sold are of a perishable nature,
Lot or quickly deteriorate in value, or
Real Estate (2,000,000) Paid (Pd.) disproportionately expensive to keep or
Taxes maintain; or
1,000,000 Balance (Bal.) 2. The private sale is for the best interest of the
Add to Free debtor and the creditors (FRIA, Sec. 131).
Properties
Setting-off and Netting under the FRIA
Movable If the debtor and creditor are mutually debtor and
Mercedes- 3,000,000 creditor of each other one debt shall be set off
Benz against the other, and only the balance, if any shall
Unpaid (2,000,000) Pd., Bal. of 1,000,000 be allowed in the liquidation proceedings (FRIA, sec.
duties 124).
Unpaid (2,000,000) Pd.
purchase
price Q UASI – C ONTRACTS
(1,000,000) Bal.
Add to Common ( A RTS . 2142 – 2176)
Credits
Free Properties QUASI-CONTRACT

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

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

535
The ratification of the management by the owner of Note: A gestor is liable for the acts or
the business produces the effects of an express negligence of his employees (5 PARAS, supra at
agency, even if the business may not have been 1157).
successful (CIVIL CODE, Art. 2149; 5 PARAS,
supra at 1158). 3. Be liable for the acts of his delegate if he
delegated to another person all or some of his
Requisites of Negotiorum Gestio duties, without prejudice to the direct obligation
1. No meeting of the minds; of the delegate toward the owner of the business
2. Taking charge of another‟s business or property; (CIVIL CODE, Art. 2146, Par. 1);
3. The property or business must have been
abandoned or neglected (otherwise, the rule on 4. Be personally liable for contracts which he has
unauthorized contracts would apply); entered into with third persons, even though he
4. The officious manager must not have been acted in the name of the owner, and there shall
expressly or implicitly authorized (otherwise, the be no right of action between the owner and
rule on agency would apply); and third persons except:
5. The officious manager (gestor) must have a. When the owner has expressly or tacitly
voluntarily taken charge (that is, there must be ratified the management, or
no vitiation of consent, such as error in thinking b. When the contract refers to things pertaining
that he owned the property or the business) (Id. to the owner of the business (CIVIL CODE,
at 1156). Art. 2152)
Negotiorum Gestio v. Implied Agency Note: The responsibility of two or more officious
Negotiorum Gestio Implied Agency managers shall be solidary, unless the
management was assumed to save the things
As to Necessity of Authorization or business from imminent danger (CIVIL
The agent is actually CODE, Art. 2146, Par. 2); and
authorized to assume
Gestor should never the agency by virtue of 5. The officious manager shall be liable for any
have been authorized in the acts of the owner or fortuitous event:
any manner. by virtue of his silence, a. If he undertakes risky operations which the
inaction, or his failure to owner was not accustomed to embark upon;
repudiate the agency. b. If he has preferred his own interest to that of
the owner
As to Necessity of Neglect or Abandonment c. If he fails to return the property or business
Business or property Neglect or after demand by the owner;
should be neglected or abandonment is not d. If he assumed the management in bad faith
abandoned. necessary. (CIVIL CODE, Art. 2147)
e. Except when the management was assumed
to save the property or business from
Note: So long as the owner does not know that imminent danger –
another is acting on his behalf without authority, i. If he is manifestly unfit to carry the
negotiorum gestio exists, but once he becomes management;
aware of such fact and still he does not repudiate ii. If by his intervention he prevented a more
the acts of the agent, the quasi-contract ceases to competent person from taking up the
exist. It has become an implied agency. management (CIVIL CODE, Art. 2148).
Responsibilities of the Officious Manager: Responsibilities of the Owner:
1. Continue taking charge of the agency or The owner of the property shall be liable for
management until the termination of the affairs obligations incurred in his interest, and shall
and its incidents, but he may require the owner, reimburse the officious manager for the necessary
if the latter is in a position to do so, to substitute and useful expenses and for damages, which the
the officious manager (CIVIL CODE, Art. 2144); latter may have suffered in the performance of his
duties in the following instances:
2. Perform his duties with all the diligence of a 1. When the owner of the property or business
good father of a family, and pay the damages enjoyed the advantages of the officious
which through his fault or negligence may be management although it may not have been
suffered by the owner of the property or expressly ratified by him (CIVIL CODE, Art.
business under management, but the courts 2150, Par. 1).
may however, increase or moderate the 2. When the management has for its purpose the
indemnity according to the circumstances of prevention of an imminent and manifest loss,
each case (CIVIL CODE, Art. 2145);

536
3
although no benefit may have been derived Requisites of Solutio Indebiti:
(CIVIL CODE, Art. 2150, Par. 2). 1. Receipt (not mere acknowledgment) of
3. Even if there had been no benefit to the owner something (CIVIL CODE, Art. 2154);
and there has been no imminent and manifest 2. There was no right to demand it because the
danger to the property of business provided: giver had no obligation (5 PARAS, supra at
a. The officious manager has acted in good faith; 1161); and
and 3. The undue delivery was because of mistake
b. The property or business is intact, ready to be either of fact or of law, which may be doubtful or
returned to the owner (CIVIL CODE, Art. difficult question of law (CIVIL CODE, Art. 2155).
2151).
Note: Payment by a joint co-debtor for the benefit of
Note: Even if the owner is a minor, he is still liable another co-debtor or co-surety is not solutio indebiti
under Article 2150 of the Civil Code for he should but a payment by a person interested in the
not be unjustly enriched at another‟s expense (5 fulfillment of the obligation under Article 1236 of the
PARAS, supra at 1159). Civil Code (5 PARAS, supra at 1162).
Liability for Contracts Primary Responsibility of a Payee: To return what

The owner shall be liable for contracts which the he has received through error or mistake although
officious manager has entered into with third there is no right to demand it (Id. at 1161).
persons when:
1. Such owner has expressly or tacitly ratified the Liability of a Payee in Bad Faith:
management; or 1. Pay legal interest if the sum of money is
2. The contract refers to things pertaining to the involved; or
owner of the business (CIVIL CODE, Art. 2152). 2. Liable for fruits received or which should have
been received if the thing produces fruits (CIVIL
When is Management Extinguished: CODE, Art. 2159, Par 1).
1. When the owner repudiates it or puts an end
thereto; Reason: The payee assumes all risks having acted
2. When the officious manager withdraws from the fraudulently though damages may be mitigated
management, subject to the provisions of Article under Art. 2215 of the Civil Code (5 PARAS, supra
2144 of the Civil Code; and at 1165).
3. By the death, civil interdiction, insanity or
insolvency of the owner or officious manager 3. He shall furthermore be answerable for any loss
(CIVIL CODE, Art. 2153). or impairment of the thing from any cause and
for damages to the person who delivered the
SOLUTIO INDEBITI thing, until it is recovered (CIVIL CODE, Art.
This takes place when something is received when 2159, Par. 2).
there is no right to demand it, and it was unduly
delivered thru mistake (CIVIL CODE, Art. 2154). Liability of Payee in Good Faith:
1. In case of impairment or loss, liability is only to
It is presumed that there was a mistake in the the extent of benefit; and
payment if something which had never been due or 2. In case of alienation, price is to be reimbursed,
had already been paid was delivered; but he from or in case of credit, the same should be
whom the return is claimed may prove that the assigned (CIVIL CODE, Art. 2160).
delivery was made out of liberality or for any other
just cause (CIVIL CODE, Art. 2163). Note: The responsibility of two or more payees,
when there has been payment of what is not due is
Payment by reason of a mistake in the construction solidary (CIVIL CODE, Art. 2157).
or application of a doubtful or difficult question of law
may come within the scope of solutio indebiti (CIVIL Exemption from Obligation to Restore
CODE, Art. 2155). This exemption shall apply to a payee, believing
good faith that the payment being made was for a
Note: Whether the question is “doubtful or difficult” legitimate and subsisting claim, who:
or not must be determined by the actual knowledge 1. Destroyed the document;
of law of the person who made the payment. If the 2. Allowed the action to prescribe;
payer was in doubt whether the debt was due, he 3. Gave up pledges; or
may recover if he proves that it was not due (CIVIL 4. Cancelled guaranties for his right (CIVIL CODE,
CODE, Art. 2156). Art. 2162).

537
Note: He who paid unduly may proceed only against 6. When the government, upon failure of any
the true debtor or the guarantor with whom the person to comply with health or safety
action is still effective (CIVIL CODE, Art. 2162). regulations concerning property, undertakes to
do the necessary work, even over his objection
Right of a Third Person: (CIVIL CODE, Art. 2169);
When the property delivered or money paid belongs
to a third person, the payee shall comply with the 7. When by accident or other fortuitous event,
provisions of Article 1984 of the Civil Code (CIVIL movables separately pertaining to two or more
CODE, Art. 2158). persons are commingled or confused, the rules
on co-ownership shall apply (CIVIL CODE, Art.
Other Quasi-Contracts 2170);
1. When, without the knowledge of the person
obliged to give support, the support was given
by a stranger, unless it appears that he gave it 8. When a person has found a lost personal
out of piety and without intention of being repaid property (CIVIL CODE, Arts. 719, 720, and
(CIVIL CODE, Art. 2164); 2171);
Requisites: 9. When a possessor in good faith has incurred

a. Support has been furnished in favor of a necessary and useful expenses (CIVIL CODE,
dependent of one bound to give support but Arts. 546 and 2172);
who fails to do so;
b. The support was supplied by a stranger; 10. When a third person, without the knowledge of
c. The same was given without the knowledge of the debtor, pays the debt (CIVIL CODE, Arts.
the person charged with the duty; and 1236, 1237 and 2173);
d. It must not have been given without the
expectation of recovering it (Ramirez v. 11. When in a small community a majority of the
Redfern, G.R. No. L-26062, December 31, inhabitants of age decide upon a measure for
1926). protection against unlawlessness, fire, flood,
storm, or other calamity, anyone who objects to
2. When funeral expense are borne by a third the plan and refuses to contribute to the
person, without the knowledge of the relatives expenses but is benefited by the project as
obliged to give support to the deceased (CIVIL executed shall be liable to pay his share of said
CODE, Art. 2165); expenses (CIVIL CODE, Art. 2174); and
3. When the person obliged to support an orphan, 12. When a third person was constrained to pay the
or an insane or an indigent person unduly taxes of another (CIVIL CODE, Art. 2175).
refuses to give support to the latter, a third
person furnishes the support (CIVIL CODE, Art. Note: The foregoing provisions are mere
2166); illustrations of other specific cases of quasi-
contracts; the enumeration has no preclusive effect
Note: As distinguished from Article 2164 of the on possible other instances.
Civil Code, the obligor in the article unduly
refuses to support the persons referred to
therein (5 PARAS, supra at 1168).
4. When through an accident or cause, a person is

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

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

538
3
COMMODATUM SIMPLE EXTRA- JUDICIAL GUARANTY PLEDGE REAL MORTGAGE CHATTEL ANTICHRESIS
LOAN JUDICIAL DEPOSIT MORTGAGE
DEPOSIT
General Rule: Money or Only movable Movable as
Personal All movables Immovables and Movables (DE Immovables
Non-consumable other (corporeal) well guaranty: the susceptible of Alienable real rights LEON, supra (CIVIL CODE,
as
goods consumable things (CIVIL immovable credit given by possession; in accordance with at 509). Art. 2132; DE
goods (CIVIL CODE, property the person incorporeal the laws, imposed LEON, supra at
Exception: CODE, Art. Art.1966; DE (CIVIL CODE,who rights upon immovable 498).
Consumable 1933). LEON, supra Art. 2006; DE
guarantees evidenced by (CIVIL CODE, Art.
goods if purpose at 113 and LEON, supra the fulfillment instruments 2124).
is not the 114). at 114). of the principal may also be
consumption of obligation; pledged (CIVIL
the object CODE, Arts.
Real guaranty: 2094 and
(CIVIL CODE, movable or 2095).
Arts. 1933 and immovable
1936; DE LEON, property (DE
supra at 10, 16). LEON, supra
at 228).
As to Consideration
Essentially Gratuitous or General Rule: Onerous (DE General Rule: Consideration is the same as the consideration of the principal contract
gratuitous (CIVIL onerous, that Gratuitous LEON, supra Gratuitous (DE LEON, supra at 331 and 386).
CODE, Art. 1933; is, with a at 165).
DE LEON, supra stipulation to Exceptions: Exception:
at 11 and 14). pay interest 1.When there When there is
(CIVIL CODE, is an a stipulation to
Art. 1933; DE agreement the contrary
LEON, Credit to the
Transactions, contrary; (CIVIL CODE,
supra at 11). 2.Depositary Art. 2048; DE
is engaged LEON, supra
in the at 228 and
business of 244).
storing
goods;
3.Where
property
saved from
destruction
without

539
knowledge
by the
owner
(CIVIL CODE,
Art. 1965; DE
LEON, supra
at 113).
As to Nature of the Contract
Real contract; Real contract; Not a contract Consensual Real contract Consensual contract Formal Consensual
However, an accepted promise to Nonetheless, (DE LEON, and formal (Actual contract DE and formal
deliver something by way of for voluntary Credit supra contract (an delivery of LEON, supra contract
commodatum or simple loan is a deposit, an at 165). oral promise of possession is at 506). (amount of the
consensual contract (CIVIL agreement to guaranty is necessary) principal and of
CODE, Art. 1934; DE LEON, constitute a unenforceable) (CIVIL CODE, the interest
supra at 7 and 12). deposit is a (DE LEON, Art. 2093; DE must be in
consensual supra at 259). LEON, supra writing)
contract (DE at 360). (CIVIL CODE,
LEON, supra Art. 2134; DE
at 112). LEON, supra at
498 and 500).
As to Purpose
Use or temporary Consumption Custody and To guarantee Contract of Intended to secure the performance of a principal and pre-existing
possession (DE (DE LEON, safekeeping of the right of security (CIVIL obligation by specially subjecting to such security, property, or the fruits
LEON, supra at supra at 11). the thing the plaintiff in CODE, Art. thereof (DE LEON, supra at 331).
11 and 16). deposited for case of a 2047; DE
the benefit of favorable LEON, supra
the depositary judgment (DE at 226).
(DE LEON, LEON, supra
supra at 165). at 165).
As to Ownership of the Thing
Retained by the Transferred to Retained by No transfer of Retained by Retained by mortgagor or owner of the Retained by
bailor (CIVIL the debtor the owner ownership pledgor or thing mortgaged (DE LEON, supra at antichretic
CODE, Art. 1933; (CIVIL CODE, (Generally, owner of the 402). debtor (DE
DE LEON, supra Art. 1933; DE depositor must thing pledged. LEON, supra at
at 10). LEON, supra be the owner, 502 and 503).
at 10). but it may
belong to a
person other
than a
depositor)
(CIVIL CODE,
Art. 1962; DE
540
3
LEON, supra
at 115).
As to Possession of the Thing
Bailee has possession of the thing Depositary has possession (DE Pledgee, or a Generally, Mortgagor- Antichretic
(DE LEON, supra at 12). LEON, supra at 110). third person by Mortgagor-debtor debtor retains creditor has
common retains possession of possession of possession of
agreement has the thing mortgaged; the thing the property
possession mortgaged (DE LEON,
(CIVIL CODE, However, mortgagor- (DE LEON, supra at 498).
Art. 2093). debtor may elect to supra at 523).
deliver the property
to mortgagee. A
mortgagee in
possession has
rights and obligations
similar to those of an
antichretic creditor
(DE LEON, supra at
385 and 471).
General Rule: Upon Upon demand Upon order of General Rule: Upon full
after the expiration of of depositor the court or Upon full payment of the
expiration of the the term (CIVIL CODE, when payment of debt (DE
period stipulated, (CIVIL CODE, Art. 1988). litigation has debtor‟s LEON, supra at
or after the Art. 1946; DE ended (CIVIL obligation 502).
accomplishment LEON, supra CODE, Art. including
of the use for at 11). 2007; DE interest due
which the LEON, supra thereon and
commodatum at 165). expenses
has been incurred for its
constituted; preservation
Exception: Exception:
Bailor may Pledgor may
demand return or demand return
its temporary use when there is
if he should have danger of
urgent need of destruction or
the thing, or if the impairment of
bailee commits the thing,
any acts of without the
fault of the

541
ingratitude. pledgee, upon
substitution of
(CIVIL CODE, another thing
Arts. 1946 and of the same
1948; DE LEON, kind and
supra at 11). quality
(CIVIL CODE,
Arts. 2105 and
2107).
As to Modes of Extinguishment
Upon the death Upon Upon the loss Upon Upon Upon Upon payment of the Upon Upon payment
of either the payment or or destruction termination of extinguishmen fulfillment of principal obligation fulfillment of of the principal
bailee or bailor, performance, of the thing litigation or t of the the principal (CIVIL CODE, Art. the principal obligation
unless by condonation deposited, upon order of obligation of obligation or by 1231). obligation or (CIVIL CODE,
stipulation the or remission, return of the the court the debtor, the destruction by the Art. 1231).
commodatum is merger, thing, (CIVIL CODE, and for the of the thing; destruction of
transmitted to the compensation novation, Art. 2007). same causes upon return of the thing
heirs of either or , merger, as all other the thing (CIVIL CODE,
both parties novation, expiration of obligations; if pledged to the Art. 1231; DE
(CIVIL CODE, annulment, the term, the creditor pledgor or LEON, supra
Art. 1939; DE rescission, fulfillment of voluntarily owner; upon a at 507).
LEON, supra at fulfillment of a the resolutory accepts statement in
18). resolutory condition, immovable or writing by the
condition, annulment, other property pledgee that
prescription rescission in payment of he renounces
(CIVIL CODE, debt; upon or abandons
Art. 1231). In case of release of the the pledge;
gratuitous guarantor by sale of the
deposit, upon the creditor; thing pledged
the death of upon the grant extinguishes
either the of extension to the principal
depositor or the debtor by obligation
depositary the creditor (CIVIL CODE,
(CIVIL CODE, without the Arts. 2110,
Arts. 1995, consent of the 2111, and
and 1231; DE guarantor; 2115; DE
LEON, supra when the LEON, supra
at 153). guarantors, at 373, 374,
through some and 507).
act of the
creditor,

542
3
cannot be
subrogated to
the latter‟s
rights (CIVIL
CODE, Arts.
2076 to 2080;
DE LEON,
supra at 310).
As to Excess Proceeds in Case of Sale
General Rule: Mortgagor is entitled Excess over Debtor is
debtor is not to balance from the the amount entitled to the
entitled to proceeds of the sale goes to debtor excess in case
excess (DE LEON, supra at (DE LEON, antichretic
418 and 428). supra at 534 creditor files a
Exception: and 506). petition for the
1. When it is sale of the real
agreed property as in a
upon; and foreclosure of
2. in the case mortgages
of a legal under Rule 68
pledge of the Rules of
(CIVIL CODE, Court (DE
Arts. 2115, LEON, supra at
and 2121). 502-503).
As to Right to Recover Deficiency in Case of Sale

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

543
Essential Requisites to Pledge and Mortgage
1. That they be constituted to secure the fulfillment of a
principal obligation;
2. That the pledgor or mortgagor be the absolute owner
of the thing pledged or mortgaged;
3. That the persons constituting the pledge or mortgage
have the free disposal of their property, and in the
absence thereof, that they be legally authorized for
the purpose

544
3

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Parties in Bailment:

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

EXECUTIVE COMMITTEE SUBJECT COMMITTEE MEMBERS ADVISERS

SAN BEDA COLLEGE OF LAW

SAN BEDA COLLEGE OF LAW

Subject Matter: Exceptions to the exception in (b):

SAN BEDA COLLEGE OF LAW

Reason: Commodatum is purely personal Reasons:

SAN BEDA COLLEGE OF LAW

Reason: Commodatum is essentially Notice is required because it is possible that the

SAN BEDA COLLEGE OF LAW

Note: No person shall be imprisoned for non-

Fungible and Non-Fungible:

SAN BEDA COLLEGE OF LAW

SAN BEDA COLLEGE OF LAW

SAN BEDA COLLEGE OF LAW

Rule on Accrued Interest

SAN BEDA COLLEGE OF LAW

Compounding Interest Illustrations:

INTEREST = principal x stipulated interest x number 600 / 9400 = 6.38%

SAN BEDA COLLEGE OF LAW

Exception: If the interest is unconscionable.

De-escalation clause is a stipulation that the rate of

SAN BEDA COLLEGE OF LAW

SAN BEDA COLLEGE OF LAW

Exceptions: (SES) OBLIGATIONS OF A DEPOSITARY

SAN BEDA COLLEGE OF LAW

What to Return: Obligation 5: If the thing deposited should earn

SAN BEDA COLLEGE OF LAW

SAN BEDA COLLEGE OF LAW

SAN BEDA COLLEGE OF LAW

Depositary’s Right of Retention EXTINGUISHMENT OF VOLUNTARY DEPOSIT

SAN BEDA COLLEGE OF LAW

SAN BEDA COLLEGE OF LAW

JUDICIAL DEPOSIT If constituted on personal property, it may be:

SAN BEDA COLLEGE OF LAW

CONTRACT OF SURETYSHIP Creditors, however, may recover from the surety

Nature of Suretyship’s Undertaking: Reason: Surety assumes a solidary liability for

SAN BEDA COLLEGE OF LAW

SAN BEDA COLLEGE OF LAW

Reasons: Guaranty v. Indorsement

SAN BEDA COLLEGE OF LAW

SAN BEDA COLLEGE OF LAW

General Rule: The qualifications need only be 2. When Unnecessary

SAN BEDA COLLEGE OF LAW

SAN BEDA COLLEGE OF LAW

SAN BEDA COLLEGE OF LAW

5. Right of Guarantor to Proceed Against 6. Right to Subrogation

SAN BEDA COLLEGE OF LAW

SAN BEDA COLLEGE OF LAW

SAN BEDA COLLEGE OF LAW

Pactum Commissorium or Pacto Commissorio

The creditor does not automatically become the Permissible stipulations:

SAN BEDA COLLEGE OF LAW

Third Commonality: Kinds of Obligations that Fifth Commonality: Concept of Possession of

SAN BEDA COLLEGE OF LAW

SAN BEDA COLLEGE OF LAW

SAN BEDA COLLEGE OF LAW

2. To Sell at public auction in case of reasonable Prohibition Against Double Pledge

SAN BEDA COLLEGE OF LAW